UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

|(Mark One)                                                    |                                                                                         
|------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                                             | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|For the fiscal year ended February 2, 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

Commission file number: 0-8858

THE PENN TRAFFIC COMPANY(Exact name of registrant as specified in its charter)

|Delaware(State of incorporation)                                                                 |  | 25-0716800(IRS Employer Identification No.)
|------------------------------------------------------------------------------------------------ |  | -------------------------------------------
|1200 State Fair Blvd., Syracuse, New York(Address of principal executive offices)                |  | 13221-4737(Zip Code)                       
|(315) 453-7284(Registrant's telephone number, including area code)                              
|Not Applicable(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:None

Securities
registered pursuant to Section 12(g) of the Act:Common Stock, $.01 par value

Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of 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 15(d) of the
Act. Yes o    No ý

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 o    No ý

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter)
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. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

|Large accelerated filer o |  | Accelerated filer ý |  | Non-accelerated filer o (Do not check if a smaller reporting company) |  | Smaller reporting company o
|------------------------- |  | ------------------- |  | --------------------------------------------------------------------- |  | ---------------------------

Indicated
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes o    No ý

The aggregate market value of the registrant's voting stock held by nonaffiliates of the registrant was approximately $76,720,249 as of August 4, 2007, the
last business day of the registrant's most recently completed second fiscal quarter.

Indicate
by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent
to the distribution of securities under a plan confirmed by a
court. Yes o    No ý

Common Stock, par value $.01 per share 8,336,192 shares outstanding as of April 16, 2008



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FORM 10-K INDEX

|          |  |                                                                                                              |  | PAGE
|--------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|PART I.  
|Item 1.   |  | Business                                                                                                     |  | 4   
|Item 1A.  |  | Risk Factors                                                                                                 |  | 11  
|Item 1B.  |  | Unresolved Staff Comments                                                                                    |  | 17  
|Item 2.   |  | Properties                                                                                                   |  | 17  
|Item 3.   |  | Legal Proceedings                                                                                            |  | 17  
|Item 4.   |  | Submission of Matters to a Vote of Security Holders                                                          |  | 18  
|PART II. 
|Item 5.   |  | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 19  
|Item 6.   |  | Selected Financial Data                                                                                      |  | 21  
|Item 7.   |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                        |  | 25  
|Item 7A.  |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 37  
|Item 8.   |  | Financial Statements and Supplementary Data                                                                  |  | 37  
|Item 9.   |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 73  
|Item 9A.  |  | Controls and Procedures                                                                                      |  | 73  
|Item 9B.  |  | Other Information                                                                                            |  | 78  
|PART III.
|Item 10.  |  | Directors, Executive Officers of Registrant and Corporate Governance                                         |  | 78  
|Item 11.  |  | Executive Compensation                                                                                       |  | 78  
|Item 12.  |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 78  
|Item 13.  |  | Certain Relationships and Related Transactions and Director Independence                                     |  | 78  
|Item 14.  |  | Principal Accountant Fees and Services                                                                       |  | 78  
|PART IV. 
|Item 15.  |  | Exhibits, and Financial Statement Schedules                                                                  |  | 79  

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements included in this Form 10-K, including, without limitation, statements included in Item 7"Management's
Discussion and Analysis of Financial Condition and Results of Operations," which are not statements of historical fact, are intended to be, and are hereby identified as, "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995, as amended, reflecting management's current analysis and expectations, based on what management believes to be reasonable
assumptions. These forward-looking statements include statements relating to our anticipated financial performance and business prospects. Statements preceded by, followed by or that include words
such as "believe," "anticipate," "estimate," "expect," "could," and other similar expressions are to be considered such forward-looking statements. Forward-looking statements may involve known and
unknown risks, uncertainties and other factors, which may cause the actual results to differ materially from those projected, stated or implied, depending on such factors as: our ability to improve
operating performance and effectuate business plans; our ability to operate pursuant to the terms of our credit facilities and to comply with the terms of our lending agreements or to amend or modify
the terms of such agreements as may be needed from time to time; our ability to generate cash; our ability to attract and maintain adequate capital; our ability to refinance our indebtedness;
increases in prevailing interest rates; our ability to obtain trade credit, and shipments and terms with vendors and service providers for current orders; our ability to maintain contracts that are
critical to our operations; potential adverse developments with respect to our liquidity or results of operations; general economic and business conditions; competition, including increased capital
investment and promotional activity by our competitors; availability, location and terms of sites for store development; the successful implementation of our capital expenditure program; labor
relations; labor and employee benefit costs including increases in health care and pension costs and the level of contributions to our sponsored pension plans; the result of our pursuit of strategic
alternatives; economic and competitive uncertainties; our ability to pursue strategic alternatives; economic and competitive uncertainties; changes in strategies; changes in generally accepted
accounting principles; adverse changes in economic and political climates around the world, including terrorist activities and international hostilities; and the outcome of pending, or the
commencement of any new, legal proceedings against, or governmental investigations of us, including the previously announced SEC and U.S. Attorney's Office investigations. We caution that the
foregoing list of important factors is not exhaustive. Accordingly, there can be no assurance that we will meet future results, performance or achievements expressed or implied by such forward-looking
statements, which are generally required to be publicly revised as circumstances change, and which we do not intend to update.

EXPLANATORY NOTE

This Annual Report on Form 10-K is for the fiscal year ended February 2, 2008 except as expressly indicated otherwise, information in
this report speaks as of such date. This report includes audited financial information for the 52-week period ended February 2, 2008, the 53-week period ended
February 3, 2007 and the 41-week period ended January 28, 2006 and unaudited financial information for the 11-week period ended April 16, 2005 and the
fiscal years ended January 29, 2005, and January 31, 2004, as well as management's discussion of our results of operations since 2006. This report does not include, and we have not
otherwise filed or furnished to the SEC, audited financial information for the fiscal year ended January 29, 2005, the 11-week period ended April 16, 2005 or the fiscal year
ended January 31, 2004. As discussed further in this report, we emerged from Chapter 11 bankruptcy reorganization effective April 13, 2005.

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PART I

ITEM 1.    BUSINESS

General

We are one of the leading food retailers in the northeastern United States. We operate 103 supermarkets in Pennsylvania, upstate New York, Vermont and New
Hampshire under the "Bi-Lo" (19 stores), "P&C" (58 stores) and "Quality" (26 stores) trade names. We also operate a wholesale food distribution business serving 58 independent supermarkets
and 66 other independent wholesale customers. We classify our businesses in two primary segments: (i) Retail Food Business and (ii) Wholesale Food Distribution Business. Our consolidated
revenues for the fiscal period ended February 2, 2008 were approximately $1.2 billion.

Our
Retail Food Business currently operates in communities with diverse economies and demographics. The average revenue per store for the 52-week period ended
February 2, 2008 was approximately $9.5 million. Our stores are generally clustered geographically within our marketing area to provide economies of scale in advertising, distribution
and operations management.

Our
supermarkets offer a wide variety of fresh foods within our meat, seafood, produce, deli, and bakery departments. Complementing our grocery, frozen food and dairy offerings is a full
line of health and beauty care and general merchandise items. Many of our locations feature pharmacies and full-service floral departments which add convenience and value to our customers'
shopping experience. Our stores' strong ties to their communities and their full service offering position them to meet their customers' needs.

Our
supermarkets, which average approximately 36,000 square feet, are conveniently located and generally modern. We tailor the size and product assortment of each store to local
demographics.

Our
Wholesale Food Distribution Business supplies independently operated supermarkets with a wide variety of food and nonfood products from our distribution centers in New York and
Pennsylvania. Customers of the Wholesale Food Distribution Business are primarily located in upstate New York and western Pennsylvania.

Revenues
for our Wholesale Food Distribution Business for the 52-week period ended February 2, 2008 were approximately $210.0 million, which represented 17.2%
of our revenues for the period.

On
May 30, 2003, The Penn Traffic Company and certain of its subsidiaries filed petitions for relief (the "Bankruptcy Cases") under Chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"). On February 2, 2005, we filed the First Amended Joint Plan of
Reorganization with the Bankruptcy Court. The Plan was confirmed on March 17, 2005 and became effective on April 13, 2005 (the "2005 Effective Date"). See "Reorganization" and
Item 7"Management's Discussion and Analysis of Financial Condition and Results of Operations."

The
Penn Traffic Company was incorporated in the State of Delaware on April 22, 1992. Our principal executive offices are at 1200 State Fair Boulevard, Syracuse, New York, 13221,
telephone (315) 453-7284.

Our
fiscal year ends each year on the Saturday closest to January 31. In addition, in connection with our emergence from Chapter 11 bankruptcy protection, on
April 16, 2005, we commenced fresh-start financial reporting. As a result, fiscal year 2008 consists of the 52-week period from February 4, 2007 to February 2, 2008
("fiscal year 2008"); fiscal year 2007 consists of the 53-week period from January 29, 2006 to February 3, 2007 ("fiscal year 2007"); fiscal year 2006 consists of two fiscal
periods, the 41-week period from April 17, 2005 to January 28, 2006 ("period ended January 28, 2006") and the unaudited 11-week period from
January 30, 2005 to April 16, 2005 ("period ended April 16, 2005").

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Business Strategy

Fiscal year 2008 can be characterized as a year of rebuilding. The organization was primarily focused on rebuilding the core business by
re-establishing basic disciplines and reemphasizing and emphasizing profitable growth around sales and margin.

Under
the direction of the new senior management team, 34 specific tactical initiatives were identified. These 34 unique opportunities combined to form our Initiative Portfolio. The
Initiative Portfolio was designed to increase sales and margin, reduce costs, rebuild our infrastructure, and enable future business growth.

Senior
executive sponsorship and functional ownership was established for each initiative. In addition, detailed implementation plans that included performance metrics and monitoring
mechanisms were developed and implemented. A leadership conference was held at the start of the fiscal year to communicate expectations and focus the organization on delivering benefits from the
Initiative Portfolio.

The
key initiatives that management developed and implemented included:



In
addition, the organizational design was tailored to enable operational excellence and support delivery of our Initiative Portfolio. Prior to fiscal year 2008, we had employed a
district structure in which several stores were under the direction of a district manager. For fiscal year 2008, each district was reorganized into several smaller zones led by a zone manager. This
change enabled each store to receive more support and attention from each zone manager, as well as provided a development opportunity for our zone managers. In addition to adding zone managers, we
added field merchandisers, human resource generalists, and customer focus coordinators to the field structure. A summary of each key initiative appears below:



Implemented best practices and improvements in technology to reduce shrinkage in our center store (grocery, general merchandise, health and beauty care, dairy and
frozen departments) and fresh areas (produce, floral, meat, seafood, bakery and deli departments) to improve total margin. Identified key performance metrics and controls to reduce the frequency of
loss to improve profitability. Targeted high shrink and underperforming stores and departments within three trade names, and developed dedicated teams to increase awareness of inventory shrink, as
well as monitor and review performance.



Focused on developing fresh category products that are store produced or exclusively produced for us so that each store's fresh department becomes a destination
point for our customers. Signature products enhance the total store freshness and quality image, thereby increasing incremental sales and customer loyalty. Examples of these items are store prepared
and packaged cut fruit, gourmet beef patties, vegetable kabobs, deli store baked turkey breast, old fashioned ham and artisan store baked

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bread.
In addition to these items we have enhanced this program by adding several varieties of seafood crab salad, deli fried chicken, foccocia bread, chicken pot pies and a flavored sausage program.



Developed ways in which we can better enhance our sales on high margin categories. Identified key mix categories such as candy, cookies, juice and private label
soda to better utilize areas within our stores to display these items and maximize sales growth within these categories. Displays such as "wall of values" lobby displays, orchard bins and aisle
baskets are being utilized. Shipper and pallet drop programs have also been a key element of our mix category growth.



Targeted stores that would benefit from minor enhancements to existing physical structure in order to enable us to drive sales through the marketing and
merchandising program that is in place. These enhancements include minor paint and fix-up, installation of some new or used cases, entire center store re-sets and refocused
merchandising plan throughout entire store.



Through process improvement, reduced expenses associated with excess center store category product reclamation. Product reclamation is the process of returning
outdated or damaged product to the vendor for credit. With improvements in product handling and product integrity, we increased profitability and margin for center store category products.



Focused on reducing costs throughout our operations. The supply initiative emphasizes the containment of supply cost by standardizing items, which reduces
repetitious inventory. In addition, our co-managers have taken on the role of "supply chain captain", verifying store orders and inspecting supply areas. By maintaining supplies in one
area of our backrooms, it has enabled our co-managers to review and challenge any department orders.



In recent years, we have experienced a declining trend in Private Label penetration throughout the center store category departments. This initiative was designed
to leverage our existing Private Label items, as well as target the rollout of an expanded line of our Value Time line of products and our Full Circle line of natural/organic items.

Long-term Strategic Restructuring

At the end of fiscal year 2008, we began to implement our long-term strategic restructuring by closing our bakery business. In early fiscal year 2009
we announced the closure of five underperforming stores. Management will continue to make long-term strategic decisions that result in removing underproductive assets from the company and
reallocating precious resources and capital projects that can generate substantially more shareholder value by driving economic profits.

Competition

The food retailing business is highly competitive and may be affected by general economic conditions and trends. The number of competitors and the degree of
competition encountered by our supermarkets vary by location. We compete with several multi-regional, regional and local supermarket chains, convenience stores, stores owned and operated and otherwise
affiliated with large food

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wholesalers,
unaffiliated independent food stores, warehouse clubs, discount drug store chains, discount general merchandise chains, "supercenters" (combination supermarket and general merchandise
stores) and other retailers.

Financial Information About Industry Segments

Our business is classified by our management into two primary industry segments: Retail Food Business and Wholesale Food Distribution Business (both described
below). Financial information about our industry segments for the 52-week period ended February 2, 2008 is found in Note 17 to our consolidated financial statements.

Retail Food Business

We are one of the leading supermarket retailers serving the northeastern United States. We operate 103 supermarkets in Pennsylvania, upstate New York, Vermont and
New Hampshire under the "P&C" (58 stores), "Bi-Lo" (19 stores), and "Quality" (26 stores) trade names. We have identified and commenced the implementation of a two-tier
strategy across all three trade names in order to segment our stores into two distinct formats (Conventional and Fresh). Our Conventional format offers many of the conveniences that our customers have
grown to expect within a traditional supermarket. Our Fresh format offers all of the features of our Conventional format with an enhanced offering to meet the needs of today's more
time-pressed consumer with an emphasis on value-added services and meal solutions.

Our
Fresh stores have unique features, including distinctively branded floral shops, expanded service departments, cafés offering gourmet sandwiches and high quality meal
solutions, and expanded in-store bakeries offering a wide array of gourmet breads and pastries. In several stores, we have also added an in-store chef and a professionally
staffed child-care center which provides safe and friendly care for shoppers' children.

Our
supermarkets average approximately 36,000 square feet in size. Many of our locations have provided decades of service in their respective markets, allowing us to establish strong
corporate citizenship ties to these communities.

We
offer a wide variety of fresh foods within our meat, seafood, produce, deli, and bakery departments. Complementing our grocery, frozen food, and dairy offer, is a full line of health
and beauty care and general merchandise items. Many of our locations feature pharmacies and full-service floral departments which add convenience and value to our customers' shopping
experience.

Our
stores' strong ties to their local communities, combined with a full service offering tailored to the local demographics of each store, helps position the stores to meet customers'
needs for high quality, fresh food products in a pleasant and clean retail environment.

Wholesale Food Distribution Business

We supply 124 independently operated supermarkets and other independent accounts with a wide variety of food and nonfood products from our distribution centers in
New York and Pennsylvania. Customers of our Wholesale Food Distribution Business are primarily located in upstate New York and western Pennsylvania.

As
part of our Wholesale Food Distribution Business, we license on a royalty-free basis, the use of our "Riverside," "Bi-Lo" and "Big M" names to 58 of these
independently owned supermarkets that in turn are required to maintain certain quality and other standards. These licensed independent stores use us as their primary wholesaler and also receive
advertising, accounting, merchandising and retail counseling services from us. We also act as a food distributor to 66 other independent accounts. We receive rent from 20 of the licensed independent
operators that sublease their supermarkets from us. In

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addition
to contributing to our operating income, our Wholesale Food Distribution Business enables us to leverage fixed and semi-fixed procurement and distribution costs over additional
revenues.

Other

On January 2, 2008, we announced the immediate closing of our Penny Curtiss commercial bakery operation as part of our strategy for improving our
long-term financial performance and further focusing our resources on enhancing the in-store experience for our customers.

Penny
Curtiss Bakery operated in a commercial bakery industry hampered by a number of challenges, including nationwide over-capacity. The bakery was contributing less than
4 percent of our total annual revenue and in August 2007 lost a significant supply contract.

Subsequent
to fiscal year ended February 2, 2008, we closed 5 retail stores and have announced the closure of an additional store.

Purchasing and Distribution

We are a large-volume purchaser of products. Our purchases are generally of sufficient volume to qualify for minimum price brackets for most items. We purchase
brand name grocery merchandise directly from national manufacturers. We also purchase private label products, other food products and certain goods not for resale through TOPCO
Associates, Inc., a national product purchasing cooperative comprised of 62 regional supermarket chains and other food distributors. For the fiscal year ended February 2, 2008, the
fiscal year ended February 3, 2007, the 41-week period ended January 28, 2006, and the 11-week period ended April 16, 2005, purchases of goods for resale
from TOPCO Associates, Inc. accounted for approximately 16.7%, 15.5%, 19.5%, and 19.4%, respectively, of our total purchases of goods during those periods.

Our
primary New York distribution facility is a leased 514,000 square foot dry grocery facility in Syracuse, New York. We also lease a 241,000 square foot distribution center for
perishable products in Syracuse.

Our
primary Pennsylvania distribution facility is a leased 390,000 square foot dry grocery facility in DuBois, Pennsylvania. We also lease a 195,000 square foot distribution center for
perishable products in DuBois.

In
January 2007, we announced the closing of the Jamestown, New York leased distribution center used for the distribution of general merchandise and health and beauty products. At the
same time, we entered into a five-year supply agreement with a third party to provide the merchandise
previously distributed from the distribution center. We ceased use of the facility in March 2007, at which time we recorded a liability of $1.9 million representing the present value of the
remaining lease rentals reduced by estimated sublease rentals that could be reasonably obtained for the distribution center. In addition, in March 2007, we sold our remaining inventory located in the
distribution center to the third party at current cost. The carrying value of such inventory at February 3, 2007 was approximately $4.8 million. For the fiscal year ended
February 2, 2008, purchases of goods for resale with this vendor accounted for approximately 4.5% of our total purchases of goods.

In
January 2008, we entered into a produce procurement contract with the same third party supplier. The agreement will allow us to benefit from purchasing cost efficiencies while
expanding access to new and alternative products. We expect the percentage of total purchases with this third party supplier to increase during fiscal year 2009.

Approximately
three-fourths of the merchandise offered in our retail stores is distributed from our warehouses by our fleet of tractors, refrigerated trailers and dry trailers.
Merchandise not delivered from our warehouses is delivered directly to the stores by manufacturers, distributors, vendor drivers and sales representatives for such products as beverages, snack foods
and bakery items.

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Employees

Labor costs and their impact on product prices are important competitive factors in the supermarket industry. As of February 2, 2008, we had approximately
7,500 total employees, of which 6,900 were hourly and 600 were salaried.

Approximately
86.2% of our total number of employees are unionized, with 6,943, or 93.1%, of our unionized employees being members of the United Food and Commercial Workers union. An
additional 6.9% of our union employees belong to the International Brotherhood of Teamsters. Approximately 13.8% of our employees are not members of a collective bargaining unit. We believe our
relations with our employees are generally good.

Government Regulation

Our food and drug business requires us to hold various licenses and to register certain of our facilities with state and federal health, drug and alcoholic
beverage regulatory agencies. By virtue of these licenses and registration requirements, we are obligated to observe certain rules and regulations. A violation of such rules and regulations could
result in a suspension or revocation of these licenses or registrations, which could require us to close the affected stores until the violation is remedied. Most of our licenses require periodic
renewals. We have experienced no material difficulties with respect to obtaining, retaining or renewing our licenses and registrations.

Seasonality, Customers and Suppliers

Our supermarket business is generally not seasonal in nature. During the past three fiscal years, no single customer or group of customers under common control
accounted for 10% or more of our consolidated revenues. Groceries, general merchandise and raw materials are available from many different sources. During the past three fiscal years, no single
supplier accounted for 10% or more of our cost of sales except TOPCO Associates, Inc., which accounted for approximately 16.7%, 15.5%,
19.5%, and 19.4% of purchases of goods for resale for the fiscal year ended February 2, 2008, the fiscal year ended February 3, 2007, the 11-week period ended
April 16, 2005, and the 41-week period ended January 28, 2006, respectively.

In
January 2007 we entered into a 5 year supply agreement with a third party to provide general merchandise and health and beauty products. For the fiscal year ended
February 2, 2008, purchases of goods for resale with this vendor accounted for approximately 4.5% of our total purchases of goods. In January 2008, we entered into a produce procurement
contract with the same third party food wholesaler allowing us to benefit from purchasing cost efficiencies while expanding access to new and alternative products. We expect the percentage of total
purchases with this third party supplier to increase during fiscal year 2009.

Reorganization

On May 30, 2003, we and all of our subsidiaries filed petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United
States Bankruptcy Court for the Southern District of New York. On April 13, 2005, our Chapter 11 Plan of Reorganization became effective.

While
operating under Chapter 11, we reorganized our business operations, including the cessation of business in Ohio and West Virginia under the Big Bear name, the implementation
of cost reduction and cost containment initiatives including consolidation and closing of warehouses, the closing of unprofitable stores and the rejection of certain executory contracts and unexpired
leases. Additionally, we disposed of a number of non-core real estate properties.

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Pursuant
to the terms of our plan of reorganization the following transactions occurred:



On
April 13, 2005, in connection with the consummation of our plan of reorganization, we entered into a $136.0 million senior credit facility comprised of a
$130.0 million revolving loan and a $6.0 million term loan. Concurrent with the senior credit facility, we entered into a $28.0 million supplemental real estate facility
consisting of a term loan on a multi-draw basis. The credit facility and the supplemental real estate facility provide us with aggregate credit facilities of $164.0 million.
Additionally, pursuant to our plan of reorganization, we entered into a sale-leaseback transaction
pursuant to which we sold our five owned distribution centers located in New York and Pennsylvania for $37.0 million and leased the distribution centers back for a period of 15 years
from emergence. The lenders under the credit facility have a first priority perfected security interest in substantially all of our assets, with a second lien on a substantial number of our leasehold
assets. The supplemental real estate facility is secured by a first lien on such leasehold interests and a second lien on substantially all of our remaining properties. Proceeds from the two credit
facilities and the sale-leaseback transaction were used to satisfy our obligations under our plan of reorganization, including payment of our debtor-in-possession
financing. Additionally, the credit facilities continue to provide funds to satisfy our ongoing working capital and capital expenditure requirements.

Available Information

We are required to file annual, quarterly and current reports, proxy statements and other information with the SEC under the Securities Exchange Act of 1934.

You
may read and copy our filings at the Public Reference Room of the SEC, Room 1024, 100 F Street NE, Washington, D.C. 20549. You may obtain information about the
Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet website that contains reports, proxy and information
statements and other information regarding issuers that file electronically through the EDGAR (Electronic Data Gathering, Analysis and Retrieval) System, available on the SEC's website
(www.sec.gov).

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ITEM 1A.    RISK FACTORS

The supermarket industry is highly competitive. If we are unable to compete effectively, our financial condition and results of operations could be materially affected.

The supermarket industry is highly competitive and characterized by high inventory turnover, high capital intensity and narrow profit margins. The number and type
of competitors vary by location and include:



We
also face increasing competition from restaurants and fast food chains due to the increasing proportion of household food expenditures for food prepared outside the home. In addition,
certain of our stores also compete with florists, pharmacies and convenience stores.

Our
principal competitors include national and regional supermarket chains, which compete with us on the basis of location, quality of products, service, price, product variety and store
condition. Increasingly competitive markets have made it difficult generally for grocery store operators to achieve comparable store sales gains, while "Every Day Low Price" ("EDLP") competitors make
it difficult to pass along food price increases as price adjustments. Because sales growth has been difficult to attain, our competitors have attempted to maintain market share through increased
levels of promotional activities and discount pricing, creating a more difficult environment in which to consistently increase year-over-year sales gains.

In
addition, most of our "traditional" and "nontraditional" competitors are not unionized and have lower labor costs, which allows them to take measures that could adversely affect our
competitive position.

We
face increased competitive pressure in a number of our markets from existing competitors and from the threatened entry by one or more major new competitors. Some of our competitors
have greater financial resources and have less indebtedness than we have, and could use these resources to take measures which could adversely affect our competitive position.

Our
business, financial condition or results of operations could be adversely affected by competitive factors, including product mix and pricing changes that may be made in response to
competition from existing or new competitors. From time to time, the relative strength of our competitors changes depending on prevailing market conditions.

Our business and results of operations may be sensitive to economic conditions that impact consumer spending.

Our business and results of operations may be sensitive to changes in overall economic conditions that impact consumer spending, including discretionary spending.
Future economic conditions affecting disposable consumer income such as employment levels, energy prices, business conditions, interest rates, inflation and tax rates could reduce consumer spending or
cause consumers to shift their spending away from our product quality and service offering, to a more focused price-based offering. A general reduction in the level of discretionary spending or shifts
in consumer discretionary spending to our competitors could adversely affect our growth and profitability.

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We may experience significant fluctuations in our comparable store sales.

Our comparable store sales in the future could fluctuate or be lower than our historical average for many reasons, including increased competition, price changes
in response to competitive factors, shifts in demographic patterns and local economic conditions, changes in traffic patterns and possible supply shortages. Our results of operations may be materially
impacted by fluctuations in our comparable store sales as it becomes more difficult to leverage expenses at a lower level of sales.

Our stores are concentrated in the Northeastern United States, making us susceptible to economic downturns, natural disasters and other adverse conditions or catastrophic
events in that region.

Our stores are located in Pennsylvania, upstate New York, Vermont and New Hampshire. As a result, we are vulnerable to economic downturns in those areas, in
addition to those that may affect the country as a whole, as well as natural and other catastrophic and terrorist events that may impact these regions. In addition, we may be adversely affected by
these events to a greater extent than our competitors whose operations extend outside of these regions. These events may adversely affect our sales, which may lead to lower earnings, or even losses,
and may also adversely affect our future growth and expansion.

Our wholesale independent business could be negatively affected if we fail to retain existing customers or attract significant numbers of new customers.

Increasing the growth and profitability of our wholesale independent business is dependent in large measure upon our ability to retain existing customers and
capture additional customers through our existing network of distribution centers, enabling us to more effectively leverage and utilize the fixed assets in our distribution business. Our ability to
achieve these goals is dependent, in part, upon our ability to continue to provide a high level of customer service, offer competitive products at low prices, maintain high levels of productivity and
efficiency, particularly in the process of integrating new customers into our distribution system and offer marketing, merchandising, information technology and ancillary services that provide value
to our independent distribution customers. If we are unable to execute these tasks effectively and at a competitive price, we may not be able to attract significant numbers of new customers and
attrition among our existing customer base could increase, either or both of which could have an adverse impact on our revenue and profitability.

Changes in vendor promotions or allowances, including the way vendors target their promotional spending, and our ability to effectively manage these programs could
significantly impact our margins and profitability.

We engage in a wide variety of promotional programs cooperatively with our vendors. The nature of these programs and the allocation of funds among them evolve
over time as the parties assess the results of specific promotions and plan for future promotions. These programs require careful management in order for us to maintain or improve margins while at the
same time increasing sales for us and for our participating vendors. A reduction in overall promotional spending or a shift in promotional spending away from certain types of promotions that we have
historically utilized could have a significant impact on our gross profit margin and profitability. Our ability to anticipate and react to changes in promotional spending by, among other things,
planning and implementing alternative programs that are expected to be mutually beneficial to our vendors and us, will be an important factor
in maintaining or improving margins and profitability. If we are unable to effectively manage these programs, it could have a material adverse effect on our results of operations and financial
condition.

12

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Our debt instruments include financial and other covenants that may limit our operating flexibility and may affect our future business strategies and operating results.

Covenants in the documents governing our outstanding or future debt, including our credit facilities, or our future debt levels, could limit our operating and
financial flexibility. Our ability to respond to market conditions and opportunities as well as capital needs could be constrained by the degree to which we are leveraged, by changes in our
availability or cost of capital, and by contractual limitations on the degree to which we may, without the consent of our lenders, take actions such as engaging in mergers, acquisitions or
divestitures, incurring additional debt, making capital expenditures, rationalizing underperforming assets and making investments, loans or advances. If needs or opportunities were identified that
would require additional financial resources, obtaining those additional resources could increase our borrowing costs, further reduce financial flexibility, require alterations in our strategies and
affect future operating results.

Substantial operating losses may occur if the customers to whom we extend credit or to whom we sublease properties fail to repay us or honor their lease obligations.

In the ordinary course of business, we extend credit, including loans, to our food distribution customers. We also sublease store sites to independent retailers.
Generally, our loans and other subleases are extended to small businesses that are unrated and may have limited access to conventional financing. As of February 2, 2008, we had outstanding
accounts receivable from these customers totaling $8.5 million and lease obligations for properties sublet to food distribution customers totaling $5.4 million. In the normal course of
business, we also sublease retail properties to third parties. While we seek to obtain security interests and other credit support in connection with the financial accommodations we extend, such
collateral may not be sufficient to cover our exposure.

If
a significant number of these customers or lease counterparties fail to repay us or honor their lease obligations to us, our operating results may be adversely affected.

A significant portion of our employees are covered under collective bargaining agreements. Our relationships with our employees and their unions including the possibility of
labor disputes or work stoppages in connection with future negotiations, could have an adverse impact on our financial results.

Labor costs, which are largely an extension of the results of collective bargaining negotiations with our unions, traditionally have had a significant impact upon
the pricing of our products in the highly competitive supermarket industry. Of our hourly workforce, 86.2% are members of unions. All salaried employees and 13.8% of our hourly workforce are not
members of a collective bargaining unit.

Because
we are party to 18 collective bargaining agreements with four retail and one warehouse technician collective bargaining agreement expiring in fiscal year 2009, it is anticipated
that the unions which are parties to these agreements will seek improvements for their members with respect to, among other things, healthcare benefits, pension benefits, and wage rates. As a result,
operating costs concerning our unionized employees may increase over the next several years. Further, our ability to control pension costs will be impacted by the Pension Protection Act of 2006, which
might require additional funding costs into the multi-employer pension plans into which we contribute.

We may experience technology failures which could have a material adverse effect on our business.

We use large, complex information technology systems that are important to our business operations. Although we have a disaster-recovery plan and have installed
security programs and procedures, the security of our technology systems could be compromised and technology failures and system disruptions could occur. Any of these events could result in a loss of
sales or profits or the theft of sensitive customer information or cause us to incur significant costs, including payments to third parties for damages.

13

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Losses as a result of our owning, leasing and developing real estate may impair our ability to focus on and expand our core business as desired.

As a result of our real estate holdings and leases, we are subject to varying degrees of risk and liability generally incident to the ownership, use and
development of real estate. These risks and liabilities include, among other things:



A
failure to adequately manage these risks and liabilities could adversely affect our revenues, profits and available cash and could have a material adverse effect on our business,
financial condition or results of operations.

Several
portions of our properties are mortgaged to secure payment of indebtedness outstanding under our credit facilities. If we are unable to meet our debt obligations, we could
sustain losses as a result of foreclosures on the properties by our lenders. In addition, if it becomes necessary or desirable for us to dispose of one or more of the mortgaged properties, we might
not be able to obtain a release of the lien on such mortgaged properties without payment of the associated debt. The foreclosure of a mortgage or default of a loan on a property or the inability to
sell a property could adversely affect our business, financial condition or results of operations. These considerations could make it difficult for us to sell properties, even if a sale were in our
best interests.

We
maintain property insurance, difference in conditions insurance, national flood insurance (where applicable), general liability insurance, directors' and officers' insurance and
excess insurance coverage. At leased and mortgaged locations we maintain any of these lines of coverage that we are contractually obligated to maintain. At owned locations we maintain all of these
lines of coverage. We maintain large deductibles and/or large layers of self-insurance on several of these lines of coverage.

We
are subject to federal, state and local laws and regulations relating to zoning, land use, environmental protection, work place safety, public health, beer and wine sales and
pharmaceutical

14

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sales.
A number of states and local jurisdictions regulate the licensing of supermarkets, including beer license grants. In addition, under certain local regulations, we are prohibited from selling
beer in certain of our stores.

We are affected by fluctuating utility and fuel costs.

Fluctuating fuel costs can adversely affect our operating costs for our fleet of tractors and trailers that distribute goods from our warehouses and distribution
facilities to all of our stores and can adversely affect our monthly store utility expenses. We may not be able to recover these rising utility and fuel costs through increased prices charged to our
customers.

We may be held liable for environmental damages with regard to our current and former properties, regardless of the lawfulness of our activities on such properties.

Our operations subject us to various laws and regulations relating to the protection of the environment, including those governing the management and disposal of
hazardous materials and the cleanup of contaminated sites. Under some environmental laws, such as the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, also known as
CERCLA or the Superfund law, and similar state statutes, responsibility for the entire cost of cleanup of a contaminated site can be imposed upon any current or former site owners or operators, or
upon any party who sent waste to the site, regardless of the lawfulness of the original activities that led to the contamination. From time to time we have been named as one of many potentially
responsible parties at Superfund sites, although to date our share of liability has typically been small. We believe we are currently in substantial compliance with applicable environmental
requirements.

However,
future developments such as more aggressive enforcement policies, new laws or discovery of unknown conditions may require expenditures that may have a material adverse effect on
our business and financial condition.

Customer concerns regarding food safety may adversely affect our business.

We could be adversely affected if our customers lose confidence in the quality and safety of certain products in our stores. Negative publicity regarding these
concerns, whether valid or not, may discourage customers from buying our products. Any loss of confidence on the part of our customers would be difficult and costly to reestablish. As such, any issue
regarding the safety of our products could have a substantial and adverse effect on our operations.

Our operating results may be impacted by variability in self-insurance liability estimates.

We are self-insured for workers' compensation and general liability claims up to set retention amounts, after which we maintain excess insurance
coverage. Liabilities are maintained based on independent actuarial estimates of aggregate liability claims incurred and an estimate for incurred but not reported claims. Our insurance accruals
reflect certain actuarial assumptions and management judgments that are made based on factors that are subject to change. Any significant variation in these factors could cause a material change in
our self-insurance liabilities and our operating results.

We have not recently filed periodic reports with the Securities and Exchange Commission.

We did not complete an audit for the periods between February 1, 2003 and April 16, 2005. Additionally, we have not made any required periodic
filings with the SEC for any period since our Annual Report on Form 10-K for the fiscal year ended February 2, 2002, except our Annual Report on Form 10-K
for period ended January 28, 2006 and February 3, 2007 and our most recent quarterly reports on Form 10-Q for all quarters ended during fiscal year 2006. Because of
our failure to make timely periodic filings with the SEC, we could be subject to civil penalties and other administrative

15

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proceedings
by the SEC. In addition, until we complete certain updated filings, it is unlikely that our common shares will be approved for listing on any national securities exchange. The failure of
our common shares to be so listed may adversely affect their liquidity and trading price.

There is no existing trading market for our common stock.

Our common shares are currently quoted on the "Pink Sheets" and there is no assurance that an active trading market for our common shares will develop. We are not
currently applying for a listing on any national securities exchange. Accordingly, no assurance can be given that a holder of common shares will be able to sell such securities in the future or as to
the price at which any such sale would occur. If a trading market were to develop, the liquidity of the market for such securities and the prices at which such securities would trade will depend upon
many factors, including the number of holders, investor expectations and other factors beyond our control. In addition, our common shares have been issued to certain pre-petition creditors
as part of our plan of reorganization. Some of these holders may prefer to liquidate their investment rather than hold it on a long-term basis, which may create an initial imbalance in the
market if and when one were to develop.

The current volatility and uncertainty in global capital markets may have an adverse effect on us.

While our credit facilities were recently extended, the current volatility and uncertainty in the global capital markets could result in either much higher
borrowing costs, difficulties in future refinancing efforts or the need to raise/sell equity at a suboptimal point in time. This credit risk could result in our food distribution customers seeking
other wholesale providers, vendors lowering their credit limits or tightening their payment terms and other hardships on the business. In addition, increased borrowing costs or unfavorable lending
terms could limit our ability to operate and run the business in the most efficient manner possible due to reduced cash availability resulting from the increased interest costs.

The results of the ongoing governmental investigations regarding our promotional allowance practices and policies may have an adverse effect on us.

We are currently a subject of ongoing investigations by the United States Attorney's Office for the Northern District of New York and by the SEC regarding our
promotional allowance practices and policies. These investigations began prior to our emergence from Chapter 11 bankruptcy protection in April 2005. We are cooperating with these investigations
and have produced documents and made our employees available for interviews as requested. At present, we are unable to predict the outcome of either of these investigations. However, an unfavorable
resolution of these investigations could ultimately result in damage claims, fines or penalties to us. Any such claims, fines or penalties could adversely affect our business or results of operations.

On
September 17, 2007, the SEC filed civil fraud charges against our former Chief Marketing Officer and former Vice-President, Non-Perishables Marketing,
alleging that such individuals orchestrated a scheme to inflate our income and other financial results by prematurely recognizing promotional allowances received from vendors from approximately the
second quarter of fiscal year 2001 through at least the fourth quarter of fiscal year 2003. The complaint further alleges that the individuals deceived our accounting personnel to carry out their
fraudulent scheme and aided and abetted violations of the Securities Exchange Act of 1934 and the rules thereunder. In addition, on the same date, the United States Attorney for the Northern District
of New York announced that a federal grand jury had returned an indictment against the abovementioned individuals on related criminal charges. Both the SEC and the United States Attorney indicated
that their investigations are continuing.

16

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ITEM 1B.    UNRESOLVED STAFF COMMENTS

None

ITEM 2.    PROPERTIES

We follow the general industry practice of leasing the majority of our retail supermarket locations. We own 20 and lease 83 of the supermarkets that we operate.
The leased supermarkets are held under leases expiring from 2008 to 2020, excluding option periods. We lease 20 supermarkets which are subleased to independent operators.

We
own two shopping centers that contain company-owned or licensed supermarkets. We also lease distribution centers in Syracuse, New York and DuBois, Pennsylvania; a closed distribution
facility in Jamestown, New York and a bakery plant in Syracuse, New York. In January 2008 the bakery plant in Syracuse was closed and is on a month-to-month lease which is
expected to terminate during July 2008.

Also
see Item 1"Business-Retail Food Business" and "Business-Purchasing and Distribution" for additional information concerning our properties.

ITEM 3.    LEGAL PROCEEDINGS

The United States Attorney for the Northern District of New York and the SEC have been conducting investigations relating to our promotional allowance practices
and policies. Such investigations began prior to our emergence from bankruptcy in April 2005. We have been cooperating with these investigations and have produced documents and made our employees
available for interviews as requested.

On
June 1, 2006, we announced that the Audit Committee of the Board of Directors had completed its internal investigation of our promotional allowance practices. The Audit
Committee hired independent counsel to perform the investigation. The Audit Committee found that we had engaged in certain improper practices principally relating to the premature recognition of
promotional allowances and that these practices had largely ceased by the time of our Chapter 11 filing in May 2003. On February 3, 2006, we announced that we had terminated the
employment of our Chief Marketing Officer and our Vice-President, Non-Perishables Marketing following an interim report to the Audit Committee on the findings of the
investigation.

On
September 17, 2007, the SEC filed civil fraud charges against our former Chief Marketing Officer and former Vice-President, Non-Perishables Marketing
alleging that such individuals orchestrated a scheme to inflate and shift our income and other financial results by prematurely recognizing promotional allowances received from vendors from
approximately the second quarter of fiscal year 2001 through at least the fourth quarter of fiscal year 2003. The complaint further alleges that the individuals deceived our accounting personnel to
carry out their fraudulent scheme and aided and abetted violations of the Securities Exchange Act of 1934 and the rules thereunder. In addition, on the same date, the United States Attorney for the
Northern District of New York announced that a federal grand jury has returned an indictment against the abovementioned individuals on related criminal charges. Both the SEC and the United States
Attorney have indicated that their investigations are continuing.

On
March 12, 2008, we commenced an action in the Supreme Court for the State of New York for the County of Onondaga seeking declaratory judgment to resolve a dispute over the
lease term for commercial property we lease in North Warren, Pennsylvania from our landlord, 1085 Market Street, L.P. We formerly operated a store in this location, which we closed in
August of 2007. We are seeking an order declaring the proper and effective lease termination date to be November 30, 2009, rather than the date asserted by our landlord, June 30, 2017.
We estimate that the increased rent

17

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expense
for the additional lease term asserted by the landlord to be approximately $2,825,000. At present, we are unable to estimate the likelihood of an unfavorable outcome.

In
connection with these matters, we could be subject to damage claims, fines or penalties. At present, we are unable to estimate the likelihood of an unfavorable outcome or the amount
of any damage claims, fines or penalties in the event of an unfavorable outcome and, accordingly, no liability has been recorded for this contingency.

Also
see Item 1"Business-Reorganization" for a description of the consummation of our plan of reorganization and see Note 13 to our consolidated financial
statements, included in this report, regarding legal proceedings relating to the consummation of our plan of reorganization.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted to a vote of security holders during the fiscal year ended February 2, 2008.

18

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PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASE OF EQUITY SECURITIES

Since August 23, 2005, our common shares have been quoted on an unsolicited basis on the Pink Sheets under the symbol "PTFC.PK." All of our common shares
that were outstanding prior to April 13, 2005, the effective date of our plan of reorganization, were cancelled as part of our emergence from Chapter 11 bankruptcy protection.

The
following table sets forth the quarterly high and low bid information for our common shares since August 23, 2005. Such over-the-counter market
quotations reflect inter-dealer prices, without retail markup, mark-down or commission and may not necessarily represent actual transactions.

High

LowQuarter Ended February 2, 2008

$
17.00

$
5.25Quarter Ended November 3, 2007


23.00


15.00Quarter Ended August 4, 2007


24.25


21.00Quarter Ended May 5, 2007


21.00


15.00Quarter Ended February 3, 2007


15.50


11.50Quarter Ended October 28, 2006


17.20


13.00Quarter Ended July 29, 2006


17.00


15.00Quarter Ended April 29, 2006


17.50


14.90Quarter Ended January 28, 2006


17.00


12.00Quarter Ended October 29, 2005


22.25


15.00


Our
common shares were held by 682 stockholders of record on February 2, 2008.

There
have been no repurchases of our common shares during the fiscal year ended February 2, 2008.

We
have not paid a cash dividend to common stockholders since we emerged from bankruptcy and we do not anticipate paying a cash dividend in the foreseeable future.

On
December 13, 2007, we issued 10,000 shares of $.01 par value Series A Convertible Preferred Stock to entities affiliated with three common shareholders for an aggregate
purchase price of $10 million. The preferred shares accrue dividends at a rate of 8% per annum and are convertible into shares of our common shares after December 13, 2008 at a
conversion price of $16.12 per share. See Note 14 to our consolidated financial statements, included in this report, for additional features of the Series A Convertible Preferred Stock.

19

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PERFORMANCE GRAPH

The following are graphs which compare the cumulative total stockholder return of our Common Stock, the cumulative total return of Standard & Poor's 500
Stock Index ("S&P Index") and the cumulative total return of Standard & Poor's Retail Food Index ("S&P Food Index") for (i) the period from February 1, 2005 through
April 15, 2005 and (ii) the period from April 16, 2005 through February 2, 2008. The Company includes two graphs to demonstrate (i) the performance of its former
Common Stock through the date of the completion of the Company's financial restructuring and (ii) the performance of the Common Stock since the completion of the Company's financial
restructuring on April 16, 2005.

GRAPHIC

|             |  | 02/01/03 |     | 01/31/04 |   | 01/29/05 |  | 04/15/05 |    | 04/16/05 |   | 01/28/06 |  | 2/3/2007 |     | 2/2/2008
|------------ |  | -------- | --- | -------- | - | -------- |  | -------- | -- | -------- | - | -------- |  | -------- | --- | --------
|Penn Traffic |  | $        | 100 |          | $ |         |  | $        |   |          | $ |         |  | $        | 100 |         
|S&P 500      |  |          | 100 |          |   | 84       |  |          | 87 |          |   | 85       |  |          | 100 |         
|S&P Food     |  |          | 100 |          |   | 50       |  |          | 47 |          |   | 45       |  |          | 100 |         

---

20

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ITEM 6.    SELECTED FINANCIAL DATA

Consolidated Five-Year Financial Summary

Set forth below is our selected historical consolidated financial data for the five fiscal years ended February 2, 2008. As a result of the consummation of
our plan of reorganization we adopted fresh-start reporting as of April 16, 2005. The accounting periods ended on or prior to April 16, 2005 have been designated "Predecessor Company"
and the periods subsequent to April 16, 2005 have been designated "Successor Company."

In
accordance with the implementation of fresh-start reporting, our assets, liabilities and stockholders' equity have been revalued as of April 16, 2005. In addition, as a result
of the consummation of our plan of reorganization, the amount of our indebtedness was substantially reduced. Accordingly, our financial statements for periods after April 16, 2005 are not
comparable to our financial statements for periods ended on or prior to such date.

The
selected historical consolidated financial data for the 52-week period ended February 2, 2008, the 53-week period ended February 3, 2007, and
the 41-week period ended January 28, 2006, are derived from our consolidated financial statements, which have been audited by Eisner LLP, independent accountants. The
Predecessor Company's selected historical consolidated financial data for the 11-week period ended April 16, 2005, and the 52-week periods ended January 29, 2005,
and January 31, 2004, are derived from our unaudited consolidated financial statements. In addition, the selected historical consolidated financial data for the Successor Company should be read
in conjunction with our consolidated financial statements and related notes included elsewhere herein.

21

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The Penn Traffic Company Selected Financial Data Fiscal Year 2008 10-K

|                                                                                                                                                                                                                                                                                                                                      |                                                           |   |          
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------- | - | ---------
|
|
|
|Revenues                                                                                                                                                                                                                                                                                                                              |                                                           | $ | 1,219,541
|Costs and operating expenses:                                                                                                                                                                                                                                                                                                         |                                                           |   |          
|                                                                                                                                                                                                                                                                                                                                      | Cost of sales                                             |   |          
|                                                                                                                                                                                                                                                                                                                                      | Selling and administrative expenses(2)                    |   |          
|                                                                                                                                                                                                                                                                                                                                      | Loss on store closings                                    |   |          
|                                                                                                                                                                                                                                                                                                                                      | Asset impairment charge(3)                                |   |          
|                                                                                                                                                                                                                                                                                                                                      | Goodwill impairment charge(4)                             |   |          
|                                                                                                                                                                                                                                                                                                                                      |                                                           |   |          
|Operating (loss) income                                                                                                                                                                                                                                                                                                               |                                                           |   | (15,222  
|                                                                                                                                                                                                                                                                                                                                      | Interest expense(5)                                       |   |          
|                                                                                                                                                                                                                                                                                                                                      | Gain on extinguishment of debt(6)                         |   |          
|                                                                                                                                                                                                                                                                                                                                      | Reorganization and other expenses(7)                      |   |          
|                                                                                                                                                                                                                                                                                                                                      |                                                           |   |          
|(Loss) income from continuing operations before income taxes and discontinued operations                                                                                                                                                                                                                                              |                                                           |   | (30,204  
|                                                                                                                                                                                                                                                                                                                                      | Provision for income taxes expense (benefit)(8)           |   |          
|                                                                                                                                                                                                                                                                                                                                      |                                                           |   |          
|(Loss) income from continuing operations                                                                                                                                                                                                                                                                                              |                                                           |   | (30,438  
|                                                                                                                                                                                                                                                                                                                                      | (Loss) income from discontinued operations, net of tax(9) |   |          
|                                                                                                                                                                                                                                                                                                                                      |                                                           |   |          
|Net (loss) income                                                                                                                                                                                                                                                                                                                     |                                                           | $ | (41,708  
|                                                                                                                                                                                                                                                                                                                                      |                                                           |   |          
|Net loss per share basic and diluted(10)                                                                                                                                                                                                                                                                                              |                                                           | $ | (4.92    
|                                                                                                                                                                                                                                                                                                                                      |                                                           |   |          
|No dividends on common stock have been paid during the past five fiscal years. Per share data is not presented for the periods ended on or prior to April 16, 2005 because of a general lack of comparability as a result of fresh start reporting
and our significantly different capital structure after emergence from bankruptcy. |                                                          
|Balance sheet data:                                                                                                                                                                                                                                                                                                                   |                                                           |   |          
|Total assets                                                                                                                                                                                                                                                                                                                          |                                                           |   | 262,449  
|Total debt (including capital leases)                                                                                                                                                                                                                                                                                                 |                                                           |   | 60,817   
|Stockholders' equity (deficit)(11)                                                                                                                                                                                                                                                                                                    |                                                           |   | 69,175   
|Other data:                                                                                                                                                                                                                                                                                                                           |                                                           |   |          
|EBITDA(12)                                                                                                                                                                                                                                                                                                                            |                                                           |   | 8,921    
|Adjusted EBITDA(13)                                                                                                                                                                                                                                                                                                                   |                                                           |   | 28,531   
|Depreciation and amortization                                                                                                                                                                                                                                                                                                         |                                                           |   | 26,242   
|LIFO provision                                                                                                                                                                                                                                                                                                                        |                                                           |   | 2,719    
|Capital expenditures                                                                                                                                                                                                                                                                                                                  |                                                           |   | 7,879    

---

Notes

The
correction resulted in an increase in deferred tax assets attributable to the net operating loss carryforwards and the recording of a related valuation allowance and a reduction in the deferred
tax liability attributable to the increase in the tax basis of long-lived assets. The net effect of the above was a $3.5 million reduction in the net deferred tax liability and a

22

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23

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|                       |                                        |   |        
|---------------------- | -------------------------------------- | - | -------
|
|
|
|Operating (loss)income |                                        | $ | (15,222
|                       | Less reorganization and other expenses |   |        
|                       | Depreciation and
amortization          |   |        
|                       | Asset impairment charge                |   |        
|                       | Goodwill impairment charge             |   |        
|                       | LIFO provision                         |   |        
|                       |                                        |   |        
|EBITDA                 |                                        | $ | 8,921  
|                       |                                        |   |        

|                                     |                                               |   |       
|------------------------------------ | --------------------------------------------- | - | ------
|
|
|EBITDA                               |                                               | $ | 8,921 
|                                     |                                               |   |       
|Reorganization and other expenses:   |                                               |   |       
|                                     | Proposed acquisition that was not consummated |   |       
|                                     | Chapter 11 reorganization costs               |   |       
|                                     |                                               |   |       
|                                     |                                               |   | 5,365 
|                                     |                                               |   |       
|Selling and Administrative expenses: |                                               |   |       
|                                     | Professional fees                             |   |       
|                                     | Closed store reserve                          |   |       
|                                     | Fixed asset policy change                     |   |       
|                                     | SEC legal costs                               |   |       
|                                     | Engagement costs                              |   |       
|                                     | Loss (Gain) on asset disposition              |   |       
|                                     | Severance                                     |   |       
|                                     | Other                                         |   |       
|                                     | Flood loss                                    |   |       
|                                     |                                               |   |       
|                                     |                                               |   | 14,245
|                                     |                                               |   |       
|Adjusted EBITDA                      |                                               | $ | 28,531
|                                     |                                               |   |       

24

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

Management's discussion and analysis of financial condition and results of operations is comprised of the following sections:





Overview

Introduction

Headquartered in Syracuse, New York, we operate or supply more than 200 supermarkets in Upstate New York, Pennsylvania, Vermont and New Hampshire. We operate two
segments. Our retail food business includes corporate-owned stores with the "BiLo", "P&C" and "Quality" trade names, and our wholesale food distribution business supplies independently operated
supermarkets and other wholesale accounts.

Business Strategy

Our primary objective is to improve our long-term financial performance and enhance the in-store experience of our customers. Under the
direction of the new senior team (formed in fiscal year 2007), the organization has focused on rebuilding the core business. This means re-establishing basic disciplines and reemphasizing
and instilling a much stronger profitable growth culture around sales and margin. Thirty-four specific tactical initiatives were identified and combined to form our Initiative Portfolio.Designed to
increase sales and margin, reduce costs, rebuild our infrastructure, and enable future business growth, the Initiative Portfolioincludes the following key components:



25

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Furthermore,
as part of our strategy, we closed 3 underperforming stores during fiscal year 2008 and in January 2008, we closed our Penny Curtiss commercial bakery operation. The bakery
had lost a significant supply contract in August 2007 and contributed less than 4% of our total annual revenue.

Subsequent
to fiscal year ended February 2, 2008, we closed 5 retail stores and have announced the closure of an additional store.

Critical Accounting Policies

Critical accounting policies are those accounting policies that are important to the portrayal of our financial condition and which require management's most
difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our significant accounting policies are
summarized in Note 3 to the consolidated financial statements.

We
believe the following accounting policies to be critical and could result in materially different amounts being reported under different conditions or using different assumptions:

Basis of Presentation

As discussed in Note 2 to our consolidated financial statements, we emerged from Chapter 11 proceedings on April 13, 2005. For financial
reporting purposes, we accounted for the consummation of our plan of reorganization as of the close of business on April 16, 2005. In accordance with SOP 90-7, "Financial
Reporting by Entities in Reorganization under the Bankruptcy Code" we have applied fresh-start reporting as of the close of business on April 16, 2005, which has resulted in significant changes
to the valuation of certain of our assets and liabilities, and to our stockholders' equity. In connection with the adoption of fresh-start reporting, a new entity has been deemed to be created for
financial reporting purposes. For purposes of the discussion of the results of operations, the 52-week period ended February 2, 2008, the 53-week period ended and
February 3, 2007, and 41-week period ended January 28, 2006, are audited and presented for comparison purposes.

Reserve for Store Closures

Reserves for closed stores are recorded in accordance with Statement of Financial Accounting Standard No. 146, "Accounting for Costs Associated with Exit
and Disposal Activities," or SFAS 146. We record a liability for the estimated future cash flows (including future lease commitments, net of estimated cost recoveries) and miscellaneous closing
costs. Future cash flows are estimated based on our knowledge of the market in which the closed stores are located. The estimates of future cash flows are then discounted to the present, based on the
interest rate of our real estate facility term loan. These estimates of discounted future cash flows could be affected by changes in real estate markets, other economic conditions and the interest
rate used in such calculations. Any one-time termination benefits are recognized at the time the benefits are communicated to the employees. Other related costs are recognized in the
period when the liability is incurred.

Impairment of Long-lived Assets

Annually or whenever changes in circumstance indicate that the carrying value of an asset may not be recoverable, we review our long-lived assets for
impairment at the individual store level based on

26

---



estimated
future undiscounted cash flows attributable to such assets. This review is in accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", or SFAS 144.

In
the event such cash flows are not expected to be sufficient to recover the recorded value of the assets, such assets are written down to their fair value. In estimating future cash
flows, management considers historical performance and assesses the effect of projected changes in competition, maturation of new stores and store remodels, merchandising and marketing strategies and
general market conditions. Fair values were determined either by management, based on managements' knowledge of local real estate markets and the value of equipment utilized in the supermarket
industry, or by an independent third party valuation firm. No assurance can be given that the actual future cash flows will be sufficient to recover the carrying value of long-lived
assets. Any reductions in the carrying value resulting from the application of this policy are reflected in the Consolidated Statement of Operations as "Asset impairment charge."

Inventories

Our inventories are stated at the lower of cost or market. We follow the link-chain, dollar-value LIFO method when calculating our LIFO charge or
credit. Vendor allowances, including early payment discounts, volume rebates, and funds for product placement and advertising, are generally recorded as a reduction of inventory cost based on average
inventory turnover rates by product category.

We
take physical counts of inventories throughout the year and record inventory shortages based on our physical counts. Where physical counts are not available we record an allowance for
inventory shortages based on historical shrinkage percentages.

Intangible Assets

We have recorded intangible assets for favorable leases, pharmacy prescription files and computer software. We amortize our favorable leases over the remaining
life of the lease including all favorable options. We amortize both the pharmacy prescription files and the computer software over five years. We consider these assets annually during our
SFAS 144 impairment testing.

Allowance for Doubtful Accounts

We evaluate the collectability of our accounts and notes receivable based on our analysis of past due accounts and historical loss trends. We record an allowance
for doubtful accounts against the receivable based on the amount that we believe is reasonably collectible. It is possible that our estimation process could differ materially from the actual amounts
collected.

Income Taxes

In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement
No. 109," or FIN 48, effective for fiscal years beginning after December 15, 2006. FIN 48 clarifies the accounting for uncertainty in tax positions. FIN 48 requires
financial statement recognition of the impact of a tax position when it is more likely than not, based on its technical merits, that the position will be sustained upon examination. In addition, we
are required to estimate our income taxes in each of the jurisdictions in which we operate. We adopted FIN 48 at the beginning of fiscal year 2008. There was no material impact on the financial
statements upon the adoption of FIN 48 and therefore we did not make any adjustment to opening retained earnings as a result of the implementation. See Note 10 to the Consolidated
Financial Statement for further information about FIN 48. In addition, various tax authorities audit our income tax returns. Although management believes these estimates are reasonable the
actual results could differ resulting in a material effect on our consolidated financial statements.

27

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Self-Insurance Liability

We are primarily self-insured for workers compensation and general liability. Self-insurance liabilities are primarily calculated based on
claims filed and an estimate of claims incurred but not yet reported. Workers compensation and general liability reserves are determined based on historical loss history, industry development factors
and trends related to actual payments. We have limited our total exposure related to self-insured liability claims incurred by maintaining stop-loss coverage with third party
insurers, as defined in the applicable insurance policies, for claims incurred in excess of established stop-loss levels and policy deductibles. Projection of losses concerning these
liabilities is subject to a high degree of variability due to factors such as claim settlement patterns, litigation trends, legal interpretations and future levels of health care. Should a greater
amount of claims occur compared to what was estimated or costs of health care increase beyond what was anticipated, reserves recorded may not be adequate and additional expense could be required in
the consolidated financial statements.

Vendor Allowances

Vendor allowances relating to our purchasing and merchandising functions are recorded as a reduction of cost of sales as they are earned based on each specific
agreement and its associated event date. Our inventory is capitalized for these vendor allowances following EITF 02-16 (Accounting by a Customer for Certain Consideration Received
from a Vendor) based on the allowance event date and the inventory turns for the specific department. These vendor allowances come in many forms: promotional allowances tied to weekly advertised items
which are recognized when the inventory is sold, warehouse slotting allowances which are recorded when the item has been distributed to the stores and are available for sale to the consumer,
long-term contractual agreements such as exclusivity programs or signing bonuses which are recognized on a straight-line basis over the life of the agreement, volume incentive
agreements which are recognized when the incentive is deemed probable and estimable based on purchase or sales targets, and allowances for running items in our weekly ad which are recognized at the
end of the ad week. Also, cash discounts for prompt payments of invoices are also recorded as a reduction in cost of sales when the payment is made to the vendor.

Pension Accounting

We currently are sole sponsors of four tax-qualified defined benefit pension plans. In accordance with the provisions of SOP 90-1,
upon emergence from bankruptcy, we recorded the underfunded status of each of the defined benefit plans as a liability on our balance sheet. As of January 28, 2006, we adopted the provisions of
Financial Accounting Standard No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans," or SFAS 158, and in accordance therewith reflected the
underfunded status of the plans in our balance sheet at such date. Prospectively, we have adjusted the liability to reflect the current funded status of the plan. Any gains or losses that arise during
the period but are not recognized as components of net periodic benefit cost will be recognized as a component of other comprehensive income. The adoption of SFAS 158 resulted in the
recognition of $8.3 million of unrecognized actuarial gains which arose during the period ended January 28, 2006, and a corresponding reduction in the defined benefit pension plan
liability at January 28, 2006. Such unrecognized gains, net of deferred taxes of $3.4 million, were credited to accumulated other comprehensive income in the amount of
$4.9 million. The adoption of SFAS 158 had no effect on our consolidated statement of operations for the period ended January 28, 2006.

During
the fiscal years ended February 2, 2008, and February 3, 2007, we recorded $13.2 million and $3.2 million of net unrecognized actuarial gains which
arose during the period and a corresponding reduction in the defined benefit pension plan liability at such date. Unrecognized gains, net of deferred taxes of $4.8 million and
$1.3 million, were recognized as an element of comprehensive loss and credited to accumulated other comprehensive income in the amount of $8.5 million and $1.9 million. See
Note 12 to the Consolidated Financial Statements for further discussion on pensions.

28

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Pension
expense is calculated based upon a number of actuarial assumptions, including an expected long-term rate of return on our pension plans' assets, a discount rate, and
an assumed rate of compensation increase. After consultation with our actuaries, we determined these actuarial assumptions at our fiscal year end to calculate liability information as of that date and
pension expense for the following year. The discount rate assumption is determined based on the internal rate of return for Citigroup Pension Liability Index with maturities that are consistent with
projected future plan cash flows. The assumed discount rate used to determine pension expense for the period ended January 28, 2006 and February 3, 2007, was 5.48% and 5.68%
respectively. The assumed discount rate at February 2, 2008 of 5.97% was used to determine pension expense for fiscal year 2008.

The
assets of the plans consist of approximately 51%, 57% and 54% equity securities; 38%, 33% and 44% fixed income securities; and 11%, 10% and 2% cash at February 2, 2008,
February 3, 2007, and January 28, 2006, respectively. The expected long-term rate of return on plan assets is based on historical and projected average rates of return for
current and planned asset classes in the plan investment portfolio. At February 2, 2008, February 3, 2007, and January 28, 2006, the expected
long-term rate of return on plan assets to be used in the determination of pension expense was 7.5%.

Significant
differences between our actual experience or significant changes in our assumptions may materially affect the pension obligations and future expense. Additionally, changes in
the fair value of plan assets at year end may materially affect our future pension expense. The fair value of plan assets can vary significantly from year to year.

Results of Operations

Overview

Fiscal year 2008 was characterized as a year of rebuilding. While much work remains to be done, our fiscal year 2008 financial results overall demonstrate our
progress toward stabilizing the business, improving gross margins, enhancing the in-store customer experience, and investing in the most promising locations in our core store portfolio.
These results also reflect substantial non-recurring expenses and a smaller corporate-owned store portfolio.

Financial Results

The following table sets forth certain Consolidated Statement of Operations components expressed as percentages of revenues for the 52-week period
ended February 2, 2008, the 53-week period ended February 3, 2007, and the 41-week period ended January 28, 2006.

(Audited)
52-Weeks
Ended
February 2,
2008

(Audited)
Restated
53-Weeks
Ended
February 3,
2007

(Audited)
Restated
41-Weeks
Ended
January 28,
2006Revenues

100.0
%
100.0
%
100.0
%Gross profit(1)

26.4

25.4

25.9Selling and administrative expenses

27.4

26.5

25.3Loss on store and distribution center closing

0.2

0.2

0.1Asset impairment charge

0.0

0.0

0.0Operating (loss) income

(1.2
)
(1.3
)
0.5Interest expense

0.8

0.7

0.8Reorganization and other expenses

0.4

0.1

0.1Loss from continuing operations, before income taxes

(2.5
)
(2.1
)
(0.5
)Income tax expense

0.0

0.0

0.0Loss from continuing operations

(2.5
)
(2.1
)
(0.5
)Loss from discontinued operations

(0.9
)
(0.0
)
(0.0
)Net loss

(3.4
)
(2.2
)
(0.5
)


---

29

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Fiscal Year 2008 (the audited 52-week period ended February 2, 2008) and Fiscal Year 2007 (the audited
53-week period ended February 3, 2007)



Revenues for the 52-week period ended February 2, 2008 decreased to $1.22 billion from $1.29 billion in the 53-week
period ended February 3, 2007. The $0.07 billion decrease in revenues was mainly attributable to a reduction in the number of our corporate-owned stores, a slight decline in same store
sales and a decrease in wholesale food distribution revenues.

The
number of Penn Traffic's corporate-owned stores declined to 103 stores at February 2, 2008, from 106 at February 3, 2007. Same store sales for the 52-week
period ended February 2, 2008 decreased 0.3% compared to the 52-week period ended February 3, 2007.

Wholesale
food distribution revenues for the 52-week period ended February 2, 2008 decreased 3.4% to $210.0 million or 17.2% of total revenues; from
$217.3 million or 16.8% of total revenues for the 53-week period ended February 3, 2007. The fiscal year 2008 decrease in the wholesale food distribution revenues of
$7.3 million was attributable to the loss of certain wholesale customers.



Gross profit was $322.0 million or 26.4% of revenues for the 52-week period ended February 2, 2008, compared to $328.8 million or
25.4% of revenues, for the 53-week period ended February 3, 2007. The increase is the result of increased sales of higher margin private label and signature products, the
implementation of a new price optimization system and improved operational disciplines to reduce shrinkage, partially offset by an increase in distribution costs.



Selling and administrative expenses for the 52-week period ended February 2, 2008, were $334.6 million or 27.4% of revenues, compared to
$342.8 million or 26.5% of revenues, for the 53-week period ended February 3, 2007. The decrease in selling and administrative expenses was principally due to a
$16.0 million decrease in payroll and payroll related expenses, partially offset by an increase of $3.0 million in professional fees and $3.0 million in outside services. The
increase in selling and administrative expenses as a percentage of revenue is due to a $1.6 million aggregate increase in non-recurring expenses and other expenses.



Depreciation and amortization expense was $26.2 million or 2.2% of revenues, for the 52-week period ended February 2, 2008, compared to
$25.9 million or 2.0% of revenues, for the 53-week period ended February 3, 2007. The decrease in depreciation and
amortization in the 52-week period was primarily due to disposals of depreciable assets in fiscal year 2008 of approximately $2.9 million.



Loss on store closings for the 52-week period ended February 2, 2008 was $2.0 million or 0.2% of revenues, compared to loss on store
closings of $2.7 million or 0.2% of revenues for the 53-week period ended February 3, 2007, as we closed 3 retail stores and one distribution center during the
52-week period ended February 2, 2008, and 6 retail stores during the 53-week period ended February 3, 2007.



Operating loss for the 52-week period ended February 2, 2008 was $15.2 million or 1.2% of revenues, compared to the operating loss of
$16.8 million or 1.3% of revenues, for the 53-week period ended February 3, 2007.

30

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Interest expense for the 52-week period ended February 2, 2008 was $9.6 million or 0.8% of revenues, compared to $9.4 million or
0.7% of revenues, for the 53-week period ended February 3, 2007. The $0.2 million increase in interest expense for the 52-week period was due to an increase in
our average borrowings.



Reorganization expense for the 52-week period ended February 2, 2008 was $5.4 million or 0.4% of revenues, compared to reorganization
expense of $1.0 million or 0.1% for the 53-week period ended February 3, 2007. The $4.4 million increase was primarily attributable to $4.8 million on
evaluation of transformational alternatives, partially offset by a $0.4 million decrease in reorganization costs.



Loss from continuing operations for the 52-week period ended February 2, 2008 was $30.4 million or 2.5% of revenues, compared to a loss
from continuing operations of $27.4 million or 2.1% of revenue during the 53-week period ended February 3, 2007. The $3.0 million increase in loss from continuing
operations is primarily due to increases of $4.4 million in reorganization expense for fiscal year 2008, partially offset by a decrease in selling and administrative expense.



Loss from discontinued operations for the 52-week period ended February 2, 2008 was $11.3 million or 0.9% of revenues, compared to a
loss from discontinued operations of $0.6 million or 0.0% of revenue during the 53-week period ended February 3, 2007. The increase in the loss from discontinued operations
in the 52-week period is primarily due to a $8.2 million one time loss related to the closure of Penny Curtiss bakery and $1.3 million loss incurred from bakery operations.



Net loss for the 52-week period ended February 2, 2008 was $41.7 million or 3.4% of revenues, compared to a net loss of
$28.0 million or 2.2% of revenue during the 53-week period ended February 3, 2007. The increase in net loss of $13.7 million in the 52-week period is
primarily attributable to the loss associated with the closure of Penny Curtiss bakery.

Fiscal Year 2007 (the audited 53-week period ended February 3, 2007) and the Fiscal Period 2006 (the audited 41-week
period ended January 28, 2006)



Revenues for the 53-week period ended February 3, 2007 increased 28.9% to $1.3 billion from $1.0 billion in the
41-week period ended January 28, 2006. The increase in revenues was mainly attributable to the difference in the number of weeks in each period. For the unaudited
52-week period ended January 28, 2006, revenues were approximately $1.3 billion.

Same
store sales for the 52-week period ended January 27, 2007 decreased 1.7% compared to the unaudited 52-week period ended January 28, 2006.

Wholesale
food distribution revenues for the 53-week period ended February 3, 2007 increased 26.4% to $217.3 million or 16.8% of total revenues; from
$171.9 million or 17.1% of total revenues for the 41-week period ended January 28, 2006. The fiscal year 2007 increase in the wholesale food distribution revenues was
attributable to the difference in the number of weeks in each period. During the unaudited 52-week period ended January 28, 2006, our wholesale food distribution revenues would have
been approximately $216.8 million or 16.9% of revenues.

31

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Gross profit was $328.8 million or 25.4% of revenues for the 53-week period ended February 3, 2007, compared to $259.5 million or
25.9% of revenues, for the 41-week period ended January 28, 2006. The decrease in gross profit as a percent of revenues in the 53-week period was primarily due to higher
product costing.



Selling and administrative expenses for the 53-week period ended February 3, 2007, were $342.8 million or 26.5% of revenues, compared to
$254.4 million or 25.3% of revenues, for the 41-week period ended January 28, 2006. The increase in selling and administrative expenses as a percentage of revenues was
principally due to non-recurring expenses, totaling $12.7 million, which consisted principally of $4.1 million of SEC investigation related legal fees, $1.6 million in
severance payments to prior management and $1.4 million of severance for the employees of the closed Jamestown facility, $1.5 million in professional fees, and $0.8 million of
costs associated with obtaining new management.



Depreciation and amortization expense was $25.9 million or 2.0% of revenues, for the 53-week period ended February 3, 2007, compared to
$18.1 million or 1.8% of revenues, for the 41-week period ended January 28, 2006. The increase in depreciation and amortization as a percent of revenues in the
53-week period was primarily due to depreciation of additions in fiscal year 2007 of approximately $22.9 million.



Loss on store closing for the 53-week period ended February 3, 2007, was $2.7 million or 0.2% of revenues compared to $0.5 million or 0.1% of
revenues, for the 41-week period January 28, 2006. The increase in loss on store closing in the 53-week period ended February 3, 2007 is primarily due to the closing of 3 retail stores
and our Jamestown distribution center.



Operating loss for the 53-week period ended February 3, 2007 was $16.8 million or 1.3% of revenues, compared to the operating income of
$4.6 million or 0.5% of revenues, for the 41-week period ended January 28, 2006.



Interest expense for the 53-week period ended February 3, 2007 was $9.4 million or 0.7% of revenues, compared to $8.3 million or
0.8% of revenues, for the 41-week period ended January 28, 2006. The decrease in interest expense as a percentage of revenues for the 53-week period was due to a
decrease in our average borrowings.



During the 53-week period ended February 3, 2007 we recorded reorganization expense totaling $1.0 million or 0.1% of revenues; and for
the 41-week period ended January 28, 2006, we recorded reorganization expense totaling $1.0 million or 0.1% of revenues. These expenses were primarily professional fees.

32

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Loss from continuing operations for the 53-week period ended February 3, 2007 was $27.4 million or 2.1% of revenues, compared to a loss
from continuing operations of $4.9 million or 0.5% of revenues during the 41-week period ended January 28, 2006. The increase in net loss as a percentage of revenues in the
53-week period is primarily due to an increase in depreciation and amortization and selling and administrative expenses from the reasons described above.



The loss from the discontinued operations for the 53-week period ended February 3, 2007 was $0.6 million and the gain for the
41-week period ended January 28, 2006 was $0.2 million. This is attributable to the discontinued bakery operations.



Net loss for the 53-week period ended February 3, 2007 was $28.0 million or 2.2% of revenues, compared to a net loss of
$4.7 million or 0.5% of revenues during the 41-week period ended January 28, 2006. The increase in net loss as a percentage of revenues in the 53-week period is
primarily due to an $8.4 million increase in depreciation and amortization and the recording of $11.4 million in non-recurring expenses during fiscal year 2007.

Liquidity and Capital Resources

Overview

As of February 2, 2008, we had cash and cash equivalents of $20.9 million and total debt outstanding of $50.5 million. In addition, we have
the ability to draw down on our recently extended revolving credit facilities. Our borrowing capability provides the necessary flexibility to stabilize the business, invest in core retail store
portfolio, improve our customers' shopping experience, and improve our overall offering in the markets served.

Financial Results



Cash used in operating activities for the 52-week period ended February 2, 2008 was $3.1 million, as compared to cash provided by
operating activities of $12.6 million for the 53-week period ended February 3, 2007. For the 52-week period ended February 2, 2008, we incurred a net loss
of $41.7 million, adjustments for non cash items of $36.4 million, and a net adjustment in operating net assets of $2.3 million. For the 53-week period ended
February 3, 2007, we incurred a net loss of $28.0 million, adjustments for non cash items of $28.9 million, and a net adjustment in operating net assets of $11.7 million.
For the 41-week period ended January 28, 2006, there was a net cash provided by operating activities of $4.7 million including a net loss of $4.7 million, adjustments
for non cash items totaling $19.3 million, and a net adjustment in operating net assets of $9.9 million.



Cash used in investing activities for the 52-week period ended February 2, 2008 and the 53-week period ended February 3,
2007 were $6.8 million and $14.2 million, respectively. The $7.4 million reduction was due to lower capital expenditures ($7.9 million as compared to $22.9 million)
partially offset by a decline in proceeds from sales of fixed assets ($1.1 million as compared to $10.3 million).

For
the 41-week period ended January 28, 2006, net cash used in investing activities was $19.9 and included capital expenditure of $20.5 million.

33

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Cash provided by financing activities for the 52-week period ended February 2, 2008 and the 53-week period ended February 3,
2007 were $6.1 million and $13.8 million, respectively. We raised $9.8 million from the issuance of preferred stock and repaid $1.9 million under our credit facility for
the 52-week period ended February 2, 2008. For the 53-week period ended February 3, 2007, we had net borrowings of $15.5 million.

For
the 41-week period ended January 28, 2006, net cash used in financing was $1.6 million.



On April 13, 2005, upon emergence from Chapter 11 proceedings, we entered into a revolving credit and term loan facility with a group of financial
institutions providing for a $130.0 million revolving credit facility and a $6.0 million term loan. Also on April 13, 2005, we entered into a supplemental real estate credit
facility with another group of lenders, providing for term loan borrowings of up to $28.0 million.
Availability under both credit facilities is dependent on levels of accounts receivable, inventory and certain other assets. Interest rates on borrowings under the revolving credit facility vary
depending upon the amount of availability. At February 2, 2008, outstanding borrowings under both facilities aggregated $46.6 million. At such date, availability in excess of outstanding
borrowings and letters of credit was approximately $36.3 million. Borrowings under the revolving credit and term loan facility are secured by substantially all of our assets, subject to first
liens on certain properties by other lenders. Borrowings under the real estate facility are secured by a first lien on substantially all of our leasehold interests and a second lien on substantially
all of our remaining assets. During fiscal year 2008, we had stand-by letters of credit of approximately $48.4 million ($45.0 million at year end). Many of these
stand-by letters of credit were required upon emergence from bankruptcy and as a result of our inability to file financial statements.

Provisions
of both credit facilities, as amended, among other things, require the maintenance of certain financial covenants (when availability under the credit facilities is less than
$27.5 million for four consecutive days or less than $25.0 million for any one day), and limit the amount of capital expenditures, our assumption of additional debt and our payment of
dividends. We were not subject to compliance with the financial covenants during fiscal year 2008 because the amount availability for borrowing had not dropped to these levels. However, had such an
event occurred, we would not have been in compliance with the financial covenants and would have been in default under the terms of the loan agreement at February 2, 2008. Pursuant to our plan
of reorganization, we entered into a collateral trust agreement with the collateral trustee in connection with the secured trade lien program. The secured trade lien program is with certain of our
vendors and allows us to maintain trade terms. This program has been extended until April 13, 2009.

On
December 26, 2006, August 1, 2007 and January 30, 2008, both the revolving credit and term loan facility and the supplemental real estate credit facility were
amended to provide us with additional liquidity by lowering the excess availability thresholds for purposes of determining compliance with certain financial covenants in the credit facilities and to
permit the disposal of assets in connection with the closing of certain stores. Furthermore, subsequent to fiscal year end, on March 27, 2008, both facilities were extended to April 13,
2009 with provisions to extend to April 13, 2010. In order to extend the supplemental real estate credit facility agreement to April 13, 2010, we will be required to pay an additional
extension fee based on its outstanding borrowings as of April 13, 2009.

We
also have borrowings under mortgages secured by the related properties.

Off-Balance Sheet Arrangements

We do not have any material off-balance sheet arrangements.

34

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Contractual Obligations and Commitments

The table below presents our significant contractual obligations at February 2, 2008 (in thousands of dollars):

|Commitment expires
During the
Fiscal Year Ending |  | Long-term
Debt(1) |        | Capital Lease
Obligations(2)(3) |   | Operating
Leases(3) |  | Other
Long-term
Liabilities(4) |        | Total
Contractual
Cash
Obligations
|------------------------------------------------ |  | ----------------- | ------ | ------------------------------- | - | ------------------- |  | ------------------------------ | ------ | ----------------------------------
|January 31, 2009                                 |  | $                 | 278    |                                 | $ | 2,510               |  | $                              | 17,454 |                                   
|January 30, 2010                                 |  |                   | 46,896 |                                 |   | 2,491               |  |                                | 15,780 |                                   
|January 29, 2011                                 |  |                   | 259    |                                 |   | 1,926               |  |                                | 14,974 |                                   
|January 28, 2012                                 |  |                   | 247    |                                 |   | 1,482               |  |                                | 12,928 |                                   
|February 2, 2013                                 |  |                   | 243    |                                 |   | 1,142               |  |                                | 11,238 |                                   
|Thereafter                                       |  |                   | 2,564  |                                 |   | 10,019              |  |                                | 48,464 |                                   

---

We
have also made certain contractual commitments that extend beyond February 2, 2008 as shown below (in thousands of dollars):

Stand-by
Letters of
Credit(1)

Surety
Bonds(2)Total amounts committed

$
47,024

$
7,495




Subsequently
our letters of credit have been reduced by $7.0 million due to a reduction requirement for $5.0 million for PACA and $2.0 million workers compensation
letter of credit.

Impact of New Accounting Pronouncements

In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement
No. 109," or FIN 48, effective for fiscal years beginning after December 15, 2006. FIN 48 clarifies the accounting for uncertainty in tax positions. FIN 48 requires
financial statement recognition of the impact of a tax position when it is more likely than not, based on its technical merits, that the position will be sustained upon examination. We adopted the
provision of FIN 48 on February 3, 2007. There was no material impact on the financial statements upon the adoption of FIN 48.

In
June 2006, the FASB ratified Emerging Issues Task Force Issue No. 06-3, "How Sales Taxes Collected From Customers and Remitted to Governmental Authorities Should Be
Presented in the Income Statement (that is, Gross Versus Net Presentation)", or EITF 06-3, effective for periods beginning December 15, 2006. EITF 06-3
allows taxes assessed by various governmental authorities that

35

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are
directly imposed on revenue-producing transactions between a seller and a customer, such as sales and some excise taxes, to be presented on either a gross or net basis. We record sales net of
applicable sales taxes and intend to continue such policy. Therefore, the adoption of EITF 06-3 will have no effect on the presentation of our revenues and expenses.

In
September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, "Fair Value Measurement," or SFAS 157, effective for fiscal years beginning
November 15, 2007. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value
measurements. SFAS 157 does not require any new fair value measurements. Management expects that the adoption of this statement will not have a material effect on our consolidated financial
statements.

In
February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities"Including
an amendment of FASB Statement No. 115, or SFAS 159, effective for fiscal years ending after November 15, 2007. SFAS 159 permits an entity to elect fair value as the
initial and subsequent measurement attribute for many financial assets and liabilities. Entities electing the fair value option would be required to recognize changes in fair value in earnings and to
distinguish on the face of the statement of financial position the fair value of assets and liabilities for which the fair value option has been elected and similar assets and liabilities measured
using another measurement attribute. The adjustment to reflect the difference between the fair value and the carrying amount would be accounted for as a cumulative-effect adjustment to retained
earnings as of the date of initial adoption. Management expects that the adoption of this statement will not have a material effect on our consolidated financial statements.

Forward-Looking Statements

Statements included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" which are not historical in nature are intended to
be, and are hereby identified as "Forward-Looking Statements" for purposes of the safe harbor provided by Section 27A of the Securities Act and Section 21E of the 1934 Act, as amended by
Public Law 104-67.

Forward-looking
statements regarding management's present plans or expectations involve risks and uncertainties and changing economic or competitive conditions, as well as the
negotiation of agreements with third parties, which would cause results to differ from present plans or expectations,
and such difference could be material. Readers should consider that such statements speak only as of the date hereof.

Certain Trends and Uncertainties

Our future results could differ materially from our forward-looking statements. Factors that could cause or contribute to such differences include, but are not
limited to those discussed in this document. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those predicted. Also, please see Risk
Factors in Part I, Item A.

36

---





ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Our financial results are subject to risk from interest rate changes on debt that has variable interest rates. Total variable rate debt outstanding under our loan
agreements at February 2, 2008 was $46.6 million with a weighted average interest rate of 11.23%. A 1% change in interest rates would impact pre-tax income by
$0.5 million based on the debt outstanding at February 2, 2008. In addition to the variable rate debt, we had $3.9 million of fixed rate debt outstanding at February 2,
2008, with a weighted average interest rate of 6.66%. We view the fixed rate debt as a partial hedge against interest rate fluctuations which should minimize the potential impact on earnings from
interest rate changes.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

|Index to Consolidated Financial Statements                                                                                                                                                          |                                    | Page
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------- | ----
|Consolidated Financial Statements as of February 2, 2008 and February 3, 2007 and for the years ended February 2, 2008 and February 3, 2007 and the period from April 17, 2005 to
January 28, 2006: |                                    |     
|Report of Independent Registered Public Accounting Firm                                                                                                                                             |                                    | 38  
|Consolidated Financial Statements:                                                                                                                                                                  |                                    |     
|                                                                                                                                                                                                    | Balance Sheets                     |     
|                                                                                                                                                                                                    | Statements of Operations           |     
|                                                                                                                                                                                                    | Statements of Cash Flows           |     
|                                                                                                                                                                                                    | Statements of Stockholders' Equity |     
|                                                                                                                                                                                                    | Notes to Financial Statements      |     

37

---





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board
of Directors
The Penn Traffic Company
Syracuse, New York

We
have audited the accompanying consolidated balance sheets of The Penn Traffic Company (the "Company") as of February 2, 2008 and February 3, 2007, and the related
consolidated statements of operations, cash flows and stockholders' equity for the years then ended and for the period from April 17, 2005 (effective date of plan of reorganization for
accounting purposes) to January 28, 2006. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We
conducted our audits in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Penn Traffic Company as of
February 2, 2008 and February 3, 2007, and the consolidated results of its operations and its cash flows for the years then ended and for the period from April 17, 2005 to
January 28, 2006, in conformity with accounting principles generally accepted in the United States of America.

As
discussed in Note 4 to the consolidated financial statements, the 2007 and 2006 financial statements have been restated to correct a misstatement.

As
discussed in Note 2 to the consolidated financial statements, on May 30, 2003, the Company filed for voluntary bankruptcy protection and reorganization under
Chapter 11 of the United States Bankruptcy Code. On April 13, 2005, the Company's amended plan of reorganization became effective and the Company emerged from bankruptcy and effective
April 16, 2005 adopted fresh-start reporting which results in a new reporting entity and a new basis of accounting.

We
also have audited, in accordance with the standards of Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of
February 2, 2008, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated April 11, 2008 expressed an adverse opinion thereon.

/s/
Eisner LLP

New
York, New York
April 11, 2008

38

---





The Penn Traffic Company        Consolidated Balance Sheets        (In thousands, except share and per share data)

|                                                                                                        |  | February 2,
2008 |         | Restated
February 3,
2007 |  
|------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | ------------------------- | -
|
|ASSETS                                                                                                  |  |                  |         |                           |  
|Current assets:                                                                                         |  |                  |         |                           |  
|Cash and cash equivalents                                                                               |  | $                | 20,916  |                           | $
|Accounts and notes receivable (less allowance for doubtful accounts of $5,690 and $3,736, respectively) |  |                  | 37,513  |                           |  
|Inventories                                                                                             |  |                  | 89,208  |                           |  
|Prepaid expenses and other current assets                                                               |  |                  | 7,307   |                           |  
|                                                                                                        |  |                  |         |                           |  
|Total current assets                                                                                    |  |                  | 154,944 |                           |  
|                                                                                                        |  |                  |         |                           |  
|Capital leases:                                                                                         |  |                  |         |                           |  
|Capital leases                                                                                          |  |                  | 11,364  |                           |  
|Less: Accumulated amortization                                                                          |  |                  | (3,096  | )                         |  
|                                                                                                        |  |                  |         |                           |  
|Capital leases, net                                                                                     |  |                  | 8,268   |                           |  
|                                                                                                        |  |                  |         |                           |  
|Fixed assets:                                                                                           |  |                  |         |                           |  
|Land                                                                                                    |  |                  | 9,313   |                           |  
|Buildings                                                                                               |  |                  | 13,273  |                           |  
|Equipment and furniture                                                                                 |  |                  | 96,652  |                           |  
|Vehicles                                                                                                |  |                  | 7,984   |                           |  
|Leasehold improvements                                                                                  |  |                  | 10,246  |                           |  
|                                                                                                        |  |                  |         |                           |  
|Total fixed assets                                                                                      |  |                  | 137,468 |                           |  
|Less: Accumulated depreciation                                                                          |  |                  | (59,066 | )                         |  
|                                                                                                        |  |                  |         |                           |  
|Fixed assets, net                                                                                       |  |                  | 78,402  |                           |  
|                                                                                                        |  |                  |         |                           |  
|Other assets:                                                                                           |  |                  |         |                           |  
|Intangible assets, net (Note 6)                                                                         |  |                  | 15,397  |                           |  
|Deferred income taxes (Note 10)                                                                         |  |                  | 2,440   |                           |  
|Other assets                                                                                            |  |                  | 2,998   |                           |  
|                                                                                                        |  |                  |         |                           |  
|Total other assets                                                                                      |  |                  | 20,835  |                           |  
|                                                                                                        |  |                  |         |                           |  
|Total assets                                                                                            |  | $                | 262,449 |                           | $
|                                                                                                        |  |                  |         |                           |  

The
accompanying notes are an integral part of these statements.

39

---



The Penn Traffic Company

Consolidated Balance Sheets (Continued)

(In thousands, except share and per share data)

|                                                                                                                                   |  |   |         |   |  
|---------------------------------------------------------------------------------------------------------------------------------- |  | - | ------- | - | -
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                               |  |   |         |   |  
|Current liabilities:                                                                                                               |  |   |         |   |  
|Current portion of obligations under capital leases (Note 5)                                                                       |  | $ | 1,368   |   | $
|Current maturities of long-term debt (Note 7)                                                                                      |  |   | 278     |   |  
|Accounts payable                                                                                                                   |  |   | 34,178  |   |  
|Other current liabilities (Note 8)                                                                                                 |  |   | 47,060  |   |  
|Accrued interest expense                                                                                                           |  |   | 176     |   |  
|Deferred income taxes (Note 10)                                                                                                    |  |   | 11,485  |   |  
|Liabilities subject to compromise (Note 9)                                                                                         |  |   | 2,516   |   |  
|                                                                                                                                   |  |   |         |   |  
|Total current liabilities                                                                                                          |  |   | 97,061  |   |  
|                                                                                                                                   |  |   |         |   |  
|Non-current liabilities:                                                                                                           |  |   |         |   |  
|Obligations under capital leases (Note 5)                                                                                          |  |   | 8,962   |   |  
|Long-term debt (Note 7)                                                                                                            |  |   | 50,209  |   |  
|Defined benefit pension plan liability (Note 12)                                                                                   |  |   | 6,326   |   |  
|Other non-current liabilities (Note 8)                                                                                             |  |   | 30,716  |   |  
|                                                                                                                                   |  |   |         |   |  
|Total noncurrent liabilities                                                                                                       |  |   | 96,213  |   |  
|                                                                                                                                   |  |   |         |   |  
|Total liabilities                                                                                                                  |  |   | 193,274 |   |  
|                                                                                                                                   |  |   |         |   |  
|Commitments and contingencies (Notes 5, 7, 12 and 13)                                                                              |  |   |         |   |  
|Stockholders' equity:                                                                                                              |  |   |         |   |  
|Preferred stockauthorized 1,000,000 shares, $.01 par value; 10,000 shares issued in 2008 and none in 2007                         |  |   | 100     |   |  
|Common stockauthorized 15,000,000 shares, $.01 par value; shares issued and to be issued, 8,519,095 in 2008 and 8,498,752 in 2007 |  |   | 85      |   |  
|Capital in excess of par value                                                                                                     |  |   | 128,149 |   |  
|Deficit                                                                                                                            |  |   | (74,356 | ) |  
|Accumulated other comprehensive income                                                                                             |  |   | 15,197  |   |  
|                                                                                                                                   |  |   |         |   |  
|Total stockholders' equity                                                                                                         |  |   | 69,175  |   |  
|                                                                                                                                   |  |   |         |   |  
|Total liabilities and stockholders' equity                                                                                         |  | $ | 262,449 |   | $
|                                                                                                                                   |  |   |         |   |  

The
accompanying notes are an integral part of these statements.

40

---





The Penn Traffic Company        Consolidated Statements of Operations        (In thousands, except share and per share data)

|                                                      |                                                                                                             | Year Ended
February 2,
2008 |           | Restated
Year Ended
February 3,
2007 |   | Restated
Period from
April 17, 2005 to
January 28,
2006 |        
|----------------------------------------------------- | ----------------------------------------------------------------------------------------------------------- | --------------------------- | --------- | ------------------------------------ | - | ------------------------------------------------------- | -------
|
|Revenues                                              |                                                                                                             | $                           | 1,219,541 |                                      | $ | 1,293,861                                               |        
|                                                      |                                                                                                             |                             |           |                                      |   |                                                         |        
|Cost and operating expenses                           |                                                                                                             |                             |           |                                      |   |                                                         |        
|                                                      | Cost of sales                                                                                               |                             |           | 897,546                              |   |                                                         | 965,095
|                                                      | Selling and administrative expenses                                                                         |                             |           | 334,641                              |   |                                                         | 342,824
|                                                      | Loss on store and distribution center closings                                                              |                             |           | 2,029                                |   |                                                         | 2,700  
|                                                      | Asset impairment                                                                                            |                             |           | 547                                  |   |                                                         |       
|                                                      |                                                                                                             |                             |           |                                      |   |                                                         |        
|                                                      |                                                                                                             |                             | 1,234,763 |                                      |   | 1,310,619                                               |        
|                                                      |                                                                                                             |                             |           |                                      |   |                                                         |        
|Operating (loss) income                               |                                                                                                             |                             | (15,222   | )                                    |   | (16,758                                                 | )      
|                                                      | Interest expense                                                                                            |                             |           | 9,617                                |   |                                                         | 9,357  
|                                                      | Reorganization and other expenses                                                                           |                             |           | 5,365                                |   |                                                         | 1,020  
|                                                      |                                                                                                             |                             |           |                                      |   |                                                         |        
|Loss from continuing operations before income taxes   |                                                                                                             |                             | (30,204   | )                                    |   | (27,135                                                 | )      
|                                                      | Income tax expense                                                                                          |                             |           | 234                                  |   |                                                         | 228    
|                                                      |                                                                                                             |                             |           |                                      |   |                                                         |        
|Loss from continuing operations                       |                                                                                                             |                             | (30,438   | )                                    |   | (27,363                                                 | )      
|Discontinued operations (Note 11)                     |                                                                                                             |                             |           |                                      |   |                                                         |        
|                                                      | (Loss) income from discontinued operations (including loss on disposal of $8.2 million in fiscal year 2008) |                             |           | (11,270                              | ) |                                                         | (587   
|                                                      |                                                                                                             |                             |           |                                      |   |                                                         |        
|Net loss                                              |                                                                                                             | $                           | (41,708   | )                                    | $ | (27,950                                                 | )      
|                                                      |                                                                                                             |                             |           |                                      |   |                                                         |        
|Net Loss Per ShareBasic and Diluted: (Note 16)       |                                                                                                             |                             |           |                                      |   |                                                         |        
|                                                      | Loss from continuing operations                                                                             |                             | $         | (3.59                                | ) | $                                                       | (3.22  
|                                                      | (Loss) income from discontinued operations                                                                  |                             |           | (1.33                                | ) |                                                         | (0.07  
|                                                      |                                                                                                             |                             |           |                                      |   |                                                         |        
|Net Loss Per ShareBasic and Diluted                  |                                                                                                             | $                           | (4.92     | )                                    | $ | (3.29                                                   | )      
|                                                      |                                                                                                             |                             |           |                                      |   |                                                         |        
|Basic and diluted shares outstanding and to be issued |                                                                                                             |                             | 8,501,323 |                                      |   | 8,498,752                                               |        
|                                                      |                                                                                                             |                             |           |                                      |   |                                                         |        

The
accompanying notes are an integral part of these statements.

41

---



The Penn Traffic Company        Consolidated Statements of Cash Flows        (In thousands)

|                                                     |                                                                                           | Year Ended
February 2,
2008                       |        | Restated
Year Ended
February 3,
2007 |        | Restated
Period from
April 17, 2005 to
January 28,
2006 |        
|---------------------------------------------------- | ----------------------------------------------------------------------------------------- | ------------------------------------------------- | ------ | ------------------------------------ | ------ | ------------------------------------------------------- | -------
|
|Operating activities:                                |                                                                                           |                                                   |        |                                      |        |                                                         |        
|                                                     | Net loss                                                                                  |                                                   | $      | (41,708                              | )      | $                                                       | (27,950
|                                                     | Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |                                                   |        |                                      |        |                                                         |        
|                                                     |                                                                                           | Depreciation and amortization                     |        |                                      | 26,242 |                                                         |        
|                                                     |                                                                                           | Loss on disposal of discontinued operations       |        |                                      | 8,207  |                                                         |        
|                                                     |                                                                                           | Asset impairment charge                           |        |                                      | 547    |                                                         |        
|                                                     |                                                                                           | Amortization of deferred finance cost             |        |                                      | 1,021  |                                                         |        
|                                                     |                                                                                           | Loss (gain) on sale of assets                     |        |                                      | 340    |                                                         |        
|Net change in operating assets and liabilities:      |                                                                                           |                                                   |        |                                      |        |                                                         |        
|                                                     |                                                                                           | Accounts and notes receivable, net                |        |                                      | (2,401 | )                                                       |        
|                                                     |                                                                                           | Prepaid expenses and other current assets         |        |                                      | 1,161  |                                                         |        
|                                                     |                                                                                           | Inventories                                       |        |                                      | 10,567 |                                                         |        
|                                                     |                                                                                           | Liabilities subject to compromise                 |        |                                      | (181   | )                                                       |        
|                                                     |                                                                                           | Accounts payable and other current liabilities    |        |                                      | (2,972 | )                                                       |        
|                                                     |                                                                                           | Other assets                                      |        |                                      | 23     |                                                         |        
|                                                     |                                                                                           | Defined benefit pension plan                      |        |                                      | (5,756 | )                                                       |        
|                                                     |                                                                                           | Other non-current liabilities                     |        |                                      | 1,846  |                                                         |        
|                                                     |                                                                                           |                                                   |        |                                      |        |                                                         |        
|Net cash (used in) provided by operating activities  |                                                                                           |                                                   | (3,064 | )                                    |        | 12,586                                                  |        
|                                                     |                                                                                           |                                                   |        |                                      |        |                                                         |        
|Investing activities:                                |                                                                                           |                                                   |        |                                      |        |                                                         |        
|                                                     |                                                                                           | Acquisition                                       |        |                                      |       |                                                         |        
|                                                     |                                                                                           | Capital expenditures                              |        |                                      | (7,879 | )                                                       |        
|                                                     |                                                                                           | Proceeds from sale of fixed assets                |        |                                      | 1,113  |                                                         |        
|                                                     |                                                                                           |                                                   |        |                                      |        |                                                         |        
|Net cash used in investing activities                |                                                                                           |                                                   | (6,766 | )                                    |        | (14,186                                                 | )      
|                                                     |                                                                                           |                                                   |        |                                      |        |                                                         |        
|Financing activities:                                |                                                                                           |                                                   |        |                                      |        |                                                         |        
|                                                     |                                                                                           | Payments of mortgages                             |        |                                      | (314   | )                                                       |        
|                                                     |                                                                                           | Net (repayments) borrowings under credit facility |        |                                      | (1,925 | )                                                       |        
|                                                     |                                                                                           | Reduction in capital lease obligations            |        |                                      | (1,432 | )                                                       |        
|                                                     |                                                                                           | Issuance of preferred stock                       |        |                                      | 9,756  |                                                         |        
|                                                     |                                                                                           |                                                   |        |                                      |        |                                                         |        
|Net cash provided by (used in) financing activities  |                                                                                           |                                                   | 6,085  |                                      |        | 13,829                                                  |        
|                                                     |                                                                                           |                                                   |        |                                      |        |                                                         |        
|Net (decrease) increase in cash and cash equivalents |                                                                                           |                                                   | (3,745 | )                                    |        | 12,229                                                  |        
|Cash and cash equivalents at beginning of period     |                                                                                           |                                                   | 24,661 |                                      |        | 12,432                                                  |        
|                                                     |                                                                                           |                                                   |        |                                      |        |                                                         |        
|Cash and cash equivalents at end of period           |                                                                                           | $                                                 | 20,916 |                                      | $      | 24,661                                                  |        
|                                                     |                                                                                           |                                                   |        |                                      |        |                                                         |        

The
accompanying notes are an integral part of these statements.

42

---





The Penn Traffic Company        Consolidated Statement of Stockholders' Equity  For the years ended February 2, 2008 and February 3, 2007  And the period from April 17, 2005 to
January 29, 2006        (In thousands)

|                                                                               |                                                                                                                  | Common
Stock |    | Preferred
Stock |   | Capital in
Excess of
Par Value |     | Deficit |         | Accumulated
Other
Comprehensive
Income |   | Total
Stockholders'
Equity |        
|------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------- | ------------ | -- | --------------- | - | ------------------------------ | --- | ------- | ------- | -------------------------------------- | - | -------------------------- | -------
|Common stock issued and to be issued in connection with plan of reorganization |                                                                                                                  | $            | 85 |                 | $ |                               |     | $       | 118,493 |                                        | $ |                           |        
|                                                                               | Net loss and comprehensive loss for the year 41-week period ended January 28, 2006                               |              |    |                |   |                                |    |         |         |                                       |   |                            | (4,698 
|                                                                               | Unrecognized actuarial gain of pension plans, net of deferred taxes of $3,396                                    |              |    |                |   |                                |    |         |         |                                       |   |                            |       
|                                                                               |                                                                                                                  |              |    |                 |   |                                |     |         |         |                                        |   |                            |        
|Balance at January 28, 2006 (RestatedSee Note 4)                              |                                                                                                                  |              | 85 |                 |   |                               |     |         | 118,493 |                                        |   | (4,698                     | )      
|                                                                               | Net loss for the year ended February 3, 2007                                                                     |              |    |                |   |                                |    |         |         |                                       |   |                            | (27,950
|                                                                               | Unrecognized actuarial gain of pension plans, net of deferred taxes of $1,296                                    |              |    |                |   |                                |    |         |         |                                       |   |                            |       
|                                                                               |                                                                                                                  |              |    |                 |   |                                |     |         |         |                                        |   |                            |        
|                                                                               | Comprehensive loss                                                                                               |              |    |                |   |                                |    |         |         |                                       |   |                            |       
|                                                                               |                                                                                                                  |              |    |                 |   |                                |     |         |         |                                        |   |                            |        
|Balance at February 3, 2007 (RestatedSee Note 4)                              |                                                                                                                  |              | 85 |                 |   |                               |     |         | 118,493 |                                        | $ | (32,648                    | )      
|                                                                               | Issuance of 10,000 shares of preferred stock, net of related costs of $244                                       |              |    |                |   |                                | 100 |         |         | 9,656                                  |   |                            |       
|                                                                               | Net loss for the year ended February 2, 2008                                                                     |              |    |                |   |                                |    |         |         |                                       |   |                            | (41,708
|                                                                               | Amortization of net actuarial gain included in net periodic pension benefit cost, net of deferred taxes of ($40) |              |    |                 |   |                                |     |         |         |                                        |   |                            |        
|                                                                               | Unrecognized actuarial gain of pension plans, net of deferred taxes of $4,858                                    |              |    |                |   |                                |    |         |         |                                       |   |                            |       
|                                                                               |                                                                                                                  |              |    |                 |   |                                |     |         |         |                                        |   |                            |        
|                                                                               | Comprehensive loss                                                                                               |              |    |                |   |                                |    |         |         |                                       |   |                            |       
|                                                                               |                                                                                                                  |              |    |                 |   |                                |     |         |         |                                        |   |                            |        
|Balance at February 2, 2008                                                    |                                                                                                                  | $            | 85 |                 | $ | 100                            |     | $       | 128,149 |                                        | $ | (74,356                    | )      
|                                                                               |                                                                                                                  |              |    |                 |   |                                |     |         |         |                                        |   |                            |        

The
accompanying notes are an integral part of these statements.

43

---





The Penn Traffic Company        Notes to Consolidated Financial Statements

Note 1Description of Business

The Penn Traffic Company and its subsidiaries (the "Company") are engaged in the retail food business and the wholesale food distribution business. As of
February 2, 2008, the Company operated 103 supermarkets under the "P&C", "Quality" and "Bi-Lo" banners in upstate New York, Pennsylvania, Vermont and New Hampshire, and supplied 124
independent supermarkets and other independent wholesale accounts. The Company services these owned and independent supermarkets and independent wholesale accounts through four distribution centers.

Note 2Voluntary Bankruptcy Filing and Reorganization

On May 30, 2003, The Penn Traffic Company and all of its subsidiaries filed voluntary petitions under Chapter 11 of the United States Bankruptcy
Code in the United States Bankruptcy Court for the Southern District of New York. The filing was made in response to pending defaults under the Company's then-existing loan agreements and
a lack of liquidity to continue operations. Under Chapter 11, the Company continued to operate its businesses as debtor-in-possession under court protection from its
creditors and claimants, while using the Chapter 11 process to substantially reduce its debt obligations and implement a plan of reorganization.

On
February 2, 2005, the Company filed the First Amended Joint Plan of Reorganization (the "Plan") with the bankruptcy court. The Plan was confirmed on March 17, 2005 and
became effective on April 13, 2005 (the "Effective Date").

Pursuant
to the terms of the Plan, the following transactions occurred on or around the Effective Date:



Note 3Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying financial statements include the accounts of The Penn Traffic Company and its wholly-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.

44

---



The Penn Traffic Company

Notes to Consolidated Financial Statements (Continued)

Note 3Summary of Significant Accounting Policies (Continued)

Fiscal Year

The Company's fiscal year ends on the Saturday closest to January 31. Fiscal year 2008 is the 52-week period ended February 2, 2008 and
fiscal year 2007 is the 53-week period ended February 3, 2007. Fiscal year 2006 is the 41-week period from April 17, 2005, the commencement of fresh-start
reporting (see below) to January 28, 2006.

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with the provisions of Statement of Position 90-7 "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7") issued by the American Institute of Certified Public Accountants. Pursuant to the provisions of
SOP 90-7, upon emergence from Chapter 11 proceedings, the Company adopted fresh-start reporting which resulted in a new reporting entity and a new basis of accounting.

Although
April 13, 2005 was the effective date of the Plan, the Company chose the close of business on April 16, 2005 as the effective date for accounting purposes to adopt
fresh-start reporting because of the proximity of that date to the end of an accounting period. Applying fresh-start reporting as of April 16, 2005 rather than the actual effective date of
April 13, 2005 did not have a material effect on the financial condition or results of operations of the Company.

The
reorganization value of the Company upon emergence from the Chapter 11 proceedings was approximately $195 million. The reorganization value represents the debt and
equity value of the Company as of the effective date. Such value, which was determined with the assistance of the Company's financial advisors, was based upon various valuation methods, including
discounted cash flow methodologies and analysis of comparable companies. The equity value of the Company upon reorganization amounting to approximately $118 million, was determined after taking
into account approximately $77 million of debt, consisting of long-term debt, obligations under capital leases and defined benefit pension plan liabilities, net of related deferred
taxes. In accordance with fresh-start reporting, all assets and liabilities were recorded at their respective fair values. The fair values of the Company's long-lived assets were
determined, in part, using information provided by third-party appraisers. The excess of approximately $28.2 million of the aggregate fair value of the Company's tangible and identifiable
intangible assets less non-interest bearing liabilities over the total reorganization value has been recorded as a pro rata reduction of non-current assets.

Use of Estimates

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

Revenue Recognition

Revenue from the sale of products to retail customers is recognized at the time of sale. Discounts provided to customers through company sponsored loyalty
programs are recognized as a reduction in sales as products are sold. Discounts provided through vendor coupons are not recognized as a reduction in sales to the extent the Company is reimbursed by
the vendor. Pharmacy revenues are

45

---



The Penn Traffic Company

Notes to Consolidated Financial Statements (Continued)

Note 3Summary of Significant Accounting Policies (Continued)

recorded
at the time of sales. Sales taxes are not recorded as a component of sales. Revenue from gift cards / certificates is recognized upon redemption of the gift certificates for products.

Revenue
from the sale of products to wholesale customers is recognized at the time of shipment to the customer.

Cost of Sales

Cost of sales includes the cost of product and related warehousing and freight costs. Vendor allowances are recorded as a reduction of cost of sales when the
related product is sold in accordance with the provisions of Emerging Issues Task Force Issue 02-16 "Accounting by a Customer (Including a Reseller) for Certain Consideration Received from
a Vendor." Vendor allowances, including early payment discounts, volume rebates, and funds for product placement and advertising, are generally recorded as a reduction of inventory cost based on
average inventory turnover rates by product category.

Vendor
allowances recognized as a reduction of cost of sales for the years ended February 2, 2008 and February 3, 2007 and for the period ended January 28, 2006
aggregated $51.9 million, $56.0 million and $43.8 million, respectively.

Advertising

Advertising costs are expensed as incurred and included in selling and administrative expenses. Advertising expense for the years ended February 2, 2008,
and February 3, 2007, and the period ended January 28, 2006, aggregated $11.9 million, $12.6 million and $11.1 million, respectively.

Cash and Cash Equivalents

The Company considers all highly liquid debt instruments with maturities of three months or less at the date of purchase to be cash equivalents.

Accounts and Notes Receivable

Accounts and notes receivable consist primarily of amounts due from wholesale customers, debit and credit card sales, third party insurance pharmacy sales and
vendor allowances. The Company establishes an allowance for doubtful accounts based on an analysis of past due accounts and historical loss trends (see Note 18).

Fair Value of Financial Instruments

The carrying value of cash, accounts receivable, trade accounts payable and accrued expenses approximate their fair values due to the relatively short maturities
of the instruments. For other debt, carrying value approximates fair value because their interest rates approximate market rates.

Inventories

Inventories, consisting primarily of grocery and pharmacy products, are stated at the lower of cost or market. Cost is determined using the last-in,
first-out method ("LIFO") using the estimated fair value of inventory on April 16, 2005, upon adoption of fresh-start reporting, to determine LIFO cost for financial reporting
purposes. If cost had been determined using the first-in, first-out method ("FIFO"), inventories would have been $5.7 million and $3.0 million higher than
reported at February 2, 2008, and February 3, 2007, respectively.

46

---



The Penn Traffic Company

Notes to Consolidated Financial Statements (Continued)

Note 3Summary of Significant Accounting Policies (Continued)

During
the years ended February 2, 2008 and February 3, 2007, inventory quantities were reduced, which resulted in a liquidation of certain LIFO inventory layers carried at
lower costs prevailing in an earlier period. The effect resulted in reducing cost of sales by approximately $0.2 million in fiscal year 2008 and $0.5 million in fiscal year 2007,
respectively.

The
Company takes physical counts of inventories throughout the year and records inventory shortage adjustments based on the physical counts. Throughout the year the Company is accruing
for inventory shortages based on historical trends. Where physical counts are not taken at the year end, the Company establishes an allowance for inventory shortages based on historical shrinkage
percentages.

Fixed Assets and Capital Leases

Major renewals and betterments are capitalized, while maintenance and repairs are charged to expense as incurred. Depreciation and amortization are provided on a
straight-line basis over the estimated useful lives of the assets or, for leasehold improvements, the shorter of the estimated useful lives of the assets or the lease term (which includes
renewal periods that are reasonably assured).

Estimated
useful lives are as follows:

Buildings

39 yearsCapitalized leases

5 to 32 yearsEquipment and furniture

3 to 10 yearsLeasehold improvements

10 to 32 yearsVehicles

3 to 8 years


Fixed
assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss would be recognized when
future
undiscounted cash flows expected to result from the use of the asset and its eventual disposal are less than the carrying amount.

During
fiscal year 2008, the Company determined in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", that the cash flows of two
stores are not expected to recover the recorded value of the assets. The carrying value of the assets were reduced to fair value. This resulted in a pre-tax charge of $0.5 million to cost and
operating expenses.

Intangible Assets

Identifiable intangible assets consist primarily of favorable leases and pharmacy prescription files (both established upon adoption of fresh-start reporting).
Favorable operating leases represent the present value of the difference by which market value rent exceeds contract rent and are amortized on a straight-line basis over the remaining
lease term, including renewal options, ranging from 2 to 32 years. Pharmacy prescription files and computer software are amortized over 5 years.

Identifiable
intangibles are reviewed for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss would be
recognized when future undiscounted cash flows expected to result from the use of the asset and its eventual disposal are less than the carrying amount.

47

---



The Penn Traffic Company

Notes to Consolidated Financial Statements (Continued)

Note 3Summary of Significant Accounting Policies (Continued)

Unfavorable Leases

Unfavorable operating leases (established upon adoption of fresh-start reporting) are reported in other non-current liabilities and represent the
present value of the difference by which contract rent exceeds market value rent and are amortized on a straight-line basis over the remaining lease term, excluding renewal options,
ranging from 2 to 13 years.

Income Taxes

Income taxes are provided based on the liability method of accounting. Deferred income taxes are recorded to reflect the tax consequences in future years of net
operating loss carryovers and temporary differences between the tax basis of assets and liabilities and their corresponding financial reporting amounts at each year-end.

Self-Insurance Liability

The Company self-insures certain insurable risks related to workers' compensation and general product liability claims. The Company accrues estimated
losses for unpaid claims, including incurred but not reported losses, with the assistance of an external actuary and by factoring in pending claims and historical loss experience. The Company also
maintains self-insured health benefits plans, which provide medical and dental benefits to employees electing coverage under the plans. The Company accrues estimated losses for unpaid
claims, including incurred but not reported claims, based on historical experience and other assumptions. Commercial policies are obtained to provide for coverage of certain risk exposure above the
self-insured retention limits. The estimated liability associated with settling unpaid claims is included in other current liabilities if expected to be settled within one year, or
otherwise is included in other non-current liabilities.

Store Pre-Opening Costs

Store pre-opening costs are expensed as incurred.

Store Closing Costs

For operating leases related to closed stores, the Company records the fair value of the liability at the cease-use date, determined based on the
discounted value of the remaining lease rentals, reduced by estimated sublease rentals that could be reasonably obtained for the property. Any one-time termination benefits are recognized
at the time the benefits are communicated to the employees. Other related costs are recognized in the period when the liability is incurred.

Shared-Based Payments

In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123(R)") which is a revision of FASB Statement No. 123 "Accounting for Stock-Based Compensation." SFAS 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income statement based on their fair values. The Company adopted SFAS 123(R) effective January 29, 2006. The adoption
of SFAS 123(R) did not have a material effect on the financial statements for year ended February 3, 2007 (see Note 15).

48

---



The Penn Traffic Company

Notes to Consolidated Financial Statements (Continued)

Note 3Summary of Significant Accounting Policies (Continued)

Defined Benefit Pension Plans

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plansan amendment of FASB Statements No. 87, 88, 106 and 132R" ("SFAS 158"). SFAS 158 requires financial statement recognition of the overfunded or
underfunded status of a defined benefit postretirement plan or other postretirement plan as an asset or liability and recognition of changes in the funded status in comprehensive earnings in the year
in which the changes occur. The Company elected early application and adopted SFAS 158 effective as of January 28, 2006. The adoption of the recognition provisions of SFAS 158
increased stockholders equity by $4.9 million, reduced the defined benefit pension plan liability by $8.3 million and increased the deferred tax liability by $3.4 million at
January 28, 2006 (see Note 12).

Reclassifications

Certain amounts have been reclassified in the 2007 and 2006 financial statements to conform to the current year presentation.

Recently Issued Accounting Standards Not Yet Adopted

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, "Fair Value Measurement" ("SFAS 157") effective for fiscal
years beginning after November 15, 2007. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures
about fair value measurements. SFAS 157 does not require any new fair value measurements. Management expects that the adoption of this statement will not have a material effect on the Company's
consolidated financial statements.

In
February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, "The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding
an amendment of FASB Statement No. 115" ("SFAS 159") effective for fiscal years beginning November 15, 2007. SFAS 159 permits an entity to elect fair value as the initial
and subsequent measurement attribute for many financial assets and liabilities. Entities electing the fair value option would be required to recognize changes in fair value in earnings. Entities
electing the fair value option are required to distinguish on the face of the statement of financial position, the fair value of assets and liabilities for which the fair value option has been elected
and similar assets and liabilities measured using another measurement attribute. The adjustment to reflect the difference between the fair value and the carrying amount would be accounted for as a
cumulative-effect adjustment to retained earnings as of the date of initial adoption. Management expects that the adoption of this statement will not have a material effect on our consolidated
financial statements.

In
December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), "Business Combinations" ("SFAS 141R") which replaces SFAS 141.
SFAS 141R changes the accounting for business combinations, including the measurement of acquirer shares issued in consideration for a business combination, the recognition of contingent
consideration, the accounting for contingencies, the recognition of capitalized in-process research and development, the accounting for acquisition-related restructuring cost accruals, the
treatment of acquisition-related transaction costs and the recognition of changes in the acquirer's income tax valuation allowance and income tax uncertainties. SFAS 141R applies prospectively
to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.

49

---



The Penn Traffic Company

Notes to Consolidated Financial Statements (Continued)

Note 3Summary of Significant Accounting Policies (Continued)

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, "Noncontrolling Interests in Consolidated Financial Statements, an
amendment of ARB 51" ("SFAS 160"), which changes the accounting and reporting for minority interests. Minority interests will be recharacterized as noncontrolling interests and will be reported
as a component of equity separate from the parent's equity, and purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. In
addition, net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement and, upon a loss of control, the interest sold, as well
as any interest retained, will be recorded at fair
value with any gain or loss recognized in earnings. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008.

Note 4Restatement

As a result of cancellation of debt in the Chapter 11 proceedings (see Note 2), the Company previously entirely eliminated all net operating loss
carryforwards and reduced the tax basis of its long-lived assets effective January 29, 2006. During the year ended February 2, 2008, the Company corrected the amount of debt
forgiveness in the chapter 11 proceedings that reduced tax attributes which results in an increase aggregating $66 million in the tax basis of its long-lived assets and net
operating loss carryforwards.

The
correction resulted in an increase in deferred tax assets attributable to the net operating loss carryforwards and the recording of a related valuation allowance and a reduction in
the deferred tax liability attributable to the increase in the tax basis of long-lived assets. The net effect of the above was a $3.5 million reduction in the net deferred tax
liability and a corresponding reduction in the carrying value of certain long-lived assets upon adoption of fresh-start reporting on April 16, 2005. As a result, net loss for the
period from April 17, 2005 to January 28, 2006 and for the year ended February 3, 2007 was restated as follows:

Year Ended
February 3,
2007

Period Ended
January 28,
2006Net loss as previously reported

$
(21,225
)
$
(3,811
)Reduction in depreciation of long-lived assets


351


277(Reduction) increase in income tax benefit


(7,076
)

(1,164
)Net loss as restated

$
(27,950
)
$
(4,698
)Net loss per share (basic and diluted):As previously reported

$
(2.50
)
$
(0.45
)Restatement


(0.79
)

(0.10
)As restated

$
(3.29
)
$
(0.55
)


50

---



The Penn Traffic Company

Notes to Consolidated Financial Statements (Continued)

Note 4Restatement (Continued)

The
balance sheet at February 3, 2007 has been restated as follows:

|                       |                         | Year Ended
February 3,
2007
As previously
reported |         | As restated |   | Change
Increase/
(decrease) |       
|---------------------- | ----------------------- | -------------------------------------------------- | ------- | ----------- | - | --------------------------- | ------
|Intangible assets, net |                         | $                                                  | 30,451  |             | $ | 25,188                      |       
|Fixed assets, net      |                         |                                                    | 99,364  |             |   | 96,488                      |       
|Deferred income taxes: |                         |                                                    |         |             |   |                             |       
|                       | Other assets            |                                                    |         |            |   |                             | 3,621 
|                       | Current liabilities     |                                                    |         | 7,816       |   |                             | 13,542
|                       | Non-current liabilities |                                                    |         | 2,632       |   |                             |      
|                       |                         |                                                    |         |             |   |                             |       
|                       |                         |                                                    |         | 10,448      |   |                             | 9,921 
|                       |                         |                                                    |         |             |   |                             |       
|Stockholders' equity   |                         | $                                                  | 100,337 |             | $ | 92,725                      |       

Note 5Leases

The Company leases store facilities for the operation of its retail food business and distribution facilities for its wholesale food distribution business. In
accordance with the provisions of FASB Statement No. 13, "Accounting for Leases," certain of the leases meet the criteria to be recorded as capital leases. The remaining leases are recorded as
operating leases. Most of the lease agreements provide for renewal options and require that the Company pay real estate taxes and other related expenses. Certain of the lease agreements also provide
for contingent rent payments based on a percentage of sales.

The
following is a summary of future minimum rent payments for operating leases and for capital leases as of February 2, 2008 (in thousands):

Fiscal Year Ending

Operating Leases

Capital LeasesJanuary 31, 2009

$
17,454

$
2,510January 30, 2010


15,780


2,491January 29, 2011


14,974


1,926January 28, 2012


12,928


1,482February 2, 2013


11,238


1,142Thereafter


48,464


10,019Total minimum lease payments

$
120,838


19,570Less: Amount representing interest





9,240Present value of net minimum lease payments





10,330Less: Current portion





1,368Long-term obligations under capital leases




$
8,962


Future
minimum rent payments have not been reduced by minimum sublease rent income of $7.6 million due in the future under non-cancelable subleases.

51

---



The Penn Traffic Company

Notes to Consolidated Financial Statements (Continued)

Note 5Leases (Continued)

Rent
expense under operating leases for the years ended February 2, 2008 and February 3, 2007 and for the period ended January 28, 2006 were $16.9 million,
$18.7 million and $10.7 million, respectively. They consist of the following (in thousands):

Year Ended
February 2, 2008

Year Ended
February 3, 2007

Period Ended
January 28, 2006Minimum rent

$
19,537

$
21,791

$
13,115Contingent rent


242


238


201Less: sublease rent


(2,854
)

(3,281
)

(2,625
)Net rent expense

$
16,925

$
18,748

$
10,691


Note 6Intangible Assets

Intangible assets consist of the following (in thousands):

|                                |  | February 2, 2008 |        | February 3, 2007
|------------------------------- |  | ---------------- | ------ | ----------------
|
|Amortized intangible assets:(1) |  |                  |        |                 
|Favorable leases                |  | $                | 18,150 |                 
|Pharmacy prescription files     |  |                  | 6,204  |                 
|Computer software               |  |                  | 1,697  |                 
|                                |  |                  |        |                 
|Total                           |  | $                | 26,051 |                 
|                                |  |                  |        |                 

---

|                                      |  |   |       |   |        |  |  |  |  |  |  | 
|------------------------------------- |  | - | ----- | - | ------ |  |  |  |  |  |  | 
|Aggregate amortization expense:       |  |   |       |   |        |  |  |  |  |  |  | 
|For the year ended February 2, 2008   |  | $ | 3,704 |   |        |  |  |  |  |  | 
|For the year ended February 3, 2007   |  | $ | 4,236 |   |        |  |  |  |  |  | 
|For the period ended January 28, 2006 |  | $ | 3,423 |   |        |  |  |  |  |  | 
|Future Amortization                   |  |   |       |   |        |  |  |  |  |  | 
|Fiscal Year Ending:                   |  |   |       |   |        |  |  |  |  |  | 
|January 31, 2009                      |  | $ | 1,666 |   |        |  |  |  |  |  | 
|January 30, 2010                      |  |   | 1,666 |   |        |  |  |  |  |  | 
|January 29, 2011                      |  |   | 1,120 |   |        |  |  |  |  |  | 
|January 28, 2012                      |  |   | 925   |   |        |  |  |  |  |  | 
|February 2, 2013                      |  |   | 889   |   |        |  |  |  |  |  | 
|Thereafter                            |  |   | 9,131 |   |        |  |  |  |  |  | 
|                                      |  |   |       |   |        |  |  |  |  |  |  | 
|                                      |  |   |       | $ | 15,397 |  |  |  |  |  |  | 
|                                      |  |   |       |   |        |  |  |  |  |  |  | 

52

---



The Penn Traffic Company

Notes to Consolidated Financial Statements (Continued)

Note 7Debt

Debt consists of the following (in thousands):

|                                                                                                                                                                                |  | February 2,
2008 |        | February 3,
2007
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------ | ----------------
|Revolving credit facility, interest (7.42% at February 2, 2008 and 7.82% at February 3, 2007) at prime plus .75% to 1.50% or LIBOR plus 2.25% to 3.00%, maturing April 13, 2009 |  | $                | 17,000 |                 
|Term loan facility, interest (11.00% at February 2, 2008 and 13.25% at February 3, 2007) at prime plus 5.00%, maturing April 13, 2009                                           |  |                  | 6,000  |                 
|Supplemental real estate credit facility, interest (11.50% at February 2, 2008 and 13.75% at February 3, 2007) at prime plus 9.00% or LIBOR plus 10%, maturing April 13, 2009   |  |                  | 23,575 |                 
|Mortgages payable, interest at 6.125% to 12%, maturing at various dates through May 1, 2021                                                                                     |  |                  | 3,912  |                 
|                                                                                                                                                                                |  |                  |        |                 
|Total debt                                                                                                                                                                      |  |                  | 50,487 |                 
|Less: Current portion of long-term debt                                                                                                                                         |  |                  | 278    |                 
|                                                                                                                                                                                |  |                  |        |                 
|Total long-term debt                                                                                                                                                            |  | $                | 50,209 |                 
|                                                                                                                                                                                |  |                  |        |                 

Maturities
of debt over the next five years are as follows (in thousands):

Fiscal Year Ending:January 31, 2009

$
278January 30, 2010


46,896January 29, 2011


259January 28, 2012


247February 2, 2013


243Thereafter


2,564$
50,487


On
April 13, 2005, upon emergence from Chapter 11 proceedings, the Company entered into a revolving credit and term loan facility with a group of financial
institutions providing for a $130 million revolving credit facility and a $6 million term loan. Also on April 13, 2005, the Company entered into a supplemental real estate credit
facility with another group of lenders, providing for borrowings of up to $28 million. Availability under both credit facilities is dependent on levels of accounts receivable, inventory and
certain other assets. Interest rates on borrowings under the revolving credit facility vary depending upon the amount of availability. At February 2, 2008, outstanding borrowings under both
facilities aggregated $46.6 million and outstanding letters of credit under the revolving credit facility,
which are primarily associated with supporting workers' compensation obligations, amounted to approximately $45.0 million. At such date, availability in excess of outstanding borrowings and
letters of credit was approximately $36.3 million. Borrowings under the revolving credit and term loan facility are secured by substantially all the assets of the Company, subject to first
liens on certain property by other lenders. Borrowings under the real estate facility are secured by a first lien on substantially all leasehold interests of the Company, and a second lien on realty
owned by the Company.

53

---



The Penn Traffic Company

Notes to Consolidated Financial Statements (Continued)

Note 7Debt (Continued)

Provisions
of both credit facilities, as amended among other things, require the maintenance of certain financial covenants (when availability under the credit facilities is less than
$27.5 million for four consecutive days or less than $25 million for any one day), and limit the amount of capital expenditures, the assumption of additional debt and the payment of
dividends. At no time through February 2, 2008 had the Company been subject to compliance with these financial covenants because the amount available for borrowing had not dropped to those
levels. However, had such an event occurred, the Company would not have been in compliance with the financial covenants and would have been in default under the terms of the loan agreement at
February 2, 2008.

On
March 29, 2008, the revolving credit and term loan facility was amended to extend the maturity date to April 13, 2009 and subject to certain conditions referred to
below, to April 13, 2010. In addition, the interest rate on the revolving credit facility was increased by .25% to prime plus .75% to 1.50% or LIBOR plus 2.25% to 3.00%. The Company is
prohibited from allowing availability to be less than $27.5 million for four consecutive days or $25 million on any one day (increasing to $30 million after April 13,
2009). Further, in order for the maturity date to be extended to April 13, 2010, the "extension conditions" of the supplemental real estate credit facility (described below) would have to be
satisfied or waived.

On
March 27, 2008, the supplemental real estate credit facility (which had been reduced to $26 million as a result of prior repayments) was amended to extend the maturity
date from April 13, 2008 to April 13, 2009. If the Company can meet certain "extension conditions," including compliance with certain financial covenants as of February 28, 2009
and have availability of not less than $35 million as of March 31, 2009, the maturity date will be extended to April 13, 2010. In addition, the interest rate was increased from
prime plus 5.50% to prime plus 9% or LIBOR plus 10%, but in no event less than 15%.

At
February 2, 2008, the revolving credit and term loan facility and the real estate credit facility have been classified based on the amended loan terms described above.

The
Company also has borrowings under mortgages secured by first liens on the related properties.

54

---



The Penn Traffic Company

Notes to Consolidated Financial Statements (Continued)

Note 8Other Current and Other Non-Current Liabilities

Other current and non-current liabilities consist of the following (in thousands):

February 2,
2008

February 3,
2007Other Current Liabilities:Vacation and other compensated absences

$
9,116

$
12,322Workers compensation


7,636


7,270Payroll and related payroll taxes


4,904


5,622Employee benefits


4,144


4,364Deferred income


1,038


100State lottery


2,740


2,404Accrued incentive pay


2,026


Utilities


1,940


2,196Other taxes payable


1,932


2,837Gift certificate clearing


1,636


2,282Professional fees


711


373Employee severance


523


2,546Reorganization costs





134Other accrued liabilities


8,714


7,203Total

$
47,060

$
49,653Other Non-Current Liabilities:Workers compensation

$
14,216

$
16,106Store closing costs


8,417


1,850Step rent liability


3,092


2,180Unfavorable leases


2,646


3,475Asset retirement obligations


1,202


959General liability insurance


1,143


1,374PBGC settlement





869Total

$
30,716

$
26,813


Note 9Liabilities Subject to Compromise

In connection with the Chapter 11 proceeding, there are two pending matters involving claims for the payment of money or the transfer of property. In one
matter, the Ohio Bureau of Workers' Compensation ("OBWC") has filed priority and administrative claims aggregating $13.4 million for pre-petition unpaid workers' compensation
premiums and for reserves to pay future claims arising from existing injuries. The OBWC has also filed claims aggregating $1.8 million for alleged non-payment of
post-petition premiums and for reserves to pay future claims arising from existing injuries. The Company disputes the amounts of the claims, and is attempting to negotiate a settlement.

In
another matter, a claimant has filed a priority claim allegedly arising under an agreement for a sale-leaseback transaction seeking either damages of $2.2 million
or specific performance of the agreement. The Company disputes the merits of the claim and is defending against it.

55

---



The Penn Traffic Company

Notes to Consolidated Financial Statements (Continued)

Note 9Liabilities Subject to Compromise (Continued)

During
the years ended February 2, 2008 and February 3, 2007, the Company paid $0.2 million and $0.2 million, respectively, in settlement of disputed claims.
The Company has established liabilities for the estimated cash payments required to settle the remaining claims outstanding in the Chapter 11 proceedings. Estimated shares of common stock to be
issued in settlement of claims have been accounted for as shares outstanding.

Note 10Income Taxes

The Company files a consolidated federal income tax return. The components of expense tax benefit for the years ended February 2, 2008 and
February 3, 2007 and the period ended January 28, 2006 are as follows (in thousands):

Year Ended
February 2, 2008

Restated
Year Ended
February 3, 2007

Restated
Period Ended
January 28, 2006(see Note 4)Continuing operations:Current tax provisionFederal

$


$


$
State


234


228


261Deferred tax (benefit)Federal








State








(61
)Total income tax expense


234


228


200Discontinued operations:Deferred taxFederal








State








61Total income tax expense








61$
234

$
228

$
261


The
following is a reconciliation between the federal income tax benefit applicable to loss from continuing operations computed at the statutory federal income tax rate and actual income
tax expense related to the loss from continuing operations (in thousands):

|                                                     |  | Year Ended
February 2, 2008 |         | Restated
Year Ended
February 3, 2007 |   | Restated
Period Ended
January 28, 2006 |  
|---------------------------------------------------- |  | --------------------------- | ------- | ------------------------------------ | - | -------------------------------------- | -
|
|Federal income tax benefit at statutory rate (35%)   |  | $                           | (10,572 | )                                    | $ | (9,497                                 | )
|State income taxes, net of federal income tax effect |  |                             | 152     |                                      |   | 148                                    |  
|Non-deductible expenses                              |  |                             | 220     |                                      |   | 14                                     |  
|Valuation allowance                                  |  |                             | 10,434  |                                      |   | 9,563                                  |  
|                                                     |  |                             |         |                                      |   |                                        |  
|Total income tax expense                             |  | $                           | 234     |                                      | $ | 228                                    |  
|                                                     |  |                             |         |                                      |   |                                        |  

56

---



The Penn Traffic Company

Notes to Consolidated Financial Statements (Continued)

Note 10Income Taxes (Continued)

The
significant components of deferred income tax assets and liabilities as of February 2, 2008 and February 3, 2007 are as follows (in thousands):

|                                                     |                                               | February 2,
2008                     |        | Restated
February 3,
2007 |        
|---------------------------------------------------- | --------------------------------------------- | ------------------------------------ | ------ | ------------------------- | -------
|
|Current deferred income tax assets/(liabilities)     |                                               |                                      |        |                           |        
|                                                     | Reserves and accruals                         |                                      | $      | 12,496                    |        
|                                                     | Valuation allowance                           |                                      |        | (9,550                    | )      
|                                                     |                                               |                                      |        |                           |        
|                                                     |                                               | Current deferred tax assets          |        |                           | 2,946  
|                                                     | Inventories                                   |                                      |        | (14,431                   | )      
|                                                     |                                               |                                      |        |                           |        
|                                                     |                                               | Net current deferred tax liabilities |        |                           | (11,485
|                                                     |                                               |                                      |        |                           |        
|Non-current deferred income tax assets (liabilities) |                                               |                                      |        |                           |        
|                                                     | Reserves and accruals                         |                                      |        | 10,953                    |        
|                                                     | Pensions                                      |                                      |        | 2,468                     |        
|                                                     | Fixed assets                                  |                                      |        | 1,117                     |        
|                                                     | Goodwill(1)                                   |                                      |        | 2,585                     |        
|                                                     | Capital lease obligations                     |                                      |        | 4,031                     |        
|                                                     | Net operating loss carryforward               |                                      |        | 34,891                    |        
|                                                     | Valuation allowance                           |                                      |        | (45,654                   | )      
|                                                     |                                               |                                      |        |                           |        
|                                                     |                                               | Non-current deferred tax assets      |        |                           | 10,391 
|                                                     |                                               |                                      |        |                           |        
|                                                     | Beneficial leases and other intangible assets |                                      |        | (4,725                    | )      
|                                                     | Fixed assets                                  |                                      |        |                          |        
|                                                     | Capital leases                                |                                      |        | (3,226                    | )      
|                                                     |                                               |                                      |        |                           |        
|                                                     |                                               | Non-current deferred tax liabilities |        |                           | (7,951 
|                                                     |                                               |                                      |        |                           |        
|                                                     |                                               | Net non-current deferred tax assets  |        |                           | 2,440  
|                                                     |                                               |                                      |        |                           |        
|Net deferred income tax liabilities                  |                                               | $                                    | (9,045 | )                         | $      
|                                                     |                                               |                                      |        |                           |        

---

At
February 2, 2008, the Company had a net operating loss carryforward for federal and state income tax purposes of approximately $85.3 million (inclusive of net operating
losses discussed in Note 4) available to offset future taxable income from 2009 through 2028.

A
valuation allowance of $55.2 million and $40.5 million was established at February 2, 2008 and February 3, 2007 to offset the net operating loss
carryforward and other deferred tax assets to the extent it is more likely than not, based upon available evidence, that the recorded value will not be realized. Realization is dependent on the
existence of sufficient taxable income within the carryforward period, including future reversals of certain taxable temporary differences. In providing the valuation allowance, no reversal of the
taxable temporary difference arising from a portion of LIFO inventory was considered to occur during such period as the period in which such reversal may occur is not

57

---



The Penn Traffic Company

Notes to Consolidated Financial Statements (Continued)

Note 10Income Taxes (Continued)

presently
determinable. During fiscal 2008 and 2007 and the period ended January 28, 2006, the valuation allowance increased $14.8 million, $10.8 million and $4.2 million,
respectively.

To
the extent net operating loss carryforwards or deductible temporary differences arising prior to the Company's emergence from Chapter 11 proceedings for which a valuation
allowance has been provided are realized, the resulting benefits will be allocated first to reduce intangible assets until they are totally eliminated and thereafter reported as an increase to
additional paid-in capital. As of February 2, 2008, approximately $15.0 million of the valuation allowance relates to pre-reorganization net operating loss carryforwards and deductible
temporary difference after reduction of $11 million which has reduced intangible assets.

On
February 4, 2007, the Company adopted Financial Accounting Standards Board Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48").
FIN 48 clarifies the criteria for recognizing tax benefits related to uncertain tax positions under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS 109"), and requires additional financial statement disclosure. As required by FIN 48, the Company applied the "more-likely-than-not"
recognition threshold to all tax positions commencing at the adoption date which resulted in no unrecognized tax benefits as of such date or February 2, 2008. Accordingly, the adoption of
FIN 48 had no effect on the Company's 2008 financial statements.

To
the extent incurred, the Company classifies interest and penalties accrued on the underpayment of income taxes as a component of income tax expense.

The
Company is no longer subject to federal, state and local income tax examinations by tax authorities for years before fiscal 2003. However, to the extent utilized in the future, the
Company's net operating loss carryforwards remain subject to examination. The Company's tax returns for the years after fiscal 2002 are currently being examined by the Internal Revenue Service.

Note 11Acquisitions, Dispositions and Discontinued Operations

Acquisitions

In March and April 2006, the Company acquired two retail stores for an aggregate purchase price of $1.5 million. The cost of the acquisitions was allocated
$0.5 million to inventories and $1.0 million to equipment.

Dispositions

During the year ended February 2, 2008, the Company disposed of three stores. It is anticipated that revenues will continue to be generated from customers
of two of the closed stores since one store was located in the same vicinity of another Company store and another store will continue to be supplied by the Company's distribution center. Revenue and
operating results of the remaining closed store which was sold were not significant.

58

---



The Penn Traffic Company

Notes to Consolidated Financial Statements (Continued)

Note 11Acquisitions, Dispositions and Discontinued Operations (Continued)

During the year ended February 3, 2007, the Company disposed of five stores of which four were closed and one was sold. It is anticipated that revenues
will continue to be generated from customers of three of these closed stores from Company stores located in the same vicinity. In addition, it is anticipated that the sold store will continue to be
serviced from the Company's distribution centers thereby continuing to generate revenue for the Company. The revenues and operating results of the remaining closed store were not significant.

During
the period ended January 28, 2006, the Company closed one store for which the revenues and operating results were not significant.

Based
on the above, the operations of the disposed stores have not been reported as discontinued operations in the accompanying financial statements.

Store
closing costs related to leases and terminated employees for the periods ended February 2, 2008, February 3, 2007 and January 28, 2006 were approximately
$0.1 million, $1.3 million and $0.5 million, respectively.

In
January 2007, the Company announced the closing of a leased distribution center used for the distribution of general merchandise and health and beauty products. At the same time, the
Company entered into a five-year supply agreement with a third party to provide the merchandise previously distributed from the distribution center. In connection with the announced
closing, in January 2007, the Company recorded a liability of $1.4 million for termination benefits which were communicated to the distribution center's employees at such time. The Company
ceased use of the facility in March 2007, at which time the Company recorded a liability of $1.9 million representing the present value of the remaining lease rentals reduced by estimated
sublease rentals that could be reasonably obtained for the distribution center. In addition, in March 2007, the Company sold its remaining inventory located in the distribution center to the third
party at current cost. The carrying value of such inventory at February 3, 2007 was approximately $4.8 million.

Discontinued operations

On January 2, 2008, as a result of the loss of a significant customer, the Company announced the closing of its commercial bakery operation. In accordance
with the provisions of FASB No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets" ("SFAS 144"), the results of operations of the commercial bakery
operation for the current and prior periods have been reported as discontinued operations. The Company recorded a loss on disposal of $8.2 million, consisting of $1.6 million loss on
write-down of the facilities' assets to fair market value, $3.1 million withdrawal liability related to participation in a multi-employer pension plan, $2.4 million related
to employee severance and $1.1 million of other costs.

Revenues
of the commercial bakery operation amounted to $12.0 million, $17.0 million and $12.2 million for the years ended February 2, 2008, and
February 3, 2007 and the period ended January 28, 2006, respectively.

Fixed
assets at February 2, 2008 includes $1.0 million of commercial bakery equipment held for sale.

59

---



The Penn Traffic Company

Notes to Consolidated Financial Statements (Continued)

Note 12Retirement Plans

The Company has four noncontributory defined benefit pension plans covering certain union personnel. The Company's policy is to fund pension benefits to the
extent contributions are deductible for tax purposes and in compliance with federal laws and regulations. For the Company's plans, normal retirement age is either 62 or 65, but provisions are made for
earlier retirement. Benefits are determined either on average annual compensation and years of service, or as a pre-determined amount for each year of service. Full vesting occurs upon
completion of five years of service. Assets of the Company's pension plans primarily consist of investments in publicly traded equity and debt securities.

In
accordance with the provisions of SOP 90-1, upon emergence from bankruptcy, the Company recorded the underfunded status of each of the defined benefit plans as a
liability on the balance sheet. As of January 28, 2006, the Company adopted the provisions of Financial Accounting Standard No. 158, "Employers' Accounting for Defined Benefit Pension
and Other Postretirement Plans" ("SFAS 158") and in accordance therewith reflected the underfunded status of the plans in its balance sheet at such date. Prospectively, the Company will adjust
the liability to reflect the current funded status of the plan. Any gains or losses that arise during the period but are not recognized as components of net periodic benefit cost will be recognized as
a component of other comprehensive income (loss). The adoption of SFAS 158 resulted in the recognition of $8.3 million of unrecognized actuarial gains which arose during the period ended
January 28, 2006 and a corresponding reduction in the defined benefit pension plan liability at January 28, 2006. Such unrecognized gains, net of deferred taxes of $3.4 million
were credited to accumulated other comprehensive income in the amount of $4.9 million. The adoption of SFAS 158 had no effect on the Company's consolidated statement of operations for
the period ended January 28, 2006 and it will not effect the Company's operating results in future periods.

During
the fiscal years ended February 2, 2008 and February 3, 2007, the Company recorded $13.2 million and $3.2 million, respectively, of net unrecognized
actuarial gains and a corresponding reduction in the defined benefit pension plan liability at such dates. The fiscal year 2008 gain primary related to a reduction in the defined benefit obligation of
the Company's most significant defined benefit plan resulting from adjustments of actuarial assumptions relating to participants status.
Unrecognized gains, net of deferred taxes of $4.8 million and $1.3 million, respectively, were recognized as an element of comprehensive loss and credited to accumulated other
comprehensive income in the amount of $8.5 million and $1.9 million, respectively.

60

---



The Penn Traffic Company

Notes to Consolidated Financial Statements (Continued)

Note 12Retirement Plans (Continued)

Information
as to the Company's four defined benefit pension plans as of February 2, 2008 and February 3, 2007, which are the measurement dates of the plans, and for the
periods included in the statement of operations then ended, is as follows (in thousands):

February 2,
2008

February 3,
2007Change in benefit obligationBenefit obligation at beginning of period

$
(106,798
)
$
(107,600
)Service cost


(1,980
)

(1,982
)Interest cost


(6,238
)

(5,975
)Actuarial gain


17,478


3,757Benefits paid


5,253


5,002Amendment


(25
)

Benefit obligation at end of period


(92,310
)

(106,798
)Change in plan assetsFair value of plan assets at beginning of period


84,647


80,000Actual return on plan assets


2,128


5,391Employer contributions


4,462


4,259Benefits paid


(5,253
)

(5,002
)Fair value of plan assets at end of period


85,984


84,648Underfunded status

$
(6,326
)
$
(22,150
)


|
|

Year Ended
February 2,
2008

Year Ended
February 3,
2007

Period Ended
January 28,
2006Components of net periodic pension cost:Service cost

$
1,980

$
1,982

$
1,468Interest cost


6,238


5,975


4,356Expected return on plan assets


(6,386
)

(5,975
)

(3,979
)Amount of recognized net gains


(118
)




Net periodic pension cost

$
1,714

$
1,982

$
1,845


The
weighted-average assumptions used to determine the net benefit obligations as of February 2, 2008 and February 3, 2007 are as follows:

Year Ended
February 2,
2008

Year Ended
February 3,
2007Discount rate

6.43
%
5.97
%Rate of compensation increase

3.00
%
3.00
%


61

---



The Penn Traffic Company

Notes to Consolidated Financial Statements (Continued)

Note 12Retirement Plans (Continued)

The
weighted-average assumptions used to determine the net benefit cost are as follows:

Year Ended February 2, 2008

Year Ended February 3, 2007

Period Ended January 28, 2006Discount rate

5.97
%
5.68
%
5.48
%Expected return on plan assets

7.50
%
7.50
%
7.50
%Rate of compensation increase

3.00
%
3.00
%
3.00
%


Amounts
in accumulated other comprehensive income will be subsequently recognized as a component of net periodic pension cost pursuant to the Company's accounting policy for amortizing
such amounts. Included in accumulated other comprehensive income at February 2, 2008 are unrecognized actuarial gains of $24.7 million ($15.2 million net of taxes), of which
$1.1 million is expected to be recognized as a component of net periodic pension cost for the year ending January 31, 2009.

Plan
assets by major category as of February 2, 2008 and February 3, 2007 are as follows:

|                  |  | February 2, 2008 |  | February 3, 2007
|----------------- |  | ---------------- |  | ----------------
|
|Equity securities |  | 50% to 60%       |  | 51%             
|Debt securities   |  | 40% to 50%       |  | 38%             
|Cash              |  | 0% to 10%        |  | 11%             

The
Company considers the actual asset categories of the invested assets and the historical rates of return of those categories as the basis for establishing the expected
long-term rate of return (7.5% at both February 2, 2008 and February 3, 2007) on plan assets.

For
the years ended February 2, 2008 and February 3, 2007, and the period ended January 28, 2006, the Company contributed $4.5 million, $4.3 million,
and $5.9 million, respectively, to the four defined benefit pension plans. For the year ending January 31, 2009, the Company expects to contribute $3.7 million to these plans.

The
amount of benefits expected to be paid over each of the next five years and in the aggregate for the following five-year period are as follows (in thousands):

Year

Amount2009

$
4,7952010


4,9232011


5,1012012


5,2252013


5,4952014-2017


31,312


On
May 20, 2004, a distress termination application was filed with the PBGC to terminate a cash balance pension plan sponsored by the Company. The PBGC filed various claims in
bankruptcy court for payment of unfunded benefit liabilities. On February 4, 2005, the parties entered into a global settlement whereby the Company settled the PBGC claims by agreeing to pay
the PBGC $0.2 million

62

---



The Penn Traffic Company

Notes to Consolidated Financial Statements (Continued)

Note 12Retirement Plans (Continued)

upon
emergence from bankruptcy and $3.5 million over a two year period commencing six months after the emergence from bankruptcy. Further, the PBGC was permitted to retain a $60 million
unsecured claim in the bankruptcy proceeding which was settled through the issuance of common shares pursuant to the Plan.

The
Company maintains a 401(k) savings plan for eligible employees. The plan provides for matching contributions by the Company for all employees not covered by other union pension
plans. The Company's contributions aggregated $1.9 million, $1.4 million and $1.4 million for the years ended February 2, 2008, and February 3, 2007, and the period
ended January 28, 2006, respectively.

The
Company also participates through its collective bargaining agreements that provide for employer contributions to fund union-sponsored pension and other benefits. The Company's
contributions aggregated $4.9 million, $5.2 million and $3.9 million for the years ended February 2, 2008 and February 3, 2007 and the period ended
January 28, 2006, respectively. The Company incurred a withdrawal liability from one plan of $3.1 million in connection with the closing of the commercial bakery operation (see
Note 11). While the Company has not indicated an intention to withdraw from any other multiemployer plan, such withdrawal could result in an obligation to the plans for a portion of unfunded
benefit obligations of the particular plans. The Company's remaining aggregate withdrawal liability at February 2, 2008 is approximately $59 million.

Note 13Commitments and Contingencies

The United States Attorney for the Northern District of New York and the Securities and Exchange Commission ("SEC") have been conducting investigations relating
to the Company's promotional allowance practices and policies. Such investigations began prior to the Company's emergence from bankruptcy in April 2005. The Company has been cooperating with these
investigations and has produced documents and made Company employees available for interviews as requested.

On
June 1, 2006, the Company announced that the Audit Committee of the Board of Directors had completed its internal investigation of the Company's promotional allowance
practices. The Audit Committee hired independent counsel to perform the investigation. The Audit Committee found that the Company had engaged in certain improper practices principally relating to the
premature recognition of promotional allowances and that these practices had largely ceased by the time of the Company's Chapter 11 filing in May 2003. On February 3, 2006, the Company
announced that the employment of the Company's Chief Marketing Officer and the Company's Vice-President, Non-Perishables Marketing had been terminated following an interim
report to the Audit Committee on the findings of the investigation.

On
September 17, 2007, the SEC filed civil fraud charges against the Company's former Chief Marketing Officer and former Vice-President, Non-Perishables
Marketing alleging that such individuals orchestrated a scheme to inflate the Company's income and other financial results by prematurely recognizing promotional allowances received from vendors from
approximately the second quarter of fiscal year 2001 through at least the fourth quarter of fiscal year 2003. The complaint further alleges that the individuals deceived the Company's accounting
personnel to carry out their fraudulent scheme and aided and abetted violations of the Exchange Act of 1934 and rules thereunder. In addition, on the same date, the United States Attorney for the
Northern District of New York announced that a federal grand jury has returned an indictment against the abovementioned individuals on related criminal

63

---



The Penn Traffic Company

Notes to Consolidated Financial Statements (Continued)

Note 13Commitments and Contingencies (Continued)

charges.
Both the SEC and the United States Attorney indicated that their investigations are continuing.

In
connection with these matters, the Company could be subject to damage claims, fines or penalties. At present, the Company is unable to estimate the likelihood of an unfavorable
outcome or the amount
of any damage claims, fines or penalties in the event of an unfavorable outcome and, accordingly, no liability has been recorded for this contingency.

On
March 12, 2008, the Company commenced an action in the Supreme Court for the State of New York for the County of Onondaga seeking declaratory judgment to resolve a dispute over
the lease term for commercial property pertaining to a store that was closed in 2007. The Company is seeking an order declaring the proper and effective lease termination date to be
November 30, 2009, rather than the date asserted by the landlord, June 30, 2017. The Company estimates that the increased rent expense for the additional lease term asserted by the
landlord to be approximately $2,825,000. At present, the Company is unable to estimate the likelihood of an unfavorable outcome and accordingly, no liability has been recorded for this contingency.

The
Company enters into various purchase commitments in the ordinary course of business. In the opinion of management, no losses are expected to result from these purchase commitments.
In connection with the five-year supply agreement for general merchandise and health and beauty products (see Note 11), the Company is obligated to pay a fee of 1.5% of the amount
by which purchases by the Company are less than $20 million in each six month period during the term of the agreement.

See
Note 7 with respect to commitments under outstanding stand-by letters of credit. At February 2, 2008, the Company is also committed under an aggregate of
$7.4 million of surety bonds which are required to be maintained for up to three years from the date of issuance.

Note 14Preferred Stock

On December 13, 2007, the Company issued 10,000 shares of $.01 par value Series A Convertible Preferred Stock to entities affiliated with certain
principal common shareholders for an aggregate purchase price of $10 million. The preferred stock accrue dividends at a rate of 8% per annum and are convertible into shares of the Company's
common stock after December 13, 2008 at a conversion price of $16.12 per share. The preferred stock is redeemable at the option of the Company after December 13, 2009 provided the market
price of the common stock of the Company exceeds $20.96 per share for 20 consecutive days. Upon a sale of the Company, as defined, the holders of the preferred stock will have the option to receive
108% of the original purchase price of the shares and all accrued but unpaid dividends. As of February 2, 2008, accumulated preferred stock dividends aggregated $0.1 million.

64

---



The Penn Traffic Company

Notes to Consolidated Financial Statements (Continued)

Note 15Stock Award Plan

On December 15, 2006, the Company established the 2006 Omnibus Award Plan (the "Award Plan"). Pursuant to the provisions of the Award Plan, the Company can
grant stock options, restricted stock, phantom stock and stock appreciation rights. The amount of shares of common stock that can be granted are limited to 902,268 in the aggregate.

On
December 15, 2006, the Company granted an aggregate of 150,000 shares of phantom stock to two officers of the Company. The awards provide for a payment in cash on the
settlement date of May 1,
2009, or earlier in certain circumstances, of the difference between the value of the Company's common stock on the grant date and the settlement date. In accordance with SFAS 123(R) the awards
are being accounted for as compensation expense and a corresponding liability over the period to settlement date based on changes in the value of the Company's common stock. On October 1, 2007,
100,000 shares of phantom stock were forfeited. Compensation expense amounting to $0.05 million, net of reversal for forfeited stock, and $0.06 million was recognized during the years
ended February 2, 2008 and February 3, 2007, respectively.

On
May 14, 2007, the Company granted an aggregate of 22,685 shares of phantom stock to five non-officer directors. The awards provide for a payment in cash on the
settlement date, which is the earlier of when the individual ceases to be a member of the Company's Board of Directors or upon the occurrence of a change in control, as defined, of the value of an
equivalent number of shares of common stock. The award was fully vested upon the grant date. The Company recorded a compensation charge with a corresponding liability for the fair value of the awards
at date of grant. The liability is being adjusted based on change in value of the Company's common stock with a corresponding adjustment to compensation expense at each period to settlement date.
Compensation expense amounting to $0.2 million was recognized during the year ended February 2, 2008 in connection with such grant.

On
February 4, 2008, the Company granted an aggregate of 15,575 additional shares of phantom stock to the same five non-officer directors.

Note 16Net Loss Per Share

Basic and diluted net loss per share is based on the net loss available to common stockholders (computed by increasing the net loss by accumulated preferred stock
dividends for the period) and the number of common shares issued and estimated to be issued pursuant to the Plan. Common shares issued and estimated to be issued in settlement of claims filed in the
Company's Chapter 11 proceeding are treated as outstanding as of the effective date of the Plan. Common shares estimated to be issued in connection with the settlement of remaining claims are
188,164 at February 2, 2008 and 201,055 at February 3, 2007 and the period ended January 28, 2006 (see Note 9). Diluted loss per share for fiscal

65

---



The Penn Traffic Company

Notes to Consolidated Financial Statements (Continued)

Note 16Net Loss Per Share (Continued)

year
2008 does not include 626,550 common shares issuable on the conversion of the preferred stock as the effect is anti-dilutive.

|                                                     |                                            | Year Ended
February 2,
2008 |           | Restated
Year Ended
February 3,
2007 |   | Restated
Period Ended
January 28,
2006 |      
|---------------------------------------------------- | ------------------------------------------ | --------------------------- | --------- | ------------------------------------ | - | -------------------------------------- | -----
|
|Basic and Diluted Loss Per Share:                    |                                            |                             |           |                                      |   |                                        |      
|Loss from continuing operations                      |                                            | $                           | (30,438   | )                                    | $ | (27,363                                | )    
|Less: cumulative preferred stock dividends           |                                            |                             | (100      | )                                    |   |                                       |      
|                                                     |                                            |                             |           |                                      |   |                                        |      
|Loss available to common stockholders                |                                            |                             | (30,538   | )                                    |   | (27,363                                | )    
|Loss from discontinued operations                    |                                            |                             | (11,270   | )                                    |   | (587                                   | )    
|                                                     |                                            |                             |           |                                      |   |                                        |      
|Net loss available to common stockholders            |                                            | $                           | (41,808   | )                                    | $ | (27,950                                | )    
|                                                     |                                            |                             |           |                                      |   |                                        |      
|Weighted average shares outstanding and to be issued |                                            |                             | 8,501,323 |                                      |   | 8,498,752                              |      
|Net loss per share:                                  |                                            |                             |           |                                      |   |                                        |      
|                                                     | Loss from continuing operations            |                             | $         | (3.59                                | ) | $                                      | (3.22
|                                                     | (Loss)/income from discontinued operations |                             |           | (1.33                                | ) |                                        | (0.07
|                                                     |                                            |                             |           |                                      |   |                                        |      
|Net loss per share: basic and diluted                |                                            | $                           | (4.92     | )                                    | $ | (3.29                                  | )    
|                                                     |                                            |                             |           |                                      |   |                                        |      

Note 17Segment Information

The Company operates in two segmentsthe retail food business and the wholesale food distribution business. The retail food business consists of 103
supermarkets which the Company operates. The wholesale food distribution business supplies 124 independent operators with food and related products and services. In fiscal year 2006, the Company had
allocated warehouse and transportation costs based on each segment's percentage of total shipments. In fiscal year 2007, the allocation method was changed to include order size and distance from the
warehouse. The effect of this change was to increase the operating income of the retail food segment and decrease the operating income of the wholesale food distribution segment by $4.9 million
for the year ended February 3, 2007.

The
Company's senior management utilizes more than one measurement to evaluate segment performance and allocate resources. However, the dominant measures utilized are revenues and
operating income before depreciation and amortization and unallocated overhead expenses.

The
accounting policies of the reportable segments are the same as those described in Note 3 except that the Company accounts for inventory on a FIFO basis at the segment level
compared to LIFO basis at the consolidated level. The tables below present information for the fiscal years ended February 2, 2008 and February 3, 2007, and the period ended
January 28, 2006, with respect to operating segments as well as reconciliations to consolidated information (in thousands).

66

---



The Penn Traffic Company

Notes to Consolidated Financial Statements (Continued)

Note 17Segment Information (Continued)

The
table below presents revenue and operating income before depreciation and amortization and unallocated overhead expenses for the period ended February 2, 2008 (in thousands)

|                                                             |  | Retail Food |           | Wholesale
Food
Distribution |   | Reconciling
Items |     | Total |        
|------------------------------------------------------------ |  | ----------- | --------- | --------------------------- | - | ----------------- | --- | ----- | -------
|Revenues                                                     |  | $           | 1,001,046 |                             | $ | 210,046           |     | $     | 8,449  
|Cost of sales                                                |  |             | (694,800  | )                           |   | (197,058          | )   |       | (2,768 
|Selling and administrative expense                           |  |             | (249,055  | )                           |   | (6,076            | )   |       | (56,189
|Loss on store and distribution center closings               |  |             |          |                             |   |                  |     |       | (2,029 
|Asset impairment                                             |  |             |          |                             |   |                  |     |       | (547   
|                                                             |  |             |           |                             |   |                   |     |       |        
|Operating income (loss) before depreciation and amortization |  |             | 57,191    |                             |   | 6,912             |     |       | (53,084
|Depreciation and amortization                                |  |             | (24,727   | )                           |   | (885              | )   |       | (629   
|                                                             |  |             |           |                             |   |                   |     |       |        
|Operating income (loss)                                      |  |             | 32,464    |                             |   | 6,027             |     |       | (53,713
|Interest expense                                             |  |             |          |                             |   |                  |     |       |       
|Reorganization and other expenses                            |  |             |          |                             |   |                  |     |       |       
|                                                             |  |             |           |                             |   |                   |     |       |        
|Loss from continuing operations before income taxes          |  |             |           |                             |   |                   |     |       |        
|                                                             |  |             |           |                             |   |                   |     |       |        
|Total assets as of February 2, 2008                          |  | $           | 196,840   | (5)                         | $ | 21,563            | (5) | $     | 44,046 
|Capital expenditures for the year ended February 2, 2008     |  | $           | 7,339     |                             | $ |                  |     | $     | 540    

---

67

---



The Penn Traffic Company

Notes to Consolidated Financial Statements (Continued)

Note 17Segment Information (Continued)

The
table below presents revenue and operating income before depreciation and amortization and unallocated overhead expenses for the period ended February 3, 2007 (in thousands)

|                                                             |  | Retail Food |           | Wholesale
Food
Distribution |   | Reconciling
Items |      | Total |        
|------------------------------------------------------------ |  | ----------- | --------- | --------------------------- | - | ----------------- | ---- | ----- | -------
|Revenues                                                     |  | $           | 1,068,188 |                             | $ | 217,320           |      | $     | 8,353  
|Cost of sales                                                |  |             | (754,777  | )(7)                        |   | (205,624          | )(7) |       | (1,529 
|Selling and administrative expense                           |  |             | (261,610  | )                           |   | (7,017            | )    |       | (51,438
|Loss on store and distribution center closings               |  |             |          |                             |   |                  |      |       | (2,700 
|                                                             |  |             |           |                             |   |                   |      |       |        
|Operating income (loss) before depreciation and amortization |  |             | 51,801    |                             |   | 4,679             |      |       | (47,314
|Depreciation and amortization                                |  |             | (24,802   | )                           |   | (1,060            | )    |       | (62    
|                                                             |  |             |           |                             |   |                   |      |       |        
|Operating income (loss)                                      |  |             | 26,999    |                             |   | 3,619             |      |       | (47,376
|Interest expense                                             |  |             |          |                             |   |                  |      |       |       
|Reorganization expenses                                      |  |             |          |                             |   |                  |      |       |       
|                                                             |  |             |           |                             |   |                   |      |       |        
|Loss from continuing operations before income taxes          |  |             |           |                             |   |                   |      |       |        
|                                                             |  |             |           |                             |   |                   |      |       |        
|Total assets as of February 3, 2007                          |  | $           | 235,612   | (5)                         | $ | 25,703            | (5)  | $     | 46,152 
|Capital expenditures for the year ended February 3, 2007     |  | $           | 20,408    |                             | $ |                  |      | $     | 2,518  

---

68

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The Penn Traffic Company

Notes to Consolidated Financial Statements (Continued)

Note 17Segment Information (Continued)

The
table below presents revenue and operating income before depreciation and amortization and unallocated overhead expenses for the period ended January 28, 2006
(in thousands)

|                                                             |  | Retail Food |          | Wholesale
Food
Distribution |   | Reconciling
Items |     | Total |        
|------------------------------------------------------------ |  | ----------- | -------- | --------------------------- | - | ----------------- | --- | ----- | -------
|Revenues                                                     |  | $           | 824,341  |                             | $ | 171,907           |     | $     | 7,425  
|Cost of sales                                                |  |             | (579,288 | )                           |   | (158,656          | )   |       | (3,536 
|Selling and administrative expense                           |  |             | (207,260 | )                           |   | (6,438            | )   |       | (25,217
|Loss on store closings                                       |  |             |          |                             |   |                   |     |       | (520   
|                                                             |  |             |          |                             |   |                   |     |       |        
|Operating income (loss) before depreciation and amortization |  |             | 37,793   |                             |   | 6,813             |     |       | (21,848
|Depreciation and amortization                                |  |             | (16,568  | )                           |   | (1,337            | )   |       | (207   
|                                                             |  |             |          |                             |   |                   |     |       |        
|Operating income (loss)                                      |  |             | 21,225   |                             |   | 5,476             |     |       | (22,055
|Interest expense                                             |  |             |         |                             |   |                  |     |       |       
|Reorganization expenses                                      |  |             |         |                             |   |                  |     |       |       
|                                                             |  |             |          |                             |   |                   |     |       |        
|Loss from continuing operations before income taxes          |  |             |          |                             |   |                   |     |       |        
|                                                             |  |             |          |                             |   |                   |     |       |        
|Total assets as of January 28, 2006                          |  | $           | 287,035  | (5)                         | $ | 23,744            | (5) | $     | 14,612 
|Capital expenditures for the year ended January 28, 2006     |  | $           | 16,649   |                             | $ |                  |     | $     | 3,884  

---

69

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The Penn Traffic Company

Notes to Consolidated Financial Statements (Continued)

Note 18Allowance for Doubtful Accounts

An analysis of the changes to the allowance for doubtful accounts for the years ended February 2, 2008 and February 3, 2007, and the periods ended
January 28, 2006, is as follows (in thousands):

Balance at April 16, 2005

$
3,243Additions charged to costs and expenses


2,540Accounts written off, net of recoveries


(2,609
)Balance at January 28, 2006


3,174Additions charged to costs and expenses


1,324Accounts written off, net of recoveries


(762
)Balance at February 3, 2007


3,736Additions charge to costs and expenses


2,432Accounts written off, net of recoveries


(478
)Balance at February 2, 2008

$
5,690


Note 19Supplemental Cash Flow Information

Year Ended
February 2,
2008

Year Ended
February 3,
2007

Year Ended
January 28,
2006Cash paid for interest

$
8,053

$
7,183

$
4,309Cash paid for income taxes

$
234

$
228

$
261Non-cash reduction in intangible assets(1)

$
5,693

$
2,068

$
3,194


---

Note 20Reorganization and Other Expenses

Reorganization expense includes professional fees and other expenses continuing to be incurred in connection with the Chapter 11 bankruptcy filing. Other
expenses consist of $4.8 million in professional fees and other expenses incurred in connection with a proposed acquisition that was not consummated.

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The Penn Traffic Company

Notes to Consolidated Financial Statements (Continued)

Note 21Quarterly Financial Data (unaudited)

Summarized below is quarterly financial data for the fiscal years ended February 2, 2008 (Fiscal 2008), and February 3, 2007 (Fiscal 2007):

|                                                          |                      | February 2, 2008 |          
|--------------------------------------------------------- | -------------------- | ---------------- | ---------
|
|
|
|Revenues                                                  |                      | $                | 297,973  
|Gross margin                                              |                      |                  | 79,336   
|(Loss) from continuing operations                         |                      |                  | (6,857   
|(Loss) from discontinued operations                       |                      |                  | (553     
|                                                          |                      |                  |          
|Net loss                                                  |                      | $                | (7,410   
|                                                          |                      |                  |          
|Loss from continuing operations available to stockholders |                      |                  | (6,857   
|Loss from discontinued operations                         |                      |                  | (553     
|                                                          |                      |                  |          
|Net loss available to stockholders                        |                      |                  | (7,410   
|                                                          |                      |                  |          
|Per common share data                                     |                      |                  |          
|                                                          | (Basic and Diluted): |                  |          
|Loss from continuing operations                           |                      |                  | (0.81    
|Loss from discontinued operations                         |                      |                  | (0.06    
|                                                          |                      |                  |          
|Net loss per common share                                 |                      | $                | (0.87    
|                                                          |                      |                  |          
|Weighted average common shares issued and to be issued    |                      |                  | 8,498,752

---

71

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The Penn Traffic Company

Notes to Consolidated Financial Statements (Continued)

Note 21Quarterly Financial Data (unaudited) (Continued)

|                                                          |                           | February 3, 2007 |          
|--------------------------------------------------------- | ------------------------- | ---------------- | ---------
|
|
|
|Revenues                                                  |                           | $                | 306,659  
|Gross margin                                              |                           |                  | 78,048   
|(Loss) from continuing operations                         |                           |                  | (7,305   
|Income (loss) from discontinued operations                |                           |                  | (152     
|                                                          |                           |                  |          
|Net loss                                                  |                           | $                | (7,457   
|                                                          |                           |                  |          
|Loss from continuing operations available to stockholders |                           |                  | (7,305   
|Loss from discontinued operations                         |                           |                  | (152     
|                                                          |                           |                  |          
|Net loss available to stockholders                        |                           |                  | (7,457   
|                                                          |                           |                  |          
|Per common share data                                     |                           |                  |          
|                                                          | (Basic and Diluted):      |                  |          
|Loss from continuing operations                           |                           |                  | (0.86    
|Loss from discontinued operations                         |                           |                  | (0.02    
|                                                          |                           |                  |          
|                                                          | Net loss per common share |                  | $        
|                                                          |                           |                  |          
|Weighted average common shares issued and to be issued    |                           |                  | 8,498,752

72

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ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

On September 6, 2006, Deloitte & Touche, LLP ("Deloitte") resigned as our independent registered public accounting firm.

Deloitte
never rendered an audit report with respect to our financial statements for any period. During the fiscal years ended January 29, 2005 and January 28, 2006 and
through Deloitte's resignation on September 6, 2006, there had been no disagreement between us and Deloitte on any matter of accounting principles or practices, financial statement disclosure,
or auditing scope or procedure, which disagreement, if not resolved to the satisfaction of Deloitte, would have caused it to make a reference to the subject matter of the disagreement in connection
with its reports.

Except
as described below, during the fiscal years ended January 29, 2005 and January 28, 2006 and through Deloitte's resignation on September 6, 2006, there have
been no reportable events (as defined in Item 304(a)(1)(v) of Regulation S-K). In connection with its resignation, Deloitte informed us that it was unwilling to rely on
representations from our former internal General Counsel. Further, as a result of the interim findings of the Audit Committee's investigation that we had engaged in certain improper practices
principally relating to the premature recognition of promotional allowances, which has been previously disclosed, Deloitte had advised us that it would need to expand significantly the scope of its
audit. However, due to its resignation such audit never took place.

We
furnished a copy of the above disclosure to Deloitte and requested that Deloitte furnish us with a letter addressed to the Securities and Exchange Commission stating whether or not it
agreed with such disclosure. Deloitte subsequently furnished us with a letter addressed to the Securities and Exchange Commission in which Deloitte agreed with the disclosure statements made by us.

On
September 22, 2006, we announced that we had hired the accounting firm of Eisner LLP to serve as our independent auditor.

ITEM 9A.

(a) Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation
of the effectiveness of the Company's disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934,
amended. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that control deficiencies which constitute a material weakness, as discussed in
subsection (b) below, existed in our internal control over financial reporting as of February 2, 2008. Because of the material weakness described below, our CEO and CFO concluded that
our disclosure controls and procedures were not effective as February 2, 2008 to provide reasonable assurance that information required to be disclosed by the Company in reports that it files
or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission's rules and forms.

In
light of the material weaknesses described below, we performed additional analyses and other post-closing procedures to determine that our financial statements included in
this report were prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). Accordingly, management believes that the financial
statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.

73

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(b) Management's Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f)
under the Securities Exchange Act of 1934, as amended. The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles in the United States of America. The Company's management assessed the effectiveness of our internal
control over financial reporting as of February 2, 2008. In making the assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission ("COSO") inInternal Control-Integrated Framework. Based upon this assessment, management identified the following material weakness in the
Company's internal control over financial reporting.

A
material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material
misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis.

We
had a material weakness in our entity level control environment in that we did not file interim financial results through the Form 10-Qs for the fiscal year ending
February 2, 2008 in accordance with U.S. GAAP within the time periods specified in the Securities and Exchange Commission's rules and forms. The principal factor that contributed to our
inability to file the Form 10-Qs for the fiscal year ending February 2, 2008 was the company lacked a sufficient complement of personnel to prepare and file these interim
financial statements on a timely basis. Additional factors contributing to this material weakness include:



Shortly
after the filing of this Form 10-K, the Company plans to file its interim financial statements on Form 10-Q for the fiscal years ending
February 2, 2007 and February 2, 2008, respectively. At this point in time, going forward management does not believe there will be any barriers preventing it from filing future
Form 10-Qs on a timely basis.

All
internal control systems have inherent limitations, including the possibility of circumvention and overriding the control. Accordingly, even effective internal control can provide
only reasonable assurance as to the reliability of financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal control may vary over
time.

Our
independent registered public accounting firm, Eisner LLP, has audited the effectiveness of our internal control over financial reporting, as stated in its report which is
included herein.

74

---



(c) Remediation Activities

Our management has discussed the material weakness described above with our Audit Committee. In an effort to remediate the identified material weakness, we have
initiated and/or undertaken the following actions:



(d) Changes in Internal Control Over Financial Reporting



As disclosed in the Form 10-K for the fiscal year ending February 2, 2007, our current President and Chief Executive Officer and Senior
Vice President and Chief Financial Officer were not in these positions during fiscal year 2007 and management did not conduct an assessment of our internal control over financial reporting. In May
2007, we hired an outside consulting firm to assist management in its evaluation of the effectiveness of internal controls over financial reporting, including disclosure controls and procedures and as
a result we were able to conclude as to its effectiveness as stated in section (b) above.



The Independent Auditor's Report within the Form 10-K for the fiscal year ending February 2, 2007 disclosed the following material
weakness:

The
Company lacked a sufficient complement of personnel possessing the appropriate knowledge, experience and training in order to timely prepare and file reliable year-end
financial statements and Annual Report on Form 10-K. This control deficiency affects substantially
all financial statement accounts that could result in a material misstatement to the Company's interim or annual consolidated financial statements that would not be prevented or detected.

We
took the following actions in the course of the fiscal year ending February 2, 2008 to remediate the 2007 material weakness:



75

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board
of Directors
The Penn Traffic Company
Syracuse, New York

We
have audited The Penn Traffic Company (the "Company") internal control over financial reporting as of February 2, 2008, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). The Company's management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Item 9A of this Form 10-K. Our
responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our
audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of that company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the
financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

A
material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material
misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management's
assessment. As of February 2, 2008, the Company lacked a sufficient complement of personnel in order to timely prepare and file reliable interim financial statements which, as of
February 2, 2008, have not been filed since the Company's emergence from Chapter 11 proceedings effective April 16, 2005. This material weakness was considered in determining the
nature, timing, and extent of audit tests applied in our audit of the 2008 consolidated financial statements, and this report does not affect our report dated April 11, 2008 on those financial
statements in which we express an unqualified opinion.

In
our opinion, because of the material weakness described above on the achievement of the objectives of the control criteria, The Penn Traffic Company did not maintain, in all material
respects,

76

---



effective
internal control over financial reporting as of February 2, 2008, based on criteria established in Internal ControlIntegrated Framework issued by COSO.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of The Penn Traffic
Company, and our report dated April 11, 2008 expressed an unqualified opinion on those financial statements.

/s/
Eisner LLP

New
York, New York
April 11, 2008

77

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ITEM 9B.    OTHER INFORMATION

None

PART III

ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this Item is incorporated herein by reference to the captions "Election of Directors" and "Executive Officers" in the Company's Proxy
Statement to be filed in connection with the Company's Annual Meeting of Stockholders to be held on or about July 9, 2008.

ITEM 11.    EXECUTIVE COMPENSATION

The information required by this Item is incorporated herein by reference to the caption "Executive Compensation" in the Company's Proxy Statement to be filed in
connection with the Company's Annual Meeting of Stockholders to be held on or about July 9, 2008.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item is incorporated herein by reference to the caption "Security Ownership of Certain Beneficial Owners and Management" in the
Company's Proxy Statement to be filed in connection with the Company's Annual Meeting of Stockholders to be held on or about July 9, 2008.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

The information required by this Item is incorporated herein by reference to the caption "Compensation of Directors" in the Company's Proxy Statement to be filed
in connection with the Company's Annual Meeting of Stockholders to be held on or about July 9, 2008.

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information called for by Item 14 appears in the Company's Proxy Statement to be filed in connection with the Company's Annual Meeting of Stockholders
to be held on or about July 9, 2008 under the caption "Principal Accountant Fees and Services" is incorporate herein by reference.

78

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PART VI

ITEM 15.    EXHIBITS, AND FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

Our consolidated financial statements filed as part of this report appear beginning on page 39.

Exhibits:

The following are filed as Exhibits to this Report:

|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1         |  | First Amended Joint Plan of Reorganization of The Penn Traffic Company and its Affiliated Debtors and Debtors-in-Possession, dated February 4, 2005 (incorporated by reference to Exhibit 2.1 to Form 8-K
filed on March 24, 2005).                                                                                                                                                                                                                                                                        
|2.2         |  | Notice of Technical Modifications to the First Amended Joint Plan of Reorganization of The Penn Traffic Company and its Affiliated Debtors and Debtors in Possession under Chapter 11 of the Bankruptcy Code dated February 4, 2005
(incorporated by reference to Exhibit 2.3 to the Form 8-K filed on March 24, 2005).                                                                                                                                                                                    
|3.1         |  | Second Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to Form 8-A12G/A filed on April 13, 2005).                                                                                                                                                                                                                                                                                                                                                              
|3.2         |  | Amended and Restated By-Laws of Penn Traffic (incorporated by reference to Exhibit 2 to Form 8-A12G/A filed on June 29, 1999).                                                                                                                                                                                                                                                                                                                                                                             
|10.1        |  | Global Settlement Agreement and Mutual Release, dated as of February 4, 2005, by and between The Pension Benefit Guaranty Corporation, the Official Committee of Unsecured Creditors and The Penn Traffic Company and its affiliated debtors
(incorporated by reference to Exhibit 10.1 to the Form 8-K filed on February 11, 2005).                                                                                                                                                                       
|10.2        |  | Form of Change in Control Protection Agreement (incorporated by reference to Exhibit 99.1 to the Form 8-K filed on April 18, 2006).                                                                                                                                                                                                                                                                                                                                                                        
|10.3        |  | Credit Agreement, among The Penn Traffic Company, Penny Curtiss Baking Company, Inc. and Big M Supermarkets, Inc., as borrowers; the other credit parties signatory thereto; General Electric Capital Corporation; JP Morgan Chase Bank, N.A.;
The CIT Group/Business Credit; GECC Capital Markets Group, Inc.; and the other lenders signatory thereto from time to time (incorporated by reference to Exhibit 99.1 to the Form 8-K filed on September 12, 2006).                                         
|10.4        |  | Supplemental Loan Credit Agreement, dated as of April 13, 2005, among The Penn Traffic Company, Penny Curtiss Baking Company, Inc. and Big M Supermarkets, Inc., as borrowers; the other credit parties signatory thereto; Kimco Capital
Corp.; and the other lenders signatory thereto from time to time (incorporated by reference to Exhibit 99.2 to the Form 8-K filed on September 12, 2006).                                                                                                         
|10.5        |  | Amendment, dated December 28, 2006, to the Credit Agreement, among The Penn Traffic Company, Penny Curtiss Baking Company, Inc. and Big M Supermarkets, Inc., as borrowers; the other credit parties signatory thereto; General Electric
Capital Corporation; JP Morgan Chase Bank, N.A.; The CIT Group/Business Credit; GECC Capital Markets Group, Inc.; and the other lenders signatory thereto from time to time (incorporated by reference to Exhibit 10.5 to the Form 10-K
filed on August 17, 2007).

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|10.6  |  | Amendment, dated December 28, 2006, to the Supplemental Loan Credit Agreement, dated as of April 13, 2005, among The Penn Traffic Company, Penny Curtiss Baking Company, Inc. and Big M Supermarkets, Inc., as borrowers; the other
credit parties signatory thereto; Kimco Capital Corp.; and the other lenders signatory thereto from time to time (incorporated by reference to Exhibit 10.6 to the Form 10-K filed on August 17, 2007).                                                                         
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.7  |  | Consulting Agreement, dated as of June 29, 2006, between The Penn Traffic Company and Robert J. Kelly (incorporated by reference to Exhibit 99.1 to the Form 8-K filed on June 30, 2006).                                                                                                                                                                                                                                                                                                                           
|10.8  |  | Offer Letter, dated as of October 2, 2006, between The Penn Traffic Company and Robert Panasuk (incorporated by reference to Exhibit 99.1 to the Form 8-K filed on October 6, 2006).                                                                                                                                                                                                                                                                                                                                
|10.9  |  | Offer Letter, dated as of December 12, 2006, between The Penn Traffic Company and Robert Panasuk (incorporated by reference to Exhibit 99.1 to the Form 8-K filed on December 18, 2006).                                                                                                                                                                                                                                                                                                                            
|10.10 |  | Severance Agreement between The Penn Traffic Company and Randy P. Martin (incorporated by reference to Exhibit 99.1 to the Form 8-K filed on February 1, 2007).                                                                                                                                                                                                                                                                                                                                                     
|10.11 |  | Offer Letter, dated May 2, 2007, between The Penn Traffic Company and Tod A. Nestor (incorporated by reference to Exhibit 99.1 to the Form 8-K filed on May 9, 2007).                                                                                                                                                                                                                                                                                                                                               
|10.12 |  | The Penn Traffic Company 2006 Omnibus Award Plan (incorporated by reference to Exhibit 99.4 to the Form 8-K filed on December 18, 2006).                                                                                                                                                                                                                                                                                                                                                                            
|10.13 |  | Form of The Penn Traffic Company Phantom Stock Award Agreement (incorporated by reference to Exhibit 99.1 to the Form 8-K filed on May 18, 2007).                                                                                                                                                                                                                                                                                                                                                                   
|10.14 |  | Second Amendment, dated as of August 1, 2007, to the Credit Agreement, among The Penn Traffic Company, Penny Curtiss Baking Company, Inc. and Big M Supermarkets, Inc., as borrowers; the other credit parties signatory thereto; General
Electric Capital Corporation; JP Morgan Chase Bank, N.A.; The CIT Group/Business Credit; GECC Capital Markets Group, Inc.; and the other lenders signatory thereto from time to time (incorporated by reference to Exhibit 99.1 to the
Form 8-K filed on August 14, 2007).
|10.15 |  | Second Amendment, dated as of August 1, 2007, to the Supplemental Loan Credit Agreement, dated as of April 13, 2005, among The Penn Traffic Company, Penny Curtiss Baking Company, Inc. and Big M Supermarkets, Inc., as borrowers;
the other credit parties signatory thereto; Kimco Capital Corp.; and the other lenders signatory thereto from time to time (incorporated by reference to Exhibit 99.2 to the Form 8-K filed on August 14, 2007).                                                                
|10.16 |  | Promotion letter, dated October 1, 2007, addressed to Gregory J. Young (incorporated by reference to Exhibit 99.1 to the Form 8-K filed on October 1, 2007).                                                                                                                                                                                                                                                                                                                                                        
|10.17 |  | Registration Rights Agreement, dated as of December 13, 2007, by and among The Penn Traffic Company and each of the purchasers set forth therein (incorporated by reference to Exhibit 10.2 to the Form 8-K filed on December 14,
2007).                                                                                                                                                                                                                                                                            
|10.18 |  | Securities Purchase Agreement, dated December 13, 2007, by and among The Penn Traffic Company and each of the purchasers set forth therein (incorporated by reference to Exhibit 10.1 to the Form 8-K filed on December 14,
2007).                                                                                                                                                                                                                                                                                  

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|21.1 |  | Subsidiaries of The Penn Traffic Company (incorporated by reference to Exhibit 21.1 to the Form 10-K filed on August 17, 2007).                                             
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of CEO pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.                                                                      
|31.2 |  | Certification of CFO pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.                                                                      
|32.1 |  | Certification of CEO pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code.
|32.2 |  | Certification of CFO pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code.

81

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Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized as of the 16th day of April 2008.

| |  | THE PENN TRAFFIC COMPANY
| |  | ------------------------
| |  | By:                     

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on its behalf by the registrant and in the capacities and
on the dates indicated:

|Signature                           |  | Title                                              |  | Date          
|----------------------------------- |  | -------------------------------------------------- |  | --------------
|                                    |  |                                                    |  |               
|/s/ROBERT J. KELLYRobert J. Kelly   |  | Chairman of the Board                              |  | April 16, 2008
|John E. Burke                       |  | Director                                           |  | April 16, 2008
|/s/KEVIN P. COLLINSKevin P. Collins |  | Director                                           |  | April 16, 2008
|/s/BEN EVANSBen Evans               |  | Director                                           |  | April 16, 2008
|/s/ALAN C. LEVITANAlan C. Levitan   |  | Director                                           |  | April 16, 2008
|/s/KURT M. CELLARKurt M. Cellar     |  | Director                                           |  | April 16, 2008
|/s/SCOTT SOZIOScott Sozio           |  | Director                                           |  | April 16, 2008
|/s/GREGORY J. YOUNGGregory J. Young |  | President and Chief Executive Officer and Director |  | April 16, 2008
|/s/TOD A. NESTORTod A. Nestor       |  | Senior Vice President and Chief Financial Officer  |  | April 16, 2008

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