SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C.

FORM 10-Q

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

For the quarterly period ended September 29, 2007

Commission file number 001-13843

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

|DELAWARE                                                       |  | 05-0599589              
|-------------------------------------------------------------- |  | ------------------------
|(State or other jurisdiction of
incorporation or organization) |  | (IRS Employer
ID Number)
|440 Ninth Avenue                                               |  |                         
|New York, New York                                             |  | 10001                   
|(Address of principal executive offices)                       |  | (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 is a large accelerated filer, an accelerated filer or a non-accelerated filer, as defined in
Rule 12b-2 of the Exchange Act (check one):

|Large accelerated filer    o |  | Accelerated filer    o |  | Non-accelerated filer    ý
|---------------------------- |  | ---------------------- |  | --------------------------

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 November 13, 2007, there were 2,595,077 shares of common stock issued and outstanding. None of the registrant's outstanding voting stock is held by
non-affiliates of the registrant.



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INDEX

PART IFINANCIAL INFORMATION

5ITEM 1.FINANCIAL STATEMENTS

5Consolidated Statements of Operations (Unaudited)For the 13 and 39 Weeks Ended September 29, 2007 and September 30, 2006

5Consolidated Balance Sheets (Unaudited)As of September 29, 2007 and December 30, 2006

6Consolidated Statements of Cash Flows (Unaudited)For the 39 Weeks Ended September 29, 2007 and September 30, 2006

7Consolidated Statements of Comprehensive Loss (Unaudited)For the 13 and 39 Weeks Ended September 29, 2007 and September 30, 2006

8Notes to Consolidated Financial Statements (Unaudited)

9ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

31ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK

45ITEM 4.CONTROLS AND PROCEDURES

46PART IIOTHER INFORMATION

49SIGNATURES

50


2

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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 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 statements
involve known and unknown risks, uncertainties and other factors that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from
those expressed or implied by any forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "could," "would," "should," "expect,"
"plan," "anticipate," "intend," "believe," "estimate," "predict," "potential," "pro forma," "seek," or "continue" or the negative of those terms or other comparable terminology. These 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:



3

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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
filing might not occur.

4

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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
Ended
September 29,
2007 |         | 13 Weeks
Ended
September 30,
2006 |   | 39 Weeks
Ended
September 29,
2007 |   | 39 Weeks
Ended
September 30,
2006 |          
|------------------------------------------ |  | --------------------------------- | ------- | --------------------------------- | - | --------------------------------- | - | --------------------------------- | ---------
|Net sales                                  |  | $                                 | 408,828 |                                   | $ | 385,655                           |   | $                                 | 1,255,146
|Cost of sales                              |  |                                   | 322,929 |                                   |   | 305,016                           |   |                                   | 996,910  
|                                           |  |                                   |         |                                   |   |                                   |   |                                   |          
|Gross profit                               |  |                                   | 85,899  |                                   |   | 80,639                            |   |                                   | 258,236  
|Selling, general & administrative expenses |  |                                   | 71,127  |                                   |   | 67,077                            |   |                                   | 217,196  
|Labor contingency income                   |  |                                   |        |                                   |   |                                  |   |                                   |         
|Depreciation and amortization              |  |                                   | 18,007  |                                   |   | 16,903                            |   |                                   | 54,460   
|Store pre-opening expenses                 |  |                                   | 200     |                                   |   | 153                               |   |                                   | 350      
|Gain on sale of pharmacy files             |  |                                   | (1,337  | )                                 |   |                                  |   |                                   | (1,337   
|Other expenses                             |  |                                   | 4,111   |                                   |   | 148                               |   |                                   | 13,352   
|                                           |  |                                   |         |                                   |   |                                   |   |                                   |          
|Operating loss                             |  |                                   | (6,209  | )                                 |   | (3,642                            | ) |                                   | (25,785  
|Interest expense, net                      |  |                                   | 15,731  |                                   |   | 14,356                            |   |                                   | 44,810   
|                                           |  |                                   |         |                                   |   |                                   |   |                                   |          
|Loss before income taxes                   |  |                                   | (21,940 | )                                 |   | (17,998                           | ) |                                   | (70,595  
|Income taxes                               |  |                                   | 112     |                                   |   | 734                               |   |                                   | 2,128    
|                                           |  |                                   |         |                                   |   |                                   |   |                                   |          
|Net loss                                   |  | $                                 | (22,052 | )                                 | $ | (18,732                           | ) | $                                 | (72,723  
|                                           |  |                                   |         |                                   |   |                                   |   |                                   |          

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

5

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

|                                                                                                                    |  | September 29,
2007 |          | December 30,
2006 |  
|------------------------------------------------------------------------------------------------------------------- |  | ------------------ | -------- | ----------------- | -
|ASSETS                                                                                                              |  |                    |          |                   |  
|Current Assets                                                                                                      |  |                    |          |                   |  
|Cash                                                                                                                |  | $                  | 1,359    |                   | $
|Receivables, net                                                                                                    |  |                    | 53,534   |                   |  
|Inventories                                                                                                         |  |                    | 220,113  |                   |  
|Deferred income taxes                                                                                               |  |                    |         |                   |  
|Prepaid expenses and other current assets                                                                           |  |                    | 14,173   |                   |  
|                                                                                                                    |  |                    |          |                   |  
|TOTAL CURRENT ASSETS                                                                                                |  |                    | 289,179  |                   |  
|Property and equipment, net                                                                                         |  |                    | 196,824  |                   |  
|Goodwill                                                                                                            |  |                    | 70,384   |                   |  
|Other assets, net                                                                                                   |  |                    | 200,478  |                   |  
|                                                                                                                    |  |                    |          |                   |  
|TOTAL ASSETS                                                                                                        |  | $                  | 756,865  |                   | $
|                                                                                                                    |  |                    |          |                   |  
|LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)                                                                      |  |                    |          |                   |  
|Current Liabilities                                                                                                 |  |                    |          |                   |  
|Accounts payable                                                                                                    |  | $                  | 79,409   |                   | $
|Accrued expenses                                                                                                    |  |                    | 43,227   |                   |  
|Deferred income taxes                                                                                               |  |                    | 574      |                   |  
|Current portion of debt                                                                                             |  |                    | 153,110  |                   |  
|Current portion of capital lease obligations                                                                        |  |                    | 3,343    |                   |  
|                                                                                                                    |  |                    |          |                   |  
|TOTAL CURRENT LIABILITIES                                                                                           |  |                    | 279,663  |                   |  
|Long-term debt                                                                                                      |  |                    | 405,032  |                   |  
|Capital lease obligations, less current portion                                                                     |  |                    | 4,593    |                   |  
|Deferred income taxes                                                                                               |  |                    | 28,568   |                   |  
|Other non-current liabilities                                                                                       |  |                    | 97,432   |                   |  
|                                                                                                                    |  |                    |          |                   |  
|TOTAL LIABILITIES                                                                                                   |  |                    | 815,288  |                   |  
|                                                                                                                    |  |                    |          |                   |  
|Commitments and contingencies (Note 9)                                                                              |  |                    |          |                   |  
|Stockholder's equity (deficit)                                                                                      |  |                    |          |                   |  
|Common stock, $0.01 par, authorized 4,205,600 shares and 3,050,000 shares; issued and outstanding: 2,594,977 shares |  |                    | 26       |                   |  
|Paid-in capital                                                                                                     |  |                    | 251,424  |                   |  
|Accumulated other comprehensive income                                                                              |  |                    | 139      |                   |  
|Accumulated deficit                                                                                                 |  |                    | (310,012 | )                 |  
|                                                                                                                    |  |                    |          |                   |  
|TOTAL STOCKHOLDER'S EQUITY (DEFICIT)                                                                                |  |                    | (58,423  | )                 |  
|                                                                                                                    |  |                    |          |                   |  
|TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)                                                                |  | $                  | 756,865  |                   | $
|                                                                                                                    |  |                    |          |                   |  

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

6

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

|                                                                                |  | 39 Weeks
Ended
September 29,
2007 |            | 39 Weeks
Ended
September 30,
2006 |  
|------------------------------------------------------------------------------- |  | --------------------------------- | ---------- | --------------------------------- | -
|Cash flows used in operating activities:                                        |  |                                   |            |                                   |  
|Net loss                                                                        |  | $                                 | (72,723    | )                                 | $
|Adjustments to reconcile net loss to net cash used in operating activities:     |  |                                   |            |                                   |  
|Depreciation and amortization                                                   |  |                                   | 57,200     |                                   |  
|Deferred income taxes                                                           |  |                                   | 1,950      |                                   |  
|Non-cash rent expense                                                           |  |                                   | 8,993      |                                   |  
|Reversal of labor contingency accrual                                           |  |                                   |           |                                   |  
|Other                                                                           |  |                                   | (321       | )                                 |  
|Change in operating assets and liabilities (net of the effect of acquisitions): |  |                                   |            |                                   |  
|Receivables                                                                     |  |                                   | 3,647      |                                   |  
|Inventories                                                                     |  |                                   | (1,189     | )                                 |  
|Prepaid expenses and other assets                                               |  |                                   | 11,486     |                                   |  
|Other assets and other liabilities, net                                         |  |                                   | 3,543      |                                   |  
|Accounts payable                                                                |  |                                   | (4,001     | )                                 |  
|Accrued expenses                                                                |  |                                   | (12,452    | )                                 |  
|                                                                                |  |                                   |            |                                   |  
|NET CASH USED IN OPERATING ACTIVITIES                                           |  |                                   | (3,867     | )                                 |  
|                                                                                |  |                                   |            |                                   |  
|Cash flows used in investing activities:                                        |  |                                   |            |                                   |  
|Capital expenditures                                                            |  |                                   | (20,058    | )                                 |  
|Lease acquisition, customer file and other costs                                |  |                                   | (14,547    | )                                 |  
|Proceeds from sale of property and other assets                                 |  |                                   | 3,335      |                                   |  
|                                                                                |  |                                   |            |                                   |  
|NET CASH USED IN INVESTING ACTIVITIES                                           |  |                                   | (31,270    | )                                 |  
|                                                                                |  |                                   |            |                                   |  
|Cash flows from financing activities:                                           |  |                                   |            |                                   |  
|Borrowings from revolving credit facility                                       |  |                                   | 1,490,788  |                                   |  
|Repayments of revolving credit facility                                         |  |                                   | (1,494,800 | )                                 |  
|Issuance of preferred stock and warrants                                        |  |                                   | 39,150     |                                   |  
|Capital contributions                                                           |  |                                   | 2,342      |                                   |  
|Deferred financing costs                                                        |  |                                   | (5         | )                                 |  
|Repayments of capital lease obligations                                         |  |                                   | (2,374     | )                                 |  
|                                                                                |  |                                   |            |                                   |  
|NET CASH PROVIDED BY FINANCING ACTIVITIES                                       |  |                                   | 35,101     |                                   |  
|                                                                                |  |                                   |            |                                   |  
|Net increase (decrease) in cash                                                 |  |                                   | (36        | )                                 |  
|Cash at beginning of period                                                     |  |                                   | 1,395      |                                   |  
|                                                                                |  |                                   |            |                                   |  
|Cash at end of period                                                           |  | $                                 | 1,359      |                                   | $
|                                                                                |  |                                   |            |                                   |  

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

7

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

|                                             |  | For the 13 Weeks Ended |         | For the 39 Weeks Ended |  
|-------------------------------------------- |  | ---------------------- | ------- | ---------------------- | -
|
|Net loss                                     |  | $                      | (22,052 | )                      | $
|Change in fair value of interest rate collar |  |                        | 29      |                        |  
|                                             |  |                        |         |                        |  
|Total other comprehensive income (loss)      |  |                        | 29      |                        |  
|                                             |  |                        |         |                        |  
|Total comprehensive loss                     |  | $                      | (22,023 | )                      | $
|                                             |  |                        |         |                        |  

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

8

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

1.    Basis of Presentation

Duane Reade Holdings, Inc. ("Duane Reade Holdings" or the "Company") 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"). Duane Reade Holdings, Inc. is a wholly-owned subsidiary of Duane Reade Shareholders, LLC
("Duane Reade Shareholders"), a parent entity also established to effectuate the Acquisition. The Acquisition was completed on July 30, 2004 through the merger of Duane Reade Acquisition Corp.
(a wholly owned subsidiary of Duane Reade Holdings, Inc.) into Duane Reade Inc. with Duane Reade Inc. being the surviving entity and a wholly owned subsidiary of Duane Reade
Holdings, Inc. 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 7) are full and unconditional, joint and several.

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 30, 2006. 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 30, 2006. 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.

2.    Recently Issued Accounting Pronouncements

In February 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 155, "Accounting
for Certain Hybrid Instruments," which amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." SFAS No. 155 allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate
the derivative from its host) if the holder elects to account for the whole instrument on a fair value basis. SFAS No. 155 also clarifies and amends certain other provisions of SFAS
No. 133 and SFAS No. 140. This statement is effective for all financial instruments acquired or issued in fiscal years beginning after September 15, 2006. The Company has adopted
SFAS 155, and such adoption has not had an effect on its consolidated financial statements.

In
June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxesan interpretation of SFAS No. 109." FIN 48 clarifies the
accounting for uncertainty in income taxes by prescribing a recognition threshold for tax positions taken or expected to be taken in a tax return. FIN 48 is effective for fiscal years beginning after
December 15, 2006. The Company has adopted FIN 48 effective with the beginning of fiscal 2007, and such adoption has not had a material effect on its consolidated financial statements.

9

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In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." This statement establishes a standard definition for fair value and a framework under generally
accepted accounting principles for measuring fair value and expands the disclosure requirements surrounding fair value measurements. This statement is effective for fiscal years beginning after
November 15, 2007. The Company has not yet determined the impact, if any, of adopting SFAS No. 157.

In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment of FASB Statement
No. 115." This statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value.
Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS No. 159 does not affect any existing accounting literature that requires
certain assets and liabilities to be carried at fair value. This statement is effective for fiscal years beginning after November 15, 2007. The Company has not yet determined the impact, if
any, of adopting SFAS No. 159.

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 prospective transition method. Under that transition method, compensation expense recognized for the thirty-nine weeks ended September 29, 2007 and September 30, 2006
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
September 29, 2007 and September 30, 2006, the Company recorded pre-tax compensation expense of approximately $0.2 million and $0.1 million, respectively,
attributable to the vested portion of stock options granted after the adoption date. For the thirty-nine weeks ended September 29, 2007 and September 30, 2006, the
corresponding expense was $0.8 million and $0.2 million, respectively.

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 "Stock Option
Plan," which became effective on the date the Acquisition was completed. The Stock 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 Stock Option Plan. On March 27, 2007, the Company amended the
Stock Option Plan so that a maximum of 575,893 shares of its common stock may be granted under the Stock Option Plan.

Under
the Stock 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 Stock 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 Stock Option Plan will be subject to such terms, including the exercise price and the conditions and timing
of exercise, not

10

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inconsistent
with the Stock Option Plan, as may be determined by the compensation committee and specified in the applicable stock option agreement or any amendment to such agreement.

For
the thirty-nine weeks ended September 29, 2007, a total of 171,000 options to acquire shares of the Company's common stock have been granted, including 168,600
options granted to executive officers of the Company on December 31, 2006. The granted options vest over a period of four to five years.

The
weighted-average grant-date fair value of options granted during the thirty-nine weeks ended September 29, 2007 was $5.59. There were no stock options
exercised during the first thirty-nine weeks of either 2007 or 2006.

The
Company has adopted Black-Scholes option pricing and other methods of valuation, the results of which were applied to the stock options issued during the thirty-nine
weeks ended September 29, 2007. The key assumptions used in this valuation were consistent with those used in 2006.

As
of September 29, 2007, there was $2.1 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 two years.

As
of September 29, 2007, a total of 127,988 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.    Inventories and Cost of Sales

At September 29, 2007, inventories, consisting solely of finished goods, would have been lower by $1.4 million 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. Cost of sales includes all store occupancy-related
costs and expenses, consisting of lease and sublease-related income and expenses, other real estate-related income and expenses primarily resulting from the disposition of store leases, store utility
costs, warehouse expenses and distribution costs. During the thirteen and thirty-nine weeks ended September 29, 2007, the Company had $1.9 million and $2.5 million of
real estate related income compared to $0.2 million and $0.4 million during the thirteen and thirty-nine weeks ended September 30, 2006. 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.

5.    Exit and Disposal Activities

In connection with the July 30, 2004 acquisition of Duane Reade Inc. and in accordance with the provisions of Emerging Issues Task Force Issue
No. 95-3, "Recognition of Liabilities in Connection with Purchase Business Combinations," the Company established a reserve of $17.0 million for costs anticipated to be
incurred as a result of the planned closing of 11 of its stores. These costs primarily relate to rent, utilities and other on-going occupancy-related expenses. At September 29, 2007
all of the planned closings had occurred, and the Company has recorded a cumulative net total of $12.0 million of primarily occupancy-related costs against this reserve resulting in the reserve
balance of $5.0 million

11

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at
September 29, 2007. The balance of this reserve is expected to be utilized primarily for rent-related costs in these closed stores.

In
the normal course of its business, the Company closes underperforming locations. In accordance with the provisions of SFAS No. 146, "Accounting for Costs Associated with Exit
or Disposal Activities," the Company establishes reserves for costs anticipated to be incurred in connection with such closed stores. At September 29, 2007, the balance of this reserve was
$3.2 million. The closed store costs are included in Other expenses within the accompanying Consolidated Statements of Operations. See Note 11 for additional details.

6.    Pharmacy and Customer File Acquisitions

During the thirteen weeks ended September 29, 2007, the Company acquired the pharmacy-related operations, including certain lease-related assets, of a
single pharmacy establishment (which is operated as a new store). During fiscal 2006, the Company did not acquire any pharmacy customer files or pharmacy establishments. The table below provides
additional details of this acquisition for the thirteen weeks ended September 29, 2007 (dollars in millions).

Thirteen Weeks
Ended
September 29,
2007Pharmacy establishments


1Total acquisitions


1Purchase price allocation:Identifiable intangibles

$
1.2Inventory


0.3Other assets


0.3Accruals and liabilities


(0.2
)Total

$
1.6


The
acquired operations have been included in the consolidated statements of operations from the date of acquisition and did not have a material effect on the reported results of
operations of the Company for the periods presented.

During
the thirteen weeks ended September 29, 2007, the Company sold several pharmacy prescription files that resulted in a gain of $1.3 million.

12

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7.    Debt

Debt is summarized as follows (in thousands):

Description of Instrument

September 29,
2007

December 30,
2006Current Debt:Asset-Based Revolving Loan Facility(1)

$
153,110

$
157,122Non-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


32


32Total

$
405,032

$
405,032Total Debt

$
558,142

$
562,154


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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 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 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 notes due
2010 and the $195.0 million aggregate principal amount of the 9.75% senior subordinated notes due 2011, in each case, on terms reasonably acceptable to the administrative agent and at least
120 days prior to each's respective scheduled maturity date. The Company fully intends to refinance or restructure the outstanding principal amounts of its senior secured notes and senior
subordinated notes within the required timeframe, in accordance with the requirements of the third amendment.

The
amended asset-based revolving loan facility includes a $50 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

13

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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. The July 2006 amendment reduced the ratios that the Company would be required to maintain
in this event. 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:



At
September 29, 2007, there was $153.1 million outstanding under the asset-based revolving loan facility, and approximately $61.2 million of remaining availability,
net of $5.7 million reserved for outstanding standby letters of credit. 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 to reclassify the debt as long-term.

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.

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 notes due 2010. Using the net proceeds from that offering, together with approximately $2.2 million of borrowings
under the amended asset-based revolving loan facility, 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 notes. These new notes were issued under the same indenture as the senior secured notes issued in December 2004, although they do not trade fungibly with
those notes.

The
senior secured notes bear interest at a floating rate of LIBOR plus 4.50%, reset quarterly. Interest on the senior secured notes is payable quarterly on each March 15,
June 15, September 15, and December 15. The senior secured notes mature on December 15, 2010. At September 29, 2007, the senior secured notes bore interest at a rate
of 10.19%.

14

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On
May 25, 2005, the Company entered into a hedging transaction through the acquisition of a "no cost collar." Under this arrangement, the Company capped its exposure on
$130.0 million of LIBOR-based borrowings under the senior secured notes at a maximum LIBOR rate of 5.30%. In addition, the Company established a minimum "floor" LIBOR rate of 3.45% in line with
then current LIBOR rates. This hedging arrangement expires on June 16, 2008. The changes in the fair value of the collar agreement are reflected in the Consolidated Statements of Comprehensive
Loss included within the financial statements. At September 29, 2007, the LIBOR rate in effect for the senior secured notes was 5.69%, which exceeded the maximum rate under the "no cost
collar." As a result, the protection afforded by the "no cost collar" reduced the overall effective interest rate on the senior secured notes to 9.95%.

The
Company guarantees the senior secured notes on a full and unconditional, senior secured basis. Duane Reade Inc. and Duane Reade GP are co-obligors under the senior
secured notes. The senior secured 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 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 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. The senior secured
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 notes at
101% of the outstanding principal amount of the senior secured notes plus accrued and unpaid interest to the date of repurchase. The indenture governing the senior secured notes contains certain
affirmative and negative covenants that limit the ability of Duane Reade Inc., Duane Reade GP and their restricted subsidiaries, as defined, to incur additional indebtedness, pay dividends,
make repayments on indebtedness that is subordinated to the senior secured notes and to make certain other restricted payments, incur certain liens, use proceeds from sales of assets, enter into
business combination transactions (including 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 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 notes that would impact the cost of borrowing, annual amortization of principal or related
indebtedness maturity. The indenture governing the senior secured notes does not contain financial maintenance covenants.

At
September 29, 2007, the weighted average combined interest rate in effect on all variable rate debt outstanding, including the benefit afforded by the "no cost collar," was
8.84%.

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

15

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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 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 senior 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 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 senior 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 remaining $351.0 million outstanding principal value of the senior
convertible notes. Upon the closing of the tender offer, a total of $350.9 million principal amount at maturity ($201.0 million issuance value) was tendered for repurchase, leaving only
$55.0 thousand of principal amount at maturity ($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 senior 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.

16

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8.    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 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.

The
Company evaluates the likelihood of recognizing the benefit of deferred tax assets, a majority of which result from the incurrence of net operating losses. This evaluation includes a
review of the individual deferred tax components and a corresponding analysis of the anticipated time period during which the "book versus tax" differences giving rise to the specific assets and
liabilities would reverse. Based on this evaluation, if the Company believes it is more likely than not that the benefits will not be realized within the period in which the deferred tax assets are
deductible, an appropriate valuation allowance would be recorded.

At
December 30, 2006, as a consequence of the significant losses incurred in the 2005 and 2006 fiscal years, as well as the projected future years' taxable losses, the Company
recorded a cumulative valuation allowance of $68.5 million. This amount represented the Company's year-end net deferred tax asset value excluding $27.2 million of deferred
tax liabilities resulting from items that are not amortized for financial statement purposes and are therefore not expected to reverse within the loss carryforward expiration period. These items
include post-2004 goodwill of $6.2 million and the deferred tax liability of $21.0 million associated with the tradename.

During
the thirteen and thirty-nine weeks ended September 29, 2007, the Company incurred additional pre-tax losses of $21.9 million and
$70.6 million, respectively, and recorded incremental valuation allowances of $9.3 million and $36.5 million, respectively. At September 29, 2007, the Company had
approximately $158.8 million of gross deferred tax assets,
approximately $83.0 million of gross deferred tax liabilities and recorded a cumulative valuation allowance of $104.9 million. The tax expense reported during the thirteen and
thirty-nine weeks ended September 29, 2007 and September 30, 2006 primarily results from the deferred tax liabilities generated by non-amortizable goodwill.

Duane
Reade Inc. is presently undergoing an examination of its New York State Franchise Tax filings for the 2001 through 2003 tax years. Adjustments proposed by New York state
have been previously accrued and, in management's opinion, are not considered material to the Company's consolidated financial statements.

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.

9.    Commitments and Contingencies

In connection with the assignment of certain store leases to third parties, the Company continues to guarantee lease obligations for six former stores. The
respective purchasers have assumed the Company's obligations under these leases and are primarily liable for these obligations. Although the

17

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Company
believes it to be unlikely, assuming that each respective purchaser became insolvent, management estimates that the Company could settle these obligations for amounts substantially less than
the aggregate obligation of $24.5 million as of September 29, 2007. The obligations are for varying terms dependent upon the respective lease, the longest of which lasts through
May 31, 2022.

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 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 it believes 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 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 to recover both the appraisal panel's award and additional amounts under the policy. During the third quarter of 2007, the U.S. District
Court rendered a decision reducing the $5.6 million award to approximately $0.8 million, plus interest, and also granted the insurance carrier's appeal to dismiss the Company's remaining
claims. The Company is planning to appeal this decision. However, due to the inherent uncertainty of litigation, there can be no assurance that this appeal will be successful.

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
in the event a successful appeal of this matter results in any additional payment to the Company related to this claim, such payment 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 $6.0 million and would in any event be substantially less that any amount
of additional recovery that might occur under this claim.

In
December 2005, the Company and Cardinal Health, a pharmacy inventory supplier, settled all matters relating to litigation arising out of a dispute regarding certain former
supply arrangements and agreements. Under the terms of this settlement, the Company paid Cardinal Health $4.5 million over a period of time to settle an outstanding trade payable, and entered
into an agreement whereby Cardinal will provide a secondary supply of pharmaceutical products to the Company until certain minimum purchase levels are achieved.

In
November 2004, Duane Reade Inc. was served with a class action complaint, Damassia v. Duane Reade Inc. The lawsuit was filed in the United States District Court,
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. The complaint seeks twice an unspecified amount of unpaid wages. The Company believes this
claim to be without merit, and it intends to defend itself against this claim. However, due to the uncertainty of litigation, there can be no assurance as to the ultimate outcome of this matter.

18

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In
April 2006, the Company was served with a purported class action complaint, Enamul 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. The complaint seeks an unspecified amount of damages. The Company believes this claim to be without merit, and it intends to vigorously defend itself against this
claim. However, due to the inherent uncertainty of litigation, there can be no assurance as to the ultimate outcome of this matter.

In
January 2005, the Equal Employment Opportunity Commission filed an action against the Company in the U.S. District Court for the Southern District of New York alleging, among
other things, that the Company created a hostile work environment for three female store employees, and potentially a class of such female employees. The Company believes that it has reached a
settlement of this litigation and has reserved for the estimated settlement within its financial statements at September 29, 2007. The settlement will not have a material impact on the Company
or its operating results.

In
November 2006, the Attorney General of the State of New Jersey filed an action against the Company alleging that the Company violated certain state regulations including
regulations relating to the presence of expired products on its shelves and certain pricing regulations. This matter was settled with the office of the Attorney General of the State of New Jersey in
September 2007, and the settlement will not have a material impact on the Company or its operating results.

Proceedings Relating to the Former Chairman and Chief Executive Officer

On September 1, 2006, Anthony J. Cuti, the Company's former Chairman, President and Chief Executive Officer, 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

19

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counterclaims
were based on information uncovered as of that date by an investigation conducted by independent legal counsel and forensic accountants at the direction of the Audit Committee.

In
a 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 restatements and the results of the investigation are discussed more fully in Note 2 to the financial statements contained
in the Company's Annual Report on Form 10-K for the year ended December 30, 2006.

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. On July 11, 2007, the arbitrator granted a stay of the arbitration through
October 23, 2007 with respect to all matters other than a motion to dismiss the above-mentioned patent claim (if the parties wish to proceed) and advancement of certain fees pursuant to a prior
order. The stay of the arbitration has been further extended to December 14, 2007.

Litigation Relating to the Acquisition

The Company is aware of six purported class action complaints challenging the Acquisition consummated by Duane Reade Inc. and Duane Reade Acquisition that
have been filed in the Court of Chancery of the State of Delaware, referred to as the "Delaware Complaints," and three purported class action complaints that have been filed in the Supreme Court of
the State of New York. Two of the New York complaints have been dismissed without prejudice. The other New York complaint (the "New York Complaint") is pending, but has not been served on the Company.
The Delaware Complaints name the former Chairman and CEO and certain other members of the Company's board of directors and executive officers as well as Duane Reade GP as defendants. Four of the
Delaware Complaints name Oak Hill as a defendant. The New York Complaint names the former Chairman and

20

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CEO
and certain other members of the Company's board of directors and executive officers as well as Duane Reade GP as defendants. One of the dismissed New York complaints named Oak Hill as a
defendant.

The
Delaware Complaints were consolidated on January 28, 2004, and on April 8, 2004, the plaintiffs in the Delaware actions filed a consolidated class action complaint. In
October 2007, the Delaware Court dismissed all of the Delaware Complaints with one exception. The Company expects the remaining complaint to be dismissed in the near future.

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

On February 20, 2007, the Company announced it had 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. The acquisition of the leases is subject to the satisfaction of certain conditions, including landlord consents. As of September 29, 2007,
the Company had completed the lease acquisition on three of these locations, two of which opened as new stores in the third quarter. The Company completed the lease acquisition on a fourth location in
October 2007, and it anticipates completing the lease acquisition on two additional locations during the fourth quarter with the balance of the lease acquisitions expected to be completed in
2008. We currently plan to open a total of three to four Gristedes locations in 2007.

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 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 are to be used, in part, to acquire up to
eight store leases from the Gristedes supermarket chain. Any funds raised through this commitment in excess of funds needed for the acquisition will be used to fund the Company's normal capital
spending, fund new store openings or reduce the Company's outstanding debt. The first portion of this equity commitment of $13.0 million was funded on March 27, 2007. The balance of the
$39.4 million commitment, in which certain members of senior management have also elected to participate, was funded on June 28, 2007. The preferred stock has a 12 year maturity
date from the issuance date and provides for an annual cash dividend of 10% payable quarterly (currently prohibited by the restrictions in the Company's indentures and revolving credit agreement),
subject to being declared by the Board of Directors, which dividend will cumulate on a quarterly basis to the extent not paid quarterly. Each of the 525,334 shares of Series A preferred stock
is immediately redeemable without penalty, at the Company's option prior to the maturity 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, as of 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.

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 preferred stock ($30.7 million) as a liability because of the mandatory redemption feature. Such liability is included in "Other non-current
liabilities" on the Consolidated

21

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Balance
Sheet. 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.

At
September 29, 2007, 600,000 shares of the Company's preferred stock ($0.01 par value) were authorized to be issued, of which 525,334 shares were outstanding, as compared to
50,000 shares authorized at December 30, 2006, none of which were outstanding.

11.    Other Expenses

The table below provides details of the Other expenses for the thirteen and thirty-nine weeks ended September 29, 2007 and September 30,
2006 (dollars in thousands).

13 Weeks
Ended
September 29,
2007

13 Weeks
Ended
September 30,
2006

39 Weeks
Ended
September 29,
2007

39 Weeks
Ended
September 30,
2006Closed store costs

$
2,729

$


$
5,078

$
Oak Hill management fee


313


313


938


938Accounting investigations








2,183


Former CEO matters


1,033





4,840


370Other


36


(165
)

313


475Total Other Expenses

$
4,111

$
148

$
13,352

$
1,783


In
the normal course of its business, the Company closes underperforming locations. In accordance with the provisions of SFAS No. 146, the Company establishes reserves for closed
store costs anticipated to be incurred in connection with such closings. See Note 9 for a discussion of the costs relating to accounting investigations and the proceedings relating to the
former Chairman and CEO.

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

The senior subordinated notes and the senior secured notes 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 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 with the current year. There is no limitation on dividends or distributions between the
parent and its subsidiaries. The financial information may not necessarily be indicative of results of operations or financial position had the subsidiary guarantors operated as independent entities.

22

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DUANE READE HOLDINGS, INC.        Condensed Consolidating Statement of Operations (Unaudited)        For the 13 weeks ended September 29, 2007        (in thousands)

|                                           |                                   | Duane Reade
Holdings,
Inc. |        | Duane Reade
Inc. |   | Duane
Reade GP |         | Subsidiary
Guarantors |         | Consolidating
Adjustments |   | Duane Reade
Holdings, Inc.
Consolidated |       
|------------------------------------------ | --------------------------------- | -------------------------- | ------ | ---------------- | - | -------------- | ------- | --------------------- | ------- | ------------------------- | - | --------------------------------------- | ------
|Net sales                                  |                                   | $                          |       |                  | $ |               |         | $                     | 408,828 |                           | $ | 9,810                                   |       
|Cost of sales                              |                                   |                            |       |                  |   |               |         |                       | 322,929 |                           |   |                                        |       
|                                           |                                   |                            |        |                  |   |                |         |                       |         |                           |   |                                         |       
|                                           | Gross profit                      |                            |        |                 |   |                |        |                       |         | 85,899                    |   |                                         | 9,810 
|Selling, general & administrative expenses |                                   |                            |       |                  |   |               |         |                       | 87,920  |                           |   | 110                                     |       
|Depreciation and amortization              |                                   |                            |       |                  |   |               |         |                       | 18,007  |                           |   |                                        |       
|Store pre-opening expense                  |                                   |                            |       |                  |   |               |         |                       | 200     |                           |   |                                        |       
|Gain on sale of pharmacy files             |                                   |                            |       |                  |   |               |         |                       | (1,337  | )                         |   |                                        |       
|Other expense                              |                                   |                            |       |                  |   |               |         |                       | 4,111   |                           |   |                                        |       
|                                           |                                   |                            |        |                  |   |                |         |                       |         |                           |   |                                         |       
|                                           | Operating (loss) income           |                            |        |                 |   |                |        |                       |         | (23,002                   | ) |                                         | 9,700 
|Equity earnings in affiliates              |                                   |                            | 22,052 |                  |   | 22,052         |         |                       |        |                           |   | 389                                     |       
|Interest expense (income), net             |                                   |                            |       |                  |   |               |         |                       | 15,731  |                           |   | (7,093                                  | )     
|                                           |                                   |                            |        |                  |   |                |         |                       |         |                           |   |                                         |       
|                                           | Income (loss) before income taxes |                            |        | (22,052          | ) |                | (22,052 | )                     |         | (38,733                   | ) |                                         | 16,404
|Income taxes (benefit)                     |                                   |                            |       |                  |   |               |         |                       | 198     |                           |   | (86                                     | )     
|                                           |                                   |                            |        |                  |   |                |         |                       |         |                           |   |                                         |       
|                                           | Net income (loss)                 |                            | $      | (22,052          | ) | $              | (22,052 | )                     | $       | (38,931                   | ) | $                                       | 16,490
|                                           |                                   |                            |        |                  |   |                |         |                       |         |                           |   |                                         |       

23

---



DUANE READE HOLDINGS, INC.        Condensed Consolidating Statement of Operations (Unaudited)        For the 13 weeks ended September 30, 2006        (in thousands)

|                                           |                                   | Duane Reade
Holdings,
Inc. |        | Duane Reade
Inc. |   | Duane
Reade GP |         | Subsidiary
Guarantors |         | Consolidating
Adjustments |   | Duane Reade
Holdings, Inc.
Consolidated |       
|------------------------------------------ | --------------------------------- | -------------------------- | ------ | ---------------- | - | -------------- | ------- | --------------------- | ------- | ------------------------- | - | --------------------------------------- | ------
|Net sales                                  |                                   | $                          |       |                  | $ |               |         | $                     | 385,655 |                           | $ | 9,247                                   |       
|Cost of sales                              |                                   |                            |       |                  |   |               |         |                       | 305,016 |                           |   |                                        |       
|                                           |                                   |                            |        |                  |   |                |         |                       |         |                           |   |                                         |       
|                                           | Gross profit                      |                            |        |                 |   |                |        |                       |         | 80,639                    |   |                                         | 9,247 
|Selling, general & administrative expenses |                                   |                            |       |                  |   |               |         |                       | 81,934  |                           |   | 136                                     |       
|Depreciation and amortization              |                                   |                            |       |                  |   |               |         |                       | 16,903  |                           |   |                                        |       
|Store pre-opening expense                  |                                   |                            |       |                  |   |               |         |                       | 153     |                           |   |                                        |       
|Other expense                              |                                   |                            |       |                  |   |               |         |                       | 148     |                           |   |                                        |       
|                                           |                                   |                            |        |                  |   |                |         |                       |         |                           |   |                                         |       
|                                           | Operating (loss) income           |                            |        |                 |   |                |        |                       |         | (18,499                   | ) |                                         | 9,111 
|Equity earnings in affiliates              |                                   |                            | 19,692 |                  |   | 19,692         |         |                       |        |                           |   | 351                                     |       
|Interest expense (income), net             |                                   |                            |       |                  |   |               |         |                       | 14,356  |                           |   | (5,746                                  | )     
|                                           |                                   |                            |        |                  |   |                |         |                       |         |                           |   |                                         |       
|                                           | Income (loss) before income taxes |                            |        | (19,692          | ) |                | (19,692 | )                     |         | (32,855                   | ) |                                         | 14,506
|Income taxes (benefit)                     |                                   |                            |       |                  |   |               |         |                       | 1,308   |                           |   | (574                                    | )     
|                                           |                                   |                            |        |                  |   |                |         |                       |         |                           |   |                                         |       
|                                           | Net income (loss)                 |                            | $      | (19,692          | ) | $              | (19,692 | )                     | $       | (34,163                   | ) | $                                       | 15,080
|                                           |                                   |                            |        |                  |   |                |         |                       |         |                           |   |                                         |       

24

---



DUANE READE HOLDINGS, INC.

Condensed Consolidating Statement of Operations (Unaudited)

For the 39 weeks ended September 29, 2007

(in thousands)

Duane Reade
Holdings, Inc.

Duane
Reade Inc.

Duane
Reade GP

Subsidiary
Guarantors

Consolidating
Adjustments

Duane Reade
Holdings, Inc.
ConsolidatedNet sales

$


$


$
1,255,146

$
30,216

$
(30,216
)
$
1,255,146Cost of sales








996,910








996,910Gross profit








258,236


30,216


(30,216
)

258,236Selling, general & administrative expenses








267,302


337


(50,443
)

217,196Depreciation and amortization








54,460








54,460Store pre-opening expense








350








350Gain on sale of pharmacy files








(1,337
)







(1,337
)Other expense








13,352








13,352Operating (loss) income








(75,891
)

29,879


20,227


(25,785
)Equity earnings in affiliates


72,723


72,723





1,243


(146,689
)

Interest expense (income), net








44,810


(20,227
)

20,227


44,810Income (loss) before income taxes


(72,723
)

(72,723
)

(120,701
)

48,863


146,689


(70,595
)Income taxes (benefit)








3,638


(1,510
)




2,128Net income (loss)

$
(72,723
)
$
(72,723
)
$
(124,339
)
$
50,373

$
146,689

$
(72,723
)


25

---



DUANE READE HOLDINGS, INC.

Condensed Consolidating Statement of Operations (Unaudited)

For the 39 weeks ended September 30, 2006

(in thousands)

Duane Reade
Holdings, Inc.

Duane
Reade Inc.

Duane
Reade GP

Subsidiary
Guarantors

Consolidating
Adjustments

Duane Reade
Holdings, Inc.
ConsolidatedNet sales

$


$


$
1,170,313

$
28,386

$
(28,386
)
$
1,170,313Cost of sales








933,114








933,114Gross profit








237,199


28,386


(28,386
)

237,199Selling, general & administrative expenses








248,222


272


(43,805
)

204,689Labor contingency








(18,004
)







(18,004
)Depreciation and amortization








54,209








54,209Store pre-opening expense








305








305Other expense








1,783








1,783Operating (loss) income








(49,316
)

28,114


15,419


(5,783
)Equity earnings in affiliates


50,633


50,633





956


(102,222
)

Interest expense (income), net








42,229


(15,419
)

15,419


42,229Income (loss) before income taxes


(50,633
)

(50,633
)

(91,545
)

42,577


102,222


(48,012
)Income taxes (benefit)








3,138


(1,477
)




1,661Net income (loss)

$
(50,633
)
$
(50,633
)
$
(94,683
)
$
44,054

$
102,222

$
(49,673
)


26

---



DUANE READE HOLDINGS, INC.

Condensed Consolidating Balance Sheet (Unaudited)

As of September 29, 2007

(in thousands)

Duane Reade
Holdings, Inc.

Duane
Reade Inc.

Duane
Reade GP

Subsidiary
Guarantors

Consolidating
Adjustments

Duane Reade
Holdings, Inc.
ConsolidatedAssetsCurrent assetsCash

$


$


$
1,320

$
39

$


$
1,359Receivables








53,534








53,534Due from affiliates





78,811


106,765


(238
)

(185,338
)

Inventories








220,113








220,113Deferred income taxes





1,140


5,049


(6,189
)




Prepaid expenses and other assets








14,173








14,173Total current assets





79,951


400,954


(6,388
)

(185,338
)

289,179Investment in affiliates


(31,366
)

(31,366
)




(2,331
)

65,063


Property and equipment








196,824








196,824Goodwill, net








70,384








70,384Deferred income taxes





1,645


9,032


(10,677
)




Other assets








154,246


395,557


(349,325
)

200,478Total assets

$
(31,366
)
$
50,230

$
831,440

$
376,161

$
(469,600
)
$
756,865Liabilities and Stockholder's Equity (Deficit)Current liabilitiesAccounts payable

$


$


$
79,409

$


$


$
79,409Due to affiliates











185,336


(185,336
)

Accrued interest








4,501








4,501Accrued expenses





101


38,625








38,726Deferred income taxes





574











574Current portion of debt








153,110








153,110Current portion of capital lease obligation








3,343








3,343Total current liabilities





675


278,988


185,336


(185,336
)

279,663Long term debt








754,357





(349,325
)

405,032Capital lease obligation, less current portion








4,593








4,593Deferred income taxes





78,467


(79,125
)

29,226





28,568Other non-current liabilities


31,113


33,567


94,978





(62,226
)

97,432Total liabilities


31,113


112,709


1,053,791


214,562


(596,887
)

815,288Stockholder's equity (deficit)Common stock


26





26





(26
)

26Paid-in-capital


247,509


247,535


251,424


2,395


(497,439
)

251,424Accumulated other comprehensive income








139








139Retained earnings (deficit)


(310,014
)

(310,014
)

(473,940
)

159,204


624,752


(310,012
)Total stockholder's equity (deficit)


(62,479
)

(62,479
)

(222,351
)

161,599


127,287


(58,423
)Total liabilities and stockholder's equity (deficit)

$
(31,366
)
$
50,230

$
831,440

$
376,161

$
(469,600
)
$
756,865


27

---





DUANE READE HOLDINGS, INC.        Condensed Consolidating Balance Sheet (Unaudited)        As of December 30, 2006        (in thousands)

|                                               |                                                      | Duane Reade
Holdings, Inc. |          | Duane
Reade Inc. |   | Duane
Reade GP |        | Subsidiary
Guarantors |          | Consolidating
Adjustments |   | Duane Reade
Holdings, Inc.
Consolidated |        
|---------------------------------------------- | ---------------------------------------------------- | -------------------------- | -------- | ---------------- | - | -------------- | ------ | --------------------- | -------- | ------------------------- | - | --------------------------------------- | -------
|Assets                                         |                                                      |                            |          |                  |   |                |        |                       |          |                           |   |                                         |        
|Current assets                                 |                                                      |                            |          |                  |   |                |        |                       |          |                           |   |                                         |        
|Cash                                           |                                                      | $                          |         |                  | $ |               |        | $                     | 1,370    |                           | $ | 25                                      |        
|Receivables                                    |                                                      |                            |         |                  |   |               |        |                       | 57,181   |                           |   |                                        |        
|Due from affiliates                            |                                                      |                            |         |                  |   | 72,259         |        |                       | 112,934  |                           |   | 145                                     |        
|Inventories                                    |                                                      |                            |         |                  |   |               |        |                       | 218,924  |                           |   |                                        |        
|Deferred income taxes                          |                                                      |                            |         |                  |   | 3,552          |        |                       | 5,066    |                           |   | (6,189                                  | )      
|Prepaid expenses and other assets              |                                                      |                            |         |                  |   |               |        |                       | 25,659   |                           |   |                                        |        
|                                               |                                                      |                            |          |                  |   |                |        |                       |          |                           |   |                                         |        
|                                               | Total current assets                                 |                            |          |                 |   |                | 75,811 |                       |          | 421,134                   |   |                                         | (6,019 
|Investment in affiliates                       |                                                      |                            | 2,209    |                  |   | 2,209          |        |                       |         |                           |   | (1,101                                  | )      
|Property and equipment                         |                                                      |                            |         |                  |   |               |        |                       | 208,148  |                           |   |                                        |        
|Goodwill, net                                  |                                                      |                            |         |                  |   |               |        |                       | 70,384   |                           |   |                                        |        
|Deferred income taxes                          |                                                      |                            |         |                  |   | 1,645          |        |                       | 9,032    |                           |   | (10,677                                 | )      
|Other assets                                   |                                                      |                            |         |                  |   |               |        |                       | 168,229  |                           |   | 345,082                                 |        
|                                               |                                                      |                            |          |                  |   |                |        |                       |          |                           |   |                                         |        
|                                               | Total assets                                         |                            | $        | 2,209            |   | $              | 79,665 |                       | $        | 876,927                   |   | $                                       | 327,285
|                                               |                                                      |                            |          |                  |   |                |        |                       |          |                           |   |                                         |        
|Liabilities and Stockholder's Equity (Deficit) |                                                      |                            |          |                  |   |                |        |                       |          |                           |   |                                         |        
|Current liabilities                            |                                                      |                            |          |                  |   |                |        |                       |          |                           |   |                                         |        
|Accounts payable                               |                                                      | $                          |         |                  | $ |               |        | $                     | 83,410   |                           | $ |                                        |        
|Due to affiliates                              |                                                      |                            |         |                  |   |               |        |                       |         |                           |   | 185,336                                 |        
|Accrued interest                               |                                                      |                            |         |                  |   |               |        |                       | 9,299    |                           |   |                                        |        
|Accrued expenses                               |                                                      |                            |         |                  |   | 132            |        |                       | 46,248   |                           |   |                                        |        
|Current portion of debt                        |                                                      |                            |         |                  |   |               |        |                       | 157,122  |                           |   |                                        |        
|Current portion of capital lease obligation    |                                                      |                            |         |                  |   |               |        |                       | 3,173    |                           |   |                                        |        
|                                               |                                                      |                            |          |                  |   |                |        |                       |          |                           |   |                                         |        
|                                               | Total current liabilities                            |                            |          |                 |   |                | 132    |                       |          | 299,252                   |   |                                         | 185,336
|Long term debt                                 |                                                      |                            |         |                  |   |               |        |                       | 703,882  |                           |   |                                        |        
|Capital lease obligation, less current portion |                                                      |                            |         |                  |   |               |        |                       | 7,137    |                           |   |                                        |        
|Deferred income taxes                          |                                                      |                            |         |                  |   | 74,871         |        |                       | (75,986  | )                         |   | 30,736                                  |        
|Other non-current liabilities                  |                                                      |                            |         |                  |   | 2,453          |        |                       | 52,217   |                           |   |                                        |        
|                                               |                                                      |                            |          |                  |   |                |        |                       |          |                           |   |                                         |        
|                                               | Total liabilities                                    |                            |          |                 |   |                | 77,456 |                       |          | 986,502                   |   |                                         | 216,072
|Stockholder's equity (deficit)                 |                                                      |                            |          |                  |   |                |        |                       |          |                           |   |                                         |        
|Common stock                                   |                                                      |                            | 26       |                  |   |               |        |                       |         |                           |   |                                        |        
|Paid-in-capital                                |                                                      |                            | 239,472  |                  |   | 239,498        |        |                       | 239,833  |                           |   | 2,395                                   |        
|Accumulated other comprehensive income         |                                                      |                            |         |                  |   |               |        |                       | 193      |                           |   |                                        |        
|Retained earnings (deficit)                    |                                                      |                            | (237,289 | )                |   | (237,289       | )      |                       | (349,601 | )                         |   | 108,818                                 |        
|                                               |                                                      |                            |          |                  |   |                |        |                       |          |                           |   |                                         |        
|                                               | Total stockholder's equity (deficit)                 |                            |          | 2,209            |   |                | 2,209  |                       |          | (109,575                  | ) |                                         | 111,213
|                                               |                                                      |                            |          |                  |   |                |        |                       |          |                           |   |                                         |        
|                                               | Total liabilities and stockholder's equity (deficit) |                            | $        | 2,209            |   | $              | 79,665 |                       | $        | 876,927                   |   | $                                       | 327,285
|                                               |                                                      |                            |          |                  |   |                |        |                       |          |                           |   |                                         |        

28

---





DUANE READE HOLDINGS, INC.        Condensed Consolidating Statement of Cash Flows (Unaudited)        For the 39 weeks ended September 29, 2007        (in thousands)

|                                         |                                                                                                    | Duane Reade
Holdings, Inc.        |   | Duane
Reade Inc. |        | Duane
Reade GP |         | Subsidiary
Guarantors |         | Consolidating
Adjustments |        | Duane Reade
Holdings, Inc.
Consolidated |       
|---------------------------------------- | -------------------------------------------------------------------------------------------------- | --------------------------------- | - | ---------------- | ------ | -------------- | ------- | --------------------- | ------- | ------------------------- | ------ | --------------------------------------- | ------
|Cash flows used in operating activities: |                                                                                                    |                                   |   |                  |        |                |         |                       |         |                           |        |                                         |       
|                                         | Net (loss) income                                                                                  |                                   | $ | (72,723          | )      | $              | (72,723 | )                     | $       | (124,339                  | )      | $                                       | 50,373
|                                         | Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: |                                   |   |                  |        |                |         |                       |         |                           |        |                                         |       
|                                         |                                                                                                    | Depreciation and amortization     |   |                  |       |                |         |                      |         |                           | 57,200 |                                         |       
|                                         |                                                                                                    | Deferred income taxes             |   |                  |       |                |         | (178                  | )       |                           | 3,638  |                                         |       
|                                         |                                                                                                    | Non-cash rent expense             |   |                  |       |                |         |                      |         |                           | 8,993  |                                         |       
|                                         |                                                                                                    | Other                             |   |                  |       |                |         |                      |         |                           | (321   | )                                       |       
|                                         |                                                                                                    | Equity in income of subsidiaries  |   |                  | 72,723 |                |         | 72,723                |         |                           |       |                                         |       
|                                         | Changes in operating assets and liabilities:                                                       |                                   |   |                  |        |                |         |                       |         |                           |        |                                         |       
|                                         |                                                                                                    | Receivables                       |   |                  |       |                |         | 209                   |         |                           | 3,055  |                                         |       
|                                         |                                                                                                    | Inventories                       |   |                  |       |                |         |                      |         |                           | (1,189 | )                                       |       
|                                         |                                                                                                    | Accounts payable                  |   |                  |       |                |         |                      |         |                           | (4,001 | )                                       |       
|                                         |                                                                                                    | Prepaid and accrued expenses      |   |                  |       |                |         | (31                   | )       |                           | (935   | )                                       |       
|                                         |                                                                                                    | Other assets and liabilities, net |   |                  |       |                |         |                      |         |                           | 54,018 |                                         |       
|                                         |                                                                                                    |                                   |   |                  |        |                |         |                       |         |                           |        |                                         |       
|                                         | NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES                                                |                                   |   |                 |        |                |        |                       |         | (3,881                    | )      |                                         | 14    
|                                         |                                                                                                    |                                   |   |                  |        |                |         |                       |         |                           |        |                                         |       
|Cash flows used in investing activities: |                                                                                                    |                                   |   |                  |        |                |         |                       |         |                           |        |                                         |       
|                                         | Capital expenditures                                                                               |                                   |   |                 |        |                |        |                       |         | (20,058                   | )      |                                         |      
|                                         | Lease acquisition and other costs                                                                  |                                   |   |                 |        |                |        |                       |         | (14,547                   | )      |                                         |      
|                                         | Proceeds from sale of property and other assets                                                    |                                   |   |                 |        |                |        |                       |         | 3,335                     |        |                                         |      
|                                         |                                                                                                    |                                   |   |                  |        |                |         |                       |         |                           |        |                                         |       
|NET CASH USED IN INVESTING ACTIVITIES    |                                                                                                    |                                   |  |                  |        |               |         |                       | (31,270 | )                         |        |                                        |       
|                                         |                                                                                                    |                                   |   |                  |        |                |         |                       |         |                           |        |                                         |       
|Cash flows from financing activities:    |                                                                                                    |                                   |   |                  |        |                |         |                       |         |                           |        |                                         |       
|                                         | Issuance of preferred stock                                                                        |                                   |   |                 |        |                |        |                       |         | 39,150                    |        |                                         |      
|Capital contribution                     |                                                                                                    |                                   |  |                  |        |               |         |                       | 2,342   |                           |        |                                        |       
|                                         | Borrowings from revolving credit facility                                                          |                                   |   |                 |        |                |        |                       |         | 1,490,788                 |        |                                         |      
|                                         | Repayments of revolving credit facility                                                            |                                   |   |                 |        |                |        |                       |         | (1,494,800                | )      |                                         |      
|                                         | Repayments of capital lease obligations                                                            |                                   |   |                 |        |                |        |                       |         | (2,374                    | )      |                                         |      
|                                         | Deferred financing costs                                                                           |                                   |   |                 |        |                |        |                       |         | (5                        | )      |                                         |      
|                                         |                                                                                                    |                                   |   |                  |        |                |         |                       |         |                           |        |                                         |       
|                                         | NET CASH PROVIDED BY FINANCING ACTIVITIES                                                          |                                   |   |                 |        |                |        |                       |         | 35,101                    |        |                                         |      
|                                         |                                                                                                    |                                   |   |                  |        |                |         |                       |         |                           |        |                                         |       
|Net change in cash                       |                                                                                                    |                                   |  |                  |        |               |         |                       | (50     | )                         |        | 14                                      |       
|Cash at beginning of period              |                                                                                                    |                                   |  |                  |        |               |         |                       | 1,370   |                           |        | 25                                      |       
|                                         |                                                                                                    |                                   |   |                  |        |                |         |                       |         |                           |        |                                         |       
|Cash at end of period                    |                                                                                                    | $                                 |  |                  | $      |               |         | $                     | 1,320   |                           | $      | 39                                      |       
|                                         |                                                                                                    |                                   |   |                  |        |                |         |                       |         |                           |        |                                         |       

29

---





DUANE READE HOLDINGS, INC.        Condensed Consolidating Statement of Cash Flows (Unaudited)        For the 39 weeks ended        September 30, 2006 (in thousands)

|                                         |                                                                                                      | Duane Reade
Holdings, Inc.                |   | Duane
Reade Inc. |        | Duane
Reade GP |         | Subsidiary
Guarantors |        | Consolidating
Adjustments |         | Duane Reade
Holdings, Inc.
Consolidated |       
|---------------------------------------- | ---------------------------------------------------------------------------------------------------- | ----------------------------------------- | - | ---------------- | ------ | -------------- | ------- | --------------------- | ------ | ------------------------- | ------- | --------------------------------------- | ------
|Cash flows from operating activities:    |                                                                                                      |                                           |   |                  |        |                |         |                       |        |                           |         |                                         |       
|                                         | Net income (loss)                                                                                    |                                           | $ | (50,633          | )      | $              | (50,633 | )                     | $      | (94,683                   | )       | $                                       | 44,054
|                                         | Adjustments to reconcile net income (loss) to net cash (used in) / provided by operating activities: |                                           |   |                  |        |                |         |                       |        |                           |         |                                         |       
|                                         |                                                                                                      | Depreciation and amortization             |   |                  |       |                |         |                      |        |                           | 57,245  |                                         |       
|                                         |                                                                                                      | Deferred tax provision                    |   |                  |       |                |         | (252                  | )      |                           | 3,138   |                                         |       
|                                         |                                                                                                      | Deferred rent expense                     |   |                  |       |                |         |                      |        |                           | 7,681   |                                         |       
|                                         |                                                                                                      | Other                                     |   |                  |       |                |         |                      |        |                           | 211     |                                         |       
|                                         |                                                                                                      | Equity in income of subsidiaries          |   |                  | 50,633 |                |         | 50,633                |        |                           |        |                                         |       
|                                         | Changes in operating assets and liabilities:                                                         |                                           |   |                  |        |                |         |                       |        |                           |         |                                         |       
|                                         |                                                                                                      | Receivables                               |   |                  |       |                |         | 158                   |        |                           | 4,105   |                                         |       
|                                         |                                                                                                      | Inventories                               |   |                  |       |                |         |                      |        |                           | 4,885   |                                         |       
|                                         |                                                                                                      | Accounts payable                          |   |                  |       |                |         |                      |        |                           | 12,858  |                                         |       
|                                         |                                                                                                      | Prepaid and accrued expenses              |   |                  |       |                |         | 94                    |        |                           | (19,537 | )                                       |       
|                                         |                                                                                                      | Other assets and liabilities, net         |   |                  |       |                |         |                      |        |                           | 18,815  |                                         |       
|                                         |                                                                                                      |                                           |   |                  |        |                |         |                       |        |                           |         |                                         |       
|NET CASH USED IN OPERATING ACTIVITIES    |                                                                                                      |                                           |  |                  |        |               |         |                       | (5,282 | )                         |         | (8                                      | )     
|                                         |                                                                                                      |                                           |   |                  |        |                |         |                       |        |                           |         |                                         |       
|Cash flows used in investing activities: |                                                                                                      |                                           |   |                  |        |                |         |                       |        |                           |         |                                         |       
|                                         | Capital expenditures                                                                                 |                                           |   |                 |        |                |        |                       |        | (18,152                   | )       |                                         |      
|                                         | Lease acquisition and other costs                                                                    |                                           |   |                 |        |                |        |                       |        | (5,226                    | )       |                                         |      
|                                         | Proceeds from sale of property                                                                       |                                           |   |                 |        |                |        |                       |        | 2,500                     |         |                                         |      
|                                         |                                                                                                      |                                           |   |                  |        |                |         |                       |        |                           |         |                                         |       
|                                         |                                                                                                      | NET CASH USED IN INVESTING ACTIVITIES     |   |                  |       |                |         |                      |        |                           | (20,878 | )                                       |       
|                                         |                                                                                                      |                                           |   |                  |        |                |         |                       |        |                           |         |                                         |       
|Cash flows from financing activities:    |                                                                                                      |                                           |   |                  |        |                |         |                       |        |                           |         |                                         |       
|                                         | Borrowings from revolving credit facility                                                            |                                           |   |                 |        |                |        |                       |        | 1,383,370                 |         |                                         |      
|                                         | Repayments of revolving credit facility                                                              |                                           |   |                 |        |                |        |                       |        | (1,354,145                | )       |                                         |      
|                                         | Deferred financing costs                                                                             |                                           |   |                 |        |                |        |                       |        | (704                      | )       |                                         |      
|                                         | Repayments of capital lease obligations                                                              |                                           |   |                 |        |                |        |                       |        | (2,349                    | )       |                                         |      
|                                         |                                                                                                      |                                           |   |                  |        |                |         |                       |        |                           |         |                                         |       
|                                         |                                                                                                      | NET CASH PROVIDED BY FINANCING ACTIVITIES |   |                  |       |                |         |                      |        |                           | 26,172  |                                         |       
|                                         |                                                                                                      |                                           |   |                  |        |                |         |                       |        |                           |         |                                         |       
|Net (decrease) increase in cash          |                                                                                                      |                                           |  |                  |        |               |         |                       | 12     |                           |         | (8                                      | )     
|Cash at beginning of period              |                                                                                                      |                                           |  |                  |        |               |         |                       | 1,338  |                           |         | 24                                      |       
|                                         |                                                                                                      |                                           |   |                  |        |                |         |                       |        |                           |         |                                         |       
|Cash at end of period                    |                                                                                                      | $                                         |  |                  | $      |               |         | $                     | 1,350  |                           | $       | 16                                      |       
|                                         |                                                                                                      |                                           |   |                  |        |                |         |                       |        |                           |         |                                         |       

30

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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 13 and 39 weeks ended September 29, 2007 and the 13 and 39
weeks ended September 30, 2006 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, general merchandise and other products 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 and seasonal and general merchandise. 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 represented 54.0% and
53.7% of our sales in the thirteen and thirty-nine weeks ended September 29, 2007, as compared to 52.9% and 53.5% in the corresponding periods last year. Gross margins generated by
our front-end business are approximately twice that of 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. Our pharmacy sales include all items we sell by prescriptions filled at our retail locations or by our central fill/mail order facility and delivered to our stores or mailed directly
to our customers. In addition, we include in our pharmacy sales 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 vs. Net as an Agent." Same-store pharmacy sales do not include such resale activity. The pharmacy
portion of our business is dominated by and dependent upon a number of third party private and government-
sponsored plans that contract with us as an authorized provider of prescriptions. In each of the past four years, New York State has enacted rules related to Medicaid which have reduced reimbursement
rates and therefore our pharmacy margin. New York again changed its rules effective July 1, 2007, further reducing reimbursement rates. We estimate that these most recent changes will reduce
our annual pharmacy margin by approximately $1.9 million. Sales processed through third party prescription plans represented approximately 92.9% and 93.0% of our prescription sales in the
thirteen and thirty-nine weeks ended September 29, 2007 and approximately 92.9% and 92.8% of our prescription sales in the thirteen and thirty-nine weeks ended
September 30, 2006.

During
2003, President Bush signed the Medicare Modernization Act, which created a new 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 new Medicare coverage took effect in January 2006 and has
resulted in decreased pharmacy margins resulting from lower reimbursement rates than our current margins on state Medicaid prescriptions as well as prescriptions that are not subject to third party
reimbursement. This new Medicare Part D program grew rapidly during 2006 and 2007 as more seniors reached age 65 and became eligible for this coverage. While the program has had an adverse
impact on our pharmacy margins, based on our experience, we expect, over time, that increased utilization of prescription drugs by senior citizens participating in the new programs who previously were
cash paying customers will

31

---



partially
offset the effect of lower margins on our revenues, although we are not certain this will be the case. Prior to January 1, 2006, state Medicaid programs that provided prescription
benefits to low income households and individuals historically represented approximately 25% of our retail pharmacy sales. At September 29, 2007, as a result of dual eligible individuals being
automatically enrolled into the Medicare Part D program as well as new enrollees becoming eligible by virtue of their having reached 65 years of age, state Medicaid plans had declined to
approximately 14.0% of our pharmacy sales while the new Medicare Part D plan represented approximately 12.9% of our pharmacy sales.

Recently
published federal reimbursement protocols governing Medicaid have adopted AMP (Average Manufacturer Price) in place of current reimbursement requirements based on average
wholesale price. This proposed change in reimbursement rates will result in significantly lower gross margins for primarily generic prescriptions provided by retail pharmacies under the various state
Medicaid programs. If implemented, these changes will become effective at the end of January 2008. There currently is proposed legislation pending in Congress that would delay implementation or
modify the proposed reimbursement requirements in a manner more favorable to retail pharmacies. While there is substantial support for this legislation in Congress, there can be no assurance that such
legislation will ultimately be enacted. On November 7, 2007, the National Association of Chain Drug Stores and the National Community Pharmacists Association filed a lawsuit in Federal Court
challenging the AMP reimbursement rules. Due to the uncertainties of litigation, there can be no assurances that this lawsuit will be successful. In addition, various states are considering increases
in state managed dispensing fees for Medicaid that have the potential of reducing the adverse impact of this new AMP pricing. There is also no such assurance that dispensing fees will be increased in
the states of New York or New Jersey where we operate all of our stores.

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 generic prescriptions in place of branded medications. Generic prescriptions generally have lower retail sales prices but are more profitable for the pharmacy than branded
prescriptions. Improved generic utilization rates as well as a combination of direct purchases and contractual wholesaler purchases enabled us to achieve improved gross margins on pharmacy retail
sales during 2005 and 2006. For the thirteen and thirty-nine weeks ended September 29, 2007, despite the continued favorable impact of higher generic dispensing rates, our gross
margins on pharmacy retail sales declined in comparison to the corresponding periods of 2006. The declines were primarily attributable to the impact of reduced Medicaid reimbursements and the
increased proportion of lower margin Medicare Part D sales as well as some significant retail price decreases on certain high volume multi-sourced generic drugs.

Our
Performance Script Network has begun to build a business providing pharmacy benefit administration and mail-order pharmacy services to New York-based employers and unions. While it
is in the early stages of development, we believe this business represents an opportunity to further increase our pharmacy sales growth. At September 29, 2007, we had approximately 93,000 lives
managed in our Performance Script Network.

We
are impacted by recent legislation in states 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 U.S. Congress recently passed legislation that would result in a federal minimum hourly wage increase to $7.25 in 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 process initiatives designed to further improve our labor efficiency.

32

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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. The consolidated financial statements included in this report reflect the
accounts of Duane Reade Holdings, Inc. and its subsidiaries for all periods shown. All significant intercompany transactions and balances have been eliminated.

Considerations Related to Operating in the New York City Marketplace

We operate approximately 89% of our 241 stores in New York City and the remainder in the surrounding areas. As a result, our performance is substantially affected
by economic conditions and other factors affecting the region such as the regulatory environment, costs of energy, real estate, insurance, taxes and rent, weather, demographics, tourism levels,
availability of labor and geopolitical factors such as terrorism. Since the second half of 2004, the New York City economy has generally reflected an improving trend.

Results of Operations

The Thirteen Weeks Ended September 29, 2007 as Compared to the Thirteen Weeks Ended September 30, 2006

For the third quarter of 2007, we achieved net sales of $408.8 million and incurred a net loss of $22.1 million, as compared to net sales of
$385.7 million and a net loss of $18.7 million in the third quarter of the previous year. Pharmacy resale activity included in net sales was $16.4 million in the third quarter of
2007, compared to $15.8 million in the previous year. The increased net loss is primarily attributable to the following factors:



33

---





The
negative impact of these items was partially offset by:



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

For the 13 Weeks EndedSeptember 29, 2007

September 30, 2006Dollars

% of Sales

Dollars

% of SalesIn thousands, except percentagesNet sales

$
408,828

100.0
%
$
385,655

100.0
%Cost of sales


322,929

79.0


305,016

79.1Gross profit


85,899

21.0


80,639

20.9Selling, general & administrative expenses


71,127

17.4


67,077

17.4Depreciation and amortization


18,007

4.4


16,903

4.4Store pre-opening expenses


200

0.0


153

0.0Gain on sale of pharmacy files


(1,337
)
(0.3
)



0.0Other expense


4,111

1.0


148

0.0Operating loss


(6,209
)
(1.5
)

(3,642
)
(0.9
)Interest expense, net


15,731

3.8


14,356

3.7Loss before income taxes


(21,940
)
(5.4
)

(17,998
)
(4.7
)Income taxes


112

0.0


734

0.2Net loss

$
(22,052
)
(5.4
)%
$
(18,732
)
(4.9
)%


Net
sales were $408.8 million in the thirteen weeks ended September 29, 2007, representing an increase of 6.0% as compared to net sales of
$385.7 million in the thirteen weeks ended September 30, 2006. Resale activity accounted for 0.2% of the increase, while an increase in retail store sales represented the remaining 5.8%.
Total same-store sales increased by 7.8% over the third quarter of last year.

Pharmacy
sales increased to $188.0 million in the third quarter of 2007 from $181.5 million in the third quarter of 2006, an increase of 3.6%, and represented 46.0% of
total sales, as compared with 47.1% of total sales in the third quarter of 2006. Resale activity accounted for 0.4% of the sales increase, while retail sales accounted for the remaining 3.2% of the
increase. Pharmacy same-store sales increased by 5.3% from last year, and third-party reimbursed pharmacy sales represented 92.9% of total prescription sales, consistent with the third
quarter of 2006. The percentage of generic drugs dispensed increased by 3.9% over the prior year, negatively impacting the pharmacy same-store sales increase by approximately 3.3%, but
contributing to an increase in gross margin per prescription dispensed. Generic drugs generally have lower retail sales prices but are more profitable than branded drugs. The average weekly
prescriptions filled per store during the third quarter of 2007 increased 3.4% as compared to the prior year period.

34

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Front-end
sales increased from $204.2 million in the third quarter of 2006 to $220.8 million in the third quarter of 2007, an increase of 8.1%, and represented
54.0% of total sales, as compared to 52.9% of total sales in the third quarter of 2006. Front-end same-store sales increased by 9.9% due to improved merchandise offering,
enhanced customer service reflecting the continuing implementation of our "Full Potential" initiative introduced last year and our store renovation program. Additionally, the stronger New York City
economy, a generally improved level of consumer demand resulting from increased tourism and favorable weather patterns have positively influenced our front-end same-store sales.

During
the thirteen weeks ended September 29, 2007, we opened four stores and closed seven stores, as compared to two stores opened and no stores closed during the thirteen weeks
ended September 30, 2006. At September 29, 2007, we operated 241 stores, as compared to 249 stores at September 30, 2006 and 248 stores at December 30, 2006.

Cost
of sales as a percentage of net sales was 79.0% and 79.1% in the third quarters of 2007 and 2006, respectively, resulting in gross profit margins of 21.0% and 20.9% in each
respective period. Cost of sales also includes a $0.6 million LIFO provision in each year's third quarter. The gross profit margin in the third quarter of 2007 reflects the impact of improved
front-end selling margins associated with a more favorable mix of promotional and regularly-priced products, offset in part by higher inventory shrink losses and lower pharmacy margins
resulting from increased Medicare Part D sales as well as lower NY Medicaid reimbursement rates and lower gross margin income attributable to significant price decreases on certain high volume
multi-sourced generic drugs that were not completely offset by higher margins associated with an overall increased proportion of generic prescriptions and $1.9 million of real estate related
income in the third quarter of 2007, compared to $0.2 million in the previous year.

Selling,
general and administrative expenses were $71.1 million, or 17.4% of net sales, and $67.1 million, or 17.4% of net sales, in the third quarter of 2007 and 2006,
respectively. The increase in selling, general and administrative expense primarily reflects increased pharmacists' labor costs, increases in minimum wage rates, union contract wage increases and
payroll costs associated with additional corporate staffing to support the continued implementation of the Duane Reade Full Potential program. In addition, during the third quarter of 2007, we
incurred retained losses of $0.5 million associated with a fire that occurred in one of our stores.

Depreciation
and amortization of property and equipment and intangible assets was $18.0 million in the third quarter of 2007, as compared to $16.9 million in the third
quarter of 2006. The increase reflects depreciation and amortization due to recent new store openings, renovations and other capital spending in recent periods. This was offset by the cumulative
depreciation adjustment recorded in the third quarter of 2006 resulting from the Audit Committee's accounting investigations. For further discussion, see Note 2 of our Annual Report on
Form 10-K for the fiscal year ended December 30, 2006.

We
incurred $0.2 million of store pre-opening expenses in the third quarters of 2007 and 2006. We opened four new stores in the third quarter of 2007 and two new
stores in the third quarter of 2006.

During
the third quarter of 2007, the Company sold several pharmacy prescription files that resulted in a separately reported gain of $1.3 million.

In
the third quarter of 2007, we incurred other expenses of $4.1 million, including costs associated with the closing of various stores ($2.7 million), various matters
related to the former Chairman and CEO ($1.0 million) and Oak Hill management fees ($0.3 million). In the third quarter of 2006, we incurred other expenses of $0.1 million,
including Oak Hill management fees ($0.3 million), additional severance costs associated with the termination of certain executive management positions ($0.2 million) and various other
costs ($0.1 million). These costs were partially offset by the reversal of

35

---



the
excess liability for our Phantom Shares ($0.5 million). The Phantom Share liability represented the value of common stock pledged to certain of our Senior Vice Presidents in exchange for
certain forfeited payments to which they were entitled.

Net
interest expense for the third quarter of 2007 was $15.7 million, as compared to $14.4 million in the third quarter of 2006. This increase was primarily attributable to
higher floating interest rates, increased debt levels incurred on our revolving loan borrowings as compared to the prior year and additional interest on the liability associated with the issuance of
our preferred stock. At September 29, 2007, the weighted average interest rate on our variable rate outstanding debt was 8.84%, as compared to a weighted average rate of 8.57% at
September 30, 2006.

In
the third quarter of 2007, we recorded an income tax provision of $0.1 million, reflecting an estimated annual effective tax rate of (3.0%). This expense is the result of an
increase to the valuation allowance of $9.3 million that largely offset the tax benefit generated by our operating loss in the quarter. In the comparable period of 2006, we recorded an income
tax provision of $0.7 million, reflecting an effective tax rate of (3.1%). This expense was the result of a valuation allowance of $8.5 million that largely offset the tax benefit
generated by our operating loss in the quarter.

The Thirty-Nine Weeks Ended September 29, 2007 as Compared to the Thirty-Nine Weeks Ended September 30, 2006

For the first nine months of 2007, we achieved net sales of $1.3 billion and incurred a net loss of $72.7 million, as compared to net sales of
$1.2 billion and a net loss of $49.7 million in the first nine months of the previous year. Pharmacy resale activity included in net sales was $46.5 million in the first nine
months of 2007, compared to $37.2 million in the previous year. The increased net loss is primarily attributable to the following factors:



The
negative impact of these items was partially offset by:



36

---





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

For the 39 Weeks EndedSeptember 29, 2007

September 30, 2006Dollars

% of Sales

Dollars

% of SalesIn thousands, except percentagesNet sales

$
1,255,146

100.0
%
$
1,170,313

100.0
%Cost of sales


996,910

79.4


933,114

79.7Gross profit


258,236

20.6


237,199

20.3Selling, general & administrative expenses


217,196

17.3


204,689

17.5Labor contingency income




0.0


(18,004
)
(1.5
)Depreciation and amortization


54,460

4.3


54,209

4.6Store pre-opening expenses


350

0.0


305

0.0Gain on sale of pharmacy files


(1,337
)
(0.1
)



0.0Other expense


13,352

1.1


1,783

0.2Operating loss


(25,785
)
(2.1
)

(5,783
)
(0.5
)Interest expense, net


44,810

3.6


42,229

3.6Loss before income taxes


(70,595
)
(5.6
)

(48,012
)
(4.1
)Income taxes


2,128

0.2


1,661

0.1Net loss

$
(72,723
)
(5.8
)%
$
(49,673
)
(4.2
)%


Net
sales were $1.3 billion in the thirty-nine weeks ended September 29, 2007, representing an increase of 7.2% as compared to net sales of
$1.2 billion in the thirty-nine weeks ended September 30, 2006. Resale activity accounted for 0.8% of the increase, while an increase in retail store sales represented the
remaining 6.4%. Total same-store sales increased by 8.0% over the first nine months of last year.

Pharmacy
sales increased from $544.0 million in the thirty-nine weeks ended September 30, 2006 to $580.7 million in the thirty-nine weeks
ended September 29, 2007, an increase of 6.7%, and represented 46.3% of total sales, as compared with 46.5% of total sales in the thirty-nine weeks ended September 30, 2006.
Resale activity accounted for 1.7% of the sales increase, while retail sales accounted for the remaining 5.0% of the increase. Pharmacy same-store sales increased by 6.8% from last year,
and third-party reimbursed pharmacy sales represented 93.0% of total prescription sales, compared to 92.8% in the thirty-nine weeks ended September 30, 2006. The percentage of
generic drugs dispensed increased by 3.6% over the prior year, negatively impacting the pharmacy same-store sales increase by approximately 3.0%, but contributing to an increase in gross
margin per prescription dispensed. Generic drugs generally have lower retail sales prices but are more profitable for us than branded drugs. The average weekly prescriptions filled per store during
the first nine months of 2007 increased 3.5% as compared to the prior year.

Front-end
sales increased from $626.3 million in the first nine months of 2006 to $674.4 million in the first nine months of 2007, an increase of 7.7%, and
represented 53.7% of total sales, as compared to 53.5% of total sales in the first nine months of 2006. Front-end same-store sales increased by 9.0%, due to improved
merchandise offering, enhanced customer service reflecting the continuing implementation of our "Full Potential" initiative introduced last year and our store renovation program. Additionally, the
stronger New York City economy, a generally improved level of consumer demand resulting from increased tourism and favorable weather patterns have positively influenced our front-end same-store sales.

During
the thirty-nine weeks ended September 29, 2007, we opened six stores and closed thirteen stores, as compared to five stores opened and seven stores closed
during the thirty-nine weeks ended September 30, 2006.

37

---



Cost
of sales as a percentage of net sales was 79.4% and 79.7% in the first nine months of 2007 and 2006, respectively, resulting in gross profit margins of 20.6% and 20.3% in each
respective period. The gross profit margin in 2007 reflects the impact of improved front-end selling margins associated with a more favorable mix of promotional and regularly-priced
products, offset in part by higher shrink losses and lower pharmacy margins resulting from increased Medicare Part D sales as well as lower NY Medicaid reimbursement rates and a reduced level
of pharmacy gross margin income resulting from retail price decreases on certain high volume multi-sourced generic drugs that were not completely offset by higher margins associated with an overall
increased proportion of generic prescriptions and reduced occupancy costs due to the assignment of various leases for closed stores to third parties. Cost of sales also includes a LIFO provision of
$1.8 million in the first nine months of 2007 as compared to a LIFO provision of $1.7 million in the first nine months of 2006 and $2.5 million of real estate related income in
first nine months of 2007, compared to $0.4 million in the previous year.

Selling,
general and administrative expenses were $217.2 million, or 17.3% of net sales, and $204.7 million, or 17.5% of net sales, in the first nine months of 2007 and
2006, respectively. The decrease in the 2007 expense percentage as compared to 2006 was attributable to improved leveraging of costs against strong same-store sales growth in both pharmacy
and front-end and increased pharmacy resale activity, which increased the dollar amount of sales.

Depreciation
and amortization of property and equipment and intangible assets was $54.5 million in the first nine months of 2007, as compared to $54.2 million in the first
nine months of 2006. The increase reflects depreciation and amortization due to recent new store openings, renovations and other capital spending in recent periods. This was partially offset by the
cumulative depreciation adjustment recorded in the third quarter of 2006 resulting from the Audit Committee's accounting investigations. For further discussion, see Note 2 of our Annual Report
on Form 10-K for the fiscal year ended December 30, 2006.

We
incurred store pre-opening expenses of $0.4 million in the first nine months of 2007, attributable to the opening of six stores, as compared to $0.3 million
in the first nine months of 2006, reflecting five new stores opened during that period.

During
2007, the Company sold several pharmacy prescription files that resulted in a separately reported gain of $1.3 million.

In
the first nine months of 2007, we incurred other expenses of $13.4 million, including costs associated with the audit committee investigations and various other matters related
to the former Chairman and CEO ($7.0 million), costs associated with the closing of various stores ($5.1 million), Oak Hill management fees ($0.9 million) and other costs
($0.3 million). In the corresponding prior year period, we incurred other expenses of $1.8 million including Oak Hill management fees ($0.9 million) and costs associated with
various matters related to the former Chairman and CEO ($0.7 million), as well as other miscellaneous costs associated with our management reorganization ($0.7 million). These costs were
partially offset by the reversal of the excess liability for our Phantom Shares ($0.5 million).

Net
interest expense for the first nine months of 2007 was $44.8 million, as compared to $42.2 million in the first nine months of 2006. This $2.6 million increase
was primarily attributable to higher floating interest rates and increased debt levels incurred on our revolving credit borrowings as compared to the prior year and interest incurred on the liability
associated with the issuance of our preferred stock.

In
the first nine months of 2007, we recorded an income tax provision of $2.1 million, reflecting an estimated annual effective tax rate of (3.0%). This expense is the result of
an increase to the valuation allowance of $36.5 million that largely offset the tax benefit generated by our operating loss in the period. In the first nine months of 2006, the income tax
provision of $1.7 million, resulting from a valuation allowance of $22.7 million, reflected an effective tax rate of (3.1%).

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Liquidity and Capital Resources

Working Capital and Cash Flow

Working capital was $9.5 million as of September 29, 2007 and $6.2 million as of December 30, 2006. The primary factors affecting the
change in working capital from December 30, 2006 include:

Increases
to working capital:



Decreases
to working capital:



Working
capital reflects the classification of outstanding borrowings under our amended asset-based revolving loan facility of $153.1 million at September 29, 2007 and
$157.1 million at December 30, 2006 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 to reclassify the debt as long-term, but is not an indication that this credit facility is expected to be retired within the next year.
This facility expires in July 2011 and we intend to continue to access it for our working capital needs throughout its remaining term.

Net
cash used in operating activities was $3.9 million in the thirty-nine weeks ended September 29, 2007 compared to $5.3 million in the
thirty-nine weeks ended September 30, 2006.

Net
cash used in investing activities was $31.3 million in the thirty-nine weeks ended September 29, 2007, compared to $20.9 million in the
thirty-nine weeks ended September 30, 2006. In the first nine months of 2007, we spent $20.1 million on capital expenditures, primarily related to new store openings and the
remodeling of existing locations, and $14.5 million on lease acquisition and other costs. This was partially offset by $3.3 million received in connection with the assignment of leases
for certain closed stores and the sale of several pharmacy prescription files. In the first nine months of 2006, capital expenditures of $18.2 million and lease acquisition, pharmacy customer
file and other costs of $5.2 million were partially offset by $2.5 million received in connection with the termination of a leased property.

Net
cash provided by financing activities was $35.1 million in the thirty-nine weeks ended September 29, 2007, compared to $26.2 million in the
thirty-nine weeks ended September 30, 2006. During the thirty-nine weeks ended September 29, 2007, cash provided by financing activities included
$39.1 million (net of expenses of $0.3 million) resulting from the issuance of preferred stock and warrants. See Note 10 to our Unaudited Consolidated Interim Financial Statements
contained elsewhere in this report for additional information regarding this transaction.

Operating Capital Requirements

Our operating capital requirements primarily result from opening and stocking new stores, remodeling and renovating existing retail locations, purchasing pharmacy
files and the continuing

39

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development
of management information systems. We opened six new stores in the first nine months of 2007, five new stores during fiscal 2006 and seven new stores during fiscal 2005. We currently plan
to open a total of 11 to 12 new stores and close 14 stores in 2007. The new store openings in 2007 include the acquisition of up to eight leases in Manhattan from the Gristedes supermarket chain. This
acquisition is subject to various conditions including, in some cases, the receipt of landlord consents. As of September 29, 2007, we had completed the lease acquisition on three of these
locations, two of which opened as new stores in the third quarter. We completed the lease acquisition on a fourth location in October 2007, and we anticipate completing the lease acquisition on
two additional locations during the fourth quarter with the balance of the lease acquisitions expected to be completed in 2008. We currently plan to open a total of three to four Gristedes locations
in 2007. The acquisition of the Gristedes leases and the related build-out costs and working capital commitments are being funded by the $39.4 million of proceeds received from the
issuance of preferred stock and warrants. Any funds in excess of the capital needed for this acquisition will be used to fund our normal capital spending, fund other new store openings or reduce our
outstanding debt. We presently plan to open a total of 12 additional stores in each of 2008 and 2009.

In
the first nine months of 2007, we spent approximately $20.1 million on capital expenditures, primarily for new, renovated and replacement stores as well as a new
"Pick-to-Light" flow rack merchandise distribution system in our Maspeth, New York distribution center. We also spent an additional $14.5 million for lease acquisition
and other costs. These amounts were partially offset by $3.3 million received in connection with the assignment of leases for certain closed stores and the sale of several pharmacy prescription
files. In the first nine months of 2006, we spent approximately $18.2 million on capital expenditures, and we spent an additional $5.2 million for lease acquisition, pharmacy customer
files and other costs. These amounts were partially offset by $2.5 million received in connection with the termination of a leased property. 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.

Other Factors Influencing our Liquidity

As of December 30, 2006, twenty-two of our stores, which generated approximately 7.3% of our net sales for fiscal 2006, had leases scheduled to
expire before the end of fiscal 2008. Six of these leases have renewal options. We believe that we will be able to renew most of the other expiring leases on economically favorable terms or,
alternatively, find other economically attractive replacement locations to lease.

As
of September 29, 2007, approximately 5,200 of our approximately 7,200 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.

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The
following table presents details of our significant commitments and obligations as at September 29, 2007, except that the data provided with respect to operating leases is as
of December 30, 2006:

|                                                |  | Payments due by Period
|----------------------------------------------- |  | ----------------------
|
|
|Long-Term Debt(1)                               |  | $                     
|Asset-Based Revolving Loan Facility(2)          |  |                       
|Capital Lease Obligations(3)                    |  |                       
|Operating Leases(4)                             |  |                       
|Fixed Interest Payments(5)                      |  |                       
|Former Chairman and Other Severance Payments(6) |  |                       
|Landlord Real Estate Litigation Settlement(7)   |  |                       
|Redeemable Preferred Stock(8)                   |  |                       
|Redeemable Preferred Stock Dividends(8)         |  |                       
|                                                |  |                       
|Total Contractual Cash Obligations(9)           |  | $                     
|                                                |  |                       

---

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The
following table presents details of our other significant commercial commitments as at September 29, 2007:

|                             |  |   |       | Amount of Commitment Expiration
per Period
|---------------------------- |  | - | ----- | ------------------------------------------
|
|
|Standby Letters of Credit(1) |  | $ | 5,722 |                                           
|                             |  |   |       |                                           
|Total Commercial Commitments |  | $ | 5,722 |                                           
|                             |  |   |       |                                           

---

In
connection with the assignment of certain store leases to third parties, we continue to guarantee lease obligations for six former stores. The respective purchasers
have assumed our obligations under these leases and are, therefore, 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 $24.5 million as of September 29, 2007. The
obligations are for varying terms dependent upon the respective lease, the longest of which lasts through May 31, 2022.

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 by Mr. Dreiling as our Chairman and CEO, Mr. Cuti's employment contract specifies payments to
him in cash totaling up to $6.6 million. We have paid a cumulative total of approximately $6.1 million of this amount through September 29, 2007, and the remaining amount is
scheduled, pursuant to the employment contract, to be paid in equal installments through December 2007. 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 detail in Note 9 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.

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In connection with the appointment of Mr. Dreiling as CEO, we were required under his employment contract to make a guaranteed payment to him of $330,000 on or before
February 19, 2006, which was paid on February 17, 2006. In addition, Mr. Dreiling's employment contract stipulated that a guaranteed 2006 bonus of not less than 100% of his
then-current $825,000 annual salary be paid on the same date as any other senior executive bonuses related to the 2006 fiscal year are paid. This bonus was paid on April 5, 2007.

In
connection with the Acquisition, the former Chairman and CEO was granted equity interests in Duane Reade Shareholders and Duane Reade Holdings, consisting of options to purchase
shares of our common stock and a profits interest in Duane Reade Shareholders. The former Chairman and CEO's employment contract provides that, as a result of his replacement on November 21,
2005 by Mr. Dreiling, 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 by Mr. Dreiling, we have treated all of his equity interests as having vested. The profits interest and options will have no
value unless the value of Duane Reade Shareholders and Duane Reade Holdings, respectively, appreciate following the Acquisition. The former Chairman and CEO'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, the former Chairman and CEO 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 detail in
Note 9 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. 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 December 9, 2005 settlement of litigation between us and Cardinal Health, we were required to make payments to Cardinal Health totaling $4.5 million.
Such payments included $2.0 million that was paid on January 15, 2006, $1.0 million that was paid on June 15, 2006, $1.0 million that was paid on December 15,
2006, $250,000 that was paid on March 15, 2007 and $250,000 that was paid on June 15, 2007. All such amounts had been previously accrued in the financial statements.

Debt

Refer to Note 7 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 100% of 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, so, 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.

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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 and the $39.4 million of additional funds received from the sale of preferred equity and warrants to purchase our common stock,
will be adequate for the next two years, to make required payments on our indebtedness, to fund anticipated capital expenditures including the acquisition of up to four additional Gristedes store
leases and to satisfy our working capital requirements. We base this belief on our recent levels of cash flow from operations of approximately $11.6 million in 2006 (which includes the
absorption of approximately $12.2 million in non-recurring net cash payments made in connection with litigation settlements and executive severance) and approximately
$3.0 million in 2005 (which includes the absorption of $9.6 million in non-recurring net cash payments made in connection with the termination of the former Chairman and
CEO's SERP), as well as projected improvements in working capital management, anticipated levels of capital expenditures and the additional borrowing capacity under the $225.0 million amended
asset-based revolving loan facility, which was approximately $61.2 million at September 29, 2007. The $39.4 million in proceeds resulting from the sale of preferred stock and
warrants that we received in the first half of 2007 are being used to fund the acquisition of up to eight Gristedes store leases as well as certain growth related capital expenditures. As of
September 29, 2007, we had completed the lease acquisition on three of these locations, two of which opened as new stores in the third quarter. We completed the lease acquisition on a fourth
location in October 2007, and we anticipate completing the lease acquisition on two additional locations during the fourth quarter with the balance of the lease acquisitions expected to be
completed in 2008. We currently plan to open a total of three to four Gristedes locations in 2007. Due to continued losses, our stockholder's equity has become a deficit. 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 our total debt will depend upon our future performance
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." Borrowings under the amended asset-based revolving loan facility and the aggregate $210.0 million
senior secured notes bear interest at floating rates. Therefore, our financial condition will be affected by changes in prevailing interest rates. On May 25, 2005, we entered into a hedging
transaction through the acquisition of a "no cost collar." Under this arrangement, we capped our exposure on $130 million of LIBOR-based borrowings under the senior secured notes at a maximum
LIBOR rate of 5.30%. In addition, we established a minimum "floor" LIBOR rate of 3.45%, in line with then current LIBOR rates. This hedging arrangement expires on June 16, 2008.

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

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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 30,
2006 are those that depend most heavily on these judgments and estimates. At September 29, 2007, 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 operating lease commitments detailed in the Contractual Obligations and Commitments table presented 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 30, 2006 or the nine months
ended September 29, 2007.

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 that portion of our debt which carries variable interest rates. Variable rate debt
outstanding at September 29, 2007 included $153.1 million of borrowings under our amended asset-based revolving loan facility and $210.0 million of senior secured notes. At
September 29, 2007, the weighted average combined interest rate in effect on all variable rate debt outstanding, including the benefit of the "no cost collar" as detailed below, was 8.84%. A
0.50% change in interest rates applied to the $363.1 million balance of floating rate debt would affect pre-tax annual results of operations by approximately $1.8 million,
excluding the benefit provided by the "no cost collar." In addition, we also have $195.0 million of senior subordinated notes and $32.0 thousand of senior convertible notes outstanding
at September 29, 2007. 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.

On
May 25, 2005, we entered into a hedging transaction through the acquisition of a "no cost collar." Under this arrangement, we capped our exposure on $130 million of
LIBOR-based borrowings under the senior secured notes at a maximum LIBOR rate of 5.30%. In addition, we established a minimum "floor" LIBOR rate of 3.45%, in line with then current LIBOR rates. This
hedging arrangement expires on June 16, 2008. At September 29, 2007, the LIBOR rate in effect on the senior secured notes was 5.69%, which exceeded the maximum rate under the "no cost
collar." As a result, on an annualized basis, the interest rate protection afforded by the "no cost collar" amounted to $0.5 million.

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

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continue
to use derivative financial products such as interest rate hedges and interest rate swaps in the future.

ITEM 4.    CONTROLS AND PROCEDURES

The Company maintains 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 its 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 the
Company's management, including its 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, the Company's 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 the Company's 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, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of that date, the Company's disclosure controls and procedures
required by paragraph (b) of the Exchange Act Rules 13a-15 or 15d-15, were not effective because of the identification of a material weakness in the Company's
internal control over financial reporting, which the Company views as an integral part of its disclosure controls and procedures.

As
described in Note 2 to the financial statements contained in the Company's Annual Report on Form 10-K for the year ended December 30, 2006, the Audit
Committee of the Company, with the assistance of independent counsel and forensic accountants, has completed an investigation relating to real estate transactions and related matters (the "Real Estate
Related Transactions") that occurred during the 2000 through 2004 fiscal years. The investigation found that the Company's accounting for a number of those transactions was improper. The independent
counsel concluded that the Real Estate Related Transactions were orchestrated by the Company's former Chairman and CEO, who was replaced in November 2005, and were expressly designed to
overstate the Company's income. According to the independent counsel's report, in order to accomplish this scheme, the former Chairman and CEO made certain false representations to the Company's Chief
Financial Officer, other members of the management of the Company and the Company's independent accountants concerning the structure and economic substance of the Real Estate Related Transactions. On
May 18, 2007, the Audit Committee concluded that the financial statements as of and for the five months ended December 25, 2004, the seven months ended July 30, 2004 and the 2000
through 2003 fiscal years (collectively, the "Affected Periods") should be restated. The conclusion to restate was based on the conclusions of the independent counsel in the investigation and the
accounting impact of the misstatements arising from the Real Estate Related Transactions, combined with previously-disclosed misstatements. The previously-disclosed misstatements related to
arrangements that the independent counsel concluded were also originated by the former Chairman and CEO for the issuance of improper credits and the subsequent rebilling of such credits related to
amounts paid to construction and other contractors at the Company's stores and the related improper accounting, which were the subject of a prior Audit Committee investigation, as described in
Note 1 to the financial statements contained in the Company's quarterly report on Form 10-Q for the quarter ended September 30, 2006.

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In
the Audit Committee's judgment, as a result of the actions of the former Chairman and CEO, the Company failed to maintain effective internal control over financial reporting and
disclosure controls and procedures, and the Audit Committee would have recommended, as remedial action, that the Company replace its former Chairman and CEO, had the Company not already done so, in
addition to the improvements in internal control over financial reporting discussed below.

(b) Changes in Internal Control over Financial Reporting

From the discovery of these misstatements related to the improper activities of its former Chairman and CEO, the Company recognized that its system of internal
controls was not adequate to provide reasonable assurance that the objectives of its disclosure controls were met. In addition, the restatement of financial statements is an indicator of the existence
of a "material weakness" in the design or operation of internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over
financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely
basis. As of September 29, 2007, the Company did not have effective internal control over financial reporting to preclude the intentional financial reporting misstatements discovered in the
investigations.

As
a result of the discovery of the internal control weaknesses uncovered by the Audit Committee investigation described above, the Company is taking the following remedial actions:



During
the third quarter of fiscal 2007, the Company hired a Director of Financial Reporting, who reports to the Senior Vice President and Chief Financial Officer.

In
October 2007, the Company hired a Chief Compliance Officer, who will report to the Chairman, President and Chief Executive Officer.

The
Company has also established a new Vice President of Real Estate position, which reports to the Senior Vice President and General Counsel. This position has the responsibility for
managing all real estate related activities under the oversight of the Company's Real Estate Committee, which includes all of the Company's senior vice presidents other than the Senior Vice President
of Human Resources and Administration. All significant real estate related transactions are reviewed and approved through the Real Estate Committee.

These
organizational changes are being made in conjunction with several improvements previously made in accounting and transaction processing controls to reduce the Company's exposure to
errors and fraud. These previous changes included a double authorization procedure for all significant invoice

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payments
within each operating department designed to reduce the Company's exposure to fraud through any one individual acting on his or her own accord. The Company's Finance Department has also set
up a separate invoice review and approval process to ensure that all payments are reasonable and within normal budget parameters, and that detailed support is attached from which to assess that the
materials or services being purchased are reasonable for the prices being paid.

During
the third quarter of fiscal 2007, with the exception of the corrective measures detailed above, there were no changes in the Company's internal control over financial reporting
that materially affected or are reasonably likely to materially affect internal control over financial reporting.

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PART II  OTHER INFORMATION

ITEM 1. Legal Proceedings

Refer to Note 9 of 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 30, 2006. 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

Not applicable.

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

Not applicable.

ITEM 5. Other Information

Not applicable.

ITEM 6. Exhibits

|Exhibit No. |  | Description                                                                                                                                                                                                                            
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.1*        |  | Fourth Amendment to Credit Agreement dated July 21, 2003, among the Company, Duane Reade, Duane Reade Inc., Duane Reade Holdings, Inc., DRI I Inc., Duane Reade International, Inc., Duane Reade Realty, Inc. and Bank of America, N.A.
|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: November 13, 2007 |  | Duane Reade Holdings, Inc.(Registrant)                                                                                      
|------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------
|                         |  | /s/RICHARD W. DREILINGRichard W. Dreiling President and Chief Executive Officer
(Principal Executive Officer)               
|                         |  | /s/JOHN K. HENRYJohn K. Henry Senior Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)

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