Pantry (PTRY) 10-Q 2008 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 27, 2007

Commission file number: 000-25813

THE PANTRY, INC.

(Exact name of registrant as specified in its charter)

Delaware	56-1574463
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1801 Douglas Drive

Sanford, North Carolina 27330

(Address of principal executive offices and zip code)

(919) 774-6700

(Registrant’s telephone number, including area code)

N/A

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx 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 filerx                                 Accelerated filer¨                                 Non-accelerated filer¨

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

COMMON STOCK, $0.01 PAR VALUE	22,209,615 SHARES
(Class)	(Outstanding at February 1, 2008)

THE PANTRY, INC.

FORM 10-Q

DECEMBER 27, 2007

TABLE OF CONTENTS

		Page
Part I—Financial Information
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets (Unaudited)	3
	Condensed Consolidated Statements of Operations (Unaudited)	4
	Condensed Consolidated Statements of Cash Flows (Unaudited)	5
	Notes to Condensed Consolidated Financial Statements (Unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.	Controls and Procedures	30
Part II—Other Information
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	32
Item 6.	Exhibits	42

2

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

THE PANTRY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands)

	December 27, 2007			September 27, 2007
	(Unaudited)			(Note 1)
ASSETS
Current assets:
Cash and cash equivalents	$	57,530		$	71,503
Receivables (net of allowance for doubtful accounts of $110 at December 27, 2007 and September 27, 2007)		80,868			84,445
Inventories		154,204			169,647
Prepaid expenses and other current assets		14,777			14,662
Deferred income taxes		10,882			10,594
Total current assets		318,261			350,851
Property and equipment, net		1,034,540			1,025,226
Other assets:
Goodwill		585,040			584,336
Other intangible assets		34,116			34,802
Other noncurrent assets		34,348			34,224
Total other assets		653,504			653,362
Total assets	$	2,006,305		$	2,029,439
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	3,541		$	3,541
Current maturities of lease finance obligations		5,538			5,348
Accounts payable		170,964			192,228
Accrued compensation and related taxes		16,303			15,739
Other accrued taxes		19,171			26,416
Self-insurance reserves		33,722			32,873
Other accrued liabilities		38,004			40,812
Total current liabilities		287,243			316,957
Other liabilities:
Long-term debt		745,864			746,749
Lease finance obligations		451,697			452,609
Deferred income taxes		74,193			74,667
Deferred vendor rebates		25,608			23,937
Other noncurrent liabilities		64,947			60,692
Total other liabilities		1,362,309			1,358,654
Commitments and contingencies (Note 4)
Shareholders’ equity:
Common stock, $.01 par value, 50,000,000 shares authorized; 22,196,949 and 22,193,949 issued and outstanding at December 27, 2007 and September 27, 2007, respectively		222			222
Additional paid-in capital		165,432			163,926
Accumulated other comprehensive (loss) income, net of deferred income taxes of $614 at December 27, 2007 and $(195) at September 27, 2007		(972	)		302
Retained earnings		192,071			189,378
Total shareholders’ equity		356,753			353,828
Total liabilities and shareholders’ equity	$	2,006,305		$	2,029,439

See Notes to Condensed Consolidated Financial Statements

3

THE PANTRY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars in thousands, except per share data)

	Three Months Ended
	December 27, 2007			December 28, 2006
	(13 weeks)			(13 weeks)
Revenues:
Merchandise	$	395,380		$	349,239
Gasoline		1,582,921			1,031,901
Total revenues		1,978,301			1,381,140
Costs and operating expenses:
Merchandise cost of goods sold (exclusive of items shown separately below)		249,017			217,923
Gasoline cost of goods sold (exclusive of items shown separately below)		1,526,764			991,682
Store operating		126,138			114,768
General and administrative		22,974			21,585
Depreciation and amortization		26,642			20,856
Total costs and operating expenses		1,951,535			1,366,814
Income from operations		26,766			14,326
Other income (expense):
Interest expense, net		(21,607	)		(14,129	)
Miscellaneous		190			167
Total other expense		(21,417	)		(13,962	)
Income before income taxes		5,349			364
Income tax expense		(2,100	)		(239	)
Net income	$	3,249		$	125
Earnings per share:
Basic	$	0.15		$	0.01
Diluted	$	0.15		$	0.01

See Notes to Condensed Consolidated Financial Statements

4

THE PANTRY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

	Three Months Ended
	December 27, 2007			December 28, 2006
	(13 weeks)			(13 weeks)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	3,249		$	125
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		26,642			20,856
Provision (benefit) for deferred income taxes		47			(234	)
Stock compensation expense		877			883
Other		1,640			1,669
Changes in operating assets and liabilities, net of effects of acquisitions:
Receivables		2,965			4,613
Inventories		15,740			10,699
Prepaid expenses and other current assets		629			4,019
Other noncurrent assets		(79	)		(139	)
Accounts payable		(21,264	)		(11,178	)
Other current liabilities and accrued expenses		(6,159	)		(14,886	)
Other noncurrent liabilities		2,083			(1,440	)
Net cash provided by operating activities		26,370			14,987
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment		(36,457	)		(19,375	)
Proceeds from sales of property and equipment		548			3,250
Acquisitions of businesses, net of cash acquired		(2,893	)		(21,768	)
Net cash used in investing activities		(38,802	)		(37,893	)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of long-term debt, including redemption premiums		(885	)		(522	)
Repayments of lease finance obligations		(1,322	)		(883	)
Proceeds from lease finance obligations		600			14,675
Proceeds from exercise of stock options		79			—
Excess income tax benefits from stock-based compensation arrangements		22			—
Other financing costs		(35	)		—
Net cash (used in) provided by financing activities		(1,541	)		13,270
NET DECREASE IN CASH AND CASH EQUIVALENTS		(13,973	)		(9,636	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		71,503			120,394
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	57,530		$	110,758
Cash paid during the period:
Interest	$	17,766		$	11,321
Income taxes	$	2,355		$	4,032
Non-cash transactions:
Accrued purchases of property and equipment	$	5,210		$	7,303

See Notes to Condensed Consolidated Financial Statements

5

THE PANTRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1—BASIS OF PRESENTATION

Unaudited Condensed Consolidated Financial Statements

The accompanying condensed consolidated financial statements include the accounts of The Pantry, Inc. and its wholly owned subsidiaries (references to “the Company,” “Pantry,” “The Pantry,” “we,” “us,” and “our” mean The Pantry, Inc. and its subsidiaries). All intercompany transactions and balances have been eliminated in consolidation. Transactions and balances of each of our wholly owned subsidiaries are immaterial to the condensed consolidated financial statements.

The condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. The condensed consolidated financial statements have been prepared from the accounting records of The Pantry, Inc. and its subsidiaries, and all amounts at December 27, 2007 and for the three months ended December 27, 2007 and December 28, 2006 are unaudited. Pursuant to Regulation S-X, certain information and note disclosures normally included in annual financial statements have been condensed or omitted. The information furnished reflects all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented, and which are of a normal, recurring nature. The condensed consolidated balance sheet at September 27, 2007 has been derived from our audited consolidated financial statements.

The condensed consolidated financial statements included herein should be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 27, 2007.

Our results of operations for the three months ended December 27, 2007 and December 28, 2006 are not necessarily indicative of results to be expected for the full fiscal year. The convenience store industry in our marketing areas generally experiences higher levels of revenues during the summer months than during the winter months.

References in this report to “fiscal 2008” refer to our current fiscal year, which ends on September 25, 2008, and references to “fiscal 2007” refer to our fiscal year which ended September 27, 2007.

Accounting Period

We operate on a 52-53 week fiscal year ending on the last Thursday in September. Fiscal 2008 and fiscal 2007 both included 52 weeks.

Reclassifications

Certain selling, general and administrative expenses previously classified as operating, general and administrative expenses on our consolidated statements of operations have been reclassified as store operating expenses. These reclassifications had no effect on shareholders’ equity or net income as previously reported.

The Pantry

As of December 27, 2007, we operated 1,644 convenience stores located in Florida (459), North Carolina (386), South Carolina (282), Georgia (135), Tennessee (104), Alabama (83), Mississippi (81), Virginia (50), Kentucky (30), Louisiana (25), and Indiana (9). Our stores offer a broad selection of merchandise, gasoline and

6

THE PANTRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

ancillary products and services designed to appeal to the convenience needs of our customers, including gasoline, car care products and services, tobacco products, beer, soft drinks, self-service fast food and beverages, publications, dairy products, groceries, health and beauty aids, money orders and other ancillary services. In all states, except Alabama and Mississippi, we also sell lottery products. As of December 27, 2007, we operated 223 quick service restaurants within 210 of our locations and 258 of our stores included car wash facilities. Self-service gasoline is sold at 1,624 locations, 1,104 of which sell gasoline under major oil company brand names including BP^® , Chevron^® , CITGO^® , Texaco^® or ExxonMobil^® .

Excise Taxes

We collect and remit federal and state excise taxes on petroleum products. Gasoline sales and cost of goods sold included excise taxes of approximately $231.7 million and $201.5 million for the three months ended December 27, 2007 and December 28, 2006, respectively.

Inventories

Inventories are valued at the lower of cost or market. Cost is determined using the last-in, first-out method for merchandise inventories and using the weighted-average method for gasoline inventories. The gasoline we purchase from our vendors is temperature adjusted. The gasoline we sell at retail is sold at ambient temperatures. The volume of gasoline we maintain in inventory can expand or contract with changes in temperature. Depending on the actual temperature experience and other factors, we may realize a net increase or decrease in the volume of our gasoline inventory during our fiscal year. At interim periods, we record any projected increases or decreases through cost of goods sold through the year based on gallon volume, which we believe more fairly reflects our results by better matching our costs to our retail sales. As of December 27, 2007 and December 28, 2006, we have increased inventory by capitalizing variances of approximately $1.9 million and $2.6 million, respectively. At the end of any fiscal year, the entire variance, if any, is absorbed into cost of goods sold.

New Accounting Standards

In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 160,Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB 51.SFAS No. 160 amends Accounting Research Bulletin (“ARB”) No. 51 to establish accounting and reporting standards for the noncontrolling interest (minority interest) in a subsidiary and for deconsolidation of a subsidiary. This statement is effective for financial statements issued for fiscal years beginning on or after December 15, 2008 and interim periods within those fiscal years. We are currently evaluating SFAS No. 160 to determine the impact, if any, on our financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007),Business Combinations. SFAS No. 141(R) establishes principles and requirements for how an acquirer in a business combination recognizes and measures the assets acquired, liabilities assumed and any noncontrolling interest in the acquiree. This statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first fiscal year beginning on or after December 15, 2008. We are currently evaluating SFAS No. 141(R) to determine the impact, if any, on our financial statements.

7

THE PANTRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently evaluating SFAS No. 159 to determine the impact, if any, on our financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We are currently evaluating SFAS No. 157 to determine the impact, if any, on our financial statements.

NOTE 2—ACQUISITIONS

We generally focus on selectively acquiring convenience store chains within and contiguous to our existing market areas. Our ability to create synergies due to our relative size and geographic concentration contributes to a purchase price that is generally in excess of the fair value of assets acquired and liabilities assumed, which results in the recognition of goodwill.

During the first quarter of fiscal 2008, we purchased three stores in one transaction for approximately $2.9 million. These stores were acquired on October 25, 2007, and the acquisition was funded using available cash on hand.

Following are the aggregate purchase price allocations for the three stores acquired during the first quarter of fiscal 2008. Certain allocations are preliminary estimates based on available information and certain assumptions management believes to be reasonable. These values are subject to change until certain valuations have been finalized and management completes its fair value assessments. We do not expect any adjustments to the fair values of the assets and liabilities disclosed in the table below to have a significant impact on our financial statements. The allocations were based on the fair values on the dates of the acquisitions (amounts in thousands):

Assets Acquired:
Inventories	$	297
Property and equipment		3,815
Total assets		4,112
Liabilities Assumed:
Other accrued liabilities		1,917
Other noncurrent liabilities		15
Total liabilities		1,932
Net tangible assets acquired, net of cash		2,180
Non-compete agreements		10
Goodwill		670
Total consideration paid, including direct acquisition costs, net of cash acquired	$	2,860

8

THE PANTRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

We expect that goodwill associated with these transactions totaling $670 thousand will be deductible for income tax purposes over 15 years.

The following unaudited pro forma information presents a summary of our consolidated results of operations as if the transaction occurred at the beginning of the fiscal year for each of the periods presented (amounts in thousands, except per share data):

	Three Months Ended
	December 27, 2007		December 28, 2006
Total revenues	$	1,979,497	$	1,385,182
Net income		3,291		268
Earnings per share:
Basic	$	0.15	$	0.01
Diluted	$	0.15	$	0.01

NOTE 3—GOODWILL AND OTHER INTANGIBLE ASSETS

We account for goodwill and other intangible assets acquired through business combinations in accordance with SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 clarifies the criteria for recognizing other intangible assets separately from goodwill in a business combination. SFAS No. 142 states that goodwill and other intangible assets deemed to have indefinite lives are no longer amortized but are reviewed for impairment annually (or more frequently if impairment indicators arise). Separable intangible assets that are not determined to have an indefinite life will continue to be amortized over their useful lives and assessed for impairment under the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Other intangible assets are included in other noncurrent assets. We determined that we operate in one reporting unit based on our current reporting structure and have thus assigned goodwill at the enterprise level.

The following table reflects goodwill and other intangible asset balances as of September 27, 2007 and the activity thereafter through December 27, 2007 (amounts in thousands, except weighted-average life data):

	Unamortized				Amortized
	Goodwill		Trade names		Trade names			Customer Agreements			Non-compete Agreements
Weighted-average useful life in years		N/A		N/A		3.0			9.7			22.5
Gross balance at September 27, 2007	$	584,336	$	24,050	$	2,850		$	1,928		$	12,463
Purchase accounting adjustments (1)		34		—		—			—			—
Acquisitions		670		—		—			—			10
Gross balance at December 27, 2007	$	585,040	$	24,050	$	2,850		$	1,928		$	12,473
Accumulated amortization at September 27, 2007					$	(2,302	)	$	(488	)	$	(3,699	)
Amortization						(238	)		(67	)		(391	)
Accumulated amortization at December 27, 2007					$	(2,540	)	$	(555	)	$	(4,090	)

⁽¹⁾ Amounts are purchase accounting adjustments related to the finalization of values for prior period acquisitions.

9

THE PANTRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The estimated future amortization expense for trade names, customer agreements and non-compete agreements as of December 27, 2007 is as follows (amounts in thousands):

Fiscal Year Ended September:
2008	$	1,655
2009		1,591
2010		918
2011		431
2012		360
Thereafter		5,111
Total estimated amortization expense	$	10,066

In accordance with our policy, we will conduct our annual impairment testing of goodwill in the second quarter of fiscal 2008 and will conduct our annual impairment testing of other intangible assets in the fourth quarter of fiscal 2008. In addition, goodwill and indefinite lived intangibles are reviewed for impairment more frequently if impairment indicators arise. No impairment charges related to goodwill or other intangible assets were recognized in the periods presented for fiscal 2008 or fiscal 2007.

NOTE 4—COMMITMENTS AND CONTINGENCIES

As previously reported, on July 17, 2004 Constance Barton, Kimberly Clark, Wesley Clark, Tracie Hunt, Eleanor Walters, Karen Meredith, Gilbert Breeden, LaCentia Thompson and Mathesia Peterson, on behalf of themselves and on behalf of classes of those similarly situated, filed suit against The Pantry, Inc. seeking class action status and asserting claims on behalf of our North Carolina present and former employees for unpaid wages under North Carolina Wage and Hour laws. The suit also seeks an injunction against any unlawful practices, damages, liquidated damages, costs and attorneys’ fees. We filed an Answer denying any wrongdoing or liability to plaintiffs in any regard. The suit originally was filed in the Superior Court for Forsyth County, State of North Carolina. On August 17, 2004, the case was removed to the United States District Court for the Middle District of North Carolina and on July 18, 2005, plaintiffs filed an Amended Complaint asserting certain additional claims under the federal Fair Labor Standards Act on behalf of all our present and former store employees. We filed a motion to dismiss parts of the Amended Complaint and on May 17, 2006, the court granted in part and denied in part our motion. On January 16, 2007, plaintiffs filed a motion to file a Second Amended Complaint asserting on behalf of themselves and classes of those similarly situated state law claims for alleged unpaid wages in all 11 states in which we do business. On February 8, 2007, we filed a motion opposing the filing of the Second Amended Complaint. The motion is pending before the court. While we deny liability in this case, to avoid the burdens, expense and uncertainty of further litigation, on March 26, 2007, we reached a proposed settlement in principle with class counsel. The proposed settlement will establish a settlement fund of $1.0 million from which payments will be made to settlement class members and class counsel. Additionally, the proposed settlement provides for us to bear all costs of sending notices, processing and preparing payments and other administrative costs of the settlement. No other payments will be made to class members or class counsel. The proposed settlement is subject to court approvals. Final approval of the proposed settlement is expected to take several months and there can be no assurance that the court will approve the proposed settlement. We incurred a one-time charge in the second quarter of fiscal 2007 of $1.25 million for the proposed settlement and associated costs.

Since the beginning of fiscal 2007, over 45 class action lawsuits have been filed in federal courts across the country against numerous companies in the petroleum industry. Major petroleum companies and significant retailers in the industry have been named as defendants in these lawsuits. To date, we have been named as a

10

THE PANTRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

defendant in seven cases: one in Florida (Cozza, et al. v. Murphy Oil USA, Inc. et al., S.D. Fla., No. 9:07-cv-80156-DMM, filed 2/16/07); one in Delaware (Becker, et al. v. Marathon Petroleum Company LLC, et al., D. Del., No. 1:07-cv-00136, filed 3/7/07); one in North Carolina (Neese, et al. v. Abercrombie Oil Company, Inc., et al., E.D.N.C., No. 5:07-cv-00091-FL, filed 3/7/07); one in Alabama (Snable, et al. v. Murphy Oil USA, Inc., et al., N.D. Ala., No. 7:07-cv-00535-LSC, filed 3/26/07); one in Georgia (Rutherford, et al. v. Murphy Oil USA, Inc., et al., No. 4:07-cv-00113-HLM, filed 6/5/07); and one in Tennessee (Shields, et al. v. RaceTrac Petroleum, Inc., et al., No. 1:07-cv-00169, filed 7/13/07); and one in South Carolina (Korleski v. BP Corporation North America, Inc., et al., D.S.C., No 6:07-cv-03218-MDL, filed 9/24/07. Pursuant to an Order entered by the Joint Panel on Multi-District Litigation, all of the cases, including the seven in which we are named, have been or will be transferred to the United States District Court for the District of Kansas where the cases will be consolidated for all pre-trial proceedings. The plaintiffs in the lawsuits generally allege that they are retail purchasers who received less motor fuel than the defendants agreed to deliver because the defendants measured the amount of motor fuel they delivered in non-temperature adjusted gallons which, at higher temperatures, contain less energy. These cases seek, among other relief, an order requiring the defendants to install temperature adjusting equipment on their retail motor fuel dispensing devices. In certain of the cases, including some of the cases in which we are named, plaintiffs also have alleged that because defendants pay fuel taxes based on temperature adjusted 60 degree gallons, but allegedly collect taxes from consumers in non-temperature adjusted gallons, defendants receive a greater amount of tax from consumers than they paid on the same gallon of fuel. The plaintiffs in these cases seek, among other relief, recovery of excess taxes paid and punitive damages. Both types of cases seek compensatory damages, injunctive relief, attorneys’ fees and costs, and prejudgment interest. The defendants have filed motions to dismiss all cases for failure to state a claim, which were heard by the court on January 11, 2008. The court has not yet ruled on the motions. In the event the motions are denied, in whole or in part, the defendants expect to file motions for summary judgment after appropriate discovery. We believe that there are substantial factual and legal defenses to the theories alleged in these lawsuits. As the cases are at an early stage, we cannot at this time estimate our ultimate exposure to loss or liability, if any, related to these lawsuits.

On November 16, 2007, Arnesa Jones, Burdeen Smith, Patricia Taylor, and Sandra Holt, on behalf of themselves and on behalf of classes of those similarly situated, filed suit against us in the United States District Court for the Northern District of Alabama (Jones, et al. v. The Pantry, Inc., No. CV-07-P-2097-S). The plaintiffs seek class action status and assert claims on behalf of our present and former employees for unpaid wages under the Fair Labor Standards Act. The plaintiffs in this lawsuit generally allege that they were/are employed by us as store managers, but their managerial duties were non-existent or minimal compared to their nonmanagerial duties. The plaintiffs further allege that we required our store managers to work over 40 hours per week for a salaried amount without overtime compensation. The suit seeks permission to give notice of this action to all of our employees during the three years immediately preceding the filing of this suit and to all other potential plaintiffs who may be similarly situated. The plaintiffs also seek damages, liquidated damages, costs, pre-judgment interest and attorneys’ fees, and any injunctive and/or declaratory relief to which they may be entitled. We believe that there are substantial factual and legal defenses to the plaintiffs’ allegations. As the case is at an early stage, we cannot at this time estimate our ultimate exposure to loss or liability, if any, related to this lawsuit.

We are party to various other legal actions in the ordinary course of our business. We believe these other actions are routine in nature and incidental to the operation of our business. While the outcome of these actions cannot be predicted with certainty, management’s present judgment is that the ultimate resolution of these matters will not have a material adverse impact on our business, financial condition or prospects. If, however, our assessment of these actions is inaccurate, or there are any significant adverse developments in these actions, our financial condition and results of operations could be adversely affected.

11

THE PANTRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

On July 28, 2005, we announced that we would restate earnings for the period from fiscal 2000 to fiscal 2005 arising from sale-leaseback accounting for certain transactions. Beginning in September 2005, we received requests from the SEC that we voluntarily provide certain information to the SEC Staff in connection with our sale-leaseback accounting, our decision to restate our financial statements with respect to sale-leaseback accounting and other lease accounting matters. In November 2006, the SEC informed us that in connection with the inquiry it had issued a formal order of private investigation. We are cooperating with the SEC in this ongoing investigation.

Our Board of Directors has adopted employment agreements for several of our executives, which create certain liabilities in the event of the termination of these executives following a change of control. These agreements have original terms of at least one year and specify the executive’s current compensation, benefits and perquisites, the executive’s entitlements upon termination of employment and other employment rights and responsibilities.

Unamortized Liabilities Associated with Vendor Payments

Based on the terms of each service or supply agreement, service and supply allowances are amortized over the life of each agreement in accordance with the specific terms. At December 27, 2007, other accrued liabilities and deferred vendor rebates include the unamortized liabilities associated with these payments of $1.6 million and $25.6 million, respectively. At September 27, 2007, other accrued liabilities and deferred vendor rebates include the unamortized liabilities associated with these payments of $1.1 million and $23.9 million, respectively.

McLane Company, Inc.—we purchase over 50% of our general merchandise from a single wholesaler, McLane Company, Inc. (“McLane”). Our arrangement with McLane is governed by a five-year distribution service agreement which expires in April 2010. We receive annual service allowances based on the number of stores operating on each contract anniversary date. If we default under the contract or terminate the distribution service agreement prior to April 2010, we must reimburse McLane the unearned, unamortized portion of the service allowance payments received to date. Based on the terms of the distribution service agreement, the original service allowances received and all future service allowances are amortized and recognized as a reduction to merchandise cost of goods sold using the straight-line method over the life of the agreement.

Major Oil Companies—we have entered into product brand imaging agreements with numerous oil companies to buy gasoline at market prices. These contracts range in length from three to ten years. In connection with these agreements, we may receive upfront vendor allowances, volume incentive payments and other vendor assistance payments. If we default under the terms of any contract or terminate any supply agreement prior to the end of the initial term, we must reimburse the respective oil company for the unearned, unamortized portion of the payments received to date. These payments are amortized and recognized as a reduction to gasoline cost of goods sold using the specific amortization periods based on the terms of each agreement, either using the straight-line method or based on gasoline volume purchased.

Environmental Liabilities and Contingencies

We are subject to various federal, state and local environmental laws and regulations. We make financial expenditures in order to comply with regulations governing underground storage tanks adopted by federal, state and local regulatory agencies. In particular, at the federal level, the Resource Conservation and Recovery Act of

12

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

1976, as amended, requires the U.S. Environmental Protection Agency to establish a comprehensive regulatory program for the detection, prevention and cleanup of leaking underground storage tanks (e.g., overfills, spills and underground storage tank releases).

Federal and state laws and regulations require us to provide and maintain evidence that we are taking financial responsibility for corrective action and compensating third parties in the event of a release from our underground storage tank systems. In order to comply with these requirements, as of December 27, 2007, we maintain letters of credit in the aggregate amount of approximately $1.4 million in favor of state environmental agencies in North Carolina, South Carolina, Virginia, Georgia, Indiana, Tennessee, Kentucky and Louisiana.

We also rely upon the reimbursement provisions of applicable state trust funds. In Florida, we meet our financial responsibility requirements by state trust fund coverage for releases occurring through December 31, 1998 and meet such requirements for releases thereafter through private commercial liability insurance. In Georgia, we meet our financial responsibility requirements by a combination of state trust fund coverage, private commercial liability insurance and a letter of credit.

Environmental reserves of $21.7 million and $21.3 million as of December 27, 2007 and September 27, 2007, respectively, represent our estimates for future expenditures for remediation, tank removal and litigation associated with 281 and 285 known contaminated sites as of December 27, 2007 and September 27, 2007, respectively, as a result of releases (e.g., overfills, spills and underground storage tank releases) and are based on current regulations, historical results and certain other factors. We estimate that approximately $20.2 million of our environmental obligations will be funded by state trust funds and third-party insurance; as a result, we may spend up to $1.5 million for remediation, tank removal and litigation. Also, as of December 27, 2007 and September 27, 2007, there were an additional 538 and 557 sites, respectively, that are known to be contaminated sites but are being remediated by third parties, and therefore, the costs to remediate such sites are not included in our environmental reserve. Remediation costs for known sites are expected to be incurred over the next one to ten years. Environmental reserves have been established with remediation costs based on internal and external estimates for each site. Future remediation for which the timing of payments can be reasonably estimated is discounted at 8.25% to determine the reserve.

We anticipate that we will be reimbursed for expenditures from state trust funds and private insurance. As of December 27, 2007, anticipated reimbursements of $20.3 million are recorded as other noncurrent assets and $3.0 million are recorded as current receivables related to all sites. In Florida, remediation of such contamination reported before January 1, 1999 will be performed by the state (or state approved independent contractors) and substantially all of the remediation costs, less any applicable deductibles, will be paid by the state trust fund. We will perform remediation in other states through independent contractor firms engaged by us. For certain sites, the trust fund does not cover a deductible or has a co-pay which may be less than the cost of such remediation. Although we are not aware of releases or contamination at other locations where we currently operate or have operated stores, any such releases or contamination could require substantial remediation expenditures, some or all of which may not be eligible for reimbursement from state trust funds or private insurance.

Several of the locations identified as contaminated are being remediated by third parties who have indemnified us as to responsibility for clean up matters. Additionally, we are awaiting closure notices on several other locations that will release us from responsibility related to known contamination at those sites. These sites continue to be included in our environmental reserve until a final closure notice is received.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Gasoline Contractual Contingencies

Our Branded Jobber Contract with BP^® sets forth minimum volume requirements per year and a minimum volume guarantee if such minimum volume requirements are not met.

• Minimum Volume—Our obligation to purchase a minimum volume of BP^® branded gasoline is subject to increase each year during the remaining term of the agreement. We exceeded the requirement for the period ending September 30, 2007. The minimum requirement for the period ending September 30, 2008 is approximately 485 million gallons of BP^® branded product. For the quarter ended December 27, 2007, approximately 143 million gallons of BP^® branded gasoline were purchased.

• Minimum Volume Guarantee—Subject to certain adjustments, in any period in which we fail to meet our minimum volume purchase obligation, we have agreed to pay BP^® two cents per gallon times the difference between the actual volume of BP^® branded product purchased and the minimum volume requirement. Based on current forecasts, we anticipate meeting the minimum volume requirements.

NOTE 5—LONG-TERM DEBT

Long-term debt consisted of the following (amounts in thousands):

	December 27, 2007			September 27, 2007
Senior subordinated notes payable; due February 15, 2014; interest payable semi-annually at 7.75%	$	250,000		$	250,000
Senior credit facility; interest payable monthly at LIBOR plus 1.75%; principal due in quarterly installments through May 15, 2014		349,125			350,000
Senior subordinated convertible notes payable; due November 15, 2012; interest payable semi-annually at 3.0%		150,000			150,000
Other notes payable; various interest rates and maturity dates		280			290
Total long-term debt		749,405			750,290
Less: Current maturities		(3,541	)		(3,541	)
Long-term debt, net of current maturities	$	745,864		$	746,749

On May 15, 2007, we entered into a Third Amended and Restated Credit Agreement (“credit agreement”), which defines the terms of our senior credit facility representing an initial aggregate amount of $675.0 million. Our senior credit facility includes: (i) a $225.0 million six-year revolving credit facility, (ii) a $350.0 million seven-year term loan facility and (iii) a $100.0 million seven-year delayed draw term loan facility available, at our option, until May 15, 2008. In addition, we may at any time incur up to $200.0 million in incremental facilities in the form of additional revolving or term loans so long as (i) such incremental facilities would not result in a default as defined in our credit agreement and (ii) we would be able to satisfy certain other conditions set forth in our credit agreement.

Proceeds from our senior credit facility were used to refinance our senior credit facility in existence at May 15, 2007 and pay related fees and expenses. In connection with the refinancing, we recorded a non-cash charge of approximately $2.2 million related to the write-off of deferred financing costs associated with our previous senior credit facility. We incurred approximately $2.5 million in costs associated with our current senior credit facility. We deferred these costs and are amortizing them over the life of the facility.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Our borrowings under the term loans bore interest through the fiscal quarter ending December 27, 2007, at our option, at either the base rate (generally the applicable prime lending rate of Wachovia Bank, as announced from time to time) plus 0.50% or LIBOR plus 1.75%. Going forward, if our consolidated total leverage ratio (as defined in the credit agreement) is less than 4.00 to 1.00, the applicable margins on the borrowings under the term loans will be decreased by 0.25%.

Our borrowings under the revolving credit facility bore interest through the fiscal quarter ending December 27, 2007, at our option, at either the base rate (generally the applicable prime lending rate of Wachovia Bank, as announced from time to time) plus 0.25% or LIBOR plus 1.50%. Going forward, if our consolidated total leverage ratio (as defined in the credit agreement) is greater than or equal to 4.00 to 1.00, the applicable margins on borrowings under the revolving credit facility will be increased by 0.25%, and if the consolidated total leverage ratio is less than or equal to 3.00 to 1.00, the applicable margins on borrowings under the revolving credit facility will be decreased by 0.25%. In addition, we may use up to $15.0 million of the revolving credit facility for swingline loans and up to $120.0 million for the issuance of commercial and standby letters of credit.

As of December 27, 2007, there were no outstanding borrowings under our revolving credit facility and we had approximately $57.0 million of standby letters of credit issued under the facility. As a result, we had approximately $168.0 million in available borrowing capacity under our revolving credit facility (approximately $63.0 million of which was available for issuance of letters of credit). The letters of credit primarily related to several self-insurance programs, vendor contracts and regulatory requirements. The LIBOR associated with our senior credit facility resets periodically, and was reset to 4.83% on November 30, 2007.

Our senior credit facility is secured by substantially all of our assets and is required to be fully and unconditionally guaranteed by any material, direct and indirect, domestic subsidiaries (of which we currently have none). In addition, the credit agreement governing our senior credit facility contains customary affirmative and negative covenants for financings of its type, including the following financial covenants: maximum total adjusted leverage ratio and minimum interest coverage ratio, as each is defined in the credit agreement. Additionally, our credit agreement contains restrictive covenants regarding our ability to incur indebtedness, make capital expenditures, enter into mergers, acquisitions, and joint ventures, pay dividends, or change our line of business, among other things. As of December 27, 2007, we were in compliance with these covenants and restrictions.

We also have outstanding $150.0 million of senior subordinated convertible notes due 2012 (“convertible notes”). The convertible notes bear interest at an annual rate of 3.0%, payable semi-annually on May 15th and November 15th of each year. The convertible notes are convertible into our common stock at an initial conversion price of $50.09 per share, upon the occurrence of certain events, including the closing price of our common stock exceeding 120% of the conversion price per share for 20 of the last 30 trading days of any calendar quarter. The stock price at which the notes would be convertible is $60.11, and as of December 27, 2007, our closing stock price was $26.40. If, upon the occurrence of certain events, the holders of the convertible notes exercise the conversion provisions of the convertible notes, we may need to remit the principal balance of the convertible notes to them in cash (see below). As such, we would be required to classify the entire amount of the outstanding convertible notes as a current liability. This evaluation of the classification of amounts outstanding associated with the convertible notes will occur every calendar quarter. Upon conversion, a holder will receive, in lieu of common stock, an amount of cash equal to the lesser of (i) the principal amount of the convertible note, or (ii) the conversion value, determined in the manner set forth in the indenture governing the convertible notes, of a number of shares equal to the conversion rate. If the conversion value exceeds the principal amount of the convertible note on the conversion date, we will also deliver, at our election, cash or

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

common stock or a combination of cash and common stock with respect to the additional conversion value upon conversion. If conversion occurs in connection with a change of control, we may be required to deliver additional shares of our common stock by increasing the conversion rate with respect to such notes. The maximum aggregate number of shares that we would be obligated to issue upon conversion of the convertible notes is 3,817,775.

The remaining annual maturities of our long-term debt as of December 27, 2007 are as follows (amounts in thousands):

Fiscal Year Ended September:
2008	$	2,656
2009		3,544
2010		3,548
2011		3,552
2012		3,555
Thereafter		732,550
Total principal payments	$	749,405

The fair value of our indebtedness approximated $684.0 million at December 27, 2007. Substantially all of our net assets are restricted as to payment of dividends and other distributions.

NOTE 6—DERIVATIVE FINANCIAL INSTRUMENTS

We enter into interest rate swap agreements to modify the interest rate characteristics of our outstanding long-term debt, and we have designated each qualifying instrument as a cash flow hedge. We formally document our hedge relationships (including identifying the hedge instruments and hedged items) and our risk-management objectives and strategies for entering into hedge transactions. At hedge inception, and at least quarterly thereafter, we assess whether derivatives used to hedge transactions are highly effective in offsetting changes in the cash flow of the hedged item. We measure effectiveness by the ability of the interest rate swaps to offset cash flows associated with changes in the variable LIBOR rate associated with our term loan facilities using the hypothetical derivative method. To the extent the instruments are considered to be effective, changes in fair value are recorded as a component of other comprehensive income or loss. To the extent there is any hedge ineffectiveness, any changes in fair value relating to the ineffective portion are immediately recognized in earnings as interest expense. When it is determined that a derivative ceases to be a highly effective hedge, we discontinue hedge accounting, and subsequent changes in the fair value of the hedge instrument are recognized in earnings. Interest (expense) income was $(38) thousand and $5 thousand for the first quarter of fiscal 2008 and fiscal 2007, respectively, for the mark-to-market adjustment of those instruments that did not qualify for hedge accounting and adjustments for hedge ineffectiveness.

The fair values of our interest rate swaps are obtained from dealer quotes. These values represent the estimated amounts that we would receive or pay to terminate the agreement taking into consideration the difference between the contract rate of interest and rates currently quoted for agreements of similar terms and maturities. At December 27, 2007, prepaid expenses and other current assets included derivative assets of approximately $28 thousand and other noncurrent liabilities included derivative liabilities of $1.7 million. At September 27, 2007, prepaid expenses and other current assets and other noncurrent assets included derivative assets of approximately $65 thousand and approximately $398 thousand, respectively. Cash flow hedges at

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

December 27, 2007 represent interest rate swaps with a notional amount of $215.0 million, a weighted-average pay rate of 4.48% and have various settlement dates, the latest of which is October 2009.

NOTE 7—STOCK COMPENSATION PLANS

Effective September 30, 2005, we adopted SFAS No. 123 (revised 2004), Share-Based Payment, using the modified-prospective-transition method. Prior to the adoption of SFAS No. 123(R), we accounted for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. We recognized $877 thousand, of which $43 thousand related to restricted stock, and $883 thousand in stock-based compensation expense in general and administrative expenses during the first quarter of fiscal 2008 and fiscal 2007, respectively.

On January 12, 2007, upon the recommendation of the Compensation and Organization Committee of our Board of Directors, our Board of Directors approved The Pantry, Inc. 2007 Omnibus Plan (the “Omnibus Plan”), and on March 29, 2007, the Omnibus Plan was approved by our shareholders. The Omnibus Plan permits the award of cash incentives and equity incentive grants covering 2.4 million shares of our common stock, plus shares subject to outstanding options under our 1999 Stock Option Plan that are forfeited or that otherwise cease to be outstanding after March 29, 2007 other than by reason of their having been exercised for, or settled in, vested and nonforfeitable shares. Awards made under the Omnibus Plan may take the form of stock options (including both incentive stock options and nonqualified options), stock appreciation rights, restricted stock and restricted stock units, performance shares and performance units, annual incentive awards, cash-based awards and other stock-based awards. The Omnibus Plan is administered by the Compensation and Organization Committee of our Board of Directors.

During the first quarter of fiscal 2008, we granted 352 thousand options to purchase our common stock at purchase prices equal to the fair market value of the related common stock on the date the options were granted. These options had an aggregate fair value of $2.7 million, which will be amortized to expense over the options’ requisite service periods. During the first quarter of fiscal 2008 we granted 37 thousand shares of restricted stock with an aggregate fair value of $1.0 million which will be amortized over the requisite service period.

During the first quarter of fiscal 2008, options to purchase 3,000 shares were exercised resulting in approximately $79 thousand in proceeds.

NOTE 8—COMPREHENSIVE INCOME

The components of comprehensive income, net of income taxes, for the periods presented are as follows (amounts in thousands):

	Three Months Ended
	December 27, 2007			December 28, 2006
Net income	$	3,249		$	125
Other comprehensive income:
Net unrealized losses on qualifying cash flow hedges (net of deferred income taxes of $809 and $29 respectively)		(1,274	)		(47	)
Comprehensive income	$	1,975		$	78

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The components of unrealized losses on qualifying cash flow hedges, net of income taxes, for the periods presented are as follows (amounts in thousands):

	Three Months Ended
	December 27, 2007			December 28, 2006
Unrealized losses on qualifying cash flow hedges	$	(1,516	)	$	(283	)
Less: Reclassification adjustment recorded in interest expense		242			236
Net unrealized losses on qualifying cash flow hedges	$	(1,274	)	$	(47	)

NOTE 9—INTEREST EXPENSE, NET

The components of interest expense, net are as follows (amounts in thousands):

	Three Months Ended
	December 27, 2007			December 28, 2006
Interest on long-term debt, including amortization of deferred financing costs	$	12,524		$	10,054
Interest on lease finance obligations		10,154			6,139
Interest rate swap settlements		(399	)		(386	)
Fair market value change in non-qualifying derivatives		38			(5	)
Capitalized interest		(522	)		(333	)
Miscellaneous		195			17
Subtotal: Interest expense		21,990			15,486
Interest income		(383	)		(1,357	)
Total interest expense, net	$	21,607		$	14,129

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THE PANTRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

NOTE 10—EARNINGS PER SHARE AND COMMON STOCK

We compute earnings per share data in accordance with the requirements of SFAS No. 128, Earnings Per Share. Basic earnings per share is computed on the basis of the weighted-average number of common shares outstanding. Diluted earnings per share is computed on the basis of the weighted-average number of common shares outstanding, plus the effect of outstanding warrants, restricted stock, stock options and convertible notes using the “treasury stock” method.

The following table reflects the calculation of basic and diluted earnings per share for the periods presented (amounts in thousands, except per share data):

	Three Months Ended
	December 27, 2007		December 28, 2006
Net income	$	3,249	$	125
Earnings per share—basic:
Weighted-average shares outstanding		22,195		22,687
Earnings per share—basic	$	0.15	$	0.01
Earnings per share—diluted:
Weighted-average shares outstanding		22,195		22,687
Dilutive impact of options and restricted stock		44		318
Weighted-average shares and potential dilutive shares outstanding		22,239		23,005
Earnings per share—diluted	$	0.15	$	0.01

Options to purchase shares of common stock that were not included in the computation of diluted earnings per share, because their inclusion would have been antidilutive, were 991 thousand and 348 thousand for the three months ended December 27, 2007 and December 28, 2006, respectively. The aggregate number of shares of common stock, approximately 3.0 million, that we may issue upon exercise of warrants was excluded from the three months ended December 27, 2007 and December 28, 2006 computations as their inclusion would have been antidilutive.

NOTE 11—ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES

On September 28, 2007, we adopted FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109,Accounting for Income Taxes. The interpretation applies to all tax positions accounted for in accordance with SFAS No. 109 and requires a recognition threshold and measurement of a tax position taken or expected to be taken in an income tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As a result of the adoption of FIN 48, we recognized a $556 thousand net increase to the reserves for uncertain tax positions. This increase was accounted for as a cumulative effect adjustment and recognized as a reduction in beginning retained earnings.

We had $590 thousand in unrecognized tax benefits at the September 28, 2007 adoption date. All of these unrecognized benefits represent costs the ultimate deductibility of which is certain, but for which there is uncertainty about the timing of deductibility. The timing of such deductibility will not impact the effective tax rate. We expect the entire amount of unrecognized tax benefits with respect to this position to be effectively settled within the next 12 months.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

We elected on adoption of FIN 48 to classify interest and penalties recognized in accordance with FIN 48 as income tax expense. We had $958 thousand of accrued interest and no penalties related to uncertain tax positions at September 28, 2007.

There were no material changes in the amounts of unrecognized tax benefits or related interest and penalties during the quarter ended December 27, 2007.

There are no significant income tax examinations in progress. Federal income tax returns for fiscal years 1999 through 2007 and state income tax returns for fiscal years 1994 through 2007 remain open for examination by the taxing authorities.

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

This discussion and analysis of our financial condition and results of operations is provided to increase the understanding of, and should be read in conjunction with, our Condensed Consolidated Financial Statements and the accompanying notes appearing elsewhere in this report. Additional discussion and analysis related to our business is contained in our Annual Report on Form 10-K for the fiscal year ended September 27, 2007. References to “the Company,” “The Pantry,” “Pantry,” “we,” “us,” and “our” mean The Pantry, Inc. and its subsidiaries.

Safe Harbor Discussion

This report, including, without limitation, our discussion and analysis of our financial condition and results of operations, contains statements that we believe are “forward-looking statements” under the Private Securities Litigation Reform Act of 1995 and that are intended to enjoy the protection of the safe harbor for forward-looking statements provided by that Act. These forward-looking statements generally can be identified by use of phrases such as “believe,” “plan,” “expect,” “anticipate,” “intend,” “forecast” or other similar words or phrases. Descriptions of our objectives, goals, targets, plans, strategies, costs and burdens of environmental remediation, anticipated capital expenditures, expected cost savings and benefits and anticipated synergies from acquisitions, and expectations regarding remodeling, rebranding, re-imaging or otherwise converting our stores are also forward-looking statements. These forward-looking statements are based on our current plans and expectations and involve a number of risks and uncertainties that could cause actual results and events to vary materially from the results and events anticipated or implied by such forward-looking statements, including:

• Competitive pressures from convenience stores, gasoline stations and other non-traditional retailers located in our markets;

• Changes in economic conditions generally and in the markets we serve;

• Unfavorable weather conditions or other trends or developments in the southeastern United States;

• Political conditions in crude oil producing regions and global demand;

• Volatility in crude oil and wholesale petroleum costs;

• Wholesale cost increases of, and tax increases on, tobacco products;

• Consumer behavior, travel and tourism trends;

• Changes in state and federal environmental and other laws and regulations;

• Dependence on one principal supplier for merchandise and two principal suppliers for gasoline;

• Financial leverage and debt covenants;

• Changes in the credit ratings assigned to our debt securities, credit facilities and trade credit;

• Inability to identify, acquire and integrate new stores;

• Dependence on senior management;

• Litigation risks, including with respect to food quality, health and other related issues;

• Inability to maintain an effective system of internal control over financial reporting;

• Acts of war and terrorism; and

• Other unforeseen factors.

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For a discussion of these and other risks and uncertainties, please refer to “Part II.—Item 1A. Risk Factors.” The list of factors that could affect future performance and the accuracy of forward-looking statements is illustrative but by no means exhaustive. Accordingly, all forward-looking statements should be evaluated with the understanding of their inherent uncertainty. The forward-looking statements included in this report are based on, and include, our estimates as of February 5, 2008. We anticipate that subsequent events and market developments will cause our estimates to change. However, while we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if new information becomes available.

Executive Overview

We are the leading independently operated convenience store chain in the southeastern United States with 1,644 stores in 11 states as of December 27, 2007. Our stores operate under a number of select banners, with 1,438 of our stores operating under Kangaroo Express, our primary operating banner. We derive our revenue from the sale of merchandise, gasoline and other ancillary products and services designed to appeal to the convenience needs of our customers. Our strategy is to continue to improve upon our position as the leading independently operated convenience store chain in the southeastern United States in the following ways:

• generating profitable growth through merchandising initiatives;

• sophisticated management of our gasoline business;

• upgrading our stores;

• leveraging our geographic economies of scale;

• benefiting from the favorable demographics of our markets;

• selectively pursuing acquisitions; and

• developing new stores.

Our net income during the first quarter of fiscal 2008 was $3.2 million, or $0.15 per share on a fully diluted basis, compared with $125 thousand, or $0.01 per share on a fully diluted basis during the first quarter of fiscal 2007, primarily due to an improvement in retail gasoline margins. While we continue to experience a volatile and challenging gasoline market, we were able to achieve double digit gains in gasoline gallons sold while improving our per gallon margin by nearly two cents from the first quarter of fiscal 2007. During the first quarter of fiscal 2008 we were faced with wholesale costs and retail prices that were considerably higher than the first quarter of fiscal 2007. Gasoline costs for the quarter were on average over 70 cents per gallon higher than the first quarter of fiscal 2007 as crude prices rose to nearly $100 per barrel fueled by geopolitical issues and declining oil inventories. We believe the sustained period of high retail gas prices, coupled with the overall softening in consumer spending, impacted our comparable gasoline gallons sold which declined 2.8 percent.

During the first quarter of fiscal 2008 we began to roll out ethanol blended product to some of our stores. We believe it remains to be seen how much of a longer term benefit we will realize from this program.

From a merchandise perspective we saw double digit revenue growth when compared with the first quarter of fiscal 2007 and continued strength in our merchandise margins. Overall comparable store merchandise sales increased 0.8% and we achieved positive quarter-to-quarter comparable store merchandise sales in 9 of our 11 states. However, during the latter part of the quarter we experienced a softening in comparable sales gains which we believe was primarily due to consistently higher retail gas prices and weaker economic conditions.

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Our expense control was solid during the quarter as we saw the expected benefit of our restructuring and positive results from our increased focus on controlling variable operating expenses. We anticipate that the expected benefits from the restructuring will continue through the remainder of fiscal 2008.

In fiscal 2007, we were able to maintain our financial flexibility by negotiating a beneficial new credit agreement giving us the ability to grow organically or through acquisition. During the first quarter of fiscal 2008 we acquired three stores in the Charleston, South Carolina market that fit our “tuck in” acquisition strategy and we opened four new larger format stores. Strategically located, we believe these larger format stores can generate nearly twice the revenue of our current average store and provide immediate higher returns. While we remain active in reviewing acquisition opportunities we continue to believe that the volume of acquired stores in fiscal 2008 will be below the 152 stores acquired in fiscal 2007.

Market and Industry Trends

During the first quarter of fiscal 2008, we again experienced a volatile rising retail and wholesale gasoline cost environment. We attempt to pass along wholesale gasoline cost changes to our customers through retail price changes; however, we are not always able to do so. The timing of any related increase or decrease in retail prices is affected by competitive conditions. As a result, we tend to experience lower gasoline margins in periods of rising wholesale costs and higher margins in periods of decreasing wholesale costs. Since 1997, our gasoline margin per gallon has remained relatively stable and averaged approximately 12.9 cents per gallon on an annual basis.

Results of Operations

We believe the selected sales data and the percentage change in the dollar amounts of each of the items presented below are important in evaluating the performance of our business operations. We operate in one business segment and believe the information presented in our Management’s Discussion and Analysis of Financial Condition and Results of Operations provides an understanding of our business segment, our operations and our financial condition. The table below provides a summary of our selected financial data for the three months ended December 27, 2007 and December 28, 2006 (amounts in thousands except per gallon data and store count):

	Three Months Ended
	December 27, 2007			December 28, 2006
Selected financial data:
Merchandise gross profit [1]	$	146,363		$	131,316
Merchandise margin		37.0	%		37.6	%
Retail gasoline data:
Gallons		526,183			460,475
Margin per gallon	$	0.1056		$	0.0866
Retail price per gallon	$	2.92		$	2.21
Wholesale gasoline data:
Gallons		18,095			6,023
Margin per gallon	$	0.0337		$	0.0548
Total gasoline gross profit [1]	$	56,157		$	40,219
Comparable store data:
Merchandise sales %		0.8	%		1.9	%
Gasoline gallons %		-2.8	%		2.0	%
Number of stores:
End of period		1,644			1,506
Weighted-average store count		1,643			1,497

[1] We compute gross profit exclusive of depreciation and allocation of store operating and general and administrative expenses.

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Three Months Ended December 27, 2007 Compared to the Three Months Ended December 28, 2006

Merchandise Revenue and Gross Profit.    Merchandise revenue for the first quarter of fiscal 2008 was $395.4 million compared to $349.2 million during the first quarter of fiscal 2007, an increase of $46.2 million, or 13.2%. The increase is primarily attributable to $43.3 million in revenue from fiscal 2007 acquisitions and a 0.8%, or $2.6 million, increase in comparable store merchandise revenue compared to the first quarter of fiscal 2007. Merchandise gross profit was $146.4 million for the first quarter of fiscal 2008 compared to $131.3 million for the first quarter of fiscal 2007, an increase of $15.1 million, or 11.5%. This increase is primarily attributable to the increased merchandise revenue, partially offset by the 60 basis point decrease in merchandise margin to 37.0% for the first quarter of fiscal 2008 compared to 37.6% for the first quarter of fiscal 2007. The decline in merchandise gross margin was primarily due to lower cigarette margins and a slightly lower mix of services and food service revenue, which generally provide higher margins.

Gasoline Revenue, Gallons and Gross Profit.    Total gasoline revenue for the first quarter of fiscal 2008 was $1.6 billion compared to $1.0 billion during the first quarter of fiscal 2007, an increase of $551.0 million, or 53.4%. The increase in gasoline revenue is primarily attributable to $222.1 million in revenue from fiscal 2007 acquisitions and the 31.9% increase in the average retail price per gallon to $2.92. These increases were partially offset by a decrease in comparable store gallons of 12.8 million, or 2.8%. Gasoline gross profit was $56.1 million for the first quarter of fiscal 2008 compared to $40.2 million for the first quarter of fiscal 2007, an increase of $15.9 million, or 39.6%. The increase is primarily attributable to the increased gallon volume and an increase in retail gross profit per gallon to 10.6 cents for the first quarter of fiscal 2008 from 8.7 cents in the first quarter of fiscal 2007. We compute gross profit exclusive of depreciation and allocation of store operating and general and administrative expenses. We present gasoline gross profit per gallon inclusive of credit card processing fees and cost of repairs and maintenance on gasoline equipment. These fees totaled 4.6 cents per gallon and 3.8 cents per gallon for the three months ended December 27, 2007 and December 28, 2006, respectively.

In the first quarter of fiscal 2008, gasoline gallons sold were 544.3 million compared to 466.5 million during the first quarter of fiscal 2007, an increase of 77.8 million gallons, or 16.7%. The increase is primarily attributable to 75.7 million gasoline gallons from fiscal 2007 acquisitions partially offset by the comparable store gasoline gallon decrease discussed above.

Store Operating and General and Administrative.    Store operating and general and administrative expenses for the first quarter of fiscal 2008 totaled $149.1 million compared to $136.4 million for the first quarter of fiscal 2007, an increase of $12.8 million, or 9.4%. This increase is primarily due to increased store count from acquisitions.

Depreciation and Amortization.    Depreciation and amortization expenses were $26.6 million for the first quarter of fiscal 2008 compared to $20.9 million for the first quarter of fiscal 2007, an increase of $5.8 million, or 27.7%. This increase is primarily attributable to fiscal 2007 acquisitions and increased capital expenditures since September 28, 2006. The increase in capital expenditures is primarily due to expansion in our new store development as we have opened 13 new stores since the beginning of fiscal 2007.

Income from Operations.    Income from operations totaled $26.8 million for the first quarter of fiscal 2008 compared to $14.3 million for the first quarter of fiscal 2007, an increase of $12.4 million, or 86.8%. The increase is primarily attributable to revenue from stores acquired since September 28, 2006 and the increase in gasoline gross profit per gallon discussed above.

EBITDA and Adjusted EBITDA.    We define EBITDA as net income before interest expense, net, loss on extinguishment of debt, income taxes and depreciation and amortization. Adjusted EBITDA includes the lease payments we make under our lease finance obligations as a reduction to EBITDA. EBITDA for the first quarter of fiscal 2008 totaled $53.6 million compared to EBITDA of $35.3 million for the first quarter of fiscal 2007, an increase of $18.3 million, or 51.6%. Adjusted EBITDA for the first quarter of fiscal 2008 totaled $42.3 million compared to $28.5 million for the first quarter of fiscal 2007, an increase of $13.8 million, or 48.4%. These increases are primarily attributable to the variances discussed above.

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EBITDA and Adjusted EBITDA are not measures of operating performance or liquidity under GAAP and should not be considered as substitutes for net income, cash flows from operating activities or other income or cash flow statement data. We have included information concerning EBITDA and Adjusted EBITDA because we believe investors find this information useful as a reflection of the resources available for strategic opportunities including, among others, to invest in our business, make strategic acquisitions and to service debt. Management also uses EBITDA and Adjusted EBITDA to review the performance of our business directly resulting from our retail operations and for budgeting and field operations compensation targets.

In accordance with GAAP, certain of our leases, including all of our sale-leaseback arrangements, are accounted for as lease finance obligations. As a result, payments made under these lease arrangements are accounted for as interest expense and a reduction of the principal amounts outstanding under our lease finance obligations. By including in Adjusted EBITDA the amounts we pay under our lease finance obligations, we are able to present such payments as operating costs instead of financing costs. We believe that this presentation helps investors better understand our operating performance relative to other companies that do not account for their leases as lease finance obligations.

Any measure that excludes interest expense, loss on extinguishment of debt, depreciation and amortization or income taxes has material limitations because we use debt and lease financing in order to finance our operations and acquisitions, we use capital and intangible assets in our business and the payment of income taxes is a necessary element of our operations. Due to these limitations, we use EBITDA and Adjusted EBITDA only in addition to and in conjunction with results presented in accordance with GAAP. We strongly encourage investors to review our consolidated financial statements and publicly filed reports in their entirety and not to rely on any single financial measure.

Because non-GAAP financial measures are not standardized, EBITDA and Adjusted EBITDA, each as defined by us, may not be comparable to similarly titled measures reported by other companies. It therefore may not be possible to compare our use of EBITDA and Adjusted EBITDA with non-GAAP financial measures having the same or similar names used by other companies.

The following table contains a reconciliation of EBITDA and Adjusted EBITDA to net income (amounts in thousands):

	Three Months Ended
	December 27, 2007			December 28, 2006
Adjusted EBITDA	$	42,326		$	28,512
Payments made for lease finance obligations		11,272			6,837
EBITDA		53,598			35,349
Interest expense, net		(21,607	)		(14,129	)
Depreciation and amortization		(26,642	)		(20,856	)
Provision for income taxes		(2,100	)		(239	)
Net income	$	3,249		$	125

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The following table contains a reconciliation of EBITDA and Adjusted EBITDA to net cash provided by operating activities (amounts in thousands):

	Three Months Ended
	December 27, 2007			December 28, 2006
Adjusted EBITDA	$	42,326		$	28,512
Payments made for lease finance obligations		11,272			6,837
EBITDA		53,598			35,349
Interest expense, net		(21,607	)		(14,129	)
Provision for income taxes		(2,100	)		(239	)
Non-cash stock based compensation		877			883
Changes in operating assets and liabilities		(6,085	)		(8,312	)
Other		1,687			1,435
Net cash provided by operating activities	$	26,370		$	14,987
Net cash used in investing activities	$	(38,802	)	$	(37,893	)
Net cash (used in) provided by financing activities	$	(1,541	)	$	13,270

Interest Expense, Net.    Interest expense, net is primarily comprised of interest on our long-term debt and lease finance obligations, net of interest income. Interest expense, net for the first quarter of fiscal 2008 was $21.6 million compared to $14.1 million for the first quarter of fiscal 2007. The increase is primarily due to increased lease finance obligations, increased borrowings under our senior credit facility and a general increase in short-term interest rates.

Liquidity and Capital Resources

Cash Flows from Operations.    Due to the nature of our business, substantially all sales are for cash and cash provided by operations is our primary source of liquidity. We rely primarily on cash provided by operating activities, supplemented as necessary from time to time by borrowings under our revolving credit facility, lease finance transactions and asset dispositions to finance our operations, pay interest and principal payments and fund capital expenditures. Cash provided by operating activities increased to $26.4 million for the first quarter of fiscal 2008 compared to $15.0 million for the first quarter of fiscal 2007. The increase in cash flow from operations is primarily attributable to an increase in net income and a decrease in overall inventories, offset by an increase in accrued expenses. We had $57.5 million of cash and cash equivalents on hand at December 27, 2007.

Capital Expenditures.    Capital expenditures (excluding all acquisitions and accrued purchases) for the first quarter of fiscal 2008 were $36.5 million. In the first quarter of fiscal 2008, we had proceeds of $548 thousand from asset dispositions and $600 thousand from lease finance obligations. As a result, our net capital expenditures, excluding all acquisitions, for the first quarter of fiscal 2008 were $34.2 million. The increase in capital expenditures is primarily due to new store development and technology spending associated with upgrading, consolidating and replacing our point-of-sale systems. We anticipate that net capital expenditures for fiscal 2008 will be approximately $130.0 million.

Our capital expenditures are primarily expenditures for store improvements, store equipment, new store development, information systems and expenditures to comply with regulatory statutes, including those related to environmental matters. We finance substantially all capital expenditures and new store development through cash flows from operations, proceeds from lease financing transactions, asset dispositions and vendor reimbursements.

Acquisitions.    During the first quarter of fiscal 2008, we purchased three stores in one transaction for approximately $2.9 million.

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Cash Flows from Financing Activities.    For the first quarter of fiscal 2008, net cash used in financing activities was $1.5 million. At December 27, 2007, our debt consisted primarily of $350.0 million in loans under our senior credit facility, $250.0 million of outstanding 7.75% senior subordinated notes and $150.0 million of outstanding 3.0% convertible notes. We also have outstanding $457.2 million of lease finance obligations.

Senior Credit Facility.    We have outstanding a Third Amended and Restated Credit Agreement which defines the terms of our senior credit facility, which includes (i) a $225.0 million revolving credit facility, (ii) a $350.0 million term loan facility and (iii) a $100.0 million delayed draw term loan. A maximum of $120.0 million of the revolving credit facility is available as a letter of credit sub-facility. The revolving credit facility has been, and will continue to be, used for our working capital and general corporate requirements and is also available for refinancing certain of our existing indebtedness and issuing commercial and standby letters of credit.

As of December 27, 2007, we had no borrowings outstanding under the revolving credit facility and approximately $57.0 million of standby letters of credit had been issued. As of December 27, 2007, we have approximately $168.0 million in available borrowing capacity under the revolving credit facility (approximately $63.0 million of which was available for issuances of letters of credit).

Senior Subordinated Notes.    We have outstanding $250.0 million of 7.75% senior subordinated notes due February 15, 2014. Interest on the senior subordinated notes is due on February 15 and August 15 of each year.

Senior Subordinated Convertible Notes.    We have outstanding $150.0 million of our convertible notes, which bear interest at an annual rate of 3.0%, payable semi-annually on May 15th and November 15th of each year. The convertible notes are convertible into our common stock at an initial conversion price of $50.09 per share, upon the occurrence of certain events, including the closing price of our common stock exceeding 120% of the conversion price per share for 20 of the last 30 trading days of any calendar quarter. If, upon the occurrence of certain events, the holders of the convertible notes exercise the conversion provisions of the convertible notes, we may need to remit the principal balance of the convertible notes to them in cash (see below). As such, we would be required to classify the entire amount outstanding of the convertible notes as a current liability in the following quarter. This evaluation of the classification of amounts outstanding associated with the convertible notes will occur every calendar quarter. Upon conversion, a holder will receive, in lieu of common stock, an amount of cash equal to the lesser of (i) the principal amount of the convertible note, or (ii) the conversion value, determined in the manner set forth in the indenture governing the convertible notes, of a number of shares equal to the conversion rate. If the conversion value exceeds the principal amount of the convertible note on the conversion date, we will also deliver, at our election, cash or common stock or a combination of cash and common stock with respect to the conversion value upon conversion. If conversion occurs in connection with a change of control, we may be required to deliver additional shares of our common stock by increasing the conversion rate with respect to such notes. The maximum aggregate number of shares that we would be obligated to issue upon conversion of the convertible notes is 3,817,775.

Shareholders’ Equity.    As of December 27, 2007, our shareholders’ equity totaled $356.7 million. The $2.9 million increase from September 27, 2007 is primarily attributable to net income in the first quarter of fiscal 2008 of $3.2 million and a $1.5 million increase in additional paid-in capital, offset by $1.2 million in net unrealized losses on cash flow hedges and a one time FIN 48 charge of $556 thousand. The increase in additional paid-in capital is primarily due to stock compensation expense and related tax benefits.

Long Term Liquidity.    We believe that anticipated cash flows from operations, funds available from our existing revolving credit facility, cash on hand and vendor reimbursements will provide sufficient funds to finance our operations at least for the next 12 months. As of December 27, 2007, we had approximately $168.0 million in available borrowing capacity under our revolving credit facility, approximately $63.0 million of which was available for issuances of letters of credit. Changes in our operating plans, lower than anticipated sales, increased expenses, additional acquisitions or other events may cause us to need to seek additional debt or equity

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financing in future periods. There can be no guarantee that financing will be available on acceptable terms or at all. Additional equity financing could be dilutive to the holders of our common stock, and additional debt financing, if available, could impose greater cash payment obligations and more covenants and operating restrictions.

New Accounting Standards

In December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB 51.SFAS No. 160 amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest (minority interest) in a subsidiary and for deconsolidation of a subsidiary. This statement is effective for financial statements issued for fiscal years beginning on or after December 15, 2008 and interim periods within those fiscal years. We are currently evaluating SFAS No. 160 to determine the impact, if any, on our financial statements.

In December 2007, the FASB issued SFAS No. 141(revised 2007),Business Combinations.SFAS No. 141(R) establishes principles and requirements for how an acquirer in a business combination recognizes and measures the assets acquired, liabilities assumed and any noncontrolling interest in the acquiree. This statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first fiscal year beginning on or after December 15, 2008. We are currently evaluating SFAS No. 141(R) to determine the impact, if any, on our financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently evaluating SFAS No. 159 to determine the impact, if any, on our financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We are currently evaluating SFAS No. 157 to determine the impact, if any, on our financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Quantitative Disclosures.    We are subject to interest rate risk on our existing long-term debt and any future financing requirements. Our fixed rate debt consists primarily of outstanding balances on our senior subordinated notes and our convertible notes, and our variable rate debt relates to borrowings under our senior credit facility. We are exposed to market risks inherent in our financial instruments. These instruments arise from transactions entered into in the normal course of business and, in some cases, relate to our acquisitions of related businesses. We hold derivative instruments primarily to manage our exposure to these risks and all derivative instruments are matched against specific debt obligations. Our debt and interest rate swap instruments outstanding at December 27, 2007, including applicable interest rates, are discussed above, in “Part I.—Item 1. Financial Statements—Notes to Condensed Consolidated Financial Statements—Note 6—Derivative Financial Instruments” and “Part I. —Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

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The following table presents the future principal cash flows and weighted-average interest rates on our existing long-term debt instruments based on rates in effect at December 27, 2007. Fair values have been determined based on quoted market prices as of December 27, 2007.

Expected Maturity Date

as of December 27, 2007

(Dollars in thousands)

	Fiscal 2008			Fiscal 2009			Fiscal 2010			Fiscal 2011			Fiscal 2012			Thereafter			Total			Fair Value
Long-term debt	$	2,656		$	3,544		$	3,548		$	3,552		$	3,555		$	732,550		$	749,405		$	683,966
Weighted-average interest rate		6.30	%		6.29	%		6.25	%		6.25	%		6.25	%		6.94	%		6.41	%

In order to reduce our exposure to interest rate fluctuations, we have entered into interest rate swap arrangements in which we agree to exchange, at specified intervals, the difference between fixed and variable interest amounts calculated by reference to an agreed upon notional amount. The interest rate differential is reflected as an adjustment to interest expense over the life of the swaps. Fixed rate swaps are used to reduce our risk of increased interest costs during periods of rising interest rates. At December 27, 2007, the interest rate on approximately 82.0% of our debt was fixed by either the nature of the obligation or through interest rate swap arrangements compared to 68.7% at September 27, 2007. The annualized effect of a one percentage point change in floating interest rates on our interest rate swap agreements and other floating rate debt obligations at December 27, 2007 would be to change interest expense by approximately $1.3 million.

The following table presents the notional principal amount, weighted-average pay rate, weighted-average receive rate and weighted-average years to maturity on our interest rate swap contracts:

Interest Rate Swap Contracts

(Dollars in thousands)

	December 27, 2007			September 27, 2007
Notional principal amount	$	215,000		$	115,000
Weighted-average fixed pay rate		4.48	%		4.26	%
Weighted-average variable receive rate		5.25	%		5.38	%
Weighted-average years to maturity		1.46			1.42

As of December 27, 2007, the fair value of our swap agreements represented a net liability of $1.7 million.

Qualitative Disclosures.    Our primary exposure relates to:

• interest rate risk on long-term and short-term borrowings;

• our ability to pay or refinance long-term borrowings at maturity at market rates;

�� • the impact of interest rate movements on our ability to meet interest expense requirements and exceed financial covenants; and

• the impact of interest rate movements on our ability to obtain adequate financing to fund future acquisitions.

We manage interest rate risk on our outstanding long-term and short-term debt through our use of fixed and variable rate debt. We expect the interest rate swaps mentioned above will reduce our exposure to short-term interest rate fluctuations. While we cannot predict or manage our ability to refinance existing debt or the impact interest rate movements will have on our existing debt, management evaluates our financial position on an ongoing basis.

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Item 4. Controls and Procedures.

As required by paragraph (b) of Rules 13a-15 and 15d- 15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), our Chief Executive Officer and our Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded, as of the end of the period covered by this report, that our disclosure controls and procedures were effective to ensure that the information that we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the first quarter of fiscal 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

From time to time, we make changes to our internal control over financial reporting that are intended to enhance its effectiveness and which do not have a material effect on our overall internal control over financial reporting. We will continue to evaluate the effectiveness of our disclosure controls and procedures and internal control over financial reporting on an ongoing basis and will take action as appropriate.

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THE PANTRY, INC.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

As previously reported, on July 17, 2004 Constance Barton, Kimberly Clark, Wesley Clark, Tracie Hunt, Eleanor Walters, Karen Meredith, Gilbert Breeden, LaCentia Thompson and Mathesia Peterson, on behalf of themselves and on behalf of classes of those similarly situated, filed suit against The Pantry, Inc. seeking class action status and asserting claims on behalf of our North Carolina present and former employees for unpaid wages under North Carolina Wage and Hour laws. The suit also seeks an injunction against any unlawful practices, damages, liquidated damages, costs and attorneys’ fees. We filed an Answer denying any wrongdoing or liability to plaintiffs in any regard. The suit originally was filed in the Superior Court for Forsyth County, State of North Carolina. On August 17, 2004, the case was removed to the United States District Court for the Middle District of North Carolina and on July 18, 2005, plaintiffs filed an Amended Complaint asserting certain additional claims under the federal Fair Labor Standards Act on behalf of all our present and former store employees. We filed a motion to dismiss parts of the Amended Complaint and on May 17, 2006, the court granted in part and denied in part our motion. On January 16, 2007, plaintiffs filed a motion to file a Second Amended Complaint asserting on behalf of themselves and classes of those similarly situated state law claims for alleged unpaid wages in all 11 states in which we do business. On February 8, 2007, we filed a motion opposing the filing of the Second Amended Complaint. The motion is pending before the court. While we deny liability in this case, to avoid the burdens, expense and uncertainty of further litigation, on March 26, 2007, we reached a proposed settlement in principle with class counsel. The proposed settlement will establish a settlement fund of $1.0 million from which payments will be made to settlement class members and class counsel. Additionally, the proposed settlement provides for us to bear all costs of sending notices, processing and preparing payments and other administrative costs of the settlement. No other payments will be made to class members or class counsel. The proposed settlement is subject to court approvals. Final approval of the proposed settlement is expected to take several months and there can be no assurance that the court will approve the proposed settlement. We incurred a one-time charge in the second quarter of fiscal 2007 of $1.25 million for the proposed settlement and associated costs.

Since the beginning of fiscal 2007, over 45 class action lawsuits have been filed in federal courts across the country against numerous companies in the petroleum industry. Major petroleum companies and significant retailers in the industry have been named as defendants in these lawsuits. To date, we have been named as a defendant in seven cases: one in Florida (Cozza, et al. v. Murphy Oil USA, Inc. et al., S.D. Fla., No. 9:07-cv-80156-DMM, filed 2/16/07); one in Delaware (Becker, et al. v. Marathon Petroleum Company LLC, et al., D. Del., No. 1:07-cv-00136, filed 3/7/07); one in North Carolina (Neese, et al. v. Abercrombie Oil Company, Inc., et al., E.D.N.C., No. 5:07-cv-00091-FL, filed 3/7/07); one in Alabama (Snable, et al. v. Murphy Oil USA, Inc., et al., N.D. Ala., No. 7:07-cv-00535-LSC, filed 3/26/07); one in Georgia (Rutherford, et al. v. Murphy Oil USA, Inc., et al., No. 4:07-cv-00113-HLM, filed 6/5/07); and one in Tennessee (Shields, et al. v. RaceTrac Petroleum, Inc., et al., No. 1:07-cv-00169, filed 7/13/07); and one in South Carolina (Korleski v. BP Corporation North America, Inc., et al., D.S.C., No 6:07-cv-03218-MDL, filed 9/24/07. Pursuant to an Order entered by the Joint Panel on Multi-District Litigation, all of the cases, including the seven in which we are named, have been or will be transferred to the United States District Court for the District of Kansas where the cases will be consolidated for all pre-trial proceedings. The plaintiffs in the lawsuits generally allege that they are retail purchasers who received less motor fuel than the defendants agreed to deliver because the defendants measured the amount of motor fuel they delivered in non-temperature adjusted gallons which, at higher temperatures, contain less energy. These cases seek, among other relief, an order requiring the defendants to install temperature adjusting equipment on their retail motor fuel dispensing devices. In certain of the cases, including some of the cases in which we are named, plaintiffs also have alleged that because defendants pay fuel taxes based on temperature adjusted 60 degree gallons, but allegedly collect taxes from consumers in non-temperature adjusted gallons, defendants receive a greater amount of tax from consumers than they paid on the same gallon of fuel. The plaintiffs in these cases seek, among other relief, recovery of excess taxes paid and

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punitive damages. Both types of cases seek compensatory damages, injunctive relief, attorneys’ fees and costs, and prejudgment interest. The defendants have filed motions to dismiss all cases for failure to state a claim, which were heard by the court on January 11, 2008. The court has not yet ruled on the motions. In the event the motions are denied, in whole or in part, the defendants expect to file motions for summary judgment after appropriate discovery. We believe that there are substantial factual and legal defenses to the theories alleged in these lawsuits. As the cases are at an early stage, we cannot at this time estimate our ultimate exposure to loss or liability, if any, related to these lawsuits.

On November 16, 2007, Arnesa Jones, Burdeen Smith, Patricia Taylor, and Sandra Holt, on behalf of themselves and on behalf of classes of those similarly situated, filed suit against us in the United States District Court for the Northern District of Alabama (Jones, et al. v. The Pantry, Inc., No. CV-07-P-2097-S). The plaintiffs seek class action status and assert claims on behalf of our present and former employees for unpaid wages under the Fair Labor Standards Act. The plaintiffs in this lawsuit generally allege that they were/are employed by us as store managers, but their managerial duties were non-existent or minimal compared to their nonmanagerial duties. The plaintiffs further allege that we required our store managers to work over 40 hours per week for a salaried amount without overtime compensation. The suit seeks permission to give notice of this action to all of our employees during the three years immediately preceding the filing of this suit and to all other potential plaintiffs who may be similarly situated. The plaintiffs also seek damages, liquidated damages, costs, pre-judgment interest and attorneys’ fees, and any injunctive and/or declaratory relief to which they may be entitled. We believe that there are substantial factual and legal defenses to the plaintiffs’ allegations. As the case is at an early stage, we cannot at this time estimate our ultimate exposure to loss or liability, if any, related to this lawsuit.

We are party to various other legal actions in the ordinary course of our business. We believe these other actions are routine in nature and incidental to the operation of our business. While the outcome of these actions cannot be predicted with certainty, management’s present judgment is that the ultimate resolution of these matters will not have a material adverse impact on our business, financial condition or prospects. If, however, our assessment of these actions is inaccurate, or there are any significant adverse developments in these actions, our financial condition and results of operations could be adversely affected.

Item 1A. Risk Factors.

You should carefully consider the risks described below and under “Part I.—Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” before making a decision to invest in our securities. The risks and uncertainties described below and elsewhere in this report are not the only ones facing us. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, could negatively impact our results of operations or financial condition in the future. If any such risks actually occur, our business, financial condition or results of operations could be materially adversely affected. In that case, the trading price of our securities could decline, and you may lose all or part of your investment.

Risks Related to Our Industry

The convenience store industry is highly competitive and impacted by new entrants. Increased competition could result in lower margins.

The convenience store industry in the geographic areas in which we operate is highly competitive and marked by ease of entry and constant change in the number and type of retailers offering the products and services found in our stores. We compete with other convenience store chains, independently owned convenience stores, gasoline stations, supermarkets, drugstores, discount stores, club stores, out of channel retailers and mass merchants. In some of our markets, our competitors have been in existence longer and have greater financial, marketing and other resources than we do. As a result, our competitors may be able to respond better to changes in the economy and new opportunities within the industry. To remain competitive, we must constantly analyze

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consumer preferences and competitors’ offerings and prices to ensure we offer a selection of convenience products and services at competitive prices to meet consumer demand. We must also maintain and upgrade our customer service levels, facilities and locations to remain competitive and drive customer traffic to our stores. Major competitive factors include, among others, location, ease of access, gasoline brands, pricing, product and service selections, customer service, store appearance, cleanliness and safety. In a number of our markets, our competitors that sell ethanol-blended gasoline may have a competitive advantage over us because, in certain regions of the country, the wholesale cost of ethanol-blended gasoline is less than pure gasoline. Competitive pressures or our inability to introduce ethanol-blended gasoline in certain markets in a timely manner or at all could materially impact our gasoline gallon volume, gasoline gross profit and overall customer traffic, which could in turn have a material adverse effect on our business, financial condition and results of operations.

Volatility of wholesale petroleum costs could impact our operating results.

Over the past three fiscal years, our gasoline revenue accounted for approximately 75.8% of total revenues and our gasoline gross profit accounted for approximately 31.7% of total gross profit. Crude oil and domestic wholesale petroleum markets are volatile. General political conditions, acts of war or terrorism and instability in oil producing regions, particularly in the Middle East and South America, could significantly impact crude oil supplies and wholesale petroleum costs. In addition, the supply of gasoline and our wholesale purchase costs could be adversely impacted in the event of a shortage, which could result from, among other things, lack of capacity at United States oil refineries or the fact that our gasoline contracts do not guarantee an uninterrupted, unlimited supply of gasoline. Significant increases and volatility in wholesale petroleum costs could result in significant increases in the retail price of petroleum products and in lower gasoline gross margin per gallon. Increases in the retail price of petroleum products could impact consumer demand for gasoline. This volatility makes it extremely difficult to predict the impact future wholesale cost fluctuations will have on our operating results and financial condition. Dramatic increases in crude oil prices squeeze retail fuel margins because fuel costs typically increase faster than retailers are able to pass them along to customers. Higher fuel prices also trigger higher credit card expenses, because credit card fees are calculated as a percentage of the transaction amount, not as a percentage of gasoline gallons sold. A significant change in any of these factors could materially impact our gasoline gallon volume, gasoline gross profit and overall customer traffic, which in turn could have a material adverse effect on our business, financial condition and results of operations.

Wholesale cost increases of, and tax increases on, tobacco products could adversely impact our operating results.

Sales of tobacco products have averaged approximately 6.7% of our total revenue over the past three fiscal years, and our tobacco gross profit accounted for approximately 13.0% of total gross profit for the same period. Significant increases in wholesale cigarette costs and tax increases on tobacco products, as well as national and local campaigns to discourage smoking in the United States, may have an adverse effect on demand for cigarettes. Currently, major cigarette manufacturers offer substantial rebates to retailers. We include these rebates as a component of our gross margin from sales of cigarettes. In the event these rebates are no longer offered, or decreased, our wholesale cigarette costs will increase accordingly. In general, we attempt to pass price increases on to our customers. However, due to competitive pressures in our markets, we may not be able to do so. In addition, reduced retail display allowances on cigarettes offered by cigarette manufacturers negatively impact gross margins. These factors could materially impact our retail price of cigarettes, cigarette unit volume and revenues, merchandise gross profit and overall customer traffic, which could in turn have a material adverse effect on our business, financial condition and results of operations.

Changes in consumer behavior, travel and tourism could impact our business.

In the convenience store industry, customer traffic is generally driven by consumer preferences and spending trends, growth rates for automobile and commercial truck traffic and trends in travel, tourism and weather. Changes in economic conditions generally, or in the southeastern United States specifically, could

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adversely impact consumer spending patterns and travel and tourism in our markets. Approximately 32% of our stores are located in coastal, resort or tourist destinations. Historically, travel and consumer behavior in such markets is more severely impacted by weak economic conditions. If visitors to resort or tourist locations decline due to economic conditions, changes in consumer preferences, changes in discretionary consumer spending or otherwise, our sales could decline, which in turn could have a material adverse effect on our business, financial condition and results of operations.

Risks Related to Our Business

Unfavorable weather conditions or other trends or developments in the southeastern United States could adversely affect our business.

Substantially all of our stores are located in the southeastern United States. Although the southeast region is generally known for its mild weather, the region is susceptible to severe storms, including hurricanes, thunderstorms, extended periods of rain, ice storms and heavy snow, all of which we have historically experienced. Inclement weather conditions as well as severe storms in the southeast region could damage our facilities, our suppliers or could have a significant impact on consumer behavior, travel and convenience store traffic patterns, as well as our ability to operate our stores. In addition, we typically generate higher revenues and gross margins during warmer weather months in the Southeast, which fall within our third and fourth fiscal quarters. If weather conditions are not favorable during these periods, our operating results and cash flow from operations could be adversely affected. We could also be impacted by regional occurrences in the southeastern United States such as energy shortages or increases in energy prices, fires or other natural disasters.

Inability to identify, acquire and integrate new stores could adversely affect our ability to grow our business.

An important part of our historical growth strategy has been to acquire other convenience stores that complement our existing stores or broaden our geographic presence. Since 1996, we have successfully completed and integrated more than 90 acquisitions, growing our store base from 379 to 1,644 stores. We expect to continue to selectively review acquisition opportunities as an element of our growth strategy. Acquisitions involve risks that could cause our actual growth or operating results to differ significantly from our expectations or the expectations of securities analysts. For example:

• We may not be able to identify suitable acquisition candidates or acquire additional convenience stores on favorable terms. We compete with others to acquire convenience stores. We believe that this competition may increase and could result in decreased availability or increased prices for suitable acquisition candidates. It may be difficult to anticipate the timing and availability of acquisition candidates.

• During the acquisition process, we may fail or be unable to discover some of the liabilities of companies or businesses that we acquire. These liabilities may result from a prior owner’s noncompliance with applicable federal, state or local laws or regulations.

• We may not be able to obtain the necessary financing, on favorable terms or at all, to finance any of our potential acquisitions.

• We may fail to successfully integrate or manage acquired convenience stores.

• Acquired convenience stores may not perform as we expect, or we may not be able to obtain the cost savings and financial improvements we anticipate.

• We face the risk that our existing financial controls, information systems, management resources and human resources will need to grow to support future growth.

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Our indebtedness could negatively impact our financial health.

As of December 27, 2007, we had consolidated debt, including lease finance obligations, of approximately $1.2 billion. As of December 27, 2007, the availability under our revolving credit facility for borrowing was approximately $168.0 million (approximately $63.0 million of which was available for issuance of letters of credit).

Our substantial indebtedness could have important consequences. For example, it could:

• make it more difficult for us to satisfy our obligations with respect to our debt and our leases;

• increase our vulnerability to general adverse economic and industry conditions;

• require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, including lease finance obligations, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;

• limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

• place us at a competitive disadvantage compared to our competitors that have less indebtedness or better access to capital by, for example, limiting our ability to enter into new markets or renovate our stores; and

• limit our ability to borrow additional funds in the future.

We are vulnerable to increases in interest rates because the debt under our senior credit facility is subject to a variable interest rate. Although in the past we have on occasion entered into certain hedging instruments in an effort to manage our interest rate risk, we may not be able to continue to do so, on favorable terms or at all, in the future.

If we are unable to meet our debt obligations, we could be forced to restructure or refinance our obligations, seek additional equity financing or sell assets, which we may not be able to do on satisfactory terms or at all. As a result, we could default on those obligations.

In addition, the credit agreement governing our senior credit facility, and the indenture governing our senior subordinated notes, each contains financial and other restrictive covenants that limit our ability to engage in activities that may be in our long-term best interests. Our failure to comply with these covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our indebtedness, which would adversely affect our financial health and could prevent us from fulfilling our obligations.

Despite current indebtedness levels, we and our subsidiaries may still be able to incur additional debt. This could further increase the risks associated with our substantial leverage.

We are able to incur additional indebtedness. The terms of the indenture that governs our senior subordinated notes permit us to incur additional indebtedness under certain circumstances. The indenture governing our senior subordinated convertible notes, or convertible notes, does not contain any limit on our ability to incur debt. In addition, the credit agreement governing our senior credit facility permits us to incur up to $100.0 million of additional indebtedness under our delayed draw term loan facility and other additional indebtedness (assuming certain financial conditions are met at the time) beyond the $225.0 million available under our revolving credit facility. If we incur additional indebtedness, the related risks that we now face could increase.

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To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control.

Our ability to make payments on our indebtedness, including without limitation any payments required to be made to holders of our senior subordinated notes and our convertible notes, and to refinance our indebtedness and fund planned capital expenditures will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

For example, upon the occurrence of a “fundamental change” (as such term is defined in the indenture governing our convertible notes), holders of our convertible notes have the right to require us to purchase for cash all outstanding convertible notes at 100% of their principal amount plus accrued and unpaid interest, including additional interest (if any), up to but not including the date of purchase. We also may be required to make substantial cash payments upon other conversion events related to the convertible notes. We may not have enough available cash or be able to obtain third-party financing to satisfy these obligations at the time we are required to make purchases of tendered notes.

Based on our current level of operations, we believe our cash flow from operations, available cash and available borrowings under our revolving credit facility will be adequate to meet our future liquidity needs for at least the next 12 months.

We cannot assure you, however, that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under our revolving credit facility in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness on or before maturity, sell assets, reduce or delay capital expenditures, seek additional equity financing or seek third-party financing to satisfy such obligations. We cannot assure you that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all. Our failure to fund indebtedness obligations at any time could constitute an event of default under the instruments governing such indebtedness, which would likely trigger a cross-default under our other outstanding debt.

If we do not comply with the covenants in the credit agreement governing our senior credit facility and the indenture governing our senior subordinated notes or otherwise default under them or the indenture governing our convertible notes, we may not have the funds necessary to pay all of our indebtedness that could become due.

The credit agreement governing our senior credit facility and the indenture governing our senior subordinated notes require us to comply with certain covenants. In particular, our credit agreement prohibits us from incurring any additional indebtedness, except in specified circumstances, or materially amending the terms of any agreement relating to existing indebtedness without lender approval. Further, our credit agreement restricts our ability to acquire and dispose of assets, engage in mergers or reorganizations, pay dividends or make investments or capital expenditures. Other restrictive covenants require that we meet a maximum total adjusted leverage ratio and a minimum interest coverage ratio, as defined in our credit agreement. A violation of any of these covenants could cause an event of default under our credit agreement.

If we default on the credit agreement governing our senior credit facility or either of the indentures governing our senior subordinated or convertible notes because of a covenant breach or otherwise, all outstanding amounts could become immediately due and payable. We cannot assure you that we would have sufficient funds to repay all the outstanding amounts, and any acceleration of amounts due under our credit agreement or either of the indentures governing our outstanding indebtedness likely would have a material adverse effect on us.

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We are subject to state and federal environmental laws and other regulations. Failure to comply with these laws and regulations may result in penalties or costs that could have a material adverse effect on our business.

We are subject to extensive governmental laws and regulations including, but not limited to, environmental regulations, employment laws and regulations, regulations governing the sale of alcohol and tobacco, minimum wage requirements, working condition requirements, public accessibility requirements, citizenship requirements and other laws and regulations. A violation or change of these laws or regulations could have a material adverse effect on our business, financial condition and results of operations.

Under various federal, state and local laws, ordinances and regulations, we may, as the owner or operator of our locations, be liable for the costs of removal or remediation of contamination at these or our former locations, whether or not we knew of, or were responsible for, the presence of such contamination. The failure to properly remediate such contamination may subject us to liability to third parties and may adversely affect our ability to sell or rent such property or to borrow money using such property as collateral. Additionally, persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of such substances at sites where they are located, whether or not the site is owned or operated by such person. Although we do not typically arrange for the treatment or disposal of hazardous substances, we may be deemed to have arranged for the disposal or treatment of hazardous or toxic substances and, therefore, may be liable for removal or remediation costs, as well as other related costs, including governmental fines, and injuries to persons, property and natural resources.

Compliance with existing and future environmental laws and regulations regulating underground storage tanks may require significant capital expenditures and increased operating and maintenance costs. The remediation costs and other costs required to clean up or treat contaminated sites could be substantial. We pay tank registration fees and other taxes to state trust funds established in our operating areas and maintain private insurance coverage in Florida and Georgia in support of future remediation obligations.

These state trust funds or other responsible third parties including insurers are expected to pay or reimburse us for remediation expenses less a deductible. To the extent third parties do not pay for remediation as we anticipate, we will be obligated to make these payments. These payments could materially adversely affect our financial condition and results of operations. Reimbursements from state trust funds will be dependent on the maintenance and continued solvency of the various funds.

In the future, we may incur substantial expenditures for remediation of contamination that has not been discovered at existing or acquired locations. We cannot assure you that we have identified all environmental liabilities at all of our current and former locations; that material environmental conditions not known to us do not exist; that future laws, ordinances or regulations will not impose material environmental liability on us; or that a material environmental condition does not otherwise exist as to any one or more of our locations. In addition, failure to comply with any environmental laws, ordinances or regulations or an increase in regulations could adversely affect our operating results and financial condition.

Failure to comply with state laws regulating the sale of alcohol and tobacco products may result in the loss of necessary licenses and the imposition of fines and penalties on us, which could have a material adverse effect on our business.

State laws regulate the sale of alcohol and tobacco products. A violation or change of these laws could adversely affect our business, financial condition and results of operations because state and local regulatory agencies have the power to approve, revoke, suspend or deny applications for, and renewals of, permits and licenses relating to the sale of these products or to seek other remedies. Such a loss or imposition could have a material adverse effect on our business. In addition, certain states regulate relationships, including overlapping ownership, among alcohol manufacturers, wholesalers and retailers, and may deny or revoke licensure if relationships in violation of the state laws exist. We are not aware of any alcoholic beverage manufacturers or wholesalers having a prohibited relationship with our company.

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Failure to comply with the other state and federal regulations we are subject to may result in penalties or costs that could have a material adverse effect on our business.

Our business is subject to various other state and federal regulations, including, without limitation, employment laws and regulations, minimum wage requirements, overtime requirements, working condition requirements and other laws and regulations. Any appreciable increase in the statutory minimum wage rate, income or overtime pay, or adoption of mandated healthcare benefits would likely result in an increase in our labor costs and such cost increase, or the penalties for failing to comply with such statutory minimums or regulations, could have a material adverse effect on our business, financial condition and results of operations.

We depend on one principal supplier for the majority of our merchandise. A disruption in supply or a change in our relationship could have a material adverse effect on our business.

We purchase over 50% of our general merchandise, including most tobacco products and grocery items, from a single wholesale grocer, McLane. We have a contract with McLane until April 2010, but we may not be able to renew the contract when it expires, or on similar terms. A change of merchandise suppliers, a disruption in supply or a significant change in our relationship with our principal merchandise suppliers could have a material adverse effect on our business, cost of goods sold, financial condition and results of operations.

We depend on two principal suppliers for the majority of our gasoline. A disruption in supply or a change in our relationship could have a material adverse effect on our business.

BP^® and CITGO^® supply approximately 76% of our gasoline purchases. We have contracts with CITGO^® until 2010 and BP^® until 2012, but we may not be able to renew either contract upon expiration. A change of suppliers, a disruption in supply or a significant change in our relationship with our principal suppliers could materially increase our cost of goods sold, which would negatively impact our financial condition and results of operations.

CITGO^® obtains a significant portion of the crude oil it refines from its ultimate parent, Petroleos de Venezuela, SA (“PDVSA”), which is owned and controlled by the government of Venezuela. The political and economic environment in Venezuela can disrupt PDVSA’s operations and adversely affect CITGO^®’s ability to obtain crude oil. In addition, the Venezuelan government can order, and in the past has ordered, PDVSA to curtail the production of oil in response to a decision by the Organization of Petroleum Exporting Countries to reduce production. The inability of CITGO^® to obtain crude oil in sufficient quantities would adversely affect its ability to provide gasoline to us and could have a material adverse effect on our business, financial condition and results of operations.

Because we depend on our senior management’s experience and knowledge of our industry, we would be adversely affected if we were to lose any members of our senior management team.

We are dependent on the continued efforts of our senior management team, including our President and Chief Executive Officer, Peter J. Sodini. Mr. Sodini’s employment contract terminates in September 2009. If, for any reason, our senior executives do not continue to be active in management, our business, financial condition or results of operations could be adversely affected. We may not be able to attract and retain additional qualified senior personnel as needed in the future. In addition, we do not maintain key personnel life insurance on our senior executives and other key employees. We also rely on our ability to recruit qualified store managers, regional managers and other store personnel. If we fail to continue to attract these individuals at reasonable compensation levels, our operating results may be adversely affected.

Pending litigation could adversely affect our financial condition and results of operations.

We are party to various legal actions in the ordinary course of our business. We believe these actions are routine in nature and incidental to the operation of our business. While the outcome of these actions cannot be predicted with certainty, management’s present judgment is that the ultimate resolution of these matters will not

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have a material adverse impact on our business, financial condition or prospects. If, however, our assessment of these actions is inaccurate, or there are any significant adverse developments in these actions, our financial condition and results of operations could be adversely affected.

Litigation and publicity concerning food quality, health and other related issues could result in significant liabilities or litigation costs and cause consumers to avoid our convenience stores.

Convenience store businesses and other food service operators can be adversely affected by litigation and complaints from customers or government agencies resulting from food quality, illness or other health or environmental concerns or operating issues stemming from one or more locations. Adverse publicity about these allegations may negatively affect us, regardless of whether the allegations are true, by discouraging customers from purchasing gasoline, merchandise or food at one or more of our convenience stores. We could also incur significant liabilities if a lawsuit or claim results in a decision against us or litigation costs regardless of results, and may divert time and money away from our operations and hurt our performance.

Pending SEC matters could adversely affect us.

As previously disclosed, on July 28, 2005 we announced that we would restate earnings for the period from fiscal 2000 to fiscal 2005 arising from sale-leaseback accounting for certain transactions. In connection with our decision to restate, we filed a Form 8-K on July 28, 2005, as well as a Form 10-K/A on August 31, 2005 restating the transactions. The SEC issued a comment letter to us in connection with the Form 8-K, and we responded to the comments. Beginning in September 2005, we received requests from the SEC that we voluntarily provide certain information to the SEC Staff in connection with our sale-leaseback accounting, our decision to restate our financial statements with respect to sale-leaseback accounting and other lease accounting matters. In November 2006, the SEC informed us that in connection with the inquiry it had issued a formal order of private investigation. As previously disclosed, we are cooperating with the SEC in this ongoing investigation. We are unable to predict how long this investigation will continue or whether it will result in any adverse action.

If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results. As a result, current and potential stockholders could lose confidence in our financial reporting, which would harm our business and the trading price of our stock.

Effective internal control over financial reporting is necessary for us to provide reliable financial reports. If we cannot provide reliable financial reports, our business and operating results could be harmed. The Sarbanes-Oxley Act of 2002, as well as related rules and regulations implemented by the SEC, NASDAQ and the Public Company Accounting Oversight Board, have required changes in the corporate governance practices and financial reporting standards for public companies. These laws, rules and regulations, including compliance with Section 404 of the Sarbanes-Oxley Act of 2002, have increased our legal and financial compliance costs and made many activities more time-consuming and more burdensome. These laws, regulations and standards are subject to varying interpretations in many cases. As a result, their application in practice may evolve over time as regulatory and governing bodies provide new guidance, which could result in continuing uncertainty regarding compliance matters. The costs of compliance with these laws, rules and regulations have adversely affected our financial results. Moreover, we run the risk of non-compliance, which could adversely affect our financial condition or results of operations or the trading price of our stock.

We have in the past discovered, and may in the future discover, areas of our internal control over financial reporting that need improvement. We have devoted significant resources to remediate our deficiencies and improve our internal control over financial reporting. Although we believe that these efforts have strengthened our internal control over financial reporting, we are continuing to work to improve our internal control over financial reporting. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. Inferior internal control over financial reporting could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock.

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Other Risks

Future sales of additional shares into the market may depress the market price of our common stock.

If we or our existing stockholders sell shares of our common stock in the public market, including shares issued upon the exercise of outstanding options, or if the market perceives such sales or issuances could occur, the market price of our common stock could decline. As of February 1, 2008, there were 22,209,615 shares of our common stock outstanding, most of which are freely tradable (unless held by one of our affiliates). Pursuant to Rule 144 under the Securities Act of 1933, as amended, during any three-month period our affiliates can resell up to the greater of (a) 1% of our aggregate outstanding common stock or (b) the average weekly trading volume for the four weeks prior to the sale. Sales by our existing stockholders also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate or to use equity as consideration for future acquisitions.

In addition, we have filed with the SEC a registration statement that covers up to 839,385 shares issuable upon the exercise of stock options currently outstanding under our 1999 Stock Option Plan, as well as a registration statement that covers up to 2.4 million shares issuable pursuant to share-based awards under our Omnibus Plan, plus any options issued under our 1999 Stock Option Plan that are forfeited or cancelled after March 29, 2007. Shares registered on a registration statement may be sold freely at any time after issuance.

Any issuance of shares of our common stock in the future could have a dilutive effect on your investment.

We may sell securities in the public or private equity markets if and when conditions are favorable, even if we do not have an immediate need for capital at that time. In other circumstances, we may issue shares of our common stock pursuant to existing agreements or arrangements. For example, upon conversion of our outstanding convertible notes, we may, at our option, issue shares of our common stock. In addition, if our convertible notes are converted in connection with a change of control, we may be required to deliver additional shares by increasing the conversion rate with respect to such notes. Notwithstanding the requirement to issue additional shares if convertible notes are converted on a change of control, the maximum conversion rate for our outstanding convertible notes is 25.4517 per $1,000 principal amount of convertible notes.

We have also issued warrants to purchase up to 2,993,000 shares of our common stock to an affiliate of Merrill Lynch in connection with the note hedge and warrant transactions entered into at the time of our offering of convertible notes.

Raising funds by issuing securities dilutes the ownership of our existing stockholders. Additionally, certain types of equity securities that we may issue in the future could have rights, preferences or privileges senior to your rights as a holder of our common stock. We could choose to issue additional shares for a variety of reasons including for investment or acquisitive purposes. Such issuances may have a dilutive impact on your investment.

The market price for our common stock has been and may in the future be volatile, which could cause the value of your investment to decline.

There currently is a public market for our common stock, but there is no assurance that there will always be such a market. Securities markets worldwide experience significant price and volume fluctuations. This market volatility could significantly affect the market price of our common stock without regard to our operating performance. In addition, the price of our common stock could be subject to wide fluctuations in response to the following factors, among others:

• A deviation in our results from the expectations of public market analysts and investors;

• Statements by research analysts about our common stock, our company or our industry;

• Changes in market valuations of companies in our industry and market evaluations of our industry generally;

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• Additions or departures of key personnel;

• Actions taken by our competitors;

• Sales or other issuances of common stock by us or our senior officers or other affiliates; or

• Other general economic, political or market conditions, many of which are beyond our control.

The market price of our common stock will also be impacted by our quarterly operating results and quarterly comparable store sales growth, which may be expected to fluctuate from quarter to quarter. Factors that may impact our quarterly results and comparable store sales include, among others, general regional and national economic conditions, competition, unexpected costs and changes in pricing, consumer trends, the number of stores we open and/or close during any given period, costs of compliance with corporate governance and Sarbanes-Oxley requirements, and other factors discussed in this Item 1A and throughout “Part I.—Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” You may not be able to resell your shares of our common stock at or above the price you pay.

Provisions in our certificate of incorporation, our bylaws and Delaware law may have the effect of preventing or hindering a change of control and adversely affecting the market price of our common stock.

Provisions in our certificate of incorporation and our bylaws and applicable provisions of the Delaware General Corporation Law may make it more difficult and expensive for a third party to acquire control of us even if a change of control would be beneficial to the interests of our stockholders. These provisions could discourage potential takeover attempts and could adversely affect the market price of our common stock. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. Our certificate of incorporation and bylaws:

• authorize the issuance of up to five million shares of “blank check” preferred stock that could be issued by our Board of Directors to thwart a takeover attempt without further stockholder approval;

• prohibit cumulative voting in the election of directors, which would otherwise allow holders of less than a majority of stock to elect some directors;

• limit who may call special meetings;

• limit stockholder action by written consent, generally requiring all actions to be taken at a meeting of the stockholders; and

• establish advance notice requirements for any stockholder that wants to propose a matter to be acted upon by stockholders at a stockholders’ meeting, including the nomination of candidates for election to our Board of Directors.

We are also subject to the provisions of Section 203 of the Delaware General Corporation Law, which limits business combination transactions with stockholders of 15% or more of our outstanding voting stock that our Board of Directors has not approved.

These provisions and other similar provisions make it more difficult for stockholders or potential acquirers to acquire us without negotiation and may apply even if some of our stockholders consider the proposed transaction beneficial to them. For example, these provisions might discourage a potential acquisition proposal or tender offer, even if the acquisition proposal or tender offer is at a premium over the then current market price for our common stock. These provisions could also limit the price that investors are willing to pay in the future for shares of our common stock.

We may, in the future, adopt other measures that may have the effect of delaying, deferring or preventing an unsolicited takeover, even if such a change of control were at a premium price or favored by a majority of unaffiliated stockholders. Such measures may be adopted without vote or action by our stockholders.

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Item 6. Exhibits.

Exhibit Number	Description of Document
10.1	The Pantry, Inc. (“The Pantry”) 1999 Stock Option Plan, as amended and restated as of October 17, 2007 (incorporated by reference to Exhibit 10.27 to The Pantry’s Annual Report on Form 10-K for the year ended September 27, 2007)
10.2	Form of Award Agreement (Awarding Nonqualified Stock Option to Employee) for The Pantry, Inc. 2007 Omnibus Plan (incorporated by reference to Exhibit 10.1 to The Pantry’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 6, 2007)
10.3	Form of Award Agreement (Awarding Restricted Stock to Employee) for The Pantry, Inc. 2007 Omnibus Plan (incorporated by reference to Exhibit 10.2 to The Pantry’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 6, 2007)
10.4	Amended and Restated Employment Agreement dated November 20, 2007 by and between Melissa H. Anderson and The Pantry (incorporated by reference to Exhibit 10.40 to The Pantry’s Annual Report on Form 10-K for the year ended September 27, 2007)
10.5	Amended and Restated Employment Agreement dated November 20, 2007 by and between Keith S. Bell and The Pantry (incorporated by reference to Exhibit 10.42 to The Pantry’s Annual Report on Form 10-K for the year ended September 27, 2007)
10.6	Amended and Restated Employment Agreement dated November 20, 2007 by and between Steven J. Ferreira and The Pantry (incorporated by reference to Exhibit 10.44 to The Pantry’s Annual Report on Form 10-K for the year ended September 27, 2007)
10.7	Amended and Restated Employment Agreement dated November 20, 2007 by and between Frank G. Paci and The Pantry (incorporated by reference to Exhibit 10.46 to The Pantry’s Annual Report on Form 10-K for the year ended September 27, 2007)
10.8	Amended and Restated Employment Agreement dated November 20, 2007 by and between David M. Zaborski and The Pantry (incorporated by reference to Exhibit 10.48 to The Pantry’s Annual Report on Form 10-K for the year ended September 27, 2007)
10.9	Amendment to Amended and Restated Employment Agreement dated October 8, 2007 by and between Daniel J. Kelly and The Pantry (incorporated by reference to Exhibit 10.1 to The Pantry’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 12, 2007)
31.1	Certification by Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification by Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 [This exhibit is being furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by that act, be deemed to be incorporated by reference into any document or filed herewith for purposes of liability under the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, as the case may be.]
32.2	Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 [This exhibit is being furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by that act, be deemed to be incorporated by reference into any document or filed herewith for purposes of liability under the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, as the case may be.]

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

THE PANTRY, INC.
By:	/S/    FRANK G. PACI
	Frank G. Paci
	Sr. Vice President, Finance, Chief Financial Officer and Secretary (Authorized Officer and Principal Financial Officer)
Date: February 5, 2008

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EXHIBIT INDEX

Exhibit Number	Description of Document
10.1	The Pantry, Inc. (“The Pantry”) 1999 Stock Option Plan, as amended and restated as of October 17, 2007 (incorporated by reference to Exhibit 10.27 to The Pantry’s Annual Report on Form 10-K for the year ended September 27, 2007)
10.2	Form of Award Agreement (Awarding Nonqualified Stock Option to Employee) for The Pantry, Inc. 2007 Omnibus Plan (incorporated by reference to Exhibit 10.1 to The Pantry’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 6, 2007)
10.3	Form of Award Agreement (Awarding Restricted Stock to Employee) for The Pantry, Inc. 2007 Omnibus Plan (incorporated by reference to Exhibit 10.2 to The Pantry’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 6, 2007)
10.4	Amended and Restated Employment Agreement dated November 20, 2007 by and between Melissa H. Anderson and The Pantry (incorporated by reference to Exhibit 10.40 to The Pantry’s Annual Report on Form 10-K for the year ended September 27, 2007)
10.5	Amended and Restated Employment Agreement dated November 20, 2007 by and between Keith S. Bell and The Pantry (incorporated by reference to Exhibit 10.42 to The Pantry’s Annual Report on Form 10-K for the year ended September 27, 2007)
10.6	Amended and Restated Employment Agreement dated November 20, 2007 by and between Steven J. Ferreira and The Pantry (incorporated by reference to Exhibit 10.44 to The Pantry’s Annual Report on Form 10-K for the year ended September 27, 2007)
10.7	Amended and Restated Employment Agreement dated November 20, 2007 by and between Frank G. Paci and The Pantry (incorporated by reference to Exhibit 10.46 to The Pantry’s Annual Report on Form 10-K for the year ended September 27, 2007)
10.8	Amended and Restated Employment Agreement dated November 20, 2007 by and between David M. Zaborski and The Pantry (incorporated by reference to Exhibit 10.48 to The Pantry’s Annual Report on Form 10-K for the year ended September 27, 2007)
10.9	Amendment to Amended and Restated Employment Agreement dated October 8, 2007 by and between Daniel J. Kelly and The Pantry (incorporated by reference to Exhibit 10.1 to The Pantry’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 12, 2007)
31.1	Certification by Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification by Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 [This exhibit is being furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by that act, be deemed to be incorporated by reference into any document or filed herewith for purposes of liability under the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, as the case may be.]
32.2	Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 [This exhibit is being furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by that act, be deemed to be incorporated by reference into any document or filed herewith for purposes of liability under the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, as the case may be.]