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 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 30, 2006. 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.

Critical Accounting Policies

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 30, 2006, management considers its policies on accounting for inventories, impairment of long-lived assets, insurance reserves, revenue recognition, 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. In addition, the Company also considers the application of FIN 48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109," which the Company adopted on the first day of its 2007 fiscal year, to involve critical accounting policies. As discussed above, FIN 48 requires the Company to evaluate the probability that a position taken or expected to be taken on a tax return will be sustained upon examination and to measure the expected benefit to ultimately be realized.

Results of Operations

In February 2007, the Company completed negotiation of a new union contract with the United Food & Commercial Workers International Union (UFCW) to replace the contract which expired on March 5, 2007. The new contract eliminates the two-tier wage structure and provides for, among other things, wage increases and modifications to the pension and health and welfare plans. The Company's employees who are members of the UFCW voted to ratify the new contract in a vote held on February 21 and 23, 2007. The new contract expires March 5, 2010.

The Company contributes to multi-employer health care and pension plans for the UFCW, and therefore, the rates paid by all employers participating in the trust funds must be equal. The UFCW has not yet reached an agreement with the three major participating supermarket chains in the Company's trade area. Consequently, the benefit contribution rates that the Company negotiated with the UFCW may change based on the outcome of the union's negotiations with the three major grocery retailers and no change in contribution rates will take effect until these negotiations are completed. Any such change would be effective retroactive to March 6, 2007.

If the UFCW reaches a wage agreement with the other participating employers in our trade area under terms that are more favorable to the employers than those agreed to by Gelson's, this could affect our ability to compete with grocery retailers whose labor costs are less than our own. In addition, if the three major grocery retailers in our trade area agree to the wage rates that Gelson's has negotiated under its new contract with the UFCW, then Gelson's has agreed to further increase its hourly wage rate for experienced level employees by an additional $.05 per hour in the second and third years of the new contract. The elimination of the two-tier wage structure and increases in wage and benefit costs provided under the new contract could negatively impact the Company's profitability unless it is able to offset the increased costs through a combination of sales growth, increased prices, management of labor hours and cost savings in other areas.

First Quarter Analysis

Net income in the first quarter of 2007 increased 23.8% to $6,466,000 compared to $5,223,000 during the first quarter of 2006. Operating income increased 14.2% to $9,626,000 in the first quarter of 2007 compared to $8,426,000 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 and were open in both periods presented) were $120,430,000 in the first quarter of 2007 representing an increase of 2.0% compared to sales of $118,053,000 in the first quarter of 2006. The first quarter of 2007 included Passover sales which occurred in the second quarter of 2006 contributing somewhat to the year over year sales increase. The Company does not believe that inflation contributed significantly to the increase in sales.

The Company's gross profit as a percent of sales was 39.2% in the first quarter of 2007 compared to 38.7% in the same period of 2006. The Company includes product costs, net of discounts and allowances, and inbound freight charges, as well as warehouse, transportation, purchasing, advertising and occupancy costs in cost of sales, thereby reducing gross profit by these amounts. As discussed under Note 1 of Notes to Condensed Consolidated Financial Statements, the gross profit percentage for 2006 has been revised to reflect the reclassification of certain costs previously recorded under SG&A expense to cost of sales. 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 31.2% in the first quarter of 2007 compared to 31.6% in the same period of the prior year. The Company experienced a decrease in labor and other related payroll expense as a percent of sales during the first quarter of 2007 compared to the same period of the prior year primarily due to increased sales dollars which did not require a similar increase in labor hours. The new contract with the UFCW which was effective on March 5, 2007, as discussed above, only impacted the last four weeks of the quarter ended March 31, 2007. The Company may experience an increase in labor costs during the remainder of fiscal 2007 as a result of the new contract.

In addition, SG&A expense decreased due to a reduction in workers' compensation expense in the first quarter of 2007 compared to the same period of the prior year. During the first half of 2006, the Company was 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. Effective July 2006, the Company purchased a one-year fully insured guaranteed cost workers' compensation insurance policy at a favorable rate to replace the high deductible program for losses occurring after June 30, 2006. The guaranteed cost program limits the Company's maximum exposure. Workers' compensation expense in the first quarter of 2007 compared to the same period of the prior year is lower as the policy premium under the new guaranteed cost program is less than what was accrued in the prior year under the Company's former high deductible program. The Company continues to maintain an accrual for claims incurred prior to July 2006 under the former program which is based on both 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.

The overall decrease in SG&A expense was partially offset by higher SARs expense in the first quarter of 2007 compared to the prior year. The Company has outstanding SARs that have been granted to non-employee directors and certain employees. During the first quarter of 2007, the Company recognized $821,000 of SARs compensation expense due to an increase in the fair value of SARs since the end of the previous quarter and the additional vesting of SARs. During the first quarter of 2006, the Company recognized $588,000 of SARs compensation expense of which $288,000 resulted from the adoption of SFAS 123(R) as discussed in Note 3 of Notes to Condensed Consolidated Financial Statements. As of March 31, 2007, assuming no change in the SARs fair value, there was approximately $839,000 of total

unrecognized compensation cost related to unvested SARs which is expected to be recognized over a weighted average period of 1.1 years.

The Company contributes to several multi-employer union pension and health care plans. Pension and health care costs are determined based on total straight-time hours worked and the contribution rate per hour as stipulated in the Company's various collective bargaining agreements. The Company's provision for all union pension and health care plans decreased 7.6% to $5,262,000 in the first quarter of 2007 compared to $5,695,000 in the first quarter of 2006 due to a reduction in the average hourly health and welfare contribution rate and the number of hours eligible for pension and health care contributions.

Interest and dividend income was $605,000 in the first quarter of 2007 compared to $422,000 for the same period in 2006 due to increased cash levels and higher interest rates in 2007.

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 gains on available-for-sale securities were $106,000 (net of income tax expense of $74,000) in the first quarter of 2007 compared to unrealized gains of $6,000 (net of income tax expense of $5,000) in the first quarter of 2006. As of March 31, 2007, net unrealized losses totaled $226,000 compared to $332,000 as of December 30, 2006. Management does not believe any of these losses are other-than-temporary.

During the first quarter of 2006, the Company purchased 149,573 shares of Class A Common Stock in unsolicited private transactions with unrelated parties for an aggregate purchase price of approximately $12,481,000. As a result of these purchases and a purchase in December 2006 of 68,331 shares for approximately $7,518,000, the weighted average shares outstanding of Class A Common Stock used in computing net income per common share was 3,161,098 during the first quarter of 2007 compared to 3,280,436 during the first quarter of 2006 which had the effect of increasing net income per common share on a comparative basis.

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 first quarter 2007 was $64,370,000. During the thirteen weeks ended March 31, 2007, the Company generated approximately $10,285,000 of cash from operating activities compared to $7,033,000 in the same period of 2006.

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 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 March 31, 2007. The Company currently maintains five standby letters of credit aggregating $12,469,000 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 March 31, 2007:

                                       Contractual Cash Obligations (In Thousands)
                                            Less Than                                 After
                               Total         1 Year       1-3 Years     4-5 Years    5 Years
7% Subordinated Income
Debentures Due September
2014 Including Interest     $     1,873    $        86   $       172   $       172   $  1,443
Capital Lease Obligations
Including Interest                  173            173             0             0          0
Operating Leases                142,966          9,868        19,022        18,189     95,887
Total Contractual Cash
Obligations (1)             $   145,012    $    10,127   $    19,194   $    18,361   $ 97,330




                                                            Other Commercial Commitments (In Thousands)
                                                                Less Than                                       After
                                                Total             1 Year         1-3 Years      4-5 Years      5 Years
Standby Letters of Credit (2)               $       12,469    $       12,469    $         0    $         0    $        0

The Company had the following other contractual cash obligations at March 31, 2007. 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.

Self-Insurance Reserves

The Company is primarily self-insured for losses related to general and auto liability claims, in addition to workers' compensation claims which occurred prior to July 2006. 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 March 31, 2007 totaled approximately $7,828,000. For claims incurred after June 30, 2006, the Company is fully insured for workers' compensation purposes under a guaranteed cost insurance policy.

Employment Agreement

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 fiscal years prior to his retirement. The Company had accrued $2,171,000 under the terms of the employment agreement as of March 31, 2007.

Property, Plant and Equipment Purchases

As of March 31, 2007, management had authorized expenditures on incomplete projects for the purchase of property, plant and equipment which totaled approximately $1,305,000. The Company has an ongoing program to remodel existing supermarkets and to add new stores. During the first quarter of 2007, capital expenditures were $755,000.

(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 will cease when all claims for the particular policy year are closed or the Company negotiates a release.

In March 2007, the Company announced a stock repurchase program, authorized by the Board of Directors, to purchase from time to time up to 200,000 shares of its Class A Common Stock in the open market or in private transactions. This was in addition to the 22,904 shares remaining under prior repurchase authorizations. The timing, volume and price of purchases are at the discretion of the management of the Company. During fiscal 2006, the Company purchased and retired 217,904 shares of Class A Common Stock for an aggregate purchase price of approximately $19,999,000 in private transactions with unrelated parties.

On April 20, 2007, 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 March 30, 2007.