Table of Contents







UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10-Q








x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d)


OF THE
SECURITIES EXCHANGE ACT OF 1934





For the
quarterly period ended November 1, 2008


OR


o TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d)


OF THE
SECURITIES EXCHANGE ACT OF 1934





For the
transition period from____________ to _____________





Commission
file number: 0-8858





THE
PENN TRAFFIC COMPANY


(Exact
name of registrant as specified in its charter)




Delaware
              25-0716800(State
      or other jurisdiction of incorporation or organization)
              (I.R.S.
      Employer Identification No.)1200
      State Fair Blvd., Syracuse, New York
              13221-4737(Address
      of principal executive offices)
              (Zip
      Code)




(315)
453-7284


(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 x           NO
o





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





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





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).    YES o           NO
x





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





Common Stock, par value $.01
per share:  8,626,683 shares outstanding as of December
5, 2008












Table of Contents




FORM 10-Q
INDEX




PART I.  FINANCIAL INFORMATION
              PAGEItem 1.
              Financial Statements
              4Item 2.
              Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
              20Item 3.
              Quantitative and Qualitative Disclosures About Market
      Risk
              27Item 4.
              Controls and Procedures
              27PART II.  OTHER INFORMATIONItem 1A.
              Risk Factors
              28Item 2.
              Legal Proceedings
              28Item 6.
              Exhibits
              29






- 2
-
 Table of Contents




SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS





Certain
statements included in this Form 10-Q, including without limitation, statements
included in Item 2 - “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” which are not statements of historical
fact, are intended to be, and are hereby identified as, “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act
of 1995, as amended, reflecting management’s current analysis and expectations,
based on what management believes to be reasonable assumptions.  These
forward-looking statements include statements relating to our anticipated
financial performance and business prospects.  Statements preceded by,
followed by or that include words such as “believe,” “anticipate,” “estimate,”
“expect,” “could,” and other similar expressions are to be considered such
forward-looking statements.  Forward-looking statements may involve
known and unknown risks, uncertainties and other factors, which may cause the
actual results to differ materially from those projected, stated or implied,
depending on such factors as the risks set forth in Item 1A – “Risk Factors” in
our Annual Report on Form 10-K for the fiscal year ended February 2, 2008; our
ability to improve operating performance and effectuate business plans; our
ability to operate pursuant to the terms of our credit facilities and to comply
with the terms of our lending agreements or to amend or modify the terms of such
agreements as may be needed from time to time; our ability to generate cash; our
ability to attract and maintain adequate capital; our ability to refinance our
indebtedness; increases in prevailing interest rates; our ability to obtain
trade credit, and shipments and terms with vendors and service providers for
current orders; our ability to maintain contracts that are critical to our
operations; potential adverse developments with respect to our liquidity or
results of operations; general economic and business conditions; competition,
including increased capital investment and promotional activity by our
competitors; availability, location and terms of sites for store development;
the successful implementation of our capital expenditure program; labor
relations; labor and employee benefit costs including increases in health care
and pension costs and the level of contributions to our sponsored pension plans;
the result of our pursuit of strategic alternatives; our ability to pursue
strategic alternatives; economic and competitive uncertainties; changes in
strategies; changes in generally accepted accounting principles; adverse changes
in economic and political climates around the world, including terrorist
activities and international hostilities; and the outcome of pending, or the
commencement of any new, legal proceedings against, or governmental
investigations of us.  We caution that the foregoing list of important
factors is not exhaustive.  Accordingly, there can be no assurance
that we will meet future results, performance or achievements expressed or
implied by such forward-looking statements, which are generally required to be
publicly revised as circumstances change, and which we do not intend to
update.






- 3
-
 Table of Contents




PART I – FINANCIAL INFORMATION




ITEM 1.
            Financial
      Statements





The Penn
Traffic Company


Condensed Consolidated Balance Sheets


(In
thousands)





November
      1,
                              
                              
                              February
      2,2008
                              
                              
                              2008(unaudited)ASSETSCurrent
      Assets:Cash and cash
      equivalents
                              
                              $
                              32,896
                              
                              
                              $
                              20,916Accounts and notes receivable
      (less allowance fordoubtful accounts of $5,186 and
      $5,690, respectively)
                              
                              
                              30,274
                              
                              
                              
                              37,513Inventories (Note
      12)
                              
                              
                              51,981
                              
                              
                              
                              89,208Prepaid expenses and other
      current assets
                              
                              
                              6,662
                              
                              
                              
                              7,307Total
      current assets
                              
                              
                              121,813
                              
                              
                              
                              154,944Capital
      Leases, net
                              
                              
                              7,457
                              
                              
                              
                              8,268Fixed
      Assets, net
                              
                              
                              64,624
                              
                              
                              
                              78,402Other
      Assets:Intangible
    assets
                              
                              
                              12,059
                              
                              
                              
                              15,397Deferred tax
    asset
                              
                              
                              —
                              
                              
                              
                              2,440Other assets
                              
                              
                              3,729
                              
                              
                              
                              2,998Total
      other assets
                              
                              
                              15,788
                              
                              
                              
                              20,835Total
      Assets
                              
                              $
                              209,682
                              
                              
                              $
                              262,449The
      accompanying notes are an integral part of these
    statements.






- 4
-
 Table of Contents




The Penn
Traffic Company


Condensed
Consolidated Balance Sheets


(In
thousands, except share and per share data)





November
      1,
                  
                  
                  February
      2,2008
                  
                  
                  2008(unaudited)LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Current portion of obligations
      under capital leases
                  
                  $
                  1,493
                  
                  
                  $
                  1,368Current maturities of long-term
      debt (Note 6)
                  
                  
                  48,365
                  
                  
                  
                  278Accounts
payable
                  
                  
                  17,448
                  
                  
                  
                  34,178Other current
      liabilities
                  
                  
                  41,028
                  
                  
                  
                  47,060Accrued interest
      expense
                  
                  
                  503
                  
                  
                  
                  176Deferred income taxes (Note
      7)
                  
                  
                  7,358
                  
                  
                  
                  11,485Liabilities subject to
      compromise (Note 5)
                  
                  
                  13
                  
                  
                  
                  2,516Total
      current liabilities
                  
                  
                  116,208
                  
                  
                  
                  97,061Non-current
      liabilities:Obligations under capital
      leases
                  
                  
                  7,826
                  
                  
                  
                  8,962Long-term debt (Note
      6)
                  
                  
                  3,414
                  
                  
                  
                  50,209Defined benefit pension plan
      liability (Note 9)
                  
                  
                  4,389
                  
                  
                  
                  6,326Deferred
      income taxes (Note 7)
                  
                  
                  1,787
                  
                  
                  
                  —Other non-current
      liabilities
                  
                  
                  28,726
                  
                  
                  
                  30,716Total
      non-current liabilities
                  
                  
                  46,142
                  
                  
                  
                  96,213Total
      liabilities
                  
                  
                  162,350
                  
                  
                  
                  193,274Commitments
      and contingencies (Notes 5, 6, 9 and 10)Stockholders’
      equity:Preferred stock - authorized
      1,000,000 shares,$.01 par value; 10,000 shares
      issued
                  
                  
                  100
                  
                  
                  
                  100Common stock - authorized
      15,000,000 shares, $.01 par value;shares issued and to be issued
      8,650,110 at November 1, 2008, and8,519,095 at February 2,
      2008
                  
                  
                  86
                  
                  
                  
                  85Capital in excess of par
      value
                  
                  
                  128,148
                  
                  
                  
                  128,149Deficit
                  
                  
                  (95,769
                  )
                  
                  
                  (74,356
                  )Accumulated other comprehensive
      income
                  
                  
                  14,767
                  
                  
                  
                  15,197Total stockholders’
      equity
                  
                  
                  47,332
                  
                  
                  
                  69,175Total
      liabilities and stockholders’ equity
                  
                  $
                  209,682
                  
                  
                  $
                  262,449The
      accompanying notes are an integral part of these
    statements.






- 5
-
 Table of Contents




The Penn
Traffic Company


Condensed Consolidated Statements of Operations


(In
thousands, except share and per share data)


(unaudited)


Quarter
      Ended
                      
                      
                      Year
      to DateNovember
      1, 2008
                      
                      
                      November
      3, 2007
                      
                      
                      November
      1, 2008
                      
                      
                      November
      3, 2007Revenues
                      
                      $
                      287,285
                      
                      
                      $
                      298,702
                      
                      
                      $
                      881,233
                      
                      
                      $
                      914,687Cost
      and operating expenses:Cost
      of sales (See Note 12)
                      
                      
                      214,932
                      
                      
                      
                      218,857
                      
                      
                      
                      655,768
                      
                      
                      
                      669,995Selling
      and administrative expenses
                      
                      
                      76,324
                      
                      
                      
                      83,281
                      
                      
                      
                      238,037
                      
                      
                      
                      252,993Gain
      on sale of assets
                      
                      
                      (958
                      )
                      
                      
                      (328
                      )
                      
                      
                      (2,757
                      )
                      
                      
                      (2,422
                      )Loss
      on store and distributioncenter
      closings (including assetimpairment of $175 and $3,178 forthe quarter and
      year to date endedNovember 1, 2008)
                      
                      
                      76
                      
                      
                      
                      146
                      
                      
                      
                      4,000
                      
                      
                      
                      2,029Operating
      loss
                      
                      
                      (3,089
                      )
                      
                      
                      (3,254
                      )
                      
                      
                      (13,815
                      )
                      
                      
                      (7,908
                      )Interest
      expense
                      
                      
                      2,179
                      
                      
                      
                      2,023
                      
                      
                      
                      6,743
                      
                      
                      
                      6,818Reorganization
      and other expenses
                      
                      
                      185
                      
                      
                      
                      2,792
                      
                      
                      
                      366
                      
                      
                      
                      4,945Loss
      from continuing operations before income taxes
                      
                      
                      (5,453
                      )
                      
                      
                      (8,069
                      )
                      
                      
                      (20,924
                      )
                      
                      
                      (19,671
                      )Income
      tax expense
                      
                      
                      109
                      
                      
                      
                      59
                      
                      
                      
                      386
                      
                      
                      
                      175Loss
      from continuing operations
                      
                      
                      (5,562
                      )
                      
                      
                      (8,128
                      )
                      
                      
                      (21,310
                      )
                      
                      
                      (19,846
                      )Discontinued
      operations (Note 8)Loss
      from discontinued operations
                      
                      
                      (23
                      )
                      
                      
                      (1,448
                      )
                      
                      
                      (103
                      )
                      
                      
                      (2,052
                      )Net
      loss
                      
                      $
                      (5,585
                      )
                      
                      $
                      (9,576
                      )
                      
                      $
                      (21,413
                      )
                      
                      $
                      (21,898
                      )Net
      Loss per share - basic anddiluted
      (Note 4)Loss
      from continuing operations
                      
                      $
                      (0.67
                      )
                      
                      $
                      (0.96
                      )
                      
                      $
                      (2.54
                      )
                      
                      $
                      (2.34
                      )Loss
      from discontinued operations
                      
                      $
                      (0.00
                      )
                      
                      $
                      (0.17
                      )
                      
                      $
                      (0.01
                      )
                      
                      $
                      (0.24
                      )Net
      Loss per share – basic and diluted
                      
                      $
                      (0.67
                      )
                      
                      $
                      (1.13
                      )
                      
                      $
                      (2.55
                      )
                      
                      $
                      (2.58
                      )Weighted
      average shares – basic and diluted
                      
                      
                      8,650,110
                      
                      
                      
                      8,498,752
                      
                      
                      
                      8,650,110
                      
                      
                      
                      8,498,752The
      accompanying notes are an integral part of these
    statements.






- 6
-
 Table of Contents




The Penn
Traffic Company


Condensed Consolidated Statements of Cash Flows


(In
thousands)


(unaudited)





For
      the Period
                      
                      
                      For
      the PeriodFebruary
      3, 2008
                      
                      
                      February
      4, 2007to
      November 1, 2008
                      
                      
                      to
      November 3, 2007Operating
      activities:Net loss
                      
                      $
                      (21,413
                      )
                      
                      $
                      (21,898
                      )Adjustments to reconcile net
      loss to net cashProvided
      by (used in) operating activities:Depreciation and
      amortization
                      
                      
                      17,090
                      
                      
                      
                      20,492Provision for doubtful
      accounts
                      
                      
                      327
                      
                      
                      
                      1,430Gain on sale of
      assets
                      
                      
                      (2,757
                      )
                      
                      
                      (328
                      )Asset impairment
      charge
                      
                      
                      3,178
                      
                      
                      
                      —Amortization of deferred
      financing cost
                      
                      
                      608
                      
                      
                      
                      744Deferred income
      taxes
                      
                      
                      378
                      
                      
                      
                      —Phantom stock
      compensation
                      
                      
                      (52
                      )
                      
                      
                      86Net
      change in operating assets and liabilities:Accounts and
      notes receivable, net
                      
                      
                      6,912
                      
                      
                      
                      (74
                      )Prepaid
      expenses and other current assets
                      
                      
                      645
                      
                      
                      
                      1,094Inventories
                      
                      
                      37,227
                      
                      
                      
                      941Liabilities
      subject to compromise
                      
                      
                      (2,503
                      )
                      
                      
                      (180
                      )Accounts
      payable and other current liabilities
                      
                      
                      (22,435
                      )
                      
                      
                      (13,471
                      )Other
      assets
                      
                      
                      (85
                      )
                      
                      
                      13Defined
      benefit pension plan
                      
                      
                      (2,644
                      )
                      
                      
                      (2,438
                      )Other
      non-current liabilities
                      
                      
                      (1,311
                      )
                      
                      
                      1,054Net
      cash provided by (used in) operating activities
                      
                      
                      13,165
                      
                      
                      
                      (12,535
                      )Investing
      activities:Capital
      expenditures
                      
                      
                      (5,269
                      )
                      
                      
                      (4,942
                      )Proceeds from sale of
      assets
                      
                      
                      5,058
                      
                      
                      
                      1,879Net
      cash used in investing activities
                      
                      
                      (211
                      )
                      
                      
                      (3,063
                      )Financing
      activities:Payments of mortgage
      debt
                      
                      
                      (208
                      )
                      
                      
                      (233
                      )Net borrowings (repayments)
      under revolving credit facility
                      
                      
                      1,500
                      
                      
                      
                      (350
                      )Reduction in capital lease
      obligations
                      
                      
                      (1,011
                      )
                      
                      
                      (1,792
                      )Payment of deferred financing
      costs
                      
                      
                      (1,255
                      )
                      
                      
                      —Net
      cash used in financing activities
                      
                      
                      (974
                      )
                      
                      
                      (2,375
                      )Increase
      (decrease) in cash and cash equivalents
                      
                      
                      11,980
                      
                      
                      
                      (17,973
                      )Cash
      and cash equivalents at the beginning of period
                      
                      
                      20,916
                      
                      
                      
                      24,661Cash
      and cash equivalents at end of period
                      
                      $
                      32,896
                      
                      
                      $
                      6,688The
      accompanying notes are an integral part of these
    statements.






- 7
-
 Table of Contents




The Penn
Traffic Company


Condensed Consolidated Statements of Stockholders’
Equity


For the
unaudited period February 2, 2008 to November 1, 2008


(In
thousands, except share data)





Common
      Stock
                      
                      
                      Preferred
                        Stock
                      
                      
                      Capital
      in Excess of Par Value
                      
                      
                      Deficit
                      
                      
                      Accumulated
      Other Comprehensive Income
                      
                      
                      Total
                        Stockholders’
                        EquityBalance
      at February 2, 2008
                      
                      $
                      85
                      
                      
                      $
                      100
                      
                      
                      $
                      128,149
                      
                      
                      $
                      (74,356
                      )
                      
                      $
                      15,197
                      
                      
                      $
                      69,175Net loss for the
      periodended November 1,
      2008
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (21,413
                      )
                      
                      
                      —
                      
                      
                      
                      (21,413
                      )Increase
      of 125,754 shares in connection with settlement of Chapter 11
      claims
                      
                      
                      1
                      
                      
                      
                      —
                      
                      
                      
                      (1
                      )
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Amortization
      of net actuarialgain
      included in net periodicpension
      benefit, net of deferred taxes of ($278) for the period ended November 1,
      2008
                      
                      
                      —
                      
                      
                      —­
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (430
                      )
                      
                      
                      (430
                      )Comprehensive
      loss
                      
                      
                      —
                      
                      
                      —­
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (21,843
                      )Balance
      at November 1, 2008
                      
                      $
                      86
                      
                      
                      $
                      100
                      
                      
                      $
                      128,148
                      
                      
                      $
                      (95,769
                      )
                      
                      $
                      14,767
                      
                      
                      $
                      47,332





The
accompanying notes are an integral part of these statements.




- 8
-
 Table of Contents




The Penn
Traffic Company


Notes to Condensed Consolidated Financial Statements





Note
1 – Basis of Presentation





The
accompanying unaudited condensed consolidated financial statements of The Penn
Traffic Company and subsidiaries (the “Company”) have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions for Form 10-Q and
Article 10 of Regulation S-X.  Accordingly, they do not include all of
the information and footnotes required by accounting principles generally
accepted in the Unites States of America for complete financial
statements.  In the opinion of management, all adjustments (consisting
of normal recurring deferrals and accruals) considered necessary for a fair
presentation have been included.  The operating results for the
periods presented are not necessarily indicative of the results to be expected
for the full year.  For further information, refer to the audited
consolidated financial statements and footnotes thereto included in the
Company’s Annual Report on Form 10-K for the fiscal year ended February 2,
2008.





The
balance sheet as of February 2, 2008 has been derived from the audited
consolidated financial statements as of such date, but does not include all of
the information and footnotes required by U.S. generally accepted accounting
standards (“GAAP”) for complete financial statements.





All
significant intercompany transactions and accounts have been eliminated in
consolidation.





Certain
prior year amounts have been reclassified to conform to current year
presentation.





Reporting
Periods


The
Company’s fiscal year ends each year on the Saturday closest to January
31.  Fiscal year 2009 is the 52-week period ending January
31, 2009.  Fiscal year 2008 is the 52-week period ended February
2, 2008.  The information presented in this Quarterly Report on Form
10-Q is for the 13-week quarter ended and 39-week period ended November 1,
2008.








Note
2 – Voluntary Bankruptcy Filing and Reorganization





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





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




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




1.
            The
      Company entered into new credit agreements providing for borrowings of up
      to $164 million.  Proceeds from these new credit agreements
      provided funds sufficient to repay a debtor-in-possession credit facility
      and all administrative and priority claims to the extent provided for in
      the Plan.




2.
            The
      Company sold and leased back its five owned distribution facilities for a
      sales price of approximately
$37 million.




3.
            All
      shares of common stock and all stock options and warrants outstanding
      prior to the confirmation of the Plan were cancelled and the holders of
      such equity securities received no distributions under the
      Plan.




4.
            The
      reorganized Company was authorized to issue new shares of common stock to
      unsecured creditors, which included holders of $100 million of senior
      notes, a claim by the Pension Benefit Guaranty Corporation (the “PBGC”) of
      $60 million and trade claims, all of whom were eligible to receive
      pro rata distributions of new shares of common stock and the right to
      share in potential proceeds from certain causes of
  action.




Pursuant
to the provisions of Statement of Position 90-7, “Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code” (“SOP 90-7”), issued by
the American Institute of Certified Public Accountants upon emergence from
Chapter 11 proceedings, the Company adopted fresh-start reporting which resulted
in a new reporting entity and a new basis of accounting.




- 9
-
 Table of Contents






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




Note
3 – Recent Accounting Standards





In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, “Fair Value Measurement,” (“SFAS 157”), effective for fiscal years
beginning after November 15, 2007.  SFAS 157 defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value
measurements.  SFAS 157 does not require any new fair value
measurements.  Effective February 3, 2008, the Company adopted the
provisions of SFAS 157.  The adoption did not have a material effect
on our consolidated financial statements.





During
calendar year 2008, the FASB issued FASB Staff Positions (“FSP”) 157-1, 157-2,
and 157-3.  FSP 157-1 amends SFAS 157 to exclude SFAS No. 13,
“Accounting for Leases”, and its related interpretive accounting pronouncements
that address leasing transactions, FSP 157-2 delays the effective date of the
application of SFAS 157 to fiscal years beginning after November 15, 2008 for
all nonfinancial assets and nonfinancial liabilities that are recognized or
disclosed at fair value in the financial statements on a nonrecurring basis, and
FSP 157-3 clarifies how the fair value of a financial asset is determined when
the market for that financial asset is inactive.





In
February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities –
Including an amendment of FASB Statement No. 115” (“SFAS 159”), effective for
fiscal years beginning after November 15, 2007.  SFAS 159
permits an entity to elect fair value as the initial and subsequent measurement
attribute for many financial assets and liabilities.  Entities
electing the fair value option would be required to recognize changes in fair
value in earnings.  The Company has not elected to apply the provision
of SFAS 159 which became effective for the Company on February 3,
2008.








Note
4 - Per Share Data





Basic and
diluted net loss per share is based on the number of common shares issued and
estimated to be issued pursuant to the Plan.  At November 1, 2008 and
February 2, 2008, 23,427 and 188,164 common shares, respectively, are estimated
to be issued in connection with the settlement of remaining
claims.  Diluted loss per share for the period ended November 1, 2008
does not include the 665,012 common shares issuable on the conversion of the
preferred stock, which was issued in December 2007, as the effect is
antidilutive.


Quarter
      Ended
                    
                    
                    Year
      to DateNovember
      1, 2008
                    
                    
                    November
      3, 2007
                    
                    
                    November
      1, 2008
                    
                    
                    November
      3, 2007Loss
      per share - basic and diluted:Loss
      from continuing operations
                    
                    $
                    (5,562
                    )
                    
                    $
                    (8,128
                    )
                    
                    $
                    (21,310
                    )
                    
                    $
                    (19,846
                    )Less:
      cumulative preferred     stock
      dividends
                    
                    
                    (200
                    )
                    
                    
                    —
                    
                    
                    
                    (605
                    )
                    
                    
                    —Loss
      available to common stockholders
                    
                    
                    (5,762
                    )
                    
                    
                    (8,128
                    )
                    
                    
                    (21,915
                    )
                    
                    
                    (19,846
                    )Loss
      from discontinued operations
                    
                    
                    (23
                    )
                    
                    
                    (1,448
                    )
                    
                    
                    (103
                    )
                    
                    
                    (2,052
                    )Net
      loss available to common stockholders
                    
                    $
                    (5,785
                    )
                    
                    $
                    (9,576
                    )
                    
                    $
                    (22,018
                    )
                    
                    $
                    (21,898
                    )Weighted
      average shares outstanding and to be issued
                    
                    
                    8,650,110
                    
                    
                    
                    8,498,752
                    
                    
                    
                    8,650,110
                    
                    
                    
                    8,498,752Net
      loss per share:Loss from
      continuingoperations
                    
                    $
                    (0.67
                    )
                    
                    $
                    (0.96
                    )
                    
                    $
                    (2.54
                    )
                    
                    $
                    (2.34
                    )Loss from
      discontinuedoperations
                    
                    
                    (0.00
                    )
                    
                    
                    (0.17
                    )
                    
                    
                    (0.01
                    )
                    
                    
                    (0.24
                    )Net
      loss per share: basic and diluted
                    
                    $
                    (0.67
                    )
                    
                    $
                    (1.13
                    )
                    
                    $
                    (2.55
                    )
                    
                    $
                    (2.58
                    )






- 10
-
 Table of Contents




Note
5 – Liabilities Subject to Compromise





In
connection with the Chapter 11 proceeding, the Ohio Bureau of Workers’
Compensation (“OBWC”) filed priority and administrative claims aggregating
$13.4 million for pre-petition unpaid workers’ compensation premiums and
for reserves to pay future claims arising from existing injuries.  The
OBWC also filed claims aggregating $1.8 million for alleged non-payment of
post-petition premiums and for reserves to pay future claims arising from
existing injuries.  On August 22, 2008, the Company and the OBWC filed
a Notice of Presentment of Stipulation and Order with Respect to Settlement of
Ohio Bureau of Workers’ Compensation Claims (the “Stipulation”) with the United
States Bankruptcy Court for the Southern District of New York, pursuant to which
the Company and the OBWC have agreed that the OBWC will release all potential
claims against the Company in exchange for the following payments by the Company
to the OBWC: a payment of $500,000 on September 9, 2008; and payments of
$217,500 on each of the following dates: March 2, 2009; September 1, 2009; March
1, 2010; and September 1, 2010. The Stipulation further provides that the
payments to be made in 2010 shall be backed by a letter of credit.  The
Bankruptcy Court approved the Stipulation on September 5, 2008, and the Company
paid the first installment due on September 9, 2008.  In addition, the
Company issued 290,491 shares of its common stock, par value $0.01 per share, to
the OBWC during the quarter ended November 1, 2008.  As of November 1,
2008, the Company has accrued $0.8 million related to the OBWC Chapter 11 claim,
recording $0.4 million in current liabilities and $0.4 million in long-term
liabilities based upon the payment terms of the Stipulation.





The
Company has established liabilities for the estimated cash payments required to
settle the remaining claims outstanding in the Chapter 11
proceedings.  Estimated shares of common stock to be issued in
settlement of claims have been accounted for as common shares to be issued in
stockholders’ equity.




Note
6 – Long-term Debt





On August
1, 2007, both of the Company’s credit facilities were amended to permit the
disposal of assets in connection with the closing of two stores.  The
amendment also requires the Company to maintain certain financial covenants
contained in such credit facilities if the availability amount is reduced to
less than $27.5 million for four consecutive days or less than $25 million for
any one day.  These minimum availability amounts have been maintained,
and thus the Company has not been subject to the financial
covenants.





In March
2008, the maturity date of both facilities was extended from April 13, 2008 to
April 13, 2009.  Based on the maturity dates of April 13, 2009,
amounts due under the revolving credit and term loan facility and the
supplemental real estate credit facility have been classified as current
maturities in the accompanying balance sheet as of November
1, 2008.  In the event certain conditions are met, the maturity
date of the credit facilities could be automatically extended to April 13,
2010. Management is currently negotiating the extension provisions of the
credit facilities. The Company currently anticipates that the maturity date
of both credit facilities will be extended, although we cannot be certain that
this will occur.





On
October 10, 2008, the Company entered into amendments to its credit facilities
that included the lenders’ consent for the Company to enter into a supply
agreement with a third party (see Note 12). In addition, the amendment provided
for a reduction in the revolving credit commitments from $130 million to $100
million.




Note
7 – Income Taxes





The
Company maintains a full valuation allowance against substantially all of its
deferred tax assets including amounts resulting from net operating loss
carryforwards.  The valuation allowance will be maintained until there
is sufficient positive evidence to conclude that it is more likely than not that
the deferred tax assets will be realized.





The
Internal Revenue Service has recently completed an examination of the Company’s
tax returns for the fiscal years ended 2004, 2005, 2006, and
2007.  The IRS examination has resulted in no changes to the Company’s
tax returns as filed for those years.  The Company’s New York State
tax returns for the fiscal years ended 2004, 2005, 2006, and 2007 are currently
under examination by the New York State Department of Taxation and
Finance.





The
Company’s sale of warehouse inventory (see Note 12) resulted in significant
changes to current and non-current deferred tax assets and
liabilities.  The decrease in current deferred tax liability from
February 2, 2008, includes a reduction of approximately $6.5 million related to
the LIFO reserve on the warehouse inventory.  The sale of warehouse
inventory also led to a change in non-current deferred taxes, from a non-current
asset balance of $2.4 million as of February 2, 2008 to a non-current liability
balance of $1.8 million as of November 1, 2008.




- 11
-
 Table of Contents




Note
8 – Dispositions and Discontinued Operations





Dispositions





During
the year to date ended November 1, 2008, the Company closed six stores and sold
four others.  Three of the four stores that were sold are now
independent customers that the Company provides with food, related products and
other services.  As significant revenues will continue to be generated
from the three sold stores the results of operations of these stores are
included within continuing operations.  It is anticipated that
revenues will continue to be generated from customers of four of the six closed
stores from the Company stores located in the same vicinity.  The
Company will no longer have a presence in the vicinity of the remaining two
closed stores but the results of operations was determined to be immaterial and
is reported within continuing operations.  The stores that were sold
resulted in cash proceeds of $3.3 million and associated gain on sale of
leasehold and fixed assets of $1.3 million for the year to date ended
November 1, 2008.  The Company obtained waivers related to the
sale of store assets in accordance with the terms of the credit
facilities.





During
the year to date ended November 1, 2008, an impairment loss of $3.2 million
(including $0.2 million recognized during the quarter ended November 1, 2008)
was recognized with respect to assets related to closed stores in accordance
with Statement of Financial Accounting Standards No. 144, “Accounting for the
Impairment or Disposal of Long-lived Assets” (“SFAS 144”).  In
addition, the Company recorded a liability of $0.9 million representing the
present value of the remaining lease rentals reduced by estimated sublease
rentals that could be reasonably obtained for five of the six closed stores (one
closed store location was owned by the Company) in accordance with Statement of
Financial Accounting Standards No. 146, “Accounting for Costs Associated with
Exit or Disposal Activities”.





Subsequent
to November 1, 2008, the Company sold two stores and assigned related leases for
total proceeds of $7.5 million, resulting in a gain on sale of approximately
$4.5 million that the Company will recognize during the fourth
quarter.  As of November 1, 2008, the stores have not been classified
as held for sale in the balance sheet of the Company as the criteria within FAS
144 was not met.





During
the quarter ended November 3, 2007, the Company disposed of two
stores.  It was anticipated that revenues would continue to be generated
from one of the closed stores as the store was converted to an independent store
and would continue to be supplied by the Company’s distribution center. 
Revenue and operating results of the remaining closed store which was sold were
not significant.  Neither store was reported in discontinued
operations.





During
the quarter ended November 1, 2008, the Company sold 6 pharmacy scripts
resulting in cash proceeds of $0.9 million and gain on sale of intangible assets
of $0.8 million.  During the year to date ended November 1, 2008, the
Company sold 7 pharmacy scripts resulting in cash proceeds of $1.5 million and
gain on sale of intangible assets of $1.3 million.





Discontinued
Operations





On
January 2, 2008, as a result of the loss of a significant customer, the Company
announced the closing of its commercial bakery operation.  In
accordance with the provisions of  SFAS 144, the results of operations
of the commercial bakery operation for the periods ended November 1, 2008 and
November 3, 2007 have been reported as discontinued operations.  Also,
certain ongoing maintenance expenses related to the bakery operations have been
classified as discontinued operations in the quarter and year-to-date ended
November 1, 2008.




Note
9 – Pension Plans





On May
30, 2008, the Board of Directors of the Company resolved to merge the Big Bear
Stores Hourly Paid General Merchandise Warehouse Employees’ Pension Plan with
and into the Big Bear Stores Hourly Paid Food Warehouse Employees’ Pension Plan
(the “Plans”) and renamed the resulting combined plan as The Penn Traffic
Company Big Bear Retirement Plan (the “Plan”) effective May 31,
2008.  Further, the Plans’ assets were consolidated and are now held
by one Trustee resulting in an amendment to the Master Trust Agreement to
reflect the fact that the Plan is no longer a Master Trust Plan.  A
new Plan document was created for the Plan amended and effective retroactively
as of June 1, 2002.  The Company now has three noncontributory defined
benefit pension plans covering certain union personnel.  The Company’s
policy is to fund pension benefits to the extent contributions are deductible
for tax purposes and in compliance with federal laws and
regulations.




- 12
-
 Table of Contents




The
following table provides the components of net periodic pension (benefit) cost
(in thousands):


Quarter
      Ended
                      
                      
                      Quarter
      Ended
                      
                      
                      Year
      to Date
                      
                      
                      Year
      to DateNovember
      1,
                      
                      
                      November
      3,
                      
                      
                      November
      1,
                      
                      
                      November
      3,2008
                      
                      
                      2007
                      
                      
                      2008
                      
                      
                      2007(unaudited)Service
      cost
                      
                      $
                      313
                      
                      
                      $
                      495
                      
                      
                      $
                      939
                      
                      
                      $
                      1,485Interest
      cost
                      
                      
                      1,474
                      
                      
                      
                      1,558
                      
                      
                      
                      4,422
                      
                      
                      
                      4,679Expected
      return on plan assets
                      
                      
                      (1,593
                      )
                      
                      
                      (1,596
                      )
                      
                      
                      (4,779
                      )
                      
                      
                      (4,790
                      )Amortization
      of unrecognized actuarial gain
                      
                      
                      (236
                      )
                      
                      
                      (29
                      )
                      
                      
                      (708
                      )
                      
                      
                      (89
                      )Net periodic pension (benefit)
      cost
                      
                      $
                      (42
                      )
                      
                      $
                      428
                      
                      
                      $
                      (126
                      )
                      
                      $
                      1,285





For the
quarters ended November 1, 2008 and November 3, 2007, the Company contributed
$1.1 million and $0.2 million, respectively, to the defined benefit pension
plans.  For the year to date ended November 1, 2008 and November 3,
2007, the Company contributed $2.5 million and $3.7 million, respectively, to
the defined benefit pension plans.





The
Company also participates in three multi-employer defined benefit pension
plans.  The Company recognizes as net pension expense any required
contributions made during the period and recognizes as a liability any required
contributions that are due and unpaid.   For the quarters ended
November 1, 2008 and November 3, 2007, the Company contributed $1.2 million and
$1.2 million, respectively, to the multi-employer defined benefit pension
plans.  For the year to date ended November 1, 2008 and November 3,
2007, the Company contributed $3.6 million and $3.7 million, respectively, to
the multi-employer defined benefit pension plans.




Note
10 – Commitments and Contingencies





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





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





On
September 17, 2007, the SEC filed civil fraud charges against the Company’s
former Chief Marketing Officer and former Vice President, Non-Perishables
Marketing alleging that such individuals orchestrated a scheme to inflate the
Company’s income and other financial results by prematurely recognizing
promotional allowances received from vendors from approximately the second
quarter of fiscal year 2001 through at least the fourth quarter of fiscal year
2003. These officers had been terminated by the Company in February 2006
following an interim report to the Audit Committee on the findings of an
internal investigation.  The SEC's complaint further alleges that the
individuals deceived the Company’s accounting personnel to carry out their
fraudulent scheme and aided and abetted the Company’s violations of the
Securities Exchange Act of 1934 and rules thereunder. In addition, on the same
date, the USAO announced that a federal grand jury has returned an indictment
against the above-mentioned individuals on related criminal charges. Both the
SEC and the USAO have indicated that their investigations are
continuing.  The Company has incurred significant legal costs
associated with these matters to date and expects to continue to do
so.  These costs are recorded in selling and administrative expenses
as incurred and are expected to increase in the next several periods unless and
until the matters are resolved.




- 13
-
 Table of Contents







On
September 30, 2008, the Company reached a settlement with the SEC with respect
to the Commission’s investigation into the Company’s accounting practices and
policies during a time period from fiscal year 2000 through fiscal year 2003,
prior to the Company's emergence from bankruptcy in April
2005.  Without admitting or denying the allegations in the
Commission’s complaint, the Company agreed to settle the charges by consenting
to a permanent injunction against any future violations of the federal
securities laws. The SEC imposed no fines or monetary penalties on the Company.
As part of the settlement, the Company has hired an independent examiner who
will provide annual reports to the SEC, the USAO and the Company’s board on,
among other things, the Company’s promotional-allowance internal controls and
financial reporting. The examiner will serve for three years.  Other
settlement terms included the Company’s consent to reform its internal controls
and policies and procedures related to promotional allowances, as well as
implementation of a telephone hotline for associates and vendors to anonymously
notify the company of misconduct related to promotional allowances.





On
October 28, 2008, the Company entered into a non-prosecution agreement with the
USAO.  Under the agreement, the USAO has agreed not to prosecute the
Company for any crimes committed by its employees between 2001 and 2004 relating
to the matters that were the subject of the USAO’s previously announced
investigation of, among other things, the Company’s accounting policies,
practices and related conduct.  The USAO’s obligations under the
agreement are subject to a number of conditions, including the
Company’s:





•
            acceptance
      of responsibility for the conduct of its employees between 2001 and
      2004;





•
            adoption
      of the remedial measures required under, and compliance with the terms of,
      the previously announced settlement of the SEC’s investigation of the
      Company, including its compliance with specified federal securities laws;
      and




•
            provision
      of full cooperation to the USAO and Federal Bureau of Investigation with
      respect to their ongoing investigations through the conclusion of any and
      all related criminal trials.




If the
USAO determines that the Company has deliberately given false, incomplete or
misleading information under the agreement, or if the Company commits a crime or
otherwise knowingly, intentionally and materially violates any provision of the
agreement, then the Company may be subject to prosecution for any federal
criminal violation of which the USAO has knowledge, including any federal
criminal violation relating to the matters subject to the USAO’s investigation.
The Company agreed that any such prosecutions that are not time-barred by the
applicable statue of limitations on the date of the agreement may be commenced
against the Company notwithstanding the expiration of the statute of limitations
after the date of the agreement.





On March
12, 2008, the Company commenced an action in the Supreme Court for the State of
New York for the County of Onondaga seeking declaratory judgment to resolve a
dispute over the lease term for commercial property pertaining to a store that
was closed in 2007.  The Company is seeking an order declaring the
proper and effective lease termination date to be November 30, 2009, rather than
June 30, 2017, the date asserted by the landlord.  The Company
estimates that the increased rent expense for the additional lease term asserted
by the landlord to be approximately $2.8 million.  At present, the
Company is unable to estimate the likelihood of an unfavorable outcome and
accordingly, no liability has been recorded for this contingency.




Note
11 – Stock Award Plan





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





At
November 1, 2008, there were 188,260 shares of phantom stock granted, 100,000
shares of phantom stock forfeited, and 88,260 shares of phantom stock
outstanding to officers and non-officer directors.  Approximately
10,426 shares of phantom stock are unvested as of the quarter ended November 1,
2008.  In accordance with Statement of Financial Accounting Standards
No. 123(R), “Share-Based Payment,” the awards are being accounted for as
compensation expense and a corresponding liability over the period to settlement
date based on changes in the value of the Company’s common
stock.  Compensation benefit totaled less than $0.1 million and $0.4
million for the quarters ended November 1, 2008 and November 3, 2007,
respectively.  Compensation (benefit) expense totaled ($0.1) million
and $0.1 million for the year to date ended November 1, 2008 and November 3,
2007, respectively.  Refer to Note 15 to the financial statements
included in the Annual Report on Form 10-K for the fiscal year ended February 2,
2008, for additional information.




- 14
-
 Table of Contents




Note
12 – Sale of Warehouse Inventory





On
September 10, 2008, the Company entered into a definitive agreement with a
supplier to provide significant additional procurement services to the
Company.  Services under the agreement began on October 12, 2008
and will continue for a period of at least eight years.  The Company
will retain responsibility for the warehousing, transportation and distribution
of product from its Syracuse, New York and DuBois, Pennsylvania warehouse
facilities to its corporate retail stores and independent customer
locations.





To
facilitate the agreement, the Company sold substantially its entire warehouse
inventory as of October 11, 2008, to the supplier for approximately $35.5
million in cash, which was the FIFO-based cost value of the inventory on that
date.  This transaction is not included within either revenue or cost
of sales for the period ended November 1, 2008.  Although it is not
obligated to, the Company is currently repurchasing this inventory from the
supplier, at the same price at which it was sold, in order to supply its
corporate retail stores.  As of November 1, 2008, approximately $23.8
million of this inventory has been repurchased.  It is expected that
the remainder of the inventory will be repurchased and used to supply the
Company’s corporate retail stores during the Company’s fiscal fourth
quarter.





The
Company accounts for all inventory using the last-in, first-out (“LIFO”)
method.  The Company will defer recognition of the income statement
benefit of the reversal of the LIFO reserve on its warehouse inventory until
that inventory has been repurchased and sold through its corporate retail stores
to customers.  For the period ended November 1, 2008, the Company
recognized a reduction in cost of sales of approximately $3.1 million (for
inventory repurchased and sold from September 10, 2008, through November 1,
2008) related to the warehouse LIFO inventory reserve, and expects that an
additional $1.5 million of benefit, which represents the remainder of the
warehouse LIFO reserve as of November 1, 2008, will be recognized during the
Company’s fourth quarter.




- 15
-
 Table of Contents




Note
13– Segment Information





The
Company operates in two segments – the retail food business and the wholesale
food distribution business.  The retail food business consists of
supermarkets which the Company operates.  The wholesale food
distribution business supplies independent supermarkets and other independent
wholesale accounts with food, related products and other services.





The
tables below present information with respect to operating segments as well as
reconciliations to consolidated information (in thousands).




Quarter
      Ended November 1, 2008Wholesale
      Food
                                  
                                  
                                  ReconcilingRetail
      Food
                                  
                                  
                                  Distribution
                                  
                                  
                                  Items
                                  
                                  
                                  Total(unaudited)Revenues
                                  
                                  $
                                  225,910
                                  
                                  
                                  $
                                  59,323
                                  
                                  
                                  $
                                  2,052
                                  (1)
                                  
                                  $
                                  287,285Cost
      of sales
                                  
                                  
                                  (159,133
                                  )
                                  
                                  
                                  (55,773
                                  )
                                  
                                  
                                  499
                                  (2)
                                  
                                  
                                  (214,407
                                  )(4)Selling
      and administrative expense
                                  
                                  
                                  (56,577
                                  )
                                  
                                  
                                  (899
                                  )
                                  
                                  
                                  (13,693
                                  )(3)
                                  
                                  
                                  (71,169
                                  )(4)Gain
      on sale of assets
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  958
                                  
                                  
                                  
                                  958Loss
      on store closing (including asset impairment)
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (76
                                  )
                                  
                                  
                                  (76
                                  )Operating
      income (loss) beforedepreciation and
      amortization
                                  
                                  
                                  10,200
                                  
                                  
                                  
                                  2,651
                                  
                                  
                                  
                                  (10,260
                                  )
                                  
                                  
                                  2,591Depreciation
      and amortization
                                  
                                  
                                  (5,243
                                  )
                                  
                                  
                                  (189
                                  )
                                  
                                  
                                  (248
                                  )
                                  
                                  
                                  (5,680
                                  )Operating
      income (loss)
                                  
                                  $
                                  4,957
                                  
                                  
                                  $
                                  2,462
                                  
                                  
                                  $
                                  (10,508
                                  )
                                  
                                  
                                  (3,089
                                  )Interest
      expense
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (2,179
                                  )Reorganization
      costs
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (185
                                  )Loss
      from continuing operationsbefore
      income taxes
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  $
                                  (5,453
                                  )


(1)
            Consists
      principally of approximately $1.6 million for trucking revenues, $0.2
      million of rental income, and $0.1 million from sales of electronic
      data.




(2)
            Includes
      approximately $0.5 million for a decrease in cost of sales to
      reconcile segment inventories on FIFO to consolidated inventories on
      LIFO.




(3)
            Consists
      principally of approximately $7.0 million of payroll, benefits, and
      payroll taxes associated with the administrative staff, approximately $3.9
      million of professional fees (of which approximately $0.7 million
      pertained to legal costs associated with the internal and SEC
      investigations relating to the Company’s practices  regarding
      promotional discounts and allowances), approximately $1.5 million of
      contract hauling costs associated with trucking revenue, $0.3 million in
      data processing maintenance costs, and $0.1 million for general
      insurance.




(4)
            Excludes
      depreciation and amortization of $0.5 million for cost of sales and
      $5.2 million related to selling and administrative
      expenses.






- 16
-
 Table of Contents








Quarter
      Ended November 3, 2007Wholesale
      Food
                          
                          
                          ReconcilingRetail
      Food
                          
                          
                          Distribution
                          
                          
                          Items
                          
                          
                          Total(unaudited)Revenues
                          
                          $
                          244,364
                          
                          
                          $
                          52,211
                          
                          
                          $
                          2,127
                          (1)
                          
                          $
                          298,702Cost
      of sales
                          
                          
                          (167,905
                          )
                          
                          
                          (48,920
                          )
                          
                          
                          (1,273
                          )(2)
                          
                          
                          (218,098
                          )(4)Selling
      and administrative expense
                          
                          
                          (61,506
                          )
                          
                          
                          (1,348
                          )
                          
                          
                          (14,506
                          )(3)
                          
                          
                          (77,360
                          )(4)Gain
      on sale of assets
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          328
                          
                          
                          
                          328Loss
      on store closing (including asset impairment)
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          (146
                          )
                          
                          
                          (146
                          )Operating
      income (loss) beforedepreciation and
      amortization
                          
                          
                          14,953
                          
                          
                          
                          1,943
                          
                          
                          
                          (13,470
                          )
                          
                          
                          3,426Depreciation
      and amortization
                          
                          
                          (6,025
                          )
                          
                          
                          (237
                          )
                          
                          
                          (418
                          )
                          
                          
                          (6,680
                          )Operating
      income (loss)
                          
                          $
                          8,928
                          
                          
                          $
                          1,706
                          
                          
                          $
                          (13,888
                          )
                          
                          
                          (3,254
                          )Interest
      expense
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (2,023
                          )Reorganization
      costs
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (2,792
                          )Loss
      from continuing operationsbefore
      income taxes
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          (8,069
                          )


(1)
            Consists
      principally of approximately $1.6 million for trucking revenues and $0.3
      million of rental income.




(2)
            Includes
      approximately $0.3 million for an increase in cost of sales to reconcile
      segment inventories on FIFO to consolidated inventories on
      LIFO.




(3)
            Consists
      principally of approximately $7.0 million of payroll, benefits, and
      payroll taxes associated with the administrative staff, approximately
      $2.8 million of professional fees (of which approximately $0.6
      million pertained to legal costs associated with the internal and SEC
      investigation relating to the Company’s practices regarding promotional
      discounts and allowances), approximately $1.3 million
      of  contract hauling costs associated with trucking revenue,
      approximately $0.1 million for an increase in reserves for doubtful
      accounts, $0.3 million in data processing maintenance costs, and $0.4
      million of general insurance.




(4)
            Excludes
      depreciation and amortization of $0.8 million for cost of sales and
      $5.9 million related to selling and administrative
      expenses.






- 17
-
 Table of Contents






Period
      from February 3, 2008 to November 1, 2008Wholesale
      Food
                      
                      
                      ReconcilingRetail
      Food
                      
                      
                      Distribution
                      
                      
                      Items
                      
                      
                      Total(unaudited)Revenues
                      
                      $
                      702,512
                      
                      
                      $
                      172,564
                      
                      
                      $
                      6,157
                      (1)
                      
                      $
                      881,233Cost
      of sales
                      
                      
                      (491,733
                      )
                      
                      
                      (162,284
                      )
                      
                      
                      (166
                      )(2)
                      
                      
                      (654,183
                      )(4)Selling
      and administrative expense
                      
                      
                      (177,295
                      )
                      
                      
                      (3,368
                      )
                      
                      
                      (41,869
                      )(3)
                      
                      
                      (222,532
                      )(4)Gain
      on sale of assets
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      2,757
                      
                      
                      
                      2,757Loss
      on store closings (including asset impairment)
                      
                      
                      (475
                      )
                      
                      
                      —
                      
                      
                      
                      (3,525
                      )
                      
                      
                      (4,000
                      )Operating
      income (loss) beforedepreciation and
      amortization
                      
                      
                      33,009
                      
                      
                      
                      6,912
                      
                      
                      
                      (36,646
                      )
                      
                      
                      3,275Depreciation
      and amortization
                      
                      
                      (15,745
                      )
                      
                      
                      (559
                      )
                      
                      
                      (786
                      )
                      
                      
                      (17,090
                      )Operating
      income (loss)
                      
                      $
                      17,264
                      
                      
                      $
                      6,353
                      
                      
                      $
                      (37,432
                      )
                      
                      
                      (13,815
                      )Interest
      expense
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (6,743
                      )Reorganization
      costs
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (366
                      )Loss
      from continuing operationsbefore
      income taxes
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      (20,924
                      )Total
      assets as of November 1, 2008
                      
                      $
                      145,046
                      (5)
                      
                      $
                      9,482
                      (5)
                      
                      $
                      55,154
                      (6)
                      
                      $
                      209,682Capital
      expenditures for the yearended
      November 1, 2008
                      
                      $
                      4,701
                      
                      
                      $
                      15
                      
                      
                      $
                      553
                      
                      
                      $
                      5,269


(1)
            Consists
      principally of approximately $4.7 million for trucking revenues, $0.8
      million of rental income and $0.3 million from sales of electronic
      data.




(2)
            Includes
      approximately $0.2 million in cost of sales to reconcile segment
      inventories on FIFO to consolidated inventories on
  LIFO.




(3)
            Consists
      principally of approximately $21.4 million of payroll, benefits, and
      payroll taxes associated with the administrative staff, approximately
      $12.0 million of professional fees (of which approximately $2.4
      million pertained to legal costs associated with the internal and SEC
      investigations relating to the Company’s practices regarding promotional
      discounts and allowances), approximately $4.3 million
      of  contract hauling costs associated with trucking revenue,
      approximately $0.6 million for an increase in reserves for doubtful
      accounts, $0.8 million in data processing maintenance costs, and $0.3
      million of general insurance.




(4)
            Excludes
      depreciation and amortization of $1.5 million for cost of sales and
      $15.5 million related to selling and administrative
      expenses.




(5)
            The
      warehouse and transportation assets have been allocated using the same
      methodology as that which was used for the warehouse and transportation
      costs.




(6)
            Consists
      principally of general corporate assets (including cash and cash
      equivalents) that cannot be separated by business
  segment.






- 18
-
 Table of Contents







Period
      from February 4, 2007 to November 3, 2007Wholesale
      Food
                            
                            
                            ReconcilingRetail
      Food
                            
                            
                            Distribution
                            
                            
                            Items
                            
                            
                            Total(unaudited)Revenues
                            
                            $
                            751,462
                            
                            
                            $
                            156,696
                            
                            
                            $
                            6,529
                            (1)
                            
                            $
                            914,687Cost
      of sales
                            
                            
                            (517,605
                            )
                            
                            
                            (146,057
                            )
                            
                            
                            (3,857
                            )(2)
                            
                            
                            (667,519
                            )(4)Selling
      and administrative expense
                            
                            
                            (185,581
                            )
                            
                            
                            (3,990
                            )
                            
                            
                            (45,520
                            )(3)
                            
                            
                            (235,091
                            )(4)Gain
      on sale of assets
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            2,422
                            
                            
                            
                            2,422Loss
      on store and distribution center closings
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (2,029
                            )
                            
                            
                            (2,029
                            )Operating
      income beforedepreciation and
      amortization
                            
                            
                            48,276
                            
                            
                            
                            6,649
                            
                            
                            
                            (42,455
                            )
                            
                            
                            12,470Depreciation
      and amortization
                            
                            
                            (18,422
                            )
                            
                            
                            (723
                            )
                            
                            
                            (1,233
                            )
                            
                            
                            (20,378
                            )Operating
      income (loss)
                            
                            $
                            29,854
                            
                            
                            $
                            5,926
                            
                            
                            $
                            (43,688
                            )
                            
                            
                            (7,908
                            )Interest
      expense
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (6,818
                            )Reorganization
      and other expenses
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (4,945
                            )Consolidated
      loss before income taxes
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            $
                            (19,671
                            )Total
      assets as of November 3, 2007
                            
                            $
                            213,552
                            (5)
                            
                            $
                            24,621
                            (5)
                            
                            $
                            29,452
                            (6)
                            
                            $
                            267,625Capital
      expenditures for the periodended
      November 3, 2007
                            
                            $
                            4,253
                            
                            
                            $
                            203
                            
                            
                            $
                            486
                            
                            
                            $
                            4,942


(1)
            Consists
      principally of approximately $4.9 million for trucking revenues and $0.9
      million of rental income.




(2)
            Includes
      approximately $0.9 million increase in cost of sales to reconcile segment
      inventories on FIFO to consolidated inventories on
  LIFO.




(3)
            Consists
      principally of approximately $20.3 million of payroll, benefits, and
      payroll taxes associated with the administrative staff, approximately
      $10.3 million of professional fees (of which approximately $1.2
      million pertained to legal costs associated with the internal and SEC
      investigations relating to the Company’s practices regarding promotional
      discounts and allowances), approximately $4.1 million
      of  contract hauling costs associated with trucking revenue,
      approximately $1.0 million for an increase in reserves for doubtful
      accounts, $0.8 million in data processing maintenance costs, and $0.8
      million of general insurance.




(4)
            Excludes
      depreciation and amortization of $2.5 million for cost of sales and
      $18.0 million related to selling and administrative
      expenses.




(5)
            The
      warehouse and transportation assets have been allocated using the same
      methodology as that which was used for the warehouse and transportation
      costs.




(6)
            Consists
      principally of general corporate assets (including cash and cash
      equivalents) that cannot be separated by business
  segment.






- 19
-
 Table of Contents






ITEM 2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations




Introduction





We
operate or supply approximately 210 supermarkets in upstate New York,
Pennsylvania, Vermont and New Hampshire.  We operate in two
segments.  Our retail food business includes corporate-owned stores
with the “BiLo”, “P&C” and “Quality” trade names, and our wholesale food
distribution business supplies independently operated supermarkets and
other wholesale accounts.





Our
primary objective is to enhance the in-store experience of our customers and
improve our long-term financial performance.  Under the direction of
our new senior team (formed in fiscal year 2007), we are focusing on
rebuilding our core business.  This means re-establishing basic
disciplines and reemphasizing and instilling a much stronger profitable growth
culture around sales and margin, as well as delivering a sufficient economic
return on assets.




Results
of Operations





The
following table sets forth certain Consolidated Statement of Operations
components expressed as percentages of revenues for the quarters and year to
date ended November 1, 2008 and November 3, 2007.




Quarter
                  
                  
                  QuarterEnded
                  
                  
                  Ended
                  
                  
                  Year
      to Date
                  
                  
                  Year
      to DateNovember
      1, 2008
                  
                  
                  November
      3, 2007
                  
                  
                  November
      1, 2008
                  
                  
                  November
      3, 2007(unaudited)Revenues
                  
                  
                  100.0
                  %
                  
                  
                  100.0
                  %
                  
                  
                  100.0
                  %
                  
                  
                  100.0
                  %Gross
      profit (1)
                  
                  
                  25.2
                  
                  
                  
                  26.7
                  
                  
                  
                  25.6
                  
                  
                  
                  26.8Selling
      and administrative expenses
                  
                  
                  26.6
                  
                  
                  
                  27.9
                  
                  
                  
                  27.0
                  
                  
                  
                  27.7Gain
      on sale of leasehold and fixed assets
                  
                  
                  (0.3
                  )
                  
                  
                  (0.1
                  )
                  
                  
                  (0.3
                  )
                  
                  
                  (0.3
                  )Loss
      on store and distribution center closing (including asset
      impairment)
                  
                  
                  0.0
                  
                  
                  
                  0.0
                  
                  
                  
                  0.5
                  
                  
                  
                  0.2Operating
      loss
                  
                  
                  (1.1
                  )
                  
                  
                  (1.1
                  )
                  
                  
                  (1.6
                  )
                  
                  
                  (0.8
                  )Interest
      expense
                  
                  
                  0.8
                  
                  
                  
                  0.7
                  
                  
                  
                  0.8
                  
                  
                  
                  0.8Reorganization
      and other expenses
                  
                  
                  0.0
                  
                  
                  
                  0.9
                  
                  
                  
                  0.0
                  
                  
                  
                  0.6Loss
      from continuing operations before income taxes
                  
                  
                  (1.9
                  )
                  
                  
                  (2.7
                  )
                  
                  
                  (2.4
                  )
                  
                  
                  (2.2
                  )Income
      tax expense
                  
                  
                  (0.0
                  )
                  
                  
                  (0.0
                  )
                  
                  
                  (0.0
                  )
                  
                  
                  (0.0
                  )Loss
      from continuing operations
                  
                  
                  (1.9
                  )
                  
                  
                  (2.7
                  )
                  
                  
                  (2.4
                  )
                  
                  
                  (2.2
                  )Loss
      from discontinued operations
                  
                  
                  (0.0
                  )
                  
                  
                  (0.5
                  )
                  
                  
                  (0.0
                  )
                  
                  
                  (0.2
                  )Net
      loss
                  
                  
                  (1.9
                  )
                  
                  
                  (3.2
                  )
                  
                  
                  (2.4
                  )
                  
                  
                  (2.4
                  )





(1)
            Revenues
      less cost of sales.






- 20
-
 Table of Contents




Quarter
Ended November 1, 2008 and Quarter Ended November 3, 2007





Revenues
for the quarter ended November 1, 2008 decreased to $287.3 million from $298.7
million for the quarter ended November 3, 2007.  The $11.4 million
decrease in revenues was mainly attributable to a reduction in the number of
corporate stores from 104 at November 3, 2007 to 93 at November 1, 2008, and a
0.8% decline in same store sales, partially offset by an increase in wholesale
food distribution revenues.





Wholesale
food distribution revenues for the quarter ended November 1, 2008 increased
to $59.3 million, or 20.6% of total revenues, from $52.2 million, or 17.5% of
total revenues, for the quarter ended November 3, 2007.  The increase
in the wholesale food distribution revenues was primarily attributable to the
addition of three new wholesale accounts during fiscal year 2009, as well as
conversion of certain corporate stores to independent customers.





Gross
Profit





Gross
profit was $72.4 million, or 25.2% of revenues, for the quarter ended November
1, 2008 compared to $79.8 million, or 26.7% of revenues, for the quarter
ended November 3, 2007.  The decrease is the result of decreased sales
due to store closings, declining customer counts due, at least in part, to
apparent trip consolidation, and erosion of margins due to certain departments’
cost inflation outpacing price inflation (such as produce, where cost increases
can not be included in retail prices due to customer sensitivity).  In
response to the increasing competition in the marketplace, we increased
advertised sale items in an attempt to increase sales volume during the quarter
ended November 1, 2008 that resulted in decreased margins on certain products
and ultimately a decrease in gross profit.





Selling
and Administrative Expenses





Selling
and administrative expenses for the quarter ended November 1, 2008 were
$76.3 million, or 26.6% of revenues, compared to $83.3 million, or 27.9% of
revenues, for the quarter ended November 3, 2007.  The decrease in
selling and administrative expenses is comprised of decreases in payroll and
employee related benefits of $3.0 million, insurance of $1.2
million, depreciation and amortization expense of $1.0 million (see below),
utilities expense of $0.8 million, rental expense of $0.7 million, and bad debt
expense of $0.4 million.  The aforementioned decrease in selling and
administrative expenses were mainly driven by the closure of stores as detailed
above and completion of unfiled Securities and Exchange Commission reports as of
April 2008, resulting in a decrease in professional fees and outside
services.





Depreciation
and Amortization





Depreciation
and amortization expense was $5.7 million, or 2.0% of revenues, for the quarter
ended November 1, 2008 compared to $6.7 million, or 2.3% of revenues, for the
quarter ended November 3, 2007.  The decrease in depreciation and
amortization during the quarter ended November 1, 2008 was primarily due to an
$11.0 million write-down of intangible assets in conjunction with the
recognition of benefits attributable to pre-reorganization net operating loss
carryforwards for prior years and a reduction in depreciation related to the
closure of the bakery in January 2008, as well as a decrease in gross
depreciable assets.





Loss
on Store Closings (including asset impairment)





Loss on
store closings was $0.1 million or less than 0.1% of revenues, for the quarter
ended November 1, 2008.  The asset impairment charges were mainly
attributed to the write-down of closed store assets held for sale.





Operating
Loss





Operating
loss for the quarter ended November 1, 2008 was $3.1 million, or 1.1% of
revenues, compared to the operating loss of $3.3 million, or 1.1% of revenues,
for the quarter ended November 3, 2007.





Reorganization
and Other Expenses





Reorganization
expense for the quarter ended November 1, 2008 was $0.2 million, or 0.1% of
revenues, compared to $2.8 million, or 0.9% of revenues, for the quarter
ended November 3, 2007.  They consist primarily of professional
fees.





Loss
from Continuing Operations Before Income Taxes





Loss from
continuing operations before income taxes for the quarter ended November 1, 2008
was $5.5 million, or 2.0% of revenues, compared to a loss from continuing
operations of $8.1 million, or 2.7% of revenues, during the quarter ended
November 3, 2007.  The $2.4 million decrease in loss from continuing
operations before income taxes is primarily due to a decrease in reorganization
and other selling and administrative expenses as a result of decreased
professional fees, offset by gross profit rate erosion.




Net
Loss





Net loss
for the quarter ended November 1, 2008 was $5.6 million, or 1.9% of
revenues, compared to a net loss of $9.6 million, or 3.2% of revenues,
during the quarter ended November 3, 2007.




- 21
-
 Table of Contents




Year
to Date Ended November 1, 2008 and Year to Date Ended November 3,
2007





Revenues





Revenues
for the year to date ended November 1, 2008 decreased to $881.2 million
from $914.7 million for the year to date ended November 3, 2007.  The
$33.5 million decrease in revenues was mainly attributable to a reduction in the
number of corporate stores from November 3, 2007 to November 1, 2008, a 1.3%
decline in same store sales, partially offset by an increase in wholesale food
distribution revenues.





Wholesale
food distribution revenues for the year to date ended November 1, 2008 increased
$15.9 million, or 8.9%, to $172.6 million, or 19.6% of total revenues, from
$156.7 million, or 16.9% of total revenues, for the year to date ended November
3, 2007.  The increase in the wholesale food distribution revenues was
primarily attributable to the addition of three new wholesale accounts during
fiscal year 2009, as well as the conversion of certain corporate stores to
independent customers.





Gross
Profit





Gross
profit was $225.4 million, or 25.6% of revenues, for the year to date ended
November 1, 2008 compared to $244.7 million, or 26.8% of revenues, for the
year to date ended November 3, 2007.  The decrease is the result of
decreased sales due to store closings, declining customer counts due to apparent
trip consolidation and erosion of margins due to certain departments’ cost
inflation outpacing price inflation (such as produce, where cost increases can
not be included in retail prices due to customer sensitivity).  In
response to the increasing competition in the marketplace, we increased
advertised sale items in an attempt to increase sales volume during the year to
date ended November 1, 2008 that resulted in decreased margins on certain
products and ultimately a decrease in gross profit.





Selling
and Administrative Expenses





Selling
and administrative expenses for the year to date ended November 1, 2008 were
$238.0 million, or 27.0% of revenues, compared to $253.0 million, or 27.7%
of revenues, for the year to date ended November 3, 2007.  The
decrease in selling and administrative expenses is comprised of decreases in
payroll and employee related benefits of $8.0 million, depreciation and
amortization expense of $3.3 million (see below), property taxes and rent
expense of $2.1 million, insurance of $1.5 million, and utilities expense of
$1.1 million, offset by increases in advertising expense of $0.7 million and
professional fees of $0.7 million.  The decreases in selling and
administrative expenses were mainly driven by the closure of stores as detailed
above.





Depreciation
and Amortization





Depreciation
and amortization expense was $17.1 million, or 1.9% of revenues, for the year to
date ended November 1, 2008 compared to $20.4 million, or 2.2% of revenues,
for the year to date ended November 3, 2007.  The decrease in
depreciation and amortization during the year to date ended November 1, 2008 was
primarily due to an $11.0 million write-down of intangible assets in conjunction
with the recognition of benefits attributable to pre-reorganization net
operating loss carryforwards for prior years and a reduction in depreciation
related to the closure of the bakery in January 2008, as well as a decrease in
gross depreciable assets.





Loss
on Store and Distribution Center Closings (including asset
impairment)





For the
year to date ended November 1, 2008, the Company recorded a loss on store
closings (including asset impairment) of $4.0 million, or 0.5% of revenues,
representing the net present value of the remaining lease rentals associated
with its closed stores of $0.8 million and asset impairment charges of $3.2
million.  The asset impairment charges were mainly attributed to the
write-down of closed store assets.  A loss of $2.0 million, or 0.2% of
revenues, representing the net present value of the remaining lease payments
associated with our closed distribution centers, was incurred for the year to
date ended November 3, 2007.





Operating
Loss





Operating
loss for the year to date ended November 1, 2008 was $13.8 million, or 1.6% of
revenues, compared to the operating loss of $7.9 million, or 0.8% of revenues,
for the year to date ended November 3, 2007.




- 22
-
 Table of Contents




Reorganization
and Other Expenses





Reorganization
expense for the year to date ended November 1, 2008 was $0.4 million, less than
0.1% of revenues, compared to $4.9 million, or 0.6% of revenues, for the
year to date ended November 3, 2007.  This expense consists primarily
of professional fees.





Loss
from Continuing Operations Before Income Taxes





Loss from
continuing operations before income taxes for the year to date ended November 1,
2008 was $20.9 million, or 2.4% of revenues, compared to a loss from continuing
operations of $19.7 million, or 2.2% of revenues, during the year to date ended
November 3, 2007.  The $1.2 million increase in loss from continuing
operations before income taxes is primarily due to a decrease in gross profit of
$19.3 million and an increase in loss on store and distribution center closings
of $2.0 million, offset by decreases in selling and administrative expenses of
$15.0 million, and reorganization and other expenses of $4.6
million.





Loss
from Discontinued Operations





Loss from
discontinued operations for the year to date ended November 1, 2008 was $0.1
million, or less than 0.1% of revenues, compared to a loss from discontinued
operations of $2.1 million, or 0.2% of revenues, during the year to date ended
November 3, 2007.  The decrease in the loss from discontinued
operations for the year to date ended November 1, 2008 to November 3, 2007 is a
result of the bakery generating operating losses during the first nine months of
fiscal year 2008 versus the closure of the bakery in January 2008, resulting in
no operations during the first nine months of fiscal year 2009.





Net
Loss





Net loss
for the year to date ended November 1, 2008 was $21.4 million, or 2.4% of
revenues, compared to a net loss of $21.9 million, or 2.4% of revenues,
during the year to date ended November 3, 2007.




- 23
-
 Table of Contents




Liquidity
and Capital Resources





Overview





As of
November 1, 2008, we had cash and cash equivalents of $32.9 million and total
debt outstanding of $61.1 million (consisting of $17.0 million in a revolving
credit facility, $6.0 million in a term loan facility, $25.1 million in a
supplemental real estate credit facility, $3.9 million in mortgages payable, and
$9.1 million in capital lease obligations).  We also have the ability
to draw down our revolving credit facilities, subject to borrowing base
restrictions.  As a result of the amendment to the credit facilities
on October 10, 2008, the revolving credit commitments were reduced from $130
million to $100 million.  We note, however, that as a result of the
calculation of our asset borrowing base of collateral, the revolving credit
available to borrow is significantly lower than $100 million.  As of
November 1, 2008, the excess revolver availability, net of outstanding letters
of credit, is $31.2 million.  We are required to maintain a minimum of
$27.5 million in excess revolver availability in order to avoid triggering
certain financial covenants included within the credit facilities.  As
of November 1, 2008, we were above that minimum requirement by $3.7
million.  To date, our excess revolver availability under the credit
facility has exceeded the minimum availability amount of $27.5
million.





A number
of developments during the year to date ended November 1, 2008, have had a
significant impact on our current liquidity and are expected to impact our
liquidity in the future.





As
discussed in Note 12 to the unaudited financial statements in Form 10-Q on
September 10, 2008, we entered into a definitive procurement agreement
transaction with a supplier to provide us with significant additional
procurement services.  The closing of the new agreement on October 12,
2008, resulted in an immediate infusion of cash of approximately $35.5
million.  Approximately $15.5 million of this amount was used to
reduce accounts payable to our warehouse vendors following the
transaction.  The remaining $20.0 million in net cash proceeds from
the transaction is considered as collateral for the borrowing base calculation
as of November 1, 2008; however, the decrease in our inventory as a result of
the transaction led to a decrease in the availability on our revolving credit
facility of approximately $18.0 million.  Therefore, the immediate net
impact of the transaction did not significantly change our cash
availability.  We currently anticipate an improvement in our future
gross profit as a result of this transaction, which we expect will improve our
working capital position and gross margins over the next fiscal
year.





During
the year to date ended November 1, 2008, we have recognized cash inflows of
approximately $5.1 million related to the sale of assets, primarily fixed assets
and pharmacy scripts (see Note 8 to the unaudited financial statements in Form
10-Q).  As the Company continues to strategically assess its assets,
we may dispose of certain additional assets in the future.  We expect
that these assets would generate additional cash inflows, however asset
dispositions can also reduce collateral in the borrowing base calculation, which
may result in reduced availability under the current credit
facilities.





Based on
the foregoing, we believe that our existing cash on hand, available borrowings
under our credit facilities, and other sources of cash will be sufficient to
satisfy our currently anticipated cash requirements for at least the next 12
months.  However, we cannot be certain that future events or
developments, including, but not limited to, customer trip consolidation,
decreased customer counts, continued economic and financial volatility, and the
inability to extend or obtain current or new financing, will not change that
assessment.




Financial
Results








Operating
Activities





Cash
provided by operating activities for the year to date ended November 1, 2008 was
$13.0 million as compared to cash used in operating activities of $12.5 million
for the year to date ended November 3, 2007.  For the year to date
ended November 1, 2008, we incurred a net loss of $21.4 million, adjustments for
non cash items of $18.8 million, and a net increase in operating net assets of
$15.8 million.  For the year to date ended November 3, 2007, we
incurred a net loss of $21.9 million, adjustments for non-cash items of $22.4
million and a net decrease in operating net assets of $13.1
million.





Investing
Activities





Cash used
in investing activities for the year to date ended November 1, 2008 and November
3, 2007 was $0.2 million and $3.1 million, respectively.  The
$2.9 million decrease was due to increased proceeds from the sale of fixed
assets ($5.1 million as compared to $1.9 million) partially offset by
increased capital expenditures ($5.3 million as compared to $4.9
million).




- 24
-
 Table of Contents




Financing
Activities





Cash used
in financing activities for the year to date ended November 1, 2008 and November
3, 2007 was $1.0 million and $2.4 million,
respectively.  The $1.4 million decrease was due to borrowings against
our revolving line of credit during the period ending November 1,
2008.





Borrowings





On
April 13, 2005, upon emergence from Chapter 11 proceedings, we entered into
a revolving credit and term loan facility with a group of financial institutions
providing for a $130.0 million revolving credit facility and a
$6.0 million term loan.  Also on April 13, 2005, we entered
into a supplemental real estate credit facility with another group of lenders,
providing for term loan borrowings of up to
$28.0 million.  Availability under both credit facilities is
dependent on levels of accounts receivable, inventory and certain other
assets.  Interest rates on borrowings under the revolving credit
facility vary depending upon the amount of availability.  At November
1, 2008, outstanding borrowings under both facilities aggregated
$51.8 million.  At such date, availability in excess of
outstanding borrowings and letters of credit was approximately $31.2
million.  Borrowings under the revolving credit and term loan facility
are secured by substantially all of our assets, subject to first liens on
certain properties by other lenders.  Borrowings under the real estate
facility are secured by a first lien on substantially all of our leasehold
interests and a second lien on substantially all of our remaining
assets.  At November 1, 2008, we had stand-by letters of credit of
approximately $40.0 million.  Many of these stand-by letters of
credit were required upon emergence from bankruptcy and as a result of our
inability to file financial statements.





Provisions
of both credit facilities, among other things, require the maintenance of
certain financial covenants (when availability under the credit facilities is
less than $27.5 million for four consecutive days or less than
$25 million for any one day), and limit the amount of capital expenditures,
our assumption of additional debt and our payment of dividends.  At no
time through November 1, 2008 had we been subject to compliance with these
financial covenants because the amount available for borrowing had not dropped
to these levels.  However, had such an event occurred, we would not
have been in compliance with the financial covenants and would have been in
default under the terms of the loan agreement at November 1, 2008.





Pursuant
to our plan of reorganization, we entered into a collateral trust agreement with
the collateral trustee in connection with the secured trade lien
program.  The secured trade lien program is with certain of our
vendors and allows us to maintain trade terms.





On
December 26, 2006, August 1, 2007 and January 30, 2008, both
the revolving credit and term loan facility and the supplemental real estate
credit facility were amended to permit the disposal of assets in connection with
the closing of certain stores.  In March 2008, the maturity date of
both facilities was extended to at least April 13, 2009.  On October
10, 2008, the Company entered into an amendment to its credit facilities that
provided consent of the lenders to the entry by the Company into a supply
agreement with a third party on September 10, 2008 (see Note 12). In addition,
the amendment provided for a reduction in the revolving credit commitments to
$100 million, which is expected to result in a reduction of commitment
fees.  See Note 7 to the financial statements included in the Annual
Report on Form 10-K for the fiscal year ended February 2, 2008 for additional
information.




We also
have $3.9 million of borrowings under mortgages secured by three related
properties as of November 1, 2008.





Certain
Contingencies





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





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




- 25
-
 Table of Contents




On
September 17, 2007, the SEC filed civil fraud charges against the Company’s
former Chief Marketing Officer and former Vice President, Non-Perishables
Marketing alleging that such individuals orchestrated a scheme to inflate the
Company’s income and other financial results by prematurely recognizing
promotional allowances received from vendors from approximately the second
quarter of fiscal year 2001 through at least the fourth quarter of fiscal year
2003. These officers had been terminated by the Company in February 2006
following an interim report to the Audit Committee on the findings of an
internal investigation.  The SEC's complaint further alleges that the
individuals deceived the Company’s accounting personnel to carry out their
fraudulent scheme and aided and abetted the Company’s violations of the
Securities Exchange Act of 1934 and rules thereunder. In addition, on the same
date, the USAO announced that a federal grand jury has returned an indictment
against the above-mentioned individuals on related criminal charges. Both the
SEC and the USAO have indicated that their investigations are
continuing.  The Company has incurred significant legal costs
associated with these matters to date and expects to continue to do
so.  These costs are recorded in selling and administrative expenses
as incurred and are expected to increase in the next several periods unless and
until the matters are resolved.





On
September 30, 2008, the Company reached a settlement with the SEC with respect
to the Commission’s investigation into the Company’s accounting practices and
policies during a time period from fiscal year 2000 through fiscal year 2003,
prior to the Company's emergence from bankruptcy in April
2005.  Without admitting or denying the allegations in the
Commission’s complaint, the Company agreed to settle the charges by consenting
to a permanent injunction against any future violations of the federal
securities laws. The SEC imposed no fines or monetary penalties on the Company.
As part of the settlement, the Company has hired an independent examiner who
will provide annual reports to the SEC, the USAO and the Company’s board on,
among other things, the Company’s promotional-allowance internal controls and
financial reporting. The examiner will serve for three years.  Other
settlement terms included the Company’s consent to reform its internal controls
and policies and procedures related to promotional allowances, as well as
implementation of a telephone hotline for associates and vendors to anonymously
notify the company of misconduct related to promotional allowances.





On
October 28, 2008, the Company entered into a non-prosecution agreement with the
USAO.  Under the agreement, the USAO has agreed not to prosecute the
Company for any crimes committed by its employees between 2001 and 2004 relating
to the matters that were the subject of the USAO’s previously announced
investigation of, among other things, the Company’s accounting policies,
practices and related conduct.  The USAO’s obligations under the
agreement are subject to a number of conditions, including the
Company’s:





•
            acceptance
      of responsibility for the conduct of its employees between 2001 and
      2004;





•
            adoption
      of the remedial measures required under, and compliance with the terms of,
      the previously announced settlement of the SEC’s investigation of the
      Company, including its compliance with specified federal securities laws;
      and




•
            provision
      of full cooperation to the USAO and Federal Bureau of Investigation with
      respect to their ongoing investigations through the conclusion of any and
      all related criminal trials.




If the
USAO determines that the Company has deliberately given false, incomplete or
misleading information under the agreement, or if the Company commits a crime or
otherwise knowingly, intentionally and materially violates any provision of the
agreement, then the Company may be subject to prosecution for any federal
criminal violation of which the USAO has knowledge, including any federal
criminal violation relating to the matters subject to the USAO’s investigation.
The Company agreed that any such prosecutions that are not time-barred by the
applicable statue of limitations on the date of the agreement may be commenced
against the Company notwithstanding the expiration of the statute of limitations
after the date of the agreement.




- 26
-
 Table of Contents










ITEM 3.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





Our
financial results are subject to risk from interest rate changes on debt that
has variable interest rates. Total variable rate debt outstanding under our loan
agreements at November 1, 2008 was $51.8 million with a weighted average
interest rate of 11.6%.  A 1.0% change in interest rates would
impact pre-tax income by $0.5 million based on the debt outstanding at
November 1, 2008.  In addition to the variable rate debt, we had $3.7
million of fixed rate debt outstanding at November 1, 2008 with a weighted
average interest rate of 6.6%.  We view the fixed rate debt as a
partial hedge against interest rate fluctuations.





ITEM 4.
            CONTROLS
      AND PROCEDURES





Disclosure
controls and procedures under Rule 13a-15(e) of the Securities Exchange Act of
1934 (the “Securities Act”) are those controls and other procedures of a company
that are designed to ensure that information required to be disclosed by the
company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the SEC’s rule and forms.  Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by an issuer in the reports it files or
submits under the Exchange Act is accumulated and communicated to the issuer’s
management, including its principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.





Pursuant
to Rule 13a-15(e) under the Exchange Act, our management evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures with the participation of our principal executive and principal
financial officers.  Based on their current observations, members of
management, with input, where appropriate, from members of the audit committee,
have concluded that our disclosure controls and procedures were effective as of
November 1, 2008 in providing reasonable assurance that material information
requiring disclosure was brought to management’s attention on a timely basis and
that our financial reporting was reliable.





Change
in our Internal Control Over Financial Reporting





There
have been no changes during the quarter ended November 1, 2008 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.






- 27
-
 Table of Contents




PART II – OTHER INFORMATION




ITEM 1A.
            RISK
      FACTORS





Our
estimates and measurement of pension obligations, net periodic benefit cost and
minimum funding requirements for defined benefit plans are subject to market
volatility that can result in significant variances between estimated and actual
results.





The
determination of our single employer noncontributory defined benefit pension
plans’ pension obligation and net periodic benefit cost is dependent, in part,
on Management’s selection of certain assumptions used by our actuaries in
calculating these amounts on an annual basis.  These assumptions
include the weighted average discount rate at which obligations can effectively
be settled, the expected long-term rate of return on assets and certain employee
related factors, such as, retirement age and mortality.





We
believe that our current assumptions used to estimate plan obligations and
annual expense are appropriate; however, as current economic conditions have
been, and continue to be volatile, with the recent month reaching unprecedented
levels, differences between actual results and expected results based on certain
of our previous assumptions could lead to changes that materially affect our
pension obligations in the Consolidated Balance Sheets and our future expense in
the Consolidated Statement of Operations.  Actual results that differ
from our Company’s assumptions are accumulated and amortized over future periods
into the Consolidated Statement of Operations.  Also, the amount of
contributions made to our single employer noncontributory benefit plans will be
affected by the performance of investments made by the plans, the extent to
which trustees of the plans reduce the costs of future service benefits, minimum
funding requirements required by ERISA and the Pension Protection Act of
2006.




ITEM 2.
            LEGAL
      PROCEEDINGS





As
previously reported, The United States Attorney for the Northern District of New
York (the “USAO”) and the SEC had been conducting investigations relating to the
Company’s promotional allowance practices and policies.  Such
investigations began prior to the Company’s emergence from bankruptcy in April
2005.  The Company was cooperating with these investigations and had
produced documents and made Company employees available for interviews as
requested.





On
September 30, 2008, the Company reached a settlement with the SEC with respect
to the Commission’s investigation into the Company’s accounting practices and
policies during a time period from fiscal year 2000 through fiscal year 2003,
prior to the Company's emergence from bankruptcy in April
2005.  Without admitting or denying the allegations in the
Commission’s complaint, the Company agreed to settle the charges by consenting
to a permanent injunction against any future violations of the federal
securities laws.  The SEC imposed no fines or monetary penalties on
the Company.  As part of the settlement, the Company has hired an
independent examiner who will provide annual reports to the SEC, the USAO and
the Company’s board on, among other things, the Company’s promotional-allowance
internal controls and financial reporting.  The examiner will serve
for three years.  Other settlement terms included the Company’s
consent to reform its internal controls and policies and procedures related to
promotional allowances, as well as implementation of a telephone hotline for
associates and vendors to anonymously notify the company of misconduct related
to promotional allowances.





On
October 28, 2008, the Company entered into a non-prosecution agreement with the
USAO.  Under the agreement, the USAO has agreed not to prosecute the
Company for any crimes committed by its employees between 2001 and 2004 relating
to the matters that were the subject of the USAO’s investigation of, among other
things, the Company’s accounting policies, practices and related
conduct.  The USAO’s obligations under the Agreement are subject to a
number of conditions, including the Company’s:





·
            acceptance
      of responsibility for the conduct of its employees between 2001 and
      2004;





·
            adoption
      of the remedial measures required under, and compliance with the terms of,
      the previously announced settlement of the Securities and Exchange
      Commission’s investigation of the Company, including its compliance with
      specified federal securities laws;
and





·
            provision
      of full cooperation to the USAO and Federal Bureau of Investigation with
      respect to their ongoing investigations through the conclusion of any and
      all related criminal trials.






- 28
-
 Table of Contents





If the
USAO determines that the Company has deliberately given false, incomplete or
misleading information under the agreement, or if the Company commits a crime or
otherwise knowingly, intentionally and materially violates any provision of the
agreement, then the Company may be subject to prosecution for any federal
criminal violation of which the USAO has knowledge, including any federal
criminal violation relating to the matters subject to the USAO’s investigation.
The Company agreed that any such prosecutions that are not time-barred by the
applicable statue of limitations on the date of the agreement may be commenced
against the Company notwithstanding the expiration of the statute of limitations
after the date of the agreement.




ITEM 6.
            EXHIBITS





The
following are filed as Exhibits to this Report:




Exhibit
      No.
              Description10.1
              Amended
      and Restated Penn Traffic Company Supply Agreement, dated September 10,
      2008, between The Penn Traffic Company and C&S Wholesale Grocers,
      Inc.





10.2
            Fifth
      Amendment, Acknowledgment and Consent to Credit Agreement, dated as of
      October 10, 2008, by and among The Penn Traffic Company, various of its
      subsidiaries, General Electric Capital Corporation as agent and lender,
      and the other lenders party
thereto.





10.3
            Acknowledgment
      and Consent, dated as of October 10, 2008, by and among The Penn Traffic
      Company, various of its subsidiaries and Kimco Capital
    Corp.





10.4
              Non-Prosecution
      Agreement, dated October 28, 2008, between The Penn Traffic Company and
      the U.S. Attorney’s Office for the Northern District of New
      York.31.1
              Certification
      of CEO pursuant to Rule 13a-14(a) under the Securities Exchange Act of
      1934, as amended.31.2
              Certification
      of CFO pursuant to Rule 13a-14(a) under the Securities Exchange Act of
      1934, as amended.32.1
              Certification
      of CEO pursuant to Rule 13a-14(b) under the Securities Exchange Act of
      1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United
      States Code.32.2
              Certification
      of CFO pursuant to Rule 13a-14(b) under the Securities Exchange Act of
      1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United
      States Code.99.1
              Press
      Release, dated December 11, 2008.







- 29
-
 Table of Contents




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.





THE
PENN TRAFFIC COMPANY






By: 
/s/  Gregory J. Young


Name:  
Gregory J. Young


Title:    
Chief Executive Officer and President






By: 
/s/  Tod A. Nestor


Name:  
Tod A. Nestor


Title:    
Senior Vice President and Chief Financial Officer