United States
Securities And Exchange Commission
Washington, D.C. 20549

SCHEDULE 14A

SCHEDULE 14A INFORMATION

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The Kroger Co.
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PROXY

NOTICEOF ANNUAL MEETINGOF SHAREHOLDERS

PROXY STATEMENT

AND

20062008 ANNUAL REPORT

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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% 

FINANCIAL HIGHLIGHTS
(in millions except per share data and percentages)

     2008     2007     Percentage
Fiscal Year(52 weeks)(52 weeks)Change (1)
Sales$76,000$70,2358.2%
Operating profit$2,451 $2,3016.5%
Net earnings per share$1.90$1.6912.4%
Average shares used in calculation659698(5.6)%
Net cash provided by operating activities $2,896$2,58112.2%
Capital expenditures$2,149 $2,1261.1%
Identical supermarket sales (2) $67,185 $62,8786.9%
Identical supermarket sales excluding fuel operations (2)$60,300$57,416 5.0%
Comparable supermarket sales (3) $69,762 $65,0667.2%
Comparable supermarket sales excluding supermarket fuel  
       operations (3)$62,492$59,3725.3%

(1)

The percentpercentage calculations were based on the rounded numbers as presented.

(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.

(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.


COVER PRINTED ON RECYCLED PAPER







FELLOW SHAREHOLDERS:

     I amThe Kroger team did an outstanding job in 2008 of consistently delivering results in an increasingly difficult economic environment. Kroger offers real value to customers when they need it most through lower prices, high-quality Kroger brands, great customer service and an overall pleasant shopping experience. As a result, total sales topped $76 billion last year as Kroger continued to generate strong sales growth.

     Kroger’s performance throughout the year produced identical supermarket sales growth of 5.0%, without fuel. We are especially pleased to writeproduce these results in such a tough economy.

     Kroger’s strong identical supermarket sales growth contributed to you aboutfavorable earnings results. We delivered earnings per diluted share of $1.90. This represents 12.4% growth over fiscal year 2007 earnings of $1.69 per diluted share. On top of that, Kroger’s 2006 performancequarterly dividend added over 1% to total shareholder return.

     During the year, we saw several shifts in the way customers shop and Kroger was – and continues to be – positioned well to pursue these changing trends as opportunities. We have unique tools that enable us to identify and act on changes in consumer behavior more quickly than our plans for continued success in 2007competitors.

Our efforts to help customers and beyond. Kroger had a very strong year. Our resultstheir families navigate the difficult economy are a direct result of the hard work and dedication of our 310,000 Associates in every area of our business. We are confidentdriven by our Customer 1st strategystrategy. As a result, we offer customers a unique combination of values no other competitor can match.

     Many of the same money-saving strategies shoppers employed in 2008 continue into 2009 including:

  • Combining trips in order to save fuel;
  • Eating out less at restaurants;
  • Choosing Kroger brands more often;
  • Entertaining at home; and
  • Using more coupons.

     These opportunities play to Kroger’s strengths. They include:

Lower Prices

     We continue to invest cost savings made in any area of our business back into lower prices for our customers. Keeping prices low is connectingone of several key drivers of our identical supermarket sales growth. In addition to lower prices, we offer customers a number of ways to save money, such as our fuel rewards and generic drug programs.

     Kroger fuel rewards programs offer customers a great value and thanks them for their loyalty by giving them additional discounts on gas when they shop in our stores, pharmacies, and gift card malls. In 2008, Kroger customers saved more than $100 million on fuel through these programs.

     We offer customers another opportunity to save through our extensive offering of generic drugs at competitive prices in our 1,900 pharmacies. In 2008, Kroger customers saved nearly $200 million though our generic drug program.

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High-Quality Kroger Brands

     Kroger’s $12.5 billion store brands portfolio enjoyed strong year-over-year growth and fueled Kroger’s overall grocery volume growth in 2008. Our customers recognize and appreciate the quality and value of our exclusive and preferred store brands, which today number more than 14,400 items. We leverage our manufacturing and procurement capabilities to innovate and introduce new items that add value for our customers.

     During 2008, 26% of Kroger’s overall grocery sales came from our own brands and Kroger brands reached a record-high 34% of grocery unit sales.And, as expected, Private Selection, our premium tier of store brands, exceeded $1 billion in sales in 2008.

     We continue to see our own brands as a strategic asset in growing our business in 2009 and beyond because our three tier program gives all customers more value for the way they live.

Customer Loyalty

     The strength of our loyalty card program helps us deepen our connection with our shopperscustomers. The scope and will enabledepth of our shopper card program is unmatched in the industry. These cards link our customers to savings on groceries, fuel, pharmacy needs, general merchandise and Kroger brands.

     We have been building our extensive collection of consumer data since 1999. Today, more than 40% of all U.S. households hold one of our shopper cards. As a result, Kroger has one of the largest retail customer databases in America.

     Through our partnership with dunnhumbyUSA, we use data derived from our loyalty card program to tailor unique coupon offers for specific households because we understand – and appreciate – that no two customers are alike. This level of personalization is a direct link to our customers no other U.S. grocery retailer can replicate.

     Our customer loyalty program also enables us to continueprovide a valuable food safety service to generate positive results for our Shareholders, Associates,customers. Using our customer loyalty database, we are able to notify customers through phone calls to homes and register receipt messages about recalls of products they may have purchased. As the Communitieslargest traditional supermarket retailer in the U.S., we serve.believe it is important to partner with customers in their efforts to keep their families safe.

OVERVIEWOF KROGER’S BUSINESSTRONG SMTRATEGY

Our results in 2006 clearly demonstrate that our Customer 1st strategy is working. We are focused on listening to our Customers and offering 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.

     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.

     This approach enables Kroger to continue to deliver on all three elements of our financial “triple 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 is 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 overall results, the needs of the business and the 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 exceed 3.5%. Each quarter we raised that target to reflect our sales momentum throughout the year.

     Total sales for the year increased 9.2% to $66.1 billion. After adjusting for the extra week in fiscal 2006, total sales increased 7.0% over fiscal 2005.

EARNINGS PERARKET SHARE GROWTHAINSOF 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 a result of the retail food industry evolves, one certainty remains:efforts of associates in every area of our business, Kroger made significant gains in market share in 2008. In the environment42 major markets we serve, Kroger gained 61 basis points of additional market share, according to the internal methodology we use to estimate market share. This is the fourth consecutive year Kroger has achieved significant market share gains. Over the past four years combined, Kroger’s share in which we operate continues to be intensely competitive. We remain focused on our key strengths, which enable us to listen and respondmajor markets has increased an outstanding 225 basis points.

These market share gains are a direct result of our associates’ commitment to our Customers.Customer 1st strategy and they demonstrate that Kroger’s competitive advantages include:long-term strategy is working.

  • our people – a team of talented professionals focused on listening and responding to Customers;
  • a high-quality asset base with leading market shares

         As population growth continues 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 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.

STRONGMARKETSHARE

     Kroger serves customers in 44 major markets – regions where we operate, nine or more stores. In 2006, Kroger held the No.1 or No. 2 market share position in 38 ofwe intend to continue to grow Kroger’s business by maintaining our 44 markets. Many of these are the largest and fastest-growing metropolitan areas in the country.

     Kroger’s overall market share in these 44 markets increased approximately 65 basis points during 2006, on a volume-weighted basis. This growth in fiscal 2006 is even more impressive considering it follows ourexisting strong market share gainsand by building on additional opportunities for sales growth. We calculate that approximately 45% of the share in the previous year. In 2005, Kroger’s overallmarkets – as much as $100 billion – is held by competitors who do not have Kroger’s economies of scale. We estimate that the 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.

GEOGRAPHICDIVERSITYANDMULTIPLEFORMATS

     Kroger operates food stores in 31 states under two dozen local banners. Our family of stores includes 2,171 combination food and drug stores, 145 price-impact warehouse stores, 122 multi-department stores and 30 Marketplace stores.

     Our combination stores employ a flexible format with products tailored to meet the specific needsthose competitors has declined about 1% during each of the neighborhood. More than 600 of our combination stores include fuel centers.

     The Marketplace format is a smaller version of the multi-department stores operated under the Fred Meyer banner. Marketplace stores contain a full grocery store and pharmacy along with expanded general merchandise departments.

     Kroger also operates 779 convenience stores, 412 fine jewelry stores and 42 food processing plants.

last four years. We continue to look for ways to capture additional market share.

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CUSTOMEROMMUNITY ISNSIGHTUPPORT

     OverAt Kroger, we consider it a privilege to support the past several years,communities where our customers and associates live and work. We focus our efforts on supporting hunger relief, health and wellness initiatives, and local schools and grassroots organizations. In 2008, our company, foundation, associates and customers donated more than $152 millionin Kroger’s name. Every year, Kroger has accumulated a substantial databaseproudly recognizes associates who make outstanding contributions to their communities. The winners of The Kroger Co. Community Service Award for 2008 are listed following this letter.

     The progress our associates made with one initiative in particular paid off in an extremely powerful way last year. Kroger’s Perishable Donations Partnership, which allows stores to donate perishable food that provides valuable insight into the shopping behaviorsis still safe and nutritious to eat but can no longer be sold in stores, expanded to include more than half of our Customers through our store loyalty card programs. More than 20 million households actively use onestores last year.

     Thanks to the efforts of our store loyalty cards.

     Kroger’s partnership with dunnhumby, a London-based leaderassociates, our family of stores contributed nearly 14 million pounds of fresh meat, dairy products, fruits, and vegetables to local food banks in customer insightthe communities we serve. This fresh meat and data management, allows usproduce provides much-needed protein and nutritional value to design tailored offerings for each Customer segment.food banks that struggle to supplement the dry goods and canned foods they typically receive.

     Our Customer loyalty data providesperishable donation program helps feed hungry families and is gratifying for our associates, who don’t like to throw away edible food. It’s also good for Kroger and the environment because it helps us reduce waste. We continue to add new stores to the program and hope to have 85% of our stores donating perishable food by the end of 2009. Our goal is to deliver 25 to 30 million pounds of perishable food annually.

SUSTAINABILITY

     We continued to make progress in our sustainability efforts throughout the year by partnering with a unique advantagecustomers to reduce waste. Together, we recycled more than 16 million pounds of plastic. In addition, associates in every area of our business helped recycle nearly 1 billion pounds of corrugated cardboard and paper last year.

     Customers have responded particularly well to our efforts to encourage them to use more reusable bags. Our family of stores sold more than six million reusable bags last year as we seek opportunitiesthese colorful, low-cost bags become household staples with multiple uses. Every reusable bag has the potential to understandsave 1,000 plastic bags over its lifetime.

     Our efforts to reduce energy use in our stores, plants, warehouses and meetoffices have also yielded terrific results. Since 2000, Kroger associates have saved enough energy to power every single-family home in Seattle for an entire year. We continue to look for ways to reduce waste and save energy in all areas of our Customers’ evolving needs and expectations.business.

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.

LOOKING AHEAD TOTO 20072009

     Our outlook for 2009 remains optimistic. At the same time, we are cautious as we help our customers navigate through today’s challenging economy. Kroger is in a strong position to sustain growth and generate value for shareholders even in this challenging economy. We continue to face competitive challenges on all fronts. Consumers today have many choices. Weset financial objectives we believe we have the right approach – and the right team of people – to meet the 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 $1.65 to deliver a double-digit return for Kroger shareholders in 2007.

     Our forecast of Kroger’s growth rate assumes a stable labor environment. The Company has a number of labor negotiations this year covering Associates in 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 allare achievable in order to invest in our businesscontinue to create career opportunitiesa strong return for existing – and future Associates.

COMMUNITY ACTIVITIES

     Kroger has a long tradition of supporting the communities where our Associates and Customers live and work. More than $150 million was contributed in Kroger’s name during 2006, through donations from our Customers, Associates and the Company, both directly and through our foundations.

shareholders.

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     Kroger has been supporting the fightWe expect full-year identical supermarket sales growth of 3% to end hunger4%, without fuel, in America for more than 25 years.fiscal 2009. We believe strong identical sales growth and operating margin expansion – both excluding fuel sales – will produce full-year 2009 earnings of $2.00 to $2.05 per diluted share. In 2006,addition, we were selected “Retailer of the Year”expect Kroger’s dividend to enhance total shareholder return by the food banks of the America’s Second Harvest network. This is the fourth time in six 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.over 1%.

     Last year,Our company’s Customer 1st strategy, which is unlike that of any other operator in our family of stores contributed more than 30 million pounds of foodindustry, continues to be a powerful competitive advantage.  Through our strategy, the Kroger team consistently delivers near-term results for shareholders and other productscontinues to food banks servinginvest in 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 somefuture growth of our Associates who make outstanding contributionscompany.

     Customers rely on Kroger because they trust us to their communities.deliver low prices, great quality products, friendly service and a pleasant shopping experience. We congratulate the winners of The Kroger Co. Community Service Award for 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

     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.

     Since 2000, Kroger has reduced our energy consumption by over 20%, or more than 1.3 billion kilowatt-hours, across all of our square footage. That’s enough energy to light, heat and cool every house in Nashville, Tennessee for one year.

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     We have learned that one of 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 implement store-specific energy reduction plans. We also have programs in place to train and educate all of our Associates about good energy habits.

     Our ongoing effortsunderstand what customers need in this important area are supported throughout the Company.environment better than others and we offer an overall value proposition that meets their changing needs. We look forward to continuing to deliver value to our customers, associates and shareholders in 2009.

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 ourthe entire Company, we extend our appreciation and congratulations to Richard Tillman, who retired after a 42-year career with Kroger. Mr. Tillman joined Kroger as a part-time food store clerk and held a variety of positions with increasing responsibility throughout his career, including President of Kroger’s Delta division.

DELIVERING IMPROVED SERVICE, SELECTIONAND VALUE

Kroger’s Customer 1st strategic plan served Customers, Associates and Shareholders well in 2006. We believe it will continue to enable the Company to achieve our objectives in 2007 and beyond.

     We are very pleased with Kroger’s growth and performance last year. We know there is much hard work ahead and we know our Associates are up to the challenge.

     We must continue to listen closely to our Customers and put their expectations and needs first – in every area of our business, every day – to achieve sustainable, profitable sales growth and continue to create value for our Shareholders.

     Thankteam, thank you for your continued supporttrust and trust.support.


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

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    Congratulations to the winners of The Kroger Co. Community Service Award for 2008:

Atlanta Bert Ratliff 
Central Betty Davenport 
Cincinnati Habitat for Humanity Team 
Kirk Richardson 
City Market Rick Lopez 
Delta Hattie Spann 
Dillon Stores Danyelle DeuFriend 
Fred Meyer Amy Jacobs 
Fry’s Paul Bennewitz 
Columbus Susie Chrisman 
Michigan Brenda Hibbs 
Jay C Stores Peggy Drees 
King Soopers Janie Tow 
Mid-Atlantic Larry Keith Wells 
Mid-South Teresa McGrew 
QFC Jennifer Reynolds 
Ralphs Hiroko Eddow 
Food 4 Less Marcus Charles 
Smith’s Richard Kennedy 
Southwest Galveston Store Team 
Pace Dairy of Indiana Irene Skelton 
Bluefield Beverage Cecelia Latimer 
Vandervoort Dairy Derryl Dears 
Country Oven Bakery Billy Taylor 
General Office Rob Rouse 
Convenience Stores Dora Bradley – Loaf n Jug 

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NOTICEOF ANNUAL MEETINGOF SHAREHOLDERS

Cincinnati, Ohio, May 15, 20072009

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, 12431241 Elm Street, Cincinnati, Ohio 45202, on June 28, 2007,25, 2009, at 11 A.M.a.m., E.D.T.,eastern time, for the following purposes:

1.

To elect the directors for the ensuing year;

     
2.To consider, act upon and approve 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 2007;2009;

 
5.3.

To act upon atwo shareholder proposal,proposals, if properly presented at the annual meeting; and

 
6.4.

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 30, 200727, 2009 will be entitled to vote at the meeting.

ATTENDANCE

     Only shareholders and persons holding proxies from shareholders may attend the meeting. PleasePlease bring 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 portionnotice of the voting instruction formmeeting or your proxy card that was mailed to you receive from your brokeras this 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, ORBY TELEPHONE. IF YOU HAVE ELECTED TO RECEIVE PRINTED MATERIALS, YOU MAY SIGN AND DATE THE ENCLOSED PROXY AND MAIL IT IN THE ENCLOSED SELF-ADDRESSED ENVELOPE.ENVELOPE PROVIDED. 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)www.thekrogerco.com, at 11 a.m., E.D.T.eastern time.

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


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PROXY STATEMENT

Cincinnati, Ohio, May 15, 20072009

     The accompanyingYour 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 $12,500.$15,000. Proxies may be solicited personally, by telephone, electronically via the Internet, or by mail.

     David B. Dillon, Steven R. Rogel, and John T. LaMacchia and Bobby S. Shackouls, 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 givenfurnished to shareholders on May 15, 2007.2009.

     As of the close of business on April 30, 2007,27, 2009, our outstanding voting securities consisted of 710,217,716652,371,396 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. Shareholders may not cumulate votes in the election of directors. At the 2006 annual meeting, shareholders voted to amend Kroger’s Articles of Incorporation to eliminate cumulative 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, Approval of Kroger Cash Bonus Plan—Approval 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 abstentions will have no effect on this proposal.

Item No. 3, 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. 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 No. 5,Nos. 3 and 4, Shareholder proposalProposals— – The affirmative vote of a majority of shares participating in the voting on thisa shareholder proposal is required for its adoption. Proxies will be voted AGAINST this proposalthese proposals unless the Proxy Committee is otherwise instructed on a proxy properly executed and returned. Abstentions and broker non-votes will have no effect on this proposal.these proposals.

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PROPOSALSTO SHAREHOLDERS

ELECTIONOF DIRECTORS

(ITEM NO. 1)

     The Board of Directors, as now authorized, consists of 16 members divided into two classes. Although 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 2008.15 members. All other members are to be elected at the annual meeting to serve until the annual meeting in 2008,2010, or until their successors have been elected by the shareholders or by the Board of Directors pursuant to Kroger’s Regulations, and qualified. 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, 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


 Professional Director
Name     Occupation (1)     Age     Since
NOMINEES FORDIRECTOR FORTERMS OFOFFICE
CONTINUINGUNTIL2010
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 AT&T Inc. He is a member of the Corporate Governance and Public Responsibilities Committees.

661991
 

 

   

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 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.

 491999
   
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.

581995

8



   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

 Professional Director
Name     Occupation (1)     Age     Since
Susan J. Kropf 

Ms. Kropf was President and Chief Operating Officer of Avon Products Inc., from 2001 until her retirement in December 2006. She joined Avon in 1970. Prior to her most recent assignment, Ms. Kropf had been Executive Vice President and Chief Operating Officer, Avon North America and Global Business Operations from 1998 to 2000. From 1997 to 1998 she was President, Avon U.S. Ms. Kropf was a member of Avon’s Board of Directors from 1998 to 2006. She currently is a member of the Board of Directors of Coach, Inc., MeadWestvaco Corporation, and Sherwin Williams Company. Ms. Kropf is a member of the Audit and Public Responsibilities Committees.

602007
 

 

   

John T. LaMacchia

Mr. LaMacchia served as Chairman of the Board of Tellme Networks, Inc., a provider of voice application networks from September 2001 to May 2007. From September 2001 through December 2004 he was also Chief Executive Officer of Tellme Networks. From May 1999 to May 2000 Mr. LaMacchia was Chief Executive Officer of CellNet Data Systems, Inc., a provider of wireless data communications. From October 1993 through February 1999, he was President and Chief Executive Officer of Cincinnati Bell Inc. Mr. LaMacchia is chair of the Compensation Committee and a member of the Corporate Governance Committee.

 671990
   
David B. Lewis

Mr. Lewis is Chairman and Chief Executive Officer of Lewis & Munday, a Detroit based law firm with offices in Washington, D.C., Seattle and Hartford. 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.

642002
 

 

   

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.

 542003
   
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.

482003
 

 

   

Jorge P. Montoya

Mr. Montoya was 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. He is chair of the Public Responsibilities Committee and a member of the Compensation Committee.

 622007

9



   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

 Professional Director
Name     Occupation (1)     Age     Since
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 Compensation and Corporate Governance Committees.

551997
 

 

   

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 through 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.

 642003
   
Steven R. Rogel

Mr. Rogel was elected Chairman of the Board of Weyerhaeuser Company in 1999 and was President and Chief Executive Officer and a director thereof from December 1997 to January 1, 2008 when he relinquished the role of President. He relinquished the CEO role in April of 2008 and retired as Chairman as of April 2009. Before that time Mr. Rogel was Chief Executive Officer, President and a director of Willamette Industries, Inc. He 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. Mr. Rogel is a director of Union Pacific Corporation. He is a member of the Corporate Governance and Financial Policy Committees.

661999
 

 

   

James A. Runde

Mr. 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.

 622006
   
Ronald L. Sargent

Mr. 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 vice chair of the Audit Committee and a member of the Public Responsibilities Committee.

532006

10



   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

 Professional Director
Name     Occupation (1)     Age     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 has been appointed by Kroger’s Board to serve as Lead Director. Mr. Shackouls is chair of the Corporate Governance Committee and a member of the Audit Committee.

581999
___________________

   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.

1211



INFORMATIONCONCERNINGTHEBOARDOFDIRECTORS

COMMITTEESOFTHEBOARD

     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 2006,2008, the Audit Committee met nineseven times, the Compensation Committee met four times, and the Corporate Governance Committee met fourtwo times. Committee memberships are shown on pages 8 through 1211 of this Proxy Statement. The Audit Committee reviews financial reporting and accounting matters pursuant to its charter 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;Board, seeks out qualified candidates for the Board;Board, and reviews the performance of Kroger, the CEO,Board, and along with the Board.other independent board members, the CEO.

     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 2008,2010, 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, 2008.2010. 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, includingbusiness 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 issheis capable, including regular attendance and participation at Board and committee meetings, and preparationandpreparation for all meetings, including review of all meeting materials provided in advance of themeeting; and
     
  • Ability to understand the perspectives of Kroger’s customers, taking into consideration the diversity ofdiversityof 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.

1312



     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.thekrogerco.comwww.thekrogerco.com. Shareholders may obtain a copy of theGuidelinesby making a written request to Kroger’s Secretary at our executive offices.

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)303A.02 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.

LEAD DIRECTOR

     The Lead Director presides over all executive sessions of the non-management directors;directors, serves as the principal liaison tobetween the non-management directors;directors and management, 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 chair of the Corporate Governance Committee is designated as the Lead Director.

AUDIT COMMITTEE EXPERTISE

     The Board of Directors has determined that David B. Lewis, and Susan M. Phillips bothand Ronald L. Sargent, all 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.

CODEOF 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.thekrogerco.com.www.thekrogerco. com. Shareholders may obtain a copy of thePolicyby making a written request to Kroger’s Secretary at our executive offices.

14



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

13



(800-689-4609) or email address (helpline@kroger.com) established by the Board’s Audit Committee. The concerns are investigated by Kroger’s Vice President of Auditing and reported 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 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.

ATTENDANCE

     The Board of Directors met sixseven times in 2006.2008. During 2006,2008, 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. Eleven of the thirteen All fifteenmembers of the Board then in office attended last year’s annual meeting.

1514



COMPENSATION DISCUSSIONAND ANALYSIS

EXECUTIVE COMPENSATION – GENERAL PRINCIPLES

     The Compensation Committee of the Board has the primary responsibility for establishing the compensation of Kroger’s executive officers, including the named executive officers who are identified in the Summary Compensation tableTable below, with the exception of the Chief Executive Officer. The Committee’s role regarding the CEO’s compensation is to make recommendations to the independent members of the Board; those independent Board members establish the CEO’s compensation.

     The Committee’s philosophy on compensation generally applies to all levels of Kroger management.That approach It requires Kroger to:

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

     The following discussion and analysis addresses the compensation of the named executive officers.officers, and the factors considered by the Committee in setting compensation for the named executive officers and making recommendations to the independent Board members in the case of the CEO’s compensation. Additional detail is provided in the compensation tables and the accompanying 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 assureensure that the officers work within the framework ofachieve Kroger’s long-term strategic objectives. In developing compensation programs and amounts to meet these objectives, the Committee exercises restraintjudgment to assureensure 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 compensationcompensationfor the named executive officers on tally sheets. The review includes an assessment for each officer,including the CEO, of salary; performance-based cash compensation, or bonus;bonus (both annual and long-term); equity and other long-term incentive compensation; accumulated realized and unrealized stock optionstockoption gains and restricted stock values; the value of any perquisites; retirement benefits; severance benefitsseverancebenefits available under The Kroger Co. Employee Protection Plan; and earnings and payouts availableunder Kroger’s non-qualifiednonqualified deferred compensation program.
     
  • Considered internal pay equity at Kroger. The Committee is aware of reported concerns at other companiesothercompanies regarding disproportionate compensation awards to chief executive officers. The CommitteeTheCommittee has assured itself that the compensation of Kroger’s CEO and that of the other named executivenamedexecutive officers bears a reasonable relationship to the compensation levels of other executive positionsexecutivepositions at Kroger.Kroger taking into consideration performance and differences in responsibilities.

1615



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

ESTABLISHING EXECUTIVE COMPENSATION

     The independent members of the Board have the exclusive authority to determine the amount of the CEO’s salary; the bonus levelpotential for the CEO; the nature and amount of any equity awards made to the CEO; and any other compensation questions related to the CEO. In setting the “bonus level”annual bonus potential 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.management, including the named executive officers. 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 as well aspotential and the percentage of bonus paid.

     The Committee performs the same function and exercises the same authority as to the other named executive officers. The Committee’s annual review of compensation for the named executive officers includes the following:

  • A detailed report, by officer, that describes current compensation, the value of equity compensation previouslycompensationpreviously awarded, the value of retirement benefits earned, and any severance or other benefitspayable upon a change of control.
     
  • An internal equity comparison of compensation at various senior levels. This current and historical analysishistoricalanalysis is undertaken to assureensure that the relationship of CEO compensation to other senior officercompensation, and senior officer compensation to other levels in the organization, is equitable.
     
  • A report from the Committee’s compensation consultant (described below) “benchmarking” named executivecomparing namedexecutive officer and other senior executive compensation with that of other companies, primarilyour competitors, to assureensure 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 levelbonuspotential, and equity awards for each of the senior officers including the other named executive officers.executiveofficers. The CEO’s recommendation takes into consideration the objectives established by and the reportsthereports received by the Committee as well as his assessment of individual job performance andcontribution 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 to advise the Committee in the design of compensation for executive officers. While the parent and affiliated companies of Mercer Human Resource Consulting perform other services for us, the Committee has found that the consultant is independent because (a) he was first engaged by the Committee before he became

16



associated with Mercer; (b) he works exclusively for the Committee and not for our management; and (c) he does not benefit from the other work that Mercer performs for Kroger; and (d) neither the consultant nor the consultant’s team perform any other services on behalf of Kroger.

     The consultant conducts an annual competitive assessment of 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 2006,2008, the group consisted of:

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

This peer group is the same group as that used in 2007.

     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.used over time. 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.

     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 has 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

17



SALARY

     We provide our named executive officers and other employees a fixed amount of cash compensation—salary—compensation – salary – for the executive’stheir work. Salaries for named executive officers (with the exception of the CEO) are established each year by the Committee. The CEO’s salary is established by the independent directors. Salaries for the named executive officers typically arewere reviewed in May, of each year.as has been customary for the past several years.

     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)Committee and the independent directors)
     
  • Benchmarking with comparable positions at peer group companies
     
  • Tenure with Kroger
     
  • Relationship with the salaries of other executives at Kroger.Kroger

     In 2006,The assessment of individual contribution is based on a subjective determination, without the use of performance targets, in the following areas:

  • Leadership
  • Contribution to the officer group
  • Achievement of established objectives, to the extent applicable
  • Decision-making abilities
  • Performance of the areas or groups directly reporting to the officer
  • Increased responsibilities
  • Strategic thinking
  • Furtherance of Kroger’s core values

     The named executive officers received salary increases, to the amounts shown below, following the annual review of their compensation in May.

Salaries   Salaries
2005     2006 2006     2007     2008
David B. Dillon  $1,100,000  $1,150,000 $1,150,000$1,185,000$1,220,000
J. Michael Schlotman  $450,000   $505,000 $505,000$525,000$545,000
W. Rodney McMullen  $773,000  $805,000 $805,000 $833,000 $860,000
Don W. McGeorge  $773,000  $805,000 $805,000$833,000$860,000
Donald E. Becker  $540,000  $575,000 $575,000$600,000$620,000

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

PERFORMANCE-BASEDANNUAL CASH BONUS

     A large percentage of our employees at all levels, including the named executive officers, are eligible to receive ana performance-based annual performance-based cash bonus based on Kroger or unit performance. The Committee establishes bonus potentials for each executive officer, other than the CEO whose bonus potential is established by the 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.

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     The Committee considers several factors in making its determination or recommendation as to bonus potentials. First, the individual’s level within the organization is a factor in that the Committee believes that more senior executives should have a greater part of their compensation dependantdependent 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 dependantdependent 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 annual cash bonus potential in effect at the end of the year for each named executive officer for 2005 and 2006 is shown below. Mr. Becker’s bonus potential was increased because ofduring 2006 to reflect an increase in salary and responsibility. The annual cash bonus potentials for Messrs. Schlotman, McMullen, and McGeorge were increased during 2007 based on an analysis performed by the Committee’s independent consultant who concluded that their bonus potentials should be increased to be competitive and from an internal equity point of view. Actual bonus payouts are prorated to reflect changes to bonus potentials during the year.

Bonus   Annual Bonus Potential
2005     2006 2006     2007     2008
David B. Dillon  $1,500,000  $1,500,000 $1,500,000$1,500,000$1,500,000
J. Michael Schlotman  $450,000   $450,000 $450,000$500,000 $500,000
W. Rodney McMullen  $950,000  $950,000 $950,000 $1,000,000$1,000,000
Don W. McGeorge  $950,000  $950,000 $950,000$1,000,000$1,000,000
Donald E. Becker  $525,000 $550,000 $550,000$550,000$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 2006,2008, thirty percent of bonus was earned based on an identical sales target;target for Kroger’s supermarkets and other business operations; 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 performance of new capital projects compared to their budgets. Targets in all cases allowOver time the Committee has placed an increased emphasis on the strategic plan by making the target more difficult to achieve. The bonus plan allows for minimal bonus to be earned at relatively low levels to provide incentive for achieving even higher levels of performance. The

     Following the close of the year, the Committee reviewed Kroger’s performance against the identical sales, EBITDA, strategic plan and capital projects objectives and determined the extent to which Kroger fell short of, met, or exceededachieved those objectives. Kroger’s EBITDA for 2008 was $4.088 billion, exceeding the targetstarget established in each of these areasby the Committee at the beginning of 2006 determined the percentageyear for 100% payout for that metric. Kroger’s identical sales for 2008 were 4.9%, also exceeding the target for 100% payout of eachthat metric. As a result of the Company’s excellent performance when compared to the targets established by the Committee, and based on the business plan adopted by the Board of Directors, the named executive officer’sofficers earned 104.948% of their bonus potential paidpotentials.

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     The 2008 targets established by the Committee for 2006.annual bonus amounts based on identical sales and EBITDA results, the actual 2008 results, and the bonus percentage earned in each of the four components of named executive officer bonus, were as follows:

     Targets          
ComponentMinimum     100%ResultAmount Earned
Identical Sales 3.0%4.0%4.9%43.397%
EBITDA$3.760 Billion$4.065 Billion$4.088 Billion30.518% 
Strategic Plan*      20.790%
Capital Projects* 10.243%
 104.948%
____________________

*

The Strategic Plan and Capital Projects components also were established by the Committee but are not disclosed as they are competitively sensitive.

     In 2006,2008, as in all years, the Committee retained discretion to reduce the bonus payout for named executivesexecutive officers if the Committee determined for any reason that the 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, EBITDA, strategic plan and capital projects objectives. The Committee made one adjustment that reduced the bonuses of the named executive officers by less than one percent. The Committee determined that income from the sale of certain assets should not be included in EBITDA for purposes of the bonus calculation. The independent members of the Board made the same adjustment, resulting in the same reduction of bonus, for the CEO. No other adjustments were made. As a result, each ofmade to the named executive officers earned 141.118% of their bonus potentials.payout or the targets during 2008.

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     The percentage paid for 20062008 represented and resulted from an extraordinaryexcellent 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% 
 Annual Cash Bonus 
       Fiscal Year              Percentage
2008104.948%
2007128.104% 
2006141.118%
2005132.094% 
200455.174% 
200324.100%
20029.900%
200131.760%
200080.360%
1999122.130%

     The actual amounts of annual performance-based cash bonuses paid to the named executive officers for 20062008 are shown in the Summary Compensation tableTable under the heading “Non-Equity Incentive Plan Compensation.” These amounts represent the bonus potentials for each named executive officer multiplied by the percentage earned in 2006.2008. In no event can any participant receive a performance-based annual cash bonus in excess of $5,000,000. Beginning with the case2009 annual cash bonus, the maximum amount that a participant, including each named executive officer, can earn is further limited to 200% of Mr. Becker, the bonusparticipant’s potential was adjusted during 2006, and the amount he earned was based on a pro-rated bonus potential.amount.

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PERFORMANCE-BASED LONG-TERM CASH BONUS

     After reviewing executive compensation with its 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 developed 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:advances its strategic plan by:

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

     The 2006 plan consists of two components. The firstphase-in component measured improvements through fiscal year 2007. The other component measures the improvements through fiscal year 2009. The second, or phase-in component, measures the improvements through fiscal year 2007. Actual payouts will beare based on the degree to which improvements are achieved, and will beare awarded in increments based on the participant’s salary at the end of fiscal year 2005. Participants receive a 1% payout for each point by which the performance in the key categories increases, and a 0.25% payout for each percentage reduction in operating costs. The Committee administers the plan and determines the bonus payout amounts based on achievement of the performance criteria. No amounts have yet beenTotal operating costs as a percentage of sales, excluding fuel, at the commencement of the 2006 plan were 28.78%, and at the end of the phase-in period were 27.89%. Combining this operating cost improvement with our performance in our key categories resulted in payouts for the phase-in component of 36.25% of the participant’s annual salary in effect at the end of fiscal year 2005.

     After reviewing an analysis conducted by its independent compensation consultant in 2007, the Committee determined that continuation of the long-term cash bonus was necessary in order for long-term compensation for the named executive officers to be competitive and to continue to focus the officers on achieving Kroger’s long-term business objectives. As a result, the Committee adopted a 2008 long-term bonus plan under which bonuses are earned under this plan.based on the extent to which Kroger advances its strategic plan by:

  • improving its performance in four key categories, based on results of customer surveys;
  • reducing total operating costs as a percentage of sales, excluding fuel; and
  • improving its performance in eleven key attributes designed to measure associate satisfaction andone key attribute designed to measure how Kroger’s focus on its values supports how associates dobusiness, based on the results of associate surveys.

     The 2008 plan measures improvements through fiscal year 2011. Participants receive a 1% payout for each point by which the performance in the key categories increases, a 0.25% payout for each percentage reduction in operating costs, and a 1% payout based on improvement in associate engagement measures. Total operating costs as a percentage of sales, excluding fuel, at the commencement of the 2008 Plan were 27.89%. Actual payouts are based on the degree to which improvements are achieved, and will be awarded based on the participant’s salary at the end of fiscal year 2007. In no event can any participant receive a performance-based long-term cash bonus in excess of $5,000,000.

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EQUITY

     Awards based on Kroger’s common stock are granted periodically 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 2006,2008, Kroger granted 3,233,0903,533,505 stock options to approximately 6,6526,850 employees, including the named executive officers, under one of Kroger’s long-term incentive plans. The options permit the holder to purchase Kroger common stock at an option price equal to the tradingclosing price of Kroger common stock on the date of the grant. Historically options could be granted at any regularly scheduled meeting of the Committee.In 20072008 the Committee adopted a policy of granting options only onat one of the four Committee meetings conducted in the same week following Kroger’s public release of its quarterly earnings results.

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     Kroger’s long-term incentive plans also provide for other equity-based awards, including restricted stock. During 20062008 Kroger awarded 2,225,8332,515,752 shares of restricted stock to 14,240approximately 17,350 employees, including the named executive officers. This amount is comparable to last year but substantially higher than in past years, as in 2006 we began reducing the number of stock options granted and increasing the number of shares of restricted stock awards. 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 added cost.

     The Committee considers several factors in determining the amount of options and restricted shares awarded to the named executive officers or, in the case of the CEO, recommending to the independent directors the amount awarded. These factors include:

  • The compensation consultant’s benchmarking report regarding equity-based and other long-termcompensation awarded by our competitors;
     
  • The officer’s level in the organization and the internal relationship of equity-based awards withinKroger;
     
  • Individual performance; and
     
  • The recommendation of the CEO, for all named executive officers other than in the case of the CEO.

     The Committee has long recognized that the amount of compensation provided to the named executive officers through equity-based pay is often below the amount paid by our competitors. Lower equity-based awards for the named executive officers and other senior management permit a broader base of Kroger associates to participate in equity awards.

     Amounts of equity awards issued and outstanding for the named executive officers are set forth in the 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 named executive officers participate in one or more of these plans, as well as one or more excess plans designed to make up the shortfall in retirement benefits created by limitations under the Internal Revenue Code on benefits to highly compensated individuals under qualified plans. Additional details regarding retirement benefits available to the named executive officers can be found in the 20062008 Pension Benefits table and the accompanying narrative description that follows this discussion and analysis.

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     Kroger also maintains an executive deferred compensation plan in which some of the named executive officers participate. This plan is a nonqualified plan under which participants can elect to defer up to 100% of their cash compensation each year. Compensation deferred during a deferral year bears interest at the rate equal to Kroger’s cost of ten year debt, which is not a preferential rate of interest.debt. Deferred amounts are paid out only in cash, in accordance with a deferral option selected by the participant at the time the deferral election is made.

     We adopted The Kroger Co. Employee Protection Plan, or KEPP, during fiscal year 1988. That plan has been renewedwas amended and restated in 1993, 1998, and in 2003.2007. 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, as well as the continuation of other benefits as described in the plan, when an employee is actually or constructively terminated without cause within two years following

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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 9up to 2024 months’ salary and bonus. The actual amount is dependent upon pay level and other benefits.years of service. 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 vestedexercisable 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 2006,2008, the only perquisites provided were:

  • payments of premiums of life insurance, accidental death and dismemberment insurance and longterm disability insurance policies, and reimbursement of the tax effects of the life insurance andaccidental death and dismemberment insurance payments, and
  • reimbursement for the tax effects of participation in a nonqualified retirement plan.

     The life insurance benefit, along with reimbursement of the tax effect of that benefit, was offered beginning several years ago to replace a split-dollar life insurance benefit that was substantially more costly to Kroger. Currently, 164 active executives, including the named executive officers, and 64 retired executives, receive this benefit.

     In addition, the named executive officers are entitled to the following benefits that do not constitute perks as defined by the SEC rules:

  • personal use of Kroger aircraft, which officers may lease from Kroger, and pay the average variable costvariablecost of operating the aircraft, making officers more available and allowing for a more efficient use oftheir 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,time; and
     
  • reimbursementincidental personal use by Kroger’s CEO of up to $4,500a lunch club that is used primarily for financial planning services, which reimbursement has been discontinued in 2007.business purposes.

     The total amount of perquisites furnished to the named executive officers is shown in the Summary Compensation tableTable and described in more detail in footnote 54 to that table.

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SECTION 162(M)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 wouldis not be deductible.

     Although     Kroger’s bonus plans are not discretionary but rather rely on performance criteria, these plansand have not been approved by shareholders in the past.shareholders. 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 planplans 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.



 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.
COMPENSATIONCOMMITTEEREPORT 

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

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EXECUTIVECOMPENSATION

SUMMARYCOMPENSATIONTABLE

     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 yearyears 2006, consisted of 53 weeks.2007 and 2008:

SUMMARY COMPENSATION TABLESUMMARY COMPENSATION TABLESUMMARY COMPENSATION TABLE
      Change in    Change in
 ��    Pension   Pension
      Value and   Value and
      Nonqualified   Nonqualified
     Non-EquityDeferred   Non-EquityDeferred
   Stock  Option Incentive Plan  Compensation  All Other StockOptionIncentive Plan CompensationAll Other
Name and Principal  Salary Bonus Awards  Awards CompensationEarnings CompensationTotal SalaryBonus AwardsAwards Compensation Earnings CompensationTotal
Position Year  ($)  ($)  ($) ($) ($) ($) ($) ($)    Year   ($)   ($)   ($)   ($)   ($)   ($)   ($)   ($)
      (1) (1) (2) (3) (4)  (1)(1)(2)(3)(4)
David B. Dillon            2008$1,204,758— $1,517,177$1,373,516$1,574,220 $2,191,743$170,307$8,031,721
Chairman and CEO 2006  $1,155,991   —  $519,160 $3,311,870  $2,116,770  $1,008,309  $142,437 $8,254,537 2007$1,173,291—$849,743$3,739,167$2,320,310$922,570$168,543$9,173,624
2006$1,155,991—$519,160$3,311,870$2,116,770 $2,833,415$142,437$10,079,643
J. Michael Schlotman           2008$537,124—$130,386$260,890$524,740$292,491$41,135$1,786,766
Senior Vice             
President and CFO 2006 $ 499,099 — $97,835 $339,653 $635,031   $256,221  $31,819$1,859,658 
Senior Vice President2007$518,726—$83,207$312,554$788,864$202,069$38,690$1,994,110
and CFO2006$499,099—$97,835$339,653$635,031$331,079$31,819$1,934,516
W. Rodney McMullen           2008$848,686—$408,313$626,386$1,049,480$348,933$59,900$3,341,698
Vice Chairman 2006 $ 809,969 — $195,956 $794,327 $1,340,621  $360,184  $44,530$3,545,587 2007$823,948—$220,907$741,288$1,546,472$216,946$57,367$3,606,928
2006$809,969—$195,956$794,327$1,340,621$499,583$44,530 $3,684,986
Don W. McGeorge           2008$848,686—$408,313$798,434$1,049,480$723,203$107,203$3,935,319
President and COO 2006 $ 809,969 — $195,956 $811,355 $1,340,621  $698,272  $83,891$3,940,064 2007$823,948—$220,907$850,480$1,546,472$536,736$105,803 $4,084,346
2006$809,969—$195,956$811,355$1,340,621$904,099$83,891$4,145,891
Donald E. Becker           2008$611,712—$565,482$241,792$577,214 $902,879$120,668$3,019,747
Executive Vice            2007 $592,312 — $385,421$577,329 $900,322$657,628  $121,428$3,234,440
President 2006 $ 575,413 — $533,782 $576,090 $767,496  $711,031  $87,552$3,251,364 2006$575,413—$533,782 $576,090$767,496 $920,760$87,552$3,461,093
____________________
 
(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 consolidated financial statements in the Company’s Form 10-K filed with the SEC on April 4, 2007.March 31, 2009. Expense for 2008 excludes 6.5%6% estimate of cumulative forfeitures butfor both non-qualified stock options and restricted stock awards. This amount includes an acceleration of expense for options granted in 2008 to those reaching age 62 with at least 5 years of service during the option vesting period, and an acceleration of expense for options granted in 2007 and 2006 to those reaching age 55 with at least five5 years of service.service during the option vesting period. Options granted in years prior to 2006 are expensed over the vesting period without regard to age or years of service of the optionee. The named executive officers had no forfeitures in 2006.the years presented.
(2)The Compensation Committee awarded a 141.118% payoutNon-equity incentive plan compensation for 2008 consists of payments under an annual cash bonus program. In accordance with the terms of the 2008 performance-based annual cash bonus program, Kroger paid 104.948% of bonus potentials for the executive officers including the named executive officers,officers. These amounts were earned with respect to performance in accordance with the terms of the 2006 performance-based cash bonus program.2008, and paid in March 2009.

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(3)All amountsAmounts are attributable to change in pension value.value and preferential earnings on nonqualified deferred compensation. During 2006,2008, 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 oramount listed for Mr. McMullen includes preferential earnings on nonqualified deferred compensation.compensation in the amount of $2,329 and change in pension value in the amount of $346,604. The amounts for the remaining named executive officers represent only change in pension value.
(4)TheseThe following table provides the items and amounts include the reimbursement of life insurance premiumsincluded in the amounts of $69,435, $16,745, $22,221, $44,213 and $43,187All Other Compensation 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 plan2008:
               Accidental     Tax Effect of          Tax Effect of
Tax EffectDeath andAccidentalLong TermParticipation in
Lifeof LifeDismembermentDeath andDisabilityNonqualified
InsuranceInsuranceInsuranceDismembermentInsuranceRetirement
  Premium Premium Premium Premium Premium Plan
Mr. Dillon  $90,339$55,602$228$140—$23,998
Mr. Schlotman $21,599 $12,494$228 $132 —$6,682
Mr. McMullen $28,367$16,957 $228$136$2,778  $11,434
Mr. McGeorge $55,989$32,858$228$134—$17,994 
Mr. Becker $58,542$36,041$228$140$2,852$22,865

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The life insurance and payment of the tax effect of the premium payment by Kroger have been offered over the past several years to a large number of executives, including the named executive officers, in substitution for split-dollar life insurance coverage that was substantially more costly to Kroger. Excluded from the amounts shown 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 totalstable 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,Schlotman, calculated using the applicable terminal charge and Standard Industry Fare Level (SIFL) mileage rates, were $8,296$3,046 and $268,$793, respectively. The other named executive officers had no such imputed income for 2006.2008. Separately, we require that officers who make personal use of our aircraft reimburse us for the full amount of theaverage 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 Also excluded is the extent to which objectives establishedpro rata portion of annual membership dues at a lunch club used primarily for business purposes but used 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.occasion for personal use. That pro rata portion equals $147.

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GRANTSOF PLAN-BASED AWARDS

     The following table provides information about equity and non-equity awards granted to the named executive officers in 2006:2008:

2006 GRANTS OF PLAN-BASED AWARDS
    All All Other     
    Other Option     
  Estimated  Stock Awards:     
2008 GRANTS OF PLAN-BASED AWARDS2008 GRANTS OF PLAN-BASED AWARDS
  Possible Payouts EstimatedAwards: Number               Estimated Possible               
  Under Future Payouts  Number of Exercise   Grant Payouts UnderEstimated FutureExerciseGrant
  Non-Equity Under Equityof Securities or Base   Date Fair Non-EquityPayouts Underor BaseDate Fair
  Incentive Plan Incentive PlanShares Under- Price of  Closing  Value of Incentive PlanEquity IncentivePrice ofValue of
  Awards Awardsof Stock lying Option Market  Stock and AwardsPlan AwardsOptionStock and
Grant  Target Targetor Units Options Awards Price  Option GrantTargetTargetAwardsOption
Name Date     ($)    (#)    (#)     (#)     ($/Sh)    ($/Sh)     Awards  Date ($) (#) ($/Sh) Awards
  (1)   (4)   (5)
David B. Dillon 1/29/2006 $1,500,000          $1,500,000(1)
5/4/2006   120,000(2)      $2,392,800  $1,185,000(2)
5/4/2006   240,000(3)   $19.94 $20.04 $1,658,064 6/26/2008115,000(3)$3,290,150
6/26/2008225,000(4)$28.61$2,015,123
J. Michael Schlotman 1/29/2006 $ 450,000          $500,000(1)
$525,000(2)
5/4/2006    10,000(2)     $ 199,400  6/26/200810,000(3)$ 286,100
5/4/2006    20,000(3)    $19.94 $20.04 $ 138,172 6/26/200820,000(4)$28.61$ 179,122
W. Rodney McMullen 1/29/2006 $ 950,000           $1,000,000(1) 
5/4/2006    30,000(2)     $ 598,200 $833,000(2)
5/4/2006    60,000(3)   $19.94 $20.04 $ 414,516 6/26/200835,000(3)$1,001,350
6/26/200865,000(4) $28.61$ 582,147
Don W. McGeorge 1/29/2006 $ 950,000           $1,000,000(1) 
$833,000(2)
5/4/2006    30,000(2)     $ 598,200 6/26/200835,000(3) $1,001,350
5/4/2006    60,000(3)   $19.94 $20.04 $ 414,516 6/26/2008  65,000(4)$28.61$ 582,147
Donald E. Becker 1/29/2006 $ 543,868        $550,000(1)    
5/4/2006    12,500(2)     $ 249,250 $600,000(2)
5/4/2006    25,000(3)   $19.94 $20.04 $ 172,715 6/26/200842,500(3)$1,215,925
6/26/200825,000(4)$28.61$ 233,903
____________________

(1)These amounts representThis amount represents the bonus base or potential of the respective named executive officer under the Company’s 20062008 performance-based annual cash bonus program. AsBy the terms of this plan, no single cash bonus to a participant may exceed $5,000,000. The amount actually earned under this plan is shown in the Summary Compensation table, actual payout was 141.118%Table.
(2)This amount represents the bonus potential of the bonus base of each named executive officer for 2006.under the Company’s performance-based 2008 Long-Term Bonus Plan, a performance-based long-term cash bonus program. “Target” amounts equal the annual base salaries of the respective named executive officers as of the last day of fiscal year 2007. Bonuses are determined upon completion of the performance period as of fiscal year ending 2011. By the terms of this plan, no single cash bonus to a participant may exceed $5,000,000.
(2)(3)This amount represents the number of restricted shares awarded under The Kroger Co. 2005 Long- Term Incentive Plan.one of the Company’s long-term incentive plans.
(3)(4)This amount represents the number of stock options granted under The Kroger Co. 2005 Long-Term Incentive Plan.one of the Company’s long-term incentive plans.
(4)(5)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 wasis defined as the average of the high and low trading pricesclosing price of Kroger stock on the date of the grant.

27



The Compensation Committee of the Board of Directors, and the independent members of the Board in the case of the CEO, established bonus bases,potentials, shown in this table as “target” amounts, for the non-equity incentive plan awardsperformance-based annual cash bonus award for the named executive officers. Amounts were payable to the extent that performance met specific objectives established at the beginning of the year.performance period. 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, except restrictions on 30,000 shares awarded to Mr. Becker in 2008 lapse in 2011 if he is then in our employ. Any dividends declared on Kroger common stock are payable on restricted stock.

27



Non-qualified Nonqualified 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.four dates of board meetings conducted in the same week following Kroger’s public release of its quarterly earnings results.

OUTSTANDING EQUITYAWARDSATFISCAL YEAR-END

     The following table discloses outstanding equity-based incentive compensation awards for the named executive officers as of the end of fiscal year 2006.2008. 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 
OUTSTANDING EQUITY AWARDS AT 2008 FISCAL YEAR-ENDOUTSTANDING EQUITY AWARDS AT 2008 FISCAL YEAR-END
       Number or Payout Option AwardsStock Awards
  Equity   of Value of Equity
  Incentive   Unearned Unearned Incentive
  Plan Awards:  Market Shares, Shares, Plan Awards:Market
Number ofNumber ofNumber of  NumberValue of Units or Units or Number ofNumber ofNumber ofValue of
SecuritiesSecuritiesSecurities  of SharesShares or Other Other SecuritiesSecuritiesSecuritiesNumber ofShares or
UnderlyingUnderlyingUnderlying  or Units ofUnits of Rights Rights UnderlyingUnderlyingUnderlyingShares orUnits of
UnexercisedUnexercised UnexercisedOption Stock That  Stock That That That UnexercisedUnexercisedUnexercisedOptionUnits of StockStock That
OptionsOptionsUnearnedExerciseOptionHave NotHave Not Have Not Have Not OptionsOptionsUnearnedExerciseOptionThat HaveHave Not
(#)(#)OptionsPrice ExpirationVested Vested Vested Vested (#)(#)OptionsPriceExpirationNot VestedVested
Name     Exercisable    Unexercisable    (#)    ($)    Date    (#)    ($)     (#)     ($)      Exercisable     Unexercisable     (#)     ($)     Date     (#)     ($)
David B. Dillon            50,000$27.175/27/200972,000(9)$1,620,000
30,000    $13.44 5/15/2007120,000(11) $3,102,000    50,000$27.175/27/200988,000(10)$1,980,000
35,000    $22.23 4/16/2008      175,000$16.592/11/2010115,000(11)$2,587,500
   35,000(6) $22.23 4/16/2008      35,000(6)$16.592/11/2010
50,000    $27.17 5/27/2009   35,000$24.435/10/2011
  50,000(7)$27.17  5/27/2009     35,000(7)$24.435/10/2011
175,000    $16.59 2/11/2010    70,000 $23.005/9/2012 
  35,000(8)$16.59 2/11/2010     35,000(8)$23.00 5/9/2012 
35,000    $24.43 5/10/2011   210,000 $14.9312/12/2012 
   35,000(9)$24.43 5/10/2011   240,00060,000(1)$17.315/6/2014 
56,000  14,000(1)  $23.00 5/9/2012   180,000120,000(2) $16.395/5/2015 
  35,000(10)$23.00 5/9/2012   96,000144,000(3)$19.945/4/2016
168,000  42,000(2)  $14.93 12/12/2012   44,000176,000(4)$28.276/28/2017
120,000  180,000(3)  $17.31 5/6/2014   225,000(5)$28.616/26/2018 
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 
OUTSTANDING EQUITY AWARDS AT 2008 FISCAL YEAR-ENDOUTSTANDING EQUITY AWARDS AT 2008 FISCAL YEAR-END
       Number or Payout Option AwardsStock Awards
  Equity   of Value of Equity
  Incentive   Unearned Unearned Incentive
  Plan Awards:  Market Shares, Shares, Plan Awards:Market
Number ofNumber ofNumber of  NumberValue of Units or Units or Number ofNumber ofNumber ofValue of
SecuritiesSecuritiesSecurities  of SharesShares or Other Other SecuritiesSecuritiesSecuritiesNumber ofShares or
UnderlyingUnderlyingUnderlying  or Units ofUnits of Rights Rights UnderlyingUnderlyingUnderlyingShares orUnits of
UnexercisedUnexercised UnexercisedOption Stock ThatStock That That That UnexercisedUnexercisedUnexercisedOptionUnits of Stock Stock That
OptionsOptionsUnearnedExerciseOptionHave NotHave Not Have Not Have Not OptionsOptionsUnearnedExerciseOptionThat HaveHave Not
(#)(#)OptionsPrice ExpirationVestedVested Vested Vested (#)(#)OptionsPriceExpirationNot VestedVested
Name     Exercisable    Unexercisable    (#)    ($)    Date     (#)    ($)     (#)     ($)     Exercisable    Unexercisable    (#)    ($)    Date    (#)    ($)
J. Michael Schlotman               10,000$27.175/27/20096,000(9)$135,000
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   10,000$27.175/27/20098,000(10)$180,000
 50,000     $16.59 2/11/2010   10,000(6)$16.592/11/201010,000(11)$225,000
   10,000(8) $16.59 2/11/2010   10,000$24.435/10/2011
10,000     $24.43 5/10/2011   10,000(7)$24.435/10/2011
  10,000(9) $24.43 5/10/2011   20,000$23.005/9/2012
16,000  4,000(1)  $23.00  5/9/2012   10,000(8)$23.005/9/2012
  10,000(10) $23.00 5/9/2012   60,000$14.9312/12/2012
48,000   12,000(2)  $14.93 12/12/2012   32,0008,000(1)$17.315/6/2014
16,000  24,000(3)  $17.31 5/6/2014   24,00016,000(2)$16.395/5/2015
8,000  32,000(4)  $16.39 5/5/2015   8,00012,000(3)$19.945/4/2016
 20,000(5)  $19.94 5/4/2016   4,00016,000(4)$28.276/28/2017
20,000(5)$28.616/26/2018
W. Rodney McMullen         30,000$27.175/27/200918,000(9)$405,000
25,000    $13.44 5/15/200730,000(11) $775,500  30,000$27.175/27/200924,000(10)$540,000
25,000    $13.44 5/15/2007   125,000$16.592/11/201035,000(11)$787,500
30,000    $22.23 4/16/2008   25,000(6)$16.592/11/2010
  30,000(6) $22.23 4/16/2008   25,000$24.435/10/2011  
30,000    $27.17 5/27/2009    25,000(7)$24.435/10/2011 
  30,000(7) $27.17 5/27/2009   50,000 $23.005/9/2012
125,000    $16.59 2/11/2010   25,000(8)$23.005/9/2012
  25,000(8) $16.59 2/11/2010    150,000 $14.9312/12/2012
25,000    $24.43 5/10/2011   60,00015,000(1) $17.31 5/6/2014
  25,000(9) $24.43 5/10/2011   45,00030,000(2) $16.395/5/2015 
40,000  10,000(1)  $23.00 5/9/2012   24,00036,000(3) $19.945/4/2016
  25,000(10) $23.00 5/9/2012   12,00048,000(4)$28.276/28/2017
120,000  30,000(2)  $14.93 12/12/2012   65,000(5)$28.616/26/2018 
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




OUTSTANDING EQUITY AWARDS AT 2008 FISCAL YEAR-END
Option AwardsStock Awards
Equity
Incentive
Plan Awards:Market
Number ofNumber ofNumber ofValue of
SecuritiesSecuritiesSecuritiesNumber ofShares or
UnderlyingUnderlyingUnderlyingShares orUnits of
UnexercisedUnexercisedUnexercisedOptionUnits of Stock Stock That
OptionsOptionsUnearnedExerciseOptionThat HaveHave Not
(#)(#)OptionsPriceExpirationNot VestedVested
Name    Exercisable    Unexercisable    (#)    ($)    Date    (#)    ($)
Don W. McGeorge30,000$27.175/27/200918,000(9)$405,000
30,000$27.175/27/200924,000(10)$540,000
125,000$16.592/11/201035,000(11)$787,500
25,000(6)$16.592/11/2010
25,000$24.435/10/2011
25,000(7)$24.435/10/2011
50,000$23.005/9/2012
25,000(8)$23.005/9/2012
150,000$14.9312/12/2012
60,00015,000(1)$17.315/6/2014
45,00030,000(2)$16.395/5/2015
24,00036,000(3)$19.945/4/2016
12,00048,000(4)$28.276/28/2017
65,000(5)$28.616/26/2018
Donald E. Becker18,000$27.175/27/20097,500(9)$168,750
18,000$27.175/27/200910,000(10)$225,000
15,000(6)$16.592/11/201012,500(11)$281,250
 12,500$24.435/10/201130,000(12)$675,000
  12,500(7)$24.435/10/2011
26,667$23.005/9/2012  
13,333(8)$23.005/9/2012
80,000$14.9312/12/2012
32,0008,000(1) $17.315/6/2014
24,00016,000(2)$16.39 5/5/2015
10,00015,000(3)$19.945/4/2016
5,00020,000(4)$28.276/28/2017
25,000(5)$28.616/26/2018 
____________________

(1)Stock options vest on 5/9/2007.6/2009.
(2)Stock options vest in equal amounts on 12/12/2007.5/5/2009 and 5/5/2010.
(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,in equal amounts on 5/4/2009, 5/4/2010 and 5/4/2011.
(6)(4)Performance stockStock options vest in equal amounts on 10/16/2007 or earlier if performance criteria is satisfied prior to such date.6/28/2009, 6/28/2010, 6/28/2011 and 6/28/2012.
(7)(5)Performance stockStock options vest in equal amounts on 11/27/2008 or earlier if performance criteria is satisfied prior to such date.6/26/2009, 6/26/2010, 6/26/2011, 6/26/2012 and 6/26/2013.
(8)(6)Performance stock options vest on 8/11/2009 or earlier if performance criteria is satisfied prior to such date.
(9)(7)Performance stock options vest on 11/10/2010 or earlier if performance criteria is satisfied prior to such date.

30



(10)(8)Performance stock options vest on 11/9/2011 or earlier if performance criteria is satisfied prior to such date.
(11)(9)Restricted stock vests at the rate of 20%/year with vesting dates of 5/4/2007, 5/4/2008,in equal amounts on 5/4/2009, 5/4/2010 and 5/4/2011.
(12)(10)Restricted stock vests in equal amounts on 5/9/2007.6/28/2009, 6/28/2010, 6/28/2011 and 6/28/2012.
(13)(11)Restricted stock vests in equal amounts on 9/17/2007.6/26/2009, 6/26/2010, 6/26/2011, 6/26/2012 and 6/26/2013.
(14)(12)    Restricted stock vests as follows: 10,000 shares on 12/10/2007 and 30,000 shares on 12/8/2008.6/26/2011.

     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, 1998 and 1999 have vested.

OPTION EXERCISESAND STOCK VESTED

     The following table provides the stock options exercised and restricted stock vested during 2006.2008.

2006 OPTION EXERCISE AND STOCK VESTED
2008 OPTION EXERCISES AND STOCK VESTED2008 OPTION EXERCISES AND STOCK VESTED
Option AwardsStock AwardsOption AwardsStock Awards
Number ofValueNumber ofValue Number ofNumber of
Shares AcquiredRealized onShares AcquiredRealized on Shares AcquiredValue RealizedShares AcquiredValue Realized
on ExerciseExerciseon VestingVesting on Exerciseon Exerciseon Vestingon Vesting
Name(#)     ($)     (#)     ($)     (#)    ($)    (#)    ($)
David B. Dillon 30,000$247,95075,000$1,555,50035,000$76,84646,000$1,283,820
J. Michael Schlotman 18,000$148,70315,800$326,72568,000$670,4914,000 $111,760
W. Rodney McMullen 60,000$607,80050,000$1,037,000 60,000$93,93612,000$335,280
Don W. McGeorge 24,000$268,87450,000$1,037,00045,000  $127,60212,000$335,280
Donald E. Becker 66,000$686,68012,500$287,925111,000$1,053,577 35,000$951,800

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

31



PENSION BENEFITS

     The following table provides information on pension benefits as of 20062008 year-end for the named executive officers.

2006 PENSION BENEFITS
2008 PENSION BENEFITS2008 PENSION BENEFITS
 NumberPresentPaymentsNumberPresentPayments
 of YearsValue ofDuringof YearsValue ofDuring
 Credited Accumulated Last FiscalCredited Accumulated Last Fiscal
 ServiceBenefitYearServiceBenefitYear
NamePlan Name(#)     ($)     ($)     Plan Name    (#)    ($)    ($)
David B. Dillon The Kroger Consolidated Retirement Benefit Plan 11 $214,080 $0 The Kroger Consolidated Retirement Benefit Plan13$310,118$0
The Kroger Co. Excess Benefit Plan 11  $ 1,690,013 $0 The Kroger Co. Excess Benefit Plan13$3,646,372$0
Dillon Companies, Inc. Excess Benefit Pension Plan 20  $1,106,543 $0 Dillon Companies, Inc. Excess Benefit Pension Plan20$4,388,300$0
J. Michael Schlotman The Kroger Consolidated Retirement Benefit Plan 21 $280,755 $0 The Kroger Consolidated Retirement Benefit Plan23$351,953$0
The Kroger Co. Excess Benefit Plan23$1,219,657 $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 Consolidated Retirement Benefit Plan23$301,799$0
The Kroger Co. Excess Benefit Plan 21  $1,278,621 $0 The Kroger Co. Excess Benefit Plan23$2,246,547$0
Don W. McGeorge The Kroger Consolidated Retirement Benefit Plan 27 $426,158 $0 The Kroger Consolidated Retirement Benefit Plan29$540,529$0
The Kroger Co. Excess Benefit Plan29$4,058,060$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 Consolidated Retirement Benefit Plan34$951,438$0
The Kroger Co. Excess Benefit Plan 32  $1,982,339 $0 The Kroger Co. Excess Benefit Plan 34 $4,060,346$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, theirTheir benefits, therefore, 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(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).Code. 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 (base salary and annual bonus) 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

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  • benefits payable between ages 55 and 62 will be reduced by 1/3⅓ 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.

     The assumptions used in calculating the present values are set forth in Note 13 to the consolidated financial statements in the Company’s Form 10-K filed with the SEC on March 31, 2009. The discount rate used to determine the present values is 7%, which is the same rate used at the measurement date for financial reporting purposes.

NONQUALIFIED DEFERRED COMPENSATION

     The following table provides information on non-qualifiednonqualified deferred compensation for the named executive officers for 2006.2008.

2006 NONQUALIFIED DEFERRED COMPENSATION
2008 NONQUALIFIED DEFERRED COMPENSATION2008 NONQUALIFIED DEFERRED COMPENSATION
ExecutiveRegistrant AggregateAggregateAggregateExecutiveRegistrantAggregateAggregateAggregate
ContributionsContributions EarningsWithdrawals/Balance atContributions Contributions EarningsWithdrawals/Balance at
in Last FYin Last FY in Last FYDistributionsLast FYEin Last FYin Last FYin Last FYDistributionsLast FYE
Name ($)     ($)      ($)     ($)      ($)    ($)    ($)    ($)    ($)    ($)
David B. Dillon $0  $0 $36,923 $0 $523,545$0$0$41,838$0$604,569
J. Michael Schlotman $0  $0 $0 $0 $0$0 $0$0$0 $0
W. Rodney McMullen $97,578(1) $0  $193,796 $0 $2,797,375 $347,692(1)$0$275,083$0$4,157,956
Don W. McGeorge $0  $0 $13,362 $0 $165,313$0$0 $15,457 $0$195,107
Donald E. Becker $0  $0 $0 $0 $0 $0$0$0 $0$0
____________________

(1)    This

The amount wasof $97,692 is included in the executive’s 2008 base salary in the Summary Compensation table.Table. The amount of $250,000 represents the deferral of annual bonus earned in fiscal year 2007 and paid in March 2008. This amount is included in the Summary Compensation Table for 2007.

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     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 and long-term 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 20062008 compensation for non-employee directors. Employee directors receive no compensation for their Board service. Fiscal year 2006 consisted of 53 weeks.

2006 DIRECTOR COMPENSATION
2008 DIRECTOR COMPENSATION2008 DIRECTOR COMPENSATION
    Change in       Change in  
    Pension       Pension Value  
    Value and       and  
Fees   Nonqualified   Fees   Nonqualified  
Earned  Non-EquityDeferred   Earned  Non-EquityDeferredAll 
or PaidStock Incentive PlanCompensation All Other  or PaidStock OptionIncentive Plan CompensationOther 
in Cash     AwardsOptionCompensationEarnings Compensation  Total in Cash Awards AwardsCompensationEarningsCompensation Total
Name ($) ($) Awards($) ($) ($)  ($)  ($)     ($)    ($)     ($)    ($)    ($)    ($)    ($)
            (3)           (4)                 (13)     (14)       (2)(3)  (15) 
Reuben V. Anderson$85,482$54,988(5)$74,262(7) $0 $6,300  $108  $221,140$74,589$63,020(4)$77,792(6)$0—(13)$114 $215,515
Robert D. Beyer$88,430$54,988(5)$35,516(8) $0 N/A $108 $ 179,042$86,523$63,020(4)$43,733(6)$0$392(14)$114 $193,782
John L. Clendenin(1)$76,233$54,988(5)$74,262(7) $0$5,000 $108 $ 210,591$30,839—(5)$42,909(7)$0$151(14)$114 $74,013
Susan J. Kropf$84,086$38,563(4)$11,601(8)$0N/A $114 $134,364
John T. LaMacchia$88,430$54,988(5)$74,262(7) $0$7,900 $108 $ 225,688$86,523$63,020(4)$77,792(6)$0$3,208(13)$114 $230,657
David B. Lewis$98,594$54,988(5)$72,504(9) $0N/A $108 $ 226,194$96,465$63,020(4)$77,792(9)$0N/A $114 $237,391
Jorge P. Montoya $81,589$38,563(4) $13,646(8)$0N/A $114 $133,912
Clyde R. Moore$86,397$54,988(5)$38,017(10) $0$7,200 $108 $ 186,710$78,699 $63,020(4)$77,829(6)$0$7(13)$114 $219,669
Katherine D. Ortega$88,430$54,988(5)$74,262(7) $0$6,700 $108 $ 224,488
Katherine D. Ortega (1)$35,773 —(5)$42,909(10)$0N/A $114 $78,796
Susan M. Phillips$86,315$54,988(5)$30,057(11) $0N/A $108 $ 171,468$84,542$63,020(4)$109,299(11)$0$192(14)$114 $257,167
Steven R. Rogel$98,594$54,988(5)$74,262(8) $0N/A $108 $ 227,952$83,634$63,020(4)$77,792(6)$0 N/A  $114  $224,560
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
James A. Runde$74,589$63,020(4)$21,402(12)$0 N/A $114 $159,125
Ronald L. Sargent$84,530$63,020(4)$19,162(12) $0N/A $114 $166,826
Bobby S. Shackouls$86,397$54,988(5)$74,262(8) $0N/A $108 $ 215,755$98,265$63,020(4)$26,472(6)$0N/A $114 $187,871
____________________

(1)

Retired from the Board member as of September 1, 2006.on June 26, 2008.

(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 consolidated financial statements in the Company’s Form 10-K filed with the SEC on April 4, 2007.March 31, 2009. Expense for 2008 excludes 6.5%6% estimate of cumulative forfeitures but includes an acceleration of expense for options granted to those reaching age 55 with at least five years of service.restricted stock awards. The grant date fair value of the annual award of 2,5003,250 shares of restricted stock to each Board member on December 7, 200611, 2008 was $57,750.$84,955.

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(4)(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 consolidated financial statements in the Company’s Form 10-K filed with the SEC on April 4, 2007.March 31, 2009. Expense for 2008 excludes 6% estimate of cumulative forfeitures for non-qualified stock option awards. This amount includes an acceleration of expense for options granted in 2008 to those reaching age 62 with at least 5 years of service during the option vesting period, and an acceleration of expense for options granted in 2007 and 2006 to those reaching age 55 with at least 5 years of service during the option vesting period. Options granted in years prior to 2006 are expensed over the vesting period without regard to age or years of service of the optionee. The grant date fair value of the annual award of 5,0006,500 stock options to each Board member on December 7, 200611, 2008 was $40,017.$53,189.

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(5)(4)

Aggregate number of stock awards outstanding at fiscal year end was 3,7504,500 shares.

(5)

Amounts are negative, reflecting the reversal of the previously booked expense due to the director’s retirement prior to the end of the fiscal year.

(6)

Aggregate stock awards outstanding at fiscal year end was 2,500 shares.

(7)Aggregatenumber of stock options outstanding at fiscal year end was 41,00044,500 shares.

(8)(7)

Aggregate number of stock options outstanding at fiscal year end was 33,00038,000 shares.

(9)(8)

Aggregate number of stock options outstanding at fiscal year end was 25,00011,500 shares.

(10)(9)

Aggregate number of stock options outstanding at fiscal year end was 37,00036,500 shares.

(11)(10)

Aggregate number of stock options outstanding at fiscal year end was 20,00029,000 shares.

(12)(11)

Aggregate number of stock options outstanding at fiscal year end was 5,00026,500 shares.

(12)

Aggregate number of stock options outstanding at fiscal year end was 16,500 shares.

(13)These amounts only reflect

This amount reflects 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 doesMr. Anderson’s pension value decreased by $2,715. In accordance with SEC rules, negative amounts are required to be disclosed, but not provide above-market orreflected in the sum of total compensation.

(14)

This amount reflects preferential earnings on nonqualified deferred compensation.

(14)(15)     

This amount reflects the cost to the Company per director for providing accidental death and disabilitydismemberment insurance coverage for outsidenon-employee 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. The director designated as the “Lead Director” received an additional annual retainer of $10,000 through December 31, 2008. Each non-employee director also receives annually, at the regularly scheduled meeting held in December, restricted stock and nonqualified stock option awards. The Corporate Governance Committee retained Mercer Human Resource Consulting to review non-employee director compensation and determined that equity awards to the non-employee directors, and the additional annual retainer to the Lead Director, were not competitive. Accordingly, non-employee directors received an award of 2,5003,250 shares of restricted stock, compared to 2,500 shares in the prior year, and an award of 6,500 nonqualified stock options, compared to 5,000 non-qualified stock options.options in the prior year. Effective January 1, 2009, the Lead Director’s additional annual retainer was increased to $20,000.

     OutsideNon-employee 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.

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     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



employeenon-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 UPONUPON TERMINATIONOR CHANGEIN CONTROL

     Kroger has no contracts, agreements, plans or arrangements that provide for payments to the named executive officers in connection with resignation, severance, retirement, termination, or change in control, provideexcept for payments to its named executive officers that are notthose available generally to salaried employees. Mr. DillonThe Kroger Co. Employee Protection Plan, or KEPP, applies to all management employees and administrative support personnel who are not covered by a collective bargaining agreement, with at least one year of service, and provides severance benefits when a participant’s employment is terminated actually or constructively within two years following a change in control of Kroger. For purposes of KEPP, a change in control occurs if:

  • any person or entity (excluding Kroger’s employee benefit plans) acquires 20% or more of the voting power of Kroger;
  • a merger, consolidation, share exchange, division, or other reorganization or transaction with Kroger results in Kroger’s voting securities existing prior to that event representing less than 60% of the combined voting power immediately after the event;
  • Kroger’s shareholders approve a plan of complete liquidation or winding up of Kroger or an agreement for the sale or disposition of all or substantially all of Kroger’s assets; or
  • during any period of 24 consecutive months, individuals at the beginning of the period who constituted Kroger’s Board of Directors cease for any reason to constitute at least a majority of the Board of Directors.

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     Assuming that a change in control occurred on the last day of Kroger’s fiscal year 2008, and the named executive officers had their employment terminated, they would receive a maximum payment or, in the case of group term life insurance, a benefit having a cost to Kroger in the amounts shown below:

AdditionalAccrued
SeveranceVacation andand BankedGroup TermTuitionOutplacement
Name    Benefit    Bonus    Vacation    Life Insurance    Reimbursement    Reimbursement
David B. Dillon$5,059,190   $120,864  $563,077$29$5,000$10,000
J. Michael Schlotman$1,923,238 $39,959   $251,538$29 $5,000$10,000
W. Rodney McMullen $3,426,302$79,365  $413,462$29$5,000 $10,000
Don W. McGeorge$3,426,302$79,365  $215,000$29$5,000$10,000
Donald E. Becker$2,196,332$45,809  $476,923$29$5,000$10,000

     Each of the named executive officers also is entitled to continuation of health care coverage for up to 24 months at the same contribution rate as existed prior to the change in control. The cost to Kroger cannot be calculated, as Kroger self insures the health care benefit and the cost is based on the health care services utilized by the participant and eligible dependents.

     Under KEPP benefits will be reduced, to the extent necessary, so that payments to an employment agreement that expired on November 30, 2006 and was not renewed.executive officer will in no event exceed 2.99 times the officer’s average W-2 earnings over the preceding five years.

     Kroger’s non-discriminatory change in control benefits under The Kroger Co. Employee Protection PlanKEPP and under stock option and restricted stock agreements are discussed further in the Compensation Discussion and Analysis section under the “Retirement and other benefits”Other Benefits” heading.

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BENEFICIAL OWNERSHIPOF COMMON STOCK

     As of February 12, 2007,13, 2009, 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:

Amount and NatureAmount and Nature
ofof

Name

Beneficial Ownership    Beneficial Ownership
Reuben V. Anderson 58,145(1) 68,515(1)
Donald E. Becker 376,708(2)(3)(4)390,704(2)(3)(4)
Robert D. Beyer 54,812(5) 110,562(1)
John L. Clendenin 63,000(1) 
David B. Dillon 1,667,446(2)(4)(6) 2,206,057(2)(3)(5)
Susan J. Kropf8,750(6)
John T. LaMacchia 68,000(1) 80,350(1)
David B. Lewis 20,500(7) 36,250(7)
Don W. McGeorge 697,997(2)(4)(8) 830,663(2)(8)
W. Rodney McMullen 893,320(2)(4) 1,039,323(2)(3)
Jorge P. Montoya 6,750(6)
Clyde R. Moore 47,500(9) 59,250(1)
Katherine D. Ortega 57,356(1) 
Susan M. Phillips 22,000(10) 36,785(9)
Steven R. Rogel 42,028(5) 57,778(1)
James A. Runde 2,500 11,250(10)
Ronald L. Sargent 4,500 13,250(10)
J. Michael Schlotman 242,994(2)(4)(11)273,742(2)(3)(11)
Bobby S. Shackouls 29,000(5) 44,750(1)
Directors and Executive Officers as a group (including those named above) 6,874,249(2)(12) 7,772,703(2)(3)(12)

(1)

This amount includes 25,00027,000 shares that represent options that are or become exercisable on or before April 13, 2007.14, 2009.

(2)

This amount includes shares that represent options that are or become exercisable on or before April 13, 2007,14, 2009, in the following amounts: Mr. Becker, 250,833;226,167; Mr. Dillon, 729,000;1,150,000; Mr. McGeorge, 473,500;551,000; Mr. McMullen, 465,000;551,000; Mr. Schlotman, 167,000;178,000; and all directors and executive officers as a group, 3,820,266.4,460,434.

36



(3)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.
(4)

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

(4)

This amount includes 10,228 shares owned by Mr. Becker’s wife. Mr. Becker disclaims beneficial ownership of these shares.

(5)

This amount includes 17,000168,432 shares owned by Mr. Dillon’s wife, and 18,008 shares in his children’s trust. Mr. Dillon disclaims beneficial ownership of these shares.

(6)

This amount includes 1,000 shares that represent options that are or become exercisable on or before April 13, 2007.14, 2009.

(6)(7)

This amount includes 219,10019,000 shares that represent options that are or become exercisable on or before April 14, 2009.

(8)

This amount includes 10,115 shares owned by Mr. Dillon’s wife and children, and 36,016 shares in his children’s trust.McGeorge’s wife. Mr. DillonMcGeorge disclaims beneficial ownership of these shares.

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(7)(9)

This amount includes 9,000 shares that represent options that are or become exercisable on or before April 13, 2007.14, 2009.

(8)(10)

This amount includes 10,152 shares owned by Mr. McGeorge’s wife. Mr. McGeorge disclaims beneficial ownership of these shares.

(9)This amount includes 21,0003,000 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, 2007.14, 2009.

(11)

This amount includes 2,0052,805 shares owned by Mr. Schlotman’s children.son. Mr. Schlotman disclaims beneficial ownership of these shares.

(12)

The figure shown includes an aggregate of 320 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.

     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 February 12, 2007,13, 2009, 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:

 Amount and  Amount and
 Nature of PercentageNature ofPercentage
Name Address of Beneficial Owner Ownership      of Class    Address of Beneficial Owner    Ownership    of Class
The Kroger Co. Savings Plan 1014 Vine Street 35,055,853(1) 5.4%
1290 Avenue of the Americas   Cincinnati, OH 45202 
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.plan.

37



SECTION16(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.Commission. 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 20062008 all filing requirements applicable to our officers, directors and 10% beneficial owners were timely satisfied, with two exceptions. Mr. Jon C. Flora filed a Form 5 reporting a stock sale that inadvertently was not reported in 2006, and Mr. Carver L. Johnson filed a Form 5 reporting three transactions with the Company in which shares were used to pay tax liability associated with restricted stock.satisfied.

39



RELATEDPERSONTRANSACTIONS

     Pursuant to ourStatement of Policy with Respect to Related Person Transactionsand the rules of the SEC, Kroger has nothe following related person transactiontransactions, which were approved by Kroger’s Audit Committee, to disclosedisclose:

  • During fiscal year 2008, Kroger entered into a series of purchase transactions with Weyerhaeuser Company, totaling approximately $36 million, involving primarily the purchase of corrugate and other paper products used for purposespackaging at Kroger’s manufacturing facilities. This amount represents substantially less than 2% of Weyerhaeuser’s annual consolidated gross revenue. A significant portion of these purchases was conducted via a competitive bidding process. Steven R. Rogel, a member of Kroger’s Board of Directors, was CEO of Weyerhaeuser for a portion of fiscal year 2008, and Chairman of the Board of Weyerhaeuser for all of 2008.
  • During fiscal year 2008, First Service Networks provided facility maintenance services totaling approximately $150,000 to Kroger’s Ralphs subsidiary. This amount represents substantially less than 2% of First Service Networks’ annual consolidated gross revenue. Clyde R. Moore, a member of Kroger’s Board of Directors, is Chairman and Chief Executive Officer of First Service Networks. Kroger’s relationship existed prior to Mr. Moore’s affiliation with First Service Networks.
  • During fiscal year 2008, Kroger entered into a series of purchase transactions with Staples, Inc., totaling approximately $12 million, involving primarily the purchase of office supplies. This amount represents substantially less than 2% of Staples’ annual consolidated gross revenue. Virtually all of this proxy statement.amount represents purchases from Corporate Express from and after July 2008 when Corporate Express was acquired by Staples. Kroger’s relationship with Corporate Express existed prior to its acquisition by Staples. Ronald L. Sargent, a member of Kroger’s Board of Directors, is Chairman and Chief Executive Officer of Staples.
  • During fiscal year 2008, Kroger paid J.P. Morgan/Chase approximately $3 million for commercial banking and investment banking fees. This amount represents substantially less than 2% of J.P. Morgan/Chase’s annual consolidated gross revenue. The son of Kroger CFO J. Michael Schlotman was employed by J.P. Morgan during fiscal year 2008, but had no responsibility for or involvement with any services provided to Kroger.

     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

WITHRESPECTTO

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 “Related Person” is:

  • 1.any person who is, or at any time since the beginning of Kroger’s last fiscal year was, a director or executive officer of Kroger or a nominee to become a director of Kroger;

    any person who is, or at any time since the beginning of Kroger’s last fiscal year was, a director or executive officer of Kroger or a nominee to become a director of Kroger;40


  • 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.
    • 2.any person who is known to be the beneficial owner of more than 5% of any class of Kroger’s voting securities; and
    3.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 each 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(including 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(including 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.

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    B. AUDIT COMMITTEE APPROVAL

         In the event management becomes aware of any Related Person Transactions that are not deemed 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 chairChair 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.

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         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 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)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)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, or an immediate family member (as defined above), is a Related Person except that the director will provide all material information about the Related Person Transaction to the Committee.

    C. DISCLOSURE

         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.

    4042



    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 the Company’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 public accountants’ qualifications and independence; the performance of the Company’s internal audit function and independent public accountants; and the preparation of this report that SEC rules require be included in the Company’s annual proxy statement.The Audit Committee performs this work pursuant to a written charter approved by the Board of Directors. The Audit Committee charter most recently was revised during fiscal 2007year 2009 and is available on the Company’s corporate website at http://www.thekrogerco.com/documents/GuidelinesIssues.pdf.The Audit Committee has implemented procedures to assist it during the course of each fiscal year in devoting the attention that is necessary and appropriate to each of the matters assigned to it under the Committee’s charter. The Audit Committee held nineseven meetings during fiscal year 2006.2008. The Audit Committee meets separately at least quarterly with the 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 the Company’s internal controls over financial reporting, and the overall quality of the Company’s financial reporting. The Audit Committee also meets separately at least quarterly with the Company’s Chief Financial Officer and General Counsel. Following these separate discussions, the Audit Committee meets in executive session.

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

         In the performance of its oversight function, the Audit Committee has reviewed and discussed with management and PricewaterhouseCoopers LLP the audited financial statements for the year ended February 3, 2007,January 31, 2009, management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of February 3, 2007,January 31, 2009, and PricewaterhouseCoopers’ evaluation of the Company’s internal control over financial 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,” as amended (AICPA, Professional Standards, Vol. 1.1, AU section 380), as adopted by the Public Company Accounting Oversight Board in Rule 3200T.

         With respect to the 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,” as adopted byapplicable requirements of the Public Company Accounting Oversight Board in Rule 3600T.regarding the independent public accountants’ communications with the Audit Committee concerning independence. The Audit Committee has reviewed and approved in advance all services provided to the Company by PricewaterhouseCoopers LLP. The Audit Committee conducted a review of services provided by PricewaterhouseCoopers LLP which included an evaluation by management and members of the Audit Committee.

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         Based upon the review and discussions described in this report, the Audit Committee recommended thatto the Board of Directors includethat the audited consolidated financial statements be included in the Company’s Annual Report on Form 10-K for the year ended February 3, 2007,January 31, 2009, as filed with the SEC.

         This report is submitted by the Audit Committee.

    David B. Lewis, Chair

    Ronald L. Sargent, Vice Chair

    Susan J. Kropf

    Susan M. Phillips

    Bobby S. Shackouls Vice Chair

    Clyde R. Moore

    Susan M. Phillips

    Ronald L. Sargent












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    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 extent 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 concluded that the long-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, comprised 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 paid in cash.

    Accounting Practices. The components of a performance target will be determined in accordance with Kroger’s accounting practices in effect on the first day of the 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 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 believes that the Bonus Plan provides an appropriate balance between salary compensation and performance-based compensation. The Committee may approve similar bonus or other payments outside of the Bonus Plan that may not be tax deductible. The Board of Directors believes it is in the best interests of Kroger to qualify performance-based compensation for deductibility under Section 162(m) in order to maximize Kroger’s income tax deductions. The approval of the 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)Awards, values and benefits not determinable for any individual or group.






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    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 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)

         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 provide 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 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 VOTEFOR THIS PROPOSAL.


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    SELECTIONOF AUDITORS
    (ITEM NO. 4)2)

         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 14, 2007,11, 2009, the Audit Committee appointed PricewaterhouseCoopers LLP as Kroger’s independent auditor for the fiscal year ending February 2, 2008.January 30, 2010. 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 VOTEFFOROR THIS PROPOSAL.












    46



    DISCLOSUREOFAUDITORFEES

         The following describes the fees billed to Kroger by PricewaterhouseCoopers LLP related to the fiscal years ended January 31, 2009 and February 3, 2007 and January 28, 2006:2, 2008:

     Fiscal 2006       Fiscal 2005    Fiscal Year 2008    Fiscal Year 2007
    Audit Fees $4,463,916$4,926,809    $4,093,444     $4,221,063  
    Audit-Related Fees 53,42953,500  54,248 122,878
    Tax Fees ——  — —
    All Other Fees —— ——
    Total $4,517,345$4,980,309$4,147,692$4,343,941

         Audit Feesfor the years ended January 31, 2009 and February 3, 2007 and January 28, 2006,2, 2008, 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-Related FeesFees for the years ended January 31, 2009 and February 3, 2007 and January 28, 2006,2, 2008, respectively, were for assurance and related services pertaining to employee benefit plan audits, captive insurance company audits, accounting consultationsconsultation 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 Fees.We did not engage PricewaterhouseCoopers LLP for other tax services for the years ended January 31, 2009 and February 3, 2007 and January 28, 2006.2, 2008.

         All Other FeesFees.. We did not engage PricewaterhouseCoopers LLP for other services for the years ended January 31, 2009 and February 3, 2007 and January 28, 2006.2, 2008.

         The Audit Committee requires that it approve in advance all audit and non-audit work performed by PricewaterhouseCoopers LLP. On March 14, 200711, 2009, the Audit Committee approved services to be performed by PricewaterhouseCoopers LLP for the remainder of fiscal 2007year 2009 that are related to the audit of Kroger

    45



    or involve the audit itself. In 2007, the Audit Committee adopted an audit and non-audit service pre-approval policy. Pursuant to the terms of that policy, the Committee will annually pre-approve certain defined services that are expected to be provided by the independent auditors. 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 fiscal 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.

    SHAREHOLDER PROPOSAL


    47    (ITEM NO. 3)

         We have been notified by a shareholder, the name and shareholdings of which will be furnished promptly to any shareholder upon written or oral request to Kroger’s Secretary at Kroger’s executive offices, that it intends to propose the following resolution at the annual meeting:

    SHAREHOLDER RESOLUTION

         WHEREAS, in our “2008 Sustainability Report,” The Kroger Co. (the “Corporation”) asserts, “The humane treatment of animals from farm to table is important to Kroger and our customers.” Further: “We continue to push for the vendor community to embrace new best practices in animal welfare. Kroger is taking an active role in facilitating an industry approach to producing sustainable and comprehensive improvements in animal welfare standards.”

         Yet our Corporation lags behind other retailers in an important measure of animal welfare: confining egg-laying hens in cramped, wire, battery cages. The cages are so small the birds can’t spread their wings. While our suppliers are asked to comply with Food Marketing Institute standards, these still allow producers to provide each hen with less space than a letter-sized sheet of paper for nearly her entire life.

         This practice is steadily falling out of favor with industry and consumers. For example, Whole Foods Market only sells eggs produced by hens living in cage-free environments, and Trader Joe’s converted all its private-label eggs to cage-free. Safeway and Harris Teeter have implemented policies to double the percentage of cage-free eggs they carry. Eleven percent of the eggs Costco sells (approximately three times our last reported percentage) are cage-free. All shell eggs used by Compass Group, the world’s largest food service company, are cage-free. National chains, including Burger King, Denny’s, Carl’s Jr., and Hardee’s, are phasing in cage-free eggs. Wolfgang Puck uses only cage-free eggs in his restaurants and packaged foods. More than 350 U.S. universities serve cage-free eggs on campus.

         In November, Californians overwhelmingly enacted the Prevention of Farm Animal Cruelty Act, making it illegal to confine laying hens in cages so small they cannot spread their wings (with a phase-out period).

         The prestigious Pew Commission on Industrial Farm Animal Production—an independent panel including former U.S. Secretary of Agriculture Dan Glickman—concluded after an extensive two-year study that battery cages should be phased out on animal welfare and food safety grounds.

    In October,The New York Timeseditorial board condemned battery cages: “[industrial farming] means endless rows of laying hens kept in battery cages so small that the birds cannot even stretch their wings.No philosophy can justify this kind of cruelty, not even the philosophy of cheapness.” (Emphasis added.)

         Increasingly, consumers, companies, and voters agree with scientists who have established that egg production “best practices” include not confining birds in battery cages.

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         We risk loss of business and reputation if we do not phase out the sale of eggs from battery-caged hens. In doing so, our Corporation can keep pace with competitors, better meet public expectations, and make a meaningful step toward our claim of being an animal welfare leader.

         RESOLVED that, in keeping with our animal welfare policy, shareholders encourage our Corporation to establish a schedule for increasing the percentage of eggs stocked from hens not confined in battery cages—confinement consumers widely view as cruel and unacceptable.

    THE BOARDOF DIRECTORS RECOMMENDSA VOTEAGAINST THIS PROPOSALFORTHE FOLLOWING REASONS:

         As one of the largest supermarket companies in the United States, our commitment, leadership and results with respect to animal welfare matters are well established and recognized within the industry. Animal welfare is an important issue to Kroger, our customers and our associates.

         According to experts, both hens housed in cages and cage-free hens can be treated humanely or poorly, with one method not being superior from an animal welfare point of view. Although hens housed in cages cannot flap their wings, they are protected from dust, poor air quality, cannibalism, and parasites. In order to ensure humane treatment of the hens that produce eggs sold to Kroger, we require that our egg suppliers adhere to the animal welfare guidelines adopted by the United Egg Producers. These guidelines, which apply to both caged and cage-free egg production, require suppliers to adhere to modern farming techniques designed to protect the safety of the eggs and to treat the hens humanely.

         Many of our customers have indicated a preference for cage-free eggs. That is why we offer cage-free eggs in virtually all of our supermarkets. We will continue to monitor the purchasing practices of our customers and will continue to meet their demand to the extent our suppliers are able to do so. We do not believe, however, that it is appropriate to increase the percentage of cage-free eggs that we stock absent customer demand when it has not been scientifically established that hens housed in modern cages are treated less humanely or less ethically than cage-free hens.

    SHAREHOLDER PROPOSAL
    (ITEM NO. 5)4)

         We have been notified by The Nathan Cummings Foundation, 475 Tenth Avenue, 14th Floor, New York, New York 10018,a shareholder, the beneficial ownername and shareholdings of 171 shares of Kroger common stock,which will be furnished promptly to any shareholder upon written or oral request to Kroger’s Secretary at Kroger’s executive offices, that it intends to propose the following resolution at the annual meeting:

    DIRECTOR ELECTION MAJORITY VOTE STANDARD PROPOSAL

         WHEREASRESOLVED:: Carbon regulation is increasing as state and local level support for addressing climate change builds. More than 350 mayors have pledged That the shareholders of The Kroger Company (“Company”) hereby request that the Board of Directors initiate the appropriate process to meet Kyoto’s targets for reducing greenhouse gas (GHG) emissions. Atamend the state level, regulations addressing GHG emissions now exist in 28 states.

    Support for measures addressing climate change is also increasingly being demonstrated atCompany’s articles of incorporation to provide that director nominees shall be elected by the federal level. In June of 2005, the Senate passed a non-binding “Senseaffirmative vote of the Senate” resolution recognizingmajority of votes cast at an annual meeting of shareholders, with a plurality vote standard retained for contested director elections, that is, when the need for a mandatory cap on GHG emissions. According toInvestor’s Business Daily, “[M]any in Washington are coming to view rigorous greenhouse legislation as inevitable.”

         These developments are being reinforced by corporate acceptancenumber of director nominees exceeds 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 pacenumber 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 peril.”

    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 accounted 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 addressing climate change and reducing their emissions and 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 we operate in the long term as climate change.”

    RESOLVED: The shareholders request that a committee of independent directors of the Board assess how the company is responding to rising regulatory, competitive, and public pressure to address climate change and report to shareholders (at reasonable cost and omitting proprietary information) by December 1, 2007board seats.

         SUPPORTING STATEMENTSTATEMENT:: In order to provide shareholders a meaningful role in director elections, our Company’s director election vote standard should be changed to a majority vote standard. A majority vote standard would require that a nominee receive a majority of the votes cast in order to be elected. The standard is particularly well-suited for the vast majority of director elections in which only board nominated candidates are on the ballot. We believe management hasthat a fiduciary duty to carefully assessmajority vote standard in board elections would establish a challenging vote standard for board nominees and disclose to shareholdersimprove the performance of individual directors and entire boards. Our Company presently uses a plurality vote standard in all pertinent information on itsdirector elections. Under the plurality vote standard, a nominee for the board can be elected with as little as a single affirmative vote, even if a substantial majority of the votes cast are “withheld” from the nominee.

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         In response to climate change.strong shareholder support for a majority vote standard in director elections, a strong majority of the nation’s leading companies, including Intel, General Electric, Motorola, Hewlett-Packard, Morgan Stanley, Wal-Mart, Home Depot, Gannett, Marathon Oil, and Safeway have adopted a majority vote standard in company bylaws or articles of incorporation. Additionally, these companies have adopted director resignation policies in their bylaws or corporate governance policies to address post-election issues related to the status of director nominees that fail to win election. However, our Company has responded only partially to the call for change, simply adopting a post-election director resignation policy that sets procedures for addressing the status of director nominees that receive more “withhold” votes than “for” votes. The plurality vote standard remains in place.

         We believe taking earlythat a post-election director resignation policy without a majority vote standard in Company bylaws or articles is an inadequate reform. The critical first step in establishing a meaningful majority vote policy is the adoption of a majority vote standard. With a majority vote standard in place, the Board can then consider action on developing post-election procedures to reduce emissionsaddress the status of directors that fail to win election. A majority vote standard combined with a post-election director resignation policy would establish a meaningful right for shareholders to elect directors, and preparereserve 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.the Board an important post-election role in determining the continued status of an unelected director. We feel that this combination of the majority vote standard with a post-election policy represents a true majority vote standard.

    THEBOARDOF DIRECTORS RECOMMENDSA VOTEAGAINST THIS PROPOSALFORTHE FOLLOWING REASONS:

         This proposal requests that we adopt a voting standard for director elections that differs from the plurality voting standard, the current default standard under Ohio law. Prior to January 1, 2008, Ohio law required all directors to be elected by a plurality. The plurality voting standard provides that the nominees who receive the most affirmative votes are elected to serve as directors.

         After careful consideration, the Board of Directors recommends a vote against this proposal because:

    • we already have implemented a policy that addresses the proponent’s concerns;
    • our current corporate governance practices already ensure that our directors are highly qualified;
    • the shareholder proposal creates uncertainty; and
    • the shareholder proposal is premature given the current state of director election practices.

    We Have Already Implemented a Majority Voting Policy

    Like a number of other large public companies facing this issue, in order to address concerns relating to director candidates who do not receive a majority of the votes cast, we have adopted a majority voting policy. Our policy, as set forth inThe Kroger Co. Board of Directors Guidelines on Issues of Corporate Governance, was adopted on March 15, 2007. TheGuidelines, including our majority vote policy, may be viewed on our website at www.thekrogerco.com.

         Our policy provides that, in an uncontested election where cumulative voting is not in effect, any director nominee who receives a greater number of “withheld” votes than “for” votes is required promptly to submit his or her resignation to the Board. In addition:

    • The Corporate Governance Committee will promptly consider the tendered resignation and will recommend to the Board whether to accept the resignation or take some other action.
    • The Board will act on the Committee’s recommendation within 90 days following the certification of the shareholder vote.

    48



    • THE BOARDOF DIRECTORSRECOMMENDSAVOT EAGAINST THIS PROPOSALFORTHE FOLLOWING REASONS:

      Kroger recognizesAny director who tenders his or her resignation will not participate in the important role it plays as a good stewardCommittee’s recommendation or the Board’s consideration of the environment.tendered resignation.

    • We will promptly disclose publicly the Board’s decision, along with the reasons for rejecting the resignation offer, if applicable, in a press release.

         We believe that our policy strikes an appropriate balance in ensuring that our shareholders continue to have a meaningful role in electing directors while preserving the ability of the Board to exercise its independent judgment and to consider all relevant factors in accepting the resignation of a director who receives fewer than a majority of votes cast.

    Our Current Process Elects Highly Qualified Directors

         We have numerous “green” initiatives in placea strong corporate governance process designed to save energyidentify and preservepropose director nominees who will best serve the interests of Kroger and our natural resources. In 2007 Kroger will publish on-line an expanded version ofshareholders. The Kroger Co. Public Responsibilities ReportBoard maintains a Corporate Governance Committee that will highlight the company’s “green” initiatives in greater detail.

         The proposal recommends a committeeis composed entirely of independent directors, assess howand all of the members of the Board, other than the Chairman/Chief Executive Officer, Vice Chairman, and Chief Operating Officer, are independent. The Corporate Governance Committee applies a rigorous set of criteria in identifying director nominees and has established procedures to consider and evaluate persons recommended by shareholders. Our strong corporate governance has been recognized by RiskMetrics Group. According to its March 1, 2009 rankings, RiskMetrics has ranked Kroger ahead of 96.8% of the companies in the Food and Staples Retailing group, as measured by the RiskMetrics Group Corporate Governance Quotient.

         As a result of these practices, our shareholders have consistently elected, by a plurality, highly qualified directors from diverse business backgrounds, substantially all of whom have been “independent” within standards adopted by the New York Stock Exchange. Adoption of a strict majority voting standard seems especially unwarranted in our case. Changing our current voting system to majority voting would have had no effect on director elections since Kroger’s recapitalization in 1988. The Board believes that the votes over this period reflect our shareholders’ confidence in the Board and in the governance protections the Board has implemented.

    The Proposal Causes Uncertainty

         In contrast to our existing majority voting policy, the majority voting amendment requested by the proposal causes uncertainty. Under Ohio law, an incumbent director who is addressing climate change.not re-elected “holds over” and continues to serve with the same voting rights and powers until his or her successor is elected and qualified. If the proposal were adopted, we could not force a director who failed to receive a majority vote to leave the Board until his or her successor is elected and qualified. In contrast, under our existing majority voting policy, a director who receives more “withhold” votes than “for” votes is required promptly to tender his or her resignation. The Board in turn will act on the tendered resignation after considering all relevant facts and circumstances in a process that will be completed and publicly disclosed promptly.

    The Proposal is Premature

         Ohio law requires the plurality voting standard in director elections unless the corporation’s articles of incorporation provide otherwise. Our Board cannot adopt majority voting in our Code of Regulations, an approach that other companies have recently taken. We can adopt majority voting only through shareholder approval of an amendment to our Articles of Incorporation. We believe that it is premature to ask our shareholders to amend our Articles of Incorporation to adopt majority voting in light of the on-going discussions and debates in this developing area. The legal community, shareholder advocates, governance experts, public companies and other groups continue to evaluate and debate the benefits, disadvantages and consequences of plurality and majority voting and whether some modified model of plurality voting might be preferable.

    49



         Plurality voting has long been the accepted standard, and the rules governing plurality voting are well established and widely understood. Any change in voting standards should be undertaken with full understanding of the consequences. We do not believe that our shareholders should be asked to approve a proposal relating to a voting system without the benefit of a consensus in this area and a greater understanding of the full ramifications of its adoption. We have been monitoring, and we will continue to monitor, developments on this topic. We do not believe that our interests, or our shareholders’ interests, would be best served by adopting such a committee report in many ways would be duplicative of the current efforts underway. It would not benefit shareholders and would be a waste of time, resources and money for Kroger and our shareholders.change.

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

    ________________

    ____________________

         SHAREHOLDER PROPOSALS — 2008– 2010 ANNUAL MEETING. Shareholder proposals intended for inclusion in our proxy material relating to Kroger’s annual meeting in June 20082010 should be addressed to the Secretary of Kroger and must be received at our executive offices not later than January 15, 2008.2010. These proposals must comply with the proxy rules established by the SEC. In addition, the proxy solicited by the Board of Directors for the 20082010 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 on or before March 31, 2008.2010. Please note, however, that Kroger’s Regulations require a minimum of 45 days’ advance notice to Kroger in order for a matter to be brought before shareholders at the annual meeting. As a result, any attempt to present a proposal without notifying Kroger on or before March 31, 2010, will be ruled out of order and will not be permitted.

    ____________________________________

         Attached to this Proxy Statement is Kroger’s 20062008 Annual Report which includes a brief description of Kroger’s business, including the general scope and nature thereof during 2006,2008, together with the audited financial information contained in our 20062008 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.atwww.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 




    4950



    Appendix 1_________

    2008 A    NNUAL REPORT
    _________

    REGULATIONS
    OF
    THEKROGERCO.
    ____________

    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 45 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 of the Company owned of record


    50



    or beneficially by the shareholder along with evidence of ownership thereof, a description of any materialinterest the shareholder has in the subject of the business requested to be conducted and any arrangementsor understandings between such shareholder and any other person or persons (including their names) inconnection with the proposal of such business, a representation that the shareholder intends to appear inperson at the meeting to bring such matter before the meeting, and such other information regarding thebusiness proposed by such shareholder as would be required to be included in the proxy statement filedpursuant 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 Board 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 Board 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.

         Members of the Board 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 Board 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 Board 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 Board 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.



    51



         SECTION 5. REMOVAL AND VACANCIES.

         A. Removals. All of the directors 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 Board 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 directors and until the director’s successor 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 Board of directors may from time to time determine, a secretary, a treasurer, and, in the discretion of the Board of directors, a chairman of the Board, one or more assistant secretaries, one or more assistant treasurers, and such other officers and assistant officers as the Board of directors may from time to time determine.

         SECTION 2. POWERS AND DUTIES. Subject to such limitations as the Board 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 Board of directors or the executive committee or, in the case of all officers other than the chairman of the Board 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 Board 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.

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

         C. Notwithstanding paragraph A of Article IV, the Board 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 Board 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 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 amendedJune 28, 2007




    53



    _______

    2006 A    NNUAL REPORT
    _______

    FINANCIAL REPORT 20062008

    MANAGEMENT’S RESPONSIBILITY FORFOR 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.www.thekrogerco.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.

    MANAGEMENT’S REPORTONON INTERNAL CONTROL OVEROVER 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 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 February 3, 2007.January 31, 2009.

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

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

    A-1



    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.
    (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.

    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

    Main trading market: New York Stock Exchange (Symbol KR) 
    Number of shareholders of record at year-end 2006: 61,920 
    Number of shareholders of record at March 30, 2007: 53,435 
    Determined by number shareholders of record 

    A-2SELECTED FINANCIAL DATA

    Fiscal Years Ended
    January 31,February 2,February 3,January 28,January 29,
    20092008200720062005
    (52 weeks)    (52 weeks)    (53 weeks)    (52 weeks)    (52 weeks)
        (In millions, except per share amounts)
    Sales$76,000$70,235$66,111$60,553$56,434
    Net earnings (loss)1,2491,1811,115958(104)
    Diluted earnings (loss) per share:
           Net earnings (loss)  1.901.69 1.541.31(0.14)
    Total assets23,21122,29321,21020,47820,491
    Long-term liabilities, including obligations  
          under capital leases and financing    
          obligations10,3118,696 8,7119,37710,537
    Shareowners’ equity5,1764,9144,9234,390 3,619
    Cash dividends per common share0.3450.290.195——

    COMMON STOCK PRICE RANGE

    20082007
    Quarter    High    Low    High    Low
    1st$28.13 $23.39$30.43$24.74
    2nd$30.99$25.86$31.94$23.95
    3rd $29.91$22.30 $30.00 $25.30
    4th$29.03$22.40$29.35$24.23
     

    Main trading market: New York Stock Exchange (Symbol KR)

     
    Number of shareholders of record at year-end 2008: 45,939
     
    Number of shareholders of record at March 27, 2009: 45,712

         The Company did not pay dividends on its Common Stock during fiscal year 2005.     During fiscal 2006, the Company’s Board of Directors adopted a dividend policy and paid three quarterly dividends of $0.065 per share. On March 1,During fiscal 2007, the Company paid its fourthone quarterly dividend of $0.065 and three quarterly dividends of $0.075. During fiscal 2008, the Company paid one quarterly dividend of $0.075 and three quarterly dividends of $0.09. On March 1, 2009, the Company paid a quarterly dividend of $0.09 per share. On March 15, 2007,12, 2009, the Company announced that its Board of Directors had increased thehas declared a quarterly dividend to $0.075of $0.09 per share, payable on June 1, 2007,2009, to shareholders of record at the close of business on May 15, 2007.2009.

    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-3A-2



    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 Groupa peer group composed of food and drug companies.companies and a former peer group.

         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, drug chains, and drug chains.discount stores. As a result, in 2003several years ago we changed our peer group ( the “Peer(the “Former 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. This year, we changed our peer group (the “Peer Group”) once again to add Tesco plc, as it has become a significant competitor in the U.S. market.

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

    BaseINDEXED RETURNSBaseINDEXED RETURNS
    PeriodYears EndingPeriodYears Ending
    Company Name/Index 2001    2002      2003     2004      2005     2006     2003    2004    2005    2006    2007    2008
    The Kroger Co.100 74.2391.15 84.80 91.34 128.31
    The Kroger Co.10093.04100.22140.78 143.01125.42
    S&P 500 Index 10079.50106.98112.69125.80144.66 100105.34 117.59 135.22132.78 80.51
    Peer Group 10076.0588.7294.9993.12102.54100 108.99107.87122.24125.95102.29
    Former Peer Group100107.06104.95115.57119.9796.11

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

    A-4A-3




    ____________________

    *

    Total assumes $100 invested on February 3, 2002,1, 2004, in The Kroger Co., S&P 500 Index, the Peer Group and the Former 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., Tesco plc, 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 emerged from bankruptcy in 2006 as a new issue and returns for the old and new issue were calculated then weighted to determine the 2006 return.

    ***

    The Former 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 the 2006 return.

    Data supplied by Standard & Poor’s.

         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-5A-4



    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

    ISSUER PURCHASESOF EQUITY SECURITIES

       Total NumberMaximum Dollar
       of SharesValue of Shares
       Purchased asthat May Yet Be
       Part of PubliclyPurchased Under
     Total NumberAverageAnnouncedthe Plans or
     of SharesPrice PaidPlans orPrograms (3)
     Period (1)     Purchased    Per Share    Programs (2)    (in millions)
    First period – four weeks     
        November 9, 2008 to December 6, 200813,315$28.63— $493
    Second period – four weeks    
        December 7, 2008 to January 3, 2009 479,385$25.62 450,500$493
    Third period – four weeks    
        January 4, 2009 to January 31, 2009164$24.77— $493
     
    Total492,864$25.70450,500$493 
    ____________________

    (1)

    The reported periods conform to the Company’s fiscal calendar composed of thirteen 28-day periods. The fourth quarter of 20062008 contained twothree 28-day periods and one 35-day period.periods.

    (2)

    Shares were repurchased under (i) a $500 million stock repurchase program, authorized by the Board of Directors on 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, whichplans. The program is limited to proceeds received from exercises of stock options and the tax benefits associated therewith. The programs haveprogram has no expiration date but may be terminated by the Board of Directors at any time. Total number of shares purchased includesinclude shares that were surrendered to the 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$1 billion stock repurchase program, referenced in Note 2 above.authorized by the Board of Directors on January 18, 2008. The program has no expiration date but may be terminated by the Board of Directors at any time. Amounts to be invested under the program utilizing option exercise proceeds are dependent upon option exercise activity.

    A-6A-5



    BUSINESS

         The Kroger Co. was founded in 1883 and incorporated in 1902. As of February 3, 2007,January 31, 2009, 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 with, or furnished them electronically withto, 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.

    EMPLOYEES

         TheAs of January 31, 2009, the Company employsemployed approximately 310,000326,000 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 320309 such agreements, usually with terms of three to five years.

         During fiscal 2007,2009, the Company has major labor contracts expiringto be negotiated covering store employees in southern California, Cincinnati, Detroit, Houston, Memphis, Toledo, SeattleAlbuquerque, Arizona, Atlanta, Dallas, Dayton, Denver and West Virginia.Portland. Negotiations in 20072009 will be challenging as the Company must have competitive cost structures in each market while meeting our associates’ needs for good wages, and affordable health care.care and increases in Company pension contributions due to the recent downturns in the equity markets.

    STORES

         As of February 3, 2007,January 31, 2009, the Company operated, either directly or through its subsidiaries, 2,4682,481 supermarkets and multi-department stores, 631781 of which had fuel centers. Approximately 39%43% 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; marketplace stores; or price impact warehouses; or marketplace stores.warehouses.

         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 – 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 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 products, toys and fine jewelry. Many multi-department stores include a fuel center.

    A-7A-6



         Marketplace stores are smaller in size than multi-department stores. They offer full-service grocery and pharmacy departments as well as an expanded general merchandise area that includes outdoor living products, electronics, home goods and toys. Many marketplace stores include a fuel center.

         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 the supermarkets, as of January 31, 2009, the Company operates, either directly oroperated through subsidiaries, 779684 convenience stores and 412385 fine jewelry stores. Substantially allAll of our fine jewelry stores located in malls are operated in leased locations. Subsidiaries operated 687 of theIn addition, 87 convenience stores while 92 were operated through franchise agreements. Approximately 44%50% of the convenience stores operated by subsidiaries were operated in Company-owned facilities. The convenience stores offer a limited assortment of staple food items and general merchandise and, in most cases, sell gasoline.

    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, 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 set forth in Item 8 below.

    MERCHANDISINGAND MANUFACTURING

         Corporate brand products play an important role in the Company’s merchandising strategy. Supermarket divisions typically stock approximately 11,00014,000 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 thansatisfy our customers’ families with quality products. Before Kroger will carry a banner brand product, the national brandproduct quality must meet our customers’ expectations in taste and carries the “Try It, Like It, or Get the National Brand Free” guarantee.efficacy, and we guarantee it. Kroger Value is the value brand, designed to deliver good quality at a very affordable price.

         Approximately 55%40% 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 February 3, 2007,January 31, 2009, the Company operated 4240 manufacturing plants. These plants consisted of 18 dairies, 1110 deli or bakery plants, five grocery product plants, three beverage plants, threetwo meat plants and two cheese plants.

    A-8A-7



    MANAGEMENT’S DISCUSSIONAND ANALYSISOF
    FINANCIAL CONDITIONAND
    R    ESULTSOF OPERATIONPERATIONS

    OUR BUSINESS

         The Kroger Co. was founded in 1883 and incorporated in 1902. It is one of the nation’s largest retailers, as measured by revenue, operating 2,4682,481 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, 631 had781 have fuel centers. We also operate 779771 convenience stores and 412385 fine jewelry stores.

         Kroger operates 4240 manufacturing plants, primarily bakeries and dairies, which supply approximately 55%40% of the corporate brand units sold in the Company’sour 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 ourthe costs we incur to make these products available to our customers. Such costs include procurement and distribution costs, facility occupancy and operational costs, and overhead expenses. Our operations are reported as a single reportable segment: the retail sale of merchandise to individual customers.

    OUR 20062008 PERFORMANCE

         The continued focusBy focusing on the customer through our Customer 1st strategy, we were able to report solid results for fiscal year 2008 in a particularly tough economy. At the beginning of our associates on delivering improved service, product selection and valuethe year, we expected to our customers generated a year of significantly improvedgrow supermarket identical supermarket sales growth, excluding fuel sales, in 2006. Our identical supermarket sales, excluding fuel, sales, grew at 5.6% in 2006. These results followed strong 2005by 3% to 5%. For 2008, supermarket identical supermarket sales, excluding fuel, sales,were 5.0%, meeting the upper end of 3.5% in 2005our original guidance.

         At the outset of fiscal year 2008, Kroger’s earnings guidance was a range of $1.83 to $1.90 per diluted share. Our 2008 earnings was $1.90 per diluted share or $1.92 per diluted share, excluding the effect of a $.02 per diluted share charge for damage and 0.8% in 2004.disruption caused by Hurricane Ike. Our 2008 earnings of $1.92 per diluted share, excluding the charge for damage and disruption caused by Hurricane Ike, represents a growth rate of 13.6% over Kroger’s 2007 full-year earnings of $1.69 per diluted share. We believe that this growth plus Kroger’s dividend yield of more than 1%, creates a strong return for shareholders.

         IncreasingOur market share helped us achievealso rose in 2008. Based on our results. Our internal data and analysis, showswe estimate that we hold the #1 or #2our market share positionincreased approximately 61 basis points in 38 of2008 across our 4442 major markets. We define a major market as one in which we operate nine or more stores. OurThis is the fourth consecutive year Kroger has achieved significant market share increased in 36 of these 44 major markets, declined in seven and remained unchanged in one. On a volume-weighted basis, our overallgain. Over the past four years combined, Kroger’s market share in these 44our major markets has increased approximately 65225 basis points during 2006.points. Market share is critical to us because it allows us to leverage the fixed costs in our business over a wider revenue base. We hold the number one or number two market share position in 39 of or our 42 major markets. Our fundamental operating philosophy is to maintain and increase market share.

         We compete against a total of 1,262 supercenters, an increase of 133 over 2005. There are 34These market share results demonstrate to us that our long-term strategy is working. As population growth continues in the major markets in which supercenters have achieved at least a #3where we operate, we intend to continue to grow Kroger’s business by maintaining our existing strong market share position. Our overall market share in these 34 major markets,and by building on a volume-weighted basis, increased over 70 basis points during 2006. Our market share increased in 27 of these 34 major markets, declined in six and remained unchanged in one.

         All of the market share estimates described above are based on our internal data and analysis.additional opportunities for sales growth. We believe they are reliable but can provide no other assurance of reliability. We believe this market share analysis illustratesestimate that Kroger continued to achieve significant growth in 2006, even in the face of aggressive expansion in the supermarket industry by supercenters, intense price competition, increasing fragmentation of retail formats and market consolidation. Our retail price investments, combined with our service and selling initiatives, led to these market share gains in 2006. We believe there is still significant room for growth. In our 44 major markets, we estimate approximately 47%45% of the share in thoseour major markets continues to be– as much as $100 billion – is held by competitors without ourwho do not have Kroger’s economies of scale.

         We were able Our economies of scale allow us to balance our sales growth with earnings growth. Our net earnings increased 16.4%deliver increasing value to $1.54 per diluted sharecustomers, which is a competitive edge, particularly in 2006, from $1.31 per diluted share in 2005. Earnings growth was primarily driven by strong identical supermarket sales growth, improving operating margins and fewer sharestoday’s economic climate.

    A-9A-8



    outstanding. In addition, fiscal 2006 included a 53rd week that benefited the year by an estimated $0.07 per diluted share, adjustments to certain deferred tax balances that benefited the year 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 expense for the adoption of stock option expensing.

    FUTURE EXPECTATIONS

         While we were pleased with our 2006 results, we must continue to adjust ourKroger’s business model is structured 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 continue building customer loyalty. We expect identical supermarket sales growth, excluding fuel sales, 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, to driveproduce sustainable earnings per share growth in 2007.a variety of economic and competitive conditions, primarily through strong identical sales growth. We expectbelieve this is the right approach to produce sustainable earnings per sharegrowth over a long period of time. We recognize that continual investment in 2007 of $1.60-$1.65 per diluted share. This represents earnings per share growth of approximately 9%-12% in 2007, net of the effect of a 53rd week in fiscal 2006 of approximately $0.07 per diluted share.

         In addition, on March 15, 2007, the Board of Directors declared an increase in Kroger’s quarterly dividendour Customer 1st strategy is necessary to $0.075 per share.

         Further discussion ondrive strong, sustainable identical sales growth. We believe that this Customer 1st strategy along with our industry, the current economic environmentfinancial strategies are delivering value to customers, shareholders, bondholders, and our related strategic plans is included in the “Outlook” section.associates, and so we remain committed to our plan.

    RESULTSOF OPERATIONS

         The following discussion summarizes our operating results for 20062008 compared to 20052007 and for 20052007 compared to 2004.2006. 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 dispute in southern California in 2004.periods.

       Net Earnings (Loss)

         Net earnings totaled $1,115 million$1.2 billion for 2006,2008, compared to net earnings totaling $958 million$1.2 billion in 20052007 and a net loss totaling $104 million$1.1 billion in 2004.2006. The increase in our net earnings for 2006,2008, compared to 20052007 and 2004,2006, resulted from improvements in the southern California market and the leveraging of fixed costs with strong non-fuel identical supermarket sales growth as well as the effect of a 53rd week in 2006.and strong fuel results. In addition, 2004 was negatively affected by goodwill charges totaling $904 million, as well as2006 net earnings included a labor dispute in southern California.53rd week.

         Earnings per diluted share totaled $1.54$1.90 or $1.92, excluding the effect of a $.02 per diluted share charge for damage and disruption caused by Hurricane Ike, in 2006,2008, compared to $1.31 per share in 2005 and a net loss of $0.14$1.69 per diluted share in 2004.2007 and $1.54 per diluted share in 2006. Earnings per diluted share increased 13.6% in 2008, excluding the effect of a $.02 per diluted share charge for damage and disruption caused by Hurricane Ike, compared to 2007. Earnings per diluted share increased 15% in 2007, compared to 2006, after adjusting for the extra week in fiscal 2006. Net earnings in 2006 benefited from a 53rd week by $0.07an estimated $.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 due to the effects of goodwill impairment charges.share. Our earnings per share growth in 20062008, 2007 and 20052006 resulted from increased net earnings, strong identical sales growth and the repurchase of Kroger stock. During fiscal 2008, we repurchased 24 million shares of Kroger stock for a total investment of $637 million. During fiscal 2007, we repurchased 53 million shares of our stock for a total investment of $1.4 billion. During fiscal 2006, we

    A-10



    repurchased 29 million shares of Kroger stock for a total investment of $633 million. During fiscal 2005, we repurchased 15 million shares of our stock for a total investment of $252 million. During fiscal 2004, we repurchased 20 million shares of Kroger stock for a total investment of $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
    Total Sales
    (in millions)
      Percentage Percentage 
         2008    Increase    2007    Increase    2006
    Total food store sales without fuel$63,7956.1%  $60,1424.2%  $57,712
    Total food store fuel sales7,464 30.0%5,74128.9% 4,455
    Total food store sales$71,2598.2% $65,883 6.0%$62,167
    Other sales (1) 4,7418.9%4,35210.3%3,944
    Total Sales$76,0008.2%$70,2356.2%$66,111
    ____________________

    (1)    

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

    A-9



         The growth in our total sales in 2008 over fiscal 2007 was primarily the result of identical storesupermarket sales increases, the addition of a 53rd week in 2006increased fuel gallon sales, and inflation in pharmacyacross most departments. Identical supermarket sales and some perishable commodities. Increasedtotal sales, excluding fuel, increased due to increased transaction count and average transaction size, were both responsible for our increases in identical supermarket sales, excluding retail fuel operations.and inflation across all departments. After adjusting for the extra week in fiscal 2006, total sales increased 7.0%8.2% in 2007 over fiscal 2005.2006.

         We define a supermarket as identical when it has been in operation without expansion or relocation for five full quarters. Fuel center discounts received at our fuel centers and earned based on in-store purchases are included in all of the supermarket identical sales results calculations illustrated below. Differences between total supermarket sales and identical supermarket sales primarily relate to changes in supermarket square footage. Annualized identical supermarket sales include all sales at the Fred Meyer multi-department stores. We calculate annualized identical supermarket sales based on a summation ofby adding together four quarters of identical supermarket sales. Our identical supermarket sales results are summarized in the table below, based on the 53-week52-week period of 2006,2008, compared to the same 53-week52-week period of the previous year. The identical store count in the table below represents the total number of identical supermarkets as of January 31, 2009 and February 2, 2008.

    Identical Supermarket Sales
    (in millions)

    Identical Supermarket Sales
    (in millions)
    2006        2005     2008    2007
    Including supermarket fuel centers$59,592 $55,993  $67,185 $62,878
    Excluding supermarket fuel centers$55,399 $52,483 $60,300$57,416
    Including supermarket fuel centers6.4% 5.3%6.9%6.9%
    Excluding supermarket fuel centers5.6% 3.5%5.0%5.3%
    Identical 4thQuarter store count2,3692,280

         We define a supermarket as comparable when it has been in operation for five full quarters, including expansions and relocations. As is the case for identical supermarket sales, fuel center discounts received at our fuel centers and earned based on in-store purchases are included in all of the supermarket comparable sales results calculations illustrated below. Annualized comparable supermarket sales include all Fred Meyer multi-department stores. We calculate annualized comparable supermarket sales based on a summation ofby adding together four quarters of comparable sales. Our annualized comparable supermarket sales results are summarized in the table below, based on the 53-week52-week period of 2006,2008, compared to the same 53-week52-week period of the previous year. The comparable store count in the table below represents the total number of comparable supermarkets as of January 31, 2009 and February 2, 2008.

    A-11Comparable Supermarket Sales
    (in millions)

        2008     2007
    Including supermarket fuel centers $69,762$65,066
    Excluding supermarket fuel centers$62,492$59,372
     
    Including supermarket fuel centers7.2%7.2%
    Excluding supermarket fuel centers5.3%5.5%
    Comparable 4thQuarter store count2,4442,352

    A-10



    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: Salessales minus merchandise costs, plus Last-In, First-Out (“LIFO”) charge (credit). Merchandise costs includeincluding advertising, warehousing and transportation, but excluding the Last-In, First-Out (“LIFO”) charge. Merchandise costs 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 24.27%, 24.80%23.20% in 2008, 23.65% in 2007 and 25.38%24.27% in 2006, 2005 and 2004, respectively. Retail2006. Our retail fuel sales loweredreduce 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%decreased 15 basis points in 2008, 20 basis points in 2007 and 26.73%26 basis points in 2006, 2005 and 2004, respectively.2006. The decrease in our non-fuel FIFO gross margin rate reflects our continued reinvestment of operating cost savings into lower prices for our customers. In addition, FIFO gross margin in 2008, compared to 2007, decreased due to high inflation in product costs.

       LIFO Charge

         The LIFO charge was $196 million in 2008, $154 million in 2007 and $50 million in 2006. Like many food retailers, we continued to experience product cost inflation in 2008 at levels that have not occurred for several years. This increase in product cost inflation caused the increase in the LIFO charge in 2008, compared to 2007 and 2006. In addition, product cost inflation in 2007, compared to 2006, caused the increase in the LIFO charge in 2007 compared to 2006.

    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, rentcosts, utilities and credit card fees. Rent expense, depreciation and amortization expense, and interest expense are not included in OG&A.

         OG&A expenses, as a percent of sales, were 17.91%, 18.21%16.95% in 2008, 17.31% in 2007 and 18.76%17.91% in 2006, 2005 and 2004, respectively.2006. The growth in our retail fuel sales lowersreduces our OG&A rate due to the very low OG&A rate on retail fuel sales as compared to non-fuel sales. Excluding the effect of retail fuel operations, our OG&A expenses, as a percent of sales were 19.59%, 19.68%excluding fuel, decreased 3 basis points in 2008, 33 basis points in 2007 and 19.81%9 basis points in 2006, 2005 and 2004, respectively. Excluding2006. The decrease in our OG&A rate in 2008, excluding the effect of retail fuel operations, expenses recorded for legal reserveswas primarily the result of increased identical supermarkets sales growth and stock option expense,a settlement received from credit card processers, partially offset by the $25 million charge related to Hurricane Ike and increases in credit card fees and health care costs. The decrease in our OG&A rate declined 28 basis points in 2006. This decrease2007, excluding the effect of retail fuel operations, was driven byprimarily the result of strong identical store sales growth, by increasing store laborincreased productivity, and by progress we havethat was made in 2007 in controlling our utility, health care and pension costs. These improvements were partially offset by increases in pension expense and credit card fees. Excluding the effect of retail fuel operations and expenses recorded for one-time legal reserves, our OG&A rate declined 16 basis points in 2006.

       Rent Expense

         Rent expense was $659 million in 2008, as compared to $644 million in 2007 and $649 million in 2006, as compared to $661 million and $680 million in 2005 and 2004, respectively.2006. Rent expense, as a percent of sales, was 0.98%0.87% in 2006,2008, as compared to 1.09%0.92% in 20052007 and 1.21%0.98% in 2004.2006. The decrease in rent expense, as a percent of sales, reflects our increasing sales leverage and our continued emphasis on ownership of real estate when available, as well as decreased charges for closed-store future rent liabilities in 2006 and 2005 compared to 2004.owning rather than leasing whenever possible.

    A-12A-11



       Depreciation and Amortization Expense

         Depreciation and amortization expense was $1,272 million, $1,265 million$1.4 billion in 2008, $1.4 billion in 2007 and $1,256 million for 2006, 2005 and 2004, respectively.$1.3 billion in 2006. The increases in depreciation and amortization expense were the result of capital expenditures totaling $1,777 million, $1,306 million$2.2 billion in 2008, $2.1 billion in 2007 and $1,634 million$1.8 billion in 2006, 2005 and 2004, respectively.2006. Depreciation and amortization expense, as a percent of sales, was 1.92%, 2.09%1.90% in 2008, 1.93% in 2007 and 2.23%1.92% in 2006, 2005 and 2004, respectively.2006. The decrease in our depreciation and amortization expense in 2008, compared to 2007, as a percent of sales, is primarily the result of totalincreasing sales. The increase in our depreciation and amortization expense in 2007, compared to 2006, as a percent of sales, increases.is due to an annual depreciation charge in both years with 2006 containing 53 weeks of sales due to the structure of our fiscal calendar.

       Interest Expense

         Net interest expense totaled $485 million in 2008, $474 million in 2007 and $488 million $510 million and $557 millionin 2006. The increase in interest expense in 2008, compared to 2007, was primarily the result of an increase in the average total debt balance for 2006, 2005 and 2004, respectively.the year, partially offset by interest income related to the mark-to-market of ineffective fair value swaps. The decrease in interest expense in 2007, compared to 2006, was the result of replacing borrowings with new borrowings at a lower interest rate. The average borrowings. During 2006, we reduced total debt $173 million from $7.2 billion as of January 28, 2006,balance in 2007 was comparable to $7.1 billion as of February 3, 2007. Interest expense in 2004 included $25 million related to the early retirement of debt.2006.

       Income Taxes

         Our effective income tax rate was 36.2%, 37.2%36.5% in 2008, 35.4% in 2007 and 136.4% for 2006, 2005 and 2004, respectively.36.2% in 2006. The effective tax rates for 2006 and 2005 differthose years differed from the federal statutory rate primarily due to the effect of state income taxes. In addition, the effective tax rate for 2004 due to the impairment of non-deductible goodwill in 2004. The effective income tax rates also differ2007 differs from the expected federal statutory rate in all years presented due to the effectresolution of state taxes as well as thesome tax issues. The effective rate in 2006 includes an adjustment of certainsome deferred tax balancesbalances.

    During thethird quarter of 2007, we resolved favorably some outstanding tax issues. This resulted in 2006.a 2007 tax benefit of approximately $40 million and reduced our effective tax rate by 1.9%.

         DuringIn 2006, during the reconciliation of our deferred tax balances, and after the filing of our annual federal and state tax returns, we identified adjustments to be made in the previousprior 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 fiscal 2006 provision for income tax expense of approximately $21 million and reduced the rate by 120 basis points.1.2%. 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 stock repurchase programprograms that compliescomply with Securities Exchange Act Rule 10b5-1 toand allow for the orderly repurchase of our common stock, from time to time. We made open market purchases totaling $448 million in 2008, $1.2 billion in 2007 and $374 million $239 million and $291 millionin 2006 under thisthese repurchase program during fiscal 2006, 2005 and 2004, respectively.programs. In addition to thisthese repurchase program,programs, 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, includingand the tax benefit from these exercises. We repurchased approximately $189 million in 2008, $270 million in 2007 and $259 million $13 million and $28 millionin 2006 under the stock option programprograms.

         In 2008, to preserve liquidity and financial flexibility, we reduced the amount of stock repurchased during 2006, 2005 and 2004, respectively.the year, decreasing the cash used for stock purchases in 2008, compared to 2007.

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    CAPITAL EXPENDITURES

         Capital expenditures, including changes in construction-in-progress payablepayables and excluding acquisitions, totaled $1,777 million$2.2 billion in 20062008 compared to $1,306 million$2.1 billion in 20052007 and $1,634 million$1.8 billion in 2004.2006. The declineincrease in 2005capital spending in 2008 compared to 2007 and 2006 was the result of our emphasis on the tightening of capital and increasing our focus on remodels, merchandising and productivity projects. 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    2008    2007    2006
    Beginning of year 2,507 2,532 2,532 2,4862,4682,507
    Opened 20 28 41 212320
    Opened (relocation) 17 12 20 14917
    Acquired 1 1 15 6381
    Acquired (relocation) — — 3  31—
    Closed (operational) (60)(54)(56)(32)(43)(60)
    Closed (relocation) (17)(12)(23)(17)(10) (17)
    End of year 2,468 2,507 2,532 2,481 2,4862,468
    Total food store square footage (in millions) 142 142 141 147145142

    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 February 3, 2007. CaseJanuary 31, 2009. We establish case reserves are established for reported claims using case-basis evaluation of the underlying claim data and are updatedwe update as information becomes known.

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         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. TheWe account for 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$4 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 $25 million on a per claim 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. Our estimates of liabilities incurred do not anticipate significant changes in historical trends for these variables, and any changes could have a considerable effect uponon future claim costs and currently recorded liabilities.

       Impairments of Long-Lived Assets

         In accordance with Statement 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, 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 for long-lived assets to be held and used, we compare the assets’ current carrying value to the assets’ fair value. Fair value is determined based on market values or discounted future cash flows to the asset’s current carrying value.flows. We record impairment when the carrying value exceeds the discounted cash flows.fair market value. With respect to owned property and equipment held for disposal, we adjust the value of the property and equipment to reflect recoverable values based on our previous efforts to dispose of similar assets and current economic conditions. We recognize impairment for the excess of the carrying value over the estimated fair market value, reduced by estimated direct costs of disposal. We recorded asset impairments in the normal course of business totaling $26 million in 2008, $24 million in 2007 and $61 million in 2006. We record costs to reduce the carrying value of long-lived assets in the Consolidated Statements of Operations as “Operating, general and administrative” expense.

         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. TheWe perform reviews are performed at the operating division level. Generally, fair value representsis determined using a multiple of earnings, or discounted projected future cash flows, and we compare

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    fair value to the carrying value of a division for purposes of identifying potential impairment. We base projected future cash flows on management’s knowledge of the current operating environment and expectations for the future. If we identify potential for impairment, we measure the fair value of a division against the fair value of its underlying assets and liabilities, excluding goodwill, to estimate an implied fair value of the division’s goodwill. We recognize goodwill impairment for any excess of the carrying value of the division’s goodwill over the implied fair value. If actual results differ significantly from anticipated future results for certain reporting units, we would need to recognize an impairment loss 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, 20052008, 2007 and 20042006 are summarized in Note 2 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, business valuations in the market, the economy and market competition.

       Intangible Assets

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

    Store Closing Costs

         We provide for closed store liabilities relating to the present value of the estimated remaining noncancellablenoncancelable 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. TheWe usually pay 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 madeWe make adjustments for changes in estimates in the period in which the change becomes known. We review store closing liabilities 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 incomeearnings 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. The 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.

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

       Post-Retirement Benefit Plans

    (a) Company-sponsored defined benefit Pension Plans

         Effective February 3, 2007, we adoptedWe account for our defined benefit pension plans using 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)132(R)(SFAS 158), which requiredrequire 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

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    and transition obligations that have not yet been recognized. We adopted the measurement date provisions of SFAS 158 effective February 3, 2008. The majority of our pension and postretirement plans previously used a December 31 measurement date. All plans are now measured as of our fiscal year end. The non-cash effect of the adoption of the measurement date provisions of SFAS 158 decreased shareowners’ equity by approximately $5 million ($3 million after-tax) and increased long-term liabilities by approximately $5 million. There was no effect on our results of operations.

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         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 1413 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. Actual 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 1413 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 is to reflect the rate at which the pension benefits could be effectively settled. In making this determination, we take into account the timing and amount of benefits that would be available under the plans. Our methodology for selecting the discount rate as of year-end 20062008 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 5.90%7.00% discount rate as of year-end 20062008 represents the equivalent single rate under a broad-market AA yield curve constructed by ouran outside consultant, Mercer Human Resource Consulting.consultant. We utilized a discount rate of 5.70%6.50% for year-end 2005.2007. The 2050 basis point increase in the discount rate decreased the projected pension benefit obligation as of February 3, 2007,January 31, 2009, by approximately $68$147 million.

         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 20062008 and 2005,2007, we assumed a pension plan investment return rate of 8.5%. Our pension plan’s average return was 9.7%4.1% for the 10 calendar years ended December 31, 2006,2008, net of all investment management fees and expenses. Our actual return forexpenses, primarily due to the poor performance of the financial markets in 2008. The value of all investments in our Company-sponsored defined benefit pension planplans during the calendar year ending December 31, 2006, on that same basis, was 13.4%2008, net of investment management fees and expenses declined 26.1%. We believe theour 8.5% pension return assumption is appropriate because we do not expect that future returns will achieve the same level of performanceperformances as the very long-term historical average annual return.return (for example, the S&P 500 Index has returned 8.4% annually on a compound basis for the 20 years ending December 31, 2008) for the various markets in which the plan invests. We have been advised that during 2007 and 2008, the trustees plan to reduce from 50% to 42% the allocation of pension plan assets to domestic and international equities and increase from 18% to 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 2007 and 2008,2009, the trustees plan to increase hedge funds within these sectors from 7% to 22%.the allocation of non-core assets, including high yield debt securities, commodities and real estate. Collectively, these changes should improve the diversification of pension plan assets. The trustees have advised us that they expect these changes will have little effect on the total returnportfolio risk but will reduceincrease the likelihood of achieving the 8.5% expected volatilityrate of the return. See Note 1413 to the Consolidated Financial Statements for more information on the asset allocations of pension plan assets.

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

    Projected Benefit
    PercentageObligationExpense
        Point ChangeDecrease/(Increase)Decrease/(Increase)
    Discount Rate +/-1.0%- 1.0%   $257/($309)  $350/($306)$38/13/($36)28)
    Expected Return on Assets+/-1.0%- 1.0%—$21/($21)

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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 $20 million in 2008, $52 million in 2007 and $150 million $300 million and $35 millionin 2006 to our Company-sponsored defined benefit pension plans in 2006, 2005 and 2004, respectively.plans. Although we areKroger is not required to make cash contributions to ourits Company-sponsored defined benefit pension plans during fiscal 2007,2009, we contributed $50made a $200 million to the planscash contribution on February 5, 2007. We may elect to make additional voluntary contributions to our Company-sponsored pension plans in order to maintain our desired funding status.2, 2009. Additional contributions may be made if our cash flows from operations exceed our expectations.required under the Pension Protection Act to avoid any benefit restrictions. We expect any electivevoluntary contributions made during 20072009 will decreasereduce 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.

         Effective January 1,Net periodic benefit cost decreased in 2008 and 2007 compared to 2006 due to participants in the Cash Balance formula of the Consolidated Retirement Benefit Plan was replaced withbeing moved to a defined contribution 401(k) Retirement Savings Account Plan, whichretirement savings account plan effective January 1, 2007. Participants under that formula continue to earn interest on prior contributions but no additional pay credits will providebe earned. The 401(k) retirement savings plan provides to eligible employees both Company matching contributions and other Companyautomatic contributions from Kroger based uponon participant contributions, plan compensation, and length of service, to eligible employees.service. We expect to make matching contributionscontributed and expensed $92 million in 2008 and $90 million in 2007 of approximately 75 million.to employee 401(k) retirement savings accounts.

    (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 $219 million in 2008, $207 million in 2007, and $204 million in 2006, $196 million in 2005, and $180 million in 2004. We estimate we would have contributed an additional $2 million in 2004 but our obligation to contribute was suspended during the southern California labor dispute.2006.

         Based on the most recent information available to us, we believe that the present value of actuarially 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., the amount of underfunding), as of December 31, 2006.2008. 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. Nonetheless, the underfunding is not a direct obligation or liability of Kroger or of any employer. As of December 31, 2006,2008, we estimate that Kroger’s share of the underfunding of multi-employer plans to which Kroger contributes was $600 million to $800 million,$3.0 billion, pre-tax, or $375 million to $500 million,$1.9 billion, after-tax. This represents a decreasean increase in the amount of underfunding estimated as of December 31, 2005. This decrease2008, compared to December 31, 2007. The increase in the amount of underfunding 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.recent market downturn. Our

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    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 2006,2008, our contributions to these plans increased approximately 4%6% over the prior year and have grown at a compound annual rate of approximately 6% since 2003. We2004.We do not expect a significant increase in our contributions to increase by approximately 1.0%multi-employer pension plans in 2007. The amount of increases in 20072009, compared to 2008, subject to collective bargaining and beyond has been favorably affected by significant improvement incapital market conditions. We believe our contributions to multi-employer pension plans could as much as double over the values of assets held in trusts, by the labor agreements negotiated in southern California and elsewhere in recentnext several years, and by related trustee actions. Although underfunding can result in the imposition of excise taxes on contributing employers, increased contributions canafter 2009, to reduce underfunding so that excise taxes are not triggered. Our estimate of future contribution increases takes into account the avoidance of those taxes.this underfunding. 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,Employers’ Accounting for Pensions.

         The amount of underfunding described above is an estimate and is disclosed forcould change based on contract negotiations, returns on the purpose described.assets held in the multi-employer plans and benefit payments. The amount could decline, and Kroger’s future expense would be favorably affected, if the values of netthe 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 wouldcould increase and Kroger’s future expense could be adversely affected if netthe 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 ContingenciesFair Value of Financial Instruments

         Various taxing authorities periodically auditIn September 2006, the FASB issued SFAS No. 157,Fair Value Measurements(SFAS 157), which defines fair value, establishes a market-based framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 does not expand or require any new fair value measurements. SFAS 157 is effective for financial assets and financial liabilities for fiscal years beginning after November 15, 2007. FASB Staff Position (FSP) 157-2Partial Deferral of the Effective Date of Statement No. 157(FSP 157-2), deferred the effective date of SFAS 157 for most non-financial assets and non-financial liabilities to fiscal years beginning after November 15, 2008. Effective February 3, 2008, we adopted SFAS 157, except for non-financial assets and non-financial liabilities which are deferred until February 1, 2009 by FSP 157-2.

         SFAS 157 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The three levels of the fair value hierarchy defined by SFAS 157 are as follows:

         Level 1 – Quoted prices are available in active markets for identical assets or liabilities;

         Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable;

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         Level 3 – Unobservable pricing inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing an asset or liability.

         For those financial instruments carried at fair value in the consolidated financial statements, the following table summarizes the fair value of these instruments at January 31, 2009:

    Fair Value Measurements Using
    (in millions)

     Quoted Prices in           
    Active MarketsSignificant
    for IdenticalSignificant OtherUnobservable 
     AssetsObservable Inputs Inputs
        (Level 1)    (Level 2)    (Level 3)    Total
    Available-for-Sale Securities  $11  $ —  $ —  $11 

    Variable Interest Entities

    In December 2008, the FASB issued FAS 140-4 and FIN 46(R)-8,Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities(FAS 140-4 and FIN 46(R)-8). FAS 140-4 and FIN 46(R)-8 require additional disclosures about an entity’s involvement with variable interest entities and transfers of financial assets. Effective January 31, 2009, we adopted FAS 140-4 and FIN 46(R)-8.

    In the first quarter of 2008, we made an investment in The Little Clinic LLC (“TLC”). TLC operates supermarket walk-in medical clinics in seven states, primarily in the Midwest and Southeast. At the date of investment, TLC was determined to be a variable-interest entity (“VIE”) under FASB Interpretation No. 46R,Consolidation of Variable Interest Entities (FIN 46R), with Kroger being the primary beneficiary. We were deemed the primary beneficiary due to our income tax returns. These audits include questions regardingcurrent ownership interest and half of our tax filing positions, includingwritten put options being at a floor price. As a result, we consolidated TLC in accordance with FIN 46R. The minority interest was recorded at fair value on the timing andacquisition date. The fair value of TLC was determined based on the amount of deductionsthe investment made by Kroger and the allocationpercentage acquired. Our assessment of incomegoodwill represents the excess of this amount over the fair value of TLC’s net assets as of the investment date. Creditors of TLC have no recourse to various tax jurisdictions.the general credit of Kroger. Conversely, creditors of Kroger have no recourse to the assets of TLC. In evaluating the exposures connected with these various tax filing positions, including state and local taxes, we record allowances for probable exposures. A numberaddition, if requested by TLC’s Board of years may elapse before a particular matter, for whichDirectors by January 1, 2010, we have establishedagreed to make a pro rata portion of an allowance, is audited and fully resolved. As of February 3, 2007, tax years 2002 through 2004 were undergoing examination by the Internal Revenue Service.additional capital contribution.

         The establishmenttable below shows the unaudited amounts of assets and liabilities from TLC included in our tax contingency allowances relies on the judgmentconsolidated results, after eliminating intercompany items, as 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 StatementsJanuary 31, 2009 (in millions of Operations.dollars):

        2008
    Current assets$31
    Property, plant and equipment, net7
    Goodwill 102
    Other assets1
           Total Assets$141
    Current liabilities$4
    Minority interests$82

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         ToIn the extent thatfourth quarter of 2008, we prevailbecame the primary beneficiary of i-wireless, LLC a VIE in matters for which allowanceswe have been established, or are requireda 25% ownership interest. We were deemed the primary beneficiary due to pay amountsour current ownership interest, $25 million line of credit guarantee, and $8 million loan to i-wireless, LLC. We became the primary beneficiary, in the fourth quarter of 2008, under FIN 46R after lending $8 million to i-wireless, LLC. i-wireless, LLC sells prepaid phones primarily in our stores. The minority interest was recorded at fair value. The fair value of i-wireless, LLC was determined based on the amount of the investment made by Kroger in the fourth quarter of 2007 and the percentage acquired. Our assessment of goodwill represents the excess of these allowances, our effective tax rate in any given financial statement period could be materially affected. An unfavorable tax settlement could require usethis amount over the fair value of cash and result in an increasei-wireless, LLC net assets as of the date of the loan. We have guaranteed the indebtedness of i-wireless, LLC, up to $25 million, which is collateralized by $8 million of inventory located in our effective tax rate instores. The creditors of Kroger have no recourse to the yearassets of resolution. A favorable tax settlement would be recognized as a reductioni-wireless, LLC.

         The table below shows the preliminary and unaudited amounts of assets and liabilities from i-wireless, LLC included in our effective tax rate in the yearconsolidated results, after eliminating intercompany items, as of resolution.January 31, 2009 (in millions of dollars):

        2008
    Current assets$   10
    Property, plant and equipment, net2
    Goodwill25
    Other assets 5
        Total Assets$42
    Current liabilities$5
    Long-term debt$30
    Minority interests$1

       Share-Based Compensation Expense

         Effective January 29, 2006, we adoptedWe account for stock options under 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.(SFAS 123(R)). 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 In addition, we account for restricted stock awards under 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 the 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 judgment 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 grants that could be different than those used to record share-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 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 by 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 grant date of the award.

         In 2006, we recognized total stock compensation expense of $72 million. This included $50 million for stock options and $22 million for restricted shares. A total of $18 million 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 (as described in Note 10 to the Consolidated Financial Statements), and the remaining $4 million 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 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 duringperiod 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 alapse.

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    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% in 2008 and 97% in 2007 of inventories for 2006 and 2005, respectively, were valued using the LIFO method. Cost for the balance of the inventories was determined using the first-in, first-out (“FIFO”)FIFO method. Replacement cost was higher than the carrying amount by $450$800 million at January 31, 2009, and by $604 million at February 3, 2007, and by $400 million at January 28, 2006.2, 2008. We follow the Link-Chain, Dollar-Value LIFO method for purposes of calculating our LIFO charge or credit.

         TheWe follow 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

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    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.

         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, we recognize vendor allowances are recognized as a reduction in merchandise costs based on inventory turns and recognized as the product is sold. We recognized approximately $3.5 billion in 2008, $3.6 billion in 2007 and $3.3 billion $3.2 billion and $3.1 billionin 2006 of vendor allowances as a reduction in merchandise costs in 2006, 2005 and 2004, respectively.costs. We recognized more than 80%85% of all vendor allowances in the item cost with the remainder being based on inventory turns.

    LIQUIDITYAND CAPITALRESOURCES

       Cash Flow Information

         Net cash provided by operating activities

         We generated $2,351 million$2.9 billion of cash from operations in 20062008 compared to $2,192 million$2.6 billion in 20052007 and $2,330 million$2.4 billion in 2004.2006. The increase in cash generated from operating activities was primarily due to strong operating results adjusted for non-cash expenses. In addition, to changes in net earnings, changes in our operating assets and liabilities also affectaffected the amount of cash provided by our operating activities. During 2006, weWe realized a

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    $129 million decreasedecreases in cash from changes in operating assets and liabilities of $411 million in 2008, $164 million in 2007 and $129 million in 2006. The increase in the change in operating assets and liabilities in 2008, compared to a $121 million2007, is primarily due to an increase in income taxes receivable. The increase in the change in operating assets and a $116 million decrease during 2005 and 2004, respectively.liabilities in 2007, compared to 2006, is primarily attributable to an increase in forward inventory buying activity. These amounts are also net of cash contributions to our Company-sponsored defined benefit pension plans totaling $150$20 million in 2006, $3002008, $52 million in 20052007, and $35 million$150 in 2004.

         The amount of cash paid for income taxes in 2006 was higher than the amounts paid in 2005 and 2004 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. This benefit reversed in 2005 and increased our cash taxes by approximately $71 and $108 million in 2006 and 2005, respectively.2006.

         Net cash used by investing activities

         Cash used by investing activities was $1,587 million$2.2 billion in 2006,2008, compared to $1,279 million$2.2 billion in 20052007 and $1,608 million$1.6 billion in 2004.2006. Our use of cash for investing activities was consistent in 2008, compared to 2007. The amount of cash used by investing activities increased in 2007, compared to 2006, due primarily to increasedhigher capital spending partially offset by higher proceeds from the sale of assets.and payments for two acquisitions. Capital expenditures, including changes in construction-in-progress payables and excluding acquisitions, were $1,777 million, $1,306 million and $1,634$2.2 billion in 2006, 20052008, $2.1 billion in 2007 and 2004, respectively.$1.8 billion in 2006. 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 $785$769 million of cash in 20062008 compared to $847$310 million in 20052007 and $737$785 million in 2004. Lower2006. The increase in the amount of cash used in 2008, compared to 2007, was primarily a result of payments for debt reduction in 2006 were partiallyon long term-debt and the bank revolver, offset by increaseddecreased stock repurchase activitiesrepurchases.

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    The decrease in the amount of cash used in 2007, compared to 2006, was primarily a result of proceeds received from the issuance of long term-debt, offset by greater stock repurchases and dividend payments in 2006.dividends paid. We repurchased $633$637 million of Kroger stock in 20062008 compared to $252$1.4 billion in 2007 and $633 million in 2005 and $3192006. We paid dividends totaling $227 million in 2004,2008, $202 million in 2007 and paid dividends totaling $140 million in 2006.

       Debt Management

         Total debt, including both the current and long-term portions of capital leases and financing obligations, decreased $173$59 million to $8.1 billion as of year-end 2008 from $8.1 billion as of year-end 2007. The slight decrease in 2008, compared to 2007, resulted from the issuance of $400 million of senior notes bearing an interest rate of 5.00%, $375 million of senior notes bearing an interest rate of 6.90% and $600 million of senior notes bearing an interest rate of 7.50%, offset by decreased commercial paper, the payments on the bank revolver, the repayment of $200 million of senior notes bearing an interest rate of 6.375% and $750 million of senior notes bearing an interest rate of 7.45% that came due in 2008. Total debt increased to $8.1 billion as of year-end 2007 from $7.1 billion as of year-end 2006. The increases in 2007, compared to 2006, resulted from $7.2 billion asthe issuance of year-end 2005. Total debt decreased $739$600 million to $7.2 billion as of year-end 2005 from $8.0 billion assenior notes bearing an interest rate of year-end 2004. The decreases were primarily6.4%, $750 million of senior notes bearing an interest rate of 6.15% and borrowings under the resultbank credit facility in 2007, offset by the repayment of using cash flow from operations to reduce outstanding debt.$200 million of senior notes bearing an interest rate of 7.65% and $300 million of senior notes bearing an interest rate of 7.80% that came due in 2007.

         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,Accounting for Derivative Investments and Hedging Activities, as amended. We had prefunded employee benefit costs of $300 million at year-end 2006, 2005in each of the three years ended 2008, 2007 and 2004.2006. The mark-to-market adjustments increased the carrying value of our debt by $17$45 million $27in 2008 and $44 million and $70 million as of year-end 2006, 2005 and 2004, respectively.in 2007.

       Factors Affecting Liquidity

         We currently borrow on a daily basis approximately $170$250 million under our F2/P2/A3 rated commercial paper (“CP”) program. These borrowings are backed by our credit facility, and reduce the amount we can borrow under the credit facility. We have capacity available under our credit facility to backstop all CP amounts outstanding. If our credit rating declineddeclines 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 facility, under which we believe we have sufficient capacity. Borrowings under the credit facility 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 facility is not affected by our credit rating, the interest cost on borrowings under the credit facility wouldcould be affected by a decrease in our credit rating or a decrease in our Applicable Percentage Ratio.

         Our credit facility also requires 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 facility. These financial covenants and ratios are described below:

    • Our Applicable Percentage Ratio (the ratio of Consolidated EBITDA to Consolidated Total InterestExpense,Interest Expense, as defined in the credit facility) was 7.508.59 to 1 as of February 3, 2007. Upon furnishing noticeto the lenders, this ratio will entitle us to a 0.05% reduction in fees under the credit facility. AlthoughourJanuary 31, 2009. Our current borrowing rate isrates are determined based onfrom the better of our Applicable Percentage Ratio under certaincircumstances that borrowing rate could be determined by reference toor our credit ratings.
      ratings asdefined by the credit facility.

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    • Our Leverage Ratio (the ratio of Net Debt to Consolidated EBITDA, as defined in the credit facility)was 2.042.02 to 1 as of February 3, 2007.January 31, 2009. If this ratio exceeded 3.50 to 1, we would be in default of ourcredit facility and our ability to borrow under the facility would be impaired.
       
    • Our Fixed Charge Coverage Ratio (the ratio of Consolidated EBITDA plus Consolidated Rental ExpensetoExpense to Consolidated Cash Interest Expense plus Consolidated Rental Expense, as defined in the creditfacility)credit facility) was 3.664.12 to 1 as of February 3, 2007.January 31, 2009. If this ratio fell below 1.70 to 1, we would be in defaultofdefault of our credit facility and our ability to borrow under the facility would be impaired.

         Consolidated EBITDA, as defined in our credit facility, includes an adjustment for unusual gains and losses. Our credit agreement is more fully described in Note 5 to the Consolidated Financial Statements. We were in compliance with our financial covenants at year-end 2006.2008.

         The tables below illustrate our significant contractual obligations and other commercial commitments, based on year of maturity or settlement, as of February 3, 2007January 31, 2009 (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
         2009     2010     2011     2012     2013     Thereafter     Total
    Contractual Obligations(1) (2)    
    Long-term debt (5)$528$542$544$1,414$1,019$3,550$7,597
    Interest on long-term debt (3)4794263983502862,4424,381
    Capital lease obligations5351574845219473
    Operating lease obligations7787386746245753,274 6,663
    Low-income housing obligations2————— 2
    Financed lease obligations1313131313172237
    Self-insurance liability (4)19211073452622468
    Construction commitments128— —— ——128
    Purchase obligations 394 87 63  51 28 19 642
    Total$2,567$1,967$1,822$2,545$1,992$9,698$20,591
    Other Commercial Commitments     
    Credit facility (5)$129$—$—$—$—$—$129
    Standby letters of credit344— ————344
    Surety bonds  106—————106
    Guarantees  27  — — — — — 27
    Total$606$—$—$—$—$—$606
    ____________________

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    (1)     The contractual obligations table excludes funding of pension and other postretirement benefit obligations, which totaled approximately $45 million in 2008. This table also excludes contributions under various multi-employer pension plans, which totaled $219 million in 2008.
    (2)We adopted FIN 48 on February 4, 2007. See Note 4 to our Consolidated Financial Statements for information regarding the adoption of FIN 48. The liability related to unrecognized tax benefits has been excluded from the contractual obligations table because a reasonable estimate of the timing of future tax settlements cannot be determined.
    (3)Amounts include contractual interest payments using the interest rate as of February 3, 2007January 31, 2009 applicable to our variable interest debt instruments, excluding commercial paper borrowings due to the short-term nature of these borrowings, and stated fixed and swapped interest rates, if applicable, for all other debt instruments.

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    (4)The amounts included in the contractual obligations table for self-insurance liability have been stated on a present value basis.
    (5)Long-term debt includes amounts under our credit facility which are also included in the Other Commercial Commitments table.

         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 February 3, 2007,January 31, 2009, we maintained a $2.5 billion, five-year revolving credit facility totaling $2.5 billion, whichthat, unless extended, terminates in 2011. Outstanding borrowings under the credit agreement and commercial paper borrowings, and some outstanding letters of credit, reduce funds available under the credit facility.agreement. In addition to the credit facility,agreement, we maintain a $50 millionmaintained three uncommitted money market line, borrowings under which also reducelines totaling $75 million in the funds available under our credit facility.aggregate. The money market line borrowingslines allow us to borrow from banks at mutually agreed upon rates, usually at rates below the rates offered under the credit agreement. As of February 3, 2007,January 31, 2009, we had outstandingno borrowings totaling $352 million under our credit agreement and net outstanding commercial paper program. Weof $90 million, that reduced amounts available under our credit agreement. In addition, as of January 31, 2009, we had no borrowings under theour money market line as of February 3, 2007.lines totaling $39 million. The outstanding letters of credit that reduced thereduce funds available under our credit facilityagreement totaled $331$337 million as of February 3, 2007.January 31, 2009.

         In addition to the available credit mentioned above, as of February 3, 2007,January 31, 2009, we had availableauthorized for issuance $1.2$1.4 billion of securities under a shelf registration statement filed with the SEC and declared effective on December 9, 2004.20, 2007.

         We also maintain surety bonds related primarily to our self-insured workers compensation claims. These bonds are required by most states in which we are self-insured for workers’ compensation and are placed with third-party insurance providers to insure payment of our obligations in the event we are unable to meet our claim payment obligations up to our self-insured retention levels. These bonds do not represent liabilities of Kroger, as we already have reserves on our books for the claims costs. 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 affect our ability to access these surety bonds, if this does become an issue, we would issue letters of credit, in states where allowed, against our credit facility to meet the state bonding requirements. This could increase our cost and decrease the funds available under our credit facility.

         Most of our outstanding public debt is jointly and severally, fully and unconditionally guaranteed by The Kroger Co. and some of our subsidiaries. See Note 1716 to the Consolidated Financial Statements for a more detailed discussion of those arrangements. In addition, we have guaranteed half of the indebtedness of threetwo real estate joint venturesentities in which we are a partner withhave 50% ownership.ownership interest. Our share of the responsibility for this indebtedness, should the partnershipsentities be unable to meet their obligations, totals approximately $6$7 million. Based on the covenants underlying this indebtedness as of February 3, 2007,January 31, 2009, it is unlikely that we will be responsible for repayment of these obligations. We have also agreed to guarantee, up to $25 million, the indebtedness of an entity of which we have 25% ownership interest. Our share of the responsibility, as

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    of January 31, 2009, should the entity be unable to meet its obligations, totals approximately $25 million and is collateralized by approximately $8 million of inventory located in our stores. In addition, we have guaranteed half of the lease payments of a location leased by an entity in which we have a 50% ownership interest. The net present value of the guaranteed rental payments is approximately $6 million.

         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 contribution obligations and 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 not aware of noany current matter that we expect tocould result in a material liabilityliability.

    RECENTLY ADOPTED ACCOUNTING STANDARDS

         In December 2004, the FASB issued SFAS No. 123 (Revised 2002),Effective January 31, 2009, we adopted FAS 140-4 and FIN 46(R)-8,Share-Based PaymentDisclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities (“SFAS No. 123(R)”), which replaced SFAS No. 123, superseded APB No. 25(FAS 140-4 and related interpretationsFIN 46(R)-8).FAS 140-4 and amended SFAS No. 95,StatementFIN 46(R)-8 require additional disclosures about an entity’s involvement with variable interest entities and transfers of Cash Flows. SFAS No 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. We adopted the provisions of SFAS No. 123(R) in the first quarter of 2006. The implementation of SFAS No. 123(R) reduced our net earnings $0.06 per diluted share in 2006.assets. See Note 102 to ourthe Consolidated Financial Statements for further discussion of the effectadoption of FAS 140-4 and FIN 46(R)-8.

    Effective February 3, 2008, we adopted SFAS No. 157, Fair Value Measurements (SFAS 157), except for non-financial assets and non-financial liabilities as deferred until February 1, 2009 by FASB Staff Position (FSP) 157-2Partial Deferral of the Effective Date of Statement No. 157 (FSP 157-2). SFAS 157 defines fair value, establishes a market-based framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 does not expand or require any new fair value measurements. FSP 157-2 deferred the effective date of SFAS 157 for most non-financial assets and non-financial liabilities to fiscal years beginning after November 15, 2008. See Note 7 to the Consolidated Financial Statements for further discussion of the adoption of SFAS No. 123(R) had on our Consolidated Financial Statements.157.

         In September 2006, theEffective February 4, 2007, we adopted FASB issued 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). SFAS No. 158 requires an employer that sponsors 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 those changes be recorded in comprehensive income, net of tax, as a separate component of shareowners’ equity. SFAS No. 158 also requires additional footnote disclosure. The recognition and disclosure provisions of SFAS No. 158 became effective for us on February 3, 2007. The measurement date provisions of SFAS No. 158 will become effective for our fiscal year beginning 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-anTaxes – an interpretation of FASB Statement No. 109. FIN (FIN No. 4848), which 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 Interpretationinterpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN No. 48 becomes effectiveSee Note 4 to the Consolidated Financial Statements for our fiscal year beginning February 4, 2007. We are evaluatingfurther discussion of the effect the implementationadoption of FIN No. 48 will48.

    Effective February 3, 2007, we adopted the recognition and disclosure provisions (except for the measurement date change) of SFAS No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB Statement No. 87, 99, 106 and 132(R)(SFAS 158), which requires the recognition of the funded status of our retirement plans on the Consolidated Balance Sheet. Actuarial gains or losses, prior service costs or credits and transition obligations that have on our Consolidated Financial Statements.not yet

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    been recognized are required to be recorded as a component of AOCI. We adopted the measurement date provisions of SFAS 158 effective February 3, 2008. The majority of our pension and postretirement plans previously used a December 31 measurement date. All plans are now measured as of our fiscal year end. The non-cash effect of the adoption of the measurement date provisions of SFAS 158 decreased shareowners’ equity by approximately $5 million ($3 million after-tax) and increased long-term liabilities by approximately $5 million. There was no effect on our results of operations. See Note 13 to the Consolidated Financial Statements for further discussion of the adoption of this standard.

    RECENTLY ISSUED ACCOUNTING STANDARDS

         In September 2006,December 2007, the FASB issued SFAS No. 157,160,Fair Value MeasurementNoncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51(SFAS 160). SFAS No. 157 defines fair value, establishes160 will require the consolidation of noncontrolling interests as a framework for measuring fair value in GAAP and expands disclosures about fair value measurement.component of equity. SFAS No. 157 does not require any new fair value measurements. SFAS No. 157160 will become effective for our fiscal year beginning February 3, 2008.1, 2009. We are currently evaluating the effect the implementationadoption of SFAS No. 157160 will have on our Consolidated Financial Statements.

         In FebruaryDecember 2007, the FASB issued SFAS No. 159,141 (Revised 2007),The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115Business Combinations.(SFAS 141R), which replaces SFAS No. 159 permits entities to make an irrevocable election to measure certain financial instruments141. SFAS 141R further expands the definitions of a business 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 subsequentmeasurement and reporting date.in a business combination. SFAS No. 159141R will be become effective for our fiscal year beginning February 3, 2008.1, 2009. Because the standard will only impact transactions entered into after February 1, 2009, SFAS 141R will not effect our Consolidated Financial Statements upon adoption.

    In March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities (SFAS 161). SFAS 161 requires enhanced disclosures of an entity’s derivative and hedging activities. SFAS 161 will become effective for our fiscal year beginning February 1, 2009. We are currently evaluating the effect the adoption of SFAS No. 159161 will have on our Consolidated Financial Statements.

         In June 2006,2008, the FASB ratified the consensus of Emerging Issues Task Force (“EITF”) issueissued FSP No. 06-03,EITF 03-6-1,How Taxes Get Collected from CustomersDetermining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities(FSP No. EITF 03-6-1).FSP No. EITF 03-6-1 clarifies that share-based payment awards that entitle their holders to receive nonforfeitable dividends before vesting should be considered participating securities and Remitted to Governmental Authorities Should Be Presentedincluded in the Income Statement (That Is, Gross versus Net Presentation).calculation of basic EPS. FSP No. 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 becomes03-6-1 will become effective for our fiscal year beginning February 4, 2007.1, 2009. We do not expectare currently evaluating the effect the adoption of FSP No. EITF No. 06-03 to03-6-1 will have a material 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.

    A-26



         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 diluted share in the range of $1.60-$2.00-$1.652.05 for 2007.2009. This represents earnings pershareearningsper share growth of approximately 9%-12%4%-7% in 2007, net of2009, excluding the effect of a 53rdweek in fiscal 2006 ofapproximately $0.07$0.02 per diluted share.
      share charge in2008 related to Hurricane Ike. In addition, our shareholder return is enhanced by our dividend byover 1%.

    • We anticipate earnings per share growth rates in the 1stand 4thquarters of 2007 will be less than theannual growth rate, and the 2ndand 3rdquarter growth rates will be higher than the annual growthrate.

    • We expect identical food storesupermarket sales growth, excluding fuel sales, of 3%-5%-4% in 2007.

    A-27



    • 2009, assumingproduct cost inflation of 1%-2%. In fiscal 2007,2009, we will continue to focus on driving sales growth and balancing investments in grossmargin andgross marginand improved customer service with operating cost reductions to provide a better shoppingexperience for our customers. We expectto finance these investments with operating cost reductions. We expect non-fuel operating margins tomarginsto improve slightly in 2007.2009, excluding the benefit of an expected lower LIFO charge. 

    • In 2009, we expect fuel margins to be approximately $0.11 per gallon, as well as continued stronggrowth in gallons sold.
    • In 2009, we expect the LIFO charge to be $75 million, assuming product cost inflation of 1%-2%.
       
    • We plan to use overcash flow primarily for capital investments, debt reduction and to pay cash dividends.As market conditions change, we plan to re-evaluate the long-term, one-thirdabove uses of cash flow for debt reduction and two-thirds forour stockrepurchase and payment of a cash dividend.activity.
       
    • 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 asfocusingas focusing on productivity increase from our existing store base through remodels. In addition, we willcontinuewill continue our emphasis on self- developmentself-development and ownership of real estate, logistics and technologyimprovements.technology improvements. 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 operationstooperations to finance capital expenditure requirements. We expect capital investment for 20072009 to be in therangethe range of $1.9-$2.1billion, excluding acquisitions. Total food store square footage is expected to growapproximately 2%1.5%-2.0% before acquisitions and operational closings.
       
    • Based on current operating trends, we believe that cash flow from operations and other sources ofliquidity, including borrowings under our commercial paper program and bank credit facility, will beadequate to meet anticipated requirements for working capital, capital expenditures, interest paymentsandpaymentsand 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 believe we have adequate sources of cash if needed under our credit agreement.
       
    • 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 potential future labor disputes, offset by improved productivityfromproductivityfrom process changes cost savings negotiated in recently completed labor agreements and leveragegained through sales increases.
       
    • We expect that our effective tax rate for 20072009 will be approximately 38%, excluding any effects fromthe implementation of FIN No. 48.
      37%.

    A-27



    • 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 20072009 there will be opportunities to reduce our operating costs in such areas asadministration, labor,productivity improvements, shrink, warehousing and transportation. These savings willsavingswill be invested in ourcoreour core business to drive profitable sales growth and offer improved value andshopping experiences forour customers.
       
    • Although we arewere not required to make cash contributions to Company-sponsored defined benefitpension plans during fiscal 2007,2008 and do not anticipate being required to do so in 2009, we contributed$20 million to these plans in 2008 and we made a $50 millioncash$200 million contribution to our Company-sponsored pension plansin 2009 on February 5, 2007. Additional voluntarycontributions may be made if our cash flows from operations exceed our expectations.2,2009. We expectany additionalexpect any elective contributions made during 20072009 will reducedecrease our required contributionsin future years.Amongyears. Among other things, investment performance of plan assets, the interest rates required to be usedtoused to calculate the pension obligations, and future changes in legislation, will determine the amounts of anyadditionalany additional contributions. We also expect 2009 expense for Company-sponsored defined benefit pension plans to be comparable to 2008. In addition, we expect to make automaticour cash contributions and matching cash contributionsexpense to the 401(k) Retirement Savings Account Plan totaling $75 millionfrom automatic and matching contributions to participants to increase in 2007.2009, compared to 2008.
    • We do not expect a significant increase in our contributions to multi-employer pension plans in 2009compared to 2008 subject to collective bargaining and capital market conditions. In addition, webelieve our contributions to multi-employer pension plans could as much as double over the nextseveral years after 2009.
       
    • We expect our contributionsexpense from the credit extended to multi-employer pension plansour customers through our company brandedcredit card in 2009 to increase at 1.0% overbe comparable to 2008 of $14 million. The 2008 expense represents an increasein net charge-offs of approximately $8 million, compared to 2007, due to the $204million we contributed during 2006.weak economy, higheroutstanding balances, and portfolio maturation. This rate is still below the credit card industry average

    A-28and the credit portfolio continues to have an above-average credit score.



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


    • The extent to which our sources of liquidity are sufficient to meet our requirements may be affectedby the state of the financial markets and the impact that such condition has on our ability to issuecommercial paper at acceptable rates. Our ability to borrow under our committed lines of credit,including our bank credit facilities, could be impaired if one or more of our lenders under those linesis unwilling or unable to honor its contractual obligation to lend to us.
    • We have various labor agreements expiringthat will be negotiated in 2007,2009, covering associates in southern California,Cincinnati, Detroit, Houston, Memphis, Toledo, SeattleAlbuquerque,Arizona, Atlanta, Dallas, Dayton, Denver and West Virginia. We are currently operatingunder a contract extension in southern California.Portland. In all of these store contracts, rising health care andpensioncareand pension 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 work stoppagestoppage affecting a substantial number of locations could have a material effect on our results.
    • If market conditions change, it could affect our uses of cash flow.
       
    • Our ability to achieve sales and earnings goals may be affected by: labor disputes; industryconsolidation; industry consolidation;pricing and promotional activities of existing and new competitors, including non-traditional competitors; our response to these actions; the state of the economy, including theinflationarythe inflationary and deflationary trends in certain commodities; trends in consumer spending; stock repurchases; and the success ofour future growth plans.

    A-28



    • Our estimate of product cost inflation could be affected by general economic conditions, weather,availability of raw materials and ingredients in the products that we sell and their packaging, andother factors beyond our control.
    • The timing of our recognition of LIFO expense will be affected primarily by expected food inflationduring the year.
    • If actual results differ significantly from anticipated future results for certain reporting units andvariable interest entities, an impairment loss for any excess of the carrying value of the division’sgoodwill over the implied fair value would need to be recognized.
       
    • In addition to the factors identified above, our identical store sales growth could be affected byincreases in Kroger private label sales, the effect of our “sister stores” (new stores opened in closeproximitycloseproximity to an existing store) and reductions in retail pricing.
    • Our operating margins, without fuel, could fail to slightly improve as expected if we are unsuccessful at containingunable topass on any cost increases, fail to deliver the cost savings contemplated or if changes in the cost of ourinventory and the timing of those changes differs from our expectations.
    • Our expected operating margin per gallon of fuel and fuel gallons sold could be affected by changesin the price of fuel or a change in our operating costs.
       
    • We have estimated our exposure to the claims and litigation arising in the normal course of business,as well as into the material litigation facing Kroger, and believe we have made adequate provisions for themwhereprovisionsfor them where it is reasonably possible to estimate and where we believe an adverse outcome is probable.isprobable. 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 and pay acash 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.earnings.
       
    • 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, iscomputed principally using the straight-line method over the estimated useful lives of individualassets, or the remaining terms of leases. Use of the straight-line method of depreciation creates a riskthat 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 actual amount of ourautomatic and matching cash contributions underto our 401(k) Retirement Savings AccountSavingsAccount Plan will depend on the number of participants, savings rate, plan compensation, and lengthwill be affected by the actual amounts contributed byof service of participants.
       
    • We believe theOur contributions and recorded expense related to multi-employer pension funds to which we contribute are substantially underfunded.Shouldcould increasemore than anticipated. Should asset values in these funds further deteriorate, or if employers withdraw fromwithdrawfrom these funds withoutprovidingwithout providing for their share of the liability, or should our estimates prove to beunderstated, ourcontributionsour contributions could increase more rapidly than we have anticipated, after 2009.
    • If weakness in the financial markets continues or worsens, our contributions to Company-sponsoreddefined benefit pension plans could increase more than anticipated.

    A-29




    • The grocery retail industry continues to experience fierce competition from other traditional foodretailers, supercenters, mass merchandisers, club or warehouse stores, drug stores and restaurants.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.
    • 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 therate of inflation, population growth and employment and job growth in the markets in which weoperate, may affect our ability to hire and train qualified employees to operate our stores. This wouldnegatively 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, wecontinue to add supermarket fuel centers to our store base. Since gasoline generates low profitmargins, including generating decreasedprofit margins, as the market price increases, we expect to seeoursee our FIFO gross profit margins decline as gasoline sales increase. Although this negativelythisnegatively affects ourFIFOour FIFO gross margin, gasoline sales provide a positive effect on operating, general and administrativeOG&A expenseexpenses 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 fornew stores, if development costs vary from those budgeted or if our logistics and technology projectsareprojectsare not completed in the time frame expected or on budget.
       
    • Interest expense could be adversely affected by the interest rate environment, changes in the Company’scredit ratings, fluctuations in the amount of outstanding debt, decisions to incur prepayment penaltieson the early redemption of debt and any factor that adversely affects our operations thatand results in anincrease in debt.
    • Impairment losses could be affected by changes in our assumptions of future cash flows or marketvalues. Our cash flow projections include several years of projected cash flows and include assumptionson variables such as inflation, the economy and market competition.
    • Our estimated expense and obligation for Company-sponsored pension plans and other post-retirementbenefits could be affected by changes in the assumptions used in calculating those amounts. Theseassumptions include, among others, the discount rate, the expected long-term rate of return on planassets, average life expectancy and the rate of increases in compensation and health care costs.
       
    • Adverse weather conditions could increase the cost our suppliers charge for their products, or maydecrease the customer demand for certain products. Increases in demand for certain commoditiescould also increase the cost our suppliers charge for their products. Additionally, increases in the costthecost of inputs, suchas utility costs or raw material costs, could negatively affect financial ratios andearnings.
       
    • Although we presently operate only in the United States, civil unrest in foreign countries in whichour suppliers do business may affect the prices we are charged for imported goods. If we are unableto pass on these increases to our customers, our FIFO gross margin and net earnings will suffer.

    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-30



    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 consolidated financial statements and of its internal control over financial reporting as of February 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.

    CONSOLIDATEDFINANCIALSTATEMENTS

    In our opinion, the accompanying consolidated financialbalance sheets and the related consolidated 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 January 31, 2009 and February 3, 2007 and January 28, 2006,2, 2008, and the results of their operations and their cash flows for each of the three years in the period ended February 3, 2007January 31, 2009 in conformity with accounting principles generally accepted in the United States of America. TheseAlso in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 31, 2009, based on criteria established inInternal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, are the responsibilityfor maintaining effective internal control over financial reporting and for its assessment of the Company’s management.effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing on page A-1. Our responsibility is to express an opinionopinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated 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 auditaudits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An auditmisstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements includesincluded 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. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.opinions.

         As discussed in Note 1514 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 provisionsmeasurement date provision 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 OverJanuary 31, 2009, the provisions of Statement of Financial Reporting appearing on page A-1 of this Annual Report, that the Company maintained effective internal control overAccounting Standards No. 157,Fair Value Measurements, for financial reportingassets and financial liabilities as of February 3, 2007 based on criteria established in2008, the provisions of Financial Accounting Standards Board Interpretation No. 48,Internal Control - Integrated FrameworkAccounting for Uncertainty in Income Taxes issued by, as of February 4, 2007 and the Committeerecognition and disclosure provisions 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 reportingSFAS No. 158 as of February 3, 2007, based on criteria established in2007.Internal 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 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.

    A-31



         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, 2007March 31, 2009 

    A-32



    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 KROGER CO.

    CONSOLIDATED BALANCE SHEETS

    January 31,     February 2,
    (In millions, except par values)20092008
    ASSETS
    Current assets
         Cash and temporary cash investments$263$242
         Deposits in-transit631676
         Receivables944786
         FIFO Inventory5,6595,453
         LIFO credit(800)  (604)
         Prefunded employee benefits300300
         Prepaid and other current assets209255
              Total current assets7,2067,108
    Property, plant and equipment, net13,16112,498
    Goodwill2,2712,144
    Other assets 573543
              Total Assets$23,211 $22,293
    LIABILITIES
    Current liabilities
         Current portion of long-term debt including obligations under capital leases
              and financing obligations$558$1,592
         Trade accounts payable3,8223,867
         Accrued salaries and wages828815
         Deferred income taxes344239
         Other current liabilities2,0772,170
              Total current liabilities7,6298,683
    Long-term debt including obligations under capital leases and financing obligations 
         Face value long-term debt including obligations under capital leases and 
              financing obligations7,4606,485
         Adjustment to reflect fair value interest rate hedges4544
              Long-term debt including obligations under capital leases and financing
                   obligations7,5056,529
    Deferred income taxes384367
    Pension and postretirement benefit obligations1,174554
    Other long-term liabilities1,2481,246
              Total Liabilities17,94017,379
    Minority interests95—
    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: 955 shares issued in 2008 and 947  
         shares issued in 2007955947
    Additional paid-in capital3,2663,031
    Accumulated other comprehensive loss(495)(122)
    Accumulated earnings 7,489 6,480 
    Common stock in treasury, at cost, 306 shares in 2008 and 284 shares in 2007(6,039) (5,422)
              Total Shareowners’ Equity5,1764,914
              Total Liabilities and Shareowners’ Equity $23,211$22,293 
            

    The accompanying notes are an integral part of the consolidated financial statements.

    A-33



    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 KROGER CO.

    CONSOLIDATED STATEMENTSOF OPERATIONS

    Years Ended January 31, 2009, February 2, 2008 and February 3, 2007

    2008     2007     2006
    (In millions, except per share amounts) (52 weeks)(52 weeks)(53 weeks)
    Sales$76,000$70,235$66,111
    Merchandise costs, including advertising, warehousing, and 
         transportation, excluding items shown separately below58,56453,77950,115
    Operating, general and administrative12,88412,15511,839
    Rent659644649
    Depreciation and amortization1,4421,3561,272
         Operating Profit2,4512,3012,236 
    Interest expense485474488
         Earnings before income tax expense1,9661,8271,748
    Income tax expense717646633
         Net earnings$1,249 $1,181$1,115
         Net earnings per basic common share$1.92$1.71$1.56
         Average number of common shares used in basic calculation 652  690715
         Net earnings per diluted common share$1.90 $1.69 $1.54
         Average number of common shares used in diluted calculation659698  723
    Dividends declared per common share$.36$.30$.26
     

    The accompanying notes are an integral part of the consolidated financial statements.

    A-34



    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 KROGER CO.

    CONSOLIDATED STATEMENTSOF CASH FLOWS

    Years Ended January 31, 2009, February 2, 2008 and February 3, 2007

    2008  2007  2006
    (In millions)(52 weeks)(52 weeks)(53 weeks)
    Cash Flows From Operating Activities:
         Net earnings $ 1,249 $ 1,181 $1,115
              Adjustments to reconcile net earnings to net cash provided by operating activities:
                   Depreciation and amortization 1,4421,3561,272
                   LIFO charge19615450
                   Stock-based employee compensation918772
                   Expense for Company-sponsored pension plans4467161
                   Deferred income taxes341(86)(60)
                   Other(36)3720
                   Changes in operating assets and liabilities net of effects from acquisitions of
                        businesses:
                        Store deposits in-transit45(62)(125)
                        Inventories(193)(381)(173)
                        Receivables(28)(17)(90)
                        Prepaid expenses473(43)
                        Accounts payable(53)165220
                        Accrued expenses(33)174134
                        Income taxes receivable (payable)(206)43(4)
                        Contribution to Company-sponsored pension plans(20)(51)(150)
                        Other10(89)(48)
                   Net cash provided by operating activities2,8962,5812,351
    Cash Flows From Investing Activities:
              Payments for capital expenditures(2,149)(2,126)(1,683)
              Proceeds from sale of assets5949143
              Payments for acquisitions(80)(90)—
              Other(9)(51)(47)
                   Net cash used by investing activities(2,179)(2,218)(1,587)
    Cash Flows From Financing Activities:
              Proceeds from issuance of long-term debt1,3771,37210
              Payments on long-term debt(1,048)(560)(556)
              Borrowings (payments) on bank revolver(441)218352
              Excess tax benefits on stock-based awards153638
              Proceeds from issuance of capital stock172188168
              Treasury stock purchases(637)(1,421)(633)
              Dividends paid(227)(202)(140)
              Increase in book overdrafts2611
              Other18(2)(25)
                   Net cash used by financing activities(769)(310)(785)
    Net increase (decrease) in cash and temporary cash investments(52)53(21)
    Cash from Consolidated Variable Interest Entity73——
    Cash and temporary cash investments:
              Beginning of year242189210
              End of year $    263 $    242 $    189
    Reconciliation of capital expenditures:
        Payments for capital expenditures $(2,149) $(2,126) $(1,683)
        Changes in construction-in-progress payables(4)66 (94)
             Total capital expenditures $(2,153)  $(2,060)  $(1,777)
    Disclosure of cash flow information:   
             Cash paid during the year for interest $    485 $    477 $    514 
             Cash paid during the year for income taxes $    641 $    640 $    615 
     

    The accompanying notes are an integral part of the consolidated financial statements.

    A-35



    THEKROGERCO.
    CONSOLIDATEDSTATEMENTOFCHANGESINSHAREOWNERS’EQUITY
     
    Year Ended February 3, 2007, January 28, 2006 and January 29, 2005
     
                     Accumulated       
       Additional  Other  
     Common StockPaid-InTreasuryStockComprehensive  Accumulated 
    (In millions) Shares Amount Capital Shares  Amount  Gain (Loss) Earnings Total
    Balances at January 31, 2004913$        913$         2,382  170 $ (2,827)$ (124) $   3,724  $4,068 
    Issuance of common stock:        
       Stock options and warrants exercised44 25— — — — 29 
       Restricted stock issued 11 9— — — — 10 
    Treasury stock activity:        
       Treasury stock purchases, at cost—— —18 (294)— — (294)
       Stock options and restricted stock exchanged —— —2 (28)— — (28)
    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)
    Balances at January 29, 20059189182,432   190 (3,149)(202)3,620 3,619 
    Issuance of common stock:        
       Stock options and warrants exercised88 57— — — — 65 
       Restricted stock issued 11 13— — — — 14 
    Treasury stock activity:        
       Treasury stock purchases, at cost—— —14 (239)— — (239)
       Stock options and restricted stock exchanged —— —— (15)— — (15)
    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)
    Net earnings—— —— — — 958 958 
    Balances at January 28, 2006927927 2,536204 (3,403)(243)4,573 4,390 
    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 
     
     200620052004     
    Net earnings (loss)$1,115$958 $(104)      
    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)$1,217$917 $(182)      
                             
     

    THE KROGER CO.

    CONSOLIDATED STATEMENTOF CHANGESIN SHAREOWNERS’ EQUITY

    Years Ended January 31, 2009, February 2, 2008 and February 3, 2007

                Accumulated     
    Additional Other 
    Common Stock Paid-In Treasury Stock Comprehensive Accumulated 
    (In millions, except per share amounts)Shares Amount Capital Shares Amount Gain (Loss) Earnings Total 
    Balances at January 28, 2006927 $   927 $2,536204 $(3,403) $(243) $4,573 $4,390
    Issuance of common stock:
         Stock options and warrants exercised9995(1)30——134
         Restricted stock issued1113—(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 ——————1,1151,115
    Balances at February 3, 20079379372,755232(4,011)(259)5,5014,923
    Issuance of common stock:
         Stock options exercised1010175—3——188
         Restricted stock issued ——(25)(1)11——(14)
    Treasury stock activity:
         Treasury stock purchases, at cost———43(1,151)——(1,151)
         Stock options and restricted stock exchanged———10(270)——(270)
    Tax benefits from exercise of stock options——35————35
    Share-based employee compensation——87————87
    Other comprehensive gain net of income tax of $82—————137—137
    Other——4—(4)—44
    Cash dividends declared ($0.30 per common share)——————(206)(206)
    Net earnings ——————1,1811,181
    Balances at February 2, 20089479473,031284(5,422)(122)6,4804,914
    Issuance of common stock:
         Stock options exercised88162—3——173
         Restricted stock issued——(46)(1)30——(16)
    Treasury stock activity:
         Treasury stock purchases, at cost———16(448)——(448)
         Stock options and restricted stock exchanged———7(189)——(189)
    Tax benefits from exercise of stock options——15————15
    Share-based employee compensation——91————91
    Other comprehensive loss net of income tax of $(224)—————(373)—(373)
    Other——13—(13)—(3)(3)
    Cash dividends declared ($0.36 per common share)——————(237)(237)
    Net earnings ——————1,2491,249
    Balances at January 31, 2009955 $   955 $3,266306 $(6,039) $(495) $7,489 $5,176
    Comprehensive income:
     
    200820072006
    Net earnings  $1,249 $1,181 $1,115
    Unrealized gain (loss) on hedging activities, net of
         income tax of $2 in 2008, $(13) in 2007 and $5 in 20063(21)7
    Amortization of unrealized gains and losses on hedging
         activities, net of income tax of $(2)(3)——
    Additional minimum pension liability  
         adjustment, net of income tax of $58 in 2006—— 95      
    Change in pension and other postretirement           
         defined benefit plans, net of income tax of      
         $(224) in 2008 and $95 in 2007(373)158— 
    Comprehensive income $   876 $1,318 $1,217 
     

    The accompanying notes are an integral part of the consolidated financial statements.

    A-36



    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

         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 February 3, 2007,January 31, 2009, 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, its wholly-owned subsidiaries and its subsidiaries.the Variable Interest Entities (“VIE”) in which the Company is the primary beneficiary. 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 52-week period ended January 31, 2009, the 52-week period ended February 2, 2008, and the 53-week period ended February 3, 2007, the 52-week period ended January 28, 2006, and the 52-week period ended January 29, 2005.2007.

       Pervasiveness of Estimates

         The preparation of financial statements in conformity with generally 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.

    Cash and temporary cash investments

    Cash and temporary cash investments represent store cash, escrow deposits and Euros held to settle Euro-denominated contracts. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 52, InventoriesForeign Currency Translation, the Company valued its carrying amount of Euros at the spot rates as of January 31, 2009 and February 2, 2008.

    Inventories

         Inventories are stated at the lower of cost (principally on a last-in, first-out “LIFO” basis) or market. In total, approximately 98% and 97% of inventories for 20062008 and 20052007, respectively, 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$800 at January 31, 2009 and $604 at February 3, 2007 and $400 at January 28, 2006.2, 2008. The Company follows the Link-Chain, Dollar-Value LIFO method for purposes of calculating its LIFO charge or credit.

    A-37



    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

         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.

    A-37



    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.

       Property, Plant and Equipment

         Generally, property,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. All new purchases of store equipment are assigned lives varying from three to nine 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 varies 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 $1,442 in 2008, $1,356 in 2007 and $1,272 in 2006, $1,265 in 2005 and $1,256 in 2004.2006.

         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 representsis determined using 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, 20052008, 2007 and 20042006 are summarized in Note 2 to the Consolidated Financial Statements.

       Intangible Assets

         In addition to goodwill, the Company has recorded intangible assets totaling $26, $22 and $28 for leasehold equities, liquor licenses and pharmacy prescription file purchases, respectively at February 3, 2007. Balances at January 28, 2006 were $35, $20 and $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.

    Impairment of Long-Lived Assets

         In accordance with Statement of Financial Accounting Standards (“SFAS”)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 the Company identifies impairment is identified for long-lived assets to be held and used, the Company compares the assets’ current carrying value to the assets’ fair value. Fair value is determined based on market values or discounted future cash flows are compared to the asset’s current carrying value. Impairment is recordedflows. The Company records impairment when the carrying value exceeds the discounted cash flows.fair market value. 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 recorded asset impairments in the normal course of business totaling $26, $24 and $61 $48in 2008, 2007 and $24 in 2006, 2005 and 2004.respectively. Costs to reduce the carrying value of long-lived assets for each of the years presented have been included in the Consolidated Statements of Operations as “Operating, general and administrative” expense.

      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 ourthe Company’s 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.

    A-39



    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.business:

    Future Lease
    Obligations
    Balance at January 29, 2005 $  65
           Additions  10
           Payments  (8) 
           Adjustments  (2) 
    Balance at January 28, 2006  65
           Additions  9
           Payments (14) 
           Adjustments (27) 
    Balance at February 3, 2007 $  33
     Future Lease
           Obligations
    Balance at February 3, 2007$89 
          Additions       8      
          Payments (16)
          Adjustments (7)
     
    Balance at February 2, 2008  74 
          Additions 4 
          Payments (13)
     
    Balance at January 31, 2009$65 

         In addition, as of February 3, 2007, the Company maintained a $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 an $8 liability for store closing costs related to two distinct, formalized plans that coordinated the closing of several locations over relatively short periods of time in 2000 and 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 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 6.

    Benefit Plans

         Effective February 3, 2007, the Company adopted the recognition and disclosure provisions (except for the measurement date change) of SFAS No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB StatementsStatement No. 87, 99, 106 and 123(R)132(R)(SFAS 158), which requiredrequires 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”). The Company adopted the measurement date provisions of SFAS 158 effective February 3, 2008. The majority of our pension and postretirement plans previously used a December 31 measurement date. All plans are now measured as of the Company’s fiscal year end. The non-cash effect of the adoption of the measurement date provisions of SFAS 158 decreased shareholders’ equity by approximately $5 ($3 after-tax) and increased long-term liabilities by approximately $5. There was no effect on the Company’s results of operations.

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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 1413 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. Actual 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.

         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 1413 for additional information regarding the Company’s benefit plans.

    Stock Option PlansBased Compensation

         Effective January 29, 2006, theThe Company adoptedaccounts for stock options under 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.(SFAS 123(R)). 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. PriorIn addition, the Company accounts for restricted stock awards under SFAS 123(R). The Company records expense for restricted stock awards in an amount equal 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 the disclosure provisions of SFAS No. 123. The Company also elected the alternative transition method for calculating windfall tax benefits available asfair market value of the adoptionunderlying stock on the grant date of SFAS No. 123(R). For further information regarding the adoption of SFAS No. 123(R), see Note 10 toaward, over the Consolidated Financial Statements.period the awards lapse.

      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 4 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.

      Uncertain Tax ContingenciesPositions

    Effective February 4, 2007, the Company adopted FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (“FIN No. 48”), which 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.

         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 before a particular matter, for which an allowance has been established, is audited and fully resolved. As of February 3, 2007, tax years 2002 through 2004 were undergoing examination by the Internal Revenue Service.

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    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    exposures. A number of years may elapse before a particular matter, for which an allowance has been established, is audited and fully resolved. As of January 31, 2009, the most recent examination concluded by the Internal Revenue Service covered the years 2002 through 2004.

         The establishmentassessment of the Company’s tax contingency allowancesposition 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.

         The following table summarizes the changes in the Company’s self-insurance liability through January 31, 2009.

          2008      2007      2006
    Beginning balance$470 $440  $445 
    Expense 189  215  196 
    Claim payments (191) (185) (201)
    Ending balance  468   470  440 
    Less current portion (192) (183) (165)
    Long-term portion$276 $287 $275 

         The current portion of the self-insured liability is included in “Other current liabilities”, and the long-term portion is included in “Other long-term liabilities” in the Consolidated Balance Sheets.

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

    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 byprovided to 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.

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    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    Merchandise Costs

         In addition toThe “Merchandise costs” line item of the Consolidated Statements of Operations includes 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.costs. 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

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    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    is recognized. When it is not possible, due 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 $532 in 2008, $506 in 2007 and $508 in 2006, $498 in 2005 and $528 in 2004.2006. 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 quarteryear 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$663, $661 and $562$600 as of January 31, 2009, February 2, 2008, and February 3, 2007, January 28, 2006, and January 29, 2005, respectively, and are reflected as a financing activity in the Consolidated Statements of Cash Flows.

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    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    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. GOODWILL

         The annual evaluation of goodwill performed during the fourth quarter of 20062008, 2007 and 20052006 did not result in impairment.

         The annual evaluationfollowing table summarizes the changes in the Company’s net goodwill balance through January 31, 2009.

           Goodwill
    Balance at January 28, 2006$2,192
          Goodwill recorded  —  
          Purchase accounting adjustments — 
     
    Balance at February 3, 2007 2,192 
          Goodwill recorded23 
          Effect of FIN 48 adoption(71)
     
    Balance at February 2, 20082,144 
          Goodwill recorded 127 
          Purchase accounting adjustments— 
     
    Balance at January 31, 2009$2,271 

    In December 2008, the FASB issued FAS 140-4 and FIN 46(R)-8,Disclosures by Public Entities (Enterprises) about Transfers of goodwill performed duringFinancial Assets and Interests in Variable Interest Entities(FAS 140-4 and FIN 46(R)-8). FAS 140-4 and FIN 46(R)-8 require additional disclosures about an entity’s involvement with variable interest entities and transfers of financial assets. Effective January 31, 2009, the fourthCompany has adopted FAS 140-4 and FIN 46(R)-8.

    In the first quarter of 2004 resulted2008, the Company made an investment in The Little Clinic LLC (“TLC”). TLC operates supermarket walk-in medical clinics in seven states, primarily in the Midwest and Southeast. At the date of investment, TLC was determined to be a $904 pre-tax, non-cash impairment charge related to goodwill atvariable-interest entity (“VIE”) under FASB Interpretation No. 46R,Consolidation of Variable Interest Entities(FIN 46R), with the Company’s Ralphs and Food 4 Less divisions.Company being the primary beneficiary. The divisions’ operating performance sufferedCompany was deemed the primary beneficiary due to the intense competitive environment during the 2003 southern California labor disputeits current ownership interest and recovery period after the labor dispute. The decreased operating performance was the resulthalf of the investments in personnel, training and price reductions necessary to help regain Ralphs’ business lost during the labor dispute.its written put options being at a floor price. As a result, the Company consolidated TLC in accordance with FIN 46R. The minority interest was recorded at fair value on the acquisition date. The fair value of TLC was determined based on the amount of the investment made by the Company and the percentage acquired. The Company’s assessment of goodwill represents the excess of this decline andamount over the decline in future expected operating performance, the divisions’ carryingfair value of goodwill exceeded its implied fair value resulting in the impairment charge. MostTLC’s net assets as of the impairment charge was non-deductible for income tax purposes. At February 3, 2007 and January 28, 2006,investment date. Creditors of TLC have no recourse to the general credit of the Company. Conversely, creditors of the Company maintained $1,458have no recourse to the assets of goodwill forTLC. In addition, if requested by TLC’s Board of Directors by January 1, 2010, the Ralphs and Food 4 Less divisions.Company has agreed to make a pro rata portion of an additional capital contribution.

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    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

         The following table summarizesbelow shows the changesunaudited amounts of assets and liabilities from TLC included in the Company’s net goodwill balance through February 3, 2007.consolidated results, after eliminating intercompany items, as of January 31, 2009:

    Goodwill
    Balance at January 31, 2004 $3,138
           Goodwill impairment charge  (904)
           Goodwill recorded  6
           Purchase accounting adjustments  (49)
    Balance at January 29, 2005 2,191
           Goodwill impairment charge  —
           Goodwill recorded  —
           Purchase accounting adjustments  1
    Balance at January 28, 2006 2,192
           Goodwill impairment charge  —
           Goodwill recorded  —
           Purchase accounting adjustments  —
    Balance at February 3, 2007 $2,192

    3. PROPERTY, PLANT 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
           2008
    Current assets     $31     
    Property, plant and equipment, net  7
    Goodwill  102
    Other assets  1
           Total Assets$141
     
    Current liabilities$4
     
    Minority interests$82

         Accumulated depreciation for leased propertyIn the fourth quarter of 2008, the Company became the primary beneficiary of i-wireless, LLC a VIE in which the Company has a 25% ownership interest. The Company was deemed the primary beneficiary due to its current ownership interest, $25 line of credit guarantee, and $8 loan to i-wireless, LLC. The Company became the primary beneficiary, in the fourth quarter of 2008, under capital leasesFIN 46R after lending $8 to i-wireless, LLC. i-wireless, LLC sells prepaid phones primarily in Company stores. The minority interest was $288recorded at February 3,fair value. The fair value of i-wireless, LLC was determined based on the amount of the investment made by the Company in the fourth quarter of 2007 and $263 atthe percentage acquired. The Company’s assessment of goodwill represents the excess of this amount over the fair value of i-wireless, LLC’s net assets as of the date of the loan. The Company has guaranteed the indebtedness of i-wireless, LLC, up to $25, which is collateralized by $8 of inventory located in the Company’s stores. The creditors of the Company have no recourse to the assets of i-wireless, LLC.

         The table below shows the preliminary and unaudited amounts of assets and liabilities from i-wireless, LLC included in the Company’s consolidated results, after eliminating intercompany items, as of January 28, 2006.31, 2009:

           2008 
    Current assets     $10     
    Property, plant and equipment, net 2
    Goodwill25
    Other assets  5
           Total Assets$42 
     
    Current liabilities$5
     
    Long-term debt$30
     
    Minority interests$1

         Approximately $566 and $798, original cost,The proforma effects of Property, Plant and Equipment collateralized certain mortgages at February 3, 2007, and January 28, 2006, respectively.these acquisitions are not material to previously reported results.

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    3. PROPERTY, PLANTANDEQUIPMENT, NET

         Property, plant and equipment, net consists of:

           2008      2007
    Land$1,944 $1,779 
    Buildings and land improvements 6,457 5,875 
    Equipment 8,993 8,620 
    Leasehold improvements   5,076  4,626 
    Construction-in-progress 880 965 
    Leased property under capital leases and financing obligations 550  571 
          Total property, plant and equipment 23,900 22,436 
    Accumulated depreciation and amortization (10,739) (9,938)
          Property, plant and equipment, net$13,161 $12,498 

         Accumulated depreciation for leased property under capital leases was $283 at January 31, 2009, and $286 at February 2, 2008.

         Approximately $396 and $540, original cost, of Property, Plant and Equipment collateralized certain mortgages at January 31, 2009 and February 2, 2008, respectively.

    4. TAXES, BASEDONINCOMENCOM E

         The provision for taxes based on income consists of:

    2006     2005     2004       2008      2007      2006
    Federal       
    Current $652 $609$ 96 $304  $661    $652  
    Deferred  (52) (79)258 331(62) (52)
    600 530354635 599 600 
    State and local        
    Current  55 42254671 55 
    Deferred  (22) (5) 1136(24)(22)
     33  37 368247 33 
    Total $633 $567 $390$717$646 $633 

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    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

         A reconciliation of the statutory federal rate and the effective rate follows:

    2006    2005    2004       2008      2007      2006
    Statutory rate 35.0%35.0%35.0%35.0%35.0%35.0%
    State income taxes, net of federal tax benefit 1.9% 1.6% 2.6%2.7%1.7% 1.9%
    Non-deductible goodwill — —101.7%
    Credits(1.0)%(0.9)% (0.8)%
    Favorable resolution of issues —  (1.9)%— 
    Deferred tax adjustment (1.2)%  —  — —  — (1.2)%
    Other changes, net 0.5% 0.6% (2.9)%(0.2)%1.5%1.3%
    36.2% 37.2% 136.4%36.5%35.4%36.2%

         During the third quarter of 2007, the Company resolved favorably certain tax issues. This resulted in a 2007 tax benefit of approximately $40.

         In 2006, 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.

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    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

         The tax effects of significant temporary differences that comprise tax balances were as follows:

    2006     2005       2008      2007
    Current deferred tax assets:        
    Net operating loss carryforwards $  17$  18
    Net operating loss and credit carryforwards$2 $16 
    Compensation related costs   32  — 43 53 
    Other   4  42 — 8 
    Total current deferred tax assets   53  60 45 77 
    Current deferred tax liabilities:        
    Compensation related costs   —  (2) 
    Insurance related costs   (109)   (107)  (104)(104)
    Inventory related costs   (212)   (168)  (242)(212)
    Other (43)— 
    Total current deferred tax liabilities   (321)   (277)  (389)(316)
    Current deferred taxes $  (268) $  (217) $(344)$(239)
    Long-term deferred tax assets:        
    Compensation related costs $  332$  290$461  $268 
    Insurance related costs   —  9
    Lease accounting   122  106 100  102 
    Closed store reserves   96  95 65 68 
    Net operating loss carryforwards   29   26
    Insurance related costs 64 64 
    Net operating loss and credit carryforwards 51 35 
    Other   47  21 13 23 
    Long-term deferred tax assets, net   626  547 754 560 
    Long-term deferred tax liabilities:        
    Depreciation   (1,114)   (1,193)  (1,138)(926)
    Insurance related costs   (33)   —
    Deferred income   (201)   (197) 
    Other — (1)
    Total long-term deferred tax liabilities   (1,348)   (1,390)  (1,138)(927)
    Long-term deferred taxes $  (722) $  (843) $(384)$(367)

         At February 3, 2007, the Company had net operating loss carryforwards for federal income tax purposes of $74 that expire from 2010 through 2018. In addition,January 31, 2009, the Company had net operating loss carryforwards for state income tax purposes of $733$451 that expire from 20102009 through 2025.2028. The utilization of certain of the Company’s net operating loss carryforwards may be limited in a given year.

         At February 3, 2007,January 31, 2009, the Company had stateState credits of $23 that$20, some of which expire from 20072009 through 2020.2027. 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 was reduced by approximately $90 as a result of federal bonus depreciation. This benefit began reversing in 2005 and increased the amount of cash paid for income taxes by approximately $71 in 2006 and $108 in 2005, respectively.

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    NNotes to Consolidated Financial Statements, Continued

    OTESThe Company adopted the provisions of FIN No. 48,TOAccounting for Uncertainty in Income Taxes Con February 4, 2007. As of adoption, the total amount of gross unrecognized tax benefits for uncertain tax positions, including positions impacting only the timing of tax benefits, was $694. A reconciliation of the beginning and ending amount of unrecognized tax benefits as of January 31, 2009 and February 2, 2008 is a follows:ONSOLIDATED FINANCIAL STATEMENTS

        2008    2007
    Beginning balance$469$694
    Additions based on tax positions related to the current year5349
    Reductions based on tax positions related to the current year(6) (32)
    Additions for tax positions of prior years411
    Reductions for tax positions of prior years (11) (162)
    Settlements (17)(90)
    Reductions due to lapse of statute of limitations—(1)
    Ending balance$492$469

         The Company does not anticipate that changes in the amount of unrecognized tax benefits over the next twelve months will have a significant impact on its results of operations or financial position.

         As of January 31, 2009 and February 2, 2008, the amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $116 and $120, respectively.

         To the extent interest and penalties would be assessed by taxing authorities on any underpayment of income tax, such amounts have been accrued and classified as a component of income tax expense. During the years ended January 31, 2009 and February 2, 2008, the Company recognized approximately $6 and $(11), CONTINUEDrespectively, in interest and penalties. The Company had accrued approximately $99 and $101 for the payment of interest and penalties as of January 31, 2009 and February 2, 2008, respectively.

         The IRS concluded a field examination of the Company’s 2002 – 2004 U.S. tax returns during the third quarter of 2007 and is currently auditing years 2005 – 2007. The audit is not expected to be completed in the next twelve months. Additionally, the Company has a case in the U.S. Tax Court. A decision on this case is not expected within the next 12 months. In connection with this case, the Company has extended the statute of limitations on our tax years after 1991 and those years remain open to examination. States have a limited time frame to review and adjust federal audit changes reported. Assessments made and refunds allowed are generally limited to the federal audit changes reported.

    5. DEBT OBLIGATIONS

         Long-term debt consists of:

        2008    2007
    Credit facility, commercial paper and money market borrowings$129$570 
    4.95% to 9.20% Senior notes and debentures due through 20387,1866,766
    5.00% to 9.95% Mortgages due in varying amounts through 2034119 166
    Other163 137
    Total debt 7,597 7,639
    Less current portion (528)(1,564)
    Total long-term debt$7,069$6,075

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    Notes to Consolidated Financial Statements, Continued

    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

         In 2007, the Company issued $600 of senior notes bearing an interest rate of 6.4% due in 2017 and $750 of senior notes bearing an interest rate of 6.15% due in 2020.

         In 2008, the Company issued $400 of senior notes bearing an interest rate of 5.0% due in 2013, $375 of senior notes bearing an interest rate of 6.9% due in 2038 and $600 of senior notes bearing an interest rate of 7.5% due in 2014.

         As of February 3, 2007,January 31, 2009, the Company had a $2,500 Five-Year Credit Agreement maturing in 2011, unless earlier terminated by the Company. Borrowings under the credit agreement 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 JP Morgan Chase Bank, N.A., (B) ½% over a moving average of secondary market morning offering rates for three-month certificates of deposit adjusted for reserve requirements, and (C) 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.applicable margin. In addition, the Company pays a Facility Feefacility fee in connection with the credit agreement. Both the Applicable Marginapplicable margin and the Facility Feefacility fee vary based upon the Company’s achievement of a financial ratio or credit rating. At February 3, 2007,January 31, 2009, the Applicable Marginapplicable margin was 0.27%0.19%, and the Facility Feefacility fee was 0.08%0.06%. The credit facility 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 agreement in whole or in parts,part, at any time, without a prepayment penalty. In addition to the credit agreement, the Company maintained three uncommitted money market lines totaling $75 in the aggregate. The money market lines allow the Company to borrow from banks at mutually agreed upon rates, usually at rates below the rates offered under the credit agreement. As of February 3, 2007,January 31, 2009, the Company had $352no borrowings under its credit agreement and net outstanding commercial paper of $90, that reduced amounts available under the Company’s credit agreement. In addition, as of January 31, 2009, the Company had borrowings under its money market lines totaling $39. The weighted average interest rate on the amounts outstanding under the credit agreement was 5.47% at February 3, 2007.

         At February 3, 2007, the Company had borrowings totaling $352 under its P2/F2/A3 rated commercial paper program. Any borrowings under this program are backed by the Company’s credit facility and reduce the amount available under the credit facility.

         At February 3, 2007, the Company also maintained a $50 money market line. In addition to credit agreement borrowings, borrowings under the Company’s money market line and somelines was 1.89% at January 31, 2009. The outstanding letters of credit that reduce funds available under the Company’s credit agreement. At February 3, 2007, these lettersagreement totaled $337 as of credit totaled $331. The Company had no borrowings under the money market line at February 3, 2007.January 31, 2009.

         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.Company or (iii) both a change of control and a below investment grade rating.

    A-47A-50



    NNotes to Consolidated Financial Statements, ContinuedOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

         The aggregate annual maturities and scheduled payments of long-term debt, as of year-end 2006,2008, and for the years subsequent to 20062008 are:

    2007$878
    2008993
    2009 912    $528
    2010 42542
    2011 537544
    20121,414
    20131,019
    Thereafter 3,219  3,550
    Total debt$6,581$7,597

    6. DERIVATIVE 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,Accounting 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. Ineffective portions of fair value hedges, if any, are recognized 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 balanceoutstanding borrowings to determine annual debt amounts subject to interest rate exposure, (ii) limit the average annual amount subject to interest rate reset and the amount of floating rate debt to a combined total of $2.5 billion$2,500 million 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-48A-51



    NNotes to Consolidated Financial Statements, ContinuedOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

         The table below summarizes the outstanding interest rate swaps designated as fair value hedges as of January 31, 2009, and February 3, 2007, and January 28, 2006. The variable component2, 2008.

    20082007
    PayPayPayPay
        Floating    Fixed    Floating    Fixed
    Notional amount$—$—$1,050  $— 
    Number of contracts   —    —   6 —
    Duration in years——2.07—
    Average variable rate——5.97%—
    Average fixed rate——6.74%—
    MaturityBetween
    March 2008 and
    January 2015

         As of eachFebruary 2, 2008, other long-term assets totaling $11 were recorded to reflect the fair value of these agreements, offset by increases in the fair value of the underlying debt.

         In 2008, the Company terminated nine fair value interest rate swap outstanding at February 3, 2007, was based on LIBOR asswaps with a total notional amount of February 3, 2007. The variable component$900. Three of eachthese terminated interest rate swap outstandingswaps were purchased and became ineffective fair value hedges in 2008. The proceeds received at January 28, 2006, was based on LIBORtermination were credited to interest expense in the amount of $15. The Company has unamortized proceeds from twelve interest rate swaps once classified as fair value hedges totaling approximately $45. The unamortized proceeds are recorded as adjustments to the carrying values of January 28, 2006.the underlying debt and are being amortized over the remaining term of the debt.

     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.$750. 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 ininto fixed interest rates on its forecasted issuances of debt in fiscal 2007 and 2008. Accordingly,In 2007, the Company terminated two of these instrumentsforward-starting interest rate swaps with a notional amount of $500. In 2008, the Company terminated the remaining forward-starting interest rate swap with a notional amount of $250. The unamortized payments and proceeds on these terminated forward-starting interest rate swaps have been designatedrecorded net of tax in other comprehensive income and will be amortized to earnings as cash flow hedges for the Company’s forecasted debt issuances. Twopayments of interest to which the swaps have ten-year terms, withhedge relates are made. As of February 2, 2008, other long-term liabilities totaling $18 were recorded to reflect the remaining swap having a twelve-year term, beginning with the issuancefair value of the debt. The average fixed rate for these instruments is 5.14%.agreements.

    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, warehouses, 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

    A-52



    Notes to take delivery, and, as a result will require net settlement, are marked to fair value on a quarterly basis.Consolidated Financial Statements, Continued

         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. As of February 3, 2007,January 31, 2009, the Company maintained sevena derivative instrumentsinstrument to protect it from decliningmanage exposure to changes in corrugated cardboard prices. These derivatives containThis derivative has 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 doinstrument does not qualify for hedge accounting, in accordance with SFAS No. 133,Accounting for Derivative Investments and Hedging Activities,, as amended. Accordingly, changesthe change in the fair value of these instruments arethis instrument is marked-to-market in the Company’s Consolidated Statements of Operations as operating, general and administrative (“OG&A”) expenses.expense. As of February 3, 2007, an accrued liability totaling $0.2 had been recorded to reflectJanuary 31, 2009, the fair value of these instruments.this instrument was insignificant.

    A-49



    N7. FOTESAIR VALUETO CONSOLIDATEDOF FINANCIAL SITATEMENTS, CONTINUEDNSTRUMENTS

    In September 2006, the FASB issued SFAS No. 157,7. FFair Value MeasurementsAIR V(SFAS 157), which defines fair value, establishes a market-based framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 does not expand or require any new fair value measurements. SFAS 157 is effective for financial assets and financial liabilities for fiscal years beginning after November 15, 2007. FASB Staff Position (FSP) 157-2ALUEPartial Deferral of the Effective Date of Statement No. 157OF FINANCIALINSTRUMENTS(FSP 157-2), deferred the effective date of SFAS No. 157 for most non-financial assets and non-financial liabilities to fiscal years beginning after November 15, 2008. Effective February 3, 2008, the Company adopted SFAS 157, except for non-financial assets and non-financial liabilities as deferred until February 1, 2009 by FSP 157-2.

         The following methods and assumptions wereSFAS 157 establishes a fair value hierarchy that prioritizes the inputs used to estimatemeasure fair value. The three levels of the fair value hierarchy defined by SFAS 157 are as follows:

         Level 1 – Quoted prices are available in active markets for identical assets or liabilities;

         Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable;

         Level 3 – Unobservable pricing inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing an asset or liability.

         For those financial instruments carried at fair value in the consolidated financial statements, the following table summarizes the fair value of each classthese instruments at January 31, 2009:

    Fair Value Measurements Using

    Quoted Prices in
    Active MarketsSignificant
    for IdenticalSignificant OtherUnobservable
    AssetsObservable InputsInputs
        (Level 1)    (Level 2)    (Level 3)    Total
    Available-for-Sale Securities $11  $—  $— $11

    A-53



    Notes to Consolidated Financial Statements, Continued

    FAIR VALUEOF OTHER FINANCIAL INSTRUMENTS

    Current and Long-term Debt

         The fair value of financial instrumentthe Company’s long-term debt, including current maturities, was estimated based on the quoted market price for which itthe same or similar issues adjusted for illiquidity based on available market evidence. If quoted market prices were not available, the fair value was practicablebased upon the net present value of the future cash flow using the forward interest rate yield curve in effect at the respective year-ends. At January 31, 2009, the fair value of total debt was $7,920 compared to estimate that value:a carrying value of $7,597. At February 2, 2008, the fair value of total debt was $7,973 compared to a carrying value of $7,639.

    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

         Theinvestments, or estimated cash flows, if appropriate. At January 31, 2009 and February 2, 2008, the carrying and fair value of the Company’spracticable long-term debt, including the current portion thereofinvestments was $67 and excluding borrowings under the credit 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 facility 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

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

     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 February 3, 2007, the Company maintained six interest rate swap agreements, with notional amounts totaling $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 March 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 February 3, 2007, other long-term liabilities totaling $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 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 February 3, 2007, other long-term assets totaling $12 were recorded to reflect the fair value of these agreements.
    (4)See Note 6 for a description of the corrugated cardboard price protection agreements.

    A-51



    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED$75, respectively.

    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 isare 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.

         Rent expense (under operating leases) consists of:

    2006     2005     2004     2008    2007    2006
    Minimum rentals $  753$  760$  772 $762$747 $753
    Contingent payments   10  8  9 12 1110
    Sublease income   (114)    (107)    (101) 
    Tenant income (115)(114)(114)
    Total rent expense $  649 $  661$  680$659$644$649

    A-54



    Notes to Consolidated Financial Statements, Continued

         Minimum annual rentals and payments under capital leases and lease-financed transactions for the five years subsequent to 20062008 and in the aggregate are:

      Lease- Lease-
    Capital OperatingFinanced CapitalOperatingFinanced
    Leases     Leases    Transactions     Leases    Leases    Transactions
    2007$   57$   778 $    3
    2008 547343
    200952 6904$53  $778      $4    
    2010 516424517384
    2011 495874576745
    2012486245
    2013455755
    Thereafter 2944,11893 2193,274111
     557 $7,549 $111  473  $6,663 $134 
    Less estimated executory costs included in capital leases(3)(1)
    Net minimum lease payments under capital leases 554472
    Less amount representing interest (237)(185)
    Present value of net minimum lease payments under capital leases$  317$287

         Total future minimum rentals under noncancellable subleases at February 3, 2007,January 31, 2009, were $444.$334.

    A-52



    NOTESTO CONSOLIDATED FINANCIALSTATEMENTS, CONTINUED

    9. EARNINGS PPERER 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 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)
    For the year endedFor the year endedFor the year ended
    January 31, 2009February 2, 2008February 3, 2007
    EarningsSharesPerEarningsSharesPerEarningsSharesPer
    (Numer- (Denomi-Share(Numer-(Denomi-Share(Numer-(Denomi-Share
    (in millions, except per share amounts)   ator)   nator)   Amount   ator)   nator)   Amount   ator)   nator)   Amount
    Basic EPS $1,249 652   $1.92 $1,181690   $1.71   $1,115   715   $1.56
    Dilutive effect of stock option             
           awards and warrants7 88
    Diluted EPS$1,249659$1.90$1,181698$1.69$1,115723$1.54

         For the years ended January 31, 2009, February 2, 2008 and February 3, 2007, January 28, 2006 and January 29, 2005, there were options outstanding for approximately 25.411.8 million, 24.62.0 million and 61.525.4 million 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.

    A-55



    Notes to Consolidated Financial Statements, Continued

    10. STOCKOPTION PLANS

         Prior to January 29, 2006, the Company applied APB No. 25, and related interpretations, in accounting for its stock option plans and provided the pro-forma disclosures required by SFAS No. 123. APB No. 25 provided for recognition of compensation expense for employee stock awards based on the intrinsic value of the award on the grant date.

    The Company grants options for common stock (“stock options”) to employees, 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. Although equityThe Company accounts for stock options under the fair value recognition provisions of SFAS No. 123(R),Share-Based Payment(SFAS 123(R)). 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 123(R). Under the fair value recognition provisions of SFAS 123(R), the Company recognizes share-based compensation expense, net of an estimated forfeiture rate, over the requisite service period of the award. Equity awards may be made throughout the year, it has beenat one of four meetings of its Board of Directors occurring shortly after the Company’s practice typically to make an annualrelease of quarterly earnings. The 2008 primary grant was made in conjunction with the MayJune meeting of itsthe Company’s Board of Directors.

         Stock options typically expire 10 years from the date of grant. Stock options vest between one and 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.At January 31, 2009, approximately 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 optionsoption grants under these plans.

    A-53



    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

         In addition to the stock options described above, the Company awards restricted stock to employees under various plans. The restrictions on these awards generally lapse between one and five years from the date of the awards and expense is recognized over the lapsing cycle.awards. Under APB No. 25,SFAS 123(R), the Company generally recordedrecords expense for restricted stock awards in an amount equal to the fair market value of the underlying stock on the grant date of award.the award, over the period the awards lapse. As of February 3, 2007,January 31, 2009, approximately sixone million shares of common stock were available for future restricted stock awards under the 2005 Long-Term Incentive Plan (the “Plan”). The Company has the ability to convert shares available for stock options under the Plan to shares available for restricted stock awards. Four shares available for common stock option awards can be converted into one share available for restricted stock awards.

         All awards become immediately exercisable upon certain changes of control of the Company.

         Historically, stock option awards were grantedA-56



    Notes 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 2006, the Company began issuing a combination of stock option and restricted stock awards to 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 the number of restricted stock awards granted increased.Consolidated Financial Statements, Continued

      Stock Options

        Changes in options outstanding under the stock option plans are summarized below:

    Weighted-SharesWeighted-
    Shares subjectaveragesubject toaverage
    to optionexerciseoptionexercise
           (in millions)       price    (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    59.3    $19.03 
    Granted 3.2$20.05 3.2$20.05
    Exercised(9.5)$13.34 (9.5)$13.34
    Canceled or Expired(1.1) $21.01 (1.1)$21.01
    Outstanding, year-end 200651.9 $20.09 51.9 $20.09
    Granted 3.4  $28.21 
    Exercised (10.1)$19.05
    Canceled or Expired(0.4)$20.79
    Outstanding, year-end 200744.8$20.94
    Granted3.5$28.49
    Exercised(8.3)$21.04
    Canceled or Expired(0.3)$23.08
    Outstanding, year-end 200839.7$21.58

    A-54



    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

        A summary of options outstanding and exercisable at February 3, 2007January 31, 2009 follows:

    Weighted-Weighted-
    averageWeighted-Weighted-averageWeighted-Weighted-
    Range ofNumberremainingaverageOptionsaverageNumberremainingaverageOptionsaverage
    Exercise Prices       outstanding       contractual life       exercise price        exercisable       exercise price              outstanding              contractual life              exercise price              exercisable              exercise price
    (in millions)(in years)(in millions)(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
    $13.78 - $14.93  4.2  3.86     $14.91      4.2      $14.91    
    $14.94 - $16.394.66.16$16.353.3$16.34
    $16.40 - $17.317.63.42$16.986.2$17.00 
    $17.32 - $22.99  9.2 4.24 $20.96  5.0 $21.407.44.74$21.725.3$21.93
    $23.00 - $31.9118.3 3.76$25.13 15.0$25.2015.94.51$26.999.8$26.38
    $ 9.90 - $31.91 51.94.79$20.0936.4$20.42
    $13.78 - $31.9139.74.47$21.5828.8$20.71

         The weighted-average remaining contractual life for options exercisable at February 3, 2007,January 31, 2009, was approximately 4.13.6 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 29, 2006, 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-55A-57



    NNotes to Consolidated Financial Statements, ContinuedOTESTO

       CRestricted stockONSOLIDATED FINANCIALSTATEMENTS, CONTINUED

    RestrictedWeighted-
    sharesaverage
    outstandinggrant-date
        (in millions)    fair value
    Outstanding, year-end 2005    0.7     $17.85 
           Granted2.2$20.16
           Lapsed(0.4)$17.46
           Canceled or Expired(0.1)$19.41
    Outstanding, year-end 20062.4$20.02 
           Granted2.5$28.20
           Lapsed(1.4)$19.90
           Canceled or Expired (0.1) $22.69
    Outstanding, year-end 2007 3.4   $25.89
           Granted2.5$28.42
           Lapsed(1.7)$26.48
           Canceled or Expired(0.1)$25.70
    Outstanding, year-end 20084.1$27.22

         The weighted-average fair value of stock options granted during 2008, 2007 and 2006 2005was $8.65, $9.66 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    2008    2007    2006
    Weighted average expected volatility (based on historical
    volatility) 27.60% 30.83% 30.13%
    Weighted average expected volatility27.89%29.23%27.60%
    Weighted average risk-free interest rate5.07%4.11%3.99% 3.63%5.06%5.07%
    Expected dividend yield1.50%N/A N/A1.50% 1.40%1.50%
    Expected term (based on historical results) 7.5 years 8.7 years8.7 years6.8 years 6.9 years 7.5 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 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 aThe dividend yield was based on our history and expectation of 1.50% to value options issued in 2005 would have decreased the fair value of each option by approximately $1.60.dividend payouts. Expected volatility was determined based upon historical stock volatilities. Impliedvolatilities; however, 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 equalA-58



    Notes to the fair market value of the underlying stock on the grant date of the award, over the period the awards lapse.Consolidated Financial Statements, Continued

         Total stock compensation recognized in 2008, 2007 and 2006 was $72. This included$91, $87 and $72, respectively. Stock option compensation recognized in 2008, 2007 and 2006 was $35, $51 and $50, for stock optionsrespectively. Restricted shares compensation recognized in 2008, 2007 and 2006 was $56, $36 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.respectively.

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         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, the 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)

         The total intrinsic value of options exercised was $18, $33 and $79 in 2008, 2007 and 2006, was $79.respectively. The total amount of cash received in 2008 by the Company from the exercise of options granted under share-based payment arrangements was $126.$172. As of February 3, 2007,January 31, 2009, there was $92$118 of total unrecognized compensation expense remaining related to non-vested share-based compensation arrangements granted under the Company’s equity award plans. This cost is expected to be recognized over a weighted-average period of approximately one year. The total fair value of options that vested was $53, $53 and $44 in 2008, 2007 and 2006, was $44.respectively.

         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, aremay be utilized to repurchase shares of the Company’s stock under a stock repurchase program adopted by the Company’s Board of Directors. During 2006,2008, the Company repurchased approximately 11seven million shares of stock in such a manner.

         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. Compensation expense was calculated over the stated vesting periods, regardless of whether 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 or 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 result, the Company recognizes 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, approximately $6$9 of compensation expense was recognized in 20062008 prior to the completion of stated vesting periods.

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    11. 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.

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         Litigation– On October 6, 2006, the Company petitioned the Tax Court (In Re: Ralphs Grocery Company and Subsidiaries, formerly known as Ralphs Supermarkets, Inc., Docket No. 20364-06) for a redetermination of deficiencies set by the Commissioner of Internal Revenue. The dispute at issue involves a 1992 transaction in which Ralphs Holding Company acquired the stock of Ralphs Grocery Company and made an election under Section 338(h)(10) of the Internal Revenue Code. The Commissioner has determined that the acquisition of the stock was not a purchase as defined by Section 338(h)(3) of the Internal Revenue Code and that the acquisition does not qualify as a purchase. The Company believes that it has strong arguments in favor of its position butand believes it is more likely than not that its position will be sustained. However, due to the inherent uncertainty involved in the litigation process, an adverse decisionthere can be no assurances that could have a material adverse effect on the Company’s financial results is a possible outcome.Tax Court will rule in favor of the Company. As of February 3, 2007,January 31, 2009, an adverse decision would require a cash payment ofup to approximately $363,$436, including interest.

         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 dispute in southern California, violated Section 1 of the Sherman Act. The lawsuit seeks declarative and injunctive relief. On May 25, 2005,28, 2008, pursuant to a stipulation between the Court deniedparties, the court entered a motion for a summaryfinal judgment filed byin favor of the defendants. RalphsAs a result of the stipulation and final judgment, there are no further claims to be litigated at the other defendants filedtrial court level. The Attorney General has appealed a notice of an interlocutory appealtrial court ruling to the United StatesNinth Circuit Court of Appeals forand the Ninth Circuit. On November 29, 2005, the appellate court dismissed the appeal. On December 7, 2006, the Court denieddefendants are appealing 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.separate ruling. Although this lawsuit is subject to uncertainties inherent toin 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 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

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    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 settlement was sent to class members, and the Court issued an Order finally approving the class action settlement on August 25, 2006. The settlement involved the issuance of coupons and gift cards. While the ultimate cost of the settlement to Ralphs is largely dependent on the rate of coupon redemption, management does not expect that the ultimate resolution of this action will have a material adverse effect on the Company’s financial 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 financial 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 impacteffect on the Company’s financial condition or results of operation.

         Guarantees– The Company periodically enters intohas guaranteed half of the indebtedness of two real estate joint venturesentities in connection with the development of certain properties.which Kroger has a 50% ownership interest. The Company usually sells its interests in such partnerships upon completionCompany’s share of the projects. As of February 3, 2007,responsibility for this indebtedness, should the Company was a partner with 50% ownership in three real estate joint ventures for which it has guaranteedentities be unable to meet their obligations, totals approximately $6 of debt incurred by the ventures.$7. Based on the covenants underlying this indebtedness as of February 3, 2007,January 31, 2009 it is unlikely that the Company will be responsible for repayment of these obligations. The Company also agreed to guarantee, up to $25, the indebtedness

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    of an entity in which Kroger has a 25% ownership interest. The Company’s share of the responsibility, as of January 31, 2009, should the entity be unable to meet its obligations, totals approximately $25 and is collateralized by approximately $8 of inventory located in the Company’s stores. In addition, the Company has guaranteed half of the lease payments of a location leased by an entity in which Kroger has a 50% ownership interest. The net present value of the guaranteed rental payments is approximately $6.

         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 the leases if any of the assignees areis unable to fulfill theirits 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.

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    12. SUBSEQUENT EVENTS

         On March 15, 2007, the Company announced its Board of Directors declared the payment of a quarterly dividend of $0.075 per share, payable on June 1, 2007, to shareholders of record as of the close of business on May 15, 2007.

    13. STOCK

    Preferred Stock

         The Company has authorized 5five million shares of voting cumulative preferred stock; 2two million were available for issuance at February 3, 2007.January 31, 2009. The stock has a par value of $100 per share and is issuable in series.

      Common Stock

         The Company has authorized 1one 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 1one billion to 2two billion when the Board of Directors determines it to be in the best interest of the Company.

      Common Stock Repurchase Program

         The Company maintains a stock repurchase programprograms that compliescomply with Securities Exchange Act Rule 10b5-1 to allow for the orderly repurchase of Kroger stock, from time to time. The Company made open market purchases totaling $448, $1,151 and $374 $239 and $291 under thisthese repurchase programprograms in fiscal 2008, 2007 and 2006, 2005 and 2004.respectively. In addition to thisthese repurchase program,programs, 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, includingand the related tax benefit. The Company repurchased approximately $259, $13$189, $270 and $28$259 under the stock option program during fiscal 2006, 20052008, 2007 and 2004,2006, respectively.

    14.13. 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 includedinclude 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.

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         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 (except for the measurement date change) 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)132(R)(SFAS 158), which requiredrequires the recognition of the funded

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    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 reflectsCompany adopted the effectsmeasurement date provisions of SFAS 158 effective February 3, 2008. The majority of our pension and postretirement plans previously used a December 31 measurement date. All plans are now measured as of the Company’s fiscal year end. The non-cash effect of the adoption of the measurement date provisions of SFAS No. 158 haddecreased shareholders’ equity by approximately $5 ($3 after-tax) and increased long-term liabilities by approximately $5. There was no effect on our Consolidated Balance Sheet asthe Company’s results of February 3, 2007.operations.

    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, 2007January 31, 2009 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 
        Pension    Other    
    January 31, 2009 BenefitsBenefitsTotal
    Unrecognized net actuarial loss (gain)$882 $(89) $793
    Unrecognized prior service cost (credit)7(28) (21)
    Unrecognized transition obligation  1  — 1
    Total liabilities$890$(117)$773

         Amounts in AOCI expected to be recognized as components of net periodic pension or postretirement benefit costs in 20072009 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 
                
    PensionOther
    January 31, 2009 BenefitsBenefitsTotal
    Net actuarial loss (gain)$8 $(5) $  3
    Prior service cost (credit) 2   (6)   (4)
    Total liabilities $10 $(11)$(1)

         Other changes recognized in other comprehensive income in 2008 are as follows (pre-tax):

        Pension    Other    
    January 31, 2009 BenefitsBenefitsTotal
    Incurred prior service cost $3$—$3
    Incurred net actuarial loss (gain)660 (54) 606
    Amortization of prior service credit (cost)(2) 7  5
    Amortization of net actuarial gain (loss)(19) 3 (16)
    Total recognized in other comprehensive income 642(44)598
    Total recognized in net periodic benefit cost and  
           other comprehensive income$687$(26)$661

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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 BenefitsPension Benefits
    Qualified PlansNon-Qualified PlanOther BenefitsQualified PlansNon-Qualified PlanOther Benefits
         2006     2005     2006     2005     2006     2005     2008     2007     2008     2007     2008     2007
    Change in benefit obligation:
    Benefit obligation at beginning of fiscal year $2,284  $2,019  $105  $113  $356  $366 
    Benefit obligation at beginning of fiscal
    year$2,342$2,419$139$113$320$373
    Service cost1231182113123942221010
    Interest cost1301136620 191511411091819
    Plan participants’ contributions————11911——89
    Amendments——3—4—23———
    Actuarial (gain) loss(4)1457(12)4(22)(148)(143)1223(55)(65)
    Benefits paid (114) (111) (7) (6) (31) (32)(123)(120)(8)(8)(26)(26)
    Other4—2—3—
    Benefit obligation at end of fiscal year$2,419 $2,284 $113 $105 $373 $356 $2,266$2,342$160$139$278$320
    Change in plan assets: 
    Fair value of plan assets at beginning of fiscal year $1,814$1,458$—$—$—$—
    Fair value of plan assets at beginning of
    fiscal year$2,230 $2,098$—$—$— $—
    Actual return on plan assets248167————(619)200————
    Employer contributions150300762023 20 51 881717
    Plan participants’ contributions————11911— —9 9
    Benefits paid (114) (111) (7) (6) (31) (32)(123)(120)(8)(8)(26)(26)
    Fair value of plan assets at end of fiscal year$2,098 $1,814 $— $— $— $— 
    Other4—————
    Fair value of plan assets at end of fiscal       
    year$1,513$2,230$—$—$— $—
    Funded status at end of fiscal year$(321) $(470) $(113) $(105) $(373)$(356)$(753)$(112)$(160)$(139) $(278)$(320)
    Net liability recognized at end of fiscal year$(753)$(112)$(160)$(139)$(278)$(320)

    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.

         Other current liabilities as of both January 31, 2009 and February 2, 2008 include $17 of net liability recognized.

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         As of January 31, 2009 and February 3, 2007,2, 2008, pension plan assets included no shares of The Kroger Co. common stock. Pension plan assets included $52, or 2.7 million shares, of common stock of The Kroger Co. at January 28, 2006.

    Pension BenefitsOther BenefitsPension BenefitsOther Benefits
    Weighted average assumptions      2006      2005      2004      2006      2005      2004       2008     2007     2006     2008     2007     2006
    Discount rate – Benefit obligationDiscount rate – Benefit obligation5.90%5.70%—  5.90% 5.70%—Discount rate – Benefit obligation7.00%6.50%5.90%7.00%6.50%5.90%
    Discount rate – Net periodic benefit cost5.70% 5.75% 6.25% 5.70% 5.75% 6.25%
    Discount rate – Net periodicDiscount rate – Net periodic  
    benefit cost benefit cost6.50%5.90%5.70%6.50%5.90% 5.70%
    Expected return on plan assetsExpected return on plan assets 8.50% 8.50%8.50%  Expected return on plan assets8.50%8.50%8.50%
    Rate of compensation increase 3.50%3.50%3.50% 
    Rate of compensation increase –Rate of compensation increase –      
    Net periodic benefit cost Net periodic benefit cost2.99%3.56% 3.50%   
    Rate of compensation increase –Rate of compensation increase – 
    Benefit Obligation Benefit Obligation2.92%2.99%3.56%

         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 20062008 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 theoretically 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 5.90%7.00% discount rate as of year-end 20062008 represents the equivalent single rate under a broad-market AA yield curve constructed by the Company’san outside consultant, Mercer Human Resource Consulting.consultant. We utilized a discount rate of 5.70%6.50% for year-end 2005.2007. The 2050 basis point increase in the discount rate decreased the projected pension benefit obligation as of February 3, 2007,January 31, 2009, by approximately $68 million.$147.

         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 9.7%4.1% for the ten calendar years ended December 31, 2006,2008, net of all fees and expenses. Our actual return for the pension plan calendar year ending December 31, 2006,2008, on that same basis, was 13.4%(26.1)%. The Company utilized a pension return assumption of 8.5% in 2008, 2007 and 2006 2005 and 2004.based on the assumption that future returns will achieve the same level of performance as the long-term historical average annual return for the various markets in which the plan invests.

         In 2005, the Company updated the mortality table usedThe fair value of plan assets decreased in 2008 compared to determine average life expectancy2007 due to deteriorating conditions in the calculation of its pension obligationglobal financial markets. This decrease caused the Company’s underfunded status to the RP-2000 Projected to 2015 mortality table. The change in this assumption increased the projected benefit obligation approximately $93,increase at the time of the change, and is reflected in unrecognized actuarial (gain) loss as of the measurement date.January 31, 2009.

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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 

        The Company uses the RP-2000 projected 2015 mortality table in calculating the pension obligation.

    Pension Benefits
    Qualified PlansNon-Qualified PlanOther Benefits
         2008     2007     2006     2008     2007     2006     2008     2007     2006
    Components of net periodic
           benefit cost:  
          Service cost $39$42$123$2$2$2$10$10$13
          Interest cost1511411301096181920
          Expected return on plan assets(178)(165)(152)——————
          Amortization of:   
                 Transition asset — — (1) ——————
                 Prior service cost—1 3 22 2(7)(6)(7)
                 Actuarial (gain) loss11314186 2 (3)— —
          Curtailment charge— —5— —— — ——
    Net periodic benefit cost$23$50$149$22$19$12$18$23$26

         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.

              Non-Qualified
    Qualified PlansNon-Qualified PlanQualified PlansPlan
          2006      2005      2006      20052008     2007 2008     2007
    PBO at end of fiscal year $2,419 $2,284  $113  $105 $2,266 $2,342$160$139
    ABO at end of fiscal year $2,232 $2,111$103 $100$2,096 $2,144$138 $118
    Fair value of plan assets at end of year$2,098$1,814$— $—$1,513$2,230$—$—

         The following table provides information about the Company’s estimated future benefit payments.

     Pension  Other      Pension     Other
     Benefits         Benefits BenefitsBenefits
    2007 $139$22   
    2008 $138$23   
    2009 $145$24   $118$19
    2010 $142$26    $125 $20 
    2011 $137 $27   $132$21
    2012 - 2016 $775    $152   
    2012$142$21
    2013$153 $22
    2014 – 2018 $922$133

         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

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    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    under the Cash Balance Plan. As a result of the decision to discontinue accruing additionalcurtail benefits under the Cash Balance Plan, the Company recorded a charge totaling $5, pre-tax, in fiscal 2006, which represented the previously unrecognized prior service costs.

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    NOTESTOCONSOLIDATED FINANCIALSTATEMENTS, CONTINUED

         Effective January 1,     Net periodic benefit cost decreased in 2008 and 2007 compared to 2006 due to participants in the Cash Balance formula of the Consolidated Retirement Benefit Plan was replaced withbeing moved to a 401(k) Retirement Savings Account Plan, whichretirement savings account plan effective January 1, 2007. Participants under that formula continue to earn interest on prior contributions but no additional pay credits will providebe earned. The 401(k) retirement savings plan provides to eligible employees both Company matching contributions and otherautomatic contributions from the Company based on participant contributions, based uponplan compensation, and length of service,service. The Company contributed and expensed $92 and $90 to eligible employees.employee 401(k) retirement savings accounts in 2008 and 2007, respectively.

         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.

    TargetTarget     
    allocationsActualallocationsallocationsActual allocations
    2006       2006       200520082008     2007
    Pension plan asset allocation, as of December 31:          
    Domestic equity securities 21.4% 21.1%36.1%15.6%11.0%15.2%
    International equity securities 24.5 27.5  25.2 16.413.9 21.4
    Investment grade debt securities 25.0 23.3 17.8 16.017.921.6
    High yield debt securities 8.0 7.7  7.6 10.0 12.79.9
    Private equity 5.0 4.9 4.2  5.5 9.2  5.9
    Hedge funds 7.6 7.4 3.8 22.0 22.917.2
    Real estate 1.5 1.4 1.1 3.03.21.7
    Other 7.0   6.7 4.3 11.5 9.27.1
    Total 100.0%100.0%100.0%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.purposes, including rebalancing exposures to certain asset classes. Any use of derivative instruments for a purpose or in a manner not specifically authorized is prohibited, unless approved in advance by the Committee.

         The current target allocations shown represent 20062008 targets that were originally established in 2005.2007 and modified during 2008. To maintain actual asset allocations consistent with target allocations, assets are reallocated or rebalanced periodically. CashIn addition, cash flow from employer contributions and participant benefit payments iscan be 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 2004, respectively. Although the Company is not required to make any cash contributions during fiscal 2007, it made a $50 cash contribution to its plans on 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 2007 will reduce its minimum required contributions in future years.

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    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    Although the Company is not required to make cash contributions to its Company-sponsored pension plans during fiscal 2009, it made a $200 cash contribution on February 2, 2009. Additional contributions may be made if required under the Pension Protection Act to avoid any benefit restrictions. The measurement date for post-retirement benefit obligations is the December 31st nearest the fiscal year-end.Company expects any voluntary contributions made during 2009 will reduce its minimum required contributions in future years.

         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%7.80% initial health care cost trend rate and a 5.00%4.50% 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% PointDecrease1% Point Increase     1% Point Decrease
    Effect on total of service and interest cost components $  5$(4) $4  $(3) 
    Effect on postretirement benefit obligation $45 $(39)$29  $(24)

         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 effect of the subsidy reduced our postretirement benefit obligation $6 at both February 3, 2007, and January 28, 2006, and did not have a material effect 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,funds, and recognized expense, of $219 in 2008, $207 in 2007, and $204 in 2006, $196 in 2005, and $180 in 2004. The Company estimates it would have contributed an additional $2 million in 2004, but its obligation to contribute was suspended during the labor dispute in southern California.2006.

         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.

         The Company also administers certainother defined contribution plans for eligible union and non-union employees. The cost of these plans for 2008, 2007 and 2006 2005 and 2004 was $8, $8 and $12, respectively.$8.

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    NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS, CONTINUED

    15.14. RENTLYECENTLYADOPTED ACCOUNTING STANDARDS

         In December 2004,Effective January 31, 2009, the FASB issued SFAS No. 123 (Revised 2002),Company adopted FAS 140-4 and FIN 46(R)-8,Share-Based PaymentDisclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities (“SFAS No. 123(R)”), which replaced SFAS No. 123, superseded APB No. 25(FAS 140-4 and related interpretationsFIN 46(R)-8). FAS 140-4 and amended SFAS No. 95,StatementFIN 46(R)-8 require additional disclosures about an entity’s involvement with variable interest entities and transfers of Cash Flows. SFAS No 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. The Company adopted the provisions of SFAS No. 123(R) in the first quarter of 2006. The implementation of SFAS No. 123(R) reduced net earnings $0.06 per diluted share in 2006.assets. See Note 102 for further discussion of the effectadoption of FAS 140-4 and FIN 46(R)-8.

    Effective February 3, 2008, the Company adopted SFAS No. 157,Fair Value Measurements (SFAS 157), except for non-financial assets and non-financial liabilities as deferred until February 1, 2009 by FASB Staff Position (FSP) 157-2Partial Deferral of the Effective Date of Statement No. 157 (FSP 157-2). SFAS 157 defines fair value, establishes a market-based framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 does not expand or require any new fair value measurements. FSP

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    157-2 deferred the effective date of SFAS 157 for most non-financial assets and non-financial liabilities to fiscal years beginning after November 15, 2008. See Note 7 for further discussion of the adoption of SFAS No. 123(R) had on the Company’s Consolidated Financial Statements.157.

         In September 2006, the FASB issued SFAS No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB Statements No. 87, 99, 106, and 123(R). SFAS No. 158 requires an employer that sponsors 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 those changes be recorded in comprehensive income, net of tax, as a separate component shareowners’ equity. SFAS No. 158 also requires additional footnote disclosure. The recognition and disclosure provisions of SFAS No. 158 became effective forEffective February 4, 2007, the Company on February 3, 2007. The measurement date provisions of SFAS No. 158 will become effective for the Company’s fiscal year beginning on February 1, 2009. See Note 14 for the effects the implementation of SFAS No. 158 had on the Company’s Consolidated Financial Statements.

    16. RECENTLYISSUED ACCOUNTINGSTANDARDS

    In June 2006, theadopted FASB issued Interpretation (“FIN”) No. 48,Accounting for Uncertainty in Income Taxes-anTaxes – an interpretation of FASB Statement No. 109. FIN (FIN No. 4848), which 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 Interpretationinterpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. See Note 4 for further discussion of the adoption of FIN No. 48 becomes48.

    Effective February 3, 2007, the Company adopted the recognition and disclosure provisions (except for the measurement date change) of SFAS No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB Statement No. 87, 99, 106 and 132(R) (SFAS 158), which requires 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 required to be recorded as a component of Accumulated Other Comprehensive Income (“AOCI”). The Company adopted the measurement date provisions of SFAS 158 effective forFebruary 3, 2008. The majority of the Company’s pension and postretirement plans previously used a December 31 measurement date. All plans are now measured as of the Company’s fiscal year beginning February 4, 2007.end. The Company is evaluatingnon-cash effect of the adoption of the measurement date provisions of SFAS 158 decreased shareholders’ equity by approximately $5 ($3 after-tax) and increased long-term liabilities by approximately $5. There was no effect on the implementationCompany’s results of FIN No. 48 will have on its Consolidated Financial Statements.operations. See Note 13 for further discussion of the adoption of this standard.

    15. RECENTLYISSUED ACCOUNTING STANDARDS

         In September 2006,December 2007, the FASB issued SFAS No. 157,160,Fair Value MeasurementNoncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51 (SFAS 160). SFAS No. 157 defines fair value, establishes160 will require the consolidation of noncontrolling interests as a framework for measuring fair value in GAAP and expands disclosures about fair value measurement.component of equity. SFAS No. 157 does not require any new fair value measurements. SFAS No. 157160 will become effective for the Company’s fiscal year beginning February 3, 2008. The Company is evaluating the effect the implementation of SFAS No. 157 will have on its 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 the Company’s fiscal year beginning February 3, 2008.1, 2009. The Company is currently evaluating the effect the adoption of SFAS No. 159160 will have on its Consolidated Financial Statements.

    In December 2007, the FASB issued SFAS No. 141 (Revised 2007),Business Combinations (SFAS 141R), which replaces SFAS 141. SFAS 141R further expands the definitions of a business and the fair value measurement and reporting in a business combination. SFAS 141R will become effective for the Company’s fiscal year beginning February 1, 2009. Because the standard will only impact transactions entered into after February 1, 2009, SFAS 141R will not effect our Consolidated Financial Statements upon adoption.

    In March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities (SFAS 161). SFAS 161 requires enhanced disclosures on an entity’s derivative and hedging activities. SFAS 161 will become effective for the Company’s fiscal year beginning February 1, 2009. The Company is currently evaluating the effect the adoption of SFAS 161 will have on its Consolidated Financial Statements.

    In June 2008, the FASB issued FSP No. EITF 03-6-1,Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (FSP No. EITF 03-6-1). FSP No. EITF 03-6-1 clarifies that share-based payment awards that entitle their holders to receive nonforfeitable dividends before vesting should be considered participating securities and included in the calculation of

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    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    In June 2006, the FASB ratified the consensus of Emerging Issues Task Force (“EITF”) issuebasic EPS. FSP 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 becomes03-6-1 will become effective for the Company’s fiscal year beginning February 4, 2007.1, 2009. The Company does not expectis currently evaluating the effect the adoption of FSP No. EITF No. 06-03 to03-6-1 will have a material effect on its Consolidated Financial Statements.

    17.16. 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 February 3, 2007,January 31, 2009, a total of approximately $5,916$7,186 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, pre-tax earnings, cash flow, and equity for all periods presented, except for consolidated pre-tax earnings in 2004.equity. 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. Therefore, the non-guarantor subsidiaries information is separately presented in the Condensed Consolidated Statements of Operations for 2004.tables below.

         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).

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    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

         The following tables present summarized financial information as of January 31, 2009 and February 2, 2008 and for the three years ended January 31, 2009.

    Condensed Consolidating
    Balance Sheets
    As of January 31, 2009

    Guarantor
        The Kroger Co.    Subsidiaries    Eliminations    Consolidated
    Current assets                
           Cash and temporary cash investments$27$236$—$263
          Deposits in-transit71560—631
          Receivables2,150765(1,971)944
          Net inventories3844,475—4,859
          Prepaid and other current assets366143—509
                 Total current assets2,9986,179(1,971)7,206 
    Property, plant and equipment, net1,74711,414—13,161
    Goodwill1322,139—2,271
    Adjustment to reflect fair value interest rate hedges————
    Other assets 7971,562(1,786)573
    Investment in and advances to subsidiaries10,266—(10,266)—
                 Total Assets$15,940$21,294 $(14,023)$23,211
    Current liabilities 
          Current portion of long-term debt including    
                 obligations under capital leases and 
                 financing obligations$558$—$—$558
          Accounts payable3863,436—  3,822
          Other current liabilities 8796,127(3,757) 3,249
                 Total current liabilities1,823  9,563(3,757)7,629
    Long-term debt including obligations under 
          capital leases and financing obligations 
          Face value long-term debt including
                 obligations under capital leases and
                 financing obligations 7,460——7,460
          Adjustment to reflect fair value interest rate  
                 hedges45——45
          Long-term debt including obligations under 
                 capital leases and financing obligations7,505——7,505
    Other long-term liabilities1,3411,465—2,806
                 Total Liabilities10,66911,028(3,757)17,940
    Minority interests95——95
    Shareowners’ Equity5,17610,266(10,266)5,176
                  Total Liabilities and Shareowners’ equity$15,940$21,294$(14,023)$23,211

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         The following tables present summarized financial information as of February 3, 2007 and January 28, 2006 and for the three years ended February 3, 2007.

    Condensed Consolidating
    Balance Sheets
    As of February 3, 20072, 2008

      Guarantor   Guarantor
    The Kroger Co.       Subsidiaries       Eliminations      ConsolidatedThe Kroger Co. Subsidiaries Eliminations Consolidated
    Current assets                 
    Cash  $        25 $      164 $         —  $      189
    Store deposits in-transit 69 545 —  614
    Cash and temporary cash investments$26$216$—$242
    Deposits in-transit76600—676 
    Receivables 168 1,982 (1,372)  7782,033634(1,881)786
    Net inventories 406 4,203 —  4,6094204,429—4,849
    Prepaid and other current assets  371  194—   565373182—555
    Total current assets 1,039 7,088  (1,372)  6,7552,9286,061(1,881)7,108
    Property, plant and equipment, net 1,429 10,350 —  11,7791,68410,814—12,498
    Goodwill, net 56 2,136 —  2,192
    Goodwill562,088—2,144
    Adjustment to reflect fair value interest rate
    hedges11——11
    Other assets 647 1,149 (1,307)  4891,412657(1,537)532
    Investment in and advances to subsidiaries  11,510  —  (11,510)   —10,098—(10,098)—
    Total Assets $ 14,681$ 20,723$ (14,189)  $ 21,215$16,189$19,620$(13,516)$22,293
    Current liabilities     
    Current portion of long-term debt     
    including obligations under capital     
    leases and financing obligations $      906$        —$         — $      906
    Current portion of long-term debt including  
    obligations under capital leases and
    financing obligations$1,592$ —$—$1,592
    Accounts payable 1,614 4,869 (2,679)  3,8041,8225,463(3,418)3,867
    Other current liabilities  (537)   3,408  —   2,871—3,224—3,224
    Total current liabilities 1,983 8,277 (2,679)  7,5813,4148,687(3,418)8,683
    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 — —  6,1366,485——6,485
    Adjustment to reflect fair value interest rate     
    hedges  18  —  —   1844——44
    Long-term debt including obligations     
    under capital leases and financing     
    obligations 6,154 — —  6,154
    Long-term debt including obligations under
    capital leases and financing obligations6,529——6,529
    Other long-term liabilities  1,621  936  —   2,5571,332835—2,167
    Total Liabilities  9,758  9,213  (2,679)   16,29211,2759,522(3,418)17,379
    Shareowners’ Equity  4,923   11,510  (11,510)   4,9234,91410,098(10,098)4,914
    Total Liabilities and Shareowners’ equity $ 14,681 $ 20,723 $ (14,189)   $ 21,215$16,189$19,620$(13,516)$22,293

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    NOTESTOOTESTOCONSOLIDATEDFINANCIALSTATEMENTS, CONTINUED

    Condensed Consolidating
    Balance Sheets
    AsStatements of Operations
    For the Year ended January 28, 200631, 2009
        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 

    Guarantor
    The Kroger Co.     Subsidiaries     Eliminations     Consolidated
    Sales$9,557$67,715$(1,272)$76,000
    Merchandise costs, including warehousing and 
           transportation7,81652,020(1,272)58,564
    Operating, general and administrative1,65711,227—12,884
    Rent128531—659
    Depreciation and amortization1571,285—1,442
          Operating profit (loss)(201)2,652—2,451
    Interest expense4805—485
    Equity in earnings of subsidiaries2,022—(2,022)—
    Earnings before tax expense1,3412,647(2,022)1,966
    Tax expense 92625—717
          Net earnings$1,249 $2,022$(2,022)$1,249

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    NOTESTOOTESTOCONSOLIDATEDFINANCIALSTATEMENTS, CONTINUED

    Condensed Consolidating
    Statements of Operations
    For the Year ended February 2, 2008

    Guarantor
    The Kroger Co.     Subsidiaries     Eliminations     Consolidated
    Sales$9,022$62,482$(1,269)$70,235
    Merchandise costs, including warehousing and
           transportation6,87748,171(1,269)53,779
    Operating, general and administrative1,66610,489—12,155
    Rent125519—644
    Depreciation and amortization1481,208—1,356
          Operating profit2062,095—2,301
    Interest expense4686—474
    Equity in earnings of subsidiaries1,511—(1,511)—
    Earnings before income tax expense1,2492,089(1,511)1,827
    Income tax expense68578—646
          Net earnings$1,181$1,511$(1,511)$1,181

    A-73



    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    Condensed Consolidating
    Statements of Operations
    For the Year ended February 3, 2007

      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-71



    NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS, CONTINUED

    Condensed Consolidating
    Statements of Operations
    For the Year ended January 28, 2006

      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-72



    NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS, CONTINUED

    Condensed Consolidating
    Statements of Operations
    For the Year ended January 29, 2005

      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-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 
    Guarantor
    The Kroger Co.     Subsidiaries     Eliminations     Consolidated
    Sales$8,731$58,383$(1,003)$66,111
    Merchandise costs, including warehousing and
           transportation6,63044,488(1,003)50,115
    Operating, general and administrative1,69710,142—11,839
    Rent132517—649
    Depreciation and amortization1361,136—1,272
          Operating profit1362,100—2,236
    Interest expense4808—488
    Equity in earnings of subsidiaries1,843—(1,843)—
    Earnings before income tax expense1,4992,092(1,843)1,748
    Income tax expense384249—633
          Net earnings$1,115$1,843$(1,843)$1,115

    A-74



    NOTESOTESTOTOCONSOLIDATEDFINANCIALSTATEMENTS, CONTINUED

    Condensed Consolidating
    Statements of OperationsCash Flows 
    For the Year ended January 28, 200631, 2009

     Guarantor   Guarantor
    The Kroger Co.      Subsidiaries       ConsolidatedThe Kroger Co.     Subsidiaries     Consolidated
    Net cash provided by operating activities  $ 1,171  $ 1,021  $ 2,192  $(852) $3,748 $2,896
    Cash flows from investing activities:      
    Capital expenditures (188)  (1,118)  (1,306) 
    Payments for capital expenditures(257)(1,892)(2,149)
    Other  11   16   27 (39)9(30)
    Net cash used by investing activities  (177)   (1,102)   (1,279) (296)(1,883)(2,179)
    Cash flows from financing activities:      
    Proceeds from issuance of long-term debt 14  —  14 1,377—1,377
    Reductions in long-term debt (764)  (33)  (797) 
    Payments on long-term debt(1,048)—(1,048)
    Proceeds from issuance of capital stock 78  —  78 187—187
    Capital stock reacquired (252)  —  (252) 
    Treasury stock purchases(637)—(637)
    Dividends paid(227)—(227)
    Other 77  33  110 (430)9(421)
    Net change in advances to subsidiaries  (140)  140   — 1,854(1,854)—
    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:      
    Net cash (used) provided by financing activities1,076(1,845)(769)
    Net increase (decrease) in cash and temporary cash investments(72)20(52)
    Cash from consolidated Variable Interest Entity73—73
    Cash and temporary cash investments:
    Beginning of year  32   112   144 26216242
    End of year  $      39 $    171 $    210 $27$236 $263 

    A-75



    NOTESOTESTOTOCONSOLIDATEDFINANCIALSTATEMENTS, CONTINUED

    Condensed Consolidating
    Statements of OperationsCash Flows 
    For the Year ended January 29, 2005February 2, 2008

      Guarantor Guarantor
    The Kroger Co.      Subsidiaries      ConsolidatedThe Kroger Co.     Subsidiaries     Consolidated
    Net cash provided by operating activities  $ (890)  $ 3,220  $ 2,330 
    Net cash (used) provided by operating activities$(941)$3,522$2,581
    Cash flows from investing activities:     
    Capital expenditures  (161) (1,473) (1,634) 
    Payments for capital expenditures(210)(1,916)(2,126)
    Other    22  4  26 (29)(63)(92)
    Net cash used by investing activities    (139)  (1,469)  (1,608) (239)(1,979)(2,218)
    Cash flows from financing activities:     
    Proceeds from issuance of long-term debt  616 — 616 1,372—1,372
    Reductions in long-term debt  (724) (286) (1,010) 
    Payments on long-term debt(560)—(560)
    Proceeds from issuance of capital stock  25 — 25 224—224
    Capital stock reacquired  (319) — (319) 
    Treasury stock purchases(1,421)—(1,421)
    Dividends paid(202)—(202)
    Other  (27) (22) (49) 21859277
    Net change in advances to subsidiaries    1,464  (1,464)  — 1,550(1,550)—
    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:     
    Net cash (used) provided by financing activities1,181(1,491)(310)
    Net increase in cash and temporary cash investments15253
    Cash and temporary cash investments:
    Beginning of year    26 133  159 25164189
    End of year  $    32  $    112   $    144  $26 $216$242

    A-76



    NOTESOTESTOTOCONSOLIDATEDFINANCIALSTATEMENTS, CONCLUDEDONTINUED

    18.Condensed Consolidating
    Statements of Cash Flows 
    For the Year ended February 3, 2007

    Guarantor
    The Kroger Co.     Subsidiaries     Consolidated
    Net cash provided by operating activities$(755)$3,106$2,351
           Cash flows from investing activities:
                 Payments for capital expenditures(143)(1,540)(1,683)
                 Other564096
    Net cash used by investing activities(87)(1,500)(1,587)
          Cash flows from financing activities:
                 Proceeds from issuance of long-term debt10—10
                 Payments on long-term debt(556)—(556)
                 Proceeds from issuance of capital stock206—206
                 Treasury stock purchases(633)—(633)
                 Dividends Paid(140)—(140)
                 Other355(27)328
                 Net change in advances to subsidiaries1,586(1,586)—
    Net cash used by financing activities828(1,613)(785)
    Net decrease in cash and temporary cash investments(14)(7)(21)
          Cash and temporary cash investments:
                 Beginning of year39171210
                 End of year $25   $164$189 

         The above February 2, 2008 condensed consolidating balance sheet and 2007 and 2006 condensed consolidating cash flow statements have been adjusted to conform to current year presentation and properly reflect intra-company receivables.

    A-77



    NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONCLUDED

    17. QUARTERLYDATA (UNAUDITED)

    Quarter  Quarter
    First Second Third Fourth Total Year FirstSecondThirdFourthTotal Year
    2006 (16 Weeks)     (12 Weeks)     (12 Weeks)     (13 Weeks)     (53 Weeks) 
    2008(16 Weeks)(12 Weeks)(12 Weeks)(12 Weeks)(52 Weeks)
    Sales$23,107$18,053$17,580$17,260$76,000
    Net earnings$386$277$237$349$1,249
    Net earnings per basic common share$0.59$0.42$0.37$0.54$1.92
    Average number of shares used in
    basic calculation657651649648652
    Net earnings per diluted common
    share$0.58$0.42$0.36$0.53$1.90
    Average number of shares used in
    diluted calculation664659656655659
    Quarter
    FirstSecondThirdFourthTotal Year
    2007(16 Weeks)    (12 Weeks)    (12 Weeks)    (12 Weeks)    (52 Weeks)
    Sales$19,415$15,138 $14,699$16,859$66,111$20,726$16,139$16,135$17,235$70,235
    Net earnings$306$209$215$385$1,115$337$267$254$323$1,181
    Net earnings per basic common share$0.42$0.29$0.30$0.55$1.56$0.48$0.38$0.37$0.48$1.71
    Average number of shares used in basic         
    calculation 722 719 712 706 715706702678668690
    Net earnings per diluted common share$0.42$0.29$0.30$0.54$1.54$0.47$0.38$0.37$0.48$1.69
    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 
    Average number of shares used in
    diluted calculation715709685676698

         Annual amounts may not sum due to rounding.

    CERTIFICATIONS

         On June 28, 2006,July 18, 2008, we submitted a Section 12(a) CEO Certification to the New York Stock Exchange 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 for fiscal years 20052007 and 2006.2008.

    A-77A-78




     

    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

    Mellon
    Employee Investment Plans Division

    P. O. Box 1089 
    Newark, New Jersey 07101 
    7090
    Troy, MI 48007-7090
    Toll Free 1-800-872-3307


     

    Questions regarding Kroger’s 401(k) planplans 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 YorkBNY Mellon Shareowner Services is Registrar and Transfer Agent for Kroger’s Common Stock. For questions concerning payment of dividends, changes of address, etc., individual shareowners should contact:

    BNY Mellon Shareowner Services

    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.P. O. Box 11258 P.O. Box 11002 
    Church Street Station Church Street Station 
    New York, New York 10286 New York, New York 10286 
    358015
    The Bank’s toll-free number is: 1-800-405-6566. E-mail: shareowners@bankofny.com
    Pittsburgh, PA 15252-8015
    Toll Free 1-866-405-6566

    Shareholder questions and requests for forms available on the Internet should be directed to: http://www.stockbny.comwww.bnymellon.com/shareowner.

    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.

     








    EXECUTIVE OFFICERS

     




    EXECUTIVEOFFICERS

    Donald E. Becker

    		Paul 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
    J. Michael Schlotman

    David B. Dillon

    		Christopher T. HjelmSenior Vice President and
    Chairman of the Board and
    Chief Executive Officer

    Kevin M. Dougherty
    Group Vice President

    Joseph A. Grieshaber, Jr.
    Group Vice President

    Paul W. Heldman
    Executive Vice President,
    Secretary and General Counsel

    Scott M. Henderson
    Vice President and Treasurer

    Christopher T. Hjelm
    Senior Vice President and
    Chief Information Officer

    Carver L. Johnson
    Group Vice President and
    Chief Diversity Officer

    Calvin J. Kaufman
    Group Vice President
    President – Manufacturing

    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

    Chief Executive OfficerChief Information Officer

    Paul J. Scutt

    Kevin M. DoughertyCarver L. JohnsonSenior Vice President
    Group Vice PresidentGroup Vice President and
    Chief Diversity Officer

    M. Elizabeth Van Oflen

    Jon C. FloraVice President and Controller

    Della Wall
    Group Vice President

    R. Pete Williams
    Senior Vice President

    		Lynn Marmer
    Group Vice President Della Wall
    Joseph A. Grieshaber, Jr.Group Vice President
    Group Vice President Don W. McGeorge
    President and 
    Chief Operating Officer

     

    OPERATINGUNITHEADS

     

    John E. Bays

    		Donna GiordanoPhyllis Norris
    Dillon StoresQFCCity Market

    Paul L. Bowen

    		John P. HackettDarel Pfeiff
    Jay CMid-South DivisionTurkey Hill Minit Markets

    William H. Breetz, Jr.

    		James HallseyMark Prestidge
    Southwest DivisionSmith’sDelta Division

    Geoffrey J. Covert
    Cincinnati Division

    Jay Cummins
    Mid-Atlantic Division

    Russell J. Dispense
    King Soopers

    Michael J. Donnelly
    Ralphs

    Michael L. Ellis
    Fred Meyer Stores

    Peter M. Engel
    Fred Meyer Jewelers

    Jon C. Flora
    Fry’s

    Donna Giordano
    QFC

    Rick Going
    Michigan Division

    John P. Hackett
    Mid-South Division

    James Hallsey
    Smith’s

    David G. Hirz

    		Mark Salisbury
    Cincinnati DivisionRalphsTom Thumb
    Jay CumminsMike HoffmannArt Stawski
    Food 4 LessKwik ShopLoaf ‘N Jug
    Russell J. Dispense

    Kathleen Kelly

    		Ron Stewart
    King SoopersKroger Personal FinanceQuik Stop

    (50% owned by Kroger)
    Michael J. DonnellyVan Tarver
    Fry’s

    Bruce A. Lucia
    Atlanta Division

    Bruce A. Macaulay
    Columbus Division

    Robert Moeder
    Central Division

    Phyllis J. Norris
    City Market

    Jeffrey A. Parker
    Kwik Shop

    Darel Pfeiff
    Turkey Hill Minit Markets

    D. Mark Prestidge
    Delta Division

    Mark W. Salisbury
    Tom Thumb

    Arthur Stawski, Sr.
    Loaf ‘N Jug

    Ron Stewart
    Quik Stop

    Van Tarver
    Convenience Stores and

    Atlanta Division
    Supermarket Petroleum
    Michael L. Ellis
    Fred Meyer StoresBruce MacaulayR. Pete Williams
    Great Lakes DivisionMid-Atlantic Division
    Peter M. Engel
    Fred Meyer JewelersRobert Moeder
    Central Division




     

     

     

     

     

     

     

     

     

    THEKROGERCO.l· 1014 VINESTREETl· CINCINNATI, OHIO45202l· (513) 762-4000


    Please mark
    your votes as
    indicated in
    this example        		x

    The Board of Directors recommends a vote FOR the nominees and FOR Proposal 2.

    1. ELECTION OF DIRECTORS:

    FOR  AGAINST  ABSTAINFOR  AGAINST ABSTAINFORAGAINST ABSTAIN
    1.1
    Reuben V.
    Anderson    		ccc1.6
    David B.
    Lewis    		ccc1.11
    Susan M.
    Phillips    		ccc
    1.2
    Robert D.
    Beyer    		ccc1.7
    Don W.
    McGeorge    		ccc1.12
    Steven R.
    Rogel    		ccc
    1.3
    David B.
    Dillon    		ccc1.8
    W. Rodney
    McMullen    		ccc1.13
    James A.
    Runde    		ccc
    1.4
    Susan J.
    Kropf    		ccc1.9
    Jorge P.
    Montoya    		ccc1.14
    Ronald L.
    Sargent    		ccc
    1.5
    John T.
    LaMacchia    		ccc1.10
    Clyde R.
    Moore    		ccc1.15
    Bobby S.
    Shackouls    		ccc
    Mark Here for Address
    Change or Comments
    SEE REVERSE    		c
    FOR AGAINST  ABSTAIN
    2. Approval ofPricewaterhouseCoopers LLP, as auditors.ccc
    The Board of Directors recommends a vote AGAINST Proposals 3 and 4
    FOR AGAINST  ABSTAIN
    3.Approve shareholder proposal, if properly presented, to recommend an increase of the percentage of eggs stocked from hens not confined in battery cages.c cc
    4.Approve shareholder proposal, if properly presented, to recommend amendment of Kroger’s articles to provide for election of directors by majority vote.c cc

    Signature  Co-owner sign here  Date 
    Please sign below exactly as name appears hereon. Joint owners should each sign. Where applicable, indicate position or representative capacity.

    5FOLD AND DETACH HERE 5

    WE ENCOURAGE YOU TO TAKE ADVANTAGE OF INTERNET OR TELEPHONE VOTING.
    BOTH ARE AVAILABLE 24 HOURS A DAY, 7 DAYS A WEEK.

    Internet and telephone voting are available through 11:59 PM Eastern Time
    June 24, 2009.

     
    INTERNET
    http://www.eproxy.com/kr
    Use the Internet to vote your proxy. Have your proxy card in hand when you access the web site.
    OR
    TELEPHONE
    1-866-580-9477
    Use any touch-tone telephone in the United States, Canada and Puerto Rico to vote your proxy. Have your proxy card in hand when you call.


    If you vote your proxy by Internet or by telephone, you do NOT need to mail back your proxy card.

    To vote by mail, mark, sign and date your proxy card and return it in the enclosed postage-paid envelope.

    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.


    Important notice regarding the Internet availability of proxy materials for the Annual Meeting of shareholders    The Proxy Statement and the 2008 Annual Report to Shareholders are available at:
    http://bnymellon.mobular.net/bnymellon/kr

    50765

    P R O X Y

     
    This Proxy is Solicited on Behalf of the Board of Directors
    for the Annual Meeting to be Held on June 25, 2009

         The undersigned hereby appoints each of DAVID B. DILLON, JOHN T. LA MACCHIA and BOBBY S. SHACKOULS 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, FOR Proposal 2, and AGAINST Proposals 3 and 4.

         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 vote your proxy by Internet or telephone or sign and return the card.

    (Continued and to be marked, dated and signed, on the other side)

    BNY MELLON SHAREOWNER SERVICES
    Address Change/Comments
    (Mark the corresponding box on the reverse side)    		P.O. BOX 3550
    SOUTH HACKENSACK, NJ 07606-9250


    5FOLD AND DETACH HERE 5

    For shareholders who have elected to receive The Kroger Co. Proxy Statement and Annual Report electronically, you can now view the 2009 Annual Meeting materials on the Internet by pointing your browser tohttp://www.thekrogerco.com/finance/documents/proxystatement.pdf.

    ChooseMLinkSMfor fast, easy and secure 24/7 online access to your future proxy materials, investment plan statements, tax documents and more. Simply log on toInvestor ServiceDirect®atwww.bnymellon.com/shareowner/isd where step-by-step instructions will prompt you through enrollment.

    50765