UNITED STATES

OMB APPROVAL

SECURITIES AND EXCHANGE COMMISSION

OMB Number: 3235-0059

United States
Securities And Exchange Commission
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NOTICEOF ANNUAL MEETINGOF SHAREHOLDERS1)  Title of each class of securities to which transaction applies:

PROXY STATEMENT
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AND2)  Aggregate number of securities to which transaction applies:

2005 ANNUAL REPORT
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PROXY

FINANCIAL HIGHLIGHTS
(in millions except per share data and percentages)N
OTICEOF ANNUAL MEETINGOF SHAREHOLDERS

PROXY STATEMENT

AND

2006 ANNUAL REPORT
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Fiscal Year
   
2005 (1)
   
2004 (1)
   
Percent
Change (2)
Sales              $60,553        $56,434          7.3%  
Operating Profit              $2,035        $843           141.4%  
Net earnings (loss) per share              $1.31        $(0.14)          N/A   
Average shares used in calculation                731           736           (0.7)%  
Net cash provided by operating activities              $2,192        $2,330          (5.9)%  
Capital expenditures              $1,306        $1,634          (20.1)%  
Identical supermarket sales (3)              $54,143        $51,413          5.3%  
Identical supermarket sales excluding supermarket fuel operations (3)              $50,866        $49,154          3.5%  
Comparable supermarket sales (4)              $55,607        $52,514          5.9%  
Comparable supermarket sales excluding supermarket fuel operations (4)              $52,200        $50,226          3.9%  
 
FINANCIALHIGHLIGHTS      
(in millions except per share data and percentages)      
     Percent
Fiscal Year 2006    2005    Change (1)
Sales $66,111 $60,553 9.2%
Operating Profit $2,236 $2,035 9.9%
Net earnings per share $1.54 $1.31 17.6%
Average shares used in calculation  723  731  (1.1)%
Net cash provided by operating activities $2,351 $2,192 7.3% 
Capital expenditures $1,683 $1,306 28.9% 
Identical supermarket sales (2) $59,592 $55,993 6.4% 
Identical supermarket sales excluding fuel operations (2) $55,399 $52,483 5.6% 
Comparable supermarket sales (3) $61,045 $57,203 6.7% 
Comparable supermarket sales excluding supermarket fuel operations (3) $56,702  $53,622  5.7% 

(1)The results as presented were affected by certain income and expense items that fluctuated between periods, including a 2004 goodwill impairment charge totaling $904, pre-tax, $861 after-tax, or $1.16 per share.

(2)The percent calculations were based on the rounded numbers as presented.

(3)(2)We define a supermarket as identical when the store has been in operation and has not been expanded or relocated for five full quarters. Annualized identical supermarket sales are calculated as a summation of four quarters of identical sales.

(4)(3)     We define a supermarket as comparable when the store has been in operation for five full quarters, including expansions and relocations. Annualized comparable supermarket sales are calculated as a summation of four quarters of comparable sales.

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 COVER PRINTED ON RECYCLED PAPER





FELLOW SHAREHOLDERS:

FELLOW SHAREHOLDERS:

I am pleased to write to you about Kroger’s improving results in 20052006 performance and to share our visionplans for continued success in 20062007 and beyond.

Thanks to Kroger had a very strong year. Our results are a direct result of the hard work and dedication of our 290,000310,000 Associates in every area of our business, Kroger had a strong year.business. We are confident that our Customer 1st business strategy is connecting with our shoppers and will enable us to continue to generate positive results as we face continued challenges in the rapidly changing retail grocery industry.

OVERVIEWOF KROGER’S BUSINESS STRATEGY

During the past several years, Kroger has changed our business strategy to align everything we do with meeting the needs and expectations of our Customers. Simply put, our business is focused on putting the Customer first. For all of us, Customer 1st is more than a slogan. It is a fundamental mindset that guides us in our daily work.

Kroger Associates are focused on improving our Customers’ shopping experiences in three major areas: service, selection and value. To deliver on this commitment to our Customers, we are:

•  managing costs and expenses while providing what our Customers tell us they expect in service, selection, value, and everyday store conditions;

•  investing in capital projects to keep our stores Customer-centered and fresh;

•  implementing technology and logistics systems to reduce costs and improve service;

•  reducing the Company’s debt;

•  repurchasing stock; and

•  now—for the first time in 18 years—paying a quarterly cash dividend to shareholders.

QUARTERLY DIVIDEND DECLARED

On March 7, 2006, Kroger announced that our Board of Directors adopted a dividend policy and declared the payment of a quarterly dividend of $0.065 per share.

This is the first dividend paid by Kroger since our leveraged recapitalization in 1988. It is a monumental event for our CompanyShareholders, Associates, and our shareholders.
the Communities we serve.

The dividend represents a vote of confidence by our BoardOVERVIEWOF KROGER’S BUSINESS STRATEGY

Our results in 2006 clearly demonstrate that our Customer 1st strategy is working. We are focused on target and that, in implementing this strategy,listening to our people will continue to delight Customers and growoffering what they tell us is important to them. Whether it is faster checkouts, cleaner stores, more convenience or better value, each of us contributes to putting the Customer 1st every day, in every store. This is the foundation of our business.

The first dividend payment will be made on June 1, 2006.
     Our business strategy also incorporates managing costs, investing in capital projects to keep our stores fresh and inviting, and implementing new technology to reduce costs and improve service.

REVIEWOF 2005

Our Associates’ renewed focus on our Customers is evidenced by the financial results we achieved in 2005.     This approach enables Kroger delivered a strong performance that exceeded our original expectations for both identical sales and earnings.

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IDENTICAL SALES GREW 3.5% WITHOUT FUEL

We told shareholders at the end of 2004 to expect Kroger’s identical supermarket sales, excluding fuel, to grow more than 2% in 2005. In mid 2005, we raised the bar to expect identical supermarket sales growth, excluding fuel, of more than 3% for the balance of the year. We exceeded both goals with increased identical supermarket sales, excluding fuel, of 3.5%. In fact, the fourth quarter of fiscal 2005 marked the tenth consecutive quarter of positive identical sales, excluding fuel, and reflected Kroger’s highest identical supermarket sales since the 1999 merger with Fred Meyer. Sustainable identical sales growth is a key driver of Kroger’s objective to increase earnings and generate value for our shareholders.

Total Company sales for fiscal 2005 increased 7.3% to a record $60.6 billion.

EARNINGS PER DILUTED SHAREOF $1.31

Kroger also delivered higher-than-expected earnings for 2005. The Company told shareholders early in the year to expect net earnings to exceed $1.21 per diluted share. When the Company reported first-quarter 2005 results, we raised that target to exceed $1.24 per diluted share. At fiscal year end, Kroger reported net earnings of $1.31 per diluted share—a strong performance in a challenging operating environment.

This increase in earnings per share was fueled by four factors: (1) improved results in Southern California, where our business continues to recover from the 2003/2004 labor dispute; (2) growth in the balance of the Company; (3) lower interest expense; and (4) fewer shares outstanding as a result of our stock repurchase program.

DELIVERINGON OUR FINANCIAL STRATEGY

Strong cash flow in 2005 enabled Krogercontinue to deliver on all three elements of our financial “triple play.”play” strategy: reducing debt, investing capital, and repurchasing stock and paying dividends.

REVIEWOF 2006

     Kroger delivered consistently strong results in 2006, exceeding our original guidance for both identical supermarket sales and earnings per share growth.

QUARTERLY DIVIDEND INCREASED

     On March 15, 2007, Kroger announced that our Board of Directors increased the quarterly dividend it pays shareholders by 15.4% to $0.075 per share. This strategy deploys cash to grow and maintainis the first increase in the quarterly dividend since the Board initiated the dividend program last year.

     In keeping with the objectives outlined when the dividend policy was initiated, Kroger’s Board increased the amount after considering the Company’s asset base, reduce debt,overall results, the needs of the business and return valuethe interest of shareholders. This increase in the quarterly dividend reflects the Board’s confidence in our strategic plan.

IDENTICAL SALES GREW 5.6% WITHOUT FUEL

     Our full-year identical supermarket sales growth in 2006, excluding fuel sales, was 5.6% – well in excess of our original goal, which was to shareholders through stock repurchases and now payment of a dividend.

exceed 3.5%. Each quarter we raised that target to reflect our sales momentum throughout the year.

The Company invested $1.3 billion in capital projects during fiscal 2005 and opened, expanded, relocated, or acquired 52 food stores, remodeled 147 stores, and closed 66 locations, including 54 operational closings.

Total debt was reduced by $738 millionsales for the year increased 9.2% to approximately $7.2$66.1 billion. The Company repurchased $252 million in stockAfter adjusting for the extra week in fiscal 2006, total sales increased 7.0% over fiscal 2005. Since

EARNINGS PER SHARE GROWTHOF 15%

     We ended the year with earnings per share growth of 15%, plus the additional value of our cash dividend program, far surpassing our original estimate of 6 – 8% growth in 2006. We raised that range to 8 – 10% during the year.

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     Our earnings per share growth was driven primarily by three factors: strong identical sales, slightly improving operating margins, and fewer shares outstanding.

     Net earnings for the year were $1.1 billion, or $1.54 per diluted share. The 53rd week in the fiscal year provided an estimated benefit of $0.07 per diluted share.

COMPETITIVEADVANTAGES

     As the retail food industry evolves, one certainty remains: the environment in which we initiatedoperate continues to be intensely competitive. We remain focused on our financial triple play strategy in January 2000, Kroger has reduced total debt by $1.8 billion and invested $3.0 billion to repurchase 155.7 million shares of stock.

COMPETITIVE STRENGTHS

In every market served by the Kroger family of stores, the competitive landscape changes constantly—driven by the evolving wants and needs of Customers.

Kroger has many competitive advantages thatkey strengths, which enable us to listen and respond to our Customers. TheseKroger’s competitive advantages include:

•  our people—who are among the most talented in our industry;
  • our people – a team of talented professionals focused on listening and responding to Customers;
    •  a high-quality asset base, with leading market shares in many of the nation’s largest and fastest growing
  • a high-quality asset base with leading market shares in many of the nation’s largest and fastest-growing markets;

    • •  broad geographic diversity and multiple retail formats that allow Kroger to meet the needs of virtually every Customer;
  • broad geographic diversity and multiple retail formats that allow Kroger to meet the needs of our diverse Customers;
  • our Customer loyalty card database, plus a unique data analysis capability;
  • outstanding private-label products that have earned industry-leading market share; and
  • a successful track record of competing head-to-head against supercenters.

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TRONGM



•  an extensive collection of consumer data generated from our customer loyalty cards as well as our valued partnership with dunnhumby USA that gives us insight into our Customers’ shopping habits;

•  a successful track record of competing against supercenter operators; and

•  outstanding private label products that can only be found at a Kroger-family store.

ARKETSTRONG MARKET SHARE

Kroger serves Customerscustomers in 44 major markets—placesmarkets – regions where we operate nine or more stores. In 2005,2006, Kroger held the No. 1No.1 or No. 2 market share positionsposition in 3538 of theseour 44 markets. Many of these are the nation’s largest and fastest-growing metro areas.
metropolitan areas in the country.

Kroger’s overall market share in these 44 major markets increased by more than 0.35%approximately 65 basis points during 2005,2006, on a volume-weighted basis.
This growth in fiscal 2006 is even more impressive considering it follows our strong market share gains in the previous year. In 2005, Kroger’s overall market share in our 44 major markets increased more than 35 basis points. Looking at the two years combined, our major market share increased approximately 100 basis points – a significant increase that clearly shows Kroger’s strategic plan is working.

GGEOGRAPHICDIVERSITYANDMULTIPLEFORMATS

Kroger operates food stores in 31 states—which gives us the geographic diversity to withstand competitive pressures in multiple markets. No retailer today can match thestates under two dozen local banners. Our family of stores includes 2,171 combination of Kroger’s size and variety of formats.

Our store portfolio includes 2,214 combination (combo) food and drug stores, 143145 price-impact warehouse stores, 123 multidepartment122 multi-department stores and 2730 Marketplace stores.

The combo store is     Our combination stores employ a flexible format with products tailored to meet the specific needs of the neighborhood. Many comboMore than 600 of our combination stores include a fuel center.
centers.

The Marketplace format is a smaller version of the multidepartmentmulti-department stores operated under the Fred Meyer banner. Marketplace stores contain a full grocery store and pharmacy along with expanded general merchandise departments, including home goods, toys, outdoor living products, and furniture. Marketplacedepartments.

     Kroger also operates 779 convenience stores, currently operate in Phoenix, Arizona; Salt Lake City, Utah; and Columbus, Ohio. Kroger Marketplace will enter the Cincinnati market in 2006 with two stores. We are excited about our Marketplace412 fine jewelry stores and how they enable us to meet our Customers’ needs.

42 food processing plants.

CUSTOMER INSIGHT

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CUSTOMER INSIGHT

     Over the past several years, Kroger has oneaccumulated a substantial database that provides valuable insight into the shopping behaviors of the most robust retail customer databases in America.our Customers through our store loyalty card programs. More than 20 million households actively use one of our store loyalty cards. The data from these cards provides us with valuable insights into our Customers’ shopping behaviors.

The key to unlocking that insight and creating value for our Customers and our Company is     Kroger’s partnership with dunnhumby. A British company, dunnhumby, is a London-based leader in the fields ofcustomer insight and data management, customer analysis, and insight-led planning.
allows us to design tailored offerings for each Customer segment.

Kroger announced a joint venture with dunnhumby, called dunnhumby USA, in May 2003.     Our customerCustomer loyalty data is helping usprovides Kroger with a unique advantage as we seek opportunities to become increasingly relevant to each Customer who shops inunderstand and meet our stores.
Customers’ evolving needs and expectations.

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EADING C



ORPORATE BRANDS

SUCCESSFUL TRACK RECORD COMPETING AGAINST SUPERCENTERS

By anticipating and meeting Customer needs, Kroger has continued to grow, even in the face of aggressive supercenter expansion. At the end of fiscal 2005, Kroger competed against 1,129 supercenters. In 32 major markets where supercenters have achieved at least a No. 3 market share position, Kroger’s overall market share grew more than 0.50%, on a volume-weighted basis.

Of our supercenter competitors, Wal-Mart is the largest by far with 875 stores and at least a No. 3 market share in 28 of our major markets. Despite this intense competition, Kroger’s overall market share in these 28 markets grew nearly 0.40% during fiscal 2005, on a volume-weighted basis.

LEADING CORPORATE BRANDS

Kroger’s corporate brands are a key part of the company’s growth and an important part of our Customer 1st strategic plan. The company’s three-tier program – Private Selection, Kroger and Value brands – enables Kroger to serve our broad and diverse Customer base.

     Today, more than 10,000 corporate brand products are available only in Kroger’s family of stores. Our private label grocery items, in terms of dollars, represent approximately 24% of the Company’s grocery sales.

     Most of our high-quality, private-label products are made in one of our 42 manufacturing plants.

Our FMV (For Maximum Value) products offer value and quality for the shopper who isLOOKING AHEAD TO 2007

     We continue to face competitive challenges on a budget. Our banner brands, either Kroger or the name of the retail store, offer excellent quality and value and come with a guarantee that consumers can “try it, like it, or get the national brand free.” Private Selection is Kroger’s premium brand, offering the finest quality—again at attractive prices.

The combined market share of Kroger’s private-label brands is nearly 24%. Today, more than 10,000 corporate brand products are available—found only in a Kroger-family store.

LOOKING AHEADTO 2006

Kroger enters the new fiscal year with strong sales momentum and a clear strategic vision, in the face of a highly competitive environment.

Already, 2006 is proving to be a year of continued consolidation in our industry. The process began several years ago and we expect it will continue into the future. Kroger’s financial strength positions us to take advantage of the many opportunities that consolidation offers.

The retail environment remains very competitive.all fronts. Consumers today have many choices. We are challenged to increase our relevance to Customers,believe we have the right approach – and the right team of people – to meet theirthe diverse needs of today’s consumers.

     As in 2006, strong identical sales, slightly improving operating margins, and fewer shares outstanding will drive Kroger’s earnings per share growth this year.

     Kroger’s quarterly cash dividend is an important component of shareholder return. We expect the combination of the Company’s dividend and earnings per share target of $1.60 to exceed their expectations better than anyone else. These are difficult challenges, but we are confident$1.65 to deliver a double-digit return for Kroger people are up to the task.

shareholders in 2007.

     Our forecast of Kroger’s growth rate assumes a stable labor environment. The Company will return to the bargaining table in 2006 withhas a number of contractslabor negotiations this year covering smaller groups of Associates than the contracts negotiated in 2005.Southern California, Cincinnati, Detroit, Houston, Memphis, Toledo, Seattle and West Virginia.

     As in the past, these labor negotiations will be challenging in the face of competitive pressures and rising pension and health care costs. We will continue to seek balanced agreements that provide good wages and benefits at a cost that is fair to all.

all in order to invest in our business to create career opportunities for existing – and future Associates.

CCOMMUNITY ACTIVITIES

Kroger has a long supportedtradition of supporting the communities where our CustomersAssociates and AssociatesCustomers live and work. More than $140$150 million was contributed in Kroger’s name in 2005,during 2006, through donations from our Customers, and Associates as well asand the Company, both directly and through its divisions or itsour foundations. This is a substantial increase from prior years, due in part to the generous response of Customers and Associates in the wake of devastating hurricanes.

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Kroger raisedhas been supporting the fight to end hunger in America for more than $4.6 million from Associates and Customers in response to Hurricanes Katrina and Rita. These funds25 years. In 2006, we were donated to the American Red Cross along with $500,000 in matching contributions from the Company’s foundations. In addition, Kroger donated more than $1.5 million in cash, gift cards, food, ice, water, prescription medicines and other products to assist communities caring for hundreds of thousands of evacuees.

In 2005, the Company’s foundations made approximately 1,550 grants—totaling $7 million—to organizations serving the communities where the Company has operations.

Nearly $6 million was raised at Kroger stores across the country during The Salvation Army’s Red Kettle Christmas Campaign. These funds assist Salvation Army chapters serving the communities where the funds were collected.

Associates donated $6.3 million to local United Way campaigns that fund human services in local communities.

Kroger was honored asselected “Retailer of the Year” by the food banks of the America’s Second Harvest (A2H) network. This is the thirdfourth time in fivesix years that Kroger has received this award. It reflects the long-standing and close working relationship we have with more than 85 local food banks that are partbanks.

     Last year, our family of the A2H network. Kroger is a major contributor to the national fight to end hunger. In 2005, we supported food banks with donations of time, expertise, funds andstores contributed more than 2930 million pounds of food and groceryother products valued at $43.7 million.

to food banks serving the local communities where we operate. Those donations provided more than 22 million meals to families and individuals across the country through food banks, soup kitchens and emergency pantries. We appreciate the role our Associates, Customers and vendors play in helping us make a difference – in every community we serve.

Each year, Kroger proudly recognizes some of our Associates who make outstanding contributions to their communities. We congratulate the winners of The Kroger Co. Community Service Award for 2005:
2006:

Jim Herzberg, Atlanta Division 
Betty Porter, Central Division 
Keith Eve, Cincinnati/Dayton Division 
Kevin Flohr, City Market 
Gary L. Moore, Delta Division 
Mariana Barrenechea, Dillon Stores 
Marnie L. Green, Food 4 Less 
Cindi Corderman, Fred Meyer 
Randy Poston, Fry’s 
Dave Fannin, Great Lakes Division 
Mark Combs, Jay C Stores 
Matt LeClaire, King Soopers 
Ed Southern, Mid-Atlantic 
Dorian Shields, Mid-South 
Sue Brooks, QFC 
Debbie Muhler, Ralphs 
Emily Brito, Smith’s 
Jim Dickinson, Southwest Division 
Veronica Johnson, Country Oven Bakery 
Lisa Webb, Pace Dairy 
Lewis and Maria Tracy, Layton Dairy 
Art Anderson, Delight Products 
Anne Sturgis, General Office 

ENVIRONMENTAL STEWARDSHIP

David Wells, Atlanta Division
Brenda Mullins, Central Division
Bryan Foltz, Cincinnati/Dayton Division
Brenda Backman, City Market
John Bell Crosby, Delta Division
Larry Gerwick, Dillon Stores
Liz Herrera, Food 4 Less
Sharon Cole, Fred Meyer
Bill Gonzales, Fry’s
Aubrey Hanson, Great Lakes Division
Cindy Shireman, Jay C Stores
Mark Lamach, King Soopers
Larry Brown, Mid-Atlantic Division
Phil Howard, Mid-South Division
Randy Bennett, QFC
Natalie Carrick, Ralphs
Terry McAninch, Smith’s
Gary Spencer Chevalier, Southwest Division
United Way Committee, Winchester Farms Dairy
Community Service Team, Country Oven Bakery
James Carter, Layton Dairy
Roberta McKelvin, Pontiac Foods
Erica Pontius, General Office
Corporate Food Technology Team, General Office
     As one of the largest retailers in the country, Kroger is committed to being a responsible steward of the environment. Conserving energy and controlling the costs associated with energy usage has long been a focus for Kroger. We have made good progress in recent years and continue to look for opportunities to do more.

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PROMOTIONSAND RETIREMENTS

Christopher T. Hjelm joined     Since 2000, Kroger in August of 2005 as Senior Vice President and Chief Information Officer. Mr. Hjelm has reduced our energy consumption by over 20%, or more than 20 years1.3 billion kilowatt-hours, across all of technology leadership experience, having served as CIOour square footage. That’s enough energy to light, heat and cool every house in Nashville, Tennessee for one year.

4



     We have learned that one of travel distribution services for Cendant Corporation, Senior Vice President for technology at eBay Inc.,the most effective ways to reduce energy consumption is by establishing best practices, which we do with the help of every Associate in every store. Our local energy teams create and Senior Vice Presidentimplement store-specific energy reduction plans. We also have programs in place to train and CIO for Federal Express Corporation. Technology is a critical factor in Kroger’s ability to serve our Customers, partner with our suppliers, and empowereducate all of our Associates and we are pleased to have Mr. Hjelm leading ourabout good energy habits.

     Our ongoing efforts in this area.

important area are supported throughout the Company.

PROMOTIONSAND RETIREMENTS

     Diversity is one of Kroger’s core values and to underscore its importance, Kroger named Carver Johnson as the Company’s first Chief Diversity Officer last year. Mr. Johnson, who has been with Kroger since 1999, and his team focus on hiring, training and retaining a diverse work force and oversee Kroger’s supplier diversity efforts. Kroger has been a leader in the use of minority and women-owned business enterprises (M/WBE) in all aspects of our business for more than 25 years, spending $1 billion annually with M/WBEs.

     Several individuals were named to lead retail divisions this year, continuing Kroger’s strong track record of developing leaders and creating opportunities for them within the Company.

Robert Moeder was named President of Kroger’s Central Division, bringing more than 30 years of retail and division management experience in Kroger to his new position. Mark Prestidge was promoted to President of Kroger’s Delta Division, after holding several leadership positions in the supermarket industry.Michael Ellis was named President of the Company’s Fred Meyer division after serving in several leadership positions within Kroger.

On behalf of our entire Company, we extend our appreciation and congratulations to John Burgon, Senior Vice President,Richard Tillman, who retired after 33 years in the grocery business. Mr. Burgon began hisa 42-year career with King SoopersKroger. Mr. Tillman joined Kroger as a producepart-time food store clerk and held a variety of upper-level management positions within several Kroger divisions,with increasing responsibility throughout his career, including presidentPresident of RalphsKroger’s Delta division.

DELIVERING IMPROVED SERVICE, SELECTIONAND VALUE

Kroger’s Customer 1st strategic plan served Customers, Associates and president of King Soopers.

Shareholders well in 2006. We believe it will continue to enable the Company to achieve our objectives in 2007 and beyond.

Michael S. Heschel, Executive Vice President, retired at year-end after 14 years as our CIO. We thank Mr. Heschel for taking our technology and logistic departments to a new level of achievement.

We are grateful to these executives for their dedication and leadership.

DELIVERING IMPROVED SERVICE, SELECTIONAND VALUE

We are very pleased with Kroger’s growth and performance in 2005, but welast year. We know that we can and must do much more to deliver what our Customers expect and demand. Therethere is much hard work ahead.ahead and we know our Associates are up to the challenge.

     We must continue to listen closely to our Customers—to truly hear what they say about usCustomers and how well we are meetingput their expectations. We must embrace change. And above all, we must put our Customers first—expectations and needs first – in every store, inarea of our business, every decision, every day.

With an ever-stronger focus on the Customer, we willday – to achieve sustainable, profitable sales growth and continue to create value for our shareholders in 2006 and beyond.
Shareholders.

Thank you for your continued support and trust.





David B. Dillon
Chairman of the Board and
Chief Executive Officer

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NOTICEOF ANNUAL MEETINGOF SHAREHOLDERS

NOTICEOF ANNUAL MEETINGOF SHAREHOLDERS

Cincinnati, Ohio, May 15, 2006
2007

To All Shareholders
of The Kroger Co.:

The annual meeting of shareholders of The Kroger Co. will be held at the MUSIC HALL BALLROOM, MUSIC HALL, 1243 Elm Street, Cincinnati, Ohio, on June 22, 2006,28, 2007, at 11 A.M., E.D.T., for the following purposes:

1.     To elect five directors;the directors for the ensuing year;

2.To consider, act upon and approve five corporate governance proposals presented by Kroger;the Kroger Cash Bonus Plan;

3.To consider, act upon and approve a proposal on rules of conduct for shareholder meetings and meetings outside of Cincinnati;
4.To consider and act upon a proposal to ratify the selection of independent auditors for the year 2006;2007;

4. 
5.To act upon twoa shareholder proposals,proposal, if properly presented at the annual meeting; and

5. 
6.To transact such other business as may properly be brought before the meeting;

all as set forth in the Proxy Statement accompanying this Notice. Holders of common shares of record at the close of business on April 24, 200630, 2007 will be entitled to vote at the meeting.

AATTENDANCE

Only shareholders and persons holding proxies from shareholders may attend the meeting. Pleasebring to the meeting the admission ticket that is attached to the proxy card.

If your shares are held in the name of a broker, trust, bank, or other nominee, please bring a proxy or letter from that broker, trust, bank or nominee confirming that you are the beneficial owner of those shares. The left side portion of the voting instruction form that you receive from your broker will serve as your admission ticket.

YOUR MANAGEMENT DESIRES TO HAVE A LARGE NUMBER OF SHAREHOLDERS REPRESENTED AT THE MEETING, IN PERSON OR BY PROXY. PLEASE VOTE YOUR PROXY ELECTRONICALLY VIA THE INTERNET OR TELEPHONE, OR SIGN AND DATE THE ENCLOSED PROXY AND MAIL IT IN THE ENCLOSED SELF-ADDRESSED ENVELOPE. NO POSTAGE IS REQUIRED IF MAILED WITHIN THE UNITED STATES.

If you are unable to attend the annual meeting, you may listen to a live webcast of the meeting, which will be accessible through our website (www.kroger.com) at 11 a.m., E.D.T.

By order of the Board of Directors,
Paul W. Heldman, Secretary 

By order of the Board of Directors,
Paul W. Heldman, Secretary

76




PROXY STATEMENT

PROXY STATEMENT

Cincinnati, Ohio, May 15, 2006
2007

The accompanying proxy is solicited by the Board of Directors of The Kroger Co., and the cost of solicitation will be borne by Kroger. We will reimburse banks, brokers, nominees, and other fiduciaries for postage and reasonable expenses incurred by them in forwarding the proxy material to their principals. Kroger has retained D.F. King & Co., Inc., 48 Wall Street, New York, New York, to assist in the solicitation of proxies and will pay that firm a fee estimated at present not to exceed $11,500.$12,500. Proxies may be solicited personally, by telephone, electronically via the Internet or by mail.

David B. Dillon, Steven R. Rogel, and John T. LaMacchia, all of whom are Kroger directors, have been named members of the Proxy Committee.

The principal executive offices of The Kroger Co. are located at 1014 Vine Street, Cincinnati, Ohio 45202-1100. Our telephone number is 513-762-4000. This Proxy Statement and Annual Report, and the accompanying proxy, were first sent or given to shareholders on May 15, 2006.
2007.

As of the close of business on April 24, 2006,30, 2007, our outstanding voting securities consisted of 722,793,542710,217,716 shares of common stock, the holders of which will be entitled to one vote per share at the annual meeting. The shares represented by each proxy will be voted unless the proxy is revoked before it is exercised. Revocation may be in writing to Kroger’s Secretary or in person at the meeting or by appointment of a subsequent proxy. The laws of Ohio, under which Kroger is organized, provide for cumulative voting forShareholders may not cumulate votes in the election of directors. If any shareholder gives written noticeAt the 2006 annual meeting, shareholders voted to the President, a Vice President, or the Secretaryamend Kroger’s Articles of Kroger, not less than 48 hours before the time fixed for the meeting, that the shareholder intendsIncorporation to cumulate votes for the election of directors, and if an announcement of the giving of that notice is made by or on behalf of the shareholder or by the Chairman or Secretary upon the convening of the meeting, each shareholder will have the right to cumulate votes at the election. Ifeliminate cumulative voting is in effect, a shareholder voting for the election of directors may cast a number of votes equal to the number of directors being elected times the number of shares held on the record date for a single nominee or divide them among nominees in full votes in any manner. Any vote “FOR” the election of directors will constitute discretionary authority to the Proxy Committee to cumulate votes, as the Proxy Committee determines, if cumulative voting is in effect.
voting.

The effect of broker non-votes and abstentions on matters presented for shareholder vote is as follows:

Item No. 1, Election of Directors—The election of directors is, pursuant to Ohio law, determined by plurality. Broker non-votes and abstentions will have no effect on this proposal.

Item No. 2, Annual ElectionApproval of All DirectorsKroger Cash Bonus Plan—This proposal is conditioned uponApproval by shareholders of the Kroger Cash Bonus Plan requires the affirmative vote of the majority of shares participating in the voting. Accordingly, broker non-votes and can only be adopted if abstentions will have no effect on this proposal.

Item No. 3, below is adopted. The affirmative vote representing at least 75% of the outstanding shares of our common stock is required to amend Kroger’s Regulations to provide for annual election of all directors. Abstentions and broker non-votes will have the same effect as votes against this proposal.

Item No. 3, Elimination of Cumulative Voting For Directors—The affirmative vote representing a majority of the outstanding shares of our common stock is required to amend Kroger’s Articles of Incorporation to eliminate cumulative voting for directors. Abstentions and broker non-votes will have the same effect as votes against this proposal.

8



Item No. 4, Elimination of 75% Supermajority Requirement for Some Transactions—The affirmative vote representing at least 75% of the outstanding shares of our common stock is required to amend Kroger’s Articles of Incorporation to eliminate certain supermajority requirements. Abstentions and broker non-votes will have the same effect as votes against this proposal.

Item No. 5, Ohio Control Share Acquisition Statute—The affirmative vote representing a majority of the outstanding shares of our common stock is required to amend Kroger’s Articles of Incorporation to opt out of the Ohio control share acquisition statute. Abstentions and broker non-votes will have the same effect as votes against this proposal.

Item No. 6, Rules of Conduct for Shareholder Meetings; Meetings Outside of Cincinnati—The affirmative vote representing a majority of the outstanding shares of our common stock is required to amend Kroger’s Regulations to provide for rules of conduct in connection with shareholder meetings and permitting these meetings outside of Cincinnati, Ohio. Abstentions and broker non-votes will have the same effect as votes against this proposal.

Item No. 7,4, Selection of Auditors—Ratification by shareholders of the selection of auditors requires the affirmative vote of the majority of shares participating in the voting. Accordingly, abstentions will have no effect on this proposal.

Item Nos. 8 & 9,No. 5, Shareholder proposalsproposal—The affirmative vote of a majority of shares participating in the voting on these proposalsthis proposal is required for theirits adoption. Proxies will be voted AGAINST these proposalsthis proposal unless the Proxy Committee is otherwise instructed on a proxy properly executed and returned. Abstentions and broker non-votes will have no effect on these proposals.this proposal.

97




PROPOSALSTO SHAREHOLDERS

EPROPOSALSTO SHAREHOLDERSLECTIONOF
DIRECTORS
(ITEM NO. 1)

ELECTIONOF DIRECTORS
(ITEM NO. 1)

The Board of Directors, as now authorized, consists of 1316 members divided into threetwo classes. FiveAlthough shareholders voted in 2006 to declassify the Board and cause all directors to be elected annually, the directors elected in 2005 will continue to serve their remaining terms until the annual meeting in 2008.All other members are to be elected at the annual meeting to serve until the annual meeting in 2009,2008, or until their successors have been elected by the shareholders or by the Board of Directors pursuant to Kroger’s Regulations and qualified. Alternatively, in the event that the Board declassification proposal (discussed in Item No. 2 below) is approved by shareholders, these five directors, if elected, will serve for a one-year term until the annual meeting in 2007. Candidates for director receiving the greatest number of votes cast by holders of shares entitled to vote at a meeting at which a quorum is present are elected, up to the maximum number of directors to be chosen at the meeting. Pursuant to guidelines adopted by the Board, as long as cumulative voting is not in effect, in an uncontested election, any nominee who receives a greater number of votes “withheld” from his or her election than votes “for” such election promptly will tender his or her resignation following certification of the shareholder vote. The Corporate Governance Committee of our Board of Directors will consider the resignation offer and recommend to the Board whether to accept the resignation. The committee memberships stated below are those in effect as of the date of this proxy statement. It is intended that, except to the extent that authority is withheld, the accompanying proxy will be voted for the election of the following persons:

   Professional    Director 
Name       Occupation (1)       Age  Since 
 
 NOMINEES FORDIRECTOR FOR TERMS OFOFFICE 
 CONTINUINGUNTIL2008 
 
Reuben V. AndersonMr. Anderson is a member in the Jackson, Mississippi, office of Phelps Dunbar, a regional law firm based in New Orleans. Prior to joining this law firm, he was a justice of the Supreme Court of Mississippi. Mr. Anderson is a director of Trustmark National Bank and AT&T Inc. He is a member of the Corporate Governance and Public Responsibilities Committees.641991
   
John L. ClendeninMr. Clendenin is Chairman Emeritus of BellSouth Corporation, a holding company with subsidiaries in the telecommunications business. From January 1984 through December 1996 he was its Chairman of the Board and Chief Executive Officer. Mr. Clendenin is a director of Equifax Incorporated, The Home Depot, Inc., Powerwave Technologies, Inc., and Acuity Brands, Inc. He is a member of the Compensation and Corporate Governance Committees.721986


8

Name
Professional
Occupation (1)
Age
Director
Since
NOMINEESFOR DIRECTORFOR TERMSOF OFFICE
CONTINUING UNTIL 2009 OR 2007 (2)

Reuben V. Anderson
            Mr. Anderson is a member in the Jackson, Mississippi, office of Phelps Dunbar, a regional law firm based in New Orleans. Prior to joining this law firm, he was a justice of the Supreme Court of Mississippi. Mr. Anderson is a director of Trustmark National Bank and BellSouth Corporation. He is a member of the Audit and Public Responsibilities Committees.        63           1991   
Don W. McGeorge
            Mr. McGeorge was elected President and Chief Operating Officer of Kroger in 2003. Before that he was elected Executive Vice President in 2000 and Senior Vice President in 1997.        51           2003   
W. Rodney McMullen
            Mr. McMullen was elected Vice Chairman of Kroger in 2003. Before that he was elected Executive Vice President in 1999 and Senior Vice President in 1997. Mr. McMullen is a director of Cincinnati Financial Corporation.        45           2003   
Clyde R. Moore
            Mr. Moore is the Chairman and Chief Executive Officer of First Service Networks, a national provider of facility and maintenance repair services. He is a director of First Service Networks. Mr. Moore is a member of the Audit and Public Responsibilities Committees.        52           1997   
 

10


   Professional    Director 
Name       Occupation (1)       Age  Since 
 
David B. DillonMr. Dillon was elected Chairman of the Board of Kroger in 2004, Chief Executive Officer in 2003, and President and Chief Operating Officer in 2000. He served as President in 1999, and as President and Chief Operating Officer from 1995-1999. Mr. Dillon was elected Executive Vice President of Kroger in 1990 and President of Dillon Companies, Inc. in 1986. He is a director of Convergys Corporation.561995
   
David B. LewisMr. Lewis is Chairman, President and Chief Executive Officer of Lewis & Munday, a Detroit based law firm with offices in Washington, D.C. and Seattle. He is a director of H&R Block. Mr. Lewis has served on the Board of Directors of Conrail, Inc., LG&E Energy Corp., Lewis & Thompson Agency, Inc., M.A. Hanna, TRW, Inc. and Comerica, Inc. He is chair of the Audit Committee and vice chair of the Public Responsibilities Committee.622002
 
Don W. McGeorgeMr. McGeorge was elected President and Chief Operating Officer of Kroger in 2003. Before that he was elected Executive Vice President in 2000 and Senior Vice President in 1997.522003
 
W. Rodney McMullenMr. McMullen was elected Vice Chairman of Kroger in 2003. Before that he was elected Executive Vice President in 1999 and Senior Vice President in 1997. Mr. McMullen is a director of Cincinnati Financial Corporation.462003
 
Jorge P. MontoyaMr. Montoya was the President of The Procter& Gamble Company’s Global Snacks & Beverage division, and President of Procter & Gamble Latin America, from 1999 until his retirement in 2004.Prior to that, he was an Executive Vice President of Procter & Gamble from 1995 to 1999. Mr. Montoya is a director of Gap, Inc. and Rohm & Haas Company.He is a member of the Compensation and Public Responsibilities Committees.602007
 
Clyde R. MooreMr. Moore is the Chairman and Chief Executive Officer of First Service Networks, a national provider of facility and maintenance repair services. He is a director of First Service Networks. Mr. Moore is a member of the Audit and Compensation Committees.531997

9


Name
Professional
Occupation (1)
Age
Director
Since

Steven R. Rogel
Mr. Rogel was elected Chairman of the Board of Weyerhaeuser Company in 1999 and has been President and Chief Executive Officer and a director thereof since December 1997. Before that time he was Chief Executive Officer, President and a director of Willamette Industries, Inc. Mr. Rogel served as Chief Operating Officer of Willamette Industries, Inc. until October 1995 and, before that time, as an executive and group vice president for more than five years. He is a director of Weyerhaeuser Company and Union Pacific Corporation. Mr. Rogel has been appointed by the Board to serve as Lead Director. He is chair of the Corporate Governance Committee and a member of the Financial Policy Committee.631999

DIRECTORS WHOSE TERMSOF OFFICE CONTINUE UNTIL 2008

Robert D. Beyer
            Mr. Beyer is Chief Executive Officer of The TCW Group, Inc., an investment management firm, where he has been employed since 1995. From 1991 to 1995, he was the co-Chief Executive Officer of Crescent Capital Corporation, which was acquired by TCW in 1995. Mr. Beyer is also a member of the Board of Directors of TCW and its ultimate parent, Société Générale Asset Management, S.A. He is chair of the Financial Policy Committee and a member of the Compensation Committee.        46           1999   
John T. LaMacchia
            Mr. LaMacchia is Chairman of the Board of Tellme Networks, Inc., a provider of voice application networks. From September 2001 through December 2004 he was also Chief Executive Officer of Tellme Networks. From October 1993 through February 1999, Mr. LaMacchia was President and Chief Executive Officer of Cincinnati Bell Inc. From May 1999 to May 2000 he was Chief Executive Officer of CellNet Data Systems, Inc., a provider of wireless data communications. Mr. LaMacchia is a director of Tellme Networks, Inc. He is chair of the Compensation Committee and a member of the Corporate Governance Committee.        64           1990   
Katherine D. Ortega
            Ms. Ortega served as an Alternate Representative of the United States to the 45th General Assembly of the United Nations in 1990-1991. Prior to that, she served as Treasurer of the United States. Ms. Ortega is a director of Rayonier Inc., Washington Mutual Investors Fund and JPMorgan Value Opportunities Fund, and Trustee of the American Funds Tax Exempt Series I. She is chair of the Public Responsibilities Committee and a member of the Corporate Governance Committee.        71           1992   
 

11


   Professional    Director 
Name       Occupation (1)       Age  Since 
 
Susan M. PhillipsDr. Phillips is Dean and Professor of Finance at The George Washington University School of Business, a position she has held since 1998. She was a member of the Board of Governors of the Federal Reserve System from December 1991 though June 1998. Before her Federal Reserve appointment, Dr. Phillips served as Vice President for Finance and University Services and Professor of Finance in The College of Business Administration at the University of Iowa from 1987 through 1991. She is a director of State Farm Mutual Automobile Insurance Company, State Farm Life Insurance Company, State Farm Companies Foundation, National Futures Association, the Chicago Board Options Exchange and the Chicago Futures Exchange. Dr. Phillips also is a trustee of the Financial Accounting Foundation. She is a member of the Audit and Financial Policy Committees.622003
   
Steven R. RogelMr. Rogel was elected Chairman of the Board of Weyerhaeuser Company in 1999 and has been President and Chief Executive Officer and a director thereof since December 1997. Before that time he was Chief Executive Officer, President and a director of Willamette Industries, Inc. Mr. Rogel served as Chief Operating Officer of Willamette Industries, Inc. until October 1995 and, before that time, as an executive and group vice president for more than five years. He is a director of Union Pacific Corporation. Mr. Rogel has been appointed by the Board to serve as Lead Director. He is chair of the Corporate GovernanceCommittee and a member of the Financial Policy Committee.641999
 
James A. RundeMr. Runde is a special advisor and a former Vice Chairman of Morgan Stanley, where he has been employed since 1974. He was a member of the Board of Directors of Burlington Resources Inc. prior to its acquisition by ConocoPhillips in 2006. Mr. Runde serves as a trustee of Marquette University and the Pierpont Morgan Library. He is a member of the Compensation and Financial Policy Committees.602006

10


Name
Professional
Occupation (1)
Age
Director
Since

Bobby S. Shackouls
Until the merger of Burlington Resources Inc. and ConocoPhillips, which became effective on March 31, 2006, Mr. Shackouls was Chairman of the Board of Burlington Resources Inc., a natural resources business, since July 1997 and its President and Chief Executive Officer since December 1995. He had been a director of that company since 1995 and President and Chief Executive Officer of Burlington Resources Oil and Gas Company (formerly known as Meridian Oil Inc.), a wholly-owned subsidiary of Burlington Resources, since 1994. Mr. Shackouls is a director of ConocoPhillips. He is vice chair of the Audit and Compensation Committees.551999

DIRECTORS WHOSE TERMSOF OFFICE CONTINUE UNTIL 2007

John L. Clendenin
            Mr. Clendenin is Chairman Emeritus of BellSouth Corporation, a holding company with subsidiaries in the telecommunications business. From January 1984 through December 1996 he was its Chairman of the Board and Chief Executive Officer. Mr. Clendenin is a director of Equifax Incorporated, The Home Depot, Inc., Powerwave Technologies, Inc., and Acuity Brands, Inc. He is a member of the Compensation and Corporate Governance Committees.        71           1986   
David B. Dillon
            Mr. Dillon was elected Chairman of the Board of Kroger in 2004, Chief Executive Officer in 2003, and President and Chief Operating Officer in 2000. He served as President in 1999, and as President and Chief Operating Officer from 1995-1999. Mr. Dillon was elected Executive Vice President of Kroger in 1990 and President of Dillon Companies, Inc. in 1986. He is a director of Convergys Corporation.        55           1995   
David B. Lewis
            Mr. Lewis is Chairman, President and Chief Executive Officer of Lewis & Munday, a Detroit based law firm with offices in Washington, D.C. and Seattle. He is a director of H&R Block and Lewis & Thompson Agency, Inc. Mr. Lewis has served on the Board of Directors of Conrail, Inc., LG&E Energy Corp., M.A. Hanna, TRW, Inc. and Comerica, Inc. He is chair of the Audit Committee and vice chair of the Public Responsibilities Committee.        61           2002   
 

12


   Professional    Director 
Name       Occupation (1)       Age  Since 
 
Ronald L. SargentMr. Sargent is Chairman and Chief Executive Officer of Staples, Inc., where he has been employed since 1989. Prior to joining Staples, Mr. Sargent spent 10 years with Kroger in various positions. In addition to serving as a director of Staples, Mr. Sargent is a director of Mattel, Inc. He is a member of the Audit and Public Responsibilities Committees.512006
    
 DIRECTORSWHOSETERMSOFOFFICECONTINUEUNTIL 2008 
 
Robert D. BeyerMr. Beyer is Chief Executive Officer of The TCW Group, Inc., an investment management firm, where he has been employed since 1995. From 1991 to 1995, he was the co-Chief Executive Officer of Crescent Capital Corporation, which was acquired by TCW in 1995. Mr. Beyer is a member of the Board of Directors of TCW and its parent, Société Générale Asset Management, S.A. He is also a member of the Board of Directors of The Allstate Corporation. Mr. Beyer is chair of the Financial Policy Committee and a member of the Compensation Committee.471999
 
John T. LaMacchiaMr. LaMacchia is Chairman of the Board of Tellme Networks, Inc., a provider of voice application networks. From September 2001 through December 2004 he was also Chief Executive Officer of Tellme Networks. From October 1993 through February1999, Mr. LaMacchia was President and Chief Executive Officer of Cincinnati Bell Inc. From May 1999 to May 2000 he was Chief Executive Officer of CellNet Data Systems, Inc., a provider of wireless data communications. He is chair of the Compensation Committee and a member of the Corporate Governance Committee.651990
 
Katherine D. OrtegaMs. Ortega served as an Alternate Representative of the United States to the 45th General Assembly of the United Nations in 1990-1991. Prior to that, she served as Treasurer of the United States. Ms. Ortega is a director of Rayonier Inc., Washington Mutual Investors Fund and JPMorgan Value Opportunities Fund, and Trustee of the American Funds Tax Exempt Series I. She is chair of the Public Responsibilities Committee and a member of the Financial Policy Committee.721992

11




Name
Professional
Occupation (1)
Age
Director
Since

Susan M. Phillips
Dr. Phillips is Dean and Professor of Finance at The George Washington University School of Business, a position she has held since 1998. She was a member of the Board of Governors of the Federal Reserve System from December 1991 though June 1998. Before her Federal Reserve appointment, Dr. Phillips served as Vice President for Finance and University Services and Professor of Finance in The College of Business Administration at the University of Iowa from 1987 through 1991. She is a director of State Farm Mutual Automobile Insurance Company, State Farm Life Insurance Company, State Farm Companies Foundation, National Futures Association, the Chicago Board Options Exchange and the Chicago Futures Exchange. Dr. Phillips also is a trustee of the Financial Accounting Foundation. She is a member of the Audit and Financial Policy Committees.612003
   Professional    Director 
Name       Occupation (1)       Age  Since 
 
Bobby S. ShackoulsUntil the merger of Burlington Resources Inc. and ConocoPhillips, which became effective on March 31, 2006, Mr. Shackouls was Chairman of the Board of Burlington Resources Inc., a natural resources business, since July 1997 and its President and Chief Executive Officer since December 1995. He had been a director of that company since 1995 and President and Chief Executive Officer of Burlington Resources Oil and Gas Company (formerly known as Meridian Oil Inc.), a wholly-owned subsidiary of Burlington Resources, since 1994. Mr. Shackouls is a director of ConocoPhillips. He is vice chair of the Audit and Corporate Governance Committees.561999

(1)     Except as noted, each of the directors has been employed by his or her present employer (or a subsidiary) in an executive capacity for at least five years.

12


(2)If the Board declassification proposal (see Item No. 2 below) is approved by shareholders, these directors will be elected to one-year terms continuing until 2007.

13



INFORMATIONCONCERNINGTHEBOARDOFDIRECTORS

CINFORMATION CONCERNINGOMMITTEESOFTHEBOARDOF DIRECTORS

DIRECTORS’ COMPENSATION

Each non-employee member of the Board receives an annual retainer of $75,000; the chair of each committee receives an additional annual retainer of $12,000; and the members of the audit committee and the director who is designated as “Lead Director” receive an additional annual retainer of $10,000. Each director also receives annually an award of 2,500 shares of restricted stock and 5,000 non-qualified stock options.

Directors who are Kroger employees receive no compensation for service as directors. We provide accidental death and disability insurance for outside directors at a cost to Kroger in 2005 of $114 per director. We also provided a major medical plan for outside directors first elected to the Board prior to July 17, 1997. No medical benefits are provided to outside directors first elected after that date.

Kroger has an unfunded retirement program for outside directors first elected to the Board prior to July 17, 1997. Under that plan, the retirement benefit is the average compensation for the five calendar years preceding retirement. Covered directors who retire from the Board prior to age 70 will be credited with 50% vesting after five years of service and an additional 10% for each year served thereafter, up to a maximum 100%. Benefits for covered directors who retire prior to age 70 will commence at the time of retirement from the Board or age 65, whichever comes later. The Board has adopted no retirement plan for directors newly elected after July 17, 1997.

We maintain a non-qualified deferred compensation plan in which all outside directors are eligible to participate. Participants may defer up to 100% of their cash compensation each year, and may elect from one or both of two alternatives. In the first alternative, compensation deferred during a deferral year bears interest at the per annum rate determined by the Board prior to the beginning of the deferral year to equal our cost of ten-year debt. In the second alternative, deferred compensation is deemed to be credited in “phantom” stock accounts and the amounts in such accounts fluctuate with the price of Kroger common stock. In both cases, deferred amounts are paid out only in cash, in accordance with a deferral option selected by the participant at the time a deferral election is made.

COMMITTEESOFTHE BOARD

The Board of Directors has a number of standing committees including Audit, Compensation, and Corporate Governance Committees. All standing committees are composed exclusively of independent directors. All Board Committees have charters that can be found on our corporate website at www.thekrogerco.com underGuidelines on IssuesofCorporate Governance. During 2005,2006, the Audit Committee met 11nine times, the Compensation Committee met sevenfour times, and the Corporate Governance Committee met four times. Committee memberships are shown on pages 98 through 1312 of this Proxy Statement. The Audit Committee reviews financial reporting and accounting matters pursuant to its charter set forth as Appendix 1 to this Proxy Statement and selects our independent accountants. The Compensation Committee recommends for determination by the independent members of our Board the compensation of the Chief Executive Officer, determines the compensation of Kroger’s other senior management and administers certain long-term incentive programs. Additional information on the Compensation Committee’s processes and procedures for consideration of executive compensation are addressed in the Compensation Discussion and Analysis below. The Corporate Governance Committee develops criteria for selecting and retaining members of the Board; seeks out qualified candidates for the Board; and reviews the performance of Kroger, the Chief Executive Officer,CEO, and the Board.

14



The Corporate Governance Committee will consider shareholder recommendations for nominees for membership on the Board of Directors. Recommendations relating to our annual meeting in June 2007,2008, together with a description of the proposed nominee’s qualifications and other relevant information, must be submitted in writing to Paul W. Heldman, Secretary, and received at our executive offices not later than January 15, 2007.2008. Shareholders who desire to submit a candidate for director should send the name of the proposed candidate, along with information regarding the proposed candidate’s background and experience, to the attention of Kroger’s Secretary at our executive offices. The shareholder also should indicate the number of shares beneficially owned by the shareholder. The Secretary will forward the information to the Corporate Governance Committee for its consideration. The Committee will use the same criteria in evaluating candidates submitted by shareholders as it uses in evaluating candidates identified by the Committee. These criteria are:

•  
  • Demonstrated ability in fields considered to be of value in the deliberations of the Board, including business management, public service, education, science, law and government;

•  
  • Highest standards of personal character and conduct;

    • •  
  • Willingness to fulfill the obligations of directors and to make the contribution of which he or she is capable, including regular attendance and participation at Board and committee meetings, and preparation for all meetings including review of all meeting materials provided in advance of the meeting; and

    • •  Ability to understand the perspectives of Kroger’s customers, taking into consideration the diversity of our customers including regional and geographic differences.

  • Ability to understand the perspectives of Kroger’s customers, taking into consideration the diversity of our customers including regional and geographic differences.

    • The Corporate Governance Committee typically recruits candidates for Board membership through its own efforts and through suggestions from other directors and shareholders. The Committee has retained an outside search firm to assist in identifying and recruiting Board candidates who meet the criteria established by the Committee.

    CORPORATE GOVERNANCE

    13



         The Board elected Mr. Montoya, Mr. Runde and Mr. Sargent as directors to fill vacancies since the 2006 annual meeting. Non-management directors, our CEO, and a third-party search firm jointly recommended each of these directors.

    CORPORATE GOVERNANCE

    The Board of Directors has adoptedGuidelines on Issuesof Corporate Governance. TheseGuidelines, which include copies of the current charters for the Audit, Compensation and Corporate Governance Committees, and the other committees of the Board of Directors, are available on our corporate website at www.kroger.com.www.thekrogerco.com Shareholders may obtain a copy of theGuidelines by making a written request to Kroger’s Secretary at our executive offices.

    In addition to our corporate governance proposals discussed in Item Nos. 2 through 6 below, Kroger’s Board adopted several other changes this year. These changes include:

    •  Warrant Dividend Plan—Kroger’s Board allowed our warrant dividend plan to expire on March 19, 2006;

    •  Executive Severance—Kroger’s Board adopted a policy that requires shareholder approval for any new severance arrangements with senior executives that would exceed 2.99 times average annual W-2 earnings over the prior five years. The limits apply to any severance arrangement, regardless of any change-in-control provision;

    •  Majority Voting—Kroger’s Board also adopted a policy requiring, so long as cumulative voting is not in effect, any director in an uncontested election who receives more “withheld” votes than “for” votes to tender his or her resignation. The Corporate Governance Committee or the remainder of the Board will be required to act on that resignation within 90 days; and

    •  Stock Ownership—Our Board adopted a stock ownership policy covering officers, directors and other key executives. This policy is more particularly described in the Guidelines.

    I15
    NDEPENDENCE



    INDEPENDENCE

    The Board of Directors has determined that all of the directors, with the exception of Messrs. Dillon, McGeorge and McMullen, have no material relationships with Kroger and therefore are independent for purposes of the New York Stock Exchange listing standards. The Board made its determination based on information furnished by all members regarding their relationships with Kroger. After reviewing the information, the Board determined that all of the non-employee directors were independent because (i) they all satisfied the independence standards set forth in Rule 10A-3 of the Securities Exchange Act of 1934, (ii) they all satisfied the criteria for independence set forth in Rule 303A.02(b) of the New York Stock Exchange Listed Company Manual, and (iii) other than business transactions between Kroger and entities with which the directors are affiliated, the value of which falls below the thresholds identified by the New York Stock Exchange listing standards, none had any material relationships with us except for those arising directly from their performance of services as a director for Kroger.

    LLEAD DIRECTOR

    The Lead Director presides over all executive sessions of the non-management directors; serves as the principal liaison to the non-management directors; and consults with the Chairman regarding information to be sent to the Board, meeting agendas and establishing meeting schedules. Unless otherwise determined by the Board, the Chairchair of the Corporate Governance Committee is designated as the Lead Director.

    AAUDIT COMMITTEE EXPERTISE

    The Board of Directors has determined that David B. Lewis and Susan M. Phillips, both independent directors who are members of the Audit Committee, are “audit committee financial experts” as defined by applicable SEC regulations and that all members of the Audit Committee are “financially literate” as that term is used in the NYSE listing standards.

    CCODEOF ETHICS

    The Board of Directors has adoptedThe Kroger Co. Policy on Business Ethics, applicable to all officers, employees and members of the Board of Directors, including Kroger’s principal executive, financial and accounting officers. ThePolicy is available on our corporate website at www.kroger.com.www.thekrogerco.com. Shareholders may obtain a copy of thePolicy by making a written request to Kroger’s Secretary at our executive offices.

    14



    CSHAREHOLDER COMMUNICATIONSWITHTHE BOARD

    The Board has established two separate mechanisms for shareholders and interested parties to communicate with the Board. Any shareholder or interested party who has concerns regarding accounting, improper use of Kroger assets, or ethical improprieties may report these concerns via the toll-free hotline (800-689-4609) or email address (helpline@kroger.com) established by the Board’s Audit Committee. Such calls and emailsThe concerns are routed directly toinvestigated by Kroger’s Vice President of Auditing for further investigation and reportingreported to the Audit Committee as deemed appropriate by the Vice President of Auditing.

    Shareholders or interested parties also may communicate with the Board in writing directed to Kroger’s Secretary at our executive offices. The Secretary will consider the nature of the communication and determine whether to forward the communication to the chair of the Corporate Governance Committee. Communications relating to personnel issues or our ordinary business operations or seeking to do business with us, will be forwarded to the business unit of Kroger that the Secretary deems appropriate. All other communications will be forwarded to the chair of the Corporate

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    Governance Committee for further consideration. The chair of the Corporate Governance Committee will take such action as he or she deems appropriate, which may include referral to the Corporate Governance Committee or the entire Board.

    AATTENDANCE

    The Board of Directors met six times in 2005.2006. During 2005,2006, all incumbent directors attended at least 75% of the aggregate number of Board meetings and committee meetings on which that director was a member. Members of the Board are expected to use their best efforts to attend all annual meetings of shareholders. ThirteenEleven of the fourteenthirteen members of the Board attended last year’s annual meeting.

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    COMPENSATION DISCUSSIONAND ANALYSIS


    EXECUTIVE COMPENSATION – GENERAL PRINCIPLES

    COMPENSATIONOF EXECUTIVE OFFICERS

    SUMMARY COMPENSATION

    The following table showsCompensation Committee of the Board has the primary responsibility for establishing the compensation forof Kroger’s executive officers, including the past three yearsnamed executive officers who are identified in the Summary Compensation table below, with the exception of the Chief Executive Officer, eachOfficer. The Committee’s role regarding the CEO’s compensation is to make recommendations to the independent members of the Company’s four most highly compensated executive officers excludingBoard; those independent Board members establish the Chief Executive Officer, and one additional former executive officer (the “named executive officers”):
    CEO’s compensation.

    SUMMARY COMPENSATION TABLE

         		 
         		    Annual Compensation
    		    Long-Term Compensation
    		    

         		 
         		    
         		    
         		    
         		    Awards
    		    Payouts
    		    
    Name and Principal
    Position
    		Year
    		   
    		Salary
    ($)
    		   
    		Bonus
    ($)
    		   
    		Other Annual
    Compensation
    ($)
    		   
    		Restricted
    Stock
    Awards
    ($)
    		   
    		Securities
    Underlying
    Options/
    SARs
    (#)
    		   
    		LTIP
    Payouts
    ($)
    		   
    		All Other
    Compensation
    ($)

         		 
         		    
         		    
         		    (1)
         		    (2)
         		    (3)
         		    (4)
         		    (5)
     
    David B. Dillon    2005    $1,100,000    $1,940,131      $43,355      $0       300,000    $0       $62,407  
    Chairman and Chief    2004    $1,083,974    $736,361      $33,900      $0       300,000    $0       $52,256  
    Executive Officer    2003    $880,062    $244,962      $21,622      $2,517,000      0    $0       $28,575  
     
    W. Rodney McMullen    2005    $773,000    $1,221,870      $13,368      $0       75,000    $0       $20,186  
    Vice Chairman    2004    $772,647    $468,979      $10,469      $0       75,000    $0       $18,341  
         2003    $704,077    $181,865      $8,614      $1,678,000      0    $0       $14,333  
     
    Don W. McGeorge    2005    $773,000    $1,221,870      $29,903      $0       75,000    $0       $40,088  
    President and Chief    2004    $772,647    $468,979      $24,834      $0       75,000    $0       $35,155  
    Operating Officer    2003    $681,462    $176,298      $16,480      $1,678,000      0    $0       $23,509  
     
    Paul W. Heldman    2005    $618,000    $710,005      $20,829      $0       40,000    $0       $32,706  
    Senior Vice President,    2004    $617,808    $275,870      $19,577      $0       40,000    $0       $27,698  
    Secretary and General    2003    $567,739    $116,913      $14,934      $671,200      0    $0       $21,007  
    Counsel                                                                               
     
    Donald E. Becker    2005    $536,250    $685,238      $24,780      $969,000      40,000    $0       $37,630  
    Executive Vice President    2004    $487,981    $242,978      $16,746      $156,500      40,000    $0       $25,503  
         2003    $438,462    $95,108      $14,214      $0       0    $0       $22,416  
     
    Michael S. Heschel    2005    $596,022    $772,750      $43,055      $0       45,000    $0       $71,072  
    Former Executive Vice    2004    $599,692    $297,940      $55,401      $0       45,000    $0       $84,310  
    President and Chief    2003    $578,077    $130,275      $44,244      $419,500      0    $0       $68,183  
    Information Officer                              
     
    (1)These amounts include reimbursement for the tax effects of the payment of certain premiums on a policy of life insurance, reimbursement for the tax effects of participation in a non-qualified retirement plan, and the value of financial planning services. For 2005, the amounts included for financial planning services were $4,500, $0, $3,200, $0, $0 and $4,000, respectively, for Messrs. Dillon, McMullen, McGeorge, Heldman, Becker and Heschel. Excluded from these totals is income imputed to the named executive officer when accompanied on our aircraft during business travel by non-business travelers. These amounts for 2005, calculated using the applicable terminal charge and Standard Industry Fare Level (SIFL) mileage rates, were $9,913, $1,379 and $707 for Mr. Dillon, Mr. Becker and Mr. Heschel, respectively. Separately, we require that officers who make personal use of our aircraft must reimburse us for the full amount of the variable cost associated with the operation of the aircraft on such flights in accordance with a time-sharing arrangement consistent with FAA regulations.

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    (2)Messrs. Dillon, McMullen, McGeorge, Heldman, Becker and Heschel had 75,000, 50,000, 50,000, 20,000, 57,500, and 0 restricted shares outstanding, respectively, at January 28, 2006. These shares had an aggregate value of $1,392,750, $928,500, $928,500, $371,400, $1,067,775 and 0, respectively, based on the market price of Kroger’s common stock on January 28, 2006. The restrictions on the shares awarded to Messrs. Dillon, McMullen, McGeorge and Heldman lapse in 2006. The restrictions on the shares awarded to Mr. Becker lapse as to 12,500 shares in 2006, 15,000 shares in 2007, and 30,000 shares in 2008. Dividends, as and when declared, are payable on these shares.

    (3)Represents options granted during the respective fiscal year. These options vest over five years. No options were granted to the named executive officers during 2003. Options terminate in 10 years if not earlier exercised or terminated. No stock appreciation rights (“SARs”) were granted in any of the three years presented.

    (4)No long-term incentive plan payout was made to the named executive officers in the three years presented.

    (5)For 2005, these amounts include the reimbursement of certain premiums for policies of life insurance in the amounts of $62,407, $20,186, $40,088, $32,706, $37,630, and $63,770, respectively, for Messrs. Dillon, McMullen, McGeorge, Heldman, Becker and Heschel. As to 2003 and 2004, these amounts include the reimbursement discussed above as well as our matching contribution under The Kroger Co. Savings Plan. This matching contribution ended on July 1, 2004. For 2005, this amount for Mr. Heschel includes a payment made to him on his retirement in the amount of $7,302.

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    STOCK OPTION/STOCK APPRECIATION RIGHT GRANTS

    We have in effect employee stock option plans pursuantThe Committee’s philosophy on compensation generally applies to which options to purchase Kroger common stock are granted to officers and other employeesall levels of Kroger management.That approach requires Kroger to:

    • Make total compensation competitive;
    • Include opportunities for equity ownership as part of compensation; and our subsidiaries.
    • Use incentive compensation to help drive performance by providing superior pay for superior results.

         The following table shows option grants in fiscal year 2005 todiscussion and analysis addresses the named executive officers:

    OPTION/SAR GRANTS IN LAST FISCAL YEAR

         		      Individual Grants
    		    Potential Realizable Value
    at Assumed Annual Rates
    of Stock Price Appreciation
    for Option Term
    		    
    Name
    		   
    		Number of
    Securities
    Underlying
    Options/SAR
    Granted
    		   
    		% of Total
    Options/SARs
    Granted to
    Employees in
    Fiscal Year
    		   
    		Exercise
    or Base
    Price
    ($/Share)
    		   
    		Expiration
    Date
    		   
    		0%
    		   
    		5%
    		   
    		10%
    David B. Dillon                300,000          4.41%        $16.39          5/5/2015        $0         $3,091,332        $7,834,041  
    W. Rodney McMullen                75,000          1.10%        $16.39          5/5/2015        $0         $772,833        $1,958,510  
    Don McGeorge                75,000          1.10%        $16.39          5/5/2015        $0         $772,833        $1,958,510  
    Paul W. Heldman                40,000          0.59%        $16.39          5/5/2015        $0         $412,178        $1,044,539  
    Donald E. Becker                40,000          0.59%        $16.39          5/5/2015        $0         $412,178        $1,044,539  
    Michael S. Heschel                45,000          0.66%        $16.39          5/5/2015        $0         $463,700        $1,175,106  
     

    AGGREGATED OPTION/SAR EXERCISESIN FISCAL YEARAND OPTION/SAR VALUES

    The following table shows information concerning the exercise of stock options during fiscal year 2005 by eachcompensation of the named executive officersofficers. Additional detail is provided in the compensation tables and the fiscal year-endaccompanying narrative disclosures that follow this discussion and analysis.

    EXECUTIVE COMPENSATION – OBJECTIVES

         The Committee has several related objectives regarding compensation. First, the Committee believes that compensation must be designed to attract and retain those best suited to fulfill the challenging roles that executive officers play at Kroger. Second, some elements of compensation should help align the interests of the officers with your interests as shareholders. Third, compensation should create strong incentives for the officers (a) to achieve the annual business plan targets established by the Board, and (b) to assure that the officers work within the framework of Kroger’s long-term strategic objectives. In developing compensation programs and amounts to meet these objectives, the Committee exercises restraint to assure that executive officer compensation does not exceed reasonable and competitive levels in light of Kroger’s performance and the needs of the business.

         To meet these objectives, the Committee has taken a number of steps over the last several years, including the following:

    • Conducted an annual review of all components of executive officer compensation, quantifying total compensation on tally sheets. The review includes an assessment for each officer, including the CEO, of salary; performance-based cash compensation, or bonus; equity and long-term incentive compensation; accumulated realized and unrealized stock option gains and restricted stock values; the value of unexercised options:

    AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES TABLE
    Name
    		   
    		Shares
    Acquired
    on
    Exercise
    (#)
    		   
    		Value
    Realized ($)
    		   
    		Number of
    Securities
    Underlying
    Unexercised
    Options/SARs at
    F/Y End (1) (#)
    Exercisable/
    Unexercisable
    		   
    		Value of Unexercised
    In-the-Money
    Options/SARs
    at F/Y End (1) ($)
    Exercisable/
    Unexercisable
    David B. Dillon                172,000        $1,669,930          576,000/849,000        $1,188,580/$1,333,247  
    W. Rodney McMullen                40,000        $388,900          450,000/355,000        $1,342,238/$507,580  
    Don McGeorge                48,000        $493,440          422,500/347,500        $1,802,385/$507,580  
    Paul W. Heldman                50,000        $477,250          322,499/208,001        $1,050,392/$283,884  
    Donald E. Becker                16,000        $152,720          276,999/194,001        $938,340/$274,003  
    Michael S. Heschel                0         $0           534,000/45,000        $1,108,766/$98,325  
     
    (1)No SARs were granted or outstanding during the fiscal year.

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    COMPENSATION COMMITTEE REPORT

    any perquisites; retirement benefits; severance benefits available under The CompensationKroger Co. Employee Protection Plan; and earnings and payouts available under Kroger’s non-qualified deferred compensation program.
  • Considered internal pay equity at Kroger. The Committee is composed exclusivelyaware of directors who meetreported concerns at other companies regarding disproportionate compensation awards to chief executive officers. The Committee has assured itself that the independence standardscompensation of Kroger’s CEO and that of the other named executive officers bears a reasonable relationship to the compensation levels of other executive positions at Kroger.

    • 16



    • Recommended share ownership guidelines, adopted by the New York Stock Exchange.Board of Directors. These guidelines require directors, officers and some other key executives to acquire and hold a minimum dollar value of Kroger stock. The Committee is responsibleguidelines require the CEO to acquire and maintain ownership of Kroger shares equal to 5 times his base salary; the Vice Chairman and the Chief Operating Officer to acquire and maintain ownership at 4 times their base salaries; Executive Vice Presidents, Senior Vice Presidents and non-employee directors at 3 times their base salaries or annual cash retainers; and other officers and key executives at 2 times their base salaries.

    ESTABLISHING EXECUTIVE COMPENSATION

         The independent members of the Board have the exclusive authority to determine the amount of the CEO’s salary; the bonus level for the approvalCEO; the nature and administrationamount of any equity awards made to the base salaryCEO; and any other compensation questions related to the CEO. In setting the “bonus level” for the CEO, the independent directors determine the dollar amount that will be multiplied by the percentage payout under the annual bonus plan applicable to all corporate management. The independent directors retain discretion to reduce the percentage payout the CEO would otherwise receive. The independent directors thus make a separate determination annually concerning both the CEO’s bonus level and bonus compensation programs, as well as the equity incentive program forpercentage of bonus paid.

         The Committee performs the same function and exercises the same authority as to the other named executive officers.

    Kroger’s compensation policies are applicable to virtually all levels The Committee’s annual review of its work force, including its executive officers. These policies require Kroger to:

    •  be competitive in total compensation;

    •  include, as part of total compensation, opportunities for equity ownership;

    •  use incentives that offer more than competitive compensation when Kroger achieves superior results; and

    •  base incentive payments, or annual bonus, on adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”); on identical sales results; on achievement of strategic initiatives and on the extent to which the sales and EBITDA results of designated capital projects exceed a minimum threshold established for those projects.

    Kroger’s cash compensation for its executive, management, and some hourly employees, consists of two components: (1) base salary, and (2) annual performance-based bonuses. In 2006, a third component, long-term performance-based bonuses for which approximately 140 executives are eligible, was added. Kroger also provides stock-based equity incentive grants to executives, management, and some hourly employees to drive long-term performance and to align the interests of employees with those of shareholders.

    In determining compensation levels the Committee considers salary and bonus levels that will attract and retain qualified executives when combined with the other components of Kroger’s compensation programs including long-term stock based equity grants. In addition to the bonus programs, the Committee also considers other programs that incorporate performance objectives, the achievement of which should contribute to long-term shareholder value. The Committee establishes salaries fornamed executive officers includes the following:

    • A detailed report, by officer, that generally aredescribes current compensation, the value of equity compensation previously awarded, the value of retirement benefits earned, and any severance or other benefits payable upon a change of control.
    • An internal equity comparison of compensation at or abovevarious senior levels. This current and historical analysis is undertaken to assure that the median compensation paid by competitors for comparable positions (where data for comparable positions are available) with an annual bonus potential that, if the annual bonus plan goals are realized, would cause their total cashrelationship of CEO compensation to be above the median,other senior officer compensation, and senior officer compensation to other levels in the third quartile.

    Inorganization, is equitable.
  • A report from the Committee’s compensation consultant (described below) “benchmarking” named executive officer and other senior executive compensation with that of other companies, primarily our competitors, to assure that the Committee’s objectives of competitiveness are met.
  • A recommendation from the CEO (except in the case of his own compensation) for salary, bonus level and equity awards for each of the last several yearssenior officers including the other named executive officers. The CEO’s recommendation takes into consideration the objectives established by and the reports received by the Committee has engagedas well as his assessment of individual job performance and contribution to our management team.
  • Historical information regarding salary, bonus and equity compensation for a 3-year period.

    •      In considering each of the factors above, the Committee does not make use of a formula, but rather subjectively reviews each in making its compensation determination.

    17



    THE COMMITTEE’S COMPENSATION CONSULTANTAND BENCHMARKING

         The Committee directly engages a compensation consultant from Mercer Human Resource Consulting anto advise the Committee in the design of compensation for executive compensation consulting firm, to perform competitive peer analysisofficers. While the parent and to determine whether the compensationaffiliated companies of the executive officers actually met our compensation philosophy. In conjunction with Kroger, Mercer Human Resource Consulting identified a group of peer retail companies, based primarily on similarity of lines of business, against which officer compensation is measured. Mercer Human Resource Consulting concludedperform other services for us, the Committee has found that the total compensation of the executive officers was at or near the median of the peer companies. The Committee has concluded that the compensation consultant is independent in part because (a) he was first engaged by the Committee before he became associated with Mercer; (b) he works exclusively for the Committee and not for managementour management; and (c) he does not benefit from the other work that Mercer performs for Kroger.

         The consultant conducts an annual competitive assessment of Kroger.executive positions at Kroger for the Committee. The assessment is one of several bases, as described above, on which the Committee determines compensation. The consultant assesses base salary; target annual performance-based bonus; target cash compensation (the sum of salary and bonus); annualized long-term incentive awards, such as stock options, other equity awards, and performance-based long-term bonuses; and total direct compensation (the sum of all these elements). The consultant compares these elements against those of other companies in a peer group of publicly-traded food and drug retailers. For 2006, the group consisted of:

    Albertson’s Safeway 
    Costco Wholesale Supervalu 
    CVS Target 
    Great Atlantic & Pacific Tea Walgreens 
    Rite Aid Wal-Mart 

         The make-up of the compensation peer group is reviewed annually and modified as circumstances warrant. Industry consolidation and other competitive forces will change the peer group used. The consultant also provides the Committee data from companies in “general industry,” a representation of major publicly-traded companies. These data are a reference point, particularly for senior staff positions where competition for talent extends beyond the retail sector.

    21



    BASE SALARY

         Kroger is the second-largest company as measured by annual revenues when compared with this peer group and the largest traditional food and drug retailer. The Committee determineshas therefore sought to ensure that salaries paid to our executive officers are at or above the median paid by competitors for comparable positions and to provide an annual bonus potential to our executive officers that, if annual business plan objectives are achieved, would cause their total cash compensation to be meaningfully above the median.

         Based in part on the analysis performed by the Committee’s compensation consultant, the Committee concluded in 2005 that when comparing total compensation of the named executive officers to that of the peer group:

    • cash compensation for the named executive officers as a group fell approximately at the median, and
    • long-term compensation for the named executive officers fell substantially below the median.

         As a result, the Committee determined to increase the potential for the named executive officers to earn long-term compensation through the adoption of a performance-based long-term bonus plan. The long-term bonus plan is discussed in more detail below.

    18



    COMPONENTSOF EXECUTIVE COMPENSATIONAT KROGER

         Compensation for our named executive officers is comprised of the following:

    • Salary
    • Performance-Based Annual Cash Bonus (annual, non-equity incentive pay)
    • Performance-Based Long-Term Cash Bonus (long-term, non-equity incentive pay)
    • Equity
    • Retirement and other benefits
    • Perquisites

    SALARY

         We provide our named executive officers and other employees a fixed amount of cash compensation—salary—for the executive’s work. Salaries for named executive officers are established each year by the Committee. Salaries for the named executive officers typically are reviewed in May of each year.

         The amount of each executive’s salary is influenced by numerous factors including:

    • An assessment of individual contribution in the judgment of the CEO and the Committee (or, in thecase of the CEO, of the Committee)
    • Benchmarking with comparable positions at peer group companies
    • Tenure with Kroger
    • Relationship with the salaries of other executives at Kroger.

         In 2006, the named executive officers by evaluating both the most recent comparative peer data available and each officer’s role and responsibilities. The Committee reviews individual salaries on an annual basis and basesreceived salary increases on Kroger’s overall performance as well asfollowing the executive’s performance, roleannual review of their compensation in May.

     Salaries   
     2005     2006 
    David B. Dillon  $1,100,000  $1,150,000 
    J. Michael Schlotman  $450,000   $505,000 
    W. Rodney McMullen  $773,000  $805,000 
    Don W. McGeorge  $773,000  $805,000 
    Donald E. Becker  $540,000  $575,000 

         The increases for Mr. Becker and contribution.

    Mr. Schlotman were greater than those for the others primarily because of benchmarking and their development in increased responsibilities.

    PERFORMANCE-BASEDANNUAL CASH BONUSESONUS

    A large percentage of our employees at all levels, including the named executive officers, are eligible to receive aan annual performance-based cash bonus based on Kroger or unit performance. The Board establishes a bonus potential for the Chief Executive Officer, and the Committee establishes bonus potentials for each executive officer, other than the other officers based onCEO whose bonus potential is established by the level within the organization.independent directors. Actual payouts, which can exceed 100% of the potential amounts only in the case of extraordinary performance, represent the extent to which performance meets or exceeds the thresholds established by the Committee.

    19



    At

         The Committee considers several factors in making its determination or recommendation as to bonus potentials. First, the Committee’s February 27, 2006 meeting,individual’s level within the Committee discussed bonus payments to the executive officers and considered performance as compared to the goalsorganization is a factor in that the Committee believes that more senior executives should have a greater part of their compensation dependant upon Kroger’s performance. Second, the individual’s salary is a factor so that a substantial portion of a named executive officer’s total cash compensation is dependant upon Kroger’s performance. Finally, the Committee considers the report of its compensation consultant to assess the bonus potential of the named executive officers in light of total compensation paid to comparable executive positions in the industry.

         The bonus potential of each named executive officer for 2005 and 2006 is shown below. Mr. Becker’s bonus potential was increased because of an increase in salary and responsibility.

     Bonus   
     2005     2006 
    David B. Dillon  $1,500,000  $1,500,000 
    J. Michael Schlotman  $450,000   $450,000 
    W. Rodney McMullen  $950,000  $950,000 
    Don W. McGeorge  $950,000  $950,000 
    Donald E. Becker  $525,000 $550,000 

         The amount of bonus that the named executive officers earn each year is determined by Kroger’s performance compared to targets established by the Committee based on the business plan adopted by the Board of Directors. In 2006, thirty percent of bonus was earned based on an identical sales target; thirty percent was based on a target for EBITDA; thirty percent was based on a set of measures for implementation and results under our strategic plan; and ten percent was based on the 2005 plan year. Based on performance of new capital projects compared to their budgets. Targets in all cases allow for minimal bonus to be earned at relatively low levels to provide incentive for achieving even higher levels of performance. The extent to which Kroger fell short of, met, or exceeded the targets established in each of these areas at the beginning of 2006 determined the percentage of each named executive officer’s bonus potential paid for 2006.

    In 2006, as in all years, the Committee retained discretion to reduce the bonus payout for named executives officers if the Committee determined for any reason that Kroger (i) had exceeded its EBITDA objective, (ii) had exceeded itsthe bonus payouts were not appropriate.The independent directors retained that discretion for the CEO’s bonus. Those bodies also retained discretion to adjust the targets under the plan should unanticipated developments arise during the year.

         Following the close of the year, the Committee reviewed Kroger’s performance against the identical sales, objective, (iii) had substantially achieved its objective for execution of theEBITDA, strategic plan and (iv) had exceededcapital projects objectives. The Committee made one adjustment that reduced the minimum sales and EBIDTA thresholds established for its capital projects. As a result,bonuses of the Committee determined that thenamed executive officers had earned 132.094% of their bonus potentials, which was slightlyby less than the 133.522% applicable to all other eligible employees participating in the corporate bonus plan.one percent. The Committee determined that income from the officers weresale of certain assets should not eligible to receive certain adjustments that causedbe included in EBITDA for purposes of the bonus payoutcalculation. The independent members of the Board made the same adjustment, resulting in the same reduction of bonus, for the CEO. No other eligible participants to be higher.adjustments were made. As a result, each of the named executive officers earned 141.118% of their bonus potentials.

    20



         The percentage paid for 2006 represented and resulted from an extraordinary performance against the business plan objectives. A comparison of bonus percentages for the named executive officers in prior years demonstrates the variability of incentive compensation:

    Fiscal Year Bonus Percentage
     2006          141.118% 
    2005  132.094% 
     2004 55.174% 
    2003  24.1% 
    2002 9.9% 

         The actual payout percentages reflectamounts of annual performance-based cash bonuses paid to the extent to which Kroger achievednamed executive officers for 2006 are shown in the 2005Summary Compensation table under the heading “Non-Equity Incentive Plan Compensation.” These amounts represent the bonus objectives establishedpotentials for each named executive officer multiplied by the Committee.

    percentage earned in 2006. In the case of Mr. Becker, the bonus potential was adjusted during 2006, and the amount he earned was based on a pro-rated bonus potential.

    PERFORMANCE-BASEDLONG-TERMONG-TERM CASH BONUSESONUS

    After reviewing executive compensation with its outside advisors,consultant in 2005, the Committee determined that the long-term component, which was made up of equity awards, of Kroger’s executive compensation was not competitive. The Committee believes that it is importantdeveloped a plan to provide an incentive to the named executive officers to achieve the long-term goals established by the Board of Directors by conditioning a portion of compensation on the achievement of those goals. Beginning in 2006, approximately 140 Kroger executives, including the named executive officers, are eligible to participate in a performance-based cash bonus plan designed to reward participants for improving the long-term performance of Kroger. Bonuses are earned based on the extent to which Kroger is successful in (i) in:

    • improving its performance in four key categories, based on results of customer surveys,surveys; and (ii)
    • reducing total operating costs as a percentage of sales, excluding fuel.

    The 2006 plan consists of two components. The first component measures the improvements through fiscal year 2009. The second, or phase-in component, measures the improvements through fiscal year 2007. In both cases, bonus is earnedActual payouts will be based on the degree to which improvements are achieved.achieved, and will be awarded in increments based on the participant’s salary at the end of fiscal 2005. The Committee administers the plan and determines the bonus payout amounts based on achievement of the performance criteria.
    No amounts have yet been earned under this plan.

    EEQUITY BASED COMPENSATION GRANTS

    Awards based on Kroger’s common stock are granted annuallyperiodically to the named executive officers and a large number of other employees. Equity participation aligns the interests of employees with your interest as shareholders, and Kroger historically has distributed equity awards widely. In 2005,2006, Kroger granted 6,801,6053,233,090 stock options to approximately 13,1886,652 employees, including the named executive officers, under one of Kroger’s Long-Term Incentive Plans.long-term incentive plans. The options permit the holder to purchase Kroger common stock at an option price equal to the trading price of Kroger common stock on the date of the grant. The
    Historically options could be granted at any regularly scheduled meeting of the Committee.In 2007 the Committee adopted a policy of granting options only on one of the four Committee meetings conducted in the same week following Kroger’s public release of its quarterly earnings results.

    2221





    2005 Plan     Kroger’s long-term incentive plans also providesprovide for other equity-based awards, including restricted stock, and during fiscal year 2005stock. During 2006 Kroger awarded 250,8002,225,833 shares of restricted stock to 13514,240 employees, including some of the named executive officers. While historically the overwhelming majority of equity awards have beenThis amount is substantially higher than in the form of non-qualified stock options, in 2006 the Committee intends to beginpast years, as we began reducing the number of stock options granted and increasing the number of shares of restricted stock awardsawards. The change in Kroger’s broad-based equity program from predominantly stock options to a mixture of options and restricted shares was precipitated by (a) the perception of increased value that restricted shares offer, (b) the retention benefit to Kroger of restricted shares, and (c) changes in accounting conventions that permitted the change without materially affecting the cost of the program.
    added cost.

    In determining the total amount to be granted annually to the executive officers, the     The Committee considers several factors in determining the amount of equity compensation grants already held by the recipient, dilution, the number ofoptions and restricted shares of common stock outstanding, the level within the organization, the size of equity grants madeawarded to the recipient in prior years, practices at peer companies for comparable positions, and the performance of Kroger during the immediately preceding year. The grants in 2005 to all employees represented approximately 1% of shares outstanding at fiscal year end.

    CHIEF EXECUTIVE OFFICER’S COMPENSATION

    The Board of Directors determines the Chief Executive Officer’s compensation annually after a review and recommendation by the Committee. In making its recommendation, the Committee considered internal equity and competitor salary data, including data for most of the companies identified in the peer group shown on the performance graph (See p. 26) . Based on these factors, the Board determined that Mr. Dillon’s existing base compensation of $1,100,000 was fair and reasonable, and did not increase his salary from the levels established in 2004. This placed Mr. Dillon’s salary below the median of competitor companies of similar size and complexity as Kroger, as reviewed by Mercer Human Resource Consulting.

    The Board established Mr. Dillon’s bonus potential effective May 1, 2005, at $1,500,000. His actual payout for the fiscal year was based on a potential of $1,468,750, taking into account his lower bonus potential in effect prior to May 1. At its March 9, 2006 meeting, the Board discussed the bonus payment to Mr. Dillon, and considered the performance of Kroger as compared to the bonus criteria established by the Committee for the 2005 plan year. Based on Kroger’s performance, the Committee determined that Kroger (i) had exceeded its EBITDA objective, (ii) had exceeded its identical sales objective, (iii) had substantially achieved its objective for execution of the strategic plan, and (iv) had exceeded the minimum sales and EBIDTA thresholds established for its capital projects. As a result, the Board determined that based on Kroger’s performance Mr. Dillon earned a bonus of $1,940,131, which represented 132.094% of his bonus potential for fiscal year 2005. This was the same bonus payout as the othernamed executive officers and slightly less than the 133.522% payout earned by the other participants in the corporate plan. The Committee determined that the officers were not eligible to receive certain adjustments that caused the bonus payout for other eligible participants to be higher.

    On May 5, 2005, Mr. Dillon was granted options to purchase 300,000 shares of Kroger common stock at an option price equal to the trading price of Kroger common stock on the date of grant. That grant was made under one of Kroger’s broad-based Long-Term Incentive Plans in accordance with the guidelines of the Committee referenced above, and at the same time that options were granted to a large number of other Kroger associates, including some hourly employees.

    Mr. Dillon is party to an employment contract that is more particularly described elsewhere in the proxy statement under the section titled “Employment Contracts” (See p. 30). That agreement establishes minimum compensation at a level below his total compensation determined in consideration of the factors identified above.

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    PERQUISITES

    The Committee does not believe it is necessary for the attraction or, retention of management talent to provide the officers a substantial amount of compensation in the form of perquisites. In 2005, the only perquisites provided to the officers were personal use of Kroger aircraft for which officers must reimburse Kroger, payments of premiums of life insurance policies and the reimbursement of the tax effects of those payments, reimbursement for the tax effects of participation in a non-qualified retirement plan, and reimbursement of up to $4,500 for financial planning services. Beginning in 2007, Kroger no longer will reimburse officers for financial planning services. The amounts of all of the perquisites are shown in footnotes 1 and 5 to the summary compensation table appearing at page 18.

    INTERNAL EQUITY

    The Committee, and the Board in the case of Mr. Dillon, believes thatthe CEO, recommending to the independent directors the amount awarded. These factors include:

    • The compensation consultant’s benchmarking report regarding equity-based and other long-term compensation awarded by our competitors;
    • The officer’s level in the organization and the internal equity is an important factor to be considered in establishing compensation for the officers. While the Committee has not established a policy regarding the ratiorelationship of total compensationequity-based awards within Kroger;
    • Individual performance; and
    • The recommendation of the Chief Executive Officer to thatCEO, for all named executive officers other than in the case of the other officers, it does review compensation levels to ensure that appropriate equity exists. The Committee intends to continue to review internal compensation equity and may adopt a formal policy if it deems such adoption would be appropriate.

    CEO.

    REVIEWOF ALL COMPONENTSOF EXECUTIVE COMPENSATION

    The Committee has reviewed all components of compensation of Kroger’s Chief Executive Officer and the other executive officers, including salary, bonus, equity and long-term incentive compensation, accumulated realized and unrealized stock option gains and restricted stock values, the dollar value to the executive and cost to Kroger of all perquisites and other personal benefits, benefits under Kroger’s pension plans, severance benefits under the Kroger Employee Protection Plan, and the earnings and accumulated payout obligations under Kroger’s non-qualified deferred compensation program. A tally sheet setting forth all the above components was prepared for and reviewed by the Committee in connection with the Committee’s consideration of compensation for the executive officers.

    SECTION 162(M) OFTHE INTERNAL REVENUE CODE

    The Omnibus Budget Reconciliation Act of 1993 places a $1,000,000 limit on the amount of certain types of compensation for the CEO and the next four most highly compensated officerslong recognized that is tax deductible by Kroger. Kroger believes that its Long-Term Incentive Plans, under which stock options were granted to the executive officers, comply with the Internal Revenue Service’s regulations on the deductibility limit. Accordingly, the compensation expense incurred thereunder related to the options should be deductible. Kroger continues to consider modifications to its other compensation programs based on the regulations. Kroger’s policy is, primarily, to design and administer compensation plans that support the achievement of long-term strategic objectives and enhance shareholder value. Where it is material and supports Kroger’s compensation philosophy, the Committee also will attempt to maximize the amount of compensation expense that is tax deductible by Kroger.

    CONCLUSION

    Based onprovided to the Committee’s review of executive officer compensation, the Committee finds the total compensation of Kroger’s Chief Executive Officer and the othernamed executive officers inthrough equity-based pay is often below the aggregate, to be fair, reasonable and not excessive. As discussed above,amount paid by our competitors. Lower equity-based awards for the Committee utilized the services of Mercer Human Resource Consulting to perform competitive peer analysis.

    24



    When the Committee considers any component of the total compensation of thenamed executive officers and when it makes recommendationsother senior management permit a broader base of Kroger associates to participate in equity awards.

         Amounts of equity awards issued and outstanding for the Board regarding the Chief Executive Officer’s compensation, the aggregate amounts and mix of all of the components, including accumulated (realized and unrealized) option and restricted stock gains,named executive officers are taken into considerationset forth in the Committee’s decisions.

    tables that follow this discussion and analysis.

    RETIREMENTAND OTHER BENEFITS

    Kroger maintains a defined benefit and several defined contribution retirement plans for its employees.The Committee and the Board of Directors believe that the caliber and motivation of all of our employees, including our executive leadership, are essential to Kroger’s performance. We believe our management compensation programs contribute to our ability to differentiate our performance from others in the marketplace. We will continue to administer our compensation program in a manner that we believe will be in the shareholders’ interests.

    Compensation Committee:

    John T. LaMacchia, Chair
    Bobby S. Shackouls, Vice Chair
    Robert D. Beyer
    John L. Clendenin

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    PERFORMANCE GRAPH

    Set forth below is a line graph comparing the five-year cumulative total shareholder return on Kroger’s common stock, based on the market price of the common stock and assuming reinvestment of dividends, with the cumulative total return of companies in the Standard & Poor’s 500 Stock Index and the Peer Group composed of food and drug companies.

    Historically, our peer group has consisted of the major food store companies. In recent years there have been significant changes in the industry, including consolidation and increased competition from supercenters and drug chains. As a result, in 2003 we changed our peer group (the “Peer Group”) to include companies operating supermarkets, supercenters and warehouse clubs in the United States as well as the major drug chains with which Kroger competes.

            COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN*
            OF THE KROGER CO., S&P 500 AND PEER GROUP**


         		      
         		    INDEXED RETURNS
    Years Ending
    		    
    Company Name / Index
    		   
    		Base
    Period
    2000
    		   
    		2001
    		   
    		2002
    		   
    		2003
    		   
    		2004
    		   
    		2005
    THE KROGER CO
    		                100           82.61          61.32          75.29          70.05          75.46  
    S&P 500 INDEX
    		                100           83.99          66.77          89.85          94.65          105.66  
    PEER GROUP
    		                100           100.68          76.57          89.33          95.64          93.76  
     

    26



    Winn-Dixie Stores, Inc., which is in bankruptcy, has been a member of the Peer Group from the inception of the rule requiring a performance graph. Because the performance of the Peer Group is market capitalization weighted, Winn-Dixie’s performance had little, if any, impact on the recent performance of the Peer Group.

    Kroger’s fiscal year ends on the Saturday closest to January 31.

    *Total assumes $100 invested on February 4, 2001, in The Kroger Co., S&P 500 Index and the Peer Group, with reinvestment of dividends.

    **The Peer Group consists of Albertson’s, Inc., Costco Wholesale Corp., CVS Corp, Delhaize Group SA (ADR), Great Atlantic & Pacific Tea Company, Inc., Koninklijke Ahold NV (ADR), Marsh Supermarkets Inc. (Class A), Safeway Inc., Supervalu Inc., Target Corp., Wal-Mart Stores Inc., Walgreen Co., Whole Foods Market Inc. and Winn-Dixie Stores, Inc.

    Data supplied by Standard & Poor’s.

    Neither the foregoing Compensation Committee Report nor the foregoing Performance Graph will be deemed incorporated by reference into any other filing, absent an express reference thereto.

    27



    COMPENSATION PURSUANTTO PLANS

    We maintain various benefit plans that are available to management and certain other employees. Kroger derives the benefit of tax deductions as a result of our contributions to some of the plans. Each of ournamed executive officers was eligible to participate in one or more of these plans, as well as one or more excess plans designed to make up the following plans.

    THE KROGER CO. EMPLOYEE PROTECTION PLAN

    We adopted The Kroger Co. Employee Protection Plan (“KEPP”) during fiscal 1988 and renewed the planshortfall in 1993, in 1998 and in 2003. All of our management employees, including the executive officers, and administrative support personnel with at least one year of service are covered. KEPP provides for severanceretirement benefits and the extension of Kroger-paid health care in the event an eligible employee actually or constructively is terminated from employment without cause within two years following a change of control of Kroger (as defined in the plan). For persons 40 years of age or older with more than six years of service, severance pay ranges from approximately 9 to 20 months’ salary and bonus, depending upon pay level and other benefits. KEPP may be amended or terminatedcreated by the Board of Directors at any time prior to a change of control, and will expire in 2008 unless renewed by the Board of Directors.

    PENSION PLAN

    We maintain The Kroger Consolidated Retirement Benefit Plan (the “Plan”) that is the surviving defined benefit plan upon the merger of our other defined benefit plans, including the Dillon Companies, Inc. Pension Plan. The Plan generally provides for pension benefits under several formulas, including a cash balance formula covering most participants under which we credit five percent of eligible compensation (up to the limit providedlimitations under the Internal Revenue Code) with interest, to the accounts of recent and future participants. For some participants, the Plan provides for unreduced benefits, beginning at age 62, equal to 1-1/2% times the years of service, after attaining age 21 (or, for participants prior to January 1, 1986, after attaining age 25), times the highest average earnings for any five years during the 10 calendar years preceding retirement, less an offset tied to Social Security benefits. Benefits under the Plan are paid from assets held in trust. We also maintain The Kroger Co. Consolidated Retirement Excess Benefit Plan, the surviving excess benefit plan upon the merger of our other excess benefit plans. The general purpose of The Kroger Co. Consolidated Retirement Excess Benefit Plan is to provide participating employees with overall retirement benefits generally comparable to the benefits provided to other participants in the Plan who are not affected by the various limitationsCode on benefits under the Plan to highly compensated employees. This plan is a non-qualified plan to provide theindividuals under qualified plans. Additional details regarding retirement benefits that may not be paid under the Plan because of the benefit limitations imposed by Section 401(a)(17) and other relevant provisions of the Internal Revenue Code. Each participant in the Plan whose benefits under the Plan are restricted by these limitations is qualified to participate in the excess benefit plan. For each Plan payment the associated excess benefit plan payment will equal the excess of what the benefit payment would have been under the Plan if the participant’s benefits had not been limited, over the actual benefit payment due under the Plan. Benefits under the excess plan are obligations of Kroger and not funded by assets held in trust. The following table gives an example of the aggregate annual retirement benefit payable on a single-life basis under the Plan and the excess benefit plan applicableavailable to the named executive officers.

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         		      Years of Service
    		    
    Five Year
    Average Remuneration
         		     15
    		    20
    		    25
    		    30
    		    35
    		    40
           $150,000                $33,750        $45,000        $56,250        $67,500        $78,750        $90,000  
     250,000                56,250          75,000          93,750          112,500          131,250          150,000  
     450,000                101,250          135,000          168,750          202,500          236,250          270,000  
     650,000                146,250          195,000          243,750          292,500          341,250          390,000  
     850,000                191,250          255,000          318,750          382,500          446,250          510,000  
     900,000                202,500          270,000          337,500          405,000          472,500          540,000  
     1,200,000                270,000          360,000          450,000          540,000          630,000          720,000  
     1,500,000                337,500          450,000          562,500          675,000          787,500          900,000  
     1,800,000                405,000          540,000          675,000          810,000          945,000          1,080,000  
     2,200,000                495,000          660,000          825,000          990,000          1,155,000          1,320,000  
     

    No deductions have been madeofficers can be found in the above2006 Pension Benefits table for offsets tied to Social Security benefits.
    and the accompanying narrative description that follows this discussion and analysis.

    Remuneration earned by Messrs. Dillon, McMullen, McGeorge, Heldman, Becker and Heschel in 2005, which was covered by the Plans, was $1,836,360.73, $1,241,979.04, $1,241,979.04, $893,870.00, $777,977.80 and $905,241.53, respectively. As of January 28, 2006, they had 30 (including credited service from the Dillon Employees’ Profit Sharing Plan discussed below), 20, 26, 23, 31 and 14 years of credited service, respectively, under the Plans’ formulas. Pursuant to his employment agreement, which has expired, Mr. Heschel received     Kroger also maintains an additional 15 years of credited service.

    DILLON PROFIT SHARING PLAN

    Dillon Companies, Inc. maintains the Dillon Employees’ Profit Sharing Plan. David B. Dillon has 20 years of credited service in the Profit Sharing Plan, but no further service will be accrued for him under this plan.

    Under the Dillon Employees’ Profit Sharing Plan, Dillon Companies, Inc. and each of its participating subsidiaries contributes a certain percentage of net income, determined annually, to be allocated among participating employees based on the percent that the participating employee’s total compensation bears to the total compensation of all participating employees employed by the particular Dillon division or subsidiary. Benefits payable under the Dillon Employees’ Profit Sharing Plan reduce amounts otherwise payable to participants under the Dillon Companies, Inc. Pension Plan formula described on the preceding page.

    The amounts contributed by Dillon Companies, Inc. and its subsidiaries pursuant to these retirement plans are not readily ascertainable for any individual, and thus are not set forth above. Recent participants in these plans now participate instead in the cash balance formula discussed in the previous section.

    29



    EMPLOYMENT CONTRACTS

    Kroger entered into an employment agreement with Mr. Dillon dated as of November 30, 2001. During the five-year period of the agreement, Kroger agrees to pay Mr. Dillon no less than a base salary equal to that existing on the date of the contract, with a bonus potential of not less than that existing on the date of the contract. The Compensation Committee of the Board may reduce these amounts during periods of adverse business conditions. In the event that Mr. Dillon’s employment actually or constructively is terminated by Kroger during the term of the agreement, other than for cause, in exchange for providing consulting services to Kroger Mr. Dillon will receive annually for a period of three years an amount equal to the sum of his then current base salary plus 50% of his then current bonus target. In addition, his stock options will become immediately exercisable, restrictions on any outstanding restricted stock will lapse, his health care benefits will be continued during that period, he will receive credited service under our pension plans, and he will be reimbursed for any taxes due because of any excess parachute payment received as well as reimbursement for the tax effect of the reimbursement. Mr. Dillon’s employment agreement contains a covenant not to compete with Kroger. The contract will expire on November 30, 2006.

    30



    EXECUTIVE DEFERRED COMPENSATION PLAN

    We maintain a non-qualifiedexecutive deferred compensation plan in which all Kroger executives, includingsome of the named executive officers are eligibleparticipate. This plan is a nonqualified plan under which participants can elect to participate. Participants may defer up to 100% of their cash compensation each year. Compensation deferred during a deferral year bears interest at the per annum rate determined by the Board priorequal to the beginning of the deferral year to equal Kroger’s cost of ten year debt.debt, which is not a preferential rate of interest. Deferred amounts are paid out only in cash, in accordance with a deferral option selected by the participant at the time athe deferral election is made.

    BENEFICIAL OWNERSHIPOF COMMON STOCK
         We adopted The Kroger Co. Employee Protection Plan, or KEPP, during fiscal year 1988. That plan has been renewed in 1993, 1998, and in 2003. All of our management employees and administrative support personnel whose employment is not covered by a collective bargaining agreement, with at least one year of service, are covered. KEPP provides for severance benefits and extended Kroger-paid health care when an employee is actually or constructively terminated without cause within two years following

    22



    a change in control of Kroger (as defined in the plan). Participants who are at least 40 and who have more than six years of service are entitled to severance pay ranging from approximately 9 to 20 months’ salary and bonus. The actual amount is dependent upon pay level and other benefits. KEPP can be amended or terminated by the Board at any time prior to a change in control. It will expire in 2008 unless renewed by the Board.

         Stock option and restricted stock agreements with participants in Kroger’s long-term incentive plans provide that those awards “vest,” with options becoming immediately vested and restrictions on restricted stock lapsing, upon a change in control as described in the agreements.

         None of the named executive officers is party to an employment agreement. The CEO did have an employment contract that expired on November 30, 2006, and was not renewed.

    PERQUISITES

    The Committee does not believe that it is necessary for the attraction or retention of management talent to provide the named executive officers a substantial amount of compensation in the form of perquisites.In 2006, the only perquisites provided were:

    • personal use of Kroger aircraft, which officers may lease from Kroger, and pay the average variable cost of operating the aircraft, making officers more available and allowing for a more efficient use of their time,
    • payments of premiums of life insurance policies, and reimbursement of the tax effects of those payments,
    • reimbursement for the tax effects of participation in a non-qualified retirement plan, and
    • reimbursement of up to $4,500 for financial planning services, which reimbursement has been discontinued in 2007.

         The total amount of perquisites furnished to the named executive officers is shown in the Summary Compensation table and described in more detail in footnote 5 to that table.

    SECTION 162(M)OFTHE INTERNAL REVENUE CODE

    Tax laws place a limit of $1,000,000 on the amount of some types of compensation for the CEO and the next four most highly compensated officers that is tax deductible by Kroger. Compensation that is deemed to be “performance-based” is excluded for purposes of the calculation and is tax deductible.Awards under Kroger’s long-term incentive plans, when payable upon achievement of stated performance criteria, should be considered performance-based and the compensation paid under those plans should be tax deductible. Generally, compensation expense related to stock options awarded to the CEO and the next four most highly compensated officers should be deductible. On the other hand, Kroger’s awards of restricted stock that vest solely upon the passage of time and are not performance-based. As a result, compensation expense for those awards to the CEO and the next four most highly compensated officers would not be deductible.

         Although Kroger’s bonus plans are not discretionary but rather rely on performance criteria, these plans have not been approved by shareholders in the past. As a result, they currently do not satisfy the Internal Revenue Code’s requirements for deductibility. At the 2007 annual meeting of shareholders Kroger is submitting for approval of shareholders (see Item No. 2 below) its cash bonus plan. If approved by shareholders, bonuses paid under the plan to the CEO and the next four most highly compensated officers will be deductible by Kroger. In Kroger’s case, this group of individuals is not identical to the group of named executive officers.

    23



         Kroger’s policy is, primarily, to design and administer compensation plans that support the achievement of long-term strategic objectives and enhance shareholder value. Where it is material and supports Kroger’s compensation philosophy, the Committee also will attempt to maximize the amount of compensation expense that is deductible by Kroger.

    COMPENSATION COMMITTEE REPORT

         The Compensation Committee has reviewed and discussed with management of the Company the Compensation Discussion and Analysis contained in this proxy statement. Based on its review and discussions with management, the Compensation Committee has recommended to the Company’s Board of Directors that the Compensation Discussion and Analysis be included in the Company’s proxy statement and incorporated by reference into its annual report on Form 10-K.

    Compensation Committee:

         John T. LaMacchia, Chair 

         Robert D. Beyer

         John L. Clendenin

         Jorge P. Montoya

         Clyde R. Moore

         James A. Runde

    24



    SUMMARY COMPENSATION TABLE

         The following table shows the compensation of the Chief Executive Officer, Chief Financial Officer and each of the Company’s three most highly compensated executive officers other than the CEO and CFO (the “named executive officers”) during fiscal 2006. Fiscal year 2006 consisted of 53 weeks.

    SUMMARY COMPENSATION TABLE
           Change in   
      ��    Pension   
           Value and   
           Nonqualified   
          Non-EquityDeferred   
        Stock  Option Incentive Plan  Compensation  All Other 
    Name and Principal  Salary Bonus Awards  Awards CompensationEarnings CompensationTotal 
    Position Year  ($)  ($)  ($) ($) ($) ($) ($) ($) 
           (1) (1) (2) (3) (4)  
    David B. Dillon            
           Chairman and CEO 2006  $1,155,991   —  $519,160 $3,311,870  $2,116,770  $1,008,309  $142,437 $8,254,537 
     
    J. Michael Schlotman           
           Senior Vice             
           President and CFO 2006 $ 499,099 — $97,835 $339,653 $635,031   $256,221  $31,819$1,859,658 
     
    W. Rodney McMullen           
           Vice Chairman 2006 $ 809,969 — $195,956 $794,327 $1,340,621  $360,184  $44,530$3,545,587 
     
    Don W. McGeorge           
           President and COO 2006 $ 809,969 — $195,956 $811,355 $1,340,621  $698,272  $83,891$3,940,064 
     
    Donald E. Becker           
           Executive Vice           
           President 2006 $ 575,413 — $533,782 $576,090 $767,496  $711,031  $87,552$3,251,364 
    ____________________

    (1)This amount represents the dollar amount recognized for financial statement reporting purposes with respect to the fiscal year in accordance with FAS 123(R). See discussion of the assumptions made in the valuation in Note 10 to the financial statements in the Company’s Form 10-K filed with the SEC on April 4, 2007. Expense excludes 6.5% estimate of forfeitures, but includes an acceleration of expense for options granted to those reaching age 55 with at least five years of service. The named executive officers had no forfeitures in 2006.
    (2)The Compensation Committee awarded a 141.118% payout for the executive officers including the named executive officers, in accordance with the terms of the 2006 performance-based cash bonus program.
    (3)All amounts are attributable to change in pension value. During 2006, pension values increased significantly primarily due to increases in final average earnings used in determining pension benefits. Since the benefits are based on final average earnings and service, the effect of the final average earnings increase is larger for those with longer service. Please refer to the Pension Benefits table for further information regarding credited service. The Company does not provide any above-market or preferential earnings on nonqualified deferred compensation.
    (4)These amounts include the reimbursement of life insurance premiums in the amounts of $69,435, $16,745, $22,221, $44,213 and $43,187 for Mr. Dillon, Mr. Schlotman, Mr. McMullen, Mr. McGeorge and Mr. Becker, respectively. These amounts also include reimbursement for the tax effects of paying such premiums in the amounts of $43,321, $9,704, $13,438, $25,761 and $26,945 for Mr. Dillon, Mr. Schlotman, Mr. McMullen, Mr. McGeorge and Mr. Becker, respectively. These amounts further include reimbursement for the tax effects of participation in a nonqualified retirement plan

    25



    in the amounts of $16,885, $5,370, $8,871, $13,649, and $16,931 for Mr. Dillon, Mr. Schlotman, Mr. McMullen, Mr. McGeorge, and Mr. Becker, respectively. For Mr. Dillon and Mr. Becker these amounts also include the value of financial planning services in the amounts of $4,500 and $489, respectively. Reimbursement for financial planning services has been discontinued in 2007. Excluded from these totals is income imputed to the named executive officer when accompanied on our aircraft during business travel by non-business travelers. These amounts for Mr. Dillon and Mr. McGeorge, calculated using the applicable terminal charge and Standard Industry Fare Level (SIFL) mileage rates, were $8,296 and $268, respectively. The other named executive officers had no such imputed income for 2006. Separately, we require that officers who make personal use of our aircraft reimburse us for the full amount of the variable cost associated with the operation of the aircraft on such flights in accordance with a time-sharing arrangement consistent with FAA regulations.

    Kroger historically has paid incentive compensation to its named executive officers based on the extent to which objectives established by the Committee are achieved. This compensation has been referred to as “bonus” in prior year proxy statements, but is now categorized as “non-equity incentive plan compensation.”The amounts shown above as non-equity incentive plan compensation reflect the compensation earned in 2006 and payable in 2007. Kroger and Mr. Dillon were parties to a five-year employment agreement that expired on November 30, 2006 and was not renewed. Restricted stock awards were granted under a long-term incentive plan, and restrictions on those shares lapse with the passage of time.

    26



    GRANTSOF PLAN-BASED AWARDS

         The following table provides information about equity and non-equity awards granted to the named executive officers in 2006:

    2006 GRANTS OF PLAN-BASED AWARDS
         All All Other     
         Other Option     
       Estimated  Stock Awards:     
       Possible Payouts EstimatedAwards: Number     
       Under Future Payouts  Number of Exercise   Grant 
       Non-Equity Under Equityof Securities or Base   Date Fair 
       Incentive Plan Incentive PlanShares Under- Price of  Closing  Value of 
       Awards Awardsof Stock lying Option Market  Stock and 
     Grant  Target Targetor Units Options Awards Price  Option 
    Name Date     ($)    (#)    (#)     (#)     ($/Sh)    ($/Sh)     Awards 
       (1)   (4)   
    David B. Dillon 1/29/2006 $1,500,000         
     5/4/2006   120,000(2)      $2,392,800 
     5/4/2006   240,000(3)   $19.94 $20.04 $1,658,064 
    J. Michael Schlotman 1/29/2006 $ 450,000          
     5/4/2006    10,000(2)     $ 199,400 
     5/4/2006    20,000(3)    $19.94 $20.04 $ 138,172 
    W. Rodney McMullen 1/29/2006 $ 950,000        
     5/4/2006    30,000(2)     $ 598,200 
     5/4/2006    60,000(3)   $19.94 $20.04 $ 414,516 
    Don W. McGeorge 1/29/2006 $ 950,000        
     5/4/2006    30,000(2)     $ 598,200 
     5/4/2006    60,000(3)   $19.94 $20.04 $ 414,516 
    Donald E. Becker 1/29/2006 $ 543,868        
     5/4/2006    12,500(2)     $ 249,250 
     5/4/2006    25,000(3)   $19.94 $20.04 $ 172,715 
    ____________________

    (1)These amounts represent the bonus base or potential of the respective named executive officer under the Company’s 2006 performance-based cash bonus program. As shown in the Summary Compensation table, actual payout was 141.118% of the bonus base of each named executive officer for 2006.
    (2)This amount represents the number of restricted shares awarded under The Kroger Co. 2005 Long- Term Incentive Plan.
    (3)This amount represents the number of stock options granted under The Kroger Co. 2005 Long-Term Incentive Plan.
    (4)Options under The Kroger Co. 2005 Long-Term Incentive Plan are granted at fair market value of Kroger common stock on the date of the grant. Fair market value was defined as the average of the high and low trading prices of Kroger stock on the date of the grant.

    The Compensation Committee of the Board of Directors, and the independent members of the Board in the case of the CEO, established bonus bases, shown in this table as “target” amounts, for the non-equity incentive plan awards for the named executive officers. Amounts were payable to the extent that performance met specific objectives established at the beginning of the year. As described in the Compensation Discussion and Analysis, actual earnings can exceed the target amounts if performance exceeds the thresholds. Restrictions on restricted stock awards made to the named executive officers lapse in equal amounts on each of the five anniversaries of the date the award is made, as long as the officer is then in our employ. Any dividends declared on Kroger common stock are payable on restricted stock.

    27



    Non-qualified stock options granted to the named executive officers vest in equal amounts on each of the five anniversaries of the date of grant. Those options were granted at the fair market value of Kroger common stock on the date of the grant. Options are granted only on one of the pre-established regularly scheduled Board meeting dates.

    OUTSTANDING EQUITYAWARDSAT FISCAL YEAR-END

         The following table discloses outstanding equity-based incentive compensation awards for the named executive officers as of the end of fiscal year 2006. Each outstanding award is shown separately. Option awards include performance-based nonqualified stock options. The vesting schedule for each award is described in the footnotes to this table.

    OUSTANDING EQUITY AWARDS AT 2006 FISCAL YEAR-END
     Option AwardsStock Awards
            Equity 
           Equity Incentive 
           Incentive Plan 
           Plan Awards: 
           Awards: Market 
            Number or Payout 
       Equity   of Value of 
       Incentive   Unearned Unearned 
       Plan Awards:  Market Shares, Shares, 
     Number ofNumber ofNumber of  NumberValue of Units or Units or 
     SecuritiesSecuritiesSecurities  of SharesShares or Other Other 
     UnderlyingUnderlyingUnderlying  or Units ofUnits of Rights Rights 
     UnexercisedUnexercised UnexercisedOption Stock That  Stock That That That 
    OptionsOptionsUnearnedExerciseOptionHave NotHave Not Have Not Have Not 
     (#)(#)OptionsPrice ExpirationVested Vested Vested Vested 
    Name     Exercisable    Unexercisable    (#)    ($)    Date    (#)    ($)     (#)     ($) 
    David B. Dillon            
     30,000    $13.44 5/15/2007120,000(11) $3,102,000    
     35,000    $22.23 4/16/2008      
        35,000(6) $22.23 4/16/2008     
     50,000    $27.17 5/27/2009   
       50,000(7)$27.17  5/27/2009    
     175,000    $16.59 2/11/2010   
       35,000(8)$16.59 2/11/2010   
     35,000    $24.43 5/10/2011   
        35,000(9)$24.43 5/10/2011   
     56,000  14,000(1)  $23.00 5/9/2012   
       35,000(10)$23.00 5/9/2012   
     168,000  42,000(2)  $14.93 12/12/2012   
     120,000  180,000(3)  $17.31 5/6/2014   
     60,000  240,000(4)  $16.39 5/5/2015   
      240,000(5)  $19.94 5/4/2016   

    28



    OUSTANDING EQUITY AWARDS AT 2006 FISCAL YEAR-END
     Option AwardsStock Awards
            Equity 
           Equity Incentive 
           Incentive Plan 
           Plan Awards: 
           Awards: Market 
            Number or Payout 
       Equity   of Value of 
       Incentive   Unearned Unearned 
       Plan Awards:  Market Shares, Shares, 
     Number ofNumber ofNumber of  NumberValue of Units or Units or 
     SecuritiesSecuritiesSecurities  of SharesShares or Other Other 
     UnderlyingUnderlyingUnderlying  or Units ofUnits of Rights Rights 
    UnexercisedUnexercised UnexercisedOption Stock ThatStock That That That 
     OptionsOptionsUnearnedExerciseOptionHave NotHave Not Have Not Have Not 
     (#)(#)OptionsPrice ExpirationVestedVested Vested Vested 
    Name     Exercisable    Unexercisable    (#)    ($)    Date     (#)    ($)     (#)     ($) 
    J. Michael Schlotman               
     9,000      $22.23  4/16/2008 8,000(12) $206,800  
         9,000(6)  $22.23 4/16/2008 10,000(11) $258,500 
     10,000       $27.17 5/27/2009   
        10,000(7) $27.17 5/27/2009   
      50,000     $16.59 2/11/2010   
        10,000(8) $16.59 2/11/2010   
     10,000     $24.43 5/10/2011   
       10,000(9) $24.43 5/10/2011   
     16,000  4,000(1)  $23.00  5/9/2012   
       10,000(10) $23.00 5/9/2012   
     48,000   12,000(2)  $14.93 12/12/2012   
     16,000  24,000(3)  $17.31 5/6/2014   
     8,000  32,000(4)  $16.39 5/5/2015   
      20,000(5)  $19.94 5/4/2016   
     
    W. Rodney McMullen         
     25,000    $13.44 5/15/200730,000(11) $775,500  
     25,000    $13.44 5/15/2007   
     30,000    $22.23 4/16/2008   
       30,000(6) $22.23 4/16/2008   
     30,000    $27.17 5/27/2009   
       30,000(7) $27.17 5/27/2009   
     125,000    $16.59 2/11/2010   
       25,000(8) $16.59 2/11/2010   
     25,000    $24.43 5/10/2011   
       25,000(9) $24.43 5/10/2011   
     40,000  10,000(1)  $23.00 5/9/2012   
       25,000(10) $23.00 5/9/2012   
     120,000  30,000(2)  $14.93 12/12/2012   
     30,000  45,000(3)  $17.31 5/6/2014   
     15,000  60,000(4)  $16.39 5/5/2015   
      60,000(5)  $19.94 5/4/2016   

    29



    OUSTANDING EQUITY AWARDS AT 2006 FISCAL YEAR-END
     Option AwardsStock Awards
             Equity
            EquityIncentive
            IncentivePlan
            PlanAwards:
            Awards:Market
            Numberor Payout
       Equity      ofValue of
        Incentive      UnearnedUnearned  
       Plan Awards:   MarketShares,Shares,
     Number of Number ofNumber of  NumberValue ofUnits orUnits or
     Securities SecuritiesSecurities  of SharesShares orOtherOther
     Underlying UnderlyingUnderlying  or Units ofUnits ofRightsRights
     UnexercisedUnexercised Unexercised Option Stock That Stock ThatThatThat
     Options  OptionsUnearned ExerciseOptionHave NotHave NotHave NotHave Not
     (#) (#)OptionsPriceExpirationVestedVestedVestedVested
    Name    Exercisable    Unexercisable     (#)    ($)    Date     (#)    ($)    (#)     ($)
    Don W. McGeorge               
      18,000     $13.44  5/15/2007  30,000(11)  $ 775,500   
     18,000     $13.44 5/15/2007     
     30,000    $14.77 7/17/2007     
     22,500     $22.23 4/16/2008     
        22,500(6) $22.23 4/16/2008     
     30,000    $27.17 5/27/2009     
       30,000(7) $27.17 5/27/2009     
      125,000    $16.59 2/11/2010     
       25,000(8) $16.59 2/11/2010     
     25,000    $24.43 5/10/2011     
        25,000(9) $24.43 5/10/2011     
     40,000  10,000(1)  $23.00 5/9/2012     
       25,000(10) $23.00 5/9/2012     
     120,000  30,000(2)  $14.93 12/12/2012     
     30,000  45,000(3)  $17.31 5/6/2014     
     15,000  60,000(4)  $16.39 5/5/2015     
      60,000(5)  $19.94 5/4/2016     
     
    Donald E. Becker          
     18,000     $13.44 5/15/2007 5,000(13) $ 129,250   
     18,000    $22.23 4/16/2008 40,000(14) $1,034,000  
     0   18,000(6) $22.23 4/16/2008 12,500(11) $ 323,125  
     18,000    $27.17 5/27/2009     
     0   18,000(7) $27.17 5/27/2009     
     75,000     $16.59 2/11/2010     
     0   15,000(8) $16.59 2/11/2010     
     12,500    $24.43 5/10/2011     
     0   12,500(9) $24.43 5/10/2011     
     21,333  5,334(1)  $23.00 5/9/2012     
     0   13,333(10) $23.00 5/9/2012     
     64,000  16,000(2)  $14.93 12/12/2012     
     16,000  24,000(3)  $17.31 5/6/2014     
     8,000  32,000(4)  $16.39 5/5/2015     
     0  25,000(5)  $19.94 5/4/2016     

    30




    ____________________

    (1)Stock options vest on 5/9/2007.
    (2)Stock options vest on 12/12/2007.
    (3)Stock options vest at the rate of 20%/year with vesting dates of 5/6/2007, 5/6/2008 and 5/6/2009.
    (4)Stock options vest at the rate of 20%/year with vesting dates of 5/5/2007, 5/5/2008, 5/5/2009 and 5/5/2010.
    (5)Stock options vest at a rate of 20%/year with vesting dates of 5/4/2007, 5/4/2008, 5/4/2009, 5/4/2010 and 5/4/2011.
    (6)Performance stock options vest on 10/16/2007 or earlier if performance criteria is satisfied prior to such date.
    (7)Performance stock options vest on 11/27/2008 or earlier if performance criteria is satisfied prior to such date.
    (8)Performance stock options vest on 8/11/2009 or earlier if performance criteria is satisfied prior to such date.
    (9)Performance stock options vest on 11/10/2010 or earlier if performance criteria is satisfied prior to such date.
    (10)Performance stock options vest on 11/9/2011 or earlier if performance criteria is satisfied prior to such date.
    (11)Restricted stock vests at the rate of 20%/year with vesting dates of 5/4/2007, 5/4/2008, 5/4/2009, 5/4/2010 and 5/4/2011.
    (12)Restricted stock vests on 5/9/2007.
    (13)Restricted stock vests on 9/17/2007.
    (14)Restricted stock vests as follows: 10,000 shares on 12/10/2007 and 30,000 shares on 12/8/2008.

         From 1997 through 2002, Kroger granted to the named executive officers performance-based nonqualified stock options. These options, having a term of ten years, vest six months prior to their date of expiration unless earlier vesting because Kroger’s stock price has achieved the specified annual rate of appreciation set forth in the stock option agreement. That rate ranged from 13 to 16%. To date, only the performance-based options granted in 1997 have vested.

    OPTION EXERCISESAND STOCK VESTED

         The following table provides the stock options exercised and restricted stock vested during 2006.

    2006 OPTION EXERCISE AND STOCK VESTED
     Option AwardsStock Awards
     Number ofValueNumber ofValue 
     Shares AcquiredRealized onShares AcquiredRealized on 
     on ExerciseExerciseon VestingVesting 
    Name(#)     ($)     (#)     ($) 
    David B. Dillon 30,000$247,95075,000$1,555,500
    J. Michael Schlotman 18,000$148,70315,800$326,725
    W. Rodney McMullen 60,000$607,80050,000$1,037,000
    Don W. McGeorge 24,000$268,87450,000$1,037,000
    Donald E. Becker 66,000$686,68012,500$287,925

         Options granted under our various long-term incentive plans have a ten-year life and expire if not exercised within that ten year period.

    31



    PENSION BENEFITS

         The following table provides information on pension benefits as of 2006 year-end for the named executive officers.

    2006 PENSION BENEFITS
      NumberPresentPayments
      of YearsValue ofDuring
      Credited Accumulated Last Fiscal
      ServiceBenefitYear
    NamePlan Name(#)     ($)     ($) 
    David B. Dillon The Kroger Consolidated Retirement Benefit Plan 11 $214,080 $0 
     The Kroger Co. Excess Benefit Plan 11  $ 1,690,013 $0 
     Dillon Companies, Inc. Excess Benefit Pension Plan 20  $1,106,543 $0 
    J. Michael Schlotman The Kroger Consolidated Retirement Benefit Plan 21 $280,755 $0 
     The Kroger Co. Excess Benefit Plan 21 $560,846 $0 
    W. Rodney McMullen The Kroger Consolidated Retirement Benefit Plan 21 $247,540 $0 
     The Kroger Co. Excess Benefit Plan 21  $1,278,621 $0 
    Don W. McGeorge The Kroger Consolidated Retirement Benefit Plan 27 $426,158 $0 
     The Kroger Co. Excess Benefit Plan 27  $2,182,611 $0 
    Donald E. Becker The Kroger Consolidated Retirement Benefit Plan 32 $714,465 $0 
     The Kroger Co. Excess Benefit Plan 32  $1,982,339 $0 

    The named executive officers all participate in The Kroger Consolidated Retirement Benefit Plan (the “Consolidated Plan”), which is a qualified defined benefit pension plan. The Consolidated Plan generally determines accrued benefits using a cash balance formula, but retains benefit formulas applicable under prior plans for certain “grandfathered participants” who were employed by Kroger on December 31, 2000.Each of the named executive officers is eligible for these grandfathered benefits under the Consolidated Plan. Therefore, their benefits are determined using formulas applicable under prior plans, including the Kroger formula covering service to The Kroger Co. and the Dillon Companies, Inc. Pension Plan formula covering service to Dillon Companies, Inc.

         The named executive officers also are eligible to receive benefits under The Kroger Co. Excess Benefit Plan (the “Kroger Excess Plan”), and Mr. Dillon also is eligible to receive benefits under the Dillon Companies, Inc. Excess Benefit Pension Plan ( the “Dillon Excess Plan”). These plans are collectively referred to as the “Excess Plans.” The Excess Plans are each considered to be nonqualified deferred compensation plans as defined in Section 409A of the Internal Revenue Code (subject to applicable transition rules). The purpose of the Excess Plans is to make up the shortfall in retirement benefits caused by the limitations on benefits to highly compensated individuals under qualified plans in accordance with the Internal Revenue Code.

         Each of the named executive officers will receive benefits under the Consolidated Plan and the Excess Plans, determined as follows:

    • 1½% times years of credited service multiplied by the average of the highest five consecutive years of total earnings during the last ten calendar years of employment, reduced by 1¼% times years of credited service multiplied by the primary social security benefit;
    • normal retirement age is 65;
    • unreduced benefits are payable beginning at age 62; and

    32



    • benefits payable between ages 55 and 62 will be reduced by 1/3 of one percent for each of the first 24 months and by ½ of one percent for each of the next 60 months by which the commencement of benefits precedes age 62.

         Although participants generally receive credited service beginning at age 21, those participants who commenced employment prior to 1986, including all of the named executive officers, began to accrue credited service after attaining age 25. In the event of a termination of employment, Mr. Becker and Mr. Dillon currently are eligible for a reduced early retirement benefit, as they each have attained age 55.

         Mr. Dillon also participates in the Dillon Employees’ Profit Sharing Plan (the “Dillon Plan”). The Dillon Plan is a qualified defined contribution plan under which Dillon Companies, Inc. and its participating subsidiaries may choose to make discretionary contributions each year that are then allocated to each participant’s account. Participation in the Dillon Plan was frozen effective January 1, 2001. Participants in the Dillon Plan elect from among a number of investment options and the amounts in their accounts are invested and credited with investment earnings in accordance with their elections. Prior to July 1, 2000, participants could elect to make voluntary contributions under the Dillon Plan, but that option was discontinued effective as of July 1, 2000. Participants can elect to receive their Dillon Plan benefit in the form of either a lump sum payment or installment payments.

         Due to offset formulas contained in the Consolidated Plan and the Dillon Excess Plan, Mr. Dillon’s accrued benefit under the Dillon Plan offsets a portion of the benefit that would otherwise accrue for him under those plans for his service with Dillon Companies, Inc. Although benefits that accrue under defined contribution plans are not reportable under the accompanying table, we have added narrative disclosure of the Dillon Plan because of the offsetting effect that benefits under that plan has on benefits accruing under the Consolidated Plan and the Dillon Excess Plan.

    NONQUALIFIED DEFERRED COMPENSATION

         The following table provides information on non-qualified deferred compensation for the named executive officers for 2006.

    2006 NONQUALIFIED DEFERRED COMPENSATION
     ExecutiveRegistrant AggregateAggregateAggregate
     ContributionsContributions EarningsWithdrawals/Balance at
     in Last FYin Last FY in Last FYDistributionsLast FYE
    Name ($)     ($)      ($)     ($)      ($)
    David B. Dillon $0  $0 $36,923 $0 $523,545
    J. Michael Schlotman $0  $0 $0 $0 $0
    W. Rodney McMullen $97,578(1) $0  $193,796 $0 $2,797,375
    Don W. McGeorge $0  $0 $13,362 $0 $165,313
    Donald E. Becker $0  $0 $0 $0 $0
    ____________________

    (1)This amount was included in the executive’s base salary in the Summary Compensation table.

    33



         Eligible participants may elect to defer up to 100% of the amount of their salary that exceeds the sum of the FICA wage base and pre-tax insurance and other Internal Revenue Code Section 125 plan deductions, as well as 100% of their annual bonus compensation. Deferral account amounts are credited with interest at the rate representing Kroger’s cost of 10-year debt as determined by Kroger’s CEO prior to the beginning of each deferral year. The interest rate established for deferral amounts for each deferral year will be applied to those deferral amounts for all subsequent years until the deferred compensation is paid out. Participants can elect to receive lump sum distributions or quarterly installments for periods up to ten years. Participants also can elect between lump sum distributions and quarterly installments to be received by designated beneficiaries if the participant dies before distribution of deferred compensation is completed.

    DIRECTOR COMPENSATION

         The following table describes the fiscal year 2006 compensation for non-employee directors. Employee directors receive no compensation for their Board service. Fiscal year 2006 consisted of 53 weeks.

    2006 DIRECTOR COMPENSATION
         Change in   
         Pension   
         Value and   
     Fees   Nonqualified   
     Earned  Non-EquityDeferred   
     or PaidStock Incentive PlanCompensation All Other  
     in Cash     AwardsOptionCompensationEarnings Compensation  Total 
    Name ($) ($) Awards($) ($) ($)  ($)  ($) 
                 (3)           (4)                 (13)     (14)      
    Reuben V. Anderson$85,482$54,988(5)$74,262(7) $0 $6,300  $108  $221,140
    Robert D. Beyer$88,430$54,988(5)$35,516(8) $0 N/A $108 $ 179,042
    John L. Clendenin$76,233$54,988(5)$74,262(7) $0$5,000 $108 $ 210,591
    John T. LaMacchia$88,430$54,988(5)$74,262(7) $0$7,900 $108 $ 225,688
    David B. Lewis$98,594$54,988(5)$72,504(9) $0N/A $108 $ 226,194
    Clyde R. Moore$86,397$54,988(5)$38,017(10) $0$7,200 $108 $ 186,710
    Katherine D. Ortega$88,430$54,988(5)$74,262(7) $0$6,700 $108 $ 224,488
    Susan M. Phillips$86,315$54,988(5)$30,057(11) $0N/A $108 $ 171,468
    Steven R. Rogel$98,594$54,988(5)$74,262(8) $0N/A $108 $ 227,952
    James Runde(1)$31,866$4,576(6)$1,342(12) $0N/A $0 $ 37,784
    Ronald L. Sargent(2)$12,620$4,576(6)$1,271(12) $0N/A $0 $ 18,467
    Bobby S. Shackouls$86,397$54,988(5)$74,262(8) $0N/A $108 $ 215,755
    ____________________

    (1)Board member as of September 1, 2006.
    (2)Board member as of December 7, 2006.
    (3)This amount represents the dollar amount recognized for financial statement reporting purposes with respect to the fiscal year in accordance with FAS 123(R). See discussion of the assumptions made in the valuation in Note 10 to the financial statements in the Company’s Form 10-K filed with the SEC on April 4, 2007. Expense excludes 6.5% estimate of forfeitures, but includes an acceleration of expense for options granted to those reaching age 55 with at least five years of service. The grant date fair value of the annual award of 2,500 shares of restricted stock to each Board member on December 7, 2006 was $57,750.
    (4)This amount represents the dollar amount recognized for financial statement reporting purposes with respect to the fiscal year in accordance with FAS 123(R). See discussion of the assumptions made in the valuation in Note 10 to the financial statements in the Company’s Form 10-K filed with the SEC on April 4, 2007. The grant date fair value of the annual award of 5,000 stock options to each Board member on December 7, 2006 was $40,017.

    34



    (5)Aggregate stock awards outstanding at fiscal year end was 3,750 shares.
    (6)Aggregate stock awards outstanding at fiscal year end was 2,500 shares.
    (7)Aggregate stock options outstanding at fiscal year end was 41,000 shares.
    (8)Aggregate stock options outstanding at fiscal year end was 33,000 shares.
    (9)Aggregate stock options outstanding at fiscal year end was 25,000 shares.
    (10)Aggregate stock options outstanding at fiscal year end was 37,000 shares.
    (11)Aggregate stock options outstanding at fiscal year end was 20,000 shares.
    (12)Aggregate stock options outstanding at fiscal year end was 5,000 shares.
    (13)These amounts only reflect the change in pension value for the applicable directors. Only those directors elected to the Board prior to July 17, 1997 are eligible to participate in the outside director retirement plan. The Company does not provide above-market or preferential earnings on nonqualified deferred compensation.
    (14)This amount reflects the cost to the Company per director for providing accidental death and disability insurance coverage for outside directors. These premiums are paid on an annual basis in February.

         Each non-employee director receives an annual retainer of $75,000. The chair of each committee receives an additional annual retainer of $12,000. Each member of the Audit Committee, as well as the director designated as the “Lead Director,” receives an additional annual retainer of $10,000. Each non-employee director also receives annually, at the regularly scheduled meeting held in December, an award of 2,500 shares of restricted stock and 5,000 non-qualified stock options.

         Outside directors first elected prior to July 17, 1997 receive a major medical plan benefit as well as an unfunded retirement benefit. The retirement benefit equals the average cash compensation for the five calendar years preceding retirement. Participants who retire from the Board prior to age 70 will be credited with 50% vesting after five years of service, and 10% for each additional year up to a maximum of 100%. Benefits for participants who retire prior to age 70 begin at the later of actual retirement or age 65.

         We also maintain a deferred compensation plan, in which all non-employee members of the Board are eligible to participate. Participants may defer up to 100% of their cash compensation. They may elect from either or both of the following two alternative methods of determining benefits:

    • interest accrues during the deferral year based on that rate of interest determined at the beginning of the deferral year to equal our cost of ten-year debt; and
    • amounts are credited in “phantom” stock accounts and the amounts in those accounts fluctuate with the price of Kroger common stock.

         In both cases, deferred amounts are paid out only in cash, based on deferral options selected by the participants at the time the deferral elections are made. Participants can elect to have distributions made in a lump sum or in quarterly installments, and may make comparable elections for designated beneficiaries who receive benefits in the event that deferred compensation is not completely paid out upon the death of the participant.

         During 2004, the Corporate Governance Committee retained Mercer Human Resource Consulting to review non-employee director compensation. The consultant determined that Kroger’s non-employee director compensation was significantly below median compensation of non-employee directors at other publicly held U.S. corporations, and therefore not competitive. Based on this evaluation, the Corporate Governance Committee recommended to the Board, and the Board approved, an increase in non-employee director compensation effective as of January 2005. The Board has determined that compensation of non-

    35



    employee directors must be competitive on an on-going basis to attract and retain directors who meet the qualifications for service on Kroger’s Board. Non-employee director compensation will be reviewed from time to time as the Corporate Governance Committee deems appropriate.

    POTENTIAL PAYMENTS UPON TERMINATIONOR CHANGEIN CONTROL

         Kroger has no contracts, agreements, plans or arrangements that in connection with resignation, severance, retirement, termination, or change in control, provide for payments to its named executive officers that are not available generally to salaried employees. Mr. Dillon had an employment agreement that expired on November 30, 2006 and was not renewed. Kroger’s non-discriminatory change in control benefits under The Kroger Co. Employee Protection Plan and under stock option and restricted stock agreements are discussed further in the Compensation Discussion and Analysis section under the “Retirement and other benefits” heading.

    BENEFICIAL OWNERSHIPOF COMMON STOCK

    As of March 8, 2006,February 12, 2007, Kroger’s directors, the named executive officers and the directors and executive officers as a group, beneficially owned shares of Kroger’s common stock as follows:

    Name
    		   
    		Amount and Nature of
    Beneficial Ownership
    Reuben V. Anderson        51,245(1)  
    Donald E. Becker        365,485(2)(7)(11)  
    Robert D. Beyer        47,912(3)  
    John L. Clendenin        56,100(4)  
    David B. Dillon ..        1,580,759(2)(8)(11)  
    Paul W. Heldman        536,883(2)(9)(11)  
    Michael S. Heschel        653,463(2)(11)  
    John T. LaMacchia        61,100(4)  
    David B. Lewis ..        14,000(5)  
    Don W. McGeorge        673,815(2)(10)(11)  
    W. Rodney McMullen        877,079(2)(11)  
    Clyde R. Moore ..        33,100(4)  
    Katherine D. Ortega        58,456(1)  
    Susan M. Phillips        16,500(6)  
    Steven R. Rogel        35,128(3)  
    Bobby S. Shackouls        22,100(3)  
    Directors and Executive Officers as a group (including those named above)        7,055,305(2)(12)(13)  
     
     Amount and Nature
     of

    Name 

    		Beneficial Ownership
    Reuben V. Anderson 58,145(1) 
    Donald E. Becker 376,708(2)(3)(4)
    Robert D. Beyer 54,812(5) 
    John L. Clendenin 63,000(1) 
    David B. Dillon 1,667,446(2)(4)(6) 
    John T. LaMacchia 68,000(1) 
    David B. Lewis 20,500(7) 
    Don W. McGeorge 697,997(2)(4)(8) 
    W. Rodney McMullen 893,320(2)(4) 
    Clyde R. Moore 47,500(9) 
    Katherine D. Ortega 57,356(1) 
    Susan M. Phillips 22,000(10) 
    Steven R. Rogel 42,028(5) 
    James A. Runde 2,500 
    Ronald L. Sargent 4,500 
    J. Michael Schlotman 242,994(2)(4)(11)
    Bobby S. Shackouls 29,000(5) 
    Directors and Executive Officers as a group (including those named above) 6,874,249(2)(12) 

    (1)This amount includes 28,60025,000 shares that represent options that are or become exercisable on or before May 7, 2006.April 13, 2007.

    (2)     This amount includes shares that represent options that are or become exercisable on or before May 7, 2006,April 13, 2007, in the following amounts: Mr. Becker, 260,999;250,833; Mr. Dillon, 696,000; Mr. Heldman, 338,499; Mr. Heschel, 534,000;729,000; Mr. McGeorge, 452,500;473,500; Mr. McMullen, 480,000;465,000; Mr. Schlotman, 167,000; and all directors and executive officers as a group, 4,326,550.3,820,266.

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    (3)This amount includes 12,600 shares that represent options that are or become exercisable on or before May 7, 2006.

    (4)This amount includes 20,600 shares that represent options that are or become exercisable on or before May 7, 2006.

    (5)This amount includes 5,000 shares that represent options that are or become exercisable on or before May 7, 2006.

    (6)This amount includes 2,000 shares that represent options that are or become exercisable on or before May 7, 2006.

    (7)This amount includes 10,228 shares owned by Mr. Becker’s wife and 1,050 shares owned by his children. Mr. Becker disclaims beneficial ownership of these shares.

    (8)(4)This amount includes 219,100 shares owned by Mr. Dillon’s wife and children, and 54,024 shares in his children’s trust. Mr. Dillon disclaims beneficial ownership of these shares.

    (9)This amount includes 320 shares owned by Mr. Heldman’s children. Mr. Heldman disclaims beneficial ownership of these shares.

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    (10)This amount includes 10,063 shares owned by Mr. McGeorge’s wife. Mr. McGeorge disclaims beneficial ownership of these shares.

    (11)The fractional interest resulting from allocations under Kroger’s defined contribution plans has been rounded to the nearest whole number.

    (5)This amount includes 17,000 shares that represent options that are or become exercisable on or before April 13, 2007.
    (6)This amount includes 219,100 shares owned by Mr. Dillon’s wife and children, and 36,016 shares in his children’s trust. Mr. Dillon disclaims beneficial ownership of these shares.
    (7)This amount includes 9,000 shares that represent options that are or become exercisable on or before April 13, 2007.
    (8)This amount includes 10,152 shares owned by Mr. McGeorge’s wife. Mr. McGeorge disclaims beneficial ownership of these shares.
    (9)This amount includes 21,000 shares that represent options that are or become exercisable on or before April 13, 2007
    (10)This amount includes 5,000 shares that represent options that are or become exercisable on or before April 13, 2007.
    (11)This amount includes 2,005 shares owned by Mr. Schlotman’s children. Mr. Schlotman disclaims beneficial ownership of these shares.
    (12)     The figure shown includes an aggregate of 2,005320 additional shares held by, or for the benefit of, the immediate families or other relatives of all directors and executive officers as a group not listed above. In each case the director or executive officer disclaims beneficial ownership of those shares.

    (13)No director or officer owned as much as 1% of the common stock of Kroger. The directors and executive officers as a group beneficially owned 1% of the common stock of Kroger.

         No director or officer owned as much as 1% of the common stock of Kroger. The directors and executive officers as a group beneficially owned 1% of the common stock of Kroger.

         No director or officer owned Kroger common stock pledged as security.

    As of March 8, 2006,February 12, 2007, the following persons reported beneficial ownership of Kroger common stock based on reports on Schedule 13G filed with the Securities and Exchange Commission or other reliable information as follows:

    Name
    		   
    		Address of Beneficial Owner
    		   
    		Amount and
    Nature of
    Ownership
    		   
    		Percentage
    of Class
    AXA Financial, Inc.            1290 Avenue of the Americas
    New York, NY 10104    		        66,138,246          9.1%  
                                              
    Brandes Investment Partners, L.P.            11988 El Camino Real, Suite 500
    San Diego, CA 92130    		        53,100,578          7.3%  
                                          
    Lord, Abbett & Co. LLC            90 Hudson Street
    Jersey City, NJ 07302    		        48,971,337          6.7%  
                                          
    The Kroger Co. Savings Plan            1014 Vine Street
    Cincinnati, OH 45202    		        50,064,465(1)          6.9%  
     
      Amount and  
      Nature of Percentage
                                     Name Address of Beneficial Owner Ownership      of Class
     1290 Avenue of the Americas   
    AXA Financial, Inc. New York, NY 10104 66,457,092 9.4% 
     
    90 Hudson Street    
    Lord, Abbett & Co. LLC Jersey City, NJ 07302 46,202,740 6.5% 
     
    1014 Vine Street    
    The Kroger Co. Savings Plan Cincinnati, OH 45202 40,480,889(1)5.7% 
    ____________________


    (1)     Shares beneficially owned by plan trustees for the benefit of participants in employee benefit plans.

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    SSECTION 16(a)16(A) BENEFICIALOWNERSHIPREPORTINGCOMPLIANCE

    Section 16(a) of the Securities Exchange Act of 1934 requires our officers and directors, and persons who own more than 10% of a registered class of our equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission and the New York Stock Exchange. Those officers, directors and shareholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file.

    Based solely on our review of the copies of forms received by Kroger, or written representations from certain reporting persons that no Forms 5 were required for those persons, we believe that during fiscal year 20052006 all filing requirements applicable to our officers, directors and 10% beneficial owners were timely satisfied, with threetwo exceptions. Mr. Michael EllisJon C. Flora filed a Form 4 one day late5 reporting a transactionstock sale that inadvertently was not reported in 2006, and Mr. Carver L. Johnson filed a Form 5 reporting three transactions with Krogerthe Company in which shares were used to pay a tax liability associated with restricted stock. Mr. Paul J. Scutt filed

    RELATEDPERSONTRANSACTIONS

    Pursuant to ourStatement of Policy with Respect to Related Person Transactionsand the rules of the SEC, Kroger has no related person transaction to disclose for purposes of this proxy statement. Director independence is discussed above under the heading “Information Concerning the Board of Directors.” Kroger’s policy on related person transactions is as follows:

    STATEMENTOFPOLICY

    WITH    RESPECTTO

    RELATEDPERSONTRANSACTIONS

    A.   INTRODUCTION

         It is the policy of Kroger’s Board of Directors that any Related Person Transaction may be consummated or may continue only if the Audit Committee approves or ratifies the transaction in accordance with the guidelines set forth in this policy. The Board of Directors has determined that the Audit Committee of the Board is best suited to review and approve Related Person Transactions.

         For the purposes of this policy, a Form 4 nine days late reporting“Related Person” is:

    • any person who is, or at any time since the beginning of Kroger’s last fiscal year was, a stock sale. Ms. M. Marnette Perry fileddirector or executive officer of Kroger or a Form 5 reportingnominee to become a restricted stock awarddirector of Kroger;
    • any person who is known to be the beneficial owner of more than 5% of any class of Kroger’s voting securities; and
    • any immediate family member of any of the foregoing persons, which means any child, stepchild, parent, stepparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law of the director, executive officer, nominee or more than 5% beneficial owner, and any person (other than a tenant or employee) sharing the household of such director, executive officer, nominee or more than 5% beneficial owner.

         For the purposes of this policy, a “Related Person Transaction” is a transaction, arrangement or relationship (or any series of similar transactions, arrangements or relationships) since the beginning of Kroger’s last fiscal year in which Kroger (including any of its subsidiaries) was, is or will be a participant and the amount involved exceeds $120,000, and in which any Related Person had, has or will have a direct or indirect material interest (other than solely as a result of being a director or a less than 10 percent beneficial owner of another entity).

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         Notwithstanding the foregoing, the Audit Committee has reviewed the following types of transactions and has determined that inadvertently waseach type of transaction is deemed to be pre-approved, even if the amount involved exceeds $120,000.

    1.Certain Transactions with Other Companies. Any transaction for property or services in the ordinary course of business involving payments to or from another company at which a Related Person’s only relationship is as an employee (other than an executive officer), director, or beneficial owner of less than 10% of that company’s shares, if the aggregate amount involved in any fiscal year does not exceed the greater of $1,000,000 or 2 percent of that company’s annual consolidated gross revenues.
    2.Certain Company Charitable Contributions. Any charitable contribution, grant or endowment by Kroger (or one of its foundations) to a charitable organization, foundation, university or other not for profit organization at which a Related Person’s only relationship is as an employee (other than an executive officer) or as a director, if the aggregate amount involved does not exceed $250,000 or 5 percent, whichever is lesser, of the charitable organization’s latest publicly available annual consolidated gross revenues.
    3.Transactions where all Shareholders Receive Proportional Benefits. Any transaction where the Related Person’s interest arises solely from the ownership of Kroger common stock and all holders of Kroger common stock received the same benefit on a pro rata basis.
    4.Executive Officer and Director Compensation. (a) Any employment by Kroger of an executive officer if the executive officer’s compensation is required to be reported in Kroger’s proxy statement, (b) any employment by Kroger of an executive officer if the executive officer is not an immediate family member of a Related Person and the Compensation Committee approved (or recommended that the Board approve) the executive officer’s compensation, and (c) any compensation paid to a director if the compensation is required to be reported in Kroger’s proxy statement.
    5.Other Transactions. (a) Any transaction involving a Related Person where the rates or charges involved are determined by competitive bids, (b) any transaction with a Related Person involving the rendering of services as a common or contract carrier, or public utility, at rates or charges fixed in conformity with law or governmental authority, or (c) any transaction with a Related Person involving services as a bank depositary of funds, transfer agent, registrar, trustee under a trust indenture or similar services.

    B.   AUDIT COMMITTEE APPROVAL

         In the event management becomes aware of any Related Person Transactions that are not reporteddeemed pre-approved under paragraph A of this policy, those transactions will be presented to the Committee for approval at the next regular Committee meeting, or where it is not practicable or desirable to wait until the next regular Committee meeting, to the chair of the Committee (who will possess delegated authority to act between Committee meetings) subject to ratification by the Committee at its next regular meeting. If advance approval of a Related Person Transaction is not feasible, then the Related Person Transaction will be presented to the Committee for ratification at the next regular Committee meeting, or where it is not practicable or desirable to wait until the next regular Committee meeting, to the Chair of the Committee for ratification, subject to further ratification by the Committee at its next regular meeting.

    39



         In connection with each regular Committee meeting, a summary of each new Related Person Transaction deemed pre-approved pursuant to paragraphs A(1) and A(2) above will be provided to the Committee for its review.

         If a Related Person Transaction will be ongoing, the Committee may establish guidelines for management to follow in 2003.

    its ongoing dealings with the Related Person. Thereafter, the Committee, on at least an annual basis, will review and assess ongoing relationships with the Related Person to see that they are in compliance with the Committee’s guidelines and that the Related Person Transaction remains appropriate.

         The Committee (or the chair) will approve only those Related Person Transactions that are in, or are not inconsistent with, the best interests of Kroger and its shareholders, as the Committee (or the chair) determines in good faith in accordance with its business judgment.

         No director will participate in any discussion or approval of a Related Person Transaction for which he or she is a Related Person except that the director will provide all material information about the Related Person Transaction to the Committee.

    C.   D32ISCLOSURE

         Kroger will disclose all Related Person Transactions in Kroger’s applicable filings as required by the Securities Act of 1933, the Securities Exchange Act of 1934 and related rules.

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    AUDIT COMMITTEE REPORT

    AUDIT COMMITTEE REPORT

    The primary function of the Audit Committee is to represent and assist the Board of Directors in fulfilling its oversight responsibilities regarding Kroger’sthe Company’s financial reporting and accounting practices including the integrity of Kroger’sthe Company’s financial statements; Kroger’sthe Company’s compliance with legal and regulatory requirements; the independent auditor’spublic accountants’ qualifications and independence; the performance of Kroger’sthe Company’s internal audit function and independent auditors;public accountants; and the preparation of this report that SEC rules require be included in Kroger’sthe Company’s annual proxy statement.The Audit Committee performs this work under the guidance ofpursuant to a written charter approved by the Board of Directors. The Audit Committee charter most recently was revised during fiscal 2006. The complete text of2007 and is available on the revised charter is reproduced in an appendix to this proxy statement. Company’s corporate website at http://www.thekrogerco.com/documents/GuidelinesIssues.pdf.The Audit Committee has implemented procedures to ensure thatassist it during the course of each fiscal year it devotesin devoting the attention that is necessary orand appropriate to each of the matters assigned to it under the Committee’s charter. The Audit Committee held 11nine meetings during fiscal year 2005.2006. The Audit Committee meets separately at least quarterly with Kroger’sthe Company’s internal auditor and PricewaterhouseCoopers LLP, the Company’s independent public accountants, without management present, to discuss the results of their audits, their evaluations of Kroger’sthe Company’s internal controls over financial reporting, and the overall quality of Kroger’sthe Company’s financial reporting. The Audit Committee also meets separately at least quarterly with Kroger’sthe Company’s Chief Financial Officer and General Counsel. Following these separate discussions, the Audit Committee meets in executive session.

    Kroger management     Management of the Company is responsible for the preparation and presentation and integrity of Kroger’sthe Company’s financial statements, the Company’s accounting and financial reporting principles and internal controls, and procedures that are reasonably designed to assure compliance with accounting standards and applicable laws and regulations. The independent public accountants are responsible for auditing Kroger’sthe Company’s financial statements and expressing opinions as to their conformity with generally accepted accounting principles and on management’s assessment of the effectiveness of Kroger’sthe Company’s internal control over financial reporting. In addition the independent public accountants will express their own opinion on the effectiveness of Kroger’sthe Company’s internal control over financial reporting.

    In the performance of its oversight function, the Audit Committee has reviewed and discussed with management and Kroger’s independent public accountants, PricewaterhouseCoopers LLP the audited financial statements for the year ended January 28, 2006,February 3, 2007, management’s assessment of the effectiveness of Kroger’sthe Company’s internal control over financial reporting as of February 3, 2007, and PricewaterhouseCoopers’ evaluation of Kroger’sthe Company’s internal control over financial reporting.reporting as of that date. The Audit Committee has also discussed with the independent public accountants the matters required to be discussed by Statement on Auditing Standards No. 61, “Communication With Audit Committees.Committees,”
    as amended (AICPA, Professional Standards, Vol. 1. AU section 380), as adopted by the Public Company Accounting Oversight Board in Rule 3200T.

    With respect to Kroger’sthe Company’s independent public accountants, the Audit Committee, among other things, discussed with PricewaterhouseCoopers LLP matters relating to its independence and has received the written disclosures and the letter from the independent public accountants required by Independence Standards Board Standard No. 1, “Independence Discussions with Audit Committees.Committees,” as adopted by the Public Company Accounting Oversight Board in Rule 3600T. The Audit Committee has reviewed and approved all services provided to Krogerthe Company by PricewaterhouseCoopers LLP. Kroger’s independent public accountants did not perform any internal audit service or participate in the design or implementation of any financial information system. The Audit Committee conducted a review of services provided by PricewaterhouseCoopers LLP which included an evaluation by management and members of the Audit Committee.

    3341




    Based upon the review and discussions described in this report, the Audit Committee recommended that the Board of Directors include the audited consolidated financial statements in Kroger’sthe Company’s Annual Report on Form 10-K for the year ended January 28, 2006,February 3, 2007, as filed with the SEC.

    This report is submitted by the Audit Committee.

    David B. Lewis, Chair

    Bobby S. Shackouls, Vice Chair
    Reuben V. Anderson
    Clyde R. Moore

    Susan M. Phillips


    Ronald L. Sargent












    42



    Neither

    APPROVALOF KROGER CASH BONUS PLAN
    (ITEM NO. 2)

         Kroger historically has paid to associates at all levels an annual bonus designed to provide an incentive to achieve superior results.

         This annual incentive plan provides pay based on the foregoing Auditextent to which Kroger meets objectives established at the beginning of each year. Kroger has not historically maintained a long-term incentive plan other than its broad-based equity compensation plans. After reviewing executive compensation with its outside advisors, the Compensation Committee Report norconcluded that the attached Auditlong-term component of Kroger’s executive compensation was not competitive. In 2006 the Board instituted a program of long-term bonuses covering periods in excess of one year under which a portion of compensation for about 140 key executives is conditioned on the achievement of those long-term goals. This program serves the dual purposes of making Kroger’s long-term compensation competitive and of providing incentives to meet long-term goals.

         Some compensation plans must be approved by shareholders in order for certain compensation earned under those plans to be considered to be performance-based and therefore deductible for federal tax purposes under Section 162(m) of the Internal Revenue Code. At the Annual Meeting, shareholders are being asked to approve the Kroger Cash Bonus Plan (the “Bonus Plan”), in order for bonuses paid under the plan to satisfy the requirements for qualified performance-based compensation under the Internal Revenue Service’s regulations under Section 162(m) and to be eligible for deductibility by Kroger. Shareholders also are being asked to approve currently outstanding annual and long-term bonuses that are not yet due and payable because the performance periods have not yet been completed. Kroger’s Compensation Committee, Chartercomprised solely of independent directors, has approved the Bonus Plan.

    DESCRIPTIONOFTHE BONUS PLAN

         All Kroger associates who are not covered by a collective bargaining agreement are eligible to participate in the Bonus Plan. Currently participation is limited to executives, managers and certain hourly employees.

    Bonus Awards

    Types. Two types of bonuses can be awarded under the Bonus Plan; an annual bonus award for each fiscal year, and a long-term bonus award for measurement periods in excess of one year. Bonus payments are based on Kroger’s performance measured against criteria established by a committee of the Board of Directors (the “Committee”) that qualifies as a “compensation committee” under Section 162(m) of the Internal Revenue Code. The Committee establishes a bonus “potential” for each bonus payable under the Bonus Plan for each participant, based on the participant’s level within Kroger, and actual payouts can exceed that amount when Kroger’s performance exceeds the pre-established thresholds.

    Business Criteria. Each participant’s bonus is based on pre-established performance targets, which will include one or more of the following components: (i) earning or earnings per share of Kroger, a unit of Kroger, or designated projects; (ii) total sales, identical sales, or comparable sales of Kroger, a unit of Kroger, or designated projects; (iii) cash flow; (iv) cash flow from operations; (v) operating profit or income; (vi) net income; (vii) operating margin; (viii) net income margin; (ix) return on net assets; (x) economic value added; (xi) return on total assets; (xii) return on common equity; (xiii) return on total capital; (xiv) total shareholder return; (xv) revenue; (xvi) revenue growth; (xvii) earnings before interest, taxes, depreciation and amortization (“EBITDA”); (xviii) EBITDA growth; (xix) funds from operations per share and per share growth; (xx) cash available for distribution; (xxi) cash available for distribution per

    43



    share and per share growth; (xxii) share price performance on an absolute basis and relative to an index of earnings per share or improvements in Kroger’s attainment of expense levels; (xxiii) reduction in operating costs as a percentage of sales; (xxiv) performance in key categories; and (xxv) implementing or completion of strategic initiatives or critical projects. Initially the performance targets for annual bonuses will include the following components: (i) EBITDA; (ii) identical sales; (iii) achievement of strategic initiatives; and (iv) sales and earnings results of designated capital projects. Initially the performance targets for long-term bonuses will include the following components: (i) performance in four key categories in our strategic plan, and (ii) operating costs as a percentage of sales.

    Bonus Amount. The bonus award for any participant is based on the achievement of specified levels of Kroger performance measured against the pre-established criteria. The Committee, in its discretion, may reduce the amount payable to any named executive officer. In no event may any one bonus earned by a participant exceed $5 million. Participants may earn more than one bonus under this Bonus Plan. Bonuses earned under the Bonus Plan will be deemed incorporated by reference into any other filing, absent an express reference thereto.

    paid in cash.

    34
    Accounting Practices



    CORPORATE GOVERNANCE PROPOSALS

    On December 9, 2005, we announced the adoption. The components of a seriesperformance target will be determined in accordance with Kroger’s accounting practices in effect on the first day of best practices relatedthe measurement period.

    Amendment. The Bonus Plan may be wholly or partially amended or otherwise modified, suspended or terminated at any time or from time to corporate governance.time by the Committee or the Board. To the extent required by Section 162(m) with respect to bonus awards that the Committee determines should qualify as performance-based compensation as described in Section 162(m)(4)(C), no action may modify the performance criteria or bonus potentials after the commencement of the measurement period with respect to which such bonus awards relate.

    BOARDRECOMMENDATION

         The Board of Directors adopted governance changesbelieves that were within its discretionthe Bonus Plan provides an appropriate balance between salary compensation and for mattersperformance-based compensation. The Committee may approve similar bonus or other payments outside of the Bonus Plan that require the approval of shareholders, the Board has recommended the action described below. By its actions in December, 2005, the Board revised itsGuidelines on Issues of Corporate Governance (which canmay not be found on our website at http://www.thekrogerco.com/documents/GuidelinesIssues.pdf) to require

    •  shareholder approval of any future severance arrangements with any of Kroger’s senior officers if the payments involved exceed 2.99 times W-2 earnings;

    •  tender of resignation by any director in an uncontested election who receives more “withheld” votes than “for” votes; and

    •  adoption of a policy of stock ownership for officers, directors and other key executives.

    The Board also decided in December to allow Kroger’s warrant dividend plan (commonly known as a “poison pill”) to expire without renewal. That plan expired on March 19, 2006.

    Finally, the Board decided to recommend certain governance changes that require the approval of shareholders to amend our Regulations or Amended Articles of Incorporation.tax deductible. The Board of Directors and management, therefore, recommend that the shareholders vote for and approve the following five proposals:

    APPROVALOF AMENDMENTTO REGULATIONSTO PROVIDEFOR ANNUAL ELECTIONOF ALL DIRECTORS
    (ITEM NO. 2)

    In 1986 the shareholders voted to amend Kroger’s Regulations to provide for the election of directors in three classes, with each class being elected for a three-year period. Over the last several years the shareholders have adopted proposals requesting that the Board of Directors take steps to eliminate the classified board and to elect all directors for one-year terms. The Board of Directors and management, as well as their independent advisors, continue to believe that a classified board is in the best interests of Kroger, our shareholders, and other affected constituencies. Nonetheless, a majority of shareholders voting on the issue have indicated that they support the annual election of directors. As a result, the Board of Directors and management are submitting to shareholders this proposal to change the method of electing directors so that each director stands for election annually for a one-year term. If the shareholders adopt this proposal, Article FOURTH, Section C. 5. of the Amended Articles of Incorporation will be revised as shown in Appendix 2 and Article II of the Regulations will be revised as shown in Appendix 3; with strikeouts reflecting language deleted from the current documents, and underlines reflecting language added to the current documents. If adopted, all directors standing for election beginning with this annual meeting of shareholders will be elected to one-year terms. The proposal will have no effect on the terms of those directors elected in prior years, whose terms will continue throughout the designated three-year period for which they were elected.

    This proposal is being submitted contingent upon the adoption by shareholders of Item No. 3 below, which, if adopted, will eliminate cumulative voting in the election of directors. Because adoption of Item No. 3 requires a smaller number of affirmative votes (a majority of outstanding shares), it is possible that Item No. 3 could be adopted even though this proposal fails.If the shareholders fail to adopt Item No. 3, this Item No. 2 cannot be adopted by shareholders.

    35



    Classified boards make it more likely that any attempt to acquire control of a company take place through orderly negotiations with the board of directors because they make it more difficult for shareholders to change the majority of the directors as only approximately one-third of the directors will stand for election in any given year. As a result, if this proposal is adopted, the possibility of a less orderly and negotiated change of control of Kroger will increase and any anti-takeover protection afforded by a classified board will be eliminated.

    The Regulations require the affirmative vote representing at least 75% of the outstanding shares of Kroger’s common stock in order to adopt this proposal.If this proposal fails to receive the requisite vote, or if the proposal in Item No. 3 is not adopted, then this proposal will not be adopted by shareholders.

    THE BOARDOF DIRECTORSAND MANAGEMENT RECOMMENDA VOTEFOR THIS PROPOSAL.

    APPROVALOF AMENDMENTTO AMENDED ARTICLESOF INCORPORATIONTO ELIMINATE CUMULATIVE VOTINGFOR DIRECTORS
    (ITEM NO. 3)

    Under Section 1701.55 of the Ohio Revised Code, shareholders are entitled to cumulate their votes for directors, unless the articles of incorporation are amended to eliminate cumulative voting. When cumulative voting is in effect, each shareholder is permitted to give one candidate that number of votes equal to the number of directors to be elected multiplied by the number of shares owned, or to divide them among nominees as the shareholder sees fit.

    Cumulative voting increases the ability of minority shareholders to elect nominees to the Board of Directors. Coupled with the annual election of directors (see Item No. 2 above), cumulative voting increases the chances that a minority shareholder could take disruptive actions to the detriment of shareholders. As a result, as a condition to implementation of the annual election of directors, the Board of Directors is submitting this proposal to eliminate cumulative voting.

    If the proposal to eliminate the classified board were approved and cumulative voting were not eliminated, the effect of cumulative voting for the election of directors would be exaggerated in comparison to its current effect because there would be a greater number of votes that a shareholder could cast for one director due to the increase in the number of directors being elected each year. Therefore, the Board of Directors believes that it is in the best interests of Kroger and its shareholders to eliminate cumulative voting.

    Although the Board of Directors does not consider the elimination of cumulative voting as an anti-takeover measure, the absence of cumulative voting could have the effect of preventing a shareholder holding a minority of Kroger’s common stock from obtaining representation on the Board. The elimination of cumulative voting might also,qualify performance-based compensation for deductibility under certain circumstances, render more difficult or discourage a merger, tender offer or proxy contest, the assumption of control by a holder of a large block of Kroger’s stock or the removal of incumbent management. Neither management nor the Board of Directors is aware of any attempt by any shareholder to accumulate sufficient shares of Kroger to obtain control of the corporation. Both view this proposal as an appropriate balancing measure in view of the proposal being submitted in Item No. 2 above.

    If this proposal is adopted, new Article FIFTH, Section B will be added to the Amended Articles of Incorporation as shown in Appendix 2, with the additions shown underlined. The Amended Articles of Incorporation require the affirmative vote representing a majority of the outstanding shares of Kroger’s common stock162(m) in order to adopt this proposal.

    THE BOARDOF DIRECTORSAND MANAGEMENT RECOMMENDA VOTEFOR THIS PROPOSAL.

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    APPROVALOF AMENDMENTTO AMENDED ARTICLESOF INCORPORATIONTO ELIMINATE 75% SUPERMAJORITY REQUIREMENTFOR SOME TRANSACTIONS
    (ITEM NO. 4)

    maximize Kroger’s Amended Articles of Incorporation contain provisions that require theincome tax deductions. The approval with some exceptions, of a supermajority representing at least 75% of the voting power of Kroger before engaging in certain transactions with shareholders owning ten percent or more of Kroger’s common stock. These transactions include:
    Bonus Plan is necessary to qualify this performance-based bonus compensation for deductibility.

    THEBOARDOFDIRECTORSANDMANAGEMENTRECOMMENDAVOTEFORTHISPROPOSAL.

     NEW PLAN BENEFITS
     Kroger Cash Bonus Plan
    Name and Position  
              Dollar value ($)         Number of Units
    All Groups (1)  (1)(1)
    ____________________

    •  (1)     mergersAwards, values and benefits not determinable for any individual or consolidations;group.


    •  sales, leases, exchanges, mortgages, pledges, transfers or other dispositions;

    •  issuances of securities or rights to acquire securities;

    •  adoptions of plans of liquidation or dissolution of Kroger; or

    •  reclassifications of securities.

    Transactions of the types identified above, in conjunction with other strategies, can be used by shareholders to obtain control of a corporation. Elimination of the supermajority provision would make it easier for a shareholder or a group of shareholders to obtain control of Kroger. Shareholder advocacy groups have suggested that supermajority provisions lead to entrenchment of the Board and permit small minorities of shareholders to thwart reforms favored by the majority of shareholders.44

    The supermajority provision currently in place has an anti-takeover effect, and the removal of that provision will eliminate the anti-takeover impact of the provision.

    If this proposal is adopted, current Article FIFTH of the Amended Articles of Incorporation will be deleted as shown in Appendix 2, and the reference to Article IV in Article VII of the Regulations will be deleted, with the deletions shown with strikeouts. The Amended Articles of Incorporation require the affirmative vote representing at least 75% of the outstanding shares of Kroger’s common stock in order to adopt this proposal.

    THE BOARDOF DIRECTORSAND MANAGEMENT RECOMMENDA VOTEFOR THIS PROPOSAL.

    APPROVALOF AMENDMENTTO AMENDED ARTICLESOF INCORPORATIONTO OPT OUTOF OHIO CONTROL SHARE ACQUISITION STATUTE
    (ITEM NO. 5)

    Section 1701.831 of the Ohio Revised Code (the Ohio control share acquisition statute) requires that any control share acquisition of a public corporation can only be made with the prior authorization of shareholders, unless the articles of incorporation or bylaws indicate that the statute does not apply. Control share acquisitions are defined by statute to be acquisitions of 20% or more of the voting power of a company. A person desiring to make a control share acquisition must first deliver notice to the corporation and the corporation’s board of directors must call a special meeting of shareholders to vote on the proposed acquisition. Kroger currently is subject to the control share acquisition statute.

    While the Ohio control share acquisition statute does provide shareholders who desire to obtain control of a corporation with prompt access to shareholders for a vote on their proposed acquisition, the statute was enacted to protect against the disruptive effects of hostile takeover attempts. The statute generally is viewed as an anti-takeover measure. If the shareholders adopt the proposal, any anti-takeover protections afforded by the statute will be eliminated.

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    EQUITY COMPENSATION PLAN INFORMATION

    If this proposal is adopted, new Article FIFTH, Section A will be added to     The following table provides information regarding shares outstanding and available for issuance under the Amended Articles of Incorporation as shown in Appendix 2, with the additions shown underlined. The Amended Articles of Incorporation require the affirmative vote representing a majority of the outstanding shares of Kroger’s common stock in order to adopt this proposal.
    Company’s existing equity compensation plans.

     (a) (b) (c) 
      Plan Category Number of securities to Weighted-average Number of securities 
     be issued upon exercise exercise price remaining for future 
     of outstanding options, of outstanding issuance under equity 
     warrants and rights options, warrants compensation plans 
      and rights excluding securities 
       reflected in column 
       (a) 
      Equity compensation plans    
           approved by security holders 51,918,179 $ 20.09 17,595,505 
      Equity compensation plans not    
           approved by security holders — $— — 
      Total 51,918,179 $ 20.09 17,595,505 

    APPROVALOF AMENDMENTTO REGULATIONSTO PROVIDEFOR RULESOF
    CONDUCTIN CONNECTIONWITH SHAREHOLDER MEETINGS; MEETINGS
    OUTSIDEOF CINCINNATI
    (ITEM NO. 3)

    THE BOARDOF DIRECTORSAND MANAGEMENT RECOMMENDA VOTEFOR THIS PROPOSAL.

    APPROVALOF AMENDMENTTO REGULATIONSTO PROVIDEFOR RULESOF CONDUCTIN CONNECTIONWITH SHAREHOLDER MEETINGS; MEETINGS OUTSIDEOF CINCINNATI
    (ITEM NO. 6)

    Kroger’s Regulations currently contain no provisions that set forth the manner in which shareholders may bring business before a meeting of shareholders. While the rules of the SEC require a shareholder to notify a corporation within a specified period of time prior to an annual meeting of shareholders if the shareholder seeks to have a proposal included in a proxy statement, a shareholder could disrupt a meeting by attempting to bring inappropriate business before the meeting without providing advance notice to the corporation. Reasonable rules of order for the conduct of shareholder meetings are appropriate, and many corporations provide for such rules. This proposal would require 45 days advance notice to Kroger of any business to be conducted at a shareholder meeting, and providesprovide that Kroger will prepare rules of conduct in advance of all shareholder meetings and make those rules available to shareholders. Recognizing that Kroger’s operations span most of the United States, this proposal also will amend the Regulations to permit shareholder meetings to be held outside of Cincinnati, Ohio, with the approval of the Board of Directors.

    Because the rules of the SEC permit proxy committees to vote discretionally on matters for which advance notice is not provided to a corporation, this proposal is not likely to have any material anti-takeover effect.

    If this proposal is adopted, new Article I, Section 2 will be added to the Regulations, old Article I, Section 2 of the Regulations will be revised and renumbered as Article I, Section 3 and additions will be made to Article VII of the Regulations, as shown in Appendix 3,1, with the additions shown underlined, and deletions shown as strikeouts. The Regulations require the affirmative vote representing a majority of the outstanding shares of Kroger’s common stock in order to adopt this proposal.

    THE BOARDOF DIRECTORSAND MANAGEMENT RECOMMENDA VOTEFORTHE BOARDOF DIRECTORSAND MANAGEMENT RECOMMENDA VOTEFOR THIS PROPOSAL.ROPOSAL
    .

    38
    45



    SELECTIONOF AUDITORS
    (ITEM NO. 4)

    SELECTIONOF AUDITORS
    (ITEM NO. 7)

    The Audit Committee of the Board of Directors is responsible for the appointment, compensation and retention of Kroger’s independent auditor, as required by law and by applicable NYSE rules. On March 8, 2006,14, 2007, the Audit Committee appointed PricewaterhouseCoopers LLP as Kroger’s independent auditor for the fiscal year ending February 3, 2007.2, 2008. While shareholder ratification of the selection of PricewaterhouseCoopers LLP as Kroger’s independent auditor is not required by Kroger’s Regulations or otherwise, the Board of Directors is submitting the selection of PricewaterhouseCoopers LLP to shareholders for ratification, as it has in past years, as a good corporate governance practice. If the shareholders fail to ratify the selection, the Audit Committee may, but is not required to, reconsider whether to retain that firm. Even if the selection is ratified, the Audit Committee in its discretion may direct the appointment of a different auditor at any time during the year if it determines that such a change would be in the best interests of Kroger and its shareholders.

    A representative of PricewaterhouseCoopers LLP is expected to be present at the meeting to respond to appropriate questions and to make a statement if he or she desires to do so.

    THE BOARDOF DIRECTORSAND MANAGEMENT RECOMMENDA VOTEFORTHE BOARDOF DIRECTORSAND MANAGEMENT RECOMMENDA VOTEFOR THIS PROPOSAL.ROPOSAL
    .

    39










    46




    DISCLOSUREOFAUDITORFEES

    DISCLOSUREOF AUDITOR FEES

    The following describes the fees billed to Kroger by PricewaterhouseCoopers LLP related to the fiscal years ended February 3, 2007 and January 28, 2006 and January 29, 2005:
    2006:


         		      
         		    Fiscal 2005
    		    Fiscal 2004
    Audit Fees                   $4,623,476        $6,052,828  
    Audit-Related Fees                     53,500          247,624  
    Tax Fees                     —           264,023  
    All Other Fees                     —           —   
    Total                   $4,676,976        $6,564,475  
     
      Fiscal 2006       Fiscal 2005
    Audit Fees $4,463,916$4,926,809 
    Audit-Related Fees 53,42953,500 
    Tax Fees —— 
    All Other Fees —— 
    Total $4,517,345$4,980,309

    Audit Feesfor the years ended February 3, 2007 and January 28, 2006, and January 29, 2005, respectively, were for professional services rendered for the audits of Kroger’s consolidated financial statements, the issuance of comfort letters to underwriters, consents, income tax provision procedures and assistance with the review of documents filed with the SEC.

    Audit-RelatedAudit-Related Fees for the years ended February 3, 2007 and January 28, 2006, and January 29, 2005, respectively, were for assurance and related services pertaining to employee benefit plan audits, captive insurance company audits, accounting consultations in connection with acquisitions, internal control reviews, attest services that are not required by statute or regulation and consultations concerning financial accounting and reporting standards.

    Tax FeesFees.We did not engage PricewaterhouseCoopers LLP for other tax services for the years ended February 3, 2007 and January 28, 2006 and January 29, 2005, respectively, were for services related to tax compliance, including the preparation of claims for refund; and tax planning and tax advice, including assistance with representation in tax audits and appeals, tax services for employee benefit plans and requests for rulings or technical advice from tax authorities.2006.

    All Other Fees. We did not engage PricewaterhouseCoopers LLP for other services for the years ended February 3, 2007 and January 28, 2006 and January 29, 2005.2006.

    The Audit Committee requires that it approve in advance all audit and non-audit work performed by PricewaterhouseCoopers LLP. On March 8, 200614, 2007 the Audit Committee approved services to be performed by PricewaterhouseCoopers LLP for the remainder of 2006fiscal 2007 that are related to the audit of Kroger or involve the audit itself. If it becomes appropriate during the year to engage the independent accountant for additional services, the Audit Committee must first approve the specific services before the independent accountant may perform the additional work.

    The Audit Committee has determined that the non-audit services performed by PricewaterhouseCoopers LLP in 2005fiscal 2006 were compatible with the maintenance of that firm’s independence in the conduct of its auditing functions.

    PricewaterhouseCoopers LLP has advised the Audit Committee that neither the firm, nor any member of the firm, has any financial interest, direct or indirect, in any capacity in Kroger or its subsidiaries.

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    47



    SHAREHOLDER PROPOSAL
    (ITEM NO. 5)

    SHAREHOLDER PROPOSAL
    (ITEM NO. 8)

    We have been notified by the People for the Ethical Treatment of Animals (PETA), 501 Front Street, Norfolk, VA 23510,The Nathan Cummings Foundation, 475 Tenth Avenue, 14th Floor, New York, New York 10018, the beneficial owner of 244171 shares of Kroger common stock, that it intends to propose the following resolution at the annual meeting:

    SUPPORTING STATEMENTWHEREAS: Carbon regulation is increasing as state and local level support for addressing climate change builds. More than 350 mayors have pledged to meet Kyoto’s targets for reducing greenhouse gas (GHG) emissions. At the state level, regulations addressing GHG emissions now exist in 28 states.

    WHEREAS consumers consider animal welfare when they decide where to purchase food products; and

    WHEREAS Kroger’s competitors—including Safeway, Albertsons, and Whole Foods—have made measurable, publicized progress on animal welfare issues, yet Kroger has done nothingSupport for measures addressing climate change is also increasingly being demonstrated at all as far as the humane community is concerned; and

    WHEREAS Kroger’s competitors—including those noted above—recognizefederal level. In June of 2005, the Senate passed a non-binding “Sense of the Senate” resolution recognizing the need for humane slaughter methodsa mandatory cap on GHG emissions. According to keepInvestor’s Business Daily, “[M]any in Washington are coming to view rigorous greenhouse legislation as inevitable.”

         These developments are being reinforced by corporate acceptance of the need to address climate change. A 2004 Conference Board report declared that, “The global economy will become less carbon-intensive over time…The real questions are what the pace of the transition will be and who will be the winners and losers…businesses that ignore the debate over climate change will do so at their competitive advantagesperil.”

    There is increasing recognition that climate change will have important impacts on all sectors.According to Institutional Shareholder Services, “…the scope of impact has expanded beyond the industries generally associated with emissions (energy, oil/gas, auto)… climate change has a measurable impact on companies in all industries.”

         Analysts at firms such as Goldman Sachs, McKinsey and JPMorgan Chase have publicly recognized the possible financial implications of climate change and have raised concerns about companies that do not adequately disclose them.

    A recent article inInside Green Business reviewed a new study that demonstrates that the retail sector accounts for a large percentage of GHG emissions once supply chain and energy inputs are particularlyaccounted for, which could shift some of the burden for reducing GHGs from power generators to retailers.

         Other retailers such as Home Depot and Wal-Mart have committed to improving conditions inaddressing climate change and reducing their poultry suppliers’ slaughterhouses;emissions and

    WHEREAS Kroger, like its competitors, purchases chickens from suppliers that use electrical stunning, have even encouraged Congress to regulate GHG emissions. According to British-based retailer Marks & Spencer’s Sustainable Development Manager, “[O]f all the sustainability issues we deal with, none poses such an all encompassing threat to the way in which the birds’ legs are forced into metal shackles before they are shocked with an electric current, have their throats slit, and are dropped into tanks of scalding-hot water, so that they are often still conscious when they suffer this hideous cruelty; and

    WHEREAS there is a USDA-approved method of poultry slaughter called “controlled-atmosphere killing” (CAK) that replaces the oxygen that the birds are breathing with inert gasses, gently and effectively putting them to sleep; and

    WHEREAS a report commissioned by McDonald’s (“the report”) concurred that CAK is, as animal welfare experts have described it, the most humane method of poultry slaughter ever developed and admitted that CAK “has advantages [over electrical stunning] from both an animal welfare and meat quality perspective .... obviates potential distress and injury ... can expeditiously and effectively stun and kill broilers with relatively low rates of aversion or other distress” and would eliminate the pain of premature shocks and inadequate stunning that are associated with electrical stunning; and

    WHEREAS the report further concludes that McDonald’s European suppliers that use CAK have experienced improvements in bird handling, stunning efficiency, working conditions, and meat yield and quality1; and

    WHEREAS it would help the company gain a competitive advantagewe operate in the cutthroat food retail industry if it eliminated the worst abuses that chickens suffer during slaughter before they end up on Kroger’s shelves and required its suppliers to phase in CAK; and
    long term as climate change.”

    WHEREAS, although CAK is optimal for both the birds’ well-being and for profits, Kroger has made no notable progress toward its implementation, despite the facts that some of its key competitors continue to make progress toward adopting the technology and that it continues to be used in Europe (as it has been for nearly a decade);

    NOW, THEREFORE, BE IT RESOVLED thatRESOLVED: The shareholders request that a committee of independent directors of the Board of Directors issue interim reportsassess how the company is responding to rising regulatory, competitive, and public pressure to address climate change and report to shareholders following the second, third, and forth quarters of 2006 detailing the progress made toward accelerating the development of CAK.

    1
    		These are the same improvements that Hormel Foods recently touted in a letter to PETA describing CAK.

    41



    THE BOARDOF DIRECTORS RECOMMENDSA VOTEAGAINST THIS PROPOSALFORTHE FOLLOWING REASONS:

    As noted by the proponent in a similar proposal included in last year’s Proxy Statement, Kroger has shown its commitment to animal welfare by adopting the animal welfare guidelines of the Food Marketing Institute. The proponent also noted in last year’s proposal that Kroger is one of the first major supermarket companies to adopt meaningful animal welfare guidelines. Some of Kroger’s suppliers have evaluated, and continue to evaluate, controlled atmosphere stunning. These evaluations considered a number of factors, including: animal welfare; scientific research and studies; production methods used commercially both in the U.S. and internationally; food safety and product quality; the safety of humans involved in the slaughter process; technical difficulties in operating equipment and procedures; environmental factors and expected costs. The research is incomplete and inconclusive as to whether controlled atmosphere stunning is a better method than conventional stunning methods.

    Moreover, Kroger’s suppliers believe that further research should be conducted to evaluate controlled atmosphere stunning and its effects on food safety and product quality issues. Kroger’s first priority has always been the safety and quality of its products. We also are committed to the humane treatment of animals. Kroger does not own, raise, transport or process livestock. However, Kroger contracts with suppliers who perform these functions and we require that our suppliers comply with government regulations pertaining to the humane treatment of animals. Kroger believes that handling animals in a humane manner, and preventing neglect or abuse, is the right thing to do.

    Kroger’s commitment, leadership and results with respect to animal welfare matters are well established, and recognized, within the industry. We work hard to be a good corporate citizen and believe in good animal handling practices. Our policies are designed to help to achieve humane treatment of animals. Kroger has been, and will continue to be, committed to upholding and abiding by our established policies and principles. In addition, we monitor our suppliers for compliance with the policies we establish. Kroger believes that the proposed report is unnecessary and would not result in any additional benefit to shareholders. The proposed report would be costly and time-intensive, and is duplicative of existing policies, initiatives and efforts.

    42



    SHAREHOLDER PROPOSAL
    (ITEM NO. 9)

    We have been notified by the General Board of Pension and Health Benefits of the United Methodist Church, 1201 Davis Street, Evanston, IL 60201, the beneficial owner of 76,350 shares of Kroger common stock, that it intends to propose the following resolution at the annual meeting:

    SUPPORTING STATEMENT

    Whereas, Investors increasingly seek disclosure of companies’ environmental, social, and governance practices in the belief that they impact shareholder value. Many investors believe companies that are good employers, environmental stewards, and corporate citizens are more likely to generate incremental financial returns, be more stable during turbulent economic and political conditions, and enjoy long-term business success.

    We believe that improved reporting on environmental, social, and governance issues will strengthen our company and the people it serves. Furthermore, we believe this information is necessary for making well-informed investment decisions as it speaks to the vision and stewardship of management and can have significant impacts on our company’s reputation and on shareholder value.

    According to Dow Jones, “Corporate Sustainability is a business approach that creates long-term shareholder value by embracing opportunities and managing risks deriving from economic, environmental, and social developments. Corporate sustainability leaders achieve long-term shareholder value by gearing their strategies and management to harness the market’s potential for sustainability products and services while at the same time successfully reducing and avoiding sustainability costs and risks.” (http://www.sustainabilityindex.com/htmle/sustainability/corpsustainability.html)

    An October 6, 2004 statement published by social research analysts reported that they value public reporting because “we find compelling the large and growing body of evidence linking companies’ strong performance addressing social and environmental issues to strong performance in creating long-term shareholder value...We believe that companies can more effectively communicate their perspectives and report performance on complex social and environmental issues through a comprehensive report than through press releases and other ad hoc communications.” (www.socialinvest.org)

    The 2004 Motorola Global Citizenship Report provides a compelling rational [sic] for sustainability reporting: “Environmental responsibility, supporting our communities, a strict code of ethics and business conduct, encouraging these values in our supply chain and exceeding customers’ expectations all make us a stronger and more competitive company.”

    Resolved: shareholders request the Board of Directors prepare, at(at reasonable expensecost and omitting proprietary information) by December 1, 2007

    SUPPORTING STATEMENT: We believe management has a fiduciary duty to carefully assess and disclose to shareholders all pertinent information on its response to climate change. We believe taking early action to reduce emissions and prepare for standards could provide competitive advantages, while inaction and opposition to climate change mitigation efforts could expose companies to regulatory and litigation risk and reputational damage.


    48



    THE BOARDOF DIRECTORSRECOMMENDSAVOT EAGAINST THIS PROPOSALFORTHE FOLLOWING REASONS:

    Kroger recognizes the important role it plays as a Sustainability Report. A summarygood steward of the report should be providedenvironment. We have numerous “green” initiatives in place to shareholders by December 2006.

    43



    SUPPORTING STATEMENT

    We believe the report should include:

    1.  The company’s operating definition of sustainability.

    2.  A review of current company policies and practices related to social, environmental, and economic sustainability.

    3.  A summary of long-term plans to integrate sustainability objectives throughout company operations.

    We recommend thatsave energy and preserve our natural resources. In 2007 Kroger join the over 700 companies who have issued sustainability reports based on the Global Reporting Initiative’s (GRI) Sustainability Reporting Guidelines (www.globalreporting.org).

    We urge shareholders to vote FOR this proposal.

    will publish on-line an expanded version ofTHE BOARDOF DIRECTORS RECOMMENDSA VOTEAGAINST THIS PROPOSALFORTHE FOLLOWING REASONS:

    In December of 2005, prior to receipt of the Proposal, theThe Kroger Co. Public Responsibilities Committee of our Board directed managment to prepare a sustainability report and to publish Report that will highlight the report on our website. As of this date, the first draft of that report is completed and Kroger expects to publish it before the end of 2006, as also requestedcompany’s “green” initiatives in the Proposal. The report includes several topics of interest to shareholders including numerous areas of corporate governance, social responsibility and environmental impact.
    greater detail.

    The proposal recommends a sustainabilitycommittee of independent directors assess how Kroger is addressing climate change. We believe such a committee report based on the Global Reporting Initiative’s (“GRI”) Guidelines. The requirementsin many ways would be duplicative of the GRI Guidelines are complex and confusing andcurrent efforts underway. It would not benefit our shareholders. We believe that the implementation of a sustainability report based on the GRI Guidelines, as opposed to the report that currently is in process,shareholders and would be a waste of time, resources and money for Kroger and our shareholders.

    We have developed our own form of sustainability reportreporting that we believe provides beneficial and cost effective disclosure to our shareholders. Thisshareholders on the environmental issues that are relevant to our business operations.The expanded report will be postedpublished on the Kroger website before the end of 2006.
    2007.

    ________________

    SHAREHOLDER PROPOSALS — 20072008 ANNUAL MEETING. Shareholder proposals intended for inclusion in our proxy material relating to Kroger’s annual meeting in June 20072008 should be addressed to the Secretary of Kroger and must be received at our executive offices not later than January 15, 2007.2008. These proposals must comply with the proxy rules established by the SEC. In addition, the proxy solicited by the Board of Directors for the 20072008 annual meeting of shareholders will confer discretionary authority to vote on any shareholder proposal presented at the meeting unless we are provided with notice of the proposal before March 31, 2007.
    2008.

    44



    ________________

    Attached to this Proxy Statement is Kroger’s 20052006 Annual Report which includes a brief description of Kroger’s business, including the general scope and nature thereof during 2005,2006, together with the audited financial information contained in our 20052006 report to the SEC on Form 10-K.A copy of that report is available to shareholders on request by writing to: Scott M. Henderson, Treasurer, The Kroger Co., 1014 Vine Street, Cincinnati, Ohio 45202-1100 or by calling 1-513-762-1220. Our SEC filings are available to the public from the SEC’s web site athttp://www.sec.gov.www.sec.gov
    .

    The management knows of no other matters that are to be presented at the meeting but, if any should be presented, the Proxy Committee expects to vote thereon according to its best judgment.

    By order of the Board of Directors, 
    Paul W. Heldman, Secretary 




    49

    By order of the Board of Directors,
    Paul W. Heldman, Secretary

    45


    APPENDICES

    Appendix 1

    AUDIT COMMITTEE CHARTER

    I.Purpose

    The primary function of the Audit Committee is to represent and assist the Board of Directors in fulfilling its oversight responsibilities regarding The Kroger Co.’s financial reporting and accounting practices including the integrity of the Company’s financial statements; the Company’s compliance with legal and regulatory requirements; the independent auditor’s qualifications and independence; the performance of the Company’s internal audit function and independent auditors; and the preparation of the report that SEC rules require be included in the Company’s annual proxy statement.

    II.COMPOSITION

    The Audit Committee will be composed of three or more directors, as determined by the Board of Directors, each of whom must be “independent” directors (as defined by the NYSE listing requirements and SEC Rule 10A-3). The Corporate Governance Committee of the Board will establish committee membership and will be empowered to remove Audit Committee members at any time. Audit Committee members may not serve on the audit committee of more than three public companies, unless approved in advance by the entire Board of Directors.

    All members of the Audit Committee must be “financially literate” as determined by the Board of Directors in its business judgment. At least one member of the Audit Committee must be an “audit committee financial expert” as defined in Item 401(h) of Regulation S-K.

    All members of the Audit Committee must comply with all requirements of the NYSE, SEC and all other applicable regulatory authorities.

    III.MEETINGS

    The Audit Committee will meet at least quarterly, if not more frequently as circumstances dictate, and will report to the full Board after each meeting. To foster open communications, the Audit Committee will meet separately and at least quarterly with management, including without limitation the Chief Financial Officer and the General Counsel, the independent auditors and the Vice President of Auditing The Audit Committee will meet with its independent counsel as necessary.

    IV.  RESPONSIBILITIES AND DUTIES

    The Audit Committee will:

    1.Meet to review and discuss with management and the independent auditors the Company’s annual audited financial statements, including the Company’s specific disclosures under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and any certification, report or opinion rendered by the Company’s independent auditors or the Company’s Principal Executive or

    46




    		Financial Officers in connection with those financial statements prior to filing with the SEC, and recommend to the Board whether the audited financial statements should be included in the annual report on Form 10-K.

    2.Meet to review and discuss with management and the independent auditors the quarterly financial statements, including the Company’s specific disclosures under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and any certification, report or opinion rendered by the Company’s independent auditors or the Company’s Principal Executive or Financial Officers in connection with those financial statements prior to filing with the SEC.

    3.Review earnings press releases, and discuss the Company’s practices with respect to earnings press releases, and financial information and earnings guidance provided to analysts and rating agencies.

    4.Review material changes in accounting policies, and financial reporting practices and material developments in financial reporting standards brought to the attention of the Audit Committee by the Company’s management or independent auditors.

    5.Review material questions of choice with respect to the appropriate accounting principles and practices to be used in the preparation of the Company’s financial statements and brought to the attention of the Audit Committee by the Company’s management or independent auditors.

    6.Review the performance of the independent auditors annually, and select (subject to ratification by the Company’s shareholders); evaluate; compensate; oversee; and, where appropriate replace, the independent auditors, which will report directly to the Audit Committee. The Audit Committee will oversee compliance by the independent auditors with the applicable requirements respecting the rotation of audit partners.

    7.Consider the independence of the independent auditors at least annually, and review an annual written statement, prepared by the independent auditors, delineating all relationships between the independent auditors and the Company, consistent with the Independence Standards Board Standard No. 1, regarding relationships and services, which may affect the independence of the independent auditors.

    8.��Obtain and review an annual written report, prepared by the independent auditors, describing: their internal quality control procedures and any material issues raised by the most recent internal quality control review or peer review, or by any inquiry or investigation by governmental or professional authorities, within the preceding five years, respecting one or more independent audits carried out by the firm, and any steps taken to deal with any such issues.

    9.Approve in advance all audit and non-audit services to be performed by the independent auditors.

    10.In consultation with management, the independent auditors and the internal auditors, review the reliability and integrity of the Company’s financial accounting policies, financial reporting processes, and disclosure and disclosure control practices and procedures.

    11.Discuss with management the major areas of risk exposure and management’s efforts to monitor and control such exposure, and discuss policies with respect to risk assessment and risk management.

    12.Review any significant disagreement among management and the independent auditors or the internal auditing department in connection with the preparation of the financial statements.

    13.Review annually the audit plans of both the internal auditor and the independent auditors.

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    14.Review periodically with the independent and internal auditors any audit problems or difficulties and management’s responses.

    15.Review with the Company’s counsel any legal matter, including environmental matters, that could have a significant effect on the Company.

    16.Receive reports from the independent auditors and management regarding, and review and discuss the adequacy and effectiveness of, the Company’s internal controls, including any significant deficiencies in internal controls and significant changes in internal controls brought to the attention of the Audit Committee by the independent auditors or management.

    17.Establish and oversee procedures for the receipt, retention and treatment of complaints received regarding accounting, internal accounting controls or auditing matters, and the confidential, anonymous submission by employees of concerns regarding questionable accounting and auditing matters.

    18.Establish and oversee procedures for compliance with and reporting violations of The Kroger Co. Policy on Business Ethics.

    19.Set clear hiring policies for employees or former employees of the independent auditors.

    20.Review and assess, annually or more frequently as circumstances dictate, the adequacy of this Charter and recommend changes to the Corporate Governance Committee as appropriate.

    21.Annually evaluate the Audit Committee’s performance and discuss the evaluation with the full Board of Directors.

    V.OUTSIDE ADVISORS

    The Audit Committee may retain at the Company’s expense independent counsel, accountants or other advisors for such purposes as the Audit Committee, in its sole discretion, determines to be appropriate, and will receive appropriate funding from the Company, as determined by the Audit Committee, for the payment of compensation to any such advisors and for the payment of ordinary administrative expenses that are necessary or appropriate in carrying out the Committee’s duties.

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    Appendix 2

    FILED WITH SECRETARY OF STATE OF OHIO
    ________________, 2006
    AMENDED ARTICLES OF INCORPORATION
    OF
    THE KROGER CO.

    The Kroger Co., a corporation for profit, heretofore organized and now existing under the laws of the State of Ohio, makes and files these Amended Articles of Incorporation and states:

    FIRST. The name of the Corporation is THE KROGER CO.

    SECOND. The principal office of the Corporation is located at Cincinnati, in Hamilton County, Ohio.

    THIRD. The purpose of said Corporation is to engage in any lawful act or activity for which corporations may be formed under Sections 1701.01 to 1701.98, inclusive, of the Ohio Revised Code.

    FOURTH. SECTION A. The maximum number of shares which the Corporation is authorized to have outstanding is one billion five million (1,005,000,000), classified as follows: five million (5,000,000) Cumulative Preferred Shares of the par value of $100.00 each; and one billion (1,000,000,000) Common Shares of the par value of $1.00 each.

    The express terms and provisions of the shares of the foregoing classes of stock of the Corporation shall be as follows:

    SECTION B. The holders of Common Shares shall have no pre-emptive rights to subscribe for or purchase any shares of any class.

    SECTION C. 1. The authorized shares of Cumulative Preferred Shares may be issued in series from time to time. All shares of any one series of Cumulative Preferred Shares shall be alike in every particular and all shares of Cumulative Preferred Shares shall rank equally. The express terms and provisions of shares of different series shall be identical except that there may be variations in respect of the dividend rate, dates of payment of dividends and dates from which they are cumulative, redemption rights and price, liquidation price, sinking fund requirements, conversion rights, and restrictions on issuance of shares of the same series or of any other class or series. The Board of Directors of the Corporation is authorized to fix, by the adoption of an amendment to the Articles creating each such series of the Cumulative Preferred Shares, (a) the designation and number of shares of such series, (b) the dividend rate of such series, (c) the dates of payment of dividends on shares of such series and the dates from which they are cumulative, (d) the redemption rights of the Corporation with respect to shares of such series and the price or prices at which shares of such series may be redeemed, (e) the amount or amounts payable to holders of shares of such series on any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, which may be different for voluntary and involuntary liquidation, dissolution, or winding up, (f) the amount of the sinking fund, if any, to be applied to the purchase or redemption of shares of such series and the manner of its application, (g) whether or not the shares of such series shall be made convertible into, or exchangeable for, shares of any other class or classes or of any other series of the same class of stock of the Corporation, and if made so convertible or exchangeable, the conversion price or prices, or the rates of exchange, and the adjustments, if any, at which such conversion or exchange may be made, and (h)

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    whether or not the issue of any additional shares of such series or any future series in addition to such series or any other class of stock shall be subject to any restrictions and, if so, the nature of such restrictions.

    2.  Dividends on Cumulative Preferred Shares of any series shall be payable at rates and on dates to be fixed by the Board of Directors at the time of the creation of such series. Dividends of the Cumulative Preferred Shares of all series shall be cumulative, and no dividends shall be declared or paid upon or set apart for the Common Stock unless and until full dividends on the outstanding Cumulative Preferred Shares of all series shall have been paid or declared and set apart for payment with respect to all past dividend periods and the current dividend period. In case of any series of Cumulative Preferred Shares, dividends shall accrue from and be cumulative from such dates as may be fixed by the Board of Directors at the time of the creation of such series. In the event of the issue of additional Cumulative Preferred Shares of any series after the initial issue of shares of such series all dividends paid on Cumulative Preferred Shares of such series prior to the issue of such additional Cumulative Preferred Shares and all dividends declared and payable to holders of record of Cumulative Preferred Shares of such series on a date prior to such additional issue shall be deemed to have been paid on the additional shares so issued.

    3.  If upon any liquidation, dissolution or winding up, the assets distributable among the holders of the Cumulative Preferred Shares of all series shall be insufficient to permit the payment of the full preferential amounts to which they shall be entitled, then the entire assets of the Corporation shall be distributed among the holders of the Cumulative Preferred Shares of all series then outstanding, ratably in proportion to the full preferential amounts to which they are respectively entitled. Nothing in this paragraph shall be deemed to prevent the purchase, acquisition or other retirement by the Corporation of any shares of its outstanding stock as now or in the future authorized or permitted by the laws of Ohio. A consolidation or merger of the Corporation with or into any other corporation or corporations, or a sale or transfer of all or substantially all of its property, shall not be deemed to be a liquidation, dissolution or winding up of the Corporation.

    4.  Notice of any proposed redemption of Cumulative Preferred Shares of any series shall be given by the Corporation by publication at least once in one daily newspaper printed in the English language and of general circulation in the Borough of Manhattan, City of New York, State of New York, and in the City of Cincinnati, State of Ohio, the first publication to be at least sixty (60) days, and not more than ninety (90) days, prior to the date fixed for such redemption. Notice of any proposed redemption of Cumulative Preferred Shares of any series also shall be given by the Corporation by mailing a copy of such notice, at least sixty (60) days, and not more than ninety (90) days, prior to the date fixed for such redemption, to the holders of record of the Cumulative Preferred Shares to be redeemed, at their respective addresses then appearing upon the books of the Corporation; but no failure to mail such notice, or defect therein or in the mailing thereof shall affect the validity of the proceedings for such redemption. In case of the redemption of a part only of the Cumulative Preferred Shares of any series at the time outstanding, the shares to be redeemed shall be selected by lot or pro rata, as the Board of Directors may determine. The Board of Directors shall have full power and authority, subject to the limitations and provisions herein contained, to prescribe the manner in which, and the terms and conditions upon which, the shares of the Cumulative Preferred Shares of any series shall be redeemed from time to time. On or at any time before the redemption date specified in such notice, the Corporation shall deposit in trust, for the holders of the shares to be redeemed, funds necessary for such redemption with a bank or trust company organized under the laws of the United States of America or the State of New York and doing business in the Borough of Manhattan, City of New York, or organized under the laws of the United States of America or of the State of Ohio and doing business in the City of Cincinnati, Ohio; and designated in such notice of redemption. Upon the publication of the notice of redemption as above provided, or upon the making of such deposit, whichever is later, all shares with respect to the redemption of which such notice and deposit shall have been given and made shall, whether or not the certificates therefor shall have been surrendered for cancellation, be deemed to be no longer

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    outstanding for any purpose, and all rights with respect to such shares shall thereupon cease and terminate, except only the rights of the holders of the certificates for such shares to receive, out of the funds so deposited in trust, from and after the date of such deposit, the amount payable upon the redemption thereof, without interest; provided, however, that no right of conversion, if any, belonging to such shares, if such right of conversion is, by its terms, to exist for a period beyond the date of the publication of such notice or the making of such deposit, shall be impaired by the publication of such notice or the making of such deposit. At the expiration of six (6) years after the date of such deposit, such trust shall terminate. Any such moneys then remaining on deposit with such bank or trust company shall be paid over to the Corporation, and thereafter the holders of the certificates for such shares shall have no claims against such bank or trust company, but only claims as unsecured creditors against the Corporation for the amount payable upon the redemption thereof without interest.

    5.  At all meetings of the shareholders, every holder of record of shares of Cumulative Preferred Shares and every holder of record of Common Stock shall be entitled to vote and shall have one vote for each share outstanding in his name on the books of the Corporation on the record date fixed for such purpose, or if no record date is fixed, on the date next preceding the day of such meeting, provided that (1) in the event that the Corporation should have failed to pay dividends on any series of Cumulative Preferred Shares for six or more quarterly dividends, the holders of Cumulative Preferred Shares of all series, voting as a single class, shall be entitled to elect two directors, each for a one-year term, whether or not the board is otherwise divided into classes with each director elected for a term longer than one year, at the meeting of shareholders for the election of directors next succeeding the time such failure to pay these six dividends first occurs, and (2) no amendment to the Articles of Incorporation or Regulations shall be made which would be substantially prejudicial to the holders of outstanding Cumulative Preferred Shares or any series thereof without the favorable vote of the holders of two-thirds of the Cumulative Preferred Shares, voting as a single class, then outstanding, unless such amendment shall not equally affect all series, in such case the favorable vote of the holders of two-thirds of the adversely affected series shall also be required. The right of holders of Cumulative Preferred Shares to elect these two directors shall terminate when all such unpaid dividends on Cumulative Preferred Shares have been paid and the directors then in office and elected by the holders of Cumulative Preferred Shares shall forthwith cease to hold office upon such payments.

    6.  The holders of the Cumulative Preferred Shares shall have no pre-emptive rights to subscribe for or purchase any shares of any class.

    FIFTH. (a) 1. In addition to any affirmative vote or approval required by law, these Amended Articles of Incorporation, or the Regulations of the Corporation:

    (A)  any merger or consolidation of the Corporation or any Subsidiary (as hereinafter defined) with or into (i) any Interested Shareholder (as hereinafter defined) or (ii) any other corporation (whether or not itself an Interested Shareholder) which, after such merger or consolidation, would be an Affiliate (as hereinafter defined) of an Interested Shareholder, or

    (B)  any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of related transactions) to or with any Interested Shareholder or any Affiliate of any Interested Shareholder of any assets of the Corporation or any Subsidiary having an aggregate fair market value of $15,000,000 or more, or

    (C)  the issuance or transfer by the Corporation or any Subsidiary (in one transaction or a series of related transactions) of any securities or options, warrants or rights to acquire securities, of the Corporation or any Subsidiary, to any Interested Shareholder or any Affiliate of any Interested Shareholder in exchange for cash, securities or other property (or a combination thereof) having an aggregate fair market value of $15,000,000 or more, or

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    (D)  the adoption of any plan or proposal for the complete or partial liquidation or dissolution of the Corporation as a result of which an Interested Shareholder would receive any assets of the Corporation other than cash, or

    (E)  any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries, or any similar transaction (whether or not with or into or otherwise involving an Interested Shareholder) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of the Corporation or any Subsidiary which is directly or indirectly beneficially owned by any Interested Shareholder, or

    (F)  any agreement, contract or other arrangement which upon consummation will result in any of the transactions described in this paragraph

    (a)  1. shall require the affirmative vote of the holders of 75% of the outstanding Voting Shares (as hereinafter defined).

    2.  The term “Business Combination”, as used in this Article Fifth, shall mean any transaction which is referred to in any one or more of clauses (A) through (F) of paragraph (a)(1).

    (b)  1. The provisions of paragraph (a)(1) of this Article Fifth shall not be applicable if either of the following conditions shall have been satisfied:

    (A)  the aggregate amount of the cash and fair market value (as of the date of the consummation of the Business Combination) of consideration other than cash to be received per share of Common or Cumulative Preferred or other Preferred Stock or Capital Stock in such Business Combination by holders thereof shall be at least equal to the highest of the following:

    (i)  the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers’ fees) paid by such Interested Shareholder for any shares of such class or series of stock acquired by it within the three-year period prior to the Business Combination (such price to be appropriately adjusted for stock splits, stock dividends, reclassification of securities and other similar events);

    (ii)  the per share book value of the shares of such class or series of stock as reported at the end of the fiscal quarter immediately preceding the public announcement of the terms of the Business Combination;

    (iii)  an amount per share which, at a minimum, bears the same percentage relationship to the market price per share of the shares of such class or series of stock immediately prior to the announcement of the intention to effect the Business Combination as the highest per share price determined in (i) above bears to the market price per share of the shares of such class or series of stock immediately prior to the acquisition by the Interested Shareholder of beneficial ownership of more than 5% of the shares of such class or series of stock but in no event in excess of two times the highest per share price determined in (i) above;

    provided that (i) no Extraordinary Event (as hereinafter defined) occurs after the Interested Shareholder has become an Interested Shareholder and prior to the consummation of the Business Combination, and (ii) if the highest preferential amount per share of a series of Cumulative Preferred or other Preferred Stock to which the holders thereof would be entitled in the event of any voluntary or involuntary liquidation, dissolution or winding-up of the affairs of the Corporation (regardless of whether the Business Combination to be consummated constitutes such an event) is greater than such aggregate amount, holders of such series of Cumulative Preferred or other Preferred Stock shall receive

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    an amount for each such share at least equal to the highest preferential amount applicable to such series of Cumulative Preferred or other Preferred Stock; or

    (B)  Either (i) the Business Combination was approved by the Board of Directors of the Corporation prior to the time that the Interested Shareholder acquired beneficial ownership of in excess of 10% of the outstanding Voting Shares, (ii) the Interested Shareholder seeking to effect such Business Combination sought and obtained the prior approval of the Board of Directors of the Corporation to such Interested Shareholder’s acquisition of beneficial ownership of 10% of the outstanding Voting Shares or (iii) the Business Combination was approved by at least two-thirds of the Continuing Directors of the Corporation.

    (c)  For the purposes of this Article Fifth:

    1.  A “Person” shall mean any individual, firm, corporation, or other entity. When two or more Persons act as a partnership, syndicate, association or other group for the purpose of acquiring, voting or disposing of Voting Shares, such partnership, syndicate, association or other group will be deemed a “Person” for the purposes of this Article.

    2.  “Interested Shareholder” shall mean any Person (other than the Corporation, any Subsidiary or any profit sharing, employee stock ownership or other employee benefit plan of the Company or of any Subsidiary or any trustee of or fiduciary with respect to any such plan acting in such capacity) who or which, together with its Affiliates and Associates (as hereinafter defined) and any other Person acting in concert with such Person is the beneficial owner, directly or indirectly, of more than 10% of the Voting Shares as of the record date for the determination of shareholders entitled to notice of and to vote on any Business Combination.

    3.  A Person shall be the “beneficial owner” of any Voting Shares:

    (A)  which such Person or any of its Affiliates and Associates would be deemed to beneficially own under Rule 13d-3 of the Securities Exchange Act as in effect on May 17, 1985, or

    (B)  which such Person or any of its Affiliates and Associates has (i) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (ii) the right to vote pursuant to any agreement, arrangement or understanding, or

    (C)  which are beneficially owned (as defined in (A) or (B) of this paragraph 3) directly or indirectly, by any other Person with which such first mentioned Person or any of its Affiliates and Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any Voting Shares.

    4.  A “Continuing Director” shall mean any member of the Board of Directors who is not affiliated with an Interested Shareholder and who was a member of the Board of Directors immediately prior to the time that the Interested Shareholder first beneficially owned more than 5% of the outstanding Voting Shares, and any successor to a Continuing Director who is not affiliated with an Interested Shareholder and is recommended to succeed a Continuing Director by two-thirds of the Continuing Directors.

    5.  “Affiliate” and “Associate” shall have the respective meanings given those terms in Rule 12b-2 under the Securities Exchange Act of 1934, as in effect on May 18, 1984.

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    6.  “Subsidiary” means any corporation, a majority of the voting shares of which is beneficially owned by the Corporation.

    7.  “Voting Shares” shall mean shares of capital stock of the Corporation entitled to vote generally for the election of directors (excluding any shares or series of capital stock entitled to vote only upon the occurrence of certain contingencies such as the nonpayment of dividends on Cumulative Preferred Stock or other Preferred Stock), considered for the purposes of this Article as a single class.

    8.  The term “Extraordinary Event” shall mean, as to any Business Combination and Interested Shareholder, any of the following events that is not approved by two-thirds of the Continuing Directors:

    (A)  any failure to declare and pay at the regular date therefor any full quarterly dividend (whether or not cumulative) on outstanding Cumulative Preferred Stock or on any other Preferred Stock then outstanding; or

    (B)  any reduction in the annual rate of dividends paid on the Common Stock (except as necessary to reflect any subdivision of the Common Stock); or

    (C)  any failure to increase the annual rate of dividends paid on the Common Stock as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction that has the effect of reducing the number of outstanding shares of the Common Stock; or

    (D)  the receipt by the Interested Shareholder, after such Interested Shareholder has become an Interested Shareholder, of a direct or indirect benefit (except proportionately as a shareholder) from any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the Corporation or any Subsidiary of the Corporation, whether in anticipation of or in connection with the Business Combination or otherwise.

    (d)  Two-thirds of the Continuing Directors (or, if there are no Continuing Directors, two-thirds of the Outside Directors) shall have the power and duty to determine for the purposes of this Article Fifth on the basis of information known to them (1) the number of Voting Shares beneficially owned by any Person, (2) whether a Person is an Affiliate or Associate of another, (3) whether the assets subject to any business combination or the consideration received for the issuance or transfer of securities by the Corporation or any Subsidiary has an aggregate fair market value of $15,000,000 or more, (4) whether the proposed transaction is subject to this Article Fifth, and (5) such other matters with respect to which a determination is required under this Article Fifth. Any such determination shall be conclusive and binding for all purposes of this Article. For purposes of this paragraph (d), an Outside Director shall mean a Director of this Corporation who is not (i) an employee or officer of this Corporation or of any Interested Shareholder (or any Affiliate of such Interested Shareholder) seeking to propose or effect a Business Combination, or (ii) a Director, Associate or Affiliate of an Interested Shareholder or of any Affiliate of such Shareholder (other than by reason of being a Director of the Corporation) or (iii) any relative by blood, marriage or adoption (excluding relationships more remote than first cousin) of any of the foregoing.

    (e)  Nothing contained in this Article Fifth shall be construed to relieve any Interested Shareholder from any fiduciary obligation imposed by law.

    (f)  Notwithstanding any other provisions of these Amended Articles of Incorporation or of the Regulations of the Corporation (and notwithstanding the fact that some lesser percentage may be specified by law, these Amended

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    Articles of Incorporation or the Regulations of the Corporation), the affirmative vote of the holders of at least 75% of the Voting Shares shall be required to amend, repeal, or adopt any provisions inconsistent with, this Article Fifth.

    FIFTH. SECTION A. Section 1701.831 of the Ohio Revised Code does not apply to the Corporation.

    SECTION B. Shareholders are not permitted to vote cumulatively in the election of directors. Any amendment to this Section B of Article Fifth will require the affirmative vote of the holders of record of shares entitling them to exercise 75% of the voting power on such proposal.

    SIXTH. The following provisions are hereby agreed to for the purpose of defining, limiting and regulating the exercise of the authority of the Corporation or of its shareholders, or of any class of its shareholders, or of its directors, or for the purpose of creating and defining rights and privileges of the shareholders among themselves.

    (a)  This Corporation reserves the right to amend, alter, change or repeal any provision contained in these Amended Articles of Incorporation in the manner now or hereafter prescribed by law, and all rights conferred on officers, directors, and shareholders herein, including but not limited to the rights of dissenting shareholders conferred by Ohio law, are granted subject to this reservation.

    (b)  Action on any matter at any shareholders’ meeting, or without such meeting, regarding which the statutes of Ohio provide that unless otherwise provided in the articles of incorporation or regulations of a corporation, there shall be the affirmative vote or consent of a larger portion than the holders of a majority of the shares entitled to vote thereon or consent thereto, may be taken by the affirmative vote or consent of the holders of a majority of shares entitled to vote thereon or consent thereto, but in the event that the vote or consent is required to be by classes, then, except as otherwise provided herein, action may be taken on such matter by the affirmative vote or consent of the holders of a majority of each class of shares entitled to vote by classes on such matter.

    (c)  The Corporation may, when authorized by the Board of Directors and without any action by the shareholders, purchase, hold, sell and reissue any of its shares in such manner and under such terms and conditions as may be prescribed by the directors.

    (d)  The Board of Directors shall have the power and authority to determine the fair value of any property other than money to be received by the Corporation in payment of its shares.

    (e)  The foregoing clauses shall be construed both as objects and powers, and it is hereby expressly provided that the foregoing enumeration of specific powers shall not be held to limit or restrict in any manner the powers of this Corporation, and are in furtherance of and in addition to, and not in limitation of, the general powers conferred by the laws of the State of Ohio.

    SEVENTH. These Amended Articles of Incorporation supersede and take the place of the existing Amended Articles of Incorporation.

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    Appendix 3

    REGULATIONS
    OF
    THEKROGERCO.O.
    ____________

    ARTICLE I

    SHAREHOLDERS

    SECTION 1. ANNUAL MEETING. The annual meeting of the shareholders shall be held on the third Friday in May, or on such other date as may be designated by the board of directors, at such hour as may be designated in the notice of the meeting.

    SECTION 2. ORDER OF BUSINESS.

    A. Presiding Officer. The Chairman, or such other officer as may be designated by the board ofdirectors, will preside over all meetings of shareholders.

    B. Authorized Business. Only business that is properly brought may be conducted during any meetingof shareholders. In the case of annual meetings of shareholders, matters set forth in the Company’s notice ofannual meeting of shareholders, along with any Company presentation, will be properly brought before themeeting. For business properly to be brought by a shareholder before the annual meeting, advance noticeof such business must be received by the secretary of the Company at the principal office of the Companynot less than 12045 calendar days prior to the date on which the Company’s proxy statement for the prior year’sannual meeting of shareholder was first mailed to shareholders. Such notice must include a descriptionin reasonable detail of the business desired to be brought along with the reasons for conducting suchbusiness, the name and record address of the shareholder proposing such business, the number of sharesof the Company owned of record or beneficially by the shareholder along with evidence of ownershipthereof, a description of any material interest the shareholder has in the subject of the business requestedto be conducted, and any arrangements or understandings between such shareholder and any other personor persons (including their names) in connection with the proposal of such business, a representationthat the shareholder intends to appear in person at the meeting to bring such matter before the meeting,and such other information regarding the business proposed by such shareholder as would be requiredto be included in the proxy statement filed pursuant to the proxy rules of the Securities and ExchangeCommission. Without limiting the foregoing, if the business proposed to be brought by such shareholderat the annual meeting is the nomination of a person or persons for election to the board of directors, thenthe notice also must include as to each person whom the shareholder proposes to nominate for election asa director the name, age, business address and residence address of the person, the principal occupationor employment of the person, the number of shares of the Company owned of record or beneficially by theperson, and any other information relating to the person that would be required to be included in a proxystatement relating to the election of directors.

    In the case of a special meeting called by the board of directors or an officer or director of the Company, only matters set forth in the Company’s notice of the meeting of shareholders, along with any Company presentation, will properly be brought before the meeting. In the case of a special meeting called by a shareholder, only matters set forth in the notice of the meeting of shareholders will properly be brought before the meeting. Such notice by a shareholder must include a description in reasonable detail of the business desired to be brought along with the reasons for conducting such business, the name and address of the shareholder proposing such business, the number of shares

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    of the Company owned of record


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    or beneficially by the shareholder along with evidence of ownership thereof, a description of any material interestmaterialinterest the shareholder has in the subject of the business requested to be conducted and any arrangements orarrangementsor understandings between such shareholder and any other person or persons (including their names) in connectioninconnection with the proposal of such business, a representation that the shareholder intends to appear in personinperson at the meeting to bring such matter before the meeting, and such other information regarding the businessthebusiness proposed by such shareholder as would be required to be included in the proxy statement filed pursuantfiledpursuant to the proxy rules of the Securities and Exchange Commission.

    C. Rules of Conduct. Rules of conduct governing all meetings of shareholders will be prepared by the Company and will be available to shareholders at the commencement of the meeting. Shareholders that desire to receive a copy of the rules of conduct prior to the date of a meeting may receive a copy of the then current rules of conduct upon written request to the secretary of the Company at the Company’s principal office.

    SECTION23. PLACE OF MEETINGS. All meetings of the shareholders shall be held at the principal office of the Company in the City of Cincinnati or at such other placeinwithin or without the City of Cincinnati as may be designated in the notice of the meeting, provided that if the meeting is to be held outside of the City of Cincinnati such alternate location must first be approved by the board of directors.

    ARTICLE II

    BOARD OF DIRECTORS

    SECTION 1. NUMBER. The boardBoard of directors shall consist of not less than nine nor more than twenty-one members, the exact number to be fixed and determined from time to time by the boardBoard of directors or at a meeting of the shareholders called for the purpose of electing directors, at which a quorum is present, by the affirmative vote of the holders of 75% of the shares which are entitled to vote on such proposal.

    The board of directors shall be divided into three classes as nearly equal in number as possible with the term of office of one class expiring each year, provided that at the annual meeting in April, 1973, the first class shall be elected for a term of one year, the second class for a term of two years, and the third class for a term of three years.Members of the boardBoard of directors shall be elected annually to terms of one year, provided that all directors then serving on the effective date of these regulations will continue to serve out the remainder of their unexpired terms.

    SECTION 2. MEETINGS. An organization meeting of the boardBoard of directors may be held, without notice, immediately after the annual meeting of the shareholders for the purpose of electing officers and attending to such other business as may properly come before the meeting. Additional regular meetings may be held at such times as may be determined from time to time by the directors.

    SECTION 3. PLACE OF MEETINGS. All meetings of the boardBoard of directors shall be held at the principal office of the Company in the City of Cincinnati or at such other place within or without the State of Ohio as may be designated in the notice of the meeting.

    SECTION 4. COMMITTEES. The boardBoard of directors may create an executive committee and any other committee of the directors, to consist of not less than 3 directors, and may delegate to any such committee any of the authority of the directors, however conferred, other than that of filling vacancies among the directors. The directors may appoint one or more directors as alternate members of any such committee, who may take the place of any absent member or members at any meeting of such committee. A majority of any such committee shall constitute a quorum for a meeting, and the act of a majority of the members of the committee present at a meeting at which a quorum is present shall be the act of the committee. The president shall be a member of the executive committee.

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    SECTION 5. REMOVAL AND VACANCIES.

    A. Removals. All of the directors, all of the directors of a particular class, or any individual director may be removed by the holders of 75% of the shares then entitled to vote at an election of directors, but only for cause.

    B. Vacancies. Any vacancy in the boardBoard of directors shall be filled only by a vote of a majority of the directors then in office, although less than a quorum, or by a sole remaining director. Any director so elected shall serve until the next election of the class for which such directorsshall have been chosen directors and until his the director’ssuccessor shall be elected and qualified.

    ARTICLE III

    OFFICERS

    SECTION 1. NUMBER AND TITLE. The officers of the Company shall be a president, such number of vice presidents as the boardBoard of directors may from time to time determine, a secretary, a treasurer, and, in the discretion of the boardBoard of directors, a chairman of the board,Board, one or more assistant secretaries, one or more assistant treasurers, and such other officers and assistant officers as the boardBoard of directors may from time to time determine.

    SECTION 2. POWERS AND DUTIES. Subject to such limitations as the boardBoard of directors or the executive committee may from time to time prescribe, the officers of the Company shall each have such powers and perform such duties as generally pertain to their respective offices and such further powers and duties as may be conferred from time to time by the boardBoard of directors or the executive committee or, in the case of all officers other than the chairman of the boardBoard and the president, by the president.

    SECTION 3. BONDS. Any officer or employee may be required to give bond for the faithful discharge of his duties in such sum and with such surety or sureties as the boardBoard of directors may from time to time determine. The premium on any bond or bonds provided for herein shall be paid by the Company.

    ARTICLE IV

    INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES

    A. Each director, officer or employee of the Company, each former director, officer or employee of the Company, and each person who is serving or shall have served at the request of the Company as a director, officer or employee of another corporation (his heirs, executors or administrators) shall be indemnified by the Company against expenses actually and necessarily incurred by him, and also against expenses, judgments, decrees, fines, penalties, or amounts paid in settlement, in connection with the defense of any pending or threatened action, suit, or proceeding, criminal or civil to which he is or may be made a party by reason of being or having been such director, officer or employee, provided,

    (1)he is adjudicated or determined not to have been negligent or guilty of misconduct in the performance of his duty to the Company or such other corporation,
    (2)he is determined to have acted in good faith in what he reasonably believed to be the best interest of the Company or of such other corporation, and
    (3)in any matter the subject of a criminal action, suit, or proceeding, he is determined to have had no reasonable cause to believe that his conduct was unlawful.

    (1)  he is adjudicated or determined not to have been negligent or guilty of misconduct in the performance of his duty to the Company or such other corporation,

    (2)  he is determined to have acted in good faith in what he reasonably believed to be the best interest of the Company or of such other corporation, and

    (3)  in any matter the subject of a criminal action, suit, or proceeding, he is determined to have had no reasonable cause to believe that his conduct was unlawful.

    The determination as to (2) and (3) and, in the absence of an adjudication as to (1) by a court of competent

    58




    jurisdiction, the determination as to (1) shall be made by the directors of the Company acting at a meeting at which a quorum consisting of directors who are not parties to or threatened with any such action, suit, or proceeding is present. Any director who is a party to or threatened with any such action,

    52



    suit or proceeding shall not be qualified to vote and, if for this reason a quorum of directors cannot be obtained to vote on such indemnification, no indemnification shall be made except in accordance with the procedure set forth in paragraph B of this Article IV.

    B. In the event that a quorum of directors qualified to vote cannot be obtained to make any determination required by paragraph A, such determination may be made in writing signed by a majority of the directors who are qualified to vote regardless of a lack of quorum or, if there be less than three directors qualified to vote, by a board of three disinterested persons, who may be officers or employees of the Company, of good character appointed by the boardBoard of directors to make such determination.

    C. Notwithstanding paragraph A of Article IV, the boardBoard of directors in its discretion may empower the president or any vice president of the Company to make the determinations, and cause the Company to indemnify any employee of the Company or other corporation which such employee is serving at the request of the Company (his heirs, executors or administrators), who is not a director or officer of the Company or such other corporation against any or all of the expenses, described and set forth in such paragraph A of Article IV.

    D. The foregoing right of indemnification shall not be deemed exclusive of any other rights to which such director, officer or employee may be entitled under the articles, the regulations, any agreement, any insurance purchased by the corporation, vote of shareholders or otherwise as a matter of law.

    ARTICLE V

    CERTIFICATES FOR SECURITIES

    If any certificate for securities of the Company should be lost, stolen or destroyed, any one of the president, the treasurer, or the secretary, upon being furnished with satisfactory evidence as to the loss, theft or destruction and as to the ownership of the certificate, and upon being furnished with appropriate security or indemnity to hold the Company harmless, may authorize a new certificate to be issued in lieu of the lost, stolen or destroyed certificate.

    ARTICLE VI

    SEAL

    The seal of the Company shall be in such form as the boardBoard of directors may from time to time determine.

    ARTICLE VII

    AMENDMENTS

    These regulations may be amended or repealed at any meeting of shareholders called for that purposeor without such meetingby the affirmative voteor consentof the holders of record of shares entitling them to exercise a majority of the voting power on such proposal, except that the affirmative voteor consentof the holders of record of shares entitling them to exercise 75% of the voting power on such proposal shall be required to amend, alter, change or repeal Sections 1 or 5 of Article II, Article IV,or this Article VII, or to amend, alter, change or repeal these regulations in any way inconsistent with the intent of the foregoing provisions.

    As amendedMay 16, 1986June 22, 200628, 2007




    53



    59_______

    2006 A

    NNUAL REPORT


    _______

    2005 ANNUALFINANCIAL REPORT
    2006

    MANAGEMENT’S RESPONSIBILITYFOR FINANCIAL REPORT 2005EPORTING

    MANAGEMENT’S RESPONSIBILITYFOR FINANCIAL REPORTING

    The management of The Kroger Co. has the responsibility for preparing the accompanying financial statements and for their integrity and objectivity. The statements were prepared in accordance with generally accepted accounting principles applied on a consistent basis and are not misstated due to material error or fraud. The financial statements include amounts that are based on management’s best estimates and judgments. Management also prepared the other information in the report and is responsible for its accuracy and consistency with the financial statements.

    The Company’s financial statements have been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, whose selection has been approved by the shareholders. Management has made available to PricewaterhouseCoopers LLP all of the Company’s financial records and related data, as well as the minutes of the shareholders’ and directors’ meetings. Furthermore, management believes that all representations made to PricewaterhouseCoopers LLP during its audit were valid and appropriate.

    Management also recognizes its responsibility for fostering a strong ethical climate so that the Company’s affairs are conducted according to the highest standards of personal and corporate conduct. This responsibility is characterized and reflected inThe Kroger Co. Policy on Business Ethics, which is publicized throughout the Company and available on the Company’s website atwww.kroger.com.The Kroger Co. Policy on Business Ethics addresses, among other things, the necessity of ensuring open communication within the Company; potential conflicts of interests; compliance with all domestic and foreign laws, including those related to financial disclosure; and the confidentiality of proprietary information. The Company maintains a systematic program to assess compliance with these policies.

    MMANAGEMENT’S REPORTONON INTERNAL CONTROL OVER FINANCIAL REPORTING

    The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. With the participation of the Chairman and Chief Executive Officer and the Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria established inInternal Control – Integrated Framework,, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management has concluded that the Company’s internal control over financial reporting was effective as of January 28, 2006.February 3, 2007.

    Our management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of January 28, 2006,February 3, 2007, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in itstheir report, which can be found on page A-30 inA-31 of this Annual Report.

    David B. Dillon
    		J. Michael Schlotman
    Chairman of the Board and
    Chief Executive Officer
    J. Michael Schlotman
    Senior Vice President and
    Chief Executive OfficerChief Financial Officer

    A-1




    SELECTED FINANCIAL DATA


         		      Fiscal Years Ended
    		    

         		      January 28,
    2006
    (52 weeks)
    		    January 29,
    2005
    (52 weeks)
    		    January 31,
    2004
    (52 weeks)
    		    February 1,
    2003
    (52 weeks)
    		    February 2,
    2002
    (52 weeks)

         		      (In millions, except per share amounts)
         		    
    Sales              $60,553        $56,434        $53,791        $51,760        $50,098  
    Earnings (loss) before cumulative effect of accounting change                958           (104)          285           1,218          1,040  
    Cumulative effect of accounting change (1)                —           —           —           (16)          —   
    Net earnings (loss)                958           (104)          285           1,202          1,040  
    Diluted earnings (loss) per share:
    		                                                                                        
    Earnings (loss) before cumulative effect of accounting change                1.31          (0.14)          0.38          1.54          1.26  
    Cumulative effect of accounting change (1)                —           —           —           (.02)          —   
    Net earnings (loss)                1.31          (0.14)          0.38          1.52          1.26  
    Total assets                20,482          20,491          20,767          20,349          19,100  
    Long-term liabilities, including obligations under capital leases and financing obligations                9,377          10,537          10,515          10,569          10,005  
    Shareowners’ equity                4,390          3,619          4,068          3,937          3,592  
    Cash dividends per common share(2)                —           —           —           —           —   
     
    SELECTEDFINANCIALDATA
     Fiscal Years Ended
     February 3,January 28,January 29,January 31,February 1,
     20072006200520042003
     (53 weeks)    (52 weeks)    (52 weeks)    (52 weeks)    (52 weeks)
     (In millions, except per share amounts)
    Sales  $66,111  $60,553  $56,434  $53,791  $51,760 
    Earnings (loss) before cumulative effect of       
           accounting change 1,115 958 (104) 285 1,218 
    Cumulative effect of accounting change (1)  —  — — — (16)
    Net earnings (loss) 1,115 958 (104)285 1,202 
    Diluted earnings (loss) per share:       
           Earnings (loss) before cumulative effect of      
                  accounting change 1.54 1.31 (0.14)0.38 1.54 
           Cumulative effect of accounting change (1) — — — — (0.02)
           Net earnings (loss) 1.54 1.31 (0.14)0.38 1.52 
    Total assets 21,215 20,482 20,491 20,767 20,349 
    Long-term liabilities, including obligations      
           under capital leases and financing      
           obligations 8,711 9,377 10,537 10,515 10,569 
    Shareowners’ equity 4,923 4,390 3,619 4,068 3,937 
    Cash dividends per common share (2)  0.195   —   —   —   — 

    (1)Amounts are net of tax. Refer to Note 4 of the Consolidated Financial Statements.

    (2)     During the fiscal year ended February 2, 2002, the Company was prohibited from paying cash dividends under the terms of its previous Credit Agreement. On May 22, 2002, the Company entered into a new Credit Agreement, at which time the restriction on payment of cash dividends was eliminated. However, no cash dividends were declared or paid in any of the periods presented.

    COMMON STOCK PRICE RANGE
    COMMONSTOCKPRICERANGE
     
       20062005
    Quarter     High    Low     High     Low
    1st   $ 20.98$ 18.05$ 18.22$ 15.15
    2nd   $23.23$19.37$20.00$16.46
    3rd   $24.15$21.49$20.88$19.09
    4th   $25.96$21.12$20.58$18.42



         		      2005
    		    2004
    		    
    Quarter
    		   
    		High
    		   
    		Low
    		   
    		High
    		   
    		Low
    1st              $18.22        $15.15        $19.67        $15.95  
    2nd              $20.00        $16.46        $18.36        $14.70  
    3rd              $20.88        $19.09        $17.31        $14.65  
    4th              $20.58        $18.42        $17.75        $15.53  
     
    Main trading market: New York Stock Exchange (Symbol KR)
     
    Number of shareholders of record at year-end 2005:2006: 50,52261,920 
     
    Number of shareholders of record at March 31, 2006:30, 2007: 54,74253,435 
     
    Determined by number of shareholders of record  

    A-2



    The Company hasdid not paidpay dividends on its Common Stock forduring fiscal year 2005. During fiscal 2006, the pastCompany’s Board of Directors adopted a dividend policy and paid three fiscal years.quarterly dividends of $0.065 per share. On March 7, 2006,1, 2007, the Company paid its fourth quarterly dividend of $0.065 per share. On March 15, 2007, the Company announced that its Board of Directors had adopted a dividend policy and declaredincreased the payment of a quarterly dividend of $0.065to $0.075 per share, payable on June 1, 2007, to shareholders of record at the close of business on May 15, 2006, to be paid on June 1, 2006.

    2007.

    EA-2
    QUITY     C



    OMPENSATION PLAN INFORMATION

    EQUITY COMPENSATION PLAN INFORMATION

    The following table provides information regarding shares outstanding and available for issuance under the Company’s existing equity compensation plans.

     (a) (b)(c)
      Plan Category   Number of securities   Weighted-average   Number of securities 
       to be issued upon   exercise price of   remaining for future 
       exercise of   outstanding options,   issuance under equity 
       outstanding options,   warrants and rights   compensation plans 
       warrants and rights     excluding securities 
          reflected in column (a) 
     Equity compensation plans approved by     
           security holders 51,918,179 $20.09 17,595,505 
     Equity compensation plans not approved by     
           security holders — $— — 
     Total 51,918,179 $20.09 17,595,505 

    A-3



    PERFORMANCE GRAPH

         Set forth below is a line graph comparing the five-year cumulative total shareholder return on Kroger’s common stock, option plans.

    based on the market price of the common stock and assuming reinvestment of dividends, with the cumulative total return of companies in the Standard & Poor’s 500 Stock Index and the Peer Group composed of food and drug companies.

         Historically, our peer group has consisted of the major food store companies. In recent years there have been significant changes in the industry, including consolidation and increased competition from supercenters and drug chains. As a result, in 2003 we changed our peer group ( the “Peer Group”) to include companies operating supermarkets, supercenters and warehouse clubs in the United States as well as the major drug chains with which Kroger competes.

    COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN*
    OF THE KROGER CO., S&P 500 AND PEER GROUP**

     BaseINDEXED RETURNS
     PeriodYears Ending
    Company Name/Index 2001    2002      2003     2004      2005     2006 
    The Kroger Co.100 74.2391.15 84.80 91.34 128.31
    S&P 500 Index 10079.50106.98112.69125.80144.66
    Peer Group 10076.0588.7294.9993.12102.54

         Kroger’s fiscal year ends on the Saturday closest to January 31.

    A-4




    ____________________

    *Total assumes $100 invested on February 3, 2002, in The Kroger Co., S&P 500 Index and the Peer Group, with reinvestment of dividends.
    **The Peer Group consists of Albertson’s, Inc., Costco Wholesale Corp., CVS Corp, Delhaize Group SA (ADR), Great Atlantic & Pacific Tea Company, Inc., Koninklijke Ahold NV (ADR), Marsh Supermarkets Inc. (Class A), Safeway, Inc., Supervalu Inc., Target Corp., Wal-Mart Stores Inc., Walgreen Co., Whole Foods Market Inc. and Winn-Dixie Stores, Inc. Albertson’s, Inc., was substantially acquired by Supervalu in July 2006, and is included through 2005. Marsh Supermarkets was acquired by Marsh Supermarkets Holding Corp. in September 2006, and is included through 2005. Winn-Dixie Stores emerged from bankruptcy in 2006 as a new issue and returns for the old and new issue were calculated then weighted to determine 2006 return.

    Data supplied by Standard & Poor’s.

         The foregoing Performance Graph will not be deemed incorporated by reference into any other filing, absent an express reference thereto.

    A-5


         		      (a)
         		    (b)
         		    (c)
     
    Plan Category
         		      Number of securities
    to be issued upon exercise of
    outstanding options,
    warrants and rights
         		    Weighted-average
    exercise price of
    outstanding options,
    warrants and rights
         		    Number of securities
    remaining for future
    issuance under equity
    compensation plans
    excluding securities
    reflected in column (a)
     
     
    Equity compensation plans approved by security holders                62,684,409(1)        $18.6498          21,981,686  
     
    Equity compensation plans not approved by security holders                —         $—           —   
     
    Total                62,684,409(1)        $18.6498          21,981,686  
     

    ISSUERPURCHASESOFEQUITYSECURITIES
        Maximum
       Total Number Dollar
       of Shares Value of Shares
       Purchased as that May Yet Be
       Part of Purchased
     Total  Publicly Under
     Number AverageAnnounced the Plans or
     of Shares Price PaidPlans or Programs (3)
    Period (1)     Purchased     Per Share    Programs (2)     (in millions)
    First period - four weeks     
           November 5, 2006 to December 2, 2006  1,176,497  $ 21.99 1,175,000 $ 297 
    Second period - four weeks       
           December 3, 2006 to December 30, 2006  1,203,899  $ 23.181,200,000 $ 271
    Third period - five weeks     
           December 31, 2006 to February 3, 2007  2,205,944  $ 23.752,200,000 $ 233
     
    Total  4,586,340  $ 23.154,575,000 $ 233

    (1)This amount includes 3,377,803 unregistered warrants outstanding and originally issued to The Yucaipa Companies pursuant to a Warrant Agreement dated as of May 23, 1996, between Smith’s Food & Drug Centers, Inc. and The Yucaipa Companies, as Consultant.

    A-3



    ISSUER PURCHASESOF EQUITY SECURITIES

    Period(1)
    		      Total Number
    of Shares
    Purchased
    		    Average
    Price Paid
    Per Share
    		    Total Number
    of Shares
    Purchased as
    Part of Publicly
    Announced
    Plans or
    Programs(2)
    		    Maximum Dollar
    Value of Shares
    that May Yet Be
    Purchased Under
    the Plans or
    Programs (3)
    (in millions)
    First four weeks
    November 6, 2005 to December 3, 2005    		                191,497        $19.42          190,000        $154   
    Second four weeks
    December 4, 2005 to December 31, 2005    		                670,000        $19.07          370,000        $147   
    Third four weeks
    January 1, 2006 to January 28, 2006    		                1,978,628        $18.88          1,750,000        $114   
    Total                2,840,125        $18.97          2,310,000        $114   
     
    (1)The reported periods conform to the Company’s fiscal calendar composed of thirteen 28-day periods. The fourth quarter of 20052006 contained threetwo 28-day periods.periods and one 35-day period.

    (2)Shares were repurchased under (i) a $500 million stock repurchase program, authorized by the Board of Directors on September 16, 2004,May 4, 2006, and (ii) a program announced on December 6, 1999, to repurchase common stock to reduce dilution resulting from our employee stock option plans, which program is limited to proceeds received from exercises of stock options and the tax benefits associated therewith. The programs have no expiration date but may be terminated by the Board of Directors at any time. NoTotal number of shares purchased includes shares that were purchased other than through publicly announced programs duringsurrendered to the periods shown.Company by participants in the Company’s long-term incentive plans to pay for taxes on restricted stock awards.

    (3)     Amounts shown in this column reflect amounts remaining under the $500 million stock repurchase program referenced in Note 2 above. Amounts to be invested under the program utilizing option exercise proceeds are dependent upon option exercise activity.

    A-6


    A-4



    BUSINESS

    BUSINESS

    The Kroger Co. was founded in 1883 and incorporated in 1902. As of January 28, 2006,February 3, 2007, the Company was one of the largest retailers in the United States based on annual sales. The Company also manufactures and processes some of the food for sale in its supermarkets. The Company’s principal executive offices are located at 1014 Vine Street, Cincinnati, Ohio 45202, and its telephone number is (513) 762-4000. The Company maintains a web site (www.kroger.com) that includes additional information about the Company. The Company makes available through its web site, free of charge, its annual reports on Form 10-K, its quarterly reports on Form 10-Q and its current reports on Form 8-K, including amendments thereto. These forms are available as soon as reasonably practicable after the Company has filed or furnished them electronically with the SEC.

    The Company’s revenues are earned and cash is generated as consumer products are sold to customers in its stores. The Company earns income predominantly by selling products at price levels that produce revenues in excess of its costs to make these products available to its customers. Such costs include procurement and distribution costs, facility occupancy and operational costs, and overhead expenses.

    EEMPLOYEES

    The Company employs approximately 290,000310,000 full and part-time employees. A majority of the Company’s employees are covered by collective bargaining agreements negotiated with local unions affiliated with one of several different international unions. There are approximately 325320 such agreements, usually with terms of three to five years.

    During fiscal 2005, major collective bargaining agreements were ratified in Atlanta, Columbus, Dallas, Portland (non-food), Roanoke, as well as Teamsters contracts covering southern California and several facilities in the Midwest.

    During fiscal 2006,2007, the Company has variousmajor labor contracts expiring throughoutin southern California, Cincinnati, Detroit, Houston, Memphis, Toledo, Seattle and West Virginia. Negotiations in 2007 will be challenging as the country; there are fewer employees covered by the contracts that expireCompany must have competitive cost structures in 2006 than was the case in 2005.
    each market while meeting our associates’ needs for good wages and affordable health care.

    SSTORES

    As of January 28, 2006,February 3, 2007, the Company operated, either directly or through its subsidiaries, 2,5072,468 supermarkets 579and multi-department stores, 631 of which had fuel centers. Approximately 35%39% of these supermarkets were operated in Company-owned facilities, including some Company-owned buildings on leased land. The Company’s current strategy emphasizes self-development and ownership of store real estate. The Company’s stores operate under several banners that have strong local ties and brand equity. Supermarkets are generally operated under one of the following formats: combination food and drug stores (“combo stores”); multi-department stores; price impact warehouses; or marketplace stores.

    The combo stores are the primary food store format. They are typically able to earn a return above the Company’s cost of capital by drawing customers from a 2 - 2-1/2– 2½ mile radius. The Company believes this format is successful because the stores are large enough to offer the specialty departments that customers desire for one-stop shopping, including “whole health”natural food and organic sections, pharmacies, general merchandise, pet centers and high-quality perishables such as fresh seafood and organic produce. Many combo stores include a fuel center.

    Multi-department stores are significantly larger in size than combo stores. In addition to the departments offered at a typical combo store, multi-department stores sell a wide selection of general merchandise items such as apparel, home fashion and furnishings, electronics, automotive, toys and fine jewelry. Many multi-department stores include a fuel center.

    A-5A-7




    Price impact warehouse stores offer a “no-frills, low cost” warehouse format and feature everyday low prices plus promotions for a wide selection of grocery and health and beauty care items. Quality meat, dairy, baked goods and fresh produce items provide a competitive advantage. The average size of a price impact warehouse store is similar to that of a combo store.

    In addition to supermarkets, the Company operates, either directly or through subsidiaries, 791779 convenience stores and 428412 fine jewelry stores. Substantially all of our fine jewelry stores are operated in leased locations. Subsidiaries operated 701687 of the convenience stores, while 9092 were operated through franchise agreements. Approximately 45%44% of the convenience stores operated by subsidiaries were operated in company-ownedCompany-owned facilities. The convenience stores offer a limited assortment of staple food items and general merchandise and, in most cases, sell gasoline.

    SSEGMENTS

    The Company operates retail food and drug stores, multi-department stores, jewelry stores, and convenience stores throughout the United States. The Company’s retail operations, which represent substantially all of the Company’s consolidated sales, earnings and total assets, are its only reportable segment. All of the Company’s operations are domestic. Revenues, profit and losses, and total assets are shown in the Company’s Consolidated Financial Statements.
    Statements set forth in Item 8 below.

    MERCHANDISINGANDMERCHANDISINGAND MANUFACTURING

    Corporate brand products play an important role in the Company’s merchandising strategy. Supermarket divisions typically stock approximately 10,00011,000 private label items. The Company’s corporate brand products are produced and sold in three quality “tiers.” Private Selection is the premium quality brand designed to be a unique item in a category or to meet or beat the “gourmet” or “upscale” brands. The “banner brand” (Kroger, Ralphs, King Soopers, etc.), which represents the majority of the Company’s private label items, is designed to be equal to or better than the national brand and carries the “Try It, Like It, or Get the National Brand Free” guarantee. FMV (For Maximum Value)Kroger Value is the value brand, designed to deliver good quality at a very affordable price.

    Approximately 55% of the corporate brand units sold are produced in the Company’s manufacturing plants; the remaining corporate brand items are produced to the Company’s strict specifications by outside manufacturers. The Company performs a “make or buy” analysis on corporate brand products and decisions are based upon a comparison of market-based transfer prices versus open market purchases. As of January 28, 2006,February 3, 2007, the Company operated 42 manufacturing plants. These plants consisted of 18 dairies, 11 deli or bakery plants, five grocery product plants, three beverage plants, three meat plants and two cheese plants.

    A-6A-8



    MANAGEMENT’S DISCUSSIONAND ANALYSISOF FINANCIAL CONDITIONAND
    RESULTSOF OPERATION

    OMANAGEMENT’S DISCUSSIONAND ANALYSISOF FINANCIAL CONDITIONAND
    RESULTSOF OPERATIONSUR     B
    USINESS

    OUR BUSINESS

    The Kroger Co. was founded in 1883 and incorporated in 1902. It is one of the nation’s largest retailers, operating 2,5072,468 supermarket and multi-department stores under two dozen banners including Kroger, Ralphs, Fred Meyer, Food 4 Less, King Soopers, Smith’s, Fry’s, Fry’s Marketplace, Dillons, QFC and City Market. Of these stores, 579631 had fuel centers. The CompanyWe also operates 791operate 779 convenience stores and 428412 fine jewelry stores.

    Kroger operates 42 manufacturing plants, primarily bakeries and dairies, which supply approximately 55% of the corporate brand units sold in the Company’s retail outlets.

    Our revenues are earned and cash is generated as consumer products are sold to customers in our stores. We earn income predominately by selling products at price levels that produce revenues in excess of our costs to make these products available to our customers. Such costs include procurement and distribution costs, facility occupancy and operational costs, and overhead expenses. The Company’sOur operations are reported as a single reportable segment: the retail sale of merchandise to individual customers.

    OOUR 2005 2006 PERFORMANCE

    The continued focus of Kroger’sour associates on delivering improved service, product selection and value to our customers generated a year of significantly improved identical supermarket sales growth, excluding fuel sales, in 2005. The 3.5% annual identical food store sales growth, without fuel, achieved in 2005 outpaced the 0.8% identical sales growth achieved on the same basis in 2004, and is a significant improvement over declining identical food store sales experienced in 2003. The fourth quarter growth was broad-based and included all retail divisions and store departments. Through the fourth quarter of 2005, we have achieved ten consecutive quarters of positive2006. Our identical supermarket sales, growth, excluding fuel sales, grew at 5.6% in 2006. These results followed strong 2005 identical supermarket sales, excluding fuel sales.
    sales, of 3.5% in 2005 and 0.8% in 2004.

         Increasing market share helped us achieve our results. Our internal analysis shows that we hold the #1 or #2 market share position in 3538 of our 44 major markets. We define a major market as one in which we operate nine or more stores. According to our internal market share estimates, which include all retail outlets including supercenters and other non-traditional retail formats, Kroger’s marketOur share increased in 2936 of these 44 major markets, in 2005, declined in 12seven and remained unchanged in three.one. On a volume-weighted basis, Kroger’sour overall market share in these 44 major markets increased 35approximately 65 basis points.
    points during 2006.

    Kroger competes in 32     We compete against a total of 1,262 supercenters, an increase of 133 over 2005. There are 34 major markets wherein which supercenters have achieved at least a #3 market share position. Kroger’sOur overall market share in these 3234 major markets, rose more than 50on a volume-weighted basis, increased over 70 basis points during 2005, on a volume-weighted basis.2006. Our market share increased in 2427 of thosethese 34 major markets, declined in seven,six and remained unchanged in one.

    These     All of the market share estimates described above are based on our internal data illustrateand analysis. We believe they are reliable but can provide no other assurance of reliability. We believe this market share analysis illustrates that Kroger continuescontinued to grow, despite an operating environmentachieve significant growth in 2006, even in the food retailingface of aggressive expansion in the supermarket industry that continues to be characterized by supercenters, intense price competition, aggressive supercenter expansion, increasing fragmentation of retail formats and market consolidation. Kroger’sOur retail price investments, combined with our service and selling initiatives, led to these market share gains in 2005.2006. We believe this growth can continue.there is still significant room for growth. In our 44 major markets, almost 50%we estimate approximately 47% of the share in those markets iscontinues to be held by competitors without our economies of scale.

    Kroger has been     We were able to balance itsour sales growth with earnings growth. Our net earnings increased 16.4% to $1.54 per diluted share in 2006, from $1.31 per diluted share in 2005, from $1.022005. Earnings growth was primarily driven by strong identical supermarket sales growth, improving operating margins and fewer shares

    A-9



    outstanding. In addition, fiscal 2006 included a 53rd week that benefited the year by an estimated $0.07 per diluted share, excludingadjustments to certain deferred tax balances that benefited the effectyear by $0.03 per diluted share, expense totaling $0.03 per diluted share for increases in legal reserves, and $0.06 per diluted share of goodwill impairment charges, in 2004. We were not only able to leverage sales improvements to achieve earnings growth, but also offset investments in targeted retail

    expense for the adoption of stock option expensing.

    FA-7
    UTURE     E



    XPECTATIONS


    price reductions and higher energy, credit card and pension costs with continued recovery from the 2003 - 2004 labor dispute in southern California, as well as improvements in shrink, advertising, warehousing, and health care costs.

    FUTURE EXPECTATIONS

    While we were very pleased with our 20052006 results, we must continue to developadjust our business model to meet the changing needs and expectations of our customers. Our plan requires balance between sales growth, earnings growth and profitable capital investment.

    We expect to achieve identical supermarket sales growth through merchandising and operating initiatives that improve the shopping experience for our customers and buildcontinue building customer loyalty. We expect 2006 food store identical supermarket sales growth, excluding fuel sales, to exceed 3.5%.
    of 3%-5% in 2007.

    To the extent that these sales initiatives involve price reductions or additional costs, we expect they will be funded by operating cost reductions and productivity improvements. We expect sales improvements and cost reductions, combined with fewer shares outstanding, due to continued share repurchase activity, to drive earnings per share growth in 2006. Kroger expects to deliver2007. We expect earnings per share in 2007 of $1.60-$1.65 per diluted share. This represents earnings per share growth in 2006 of approximately 6% to 8%. This includes9%-12% in 2007, net of the effect of a 53rd week in fiscal 2006 substantially offset by the expected effect of expensing of stock options, which we anticipate will reduce net earnings approximately $0.05-$0.06$0.07 per diluted share. See “Recently Issued Accounting Standards” for additional discussion of the expensing of stock options beginning in 2006.

    In addition, on March 7, 2006, we announced that Kroger’s15, 2007, the Board of Directors declared the payment of aan increase in Kroger’s quarterly dividend of $0.065to $0.075 per share. The payment will be made June 1, 2006 to holders of record at the close of business on May 15, 2006.

    Further discussion on our industry, the current economic environment and our related strategic plans is included in “Outlook.”
    the “Outlook” section.

    RRESULTSOF OPERATIONS

    The following discussion summarizes our operating results for 2006 compared to 2005 and for 2005 compared to 2004 and for 2004 compared to 2003.2004. Comparability is affected by certain income and expense items that fluctuated significantly between and among the periods, including goodwill and asset impairment charges and a labor disputesdispute in West Virginia and southern California.
    California in 2004.

    Net Earnings (Loss)

    Net earnings totaled $1,115 million for 2006, compared to net earnings totaling $958 million forin 2005 compared toand a net loss totaling $104 million in 2004 and net earnings totaling $285 million in 2003.2004. The increase in our net earnings for 2005,2006, compared to 20042005 and 2003,2004, resulted from improvements in the southern California market and the leveraging of fixed costs with strong identical supermarket sales growth.growth, as well as the effect of a 53rd week in 2006. In addition, 2004 and 2003 werewas negatively affected by goodwill and asset impairment charges totaling $904 million, and $591 million, respectively, as well as a labor disputesdispute in West Virginia and southern California.

    Earnings per diluted share totaled $1.54 in 2006, compared to $1.31 per share in 2005 compared toand a net loss of $0.14 per share in 2004 and earnings of $0.38 per diluted share in 2003.2004. Net earnings in 2006 benefited by $0.07 per share due to the 53rd week and $0.03 per share from the adjustment of certain deferred tax balances. Net earnings in 2006 also included expense of $0.03 per share recorded for legal reserves. Net earnings were reduced by $1.16 per share in 2004 and $0.78 per diluted share in 2003 due to the effects of goodwill and asset impairment charges. Our earnings per share growth in 2006 and 2005 resulted from increased net earnings and the repurchase of Kroger stock. During fiscal 2006, we

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    repurchased 29 million shares of Kroger stock for a total investment of $633 million. During fiscal 2005, we repurchased 15 million shares of Krogerour stock for a total investment of $252 million. During fiscal 2004, we repurchased 20 million shares of our stock

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    for a total investment of $319 million. During fiscal 2003, we repurchased 19 million shares of Kroger stock for a total investment of $301$319 million.

    Sales

    Total Sales
    (in millions)
      Percentage Percentage 
     2006    Increase    2005    Increase    2004
    Total food store sales without fuel$57,7127.9%$53,472 4.6%$51,106
    Total food store fuel sales 4,45526.3% 3,52653.0% 2,305
    Total food store sales$62,1679.1%$56,9986.7%$53,411
    Other sales (1) 3,94410.9% 3,55517.6% 3,023
    Total Sales $66,1119.2%$60,5537.3%$56,434

    (1)Other sales primarily relate to sales at convenience stores, including fuel, jewelry stores and sales by our manufacturing plants to outside firms.

    Total Sales
    (     The growth in millions)


         		      2005
    		    Percentage
    Increase
    		    2004
    		    Percentage
    Increase
    		    2003
    Total food store sales without fuel              $53,472          4.6%        $51,106          2.9%        $49,650  
    Total food store fuel sales                3,526          53.0%          2,305          59.0%          1,450  
    Total food store sales              $56,998          6.7%        $53,411          4.5%        $51,100  
    Other sales                3,555          17.6%          3,023          12.3%          2,691  
    Total Sales              $60,553          7.3%        $56,434          4.9%        $53,791  
     

    Ourour total sales rose as awas primarily the result of increasedidentical store sales increases, the addition of a 53rd week in 2006 and inflation in pharmacy and some perishable commodities. Increased transaction count and average transaction size were both responsible for our increases in identical supermarket sales, and square footage growth, as well as inflationexcluding retail fuel operations. After adjusting for the extra week in fuel and other commodities.
    fiscal 2006, total sales increased 7.0% over fiscal 2005.

    We define a supermarket as identical when it has been in operation without expansion or relocation for five full quarters. Differences between total supermarket sales and identical supermarket sales primarily relate to changes in supermarket square footage. We calculate annualized identical supermarket sales based on a summation of four quarters of identical supermarket sales. Our identical supermarket sales results are summarized in the table below.below, based on the 53-week period of 2006, compared to the same 53-week period of the previous year.

    Identical Supermarket Sales
    (in millions)
     2006        2005 
    Including supermarket fuel centers$59,592 $55,993 
    Excluding supermarket fuel centers$55,399 $52,483 
     
    Including supermarket fuel centers6.4% 5.3%
    Excluding supermarket fuel centers5.6% 3.5%

    Identical Supermarket Sales
    (in millions)


         		      2005
    		    2004
    Including fuel centers              $54,144        $51,413  
    Excluding fuel centers              $50,866        $49,154  
     
    Including fuel centers                5.3%          2.1%  
    Excluding fuel centers                3.5%          0.8%  
     

    We define a supermarket as comparable store when it has been in operation for five full quarters, including expansions and relocations. We calculate annualized comparable supermarket sales based on a summation of four quarters of comparable sales. Our annualized comparable supermarket sales results are summarized in the table below.
    below, based on the 53-week period of 2006, compared to the same 53-week period of the previous year.

    Comparable Supermarket SalesA-11


    (in millions)


         		      2005
    		    2004
    Including supermarket fuel centers              $55,607        $52,514  
    Excluding supermarket fuel centers              $52,200        $50,226  
     
    Including supermarket fuel centers                5.9%          2.6%  
    Excluding supermarket fuel centers                3.9%          1.3%  
     

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    Comparable Supermarket Sales
    (in millions)
     2006         2005 
    Including supermarket fuel centers $61,045 $57,203 
    Excluding supermarket fuel centers $56,702 $53,622 
     
    Including supermarket fuel centers 6.7%5.9%
    Excluding supermarket fuel centers 5.7%3.9%


    FIFO Gross Margin

    We calculate First-In, First-Out (“FIFO”) Gross Margin as follows: Sales minus merchandise costs plus Last-In, First-Out (“LIFO”) charge (credit). Merchandise costs include advertising, warehousing and transportation, but exclude depreciation expense and rent expense. FIFO gross margin is an important measure used by our management to evaluate merchandising and operational effectiveness.

         Our FIFO gross margin rates were 24.80%24.27%, 24.80% and 25.38% in 2006, 2005 and 26.38% in 2005, 2004, and 2003, respectively. Excluding the effect of retail fuel operations, our FIFO gross margin rates were 26.69%, 26.73% and 27.31% in 2005, 2004 and 2003, respectively. The growth in our retailRetail fuel sales lowerslowered our FIFO gross margin rate due to the very low FIFO gross margin on retail fuel sales as compared to non-fuel sales. Excluding the effect of retail fuel operations, our FIFO gross margin rates were 26.43%, 26.69% and 26.73% in 2006, 2005 and 2004, respectively. The declining rates ondecrease in our non-fuel sales reflectFIFO gross margin rate reflects our continued investment inreinvestment of operating cost savings into lower retail prices for our customers. In 2005, improvements in shrink, advertising and warehousing costs helped offset higher energy costs and our investments in targeted retail price reductions for our customers. We estimate higher energy costs decreased our FIFO gross margin rate on non-fuel sales by 5 basis points in 2005.

    Operating, General and Administrative Expenses

    Operating, general and administrative (“OG&A”) expenses consist primarily of employee-related costs such as wages, health care benefit costs and retirement plan costs. Among other items, rent expense, depreciation and amortization expense, and interest expense are not included in OG&A.

         OG&A expenses, as a percent of sales, were 18.21%17.91%, 18.21% and 18.76% in 2006, 2005 and 19.25% in 2005, 2004, and 2003, respectively. Excluding the effect of retail fuel operations, our OG&A rates were 19.68%, 19.81% and 19.98% in 2005, 2004 and 2003, respectively. The growth in our retail fuel sales lowers our OG&A rate due to the very low OG&A rate on retail fuel sales as compared to non-fuel sales. The decliningExcluding the effect of retail fuel operations, our OG&A expenses, as a percent of sales, were 19.59%, 19.68% and 19.81% in 2006, 2005 and 2004, respectively. Excluding the effect of retail fuel operations, expenses recorded for legal reserves and stock option expense, our OG&A rate on non-fuel salesdeclined 28 basis points in 2006. This decrease was primarily the result of our continued recovery in southern California, strongdriven by identical supermarketstore sales growth, by increasing store labor productivity, improvements, lowerand by progress we have made in controlling our health care costs and $12.9 million of settlement income related to a previous class-action credit card lawsuit.costs. These improvements were partially offset by increasedincreases in pension costs,expense and credit card fees and incentive plan expenses, increases in reserves for certain legal matters, the writedown to fair market value of assets held for sale, and the effects of hurricanes Katrina and Rita. We estimate higher energy costs increased our 2005 OG&A rate on non-fuel sales by 7 basis points.

    fees.

    Rent Expense

    Rent expense was $649 million in 2006, as compared to $661 million and $680 million in 2005 and 2004, respectively. Rent expense, as a percent of sales, was 0.98% in 2006, as compared to $680 million1.09% in 2005 and $657 million1.21% in 2004 and 2003, respectively.2004. The decrease in rent expense reflects our increasing sales leverage and our continued emphasis on ownership of real estate. The decline from 2004 was also affected by a decrease inestate when available, as well as decreased charges for the net present value of leaseclosed-store future rent liabilities recorded for store closings.
    in 2006 and 2005 compared to 2004.

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    Depreciation and Amortization Expense

    Depreciation and amortization expense was $1,272 million, $1,265 million and $1,256 million for 2006, 2005 and $1,209 million for 2005, 2004, and 2003, respectively. The slight increaseincreases in depreciation and amortization expense in 2005 waswere the result of current capital expenditures totaling $1,777 million, $1,306 million and $1,634 million in 2006, 2005 and 2004, respectively. Depreciation and amortization expense, as a percent of $1.3 billion. Capital expendituressales, was 1.92%, 2.09% and 2.23% in 2006, 2005 and 2004, respectively. The decrease in our depreciation and 2003 were $1.6 billion and $2.0 billion, respectively.
    amortization expense, as a percent of sales, is primarily the result of total sales increases.

    Interest Expense

    Net interest expense totaled $488 million, $510 million and $557 million for 2006, 2005 and $604 million for 2005, 2004, and 2003, respectively. The decrease in interest expense iswas the result of lower average borrowings. During 2005,2006, we reduced total debt

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    $739 $173 million from $8.0 billion as of January 29, 2005 to $7.2 billion as of January 28, 2006.2006, to $7.1 billion as of February 3, 2007. Interest expense in 2004 and 2003 included $25 million and $18 million, respectively, related to the early retirement of debt.

    Income Taxes

    Our effective income tax rate was 37.2%36.2%, 37.2% and 136.4% for 2006, 2005 and 61.4% for 2005, 2004, and 2003, respectively. The effective tax rates for 20042006 and 20032005 differ from the effective tax rate for 20052004 due to the impairment of non-deductible goodwill in 2004 and 2003.2004. The effective income tax rates also differ from the expected federal statutory rate in all years presented due to the effect of state taxes.
    taxes as well as the adjustment of certain deferred tax balances in 2006.

    COMMON STOCK REPURCHASE PROGRAM
         During the reconciliation of our deferred tax balances, after the filing of annual federal and state tax returns, we identified adjustments to be made in the previous years’ deferred tax reconciliation. We corrected these deferred tax balances in our Consolidated Financial Statements for the year ended February 3, 2007, which resulted in a reduction of our 2006 provision for income tax expense of approximately $21 million and reduced the rate by 120 basis points. We do not believe these adjustments are material to our Consolidated Financial Statements for the year ended February 3, 2007, or to any prior years’ Consolidated Financial Statements. As a result, we have not restated any prior year amounts.

    COMMONSTOCK REPURCHASE PROGRAM

    We maintain a trading plan understock repurchase program that complies with Securities Exchange Act Rule 10b5-1 to allow for ourthe orderly repurchase of Krogerour common stock, from time to time, even though we may be aware of material non-public information, as long as purchases are made in accordance with the plan.time. We made open market purchases totaling $374 million, $239 million $291 million and $277$291 million under this repurchase program during fiscal 2006, 2005 2004 and 2003,2004, respectively. In addition to this repurchase program, in December 1999 we began a program to repurchase common stock to reduce dilution resulting from our employee stock option plans. This program is solely funded by proceeds from stock option exercises, including the tax benefit from these exercises. We repurchased approximately $259 million, $13 million $28 million and $24$28 million under the stock option program during 2006, 2005 and 2004, and 2003, respectively.

    CCAPITAL EXPENDITURES

    Capital expenditures, including changes in construction-in-progress payable and excluding acquisitions, totaled $1.3 billion$1,777 million in 2006 compared to $1,306 million in 2005 compared to $1.6 billionand $1,634 million in 2004 and $2.0 billion in 2003.2004. The decline in 2005 and 2004 was the result of our emphasis on the tightening of capital and increasing our focus on remodels, merchandising and productivity projects. Capital expenditures in 2003 included $202 million related to the purchase of assets previously financed under a synthetic lease. The table below shows our supermarket storing activity and our total food store square footage:

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    Supermarket Storing Activity

     2006    2005    2004
    Beginning of year 2,507 2,532 2,532 
    Opened 20 28 41 
    Opened (relocation) 17 12 20 
    Acquired 1 1  15 
    Acquired (relocation) —  — 3 
    Closed (operational) (60)(54)(56)
    Closed (relocation) (17)(12)(23)
    End of year 2,468 2,507 2,532 
    Total food store square footage (in millions) 142 142 141 

    CRITICAL ACCOUNTING POLICIES


         		      2005
    		    2004
    		    2003
    Beginning of year                2,532          2,532          2,488  
    Opened                28          41           44   
    Opened (relocation)                12          20           14   
    Acquired                1          15           25   
    Acquired (relocation)                —           3           5   
    Closed (operational)                (54)          (56)          (25)  
    Closed (relocation)                (12)          (23)          (19)  
    End of year                2,507          2,532          2,532  
    Total food store square footage (in millions)                142          141           140   
     

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    CRITICAL ACCOUNTING POLICIES

    We have chosen accounting policies that we believe are appropriate to report accurately and fairly our operating results and financial position, and we apply those accounting policies in a consistent manner. Our significant accounting policies are summarized in Note 1 to the Consolidated Financial Statements.

    The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and other factors we believe 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 could differ from those estimates.

    We believe that the following accounting policies are the most critical in the preparation of our financial statements because they involve the most difficult, subjective or complex judgments about the effect of matters that are inherently uncertain.

    Self-Insurance Costs

    We primarily are self-insured for costs related to workers’ compensation and general liability claims. The liabilities represent our best estimate, using generally accepted actuarial reserving methods, of the ultimate obligations for reported claims plus those incurred but not reported for all claims incurred through January 28, 2006. Case-reservesFebruary 3, 2007. Case reserves are established for reported claims using case-basis evaluation of the underlying claim data and are updated as information becomes known.

    The liabilities for workers’ compensation claims are accounted for on a present value basis utilizing a risk-adjusted discount rate. The difference between the discounted and undiscounted workers’ compensation liabilities was $17 million as of January 28, 2006.     For both workers’ compensation and general liability claims, we have purchased stop-loss coverage to limit our exposure to any significant exposure on a per claim basis. We are insured for covered costs in excess of these per claim limits. The liabilities for workers’ compensation claims are accounted for on a present value basis utilizing a risk-adjusted discount rate. A 25 basis point decrease in our discount rate would increase our liability by approximately $3 million. General liability claims are not discounted.

    We are also similarly self-insured for property-related losses. We have purchased stop-loss coverage to limit our exposure to losses in excess of $10$25 million on a per claim basis.
    basis, except in the case of an earthquake, for which stop-loss coverage is in excess of $50 million per claim, up to $200 million per claim in California and $300 million outside of California.

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    The assumptions underlying the ultimate costs of existing claim losses are subject to a high degree of unpredictability, which can affect the liability recorded for such claims. For example, variability in inflation rates of health care costs inherent in these claims can affect the amounts realized. Similarly, changes in legal trends and interpretations, as well as a change in the nature and method of how claims are settled can affect ultimate costs. Although ourOur estimates of liabilities incurred do not anticipate significant changes in historical trends for these variables, and any changes could have a considerable effect upon future claim costs and currently recorded liabilities.

    Impairments of Long-Lived Assets

    In accordance with SFASStatement of Financial Accounting Standards (“SFAS”) No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, we monitor the carrying value of long-lived assets for potential impairment each quarter based on whether certain trigger events have occurred. These events include current period losses combined with a history of losses or a projection of continuing losses or a significant decrease in the market value of an asset. When a trigger event occurs, we perform an impairment calculation, is performed, comparing projected undiscounted cash flows, utilizing current cash flow information and expected growth rates related to specific stores, to the carrying value for those stores. If we identify impairment is identified for

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    long-lived assets to be held and used, we compare discounted future cash flows to the asset’s current carrying value. We record impairment when the carrying value exceeds the discounted cash flows. With respect to owned property and equipment held for disposal, we adjust the value of the property and equipment is adjusted to reflect recoverable values based on our previous efforts to dispose of similar assets and current economic conditions. Impairment is recognizedWe recognize impairment for the excess of the carrying value over the estimated fair market value, reduced by estimated direct costs of disposal.

    We perform impairment reviews at both the division and corporate levels. Generally, for reviews performed by local management,record costs to reduce the carrying value of long-lived assets are reflected in the Consolidated Statements of EarningsOperations as “Operating, general and administrative” expense. Costs to reduce the carrying value of long-lived assets that result from corporate-level strategic plans are separately identified in the Consolidated Statements of Earnings as “Asset impairment charges.”

    The factors that most significantly affect the impairment calculation are our estimates of future cash flows. Our cash flow projections look several years into the future and include assumptions on variables such as inflation, the economy and market competition. Application of alternative assumptions and definitions, such as reviewing long-lived assets for impairment at a different organizational level, could produce significantly different results.

    Goodwill

    We review goodwill for impairment during the fourth quarter of each year, and also upon the occurrence of trigger events. The reviews are performed at the operating division level. Generally, fair value represents a multiple of earnings, or discounted projected future cash flows, and is comparedwe compare fair value to the carrying value of a division for purposes of identifying potential impairment. ProjectedWe base projected future cash flows are based on management’s knowledge of the current operating environment and expectations for the future. If we identify potential for impairment, is identified,we measure the fair value of a division is measured against the fair value of its underlying assets and liabilities, excluding goodwill, to estimate an implied fair value of the division’s goodwill. GoodwillWe recognize goodwill impairment is recognized for any excess of the carrying value of the division’s goodwill over the implied fair value. Results of the goodwill impairment reviews performed during 2006, 2005 2004 and 20032004 are summarized in Note 42 to the Consolidated Financial Statements.

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    The annual impairment review requires the extensive use of accounting judgment and financial estimates. Application of alternative assumptions and definitions, such as reviewing goodwill for impairment at a different organizational level, could produce significantly different results. Similar to our policy on impairment of long-lived assets, the cash flow projections embedded in our goodwill impairment reviews can be affected by several items such as inflation, the economy and market competition.

    Intangible Assets

    In addition to goodwill, we have recorded intangible assets totaling $35$26 million, $20$22 million and $30$28 million for leasehold equities, liquor licenses and pharmacy prescription file purchases, respectively, at January 28, 2006.February 3, 2007. Balances at January 29, 2005,28, 2006, were $40$35 million, $20 million and $29$30 million for lease equities, liquor licenses and pharmacy prescription files, respectively. LeaseholdWe amortize leasehold equities are amortized over the remaining life of the lease. OwnedWe do not amortize owned liquor licenses, are not amortized, whilehowever, we amortize liquor licenses that must be renewed are amortized over their useful lives. PharmacyWe amortize pharmacy prescription file purchases are amortized over seven years. TheseWe consider these assets are considered annually during our testing for impairment.

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    Store Closing Costs

    We provide for closed store liabilities relating to the present value of the estimated remaining noncancellable lease payments after the closing date, net of estimated subtenant income. We estimate the net lease liabilities using a discount rate to calculate the present value of the remaining net rent payments on closed stores. The closed store lease liabilities usually are paid over the lease terms associated with the closed stores, which generally have remaining terms ranging from one to 20 years. Adjustments to closed store liabilities primarily relate to changes in subtenant income and actual exit costs differing from original estimates. Adjustments are made for changes in estimates in the period in which the change becomes known. StoreWe review store closing liabilities are reviewed quarterly to ensure that any accrued amount that is not a sufficient estimate of future costs, or that no longer is needed for its originally intended purpose, is adjusted to income in the proper period.

    We estimate subtenant income, future cash flows and asset recovery values based on our experience and knowledge of the market in which the closed store is located, our previous efforts to dispose of similar assets and current economic conditions. However, theThe ultimate cost of the disposition of the leases and the related assets is affected by current real estate markets, inflation rates and general economic conditions.

    Owned     We reduce owned stores held for disposal are reduced to their estimated net realizable value. CostsWe account for costs to reduce the carrying values of property, equipment and leasehold improvements are accounted for in accordance with our policy on impairment of long-lived assets. InventoryWe classify inventory write-downs if any, in connection with store closings, are classifiedif any, in “Merchandise costs.” CostsWe expense costs to transfer inventory and equipment from closed stores as they are expensed as incurred.

    Post-Retirement Benefit Plans

    (a) Company-sponsored Pension Plans

         Effective February 3, 2007, we adopted the recognition and disclosure provisions of SFAS No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB Statements No. 87, 99, 106 and 123(R), which required the recognition of the funded status of its retirement plans on the Consolidated Balance Sheet. We are now required to record, as a component of Accumulated Other Comprehensive Income (“AOCI”), actuarial gains or losses, prior service costs or credits and transition obligations that have not yet been recognized.

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    (a)  Company-sponsored Pension Plans


    The determination of our obligation and expense for Company-sponsored pension plans and other post-retirement benefits is dependent upon our selection of assumptions used by actuaries in calculating those amounts. Those assumptions are described in Note 1714 to the Consolidated Financial Statements and include, among others, the discount rate, the expected long-term rate of return on plan assets, average life expectancy and the rate of increases in compensation and health care costs. In accordance with Generally Accepted Accounting Principles (“GAAP”), actualActual results that differ from our assumptions are accumulated and amortized over future periods and, therefore, generally affect our recognized expense and recorded obligation in future periods. While we believe that our assumptions are appropriate, significant differences in our actual experience or significant changes in our assumptions, including the discount rate used and the expected return on plan assets, may materially affect our pension and other post-retirement obligations and our future expense. Note 1714 to the Consolidated Financial Statements discusses the effect of a 1% change in the assumed health care cost trend rate on other post-retirement benefit costs and the related liability.

    The objective of our discount rate assumption wasis to reflect the rate at which the pension benefits could be effectively settled. In making this determination, we tooktake into account the timing and amount of benefits that would be available under the plan.plans. Our methodology for selecting the discount rate as of year-end 20052006 was to match the plan’s cash flows to that of a yield curve that provides the equivalent yields on zero-coupon corporate bonds for each maturity. Benefit cash flows due in a particular year can be “settled” theoretically by “investing” them in the zero-coupon bond that matures in the same year. The discount rate is the single rate that produces the same present value of cash flows. The selection of the 5.70%5.90% discount rate as of year-end 20052006 represents the equivalent single rate under a broad-market AA yield curve constructed by our outside consultant, Mercer Human Resource Consulting. We utilized a discount rate of 5.75%5.70% for year-end 2004.2005. The 520 basis point reductionincrease in the discount rate increaseddecreased the projected pension benefit obligation as of January 28, 2006,February 3, 2007, by approximately $12$68 million.

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    To determine the expected return on pension plan assets, we consider current and forecasted plan asset allocations as well as historical and forecasted returns on various asset categories. For 2006 and 2005, we assumed a pension plan investment return rate of 8.5%, consistent with 2004.. Our pension plan’s average return was 9.6%9.7% for the 10 calendar years ended December 31, 2005,2006, net of all investment management fees and expenses. Our actual return for the pension plan calendar year ending December 31, 2005,2006, on that same basis, was 10.3%13.4%. We believe the pension return assumption is appropriate because we do not expect that future returns will achieve the same level of performance as the historical average annual return. We have been advised that during 20062007 and 2007,2008, the trustees plan to reduce from 61%50% to 42% the allocation of pension plan assets to domestic and international equities and increase from 12%18% to 30%27% the allocation to non-core assets, including inflation-linked bonds, commodities, hedge funds and real estate. Furthermore, in order to augment the return on domestic equities and investment grade debt securities during 20062007 and 2007,2008, the trustees plan to increase hedge funds within these sectors from 3%7% to 15%22%. Collectively, these changes should improve the diversification of pension plan assets. The trustees expect these changes towill have little effect on the total return but will reduce the expected volatility of the return. See Note 1714 to the Consolidated Financial Statements for more information on the asset allocations of pension plan assets.

    Sensitivity to changes in the major assumptions used in the calculation of Kroger’s pension plan liabilities for the Qualified Plans is illustrated below (in millions).


    		Percentage
    Point Change
    		Projected Benefit
    Obligation
    Decrease/(Increase)
    		Expense
    Decrease/(Increase)
    Discount Rate     Projected Benefit    ± 1.0
    %  PercentageObligationExpense
    Point ChangeDecrease/(Increase)Decrease/(Increase)
    Discount Rate +/-1.0% $277/350/($315306) $27/($3338/($36))  
    Expected Return on Assets+/-1.0%± 1.0%  — $21/($21) $15/($15)  

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    In 2005, we updated the mortality table used to determine average life expectancy in the calculation of our pension obligation to the RP-2000 Projected to 2015 mortality table. The change in this assumption increased our projected benefit obligation by approximately $93 million at the time of the change, and is reflected in unrecognized actuarial (gain) loss as of the measurement date.

    We contributed $150 million, $300 million $35 million and $100$35 million to our Company-sponsored pension plans in 2006, 2005 2004 and 2003,2004, respectively. Although we are not required to make cash contributions to our Company-sponsored pension plans during fiscal 2006,2007, we made a $150contributed $50 million cash contributionto the plans on February 5, 2007. We may elect to make additional voluntary contributions to our qualifiedCompany-sponsored pension plans on March 27, 2006.in order to maintain our desired funding status. Additional contributions may be made if our cash flows from operations exceed our expectations. We expect any elective contributions made during 20062007 will decrease our required contributions in future years. Among other things, investment performance of plan assets, the interest rates required to be used to calculate the pension obligations, and future changes in legislation, will determine the amounts of any additional contributions.

    (b)  Multi-Employer Plans

         Effective January 1, 2007, the Cash Balance Plan was replaced with a 401(k) Retirement Savings Account Plan, which will provide both Company matching contributions and other Company contributions based upon length of service, to eligible employees. We expect to make matching contributions in 2007 of approximately 75 million.

    (b) Multi-Employer Plans

    We also contribute to various multi-employer pension plans based on obligations arising from most of our collective bargaining agreements. These plans provide retirement benefits to participants based on their service to contributing employers. The benefits are paid from assets held in trust for that purpose. Trustees are appointed in equal number by employers and unions. The trustees typically are responsible for determining the level of benefits to be provided to participants as well as for such matters as the investment of the assets and the administration of the plans.

    We recognize expense in connection with these plans as contributions are funded, in accordance with GAAP. We made contributions to these plans, and recognized expense, of $204 million in 2006, $196 million in 2005, and $180 million in 2004, and $169 million in 2003.2004. We estimate we would have contributed an additional $2 million in 2004 and $13 million in 2003, but our obligation to contribute was suspended during the southern California and West Virginia labor disputes.
    dispute.

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    Based on the most recent information available to us, we believe that the present value of actuarialactuarially accrued liabilities in most or all of these multi-employer plans substantially exceeds the value of the assets held in trust to pay benefits. We have attempted to estimate the amount by which these liabilities exceed the assets, i.e.(i.e., the amount of underfunding,underfunding), as of December 31, 2005.2006. Because Kroger is only one of a number of employers contributing to these plans, we also have attempted to estimate the ratio of Kroger’s contributions to the total of all contributions to these plans in a year as a way of assessing Kroger’s “share” of the underfunding. As of December 31, 2005,2006, we estimate that Kroger’s share of the underfunding of multi-employer plans to which Kroger contributes was $1.0$600 million to $1.3 billion,$800 million, pre-tax, or $625$375 million to $813$500 million, after-tax. This is consistent withrepresents a decrease in the amount of underfunding estimated as of December 31, 2004.2005. This decrease is attributable to, among other things, the continuing benefit of plan design changes and the investment returns on assets held in trust for the plans during 2006. Our estimate is based on the best information available to us including actuarial evaluations and other data (that include the estimates of others), and such information may be outdated or otherwise unreliable. Our estimate is imprecise and not necessarily reliable.

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    We have made and disclosed this estimate not because this underfunding is a direct liability of Kroger. Rather, we believe the underfunding is likely to have important consequences. We expect our contributions to these multi-employer plans will continue to increase each year, and therefore the expense we recognize under GAAP will increase. In 2005,2006, our contributions to these plans increased approximately 9%4% over the prior year.year and have grown at a compound annual rate of approximately 6% since 2003. We expect our contributions to increase by approximately five percent1.0% in 2006 and each year thereafter.2007. The amount of increases in 20062007 and beyond has been favorably affected by significant improvement in the values of assets held in trusts, by the labor agreements negotiated in southern California and elsewhere during 2005in recent years, and 2004, as well as by related trustee actions. Although underfunding can result in the imposition of excise taxes on contributing employers, increased contributions can reduce underfunding so that excise taxes are not triggered. Our estimate of future contribution increases takes into account the avoidance of those taxes. Finally, underfunding means that, in the event we were to exit certain markets or otherwise cease making contributions to these funds, we could trigger a substantial withdrawal liability. Any adjustment for withdrawal liability will be recorded when it is probable that a liability exists and can be reasonably estimated, in accordance with SFAS No. 87,Employer’sEmployers’ Accounting for PensionsPensions..

    The amount of underfunding described above is an estimate and is disclosed for the purpose described. The amount could decline, and Kroger’s future expense would be favorably affected, if the values of net assets held in the trust significantly increase or if further changes occur through collective bargaining, trustee action or favorable legislation. On the other hand, Kroger’s share of the underfunding would increase and Kroger’s future expense could be adversely affected if net asset values decline, if employers currently contributing to these funds cease participation or if changes occur through collective bargaining, trustee action or adverse legislation.

    Deferred Rent

    We recognize rent holidays, including the time period during which we have access to the property for construction of buildings or improvements, as well as construction allowances and escalating rent provisions on a straight-line basis over the term of the lease. The deferred amount is included in Other Current Liabilities and Other Long-Term Liabilities on the Consolidated Balance Sheets.

    Tax Contingencies

    Various taxing authorities periodically audit our income tax returns. These audits include questions regarding our tax filing positions, including the timing and amount of deductions and the allocation of income to various tax jurisdictions. In evaluating the exposures connected with these various tax filing positions, including state and local taxes, we record allowances for probable exposures. A number of years may elapse before a particular matter, for which

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    we have established an allowance, is audited and fully resolved. As of January 28, 2006,February 3, 2007, tax years 2002 through 2004 were undergoing examination by the Internal Revenue Service.

    The establishment of our tax contingency allowances relies on the judgment of management to estimate the exposures associated with our various filing positions. Although management believes those estimates and judgments are reasonable, actual results could differ, resulting in gains or losses that may be material to our Consolidated Statements of Operations.

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    To the extent that we prevail in matters for which allowances have been established, or are required to pay amounts in excess of these allowances, our effective tax rate in any given financial statement period could be materially affected. An unfavorable tax settlement could require use of cash and result in an increase in our effective tax rate in the year of resolution. A favorable tax settlement would be recognized as a reduction in our effective tax rate in the year of resolution.

    Stock Option Plans   Share-Based Compensation Expense

    We applyEffective January 29, 2006, we adopted the fair value recognition provisions of SFAS No. 123(R),Share-Based Payment, using the modified prospective transition method and, therefore, have not restated results for prior periods. Under this method, we recognize compensation expense for all share-based payments granted on or after January 29, 2006, as well as all share-based payments granted prior to, but not yet vested as of, January 29, 2006, in accordance with SFAS No. 123(R). Under the fair value recognition provisions of SFAS No. 123(R), we recognize share-based compensation expense, net of an estimated forfeiture rate, over the requisite service period of the award.

    Prior to the adoption of SFAS No. 123(R), we accounted for share-based payments under Accounting Principles Board (“APB”) Opinion No. 25,Accounting for Stock Issued to Employees and related interpretationsthe disclosure provisions of SFAS No. 123, as amended. We recognized compensation expense for all share-based awards described above using the straight-line attribution method applied to the fair value of each option grant, over the requisite service period associated with each award. The requisite service period is typically consistent with the vesting period, except as noted below. Because awards typically vest evenly over the requisite service period, compensation cost recognized in 2006 is at least equal to the grant-date fair value of the vested portion of all outstanding options.

         The weighted-average fair value of stock options granted during 2006, 2005 and 2004 was $6.90, $7.70 and $7.91, respectively. The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option-pricing model, based on the assumptions shown in the table below. The Black-Scholes model utilizes extensive accounting forjudgment and financial estimates, including the term employees are expected to retain their stock options before exercising them, the volatility of our stock price over that expected term, the dividend yield over the term and the number of awards expected to be forfeited before they vest. Using alternative assumptions in the calculation of fair value would produce fair values for stock option plans. Accordingly, becausegrants that could be different than those used to record share-based compensation expense in the exercise priceConsolidated Statements of Operations.

         The following table reflects the weighted-average assumptions used for grants awarded to option holders.

     2006    2005    2004
    Weighted average expected volatility 27.60%30.83%30.13%
    Weighted average risk-free interest rate 5.07%4.11% 3.99%
    Expected dividend yield 1.50% N/A N/A 
    Expected term 7.5 years 8.7 years 8.7 years 

         The weighted-average risk-free interest rate was based on the yield of a treasury note as of the grant date, continuously compounded, which matures at a date that approximates the expected term of the options. Prior to 2006, we did not pay a dividend, so an expected dividend rate was not included in the determination of fair value for options granted during fiscal year 2005. Using a dividend yield of 1.50% to value options issued in 2005 would have decreased the fair value of each option granted equalsby approximately $1.60.

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    We determined expected volatility based upon historical stock volatilities. We also considered implied volatility. We determined expected term based upon a combination of historical exercise and cancellation experience, as well as estimates of expected future exercise and cancellation experience.

         Under SFAS No. 123(R), we record expense for restricted stock awards in an amount equal to the fair market value of the underlying stock on the option grant date no stock-basedof the award.

         In 2006, we recognized total stock compensation expense isof $72 million. This included in net earnings, other than expenses related to$50 million for stock options and $22 million for restricted shares. A total of $18 million of the restricted stock awards. Notes 1 and 12expense was attributable to the wider distribution of restricted shares incorporated into the first quarter 2006 grant of share-based awards (as described in Note 10 to the Consolidated Financial Statements describeStatements), and the effect on net earnings ifremaining $4 million of restricted stock expense related to previously issued restricted stock awards. The incremental compensation cost for all options had been determined based on the fair market value at the grant date for awards, consistent with the methodology prescribed under SFAS No. 123,Accounting for Stock-Based Compensation.

    In December 2004, the FASB issued SFAS No. 123 (Revised 2004),Share-Based Payment (“SFAS No. 123R”), which replaces SFAS No. 123, supersedes APB No. 25 and related interpretations and amends SFAS No. 95, Statement of Cash Flows. The provisions of SFAS No. 123R are similarexpense attributable to those of SFAS No. 123; however, SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements as compensation cost based on their fair value on the date of grant. Fair value of share-based awards will be determined using option pricing models (e.g., Black-Scholes or binomial models) and assumptions that appropriately reflect the specific circumstances of the awards. Compensation cost will be recognized over the vesting period based on the fair value of awards that actually vest. We expect to adopt SFAS No. the adoption of SFAS No. 123R to reduce net earnings by $0.05-$0.06123(R) in 2006 was $68 million, pre-tax, or $43 million and $0.06 per diluted share, after tax. In 2005, we recognized stock compensation cost of $7 million, pre-tax, related entirely to restricted stock grants.

         These costs were recognized as operating, general and administrative costs in our Company’s Consolidated Statements of Operations. The cumulative effect of applying a forfeiture rate to unvested restricted shares at January 29, 2006 was not material. The pro forma earnings effect of stock options in prior years, in accordance with SFAS No. 123, is described below:

    (in millions, except per share amounts)  2005       2004 
    Net earnings (loss), as reported$958 $(104)
           Stock-based compensation expense included in net earnings, net of    
                   income tax benefits 5  8 
           Total stock-based compensation expense determined under fair value    
                   method for all awards, net of income tax benefits (1) (34) (48)
    Pro forma net earnings (loss)$929 $(144)
      
    Earnings (loss) per basic common share, as reported$1.32  $(0.14)
    Pro forma earnings (loss) per basic common share $1.28 $(0.20)
    Earnings (loss) per diluted common share, as reported$1.31 $(0.14)
    Pro forma earnings (loss) per diluted common share$ 1.27 $(0.20)

    (1)Refer to Note 10 of our Consolidated Financial Statements for a summary of the assumptions used for options issued in each year at an option price equal to the fair market value of the stock at the date of the grant.

         As of February 3, 2007, we had $92 million of total unrecognized compensation expense related to non-vested share-based compensation arrangements granted under equity award plans. We expected to recognize this cost over a weighted-average period of approximately one year. The total fair value of options that vested in 2006 was $44 million.

         For share-based awards granted prior to the adoption of SFAS No. 123(R), the Company’s stock option grants generally contained retirement-eligibility provisions that caused the options to vest upon the earlier of the stated vesting date or retirement. We calculated compensation expense over the stated vesting periods, regardless of whether certain employees became retirement-eligible during fiscal 2006.

    the respective vesting periods. Upon the adoption of SFAS No. 123(R), we continued this method of recognizing compensation expense of awards granted prior to the adoption of SFAS No. 123(R). For awards granted on or after January 29, 2006, options vest based on the stated vesting date, even if an employee retires prior to the vesting date. However, the requisite service period ends on the employee’s retirement-eligible date. As a

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    Inventories

    result, we recognize expense for stock option grants containing such retirement-eligibility provisions over the shorter of the vesting period or the period until employees become retirement-eligible (the requisite service period). As a result of retirement eligibility provisions in stock option awards granted on or after January 29, 2006, we recognized approximately $6 million of compensation expense in 2006 prior to the completion of stated vesting periods.

         Shares issued as a result of stock option exercises may be newly issued shares or reissued treasury shares. We expect to reissue shares held in treasury upon exercise of these options.

       Inventories

    Inventories are stated at the lower of cost (principally on a LIFO basis) or market. In total, approximately 98% of inventories for 20052006 and 2004,2005, respectively, were valued using the LIFO method. Cost for the balance of the inventories was determined using the first-in, first-out (“FIFO”) method. Replacement cost was higher than the carrying amount by $450 million at February 3, 2007, and by $400 million at January 28, 2006, and by $373 million at January 29, 2005.2006. We follow the Link-Chain, Dollar-Value LIFO method for purposes of calculating our LIFO charge or credit.

    The item-cost method of accounting to determine inventory cost before the LIFO adjustment is followed for substantially all store inventories at our supermarket divisions. This method involves counting each item in inventory, assigning costs to each of these items based on the actual purchase costs (net of vendor allowances and cash discounts) of each item and recording the actual cost of items sold. The item-cost method of accounting allows for more accurate reporting of periodic inventory balances and enables management to more precisely manage inventory and purchasing levels when compared to the methodology followed under the retail method of accounting.

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    We evaluate inventory shortages throughout the year based on actual physical counts in our facilities. We record allowances for inventory shortages based on the results of recent physical counts to provide for estimated shortages from the last physical count to the financial statement date.

    Vendor Allowances

    We recognize all vendor allowances as a reduction in merchandise costs when the related product is sold. In most cases, vendor allowances are applied to the related product by item, and therefore reduce the carrying value of inventory by item. When it is not practicable to allocate vendor allowances to the product by item, vendor allowances are recognized as a reduction in merchandise costs based on inventory turns and recognized as the product is sold. In fiscal 2005 and 2004, weWe recognized approximately $3.3 billion, $3.2 billion and $3.1 billion respectively, of vendor allowances as a reduction in merchandise costs. Morecosts in 2006, 2005 and 2004, respectively. We recognized more than 80% of all vendor allowances were recognized in the item cost with the remainder being based on inventory turns.

    LLIQUIDITYAND CAPITALRESOURCES

    Cash Flow Information

    Net cash provided by operating activities

    We generated $2,192$2,351 million of cash from operations in 20052006 compared to $2,192 million in 2005 and $2,330 million in 2004 and $2,215 million in 2003.2004. In addition to changes in net earnings, changes in our operating assets and liabilities also affect the amount of cash provided by our operating activities. During 2005,2006, we realized a $128

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    $129 million increasedecrease in cash from changes in operating assets and liabilities, compared to a $103$121 million increase and $247a $116 million decrease during 20042005 and 2003,2004, respectively. These amounts are net of cash contributions to our Company-sponsored pension planplans totaling $150 million in 2006, $300 million in 2005 and $35 million in 2004 and $100 million in 2003.

    2004.

    The amount of cash paid for income taxes in 20052006 was higher than the amounts paid in 20042005 and 20032004 due to higher net earnings. In addition, the bonus depreciation provision, which expired in December 2004, reduced our cash taxes by approximately $90 million in 2004 and 2003.2004. This benefit reversed in 2005. This provision2005 and increased our cash taxes by approximately $71 and $108 million in 2006 and 2005, and reduced our cash taxes by approximately $90 million and $122 million in 2004 and 2003, respectively.

    Net cash used by investing activities

    Cash used by investing activities was $1,587 million in 2006, compared to $1,279 million in 2005 compared toand $1,608 million in 2004 and $2,026 million in 2003.2004. The amount of cash used by investing activities decreasedincreased in 2006 due to increased capital spending, partially offset by higher proceeds from the sale of assets. Capital expenditures, including changes in construction-in-progress payables and excluding acquisitions, were $1,777 million, $1,306 million and $1,634 billion in 2006, 2005 and 2004, due to reduced capital expenditures.respectively. Refer to the Capital Expenditures section for an overview of our supermarket storing activity during the last three years.

    Net cash used by financing activities

    Financing activities used $847$785 million of cash in 20052006 compared to $847 million in 2005 and $737 million in 2004. Lower cash payments for debt reduction in 2006 were partially offset by increased stock repurchase activities and dividend payments in 2006. We repurchased $633 million of Kroger stock in 2006 compared to $252 million in 2005 and $319 million in 2004, and $201paid dividends totaling $140 million in 2003. The increase in cash used by financing in 2005 was due to a decrease in long-term debt issuances. The increases in 2005 and 2004 over 2003 are primarily due to the amount of cash used to reduce our outstanding debt.
    2006.

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    Debt Management

    Total debt, including both the current and long-term portions of capital leases and financing obligations, decreased $173 million to $7.1 billion as of year-end 2006 from $7.2 billion as of year-end 2005. Total debt decreased $739 million to $7.2 billion as of year-end 2005 from $8.0 billion as of year-end 2004. Total debt decreased $393 million to $8.0 billion as of year-end 2004 from $8.4 billion as of year-end 2003. The decreases were primarily the result of using cash flow from operations to reduce outstanding debt.

    Our total debt balances were also affected by our prefunding of employee benefit costs and by the mark-to-market adjustments necessary to record fair value interest rate hedges of our fixed rate debt, pursuant to SFAS No. 133.133Accounting for Derivative Investments and Hedging Activities, as amended. We had prefunded employee benefit costs of $300 million at year-end 2006, 2005 2004 and 2003.2004. The mark-to-market adjustments increased the carrying value of our debt by $17 million, $27 million $70 million and $104$70 million as of year-end 2006, 2005 and 2004, and 2003, respectively.

    Factors Affecting Liquidity

    We currently borrow on a daily basis approximately $15$170 million under our F2/P2/A3 rated commercial paper (“CP”) program. These borrowings are backed by our credit facilities,facility, and reduce the amount we can borrow under the credit facilities.facility. We have capacity available under our credit facilitiesfacility to backstop all CP amounts outstanding. If our credit rating declined below its current level of BBB/Baa2/BBB-, the ability to borrow under our current CP program could be adversely affected for a period of time immediately following the reduction of our credit rating. This could require us to borrow additional funds under the credit facilities,facility, under which we believe we have sufficient capacity. Borrowings under the credit facilitiesfacility may be more costly than the money we borrow under our current CP program, depending on the current

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    interest rate environment. However, in the event of a ratings decline, we do not anticipate that access to the CP markets currently available to us would be significantly limited for an extended period of time (i.e., in excess of 30 days). Although our ability to borrow under the credit facilitiesfacility is not affected by our credit rating, the interest cost on borrowings under the credit facilitiesfacility would be affected by a decrease in our credit rating or a decrease in our Applicable Percentage Ratio.

    Our credit facilitiesfacility also requirerequires the maintenance of a Leverage Ratio and a Fixed Charge Coverage Ratio (our “financial covenants”). A failure to maintain our financial covenants would impair our ability to borrow under the credit facilities.facility. These financial covenants and ratios are described below:

    • Our Applicable Percentage Ratio (the ratio of Consolidated EBITDA to Consolidated Total Interest Expense,InterestExpense, as defined in the credit facilities)facility) was 6.707.50 to 1 as of January 28, 2006. IfFebruary 3, 2007. Upon furnishing noticeto the lenders, this ratio declinedwill entitle us to below 4.75 to 1, the cost of our borrowingsa 0.05% reduction in fees under the credit facilities would increase at least 0.13%. The cost offacility. Althoughour current borrowing rate is determined based on our borrowingsApplicable Percentage Ratio, under the credit facilities wouldcertaincircumstances that borrowing rate could be similarly affecteddetermined by a one-level downgrade inreference to our credit rating.
    ratings.
  • Our Leverage Ratio (the ratio of Net Debt to Consolidated EBITDA, as defined in the credit facilities) facility)was 2.232.04 to 1 as of January 28, 2006.February 3, 2007. If this ratio exceeded 3.50 to 1, we would be in default of ourcredit facilitiesfacility and our ability to borrow under these facilitiesthe facility would be impaired.

  • Our Fixed Charge Coverage Ratio (the ratio of Consolidated EBITDA plus Consolidated Rental Expense toExpenseto Consolidated Cash Interest Expense plus Consolidated Rental Expense, as defined in the credit facilities)creditfacility) was 3.383.66 to 1 as of January 28, 2006.February 3, 2007. If this ratio fell below 1.70 to 1, we would be in default ofdefaultof our credit facilitiesfacility and our ability to borrow under these facilitiesthe facility would be impaired.

    • Consolidated EBITDA, as defined in our credit facilities,facility, includes an adjustment for unusual gains and losses. Our credit agreements areagreement is more particularlyfully described in Note 75 to the Consolidated Financial Statements. We were in compliance with our financial covenants at year-end 2005.
    2006.

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    The tables below illustrate our significant contractual obligations and other commercial commitments, based on year of maturity or settlement, as of January 28, 2006February 3, 2007 (in millions of dollars):

         2007    2008    2009    2010    2011    Thereafter    Total
    Contractual Obligations               
    Long-term debt$878$993$912$42$537$3,219$6,581
    Interest on long-term debt (1) 428 332 304 250 222 1,712 3,248
    Capital lease obligations 57 54 52 51 49 294 557
    Operating lease obligations 778 734 690 642 587 4,118 7,549
    Low-income housing obligations 6 2 — — — — 8
    Financed lease obligations 11 11 11 11 11 157 212
    Construction commitments  190 — — — — — 190
    Purchase obligations 431 56 46 34 23 16 606
    Total $2,779$2,182$2,015$1,030$1,429 $9,516$18,951
      
    Other Commercial Commitments               
    Credit facility$352$—$—$—$—$     —$352
    Standby letters of credit 331  — —  — —  —  331
    Surety bonds 53 —  — — — — 53
    Guarantees 6 — — —  — — 6
    Total $742$—$—$—$—$     —$742

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         		      2006
    		    2007
    		    2008
    		    2009
    		    2010
    		    Thereafter
    		    Total
    Contractual Obligations
    		                                                                                                                    
    Long-term debt              $527         $527         $1,000        $912         $42         $3,739        $6,747  
    Interest on long-term debt (1)                480           423           329           303           250           1,922          3,707  
    Capital lease obligations                61           57           54           52           51           344           619   
    Operating lease obligations                784           732           684           635           588           4,075          7,498  
    Charitable contributions                14           —           —           —           —           —           14   
    Minimum contributions to Company-sponsored
    pension plans    		                —           —           —           —           —           —           —   
    Low-income housing obligations                47           6           2           —           —           —           55   
    Financed lease obligations                11           11           11           11           11           159           214   
    Construction commitments                95           —           —           —           —           —           95   
    Purchase obligations                362           60           18           5           1           —           446   
    Total
    		              $2,381        $1,816        $2,098        $1,918        $943         $10,239        $19,395  
     
    Other Commercial Commitments
    		                                                                                                                    
    Credit facilities              $—         $—         $—         $—         $—         $—         $—   
    Standby letters of credit                314           —           —           —           —           —           314   
    Surety bonds                106           —           —           —           —           —           106   
    Guarantees                11           —           —           —           —           —           11   
    Total
    		              $431         $—         $—         $—         $—         $—         $431   
     
    (1)     Amounts include contractual interest payments using the interest rate as of January 28, 2006February 3, 2007 applicable to Kroger’sour variable interest debt instruments, excluding commercial paper borrowings due to the short-term nature of these borrowings, and stated fixed interest rates for all other debt instruments.

    Although we are not required to make cash contributions to our Company-sponsored pension plans during fiscal 2006, we made a $150 million cash contribution to our qualified pension plans on March 27, 2006. Additional contributions may be made if our cash flows from operations exceed our expectations. We expect any elective contributions made during 2006 will reduce our minimum required contributions in future years. Among other things, investment performance of plan assets, the interest rates required to be used to calculate the pension obligations, and future changes in legislation, will determine the amounts of any additional contributions. At this time, it is not reasonably practicable to estimate contribution amounts for 2007 and beyond.

    Our construction commitments include funds owed to third parties for projects currently under construction. These amounts are reflected in other current liabilities in our Consolidated Balance Sheets.

    Our purchase obligations include commitments to be utilized in the normal course of business, such as several contracts to purchase raw materials utilized in our manufacturing plants and several contracts to purchase energy to be used in our stores and manufacturing facilities. Our obligations also include management fees for facilities operated by third parties. Any upfront vendor allowances or incentives associated with outstanding purchase commitments are recorded as either current or long-term liabilities in our Consolidated Balance Sheets.

    As of January 28, 2006,February 3, 2007, we maintained a five-year revolving credit facility totaling $1.8$2.5 billion, which terminates in 2010. In addition, we maintained a $700 million five-year credit facility that terminates in 2007.2011. Outstanding

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    borrowings under the credit agreementsagreement and commercial paper borrowings, and some outstanding letters of credit, reduce funds available under the credit facilities.facility. In addition to the credit facilities,facility, we maintain a $50 million money market line, borrowings under which also reduce the funds available under our credit facilities.facility. The money market line borrowings allow us to borrow from banks at mutually agreed upon rates, usually at rates below the rates offered under the credit agreements.agreement. As of January 28, 2006,February 3, 2007, we had no outstanding borrowings totaling $352 million under our credit agreementsagreement and commercial paper program. We had no borrowings under the money market line as of January 28, 2006.February 3, 2007. The outstanding letters of credit that reduced the funds available under our credit facilitiesfacility totaled $303$331 million as of January 28, 2006.
    February 3, 2007.

    In addition to the available credit mentioned above, as of January 28, 2006,February 3, 2007, we had available for issuance $1.2 billion of securities under a shelf registration statement filed with the SEC and declared effective on December 9, 2004.

    We also maintain surety bonds related primarily to our self-insured insurance costs.workers compensation claims. These bonds are required by most states in which we are self-insured for workers’ compensation and general liability exposures, and are madeplaced with third-party insurance providers to insure payment of our obligations in the event we are unable to make those payments.meet our claim payment obligations up to our self-insured retention levels. These bonds do not represent liabilities of Kroger, as we already have liabilitiesreserves on our books for the insuranceclaims costs. However, we do pay annual maintenance fees to have these bonds in place. Market changes may make the surety bonds more costly and, in some instances, availability of these bonds may become more limited, which could affect our costs of, or access to, such bonds. Although we do not believe increased costs or decreased availability would significantly effectaffect our ability to access these surety bonds, if this does become an issue, we likely would issue letters of credit, in states where allowed, against our credit facilitiesfacility to meet the state bonding requirements. This could increase our cost and decrease the funds available under our credit facilities.
    facility.

    Most of our outstanding public debt is jointly and severally, fully and unconditionally guaranteed by The Kroger Co. and some of itsour subsidiaries. See Note 1917 to the Consolidated Financial Statements for a more detailed discussion of those arrangements. In addition, we have guaranteed half of the indebtedness of three real estate joint ventures in which we are a partner with 50% ownership. Our share of the responsibility for this indebtedness, should the partnerships be unable to meet their obligations, totals approximately $11$6 million. Based on the covenants underlying this indebtedness as of January 28, 2006,February 3, 2007, it is unlikely that we will be responsible for repayment of these obligations.

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    We also are contingently liable for leases that have been assigned to various third parties in connection with facility closings and dispositions. We could be required to satisfy obligations under the leases if any of the assignees are unable to fulfill their lease obligations. Due to the wide distribution of our assignments among third parties, and various other remedies available to us, we believe the likelihood that we will be required to assume a material amount of these obligations is remote. We have agreed to indemnify certain third-party logistics operators for certain expenses, including pension trust fund withdrawal liabilities.

    In addition to the above, we enter into various indemnification agreements and take on indemnification obligations in the ordinary course of business. Such arrangements include indemnities against third party claims arising out of agreements to provide services to Kroger; indemnities related to the sale of our securities; indemnities of directors, officers and employees in connection with the performance of their work; and indemnities of individuals serving as fiduciaries on benefit plans. While Kroger’s aggregate indemnification obligation could result in a material liability, we are aware of no current matter that we expect to result in a material liability

    Financial Risk ManagementR
    ECENTLY ADOPTED ACCOUNTING STANDARDS

    We use derivative financial instruments primarily to manage our exposure to fluctuations in interest rates and, to a lesser extent, adverse fluctuations in commodity prices and other market risks. We do not enter into derivative financial instruments for trading purposes. As a matter of policy, all of our derivative positions are intended to reduce

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    risk by hedging an underlying economic exposure. Because of the high correlation between the hedging instrument and the underlying exposure, fluctuations in the value of the instruments generally are offset by reciprocal changes in the value of the underlying exposure. The interest rate derivatives we use are straightforward instruments with liquid markets.

    We manage our exposure to interest rates and changes in the fair value of our debt instruments primarily through the strategic use of variable and fixed rate debt, and interest rate swaps. Our current program relative to interest rate protection contemplates both fixing the rates on variable rate debt and hedging the exposure to changes in the fair value of fixed-rate debt attributable to changes in interest rates. To do this, we use the following guidelines: (i) use average daily bank balance to determine annual debt amounts subject to interest rate exposure, (ii) limit the annual amount of debt subject to interest rate reset and the amount of floating rate debt to a combined total of $2.5 billion or less, (iii) include no leveraged products, and (iv) hedge without regard to profit motive or sensitivity to current mark-to-market status.

    As of January 28, 2006, we maintained ten interest rate swap agreements, with notional amounts totaling approximately $1,375 million, to manage our exposure to changes in the fair value of our fixed rate debt resulting from interest rate movements by effectively converting a portion of our debt from fixed to variable rates. These agreements mature at varying times between July 2006 and January 2015. Variable rates for our agreements are based on U.S. dollar London Interbank Offered Rate (“LIBOR”). The differential between fixed and variable rates to be paid or received is accrued as interest rates change in accordance with the agreements and is recognized over the life of the agreements as an adjustment to interest expense. These interest rate swap agreements are being accounted for as fair value hedges. As of January 28, 2006, other long-term liabilities totaling $34 million were recorded to reflect the fair value of these agreements, offset by decreases in the fair value of the underlying debt.

    In addition, as of January 28, 2006, we maintained three forward-starting interest rate swap agreements, with notional amounts totaling $750 million, to manage our exposure to changes in future benchmark interest rates. A forward-starting interest rate swap is an agreement that effectively hedges future benchmark interest rates, including general corporate spreads, on debt for an established period of time. We entered into the forward-starting interest rate swaps in order to lock in fixed interest rates on our forecasted issuance of debt in fiscal 2007 and 2008. Accordingly, these instruments have been designated as cash flow hedges for our forecasted debt issuances. Two of these swaps have ten-year terms, with the remaining swap having a twelve-year term, beginning with the issuance of the debt. The average fixed rate for these instruments is 5.14%, and the variable rate will be determined at the inception date of the swap. As of January 28, 2006, we had recorded other long-term liabilities totaling $2 million to reflect the fair value of these agreements.

    During 2003, we terminated six interest rate swap agreements that were accounted for as fair value hedges. Approximately $114 million of proceeds received as a result of these terminations were recorded as adjustments to the carrying values of the underlying debt and are being amortized over the remaining lives of the debt. As of January 28, 2006, the unamortized balances totaled approximately $63 million.

    Annually, we review with the Financial Policy Committee of our Board of Directors compliance with the guidelines. The guidelines may change as our business needs dictate.

    The tables below provide information about our interest rate derivatives and underlying debt portfolio as of January 28, 2006. The amounts shown for each year represent the contractual maturities of long-term debt, excluding capital leases, and the average outstanding notional amounts of interest rate derivatives as of January 28, 2006. Interest rates reflect the weighted average for the outstanding instruments. The variable component of each interest rate derivative and the variable rate debt is based on U.S. dollar LIBOR using the forward yield curve as of January 28, 2006.

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    The Fair-Value column includes the fair-value of our debt instruments and interest rate derivatives as of January 28, 2006. Refer to Notes 7, 8 and 9 to the Consolidated Financial Statements:


         		      Expected Year of Maturity
    		    

         		      2006
    		    2007
    		    2008
    		    2009
    		    2010
    		    Thereafter
    		    Total
    		    Fair Value

         		      (In millions)
         		    
    Debt
    		                                                                                                                                        
    Fixed rate              $(519)        $(526)        $(994)        $(896)        $(35)        $(3,639)        $(6,609)        $(6,900)  
    Average interest rate                7.78%          7.78%          7.27%          7.76%          8.98%          6.66%                                  
    Variable rate              $(8)        $(1)        $(6)        $(16)        $(7)        $(100)        $(138)        $(138)  
    Average interest rate                3.29%          3.32%          3.33%          3.38%          3.42%          3.80%                                  
     


         		      Average Notional Amounts Outstanding
    		    

         		      2006
    		    2007
    		    2008
    		    2009
    		    2010
    		    Thereafter
    		    Total
    		    Fair Value

         		      (In millions)
         		    
    Interest Rate Derivatives
    		                                                                                                                                        
    Variable to fixed              $—         $—         $—         $—         $—         $—         $—         $—   
    Average pay rate                                                                                                                                        
    Average receive rate                                                                                                                                        
    Fixed to variable              $1,238        $1,050        $363         $300         $300         $300         $1,375        $(34)  
    Average pay rate                8.02%          7.78%          5.71%          5.16%          5.23%          5.26%                                  
    Average receive rate                6.90%          6.74%          5.38%          4.95%          4.95%          4.95%                                  
     

    Commodity Price Protection

    We enter into purchase commitments for various resources, including raw materials utilized in our manufacturing facilities and energy to be used in our stores, manufacturing facilities and administrative offices. We enter into commitments expecting to take delivery of and to utilize those resources in the conduct of normal business. Those commitments for which we expect to utilize or take delivery in a reasonable amount of time in the normal course of business qualify as normal purchases and normal sales. For any commitments for which we do not expect to take delivery and, as a result, will require net settlement, the contracts are marked to fair value on a quarterly basis.

    Some of the product we purchase is shipped in corrugated cardboard packaging. We sell corrugated cardboard when it is economical to do so. In the fourth quarter of 2004, we entered into six derivative instruments to protect us from declining corrugated cardboard prices. These derivatives contain a three-year term. None of the contracts, either individually or in the aggregate, hedge more than 50% of our expected corrugated cardboard sales. The instruments do not qualify for hedge accounting, in accordance with SFAS No. 133,Accounting for Derivative Investments and Hedging Activities, as amended. Accordingly, changes in the fair value of these instruments are marked-to-market in our Consolidated Statement of Operations in OG&A expenses. As of January 28, 2006, an other asset totaling $3 million had been recorded for the instruments.

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    RECENTLY ISSUED ACCOUNTING STANDARDS

    In December 2004, the FASB issued SFAS No. 123 (Revised 2004)2002),Share-Based Payment (“SFAS No. 123R”123(R)”), which replacesreplaced SFAS No. 123, supersedessuperseded APB No. 25 and related interpretations and amendsamended SFAS No. 95,, Statement of Cash Flows. The provisions of SFAS No. 123R are similar to those of SFAS No. 123; however, SFAS No. 123RNo 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements as compensation cost based on their fair value on the date of grant. Fair value of share-based awards will be determined using option pricing models (e.g. Black-Scholes or binomial models) and assumptions that appropriately reflectWe adopted the specific circumstances of the awards. Compensation cost will be recognized over the vesting period based on the fair value of awards that actually vest.

    Prior to the adoptionprovisions of SFAS No. 123R, we are accounting for share-based compensation expense under the recognition and measurement provisions of APB No. 25, “Accounting for Stock Issued to Employees” and are following the accepted practice of recognizing share-based compensation expense over the explicit vesting period. SFAS No. 123R will require the immediate recognition at the grant date of the full share-based compensation expense for grants to retirement eligible employees, as the explicit vesting period is non-substantive. We expect to adopt SFAS No. 123R123(R) in the first quarter of 2006. We expectThe implementation of SFAS No. 123(R) reduced our net earnings $0.06 per diluted share in 2006. See Note 10 to our Consolidated Financial Statements for further discussion of the effect the adoption of SFAS No. 123R to reduce net earnings by $0.05-$0.06 per diluted share during fiscal 2006.
    123(R) had on our Consolidated Financial Statements.

    In November 2004,September 2006, the FASB issued SFAS No. 151,158,Inventory Costs, anEmployers’ Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment of ARBFASB Statements No. 43, Chapter 487, 99, 106, and 123(R), which clarifies. SFAS No. 158 requires an employer that inventory costssponsors one or more single-employer defined benefit plans to recognize in its statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status. In addition, SFAS No. 158 requires an employer to measure a plan’s assets and obligations and determine its funded status as of the end of the employer’s fiscal year and recognize changes in the funded status of a defined benefit postretirement plan in the year the changes occur and that are “abnormal” are required tothose changes be charged to expense as incurred as opposed to being capitalized into inventoryrecorded in comprehensive income, net of tax, as a product cost.separate component of shareowners’ equity. SFAS No. 151 provides examples158 also requires additional footnote disclosure. The recognition and disclosure provisions of “abnormal” costs to include costs of idle facilities, excess freight and handling costs and spoilage. SFAS No. 151158 became effective for us on February 3, 2007. The measurement date provisions of SFAS No. 158 will become effective for our fiscal year beginning January 29, 2006. February 1, 2009. See Note 14 to our Consolidated Financial Statements for the effects the implementation of SFAS No. 158 had on our Consolidated Financial Statements.

    RECENTLY ISSUED ACCOUNTING STANDARDS

    In June 2006, the FASB issued Interpretation (“FIN”) No. 48,Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109. FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN No. 48 becomes effective for our fiscal year beginning February 4, 2007. We are evaluating the effect the implementation of FIN No. 48 will have on our Consolidated Financial Statements.

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    In September 2006, the FASB issued SFAS No. 157,Fair Value Measurement. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurement. SFAS No. 157 does not require any new fair value measurements. SFAS No. 157 will become effective for our fiscal year beginning February 3, 2008. We are evaluating the effect the implementation of SFAS No. 157 will have on our Consolidated Financial Statements.

    In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115. SFAS No. 159 permits entities to make an irrevocable election to measure certain financial instruments and other assets and liabilities at fair value on an instrument-by-instrument basis. Unrealized gains and losses on items for which the fair value option has been elected should be recognized into net earnings at each subsequent reporting date. SFAS No. 159 will be become effective for our fiscal year beginning February 3, 2008. We are currently evaluating the effect the adoption of SFAS No. 151159 will have on our Consolidated Financial Statements.

    In June 2006, the FASB ratified the consensus of Emerging Issues Task Force (“EITF”) issue No. 06-03,How Taxes Get Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation). EITF No. 06-03 indicates that the income statement presentation of taxes within the scope of the Issue on either a gross basis or a net basis is an accounting policy decision that should be disclosed pursuant to Opinion 22. EITF No. 06-03 becomes effective for our fiscal year beginning February 4, 2007. We do not expectedexpect the adoption of EITF No. 06-03 to have a material effect on our Consolidated Financial Statements.

    In May 2005, the FASB issued SFAS No. 154,Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS No. 154 requires retrospective application to prior periods financial statements for changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 also requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle should be recognized in the period of the accounting change. SFAS No. 154 further requires a change in depreciation, amortization or depletion method for long-lived, non-financial assets to be accounted for as a change in accounting estimate effected by a change in accounting principle. SFAS No. 154 will become effective for our fiscal year beginning January 29, 2006.O
    UTLOOK

    FASB Interpretation No. 47 (“FIN 47”) “Accounting for Conditional Asset Retirement Obligations” was issued by the FASB in March 2005. FIN 47 provides guidance relating to the identification of and financial reporting for legal obligations to perform an asset retirement activity. The Interpretation requires recognition of a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. FIN 47 became effective during fiscal 2005. The adoption of FIN 47 did not have a material effect on our Consolidated Financial Statements.

    In November 2004, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 04-10, “Determining Whether to Aggregate Operating Segments That Do No Meet the Quantitative Thresholds.” EITF No. 04-10 concludes that operating segments that do not meet the quantitative thresholds can be aggregated only if aggregation is consistent with the objectives and basic principles of SFAS No. 131,Disclosures about Segments of an Enterprise and Related Information, the segments have similar economic characteristics, and the segments share a majority of

    A-24




    the aggregation criteria listed in (a)-(e) of paragraph 17 of SFAS No. 131. EITF No. 04-10 became effective for fiscal years ending after September 15, 2005, and did not have a material effect on our Consolidated Financial Statements.

    In June 2005, the EITF reached a consensus on EITF Issue No. 05-6, “Determining the Amortization Period for Leasehold Improvements Purchased After Lease Inception or Acquired in a Business Combination.” EITF No. 05-6 requires that leasehold improvements acquired in a business combination be amortized over the shorter of the useful life of the assets or a term that includes required lease periods and renewal periods deemed to be reasonably assured at the date of acquisition. EITF No. 05-6 further requires that leasehold improvements that are placed into service significantly after, and not contemplated at or near the beginning of the lease term, shall be amortized over the shorter of the useful life of the assets or a term that includes the required lease periods and any renewal periods deemed to be reasonably assured at the date of acquisition. EITF No. 05-6 became effective for our second fiscal quarter beginning August 14, 2005. The adoption of EITF No. 05-6 did not have a material effect on our Consolidated Financial Statements.

    In October 2005, the FASB issued FASB Staff Position (“FSP”) FAS 13-1, “Accounting for Rental Costs Incurred during a Construction Period.” FSP FAS 13-1 requires rental costs associated with building or ground leases incurred during a construction period to be recognized as rental expense. In addition, FSP FAS 13-1 requires lessees to cease capitalizing rental costs, as of December 15, 2005, for operating lease agreements entered into prior to December 15, 2005. Early adoption is permitted. The Company was already in compliance with the provisions of FSP FAS 13-1, therefore it had no effect on our Consolidated Financial Statements.

    OUTLOOK

    This discussion and analysis contains certain forward-looking statements about Kroger’s future performance. These statements are based on management’s assumptions and beliefs in light of the information currently available. Such statements relate to, among other things: projected change in net earnings; identical sales growth; expected pension plan contributions; our ability to generate operating cash flow; projected capital expenditures; square footage growth; opportunities to reduce costs; cash flow requirements; and our operating plan for the future; and are indicated by words such as “comfortable,” “committed,” “will,” “expect,” “goal,” “should,” “intend,” “target,” “believe,” “anticipate,” and similar words or phrases. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially.

    Statements elsewhere in this report and below regarding our expectations, projections, beliefs, intentions or strategies are forward-looking statements within the meaning of Section 21 E of the Securities Exchange Act of 1934. While we believe that the statements are accurate, uncertainties about the general economy, our labor relations, our ability to execute our plans on a timely basis and other uncertainties described below could cause actual results to differ materially.

    • We expect earnings per share in the range of $1.60-$1.65 for 2007. This represents earnings pershare growth of approximately 6% - 8%9%-12% in 2006. This includes2007, net of the effect of a 53rd 53rdweek in fiscal 2006 which will be substantially offset by the expensing of stock options. We anticipate the expensing of stock options will reduce net earnings approximately $0.05 - $0.06$0.07 per diluted share.
    • We also expect 2007anticipate earnings per share growth torates in the 1stand 4thquarters of 2007 will be approximately 6% - 8%, based on comparable 52-week results for 2006.
    less than theannual growth rate, and the 2ndand 3rdquarter growth rates will be higher than the annual growthrate.
  • We expect identical food store sales growth, excluding fuel sales, to exceed 3.5%of 3%-5% in 2006.2007.

    • A-27



    • In fiscal 2006,2007, we will continue to focus on driving sales growth and balancing investments in gross margingrossmargin and improved customer service with operating cost reductions to provide a better shoppingexperience for our customers. We expect operating margins in southern California to improve slightly due to the continued recovery in that market, although we expect improvement in 2006 will be less than in 2005. We expect operating margins, excluding the effect of fuel sales, to hold steady in the balance of the Company.
    2007.

  • A-25



    • We plan to use, over the long-term, one-third of cash flow for debt reduction and two-thirds for stockrepurchase orand payment of a cash dividend.

  • We expect to obtain sales growth from new square footage, as well as from increased productivityfrom existing locations.

  • Capital expenditures reflect our strategy of growth through expansion and acquisition, as well as focusingasfocusing on productivity increase from our existing store base through remodels. In addition, we will continuewillcontinue our emphasis on self-developmentself- development and ownership of real estate, logistics and technology improvements.technologyimprovements. The continued capital spending in technology is focused on improving store operations,logistics, manufacturing procurement, category management, merchandising and buying practices,and should reduce merchandising costs. We intend to continue using cash flow from operations tooperationsto finance capital expenditure requirements. We expect capital investment for 20062007 to be in the rangetherange of $1.7 - $1.9$1.9-$2.1 billion, excluding acquisitions. Total food store square footage is expected to grow 1.5% -approximately 2% before acquisitions and operational closings.

  • Based on current operating trends, we believe that cash flow from operations and other sources of liquidity,ofliquidity, including borrowings under our commercial paper program and bank credit facilities,facility, will be adequatebeadequate to meet anticipated requirements for working capital, capital expenditures, interest payments andpaymentsand scheduled principal payments for the foreseeable future. We also believe we have adequatecoverage of our debt covenants to continue to respond effectively to competitive conditions.

  • We expect that our OG&A results will be affected by increased costs, such as higher energy costs,pension costs and credit card fees, as well as any future labor disputes, offset by improved productivity fromproductivityfrom process changes, cost savings negotiated in recently completed labor agreements and leveragegained through sales increases.

  • We expect that our effective tax rate for 20062007 will be approximately 37.5%.
    • 38%, excluding any effects fromthe implementation of FIN No. 48.
    We will continue to evaluate under-performing stores. We anticipate operational closings will continue at an above-historical rate.

  • We expect rent expense, as a percent of total sales and excluding closed-store activity, will decreasedue to the emphasis our current strategy places on ownership of real estate.

  • We believe that in 20062007 there will be opportunities to reduce our operating costs in such areas as administration,asadministration, labor, shrink, warehousing and transportation. These savings will be invested in our coreourcore business to drive profitable sales growth and offer improved value and shopping experiences forour customers.

  • Although we are not required to make cash contributions during fiscal 2006,2007, we made a $150 million cash$50 millioncash contribution to our qualifiedCompany-sponsored pension plans on March 27, 2006.February 5, 2007. Additional contributionsvoluntarycontributions may be made if our cash flows from operations exceed our expectations. We expect anyexpectany additional elective contributions made during 20062007 will reduce our contributions in future years. Amongyears.Among other things, investment performance of plan assets, the interest rates required to be used tousedto calculate pension obligations and future changes in legislation will determine the amounts of any additionalanyadditional contributions.
    • In addition, we expect to make automatic and matching cash contributionsto the 401(k) Retirement Savings Account Plan totaling $75 million in 2007.
  • We expect our contributions to multi-employer pension plans to increase at 5% per year1.0% over the $196 million$204million we contributed during 2005.2006.

    • A-28


    A-26



    Various uncertainties and other factors could cause us to fail to achieve our goals. These include:

    • We have various labor agreements expiring in 2006,2007, covering smaller groups of associates than those contracts negotiated in 2005.southern California,Cincinnati, Detroit, Houston, Memphis, Toledo, Seattle and West Virginia. We are currently operatingunder a contract extension in southern California. In all of these contracts, rising health care and pensionandpension costs will continue to be an important issue in negotiations. Third parties who operate adistribution facility for us in Louisville, Kentucky, are operating without a labor agreement, and theunion representing employees there may call a strike if an agreement is not reached. A prolonged workstoppage ataffecting a substantial number of storeslocations could have a material effect on our results.

  • Our ability to achieve sales and earnings goals may be affected by: labor disputes; industry consolidation;industryconsolidation; pricing and promotional activities of existing and new competitors, including non-traditional competitors; our response to these actions; the state of the economy, including the inflationarytheinflationary and deflationary trends in certain commodities; stock repurchases; and the success ofour future growth plans.

  • In addition to the factors identified above, our identical store sales growth could be affected by increasesbyincreases in Kroger private label sales, the effect of our “sister stores” (new stores opened in closeproximity to an existing store) and reductions in retail pricing.

  • Our operating margins could fail to improve if our operations in southern California do not improve as expected or if we are unsuccessful at containing ouroperating costs.

  • We have estimated our exposure to the claims and litigation arising in the normal course of business,as well as in material litigation facing the Company,Kroger, and believe we have made adequate provisions for them wherethemwhere it is reasonably possible to estimate and where we believe an adverse outcome is probable.Unexpected outcomes in these matters, however, could result in an adverse effect on our earnings.

  • The proportion of cash flow used to reduce outstanding debt, repurchase common stock orand pay a cashacash dividend may be affected by the amount of outstanding debt available for pre-payments, changesin borrowing rates and the market price of Kroger common stock.

  • Consolidation in the food industry is likely to continue and the effects on our business, either favorableor unfavorable, cannot be foreseen.

  • Rent expense, which includes subtenant rental income, could be adversely affected by the state of theeconomy, increased store closure activity and future consolidation.

  • Depreciation expense, which includes the amortization of assets recorded under capital leases, is computediscomputed principally using the straight-line method over the estimated useful lives of individual assets,individualassets, or the remaining terms of leases. Use of the straight-line method of depreciation creates a risk thatriskthat future asset write-offs or potential impairment charges related to store closings would be largerthan if an accelerated method of depreciation was followed.

  • Our effective tax rate may differ from the expected rate due to changes in laws, the status of pendingitems with various taxing authorities and the deductibility of certain expenses.

  • The amount of our matching cash contributions under our 401(k) Retirement Savings Account Planwill be affected by the actual amounts contributed by participants.
  • We believe the multi-employer pension funds to which we contribute are substantially underfunded, and we believe the effect of that underfunding will be the increased contributions we have projected over the next several years. Shouldunderfunded.Should asset values in these funds deteriorate, or if employers withdraw from these funds without providingwithoutproviding for their share of the liability, or should our estimates prove to be understated, our contributionsourcontributions could increase more rapidly than we have anticipated.

    • A-29



    • The grocery retail industry continues to experience fierce competition from other traditional food retailers,foodretailers, supercenters, mass merchandisers, club or warehouse stores, drug stores and restaurants. Ourrestaurants.Our continued success
    is dependent upon our ability to compete in this industry and to reduceoperating expenses, including managing health care and pension costs contained in our collectivebargaining agreements. The competitive environment may cause us to reduce our prices in orderto gain or maintain share of sales, thus reducing margins. While we believe our opportunities forsustained profitable growth are considerable, unanticipated actions of competitors could adverselyaffect our sales.

  • A-27



    • is dependent upon our ability to compete in this industry and to reduce operating expenses, including managing health care and pension costs contained in our collective bargaining agreements. The competitive environment may cause us to reduce our prices in order to gain or maintain share of sales, thus reducing margins. While we believe our opportunities for sustained profitable growth are considerable, unanticipated actions of competitors could adversely affect our sales.

    Changes in laws or regulations, including changes in accounting standards, taxation requirementsand environmental laws may have a material effect on our financial statements.

  • Changes in the general business and economic conditions in our operating regions, including the ratetherate of inflation, population growth and employment and job growth in the markets in which we operate,weoperate, may affect our ability to hire and train qualified employees to operate our stores. This would negativelywouldnegatively affect earnings and sales growth. General economic changes may also affect the shoppinghabits of our customers, which could affect sales and earnings.

  • Changes in our product mix may negatively affect certain financial indicators. For example, we continuewecontinue to add supermarket fuel centers to our store base. Since gasoline generates low profit margins,profitmargins, including generating decreased margins as the market price increases, we expect to see ourseeour FIFO gross profit margins decline as gasoline sales increase. Although this negatively affects our FIFOourFIFO gross margin, gasoline sales provide a positive effect on operating, general and administrativeexpenses as a percent of sales.

  • Our ability to integrate any companies we acquire or have acquired, and achieve operatingimprovements at those companies, will affect our operations.

  • Our capital expenditures, expected square footage growth, and number of store projects completedduring the year could differ from our estimate if we are unsuccessful in acquiring suitable sites for newfornew stores, if development costs vary from those budgeted or if our logistics and technology projects areprojectsare not completed in the time frame expected or on budget.

    • Our expected square footage growth and the number of store projects completed during the year are dependent upon our ability to acquire desirable sites for construction of new facilities as well as the timing and completion of projects.

  • Interest expense could be adversely affected by the interest rate environment, changes in the Company’s creditCompany’scredit ratings, fluctuations in the amount of outstanding debt, decisions to incur prepayment penalties onpenaltieson the early redemption of debt and any factor that adversely affects our operations that results in anincrease in debt.

    • Our estimated expense of $0.05 - $0.06 per diluted share, from the adoption of SFAS No. 123-R, requiring the expensing of stock options, could vary if the assumptions that were used to calculate the expense prove to be inaccurate or are changed.

    The amount we contribute to Company-sponsored pension plans could vary if the amount of cash flow that we generate differs from that expected.

  • Adverse weather conditions could increase the cost our suppliers charge for their products, or may decreasemaydecrease the customer demand for certain products. Additionally, increases in the cost of inputs, suchas utility costs or raw material costs, could negatively affect financial ratios and earnings.

  • Although we presently operate only in the United States, civil unrest in foreign countries in which ourwhichour suppliers do business may affect the prices we are charged for imported goods. If we are unable tounableto pass on these increases to our customers, our FIFO gross margin and net earnings will suffer.

    • A-28



    We cannot fully foresee the effects of changes in economic conditions on Kroger’s business. We have assumed economic and competitive situations will not change significantly for 2006.

    Other factors and assumptions not identified above could also cause actual results to differ materially from those set forth in the forward-looking information. Accordingly, actual events and results may vary significantly from those included in, contemplated or implied by forward-looking statements made by us or our representatives.

    A-29A-30




    REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

    REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

    To the Shareowners and Board of Directors of
    The Kroger Co.:

    We have completed integrated audits of The Kroger Co.’s January 28, 2006 and January 29, 2005 consolidated financial statements and of its internal control over financial reporting as of January 28, 2006, and an audit of its January 31, 2004 consolidated financial statementsFebruary 3, 2007, in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

    CCONSOLIDATEDFINANCIALSTATEMENTS

    In our opinion, the accompanying consolidated balance sheets and the related consolidatedfinancial statements of operations, cash flows and changes in shareowners’ equity present fairly, in all material respects, the financial position of The Kroger Co. and its subsidiaries at February 3, 2007 and January 28, 2006, and January 29, 2005, and the results of their operations and their cash flows for each of the three years in the period ended January 28, 2006February 3, 2007 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

    INTERNALCONTROLOVERFINANCIALREPORTINGAs discussed in Note 15 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123(R),
    Share-Based Payment, as of January 29, 2006 and the recognition and disclosure provisions of Statement of Financial Accounting Standards No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, as of February 3, 2007.

    INTERNALCONTROLOVERFINANCIALREPORTING

    Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing on page A-1 of this Annual Report, that the Company maintained effective internal control over financial reporting as of January 28, 2006February 3, 2007 based on criteria established inInternal Control –- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 28, 2006,February 3, 2007, based on criteria established inInternal Control –- Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing

    A-31



    and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

    A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in

    A-30




    accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

    Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


    Cincinnati, Ohio 
    April 4, 2007 

    A-32


    Cincinnati, Ohio
    April 7, 2006

    A-31



    THE KROGER CO.
    CONSOLIDATED BALANCE SHEETS

    (In millions)
    		   
    		January 28,
    2006
    		   
    		January 29,
    2005
    ASSETS
    		                                    
    Current assets
    		                                        
    Cash and temporary cash investments              $210        $144   
    Deposits In-Transit                488          506   
    Receivables                680          661   
    Receivables – Taxes                6          167   
    FIFO Inventory                4,886          4,729  
    LIFO Credit                (400)          (373)  
    Prefunded employee benefits                300          300   
    Prepaid and other current assets                296          272   
    Total current assets                6,466          6,406  
    Property, plant and equipment, net                11,365          11,497  
    Goodwill, net                2,192          2.191  
    Other assets                459          397   
    Total Assets              $20,482        $20,491  
    LIABILITIES
    		                                    
    Current liabilities                                        
    Current portion of long-term debt including obligations under capital leases and financing obligations              $554        $71   
    Accounts payable                3,550          3,598  
    Accrued salaries and wages                742          659   
    Deferred income taxes                217          286   
    Other current liabilities                1,652          1,721  
    Total current liabilities                6,715          6,335  
    Long-term debt including obligations under capital leases and financing obligations                                        
    Face value long-term debt including obligations under capital leases and financing obligations                6,651          7,830  
    Adjustment to reflect fair value interest rate hedges                27          70   
    Long-term debt including obligations under capital leases and financing obligations                6,678          7,900  
    Deferred income taxes                843          841   
    Other long-term liabilities                1,856          1,796  
    Total Liabilities                16,092          16,872  
    Commitments and Contingencies                                        
    SHAREOWNERS’ EQUITY
    		                                    
    Preferred stock, $100 par, 5 shares authorized and unissued                —           —   
    Common stock, $1 par, 1,000 shares authorized: 927 shares issued in 2005 and
    918 shares issued in 2004    		                927          918   
    Additional paid-in capital                2,536          2,432  
    Accumulated other comprehensive loss                (243)          (202)  
    Accumulated earnings                4,573          3,620  
    Common stock in treasury, at cost, 204 shares in 2005 and 190 shares in 2004                (3,403)          (3,149)  
    Total Shareowners’ Equity                4,390          3,619  
    Total Liabilities and Shareowners’ Equity              $20,482        $20,491  
     
    THE KROGER CO. 
       
    CONSOLIDATEDBALANCESHEETS 
     February 3,     January 28,
    (In millions - except par value)2007 2006
    ASSETS    
    Current assets   
           Cash and temporary cash investments$189 $210 
           Deposits in-transit614  488 
           Receivables773  680 
           Receivables - taxes5  6 
           FIFO inventory5,059  4,886 
           LIFO credit(450)  (400) 
           Prefunded employee benefits 300  300 
           Prepaid and other current assets 265  296 
                   Total current assets6,755  6,466 
    Property, plant and equipment, net11,779  11,365 
    Goodwill2,192  2,192 
    Other assets 489  459 
                   Total Assets$21,215 $20,482 
    LIABILITIES    
    Current liabilities   
           Current portion of long-term debt including obligations under capital leases   
                   and financing obligations$906 $554 
           Accounts payable3,804  3,546 
           Accrued salaries and wages 796  780 
           Deferred income taxes 268  217 
           Other current liabilities  1,807  1,618 
                   Total current liabilities7,581  6,715 
    Long-term debt including obligations under capital leases and financing   
           obligations   
           Face value long-term debt including obligations under capital leases and   
                   financing obligations6,136  6,651 
           Adjustment to reflect fair value interest rate hedges 18  27 
           Long-term debt including obligations under capital leases and financing   
                   obligations6,154  6,678 
    Deferred income taxes722  843 
    Other long-term liabilities 1,835  1,856 
                   Total Liabilities 16,292  16,092 
    Commitments and Contingencies (See Note 11)    
    SHAREOWNERS’ EQUITY    
    Preferred stock, $100 par, 5 shares authorized and unissued—  — 
    Common stock, $1 par, 1,000 shares authorized: 937 shares issued in 2006 and   
           927 shares issued in 2005 937  927 
    Additional paid-in capital2,755  2,536 
    Accumulated other comprehensive loss (259)   (243)
    Accumulated earnings5,501  4,573 
    Common stock in treasury, at cost, 232 shares in 2006 and 204 shares in 2005 (4,011)  (3,403)
                   Total Shareowners’ Equity 4,923  4,390 
                   Total Liabilities and Shareowners’ Equity$21,215 $20,482 
            

    The accompanying notes are an integral part of the consolidated financial statements.

    A-32A-33




    THE KROGER CO.
    CONSOLIDATED STATEMENTSOF OPERATIONS

    Years Ended January 28, 2006, January 29, 2005, and January 31, 2004

    (In millions, except per share amounts)
    		   
    		2005
    (52 weeks)
    		   
    		2004
    (52 weeks)
    		   
    		2003
    (52 weeks)
    Sales              $60,553        $56,434        $53,791  
    Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below                45,565          42,140          39,637  
    Operating, general and administrative                11,027          10,611          10,354  
    Rent                661          680           657   
    Depreciation and amortization                1,265          1,256          1,209  
    Goodwill impairment charge                —           904           471   
    Asset impairment charges                —           —           120   
    Operating Profit                2,035          843           1,343  
    Interest expense                510          557           604   
    Earnings before income tax expense                1,525          286           739   
    Income tax expense                567          390           454   
    Net earnings (loss)              $958        $(104)        $285   
    Net earnings (loss) per basic common share              $1.32        $(0.14)        $0.38  
    Average number of common shares used in basic calculation                724          736           747   
    Net earnings (loss) per diluted common share              $1.31        $(0.14)        $0.38  
    Average number of common shares used in diluted calculation                731          736           754   
     
    THE KROGERCO.
     
    CONSOLIDATEDSTATEMENTSOFOPERATIONS
     
    Years Ended February 3, 2007, January 28, 2006, and January 29, 2005     
         2006    2005    2004
    (In millions, except per share amounts) (53 weeks) (52 weeks) (52 weeks)
    Sales $66,111$60,553 $56,434 
    Merchandise costs, including advertising, warehousing, and      
           transportation, excluding items shown separately below 50,115 45,565 42,140 
    Operating, general and administrative 11,839 11,027 10,611 
    Rent 649 661 680 
    Depreciation and amortization 1,272 1,265 1,256 
    Goodwill impairment charge — — 904 
           Operating Profit 2,236 2,035 843 
    Interest expense 488 510 557 
           Earnings before income tax expense 1,748 1,525 286 
    Income tax expense 633  567 390 
           Net earnings (loss)$  1,115$     958 $    (104)
           Net earnings (loss) per basic common share$    1.56$    1.32$   (0.14)
           Average number of common shares used in basic calculation715 724 736 
           Net earnings (loss) per diluted common share$    1.54$    1.31$   (0.14)
           Average number of common shares used in diluted calculation 723 731 736 
               

    The accompanying notes are an integral part of the consolidated financial statements.

    A-33A-34




    THE KROGER CO.
    CONSOLIDATED STATEMENTSOF CASH FLOWS

    Years Ended January 28, 2006, January 29, 2005 and January 31, 2004

    (In millions)
    		   
    		2005
    (52 weeks)
    		   
    		2004
    (52 weeks)
    		   
    		2003
    (52 weeks)
    Cash Flows From Operating Activities:
    		                                                        
    Net earnings (loss)              $958        $(104)        $285   
    Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
    		                                                        
    Depreciation and amortization                1,265          1,256          1,209  
    LIFO charge                27          49           34   
    Pension expense for Company-sponsored pension plans                138          117           92   
    Goodwill impairment charge                —           861           471   
    Asset impairment charges                —           —           120   
    Deferred income taxes                (63)          230           329   
    Other                39          59           22   
    Changes in operating assets and liabilities net of effects from acquisitions of businesses:
    		                                                        
    Store deposits in-transit                18          73           (363)  
    Inventories                (157)          (236)          (20)  
    Receivables                (19)          13           3   
    Prepaid expenses                31          (31           5   
    Accounts payable                (80)          167           44   
    Accrued expenses                162          (10)          132   
    Income taxes receivable (payable)                200          (86)          (62)  
    Contribution to company sponsored pension plans                (300)          (35)          (100)  
    Other                (27)          7           14   
    Net cash provided by operating activities                2,192          2,330          2,215  
    Cash Flows From Investing Activities:
    		                                                        
    Capital expenditures, excluding acquisitions                (1,306)          (1,634)          (2,000)  
    Proceeds from sale of assets                69          86           68   
    Payments for acquisitions, net of cash acquired                —           (25)          (87)  
    Other                (42)          (35)          (7)  
    Net cash used by investing activities                (1,279)          (1,608)          (2,026)  
    Cash Flows From Financing Activities:
    		                                                        
    Proceeds from issuance of long-term debt                14          616           347   
    Proceeds from lease-financing transactions                76          6           —   
    Payments on long-term debt                (103)          (701)          (816)  
    Borrowings (payments) on bank revolver                (694)          (309)          329   
    Debt prepayment costs                —           (25)          (17)  
    Financing charges incurred                —           (5)          (3)  
    Proceeds from issuance of capital stock                78          25           39   
    Treasury stock purchases                (252)          (319)          (301)  
    Cash received from interest rate swap terminations                —           —           114   
    Increase (decrease) in book overdrafts                34          (25)          107   
    Net cash used by financing activities                (847)          (737)          (201)  
    Net increase (decrease) in cash and temporary cash investments                66          (15)          (12)  
    Cash and temporary cash investments:
    		                                                        
    Beginning of year                144          159           171   
    End of year              $210        $144         $159   
    Disclosure of cash flow information:
    		                                                        
    Cash paid during the year for interest              $511        $590         $589   
    Cash paid during the year for income taxes              $431        $206         $139   
     
    THE KROGERCO.
    CONSOLIDATEDSTATEMENTSOFCASHFLOWS
       
    Year Ended February 3, 2007, January 28, 2006 and January 29, 2005      
       
         2006    2005    2004
    (In millions)  (53 weeks) (52 weeks) (52 weeks)
    Cash Flows From Operating Activities:       
           Net earnings (loss)  $1,115  $    958  $   (104)
                   Adjustments to reconcile net earnings (loss) to net cash provided by operating      
                           activities:       
                           Depreciation and amortization  1,272  1,265  1,256 
                           LIFO charge  50  27  49 
                           Stock option expense  72  7  13 
                           Expense for Company-sponsored pension plans   161  138  117 
                           Goodwill impairment charge  —  —  861 
                           Deferred income taxes  (60)  (63) 230 
                           Other  20  39  59 
                           Changes in operating assets and liabilities net of effects from acquisitions of      
                           businesses:       
                                   Store deposits in-transit   (125)  18  73 
                                   Inventories  (173)  (157) (236)
                                   Receivables  (90)  (19) 13 
                                   Prepaid expenses  (43)  31  (31)
                                   Accounts payable  256  (80) 167 
                                   Accrued expenses  98  155  (23)
                                   Income taxes receivable (payable)  (4)  200  (86)
                                   Contribution to Company-sponsored pension plans  (150)  (300) (35)
                                   Other  (48)  (27) 7 
                           Net cash provided by operating activities   2,351  2,192  2,330 
    Cash Flows From Investing Activities:       
                   Capital expenditures, excluding acquisitions  (1,683)  (1,306) (1,634)
                   Proceeds from sale of assets  143  69  86 
                   Payments for acquisitions, net of cash acquired  —  —  (25)
                   Other   (47)  (42) (35)
                           Net cash used by investing activities  (1,587)  (1,279) (1,608)
    Cash Flows From Financing Activities:       
                   Proceeds from issuance of long-term debt  10  14  616 
                   Proceeds from lease-financing transactions  15  76  6 
                   Payments on long-term debt  (556)  (103) (701)
                   Borrowings (payments) on bank revolver  352  (694) (309)
                   Debt prepayment costs  —  —  (25)
                   Proceeds from issuance of capital stock  168  78  25 
                   Treasury stock purchases  (633)  (252) (319)
                   Dividends paid  (140)  —  — 
                   Other   (1)  34  (30)
                           Net cash used by financing activities  (785)  (847) (737)
    Net increase (decrease) in cash and temporary cash investments  (21)  66  (15)
    Cash and temporary cash investments:       
                   Beginning of year  210  144  159 
                   End of year  $    189  $    210  $    144 
    Reconciliation of capital expenditures        
           Payments for property and equipment $(1,683)  $(1,306) $(1,634)
           Changes in construction-in-progress payables  (94)  —  — 
                   Total capital expenditures $(1,777)  $(1,306)  $(1,634)
    Disclosure of cash flow information:        
                   Cash paid during the year for interest $    514   $    511  $    590 
                   Cash paid during the year for income taxes  $    615  $    431  $    206 
                 

    The accompanying notes are an integral part of the consolidated financial statements.

    A-34A-35




    THE KROGER CO.
    CONSOLIDATED STATEMENTOF CHANGESIN SHAREOWNERS’ EQUITY

    Years Ended January 28, 2006, January 29, 2005 and January 31, 2004

    THEKROGERCO.THEKROGERCO.
    CONSOLIDATEDSTATEMENTOFCHANGESINSHAREOWNERS’EQUITYCONSOLIDATEDSTATEMENTOFCHANGESINSHAREOWNERS’EQUITY
     
    Year Ended February 3, 2007, January 28, 2006 and January 29, 2005Year Ended February 3, 2007, January 28, 2006 and January 29, 2005
     
                    Accumulated    
      Additional  Other  

    		 Common Stock
    		  
         		  Treasury Stock
    		   Common StockPaid-InTreasuryStockComprehensive  Accumulated 
    (In millions)
    		Shares
    		  
    		Amount
    		  
    		Additional
    Paid-In
    Capital
    		  
    		Shares
    		  
    		Amount
    		  
    		Accumulated
    Other
    Comprehensive
    Gain (Loss)
    		  
    		Accumulated
    Earnings
    		  
    		Total
    		 Shares Amount Capital Shares  Amount  Gain (Loss) Earnings Total
    Balances at February 1, 2003    908     $908     $2,317     150     $(2,521)        $(206)        $3,439    $3,937 
    Issuance of common stock:
    		        
    Stock options and warrants exercised    4      4      35      —      —       —       —      39  
    Restricted stock issued    1      1      9      —      —       —       —      10  
    Treasury stock activity:
    		        
    Treasury stock purchases, at cost    —      —      —      19      (301)      —       —      (301) 
    Stock options and restricted stock exchanged    —      —      —      1      (5)      (5)    
    Tax benefits from exercise of stock options and warrants    —      —      21      —      —       —       —      21  
    Other comprehensive gain, net of income tax of $(49)    —      —      —      —      —       82       —      82  
    Net earnings    —      —      —      —      —       —       285      285  
    Balances at January 31, 2004    913      913      2,382     170      (2,827)      (124)      3,724     4,068 913$        913$         2,382  170 $ (2,827)$ (124) $   3,724  $4,068 
    Issuance of common stock:
    		                
    Stock options and warrants exercised    4      4      25      —      —       —       —      29  44 25— — — — 29 
    Restricted stock issued    1      1      9      —      —       —       —      10  11 9— — — — 10 
    Treasury stock activity:
    		      ��           
    Treasury stock purchases, at cost    —      —      —      18      (294)      —       —      (294) —— —18 (294)— — (294)
    Stock options and restricted stock exchanged    —      —      —      2      (28)      —       —      (28) —— —2 (28)— — (28)
    Tax benefits from exercise of stock options and warrants    —      —      16      —      —       —       —      16  
    Other comprehensive loss net of income tax of $47    —      —      —      —      —       (78)      —      (78) 
    Tax benefits from exercise of stock options and         
    warrants—— 16— — — — 16 
    Other comprehensive gain, net of income         
    tax of $47———— — (78)— (78)
    Net loss    —      —      —      —      —       —       (104)     (104) ———— — — (104)(104)
    Balances at January 29, 2005    918      918      2,432     190      (3,149)      (202)      3,620     3,619 9189182,432   190 (3,149)(202)3,620 3,619 
    Issuance of common stock:
    		                
    Stock options and warrants exercised    8      8      57      —      —       —       —      65  88 57— — — — 65 
    Restricted stock issued    1      1      13      —      —       —       —      14  11 13— — — — 14 
    Treasury stock activity:
    		                
    Treasury stock purchases, at cost    —      —      —      14      (239)      —       —      (239) —— —14 (239)— — (239)
    Stock options and restricted stock exchanged    —      —      —      —      (15)      —       —      (15) —— —— (15)— — (15)
    Tax benefits from exercise of stock options and warrants    —      —      34      —      —       —       —      34  
    Other comprehensive loss net of income tax of $26    —      —      —      —      —       (41)      —      (41) 
    Tax benefits from exercise of stock options and         
    warrants—— 34— — — — 34 
    Other comprehensive loss net of income         
    tax of $26—— —— — (41)— (41)
    Other                  (5)     (5)         —— —— — — (5)(5)
    Net earnings    —      —      —      —      —       —       958      958  —— —— — — 958 958 
    Balances at January 28, 2006    927     $927     $2,536     204     $(3,403)     $(243)     $4,573    $4,390 927927 2,536204 (3,403)(243)4,573 4,390 
    Comprehensive income:
    		        
    Issuance of common stock:        
    Stock options and warrants exercised99 95(1)30 — — 134 
    Restricted stock issued 11 13— (5)— — 9 
    Treasury stock activity:        
    Treasury stock purchases, at cost—— —18 (374)— — (374)
    Stock options and restricted stock exchanged — — —11 (259)— — (259)
    Tax benefits from exercise of stock options and         
    warrants— —39— — — — 39 
    Share-based employee compensation— — 72— — — — 72 
    Other comprehensive gain net of        
    income tax of $(63)— — —— — 102 — 102 
    SFAS No. 158 adjustment net of        
    income tax of $71— ——— — (120)— (120)
    Other— ——— — 2 — 2 
    Cash dividends declared        
    ($0.26 per common share)— ——— — — (187)(187)
    Net earnings— ——— — — 1,115 1,115 
    Balances at February 3, 2007937$        937$         2,755232 $ (4,011)$ (259)$   5,501  $4,923 
        2005     2004     2003         200620052004     
    Net earnings (loss)   $958     $(104)    $285          $1,115$958 $(104)      
    Reclassification adjustment for losses included in
    net earnings (loss), net of income tax of $(14)
    in 2003    		    —      —      23          
    Unrealized gain (loss) on hedging activities, net of
    income tax of $(1) in 2005, $1 in 2004 and $(2)
    in 2003    		    1      (1)     3          
    Additional minimum pension liability adjustment, net
    of income tax of $26 in 2005, $46 in 2004 and
    $(33) in 2003    		    (42)     (77)     56          
    Reclassification adjustment for losses included       
    in net earnings (loss) ——  —      
    Unrealized gain (loss) on hedging activities, net      
    of income tax of $(5) in 2006 $(1) in 2005      
    and $1 in 200471  (1)      
    Additional minimum pension liability       
    adjustment, net of income tax of $(58) in      
    2006, $26 in 2005       
    and $46 in 200495(42) (77)      
    Comprehensive income (loss)   $917     $(182)    $367          $1,217$917 $(182)     
         
     

    The accompanying notes are an integral part of the consolidated financial statements.

    A-35A-36




    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

    All dollar amounts are in millions except share and per share amounts.

    Certain prior-year amounts have been reclassified to conform to current year presentation.

    1.    
    		ACCOUNTING POLICIES

    1. ACCOUNTING POLICIES

    The following is a summary of the significant accounting policies followed in preparing these financial statements.

    Description of Business, Basis of Presentation and Principles of Consolidation

    The Kroger Co. (the “Company”) was founded in 1883 and incorporated in 1902. As of January 28, 2006,February 3, 2007, the Company was one of the largest retailers in the United States based on annual sales. The Company also manufactures and processes food for sale by its supermarkets. The accompanying financial statements include the consolidated accounts of the Company and its subsidiaries. Significant intercompany transactions and balances have been eliminated.

    Fiscal Year

    The Company’s fiscal year ends on the Saturday nearest January 31. The last three fiscal years consist of the 53-week period ended February 3, 2007, the 52-week period ended January 28, 2006, and the 52-week period ended January 29, 2005, and the 52-week period ended January 31, 2004.
    2005.

    Pervasiveness of Estimates

    The preparation of financial statements in conformity with Generally Accepted Accounting Principlesgenerally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. Disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of consolidated revenues and expenses during the reporting period also is required. Actual results could differ from those estimates.

    Inventories

    Inventories are stated at the lower of cost (principally on a last-in, first-out “LIFO” basis) or market. In total, approximately 98% of inventories for 20052006 and approximately 97% of inventories for 20042005 were valued using the LIFO method. Cost for the balance of the inventories, including substantially all fuel inventories, was determined using the first-in, first-out (“FIFO”) method. Replacement cost was higher than the carrying amount by $450 at February 3, 2007 and $400 at January 28, 2006 and $373 at January 29, 2005.2006. The Company follows the Link-Chain, Dollar-Value LIFO method for purposes of calculating its LIFO charge or credit.

    The item-cost method of accounting to determine inventory cost before the LIFO adjustment is followed for substantially all store inventories at the Company’s supermarket divisions. This method involves counting each item in inventory, assigning costs to each of these items based on the actual purchase costs (net of vendor allowances and cash discounts) of each item and recording the actual cost of items sold. The item-cost method of accounting allows for more accurate reporting of periodic inventory balances and enables management to more precisely manage inventory when compared to the retail method of accounting.

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    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    The Company evaluates inventory shortages throughout the year based on actual physical counts in its facilities. Allowances for inventory shortages are recorded based on the results of these counts to provide for estimated shortages as of the financial statement date.

    A-36



    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    Property, Plant and Equipment

    Generally, property, plant and equipment are recorded at cost. Depreciation expense, which includes the amortization of assets recorded under capital leases, is computed principally using the straight-line method over the estimated useful lives of individual assets. Leasehold improvements are depreciated over the shorter of the remaining life of the lease term or the useful life of the asset. Buildings and land improvements are depreciated based on lives varying from 10 to 40 years. Some store equipment acquired as a result of the Fred Meyer merger was assigned a 15-year life. The life of this equipment was not changed. All new purchases of store equipment are assigned lives varying from three to nine years. Leasehold improvements are amortized over the shorter of the lease term to which they relate, which varyvaries from four to 25 years, or the useful life of the asset. Manufacturing plant and distribution center equipment is depreciated over lives varying from three to 15 years. Information technology assets are generally depreciated over five years. Depreciation and amortization expense was $1,272 in 2006, $1,265 in 2005 and $1,256 in 2004 and $1,209 in 2003.
    2004.

    Interest costs on significant projects constructed for the Company’s own use are capitalized as part of the costs of the newly constructed facilities. Upon retirement or disposal of assets, the cost and related accumulated depreciation are removed from the balance sheet and any gain or loss is reflected in net earnings.

    Deferred Rent

    The Company recognizes rent holidays, including the time period during which the Company has access to the property for construction of buildings or improvements, as well as construction allowances and escalating rent provisions on a straight-line basis over the term of the lease. The deferred amount is included in Other Current Liabilities and Other Long-Term Liabilities on the Company’s Consolidated Balance Sheets.

    Goodwill

    The Company reviews goodwill for impairment during the fourth quarter of each year, and also upon the occurrence of trigger events. The reviews are performed at the operating division level. Generally, fair value represents a multiple of earnings, or discounted projected future cash flows, and is compared to the carrying value of a division for purposes of identifying potential impairment. Projected future cash flows are based on management’s knowledge of the current operating environment and expectations for the future. If potential for impairment is identified, the fair value of a division is measured against the fair value of its underlying assets and liabilities, excluding goodwill, to estimate an implied fair value of the division’s goodwill. Goodwill impairment is recognized for any excess of the carrying value of the division’s goodwill over the implied fair value. Results of the goodwill impairment reviews performed during 2006, 2005 2004 and 20032004 are summarized in Note 42 to the Consolidated Financial Statements.

    Intangible Assets

    In addition to goodwill, the Company has recorded intangible assets totaling $35, $20$26, $22 and $30$28 for leasehold equities, liquor licenses and pharmacy prescription file purchases, respectively at January 28, 2006.February 3, 2007. Balances at January 29, 200528, 2006 were $40,$35, $20 and $29$30 for leasehold equities, liquor licenses and

    A-38



    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    pharmacy prescription files, respectively. Leasehold equities are amortized over the remaining life of the lease. Owned liquor licenses are not amortized, while liquor licenses that must be renewed are amortized over their useful lives. Pharmacy prescription file purchases are amortized over seven years. These assets are considered annually during the Company’s testing for impairment.

    A-37



    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    Impairment of Long-Lived Assets

    In accordance with SFASStatement of Financial Accounting Standards (“SFAS”) No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, the Company monitors the carrying value of long-lived assets for potential impairment each quarter based on whether certain trigger events have occurred. These events include current period losses combined with a history of losses or a projection of continuing losses or a significant decrease in the market value of an asset. When a trigger event occurs, an impairment calculation is performed, comparing projected undiscounted future cash flows, utilizing current cash flow information and expected growth rates related to specific stores, to the carrying value for those stores. If impairment is identified for long-lived assets to be held and used, discounted future cash flows are compared to the asset’s current carrying value. Impairment is recorded when the carrying value exceeds the discounted cash flows. With respect to owned property and equipment held for sale, the value of the property and equipment is adjusted to reflect recoverable values based on previous efforts to dispose of similar assets and current economic conditions. Impairment is recognized for the excess of the carrying value over the estimated fair market value, reduced by estimated direct costs of disposal.

    The Company performs impairment reviews at bothrecorded asset impairments in the divisionnormal course of business totaling $61, $48 and corporate levels. Generally, for reviews performed by local divisional management, costs$24 in 2006, 2005 and 2004. Costs to reduce the carrying value of long-lived assets for each of the years presented have been reflectedincluded in the Consolidated Statements of EarningsOperations as “Operating, general and administrative” expense. Cost to reduce the carrying value of long-lived assets that result from corporate – level strategic plans are separately identified in the Consolidated Statements of Earnings as “Asset impairment charges.” See Note 3 to the Consolidated Financial Statements for details of asset impairment charges from corporate-level strategic plans recorded in 2003.

    Store Closing Costs

    All closed store liabilities related to exit or disposal activities initiated after December 31, 2002, are accounted for in accordance with SFAS No. 146,Accounting for Costs Associated with Exit or Disposal Activities. The Company provides for closed store liabilities relating to the present value of the estimated remaining noncancellable lease payments after the closing date, net of estimated subtenant income. The Company estimates the net lease liabilities using a discount rate to calculate the present value of the remaining net rent payments on closed stores. The closed store lease liabilities usually are paid over the lease terms associated with the closed stores, which generally have remaining terms ranging from one to 20 years. Adjustments to closed store liabilities primarily relate to changes in subtenant income and actual exit costs differing from original estimates. Adjustments are made for changes in estimates in the period in which the change becomes known. Store closing liabilities are reviewed quarterly to ensure that any accrued amount that is not a sufficient estimate of future costs, or that no longer is needed for its originally intended purpose, is adjusted to income in the proper period.

    Owned stores held for disposal are reduced to their estimated net realizable value. Costs to reduce the carrying values of property, equipment and leasehold improvements are accounted for in accordance with our policy on impairment of long-lived assets. Inventory write-downs, if any, in connection with store closings, are classified in “Merchandise costs.” Costs to transfer inventory and equipment from closed stores are expensed as incurred.

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    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    The following table summarizes accrual activity for future lease obligations of stores closed that were closed in the normal course of business, not part of a coordinated closing.


    		Future Lease
    Obligations
    Balance at January 31, 2004   $35
    Additions28  ��
    Payments(10)  
    Adjustments12
    Obligations 
    Balance at January 29, 2005$  65
           Additions  10
           Payments    65
    Additions10
    Payments(8(8) 
    Adjustments  (2(2)
     
    Balance at January 28, 2006  65
           Additions    $ 965
           Payments (14) 
           Adjustments (27) 
    Balance at February 3, 2007 $  33 

    In addition, as of February 3, 2007, the Company maintained a $9$48 liability for facility closure costs, representing the present value of lease obligations remaining through 2019 for locations closed in California prior to the Fred Meyer merger in 1999, and $13an $8 liability at January 28, 2006 and January 29, 2005, respectively, for store closing costs related to two distinct, formalized plans that coordinated the closing of several locations over a relatively short periods of time in 2000 and 2001 and a $2 and $4 liability at January 28, 2006 and January 29, 2005, respectively, for lease commitments through 2009 related to the consolidation of the Company’s Nashville division office. The change in these liabilities for each of the past two years relates to the payment of lease commitments.
    2001.

    Interest Rate Risk Management

    The Company uses derivative instruments primarily to manage its exposure to changes in interest rates. The Company’s current program relative to interest rate protection and the methods by which the Company accounts for its derivative instruments are described in Note 8.
    6.

    Commodity Price Protection

    The Company enters into purchase commitments for various resources, including raw materials utilized in its manufacturing facilities and energy to be used in its stores, manufacturing facilities and administrative offices. The Company enters into commitments expecting to take delivery of and to utilize those resources in the conduct of the normal course of business. The Company’s current program relative to commodity price protection and the methods by which the Company accounts for its purchase commitments are described in Note 8.
    6.

    Benefit Plans

    Effective February 3, 2007, the Company adopted the provisions of SFAS No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB Statements No. 87, 99, 106 and 123(R), which required the recognition of the funded status of its retirement plans on the Consolidated Balance Sheet. Actuarial gains or losses, prior service costs or credits and transition obligations that have not yet been recognized are now required to be recorded as a component of Accumulated Other Comprehensive Income (“AOCI”).

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    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    The determination of the obligation and expense for Company-sponsored pension plans and other post-retirement benefits is dependent on the selection of assumptions used by actuaries and the Company in calculating those amounts. Those assumptions are described in Note 1714 and include, among others, the discount rate, the expected long-term rate of return on plan assets and the rates of increase in compensation and health care costs. In accordance with generally accepted accounting principles, actualActual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect the recognized expense and recorded obligation in future periods. While the Company believes that the assumptions are appropriate, significant differences in actual experience or significant changes in assumptions may materially affect the pension and other post-retirement obligations and future expense.

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    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    The Company also participates in various multi-employer plans for substantially all union employees. Pension expense for these plans is recognized as contributions are funded. Refer to Note 1714 for additional information regarding the Company’s benefit plans.

    Stock Option Plans

    TheEffective January 29, 2006, the Company appliesadopted the fair value recognition provisions of SFAS No. 123(R), Share-Based Payment, using the modified prospective transition method and, therefore, has not restated results for prior periods. Under this method, the Company recognizes compensation expense for all share-based payments granted after January 29, 2006, as well as all share-based payments granted prior to, but not yet vested as of, January 29, 2006, in accordance with SFAS No. 123(R). Under the fair value recognition provisions of SFAS No. 123(R), the Company recognizes share-based compensation expense, net of an estimated forfeiture rate, over the requisite service period of the award. Prior to the adoption of SFAS No. 123(R), the Company accounted for share-based payments under Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees, (“APB No. 25”) and related interpretations in accounting for its stock option plans. The Company grants options for common stock at an option price equal to the fair market valuedisclosure provisions of the stock at the date of the grant. Accordingly, the Company does not record stock-based compensation expense for these options.SFAS No. 123. The Company also makes restricted stock awards. Compensation expense included in net earningselected the alternative transition method for restricted stock awards totaled approximately $5, $8 and $8 after-tax, in 2005, 2004 and 2003, respectively. The Company’s stock option plans are more fully described in Note 12.

    The following table illustratescalculating windfall tax benefits available as of the effect on net earnings, net earnings per basic common share and net earnings per diluted common share if compensation cost for all options had been determined based on the fair market value recognition provisionadoption of SFAS No. 123:
    123(R). For further information regarding the adoption of SFAS No. 123(R), see Note 10 to the Consolidated Financial Statements.

    		   
    		2005
    		   
    		2004
    		   
    		2003
    Net earnings (loss), as reported              $958        $(104)        $285   
    Add: Stock-based compensation expense included in net earnings, net of income
    tax benefits    		                5          8           8   
    Subtract: Total stock-based compensation expense determined under fair value method for all awards, net of income tax benefits(1)                (34)          (48)          (48)  
    Pro forma net earnings (loss)              $929        $(144)        $245   
    Earnings (loss) per basic common share, as reported              $1.32        $(0.14)        $0.38  
    Pro forma earnings (loss) per basic common share              $1.28        $(0.20)        $0.33  
    Earnings (loss) per diluted common share, as reported              $1.31        $(0.14)        $0.38  
    Pro forma earnings (loss) per diluted common share              $1.27        $(0.20)        $0.32  
     
    (1)Refer to Note 12 for a summary of the assumptions used for options issued in each year at an option price equal to the fair market value of the stock at the date of the grant.

    Deferred Income Taxes

    Deferred income taxes are recorded to reflect the tax consequences of differences between the tax basis of assets and liabilities and their financial reporting basis. Refer to Note 64 for the types of differences that give rise to significant portions of deferred income tax assets and liabilities. Deferred income taxes are classified as a net current or noncurrent asset or liability based on the classification of the related asset or liability for financial reporting purposes. A deferred tax asset or liability that is not related to an asset or liability for financial reporting is classified according to the expected reversal date.

    Tax Contingencies

    Various taxing authorities periodically audit the Company’s income tax returns. These audits include questions regarding the Company’s tax filing positions, including the timing and amount of deductions and the allocation of income to various tax jurisdictions. In evaluating the exposures connected with these various tax filing positions, including state and local taxes, the Company records allowances for probable exposures. A number of years may elapse

    A-40



    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


    before a particular matter, for which an allowance has been established, is audited and fully resolved. As of January 28, 2006,February 3, 2007, tax years 2002 through 2004 were undergoing examination by the Internal Revenue Service.

    A-41



    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    The establishment of the Company’s tax contingency allowances relies on the judgment of management to estimate the exposures associated with the Company’s various filing positions.

    Self-Insurance Costs

    The Company primarily is self-insured for costs related to workers’ compensation and general liability claims. Liabilities are actuarially determined and are recognized based on claims filed and an estimate of claims incurred but not reported. The liabilities for workers’ compensation claims are accounted for on a present value basis. The Company has purchased stop-loss coverage to limit its exposure to any significant exposure on a per claim basis. The Company is insured for covered costs in excess of these per claim limits.

    Revenue Recognition

    Revenues from the sale of products are recognized at the point of sale of the Company’s products. Discounts provided to customers by the Company at the time of sale, including those provided in connection with loyalty cards, are recognized as a reduction in sales as the products are sold. Discounts provided by vendors, usually in the form of paper coupons, are not recognized as a reduction in sales provided the coupons are redeemable at any retailer that accepts coupons. Pharmacy sales are recorded when picked up by the customer. Sales taxes are not recorded as a component of sales. The Company does not recognize a sale when it sells gift cards and gift certificates. Rather, a sale is recognized when the gift card or gift certificate is redeemed to purchase the Company’s products.

    Merchandise Costs

    In addition to the product costs, net of discounts and allowances; advertising costs (see separate discussion below); inbound freight charges; warehousing costs, including receiving and inspection costs; transportation costs; and manufacturing production and operational costs are included in the “Merchandise costs” line item of the Consolidated Statements of Operations. Warehousing, transportation and manufacturing management salaries are also included in the “Merchandise costs” line item; however, purchasing management salaries and administration costs are included in the “Operating, general, and administrative” line item along with most of the Company’s other managerial and administrative costs. Rent expense and depreciation expense are shown separately in the Consolidated Statements of Operations.

    Warehousing and transportation costs include distribution center direct wages, repairs and maintenance, utilities, inbound freight and, where applicable, third party warehouse management fees, as well as transportation direct wages and repairs and maintenance. These costs are recognized in the periods the related expenses are incurred.

    The Company believes the classification of costs included in merchandise costs could vary widely throughout the industry. The Company’s approach is to include in the “Merchandise costs” line item the direct, net costs of acquiring products and making them available to customers in its stores. The Company believes this approach most accurately presents the actual costs of products sold.

    The Company recognizes all vendor allowances as a reduction in merchandise costs when the related product is sold. When possible, vendor allowances are applied to the related product by item and, therefore, reduce the carrying value of inventory by item. When the items are sold, the vendor allowance

    A-42



    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    is recognized. When it is not possible, due

    A-41



    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


    to systems constraints, to allocate vendor allowances to the product by item, vendor allowances are recognized as a reduction in merchandise costs based on inventory turns and, therefore, recognized as the product is sold.

    Advertising Costs

    The Company’s advertising costs are recognized in the periods the related expenses are incurred and are included in the “Merchandise costs” line item of the Consolidated Statements of Operations. The Company’s pre-tax advertising costs totaled $508 in 2006, $498 in 2005 and $528 in 2004 and $527 in 2003.2004. The Company does not record vendor allowances for co-operative advertising as a reduction of advertising expense.

    Deposits In-Transit

    Deposits in-transit generally represent funds deposited to the Company’s bank accounts at the end of the quarter related to sales, a majority of which were paid for with credit cards and checks, to which the Company does not have immediate access.

    Consolidated Statements of Cash Flows

    For purposes of the Consolidated Statements of Cash Flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be temporary cash investments. Book overdrafts, which are included in accounts payable, represent disbursements that are funded as the item is presented for payment. Book overdrafts totaled $600, $596 $562 and $587$562 as of February 3, 2007, January 28, 2006, and January 29, 2005, and January 31, 2004, respectively, and are reflected as a financing activity in the Consolidated Statements of Cash Flows.

    Segments

    The Company operates retail food and drug stores, multi-department stores, jewelry stores, and convenience stores throughout the United States. The Company’s retail operations, which represent substantially all of the Company’s consolidated sales, are its only reportable segment. All of the Company’s operations are domestic.

    2.    
    		MERGER-RELATED COSTS

    There were no merger-related costs incurred in 2005, 2004 or 2003.

    The following table shows the changes in accruals related to business combinations:
    2. GOODWILL


         		      Facility
    Closure Costs
    		    Incentive
    Awards and
    Contributions
    Balance at February 1, 2003              $74         $20   
    Adjustment of charitable contribution allowance                —           (5)  
    Payments                (10)          —   
     
    Balance at January 31, 2004                64           15   
    Payments                (7)          (1)  
     
    Balance at January 29, 2005                57           14   
    Payments                (4)          —   
     
    Balance at January 28, 2006              $53         $14   
     

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    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    The $53 liability for facility closure costs primarily represents the present value of lease obligations remaining through 2019 for locations closed in California prior to the Fred Meyer merger. The $14 liability relates to a charitable contribution required as a result of the Fred Meyer merger. The Company is required to make this contribution by May 2006.

    3.    
    		ASSET IMPAIRMENT CHARGEAND RELATED ITEMS

    During 2003, the Company authorized closure of several stores throughout the country based on results for 2002 and 2003, as well as updated projections for 2004 and beyond. This event triggered an impairment review of stores slated for closure as well as several other under-performing locations in the fourth quarter 2003. The review resulted in a pre-tax charge totaling $120. These charges are more fully described below. No corporate-level asset impairment charges were recorded in 2005 or 2004.

    Assets to be Disposed of

    The impairment charges for assets to be disposed of related primarily to the carrying values of land, buildings, equipment and leasehold improvements for stores that have closed or have been approved for closure. The impairment charges were determined by estimating the fair values of the locations, less costs of disposal. Fair values were based on third party offers to purchase the assets, or market value for comparable properties, if available. As a result, pre-tax impairment charges related to assets to be disposed of were recognized, reducing the carrying value of fixed assets by $54 in 2003.

    Assets to be Held and Used

    The impairment charges for assets to be held and used related primarily to the carrying values of land, buildings, equipment and leasehold improvements for stores that will continue to be operated by the Company. Updated projections, based on revised operating plans, were used, on a gross basis, to determine whether the assets were impaired. Then, discounted cash flows were used to estimate the fair value of the assets for purposes of measuring the impairment charge. As a result, impairment charges related to assets to be held and used were recognized, reducing the carrying value of fixed assets by $66 in 2003.

    4. GOODWILL, NET

    The annual evaluation of goodwill performed during the fourth quarter of 2006 and 2005 did not result in impairment.

    The annual evaluation of goodwill performed during the fourth quarter of 2004 resulted in a $904 pre-tax, non-cash impairment charge related to goodwill at the Company’s Ralphs and Food 4 Less divisions. The divisions’ operating performance suffered due to the intense competitive environment during the 2003 southern California labor dispute and recovery period after the labor dispute. The decreased operating performance was the result of the investments in personnel, training and price reductions necessary to help regain Ralphs’ business lost during the labor dispute. As a result of this decline and the decline in future expected operating performance, the divisions’ carrying value of goodwill exceeded its implied fair value resulting in the impairment charge. Most of the impairment charge was non-deductible for income tax purposes. As ofAt February 3, 2007 and January 28, 2006, the Company maintained $1,458 of goodwill for the Ralphs and Food 4 Less divisions.

    The annual evaluation of goodwill performed during the fourth quarter of 2003 resulted in a $471 non-cash impairment charge related to the goodwill at the Company’s Smith’s division. In 2003, the Company’s Smith’s divisionA-43

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    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


    experienced a substantial decline in operating performance when compared to prior year performance and budgeted 2003 results. Additionally, the Company forecasted a further decline in the future operating performance of the division reflecting the necessary investments in capital and targeted retail price reductions in order to maintain and grow market share and provide acceptable long-term return on capital. The impairment charge, which was non-deductible for income tax purposes, adjusted the carrying value of the division’s goodwill to its implied fair value. As of January 28, 2006, the Company maintained $166 of goodwill for the Smith’s division.

    The following table summarizes the changes in the Company’s net goodwill balance through January 28, 2006.
    February 3, 2007.

    Balance at February 1, 2003  $3,606
    Goodwill impairment charge(471)  
    Goodwill recorded9
    Purchase accounting adjustments(6)  
    Balance at January 31, 2004$3,138
    Goodwill impairment charge(904 (904)
    Goodwill recorded 66
    Purchase accounting adjustments(49 (49)
    Balance at January 29, 2005 2,191
           Goodwill impairment charge  —
           Goodwill recorded  — 
    Goodwill impairment charge—
    Goodwill recorded—
    Purchase accounting adjustments 11
     
    Balance at January 28, 20062,192
           Goodwill impairment charge  —
           Goodwill recorded  —
           Purchase accounting adjustments  — 
    Balance at February 3, 2007 $2,192 

    3. P5.ROPERTY, PROPERTY, PLANTAND AND EQUIPMENT, NET

    Property, plant and equipment, net consists of:

     2006    2005
    Land $1,690$ 1,675 
    Buildings and land improvements 5,402 5,142
    Equipment 8,255  7,980
    Leasehold improvements 4,221  3,917
    Construction-in-progress  822  511
    Leased property under capital leases and financing obligations   592  561
           Total property, plant and equipment 20,982 19,786
    Accumulated depreciation and amortization  (9,203)  (8,421)
           Property, plant and equipment, net $11,779 $11,365


         		      2005
    		    2004
    Land              $1,675        $1,580  
    Buildings and land improvements                5,142          4,975  
    Equipment                7,980          7,797  
    Leasehold improvements                3,917          3,804  
    Construction-in-progress                511          541   
    Leased property under capital leases and financing obligations                561          506   
                     19,786          19,203  
    Accumulated depreciation and amortization                (8,421)          (7,706)  
    Total              $11,365        $11,497  
     

    Accumulated depreciation for leased property under capital leases was $288 at February 3, 2007, and $263 at January 28, 20062006.

         Approximately $566 and $252 at January 29, 2005.

    Approximately $798, and $982, original cost, of Property, Plant and Equipment collateralized certain mortgages at February 3, 2007, and January 28, 2006, and January 29, 2005, respectively.

    A-44




    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
    4. TAXES, BASEDON INCOME

    6. TAXES BASEDON INCOME

    The provision for taxes based on income consists of:

     2006     2005     2004 
    Federal    
           Current $652 $609$ 96
           Deferred  (52) (79)258
     600 530354
    State and local   
           Current  55 4225
           Deferred  (22) (5) 11
      33  37  36
    Total $633  $567 $390


         		      2005
    		    2004
    		    2003
    Federal
    		                                                        
    Current              $609         $96         $177   
    Deferred                (79)          258           238   
                     530           354           415   
     
    State and local
    		                                                        
    Current                42           25           18   
    Deferred                (5)          11           21   
                     37           36           39   
    Total              $567         $390         $454   
     

    A reconciliation of the statutory federal rate and the effective rate follows:

     2006    2005    2004 
    Statutory rate 35.0%35.0%35.0%
    State income taxes, net of federal tax benefit 1.9% 1.6% 2.6%
    Non-deductible goodwill — —101.7%
    Deferred tax adjustment (1.2)%  —  —
    Other changes, net 0.5% 0.6% (2.9)%
     36.2% 37.2% 136.4%

         During the reconciliation of the Company’s deferred tax balances, after the filing of annual federal and state tax returns, the Company identified adjustments to be made in the prior years’ deferred tax reconciliation. These deferred tax balances were corrected in the Company’s Consolidated Financial Statements for the year ended February 3, 2007, which resulted in a reduction of the Company’s 2006 provision for income tax expense of approximately $21. The Company does not believe these adjustments are material to its Consolidated Financial Statements for the year ended February 3, 2007, or to any prior years’ Consolidated Financial Statements. As a result, the Company has not restated any prior year amounts.

    A-45


         		      2005
    		    2004
    		    2003
    Statutory rate                35.0%          35.0%          35.0%  
    State income taxes, net of federal tax benefit                1.6%          2.6%          3.4%  
    Non-deductible goodwill                0.0%          101.7%          22.3%  
    Other changes, net                0.6%          (2.9)%          0.7%  
                     37.2%          136.4%          61.4%  
     

    A-45



    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    The tax effects of significant temporary differences that comprise tax balances were as follows:


         		      2005
    		    2004
    Current deferred tax assets:
    		                                        
    Net operating loss carryforwards              $18        $19   
    Other                42          —   
    Total current deferred tax assets                60          19   
     
    Current deferred tax liabilities:
    		                                        
    Compensation related costs                (2)          (19)  
    Insurance related costs                (107)          (136)  
    Inventory related costs                (168)          (119)  
    Other                —           (31)  
    Total current deferred tax liabilities                (277)          (305)  
     
    Current deferred taxes              $(217)        $(286)  
     
    Long-term deferred tax assets:
    		                                        
    Compensation related costs              $290        $383   
    Insurance related costs                9          15   
    Lease accounting                106          60   
    Closed store reserves                95          115   
    Net operating loss carryforwards                26          79   
    Other                21          147   
    Long-term deferred tax assets, net                547          799   
     
    Long-term deferred tax liabilities:
    		                                        
    Depreciation                (1,193)          (1,437)  
    Deferred income                (197)          (203)  
    Total long-term deferred tax liabilities                (1,390)          (1,640)  
     
    Long-term deferred taxes              $(843)        $(841)  
     
     2006     2005 
    Current deferred tax assets:     
           Net operating loss carryforwards $  17$  18
           Compensation related costs   32  —
           Other   4  42
                           Total current deferred tax assets   53  60
    Current deferred tax liabilities:     
           Compensation related costs   —  (2) 
           Insurance related costs   (109)   (107) 
           Inventory related costs   (212)   (168) 
                           Total current deferred tax liabilities   (321)   (277) 
    Current deferred taxes $  (268) $  (217) 
    Long-term deferred tax assets:     
           Compensation related costs $  332$  290
           Insurance related costs   —  9
           Lease accounting   122  106
           Closed store reserves   96  95
           Net operating loss carryforwards   29   26
           Other   47  21
                           Long-term deferred tax assets, net   626  547
    Long-term deferred tax liabilities:     
           Depreciation   (1,114)   (1,193) 
           Insurance related costs   (33)   —
           Deferred income   (201)   (197) 
                           Total long-term deferred tax liabilities   (1,348)   (1,390) 
    Long-term deferred taxes $  (722) $  (843) 

    At January 28, 2006,February 3, 2007, the Company had net operating loss carryforwards for federal income tax purposes of $126$74 that expire from 2010 through 2018. In addition, the Company had net operating loss carryforwards for state income tax purposes of $394$733 that expire from 20092010 through 2023.2025. The utilization of certain of the Company’s net operating loss carryforwards may be limited in a given year.

    At January 28, 2006,February 3, 2007, the Company had state Alternative Minimum Tax Credit carryforwards of $5. In addition, the Company had other state credits of $20, which$23 that expire from 20062007 through 2015.2020. The utilization of certain of the Company’s credits may be limited in a given year.

    The amounts of cash paid for income taxes in 2004 and 2003 werewas reduced by approximately $90 and $122, respectively, as a result of federal bonus depreciation. This benefit reversedbegan reversing in 2005 and increased the amount of cash paid for income taxes by approximately $108.
    $71 in 2006 and $108 in 2005, respectively.

    A-46




    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
    5. DEBT OBLIGATIONS

    7. DEBT OBLIGATIONS

    Long-term debt consists of:

    2006    2005
    Credit facility $  352$  —
    4.95% to 9.20% Senior notes and debentures due through 2031  5,916  6,390
    5.00% to 9.95% mortgages due in varying amounts through 2034  169  179
    Other  144   178 
    Total debt  6,581  6,747
    Less current portion  (878)  (527)
    Total long-term debt $5,703  $6,220


         		      2005
    		    2004
    Credit Facilities              $—         $694   
    4.95% to 8.92% Senior Notes and Debentures due through 2031                6,390          6,391  
    5.00% to 9.95% mortgages due in varying amounts through 2017                179          218   
    Other                178          202   
    Total debt                6,747          7,505  
    Less current portion                (527)          (46)  
    Total long-term debt              $6,220        $7,459  
     

    As of January 28, 2006,February 3, 2007, the Company had a $1,800$2,500 Five-Year Credit Agreement maturing in 2010, and a $700 Five-Year Credit Agreement maturing in 2007,2011, unless earlier terminated by the Company. Borrowings under thesethe credit agreementsagreement bear interest at the option of the Company at a rate equal to either (i) the highest, from time to time of (A) the base rate of Citibank,JP Morgan Chase Bank, N.A., (B) 1/2%½% over a moving average of secondary market morning offering rates for three-month certificates of deposit adjusted for reserve requirements, and (C) 1/2%½% over the federal funds rate or (ii) an adjusted Eurodollar rate based upon the London Interbank Offered Rate (“Eurodollar Rate”) plus an Applicable Margin. In addition, the Company pays a Facility Fee in connection with thesethe credit agreements.agreement. Both the Applicable Margin and the Facility Fee vary based upon the Company’s achievement of a financial ratio or credit rating. At January 28, 2006,February 3, 2007, the Applicable Margin was 0.27% and the Facility Fee was 0.08% for both facilities.. The credit agreements containfacility contains covenants, which, among other things, require the maintenance of certain financial ratios, including fixed charge coverage and leverage ratios. The Company may prepay the credit agreementsagreement in whole or in parts, at any time, without a prepayment penalty. As of February 3, 2007, the Company had $352 outstanding under the credit agreement. The weighted average interest rate on the amounts outstanding under the credit facilitiesagreement was 2.49%5.47% at January 29, 2005. There were no outstanding borrowings under the credit facilities as of January 28, 2006.
    February 3, 2007.

    At January 28, 2006,February 3, 2007, the Company had no borrowings totaling $352 under its P2/F2/A3 rated commercial paper program. Any borrowings under this program are backed by the Company’s credit facilitiesfacility and reduce the amount available under the credit facilities.
    facility.

    At January 28, 2006,February 3, 2007, the Company also maintained a $50 money market line. In addition to credit agreement borrowings, borrowings under the money market line and some outstanding letters of credit reduce funds available under the Company’s credit agreements.agreement. At January 28, 2006,February 3, 2007, these letters of credit totaled $303.$331. The Company had no borrowings under the money market line at January 28, 2006.
    February 3, 2007.

    Most of the Company’s outstanding public debt is subject to early redemption at varying times and premiums, at the option of the Company. In addition, subject to certain conditions, some of the Company’s publicly issued debt will be subject to redemption, in whole or in part, at the option of the holder upon the occurrence of a redemption event, upon not less than five days’ notice prior to the date of redemption, at a redemption price equal to the default amount, plus a specified premium. “Redemption Event” is defined in the indentures as the occurrence of (i) any person or group, together with any affiliate thereof, beneficially owning 50% or more of the voting power of the Company or (ii) any one person or group, or affiliate thereof, succeeding in having a majority of its nominees elected to the Company’s Board of Directors, in each case, without the consent of a majority of the continuing directors of the Company.

    A-47




    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    The aggregate annual maturities and scheduled payments of long-term debt, as of year-end 2005,2006, and for the years subsequent to 20052006 are:

    2007$878
    2008993
    2009 912
    2010 42
    2011 537
    Thereafter 3,219
    Total debt$6,581

    6. FINANCIAL INSTRUMENTS

    2006              $527   
    2007                527   
    2008                1,000  
    2009                912   
    2010                42   
    Thereafter                3,739  
    Total debt              $6,747  
     
    8.    
    		FINANCIAL INSTRUMENTS

    Interest Rate Risk Management

    The Company historically has used derivatives to manage its exposure to changes in interest rates. The interest differential to be paid or received is accrued as interest expense. SFAS No. 133, “AccountingAccounting for Derivative Instruments and Hedging Activities”, as amended, defines derivatives, requires that derivatives be carried at fair value on the balance sheet and provides for hedge accounting when certain conditions are met. In accordance with this standard, the Company’s derivative financial instruments are recognized on the balance sheet at fair value. Changes in the fair value of derivative instruments designated as “cash flow” hedges, to the extent the hedges are highly effective, are recorded in other comprehensive income, net of tax effects. Ineffective portions of cash flow hedges, if any, are recognized in current period earnings. Other comprehensive income or loss is reclassified into current period earnings when the hedged transaction affects earnings. Changes in the fair value of derivative instruments designated as “fair value” hedges, along with corresponding changes in the fair values of the hedged assets or liabilities, are recorded in current period earnings.

    The Company assesses, both at the inception of the hedge and on an ongoing basis, whether derivatives used as hedging instruments are highly effective in offsetting the changes in the fair value or cash flow of the hedged items. If it is determined that a derivative is not highly effective as a hedge or ceases to be highly effective, the Company discontinues hedge accounting prospectively.

    The Company’s current program relative to interest rate protection contemplates both fixing the rates on variable rate debt and hedging the exposure to changes in the fair value of fixed-rate debt attributable to changes in interest rates. To do this, the Company uses the following guidelines: (i) use average daily bank balance to determine annual debt amounts subject to interest rate exposure, (ii) limit the annual amount subject to interest rate reset and the amount of floating rate debt to a combined total of $2.5 billion or less, (iii) include no leverage products, and (iv) hedge without regard to profit motive or sensitivity to current mark-to-market status.

    Annually, the Company reviews with the Financial Policy Committee of the Board of Directors compliance with the guidelines. These guidelines may change as the Company’s needs dictate.

    A-48




    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    The table below summarizes the outstanding interest rate swaps designated as hedges as of February 3, 2007, and January 28, 2006, and January 29, 2005.2006. The variable component of each interest rate swap outstanding at February 3, 2007, was based on LIBOR as of February 3, 2007. The variable component of each interest rate swap outstanding at January 28, 2006, was based on LIBOR as of January 28, 2006. The variable component of each interest rate swap outstanding at January 29, 2005, was based on LIBOR as of January 29, 2005.


         		      2005
    		    2004
    		    

         		      Pay
    Floating
    		    Pay
    Fixed
    		    Pay
    Floating
    		    Pay
    Fixed
    Notional amount              $1,375        $—         $1,375        $—   
    Duration in years                3.28          —           4.29          —   
    Average variable rate                8.14%          —           6.29%          —   
    Average fixed rate                6.98%          —           6.98%          —   
     
     2006 2005 
     Pay Pay Pay Pay 
     Floating     Fixed     Floating     Fixed 
    Notional amount  $1,050$ —  $1,375$ — 
    Duration in years  3.08—  3.28— 
    Average variable rate  8.07%  —   8.14% — 
    Average fixed rate  6.74% —  6.98% — 

    In addition to the interest rate swaps noted above, in 2005 the Company entered into three forward-starting interest rate swap agreements with a notional amount totaling $750 million. A forward-starting interest rate swap is an agreement that effectively hedges future benchmark interest rates, including general corporate spreads, on debt for an established period of time. The Company entered into the forward-starting interest rate swaps in order to lock in fixed interest rates on its forecasted issuances of debt in fiscal 2007 and 2008. Accordingly, these instruments have been designated as cash flow hedges for the Company’s forecasted debt issuances. Two of the swaps have ten-year terms, with the remaining swap having a twelve-year term, beginning with the issuance of the debt. The average fixed rate for these instruments is 5.14%.

    Commodity Price Protection

    The Company enters into purchase commitments for various resources, including raw materials utilized in its manufacturing facilities and energy to be used in its stores, manufacturing facilities and administrative offices. The Company enters into commitments expecting to take delivery of and to utilize those resources in the conduct of normal business. Those commitments for which the Company expects to utilize or take delivery in a reasonable amount of time in the normal course of business qualify as normal purchases and normal sales. Any commitments for which the Company does not expect to take delivery, and, as a result will require net settlement, are marked to fair value on a quarterly basis.

    Some of the product the Company purchases is shipped in corrugated cardboard packaging. The corrugated cardboard is sold when it is economical to do so. In the fourth quarterAs of 2004,February 3, 2007, the Company entered into sixmaintained seven derivative instruments to protect it from declining corrugated cardboard prices. These derivatives contain a three-year term. None of the contracts, either individually or in the aggregate, hedge more than 50% of the Company’s expected corrugated cardboard sales. The instruments do not qualify for hedge accounting, in accordance with SFAS No. 133,Accounting for Derivative Investments and Hedging Activities, as amended. Accordingly, changes in the fair value of these instruments are marked-to-market in the Company’s Consolidated Statements of Operations as operating, general and administrative (“OG&A”) expenses. As of January 28, 2006,February 3, 2007, an other assetaccrued liability totaling $3$0.2 had been recorded forto reflect the fair value of these instruments.

    A-49




    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    NOTESTO CONSOLIDATED7. FAIR VALUEOF FINANCIAL STATEMENTS, CONTINUED
    INSTRUMENTS

    9.    
    		FAIR VALUEOF FINANCIAL INSTRUMENTS

    The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it was practicable to estimate that value:

    Cash and Temporary Cash Investments, Store Deposits In-Transit, Receivables, Prepaid and Other Current Assets, Accounts Payable, Accrued Salaries and Wages and Other Current Liabilities

    The carrying amounts of these items approximated fair value.

    Long-term Investments

    The fair values of these investments were estimated based on quoted market prices for those or similar investments.

    Long-term Debt

    The fair value of the Company’s long-term debt, including the current portion thereof and excluding borrowings under the credit facilities,facility, was estimated based on the quoted market price for the same or similar issues. If quoted market prices were not available, the fair value was based upon the net present value of the future cash flows using the forward interest rate yield curve in effect at the respective year-ends. The carrying values of long-term debt outstanding under the Company’s credit facilitiesfacility approximated fair value.

    Interest Rate Protection Agreements

    The fair value of these agreements was based on the net present value of the future cash flows using the forward interest rate yield curve in effect at the respective year-ends.

    A-50




    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

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


         		      2005
    		    2004
    		    

         		      Carrying
    Value
    		    Estimated
    Fair Value
    		    Carrying
    Value
    		    Estimated
    Fair Value
    Cash and temporary cash investments              $210         $210         $144         $144   
    Store deposits in-transit              $488         $488         $506         $506   
    Long-term investments for which it is
    		                                                                        
    Practicable              $118         $118         $89         $89   
    Not Practicable              $1         $—         $15         $—   
    Debt for which it is(1)                                                                        
    Practicable              $(6,747)        $(7,038)        $(7,505)        $(8,304)  
    Not Practicable              $—         $—         $—         $—   
    Interest Rate Protection Agreements
    		                                                                        
    Receive fixed swaps(2)              $(34)        $(34)        $(11)        $(11)  
    Forward-starting swaps(3)              $(2)        $(2)        $—         $—   
    Corrugated Cardboard Price Protection Agreements(4)              $3         $3         $(2)        $(2)  
     
     2006 2005 
     Carrying Estimated Carrying Estimated 
     Value     Fair Value     Value     Fair Value 
    Cash and temporary cash investments $189$189$210$210
    Store deposits in-transit $614$614$488$488
    Long-term investments for which it is  
           Practicable $152$152$118$118
           Not Practicable $—$—$1$—
    Debt for which it is(1)  
           Practicable $(6,581)$(6,859)$(6,747)$(7,038)
           Not Practicable $—$—$—$—
    Interest Rate Protection Agreements 
           Receive fixed swaps asset/(liability)(2) $(28)$(28)$(34)$(34)
           Forward-starting swap asset/(liability)(3) $12$12$(2)$(2)
    Corrugated Cardboard Price Protection Agreements(4) $—$—$3$3

    (1)     Excludes capital lease and lease-financing obligations.

    (2)As of January 28, 2006,February 3, 2007, the Company maintained 10six interest rate swap agreements, with notional amounts totaling $1,375,$1,050, to manage its exposure to changes in the fair value of its fixed rate debt resulting from interest rate movements by effectively converting a portion of the Company’s debt from fixed to variable rates. These agreements mature at varying times between July 2006March 2008 and January 2015. Variable rates for these agreements are based on U.S. dollar London Interbank Offered Rate (“LIBOR”). The differential between fixed and variable rates to be paid or received is accrued as interest rates change in accordance with the agreements and is recognized over the life of the agreements as an adjustment to interest expense. These interest rate swap agreements are being accounted for as fair value hedges. As of January 28, 2006,February 3, 2007, other long-term liabilities totaling $34$28 were recorded to reflect the fair value of these agreements, offset by decreases in the fair value of the underlying debt.

    (3)As of January 28, 2006,February 3, 2007, the Company maintained three forward-starting interest rate swap agreements, with notional amounts totaling $750, to manage its exposure to changes in future benchmark interest rates. A forward-starting interest rate swap is an agreement that effectively hedges future benchmark interest rates, including general corporate spreads, on debt for an established period of time. The Company entered into the forward-starting interest rate swaps in order to lock in fixed interest rates on the Company’s forecasted issuance of debt in fiscal 2007 and 2008. As of January 28, 2006,February 3, 2007, other long-term liabilitiesassets totaling $2$12 were recorded to reflect the fair value of these agreements.

    (4)See Note 86 for a description of the corrugated cardboard price protection agreements.

    A-51


    10.    
    		LEASESAND LEASE-FINANCED TRANSACTIONS

    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    8. LEASESAND LEASE- FINANCED TRANSACTIONS

    The Company operates primarily in leased facilities. Lease terms generally range from 10 to 20 years with options to renew for varying terms. Terms of certain leases include escalation clauses, percentage rent based on sales or payment of executory costs such as property taxes, utilities or insurance and maintenance. Rent expense for leases with escalation clauses, capital improvement funding or other lease concessions is accounted for on a straight-line basis beginning with the earlier of the lease commencement date or the date the Company takes possession. Portions of certain properties are subleased to others for periods generally ranging from one to 20 years.

    A-51



    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    Rent expense (under operating leases) consists of:


         		      2005
    		    2004
    		    2003
    Minimum rentals              $760        $772         $744   
    Contingent payments                8          9           9   
    Sublease income                (107)          (101)          (96)  
                   $661        $680         $657   
     
     2006     2005     2004 
    Minimum rentals $  753$  760$  772 
    Contingent payments   10  8  9
    Sublease income   (114)    (107)    (101) 
           Total rent expense $  649 $  661$  680

    Minimum annual rentals and payments under capital leases and lease-financed transactions for the five years subsequent to 2006 and in the aggregate are:


         		      Capital
    Leases
    		    Operating
    Leases
    		    Lease-
    Financed
    Transactions
    2006              $61         $784         $3   
    2007                57           732           3   
    2008                54           684           3   
    2009                52           635           3   
    2010                51           588           4   
    Thereafter                344           4,075          96   
                     619         $7,498        $112   
    Less estimated executory costs included in capital leases                (3)                                  
    Net minimum lease payments under capital leases                616                                   
    Less amount representing interest                (270)                                  
    Present value of net minimum lease payments under capital leases              $346                                   
     
       Lease- 
     Capital OperatingFinanced 
    Leases     Leases    Transactions 
    2007$   57$   778 $    3
    2008 547343
    200952 6904
    2010 516424
    2011 495874
    Thereafter 2944,11893 
      557  $7,549  $111 
    Less estimated executory costs included in capital leases(3)
    Net minimum lease payments under capital leases 554
    Less amount representing interest (237)
    Present value of net minimum lease payments under capital leases$  317

    Total future minimum rentals under noncancellable subleases at January 28, 2006,February 3, 2007, were $431.$444.

    A-52



    NOTESTO CONSOLIDATED FINANCIALSTATEMENTS, CONTINUED

    11.    
    		EARNINGS PER COMMON SHARE

    9. EARNINGSPER COMMONSHARE (“EPS”)

    Basic earnings (loss) per common share equals net earnings (loss) divided by the weighted average number of common shares outstanding. Diluted earnings per common share equals net earnings (loss) divided by the weighted average number of common shares outstanding after giving effect to dilutive stock options and warrants.

    The following table provides a reconciliation of earnings and shares used in calculating basic earnings per share to those used in calculating diluted earnings per share.


         		      For the year ended
    January 28, 2006
    		    For the year ended
    January 29, 2005
    		    For the year ended
    January 31, 2004
    		    

         		    Earnings
    (Numer-
    ator)
    		    Shares
    (Denomi-
    nator)
    		    Per
    Share
    Amount
    		    Earnings
    (Numer-
    ator)
    		    Shares
    (Denomi-
    nator)
    		    Per
    Share
    Amount
    		    Earnings
    (Numer-
    ator)
    		    Shares
    (Denomi-
    nator)
    		    Per
    Share
    Amount
    Basic EPS      $958          724        $1.32        $(104)          736         $(0.14)        $285           747         $0.38  
    Dilutive effect of stock option
    awards and warrants    		                    7                                  —                                   7                   
    Diluted EPS      $958          731        $1.31        $(104)          736         $(0.14)        $285           754         $0.38  
     
    For the year ended For the year endedFor the year ended
    February 3, 2007 January 28, 2006January 29, 2005
    EarningsSharesPerEarningsSharesPerLossSharesPer
    (in millions, except per(Nume-(Denomi-Share(Nume-(Denomi-Share(Nume-(Denomi-Share
    share amounts)     rator)     nator)     Amount     rator)     nator)     Amount     rator)     nator)     Amount
    Basic EPS $1,115 715    $1.56 $958 724    $1.32 $(104)736   $(0.14)
    Dilutive effect of stock
       optionawards and
       warrants8   7   —    
    Diluted EPS $1,115 723    $1.54 $958 731    $1.31 $(104) 736    $(0.14)

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    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    For the years ended February 3, 2007, January 28, 2006 and January 29, 2005, and January 31, 2004, there were options outstanding for approximately 25.4 million, 24.6 million and 61.5 and 33.7million shares of common stock, respectively, that were excluded from the computation of diluted EPS. These shares were excluded because their inclusion would have had an anti-dilutive effect on EPS.

    10. S12. STOCKOPTION PLANS

    The     Prior to January 29, 2006, the Company applies Accounting Principles Board Opinionapplied APB No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, in accounting for its stock option plans. Allplans and provided the pro-forma disclosures required by SFAS No. 123. APB No. 25 provided for recognition of compensation expense for employee stock awards become immediately exercisable upon certain changes of controlbased on the intrinsic value of the Company.
    award on the grant date.

    The Company grants options for common stock (“stock options”) to employees, under various plans, as well as to its non-employee directors, under various plans at an option price equal to the fair market value of the stock at the date of grant. In additionAlthough equity awards may be made throughout the year, it has been the Company’s practice typically to cash payments,make an annual grant in conjunction with the plans generally provide for the exerciseMay meeting of its Board of Directors.

         Stock options by exchanging issued shares of stock of the Company. At January 28, 2006, approximately 22.0 shares of common stock were available for future options under these plans. Options generally willtypically expire 10 years from the date of grant. OptionsStock options vest inbetween one year toand five years from the date of grant or, for certain stock options, the earlier of the Company’s stock reaching certain pre-determined and appreciated market prices or nine years and six months from the date of grant.

    Under APB No. 25, the Company did not recognize compensation expense for these stock option grants. At February 3, 2007, approximately 18 million shares of common stock were available for future options under these plans.

    A-53



    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    In addition to the stock options described above, the Company also awards restricted stock to employees under various plans. The restrictions on these awards generally lapse inbetween one year toand five years from the date of the awards and expense is recognized over the lapsing cycle. TheUnder APB No. 25, the Company generally recordsrecorded expense for restricted stock awards in an amount equal to the fair market value of the underlying stock on the date of award. The Company issued approximately 0.1, 0.2 and 0.7 shares of restricted stock in 2005, 2004 and 2003, respectively. As of January 28, 2006,February 3, 2007, approximately 8.0six million shares of common stock were available for future restricted stock awards.awards under the 2005 Long-Term Incentive Plan (the “Plan”). The Company has the ability to convert shares available for issuancestock options under the 2005 Long-Term Incentive Plan to shares available for restricted stock awards. Four shares available for othercommon stock awards can be converted into one share available for restricted stock awards. Compensation expense included

         All awards become immediately exercisable upon certain changes of control of the Company.

         Historically, stock option awards were granted to various employees throughout the organization. Restricted stock awards, however, were limited to approximately 150 associates, including members of the Board of Directors and certain members of senior management. Beginning in net earnings for2006, the Company began issuing a combination of stock option and restricted stock awards totaled approximately $5, $8to those employees who previously received only stock option awards, in an effort to further align those employees’ interests with those of the Company’s non-employee shareholders. As a result, the number of stock option awards granted in 2006 decreased and $8, after-tax, in 2005, 2004 and 2003, respectively.

    the number of restricted stock awards granted increased.

       Stock Options

    Changes in options outstanding under the stock option plans excluding restricted stock awards, were:are summarized below:

    Weighted-
    Shares subjectaverage
    to optionexercise
           (in millions)       price
    Outstanding, year-end 2003 60.1    $17.62 
      Granted6.7$17.28 
      Exercised(4.2)$7.29 
     Canceled or Expired(1.1)$20.99 
    Outstanding, year-end 200461.5$18.20 
     Granted6.8$16.50 
     Exercised(7.7) $9.81 
     Canceled or Expired(1.3)$20.92 
    Outstanding, year-end 200559.3$19.03 
     Granted 3.2$20.05 
     Exercised(9.5)$13.34 
     Canceled or Expired(1.1) $21.01 
    Outstanding, year-end 200651.9 $20.09 


         		      Shares subject
    to option
    		    Weighted-
    average
    Exercise
    price
    Outstanding, year-end 2002                66.2        $16.97  
    Granted                0.3        $16.34  
    Exercised                (4.9)        $7.59  
    Canceled or Expired                (1.5)        $21.19  
    Outstanding, year-end 2003                60.1        $17.62  
    Granted                6.7        $17.28  
    Exercised                (4.2)        $7.29  
    Canceled or Expired                (1.1)        $20.99  
    Outstanding, year-end 2004                61.5        $18.20  
    Granted                6.8        $16.50  
    Exercised                (7.7)        $9.81  
    Canceled or Expired                (1.3)        $20.92  
    Outstanding, year-end 2005                59.3        $19.03  
     

    A-53A-54




    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    A summary of options outstanding and exercisable at February 3, 2007 follows:

    Weighted-
    averageWeighted-Weighted-
    Range ofNumberremainingaverageOptionsaverage
    Exercise Prices       outstanding       contractual life       exercise price        exercisable       exercise price
    (in millions)(in years)(in millions)
    $ 9.90 - $14.93  7.94.51$14.45   7.1 $14.39
    $14.94 - $16.39   6.18.16 $16.35  2.2$16.31
    $16.40 - $17.3110.45.32$16.97  7.1$16.90
    $17.32 - $22.99  9.2 4.24 $20.96  5.0 $21.40
    $23.00 - $31.9118.3 3.76$25.13 15.0$25.20
    $  9.90 - $31.91 51.94.79$20.0936.4$20.42

         The weighted-average remaining contractual life for options exercisable at February 3, 2007, was approximately 4.1 years.

       Restricted stock

    RestrictedWeighted-
    sharesaverage
    outstandinggrant-date
           (in millions)       fair value
    Outstanding, year-end 2005 0.7  $17.85 
        Granted 2.2$20.16 
        Lapsed(0.4) $17.46 
        Canceled or Expired(0.1)$19.41 
    Outstanding, year-end 20062.4 $20.02 

       Adoption of SFAS No. 123(R)

    Effective January 28,29, 2006, follows:

    the Company adopted the provisions of SFAS No. 123(R),Share-Based Payment, using the modified-prospective method. Under this method, the Company recognize compensation expense for all share-based awards granted prior to, but not yet vested as of, January 29, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123,Accounting for Stock-Based Compensation. For all share-based awards granted on or after January 29, 2006, the Company recognizes compensation expense based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R).

         In accordance with the provisions of the modified-prospective transition method, results for prior periods have not been restated. Compensation expense for all share-based awards described above was recognized using the straight-line attribution method applied to the fair value of each option grant, over the requisite service period associated with each award. The requisite service period is typically consistent with the vesting period, except as noted below. Because awards typically vest evenly over the requisite service period, compensation cost recognized through February 3, 2007, is at least equal to the grant-date fair value of the vested portion of all outstanding awards. All of the Company stock-based incentive plans are considered equity plans under SFAS No. 123(R).

    A-55



    NOTESTO CONSOLIDATED FINANCIALSTATEMENTS, CONTINUED

         The weighted-average fair value of stock options granted during 2006, 2005 and 2004 was $6.90, $7.70 and $7.91, respectively. The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option-pricing model, based on the assumptions shown in the table below. The Black-Scholes model utilizes extensive accounting judgment and financial estimates, including the term employees are expected to retain their stock options before exercising them, the volatility of the Company’s stock price over that expected term, the dividend yield over the term and the number of awards expected to be forfeited before they vest. Using alternative assumptions in the calculation of fair value would produce fair values for stock option grants that could be different than those used to record stock-based compensation expense in the Consolidated Statements of Operations.

         The following table reflects the weighted-average assumptions used for grants awarded to option holders:

           2006       2005       2004
    Weighted average expected volatility (based on historical
         volatility) 27.60% 30.83% 30.13%
    Weighted average risk-free interest rate5.07%4.11%3.99%
    Expected dividend yield1.50%N/A N/A
    Expected term (based on historical results) 7.5 years 8.7 years8.7 years

    Range of
    Exercise Prices
    		   
    		Number
    Outstanding
    		   
    		Weighted-
    Average
    Remaining
    Contractual Life
    		   
    		Weighted-
    Average
    Exercise Price
    		   
    		Options
    Exercisable
    		   
    		Weighted-
    Average
    Exercise Price

         		      
         		    (In years)
         		    
    $ 5.66 - $14.92                8.1          0.90        $11.70          8.1        $11.69  
    $14.93 - $16.38                7.3          6.86        $14.95          5.3        $14.94  
    $16.39 - $17.30                12.1          6.89        $16.48          4.8        $16.59  
    $17.31 - $22.26                12.7          5.32        $19.37          7.5        $20.06  
    $22.27 - $31.91                19.1          4.77        $25.10          15.2        $25.23  
    $ 5.66 - $31.91                59.3          5.05        $19.03          40.9        $19.24  
     

         The weighted-average risk-free interest rate was based on the yield of a treasury note as of the grant date, continuously compounded, which matures at a date that approximates the expected term of options. During the years presented, prior to 2006, the Company did not pay a dividend, so an expected dividend rate was not included in the determination of fair value for options granted during those years. Using a dividend yield of 1.50% to value options issued in 2005 would have decreased the fair value of each option by approximately $1.60. Expected volatility was determined based upon historical stock volatilities. Implied volatility was also considered. Expected term was determined based upon a combination of historical exercise and cancellation experience as well as estimates of expected future exercise and cancellation experience.

         Under SFAS No. 123(R), the Company records expense for restricted stock awards in an amount equal to the fair market value of the underlying stock on the grant date of the award, over the period the awards lapse.

         Total stock compensation recognized in 2006 was $72. This included $50 for stock options and $22 for restricted shares. A total of $18 of the restricted stock expense was attributable to the wider distribution of restricted shares incorporated into the first quarter 2006 grant of share-based awards, and the remaining $4 of restricted stock expense related to previously issued restricted stock awards. The incremental compensation expense attributable to the adoption of SFAS No. 123(R) in 2006 was $68, pre-tax, or $43 and $0.06 per basic and diluted share, after tax. Stock compensation cost recognized in 2005, related entirely to restricted stock grants, was $7, pre-tax. These costs were recognized as operating, general and administrative expense in the Company’s Consolidated Statements of Operations. The cumulative effect of applying a forfeiture rate to unvested restricted shares at January 29, 2006 was not material.

    A-56



    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    If compensation cost for the Company’s stock option plans for the years ended January 28, 2006 and January 29, 2005 had been determined based upon the fair value at the grant date for awards under these plans consistent with the methodology prescribed under SFAS No. 123,Accounting for Stock-Based Compensation, the Company’s net earnings and diluted earnings per common share would have been reduced to the pro forma amounts below:

           2005       2004
    Net earnings (loss), as reported$958$(104)
         Stock-based compensation expense included in net earnings, 
              net ofincome tax benefits5 8
         Total stock-based compensation expense determined under fair
              valuemethod for all awards, net of income tax benefits (34) (48)
    Pro forma net earnings (loss) $929 $(144)
    Earnings (loss) per basic common share, as reported$1.32$(0.14)
    Pro forma earnings (loss) per basic common share$1.28 $(0.20)
    Earnings (loss) per diluted common share, as reported $1.31 $(0.14)
    Pro forma earnings (loss) per diluted common share$ 1.27$(0.20)


         		      2005
    		    2004
    		    2003
    		    

         		      Actual
    		    Pro Forma
    		    Actual
    		    Pro Forma
    		    Actual
    		    Pro Forma
    Net earnings (loss)              $958        $929        $(104)        $(144)        $285         $245   
    Earnings (loss) per diluted common share              $1.31        $1.27        $(0.14)        $(0.20)        $0.38        $0.32  
     

    The fairtotal intrinsic value of each option grantoptions exercised in 2006 was estimated on$79. The total amount of cash received from the dateexercise of grant usingoptions granted under share-based payment arrangements was $126. As of February 3, 2007, there was $92 of total unrecognized compensation expense related to non-vested share-based compensation arrangements granted under the Black-Scholes option-pricing model, based on historical assumptions shown in the table below. These amounts reflected in this pro forma disclosure are not indicativeCompany’s equity award plans. This cost is expected to be recognized over a weighted-average period of future amounts.approximately one year. The following table reflects the assumptions used for grants awarded in each year to option holders:


         		      2005
    		    2004
    		    2003
    Weighted average expected volatility (based on historical volatility)                30.83%          30.13%          30.23%  
    Weighted average risk-free interest rate                4.11%          3.99%          3.33%  
    Expected term (based on historical results)                8.7 years          8.7 years          8.5 years  
     

    The weighted averagetotal fair value of options that vested in 2006 was $44.

         Shares issued as a result of stock option exercises may be newly issued shares or reissued treasury shares. Proceeds received from the exercise of options, and the related tax benefit, are utilized to repurchase shares of the Company’s stock under a stock repurchase program adopted by the Company’s Board of Directors. During 2006, the Company repurchased approximately 11 million shares of stock in such a manner.

         For share-based awards granted during 2005, 2004 and 2003 was $7.70, $7.91 and $7.09, respectively. The Company utilizes a risk-free interest rate basedprior to the adoption of SFAS No. 123(R), the Company’s stock option grants generally contained retirement-eligibility provisions that caused the options to vest upon the yield of a treasury note maturing at a date that approximates the option’s vest date.

    Grants in 2004 returned to normal levels after grants in 2003 were unusually low, due primarily to a general grant of approximately 3.8 stock options to management and support employees, and approximately 3.9 options to executives including senior officers and division presidents, that was approved by the Compensation Committeeearlier of the Boardstated vesting date or retirement. Compensation expense was calculated over the stated vesting periods, regardless of Directorswhether certain employees became retirement-eligible during the respective vesting periods. Upon the adoption of SFAS No. 123(R), the Company continued this method of recognizing compensation expense for awards granted prior to the adoption of SFAS No. 123(R). For awards granted on December 12, 2002 (fiscal 2002). This grant replacedor after January 29, 2006, options vest based on the stated vesting date, even if an employee retires prior to the vesting date. The requisite service period ends, however, on the employee’s retirement-eligible date. As a planned grant in May 2003 and was accelerated to secureresult, the continued alignment of employee interests with thoseCompany recognizes expense for stock option grants containing such retirement-eligibility provisions over the shorter of the shareholders as strategic plans were implemented. The Committee also madevesting period or the period until employees become retirement-eligible (the requisite service period). As a result of retirement eligibility provisions in stock option awards granted on or after January 29, 2006, approximately $6 of restricted stock to senior officers and division presidentscompensation expense was recognized in recognition of their vital role in a challenging operating environment. The restrictions on these shares lapsed in fiscal 2005, conditioned on the recipients’ continued employment with the Company at that time.

    In addition2006 prior to the stock options described above, at January 28, 2006, there were 3.4 warrants outstanding. The warrants, exercisable at $11.91, were originally issued pursuant to a Warrant Agreement dated May 23, 1996. The warrants expire in May 2006.
    completion of stated vesting periods.

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    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    11. CNOTESTOOMMITMENTSAND CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
    ONTINGENCIES

    13. COMMITMENTSAND CONTINGENCIES

    The Company continuously evaluates contingencies based upon the best available evidence.

    The Company believes that allowances for loss have been provided to the extent necessary and that its assessment of contingencies is reasonable. To the extent that resolution of contingencies results in amounts that vary from the Company’s estimates, future earnings will be charged or credited.

    The principal contingencies are described below:

    Insurance — – The Company’s workers’ compensation risks are self-insured in certain states. In addition, other workers’ compensation risks and certain levels of insured general liability risks are based on retrospective premium plans, deductible plans, and self-insured retention plans. The liability for workers’ compensation risks is accounted for on a present value basis. Actual claim settlements and expenses incident thereto may differ from the provisions for loss. Property risks have been underwritten by a subsidiary and are reinsured with unrelated insurance companies. Operating divisions and subsidiaries have paid premiums, and the insurance subsidiary has provided loss allowances, based upon actuarially determined estimates.

    Litigation — In December, 2005, the United States Attorney’s Office for the Central District of California notified – On October 6, 2006, the Company that a federal grand jury had returned an indictment againstpetitioned the Tax Court (In Re: Ralphs Grocery Company (“Ralphs”)and Subsidiaries, formerly known as Ralphs Supermarkets, Inc., Docket No. 20364-06) for a wholly-owned subsidiaryredetermination of deficiencies set by the Commissioner of Internal Revenue. The Kroger Co., with regard to Ralphs’ hiring practices duringdispute at issue involves a 1992 transaction in which Ralphs Holding Company acquired the labor dispute from October 2003 through February 2004 (United Statesstock of America v. Ralphs Grocery Company United States District Court for and made an election under Section 338(h)(10) of the Central DistrictInternal Revenue Code. The Commissioner has determined that the acquisition of California, CR No. 05-1210 PA). The indictment allegesthe stock was not a criminal conspiracypurchase as defined by Section 338(h)(3) of the Internal Revenue Code and other criminal activity resulting in some locked-out employees being allowed or encouraged to work under false identities or false Social Security numbers, despite Company policy forbidding such conduct. Trial has been set for August 15, 2006.that the acquisition does not qualify as a purchase. The Company has been informed that the grand jury continues to investigate whether additional parties, including Kroger, should be held liable for the alleged misconduct. In addition, these alleged hiring practices are the subjectstrong arguments in favor of claims that Ralphs’ conduct of the lockout was unlawful, and that Ralphs is liable under the National Labor Relations Act (“NLRA”). The Los Angeles Regional Office of the National Labor Relations Board (“NLRB”) has notified the charging parties that all charges alleging that Ralphs’ lockout violated the NLRA have been dismissed. That decision is being appealed by the charging partiesits position, but due to the General Counsel ofinherent uncertainty involved in the NLRB. The amounts potentially claimed in both the criminal and the NLRB matter are substantial, but based on the information presently available to the Company, management does not expect the ultimate resolution of this matter tolitigation process, an adverse decision that could have a material adverse effect on the Company’s financial conditionresults is a possible outcome. As of the Company.February 3, 2007, an adverse decision would require a cash payment of approximately $363, including interest.

    On September 8, 2005, the Los Angeles City Attorney’s office filed a misdemeanor complaint against a subsidiary of the Company, Ralphs Grocery Company (People v. Ralphs Grocery Company, Superior Court of California, County of Los Angeles, Case No. 5CR02616) regarding alleged violations of the California Water Code. Ralphs operates a system at one store location to treat groundwater within an underground basement because of the presence of naturally occurring petroleum associated with the nearby La Brea tar pits, which system is subject to a discharge permit issued by the California Regional Water Quality Control Board. On December 1, 2005, Ralphs executed a civil consent judgment, the misdemeanor complaint was dismissed and Ralphs paid a civil penalty.

    On February 2, 2004, the Attorney General for the State of California filed an action in Los Angeles federal court (California, ex rel Lockyer v. Safeway, Inc. dba Vons, a Safeway Company; Albertson’s, Inc. and Ralphs Grocery Company, a division of The Kroger Co.,, United States District Court Central District of California, Case No. CV04-0687) alleging that the Mutual Strike Assistance Agreement (the “Agreement”) between the Company, Albertson’s, Inc. and Safeway Inc. (collectively, the “Retailers”), which was designed to prevent the union from placing disproportionate pressure on one or more of the Retailers by picketing such Retailer(s) but not the other Retailer(s) during the labor

    A-55



    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


    dispute in southern California, violated Section 1 of the Sherman Act. The lawsuit seeks declarative and injunctive relief. On May 25, 2005, the Court denied a motion for a summary judgment filed by the defendants. Ralphs and the other defendants filed a notice of an interlocutory appeal to the United States Court of Appeals for the Ninth Circuit. On November 29, 2005, the appellate court dismissed the appeal. On December 7, 2006, the Court denied a motion for summary judgment filed by the State of California. The Company continues to believe it has strong defenses against this lawsuit and is vigorously defending it. Although this lawsuit is subject to uncertainties inherent to the litigation process, based on the information presently available to the Company, management does not expect that the ultimate resolution of this action will have a material adverse effect favorable or adverse, on the Company’s financial condition, results of operations or cash flows.

    Ralphs Grocery Company is the defendant in a group of civil actions initially filed in 2003 and for which a coordination order was issued on January 20, 2004 inThe Great Escape Promotion Cases pending in the Superior Court of California, County of Los Angeles, Case No. JCCP No. 4343. The plaintiffs

    A-58



    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    allege that Ralphs violated various laws protecting consumers in connection with a promotion pursuant to which Ralphs offered travel awards to customers. On February 22, 2006, the Court inThe Great Escape Promotion Cases issued an Order granting preliminary approval of the class action settlement. Notice of the class action should besettlement was sent to class members, within the next 90 days, and the date set for final approval ofCourt issued an Order finally approving the class action is set forsettlement on August 25, 2006. The Company has no reasonsettlement involved the issuance of coupons and gift cards. While the ultimate cost of the settlement to believe that final approval will not be obtained, andRalphs is largely dependent on the rate of coupon redemption, management does not believeexpect that the ultimate outcomeresolution of this action will have a material adverse effect on the Company’s financial condition.condition, results of operations or cash flows.

    On August 12, 2000, Ralphs Grocery Company, along with several other potentially responsible parties, entered into a consent decree with the U. S. Environmental Protection Agency surrounding the purported release of volatile organic compounds in connection with industrial operations at a property located in Los Angeles, California. The consent decree followed the EPA’s earlier Administrative Order No. 97-18 in which the EPA sought remedial action pursuant to its authority under the Comprehensive Environmental Remediation, Compensation and Liability Act. Under the consent decree, Ralphs contributes a share of the costs associated with groundwater extraction and treatment. The treatment process is expected to continue until at least 2012.

    Various claims and lawsuits arising in the normal course of business, including suits charging violations of certain antitrust, wage and hour, or civil rights laws, are pending against the Company. Some of these suits purport or have been determined to be class actions and/or seek substantial damages. Any damages that may be awarded in antitrust cases will be automatically trebled. Although it is not possible at this time to evaluate the merits of all of these claims and lawsuits, nor their likelihood of success, the Company is of the belief that any resulting liability will not have a material adverse effect on the Company’s Financialfinancial position.

    The Company continually evaluates its exposure to loss contingencies arising from pending or threatened litigation and believes it has made adequate provisions therefor. Nonetheless, assessing and predicting the outcomes of these matters involve substantial uncertainties. It remains possible that despite management’s current belief, material differences in actual outcomes or changes in management’s evaluation or predictions could arise that could have a material adverse impact on the Company’s financial condition or results of operation.

    Guarantees — – The Company periodically enters into real estate joint ventures in connection with the development of certain properties. The Company usually sells its interests in such partnerships upon completion of the projects. As of January 28, 2006,February 3, 2007, the Company was a partner with 50% ownership in three real estate joint ventures for which it has guaranteed approximately $11$6 of debt incurred by the ventures. Based on the covenants underlying this indebtedness as of January 28, 2006,February 3, 2007, it is unlikely that the Company will be responsible for repayment of these obligations.

    Assignments — – The Company is contingently liable for leases that have been assigned to various third parties in connection with facility closings and dispositions. The Company could be required to satisfy the obligations under

    A-56



    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


    the leases if any of the assignees are unable to fulfill their lease obligations. Due to the wide distribution of the Company’s assignments among third parties, and various other remedies available, the Company believes the likelihood that it will be required to assume a material amount of these obligations is remote.

    A-59



    N14.OTESTO CONSOLIDATED FINANCIAL SUBSEQUENT EVENTSTATEMENTS

    , CONTINUED

    12. SUBSEQUENT EVENTS

    On March 7, 2006,15, 2007, the Company announced its Board of Directors declared the payment of a quarterly dividend of $0.065$0.075 per share, payable on June 1, 2007, to shareholders of record as of the close of business on May 15, 2006 to be paid on June 1, 2006.

    2007.

    On March 27, 2006, the Company made a cash contribution of $150 to its Company-sponsored pension plans.
    13. STOCK

    15. WARRANT DIVIDEND PLAN

    On February 28, 1986, the Company adopted a warrant dividend plan providing for stock purchase rights to owners of the Company’s common stock. The plan was amended and restated as of April 4, 1997, and further amended on October 18, 1998. Each share of common stock currently has attached one-fourth of a right. Each right, when exercisable, entitles the holder to purchase from the Company one ten-thousandth of a share of Series A Preferred Shares, par value $100 per share, at $87.50 per one ten-thousandth of a share. The rights will become exercisable, and separately tradable, 10 business days following a tender offer or exchange offer resulting in a person or group having beneficial ownership of 10% or more of the Company’s common stock. In the event the rights become exercisable and thereafter the Company is acquired in a merger or other business combination, each right will entitle the holder to purchase common stock of the surviving corporation, for the exercise price, having a market value of twice the exercise price of the right. Under certain other circumstances, including certain acquisitions of the Company in a merger or other business combination transaction, or if 50% or more of the Company’s assets or earnings power are sold under certain circumstances, each right will entitle the holder to receive upon payment of the exercise price, shares of common stock of the acquiring company with a market value of two times the exercise price. At the Company’s option, the rights, prior to becoming exercisable, are redeemable in their entirety at a price of $0.01 per right. The rights expired on March 19, 2006.

    16. STOCK

    Preferred Stock

    The Company has authorized 5 million shares of voting cumulative preferred stock; 2 million were available for issuance at January 28, 2006. Fifty thousand shares were designated as “Series A Preferred Shares” and were reserved for issuance under the Company’s warrant dividend plan. The Series A Preferred Shares were no longer needed for reservation as of the March 19, 2006 expiration of the Company’s warrant dividend plan, and that series was eliminated.February 3, 2007. The stock has a par value of $100 and is issuable in series.

    Common Stock

    The Company has authorized 1,0001 billion shares of common stock, $1 par value per share. On May 20, 1999, the shareholders authorized an amendment to the Amended Articles of Incorporation to increase the authorized shares of common stock from 1,0001 billion to 2,0002 billion when the Board of Directors determines it to be in the best interest of the Company.

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    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    Common Stock Repurchase Program

    The Company maintains a trading plan understock repurchase program that complies with Securities Exchange Act Rule 10b5-1 to allow for the orderly repurchase of Kroger stock, from time to time, even though we may be aware of material non-public information, as long as purchases are made in accordance with the plan.time. The Company made open market purchases totaling $374, $239 $291 and $277$291 under this repurchase program in fiscal 2006, 2005 2004 and 2003.2004. In addition to this repurchase program, in December 1999, the Company began a program to repurchase common stock to reduce dilution resulting from its employee stock option plans. This program is solely funded by proceeds from stock option exercises, including the tax benefit. The Company reacquiredrepurchased approximately $259, $13 $28 and $24$28 under the stock option program during fiscal 2006, 2005 and 2004, and 2003, respectively.

    14. B17. BENEFIT PLANS

    The Company administers non-contributory defined benefit retirement plans for substantially all non-union employees and some union-represented employees as determined by the terms and conditions of collective bargaining agreements. These included several qualified pension plans (the “Qualified Plans”) and a non-qualified plan (the “Non-Qualified Plan”). The Non-Qualified Plan pays benefits to any employee that earns in excess of the maximum allowed for the Qualified Plans by Section 415 of the Internal Revenue Code. The Company only funds obligations under the Qualified Plans. Funding for the pension plans is based on a review of the specific requirements and on evaluation of the assets and liabilities of each plan.

    In addition to providing pension benefits, the Company provides certain health care benefits for retired employees. The majority of the Company’s employees may become eligible for these benefits if they reach normal retirement age while employed by the Company. Funding of retiree health care benefits occurs as claims or premiums are paid.

    Effective February 3, 2007, the Company adopted the recognition and disclosure provisions of SFAS No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB Statement No. 87, 99, 106 and 123(R), which required the recognition of the funded

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    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    status of its retirement plans on the Consolidated Balance Sheet. Actuarial gains or losses, prior service costs or credits and transition obligations that have not yet been recognized are now required to be recorded as a component of Accumulated Other Comprehensive Income (“AOCI”). The following table reflects the effects the adoption of SFAS No. 158 had on our Consolidated Balance Sheet as of February 3, 2007.

    BeforeAfter
    ApplicationApplication
    of SFAS No.of SFAS No.
    February 3, 2007        158       Adjustments       158
    Other assets     $497     $(8)    $489
    Total assets $21,223$(8)$21,215
    Deferred income taxes$792$(70)$722
    Other long-term liabilities$1,653$182$1,835
    Total liabilities $16,180$112$16,292
    Accumulated other comprehensive loss$(139)  $(120)   $(259)  
    Total shareowners’ equity$5,043 $(120)$4,923
    Total liabilities and shareowners’ equity$21,223$(8) $21,215

         Amounts recognized in AOCI as of February 3, 2007 consist of the following (pre-tax):

    PensionOther
    February 3, 2007        Benefits       Benefits       Total
    Unrecognized net actuarial loss$433$28$461
    Unrecognized prior service cost (credit)7(42)(35)
    Unrecognized transition obligation 1   —  1 
    Total amounts deferred in AOCI  $441      $(14)       $427 

         Amounts in AOCI expected to be recognized as components of net periodic pension or postretirement benefit costs in 2007 are as follows (pre-tax):

    PensionOther
    February 3, 2007        Benefits       Benefits       Total
    Net actuarial loss $35 $—   $35
    Prior service cost     2 (6) (4)
    Total$37  $ (6) $31 

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    Information with respect to change in benefit obligation, change in plan assets, the funded status of the plans recorded in the Consolidated Balance Sheets, net amounts recognized at end of fiscal years, weighted average assumptions and components of net periodic benefit cost follow:

    Pension Benefits
    Qualified PlansNon-Qualified PlanOther Benefits
         2006     2005     2006     2005     2006     2005
    Change in benefit obligation:
    Benefit obligation at beginning of fiscal year $2,284  $2,019  $105  $113  $356  $366 
        Service cost123118211312
        Interest cost1301136620 19
        Plan participants’ contributions————119
        Amendments——3—4
        Actuarial (gain) loss(4)1457(12)4(22)
        Benefits paid (114) (111) (7) (6) (31) (32)
    Benefit obligation at end of fiscal year$2,419 $2,284 $113 $105 $373 $356 
    Change in plan assets:
    Fair value of plan assets at beginning of fiscal year $1,814$1,458$—$—$—$—
        Actual return on plan assets248167————
        Employer contributions150300762023
        Plan participants’ contributions————119
        Benefits paid (114) (111) (7) (6) (31) (32)
    Fair value of plan assets at end of fiscal year$2,098 $1,814 $— $— $— $— 
    Funded status at end of fiscal year$(321) $(470) $(113) $(105) $(373)$(356)

    Pension Benefits
    Qualified PlansNon-Qualified PlanOther Benefits
         2006(1)     2005     2006(1)     2005     2006(1)     2005
        Funded status at end of year$(321)$(470)$(113)$(105)$(373)$(356)
        Unrecognized actuarial (gain) loss—541—27—23
        Unrecognized prior service cost—9—8—(49)
        Unrecognized net transition (asset) obligation —  (1) —  1  —  1 
    Net asset (liability) recognized at end of fiscal year$(321)$79 $(113)$(69)$(373)$(381)
    Accrued benefit liability$(321)$(217)$(113)$(112)$(386)$(381)
    Additional minimum liability—(80)—12——
    Intangible asset—10—8——
    Accumulated other comprehensive loss —  366  —  23  14  — 
    Net asset (liability) recognized at end of fiscal year$(321)$79 $(113)$(69)$(372)$(381)

    (1)    Effective February 3, 2007, the Company adopted SFAS No. 158.

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    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


         		      Pension Benefits
    		    

         		      Qualified Plans
    		    Non-Qualified Plan
    		    Other Benefits
    		    

         		      2005
    		    2004
    		    2005
    		    2004
    		    2005
    		    2004
    Change in benefit obligation:
    		                                                                                                        
    Benefit obligation at beginning of fiscal year              $2,019        $1,741        $113        $103         $366        $363   
    Service cost                118          106           1          1           12          10   
    Interest cost                113          109           6          6           19          21   
    Plan participants’ contributions                —           —           —           —           9          9   
    Amendments                —           —           3          —           4          (24)  
    Actuarial (gain) loss                145          154           (12)          7           (22)          19   
    Benefits paid                (111)          (91)          (6)          (4)          (32)          (32)  
    Benefit obligation at end of fiscal year              $2,284        $2,019        $105        $113         $356        $366   
     
    Change in plan assets:
    		                                                                                                        
    Fair value of plan assets at beginning of fiscal year              $1,458        $1,379        $—         $—         $—         $—   
    Actual return on plan assets                167          135           —           —           —           —   
    Employer contribution                300          35           6          4           23          23   
    Plan participants’ contributions                —           —           —           —           9          9   
    Benefits paid                (111)          (91)          (6)          (4)          (32)          (32)  
    Fair value of plan assets at end of fiscal year              $1,814        $1,458        $—         $—         $—         $—   
     

         As of February 3, 2007, pension plan assets included no shares of The Kroger Co. common stock. Pension plan assets includeincluded $52, and $112or 2.7 million shares, of common stock of The Kroger Co. at January 28, 2006 and January 29, 2005, respectively. The plan owned 2.7 and 6.6 shares of The Kroger Co. common stock at January 28, 2006 and January 29, 2005, respectively.2006.

    Pension BenefitsOther Benefits
    Weighted average assumptions      2006      2005      2004      2006      2005      2004 
    Discount rate – Benefit obligation5.90%5.70%—  5.90% 5.70%—
    Discount rate – Net periodic benefit cost5.70% 5.75% 6.25% 5.70% 5.75% 6.25%
    Expected return on plan assets 8.50% 8.50%8.50%  
    Rate of compensation increase 3.50%3.50%3.50% 


         		      Pension Benefits
    		    

         		      Qualified Plans
    		    Non-Qualified Plan
    		    Other Benefits
    		    

         		      2005
    		    2004
    		    2005
    		    2004
    		    2005
    		    2004
    Net liability recognized at end of fiscal year:
    		                                                                                                        
    Funded status at end of year              $(470)        $(561)        $(105)        $(113)        $(356)        $(366)  
    Unrecognized actuarial (gain) loss                541          457           27          41           23          45   
    Unrecognized prior service cost                9          11           8          11           (49)          (60)  
    Unrecognized net transition (asset) obligation                (1)          —           1          —           1          1   
     
    Net liability recognized at end of fiscal year              $79        $(93)        $(69)        $(61)        $(381)        $(380)  
    Prepaid benefit cost              $—         $—         $—         $—         $—         $—   
    Accrued benefit liability                (217)          (273)          (112)          (103)          (381)          (380)  
    Additional minimum liability                (80)          (119)          12          (4)          —           —   
    Intangible asset                10          13           8          11           —           —   
    Accumulated other comprehensive loss                366          286           23          35           —           —   
    Net liability recognized at end of fiscal year              $79        $(93)        $(69)        $(61)        $(381)        $(380)  
     

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         		      Pension Benefits
    		    Other Benefits
    		    
    Weighted average assumptions
    		      2005
    		    2004
    		    2003
    		    2005
    		    2004
    		    2003
    Discount rate – Benefit obligation                5.70%          5.75%          —           5.70%          5.75%          —   
    Discount rate – Net periodic benefit cost                5.75%          6.25%          6.75%          5.75%          6.25%          6.75%  
    Expected return on plan assets                8.50%          8.50%          8.50%                                                  
    Rate of compensation increase                3.50%          3.50%          3.50%                                                  
     

    The Company’s discount rate assumption was intended to reflect the rate at which the pension benefits could be effectively settled. It takes into account the timing and amount of benefits that would be available under the plan. The Company’s methodology for selecting the discount rate as of year-end 20052006 was to match the plan’s cash flows to that of a yield curve that provides the equivalent yields on zero-coupon corporate bonds for each maturity. Benefit cash flows due in a particular year can be “settled” theoretically by “investing” them in the zero-coupon bond that matures in the same year. The discount rate is the single rate that produces the same present value of cash flows. The selection of the 5.70%5.90% discount rate as of year-end 20052006 represents the equivalent single rate under a broad-market AA yield curve constructed by the Company’s outside consultant, Mercer Human Resource Consulting. We utilized a discount rate of 5.75%5.70% for year-end 2004.2005. The 520 basis point reductionincrease in the discount rate increaseddecreased the projected pension benefit obligation as of January 28, 2006,February 3, 2007, by approximately $12$68 million.

    To determine the expected return on pension plan assets, the Company contemplates current and forecasted plan asset allocations as well as historical and forecasted returns on various asset categories. The average annual return on pension plan assets was 9.6%9.7% for the ten calendar years ended December 31, 2005,2006, net of all fees and expenses. Our actual return for the pension plan calendar year ending December 31, 2005,2006, on that same basis, was 10.3%13.4%. The Company utilized a pension return assumption of 8.5% in 2005 and 2004 and 9.5%, in 2003. The Company believes the 2004 reduction in the pension return assumption was appropriate because future returns are not expected to achieve the same level of performance as the historical average annual return. For measurement purposes, a 9% initial annual rate of increase, and a 5% ultimate annual rate of increase, in the per capita cost of other benefits, were assumed for pre-retirement age personnel in2006, 2005 and 2004. In 2003, a 10% initial annual rate of increase, and a 5% ultimate annual rate of increase were assumed.

    In 2005, the Company updated the mortality table used to determine average life expectancy in the calculation of its pension obligation to the RP-2000 Projected to 2015 mortality table. The change in this assumption increased the projected benefit obligation approximately $93, at the time of the change, and is reflected in unrecognized actuarial (gain) loss as of the measurement date.

    A-63


         		      Pension Benefits
    		    

         		      Qualified Plans
    		    Non-Qualified Plan
    		    Other Benefits
    		    

         		      2005
    		    2004
    		    2003
    		    2005
    		    2004
    		    2003
    		    2005
    		    2004
    		    2003
    Components of net periodic benefit cost:
    		                                                                                                                                                        
    Service cost              $118        $106         $99         $1        $1         $1         $12        $10         $8   
    Interest cost                113          109           101           6          6           6           19          21           21   
    Expected return on plan assets                (130)          (121)          (122)          —           —           —           —           —           —   
    Amortization of:
    		                                                                                                                                                        
    Transition asset                (1)          (1)          (1)          —           —           —           —           —           —   
    Prior service cost                3          3           3           2          2           2           (7)          (5)          (5)  
    Actuarial (gain) loss                24          9           —           2          3           3           —           —           —   
    Net periodic benefit cost              $127        $105         $80         $11        $12         $12         $24        $26         $24   
     

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    Pension Benefits
    Qualified PlansNon-Qualified PlanOther Benefits
        2006    2005    2004    2006    2005    2004    2006    2005    2004
    Components of net periodic
         benefit cost:
         Service cost $123  $118 $106 $2$1 $1 $13  $12 $10 
         Interest cost130113109666201921
         Expected return on plan assets(152)(130)(121)——————
         Amortization of:
              Transition asset(1)(1)(1)——————
              Prior service cost333222(7)(7)(5)
              Actuarial (gain) loss41249223———
         Curtailment charge 5  —  —  — — — —  —  — 
    Net periodic benefit cost $149  $127  $105  $12 $11 $12 $26  $24  $26 

    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    The following table provides the projected benefit obligation (“PBO”), accumulated benefit obligation (“ABO”) and the fair value of plan assets for all Company-sponsored pension plans.

    Qualified PlansNon-Qualified Plan
          2006      2005      2006      2005
    PBO at end of fiscal year $2,419 $2,284  $113  $105
    ABO at end of fiscal year $2,232 $2,111$103 $100
    Fair value of plan assets at end of year$2,098$1,814$— $—


         		      Qualified Plans
    		    Non-Qualified Plan
    		    

         		      2005
    		    2004
    		    2005
    		    2004
    PBO at end of fiscal year              $2,284        $2,019        $105        $113   
    ABO at end of fiscal year              $2,111        $1,851        $100        $106   
    Fair value of plan assets at end of year              $1,814        $1,458        $—         $—   
     

    The following table provides information about the Company’s estimated future benefit payments.

      Pension  Other 
      Benefits         Benefits 
    2007 $139$22   
    2008 $138$23   
    2009 $145$24   
    2010 $142$26   
    2011 $137 $27   
    2012 - 2016 $775    $152   

         The Company discontinued the accrual of additional benefits under the Company’s cash balance formula of the Consolidated Retirement Benefit Plan (the “Cash Balance Plan”) effective January 1, 2007. Participants in the Cash Balance Plan will continue to earn interest credits on their accrued benefit balance as of December 31, 2006, based on average Treasury rates, but will no longer accrue cash balance pay credits under the Cash Balance Plan after December 31, 2006. Projected pension benefit payments, as noted above, are lower than estimates in prior years as a result of the discontinuation of benefit accruals under the Cash Balance Plan. As a result of the decision to discontinue accruing additional benefits under the Cash Balance Plan, the Company recorded a charge totaling $5, pre-tax, which represented the previously unrecognized prior service costs.

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    NOTESTOCONSOLIDATED FINANCIALSTATEMENTS, CONTINUED


         		      Pension
    Benefits
    		    Other
    Benefits
    2006              $139         $21   
    2007              $147         $22   
    2008              $154         $23   
    2009              $162         $24   
    2010              $161         $25   
    2011–2015              $978         $141   
     

         Effective January 1, 2007, the Cash Balance Plan was replaced with a 401(k) Retirement Savings Account Plan, which will provide both Company matching contributions and other Company contributions based upon length of service, to eligible employees.

    The following table provides information about the target and actual pension plan asset allocations. Allocation percentages are shown as of December 31 for each respective year. The pension plan measurement date is the December 31st31st nearest the fiscal year-end.

     Target
     allocationsActualallocations
     2006       2006       2005
    Pension plan asset allocation, as of December 31:    
         Domestic equity securities 21.4% 21.1%36.1%
        International equity securities 24.5 27.5  25.2 
        Investment grade debt securities 25.0 23.3 17.8 
        High yield debt securities 8.0 7.7  7.6 
        Private equity 5.0 4.9 4.2 
        Hedge funds 7.6 7.4 3.8 
        Real estate 1.5 1.4 1.1 
        Other 7.0   6.7 4.3 
    Total 100.0%100.0%100.0%


         		      Target
    allocations
    		    Actual allocations
    		    

         		      2005
    		    2005
    		    2004
    Pension plan asset allocation, as of December 31:
    		                                                        
    Domestic equity securities                38.0%          36.1%          39.5%  
    International equity securities                23.0          25.2          25.1  
    Investment grade debt securities                18.0          17.8          18.6  
    High yield debt securities                8.0          7.6          8.2  
    Private equity                4.5          4.2          3.8  
    Hedge funds                4.0          3.8          2.3  
    Real estate                1.5          1.1          0.5  
    Other                3.0          4.3          2.0  
    Total                100.0%          100.0%          100.0%  
     

    Investment objectives, policies and strategies are set by the Pension Investment Committee (the “Committee”) appointed by the CEO. The primary objectives include holding, protecting and investing the assets and distributing benefits to participants and beneficiaries of the pension plans. Investment objectives have been established based on a comprehensive review of the capital markets and each underlying plan’s current and projected financial requirements. The time horizon of the investment objectives is long-term in nature and plan assets are managed on a going-concern basis.

    Investment objectives and guidelines specifically applicable to each manager of assets are established and reviewed annually. Derivative instruments may be used for specified purposes. Any use of derivative instruments for a purpose or in a manner not specifically authorized is prohibited, unless approved in advance by the Committee. Common stock of The Kroger Co. is included in plan assets subject to statutory limitations restricting additional purchases when the fair value of the stock equals or exceeds 10% of plan assets.

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    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    The current target allocations shown represent 20052006 targets that were established in 2004.2005. To maintain actual asset allocations consistent with target allocations, assets are reallocated or rebalanced on a regular basis.periodically. Cash flow from employer contributions and participant benefit payments is used to fund underweight asset classes and divest overweight asset classes, as appropriate. The Company expects that cash flow will be sufficient to meet most rebalancing needs. The Company made cash contributions of $150, $300 and $35 in 2006, 2005 and $100 in 2005, 2004, and 2003, respectively. Although the Company is not required to make any cash contributions during fiscal 2006,2007, it made a $150$50 cash contribution to its Qualified Plansplans on March 27, 2006.February 5, 2007. Additional contributions may be made if the Company’s cash flow from operations exceeds its expectations. The Company expects any voluntary contributions made during 20062007 will reduce its minimum required contributions in future years.

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    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    The measurement date for post-retirement benefit obligations is the December 31st nearest the fiscal year-end. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. The Company used a 9.00% initial health care cost trend rate and a 5.00% ultimate health care cost trend rate to determine its expense. A one-percentage-point change in the assumed health care cost trend rates would have the following effects:

     1% PointIncrease     1% PointDecrease
    Effect on total of service and interest cost components $  5$(4)
    Effect on postretirement benefit obligation $45 $(39)


         		      1% Point Increase
    		    1% Point Decrease
    Effect on total of service and interest cost components              $4         $(3)  
    Effect on postretirement benefit obligation              $41         $(35)  
     

    On December 8, 2003, the President signed into law the Medicare Prescription Drug Improvement and Modernization Act of 2003. The law provides for a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit at least actuarially equivalent to the benefit established by the law. We have concluded that our plan is at least “actuarially equivalent” to the Medicare Part D plan for certain covered groups only, and will be eligible for the subsidy for those groups. The impacteffect of the subsidy reduced our postretirement benefit obligation $6 at both February 3, 2007, and $9 at January 28, 2006, and January 29, 2005, respectively, and did not have a material impacteffect on our net periodic benefit cost in either of those years. The remaining groups’ benefits are not “actuarially equivalent” to the Medicare Part D plan and we have made the decision to pay as secondary coverage to Medicare Part D for those groups.

    The Company also contributes to various multi-employer pension plans based on obligations arising from most of its collective bargaining agreements. These plans provide retirement benefits to participants based on their service to contributing employers. The benefits are paid from assets held in trust for that purpose. Trustees are appointed in equal number by employers and unions. The trustees typically are responsible for determining the level of benefits to be provided to participants as well as for such matters as the investment of the assets and the administration of the plans.

    The Company recognizes expense in connection with these plans as contributions are funded, in accordance with GAAP. The Company made contributions to these plans, and recognized expense, of $204 in 2006, $196 in 2005, and $180 in 2004, and $169 in 2003.2004. The Company estimates it would have contributed an additional $2 million in 2004, and $13 million in 2003, but its obligation to contribute was suspended during the labor disputesdispute in southern California and West Virginia.
    California.

    Based on the most recent information available to it, the Company believes that the present value of actuarial accrued liabilities in most or all of these multi-employer plans substantially exceeds the value of the assets held in trust to pay benefits. Although underfunding can result in the imposition of excise taxes on contributing employers, factors such as increased contributions, increased asset values or future service benefit changes can reduce underfunding so that excise taxes are not triggered. Moreover, if the Company were to exit certain markets or otherwise cease making contributions to these funds, the Company could trigger a substantial withdrawal liability. Any adjustment for withdrawal liability will be recorded when it is probable that a liability exists and can be reasonably estimated, in accordance with GAAP.

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    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    The Company also administers certain defined contribution plans for eligible union and non-union employees. The cost of these plans for 2006, 2005 2004 and 20032004 was $8, $8 and $12, and $14, respectively.

    A-66



    18. RECENTLY ISSUED ACCOUNTINGNOTESTOCONSOLIDATEDFINANCIALSTANDARDSTATEMENTS, CONTINUED

    15. RENTLYADOPTED ACCOUNTING STANDARDS

    In December 2004, the FASB issued SFAS No. 123 (Revised 2004)2002),Share-Based Payment (“SFAS No. 123R”123(R)”), which replacesreplaced SFAS No. 123, supersedessuperseded APB No. 25 and related interpretations and amendsamended SFAS No. 95,, Statement of Cash Flows. The provisions of SFAS No. 123R are similar to those of SFAS No. 123; however, SFAS No. 123RNo 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements as compensation cost based on their fair value on the date of grant. Fair valueThe Company adopted the provisions of share-based awards will be determined using option pricing models (e.g. Black-Scholes or binomial models) and assumptions that appropriately reflectSFAS No. 123(R) in the specific circumstancesfirst quarter of 2006. The implementation of SFAS No. 123(R) reduced net earnings $0.06 per diluted share in 2006. See Note 10 for further discussion of the awards. Compensation cost will be recognized over the vesting period based on the fair value of awards that actually vest.

    Prior toeffect the adoption of SFAS No. 123R,123(R) had on the Company is accounting for share-based compensation expense under the recognition and measurement provisions of APB No. 25, “Accounting for Stock Issued to Employees” and is following the accepted practice of recognizing share-based compensation expense over the explicit vesting period. Adoption of SFAS No. 123R will require the immediate recognition at the grant date of the full share-based compensation expense for grants to retirement eligible employees, as the explicit vesting period is non-substantive. The Company expects to adopt SFAS No. 123R in the first quarter of 2006 and that the adoption will reduce net earnings by $0.05 - $0.06 per diluted share during fiscal 2006.
    Company’s Consolidated Financial Statements.

    In November 2004,September 2006, the FASB issued SFAS No. 151,158,Inventory Costs, anEmployers’ Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment of ARBFASB Statements No. 43, Chapter 487, 99, 106, and 123(R), which clarifies. SFAS No. 158 requires an employer that inventory costssponsors one or more single-employer defined benefit plans to recognize in its statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status. In addition, SFAS No. 158 requires an employer to measure a plan’s assets and obligations and determine its funded states as of the end of the employer’s fiscal year and recognize changes in the funded status of a defined benefit postretirement plan in the year the changes occur and that are “abnormal” are required tothose changes be charged to expense as incurred as opposed to being capitalized into inventoryrecorded in comprehensive income, net of tax, as a product cost.separate component shareowners’ equity. SFAS No. 151 provides examples158 also requires additional footnote disclosure. The recognition and disclosure provisions of “abnormal” costs to include costs of idle facilities, excess freight and handling costs and spoilage. SFAS No. 151158 became effective for the Company on February 3, 2007. The measurement date provisions of SFAS No. 158 will become effective for the Company’s fiscal year beginning January 29, 2006. The adoptionon February 1, 2009. See Note 14 for the effects the implementation of SFAS No. 151 is not expected to have a material effect158 had on the Company’s Consolidated Financial Statements.

    16. RECENTLYISSUED ACCOUNTINGSTANDARDS

    In May 2005,June 2006, the FASB issued Interpretation (“FIN”) No. 48,Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109. FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN No. 48 becomes effective for the Company’s fiscal year beginning February 4, 2007. The Company is evaluating the effect the implementation of FIN No. 48 will have on its Consolidated Financial Statements.

    In September 2006, the FASB issued SFAS No. 154,157,Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3.Fair Value Measurement. SFAS No. 154 requires retrospective application to prior periods financial statements157 defines fair value, establishes a framework for changesmeasuring fair value in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change.GAAP and expands disclosures about fair value measurement. SFAS No. 154 also requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle should be recognized in the period of the accounting change.157 does not require any new fair value measurements. SFAS No. 154 further requires a change in depreciation, amortization or depletion method for long-lived, non-financial assets to be accounted for as a change in accounting estimate effected by a change in accounting principle. SFAS No. 154157 will become effective for the Company’s fiscal year beginning January 29, 2006.February 3, 2008. The Company is evaluating the effect the implementation of SFAS No. 157 will have on its Consolidated Financial Statements.

    FASB Interpretation No. 47 (“FIN 47”) “Accounting for Conditional Asset Retirement Obligations” was issued byIn February 2007, the FASB in March 2005. FIN 47 provides guidance relatingissued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115. SFAS No. 159 permits entities to the identification ofmake an irrevocable election to measure certain financial instruments and financial reportingother assets and liabilities at fair value on an instrument-by-instrument basis. Unrealized gains and losses on items for legal obligations to perform an asset retirement activity. The Interpretation requires recognition of a liability forwhich the fair value of a conditional asset retirement obligation when incurred ifoption has been elected should be recognized into net earnings at each subsequent reporting date. SFAS No. 159 will be become effective for the liability’s fair value can be reasonably estimated. FIN 47 became effective duringCompany’s fiscal 2005.year beginning February 3, 2008. The Company is currently evaluating the effect the adoption of FIN 47 did notSFAS No. 159 will have a material effect on the Company’sits Consolidated Financial Statements.

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    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    In November 2004,June 2006, the FASB ratified the consensus of Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issueissue No. 04-10, “Determining Whether06-03,How Taxes Get Collected from Customers and Remitted to Aggregate Operating Segments That Do Not MeetGovernmental Authorities Should Be Presented in the Quantitative Thresholds.”Income Statement (That Is, Gross versus Net Presentation). EITF No. 04-10

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    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


    concludes06-03 indicates that operating segments that do not meet the quantitative thresholds can be aggregated on if aggregation is consistent withincome statement presentation of taxes within the objectives and basic principles of SFAS No. 131,Disclosures about Segments of an Enterprise and Related Information, the segments have similar economic characteristics, and the segments share a majorityscope of the aggregation criteria listed in (a) - (e) of paragraph 17 of SFAS No. 131.Issue on either a gross basis or a net basis is an accounting policy decision that should be disclosed pursuant to Opinion 22. EITF No. 04-10 became06-03 becomes effective for the Company’s fiscal years ending after September 15, 2005, and didyear beginning February 4, 2007. The Company does not expect the adoption of EITF No. 06-03 to have a material effect on ourits Consolidated Financial Statements.

    In June 2005, the EITF reached a consensus on EITF Issue No. 05-6, “Determining the Amortization Period for Leasehold Improvements Purchased After Lease Inception or Acquired in a Business Combination.” EITF No. 05-6 requires that leasehold improvements acquired in a business combination be amortized over the shorter of the useful life of the assets or a term that includes required lease periods and renewal periods deemed to be reasonably assured at the date of acquisition. EITF No. 05-6 further requires that leasehold improvements that are placed into service significantly after, and not contemplated at or near the beginning of the lease term, shall be amortized over the shorter of the useful life of the assets or a term that includes the required lease periods and any renewal periods deemed to be reasonably assured at the date of acquisition. EITF No. 05-6 became effective for the Company’s second fiscal quarter beginning August 14, 2005. The adoption of EITF No. 05-6 did not have a material effect on the Company’s Consolidated Financial Statements.
    17. GUARANTOR SUBSIDIARIES

    In October 2005, the FASB issued FASB Staff Position (“FSP”) FAS 13-1, “Accounting for Rental Costs Incurred during a Construction Period.” FSP FAS 13-1 requires rental costs associated with building or ground leases incurred during a construction period to be recognized as rental expense. In addition, FSP FAS 13-1 requires lessees to cease capitalizing rental costs, as of December 15, 2005, for operating lease agreements entered into prior to December 15, 2005. Early adoption is permitted. The Company was already in compliance with the provisions of FSP FAS 13-1, therefore it had no effect on the Company’s Consolidated Financial Statements.

    19. GUARANTOR SUBSIDIARIES

    The Company’s outstanding public debt (the “Guaranteed Notes”) is jointly and severally, fully and unconditionally guaranteed by The Kroger Co. and some of its subsidiaries (the “Guarantor Subsidiaries”). At January 28, 2006,February 3, 2007, a total of approximately $6,390$5,916 of Guaranteed Notes was outstanding. The Guarantor Subsidiaries and non-guarantor subsidiaries are wholly-owned subsidiaries of The Kroger Co. Separate financial statements of The Kroger Co. and each of the Guarantor Subsidiaries are not presented because the guarantees are full and unconditional and the Guarantor Subsidiaries are jointly and severally liable. The Company believes that separate financial statements and other disclosures concerning the Guarantor Subsidiaries would not be material to investors.

    The non-guaranteeing subsidiaries represent less than 3% on an individual and aggregate basis of consolidated assets, pretaxpre-tax earnings, cash flow, and equity for all periods presented, except for consolidated pre-tax earnings in 2004 and 2003.2004. Therefore, the non-guarantor subsidiaries’ information is not separately presented in the balance sheets and the statements of cash flows, but rather is included in the column labeled “Guarantor Subsidiaries,” for those periods. The non-guaranteeing subsidiaries represented approximately 10% of 2004 consolidated pre-tax earnings and 4% of 2003 consolidated pre-tax earnings. Therefore, the non-guarantor subsidiaries information is separately presented in the Condensed Consolidated Statements of EarningsOperations for 2004 and 2003.
    2004.

    There are no current restrictions on the ability of the Guarantor Subsidiaries to make payments under the guarantees referred to above, except, however, the obligations of each guarantor under its guarantee are limited to the maximum amount as will result in obligations of such guarantor under its guarantee not constituting a fraudulent conveyance or fraudulent transfer for purposes of Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act, or any similar Federal or state law (e.g., adequate capital to pay dividends under corporate laws).

    A-64A-68




    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    The following tables present summarized financial information as of February 3, 2007 and January 28, 2006 and January 29, 2005 and for the three years ended January 28, 2006.
    February 3, 2007.

    Condensed Consolidating
    Balance Sheets
    As of February 3, 2007

       Guarantor    
     The Kroger Co.       Subsidiaries       Eliminations      Consolidated
    Current assets       
           Cash  $        25 $      164 $         —  $      189
           Store deposits in-transit 69 545 —  614
           Receivables 168 1,982 (1,372)  778
           Net inventories 406 4,203 —  4,609
           Prepaid and other current assets  371  194—   565
                   Total current assets 1,039 7,088  (1,372)  6,755
    Property, plant and equipment, net 1,429 10,350 —  11,779
    Goodwill, net 56 2,136 —  2,192
    Other assets 647 1,149 (1,307)  489
    Investment in and advances to subsidiaries  11,510  —  (11,510)   —
                   Total Assets $ 14,681$ 20,723$ (14,189)  $ 21,215
           Current liabilities       
           Current portion of long-term debt       
                   including obligations under capital       
                   leases and financing obligations $      906$        —$         — $      906
           Accounts payable 1,614 4,869 (2,679)   3,804
           Other current liabilities  (537)   3,408  —   2,871
                   Total current liabilities 1,983 8,277 (2,679)  7,581
    Long-term debt including obligations under       
           capital leases and financing obligations       
           Face value long-term debt including       
                   obligations under capital leases and       
                   financing obligations 6,136 — —  6,136
           Adjustment to reflect fair value interest rate       
                   hedges  18  —  —   18
           Long-term debt including obligations       
                   under capital leases and financing       
                   obligations 6,154 — —  6,154
    Other long-term liabilities  1,621  936  —   2,557
                   Total Liabilities  9,758  9,213  (2,679)   16,292
    Shareowners’ Equity  4,923   11,510  (11,510)   4,923
                   Total Liabilities and Shareowners’ equity $ 14,681 $ 20,723 $ (14,189)   $ 21,215

    A-69



    NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS, CONTINUED

    Condensed Consolidating
    Balance Sheets
    As of January 28, 2006

        Guarantor    
     The Kroger Co.        Subsidiaries      Eliminations       Consolidated 
    Current assets       
           Cash  $        39 $       171$         — $      210
           Store deposits in-transit  46 442 — 488
           Receivables  1,088 526 (928) 686
           Net inventories  460 4,026 —  4,486
           Prepaid and other current assets   355  241   —  596
                   Total current assets  1,988 5,406 (928) 6,466
    Property, plant and equipment, net  1,255 10,110 — 11,365
    Goodwill, net  56 2,136 — 2,192
    Other assets  (509) 968 —  459
    Investment in and advances to subsidiaries  10,808  —  (10,808)  —
                   Total Assets $ 13,598 $  18,620$ (11,736) $ 20,482
    Current liabilities       
           Current portion of long-term debt       
                   including obligations under capital        
                   leases and financing obligations  554 $        —$         — $      554
           Accounts payable  263 4,215 (928) 3,550
           Other current liabilities   (151)  2,762  —  2,611
                   Total current liabilities  666 6,977  (928) 6,715
    Long-term debt including obligations under       
           capital leases and financing obligations       
           Face value long-term debt including       
                   obligations under capital leases and        
                   financing obligations  6,651 — — 6,651 
           Adjustment to reflect fair value interest rate       
                   hedges  27 — — 27
           Long-term debt including obligations        
                   under capital leases and financing       
                   obligations  6,678 — — 6,678
    Other long-term liabilities  1,864  835   —  2,699
                   Total Liabilities  9,208  7,812  (928)  16,092
    Shareowners’ Equity  4,390  10,808  (10,808)  4,390
                   Total Liabilities and Shareowners’ equity  $ 13,598   $ 18,620   $ (11,736)   $ 20,482 

    A-70


         		      The Kroger Co.
    		    Guarantor
    Subsidiaries
    		    Eliminations
    		    Consolidated
    Current assets
    		                                                                        
    Cash              $39         $171         $—         $210   
    Store deposits in-transit                46           442           —           488   
    Receivables                1,088          526           (928)          686   
    Net inventories                460           4,026          —           4,486  
    Prepaid and other current assets                355           241           —           596   
    Total current assets                1,988          5,406          (928)          6,466  
    Property, plant and equipment, net                1,255          10,110          —           11,365  
    Goodwill, net                56           2,136          —           2,192  
    Other assets                (509)          968           —           459   
    Investment in and advances to subsidiaries                10,808          —           (10,808)          —   
    Total Assets              $13,598        $18,620        $(11,736)        $20,482  
    Current liabilities
    		                                                                        
    Current portion of long-term debt including obligations under capital leases and financing obligations              $554         $—         $—         $554   
    Accounts payable                263           4,215          (928)          3,550  
    Other current liabilities                (151)          2,762          —           2,611  
    Total current liabilities                666           6,977          (928)          6,715  
    Long-term debt including obligations under capital leases and financing obligations                                                                        
    Face value long-term debt including obligations under capital leases and financing obligations                6,651          —           —           6,651  
    Adjustment to reflect fair value interest
    rate hedges    		                27           —           —           27   
    Long-term debt including obligations under capital leases and financing obligations                6,678          —           —           6,678  
    Other long-term liabilities                1,864          835           —           2,699  
    Total Liabilities                9,208          7,812          (928)          16,092  
    Shareowners’ Equity                4,390          10,808          (10,808)          4,390  
    Total Liabilities and Shareowners’ equity              $13,598        $18,620        $(11,736)        $20,482  
     

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    NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS, CONTINUED

    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    Condensed Consolidating
    Balance Sheets
    AsStatements of January 29, 2005Operations
    For the Year ended February 3, 2007


         		      The Kroger Co.
    		    Guarantor
    Subsidiaries
    		    Eliminations
    		    Consolidated
    Current assets
    		                                                                        
    Cash              $32         $112         $—         $144   
    Store deposits in-transit                20           486           —           506   
    Receivables                583           747           (502)          828   
    Net inventories                415           3,941          —           4,356  
    Prepaid and other current assets                275           297           —           572   
    Total current assets                1,325          5,583          (502)          6,406  
    Property, plant and equipment, net                1,277          10,220          —           11,497  
    Goodwill, net                20           2,171          —           2,191  
    Other assets                642           (245)          —           397   
    Investment in and advances to subsidiaries                10,668          —           (10,668)          —   
    Total assets              $13,932        $17,729        $(11,170)        $20,491  
    Current liabilities
    		                                                                        
    Current portion of long-term debt including obligations under capital leases and financing obligations              $71         $—         $—         $71   
    Accounts payable                188           3,912          (502)          3,598  
    Other current liabilities                319           2,347          —           2,666  
    Total current liabilities                578           6,259          (502)          6,335  
    Long-term debt including obligations under capital leases and financing obligations                                                                        
    Face value long-term debt including obligations under capital leases and financing obligations                7,797          33           —           7,830  
    Adjustment to reflect fair value interest
    rate hedges    		                70           —           —           70   
    Long-term debt including obligations under capital leases and financing obligations                7,867          33           —           7,900  
    Other long-term liabilities                1,868          769           —           2,637  
    Total liabilities                10,313          7,061          (502)          16,872  
    Shareowners’ Equity                3,619          10,668          (10,668)          3,619  
    Total liabilities and shareowners’ equity              $13,932        $17,729        $(11,170)        $20,491  
     
      Guarantor   
     The Kroger Co.       Subsidiaries       Eliminations       Consolidated 
    Sales $8,731$58,383$(1,003) $66,111
    Merchandise costs, including warehousing    
           and transportation 6,63044,488(1,003) 50,115
    Operating, general and administrative 1,69710,142— 11,839
    Rent 132517— 649
    Depreciation and amortization  136 1,136 —  1,272
           Operating profit 1362,100— 2,236
    Interest expense 4808— 488
    Equity in earnings of subsidiaries  1,843 — (1,843) —
    Earnings before tax expense  1,4992,092(1,843)1,748
    Tax expense  384   249 —  633
           Net earnings  $1,115 $  1,843   $(1,843)  $  1,115

    A-66A-71




    NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS, CONTINUED

    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    Condensed Consolidating
    Statements of Operations
    For the Year ended January 28, 2006


         		      The Kroger Co.
    		    Guarantor
    Subsidiaries
    		    Eliminations
    		    Consolidated
    Sales              $8,693        $52,822        $(962)        $60,553  
    Merchandise costs, including warehousing
    and transportation    		                6,502          40,021          (958)          45,565  
    Operating, general and administrative                1,657          9,368          2           11,027  
    Rent                165           502           (6)          661   
    Depreciation and amortization                139           1,126          —           1,265  
    Operating profit                230           1,805          —           2,035  
    Interest expense                498           12           —           510   
    Equity in earnings of subsidiaries                1,164          —           (1,164)          —   
    Earnings (loss) before tax expense                896           1,793          (1,164)          1,525  
    Tax expense (benefit)                (62)          629           —           567   
    Net earnings (loss)              $958         $1,164        $(1,164)        $958   
     
      Guarantor    
     The Kroger Co.       Subsidiaries       Eliminations       Consolidated 
    Sales $8,693 $ 52,822$    (962) $ 60,553
    Merchandise costs, including warehousing      
           and transportation 6,502 40,021(958)  45,565
    Operating, general and administrative 1,657 9,3682  11,027
    Rent 165 502(6)  661
    Depreciation and amortization  139  1,126 —   1,265
           Operating profit 230 1,805—  2,035
    Interest expense 498 12—  510
    Equity in earnings of subsidiaries  1,164  — (1,164)   —
    Earnings before tax expense 896 1,793(1,164)  1,525
    Tax expense (benefit)  (62)   629 —   567
           Net earnings  $   958   $   1,164   $ (1,164)   $      958 

    A-67A-72




    NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS, CONTINUED

    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    Condensed Consolidating
    Statements of Operations
    For the Year ended January 29, 2005


         		      The Kroger Co.
    		    Guarantor
    Subsidiaries
    		    Non-Guarantor
    Subsidiaries
    		    Eliminations
    		    Consolidated
    Sales              $8,003        $49,432        $41         $(1,042)        $56,434  
    Merchandise costs, including warehousing and transportation                6,420          36,721          —           (1,001)          42,140  
    Operating, general and administrative                1,126          9,494          (9)          —           10,611  
    Rent                194           527           —           (41)          680   
    Depreciation and amortization                110           1,142          4           —           1,256  
    Goodwill impairment charge                —           904           —           —           904   
    Operating profit                153           644           46           —           843   
    Interest expense                529           6           22           —           557   
    Equity in earnings of subsidiaries                430           —           —           (430)          —   
    Earnings (loss) before tax expense                54           638           24           (430)          286   
    Tax expense (benefit)                158           231           1           —           390   
    Net earnings (loss)              $(104)        $407         $23         $(430)        $(104)  
     
      Guarantor       Non-Guarantor   
     The Kroger Co.       Subsidiaries Subsidiaries       Eliminations  Consolidated 
    Sales $8,003  $49,432$41  $(1,042)       $56,434 
    Merchandise costs, including      
           warehousing and      
           transportation 6,420 36,721— (1,001) 42,140 
    Operating, general and      
           administrative 1,126 9,494(9) — 10,611 
    Rent 194 527— (41) 680 
    Depreciation and amortization 110 1,1424 — 1,256 
    Goodwill impairment charge  —  904 —  —  904 
                  Operating profit 153 644 46 — 843 
    Interest expense 529 622 — 557 
    Equity in earnings of subsidiaries  430  — —  (430)  — 
    Earnings before tax expense 54 63824 (430)  286 
    Tax expense  158  231 1  —  390 
                  Net earnings (loss)  $  (104)  $     407  $23   $   (430) $    (104)

    A-68A-73




    NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS, CONTINUED

    Condensed Consolidating
    Statements of Operations
    For the Year ended February 3, 2007

       Guarantor  
     The Kroger Co.      Subsidiaries      Consolidated
    Net cash provided by operating activities  $ 152  $ 2,199 $ 2,351 
           Cash flows from investing activities:       
                   Capital expenditures  (143)  (1,540)  (1,683) 
                   Other    56  40  96 
    Net cash used by investing activities   (87)   (1,500)   (1,587) 
           Cash flows from financing activities:       
                   Proceeds from issuance of long-term debt  362  —  362 
                   Reductions in long-term debt  (556)  —  (556) 
                   Proceeds from issuance of capital stock  168  —  168 
                   Capital stock reacquired  (633)  —  (633) 
                   Dividends paid  (140)  —  (140) 
                   Other  18  (4)  14 
                   Net change in advances to subsidiaries  702  (702)  — 
    Net cash used by financing activities   (79)   (706)   (785) 
    Net decrease in cash and temporary cash investments  (14)  (7)  (21) 
           Cash and temporary investments:        
                   Beginning of year   39   171  210 
                   End of year  $   25   $    164   $    189 

    A-74



    NOTESTOOTESTOCONSOLIDATEDFINANCIALSTATEMENTS, CONTINUED

    Condensed Consolidating
    Statements of Operations
    For the Year ended January 28, 2006

      Guarantor   
     The Kroger Co.      Subsidiaries       Consolidated
    Net cash provided by operating activities  $ 1,171  $ 1,021  $ 2,192 
           Cash flows from investing activities:      
                   Capital expenditures (188)  (1,118)  (1,306) 
                   Other  11   16   27 
    Net cash used by investing activities  (177)   (1,102)   (1,279) 
           Cash flows from financing activities:      
                   Proceeds from issuance of long-term debt 14  —  14 
                   Reductions in long-term debt (764)  (33)  (797) 
                   Proceeds from issuance of capital stock 78  —  78 
                   Capital stock reacquired (252)  —  (252) 
                   Other 77  33  110 
                   Net change in advances to subsidiaries  (140)  140   — 
    Net cash provided (used) by financing activities  (987)   140  (847) 
    Net increase in cash and temporary cash investments 7  59  66 
           Cash and temporary investments:      
                   Beginning of year  32    112   144 
                   End of year  $      39   $    171  $    210 

    A-75



    NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS, CONTINUED

    Condensed Consolidating
    Statements of Operations
    For the Year ended January 31, 200429, 2005


         		      The Kroger Co.
    		    Guarantor
    Subsidiaries
    		    Non-Guarantor
    Subsidiaries
    		    Eliminations
    		    Consolidated
    Sales              $6,935        $47,752        $45         $(941)        $53,791  
    Merchandise costs, including warehousing and transportation                5,583          34,943          —           (889)          39,637  
    Operating, general and administrative                1,305          9,060          (11)          —           10,354  
    Rent                168           541           —           (52)          657   
    Depreciation and amortization                91           1,114          4           —           1,209  
    Goodwill impairment charge                —           471           —           —           471   
    Asset impairment charge                —           120           —           —           120   
    Operating profit (loss)                (212)          1,503          52           —           1,343  
    Interest expense                568           15           21           —           604   
    Equity in earnings of subsidiaries                939           —           —           (939)          —   
    Earnings (loss) before tax expense                159           1,488          31           (939)          739   
    Tax expense (benefit)                (126)          571           9           —           454   
    Net earnings (loss)              $285         $917         $22         $(939)        $285   
     
       Guarantor 
     The Kroger Co.      Subsidiaries      Consolidated
    Net cash provided by operating activities  $ (890)  $ 3,220  $ 2,330 
                   Cash flows from investing activities:     
                   Capital expenditures  (161) (1,473) (1,634) 
                   Other    22  4  26 
    Net cash used by investing activities    (139)  (1,469)  (1,608) 
                   Cash flows from financing activities:     
                   Proceeds from issuance of long-term debt  616 — 616 
                   Reductions in long-term debt  (724) (286) (1,010) 
                   Proceeds from issuance of capital stock  25 — 25 
                   Capital stock reacquired  (319) — (319) 
                   Other  (27) (22) (49) 
                   Net change in advances to subsidiaries    1,464  (1,464)  — 
    Net cash provided (used) by financing activities   1,035  (1,772)  (737) 
    Net (decrease) increase in cash and temporary cash     
               investments  6 (21) (15) 
                   Cash and temporary investments:     
                   Beginning of year    26   133  159 
                   End of year  $    32  $    112   $    144 

    A-69A-76




    NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS, CONCLUDED

    18. QNOTESTOUARTERLYDATA (UNAUDITED)

     Quarter   
     First Second Third Fourth Total Year 
    2006 (16 Weeks)     (12 Weeks)     (12 Weeks)     (13 Weeks)     (53 Weeks) 
    Sales$19,415$15,138 $14,699$16,859$66,111
    Net earnings$306$209$215$385$1,115
    Net earnings per basic common share$0.42$0.29$0.30$0.55$1.56
    Average number of shares used in basic          
           calculation 722 719 712 706 715
    Net earnings per diluted common share$0.42$0.29$0.30$0.54$1.54
    Average number of shares used in diluted          
           calculation 729 725 720 715 723
     
     Quarter   
     First Second Third Fourth Total Year 
    2005 (16 Weeks)     (12 Weeks)     (12 Weeks)     (12 Weeks)     (52 Weeks) 
    Sales$17,948$13,865 $

    14,020

    		$14,720$60,553
    Net earnings$294 $196$185$283$958
    Net earnings per basic common share$0.40$0.27$0.26$0.39$1.32
    Average number of shares used in basic          
           calculation 727   722  724 724 724
    Net earnings per diluted common share$0.40$0.27 $0.25$0.39$1.31
    Average number of shares used in diluted             
           calculation 732   730   732   730   731 

    CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
    ERTIFICATIONS

    Condensed Consolidating
    Statements of Cash Flows
    For the Year ended January     On June 28, 2006,


         		      The Kroger Co.
    		    Guarantor
    Subsidiaries
    		    Consolidated
    Net cash provided by operating activities              $1,171        $1,021        $2,192  
    Cash flows from investing activities:
    		                                                        
    Capital expenditures                (188)          (1,118)          (1,306)  
    Other                11           16           27   
    Net cash used by investing activities                (177)          (1,102)          (1,279)  
    Cash flows from financing activities:
    		                                                        
    Proceeds from issuance of long-term debt                14           —           14   
    Reductions in long-term debt                (764)          (33)          (797)  
    Proceeds from issuance of capital stock                78           —           78   
    Capital stock reacquired                (252)          —           (252)  
    Other                77           33           110   
    Net change in advances to subsidiaries                (140)          140           —   
    Net cash provided (used) by financing activities                (987)          140           (847)  
    Net (decrease) increase in cash and temporary cash investments                7           59           66   
    Cash and temporary investments:
    		                                                        
    Beginning of year                32           112           144   
    End of year              $39         $171         $210   
     

    A-70



    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    Condensed Consolidating
    Statements of Cash Flows
    For the Year ended January 29, 2005


         		      The Kroger Co.
    		    Guarantor
    Subsidiaries
    		    Consolidated
    Net cash provided by operating activities              $(890)        $3,220        $2,330  
    Cash flows from investing activities:
    		                                                        
    Capital expenditures                (161)          (1,473)          (1,634)  
    Other                22           4           26   
    Net cash used by investing activities                (139)          (1,469)          (1,608)  
    Cash flows from financing activities:
    		                                                        
    Proceeds from issuance of long-term debt                616           —           616   
    Reductions in long-term debt                (724)          (286)          (1,010)  
    Proceeds from issuance of capital stock                25           —           25   
    Capital stock reacquired                (319)          —           (319)  
    Other                (27)          (22)          (49)  
    Net change in advances to subsidiaries                1,464          (1,464)          —   
    Net cash provided (used) by financing activities                1,035          (1,772)          (737)  
    Net (decrease) increase in cash and temporary cash investments                6           (21)          (15)  
    Cash and temporary investments:
    		                                                        
    Beginning of year                26           133           159   
    End of year              $32         $112         $144   
     

    A-71



    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    Condensed Consolidating
    Statements of Cash Flows
    For the Year ended January 31, 2004


         		      The Kroger Co.
    		    Guarantor
    Subsidiaries
    		    Consolidated
    Net cash provided by operating activities              $385         $1,830        $2,215  
    Cash flows from investing activities:
    		                                                        
    Capital expenditures                (176)          (1,824)          (2,000)  
    Other                (59)          33           (26)  
    Net cash used by investing activities                (235)          (1,791)          (2,026)  
    Cash flows from financing activities:
    		                                                        
    Proceeds from issuance of long-term debt                247           100           347   
    Reductions in long-term debt                (347)          (140)          (487)  
    Proceeds from issuance of capital stock                39           —           39   
    Proceeds from interest rate swap terminations                114           —           114   
    Capital stock reacquired                (301)          —           (301)  
    Other                (23)          110           87   
    Net change in advances to subsidiaries                104           (104)          —   
    Net cash provided (used) by financing activities                (167)          (34)          (201)  
    Net (decrease) increase in cash and temporary cash investments                (17)          5           (12)  
    Cash and temporary investments:
    		                                                        
    Beginning of year                43           128           171   
    End of year              $26         $133         $159   
     

    A-72



    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONCLUDED

    20. QUARTERLY DATA (Unaudited)


         		      Quarter
    		    
    2005
    		   
    		First
    (16 Weeks)
    		   
    		Second
    (12 Weeks)
    		   
    		Third
    (12 Weeks)
    		   
    		Fourth
    (12 Weeks)
    		   
    		Total Year
    (52 Weeks)
    Sales
    		              $17,948        $13,865        $14,020        $14,720        $60,553  
    Net earnings
    		              $294        $196        $185        $283        $958  
    Net earnings per basic common share
    		              $0.40        $0.27        $0.26        $0.39        $1.32  
    Average number of shares used in basic calculation
    		                727          722          724          724          724  
    Net earnings per diluted common
    share
    		              $0.40        $0.27        $0.25        $0.39        $1.31  
    Average number of shares used in diluted calculation
    		                732          730          732          730          731  
     

    2004
    		   
    		First
    (16 Weeks)
    		   
    		Second
    (12 Weeks)
    		   
    		Third
    (12 Weeks)
    		   
    		Fourth
    (12 Weeks)
    		   
    		Total Year
    (52 Weeks)
    Sales              $16,905        $12,980        $12,854        $13,695        $56,434  
    Net earnings (loss)              $263         $142         $143         $(652)        $(104)  
    Net earnings (loss) per basic common share              $0.35        $0.19        $0.19        $(0.89)        $(0.14)  
    Average number of shares used in basic calculation                741           737           736           730           736   
    Net earnings (loss) per diluted common share              $0.35        $0.19        $0.19        $(0.89)        $(0.14)  
    Average number of shares used in diluted calculation                749           744           742           730           736   
     

    CERTIFICATIONS

    Kroger we submitted a Section 12(a) CEO Certification to the New York Stock Exchange for fiscal year 2004 with no qualifications. We also filed with the SEC the Rule 13a-14(a)/15d-14(a) Certifications as an exhibit to Form 10-K as amended, for fiscal years 20042005 and 2005.
    2006.

    A-73A-77




    Kroger has a variety of plans under which employees may acquire common stock of Kroger. Employees of Kroger and its subsidiaries own shares through a profit sharing plan, as well as 401(k) plans and a payroll deduction plan called the Kroger Stock Exchange. If employees have questions concerning their shares in the Kroger Stock Exchange, or if they wish to sell shares they have purchased through this plan, they should contact:

    The Bank of New York
    Employee Investment Plans Division
    P. O. Box 1089
    Newark, New Jersey 07101
    Toll Free 1-800-872-3307

    Questions regarding Kroger’s 401(k) plan should be directed to the employee’s Human Resources Department or 1-800-2KROGER. Questions concerning any of the other plans should be directed to the employee’s Human Resources Department.

    SHAREOWNERS:  The Bank of New York is Registrar and Transfer Agent for Kroger’s Common Stock. For questions concerning payment of dividends, changes of address, etc., individual shareowners should contact:

    Kroger has a variety of plans under which employees may acquire common stock of Kroger. Employees of Kroger and its subsidiaries own shares through a profit sharing plan, as well as 401(k) plans and a payroll deduction plan called the Kroger Stock Exchange. If employees have questions concerning their shares in the Kroger Stock Exchange, or if they wish to sell shares they have purchased through this plan, they should contact:


    The Bank of New York 
    Employee Investment Plans Division 
    P. O. Box 1089 
    Newark, New Jersey 07101 
    Toll Free 1-800-872-3307 

    Questions regarding Kroger’s 401(k) plan should be directed to the employee’s Human Resources Department or 1-800-2KROGER. Questions concerning any of the other plans should be directed to the employee’s Human Resources Department.

    SHAREOWNERS: The Bank of New York is Registrar and Transfer Agent for Kroger’s Common Stock. For questions concerning payment of dividends, changes of address, etc., individual shareowners should contact:

    Written Shareholder inquiries:
    		Certificate transfer and address changes:
    The Bank of New York The Bank of New York
    Shareholder Relations Department                        Receive and Deliver Department
    P.O. Box 11258 P.O. Box 11002
    Church Street Station Church Street Station
    New York, New York 10286 New York, New York 10286

    The Bank’s toll-free number is: 1-800-524-4458.
    The Bank’s toll-free number is: 1-800-405-6566. E-mail: shareowners@bankofny.com

    Shareholder questions and requests for forms available on the Internet should be directed to: http://www.stockbny.com

    FINANCIAL INFORMATION: Call (513) 762-1220 to request printed financial information, including Kroger’s most recent report on Form 10-Q or 10-K, or press release. Written inquiries should be addressed to Shareholder Relations, The Kroger Co., 1014 Vine Street, Cincinnati, Ohio 45202-1100. Information also is available on Kroger’s corporate website at www.thekrogerco.com.


    Shareholder questions and requests for forms available on the Internet should be directed to: http://www.stockbny.com

    FINANCIAL INFORMATION:  Call (513) 762-1220 to request printed financial information, including Kroger’s most recent report on Form 10-Q or 10-K, or press release. Written inquiries should be addressed to Shareholder Relations, The Kroger Co., 1014 Vine Street, Cincinnati, Ohio 45202-1100. Information also is available on Kroger’s website at www.kroger.com.




    EXECUTIVE OFFICERS

    Donald E. Becker

    Executive Vice President

    William T. Boehm

    Senior Vice President

    President—Manufacturing

    David B. Dillon

    Chairman of the Board and
    Chief Executive Officer

    Kevin M. Dougherty

    Group Vice President

    Michael L. Ellis

    Group Vice President

    Jon C. Flora

    Senior Vice President

    Joseph A. Grieshaber, Jr.

    Group Vice President

    Paul W. Heldman

    Executive Vice President, Secretary
    and General Counsel

    Scott M. Henderson

    EXECUTIVEOFFICERS
    Donald E. BeckerPaul W. HeldmanW. Rodney McMullen
    Executive Vice PresidentExecutive Vice President,Vice Chairman
    Secretary and General Counsel
    William T. BoehmM. Marnette Perry
    Senior Vice PresidentScott M. HendersonSenior Vice President
    President—ManufacturingVice President and Treasurer

    Christopher T. Hjelm

    Senior Vice President and
    Chief Information Officer

    Carver L. Johnson

    Group Vice President

    Lynn Marmer

    Group Vice President

    Don W. McGeorge

    President and
    Chief Operating Officer

    W. Rodney McMullen

    Vice Chairman

    M. Marnette Perry

    Senior Vice President

    J. Michael Schlotman

    Senior Vice President and
    Chief Financial Officer

    Paul J. Scutt

    Senior Vice President

    M. Elizabeth Van Oflen

    Vice President and Controller

    Della Wall

    Group Vice President

    OPERATING UNIT HEADS

    John Bays

    Dillon Stores

    Paul L. Bowen

    Jay C

    William H. Breetz, Jr.

    Southwest Division

    Geoffrey J. Covert

    Cincinnati Division

    Jay Cummins

    Food 4 Less

    Russell J. Dispense

    King Soopers

    Michael J. Donnelly

    Fry’s

    Peter M. Engel

    Fred Meyer Jewelers

    Donna Giordano

    QFC

    John P. Hackett

    Mid-South Division

    James Hallsey

    Smith’s

    David G. Hirz

    Ralphs

    Mike Hoffmann

    Kwik Shop

    Lisa Holsclaw

    Central Division

    Kathleen Kelly

    Kroger Personal Finance
    (50% owned by Kroger)

    Bruce A. Lucia

    Atlanta Division

    Bruce Macaulay

    Great Lakes Division

    Robert Moeder

    Convenience Stores and
    Supermarket Petroleum

    Phyllis Norris

    City Market

    Darel Pfeiff

    Turkey Hill Minit Markets

    Mark Salisbury

    Tom Thumb

    Art Stawski

    Loaf 'N Jug

    Van Tarver

    Quik Stop

    Richard L. Tillman

    Delta Division

    Darrell D. Webb

    Fred Meyer Stores

    R. Pete Williams

    Mid-Atlantic Division


    THE KROGER CO.  • 1014 VINE STREET • CINCINNATI, OHIO 45202 • (513) 762-4000

    The Kroger Co.

    Three Ways to Vote

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    J. Michael Schlotman
    INTERNETDavid B. DillonChristopher T. Hjelm   ORTELEPHONEORMAILSenior Vice President and

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    1-866-388-1533

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    Your Internet or telephone vote authorizes the named proxies to vote your shares in the same manner as if you marked, signed and returned your proxy card. If you have submitted your proxy by the Internet or telephone there is no need for you to mail back your proxy card.

    For shareholders who have elected to receive The Kroger Co. Proxy Statement and Annual Report electronically, you can now view the 2006 Annual Meeting materials on the Internet by pointing your browser tohttp://www.kroger.com/reports.

    NOTE: Admission Ticket printed on reverse is required for admission to Annual Meeting.

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    o

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    (x) in Black or Blue ink.

    The Board of Directors recommends a vote FOR the nominees and FOR Proposals 2, 3, 4, 5, 6 and 7.Chief Information Officer
    Paul J. Scutt
    1. ELECTION OF DIRECTORSKevin M. DoughertyCarver L. Johnson   Senior Vice President
    Group Vice PresidentGroup Vice President and
    Chief Diversity OfficerM. Elizabeth Van Oflen
    Jon C. FloraVice President and Controller

    FOR all nominees   o

    listed below

    Senior Vice President

    WITHHOLD AUTHORITYLynn Marmer to vote    o

    for all nominees listed below

    		*EXCEPTIONSo

    		 
    Group Vice President 
    Nominees:Della Wall

    01 Reuben V. Anderson, 02 Don W. McGeorge, 03 W. Rodney McMullen,

    04 Clyde R. Moore, and 05 Steven R. Rogel.

    (INSTRUCTION: To withhold authority to vote for any individual nominee mark the
    “Exceptions” box and write that nominee’s name on the space provided below.)Joseph A. Grieshaber, Jr.

    		Group Vice President
    Group Vice President Don W. McGeorge 
    *EXCEPTIONS____________________________________________

    FORAGAINSTABSTAINPresident and  
    Chief Operating Officer

    2.   Annual Election of All Directors.
    (Requires the adoption of Proposal 3)

    		ooo

    3.   Elimination of Cumulative Voting For Directors.

    		ooo

    4.   Elimination of Supermajority Requirement for Some Transactions.

    		ooo

    5.   Opt Out of the Ohio Control Share Acquisition Statute.

    		ooo

    6.   Rules of Conduct for Shareholder Meetings; Meetings outside of Cincinnati.

    		ooo

    7.   Approval of PricewaterhouseCoopers LLP, as auditors.

    		ooo

    The Board of Directors recommends a vote AGAINST Proposals 8 and 9.

    8.   Approve shareholder proposal, if properly presented, to recommend progress reports on suppliers’ controlled-atmosphere killing of chickens.

    		ooo

    9.   Approve shareholder proposal, if properly presented, to recommend the preparation of sustainability report.

    		ooo

    S C A N   L I N E

    Please sign below exactly as name appears hereon. Joint owners should each sign. Where applicable, indicate position or representative capacity.

       
     DateOPERATINGUNITHEADS
    John BaysDonna GiordanoPhyllis Norris
    Dillon StoresQFCCity Market
    Paul L. BowenJohn P. HackettDarel Pfeiff
    Jay CMid-South DivisionTurkey Hill Minit Markets
    William H. Breetz, Jr.James HallseyMark Prestidge
    Southwest DivisionSmith’sDelta Division
    Geoffrey J. CovertDavid G. HirzMark Salisbury
    Cincinnati DivisionRalphsTom Thumb
    Jay CumminsMike HoffmannArt Stawski
    Food 4 LessKwik ShopLoaf ‘N Jug
    Russell J. DispenseKathleen KellyRon Stewart
    King SoopersKroger Personal FinanceQuik Stop
    (50% owned by Kroger)
    Michael J. Donnelly Van Tarver 
        Share Owner sign hereFry’sBruce A. Lucia Convenience Stores and
    Atlanta Division    Co-Owner sign hereSupermarket Petroleum
    Michael L. Ellis  

    LOGO

    ADMISSION TICKET

    You are cordially invited to attend the annual meeting of shareholders of The Kroger Co. to be held on Thursday, June 22, 2006 at 11:00 a.m. E.D.T. at The Music Hall Ballroom, Music Hall, 1243 Elm Street, Cincinnati, Ohio.

    You should present this admission ticket in order to gain admittance to the meeting. This ticket admits only the shareholder listed on the reverse side and is not transferable. If your shares are held in the name of a broker, trust, bank or other nominee, you should bring with you a proxy or letter from the broker, trustee, bank or nominee confirming your beneficial ownership of the shares.

    v FOLD AND DETACH HEREv

    THE KROGER CO.

    P R O X Y

    This Proxy is Solicited on Behalf of the Board of Directors

    for the Annual Meeting to be Held June 22, 2006

    The undersigned hereby appoints each of DAVID B. DILLON, STEVEN R. ROGEL, and JOHN T. LA MACCHIA, or if more than one is present and acting then a majority thereof, proxies, with full power of substitution and revocation, to vote the common shares of The Kroger Co. that the undersigned is entitled to vote at the annual meeting of shareholders, and at any adjournment thereof, with all the powers the undersigned would possess if personally present, including authority to vote on the matters shown on the reverse in the manner directed, and upon any other matter that properly may come before the meeting. The undersigned hereby revokes any proxy previously given to vote those shares at the meeting or at any adjournment.

    The proxies are directed to vote as specified on the reverse hereof and in their discretion on all other matters coming before the meeting. Except as specified to the contrary on the reverse, the shares represented by this proxy will be voted FOR all nominees listed, including the discretion to cumulate votes, FOR Proposals 2, 3, 4, 5, 6 and 7 and AGAINST Proposals 8 and 9.

    (continued, and to be signed, on other side)

    Fred Meyer StoresBruce MacaulayR. Pete Williams
    If you wish to vote in accordance with the recommendations of the Board of Directors, all you need do is sign and return this card. The Proxy Committee cannot vote your shares unless you sign and return the card or vote your proxy by Internet or telephone.Great Lakes DivisionMid-Atlantic Division
    Peter M. Engel  
    Fred Meyer JewelersRobert Moeder
     THE KROGER CO.
    P.O. BOX 11382
    NEW YORK, N.Y. 10203-0382    		To change your address, please mark this box.
    		o
    To consent to future access of the annual reports and proxy materials electronically via the Internet, please mark this box. I understand that the Company may no longer distribute printed materials to me for any future shareholder meeting until such consent is revoked. I understand that I may revoke my consent at any time.Central Division 

    o

    		To include any comments,
    please mark this box.    		o



     

    THEKROGERCO. l  1014 VINESTREETl  CINCINNATI, OHIO45202l  (513) 762-4000