SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x                              QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 28, 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 0-9904

(Exact name of registrant as specified in its charter)

Former name, former address and former fiscal year, if changed since last report.

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 ¨

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.:

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

The number of shares outstanding of the registrant’s class of common stock as of August 1, 2008 was:

3,161,098 shares of Class A Common Stock

PART I.  FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ARDEN GROUP, INC. AND CONSOLIDATED SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

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

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ARDEN GROUP, INC. AND CONSOLIDATED SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

(UNAUDITED)

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

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ARDEN GROUP, INC. AND CONSOLIDATED SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

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

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

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ARDEN GROUP, INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1.       Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The condensed consolidated financial statements of Arden Group, Inc. (Company) include the accounts of the Company and its direct and indirect subsidiaries.  All intercompany accounts and transactions are eliminated in consolidation.  The Company operates 18 full-service supermarkets in Southern California carrying both perishable and other grocery products.

The accompanying condensed consolidated financial statements for the thirteen and twenty-six weeks ended June 28, 2008 and June 30, 2007 have been prepared in accordance with the instructions to Form 10-Q, Article 10 of Regulation S-X and generally accepted accounting principles in the United States (GAAP) for interim financial information.  These financial statements have not been audited by an independent registered public accounting firm but include all adjustments which, in the opinion of management of the Company, are necessary for a fair statement of the financial position and the results of operations for the periods presented.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to Securities and Exchange Commission (SEC) regulations.  Accordingly, the accompanying condensed consolidated financial statements should be read in conjunction with the Company’s fiscal 2007 Annual Report on Form 10-K.  The results of operations for the six month period ended June 28, 2008 are not necessarily indicative of the results to be expected for the full year ending January 3, 2009.

Revenue Recognition

The Company recognizes revenue at the time of sale.  Revenue is recorded net of sales tax.   Discounts given to customers are recorded at the point of sale as a reduction of revenues.  The Company maintains a bad debt allowance for receivables from vendors and Gelson’s Markets (Gelson’s) credit card users.  Valuation reserves are adjusted periodically based on historical recovery rates.  The Company records income from licensing arrangements, subleases, leases and finance charges as they are earned.  Income from all licensing arrangements, rental income and finance charges represents less than 1% of sales for all periods presented and, therefore, is not disclosed separately on the Condensed Consolidated Statements of Operations and Comprehensive Income.

Cost of Sales

Cost of sales includes product costs, net of discounts and allowances, and inbound freight charges, as well as warehouse, transportation, purchasing, advertising and occupancy costs.  Warehouse and transportation costs include receiving costs, internal transfer costs, labor, building rent, utilities, depreciation, repairs and maintenance and fuel for the Company’s distribution center and distribution system.  Purchasing costs include both labor and administrative expense associated with the purchase of the Company’s products.  Advertising costs, net of vendor reimbursements, are expensed as incurred and include the cost of the Gelson’s newsletter, newspaper ads and other print advertising. 

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Occupancy costs consist of rent, common area charges (where applicable), depreciation and utilities related to Gelson’s operations. The following table summarizes warehouse, transportation, purchasing, advertising and occupancy costs for the thirteen and twenty-six weeks ended June 28, 2008 and June 30, 2007.

Fair Value Measurements

On the first day of fiscal 2008, the Company adopted Statement of Financial Accounting Standards No. (SFAS) 157, “Fair Value Measurements.”  SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosure about fair value measurements.  SFAS 157 defines fair value as the amount that would be received upon sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  SFAS 157 also establishes a fair value hierarchy which prioritizes the types of inputs to valuation techniques that companies may use to measure fair value.  The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1).  The next highest priority is given to inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly (Level 2).  The lowest priority is given to unobservable inputs in which there is little or no market data available and which require the reporting entity to develop its own assumptions (Level 3).  The fair value of the Company’s financial assets and liabilities measured on a recurring basis includes investments which appear under Assets on the Condensed Consolidated Balance Sheets.  The following table sets forth the fair value of investments as of June 28, 2008 including the input level used to determine fair value at the measurement date.

Vendor Allowances

The Company receives a variety of allowances from its vendors whose products are sold in Gelson’s stores.  Typically, the vendors are paying the Company to promote their products.  The promotion may be a temporary price reduction, a feature in a print advertisement or newsletter, or placement of the vendor’s product in a preferred location in a store. The promotions are typically two to three weeks long and are recognized when the commitment has been fulfilled.  Vendor allowances are recorded as a reduction of cost of sales.

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Occasionally, the Company receives rebate allowances in the form of upfront lump-sum payments from vendors.  Under the terms of these long-term agreements (which typically extend for several months or years), the Company earns the rebates as it purchases product from the vendor.  The upfront payments are recorded as a liability when they are received and are recorded as a reduction of inventory cost as the product is purchased.  In the event the Company does not purchase the minimum amount of product specified in the agreement, the upfront payments must be returned on a pro rata basis to the vendor.  If the contract does not specify that the rebate is earned as product is purchased, then the upfront payments are recorded as a liability when received and recognized as a reduction of cost of sales on a pro rata basis as the product is sold.

2.       Multi-Employer Pension and Health Care Plans

The Company contributes to several multi-employer union pension and health care plans, administered by various trustees, in accordance with the provisions of various labor contracts.  Pension and health care costs are generally based on the number of straight-time hours worked and the contribution rate per hour as stipulated in the Company’s various collective bargaining agreements.  In July 2007, grocery retailers in the Southern California area negotiated a significant reduction in the average hourly contribution rates for health care with the United Food & Commercial Workers International Union (UFCW) effective March 2007.  The majority of the Company’s employees are members of the UFCW.  Union pension and health care plan expense totaled approximately $3,601,000 and $5,232,000 in the second quarter of 2008 and 2007, respectively.  Contributions were approximately $7,131,000 for the first half of 2008 compared to $10,495,000 in the same period of the prior year.

The Arden Group, Inc. 401(k) Retirement Savings Plan (Plan) covers all nonunion employees of the Company and its subsidiaries who have attained the age of 18 and have completed the applicable service requirement.  The Plan provides that, with certain limitations, an employee with at least one month of service may elect to contribute up to 100% of such employee’s annual compensation to the Plan up to a maximum of $15,500 in 2008 on a tax-deferred basis, in addition to catch up contributions up to a maximum of $5,000 for employees over the age of 50.  Employees are eligible to participate in the Company’s discretionary contributions beginning on January 1 or July 1 following the completion of one year of service.  The Company accrued approximately $237,000 and $234,000 towards this benefit for the second quarter of 2008 and 2007, respectively.  The Company accrued $515,000 and $481,000 during the first six months of 2008 and 2007, respectively.

3.       Stock Appreciation Rights

The Company has outstanding stock appreciation rights (SARs) that have been granted to non-employee directors and certain employees.  Each SAR entitles the holder to receive cash upon exercise equal to the excess of the fair market value of a share of the Company’s Class A Common Stock, as determined in accordance with the SARs agreement, on the date of exercise over the fair market value of such share on the date granted.  SARs granted prior to December 2007 vest 25% each year beginning at the end of the first year and expire five years from the date of grant.  SARs granted in December 2007 vest 25% each year beginning at the end of the third year and expire seven years from the date of grant.

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The fair value of each SAR is estimated on the date of grant and, subsequently, at the end of each reporting period using the Black-Scholes option-pricing model which relies on the use of various highly subjective assumptions. The assumptions used in the Black-Scholes option-pricing model for the second quarter ended June 28, 2008 were as follows:

Compensation expense must be recognized each reporting period for changes in fair value and vesting.  During the second quarter of 2008, the Company reversed $287,000 of compensation expense recognized in prior periods due to a reduction in the fair value of SARs during the period partially offset by additional vesting.  The Company recognized $433,000 of compensation expense during the same period of 2007 reflecting an increase in the fair value of SARs during the quarter and additional vesting.  On a year-to-date basis, the Company recognized a reversal of SARs compensation expense of $189,000 for the first half of 2008 compared to expense of $1,254,000 during the same period of 2007.  Compensation expense is recorded under selling, general and administrative (SG&A) expense on the Condensed Consolidated Statements of Operations and Comprehensive Income.  During the second quarter of 2008, 3,775 SAR units were exercised with an intrinsic value of $272,000.  Intrinsic value represents the amount by which the fair value of SARs on the date of exercise exceeds the base price.

4.       Income Taxes

The Company adopted Financial Accounting Standards Board Interpretation No. (FIN) 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109,” on the first day of its 2007 fiscal year.  As of June 28, 2008 and June 30, 2007, the Company had approximately $23,000 and $40,000 of unrecognized tax benefits, respectively, all of which would impact our effective tax rate if recognized.  The Company does not believe that the unrecognized tax benefit will change significantly within the year following the end of the second quarter of 2008.

The Company recognizes interest and penalties related to uncertain tax positions in interest expense and SG&A expense, respectively, in the Condensed Consolidated Statements of Operations and Comprehensive Income.  No interest or penalties were recognized during the first half of 2008 or 2007.  As of June 28, 2008 and June 30, 2007, the Company had approximately $84,000 and $87,000 accrued for interest, respectively, and no accrual for penalties at the end of either period.  The interest accrual is net of the applicable federal and state tax savings which would result if the interest were paid out.

The Company files income tax returns in the U.S. federal jurisdiction and the California state jurisdiction.  The Company is no longer subject to federal and state tax examinations for years before 2004 and 2003, respectively.

5.       Net Income Per Common Share

Basic net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period.  Diluted net income per common share is determined by dividing net income by the weighted average number of common and potential common shares outstanding during the period.  There were no potential common shares outstanding

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during the periods presented, and therefore, basic and diluted net income per common share are the same.

6.       Commitments and Contingent Liabilities

The Company and its subsidiaries are subject to a myriad of environmental laws, regulations and lease covenants with its landlords regarding air, water and land use, products for sale, and the use, storage and disposal of hazardous materials. The Company believes it substantially complies, and has in the past substantially complied, with federal, state and local environmental laws and regulations and private covenants.  The Company cannot, at this time, estimate the expense it ultimately may incur in connection with any current or future violations; however, it believes any such claims will not have a material effect upon either the Company’s consolidated financial position, results of operations or cash flows.

The Company and its subsidiaries are defendants in a number of cases currently in litigation, being vigorously defended, in which the complainants seek monetary damages.  As of the date hereof, no estimate of potential liability, if any, is possible. Based upon current information, management, after consultation with legal counsel defending the Company’s interests in the cases, believes the ultimate disposition thereof will have no material effect upon either the Company’s consolidated financial position, results of operations or cash flows.

7.       Recent Accounting Standards

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS 157, “Fair Value Measurements.”  SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements.  SFAS 157 does not require any new fair value measurements.  The adoption of SFAS 157 in the first quarter of 2008 did not have any impact on the Company’s consolidated financial statements.

In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115.”  SFAS 159 permits entities to make an irrevocable election to measure certain financial instruments and other assets and liabilities at fair value on an instrument-by-instrument basis.  Unrealized gains and losses on items for which the fair value option has been elected will be recognized in net earnings at each subsequent reporting date.  The adoption of SFAS 159 in the first quarter of 2008 did not result in a change to the Company’s accounting policy and, accordingly, did not have any effect on the Company’s consolidated financial statements.

8.       Subsequent Events

On July 18, 2008, the Company paid a regular quarterly cash dividend of $0.25 per share on Class A Common Stock totaling approximately $790,000 to stockholders of record on June 30, 2008.

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

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of the Company.  Certain statements contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in other parts of this report and in other Company filings are forward-looking statements.  These statements discuss, among other things, future sales growth, operating results and financial condition.  Forward-looking statements reflect

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the Company’s current plans and expectations regarding important risk factors and are based on information currently known to the Company.  The Company cautions readers that any forward-looking statements contained in this report or made by the management of the Company involve risks and uncertainties, and are subject to change based on various important factors.  In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors,” in the Company’s Annual Report on Form 10-K for the year ended December 29, 2007. The risks described in the Company’s Annual Report on Form 10-K are not the only risks it faces. Additional risks and uncertainties not currently known to the Company or that it currently deems to be not material could also have an adverse effect on the Company’s future sales growth, operating results or financial position.  The Company does not undertake any obligation to update forward-looking statements.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions about future events that may affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities.  Management has established accounting policies that they believe are appropriate in order to reflect the accurate reporting of the Company’s operating results, financial position and cash flows.  The Company applies these accounting policies in a consistent manner.  Management bases their estimates on historical experience, current and expected economic conditions and various other factors that management believes to be reasonable under the circumstances.  These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  The Company reevaluates these significant factors and makes adjustments where facts and circumstances dictate.  Future events and their effects cannot be determined with absolute certainty, and therefore actual results may differ from estimates.  As discussed in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2007, management considers its policies on accounting for inventories, impairment of long-lived assets, insurance reserves, cost of sales, vendor allowances and share-based compensation to be the most critical in the preparation of the Company’s financial statements because they involve the most difficult, subjective or complex judgments about the effect of matters that are inherently uncertain.

Arden Group, Inc. is a holding company which conducts operations through its first and second tier wholly-owned subsidiaries, Arden Mayfair, Inc. and Gelson’s Markets, respectively.  Gelson’s operates 18 full-service supermarkets in Southern California.  Gelson’s caters to the upscale customer who expects superior quality, service and merchandise selection.  In addition to the customary supermarket offerings, Gelson’s offers specialty items such as imported foods, unusual delicatessen items and organic and natural food products.  All Gelson’s stores include the typical service departments such as meat, seafood, delicatessen, floral, sushi, cheese and bakery.  In addition, some stores offer further services including fresh pizza, coffee bars, gelato bars and carving carts offering cooked meats.

The Company’s management focuses on a number of performance indicators in evaluating financial condition and results of operations.  Same store sales, gross profit and labor costs are some of the key factors that management considers.  Both sales and gross profit are significantly influenced by competition in our trade area.  Gelson’s already faces competition from regional and national supermarket chains (most of which have greater resources and a larger market share than Gelson’s), stores specializing in natural and organic foods, specialty and gourmet markets and grocery departments in mass merchandise and club stores.  Futhermore, if the merger trend among our competitors continues, this may also impact

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our ability to compete, as the newly formed larger competitors may possess stronger bargaining power with vendors and suppliers and have greater market recognition among consumers.  In addition, rising fuel and food prices have made it necessary for us to increase our sales prices, which in turn, may result in a loss of sales as some of our customers may elect to make some or all of their purchases from our competitors.  Finally, increasing labor costs and a slowing economy continue to negatively impact the Company’s profitability as well.

Labor and other related payroll costs are the second largest expense (after product cost) incurred by Gelson’s, and thus is a financial measure which is carefully monitored by management.  As of fiscal 2007 year end, Gelson’s had approximately 1,328 full-time and 1,001 part-time store, warehouse and office employees.  The majority of Gelson’s employees are members of the UFCW.  In February 2007, the Company completed negotiation of a new union contract with the UFCW to replace the contract which expired on March 5, 2007.  The new Gelson’s contract eliminated the two-tier wage configuration and returned it to a single wage structure and provided for, among other things, wage increases and modifications to the Company’s pension and health and welfare contribution rates.  The new contract expires March 5, 2010.

The Company contributes to a multi-employer health care and pension plan trust on behalf of its employees who are members of the UFCW.  All employers who participate in a multi-employer plan are required to contribute at the same hourly rate based on straight time hours worked in order to fund the plan.  Consequently, the benefit contribution rates that the Company negotiated with the UFCW effective March 2007 were subject to change retroactively based on the outcome of the union’s negotiations with the three major grocery retailers in our trade area which were completed in July 2007.  The employees of the three major grocery retailers voted to ratify their contract on July 22, 2007.  Their new agreement expires March 6, 2011, one year after Gelson’s contract with the UFCW expires.  If no extension agreement is reached and Gelson’s contract expires prior to the others’, it is possible that Gelson’s will be required to negotiate separately and may suffer a job action if an agreement cannot be reached.

The agreement reached with the UFCW and the three major grocery retailers resulted in a substantial reduction in the average hourly contribution rates for pension and health care.  The majority of the reduction relates to the health and welfare fund which, as of January 31, 2008, was overfunded in total, for all employers, by approximately $507,000,000.  The reduction in the health and welfare contribution rate is expected to reduce the overfunded status of the fund during the term of the new contract between the UFCW and the three major grocery retailers.  The change in contribution rates for both pension and health care were retroactive to the beginning of March 2007, however, the Company did not record the retroactive credit related to the period from March through June 2007 until the third quarter of 2007 when the agreement with the majors was reached.  The reduction in the contribution rates resulted in a substantial decrease in the Company’s SG&A expense when comparing periods covered by the current and the expired contracts.

The agreement that the majors reached with the UFCW also provides for hourly wage rates based on job classification and experience that, in some cases, are less than those agreed to by Gelson’s.  This could affect our ability to compete with grocery retailers whose hourly rates are less than our own.  Increases in wages provided under the new contract have, and will continue to, impact the Company’s profitability unless it is able to offset the increased expense through a combination of sales growth, increased gross margin, management of labor hours and cost savings in other areas.

Another component of labor related expense is the cost of workers’ compensation.  Effective July 1, 2006, the Company purchased a one-year fully insured guaranteed cost workers’ compensation insurance policy

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which eliminated the Company’s risk for claims occurring after June 30, 2006.  Since then, the Company has continued to renew the guaranteed cost policy annually.  For the policy year ended June 30, 2008, the Company negotiated a one time credit of approximately $760,000 which was amortized over the policy period.  Consequently, the Company will experience an increase in worker’s compensation costs beginning July 1, 2008.  For claims incurred prior to July 1, 2006, the Company is primarily self-insured through the use of a high deductible policy which provides the Company with stop-loss coverage to limit its exposure on a per claim basis and provides coverage for qualifying costs in excess of per claim limits.  The Company continues to maintain an accrual for claims covered under the high deductible program.  That accrual is based on both undeveloped reported claims and an estimate of claims incurred but not reported.  While the Company devotes substantial time and commitment to maintaining a safe work environment, the ultimate cost of workers’ compensation is highly dependent upon legal and legislative trends, the inflation rate of health care costs and the Company’s ability to manage claims.

In the past, the Company’s quarterly results have reflected significant fluctuations in operating income as a result of adjustments recorded to reflect the change in the fair value of SARs that have been granted to non-employee directors and certain employees.  Each SAR entitles the holder to receive cash upon exercise equal to the excess of the fair market value of a share of the Company’s Class A Common Stock, as determined in accordance with the SARs agreement, on the date of exercise over the fair market value of such share on the date granted.  Fluctuations in the market price of the Company’s Class A Common Stock from the end of the previous fiscal quarter impact the recognition or reversal of SARs compensation expense in the quarter being reported upon.  Since the Company cannot predict future fluctuations in the market price of its stock, it also cannot forecast future SARs compensation expense adjustments and the extent to which operating income will be impacted.

Second Quarter Analysis

Net income in the second quarter of 2008 increased 1.7% to $6,614,000 compared to $6,501,000 during the second quarter of 2007.  Operating income increased 4.0% to $10,592,000 in the second quarter of 2008 compared to $10,188,000 in the same period of 2007.

Same store sales from the Company’s 18 supermarkets (all of which are located in Southern California), including revenue from licensing arrangements, subleases, leases and finance charges, were $116,616,000 during the second quarter of 2008.  This represents a decrease of 2.7% from the second quarter of 2007, when sales were $119,823,000.  Sales during 2008 were negatively impacted by increased competition in our trade area, a slowing economy and rising fuel and food prices which may have caused some of our customers to make some or all of their purchases from our competitors.

The Company’s gross profit as a percent of sales was 38.5% in the second quarter of 2008 compared to 38.8% in the same period of 2007. The decrease in gross profit as a percent of sales to some extent reflects the Company’s absorbing some cost increases rather than passing them on to its customers.  In calculating gross profit, the Company deducts product costs, net of discounts and allowances, and inbound freight charges, as well as warehouse, transportation, purchasing, advertising and occupancy costs.  Gross profit as a percent of sales for the Company may not be comparable to those of other companies in the grocery industry since there may be differences in recording certain costs as cost of sales or as SG&A expense.

SG&A expense as a percent of sales was 29.4% in the second quarter of 2008 compared to 30.3% in the same period of the prior year.  The Company’s provision for all union pension and health care plans

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decreased 31.2% to $3,601,000 in the second quarter of 2008 compared to $5,232,000 in the second quarter of 2007.  Union pension and health care expense for the second quarter of 2007 would have been $1,709,000 lower or a total of $3,523,000 had the retroactive credit discussed above been reflected in the first half of 2007 rather than the third quarter of 2007 when the agreement was reached.  The increase in expense from $3,523,000 during the second quarter of 2007 compared to $3,601,000 in the second quarter of 2008 resulted from an increase in the health care contribution rate effective March 2008 partially offset by a slight decrease in the hours eligible for contribution.  Lower SARs compensation expense in the second quarter of 2008 compared to the same period of the prior year also contributed to the decrease in SG&A expense as a percent of sales.  During the second quarter of 2008, the Company reversed $287,000 of SARs compensation expense recognized in prior periods.  During the same period of 2007, the Company recorded SARs compensation expense of $433,000.  Workers’ compensation expense also decreased 7.0% to $966,000 during the second quarter of 2008 compared to $1,038,000 in the second quarter of 2007 due to the one-time credit discussed above and a decrease in the premium partially offset by an adjustment to increase the reserves related to losses prior to July 1, 2006.  The decrease in SG&A expense as a percent of sales was partially offset by an increase in UFCW hourly wage rates effective early March 2008 in accordance with the current collective bargaining agreement.  To a lesser extent, SG&A expense was also impacted by hourly wage rate increases under collective bargaining agreements with unions other than the UFCW.

SARs compensation expense must be recognized each reporting period for changes in fair value and vesting.  During the second quarter of 2008, the Company reversed $287,000 of SARs compensation expense recognized in prior periods due to a decrease in the fair value of SARs during the quarter partially offset by additional vesting.  During the second quarter of 2007, the Company recognized $433,000 of SARs compensation expense due to an increase in the fair value of SARs during the quarter and the additional vesting of SARs.  As of June 28, 2008, assuming no change in the SARs fair value, there was approximately $2,256,000 of total unrecognized compensation cost related to SARs which is expected to be recognized over a weighted average period of approximately 4.4 years.  As of June 28, 2008, there were 138,550 SARs units outstanding.

Interest and dividend income was $704,000 in the second quarter of 2008 compared to $809,000 for the same period in 2007 due to lower interest rates in 2008 partially offset by increased cash levels.

SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities,” requires that unrealized holding gains and losses from available-for-sale securities be included as a component of stockholders’ equity.  Unrealized losses on available-for-sale securities were $145,000 (net of income tax benefit of $99,000) in the second quarter of 2008 compared to unrealized losses of $101,000 (net of income tax benefit of $70,000) in the second quarter of 2007.  As of June 28, 2008, net unrealized losses totaled $186,000 compared to $327,000 as of June 30, 2007.  Management does not believe any of these losses are other-than-temporary.

Year-To-Date Analysis

Net income in the first six months of 2008 increased 1.4% to $13,143,000 compared to $12,967,000 during the first six months of 2007.  Operating income increased 6.1% to $21,013,000 for the first six months of 2008 compared to $19,814,000 in the same period of the prior year.

Same store sales from the Company’s 18 supermarkets (all of which are located in Southern California), including revenue from licensing arrangements, subleases, leases and finance charges, were $235,432,000 during the first half of 2008.  This represents a decrease of 2.0% from the same period of the prior year,

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when sales were $240,253,000.  Sales were negatively impacted by increased competition in our trade area, a slowing economy and rising fuel and food prices which may have caused some of our customers to make some or all of their purchases from our competitors.

The Company’s gross profit as a percent of sales was 38.4% in the first six months of 2008 compared to 39.0% in the same period of 2007.  The decrease in gross profit as a percent of sales to some extent reflects the Company’s absorbing some cost increases rather than passing them on to its customers.  In calculating gross profit, the Company deducts product costs, net of discounts and allowances, and inbound freight charges, as well as warehouse, transportation, purchasing, advertising and occupancy costs.  Gross profit as a percent of sales for the Company may not be comparable to those of other companies in the grocery industry since there may be differences in recording certain costs as cost of sales or as SG&A expense.

SG&A expense as a percent of sales was 29.5% in the first six months of 2008 compared to 30.8% in the same period of 2007.  The Company’s provision for all union pension and health care plans decreased 32.1% to $7,131,000 in the first six months of 2008 compared to $10,495,000 in the first six months of 2007.  Union pension and health care expense for the first half of 2007 would have been $2,374,000 lower or a total of $8,121,000 had the retroactive credit discussed above been reflected in the first half of 2007 rather than the third quarter of 2007 when the agreement was reached.  The remaining decrease in expense from $8,121,000 during the first half of 2007 compared to $7,131,000 during the same period of 2008 resulted from a decrease in the pension and health care contribution rates effective March 2007 as discussed above and a slight decrease in the hours eligible for contribution.  SARs compensation expense also decreased significantly during the first six months of 2008 compared to the same period of the prior year.  During the first half of 2008, the Company reversed $189,000 of SARs compensation expense recognized in prior periods; however, during the same period of 2007, the Company recorded SARs compensation expense of $1,254,000.  Finally, workers’ compensation expense decreased 27.9% to $1,538,000 in the first six months of 2008 compared to $2,133,000 in the first six months of 2007 due to the one-time credit discussed above and a decrease in the premium partially offset by an adjustment to increase the reserves related to losses prior to July 1, 2006.  The decrease in SG&A expense as a percent of sales was partially offset by an increase in UFCW hourly wage rates effective early March 2007 and 2008 in accordance with the current collective bargaining agreement.  To a lesser extent, SG&A expense was also impacted by hourly wage rate increases under collective bargaining agreements with unions other than the UFCW.

The Company records adjustments to SARs compensation expense each reporting period to reflect changes in fair value and vesting.  During the first six months of 2008, the Company reversed $189,000 of SARs compensation expense recognized in prior periods due to a decrease in the fair value of SARs since the end of fiscal 2007 partially offset by additional vesting of SARs.  During the first six months of 2007, the Company recognized $1,254,000 of SARs compensation expense due to an increase in the fair value of SARs since the end of fiscal 2006 and the additional vesting of SARs.  As of June 28, 2008, assuming no change in the SARs fair value, there was approximately $2,256,000 of total unrecognized compensation cost related to SARs which is expected to be recognized over a weighted average period of approximately 4.4 years.  As of June 28, 2008, there were 138,550 SARs units outstanding.

Interest and dividend income was $1,323,000 in the first six months of 2008 compared to $1,414,000 for the same period in 2007 due to lower interest rates in 2008 partially offset by increased cash levels.

SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities,” requires that unrealized holding gains and losses from available-for-sale securities be included as a component of stockholders’

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equity.  Unrealized losses on available-for-sale securities were $7,000 (net of income tax benefit of $4,000) in the first six months of 2008 compared to unrealized gains of $5,000 (net of income tax expense of $4,000) in the same period of 2007.

CAPITAL EXPENDITURES/LIQUIDITY

The Company’s current cash position, including investments and net cash provided by operating activities, are the primary sources of funds available to meet the Company’s capital expenditure and liquidity requirements.  The Company’s cash position, including investments, at the end of the second quarter 2008 was $89,378,000.  During the twenty-six weeks ended June 28, 2008, the Company generated approximately $15,604,000 of cash from operating activities compared to $18,938,000 in the same period of 2007.  The decrease in net cash provided by operating activities is primarily due to an acceleration in income tax payments in 2008 due to a change in federal tax law.  The change affects the timing of income tax payments, but will not have an impact on the Company’s overall effective income tax rate.

Cash not required for the immediate needs of the Company is temporarily invested in commercial paper and marketable securities.  Currently, all temporary investments are highly liquid.  The Company is continually investigating opportunities for the use of these funds including new locations and the expansion and remodel of existing stores.   The Company estimates that the remodel of its store on Franklin Boulevard in Hollywood, California will be completed in the fall of 2008.

The Company also has two revolving lines of credit totaling $23,000,000 available for standby letters of credit, funding operations and expansion.  There were no outstanding borrowings against either of the revolving lines as of June 28, 2008.  The Company currently maintains four standby letters of credit aggregating $9,569,000 pursuant to the Company’s lease requirements and general and auto liability and workers’ compensation self-insurance programs.  The standby letters of credit reduce the available borrowings under its revolving lines.

The following table sets forth the Company’s contractual cash obligations and commercial commitments as of June 28, 2008:

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(1)         Other Contractual Obligations

The Company had the following other contractual cash obligations at June 28, 2008.  The Company is unable to include these liabilities in the tabular disclosure of contractual cash obligations as the exact timing and amount of payments are unknown.

The Company is primarily self-insured for losses related to general and auto liability claims and for all open years prior to July 1, 2006 for workers’ compensation.  The Company maintains stop-loss coverage to limit its loss exposure on a per claim basis. Liabilities associated with the risks that are retained by the Company are estimated, in part, by considering historical claims experience and regression analysis. Accruals are based on reported claims and an estimate of claims incurred but not reported.  While the ultimate amount of claims incurred is dependent on future developments, in management’s opinion recorded reserves are adequate to cover the future payment of claims.  The Company’s workers’ compensation and liability insurance reserves for reported claims and an estimate of claims incurred but not reported at June 28, 2008 totaled approximately $6,021,000.  For workers’ compensation claims incurred after June 30, 2006, the Company is fully insured under guaranteed cost insurance policies.

The Company has an employment agreement with a key executive officer that provides for annual retirement compensation equal to 25% of his average base salary and bonus earned in the last three full fiscal years prior to the cessation of his employment plus certain other benefits. The Company had accrued $2,106,000 under the terms of the employment agreement as of June 28, 2008.

As of June 28, 2008, management had authorized expenditures on incomplete projects for the purchase of property, plant and equipment which totaled approximately $1,785,000.  The Company has an ongoing program to remodel existing supermarkets and to add new stores.  During the first half of 2008, capital expenditures were $3,408,000.

(2)   Standby Letters of Credit

The Company’s letters of credit renew automatically each year unless the issuer notifies the Company otherwise.  The amount of each letter of credit held pursuant to the Company’s workers’ compensation and general and auto liability insurance programs will be adjusted annually based upon the outstanding claim reserves as of the renewal date.  Each letter of credit obligation supporting insurance claims will cease when all claims for the particular policy year are closed or the Company negotiates a release.

On July 18, 2008, the Company paid a regular quarterly cash dividend of $0.25 per share of Class A Common Stock totaling approximately $790,000 to stockholders of record on June 30, 2008.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company currently has no bank debt or fixture financing.  If the Company should obtain financing or draw on its existing lines of credit, which bear interest at the bank’s reference rate or the bank’s adjusted London Interbank Offer Rate (LIBOR) plus an index up to 1.2%, the Company could then be exposed to market risk related to interest fluctuations.

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A change in market prices exposes the Company to market risk related to its investments.  As of June 28, 2008, all investments were classified as available-for-sale securities and totaled $44,573,000.  A hypothetical 10% drop in the market value of these investments would result in a $4,457,000 unrealized loss and a corresponding decrease in the fair value of these instruments.  This hypothetical drop would not affect cash flow and would not have an impact on earnings until the Company sold the investments.

ITEM 4.  CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its reports filed pursuant to Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer or the person temporarily performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Management, with the participation of the Chief Executive Officer and the person temporarily performing the functions of the Chief Financial Officer of the Company, has performed an evaluation of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the person temporarily performing the functions of the Chief Financial Officer of the Company concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.

Management, with the participation of the Chief Executive Officer and the person temporarily performing the functions of the Chief Financial Officer of the Company, has evaluated any changes in the Company’s internal control over financial reporting that occurred during the most recent fiscal quarter. Based on that evaluation, management, the Chief Executive Officer and the person temporarily performing the functions of the Chief Financial Officer of the Company have concluded that there has been no change in the Company’s internal control over financial reporting during the Company’s fiscal quarter ended June 28, 2008 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II.  OTHER INFORMATION

ITEM 1A.  RISK FACTORS

There have been no material changes in our risk factors from those disclosed in our 2007 Annual Report on Form 10-K.

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

(a)           The Annual Meeting of Stockholders was held on June 10, 2008.

(b)           Proxies for the meeting were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934.  There was no solicitation in opposition to management’s nominees for directors as listed in the Proxy Statement.  Two nominees were elected by Class A stockholders at the Annual Meeting as follows:

Continuing directors whose terms of office do not expire until 2009 or 2010 are:

Bernard Briskin

John G. Danhakl

Kenneth A. Goldman

Steven Romick

There were 80,697 broker non-votes.

(c)           The selection of Moss Adams LLP, an independent registered public accounting firm, to audit the financial statements of the Company and its consolidated subsidiaries for the 2008 fiscal year was approved by the following votes:

There were 80,697 broker non-votes.

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ITEM 6.  EXHIBITS

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.

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