PART I

ITEM 1 BUSINESS

GENERAL

The Pep Boys—Manny, Moe & Jack and subsidiaries (the “Company”) is a leading automotive retail and service chain. The Company operates in one industry, the automotive aftermarket. The Company is engaged principally in the retail sale of automotive parts, tires and accessories, automotive repairs and maintenance and the installation of parts. The Company’s primary operating unit is its SUPERCENTER format. As of February 3, 2007, the Company operated 593 stores consisting of 582 SUPERCENTERS and one SERVICE & TIRE CENTER, having an aggregate of 6,162 service bays, as well as 10 non-service/non-tire format PEP BOYS EXPRESS stores. The Company operates approximately 12,167,000 gross square feet of retail space, including service bays. The SUPERCENTERS average approximately 20,700 square feet and the 10 PEP BOYS EXPRESS stores average approximately 9,700 square feet. The Company believes that its unique SUPERCENTER format offers the broadest capabilities in the industry and positions the Company to gain market share and increase its profitability by serving “do-it-yourself” (retail) and “do-it-for-me” (service labor, installed merchandise and tires) customers with the highest quality merchandise and service offerings.

The following table sets forth the percentage of total revenues from continuing operations contributed by each class of similar products or services for the Company and should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere herein:

	Year ended
	February 3, 2007			January 28, 2006			January 29, 2005
Parts and Accessories		68.5	%		69.3	%		67.8	%
Tires		14.1			13.6			14.2
Total Merchandise Sales		82.6			82.9			82.0
Service Labor		17.4			17.1			18.0
Total Revenues		100.0	%		100.0	%		100.0	%

As of February 3, 2007 the Company operated its stores in 36 states and Puerto Rico. The following table indicates, by state, the number of stores the Company had in operation at the end of fiscal 2002, 2003, 2004, 2005and 2006, and the number of stores opened and closed by the Company during each of the last four fiscal years:

NUMBER OF STORES AT END OF FISCAL YEARS 2002 THROUGH 2006

State	2006 Year End		Closed	Opened	2005 Year End		Closed	Opened	2004 Year End	Closed	Opened	2003 Year End	Closed	Opened	2002 Year End
Alabama	1		—	—	1		—	—	1	—	—	1	—	—	1
Arizona	22		—	—	22		—	—	22	—	—	22	1	—	23
Arkansas	1		—	—	1		—	—	1	—	—	1	—	—	1
California	121		—	—	121		1	—	122	—	—	122	12	—	134
Colorado	8		—	—	8		—	—	8	—	—	8	—	—	8
Connecticut	8		—	—	8		—	—	8	—	—	8	—	—	8
Delaware	6		—	—	6		—	—	6	—	—	6	—	—	6
Florida	43		—	—	43		—	—	43	—	—	43	4	—	47
Georgia	25		—	—	25		—	—	25	—	—	25	1	—	26
Illinois	23		—	—	23		—	—	23	—	—	23	1	—	24
Indiana	9		—	—	9		—	—	9	—	—	9	—	—	9
Kansas	2		—	—	2		—	—	2	—	—	2	—	—	2
Kentucky	4		—	—	4		—	—	4	—	—	4	—	—	4
Louisiana	10	**	—	—	10	**	—	—	10	—	—	10	—	—	10
Maine	1		—	—	1		—	—	1	—	—	1	—	—	1
Maryland	19		—	—	19		—	—	19	—	—	19	—	—	19
Massachusetts	7		—	—	7		—	—	7	—	—	7	1	—	8
Michigan	7		—	—	7		—	—	7	—	—	7	—	—	7
Minnesota	3		—	—	3		—	—	3	—	—	3	—	—	3
Missouri	1		—	—	1		—	—	1	—	—	1	—	—	1
Nevada	12		—	—	12		—	—	12	—	—	12	—	—	12
New Hampshire	4		—	—	4		—	—	4	—	—	4	—	—	4
New Jersey	28		—	—	28		—	—	28	—	—	28	1	—	29
New Mexico	8		—	—	8		—	—	8	—	—	8	—	—	8
New York	29		—	—	29		—	—	29	—	—	29	2	—	31
North Carolina	10		—	—	10		—	—	10	—	—	10	1	—	11
Ohio	12		—	—	12		—	—	12	—	—	12	1	—	13
Oklahoma	6		—	—	6		—	—	6	—	—	6	—	—	6
Pennsylvania	42		—	—	42		—	—	42	—	—	42	3	—	45
Puerto Rico	27		—	—	27		—	—	27	—	—	27	—	—	27
Rhode Island	3		—	—	3		—	—	3	—	—	3	—	—	3
South Carolina	6		—	—	6		—	—	6	—	—	6	—	—	6
Tennessee	7		—	—	7		—	—	7	—	—	7	—	—	7
Texas	54		—	—	54		1	—	55	—	—	55	5	—	60
Utah	6		—	—	6		—	—	6	—	—	6	—	—	6
Virginia	16		—	—	16		—	—	16	—	—	16	1	—	17
Washington	2		—	—	2		—	—	2	—	—	2	—	—	2
Total	593		—	—	593		2	—	595	—	—	595	34	—	629

** Due to damage sustained as a result of Hurricane Katrina in August 2005, two stores were temporarily closed at fiscal 2005 year end and one store remained closed at fiscal 2006 year end.

STORE IMPROVEMENTS

In fiscal 2006, the Company incurred approximately $37,924,000 of its total capital expenditures of $53,903,000 to maintain and improve its stores. Approximately one third of these expenditures resulted from the Company’s store redesign plan which results in better merchandising within its retail business, promotes cross-selling and improves the overall customer experience. In fiscal 2006, the Company grand reopened 104 remodeled stores. We expect to grand reopen approximately 125 remodeled stores in each of 2007 and 2008 with the remaining approximately 50 stores to be completed in 2009. The funding of our remodelings is expected to come from net cash generated from operating activities and the Company’s existing line of credit.

PRODUCTS AND SERVICES

Each Pep Boys SUPERCENTER and PEP BOYS EXPRESS store carries a similar product line, with variations based on the number and type of cars registered in the markets where the store is located. A full complement of inventory at a typical SUPERCENTER includes an average of approximately 22,000 items (approximately 21,000 items at a PEP BOYS EXPRESS store). The Company’s product lines include: tires (not stocked at PEP BOYS EXPRESS stores); batteries; new and remanufactured parts for domestic and import vehicles; chemicals and maintenance items; fashion, electronic, and performance accessories; personal transportation merchandise; and select non-automotive merchandise that appeals to automotive “Do-It-Yourself” customers, such as generators, power tools and canopies.

In addition to offering a wide variety of high quality name brand products, the Company sells an array of high quality products under various private label names. The Company sells tires under the names CORNELL®, FUTURA® and DEFINITYTM; and batteries under the name PROSTART®. The Company also sells wheel covers under the name FUTURA®; water pumps and cooling system parts under the name PROCOOL®; air filters, anti-freeze, chemicals, cv axles, lubricants, oil, oil filters, oil treatments, transmission fluids and wiper blades under the name PROLINE®; alternators, battery booster packs and starters under the name PROSTART®; power steering hoses and power steering pumps under the name PROSTEER®; brakes under the name PROSTOP®; brakes, starters and ignition under the name VALUEGRADE; and paints under the name VARSITY®. All products sold by the Company under various private label names accounted for approximately 24% of the Company’s merchandise sales in fiscal 2006, and approximately 22% and 33% in fiscal 2005 and 2004.

The Company has service bays in 583 of its 593 locations. While each service department has the ability to perform virtually all types of automotive service (except body work), the Company continuously evaluates the types of services it offers, focusing on the most profitable maintenance and repair services.

The Company’s commercial automotive parts delivery program, branded PEP EXPRESS PARTS®, is designed to increase the Company’s market share with the professional installer and to leverage its inventory investment. The program satisfies the installed merchandise customer by taking advantage of the breadth and quality of its parts inventory as well as its experience supplying its own service bays and mechanics. As of February 3, 2007, 459, or approximately 77%, of the Company’s stores provide commercial parts delivery.

The Company has a point-of-sale system in all of its stores, which gathers sales and gross profit data by stock-keeping unit from each store on a daily basis. This information is then used by the Company to help formulate its pricing, marketing and merchandising strategies. The Company has an electronic parts catalog and an electronic commercial invoicing system in all of its stores. The Company has an electronic work order system in all of its service centers. This system creates a service history for each vehicle, provides customers with a comprehensive sales document and enables the Company to maintain a service customer database.

The Company primarily uses an “Everyday Low Price” (EDLP) strategy in establishing its selling prices. Management believes that EDLP provides better value to its customers on a day-to-day basis, helps level customer demand and allows more efficient management of inventories. On a weekly basis, the Company employs a promotional pricing strategy on select items to drive increased customer traffic.

The Company uses various forms of advertising to promote its category-dominant product offering, its state-of-the-art service and repair capabilities and its commitment to customer service and satisfaction. The Company is committed to an effective promotional schedule with a weekly circular program, extra-effort promotions supported by Run of Paper (ROP) and radio and television advertising during highly seasonal times of the year and various in-store promotions.

In fiscal 2006, approximately 37% of the Company’s total revenues were cash transactions (including personal checks) with the remainder being credit and debit card transactions and commercial credit accounts.

The Company does not experience significant seasonal fluctuation in the generation of its revenues.

STORE OPERATIONS AND MANAGEMENT

All Pep Boys stores are open seven days a week. Each SUPERCENTER has a Retail Manager and Service Manager (PEP BOYS EXPRESS STORES only have a Retail Manager) who report up through a distinct organization of Area Directors and Divisional Vice Presidents specializing in operating their respective businesses. The Divisional Vice Presidents—Service report to the Senior Vice President—Service. The Senior Vice President—Service and Divisional Vice Presidents—Retail report to the Executive Vice President—Operations, who in turn, reports directly to the President & Chief Executive Officer. The President & Chief Executive Officer serves as the Company’s principal operations officer. A Retail Manager’s and a Service Manager’s average length of service with the Company is approximately 7.7 and 5.3 years, respectively.

Supervision and control over the individual stores are facilitated by means of the Company’s computer system, operational handbooks and regular visits to the individual stores by Area Directors and Divisional Vice Presidents. All of the Company’s advertising, accounting, purchasing, management information systems, and most of its administrative functions are conducted at its corporate headquarters in Philadelphia, Pennsylvania. Certain administrative functions for the Company’s divisional operations are performed at various regional offices of the Company. See, “Item 2. Properties.”

INVENTORY CONTROL AND DISTRIBUTION

Most of the Company’s merchandise is distributed to its stores from its warehouses primarily by dedicated and contract carriers. Target levels of inventory for each product have been established for each of the Company’s warehouses and stores and are based upon prior shipment history, sales trends and seasonal demand. Inventory on hand is compared to the target levels on a weekly basis at each warehouse. If the inventory on hand at a warehouse is below the target levels, the Company’s buyers order merchandise from its suppliers.

Each Pep Boys store has an automatic inventory replenishment system that automatically orders additional inventory when a store’s inventory on hand falls below the target levels. In addition, the Company’s centralized buying system, coupled with continued advancement in its warehouse and distribution systems, has enhanced the Company’s ability to control its inventory.

SUPPLIERS

During fiscal 2006, the Company’s ten largest suppliers accounted for approximately 40% of the merchandise purchased by the Company. No single supplier accounted for more than 17% of the Company’s purchases. The Company has no long-term contracts under which the Company is required to purchase merchandise. Management believes that the relationships the Company has established with its suppliers are generally good.

In the past, the Company has not experienced difficulty in obtaining satisfactory sources of supply and believes that adequate alternative sources of supply exist, at substantially similar cost, for virtually all types of merchandise sold in its stores.

COMPETITION

The business of the Company is highly competitive. The Company encounters competition from nationwide and regional chains and from local independent merchants. The Company’s competitors include general, full range, discount or traditional department stores which carry automotive parts and accessories and/or have automotive service centers, as well as specialized automotive retailers. Generally, the specialized automotive retailers focus on either the “do-it-yourself” or “do-it-for-me” areas of the business. The Company believes that its operation in both the “do-it-yourself” and “do-it-for-me” areas of the business positively differentiates it from most of its competitors. However, certain competitors are larger in terms of sales volume, store size, and/or number of stores. Therefore, these competitors have access to greater capital and management resources and have been operating longer in particular geographic areas than the Company.

The Company believes that the warranty policies in connection with the higher priced items it sells, such as tires, batteries, brake linings and other major automotive parts and accessories, are comparable or superior to those of its competitors.

REGULATION

The Company is subject to various federal, state and local laws and governmental regulations relating to the operation of its business, including those governing the handling, storage and disposal of hazardous substances contained in the products it sells and uses in its service bays, the recycling of batteries, tires and used lubricants, and the ownership and operation of real property.

EMPLOYEES

At February 3, 2007, the Company employed 18,794 persons as follows:

Description	Full-time		%	Part-time		%	Total	%
Retail		5,023	37.7		3,831	70.2	8,854	47.1
Service Center		6,764	50.7		1,549	28.5	8,313	44.2
STORE TOTAL		11,787	88.4		5,380	98.7	17,167	91.3
Warehouses		696	5.2		66	1.2	762	4.1
Offices		857	6.4		8	0.1	865	4.6
TOTAL EMPLOYEES		13,340	100.0		5,454	100.0	18,794	100.0

The Company had no union employees as of February 3, 2007. At the end of fiscal 2005, the Company employed approximately 14,358 full-time and 5,622 part-time employees.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained herein, including in “Item 1. Business” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”, constitute “forward-looking statements” within the meaning of The Private Securities Litigation Reform Act of 1995. The words “guidance,” “expects,” “anticipates,” “estimates,” “forecasts” and similar expressions are intended to identify these forward-looking statements. Forward-looking statements include management’s expectations regarding future financial performance, automotive aftermarket trends, levels of competition, business development activities, future capital expenditures, financing sources and availability and the effects of regulation and litigation. Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be achieved. Our actual results may differ materially from the results discussed in the forward-looking statements due to factors beyond our control, including the strength of the national and regional

economies, retail and commercial consumers’ ability to spend, the health of the various sectors of the automotive aftermarket, the weather in geographical regions with a high concentration of our stores, competitive pricing, the location and number of competitors’ stores, product and labor costs and the additional factors described in our filings with the Securities and Exchange Commission (“SEC”). See, “Item 1A. Risk Factors.” We assume no obligation to update or supplement forward-looking statements that become untrue because of subsequent events.

SEC REPORTING

We electronically file certain documents with, or furnish such documents to, the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, along with any related amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. From time-to-time, we may also file registration and related statements pertaining to equity or debt offerings. You may read and copy any materials we file with the SEC at the SEC’s Office of Filings and Information Services at 100 F Street, NE, Washington, DC 20549. You may obtain information regarding the Office of Filings and Information Services by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file or furnish documents electronically with the SEC.

We provide free electronic access to our annual, quarterly and current reports (and all amendments to these reports) on our Internet website, www.pepboys.com. These reports are available on our website as soon as reasonably practicable after we electronically file or furnish such materials with or to the SEC. Information on our website does not constitute part of this Annual Report, and any references to our website herein are intended as inactive textual references only.

Copies of our SEC reports are also available free of charge from our investor relations department. Please call 215-430-9720 or write Pep Boys, Investor Relations, 3111 West Allegheny Avenue, Philadelphia, PA 19132.

EXECUTIVE OFFICERS OF THE COMPANY

The following table indicates the names, ages and tenures with the Company and positions (together with the year of election to such positions) of the executive officers of the Company:

Name	Age	Tenure with Company	Position with the Company and Date of Election to Position
Jeffrey C. Rachor	45	—	President & Chief Executive Officer since March 26, 2007
Harold L. Smith	56	4 years	Executive Vice President—Merchandising, Marketing, Supply Chain and Commercial since August 2003
Mark S. Bacon	43	2 years	Executive Vice President—Operations since August 2006
Joseph A. Cirelli	47	30 years	Senior Vice President—Service since October 2005
Mark L. Page	50	31 years	Senior Vice President—Parts and Tires since October 2005
Harry F. Yanowitz	40	4 years	Senior Vice President—Chief Financial Officer since August 2004

Jeffrey C. Rachor, President & Chief Executive Officer, joined the Company on March 26, 2007, after having most recently served as President, Chief Operating Officer, and a Director of Sonic Automotive Inc, a Fortune 300 company and the third largest automotive retailer in the United States. Prior to joining Sonic in 1997, he served as Chief Operating Officer and General Manager of Nelson Bowers Dealerships and held positions with American Suzuki Motor and General Motors corporations.

Harold L. Smith, Executive Vice President—Merchandising, Marketing, Supply Chain and Commercial, joined the Company in August 2003 after most recently serving in such capacity for CSK Auto. Prior to CSK Auto, Mr. Smith served as the President of Bass Pro Companies, a leading outdoor recreation retailer. Before Bass Pro, he served as CEO of several retail companies, including Builders Emporium, Ernst Home Centers, and Homeowners Do-It-Yourself Centers.

Mark S. Bacon, Executive Vice President, Operations—Mark S. Bacon was named Executive Vice President—Operations in August 2006. Mr. Bacon joined the Company in February 2005 as Senior Vice President—Retail Operations and assumed overall responsibility for both retail and service operations in October 2005. Prior to joining the Company, he was Senior Vice President, Sales and Operations for Staples and has also held various operations positions with companies such as Wal-Mart and Hills Stores.

Joseph A. Cirelli was named Senior Vice President—Service in October 2005. Since March 1977, Mr. Cirelli has served the Company in positions of increasing seniority, including Vice President—Real Estate and Development, Vice President—Operations Administration, and Vice President—Customer Satisfaction.

Mark L. Page was named Senior Vice President—Parts & Tires in October 2005 and has been a Senior Vice President of the Company since March 1993. Since June 1975, Mr. Page has served the Company in various store operations positions of increasing seniority.

Harry F. Yanowitz was named Senior Vice President—Chief Financial Officer in August 2004. Mr. Yanowitz joined the Company in June 2003 as Senior Vice President—Strategy & Business Development after having most recently served as Managing Director of Sherpa Investments, a private investment firm. Previously, he was President of Chapters, Canada’s largest book retailer. Prior to joining Chapters, Mr. Yanowitz was a consultant with Bain & Company.

Each of the officers serves at the pleasure of the Board of Directors of the Company.

ITEM 1A RISK FACTORS

Our business faces significant risks. The risks described below may not be the only risks we face. If any of the events or circumstances described as risks below actually occurs, our business, results of operations or financial condition could be materially and adversely affected.

Risks Related to Pep Boys

If we are unable to generate sufficient cash flows from our operations, our liquidity will suffer and we may be unable to satisfy our obligations.

We require significant capital to fund our business. While we believe we have the ability to sufficiently fund our planned operations and capital expenditures for the balance of fiscal year 2007, circumstances could arise that would materially affect our liquidity. For example, cash flows from our operations could be affected by changes in consumer spending habits or the failure to maintain favorable vendor payment terms or our inability to successfully implement sales growth initiatives. We may be unsuccessful in securing alternative financing when needed, on terms that we consider acceptable, or at all.

PART II

ITEM 5 MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The common stock of The Pep Boys—Manny, Moe & Jack is listed on the New York Stock Exchange under the symbol “PBY”. There were 6,088 registered shareholders as of April 13, 2007. The following table sets forth for the periods listed, the high and low sale prices and the cash dividends paid on the Company’s common stock.

MARKET PRICE PER SHARE

	Market Price Per Share						Cash Dividends
	High			Low			Per Share
*Fiscal year ended February 3, 2007*
Fourth Quarter		$	16.05		$	12.48		$	0.0675
Third Quarter		14.58			9.33			0.0675
Second Quarter		14.96			10.66			0.0675
First Quarter		16.55			14.05			0.0675
*Fiscal year ended January 28, 2006*
Fourth Quarter		$	15.99		$	12.54		$	0.0675
Third Quarter		14.84			11.75			0.0675
Second Quarter		15.24			12.54			0.0675
First Quarter		18.80			14.06			0.0675

It is the present intention of the Company’s Board of Directors to continue to pay regular quarterly cash dividends; however, the declaration and payment of future dividends will be determined by the Board of Directors in its sole discretion and will depend upon the earnings, financial condition and capital needs of the Company and other factors which the Board of Directors deems relevant.

EQUITY COMPENSATION PLANS

The following table sets forth the Company’s shares authorized for issuance under its equity compensation plans at February 3, 2007:

	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)		Weighted-average price of outstanding options (excluding securities reflected in column (a)) (b)			Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders		2,493,028		$	13.64		3,243,817

STOCK PRICE PERFORMANCE

The following graph compares the cumulative total return on shares of Pep Boys Stock over the past five years with the cumulative total return on shares of companies in (1) the Standard & Poor’s SmallCap 600 Index, (2) the S&P 600 Speciality Stores Index and (3) the S&P 600 Automotive Retail Index. Pep Boys moved from the S&P 600 Speciality Stores Index to the S&P 600 Automotive Retail Index upon its formation in May 2005. Until such time as the S&P 600 Automotive Retail index has five years of history, Pep Boys will show a comparison to both peer group indexes. The comparison assumes that $100 was invested in January 2002 in Pep Boys Stock and in each of the indices and assumes reinvestment of dividends.

Company / Index	Jan. 2002			Jan. 2003			Jan. 2004			Jan. 2005			Jan. 2006			Jan. 2007
Pep Boys		$	100		$	66		$	143		$	109		$	105		$	110
S&P SmallCap 600 Index		$	100		$	83		$	122		$	139		$	170		$	187
S&P 600 Specialty Stores Index		$	100		$	84		$	137		$	125		$	122		$	125
S&P 600 Automotive Retail Index*											$	100		$	130		$	170

* The S&P 600 Automotive Retail Index was created in May 2005. Therefore, the total return for January 2006 is for the period from May 2005 through January 2006.

ITEM 6 SELECTED FINANCIAL DATA

The following tables set forth the selected financial data for the Company and should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere herein.

Year ended	Feb. 3, 2007			Jan. 28, 2006			Jan. 29, 2005			Jan. 31, 2004			Feb. 1, 2003
	(dollar amounts are in thousands, except share data)
STATEMENT OF OPERATIONS DATA(5)
Merchandise sales	$	1,876,290		$	1,854,408		$	1,863,015		$	1,728,386		$	1,697,628
Service revenue	395,871			383,621			409,881			405,884			400,149
Total revenues	2,272,161			2,238,029			2,272,896			2,134,270			2,097,777
Gross profit from merchandise sales	539,954			476,856			517,871			486,087		(3)	507,702		(4)
Gross profit from service revenue	31,802			30,411			92,739			94,762		(3)	100,355		(4)
Total gross profit	571,756			507,267			610,610			580,849		(3)	608,057		(4)
Selling, general and administrative expenses	551,031			523,318		(1)	547,336		(2)	569,834		(3)	504,163		(4)
Net Gain (Loss) from Sales of Assets(6)	15,297			4,826			11,848			(61		)	1,909
Operating (loss) profit	36,022			(11,225		)(1)	75,122		(2)	10,954		(3)	105,803		(4)
Non-operating income	7,023			3,897			1,824			3,340			3,097
Interest expense	49,342			49,040			35,965			38,255			47,237
(Loss) earnings from continuing operations before income taxes and cumulative effect of change in accounting principle	(6,297		)	(56,368		)(1)	40,981		(2)	(23,961		)(3)	61,267		(4)
Net (loss) earnings from continuing operations before cumulative effect of change in accounting principle	(2,000		)	(35,799		)(1)	25,666		(2)	(15,145		)(3)	38,881		(4)
Discontinued operations, net of tax(6)	(738		)	292			(2,087		)	(16,265		)	587
Cumulative effect of change in accounting principle, net of tax	189			(2,021		)	—			(2,484		)	—
Net (loss) earnings	(2,549		)	(37,528		)(1)	23,579		(2)	(33,894		)(3)	39,468		(4)
BALANCE SHEET DATA
Working capital	$	163,960		$	247,526		$	180,651		$	76,227		$	130,680
Current ratio	1.27 to 1			1.43 to 1			1.27 to 1			1.10 to 1			1.24 to 1
Merchandise inventories	$	607,042		$	616,292		$	602,760		$	553,562		$	488,882
Property and equipment-net	906,247			947,389			945,031			923,209			974,673
Total assets	1,767,199			1,821,753			1,867,023			1,778,046			1,741,650
Long-term debt (includes all convertible debt)	535,031			586,239			471,682			408,016			525,577
Total stockholders’ equity	567,755			594,565			653,456			569,734			605,880
DATA PER COMMON SHARE
Basic (loss) earnings from continuing operations before cumulative effect of change in accounting principle	$	(0.04	)	$	(0.65	)(1)	$	0.46	(2)	$	(0.29	)(3)	$	0.75	(4)
Basic (loss) earnings	(0.05		)	(0.69		)(1)	0.42		(2)	(0.65		)(3)	0.77		(4)
Diluted (loss) earnings from continuing operations before cumulative effect of change in accounting principle	(0.04		)	(0.65		)(1)	0.45		(2)	(0.29		)(3)	0.73		(4)
Diluted net (loss) earnings	(0.05		)	(0.69		)(1)	0.41		(2)	(0.65		)(3)	0.74		(4)
Cash dividends declared	0.27			0.27			0.27			0.27			0.27
Stockholders’ equity	10.53			10.97			11.87			10.79			11.73
Common share price range:
High	16.55			18.80			29.37			23.99			19.38
Low	9.33			11.75			11.83			6.00			8.75
OTHER STATISTICS
Return on average stockholders’ equity	(0.4		)%	(6.0		)%	3.9		%	(5.8		)%	6.7		%
Common shares issued and outstanding	53,934,084			54,208,803			55,056,641			52,787,148			51,644,578
Capital expenditures	53,903			92,083			103,766			43,262			43,911
Number of retail outlets	593			593			595			595			629
Number of service bays	6,162			6,162			6,181			6,181			6,527

(1) Includes a pretax charge of $4,200 related to an asset impairment charge reflecting the remaining value of a commercial sales software asset, which was included in selling, general and administrative expenses.

(2) Includes a pretax charge of $6,911 related to certain executive severance obligations.

(3) Includes pretax charges of $88,980 related to corporate restructuring and other one-time events of which $29,308 reduced gross profit from merchandise sales, $3,278 reduced gross profit from service revenue and $56,394 was included in selling, general and administrative expenses.

(4) Includes pretax charges of $2,529 related to the Profit Enhancement Plan of which $2,014 reduced the gross profit from merchandise sales, $491 reduced gross profit from service revenue and $24 was included in selling, general and administrative expenses.

(5) Statement of operations data reflects 53 weeks for year ended February 3, 2007 while the prior years reflect 52 weeks.

(6) Prior fiscal year amounts reflect reclassifications to separately disclose Net Gain (Loss) from Sales of Assets from Costs of Merchandise Sales and the change in classification of a store from discontinued operations to continuing operations.

ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Introduction

Pep Boys is a leader in the automotive aftermarket, with 593 stores and more than 6,000 service bays located throughout 36 states and Puerto Rico. All of our stores feature the nationally recognized Pep Boys brand name, established through more than 80 years of providing high-quality automotive merchandise and services, and are company-owned, ensuring chain-wide consistency for our customers. We are the only national chain offering automotive service, accessories, tires and parts under one roof, positioning us to achieve our goal of becoming the category dominant one-stop shop for automotive maintenance and accessories.

Of our 593 stores, 582 are what we refer to as SUPERCENTERS, which feature an average of 11 state-of-the-art service bays, with an average of more than 20,000 square feet per SUPERCENTER. Our store size allows us to display and sell a more complete offering of merchandise in a wider array of categories than our competitors, with a focus on the high-growth accessories segment and a comprehensive tire offering. We leverage this investment in inventory through our ability to install what we sell in our service bays and by offering this merchandise to both commercial and retail customers.

Our fiscal year ends on the Saturday nearest January 31, which results in an extra week every six years. Our fiscal year ended February 3, 2007 was a 53-week year with the fourth quarter including 14 weeks versus 13 weeks in fiscal 2005. All other years included in this report are 52 weeks.

Total revenues for the fiscal year ended February 3, 2007 were $2,272,161,000 as compared to the $2,238,029,000 recorded in the prior year. On a 52 week basis, comparable merchandise sales decreased 0.5% and comparable service revenue increased 1.3%. While we believe the macro economic environment negatively impacted our business throughout 2006, we were pleased with the increase in our service revenue which showed steady improvement in the second half of fiscal 2006. Continued focus on our service center productivity and service manager retention has helped recapture this market share.

Our net loss per share in the fifty-three weeks ended February 3, 2007 was $.05 per share or $.64 per share improvement over the $.69 loss per share recorded in 2005. Continual focus on our business strategy during the year permitted us to improve margins through better product acquisition costs and cost control incentives, which resulted in a reduction of our loss per share.

In addition to the improved operating performance during 2006, the Company focused significantly on improving its cash flow and strengthening its balance sheet. In the third quarter of 2006, we increased our Senior Secured Term Loan facility to $320,000,000, in order to refinance our Convertible Senior Notes due June 1, 2007, and extended the facility’s maturity to 2013, currently, the date of our first significant funded debt maturity. Our cash flow from operating activities improved by $130,817,000 and capital expenditures were $35,733,000 less then last year.

During 2006 we reinvested in our existing stores to redesign their interiors and enhance their exterior appeal. Our new interior design features four distinct merchandising worlds: accessories (fashion, electronic and performance merchandise), maintenance (hard parts and chemicals), garage (repair shop and travel) and service (including tire, wheel and accessory installation). We believe that this layout provides customers with a clear and concise way of finding what they need and promotes cross-selling. Modifications to the exterior of our stores are designed to increase customer traffic.

During 2006 we grand reopened 104 Stores in the following markets: New York—32 (first quarter); Denver, CO, Colorado Springs, CO, Orlando, FL, Miami, FL, and West Palm Beach, FL—34 (second quarter); Northern Florida and Mobile-Pensacola, FL—13 (third quarter); Dallas, TX, Waco, TX,

Abilene, TX and Tyler, TX—25 (fourth quarter). We expect to grand reopen approximately 125 remodeled stores in each of 2007 and 2008 with the remaining approximately 50 stores to be completed in 2009.

Business Strategy

Keeping Our Merchandising Fresh and Exciting. We continually merchandise our stores with a new and flexible product mix designed to increase customer purchases. We take advantage of our industry-leading average retail square footage to increase the appeal of our merchandise displays. We utilize product-specific advertising to highlight promotional items and pricing, primarily through weekly print advertising.

· Enhancing Our Stores. We are investing in our existing stores to redesign our interiors and enhance their exterior appeal. We believe that this layout will provide customers with a clear and concise way of finding what they need and will promote cross-selling.

· Improving Service Center Performance. We are working to improve the financial performance of our service center operations by improving tire sales and related attachment sales, and improving labor productivity. To improve tire sales, we have reduced our advertised opening price points, while offering attractive opportunities for customers to upgrade to tires with better warranties, features, or brands. In addition, we have emphasized training our staff to offer beneficial services related to each tire sale such as wheel balancing, alignments and warranties, as well as to provide a thorough safety check that highlights any further car maintenance or repair needs. We continually tailor our labor costs to labor sales volumes providing an opportunity to improve labor productivity going forward.

· Improve Store Productivity. We continually focus on improving the returns of our investment in store assets through managing our store portfolio, and taking advantage of opportunities for store relocations, disposals or new store additions. Any net store growth will focus primarily upon increasing penetration in our existing markets to further leverage our investments.

The following discussion explains the material changes in our results of operations for the fifty-three weeks ended February 3, 2007, and fifty-two weeks ended January 28, 2006, and January 28, 2005.

CAPITAL & LIQUIDITY

Capital Resources and Needs

Our cash requirements arise principally from the purchase of inventory, capital expenditures related to existing stores, offices and distribution centers and our stock repurchase program.

In fiscal 2006, improved operating results and working capital management, real estate sales and reduced capital expenditures allowed us to reduce our total debt by $48,975,000 and to repay in full $24,669,000 of borrowings against our company-owned life insurance policy assets.

While the primary capital expenditures for the fiscal year 2006 continue to be attributed to store redesigning, the rate of our store refurbishment program was decreased significantly both as a result of our decision in the second quarter to extend it through fiscal 2009 as well as its increased cost effectiveness. We remodeled 120 stores in 2006 and grand reopened 104 stores. In 2007, we expect to remodel 137 stores with the remaining being completed in late 2008 or early 2009.

On September 7, 2006 our Board of Directors renewed our stock repurchase program, resetting the authorized amount of shares that we can repurchase under the program to $100,000,000. We will purchase our common stock on the open market or in privately negotiated transactions from time to time in

accordance with the requirements of the SEC. In the fourth quarter of fiscal 2006, we had repurchased $7,311,000 at an average of $14.77 per share. This program expires on September 30, 2007.

Our capital expenditure program in 2007 is expected to be similar to the fiscal 2006 program, with inventory levels in 2007 comparable to 2006.

We anticipate that cash provided by operating activities, our existing line of credit, cash on hand and future access to the capital markets will exceed our expected cash requirement in fiscal 2007.

The Company’s working capital was $163,960,000 at February 3, 2007, $247,526,000 at January 28, 2006, and $180,651,000 at January 29, 2005. The Company’s long-term debt, as a percentage of its total capitalization, was 49% at February 3, 2007, 50% at January 28, 2006 and 42% at January 29, 2005 respectively. As of February 3, 2007, the Company had a $357,500,000 line of credit, with an availability of approximately $190,000,000. Our current portion of long term debt is $3,490,000 at February 3, 2007.

Contractual Obligations

The following chart represents the Company’s total contractual obligations and commercial commitments as of February 3, 2007:

			Due in less			Due in		Due in		Due after
Obligation	Total		than 1 year			1 - 3 years		3 - 5 years		5 years
	(dollar amounts in thousands)
Long-term debt(1)	$	537,836		$	3,201	$	24,028	$	6,456	$	504,151
Operating leases	482,849			57,670		100,902		84,727		239,550
Expected scheduled interest payments on all long-term debt	289,487			39,932		118,285		116,270		15,000
Capital leases	685			289		239		157		—
Total cash obligations	$	1,310,857		$	101,092	$	243,454	$	207,610	$	758,701

(1) Long-term debt includes current maturities.

The table excludes our pension obligation. We made voluntary contributions of $504,000, $1,867,000 and $1,819,000, to our pension plans in fiscal 2006, 2005 and 2004, respectively. Future plan contributions are dependent upon actual plan asset returns and interest rates. We expect contributions to approximate $1,258,000 in fiscal 2007. See Note 9 of Notes to Consolidated Financial Statements in “Item 8 Financial Statements and Supplementary Data” for further discussion of our pension plans.

			Due in less			Due in			Due in			Due after
Commercial Commitments	Total		than 1 year			1 - 3 years			3 - 5 years			5 years
	(dollar amounts in thousands)
Import letters of credit	$	487		$	487		$	—		$	—		$	—
Standby letters of credit	55,708			42,708			13,000			—			—
Surety bonds	11,224			11,016			208			—			—
Purchase obligations(1)	14,448			14,448			—			—			—
Total commercial commitments	$	81,867		$	68,659		$	13,208		$	—		$	—

(1) Our open purchase orders are based on current inventory or operational needs and are fulfilled by our vendors within short periods of time. We currently do not have minimum purchase commitments under our vendor supply agreements and generally our open purchase orders (orders that have not been shipped) are not binding agreements. Those purchase obligations that are in transit from our vendors at February 3, 2007 are considered to be a contractual obligation.

Long-term Debt

On January 27, 2006 the Company entered into a $200,000,000 Senior Secured Term Loan facility due January 27, 2011. This facility is secured by the real property and improvements associated with 154 of the Company’s stores. Interest at the rate of London Interbank Offered Rate (LIBOR) plus 3.0% on this facility was payable by the Company starting in February 2006. Proceeds from this facility were used to satisfy and discharge the Company’s then outstanding $43,000,000 6.88% Medium Term Notes due March 6, 2006 and $100,000,000 6.92% Term Enhanced Remarketable Securities (TERMS) due July 7, 2016 and to reduce borrowings under the Company’s line of credit by approximately $39,000,000.

On October 30, 2006, the Company amended and restated the Senior Secured Term Loan facility to (i) increase the size from $200,000,000 to $320,000,000, (ii) extend the maturity from January 27, 2011 to October 27, 2013, (iii) reduce the interest rate from LIBOR plus 3.00% to LIBOR plus 2.75%. An additional 87 stores (bringing the total to 241 stores) were added to the collateral pool securing the facility. Proceeds were used to satisfy and discharge $119,000,000 in outstanding 4.25% convertible Senior Notes due June 1, 2007.

On February 15, 2007, the Company further amended the Senior Secured Term Loan facility to reduce the interest rate from LIBOR plus 2.75% to LIBOR plus 2.00%.

Upon maturity on June 1, 2005, the Company retired the remaining $40,444,000 aggregate principal amount of its 7.0% Senior Notes with cash from operations and its existing line of credit.

On December 14, 2004, the Company issued $200,000,000 aggregate principal amount of 7.5% Senior Subordinated Notes due December 15, 2014.

On December 2, 2004, the Company further amended its amended and restated line of credit agreement. The amendment increased the amount available for borrowings to $357,500,000, with an ability, upon satisfaction of certain conditions, to increase such amount to $400,000,000. The amendment also reduced the interest rate under the agreement to LIBOR plus 1.75% (after June 1, 2005, the rate decreased to LIBOR plus 1.50%, subject to 0.25% incremental increases as excess availability falls below $50,000,000). The amendment also provided the flexibility, upon satisfaction of certain conditions, to release up to $99,000,000 of reserves required as of December 2, 2004 under the line of credit agreement to support certain operating leases. This reserve was $73,912,000 on February 3, 2007. Finally, the amendment extended the term of the agreement through December 2009. The weighted average interest rate on borrowings under the line of credit agreement was 7.67 % and 6.2% at February 3, 2007 and January 28, 2006, respectively.

The other notes payable have a principal balance of $268,000 and $1,315,000 and a weighted average interest rate of 8.0% and 5.1% at February 3, 2007 and January 28, 2006, respectively, and mature at various times through August 2016. Certain of these notes are collateralized by land and buildings with an aggregate carrying value of approximately $1,774,000 and $6,744,000 at February 3, 2007 and January 28, 2006, respectively.

Other Contractual Obligations

In the third quarter of fiscal 2004, the Company entered into a vendor financing program with an availability of $20,000,000. Under this program, the Company’s factor makes accelerated and discounted payments to its vendors and the Company, in turn, makes its regularly-scheduled full vendor payments to the factor. As of February 3, 2007 and January 28, 2006, there was an outstanding balance of $13,990,000 and $11,156,000, respectively, under this program, classified as trade payable program liability in the consolidated balance sheet.

In October 2001, the Company entered into a contractual commitment to purchase media advertising services with equal annual purchase requirements totaling $39,773,000 over four years. During the second quarter of fiscal 2004, it was determined that the Company would be unable to meet this obligation for the 2004 contract year which ended on November 30, 2004. As a result, the Company recorded a $1,579,000 charge to selling, general and administrative expenses in the quarter ended July 31, 2004 related to the anticipated shortfall in this purchase commitment. This agreement expired in October 2005.

The Company has letter of credit arrangements in connection with its risk management, import merchandising and vendor financing programs. The Company was contingently liable for $487,000 and $1,015,000 in outstanding import letters of credit and $55,708,000 and $41,218,000 in outstanding standby letters of credit as of February 3, 2007 and January 28, 2006, respectively.

The Company was also contingently liable for surety bonds in the amount of approximately $11,224,000 and $13,021,000 as of February 3, 2007 and January 28, 2006, respectively. The surety bonds guarantee certain of the Company’s payments (for example utilities, easement repairs, licensing requirements and customs fees).

Off-balance Sheet Arrangements

In the third quarter of fiscal 2004, the Company entered into a $35,000,000 operating lease for certain operating equipment at an interest rate of LIBOR plus 2.25%. The Company has evaluated this transaction in accordance with the original guidance of Financial Accounting Standards Board Interpretation Number (FIN) 46 and has determined that it is not required to consolidate the leasing entity. As of February 3, 2007, there was an outstanding commitment of $14,938,000 under the lease. The lease includes a residual value guarantee with a maximum value of approximately $172,000. The Company expects the fair market value of the leased equipment to substantially reduce or eliminate the Company’s payment under the residual guarantee at the end of the lease term. In accordance with FIN 45, the Company has recorded a liability for the fair value of the guarantee related to this operating lease. As of February 3, 2007 and January 28, 2006, the current value of this liability was $71,000 and $105,000, respectively, which is recorded in other long-term liabilities on the consolidated balance sheets.

On August 1, 2003, the Company renegotiated $132,000,000 in operating leases. These leases, which expire on August 1, 2008, have lease payments with an effective rate of LIBOR plus 2.06%. The Company has evaluated this transaction in accordance with the original guidance of FIN 46 and has determined that it is not required to consolidate the leasing entity. The leases include a residual value guarantee with a maximum value of approximately $105,000,000. The Company expects the fair market value of the leased real estate to substantially reduce or eliminate the Company’s payment under the residual guarantee at the end of the lease term. In accordance with FIN 45, the Company has recorded a liability for the fair value of the guarantee related to this operating lease. As of February 3, 2007, the current value of this liability was $1,496,000, which is recorded in other long-term liabilities on the consolidated balance sheets. As of February 3, 2007, there was an outstanding commitment of $117,627,000 under the lease.

The Company leases certain property and equipment under operating leases and capital leases which contain renewal and escalation clauses, step rent provisions, capital improvements funding and other lease concessions. These provisions are considered in the Company’s calculation of its minimum lease payments which are recognized as expense on a straight-line basis over the applicable lease term. In accordance with the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 13, as amended by SFAS No. 29, any lease payments that are based upon an existing index or rate are included in the Company’s minimum lease payment calculations. Total operating lease commitments as of February 3, 2007 were $482,849,000.

Pension Plans

The Company has a defined benefit pension plan covering its full-time employees hired on or before February 1, 1992 and an unfunded Supplemental Executive Retirement Plan (SERP) that includes a defined benefit portion. The pension expense under these plans for fiscal 2006, 2005, and 2004 was $3,999,000, $4,331,000 and $4,076,000, respectively. The fiscal year 2006 expense is calculated based upon a number of actuarial assumptions, including an expected return on plan assets of 6.30% and a discount rate of 5.70%. In developing the expected return on asset assumptions, the Company evaluated input from its actuaries, including their review of asset class return expectations. The discount rate utilized for the pension plans is based on a model bond portfolio with durations that match the expected payment patterns of the plans. The Company will continue to evaluate its actuarial assumptions and adjust as necessary. In fiscal 2006, the Company contributed an aggregate of $504,000 to our pension plans. Based upon the current funded status of the defined benefit pension plan and the unfunded defined benefit portion of the SERP, aggregate cash contributions are expected to be $1,258,000 in fiscal 2007.

On January 31, 2004, the Company amended and restated its SERP. This amendment converted the defined benefit plan to a defined contribution plan for certain unvested participants and all future participants. All vested participants under the defined benefit portion will continue to accrue benefits according to the defined benefit formula. In connection with these amendments, the Company settled several obligations related to the benefits under the defined benefit SERP. These obligations totaled $568,000, and resulted in an expense under SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” of approximately $774,000 in fiscal 2004.

RESULTS OF OPERATIONS

Management Overview-Fiscal 2006

Fiscal 2006 was a year of continuous improvement to operating performance for the Company. Our operating profit for fiscal 2006 was $36,022,000 or a $47,247,000 improvement over the operating loss in fiscal 2005 of $11,225,000. On a 52 week basis, our comparable sales were basically flat, but included a 1.3% improvement in service revenues. With revenue flat, improvements in margins and lower operating costs helped drive this operating profit improvement. Net loss for fiscal 2006 decreased to $2,549,000 or $0.05 per share (basic & diluted) from a net loss in 2005 of $37,528,000 or $0.69 per share (basic & diluted).

Discontinued Operations

In accordance with SFAS No. 144, our discontinued operations continues to reflect the costs associated with the stores remaining from the 33 stores closed on July 31, 2003 as part of our corporate restructuring (see Item 8 Financial Statements and Supplementary Data- note 7).

During the second quarter of fiscal 2006, we sold a store that we have leased back and will continue to operate for a one year period. Due to our significant continuing involvement with this store following the sale, we reclassified back into continuing operations, for all periods presented, this store’s revenues and costs that had been previously reclassified into discontinued operations during the third quarter of fiscal 2005, in accordance with SFAS No. 144 and EITF 03-13.

During fiscal 2005, the Company sold a closed store for proceeds of $931,000 resulting in a pre-tax gain of $341,000, which was recorded in discontinued operations on the consolidated statement of operations.

During fiscal 2004, the Company sold assets held for disposal for proceeds of $13,327,000 resulting in a loss of $91,000, which was recorded in discontinued operations on the consolidated statement of operations.

Analysis of Statement of Operations

The following table presents, for the periods indicated, certain items in the consolidated statements of operations as a percentage of total revenues (except as otherwise provided) and the percentage change in dollar amounts of such items compared to the indicated prior period.

	Percentage of Total Revenues									Percentage Change
Year ended	Feb 3, 2007 (fiscal 2006)			Jan. 28, 2006 (fiscal 2005)			Jan. 29, 2005 (fiscal 2004)			Fiscal 2006 vs. Fiscal 2005			Fiscal 2005 vs. Fiscal 2004
Merchandise Sales		82.6	%		82.9	%		82.0	%		1.2	%		(0.5	)%
Service Revenue(1)		17.4			17.1			18.0			3.2			(6.4	)
Total Revenues		100.0			100.0			100.0			1.5			(1.5	)
Costs of Merchandise Sales(2)		71.2	(3)		74.3	(3)		72.2	(3)		(3.0	)		2.4
Costs of Service Revenue(2)		92.0	(3)		92.1	(3)		77.4	(3)		3.1			11.4
Total Costs of Revenues		74.8			77.3			73.1			(1.8	)		4.1
Gross Profit from Merchandise Sales		28.8	(3)		25.7	(3)		27.8	(3)		13.2			(7.9	)
Gross Profit from Service Revenue		8.0	(3)		7.9	(3)		22.6	(3)		4.6			(67.2	)
Total Gross Profit		25.2			22.7			26.9			12.7			(16.9	)
Selling, General and Administrative Expenses		24.3			23.4			24.1			5.3			(4.4	)
Net Gain from Sales of Assets		0.7			0.2			0.5			217.0			(59.3	)
Operating (Loss) Profit		1.6			(0.5	)		3.3			420.9			(114.9	)
Non-operating Income		0.3			0.2			0.1			80.2			113.7
Interest Expense		2.2			2.2			1.6			0.6			36.4
(Loss) Earnings from Continuing Operations Before Income Taxes and Cumulative Effect of Change in Accounting Principle		(0.3	)		(2.5	)		1.8			88.8			(237.5	)
Income Tax (Benefit) Expense		(68.2	)(4)		(36.5	)(4)		37.4	(4)		(79.1	)		234.3
Net (Loss) Earnings from Continuing Operations Before Cumulative Effect of Change in Accounting Principle		(0.1	)		(1.6	)		1.1			94.4			(239.5	)
Discontinued Operations, Net of Tax		—			—			(0.1	)		(352.7	)		114.0
Cumulative Effect of Change in Accounting Principle, Net of Tax		—			(0.1	)		—			109.4			—
Net (Loss) Earnings		(0.01	)		(1.7	)		1.0			93.2			(259.2	)

(1) Service revenue consists of the labor charge for installing merchandise or maintaining or repairing vehicles, excluding the sale of any installed parts or materials.

(2) Costs of merchandise sales include the cost of products sold, buying, warehousing and store occupancy costs. Costs of service revenue include service center payroll and related employee benefits and

service center occupancy costs. Occupancy costs include utilities, rents, real estate and property taxes, repairs and maintenance and depreciation and amortization expenses.

(3) As a percentage of related sales or revenue, as applicable.

(4) As a percentage of (Loss) Earnings from Continuing Operations Before Cumulative Effect of Change in Accounting Principle

Fiscal 2006 vs. Fiscal 2005

Total revenues for fiscal 2006 increased 1.5%. Fiscal 2006 included 53 weeks versus 52 weeks in fiscal 2005. The 1.5% increase in revenue was the result of an additional week of sales along with increased improvement in our service counter operations. On a 52 week basis, the Company had a decrease in comparable store revenues of 0.2%. Comparable store service revenue increased 1.3% while comparable store merchandise sales decreased 0.5%. All stores that are included in the comparable store sales base as of the end of the period are included in the Company’s comparable store data calculations. Upon reaching its 13th month of operation, a store is added to our comparable store sales base. Stores are removed from the comparable store sales base upon their relocation or closure. Once a relocated store reaches its 13th month of operation at its new location, it is added back into our comparable store sales base. Square footage increases are infrequent and immaterial and, accordingly, are not considered in our calculations of comparable store data.

Gross profit from merchandise sales increased, as a percentage of merchandise sales, to 28.8% in fiscal 2006 from 25.7% in fiscal 2005. The increase in dollars was $63,098,000 or a 13.2% increase from the prior year. This increase, as a percentage of merchandise sales, was due to improved product margins and decreased warehousing costs partially offset by higher occupancy costs. The increase in merchandise margins resulted from the restructuring of our vendor agreements, lower freight costs and lower acquisition costs. Effective January 29, 2006, substantially all of our vendor agreements were restructured to no longer identify specific incremental expenses for cooperative advertising; therefore all vendor support funds are now treated as a reduction of inventories and are recognized as an increase to gross profit from merchandise sales when the inventories are sold, in accordance with EITF 02-16. Gross profit from merchandise sales from fiscal 2006 improved by approximately $37,100,000 compared to fiscal 2005, primarily as a result of these changes. Warehousing costs were reduced due to a more efficient store replenishment schedule and the absence in fiscal 2006 of certain costs associated with the fiscal 2005 relocation of our Southern California distribution center. Increased occupancy costs were the result of higher utility costs and higher depreciation expense associated with our store remodel program. The Company’s gross profit classification may not be comparable to the classification used by certain other entities. Some entities (including the Company) include distribution, store occupancy, buying and other costs in cost of goods sold. Other entities exclude such costs from gross profit, including them instead in general and administrative and / or sales and marketing expenses.

Gross profit from service revenue increased, as a percentage of service revenue, to 8.0% in fiscal 2006 from 7.9% in fiscal 2005. The increase in dollars was $1,391,000 or a 4.6% increase from the prior year. This increase as a percentage of service revenue was primarily due to lower workers compensation expense and repairs and maintenance costs offset by cost associated with providing free or discounted towing services to our customers.

Net gain from sales of assets increased, as percentage of total revenue to 0.7% from 0.2% in fiscal 2005. The $10,471,000 increase resulted from the sale of one owned property and the leasehold interest in another in 2006 versus the sale of one owned property in 2005.

Selling, general and administrative expenses increased, as a percentage of total revenues, to 24.3% in fiscal 2006 from 23.4% in fiscal 2005. This was a $27,713,000 or 5.3% increase over the prior year. This

increase, as a percentage of total revenues, was due primarily to higher net media expense offset by reduced general office expense. The increase in net media expense was caused by a change in our vendor agreements which resulted in a different application of EITF 02-16, whereby approximately $35,700,000 in vendor support funds were recorded as a reduction to advertising cost in fiscal 2005 (see above explanation of vendor agreement restructuring). General office expense was favorable by $5,007,000 primarily due to the Company incurring a $4,200,000 software impairment charge in fiscal 2005.

Interest expense increased $302,000 to $49,342,000 in fiscal 2006 from fiscal 2005. Included in fiscal 2006 was $4,200,000 of costs associated with the early satisfaction and discharge of $119,000,000 4% Senior Convertible Notes due in June, 2007 and in fiscal 2005, $ 9,738,000 in interest and fees associated with the early satisfaction and discharge of our $43,000,000 6.88% Medium Term Notes and $100,000,000 6.92% Term Enhanced Remarketable Securities (TERMS). Also in fiscal 2006, the Company incurred a higher weighted average interest rate, offset by lower debt levels and a reduction to interest expense for the increase in the fair value of the interest rate swap of $1,490,000.

Non-operating income increased as a percentage of total revenues from 0.2% in 2005 to 0.3% in 2006. This 80% increase of $3,126,000 was a result of interest earned on the investment of funds used for the early satisfaction and discharge of the Senior Convertible notes.

Our income tax benefit as a percentage of loss from continuing operations before income taxes and cumulative effect of change in accounting principle increased to 68.2% or $4,297,000 versus 36.5% or $20,569,000. The increase in the effective rate is due to a non-cash adjustment of $2,451,000 to our state deferred liabilities resulting from a change in the Company’s filing position.

Loss from discontinued operations decreased from a gain of $292,000, net of tax, in fiscal 2005 to a loss of $738,000, net of tax, in fiscal 2006 due to continuing expenses incurred from locations associated with the corporate restructuring which occurred in fiscal 2003.

Net loss decreased, as a percentage of total revenues, due primarily to an increase in gross profit from merchandise sales as a percentage of merchandise sales, an increase in gain on sale of assets, increase in non-operating income offset by higher selling, general and administrative expenses.

Effects of Inflation

The Company uses the LIFO method of inventory valuation. Thus, the cost of merchandise sold approximates current cost. Although the Company cannot accurately determine the precise effect of inflation on its operations, it does not believe inflation has had a material effect on revenues or results of operations during all fiscal years presented.

Fiscal 2005 vs. Fiscal 2004

Total revenues for fiscal 2005 decreased 1.5%. This decrease was due primarily to a decrease in comparable store revenues of 1.3%. Comparable store service revenue decreased 6.1% while comparable store merchandise sales decreased 0.2%.

Gross profit from merchandise sales decreased, as a percentage of merchandise sales, to 25.7% in fiscal 2005 from 27.8% in fiscal 2004. This was a 7.9% or $41,015,000 decrease from the prior year. This decrease, as a percentage of merchandise sales, was due to increases in warehousing costs and occupancy costs, and decreases in merchandise margins. The increase in warehousing costs was from increases in rent expense and rental equipment for the new warehouse in San Bernardino, CA. The increase in store occupancy costs was due to increased lease expense associated with the new point-of sale system and building and equipment maintenance expenses related to the store refurbishment program. The decrease in merchandise margin resulted from higher tire costs, a less favorable product mix consisting of more sales from lower margin products and higher freight costs.

Gross profit from service revenue decreased, as a percentage of service revenue, to 7.9% in fiscal 2005 from 22.6% in fiscal 2004. This was a 67.2% or $62,328,000 decrease from the prior year. This decrease, as a percentage of service revenue, was due to decreased service revenue against fixed occupancy costs, in addition to increased payroll and benefits. The decrease in service revenue resulted primarily from decreased customer traffic and reduced tire sales, which results in fewer tire-related services and a negative impact on the overall service results. The increase in payroll and benefits was primarily due to a restructuring of field operations into separate retail and service teams on January 30, 2005. In connection with this restructuring, certain retail personnel, who were previously utilized in merchandising roles supporting the service business, were reassigned to purely service-related responsibilities. The labor and benefit costs related to these associates, approximately $21,132,000, which were previously recognized in selling, general and administrative expenses, are now recognized in costs of service revenue.

Net gain from sales of assets decreased, as percentage of total revenue to 0.2% from 0.5% in fiscal 2004. The $7,022,000 decrease resulted from the sale of one owned property in 2005 versus the sale of a distribution center in 2004.

Selling, general and administrative expenses decreased, as a percentage of total revenues, to 23.4% in fiscal 2005 from 24.1% in fiscal 2004. This was a $24,018,000 or 4.4% decrease from the prior year. This decrease, as a percentage of total revenues, was due primarily to decreases in store expenses, general office costs and employee benefits, offset, in part, by an increase in net media expense. The decrease in store expenses was primarily caused by a decrease of approximately $21,132,000 in payroll and related benefit costs (see above explanation of field operations restructuring), offset by increased hiring expenses, and travel expense associated with the store refurbishment program. The decrease in administrative expenses was primarily due to the recognition of $6,911,000 of executive severance in 2004, offset by a $4,200,000 asset impairment charge reflecting the remaining value of a commercial sales software asset in 2005, higher travel costs, auditing and tax services and meeting costs. The increase in net media expense was due primarily to incremental circular advertising and sales promotion expenses of approximately $11,000,000 related to the grand reopenings.

Interest expense increased 36.4% or $13,075,000 due primarily to $9,738,000 in interest and fees associated with the early satisfaction and discharge of the Company’s $43,000,000 6.88% Medium Term Notes ($342,000 of interest through original maturity) and the $100,000,000 6.92% TERMS ($1,296,000 of interest through original maturity, and $8,100,000 to purchase an associated call option).

Earnings from discontinued operations increased from a loss of $2,087,000, net of tax, in fiscal 2004 to earnings of $292,000, net of tax, in fiscal 2005 due primarily to changes in assumptions for sublet income and expenses related to closed stores.

Net earnings decreased, as a percentage of total revenues, due primarily to a decrease in total gross profit, an increase in interest expense and the impact of a net charge for the cumulative effect of a change in accounting principle for the adoption of FIN 47, “Accounting for Conditional Asset Retirement Obligations” recorded in fiscal 2005, offset by decreases in income tax expense and loss from discontinued operations.

Industry Comparison

We operate in the U.S. automotive aftermarket, which has two general competitive arenas: the Do-It-For-Me (“DIFM”) (service labor, installed merchandise and tires) market and the Do-It-Yourself (“DIY”) (retail merchandise) market. Generally, the specialized automotive retailers focus on either the “DIY” or “DIFM” areas of the business. We believe that operation in both the “DIY” and “DIFM” areas of the business positively differentiates us from most of our competitors. Although we manage our store performance at a store level in aggregation, we believe that the following presentation shows an accurate comparison against competitors within the two sales arenas. We compete in the “DIY” area of the business through our retail sales floor and commercial sales business (Retail Sales). Our Service Center business (labor and installed merchandise and tires) competes in the “DIFM” area of the industry. The following table presents the revenues and gross profit for each area of the business.

	Year ended
(dollar amounts in thousands)	February 3, 2007		January 28, 2006		January 29, 2005
Retail Sales(1)	$	1,352,395	$	1,356,784	$	1,352,695
Service Center Revenue(2)	919,766		881,245		920,201
Total Revenues	$	2,272,161	$	2,238,029	$	2,272,896
Gross Profit from Retail Sales(3)	$	381,247	$	343,860	$	355,270
Gross Profit from Service Center Revenue(3)	190,509		163,407		255,340
Total Gross Profit	$	571,756	$	507,267	$	610,610

(1) Excludes revenues from installed products.

(2) Includes revenues from installed products.

(3) Gross Profit from Retail Sales includes the cost of products sold, buying, warehousing and store occupancy costs. Gross Profit from Service Center Revenue includes the cost of installed products sold, buying, warehousing, service center payroll and related employee benefits and service center occupancy costs. Occupancy costs include utilities, rents, real estate and property taxes, repairs and maintenance and depreciation and amortization expenses.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to customer incentives, product returns and warranty obligations, bad debts, inventories, income taxes, financing operations, restructuring costs, retirement benefits, share based compensation, risk participation agreements and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The Company believes that the following represent its more critical estimates and assumptions used in the preparation of the consolidated financial statements, although not inclusive:

· The Company evaluates whether inventory is stated at the lower of cost or market based on historical experience with the carrying value and life of inventory. The assumptions used in this evaluation are based on current market conditions and the Company believes inventory is stated at the lower of cost or market in the consolidated financial statements. In addition, historically the Company has been able to return excess items to vendors for credit. Future changes in vendors, in their policies or in their willingness to accept returns of excess inventory could require a revision in the estimates. If our estimates regarding excess or obsolete inventory are inaccurate, we may be exposed to losses or gains that could be material. A 10% difference in these estimates at February 3, 2007 would have affected net earnings by approximately $428,000 for the fiscal year ended February 3, 2007.

· The Company has risk participation arrangements with respect to casualty and health care insurance, including the maintaining of stop loss coverage with third party insurers to limit our total exposure. A reserve for the liabilities associated with these agreements is established using actuarial methods followed in the insurance industry and our historical claims experience. The amounts included in the Company’s costs related to these arrangements are estimated and can vary based on changes in assumptions, claims experience or the providers included in the associated insurance programs. A 10% change in our self-insurance liabilities at February 3, 2007 would have affected net earnings by approximately $2,723,000 for the fiscal year ended February 3, 2007.

· The Company records reserves for future product returns, warranty claims and inventory shrinkage. The reserves are based on current sales of products and historical claims and inventory shrinkage experience. If actual experience differs from historical levels, revisions in the Company’s estimates may be required. A 10% change in these reserves at February 3, 2007 would have affected net earnings by approximately $329,000 for the fiscal year ended February 3, 2007.

· The Company has significant pension costs and liabilities that are developed from actuarial valuations. Inherent in these valuations are key assumptions including discount rates, expected return on plan assets, mortality rates and merit and promotion increases. The Company is required to consider current market conditions, including changes in interest rates, in selecting these assumptions. Changes in the related pension costs or liabilities may occur in the future due to changes in the assumptions. The following table highlights the sensitivity of our pension obligations and expense to changes in these assumptions, assuming all other assumptions remain constant:

Change in Assumption	Impact on Annual Pension Expense	Impact on Projected Benefit Obligation
0.50 percentage point decrease in discount rate	Increase $480,000	Increase $3,795,000
0.50 percentage point increase in discount rate	Decrease $480,000	Decrease $3,795,000
5.0% decrease in expected rate of return on assets	Increase $187,000	—
5.0% increase in expected rate of return on assets	Decrease $187,000	—

· The Company periodically evaluates its long-lived assets for indicators of impairment. Management’s judgments are based on market and operational conditions at the time of evaluation. Future events could cause management’s conclusion on impairment to change, requiring an adjustment of these assets to their then current fair market value.

· We have a share-based compensation plan, which includes stock options and restricted stock units, or RSUs. We account for our share-based compensation plans as prescribed by the fair value provisions of SFAS No. 123R. We determine the fair value of our stock options at the date of the grant using the Black-Scholes option-pricing model. The RSUs are awarded at a price equal to the

market price of our underlying stock on the date of the grant. The pricing model and generally accepted valuation techniques require management to make assumptions and to apply judgment to determine the fair value of our awards. These assumptions and judgments include the expected life of stock options, expected stock price volatility, future employee stock option exercise behaviors and the estimate of award forfeitures. We do not believe there is a reasonable likelihood there will be a material change in the future estimates or assumptions we use to determine stock-based compensation expense. However, if actual results are different from these assumptions, the share-based compensation expense reported in our financial statements may not be representative of the actual economic cost of the share-based compensation. In addition, significant changes in these assumptions could materially impact our share-based compensation expense on future awards. A 10% change in our share-based compensation expense for the fiscal year ended February 3, 2007 would have affected net income by approximately $97,000 for the fiscal year ended February 3, 2007.

· The Company is required to estimate its income taxes in each of the jurisdictions in which it operates. This requires the Company to estimate its actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as depreciation of property and equipment and valuation of inventories, for tax and accounting purposes. The Company determines its provision for income taxes based on federal and state tax laws and regulations currently in effect, some of which have been recently revised. Legislation changes currently proposed by certain states in which we operate, if enacted, could increase our transactions or activities subject to tax. Any such legislation that becomes law could result in an increase in our state income tax expense and our state income taxes paid, which could have a material effect on our net income.

The temporary differences between the book and tax treatment of income and expenses result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income. To the extent we believe that recovery is not more likely than not, we must establish a valuation allowance. To the extent we establish a valuation allowance or change the allowance in a future period, income tax expense will be impacted. Actual results could differ from this assessment if adequate taxable income is not generated in future periods. Net deferred tax liabilities as of February 3, 2007 and January 28, 2006 totaled $28,931,000 and $18,354,000, respectively, representing approximately 2.4% and 1.5% of liabilities, respectively.

RECENT ACCOUNTING STANDARDS

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140.” This statement simplifies accounting for certain hybrid instruments currently governed by SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” or SFAS No. 133, by allowing fair value remeasurement of hybrid instruments that contain an embedded derivative that otherwise would require bifurcation. SFAS No. 155 also eliminates the guidance in SFAS No. 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets,” which provides such beneficial interests are not subject to SFAS No. 133. SFAS No. 155 amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities—a Replacement of FASB Statement No. 125,” by eliminating the restriction on passive derivative instruments that a qualifying special-purpose entity may hold. SFAS No. 155 is effective for financial instruments acquired or issued after the beginning of our fiscal year 2007. We are currently evaluating the impact of SFAS No. 155 and will adopt the standard February 4, 2007.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets—an amendment of FASB Statement No. 140.” SFAS No. 156 amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” with respect to the accounting for separately recognized servicing assets and servicing liabilities. SFAS No. 156 is effective for fiscal years beginning after September 15, 2006. We are currently evaluating the impact of SFAS No. 156 and will adopt the standard February 4, 2007.

In June of 2006, the FASB ratified the consensus reached by the Emerging Issues Task Force on Issue 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement (That Is, Gross versus Net Presentation). The scope of this consensus includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include, but is not limited to sales, use, value added and some excise taxes. Additionally, this consensus seeks to address how a company should address the disclosure of such items in interim and annual financial statements, either gross or net pursuant to APB Opinion No. 22, Disclosure of Accounting Policies. The Company is required to adopt this statement in fiscal 2007. The Company presents sales net of sales taxes in its consolidated statement of operations and does not anticipate changing its policy as a result of EITF 06-3.

In July of 2006, the FASB released FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement 109 (FIN 48). FIN 48 prescribes a model for the recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides guidance on derecognition, classification, interest and penalties, disclosure and transition. FIN 48 is effective for financial statements issued for fiscal years beginning after December 15, 2006. The Company does not expect the adoption of this statement to have a material impact on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS No. 157). SFAS 157 defines the term fair value, establishes a framework for measuring it within generally accepted accounting principles and expands disclosures about its measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of SFAS No. 157.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an Amendment of FASB Statements No. 87, 88, 106 and 132(R)” (SFAS 158). SFAS No. 158 requires entities to:

· Recognize on its balance sheet the funded status (measured as the difference between the fair value of plan assets and the benefit obligation) of pension and other postretirement benefit plans;

· Recognize, through comprehensive income, certain changes in the funded status of a defined benefit and post retirement plan in the year in which the changes occur;

· Measure plan assets and benefit obligations as of the end of the employer’s fiscal year; and

· Disclose additional information.

The requirement to recognize the funded status of a benefit plan and the additional disclosure requirements are effective for fiscal years ended after December 15, 2006. Accordingly, the Company adopted SFAS No.158 for its fiscal year ended February 3, 2007. The incremental effect from applying SFAS No. 158 on individual line items in the Company’s Consolidated Balance Sheets at February 3, 2007 follows:

	Before								After
	Application of								Application of
	SFAS No. 158				Adjustments				SFAS No. 158
Deferred Income Taxes		$	22,996			$	1,832			$	24,828
Other Long Term Assets		69,635				(1,651		)		67,984
Total Assets		1,767,018				181				1,767,199
Accrued Expenses		292,280				—				292,280
Other Long Term Liabilities		56,998				3,235				60,233
Total Liabilities		1,196,209				3,235				1,199,444
Accumulated Other Comprehensive Loss		(6,326		)		(3,054		)		(9,380		)
Total Stockholders’ Equity		570,809				(3,054		)		567,755
Total Liabilities and Stockholders’ Equity		1,767,018				181				1,767,199

The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end is effective for fiscal years ending after December 15, 2008. The Company’s current measurement date is December 31. The Company will not elect early adoption of these additional SFAS No.158 requirements and will adopt these requirements for the fiscal year ended January 31, 2009.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of SFAS No. 159.

ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company has market rate exposure in its financial instruments primarily due to changes in interest rates.

Variable Rate Debt

Pursuant to terms of its revolving credit agreement, changes in the lender’s LIBOR could affect the rates of which the Company could borrow funds thereunder. At February 3, 2007, the Company had outstanding borrowings of $17,568,000 against the revolving credit agreement. Additionally, the Company has a $320,000,000 Senior Secured Term Loan facility that bears interest at three month LIBOR plus 2.75%, which was negotiated to LIBOR plus 2.00% after February 3, 2007, and $117,627,000 of real estate operating leases and $14,938,000 of equipment operating leases which have lease payments that vary based on changes in LIBOR. A one percent change in the LIBOR rate for the fiscal year ended February 3, 2007 would have affected net income by approximately $1,493,000 for the fiscal year ended February 3, 2007.

Fixed Rate Debt

The table below summarizes the fair value and contract terms of fixed rate debt instruments held by the Company at February 3, 2007:

(dollar amounts in thousands)	Amount		Average Interest Rate
Fair value at February 3, 2007	$	189,268
Expected maturities:
2007	$	268		8.00	%
2008	—			—
2009	—			—
2010	—			—
2011	—			—
Thereafter	200,000			7.50	%
	$	200,268

At January 28, 2006, the Company had outstanding $319,215,000 of fixed rate notes with an aggregate fair market value of $315,039,000.

Interest Rate Swap

On June 3, 2003, the Company entered into an interest rate swap for a notional amount of $130,000,000. The Company had designated the swap as a cash flow hedge of the Company’s real estate operating lease payments. The interest rate swap converts the variable LIBOR portion of the lease payment to a fixed rate of 2.90% and terminates on July 1, 2008. If the critical terms of the interest rate swap or hedge item do not change, the interest rate swap is considered to be highly effective with all changes in fair value included in other comprehensive income. As of February 3, 2007 and January 28, 2006, the fair value was $4,150,000 and $5,790,000, respectively. In the fourth quarter of fiscal 2006, the Company determined it was not in compliance with FAS 133 for hedge accounting and, accordingly, recorded a reduction of rent expense, which is included in Costs of Merchandise and Costs of Service Revenues, for the cumulative fair value change of $4,150,000. This change in fair value had previously been recorded in Accumulated Other Comprehensive Income (Loss) on the consolidated balance sheets. The Company evaluated the impact of this error, along with three other errors, on an annual and quarterly basis and concluded there was no material impact on any historical periods, on an individual or aggregate basis. The Company corrected these errors in the fourth quarter of fiscal 2006, resulting in no material impact to the consolidated financial statements. The Company has removed its designation as a cash flow hedge on this transaction and will record the change in fair value through its operating statement until the date of termination.

On November 2, 2006, the Company entered into an interest rate swap for a notional amount of $200,000,000. The Company has designated the swap a cash flow hedge on the first $200,000,000 of the Company’s $320,000,000 senior secured notes. The interest rate swap converts the variable LIBOR portion of the interest payments to a fixed rate of 5.036% and terminates in October 2013. The Company did not meet the documentation requirements of SFAS No. 133, at inception or as of February 3, 2007 and, accordingly, recorded the increase in the fair value of the interest rate swap of $1,490 as a reduction to Interest Expense. The Company intends to meet the documentation requirements of SFAS No. 133 for hedge accounting in the first quarter of fiscal 2007 and prospectively then record the effective portion of the change in fair value through Accumulated Other Comprehensive Income (Loss).

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
The Pep Boys—Manny, Moe & Jack and Subsidiaries
(dollar amounts in thousands, except share data)

	Common Stock				Additional Paid-in				Retained				Treasury Stock					Accumulated Other Comprehensive				Benefits			Total Stockholders’
	Shares	Amount			Capital				Earnings				Shares		Amount			Loss				Trust			Equity
Balance, January 31, 2004	63,910,577		$	63,911		$	177,317			$	531,933		(8,928,159	)	$	(144,148	)		$	(15	)	$	(59,264	)		$	569,734
Comprehensive Income:
Net income										23,579
Minimum pension liability adjustment, net of tax																			(5,799		)
Fair market value adjustment on derivatives, net of tax																			962
Total Comprehensive Income																										18,742
Issuance of Common Stock	4,646,464		4,646			104,208																				108,854
Cash dividends ($.27 per share)										(15,676		)														(15,676		)
Effect of stock options and related tax benefits						2,064				(2,984		)	638,210		10,137											9,217
Stock compensation expense						1,184																				1,184
Repurchase of Common Stock													(3,077,000	)	(39,718		)									(39,718		)
Dividend reinvestment plan						193				(72		)	61,819		998											1,119
Balance, January 29, 2005	68,557,041		68,557			284,966				536,780			(11,305,130	)	(172,731		)		(4,852		)	(59,264		)		653,456
Comprehensive Loss:
Net loss										(37,528		)
Minimum pension liability adjustment, net of tax																			(22		)
Fair market value adjustment on derivatives, net of tax																			1,309
Total Comprehensive Loss																										(36,241		)
Cash dividends ($.27 per share)										(14,686		)														(14,686		)
Effect of stock options and related tax benefits						1,719				(2,520		)	338,856		5,592											4,791
Effect of restricted stock unit conversions						(636		)					28,981		433											(203		)
Stock compensation expense						2,049																				2,049
Repurchase of Common Stock													(1,282,600	)	(15,562		)									(15,562		)
Dividend reinvestment plan										(120		)	66,925		1,081											961
Balance, January 28, 2006	68,557,041		68,557			288,098				481,926			(12,152,968	)	(181,187		)		(3,565		)	(59,264		)		594,565
Comprehensive Loss:
Net loss										(2,549		)
Minimum pension liability adjustment, net of tax																			887
Fair market value adjustment on derivatives, net of tax																			(3,648		)
Total Comprehensive Loss																										(5,310		)
Cash dividends ($.27 per share)										(14,757		)														(14,757		)
Incremental effect from adoption of FAS No. 158, net of tax																			(3,054		)					(3,054		)
Effect of stock options and related tax benefits						(669		)		(657		)	80,641		1,387											61
Effect of restricted stock unit conversions						(1,096		)					74,107		712											(384		)
Stock compensation expense						3,051																				3,051
Repurchase of Common Stock													(494,800	)	(7,311		)									(7,311		)
Dividend reinvestment plan										(166		)	65,333		1,060											894
Balance, February 3, 2007	68,557,041		$	68,557		$	289,384			$	463,797		(12,427,687	)	$	(185,339	)		$	(9,380	)	$	(59,264	)		$	567,755

See notes to the consolidated financial statements

CONSOLIDATED STATEMENTS OF CASH FLOWS
The Pep Boys—Manny, Moe & Jack and Subsidiaries
(dollar amounts in thousands)

	Year ended
	February 3, 2007				January 28, 2006				January 29, 2005
Cash Flows from Operating Activities:
Net (Loss) Earnings		$	(2,549	)		$	(37,528	)		$	23,579
Adjustments to Reconcile Net (Loss) Earnings to Net Cash (Used in) Provided by Continuing Operations:
Net (earnings) loss from discontinued operations		738				(292		)		2,087
Depreciation and amortization		88,476				79,887				76,620
Cumulative effect of change in accounting principle, net of tax		(189		)		2,021				—
Accretion of asset retirement obligation		269				109				135
Loss on defeasance of convertible debt		755				—				—
Stock compensation expense		3,051				2,049				1,184
Cancellation of vested stock options		(1,056		)		—				—
Deferred income taxes		(8,316		)		(27,792		)		26,853
Deferred gain on sale leaseback		—				—				(130		)
Reduction in asset retirement liability		—				(1,815		)		—
Gain from sales of assets		(15,297		)		(4,826		)		(11,848		)
Loss on impairment of assets		840				4,200				—
Gain from derivative valuation		(5,568		)		—				—
Excess tax benefits from stock based awards		(95		)		—				—
Increase in cash surrender value of life insurance policies		(2,143		)		(3,389		)		(3,540		)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable, prepaid expenses and other		24,045				15,166				(17,753		)
Decrease (increase) in merchandise inventories		9,250				(13,532		)		(49,198		)
Increase (decrease) in accounts payable		3,549				(49,041		)		(24,387		)
(Decrease) increase in accrued expenses		(4,165		)		(18,864		)		25,853
Increase (decrease) in other long-term liabilities		2,093				16,760				(1,272		)
Net Cash Provided (Used in) by Continuing Operations		93,688				(36,887		)		48,183
Net Cash Used in Discontinued Operations		(1,258		)		(1,500		)		(2,732		)
Net Cash Provided by (Used in) Operating Activities		92,430				(38,387		)		45,451
Cash Flows from Investing Activities:
Cash paid for property and equipment		(50,212		)		(85,945		)		(88,068		)
Proceeds from sales of assets		17,542				4,043				18,021
Proceeds from sales of assets held for disposal		—				6,913				—
(Repayment) proceeds from life insurance policies		(24,669		)		24,655				—
Premiums paid on life insurance policies		—				(605		)		(1,778		)
Net cash used in continuing operations		(57,339		)		(50,939		)		(71,825		)
Net cash provided by discontinued operations		—				916				13,327
Net Cash Used in Investing Activities		(57,339		)		(50,023		)		(58,498		)
Cash Flows from Financing Activities:
Net (payments) borrowings under line of credit agreements		(48,569		)		57,985				8,102
Excess tax benefits from stock based awards		95				—				—
Net borrowings (payments) on trade payable program liability		2,834				11,156				(7,216		)
Payments for finance issuance costs		(2,217		)		(5,150		)		(5,500		)
Proceeds from issuance of notes		121,000				200,000				200,000
Reduction of long-term debt		(2,263		)		(183,459		)		(189,991		)
Reduction of convertible debt		(119,000		)		—				(31,000		)
Payments on capital lease obligations		(227		)		(383		)		(1,040		)
Dividends paid		(14,757		)		(14,686		)		(15,676		)
Repurchase of common stock		—				(15,562		)		(39,718		)
Proceeds from issuance of common stock		—				—				108,854
Proceeds from exercise of stock options		722				3,071				6,887
Proceeds from dividend reinvestment plan		894				961				1,119
Net Cash (Used in) Provided by Financing Activities		(61,488		)		53,933				34,821
Net (Decrease) Increase in Cash and Cash Equivalents		(26,397		)		(34,477		)		21,774
Cash and Cash Equivalents at Beginning of Year		48,281				82,758				60,984
Cash and Cash Equivalents at End of Year		$	21,884			$	48,281			$	82,758
Cash paid for interest, net of amounts capitalized		$	46,245			$	50,602			$	30,019
Cash received from income tax refunds		$	1			$	10,097			$	23,290
Cash paid for income taxes		$	632			$	1,770			$	48,732
Supplemental Disclosure of Cash Flow Information:
Non-cash investing activities:
Changes in accrued purchases of property and equipment		$	3,691			$	6,138			$	15,698
Write off of equipment and recognition of insurance receivable		$	—			$	345			$	—
Non-cash financing activities:
Equipment capital leases		$	84			$	789			$	1,413
Repurchase of common stock not settled		$	7,311			$	—			$	—

See notes to the consolidated financial statements

THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended February 3, 2007, January 28, 2006 and January 29, 2005
(dollar amounts in thousands, except share data)

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS The Pep Boys—Manny, Moe & Jack and subsidiaries (the “Company”) is engaged principally in the retail sale of automotive parts and accessories, automotive maintenance and service and the installation of parts through a chain of stores. The Company currently operates stores in 36 states and Puerto Rico.

FISCAL YEAR END The Company’s fiscal year ends on the Saturday nearest to January 31. Fiscal year 2006 which ended February 3, 2007, was comprised of 53 weeks and fiscal years 2005, which ended January 28, 2006, and 2004, which ended January 29, 2005, were comprised of 52 weeks.

PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated.

USE OF ESTIMATES The preparation of the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United States of America necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

MERCHANDISE INVENTORIES Merchandise inventories are valued at the lower of cost or market. Cost is determined by using the last-in, first-out (LIFO) method. An actual valuation of inventory under the LIFO method can be made only at the end of each fiscal year based on inventory and costs at that time. Accordingly, interim LIFO calculations must be based on management’s estimates of expected fiscal year-end inventory levels and costs. If the first-in, first-out (FIFO) method of costing inventory had been used by the Company, inventory would have been $593,265 and $615,698 as of February 3, 2007 and January 28, 2006, respectively.

During the fourth quarter of fiscal 2006, the Company changed its process for counting its physical inventories. Previously, the Company conducted, using its own employees, a physical inventory count of its inventory during the last weekend of its fiscal year and estimated its inventory levels as of the end of the first three fiscal quarters of each year. The Company now utilizes a third party to conduct physical counts of its inventory throughout the year and then utilizes a systemized roll-forward process to determine its physical inventory levels at the end of each fiscal quarter. As a result of this change, the Company established, and will revise quarterly, a reserve for estimated inventory shrinkage based upon the historical results of its cycle count program.

The Company also records valuation adjustments (reserves) for potentially excess and obsolete inventories based on current inventory levels, the historical analysis of product sales and current market conditions. The nature of the Company’s inventory is such that the risk of obsolescence is minimal and excess inventory has historically been returned to the Company’s vendors for credit. The Company provides reserves when less than full credit is expected from a vendor or when market is lower than recorded costs. The Company’s reserves against inventory for these matters were $13,462 and $12,822 as of February 3, 2007 and January 28, 2006, respectively.

THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended February 3, 2007, January 28, 2006 and January 29, 2005
(dollar amounts in thousands, except share data)

CASH AND CASH EQUIVALENTS Cash equivalents include all short-term, highly liquid investments with a maturity of three months or less when purchased. All credit and debit card transactions that process in less than seven days are also classified as cash and cash equivalents.

PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation and amortization are computed using the straight-line method over the following estimated useful lives: building and improvements, 5 to 40 years, and furniture, fixtures and equipment, 3 to 10 years. Maintenance and repairs are charged to expense as incurred. Upon retirement or sale, the cost and accumulated depreciation are eliminated and the gain or loss, if any, is included in the determination of net income. The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable.

SOFTWARE CAPITALIZATION The Company, in accordance with AICPA Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use”, capitalizes certain direct development costs associated with internal-use software, including external direct costs of material and services, and payroll costs for employees devoting time to the software projects. These costs are amortized over a period not to exceed five years beginning when the asset is substantially ready for use. Costs incurred during the preliminary project stage, as well as maintenance and training costs, are expensed as incurred.

CAPITALIZED INTEREST Interest on borrowed funds is capitalized in connection with the construction of certain long-term assets. Capitalized interest was immaterial in fiscal years 2006, 2005 and 2004.

REVENUE RECOGNITION The Company recognizes revenue from the sale of merchandise at the time the merchandise is sold. Service revenues are recognized upon completion of the service. The Company records revenue net of an allowance for estimated future returns. The Company establishes reserves for sales returns and allowances based on current sales levels and historical return rates. Return activity is immaterial to revenue and results of operations in all periods presented.

ACCOUNTS RECEIVABLE Accounts receivable are primarily comprised of amounts due from commercial customers. The Company records an allowance for doubtful accounts based on percentage of sales. The allowance is revised on a monthly basis against historical data for adequacy. Specific accounts are written off against the allowance when management determines the account is uncollectible.

TRADE PAYABLE PROGRAM LIABILITY In the third quarter of fiscal 2004, the Company entered into a vendor financing program with an availability of $20,000. Under this program, the Company’s factor makes accelerated and discounted payments to its vendors and the Company, in turn, makes its regularly-scheduled full vendor payments to the factor. There were outstanding balances of $13,990 and $11,156 under the program at February 3, 2007 and January 28, 2006, respectively.

VENDOR SUPPORT FUNDS The Company receives various incentives in the form of discounts and allowances from its vendors based on the volume of purchases or for services that the Company provides to the vendors. These incentives received from vendors include rebates, allowances and promotional funds. Typically, these funds are dependent on purchase volumes and advertising activities. The amounts received are subject to changes in market conditions, vendor marketing strategies and changes in the profitability or sell-through of the related merchandise for the Company.

The Company accounts for vendor support funds in accordance with Financial Accounting Standards Board (FASB) Emerging Issues Task Force (EITF) Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Cash Consideration Received from a Vendor” (EITF 02-16). Rebates and other miscellaneous incentives are earned based on purchases or product sales. These incentives are treated as a reduction of inventories and are recognized as a reduction to cost of sales as the inventories are sold. Certain vendor allowances are used exclusively for promotions and to partially or fully offset certain other direct expenses. Such allowances would be offset against the appropriate expenses they offset, once the Company determines the allowances are for specific, identifiable incremental expenses.

WARRANTY RESERVE The Company provides warranties for both its merchandise sales and service labor. Warranties for merchandise are generally covered by its vendors, with the Company covering any costs above the vendor’s stipulated allowance. Service labor warranties are covered in full by the Company on a limited lifetime basis. The Company establishes its warranty reserves based on historical data of warranty transactions. These costs are included in either our Costs of Merchandise Sales or Costs of Service Revenue.

Components of the reserve for warranty costs for fiscal years ended February 3, 2007 and January 28, 2006, are as follows:

Balance at January 29, 2005	$	1,324
Additions related to fiscal 2005 sales	13,429
Warranty costs incurred in fiscal 2005	(13,276		)
Balance at January 28, 2006	1,477
Additions related to fiscal 2006 sales	11,577
Warranty costs incurred in fiscal 2006	(12,409		)
Balance at February 3, 2007	$	645

LEASES The Company’s policy is to amortize leasehold improvements over the lesser of the lease term or the economic life of those assets. Generally, for the stores the lease term is the base lease term and for distribution centers the lease term includes the base lease term plus certain renewal option periods for which renewal is reasonably assured and for which failure to exercise the renewal option would result in an economic penalty. The calculation for straight-line rent expense is based on the same lease term with consideration for step rent provisions, escalation clauses, rent holidays and other lease concessions. The Company expenses rent during the construction or build-out phase of the lease.

SERVICE REVENUE Service revenue consists of the labor charge for installing merchandise or maintaining or repairing vehicles, excluding the sale of any installed parts or materials.

COSTS OF REVENUES Costs of merchandise sales include the cost of products sold, buying, warehousing and store occupancy costs. Costs of service revenue include service center payroll and related employee benefits, service center occupancy costs and cost of providing free or discounted towing services to our customers. Occupancy costs include utilities, rents, real estate and property taxes, repairs and maintenance and depreciation and amortization expenses.

PENSION EXPENSE The Company reports all information on its pension and savings plan benefits in accordance with FASB Statement of Financial Accounting Standards (SFAS) No. 132, “Employers’ Disclosure about Pensions and Other Postretirement Benefits (revised 2003)” (SFAS 132R), as amended

by SFAS No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans- an Amendment of FASB Statements No. 87, 88, 106 and 132(R)”.

INCOME TAXES The Company uses the liability method of accounting for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes.” Under the liability method, deferred income taxes are determined based upon enacted tax laws and rates applied to the differences between the financial statement and tax bases of assets and liabilities.

ADVERTISING The Company expenses the production costs of advertising the first time the advertising takes place. Gross advertising expense for 2006, 2005, and 2004 was $84,206, $85,809 and $73,996, respectively. No advertising costs were recorded as assets as of February 3, 2007 or January 28, 2006.

The Company restructured substantially all of its vendor agreements in the fourth quarter of fiscal 2005 to provide flexibility in how the Company can use vendor support funds, and eliminate the administrative burden associated with tracking the application of such funds. Therefore, in fiscal 2006, substantially all vendor support funds were treated as a reduction of inventories and recognized as a reduction to cost of merchandise sales as inventories are subsequently sold.

Prior to fiscal year 2006, certain cooperative advertising reimbursements were netted against specific, incremental, identifiable costs incurred in connection with the selling of the vendor’s product. Cooperative advertising reimbursements of $35,702 and $36,579 for fiscal years 2005 and 2004, respectively, were recorded as a reduction of advertising expense with the net amount included in selling, general and administrative expenses in the consolidated statement of operations. Any excess reimbursements over these costs are characterized as a reduction of inventory and are recognized as a reduction of cost of sales as the inventories are sold, in accordance with EITF 02-16. The amount of excess reimbursements recognized as a reduction of costs of sales were $53,753 and $48,950 for fiscal years 2005 and 2004, respectively. The balance of excess reimbursements remaining in inventory was immaterial as of January 28, 2006.

STORE OPENING COSTS The costs of opening new stores are expensed as incurred.

IMPAIRMENT OF LONG-LIVED ASSETS The Company accounts for impaired long-lived assets in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This standard prescribes the method for asset impairment evaluation for long-lived assets and certain identifiable intangibles that are both held and used or to be disposed of. The Company evaluates the ability to recover long-lived assets whenever events or circumstances indicate that the carrying value of the asset may not be recoverable. In the event assets are impaired, losses are recognized to the extent the carrying value exceeds the fair value. In addition, the Company reports assets to be disposed of at the lower of the carrying amount or the fair market value less selling costs.

During fiscal 2006, the Company recorded an $840 impairment charge principally related for one store location.

In the fourth quarter of fiscal 2005, the Company recorded in selling, general and administrative expenses an impairment charge of $4,200 reflecting the remaining value of a commercial sales software asset.

EARNINGS PER SHARE Earnings per share for all periods have been computed in accordance with SFAS No. 128, “Earnings Per Share” as amended by SFAS No. 123 (revised 2004), “Share-Based

Payment.” Basic earnings per share is computed by dividing earnings by the weighted average number of common shares outstanding during the year. Diluted earnings per share is computed by dividing earnings plus the interest on the convertible senior notes by the weighted average number of common shares outstanding during the year plus the assumed conversion of dilutive convertible debt and incremental shares that would have been outstanding upon the assumed exercise of dilutive stock options.

ACCOUNTING FOR STOCK-BASED COMPENSATION At February 3, 2007, the Company has three stock-based employee compensation plans, which are described in full in Note 12, “Equity Compensation Plans.”

Effective January 29, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (SFAS No.123R) requiring that compensation cost relating to share-based payment transactions be recognized in the financial statements. The cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity award). Prior to January 29, 2006, the Company accounted for share-based compensation to employees in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB No. 25), and related interpretations. The Company also followed the disclosure requirements of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation”. The Company adopted SFAS No. 123R using the modified prospective method and, accordingly, financial statement amounts for periods prior to January 29, 2006 have not been restated to reflect the fair value method of recognizing compensation cost relating to share-based compensation.

The Company recognized approximately $1,340 of compensation expense related to stock options, and approximately $1,711 of compensation expense related to restricted stock units (RSUs), in its operating results (included in selling, general and administrative expenses) for fiscal year 2006. The related tax benefit recognized was approximately $894. Compensation expense for RSUs was $2,049 and $1,183, for fiscal year 2005 and 2004 respectively, and was included in selling, general and administrative expenses. The cumulative effect from adopting the provisions of SFAS No. 123R in fiscal year 2006 was $189 benefit, net of tax.

The application of SFAS 123(R) had the following effect on reported amounts in fiscal year 2006, relative to amounts that would have been reported using the intrinsic value method under previous accounting (dollars in thousands, except per share amounts):

	SFAS 123(R) Adjustments
Operating profit		$	(1,340	)
Loss from Continuing Operations Before Income Taxes and Cumulative Effect of Change in Accounting Principle		$	(1,340	)
Income Tax Benefit		$	393
Net Loss		$	(947	)
Basic Loss per Share		$	(0.02	)
Diluted Loss per Share		$	(0.02	)
Cash flow from operating activities		$	(95	)
Cash flow from financing activities		$	95

The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation for the fiscal years ended as follows:

	January 28, 2006				January 29, 2005
Net (loss) earnings:
As reported		$	(37,528	)		$	23,579
Add: Stock-based compensation for RSU’s, net of tax		1,301				741
Less: Total stock-based compensation expense determined under fair value-based method, net of tax		(3,121		)		(2,858		)
Pro forma		$	(39,348	)		$	21,462
Net earnings (loss) per share:
Basic:
As reported		$	(0.69	)		$	0.42
Pro forma		$	(0.72	)		$	0.38
Diluted:
As reported		$	(0.69	)		$	0.41
Pro forma		$	(0.72	)		$	0.38

Expected volatility is based on historical volatilities for a time period similar to that of the expected term. In estimating the expected term of the options, the Company has utilized the “simplified method” allowable under the Securities and Exchange Commission, or SEC, Staff Accounting Bulletin No. 107, Share-Based Payment. The risk-free rate is based on the U.S. treasury yield curve for issues with a remaining term equal to the expected term. The fair value of each option granted during fiscal years 2006, 2005 and 2004 is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

	Year ended
	February 3,			January 28,			January 29,
	2007			2006			2005
Dividend yield		2.02	%		1.77	%		1.67	%
Expected volatility		53	%		41	%		41	%
Risk-free interest rate range:
High		4.8	%		4.6	%		4.8	%
Low		4.6	%		3.5	%		2.0	%
Ranges of expected lives in years		5-7			3-8			4-8

SFAS No. 123R also requires the Company to change the classification, in its consolidated statement of cash flows, of any excess tax benefits realized upon the exercise of stock options or issuance of RSUs, in excess of that which is associated with the expense recognized for financial reporting purposes. Approximately $95 is reflected as a financing cash inflow rather than as a reduction of income taxes paid in the consolidated statement of cash flows for fiscal year 2006.

COMPREHENSIVE LOSS Comprehensive loss is reported in accordance with SFAS No. 130, “Reporting Comprehensive Income.” Other comprehensive loss includes minimum pension liability and fair market value of cash flow hedges.

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The Company may enter into interest rate swap agreements to hedge the exposure to increasing rates with respect to its variable rate debt, when the Company deems it prudent to do so. The Company reports derivatives and hedging activities in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 137, SFAS No. 138 and SFAS No. 149. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value.

SEGMENT INFORMATION The Company reports segment information in accordance with SFAS No. 131, “Disclosure about Segments of an Enterprise and Related Information.” The Company operates in one industry, the automotive aftermarket. In accordance with SFAS No. 131, the Company aggregates all of its stores and reports one operating and reporting segment. Sales by major product categories are as follows:

Year ended	Feb. 3, 2007		Jan. 28, 2006		Jan. 29, 2005
Parts and Accessories	$	1,555,406	$	1,550,309	$	1,539,513
Tires	320,884		304,099		323,502
Total Merchandise Sales	1,876,290		1,854,408		1,863,015
Service Labor	395,871		383,621		409,881
Total Revenues	$	2,272,161	$	2,238,029	$	2,272,896

SIGNIFICANT SUPPLIERS During fiscal 2006, the Company’s ten largest suppliers accounted for approximately 40% of the merchandise purchased by the Company. No single supplier accounted for more than 17% of the Company’s purchases. The Company has no long-term contracts under which the Company is required to purchase merchandise. Management believes that the relationships the Company has established with its suppliers are generally good.

RECENT ACCOUNTING STANDARDS

Statement No. 125,” by eliminating the restriction on passive derivative instruments that a qualifying special-purpose entity may hold. SFAS No. 155 is effective for financial instruments acquired or issued after the beginning of our fiscal year 2007. We are currently evaluating the impact of SFAS No 155 and will adopt the standard February 4, 2007.

In June 2006, the FASB ratified the consensus reached by the Emerging Issues Task Force on Issue 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement (That Is, Gross versus Net Presentation).” The scope of this consensus includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include, but is not limited to sales, use, value added and some excise taxes. Additionally, this consensus seeks to address how a company should address the disclosure of such items in interim and annual financial statements, either gross or net pursuant to APB Opinion No. 22, Disclosure of Accounting Policies. The Company is required to adopt this statement in fiscal 2007. The Company presents sales net of sales taxes in its consolidated statement of operations and does not anticipate changing its policy as a result of EITF 06-3.

In July 2006, the FASB released FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement 109” (FIN 48). FIN 48 prescribes a model for the recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides guidance on derecognition, classification, interest and penalties, disclosure and transition. The Company does not expect the adoption of this statement, beginning in fiscal 2007, will have a material impact on its consolidated financial statements.

In September 2006, the SEC, staff issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” or SAB 108. SAB 108 was issued in order to eliminate the diversity in practice surrounding how public companies quantify financial statement misstatements. SAB 108 requires that registrants quantify errors using both a balance sheet and income statement approach and evaluate whether either approach results in a misstated amount that, when all relevant quantitative and qualitative factors are considered, is material. SAB 108 is effective for financial statements covering the first fiscal year ending after November 15, 2006. We adopted SAB 108 for the year ended February 3, 2007 with no impact on our consolidated financial condition, results of operations or cash flows.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 defines the term fair value, establishes a framework for measuring it within generally accepted accounting principles and expands disclosures about its measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently evaluating the impact SFAS No. 157 will have on our financial statements beginning in fiscal 2008.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans- an Amendment of FASB Statements No. 87, 88, 106 and 132(R)” (SFAS 158). SFAS No. 158 requires entities to:

· Recognize on its balance sheet the funded status (measured as the difference between the fair value of plan assets and the benefit obligation) of pension and other postretirement benefit plans;

· Recognize, through comprehensive income, certain changes in the funded status of a defined benefit and post retirement plan in the year in which the changes occur;

· Measure plan assets and benefit obligations as of the end of the employer’s fiscal year; and

· Disclose additional information.

The requirement to recognize the funded status of a benefit plan and the additional disclosure requirements are effective for fiscal years ended after December 15, 2006. Accordingly, the Company adopted these requirements of SFAS No.158 at February 3, 2007. The incremental effect from adopting SFAS No. 158, as of February 3, 2007, on individual line items in the Company’s Consolidated Balance Sheets at February 3, 2007 follows:

	Before								After
	Application of								Application of
	SFAS No. 158				Adjustments				SFAS No. 158
Deferred Income Taxes		$	22,996			$	1,832			$	24,828
Other Long Term Assets		69,635				(1,651		)		67,984
Total Assets		1,767,018				181				1,767,199
Accrued Expenses		292,280				—				292,280
Other Long Term Liabilities		56,998				3,235				60,233
Total Liabilities		1,196,209				3,235				1,199,444
Accumulated Other Comprehensive Loss		(6,326		)		(3,054		)		(9,380		)
Total Stockholders’ Equity		570,809				(3,054		)		567,755
Total Liabilities and Stockholders’ Equity		1,767,018				181				1,767,199

The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end is effective for fiscal years ending after December 15, 2008. The Company will not elect early adoption of these additional SFAS No.158 requirements and will adopt these requirements for the fiscal year ended January 31, 2009.

RECLASSIFICATIONS Certain reclassifications have been made to the prior years’ consolidated financial statements to provide comparability with the current year’s presentation of Net Gain from Sales of Assets from Cost of Merchandise Sales and the change in classification of a store from discontinued operations to continuing operations, see Note 7.

NOTE 2—DEBT AND FINANCING ARRANGEMENTS

LONG-TERM DEBT

	February 3, 2007			January 28, 2006
7.50% Senior Subordinated Notes, due December 2014		$	200,000		$	200,000
Senior Secured Term Loan, due October 2013		320,000			200,000
Medium-Term Notes, 6.4% to 6.52%, due July 2007 through September 2007		—			215
Other notes payable, 8.0%		268			1,315
Capital lease obligations, payable through October 2009		685			829
Line of credit agreement, through December 2009		17,568			66,137
		538,521			468,496
Less current maturities		3,490			1,257
Total Long-Term Debt		$	535,031		$	467,239

On January 27, 2006 the Company entered into a $200,000 Senior Secured Term Loan facility due January 27, 2011. This facility is secured by the real property and improvements associated with 154 of the Company’s stores. Interest at the rate of London Interbank Offered Rate (LIBOR) plus 3.0% on this facility was payable by the Company starting in February 2006. Proceeds from this facility were used to satisfy and discharge the Company’s then outstanding $43,000 6.88% Medium Term Notes due March 6, 2006 and $100,000 6.92% Term Enhanced Remarketable Securities (TERMS) due July 7, 2016 and to reduce borrowings under the Company’s line of credit by approximately $39,000.

On October 30, 2006, the Company amended and restated the Senior Secured Term Loan facility to (i) increase the size from $200,000 to $320,000, (ii) extend the maturity from January 27, 2011 to October 27, 2013, (iii) reduce the interest rate from LIBOR plus 3.00% to LIBOR plus 2.75%. An additional 87 stores (bringing the total to 241 stores) were added to the collateral pool securing the facility. Proceeds were used to satisfy and discharge $119,000 in outstanding 4.25% convertible Senior Notes due June 1, 2007.

On February 15, 2007, the Company further amended the Senior Secured Term Loan facility to reduce the interest rate from LIBOR plus 2.75% to LIBOR plus 2.00%.

The TERMS were retired on January 27, 2006 with proceeds from the Company’s Senior Secured Term Loan facility. In retiring the TERMS, the Company was obligated to purchase a call option, which, if exercised, would have allowed the securities to be remarketed through a maturity date of July 7, 2016. The $8,100 redemption price of the call option was based upon the then present value of the remaining payments on the TERMS through July 17, 2016, at 5.45%, discounted at the 10-year Treasury rate.

On December 14, 2004, the Company issued $200,000 aggregate principal amount of 7.5% Senior Subordinated Notes due December 15, 2014.

On December 2, 2004, the Company further amended its amended and restated line of credit agreement. The amendment increased the amount available for borrowings to $357,500, with an ability, upon satisfaction of certain conditions, to increase such amount to $400,000. The amendment also reduced

the interest rate under the agreement to LIBOR plus 1.75% (after June 1, 2005, the rate decreased to LIBOR plus 1.50%, subject to 0.25% incremental increases as excess availability falls below $50,000). The amendment also provided the flexibility, upon satisfaction of certain conditions, to release up to $99,000 of reserved credit line availability required as of December 2, 2004 under the line of credit agreement to support certain operating leases. This reserve was $73,912 on February 3, 2007. Finally, the amendment extended the term of the agreement through December 2009. The weighted average interest rate on borrowings under the line of credit agreement was 7.67 % and 6.2% at February 3, 2007 and January 28, 2006, respectively.

In the third quarter of fiscal 2004, the Company entered into a vendor financing program with an availability of $20,000. Under this program, the Company’s factor makes accelerated and discounted payments to its vendors and the Company, in turn, makes its regularly scheduled full vendor payments to the factor. As of February 3, 2007 and January 28, 2006, the Company had an outstanding balance of $13,990 and $11,156, respectively, under these arrangements, classified as trade payable program liability in the consolidated balance sheets.

The other notes payable have a principal balance of $268 and $1,315 and a weighted average interest rate of 8.0% and 5.1% at February 3, 2007 and January 28, 2006, respectively, and mature at various times through August 2016. Certain of these notes are collateralized by land and buildings with an aggregate carrying value of approximately $1,774 and $6,744 at February 3, 2007 and January 28, 2006, respectively.

CONVERTIBLE DEBT

	February 3, 2007			January 28, 2006
4.25% Senior convertible notes, due June 2007		$	—		$	119,000
Less current maturities		—			—
Total Long-Term Convertible Debt		$	—		$	119,000

On October 27, 2006, the Company amended and restated its Senior Secured Term Loan Facility to increase its size from $200,000 to $320,000. Proceeds from the facility were used to satisfy and discharge the Company’s outstanding $119,000 4.25% Convertible Senior Notes due June 1, 2007 by deposit into an escrow fund with an independent trustee. The right of the holders of the convertible notes to convert them into shares of the Company’s common stock, at any time until the June 1, 2007 maturity date, survives such satisfaction and discharge. The conversion price is approximately $22.40 per share. The Company recorded non-cash charges for the value of such conversion right, approximately $755 as determined by the Black-Scholes method, and $430 for deferred financing cost.

OTHER

Several of the Company’s debt agreements require the maintenance of certain financial ratios and compliance with covenants. The most restrictive of these covenants, an EBITDA requirement, is triggered if the Company’s availability under its line of credit agreement drops below $50,000. As of February 3, 2007 the Company had an availability of approximately $190,000 under its line of credit, and was in compliance with all covenants contained in its debt agreements.

The annual maturities of all long-term debt and capital lease commitments for the next five fiscal years are:

	Long-Term			Capital
Year	Debt			Leases			Total
2007		$	3,201		$	289	$	3,490
2008		3,241			239		3,480
2009		20,787			157		20,944
2010		3,229			—		3,229
2011		3,227			—		3,227
Thereafter		504,151			—		504,151
Total		$	537,836		$	685	$	538,521

The Company has letter of credit arrangements in connection with its risk management, import merchandising and vendor financing programs. The Company was contingently liable for $487 and $1,015 in outstanding import letters of credit and $55,708 and $41,218 in outstanding standby letters of credit as of February 3, 2007 and January 28, 2006 respectively. The Company was also contingently liable for surety bonds in the amount of approximately $11,224 and $13,021 at February 3, 2007 and January 28, 2006, respectively.

NOTE 3—ACCRUED EXPENSES

The Company’s accrued expenses as of February 3, 2007 and January 28, 2006, were as follows:

	February 3, 2007			January 28, 2006
Casualty and medical risk insurance		$	173,826		$	178,498
Accrued compensation and related taxes		44,317			44,565
Sales tax payable		11,286			11,597
Other		62,851			56,101
Total		$	292,280		$	290,761

NOTE 4—OTHER CURRENT ASSETS

The Company’s other current assets as of February 3, 2007 and January 28, 2006, were as follows:

	February 3, 2007			January 28, 2006
Reinsurance premiums and receivable		$	69,239		$	82,629
Income taxes receivable		—			2,694
Other		1,129			123
Total		$	70,368		$	85,446

NOTE 5—LEASE AND OTHER COMMITMENTS

On October 18, 2004, the Company entered into a Master Lease agreement providing for the lease of up to $35,000 of new point-of-sale hardware for the Company’s stores at an interest rate of LIBOR plus

2.25%. This Master Lease is reflected in the Company’s consolidated financial statements as an operating lease. The Company has evaluated this transaction in accordance with the guidance of FIN 46R and has determined that it is not required to consolidate the leasing entity. The Company has an outstanding commitment of approximately $14,938 and $20,507 on this operating lease facility as of February 3, 2007 and January 28, 2006. The lease includes a residual value guarantee with a maximum value of approximately $172. The Company expects the fair market value of the leased equipment to substantially reduce or eliminate the Company’s payment under the residual guarantee at the end of the lease term.

In accordance with FIN 45, the Company has recorded a liability for the fair value of the guarantee related to this operating lease. As of February 3, 2007 and January 28, 2006, the current value of this liability was $71 and $105, respectively, which is recorded in other long-term liabilities on the consolidated balance sheets.

On August 1, 2003, the Company renegotiated $132,000 of store and distribution center operating leases. These leases, which expire on August 1, 2008, have lease payments with an effective rate of LIBOR plus 2.06%. The Company has evaluated this transaction in accordance with the original guidance of FIN 46 and has determined that it is not required to consolidate the leasing entity. As of February 3, 2007 and January 28, 2006 there was an outstanding commitment of $117,627 and $123,970 under the leases. The leases include a residual value guarantee with a maximum value of approximately $105,000. The Company expects the fair market value of the leased real estate to substantially reduce or eliminate the Company’s payment under the residual guarantee at the end of the lease term.

In accordance with FIN 45, the Company has recorded a liability for the fair value of the guarantee related to this operating lease. As of February 3, 2007 and January 28, 2006, the current value of this liability was $1,496 and $2,493, respectively, which is recorded in other long-term liabilities on the consolidated balance sheets.

The Company leases certain property and equipment under operating leases and capital leases, which contain renewal and escalation clauses, step rent provisions, capital improvements funding and other lease concessions. These provisions are considered in the Company’s calculation of the Company’s minimum lease payments, which are recognized as expense on a straight-line basis over the applicable lease term. In accordance with SFAS No. 13, as amended by SFAS No. 29, any lease payments that are based upon an existing index or rate are included in the Company’s minimum lease payment calculations. Future minimum rental payments for noncancelable operating leases and capital leases in effect as of February 3, 2007 are shown in the table below. All amounts are exclusive of lease obligations and sublease rentals applicable to stores for which reserves, in conjunction with the restructuring, have previously been established.

The aggregate minimum rental payments for such leases having initial terms of more than one year are approximately:

Year	Operating Leases		Capital Leases
2007	$	57,670		$	290
2008	53,788			260
2009	47,114			183
2010	43,548			—
2011	41,179			—
Thereafter	239,550			—
Aggregate minimum lease payments	$	482,849		$	733
Less: interest on capital leases				(48		)
Present Value of Net Minimum Lease Payments				$	685

Rental expenses incurred for operating leases in fiscal years 2006, 2005, and 2004 were $59,953, $67,601 and $60,941, respectively.

In October 2001, the Company entered into a contractual commitment to purchase media advertising services with equal annual purchase requirements totaling $39,773 over four years. During the second quarter of fiscal 2004, it was determined that the Company would be unable to meet its obligation for the 2004 contract year, which ended on November 30, 2004. As a result, the Company recorded a $1,579 charge to selling, general and administrative expenses in the quarter ended July 31, 2004 related to the anticipated shortfall in this purchase commitment. This agreement expired in October 2005.

Our open purchase orders are based on current inventory or operational needs and are fulfilled by our vendors within short periods of time. We currently do not have minimum purchase commitments under our vendor supply agreements and generally our open purchase orders (orders that have not been shipped) are not binding agreements. Those purchase obligations that are in transit from our vendors at February 3, 2007 are considered to be a contractual obligation.

NOTE 6—STOCKHOLDERS’ EQUITY

SHARE REPURCHASE—TREASURY STOCK On September 7, 2006, the Company renewed its share repurchase program, which had approximately $45,000 of its original $100,000 authorization remaining and was set to expire on September 30, 2006. Under the renewed program, the Board reset the authority back to $100,000 for repurchases to be made from time to time in the open market or in privately negotiated transactions through September 30, 2007. The Company repurchased approximately 494,800 shares during fiscal 2006 for approximately $7,311.

All of these repurchased shares were placed into the Company’s treasury. A portion of the treasury shares will be used by the Company to provide benefits to employees under its compensation plans and in conjunction with the Company’s dividend reinvestment program. As of February 3, 2007, the Company reflected 12,427,687 shares of its common stock at a cost of $185,339 as “cost of shares in treasury” on the Company’s consolidated balance sheet.

SALE OF COMMON STOCK On March 24, 2004, the Company sold 4,646,464 shares of common stock (par value $1 per share) at a price of $24.75 per share for net proceeds of $108,854.

RIGHTS AGREEMENT On December 31, 1997, the Company distributed as a dividend one common share purchase right on each of its common shares. The rights will not be exercisable or transferable apart from the Company’s common stock until a person or group, as defined in the rights agreement (dated December 5, 1997), without the proper consent of the Company’s Board of Directors, acquires 15% or more, or makes an offer to acquire 15% or more of the Company’s outstanding stock. When exercisable, the rights entitle the holder to purchase one share of the Company’s common stock for $125. Under certain circumstances, including the acquisition of 15% of the Company’s stock by a person or group, the rights entitle the holder to purchase common stock of the Company or common stock of an acquiring company having a market value of twice the exercise price of the right.

The rights do not have voting power and are subject to redemption by the Company’s Board of Directors for $.01 per right anytime before a 15% position has been acquired and for 10 days thereafter, at which time the rights become non-redeemable. The rights expire on December 31, 2007.

BENEFITS TRUST On April 29, 1994, the Company established a flexible employee benefits trust with the intention of purchasing up to $75,000 worth of the Company’s common shares. The repurchased shares will be held in the trust and will be used to fund the Company’s existing benefit plan obligations including healthcare programs, savings and retirement plans and other benefit obligations. The trust will allocate or sell the repurchased shares through 2023 to fund these benefit programs. As shares are released from the trust, the Company will charge or credit additional paid-in capital for the difference between the fair value of shares released and the original cost of the shares to the trust. For financial reporting purposes, the trust is consolidated with the accounts of the Company. All dividend and interest transactions between the trust and the Company are eliminated. In connection with the Dutch Auction self-tender offer, 37,230 shares were tendered at a price of $16.00 per share in fiscal 1999. At February 3, 2007, the Company has reflected 2,195,270 shares of its common stock at a cost of $59,264 as “cost of shares in benefits trust” on the Company’s consolidated balance sheet.

NOTE 7—Discontinued Operations

During fiscal 2005, the Company sold a closed store for proceeds of $931 resulting in a pre-tax gain of $341,000, which was recorded in discontinued operations on the consolidated statement of operations.

During fiscal 2004, the Company sold assets held for disposal for proceeds of $13,327 resulting in a loss of $91,000, which was recorded in discontinued operations on the consolidated statement of operations.

NOTE 8—SUPPLEMENTAL GUARANTOR INFORMATION

On December 14, 2004, the Company issued $200,000 aggregate principal amount of 7.50% Senior Subordinated Notes due December 15, 2014 which are unsecured and fully and unconditionally guaranteed by the Company’s wholly-owned direct and indirect operating subsidiaries, The Pep Boys Manny, Moe & Jack of California, Pep Boys—Manny, Moe & Jack of Delaware, Inc., Pep Boys—Manny, Moe & Jack of Puerto Rico, Inc. and PBY Corporation.

The following are consolidating balance sheets of the Company as of February 3, 2007 and January 28, 2006 and the related condensed consolidating statements of operations and condensed consolidating statements of cash flows for the fiscal years ended February 3, 2007, January 28, 2006 and January 29, 2005.

CONDENSED CONSOLIDATING BALANCE SHEET

As of February 3, 2007	Pep Boys			Subsidiary Guarantors			Subsidiary Non- Guarantors			Consolidation / Elimination				Consolidated
ASSETS
Current Assets:
Cash and cash equivalents	$	13,581			$	7,946		$	357		$	—			$	21,884
Accounts receivable, net	17,377				12,205			—			—				29,582
Merchandise inventories	211,445				395,597			—			—				607,042
Prepaid expenses	24,511				13,469			20,044			(18,760		)		39,264
Other	—				2,255			75,038			(6,925		)		70,368
Total Current Assets	266,914				431,472			95,439			(25,685		)		768,140
Property and Equipment—at cost:
Land	78,507				166,767			12,893			(6,462		)		251,705
Buildings and improvements	310,952				607,948			20,937			(10,612		)		929,225
Furniture, fixtures and equipment	289,005				395,037			—			—				684,042
Construction in progress	2,654				810			—			—				3,464
	681,118				1,170,562			33,830			(17,074		)		1,868,436
Less accumulated depreciation and	382,363				576,186			239			3,401				962,189
Total Property and Equipment—Net	298,755				594,376			33,591			(20,475		)		906,247
Investment in subsidiaries	1,567,674				1,384,492			—			(2,952,166		)		—
Intercompany receivable	—				726,297			81,160			(807,457		)		—
Deferred income taxes	24,828				—			—			—				24,828
Other	63,843				4,141			—			—				67,984
Total Assets	$	2,222,014			$	3,140,778		$	210,190		$	(3,805,783	)		$	1,767,199
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	265,480			$	9		$	—		$	—			$	265,489
Trade payable program liability	13,990				—			—			—				13,990
Accrued expenses	22,512				136,073			195,321			(61,626		)		292,280
Current deferred taxes	6,344				28,724			—			(6,137		)		28,931
Current maturities of long-term debt and obligations under capital leases	3,490				—			—			—				3,490
Total Current Liabilities	311,816				164,806			195,321			(67,763		)		604,180
Long-term debt and obligations under capital leases, less current maturities	523,735				11,296			—			—				535,031
Other long-term liabilities	32,855				27,378			—			—				60,233
Intercompany liabilities	807,457				—			—			(807,457		)		—
Stockholders’ Equity:
Common stock	68,557				1,502			100			(1,602		)		68,557
Additional paid-in capital	289,384				436,857			3,900			(440,757		)		289,384
Retained earnings	442,193				2,498,939			10,869			(2,488,204		)		463,797
Accumulated other comprehensive loss	(9,380		)		—			—			—				(9,380		)
Less:
Cost of shares in treasury	185,339				—			—			—				185,339
Cost of shares in benefits trust	59,264				—			—			—				59,264
Total Stockholders’ Equity	546,151				2,937,298			14,869			(2,930,563		)		567,755
Total Liabilities and Stockholders’ Equity	$	2,222,014			$	3,140,778		$	210,190		$	(3,805,783	)		$	1,767,199

CONDENSED CONSOLIDATING BALANCE SHEET

As of January 28, 2006	Pep Boys			Subsidiary Guarantors				Subsidiary Non- Guarantors				Consolidation / Elimination				Consolidated
ASSETS
Current Assets:
Cash and cash equivalents	$	12,019			$	6,953			$	29,309			$	—			$	48,281
Accounts receivable, net	20,030				16,404				—				—				36,434
Merchandise inventories	209,384				406,908				—				—				616,292
Prepaid expenses	33,765				9,678				19,000				(21,491		)		40,952
Other	6,116				8,960				70,370				—				85,446
Assets held for disposal	—				652				—				—				652
Total Current Assets	281,314				449,555				118,679				(21,491		)		828,057
Property and Equipment—at cost:
Land	86,805				170,997				—				—				257,802
Buildings and improvements	316,725				599,855				—				—				916,580
Furniture, fixtures and equipment	278,742				392,447				—				—				671,189
Construction in progress	15,261				597				—				—				15,858
	697,533				1,163,896				—				—				1,861,429
Less accumulated depreciation and	364,793				549,247				—				—				914,040
Total Property and Equipment—Net	332,740				614,649				—				—				947,389
Investment in subsidiaries	1,520,208				1,290,063				—				(2,810,271		)		—
Intercompany receivable	—				631,061				84,563				(715,624		)		—
Other	42,144				3,723				—				440				46,307
Total Assets	$	2,176,406			$	2,989,051			$	203,242			$	(3,546,946	)		$	1,821,753
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	261,931			$	9			$	—			$	—			$	261,940
Trade payable program liability	11,156				—												11,156
Accrued expenses	45,410				90,428				195,472				(40,549		)		290,761
Current deferred taxes	64				21,690				(6,337		)		—				15,417
Current maturities of long-term debt and obligations under capital leases	1,257				—				—				—				1,257
Total Current Liabilities	319,818				112,127				189,135				(40,549		)		580,531
Long-term debt and obligations under capital leases, less current maturities	423,572				43,667				—				—				467,239
Convertible long-term debt, less current maturities	119,000				—				—				—				119,000
Other long-term liabilities	9,625				28,359				—				19,497				57,481
Intercompany liabilities	716,978				(1,353		)		—				(715,625		)		—
Deferred income taxes	(7,152		)		10,089				—				—				2,937
Stockholders’ Equity:
Common stock	68,557				1,502				100				(1,602		)		68,557
Additional paid-in capital	288,098				436,858				3,900				(440,758		)		288,098
Retained earnings	481,926				2,357,802				10,107				(2,367,909		)		481,926
Accumulated other comprehensive loss	(3,565		)		—				—				—				(3,565		)
Less:
Cost of shares in treasury	181,187				—				—				—				181,187
Cost of shares in benefits trust	59,264				—				—				—				59,264
Total Stockholders’ Equity	594,565				2,796,162				14,107				(2,810,269		)		594,565
Total Liabilities and Stockholders’ Equity	$	2,176,406			$	2,989,051			$	203,242			$	(3,546,946	)		$	1,821,753

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

Year ended February 3, 2007	Pep Boys			Subsidiary Guarantors			Subsidiary Non- Guarantors				Consolidation / Elimination				Consolidated
Merchandise Sales	$	653,284		$	1,223,006			$	—			$	—			$	1,876,290
Service Revenue	138,088			257,783				—				—				395,871
Other Revenue	—			—				27,407				(27,407		)		—
Total Revenues	791,372			1,480,789				27,407				(27,407		)		2,272,161
Costs of Merchandise Sales	467,514			868,822				—				—				1,336,336
Costs of Service Revenue	126,853			237,216				—				—				364,069
Costs of Other Revenue	—			—				32,020				(32,020		)		—
Total Costs of Revenues	594,367			1,106,038				32,020				(32,020		)		1,700,405
Gross Profit from Merchandise Sales	185,770			354,184				—				—				539,954
Gross Profit from Service Revenue	11,235			20,567				—				—				31,802
Gross Loss from Other Revenue	—			—				(4,613		)		4,613				—
Total Gross Profit (Loss)	197,005			374,751				(4,613		)		4,613				571,756
Selling, General and Administrative Expenses	187,672			358,496				355				4,508				551,031
Net Gain from Sale of Assets	35			15,262				—				—				15,297
Operating Profit (Loss)	9,368			31,517				(4,968		)		105				36,022
Non(Operating (Expense) Income	(18,282		)	125,271				1,695				(101,661		)		7,023
Interest Expense (Income)	107,102			49,003				(5,207		)		(101,556		)		49,342
(Loss) Earnings from Continuing Operations Before Income Taxes and Cumulative Effect of Change in Accounting Principle	(116,016		)	107,785				1,934				—				(6,297		)
Income Tax (Benefit) Expense	(41,395		)	36,452				646								(4,297		)
Equity in Earnings of Subsidiaries	71,932			95,270				—				(167,202		)		—
Net (Loss) Earnings from Continuing Operations Before Cumulative Effect of Change in Accounting Principle	(2,689		)	166,603				1,288				(167,202		)		(2,000		)
Earnings (Loss) From Discontinued Operations, Net of Tax	(49		)	(689		)		—				—				(738		)
Cumulative Effect of Change in Accounting Principle, Net of Tax	189			—				—				—				189
Net (Loss) Earnings	$	(2,549	)	$	165,914			$	1,288			$	(167,202	)		$	(2,549	)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

Year ended January 28, 2006	Pep Boys			Subsidiary Guarantors			Subsidiary Non- Guarantors				Consolidation / Elimination				Consolidated
Merchandise Sales	$	643,353		$	1,211,055			$	—			$	—			$	1,854,408
Service Revenue	132,281			251,340				—				—				383,621
Other Revenue	—			—				29,500				(29,500		)		—
Total Revenues	775,634			1,462,395				29,500				(29,500		)		2,238,029
Costs of Merchandise Sales	474,965			902,587				—				—				1,377,552
Costs of Service Revenue	120,320			232,890				—				—				353,210
Costs of Other Revenue	—			—				34,188				(34,188		)		—
Total Costs of Revenues	595,285			1,135,477				34,188				(34,188		)		1,730,762
Gross Profit from Merchandise Sales	168,388			308,468				—				—				476,856
Gross Profit from Service Revenue	11,961			18,450				—				—				30,411
Gross Loss from Other Revenue	—			—				(4,688		)		4,688				—
Total Gross Profit (Loss)	180,349			326,918				(4,688		)		4,688				507,267
Selling, General and Administrative Expenses	176,812			341,491				327				4,688				523,318
Net (Loss) Gain from Sale of Assets	(675		)	5,501				—				—				4,826
Operating Profit (Loss)	2,862			(9,072		)		(5,015		)		—				(11,225		)
Non(Operating (Expense) Income	(18,682		)	92,005				575				(70,001		)		3,897
Interest Expense (Income)	88,928			33,987				(3,874		)		(70,001		)		49,040
(Loss) Earnings from Continuing Operations Before Income Taxes and Cumulative Effect of Change in Accounting Principle	(104,748		)	48,946				(566		)		—				(56,368		)
Income Tax (Benefit) Expense	(36,957		)	16,600				(212		)						(20,569		)
Equity in Earnings of Subsidiaries	30,793			64,018				—				(94,811		)		—
Net (Loss) Earnings from Continuing Operations Before Cumulative Effect of Change in Accounting Principle	(36,998		)	96,364				(354		)		(94,811		)		(35,799		)
Earnings (Loss) From Discontinued Operations, Net of Tax	324			(32		)		—				—				292
Cumulative Effect of Change in Accounting Principle, Net of Tax	(854		)	(1,167		)		—				—				(2,021		)
Net (Loss) Earnings	$	(37,528	)	$	95,165			$	(354	)		$	(94,811	)		$	(37,528	)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

Year ended January 29, 2005	Pep Boys			Subsidiary Guarantors			Subsidiary Non- Guarantors				Consolidation / Elimination				Consolidated
Merchandise Sales	$	647,135		$	1,215,880			$	—			$	—			$	1,863,015
Service Revenue	141,915			267,966				—				—				409,881
Other Revenue	—			—				28,432				(28,432		)		—
Total Revenues	789,050			1,483,846				28,432				(28,432		)		2,272,896
Costs of Merchandise Sales	469,620			875,524				—				—				1,345,144
Costs of Service Revenue	108,554			208,588				—				—				317,142
Costs of Other Revenue	—			—				35,693				(35,693		)		—
Total Costs of Revenues	578,174			1,084,112				35,693				(35,693		)		1,662,286
Gross Profit from Merchandise Sales	177,515			340,356				—				—				517,871
Gross Profit from Service Revenue	33,361			59,378				—				—				92,739
Gross Loss from Other Revenue	—			—				(7,261		)		7,261				—
Total Gross Profit (Loss)	210,876			399,734				(7,261		)		7,261				610,610
Selling, General and Administrative Expenses	189,161			350,598				316				7,261				547,336
Net Gain from Sale of Assets	199			11,649				—				—				11,848
Operating Profit (Loss)	21,914			60,785				(7,577		)		—				75,122
Non(Operating (Expense) Income	(18,317		)	71,679				3,397				(54,935		)		1,824
Interest Expense (Income)	64,268			26,632				—				(54,935		)		35,965
(Loss) Earnings from Continuing Operations Before Income Taxes and Cumulative Effect of Change in Accounting Principle	(60,671		)	105,832				(4,180		)		—				40,981
Income Tax (Benefit) Expense	(22,515		)	39,320				(1,490		)						15,315
Equity in Earnings of Subsidiaries	62,122			64,958				—				(127,080		)		—
Net (Loss) Earnings from Continuing Operations Before Cumulative Effect of Change in Accounting Principle	23,966			131,470				(2,690		)		(127,080		)		25,666
Earnings (Loss) From Discontinued Operations, Net of Tax	(387		)	(1,700		)		—				—				(2,087		)
Net (Loss) Earnings	$	23,579		$	129,770			$	(2,690	)		$	(127,080	)		$	23,579

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Year ended February 3, 2007	Pep Boys			Subsidiary Guarantors				Subsidiary Non- Guarantors				Consolidation Elimination				Consolidated
Cash Flows from Operating Activities:
Net (Loss) Earnings	$	(2,549	)		$	165,914			$	1,288			$	(167,202	)		$	(2,549	)
Adjustments to Reconcile Net (Loss) Earnings to Net Cash (Used in) Provided By Continuing Operations:
Net loss (earnings) from discontinued operations	49				689				—				—				738
Depreciation and amortization	31,795				56,681				240				(240		)		88,476
Cumulative effect of change in accounting principle	(189		)		—				—				—				(189		)
Accretion of asset disposal obligation	95				174				—				—				269
Loss on defeasance of convertible debt	755				—				—				—				755
Stock compensation expense	3,051				—				—				—				3,051
Cancellation of vested stock options	(1,056		)		—				—				—				(1,056		)
Equity in earnings of subsidiaries	28,039				(163,669		)		—				135,630				—
Deferred income taxes	(11,598		)		(3,055		)		6,337				—				(8,316		)
Loss (gain) from sale of assets	(35		)		(15,262		)		—				—				(15,297		)
Loss on impairment of assets	550				290				—				—				840
Gain from derivative valuation	(5,568		)		—				—				—				(5,568		)
Excess tax benefits from stock based awards	(95		)		—				—				—				(95		)
Increase in cash surrender value of life insurance policies	(2,143		)		—				—				—				(2,143		)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable, prepaid expenses and other	24,587				7,113				(5,712		)		(1,943		)		24,045
Increase in merchandise inventories	(2,061		)		11,311				—				—				9,250
(Decrease) increase in accounts payable	3,549				—				—				—				3,549
(Decrease) increase in accrued expenses	(49,057		)		45,645				(151		)		(602		)		(4,165		)
(Decrease) increase in other long-term liabilities	3,074				(981		)		—				—				2,093
Net cash (used in) provided by continuing operations	21,193				104,850				2,002				(34,357		)		93,688
Net cash used in discontinued operations	(1,258		)		—				—				—				(1,258		)
Net Cash (Used in) Provided by Operating Activities	19,935				104,850				2,002				(34,357		)		92,430
Cash Flows from Investing Activities:
Capital expenditures	(23,793		)		(26,419		)		(33,830		)		33,830				(50,212		)
Proceeds from sales of assets	1,097				16,445				—				—				17,542
Proceeds from life insurance policies	(24,669		)		—				—				—				(24,669		)
Net cash provided by (used in) continuing operations	(47,365		)		(9,974		)		(33,830		)		33,830				(57,339		)
Net cash provided by discontinued operations	—				—				—				—				—
Net Cash Provided by (Used in) Investing Activities	(47,365		)		(9,974		)		(33,830		)		33,830				(57,339		)
Cash Flows from Financing Activities:
Net borrowings under line of credit agreements	(48,569		)		—				—				—				(48,569		)
Excess tax benefits from stock based awards	95				—				—				—				95
Net borrowings (payments) on trade payable program liability	2,834				—				—				—				2,834
Payments for finance issuance costs	(2,217		)		—				—				—				(2,217		)
Proceeds from issuance of notes	121,000				—				—				—				121,000
Reduction of long-term debt	(2,263		)		—				—				—				(2,263		)
Reduction of convertible debt	(119,000		)		—				—				—				(119,000		)
Payments on capital lease obligations	(227		)		—				—				—				(227		)
Intercompany borrowings (payments)	90,480				(93,883		)		3,403				—				—
Dividends paid	(14,757		)		—				(527		)		527				(14,757		)
Proceeds from exercise of stock options	722				—				—				—				722
Proceeds from dividend reinvestment plan	894				—				—				—				894
Net Cash (used in) Provided by Financing Activities	28,992				(93,883		)		2,876				527				(61,488		)
Net (Decrease) Increase in Cash	1,562				993				(28,952		)		—				(26,397		)
Cash and Cash Equivalents at Beginning of Year	12,019				6,953				29,309				—				48,281
Cash and Cash Equivalents at End of Year	$	13,581			$	7,946			$	357			$	—			$	21,884

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Year ended January 28, 2006	Pep Boys			Subsidiary Guarantors				Subsidiary Non- Guarantors				Consolidation Elimination				Consolidated
Cash Flows from Operating Activities:
Net (Loss) Earnings	$	(37,528	)		$	95,165			$	(354	)		$	(94,811	)		$	(37,528	)
Adjustments to Reconcile Net (Loss) Earnings to Net Cash (Used in) Provided By Continuing Operations:
Net loss (earnings) from discontinued operations	(324		)		32				—				—				(292		)
Depreciation and amortization	29,391				50,496				—				—				79,887
Cumulative effect of change in accounting principle	854				1,167				—				—				2,021
Accretion of asset disposal obligation	25				84				—				—				109
Stock compensation expense	2,049				—				—				—				2,049
Equity in earnings of subsidiaries	65,004				(159,815		)		—				94,811				—
Deferred income taxes	(18,604		)		(8,497		)		(691		)		—				(27,792		)
Net gain from reduction in asset retirement liability	(657		)		(1,158		)		—				—				(1,815		)
Loss (gain) from sale of assets	675				(5,501		)		—				—				(4,826		)
Loss on impairment of assets	4,200				—				—				—				4,200
Increase in cash surrender value of life insurance policies	(3,389		)		—				—				—				(3,389		)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable, prepaid expenses and other	8,161				11,161				(3,073		)		(1,083		)		15,166
Increase in merchandise inventories	(3,476		)		(10,056		)		—				—				(13,532		)
(Decrease) increase in accounts payable	(49,041		)		—				—				—				(49,041		)
(Decrease) increase in accrued expenses	(20,019		)		2,711				16,858				(18,414		)		(18,864		)
(Decrease) increase in other long-term liabilities	(2,913		)		176				—				19,497				16,760
Net cash (used in) provided by continuing operations	(25,592		)		(24,035		)		12,740				—				(36,887		)
Net cash used in discontinued operations	(221		)		(1,279		)		—				—				(1,500		)
Net Cash (Used in) Provided by Operating Activities	(25,813		)		(25,314		)		12,740				—				(38,387		)
Cash Flows from Investing Activities:
Capital expenditures	(16,455		)		(69,490		)		—				—				(85,945		)
Proceeds from sales of assets	978				3,065				—				—				4,043
Proceeds from sales of assets held for disposal	—				6,913				—				—				6,913
Proceeds from life insurance policies	24,655				—				—				—				24,655
Premiums paid on life insurance policies	(605		)		—				—				—				(605		)
Net cash provided by (used in) continuing operations	8,573				(59,512		)		—				—				(50,939		)
Net cash provided by discontinued operations	916				—				—				—				916
Net Cash Provided by (Used in) Investing Activities	9,489				(59,512		)		—				—				(50,023		)
Cash Flows from Financing Activities:
Net borrowings under line of credit agreements	19,685				38,300				—				—				57,985
Net borrowings (payments) on trade payable program liability	11,156				—				—				—				11,156
Payments for finance issuance costs	(5,150		)		—				—				—				(5,150		)
Proceeds from issuance of notes	200,000				—				—				—				200,000
Reduction of long-term debt	(183,459		)		—				—				—				(183,459		)
Payments on capital lease obligations	(383		)		—				—				—				(383		)
Intercompany borrowings (payments)	(46,322		)		45,005				1,317				—				—
Dividends paid	(14,686		)		—				—				—				(14,686		)
Repurchase of common stock	(15,562		)		—				—				—				(15,562		)
Proceeds from exercise of stock options	3,071				—				—				—				3,071
Proceeds from dividend reinvestment plan	961				—				—				—				961
Net Cash (used in) Provided by Financing Activities	(30,689		)		83,305				1,317				—				53,933
Net (Decrease) Increase in Cash	(47,013		)		(1,521		)		14,057				—				(34,477		)
Cash and Cash Equivalents at Beginning of Year	59,032				8,474				15,252				—				82,758
Cash and Cash Equivalents at End of Year	$	12,019			$	6,953			$	29,309			$	—			$	48,281

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Year ended January 29, 2005	Pep Boys			Subsidiary Guarantors				Subsidiary Non- Guarantors				Consolidation Elimination				Consolidated
Cash Flows from Operating Activities:
Net (Loss) Earnings	$	23,579			$	129,770			$	(2,690	)		$	(127,080	)		$	23,579
Adjustments to Reconcile Net (Loss) Earnings to Net Cash (Used in) Provided By Continuing Operations:
Net loss (earnings) from discontinued operations	387				1,700				—				—				2,087
Depreciation and amortization	29,261				47,359				—				—				76,620
Accretion of asset disposal obligation	29				106				—				—				135
Stock compensation expense	1,184				—				—				—				1,184
Equity in earnings of subsidiaries	(144,798		)		32,718				—				112,080				—
Deferred income taxes	(19,254		)		46,505				(398		)		—				26,853
Deferred gain on sale leaseback	(34		)		(96		)		—				—				(130		)
Loss (gain) from sale of assets	(199		)		(11,649		)		—				—				(11,848		)
Increase in cash surrender value of life insurance policies	(3,540		)		—				—				—				(3,540		)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable, prepaid expenses and other	(1,057		)		(5,151		)		(12,930		)		1,385				(17,753		)
Increase in merchandise inventories	(14,797		)		(34,401		)		—				—				(49,198		)
(Decrease) increase in accounts payable	(24,387		)		—				—				—				(24,387		)
(Decrease) increase in accrued expenses	16,992				(15,288		)		25,534				(1,385		)		25,853
(Decrease) increase in other long-term liabilities	(887		)		(385		)		—				—				(1,272		)
Net cash (used in) provided by continuing operations	(137,521		)		191,188				9,516				(15,000		)		48,183
Net cash used in discontinued operations	(479		)		(2,253		)		—				—				(2,732		)
Net Cash (Used in) Provided by Operating Activities	(138,000		)		188,935				9,516				(15,000		)		45,451
Cash Flows from Investing Activities:
Capital expenditures	(43,975		)		(44,093		)		—				—				(88,068		)
Proceeds from sales of assets	331				17,690				—				—				18,021
Proceeds from life insurance policies	(1,778		)		—				—				—				(1,778		)
Net cash provided by (used in) continuing operations	(45,422		)		(26,403		)		—				—				(71,825		)
Net cash provided by discontinued operations	7,826				5,501				—				—				13,327
Net Cash Provided by (Used in) Investing Activities	(37,596		)		(20,902		)		—				—				(58,498		)
Cash Flows from Financing Activities:
Net borrowings under line of credit agreements	2,768				5,334				—				—				8,102
Net borrowings (payments) on trade payable program liability	(7,216		)		—				—				—				(7,216		)
Payments for finance issuance costs	(5,500		)		—				—				—				(5,500		)
Proceeds from issuance of notes	200,000				—				—				—				200,000
Reduction of long-term debt	(189,991		)		—				—				—				(189,991		)
Reduction of convertible debt	(31,000		)		—				—				—				(31,000		)
Payments on capital lease obligations	(1,040		)		—				—				—				(1,040		)
Intercompany borrowings (payments)	161,212				(173,965		)		12,753				—				—
Dividends paid	(15,676		)		—				(15,000		)		15,000				(15,676		)
Repurchase of common stock	(39,718		)		—				—				—				(39,718		)
Proceeds from issuance of stock	108,854				—				—				—				108,854
Proceeds from exercise of stock options	6,887				—				—				—				6,887
Proceeds from dividend reinvestment plan	1,119				—				—				—				1,119
Net Cash (used in) Provided by Financing Activities	190,699				(168,631		)		(2,247		)		15,000				34,821
Net (Decrease) Increase in Cash	15,103				(598		)		7,269				—				21,774
Cash and Cash Equivalents at Beginning of Year	43,929				9,072				7,983				—				60,984
Cash and Cash Equivalents at End of Year	$	59,032			$	8,474			$	15,252			$	—			$	82,758

NOTE 9—BENEFIT PLANS

DEFINED BENEFIT PLANS

The Company has a defined benefit pension plan covering substantially all of its full-time employees hired on or before February 1, 1992. Normal retirement age is 65. Pension benefits are based on salary and years of service. The Company’s policy is to fund amounts as are necessary on an actuarial basis to provide assets sufficient to meet the benefits to be paid to plan members in accordance with the requirements of ERISA.

The actuarial computations are made using the “projected unit credit method.” Variances between actual experience and assumptions for costs and returns on assets are amortized over the remaining service lives of employees under the plan.

As of December 31, 1996, the Company froze the accrued benefits under the plan and active participants became fully vested. The plan’s trustee will continue to maintain and invest plan assets and will administer benefit payments.

The Company also has a Supplemental Executive Retirement Plan (SERP). This unfunded plan has a defined benefit component that provides key employees designated by the Board of Directors with retirement and death benefits. Retirement benefits are based on salary and bonuses; death benefits are based on salary. Benefits paid to a participant under the defined pension plan are deducted from the benefits otherwise payable under the defined benefit portion of the SERP.

On January 31, 2004, the Company amended and restated its SERP. This amendment converted the defined benefit plan to a defined contribution plan for certain unvested participants and all future participants, and resulted in an expense under SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits” (SFAS No. 88), of approximately $2,191. All vested participants under the defined benefits portion will continue to accrue benefits according to the previous defined benefit formula.

In fiscal 2004, the Company settled several obligations related to the benefits under the defined benefit SERP. These obligations totaled $2,065. These obligations resulted in an expense under SFAS No. 88 of approximately $774 in fiscal 2004.

The Company uses a December 31 measurement date for determining benefit obligations and the fair value of plan assets of its plans.

Pension expense includes the following:

	Year ended
	February 3, 2007				January 28, 2006				January 29, 2005
Service cost		$	246			$	363			$	438
Interest cost		3,071				3,011				2,903
Expected return on plan assets		(2,176		)		(2,339		)		(2,299		)
Amortization of transitional obligation		163				163				163
Amortization of prior service cost		360				360				364
Recognized actuarial loss		2,335				2,205				1,733
Net periodic benefit cost		3,999				3,763				3,302
FAS No. 88 settlement charge		—				568				774
Total Pension Expense		$	3,999			$	4,331			$	4,076

The following table sets forth the reconciliation of the benefit obligation, fair value of plan assets and funded status of the Company’s defined benefit plans:

Year ended	February 3, 2007				January 28, 2006
Change in Benefit Obligation:
Benefit obligation at beginning of year		$	54,349			$	52,384
Service cost		246				363
Interest cost		3,071				3,011
Settlement loss		—				82
Actuarial loss		1,446				2,749
Benefits paid		(1,498		)		(4,240		)
Benefit Obligation at End of Year		$	57,614			$	54,349
Change in Plan Assets:
Fair value of plan assets at beginning of year		$	35,292			$	35,508
Actual return on plan assets (net of expenses)		3,392				1,043
Employer contributions		308				2,981
Benefits paid		(1,498		)		(4,240		)
Fair Value of Plan Assets at End of Year		$	37,494			$	35,292
Funded (Unfunded) status at December 31		$	(20,120	)		$	(19,057	)
Funded (Unfunded) Status at Fiscal Year End
Funded (Unfunded) status at December 31		$	(20,120	)		$	(19,057	)
Amount contributed after measurement date		221				25
Funded (Unfunded) status at fiscal year end		$	(19,899	)		$	(19,032	)
Net Amounts Recognized on Consolidated Balance Sheet at February 3, 2007
Current benefit liability (included in accrued expenses)		$	(2,950	)
Noncurrent benefit liability (included in other long-term liabilities)		(16,949		)
Net amount recognized at fiscal year end		$	(19,899	)
Reconciliation of the Funded Status at January 28, 2006
Funded (Unfunded) status at fiscal year end						$	(19,032	)
Unrecognized transition obligation						817
Unrecognized prior service cost						1,358
Unrecognized actuarial loss						14,828
Net amount recognized at fiscal year end						$	(2,029	)
Net Amounts Recognized on Consolidated Balance Sheet at January 28, 2006
Accrued benefit liability						$	(15,112	)
Intangible asset						2,174
Accumulated other comprehensive loss						10,909
Net amount recognized at fiscal year end						$	(2,029	)
Amounts Recognized in Other Comprehensive Income (pre-tax) at February 3, 2007
Net loss		$	13,276
Prior service cost		1,650
Net amount recognized at fiscal year end		$	14,926
Other Comprehensive Loss Attributable to change in Additional Minimum Liability Recognition		$	3,467			$	35
Accumulated Benefit Obligation at Fiscal Year End		$	54,379			$	50,404
Cash Flows
Employer contributions expected during fiscal 2007		$	1,258			$	1,417

The following table sets forth additional fiscal year-end information for the defined benefit portion of the Company’s SERP for which the accumulated benefit obligation is in excess of plan assets:

Year ended	February 3, 2007			January 28, 2006
Projected benefit obligation		$	17,499		$	16,859
Accumulated benefit obligation		14,264			12,914

The following actuarial assumptions were used by the Company to determine pension expense and to present disclosure benefit obligations:

Year ended	February 3, 2007			January 28, 2006			January 29, 2005
Weighted-Average Assumptions as of December 31:
Discount rate		5.90	%		5.70	%
Rate of compensation increase		4.0	%(1)		4.0	%(1)
Weighted-Average Assumptions for Net Periodic Benefit Cost Development:
Discount rate		5.70	%		5.75	%		6.25	%
Expected return on plan assets		6.30	%		6.75	%		6.75	%
Rate of compensation expense		4.0	%(1)		4.0	%(1)		4.0	%(1)

(1) In addition, bonuses are assumed to be 25% of base pay for the SERP.

To develop the expected long-term rate of return on assets assumption, the Company considered the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio. This resulted in the selection of the 6.30% long-term rate of return on assets assumption.

The Company selected the discount rate at December 31, 2006 to reflect a rate commensurate with a model bond portfolio with durations that match the expected payment patterns of the plans.

Pension plan assets are stated at fair market value and are composed primarily of money market funds, stock index funds, fixed income investments with maturities of less than five years, and the Company’s common stock.

Our target asset allocation is 50% equity securities and 50% fixed income. The weighted average asset allocations by asset category are as follows:

Plan Assets	As of December 31, 2006			As of December 31, 2005
Equity securities		54	%		50	%
Fixed income		46	%		50	%
Total		100	%		100	%

Equity securities include Pep Boys common stock in the amounts of $817 (2.2% of total plan assets) and $819 (2.3% of total plan assets) at December 31, 2006 and December 31, 2005, respectively.

Benefit payments, including amounts to be paid from Company assets, and reflecting expected future service, as appropriate, are expected to be paid as follows:

2007	$	2,665
2008	2,715
2009	3,395
2010	3,242
2011	4,167
2012 – 2016	25,967

DEFINED CONTRIBUTION PLAN

As discussed above, the SERP includes a non-qualified defined contribution portion for key employees designated by the Board of Directors. The Company’s contribution expense for the defined contribution portion of the plan was $603, $560 and $678 for fiscal years 2006, 2005 and 2004, respectively.

The Company has 401(k) savings plans, which cover all full-time employees who are at least 21 years of age with one or more years of service. The Company contributes the lesser of 50% of the first 6% of a participant’s contributions or 3% of the participant’s compensation. The Company’s savings plans’ contribution expense was $2,963, $3,126 and $3,463 in fiscal 2006, 2005 and 2004, respectively.

DEFERRED COMPENSATION PLAN

In the first quarter of 2004, the Company adopted a non-qualified deferred compensation plan that allows its officers and certain other employees to defer up to 20% of their annual salary and 100% of their annual bonus. Additionally, the first 20% of an officer’s bonus deferred into the Company’s stock is matched by the Company on a one-for-one basis with the Company’s stock that vests and is expensed over three years. The shares required to satisfy distributions of voluntary bonus deferrals and the accompanying match in the Company’s stock are issued under the Stock Incentive Plans.

RABBI TRUST

The Company has accounted for the non-qualified deferred compensation plan and the SERP in accordance with EITF 97-14, “Accounting for Deferred Compensation Arrangements Where Amounts Earned are Held in a Rabbi Trust and Invested.” The Company establishes and maintains a deferred liability for these plans. The Company plans to fund this liability by remitting the officers’ deferrals to a Rabbi Trust where these deferrals are invested in various securities, including life insurance policies. These assets are included in non-current other assets. Accordingly, all gains and losses on these underlying investments, which are held in the Rabbi Trust to fund the deferred liability, are recognized in the Company’s consolidated statement of operations. Under these plans, there were liabilities of $20,761 at February 3, 2007 and $16,137 at January 28, 2006.

NOTE 10—NET EARNINGS PER SHARE

For fiscal years 2006, 2005 and 2004, basic earnings per share are based on net earnings divided by the weighted average number of shares outstanding during the period. Diluted earnings per share assumes the dilutive effects of the conversion of convertible senior notes and the exercising of stock options. Adjustments for the stock options were anti-dilutive in fiscal 2006 and 2005 and therefore excluded from the calculation due to the Company’s net loss for the year. Additionally, adjustments for the convertible senior notes and purchase rights were anti-dilutive in all periods presented.

The following schedule presents the calculation of basic and diluted earnings per share for net (loss) earnings from continuing operations:

Year ended	February 3, 2007				January 28, 2006				January 29, 2005
(a) Net (loss) earnings from continuing operations before cumulative effect of change in accounting principle		$	(2,000	)		$	(35,799	)		$	25,666
Adjustment for interest on convertible senior notes, net of income tax effect		—				—				—
(b) Adjusted net (loss) earnings from continuing operations		$	(2,000	)		$	(35,799	)		$	25,666
(c) Average number of common shares outstanding during period		54,318				54,831				56,361
Common shares assumed issued upon conversion of convertible senior notes		—				—				—
Common shares assumed issued upon exercise of dilutive stock options, net of assumed repurchase, at the average market price		—				—				1,296
(d) Average number of common shares assumed outstanding during period		54,318				54,831				57,657
Basic (Loss) Earnings Per Share:
Net (Loss) Earnings From Continuing Operations Before Cumulative Effect of Change in Accounting Principle (a/c)		$	(0.04	)		$	(0.65	)		$	0.46
Loss from Discontinued Operations, Net of Tax		(0.01		)		—				(0.04		)
Cumulative Effect of Change in Accounting Principle, Net of Tax		—				(0.04		)		—
Basic (Loss) Earnings Per Share		$	(0.05	)		$	(0.69	)		$	0.42
Diluted (Loss) Earnings Per Share:
Net (Loss) Earnings From Continuing Operations Before Cumulative Effect of Change in Accounting Principle (b/d)		$	(0.04	)		$	(0.65	)		$	0.45
Discontinued Operations, Net of Tax		(0.01		)		—				(0.04		)
Cumulative Effect of Change in Accounting Principle, Net of Tax		—				(0.04		)		—
Diluted (Loss) Earnings Per Share		$	(0.05	)		$	(0.69	)		$	0.41

For the years ended February 3, 2007, January 28, 2006 and January 29, 2005, there were 2,459,618, 4,802,970 and 1,950,980 options and restricted stock units that were not included in the computation of diluted EPS because they were antidilutive for the periods.

NOTE 11—EQUITY COMPENSATION PLANS

The Company has a stock-based compensation plan originally approved by the stockholders on May 21, 1990 under which it has previously granted non-qualified stock options and incentive stock options to key employees and members of its Board of Directors. As of February 3, 2007, there were no awards remaining available for grant under the 1990 Plan. The Company has a stock-based compensation plan originally approved by the stockholders on June 2, 1999 under which it has previously granted and may continue to grant non-qualified stock options, incentive stock options and restricted stock units (RSUs) to key employees and members of its Board of Directors. As of February 3, 2007, there were 3,243,817 awards remaining available for grant under the 1999 Plan.

Incentive stock options and non-qualified stock options previously granted under the plans (i) to non-officers, vest fully on the third anniversary of their grant date and (ii) to officers, vest over a four-year period, with one-fifth vesting on each of the grant date and the next four anniversaries thereof. Generally, options granted prior to March 3, 2004 carry an expiration date of ten years and options granted on or after March 3, 2004 carry an expiration date of seven years.

RSUs previously granted to non-officers vest fully on the third anniversary of their grant date. RSUs previously granted to officers (i) on or prior to January 28, 2006, generally vest over a four-year period with one-fifth vesting on each of the grant date and the next four anniversaries thereof and (ii) after January 28, 2006, generally vest over a four-year period with one-fourth vesting on each of the first four anniversaries of the grant date.

The Company has also granted RSUs under the 1999 plan in conjunction with its non-qualified deferred compensation plan. Under the deferred compensation plan, the first 20% of an officer’s bonus deferred into the Company’s stock fund is matched by the Company on a one-for-one basis with RSUs that vest over a three-year period, with one third vesting on each of the first three anniversaries of the grant date.

The exercise price, term and other conditions applicable to future stock option and RSU grants under the 1999 plan are generally determined by the Board of Directors; provided that the exercise price of stock options must be at least 100% of the quoted market price of the common stock on the grant date. The Company currently satisfies share requirements resulting from RSU conversions and option exercises from its Treasury. The Company believes its Treasury share balance at February 3, 2007 is adequate to satisfy such activity during the next twelve-month period.

The following table summarizes the options under our plans:

	Fiscal 2006
	Shares		Weighted Average Exercise Price
Outstanding—beginning of year	4,537,155			$	15.87
Granted	61,977			15.01
Exercised	(84,500	)		8.48
Forfeited	(329,898	)		13.36
Expired	(2,083,902	)		16.21
Outstanding—end of year	2,100,832			16.20
Vested and expected to vest	2,095,153			16.20
Options exercisable at year end	1,834,670			16.23

The following table summarizes information about options during the last three fiscal years (dollars in thousands except per option amount):

	Fiscal 2006			Fiscal 2005			Fiscal 2004
Weighted average fair value at grant date per option		$	10.04		$	7.66		$	13.60
Intrinsic value at exercise date		$	370		$	2,531		$	8,305

The aggregate intrinsic value of outstanding options at February 3, 2007 was $4,455, of which $4,100 were vested. At February 3, 2007, the weighted average remaining contractual term of outstanding options and exercisable options is 4.2 years and 3.9 years. At February 3, 2007, the weighted average remaining contractual term and aggregate intrinsic value of outstanding and expected to vest options is 4.2 years and $4,448. The cash received and related tax benefit realized from options exercised during fiscal year 2006 was $722 and $252 respectively. At February 3, 2007, there was approximately $1,160 of total unrecognized pre-tax compensation cost related to non-vested stock options, which is expected to be recognized over a weighted-average period of 1.4 years.

The following table summarizes information about non-vested stock awards (RSUs) since January 29, 2006:

	Number of RSUs			Weighted Average Fair Value
Nonvested at January 29, 2006		265,815			$	18.41
Granted		226,161			13.58
Forfeited		(62,132	)		16.41
Vested		(71,058	)		19.93
Nonvested at February 3, 2007		358,786			$	15.41

The following table summarizes information about RSUs during the last three fiscal years (dollars in thousands except per unit amount):

	Fiscal 2006		Fiscal 2005		Fiscal 2004
Weighted average fair value at grant date per unit		$ 13.58		$ 16.71		$ 22.41
Fair Value at vesting date		$ 1,660		$ 881		$ 8
Intrinsic value at conversion date		$ 1,075		$ 679		$ 5
Tax benefits realized from conversions		$ 734		$ 248		$ 3

At February 3, 2007, there was approximately $3,370 of total unrecognized pre-tax compensation cost related to non-vested RSUs, which is expected to be recognized over a weighted-average period of 1.7 years.

NOTE 12—ASSET RETIREMENT OBLIGATIONS

At February 3, 2007, the Company has a liability pertaining to the asset retirement obligation in accrued expenses and other long-term liabilities on its consolidated balance sheet. The following is a reconciliation of the beginning balance and ending carrying amounts of the Company’s asset retirement obligation under SFAS 143 from January 29, 2005 through February 3, 2007:

Asset retirement obligation, January 29, 2005	$ 5,057
Asset retirement obligation incurred during the period	43
Asset retirement obligation settled during the period	(141	)
Accretion expense	109
Reduction in asset retirement liability	(1,945	)
Adoption of FIN 47	3,652
Asset retirement obligation, January 28, 2006	6,775
Asset retirement obligation incurred during the period	131
Asset retirement obligation settled during the period	(130	)
Accretion expense	269
Asset retirement obligation, February 3, 2007	$ 7,045

In the fourth quarter of fiscal 2005, the Company reviewed and revised its estimated settlement costs. The Company reversed $1,945 of the liability as the original estimates of the contamination occurrence rate and the cost to remediate such contaminations proved to be higher than actual experience is yielding.

The Company adopted FIN 47, “Accounting for Conditional Asset Retirement Obligations,” an interpretation of SFAS 143, “Asset Retirement Obligations” on January 28, 2006. This interpretation impacted the Company in recognition of legal obligations associated with surrendering its leased properties. These obligations were previously omitted from the Company’s SFAS 143 analysis due to their uncertain timing. The impact of adopting FIN 47 was the recognition of net additional leasehold improvement assets amounting to $470, an asset retirement obligation of $3,652 and a charge of $3,182 ($2,021, net of tax), which was included in Cumulative Effect of Change in Accounting Principle in the accompanying consolidated statement of operations for fiscal year 2005.

Had the Company adopted the provisions of FIN 47 prior to January 28, 2006, the amount of the asset retirement obligations on a pro forma basis would have been $3,441 as of January 29, 2005. The following table summarizes the pro forma net earnings and earnings per share for the fiscal year ended January 29, 2005, had the Company adopted the provisions of FIN 47 prior to January 28, 2006:

Year ended	January 29, 2005
Net Earnings (Loss):
As reported		$ 23,579
Pro Forma		$ 23,409
Net Earnings (Loss) per share:
Basic:
As reported		$ 0.42
Pro Forma		$ 0.42
Diluted:
As reported		$ 0.41
Pro Forma		$ 0.41

NOTE 13—INCOME TAXES

The provision (benefit) for income taxes includes the following:

	Year ended
	February 3, 2007			January 28, 2006			January 29, 2005
Current:
Federal		$ —			$ —			$ (21,639	)
State		1,001			1,639			(1,268	)
Deferred:
Federal		(2,496	)		(20,422	)		35,379
State		(2,802	)		(1,786	)		2,843
		$ (4,297	)		$ (20,569	)		$ 15,315

A reconciliation of the statutory federal income tax rate to the effective rate of the provision for income taxes follows:

	Year ended
	February 3, 2007			January 28, 2006			January 29, 2005
Statutory tax rate		35.0	%		35.0	%		35.0	%
State income taxes, net of federal tax benefits		(3.6	)		0.9			2.8
Job credits		5.8			0.8			(1.0	)
State Deferred Adjustment(a)		38.9			—			—
Foreign Taxes, net of federal benefits		(3.8	)		—			—
Other, net		(4.1	)		(0.2	)		0.6
		68.2	%		36.5	%		37.4	%

(a) The tax rate for the year ended February 2007 includes an adjustment to the state deferred liabilities primarily due to change in the Company’s filing position in certain states. Based on the new filing position, the Company has recorded certain tax attributes that were not recognized previously.

Items that gave rise to significant portions of the deferred tax accounts are as follows:

	February 3, 2007			January 28, 2006
Deferred tax assets:
Employee compensation		$ 8,227			$ 6,693
Store closing reserves		741			1,087
Legal		2,193			500
Benefit Accruals		1,998			538
Net operating loss carryforwards		46,831			27,640
Tax credit carryforwards		13,944			12,775
Accrued leases		12,937			13,522
Interest rate derivatives		1,305			—
Other		3,566			3,049
Gross deferred tax assets		91,742			65,804
Valuation allowance		(4,077	)		(3,545	)
		$ 87,665			$ 62,259
Deferred tax liabilities:
Depreciation		$ 51,017			$ 55,222
Inventories		37,544			17,655
Real estate tax		2,414			2,405
Insurance		793			3,180
Interest rate derivatives		—			2,151
		$ 91,768			$ 80,613
Net deferred tax liability		$ 4,103			$ 18,354

As of February 3, 2007 and January 28, 2006, the Company had available tax net operating losses that can be carried forward to future years. The $328,826 net operating loss carryforward in 2007 consists of $118,802 of federal losses and $210,024 of state losses. The federal net operating loss begins to expire in 2023 while the state net operating losses will expire in various years beginning in 2008.

The tax credit carryforward in 2007 consists of $4,772 of alternative minimum tax credits, $3,021 of work opportunity credits, $5,829 of state tax credits and $322 of charitable contribution carryforward.

The tax credit carryforward in 2006 consists of $4,412 of alternative minimum tax credits, $2,612 of work opportunity credits, $ 5,506 of state tax credits and $246 of charitable contribution carryforward.

Due to the uncertainty of the Company’s ability to realize certain state tax attributes, valuation allowances of $4,077 and $3,545 were recorded at February 3, 2007 and January 28, 2006, respectively.

NOTE 14—CONTINGENCIES

The Company is party to various actions and claims, including purported class actions, arising in the normal course of business. The Company believes that amounts accrued for awards or assessments in connection with such matters are adequate and that the ultimate resolution of these matters will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

NOTE 15—INTEREST RATE SWAP AGREEMENT

On June 3, 2003, the Company entered into an interest rate swap for a notional amount of $130,000. The Company had designated the swap as a cash flow hedge of the Company’s real estate operating lease payments. The interest rate swap converts the variable LIBOR portion of the lease payment to a fixed rate of 2.90% and terminates on July 1, 2008. If the critical terms of the interest rate swap or hedge item do not change, the interest rate swap is considered to be highly effective with all changes in fair value included in other comprehensive income. As of February 3, 2007 and January 28, 2006, the fair value was $4,150 and $5,790, respectively. In the fourth quarter of fiscal 2006, the Company determined it was not in compliance with SFAS No. 133 for hedge accounting and, accordingly, recorded a reduction of rent expense, which is included in Costs of Merchandise and Costs of Service Revenues, for the cumulative fair value change of $4,150. This change in fair value had previously been recorded in Accumulated Other Comprehensive Income (Loss) on the consolidated balance sheets. The Company evaluated the impact of this error, along with three other errors, on an annual and quarterly basis and concluded there was no material impact on any historical periods, on an individual or aggregate basis. The Company corrected these errors in the fourth quarter of fiscal 2006, resulting in no material impact to the consolidated financial statements. The Company has removed its designation as a cash flow hedge on this transaction and will record the change in fair value through its operating statement until the date of termination.

On November 2, 2006, the Company entered into an interest rate swap for a notional amount of $200,000. The Company has designated the swap a cash flow hedge on the first $200,000 of the Company’s $320,000 senior secured notes. The interest rate swap converts the variable LIBOR portion of the interest payments to a fixed rate of 5.036% and terminates in October 2013. The Company did not meet the documentation requirements of SFAS No. 133, at inception or as of February 3, 2007 and, accordingly, recorded the increase in the fair value of the interest rate swap of $1,490 as a reduction to Interest

Expense. The Company intends to meet the documentation requirements of SFAS No. 133 for hedge accounting in the first quarter of fiscal 2007 and will prospectively record the effective portion of the change in fair value through Accumulated Other Comprehensive Income (Loss).

NOTE 16—FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair values of the Company’s financial instruments are as follows:

	February 3, 2007		January 28, 2006
	Carrying Amount	Estimated Fair Value	Carrying Amount	Estimated Fair Value
Assets:
Cash and cash equivalents	$ 21,884	$ 21,884	$ 48,281	$ 48,281
Accounts receivable	29,582	29,582	36,434	36,434
Interest rate swap derivatives	5,522	5,522	5,790	5,790
Liabilities:
Accounts payable	265,489	265,489	261,940	261,940
Long-term debt including current maturities	538,521	530,721	468,496	444,585
Senior convertible notes	—	—	119,000	114,835

CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE

The carrying amounts approximate fair value because of the short maturity of these items.

INTEREST RATE SWAP DERIVATIVES

The fair value of the interest rate swap derivatives are obtained from dealer quotes. This value represents the estimated amount the Company would receive or pay to terminate agreements, taking into consideration current interest rates and the creditworthiness of the counterparties.

LONG-TERM DEBT INCLUDING CURRENT MATURITIES AND SENIOR CONVERTIBLE NOTES

Interest rates that are currently available to the Company for issuance of debt with similar terms and remaining maturities are used to estimate fair value for debt issues that are not quoted on an exchange.

The fair value estimates presented herein are based on pertinent information available to management as of February 3, 2007 and January 28, 2006. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since those dates, and current estimates of fair value may differ significantly from amounts presented herein.

NOTE 17—QUARTERLY FINANCIAL DATA (UNAUDITED)

	Total		Gross	Operating (Loss)			Net (Loss) Earnings From Continuing Operations Before Cumulative Effect of Change in Accounting			Net (Loss)			Net (Loss) Earnings Per Share From Continuing Operations Before Cumulative Effect of Change in Accounting Principle					Net (Loss) Earnings Per Share					Cash Dividends		Market Price Per Share
	Revenues		Profit	Profit			Principle			Earnings			Basic		Diluted			Basic		Diluted			Per Share		High	Low
Year Ended February 3, 2007
4th Quarter		$ 586,146	$ 150,083		$ 18,140			$ 8,110			$ 7,716		$ 0.15			$ 0.15		$ 0.14			$ 0.14			$ 0.0675	$ 16.05	$ 12.48
3rd Quarter		550,849	137,693		(1,349	)		(10,713	)		(10,914	)	(0.20	)		(0.20	)	(0.20	)		(0.20	)		0.0675	14.58	9.33
2nd Quarter		578,565	145,102		11,989			1,470			1,352		0.03			0.03		0.03			0.03			0.0675	14.96	10.66
1st Quarter		556,601	138,878		7,242			(867	)		(703	)	(0.02	)		(0.02	)	(0.01	)		(0.01	)		0.0675	16.55	14.05
Year Ended January 28, 2006
4th Quarter(1)		$ 550,481	$ 110,412		$ (15,690	)		$ (22,869	)		$ (24,601	)	$ (0.42	)		$ (0.42	)	$ (0.46	)		$ (0.46	)		$ 0.0675	$ 15.99	$ 12.54
3rd Quarter		545,904	119,113		(8,553	)		(11,376	)		(11,196	)	(0.21	)		(0.21	)	(0.20	)		(0.20	)		0.0675	14.84	11.75
2nd Quarter		577,418	138,228		9,659			2,264			1,043		0.01			0.01		0.02			0.02			0.0675	15.24	12.54
1st Quarter		564,226	139,514		3,359			(3,818	)		(2,774	)	(0.04	)		(0.04	)	(0.05	)		(0.05	)		0.0675	18.80	14.06

Under the Company’s present accounting system, actual gross profit from merchandise sales can be determined only at the time of physical inventory, which is taken at the end of the fiscal year. In fiscal year 2006, these physical inventories were taken at different times during the course of the fourth quarter resulting in the Company recording an estimate for inventory shrinkage from the time of the physical inventory to the end of the fiscal year. Gross profit from merchandise sales for the first, second and third quarters is estimated by the Company based upon recent historical gross profit experience and other appropriate factors. Any variation between estimated and actual gross profit from merchandise sales for the first three quarters is reflected in the fourth quarter’s results.

Certain reclassifications have been made to the prior years’ consolidated financial statements to provide comparability with the current year’s presentation of Net Gain from Sales of Assets from Cost of Merchandise Sales and the change in classification of a store from discontinued operations to continuing operations.

Pennsylvania		23-0962915
(State or other jurisdiction of incorporation or organization)		(I.R.S. employer identification no.)
3111 West Allegheny Avenue, Philadelphia, PA		19132
(Address of principal executive office)		(Zip code)

Title of each class		Name of each exchange on which registered
Common Stock, $1.00 par value		New York Stock Exchange
Common Stock Purchase Rights		New York Stock Exchange

		Page
PART I
Item 1.	Business		1
Item 1A.	Risk Factors		7
Item 1B.	Unresolved Staff Comments		10
Item 2.	Properties		10
Item 3.	Legal Proceedings		11
Item 4.	Submission of Matters to a Vote of Security Holders		11
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		12
Item 6.	Selected Financial Data		14
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		28
Item 8.	Financial Statements and Supplementary Data		31
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		74
Item 9A.	Controls and Procedures		74
Item 9B.	Other Information		78
PART III
Item 10.	Directors, Executive Officers and Corporate Governance		78
Item 11.	Executive Compensation		78
Item 12.	Security Ownership of Certain Beneficial Owners		78
Item 13.	Certain Relationships and Related Transactions and Director Independence		78
Item 14.	Principal Accounting Fees and Services		78
PART IV
Item 15.	Exhibits and Financial Statement Schedules		79
	Signatures		84

		Page
1.	The following consolidated financial statements of The Pep Boys—Manny, Moe & Jack are included in Item 8
	Report of Independent Registered Public Accounting Firm		31
	Consolidated Balance Sheets—February 3, 2007 and January 28, 2006		32
	Consolidated Statements of Operations—Years ended February 3, 2007, January 28, 2006 and January 29, 2005		33
	Consolidated Statements of Stockholders’ Equity—Years ended February 3, 2007, January 28, 2006 and January 29, 2005		34
	Consolidated Statements of Cash Flows—Years ended February 3, 2007, January 28, 2006 and January 29, 2005		35
	Notes to Consolidated Financial Statements		36
2.	The following consolidated financial statement schedule of
	The Pep Boys—Manny, Moe & Jack is included
	Schedule II Valuation and Qualifying Accounts and Reserves		86
	All other schedules have been omitted because they are not applicable or not required or the required information is included in the consolidated financial statements or notes thereto.		80
3.	Exhibits

(3.1)	Articles of Incorporation, as amended	Incorporated by reference from the Company’s Form 10-K for the fiscal year ended January 30, 1988.
(3.2)	By-Laws, as amended	Incorporated by reference from the Registration Statement on Form S-3 (File No. 33-39225).
(3.3)	Amendment to By-Laws (Declassification of Board of Directors)	Incorporated by reference from the Company’s Form 10-K for the fiscal year ended January 29, 2000.
(4.1)	Indenture dated May 21, 2002, between the Company and Wachovia Bank, National Association, as Trustee, including form of security.	Incorporated by reference from the Registration Statement on Form S-3 (File No. 333-98255).
(4.2)	Indenture, dated December 14, 2004, between the Company and Wachovia Bank, National Association, as trustee, including form of security.	Incorporated by reference from the Company’s Form 8-K dated December 15, 2004.
(4.3)	Supplemental Indenture, dated December 14, 2004, between the Company and Wachovia Bank, National Association, as trustee.	Incorporated by reference from the Company’s Form 8-K dated December 15, 2004.
(4.4)	Rights Agreement dated as of December 5, 1997 between the Company and First Union National Bank	Incorporated by reference from the Company’s Form 8-K dated December 8, 1997.
(4.5)	Amendment to Rights Agreement dated as of August 18, 2006 between the Company and the Rights Agent	Incorporated by reference from the Company’s Registration Statement on form 8-A/A (Amendment No. 2) filed on august 21, 2006.
(4.6)	Dividend Reinvestment and Stock Purchase Plan dated January 4, 1990	Incorporated by reference from the Registration Statement on Form S-3 (File No. 33-32857).
(10.1)*	Medical Reimbursement Plan of the Company	Incorporated by reference from the Company’s Form 10-K for the fiscal year ended January 31, 1982.
(10.2)*	Directors’ Deferred Compensation Plan, as amended	Incorporated by reference from the Company’s Form 10-K for the fiscal year ended January 30, 1988.
(10.3)*	Form of Employment Agreement (Change of Control) between the Company and certain officers of the Company.	Incorporated by reference from the Company’s Form 10-Q for the quarter ended October 31, 1998.
(10.4)*	Change of Control Agreement dated as of February 10, 2006 between the Company and Harry F. Yanowitz.	Incorporated by reference from the Company’s Form 8-K filed on February 13, 2006.

(10.5)*	Form of Non-Competition Agreement between the Company and certain officers of the Company.	Incorporated by reference from the Company’s Form 8-K filed on February 10, 2006.
(10.6)*	Employment Agreement dated March 13, 2007 between the Company and Jeffrey C. Rachor.
(10.7)*	The Pep Boys—Manny, Moe and Jack 1990 Stock Incentive Plan—Amended and Restated as of March 26, 2001.	Incorporated by reference from the Company’s Form 10-K for the year ended February 1, 2003.
(10.8)*	The Pep Boys—Manny, Moe and Jack 1999 Stock Incentive Plan—amended and restated as of September 15, 2005.	Incorporated by reference from the Company’s Form 10-Q for the quarter ended October 29, 2005.
(10.9)*	The Pep Boys—Manny, Moe & Jack Pension Plan—Amended and Restated as of September 10, 2001.	Incorporated by reference from the Company’s Form 10-K for the fiscal year ended February 1, 2003
(10.10)*	The Pep Boys-Manny, Moe & Jack Pension Plan Amendment 2005-1
(10.11)*	Long-Term Disability Salary Continuation Plan amended and restated as of March 26, 2002.	Incorporated by reference from the Company’s Form 10-K for the fiscal year ended February 1, 2003.
(10.12)*	Amendment and restatement as of September 3, 2002 of The Pep Boys Savings Plan.	Incorporated by reference from the Company’s Form 10-Q for the quarter ended November 2, 2002.
(10.13)*	The Pep Boys Savings Plan Amendment 2004-1	Incorporated by reference from the Company’s Form 10-K for the fiscal year ended January 31, 2004.
(10.14)*	The Pep Boys Savings Plan Amendment 2005-1
(10.15)*	Amendment and restatement as of September 3, 2002 of The Pep Boys Savings Plan—Puerto Rico.	Incorporated by reference from the Company’s Form 10-Q for the quarter ended November 2, 2002.
(10.16)*	The Pep Boys Deferred Compensation Plan	Incorporated by reference from the Company’s Form 10-K for the fiscal year ended January 31, 2004.
(10.17)*	The Pep Boys Annual Incentive Bonus Plan (amended and restated as of December 9, 2003)	Incorporated by reference from the Company’s Form 10-K for the fiscal year ended January 31, 2004.

(10.18)*	Amendment to and Restatement of the Executive Supplemental Pension Plan, effective as of January 31, 2004.	Incorporated by reference from The Company’s Form 10-Q for the quarter ended May 1, 2004.
(10.19)	Flexible Employee Benefits Trust	Incorporated by reference from the Company’s Form 8-K filed May 6, 1994.
(10.20)	The Pep Boys Grantor Trust Agreement
(10.21)	Amended and Restated Loan and Security Agreement, dated August 1, 2003, by and among the Company, Congress Financial Corporation, as Agent, The CIT Group/Business Credit, Inc. and General Electric Capital Corporation, as Co-Documentation Agents, and the Lenders from time to time party thereto.	Incorporated by reference from the Company’s Form 10-Q for the quarter ended August 2, 2003.
(10.22)	Amendment No. 1, dated October 24, 2003, to the Amended and Restated Loan and Security Agreement, by and among the Company, Congress Financial Corporation, as Agent, and the other parties thereto.	Incorporated by reference from the Company’s Form 10-Q for the quarter ended November 1, 2003.
(10.23)	Amendment No. 2, dated October 15, 2004, to the Amended and Restated Loan and Security Agreement, by and among the Company, Congress Financial Corporation, as Agent, and the other parties thereto.	Incorporated by reference from the Company’s Form 8-K filed December 3, 2004.
(10.24)	Amendment No. 3, dated December 2, 2004, to the Amended and Restated Loan and Security Agreement, by and among the Company, Congress Financial Corporation, as Agent, and the other parties thereto.	Incorporated by reference from the Company’s Form 8-K filed December 3, 2004.
(10.25)	Amendment No. 4, dated November 16, 2005, to the Amended and Restated Loan and Security Agreement, by and among the Company, Congress Financial Corporation, as Agent, and the other parties thereto.
(10.26)	Amendment No. 5, dated January 27, 2006, to the Amended and Restated Loan and Security Agreement, by and among the Company, Congress Financial Corporation, as Agent, and the other parties thereto.	Incorporated by reference from the Company’s Form 8-K filed January 30, 2006.
(10.27)	Amendment No. 6, dated September 22, 2006, to the Amended and Restated Loan and Security Agreement, by and among the Company, Wachovia Bank, National Association, successor-in-interest to Congress Financial Corporation, as Agent, and the other parties thereto.	Incorporated by reference from the Company’s Form 8-K filed October 30, 2006.
(10.28)	Participation Agreement, dated as of August 1, 2003, among the Company, Wachovia Development Corporation, as the Borrower and the Lessor, the Lenders and Wachovia Bank, National Association, as Agent for the Lenders and the Secured Parties.	Incorporated by reference from the Company’s Form 10-Q for the quarter ended August 2, 2003.

(10.29)	Amended and Restated Lease Agreement, dated as of August 1, 2003, between Wachovia Development Corporation, as Lessor, and the Company.	Incorporated by reference from the Company’s Form 10-Q for the quarter ended August 2, 2003.
(10.30)	Trade Agreement, dated October 18, 2004, between the Company and GMAC Commercial Finance, LLC.	Incorporated by reference from the Company’s Form 8-K dated October 19, 2004.
(10.31)	Master Lease Agreement, dated October 18, 2004, between the Company and with RBS Lombard, Inc.	Incorporated by reference from the Company’s Form 8-K dated October 19, 2004.
(10.32)	Amended and Restated Credit Agreement, dated October 27, 2006, among the Company, Wachovia Bank, National Association, as Administrative Agent, and the other parties thereto.	Incorporated by reference from the Company’s Form 8-K filed October 30, 2006.
(10.33)	First Amendment dated February 15, 2007 to Amended and Restated Credit Agreement, dated October 27, 2006, among the Company, Wachovia Bank, National Association, as Administrative Agent, and the other parties thereto.	Incorporated by reference from the Company’s Form 8-K filed February 16, 2007.
(12.00)	Computation of Ratio of Earnings to Fixed Charges
(21.00)	Subsidiaries of the Company
(23.00)	Consent of Independent Registered Public Accounting Firm
(31.1)	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(31.2)	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(32.1)	Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(32.2)	Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b)	None

	THE PEP BOYS—MANNY, MOE & JACK
	(Registrant)
	by:	/s/ HARRY F. YANOWITZ
Dated: April 18, 2007		Harry F. Yanowitz
		Senior Vice President and Chief Financial Officer

	SIGNATURE	CAPACITY	DATE
/s/ JEFFREY C. RACHOR		President & Chief Executive Officer & Director	April 18, 2007
Jeffrey C. Rachor		(Principal Executive Officer)
/s/ HARRY F. YANOWITZ		Senior Vice President and Chief Financial Officer	April 18, 2007
Harry F. Yanowitz		(Principal Financial Officer)
/s/ BERNARD K. MCELROY		Chief Accounting Officer and Treasurer	April 18, 2007
Bernard K. McElroy		(Principal Accounting Officer)
/s/ WILLIAM LEONARD		Chairman of the Board	April 18, 2007
William Leonard
/s/ M. SHÂN ATKINS		Director	April 18, 2007
M. Shân Atkins
/s/ PETER A. BASSI		Director	April 18, 2007
Peter A. Bassi
/s/ ROBERT H. HOTZ		Director	April 18, 2007
Robert H. Hotz
/s/ THOMAS R. HUDSON Jr.		Director	April 18, 2007
Thomas R. Hudson Jr.
/s/ MAX L. LUKENS		Director	April 18, 2007
Max L. Lukens
/s/ JAMES A. MITAROTONDA		Director	April 18, 2007
James A. Mitarotonda

/s/ JANE SCACCETTI	Director	April 18, 2007
Jane Scaccetti
/s/ JOHN T. SWEETWOOD	Director	April 18, 2007
John T. Sweetwood
/s/ NICK WHITE	Director	April 18, 2007
Nick White
/s/ JAMES A. WILLIAMS	Director	April 18, 2007
James A. Williams

Column A	Column B			Column C						Column D			Column E
Description	Balance at Beginning of Period			Additions Charged to Costs and Expenses			Additions Charged to Other Accounts			Deductions(1)			Balance at End of Period
	(in thousands)
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year Ended February 3, 2007		$	1,188		$	2,317		$	—		$	2,000		$	1,505
Year Ended January 28, 2006		$	1,030		$	1,733		$	—		$	1,575		$	1,188
Year Ended January 29, 2005		$	739		$	1,831		$	—		$	1,540		$	1,030