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

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

For the quarterly period ended March 28, 2009

Commission File Number 001-13843

DUANE READE HOLDINGS, INC.(Exact name of registrant as specified in its charter)

DELAWARE(State or other jurisdiction of
incorporation or organization)

05-0599589(IRS Employer
ID Number)440 Ninth Avenue
New York, New York(Address of principal executive offices)

10001(Zip Code)


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

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 ý                    No o*

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit
and post such files).

Yes o                    No 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:

Large accelerated filer o

Accelerated filer o

Non-accelerated filer ý (Do not check if a smaller reporting company)

Smaller reporting company o


Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) (check one):

Yes o                    No ý

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

As
of May 5, 2009, there were 2,615,077 shares of common stock issued and outstanding. All but 20,100 shares of the common stock of the registrant are held by its parent.

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INDEX



PART IFINANCIAL INFORMATION

6ITEM 1.FINANCIAL STATEMENTS

6Consolidated Statements of Operations (Unaudited)For the 13 Weeks Ended March 28, 2009 and March 29,
 2008

6Consolidated Balance Sheets (Unaudited)As of March 28, 2009 and December 27, 2008

7Consolidated Statements of Cash Flows (Unaudited)For the 13 Weeks Ended March 28, 2009 and March 29,
 2008

8Consolidated Statements of Comprehensive Loss (Unaudited)For the 13 Weeks Ended March 28, 2009 and
March 29, 2008

9Notes to Consolidated Financial Statements (Unaudited)

10ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

35ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

48ITEM 4.CONTROLS AND PROCEDURES

49PART IIOTHER INFORMATION

50SIGNATURES

51


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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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



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

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

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PART IFINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

Duane Reade Holdings, Inc.    Consolidated Statements of Operations (Unaudited)    (In thousands)

13 Weeks EndedMarch 28,
2009

March 29,
2008Net sales

$
444,456

$
427,137Cost of sales (exclusive of depreciation and amortization shown separately below)


307,246


294,445Gross profit


137,210


132,692Selling, general and administrative expenses


122,055


117,954Depreciation and amortization


18,076


17,919Store pre-opening expenses


47


47Other expenses


1,404


899Operating loss


(4,372
)

(4,127
)Interest expense, net


11,900


15,906Loss before income taxes


(16,272
)

(20,033
)Income tax expense


939


960Net loss

$
(17,211
)
$
(20,993
)


The
accompanying notes are an integral part of these financial statements.

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Duane Reade Holdings, Inc.        Consolidated Balance Sheets (Unaudited)        (In thousands, except share and per share data)

March 28,
2009

December 27,
2008ASSETSCurrent AssetsCash

$
1,423

$
1,430Receivables, net


52,963


55,783Inventories


215,445


214,154Prepaid expenses and other current assets


15,714


13,541Total Current Assets


285,545


284,908Property and equipment, net


188,223


186,560Goodwill


69,510


69,510Other assets, net


165,359


171,622Total Assets

$
708,637

$
712,600LIABILITIES AND STOCKHOLDERS' DEFICITCurrent LiabilitiesAccounts payable

$
98,314

$
88,238Accrued interest


3,854


8,597Accrued expenses


43,086


52,262Current portion of debt


153,180


144,642Current portion of capital lease obligations


5,971


4,485Total Current Liabilities


304,405


298,224Long-term debt


405,034


405,033Capital lease obligations, less current portion


1,282


1,492Deferred income taxes


28,855


28,440Redeemable preferred stock and accrued dividends


38,093


36,775Deferred rent liabilities


56,506


53,084Other non-current liabilities


38,165


36,253Total Liabilities


872,340


859,301Commitments and contingencies (Note 12)Stockholders' deficitPreferred stock, $0.01 par; authorized 50,000 shares; issued and outstanding: zero shares at March 28, 2009 and December 27, 2008





Common stock, $0.01 par; authorized 4,205,600 shares at March 28, 2009 and December 27, 2008; issued and outstanding: 2,615,077 shares at
March 28, 2009 and December 27, 2008


26


26Paid-in capital


256,085


255,867Accumulated other comprehensive loss


(4,755
)

(4,747
)Accumulated deficit


(415,059
)

(397,847
)Total Stockholders' Deficit


(163,703
)

(146,701
)Total Liabilities and Stockholders' Deficit

$
708,637

$
712,600


The
accompanying notes are an integral part of these financial statements.

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Duane Reade Holdings, Inc.        Consolidated Statements of Cash Flows (Unaudited)        (In thousands)

13 Weeks EndedMarch 28,
2009

March 29,
2008Cash flows provided by (used in) operating activities:Net loss

$
(17,211
)
$
(20,993
)Adjustments to reconcile net loss to net cash provided by (used in) operating activities:Depreciation and amortization


18,989


18,831Deferred income taxes


933


904Non-cash rent expense


3,422


2,721Non-cash interest expense attributable to redeemable preferred stock


1,088


2,898Other non-cash items


219


(153
)Change in operating assets and liabilities:Receivables


2,820


2,643Prepaid expenses and other current assets


(2,173
)

(283
)Inventories


(1,291
)

(2,299
)Accounts payable


10,076


(2,230
)Accrued expenses


(14,445
)

(1,849
)Other assets and liabilities, net


1,845


(266
)NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES


4,272


(76
)Cash flows used in investing activities:Capital expenditures


(9,847
)

(7,236
)Lease acquisition, customer file and other costs


(1,840
)

(1,705
)Proceeds from sale of assets





525NET CASH USED IN INVESTING ACTIVITIES


(11,687
)

(8,416
)Cash flows provided by financing activities:Borrowings from revolving credit facility


513,905


508,369Repayments of revolving credit facility


(505,367
)

(499,033
)Capital contributions





130Repayments of capital lease obligations


(1,130
)

(954
)NET CASH PROVIDED BY FINANCING ACTIVITIES


7,408


8,512Net increase (decrease) in cash


(7
)

20Cash at beginning of period


1,430


1,380Cash at end of period

$
1,423

$
1,400


The
accompanying notes are an integral part of these financial statements.

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Duane Reade Holdings, Inc.        Consolidated Statements of Comprehensive Loss (Unaudited)        (in thousands)

13 Weeks EndedMarch 28,
2009

March 29,
2008Net loss

$
(17,211
)
$
(20,993
)Change in fair value of interest rate collar


(8
)

(216
)Total Other Comprehensive Loss


(8
)

(216
)Total Comprehensive Loss

$
(17,219
)
$
(21,209
)


The
accompanying notes are an integral part of these financial statements.

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Notes to Unaudited Consolidated Interim Financial Statements        (dollars in thousands)

1. Basis of Presentation

Duane Reade Holdings, Inc. was formed in December 2003 by Oak Hill Capital Partners, LP, a private equity firm ("Oak Hill") in order to acquire Duane Reade Inc. and
its subsidiaries (the "Acquisition"). Approximately 99% of the common stock of Duane Reade Holdings, Inc. ("Duane Reade Holdings" or the "Company") is owned by Duane Reade
Shareholders, LLC, a parent entity also established to effectuate the Acquisition. The Acquisition was completed on July 30, 2004 through the merger of Duane Reade Acquisition (a
wholly-owned subsidiary of Duane Reade Holdings) into Duane Reade Inc. with Duane Reade Inc. being the surviving entity and a wholly-owned subsidiary of Duane Reade Holdings after the
merger transaction.

The
Company, along with certain of its subsidiaries, is a guarantor of the debt obligations of Duane Reade Inc. and Duane Reade, the New York general partnership that holds the
operating assets and liabilities ("Duane Reade GP"). The Company has no assets or operations other than its investment in its subsidiaries. The guarantees provided by the Company and its other
subsidiaries under the debt obligations of Duane Reade Inc. and Duane Reade GP (described in more detail in Note 6) are full and unconditional, joint and several.

The
Company has incurred losses since the Acquisition date due primarily to the additional depreciation and amortization expense relating to the stepped-up fair value of its
assets on the Acquisition date, and increased interest expense resulting from Acquisition indebtedness. The Company has an accumulated deficit of $415.1 million at March 28, 2009. The
Company has generated positive net cash flows from operations of $4.3 million during the 13 weeks ended March 28, 2009, $44.3 million in fiscal 2008, $19.3 million
in fiscal 2007 and $11.6 million in fiscal 2006. The amended asset-based revolving loan facility contains a single fixed charge coverage requirement which only becomes applicable when
borrowings exceed 90 percent of the borrowing base, as defined in the agreement governing the amended asset-based revolving loan facility. The Company has never been
subject to the financial coverage requirement. Historically, the Company's borrowings have never exceeded 90 percent of the borrowing base, and the Company does not expect to exceed this
threshold during the remainder of 2009. If the fixed charge coverage ratio had been in effect during the first quarter of 2009, the Company would have been in full compliance with the covenant.

The
Company intends to refinance its senior floating rate notes due 2010 and senior subordinated notes due 2011 in the amounts of $210 million and $195 million,
respectively, prior to their maturity dates. There can be no assurance that such refinancing will actually take place.

The
Unaudited Consolidated Interim Financial Statements included herein reflect all adjustments which, in the opinion of management, are necessary to present a fair statement of the
results of operations, financial position, cash flows and comprehensive loss of the Company, and have been prepared, in all material respects, in accordance with the same accounting principles
followed in the preparation of the Company's Annual Consolidated Financial Statements for the year ended December 27, 2008. These Unaudited Consolidated Interim Financial Statements should be
read in conjunction with the Company's Consolidated Financial Statements included in its Annual Report on Form 10-K for the year ended December 27, 2008. The Unaudited
Consolidated Interim Financial Statements include the assets and operations of the Company and its subsidiaries. All significant intercompany transactions and balances have been eliminated. The
results for the interim periods presented are not necessarily indicative of the results expected for the full year.

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Notes to Unaudited Consolidated Interim Financial Statements (Continued)

(dollars in thousands)

2. Recently Issued Accounting Pronouncements

In May 2008, the Financial Accounting Standards Board ("FASB") approved FASB Staff Position ("FSP") APB 14-1, "Accounting for Convertible Debt Instruments That May Be
Settled
in Cash upon Conversion (Including Partial Cash Settlement)." FSP APB 14-1 clarifies that convertible debt instruments that may be settled in cash upon conversion (including partial
cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, "Accounting for Convertible Debt and Debt issued with Stock Purchase Warrants." Additionally, FSP
APB 14-1 specifies that issuers of such instruments should separately account for the liability and the equity components in a manner that will reflect the entity's nonconvertible
debt borrowing rate when interest cost is recognized in subsequent periods, with the equity component being valued based on the difference between such non-convertible debt borrowing rate
and the actual cash interest rate on such convertible debt. FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008, and interim periods within those
fiscal years and must be applied retrospectively to all periods presented. The Company adopted FSP APB 14-1 on December 28, 2008, the first day of fiscal 2009, and its
adoption did not have a material effect on the consolidated financial statements.

In
April 2008, the FASB issued FASB FSP No. FAS 142-3, "Determination of the Useful Life of Intangible Assets," which amends the factors that should be considered in
developing renewal or extension assumptions used in determining the useful lives of recognized intangible assets. FSP No. FAS 142-3 is effective for fiscal years beginning after
December 15, 2008, and interim periods within those years. The Company adopted FSP No. FAS 142-3 on December 28, 2008, the first day of fiscal 2009, and its adoption
did not have a material effect on the consolidated financial statements.

In
May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles." This standard is intended to improve financial reporting by identifying a
consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with generally accepted accounting principles in
the United States for non-governmental entities. SFAS No. 162 is effective 60 days following approval by the U.S. Securities and Exchange Commission ("SEC") of the Public
Company Accounting Oversight Board's amendments to AU Section 411, "The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles." The Company does not expect the
adoption of SFAS No. 162 to have a material impact on the preparation of the consolidated financial statements.

In
March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activitiesan Amendment of FASB Statement No. 133." The new
standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand the effects on an
entity's financial position, financial performance, and cash flows. SFAS No. 161 is effective prospectively for periods beginning on or after November 15, 2008. The Company adopted SFAS
No. 161 on December 28, 2008, the first day of fiscal 2009, and its adoption did not have a material effect on the consolidated financial statements.

In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial StatementsAn Amendment of ARB No. 51." SFAS No. 160
establishes accounting and reporting standards pertaining to ownership interests in subsidiaries held by parties other than the parent, the amount of net income attributable to the parent and to the
noncontrolling interest, changes in a parent's ownership interest, and the valuation of any retained noncontrolling equity investment when a subsidiary is deconsolidated. This statement also
establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling

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Notes to Unaudited Consolidated Interim Financial Statements (Continued)

(dollars in thousands)

2. Recently Issued Accounting Pronouncements (Continued)

owners.
SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. The Company adopted SFAS No. 160 on December 28, 2008, the first day of fiscal
2009, and its adoption did not have a material effect on the consolidated financial statements.

In
December 2007, the FASB issued SFAS No. 141(R), "Business Combinations." SFAS No. 141(R) requires the acquiring entity in a business combination to recognize the full
fair value of assets acquired and liabilities assumed in the transaction (whether a full or partial acquisition), establishes the acquisition-date fair value as the measurement objective
for all assets acquired and liabilities assumed, and requires the acquirer to disclose the information needed to evaluate and understand the nature and effect of the business combination. This
statement applies to all transactions or other events in which the acquirer obtains control of one or more businesses, including those sometimes referred to as "true mergers" or "mergers of equals"
and combinations achieved without the transfer of consideration, for example, by contract alone or through the lapse of minority veto rights. For new acquisitions made following the adoption of
SFAS 141(R), significant costs directly related to the acquisition including legal, audit and other fees, as well as most acquisition-related restructuring, will have to be expensed as incurred
rather than included in goodwill as is generally permitted under SFAS No. 141, "Business Combinations." Additionally, contingent purchase price arrangements (also known as
earn-outs) will be re-measured to estimated fair value with the impact reported in earnings, whereas under present rules the contingent purchase consideration is recorded to
goodwill when determined. Adoption of SFAS No. 141(R) is required for business combinations after December 15, 2008. Early adoption and retroactive application of SFAS No. 141(R)
to fiscal years preceding the effective date are not permitted. The Company adopted SFAS No. 141(R) on December 28, 2008, the first day of fiscal 2009, and its adoption did not have a
material effect on the consolidated financial statements.

3. Stock-Based Payment

In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment." This statement established standards for the accounting for transactions in which an entity exchanges its
equity instruments for goods or services. Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R), using the "modified" prospective
transition method. Under that transition method, compensation expense recognized for the thirteen weeks ended March 28, 2009 and March 29, 2008 reflects the vested portion of share-based
payments granted on or after January 1, 2006 based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). The Company has elected to
recognize compensation expense on a straight-line basis over the vesting period of the respective options. During the thirteen weeks ended March 28, 2009 and March 29, 2008,
the Company recorded pre-tax compensation expense of approximately $217.7 thousand and $33.3 thousand, respectively, attributable to the vested portion of stock options
granted after the adoption date.

Management Stock Option Plan

The Company's Board of Directors adopted the Duane Reade Holdings, Inc. Management Stock Option Plan, referred to in this report
as the "2004 Option Plan," which became effective on the date the Acquisition was completed. The 2004 Option Plan is administered by the compensation committee of the Board of Directors. Any officer,
employee, director or consultant of Duane Reade Holdings or any of its subsidiaries or affiliates is eligible to be designated a participant under the 2004 Option Plan.

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Notes to Unaudited Consolidated Interim Financial Statements (Continued)

(dollars in thousands)

3. Stock-Based Payment (Continued)

The
Company may grant a maximum of 575,893 shares of its common stock under the 2004 Option Plan.

Under
the 2004 Option Plan, the compensation committee of Duane Reade Holdings may grant awards of nonqualified stock options, incentive stock options, or any combination of the
foregoing. A stock option granted under the 2004 Option Plan will provide a participant with the right to purchase, within a specified period of time, a stated number of shares of the Company's common
stock at the price specified in the award agreement. Stock options granted under the 2004 Option Plan will be subject to such terms, including the exercise price and the conditions and timing of
exercise, not inconsistent with the 2004 Option Plan, as may be determined by the compensation committee and specified in the applicable stock option agreement or thereafter.

During
the thirteen weeks ended March 28, 2009, there were 23,000 options granted. The weighted-average grant-date fair value of the options granted during the
thirteen weeks ended March 28, 2009 was $0. There were no options granted during the thirteen weeks ended March 29, 2008.

There
were no stock options exercised during the first thirteen weeks of either 2009 or 2008.

The
fair value of each option grant issued during the thirteen weeks ended March 28, 2009 was estimated on the date of grant using the lattice-pricing model with the following
weighted-average assumptions:



As
of March 28, 2009, there was $2.3 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under
the stock-based
compensation plan. That cost is expected to be recognized on a straight-line basis over a weighted-average period of approximately 2.9 years.

As
of March 28, 2009, a total of 87,699 shares of common stock of the Company were reserved for the issuance of additional stock options. The Company expects to satisfy the
exercise of stock options utilizing newly-issued shares.

4. Inventory and Cost of Sales

At March 28, 2009 and December 27, 2008, inventories, consisting solely of finished goods, would have increased by $3.3 million and $2.4 million,
respectively, if they had been valued on a lower of first-in, first-out ("FIFO") cost or market basis instead of a last-in, first-out ("LIFO") basis.
Included within cost of sales are all warehouse expenses and distribution costs, except for depreciation and amortization expense which is shown separately on the consolidated statement of operations.
The Company reflects promotional allowances from vendors as a reduction of inventory or advertising expense, depending on the nature of the allowance, when such inventory is sold or advertising or
promotions have been completed and the related allowances have been earned.

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Notes to Unaudited Consolidated Interim Financial Statements (Continued)

(dollars in thousands)

5. Exit and Disposal Activities

In the normal course of its business, the Company closes underperforming locations. In accordance with the provisions of Emerging Issues Task Force Issue No. 95-3,
"Recognition of Liabilities in Connection with Purchase Business Combinations" and SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," the Company establishes
reserves for costs to be incurred in connection with such store closings. At March 28, 2009, the balance of this reserve was $5.4 million. This balance will be used primarily for
occupancy-related costs in these closed stores.

6. Debt

Debt is summarized as follows (dollars in thousands):

Description of Instrument

March 28,
2009

December 27,
2008Current debt:Asset-based revolving loan facility (1)

$
153,180

$
144,642Non-current Debt:Senior secured floating rate notes due 2010

$
210,000

$
210,0009.75% Senior subordinated notes due 2011


195,000


195,0002.1478% Senior convertible notes due 2022 (2)


34


33Total Non-current debt

$
405,034

$
405,033Total Debt

$
558,214

$
549,675






Asset-Based Revolving Loan Facility

On July 22, 2004, in connection with the Acquisition, the asset-based revolving loan facility was amended to increase the
borrowing capacity to an aggregate principal amount of $250.0 million, subject to an adjusted borrowing base calculation based upon specified advance rates against the value of inventory,
pharmacy prescription files and accounts receivable. The original maturity date of the amended asset-based revolving loan facility was July 21, 2008. In August 2005, in conjunction with the
issuance of $50.0 million aggregate principal amount of senior secured floating rate notes due 2010, the Company permanently reduced the maximum availability under the amended asset-based
revolving loan facility by $25.0 million to $225.0 million. On July 7, 2006, the Company entered into a further amendment to the amended asset-based revolving loan facility to
extend its maturity from July 21, 2008 to July 21, 2011, subject to the requirement that the Company refinance or restructure the $210.0 million aggregate principal amount of the
senior secured floating rate notes due 2010 on terms

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Notes to Unaudited Consolidated Interim Financial Statements (Continued)

(dollars in thousands)

6. Debt (Continued)

reasonably
acceptable to the administrative agent and at least 120 days prior to the scheduled maturity date. The Company fully intends to refinance or restructure the outstanding principal
amounts of its senior secured floating rate notes within the required timeframe, in accordance with the requirements of the third amendment.

On
September 28, 2007, the asset-based revolving loan facility was amended to exclude from the definition of Capital Expenditures any expenditure made with the proceeds of any
equity securities issued or capital contributions received by the Company.

The
amended asset-based revolving loan facility includes a $50.0 million sub-limit for the issuance of letters of credit. Obligations under the revolving loan facility
are collateralized by a first priority interest in inventory, receivables, pharmacy prescription files, deposit accounts and certain other current assets. Under the amended asset-based revolving loan
facility, Duane Reade GP is the sole obligor. However, the amended asset-based revolving loan facility is guaranteed on a full and unconditional basis by the Company, Duane Reade Inc.
and each of the Company's other domestic subsidiaries other than the obligor.

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

Revolving
loans under the amended asset-based revolving loan facility, at the Company's option, bear interest at either:



Borrowings
under the amended facility continue to be primarily LIBOR-based. At March 28, 2009, the amended asset-based revolving loan facility bore interest at a weighted average
annual rate of 2.4%.

At
March 28, 2009, there was $153.2 million outstanding under the amended asset-based revolving loan facility, and approximately $57.7 million of remaining
availability, net of $9.1 million reserved for outstanding standby letters of credit. The $9.1 million reserved for outstanding letters of credit includes a $3.5 million letter of
credit required for the litigation settlement agreement relating to two class action lawsuits. See Note 12 for further discussion of the litigation settlement agreement. Obligations under this
facility have been classified as current liabilities because cash receipts controlled by the lenders are used to reduce outstanding debt, and the Company does not meet the criteria of SFAS
No. 6, "Classification of Short-Term Obligations Expected to be RefinancedAn Amendment of ARB No. 43,
Chapter 3A," to classify the debt as long-term.

Senior Secured Floating Rate Notes due 2010.On December 20, 2004, the Company closed an offering of $160.0 million
aggregate principal
amount of senior secured floating rate notes due 2010.

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Notes to Unaudited Consolidated Interim Financial Statements (Continued)

(dollars in thousands)

6. Debt (Continued)

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

The
senior secured floating rate notes bear interest at a rate of LIBOR plus 4.50%, reset quarterly. Interest on the senior secured floating rate notes is payable quarterly on each
March 15, June 15, September 15, and December 15. The senior secured floating rate notes mature on December 15, 2010. At March 28, 2009, the senior secured
floating rate notes bore interest at an annual rate of 5.8%.

On
April 30, 2008, the Company entered into a hedging transaction through the acquisition of a "no cost collar." Under this arrangement, the Company capped its exposure on
$210.0 million of LIBOR-based borrowings at a maximum LIBOR rate of 5.2%. In addition, the Company established a minimum "floor" LIBOR rate of 2.6%, in line with then current LIBOR rates. The
changes in the fair value of the hedge agreement are reflected within other comprehensive loss on the Consolidated Statements of Comprehensive Loss (Unaudited) included within the interim financial
statements. At March 28, 2009, the LIBOR rate in effect was approximately 1.3%, which was below the minimum rate specified under the "no cost collar." As a result, the "no cost collar"
increased the effective annual interest rate on the Company's LIBOR-based borrowings by approximately 0.7%. This hedging arrangement expires on December 15, 2010.

The
Company guarantees the senior secured floating rate notes on a full and unconditional, senior secured basis. Duane Reade Inc. and Duane Reade GP are
co-obligors under the senior secured floating rate notes. The senior secured floating rate notes rank equally in right of payment with any of the Company's, Duane Reade Inc.'s or
Duane Reade GP's unsubordinated indebtedness and senior in right of payment to any of the Company's, Duane Reade Inc.'s or Duane Reade GP's subordinated or senior subordinated
indebtedness. All obligations under the senior secured floating rate notes are guaranteed on a senior basis by each of the Company's existing subsidiaries, other than Duane Reade Inc. and Duane
Reade GP, and will be guaranteed by future subsidiaries of Duane Reade Inc. and Duane Reade GP except certain foreign and certain domestic subsidiaries. The senior secured
floating rate notes and the guarantees are collateralized by a first priority interest in substantially all of Duane Reade Inc. and Duane Reade GP's assets other than those assets in
which the lenders under the amended asset-based revolving loan facility have a first priority interest and certain excluded assets defined in the indentures. The senior secured floating rate notes and
the guarantees are also collateralized by a second priority interest in all collateral pledged on a first priority basis to lenders under the amended asset-based revolving loan facility.

Upon
the occurrence of specified change of control events, Duane Reade Inc. and Duane Reade GP will be required to make an offer to repurchase all of the senior secured
floating rate notes at 101% of the outstanding principal amount of the senior secured floating rate notes plus accrued and unpaid interest to the date of repurchase. The indenture governing the senior
secured floating rate notes contains certain affirmative and negative covenants that limit the ability of Duane Reade Inc., Duane Reade GP and their restricted subsidiaries, as defined,
to incur additional indebtedness, pay

16

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Table of Contents

Notes to Unaudited Consolidated Interim Financial Statements (Continued)

(dollars in thousands)

6. Debt (Continued)

dividends,
make repayments on indebtedness that is subordinated to the senior secured floating rate notes and to make certain other restricted payments, incur certain liens, use proceeds from sales of
assets, enter into business combination transactions (including mergers, consolidations and asset sales), enter into sale-leaseback transactions, enter into transactions with affiliates
and permit restrictions on the payment of dividends by restricted subsidiaries. The indenture governing the senior secured floating rate notes contains customary events of default, which, if
triggered, may result in the acceleration of the indebtedness outstanding under the indenture. There are no credit ratings related triggers in the indenture governing the senior secured floating rate
notes that would impact the cost of borrowing, annual amortization of principal or related indebtedness maturity. The indenture governing the senior secured floating rate notes does not contain
financial maintenance covenants.

At
March 28, 2009, the weighted average combined interest rate in effect on all variable rate debt outstanding, including the effect of the "no cost collar," was 5.1%.

Senior Subordinated Notes due 2011.On July 30, 2004, upon completion of the Acquisition, Duane Reade Inc. and Duane
Reade GP
co-issued $195.0 million of 9.75% senior subordinated notes due 2011. The senior subordinated notes mature on August 1, 2011 and bear interest at 9.75% per annum payable in
semi-annual installments on February 1 and August 1. The senior subordinated notes are uncollateralized obligations and subordinated in right of payment to all of the
Company's, Duane Reade Inc.'s and Duane Reade GP's existing and future unsubordinated indebtedness, including borrowings under the amended asset-based revolving loan facility and the
senior secured floating rate notes. The senior subordinated notes will rank equally with any future senior subordinated indebtedness and senior to any future subordinated indebtedness. The senior
subordinated notes are guaranteed on an uncollateralized, senior subordinated basis by the Company and all of Duane Reade Inc.'s existing direct and indirect domestic subsidiaries other than
Duane Reade GP, which is a co-obligor under the senior subordinated notes. Upon the occurrence of specified change of control events, the Company will be required to make an offer
to repurchase all of the senior subordinated notes at 101% of the outstanding principal amount of the senior subordinated notes plus accrued and unpaid interest to the date of repurchase. The
indenture governing the senior subordinated notes contains certain affirmative and negative covenants that limit the ability of Duane Reade Inc., Duane Reade GP and their restricted
subsidiaries to incur additional indebtedness, pay dividends, make repayments on indebtedness that is subordinated to the senior subordinated notes and to make certain other restricted payments, incur
certain liens, use proceeds from sales of assets, enter into business combination transactions (including mergers, consolidations and asset sales), enter into transactions with affiliates and permit
restrictions on the payment of dividends by restricted subsidiaries. The indenture governing the senior subordinated notes contains customary events of default, which, if triggered, may result in the
acceleration of the indebtedness outstanding
under the indenture. There are no credit ratings related triggers in the indenture governing the senior subordinated notes that would impact the cost of borrowing, annual amortization of principal or
related indebtedness maturity. The indenture governing the senior subordinated notes does not contain financial maintenance covenants.

2.1478% Senior Convertible Notes due 2022.On April 16, 2002, Duane Reade Inc. completed an offering of
$381.5 million aggregate
principal amount of senior convertible notes maturing on April 16, 2022 (the "Convertible Notes"). The Convertible Notes were issued at a price of $572.76 per note (57.276% of the principal
amount at maturity) and paid cash interest at the rate of 2.1478% per year on the principal amount at maturity, payable semi-annually in arrears on April 16 and October 16 of

17

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Table of Contents

Notes to Unaudited Consolidated Interim Financial Statements (Continued)

(dollars in thousands)

6. Debt (Continued)

each
year beginning on October 16, 2002, until April 16, 2007. Since that date, interest has accrued on the notes as amortization of the original issue discount representing a yield to
maturity of 3.75% per year, computed on a semi-annual bond equivalent basis. In December 2002, Duane Reade Inc. repurchased a total of $30.5 million principal value of the
Convertible Notes at an average purchase price of $486.99 per $1,000 note, resulting in a remaining net outstanding balance of $201.0 million.

In
connection with the Acquisition, Duane Reade Inc. made a tender offer to repurchase all of the $351.0 million outstanding principal value of the Convertible Notes. Upon
the closing of the tender offer, a total of $350.9 million principal value ($201.0 million issuance value) was tendered for repurchase, leaving only $55.0 thousand of principal
value ($32.0 thousand of issuance value) outstanding. Duane Reade Inc. may redeem for cash all or a portion of the principal value of the outstanding Convertible Notes at any time after
April 16, 2007, at a price equal to the sum of the issue price plus accrued original issue discount and accrued cash interest, if any, to the redemption date.

Debt Maturities.At March 28, 2009, the aggregate maturities of debt are as follows (dollars in thousands):

2009

$
2010


210,0002011


348,1802012


2012


Thereafter


34Total

$
558,214


7. Derivative Instruments and Hedging Activity

SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, establishes accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging activities. Under SFAS No. 133, all derivatives, whether designated in hedging relationships or not, are required to
be recorded on the balance sheet at fair value. SFAS No. 133 defines requirements for designation and documentation of hedging relationships, as well as ongoing effectiveness assessments, which
must be met in order to qualify for hedge accounting. For a derivative that does not qualify as a hedge, changes in fair value would be recorded in earnings immediately.

At
March 28, 2009, the Company's hedging activity consists of a "no cost" interest rate collar designed to hedge interest rate variability on portions of its LIBOR-based
borrowings. The Company formally documents the relationship between the hedging instruments and the hedged items, as well as its risk management objectives and strategy for undertaking hedge
transactions. This interest rate collar qualifies for hedge accounting as a cash flow hedge. Accordingly, the Company recognizes this derivative at fair value as either an asset or liability on the
consolidated balance sheets. All changes in the interest rate collar's fair value are recorded in accumulated other comprehensive income (loss) and subsequently reclassified into earnings when the
related interest expense on the underlying borrowing is recognized. The Company has not, and does not plan to, enter into any derivative financial instruments for trading or speculative purposes.

18

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Table of Contents

Notes to Unaudited Consolidated Interim Financial Statements (Continued)

(dollars in thousands)

7. Derivative Instruments and Hedging Activity (Continued)

The objective of the "no cost" interest rate collar is to eliminate the variability of quarterly cash flows resulting from interest rate fluctuations above the cap rate and below the
floor rate on the LIBOR variable interest payments attributable to the debt instruments identified as the hedged transaction. Under the current "no cost" interest rate collar, the Company capped its
exposure on $210.0 million of LIBOR-based borrowings at a maximum LIBOR rate of 5.2%. In addition, the Company established a minimum "floor" LIBOR rate of 2.6%, in line with then current LIBOR
rates. The changes in the fair value of the hedge agreement are reflected within other comprehensive loss on the Consolidated Statements of Comprehensive Loss (Unaudited) included within the interim
financial statements. During the thirteen weeks ended March 28, 2009 and March 29, 2008, the Company reflected other
comprehensive losses of $8.3 thousand and $0.2 million, respectively, on the Consolidated Statements of Comprehensive Loss (Unaudited) included within the interim financial statements.

At
March 28, 2009, the LIBOR rate in effect was approximately 1.3%, which was below the minimum rate specified under the "no cost collar." As a result, the "no cost collar"
increased the effective annual interest rate on the Company's LIBOR-based borrowings by approximately 0.7%.

The
fair value of the interest rate collar resulted in a hedge liability of $4.8 million and $4.7 million at March 28, 2009 and December 27, 2008,
respectively. As of March 28, 2009, the Company expects approximately $2.6 million associated with the interest rate collar to be recognized as additional interest expense during the
next twelve months. This hedging arrangement expires on December 15, 2010.

As
discussed further in Note 8, on March 27, 2007, certain affiliates of Oak Hill Capital Partners L.P. made an equity commitment of $39.4 million in the form
of Series A preferred stock and warrants to acquire approximately 11% (on a fully diluted basis) of the Company's common stock at an exercise price of $75.00 per share. Each of the 525,334
shares of Series A preferred stock is immediately redeemable without penalty, at the Company's option prior to the mandatory redemption date, at a liquidation preference of $75.00 per share
plus any accrued but unpaid dividends as of the redemption date. The Company has the right, at its option, immediately prior to an initial public offering (IPO), to require holders of the preferred
stock to convert all (but not less than all) of such shares into a number of shares of the Company's common stock equal to the liquidation preference for such shares of preferred stock, divided by the
price per share of the Company's common stock set forth in the final prospectus to be used in connection with the IPO. Upon the occurrence of a change in control, the Company will be required to
redeem all outstanding shares of the Series A preferred stock at a redemption price per share of $75.00 per share plus accrued and unpaid dividends. The Company has recorded a liability for the
Series A preferred stock's mandatory redemption feature, which is considered a derivative financial instrument. The recorded liability for the Series A preferred stock's mandatory
redemption feature was $5.4 million and $5.6 million at March 28, 2009 and December 27, 2008, respectively. Such liability is included in "Other non-current
liabilities" on the Consolidated Balance Sheet.

The
valuation approach used to calculate the fair value of the Series A preferred stock's mandatory redemption feature is a combination of future liquidity event probabilities,
risk-adjusted returns, and a net present value analysis. The changes in the fair value of the Series A preferred stock's mandatory redemption feature are reflected as increases or
decreases within interest expense. During the thirteen weeks ended March 28, 2009, the fair value of the Series A preferred stock's mandatory

19

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Table of Contents

Notes to Unaudited Consolidated Interim Financial Statements (Continued)

(dollars in thousands)

7. Derivative Instruments and Hedging Activity (Continued)

redemption
feature decreased by $0.2 million and reduced the period's recorded interest expense. During the thirteen weeks ended March 29, 2008, the fair value of the Series A
preferred stock's mandatory redemption feature increased by $1.7 million and increased the period's recorded interest expense. The changes in the fair value of the Series A preferred
stock's mandatory redemption feature are reflected as non-cash operating activity items on the statement of cash flows.

8. Issuance of Preferred Stock and Common Stock Warrants in Connection with the Acquisition of Store Leases

On February 20, 2007, the Company entered into an agreement to acquire up to eight leases from the Gristedes supermarket chain for certain locations in the borough of Manhattan,
New York City. As of March 28, 2009, the Company had completed the lease acquisitions for six of the former Gristedes locations and has opened a store at each of the acquired locations. The
acquisition of these leases has been funded through a portion of the proceeds from the issuance of $39.4 million of preferred stock and common stock warrants. The Company's agreement with
Gristedes has expired, and the Company is not obligated to acquire the remaining two leases.

On
March 27, 2007, certain affiliates of Oak Hill Capital Partners L.P. made an equity commitment of $39.4 million in the form of Series A preferred stock and
warrants to acquire approximately 11% (on a fully diluted basis) of the Company's common stock at an exercise price of $75.00 per share. The proceeds from this capital infusion were used, in part, to
acquire the Gristedes leases and to fund certain other capital expenditures. The funds raised through this commitment in excess of funds needed for the acquisition were used to fund the Company's
normal capital spending, fund new store openings or to reduce the Company's outstanding debt. The first portion of this equity commitment, which amounted to $13.0 million, was funded on
March 27, 2007 and the balance of the $39.4 million commitment, in which certain members of senior management also elected to participate, was funded on June 28, 2007. The
preferred stock has a 12-year mandatory redemption date from the issuance date and provides for an annual cash dividend of 10% payable quarterly subject to being declared by the Board of
Directors. To the extent the dividends are not paid in cash, the dividends will cumulate on a quarterly basis. The dividends are recorded within interest expense on the Statement of Operations. Under
the agreements governing its indebtedness, the Company is not currently permitted to pay such dividends in cash. As of March 28, 2009 and December 27, 2008, the Company had accrued
unpaid dividends of $7.9 million and $6.7 million, respectively.

Each
of the 525,334 shares of Series A preferred stock is immediately redeemable without penalty, at the Company's option prior to the mandatory redemption date, at a liquidation
preference of $75.00 per share plus any accrued but unpaid dividends as of the redemption date. The Company has the
right, at its option, immediately prior to an initial public offering (IPO), to require holders of the preferred stock to convert all (but not less than all) of such shares into a number of shares of
the Company's common stock equal to the liquidation preference for such shares of preferred stock, divided by the price per share of the Company's common stock set forth in the final prospectus to be
used in connection with the IPO. Upon the occurrence of a change in control, the Company will be required to redeem all outstanding shares of the Series A preferred stock at a redemption price
per share of $75.00 per share plus accrued and unpaid dividends.

The
warrants are exercisable initially to purchase an aggregate of up to 384,174 shares of the Company's common stock. The purchase price for each share of the Series A preferred
stock is $75.00

20

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Table of Contents

Notes to Unaudited Consolidated Interim Financial Statements (Continued)

(dollars in thousands)

8. Issuance of Preferred Stock and Common Stock Warrants in Connection with the Acquisition of Store Leases (Continued)

per
share, and warrants are exercisable for the Company's common stock at a price per share of $75.00, subject to certain adjustments.

In
accordance with SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity," the Company has recorded the portion of the
proceeds that are attributable to the Series A preferred stock ($30.7 million) as a liability because of the mandatory redemption feature. The remaining amount of $8.4 million
(net of $0.3 million of expenses) was ascribed to the warrants, based on a relative fair value basis, and is recorded within additional paid-in capital. The Company has also
recorded a liability for the Series A preferred stock's mandatory redemption feature, which is considered a derivative financial instrument. The recorded liability for the Series A
preferred stock's mandatory redemption feature was $5.4 million and $5.6 million at March 28, 2009 and December 27, 2008, respectively. Such liability is included in "Other
non-current liabilities" on the Consolidated Balance Sheet.

9. Fair Value

The Company applies SFAS No. 157 to account for its financial and nonfinancial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value
and requires certain disclosures. This standard does not require any new fair value measurements, however, it applies to all other accounting pronouncements that require or permit fair value
measurements. This standard does not apply to fair value measurements related to share-based payments, nor does it apply to fair value measurements related to inventory.

SFAS
No. 157 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the
fair value hierarchy under SFAS No. 157 are described below:



A
financial instrument's level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The fair value estimates
presented in the tables below are based on the information available to the Company as of March 28, 2009 and December 27, 2008.

Valuation Techniques

The valuation approach used to calculate the fair value of the Series A preferred stock's mandatory redemption feature is a
combination of future liquidity event probabilities, risk-adjusted returns, and a net present value analysis. The valuation methodology applied to the profits interest is

21

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Table of Contents

Notes to Unaudited Consolidated Interim Financial Statements (Continued)

(dollars in thousands)

9. Fair Value (Continued)

based
on a Monte Carlo simulation, which estimates the fair value of the profits interest based on several inputs, including the fair value of the Company's equity, future liquidity event
probabilities and the expected volatility of the underlying equity value. The interest rate collar is valued using models that contain observable market data as well as models that have
non-observable inputs, such as assumptions regarding the future performance of the underlying assets. The guarantees for assigned store leases are valued using a probability weighted net
present value analysis which considers the probability of future events which may cause the Company to fulfill the guarantees.

Due
to the significant judgment applied in the valuation approaches, the valuations cannot be determined with precision, cannot be substantiated by comparison to quoted prices in active
markets, and may not represent the amounts that would be realized in a current sale or immediate settlement of the asset or liability. Additionally, there are inherent uncertainties in any fair value
measurement technique, and changes in the underlying assumptions could materially affect the fair value measurement amounts, causing the Company to record additional expenses in a future period or to
reverse previously recorded expenses in a future period.

Fair Value on a Recurring Basis

The assets and liabilities measured at fair value on a recurring basis are categorized in the tables below based upon the lowest level
of significant input to the valuations. As required by SFAS No. 157, the assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the
fair value measurement (dollars in thousands). The amounts representing liabilities are denoted in parentheses in the tables below.

Balances at March 28, 2009Level 1

Level 2

Level 3

TotalSeries A Preferred stockmandatory redemption feature

$


$


$
(5,394
)
$
(5,394
)Profits interest











Interest rate collar








(4,755
)

(4,755
)Guarantees








(504
)

(504
)Total

$


$


$
(10,653
)
$
(10,653
)


22

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Table of Contents

Notes to Unaudited Consolidated Interim Financial Statements (Continued)

(dollars in thousands)

9. Fair Value (Continued)

The
table presented below summarizes the change in balance sheet carrying values associated with the Company's Level 3 assets and liabilities recorded at fair value on a recurring
basis during the thirteen weeks ended March 28, 2009 (dollars in thousands).

Preferred Stock
Mandatory
Redemption Feature(1)

Profits
Interest

Interest
Rate Collar

Guarantees

TotalBalance at December 27, 2008

$
(5,624
)
$


$
(4,747
)
$
(504
)
$
(10,875
)Gains/(Losses)Included in net loss


230











230Included in other comprehensive loss








(8
)




(8
)Transfers














Balance at March 28, 2009

$
(5,394
)
$


$
(4,755
)
$
(504
)
$
(10,653
)The amount of gains/(losses) for the period included in net loss and attributable to the change in unrealized gains/(losses) for assets and liabilities
still held at March 28, 2009.

$
230

$


$


$


$
230


---

10. Other Expenses

The table below provides detail of other expenses for the thirteen weeks ended March 28, 2009 and March 29, 2008 (dollars in thousands).

Thirteen Weeks EndedMarch 28,
2009

March 29,
2008Closed store costs

$
155

$
199Oak Hill management fee


312


312Former CEO (Mr. Cuti) matters


937


281Miscellaneous other





107Total Other expenses

$
1,404

$
899


See
Note 12 for a discussion of the costs relating to accounting investigations and the proceedings relating to Mr. Cuti. The Oak Hill management fee is payable quarterly.

11. Income Taxes

Income taxes are recorded based on the estimated combined statutory tax rates expected to be applicable for the full fiscal year less applicable employment related tax credits. The
effective tax rate

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Table of Contents

Notes to Unaudited Consolidated Interim Financial Statements (Continued)

(dollars in thousands)

11. Income Taxes (Continued)

prior
to the application of deferred tax asset valuation reserves is lower than the combined statutory rates, primarily reflecting the impact of these income tax credits. The wage-based
employment tax credits represent the economic benefits earned by the Company for its participation in various federal and state hiring incentive programs. These benefits are based on the number of
qualifying employees hired and retained by the Company for a specified time period. Employees qualify for these hiring programs primarily as a result of their enrollment in various economic assistance
programs.

As
a result of the Company's significant losses incurred in 2008 and 2007 and its anticipated future performance based on projections, the Company evaluated the need to record a
valuation allowance against its net deferred tax assets as part of the 2008 tax provision accounting procedures. The evaluation undertaken included a review of the individual deferred tax components
and a corresponding analysis of the anticipated time period during which the temporary differences giving rise to deferred tax assets and liabilities would reverse. Based on the results of this
analysis, the Company determined that, except for two specific items, all deferred tax assets and liabilities were expected to reverse within the same period. The non-reversing items total
$31.7 million and include the deferred tax liability of $10.8 million related to post-2004 goodwill and the deferred tax liability of $20.9 million associated with the
trade name. Because these items are not amortized for financial statement purposes, a reversal of the corresponding deferred tax liability is not expected to occur within the expiration period.

At
December 27, 2008, the Company had approximately $181.5 million of gross deferred tax assets and approximately $70.4 million of gross deferred tax liabilities,
resulting in a net deferred tax asset of $111.1 million. After adjusting for the value of the deferred tax liabilities that do not reverse, the resulting cumulative valuation allowance amounted
to $142.9 million, of which $30.9 million was recorded in 2008.

During
the thirteen weeks ended March 28, 2009, the Company incurred an additional pre-tax loss of $16.3 million and recorded an incremental valuation allowance
of $7.0 million. At March 28, 2009, the Company had approximately $184.9 million of gross deferred tax assets, approximately $67.7 million of gross deferred tax liabilities
and had recorded a cumulative valuation allowance of $149.8 million. The tax expense reported during the thirteen weeks ended March 28, 2009 and March 29, 2008 primarily results
from the deferred tax liabilities generated by non-amortizable goodwill.

During
the thirteen weeks ended March 28, 2009, there were no material changes to the Company's uncertain tax positions.

In
September 2008, the Company was notified by the Internal Revenue Service that its Form 1120 filing for the 2006 tax year had been selected for examination. The examination is
in its early stages and there have been no proposed adjustments to date.

The
Company reflects interest charges incurred in connection with audit settlements as interest expense; however, if any tax-related penalties were to be incurred, such
amounts would be recorded as a component of the income tax provision.

12. Commitments and Contingencies

The Company is party to legal actions arising in the ordinary course of business. Based on information presently available to the Company, it believes that the ultimate outcome of these
actions

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Notes to Unaudited Consolidated Interim Financial Statements (Continued)

(dollars in thousands)

12. Commitments and Contingencies (Continued)

will
not have a material adverse effect on its financial position, results of operations or cash flows. In addition, the Company is a party to the following legal actions and matters:

During
2002, the Company initiated a legal action against its former property insurance carrier, in an attempt to recover what the Company believed to be a fair and reasonable settlement
for the business interruption portion of its claim originating from the September 11, 2001 World Trade Center terrorist attack, during which its single highest volume and most profitable store
was completely destroyed. After a lengthy litigation and appraisal process, an appraisal panel awarded the Company approximately $5.6 million in 2005 (in addition to the $9.9 million
that was paid by the insurer to the Company in 2002). As a result of the insurer's refusal to pay this amount and also as a result of the Second Circuit Court of Appeals' interpretation of the
Company's insurance policy, in January 2007, the Company commenced another action in the U.S. District Court for the Southern District of New York to recover both the appraisal panel's award and
additional amounts under the policy. In August 2007, the District Court entered judgment in the amount of $0.8 million plus interest, and both parties appealed. The appeals have been briefed
and oral argument in the Second Circuit Court of Appeals has been held. However, due to the inherent uncertainty of litigation, there can be no assurance that this appeal will be successful.

Accordingly,
given the risks and uncertainties inherent in litigation, there can be no definitive assurance that the Company will actually receive any or all of the panel's appraised
value of this claim, and the Company has not recognized any income related to this matter, other than $9.4 million of the original $9.9 million paid by the insurer in 2002. It should be
noted that any payment to the Company that might be forthcoming as a result of this claim may also result in the incurrence of additional expenses that are contingent upon the amount of such insurance
claim settlement. These expenses, if incurred, are not expected to exceed $4.0 million.

In
November 2004, the Company was served with a purported class action complaint, Damassia v. Duane Reade Inc. The lawsuit was filed in the U.S. District Court for the Southern
District of New York. The complaint alleges that, from the period beginning November 1998, the Company incorrectly gave some employees the title "Assistant Manager," in an attempt to avoid paying
these employees overtime, in contravention of the Fair Labor Standards Act and New York law. In May 2008, the court certified this case as a class action. In April 2006, the Company was served with a
purported class action complaint, Chowdhury v. Duane Reade Inc. and Duane Reade Holdings, Inc. The complaint alleges that, from a period beginning March 2000, the Company incorrectly
classified certain employees in an attempt to avoid paying overtime to such employees, thereby violating the Fair Labor Standards Act and New York law. In May 2008, the court certified this case as a
class action. The complaint seeks an unspecified amount of damages. In January 2009, the Company announced that, without admitting liability, it has entered into a Memorandum of Understanding to
settle these two class action cases for $3.5 million. The settlement is subject to the approval of the U.S. District Court for the Southern District of New York. While the Company believed that
it could strongly defend itself against the matters involved in this litigation, it agreed to this settlement in order to avoid future defense costs and uncertainty surrounding this litigation. As a
result of this settlement agreement, the Company recorded a $3.5 million one-time, pre-tax charge during the fourth quarter ended December 27, 2008. The
litigation settlement required the Company to obtain a letter of credit for the payment of the $3.5 million obligation. As of March 28, 2009, the Company has obtained the necessary
letter of credit.

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Table of Contents

Notes to Unaudited Consolidated Interim Financial Statements (Continued)

(dollars in thousands)

12. Commitments and Contingencies (Continued)

In
November 2007, the Company was served with a subpoena from the Office of the Attorney General of the State of New York. The subpoena requested information regarding services to
customers with limited English proficiency. The Company has cooperated with the Office of the Attorney General and on April 22, 2009, the Company settled this matter with the Office of the
Attorney General. Under the terms of the settlement, the Company agreed to provide customers with information about prescription drugs in the customers' primary languages. In addition, the Company
agreed to equip its stores with telephones that will connect customers with off-site interpreters working for language-service contractors.

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

Proceedings Relating to Anthony J. Cuti

On September 1, 2006, Anthony J. Cuti, a former Chairman, President and Chief Executive Officer of the Company, initiated an
arbitration before the American Arbitration Association against Duane Reade Inc., Duane Reade Holdings, Inc. and Duane Reade Shareholders, LLC, which are referred to as the
"respondents." The arbitration relates to his termination in November 2005. Mr. Cuti asserts various claims including, with respect to his employment agreement, breach of contract relating to
the notice of termination provision, failure to make certain payments toward his 1998 corporate-owned life insurance policy, relief from the non-competition and
non-solicitation covenants, failure to provide adequate information relating to the valuation of his profits interest and breach of the covenant of good faith and fair dealing. Other
claims relate to the patent rights for the Company's virtual pharmacy kiosk system and payment of an alleged deferred 2001 bonus based on any insurance recovery the Company may obtain on its business
interruption claim in connection with the 2001 World Trade Center tragedy. On March 16, 2007, Mr. Cuti sought leave to file an amended demand asserting additional allegations in support
of his claim for breach of contract for failure to comply with the notice of termination provision in his employment agreement, and a claim for defamation. On May 17, 2007, the arbitrator
issued an order granting leave to file Mr. Cuti's amended demand. Mr. Cuti seeks monetary damages, declaratory relief, rescission of his employment agreement and the payment of his legal
costs and fees associated with his termination and the arbitration.

On
November 22, 2006, the respondents filed counterclaims and affirmative defenses against Mr. Cuti in the arbitration, alleging that between 2000 and 2005, Mr. Cuti
was responsible for improper practices involving invoice credits and rebillings for the construction of the Company's stores, that led to overstating the Company's publicly reported earnings, and that
caused the Company to create and maintain inaccurate records and publish financial statements containing misstatements. These counterclaims were based on information uncovered as of that date by an
investigation conducted by independent legal counsel and forensic accountants at the direction of the Audit Committee.

26

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Table of Contents

Notes to Unaudited Consolidated Interim Financial Statements (Continued)

(dollars in thousands)

12. Commitments and Contingencies (Continued)

In
a press release dated April 2, 2007, the Company disclosed that, based on new information provided to the Company, the Audit Committee, with the assistance of independent
counsel and forensic accountants, was conducting a review and investigation concerning the propriety of certain real estate transactions and related matters and whether the accounting for such
transactions was proper. On April 9, 2007, the respondents sought leave to file proposed amended counterclaims based on that new information. On May 17, 2007, the arbitrator issued an
order granting leave to file the amended counterclaims. The amended counterclaims seek rescission of employment agreements entered into between the Company and Mr. Cuti, return of all
compensation paid under the employment
agreements, other compensatory and punitive damages, and legal costs and fees associated with the Audit Committee's investigation and the arbitration.

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

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

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

On
October 9, 2008, the United States Attorney's Office for the Southern District of New York and the SEC announced the filing of criminal and civil securities fraud charges
against Mr. Cuti and another former executive of the Company, William Tennant. In the criminal indictment, the government charges that Mr. Cuti and Mr. Tennant engaged in a
scheme, involving the credits and rebillings and real estate-related transactions discussed above, to falsely inflate the income and reduce the expenses that the Company reported to the investing
public and others. The SEC's complaint similarly alleges that Mr. Cuti and Mr. Tennant entered into a series of fraudulent transactions designed to boost reported income and enable the
Company to meet quarterly and annual earnings guidance. Both proceedings are continuing.

Other Commitments

In connection with the assignment of certain store leases to third parties during 2008 and 2007, the Company provides secondary
guarantees on the lease obligations for the assigned stores. The respective purchasers have assumed the Company's obligations under these leases and are primarily liable for these obligations.
Although the Company believes it to be unlikely, assuming that each respective purchaser became insolvent, management estimates that the Company could settle these obligations for

27

---



Table of Contents

Notes to Unaudited Consolidated Interim Financial Statements (Continued)

(dollars in thousands)

12. Commitments and Contingencies (Continued)

amounts
substantially less than the aggregate obligation of $27.0 million as of March 28, 2009. The obligations are for varying terms dependent upon the respective lease, the longest of
which lasts through May 31, 2022.

13. Subsequent Event

In April 2009, the Company entered into new collective bargaining agreements with the RWDSU/Local 338 and Local 340A unions. The two unions represent approximately 4,800 of the Company's
7,000 employees at March 28, 2009. The new collective bargaining agreements will expire on December 31, 2012 and have been ratified by the membership of both unions.

14. Condensed Consolidating Interim Financial Information of Subsidiary Guarantors and Co-Obligors

The 9.75% senior subordinated notes due 2011 and the senior secured floating rate notes due 2010 were co-issued by Duane Reade Inc. and Duane Reade GP, each of
whom is considered a "co-obligor." The Company and each of its other subsidiaries, composed of DRI I Inc., Duane Reade International, Inc. and Duane Reade
Realty, Inc., are guarantors of such notes. The guarantee of the Company and of each subsidiary guarantor is full and unconditional and joint and several.

The
following condensed consolidating interim financial information for the Company presents the financial information of Duane Reade Holdings, Inc., the co-obligors
and the subsidiary guarantors, prepared on the equity basis of accounting. Such presentation is based on the Company's understanding and interpretation of Rule 3-10 under the
Securities and Exchange Commission's Regulation S-X. Income tax expense (benefit) and deferred income taxes have been allocated to individual entities according to the Company's
income tax allocation methodology. Certain of the prior year information has been adjusted to conform its presentation to the current year. The financial information may not necessarily be indicative
of results of operations or financial position had the subsidiary guarantors operated as independent entities.

28

---





Table of Contents

DUANE READE HOLDINGS, INC.        Condensed Consolidating Statement of Operations (Unaudited)        For the 13 weeks ended March 28, 2009        (in thousands)

Duane Reade
Holdings, Inc.

Duane
Reade Inc.

Duane
Reade GP

Subsidiary
Guarantors

Consolidating
Adjustments

Duane Reade
Holdings, Inc.
ConsolidatedNet sales

$


$


$
444,456

$


$


$
444,456Cost of sales (exclusive of depreciation and amortization shown separately below)








307,246








307,246Gross profit








137,210








137,210Selling, general and administrative expenses








121,938


117





122,055Depreciation and amortization








18,076








18,076Store pre-opening expense








47








47Other expenses








1,404








1,404Operating loss








(4,255
)

(117
)




(4,372
)Equity earnings in affiliates


17,211


17,211





171


(34,593
)

Interest expense, net








11,900








11,900Income (loss) before income taxes


(17,211
)

(17,211
)

(16,155
)

(288
)

34,593


(16,272
)Income tax expense








932


7





939Net income (loss)

$
(17,211
)
$
(17,211
)
$
(17,087
)
$
(295
)
$
34,593

$
(17,211
)


29

---



Table of Contents

DUANE READE HOLDINGS, INC.        Condensed Consolidating Statement of Operations (Unaudited)        For the 13 weeks ended March 29, 2008        (in thousands)

Duane Reade
Holdings, Inc.

Duane
Reade Inc.

Duane
Reade GP

Subsidiary
Guarantors

Consolidating
Adjustments

Duane Reade
Holdings, Inc.
ConsolidatedNet sales

$


$


$
427,137

$
10,373

$
(10,373
)
$
427,137Cost of sales (exclusive of depreciation and amortization shown separately below)








294,445








294,445Gross profit








132,692


10,373


(10,373
)

132,692Selling, general and administrative expenses








134,416


120


(16,582
)

117,954Depreciation and amortization








17,919








17,919Store pre-opening expense








47








47Other expenses








899








899Operating (loss) income








(20,589
)

10,253


6,209


(4,127
)Equity earnings in affiliates


20,993


20,993





382


(42,368
)

Interest expense, net








15,906


(6,209
)

6,209


15,906Income (loss) before income taxes


(20,993
)

(20,993
)

(36,495
)

16,080


42,368


(20,033
)Income tax (benefit) expense








1,749


(789
)




960Net income (loss)

$
(20,993
)
$
(20,993
)
$
(38,244
)
$
16,869

$
42,368

$
(20,993
)


30

---





Table of Contents

DUANE READE HOLDINGS, INC.        Condensed Consolidating Balance Sheet (Unaudited)        As of March 28, 2009        (in thousands)

Duane Reade
Holdings, Inc.

Duane
Reade Inc.

Duane
Reade GP

Subsidiary
Guarantors

Consolidating
Adjustments

Duane Reade
Holdings, Inc.
ConsolidatedAssetsCurrent assetsCash

$


$


$
1,389

$
34

$


$
1,423Receivables








52,963








52,963Due from affiliates





76,732


109,124


(518
)

(185,338
)

Inventories








215,445








215,445Deferred income taxes





1,140


5,049


(6,189
)




Prepaid expenses and other current assets








15,714








15,714Total current assets





77,872


399,684


(6,673
)

(185,338
)

285,545Investment in affiliates


(136,402
)

(136,412
)




(3,549
)

276,363


Property and equipment, net








188,223








188,223Goodwill








69,510








69,510Deferred income taxes





1,645


9,032


(10,677
)




Other assets, net








119,127


412,377


(366,145
)

165,359Total assets

$
(136,402
)
$
(56,895
)
$
785,576

$
391,478

$
(275,120
)
$
708,637Liabilities and Stockholders' Equity (Deficit)Current liabilitiesAccounts payable

$


$


$
98,314

$


$


$
98,314Due to affiliates











185,336


(185,336
)

Accrued interest








3,854








3,854Accrued expenses





3,555


39,531








43,086Current portion of debt








153,180








153,180Current portion of capital lease obligations








5,971








5,971Total current liabilities





3,555


300,850


185,336


(185,336
)

304,405Long-term debt








771,179





(366,145
)

405,034Capital lease obligations, less current portion








1,282








1,282Deferred income taxes





75,706


(75,885
)

29,034





28,855Redeemable preferred stock and accrued dividends


31,112


31,113


38,093





(62,225
)

38,093Deferred rent liabilities








56,506








56,506Other non-current liabilities





257


37,908








38,165Total liabilities


31,112


110,631


1,129,933


214,370


(613,706
)

872,340Stockholders' equity (deficit)Common stock


26














26Paid-in-capital


247,520


247,535


256,111


2,395


(497,476
)

256,085Accumulated other comprehensive loss








(4,755
)







(4,755
)Retained earnings (deficit)


(415,060
)

(415,061
)

(595,713
)

174,713


836,062


(415,059
)Total stockholders' equity (deficit)


(167,514
)

(167,526
)

(344,357
)

177,108


338,586


(163,703
)Total liabilities and stockholders' equity (deficit)

$
(136,402
)
$
(56,895
)
$
785,576

$
391,478

$
(275,120
)
$
708,637


31

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Table of Contents

DUANE READE HOLDINGS, INC.        Condensed Consolidating Balance Sheet (Unaudited)        As of December 27, 2008        (in thousands)

Duane Reade
Holdings, Inc.

Duane
Reade Inc.

Duane
Reade GP

Subsidiary
Guarantors

Consolidating
Adjustments

Duane Reade
Holdings, Inc.
ConsolidatedAssetsCurrent assetsCash

$


$


$
1,386

$
44

$


$
1,430Receivables, net








55,783








55,783Due from affiliates





76,756


108,993


(411
)

(185,338
)

Inventories








214,154








214,154Deferred income taxes





1,140


5,049


(6,189
)




Prepaid expenses and other current assets








13,541








13,541Total current assets





77,896


398,906


(6,556
)

(185,338
)

284,908Investment in affiliates


(119,191
)

(119,201
)




(3,378
)

241,770


Property and equipment, net








186,560








186,560Goodwill








69,510








69,510Deferred income taxes





1,645


9,032


(10,677
)




Other assets, net








125,390


412,377


(366,145
)

171,622Total assets

$
(119,191
)
$
(39,660
)
$
789,398

$
391,766

$
(309,713
)
$
712,600Liabilities and Stockholders' Equity (Deficit)Current liabilitiesAccounts payable

$


$


$
88,238

$


$


$
88,238Due to affiliates











185,336


(185,336
)

Accrued interest








8,597








8,597Accrued expenses





3,056


49,206








52,262Current portion of long-term debt








144,642








144,642Current portion of capital lease obligations








4,485








4,485Total current liabilities





3,056


295,168


185,336


(185,336
)

298,224Long term debt








771,178





(366,145
)

405,033Capital lease obligations, less current portion








1,492








1,492Deferred income taxes





76,230


(76,817
)

29,027





28,440Redeemable preferred stock and accrued dividends


31,113


31,113


36,775





(62,226
)

36,775Deferred rent liabilities








53,084








53,084Other non-current liabilities





256


35,997








36,253Total liabilities


31,113


110,655


1,116,877


214,363


(613,707
)

859,301Stockholders' equity (deficit)Common stock


26














26Paid-in-capital


247,519


247,535


255,894


2,395


(497,476
)

255,867Accumulated other comprehensive income (loss)








(4,747
)







(4,747
)Retained earnings (Accumulated deficit)


(397,849
)

(397,850
)

(578,626
)

175,008


801,470


(397,847
)Total stockholders' equity (deficit)


(150,304
)

(150,315
)

(327,479
)

177,403


303,994


(146,701
)Total liabilities and stockholders' equity (deficit)

$
(119,191
)
$
(39,660
)
$
789,398

$
391,766

$
(309,713
)
$
712,600


32

---





Table of Contents

DUANE READE HOLDINGS, INC.        Condensed Consolidating Statement of Cash Flows (Unaudited)        For the 13 weeks ended March 28, 2009        (in thousands)

Duane Reade
Holdings, Inc.

Duane
Reade Inc.

Duane
Reade GP

Subsidiary
Guarantors

Consolidating
Adjustments

Duane Reade
Holdings, Inc.
ConsolidatedCash flows provided by (used in) operating activities:Net (loss) income

$
(17,211
)
$
(17,211
)
$
(17,087
)
$
(295
)
$
34,593

$
(17,211
)Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:Depreciation and amortization








18,989








18,989Deferred income taxes





(6
)

932


7





933Non-cash rent expense








3,422








3,422Non-cash interest expense attributable to redeemable preferred stock








1,088








1,088Other non-cash items








219








219Equity in income of subsidiaries


17,211


17,211





171


(34,593
)

Changes in operating assets and liabilities:Receivables





24


2,689


107





2,820Prepaid expenses and other current assets








(2,173
)







(2,173
)Inventories








(1,291
)







(1,291
)Accounts payable








10,076








10,076Accrued expenses





(18
)

(14,427
)







(14,445
)Other assets and liabilities, net








1,845








1,845NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES








4,282


(10
)




4,272Cash flows used in investing activities:Capital expenditures








(9,847
)







(9,847
)Lease acquisition, customer files and other costs








(1,840
)







(1,840
)Proceeds from sale of assets

















NET CASH USED IN INVESTING ACTIVITIES








(11,687
)







(11,687
)Cash flows from financing activities:Borrowings from revolving credit facility








513,905








513,905Repayments of revolving credit facility








(505,367
)







(505,367
)Capital contributions

















Repayments of capital lease obligations








(1,130
)







(1,130
)NET CASH PROVIDED BY FINANCING ACTIVITIES








7,408








7,408Net increase (decrease) in cash








3


(10
)




(7
)Cash at beginning of period








1,386


44





1,430Cash at end of period

$


$


$
1,389

$
34

$


$
1,423


33

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Table of Contents

DUANE READE HOLDINGS, INC.        Condensed Consolidating Statement of Cash Flows (Unaudited)        For the 13 weeks ended March 29, 2008        (in thousands)

Duane Reade
Holdings, Inc.

Duane
Reade Inc.

Duane
Reade GP

Subsidiary
Guarantors

Consolidating
Adjustments

Duane Reade
Holdings, Inc.
ConsolidatedCash flows provided by (used in) operating activities:Net (loss) income

$
(20,993
)
$
(20,993
)
$
(38,244
)
$
16,869

$
42,368

$
(20,993
)Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:Depreciation and amortization








18,831








18,831Deferred income taxes





(56
)

1,749


(789
)




904Non-cash rent expense








2,721








2,721Non-cash interest expense attributable to redeemable preferred stock








2,898








2,898Other non-cash items








(153
)







(153
)Equity in income of subsidiaries


20,993


20,993





382


(42,368
)

Changes in operating assets and liabilities:Receivables





(505
)

3,040


108





2,643Prepaid expenses and other current assets








(283
)







(283
)Inventories








(2,299
)







(2,299
)Accounts payable








(2,230
)







(2,230
)Accrued expenses





56


(1,905
)







(1,849
)Other assets and liabilities, net





505


15,779


(16,550
)




(266
)NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES








(96
)

20





(76
)Cash flows used in investing activities:Capital expenditures








(7,236
)







(7,236
)Lease acquisition, customer files and other costs








(1,705
)







(1,705
)Proceeds from sale of assets








525








525NET CASH USED IN INVESTING ACTIVITIES








(8,416
)







(8,416
)Cash flows from financing activities:Borrowings from revolving credit facility








508,369








508,369Repayments of revolving credit facility








(499,033
)







(499,033
)Capital contributions








130








130Repayments of capital lease obligations








(954
)







(954
)NET CASH PROVIDED BY FINANCING ACTIVITIES








8,512








8,512Net increase in cash











20





20Cash at beginning of period








1,343


37





1,380Cash at end of period

$


$


$
1,343

$
57

$


$
1,400


34

---





Table of Contents

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion regarding our financial condition and results of operations for the thirteen weeks ended March 28, 2009
and the thirteen weeks ended March 29, 2008 should be read in conjunction with the more detailed financial information contained in our consolidated financial statements and their notes as well
as the Special Note Regarding Forward-Looking Statements that are contained elsewhere in this report.

General

Our business consists of the sale of a wide variety of health and beauty care products, convenience-oriented food and general
merchandise items and a pharmacy operation
managed to supply customers with their prescription needs. We refer to the non-prescription portion of our business as front-end sales because most of these sales are processed
through the front check-out sections of our stores. This portion of our business consists of brand name and private label health and beauty care items, food and beverages, tobacco
products, cosmetics, housewares, greeting cards, photofinishing services, photo supplies, seasonal and general merchandise and other products for our customers' daily needs. Health and beauty care
products, including over-the-counter items, represent our highest volume categories within front-end sales. The front-end portion of our business was
53.3% and 54.5% of our net sales in the thirteen weeks ended March 28, 2009 and March 29, 2008, respectively, and is characterized by generally higher gross margins as compared to our
pharmacy or back-end business.

Because
of our numerous convenient locations in high-traffic commercial and residential areas and the lack of other convenience-oriented retailers in our core market areas,
our front-end business is generally a larger proportion of our total sales than for other major conventional drugstore chains, whose front-end sales average between 30% and 40%
of total sales. Over the last few years, pharmacy sales have experienced a slower rate of growth primarily due to increases in third party plan co-payments, reduced sales of hormonal
replacement drugs and certain arthritis medications, reduced third party reimbursement rates resulting from changes in regulations or cost-saving measures, limitations on maximum
reimbursements for certain generic medications by third party plans, increases in the percentage of sales represented by lower-priced generic medications and increased penetration by mail order and
internet-based pharmacies. In addition, growth in pharmacy sales has been dampened due to the slowing pace of approvals from the Food and Drug Administration. Our pharmacy sales include all items we
sell by prescriptions filled at our retail locations or deliver direct to customers. In addition, we include in our pharmacy sales certain resales of retail pharmaceutical inventory. Sales processed
through third party, private and government-sponsored plans that contract with us as an authorized provider of prescriptions represented 94.0% and 93.2% of our prescription sales during the thirteen
weeks ended March 28, 2009 and March 29, 2008, respectively.

The
Medicare Modernization Act created a Medicare Part D benefit that expanded Medicare coverage of prescription drugs for senior citizens as well as for certain "dual eligible"
individuals that were previously covered under state administered Medicaid plans. This Medicare coverage has resulted in decreased pharmacy margins resulting from lower reimbursement rates than our
current margins on state Medicaid prescriptions. The Medicare Part D program has grown rapidly since taking effect and the program's growth may continue as more seniors have become eligible and
may enroll for the coverage. While the program has had an adverse impact on our pharmacy margins, we expect that increased utilization of prescription drugs by senior citizens participating in the new
programs who previously were cash paying customers will partially offset the effect of the lower margins, although we are not certain this will be the case. The Medicare Part D program
represented approximately 13.2% and 12.7% of our retail pharmacy sales for the thirteen weeks ended March 28, 2009 and March 29, 2008, respectively.

State
Medicaid programs which provide prescription benefits to low income households and individuals represented approximately 16.1% and 14.1% of our retail pharmacy sales for the
thirteen

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weeks
ended March 28, 2009 and March 29, 2008, respectively. Over the past several years, New York State reduced Medicaid and EPIC prescription reimbursement rates, and increased the
number of generic drugs subject to maximum allowable cost reimbursement limits, adversely impacting our pharmacy gross margins. Under the Medicaid guidelines, providers cannot refuse to dispense
prescriptions to Medicaid recipients who claim they do not have the means to pay the required co-payments. Most Medicaid recipients do in fact decline to make the co-payments,
resulting in the requirement for the provider to absorb this cost. The current economic downturn may result in additional reductions in New York Medicaid prescription reimbursements. The economic
stimulus package passed by Congress and signed into law by President Obama could provide states with additional Medicaid funding and may reduce the extent of each state's proposed reductions in
Medicaid reimbursements. Under the economic stimulus package, over $80 billion would be allocated to help states with Medicaid. In addition, the economic stimulus package includes provisions to
subsidize health care insurance premiums for the unemployed under the COBRA program and provisions that will aid states in defraying budget cuts.

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

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

In
January 2008, the court denied approval of the First Data Bank and Medi-Span settlements as proposed. Subsequently, new settlement agreements were submitted to the court.
On
March 17, 2009, the court issued an order approving the revised settlements. Pursuant to the settlements, as approved, First Data Bank and Medi-Span have agreed to reduce the
reported AWP for certain drugs by four percent. Separately, and not pursuant to the settlement agreements, First Data Bank and Medi-Span have indicated that they will also reduce the
reported AWP for a large number of additional drugs not covered by the settlement agreements and that they intend to discontinue the reporting of AWP in the future. Under the terms of the court's
decision, the settlement agreements can become effective no earlier than 180 days from the entry of final judgment, which occurred on March 30, 2009. Although the court's ruling will
take effect no earlier than 180 days following March 30, 2009, some parties have appealed the court's ruling and are seeking a stay of the implementation of the settlement. The court's
ruling, if not revised on appeal, could potentially have a significant adverse impact on us and the drugstore industry as a whole.

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

In
an effort to offset some of the adverse pharmacy gross margin impacts from the trends discussed above, there has been an intensified effort on the part of retailers to support
increased utilization of lower priced but higher margin generic prescriptions in place of branded medications. New generic drug introductions have also enabled retailers to increase the proportion of
generic prescriptions to total prescriptions dispensed. Improved generic utilization rates as well as a combination of direct purchases and contractual wholesaler purchases enabled us to partially
offset the adverse margin impact of Medicare Part D and reduced state Medicaid reimbursement rates during 2008 and 2007. In addition, we believe that the higher volume of pharmacy sales to
third party plan customers helps to offset the related lower gross profit margins and allows us to leverage other fixed store operating expenses. We believe that increased third party plan sales also
generate additional front-end sales by increasing customer traffic in our stores.

We
are also impacted by legislation to increase the minimum hourly wages. New York State increased the minimum hourly wage from $5.15 to $6.00 on January 1, 2005, to $6.75 on
January 1, 2006, and again to $7.15 on January 1, 2007. New Jersey increased the minimum hourly wage from $5.15 to $6.15 on October 1, 2005 and again to $7.15 on October 1,
2006. In addition, the federal minimum hourly wage was increased to $6.55 in July 2008 and the U.S. Congress passed legislation that will result in a
federal minimum hourly wage increase to $7.25 in July 2009. While these increases have impacted our cost of labor, we have, and believe we can continue to, offset a significant portion of these cost
increases through initiatives designed to further improve our labor efficiency.

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

Considerations Related to Operating in the New York City Marketplace

All of our operations are conducted within the New York greater metropolitan area. As a result, our performance will be substantially
affected by economic conditions and other factors affecting the region such as the regulatory environment, unemployment levels, cost of energy, real estate, insurance,

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taxes
and rent, weather, demographics, availability of labor, financial markets and geopolitical factors such as terrorism.

Since
the second half of 2004, the New York City economy began a gradual improvement over the economic downturn experienced in the aftermath of the 2001 World Trade Center attack to the
point where it had essentially achieved a full recovery by the latter part of 2006. Strength in employment rates, tourism and overall commerce continued throughout 2007. In 2008, economic conditions
worsened considerably, particularly so during the fourth quarter, and the level of national economic activity as measured by a number of key economic indicators shows that the economy entered into a
recession in 2008. The recession has continued through the first quarter of 2009. The March 2009 unemployment data for New York City indicated an unemployment rate of 8.1%, compared to 7.2% in
December 2008. The national rate of unemployment increased from 7.2% in December 2008 to 8.5% in March 2009.

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

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

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

Certain Line Items Presented

Net sales:Net sales include all front-end and pharmacy sales as well as certain resales of retail pharmaceutical inventory that are
required to be reported on a gross basis in accordance with Emerging Issues Task Force Issue No. 99-19, "Reporting Revenue Gross as a Principal versus Net as
an Agent". We refer to net sales excluding such resale activity as "net retail sales" and pharmacy sales excluding such resale activity as "pharmacy net retail sales."
"Same-store sales" represent sales for stores that have been open for at least 13 months and exclude any resale activity.

Cost of goods sold:Cost of goods sold includes all costs of products sold, net of any promotional income
or rebates received from manufacturers or wholesalers. Cost of goods sold is shown exclusive of depreciation and amortization expense for our distribution centers. Shrink losses are also recorded in
cost of goods sold.

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

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

Store pre-opening expenses:These expenses primarily represent the labor costs we incur related to our employees performing various
tasks
associated with the opening of a new location.

Results of Operations

The Thirteen Weeks Ended March 28, 2009 as Compared to the Thirteen Weeks Ended March 29, 2008

For the thirteen weeks ended March 28, 2009, we achieved net sales of $444.5 million and incurred a net loss of
$17.2 million, as compared to net sales of $427.1 million and a
net loss of $21.0 million during the thirteen weeks ended March 29, 2008. Pharmacy resale activity included in net sales was $17.7 million in the first quarter of 2009, compared
to $12.2 million in the first quarter of 2008. The decrease in our net loss is primarily attributable to an increase in gross profit of $4.5 million, reflecting a continuation of the
improved trend of increasing net sales, improved assortments of higher margin categories and increased penetration of higher margin generic prescriptions. The following are the other major factors
impacting our results during the thirteen weeks ended March 28, 2009 as compared to the thirteen weeks ended March 29, 2008:



The
following sets forth the results of operations for the periods indicated:

For the 13 Weeks EndedMarch 28, 2009

March 29, 2008Dollars

% of Sales

Dollars

% of SalesIn thousands, except percentagesStatement of Operations DataNet sales

$
444,456


100.0
%
$
427,137


100.0
%Cost of sales (exclusive of depreciation and amortization shown separately below)


307,246


69.1


294,445


68.9Gross profit


137,210


30.9


132,692


31.1Selling, general and administrative expenses


122,055


27.5


117,954


27.6Depreciation and amortization


18,076


4.1


17,919


4.2Store pre-opening expenses


47


0.0


47


0.0Other expenses


1,404


0.3


899


0.2Operating loss


(4,372
)

(1.0
)

(4,127
)

(1.0
)Interest expense, net


11,900


2.7


15,906


3.7Loss before income taxes


(16,272
)

(3.7
)

(20,033
)

(4.7
)Income tax provision


939


0.2


960


0.2Net loss

$
(17,211
)

(3.9
)%
$
(20,993
)

(4.9
)%


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The
following sets forth selected operating and other data for the periods indicated:

For the 13 Weeks EndedMarch 28,
2009

March 29,
2008Operating and Other DataSame-store sales growth


1.1
%

4.5
%Pharmacy same-store sales growth


3.5
%

1.5
%Front-end same-store sales growth


(0.8
)%

7.0
%Pharmacy sales as a percentage of net sales


46.7
%

45.5
%Third-party sales as a percentage of pharmacy sales


94.0
%

93.2
%Total stores, beginning of period


251


242New stores


1


1Closed stores


0


(1
)Total stores, end of period


252


242


Net
sales were $444.5 million in the thirteen weeks ended March 28, 2009, compared to $427.1 million in the thirteen weeks ended March 29, 2008, representing
an increase of 4.1% or $17.3 million. Resale activity increased by $5.5 million as compared to the prior year period, while net retail sales to retail customers increased by 2.8% over
this same period. Total same-store sales increased by 1.1% over the first quarter of last year.

Pharmacy
sales increased to $207.6 million in the first quarter of 2009 from $194.2 million in the first quarter of 2008, an increase of 6.9%, and represented 46.7% of
total sales, as compared with 45.5% of total sales in the first quarter of 2008. The 6.9% increase in pharmacy sales is primarily due to the increase in resale activity and a strong
same-store sales performance, which increased 3.5% despite a relatively weak flu season. During the first quarter of 2009, pharmacy net retail sales
increased $7.9 million, or 4.3%, compared to the prior year period. The percentage of generic drugs dispensed increased by 2.6% over the prior year, negatively impacting the pharmacy
same-store sales increase by approximately 3.3%. Generic drugs generally have lower retail sales prices but are more profitable than branded drugs.

Front-end
sales increased to $236.8 million in the first quarter of 2009 compared to $232.9 million in the first quarter of 2008, an increase of 1.7%, and
represented 53.3% of total sales during the first quarter of 2009, as compared to 54.5% of total sales in the first quarter of 2008. The total front-end sales growth was primarily driven
by the increased number of stores and continued strong performance in the food and beverage categories. For the first quarter of 2009, front-end same-store sales declined 0.8%,
which reflects the impact of the economic recession, harsher winter weather and a mild flu season. The front-end same-store sales were negatively impacted by approximately 0.6%
due to the shift of the Easter holiday into the second quarter this year as compared to the first quarter in 2008. This shift of the Easter holiday partially offset the 0.9% favorable
front-end same-store sales impact of cigarette price increases attributable to an increase in New York State cigarette excise taxes. Although such additional sales do not
result in any additional profit to the Company, the increase in the sales price on cigarettes positively impacted front-end sales.

Cost
of sales as a percentage of net sales was 69.1% and 68.9% during the first quarter of 2009 and 2008, respectively, resulting in a gross profit margin of 30.9% and 31.1% for each
respective period. Gross margin on net retail sales, which excludes pharmacy resale activity, expanded to 32.2% from 32.0% during the first quarter of 2009 and 2008, respectively. The enhanced gross
profit on net retail sales in 2009 reflects higher front-end selling margins resulting from an improved mix of higher margin categories inclusive of private label products, higher rates of
generic utilization and reduced inventory shrink losses.

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Selling,
general and administrative expenses were $122.1 million and $118.0 million, in the first quarter of 2009 and 2008, respectively. The $4.1 million increase
in selling, general and administrative expenses is primarily attributable to increased store occupancy costs associated with the increased number of stores, lease renewals and the additional store
payroll and related costs associated with the new stores. As a percentage of net sales, selling, general and administrative expenses decreased slightly to 27.5% in the first quarter of 2009 from 27.6%
in the first quarter of 2008 and reflects initial cost savings from initiatives that have been implemented to mitigate the impact of the current economic conditions.

Depreciation
and amortization of property and equipment and intangible assets was $18.1 million in the first quarter of 2009, as compared to $17.9 million in the first
quarter of 2008.

We
incurred store pre-opening expenses of $47,000 in the first quarter of both 2009 and 2008, attributable to the opening of one new store in each respective period.

In
the first quarter of 2009, we incurred other expenses of $1.4 million, including costs associated with closed stores ($0.2 million), Oak Hill management fees
($0.3 million) and costs associated with matters related to Mr. Cuti ($0.9 million). During the first quarter of 2008, we incurred other expenses of $0.9 million, including
costs associated with closed stores ($0.2 million), Oak Hill management fees ($0.3 million), costs associated with matters related to Mr. Cuti ($0.3 million) and other
items ($0.1 million).

Net
interest expense for the first quarter of 2009 was $11.9 million, as compared to $15.9 million in the first quarter of 2008. This decrease was primarily attributable to
lower interest rates on our variable rate borrowings as compared to the prior year and a reduction in the non-cash interest expense incurred for our Series A preferred stock's
mandatory redemption feature, which is considered a derivative financial instrument. At March 28, 2009, the weighted average interest rate on our variable rate outstanding debt was 5.1%, as
compared to a weighted average rate of 6.3% at March 29, 2008.

In
the first quarter of 2009, we recorded an income tax provision of $0.9 million, reflecting an estimated effective tax rate of 5.8%. This expense is inclusive of an incremental
valuation allowance of $7.0 million that largely offset the tax benefit generated by our operating loss in the quarter. In the first quarter of 2008, we recorded an income tax provision of
$1.0 million, reflecting an estimated effective tax rate of 4.8%. This expense is inclusive of an incremental valuation allowance of $8.6 million that largely offset the tax benefit
generated by our operating loss in the quarter. The valuation allowances reflect the significant losses incurred in each period, as well as the anticipated financial performance over the next several
years and the unlikelihood of recognizing the future tax benefits of our accumulated losses.

Liquidity and Capital Resources

Working Capital and Cash Flow

We had a working capital deficit of $18.9 million at March 28, 2009, as compared to a working capital deficit of
$13.3 million at December 27, 2008. The $5.5 million increase in our working capital deficit at March 28, 2009 is primarily due to increased revolving loan borrowings at
March 28, 2009, compared to December 27, 2008. This was partially offset by slightly higher inventory levels and reductions in accrued expenses resulting primarily from the timing of our
bi-weekly payroll cycle and the semi-annual interest payment on our senior subordinated notes. Working capital reflects the classification of outstanding borrowings under our
amended asset-based revolving loan facility of $153.2 million at March 28, 2009 and $144.6 million at December 27, 2008 as current liabilities. This current classification
is required because cash receipts controlled by the lenders are used to reduce outstanding debt, and we do not meet the criteria of SFAS No. 6, "Classification of
Short-Term Obligations Expected to be RefinancedAn Amendment of ARB No. 43, Chapter 3A" to classify the debt as long-term,
but is not an indication that this credit facility is expected to be retired within the next

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year.
The amended asset-based revolving loan facility expires in July of 2011, and we intend to continue to access it for our working capital needs throughout its remaining term.

Net
cash provided by operating activities was $4.3 million in the thirteen weeks ended March 28, 2009 compared to net cash used in operating activities of
$0.1 million in the thirteen weeks ended March 29, 2008. The increase in our operating cash flows is primarily attributable to the reduction in our net loss from $21.0 million
during the thirteen weeks ended March 29, 2008 to $17.2 million during the thirteen weeks ended March 28, 2009.

Net
cash used in investing activities was $11.7 million in the thirteen weeks ended March 28, 2009 compared to $8.4 million in the thirteen weeks ended
March 29, 2008. In the thirteen weeks ended March 28, 2009, we spent $9.8 million on capital expenditures, primarily related to new stores and the remodeling of existing
locations, and $1.8 million on lease acquisition and other costs, including capitalized software costs. In the thirteen weeks ended March 29, 2008, we spent $7.2 million on
capital expenditures, primarily related to new stores and the remodeling of existing locations, and $1.7 million on lease acquisition and other costs, including capitalized software costs. The
net cash flow used in investing activities for the thirteen weeks ended March 29, 2008 also included $0.5 million of proceeds related to the disposition of certain assets.

Net
cash provided by financing activities was $7.4 million in the thirteen weeks ended March 28, 2009, compared to $8.5 million in the thirteen weeks ended
March 29, 2008. The financing activity in the thirteen weeks ended March 28, 2009 reflects a net increase of $8.5 million in outstanding borrowings under our amended asset-based
revolving loan facility and capital lease payments of $1.1 million. The
financing activity in the thirteen weeks ended March 29, 2008 reflects a net increase of $9.3 million in outstanding borrowings under our amended asset-based revolving loan facility and
capital lease payments of $1.0 million. During the thirteen weeks ended March 29, 2008, Oak Hill reimbursed us for a portion of our legal costs incurred in connection with the
proceedings relating to Mr. Cuti, which is discussed in Note 12 to our Unaudited Consolidated Interim Financial Statements contained elsewhere in this report. The reimbursements totaled
$0.1 million for the thirteen weeks ended March 29, 2008 and are reflected as an additional capital contribution within net cash provided by financing activities.

Operating Capital Requirements

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

As
a result of the recession, we experienced declines in consumer demand that accelerated during the fourth quarter of 2008 and are expected to continue throughout fiscal 2009. Expected
higher rates of unemployment, reduced levels of tourism and decreased commercial activity are factors impacting our outlook for the current year. We are implementing certain measures to mitigate the
impact of these recessionary economic conditions. These actions include the implementation of a number of strategic cost savings initiatives to improve efficiency and eliminate non-value
added activities. The total cost savings associated with the program is expected to be in the range of $7.0 to $10.0 million in fiscal 2009.

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Other Factors Influencing our Liquidity

Eight of our stores, which generated approximately 3.2% of our net sales for fiscal 2008, have leases scheduled to expire before the
end of fiscal 2010. While none of these leases have options to extend the term of the lease, we believe that we will be able to renew the expiring leases on economically favorable terms or,
alternatively, find other economically attractive locations to lease.

As
of March 28, 2009, approximately 5,200 of our approximately 7,000 employees were represented by various labor unions and were covered by collective bargaining agreements.
Pursuant to the terms of the collective bargaining agreements covering these employees, we are required, in some instances, to pay specified annual increases in salary and benefits contributions
relating to the member employees. We do not believe that these increases will have a material impact on our liquidity or results of operations. Our collective bargaining agreements with the
RWDSU/Local 338 and Local 340A unions, who, on a combined basis represent approximately 4,800 of our employees in all of our stores, expired on March 31, 2009. In April 2009, we entered into
new collective bargaining agreements with both unions. The new collective bargaining agreements will expire on December 31, 2012 and have been ratified by the membership of both unions.

Approximately
400 of our employees in our two distribution centers in Maspeth, Queens, NY and North Bergen, NJ are represented by Local 210, International Brotherhood of Teamsters,
Chauffeurs and Warehousemen, under a collective bargaining agreement that expires on August 31, 2011.

In
June 2005, the appraisal panel in the World Trade Center insurance claim litigation determined the amount of our business interruption loss as a result of the events of
September 11, 2001. This determination by the panel is subject to existing appeals and potentially additional appeals, and on June 22, 2005, the Second Circuit Court of Appeals affirmed
the decision of the trial court, with modifications, including modifications to certain of the legal tests on which the appraisal panel's decision was based. Based on this decision and related
modifications, the appraisal panel revised its previously issued determination to require an additional $5.6 million payment from the insurance carrier in addition to the $9.9 million
previously paid by the insurance carrier in 2002. As a result of the insurer's refusal to pay this amount and also as a result of the Second Circuit Court of Appeals' interpretation of our insurance
policy, in January 2007, we commenced another action in the U.S. District Court for the Southern District of New York to recover both the appraisal panel's award and additional amounts under
the policy. In August 2007, the District Court entered judgment in the amount of $0.8 million plus interest, and both parties appealed. The appeals have been briefed and oral argument in the
Second Circuit Court of Appeals has been held. However, due to the inherent uncertainty of litigation, there can be no assurance that this appeal will be successful. See Note 12 to the
Unaudited Consolidated Interim Financial Statements contained elsewhere in this report for a more detailed explanation of this matter.

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Table of Contents

The
following table presents details of our significant commitments and obligations as at March 28, 2009, except that the data provided with respect to operating leases is as of
December 27, 2008:

Payments due by PeriodContractual Cash Obligations

Total

Within
1 year

Within
2-3 years

Within
4-5 years

After
5 years(dollars in thousands)Long-Term Debt(1)

$
405,034

$


$
405,000

$


$
34Asset-Based Revolving Loan Facility(2)


153,180





153,180





Capital Lease Obligations(3)


7,253


5,971


1,282





Operating Leases(4)


1,602,254


145,772


290,147


275,236


891,099Closed Store Costs(5)


5,394


2,136


1,253


669


1,336Fixed Interest Payments(6)


47,532


19,013


28,519





Severance Payments(7)


712


596


16


15


85Redeemable Preferred Stock(8)


39,400











39,400Redeemable Preferred Stock Dividends(8)


89,496











89,496Total Contractual Cash Obligations(9)

$
2,350,255

$
173,488

$
879,397

$
275,920

$
1,021,450


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The
following table presents details of our other significant commercial commitments as at March 28, 2009:

Amount of Commitment Expiration
per PeriodOther Commercial Commitments

Total Amounts
Committed

Within
1 year

2-3 years

4-5 years

After
5 years(dollars in thousands)Standby Letters of Credit(1)

$
9,142

$
9,142

$


$


$
Total Commercial Commitments

$
9,142

$
9,142

$


$


$



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We
are party to multi-year, merchandise supply agreements in the normal course of business. The largest of these agreements is with AmerisourceBergen, our primary
pharmaceutical supplier. Generally, these agreements provide for certain volume commitments and may be terminated by us, subject in some cases to specified termination payments, none of which we
believe would constitute a material adverse effect on our financial position, results of operations or cash flows. It is the opinion of management that if any of these agreements were terminated or if
any contracting party was to experience events precluding fulfillment of its obligations, we would be able to find a suitable alternative supplier.

In
connection with the November 21, 2005 replacement of Mr. Cuti as our CEO, Mr. Cuti's employment contract specified payments to Mr. Cuti in cash totaling up
to $6.6 million. We have paid the full amount through December 27, 2008. In addition, the employment contract provides for continued health insurance coverage for Mr. Cuti during
the 25-month period following termination and, upon expiration of that period, if Mr. Cuti is not otherwise eligible under another employer's comparable medical plan, lifetime
retiree medical benefits at a cost not to exceed $50,000 annually. In
an ongoing arbitration between Mr. Cuti and us (explained in more detail in Note 12 to the Unaudited Consolidated Interim Financial Statements contained elsewhere in this report), we are
seeking, among other forms of relief, rescission of employment agreements entered into between us and Mr. Cuti, the return of all compensation paid under the employment agreements, including
the benefits described in this paragraph, and other monetary damages.

In
connection with the Acquisition, Mr. Cuti was granted equity interests in Duane Reade Shareholders and Duane Reade Holdings, consisting of options to purchase shares of our
common

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stock
and a profits interest in Duane Reade Shareholders. Mr. Cuti's employment contract provides that, as a result of his replacement on November 21, 2005, he had the right to require
us to purchase for cash, to be paid over a two year period, all or a portion of these equity interests as he may designate, at a value determined in accordance with a formula. In connection with his
replacement, we have treated all of his equity interests as having vested. The options have expired unexercised, and the profits interest will have no value unless the value of Duane Reade
Shareholders and Duane Reade Holdings, Inc., respectively, appreciate following the Acquisition. Mr. Cuti's purchase right will be suspended at any time when the exercise of such
purchase rights would result in a default under the financing arrangements of Duane Reade Shareholders, Duane Reade Holdings or Duane Reade Inc. On December 21, 2005, Mr. Cuti
provided notice to Duane Reade Inc. that he was exercising his repurchase right to cause us to repurchase 5% of his profits interest. Pursuant to the procedures outlined in the new employment
agreement, Duane Reade Inc. has advised him that his profits interest as of December 21, 2005 was determined to have no value. The benefits described in this paragraph were all granted
under an employment agreement between Mr. Cuti and us. In an ongoing arbitration between Mr. Cuti and us (explained in more detail in Note 12 to the Unaudited Consolidated Interim
Financial Statements contained elsewhere in this report), we are seeking, among other forms of relief, rescission of employment agreements entered into between us and Mr. Cuti and the return of
all compensation paid under the employment agreements, including the benefits described in this paragraph. The determination that Mr. Cuti's profits interest as of December 21, 2005 had
no value is also one of several subjects specifically at issue in the arbitration.

In
connection with the assignment of certain store leases to third parties during 2008 and 2007, we continue to provide secondary guarantees on the lease obligations for the assigned
stores. The respective purchasers have assumed our obligations under these leases and are primarily liable for these obligations. Although we believe it to be unlikely, assuming that each respective
purchaser became insolvent, management estimates that we could settle these obligations for amounts substantially less than the aggregate obligation of $27.0 million as of March 28,
2009. The obligations are for varying terms dependent upon the respective lease, the longest of which lasts through May 31, 2022.

Debt

Refer to Note 6 to the Unaudited Consolidated Interim Financial Statements contained elsewhere in this report for a detailed
description with respect to the various components of our debt structure.

Liquidity Assessment

Duane Reade Holdings is a holding company formed in connection with the Acquisition to hold the common stock of Duane Reade Inc.
Duane Reade Holdings operates all of its business through Duane Reade Inc. and its subsidiaries and has no other independent assets, liabilities or operations. To the extent it has liquidity
requirements, it will depend on distributions of cash from Duane Reade Inc., to the extent permitted by the various agreements to which Duane Reade Inc. is a party. Currently, we do not
expect Duane Reade Holdings to have any material liquidity requirements.

We
have incurred losses since the Acquisition date due primarily to the additional depreciation and amortization expense relating to the stepped-up fair value of our assets
on the Acquisition date, and increased interest expense resulting from Acquisition indebtedness. We have an accumulated deficit of $415.1 million at March 28, 2009. We have generated
positive net cash flows from operations of $4.3 million during the 13 weeks ended March 28, 2009, $44.3 million in fiscal 2008, $19.3 million in fiscal 2007 and
$11.6 million in fiscal 2006. The amended asset-based revolving loan facility contains a single fixed charge coverage requirement which only becomes applicable when borrowings exceed
90 percent of the borrowing base, as defined in the agreement governing the amended asset-based revolving loan facility. We have never been subject to the financial coverage requirement.
Historically, our borrowings have never exceeded 90 percent of the borrowing base, and we do not expect to exceed

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this
threshold during the remainder of 2009. If the fixed charge coverage ratio had been in effect during the first quarter of 2009, we would have been in full compliance with the covenant.

We
intend to refinance our senior floating rate notes due 2010 and senior subordinated notes due 2011 in the amounts of $210 million and $195 million, respectively, prior
to their maturity dates. There can be no assurance that such refinancing will actually take place.

We
believe that, based on current levels of operations and anticipated growth, cash flow from operations, together with other available sources of funds, including revolving loan
borrowings under the amended asset-based revolving loan facility, will be adequate to make required payments on our indebtedness, to fund anticipated capital expenditures and to satisfy our working
capital requirements for fiscal 2009. We base this belief on our recent levels of cash flow from operations, projected improvements in working capital management, anticipated levels of capital
expenditures and the available borrowing capacity under the $225.0 million amended asset-based revolving loan facility, which was approximately $57.7 million at March 28, 2009. As
of May 4, 2009, our availability under the amended asset-based revolving loan facility has increased to approximately $60.6 million. Our stockholders' deficit is expected to increase in
2009 due to continued losses; however, this deficit does not impact our liquidity as noted above and has no impact on our debt covenants.

Our
ability to meet our debt service obligations and reduce or refinance our total debt will depend upon our future performance and financial condition, credit market conditions and the
availability of financing which, in turn, will be subject to general economic, financial, business, competitive, legislative, regulatory and other conditions, many of which are beyond our control. In
addition, our operating results, cash flow and capital resources may not be sufficient for repayment of our indebtedness in the future. Some risks that could adversely affect our ability to meet our
debt service obligations include, but are not limited to, reductions in third party prescription reimbursement rates, declines in the New York City economy, increases in competitive activity, adverse
changes in vendor credit terms, changes in drug consumption patterns, additional adverse legislative changes or a major disruption of business in our markets from a terrorist event, natural disaster
or other unexpected events. Other factors that may adversely affect our ability to service our debt are described above under "Special Note Regarding Forward-Looking Statements."

We
or our affiliates may, from time to time, seek to retire or purchase our outstanding debt in open market purchases, in privately negotiated transactions, or otherwise. Such retirement
or purchase of debt may be funded from the operating cash flows of the business or other sources and will depend upon prevailing market conditions, liquidity requirements, contractual restrictions and
other factors, and the amounts involved may be material.

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

Borrowings
under the amended asset-based revolving loan facility and the aggregate $210.0 million senior secured floating rate notes bear interest at floating rates. Therefore,
our financial condition will be affected by changes in prevailing interest rates. On April 30, 2008, we entered into a hedging transaction through the acquisition of a "no cost collar." Under
this arrangement, we capped our exposure on $210.0 million of LIBOR-based borrowings at a maximum LIBOR rate of 5.2%. In addition, we established a minimum "floor" LIBOR rate of 2.6%, in line
with then current LIBOR rates. At March 28, 2009, the LIBOR rate in effect was approximately 1.3%, which was below the minimum rate specified under the "no cost collar." As a result, the "no
cost collar" increased the
effective annual interest rate on our LIBOR- based borrowings by approximately 0.7%. This hedging arrangement expires on December 15, 2010.

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There
are no credit ratings related triggers in the amended asset-based revolving loan facility that would impact the cost of borrowing, annual amortization of principal or related
indebtedness maturity.

Critical Accounting Policies

Our discussion of results of operations and financial condition relies on our consolidated financial statements that are prepared based
on certain critical accounting policies that require management to make judgments and estimates that are subject to varying degrees of uncertainty. We believe that investors need to be aware of these
policies and how they impact our financial reporting to gain a more complete understanding of our consolidated financial statements as a whole, as well as our related discussion and analysis presented
herein. While we believe that these accounting policies are grounded on sound measurement criteria, actual future events can and often do result in outcomes that can be materially different from these
estimates or forecasts. The accounting policies and related risks described in our Annual Report on Form 10-K for the year ended December 27, 2008 are those that depend most
heavily on these judgments and estimates. At March 28, 2009, there have been no material changes to any of the Critical Accounting Policies contained therein.

Off-Balance Sheet Arrangements

We are not a party to any agreements with, or commitments to, any special purpose entities that would constitute material
off-balance sheet financing other than the items listed above.

Seasonality

In general, sales of drugstore items such as prescription drugs, over-the-counter drugs and health and beauty
care products exhibit limited seasonality in the aggregate, but do vary by product category. Quarterly results are primarily affected by the timing of certain holidays, the timing of new store
openings and the sale of seasonal products, with the Christmas holiday season normally generating a higher proportion of sales and earnings than other periods.

Inflation

We believe that inflation has not had a material impact on our results of operations during the three years ended December 27,
2008 or the thirteen weeks ended March 28, 2009.

Recently Issued Accounting Pronouncements

Refer to Note 2 of the Unaudited Consolidated Interim Financial Statements contained elsewhere in this report for a detailed
description of various recently issued accounting pronouncements.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our financial results are subject to risk from interest rate fluctuations on the portion of our debt that carries variable interest
rates. Variable rate debt outstanding at March 28, 2009 included $153.2 million of borrowings under our amended asset-based revolving loan facility and $210.0 million of senior
secured floating rate notes. At March 28, 2009, the weighted average combined interest rate in effect on all variable rate debt outstanding was 5.1%. A 0.50% change in interest rates applied to
the $363.2 million balance of floating rate debt would affect pre-tax annual results of operations by approximately $1.8 million, excluding the impact, if any, of the "no
cost collar" as detailed below. In addition, we also have $195.0 million of senior subordinated notes and
$34.0 thousand of senior convertible notes outstanding at March 28, 2009. The senior subordinated notes bear interest payable semi-annually at a fixed rate of 9.75% and are
therefore not subject to risk from interest rate fluctuations. The senior convertible notes accrete interest at an annual fixed rate of 3.75% and are also not subject to interest rate fluctuations.

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On
April 30, 2008, we entered into a hedging transaction through the acquisition of a "no cost collar." Under this arrangement, we capped our exposure on $210.0 million of
LIBOR-based borrowings at a maximum LIBOR rate of 5.2%. In addition, we established a minimum "floor" LIBOR rate of 2.6%, in line with then current LIBOR rates. The changes in the fair value of the
hedge agreement are reflected within other comprehensive loss on the Consolidated Statements of Comprehensive Loss (Unaudited) contained elsewhere in this report. At March 28, 2009, the LIBOR
rate in effect was approximately 1.3%, which was below the minimum rate specified under the "no cost collar." As a result, the "no cost collar" increased the effective annual interest rate on our
LIBOR-based borrowings by approximately 0.7%. The calculation of the fair value of the "no cost collar" resulted in a hedge liability of $4.8 million at March 28, 2009. This hedging
arrangement expires on December 15, 2010.

The
principal objective of our investment management activities is to maintain acceptable levels of interest rate and liquidity risk to facilitate our funding needs. As part of our risk
management, we may continue to use derivative financial products such as interest rate hedges and interest rate swaps in the future.

ITEM 4.    CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") designed to provide reasonable assurance that the information required to be reported in our Exchange Act filings is recorded,
processed, summarized and reported within the timeframes specified and pursuant to the regulations of the SEC, including controls and procedures designed to ensure that this information is accumulated
and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. It should be noted that
because of inherent limitations, our disclosure controls and procedures, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the
disclosure controls and procedures are met.

(a)   Evaluation of Disclosure Controls and Procedures

An evaluation was carried out under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our "disclosure controls and procedures" (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities
Exchange Act of 1934) as at the end of the period covered by this quarterly report.

Based
on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of that date, our disclosure controls and procedures required by
paragraph (b) of the Exchange Act Rules 13a-15 or 15d-15, were effective.

(b)   Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the first quarter ended March 28, 2009 that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II  OTHER INFORMATION

ITEM 1.    Legal Proceedings

Refer to Note 12 to the Unaudited Consolidated Interim Financial Statements contained elsewhere in this report for a detailed
description of the various legal proceedings in which we are involved.

ITEM 1A.    Risk Factors

For information regarding factors that could affect our results of operations, financial position and liquidity, see the risk factors
discussion provided in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 27, 2008. See also "Special Note Regarding Forward-Looking
Statements" above.

ITEM 2.    Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

ITEM 3.    Defaults Upon Senior Securities



ITEM 4.    Submission of Matters to a Vote of Security Holders

Not applicable.

ITEM 5.    Other Information

Not applicable.

ITEM 6.    Exhibits

| |       |  |                                                                                           
| | ----- |  | ------------------------------------------------------------------------------------------
|
| | 31.1* |  | Sarbanes-Oxley Section 302 Certification of the Company's Chief Executive Officer ("CEO").
| | 31.2* |  | Sarbanes-Oxley Section 302 Certification of the Company's Chief Financial Officer ("CFO").
| | 32**  |  | Sarbanes-Oxley Section 906 Certifications of the Company's CEO and CFO.                   

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.

Dated: May 7, 2009

DUANE READE HOLDINGS, INC.(Registrant)/s/ JOHN A. LEDERER John A. Lederer Chief Executive Officer, Chairman of the Board and Director
(Principal Executive Officer)/s/ JOHN K. HENRY John K. Henry Senior Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)


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