UNITED STATES ~~SECURITIES~~ ~~AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549~~

~~FORM~~SECURITIES ~~10-K~~ AND EXCHANGE COMMISSION

ý		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 27, 2008
OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

WASHINGTON, D.C. 20549

~~Commission~~FORM ~~file number: 001~~10-~~13843~~K

~~DUANE~~x ~~READE~~ANNUAL ~~HOLDINGS, INC. (Exact~~REPORT ~~name~~PURSUANT ofTO ~~registrant~~SECTION as13 ~~specified~~OR in15(d) ~~its~~OF ~~charter)~~THE SECURITIES EXCHANGE ACT OF 1934

Delaware (State or other jurisdiction of incorporation or organization)		05-0599589 (I.R.S. Employer Identification No.)
440 Ninth Avenue, New York, NY (Address of principal executive offices)		10001 (Zip Code)

For the fiscal year ended December 26, 2009

~~(212) 273-5700 (Registrant's~~OR ~~telephone number, including area code)~~

~~None (Former~~¨ ~~name,~~TRANSITION ~~former~~REPORT ~~address~~PURSUANT ~~and~~TO ~~former~~SECTION ~~fiscal~~13 ~~year,~~OR if15(d) ~~changed~~OF ~~since~~THE ~~last~~SECURITIES ~~report)~~EXCHANGE ACT OF 1934

~~Securities registered~~For ~~pursuant to Section 12(b) of~~ the ~~Act:~~transition period from to

Title of each Class		Name of each exchange on which registered
None		Not applicable

Commission file number: 333-122206-05

~~Securities registered~~DUANE ~~pursuant~~READE ~~to Section~~HOLDINGS, ~~12(g)~~INC. ~~of the Act: None~~

~~Indicate by~~(Exact ~~check~~name ~~mark~~of ~~if the~~ registrant ~~is a well-known seasoned issuer,~~ as ~~defined~~specified in ~~Rule 405~~its ofcharter) ~~the Securities Act. Yes o No ý~~

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ý* No o


Delaware		05-0599589
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

440 Ninth Avenue, New York, NY		10001
(Address of principal executive offices)		(Zip Code)

~~Indicate by check mark whether the registrant~~ (1212) ~~has~~273-5700 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 ý No o

~~Indicate~~(Registrant’s bytelephone ~~check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein~~number, ~~and~~including ~~will~~area ~~not~~code) ~~be contained, to the best of 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. ý~~

~~Indicate~~None by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.

~~Large~~(Former ~~accelerated~~name, ~~filer~~former oaddress ~~Accelerated~~and ~~filer~~former ofiscal ~~Non-accelerated~~year, ~~filer ý (Do not check~~ if achanged ~~smaller~~since ~~reporting~~last ~~company~~report) ~~Smaller reporting company o~~

~~Indicate~~Securities byregistered ~~check~~pursuant ~~mark~~to ~~whether the registrant is a shell company~~ Section 12(asb) ~~defined in Rule 12b-2~~ of the ~~Exchange~~ Act~~). Yes o No ý~~:

AsTitle of ~~March 9,~~each ~~2009,~~Class ~~the~~Name ~~aggregate market value~~ of ~~the~~each ~~registrant's~~exchange ~~common~~on ~~stock~~which ~~held~~registered byNone ~~non-affiliates~~Not ~~of the registrant was not significant. All but 20,100 shares of the common stock of the registrant are held by its parent.~~ applicable

~~DOCUMENTS~~Securities ~~INCORPORATED~~registered BYpursuant ~~REFERENCE~~ to Section 12(g) of the Act: None

Indicate by check ~~Table~~mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of ~~Contents~~the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant ~~INDEX~~ to Section 13 or Section 15(d) of the Exchange Act. Yes x* No ¨

		Page
PART I
ITEM 1.	Business	6
ITEM 1A.	Risk Factors	21
ITEM 2.	Properties	32
ITEM 3.	Legal Proceedings	33
ITEM 4.	Submission of Matters to a Vote of Security Holders	35
PART II
ITEM 5.	Market for Registrant's Common Equity and Related Stockholder Matters	36
ITEM 6.	Selected Financial Data	36
ITEM 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	39
ITEM 7A.	Quantitative and Qualitative Discussions About Market Risk	63
ITEM 8.	Financial Statements and Supplementary Data	64
ITEM 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	109
ITEM 9A.	Controls and Procedures	109
ITEM 9B.	Other Information	109
PART III
ITEM 10.	Directors and Executive Officers of the Registrant	110
ITEM 11.	Executive Compensation	113
ITEM 12.	Security Ownership of Certain Beneficial Owners and Management	147
ITEM 13.	Certain Relationships and Related Transactions	149
ITEM 14.	Principal Accountant Fees and Services	152
PART IV
ITEM 15.	Exhibits and Financial Statement Schedule	153
SIGNATURES		163

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 ¨

2Indicate 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 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

Indicate by check mark whether the registrant is a large accelerated filer, an ~~Table~~accelerated filer, or a non-accelerated filer. See definition of ~~Contents~~“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated ~~SPECIAL~~filer ~~NOTE~~¨ ~~REGARDING~~Accelerated ~~FORWARD~~filer ¨ Non-~~LOOKING~~accelerated ~~STATEMENTS~~ filer x (Do not check if a smaller reporting company) Smaller reporting company ¨

~~This~~Indicate ~~and~~by ~~other~~check ofmark ~~our~~whether ~~public filings or public statements contain forward-looking statements within~~ the ~~meaning~~registrant ofis ~~Section 27A of the Securities Act, Section 21E of the Securities Exchange Act and the Private Securities Litigation Reform Act of 1995, that involve~~ a ~~number~~shell ofcompany risks and uncertainties. These forward-looking statements relate to future events or our future financial performance with respect to our financial condition, results of operations, business plans and strategies, operating efficiencies or synergies, competitive positions, growth opportunities for existing products such (as ~~private~~defined ~~label~~in ~~merchandise, plans and objectives of management, capital expenditures, growth and maturation of our stores and other matters. These forward~~Rule 12b-~~looking~~2 ~~statements involve known and unknown risks, uncertainties and other factors that may cause our or our industry's actual results, levels~~ of activity, performance or achievements to be materially different from those expressed or implied by any forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "could," "would," "should," "expect," "plan," "anticipate," "intend," "believe," "estimate," "predict," "potential," "pro forma," "seek," or "continue" or the ~~negative~~ ofExchange ~~those terms or other comparable terminology~~Act). Yes ¨ No x These forward-looking statements are only predictions and such expectations may prove to be incorrect. Some of the things that could cause our actual results to differ substantially from our expectations are:

3As of March 23, 2010, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was not significant. All but 20,100 shares of the common stock of the registrant are held by its parent.

~~Table~~DOCUMENTS ofINCORPORATED ~~Contents~~BY REFERENCE

4None

~~Table~~* The registrant is not subject to the filing of ~~Contents~~Section 13 or 15(d) of the Securities Exchange Act of 1934. The registrant is a voluntary filer.

We undertakeTable no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this report. We do not, nor does any other person, assume responsibility for the accuracy and completeness of those statements. Contents

~~We caution~~INDEX you that the areas of risk described above may not be exhaustive. We operate in a continually changing business environment, and new risks emerge from time to time. Management cannot predict such new risks, nor can it assess the impact, if any, of such risks on our businesses or the extent to which any risk or combination of risks may cause actual results to differ materially from those projected in any forward-looking statements. In light of these risks, uncertainties and assumptions, you should keep in mind that any forward-looking statement made in this report might not occur.


		Page

PART I

ITEM 1.	Business	6
ITEM 1A.	Risk Factors	18
ITEM 2.	Properties	28
ITEM 3.	Legal Proceedings	29
ITEM 4.	Reserved	31

PART II

ITEM 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	31
ITEM 6.	Selected Financial Data	31
ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
ITEM 7A.	Quantitative and Qualitative Discussions About Market Risk	55
ITEM 8.	Financial Statements and Supplementary Data	57
ITEM 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	101
ITEM 9A.	Controls and Procedures	101
ITEM 9B.	Other Information	101

PART III

ITEM 10.	Directors, Executive Officers of the Registrant and Corporate Governance	102
ITEM 11.	Executive Compensation	105
ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	130
ITEM 13.	Certain Relationships and Related Transactions, and Director Independence	132
ITEM 14.	Principal Accounting Fees and Services	134

PART IV

ITEM 15.	Exhibits and Financial Statement Schedules	136

SIGNATURES		143

~~Table~~2 ~~of Contents~~

Table of PART I Contents

SPECIAL ~~ITEM~~NOTE ~~1. BUSINESS~~ REGARDING FORWARD-LOOKING STATEMENTS

This ~~The~~and ~~Acquisition~~ other of our public filings or public statements contain forward-looking statements within the meaning of Section 27A of the Securities Act, Section 21E of the Securities Exchange Act and the Private Securities Litigation Reform Act of 1995 that involve a number of risks and uncertainties. These forward-looking statements relate to, among other things, the timing and completion of our pending acquisition by Walgreen Co., future events or our future financial performance with respect to our financial condition, results of operations, business plans and strategies, operating efficiencies or synergies, competitive positions, growth opportunities for existing products such as private label merchandise, plans and objectives of management, capital expenditures, growth and maturation of our stores and other matters. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by any forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “could,” “would,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential,” “pro forma,” “as-adjusted,” “seek,” or “continue” or the negative of those terms or other comparable terminology. These forward-looking statements are only predictions and such expectations may prove to be incorrect. Some of the things that could cause our actual results to differ substantially from our expectations are:

On• ~~July 30, 2004,~~ the ~~acquisition~~ability of ~~Duane~~Walgreen ~~Reade Inc~~Co. ~~(the~~to ~~"Acquisition")~~complete ~~was completed by a group of investors, including Oak Hill Capital Partners, L.P. ("Oak Hill"), and both former and certain current members of our management team. As part of~~ the ~~Acquisition,~~transactions ~~Duane~~contemplated ~~Reade~~in ~~Acquisition~~connection ~~Corp., our wholly-owned subsidiary, merged~~ with ~~and~~Walgreen ~~into Duane Reade Inc~~Co.,’s ~~with~~acquisition ~~Duane~~of ~~Reade Inc. remaining as the surviving corporation.~~ us;

~~As a~~• ~~result of~~ the ~~Acquisition,~~impact ~~Duane~~of ~~Reade Inc.'s~~our ~~shares~~announced ~~ceased~~acquisition toby beWalgreen ~~listed~~Co. on ~~the~~our ~~New~~business ~~York Stock Exchange~~generally, ~~and~~including werelationships ~~operate~~with ~~as a privately held company. Each share of Duane Reade Inc.'s common stock outstanding immediately prior to the Acquisition was converted into the right to receive $16.50 per share~~customers, ~~without interest~~suppliers, inlandlords ~~cash.~~and employees;

• ~~General~~ the ability to open and operate new stores on a profitable basis, the maturation of those stores and the ability to increase sales in existing stores;

We• ~~are~~ the ~~largest~~competitive ~~drugstore~~environment ~~chain~~ in ~~New York City, which is~~ the ~~largest sales volume~~ drugstore ~~market~~industry in ~~the~~general ~~United States. In 2008, we believe that we led the drugstore market in New York City in sales of both back-end (pharmacy)~~ and ~~front-end (non-pharmacy) categories. As of December 27, 2008, we operated 148 of our 251 stores~~ in Manhattan's high-traffic business and residential districts, representing over twice as many stores as our next largest competitor in Manhattan. In addition, at December 27, 2008, we operated 77 stores in New York's densely populated outer boroughs and 26 stores in the ~~surrounding~~ New York ~~and~~greater ~~New~~metropolitan Jersey suburbs, including the Hudson River communities of northeastern New Jersey, as well as Westchester, Nassau and Suffolk counties in New York. Since opening our first store in 1960, we have executed a marketing and operating strategy tailored to the unique characteristics of New York City, the most densely populated major market in the United States. Sales of higher margin front-end items accounted for approximately 54% of our total sales in fiscal 2008, one of the highest ratios in the chain drug industry. area;

~~Our name~~• ~~is derived from~~ our ~~first~~significant successful full-service drugstore, which opened in 1960 on Broadway, between Duane and Reade Streets in Manhattan. We enjoy strong brand name recognition in the New York greater metropolitan area, which we believe results from our many locations in high-traffic areas of New York City, promotional advertising, and our Dollar Rewards customer loyalty program. indebtedness;

~~We have~~• ~~developed an operating strategy designed to capitalize on~~ the ~~unique~~continued ~~characteristics~~efforts of ~~the~~health ~~New~~maintenance ~~York~~organizations, ~~greater~~managed ~~metropolitan~~care ~~area~~organizations, ~~which~~pharmacy ~~include~~benefit ~~high-traffic~~management ~~volume, complex distribution~~companies ~~logistics,~~ and ~~high~~other ~~costs~~third ofparty ~~occupancy,~~payers ~~advertising~~to ~~and~~reduce ~~personnel.~~prescription ~~The~~reimbursement ~~key~~rates ~~elements~~and ofpricing ~~our~~pressure ~~operating~~from ~~strategy~~internet-based ~~are:~~and mail-order-based providers;

~~We believe~~• ~~that~~the ~~our~~continued ~~customer~~efforts ~~service~~of ~~orientation~~federal, ~~competitive~~state ~~price~~and ~~format,~~municipal ~~broad~~government ~~product~~agencies ~~offerings~~to ~~and~~reduce ~~Dollar~~Medicaid ~~Rewards~~reimbursement ~~Loyalty~~rates, ~~Card~~modify ~~program~~Medicare ~~provide~~benefits ~~a convenient~~ and/or ~~value-oriented shopping~~reduce ~~experience~~prescription ~~for~~drug ~~our~~costs ~~customers~~ and/or ~~help to build customer loyalty.~~ coverages;

~~Despite~~ • the ~~high~~impact ~~costs~~ of ~~operating in~~ the ~~New~~Medicare ~~York~~Prescription ~~greater metropolitan area~~Drug, ~~our~~Improvement ~~high~~and ~~sales~~Modernization ~~per~~Act ~~square~~of ~~foot~~2003 ~~stores generally allow us to effectively leverage occupancy costs, payroll and other store expenses~~(P.L. ~~Our approximately 506~~108-179),~~000~~ ~~square~~or ~~foot~~the ~~primary~~Medicare ~~distribution~~Modernization ~~facility is centrally located in Maspeth~~Act, ~~Queens,~~and ~~New~~the ~~York~~Medicare ~~City.~~Part ~~The~~D ~~facility~~benefit iscreated ~~located within ten miles of approximately 90% of our~~ thereunder;

6• the impact of the initiative announced by the Office of the New York State Medicaid Inspector General to recover and recoup significant amounts of Medicaid payments that were allegedly improperly paid to New York State retail pharmacies;

~~Table~~• changes in pharmacy prescription reimbursement rates attributable to modifications in the definition of ~~Contents~~indexed pricing terms such as “Average Wholesale Price” or “Average Manufacturer Price”, including the impact of the court-approved settlement in the First Data Bank litigation relating to the reporting of Average Wholesale Prices;

~~stores, and~~• ~~none~~the impact of ~~our~~the ~~retail~~changing ~~locations~~regulatory ~~are~~environment ~~farther~~in ~~than~~which 50our ~~miles~~pharmacy ~~from~~department ~~this~~operates, ~~facility.~~especially Wethe ~~also~~proposed ~~operate~~implementation aof ~~second,~~the ~~smaller~~federally ~~warehouse~~approved ~~facility~~change in ~~North~~the ~~Bergen,~~pricing ~~New~~formula ~~Jersey~~ for ~~the~~generic ~~distribution~~pharmaceuticals ofsupplied ~~certain seasonal~~to ~~and~~Medicaid ~~other~~beneficiaries ~~promotional~~based ~~merchandise.~~on ~~This~~the ~~approximately~~use ~~114,000 square foot support facility enjoys similar proximity to most~~ of ~~our~~Average ~~New~~Manufacturer ~~York~~Price, ~~City~~which ~~locations~~could ~~while~~negatively ~~providing~~affect ~~additional~~the ~~capacity and~~profitability ~~closer proximity to our stores located in New Jersey. We believe that these two central locations allow us to maintain relatively low warehouse and distribution costs as a percentage~~ of ~~sales.~~filling Medicaid prescriptions;

~~As of~~• ~~December 27,~~the ~~2008,~~impact ~~we operated 251 stores, 15~~ of ~~which~~aggressive ~~were~~enforcement ~~opened~~by ~~during fiscal 2008. During fiscal 2007 and 2006~~federal, westate ~~opened ten stores~~ and ~~five~~local ~~stores,~~law ~~respectively.~~enforcement ~~We closed~~agencies ~~six~~of ~~stores~~federal ~~in 2008, 16 stores in 2007~~ and ~~eight~~state ~~stores~~laws indealing ~~2006.~~with ~~Among~~past ~~the 15 new stores we opened during 2008, 11 were in Manhattan, three were in the densely populated outer boroughs of New York City~~ and ~~one~~future ~~was~~matters inrelated ~~New Jersey.~~to Assubmission of ~~December 27,~~false ~~2008~~claims, ~~approximately~~fraud ~~59%~~and ~~of our stores were in Manhattan~~abuse, ~~31%~~pharmacist ~~were~~licensing ~~in the outer boroughs of New York City~~ and ~~10%~~excluded ~~were~~provider ~~located outside New York City. At December 27~~lists, ~~2008~~including, wewithout ~~occupied approximately 1.7 million square feet of retail space~~limitation, ~~approximately 3% more than at~~ the ~~end~~excluded ofprovider ~~fiscal~~list ~~2007.~~matter ~~Approximately 46% of the stores~~ we ~~operated~~self-reported ~~at December 27,~~to ~~2008 had been opened since~~ the ~~beginning~~Office of ~~fiscal~~the ~~2001.~~Medicaid Inspector General;

~~In March~~• ~~2006, as part of an expansion and realignment of~~ the ~~senior~~outcome management team that started in November 2005, we implemented a six-point strategic plan to transform our business and improve performance, known as "Duane Reade Full Potential." The successful implementation of ~~"Duane Reade Full Potential" allowed us to stabilize~~ our ~~business~~ongoing ~~performance~~tax ~~and~~examinations ~~resulted~~by ~~in improved~~federal ~~sales~~ and ~~margin~~state ~~performance~~tax during 2008, 2007 and 2006, compared to 2005, as well as improved leveraging of costs and improved working capital management. In April 2008, John A. Lederer was appointed as our Chairman and Chief Executive Officer. authorities;

~~We believe~~• ~~our~~the ~~current~~outcome ~~market position provides us with an opportunity to become one~~ of ~~the~~favorable ~~New~~or ~~York~~unfavorable ~~metropolitan~~adjustments ~~area's most recognized and trusted brands. During 2008, we sought~~ to ~~further~~ ~~strengthen~~ our ~~management~~estimated ~~team~~tax ~~and~~liabilities ~~build~~due ~~upon~~to ~~the~~closure ~~success~~of weincome ~~have~~tax ~~achieved~~examinations, ~~by adding~~ new ~~senior~~regulatory ~~management~~or ~~executives~~judicial ~~in operations~~pronouncements, ~~supply~~or ~~chain~~other ~~and~~relevant merchandising to execute several strategic plans that we believe will return us to profitability and further strengthen our brand in the New York metropolitan area. Our strategic plan for 2009 includes: events;

~~Our strategic~~• ~~plan will focus on serving~~ the ~~needs~~outcome of our ~~customers~~application byfor ~~providing~~relief ~~them~~from ~~with~~any ~~the~~potential ~~products~~tax ~~they~~liabilities ~~need~~arising tofrom ~~look~~possible ~~and~~qualification ~~feel~~as ~~better and will offer them~~ a ~~wide~~personal ~~assortment~~holding ~~of products designed to meet their everyday needs. The implementation of this strategic plan began in the second half of 2008 and will continue throughout 2009.~~ company;

• ~~Where~~the ~~you~~ultimate ~~can~~disposition ~~find~~of ~~additional~~tax ~~information~~ contingencies relating to the collectability of certain balances;

We3 ~~maintain a company website at www.duanereade.com. We make copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments~~

7Table of Contents

~~Table~~• the strength of ~~Contents~~the economy in general and the economic conditions in the New York greater metropolitan area including, in particular, employment and income-related factors, seasonal and weather-related factors, special events, changes in consumer purchasing power and/or spending patterns;

~~to those~~• ~~reports~~changes ~~filed~~in ~~with or furnished to~~ the ~~SEC~~cost ~~available to investors on or through our website free~~ of ~~charge~~goods asand ~~soon as reasonably practicable after we have electronically filed them with or furnished them to the SEC. The contents of our website do not constitute a portion of this report.~~ services;

~~The public~~• ~~may~~trends ~~read~~in ~~and~~the ~~copy~~healthcare ~~any~~industry, ~~materials~~including ~~filed by us with~~ the ~~SEC~~continued atconversion ~~the~~of ~~SEC's~~various ~~Public~~prescription ~~Reference~~drugs ~~Room,~~to ~~located~~over-the-counter ~~at 100 F Street~~medications, ~~N.E.~~negative ~~Washington,~~publicity DCand ~~20549.~~the ~~The~~related ~~public~~sales ~~may~~declines ~~obtain information~~for oncertain ~~the~~categories ~~operation~~ of ~~the~~drugs ~~Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition~~including, ~~the~~without ~~SEC maintains a website at which reports~~limitation, ~~proxy~~certain ~~and information~~pain ~~statements~~medications and ~~other information regarding issuers that file electronically with~~ the ~~SEC~~increasing ~~are~~market ~~available.~~share ~~This~~of ~~website~~internet-based ~~may~~and bemail-order-based ~~accessed at http://www.sec.gov.~~ providers;

• ~~Company~~employment ~~Operations~~ disputes and labor relations;

• ~~Front-End~~our ~~Merchandising~~ ability to prevent fraud;

~~Our~~• overall front-end merchandising strategy is to provide a broad selection of competitively priced, branded and private label drugstore products in convenient, customer-friendly presentations. To further enhance customer service and loyalty, we attempt to maintain a consistent in-stock position in all merchandise categories. We offer brand name and private label health and beauty care products (including over-the-counter items), food and beverage items (including beer in all stores which have obtained the appropriate licenses), tobacco products, cosmetics, housewares, greeting cards, photofinishing services, photo supplies, seasonal and general merchandise and other products. Health and beauty care products represent our ~~highest~~ability ~~volume product categories within front-end sales, and we allocate ample shelf space~~ to ~~popular~~limit ~~brands~~inventory ofshrink these items. We place convenience items, such as candy, snacks and seasonal goods, near the check-out registers to provide all customers with optimum convenience and to stimulate impulse purchases. To further enhance our health and beauty offerings, we operate Skin Wellness Centers in 38 stores. Our Skin Wellness Centers are staffed by trained beauty advisors and offer our customers high-end skin care brands. losses;

~~In addition~~• to a wide array of branded products, we also offer our own private label products under various names including "5th Avenue", "Apt. 5", "Christmas in New York" and "Duane Reade." Private label products provide customers with high-quality, lower priced alternatives to brand name products, while generating generally higher gross profit margins than brand name products. These offerings also enhance our reputation as a value-oriented retailer, build customer loyalty and differentiate ourselves from competitors. We believe that our strong brand image, reputation for quality and reliability in the ~~New~~impact ~~York City market, and our economies~~ of ~~scale~~any incomprehensive ~~purchasing~~federal ~~allow~~healthcare usreform to effectively manage an improved assortment of private label goods that offer an alternative for increased value to the consumer with higher profitability than comparable branded products. In fiscal 2008, our private label products accounted for approximately 8.9% of non-pharmacy sales. legislation;

~~We further~~• ~~complement~~changes ~~our~~in ~~product~~federal ~~offerings~~and ~~with~~state ~~additional~~laws ~~customer~~and ~~services~~regulations, ~~such~~including asthe ~~ATMs,~~potential ~~sales~~impact of ~~lottery~~changes ~~tickets~~in ~~and~~regulations ~~postage~~surrounding ~~stamps,~~the ~~money~~importation ~~transfer~~of ~~services~~pharmaceuticals ~~and~~from ~~acceptance~~foreign ofcountries ~~food stamps~~ and ~~other~~changes ~~government-sponsored benefits. We also offer on-site photofinishing services~~ in ~~over~~laws 90governing ofminimum ~~our~~wage ~~stores.~~ requirements;

• ~~Pharmacy~~ our ability to successfully execute our business plan;

~~Our~~• ~~pharmacy business is central to our customer identity and provides a critical link to our health and wellness business and sales in over-~~the~~-counter~~ ~~front-end~~outcome ~~products. Sales~~ of ~~prescription~~the ~~medications~~arbitration ~~are~~proceeding ~~expected~~that tohas ~~experience~~been ~~strong~~instituted ~~long-term~~against ~~growth~~us ~~trends~~by ~~attributable~~Anthony toJ. ~~the aging population~~Cuti, ~~new~~a ~~drug~~former ~~discoveries~~Chairman, ~~and~~President ~~increased use of quality of life prescription products. Increased prescription coverage through various private~~ and ~~government~~Chief ~~sponsored~~Executive plans such as the Medicare Part D program as well as other favorable demographic trends are expected to result in strong growth for all aspects of this business. Our same-store prescription retail drug sales grew by 3.1% in 2008 as Officer;

8• the progress and outcome of the criminal indictments against former executives of ours by the United States District Attorney’s Office for the Southern District of New York and the civil securities fraud charges filed by the SEC;

~~Table~~• ofliability ~~Contents~~and other claims asserted against us, including the items discussed in “Item 3. Legal Proceedings” included elsewhere in this report;

~~compared to~~• ~~2007~~changes ~~and by 5.9%~~ in 2007 as compared to 2006. Sales of prescription drugs represented 46.1% of total sales in 2008, compared to 46.0% of total sales in 2007 and 46.5% of total sales in 2006. The number of generic prescriptions filled represented 59.6% of total prescriptions filled in 2008 as compared to 55.7% of total prescriptions filled in 2007 and 52.1% of total prescriptions filled in 2006. While the increase in the percentage of generic prescriptions filled reduces the rate of pharmacy same-store sales growth overall, it increases our ~~gross~~operating ~~margin~~strategy ~~per prescription~~or ~~filled.~~development This increased gross margin is due to lower cost generic prescriptions generally being more profitable than their branded equivalents. The trend of increases in generic prescriptions filled is the result of several high volume branded drug patent expirations that have enabled the introduction of lower cost generic alternatives and the conversion of certain popular prescription drugs to over-the-counter drugs. We have also continued to emphasize the value of using lower cost generic products to our customers. plans;

~~We believe~~• ~~that~~ our ~~extensive~~ability ~~network~~to ~~of conveniently located stores~~attract, ~~strong~~hire ~~local market position~~ and ~~reputation~~retain ~~for~~qualified ~~high quality healthcare products help in attracting pharmacy business from individual customers as well as managed care organizations~~personnel, ~~insurance~~including ~~companies, employers and other third party payers. The percentage of~~ our ~~total~~ability ~~prescription drug sales covered by third party plans, which include government-paid plans, increased~~ to ~~approximately~~attract ~~93.4%~~qualified inpharmacists ~~2008,~~at asacceptable ~~compared~~wage to approximately 93.0% in 2007 and approximately 92.8% in 2006. Gross margins on sales covered by third party plans are generally lower than cash prescription drug sales because of the highly competitive nature of pricing for this business. rates;

~~The Medicare~~• ~~Modernization~~interest ~~Act~~rate ~~created~~fluctuations aand ~~Medicare~~changes Part D benefit that expanded Medicare coverage of prescription drugs for senior citizens as well as for certain "dual eligible" individuals that were previously covered under state administered Medicaid plans. This Medicare coverage has resulted in ~~decreased~~capital ~~pharmacy~~market ~~margins~~conditions ~~resulting~~or ~~from~~other ~~lower~~events ~~reimbursement~~affecting ~~rates than~~ our ~~current~~ ~~margins~~ability onto ~~state~~obtain ~~Medicaid~~necessary ~~prescriptions.~~financing ~~The~~on ~~Medicare~~favorable ~~Part D~~terms ~~program~~to ~~has~~operate ~~grown~~and ~~rapidly~~fund ~~since~~the ~~taking~~anticipated ~~effect in 2006. The program's~~ growth ~~may~~of ~~continue~~our asbusiness ~~more~~or ~~seniors~~to ~~have~~refinance ~~become eligible~~our ~~and~~existing ~~enroll for the coverage.~~ debt;

~~In July~~• ~~2007,~~ the ~~Centers~~continuation ~~for Medicare & Medicaid Services,~~ or ~~CMS,~~further ~~issued~~deterioration ~~a final rule that may negatively affect our level~~ of ~~reimbursements~~current ~~for~~credit ~~certain~~market ~~generic~~conditions ~~drugs~~under bywhich ~~setting an~~business ~~upper~~credit ~~limit~~is onseverely the amount of reimbursement for such drugs based on the "Average Manufacturer Price" ("AMP"). As a result of a lawsuit brought by the National Association of Chain Drug Stores and the National Community Pharmacists Association to challenge the implementation of the new rule, a federal court temporarily enjoined the implementation of the new rule pending the outcome of the lawsuit and the lawsuit remains pending. In July 2008, Congress enacted H.R. 6331, the Medicare Improvements for Patients and Providers Act of 2008 ("MIPPA"). The former President Bush subsequently vetoed MIPPA and, on July 15, 2008, Congress overrode the veto. MIPPA delayed the implementation of the use of Average Manufacturer Price with respect to payments made by State Medicaid Plans for multiple source generic drugs until September 30, 2009. MIPPA also prohibited the Secretary of Health and Human Services from making public any Average Manufacturer Price information that was previously disclosed to the Secretary of Health and Human Services. The outcomes of the lawsuit and the impact of MIPPA are uncertain at this time, so we currently are unable to determine what effect the new rule will ultimately have on our business. restricted;

~~In an~~• ~~effort~~exposure to ~~offset~~multiemployer ~~some~~pension ofplans ~~the~~as ~~adverse~~a ~~pharmacy~~result ~~gross~~of ~~margin~~current ~~impacts~~market ~~from~~conditions, ~~the~~including ~~trends~~without ~~discussed above~~limitation, ~~there~~possible ~~has~~increases ~~been~~in ancontributions ~~intensified~~and ~~effort~~recorded onexpense ~~the~~related ~~part of retailers~~ to ~~support increased~~our ~~utilization~~multiemployer ofpension ~~lower~~funds ~~priced~~if ~~but~~financial ~~higher~~markets ~~margin~~decline ~~generic~~or ~~prescriptions~~asset values in ~~place of branded medications. New generic drug introductions have also enabled retailers to increase~~ the ~~proportion~~funds ~~of generic~~deteriorate, ~~prescriptions~~if toother ~~total~~employers ~~prescriptions~~withdraw ~~dispensed.~~from ~~Improved~~these ~~generic~~funds ~~utilization~~without ~~rates~~providing asfor ~~well~~their asshare ~~a combination~~ of ~~direct purchases and contractual wholesaler purchases enabled us to offset~~ the ~~adverse~~ ~~margin~~liability ~~impact~~or ofshould ~~Medicare~~estimates ~~Part D~~prove ~~and reduced state Medicaid reimbursement rates during 2008 and 2007. In addition, we believe that the higher volume of pharmacy sales~~ to ~~third~~be ~~party plan customers~~ incorrect;

9• the effects of the current economic recession on our customers and the markets we serve, particularly the difficulties in the financial services industry and the general economic downturn that began in the latter half of 2007 and which significantly deteriorated during the fourth quarter of 2008 and continued through 2009;

~~Table~~• the effects of ~~Contents~~increased energy, transportation or other costs, increased unemployment, decreases in housing prices, decreases in wages or other similar factors that may have a negative effect on the disposable income or spending patterns of our customers;

~~helps to~~• ~~offset~~natural ~~the~~and ~~related~~man-made ~~lower~~disasters ~~gross profit margins~~ and ~~allows~~the uscontinued toimpact ~~leverage~~of, ~~other~~or ~~fixed~~new ~~store~~occurrences ~~operating~~of, ~~expenses.~~terrorist Weattacks ~~believe that increased third party plan sales also generate additional general merchandise sales by increasing customer traffic~~ in ~~our~~the ~~stores.~~New AsYork ofgreater ~~December 27,~~metropolitan ~~2008,~~area weand ~~had~~any ~~contracts~~actions ~~with~~that ~~over~~may ~~370~~be ~~third~~taken ~~party~~by ~~plans~~federal, ~~including~~state ~~virtually~~or ~~all~~municipal ~~major~~authorities ~~third party plans~~ in ~~our market~~response ~~areas.~~to ~~During~~or ~~fiscal~~in ~~2008,~~anticipation ~~New York Medicaid represented approximately 14% and 6%~~ of ~~our~~such ~~retail~~events ~~pharmacy~~ and ~~net retail store sales, respectively.~~ occurrences;

~~Over the~~• ~~past~~changes ~~several~~in ~~years,~~levels ~~New~~of ~~York~~vendor ~~State reduced Medicaid and Elderly Pharmaceutical Insurance Coverage (EPIC) prescription reimbursement rates~~rebates, ~~adversely~~allowances impacting our pharmacy gross margins. Under the New York State Medicaid program, reimbursement for multiple source prescription drugs for which an upper limit has been set by CMS will be an amount equal to the specific upper limit set by CMS. For a multiple source prescription drug or a brand-name prescription drug for which CMS has not set a specific upper limit, the lower of the estimated acquisition cost of such drug to pharmacies or the dispensing pharmacy's usual and ~~customary~~related ~~price~~payment charged to the general public will be applied. Under the Medicaid guidelines, providers cannot refuse to dispense prescriptions to Medicaid recipients who claim they do not have the means to pay the required co-payments. Most Medicaid recipients do in fact decline to make the co-payments resulting in the requirement for the provider to absorb this cost. terms;

~~The current~~• ~~economic~~changes ~~downturn may result~~ in ~~additional~~timing ~~reductions~~of inour ~~New~~acquisition ~~York Medicaid prescription reimbursements. Budget proposals for New York State in 2009 currently include reductions in the reimbursements for pharmacies in the Medicaid and EPIC programs. The State~~ of ~~New~~stores ~~Jersey is also proposing Medicaid reductions in their 2009 budget proposals. Neither state has approved their final budget proposals,~~ and ~~while~~prescription itfiles ~~is highly likely that there will ultimately be further reductions in reimbursements, the economic stimulus package recently passed by Congress~~ and ~~signed~~ ~~into~~capital ~~law~~expenditure by President Obama could provide states with additional Medicaid funding and may reduce the extent of each state's proposed reductions in Medicaid reimbursements. Under the economic stimulus package, over $80 billion would be allocated to help states with Medicaid. In addition, the economic stimulus package includes provisions to subsidize health care insurance premiums for the unemployed under the COBRA program and provisions that will aid states in defraying budget cuts. plans;

~~In 2008,~~• wechanges ~~experienced~~in ~~pharmacy~~real ~~sales~~estate ~~growth~~market ~~due~~conditions ~~to increased utilization of Medicare Part D, pharmacy same-store sales growth of 3.1%~~ and ~~increases in average price per prescription. Previous factors that have influenced~~ our ~~pharmacy~~ability ~~sales~~to ~~are~~continue ~~the~~to ~~level~~renew ofexpiring ~~third~~leases ~~party~~or ~~plan co-payments, publicity surrounding certain medications, conversion of certain prescription drugs~~ to ~~over-the-counter~~secure ~~status~~suitable ~~and~~new ~~increased~~store ~~mail~~locations ~~order~~under ~~and~~acceptable ~~internet~~lease ~~based penetration.~~ terms;

~~Our pharmacies~~• ~~are linked by a central computer system that makes central patient records available in real time, so that~~ our ~~customers~~ability ~~can~~to ~~fill~~successfully ~~prescriptions~~implement ~~at any Duane Reade pharmacy. The system provides customers with a broad range of services, including concurrent, prospective~~ and ~~retrospective~~manage ~~drug~~new ~~reviews. Our pharmacy~~ computer ~~network~~systems ~~profiles customer medical~~ and ~~other~~ relevant information, supplies customers with information concerning their drug purchases for income tax and insurance purposes and prepares prescription labels and receipts. The computer network also expedites transactions with third party plans by electronically transmitting prescription information directly to the third party plan and providing on-line adjudication. At the time of sale, on-line adjudication confirms customer eligibility, prescription coverage, pricing and co-payment requirements and automatically bills the respective plan. On-line adjudication also reduces losses from rejected claims and eliminates a portion of our administrative burden related to the billing and collection of receivables and related costs. technologies;

~~We currently~~• ~~operate~~demographic two Diabetes Resource Centers, one center is located in Manhattan and the second center is located in Brooklyn. Both Diabetes Resource Centers are designed to assist individuals and their families in managing diabetes and serve as educational facilities which provide free training. changes;

104

~~The Diabetes~~• ~~Resource~~our ~~Centers~~ability ~~and~~to ~~their~~refinance ~~services,~~or ~~managed~~extinguish byour ~~licensed~~outstanding ~~pharmacists~~debt ~~and~~obligations, ~~certified~~including ~~diabetes~~senior ~~educators,~~subordinated ~~are~~notes ~~open~~due 2011, prior to the ~~public~~respective ~~and~~maturity ~~are~~dates; ~~free of charge.~~ and

~~In 2007,~~• inother ~~partnership~~risks ~~with~~and ~~Consumer~~uncertainties ~~Health~~detailed ~~Services, Inc.,~~elsewhere ~~we launched DR Walk-~~in ~~Medical~~this ~~Care.~~annual ~~These~~report ~~sites~~on ~~are~~Form ~~designed to provide customers with convenient access to high~~10-~~quality,~~K ~~urgent~~ and ~~non-emergency~~from ~~medical~~time ~~services at affordable prices, with the option~~ to ~~see~~time ~~on-site physicians on a walk-~~in ~~basis for immediate examination and treatment. We currently have two of these DR Walk-in Medical Care centers in~~ our ~~stores~~filings ~~and~~with ~~believe these services enhance our convenience image, promote stronger customer loyalty and assist us in addressing~~ the ~~wellness needs of our customers~~SEC.

We ~~Internet~~ undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this report. We do not, nor does any other person, assume responsibility for the accuracy and completeness of those statements.

~~Our~~We ~~interactive~~caution ~~website,~~you ~~www~~that the areas of risk described above may not be exhaustive.~~duanereade.com,~~ isWe operate in a ~~convenient~~continually ~~and~~changing ~~efficient~~business ~~means~~environment, ~~that~~and ~~customers~~new ~~may~~risks ~~use~~emerge from time to ~~access~~time. ~~our~~Management ~~Duane~~cannot ~~Reade~~predict ~~ePharmacy.~~such ~~Customers~~new risks, nor can ~~register~~it toassess ~~have~~the ~~access~~impact, if any, of such risks on our businesses or the extent to ~~view~~which ~~their~~any ~~prescription~~risk ~~records,~~or ~~print~~combination ~~insurance~~of ~~and~~risks ~~tax~~may ~~reports,~~cause ~~order~~actual ~~refills,~~results ~~order~~to ~~new~~differ ~~prescription~~materially from those projected in any forward-looking statements. In light of these risks, uncertainties and ~~transfers~~assumptions, ~~access~~you ~~drug~~should ~~information~~keep ~~and~~in ~~ask~~mind ~~our~~that ~~pharmacists~~any aforward-looking ~~question~~statement made in this report might not occur.

~~Our website~~5 ~~also allows our customers to:~~

Our strategyTable hasof been to develop the website as an additional vehicle to deliver superior customer service, enhance our brand recognition and to supplement our convenient store locations. We believe www.duanereade.com provides one more important touch point to provide pharmacy services as well as allowing customers to contact us though the internet. Contents

PART ~~Store~~I ~~Operations~~

~~Our~~ITEM ~~stores range in size from under 500 to approximately 12,700 square feet, with an average of approximately 6,764 square feet per store as of December 27, 2008~~1. Our stores are designed to facilitate customer convenience. We attempt to group merchandise logically in order to enable customers to locate items quickly and conveniently. During 2008, we undertook an initiative to modernize our store locations through several store renovations, new interior and exterior design graphics and décor. Several of our 2008 store openings reflect these new store design concepts. BUSINESS

WeGeneral establish each store's hours of operation in an attempt to best serve customer traffic patterns and purchasing habits. Most stores in Manhattan's business districts are generally open six days per week. In residential and certain business/shopping districts, most stores are open seven days per week, with a heavy emphasis on convenient, early morning openings and late evening closings. We intend to continue to identify stores where we believe extended operating hours would improve customer service and convenience and contribute to our profitability. Most of our stores offer delivery services as an added customer convenience. Customers can arrange for delivery via phone, fax or internet. Each store is supervised by a store manager and one or more assistant store managers. Our stores are supplied up to five times per week from our two warehouses which enables us to maintain a high in-stock position, maximizes store selling space and minimizes our inventory investment per store.

We ~~Purchasing~~are the largest drugstore chain in New York City. The New York metropolitan area is the largest sales volume drugstore market in the United States. In 2009, we believe that we led the drugstore market in New York City in sales of both back-end (pharmacy) and ~~Distribution~~ front-end (non-pharmacy) categories. As of December 26, 2009, we operated 150 of our 257 stores in Manhattan’s high-traffic business and residential districts, representing over twice as many stores as our next largest competitor in Manhattan. In addition, at December 26, 2009, we operated 83 stores in New York City’s densely populated outer boroughs and 24 stores in the surrounding New York and New Jersey suburbs, including the Hudson River communities of northeastern New Jersey, as well as Westchester, Nassau and Suffolk counties in New York. In total, we operated 257 stores as of December 26, 2009. Since opening our first store in 1960, we have executed a marketing and operating strategy tailored to the unique characteristics of New York City, the most densely populated major market in the United States. Our name is derived from our first store, which opened in 1960 on Broadway, between Duane and Reade Streets in Manhattan. We enjoy strong brand name recognition in the New York greater metropolitan area, which we believe results from our many locations in high-traffic areas of New York City, promotional advertising, and our Flex Rewards customer loyalty program.

InDuane ~~total~~Reade Holdings, weInc., ~~purchase~~a ~~from~~Delaware ~~over~~corporation, 1was formed in December 2003. On July 30,~~000~~ ~~vendors~~2004, the acquisition of Duane Reade Inc. We(the ~~believe~~“Acquisition”) ~~that~~was ~~there~~completed ~~are~~by ~~ample~~a ~~sources~~group of ~~supply~~investors, ~~for~~including Oak Hill Capital Partners, L.P. (“Oak Hill”), and both former and certain current members of our management team. Approximately 99% of the ~~merchandise~~common westock ~~currently~~of ~~sell~~Duane Reade Holdings, Inc. is owned by Duane Reade Shareholders, LLC, a parent entity ~~and~~also ~~that~~established to effectuate the ~~loss~~Acquisition. The Acquisition was completed on July 30, 2004 through the merger of ~~any~~Duane ~~one~~Reade ~~non~~Acquisition Corp. (a wholly-~~pharmacy~~owned ~~supplier~~subsidiary ~~would~~of ~~not~~Duane Reade Holdings, Inc.) into Duane Reade Inc., with Duane Reade Inc. being the surviving entity and a wholly-owned subsidiary of Duane Reade Holdings, Inc. after the merger transaction.

11As a result of the Acquisition, Duane Reade Inc.’s shares ceased to be listed on the New York Stock Exchange, and we operate as a privately held company.

~~Table~~Subsequent ofEvent ~~Contents~~– Potential Change in Control

~~have~~ On February 17, 2010, we announced a ~~material~~definitive ~~effect~~agreement onunder ~~our~~which ~~business~~Walgreen Co. We(“Walgreens”) ~~distribute~~will ~~approximately~~acquire ~~84%~~Duane ofReade ~~our~~from affiliates ~~non-pharmacy~~of ~~merchandise~~Oak ~~through~~Hill ~~our~~in ~~warehouses~~a ~~and~~cash ~~receive~~transaction ~~direct-to-store deliveries~~ for ~~approximately~~a ~~16%~~total enterprise value of ~~our~~$1.075 ~~non-pharmacy~~billion, ~~purchases~~which includes the assumption of debt. ~~Direct-~~The transaction is subject to~~-store~~ ~~deliveries~~customary ~~are~~conditions, ~~made~~including ~~primarily~~the ~~for~~receipt ~~greeting~~of ~~cards,~~regulatory ~~photofinishing~~approvals, ~~convenience~~and ~~foods,~~would include ~~beverages~~all of our stores, as well as our corporate office and ~~various~~two ~~categories~~distribution ofcenters. ~~general~~There ~~merchandise~~can be no assurance that the transaction will be completed.

~~We generally~~Business ~~purchase~~Strategy ~~prescription medications under long-term supply agreements. Approximately $30 million of our pharmacy inventory at December 27, 2008 was shipped directly to our stores on a consignment basis.~~

Our ~~Advertising~~mission is to build the best urban drugstore proposition in our markets. To allow us to achieve our mission, we have crafted a transformational “Prescription for Change” business strategy which focuses on serving the needs of our customers by providing them with the products they need to look and ~~Promotion~~ feel better as well as offering our customers a wide assortment of products designed to meet their everyday needs. In 2009, we made great strides in the implementation of our Prescription for Change strategy, in order to become the destination of choice for the health, beauty, wellness and convenience needs of our customers. We believe the successful implementation of our Prescription for Change strategy, together with our market position, will enable us to become one of the New York metropolitan area’s most recognized and trusted brands and will allow us to achieve our brand vision of “New York Living Made Easy.”

WeThe ~~advertise~~key ~~for~~elements ~~our stores in a number~~ of traditional and non-traditional ways. We use circulars, radio, direct mail, subway and bus advertising, the internet and electronic indoor and outdoor advertising which highlight promotional items, special service offerings and programs. To promote our ~~brand~~Prescription ~~within~~for ~~our~~Change ~~trade area,~~strategy weare: ~~provide customers with distinctive shopping bags bearing our Duane Reade logo.~~

~~To maximize~~• Improving the ~~benefits~~pharmacy ofoperations ~~membership,~~through ~~many~~maintenance of ~~our~~improved ~~promotions are linked to our Dollar Rewards Loyalty Card and are targeted towards our most frequent shoppers. Dollar Rewards was the first loyalty card program~~ in ~~the U.S. chain drug store industry. Approximately one~~-~~half~~stock ofconditions, ~~our~~more ~~front-end~~convenient ~~sales~~operating ~~are~~hours, ~~attributable~~faster tocustomer ~~the~~prescription ~~approximately~~fulfillment ~~2.6 million~~and ~~card members~~enhanced ~~who~~accessibility ~~used~~and ~~the~~interaction ~~loyalty~~between ~~card~~our incustomers ~~fiscal~~and ~~2008~~pharmacists.

• ~~Management~~Enhancing ~~Information~~the ~~Systems~~ customer’s experience by providing our store personnel with additional training on planning, directing and organizing the store for success.

We6 have computerized pharmacy and inventory management information systems. We use scanning point-of-sale (POS) systems in each of our stores. These systems allow better control of pricing, inventory and shrink. POS also provides sales analysis that allows for improved labor scheduling and helps optimize product shelf space allocation and design by allowing detailed analysis of stock-keeping unit sales.

We utilizeTable aof fully automated computer-assisted merchandise replenishment system for store front-end and pharmacy orders sourced through our distribution centers and our primary pharmacy supply distributor. These systems use item-specific and store-specific sales history to produce "suggested" orders for each store, which can be accepted or modified by the stores before being released. Contents

~~We also~~• ~~use~~Improving ~~radio frequency hand held scanning devices to communicate directly with~~ our ~~central~~merchandise ~~processing facilities that permit real-time updates of our perpetual inventory information. These devices are also used to support inventory ordering, transfers, price changes~~ and ~~direct~~private ~~store~~label ~~deliveries.~~offerings ~~We utilize a chain-wide specific item cost-based inventory tracking~~ and ~~valuation~~differentiating ~~system~~ourselves ~~which~~from ~~provides~~competitors ~~improved~~through ~~controls~~the ~~over~~use ~~inventory~~of ~~management~~exclusive ~~and~~brand ~~shrink-related losses. Our in-store shelf labeling system is designed to improve pricing accuracy~~products, ~~upgrade~~improved ~~our~~presentations ~~ability to communicate item prices to our customers~~ and ~~reduce~~a ~~the~~strengthened ~~costs~~Flex ~~associated~~Rewards ~~with~~loyalty ~~processing~~card ~~weekly price changes~~program.

• ~~Competition~~ Modernizing our store locations through innovative store renovations, new interior and exterior design graphics and décor.

~~Our~~For ~~stores~~2010, ~~compete~~our onPrescription ~~the~~for ~~basis~~Change ofimperatives ~~convenience~~include ofincreasing ~~location~~average ~~and~~sales ~~store~~per ~~layout,~~transaction ~~product~~for ~~mix,~~our front-end ~~selection,~~business ~~customer service~~ and ~~price.~~increasing ~~The New York City drugstore market is highly fragmented due to~~ the ~~complexities~~number ~~and costs~~ of ~~doing~~average ~~business~~prescriptions infilled ~~the~~per ~~most~~store ~~densely~~for ~~populated~~our ~~area~~pharmacy ~~of the country~~operations. WeIn ~~believe~~addition, ~~the~~we ~~diverse~~will ~~labor~~continue ~~pool,~~to ~~local customer~~focus ~~needs~~on ~~and~~improving the ~~complex~~total ~~real~~shopping ~~estate~~experience ~~market~~for inour ~~New~~customers ~~York~~because ~~City~~we ~~all~~believe ~~favor regional chains~~ that ~~are familiar with the market. We tailor~~ our customer ~~store~~service ~~format~~orientation toand ~~meet~~Flex ~~all~~Rewards ofLoyalty ~~these~~Card ~~requirements,~~program ~~which~~provide ~~has proven~~a ~~successful~~convenient ~~in the business~~ and ~~residential~~value-oriented ~~neighborhoods~~shopping ofexperience ~~Manhattan,~~for ~~the~~our ~~outer~~customers ~~boroughs~~ and ~~surrounding~~help ~~areas.~~to ~~Currently,~~build wecustomer ~~have~~loyalty. ~~the largest market share in~~

12Our Stores

~~Table~~As of ~~Contents~~December 26, 2009, we operated 257 stores, compared to 251 stores at December 27, 2008 and 242 stores at December 29, 2007. The following table provides our store openings and closings for each fiscal year in the three year period ended December 26, 2009.

New York City compared to our chain drug competitors in the drugstore business. Our primary competition comes from over 1,400 independent pharmacies located in New York City, as well as stores operated by major drugstore chains including CVS, Rite Aid and Walgreens. We believe that we have significant competitive advantages over independent drugstores in New York City. These include purchasing economies of scale, two strategically located warehouses that minimize store inventory and maximize selling space, a broad line of in-stock, brand name merchandise, the ability to offer a broad range of value-oriented private label products and a convenient store format. Against major drug chain competition, we enjoy the advantages of strategically located warehouses, a larger number of convenient locations and greater experience operating stores in the New York greater metropolitan area. In addition to competition from the drugstore chains named above, our pharmacy business also competes with hospitals, health maintenance organizations and Canadian imports.


	Fiscal Year Ended
	December 26, 2009		December 27, 2008		December 29, 2007
Store locations, beginning of year	251		242		248
Store openings	10		15		10
Store closings	(4	)	(6	)	(16	)

Store locations, end of year	257		251		242

~~We also~~In ~~compete~~2009, towe aopened ~~lesser~~three ~~extent~~new ~~with~~stores ~~other~~in ~~classes~~Manhattan ofand ~~retail~~seven ~~trade,~~in ~~including~~the ~~supermarkets~~densely ~~and~~populated ~~mass~~outer ~~merchants~~boroughs of New York City. WeAs ~~believe~~of ~~that~~December 26, 2009, approximately 59% of our ~~concentration~~stores were in Manhattan, 32% were in the ~~densely~~outer ~~populated~~boroughs of New York City ~~market~~ ~~limits~~and ~~the~~9% ~~ability~~were located outside New York City. At December 26, 2009, we occupied approximately 1.8 million square feet of ~~big~~retail ~~box~~space, ~~retailers~~an ~~and~~increase ~~supermarkets~~of approximately 3.5% compared to ~~expand~~the ~~meaningfully~~end inof ~~many~~fiscal 2008. Approximately 39% of ~~our~~the ~~prime~~stores ~~trading~~we ~~areas~~operated at December 26, 2009 had been opened since the beginning of fiscal 2002.

~~An adverse~~Our ~~trend~~approximately ~~for~~506,000 ~~drugstore~~square ~~retailing~~foot ~~has~~primary ~~been the growth in mail-order and internet-based prescription processors. These prescription~~ distribution ~~methods~~facility ~~have~~is ~~grown~~centrally ~~in market~~located ~~share relative to drugstores as a result of the rapid rise~~ in ~~drug~~Maspeth, ~~costs~~Queens, ~~experienced~~New inYork ~~recent years~~City. ~~Mail-order~~The ~~prescription distribution methods have been perceived by many~~facility ~~employers~~is ~~and~~located ~~insurers~~within asten ~~being~~miles ~~less~~of ~~costly~~approximately ~~than~~90% ~~traditional~~of ~~distribution~~our ~~methods~~stores, and ~~have~~none ~~been mandated by an increasing number~~ of ~~third~~our ~~party~~retail ~~pharmacy~~locations ~~benefit~~are ~~managers,~~farther ~~many~~than of50 ~~which~~miles ~~also~~from ~~own~~this ~~and manage mail-order distribution operations~~facility. InWe ~~addition~~also tooperate ~~these~~a ~~forms of mail-order distribution~~second, ~~there~~smaller ~~have~~warehouse ~~also~~facility ~~been~~in anNorth ~~increasing~~Bergen, ~~number~~New ofJersey ~~internet-based~~for ~~prescription~~the ~~distributors~~distribution ~~that specialize in offering~~ of certain ~~high~~seasonal ~~demand~~and ~~lifestyle~~other ~~drugs~~promotional ~~at deeply discounted prices~~merchandise. ~~A number~~This ofapproximately ~~these~~114,000 ~~internet-based~~square ~~distributors~~foot ~~operate~~support ~~illicitly~~facility ~~and~~enjoys ~~outside~~similar ~~the~~proximity ~~reach~~to most of ~~regulations~~our ~~that~~New ~~govern~~York ~~legitimate~~City ~~drug~~locations ~~retailers.~~while ~~Competition~~providing ~~from~~additional ~~Canadian~~capacity ~~imports has also created volume~~ and ~~pricing~~ ~~pressure.~~closer ~~Imports~~proximity ~~from foreign countries may increase further if recently introduced legislation seeking~~ to ~~legalize~~our ~~the~~stores located ~~importation~~in ofNew ~~drugs from Canada and other countries is eventually enacted~~Jersey. We believe that these ~~alternate~~two ~~distribution~~central ~~channels~~locations ~~have~~allow ~~acted~~us to ~~restrain~~maintain ~~the~~relatively ~~rate~~low ofwarehouse ~~sales~~and ~~growth~~distribution ~~for~~costs ~~traditional~~as ~~chain~~a ~~drug~~percentage ~~retailers~~of ~~in the last several years~~sales.

~~Since 1996,~~Company ~~the~~Operations national market share of prescription drug sales attributable to drugstore chains have remained flat at approximately 40%, while industry data shows the mail-order market share increasing from approximately 12% in 1996 to a current market share of approximately 21%. We expect the increase in market share for mail-order to continue, which will continue to restrain growth for market participants and cause negative pricing pressure. While mail-order market share is expected to continue to increase, we believe that the use of mail-order is limited due to the time delay associated with mail-order sales, which limits the ability of customers to use this channel to obtain drugs to treat acute conditions. Approximately 56% of our new prescriptions are for acute cases. Further, we believe the cost savings associated with mail-order prescriptions are generally achieved through large volume orders, and typically orders of less than a 90-day supply will cost the same or more than a retail purchase due to shipping costs.

Front-End ~~Government~~Merchandising ~~Regulation~~

~~Our~~To ~~business~~achieve isour ~~subject~~brand tovision ~~extensive~~of ~~federal~~New York Living Made Easy, ~~state~~our front-end merchandising strategy focuses on providing customers with a wide selection of competitively priced products in convenient and ~~local~~customer-friendly ~~regulations~~presentations. ~~These~~We ~~regulations~~offer ~~cover~~a ~~required~~variety ~~qualifications~~of brand name and private label health and beauty care products, ~~day~~including toover-the-counter ~~day operations~~items, ~~reimbursement~~food and ~~documentation~~beverage ofitems, ~~activities~~including fresh sandwiches and salads, cosmetics, greeting cards and housewares. We ~~continuously~~further ~~monitor~~complement ~~the~~our ~~effects~~front-end product offerings with additional customer services such as ATMs, sales of ~~regulatory~~lottery ~~activity~~tickets onand ~~our~~postage ~~pharmacy~~stamps, DVD movie rental kiosks, money transfer services and ~~non~~acceptance of food stamps and other government-~~pharmacy~~sponsored ~~related~~benefits. ~~operations~~In addition, on-site digital photofinishing services are available in 87 of our store locations as of December 26, 2009.

13The growth of our private label offerings plays an important role in our front-end merchandising strategy. Private label products provide customers with high-quality and lower priced alternatives to brand name products, while generating generally higher gross profit margins than brand name products. Private label offerings also enhance our reputation as a value-oriented retailer, build customer loyalty and allow us to differentiate ourselves from competitors. During the third quarter of 2009, we successfully re-launched many of our private label household and value brands. In addition, we

~~Table~~7 ~~of Contents~~

Table Licensureof and Registration Laws Contents

~~New~~ introduced ~~York~~“DR ~~and~~Delish”, ~~New~~our ~~Jersey~~new ~~require~~exclusive ~~that~~brand ~~companies operating a pharmacy within the state be licensed by the state board of pharmacy. We currently have pharmacy licenses~~ for ~~each~~food ~~pharmacy we operate in New York~~ and ~~New Jersey~~beverages. ~~Pharmacists~~We ~~who~~also ~~provide~~offer ~~services on~~ our ~~behalf~~own ~~are~~private ~~required~~label toproducts ~~obtain~~under ~~and~~various ~~maintain~~other ~~professional~~names ~~licenses~~including ~~and are~~“5th Avenue”, ~~subject to state regulations regarding professional standards of conduct~~“Apt. ~~Each~~5”, of“Christmas ~~our pharmacists located~~ in New York” isand ~~required~~“Duane ~~to be licensed by the State of New York~~Reade.” ~~The~~In ~~State~~fiscal of2009, ~~New Jersey requires the pharmacists employed at~~ our ~~stores~~private inlabel ~~New~~products ~~Jersey~~accounted tofor beapproximately ~~licensed~~10.4% inof ~~New~~front-end ~~Jersey~~sales.

Health ~~Medicare~~and beauty care products represent our highest volume product categories within front-end sales. To further enhance our health and ~~Medicaid~~ beauty offerings, we operate Skin Wellness Centers in 44 store locations as of December 26, 2009. Our Skin Wellness Centers are staffed by trained beauty advisors and offer our customers a wide range of skin care brands. In 2009, we also introduced our customers to the “Look Boutique,” our first upscale beauty department.

~~The~~Pharmacy ~~pharmacy business operates under regulatory and cost containment pressures from federal and state legislation primarily affecting Medicaid and, to a lesser extent, Medicare.~~

~~We receive~~Our ~~reimbursement~~pharmacy ~~from~~business ~~government~~is ~~sponsored~~central ~~third~~to ~~party~~our ~~plans,~~customer ~~including~~identity ~~Medicaid~~ and ~~Medicare,~~provides ~~non-government~~a ~~third~~critical ~~party~~link ~~plans~~to ~~such~~our ashealth ~~managed~~and ~~care~~wellness ~~organizations~~business and ~~also~~ ~~directly~~sales ~~from~~in ~~individuals (i.e. private~~over-~~pay). For~~ the ~~2008 fiscal year, our pharmacy payer mix, as a percentage of total prescription sales, was approximately 66% managed care organizations, 27% Medicaid/Medicare and 7% private~~-~~pay.~~counter ~~Pricing for private~~front-~~pay~~end ~~patients is based on prevailing regional market rates~~products. ~~However,~~We ~~federal~~believe ~~laws~~that ~~and~~our ~~regulations~~extensive ~~contain~~network ~~a variety~~ of ~~requirements~~conveniently ~~relating~~located ~~to the reimbursement and furnishing of prescription drugs under Medicaid. First~~stores, ~~states~~strong ~~are~~local ~~given~~market ~~authority,~~position ~~subject~~and toreputation ~~applicable standards, to limit or specify conditions~~ for ~~the~~high ~~coverage~~quality ofhealthcare ~~some~~products ~~drugs.~~help ~~Second,~~in asattracting ~~discussed below, federal Medicaid law establishes standards for~~ pharmacy ~~practice,~~business ~~including~~from ~~patient~~individual ~~counseling~~customers ~~and~~as ~~drug~~well ~~utilization review.~~as ~~Third,~~managed ~~federal~~care regulations impose reimbursement requirements for prescription drugs furnished to Medicaid beneficiaries. Prescription drug benefits under Medicare are paid pursuant to the Medicare Prescription Drug Improvement and Modernization Act of 2003 (P.L. 108-173)organizations, orinsurance ~~the Medicare Modernization Act. In addition to requirements mandated by federal law~~companies, ~~individual~~ ~~states~~employers ~~have substantial discretion in determining administrative, coverage, eligibility~~ and ~~reimbursement~~other ~~policies~~third ~~under~~party ~~their respective state Medicaid programs that may affect our pharmacy operations~~payers.

~~The Medicare~~Sales ~~and~~of ~~Medicaid~~prescription ~~programs~~medications are ~~subject~~expected to ~~statutory~~experience ~~and~~long-term ~~regulatory~~growth ~~changes,~~trends attributable ~~retroactive~~to ~~and~~the ~~prospective~~aging ~~rate adjustments~~population, ~~administrative~~new ~~rulings~~drug discoveries, ~~executive orders~~ and ~~freezes~~increased ~~and funding~~use ~~restrictions,~~of ~~all~~quality of ~~which~~life ~~may~~prescription ~~significantly~~products. ~~impact~~Increased ~~our~~prescription ~~pharmacy~~coverage ~~operations.~~through Wevarious ~~cannot~~private ~~assure~~and ~~you~~government ~~that~~sponsored ~~payments~~plans ~~for~~such ~~pharmaceuticals~~as ~~under~~ the Medicare ~~and~~Part D ~~Medicaid programs will continue to be~~program ~~based~~as onwell ~~current~~as ~~methodologies~~other orfavorable ~~even~~demographic ~~remain~~trends ~~similar~~are expected to ~~present~~result ~~levels.~~in Wecontinued ~~may~~growth befor ~~subject~~all toaspects ~~rate~~of ~~reductions~~this asbusiness. aSales ~~result~~ of ~~federal~~prescription ordrugs ~~state~~represented ~~budgetary~~46.7% ~~constraints~~of ornet ~~legislative~~sales orin ~~other changes related to the Medicare and Medicaid programs including~~2009, ~~but~~compared ~~not limited~~ to, ~~the Medicare Part D drug benefit~~46.1% ~~Over~~of ~~the~~net ~~past~~sales ~~several~~in ~~years,~~2008 ~~New York State has reduced Medicaid~~ and ~~EPIC~~46.0% ~~prescription~~of ~~reimbursement~~net ~~rates, adversely impacting our pharmacy~~ sales ~~and~~in ~~gross margins~~2007.

An ~~Fraud,~~ongoing ~~Waste~~trend in our pharmacy business has been the utilization of generic prescription drugs in lieu of their branded equivalents when filling a prescription. The number of generic prescriptions filled represented 62.3% of total prescriptions filled in 2009 as compared to 59.6% of total prescriptions filled in 2008 and ~~Abuse~~55.7% ~~Laws~~ of total prescriptions filled in 2007. While the increase in the percentage of generic prescriptions filled reduces the rate of pharmacy sales growth overall, it increases our profitability per prescription filled since generic prescriptions are generally purchased at a lower cost than their branded equivalents. We also continue to emphasize the value of using generic products to our customers since generic prescriptions typically have a lower retail price to the customer.

WeThe ~~are~~retail ~~subject~~drugstore toindustry ~~federal~~relies ~~and~~significantly ~~state~~on ~~laws~~third ~~and~~party ~~regulations~~payors. ~~governing~~The ~~financial~~percentage ~~and~~of ~~other~~our ~~arrangements~~total ~~between~~prescription ~~healthcare~~drug ~~providers.~~sales covered by ~~Commonly~~third ~~referred~~party plans, which include government-paid plans, increased to approximately 94.2% in 2009, as ~~the~~compared ~~fraud~~to approximately 93.4% in 2008 and approximately 93.0% in 2007. Third party payors, ~~waste~~including the Medicare Part D plans and ~~abuse~~the ~~laws~~state sponsored Medicaid agencies, ~~these~~at ~~laws~~times ~~prohibit~~change the eligibility requirements of participants or reduce certain ~~financial~~reimbursement ~~relationships~~rates. ~~between~~These ~~pharmacies~~evaluations and ~~physicians,~~resulting ~~vendors~~changes and ~~other~~reductions ~~referral~~are ~~sources~~expected to continue. ~~Violations~~When ofthird ~~fraud~~party payors, including the ~~waste~~Medicare ~~and~~Part ~~abuse~~D ~~laws~~program and ~~regulations~~state ~~could~~sponsored ~~subject~~Medicaid ~~us to~~agencies, ~~among~~reduce ~~other~~the ~~things,~~number ~~significant~~of ~~fines,~~participants ~~penalties,~~or ~~injunctive~~reduce ~~relief~~their reimbursement rates, ~~pharmacy~~sales ~~shutdowns~~and margins in the industry could be reduced, and ~~possible~~profitability ~~exclusion~~of ~~from~~the ~~participation~~industry incould ~~federal~~be adversely affected. ~~and~~These ~~state~~possible ~~healthcare~~adverse ~~programs~~effects can be offset by controlling expenses, ~~including~~dispensing ~~Medicare~~more higher margin generics and ~~Medicaid~~dispensing more prescriptions overall. ~~Changes~~For inmore ~~healthcare~~information ~~laws~~regarding orregulations ~~new~~governing ~~interpretations~~third-party ofplan ~~existing~~reimbursements, ~~laws~~see “Government ~~may~~Regulation—Medicare, ~~significantly~~Medicaid ~~affect~~and Third-Party Payors.”

14In addition to the trends and risks discussed above, our pharmacy business is subject to many of the trends and risks in the healthcare industry, including changes in reimbursement levels for certain prescription drugs, healthcare reform and enforcement initiatives sponsored by federal, state and local governments, our ability at attract and retain highly skilled and qualified pharmacists. These trends and risks are described in greater detail under “Item 1A. Risk Factors.” Previous factors that have influenced our pharmacy sales are the level of third party plan co-payments, publicity surrounding certain medications, conversion of certain prescription drugs to over-the-counter status and increased mail-order and internet-based penetration.

~~Table~~Our pharmacies are linked by a central computer system that makes central patient records available in real time, so that our customers can fill prescriptions at any of ~~Contents~~our pharmacies. The system provides customers with a broad range of services, including concurrent, prospective and retrospective drug reviews. Our pharmacy computer network profiles customer medical and other relevant information, supplies customers with information concerning their drug purchases for income tax and insurance purposes and prepares prescription labels and receipts. The computer network also expedites transactions with third party plans by electronically transmitting prescription information directly to the third party plan and providing on-line adjudication. At the time of sale, on-line adjudication confirms customer eligibility, prescription coverage, pricing and co-payment requirements and automatically bills the respective plan. On-line adjudication also reduces losses from rejected claims and eliminates a portion of our administrative burden related to the billing and collection of receivables and related costs.

~~our pharmacy~~8 ~~business. Some of the fraud, waste and abuse laws that have been applied in the pharmaceutical industry include:~~

FederalTable Anti-Kickback Statute: The federal anti-kickback statute, Section 1128B(b) of the Social Security Act (42 U.S.C. 1320a-7b(b)), prohibits, among other things, the knowing and willful offer, payment, solicitation or acceptance of remuneration, directly or indirectly, in return for referring an individual to a provider of services for which payment may be made in whole or in part under a federal healthcare program, including the Medicare or Medicaid programs. In addition, the federal anti-kickback statute prohibits the knowing and willful solicitation or receipt of any remuneration, directly or indirectly, in return for purchasing, leasing, ordering or arranging for or recommending the purchasing, leasing or ordering of any good, facility, service or item for which payment may be made in whole or in part under a federal health care program, including Medicare or Medicaid. Remuneration has been interpreted to include any type of cash or in-kind benefit, including long-term credit arrangements, gifts, supplies, equipment, prescription switching fees, or the furnishing of business machines. Several courts have found that the anti-kickback statute is violated if any purpose of the remuneration, not just the primary purpose, is to induce referrals. Contents

~~Potential sanctions~~In ~~for~~2007, ~~violations~~Consumer ofHealth ~~the anti-kickback statute include felony convictions~~Services, Inc. ~~imprisonment,~~launched ~~substantial~~DR ~~criminal fines and exclusion from participation~~ Walk-in ~~any federal~~Medical ~~healthcare program, including the Medicare and Medicaid programs~~Care. ~~Violations~~These ~~may~~sites are ~~also~~designed ~~give rise~~ to ~~civil~~provide ~~monetary~~customers ~~penalties~~with inconvenient ~~the~~access ~~amount~~to ~~of $50~~high-quality,~~000~~ ~~per~~urgent ~~violation,~~and ~~plus treble damages. In addition to the federal anti~~non-~~kickback~~emergency ~~statute,~~medical ~~many~~services ~~states,~~at ~~including~~affordable ~~New Jersey~~prices, ~~have~~with ~~enacted~~the ~~State Medicaid~~option ~~anti-kickback statutes that are similar~~ to ~~the~~see ~~prohibitions of the federal anti~~on-~~kickback~~site ~~statute.~~physicians ~~Potential~~on ~~sanctions~~a ~~and violations of state anti~~walk-~~kickback statutes~~in ~~are~~basis ~~similar~~for toimmediate ~~those~~examination ofand ~~federal anti-kickback statutes~~treatment. ~~Although~~As ~~we believe that our relationships with vendors~~of December 26, ~~physicians~~2009, ~~and~~we ~~other~~had ~~potential~~four ~~referral~~of ~~sources~~these ~~have~~DR ~~been structured~~ Walk-in ~~compliance~~Medical ~~with~~Care ~~fraud,~~centers ~~waste~~in ~~and~~our ~~abuse~~stores ~~laws,~~and ~~including~~believe ~~the~~these ~~federal~~services ~~and~~enhance ~~state~~our ~~anti-kickback~~convenience ~~statutes~~image, ~~the~~promote ~~Department~~stronger ofcustomer ~~Health~~loyalty and ~~Human~~assist ~~Services~~us ~~has acknowledged~~ in ~~its pharmaceutical~~addressing ~~industry~~the ~~compliance~~wellness ~~guidance~~needs ~~that~~of ~~many~~our ~~common business activities potentially implicate the anti-kickback statute~~customers. ~~We cannot offer any assurance that a government~~A ~~enforcement~~fifth ~~agency,~~DR ~~private~~Walk-in ~~litigant,~~Medical orCare ~~court~~center ~~will~~opened ~~not~~in ~~interpret~~ our ~~business~~stores ~~relations~~in toFebruary ~~violate the fraud, waste and abuse laws~~2010.

~~The~~Internet False Claims Act: Under the False Claims Act, civil penalties may be imposed upon any person who, among other things, knowingly or recklessly submits, or causes the submission of false or fraudulent claims for payment to the federal government, for example, in connection with Medicare and Medicaid. Any person who knowingly or recklessly makes or uses a false record or statement in support of a false claim, or to avoid paying amounts owed to the federal government, may also be subject to damages and penalties under the False Claims Act.

~~Moreover, private~~Our ~~individuals~~interactive ~~may bring qui tam~~website, ~~or "whistle blower~~www.duanereade.com," ~~suits~~is ~~under~~a ~~the~~convenient ~~False Claims Act,~~ and ~~may~~efficient ~~receive~~means athat ~~portion~~customers ~~of amounts~~may ~~recovered~~use onto ~~behalf~~access ofour ~~the~~Duane ~~federal government~~Reade ePharmacy. ~~Such~~Customers ~~actions~~can ~~must~~register beto ~~filed~~have ~~under~~access ~~seal~~to ~~pending~~view their ~~review~~prescription byrecords, ~~the~~print ~~Department~~insurance ofand ~~Justice.~~tax ~~Penalties of between $5~~reports,~~500~~ ~~and~~order ~~$11~~refills,~~000~~ ~~and~~order ~~treble damages~~new ~~may~~prescription beand ~~imposed~~transfers, ~~for~~access ~~each~~drug ~~violation~~information ofand ~~the~~ask ~~False~~our ~~Claims~~pharmacists ~~Act.~~a Several federal district courts have held that the False Claims Act may apply to claims for reimbursement when an underlying service was delivered in violation of other laws or regulations, including the anti-kickback statutequestion.

~~In addition~~Our towebsite ~~the~~also ~~False~~allows ~~Claims~~our ~~Act,~~customers ~~the federal government has other civil and criminal statutes, which may be utilized if the government suspects that we have submitted false claims. Criminal provisions that are similar~~ to: the False Claims Act provide that if a corporation is convicted of presenting a claim or making a statement that it knows to be false, fictitious or fraudulent to any federal agency, it may be fined not more than twice any pecuniary gain to the corporation, or, in the

15• View our latest circular and company information.

~~Table~~• ofObtain ~~Contents~~information about our customer loyalty program and our Flex Rewards card.

~~alternative, no~~• ~~more~~Locate ~~than~~a ~~$500,000~~Duane ~~per~~Reade ~~offense.~~near ~~Many states also have similar false claims statutes that impose liability for the types of acts prohibited by the False Claims Act~~them.

~~In April~~• ~~2007,~~Submit ~~former~~digital ~~New~~photos ~~York State Governor Elliot Spitzer signed legislation implementing the Health and Mental Hygiene Budget~~ for ~~the 2007-2008 fiscal year~~processing. New York State's False Claims Act was included within that legislation. The New York State False Claims Act is modeled after the federal False Claims Act. The New York State False Claims Act provides that a false claim can result in civil penalties between $6,000 to $12,000 per claim and possible treble damages. In addition, the New York State Medicaid Inspector General James G. Sheehan has announced the commencement of an aggressive audit program targeting Medicaid payments to New York State retail pharmacies. The New Jersey Health Care Claims Fraud Act (N.J.S.A. 2C:21-4.2, et seq.) prohibits the filing of false or misleading claims for payment for health care services and imposes penalties including imprisonment and fines of five times the amount of the claim or more. Section 6031 of the Deficit Reduction Act of 2005 and Section 1901 of the Social Security Act provide a financial incentive for states to enact false claims acts that establish liability to the state for the submission of false or fraudulent claims to the state's Medicaid program.

~~If a~~• ~~state~~Place ~~false~~orders claims act is determined to meet certain enumerated requirements, the state is entitled to an increase of 10 percentage points in its share of any amounts recovered under a state action brought under such law. Under Section 1909(b) of the Social Security Act, the United States Department of Health and Human Services, Office of Inspector General is required to determine, in consultation with the Attorney General of the United States, whether a state has in effect a law relating to false or fraudulent claims submitted to a state Medicaid Program that meets the enumerated requirements. The effective date of Section 1909 of the Social Security Act is January 1, 2007. On August 7, 2007, the Office of Inspector General notified the New York State Attorney General that the New York State False Claims Act met the requirements of Section 1909(b). The Office of the Inspector General has reviewed the New Jersey State False Claims Act and has notified the New Jersey Attorney General that the New Jersey State False Claims Act does not meet the enumerated requirements of Section 1909(b). On May 19, 2005, New York City Mayor Michael Bloomberg signed into law the New York City False Claims Act (Local Law 53 of 2005) which authorizes citizens to bring lawsuits to recover treble damages for ~~fraudulent~~contact ~~claims submitted to the city~~lenses. Finally, the submission of false claims may result in termination of our participation in federal or state healthcare programs. Members of management and persons who actively participate in the submission of false claims can also be excluded from participation in federal healthcare programs.

~~We believe~~Our ~~that~~strategy wehas ~~have~~been ~~sufficient procedures in place~~ to ~~provide~~develop ~~for~~ the ~~accurate~~website ~~completion~~as ofan ~~claim~~additional ~~forms~~vehicle ~~and~~to ~~requests~~deliver ~~for~~superior ~~payment.~~customer ~~Nonetheless~~service, ~~given~~enhance ~~the~~our ~~complexities~~brand ofrecognition ~~the Medicare,~~and ~~Medicaid~~to ~~and~~supplement ~~other~~our ~~third~~convenient ~~party~~store ~~payer~~locations. ~~programs,~~We ~~some~~believe www.duanereade.com ofprovides ~~our~~one ~~billing~~more ~~and~~important ~~record-keeping~~touch ~~practices~~point ~~may~~to beprovide ~~alleged~~pharmacy toservices beas ~~false~~well ~~claims~~as byallowing ~~the~~customers ~~enforcing~~to ~~agency~~contact orus athough ~~private~~the ~~litigant~~internet.

Store ~~Physician~~Operations ~~Self-Referral Laws~~

~~The~~Our ~~federal~~stores ~~physician~~range ~~self-referral~~in ~~law,~~size ~~Section 1877~~from ofunder ~~the~~500 ~~Social~~to ~~Security Act (42 U.S.C.~~approximately ~~§ 1395nn~~12,700 ~~commonly~~square ~~known~~feet, aswith ~~the~~an ~~"Stark~~average ~~Law")~~of ~~prohibits~~approximately ~~physicians~~6,839 ~~from~~square ~~referring~~feet ~~Medicare~~of ~~patients~~selling ~~for~~space ~~certain~~per ~~designated~~store ~~health~~as ~~services to entities with which the physician or an immediate family member~~ of ~~the~~December 26, ~~physician~~2009. ~~has~~Our astores ~~financial~~are ~~relationship,~~designed ~~unless~~to anfacilitate ~~exception~~customer ~~applies~~convenience. ~~The~~During ~~Stark~~2008, ~~Law~~we isundertook ~~implicated if the physician has~~ an ~~ownership~~initiative orto ~~financial~~modernize ~~relationship with the~~our ~~entity~~store ~~that~~locations isthrough ~~providing~~several ~~the~~store ~~designated~~renovations, ~~health~~new ~~service.~~interior ~~The~~and ~~Stark~~exterior ~~Law~~design ~~also~~graphics ~~prohibits~~and ~~the~~décor. ~~entity~~We ~~from~~opened ~~billing~~ten ~~for~~new ~~services~~stores ~~provided~~in ~~pursuant~~fiscal to2009, a15 ~~prohibited~~new ~~referral.~~stores ~~Among~~in ~~the~~fiscal ~~designated~~2008 ~~services covered~~and byten ~~the~~new ~~Stark~~stores ~~Law~~in ~~include~~fiscal ~~outpatient prescription drugs~~2007. ~~Sanctions~~Several ~~for~~of ~~violating~~our ~~the~~2008 ~~Stark~~store openings ~~Law include denial of payment~~ and ~~civil~~all ~~monetary penalties~~ of ~~not~~our ~~more~~2009 ~~than~~store ~~$15,000~~openings ~~for~~reflect ~~each~~these ~~bill~~new ~~or claim~~store ~~for~~design ~~a service~~concepts. Any physician or other entity that enters into an arrangement or scheme (such as a cross-referral arrangement) which the physician or entity knows, or should know, has a principal purpose of issuing referrals by the physician

16We establish each store’s hours of operation in an attempt to best serve customer traffic patterns and purchasing habits. Approximately one third of our store locations are open 24 hours. Most stores in Manhattan’s business districts are generally open six days per week. In residential and certain business/shopping districts, most stores are open seven days per week, with a heavy emphasis on convenient, early morning openings and late evening closings. We intend to continue to identify stores where we believe extended operating hours would improve customer service and convenience and contribute to our profitability. Many of our stores offer delivery services as an added customer convenience. Customers can arrange for delivery via phone, fax or internet. Each store is supervised by a store manager and one or more assistant store managers. Our stores are supplied up to five times per week from our two warehouses which enables us to maintain a high in-stock position, maximizes store selling space and minimizes our inventory investment per store.

~~Table~~Purchasing ofand ~~Contents~~Distribution

~~to a~~In ~~particular entity which~~total, ifwe ~~the~~purchase ~~physician~~from ~~directly~~over ~~made referrals to such entity~~1,000 ~~would~~vendors ~~be in violation of the Stark Law,~~ and ~~subject~~believe tothat athere ~~civil~~are ~~monetary~~ample ~~penalty~~sources of ~~not~~supply ~~more than $100,000~~ for ~~each~~ ~~such arrangement or scheme. The Stark Law is implicated if~~ the ~~physician,~~merchandise orwe ancurrently ~~immediate family member of such physician, has an ownership or compensation arrangement with the entity~~sell. ~~Both New~~We ~~York~~distribute ~~and~~approximately ~~New~~84% ~~Jersey~~of ~~have~~our ~~enacted state physician self~~non-~~referral~~pharmacy ~~statutes~~merchandise ~~and~~through ~~regulations~~our ~~that~~warehouses ~~are similar to the Stark Law in scope~~ and ~~purpose.~~receive ~~The federal and state physician self~~direct-~~referral laws are also commonly referred~~ to-store asdeliveries ~~fraud,~~for ~~waste~~approximately ~~and~~16% ~~abuse~~of ~~laws. Although we believe that~~ our ~~relationships~~non-pharmacy ~~with~~purchases. ~~physicians~~Direct-to-store ~~and~~deliveries ~~other individuals~~ are inmade ~~compliance~~primarily ~~with~~for ~~the Stark~~greeting ~~Law and its state equivalents~~cards, convenience ~~a government enforcement agent~~foods, ~~private~~beverages ~~litigant~~and orvarious ~~court~~categories ~~may~~of ~~determine~~general ~~that our business relationships violate the fraud, waste and abuse laws~~merchandise.

We ~~Drug~~generally ~~Utilization~~purchase ~~Review~~ prescription medications under long-term supply agreements. Approximately $30 million of our pharmacy inventory at December 26, 2009 was shipped directly to our stores on a consignment basis.

~~The~~9 Omnibus Budget Reconciliation Act of 1990, or OBRA 90, establishes a number of regulations regarding state Medicaid prescription drug benefits. Although OBRA 90 primarily focuses on drug manufacturers' obligations to provide drug rebates under state Medicaid programs, it also requires states to create drug utilization review, or DUR, requirements in order to combat fraud, abuse, gross overuse and inappropriate or medically unnecessary care as well as to educate patients about potential adverse reactions. DUR requires pharmacists to discuss with patients relevant information in connection with dispensing drugs to patients. This information may include the name and description of the medication, route and dosage form of the drug therapy, special directions and precautions for patients, side effects, storage, refill and actions to be taken upon a missed dosage. Under DUR requirements, pharmacists are also required to make a reasonable effort to obtain the patient's identification information, medical history and drug reaction history and to keep notes relevant to an individual's drug therapy. We believe our pharmacists provide the required drug use consultation with our customers.

Table Healthcareof Information Practices Contents

~~The~~Advertising ~~Health Insurance Portability~~ and ~~Accountability~~Promotion Act of 1996, or HIPAA, sets forth standards for electronic transactions; unique provider, employer, health plan and patient identifiers; security and electronic signatures as well as privacy protections relating to the exchange of individually identifiable health information. The Department of Health and Human Services, or DHHS, has released several rules mandating compliance with the standards set forth under HIPAA. We believe our pharmacies initially achieved compliance with DHHS's standards governing the privacy of individually identifiable health information that became effective on April 14, 2003 and with DHHS's standards governing the security of electronically stored health information that became effective on April 20, 2005. In addition, we have implemented the uniform standards governing common healthcare transactions by the required compliance date of October 16, 2003. Finally, management has taken or will continue to take all necessary steps to achieve and maintain compliance with the HIPAA standards mentioned above and with other HIPAA rules as applicable, including the standard unique employer identifier rule, the standard health care provider identifier rule and the enforcement rule.

We ~~continue~~ toadvertise ~~evaluate~~for ~~the~~our ~~effect~~stores ofin ~~the~~a ~~HIPAA~~number ~~standards~~of ontraditional ~~our~~and ~~business~~non-traditional ways. AtWe ~~this~~use ~~time~~circulars, ~~management~~direct ~~believes~~mail, ~~that~~subway ~~our~~and ~~pharmacies~~bus ~~have~~advertising, the ~~taken~~internet ~~all~~and ~~appropriate~~electronic ~~steps~~indoor toand ~~achieve~~outdoor ~~compliance with~~advertising ~~the~~which ~~HIPAA~~highlight ~~requirements.~~promotional ~~Moreover~~items, ~~HIPAA~~special ~~compliance~~service isofferings anand ~~ongoing~~programs. ~~process~~In ~~that~~early ~~will~~November ~~require~~2009, ~~continued~~we ~~attention~~introduced ~~and~~a ~~adaptation~~new ~~even~~marketing ~~after~~vehicle ~~the~~dubbed ~~official~~“The ~~compliance~~Duane ~~dates.~~Reader,” ~~Management~~a ~~does not~~20-page ~~currently~~magazine ~~believe~~which ~~that~~offers ~~the~~readers ~~cost~~hundreds of ~~compliance~~new ~~with~~products, ~~the existing HIPAA requirements will be material to us; however~~bargains, ~~management~~historical ~~cannot~~New ~~predict~~York ~~the~~facts ~~cost~~and oftips ~~future~~on ~~compliance~~living ~~with HIPAA requirements. Noncompliance with HIPAA may result~~ in ~~criminal~~New ~~penalties and civil sanctions~~York. ~~The~~To ~~HIPAA~~further ~~standards~~promote ~~have increased~~ our ~~regulatory~~brand ~~and~~within ~~compliance burden and have significantly affected the manner in which~~ our ~~pharmacies~~trade ~~use~~area, ~~and~~we ~~disclose~~provide ~~health~~customers ~~information,~~with ~~both~~distinctive ~~internally~~shopping ~~and~~bags ~~with~~bearing ~~other~~our ~~entities~~Duane Reade logo.

17Our Duane Reade Dollar Rewards program was the first loyalty card program in the U.S. chain drug store industry. Approximately half of our front-end sales are attributable to customers who used the loyalty card in fiscal 2009. On January 16, 2010, we announced the launch of Duane Reade FlexRewards, a new, easier-to-use customer rewards program that replaces our previous Dollar Rewards program. The FlexRewards program will offer members lower prices, more opportunities to earn points, more control over how and when they can spend their rewards, and a much easier and rewarding experience overall. The new Duane Reade FlexRewards program will provide our customers with the ability to benefit from more reward opportunities than before.

~~Table~~Management ofInformation ~~Contents~~Systems

InWe ~~addition~~have tocomputerized ~~the~~pharmacy ~~HIPAA~~and ~~restrictions~~inventory management ~~relating to the exchange of healthcare~~ information, ~~individual~~systems. ~~states~~We ~~have~~use ~~adopted~~scanning ~~laws protecting the confidentiality~~ point-of ~~patient~~-sale ~~information~~(POS) ~~which~~systems ~~impact the manner~~ in ~~which~~each ~~pharmacy~~of ~~records~~our ~~are maintained~~stores. ~~Violation~~These ofsystems ~~patient~~allow ~~confidentiality~~better ~~rights~~control ~~under~~of ~~common law~~pricing, ~~state~~inventory ~~law or federal law could give rise to damages, penalties, civil or criminal fines~~ and~~/or~~ ~~injunctive relief~~shrink. WePOS ~~believe~~also ~~that~~provides ~~our pharmacy operations, data~~ sales ~~arrangements~~analysis ~~and~~that ~~prescription~~allows ~~file-buying~~for ~~program~~improved ~~are~~labor inscheduling ~~compliance with~~and ~~applicable~~helps ~~federal~~optimize ~~and~~product ~~state~~shelf ~~privacy~~space ~~protections.~~allocation ~~However,~~and andesign ~~enforcement~~by ~~agency~~allowing ordetailed ~~court~~analysis ~~may find a violation~~ of ~~state or federal privacy protections arising from our pharmacy operations, our data sales arrangements or our prescription file~~stock-~~buying~~keeping ~~program~~unit ~~and such finding of a violation may have a material adverse effect upon our business and our financial results~~sales.

We utilize ~~Healthcare~~a ~~Reform~~fully automated computer-assisted merchandise replenishment system for store front-end and ~~Federal~~pharmacy ~~Budget~~orders ~~Legislation~~ sourced through our distribution centers and our primary pharmacy supply distributor. These systems use item-specific and store-specific sales history to produce “suggested” orders for each store, which can be accepted or modified by the stores before being released.

InWe ~~recent~~also ~~years,~~use ~~Congress~~radio ~~has~~frequency ~~passed~~hand aheld ~~number~~scanning ofdevices ~~federal~~to ~~laws~~communicate ~~that~~directly ~~have~~with ~~created~~our ~~major~~central ~~changes~~processing infacilities ~~the~~that ~~healthcare~~permit ~~system.~~real-time Inupdates ~~December 2000, the Medicare, Medicaid and SCHIP (State Children's Health Insurance Program) Benefits Improvement and Protection Act~~ of ~~2000,~~our orperpetual ~~BIPA,~~inventory ~~was signed into law~~information. ~~Generally,~~These ~~BIPA~~devices are ~~addressed~~also ~~attempts~~used to ~~modify~~ ~~the~~support ~~calculation~~inventory ~~of average wholesale prices of drugs~~ordering, ~~or AWPs~~transfers, ~~upon~~price ~~which~~changes ~~Medicare~~ and ~~Medicaid~~direct ~~pharmacy~~store ~~reimbursement has been based~~deliveries. ~~The~~We ~~federal~~utilize ~~government~~a ~~has~~chain-wide ~~been~~specific ~~actively~~item ~~investigating whether~~cost-based ~~pharmaceutical~~inventory ~~manufacturers~~tracking ~~have~~and ~~been~~valuation ~~improperly~~system ~~manipulating~~which ~~average~~provides ~~wholesale~~improved ~~prices,~~controls ~~and~~over ~~several~~inventory ~~pharmaceutical~~management ~~manufacturers have paid significant civil~~ and ~~criminal~~shrink-related ~~penalties to resolve litigation relating to allegedly improper practices affecting AWP~~losses. InOur ~~October 2006,~~ in-store ~~connection~~shelf ~~with~~labeling asystem ~~class action filed in the United States District for the District of Massachusetts, First Data Bank, which~~ is ~~one~~designed ofto ~~two~~improve ~~primary~~pricing ~~sources of AWP price reporting~~accuracy, ~~announced~~upgrade ~~that~~our itability ~~had entered into a settlement agreement related~~ to ~~its~~communicate ~~reporting~~item ~~of average wholesale~~ prices, ~~subject~~ to ~~final~~our ~~court~~customers ~~approval.~~and ~~Under the terms of the proposed settlement agreement, First Data Bank agreed to~~ reduce the ~~reported~~costs ~~AWP~~associated ~~of certain drugs by four percent and to discontinue the publishing of AWP at a future time. In May 2007, in connection~~ with aprocessing ~~separate~~weekly ~~class action filed in the same court, Medi-Span, the other primary source of average wholesale~~ price ~~reporting, entered into a similar settlement agreement, also subject to final court approval~~changes.

~~In January~~Competition 2008, the court denied approval of the First Data Bank and Medi-Span settlements as proposed. Subsequently, new settlement agreements were submitted to the court. On March 17, 2009, the court issued an order approving the revised settlements. Pursuant to the settlements, as approved, First Data Bank and Medi-Span have agreed to reduce the reported AWP for certain drugs by four percent. Separately, and not pursuant to the settlement agreements, First Data Bank and Medi-Span have indicated that they will also reduce the reported AWP for a large number of additional drugs not covered by the settlement agreements and that they intend to discontinue the reporting of AWP in the future. Under the terms of the court's decision, the settlement agreements can become effective no earlier than 180 days from the entry of final judgment. Although the court's ruling will take effect no earlier than 180 days from March 17, 2009, we believe that some parties will appeal the court's ruling and seek a stay of the implementation of the settlement. The court's ruling, if not revised on appeal, could potentially have a significant adverse impact on us and the drugstore industry as a whole.

~~A number~~Our stores compete on the basis of ~~contracts~~convenience ~~with~~of ~~third-party~~location ~~plans~~and ~~contain~~store ~~provisions~~layout, ~~that~~product ~~allow~~mix, usselection, tocustomer ~~adjust~~service ~~our~~and ~~pricing~~price. toThe ~~maintain~~New ~~the~~York ~~relative~~City ~~economics~~drugstore ofmarket is highly fragmented due to the ~~contract~~complexities inand ~~light~~costs of adoing ~~change~~business in ~~AWP~~ ~~methodology.~~the ~~Most~~most densely populated area of ~~our~~the ~~contracts~~country. ~~with~~We ~~both~~tailor ~~private~~our ~~and~~store ~~governmental~~format ~~plans~~to ~~also~~meet ~~include~~all ~~provisions~~of ~~that~~these ~~allow~~requirements, uswhich tohas ~~terminate~~proven successful in the ~~contracts~~business ~~unilaterally~~and residential neighborhoods of Manhattan, ~~either~~the ~~because~~outer ~~parties~~boroughs ~~cannot~~and ~~renegotiate~~surrounding ~~our~~areas. ~~pricing~~Currently, we have the largest market share in New York City compared to ~~account~~our ~~for~~chain drug competitors in the ~~change~~drugstore business. Our primary competition comes from the independent pharmacies located in ~~AWP~~New ~~methodology~~York orCity, ~~for~~as ~~any~~well ~~reason~~as ~~upon~~stores 30operated toby major ~~90 days'~~drugstore ~~notice~~chains including CVS, Rite Aid and Walgreens. ~~While~~We believe that we ~~expect~~have tosignificant ~~negotiate~~competitive ~~with~~advantages ~~the~~over ~~various~~independent ~~governmental~~drugstores in New York City. These include purchasing economies of scale, two strategically located warehouses that minimize store inventory and ~~non~~maximize selling space, a broad line of in-~~governmental third-party~~stock, ~~plans~~brand ~~for~~name ~~adjustments~~merchandise, ~~relating~~the ability to ~~the~~offer ~~expected~~a ~~changes~~broad torange ~~AWP~~of value-oriented private label products and a convenient store format. Against major drug chain competition, we ~~cannot~~enjoy bethe ~~certain~~advantages ~~that~~of ~~these~~strategically ~~negotiations~~located ~~will~~warehouses, bea ~~successful.~~larger ~~Due~~number toof ~~these~~convenient ~~factors~~locations and greater experience operating stores in the ~~uncertainty~~New ~~over~~York ~~future~~greater ~~appeals or~~metropolitan ~~stays~~area. ofIn addition to competition from the ~~court~~drugstore ~~ruling~~chains named above, ~~which~~our ~~could~~pharmacy ~~delay~~business ~~the~~also ~~effective~~competes ~~date~~with ofhospitals, ~~the~~health ~~implementation~~maintenance oforganizations ~~the~~and ~~settlement~~foreign ~~agreements~~imports. We also compete with other classes of retail trade, weincluding ~~cannot~~supermarkets and mass merchants.

18An adverse trend for drugstore retailing has been the growth in mail-order and internet-based prescription processors. These prescription distribution methods have grown in market share relative to drugstores as a result of the rapid rise in drug

~~Table~~10 ~~of Contents~~

predict withTable certainty or accurately quantify the ultimate effect of the AWP reduction on our revenues, profitability, future operations or business relationships. Contents

In ~~response~~costs toexperienced ~~BIPA~~in ~~and~~recent ~~other~~years. ~~criticisms~~Mail-order ofprescription ~~AWP~~distribution ~~pricing~~methods ~~methodologies,~~have ~~the~~been ~~Medicare~~perceived ~~Modernization~~by ~~Act~~many ~~described~~employers ~~above~~and ~~contains~~insurers aas ~~number~~being ofless ~~drug~~costly ~~pricing~~than ~~reforms,~~traditional ~~some~~distribution ofmethods ~~which were~~and ~~effective~~have ~~January 1,~~been ~~2004.~~mandated ~~Section 1927~~by an increasing number of ~~the~~third ~~Social~~party ~~Security~~pharmacy ~~Act~~benefit ~~established~~managers, ~~the~~many ~~Medicaid~~of ~~drug~~which ~~rebate~~also ~~program.~~own ~~For~~and amanage ~~manufacturer's~~mail-order ~~covered~~distribution ~~outpatient~~operations. ~~drugs~~In addition to bethese ~~eligible~~forms ~~for~~of ~~federal Medicaid~~mail-order ~~funding~~distribution, ~~under~~there ~~the~~have ~~Medicaid~~also ~~drug~~been ~~rebate~~an ~~program,~~increasing number ~~the~~of ~~manufacturer~~internet-based ~~must~~prescription ~~enter~~distributors ~~into~~that aspecialize ~~rebate~~in ~~agreement~~offering ~~with~~certain ~~the~~high ~~CMS,~~demand ~~and~~lifestyle ~~pay~~drugs ~~quarterly~~at ~~rebates~~deeply todiscounted ~~the states~~prices. ~~Section 1927(b)(3)~~A number of these internet-based distributors operate outside the ~~Act requires~~reach aof ~~participating~~regulations ~~manufacturer~~that togovern other ~~report~~drug ~~quarterly~~retailers. toCompetition ~~CMS~~from ~~the~~foreign ~~average~~imports ~~manufacturer~~has ~~price~~also ~~for~~created ~~each~~volume ~~covered~~and ~~outpatient~~pricing ~~drug~~pressure. ~~Section 1927(k)(1)~~Imports offrom ~~the~~foreign ~~Social~~countries ~~Security~~may ~~Act~~increase ~~defines~~further ~~the~~if ~~"average~~recently ~~manufacturer~~introduced ~~price"~~legislation asseeking to legalize the ~~average~~importation of drugs from foreign countries ~~price~~is ~~paid~~eventually toenacted. ~~the~~We ~~manufacturer~~believe bythese ~~wholesalers~~alternate ~~for~~distribution ~~drugs~~channels ~~distributed~~have acted to restrain the ~~retail~~rate ~~pharmacy~~of ~~class~~sales ofgrowth ~~trade,~~for ~~after~~traditional ~~deducting~~chain ~~customary~~drug ~~prompt~~retailers ~~pay~~in ~~discounts~~the last several years.

~~Under~~Since 1996, the national market share of prescription drug sales attributable to drugstore chains have remained flat at approximately 40%, ~~Section 1902(~~while industry data shows the mail-order market share increasing from approximately 12% in 1996 to a~~)(54)~~ current market share of approximately 22%. We expect the ~~Social~~increase ~~Security~~in ~~Act~~market share for mail-order to continue, ~~each~~which ~~state~~will continue to restrain growth for market participants and cause negative pricing pressure. While mail-order market share is ~~required~~expected to ~~submit~~continue ato ~~Medicaid~~increase, ~~state~~we ~~plan~~believe that the use of mail-order is limited due to ~~CMS~~the ~~describing~~time ~~its~~delay ~~payment~~associated ~~methodology~~with ~~for~~mail-order ~~covered~~sales, ~~outpatient~~which limits the ability of customers to use this channel to obtain drugs. ~~Federal~~to ~~regulations~~treat ~~require,~~acute ~~with~~conditions. ~~certain~~Approximately ~~exceptions,~~56% ~~that~~of ~~each~~our ~~state's~~new ~~Medicaid~~prescriptions ~~reimbursement~~are for aacute ~~drug~~cases. ~~not~~Further, ~~exceed~~we ~~(in~~believe the ~~aggregate)~~cost ~~the~~savings ~~lower~~associated ofwith ~~(a) its~~mail-order ~~estimated~~prescriptions ~~acquisition~~are ~~costs~~generally achieved ~~plus~~through alarge ~~reasonable~~volume ~~dispensing~~orders, ~~fee~~and ortypically ~~(b) the~~orders ~~provider's~~of ~~usual~~less ~~and~~than ~~customary~~a ~~charge~~90-day tosupply will cost the ~~public~~same or more than a retail purchase.

~~The Deficit~~Government ~~Reduction~~Regulation Act of 2005 requires the Secretary of the United States Department of Health and Human Services to provide average manufacturer price data to the states on a monthly basis beginning July 1, 2006. On July 17, 2007, CMS issued a final rule that implemented the provisions of the Deficit Reduction Act with respect to prescription drug reimbursement under the Medicaid program. This rule defined the terms "average manufacturer price" and "best price". It specifies the items that must be included and excluded in the calculation of each term. This rule became effective on October 1, 2007. The rule also implemented the Deficit Reduction Act provision establishing a new reimbursement formula for generic drugs under Medicaid and establishes federal upper limits for generics based on 250% of the lowest AMP in a given drug class. In November 2007, the National Association of Chain Drug Stores and the National Community Pharmacists Association filed a lawsuit in federal court seeking to enjoin the implementation of the proposed AMP reimbursement rules. On December 19, 2007, the United States District Court for the District of Columbia granted a preliminary injunction enjoining CMS from implementing the proposed AMP reimbursement rules. The preliminary injunction remains in place. However, it is uncertain at this time whether HHS and CMS will revise and reissue the AMP reimbursement rules and what impact, if any, the revised and reissued rules, if any, will have on us.

~~The Medicare~~Our ~~Part D~~business ~~drug~~is ~~benefit~~subject ~~went into effect on January 1, 2006. Prior~~ to ~~January 1,~~extensive ~~2006~~federal, ~~Medicare~~state ~~beneficiaries~~and ~~were~~local ~~able~~regulations. ~~to receive some assistance with~~These ~~their~~regulations ~~prescription~~cover ~~drug~~required ~~costs~~qualifications, ~~through~~day ato ~~prescription~~day ~~drug~~operations, ~~discount~~reimbursement ~~card~~and ~~program~~documentation ~~which~~of ~~began~~activities. inWe ~~June~~continuously ~~2004.~~monitor ~~This~~the ~~discount~~effects ~~card~~of ~~program~~regulatory ~~gave~~activity ~~enrollees~~on ~~access~~our topharmacy ~~negotiated~~and ~~discount~~non-pharmacy ~~prices~~related ~~for prescription drugs~~operations.

~~On January 28,~~Licensure 2005, CMS published a final rule to implement the Medicare Part D drug benefit. Under the Medicare Part D drug benefit, Medicare beneficiaries are able to enroll in prescription drug plans offered by private entities or, to the extent private entities fail to offer a plan in a given area, through a government contractor. Medicare Part D prescription drug plans include both plans providing the drug benefit on a stand alone basis and ~~Medicare~~Registration ~~Advantage~~Laws plans that provide drug coverage as a supplement to an existing medical benefit under the applicable Medicare Advantage plan. Pursuant to the CMS final rule, we will be reimbursed for drugs that we provide to enrollees of a given Medicare Part D prescription drug plan in accordance with the terms of the agreements negotiated between the Medicare Part D plan and us. We accept most Medicare Part D plans in our market areas. The amount of reimbursement to us under Medicare Part D plans is less than the amount under New York and New Jersey State Medicaid, and generally less than traditional nongovernmental third-party plans.

19New York and New Jersey require that companies operating a pharmacy within the state be licensed by the state board of pharmacy. We currently have pharmacy licenses for each pharmacy we operate in New York and New Jersey. Pharmacists who provide services on our behalf are required to obtain and maintain professional licenses and are subject to state regulations regarding professional standards of conduct. Each of our pharmacists located in New York is required to be licensed by the State of New York. The State of New Jersey requires the pharmacists employed at our stores in New Jersey to be licensed in New Jersey. Our pharmacists are also subject to Medicare and Medicaid regulations and requirements.

~~Table~~Failure ofto ~~Contents~~comply with licensure and registration laws could subject us and our employees to disciplinary action including fines, suspensions and/or revocations.

~~CMS is~~Medicare, ~~continuing~~Medicaid toand ~~issue sub~~Third-~~regulatory~~party ~~guidance~~Payors on many additional aspects of the CMS final rule. We are monitoring these government pronouncements and statements of guidance, and we cannot predict at this time the ultimate effect of the CMS final rule or other potential developments relating to its implementation on our business or results of operations.

ItThe retail drugstore industry relies significantly on third party payors, and the pharmacy business operates under regulatory and cost iscontainment ~~uncertain~~pressures atfrom ~~this~~federal ~~time~~and ~~what~~state ~~additional~~legislation ~~healthcare~~primarily ~~reform~~affecting ~~initiatives~~Medicaid and, ifto ~~any~~a lesser extent, ~~will~~Medicare. beWe ~~implemented~~receive reimbursement from government sponsored third party plans, orincluding ~~whether~~Medicaid ~~there~~and ~~will~~Medicare, benon-government ~~other~~third party ~~changes~~plans such as managed care organizations and also directly from individuals (i.e. private-pay). The percentage of our total prescription drug sales covered by third party plans, which include government-paid plans, increased to approximately 94.2% in 2009, as compared to approximately 93.4% in 2008 and approximately 93.0% in 2007. Third party payors, including the ~~administration~~Medicare ofPart ~~governmental~~D plans and the state sponsored Medicaid agencies, at times change the eligibility requirements ~~healthcare~~of ~~programs~~participants or ~~interpretations~~reduce ofcertain ~~governmental~~reimbursement ~~policies~~rates. orThese ~~other~~evaluations and resulting changes ~~affecting~~and ~~the~~reductions ~~healthcare~~are ~~system~~expected to continue. WeWhen ~~cannot~~third ~~assure~~party ~~you~~payors, ~~that~~including ~~future~~the ~~healthcare~~Medicare orPart ~~budget~~D ~~legislation~~program orand ~~other~~state ~~changes~~sponsored Medicaid agencies, reduce the ~~including~~number ~~those~~of ~~referenced~~participants ~~above~~or reduce their reimbursement rates, ~~will~~sales ~~not~~and ~~materially~~margins in the industry could be reduced, and profitability of the industry could be adversely ~~impact~~affected. ~~our~~These ~~pharmacy~~possible ~~business~~adverse effects can be offset by controlling expenses, dispensing more higher margin generics and dispensing more prescriptions overall.

For ~~Non~~the 2009 fiscal year, our pharmacy payer mix, as a percentage of total prescription sales, was approximately 64.5% managed care organizations, 29.7% Medicaid/Medicare and 5.8% private-~~Healthcare~~pay. ~~Licenses~~ Pricing for private-pay patients is based on prevailing regional market rates. However, federal laws and regulations contain a variety of requirements relating to the reimbursement and furnishing of prescription drugs under Medicaid. First, states are given authority, subject to applicable standards, to limit or specify conditions for the coverage of some drugs. Second, as discussed below, federal Medicaid law

We11 have been granted cigarette tax stamping licenses from the State of New York and the City of New York, which permit us to buy cigarettes directly from the manufacturers and stamp the cigarettes ourselves. Our stores possess cigarette tax retail dealer licenses issued by the State of New York, the City of New York and the State of New Jersey. Most of our stores have been granted licenses by the United States Department of Agriculture, enabling them to serve as certified Food Stamp retailers. In addition, most of our stores possess beer licenses and food licenses issued by the State of New York. We seek to comply with all of these licensing and registration requirements and continue to actively monitor our compliance. By virtue of these license and registration requirements, we are obligated to observe certain rules and regulations, and a violation of these rules and regulations could result in suspension or revocation of one or more licenses or registrations and/or the imposition of monetary penalties or fines.

Table Minimumof Wage Requirements Contents

We establishes ~~are~~standards ~~impacted~~for bypharmacy ~~legislation~~practice, toincluding ~~increase~~patient ~~the~~counseling ~~minimum~~and ~~hourly~~drug ~~wages~~utilization review. ~~New~~Third, ~~York~~federal ~~State~~regulations ~~increased~~impose ~~the~~reimbursement ~~minimum~~requirements ~~hourly~~for ~~wage~~prescription ~~from~~drugs furnished ~~$5.15~~ to ~~$6.00~~ onMedicaid ~~January 1,~~beneficiaries. ~~2005,~~Prescription todrug ~~$6.75~~benefits onunder ~~January 1,~~Medicare ~~2006,~~are ~~and~~paid ~~again~~pursuant to ~~$7.15~~the onMedicare ~~January 1,~~Prescription ~~2007.~~Drug ~~New~~Improvement ~~Jersey~~and ~~increased~~Modernization ~~the~~Act ~~minimum~~of ~~hourly~~2003 ~~wage from $5~~(P.~~15 to $6~~L.15 ~~on October 1~~108-173), ~~2005~~ ~~and~~or ~~again~~the toMedicare ~~$7.15~~Modernization ~~on October 1, 2006~~Act. In addition, ~~the federal minimum hourly wage increased~~ to ~~$6.55 in July 2008 and the U.S. Congress passed legislation~~ ~~that~~requirements ~~will~~mandated ~~result~~by ~~in a~~ federal ~~minimum~~law, ~~hourly~~individual ~~wage~~states ~~increase~~have tosubstantial ~~$7.25~~discretion in ~~July~~determining ~~2009. While these increases have impacted our cost of labor~~administrative, ~~we have~~coverage, eligibility and ~~believe~~reimbursement wepolicies ~~can~~under ~~continue~~their ~~to,~~respective ~~offset~~state aMedicaid ~~significant portion~~programs ofthat ~~these~~may ~~cost~~affect ~~increases through initiatives designed to further improve~~ our ~~labor efficiency~~pharmacy operations.

The ~~Employees~~ Medicare and Medicaid programs are subject to statutory and regulatory changes, retroactive and prospective rate adjustments, administrative rulings, executive orders and freezes and funding restrictions, all of which may significantly impact our pharmacy operations. We cannot assure you that payments for pharmaceuticals under the Medicare and Medicaid programs will continue to be based on current methodologies or even remain similar to present levels. We may be subject to rate reductions as a result of federal or state budgetary constraints or legislative or other changes related to the Medicare and Medicaid programs including, but not limited to, the Medicare Part D drug benefit. Over the past several years, New York State has reduced Medicaid and Elderly Pharmaceutical Insurance Coverage (EPIC) prescription reimbursement rates, adversely impacting our pharmacy sales and profitability. Under the New York State Medicaid program, reimbursement for multiple source prescription drugs for which an upper limit has been set by the Center for Medicare and Medicaid Services (“CMS”) will be an amount equal to the specific upper limit set by CMS. For a multiple source prescription drug or a brand-name prescription drug for which CMS has not set a specific upper limit, the lower of the estimated acquisition cost of such drug to pharmacies or the dispensing pharmacy’s usual and customary price charged to the general public will be applied. Under the Medicaid guidelines, providers cannot refuse to dispense prescriptions to Medicaid recipients who claim they do not have the means to pay the required co-payments. Most Medicaid recipients do in fact decline to make the co-payments resulting in the requirement for the provider to absorb this cost.

AsIn ~~of December~~July 272007, ~~2008,~~CMS weissued ~~had~~a ~~approximately~~final ~~6,800~~rule ~~employees.~~that ~~Unions~~may ~~represent~~negatively ~~approximately~~affect ~~5,000~~our level of ~~our~~reimbursements ~~employees. Non-union~~for ~~employees~~certain ~~include~~generic ~~employees~~drugs atby ~~corporate~~setting ~~headquarters,~~an upper ~~store~~limit ~~and~~on ~~warehouse~~the ~~management~~amount ~~and~~of ~~all~~reimbursement offor ~~our~~such ~~store~~drugs ~~pharmacists~~based on the “Average Manufacturer Price.” ~~The~~As ~~distribution~~a ~~facility~~result ~~employees~~of ~~are~~a ~~represented~~lawsuit brought by the ~~International~~ ~~Brotherhood~~National Association of ~~Teamsters,~~Chain ~~Chauffeurs~~Drug Stores and ~~Warehousemen~~the ~~and~~National ~~Helpers~~Community Pharmacists Association to challenge the implementation of ~~America~~the new rule, ~~Local~~a ~~210~~federal ~~under~~court atemporarily ~~collective~~enjoined ~~bargaining~~the ~~agreement~~implementation ~~that~~of ~~expires~~the onnew ~~August~~rule pending the outcome of the lawsuit and the lawsuit remains pending. In July 312008, ~~2011~~Congress enacted H.R. At6331, the Medicare ~~December~~Improvements for Patients and Providers Act of 2008 (“MIPPA”). Former President Bush subsequently vetoed MIPPA and, on July 2715, 2008, ~~employees~~Congress inoverrode ~~141~~the ~~stores~~veto. ~~were~~MIPPA ~~represented~~has bydelayed ~~RWDSU/Local~~the ~~338~~implementation ~~and~~of ~~employees~~the inuse ~~109~~of ~~stores~~Average ~~were~~Manufacturer Price ~~represented~~with byrespect ~~Local~~to ~~340A~~payments ~~New~~made ~~York~~by ~~Joint~~State ~~Board,~~Medicaid ~~UNITE~~Plans ~~AFL~~for ~~CIO~~multiple source generic drugs. ~~Our~~MIPPA ~~three~~also ~~year contracts~~prohibited ~~with~~the ~~RWDSU/Local~~Secretary ~~338~~of Health and ~~Local~~Human ~~340A~~Services ~~expire~~from onmaking ~~March 31,~~public ~~2009.~~any WeAverage ~~are~~Manufacturer ~~currently~~Price ~~engaged~~information inthat ~~negotiating~~was ~~new~~previously disclosed ~~collective~~to ~~bargaining~~the ~~agreements~~Secretary ~~with~~of ~~these~~Health ~~two~~and ~~unions~~Human Services.

In ~~Intellectual~~recent ~~Property~~ years, Congress has passed a number of federal laws that have created major changes in the healthcare system. In December 2000, the Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 2000, or BIPA, was signed into law. Generally, BIPA addressed attempts to modify the calculation of average wholesale prices of drugs, or AWPs, upon which Medicare and Medicaid pharmacy reimbursement has been based. The federal government has been actively investigating whether pharmaceutical manufacturers have been improperly manipulating average wholesale prices, and several pharmaceutical manufacturers have paid significant civil and criminal penalties to resolve litigation relating to allegedly improper practices affecting AWP. In October 2006, in connection with a class action filed in the United States District Court for the District of Massachusetts, First Data Bank, which is one of two primary sources of AWP price reporting, announced that it had entered into a settlement agreement related to its reporting of average wholesale prices, subject to final court approval. Under the terms of the proposed settlement agreement, First Data Bank agreed to reduce the reported AWP of certain drugs by four percent and to discontinue the publishing of AWP at a future time. In May 2007, in connection with a separate class action filed in the same court, Medi-Span, the other primary source of average wholesale price reporting, entered into a similar settlement agreement, also subject to final court approval.

WeIn ~~hold~~January 2008, athe ~~number~~court denied approval of ~~registered~~the First Data Bank and ~~unregistered~~Medi-Span ~~trademarks~~settlements as proposed. ~~Trademarks~~Subsequently, new wesettlement ~~have~~agreements ~~registered~~were ~~with~~submitted to the court. On March 17, 2009, the court issued an order approving the revised settlements. Some parties appealed the court’s ruling. On September 3, 2009, the United States ~~Trademark~~Court ~~Office~~of Appeals ~~include~~for the ~~name~~First ~~"Duane~~Circuit ~~Reade;"~~affirmed the ~~distinctive~~decision ~~"DR"~~of ~~logo;~~the ~~"DR~~District Court approving the settlements. Pursuant to the settlements, as approved, First Data Bank and Medi-Span have agreed to reduce the reported AWP for certain drugs by four percent. Separately, and not pursuant to the settlement agreements, First Data Bank and Medi-Span have indicated that they will also reduce the reported AWP for a large number of additional drugs not covered by the settlement agreements and that they intend to discontinue the reporting of AWP in the future. The settlement agreements became effective on September 26, 2009.

2012

~~Express," and~~A ~~its~~number ~~associated~~of ~~logo;~~contracts ~~"Christmas~~with inthird-party ~~New~~plans ~~York;"~~contain ~~"Mayfair~~provisions ~~Chemists;"~~that ~~"Fifth~~allow ~~Avenue~~us ~~Preferred;"~~to ~~"Color~~adjust ~~for~~our pricing to maintain the ~~City;"~~relative ~~"Apt~~economics of the contract in light of a change in AWP methodology. ~~5";~~Most of our contracts with both private and ~~the~~governmental ~~logo~~plans ~~"Performance~~also ~~Script~~include ~~Network".~~provisions Wethat ~~have applications~~allow ~~currently~~us ~~pending~~to ~~before~~terminate the ~~United~~contracts ~~States~~unilaterally, ~~Trademark~~either because ~~Office~~parties tocannot ~~register~~renegotiate our ~~trademarks~~pricing ~~"City~~to ~~Chic";~~account ~~"Duane~~for ~~Reade~~the ~~DRC~~change ~~Diabetes~~in ~~Resource~~AWP ~~Center,"~~methodology or for any reason upon 30 to 90 days’ notice. While we have negotiated with ~~its~~many ~~associated~~of ~~logo;~~the various governmental and ~~"We~~non-governmental ~~Pledge"~~third-party plans ~~with~~for ~~the~~adjustments ~~Duane~~relating ~~Reade~~to ~~logo.~~the Weexpected ~~regard~~changes to AWP, the ~~Duane~~New ~~Reade~~York ~~name~~State ~~and~~Legislature ~~logo,~~is ascurrently ~~well~~considering aslegislation ~~our~~that ~~other~~would ~~trademarks,~~modify asthe ~~valuable~~formula ~~assets.~~upon Inwhich ~~September~~New ofYork ~~1998,~~Medicaid webases ~~acquired~~its ~~twenty-nine~~reimbursement ~~Rock~~rates, ~~Bottom~~which, ~~stores~~if passed, will move ~~which~~pharmacy wereimbursement ~~converted~~rates with respect to Medicaid at or near the ~~Duane~~pre-settlement ~~Reade~~levels. ~~format~~However, inat this time there is no assurance that this legislation would be ultimately passed by the ~~1999~~New ~~fiscal~~York ~~year.~~State InLegislature ~~addition~~or if passed, will be in ~~connection~~its current ~~with~~form. ~~the~~In ~~Rock~~late ~~Bottom~~September ~~acquisition~~2009, weNew ~~acquired~~York Medicaid began to implement the ~~"Rock~~AWP ~~Bottom"~~reductions. ~~name~~Although ~~and~~there is some uncertainty due to the ~~"Rock~~pending ~~Bottom"~~legislation ~~logo~~at the New York State Legislature, ~~each~~our fiscal 2009 results were adversely impacted by approximately $1.0 million as a result of ~~which~~the New York Medicaid AWP reimbursement reductions and we expect an impact of approximately $4.0 million in fiscal 2010 unless the reimbursement rates are ~~registered~~adjusted ~~trademarks~~to offset the AWP impact.

The current economic conditions may result in additional reductions in New York Medicaid prescription reimbursements. The upcoming budget ~~ITEM~~proposals 1Afor New York State are expected include reductions in the reimbursements for pharmacies in the Medicaid and EPIC programs. ~~Risk~~ ~~Factors~~ The State of New Jersey is expected to propose Medicaid reductions in their upcoming budget proposals. Although neither state has approved their final budget proposals, we believe it is highly likely that there will ultimately be further reductions in reimbursements.

~~The~~In ~~following~~an ~~risk~~effort ~~factors~~to ~~should~~offset besome ~~read~~of ~~carefully~~the adverse effects from the trends discussed above, there has been an intensified effort on the part of retailers to support increased utilization of lower priced but higher margin generic prescriptions in ~~connection~~place ~~with~~of ~~evaluating~~branded medications. New generic drug introductions have also enabled retailers to increase the proportion of generic prescriptions to total prescriptions dispensed. In the past, improved generic utilization rates as well as a combination of direct purchases and contractual wholesaler purchases have enabled us to partially offset the adverse margin impact of Medicare Part D and ~~this~~reduced ~~annual~~state ~~report~~Medicaid onreimbursement rates. In addition, we ~~Form 10-K~~believe that the higher volume of pharmacy sales to third party plan customers help to offset the related lower profitability and allows us to leverage other fixed store operating expenses. ~~Certain~~We ~~statements~~believe inthat ~~this~~increased ~~"Risk~~third ~~Factors"~~party ~~section~~plan ~~are~~sales ~~forward-looking~~also generate ~~statements~~additional general merchandise sales by increasing customer traffic in our stores. ~~See~~As ~~Special~~of ~~Note~~December 26, ~~Regarding~~2009, ~~"Forward-Looking~~we ~~Statements"~~had ~~above~~contracts with virtually all major third party plans in our market areas.

Fraud, ~~Risks~~Waste ~~Related~~and toAbuse ~~Our~~Laws ~~Business~~

We ~~face~~are asubject ~~high~~to ~~level~~federal and state laws and regulations governing financial and other arrangements between healthcare providers. Commonly referred to as the fraud, waste and abuse laws, these laws prohibit certain financial relationships between pharmacies and physicians, vendors and other referral sources. Violations of ~~competition~~fraud, waste and abuse laws and regulations could subject us to, among other things, significant fines, penalties, injunctive relief, pharmacy shutdowns and possible exclusion from participation in federal and state healthcare programs, including Medicare and Medicaid. Changes in healthcare laws or new interpretations of existing laws may significantly affect our ~~markets~~pharmacy business. Some of the fraud, waste and abuse laws that have been applied in the pharmaceutical industry include:

WeFederal ~~operate~~Anti-Kickback inStatute: ~~highly~~The ~~competitive~~federal ~~markets.~~anti-kickback Instatute, Section 1128B(b) of the ~~New~~Social ~~York~~Security ~~greater~~Act ~~metropolitan~~(42 ~~area~~U.S.C. 1320a-7b(b)), weprohibits, ~~compete~~among ~~against~~other ~~national~~things, ~~regional~~the knowing and ~~local drugstore~~willful ~~chains~~offer, ~~discount~~payment, ~~drugstores~~solicitation or acceptance of remuneration, ~~supermarkets~~directly or indirectly, ~~combination~~in ~~food~~return ~~and~~for ~~drugstores,~~referring ~~discount~~an ~~general~~individual ~~merchandise~~to ~~stores,~~a ~~mass~~provider ~~merchandisers,~~of ~~independent~~services ~~drugstores~~for ~~and~~which ~~local~~payment ~~merchants.~~may ~~Major~~be ~~chain competitors~~made in ~~the~~whole ~~New~~or ~~York~~in ~~greater~~part ~~metropolitan~~under ~~area~~a ~~include~~federal ~~CVS~~healthcare program, ~~Rite~~including ~~Aid~~the ~~and~~Medicare ~~Walgreens~~or Medicaid programs. In addition, ~~other~~the ~~chain~~federal ~~stores~~anti-kickback ~~may~~statute ~~enter~~prohibits the ~~New~~knowing ~~York~~and ~~greater~~willful ~~metropolitan~~solicitation ~~area~~or ~~and~~receipt ~~become~~of ~~significant competitors~~any remuneration, directly or indirectly, in ~~the~~return ~~future.~~for ~~Many~~purchasing, ofleasing, ~~our~~ordering ~~competitors~~or ~~have~~arranging ~~greater~~for ~~financial~~or ~~and~~recommending ~~other~~the ~~resources~~purchasing, ~~than~~leasing or weordering ~~do.~~of ~~Currently~~any good, wefacility, ~~have~~service ~~the~~or ~~largest~~item ~~market~~for ~~share~~which payment may be made in ~~the~~whole ~~New~~or ~~York~~in ~~metropolitan~~part ~~area~~under ~~compared~~a tofederal ~~our competitors~~health incare ~~the~~program, ~~drugstore~~including ~~business~~Medicare or Medicaid. IfRemuneration has been interpreted to include any type of ~~our~~cash ~~current~~or ~~competitors~~in-kind benefit, orincluding ~~new~~long-term ~~competitors~~credit arrangements, ~~were~~gifts, tosupplies, ~~devote~~equipment, ~~significant~~prescription ~~resources~~switching tofees, ~~enhancing~~ or ~~establishing~~the anfurnishing ~~increased~~of ~~presence~~business inmachines. Several courts have found that the ~~New~~anti-kickback ~~York greater~~statute ~~metropolitan~~is ~~area,~~violated ~~they~~if ~~could~~any ~~make~~purpose itof ~~difficult~~the remuneration, ~~for~~not usjust the primary purpose, is to ~~maintain~~induce orreferrals. ~~grow~~Potential ~~our~~sanctions ~~market~~for ~~share~~violations orof ~~maintain~~the ~~our~~anti-kickback ~~margins~~statute include felony convictions, ~~and~~imprisonment, ~~our~~substantial ~~advertising~~criminal fines and ~~promotional~~exclusion ~~costs~~from ~~could~~participation ~~increase.~~in ~~This~~any ~~competition~~federal ~~could~~healthcare ~~materially~~program, ~~adversely~~including ~~affect~~the ~~our~~Medicare ~~results~~and ofMedicaid ~~operations~~programs. ~~and~~Violations ~~financial~~may ~~condition~~also give rise to civil monetary penalties in the ~~future~~amount of $50,000 per violation, plus treble damages. In addition to ~~competition~~the ~~from~~federal ~~the~~anti-kickback ~~drugstore~~statute, ~~chains~~many ~~named~~states, including ~~above~~New Jersey, ~~our~~have ~~pharmacy~~enacted ~~business~~State ~~also~~Medicaid ~~competes~~anti-kickback statutes that are similar to the prohibitions of the federal anti-kickback statute. Potential sanctions and violations of state anti-kickback statutes are similar to those of federal anti-kickback statutes. Although we believe that our relationships with ~~hospitals~~vendors, ~~health~~physicians, ~~maintenance~~and ~~organizations~~other potential referral sources have been structured in compliance with fraud, waste and ~~Canadian~~abuse ~~imports.~~laws, including the federal and state anti-kickback statutes, the Department of Health and Human Services has acknowledged in its pharmaceutical industry compliance guidance that many common

~~Another adverse~~13 trend for drugstore retailing has been the growth in mail-order and internet-based prescription processors. These prescription distribution methods have grown in market share relative to drugstores as a result of the rapid rise in drug costs experienced in recent years. Mail-order prescription distribution methods have been perceived by employers and insurers as being less costly than traditional distribution methods and are being mandated by an increasing number of third party pharmacy benefit managers, many of which also own and manage mail-order distribution operations, as well as a growing number of employers and unions. In addition to these forms of mail-order distribution, there have also been an increasing number of internet-based prescription distributors that specialize in offering certain high demand lifestyle drugs at deeply discounted prices. A number of these internet-based distributors operate illicitly and outside the reach of regulations that govern legitimate drug retailers. Competition from Canadian imports has also created volume and pricing pressure. Imports from foreign countries may increase further if recently introduced legislation seeking to legalize the importation of drugs from Canada and other countries is eventually enacted. These alternate distribution channels have acted to restrain the rate of sales growth for traditional chain drug retailers in the last several years.

21Table of Contents

~~Table~~ business ofactivities ~~Contents~~potentially implicate the anti-kickback statute. We cannot offer any assurance that a government enforcement agency, private litigant, or court will not interpret our business relations to violate the fraud, waste and abuse laws.

The WeFalse ~~operate~~Claims Act: Under the False Claims Act, civil penalties may be imposed upon any person who, among other things, knowingly or recklessly submits, or causes the submission of false or fraudulent claims for payment to the federal government, for example, in connection with Medicare and Medicaid. Any person who knowingly or recklessly makes or uses a ~~concentrated~~false ~~region~~record or statement in support of a false claim, or to avoid paying amounts owed to the federal government, may also be subject to damages and penalties under the False Claims Act. Moreover, asprivate aindividuals ~~result~~may bring qui tam, ~~our~~or ~~business~~“whistle isblower,” ~~significantly~~suits ~~influenced~~under the False Claims Act, and may receive a portion of amounts recovered on behalf of the federal government. Such actions must be filed under seal pending their review by the ~~economic~~Department ~~conditions~~of Justice. Penalties of between $5,500 and ~~other~~$11,000 ~~characteristics~~and treble damages may be imposed for each violation of the ~~New~~False ~~York~~Claims ~~greater~~Act. Several federal district courts have held that the False Claims Act may apply to ~~metropolitan~~claims ~~area~~for reimbursement when an underlying service was delivered in violation of other laws or regulations, including the anti-kickback statute.

~~Substantially all of our stores are located in the greater New York metropolitan area.~~ In addition, into ~~a number of respects,~~ the ~~current~~ ~~economic~~False ~~downturn~~Claims ~~can affect retailers disproportionately~~Act, ~~as consumers may prioritize reductions in discretionary spending on consumer goods in response to~~ the ~~deterioration~~federal ofgovernment ~~the~~has ~~economy. As~~other acivil ~~result,~~and wecriminal ~~are sensitive to~~statutes, ~~and~~which ~~our~~may ~~success will~~ be ~~substantially~~utilized ~~affected~~if ~~by, economic conditions and other factors affecting this region, such as~~ the ~~regulatory~~government ~~environment,~~suspects ~~unemployment levels,~~that ~~cost~~we ofhave ~~energy,~~submitted ~~real~~false ~~estate, insurance, taxes and rent, weather, demographics, the availability of labor, financial markets and geopolitical factors such as terrorism~~claims. WeCriminal ~~cannot predict~~provisions ~~economic~~that ~~conditions~~are insimilar ~~this~~to ~~region. During~~ the ~~1990s,~~False ~~the~~Claims ~~New~~Act ~~York~~provide ~~City~~that ~~economy~~if ~~grew~~a ~~substantially,~~corporation ~~and~~is ~~our~~convicted ~~business benefited from this high rate~~ of ~~economic~~presenting ~~growth. As~~ a ~~result~~claim ofor ~~the~~making ~~economic recession~~a ~~and~~statement ~~the~~that ~~terrorist~~it ~~attack~~knows onto ~~the~~be ~~World Trade Center in September 2001~~false, ~~however,~~fictitious ~~the~~or ~~New~~fraudulent ~~York~~to ~~City~~any ~~economy~~federal ~~was materially and adversely affected. In the latter half of 2008 and the beginning of 2009~~agency, ~~economic~~it conditions worsened considerably and the level of national economic activity as measured by a number of recent key economic indicators has shown that the economy entered into a recession in 2008. The New York City economy may be ~~particularly~~fined ~~susceptible~~not tomore athan ~~downturn~~twice ~~because~~any pecuniary ofgain ~~difficulties in the financial services industry. Furthermore,~~ to the ~~extent that personal disposable income declines as a result of rising unemployment~~corporation, ~~higher taxes~~or, ~~reduced~~in ~~bonus~~the ~~income~~alternative, ~~falling~~no ~~housing~~more ~~prices,~~than ~~higher consumer debt levels~~$500,000 ~~increased~~per ~~energy~~offense. ~~costs~~Many orstates ~~other~~also ~~macroeconomic factors,~~have wesimilar ~~could~~false ~~experience~~claims ~~lower~~statutes ~~profit~~that ~~margins,~~impose ~~lower~~liability ~~sales~~for ~~(particularly~~the intypes ~~front-end merchandise) and increased levels~~ of ~~shrink.~~acts ~~Because~~prohibited ~~most~~by ~~of our stores are located in~~ the ~~highly urbanized~~False ~~areas~~Claims ~~throughout New York City and the surrounding metropolitan area, our stores experience a higher rate of shrink than our national competitors~~Act.

~~Our sales~~In ~~and~~April ~~profitability~~2007, ~~have~~former inNew ~~the~~York ~~past~~State ~~been~~Governor ~~affected~~Elliot bySpitzer ~~events~~signed legislation implementing the Health and ~~other~~Mental ~~factors~~Hygiene ~~that~~Budget ~~affect~~for ~~New~~the 2007-2008 ~~York~~fiscal ~~City~~year. ~~Examples~~New ~~include~~York ~~smoking-ban~~State’s ~~legislation,~~False ~~the~~Claims ~~August~~Act ~~2003 Northeast~~was ~~power~~included ~~blackout,~~within ~~significant~~that ~~non-recurring~~legislation. ~~increases~~The inNew ~~real~~York ~~estate~~State ~~taxes~~False ~~and~~Claims ~~insurance~~Act ~~costs~~is ~~and~~modeled after the ~~2004~~federal ~~Republican~~False ~~National~~Claims ~~Convention~~Act. InThe ~~2005,~~New ~~our~~York ~~results~~State ~~were~~False ~~negatively~~Claims Act provides that a false claim ~~affected~~can byresult ~~increased~~in ~~labor~~civil ~~costs~~penalties ~~associated~~between ~~with~~$6,000 ~~the~~to ~~ongoing~~$12,000 ~~shortage~~per ofclaim ~~pharmacists~~and inpossible treble damages. In addition, the New York ~~City~~State ~~metropolitan~~Medicaid ~~area~~Inspector ~~and~~General ~~increases~~James inG. ~~New~~Sheehan ~~York~~has ~~state~~announced ~~and~~the tocommencement aof ~~lesser~~an ~~extent~~aggressive ~~New~~audit ~~Jersey~~program ~~state~~targeting ~~minimum~~Medicaid ~~wage~~payments ~~rates.~~to WeNew ~~have~~York ~~continued~~State toretail ~~experience~~pharmacies. ~~cost~~The ~~pressures~~New ~~from~~Jersey ~~increased~~Health ~~pharmacist~~Care ~~salary~~Claims ~~and~~Fraud ~~benefit~~Act ~~costs~~(N.J.S.A. as2C:21-4.2, ~~well~~et asseq.) ~~further~~prohibits ~~increases~~the infiling ~~minimum~~of ~~wage~~false ~~rates.~~or ~~Any~~misleading ~~increases~~claims infor ~~federal~~payment ~~taxes or~~for inhealth ~~city~~care orservices ~~state~~and ~~taxes~~imposes inpenalties ~~New~~including imprisonment ~~York~~and ~~City~~fines orof ~~the~~five ~~Tri-State~~times ~~Area~~the ~~resulting~~amount ~~from~~of ~~state~~the claim or ~~local~~more. ~~government~~Section 6031 ~~budget~~of ~~deficits~~the ~~may~~Deficit ~~further~~Reduction ~~reduce~~Act ~~consumers'~~of ~~disposable~~2005 ~~income,~~and ~~which~~Section 1901 ~~could~~of ~~have a~~the ~~further~~Social ~~negative~~Security ~~impact~~Act onprovide ~~our~~a ~~business.~~financial ~~Any~~incentive ~~other~~for ~~unforeseen~~states ~~events~~to orenact ~~circumstances~~false claims acts that establish ~~affect~~liability to the ~~New~~state ~~York~~for ~~City~~the ~~metropolitan~~submission ~~area~~of ~~could~~false ~~also~~or ~~materially~~fraudulent ~~adversely~~claims ~~affect~~to ~~our~~the ~~revenues~~state’s ~~and profitability~~Medicaid program.

InIf a ~~addition~~state false claims act is determined to meet certain enumerated requirements, ~~perceived~~the ~~instability~~state is entitled to an increase of 10 percentage points in ~~our~~its ~~business~~share of any amounts recovered under a state action brought under such law. Under Section 1909(b) of the Social Security Act, the United States Department of Health and Human Services, Office of Inspector General is required to determine, in consultation with the ~~financial~~Attorney ~~health~~General of the United States, whether a state has in effect a law relating to false or fraudulent claims submitted to a state Medicaid Program that meets the enumerated requirements. The effective date of Section 1909 of the Social Security Act is January 1, 2007. On August 7, 2007, the Office of Inspector General notified the New York ~~City~~State ~~and~~Attorney General that the ~~surrounding~~New ~~areas~~York ~~may~~State ~~negatively~~False ~~affect~~Claims ~~our~~Act ~~relations~~met ~~with~~the ~~our~~requirements ~~suppliers~~of Section 1909(b). The Office of the Inspector General has reviewed the New Jersey State False Claims Act and ~~trade~~has notified the ~~creditors~~New Jersey Attorney General that the New Jersey State False Claims Act does not meet the enumerated requirements of Section 1909(b). AsOn aMay 19, ~~result~~2005, ~~our~~New ~~suppliers~~York orCity ~~trade~~Mayor ~~creditors~~Michael ~~may~~Bloomberg ~~present~~signed usinto ~~with~~law ~~terms~~the ~~that~~New ~~are~~York ~~materially~~City ~~more~~False ~~disadvantageous~~Claims Act (Local Law 53 of 2005) which authorizes citizens to usbring ~~than~~lawsuits ~~those~~to werecover ~~currently~~treble ~~enjoy~~damages for fraudulent claims submitted to the city. Finally, ~~which~~the ~~may~~submission ~~have~~of afalse ~~negative~~claims ~~impact~~may onresult in termination of our participation in federal or state ~~ability~~healthcare toprograms. ~~operate~~Members ~~our~~of ~~business~~management and ~~manage~~persons ~~our~~who ~~liquidity~~actively participate in the submission of false claims can also be excluded from participation in federal healthcare programs.

We ~~Continued~~believe ~~volatility~~that ~~and~~we ~~disruption~~have sufficient procedures in place to provide for the ~~global~~accurate ~~capital~~completion ~~and~~of ~~credit~~claim ~~markets~~forms ~~may~~and ~~adversely~~requests ~~affect~~for ~~our~~payment. Nonetheless, ~~results~~given the complexities of ~~operations~~the Medicare, Medicaid and ~~financial~~other ~~condition,~~third asparty ~~well~~payer asprograms, ~~our~~some ~~ability to~~of ~~access~~our ~~credit~~billing and ~~the~~record-keeping ~~financial~~practices ~~soundness~~may ofbe ~~our~~alleged ~~customers,~~to ~~third~~be ~~party~~false ~~providers~~claims ~~and~~by ~~vendors~~the enforcing agency or a private litigant.

~~Recently,~~Physician ~~the~~Self-Referral ~~global~~Laws capital and credit markets have been experiencing a period of unprecedented turmoil and upheaval, characterized by the bankruptcy, failure, collapse or sale of various financial institutions and an unprecedented level of intervention from the United States federal government. These conditions could adversely affect the demand for our products and services and, therefore,

22The federal physician self-referral law, Section 1877 of the Social Security Act (42 U.S.C. § 1395nn, commonly known as the “Stark Law”) prohibits physicians from referring Medicare patients for certain designated health services to entities with which the physician or an immediate family member of the physician has a financial relationship, unless an

~~Table~~14 ~~of Contents~~

reduce purchasesTable by our customers, which would negatively affect our revenue growth and cause a decrease in our profitability. In addition, reduced consumer spending may drive us and our competitors to offer additional products at promotional prices, which would have a negative impact on gross profit. A continued softening in consumer sales may adversely affect our industry, business and results of operations. Contents

In ~~addition,~~exception ~~interest~~applies. ~~rate~~The ~~fluctuations,~~Stark ~~financial~~Law ~~market~~is ~~volatility~~implicated if the physician has an ownership or ~~credit~~financial ~~market~~relationship ~~disruptions~~with ~~may~~the ~~limit~~entity ~~our~~that ~~access~~is toproviding ~~capital~~the ~~and~~designated ~~may~~health service. The Stark Law also prohibits ~~negatively~~the ~~affect~~entity ~~our~~from ~~customers'~~billing ~~and~~for ~~our vendors'~~services ~~ability~~provided pursuant to ~~obtain~~a ~~credit~~prohibited toreferral. ~~finance~~Among ~~their~~the ~~businesses~~designated onservices ~~acceptable~~covered ~~terms.~~by Asthe aStark ~~result,~~Law ~~our~~include ~~customers'~~outpatient ~~needs~~prescription ~~and~~drugs. ~~ability~~Sanctions tofor ~~purchase~~violating ~~our~~the ~~products~~Stark ~~may~~Law ~~decrease,~~include denial of payment and ~~our~~civil ~~vendors~~monetary ~~may~~penalties ~~increase their~~of ~~prices~~not more than $15,000 ~~reduce~~for ~~their~~each ~~output~~bill or ~~change~~claim ~~their~~for ~~terms~~a ~~of sale~~service. IfAny ~~our~~physician ~~third~~or ~~party~~other ~~providers'~~entity that enters into an arrangement or ~~vendors'~~scheme ~~operating~~(such ~~and~~as ~~financial~~a ~~performance~~cross-referral ~~deteriorates~~arrangement) which the physician or entity knows, or should know, has a principal purpose of issuing referrals by the physician to a particular entity which, if ~~they~~the ~~are~~physician ~~unable~~directly made referrals to ~~make~~such ~~scheduled payments~~entity, orwould ~~obtain~~be ~~credit~~in violation of the Stark Law, ~~our~~and ~~third~~subject ~~party providers~~to ~~may~~a civil monetary penalty of not bemore than ~~able~~$100,000 tofor ~~pay~~each such arrangement or scheme. The Stark Law is implicated if the physician, or ~~may~~an ~~delay~~immediate ~~payment~~family member of such physician, ~~accounts~~has ~~receivable~~an ~~owed~~ownership toor ~~us,~~compensation arrangement with the entity. Both New York and ~~our~~New ~~vendors~~Jersey ~~may~~have ~~restrict~~enacted state ~~credit~~physician orself-referral ~~impose~~statutes ~~different~~and ~~payment~~regulations ~~terms~~that are similar to the Stark Law in scope and purpose. ~~Any~~The ~~inability~~federal ofand ~~customers~~state physician self-referral laws are also commonly referred to ~~pay~~as ~~us for~~fraud, waste and abuse laws. Although we believe that our ~~products,~~relationships orwith ~~any~~physicians ~~demands~~and byother ~~vendors~~individuals ~~for~~are ~~different~~in ~~payment~~compliance ~~terms~~with the Stark Law and its state equivalents, a government enforcement agent, private litigant or court may ~~adversely~~determine ~~affect~~that our ~~operations~~business relationships violate the fraud, waste and ~~cash~~abuse ~~flow~~laws.

~~Declining economic~~Drug ~~conditions~~Utilization ~~may~~Review ~~also increase our costs. If the economic conditions do not improve or continue to deteriorate, our results of operations or financial condition could be adversely affected.~~

The WeOmnibus ~~require~~Budget Reconciliation Act of 1990, or OBRA 90, establishes a ~~significant~~number ~~amount~~of regulations regarding state Medicaid prescription drug benefits. Although OBRA 90 primarily focuses on drug manufacturers’ obligations to provide drug rebates under state-administered Medicaid programs, it also requires states to create drug utilization review, or DUR, requirements in order to combat fraud, abuse, gross overuse and inappropriate or medically unnecessary care as well as to educate patients about potential adverse reactions. DUR requires pharmacists to discuss with patients relevant information in connection with dispensing drugs to patients. This information may include the name and description of ~~cash~~the ~~flow~~medication, ~~from~~route ~~operations~~and dosage form of the drug therapy, special directions and ~~third~~precautions ~~party~~for ~~financing~~patients, side effects, storage, refill and actions to ~~pay~~be ~~our~~taken ~~indebtedness~~upon a missed dosage. Under DUR requirements, pharmacists are also required to ~~execute~~make ~~our~~a ~~business~~reasonable ~~plan~~effort to obtain the patient’s identification information, medical history and drug reaction history and to ~~fund~~keep notes relevant to an individual’s drug therapy. We believe our ~~other~~pharmacists ~~liquidity~~provide the ~~needs~~required drug use consultation with our customers.

WeHealthcare ~~may~~Information ~~not~~Practices be able to generate sufficient cash flow from operations, our suppliers may not continue to extend us normal trade payments terms, and future borrowings may not be available to us under our amended asset-based revolving loan facility or otherwise in an amount we will need to pay our indebtedness, to execute our business plan or to fund our other liquidity needs. We spent $47.0 million in 2008 on capital expenditures, lease acquisitions, pharmacy customer file acquisitions and other capital items and expect to invest between $40.0 million and $45.0 million in 2009. We also require working capital to support inventory for our existing stores. In addition, we may need to refinance some or all of our indebtedness, including indebtedness under our amended asset-based revolving loan facility, our senior subordinated notes and our senior secured floating rate notes, or our preferred stock at or before maturity. We may not be able to refinance any of our indebtedness on commercially reasonable terms or at all. Failure to generate or raise sufficient funds may require us to modify, delay or abandon some of our future business initiatives or expenditure plans.

The ~~Our~~Health ~~operations~~Insurance ~~are~~Portability ~~subject~~and Accountability Act of 1996, or HIPAA, sets forth standards for electronic transactions; unique provider, employer, health plan and patient identifiers; security and electronic signatures as well as privacy protections relating to ~~trends~~the inexchange of individually identifiable health information. The Department of Health and Human Services, or DHHS, has released several rules mandating compliance with the standards set forth under HIPAA. We believe our pharmacies initially achieved compliance with DHHS’s standards governing the privacy of individually identifiable health information that became effective on April 14, 2003 and with DHHS’s standards governing the security of electronically stored health information that became effective on April 20, 2005. In addition, we have implemented the uniform standards governing common healthcare ~~industry~~transactions by the required compliance date of October 16, 2003. Finally, management has taken or will continue to take all necessary steps to achieve and maintain compliance with the HIPAA standards mentioned above and with other HIPAA rules as applicable, including the standard unique employer identifier rule, the standard health care provider identifier rule and the enforcement rule.

~~Pharmacy~~We ~~sales,~~continue ~~which~~to ~~typically~~evaluate ~~generate~~the ~~lower~~effect ~~margins~~of ~~than~~the ~~front-end~~HIPAA ~~sales,~~standards ~~represent~~on ~~a significant percentage of~~ our ~~total~~ ~~sales~~business. ~~Pharmacy~~At ~~sales~~this time, ~~including~~management ~~resales~~believes ofthat ~~certain~~our ~~retail~~pharmacies ~~inventory,~~have ~~accounted~~taken ~~for~~all ~~approximately~~appropriate ~~46.1%~~steps ofto ~~total~~achieve ~~sales~~compliance inwith the ~~fiscal~~HIPAA requirements. ~~year ended December 27~~Moreover, ~~2008,~~HIPAA ~~approximately~~compliance ~~46.0%~~is ~~of total~~an ~~sales~~ongoing inprocess ~~the~~that ~~fiscal~~will ~~year~~require ~~ended~~continued ~~December 29,~~attention ~~2007~~ and ~~approximately~~adaptation ~~46.5%~~even ofafter ~~total sales in~~ the ~~fiscal~~official ~~year~~compliance ~~ended December 30, 2006~~dates. ~~Pharmacy~~Management ~~sales~~does not ~~only~~currently ~~have~~believe ~~lower~~that ~~margins~~the ~~than non-pharmacy~~cost ~~sales~~of ~~but~~compliance ~~are~~with ~~also~~the ~~subject~~existing ~~to increasing margin pressure, as managed care organizations, insurance companies, government funded programs, employers and other third party~~HIPAA ~~payers,~~requirements ~~which~~will ~~collectively~~be wematerial ~~call~~to ~~third~~us; ~~party plans~~however, ~~have~~management ~~become~~cannot ~~prevalent~~predict in the ~~New~~cost ~~York~~of ~~greater~~future ~~metropolitan~~compliance ~~area~~with ~~and~~HIPAA ~~as these plans continue to seek cost containment~~requirements. ~~Also,~~Noncompliance ~~any~~with ~~substantial~~HIPAA ~~delays in~~may ~~reimbursement~~result ~~or significant reduction~~ in ~~coverage~~criminal orpenalties ~~payment~~and ~~rates~~civil ~~from~~sanctions. ~~third~~The ~~party~~HIPAA ~~plans~~standards ~~may~~ have aincreased ~~material adverse effect on~~ our regulatory ~~business.~~and Incompliance ~~addition,~~burden anand ~~increasing~~have ~~number~~significantly ofaffected ~~employers~~the ~~are~~manner ~~now requiring participants~~ in ~~their~~which ~~plans~~our topharmacies ~~obtain~~use ~~some~~and ofdisclose ~~their~~health ~~prescription drugs~~information, ~~especially~~both ~~those~~internally ~~for~~and ~~non-acute~~with ~~conditions,~~other ~~through mail-order providers~~entities. ~~Medicare Part D benefits for senior citizens that became available in January~~

23In addition to the HIPAA restrictions relating to the exchange of healthcare information, individual states have adopted laws protecting the confidentiality of patient information which impact the manner in which pharmacy records are maintained. Violation of patient confidentiality rights under common law, state law or federal law could give rise to damages, penalties, civil or criminal fines and/or injunctive relief. We believe that our pharmacy operations, data sales arrangements and prescription file-buying program are in compliance with applicable federal and state privacy protections. However, an enforcement agency or court may find a violation of state or federal privacy protections arising from our pharmacy operations, our data sales arrangements or our prescription file-buying program and such finding of a violation may have a material adverse effect upon our business and our financial results.

~~Table~~15 ~~of Contents~~

2006 resultedTable in lower reimbursement rates and resultant gross margins than the non-third party plan margins and state Medicaid reimbursement rates they replaced. These factors and other factors related to pharmacy sales described below may have a negative impact on our pharmacy sales in the future. See the risk factor "We face a high level of competition in our markets" for further discussion on drugstore retail trends. Sales to third party prescription plans, which include government-paid plans, represented 93.4% of our prescription drug sales for the fiscal year ended December 27, 2008, 93.0% of our prescription drug sales for the fiscal year ended December 29, 2007 and 92.8% of our prescription drug sales for the fiscal year ended December 30, 2006. Contents

~~The continued~~Healthcare ~~conversion~~Reform ~~of various prescription drugs to over-the-counter medications may materially reduce our pharmacy sales~~ and ~~customers~~Federal ~~may~~Budget ~~seek~~Legislation to purchase such medications at non-pharmacy stores. Also, if the rate at which new prescription drugs become available slows or if new prescription drugs that are introduced into the market fail to achieve popularity, our pharmacy sales may be adversely affected. The withdrawal of certain drugs from the market or concerns about the safety or effectiveness of certain drugs or negative publicity surrounding certain categories of drugs may also have a negative effect on our pharmacy sales or may cause shifts in our pharmacy or front-end product mix. For example, the rate of growth in pharmacy sales declined in 2005 due to a number of factors, including a decline in demand for hormonal replacement medications, increasing third party plan co-payments, negative publicity surrounding certain arthritis medications, conversion of certain prescription drugs to over-the-counter status and increased mail order and internet based penetration.

~~Healthcare~~In recent years, Congress has passed a number of federal laws that have created major changes in the healthcare system. In December 2000, the ~~reform~~Medicare, Medicaid and ~~enforcement~~SCHIP ~~initiatives~~(State ~~sponsored~~Children’s byHealth Insurance Program) Benefits Improvement and Protection Act of 2000, or BIPA, was signed into law. Generally, BIPA addressed attempts to modify the calculation of average wholesale prices of drugs, or AWPs, upon which Medicare and Medicaid pharmacy reimbursement has been based. The federal government has been actively investigating whether pharmaceutical manufacturers have been improperly manipulating average wholesale prices, and several ~~state~~pharmaceutical ~~governments~~manufacturers ~~may~~have ~~also~~paid ~~affect~~significant ~~our~~civil ~~revenues~~and ~~from~~criminal ~~prescription~~penalties ~~drug~~to ~~sales~~resolve litigation relating to allegedly improper practices affecting AWP. ~~These~~In ~~initiatives~~October 2006, in connection with a class action filed in the United States ~~include:~~District Court for the District of Massachusetts, First Data Bank, which is one of two primary sources of AWP price reporting, announced that it had entered into a settlement agreement related to its reporting of average wholesale prices, subject to final court approval. Under the terms of the proposed settlement agreement, First Data Bank agreed to reduce the reported AWP of certain drugs by four percent and to discontinue the publishing of AWP at a future time. In May 2007, in connection with a separate class action filed in the same court, Medi-Span, the other primary source of average wholesale price reporting, entered into a similar settlement agreement, also subject to final court approval.

~~These initiatives~~In ~~could~~January ~~lead~~2008, to the ~~enactment~~court denied approval of the First Data Bank and Medi-Span settlements as proposed. Subsequently, ornew ~~changes~~settlement agreements were submitted to, ~~federal~~the ~~regulations~~court. ~~and~~On ~~state~~March 17, ~~regulations~~2009, inthe ~~New~~court ~~York~~issued ~~and~~an ~~New~~order ~~Jersey~~approving ~~that~~the ~~could~~revised ~~adversely~~settlements. ~~impact~~Some ~~our~~parties ~~prescription~~appealed ~~drug sales~~the ~~and~~court’s ruling. On September 3, ~~accordingly~~2009, ~~our~~the ~~results~~United States Court of ~~operations.~~Appeals Itfor isthe ~~uncertain~~First Circuit ataffirmed ~~this~~the ~~time~~decision ~~what~~of ~~additional~~the ~~healthcare~~District ~~reform~~Court ~~initiatives~~approving the settlements. Pursuant to the settlements, ifas ~~any~~approved, ~~will~~First beData ~~implemented,~~Bank orand ~~whether~~Medi-Span ~~there~~have ~~will~~agreed beto ~~other~~reduce ~~changes~~the inreported AWP for certain drugs by four percent. Separately, and not pursuant to the ~~administration~~settlement ofagreements, ~~governmental~~First ~~healthcare~~Data ~~programs~~Bank orand ~~interpretations~~Medi-Span ofhave ~~governmental~~indicated ~~policies~~that orthey ~~other~~will ~~changes~~also ~~affecting~~reduce the ~~healthcare~~reported ~~system.~~AWP ~~Future~~for ~~healthcare~~a orlarge ~~budget~~number ~~legislation~~of oradditional ~~other~~drugs not covered by the settlement agreements and that they intend to discontinue the ~~changes,~~reporting ~~including~~of ~~those~~AWP ~~referenced~~in ~~above,~~the ~~may~~future. ~~materially~~The ~~adversely~~settlement ~~impact~~agreements ~~our~~became ~~pharmacy~~effective ~~business~~on September 26, 2009.

A ~~Changes~~number of contracts with third-party plans contain provisions that allow us to adjust our pricing to maintain the relative economics of the contract in light of a change in AWP methodology. Most of our contracts with both private and governmental plans also include provisions that allow us to terminate the contracts unilaterally, either because parties cannot renegotiate our pricing to account for the change in AWP methodology or for any reason upon 30 to 90 days’ notice. While we have negotiated with many of the various governmental and non-governmental third-party plans for adjustments relating to the expected changes to AWP, the New York State Legislature is currently considering legislation that would modify the formula upon which New York Medicaid bases its reimbursement rates, which, if passed, will move pharmacy reimbursement rates with respect to Medicaid at or near the pre-settlement levels. ~~for~~However, ~~certain~~at ~~prescription~~this ~~drugs~~time ~~continue~~there is no assurance that this legislation would be ultimately passed by the New York State Legislature or if passed, will be in its current form. In late September 2009, New York Medicaid began to ~~reduce~~implement the AWP reductions. Although there is some uncertainty due to the pending legislation at the New York State Legislature, our ~~margins~~fiscal on2009 ~~pharmacy~~results ~~sales~~were ~~and~~adversely ~~could~~impacted ~~have~~by approximately $1.0 million as a ~~material~~result ~~adverse~~of ~~effect~~the onNew ~~our~~York ~~overall~~Medicaid AWP reimbursement reductions and we expect an impact of approximately $4.0 million in fiscal 2010 unless ~~performance~~the reimbursement rates are adjusted to offset the AWP impact.

~~During~~In ~~the~~response ~~fiscal~~to ~~years~~BIPA ~~ended~~and ~~December 27,~~other ~~2008,~~criticisms ~~December 29~~of AWP pricing methodologies, ~~2007~~the Medicare Modernization Act described above contains a number of drug pricing reforms, ~~and~~some ~~December~~of which were effective January 301, ~~2006,~~2004. weSection 1927 ~~were~~of ~~wholly~~the orSocial Security Act established the Medicaid drug rebate program. ~~partially~~For ~~reimbursed~~a bymanufacturer’s ~~third~~covered ~~party~~outpatient ~~plans~~drugs to be eligible for ~~approximately~~federal ~~93.4%,~~Medicaid ~~93.0%~~funding ~~and~~under ~~92.8%~~the Medicaid drug rebate program, ~~respectively~~the manufacturer must enter into a rebate agreement with the CMS, and pay quarterly rebates to the states. Section 1927(b)(3) of the ~~prescription~~Act ~~drugs~~requires ~~that~~a weparticipating ~~sold.~~manufacturer ~~The~~to ~~percentage~~report quarterly to CMS the average manufacturer price for each covered outpatient drug. Section 1927(k)(1) of ~~prescription~~the ~~sales~~Social ~~reimbursed~~Security byAct ~~third~~defines ~~party~~the “average ~~plans~~manufacturer ~~has~~price” ~~been~~as ~~increasing~~the average price paid to the manufacturer by wholesalers for drugs distributed to the retail pharmacy class of trade, ~~and~~after wededucting ~~expect~~customary ~~that~~prompt ~~percentage~~pay discounts. Under Section 1902(a)(54) of the Social Security Act, each state is required to ~~continue~~submit a Medicaid state plan to ~~increase.~~CMS ~~Prescription~~describing ~~sales~~its ~~reimbursed~~payment bymethodology ~~third~~for ~~party~~covered ~~plans~~outpatient drugs. Federal regulations require, ~~including~~with ~~Medicare~~certain ~~and~~exceptions, that each state’s Medicaid ~~plans,~~reimbursement ~~have~~for ~~lower~~a ~~gross~~drug ~~margins~~not ~~than~~exceed ~~other~~(in ~~pharmacy~~the ~~sales.~~aggregate) ~~Third~~the ~~party~~lower ~~plans~~of ~~may~~(a) its ~~not~~estimated ~~increase~~acquisition ~~reimbursement~~costs ~~rates~~plus a reasonable dispensing fee or (b) the provider’s usual and customary charge to the public.

24The Deficit Reduction Act of 2005 requires the Secretary of the United States Department of Health and Human Services to provide average manufacturer price data to the states on a monthly basis beginning July 1, 2006. On July 17, 2007, CMS issued a final rule that implemented the provisions of the Deficit Reduction Act with respect to prescription drug reimbursement under the Medicaid program. This rule defined the terms “average manufacturer price” and “best price”. It specifies the items that must be included and excluded in the calculation of each term. This rule became effective on October 1, 2007. The rule also implemented the Deficit Reduction Act provision establishing a new reimbursement formula

~~Table~~16 ~~of Contents~~

sufficiently toTable offsetof expected increases in prescription acquisition costs, thereby reducing our margins and adversely affecting our profitability. In addition, continued increases in co-payments by third party plans may result in decreases in drug usage. Contents

In ~~particular,~~for ~~Medicare~~generic ~~and~~drugs under Medicaid ~~programs are subject to statutory~~ and ~~regulatory~~establishes ~~changes,~~federal ~~retroactive~~upper ~~and~~limits ~~prospective~~for ~~reimbursement~~generics ~~rate~~based ~~adjustments,~~on ~~administrative~~250% ~~rulings, executive orders and freezes and funding restrictions, all~~ of ~~which~~the ~~may~~lowest ~~significantly~~AMP ~~impact~~in ~~our~~a ~~pharmacy~~given ~~operations~~drug class. ~~For~~In ~~the~~November ~~2008 fiscal year~~2007, ~~approximately~~the ~~27%~~National Association of ~~our~~Chain ~~total prescription sales were~~Drug ~~paid~~Stores ~~for~~and bythe ~~Medicaid~~National orCommunity ~~Medicare.~~Pharmacists ~~Over~~Association ~~the~~filed ~~last several years,~~ a ~~number~~lawsuit ofin ~~states~~federal ~~experiencing~~court ~~budget~~seeking ~~deficits~~to ~~have~~enjoin ~~moved~~the toimplementation ~~reduce~~of ~~Medicaid~~the ~~prescription~~proposed AMP reimbursement ~~rates~~rules. ~~Over~~On ~~the past several years~~December 19, ~~New York State reduced Medicaid and EPIC prescription reimbursement rates~~2007, ~~adversely~~the ~~impacting~~United ~~our~~States ~~pharmacy~~District ~~gross~~Court ~~margins.~~for ~~Under~~ the ~~New~~District ~~York State Medicaid Program, reimbursement for a~~of ~~multiple~~Columbia ~~source~~granted ~~prescription drug for which~~ a ~~federal~~preliminary ~~upper~~injunction ~~limit~~enjoining ~~has been set by~~ CMS ~~will~~from beimplementing ~~in an amount equal to~~ the ~~specific~~proposed ~~federal~~AMP ~~upper~~reimbursement ~~limit~~rules. ~~for~~The ~~the~~preliminary ~~multiple~~injunction ~~source~~remains ~~prescription~~in ~~drug~~place. ~~For~~However, ~~a multiple~~it ~~source~~is ~~prescription~~uncertain ~~drug~~at orthis atime ~~brand~~whether ~~name~~HHS ~~prescription~~and ~~drug~~CMS ~~for~~will ~~which~~revise noand ~~specific~~reissue ~~federal~~the ~~upper~~AMP reimbursement ~~limit~~rules ~~has~~and ~~been~~what ~~set~~impact, ~~the~~if ~~lower~~any, of the ~~estimated~~revised ~~cost of each drug to pharmacies or the dispensing pharmacy's usual~~ and ~~customary~~reissued ~~price~~rules, ~~charged~~if toany, ~~the public~~ will behave ~~applied~~on us.

~~In July~~The ~~2007, the Centers for~~ Medicare Part &D ~~Medicaid~~drug ~~Services,~~benefit orwent ~~CMS,~~into ~~issued~~effect ~~a final rule that may negatively affect our level of reimbursements for certain generic drugs by setting an upper limit~~ on the amount of reimbursement for such drugs based on the "Average Manufacturer Price." As a result of a lawsuit brought by the National Association of Chain Drug Stores and the National Community Pharmacists Association to challenge the implementation of the new rule, a federal court temporarily enjoined the implementation of the new rule pending the outcome of the lawsuit and the lawsuit remains pending. In July 2008, Congress enacted H.R.January ~~6331~~1, ~~the Medicare Improvements for Patients and Providers Act of 2008 ("MIPPA")~~2006. ~~The~~Prior ~~former~~to ~~President Bush subsequently vetoed MIPPA and, on July~~January 151, ~~2008~~2006, ~~Congress~~Medicare ~~overrode~~beneficiaries ~~the~~were ~~veto.~~able ~~MIPPA~~to ~~delayed~~receive ~~the~~some ~~implementation~~assistance ~~of the use of Average Manufacturer Price~~ with ~~respect~~their toprescription ~~payments~~drug ~~made~~costs bythrough ~~State~~a ~~Medicaid~~prescription ~~Plans for~~drug ~~multiple~~discount ~~source~~card ~~generic~~program ~~drugs until September 30, 2009. MIPPA also prohibited the Secretary of Health and Human Services from making public any Average Manufacturer Price information that~~which ~~was~~began ~~previously~~in ~~disclosed~~June ~~to the Secretary of Health and Human Services~~2004. ~~The~~This ~~outcomes~~discount ofcard ~~the~~program ~~lawsuit~~gave ~~and~~enrollees ~~the~~access ~~impact of MIPPA are uncertain at this time, so we currently are unable~~ to ~~determine~~negotiated ~~what~~discount ~~effect~~prices ~~the~~for ~~new~~prescription ~~rule will ultimately have on our business~~drugs.

~~The~~On ~~Medicare~~January 28, ~~Modernization~~2005, ~~Act~~CMS ~~created~~published a final rule to implement the Medicare Part D drug benefit. ~~that~~Under ~~expanded~~the Medicare ~~coverage~~Part D ofdrug ~~prescription~~benefit, ~~drugs~~Medicare ~~for~~beneficiaries ~~senior~~are ~~citizens~~able asto ~~well~~enroll asin ~~for~~prescription ~~certain~~drug ~~"dual~~plans ~~eligible"~~offered by private entities or, ~~individuals~~to ~~that~~the ~~were~~extent ~~previously~~private ~~covered~~entities ~~under~~fail ~~state~~to ~~administered~~offer ~~Medicaid~~a ~~plans~~plan in a given area, through a government contractor. ~~This~~Medicare Part D prescription drug plans include both plans providing the drug benefit on a stand alone basis and Medicare Advantage plans that provide drug coverage ~~has~~as ~~resulted~~a insupplement ~~decreased~~to ~~pharmacy~~an ~~margins~~existing ~~resulting~~medical ~~from~~benefit ~~lower~~under ~~reimbursement~~the ~~rates~~applicable ~~than~~Medicare ~~our~~Advantage plan. Pursuant to the CMS final rule, we will be reimbursed for drugs that we provide to enrollees of a given Medicare Part D ~~current~~prescription ~~margins~~drug onplan ~~state~~in ~~Medicaid~~accordance ~~prescriptions.~~with ~~The~~the terms of the agreements negotiated between the Medicare Part D ~~program~~plan ~~has~~and ~~grown~~us. ~~rapidly~~We ~~since~~accept ~~taking~~most ~~effect~~Medicare Part D plans in ~~2006~~our market areas. The ~~program's~~amount ~~growth~~of ~~may~~reimbursement ~~continue~~to asus ~~more~~under ~~seniors~~Medicare Part D ~~have~~plans ~~become eligible~~is less than the amount under New York and ~~enroll~~New ~~for~~Jersey ~~the~~State ~~coverage~~Medicaid, and generally less than traditional nongovernmental third-party plans.

~~In recent~~CMS ~~years,~~is ~~Congress~~continuing ~~has~~to ~~passed~~issue asub-regulatory ~~number~~guidance ofon ~~federal~~many ~~laws~~additional ~~that~~aspects ~~have~~of ~~created major changes in~~ the ~~healthcare~~CMS ~~system~~final rule. InWe ~~December~~are ~~2000,~~monitoring ~~the~~these ~~Medicare,~~government ~~Medicaid~~pronouncements and ~~SCHIP~~statements ~~Benefits Improvement and Protection Act~~ of ~~2000~~guidance, orand ~~BIPA,~~we ~~was~~cannot ~~signed~~predict ~~into~~at this ~~law.~~time ~~Generally,~~the ~~BIPA~~ultimate ~~addressed~~effect ~~attempts~~of ~~to modify~~ the ~~calculation~~CMS offinal ~~average~~rule ~~wholesale prices of drugs,~~ or ~~AWPs,~~other ~~upon~~potential ~~which~~developments Medicare and Medicaid pharmacy reimbursement has been based. The federal government has been actively investigating whether pharmaceutical manufacturers have been improperly manipulating average wholesale prices, and several pharmaceutical manufacturers have paid significant civil and criminal penalties to resolve litigation relating to ~~allegedly~~its ~~improper~~implementation ~~practices~~on ~~affecting~~our ~~AWP.~~business Inor ~~October~~results ~~2006, in connection with a class action filed in the United States District for the District~~ of ~~Massachusetts,~~operations. ~~First Data Bank, which is one of two primary sources of AWP price reporting, announced that it had~~

25It is uncertain at this time what additional healthcare reform initiatives, if any, will be implemented, or whether there will be other changes in the administration of governmental healthcare programs or interpretations of governmental policies or other changes affecting the healthcare system. We cannot assure you that future healthcare or budget legislation or other changes, including those referenced above, will not materially adversely impact our pharmacy business.

~~Table~~Non-Healthcare ofLicenses ~~Contents~~

~~entered into~~We ahave ~~settlement~~been ~~agreement~~granted ~~related~~cigarette totax ~~its~~stamping ~~reporting~~licenses from the State of ~~average~~New ~~wholesale~~York ~~prices~~and the City of New York, ~~subject~~which permit us to ~~final~~buy ~~court~~cigarettes directly ~~approval.~~from ~~Under~~the manufacturers and stamp the ~~terms~~cigarettes ofourselves. Our stores possess cigarette tax retail dealer licenses issued by the ~~proposed~~State ~~settlement~~of ~~agreement~~New York, ~~First~~the ~~Data~~City ~~Bank~~of ~~agreed to~~New ~~reduce~~York and the ~~reported~~State ~~AWP~~ of ~~certain~~New ~~drugs~~Jersey. byMost ~~four~~of ~~percent~~our ~~and~~stores tohave ~~discontinue~~been granted licenses by the ~~publishing~~United States Department of ~~AWP~~Agriculture, atenabling athem ~~future~~to ~~time~~serve as certified Food Stamp retailers. In ~~May 2007~~addition, inmost ~~connection~~of ~~with~~our astores ~~separate~~possess ~~class~~beer ~~action~~licenses ~~filed~~and infood licenses issued by the ~~same~~State ~~court,~~of New York. We seek to comply with all of ~~Medi-Span,~~these ~~the~~licensing ~~other~~and ~~primary~~registration ~~source~~requirements and continue to actively monitor our compliance. By virtue of ~~average~~these ~~wholesale~~license ~~price~~and ~~reporting~~registration requirements, ~~entered~~we ~~into~~are aobligated ~~similar~~to ~~settlement~~observe ~~agreement~~certain rules and regulations, ~~also~~and ~~subject~~a toviolation ~~final~~of ~~court~~these ~~approval~~rules and regulations could result in suspension or revocation of one or more licenses or registrations and/or the imposition of monetary penalties or fines.

~~In January~~Minimum ~~2008,~~Wage ~~the~~Requirements court denied approval of the First Data Bank and Medi-Span settlements as proposed. Subsequently, new settlement agreements were submitted to the court. On March 17, 2009, the court issued an order approving the revised settlements. Pursuant to the settlements, as approved, First Data Bank and Medi-Span have agreed to reduce the reported AWP for certain drugs by four percent. Separately, and not pursuant to the settlement agreements, First Data Bank and Medi-Span have indicated that they will also reduce the reported AWP for a large number of additional drugs not covered by the settlement agreements and that they intend to discontinue the reporting of AWP in the future. Under the terms of the court's decision, the settlement agreements can become effective no earlier than 180 days from the entry of final judgment. Although the court's ruling will take effect no earlier than 180 days from March 17, 2009, we believe that some parties will appeal the court's ruling and seek a stay of the implementation of the settlement. The court's ruling, if not revised on appeal, could potentially have a significant adverse impact on us and the drugstore industry as a whole.

~~A number~~We ofare ~~contracts~~impacted ~~with~~by ~~third-party~~legislation ~~plans contain provisions that allow us~~ to increase ~~adjust~~the ~~our~~minimum ~~pricing~~hourly towages. ~~maintain~~New ~~the~~York ~~relative~~State ~~economics~~increased of the ~~contract~~minimum inhourly ~~light~~wage offrom a$5.15 ~~change~~to ~~in AWP methodology~~$6.00 ~~Most~~on ofJanuary 1, ~~our~~2005, ~~contracts~~to ~~with~~$6.75 ~~both~~on ~~private~~January 1, 2006, and ~~governmental~~again ~~plans~~to ~~also~~$7.15 ~~include~~on ~~provisions~~January 1, ~~that~~2007. ~~allow~~New usJersey toincreased ~~terminate~~ the ~~contracts~~minimum ~~unilaterally,~~hourly wage ~~either~~from ~~because~~$5.15 ~~parties cannot renegotiate our pricing~~ to ~~account~~$6.15 ~~for~~on ~~the~~October 1, ~~change~~2005 inand ~~AWP~~again ~~methodology~~to or$7.15 ~~for~~on ~~any reason upon 30 to 90~~October ~~days'~~1, ~~notice~~2006. ~~While~~In weaddition, ~~expect to negotiate with~~ the ~~various~~federal ~~governmental~~minimum ~~and~~hourly ~~non-governmental third-party~~wage ~~plans~~increased ~~for~~to ~~adjustments~~$7.25 ~~relating~~in toJuly ~~the~~2009. ~~expected~~As ~~changes~~a ~~to AWP~~result, weboth ~~cannot~~New beYork ~~certain~~State ~~that these negotiations will be successful. Due to these factors~~ and ~~the~~New ~~uncertainty~~Jersey ~~over~~have ~~future~~increased ~~appeals~~their minimum orhourly ~~stays~~wage ofto ~~the~~$7.25 ~~court~~effective ~~ruling~~July 24, ~~which~~2009. ~~could~~While ~~delay~~these ~~the~~increases ~~effective~~have ~~date~~impacted ofour ~~the~~cost ~~implementation~~ of ~~the settlement agreements~~labor, we ~~cannot~~have, ~~predict~~and ~~with~~believe ~~certainty~~we orcan ~~accurately~~continue ~~quantify~~to, ~~the~~offset ~~ultimate~~a ~~effect~~significant portion of ~~the~~ ~~AWP~~these ~~reduction~~cost onincreases ~~our~~through ~~revenues,~~initiatives ~~profitability,~~designed ~~future~~to ~~operations~~further orimprove our ~~business~~labor ~~relationships~~efficiency.

Employees If we fail to comply with all of the government regulations that apply to our business, we could incur substantial reimbursement obligations, damages, penalties, injunctive relief and/or exclusion from participation in federal or state healthcare programs.

~~Our~~As ~~pharmacy operations are subject to a variety~~ of ~~complex federal~~December 26, ~~state and local government laws and regulations~~2009, ~~including~~approximately ~~federal and state civil fraud~~5,200 ~~anti-kickback, false claims and other laws. We endeavor to structure all~~ of our ~~relationships~~approximately ~~to comply with these laws. However~~7,000 ifemployees ~~any~~were ofrepresented ~~our~~by ~~operations~~various ~~are~~labor ~~found to~~unions violate these or other government regulations, we could suffer severe penalties, including suspension of payments from government programs; loss of required government certifications; loss of authorizations to participate in or exclusion from government reimbursement programs, such as the Medicare and ~~Medicaid~~were ~~programs;~~covered ~~loss~~by ofcollective ~~licenses; and significant fines or monetary penalties for~~bargaining ~~anti-kickback law violations, submission of false claims or other failures to meet reimbursement program requirements.~~

~~In addition~~17 to the regulations relating to the conduct of our pharmacy business, our pharmacists are subject to licensing requirements and are required to comply with various federal and state laws regarding compliance with dispensing procedures, anti-fraud statutes, false claims and other rules and regulations. Although we have a compliance program in place, in the event that a pharmacist is determined to not have a valid license for purposes of processing certain state and federal claims or is listed on a federal or state excluded provider list, we could be subject to significant fines and penalties.

26Table of Contents

~~Table~~ agreements. Pursuant to the terms of ~~Contents~~the collective bargaining agreements covering these employees, we are required, in some instances, to pay specified increases in salary and benefits contributions relating to the member employees. We do not believe that these increases will have a material impact on our liquidity or results of operations. Our collective bargaining agreements with the RWDSU/Local 338 and Local 340A unions, who, on a combined basis represent approximately 4,700 of the employees in all of our stores, will expire on December 31, 2012.

~~Federal and~~Approximately ~~state~~500 ~~laws~~of ~~that require~~ our ~~pharmacists~~employees toin ~~offer free counseling to their customers about medication, dosage, delivery systems, common side effects and other information the pharmacists deem significant can impact~~ our ~~business.~~two ~~Our~~distribution ~~pharmacists~~centers ~~may~~in ~~also have a duty to warn customers regarding any potential negative effects of a prescription drug if the warning could reduce or negate these effects. Violations of federal~~Maspeth, ~~state~~Queens, ~~and~~NY ~~common law privacy protections could give rise to significant damages, penalties,~~ and~~/or~~ ~~injunctive~~North ~~relief. Additionally~~Bergen, weNJ are ~~subject~~represented toby ~~federal~~Local ~~and state regulations relating to our pharmacy operations~~210, ~~including~~International ~~purchasing,~~Brotherhood ~~storing and dispensing~~ of ~~controlled substances. Laws governing our employee relations~~Teamsters, ~~including~~Chauffeurs ~~minimum~~and ~~wage requirements~~Warehousemen, ~~overtime~~under ~~and~~a ~~working~~collective ~~conditions also impact our business. Increases in the federal~~bargaining ~~minimum~~agreement ~~wage~~that ~~rate,~~expires ~~employee~~on ~~benefit costs or other costs associated with employees could significantly increase our cost of operations~~August 31, ~~which could materially adversely affect our level of profitability~~2011.

Intellectual ~~Budgetary~~Property ~~pressures may cause various governmental agencies to reduce health care expenditures or change the terms of their payments to us. Any such reductions could negatively impact our business.~~

~~Both~~We ~~state~~hold ~~and~~a ~~federal~~number ~~government~~of ~~sponsored~~registered ~~payers,~~and asunregistered atrademarks. ~~result~~Trademarks ofwe ~~budget~~have ~~deficits~~registered orwith ~~reductions,~~the ~~may~~United ~~seek~~States toTrademark ~~reduce~~Office ~~their~~include ~~health care~~the ~~expenditures~~name by“Duane ~~renegotiating~~Reade;” the ~~terms~~distinctive of“DR” ~~their~~logo; ~~payments~~“DR ~~with~~Express,” ~~us.~~and its associated logo; “Christmas in

~~The current economic downturn may result in additional reductions in~~ New York;” ~~Medicaid~~“Fifth ~~prescription~~Avenue ~~reimbursements.~~Preferred;” ~~Budget~~“Color ~~proposals~~ for ~~New York State for 2009 currently include reductions in~~ the ~~reimbursements~~City;” ~~for pharmacies in~~ the ~~Medicaid~~logo ~~and~~“Performance ~~EPIC~~Script ~~programs.~~Network;” ~~The~~“Skin ~~State~~Wellness ofCenter;” New Jersey is also proposing reductions in dispensing fees and reimbursement rates in 2009. Neither state has approved their final budget proposals, but it is highly likely that there will ultimately be further reductions in reimbursements, and any reduction in payments by such government sponsored payers may adversely affect our operations and cash flow.

“Rock WeBottom” ~~could~~and beits ~~materially~~associated ~~and~~logo, ~~adversely~~“We ~~affected~~Pledge” ifwith ~~either~~the ofDuane ~~our~~Reade ~~distribution~~logo ~~centers~~and is“New ~~shut~~York ~~down~~Living Made Easy. ”

We ~~operate~~have ~~two~~applications ~~centralized~~currently ~~distribution~~pending ~~centers,~~before ~~one in Queens, New York and~~ the ~~other~~United inStates ~~North~~Trademark ~~Bergen,~~Office ~~New Jersey. We ship most of our non-pharmacy products~~ to ~~our~~register ~~stores through~~ our ~~distribution~~trademarks ~~centers~~“Apt. ~~If either of our distribution centers is destroyed~~5,” or shut down for any other reason, including because of weather or labor issues, we could incur significantly higher costs and longer lead times associated with distributing our products to our stores during the time it takes for us to reopen or replace the centers. We maintain business interruption insurance to protect us from the costs relating to matters such as a shutdown, but our insurance may not be sufficient, or the insurance proceeds may not be timely paid to us, in the event of a shutdown.

“DR WeDelish,” ~~rely~~“City onChic,” a“Duane ~~primary~~Reade ~~supplier~~DRC ofDiabetes ~~pharmaceutical~~Resource ~~products~~Center,” towith ~~sell~~its ~~products~~associated tologo; us“LOOKboutique,” “How onI ~~satisfactory~~Feel,” ~~terms.~~“How AI ~~disruption~~Look” inand ~~our~~“What ~~relationship~~I ~~with~~Need ~~this supplier could have a material adverse effect on our business~~Now. ”

WeAvailable ~~are party to multi-year, merchandise supply agreements in the normal course of business. The largest of these is with~~Information AmerisourceBergen, our primary pharmaceutical supplier, which supplied most of our pharmaceutical products in fiscal 2008 and 2007. Management believes that if any of these agreements were terminated or if any contracting party were to experience events precluding fulfillment of its obligations, we would be able to find a suitable alternative supplier. However, we may not be able to do so without significant disruption to our business. Finding suitable alternative suppliers could take a significant amount of time and result in a loss of customers.

We maintain a company website at www.duanereade.com. We ~~may~~make becopies ~~unable~~of toour ~~attract~~Annual Report on Form 10-K, ~~hire~~Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and ~~retain~~any ~~qualified~~amendments ~~pharmacists,~~to ~~which~~those ~~could~~reports ~~harm~~filed with or furnished to the SEC available to investors on or through our ~~business~~website free of charge as soon as reasonably practicable after we have electronically filed them with or furnished them to the SEC. The contents of our website do not constitute a portion of this report.

AsThe ~~our~~public ~~business~~may ~~expands~~read and copy any materials filed by us with the SEC at the SEC’s Public Reference Room, welocated ~~believe~~at ~~that~~100 F ~~our~~Street, ~~future~~N.E. ~~success~~Washington, ~~will~~DC ~~depend~~20549. ~~greatly~~The public may obtain information on ~~our~~the ~~continued~~operation ~~ability~~of tothe ~~attract~~Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website at which reports, proxy and ~~retain~~information ~~highly skilled~~statements and ~~qualified~~other ~~pharmacists~~information regarding issuers that file electronically with the SEC are available. ~~The~~This website ~~competition~~may ~~for~~be ~~qualified~~accessed at http://www.sec.gov.

27ITEM 1A. Risk Factors

~~Table~~The following ofrisk ~~Contents~~factors should be read carefully in connection with evaluating us and this annual report on Form 10-K. Certain statements in this “Risk Factors” section are forward-looking statements. See Special Note Regarding “Forward-Looking Statements” above.

~~pharmacists and~~Risks ~~other~~Related ~~pharmacy professionals may make it difficult for us~~ to ~~attract,~~Our ~~hire~~Business and retain qualified pharmacists. Although we generally have been able to meet our pharmacist staffing requirements in the past, our inability to do so in the future at costs that are favorable to us, or at all, could negatively impact our revenue, and our customers could experience lower levels of customer care. In 2008, we continued to experience cost pressures from increased pharmacist salary and benefit costs.

We ~~Most~~face ofa ~~our~~high ~~employees~~level ~~are~~of ~~covered~~competition byin ~~collective~~our ~~bargaining agreements~~markets. ~~A failure to negotiate new agreements when the existing agreements terminate could disrupt our business.~~

AsWe ofoperate ~~December 27,~~in ~~2008~~highly competitive markets. In the New York greater metropolitan area, we ~~had~~compete ~~approximately~~against 6national,~~800~~ ~~employees.~~regional ~~Unions~~and ~~represent~~local ~~approximately~~drugstore 5chains,~~000~~ ofdiscount ~~our~~drugstores, ~~employees.~~supermarkets, combination food ~~Non-union~~and ~~employees~~drugstores, ~~include~~discount ~~employees~~general atmerchandise ~~corporate~~stores, ~~headquarters~~mass merchandisers, ~~store~~independent drugstores and ~~warehouse~~local ~~management~~merchants. ~~and~~Major ~~all~~chain ofcompetitors ~~our~~in ~~store~~the ~~pharmacists.~~New ~~The~~York ~~distribution~~greater ~~facility~~metropolitan ~~employees~~area ~~are~~include ~~represented~~CVS, byRite ~~the International~~Aid ~~Brotherhood~~and ofWalgreens. ~~Teamsters~~In addition, ~~Chauffeurs~~other ~~and~~chain stores ~~Warehousemen~~may enter the New York greater metropolitan area and ~~Helpers~~become significant competitors in the future. Many of ~~America,~~our ~~Local 210~~competitors ~~under~~have agreater ~~collective~~financial ~~bargaining~~and ~~agreement~~other ~~that~~resources ~~expires~~than onwe ~~August 31~~do. Currently, ~~2011. Local 210~~we ~~represents~~have ~~approximately~~the ~~400~~largest ~~employees~~market share in ~~our~~the ~~Maspeth,~~ New York metropolitan ~~and~~area ~~North~~compared ~~Bergen,~~to ~~New~~our ~~Jersey~~competitors ~~warehouse~~in ~~facilities~~the drugstore business. AtIf ~~December 27~~any of our current competitors, ~~2008~~or new competitors, ~~employees~~were into ~~141~~devote ~~stores~~significant ~~were represented~~resources byto enhancing or establishing an increased presence in the ~~RWDSU/Local 338~~New ~~and~~York ~~employees~~greater inmetropolitan ~~109~~area, ~~stores~~they ~~were~~could ~~represented~~make byit ~~Local 340A~~difficult ~~New~~for ~~York~~us ~~Joint~~to ~~Board~~maintain or grow our market share or maintain our margins, ~~UNITE~~and ~~AFL-CIO~~our advertising and promotional costs could increase. ~~Our~~This ~~three~~competition ~~year~~could ~~collective~~materially ~~bargaining~~adversely ~~agreements~~affect ~~with~~our ~~RWDSU/Local~~results ~~338~~of operations and ~~Local~~financial ~~340A~~condition ~~expire~~in ~~on March 31~~the future. In addition to competition from the drugstore chains named above, ~~2009~~our pharmacy business also competes with hospitals, health maintenance organizations and foreign imports.

~~While we~~18 are currently engaged in negotiating new collective bargaining agreements with RWDSU/Local 338 and Local 340A, there can be no assurance that these negotiations will be successful, and we may be unable to reach new collective bargaining agreements on terms favorable to us. Our business operations may be interrupted as a result of labor disputes, strikes, work stoppages or difficulties and delays in the process of renegotiating our collective bargaining agreements.

Table We may be subject to significant liability should the consumption of any of our products cause injury, illness or death. Contents

~~Products~~Another ~~that~~adverse wetrend ~~sell~~for ~~could~~drugstore ~~become~~retailing ~~subject~~has tobeen ~~contamination,~~the ~~product~~growth ~~tampering,~~in ~~mislabeling~~mail-order orand internet-based ~~other~~prescription ~~damage~~processors. ~~requiring~~These usprescription distribution methods have grown in market share relative to ~~recall~~drugstores ~~our private~~as ~~label~~a ~~products~~result of the rapid rise in drug costs experienced in recent years. InMail-order ~~addition~~prescription distribution methods have been perceived by employers and insurers as being less costly than traditional distribution methods and are being mandated by a number of third party pharmacy benefit managers, ~~errors~~many inof ~~the~~which ~~dispensing~~also own and ~~packaging~~manage mail-order distribution operations, as well as a number of ~~pharmaceuticals~~employers ~~could~~and ~~lead~~unions. In addition to ~~serious~~these ~~injury~~forms orof ~~death.~~mail-order ~~Product~~distribution, ~~liability~~there ~~claims~~have ~~may~~also bebeen ~~asserted~~an ~~against~~increasing usnumber ~~with~~of ~~respect~~internet-based prescription distributors that specialize in offering certain high demand tolifestyle ~~any~~drugs at deeply discounted prices. A number of these internet-based distributors operate outside the ~~products~~reach orof ~~pharmaceuticals~~regulations wethat ~~sell~~govern other drug retailers. Competition from foreign imports has also created volume and wepricing pressure. Imports from foreign countries may beincrease ~~obligated~~further toif ~~recall~~recently ~~our~~introduced ~~private~~legislation ~~label~~seeking ~~products.~~to Alegalize ~~product~~the ~~liability~~importation ~~judgment~~of ~~against~~drugs usfrom orforeign acountries ~~product~~is ~~recall~~eventually ~~could~~enacted. These alternate distribution channels have aacted ~~material~~to restrain the rate ~~adverse~~of ~~effect~~sales ongrowth ~~our~~for ~~business,~~traditional ~~financial~~chain ~~condition~~drug orretailers ~~results~~in ofthe ~~operations~~last several years.

We ~~depend~~operate onin ~~our~~a ~~management~~concentrated ~~team,~~region and, ~~the~~as ~~loss~~a ofresult, our ~~their~~business ~~services~~is ~~could~~significantly ~~have~~influenced aby ~~material~~the ~~adverse~~economic ~~effect~~conditions onand ~~our~~other ~~business~~characteristics of the New York greater metropolitan area.

~~Our~~Substantially ~~success~~all ~~depends~~of toour stores are located in the greater New York metropolitan area. In addition, in a ~~large~~number ~~extent~~of onrespects, the ~~continued~~current ~~service~~economic downturn can affect retailers disproportionately, as consumers may prioritize reductions in discretionary spending on consumer goods in response to the deterioration of the economy. As a result, we are sensitive to, and our ~~executive~~success ~~management~~will ~~team.~~be ~~Departures~~substantially affected by, ~~our~~economic ~~executive~~conditions ~~officers~~and other ~~could~~factors ~~have~~affecting athis ~~negative~~region, ~~impact~~such onas the regulatory environment, unemployment levels, cost of energy, real estate, insurance, taxes and rent, weather, demographics, the availability of labor, financial markets and geopolitical factors such as terrorism. We cannot predict economic conditions in this region. During the 1990s, the New York City economy grew substantially, and our business benefited from this high rate of economic growth. As a result of the economic recession and the terrorist attack on the World Trade Center in September 2001, however, the New York City economy was materially and adversely affected. In the latter half of 2008 and the beginning of 2009, economic conditions worsened considerably and the level of national economic activity as wemeasured by a number of recent key economic indicators has shown that the economy entered into a recession in 2008. It may ~~not~~be some time before the economy recovers completely. The New York City economy may be particularly ~~able~~slow to ~~find~~recover ~~suitable~~because ~~management~~of ~~personnel~~difficulties in the financial services industry and job losses associated with such difficulties. Furthermore, to ~~replace~~the ~~departing~~extent ~~executives~~that onpersonal disposable income declines as a ~~timely~~result ~~basis.~~of Werising dounemployment, ~~not~~higher taxes, ~~maintain~~reduced ~~key~~bonus income, falling housing prices, higher consumer debt levels, increased energy costs or other macroeconomic factors, we could experience reduced profitability, lower sales (particularly in front-~~man~~end ~~life insurance~~merchandise) onand ~~any~~increased levels of ~~our~~inventory ~~executive officers~~shrink.

Our ~~Continued~~sales ~~volatility~~and profitability have in ~~insurance~~the ~~related~~past ~~expenses~~been affected by events and other factors that affect New York City. Examples include smoking-ban legislation, the ~~markets~~August ~~for~~2003 Northeast power blackout, and significant non-recurring increases in real estate taxes and insurance ~~coverage~~costs. We have continued to experience cost pressures from increases in minimum wage rates. Any increases in federal taxes or in city or state taxes in New York City or the Tri-State Area resulting from state or local government budget deficits may further reduce consumers’ disposable income, which could have a further ~~material~~negative ~~adverse~~impact ~~effect~~ on usour business. Any other unforeseen events or circumstances that affect the New York City metropolitan area could also materially adversely affect our revenues and profitability.

~~The~~In ~~costs of employee health~~addition, ~~workers'~~perceived ~~compensation,~~instability ~~property~~in ~~and~~our ~~casualty,~~business ~~general liability, director~~ and ~~officer~~in ~~and~~the ~~other~~financial ~~types~~health of ~~insurance~~ ~~could~~New ~~rise,~~York ~~while~~City and the ~~amount~~surrounding ~~and~~areas ~~availability~~may ofnegatively affect ~~coverage~~our ~~can~~relations ~~decrease.~~with ~~These~~our ~~conditions~~suppliers ~~are~~and ~~exacerbated~~trade bycreditors. ~~rising~~As ~~healthcare~~a ~~costs~~result, ~~legislative~~our ~~changes,~~suppliers ~~economic~~or ~~conditions~~trade ~~and~~creditors ~~the~~may ~~threat of~~present ~~terrorist~~us ~~attacks~~with ~~such~~terms as that ~~which~~are ~~occurred on~~materially ~~September 11,~~more ~~2001.~~disadvantageous Ifto ~~our~~us ~~insurance-related~~than ~~costs~~those ~~increase~~we ~~significantly~~currently enjoy, orwhich ifmay wehave ~~are~~a ~~unable~~negative toimpact ~~obtain~~on our ~~adequate~~ability ~~levels~~to ofoperate ~~insurance,~~ our ~~financial~~business ~~position~~ and ~~results~~manage ofour ~~operations could be materially adversely affected~~liquidity.

28Continued volatility and disruption to the global capital and credit markets may adversely affect our results of operations and financial condition, as well as our ability to access credit and the financial soundness of our customers, third party providers and vendors.

The financial services industry, which is highly concentrated in the New York City marketplace, experienced significant difficulties during ~~Table~~2008 and 2009. During 2008 and for portions of ~~Contents~~2009, the global capital and credit markets experienced a period of unprecedented turmoil and upheaval, characterized by the bankruptcy, failure, collapse or sale of various financial institutions and an unprecedented level of intervention from the United States federal government. These conditions have adversely affected the demand for our products and services and, therefore, reduced purchases by our customers, which have negatively affected our revenue growth and caused a decrease in our profitability. In addition, reduced consumer spending may drive us and our competitors to offer additional products at promotional prices, which would have a negative impact on our operations. A continued softening in consumer sales may adversely affect our industry, business and results of operations.

19 ~~Certain risks are inherent in providing pharmacy services, and our insurance may not be adequate to cover any claims against us.~~

PharmaciesTable are exposed to risks inherent in the packaging, dispensing and distribution of pharmaceuticals and other healthcare products. Although we maintain professional liability and errors and omissions liability insurance, the coverage limits under our insurance programs may not be adequate to protect us against future claims, and we may not have the ability to maintain this insurance on acceptable terms in the future, which could materially adversely affect our business. Contents

In Weaddition, ~~are~~interest ~~subject~~rate fluctuations, financial market volatility or credit market disruptions may limit our access to ~~trends~~capital inand ~~the~~may ~~retail~~also ~~industry~~negatively affect our customers’ and ~~changes~~our invendors’ ~~consumer~~ability ~~preferences~~to obtain credit to finance their businesses on acceptable terms. As a result, our customers’ needs and aability ~~failure~~to purchase our products may decrease, and our vendors may increase their prices, reduce their output or change their terms of sale. If our third party providers’ or vendors’ operating and financial performance deteriorates, or if they are unable to ~~anticipate~~make ~~such~~scheduled ~~changes~~payments or ~~react~~obtain credit, our third party providers may not be able to ~~such~~pay, ~~changes~~or inmay adelay ~~timely~~payment ~~manner~~of, accounts receivable owed to us, and our vendors may restrict credit or impose different payment terms. Any inability of ~~have~~customers ato ~~material~~pay ~~adverse~~us ~~effect~~for onour products, or any demands by vendors for different payment terms, may adversely affect our ~~business~~operations and cash flow.

~~Our~~Declining ~~success~~economic ~~depends~~conditions onmay ~~our~~also ~~ability~~increase toour ~~respond to changing trends and shifting consumer demand~~costs. If wethe ~~misjudge~~economic ~~trends~~conditions ~~and~~do ~~are~~not ~~unable~~improve ~~to adjust our product offerings in a timely manner, our sales may decline~~ or ~~fail~~continue to ~~meet expectations and any excessive inventory may need to be sold at lower prices. For instance~~deteriorate, ~~over the past several years,~~ our ~~overall~~results ~~photofinishing business and sales~~ of ~~film~~operations ~~have~~or ~~experienced~~financial ~~significant~~condition declining sales as the industry as a whole experiences declines in the use of traditional technologies and as we have made the transition to digital photofinishing. We have placed self-serve kiosks in several of our store locations in an attempt to respond to the transition to digital photofinishing but our digital photofinishing business may not grow as expected. As a result, our business and prospects could ~~suffer.~~be ~~Trends other than changes in product demand in the retail industry may also~~ adversely ~~affect our business. For example, changing demands for customer and ancillary services, developments in our loyalty card programs~~ ~~and other such trends may also affect the business~~affected.

~~Our operations~~We ~~are~~require ~~also~~a ~~impacted~~significant byamount ~~consumer~~of ~~spending~~cash ~~levels,~~flow ~~which~~from ~~are~~operations ~~affected~~and bythird ~~general~~party ~~economic~~financing ~~conditions,~~to ~~consumer~~pay ~~confidence,~~our ~~employment levels~~indebtedness, ~~availability~~to ~~of consumer credit~~execute ~~and~~our ~~interest~~business ~~rates~~plan ~~on that credit, consumer debt levels, cost of consumer staples, including food~~ and ~~energy,~~to ~~cost~~fund ofour other ~~goods,~~liquidity ~~adverse weather conditions and other factors over which we have little or no control~~needs.

We ~~The~~may ~~outcome~~not ofbe ~~current~~able to generate sufficient cash flow from operations, our suppliers may not continue to extend us normal trade payments terms, and future ~~litigations~~borrowings ~~and~~may ~~other~~not ~~proceedings~~be available to us under our asset-based revolving loan facility or otherwise in ~~which~~an amount we ~~are~~will ~~involved~~need ~~may~~to ~~have~~pay aour ~~material~~indebtedness, ~~adverse~~to execute ~~effect~~our business plan or to fund our other liquidity needs. We spent $64.4 million in 2009 on capital expenditures, lease acquisitions, pharmacy customer file acquisitions and other capital items. We also require working capital to support inventory for our ~~results~~existing stores. In addition, we may need to refinance some or all of ~~operations~~our indebtedness, including indebtedness under our asset-based revolving loan facility, our senior subordinated notes due 2011 and ~~cash~~our ~~flow~~senior secured notes due 2015, or our redeemable preferred stock at or before maturity. We may not be able to refinance any of our indebtedness on commercially reasonable terms or at all. Failure to generate or raise sufficient funds may require us to modify, delay or abandon some of our future business initiatives or expenditure plans.

WeOur operations are subject to ~~various~~trends ~~litigations and other proceedings~~ in ~~our business, which if determined unfavorably to us, could have a material adverse effect on our results of operations and cash flow. In addition, any of~~ the ~~current~~healthcare ~~or possible future civil or criminal actions in which we may be involved could require significant management and financial resources, which could otherwise be devoted to the operation of our business~~industry. ~~For a more detailed discussion of these litigations and other proceedings, see "Item 3.~~ ~~Legal Proceedings."~~

Pharmacy ~~Risks~~sales, ~~Related~~which typically generate lower margins than front-end sales, represent a significant percentage of our total sales. Pharmacy sales, including resales of certain retail inventory, accounted for approximately 46.7% of total sales in the fiscal year ended December 26, 2009, approximately 46.1% of total sales in the fiscal year ended December 27, 2008 and approximately 46.0% of total sales in the fiscal year ended December 29, 2007. Pharmacy sales are also subject to ~~Our~~increasing ~~Capital~~margin ~~Structure~~ pressure, as managed care organizations, insurance companies, government funded programs, employers and other third party payers, which collectively we call third party plans, have become prevalent in the New York greater metropolitan area and as these plans continue to seek cost containment. Also, any substantial delays in reimbursement or significant reduction in coverage or payment rates from third party plans may have a material adverse effect on our business. In addition, a number of employers are now requiring participants in their plans to obtain some of their prescription drugs, especially those for non-acute conditions, through mail-order providers. Medicare Part D benefits for senior citizens that became available in January 2006 resulted in lower reimbursement rates and lower profitability than the non-third party and state Medicaid reimbursement rates they replaced. These factors and other factors related to pharmacy sales described below may have a negative impact on our pharmacy sales in the future. See the risk factor “We face a high level of competition in our markets” for further discussion on drugstore retail trends. Sales to third party prescription plans, which include government-paid plans, represented 94.2% of our prescription drug sales for the fiscal year ended December 26, 2009, 93.4% of our prescription drug sales for the fiscal year ended December 27, 2008 and 93.0% of our prescription drug sales for the fiscal year ended December 29, 2007.

The ~~Our~~continued ~~substantial~~conversion ~~indebtedness~~of ~~could~~various ~~prevent~~prescription usdrugs ~~from~~to ~~fulfilling~~over-the-counter ~~our~~medications ~~obligations~~may ~~under~~materially reduce our ~~indebtedness~~pharmacy sales and customers may ~~otherwise~~seek ~~restrict~~to purchase such medications at non-pharmacy stores. Also, if the rate at which new prescription drugs become available slows or if new prescription drugs that are introduced into the market fail to achieve popularity, our pharmacy ~~activities~~sales may be adversely affected. The withdrawal of certain drugs from the market or concerns about the safety or effectiveness of certain drugs or negative publicity surrounding certain categories of drugs may also have a negative effect on our pharmacy sales or may cause shifts in our pharmacy or front-end product mix. For example, the rate of growth in pharmacy sales declined in 2005 due to a number of factors, including a decline in demand for hormonal replacement medications, increasing third party plan co-payments, negative publicity surrounding certain arthritis medications, conversion of certain prescription drugs to over-the-counter status and increased mail order and internet based penetration.

WeHealthcare ~~have~~reform aand ~~significant~~enforcement ~~amount~~initiatives ofsponsored ~~indebtedness.~~by Asfederal ofand ~~December 27,~~state ~~2008,~~governments wemay ~~had~~also aaffect ~~total~~our ofrevenues ~~approximately~~from ~~$555.7 million~~prescription ofdrug ~~indebtedness outstanding, consisting of approximately $144~~sales.~~6 million~~ ~~outstanding~~These ~~under~~initiatives ~~the~~include: amended asset-based revolving loan facility, $210.0 million of outstanding senior secured floating rate notes, $195.0 million of outstanding senior subordinated notes and approximately $6.0 million of capital lease obligations.

~~Our outstanding~~• ~~indebtedness~~proposals ~~could:~~designed to significantly reduce spending on Medicare, Medicaid and other government programs;

2920

~~During 2006,~~• wechanges extended the maturity of the amended asset-based revolving loan facility from 2008 to 2011. As a condition of this extension, we are required to refinance any outstanding amounts under the $210.0 million of senior secured floating rate notes not later than 120 days prior to their maturity date of December 15, 2010. Our ability to refinance our indebtedness will depend on, among other things, our financial condition at the time, credit market conditions and the availability of financing. Our ability to refinance our indebtedness could be impaired if debt holders develop a negative perception of our long-term or short-term financial prospects. Such negative perceptions could result if we suffer a decline in ~~the level~~programs ofproviding ~~our~~for ~~business~~reimbursement ~~activity,~~for ~~among other reasons. In addition, because of disruptions in~~ the ~~worldwide~~cost ~~credit markets, because~~ of ~~the~~prescription ~~economic~~drugs ~~downturn~~by ~~and~~third ~~its~~party impact on our business or for other reasons, we may not be able to obtain refinancing on commercially reasonable terms or at all. Failure to refinance our indebtedness could have a material adverse effect on us and could require us to dispose of assets if we cannot refinance our indebtedness. We may be unable to sell some of our assets, or we may have to sell assets at a substantial discount from market value, either of which could adversely affect our results of operations. plans;

• ~~Despite current indebtedness levels, we and our subsidiaries may still be able to incur substantial additional indebtedness. This could further exacerbate~~ the ~~risks associated~~Medicare ~~with~~Modernization ~~our existing substantial indebtedness.~~ Act;

We• ~~and~~increased ~~our~~scrutiny subsidiaries may be able to incur substantial additional indebtedness in the future. We are able to incur up to $220.0 million in total indebtedness under the amended asset-based revolving loan facility, of ~~which approximately $144.6 million was outstanding as of December 27~~, 2008. Our ability to borrow under the amended asset-based revolving loan facility is subject to a borrowing base formula. The agreement governing the amended asset-based revolving loan facility also allows us to incur additional other indebtedness. The indentures governing the senior secured floating rate notes and ~~the~~litigation ~~senior~~relating ~~subordinated notes contain some limitations on the ability of Duane Reade Inc., Duane Reade GP and their restricted subsidiaries~~ to ~~incur indebtedness; however~~, ~~those~~prescription ~~indentures~~drug ~~may~~manufacturers’ ~~not~~pricing ~~prohibit those entities from incurring additional indebtedness. There is no restriction on the ability of Duane Reade Holdings, Inc. to incur indebtedness. If new indebtedness is added to our~~ and ~~our~~marketing ~~subsidiaries'~~practices; ~~current indebtedness levels, the related risks that we~~ and ~~they now face would intensify.~~

• ~~The~~regulatory ~~agreements~~changes ~~governing~~relating ~~our~~to ~~indebtedness~~the ~~include~~approval ~~restrictive~~process ~~and~~for ~~financial~~prescription ~~covenants that may limit our operating and financial flexibility~~drugs.

~~The~~These ~~indenture~~initiatives ~~governing~~could ~~the~~lead ~~senior~~to ~~secured floating rate notes,~~ the ~~agreement~~enactment ~~governing the amended asset-based revolving loan facility and the indenture governing the senior subordinated notes contain covenants that~~of, ~~among~~or ~~other~~changes ~~things~~to, ~~restrict~~federal ~~our~~regulations ~~ability~~and tostate ~~take~~regulations ~~specific~~in ~~actions,~~New ~~even~~York ifand we

30New Jersey that could adversely impact our prescription drug sales and, accordingly, our results of operations. It is uncertain at this time what additional healthcare reform initiatives, if any, will be implemented, or whether there will be other changes in the administration of governmental healthcare programs or interpretations of governmental policies or other changes affecting the healthcare system. Future healthcare or budget legislation or other changes, including those referenced above, may materially adversely impact our pharmacy business.

~~Table~~Changes in reimbursement levels for certain prescription drugs continue to reduce the profitability of ~~Contents~~our on pharmacy business and could have a material adverse effect on our overall performance.

~~believe~~During the fiscal years ended December 26, 2009, December 27, 2008 and December 29, 2007, we were ~~them~~wholly toor bepartially inreimbursed ~~our~~by ~~best~~third ~~interest~~party plans for approximately 94.2%, ~~These~~93.4% ~~include~~and ~~restrictions~~93.0%, onrespectively, of the ~~ability~~prescription drugs that we sold. The percentage of ~~Duane~~prescription ~~Reade Inc~~sales reimbursed by third party plans has been increasing, and we expect that percentage to continue to increase. Prescription sales reimbursed by third party plans, ~~Duane~~including ~~Reade GP~~Medicare and ~~their~~Medicaid ~~restricted~~plans, ~~subsidiaries~~have lower reimbursement rates than other pharmacy sales. Third party plans may not increase reimbursement rates sufficiently to: offset expected increases in prescription acquisition costs, thereby reducing the profitability of our pharmacy business and adversely affecting our overall performance. In addition, continued increases in co-payments by third party plans may result in decreases in drug usage.

In particular, Medicare and Medicaid programs are subject to statutory and ~~addition~~regulatory changes, ~~the~~retroactive ~~agreement~~and ~~governing~~prospective ~~the~~reimbursement ~~amended~~rate ~~asset-based~~adjustments, ~~revolving~~administrative ~~loan~~rulings, ~~facility~~executive ~~contains~~orders aand ~~single~~freezes ~~fixed~~and ~~charge~~funding ~~coverage~~restrictions, ~~requirement~~all of which ~~only~~may ~~becomes~~significantly ~~applicable~~impact ~~when~~our ~~borrowings exceed~~pharmacy ~~90 percent~~operations. ofFor the ~~borrowing~~2009 ~~base~~fiscal year, approximately as29.7% ~~defined~~of inour ~~the~~total ~~agreement~~prescription ~~governing~~sales ~~the~~were ~~amended~~paid ~~asset-based~~for ~~revolving~~by ~~loan~~Medicaid ~~facility~~or Medicare. ~~Borrowings~~Over ~~under~~ the ~~amended~~last ~~asset-based~~several ~~revolving~~years, ~~loan~~a ~~facility~~ number of states experiencing budget deficits have ~~not~~moved ~~exceeded~~to ~~90 percent~~reduce ofMedicaid prescription reimbursement rates. Over the ~~borrowing~~past several ~~base~~years, New York State reduced Medicaid and, asEPIC aprescription ~~result~~reimbursement rates, adversely impacting our pharmacy operations. Under the ~~fixed~~New ~~charge~~York ~~covenant~~State ~~has~~Medicaid ~~not~~Program, ~~become~~reimbursement ~~applicable.~~for ~~There~~a ~~are~~multiple nosource ~~credit~~prescription ~~ratings~~drug ~~related~~for ~~triggers~~which a federal upper limit has been set by CMS will be in an amount equal to the ~~amended~~specific ~~asset-based revolving~~federal ~~loan~~upper ~~facility~~limit ~~that~~for ~~would~~the ~~impact~~multiple source prescription drug. For a multiple source prescription drug or a brand name prescription drug for which no specific federal upper limit has been set, the ~~cost~~lower of ~~borrowing,~~the ~~annual~~estimated ~~amortization~~cost of ~~principal~~each drug to pharmacies or ~~related~~the ~~indebtedness~~dispensing ~~maturity~~pharmacy’s usual and customary price charged to the public will be applied.

In ~~Issues~~July 2007, ~~affecting~~CMS ~~financial~~issued ~~institutions~~a ~~could~~final ~~adversely~~rule that may negatively affect ~~financial~~our ~~markets~~level ~~generally~~of asreimbursements ~~well~~for ascertain ~~our~~generic ~~ability~~drugs by setting an upper limit on the amount of reimbursement for such drugs based on the “Average Manufacturer Price.” As a result of a lawsuit brought by the National Association of Chain Drug Stores and the National Community Pharmacists Association to challenge ~~raise~~the ~~capital~~implementation orof ~~access~~the ~~liquidity~~new rule, a federal court temporarily enjoined the implementation of the new rule pending the outcome of the lawsuit and the lawsuit remains pending. In July 2008, Congress enacted H.R. 6331, the Medicare Improvements for Patients and Providers Act of 2008 (“MIPPA”). The former President Bush subsequently vetoed MIPPA and, on July 15, 2008, Congress overrode the veto. MIPPA has delayed the implementation of the use of Average Manufacturer Price with respect to payments made by State Medicaid Plans for multiple source generic drugs. MIPPA also prohibited the Secretary of Health and Human Services from making public any Average Manufacturer Price information that was previously disclosed to the Secretary of Health and Human Services.

~~Factors~~The ~~that~~Medicare weModernization ~~cannot~~Act ~~control,~~created ~~such~~a asMedicare ~~disruption~~Part ~~of the financial markets or negative views about the financial services industry~~D ~~generally~~benefit ~~could~~that ~~impair~~expanded ~~our~~Medicare ~~ability~~coverage ~~to raise necessary funding. The creditworthiness~~ of ~~many~~prescription ~~financial~~drugs ~~institutions~~for ~~may~~senior becitizens ~~closely~~as ~~interrelated~~well as afor ~~result~~certain of“dual ~~credit,~~eligible” ~~derivative,~~individuals ~~trading,~~that ~~clearing~~were orpreviously ~~other~~covered ~~relationships~~under ~~between~~state ~~the~~administered ~~institutions~~Medicaid plans. As aThis ~~result,~~Medicare ~~concerns~~coverage ~~about,~~has orresulted in adecreased ~~default~~pharmacy ormargins ~~threatened~~resulting ~~default~~from ~~by,~~lower ~~one~~reimbursement ~~institution~~rates ~~could~~than ~~lead~~our tocurrent ~~significant~~margins ~~market-wide~~on ~~liquidity~~state ~~and~~Medicaid ~~credit problems, losses or defaults by other institutions~~prescriptions. ~~This~~The ~~may~~Medicare ~~adversely~~Part ~~affect~~D ~~the~~program ~~financial~~has ~~institutions,~~grown ~~such~~rapidly assince ~~banks~~taking ~~and~~effect ~~insurance~~in ~~providers,~~2006. ~~with~~The ~~which~~program’s wegrowth ~~interact~~may oncontinue aas more ~~daily~~seniors ~~basis,~~become eligible and ~~therefore~~enroll ~~could~~for ~~adversely~~the ~~affect our ability to raise needed funds or access liquidity~~coverage.

21 We are a company whose equity is not publicly traded and which is effectively controlled by a single stockholder. That stockholder may effect changes to our board of directors, management and business plan, and interests of that stockholder may conflict with the interests of our noteholders.

DuaneTable Reade Shareholders owns approximately 99.2% of the outstanding shares of our common stock. Oak Hill owns a majority of the voting membership interests in Duane Reade Shareholders. See "Item 6. Selected Financial Data." Contents

~~Accordingly, Oak~~In ~~Hill~~recent ~~indirectly~~years, ~~beneficially~~Congress ~~owns~~has passed a ~~majority~~number of ~~our~~federal ~~outstanding~~laws ~~shares~~that ofhave ~~common~~created ~~stock~~major changes ~~and~~in ~~can~~the ~~determine~~healthcare system. In December 2000, the ~~outcomes~~Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 2000, or BIPA, was signed into law. Generally, BIPA addressed attempts to modify the ~~elections~~calculation of ~~members~~average wholesale prices of ~~our~~drugs, ~~board~~or ofAWPs, upon which Medicare and Medicaid pharmacy reimbursement has been based. The federal government has been actively investigating whether pharmaceutical manufacturers have been improperly manipulating average ~~directors~~wholesale prices, and several pharmaceutical manufacturers have paid significant civil and criminal penalties to resolve litigation relating to allegedly improper practices affecting AWP. In October 2006, in connection with a class action filed in the ~~outcome~~United States District Court for the District of ~~corporate~~Massachusetts, ~~actions~~First ~~requiring~~Data ~~stockholder~~Bank, ~~approval~~which is one of two primary sources of AWP price reporting, ~~including~~announced ~~mergers~~that it had entered into a settlement agreement related to its reporting of average wholesale prices, ~~consolidations~~subject ~~and~~to final court approval. Under the ~~sale~~terms of ~~all~~the orproposed ~~substantially~~settlement ~~all~~agreement, First Data Bank agreed to reduce the reported AWP of ~~our~~certain ~~assets.~~drugs ~~Oak~~by ~~Hill~~four ~~also~~percent ~~controls~~and ~~our~~to discontinue the publishing of AWP at a future time. In ~~management~~May 2007, ~~policies~~in ~~and~~connection with a separate class action filed in the same court, Medi-Span, the other primary source of average wholesale price reporting, entered into a similar settlement agreement, also subject to final court approval.

31In January 2008, the court denied approval of the First Data Bank and Medi-Span settlements as proposed. Subsequently, new settlement agreements were submitted to the court. On March 17, 2009, the court issued an order approving the revised settlements. Some parties appealed the court’s ruling. On September 3, 2009, the United States Court of Appeals for the First Circuit affirmed the decision of the District Court approving the settlements. Pursuant to the settlements, as approved, First Data Bank and Medi-Span have agreed to reduce the reported AWP for certain drugs by four percent. Separately, and not pursuant to the settlement agreements, First Data Bank and Medi-Span have indicated that they will also reduce the reported AWP for a large number of additional drugs not covered by the settlement agreements and that they intend to discontinue the reporting of AWP in the future. The settlement agreements became effective on September 26, 2009.

~~Table~~A number of ~~Contents~~contracts with third-party plans contain provisions that allow us to adjust our pricing to maintain the relative economics of the contract in light of a change in AWP methodology. Most of our contracts with both private and governmental plans also include provisions that allow us to terminate the contracts unilaterally, either because parties cannot renegotiate our pricing to account for the change in AWP methodology or for any reason upon 30 to 90 days’ notice. While we have negotiated with many of the various governmental and non-governmental third-party plans for adjustments relating to the expected changes to AWP, the New York State Legislature is currently considering legislation that would modify the formula upon which New York Medicaid bases its reimbursement rates, which, if passed, will move pharmacy reimbursement rates with respect to Medicaid at or near the pre-settlement levels. However, at this time there is no assurance that this legislation would be ultimately passed by the New York State Legislature or if passed, will be in its current form. In late September 2009, New York Medicaid began to implement the AWP reductions. Although there is some uncertainty due to the pending legislation at the New York State Legislature, our fiscal 2009 results were adversely impacted by approximately $1.0 million as a result of the New York Medicaid AWP reimbursement reductions and we expect an impact of approximately $4.0 million in fiscal 2010 unless the reimbursement rates are adjusted to offset the AWP impact.

~~financing decisions~~If ~~and~~we isfail ~~in a position~~ to ~~prevent~~comply ~~or cause a change of control. The interests of Oak Hill could conflict~~ with ~~those~~all of ~~our~~the ~~public debt holders. For example, if we encounter financial~~government ~~difficulties~~regulations orthat ~~are~~apply ~~unable~~ to ~~pay~~ our ~~debts as they come due~~business, ~~the~~we ~~interests~~could ofincur ~~Oak~~substantial ~~Hill~~reimbursement ~~as an equity holder might conflict with the interests of our noteholders. Oak Hill may have an interest in pursuing acquisitions~~obligations, ~~divestitures or financings or other transactions that~~damages, ~~in its judgment could enhance its equity investment~~penalties, ~~even~~injunctive ~~though~~relief ~~such transactions may involve significant risks to our noteholders. In addition, Oak Hill~~ and/or ~~its~~exclusion ~~affiliates~~from ~~may~~participation in ~~the~~federal ~~future~~or ~~own~~state ~~interests~~healthcare ~~in businesses that compete with ours~~programs.

Our pharmacy operations are subject to a variety of complex federal, state and local government laws and regulations, including federal and ~~ITEM~~state 2civil fraud, anti-kickback, false claims and other laws. ~~PROPERTIES~~ We endeavor to structure all of our relationships to comply with these laws. However, if any of our operations are found to violate these or other government regulations, we could suffer severe penalties, including suspension of payments from government programs; loss of required government certifications; loss of authorizations to participate in or exclusion from government reimbursement programs, such as the Medicare and Medicaid programs; loss of licenses; and significant fines or monetary penalties for anti-kickback law violations, submission of false claims or other failures to meet reimbursement program requirements.

AsIn addition to the regulations relating to the conduct of ~~December 27~~our pharmacy business, ~~2008~~our pharmacists are subject to licensing requirements and are required to comply with various federal and state laws regarding compliance with dispensing procedures, anti-fraud statutes, false claims and other rules and regulations. Although we ~~were~~have ~~operating~~a ~~stores~~compliance program in place, in the ~~following~~event ~~locations:~~that a pharmacist is determined to not have a valid license for purposes of processing certain state and federal claims or is listed on a federal or state excluded provider list, we could be subject to significant fines and penalties.

		No. of Stores
Manhattan, NY			148
Brooklyn, NY			31
Queens, NY			27
Bronx, NY			11
New Jersey			11
Staten Island, NY			8
Nassau County, NY			8
Westchester County, NY			6
Suffolk County, NY			1
Total			251

~~All of~~22 our stores operated at December 27, 2008 are leased. The average remaining lease term for stores operating as of December 27, 2008 is 8.9 years, which does not include the exercise of lease renewal options available to us. The exercise of the lease renewal options available to us would increase the average remaining lease term to 13.0 years. The following table sets forth the lease expiration dates of our leased stores on an annual basis through 2013 and thereafter. Of the 59 stores with leases expiring by December 31, 2013, 27 have renewal options. During the first quarter of the 2009 fiscal year, we entered into new leases for two of the four leases that were scheduled to expire in 2009. For all of our store locations, we believe that we will be able to either renew the expiring leases on economically favorable terms or find other economically attractive locations to lease.

Year
2009	4	0
2010	6	0
2011	10	3
2012	15	8
2013	24	16
Thereafter	192	90

We ~~occupy~~Medicare ~~approximately~~and/or ~~70,000~~New ~~square~~York ~~feet~~State ~~for~~Medicaid ~~our~~programs ~~corporate~~at ~~headquarters,~~various ~~located~~timeframes between 2001 and 2008. We are currently in ~~Manhattan,~~discussion ~~New~~with ~~York~~the ~~City,~~OMIG ~~under~~regarding acertain ~~lease~~Medicaid ~~that~~reimbursements ~~expires~~received inby ~~2012~~us and related to the activities of these pharmacists. We have communicated to the OMIG our belief that payments received by us for the cost of prescriptions dispensed do not represent overpayments. In the 2009 fiscal year, we recorded a ~~renewal~~$0.8 ~~option~~million charge relating to ~~extend~~the potential disgorgement of dispensing fees received by us for prescriptions dispensed by the excluded pharmacists. Due to the inherent uncertainty of the matter, there can be no assurance that this matter will be resolved for ~~lease~~the amount recorded by us, and we may be required to repay the total amount of Medicaid reimbursement received by us for anthe ~~additional~~prescriptions ~~five~~dispensed ~~years~~by ~~beyond~~some or all of the ~~initial~~excluded ~~expiration~~pharmacists. ~~date~~If we are required to repay the total amount of Medicaid reimbursement received for the prescriptions dispensed by some or all of the excluded pharmacists, the payment may range as high as $15.7 million.

WeFederal and state laws that require our pharmacists to offer free counseling to their customers about medication, dosage, delivery systems, common side effects and other information the pharmacists deem ~~occupy~~significant ~~approximately~~can ~~506~~impact our business. Our pharmacists may also have a duty to warn customers regarding any potential negative effects of a prescription drug if the warning could reduce or negate these effects. Violations of federal,~~000~~ ~~square~~state, ~~feet~~and common law privacy protections could give rise to significant damages, penalties, and/or injunctive relief. Additionally, we are subject to federal and state regulations relating to our pharmacy operations, including purchasing, storing and dispensing of controlled ~~warehouse~~substances. ~~space~~Laws ingoverning ~~Maspeth~~our employee relations, ~~Queens~~including minimum wage requirements, ~~New~~overtime ~~York~~and ~~City~~working ~~under~~conditions aalso ~~lease~~impact ~~that~~our ~~expires~~business. Increases in ~~2017~~the federal minimum wage rate, employee benefit costs or other costs associated with employees could significantly increase our cost of operations, which could materially adversely affect our level of profitability.

~~We occupy~~Budgetary ~~approximately~~pressures ~~114,000~~may ~~square~~cause ~~feet~~various ofgovernmental ~~warehouse~~agencies ~~space~~to inreduce ~~North~~health ~~Bergen,~~care ~~New~~expenditures ~~Jersey~~or ~~under~~change athe ~~lease~~terms ~~that~~of ~~expires~~their inpayments ~~2018~~to us. Any such reductions could negatively impact our business.

32Both state and federal government sponsored payers, as a result of budget deficits or reductions, may seek to reduce their health care expenditures by renegotiating the terms of their payments with us.

~~Table~~The current economic conditions may result in additional reductions in New York Medicaid prescription reimbursements. The upcoming budget proposals for New York State are expected include reductions in the reimbursements for pharmacies in the Medicaid and EPIC programs. The State of ~~Contents~~New Jersey is also expected to propose Medicaid reductions in their upcoming budget proposals. Although neither state has approved their final budget proposals, we believe it is highly likely that there will ultimately be further reductions in reimbursements, and any reduction in payments by such government sponsored payers may adversely affect our operations and cash flow.

We could be materially and ~~ITEM~~adversely 3affected if either of our distribution centers is shut down. ~~LEGAL~~ ~~PROCEEDINGS~~

We ~~are~~operate ~~party~~two tocentralized ~~legal~~distribution centers, ~~actions~~one ~~arising~~ in Queens, New York and the ~~ordinary~~other ~~course~~in ofNorth ~~business~~Bergen, New Jersey. ~~Based~~We onship ~~information~~most ~~presently~~of ~~available~~our non-pharmacy products to ~~us,~~our westores ~~believe that~~through ~~the~~our ~~ultimate~~distribution ~~outcome~~centers. ofIf ~~these~~either ~~actions~~of ~~will~~our ~~not~~distribution ~~have~~centers ais ~~material~~destroyed, ~~adverse~~or ~~effect~~shut ondown ~~the~~for ~~financial~~any ~~position~~other reason, ~~results~~including because of ~~operations~~weather or ~~cash~~labor ~~flows~~issues, ofwe could incur significantly higher costs and longer lead times associated with distributing our ~~company.~~products Into ~~addition,~~our westores ~~are~~during athe ~~party~~time it takes for us to reopen or replace the centers. We ~~following~~maintain ~~legal~~business ~~actions~~interruption ~~and~~insurance to protect us from the costs relating to matters: such as a shutdown, but our insurance may not be sufficient, or the insurance proceeds may not be timely paid to us, in the event of a shutdown.

~~During 2002,~~We werely ~~initiated~~on a ~~legal~~primary ~~action~~supplier ~~against~~of ~~our~~pharmaceutical ~~former~~products ~~property insurance carrier, in an attempt~~ to ~~recover~~sell ~~what~~products ~~we believed~~ to be a fair and reasonable settlement for the business interruption portion of our claim originating from the September 11, 2001 World Trade Center terrorist attack, during which our single highest volume and most profitable store was completely destroyed. After a lengthy litigation and appraisal process, an appraisal panel awarded us ~~approximately~~on ~~$5.6 million~~satisfactory ~~(in addition to the $9~~terms.~~9 million~~ ~~that~~A ~~was~~disruption ~~paid by the insurer to us~~ in ~~2002).~~our Asrelationship awith ~~result of the insurer's refusal to pay~~ this supplier ~~amount~~could ~~and~~have ~~also as~~ a ~~result~~material ofadverse ~~the~~effect ~~Second~~on ~~Circuit Court of Appeals' interpretation of~~ our ~~insurance policy, in January 2007, we commenced another action in the U~~business.S. District Court for the Southern District of New York to recover both the appraisal panel's award and additional amounts under the policy. In August 2007, the District Court entered judgment in the amount of $0.8 million plus interest, and both parties appealed. The appeals have been briefed and oral argument in the Second Circuit Court of Appeals has been held. However, due to the inherent uncertainty of litigation, there can be no assurance that this appeal will be successful.

~~Accordingly, given~~We ~~the~~are ~~risks~~party ~~and~~to ~~uncertainties~~multi-year, ~~inherent~~merchandise supply agreements in ~~litigation,~~the ~~there~~normal ~~can~~course beof nobusiness. ~~definitive~~The ~~assurance~~largest ~~that~~of wethese ~~will~~is ~~actually~~with ~~receive~~AmerisourceBergen, ~~any~~our orprimary ~~all~~pharmaceutical ofsupplier, ~~the~~which ~~panel's~~currently ~~appraised~~supplies ~~value~~most of ~~this~~ ~~claim,~~our ~~and~~pharmaceutical weproducts. ~~have~~Management ~~not~~believes ~~recognized~~that if any ~~income~~of ~~related~~these toagreements ~~this~~were terminated ~~matter,~~or ~~other~~if ~~than~~any ~~$9.4 million~~contracting ofparty ~~the~~were ~~original~~to ~~$9.9 million~~experience ~~paid~~events byprecluding ~~the~~fulfillment ~~insurer~~of inits ~~2002.~~obligations, Itwe ~~should~~would be ~~noted~~able ~~that~~to ~~any payment~~find toa ussuitable ~~that~~alternative ~~might~~supplier. beHowever, ~~forthcoming~~we asmay anot ~~result~~be ofable ~~this~~to ~~claim~~do ~~may~~so ~~also~~without ~~result~~significant indisruption ~~the~~to ~~incurrence~~our business. ofFinding ~~additional~~suitable ~~expenses~~alternative ~~that~~suppliers ~~are~~could ~~contingent~~take ~~upon~~a ~~the~~significant amount of ~~such~~time ~~insurance~~and ~~claim~~result ~~settlement.~~in ~~These expenses,~~a ifloss ~~incurred,~~of ~~are not expected to exceed $4~~customers.~~0 million.~~

~~In November~~We ~~2004,~~may ~~we were served with a purported class action complaint, Damassia v. Duane Reade Inc. The lawsuit was filed in the U.S. District Court for the Southern District~~be ofunable ~~New York. The complaint alleges that, from the period beginning November 1998, we incorrectly gave some employees the title "Assistant Manager," in an attempt~~ to ~~avoid paying these employees overtime~~attract, inhire ~~contravention of the Fair Labor Standards Act~~ and ~~New~~retain ~~York~~qualified ~~law. In May 2008~~pharmacists, ~~the~~which ~~court~~could ~~certified~~harm ~~this~~our ~~case as a class action~~business. In April 2006, we were served with a purported class action complaint, Chowdhury v. Duane Reade Inc. and Duane Reade Holdings, Inc. The complaint alleges that, from a period beginning March 2000, we incorrectly classified certain employees in an attempt to avoid paying overtime to such employees, thereby violating the Fair Labor Standards Act and New York law. In May 2008, the court certified this case as a class action. The complaint seeks an unspecified amount of damages. In January 2009, we announced that, without admitting liability, we have entered into a Memorandum of Understanding to settle these two class action cases for $3.5 million. The settlement is subject to the approval of the U.S. District Court for the Southern District of New York. While we believe that we can strongly defend ourselves against the matters involved in this litigation, we have agreed to this settlement so that we may avoid future defense costs and uncertainty surrounding this litigation. As a result of this settlement agreement, we recorded a $3.5 million one-time, pre-tax charge for the fourth quarter ended December 27, 2008.

~~In November~~As ~~2007~~our business expands, we believe ~~were~~that ~~served~~our ~~with~~future asuccess ~~subpoena~~will ~~from~~depend ~~the~~greatly ~~Office~~on ofour ~~the~~continued ~~Attorney~~ability ~~General~~to ofattract ~~the~~and ~~State~~retain ofhighly ~~New~~skilled ~~York~~and qualified pharmacists. The ~~subpoena~~competition ~~requested~~for ~~information~~qualified ~~regarding~~pharmacists ~~our~~and ~~services~~other topharmacy ~~customers~~professionals may make it difficult for us to ~~with~~attract, ~~limited~~hire ~~English~~and ~~proficiency~~retain qualified pharmacists. WeAlthough ~~are~~we ~~cooperating~~generally ~~with~~have ~~the~~been ~~Office~~able ofto meet our pharmacist staffing requirements in the ~~Attorney~~past, ~~General~~our ~~and~~inability ~~believe~~to ~~this~~do ~~matter~~so ~~will~~in bethe ~~settled~~future onat ~~terms~~costs ~~acceptable~~that are favorable to us., ~~Should~~or ~~this~~at ~~matter~~all, ~~not~~could benegatively ~~settled~~impact our revenue, ~~we believe~~and ~~that~~our wecustomers ~~have~~could ~~valid~~experience ~~defenses~~lower tolevels ~~any~~of ~~claims~~customer ~~that~~care. ~~may~~In be2009, ~~made~~we ~~against~~continued usto ~~and~~experience wecost ~~will~~pressures ~~vigorously~~from ~~defend~~increased ~~ourselves~~pharmacist salary and benefit costs.

3323

~~In January~~Most ~~2008, we were served with a subpoena from the Department~~ of ~~Health~~our ~~and~~employees ~~Human~~are ~~Services,~~covered ~~Office~~by ofcollective ~~the~~bargaining ~~Inspector General~~agreements. ~~The~~A ~~subpoena~~failure ~~seeks information relating~~ to ~~the operation~~negotiate ~~of our pharmacy kiosks and information relating to a business relationship that we had with Mobility Plus, a provider of durable medical equipment. In February 2008, we received an identical~~new ~~subpoena~~agreements ~~from~~when the ~~Office~~existing ofagreements ~~the~~terminate ~~Attorney~~could ~~General~~disrupt ofour ~~the State of New York, Medicaid Fraud Control Unit~~business. We are in the process of responding to the information requests from both entities. While we believe that we have been in compliance with all applicable rules and regulations, at this stage, there can be no assurance as to the ultimate outcome of this matter.

As ~~Proceedings~~of ~~Relating~~December 26, to2009, ~~Anthony~~we Jhad approximately 7,000 employees. ~~Cuti~~ Unions represent approximately 5,200 of our employees. Non-union employees include employees at corporate headquarters, store and warehouse management and all of our store pharmacists. The distribution facility employees are represented by the International Brotherhood of Teamsters, Chauffeurs and Warehousemen and Helpers of America, Local 210 under a collective bargaining agreement that expires on August 31, 2011. Local 210 represents approximately 500 employees in our Maspeth, New York and North Bergen, New Jersey warehouse facilities. At December 26, 2009, employees in 144 stores were represented by the RWDSU/Local 338 and employees in 113 stores were represented by Local 340A New York Joint Board, UNITE AFL-CIO. The collective bargaining agreements with RWDSU/Local 338 and Local 340A will expire on December 31, 2012.

OnAlthough September 1, 2006, Anthony J. Cuti, a former Chairman, President and Chief Executive Officer of the Company, initiated an arbitration before the American Arbitration Association against Duane Reade Inc., Duane Reade Holdings, Inc. and Duane Reade Shareholders, LLC, which we ~~refer~~believe tothat asour ~~the "respondents."~~relations ~~The arbitration relates to his termination in November 2005. Mr. Cuti asserts various claims including,~~ with ~~respect~~our toemployees ~~his~~are ~~employment agreement~~satisfactory, ~~breach~~we ofmay ~~contract~~not ~~relating~~be ~~to the~~able ~~notice of termination provision, failure~~ to ~~make~~successfully ~~certain~~extend ~~payments~~or ~~toward~~renegotiate ~~his~~our ~~1998~~collective ~~corporate-owned~~bargaining ~~life~~agreements ~~insurance~~as ~~policy,~~they ~~relief~~expire from ~~the~~time ~~non-competition and non-solicitation covenants, failure~~ to ~~provide adequate information relating to the valuation of his profits interest and breach of the covenant of good faith and fair dealing. Other~~time, ~~claims relate to the patent rights for our virtual pharmacy kiosk system~~ and ~~payment of an alleged deferred 2001 bonus based on any insurance recovery~~ we may ~~obtain~~be onunable ~~our business interruption claim in connection with the 2001 World Trade Center tragedy. On March 16, 2007, Mr. Cuti sought leave~~ to ~~file~~reach annew ~~amended~~collective ~~demand~~bargaining ~~asserting~~agreements ~~additional~~on ~~allegations~~terms infavorable ~~support of his claim for breach of contract for failure~~ to ~~comply~~us. ~~with~~Our ~~the~~business ~~notice~~operations ofmay ~~termination~~be ~~provision~~interrupted inas ~~his employment agreement, and~~ a ~~claim~~result ~~for~~of ~~defamation.~~labor ~~On May 17~~disputes, ~~2007~~strikes, ~~the~~work ~~arbitrator~~stoppages ~~issued~~or andifficulties ~~order granting~~and ~~leave~~delays toin ~~file Mr. Cuti's amended demand. Mr. Cuti seeks monetary damages, declaratory relief, rescission of his employment agreement and~~ the ~~payment~~process of ~~his legal costs and fees~~renegotiating ~~associated~~our ~~with~~collective ~~his~~bargaining ~~termination and the arbitration~~agreements.

~~On November 22,~~We ~~2006,~~may ~~the~~be ~~respondents~~subject ~~filed~~to ~~counterclaims~~significant ~~and~~liability ~~affirmative~~should ~~defenses against Mr. Cuti in~~ the ~~arbitration,~~consumption ~~alleging~~of ~~that~~any ~~between 2000 and 2005, Mr. Cuti was responsible for improper practices involving invoice credits and rebillings for the construction~~ of our ~~stores,~~products ~~that led to overstating our publicly reported earnings~~cause injury, ~~and~~illness ~~that~~or ~~caused us to create and maintain inaccurate records and publish financial statements containing misstatements~~death. ~~These counterclaims were based on information uncovered as of that date by an investigation conducted by independent legal counsel and forensic accountants at the direction of the Audit Committee.~~

~~In a~~Products ~~press~~that ~~release dated April 2, 2007,~~ we ~~disclosed~~sell ~~that,~~could ~~based~~become onsubject ~~new information provided~~ to uscontamination, ~~the~~product ~~Audit Committee~~tampering, ~~with~~mislabeling or ~~the~~other ~~assistance~~damage ofrequiring ~~independent~~us ~~counsel~~to ~~and~~recall ~~forensic accountants,~~our ~~was~~private ~~conducting~~label aproducts. ~~review~~In ~~and~~addition, ~~investigation~~errors ~~concerning~~in the ~~propriety~~dispensing ~~of certain real estate transactions~~ and ~~related~~packaging ~~matters~~of ~~and~~pharmaceuticals ~~whether~~could ~~the~~lead ~~accounting for such transactions was proper. On April 9, 2007, the respondents sought leave~~ to ~~file~~serious ~~proposed~~injury ~~amended~~or ~~counterclaims based on that new information~~death. OnProduct ~~May 17,~~liability ~~2007,~~claims ~~the~~may ~~arbitrator~~be ~~issued~~asserted anagainst ~~order~~us ~~granting~~with ~~leave~~respect to ~~file~~any of the ~~amended~~products ~~counterclaims.~~or ~~The~~pharmaceuticals ~~amended~~we ~~counterclaims~~sell ~~seek~~and ~~rescission~~we ofmay ~~employment~~be ~~agreements~~obligated ~~entered~~to ~~into~~recall ~~between~~our usprivate ~~and~~label Mrproducts. ~~Cuti,~~ ~~return~~A ofproduct ~~all~~liability ~~compensation~~judgment ~~paid~~against ~~under~~us ~~the~~or ~~employment agreements,~~a ~~other~~product ~~compensatory~~recall ~~and~~could ~~punitive~~have ~~damages,~~a ~~and~~material ~~legal~~adverse ~~costs~~effect ~~and~~on ~~fees~~our ~~associated~~business, ~~with~~financial ~~the~~condition ~~Audit~~or ~~Committee's~~results of ~~investigation and the arbitration~~operations.

~~On May 18,~~We ~~2007,~~depend ~~the~~on ~~independent~~our ~~counsel~~management team, and the ~~forensic~~loss ~~accountants~~of ~~completed~~ their ~~review~~services ~~and~~could ~~investigation.~~have ~~The~~a ~~independent~~material ~~counsel~~adverse ~~concluded~~effect ~~that~~on ~~Mr. Cuti orchestrated certain real estate and other transactions that led to overstating~~ our ~~publicly reported earnings, and that caused us to create and maintain inaccurate records and publish financial statements containing misstatements~~business. ~~On May 22, 2007, the Audit Committee determined, after considering the results of the review and~~

34Our success depends to a large extent on the continued service of our executive management team. Departures by our executive officers could have a negative impact on our business, as we may not be able to find suitable management personnel to replace departing executives on a timely basis. We do not maintain key-man life insurance on any of our executive officers.

~~Table~~Continued ofvolatility ~~Contents~~in insurance related expenses and the markets for insurance coverage could have a material adverse effect on us.

~~investigation~~The costs of employee health, workers’ compensation, property and casualty, general liability, ~~that~~director ~~certain~~and officer and other types of ~~our~~insurance ~~previously-issued~~could ~~financial~~rise, ~~statements~~while ~~would~~the ~~have~~amount toand beavailability ~~restated~~of coverage can decrease. WeThese ~~filed~~conditions are exacerbated by rising healthcare costs, legislative changes, economic conditions and the ~~necessary~~threat ~~restated~~of terrorist attacks such as that which occurred on September 11, 2001. If our insurance-related costs increase significantly, or if we are unable to obtain adequate levels of insurance, our financial ~~statements~~position ~~for~~and ~~the~~results ~~periods~~of operations could be materially adversely affected.

~~On May 22,~~24 2007, we received a grand jury subpoena from the United States Attorney's Office for the Southern District of New York seeking documents relating to the allegations in the amended counterclaims discussed above. We have cooperated fully with the investigation. The SEC also requested that we provide it with information related to this matter.

On May 25,Table 2007, the United States Attorney's Office for the Southern District of New York filed an application requesting that the arbitrator stay further proceedings in the arbitration, including discovery, pending further developments in its criminal investigation of Mr. Cuti. Following briefing by the parties on the application, the arbitrator entered an order staying the arbitration proceedings. The stay has been extended from time to time. Contents

~~On October 9,~~Certain ~~2008,~~risks ~~the~~are ~~United~~inherent States Attorney's Office for the Southern District of New York and the SEC announced the filing of criminal and civil securities fraud charges against Mr. Cuti and another former executive of the Company, William Tennant. In the criminal indictment, the government charges that Mr. Cuti and Mr. Tennant engaged in ~~a scheme,~~providing ~~involving~~pharmacy ~~the credits and rebillings and real estate-related transactions discussed above~~services, ~~to falsely inflate the income~~ and ~~reduce~~our ~~the~~insurance ~~expenses~~may ~~that~~not webe ~~reported~~adequate to ~~the investing public and~~ ~~others.~~cover ~~The~~any ~~SEC's~~claims ~~complaint~~against ~~similarly alleges that Mr. Cuti and Mr. Tennant entered into a series of fraudulent transactions designed to boost reported income and enable~~ us ~~to meet quarterly and annual earnings guidance~~. ~~Both proceedings are continuing.~~

Pharmacies are exposed to risks inherent in the packaging, dispensing and distribution ~~ITEM~~of 4pharmaceuticals and other healthcare products. ~~SUBMISSION~~ OFAlthough ~~MATTERS~~we TOmaintain Aprofessional ~~VOTE~~liability OFand ~~SECURITY~~errors ~~HOLDERS~~ and omissions liability insurance, the coverage limits under our insurance programs may not be adequate to protect us against future claims, and we may not have the ability to maintain this insurance on acceptable terms in the future, which could materially adversely affect our business.

~~During~~We ~~fiscal~~are ~~2008~~subject to trends in the retail industry and changes in consumer preferences, weand ~~did~~a ~~not~~failure ~~submit~~to ~~any~~anticipate ~~matters~~such changes or react to such changes in a ~~vote~~timely ofmanner ~~our~~may ~~security~~have ~~holders~~a material adverse effect on our business.

35Our success depends on our ability to respond to changing trends and shifting consumer demand. If we misjudge trends and are unable to adjust our product offerings in a timely manner, our sales may decline or fail to meet expectations and any excessive inventory may need to be sold at lower prices. For instance, over the past several years, our overall photofinishing business and sales of film have experienced significant declining sales as the industry as a whole experiences declines in the use of traditional technologies and as we have made the transition to digital photofinishing. We have placed self-serve kiosks in several of our store locations in an attempt to respond to the transition to digital photofinishing but our digital photofinishing business may not grow as expected. As a result, our business and prospects could suffer. Trends other than changes in product demand in the retail industry may also adversely affect our business. For example, changing demands for customer and ancillary services, developments in our loyalty card programs and other such trends may also affect the business.

~~Table~~Our operations are also impacted by consumer spending levels, which are affected by general economic conditions, consumer confidence, employment levels, availability of ~~Contents~~consumer credit and interest rates on that credit, consumer debt levels, cost of consumer staples, including food and energy, cost of other goods, adverse weather conditions and other factors over which we have little or no control.

Changes in our tax rates, tax positions or exposure to additional income tax liabilities could affect our ~~PART~~business. II

The amount of income taxes we pay is subject to future and ongoing audits by U.S. federal, state and local ~~ITEM~~tax 5authorities, which may result in proposed assessments. ~~MARKET~~ ~~FOR~~Our ~~REGISTRANT'S~~estimate ~~COMMON~~for ~~EQUITY~~the ~~AND~~potential ~~RELATED~~outcome ~~STOCKHOLDER~~for ~~MATTERS~~ any uncertain tax issue is highly judgmental. We assess our income tax positions for all years subject to examination based upon management’s evaluation of the facts, circumstances and information available at the reporting date. Tax-related items that could cause our actual results to differ substantially from expectations include the outcome of our application for relief from any potential tax liabilities arising from qualification as a personal holding company and the ultimate disposition of tax contingencies relating to the collectability of certain balances.

AsThe aoutcome ~~result~~ of ~~the~~current ~~Acquisition,~~and wefuture ~~have~~litigations noand ~~publicly~~other ~~traded~~proceedings ~~common~~in ~~stock~~which ~~and~~ we ~~have~~are ~~not~~involved ~~paid~~may ~~dividends~~have ona ~~our~~material ~~common~~adverse ~~stock~~effect ~~since~~on ~~the Acquisition.~~our Weresults ~~currently~~of dooperations ~~not~~and ~~have~~cash ~~any intention to pay a dividend on our common stock~~flow.

We are subject to various litigations and other proceedings in our business, which if determined unfavorably to us, could have a material ~~ITEM~~adverse 6effect on our results of operations and cash flow. ~~SELECTED~~ ~~FINANCIAL~~In ~~DATA~~ addition, any of the current or possible future civil or criminal actions in which we may be involved could require significant management and financial resources, which could otherwise be devoted to the operation of our business. For a more detailed discussion of these litigations and other proceedings, see “Item 3. Legal Proceedings.”

~~The~~Risks ~~Selected~~Related Financial Data presented below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Audited Financial Statements and the notes related to ~~those~~Our ~~statements~~Capital ~~contained~~Structure ~~herein.~~

~~Duane Reade~~Our ~~Holdings, Inc.~~substantial ~~was~~indebtedness ~~formed in December 2003 to acquire Duane Reade Inc. and its subsidiaries. Approximately 99% of the common stock of Duane Reade~~could ~~Holdings, Inc.~~prevent isus ~~owned~~from byfulfilling ~~Duane~~our ~~Reade~~obligations ~~Shareholders, LLC,~~under aour ~~parent~~indebtedness entity also established to effectuate the Acquisition. The Acquisition was completed on July 30, 2004 through the merger of Duane Reade Acquisition (a wholly-owned subsidiary of Duane Reade Holdings, Inc.) into Duane Reade Inc., with Duane Reade Inc. being the surviving entity and ~~a wholly-owned~~may subsidiary of Duane Reade Holdings, Inc. after the merger transaction. As a result of the Acquisition and resulting change in control and change in historical cost basis of accounting, the operating results are presented separately for the predecessor period December 28, 2003 through July 30, 2004 and the successor periods following the closing date of the Acquisition (July 31, 2004 through December 25, 2004 and the fiscal years ending December 31, 2005, December 30, 2006, December 29, 2007 and December 27, 2008). The predecessor period financial statements include Duane Reade Inc. and all its subsidiaries and the successor period financial statements include Duane Reade Holdings, Inc. and all its subsidiaries. Duane Reade Holdings, Inc. had nominal activity and no operations prior to the completion of the Acquisition. Except where the context otherwise ~~requires,~~restrict ~~all references to "we," "us," and "~~our" ~~(and similar terms) in the data below and the related footnotes mean the successor for periods ending after July 30, 2004 and the predecessor for periods ending on or prior to July 30, 2004~~activities.

~~The~~We have ~~summary~~a ~~historical~~significant ~~consolidated~~amount ~~financial~~of ~~and~~indebtedness. ~~other~~As ~~data~~of ~~set~~December 26, ~~forth~~2009, ~~below~~we ashad ofa ~~and~~total ~~for~~of ~~the~~approximately ~~periods~~$458.1 million ~~from~~of ~~December 28~~indebtedness outstanding, ~~2003~~consisting toof ~~July~~approximately $106.4 ~~30,~~million ~~2004~~outstanding ~~and~~under ~~from~~the ~~July 31,~~asset-based ~~2004 to~~revolving ~~December 25~~loan facility, ~~2004~~senior secured notes with a carrying value of $292.6 million and ~~for~~a ~~the~~maturity ~~fiscal~~value ~~years~~of ~~ended~~$300.0 ~~December 31~~million, ~~2005, December~~$51.7 ~~30,~~million ~~2006,~~of ~~December~~outstanding senior subordinated notes and approximately $7.4 29million of capital lease obligations. In addition, we ~~2007~~have ~~and~~redeemable preferred stock with a maturity value of $164.4 million outstanding at December 2726, 2009.

3625

~~2008 have~~Our ~~been~~outstanding ~~derived~~indebtedness ~~from~~could: ~~our audited consolidated financial statements. The dollar amounts shown in the table below are in thousands.~~

	Successor															Predecessor
													Period from July 31, 2004 through December 25, 2004(2)			Period from December 28, 2003 through July 30, 2004(2)
	Fiscal Year(1)
	2008			2007			2006			2005
Statement of Operations Data
Net sales	$	1,774,029		$	1,686,752		$	1,584,778		$	1,589,451		$	670,568		$	927,801
Cost of sales(3)		1,227,129			1,176,376			1,108,727			1,135,596			485,961			668,271
Gross profit(3)		546,900			510,376			476,051			453,855			184,607			259,530
Selling, general & administrative expenses		476,574			446,696			426,532			425,931			162,067			219,970
Transaction expenses(4)		—			—			—			681			37,575			3,005
Labor contingency expense (income)(5)		—			—			(18,004	)		4,400			1,789			2,611
Depreciation and amortization		68,539			73,080			71,932			70,594			27,009			21,396
Store pre-opening expenses		797			600			305			364			365			470
Gain on sale of pharmacy files		—			(1,337	)		—			—			—			—
Other(6)		16,808			15,948			14,747			31,761			26,433			—
Operating (loss) income		(15,818	)		(24,611	)		(19,461	)		(79,876	)		(70,631	)		12,078
Interest expense, net		54,915			60,977			56,947			50,004			15,880			7,977
Debt extinguishment(7)		—			—			—			—			7,525			—
(Loss) income before income taxes		(70,733	)		(85,588	)		(76,408	)		(129,880	)		(94,036	)		4,101
Income tax (expense) benefit		(2,045	)		(2,192	)		(2,956	)		29,492			36,499			(1,046	)
Net (loss) income		(72,778	)	$	(87,780	)	$	(79,364	)	$	(100,388	)	$	(57,537	)	$	3,055
Balance Sheet Data (at end of period)
Working capital (deficit)(8)	$	(13,316	)	$	8,611		$	6,204		$	50,384		$	67,073			N/A
Total assets		712,600		$	742,489		$	798,581		$	869,602		$	953,918			N/A
Total debt and capital lease obligations	$	555,652		$	555,853		$	572,464		$	554,222		$	511,690			N/A
Stockholders' equity (deficit)	$	(146,701	)	$	(73,323	)	$	2,737		$	81,834		$	181,961			N/A
Operating and Other Data
Net cash (used in) provided by operating activities	$	44,317		$	19,271		$	11,616		$	3,004		$	(11,561	)	$	20,694
Net cash used in investing activities	$	(47,001	)	$	(41,921	)	$	(29,070	)	$	(26,629	)	$	(437,249	)	$	(31,619	)
Net cash provided by financing activities		2,734		$	22,635		$	17,487		$	23,658		$	448,801		$	11,011
Number of stores at end of period		251			242			248			251			255			N/A
Same store sales growth(9)		4.2	%		7.4	%		4.6	%		1.9	%		0.6	%		N/A
Pharmacy same store sales growth(9)		3.1	%		5.9	%		2.6	%		0.8	%		5.0	%		N/A
Front-end same store sales growth(9)		5.0	%		8.6	%		6.2	%		2.8	%		-2.8	%		N/A
Average store size (selling square feet) at end of period		6,764			6,813			6,987			6,955			7,035			N/A
Sales per square foot	$	1,010		$	975		$	881		$	862		$	813			N/A
Pharmacy sales as a % of net sales(10)		46.1	%		46.0	%		46.5	%		48.1	%		51.0	%		N/A
Third party plan sales as a % of prescription sales		93.4	%		93.0	%		92.8	%		92.7	%		92.3	%		N/A
Investing Activities:
Purchase of Duane Reade	$	—		$	—		$	—		$	—		$	413,684		$	—
New, remodeled and relocated stores		29,700			23,584			14,104			14,056			11,803			17,214
Acquisitions		1,177			1,342			—			2,437			7,361			8,741
Asset proceeds		(525	)		(3,335	)		(2,500	)		(7,069	)		—			—
Other		16,649			20,330			17,466			17,205			4,401			5,664
Total	$	47,001		$	41,921		$	29,070		$	26,629		$	437,249		$	31,619

•

make it more difficult for us to satisfy our obligations;

37• limit our ability to obtain additional financing for funding our growth strategy, capital expenditures, acquisitions, working capital or other purposes;

~~Table~~• require us to dedicate a substantial portion of ~~Contents~~our operating cash flow to service our debt, thereby reducing funds available for our growth strategy, capital expenditures, acquisitions, working capital and other purposes;

38• increase our vulnerability to adverse economic, regulatory and industry conditions;

~~Table~~• oflimit ~~Contents~~our flexibility in planning for, or responding to, changing business and economic conditions, including reacting to any economic slowdown in the New York greater metropolitan area;

• ~~ITEM~~place ~~7. MANAGEMENT'S~~us ~~DISCUSSION~~at ~~AND~~a ~~ANALYSIS~~competitive OFdisadvantage ~~FINANCIAL~~relative ~~CONDITION~~to ~~AND~~our ~~RESULTS~~competitors OFwith ~~OPERATIONS~~ less indebtedness; and

~~The~~• ~~following~~subject ~~discussion~~us ~~regarding~~to ~~our~~ financial ~~condition~~ and ~~results~~other ofrestrictive ~~operations for the 52 weeks ended December 27~~covenants, ~~2008,~~ ~~December 29, 2007~~ and ~~December 30,~~our ~~2006~~failure ~~should~~to becomply ~~read in connection~~ with ~~the~~these ~~more~~covenants ~~detailed~~could ~~financial~~result ~~information contained~~ in ~~our~~an ~~consolidated~~event ~~financial statements and their notes included elsewhere in this annual report. Certain~~ of ~~the~~default, ~~statements in this section are forward-looking statements and involve numerous risks and uncertainties including~~which, ~~but~~if not ~~limited~~cured toor waived, ~~those described~~could result in ~~"Item 1A.~~the ~~Risk~~acceleration ~~Factors."~~of ~~See~~all ~~also~~of ~~"Special~~our ~~Note Regarding Forward-Looking Statements~~indebtedness."

~~The~~Our ability to refinance ~~following~~our ~~Management's~~indebtedness ~~Discussion~~will depend on, among other things, our financial condition at the time, credit market conditions and ~~Analysis~~the availability of ~~Financial~~financing. ~~Condition~~Our ability to refinance our indebtedness could be impaired if debt holders develop a negative perception of our long-term or short-term financial prospects. Such negative perceptions could result if we suffer a decline in the level of our business activity, among other reasons. In addition, because of disruptions in the worldwide credit markets, because of the economic downturn and ~~Results~~its impact on our business or for other reasons, we may not be able to obtain refinancing on commercially reasonable terms or at all. Failure to refinance our indebtedness could have a material adverse effect on us and could require us to dispose of ~~Operations~~assets isif ~~organized~~we ascannot ~~follows:~~refinance our indebtedness. We may be unable to sell some of our assets, or we may have to sell assets at a substantial discount from market value, either of which could adversely affect our results of operations.

Despite ~~Executive~~current ~~Summary~~ indebtedness levels, we and our subsidiaries may still be able to incur substantial additional indebtedness. This could further exacerbate the risks associated with our existing substantial indebtedness.

We ~~General~~and ~~Description~~ our subsidiaries may be able to incur substantial additional indebtedness in the future. We are able to incur up to $225.0 million in total indebtedness under the asset-based revolving loan facility, of which approximately $106.4 million was outstanding as of December 26, 2009. Our ability to borrow under the asset-based revolving loan facility is subject to a borrowing base formula. The agreement governing the asset-based revolving loan facility also allows us to incur additional other indebtedness. The indentures governing the senior secured notes and the senior subordinated notes contain some limitations on the ability of Duane Reade Inc., Duane Reade GP and their restricted subsidiaries to incur indebtedness; however, those indentures may not prohibit those entities from incurring additional indebtedness. There is no restriction on the ability of Duane Reade Holdings, Inc. to incur indebtedness. If new indebtedness is added to our and our subsidiaries’ current indebtedness levels, the related risks that we and they now face would intensify.

~~Our~~The ~~business consists of the sale of a wide variety of health and beauty care products, convenience oriented food and general~~agreements ~~merchandise~~governing ~~items and a pharmacy operation managed to supply customers with their prescription needs. We refer to the non-prescription portion of~~ our ~~business~~indebtedness asinclude ~~front-end sales~~restrictive ~~because most of these sales are processed through the front check-out sections of our stores. This portion of our business consists of brand name~~ and ~~private~~financial ~~label~~covenants ~~health~~that ~~and~~may ~~beauty care~~limit ~~items, food and beverages, tobacco products, cosmetics, housewares, greeting cards, photofinishing services, photo supplies, seasonal and general merchandise and other products for~~ our ~~customers' daily~~operating ~~needs. Health~~ and ~~beauty~~financial ~~care products, including over-the-counter items, represent our highest volume categories within front-end sales~~flexibility. The front-end portion of our business represented 53.9% and 54.0% of our sales in fiscal 2008 and fiscal 2007, respectively, and is characterized by generally higher gross margins as compared to our pharmacy or back-end business.

~~Because of~~The ~~our~~indenture ~~numerous~~governing ~~convenient~~the ~~locations~~senior insecured ~~high-traffic~~notes ~~commercial~~ and ~~residential~~the ~~areas~~agreement ~~and~~governing the ~~lack of other convenience~~asset-~~oriented~~based ~~retailers~~revolving inloan ~~our~~facility ~~core~~contain ~~market~~covenants ~~areas~~that, ~~our~~ ~~front-end~~among ~~business is generally a larger proportion of our total sales than for~~ other ~~major conventional drugstore chains~~things, ~~whose~~restrict ~~front-end~~our ~~sales~~ability ~~average~~to ~~between~~take ~~30%~~specific ~~and 40% of total sales. Over the last few years~~actions, ~~pharmacy~~even ~~sales~~if ~~have~~we ~~experienced~~believe athem ~~slower rate of growth primarily due~~ to ~~increases~~be in ~~third party plan co-payments, reduced sales of hormonal~~ ~~replacement~~our ~~drugs~~best ~~and~~interest. ~~certain~~These ~~arthritis~~include ~~medications,~~restrictions ~~reduced third party reimbursement rates resulting from changes in regulations or cost-saving measures, limitations~~ on ~~maximum reimbursements for certain generic medications by third party plans, increases in~~ the ~~percentage~~ability of ~~sales~~Duane ~~represented~~Reade Inc., byDuane ~~lower-priced~~Reade GP ~~generic~~and ~~medications~~their ~~and~~restricted ~~increased~~subsidiaries ~~penetration~~to:

39• incur additional indebtedness;

~~Table~~• ofpay ~~Contents~~dividends or distributions on, or redeem or repurchase, capital stock;

~~by mail~~• ~~order~~incur and internet-based pharmacies. Our pharmacy sales include all items we sell by prescriptions filled at our retail locations or deliver direct to customers. In addition, we include in our pharmacy sales certain resales of retail pharmaceutical inventory. Sales processed through third party, private and government-sponsored plans that contract with us as an authorized provider of prescriptions represented 93.4% of our prescription sales in 2008 and 93.0% of our prescription sales in 2007. liens;

~~The Medicare~~• Modernization Act created a Medicare Part D benefit that expanded Medicare coverage of prescription drugs for senior citizens as well as for certain "dual eligible" individuals that were previously covered under state administered Medicaid plans. This Medicare coverage has resulted in decreased pharmacy margins resulting from lower reimbursement rates than our current margins on state Medicaid prescriptions. The Medicare Part D program has grown rapidly since taking effect in 2006. The program's growth may continue as more seniors have become eligible and enroll for the coverage. While the program has had an adverse impact on our pharmacy marginsprepay, weredeem ~~expect~~or ~~that~~repurchase ~~increased~~specified utilization of prescription drugs by senior citizens participating in the new programs who previously were cash paying customers will partially offset the effect of the lower margins, although we are not certain this will be the case. The Medicare Part D program represented approximately 13% of our retail pharmacy sales for the year ended December 27, 2008 and 12% of our retail pharmacy sales for the year ended December 29, 2007. indebtedness;

~~State Medicaid~~26 programs which provide prescription benefits to low income households and individuals represented approximately 14% of our retail pharmacy sales in 2008 and 2007. Over the past several years, New York State reduced Medicaid and EPIC prescription reimbursement rates, and increased the number of generic drugs subject to maximum allowable cost reimbursement limits, adversely impacting our pharmacy gross margins. Under the Medicaid guidelines, providers cannot refuse to dispense prescriptions to Medicaid recipients who claim they do not have the means to pay the required co-payments. Most Medicaid recipients do in fact decline to make the co-payments, resulting in the requirement for the provider to absorb this cost. The current economic downturn may result in additional reductions in New York Medicaid prescription reimbursements. Budget proposals for New York State in 2009 currently include reductions in the reimbursements for pharmacies in the Medicaid and EPIC programs. The State of New Jersey is also proposing Medicaid reductions in their 2009 budget proposals. Neither state has approved their final budget proposals, and while it is highly likely that there will ultimately be further reductions in reimbursements, the economic stimulus package recently passed by Congress and signed into law by President Obama could provide states with additional Medicaid funding and may reduce the extent of each state's proposed reductions in Medicaid reimbursements. Under the economic stimulus package, over $80 billion would be allocated to help states with Medicaid. In addition, the economic stimulus package includes provisions to subsidize health care insurance premiums for the unemployed under the COBRA program and provisions that will aid states in defraying budget cuts.

In JulyTable 2007, the Centers for Medicare & Medicaid Services, or CMS, issued a final rule that may negatively affect our level of reimbursements for certain generic drugs by setting an upper limit on the amount of reimbursement for such drugs based on the "Average Manufacturer Price." As a result of a lawsuit brought by the National Association of Chain Drug Stores and the National Community Pharmacists Association to challenge the implementation of the new rule, a federal court temporarily enjoined the implementation of the new rule pending the outcome of the lawsuit and the lawsuit remains pending. In July 2008, Congress enacted H.R. 6331, the Medicare Improvements for Patients and Providers Act of 2008 ("MIPPA"). The former President Bush subsequently vetoed MIPPA and, on July 15, 2008, Congress overrode the veto. MIPPA delayed the implementation of the use of Average Manufacturer Price with respect to payments made by State Medicaid Plans for multiple source generic drugs until September 30, 2009. MIPPA also prohibited the Secretary of Health and Human Services from making public any Average Manufacturer Price information that was previously disclosed to the Secretary of Health and Human Services. The outcome of the lawsuit and the impact of MIPPA are Contents

40• merge, consolidate or sell assets or enter into other business combination transactions;

~~Table~~• ofmake ~~Contents~~acquisitions, capital expenditure investments or other investments;

~~uncertain at~~• ~~this~~enter ~~time,~~into sotransactions wewith ~~currently are unable to determine what effect the new rule will ultimately have on our business. See "Item 1. Business—Company Operations—Pharmacy."~~ affiliates;

~~In October~~• ~~2006,~~enter in connection with a class action filed in the United States District for the District of Massachusetts, First Data Bank, which is one of two primary sources of AWP price reporting, announced that it had entered into a settlement agreement related to its reporting of average wholesale prices, subject to final court approval. Under the terms of the proposed settlement agreement, First Data Bank agreed to reduce the reported AWP of certain drugs by four percent and to discontinue the publishing of AWP at a future time. In May 2007, in connection with a separate class action filed in the same court, Medisale-~~Span,~~leaseback ~~the other primary source of average wholesale price reporting, entered into a similar settlement agreement, also subject to final court approval.~~ transactions;

~~In January~~• ~~2008,~~use ~~the~~proceeds court denied approval of the First Data Bank and Medi-Span settlements as proposed. Subsequently, new settlement agreements were submitted to the court. On March 17, 2009, the court issued an order approving the revised settlements. Pursuant to the settlements, as approved, First Data Bank and Medi-Span have agreed to reduce the reported AWP for certain drugs by four percent. Separately, and not pursuant to the settlement agreements, First Data Bank and Medi-Span have indicated that they will also reduce the reported AWP for a large number of additional drugs not covered by the settlement agreements and that they intend to discontinue the reporting of AWP in the future. Under the terms of the court's decision, the settlement agreements can become effective no earlier than 180 days from ~~the~~sale ~~entry~~ of final judgment. Although the court's ruling will take effect no earlier than 180 days from March 17, 2009, we believe that some parties will appeal the court's ruling and seek a stay of the implementation of the settlement. The court's ruling, if not revised on appeal, could potentially have a significant adverse impact on us and the drugstore industry as a whole. assets;

~~A number~~• ofpermit ~~contracts~~restrictions ~~with~~on ~~third-party plans contain provisions that allow us to adjust our pricing to maintain~~ the ~~relative~~payment ~~economics~~ of ~~the~~dividends ~~contract~~by intheir light of a change in AWP methodology. Most of our contracts with both private and governmental plans also include provisions that allow us to terminate the contracts unilaterally, either because parties cannot renegotiate our pricing to account for the change in AWP methodology or for any reason upon 30 to 90 days' notice. While we expect to negotiate with the various governmental and non-governmental third-party plans for adjustments relating to the expected changes to AWP, we cannot be certain that these negotiations will be successful. Due to these factors and the uncertainty over future appeals or stays of the court ruling, which could delay the effective date of the implementation of the settlement agreements, we cannot predict with certainty or accurately quantify the ultimate effect of the AWP reduction on our revenues, profitability, future operations or business relationships. subsidiaries;

~~In an~~• ~~effort~~impair ~~to offset some of~~ the ~~adverse~~collateral; pharmacy gross margin impacts from the trends discussed above, there has been an intensified effort on the part of retailers to support increased utilization of lower priced but higher margin generic prescriptions in place of branded medications. New generic drug introductions have also enabled retailers to increase the proportion of generic prescriptions to total prescriptions dispensed. Improved generic utilization rates as well as a combination of direct purchases and contractual wholesaler purchases enabled us to partially offset the adverse margin impact of Medicare Part D and reduced state Medicaid reimbursement rates during 2008 and 2007. In addition, we believe that the higher volume of pharmacy sales to third party plan customers help to offset the related lower gross profit margins and allows us to leverage other fixed store operating expenses. We believe that increased third party plan sales also generate additional general merchandise sales by increasing customer traffic in our stores. As of December 27, 2008, we had contracts with over 370 third party plans, including virtually all major third party plans in our market areas. During fiscal 2008, New York Medicaid represented approximately 14% and 6% of our retail pharmacy and net retail store sales, respectively.

41• change their business.

In addition, the agreement governing the asset-based revolving loan facility contains a single fixed charge coverage requirement which only becomes applicable when borrowings exceed 90 percent of the ~~Table~~borrowing base, as defined in the agreement governing the asset-based revolving loan facility. Borrowings under the asset-based revolving loan facility have not exceeded 90 percent of ~~Contents~~the borrowing base and, as a result, the fixed charge covenant has not become applicable. There are no credit ratings related triggers in the asset-based revolving loan facility that would impact the cost of borrowing, annual amortization of principal or related indebtedness maturity.

WeIssues ~~are~~affecting ~~also~~financial ~~impacted~~institutions bycould ~~legislation~~adversely toaffect ~~increase~~financial ~~the~~markets ~~minimum~~generally ~~hourly~~as ~~wages.~~well ~~New~~as York State increased the minimum hourly wage from $5.15 to $6.00 on January 1, 2005, to $6.75 on January 1, 2006, and again to $7.15 on January 1, 2007. New Jersey increased the minimum hourly wage from $5.15 to $6.15 on October 1, 2005 and again to $7.15 on October 1, 2006. In addition, the federal minimum hourly wage was increased to $6.55 in July 2008 and the U.S. Congress passed legislation that will result in a federal minimum hourly wage increase to $7.25 in July 2009. While these increases have impacted our ~~cost~~ability ~~of labor, we have, and believe we can continue~~ to, ~~offset~~raise acapital ~~significant~~or ~~portion of these cost increases~~access ~~through initiatives designed to further improve our labor efficiency~~liquidity.

~~We operate~~Factors ~~approximately~~that ~~90%~~we ofcannot ~~our~~control, ~~251~~such ~~stores~~as indisruption ~~New~~of ~~York~~the ~~City~~financial ~~and~~markets ~~the~~or ~~remainder~~negative inviews about the financial ~~surrounding~~services ~~areas,~~industry ~~and~~generally could impair our ~~financial~~ability ~~performance~~to israise ~~therefore~~necessary ~~heavily~~funding. ~~influenced~~The bycreditworthiness ~~the~~of ~~local economy.~~many Wefinancial ~~analyze~~institutions may be closely interrelated as a ~~number~~result of ~~economic~~credit, ~~indicators~~derivative, ~~specific~~trading, toclearing ~~New~~or ~~York~~other ~~City~~relationships between tothe ~~gauge~~institutions. ~~the~~As ~~health~~a ofresult, ~~this~~concerns ~~economy~~about, ~~including~~or ~~unemployment~~a ~~rates,~~default ~~job~~or ~~creation~~threatened default by, ~~gross~~one ~~city~~institution ~~product,~~could ~~hotel~~lead ~~occupancy~~to ~~rates and~~significant ~~bridge~~market-wide liquidity and ~~tunnel~~credit ~~commuter~~problems, ~~traffic~~losses ~~volumes~~or defaults by other institutions. WeThis ~~also~~may ~~analyze~~adversely ~~market~~affect the ~~share~~financial ~~data~~institutions, ~~same-store~~such ~~sales~~as ~~trends~~banks and insurance providers, ~~average~~with ~~store~~which ~~sales~~we ~~and~~interact ~~sales~~on ~~per~~a ~~square~~daily ~~foot~~basis, ~~data~~and ~~among~~therefore ~~other~~could ~~key~~adversely ~~performance indicators~~affect our ability to ~~monitor~~raise ~~our~~needed ~~overall~~funds ~~performance~~or access liquidity.

~~Our primary~~We ~~assets~~ are ~~our~~a ~~ownership~~company ofwhose ~~100%~~equity ofis ~~the~~not ~~outstanding~~publicly ~~capital~~traded ~~stock~~and ~~of Duane Reade Inc.,~~ which inis ~~turn~~effectively ~~owns~~controlled ~~99%~~by ofa ~~the~~single ~~outstanding partnership interest of Duane Reade GP and all of the outstanding common stock of DRI I Inc~~stockholder. ~~DRI~~That ~~I Inc.~~stockholder ~~owns~~may ~~the~~effect ~~remaining 1% partnership interest in Duane Reade GP. Substantially all of our operations~~changes ~~are conducted through Duane Reade GP. In August 1999, we established two new subsidiaries, Duane Reade International, Inc. and Duane Reade Realty, Inc. Duane Reade GP distributed~~ to ~~Duane~~our ~~Reade Inc.~~board ~~and~~of ~~DRI I Inc. all rights~~directors, ~~title,~~management and ~~interest~~business ~~in all its trademarks~~plan, ~~trade names~~ and ~~all~~interests ~~other intellectual property rights. In turn, Duane Reade Inc. and DRI I Inc. made a capital contribution~~ of ~~these~~that ~~intellectual~~stockholder ~~property~~may ~~rights~~conflict towith ~~Duane Reade International. This change created a controlled system to manage and exploit these intellectual property rights separate and apart from~~ the ~~retail~~interests ~~operations. In addition, Duane Reade GP distributed some~~ of ~~its~~our ~~store leases to Duane Reade Inc~~noteholders. and DRI I Inc., which in turn made a capital contribution of these leases to Duane Reade Realty. Duane Reade Realty is the lessee under certain store leases entered into after its creation. Duane Reade Realty subleases to Duane Reade GP the properties subject to those leases.

Duane ~~Considerations~~Reade ~~Related~~Shareholders toown ~~Operating~~approximately in99.2% of the ~~New~~outstanding ~~York~~shares ~~City~~of ~~Marketplace~~ our common stock. Oak Hill owns a majority of the voting membership interests in Duane Reade Shareholders. See “Item 6. Selected Financial Data.”

~~All~~Accordingly, Oak Hill indirectly beneficially owns a majority of our outstanding ~~operations~~shares ~~are~~of ~~conducted~~common ~~within~~stock and can determine the ~~New~~outcomes ~~York~~of ~~greater~~the ~~metropolitan~~elections ~~area.~~of Asmembers aof ~~result~~our board of directors and the outcome of corporate actions requiring stockholder approval, ~~our~~including ~~performance~~mergers, ~~will~~consolidations beand ~~substantially~~the sale of all or ~~affected~~substantially byall ~~economic~~of ~~conditions~~our assets. Oak Hill also controls our management, policies and ~~other~~financing ~~factors~~decisions ~~affecting~~and ~~the~~is ~~region~~in ~~such~~a asposition ~~the~~to ~~regulatory~~prevent ~~environment,~~or ~~unemployment~~cause ~~levels,~~a ~~cost~~change of ~~energy~~control. The interests of Oak Hill could conflict with those of our public debt holders. For example, ~~real~~if ~~estate~~we encounter financial difficulties or are unable to pay our debts as they come due, ~~insurance~~the interests of Oak Hill as an equity holder might conflict with the interests of our noteholders. Oak Hill may have an interest in pursuing acquisitions, ~~taxes~~divestitures ~~and~~or ~~rent~~financings or other transactions that, ~~weather~~in its judgment could enhance its equity investment, ~~demographics,~~ ~~availability~~even ofthough ~~labor~~such transactions may involve significant risks to our noteholders. In addition, ~~financial~~Oak ~~markets~~Hill and ~~geopolitical~~its ~~factors~~affiliates ~~such~~may asin the ~~terrorism~~future own interests in businesses that compete with ours.

~~Since the~~Our ~~second~~pending ~~half~~acquisition ofby ~~2004,~~Walgreens ~~the~~may ~~New~~cause ~~York~~disruption ~~City economy began a gradual improvement over the economic downturn experienced~~ in ~~the aftermath of the 2001 World Trade Center attack to the~~our ~~point~~business ~~where it had essentially achieved a full recovery by the latter part of 2006. Strength in employment rates, tourism~~ and ~~overall~~adversely ~~commerce~~affect ~~continued~~our ~~throughout~~future ~~2007.~~business ~~In 2008, economic conditions worsened considerably, particularly so during the fourth quarter,~~ and ~~the level of national economic activity as measured by a number of recent key economic indicators has shown that the economy entered into a recession in 2008. The~~ financial ~~services industry, which is highly concentrated in the New York City marketplace, experienced significant difficulties during 2008~~results. The total unemployment rate for New York City increased 2.4% from 4.8% in December 2007 to 7.2% in December 2008. This represents the highest level of unemployment in New York City since April 2004. The national rate of unemployment increased 2.3% from 4.9% in December 2007 to 7.2% in December 2008.

42We have entered into a definitive agreement, under which Walgreens will acquire us from affiliates of Oak Hill.

~~Table~~The announcement of ~~Contents~~our pending acquisition by Walgreens, whether or not consummated, may result in a loss of key personnel and may disrupt our sales and operations, which may negatively impact our financial performance. The agreement generally requires us to operate our business in the ordinary course pending consummation of the transaction, but includes certain contractual restrictions on the conduct of our business that may limit certain of our activities and affect our ability to attain our financial goals. Additionally, the announcement of our pending acquisition, whether or not consummated, may negatively impact our relationships with customers, suppliers, landlords and other third parties.

~~Furthermore, because~~27 most of our stores are located in the highly urbanized areas throughout New York City and the surrounding metropolitan area, our stores experience a higher rate of shrink than our national competitors.

Our salesTable and profitability have in the past been affected by events and other factors that affect New York City. Examples include smoking-ban legislation, the August 2003 Northeast power blackout, significant non-recurring increases in real estate taxes and insurance costs and the 2004 Republican National Convention. In 2005, our results were negatively affected by increased labor costs associated with the ongoing shortage of pharmacists in the New York City metropolitan area and increases in New York state and to a lesser extent New Jersey state minimum wage rates. We have continued to experience cost pressures from increased pharmacist salary and benefit costs as well as further increases in minimum wage rates. Any increases in federal taxes or in city or state taxes in New York City or the Tri-State Area resulting from state or local government budget deficits may further reduce consumers' disposable income, which could have a further negative impact on our business. Any other unforeseen events or circumstances that affect the New York City metropolitan area could also materially adversely affect our revenues and profitability. Contents

~~In addition,~~The ~~perceived~~agreement ~~instability~~provides inthat, ~~our~~upon ~~business~~Walgreens’ ~~and~~request, inwe ~~the~~may ~~financial~~be ~~health~~required ofto ~~New~~offer ~~York~~to purchase ~~City and~~ the ~~surrounding~~outstanding ~~areas~~aggregate ~~may~~principal ~~negatively~~amount ~~affect~~of ~~our~~any ~~relations~~series ~~with~~of ~~our~~notes ~~suppliers~~issued ~~and~~by ~~trade creditors.~~us Asor aany ~~result,~~of our ~~suppliers~~subsidiaries oron ~~trade creditors may present us with~~ terms ~~that~~and ~~are~~conditions ~~materially~~specified ~~more~~by ~~disadvantageous~~Walgreens. toThe usoffer ~~than those we currently enjoy, which~~ may ~~have~~not abe ~~negative~~successfully ~~impact~~completed onas ~~our ability~~contemplated tounder ~~operate~~the ~~our~~agreement ~~business~~or ~~and manage our liquidity~~at all.

Consummation ~~Certain~~of ~~Line~~the ~~Items~~transaction ~~Presented~~ is subject to customary closing conditions, including the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”) and the absence of certain legal impediments prohibiting the consummation of the transaction. The agreement is subject to termination if the transaction is not completed by August 17, 2010 (which date can be extended to November 17, 2010 if all conditions to closing have been satisfied by August 17, 2010, other than the conditions relating to the absence of legal impediments or the expiration or termination of the waiting period under the HSR Act). The agreement also contains certain other termination rights for both Walgreens and us.

~~Net~~We ~~sales: Net~~cannot ~~sales~~predict ~~include~~whether ~~all~~the ~~front-end~~closing ~~and~~conditions ~~pharmacy~~for ~~sales~~the astransaction ~~well~~will ~~as certain resales of retail pharmaceutical inventory that are required to~~ be ~~reported~~satisfied. onAs a ~~gross basis in accordance with Emerging Issues Task Force Issue No. 99-19~~result, ~~"Reporting~~our ~~Revenue~~pending ~~Gross~~acquisition asby aWalgreens may ~~Principal~~not ~~versus~~be ~~Net as an Agent"~~completed. WeIf ~~refer~~the toclosing ~~net~~conditions ~~sales~~set ~~excluding~~forth ~~such~~in ~~resale~~the ~~activity~~agreement asare ~~"net~~not ~~retail~~satisfied ~~sales"~~or ~~and~~waived ~~pharmacy~~pursuant ~~sales~~to ~~excluding~~the ~~such~~agreement, ~~resale~~or ~~activity~~if asthe ~~"pharmacy~~transaction ~~net~~is ~~retail~~not ~~sales." "Same-store~~completed ~~sales" represent sales~~ for ~~stores~~any ~~that~~other ~~have~~reason, ~~been~~our ~~open~~ongoing ~~for~~business atmay ~~least~~be ~~13 months~~adversely ~~and exclude any resale activity~~affected.

~~Cost~~In ofaddition, ~~goods~~we ~~sold: Cost~~are ofnot ~~goods~~currently ~~sold~~able ~~includes~~to ~~all~~predict ~~costs~~the nature of ~~products~~the ~~sold~~changes, ~~net~~if of any, ~~promotional~~to ~~income~~our oroperations, ~~rebates~~our ~~received~~liquidity ~~from manufacturers or wholesalers. Cost of goods sold is shown exclusive of depreciation~~ and ~~amortization expense for~~ our business ~~distribution~~strategy ~~centers.~~that ~~Shrink~~may ~~losses~~occur ~~are~~following ~~also~~the ~~recorded~~completion ~~in cost~~ of ~~goods~~the ~~sold~~transactions.

~~Selling~~These ~~general &~~matters, ~~administrative~~alone ~~expenses: SG&A~~or ~~includes~~in ~~employee~~combination, ~~wages~~could have ~~and~~a ~~related~~material ~~costs,~~adverse ~~professional~~effect ~~fees,~~on ~~store occupancy~~our ~~costs~~business, ~~advertising~~ ~~expenses,~~financial ~~credit~~condition ~~card fees~~ and ~~all~~results ~~other~~of ~~store~~operations and ~~office-related~~the ~~operating~~trading ~~expenses.~~of Inour ~~addition, real estate-related income is included in store occupancy costs~~securities.

~~Depreciation~~ITEM and amortization: Depreciation and amortization consists primarily of depreciation of store fixtures and equipment and amortization of leasehold improvements as well as intangible assets, including pharmacy files and lease acquisition costs2. PROPERTIES

~~Store~~As ~~pre-opening~~of December 26, ~~expenses: These~~2009, ~~expenses primarily represent the labor costs~~ we ~~incur~~were ~~related~~operating tostores ~~our~~in ~~employees performing various tasks associated with~~ the ~~opening~~following oflocations: ~~a new location.~~


		No. of Stores
Manhattan, NY		150
Brooklyn, NY		32
Queens, NY		31
Bronx, NY		12
New Jersey		10
Staten Island, NY		8
Nassau County, NY		7
Westchester County, NY		6
Suffolk County, NY		1

Total		257

~~Table~~All of ~~Contents~~our stores operated at December 26, 2009 are leased. The average remaining lease term for stores operating as of December 26, 2009 is approximately 8.5 years, which does not include the exercise of lease renewal options available to us. The exercise of the lease renewal options available to us would increase the average remaining lease term to approximately 12.8 years.

The following table sets forth the lease expiration dates of our leased stores on an annual basis through 2014 and thereafter. Of the 87 stores with leases expiring by December 31, 2014, 34 have renewal options. For all of our store locations, we believe that we will ~~RESULTS~~be OFable ~~OPERATIONS~~ to either renew the expiring leases on economically favorable terms or find other economically attractive locations to lease.

2008 Overview


Year	No. of Leases Expiring	Number With Renewal Options
2010(1)	5	1
2011	11	3
2012	13	6
2013	24	16
2014	34	8
Thereafter	170	90

~~For~~(1) ~~the~~Includes ~~2008~~one ~~fiscal~~store ~~year,~~location wewith ~~achieved~~a ~~net~~month-to-month ~~sales~~lease. ofOf ~~$1.774 billion~~the ~~and~~four ~~incurred~~remaining astores, ~~net~~we ~~loss~~entered ofinto ~~$72.8 million,~~a asnew ~~compared to~~lease ~~net~~for ~~sales~~one ofstore ~~$1.687 billion~~location ~~and~~subsequent ato ~~net~~the ~~loss~~end of ~~$87.8 million~~our in2009 ~~the 2007~~ fiscal year. ~~The~~and ~~reduction~~we inalso ~~our~~entered ~~net~~into ~~loss~~a ~~for~~new ~~the~~lease ~~2008~~that ~~fiscal~~will ~~year,~~allow asus ~~compared~~ to ~~fiscal~~relocate ~~2007,~~one ~~was~~of ~~primarily attributable to~~ the ~~following~~four ~~factors:~~ stores.

~~The positive~~28 ~~impact of the above items was partially offset by an increase in selling, general and administrative expenses of $29.9 million, primarily due to the following factors:~~

The 2007Table fiscal year also included a $1.3 million gain from the sale of several pharmacy prescription files, which did not recur in the 2008 fiscal year. Contents

We ~~2007~~occupy ~~Overview~~ approximately 70,000 square feet for our corporate headquarters, located in Manhattan, New York City, under a lease that expires in 2012. We have a renewal option to extend the lease for an additional five years beyond the initial expiration date.

~~For~~We ~~the~~occupy ~~2007~~approximately ~~fiscal year~~506,000 wesquare ~~achieved~~feet ~~net sales~~ of ~~$1.687 billion~~warehouse ~~and~~space ~~incurred~~in aMaspeth, ~~net loss of $87.8 million~~Queens, asNew ~~compared to~~York ~~net~~City ~~sales~~under ~~of $1.585 billion and~~ a ~~net~~lease ~~loss~~that ofexpires ~~$79.4 million~~ in ~~the 2006 fiscal year~~2017. ~~The increased net loss sustained in the 2007 fiscal year was primarily attributable to a~~ pre-tax labor contingency credit of $18.0 million recorded in 2006 that resulted from the favorable settlement of the National Labor Relations Board (NLRB) litigation. Excluding the impact of this credit, our net loss would have declined by $9.6 million as compared to the 2006 fiscal year. Following are the other major factors impacting our results in fiscal 2007, compared to fiscal 2006:

44We occupy approximately 114,000 square feet of warehouse space in North Bergen, New Jersey under a lease that expires in 2018.

~~Table~~ITEM of3. ~~Contents~~LEGAL PROCEEDINGS

~~The~~We are ~~following~~party ~~sets~~to ~~forth~~legal ~~our~~actions ~~results~~arising in the ordinary course of ~~operations~~business. inBased ~~dollars~~on ~~(in~~information ~~thousands)~~presently ~~and~~available asto aus, ~~percentage~~we believe that the ultimate outcome of ~~sales~~these ~~for~~actions will not have a material adverse effect on the ~~periods~~financial ~~indicated~~position, results of operations or cash flows of our company. In addition, we are a party to the following legal actions and matters:

	Fiscal Year Ended December 27, 2008						Fiscal Year Ended December 29, 2007						Fiscal Year Ended December 30, 2006
	Dollars			% of Sales			Dollars			% of Sales			Dollars			% of Sales
Net sales	$	1,774,029			100.0	%	$	1,686,752			100.0	%	$	1,584,778			100.0	%
Cost of sales (exclusive of depreciation and amortization shown separately below)		1,227,129			69.2	%		1,176,376			69.7	%		1,108,727			70.0	%
Gross profit		546,900			30.8	%		510,376			30.3	%		476,051			30.0	%
Selling, general and administrative expenses		476,574			26.9	%		446,696			26.5	%		426,532			26.9	%
Labor contingency expense		—			0.0	%		—			0.0	%		(18,004	)		-1.1	%
Depreciation and amortization		68,539			3.9	%		73,080			4.3	%		71,932			4.5	%
Store pre-opening expenses		797			0.0	%		600			0.0	%		305			0.0	%
Gain on sale of pharmacy files		—			0.0	%		(1,337	)		-0.1	%		—			0.0	%
Other		16,808			0.9	%		15,948			0.9	%		14,747			0.9	%
Operating loss		(15,818	)		-0.9	%		(24,611	)		-1.5	%		(19,461	)		-1.2	%
Interest expense, net		54,915			3.1	%		60,977			3.6	%		56,947			3.6	%
Loss before income taxes		(70,733	)		-4.0	%		(85,588	)		-5.1	%		(76,408	)		-4.8	%
Income tax expense		2,045			0.1	%		2,192			0.1	%		2,956			0.2	%
Net loss	$	(72,778	)		-4.1	%	$	(87,780	)		-5.2	%	$	(79,364	)		-5.0	%

We have self-reported to the State of New York Office of the Medicaid Inspector General (the “OMIG”), a matter relating to certain pharmacists who were inadvertently employed by us while they were excluded from participating in the Medicare and/or New York State Medicaid programs at various timeframes between 2001 and 2008. We are currently in discussion with the OMIG regarding certain Medicaid reimbursements received by us and related to the activities of these pharmacists. We have communicated to the OMIG our belief that payments received by us for the cost of prescriptions dispensed do not represent overpayments. In the 2009 fiscal year, we recorded a $0.8 million charge relating to the potential disgorgement of dispensing fees received by us for prescriptions dispensed by the excluded pharmacists. Due to the inherent uncertainty of the matter, there can be no assurance that this matter will be resolved for the amount recorded by us, and we may be required to repay the total amount of Medicaid reimbursement received by us for the prescriptions dispensed by some or all of the excluded pharmacists. If we are required to repay the total amount of Medicaid reimbursement received for the prescriptions dispensed by some or all of the excluded pharmacists, the payment may range as high as $15.7 million.

In January 2008, we were served with a subpoena from the Department of Health and Human Services, Office of the Inspector General. The ~~Twelve~~subpoena ~~Months~~seeks ~~Ended~~information ~~December 27~~relating to the operation of our pharmacy kiosks and information relating to a business relationship that we had with Mobility Plus, a provider of durable medical equipment. In February 2008, ~~Compared~~we received an identical subpoena from the Office of the Attorney General of the State of New York, Medicaid Fraud Control Unit. We are in the process of responding to the information ~~Twelve~~requests ~~Months~~from ~~Ended~~both ~~December 29~~entities. While we believe that we have been in compliance with all applicable rules and regulations, ~~2007~~ at this stage, there can be no assurance as to the ultimate outcome of this matter. Based on information presently available to us, it is not possible to determine the likelihood of liability or reasonably ascertain the amount of liability, if any.

~~Net~~During ~~sales~~2002, ~~were~~we initiated a legal action against our former property insurance carrier, in an attempt to recover what we believed to be a fair and reasonable settlement for the business interruption portion of our claim originating from the September 11, 2001 World Trade Center terrorist attack, during which our single highest volume and most profitable store was completely destroyed. After a lengthy litigation and appraisal process, an appraisal panel awarded us approximately $15.776 ~~billion~~million (in ~~2008~~addition ~~and~~to the $19.699 ~~billion~~million that was paid by the insurer to us in ~~2007~~2002). ~~The~~As ~~2008~~a ~~net~~result ~~sales~~of ~~increased~~the byinsurer’s ~~5.2%~~refusal to pay this amount and also as ~~compared~~a toresult of the Second Circuit Court of Appeals’ interpretation of our ~~prior~~insurance ~~year~~policy, ~~net~~in ~~sales~~January 2007, we commenced another action in the U.S. ~~Resale~~District ~~activity~~Court ~~increased~~for bythe Southern District of New York to recover both the appraisal panel’s award and additional amounts under the policy. In August 2007, the District Court entered judgment in the amount of $200.8 million asplus ~~compared~~interest, and both parties appealed. The appeals have been briefed and oral argument in the Second Circuit Court of Appeals has been held. However, due to the inherent uncertainty of litigation, there can be no assurance that this appeal will be successful.

45Accordingly, given the risks and uncertainties inherent in litigation, there can be no definitive assurance that we will actually receive any or all of the panel’s appraised value of this claim, and we have not recognized any income related to this matter, other than $9.4 million of the original $9.9 million paid by the insurer in 2002. It should be noted that any payment to

~~Table~~29 ~~of Contents~~

2007, whichTable representedof a 1.2% increase in overall net sales, while net retail sales to customers increased by 4.1% over this same period. Total same-store sales in 2008 increased by 4.2% over the prior year. Contents

~~Pharmacy~~ ~~sales~~us ~~increased~~that tomight ~~$817.5 million~~be inforthcoming ~~2008~~as ~~from~~a ~~$776.4 million~~result ~~in 2007, an increase~~ of ~~5.3%,~~this ~~and~~claim ~~represented~~may ~~46.1%~~also ofresult ~~total sales, as compared with 46.0% of total sales~~ in ~~2007.~~the ~~Resale~~incurrence ~~activity accounted for 2.7%~~ of ~~the~~additional ~~pharmacy~~expenses ~~sales~~that ~~increase,~~are ~~while~~contingent ~~pharmacy~~upon ~~net retail sales accounted for~~ the ~~remaining~~ ~~2.6%~~amount of ~~the~~such ~~increase.~~insurance ~~Pharmacy~~claim ~~same-store sales increased by 3~~settlement.1% ~~from last year, and third-party reimbursed pharmacy sales represented 93.4% and 93.0% of total prescription~~These ~~sales in 2008 and 2007~~expenses, ~~respectively.~~if ~~The percentage of generic drugs dispensed increased by 3.9% over the prior year~~incurred, negatively impacting the pharmacy same-store sales increase by approximately 3.7%, but contributing to an increase in gross margin per prescription dispensed. Generic drugs generally have lower retail sales prices but are ~~more~~not ~~profitable~~expected ~~for us than branded drugs. The switch of Zyrtec, a prescription allergy medication,~~ to ~~over-the-counter~~exceed ~~status negatively impacted pharmacy same-store sales by 0~~$2.~~4% during 2008~~5 million.

~~Front-end~~In November 2004, we were served with a purported class ~~sales~~action ~~increased~~complaint, toDamassia ~~$956~~v.5 Duane Reade ~~million~~Inc. The lawsuit was filed in ~~2008~~the ~~from~~U.S. ~~$910~~District Court for the Southern District of New York.~~3 million~~ inThe ~~2007~~complaint alleges that, from the period beginning November 1998, we incorrectly gave some employees the title “Assistant Manager,” in an ~~increase~~attempt ofto ~~5.1%~~avoid paying these employees overtime, in contravention of the Fair Labor Standards Act and ~~represented~~New 53York law.9% ofIn ~~total~~May ~~sales~~2008, the court certified this case as ~~compared~~a toclass 54action.0% In April 2006, we were ofserved ~~total~~with ~~sales~~a inpurported ~~2007~~class action complaint, Chowdhury v. ~~Front-end~~Duane ~~same-store~~Reade Inc. ~~sales~~and ~~increased~~Duane byReade 5Holdings, Inc.0% The complaint alleges that, ~~due~~from toa ~~improved~~period ~~merchandise~~beginning ~~offerings~~March ~~and~~2000, ~~the~~we ~~strong~~incorrectly ~~performance~~classified certain employees in an attempt to avoid paying overtime to such employees, thereby violating the ~~food~~Fair Labor Standards Act and ~~beverage~~New ~~categories~~York law. In May 2008, ~~over-~~ the~~-counter~~ ~~products~~court ~~and~~certified ~~health~~this ~~and~~case ~~beauty~~as ~~items~~a class action. The ~~aforementioned~~complaint ~~switch~~seeks an unspecified amount of ~~Zyrtec~~damages. toIn ~~over-the-counter~~January ~~status~~2009, ~~positively~~we ~~impacted~~announced ~~front-end~~that, ~~same-store~~without ~~sales~~admitting byliability, ~~approximately~~we 0.have entered into a Memorandum of Understanding to settle these two class action cases for $3%.5 million. inThe ~~2008~~settlement was subject to the approval of the U.S. ~~Additionally,~~District inCourt ~~June~~for ~~2008~~the Southern District of New York. While we ~~raised~~believed ~~the~~that ~~sales~~we ~~price~~could onstrongly ~~our~~defend ~~cigarettes~~ourselves ~~commensurate~~against ~~with~~the anmatters ~~increase~~involved in ~~cigarette excise~~this ~~taxes~~litigation, we have agreed to this settlement in ~~New~~order ~~York~~to ~~State.~~avoid ~~Although~~future ~~such~~defense ~~additional~~costs ~~sales~~and douncertainty ~~not~~surrounding this litigation. As a result inof this ~~any~~settlement ~~additional~~agreement, ~~profit~~we torecorded usa $3.5 million one-time, pre-tax charge during the ~~June~~fourth ~~2008~~quarter ~~increase~~ended inDecember 27, 2008. Following the ~~sales~~final ~~price~~approval onof ~~our~~the ~~cigarettes~~settlement ~~positively~~by ~~impacted front-end~~the ~~sales~~court, bywe 0paid the $3.5% million settlement amount in August 2009.

~~As of~~Proceedings ~~December 27,~~Relating ~~2008,~~to weAnthony ~~operated 251 stores, 15 of which were opened during fiscal 2008~~J. WeCuti ~~closed six stores in 2008. In fiscal 2007, we opened ten stores and we closed 16 stores.~~

~~Cost of~~On ~~sales~~September 1, as2006, aAnthony ~~percentage~~J. ofCuti, ~~net~~a ~~sales~~former ~~was~~Chairman, ~~69.2%~~President and ~~69.7%~~Chief inExecutive ~~2008~~Officer ~~and~~of ~~2007,~~the ~~respectively~~Company, ~~resulting~~initiated inan ~~gross~~arbitration before ~~profit~~the ~~margins~~American ofArbitration 30Association against Duane Reade Inc.8%, ~~and~~Duane 30Reade Holdings, Inc.3% inand ~~each~~Duane ~~respective~~Reade ~~period~~Shareholders, LLC, which we refer to as the “respondents.” The ~~improved~~ ~~gross~~arbitration ~~profit~~relates ~~margin~~to his termination in November ~~2008~~2005. ~~reflects~~Mr. Cuti ~~the~~asserts ~~impact~~various ofclaims ~~improved~~including, ~~front-end~~with ~~selling~~respect ~~margins~~to ~~due~~his employment agreement, breach of contract relating to ~~improved~~the ~~assortments~~notice of ~~higher~~termination ~~margin~~provision, ~~products~~failure to make certain payments toward his 1998 corporate-owned life insurance policy, ~~increased~~relief ~~pharmacy~~from ~~margins~~the ~~due~~non-competition and non-solicitation covenants, failure to ~~higher~~ ~~rates~~provide adequate information relating to the valuation of ~~generic~~his ~~utilization~~profits interest and ~~reductions~~breach inof the ~~level~~covenant of ~~inventory~~good ~~shrink~~faith ~~losses~~and fair dealing. ~~These~~Other ~~improvements~~claims relate ~~were~~to ~~offset~~the inpatent ~~part~~rights byfor aour ~~higher~~virtual ~~LIFO~~pharmacy ~~charge~~kiosk system and payment of an alleged deferred 2001 bonus based on any insurance recovery we may obtain on our business interruption claim in ~~2008~~connection ~~and~~with ~~modestly~~the ~~reduced~~2001 ~~levels~~World ofTrade ~~vendor~~Center tragedy. ~~allowances~~On March 16, 2007, Mr. Cuti ~~Cost~~sought leave to file an amended demand asserting additional allegations in support of ~~sales~~his ~~includes~~claim afor ~~LIFO~~breach ~~provision~~of contract for failure to comply with the notice of $4termination provision in his employment agreement, and a claim for defamation.0 On May ~~million~~17, in2007, ~~2008~~the asarbitrator ~~compared~~issued an order granting leave to afile ~~LIFO~~Mr. Cuti’s ~~provision~~amended ofdemand. $1Mr.6 ~~million~~Cuti inseeks ~~2007~~monetary damages, declaratory relief, rescission of his employment agreement and the payment of his legal costs and fees associated with his termination and the arbitration.

~~Selling, general~~On ~~and administrative expenses were $476.6~~November ~~million~~22, or2006, ~~26.9%~~the respondents offiled ~~net~~counterclaims ~~sales,~~ and ~~$446.7 million,~~affirmative ordefenses ~~26.5%~~against ~~of net sales, in 2008 and 2007, respectively~~Mr. Cuti ~~The increase~~ in the ~~2008~~arbitration, ~~expense~~alleging ~~percentage~~that asbetween ~~compared~~2000 toand ~~2007~~2005, ~~is primarily due to an increase of 0~~Mr.2% Cuti inwas ~~store~~responsible ~~occupancy~~for ~~costs~~improper ~~related~~practices toinvolving ~~new~~invoice ~~stores,~~credits ~~relocations~~ and ~~reduced~~rebillings ~~real~~for ~~estate related income,~~the aconstruction ~~0.9% increase in store payroll and related costs associated with an increased number~~ of our stores, asthat ~~well~~led asto ~~wage~~overstating ~~and~~our ~~salary~~publicly ~~rate~~reported ~~increases~~earnings, and ~~higher~~that ~~general~~caused ~~and~~us ~~administrative~~to ~~costs~~create ~~associated~~and ~~with a~~maintain ~~$3.5 million~~inaccurate ~~litigation~~records ~~settlement for two class action lawsuits~~ and ~~additional~~publish ~~recruitment~~financial ~~and~~statements ~~relocation~~containing ~~fees paid in connection with the hiring of senior management executives~~misstatements. These ~~items~~ counterclaims were ~~partially~~based ~~offset~~on byinformation uncovered ~~improved~~as ~~leveraging~~ of ~~costs~~that ~~against~~date ~~strong~~by ~~same-store~~an ~~sales~~investigation ~~growth~~conducted inby ~~both~~independent ~~pharmacy~~legal ~~and~~counsel ~~front-end. Excluding the litigation settlement charge, selling, general~~ and ~~administrative~~forensic ~~expenses~~accountants asat athe ~~percentage~~direction of ~~net~~the ~~sales~~Audit ~~were 26~~Committee.7% ~~in 2008.~~

~~Depreciation~~In a press release dated April 2, 2007, we disclosed that, based on new information provided to us, the Audit Committee, with the assistance of independent counsel and forensic accountants, was conducting a review and ~~amortization~~investigation concerning the propriety of ~~property~~certain real estate transactions and ~~equipment~~related matters and ~~intangible~~whether ~~assets~~the ~~decreased~~accounting $4for such transactions was proper.5 On April ~~million~~9, 2007, the respondents sought leave to ~~$68~~file proposed amended counterclaims based on that new information.~~5 million~~ inOn ~~2008~~May 17, as2007, ~~compared~~the arbitrator issued an order granting leave to ~~$73.1 million~~file inthe ~~2007~~amended counterclaims. The ~~decrease~~amended incounterclaims ~~2008~~seek isrescission ~~due~~of ~~primarily~~employment toagreements ~~reduced~~entered ~~amortization~~into ~~expense~~between ~~for~~us and ~~certain~~Mr. Cuti, ~~intangible~~return ~~assets~~of ~~becoming~~all ~~fully~~compensation ~~amortized.~~paid ~~The~~under the employment agreements, other compensatory and punitive damages, and legal costs and fees associated with the Audit Committee’s investigation and the arbitration.

46On May 18, 2007, the independent counsel and the forensic accountants completed their review and investigation. The independent counsel concluded that Mr. Cuti orchestrated certain real estate and other transactions that led to overstating our publicly reported earnings, and that caused us to create and maintain inaccurate records and publish financial statements containing misstatements. On May 22, 2007, the Audit Committee determined, after considering the results of the review and investigation, that certain of our previously-issued financial statements would have to be restated. We have filed the necessary restated financial statements for the periods affected.

~~Table~~30 ~~of Contents~~

decrease wasTable partiallyof offset by the additional depreciation and amortization for the 15 stores opened during 2008. Contents

WeOn May 22, 2007, we received a grand jury subpoena from the United States ~~incurred~~Attorney’s ~~store~~Office ~~pre-opening~~for ~~expenses~~the Southern District of ~~$0.8 million~~New inYork ~~2008,~~seeking ~~attributable~~documents relating to the ~~opening~~allegations ofin 15the ~~stores,~~amended ascounterclaims ~~compared~~discussed toabove. $0We are cooperating fully with the investigation.~~6 million~~ inThe ~~2007,~~SEC ~~reflecting~~has ~~ten~~also requested that we provide it ~~new~~with ~~stores~~information ~~opened~~related ~~during~~to ~~that~~this ~~period~~matter.

~~The prior~~On ~~year~~May 25, ~~period~~2007, ~~included~~the aUnited ~~$1.3 million~~States ~~gain~~Attorney’s ~~from~~Office for the ~~sale~~Southern District of ~~several~~New ~~pharmacy~~York ~~prescription~~filed ~~files~~an application requesting that the arbitrator stay further proceedings in the arbitration, ~~which~~including ~~did~~discovery, ~~not~~pending ~~recur~~further developments in its criminal investigation of Mr. Cuti. Following briefing by the ~~current~~parties on ~~year~~the application, the arbitrator entered an order staying the arbitration proceedings. The stay has been extended from time to time.

~~In 2008,~~On ~~we incurred other expenses of $16.8~~October ~~million~~9, ~~including~~2008, ~~asset~~the ~~impairment~~United ~~charges~~States ~~($7.7 million),~~Attorney’s ~~costs~~Office ~~associated~~for ~~with~~ the ~~closing~~Southern District of ~~various~~New ~~stores ($3.6 million),~~York ~~Oak~~and ~~Hill~~the ~~management~~SEC ~~fees~~announced ~~($1.25 million),~~the ~~and~~filing ~~costs~~of ~~associated~~criminal ~~with~~and ~~various~~civil ~~matters~~securities ~~related~~fraud tocharges against Mr. Cuti ~~($6.0 million).~~and ~~The~~another ~~asset~~former ~~impairment~~executive ~~charges are~~of ~~non-cash~~the ~~expenses~~Company, ~~and~~William ~~are~~Tennant. ~~necessary~~In ~~to reduce~~ the ~~carrying~~criminal ~~value~~indictment, ofthe ~~certain~~government ~~store~~charges ~~assets~~that ~~to their estimated fair value~~Mr. Cuti ~~The~~and ~~2008 other expenses also includes a $1~~Mr.8 ~~million~~Tennant ~~net benefit~~engaged ~~related~~in toa ~~fair~~scheme, ~~value~~involving ~~adjustments to reverse excess liabilities for~~ the ~~phantom~~credits ~~stock~~and ~~liability~~rebillings and ~~the~~real ~~profits~~estate-related ~~interest~~transactions ~~liability~~discussed asabove, ~~well as additional pension benefit costs related~~ to afalsely ~~March~~inflate ~~2006~~the ~~union~~income ~~contract~~and ~~settlement.~~reduce In the ~~corresponding~~expenses ~~2007~~that ~~period,~~ we ~~incurred~~reported ~~other~~to ~~expenses of $15.9 million, including costs associated with~~ the ~~completed~~investing ~~audit~~public ~~committee~~and ~~investigations ($2~~others.~~3 million)~~ ~~and~~The ~~various~~SEC’s ~~other~~complaint ~~matters~~similarly ~~related~~alleges tothat Mr. Cuti ~~($6~~and Mr.0 ~~million),~~Tennant ~~costs~~entered ~~associated~~into ~~with~~a ~~the~~series ~~closing~~ of ~~various~~fraudulent ~~stores~~transactions ~~($4.4 million),~~designed ~~Oak~~to ~~Hill~~boost reported ~~management~~income ~~fees ($1.25 million),~~and ~~asset~~enable ~~impairment~~us ~~charges~~to ~~($0.9 million)~~meet quarterly and ~~other~~annual ~~costs~~earnings ~~($1~~guidance.~~2 million)~~ Both proceedings are continuing.

~~Net interest~~ITEM expense for 2008 was $54.9 million, as compared to $61.0 million in 2007. The decrease of $6.1 million was primarily attributable to lower outstanding borrowings on our revolving credit facility and lower interest rates on our variable rate debt. At December 27, 2008, the weighted average interest rate on our variable rate debt was 5.2%, as compared to 8.4~~% at December 29, 2007~~. RESERVED

In ~~2008,~~PART weII recorded an income tax provision of $2.0 million, inclusive of a valuation allowance of $30.9 million, while in 2007, we recorded an income tax provision of $2.2 million, inclusive of a valuation allowance of $43.5 million. The valuation allowances reflect the significant losses incurred in these years, as well as the anticipated financial performance over the next several years and the unlikelihood of recognizing the future tax benefits of the accumulated losses.

ITEM ~~The~~5. ~~Twelve~~MARKET ~~Months~~FOR ~~Ended~~REGISTRANT’S ~~December 29~~COMMON EQUITY, ~~2007~~RELATED ~~Compared~~STOCKHOLDER toMATTERS ~~the~~AND ~~Twelve~~ISSUER ~~Months~~PURCHASES ~~Ended~~OF ~~December 30, 2006~~ EQUITY SECURITIES

~~Net~~As ~~sales~~a ~~were~~result ~~$1.69 billion~~of ~~in 2007 and $1.58 billion in 2006. The 2007 net sales increased by 6.4% as compared to~~ the ~~prior~~ ~~year~~Acquisition, ~~net~~we ~~sales.~~have ~~Resale~~no ~~activity~~publicly ~~increased~~traded bycommon ~~$9.1 million~~stock asand ~~compared~~we tohave ~~2006,~~not ~~which~~paid ~~represented~~dividends aon ~~0.6%~~our ~~increase~~common instock ~~overall~~since ~~net sales, while net retail sales to customers increased by~~the 5Acquisition.9% ~~over~~We ~~this~~currently ~~same~~do ~~period.~~not ~~Total~~have ~~same~~any ~~store~~intention ~~sales~~to inpay ~~2007~~a ~~increased~~dividend byon ~~7.4%~~our ~~over~~common ~~the prior year~~stock.

~~Pharmacy sales~~ITEM increased to $776.4 million in 2007 from $736.1 million in 2006, an increase of 5.5%, and represented 46.0% of total sales, as compared with 46.5% of total sales in 2006. Resale activity accounted for 1.2% of the pharmacy sales increase, while pharmacy net retail sales accounted for the remaining 4.3% of the increase. Pharmacy same-store sales increased by 5.9% from 2006, and third-party reimbursed pharmacy sales represented 93.0% and 92.8% of total prescription sales in 2007 and 2006, respectively. The percentage of generic drugs dispensed increased by 3.6~~% over the prior year, negatively impacting the pharmacy same-store sales increase by approximately 3~~.~~1%,~~ ~~but~~SELECTED ~~contributing~~FINANCIAL to an increase in gross margin per prescription dispensed. Generic drugs generally have lower retail sales prices but are more profitable for us than branded drugs. The average weekly prescriptions filled per store during 2007 increased 1.6% as compared to the prior year. DATA

~~Front-end sales~~The ~~increased~~Selected toFinancial ~~$910.3 million~~Data inpresented ~~2007~~below ~~from~~should ~~$848.6 million~~be read in ~~2006,~~conjunction anwith ~~increase~~“Management’s ofDiscussion ~~7.3%,~~ and ~~represented~~Analysis ~~54.0%~~ of ~~total~~Financial ~~sales,~~Condition asand ~~compared~~Results ~~to 53.5%~~ of ~~total~~Operations” ~~sales~~and inthe ~~2006.~~Consolidated ~~Front-end~~Audited ~~same-store~~Financial ~~sales~~Statements ~~increased~~and bythe notes ~~8.6%,~~related ~~due~~ to ~~improved~~those ~~merchandise~~statements ~~offerings,~~contained ~~enhanced~~herein. ~~customer service~~

47The summary historical consolidated financial and other data set forth below as of and for the fiscal years ended December 26, 2009, December 27, 2008, December 29, 2007, December 30, 2006 and December 31, 2005 have been derived from our audited consolidated financial statements, unless otherwise noted. The dollar amounts shown in the table below are in thousands.

Table of Contents


	Fiscal Year(1)
	2009			2008			2007			2006			2005
Statement of Operations Data
Net sales	$	1,837,499		$	1,774,029		$	1,686,752		$	1,584,778		$	1,589,451
Costs and expenses:
Cost of sales(2)		1,268,094			1,227,129			1,176,376			1,108,727			1,135,596
Selling, general & administrative expenses		490,164			476,574			446,696			426,532			425,931
Transaction expenses(3)		—			—			—			—			681
Labor contingency expense (income)(4)		—			—			—			(18,004	)		4,400
Depreciation and amortization		72,609			68,539			73,080			71,932			70,594
Store pre-opening expenses		532			797			600			305			364
Gain on sale of pharmacy files		(321	)		—			(1,337	)		—			—
Other(5)		14,053			16,808			15,948			14,747			31,761

Operating loss		(7,632	)		(15,818	)		(24,611	)		(19,461	)		(79,876	)
Interest expense, net		66,581			52,464			59,464			56,947			50,004
Fair value adjustments for mandatory redemption features of redeemable preferred stock		58,989			2,451			1,513			—			—
Gain on debt extinguishment, net(6)		(12,463	)		—			—			—			—

Loss before income taxes		(120,739	)		(70,733	)		(85,588	)		(76,408	)		(129,880	)
Income tax expense (benefit)		3,557			2,045			2,192			2,956			(29,492	)

Net loss	$	(124,296	)	$	(72,778	)	$	(87,780	)	$	(79,364	)	$	(100,388	)

Balance Sheet Data (at end of period)
Working capital (deficit)(7)	$	26,219		$	(13,316	)	$	8,611		$	6,204		$	50,384
Total assets	$	752,069		$	712,600		$	742,489		$	798,581		$	869,602
Total debt and capital lease obligations	$	458,168		$	555,652		$	555,853		$	572,464		$	554,222
Stockholders’ equity (deficit)	$	(226,690	)	$	(146,701	)	$	(73,323	)	$	2,737		$	81,834
Operating and Other Data
Net cash provided by operating activities	$	37,982		$	44,317		$	19,271		$	11,616		$	3,004
Net cash used in investing activities	$	(64,367	)	$	(47,001	)	$	(41,921	)	$	(29,070	)	$	(26,629	)
Net cash provided by financing activities	$	26,337			2,734		$	22,635		$	17,487		$	23,658
Number of stores at end of period		257			251			242			248			251
Same store sales growth(8)		1.5	%		4.2	%		7.4	%		4.6	%		1.9	%
Pharmacy same store sales growth(8)		4.6	%		3.1	%		5.9	%		2.6	%		0.8	%
Front-end same store sales growth(8)		(0.8	)%		5.0	%		8.6	%		6.2	%		2.8	%
Average store size (selling square feet) at end of period		6,839			6,764			6,813			6,987			6,955
Sales per square foot	$	1,012		$	1,010		$	975		$	881		$	862
Pharmacy sales as a % of net sales(9)		46.7	%		46.1	%		46.0	%		46.5	%		48.1	%
Third party plan sales as a % of prescription sales		94.2	%		93.4	%		93.0	%		92.8	%		92.7	%
Investing Activities:
New, remodeled and relocated stores	$	39,324		$	29,700		$	23,584		$	14,104		$	14,056
Acquisitions		3,784			1,177			1,342			—			2,437
Asset proceeds		(449	)		(525	)		(3,335	)		(2,500	)		(7,069	)
Other		21,708			16,649			20,330			17,466			17,205

Total	$	64,367		$	47,001		$	41,921		$	29,070		$	26,629

FIFO EBITDA(Unaudited)(10)	$	71,203		$	56,713		$	50,069		$	37,500		$	(3,370	)
Adjusted FIFO EBITDA(Unaudited)(10)	$	99,020		$	86,969		$	78,677		$	63,694		$	42,167

~~reflecting the~~31 continuing implementation of our "Full Potential" initiative and our store renovation program. Additionally, the stronger New York City economy, a generally improved level of consumer demand resulting from increased tourism and favorable weather patterns positively influenced our front-end same-store sales. Front-end sales were driven by strong performance in our food and beverage categories, over-the-counter products and health and beauty categories.

As ofTable December 29, 2007, we operated 242 stores, ten of which were opened during fiscal 2007. We closed 16 stores in 2007. In fiscal 2006, we opened five stores and we closed eight stores. Contents

~~Cost of~~(1) ~~sales as a percentage of net sales was 69.7% and 70.0% in 2007 and 2006, respectively, resulting in gross profit margins of 30.3% and 30.0% in each respective period.~~ The ~~gross profit~~2005 ~~margin~~fiscal inyear ~~2007~~contains ~~reflects~~53 the impact of improved front-end selling margins associated with a more favorable mix of promotional and regularly-priced products, improved assortments of higher margin products and a lower LIFO chargeweeks. ~~These~~All ~~improvements~~other ~~were~~fiscal ~~offset~~years inshown ~~part~~contain by52 ~~higher shrink losses, modestly reduced levels of vendor allowances and lower pharmacy margins resulting from increased lower margin Medicare Part D sales~~weeks. In addition, our gross profit margin was negatively impacted by lower New York Medicaid reimbursement rates. Cost of sales includes a LIFO provision of $1.6 million in 2007 as compared to a LIFO provision of $3.0 million in 2006.

~~Selling, general~~(2) ~~and~~Shown ~~administrative~~exclusive ~~expenses were $446.7 million, or 26.5%~~ of ~~net~~depreciation ~~sales, and $426.5 million, or 26.9% of net sales, in 2007 and 2006, respectively. Approximately 0.2% of the decrease in the 2007~~ expense ~~percentage~~for ~~as compared to 2006 was attributable to improved leveraging of~~ our ~~store~~distribution ~~occupancy~~centers ~~expenses~~which ~~and~~is ~~higher~~included ~~real estate related income. The remaining 0.2% was due to improved leveraging of costs against strong same-store sales growth~~ in ~~both~~the ~~pharmacy~~separate ~~and~~line ~~front-end,~~item ~~process~~captioned ~~related~~depreciation ~~improvements, reduced advertising costs~~ and ~~lower legal and professional fees, partially offset by increased minimum wage rates and higher costs associated with pharmacist salaries~~amortization.

~~Depreciation and~~(3) ~~amortization~~We ofincurred ~~property~~pre-tax ~~and~~expenses ~~equipment~~of ~~and~~approximately ~~intangible assets was~~ $730.~~1 million~~7 ~~in 2007, as compared to $71.9~~ million in ~~2006.~~fiscal ~~The~~2005 ~~increase~~related ~~reflects depreciation and amortization due~~ to ~~new store openings, renovations and other capital spending as well as~~ the ~~cumulative depreciation adjustment recorded in the third quarter of 2006 resulting from the Audit Committee's accounting investigations~~Acquisition. ~~For further discussion of the accounting investigations, see Note 2 of the notes to our annual consolidated financial statements.~~

(4) We ~~incurred~~ ~~store~~recognized pre-~~opening~~tax ~~expenses~~income of $18.0 million in fiscal 2006 and incurred pre-tax charges of $4.6 4 million in ~~2007,~~fiscal ~~attributable~~2005 toin connection with the ~~opening~~recognition and subsequent resolution of ~~ten~~a ~~stores,~~National asLabor ~~compared~~Relations toBoard ~~$0.3 million~~decision in ~~2006,~~a ~~reflecting~~litigation ~~five new~~matter ~~stores~~relating ~~opened~~to ~~during~~our ~~that~~collective ~~period.~~bargaining agreement with one of our former unions.

~~During 2007,~~(5) weNote ~~sold~~16 ~~several~~to ~~pharmacy~~the ~~prescription~~consolidated ~~files~~financial ~~that~~statements ~~resulted~~provides in a ~~separately~~detailed ~~reported~~explanation ~~gain~~ of ~~$1.3 million.~~these charges.

~~In 2007, we incurred other expenses of $15.9 million, including costs associated with the completed audit committee investigations~~ (~~$2.3 million) and various other matters related to Mr. Cuti ($~~6~~.0 million~~), ~~costs~~We ~~associated~~recorded ~~with~~a ~~the~~pre-tax ~~closing~~gain of ~~various stores (~~$412.~~4 million),~~5 ~~Oak Hill management fees ($1.25~~ million), ~~asset~~relating ~~impairment~~to ~~charges ($0.9 million) and other costs ($1.2 million). In~~ the ~~corresponding~~extinguishment ~~prior year period, we incurred other expenses~~ of ~~$14.8 million,~~debt ~~including~~during asset impairment charges ($10.2 million), Oak Hill management fees ($1.25 million), costs associated with audit committee investigations ($0.8 million) and costs associated with various matters related to Mr. Cuti ($1.3 million), as well as other miscellaneous costs associated with our management reorganization and the ~~reversal~~third quarter of ~~the~~fiscal ~~excess liability for our phantom shares ($1~~2009.~~2 million).~~

~~Net interest~~(7) ~~expense~~Working ~~for~~capital ~~2007~~(deficit) ~~was~~reflects ~~$61.0 million~~the classification of our asset-based revolving loan facility as a current liability, rather than as ~~compared~~long-term todebt, ~~$56.9 million~~because incash ~~2006.~~receipts ~~This~~controlled ~~$4.1 million~~by ~~increase~~the ~~was~~lenders ~~primarily~~are ~~attributable~~used to ~~higher non-cash~~reduce ~~interest~~outstanding ~~expense~~debt, ~~associated~~and ~~with~~we do not meet the ~~accretion~~criteria ofunder Generally Accepted Accounting Principles in the ~~discount~~United onStates (“GAAP”) to classify the ~~liability~~debt ~~recorded~~as ~~for~~long-term. For the ~~preferred~~fiscal ~~stock~~years ~~offering~~ended ~~completed~~December ~~during~~26, ~~the~~2009, ~~second~~December ~~quarter~~27, of2008, December 29, 2007, December 30, 2006 and December 31, 2005, the revolving loan balance was $106.4 million, $144.6 million, $141.4 million, $157.1 million and $135.7 million, respectively.

48(8) Same-store sales figures include stores that have been in operation for at least 13 months.

~~Table~~(9) Includes resales of ~~Contents~~certain retail inventory.

~~In 2007,~~32 we recorded an income tax provision of $2.2 million, inclusive of a valuation allowance of $43.5 million, while in 2006, we recorded an income tax provision of $3.0 million, inclusive of a valuation allowance of $38.1 million. The valuation allowances reflect the significant losses incurred in these years, as well as the anticipated financial performance over the next several years and the unlikelihood of recognizing the future tax benefits of the accumulated losses.

Table Liquidityof and Capital Resources Contents

(10) ~~Working~~As ~~Capital~~ used in this Form 10-K, FIFO EBITDA means earnings before interest, income taxes, depreciation, amortization, non-cash charges and credits related to the LIFO inventory valuation method, extraordinary charges and other items we believe are appropriate to exclude, such as labor contingency income (expense), fair value adjustments for mandatory redemption features of redeemable preferred stock, gain on debt extinguishment, net, and transaction expenses. We believe that FIFO EBITDA, as presented, represents a useful measure of assessing the performance of our ongoing operating activities, as it reflects our earnings trends without the impact of certain non-cash charges and other items we believe are appropriate to exclude.

WeAdjusted ~~had~~FIFO aEBITDA ~~working~~is ~~capital~~FIFO ~~deficit~~EBITDA, ~~of $13.3 million~~ as defined ~~of December 27~~above, ~~2008,~~adjusted ~~as compared~~ to aeliminate ~~working~~the ~~capital~~effects ~~balance~~ of ~~$8.6 million~~ asitems ofthat ~~December 29,~~are ~~2007~~not ~~and~~considered ~~$6.2 million~~by asmanagement ofto ~~December 30,~~be ~~2006.~~indicative ~~Working capital reflects the classification~~ of ~~outstanding~~our ~~borrowings~~usual ~~under~~underlying ~~our~~results, ~~amended asset-based~~such ~~revolving~~as ~~loan~~Former ~~facility~~CEO ~~of $144~~(Mr.~~6 million~~ atCuti) ~~December 27, 2008, $141~~matters.~~4 million~~ atWe ~~December 29,~~believe ~~2007~~that ~~and~~Adjusted ~~$157.1 million~~FIFO atEBITDA ~~December 30,~~is ~~2006~~useful asfor investors ~~current~~because ~~liabilities.~~it ~~This~~provides ~~current~~a ~~classification~~useful ismeasure ~~required~~of ~~because~~our ~~cash~~performance ~~receipts~~and ~~controlled~~ability byto service the ~~lenders~~interest ~~are~~payments ~~used~~on toour ~~reduce~~ outstanding debt, ~~and~~without ~~we do not meet~~ the ~~criteria~~effects of ~~SFAS~~various ~~No. 6, "Classification~~items ofwe ~~Short-Term~~believe ~~Obligations~~are ~~Expected~~appropriate to beexclude. ~~Refinanced—An~~In ~~Amendment~~addition, oftargets ~~ARB~~and ~~No. 43,~~positive ~~Chapter 3A"~~trends toin ~~classify~~Adjusted ~~the~~FIFO ~~debt~~EBITDA asare ~~long-term,~~used ~~but~~as isperformance ~~not~~measures anand ~~indication that this credit facility is expected~~ to bedetermine ~~retired~~certain ~~within~~compensation ~~the~~of ~~next year~~management. ~~The~~Adjusted ~~amended~~FIFO ~~asset-based~~EBITDA ~~revolving~~is ~~loan~~also ~~expires~~a inprimary ~~July~~component ~~of 2011,~~in ~~and~~the wecalculation ~~intend~~used toby ~~continue~~some toof ~~access it for~~ our ~~working~~creditors ~~capital~~in ~~needs~~assessing ~~throughout~~debt ~~its~~covenant ~~remaining term~~compliance.

~~The decrease~~In inevaluating ~~our~~FIFO ~~working~~EBITDA ~~capital~~and ~~balance~~Adjusted isFIFO ~~primarily~~EBITDA, ~~due~~you toshould be aware that in the ~~timing~~future ofwe ~~merchandise~~may ~~receipts~~incur ~~versus~~charges ~~the~~and ~~previous~~other items ~~year,~~such ~~the~~as ~~increased~~those ~~revolving~~used ~~loan~~in ~~borrowings~~calculating ~~at December 27,~~FIFO ~~2008~~EBITDA ~~compared~~and ~~to December 29,~~Adjusted ~~2007~~FIFO EBITDA. Our presentation of FIFO EBITDA and ~~increases~~Adjusted inFIFO EBITDA should not be construed as an inference that our ~~December 27,~~future ~~2008~~results ~~accrued~~will ~~expenses~~be ~~for~~unaffected aby $3items we believe are appropriate to exclude.~~5 million~~ ~~litigation~~FIFO ~~settlement~~EBITDA ~~for~~and ~~two~~Adjusted ~~class~~FIFO ~~action~~EBITDA ~~lawsuits~~have limitations as analytical tools, and ayou ~~$4.7 million liability~~should ~~related~~not toconsider them in isolation or as substitutes for analysis of our ~~interest~~results ~~rate~~as ~~collar~~reported under GAAP. Some of these limitations are:

• ~~Cash~~they ~~Flow~~do ~~for~~not ~~the~~reflect ~~Twelve~~every ~~Months~~cash ~~Ended December 27~~expenditure, ~~2008~~future asrequirements ~~Compared~~for tocapital ~~the~~expenditures ~~Twelve~~or ~~Months~~contractual ~~Ended December 29, 2007~~ commitments;

~~Net~~• ~~cash~~they ~~provided~~do bynot ~~operating~~reflect ~~activities~~changes ~~was $44.3 million~~ in ~~fiscal 2008 as compared to $19.3 million in the 2007 fiscal year. The increase against the prior year reflects the improved operating results in 2008~~, ~~during~~or ~~which our operating loss was reduced by $8.8 million to $15.8 million from $24.6 million. Our operating losses include non-~~cash ~~asset~~requirements ~~impairment charges of $7.7 million in fiscal 2008 and $0.9 million in the 2007 fiscal year. While the asset impairment charges increase our operating loss~~for, ~~they are non-cash in nature. During fiscal 2008, we also benefited from reduced interest expense due to lower interest rates and lower average outstanding borrowings on~~ our ~~revolving~~working ~~credit~~capital ~~facility.~~ needs;

~~Net cash~~• ~~used~~they indo ~~investing~~not ~~activities~~reflect inthe ~~2008~~significant ~~was~~interest ~~$47.0 million,~~expense asor ~~compared~~the to $41.9 million in 2007. The increase is primarily due to capital expenditures for new store openings during 2008. We opened 15 new stores in 2008, compared to ten new stores in 2007. Our capital expenditures in 2008 were $33.1 million compared to $26.1 million in 2007. We had lease acquisition and other investing activities of $14.4 million in 2008, compared to $19.2 million in 2007. Fiscal 2008 cash ~~flow~~requirements ~~used~~necessary ~~in investing activities included $0.5 million of proceeds related~~ to ~~the~~service ~~disposition~~interest ofor ~~certain~~principal ~~properties,~~payments ~~while~~on ~~fiscal~~our ~~2007 cash flow used in investing activities included $3.3 million of proceeds resulting from similar property dispositions.~~ debt;

~~Net cash~~• ~~provided~~although bydepreciation ~~financing~~and ~~activities~~amortization inare ~~2008~~non-cash ~~was $2.7 million~~charges, ~~as compared to $22.6 million in 2007. The prior year net cash provided by financing activities reflects~~ the ~~issuance~~assets ofbeing ~~$39.1 million~~depreciated ~~in preferred stock~~ and ~~warrants~~amortized ~~(net~~will ofoften ~~expenses~~have ofto ~~$0.3 million),~~be areplaced ~~portion~~in ~~of which was used to fund~~ the ~~acquisition of six Gristedes supermarket leases. As of December 27~~future, ~~2008,~~and weFIFO ~~have~~EBITDA ~~opened~~and ~~new~~Adjusted ~~stores~~FIFO atEBITDA ~~each~~do ~~location.~~not ~~Our~~reflect ~~agreement~~any ~~with~~cash ~~Gristedes~~requirements ~~has~~for ~~expired~~such ~~and we are not obligated to acquire any~~ replacements;

49• they are not adjusted for all non-cash income or expense items that are reflected in our statements of cash flows;

~~Table~~• they do not reflect the impact of ~~Contents~~earnings or charges resulting from matters we believe are appropriate to exclude;

~~additional leases.~~• ~~See~~they ~~Note 14~~do tonot ~~the~~reflect ~~notes~~limitations toon ~~our~~or ~~consolidated~~costs ~~financial~~related ~~statements~~to ~~contained~~transferring ~~elsewhere~~earnings infrom ~~this~~our ~~report~~subsidiaries ~~for~~to ~~additional~~us; ~~information regarding this transaction.~~ and

• ~~Cash~~other ~~Flow~~companies ~~for~~in ~~the~~our ~~Twelve~~industry ~~Months~~may ~~Ended~~calculate ~~December 29,~~these ~~2007~~measures asdifferently ~~Compared~~than towe ~~the~~do, ~~Twelve~~limiting ~~Months~~their ~~Ended~~usefulness ~~December 30,~~as ~~2006~~ comparative measures.

~~Net~~Because ~~cash~~of ~~provided~~these bylimitations, ~~operating~~FIFO ~~activities~~EBITDA ~~was~~and ~~$19.3 million~~Adjusted inFIFO ~~fiscal~~EBITDA ~~2007~~should not be considered as ~~compared~~measures of discretionary cash available to ~~$11.6 million~~us to invest in the ~~2006 fiscal~~growth ~~year~~of our business or as a measure of cash that will be available to us to meet our obligations. ~~The~~You ~~increase~~should ~~over~~compensate ~~the~~for ~~prior~~these ~~year~~limitations by relying primarily ~~reflects~~on ~~improved~~our ~~operating~~GAAP results ~~(which~~and ~~exclude~~using FIFO ~~the~~EBITDA ~~non-cash~~and ~~labor~~Adjusted ~~contingency~~FIFO ~~credit~~EBITDA ~~recorded~~only insupplementally. ~~2006)~~See ~~and~~our ~~the~~consolidated ~~benefits~~financial ofstatements ~~our working~~contained ~~capital~~in ~~management~~this ~~initiatives~~Form 10-K.

~~Net cash~~FIFO ~~used~~EBITDA inand ~~investing~~Adjusted ~~activities~~FIFO inEBITDA ~~2007~~are ~~was~~not ~~$41.9 million,~~intended as ~~compared~~alternatives to ~~$29.1 million~~net inincome, ~~2006.~~as ~~Capital~~indicators ~~expenditures in 2007~~ of ~~$26.1 million~~our ~~were $0.9 million~~operating ~~higher than 2006~~performance, ~~while~~as ~~lease~~alternatives ~~acquisition,~~to ~~pharmacy~~any ~~customer~~other ~~file~~measure ~~and~~of ~~other~~performance ~~costs~~ in ~~2007~~conformity ofwith ~~$19.2 million~~GAAP ~~were~~nor ~~higher~~as ~~than~~alternatives ~~2006~~to cash flow provided by ~~$12.7 million,~~operating ~~principally~~activities ~~due~~as ~~to five~~measures ~~Gristedes~~of ~~supermarket~~liquidity. ~~lease~~You ~~acquisitions~~should ~~completed~~therefore ~~during~~not ~~the~~place ~~year.~~undue ~~Fiscal~~reliance ~~2007~~on ~~cash~~FIFO ~~flow~~EBITDA ~~used~~or inAdjusted ~~investing~~FIFO ~~activities~~EBITDA ~~included~~or ~~$3.3 million~~ratios ofcalculated ~~proceeds~~using ~~related~~those tomeasures. ~~the~~A ~~disposition~~reconciliation of ~~certain~~ ~~properties,~~net ~~while~~loss ~~fiscal~~to ~~2006~~FIFO ~~cash~~EBITDA ~~flow~~and ~~used~~Adjusted inFIFO EBITDA ~~investing~~for ~~activities~~each period included ~~$2.5 million~~above ofis ~~proceeds~~set ~~resulting~~forth ~~from~~below: ~~similar property dispositions.~~

Net cash provided by financing activities in 2007 was $22.6 million, as compared to $17.5 million in 2006. The increase in cash provided by financing activities in 2007 reflects the issuance of $39.1 million in preferred stock and warrants (net of expenses of $0.3 million), a portion of which was used to fund the acquisition of five Gristedes supermarket leases and other capital expenditures. This was partially offset by repayments of revolver borrowings with unspent proceeds from the issuance of the preferred stock and warrants as well as the improvement in cash flow from operations. See Note 14 to the notes to our consolidated financial statements contained elsewhere in this report for additional information regarding this transaction.


	Fiscal Year
	2009			2008			2007			2006			2005
FIFO EBITDA	$	71,203		$	56,713		$	50,069		$	37,500		$	(3,370	)
LIFO Expense		6,226			3,992			1,600			3,033			831

LIFO EBITDA		64,977			52,721			48,469			34,467			(4,201	)
Depreciation and amortization		(72,609	)		(68,539	)		(73,080	)		(71,932	)		(70,594	)
Labor contingency income (expense)		—			—			—			18,004			(4,400	)
Interest expense, net		(66,581	)		(52,464	)		(59,464	)		(56,947	)		(50,004	)
Fair value adjustments for mandatory redemption features of redeemable preferred stock		(58,989	)		(2,451	)		(1,513	)		—			—
Gain on debt extinguishment, net		12,463			—			—			—			—
Transaction expenses		—			—			—			—			(681	)
Income tax (expense) benefit		(3,557	)		(2,045	)		(2,192	)		(2,956	)		29,492

Net loss	$	(124,296	)	$	(72,778	)	$	(87,780	)	$	(79,364	)	$	(100,388	)


Calculation of Adjusted FIFO EBITDA

FIFO EBITDA as above	$	71,203		$	56,713		$	50,069		$	37,500		$	(3,370	)
Deferred rent expense(a)		12,914			12,751			11,678			10,956			13,243
Former CEO (Mr. Cuti) matters, net(b)		5,147			6,029			6,013			1,280			11,810
Oak Hill management fee(c)		1,250			1,250			1,250			1,250			1,250
Asset impairment charges(d)		1,814			7,662			868			10,202			16,600
Stock option expense		850			697			982			336			—
Closed store costs(e)		4,812			3,649			4,351			—			2,100
Accounting investigation costs(f)		—			—			2,250			835			—
Miscellaneous other		1,030	(g)		(1,782	)(h)		1,216	(i)		1,335	(j)		534	(k)

Adjusted FIFO EBITDA	$	99,020		$	86,969		$	78,677		$	63,694		$	42,167

33 ~~Operating Capital Requirements~~

OurTable operating capital requirements primarily result from opening and stocking new stores, remodeling and renovating existing retail locations, purchasing pharmacy files and the continuing development of management information systems. We opened 15 new stores in 2008, ten new stores in 2007 and five new stores in 2006. We currently plan to open between 10 to 12 new stores in 2009 and between 10 to 15 new stores in 2010. Capital spending in 2009 is expected to be approximately $40 to $45 million, with approximately $17 million related to maintenance capital spending and approximately $23 to $28 million related to growth capital spending. We also require working capital to support inventory for our existing and new stores. Historically, we have been able to lease almost all of our store locations, so acquisitions of real estate are not expected to have a significant impact on our capital requirements. Contents

As (a) ~~result~~Deferred ofrent ~~the~~expense recession, we experienced declines in consumer demand that accelerated during the fourth quarter of 2008 and are expected to continue throughout fiscal 2009. Expected higher rates of unemployment, reduced levels of tourism and decreased commercial activity are factors impacting our outlook for the current year. We are implementing certain measures to mitigate the impact of these recessionary economic conditions. These actions include hiring and wage freezes in administrative and certain other areas of the business, as well as the implementation of a ~~number~~period ~~of strategic~~equals ~~cost~~our ~~savings initiatives to improve efficiency and eliminate non-value added activities. The~~ total ~~cost~~rent ~~savings~~expense ~~associated~~recorded ~~with~~under ~~the~~GAAP ~~program~~less iscash ~~expected~~rent toexpense beactually paid in the ~~range of $7~~period.~~0 to $10.0 million in fiscal 2009.~~

(b) ~~Liquidity~~Reflects ~~Assessment~~ charges relating to a former CEO (Mr. Cuti), including severance expenses and legal expenses for proceedings relating to Mr. Cuti. For a detailed explanation of these charges, see Notes 2 and 18 to the consolidated audited financial statements, which are contained elsewhere in this report. The net expense for fiscal year 2009 includes insurance proceeds of approximately $4.4 million, which reduced the recorded expense to the amount shown above.

~~Duane~~(c) ~~Reade~~Oak ~~Holdings~~Hill Capital Management, Inc. is(an aaffiliate ~~holding~~of ~~company~~Oak ~~formed~~Hill inCapital ~~connection~~Partners, L.P.), provides us with ~~the~~financial ~~Acquisition~~advisory toand ~~hold~~management ~~the~~services ~~common~~under ~~stock~~a ofmanagement ~~Duane Reade Inc~~services agreement. ~~Duane~~In ~~Reade~~consideration ~~Holdings~~of these services, Oak Hill Capital Management, Inc. ~~operates~~receives ~~all~~an annual fee of ~~its~~$1.25 ~~business~~million, payable quarterly.

50(d) Represents charges to reduce the carrying value of certain store assets to fair value.

~~Table~~(e) In the normal course of ~~Contents~~our business, we close store locations prior to the store location’s lease expiration and establish reserves for costs anticipated to be incurred over the remaining lease term.

~~through Duane~~(f) ~~Reade Inc.~~These ~~and~~charges ~~its~~relate ~~subsidiaries~~to ~~and~~accounting ~~has~~investigations nothat ~~other~~were ~~independent~~completed ~~assets,~~in ~~liabilities~~the orfirst ~~operations.~~half Toof the ~~extent~~2007 itfiscal ~~has~~year. ~~liquidity~~For ~~requirements,~~a itdetailed ~~will~~explanation ~~depend~~of onthese ~~distributions~~charges ~~of cash~~see ~~from~~Note ~~Duane~~2 ~~Reade Inc.,~~ to the ~~extent~~consolidated ~~permitted~~audited byfinancial ~~the various agreements to which Duane Reade Inc. is a party. Currently~~statements, wecontained doelsewhere ~~not~~in ~~expect~~this ~~Duane Reade Holdings, Inc~~report. ~~to have any material liquidity requirements.~~

~~We have~~(g) ~~incurred~~Includes ~~losses~~a ~~since~~$0.8 ~~the~~million ~~Acquisition~~charge ~~date due primarily to the additional depreciation and amortization expense~~ relating to the ~~stepped-up~~potential ~~fair~~disgorgement ~~value~~ of ~~our~~dispensing ~~assets on~~fees ~~the~~received ~~Acquisition~~by ~~date,~~us ~~and~~for ~~increased~~prescriptions ~~interest~~dispensed ~~expense~~by oncertain ~~Acquisition~~pharmacists ~~indebtedness.~~who Wewere ~~have~~inadvertently anemployed ~~accumulated~~by ~~deficit~~us ofwhile ~~$397.8 million~~they atwere ~~December 27,~~excluded ~~2008. We have generated positive net cash flows~~ from ~~operations~~participating ~~of $44.3 million~~ in ~~fiscal~~the ~~2008,~~Medicare ~~$19.3 million in fiscal 2007~~ and/or ~~$11.6 million~~New inYork ~~fiscal~~State ~~2006.~~Medicaid Weprograms ~~have~~at ~~never~~various ~~been~~timeframes ~~subject~~between to2001 ~~the~~and ~~single quarterly fixed charge financial coverage requirement specified in the amended asset-based revolving loan facility agreement~~2008. ~~The~~For ~~fixed~~a ~~charge~~detailed ~~financial~~explanation ~~covenant becomes applicable when borrowings exceed 90 percent~~ of ~~the~~these ~~borrowing~~charges ~~base,~~see asNote ~~defined~~18 ~~in the agreement. Historically, our borrowings have never exceeded 90 percent of the borrowing base and we do not expect~~ to ~~exceed this threshold during 2009. If~~ the ~~fixed~~consolidated ~~charge~~audited ~~coverage~~financial ~~ratio was in effect during fiscal 2008~~statements, wecontained ~~would~~elsewhere ~~have been~~ in ~~full~~this ~~compliance with the covenant~~report.

~~We intend~~(h) toIncludes ~~refinance~~severance costs relating to our ~~senior~~former ~~floating~~executives, ~~rate~~costs ~~notes~~relating ~~due~~to ~~2010~~a union contract settlement and ~~senior~~costs ~~subordinated~~relating ~~notes~~to ~~due~~changes ~~2011~~in the fair value of the phantom stock liability, partially offset by benefits resulting from changes in the ~~amounts~~fair value of ~~$210 million~~a profits interest liability. The phantom stock liability represents the value of shares of common stock pledged to one of our current and ~~$195 million,~~a ~~respectively,~~former ~~prior~~ Senior Vice President in exchange for certain forfeited payments to ~~their~~which ~~maturity~~they ~~dates~~were entitled. ~~There~~The ~~can~~profits beinterest noliability ~~assurance~~relates ~~that~~to ~~such~~a ~~refinancing~~former ~~will~~CEO ~~actually~~(Mr. ~~take~~Cuti) ~~place~~and entitles him to a predetermined share of our future growth in equity value. Both the phantom stock liability and the profits interest liability are recorded at their fair value. Due to inherent uncertainties in any fair value measurement technique, changes in the underlying assumptions could materially affect the future fair value measurement amounts, causing us to record additional expenses or reverse previously recorded expenses in a future period.

~~We believe~~(i) ~~that,~~Includes ~~based~~benefits onresulting ~~current levels of operations and anticipated growth, cash flow~~ from ~~operations,~~changes ~~together~~in ~~with~~the ~~other~~fair ~~available~~value ~~sources~~ of ~~funds, including revolving loan borrowings under~~ the ~~amended~~phantom ~~asset-based~~stock ~~revolving~~liability ~~loan facility, will be adequate to make required payments on our indebtedness, to fund anticipated capital expenditures~~ and tochanges ~~satisfy our working capital requirements for fiscal 2009. We base this belief on our recent levels of cash flow from operations of approximately $44.3 million~~ in ~~fiscal 2008, projected improvements in working capital management, anticipated levels of capital expenditures and~~ the ~~available~~fair ~~borrowing~~value ~~capacity under the $225.0 million amended asset-based revolving loan facility, which was approximately $69.0 million at December 27, 2008. As~~ of ~~March 24, 2009, our availability has decreased to approximately $56.2 million. The decrease in our availability is primarily due to~~ the ~~February 1,~~profits ~~2009 payment of the semi-annual~~ interest ~~payment~~liability, onpartially ~~our~~offset ~~senior~~by ~~subordinated notes and an~~ additional ~~$3.5 million~~costs ~~letter of credit required for the litigation settlement agreement~~ relating to ~~two~~a ~~class~~union ~~action~~contract ~~lawsuits.~~settlement ~~Our~~and ~~stockholders'~~severance ~~deficit~~costs isrelating ~~expected~~ to ~~increase in 2009 due to continued losses; however, this deficit does not impact~~ our ~~liquidity~~ asformer ~~noted above and has no impact on our debt covenants~~executives.

~~Our ability~~(j) toIncludes ~~meet~~severance ~~our~~costs ~~debt~~relating ~~service~~to ~~obligations and reduce or refinance~~ our ~~total~~former ~~debt will depend upon our future performance and financial condition~~executives, ~~credit~~costs ~~market~~relating ~~conditions~~to ~~and~~changes ~~the availability of financing which,~~ in ~~turn,~~the ~~will~~fair bevalue ~~subject~~of tothe ~~general~~profits ~~economic,~~interest ~~financial,~~liability ~~business, competitive, legislative, regulatory~~ and ~~other~~executive ~~conditions~~relocation, ~~many~~recruitment ~~of which are beyond our control. In addition, our operating results, cash flow~~ and ~~capital~~retention ~~resources may not be sufficient for repayment of our indebtedness in the future~~costs. ~~Some~~These ~~risks~~items ~~that~~were ~~could~~partially ~~adversely~~offset ~~affect~~by ~~our~~benefits ~~ability~~resulting tofrom ~~meet~~changes ~~our debt service obligations include, but are not limited to, reductions~~ in ~~third party prescription reimbursement rates, declines in~~ the ~~New~~fair ~~York~~value ~~City economy, increases in competitive activity, adverse changes in vendor credit terms, changes in drug consumption patterns, additional adverse legislative changes or a major disruption~~ of ~~business~~the inphantom ~~our~~stock ~~markets from a terrorist event, natural disaster or other unexpected events~~liability. ~~Other factors that may adversely affect our ability to service our debt are described above under "Special Note Regarding Forward-Looking Statements."~~

~~We may,~~(k) ~~from~~The ~~time~~application toof ~~time,~~purchase ~~seek~~accounting toresulted ~~retire~~in oran ~~purchase~~increase ~~our~~in ~~outstanding~~the ~~debt~~inventory invaluation ~~open~~by ~~market~~$8.5 ~~purchases~~million over FIFO cost as of July 30, in2004. ~~privately~~During ~~negotiated~~the ~~transactions~~period ended December 25, or2004, ~~otherwise~~approximately $7.9 ~~Such~~million ~~retirement~~of orthis purchase accounting adjustment was charged to cost of ~~debt~~ ~~may~~sales beon ~~funded~~a ~~from~~FIFO ~~the~~EBITDA ~~operating~~basis. ~~cash~~The ~~flows~~balance of the ~~business~~purchase accounting adjustment, or ~~other~~approximately ~~sources~~$0.5 ~~and~~million, ~~will~~was ~~depend~~charged ~~upon~~to cost of sales during the first quarter of 2005.

51ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

~~Table~~The following discussion regarding our financial condition and results of ~~Contents~~operations for the fiscal years ended December 26, 2009, December 27, 2008 and December 29, 2007 should be read in connection with the more detailed

~~prevailing market~~34 ~~conditions, liquidity requirements, contractual restrictions and other factors, and the amounts involved may be material.~~

During 2006,Table we extended the maturity of the amended asset-based revolving loan facility from 2008 to 2011. As a condition of this extension, we are required to refinance any outstanding amounts under the $210.0 million of senior secured floating rate notes not later than 120 days prior to their maturity date of December 15, 2010. Contents

~~Borrowings~~ ~~under~~financial ~~the~~information ~~amended~~contained ~~asset-based~~in ~~revolving~~our ~~loan~~consolidated ~~facility~~financial statements and ~~the~~their ~~aggregate $210.0 million senior secured floating rate~~ notes ~~bear~~included ~~interest~~elsewhere ~~at floating rates. Therefore, our financial condition will be affected by changes~~ in ~~prevailing~~this ~~interest~~annual ~~rates~~report. OnCertain ~~April 30,~~of ~~2008, we entered into a hedging transaction through~~ the ~~acquisition~~statements ofin ~~a "no cost collar." Under~~ this ~~arrangement,~~section weare ~~capped~~forward-looking ~~our~~statements ~~exposure~~and oninvolve ~~$210.0 million~~numerous ofrisks ~~LIBOR-based~~and ~~borrowings~~uncertainties ~~at a maximum LIBOR rate of 5.2%. In addition~~including, webut ~~established~~not alimited ~~minimum "floor" LIBOR rate of 2.6%~~to, inthose ~~line~~described ~~with then current LIBOR rates. At December 27, 2008, the LIBOR rate~~ in ~~effect was approximately 1~~“Item 1A.~~9%,~~ ~~which~~Risk ~~was below the minimum rate specified under the "no cost collar~~Factors."” AsSee aalso ~~result,~~“Special ~~the~~Note ~~"no~~Regarding ~~cost collar" increased the effective annual interest rate on our LIBOR~~Forward-~~based~~Looking ~~borrowings by approximately 0~~Statements.~~4%.~~” ~~This hedging arrangement expires on December 15, 2010.~~

The ~~amended~~ ~~asset-based~~matters ~~revolving~~discussed ~~loan~~herein ~~facility~~do ~~contains~~not areflect ~~single~~changes ~~fixed~~in ~~charge~~our ~~coverage~~operations ~~requirement~~that ~~which~~may ~~only~~occur ~~becomes~~as ~~applicable~~a ~~when~~result ~~borrowings~~of ~~exceed~~our ~~90 percent~~pending ofacquisition ~~the~~by Walgreens, ~~borrowing~~which ~~base~~is expected to close during 2010, assince ~~defined~~we inare ~~the~~not ~~agreement~~currently ~~governing~~able ~~the~~to ~~amended~~predict ~~asset-based~~those ~~revolving~~changes, ~~loan~~if ~~facility.~~any, ~~There~~to ~~are~~our nooperations, ~~credit~~our ~~ratings~~liquidity ~~related~~and ~~triggers~~our inbusiness ~~the~~strategy. ~~amended~~See ~~asset-based~~“Item ~~revolving~~1A: ~~loan~~Risk ~~facility that~~Factors ~~would~~– ~~impact~~Our ~~the~~pending ~~cost~~acquisition ofby ~~borrowing,~~Walgreens ~~annual~~may cause ~~amortization~~disruption ofin ~~principal~~our orbusiness ~~related~~and ~~indebtedness~~adversely ~~maturity~~affect our future business and financial results.”

The ~~Debt~~ following Management’s Discussion and Analysis of Financial Condition and Results of Operations is organized as follows:

~~Amended~~• ~~Asset-Based~~Executive ~~Revolving~~Summary—This ~~Loan~~section ~~Facility Our~~provides ~~amended asset-based revolving loan facility has~~ a ~~maximum~~general ~~borrowing~~description ~~capacity~~ of ~~$225.0 million,~~ ~~subject to a borrowing base calculation based on specified advance rates against the value of~~ our ~~inventory~~business, ~~pharmacy~~including ~~prescription~~opportunities, ~~files~~risks and ~~accounts~~uncertainties ~~receivable.~~that ~~The~~we ~~asset-based revolving~~focus ~~loan facility matures~~ on ~~July 21,~~in ~~2011. The maturity date is subject to our refinancing or restructuring~~ the ~~aggregate~~operation ~~principal amounts~~ of our ~~$210.0 million~~business, ~~senior~~a ~~secured floating~~brief ~~rate~~discussion ~~notes~~of ~~due~~the ~~2010~~considerations ~~and~~related ~~$195.0 million~~to ~~senior~~operating ~~subordinated notes due 2011,~~ in ~~each~~the ~~case~~New onYork ~~terms~~City ~~reasonably~~marketplace ~~acceptable~~and todescribes the ~~administrative~~impact ~~agent and at least 120 days prior to each series~~ of ~~notes'~~our ~~respective~~acquisition ~~scheduled~~on ~~maturity~~July ~~date.~~30, 2004.

~~The amended~~• ~~asset-based~~Results ~~revolving~~of ~~loan~~Operations—This ~~facility~~section ~~includes~~provides aan ~~$50 million~~analysis ~~sub-limit for the issuance~~ of ~~letters of credit. Obligations under~~ the ~~revolving~~significant ~~loan~~line ~~facility are~~items ~~collateralized~~on ~~by a first priority interest in inventory, receivables, pharmacy prescription files, deposit accounts and certain other current assets. Under~~ the ~~amended~~consolidated ~~asset-based~~statements ~~revolving loan facility, Duane Reade GP is the sole obligor. However, the amended asset-based revolving loan facility is guaranteed on a full and unconditional basis by us, Duane Reade Inc. and each~~ of ~~our~~ ~~other domestic subsidiaries other than the obligor~~operations.

~~The amended~~• ~~asset-based~~Liquidity ~~revolving~~and ~~loan~~Capital ~~facility~~Resources—This ~~contains~~section aprovides ~~single~~an ~~fixed~~analysis ~~charge~~of ~~coverage~~our ~~requirement~~working ~~which~~capital ~~only becomes applicable when borrowings exceed 90 percent of the borrowing base~~position, as defined in the agreement governing the amended asset-based revolving loan facility. Borrowings under the amended asset-based revolving loan facility have not exceeded 90 percent of the borrowing base andliquidity, ascash ~~a result~~flows, ~~the~~sources ~~fixed~~and ~~charge~~uses ~~covenant has not become applicable. There are no credit ratings related triggers in the amended asset-based revolving loan facility that would impact the cost~~ of ~~borrowing~~cash, ~~annual~~contractual ~~amortization~~obligations ofand ~~principal~~other orfactors ~~related~~influencing ~~indebtedness~~our ~~maturity~~liquidity.

~~On September 28,~~• ~~2007,~~Critical ~~the~~Accounting ~~asset-based~~Policies ~~revolving~~and ~~loan~~Estimates—This ~~facility~~section ~~was~~discusses ~~amended~~those toaccounting ~~exclude~~policies ~~from~~that ~~the~~are ~~definition~~considered ofimportant ~~"Capital~~to ~~Expenditures"~~our ~~any~~financial ~~expenditure~~condition ~~made~~and ~~with~~results ~~the~~of ~~proceeds~~operations, ofand ~~any equity~~which ~~securities~~require ~~issued~~us to exercise subjective or ~~capital~~complex ~~contributions~~judgments ~~received~~in bytheir usapplication. In addition, this section discusses the impact of recently issued accounting pronouncements.

52Executive Summary

~~Table~~General ofDescription ~~Contents~~

~~Revolving~~Our ~~loans~~business ~~under~~consists of the ~~amended~~sale ~~asset~~of a wide variety of health and beauty care products, convenience oriented food and general merchandise items and a pharmacy operation managed to supply customers with their prescription needs. We refer to the non-~~based~~prescription ~~revolving~~portion ~~loan~~of ~~facility~~our business as front-end sales because most of these sales are processed through the front check-out sections of our stores. This portion of our business consists of brand name and private label health and beauty care items, atfood and beverages, tobacco products, cosmetics, housewares, greeting cards, photofinishing services, photo supplies, seasonal and general merchandise and other products for our ~~option~~customers’ daily needs. Health and beauty care products, ~~bear~~including ~~interest~~over-the-counter atitems, ~~either:~~represent our highest volume categories within front-end sales. The front-end portion of our business represented 53.3% and 53.9% of our sales in fiscal 2009 and fiscal 2008, respectively.

~~Borrowings under~~Because of our numerous convenient locations in high-traffic commercial and residential areas and the ~~amended~~lack ~~facility~~of ~~continue~~other toconvenience-oriented retailers bein ~~primarily~~our ~~LIBOR~~core market areas, our front-~~based.~~end Atbusiness ~~December 27~~is generally a larger proportion of our total sales than for other major conventional drugstore chains, ~~2008~~whose front-end sales average between 30% and ~~December 29,~~40% ~~2007~~of total sales. Our pharmacy sales include all items we sell by prescriptions filled at our retail locations or deliver direct to customers. In addition, ~~the~~we ~~amended~~include ~~asset-based~~in ~~revolving~~our ~~loan~~pharmacy ~~facility~~sales ~~bore~~certain resales of retail pharmaceutical inventory. Sales processed through third party, private ~~interest~~and atgovernment-sponsored aplans ~~weighted~~that ~~average~~contract ~~annual~~with ~~rate~~us as an authorized provider of 3prescriptions represented 94.512% of our prescription sales in 2009 and 693.724%, ~~respectively~~of our prescription sales in 2008.

~~At December 27,~~The ~~2008,~~Medicare ~~there~~Modernization ~~was~~Act ~~$144.6 million~~created ~~outstanding~~a ~~under~~Medicare ~~the~~Part D ~~amended~~benefit ~~asset-based~~that ~~revolving~~expanded ~~loan~~Medicare ~~facility,~~coverage ~~and~~of ~~approximately~~prescription ~~$69.0 million~~drugs offor ~~remaining~~senior ~~availability,~~citizens ~~net~~as ofwell ~~$6.3 million~~as ~~reserved~~ for ~~outstanding~~certain ~~standby~~“dual ~~letters~~eligible” ofindividuals ~~credit.~~that ~~Obligations~~were previously covered under ~~this~~state ~~facility~~administered ~~have~~Medicaid ~~been~~plans. ~~classified~~This asMedicare ~~current~~coverage ~~liabilities~~has ~~because~~resulted ~~cash~~in ~~receipts~~decreased pharmacy margins resulting from lower reimbursement rates ~~controlled~~than byour current margins on state Medicaid prescriptions. The Medicare Part D program has grown rapidly since taking effect and the ~~lenders~~program’s ~~are~~growth ~~used~~may tocontinue ~~reduce~~as ~~outstanding~~more ~~debt~~seniors become eligible and weenroll dofor ~~not~~the ~~meet~~coverage. While the program ~~criteria~~has ofhad ~~SFAS~~an ~~No. 6,~~adverse ~~"Classification~~impact on the profitability of ~~Short-Term~~our ~~Obligations Expected~~pharmacy tobusiness, bewe ~~Refinanced—An~~expect ~~Amendment~~that increased utilization of ~~ARB~~prescription ~~No. 43,~~drugs ~~Chapter 3A",~~by tosenior ~~classify~~citizens participating in the ~~debt~~new asprograms ~~long-term.~~who Wepreviously ~~intend~~were tocash ~~continue~~paying tocustomers ~~utilize~~will partially offset the adverse impact, although we are not certain this ~~facility~~will ~~for~~be the case. The Medicare Part D program represented approximately 13.2% of our ~~working~~retail ~~capital~~pharmacy ~~needs~~sales ~~though~~for the ~~date~~year ended December 26, 2009 and 12.8% of ~~its~~our ~~maturity~~retail inpharmacy sales ~~July~~for ~~2011~~the year ended December 27, 2008.

~~Senior~~35 Secured Floating Rate Notes due 2010 On December 20, 2004, we closed an offering of $160.0 million aggregate principal amount of senior secured floating rate notes due 2010. Using the net proceeds from that offering, together with approximately $2.2 million of borrowings under the amended asset-based revolving loan facility, we repaid all outstanding principal under the previously existing $155.0 million senior term loan facility, along with approximately $3.6 million of early repayment premium and accrued but unpaid interest through December 20, 2004. On August 9, 2005, we issued a further $50.0 million of senior secured notes. These new notes were issued under the same indenture as the December 2004 notes, although they do not trade fungibly with those December 2004 notes.

The seniorTable secured notes bear interest at a floating rate of LIBOR plus 4.50%, reset quarterly. Interest on the senior secured notes is payable quarterly on each March 15, June 15, September 15, and December 15. The senior secured notes mature on December 15, 2010. At December 27, 2008, the senior secured notes bore interest at an annual rate of 6.42%. Contents

OnState Medicaid programs which provide prescription benefits to low income households and ~~April 30,~~individuals ~~2008,~~represented weapproximately ~~entered~~16.5% ~~into~~of aour ~~hedging~~retail ~~transaction~~pharmacy ~~through~~sales ~~the~~in ~~acquisition~~2009 and 14.2% of aour ~~"no~~retail ~~cost~~pharmacy ~~collar~~sales in 2008." ~~Under~~Over ~~this~~the ~~arrangement~~past several years, weNew ~~capped~~York ~~our~~State ~~exposure~~reduced onMedicaid ~~$210.0 million~~and ~~of LIBOR-based~~EPIC ~~borrowings~~prescription atreimbursement arates, ~~maximum~~and ~~LIBOR~~increased the ~~rate~~number of ~~5.2%.~~generic Indrugs ~~addition,~~subject weto ~~established~~maximum aallowable ~~minimum~~cost ~~"floor"~~reimbursement ~~LIBOR~~limits, ~~rate~~adversely ofimpacting 2our pharmacy operations.6% Under the Medicaid guidelines, inproviders ~~line~~cannot ~~with~~refuse ~~then~~to ~~current~~dispense ~~LIBOR~~prescriptions ~~rates.~~to ~~The~~Medicaid ~~changes~~recipients inwho claim they do not have the ~~fair~~means ~~value~~to ofpay the ~~hedge~~ ~~agreement~~required ~~are~~co-payments. ~~reflected~~Most onMedicaid ~~the~~recipients ~~Consolidated~~do ~~Statements~~in offact ~~Stockholder's~~decline ~~Equity~~to ~~(Deficit)~~make ~~and~~the ~~Comprehensive~~co-payments, ~~Income~~resulting ~~(Loss)~~in ~~included~~the ~~within~~requirement for the ~~financial~~provider ~~statements~~to absorb this cost. AtThe ~~December 27,~~current ~~2008, the~~economic ~~LIBOR~~conditions ~~rate~~may result in ~~effect~~additional reductions ~~was~~in ~~approximately~~New ~~1.9%,~~York ~~which~~Medicaid ~~was~~prescription ~~below~~reimbursements. ~~the~~The ~~minimum~~upcoming ~~rate~~budget ~~specified~~proposals ~~under~~for ~~the~~New ~~"no~~York ~~cost~~State ~~collar."~~are Asexpected ato ~~result,~~include reductions in the ~~"no~~reimbursements ~~cost~~for ~~collar"~~pharmacies ~~increased~~in the ~~effective~~Medicaid ~~annual~~and ~~interest~~EPIC ~~rate~~programs. The State of New Jersey is also onexpected ~~our~~to ~~LIBOR-based~~propose ~~borrowings~~Medicaid byreductions ~~approximately~~in 0their upcoming budget proposals.~~4%.~~ ~~This~~Although ~~hedging~~neither ~~arrangement~~state ~~expires~~has onapproved ~~December 15~~their final budget proposals, ~~2010.~~we believe it is highly likely that there will ultimately be further reductions in reimbursements.

~~We guarantee~~In ~~the~~July ~~senior~~2007, ~~secured~~the ~~notes~~Centers onfor aMedicare & ~~full~~Medicaid ~~and~~Services, ~~unconditional~~or CMS, ~~senior~~issued ~~secured~~a ~~basis.~~final ~~Duane~~rule ~~Reade Inc.~~that ~~and~~may ~~Duane~~negatively ~~Reade GP~~affect our ~~are~~level ~~co-obligors~~of ~~under~~reimbursements ~~the~~for ~~senior secured~~certain ~~notes.~~generic ~~The~~drugs ~~senior~~by ~~secured~~setting ~~notes~~an ~~rank~~upper ~~equally~~limit inon ~~right~~the amount of ~~payment~~reimbursement ~~with~~for ~~any~~such ofdrugs ~~our,~~based ~~Duane~~on ~~Reade Inc~~the “Average Manufacturer Price.'s” orAs ~~Duane~~a ~~Reade GP's~~result ~~unsubordinated~~of ~~indebtedness~~a ~~and~~lawsuit ~~senior~~brought inby ~~right~~the National Association of Chain ~~payment~~Drug toStores ~~any~~and ofthe ~~our,~~National ~~Duane~~Community ~~Reade Inc.'s~~Pharmacists orAssociation ~~Duane~~to ~~Reade GP's~~challenge ~~subordinated~~the orimplementation ~~senior~~of ~~subordinated~~the ~~indebtedness.~~new ~~All~~rule, ~~obligations~~a ~~under~~federal ~~the~~court ~~senior~~temporarily ~~secured~~enjoined ~~notes~~the ~~are~~implementation ~~guaranteed~~of onthe anew ~~senior basis~~rule bypending ~~each~~the outcome of ~~our~~the ~~existing~~lawsuit ~~subsidiaries,~~and ~~other~~the ~~than~~lawsuit ~~Duane~~remains pending. ~~Reade~~In July ~~Inc.~~2008, ~~and~~Congress ~~Duane~~enacted ~~Reade GP~~H.R. 6331, ~~and~~the ~~will~~Medicare beImprovements ~~guaranteed~~for byPatients ~~future~~and ~~subsidiaries~~Providers Act of ~~Duane~~2008 ~~Reade Inc~~(“MIPPA”). ~~and~~The ~~Duane Reade GP~~former ~~except~~President ~~certain~~Bush ~~foreign~~subsequently vetoed MIPPA and, ~~certain~~on ~~domestic~~July 15, ~~subsidiaries~~2008, Congress overrode the veto. MIPPA ~~The~~has ~~senior~~delayed ~~secured~~the ~~notes~~implementation ~~and~~of the ~~guarantees~~use ~~are~~of ~~collateralized~~Average Manufacturer Price with respect to payments made by aState ~~first~~Medicaid ~~priority~~Plans ~~interest~~for inmultiple ~~substantially~~source ~~all~~generic drugs. MIPPA also prohibited the Secretary of ~~our~~Health ~~assets~~and Human Services from making ~~other~~public ~~than~~any ~~those~~Average ~~assets~~Manufacturer inPrice ~~which~~information ~~the~~that ~~lenders~~was ~~under~~previously disclosed to the ~~amended~~Secretary ~~asset-based~~of ~~revolving~~Health ~~loan~~and ~~facility~~Human ~~have~~Services.

53In October 2006, in connection with a class action filed in the United States District Court for the District of Massachusetts, First Data Bank, which is one of two primary sources of AWP price reporting, announced that it had entered into a settlement agreement related to its reporting of average wholesale prices, subject to final court approval. Under the terms of the proposed settlement agreement, First Data Bank agreed to reduce the reported AWP of certain drugs by four percent and to discontinue the publishing of AWP at a future time. In May 2007, in connection with a separate class action filed in the same court, Medi-Span, the other primary source of average wholesale price reporting, entered into a similar settlement agreement, also subject to final court approval.

~~Table~~In January 2008, the court denied approval of ~~Contents~~the First Data Bank and Medi-Span settlements as proposed. Subsequently, new settlement agreements were submitted to the court. On March 17, 2009, the court issued an order approving the revised settlements. Some parties appealed the court’s ruling. On September 3, 2009, the United States Court of Appeals for the First Circuit affirmed the decision of the District Court approving the settlements. Pursuant to the settlements, as approved, First Data Bank and Medi-Span have agreed to reduce the reported AWP for certain drugs by four percent. Separately, and not pursuant to the settlement agreements, First Data Bank and Medi-Span have indicated that they will also reduce the reported AWP for a large number of additional drugs not covered by the settlement agreements and that they intend to discontinue the reporting of AWP in the future. The settlement agreements became effective on September 26, 2009.

A number of contracts with third-party plans contain provisions that allow us to adjust our pricing to maintain the relative economics of the contract in light of a change in AWP methodology. Most of our ~~first~~contracts ~~priority~~with ~~interest~~both private and ~~certain~~governmental ~~excluded~~plans ~~assets~~also include provisions that allow us to terminate the contracts unilaterally, aseither ~~defined~~because ~~within~~parties cannot renegotiate our pricing to account for the ~~indenture~~change in AWP methodology or for any reason upon 30 to 90 days’ notice. ~~The~~While ~~senior~~we ~~secured~~are ~~notes~~currently negotiating with many of the various governmental and non-governmental third-party plans for adjustments relating to the ~~guarantees~~expected ~~are~~changes ~~also~~to ~~collateralized~~AWP, we cannot be certain that these negotiations will be successful. In addition, the New York State Legislature is currently considering legislation that would modify the formula upon which New York Medicaid bases its reimbursement rates, which, if passed, will move pharmacy reimbursement rates with respect to Medicaid at or near the pre-settlement levels. However, at this time there is no assurance that this legislation would be ultimately passed by athe ~~second~~New ~~priority~~York ~~interest~~State Legislature or if passed, will be in ~~all~~its current ~~collateral~~form. ~~pledged~~In onlate aSeptember ~~first~~2009, ~~priority~~New ~~basis~~York Medicaid began to ~~lenders~~implement ~~under~~the AWP reductions. Although there is some uncertainty due to the ~~amended~~pending ~~asset-based~~legislation ~~revolving~~at ~~loan~~the ~~facility~~New York State Legislature, our fiscal 2009 results were adversely impacted by approximately $1.0 million as a result of the New York Medicaid AWP reimbursement reductions and we expect an impact of approximately $4.0 million in fiscal 2010 unless the reimbursement rates are adjusted to offset the AWP impact.

~~Upon the~~In ~~occurrence of specified change of control events, we will be required to make~~ an ~~offer~~effort to ~~repurchase~~offset ~~all~~some of the ~~senior~~adverse ~~secured~~pharmacy ~~notes~~impact atfrom ~~101% of~~ the ~~outstanding~~trends ~~principal~~discussed amount of the senior secured notes plus accrued and unpaid interest to the date of repurchase. The indenture governing the senior secured notes contains certain affirmative and negative covenants that limit the ability of Duane Reade Inc.above, ~~Duane~~there ~~Reade GP~~has ~~and~~been ~~their~~an ~~restricted~~intensified ~~subsidiaries,~~effort ~~as defined, to incur additional indebtedness, pay dividends, make repayments~~ on ~~indebtedness that is subordinated to~~ the ~~senior secured notes and to make certain other restricted payments, incur certain liens, use proceeds from sales of assets, enter into business combination transactions (including~~part ~~mergers, consolidations and asset sales), enter into sale-leaseback transactions, enter into transactions with affiliates and permit restrictions on the payment~~ of ~~dividends~~retailers byto ~~restricted subsidiaries.~~support ~~The~~increased ~~indenture~~utilization ~~governing the senior secured notes contains customary events~~ of ~~default,~~lower ~~which,~~priced ifbut ~~triggered,~~higher ~~may~~margin ~~result in the acceleration of the indebtedness outstanding under the~~generic indenture. There are no credit ratings related triggers in the indenture governing the senior secured notes that would impact the cost of borrowing, annual amortization of principal or related indebtedness maturity. The indenture governing the senior secured notes does not contain financial maintenance covenants.

~~At December 27,~~36 ~~2008, the weighted average combined interest rate in effect on all variable rate debt outstanding, including the effect of the "no cost collar," was 5.23%.~~

SeniorTable Subordinated Notes due 2011 On July 30, 2004, upon completion of the Acquisition, Duane Reade Inc. and Duane Reade GP co-issued $195.0 million of 9.75% senior subordinated notes due 2011. The senior subordinated notes mature on August 1, 2011 and bear interest at 9.75% per annum payable in semi-annual installments on February 1 and August 1. The senior subordinated notes are uncollateralized obligations and subordinated in right of payment to all of our, Duane Reade Inc.'s and Duane Reade GP's existing and future unsubordinated indebtedness, including borrowings under the amended asset-based revolving loan facility and the senior secured notes. The senior subordinated notes will rank equally with any future senior subordinated indebtedness and senior to any future subordinated indebtedness. The senior subordinated notes are guaranteed on an uncollateralized, senior subordinated basis by us and all of Duane Reade Inc.'s existing direct and indirect domestic subsidiaries other than Duane Reade GP, which is a co-obligor under the senior subordinated notes. Upon the occurrence of specified change of control events, we will be required to make an offer to repurchase all of the senior subordinated notes at 101% of the outstanding principal amount of the senior subordinated notes plus accrued and unpaid interest to the date of repurchase. The indenture governing the senior subordinated notes contains certain affirmative and negative covenants that limit the ability of Duane Reade Inc., Duane Reade GP and their restricted subsidiaries to incur additional indebtedness, pay dividends, make repayments on indebtedness that is subordinated to the senior subordinated notes and to make certain other restricted payments, incur certain liens, use proceeds from sales of assets, enter into business combination transactions (including mergers, consolidations and asset sales), enter into transactions with affiliates and permit restrictions on the payment of dividends by restricted subsidiaries. The indenture governing the senior subordinated notes contains customary events of default, which, if triggered, may result in the acceleration of the indebtedness outstanding under the indenture. There are no credit ratings related triggers in the indenture governing the senior subordinated notes that would impact the cost of borrowing, annual amortization of principal or related indebtedness maturity. Contents

prescriptions ~~Other~~in ~~Factors~~place ~~Influencing~~of branded medications. New generic drug introductions have also enabled retailers to increase the proportion of generic prescriptions to total prescriptions dispensed. Improved generic utilization rates as well as a combination of direct purchases and contractual wholesaler purchases enabled us to partially offset the adverse margin impact of Medicare Part D and reduced state Medicaid reimbursement rates during 2009 and 2008. In addition, we believe that the higher volume of pharmacy sales to third party plan customers help to offset the related lower profitability and allows us to leverage other fixed store operating expenses. We believe that increased third party plan sales also generate additional general merchandise sales by increasing customer traffic in our ~~Liquidity~~ stores. As of December 26, 2009, we had contracts with virtually all major third party plans in our market areas. During fiscal 2009, New York Medicaid represented approximately 16.5% and 7.3% of our retail pharmacy and net retail store sales, respectively.

~~Ten~~We ofare ~~our~~also ~~stores,~~impacted ~~which~~by ~~generated~~legislation ~~approximately~~to 4increase the minimum hourly wages.3% ofNew ~~our~~York ~~net~~State ~~sales~~increased ~~for~~its ~~fiscal~~minimum ~~2008,~~hourly ~~have~~wage ~~leases~~from ~~scheduled~~$5.15 to ~~expire~~$6.00 ~~before~~on ~~the~~January 1, ~~end~~2005, to $6.75 on January 1, 2006, ofand ~~fiscal~~again ~~2010~~to $7.15 ~~While~~on ~~none~~January 1, of2007. ~~these~~New ~~leases~~Jersey ~~have~~increased ~~options~~its minimum hourly wage from $5.15 to ~~extend~~$6.15 ~~the~~on ~~term~~October 1, of2005 and again to $7.15 on October 1, 2006. In addition, the ~~lease~~federal minimum hourly wage was increased to $7.25 in July 2009. As a result, weboth ~~believe~~New ~~that~~York weState ~~will~~and beNew ~~able~~Jersey have increased their minimum hourly wage to ~~renew~~$7.25 ~~the~~effective ~~expiring~~July 24, ~~leases~~2009. onWhile ~~economically~~these ~~favorable~~increases ~~terms~~have orimpacted our cost of labor, ~~alternatively~~we have, and believe we can continue to, offset a ~~find~~significant ~~other~~portion ~~economically~~of ~~attractive~~these ~~locations~~cost increases through initiatives designed to ~~lease.~~further ~~During~~improve ~~the~~our ~~first~~labor efficiency.

54We operate approximately 91% of our 257 stores in New York City and the remainder in the surrounding areas, and our financial performance is therefore heavily influenced by the local economy. We analyze a number of economic indicators specific to New York City to gauge the health of this economy, including unemployment rates, job creation, gross city product, hotel occupancy rates and bridge and tunnel commuter traffic volumes. We also analyze market share data, same-store sales trends, average store sales and sales per square foot data among other key performance indicators to monitor our overall performance.

~~Table~~Our primary assets are our ownership of ~~Contents~~100% of the outstanding capital stock of Duane Reade Inc., which in turn owns 99% of the outstanding partnership interest of Duane Reade GP and all of the outstanding common stock of DRI I Inc. DRI I Inc. owns the remaining 1% partnership interest in Duane Reade GP. Substantially all of our operations are conducted through Duane Reade GP. In August 1999, we established two new subsidiaries, Duane Reade International and Duane Reade Realty, Inc. Duane Reade GP distributed to Duane Reade Inc. and DRI I Inc. all rights, title, and interest in all its trademarks, trade names and all other intellectual property rights. In turn, Duane Reade Inc. and DRI I Inc. made a capital contribution of these intellectual property rights to Duane Reade International. This change created a controlled system to manage and exploit these intellectual property rights separate and apart from the retail operations. Duane Reade Realty is the lessee under certain store leases entered into after its creation. Duane Reade Realty subleases to Duane Reade GP the properties subject to those leases.

~~quarter of~~Considerations ~~fiscal~~Related ~~2009,~~to weOperating ~~entered~~in ~~into new leases for two of~~ the ~~four~~New ~~leases~~York ~~that~~City ~~were~~Marketplace ~~scheduled to expire in 2009.~~

~~As of~~All ~~December 27, 2008, approximately 5,000~~ of our ~~approximately~~operations ~~6,800~~are ~~employees~~conducted ~~were~~within ~~represented~~the byNew ~~various~~York ~~labor~~greater ~~unions~~metropolitan ~~and were covered by collective bargaining agreements~~area. ~~Pursuant~~ toAs ~~the~~a ~~terms of the collective bargaining agreements covering these employees~~result, weour ~~are~~performance ~~required,~~will inbe ~~some~~substantially affected ~~instances,~~by toeconomic ~~pay~~conditions ~~specified annual increases in salary~~ and ~~benefits~~other ~~contributions relating~~factors toaffecting the ~~member~~region ~~employees.~~such Weas ~~do not believe that these increases will have a material impact on our liquidity or results of operations. Our collective bargaining agreements with~~ the ~~RWDSU/Local~~ ~~338~~regulatory ~~and Local 340A unions~~environment, ~~who,~~unemployment ~~on a combined basis represent approximately 4~~levels,~~600~~ ofcost ~~our employees in all~~ of ~~our stores~~energy, ~~expire~~real ~~on March 31~~estate, ~~2009. We are currently engaged in negotiations to renew these collective bargaining agreements. Approximately 400 of our employees in our two distribution centers in Maspeth~~insurance, ~~Queens,~~taxes NY and ~~North~~rent, ~~Bergen~~weather, ~~NJ are represented by Local 210~~demographics, ~~International~~availability ~~Brotherhood~~ of ~~Teamsters~~labor, ~~Chauffeurs~~financial markets and ~~Warehousemen,~~geopolitical ~~under~~factors asuch ~~collective~~as ~~bargaining agreement that expires on August 31, 2011~~terrorism.

~~In June~~Since ~~2005,~~ the ~~appraisal~~second ~~panel~~half inof ~~the~~2004, ~~World Trade Center insurance claim litigation determined~~ the ~~amount~~New ofYork ~~our~~City ~~business~~economy ~~interruption~~began ~~loss as~~ a ~~result of the events of~~gradual ~~September 11,~~improvement ~~2001.~~over ~~This determination by~~ the ~~panel~~economic isdownturn ~~subject~~experienced toin ~~existing appeals and potentially additional appeals, and on June 22, 2005,~~ the ~~Second~~aftermath ~~Circuit Court~~ of ~~Appeals affirmed~~ the ~~decision~~2001 ofWorld ~~the~~Trade ~~trial~~Center ~~court,~~attack ~~with~~to ~~modifications,~~the ~~including~~point ~~modifications~~where toit ~~certain~~had ofessentially ~~the~~achieved ~~legal~~a ~~tests~~full onrecovery ~~which~~by the ~~appraisal~~latter ~~panel's~~part ~~decision~~of ~~was based~~2006. ~~Based~~Strength onin ~~this~~employment ~~decision~~rates, tourism and ~~related~~overall ~~modifications,~~commerce ~~the~~continued ~~appraisal~~throughout ~~panel~~2007. ~~revised~~In ~~its~~2008, ~~previously~~economic ~~issued~~conditions ~~determination~~worsened toconsiderably, ~~require~~particularly anso ~~additional~~during ~~$5.6 million payment from~~ the ~~carrier~~fourth inquarter, ~~addition~~and to the ~~$9.9 million~~level ~~previously paid~~of bynational ~~the~~economic ~~insurance~~activity ~~carrier~~as inmeasured ~~2002.~~by As a ~~result~~number of ~~the~~recent ~~insurer's~~key ~~refusal~~economic toindicators ~~pay~~has ~~this~~shown ~~amount~~that the ~~and~~economy ~~also~~entered asinto a ~~result~~recession ofin ~~the~~2008. ~~Second~~The ~~Circuit~~financial ~~Court~~services ~~of Appeals' interpretation of our insurance policy~~industry, ~~in January~~which ~~2007,~~is wehighly ~~commenced~~concentrated ~~another action~~ in the ~~U.S. District Court for the Southern District of~~ New York toCity ~~recover~~marketplace, ~~both~~experienced ~~the~~significant ~~appraisal~~difficulties ~~panel's~~during ~~award~~2008 and ~~additional~~2009 ~~amounts~~but ~~under~~began ~~the~~to ~~policy.~~show ~~In August~~signs ~~2007,~~of ~~the~~recovery ~~District~~during ~~Court entered judgment in~~ the latter ~~amount~~half of $02009.~~8 million~~ ~~plus~~The ~~interest,~~total ~~and~~unemployment ~~both~~rate ~~parties~~for ~~appealed.~~New ~~The~~York ~~appeals~~City ~~have~~increased ~~been~~3.4% ~~briefed~~from ~~and~~7.2% ~~oral argument~~ in ~~the~~December ~~Second~~2008 ~~Circuit Court~~to ofapproximately ~~Appeals~~10.6% ~~has~~in ~~been~~December ~~held~~2009. ~~However,~~The ~~due~~national torate ~~the inherent uncertainty~~ of ~~litigation,~~unemployment ~~there~~increased ~~can be no assurance that this appeal will be successful~~2.8% ~~Please~~from ~~see "Item 3~~7.2% ~~Legal~~in ~~Proceedings"~~December ~~for a~~2008 ~~more~~to ~~detailed~~10.0% ~~explanation~~in ~~of this matter~~December 2009.

~~The~~Our sales and profitability have in the past been affected by events and other factors that affect New York City. ~~following~~Examples ~~tables~~include ~~provide~~smoking-ban ~~information~~legislation, ~~with~~the ~~respect~~August to2003 ~~our~~Northeast ~~commitments~~power blackout, significant non-recurring increases in real estate taxes and ~~obligations~~insurance ascosts. atWe ~~December 27~~have continued to experience cost pressures from increases in minimum wage rates. Any increases in federal taxes or in city or state taxes in New York City or the Tri-State Area resulting from state or local government budget deficits may further reduce consumers’ disposable income, ~~2008:~~which could have a further negative impact on our business. Any other unforeseen events or circumstances that affect the New York City metropolitan area could also materially adversely affect our revenues and profitability.

	Payments due by Period
Contractual Cash Obligations	Total		Within 1 year		Within 2-3 years		Within 4-5 years		After 5 years
	(dollars in thousands)
Long-Term Debt(1)	$	405,033	$	—	$	405,000	$	—	$	33
Asset-Based Revolving Loan Facility(2)		144,642		—		144,642		—		—
Capital Lease Obligations(3)		5,977		4,485		1,492		—		—
Operating Leases(4)		1,602,254		145,772		290,147		275,236		891,099
Closed Store Costs(5)		8,154		4,718		1,399		662		1,375
Fixed Interest Payments(6)		57,038		19,013		38,025		—		—
Severance Payments(7)		585		467		16		15		87
Redeemable Preferred Stock(8)		39,400		—		—		—		39,400
Redeemable Preferred Stock Dividends(8)		89,496		—		—		—		89,496
Total Contractual Cash Obligations	$	2,352,579	$	174,455	$	880,721	$	275,913	$	1,021,490

55Table of Contents

~~Table~~In addition, perceived instability in our business and in the financial health of ~~Contents~~New York City and the surrounding areas may negatively affect our relations with our suppliers and trade creditors. As a result, our suppliers or trade creditors may present us with terms that are materially more disadvantageous to us than those we currently enjoy, which may have a negative impact on our ability to operate our business and manage our liquidity.

~~notes~~Certain Line ~~due~~Items inPresented ~~2022. For more information about the terms of the indebtedness described above, please see "—Debt," above.~~

			Amount of Commitment Expiration per Period
Other Commercial Commitments	Total Amounts Committed		Within 1 year		After 2-3 years		4-5 years		5 years
	(dollars in thousands)
Standby Letters of Credit(1)	$	6,334	$	6,334	$	—	$	—	$	—
Total Commercial Commitments	$	6,334	$	6,334	$	—	$	—	$	—

Net sales: Net sales include all front-end and pharmacy sales as well as certain resales of retail pharmaceutical inventory that are required to be reported on a gross basis in accordance with Accounting Standards Codification Topic 605. We refer to net sales excluding such resale activity as “net retail sales” and pharmacy sales excluding such resale activity as “pharmacy net retail sales.” “Same-store sales” represent sales for stores that have been open for at least 13 months and exclude any resale activity.

~~We are~~Cost ~~party~~of togoods ~~multi-year,~~sold: ~~merchandise~~Cost ~~supply~~of ~~agreements~~goods insold ~~the~~includes ~~normal~~all ~~course~~costs of ~~business.~~products ~~The~~sold, ~~largest~~net of ~~these~~any ~~agreements~~promotional isincome ~~with~~or ~~AmerisourceBergen,~~rebates ~~our~~received ~~primary~~from ~~pharmaceutical~~manufacturers ~~supplier~~or wholesalers. ~~Generally,~~Cost ~~these~~of ~~agreements~~goods ~~provide~~sold ~~for~~is ~~certain~~shown ~~volume~~exclusive ~~commitments~~of depreciation and ~~may~~amortization beexpense ~~terminated~~for byour usdistribution centers, ~~subject~~which inis ~~some~~included ~~cases~~in tothe ~~specified~~separate ~~termination~~line ~~payments,~~item ~~none~~captioned ofdepreciation ~~which~~and ~~we believe~~amortization. ~~would~~Inventory ~~constitute~~shrink alosses are ~~material~~also ~~adverse~~recorded ~~effect~~in oncost ~~our financial position, results~~ of ~~operations~~goods ~~or cash flows~~sold. ~~It is the opinion of~~

56Selling general & administrative expenses: SG&A includes employee wages and related costs, professional fees, store occupancy costs, advertising expenses, credit card fees and all other store and office-related operating expenses. In addition, real estate-related income is included in store occupancy costs.

~~Table~~Depreciation and amortization: Depreciation and amortization consists primarily of ~~Contents~~depreciation of store fixtures and equipment and amortization of leasehold improvements as well as intangible assets, including pharmacy files and lease acquisition costs.

~~management that~~Store ifpre-opening ~~any~~expenses: ofThese ~~these~~expenses ~~agreements~~primarily ~~were~~represent ~~terminated~~the orlabor ifcosts ~~any~~we ~~contracting~~incur ~~party~~related ~~was~~ to ~~experience~~our ~~events~~employees ~~precluding~~performing ~~fulfillment~~various oftasks ~~its~~associated ~~obligations,~~with wethe ~~would~~opening beof ~~able to find~~ a ~~suitable alternative~~new ~~supplier~~location.

~~In connection~~RESULTS ~~with~~OF ~~the~~OPERATIONS November 21, 2005 replacement of Mr. Cuti as our CEO, Mr. Cuti's employment contract specified payments to Mr. Cuti in cash totaling up to $6.6 million. We have paid the full amount through December 27, 2008. In addition, the employment contract provides for continued health insurance coverage for Mr. Cuti during the 25-month period following termination and, upon expiration of that period, if Mr. Cuti is not otherwise eligible under another employer's comparable medical plan, lifetime retiree medical benefits at a cost not to exceed $50,000 annually. In an ongoing arbitration between Mr. Cuti and us (explained in more detail in "Item 3. Legal Proceedings"), we are seeking, among other forms of relief, rescission of employment agreements entered into between us and Mr. Cuti, the return of all compensation paid under the employment agreements, including the benefits described in this paragraph, and other monetary damages.

~~In connection~~2009 ~~with~~Overview the Acquisition, Mr. Cuti was granted equity interests in Duane Reade Shareholders and Duane Reade Holdings, Inc., consisting of options to purchase shares of our common stock and a profits interest in Duane Reade Shareholders. Mr. Cuti's employment contract provides that, as a result of his replacement on November 21, 2005, he had the right to require us to purchase for cash, to be paid over a two year period, all or a portion of these equity interests as he may designate, at a value determined in accordance with a formula. In connection with his replacement, we have treated all of his equity interests as having vested. The options have expired unexercised, and the profits interest will have no value unless the value of Duane Reade Shareholders and Duane Reade Holdings, Inc., respectively, appreciate following the Acquisition. Mr. Cuti's purchase right will be suspended at any time when the exercise of such purchase rights would result in a default under the financing arrangements of Duane Reade Shareholders, Duane Reade Holdings, Inc. or Duane Reade Inc. On December 21, 2005, Mr. Cuti provided notice to Duane Reade Inc. that he was exercising his repurchase right to cause us to repurchase 5% of his profits interest. Pursuant to the procedures outlined in the new employment agreement, Duane Reade Inc. has advised him that his profits interest as of December 21, 2005 was determined to have no value. The benefits described in this paragraph were all granted under an employment agreement between Mr. Cuti and us. In an ongoing arbitration between Mr. Cuti and us (explained in more detail in "Item 3. Legal Proceedings"), we are seeking, among other forms of relief, rescission of employment agreements entered into between us and Mr. Cuti and the return of all compensation paid under the employment agreements, including the benefits described in this paragraph. The determination that Mr. Cuti's profits interest as of December 21, 2005 had no value is also one of several subjects specifically at issue in the arbitration.

~~In connection~~For ~~with~~ the ~~assignment~~2009 offiscal ~~certain~~year, ~~store~~we ~~leases~~achieved tonet ~~third~~sales ~~parties~~of ~~during~~$1.837 billion ~~2008~~ and ~~2007,~~incurred wea ~~continue~~net toloss of ~~provide~~$124.3 million, ~~secondary~~as ~~guarantees~~compared onto ~~the~~net ~~lease~~sales ~~obligations~~of ~~for~~$1.774 billion ~~the~~and ~~assigned stores.~~a ~~The~~net ~~respective~~loss ~~purchasers~~of ~~have~~$72.8 million ~~assumed~~in ~~our~~the ~~obligations~~2008 ~~under~~fiscal ~~these~~year. ~~leases~~The ~~and~~increase ~~are~~in ~~primarily~~our ~~liable~~net loss for ~~these~~the ~~obligations.~~2009 ~~Although~~fiscal weyear, ~~believe~~as itcompared to befiscal ~~unlikely~~2008, ~~assuming~~was ~~that~~primarily ~~each~~attributable ~~respective~~to a ~~purchaser~~$56.5 ~~became~~million ~~insolvent,~~increase ~~management~~in ~~estimates~~fair ~~that~~value wecharges, ~~could~~reflecting ~~settle~~the ~~these~~increased ~~obligations~~probability ~~for~~of ~~amounts~~a ~~substantially~~near ~~less~~term ~~than~~mandatory ~~the~~redemption ~~aggregate~~of ~~obligation~~our ofredeemable ~~$27~~preferred stock.~~8 million~~ asExcluding ofthe ~~December 27~~additional fair value charges, ~~2008.~~ ~~The~~our ~~obligations~~2009 ~~are~~net ~~for~~loss ~~varying~~would ~~terms~~have ~~dependent~~declined ~~upon~~by ~~the~~$5.0 million. ~~respective~~The ~~lease,~~following are the ~~longest~~major offactors ~~which~~contributing ~~lasts~~to ~~through~~our ~~May 31,~~improved ~~2022.~~results in the 2009 fiscal year:

• ~~Off-Balance~~the ~~Sheet~~benefits ~~Arrangements~~ of the $67.8 million increase in our net retail store sales;

We• ~~are~~a ~~not~~decrease ain ~~party~~our tocost ~~any~~of ~~agreements~~sales ~~with~~as a percentage of net sales, orprimarily ~~commitments~~attributable to, ~~any~~improved ~~special~~front-end ~~purpose~~assortments, ~~entities~~including ~~that~~increased ~~would~~sales ~~constitute~~of ~~material off~~private-~~balance~~label ~~sheet~~branded ~~financing~~products, ~~other~~higher ~~than~~rates of generic drug utilization and reductions in the ~~items~~level ~~listed~~of ~~above~~front-end inventory shrink. These benefits were partially offset by reduced third party pharmacy reimbursement rates and an increase in our LIFO charge for the 2009 fiscal year;

• ~~Critical~~a ~~Accounting~~$10.1 ~~Policies~~ million reduction in general and administrative costs primarily attributable to cost savings initiatives that were implemented during fiscal 2009;

~~Our~~• ~~discussion~~a ofdecrease ~~results~~in ofother ~~operations~~expenses and financial condition relies on our consolidated financial statements that are prepared based on certain critical accounting policies that require management to make judgments and estimates that are subject to varying degrees of ~~uncertainty~~$2.8 Wemillion, ~~believe~~primarily ~~that~~attributable ~~investors need~~ to bereductions ~~aware~~in ofasset ~~these policies~~impairment ~~and~~charges; ~~how they impact our financial reporting to gain a more~~ and

57• the completion of a debt refinancing transaction during the third quarter of 2009, that resulted in a $12.5 million gain on debt extinguishment.

~~Table~~Partially ofoffsetting ~~Contents~~these benefits were the following factors:

~~complete understanding~~• ofan ~~our~~increase ~~consolidated~~in ~~financial~~our ~~statements~~store asoccupancy ~~a whole~~costs, asprimarily ~~well~~attributable asto ~~our~~new ~~related~~stores, ~~discussion~~store ~~and analysis presented herein. While we believe that these accounting policies are grounded on sound measurement criteria~~expansions, ~~actual~~relocations ~~future events can~~ and ~~often~~lease dorenewals ~~result~~as inwell ~~outcomes~~as ~~that~~additional ~~can~~store bepayroll ~~materially different from these estimates or forecasts. The accounting policies~~ and related ~~risks~~ ~~described~~costs inassociated ~~the~~with ~~paragraphs~~our ~~below~~increased ~~are~~number ~~those~~of ~~that depend most heavily on these judgments and estimates.~~ stores;

38 ~~Receivables—Reserves for Uncollectible Accounts~~

AtTable December 27, 2008 and December 29, 2007, accounts receivable included $40.7 million and $37.7 million, respectively, representing amounts due from various insurance companies, pharmacy benefit management companies and governmental agencies under third party payment plans for prescription sales made prior to those dates. Our accounting policy, which is based on our past collection experience, is to fully reserve for all pharmacy receivables over 120 days old that are unpaid at the evaluation date and deemed uncollectible, as well as any other pharmacy receivables deemed potentially uncollectible. Pharmacy receivables other than New York Medicaid are adjudicated at the point of sale and do not generally have issues of collectability. There was approximately $0.1 million reserved for uncollectible pharmacy receivables at each of December 27, 2008 and December 29, 2007. Other receivables, which primarily consist of amounts due from vendors, are reserved for based upon a specific application of our historical collection experience to the total aged receivable balance. We have an aggregate allowance for doubtful accounts of approximately $1.7 million at December 27, 2008 and December 29, 2007. Contents

• ~~Inventory~~an ~~Shrink~~increase ~~Estimates~~ in depreciation and amortization expense of $4.1 million in fiscal 2009 primarily attributable to our increased capital spending on new store locations and recent store renovations;

We• ~~perform~~an ~~front-end~~increase ~~and pharmacy physical inventories~~ in ~~all of~~ our ~~stores~~interest ~~at least once per year on a staggered cycle basis and we cycle count inventories at our distribution centers throughout the year. Inventories are valued using the average specific item cost~~expense, ~~last-in,~~resulting ~~first-out~~from ~~(LIFO) method reduced by estimated inventory shrink losses for~~ the ~~period~~completion between the last physical inventory in each store and the balance sheet date. These shrink estimates are based on the latest store trends. At December 27, 2008 and December 29, 2007, a change in this shrink estimate of ~~1.0%~~our of front-end sales would impact year-to-date pre-tax earnings and related reserves by approximately $3.6 million and $3.3 million, respectively. To the extent that personal disposable income declines as a result of rising unemployment, higher taxes, reduced bonus income, falling housing prices, higher consumer debt ~~levels,~~refinancing ~~increased energy costs or other macroeconomic factors, we may encounter increased levels of shrink. Because most of our stores are located~~ in the ~~highly~~third ~~urbanized~~quarter ~~areas throughout New York City and the surrounding metropolitan area, our stores experience a higher rate~~ of ~~shrink~~2009; ~~than our national competitors.~~ and

• ~~Insurance~~a ~~Liabilities~~$1.5 ~~and~~million ~~Reserves~~ increase in our provision for income taxes.

AtThe ~~December 27,~~fiscal 2008 ~~and December 29~~selling, ~~2007, there were $4.7 million and $4.8 million of accrued~~ general ~~liability~~ claim costs, respectively, that primarily related to the gross amount payable for customer accident claims. Our policy is to recognize a liability for the estimated projected ultimate settlement value of these claims as well as a provision for incurred but unreported claims as of each balance sheet date. These estimates are made based on a review of the facts and ~~circumstances~~administrative ~~of each~~expenses ~~individual~~included ~~claim using experienced third party claims adjustors. These estimates are also reviewed and monitored on an ongoing basis by management. For~~ a ~~majority of the claims, the maximum self-insured portion of any individual claim amounts to~~ $~~250,000, although our historical claim settlement experience is significantly lower~~3.5 ~~We carry primary general liability insurance coverage (above the self-insured limit) of $15~~ million ~~and~~litigation ~~also~~settlement ~~have~~charge, awhich ~~general~~did ~~liability~~not ~~umbrella~~recur ~~policy that provides an additional $100 million of insurance coverage beyond~~in the ~~primary~~2009 ~~limit~~fiscal year. ~~At December 27, 2008, there were 234 outstanding claims with an average projected settlement value of approximately $20,274, as~~

582008 Overview

~~Table~~For the 2008 fiscal year, we achieved net sales of ~~Contents~~$1.774 billion and incurred a net loss of $72.8 million, as compared to net sales of $1.687 billion and a net loss of $87.8 million in the 2007 fiscal year. The reduction in our net loss for the 2008 fiscal year, as compared to fiscal 2007, was primarily attributable to the following factors:

~~compared to~~• ~~231~~the ~~outstanding~~benefits ~~claims~~of ~~with~~the an$87.3 ~~average~~million ~~projected~~increase ~~settlement~~in ~~value~~net sales, of ~~approximately~~which $~~20,850~~66.5 atmillion ~~December 29,~~was ~~2007.~~in our net retail store sales;

• ~~Impairment~~a decrease in cost of ~~Long~~sales as a percentage of net sales, primarily attributable to improved front-~~Lived~~end ~~Assets~~ assortments, higher rates of generic drug utilization and reductions in the level of inventory shrink losses;

At• ~~December 27,~~a ~~2008,~~decrease wein ~~had~~interest ~~net~~expense ~~fixed assets~~ of $~~186~~7.~~6 million and other net intangible assets consisting of favorable leases and other lease acquisition costs of $66.6 million, customer lists of $29.~~0 ~~million,~~ ~~capitalized software of $18.0~~ million and non-competition agreements of $0.3 million. Our policy is to evaluate our intangible and long-lived assets, exclusive of goodwill and indefinite-lived intangible assets, for impairment when circumstances indicate that ~~impairment~~was ~~may~~primarily ~~have~~due ~~occurred. These circumstances include, but are not limited~~ to, alower ~~significant~~interest ~~adverse~~rates ~~change~~applicable in legal factors or in the business climate, adverse action or assessment by a regulator, unanticipated competition or the loss of key personnel. When evaluating long-lived assets for potential impairment, we first compare the carrying value of the asset to ~~the asset's~~our ~~estimated~~variable ~~future~~rate ~~cash~~debt ~~flows (undiscounted~~ and ~~without~~reduced ~~interest~~levels ~~charges). If the estimated future cash flows are less than the carrying value~~ of ~~the~~borrowing ~~asset, we calculate the amount of the impairment loss. The impairment loss calculation compares the carrying value of the asset to the asset's estimated fair value, which may be based~~ on ~~estimated~~our ~~future cash flows. We recognize an impairment loss if the amount of the~~ asset~~'s carrying value exceeds the asset's estimated fair value. Any such write downs would result in a non~~-~~cash~~based ~~operating~~revolving ~~loss.~~loan ~~Our~~facility; ~~impairment loss calculations can be affected by uncertainties because they require management to make assumptions~~ and to apply judgment to estimate future cash flows and asset fair values, including forecasting useful lives of the assets and selecting the discount rate that reflects the risk inherent in future cash flows. Using the impairment evaluation methodology described, we recorded long-lived asset impairment charges totaling $7.7 million and $0.9 million, in the aggregate, during fiscal 2008 and fiscal 2007, respectively. With respect to the testing of our long-lived assets for impairment, we may be required to record additional asset impairment charges in the future if the general economic downturn persists and if there is a prolonged period of economic weakness in the markets we serve.

• ~~Impairment~~a ofdecrease ~~Goodwill~~in non-cash depreciation and ~~Intangible~~amortization ~~Assets~~ expenses of $4.5 million in 2008. The decrease is primarily due to reduced amortization expense for certain intangible assets which became fully amortized.

AtThe ~~December 27,~~positive ~~2008,~~impact ~~the carrying value~~ of ~~our~~the ~~goodwill~~above ~~and~~items ~~our trade name~~ was ~~approximately $69.5 million and~~ ~~$46.0 million,~~partially ~~respectively.~~offset ~~Goodwill~~by ~~and~~an ~~indefinite~~increase ~~lived intangibles are not amortized but are evaluated annually as of the year end balance sheet date and between annual tests~~ in ~~certain circumstances as required under SFAS No. 142~~selling, ~~"Goodwill~~general and ~~Other~~administrative ~~Intangible~~expenses ~~Assets." The process~~ of ~~evaluating our goodwill and our trade name for impairment involves the determination of fair value~~$29.9 ~~Inherent in such fair value determinations are certain judgments and estimates~~million, ~~including~~primarily adue ~~projection~~to ~~of future cash flows,~~ the ~~interpretation of~~following ~~economic~~factors: ~~indicators and market valuations, assumptions in our business plans and other quantitative and qualitative analyses.~~

~~We assess~~• ~~our~~an ~~goodwill~~increase ~~and our trade name for impairment annually at the end~~ of ~~its fiscal year and in interim periods if certain events occur indicating the carrying value may be impaired~~$14.4 Wemillion ~~perform our analysis~~ for ~~potential~~additional ~~impairment~~store inpayroll accordance with SFAS No. 142, which requires that a two-step impairment test be performed on goodwill. In the first step, the fair value of the reporting unit is compared to its carrying value. If the fair value exceeds its carrying value, goodwill is not impaired, and norelated ~~further~~costs ~~testing~~associated iswith ~~required.~~an Ifincreased ~~the~~number ~~carrying value~~ of ~~the~~stores ~~reporting~~as ~~unit~~well ~~exceeds~~as ~~its~~wage ~~fair value, then a second step must be performed in order to determine the implied fair value of the goodwill~~ and ~~compare~~salary itrate ~~to the carrying value of the goodwill. If the carrying value of goodwill exceeds its implied fair value then an impairment loss is recorded equal to the difference.~~ increases;

~~Our most~~• ~~recent~~an ~~evaluation~~increase of ~~goodwill~~$10.2 ~~and~~million ~~our trade name as of December 27, 2008 resulted~~ in nostore ~~impairment~~occupancy ~~charge~~costs torelated ~~these assets. We may be required~~ to ~~perform~~new ~~an additional interim impairment review if circumstances similar to those listed above~~stores, ~~under~~relocations ~~the~~and ~~caption~~reduced ~~"Impairment~~real ofestate ~~Long-Lived~~related ~~Assets,"~~income; indicate that impairment may have occurred. We may be required to recognize an impairment charge at the time an interim or future annual impairment review is performed, depending in part on our estimated fair value. These types of analyses can be affected by uncertainties because and

59• higher general and administrative costs associated with a $3.5 million litigation settlement charge for two class action lawsuits and additional recruitment fees and relocation costs paid in connection with the hiring of senior management executives.

~~Table~~The 2007 fiscal year also included a $1.3 million gain from the sale of ~~Contents~~several pharmacy prescription files, which did not recur in the 2008 fiscal year.

~~they require~~The ~~management~~following tosets ~~make~~forth ~~assumptions~~our ~~and~~results toof ~~apply~~operations ~~judgment~~in todollars ~~estimate~~(in ~~future~~thousands) ~~cash flows~~ and ~~to estimate industry economic factors,~~ as ~~well~~a aspercentage ~~the profitability~~ of ~~future~~net ~~business~~sales ~~strategies and~~for the ~~selection~~periods ~~of an appropriate discount rate that reflects the risk inherent in future cash flows~~indicated. ~~If actual results are not consistent with our estimates or assumptions, we may be exposed to an impairment charge that could be material.~~

Closed Store Reserve

Fiscal Year Ended
December 26, 2009

Fiscal Year Ended
December 27, 2008

Fiscal Year Ended
December 29, 2007

Dollars

% of Sales

Dollars

% of Sales

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