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, other parts of this report and other Company filings are forward-looking statements. These statements discuss, among other things, future sales, 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 available to us. 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. Such statements may be identified by such words as "anticipate," "expect," "may," "believe," "could," "estimate," "project," and similar words or phrases. The Company does not undertake any obligation to update forward-looking statements.

Overview

Arden is a holding company which conducts operations through its first and second tier wholly-owned subsidiaries, Arden-Mayfair and Gelson's, 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, hot 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 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. The recent downturn in economic conditions has led to even greater competition in the grocery industry. As discretionary income declines, some consumers are reducing their spending and making more value conscious decisions. We are forced to compete for fewer customer dollars and keep our retail prices low as our competitors also reduce their prices in an attempt to maintain or increase their own market share.

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 2008 year end, Gelson's had approximately 1,324 full-time and 967 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 three major grocery retailers in our trade area had not reached an agreement by this date. The new Gelson's contract starts the elimination process of the two-tier wage configuration and returns it to a single wage structure and provides for, among other things, wage increases and modifications to the Company's pension and health and welfare contribution rates. 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 originally had an expiration date of March 5, 2010 which was different from the expiration date of the majors' contract. Effective March 10, 2009, the Company's UFCW employees voted to ratify an amendment to our contract with the UFCW which extends the contract expiration date to March 6, 2011, the same date the contract between the UFCW and the majors expires.

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. For purposes of the multi-employer plans for health care and pension benefits, Gelson's is subject to the same contract and term as the majors which expires on March 6, 2011.

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 was overfunded at the time of contract negotiation. The reduction in the health and welfare contribution rate was originally expected to substantially reduce the overfunded status of the fund during the term of the new contract. The change in contribution rates for both pension and health care were retroactive to the beginning of March 2007. The reduction in the contribution rates resulted in a substantial decrease in the Company's selling, general and administrative (SG&A) expense when comparing periods covered by the current and the expired contracts. The Company's health and welfare contribution rate was scheduled to increase effective with hours worked during March 2009 and after; however, the Company was recently notified by the Trust that the increase has been suspended for the six month period beginning March 2009 and ending August 2009. The Trust will review the effective rate again in August 2009.

Current economic conditions and the turmoil in the financial markets could significantly impact the future funded status of the health care and pension plans in which the Company participates. Many factors influence the funded status of the plans including changes in the cost of health care, the return on investments of funds held by the plan, changes to benefits offered under the plan and government regulations. The Company anticipates that both health care and pension benefits will be important topics in future negotiations. If, in the future, the Company and other participating employers are unable to negotiate an acceptable agreement with the union concerning employee benefits, a labor dispute could result or the negotiations could result in a new agreement requiring higher contribution rates. In addition, if any of the participating employers in the plan withdraws from the plan due to insolvency and is not able to contribute an amount sufficient to cover the underfunded liabilities associated with its participants, the Company may be required to make additional contributions. Each of these scenarios could negatively impact the Company's financial condition and results of operations.

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 will negatively 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, decreased labor turnover and cost savings in other areas. Current economic conditions make it difficult to achieve significant sales growth and increased profit margins.

Another component of labor related expense is the cost of workers' compensation. 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. Effective July 2006, the Company purchased a one-year fully insured guaranteed cost workers' compensation insurance policy to replace the high deductible program for losses occurring after June 30, 2006. The guaranteed cost program eliminates the Company's risk against claims occurring after June 30, 2006 and has resulted in lower workers' compensation expense compared to the high deductible program. The Company has continued to renew the guaranteed cost policy annually. The Company continues to maintain an accrual for claims incurred prior to July 2006 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, 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 from the end of the previous fiscal year impact the recognition or reversal of SARs compensation expense in the year 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.

Results of Operations

2008 Compared to 2007

Net income in 2008 decreased 15.5% to $24,667,000 compared to $29,207,000 during 2007. Operating income decreased 10.8% to $40,319,000 in 2008 compared to $45,177,000 in 2007.

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 $479,117,000 in 2008 (a 53 week fiscal year). This represents a decrease of 1.4% from 2007 (a 52 week fiscal year), when sales were $485,939,000. Sales during 2008 were negatively impacted by economic conditions, increased competition in our trade area and increased fuel and food prices. The extra week in 2008 compared to the prior year somewhat offset the decrease in sales.

The Company's gross profit as a percent of sales was 38.5% in 2008 compared to 38.7% in 2007. 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 in 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 30.1% in 2008 compared to 29.4% in 2007. The increase in SG&A expense as a percent of sales is primarily due to 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. These increases were partially offset by lower SARs compensation expense in 2008 compared to the prior year. During 2008, the Company recognized $1,823,000 of SARs compensation expense compared to $2,908,000 in 2007.

The Company contributes to several multi-employer union pension and health care plans. Pension and health care payments are determined based on straight-time hours worked and the

contribution rate as stipulated in the Company's various collective bargaining agreements. The Company recognized union pension expense of $5,065,000 in 2008 compared to $5,332,000 in 2007. Union health care expense was $9,258,000 in 2008 compared to $9,788,000 in 2007. Costs decreased due to a reduction in the average hourly contribution rate effective March 2007 as discussed above and in the number of hours eligible for contributions.

The Company is primarily self-insured for losses related to general and auto liability claims as well as for workers' compensation in some prior years. The Company has stop-loss insurance coverage to limit its exposure on a per claim basis and is insured for covered costs in excess of per claim limits. 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 for general and auto liability claims and workers' compensation are adequate to cover the future payment of claims.

In addition to high deductible coverage for workers' compensation and general and auto liability claims, the Company also carries property, business interruption, fiduciary, directors and officers, crime, earthquake, special event and employment practices liability insurance. Management believes, based on recent and past experience, that current insurance coverage meets the reasonable requirements of the Company.

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. (SFAS) 123(R) (revised 2004), "Share-Based Payment," which requires the measurement and recognition of compensation expense based on the fair value of SARs. SFAS 123(R) requires the Company to remeasure the fair value of SARs each reporting period until the award is settled. Compensation expense must be recognized each reporting period for changes in fair value and vesting. During 2008, the Company recognized $1,823,000 of SARs compensation expense due to an increase in the fair value of SARs at the time of exercise and the additional vesting of SARs. During 2007, the Company recognized $2,908,000 of SARs compensation expense. Compensation expense is recorded under SG&A expense on the Consolidated Statements of Operations and Comprehensive Income. As of January 3, 2009, assuming no change in the SARs fair value, there was approximately $2,886,000 of total unrecognized compensation cost related to outstanding SARs which is expected to be recognized over a weighted average period of 4.7 years. The total intrinsic value of SARs exercised during 2008 and 2007 was approximately $3,443,000 and $5,643,000, respectively. Intrinsic value represents the amount by which the fair value of SARs on the date of exercise exceeds the grant price.

During 2008, the Company procured approximately 16% of its product through Unified, a grocery wholesale cooperative. As a member-patron, the Company is required to provide Unified with certain minimum deposits and credit in order to purchase product from the cooperative. As of January 3, 2009, the Company had approximately $1,676,000 on deposit with Unified, in addition to approximately $625,000 related to ownership of equity shares in Unified. In 2008 and 2007, the Company recorded approximately $251,000 and $253,000, respectively, in patronage dividend income received in the form of cash and Unified equity shares as a reduction of cost of sales.

Interest and dividend income was $2,460,000 in 2008 compared to $3,340,000 for 2007 primarily due to lower interest rates in 2008 partially offset by increased average cash levels. Due to the

special cash dividend paid on December 8, 2008 totaling approximately $79,000,000, the Company anticipates a significant decrease in investment income in fiscal 2009.

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 investments were $188,000 (net of income tax expense of $129,000) in 2008 compared to unrealized gains of $153,000 (net of income tax expense of $106,000) in 2007.

2007 Compared to 2006

Net income in 2007 increased 25.8% to $29,207,000 compared to $23,224,000 during 2006. Operating income increased 23.2% to $45,177,000 in 2007 compared to $36,680,000 in 2006.

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 $485,939,000 in 2007. This represents an increase of .7% from 2006, when sales were $482,737,000. The Company experienced sales growth due to product pricing decisions (primarily due to product cost increases) partially offset by a decrease in customer count. Sales during 2007 were influenced by increased competition in our trade area from new competitors entering our market. In addition, the merger trend amongst our competitors resulted in larger companies that possess stronger market recognition.

The Company's gross profit as a percent of sales was 38.7% in 2007 compared to 38.6% in 2006. 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 in 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 29.4% in 2007 compared to 31.0% in 2006. The Company's provision for all union pension and health care plans decreased 31.4% to $15,120,000 in 2007 compared to $22,032,000 in 2006 due to a reduction in the average hourly contribution rates for pension and health care as discussed above as well as a slight decrease in the number of hours eligible for contributions. Workers' compensation expense also decreased 39.5% to $2,992,000 in 2007 compared to $4,945,000 in 2006 as discussed above. Finally, lower SARs compensation expense in 2007 compared to the prior year also contributed to the decrease in SG&A expense as a percent of sales. During 2007, the Company recognized $2,908,000 of SARs compensation expense compared to $3,671,000 in 2006. The decrease in SG&A expense was partially offset by an increase in labor costs as a result of the new contract with the UFCW as discussed above.

The Company contributes to several multi-employer union pension and health care plans. Pension and health care payments are determined based on straight-time hours worked and the contribution rate as stipulated in the Company's various collective bargaining agreements. The Company recognized union pension expense of $5,332,000 in 2007 compared to $6,801,000 in 2006. Union health care expense was $9,788,000 in 2007 compared to $15,231,000 in 2006.

Costs decreased due to a reduction in the average hourly contribution rate as discussed above and in the number of hours eligible for contributions.

For a discussion of workers' compensation, general and auto liability and other types of insurance coverage, see the discussion under the heading "2008 Compared to 2007" presented above.

Stock-based compensation under the SARs program was previously subject to variable accounting in accordance with Financial Accounting Standards Board Interpretation No. (FIN) 28, "Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans," an interpretation of Accounting Principles Board Opinion No. (APB) 25, "Accounting for Stock Issued to Employees." Under FIN 28, compensation expense was recognized as the SARs vested using the graded-vesting method. In addition, changes in the market price of the Company's Class A impacted the recognition of SARs expense.

Effective January 1, 2006, the Company adopted SFAS 123(R) (revised 2004), "Share-Based Payment," which requires the measurement and recognition of compensation expense based on the fair value of SARs. The Company adopted SFAS 123(R) using the modified prospective transition method, and therefore prior period results were not restated. As of January 1, 2006, the cumulative effect of adopting SFAS 123(R) resulted in the recognition of $288,000 in compensation expense as well as additional expense of $3,383,000 related to an increase in the fair value of SARs since the end of fiscal 2005 and the additional vesting of SARs. Compensation expense is recorded under SG&A expense on the Consolidated Statements of Operations and Comprehensive Income.

SFAS 123(R) requires the Company to remeasure the fair value of SARs each reporting period until the award is settled. Compensation expense must be recognized each reporting period for changes in fair value and vesting. During 2007, the Company recorded $2,908,000 of compensation expense related to the increase in the fair value of SARs and additional vesting during the period. As of December 29, 2007, assuming no change in the SARs fair value, there was approximately $4,541,000 of total unrecognized compensation cost related to SARs which is expected to be recognized over a weighted average period of 4.6 years. The total intrinsic value of SARs exercised during 2007 and 2006 was approximately $5,643,000 and $1,305,000, respectively. Intrinsic value represents the amount by which the fair value of SARs on the date of exercise exceeds the grant price.

During 2007, the Company procured approximately 17% of its product through Unified, a grocery wholesale cooperative. As a member-patron, the Company is required to provide Unified with certain minimum deposits and credit in order to purchase product from the cooperative. As of December 29, 2007, the Company had approximately $1,659,000 on deposit with Unified, in addition to approximately $503,000 related to ownership of equity shares in Unified. In 2007 and 2006, the Company recorded approximately $253,000 and $323,000, respectively, in patronage dividend income received in the form of cash and Unified equity shares as a reduction of cost of sales.

Interest and dividend income was $3,340,000 in 2007 compared to $2,560,000 for 2006 primarily 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 investments were $153,000 (net of income tax expense of $106,000) in 2007 compared to unrealized losses of $39,000 (net of income tax benefit of $28,000) in 2006.

Liquidity and Capital Resources

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 January 3, 2009 was $19,144,000. The Company's cash position was reduced by approximately $79,027,000 on December 8, 2008 when the Company paid a special cash dividend of twenty-five dollars ($25) per share on the Company's Class A. 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 Mayfair store on Franklin Boulevard in Hollywood, California is currently being converted to the Gelson's name and format as part of a major remodel which is expected to be completed by the spring of 2009.

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 January 3, 2009. 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 Company's working capital was $13,847,000 at January 3, 2009 compared to $70,154,000 at December 29, 2007. The decrease is due to the payment of the special cash dividend as discussed above. The Company believes that its current working capital, as well as future cash flow, is sufficient to meet its ongoing needs during fiscal 2009. Net cash provided by operating activities during fiscal 2008 totaled $28,467,000. Cash flows from operating activities resulted primarily from net income plus non-cash expenses and changes in working capital.

Net cash provided by investing activities was $5,288,000 in 2008. Investing activities included the sale of investments of $35,556,000 primarily in anticipation of the special dividend partially offset by the purchase of investments earlier in the year of $25,130,000 and capital expenditures of $5,159,000. Net cash used in financing activities consisted solely of dividends, both regular and special, paid during 2008 totaling $82,188,000.

The Company's current ratio was 1.41 at January 3, 2009 compared to 2.63 at December 29, 2007. The Company's total liabilities to equity ratio increased to .95 at January 3, 2009 from .54 at December 29, 2007. Both of these ratios were significantly impacted by the special dividend discussed above.

The following table sets forth the Company's contractual cash obligations and commercial commitments as of January 3, 2009:

                                        Contractual Cash Obligations (In Thousands)
                                           Less Than                                     After
                              Total         1 Year        1-3 Years      4-5 Years      5 Years

7% Subordinated Income
Debentures Due
. . .