Unified Grocers 424B3 Prospectus supplement

Filed Pursuant to Rule 424(b)(3)

Registration Number 333-131413

PROSPECTUS SUPPLEMENT NO. 1

to Prospectus dated

April 3, 2007

(Registration No. 333-131413)

UNIFIED WESTERN GROCERS, INC.

This Prospectus Supplement No. 1 supplements our Prospectus dated April 3, 2007. The securities that are the subject of the Prospectus have been registered to permit their sale by us.

This Prospectus Supplement includes the attached Quarterly Report on Form 10-Q for the period ended March 31, 2007 of Unified Western Grocers, Inc., as filed by us with the Securities and Exchange Commission.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

The date of this Prospectus Supplement is May 15, 2007

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007

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: 0-10815

UNIFIED WESTERN GROCERS, INC.

(Exact name of registrant as specified in its charter)

California

95-0615250

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

5200 Sheila Street, Commerce, CA 90040

(Address of principal executive offices) (Zip Code)

(323) 264-5200

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes[X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer [ ]		Accelerated filer [ ]		Non-accelerated filer [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

The number of shares outstanding of each of the registrant’s classes of common stock, as of April 28, 2007, were as follows:

Class A:147,000 shares;Class B: 471,336 shares;Class C: 15 shares;Class E: 186,350 shares

Table of Contents


Item		Page
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	3
	Consolidated Condensed Balance Sheets	3
	Consolidated Condensed Statements of Earnings and Comprehensive Earnings	4
	Consolidated Condensed Statements of Cash Flows	5
	Notes to Consolidated Condensed Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4.	Controls and Procedures	33

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3.	Defaults Upon Senior Securities	34
Item 4.	Submission of Matters to a Vote of Security Holders	34
Item 5.	Other Information	35
Item 6.	Exhibits	35

Signatures		36

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

Unified Western Grocers, Inc. and Subsidiaries

Consolidated Condensed Balance Sheets – Unaudited

(dollars in thousands)


	March 31, 2007			September 30, 2006
Assets

Current assets:
Cash and cash equivalents	$	16,471		$	11,150
Accounts and notes receivable, net of allowances of $2,765 and $2,383 at March 31, 2007 and September 30, 2006, respectively		145,537			146,321
Inventories		193,112			206,843
Prepaid expenses		6,931			8,817
Deferred income taxes		10,563			10,563

Total current assets		372,614			383,694
Properties, net		186,980			176,333
Investments		76,769			74,972
Notes receivable, net of allowances of $168 and $500 at March 31, 2007 and September 30, 2006, respectively		12,015			10,621
Goodwill		27,982			27,982
Other assets, net		46,652			43,513

Total Assets	$	723,012		$	717,115

Liabilities and Shareholders’ Equity

Current liabilities:
Accounts payable	$	148,394		$	153,577
Accrued liabilities		106,703			108,718
Current portion of notes payable		2,342			8,405
Subordinated patronage dividend certificates		3,141			—
Members’ excess deposits and estimated patronage dividends		18,916			13,904

Total current liabilities		279,496			284,604
Notes payable, less current portion		167,366			153,184
Long-term liabilities, other		104,024			103,682
Members’ deposits and certificates:
Members’ required deposits		8,856			10,211
Subordinated patronage dividend certificates		—			3,141
Commitments and contingencies

Shareholders’ equity:
Class A Shares: 500,000 shares authorized, 148,200 and 154,150 shares outstanding at March 31, 2007 and September 30, 2006, respectively		24,405			25,333
Class B Shares: 2,000,000 shares authorized, 471,336 and 495,041 shares outstanding at March 31, 2007 and September 30, 2006, respectively		77,541			81,306
Class E Shares: 2,000,000 shares authorized, 186,350 shares outstanding at March 31, 2007 and September 30, 2006		18,635			18,635
Retained earnings after elimination of accumulated deficit of $26,976 effective September 28, 2002		43,310			38,017
Receivable from sale of Class A Shares to members		(709	)		(989	)
Accumulated other comprehensive earnings (loss)		88			(9	)

Total shareholders’ equity		163,270			162,293

Total Liabilities and Shareholders’ Equity	$	723,012		$	717,115

The accompanying notes are an integral part of these statements.

Unified Western Grocers, Inc. and Subsidiaries

Consolidated Condensed Statements of Earnings

and Comprehensive Earnings – Unaudited

(dollars in thousands)


	Thirteen Weeks Ended						Twenty-Six Weeks Ended
	March 31, 2007			April 1, 2006			March 31, 2007			April 1, 2006

Net sales	$	753,624		$	710,034		$	1,534,999		$	1,460,842
Cost of sales		678,467			636,954			1,383,486			1,311,336
Distribution, selling and administrative expenses		61,680			58,790			121,757			118,573

Operating income		13,477			14,290			29,756			30,933
Interest expense		(3,608	)		(3,507	)		(7,488	)		(7,498	)

Earnings before estimated patronage dividends and income taxes		9,869			10,783			22,268			23,435
Estimated patronage dividends		(3,510	)		(4,267	)		(10,087	)		(9,363	)

Earnings before income taxes		6,359			6,516			12,181			14,072
Income taxes		(2,789	)		(2,527	)		(5,149	)		(4,276	)

Net earnings		3,570			3,989			7,032			9,796
Other comprehensive earnings, net of income taxes:
Unrealized holding gain (loss) on investments		(46	)		(336	)		97			(364	)

Comprehensive earnings	$	3,524		$	3,653		$	7,129		$	9,432

The accompanying notes are an integral part of these statements.

Unified Western Grocers, Inc. and Subsidiaries

Consolidated Condensed Statements of Cash Flows – Unaudited

(dollars in thousands)


	Twenty-Six Weeks Ended
	March 31, 2007			April 1, 2006
Cash flows from operating activities:
Net earnings	$	7,032		$	9,796
*Adjustments to reconcile net earnings to net cash provided by operating activities:*
Depreciation and amortization		9,731			10,256
Provision for doubtful accounts		7			(164	)
(Gain) loss on sale of properties		(182	)		62
Purchases of trading securities		(3,757	)		(3,739	)
Proceeds from maturities or sales of trading securities		2,788			10,715
*(Increase) decrease in assets:*
Accounts receivable		(16	)		7,731
Inventories		13,731			13,658
Prepaid expenses		1,886			705
Pension plan assets		(1,041	)		—
*Increase (decrease) in liabilities:*
Accounts payable		(5,183	)		(21,516	)
Accrued liabilities		(2,015	)		(6,610	)
Long-term liabilities, other		1,383			3,025

Net cash provided by operating activities		24,364			23,919

Cash flows from investing activities:
Purchases of properties		(18,170	)		(6,599	)
Purchases of securities and other investments		(5,954	)		(20,937	)
Proceeds from maturities or sales of securities and other investments		5,275			18,039
Increase in notes receivable		(601	)		(635	)
Proceeds from sales of properties		182			200
Increase in other assets		(4,676	)		(3,089	)

Net cash utilized by investing activities		(23,944	)		(13,021	)

Cash flows from financing activities:
Additions to long-term notes payable		15,479			—
Reduction of long-term notes payable		—			(8,016	)
Reduction of short-term notes payable		(7,519	)		(7,697	)
Payment of deferred financing fees		(564	)		—
Members’ excess deposits and estimated patronage dividends		5,011			5,213
Class E Share cash dividend		(928	)		—
(Decrease) increase in members’ required deposits		(1,355	)		143
Decrease in receivable from sale of Class A Shares to members		280			262
Repurchase of shares from members		(5,837	)		(4,739	)
Issuance of shares to members		334			432

Net cash provided (utilized) by financing activities		4,901			(14,402	)

Net increase (decrease) in cash and cash equivalents		5,321			(3,504	)
Cash and cash equivalents at beginning of period		11,150			17,437

Cash and cash equivalents at end of period	$	16,471		$	13,933

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	7,345		$	6,737
Income taxes	$	4,650		$	8,242

Supplemental disclosure of non-cash items:
Conversion of Class B Shares to Class A Shares	$	51		$	—

The accompanying notes are an integral part of these statements.

Unified Western Grocers, Inc. and Subsidiaries

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS

OF PRESENTATION

The consolidated condensed financial statements include the accounts of Unified Western Grocers, Inc. and all its subsidiaries (the “Company” or “Unified”). Inter-company transactions and accounts with subsidiaries have been eliminated. The interim financial statements included herein have been prepared by the Company without audit, pursuant to the rules and regulations promulgated by the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to SEC rules and regulations; nevertheless, management believes that the disclosures are adequate to make the information presented not misleading. These consolidated condensed financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s latest Annual Report on Form 10-K filed with the SEC. The results of operations for the interim periods are not necessarily indicative of the results for the full year.

The accompanying consolidated condensed financial statements reflect all adjustments that, in the opinion of management, are both of a normal and recurring nature and necessary for the fair presentation of the results for the interim periods presented. The preparation of the consolidated condensed financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated condensed financial statements and accompanying notes. As a result, actual results could differ from those estimates.

The Company’s banking arrangements allow the Company to fund outstanding checks when presented to the financial institution for payment. This cash management practice frequently results in total issued checks exceeding the available cash balance at a single financial institution. The Company’s policy is to record its cash disbursement accounts with a cash book overdraft in accounts payable. At March 31, 2007 and September 30, 2006, the Company had book overdrafts of $27.2 million and $33.1 million, respectively, classified in accounts payable.

2. VARIABLE

INTEREST ENTITY

In fiscal 2004, the Company signed a purchase and sale agreement with an unrelated business property developer to transfer and assign the leasehold and sub-leasehold interests and certain assets relating to eleven closed store locations.

At March 31, 2007, the Company remains contingently liable for the lease payments on six of these store locations until such time as the leases expire or the Company is released from all liabilities and obligations under the respective leases. The net present value of the Company’s currently estimated obligation for the remaining leasehold and sub-leasehold interests for the six stores totals approximately $5.3 million at March 31, 2007, with the last lease expiring in 2019. The Company’s maximum loss exposure related to these leases is $16.2 million.

The Financial Accounting Standards Board (“FASB”) issued in January 2003 and revised in December 2003 FASB Interpretation No. 46R (“FIN 46R”),“Consolidation of Variable Interest Entities – an Interpretation of Accounting Research Bulletin (“ARB”) No. 51, Consolidated Financial Statements.”Although the Company has no ownership interest in the unrelated third party that assumed the leasehold and sub-leasehold interests from the Company, that third party is considered a variable interest entity pursuant to FIN 46R. Because the primary investor in the variable interest entity currently does not have sufficient equity at risk, the Company is considered the primary beneficiary. Accordingly, the Company is required to consolidate the assets, liabilities and non-controlling interests of the variable interest entity, as well as the results of operations.

At March 31, 2007 and September 30, 2006, the Company consolidated the variable interest entity’s accounts, including total assets of $0.8 and $0.5 million, respectively, comprised primarily of $0.6 million and $0.2 million in properties, respectively, and $0.2 million and $0.3 million in other assets, respectively. The Company also consolidated the variable interest entity’s lease reserves of approximately $5.3 million and $4.7 million, respectively.

Unified Western Grocers, Inc. and Subsidiaries

Notes to Consolidated Condensed Financial Statements (Unaudited)—(Continued)

3. SEGMENT

INFORMATION

Unified is a retailer-owned, grocery wholesale cooperative serving supermarket operators located primarily in the western United States and in the South Pacific. Unified sells a wide variety of grocery-related and general merchandise products to its customers. The Company’s customers include its owners (“Members”) and non-owners (“non-members”). Unified also provides support services to its customers through the Wholesale Distribution segment, including retail technology, and through separate subsidiaries, including financing and insurance. The availability of specific products and services may vary by geographic region.

Management identifies segments based on the information monitored by the Company’s chief operating decision-makers to manage the business and, accordingly, has identified the following two reportable segments:

The Wholesale Distribution segment includes the results of operations from the sale of food and general merchandise products to both Members and non-members. As of and for the twenty-six weeks ended March 31, 2007, the Wholesale Distribution segment represents approximately 99% of the Company’s total sales and 86% of total assets.

The Insurance segment includes the results of operations for the Company’s three insurance subsidiaries (Grocers and Merchants Insurance Service, Inc., Springfield Insurance Company and Springfield Insurance Company, Ltd.). These subsidiaries provide insurance and insurance-related products, including workers’ compensation and liability insurance policies, to both the Company and its Members primarily located in California. As of and for the twenty-six weeks ended March 31, 2007, the Company’s Insurance segment collectively accounts for approximately 1% of the Company’s total sales and 12% of total assets.

The “All Other” category includes the results of operations for the Company’s other support businesses, including its finance subsidiary, whose services are provided to a common customer base, none of which individually meets the quantitative thresholds of a reportable segment. As of and for the twenty-six weeks ended March 31, 2007, the “All Other” category collectively accounts for less than 1% of the Company’s total sales and 2% of total assets.

Unified Western Grocers, Inc. and Subsidiaries

Notes to Consolidated Condensed Financial Statements (Unaudited)—(Continued)

Information about the Company’s operating segments is summarized below.

(dollars in thousands)


	Thirteen Weeks Ended						Twenty-Six Weeks Ended
	March 31, 2007			April 1, 2006			March 31, 2007			April 1, 2006
Net sales
Wholesale distribution	$	749,777		$	706,554		$	1,527,648		$	1,452,813
Insurance		6,976			5,183			12,485			11,485
All other		573			422			1,159			837
Inter-segment eliminations		(3,702	)		(2,125	)		(6,293	)		(4,293	)

Total net sales	$	753,624		$	710,034		$	1,534,999		$	1,460,842

Operating income
Wholesale distribution	$	12,163		$	12,818		$	27,741		$	26,698
Insurance		1,442			1,409			2,589			4,519
All other		(128	)		63			(574	)		(284	)

Total operating income		13,477			14,290			29,756			30,933

Interest expense		(3,608	)		(3,507	)		(7,488	)		(7,498	)
Estimated patronage dividends		(3,510	)		(4,267	)		(10,087	)		(9,363	)
Income taxes		(2,789	)		(2,527	)		(5,149	)		(4,276	)

Net earnings	$	3,570		$	3,989		$	7,032		$	9,796

Depreciation and amortization
Wholesale distribution	$	4,937		$	4,942		$	9,626		$	10,145
Insurance		42			50			89			109
All other		10			—			16			2

Total depreciation and amortization	$	4,989		$	4,992		$	9,731		$	10,256

Capital expenditures
Wholesale distribution	$	9,766		$	4,465		$	17,544		$	6,571
Insurance		—			12			—			20
All other		626			8			626			8

Total capital expenditures	$	10,392		$	4,485		$	18,170		$	6,599

Identifiable assets
Wholesale distribution	$	618,633		$	572,472		$	618,633		$	572,472
Insurance		86,179			87,778			86,179			87,778
All other		18,200			17,891			18,200			17,891

Total identifiable assets	$	723,012		$	678,141		$	723,012		$	678,141

4. SHAREHOLDERS’ EQUITY

During the twenty-six week period ended March 31, 2007, the Company issued 1,500 Class A Shares with an issue value of $0.3 million and redeemed 7,750 Class A Shares with a redemption value of $1.6 million. The Company also redeemed 23,405 Class B Shares with a redemption value of $4.2 million. In addition, 300 Class A Shares were converted from Class B Shares at a value of $0.1 million.

On October 5, 2006, the Board of Directors declared a 6% cash dividend (approximately $0.9 million) on the outstanding Class E Shares of the Company as of September 28, 2006. The dividend was paid on January 5, 2007.

Unified Western Grocers, Inc. and Subsidiaries

Notes to Consolidated Condensed Financial Statements (Unaudited)—(Continued)

5. CONTINGENCIES

The Company is a party to various litigation, claims and disputes, some of which are for substantial amounts, arising in the ordinary course of business. While the ultimate effect of such actions cannot be predicted with certainty, the Company believes the outcome of these matters will not result in a material adverse effect on its financial condition or results of operations.

6. NOTES

PAYABLE

In March 2007, the Company’s finance subsidiary, Grocers Capital Company (“GCC”), completed a Change in Terms Agreement on its second amended and restated credit agreement and loan purchase and servicing agreement with a third party bank. There were no changes to the second amended and restated credit and loan purchase and servicing agreements other than the maturity dates, which were extended to March 31, 2010 and March 31, 2008, respectively. Amounts advanced under the credit agreement bear interest at prime (8.25% and 8.25%) or Eurodollar (5.35% and 5.36%) plus 2.00% at March 31, 2007 and September 30, 2006, respectively. GCC had no borrowings outstanding under the credit agreement at March 31, 2007 or September 30, 2006. The aggregate amount of secured borrowings under the loan purchase and servicing agreement was $3.6 million and $5.1 million at March 31, 2007 and September 30, 2006, respectively.

At September 30, 2006, the Company had a $225 million secured revolving credit facility (“Revolving Credit Agreement”) which was amended and restated on December 5, 2006. The Amended and Restated Credit Agreement (the “Amended Agreement”) permits advances and letters of credit up to $225 million, with an option to expand to $300 million in the future. The Amended Agreement matures on January 31, 2012 and continues to be secured by the inventory and accounts receivable of the Company and certain subsidiaries. Interest is based on either LIBOR plus an applicable margin (0.75% to 1.75%) or the lender’s base rate plus an applicable margin (0.00% to 0.25%). Undrawn portions of the commitments under the Amended Agreement bear commitment fees at rates between 0.15% and 0.35% per annum. The Amended Agreement contains customary covenants, default provisions and limitations on shareholder distributions (including the repurchase of shares) similar to those included in the original Revolving Credit Agreement. The Company had $69.5 million and $53.6 million outstanding under the Amended Agreement and the Revolving Credit Agreement at March 31, 2007 and September 30, 2006, respectively.

7. PENSION

AND OTHER POSTRETIREMENT BENEFITS

The Company sponsors a cash balance plan (“Cash Balance Plan”). The Cash Balance Plan is a noncontributory defined benefit pension plan covering substantially all employees of the Company who are not subject to a collective bargaining agreement. Benefits under the Cash Balance Plan are provided through a trust and also through annuity contracts.

The Company also sponsors an Executive Salary Protection Plan II (“ESPP II”) that provides supplemental post-termination retirement income based on each participant’s final salary and years of service as an officer of the Company. Funds are held in a rabbi trust for the ESPP II consisting primarily of life insurance policies reported at cash surrender value. The cash surrender value of such life insurance policies aggregated $16.2 million and $15.2 million at March 31, 2007 and September 30, 2006, respectively, and are included in other assets in the Company’s consolidated condensed balance sheets. The related accrued benefit cost (representing the Company’s benefit obligation to participants) of $14.0 million and $13.4 million at March 31, 2007 and September 30, 2006, respectively, is recorded in other long-term liabilities in the Company’s consolidated condensed balance sheets. Trust assets are excluded from ESPP II plan assets as they do not qualify as plan assets under Statement of Financial Accounting Standards (“SFAS”) No. 87,“Employers’ Accounting for Pensions” (“SFAS 87”). The assets held in the rabbi trust are not available for general corporate purposes. The rabbi trust is subject to creditor claims in the event of insolvency.

The Company sponsors postretirement benefit plans that cover both non-union and union employees. The plans are not funded.

Unified Western Grocers, Inc. and Subsidiaries

Notes to Consolidated Condensed Financial Statements (Unaudited)—(Continued)

The Company’s funding policy is to make contributions to the Cash Balance Plan in amounts that are at least sufficient to meet the minimum funding requirements of applicable laws and regulations, but no more than amounts deductible for federal income tax purposes. The Company contributed $1.0 million to the Cash Balance Plan during the twenty-six weeks ended March 31, 2007 for the 2006 plan year. At this time, the Company expects to make quarterly estimated contributions to the Cash Balance Plan totaling $2.3 million during the remainder of fiscal 2007 for the 2007 plan year. At its discretion, the Company may contribute in excess of this amount. Additional contributions for the 2006 plan year, if any, will be due by September 14, 2007, while contributions for the 2007 plan year will be due by September 15, 2008. The Company contributed $0.6 million to the ESPP II during the twenty-six weeks ended March 31, 2007 to fund projected benefit payments to participants for the 2007 plan year.

At March 31, 2007, the fair value of the Cash Balance Plan assets increased to $95.5 million from $84.9 million at September 30, 2006.

8. RELATED

PARTY TRANSACTIONS

Members affiliated with directors of the Company make purchases of merchandise from the Company and also may receive benefits and services that are of the type generally offered by the Company to its similarly situated eligible Members. Management believes such transactions are on terms that are generally consistent with terms available to other Members similarly situated. As of the date of this report, there have been no material changes to the related party transactions disclosed in Note 17 to Notes to Consolidated Financial Statements in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the year ended September 30, 2006.

9. NEW

ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB ratified Emerging Issues Task Force (“EITF”) No. 06-4,“Accounting for Deferred Compensation and Postretirement Benefits Associated with Endorsement Split-Dollar Life Insurance Arrangements” (“EITF No. 06-4”) and in March 2007, the FASB ratified EITF Issue No. 06-10,“Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements”(“EITF No. 06-10”). EITF No. 06-4 requires deferred compensation or postretirement benefit aspects of an endorsement-type split-dollar life insurance arrangement to be recognized as a liability by the employer and states the obligation is not effectively settled by the purchase of a life insurance policy. The liability for future benefits should be recognized based on the substantive agreement with the employee, which may be either to provide a future death benefit or to pay for the future cost of the life insurance. EITF No. 06-10 provides recognition guidance for postretirement benefit liabilities related to collateral assignment split-dollar life insurance arrangements, as well as recognition and measurement of the associated asset on the basis of the terms of the collateral assignment split-dollar life insurance arrangement. EITF No.’s 06-4 and 06-10 are effective for fiscal years beginning after December 15, 2007. Accordingly, EITF No.’s 06-4 and 06-10 will be adopted commencing in the first quarter for the Company’s fiscal year 2009. The Company is currently assessing the impact these standards may have on its consolidated financial statements.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159,“The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115” (“SFAS No. 159”). SFAS No. 159 provides companies with an option to measure, at specified election dates, many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS No. 159 is expected to expand the use of fair value measurement consistent with the Board’s long-term objectives for financial instruments. A company that adopts SFAS No. 159 will report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Accordingly, SFAS No. 159 will be adopted commencing in the first quarter for the Company’s fiscal year 2009. The Company is currently assessing the impact this standard may have on its consolidated financial statements.

Unified Western Grocers, Inc. and Subsidiaries

Notes to Consolidated Condensed Financial Statements (Unaudited)—(Continued)

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158,“Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFAS No. 158”). SFAS No. 158 requires that employers recognize on a prospective basis the funded status of an entity’s defined benefit pension and postretirement plans as an asset or liability in the financial statements, requires the measurement of defined benefit pension and postretirement plan assets and obligations as of the end of the employer’s fiscal year, and requires recognition of the funded status of defined benefit pension and postretirement plans in other comprehensive income. SFAS No. 158 also requires additional disclosures in the notes to the financial statements. An employer without publicly traded equity securities shall initially apply the requirement to recognize the funded status of a benefit plan and the disclosure requirements as of the end of the fiscal year ending after June 15, 2007. Accordingly, the Company will adopt SFAS No. 158 in the fourth quarter of its fiscal year ending September 29, 2007. The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position shall be effective for fiscal years ending after December 15, 2008. Accordingly, the Company will adopt this requirement effective with its fiscal year ending on October 3, 2009. The Company is currently assessing the impact this standard will have on its consolidated financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157,“Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 provides guidance for using fair value to measure assets and liabilities. Under SFAS No. 157, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity would enter into transactions for the asset or liability. SFAS No. 157 establishes a fair value hierarchy that prioritizes the information used to develop the assumptions that market participants would use when pricing the asset or liability. The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. In addition, SFAS No. 157 requires that fair value measurements be separately disclosed by level within the fair value hierarchy. SFAS No. 157 does not require new fair value measurements and is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. Accordingly, SFAS No. 157 will be adopted commencing in the first quarter for the Company’s fiscal year 2009. The Company is currently assessing the impact this standard may have on its consolidated financial statements.

In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 108,“Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB No. 108”). SAB No. 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The SEC staff believes that registrants should quantify errors using both a balance sheet and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. The guidance in SAB No. 108 should be applied to financial statements for fiscal years ending after November 15, 2006 (and is encouraged for any interim period of the first fiscal year ending after that date). Accordingly, the Company will adopt SAB No. 108 effective with its fiscal year ending September 29, 2007. The Company does not currently believe that adopting SAB No. 108 will have a significant impact on its consolidated financial statements.

In July 2006, the FASB issued Interpretation No. 48 (“FIN 48”),“Accounting for Uncertainty in Income Taxes,” which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with FASB Statement No. 109,“Accounting for Income Taxes.” FIN 48 provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. Accordingly, FIN 48 will be adopted commencing in the first quarter of the Company’s fiscal year 2008. The Company is currently assessing the financial impact of FIN 48 on its consolidated financial statements.

In May 2005, the FASB issued SFAS No. 154,“Accounting Changes and Error Corrections” (“SFAS No. 154”). SFAS No. 154 requires retrospective application to prior periods’ financial statements of a voluntary change in

Unified Western Grocers, Inc. and Subsidiaries

Notes to Consolidated Condensed Financial Statements (Unaudited)—(Continued)

accounting principle and that a change in method of depreciation, amortization, or depletion for long-lived, non-financial assets be accounted for as a change in accounting estimate that is affected by a change in accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company adopted this pronouncement beginning with its fiscal year 2007. The adoption of SFAS No. 154 had no impact on the Company’s financial condition and results of operations.

10. SUBSEQUENT

EVENTS

On May 4, 2007, the Company signed a letter of understanding to purchase certain assets and assume certain liabilities of Associated Grocers, Inc. (“AG”) of Seattle, Washington. The transaction is subject to completion of due diligence, the execution of a definitive purchase agreement, and approval by the Board of Directors of AG and Unified, AG shareholders, and federal and state regulatory agencies.

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

FORWARD-LOOKING INFORMATION

This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to expectations concerning matters that (a) are not historical facts, (b) predict or forecast future events or results, or (c) embody assumptions that may prove to have been inaccurate. These forward-looking statements involve risks, uncertainties and assumptions. When the Company uses words such as “believes,” “expects,” “anticipates” or similar expressions, the Company is making forward-looking statements. Although Unified believes that the expectations reflected in such forward-looking statements are reasonable, the Company cannot give readers any assurance that such expectations will prove correct. The actual results may differ materially from those anticipated in the forward-looking statements as a result of numerous factors, many of which are beyond the Company’s control. Important factors that could cause actual results to differ materially from the Company’s expectations include, but are not limited to, the factors discussed in the sections entitled “Risk Factors” and “Critical Accounting Policies and Estimates” within “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” All forward-looking statements attributable to Unified are expressly qualified in their entirety by the factors that may cause actual results to differ materially from anticipated results. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinion only as of the date hereof. The Company undertakes no duty or obligation to revise or publicly release the results of any revision to these forward-looking statements. Readers should carefully review the risk factors described in this document as well as in other documents the Company files from time to time with the Securities and Exchange Commission.

COMPANY OVERVIEW

General

Unified Western Grocers, Inc. (referred to in this Form 10-Q as “Unified,” “the Company,” “our” or “we”) is a retailer-owned, grocery wholesale cooperative serving supermarket operators located primarily in the western United States and the South Pacific. Our customers range in size from single store operators to regional supermarket chains. The Company operates its business in two reportable business segments: (1) Wholesale Distribution and (2) Insurance. All remaining business activities are grouped into “All Other” (see Note 3 of Notes to Consolidated Condensed Financial Statements).

We sell a wide variety of products typically found in supermarkets. We report all product sales in our Wholesale Distribution segment, which represents approximately 99% of our total sales. Our customers include our owners (“Members”) and non-owners (“non-members”). We also provide support services to our customers, including retail technology, insurance and financing. Insurance activities account for approximately 1% of total sales and are reported in our Insurance segment, while finance activities are grouped with our All Other business activities. The availability of specific products and services may vary by geographic region. We have three separate geographical and marketing regions. The regions are Southern California, Northern California and the Pacific Northwest.

A California corporation organized in 1922 and incorporated in 1925, Unified does business primarily with those customers that have been accepted as Members. Members are required to meet specific member capitalization requirements, which include capital stock ownership and may include required cash deposits. In addition, each Member must meet minimum purchase requirements. The membership requirements, including capitalization requirements, may be modified at the discretion of the Company’s Board of Directors (the “Board”).

We distribute the earnings from activities conducted with our Members, excluding subsidiaries (collectively “patronage business”), in the form of patronage dividends. Our patronage earnings are based on the combined results of the Company’s three patronage earnings divisions: the Southern California Dairy Division, the Pacific Northwest Dairy Division and the Cooperative Division. The Company conducts business on a non-patronage basis in the Wholesale Distribution segment through its specialty food subsidiary (Market Centre) and international sales subsidiary (Unified International, Inc). These businesses sell products to both Members and non-members. An entity that does not meet Member purchase requirements or does not desire to become a Member may conduct business with Unified as a non-member customer on a non-patronage basis. The Company does business through its subsidiaries on a non-patronage basis. Earnings from the Company’s subsidiaries and from business conducted with non-members (collectively “non-patronage business”) are retained by the Company.

Facilities and Transportation

The Company operates various warehouse and office facilities that are located in Commerce, Los Angeles, Santa Fe Springs, Stockton, Hayward, Livermore and Fresno, California and Milwaukie, Oregon. The Company operates a fleet of tractors and trailers that it uses to distribute products to its customers. Customers have the choice of two delivery options. Customers may either elect to have the Company deliver orders to their stores or warehouse locations or may choose to pick their orders up from the Company’s distribution centers. The Company also operates a bakery manufacturing facility and a milk, water and juice processing plant in Los Angeles, which primarily serve the Southern California region.

Industry Overview And The Company’s Operating Environment

Competition

Unified competes in the wholesale grocery industry with regional and national food wholesalers such as Associated Grocers of Seattle, C&S Wholesale, and Supervalu Inc., as well as other local wholesalers that provide a broad range of products and services to their customers. Unified also competes with many local and regional meat, grocery product, specialty, and general food wholesalers. Unified’s customers compete directly with vertically integrated regional and national chains. The growth or loss in market share of our customers will also impact the Company’s sales and earnings. For more information about the competition Unified faces, please refer to “Risk Factors.”

The marketplace in which we operate continues to evolve and present challenges both to our customers and us. The continued expansion of large box store formats into our marketplace will present challenges for some of the retail grocery stores owned by our customers. In addition, self-distributing alternative formats such as warehouse, supercenters, discount, drug, natural and organic, and convenience stores continue to expand their offering of products that are a core part of the conventional grocery store offering, thereby creating additional competition for our customers. Demographic changes have created more ethnic diversity in our marketplace. To effectively compete with these changes, many of our successful customers have focused on, among other things, differentiation strategies in specialty products and items on the perimeter of the store such as produce, service deli, service bakery and meat categories.

We provide a broad range of product offerings and unique services to help our retail customers with their individual differentiation strategies. Through our grocery specialty subsidiary, Market Centre, we offer specialty grocery products in four categories: gourmet specialties, ethnic foods, natural/organic products and confections. In addition to supplying these products, Market Centre, similar to support provided through the Cooperative Division, offers a wide range of retail support services, including category development and management, merchandising services, marketing programs and promotional strategies.

We also support growth by offering promotions on fast-moving products and by supporting and sponsoring major events that help promote sales at the retail level.

Economic Factors

We are impacted by changes in the overall economic environment. In recent periods, the Company has experienced significant volatility in certain costs. For example, costs associated with our workers’ compensation coverage in California have declined after several years of cost increases. Pension and other postretirement benefit costs have also improved due primarily to plan changes and the favorable impact of changes in actuarial assumptions. On the other hand, external factors continue to drive increases in costs. For example, increases in wages and other employment related benefits occur as a result of negotiated labor contracts and adjustments for non-represented employees. These costs may significantly change in future years. We continually focus attention on initiatives aimed at improving business processes and managing costs. We have also been upgrading our warehouse management system as discussed below in “Technology.”

Technology

Technology improvements have been an important part of Unified’s strategy to improve service to its customers and lower costs. Unified’s customers benefit from the Company’s substantial investment in supply-chain technology, including improvements in the Company’s vendor management activities through new item introductions, promotions management and payment support activities.

Technology improvements in the Company’s distribution systems have helped lower costs and improve order accuracy. Over the past three years, we have been upgrading our warehouse systems to improve efficiencies and order fulfillment accuracy. Through the end of fiscal 2006, our five main facilities have been upgraded. We expect to see additional warehouse improvements and order fulfillment accuracy as each facility fully realizes the benefits of the upgrade. We have also begun the process of implementing a new Enterprise Resource Planning (“ERP”) system that will operate in our dairy processing and bakery plants. The new system will automate our record keeping, thereby providing greater visibility of performance metrics and allowing us to improve the manufacturing process. We expect the ERP system installation to be completed in our dairy plant during the current year.

During fiscal 2006, we began a major renovation of our northern California Stockton facility to add additional square footage and to install a mechanized conveyor system. This conveyor system will allow us to more effectively merge product at the facility with products sourced from our other facilities and key vendor partners. This will result in expanded product availability for our Members and non-member customers without the need to carry these products in our Stockton facility.

Additionally, we continue to make improvements to better support our interactions with vendors and customers. We provide network connectivity, data exchange, and a portfolio of applications to our customers. Improving these tools allows independent retailers with varying formats and needs to benefit from standardization while making use of business applications best suited to their unique needs.

Our Member-focused efforts include improvements through our Memberlink technology product that is a Web-based set of business applications designed to improve collaboration and streamline business processes across the entire supply chain.

Sales Activities and Recent Developments

We experienced an overall sales increase of $74.1 million, or 5.1%, for the twenty-six weeks ended March 31, 2007 (the “2007 Period”) as compared to the twenty-six week period ended April 1, 2006 (the “2006 Period”). Net Wholesale Distribution sales increased $74.8 million in the 2007 Period compared to the 2006 Period. Several factors contributed to the change in net Wholesale Distribution sales during the 2007 Period. This increase was due primarily to a $38.8 million, or 2.7%, sales increase in our continuing customer business driven primarily by new store openings, growth in the Company’s perishables divisions, and growth in Market Centre, our specialty grocery subsidiary. Additionally, inflation in meat and produce costs has increased in the 2007 Period and accounted for $16.1 million in sales increases. Subsequent to the 2006 Period, we began supplying customers that were previously serviced by competitors, resulting in a $26.1 million increase in sales for the 2007 Period. Sales related to customers who discontinued their business with us and began purchasing from competitors resulted in a $6.2 million decline in sales in the 2007 Period versus the 2006 Period.

Sales in our Insurance segment declined $0.7 million in the 2007 Period versus the 2006 Period due to a reduction in premium rates associated with our California workers’ compensation insurance products, partially offset by an increase in volume. Sales in our All Other business activities were consistent at $0.5 million for the 2007 and 2006 periods.

RESULTS OF OPERATIONS

The following discussion of the Company’s financial condition and results of operations should be read in conjunction with the consolidated condensed financial statements and notes to the consolidated condensed financial statements, specifically Note 3 to Notes to Consolidated Condensed Financial Statements, “Segment Information,” included elsewhere in this report. Certain statements in the following discussion are not historical in nature and should be considered to be forward-looking statements that are inherently uncertain.

The following table sets forth selected consolidated financial data of Unified expressed as a percentage of net sales for the periods indicated and the percentage increase or decrease in such items over the prior period.


	Thirteen Weeks Ended					% Change Thirteen Weeks		Twenty-Six Weeks Ended				% Change Twenty-Six Weeks
Fiscal Period Ended	March 31, 2007		April 1, 2006			% Change Thirteen Weeks		March 31, 2007		April 1, 2006		% Change Twenty-Six Weeks
Net sales	100.0	%	100.0	%		6.1	%	100.0	%	100.0	%	5.1	%
Cost of sales	90.0		89.7			6.5		90.1		89.8		5.5
Distribution, selling and administrative expenses	8.2		8.3			4.9		7.9		8.1		2.7

Operating income	1.8		2.0		��	(5.7	)	2.0		2.1		(3.8	)
Interest expense	(0.5	)	(0.5	)		2.9		(0.5	)	(0.5	)	(0.1	)
Estimated patronage dividends	(0.5	)	(0.6	)		(17.7	)	(0.7	)	(0.6	)	7.7
Income taxes	(0.4	)	(0.4	)		10.4		(0.3	)	(0.3	)	20.4

Net earnings	0.4	%	0.5	%		(10.5	)%	0.5	%	0.7	%	(28.2	)%

THIRTEEN WEEK PERIOD ENDED MARCH 31, 2007 (“2007 PERIOD”) COMPARED TO THE THIRTEEN WEEK PERIOD ENDED APRIL 1, 2006 (“2006 PERIOD”)

Overview of the 2007 Period. Our consolidated operating income was $13.5 million in the 2007 Period compared to $14.3 million in the 2006 Period. Operating income for the Wholesale Distribution segment and All Other categories decreased compared to the 2006 Period.

Wholesale Distribution Segment: The Wholesale Distribution segment’s operating income was $12.2 million in the 2007 Period compared to $12.8 million in the 2006 Period. The decrease in operating income was due primarily to a reduction in margin partially offset by improvements in our operations. Previously, we also experienced reduced workers’ compensation expense in the 2006 Period due to recent legislative changes.

Insurance Segment: Operating income in our Insurance segment was $1.4 million in the 2007 Period, which is consistent with the 2006 Period. In 2003 and 2004, the California Legislature passed workers’ compensation reforms that have helped to reduce the cost of claims, particularly with respect to medical costs. In the 2006 Period, we experienced reduced claims costs on older policy years, resulting in favorable adjustments to claims reserves. In the 2007 Period, claims on older policy years stabilized, resulting in reduced reserve adjustments, but operating income benefited from higher commission revenue related to increased volume.

All Other: All Other business activities primarily consist of our finance subsidiary and the consolidation of a variable interest entity as discussed in Note 2 of the Notes to the Consolidated Condensed Financial Statements in Item 1. Operating income decreased $0.2 million to a loss of $0.1 million for the 2007 Period compared to income of $0.1 million in the 2006 Period, and consisted of $0.3 million in operating income from our finance subsidiary offset by $0.4 million in operating expense associated with our variable interest entity.

The following tables summarize the performance of each business segment for the 2007 and 2006 Periods.

Wholesale Distribution Segment

(dollars in thousands)


	Thirteen Weeks Ended March 31, 2007			Thirteen Weeks Ended April 1, 2006
	Amounts in 000’s		Percent to Net Sales	Amounts in 000’s		Percent to Net Sales	Difference

Gross sales	$	749,777		$	706,554		$	43,223
Inter-segment eliminations

Net sales		749,777	100.0		706,554	100.0		43,223
Cost of sales		677,706	90.4		636,680	90.1		41,026
Distribution, selling and administrative expenses		59,908	8.0		57,056	8.1		2,852

Operating income	$	12,163	1.6	$	12,818	1.8	$	(655	)

Insurance Segment

(dollars in thousands)


	Thirteen Weeks Ended March 31, 2007				Thirteen Weeks Ended April 1, 2006
	Amounts in 000’s			Percent to Net Sales	Amounts in 000’s			Percent to Net Sales	Difference
Gross sales—premiums earned	$	6,976			$	5,183			$	1,793
Inter-segment eliminations		(3,414	)			(1,975	)			(1,439	)

Net sales—premiums earned		3,562		100.0		3,208		100.0		354
Cost of sales—underwriting expenses		761		21.4		274		8.5		487
Selling and administrative expenses		1,359		38.1		1,525		47.6		(166	)

Operating income	$	1,442		40.5	$	1,409		43.9	$	33

All Other

(dollars in thousands)


	Thirteen Weeks Ended March 31, 2007					Thirteen Weeks Ended April 1, 2006
	Amounts in 000’s			Percent to Net Sales		Amounts in 000’s			Percent to Net Sales	Difference
Gross sales	$	573				$	422			$	151
Inter-segment eliminations		(288	)				(150	)			(138	)

Net sales		285		100.0			272		100.0		13
Selling and administrative expenses		413		144.9			209		76.8		204

Operating income (loss)	$	(128	)	(44.9	)	$	63		23.2	$	(191	)

Net sales. Consolidated net sales increased $43.5 million, or 6.1%, to $753.6 million in the 2007 Period compared to $710.1 million for the 2006 Period.

Wholesale Distribution Segment: Net Wholesale Distribution sales increased $43.2 million to $749.8 million in the 2007 Period compared to $706.6 million for the 2006 Period.

Continuing Customer Sales Growth

Approximately $18.6 million of sales increases were due to new store locations and growth in our distribution volume at existing locations, including $7.7 million of growth in our Market Centre subsidiary, which have helped our customers differentiate themselves from their competition.

Inflation in meat and produce costs has accounted for $14.7 million in sales increases in the 2007 Period compared to the 2006 Period.

Customer Changes

During the 2007 Period, we began supplying customers that were previously served by competitors, resulting in a $12.7 million increase in sales.

Sales to customers in the 2006 Period that discontinued business with us and began purchasing their products from competitors were $2.8 million.

Insurance Segment: Net sales, consisting principally of premium revenues, increased $0.3 million to $3.5 million in the 2007 Period compared to $3.2 million for the 2006 Period resulting primarily from higher commission revenue related to increased policy volume, partially offset by lower premium rates. Our Insurance Segment primarily sells workers’ compensation coverage in California.

All Other: Net sales were consistent at $0.3 million in the 2007 and 2006 Periods.

Cost of sales. Consolidated cost of sales was $678.5 million for the 2007 Period and $637.0 million for the 2006 Period and comprised 90.0% and 89.7% of consolidated net sales for the 2007 and 2006 Periods, respectively.

Wholesale Distribution Segment: Cost of sales increased by $41.0 million to $677.7 million in the 2007 Period compared to $636.7 million in the 2006 Period. As a percentage of net wholesale sales, cost of sales was 90.4% and 90.1% for the 2007 and 2006 Periods, respectively.

A change in product and Member sales mix contributed to a 0.1% increase in cost of sales as a percent of net wholesale sales. Our growth was primarily in products that carry a higher cost of sales as a percent of net sales compared to the 2006 Period product mix average. In addition, our larger customers have driven the sales growth in new store openings. These customers typically pick up their orders from our facilities and their larger order sizes allow for higher operational efficiencies but result in lower margins. As a result, the margin on these customers is lower than average and increases the cost of sales as a percent of net wholesale sales.

A change in vendor promotional support contributed to a 0.2% increase in cost of sales as a percent of net wholesale sales. Our vendors and brokers are continually evaluating their go-to-market strategies to effectively promote their products. Changes in their strategies could have a favorable or unfavorable impact on our financial performance. See “Critical Accounting Policies and Estimates – Vendor Funds” discussed in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended September 30, 2006.

Insurance Segment: Cost of sales increased $0.5 million from $0.3 million to $0.8 million in the 2007 Period compared to the 2006 Period. During 2003 and 2004, California legislative reforms were passed aimed at reducing the rising cost of workers’ compensation expenses, primarily in the cost of providing health care. As a result of these reforms, in the 2006 Period we experienced reductions in costs associated with (1) claims loss expense and loss reserve expenses (consisting of payments to health care providers and injured workers, along with estimates of claims not yet resolved), and (2) loss adjustment expenses (consisting of adjudication expenses and legal expenses associated with defending claims). In 2006, required loss reserves declined and reduced cost of sales. These costs stabilized in the 2007 Period and required no further reductions in loss reserves related to earlier periods. Cost of sales also includes underwriting expenses (consisting of commissions, premium taxes and regulatory fees); however, these expenses remained stable in the 2007 Period relative to the 2006 Period. Additionally, the cost of insurance and the sufficiency of loss reserves are also impacted by actuarial estimates based on a detailed analysis of health care cost trends, mortality rates, claims history, demographics and industry trends. As a result, the amount of loss reserves and future expenses is significantly affected by these variables and may significantly change, depending on the cost of providing benefits and the results of further legislative action. See additional discussion related to insurance reserves under “Risk Factors” – “Our insurance reserves may be inadequate if unexpected losses occur.”

Distribution, selling and administrative expenses. Consolidated distribution, selling and administrative expenses were $61.7 million in the 2007 Period compared to $58.8 million in the 2006 Period, and comprised 8.2% and 8.3% of net sales for the 2007 and 2006 Periods, respectively.

Wholesale Distribution Segment: Distribution, selling and administrative expenses were $59.9 million in the 2007 Period compared to $57.1 million in the 2006 Period, and comprised 8.0% and 8.1% of net wholesale sales for the 2007 and 2006 Periods, respectively. As discussed in further detail below, decreases in employee benefits and transportation expenses reduced costs $0.8 million, or 0.1% of net wholesale sales. This decrease was offset by increased costs for workers’ compensation and other expenses of $3.6 million, but remained flat as a percent of net wholesale sales.

Pension and Other Postretirement Benefits and Health Care Expenses: During the 2007 Period, the Company experienced decreases in postretirement benefit costs of $0.7 million, primarily due to plan changes and the favorable impact of changes in actuarial assumptions, and increases in health care expenses of $0.5 million. This resulted in a $0.2 million net decrease in employee benefits expense and was flat as a percent of net wholesale sales. See additional discussion on benefit plan assets and liabilities under “Risk Factors”—“The value of our benefit plan assets and liabilities is based on estimates and assumptions, which may prove inaccurate.”

Transportation Expenses: Transportation expenses declined $0.6 million, or 0.1%, as a percent of net wholesale sales, primarily due to reducing our reliance on third party carriers.

The following expenses increased in the 2007 Period compared to the 2006 Period, offsetting the decreases in distribution, selling and administrative expenses that were discussed above:

Workers’ Compensation Expense: Through December 31, 2006, the Company’s Wholesale Distribution segment was self-insured up to $300,000 per incident with a stop loss coverage provided by our Insurance segment up to $1.0 million and third party coverage over that amount. Effective January 1, 2007, workers’ compensation coverage is provided entirely through the Insurance segment up to $1.0 million per incident and third party coverage over that amount. Loss accruals up to the stop loss coverage are made based on actuarially developed loss estimates. Our workers’ compensation expenses increased by $0.7 million in the 2007 Period, or 0.1% as a percent of net wholesale sales, primarily due to recording in the 2006 Period the positive impact of the California legislative reforms discussed above. In the 2007 Period, costs stabilized and did not result in an adjustment to reserves for prior policy years. Future expenses may significantly change depending on the cost of providing health care and the results of further legislative action.

Other Expense Changes: General expenses increased $2.9 million, but decreased 0.1% as a percent of net wholesale sales due to the $43.2 million increase in net wholesale sales.

Insurance Segment: Selling and administrative expenses for the Insurance segment declined $0.1 million to $1.4 million for the 2007 Period compared to $1.5 million for the 2006 Period.

All Other: Selling and administrative expenses for our All Other business activities for the 2007 Period increased $0.2 million to $0.4 million compared to $0.2 million for the 2006 Period.

Interest. Interest expense was $3.6 million in the 2007 Period compared to $3.5 million in the 2006 Period and comprised 0.5% of consolidated net sales for both the 2007 and 2006 Periods. Factors contributing to the increase in interest expense are as follows:

Interest expense on our primary debt instruments was $2.9 million and $2.8 million for the 2007 and 2006 Periods, respectively.

Weighted Average Borrowings: Interest expense increased $0.2 million from the 2006 Period due to an increase in our weighted average borrowings. Weighted average borrowings increased by $10.8 million due to principal payments on secondary notes (i.e. Capital Investment Notes), payment of patronage dividends, Class E Share dividends and increased capital expenditures, partially offset by improved cash flow from operations and our Equity Enhancement Program (see “Equity Enhancement Plan”).

Interest Rates: Interest expense declined $0.1 million from the 2006 Period due to a decrease in our effective borrowing rate. Our effective borrowing rate for the combined primary debt, made up of the revolving line of credit and senior secured notes, was 7.2% and 7.4% for the 2007 and 2006 Periods, respectively. We signed an agreement on December 5, 2006 to amend and restate the revolving credit facility and realized a reduction in our interest rate margin over the base borrowing rate on the revolving line of credit. In addition, we were able to lower the fees associated with the financing which had the impact of lowering our overall borrowing costs. Partially offsetting the foregoing factors and consistent with the overall market interest rate change, the base borrowing rate on the revolving line of credit increased over the 2006 Period, offsetting the reduction in interest rate margin.

Borrowings on our revolving credit agreement are subject to market rate fluctuations. A 25 basis point change in the market rate of interest over the 2007 Period would have resulted in a $0.04 million increase or decrease in corresponding interest expense.

Interest expense on our secondary debt instruments was $0.7 million in both the 2007 and 2006 Periods.

Estimated patronage dividends. Estimated patronage dividends for the 2007 Period were $3.5 million, compared to $4.3 million in the 2006 Period, a decrease of 17.7%. Patronage dividends for the 2007 and 2006 Periods consisted of the patronage earnings from the Company’s three patronage earnings divisions: the Southern California Dairy Division, the Pacific Northwest Dairy Division and the Cooperative Division. For the 2007 and 2006 Periods, respectively, the Company had patronage earnings of $2.7 million and $2.4 million in the Southern California Dairy Division, $0.2 million and $0.2 million in the Pacific Northwest Dairy Division and $0.6 million and $1.7 million in the Cooperative Division.

Income taxes. The Company’s effective income tax rate was 43.9% for the 2007 Period compared to 38.8% for the 2006 Period. The Company estimates that its effective tax rate will be 42% for the remainder of fiscal 2007. The higher rate for the 2007 Period is due to non-recurring tax benefits recorded in the 2006 Period that did not impact the 2007 Period.

TWENTY-SIX WEEK PERIOD ENDED MARCH 31, 2007 (“2007 PERIOD”) COMPARED TO THE TWENTY-SIX WEEK PERIOD ENDED APRIL 1, 2006 (“2006 PERIOD”)

Overview of the 2007 Period. Our consolidated operating income was $29.7 million in the 2007 Period compared to $30.9 million in the 2006 Period. Operating income for the Wholesale Distribution segment improved over the 2006 Period, but was offset by (1) stabilized operating income in the Insurance segment for the 2007 Period that excluded non-recurring favorable reserve adjustments in the 2006 Period and, (2) reductions in the All Other categories.

Wholesale Distribution Segment: The Wholesale Distribution segment realized an overall net increase in operating income of $1.0 million to $27.7 million in the 2007 Period compared to $26.7 million in the 2006 Period. The increase in operating income was primarily due to growth in revenue combined with reductions in postretirement benefits expense and transportation expenses.

Insurance Segment: Operating income declined $1.9 million in our Insurance segment to $2.6 million in the 2007 Period compared to $4.5 million in the 2006 Period. In 2003 and 2004, the California Legislature passed workers’ compensation reforms that have helped to reduce the cost of claims, particularly with respect to medical costs. In the 2006 Period, we experienced reduced claims costs on older policy years, resulting in favorable adjustments to claims reserves. In the 2007 Period, claims on older policy years stabilized, resulting in no additional reductions in loss reserves related to earlier periods.

All Other: All Other business activities primarily consist of our finance subsidiary and the consolidation of a variable interest entity as discussed in Note 2 of the Notes to Consolidated Condensed Financial Statements in Item 1. Operating income decreased $0.3 million to a loss of $0.6 million for the 2007 Period compared to a loss of $0.3 million in the 2006 Period. The loss of $0.6 million for the 2007 period was due primarily to lease expenses associated with our variable interest entity of $1.2 million partially offset by income of $0.6 million in our finance subsidiary.

The following tables summarize the performance of each business segment for the 2007 and 2006 Periods.

Wholesale Distribution Segment

(dollars in thousands)


	Twenty-Six Weeks Ended March 31, 2007				Twenty-Six Weeks Ended April 1, 2006
	Amounts in 000’s			Percent to Net Sales	Amounts in 000’s			Percent to Net Sales		Difference
Gross sales	$	1,527,648			$	1,452,813				$	74,835
Inter-segment eliminations

Net sales		1,527,648		100.0		1,452,813		100.0			74,835
Cost of sales		1,382,364		90.5		1,311,493		90.3			70,871
Distribution, selling and administrative expenses		117,543		7.7		114,622		7.9			2,921

Operating income	$	27,741		1.8	$	26,698		1.8		$	1,043

Insurance Segment (dollars in thousands)

	Twenty-Six Weeks Ended March 31, 2007				Twenty-Six Weeks Ended April 1, 2006
	Amounts in 000’s			Percent to Net Sales	Amounts in 000’s			Percent to Net Sales		Difference
Gross sales—premiums earned	$	12,485			$	11,485				$	1,000
Inter-segment eliminations		(5,720	)			(4,001	)				(1,719	)

Net sales—premiums earned		6,765		100.0		7,484		100.0			(719	)
Cost of sales—underwriting expenses		1,122		16.6		(157	)	(2.1	)		1,279
Selling and administrative expenses		3,054		45.1		3,122		41.7			(68	)

Operating income	$	2,589		38.3	$	4,519		60.4		$	(1,930	)

All Other

(dollars in thousands)


	Twenty-Six Weeks Ended March 31, 2007					Twenty-Six Weeks Ended April 1, 2006
	Amounts in 000’s			Percent to Net Sales		Amounts in 000’s			Percent to Net Sales		Difference
Gross sales	$	1,159				$	837				$	322
Inter-segment eliminations		(573	)				(292	)				(281	)

Net sales		586		100.0			545		100.0			41
Selling and administrative expenses		1,160		152.1			829		152.1			331

Operating (loss) income	$	(574	)	(52.1	)	$	(284	)	(52.1	)	$	(290	)

Net sales. Consolidated net sales increased $74.1 million to $1.535 billion in the 2007 Period compared to $1.461 billion in the 2006 Period.

Wholesale Distribution Segment: Net Wholesale Distribution sales increased $74.8 million to $1.528 billion in the 2007 Period compared to $1.453 billion for the 2006 Period. We continued to experience sales growth through new store openings by our customers and growth in sales of products that help our customers differentiate their stores from the competition.

Continuing Customer Sales Growth

Approximately $38.8 million of sales increases were due primarily to a $9.7 million growth in our perishables product offerings such as meat, produce, service deli and service bakery, and a

$13.3 million growth in our Market Centre subsidiary, which have helped our customers differentiate themselves from their competition. This growth is driven by new store locations and growth in our distribution volume at existing locations.

Inflation in meat and produce costs has accounted for $16.1 million in sales increases in the 2007 Period compared to the 2006 Period.

Customer Changes

During the 2007 Period, we began supplying customers that were previously served by competitors, resulting in a $26.1 million increase in sales.

Sales to customers in the 2006 Period that discontinued business with us and began purchasing their products from competitors were $6.2 million.

Insurance Segment: Net sales, consisting principally of premium revenues, decreased $0.7 million to $6.8 million in the 2007 Period compared to $7.5 million for the 2006 Period due to decreased premium rates charged to California customers for workers’ compensation insurance, partially offset by increases related to policy volume. Our Insurance Segment primarily sells workers’ compensation coverage in California. The California legislature passed legislation in 2003 and 2004 to allow greater controls over medical costs related to workers’ compensation. These cost reductions have led to lower policy premiums in the 2007 Period compared to the 2006 Period.

All Other: Net sales were consistent at $0.5 million for the 2007 and 2006 Periods.

Cost of sales. Consolidated cost of sales was $1.383 billion for the 2007 Period compared to $1.311 billion for the 2006 Period and comprised 90.1% and 89.8% of consolidated net sales for the 2007 and 2006 Periods, respectively.

Wholesale Distribution Segment: Cost of sales increased by $70.9 million to $1.382 billion in the 2007 Period compared to $1.311 billion in the 2006 Period. As a percentage of net wholesale sales, cost of sales was 90.5% and 90.3% for the 2007 and 2006 Periods, respectively. Several factors contributed to the 0.2% increase in cost of sales as a percentage of net wholesale sales.

A change in vendor promotional support contributed to a 0.1% increase in cost of sales as a percent of net wholesale sales. Our vendors and brokers are continually evaluating their go-to-market strategies to effectively promote their products. Changes in their strategies could have a favorable or unfavorable impact on our financial performance. See “Critical Accounting Policies and Estimates – Vendor Funds” discussed in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended September 30, 2006.

Insurance Segment: Cost of sales increased $1.2 million from a $0.1 million credit to $1.1 million in the 2007 Period compared to the 2006 Period. During 2003 and 2004, California legislative reforms were passed aimed at reducing the rising cost of workers’ compensation expenses, primarily in the cost of providing health care. As a result of these reforms, in the 2006 Period we experienced reductions in costs associated with (1) claims loss expense and loss reserve expenses (consisting of payments to health care providers and injured workers, along with estimates of claims not yet resolved), and (2) loss adjustments expenses (consisting of adjudication expenses and legal expenses associated with defending claims). These costs stabilized in the 2007 Period and required no further reductions in loss reserves related to earlier periods. Cost of sales also includes underwriting expenses (consisting of commissions, premium taxes and regulatory fees); however, these expenses remained stable in the 2007 Period relative to the 2006 Period. Additionally, the cost of insurance and the sufficiency of loss reserves are also impacted by actuarial estimates based on a detailed analysis of health care cost trends, mortality rates,

claims history, demographics and industry trends. As a result, the amount of loss reserves and future expenses is significantly affected by these variables and may significantly change, depending on the cost of providing benefits and the results of further legislative action. See additional discussion related to insurance reserves under “Risk Factors” – “Our insurance reserves may be inadequate if unexpected losses occur.”

Distribution, selling and administrative expenses. Consolidated distribution, selling and administrative expenses were $121.8 million in the 2007 Period compared to $118.6 million in the 2006 Period, and comprised 7.9% and 8.1% of net sales for the 2007 and 2006 Periods, respectively.

Wholesale Distribution Segment: Distribution, selling and administrative expenses were $117.5 million in the 2007 Period compared to $114.6 million in the 2006 Period, and comprised 7.7% and 7.9% of net wholesale sales for the 2007 and 2006 Periods, respectively. As discussed in further detail below, decreases in employee benefits and transportation expenses reduced costs $2.0 million, or 0.1% of net wholesale sales. This decrease was offset by increased costs for workers’ compensation and other expenses of $4.9 million, but declined 0.1% as a percent of net wholesale sales due to the $74.8 million increase in net wholesale sales.

Pension and Other Postretirement Benefits and Health Care Expenses: During the 2007 Period, the Company experienced postretirement benefit cost decreases of $1.4 million, primarily due to plan changes and the favorable impact of changes in actuarial assumptions, and increases in health care expenses of $0.9 million. This resulted in a $0.5 million net decrease in employee benefits expense and was flat as a percent of net wholesale sales. See additional discussion on benefit plan assets and liabilities under “Risk Factors” – “The value of our benefit plan assets and liabilities is based on estimates and assumptions, which may prove inaccurate.”

Transportation Expenses: Transportation expenses declined $1.5 million, or 0.1%, as a percent of net wholesale sales, primarily due to reducing our reliance on third party carriers.

The following expenses increased in the 2007 Period compared to the 2006 Period, offsetting the decreases in distribution, selling and administrative expenses that were discussed above:

Workers’ Compensation Expense: Through December 31, 2006, the Company’s Wholesale Distribution segment was self-insured up to $300,000 per incident with a stop loss coverage provided by our Insurance segment up to $1.0 million and third party coverage over that amount. Effective January 1, 2007, workers’ compensation coverage is provided entirely through the Insurance segment up to $1.0 million per incident and third party coverage over that amount. Loss accruals up to the stop loss coverage are made based on actuarially developed loss estimates. Our workers’ compensation expenses increased by $0.3 million, but remained flat as a percent of net wholesale sales. Future expenses may significantly change depending on the cost of providing health care and the results of further legislative action.

Other Expense Changes: General expenses increased $4.6 million, but declined 0.1% as a percent of net wholesale sales due to the $74.8 million increase in net wholesale sales.

Insurance Segment: Selling and administrative expenses for the Insurance segment were comparable at $3.1 million for the 2007 and 2006 Periods.

All Other: Selling and administrative expenses for our All Other business activities for the 2007 Period increased $0.3 million to $1.1 million compared to $0.8 million for the 2006 Period as a result of incurring higher lease loss reserves on properties associated with our variable interest entity.

Interest. Interest expense was $7.5 million for both the 2007 and 2006 Periods and comprised 0.5% of consolidated net sales for both the 2007 and 2006 Periods. Factors contributing to the level interest expense are as follows:

Interest expense on our primary debt instruments was $6.0 million and $6.1 million for the 2007 and 2006 Periods, respectively.

Weighted Average Borrowings: Interest expense increased $0.1 million from the 2006 Period due to an increase in our weighted average borrowings. Weighted average borrowings increased by $1.7 million due to principal payments on secondary notes (i.e. Capital Investment Notes), payment of

patronage dividends, Class E Share dividends and increased capital expenditures, partially offset by improved cash flow from operations and our Equity Enhancement Program (see “Equity Enhancement Plan”).

Interest Rates: Interest expense declined $0.2 million from the 2006 Period due to a decrease in our effective borrowing rate. Our effective borrowing rate for the combined primary debt, made up of the revolving line of credit and senior secured notes, was 7.4% and 7.6% for the 2007 and 2006 Periods, respectively. Two primary factors contributed to the decrease in interest rates. First, we amended and restated our Senior Note Agreement in fiscal 2006 (see “Outstanding Debt and Other Financing Arrangements” discussed in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended September 30, 2006 for additional information), thereby reducing our effective interest rate on this debt. Second, we signed an agreement on December 5, 2006 to amend and restate the revolving credit facility and realized a reduction in our interest rate margin over the base borrowing rate on the revolving line of credit. In addition, we were able to lower the fees associated with the financing which had the impact of lowering our overall borrowing costs. Partially offsetting the foregoing factors and consistent with the overall market interest rate change, the base borrowing rate on the revolving line of credit increased over the 2006 Period, offsetting the reduction in interest rate margin.

Borrowings on our revolving credit agreement are subject to market rate fluctuations. A 25 basis point change in the market rate of interest over the 2007 Period would have resulted in a $0.08 million increase or decrease in corresponding interest expense.

Interest expense on our secondary debt instruments was $1.5 million in the 2007 Period, an increase of $0.1 million compared to $1.4 million in the 2006 Period.

Estimated patronage dividends. Estimated patronage dividends for the 2007 Period were $10.1 million, compared to $9.4 million in the 2006 Period, an increase of 7.7%. Patronage dividends for the 2007 and 2006 Periods consisted of the patronage earnings from the Company’s three patronage earnings divisions: the Southern California Dairy Division, the Pacific Northwest Dairy Division and the Cooperative Division. For the 2007 and 2006 Periods, respectively, the Company had patronage earnings of $5.4 million and $5.1 million in the Southern California Dairy Division, $0.3 million and $0.3 million in the Pacific Northwest Dairy Division and $4.4 million and $4.0 million in the Cooperative Division.

Income taxes. The Company’s effective income tax rate was 42.3% for the 2007 Period compared to 30.4% for the 2006 Period. The Company estimates that its effective tax rate will be 42% for the remainder of fiscal 2007. The higher rate for the 2007 Period is due to non-recurring tax benefits recorded in the 2006 Period that did not impact the 2007 Period.

LIQUIDITY AND CAPITAL RESOURCES

The Company finances its capital needs through a combination of internal and external sources. These sources include cash from operations, Member investments, bank borrowings, various types of long-term debt and lease financing. The Company believes that the combination of cash flows from operations, current cash balances, its Equity Enhancement Plan described below, and available lines of credit, will be sufficient to service its debt, redeem Members’ capital shares and subordinated patronage dividend certificates, make income tax payments and to meet its anticipated needs for working capital and capital expenditures through at least the next five fiscal years.

CASH FLOW

The Company continued to generate positive cash flow from operations during the twenty-six week 2007 Period. Cash from operations was used for investing and financing activities, including investing in the Company’s infrastructure, providing financing to Members, and redemption of Members’ capital shares. The Company also reinvested proceeds from maturing investments.

Net cash, consisting of cash and cash equivalents, increased by $5.3 million to $16.5 million for the twenty-six week 2007 Period ended March 31, 2007 compared to $11.2 million as of the fiscal year ended September 30, 2006.

The following table summarizes the impact of operating, investing and financing activities on the Company’s cash flows for the twenty-six week 2007 and 2006 Periods:


(dollars in thousands)
*Summary of Net Increase (Decrease) in Total Cash Flows*	*2007*			*2006*			*Difference*
Cash provided by operating activities	$	24,364		$	23,919		$	445
Cash utilized by investing activities		(23,944	)		(13,021	)		(10,923	)
Cash provided (utilized) by financing activities		4,901			(14,402	)		19,303

Total increase (decrease) in cash flows	$	5,321		$	(3,504	)	$	8,825

Net cash from operating, investing and financing activities increased by $8.8 million to $5.3 million for the 2007 Period compared to a decrease of $(3.5) million for the 2006 Period. The increase in net cash for the 2007 Period consisted of cash provided from operating activities of $24.4 million and financing activities of $4.9 million offset by amounts used in investing activities of $24.0 million. The primary factors contributing to the changes in cash flow are discussed below. At March 31, 2007 and September 30, 2006, working capital was $93.1 million and $99.1 million, respectively. The current ratio was 1.3 at March 31, 2007 and September 30, 2006.

Operating Activities: Net cash provided by operating activities increased by $0.4 million to $24.4 million for the 2007 Period compared to $23.9 million for the 2006 Period. The increase in cash provided by operating activities compared to the 2006 Period was attributable primarily to decreases between the periods in cash utilized to pay accounts payable ($16.3 million) and prepaid expenses ($1.2 million). In addition, net cash of $0.2 million was provided from other operating activities. These increases of $17.7 million in cash provided were partially offset by reduced cash from the sale of trading securities for the Company’s insurance subsidiaries ($7.9 million), increased accounts receivable between the periods ($7.7 million), and reduced growth between the periods in long-term liabilities ($1.7 million).

Investing Activities: Net cash used in investing activities increased by $11.0 million to $24.0 million for the 2007 Period compared to $13.0 million utilized in the 2006 Period. The increase in cash used for investing activities during the 2007 Period as compared to the 2006 Period was due mainly to (1) increases in capital expenditures of $11.6 million for a building renovation and purchases of warehouse and computer equipment and (2) increases in other assets of $1.6 million. This $13.2 million increase in cash used was partially offset by decreases in net investments of $2.2 million by the Company’s insurance subsidiaries, consisting of the purchase and sale of securities to replace maturing investments in their portfolios. Spending on investing activities is expected to be funded by existing cash balances, cash generated from operations or additional borrowings.

Financing Activities: Net cash provided by financing activities was approximately $4.9 million for the 2007 Period compared to $14.4 million utilized for the 2006 Period. The net increase of $19.3 million in cash provided by financing activities for the 2007 Period as compared to the 2006 Period was due primarily to changes in the Company’s long-term and short-term notes payable and deferred financing fees, an increase of $23.1 million resulting from higher borrowings and the payment of financing fees associated with the Company’s amendment and restatement of its secured revolving credit facility (see “Credit Facilities” below). This increase in cash was partially offset by cash utilized as a result of changes in Member investment activities and share redemptions of $3.8 million. Future cash used by financing activities is expected to be funded by the Company’s continuing operating cash flow and the positive impact of the Equity Enhancement Plan to meet operating and capital spending requirements (see “Equity Enhancement Plan” below).

Equity Enhancement Plan

In fiscal 2002, the Company initiated an equity enhancement plan designed to build equity in the Company for future investment in the business and other infrastructure improvements. See “Equity Enhancement Plan” discussed in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended September 30, 2006 for additional information.

Credit Facilities

Agreement (the “Amended Agreement”) permits advances and letters of credit up to $225 million, with an option to expand to $300 million in the future. The Amended Agreement matures on January 31, 2012 and continues to be secured by the inventory and accounts receivable of the Company and certain subsidiaries. Interest is based on either LIBOR plus an applicable margin (0.75% to 1.75%) or the lender’s base rate plus an applicable margin (0.00% to 0.25%). Undrawn portions of the commitments under the Amended Agreement bear commitment fees at rates between 0.15% and 0.35% per annum. The Amended Agreement contains customary covenants, default provisions and limitations on shareholder distributions (including the repurchase of shares) similar to those included in the original Revolving Credit Agreement. The Company had $69.5 million outstanding under the facility as of March 31, 2007, with access to a significant amount of capital under this facility (up to $225 million, with an option to expand to $300 million) still available to the Company.

Off-Balance Sheet Arrangements

As of the date of this report, with the exception of the transaction disclosed in Note 2 of Notes to Consolidated Condensed Financial Statements, the Company does not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

Other than as discussed in “Credit Facilities” above and “Outstanding Debt and Other Financing Arrangements” below, there have been no material changes in the Company’s contractual obligations and commercial commitments outside the ordinary course of the Company’s business during the twenty-six week period ending March 31, 2007. See “Contractual Obligations and Commercial Commitments” discussed in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended September 30, 2006 for additional information.

OUTSTANDING DEBT AND OTHER FINANCING ARRANGEMENTS

Other than as discussed above in “Credit Facilities” and in the paragraph below, there have been no material changes in the Company’s outstanding debt and other financing arrangements outside the ordinary course of the Company’s business during the twenty-six week period ending March 31, 2007. See “Outstanding Debt and Other Financing Arrangements” discussed in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended September 30, 2006 for additional information.

In March 2007, the Company’s finance subsidiary, Grocers Capital Company (“GCC”), completed a Change in Terms Agreement on its second amended and restated credit agreement and loan purchase and servicing agreement with a third party bank. There were no changes to the second amended and restated credit and loan purchase and servicing agreements other than the maturity dates, which were extended to March 31, 2010 and March 31, 2008, respectively. GCC had no borrowings outstanding under the credit agreement at March 31, 2007. The aggregate amount of secured borrowings under the loan purchase and servicing agreement was $3.6 million at March 31, 2007.

At March 31, 2007 and September 30, 2006, respectively, the Company had a total of $96.1 million and $96.5 million outstanding in senior secured notes to certain insurance companies and pension funds (referred to collectively as John Hancock Life Insurance Company, or “Hancock”) under a note purchase agreement dated September 29, 1999 (as amended, the “Senior Note Agreement”) as amended and restated effective January 6, 2006.

MEMBER INVESTMENTS AND PATRONAGE DIVIDENDS

Members are required to meet specific capitalization requirements, which include capital stock ownership and may include required cash deposits (“Required Deposits”). Members may also maintain deposits with Unified in excess of such Required Deposit amounts (“Excess Deposits”). See “Member Investments and Patronage Dividends” discussed in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended September 30, 2006 for additional information.

Members’ Required Deposits are contractually subordinated and subject to the prior payment in full of certain senior indebtedness of the Company. Unified’s obligation to repay Members’ Required Deposit accounts on termination of Member status (once the Member’s obligations to Unified have been satisfied) is reported as a long-term liability on Unified’s consolidated condensed balance sheets. Excess Deposits are not subordinated to Unified’s other obligations and are reported as short-term liabilities on Unified’s consolidated condensed balance sheets. At March 31, 2007 and September 30, 2006, Unified had $8.9 million and $10.2 million, respectively, in “Members’ required deposits” and $18.9 million and $13.9 million, respectively, in “Members’ excess deposits and estimated patronage dividends” (of which $13.1 million and $10.7 million, respectively, represented Excess Deposits).

On October 5, 2006, the Board declared a 6% cash dividend (approximately $0.9 million) on the outstanding Class E Shares of the Company as of September 28, 2006. The dividend was paid on January 5, 2007.

REDEMPTION OF CAPITAL STOCK

On October 6, 2006, the Board authorized the repurchase on October 12, 2006 of 3,550 shares of the Company’s Class A Shares that had been tendered and were pending redemption. The Company paid approximately $0.7 million to redeem the shares. On December 13, 2006, the Board authorized the repurchase on December 27, 2006 of 23,405 shares of the Company’s Class B Shares that had been tendered and were pending redemption. The Company paid approximately $4.2 million to redeem the shares.

On February 13, 2007, the Board authorized the repurchase on February 15, 2007 of 4,200 shares of the Company’s Class A Shares that had been tendered and were pending redemption. The Company paid approximately $0.9 million to redeem the shares.

See “Redemption of Capital Stock” discussed in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended September 30, 2006 for additional information.

PENSION AND POSTRETIREMENT BENEFIT PLANS

The Company sponsors a cash balance plan (“Cash Balance Plan”). The Company’s funding policy is to make contributions to the Cash Balance Plan in amounts that are at least sufficient to meet the minimum funding requirements of applicable laws and regulations, but no more than amounts deductible for federal income tax purposes. The Company also sponsors an Executive Salary Protection Plan II (“ESPP II”) that provides supplemental post-termination retirement income based on each participant’s final salary and years of service as an officer of the Company. Funds are held in a rabbi trust for the ESPP II consisting primarily of life insurance policies reported at cash surrender value.

The Company’s net periodic benefit cost for its combined pension and other postretirement benefits was approximately $4.2 million for the twenty-six week period ended March 31, 2007 compared to $5.6 million for the twenty-six week period ended April 1, 2006.

The Company contributed $1.0 million to the Cash Balance Plan during the twenty-six weeks ended March 31, 2007 for the 2006 plan year. At this time, the Company expects to make quarterly estimated contributions to the Cash Balance Plan totaling $2.3 million during the remainder of fiscal 2007 for the 2007 plan year. At its discretion, the Company may contribute in excess of this amount. Additional contributions for the 2006 plan year, if any, will be due by September 14, 2007, while contributions for the 2007 plan year will be due by September 15, 2008. The Company contributed $0.6 million to the ESPP II during the twenty-six weeks ended March 31, 2007 to fund projected benefit payments to participants for the 2007 plan year.

At March 31, 2007, the fair value of the Cash Balance Plan assets increased to $95.5 million from $84.9 million at September 30, 2006.

RISK FACTORS

The risks and uncertainties described below are not the only ones the Company faces. Additional risks and uncertainties not presently known to the Company or that the Company currently deems immaterial also may impair the Company’s business operations. If any of the following risks occur, the Company’s business, prospects, financial condition, operating results and cash flows could be adversely affected in amounts that could be material.

Unified’s management deals with many risks and uncertainties in the normal course of business. Readers should be aware that the occurrence of the risks, uncertainties and events described in the risk factors below and elsewhere in this Form 10-Q could have an adverse effect on the Company’s business, results of operations and financial position.

The markets in which we operate are highly competitive, characterized by high volume and low profit margins, customer incentives, including pricing, variety, and delivery, and industry consolidation. The shifting of market share among competitors is typical of the wholesale food business as competitors attempt to increase sales in various markets. A significant portion of the Company’s sales are made at prices based on the cost of products it sells plus a markup. As a result, the Company’s profit levels may be negatively impacted if it is forced to respond to competitive pressure by reducing prices.

The increased competition has caused the industry to undergo changes as participants seek to lower costs, further increasing pressure on the industry’s already low profit margins. In addition to price competition, food wholesalers also compete with regard to quality, variety and availability of products offered, strength of private label brands offered, schedules and reliability of deliveries and the range and quality of services provided.

Continued consolidation in the industry, consolidation among the Company’s suppliers, new entrants and trends toward vertical integration could create additional competitive pressures that reduce margins and adversely affect the Company’s business, financial condition and results of operations.

The Company may experience reduced sales if Members lose market share to fully integrated chain stores, warehouse stores and supercenters that have gained increased market share. This trend is expected to continue. These supercenters have benefited from concentrated buying power and low-cost distribution technology, and have increasingly gained market share at the expense of traditional supermarket operators, including some independent operators, many of whom are the Company’s customers. The market share of such alternative format stores is expected to grow in the future, potentially resulting in a loss of sales volume for the Company. A loss of sales volume could potentially cause patronage dividends to be reduced and/or the Exchange Value of the Company’s shares to decrease, thereby reducing the value of the Members’ Class A and Class B Shares.

We will continue to be subject to risk of loss of member volume. The Company’s operating results are highly dependent upon either maintaining or growing its distribution volume to its customers. The Company’s top ten Member and non-member customers constituted approximately 43% of total sales for the twenty-six week period ended March 31, 2007. A significant loss in membership or volume could adversely affect the Company’s operating results. We will continue to be subject to the risks associated with consolidation within the grocery industry. When independent retailers are acquired by large chains with self-distribution capacity, are driven from business by larger grocery chains, or become large enough to develop their own self-distribution system, we will lose distribution volume. Members may also select other wholesale providers. Reduced volume is normally injurious to profitable operations since fixed costs must be spread over a lower sales volume if the volume cannot be replaced.

The Company may experience reduced sales if Members purchase directly from manufacturers. Increased industry competitive pressure is causing some of the Company’s Members that can qualify to purchase directly from manufacturers to increase their level of direct purchases from manufacturers and expand their self-distribution activities. The Company’s operating results could be adversely affected if a significant reduction in distribution volume occurred in the future.

We are vulnerable to changes in general economic conditions. The Company is affected by certain economic factors that are beyond its control including inflation. An inflationary economic period could impact the Company’s operating expenses in a variety of areas, including, but not limited to, employee wages, benefits and workers’ compensation insurance, as well as energy and fuel costs. A portion of the risk related to wages and benefits is mitigated by bargaining agreements that contractually determine the amount of such increases. General economic conditions also impact our pension plan liabilities, as the assets funding or supporting these liabilities are invested assets that are subject to interest rate and stock market fluctuations. A portion of the Company’s debt is at floating interest rates and an inflationary economic cycle typically results in higher interest costs. The Company operates in a highly competitive marketplace and passing on such cost increases to customers could be difficult.

To the extent the Company is unable to mitigate increasing costs, patronage dividends may be reduced and/or the Exchange Value of the Company’s shares may decrease, thereby reducing the value of the Members’ Class A and Class B Shares.

Changes in the economic environment could adversely affect Unified’s customers’ ability to meet certain obligations to the Company or leave the Company exposed for obligations the Company has guaranteed. Loans to Members, trade receivables and lease guarantees could be at risk in a sustained inflationary environment. The Company establishes reserves for notes receivable, trade receivables, and lease commitments for which the Company may be at risk for default. Under certain circumstances, the Company would be required to foreclose on assets provided as collateral or assume payments for leased locations for which the Company has guaranteed payment. Although the Company believes its reserves to be adequate, the Company’s operating results could be adversely affected in the event that actual losses exceed available reserves.

The Company may on occasion hold investments in the common and/or preferred stock of its Members and suppliers. These investments are generally held at cost or the equity method and are periodically evaluated for impairment. As a result, changes in the economic environment that adversely affect the business of these Members and suppliers could result in the write-down of these investments. This risk is unique to a cooperative form of business in that investments are made to support Members’ businesses, and those economic conditions that adversely affect the Members can also reduce the value of the Company’s investment, and hence the Exchange Value of the underlying capital shares.

Litigation could lead to unexpected losses. During the normal course of carrying out its business, the Company may become involved in litigation. In the event that management determines that the probability of an adverse judgment in a pending litigation is likely and that the exposure can be reasonably estimated, appropriate reserves are recorded at that time pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 5“Accounting for Contingencies.” The final outcome of any litigation could adversely affect operating results if the actual settlement amount exceeds established reserves and insurance coverage.

We are subject to environmental laws and regulations. The Company owns and operates various facilities for the manufacture, warehousing and distribution of products to its customers. Accordingly, the Company is subject to increasingly stringent federal, state and local laws, regulations and ordinances that (i) govern activities or operations that may have adverse environmental effects, such as discharges to air and water, as well as handling and disposal practices for solid and hazardous wastes and (ii) impose liability for the costs of cleaning up, and certain damages resulting from, sites of past spills, disposals or other releases of hazardous materials. In particular, under applicable environmental laws, the Company may be responsible for remediation of environmental conditions and may be subject to associated liabilities (including liabilities resulting from lawsuits brought by private litigants) relating to its facilities and the land on which the Company facilities are situated, regardless of whether the Company leases or owns the facilities or land in question and regardless of whether such environmental conditions were created by it or by a prior owner or tenant.

We are exposed to potential product liability claims and potential negative publicity surrounding any assertion that the Company’s products caused illness or injury. The packaging, marketing and distribution of food products purchased from others involve an inherent risk of product liability, product recall and adverse publicity. Such products may contain contaminants that may be inadvertently redistributed by the Company. These contaminants may result in illness, injury or death if such contaminants are not eliminated. Accordingly, the Company maintains stringent quality standards on the products it purchases from suppliers, as well as products manufactured by the Company itself. The Company generally seeks contractual indemnification and insurance coverage from parties supplying its products and rigorously tests its private brands and manufactured products to ensure the Company’s quality standards are met. Product liability claims in excess of available reserves and insurance coverage, as well as the negative publicity surrounding any assertion that the Company’s products caused illness or injury could have a material adverse effect on its reputation and on the Company’s business, financial condition and results of operations.

Our insurance reserves may be inadequate if unexpected losses occur. The Company’s insurance subsidiaries are regulated by the State of California and are subject to the rules and regulations promulgated by the appropriate regulatory agencies. In addition, the Company is self-insured for workers’ compensation up to $1,000,000 per

incident and maintains appropriate reserves to cover anticipated payments. Insurance reserves are recorded based on estimates made by management and validated by third party actuaries to ensure such estimates are within acceptable ranges. Actuarial estimates are based on detailed analyses of health care cost trends, mortality rates, claims history, demographics, industry trends and federal and state law. As a result, the amount of reserve and related expense is significantly affected by the outcome of these studies. Significant and adverse changes in the experience of claims settlement and other underlying assumptions could negatively impact operating results.

We may not have adequate resources to fund our operations. The Company relies primarily upon cash flow from its operations and Member investments to fund its operating activities. In the event that these sources of cash are not sufficient to meet the Company’s requirements, additional sources of cash are expected to be obtained from the Company’s credit facilities to fund its daily operating activities. Our Revolving Credit Agreement, which expires on January 31, 2012, requires compliance with certain financial covenants, including minimum tangible net worth, fixed charge coverage ratio and total funded debt to earnings before interest, taxes, depreciation, amortization and patronage dividends (“EBITDAP”). While the Company is currently in compliance with all required covenants and expects to remain in compliance, this does not guarantee the Company will remain in compliance in future periods.

The Company’s Revolving Credit Agreement permits advances up to a maximum of $225 million. As of March 31, 2007, the Company believes it has sufficient cash flow from operations and availability under the Revolving Credit Agreement to meet operating needs and capital spending requirements through fiscal 2011. However, if access to operating cash or to the Revolving Credit Agreement becomes restricted, the Company may be compelled to seek alternate sources of cash. The Company cannot assure that alternate sources will provide cash on terms favorable to the Company. Consequently, the inability to access alternate sources of cash on terms similar to its existing agreement could adversely affect the Company’s operations.

The value of our benefit plan assets and liabilities is based on estimates and assumptions, which may prove inaccurate. The Company’s employees participate in Company sponsored defined pension and postretirement benefit plans. Officers of the Company also participate in a Company sponsored ESPP II, which provides additional post-termination retirement income based on each participant’s final salary and years of service as an officer of the Company. The postretirement plans provide medical benefits for retired non-union employees, life insurance benefits for retired non-union employees for which active non-union employees are no longer eligible, and lump-sum payouts for unused sick days covering certain eligible union and non-union employees. Liabilities for the postretirement plans are not funded. The Company accounts for these benefit plans in accordance with SFAS No. 87,“Employers’ Accounting for Pensions,” SFAS No. 106“Employers’ Accounting for Postretirement Benefits Other Than Pensions” and SFAS No. 112“Employers’ Accounting forPostemployment Benefits,” which require the Company to make actuarial assumptions that are used to calculate the carrying value of the related assets, where applicable, and liabilities and the amount of expenses to be recorded in the Company’s consolidated financial statements. Assumptions include the expected return on plan assets, discount rates, health care cost trend rate, projected life expectancies of plan participants and anticipated salary increases. While we believe the underlying assumptions are appropriate, the carrying value of the related assets and liabilities and the amount of expenses recorded in the consolidated financial statements could differ if other assumptions are used.

Additionally, new accounting pronouncements that require adjustments to shareholders’ equity, such as SFAS No. 158“Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans”,have the potential to impact companies whose equity securities are issued and redeemed at book value (“book value companies”) disproportionately more than companies whose share values are market-based (“publicly traded”). While valuations of publicly traded companies are primarily driven by their income statement and cash flows, the traded value of the shares of book value companies, however, may be immediately impacted by adjustments affecting shareholders’ equity upon implementation. Therefore, such pronouncements may require companies to redefine the method used to value their shares.

A system failure or breach of system or network security could delay or interrupt services to our customers or subject us to significant liability. The Company has implemented security measures such as firewalls, virus protection, intrusion detection and access controls to address the risk of computer viruses and unauthorized access. A business continuity plan has been developed focusing on the offsite restoration of computer hardware and software applications. Business resumption plans are currently being developed which include procedures to ensure the continuation of business operations in response to the risk of damage from energy blackouts, natural

disasters, terrorism, war and telecommunication failures. In addition, change management procedures and quality assurance controls have been implemented to ensure that new or upgraded business management systems operate as intended. However, there is still a possibility that a system failure, accident or security breach could result in a material disruption to the Company’s business. In addition, substantial costs may be incurred to remedy the damages caused by these disruptions.

Our success depends on our retention of our executive officers, senior management and our ability to hire andretain additional key personnel. The Company’s success depends on the skills, experience and performance of its executive officers, senior management and other key personnel. The loss of service of one or more of its executive officers, senior management or other key employees could have a material adverse effect on the Company’s business, prospects, financial condition, operation results and cash flows. The Company’s future success also depends on its continuing ability to attract and retain highly qualified technical, sales and managerial personnel. Competition for these personnel is intense, and there can be no assurance that the Company can retain our key employees or that it can attract, assimilate or retain other highly qualified technical, sales and managerial personnel in the future.

The successful operation of our business depends upon the supply, including raw material, and marketing relationships from other companies, including those supplying our private brand products. The Company depends upon third parties for supply of products, including private brand products, and raw materials. Any disruption in the services provided by any of these suppliers, or any failure by them to handle current or higher volumes of activity, could have a material adverse effect on the Company’s business, prospects, financial condition, operating results and cash flows.

The Company participates in various marketing and promotional programs to increase sales volume and reduce merchandise costs. Failure to continue these relationships on terms that are acceptable to Unified, or to obtain adequate marketing relationships could have a material adverse effect on the Company’s business, prospects, financial condition, operating results and cash flows.

Increased energy, diesel fuel and gasoline costs could reduce our profitability. The Company’s operations require and are dependent upon the continued availability of substantial amounts of electricity, diesel fuel and gasoline to manufacture, store and transport products. The Company’s trucking operations are extensive and diesel fuel storage capacity represents approximately two weeks average usage. The prices of electricity, diesel fuel and gasoline fluctuate significantly over time. Given the competitive nature of the grocery industry, the Company may not be able to pass on increased costs of production, storage and transportation to the customers. As a result, either a shortage or significant increase in the cost of electricity, diesel fuel or gasoline could disrupt distribution activities and negatively impact our business and results of operations.

Strike or work stoppage by our union employees could disrupt our business. The inability to negotiate acceptable contracts with the unions could result in a strike or work stoppage and increased operating costs resulting from higher wages or benefits paid to union members or replacement workers. Such outcome could have a material negative impact on the Company’s operations and financial results. Approximately 66% of Unified’s employees are covered by collective bargaining agreements that have various expiration dates ranging through 2010.

If we fail to maintain an effective system of internal controls, we may not be able to detect fraud or report our financial results accurately, which could harm our business and we could be subject to regulatory scrutiny. Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”), Unified will be required, beginning in its fiscal year 2008, to perform an evaluation of the Company’s internal controls over financial reporting and have the Company’s independent registered public accounting firm test and evaluate the design and operating effectiveness of such internal controls and publicly attest to such evaluation. The Company has prepared an internal plan of action for compliance with the requirements of Section 404, which includes a timeline and scheduled activities, although as of the date of this filing the Company has not yet completed its effectiveness evaluation. Although the Company believes its internal controls are operating effectively, the Company cannot guarantee that it will not have any material weaknesses. Compliance with the requirements of Section 404 is expected to be expensive and time-consuming. If the Company fails to complete this evaluation in a timely manner, or if the Company’s independent registered public accounting firm cannot timely attest to the Company’s

evaluation, the Company could be subject to regulatory scrutiny and a loss of public confidence in our internal controls. In addition, any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm the Company’s operating results or cause the Company to fail to meet its reporting obligations.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of the Company’s consolidated condensed financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates, assumptions and judgments that affect the amount of assets and liabilities reported in the consolidated condensed financial statements, the disclosure of contingent assets and liabilities as of the date of the consolidated condensed financial statements and reported amounts of revenues and expenses during the year. The Company believes its estimates and assumptions are reasonable; however, future results could differ from those estimates under different assumptions or conditions.

The Company’s discussion and analysis of its financial condition and results of operations is based upon its consolidated condensed financial statements. On an ongoing basis, we evaluate our estimates, including those related to allowances for doubtful accounts, lease loss reserves, inventories, investments, goodwill and intangible assets, long-lived assets, income taxes, insurance reserves, pension and postretirement benefits and contingencies and litigation. We base our estimates on historical experience and on various other assumptions and factors that we believe to be reasonable under the circumstances. Based on our ongoing review, we make adjustments we consider appropriate under the facts and circumstances. We have discussed the development, selection and disclosure of these estimates with the Audit Committee. The accompanying consolidated condensed financial statements are prepared using the same critical accounting policies and estimates discussed in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2006.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Refer to Note 9 to Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this quarterly report on Form 10-Q for management’s discussion of recently issued accounting pronouncements and their expected impact, if any, on the Company’s consolidated condensed financial statements.

AVAILABILITY OF SEC FILINGS

Unified makes available, free of charge, through its website (http://www.uwgrocers.com) its Forms 10-K, 10-Q and 8-K, as well as its registration and proxy statements, as soon as reasonably practicable after those reports are electronically filed with the Securities and Exchange Commission (the “SEC”). A copy of any of the reports filed with the SEC can be obtained from the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. A copy may also be obtained by calling the SEC at 1-800-SEC-0330. All reports filed electronically with the SEC are available on the SEC’s web site at http://www.sec.gov.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The following discussion of the market risks the Company faces contains forward-looking statements. Forward-looking statements are subject to risks and uncertainties. Actual results could differ materially from those discussed in the forward-looking statements.

Unified is subject to interest rate changes on its notes payable under the Company’s credit agreements that may affect the fair value of the notes payable, as well as cash flow and earnings. Based on the notes payable outstanding at March 31, 2007 and the current market condition, a one percent increase in the applicable interest rates would decrease the Company’s annual cash flow and pretax earnings by approximately $0.7 million. Conversely, a one percent decrease in the applicable interest rates would increase annual cash flow and pretax earnings by $0.7 million.

The Company’s investments in convertible bonds are classified as trading securities. As such, the Company is subject to market risk associated with fluctuations in interest rates and the market value of the embedded conversion feature.

The Company is exposed to credit risk on accounts receivable through the ordinary course of business and the Company performs ongoing credit evaluations. Concentration of credit risk with respect to accounts receivables are limited due to the nature of our customer base (i.e., primarily Members). The Company currently believes its allowance for doubtful accounts is sufficient to cover customer credit risks.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure controls and procedures. Disclosure controls are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed to reasonably assure that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entity’s disclosure objectives. The likelihood of achieving such objectives is affected by limitations inherent in disclosure controls and procedures. These include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures such as simple errors, mistakes or intentional circumvention of the established processes.

At the end of the period covered by this report, Unified’s management, with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Our Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective at the reasonable assurance level described above as of the end of the period covered in this report.

Changes in internal controls over financial reporting. Management, with the participation of the Chief Executive Officer and 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 Chief Financial Officer of the Company have concluded that no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the quarter ended March 31, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

The Company is a non-accelerated filer and is required to comply with the internal control reporting and disclosure requirements of Section 404 of the Sarbanes-Oxley Act for fiscal years ending on or after December 15, 2007. The Company is currently in the documentation phase of its Section 404 compliance and will be required to comply with these disclosure requirements for its fiscal year ending September 27, 2008.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 1A. RISK FACTORS

There are no material changes from risk factors as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2006, filed on December 18, 2006 (File No. 000-10815). Refer to “Risk Factors” in Part I, Item 2 of this Quarterly Report on Form 10-Q for discussion of the Company’s risk factors.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

COMPANY PURCHASES OF EQUITY SECURITIES


Period	Total Number of Shares Purchased	Average Price Paid Per Share
December 31, 2006 – January 27, 2007	– Shares		—
January 28, 2007 – February 24, 2007	4,200 Class A Shares	$	222.82
February 25, 2007 – March 31, 2007	– Shares		—

Total	4,200 Class A Shares	$	222.82

Refer to “Redemption of Capital Stock” in Part I, Item 2 of this quarterly report on Form 10-Q for discussion of the Company’s share redemptions.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

(a)

Date of Meeting: February 13, 2007 (Annual Meeting)

(b)

The matters voted upon at the meeting and the results of each vote are as follows:

Election of Directors


Class A Directors	Votes For	Withheld Authority
Louis A. Amen	96,000	6,000
John Berberian	96,900	5,100
Oscar Gonzalez	96,000	6,000
Mark Kidd	97,200	4,800
John D. Lang	96,600	5,400
Jay T. McCormack	96,600	5,400
John Najjar	96,600	5,400
Peter J. O’Neal	96,300	5,700
Michael A. Provenzano, Jr.	96,600	5,400
Thomas S. Sayles	96,900	5,100
Kenneth Ray Tucker	96,900	5,100
Richard L. Wright	96,600	5,400
Class B Directors	Votes For	Withheld Authority
Darioush Khaledi	356,286	16,002
Douglas A. Nidiffer	358,350	13,938
Robert E. Stiles	356,663	15,625

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS


(a)		Exhibits

3.1		Amended and Restated Articles of Incorporation of the Registrant, as amended (incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 29, 2003).

3.2		Bylaws of the Registrant, as amended (incorporated by reference to Exhibit 3.2 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2006, filed on December 18, 2006).

10.67.1		Change in Terms Agreement dated as of March 26, 2007 to Second Amended and Restated Loan Purchase and Service Agreement dated as of June 9, 2004, between Grocers Capital Company and National Consumer Cooperative Bank, as buyer.

10.68.1		Change in Terms Agreement dated as of March 27, 2007 to Second Amended and Restated Credit Agreement dated as of June 9, 2004, among Grocers Capital Company, the lenders listed therein and National Consumer Cooperative Bank, as agent.

31.1		Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Chief Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Chief Executive Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Chief Financial Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.


UNIFIED WESTERN GROCERS, INC.

By		/s/ ALFRED A. PLAMANN
		*President and Chief Executive Officer* *(Principal Executive Officer)*

By		/s/ RICHARD J. MARTIN
		*Richard J. Martin* *Executive Vice President, Finance &* *Administration and Chief Financial Officer* *(Principal Financial and Accounting Officer)*

By		/s/ RANDALL G. SCOVILLE
		*Randall G. Scoville* *Vice President, Accounting and Chief* *Accounting Officer*

Dated: May 11, 2007

Exhibit 10.67.1

CHANGE IN TERMS AGREEMENT

Principal

$70,000,000

Loan Date

06/09/2004

Maturity

06-09-2007

Loan No

Master
Commitment

Call / Coll

Account

Officer

Initials

References in the shaded area are for Lender’s use only and do not limit the applicability of this document to any particular loan or item.

Any item above containing “***” has been omitted due to text length limitations.

Borrower:

Grocers Capital Company

5200 Sheila Street

Commerce, CA 90040

Lender:

NCB

1725 Eye Street NW, Suite 600

Washington, DC 20006


Principal Amount: $70,000,000.00		Date of Agreement: March 26, 2007

DESCRIPTION OF EXISTING INDEBTEDNESS. WHEREAS,that certain Loan Purchase and Servicing Agreement dated as of August 29, 1996 shall remain outstanding as Loans under, and subject to, the terms of this Agreement.

WHEREAS,the Loans outstanding under the Amended and Restated Loan Purchase and Servicing Agreement (each an “Amended and Restated Loan” and, collectively, the “Amended and Restated Loans”), shall remain outstanding as Loans under, and subject to, the terms of this Agreement.

WHEREAS,GCC and Buyer desire (i) to amend and restate the Amended and Restated Loan Purchase and Servicing Agreement dated as of December 7, 2001 (as amended, the “Amended and Restated Loan Purchase and Servicing Agreement”) as set forth in this Agreement and (ii) in connection therewith, amend and restate the Amended and Restated Guaranty Agreement as set forth in the Second Amended and Restated Guaranty Agreement; and

WHEREAS,Lender is the owner and holder of that certain Second Amended and Restated Loan Purchase and Servicing Agreement (this “Agreement”) dated June 9, 2004 by and between Grocers Capital Company, a California Corporation (“GCC”), as Seller (in such capacity, the “Seller”) and as Servicer (in such capacity, the “Servicer”), and NCB a/k/a National Consumer Cooperative Bank, a financial institution organized under the laws of the United States (the “Buyer”) for consideration in the amount of Seventy Million Dollars and 00/100. ($70,000,000.00) under the Loan Purchase Program as amended;

DESCRIPTION OF CHANGE IN TERMS. NOW, THEREFORE, in consideration of the foregoing and for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1.	The Second Amended and Restated Loan Purchase and Servicing Agreement is hereby amended to provide for:

A.)

Renewal of the Loan Purchase Program for a 9-month term to 3/31/08.

2.	Except as hereby expressly modified, the Note and the Loan Agreement shall be and remain unchanged and in full force and effect, and the same are hereby expressly approved, ratified and confirmed.

This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, shall be construed in accordance with the laws of the District of Columbia, and may be modified only by a written agreement executed by the party against whom such modification is sought to be enforced.

IN WITNESS WHEREOF, each of the undersigned has caused this Agreement to be executed on its behalf as of the year and date first above written.

CONTINUING VALIDITY. Except as expressly changed by this Agreement, the terms of the original obligations, including all agreements evidenced or securing the obligation (s), remain unchanged and in full force and effect. Consent by Lender to this Agreement does not waive Lender’s right to strict performance of the obligation(s) as changed, nor obligate Lender to make any future change in terms. Nothing in this Agreement will constitute a satisfaction of the obligation(s). It is the intention of Lender to retain as liable parties all makers and endorsers of the original obligation(s), including accommodation parties, unless a party is expressly released by Lender in writing. Any maker or endorser, including accommodation makers, will not be released by virtue of this Agreement. If any person who signed the original obligation does not sign this Agreement below, then all persons signing below acknowledge that this Agreement is given conditionally, based on the representation to Lender that the non-signing party consents to the changes and provisions of this Agreement or otherwise will not be released by it. This waiver applies not only to any initial extension, modification or release, but also to all such subsequent actions.

VENUE/JURISDICTION. All parties hereto agree that, at the option of the Lender, all litigation regarding any matter arising hereunder shall be in the local or federal courts located in the District of Columbia, and all parties hereto hereby waive any defense of inconvenient forum. As used herein, "the laws of the District of Columbia" means the internal laws thereof, excluding its choice of law.

RELATIONSHIP OF PARTIES. Neither this Agreement nor any of the Related Documents is intended to create any relationship between (a) Lender and (b) Borrower or any Grantor or Guarantor, except as specifically stated herein or in the Related Documents, and Lender does not assume and shall not have a fiduciary duty to Borrower or any Grantor or Guarantor.

JURY TRIAL. BECAUSE OF THE COMPLEXITY OF LITIGATION REGARDING FINANCIAL TRANSACTIONS AND THE IMPORTANCE OF EXPEDITING SUCH LITIGATION, EACH OF BORROWER AND LENDER, AFTER RECEIVING THE ADVICE OF ITS OWN ATTORNEYS, KNOWINGLY AND VOLUNTARILY WAIVES ANY RIGHT TO JURY TRIAL AND AGREES THAT ALL ISSUES SHOULD BE TRIED BY A COURT SITTING WITHOUT A JURY.

CHANGE IN TERMS AGREEMENT

(Continued)

Page 2

PROCESS SERVICE. All parties hereto agrees that process may be served upon any party hereto by certified or registered mail, return receipt requested, directed to such party at its last known address, and each party waives any defense of insufficiency of service with respect to process so served.

DEFAULT FURTHER EXPLAINED. Notwithstanding the foregoing, there shall be no cure period for failure of the Borrower to observe or comply with any negative covenant contained in this Note or related documents, nor shall any cure period be available for the Borrowers failing to maintain Insurance in accordance with the related documents. Any default having an adverse affect on any lien granted by Borrower in favor of Lender pursuant to related documents, or under the category of Default, which includes, Payment Default, Other Defaults, Default in Favor of Third Parties, False Statements, Insolvency, Creditor or Forfeiture Proceedings, Events Affecting Guarantor, Change in Ownership, Adverse Change, or Cure Provisions.

THIS AGREEMENT IS GIVEN UNDER SEAL AND IT IS INTENDED THAT THIS AGREEMENT IS AND SHALL CONSTITUTE AND HAVE THE EFFECT OF A SEALED INSTRUMENT ACCORDING TO LAW.

PRIOR TO SIGNING THIS AGREEMENT, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS AGREEMENT. BORROWER AGREES TO THE TERMS OF THE AGREEMENT.


BORROWER:

By:	/s/ Carolyn Fox	(Seal)
	Carolyn Fox, President of Grocers Capital Company

Exhibit 10.68.1

CHANGE IN TERMS AGREEMENT

Principal

$10,000,000

Loan Date

06/09/2004

Maturity

06-09-2007

Loan No
220290501

Call / Coll

Account

Officer

Initials

References in the shaded area are for Lender’s use only and do not limit the applicability of this document to any particular loan or item.

Any item above containing “***” has been omitted due to text length limitations.

Borrower:

Grocers Capital Company

5200 Sheila Street

Commerce, CA 90040

Lender:

NCB

1725 Eye Street NW, Suite 600

Washington, DC 20006


Principal Amount: $10,000,000.00		Date of Agreement: March 27, 2007

DESCRIPTION OF EXISTING INDEBTEDNESS. WHEREAS, advances of monies under the Loan are subject to the terms and conditions of a certain Change in Terms Agreement dated January 1, 2006 (the " Change In Terms, dated January 1, 2006"), by and between Borrower and Lender as amended.

WHEREAS, Lender is the owner and holder of a certain Secured Promissory Note dated June 9, 2004 (the “Note”), made by Borrower and payable to Lender or order in the original principal amount of Ten Million Dollars and 00/100. ($10,000,000.00) ("Loan Number 220290501) as amended.

WHEREAS,advances of monies under the Loan are subject to the terms and conditions between Borrower, certain financial institutions as lenders (“Lenders”), and Agent are parties to an Amended and Restated Credit Agreement dated as of December 7, 2001 herewith (as amended, restated, modified, renewed or extended from time to time, the “Credit Agreement”). The Credit Agreement amends and restates that certain Credit Agreement dated as of September 20, 1996 (the “Prior Credit Agreement”) among Borrower, the lenders party thereto and NCB, as agent.

WHEREAS,advances of monies under the Loan are subject to the terms and conditions of that certain Second Amended and Restated Credit Agreement dated June 9, 2004 (as amended, restated, modified, renewed or extended from time to time, the "Credit Agreement"). The Credit Agreement amends and restates that certain Amended and Restated Credit Agreement dated as of December 7, 2001 (the “Prior Credit Agreement”) among Borrower, the lenders party thereto and NCB, as agent. It is a condition precedent to the borrowings under the Credit Agreement that Borrower enter into this Agreement and grant to Agent, for itself and for the ratable benefit of Lenders, the security interests hereinafter provided to secure the obligations of Borrower described below.

1.	The Promissory Note is hereby amended to provide for:

A.)

Renewal of the Line of Credit for an additional 33-month term to mature on 3/31/2010.

2.	Except as hereby expressly modified, the Note and the Loan Agreement shall be and remain unchanged and in full force and effect, and the same are hereby expressly approved, ratified and confirmed.

IN WITNESS WHEREOF, each of the undersigned has caused this Agreement to be executed on its behalf as of the year and date first above written.

CHANGE IN TERMS AGREEMENT

(Continued)

Page 2

DEFAULT FURTHER EXPLAINED. Notwithstanding the foregoing, there shall be no cure period for failure of the Borrower to observe or comply with any negative covenant contained in this Note or related documents, nor shall any cure period be available for the Borrowers failing to maintain Insurance in accordance with the related documents. Any default having an adverse affect on any lien granted by Borrower in favor of Lender pursuant to related documents, or under the category of Default, which includes, Payment Default, Other Defaults, Default in Favor of Third Parties, False Statements, Insolvency, Creditor or Forfeiture Proceedings, Events Affecting Guarantor, Change in Ownership, Adverse Change, or Cure Provisions.

THIS AGREEMENT IS GIVEN UNDER SEAL AND IT IS INTENDED THAT THIS AGREEMENT IS AND SHALL CONSTITUTE AND HAVE THE EFFECT OF A SEALED INSTRUMENT ACCORDING TO LAW.

PRIOR TO SIGNING THIS AGREEMENT, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS AGREEMENT. BORROWER AGREES TO THE TERMS OF THE AGREEMENT.


BORROWER:

By:	/s/ Carolyn Fox	(Seal)
	Carolyn Fox, President of Grocers Capital Company

EXHIBIT 31.1

CERTIFICATION

I, Alfred A. Plamann, certify that:

I have reviewed this Quarterly Report on Form 10-Q of Unified Western Grocers, Inc. (the “Registrant”);

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent functions):

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Dated: May 11, 2007

/s/ ALFRED A. PLAMANN

Alfred A. Plamann

President and Chief Executive Officer

(Principal Executive Officer)

EXHIBIT 31.2

CERTIFICATION

I, Richard J. Martin, certify that:

I have reviewed this Quarterly Report on Form 10-Q of Unified Western Grocers, Inc. (the “Registrant”);

Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Dated: May 11, 2007

/s/ RICHARD J. MARTIN

Richard J. Martin

Executive Vice President, Finance and Administration and Chief Financial Officer

(Principal Financial and Accounting Officer)

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE

SARBANES-OXLEY ACT OF 2002

Pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and in connection with the Quarterly Report on Form 10-Q of Unified Western Grocers, Inc. (the “Company”) for the fiscal quarter ended March 31, 2007, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Alfred A. Plamann, President and Chief Executive Officer of the Company, hereby certify that:

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods presented in the Report.

Date: May 11, 2007

/s/ ALFRED A. PLAMANN

Alfred A. Plamann

President and Chief Executive Officer

(Principal Executive Officer)

A signed original of this written statement required by Section 906 has been provided to the Company and will be furnished to the Securities and Exchange Commission or its staff upon request.

EXHIBIT 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE

SARBANES-OXLEY ACT OF 2002

Pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and in connection with the Quarterly Report on Form 10-Q of Unified Western Grocers, Inc. (the “Company”) for the fiscal quarter ended March 31, 2007, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Richard J. Martin, Executive Vice President, Finance and Administration and Chief Financial Officer of the Company, hereby certify that:

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods presented in the Report.

Date: May 11, 2007

/s/ RICHARD J. MARTIN

Richard J. Martin

Executive Vice President, Finance and

Administration and Chief Financial Officer

(Principal Financial and Accounting Officer)

A signed original of this written statement required by Section 906 has been provided to the Company and will be furnished to the Securities and Exchange Commission or its staff upon request.

Unified Grocers Inactive 424B3Prospectus supplement