~~UNITED STATES~~

~~SECURITIES AND EXCHANGE COMMISSION~~

~~Washington, D.C. 20549~~

~~FORM 10-Q~~

xUNITED STATES

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

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~November 5, 2005~~May 20, 2006

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

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

For the transition period fromto ____to____

Commission file number 1-303

~~Commission file number 1-303~~

~~THE KROGER CO.~~

~~(Exact name of registrant as specified in its charter)~~

		THE KROGER CO.
~~Ohio~~(Exact name of registrant as specified in its charter)		~~31-0345740~~

Ohio 31-0345740
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
~~(I.R.S. Employer~~
Identification No.)
1014 Vine Street, Cincinnati, OH 45202
(Address of principal executive offices)
(Zip Code)
(513) 762-4000
(Registrant’s telephone number, including area code)
Unchanged
(Former name, former address and former fiscal year, if changed since last report)
~~1014 Vine Street, Cincinnati, OH 45202~~
~~(Address of principal executive offices)~~
~~(Zip Code)~~
~~(513) 762-4000~~
~~(Registrant’s telephone number, including area code)~~
~~Unchanged~~
~~(Former name, former address and former fiscal year, if changed since last report)~~

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YesxNo¨o.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, ~~(as defined~~or a non-accelerated. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange ~~Act).    Yes~~  xAct. (Check one):    No  ¨.
Large accelerated filerx Accelerated filero Non-accelerated filero

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨oNox.
~~There were 725,483,410 shares of Common Stock ($1 par value) outstanding as of December 9, 2005.~~
There were 722,514,243 shares of Common Stock ($1 par value) outstanding as of June 23, 2006.
~~PART I - FINANCIAL INFORMATION~~

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.
THE KROGER CO.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
(unaudited)
~~(unaudited)~~

   Third Quarter Ended
   Three Quarters Ended
   November 5,
2005
   November 6,
2004
   November 5,
2005
   November 6,
2004
Sales
   $ 14,020    $ 12,854    $ 45,833    $ 42,739
Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below
   10,596    9,639    34,503    31,883
Operating, general and administrative
   2,556    2,433    8,380    8,075
Rent
   166    158    514    525
Depreciation and amortization
   287    287    969    949




Operating Profit
   415    337    1,467    1,307
Interest expense
   114    117    394    442




Earnings before income tax expense
   301    220    1,073    865
Income tax expense
   116    77    397    317




Net earnings
   $ 185    $ 143    $ 676    $ 548




Net earnings per basic common share
   $ 0.26    $ 0.19    $ 0.93    $ 0.74




Average number of common shares used in basic calculation
   724    736    725    738
Net earnings per diluted common share
   $ 0.25    $ 0.19    $ 0.92    $ 0.73




Average number of common shares used in diluted calculation
   732    742    731    746
First Quarter Ended

May 20, 2006 May 21, 2005
Sales $ 19,415 $ 17,948
Merchandise costs, including advertising, warehousing, and transportation,
excluding items shown separately below 14,659 13,443
Operating, general and administrative 3,528 3,295
Rent 196 203
Depreciation and amoritzation 388 389
Operating profit 644 618
Interest expense 155 159
Earnings before income tax expense 489 459
Income tax expense 183 165
Net earnings $ 306 $ 294
Net earnings per basic common share $ 0.42 $ 0.40
Average number of common shares used in basic calculation 722 727
Net earnings per diluted share $ 0.42 $ 0.40
Average number of common shares used in diluted calculation 729 732

The accompanying notes are an integral part of the Consolidated Financial Statements.
THE KROGER CO.
CONSOLIDATED BALANCE SHEETS
(in millions, except per share amounts)
(unaudited)
~~(unaudited)~~


November 5,
2005
January 29,
2005

ASSETS

Current assets

Cash – In stores
   $ 137 $ 144
Cash – Temporary cash investments
   100 —


Total Cash
   237 144
Deposits in-transit
   562 506
Receivables
   664 661
Receivables - Taxes
   —   167
FIFO Inventory
   5,186 4,729
LIFO Credit
   (400 ) (373 )
Prefunded employee benefits
   —   300
Property held for sale
   98 23
Prepaid and other current assets
   226 249


Total current assets
   6,573 6,406
Property, plant and equipment, net
   11,381 11,497
Goodwill
   2,192 2,191
Other assets and investments
   431 397


Total Assets
   $ 20,577 $ 20,491


LIABILITIES

Current liabilities

Current portion of long-term debt, at face value, including obligations under capital leases and financing obligations
   $ 639 $ 71
Accounts payable
   3,763 3,598
Deferred income taxes
   267 267
Other current liabilities
   2,548 2,380


Total current liabilities
   7,217 6,316
Long-term debt including obligations under capital leases and financing obligations:

Long-term debt, at face value, including obligations under capital leases and financing obligations
   6,596 7,830
Adjustment to reflect fair value interest rate hedges (Note 11)
   25 70


Long-term debt including obligations under capital leases and financing obligations
   6,621 7,900
Deferred income taxes
   879 939
Other long-term liabilities
   1,777 1,796


Total Liabilities
   16,494 16,951


Commitments and Contingencies (Note 10)

SHAREOWNERS’ EQUITY

Preferred stock, $100 par, 5 shares authorized and unissued
   —   —
Common stock, $1 par, 1,000 shares authorized: 926 shares issued in 2005 and 918 shares issued in 2004
   926 918
Additional paid-in capital
   2,494 2,432
Accumulated other comprehensive loss
   (199 ) (202 )
Accumulated earnings
   4,211 3,541
Common stock in treasury, at cost, 201 shares in 2005 and 190 shares in 2004
   (3,349 ) (3,149 )


Total Shareowners’ Equity
   4,083 3,540


Total Liabilities and Shareowners’ Equity
   $ 20,577 $ 20,491


January 28,
May 20, 2006 2006
ASSETS
Current assets
Cash - In stores $ 133 $ 147
Cash - Temporary cash investments    526 63

Total cash 659 210

Deposits in-transit 523 488
Receivables 696 686
FIFO inventory 4,855 4,886
LIFO credit (410 ) (400 )
Prefunded employee benefits 22 300
Prepaid and other current assets    311    296

Total current assets 6,656 6,466

Property, plant and equipment, net 11,402 11,365
Goodwill 2,192 2,192
Other assets 485    459

Total Assets $ 20,735 $ 20,482

LIABILITIES
Current liabilities
       Current portion of long-term debt including obligations under capital leases and financing
                      obligations
$ 743 $ 554
Accounts payable 3,564 3,550
Accrued salaries and wages 635 742
Deferred income taxes 217 217
Other current liabilities 1,950 1,652

Total current liabilities 7,109 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 6,431 6,651
Adjustment to reflect fair-value interest rate hedges 12    27

Long-term debt including obligations under capital leases and financing obligations 6,443 6,678

Deferred income taxes 834 843
Other long-term liabilities 1,745 1,856

Total Liabilities 16,131 16,092

Commitments and contingencies

SHAREOWNERS' EQUITY

Preferred stock, $100 par, 5 shares authorized and unissued - -
Common stock, $1 par, 1,000 shares authorized; 931 shares issued in 2006 and 927 shares
issued in 2005 931 927
Additional paid-in capital 2,599 2,536
Accumulated other comprehensive loss (225 ) (243 )
Accumulated earnings 4,832 4,573
Common stock in treasury, at cost, 211 shares in 2006 and 198 shares in 2005 (3,533 ) (3,403 )

Total Shareowners' Equity 4,604 4,390

Total Liabilities and Shareowners' Equity $ 20,735 $ 20,482

The accompanying notes are an integral part of the Consolidated Financial Statements.
THE KROGER CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions and unaudited)

   Three Quarters Ended


November 5,
2005
November 6,
2004

Cash Flows From Operating Activities:

Net earnings
   $ 676 $ 548
Adjustments to reconcile net earnings to net cash provided by operating activities:

Depreciation and amortization
   969 949
LIFO charge
   27 31
Deferred income taxes
   (62 ) 143
Other
   35 34
Changes in operating assets and liabilities net of effects from acquisitions of businesses:

Inventories
   (457 ) (492 )
Receivables
   (3 ) 20
Deposits in-transit
   (56 ) 12
Prepaid expenses
   321 314
Accounts payable
   344 331
Accrued expenses
   122 (60 )
Accrued income taxes
   346 153
Contribution to company-sponsored pension plans
   (300 ) (35 )
Long-term liabilities
   87 100


Net cash provided by operating activities
   2,049 2,048


Cash Flows From Investing Activities:

Capital expenditures, excluding acquisitions
   (1,011 ) (1,280 )
Proceeds from sale of assets
   61 58
Other
   (22 ) 7


Net cash used by investing activities
   (972 ) (1,215 )


Cash Flows From Financing Activities:

Proceeds from issuance of long-term debt
   13 —
Payments on long-term debt
   (61 ) (777 )
Borrowings (payments) on bank revolver
   (629 ) 263
Financing charges incurred
   —   (5 )
Debt prepayment costs
   —   (25 )
Decrease in book overdrafts
   (181 ) (102 )
Proceeds from issuance of capital stock
   76 33
Treasury stock purchases
   (202 ) (249 )


Net cash used by financing activities
   (984 ) (862 )


Net increase (decrease) in cash and temporary cash investments
   93 (29 )


Cash and temporary cash investments:

Beginning of year
   144 159
End of quarter
   $ 237 $ 130


Supplemental disclosure of cash flow information:

Cash paid during the year for interest
   $ 442 $ 516
Cash paid during the year for income taxes
   $ 112 $ 4
Quarter Ended
May 20, May 21,
2006 2005
Cash Flows from Operating Activities
Net earnings $ 306 $ 294
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization 388 389
LIFO charge 10 11
Stock option expense 22 3
Pension expense for Company-sponsored plans 49 43
Deferred income taxes (19 ) (20 )
Gain on sale of property (7 ) (5 )
Other 58 20
Changes in operating assets and liabilities net of effects from acquisitions
                      of businesses
Store deposits in-transit (35 ) (15 )
Receivables (16 ) 45
Inventories 32 53
Prepaid expenses 224 265
Accounts payable 68 (135 )
Accrued expenses (117 ) (59 )
Income taxes receivable (payable) 168 181
Contribution to Company-sponsored pension plans (150 ) (89 )
Other 3 (8 )

Net cash provided by operating activities 984    973

Cash Flows from Investing Activities
Payments for property and equipment (420 )       (401 )
Proceeds from sale of assets 53 28
Other (3 ) (4 )

Net cash used by investing activities (370 ) (377 )

Cash Flows from Financing Activities
Proceeds from issuance of long-term debt - 6
Payments on long-term debt (25 ) (32 )
Payments on bank revolver - (428 )
Financing charges incurred (1 )    -
Proceeds from issuance of capital stock 49 22
Treasury stock purchases (134 ) (153 )
Decrease in book overdrafts (54 ) (20 )

Net cash used by financing activities (165 ) (605 )

Net increase (decrease) in cash and temporary cash investments 449 (9 )

Cash and temporary cash investments:
Beginning of year 210 144

End of quarter $ 659    $ 135

Reconciliation of capital expenditures
Payments for property and equipment $ (420 ) $ (401 )
Changes in construction-in-progress payables (30 ) -

Total capital expenditures $ (450 ) $ (401 )

Disclosure of cash flow information
Cash paid during the quarter for interest $ 179 $ 190
Cash paid during the quarter for income taxes $ 24 $ 5

The accompanying notes are an integral part of the Consolidated Financial Statements.
N~~OTES~~TO C~~ONSOLIDATED~~ F~~INANCIAL~~ S~~TATEMENTS~~OTES TO
CONSOLIDATEDFINANCIALSTATEMENTS
All amounts are in millions except per share amounts.
Certain prior-year amounts have been reclassified to conform to current-year presentation.
1. ACCOUNTINGPOLICIES
Basis of Presentation and Principles of Consolidation

The accompanying financial statements include the consolidated accounts of The Kroger Co. and its subsidiaries. The January ~~29, 2005~~28, 2006 balance sheet was derived from audited financial statements and, due to its summary nature, does not include all disclosures required by generally accepted accounting principles (“GAAP”). Significant intercompany transactions and balances have been eliminated. References to the “Company” in these Consolidated Financial Statements mean the consolidated company.

In the opinion of management, the accompanying unaudited Consolidated Financial Statements include all normal, recurring adjustments that are necessary for a fair presentation of results of operations for such periods but should not be considered as indicative of results for a full year. The financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted, pursuant to SEC regulations. Accordingly, the accompanying ~~consolidated financial statements~~Consolidated Financial Statements should be read in conjunction with the fiscal ~~2004~~2005 Annual Report on Form 10-K of The Kroger Co. filed with the SEC on April ~~15, 2005, as amended.~~7, 2006.

The unaudited information included in the Consolidated Financial Statements for the ~~third~~first quarter ended May 20, 2006 and ~~three quarters ended November 5,~~May 21, 2005 ~~and November 6, 2004~~ include the results of operations of the Company for the ~~12-week and 40-week~~16-week periods then ended.
~~Vendor Allowances~~   Stock-Based Compensation Expense

~~The~~Effective January 29, 2006, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123(R),Share-Based Payment, using the modified prospective transition method and, therefore, has not restated results for prior periods. Under this method, the Company recognizes compensation expense for all ~~vendor allowances~~share-based payments granted after January 29, 2006, as ~~a reduction~~well as all share-based payments granted prior to, but not yet vested, as of January 29, 2006, in ~~merchandise costs when~~accordance with SFAS No. 123(R). Under the ~~related product is sold. In most cases, vendor allowances are applied~~fair value recognition provisions of SFAS No. 123(R), the Company recognizes share-based compensation expense, net of an estimated forfeiture rate, over the requisite service period of the award. Prior to the ~~related product by item,~~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” and ~~therefore reduce~~ the ~~carrying value~~disclosure provisions of ~~inventory by item. When it is not practicable to allocate vendor allowances~~SFAS No. 123. For further information regarding the adoption of SFAS No. 123(R), see Note 2 to the ~~product by item, vendor allowances are recognized as a reduction in merchandise costs based on inventory turns and recognized as the product is sold.~~Consolidated Financial Statements.
Store Closing and Other Expense Allowances

All closed store liabilities related to exit or disposal activities initiated after December 31, 2002, are accounted for in accordance with ~~Statement on Financial Accounting Standards (“SFAS”)~~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 lease buyouts. 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 the 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. The Company recorded asset impairments in the normal course of business totaling $10 in the first quarter of 2006 and $8 in the first quarter of 2005.

The following table summarizes accrual activity for future lease obligations of stores closed in the normal course of business.
Future Lease Obligations
2006 2005
Balance at beginning of year $ 65 $ 65
Additions — 5
Payments (2 ) (2 )
Adjustments — (4 )

Balance at end of First Quarter $ 63 $ 64



   Future Lease Obligations

   2005
2004

Balance at beginning of year
   $ 65 $ 35
Additions
   19 23
Payments
   (11 ) (7 )
Adjustments
   (4 ) 3


Balance at end of Third Quarter
   $ 69 $ 54
In addition, the Company maintains a ~~$54~~$52 liability for facility closure costs for locations closed in California prior to the Fred Meyer merger ~~a $14 liability relating to a charitable contribution required as a result of the Fred Meyer merger~~ and ~~a $9~~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.
2. STOCKOPTIONPLANS

~~The~~Prior to January 29, 2006, the Company ~~applies~~applied Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB No. 25”) and related interpretations, ~~to account~~in accounting for its stock option ~~plans.~~ plans and provided the required pro-forma disclosures of 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 equity awards may be made throughout the year, it has been the Company’s practice typically to make a general annual grant in conjunction with the May meeting of its Board of Directors. Stock options generally expire 10 years from the date of grant. ~~Accordingly,~~Stock options vest in one year to five years from the date of grant or, for certain stock options, the earlier of the Company’s stock reaching certain pre-determined market prices or nine years and six months from the date of grant. Under APB No. 25, the Company ~~does~~did not ~~record stock-based~~recognize compensation expense for these ~~options.~~stock option grants. At May 20, 2006, approximately 17 shares of common stock were available for future options under these plans.
     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 in one year to five years from the date of the awards and expense is recognized over the lapsing cycle. As of May 20, 2006, approximately six shares of common stock were available for future restricted stock awards under the 2005 Long-Term Incentive Plan (the “Plan”). The Company ~~also makes~~has the ability to convert shares available for issuance under the Plan to shares available for restricted stock awards. ~~Compensation~~Four shares available for other awards can be converted into one share available for restricted stock awards. Under APB No. 25, the Company generally recorded expense ~~included in net earnings~~ for restricted stock awards ~~totaled approximately $1 and $1, after-tax, for~~in an amount equal to the ~~third quarters~~fair market value of ~~2005 and 2004, respectively.~~the underlying stock on the date of award.
     All awards become immediately exercisable upon certain changes of control of the Company.
     Historically, stock option awards were granted to various employees throughout the organization. Restricted stock ~~expense totaled $4~~awards, however, were limited to approximately 150 associates, including members of the Board of Directors and ~~$6, after-tax, for~~certain members of senior management. Beginning in 2006, the ~~first three quarters~~Company began issuing a combination of ~~2005~~stock option and ~~2004, respectively. The~~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.
     Changes in options outstanding under the stock option plans are ~~more fully described in~~summarized below.
   Stock Options
Shares subject Weighted-average
to option exercise price
Outstanding, year-end 2005 59.3 $ 19.03
Granted 3.1 $ 19.94
Exercised (4.3 ) $ 11.21
Canceled or Expired (0.3 ) $ 20.78

Outstanding, May 20, 2006 57.8 $ 19.66

     A summary of stock options outstanding and exercisable at May 20, 2006 follows:
Weighted-
average
remaining Weighted- Weighted-
Number contractual life average Options average
Range of exercise prices outstanding (in years) exercise price exercisable exercise price
$ 7.10 - $14.93 11.1 4.40 $ 14.11 9.5 $ 13.97
$14.94 - $16.39 6.6 8.86 $ 16.35 2.4 $ 16.32
$16.40 - $17.31 11.5 6.02 $ 16.97 8.1 $ 16.90
$17.32 - $23.00 15.5 5.24 $ 21.66 9.8 $ 22.05
$23.01 - $31.91 13.1 3.79 $ 26.06 11.1 $ 26.06

$ 7.10 - $31.91 57.8 5.32 $ 19.66 40.9 $ 19.90

     The weighted-average remaining contractual life for options exercisable was approximately 4.6 years.
Restricted Stock
Restricted Weighted-
shares average grant-
outstanding date fair value
Outstanding, year-end 2005 0.7 $            17.85
Granted 2.1 $ 19.93
Lapsed (0.1 ) $            17.86
Canceled or Expired — $                 —

Outstanding, May 20, 2006 2.7 $ 19.46

   Adoption of SFAS No. 123(R)
Effective January 29, 2006, the ~~Company’s fiscal 2004 Annual Report on Form 10-K.~~
~~The following table illustrates~~Company adopted the ~~effect on net earnings, net earnings per basic common share and net earnings per diluted common share as if~~provisions of SFAS No. 123(R),Share-Based Payment, using the modified-prospective application method. Under this method, the Company recognized compensation ~~cost~~expense for the first quarter ended May 20, 2006 for all ~~options had been determined~~share-based awards granted prior to, but not yet vested as of January 29, 2006 based on the grant date fair ~~market~~ value ~~recognition provision~~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 recognized compensation expense based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R).


   Third Quarter
Year-To-Date

   2005
2004
2005
2004

Net earnings, as reported
   $ 185 $ 143 $ 676 $ 548
Add: Stock-based compensation expense included in net earnings, net of income tax benefits
   1 1 4 6
Subtract: Total stock-based compensation expense determined under fair value method for all awards, net of income tax benefits
   (9 ) (10 ) (26 ) (35 )


Pro forma net earnings
   $ 177 $ 134 $ 654 $ 519


Net earnings per basic common share, as reported
   $ 0.26 $ 0.19 $ 0.93 $ 0.74
Pro forma earnings per basic common share
   $ 0.25 $ 0.18 $ 0.90 $ 0.70
Net earnings per diluted common share, as reported
   $ 0.25 $ 0.19 $ 0.92 $ 0.73
Pro forma earnings per diluted common share
   $ 0.24 $ 0.18 $ 0.89 $ 0.70
~~To calculate pro forma stock-based compensation,~~In accordance with the ~~Company estimated~~provisions of the modified-prospective application 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 May 20, 2006 is at least equal to the grant-date fair value of the vested portion of all outstanding options. All of the Company’s stock-based incentive plans are considered equity plans under SFAS No. 123(R).
     The weighted-average fair value of stock options granted during the first quarters ended May 20, 2006 and May 21, 2005, was $6.90 and $7.70, respectively. The fair value of each stock option grant was estimated on the date of ~~the~~ 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 ~~pricing model with~~grants that could be different than those used to record stock-based compensation expense in the Consolidated Statement of Operations.
     The following table reflects the weighted average assumptions used for grants ~~in 2005 and 2004.~~awarded to option holders:
2006 2005
Risk-free interest rate 5.07% 4.11%
Expected dividend yield 1.50% N/A
Expected volatility 27.60% 30.83%
Expected term 7.50 Years 8.70 Years



   2005
2004

Weighted average expected volatility (based on historical volatility)
   30.83 % 30.13 %
Weighted average risk-free interest rate
   4.11 % 3.99 %
Expected term (based on historical results)
   8.7 years 8.7 years
The weighted average ~~fair value of options granted during 2005 and 2004 was $7.64 per share granted and $7.91 per share granted, respectively. The Company uses a~~ risk-free interest rate was based ~~upon~~on the yield of a treasury note ~~maturing~~as of the grant date, continuously compounded, which matures at a date that approximates the ~~option’s~~ expected ~~term.~~term of the 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 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. Expected volatility was determined based upon historical stock volatilities. Implied volatility was also considered. Expected term was determined based upon a combination of historical exercise and cancellation experience as well as estimates of expected future exercise and cancellation experience.
     Total stock compensation recognized in the quarter ended May 20, 2006 was $22, pre-tax. This included $19 related to stock options and $3 related to restricted shares. A total of $1 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 $2 of restricted stock expense related to previously issued restricted stock. As a result, the incremental compensation expense attributable to the adoption of SFAS No. 123(R) in the first quarter of 2006 was $20, pre-tax, or $13 and $0.02 per basic and diluted share, after tax. Stock compensation expense recognized in the quarter ended May 21, 2005, related entirely to restricted stock grants, was $3. These costs were recognized as operating, general and administrative costs in the Company’s Consolidated Statement of Operations for the quarters ended May 20, 2006 and May 21, 2005. 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 the prior year, in accordance with SFAS No. 123, is described below.
     If compensation cost for the Company’s stock option plans for the first quarter ended May 21, 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 Company’s net earnings and diluted earnings per common share would have been reduced to the pro forma amounts below:
First Quarter
2005
Net earnings, as reported $ 294
Add: Stock-based compensation expense included in net earnings, net of income tax benefits 2
Subtract: Total stock-based compensation expense determined under fair value method for all
                 awards, net of income tax benefits

(8 )
Pro forma net earnings $ 288
Net earnings per basic common share, as reported $ 0.40
Pro forma earnings per basic common share $ 0.40
Net earnings per diluted common share, as reported $ 0.40
Pro forma earnings per diluted common share $ 0.39

     The total intrinsic value of options exercised in the first quarter of 2006 was $14. The total amount of cash received from the exercise of options granted under share-based payment arrangements was $48. As of May 20, 2006, there was $134 of total unrecognized compensation cost related to non-vested stock-based compensation arrangements granted under the Company’s stock option plans. This cost is expected to be recognized over a weighted-average period of approximately 2 years. The total fair value of options that vested during the quarter was $34 for each of the quarters ended May 20, 2006 and May 21, 2005.
     Shares issued as a result of stock option exercises may be newly issued shares or reissued treasury shares. Proceeds received from the exercise of stock options, and the related tax benefit, are utilized to repurchase shares of the Company’s stock. During the first quarter of 2006, the Company repurchased approximately 0.7 shares of stock in such a manner.
     The Company’s stock option grants generally contain retirement-eligibility provisions allowing employees to retire and retain their awards. For share-based awards granted prior to the adoption of SFAS No. 123(R), 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 will continue this method of recognizing compensation expense for those awards granted prior to the adoption of SFAS No. 123(R). However, for awards granted on or after January 29, 2006, the Company will recognize expense for stock option grants containing retirement-eligibility provisions over the shorter of the vesting period or the period until employees become retirement-eligible. As a result of retirement-eligibility provisions in stock option awards granted in 2006, approximately $6 of compensation cost was recognized prior to the completion of stated vesting periods.
3. DEBTOBLIGATIONS
Long-term debt consists of:
May 20, January 28,
2006 2006
Credit Facility and Commercial Paper borrowings $ — $ —
4.95% to 8.92% Senior Notes and Debentures due through 2031 6,390 6,390
5.00% to 9.95% mortgages due in varying amounts through 2017 174 179
Other 166 178

Total debt, excluding capital leases and financing obligations 6,730 6,747

Less current portion (716 ) (527 )

Total long-term debt, excluding capital leases and financing obligations $ 6,014 $ 6,220



   November 5,
2005

January 29,
2005

Credit Facility and Commercial Paper borrowings
   $ 65 $ 694
4.95% to 8.92% Senior Notes and Debentures due through 2031
   6,391 6,391
5.00% to 10.23% mortgages due in varying amounts through 2017
   213 218
Other
   177 202


Total debt, excluding capital leases and financing obligations
   6,846 7,505
Less current portion
   (613 ) (46 )


Total long-term debt, excluding capital leases and financing obligations
   $ 6,233 $ 7,459


4. COMPREHENSIVEINCOME

Comprehensive income is as follows:

   Third Quarter Ended
   Year-To-Date
   November 5,
2005
   November 6,
2004
   November 5,
2005
   November 6,
2004
Net earnings
   $ 185    $ 143    $ 676    $ 548
Unrealized gain (loss) on hedging activities, net of tax⁽¹⁾
   1    —      3    —




Comprehensive income
   $ 186    $ 143    $ 679    $ 548




First Quarter Ended
May 20, 2006 May 21,2005
Net earnings $ 306 $ 294
Unrealized gain on hedging activities, net of tax⁽¹⁾ 18 1
Comprehensive income $ 324 $ 295

⁽¹⁾ Amount is net of tax of $11 for the first quarter of 2006 and $1 for the ~~third~~first quarter of ~~2005 and $2 for the first three quarters of~~ 2005.

During 2006 and 2005, other comprehensive income consisted of reclassifications of previously deferred losses on cash flow hedges into net earnings as well as market value adjustments to reflect cash flow hedges at fair value as of the respective balance sheet dates.
5. BENEFITPLANS

~~The following table provides the components of net periodic benefit costs for the Company-sponsored pension plans and other post-retirement benefits for the third quarter of 2005 and 2004.~~

   Third Quarter

   Pension Benefits
Other Benefits

   2005
2004
2005
2004

Components of net periodic benefit cost:

Service cost
   $ 26 $ 26 $ 3 $ 3
Interest cost
   27 26 5 5
Expected return on plan assets
   (31 ) (28 ) —   —
Amortization of:

Transition asset
   —   —   —   —
Prior service cost
   1 1 (2 ) (2 )
Actuarial (gain) loss
   7 2 —   —


Net periodic benefit cost
   $ 30 $ 27 $ 6 $ 6


The following table provides the components of net periodic benefit costs for the Company-sponsored pension plans and other post-retirement benefits for the first ~~three quarters~~quarter of ~~2005~~2006 and ~~2004:~~2005.
First Quarter
Pension Benefits Other Benefits
2006 2005 2006 2005
Components of net periodic benefit cost:
Service cost $ 41 $ 38 $ 4 $ 3
Interest cost 41 37 6 6
Expected return on plan assets (47 ) (39 ) — —
Amortization of:
Prior service cost 2 2 (2 ) (2 )
                     Actuarial (gain) loss 12 8 — —

Net periodic benefit cost $ 49 $ 46 $ 8 $ 7



   Year-To-Date

   Pension Benefits
Other Benefits

   2005
2004
2005
2004

Components of net periodic benefit cost:

Service cost
   $ 92 $ 85 $ 9 $ 8
Interest cost
   92 87 16 17
Expected return on plan assets
   (100 ) (94 ) —   —
Amortization of:

Transition asset
   —   —   —   —
Prior service cost
   4 4 (6 ) (5 )
Actuarial (gain) loss
   21 7 1 —


Net periodic benefit cost
   $ 109 $ 89 $ 20 $ 20


The Company contributed ~~$300~~$150 to ~~the~~ Company-sponsored pension plans in the first ~~three quarters~~quarter of ~~2005 and may elect to make additional contributions during 2005 in order to maintain its desired funding status.~~2006.

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~~ Company recognizes expense in connection with these plans as contributions are funded, in accordance with SFAS No. 87,Employers’ Accounting for Pensions.
6. INCOMETAXES

The effective income tax rate was ~~37.0%~~37.4% for the first ~~three quarters~~quarter of ~~2005~~2006 and ~~36.7%~~35.9% for the first ~~three quarters~~quarter of ~~2004. In addition~~2005. The 2006 effective income tax rated differed from the federal statutory rate due to the effect of state ~~taxes, the~~taxes. The 2005 effective income tax rate differed from the federal statutory rate due to the effect of state taxes and a reduction ofin previously recorded tax contingency allowances resulting from a revision of the required allowances based on resolutions with tax authorities during the quarters and the third quarter effect of certain legal expenses that were not deductible for tax purposes.
allowances.
7. EARNINGSPERCOMMONSHARE

Earnings per basic common share equals net earnings divided by the weighted average number of common shares outstanding. Earnings per diluted common share equals net earnings divided by the weighted average number of common shares outstanding, after giving effect to dilutive stock options, restricted stock and warrants.

The following table provides a reconciliation of net earnings and shares used in calculating earnings per basic common share to those used in calculating earnings per diluted common share:
First Quarter Ended First Quarter Ended
May 20, 2006 May 21, 2005
Earnings Shares Per Share Earnings Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
Earnings per basic common share $ 306 722 $ 0.42 $ 294 727 $ 0.40
     Dilutive effect of stock options,
          restricted stock and warrants 7 5

Earnings per diluted common share $ 306 729 $ 0.42 $ 294 732 $ 0.40




Third Quarter Ended
November 5, 2005

Third Quarter Ended
November 6, 2004
   Earnings
(Numerator)
   Shares
(Denominator)
   Per Share
Amount
   Earnings
(Numerator)
   Shares
(Denominator)
   Per Share
Amount
Earnings per basic common share
   $ 185    724    $ 0.26    $ 143    736    $ 0.19
Dilutive effect of stock options and warrants
      8          6



Earnings per diluted common share
   $ 185    732    $ 0.25    $ 143    742    $ 0.19




Three Quarters Ended
November 5, 2005

Three Quarters Ended
November 6, 2004
   Earnings
(Numerator)
   Shares
(Denominator)
   Per Share
Amount
   Earnings
(Numerator)
   Shares
(Denominator)
   Per Share
Amount
Earnings per basic common share
   $ 676    725    $ 0.93    $ 548    738    $ 0.74
Dilutive effect of stock options and warrants
      6          8



Earnings per diluted common share
   $ 676    731    $ 0.92    $ 548    746    $ 0.73



The Company had options outstanding for approximately 2433 shares and 39 shares during the ~~third quarters~~first quarter of ~~2005~~2006 and ~~2004,~~2005, respectively, that were excluded from the computations of earnings per diluted common share because their inclusion would have had an anti-dilutive effect on earnings per share. For the first three quarters of 2005 and 2004, the Company had options outstanding for approximately 25 and 31 shares, respectively, that were excluded from the computations of diluted earnings per share because their inclusion would have had an anti-dilutive effect on earnings per share.
8. RECENTLYISSUEDACCOUNTING STANDARDS

~~8. RECENTLY~~ I~~SSUED~~ A~~CCOUNTING~~ S~~TANDARDS~~
~~In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (Revised 2004),~~~~Share-Based Payment~~ ~~(“SFAS No. 123R”), which replaces SFAS No. 123, supersedes APB No. 25 and related interpretations and amends SFAS No. 95~~~~Statement of Cash Flows~~. The provisions of SFAS No. 123R are similar to those of SFAS No. 123; however, SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements as compensation cost based on their fair value on the date of grant. Fair value of share-based awards will be determined using option pricing models (e.g. Black-Scholes or binomial models) and assumptions that appropriately reflect the specific circumstances of the awards.
Prior to the adoption of SFAS No. 123R, the Company is accounting for share-based compensation expense under the recognition and measurement provisions of APB No. 25, “Accounting for Stock Issued to Employees” and is following the accepted practice of recognizing share-based compensation expense over the explicit vesting period. SFAS No. 123R will require the immediate recognition at the grant date of the full share-based compensation expense for grants to retirement eligible employees, as the explicit vesting period is non-substantive. The estimated effect of applying the explicit vesting period approach versus the non-substantive approach is not material to any period presented. The Company expects to adopt SFAS No. 123R in the first quarter of fiscal 2006 and expects the adoption to reduce net earnings by $0.04-$0.06 per diluted share during fiscal 2006.
In November 2004, the FASB issued SFAS No. 151,Inventory Costs, an amendment of ARB No. 43 Chapter 4, which clarifies that inventory costs that are “abnormal” are required to be charged to expense as incurred as opposed to being capitalized into inventory as a product cost. SFAS No. 151 provides examples of “abnormal” costs to include costs of idle facilities, excess freight and handling costs and spoilage. SFAS No. 151 ~~will become~~became effective for the Company’s fiscal year beginning January 29, 2006. The adoption of SFAS No. 151 isdid not ~~expected to~~ have a material effect on the Company’s Consolidated Financial Statements.

In ~~May 2005,~~February 2006, the FASB issued ~~SFAS~~Staff Position (“FSP”) No. ~~154,~~~~Accounting Changes~~123(R)-4, “Classification of Options and ~~Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3~~~~. SFAS No. 154 requires retrospective application to prior periods financial statements~~Similar Instruments Issued as Employee Compensation that Allow for ~~changes in accounting principle, unless it is impracticable to determine either~~Cash Settlement upon the ~~period-specific effects or the cumulative effect of the change. SFAS No. 154 also requires that retrospective application~~Occurrence of a ~~change in accounting principle be limited to~~Contingent Event.” FSP No. 123(R)-4 addresses the ~~direct effects~~classification of options and similar instruments issued as employee compensation that allow for cash settlement upon the ~~change. Indirect effects~~occurrence of a ~~change in accounting principle should~~contingent event. FSP No. 123(R)-4 provides that cash settlement features that can be ~~recognized in~~exercised only upon the ~~period~~occurrence of a contingent event that is outside the ~~accounting change. SFAS No. 154 further requires a change in depreciation, amortization~~employee’s control does not require classifying the option or ~~depletion method for long-lived, non-financial assets to be accounted for~~similar instrument as a ~~change in accounting estimate effected by a change in accounting principle. SFAS~~liability until it becomes probable that the event will occur. The Company adopted the provisions of FSP No. ~~154 will become effective for~~123(R)-4 during the ~~Company’s fiscal year beginning January 29,~~first quarter of 2006.
FASB Interpretation No. 47 (“FIN 47”) “Accounting for Conditional Asset Retirement Obligations” was issued by the FASB in March 2005. FIN 47 provides guidance relating to the identification of and financial reporting for legal obligations to perform an asset retirement activity. The Interpretation requires recognition of a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. The adoption ~~of FIN 47 is not expected to have a material effect on the Company’s Consolidated Financial Statements.~~
In June 2005, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 05-6, “Determining the Amortization Period for Leasehold Improvements Purchased After Lease Inception or Acquired in a Business Combination.” EITF No. 05-6 requires that leasehold improvements acquired in a business combination be amortized over the shorter of the useful life of the assets or a term that includes required lease periods and renewals deemed to be reasonably assured at the date of acquisition. EITF No. 05-6 further requires that leasehold improvements that are placed into service significantly after and not contemplated at or near the beginning of the lease term shall be amortized over the shorter of the useful life of the assets or a term that includes the required lease periods and renewals deemed to be reasonably assured at the date of acquisition. EITF No. 05-6 became effective for the Company’s fiscal quarter beginning August 14, 2005. The adoption of EITF No. 05-6 did not have a material effect on the Company’s Consolidated Financial Statements.
In October 2005, the FASB issued FASB Staff Position FAS 13-1, “Accounting for Rental Costs Incurred during a Construction Period” (“FSP FAS 13-1”). FSP FAS 13-1 requires rental costs associated with building or ground leases incurred during a construction period to be recognized as rental expense and is effective for the first reporting period beginning after December 15, 2005. In addition, FSP FAS 13-1 requires lessees to cease capitalizing rental costs as of December 15, 2005 for operating lease agreements entered into prior to December 15, 2005. Early adoption is permitted. The Company was already in compliance with the provisions of FSP FAS 13-1, therefore it will have no effect on the Company’s Consolidated Financial Statements.9. GUARANTORSUBSIDIARIES

~~9. GUARANTOR~~ S~~UBSIDIARIES~~
The Company’s outstanding public debt (the “Guaranteed Notes”) is jointly and severally, fully and unconditionally guaranteed by The Kroger Co. and certain of its subsidiaries (the “Guarantor Subsidiaries”). At ~~November 5, 2005,~~May 20, 2006, a total of approximately $6.3 billion of Guaranteed Notes were outstanding. The Guarantor Subsidiaries and non-guarantor subsidiaries are direct or indirect 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 ~~represented~~represent less than 3% on an individual and aggregate basis of consolidated assets, pre-tax earnings, cash flow and equity. Therefore, the non-guarantor subsidiaries’ information is not separately presented in the tables below.

There are no current restrictions on the ability of the Guarantor Subsidiaries to make payments under the guarantees referred to above. The obligations of each guarantor under its guarantee are limited to the maximum amount permitted under Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act, or any similar Federal or state law (e.g. laws requiring adequate capital to pay dividends) respecting fraudulent conveyance or fraudulent transfer.
The following tables present summarized financial information as of January ~~29, 2005~~28, 2006 and for the ~~third quarters~~first quarter ended May 20, 2006 and ~~the three quarters ended, November 5, 2005 and November 6, 2004:~~May 21, 2005:
Condensed Consolidating

Balance Sheets

As of ~~November 5, 2005~~May 20, 2006
The Kroger Guarantor
Co. Subsidiaries Eliminations Consolidated
Current assets
Cash, including temporary cash investments $ 495 $ 164 $ — $ 659
Deposits in-transit 63 460 — 523
Accounts receivable 166 1,458 (928 ) 696
Inventory, net 448 3,995 — 4,443
Prepaid and other current assets 110 225 — 335

Total current assets 1,282 6,302 (928 ) 6,656

Property, plant and equipment, net 1,321 10,081 — 11,402
Goodwill 56 2,136 — 2,192
Other assets and investments 590 1,053 (1,158 ) 485
Investment in and advances to subsidiaries 11,659 — (11,659 ) —

Total assets $ 14,908 $ 19,572 $ (13,745 ) $ 20,735

Current liabilities
Current portion of long-term debt including obligations under capital
leases and financing obligations $ 743 $ — $ — $ 743
Accounts payable 1,424 4,226 (2,086 ) 3,564
Other current liabilities 78 2,724 — 2,802

Total current liabilities 2,245 6,950 (2,086 ) 7,109

Long-term debt including obligations under capital leases and financing
     obligations
Face value long-term debt including obligations under capital leases
and financing obligations 6,431 — — 6,431
Adjustment to reflect fair value interest rate hedges 12 — —    12

Long-term debt including obligations under capital leases and
financing obligations 6,443 — — 6,443
Other long-term liabilities 1,616 963 — 2,579

Total liabilities 10,304 7,913 (2,086 ) 16,131

Shareowners’ Equity 4,604 11,659 (11,659 ) 4,604

Total liabilities and shareowners’ equity $ 14,908 $ 19,572 $ (13,745 ) $ 20,735

   The Kroger Co.
   Guarantor
Subsidiaries
Eliminations
Consolidated
Current assets

Cash, including temporary cash investments
   $ 25    $ 212 $ —   $ 237
Deposits in-transit
   60    502 —   562
Accounts receivable
   501    665 (502 ) 664
Net inventories
   408    4,378 —   4,786
Prepaid and other current assets
   69    255 —   324



Total current assets
   1,063    6,012 (502 ) 6,573
Property, plant and equipment, net
   1,303    10,078 —   11,381
Goodwill
   56    2,136 —   2,192
Other assets and investments
   548    (117 ) —   431
Investment in and advances to subsidiaries
   10,719    —   (10,719 ) —



Total assets
   $ 13,689    $ 18,109 $ (11,221 ) $ 20,577



Current liabilities

Current portion of long-term debt including obligations under capital leases and financing obligations
   $ 639    $ —   $ —   $ 639
Accounts payable
   193    4,072 (502 ) 3,763
Other current liabilities
   241    2,574 —   2,815



Total current liabilities
   1,073    6,646 (502 ) 7,217
Long-term debt including obligations under capital leases and financing obligations

Face value long-term debt including obligations under capital leases and financing obligations
   6,596    —   —   6,596
Adjustment to reflect fair value interest rate hedges
   25    —   —   25



Long-term debt including obligations under capital leases and financing obligations
   6,621    —   —   6,621
Other long-term liabilities
   1,912    744 —   2,656



Total liabilities
   9,606    7,390 (502 ) 16,494
Shareowners’ Equity
   4,083    10,719 (10,719 ) 4,083



Total liabilities and shareowners’ equity
   $ 13,689    $ 18,109 $ (11,221 ) $ 20,577



Condensed Consolidating

Balance Sheets

As of January ~~29, 2005~~28, 2006
    The Kroger     Guarantor
Co. Subsidiaries Eliminations Consolidated
Current assets
Cash, including temporary cash investments $ 39 $ 171 — $ 210
Deposits in-transit 46 442 — 488
Accounts receivable 1,088 526 (928 ) 686
Inventory, net 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 56 2,136 — 2,192
Other assets and investments 591 968 (1,100 ) 459
Investment in and advances to subsidiaries 10,808 — (10,808 ) —
                     Total assets $ 14,698 $ 18,620 $ (12,836 ) $ 20,482

Current liabilities
Current portion of long-term debt including obligations under capital
leases and financing obligations $ 554 $ — $ — $ 554
Accounts payable 1,363 4,215 (2,028 ) 3,550
Other current liabilities (151 ) 2,762 — 2,611

Total current liabilities 1,766 6,977 (2,028 ) 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 10,308 7,812 (2,028 ) 16,092
Shareowners’ Equity 4,390 10,808 (10,808 ) 4,390

Total liabilities and shareowners’ equity $ 14,698 $ 18,620 $ (12,836 ) $ 20,482

   The Kroger Co.
   Guarantor
Subsidiaries
Eliminations
Consolidated
Current assets

Cash, including temporary cash investments
   $ 32    $ 112 —   $ 144
Deposits in-transit
   20    486 —   506
Accounts receivable
   583    747 (502 ) 828
Net inventories
   415    3,941 —   4,356
Prepaid and other current assets
   275    297 —   572



Total current assets
   1,325    5,583 (502 ) 6,406
Property, plant and equipment, net
   1,277    10,220 —   11,497
Goodwill
   20    2,171 —   2,191
Other assets and investments
   642    (245 ) —   397
Investment in and advances to subsidiaries
   10,518    —   (10,518 ) —



Total assets
   $ 13,782    $ 17,729 $ (11,020 ) $ 20,491



Current liabilities

Current portion of long-term debt including obligations under capital leases and financing obligations
   $ 71    $ —   $ —   $ 71
Accounts payable
   188    3,912 (502 ) 3,598
Other current liabilities
   319    2,328 —   2,647



Total current liabilities
   578    6,240 (502 ) 6,316
Long-term debt including obligations under capital leases and financing obligations

Face value long-term debt including obligations under capital leases and financing obligations
   7,797    33 —   7,830
Adjustment to reflect fair value interest rate hedges
   70    —   —   70



Long-term debt including obligations under capital leases and financing obligations
   7,867    33 —   7,900
Other long-term liabilities
   1,797    938 —   2,735



Total liabilities
   10,242    7,211 (502 ) 16,951
Shareowners’ Equity
   3,540    10,518 (10,518 ) 3,540



Total liabilities and shareowners’ equity
   $ 13,782    $ 17,729 $ (11,020 ) $ 20,491



Condensed Consolidating

Statements of Operations

For the Quarter Ended ~~November 5, 2005~~May 20, 2006
    The Kroger     Guarantor
Co. Subsidiaries Eliminations Consolidated
Sales $ 2,800 $ 16,911 $ (296) $ 19,415
Merchandise costs, including warehousing and transportation 2,252 12,703 (296) 14,659
Operating, general and administrative 521 3,007 — 3,528
Rent 48 148 — 196
Depreciation and amortization 47 341 — 388

Operating profit (loss) (68 ) 712 — 644
Interest expense 153 2 — 155
Equity in earnings of subsidiaries 502 — (502 ) —

Earnings (loss) before income tax expense 281 710 (502 ) 489
Income tax expense (25 ) 208 — 183

Net earnings $ 306 $ 502 $ (502 ) $ 306

Condensed Consolidating
Statements of Operations
For the Quarter Ended May 21, 2005

The Kroger Guarantor
Co. Subsidiaries Eliminations Consolidated
Sales $ 2,530 $ 15,705 $ (287 ) $ 17,948
Merchandise costs, including warehousing and transportation 2,116 11,612 (285 ) 13,443
Operating, general and administrative 475 2,820 — 3,295
Rent 56 149 (2 ) 203
Depreciation and amortization 25 364 — 389

Operating profit (loss) (142 ) 760 — 618
Interest expense 150 9 — 159
Equity in earnings of subsidiaries 489 — (489 ) —

Earnings (loss) before income tax expense 197 751 (489 ) 459
Income tax expense (benefit) (97 ) 262 — 165

Net earnings $ 294 $ 489 $ (489 ) $ 294

   The Kroger Co.
Guarantor
Subsidiaries
   Eliminations
Consolidated
Sales
   $ 2,013 $ 12,164    $ (157 ) $ 14,020
Merchandise costs, including warehousing and transportation
   1,541 9,210    (155 ) 10,596
Operating, general and administrative
   389 2,167    —   2,556
Rent
   34 134    (2 ) 166
Depreciation and amortization
   62 225    —   287




Operating profit (loss)
   (13 ) 428    —   415
Interest expense
   113 1    —   114
Equity in earnings of subsidiaries
   381 —      (381 ) —




Earnings (loss) before income tax expense
   255 427    (381 ) 301
Income tax expense (benefit)
   70 46    —   116




Net earnings
   $ 185 $ 381    $ (381 ) $ 185




Condensed Consolidating

Statements of ~~Operations~~
Cash Flows
For the Quarter Ended ~~November 6, 2004~~May 20, 2006
    The Kroger     Guarantor
Co. Subsidiaries Consolidated
Net cash provided by operating activities $ 1,424 $ (440 ) $ 984
Cash flows from investing activities:
Capital expenditures, excluding acquisitions (28 ) (392 ) (420 )
Other 21 29 50

Net cash used by investing activities (7 ) (363 ) (370 )

Cash flows from financing activities:
Proceeds from issuance of long-term debt — — —
Reductions in long-term debt (25 ) — (25 )
Proceeds from issuance of capital stock 49 — 49
Treasury stock purchases (134 ) — (134 )
Other — (55 ) (55 )
Net change in advances to subsidiaries (851 ) 851 —

Net cash used by financing activities (961 ) 796 (165 )

Net increase (decrease) in cash 456 (7 ) 449
Cash:
Beginning of year 39 171 210

End of quarter $ 495 $ 164 $   659

   The Kroger Co.
Guarantor
Subsidiaries
   Non-Guarantor
Subsidiaries
Eliminations
Consolidated
Sales
   $ 1,611 $ 11,516    $ 12 $ (285 ) $ 12,854
Merchandise costs, including warehousing and transportation
   1,306 8,606    —   (273 ) 9,639
Operating, general and administrative
   374 2,062    (3 ) —   2,433
Rent
   28 142    —   (12 ) 158
Depreciation and amortization
   23 262    2 —   287




Operating profit (loss)
   (120 ) 444    13 —   337
Interest expense
   105 6    6 —   117
Equity in earnings of subsidiaries
   317 —      —   (317 ) —




Earnings (loss) before income tax expense
   92 438    7 (317 ) 220
Income tax expense (benefit)
   (51 ) 126    2 —   77




Net earnings
   $ 143 $ 312    $ 5 $ (317 ) $ 143




Condensed Consolidating
~~Statements of Operations~~
~~For the Three Quarters Ended November 5, 2005~~

   The Kroger Co.
Guarantor
Subsidiaries
   Eliminations
Consolidated
Sales
   $ 6,502 $ 39,992    $ (661 ) $ 45,833
Merchandise costs, including warehousing and transportation
   5,173 29,985    (655 ) 34,503
Operating, general and administrative
   1,251 7,129    —   8,380
Rent
   123 397    (6 ) 514
Depreciation and amortization
   104 865    —   969




Operating profit (loss)
   (149 ) 1,616    —   1,467
Interest expense
   387 7    —   394
Equity in earnings of subsidiaries
   1,149 —      (1,149 ) —




Earnings (loss) before income tax expense
   613 1,609    (1,149 ) 1,073
Income tax expense (benefit)
   (63 ) 460    —   397




Net earnings
   $ 676 $ 1,149    $ (1,149 ) $ 676




~~Condensed Consolidating~~
~~Statements of Operations~~
~~For the Three Quarters Ended November 6, 2004~~

   The Kroger Co.
Guarantor
Subsidiaries
   Eliminations
Consolidated
Sales
   $ 6,004 $ 37,531    $ (796 ) $ 42,739
Merchandise costs, including warehousing and transportation
   4,861 27,778    (756 ) 31,883
Operating, general and administrative
   1,163 6,912    —   8,075
Rent
   140 425    (40 ) 525
Depreciation and amortization
   82 867    —   949




Operating profit (loss)
   (242 ) 1,549    —   1,307
Interest expense
   415 27    —   442
Equity in earnings of subsidiaries
   989 —      (989 ) —




Earnings (loss) before income tax expense
   332 1,522    (989 ) 865
Income tax expense (benefit)
   (216 ) 533    317




Net earnings
   $ 548 $ 989    $ (989 ) $ 548




~~Condensed Consolidating~~
Statements of Cash Flows

For the Quarter Ended ~~November 5,~~May 21, 2005
    The Kroger     Guarantor
Co. Subsidiaries Consolidated
Net cash provided by operating activities $ (820 ) $ 1,793 $ 973
Cash flows from investing activities:
Capital expenditures, excluding acquisitions (33 ) (368 ) (401 )
Other 9 15 24

Net cash used by investing activities (24 ) (353 ) (377 )

Cash flows from financing activities:
Proceeds from issuance of long-term debt 6 — 6
Reductions in long-term debt (459 ) (1 ) (460 )
Proceeds from issuance of capital stock 22 — 22
Treasury stock purchases (153 ) — (153 )
Other (2 ) (18 ) (20 )
Net change in advances to subsidiaries 1,424 (1,424 ) —

Net cash used by financing activities 838 (1,443 ) (605 )

Net decrease in cash (6 ) (3 ) (9 )
Cash:
Beginning of year 32 112 144

End of quarter $ 26 $ 109 $ 135

   The Kroger Co.
Guarantor
Subsidiaries
Consolidated

Net cash provided by operating activities
   $ 1,071 $ 978 $ 2,049
Cash flows from investing activities:

Capital expenditures, excluding acquisitions
   (125 ) (886 ) (1,011 )
Other
   17 22 39


Net cash used by investing activities
   (108 ) (864 ) (972 )


Cash flows from financing activities:

Proceeds from issuance of long-term debt
   13 —   13
Payments on long-term debt
   (28 ) (33 ) (61 )
Payments on bank revolver
   (629 ) —   (629 )
Proceeds from issuance of capital stock
   76 —   76
Treasury stock purchases
   (202 ) —   (202 )
Other
   1 (182 ) (181 )
Net change in advances to subsidiaries
   (201 ) 201 —


Net cash used by financing activities
   (970 ) (14 ) (984 )


Net increase (decrease) in cash
   (7 ) 100 93
Cash:

Beginning of year
   32 112 144


End of quarter
   $ 25 $ 212 $ 237


10. COMMITMENTS AND CONTINGENCIES
~~Condensed Consolidating~~
~~Statements of Cash Flows~~
~~For the Quarter Ended November 6, 2004~~

   The Kroger Co.
Guarantor
Subsidiaries
Consolidated

Net cash provided by operating activities
   $ 481 $ 1,567 $ 2,048
Cash flows from investing activities:

Capital expenditures, excluding acquisitions
   (136 ) (1,144 ) (1,280 )
Other
   17 48 65


Net cash used by investing activities
   (119 ) (1,096 ) (1,215 )


Cash flows from financing activities:

Payments on long-term debt
   (777 ) —   (777 )
Borrowings on bank revolver
   256 7 263
Proceeds from issuance of capital stock
   33 —   33
Treasury stock purchases
   (249 ) —   (249 )
Other
   (32 ) (100 ) (132 )
Net change in advances to subsidiaries
   403 (403 ) —


Net cash used by financing activities
   (366 ) (496 ) (862 )


Net decrease in cash
   (4 ) (25 ) (29 )
Cash:

Beginning of year
   26 133 159


End of quarter
   $ 22 $ 108 $ 130


~~10. COMMITMENTSAND~~ C~~ONTINGENCIES~~
The Company continuously evaluates contingencies based upon the best available evidence.

Management believes that allowances for loss have been provided to the extent necessary and that its assessment of contingencies is reasonable. Allowances for loss are included in other current liabilities and other long-term liabilities. To the extent that resolution of contingencies results in amounts that vary from management’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. The liability for general liability risks is not present-valued. Actual claim settlements and expenses incident thereto may differ from the provisions for loss.

Litigation — ~~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. Under the Agreement, the Company paid approximately $147 to the other Retailers. The lawsuit raises claims that could question the validity of those payments, as well as claims that the retailers unlawfully restrained competition. On May 25,In December, 2005, the Court denied a motion for a summary judgment filed by the defendants. Ralphs and the other defendants filed a notice of an interlocutory appeal to the United States Court of Appeals for the Ninth Circuit. On November 29, 2005, the appellate court dismissed the appeal. The Company continues to believe it has strong defenses against this lawsuit and is vigorously defending it. Although this lawsuit is subject to uncertainties inherent to the litigation process, based on the information presently available to the Company, management does not expect that the ultimate resolution of this action will have a material effect, favorable or adverse, on the Company’s financial condition, results of operations or cash flows.
~~The~~ United States Attorney’s Office for the Central District of California ~~is investigating~~notified the ~~hiring practices of~~Company that a federal grand jury had returned an indictment against Ralphs Grocery Company (“Ralphs”), a wholly-owned subsidiary of The Kroger Co., with regard to Ralphs’ hiring practices during the labor dispute from October 2003 through February ~~2004. Among~~2004 (United Statesof America v. Ralphs Grocery Company, United States District Court for the ~~matters under investigation is whether~~Central District of California, CR No. 05-1210 PA). The indictment alleges a criminal conspiracy and other criminal activity resulting in some locked-out employees ~~were~~being allowed or encouraged to work under false identities or false Social Security numbers, despite Company policy forbidding such conduct. ~~A grand jury~~Trial has ~~convened to consider whether such acts violated federal criminal statutes. The Company expects that Ralphs will be indicted on charges that its conduct violated federal law.~~been set for August 15, 2006. In addition, these alleged hiring practices are the subject of claims that Ralphs’ conduct of the lockout was unlawful, and that Ralphs is liable under the National Labor Relations Act (“NLRA”). The Los Angeles Regional Office of the National Labor Relations Board (“NLRB”) has notified the charging parties that all charges alleging that Ralphs’ lockout violated the NLRA have been dismissed. That decision is being appealed by the charging parties to the General Counsel of the NLRB.
     During the first quarter of 2006, the Company increased its reserves associated with legal proceedings arising from these matters. The ~~amounts potentially claimed~~current quarter charge reduced earnings by $0.03 per diluted share and increased the amount of reserves established for this contingency. Ralphs expects to enter into an agreement that will include a plea of guilty to some of the charges in the indictment and will, if approved by the Court, resolve both the criminal litigation with Ralphs and the NLRB ~~matter are substantial, but based on~~proceedings. The Company can provide no assurance that such an agreement will be entered into, or that if it is entered into, it will be approved by the ~~information presently available to~~Court. The amount reserved by the Company ~~management does not expect the ultimate resolution~~represents its best estimate of ~~this matter to have a material effect on the financial condition of the Company.~~its exposure in connection with these legal proceedings.

On September 8, 2005, the Los Angeles City Attorney’s office filed a misdemeanor complaint against a subsidiary of the Company, Ralphs Grocery Company (People v. Ralphs Grocery Company, Superior Court of California, County of Los Angeles, Case No. 5CR02616) regarding alleged violations of the California Water Code. Ralphs operates a system at one store location to treat groundwater within an underground basement because of the presence of naturally occurring petroleum associated with the nearby La Brea tar pits, which system is subject to a discharge permit issued by the California Regional Water Quality Control Board. On December 1, 2005, Ralphs executed a civil consent judgment under which the misdemeanor complaint is to be dismissed and Ralphs will pay a civil penalty.
On November 24, 2004, the Company was notified by the office of the United States Attorney for the District of Colorado that the Drug Enforcement Agency (“DEA”) had referred a matter to it for investigation regarding alleged violation of the Controlled Substances Act by the Company’s King Soopers division. The government alleges that ineffective controls and procedures, as well as improper record keeping, permitted controlled substances to be diverted from pharmacies operated by King Soopers. As a result of these allegations, the Company has retained a consultant to assist it in reviewing its policies and procedures, record keeping and training in its pharmacies, and is taking corrective action, as warranted. On October 20, 2005, the Company resolved this matter by agreeing to pay a $7 civil penalty, agreeing to implement a comprehensive compliance program, and agreeing to an additional $3 payment if it fails to comply with the compliance program.
Various claims and lawsuits arising in the normal course of business, including suits charging violations of certain antitrust and civil rights laws, are pending against the Company. Some of these purport or have been determined to be class actions and/or seek substantial damages. Any damages that may be awarded in an antitrust case will be automatically trebled. Although it is not possible at this time to evaluate the merits of all 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 involves 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 effect on the Company’s financial condition or results of operation.

Guarantees – The Company periodically enters into real estate joint ventures in connection with the development of certain properties. The Company usually sells its interest in such partnerships upon completion of the projects. As of ~~November 5, 2005,~~May 20, 2006, the Company was a partner with 50% ownership in two real estate joint ventures for which it has guaranteed approximately ~~$11~~$7 of debt incurred by the ventures. Based on the covenants underlying this indebtedness as of ~~November 5, 2005,~~May 20, 2006, it is unlikely that the Company will be responsible for repayment of these obligations.
Assignments – The Company is contingently liable for leases that have been assigned to various third parties in connection with facility closings and dispositions. The Company could be required to satisfy obligations under leases if any of the assignees are unable to fulfill their lease obligations. Due to the wide distribution of the Company’s assignments among third parties, and various other remedies available, the Company believes the likelihood that it will be required to satisfy a material amount of these obligations is remote.

Benefit Plans – The Company administers certain 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. Funding for the pension plans is based on a review of the specific requirements and an evaluation of the assets and liabilities of each plan.

In addition to providing pension benefits, the Company provides certain health care benefits for retired employees. Funding for the retiree health care benefits occurs as claims or premiums are paid.

The determination of the obligation and expense for the Company’s pension and other post-retirement benefits is dependent on the Company’s selection of assumptions used by actuaries in calculating those amounts. Those assumptions are described in the Company’s fiscal ~~2004~~2005 Annual Report on Form 10-K 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 such 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 contributed ~~$300~~$150 to its Company-sponsored pension plans in the first ~~three quarters~~quarter of ~~2005.~~2006. The Company expects these contributions towill reduce its minimum required contributions in future years. Among other things, investment performance of plan assets, the interest rates required to be used to calculate pension obligations and future changes in legislation will determine the amounts of any additional contributions. While the Company has no required contributions due in 2006, the Company expects to make voluntary contributions to Company-sponsored pension plans totaling approximately $100 - $150 during fiscal 2006.

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.

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. Because the Company is only one of a number of employers contributing to these plans, it is difficult to ascertain what the Company’s “share” of the underfunding would be, although we anticipate the Company’s contributions to these plans will increase each year. Although underfunding can result in the imposition of excise taxes on contributing employers, other factors such as increased contributions, changes in benefits and improved investment performance 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 determined, in accordance with SFAS No. 87,Employers’ Accounting for Pensions.
11. FAIR VALUE INTEREST RATE HEDGES

In 2003, the Company reconfigured a portion of its interest derivative portfolio by terminating six interest rate swap agreements that were accounted for as fair value hedges. Approximately $114 of proceeds received as a result of these terminations were recorded as adjustments to the carrying values of the underlying debt and are being amortized over the remaining lives of the debt. As of ~~November 5, 2005,~~May 20, 2006, the unamortized balances totaled approximately ~~$67.~~$58.

At the end of the ~~third~~first quarter of ~~2005,~~2006, the Company maintained 10ten interest rate swap agreements that are being accounted for as fair value hedges. As of ~~November 5, 2005,~~May 20, 2006, liabilities totaling ~~$42~~$46 have been recorded to reflect the fair value of these ~~new~~ agreements, offset by reductions in the fair value of the underlying debt.
~~12. SUBSEQUENT~~ E~~VENTS~~
~~On November 17, 2005,~~ In addition, the Company ~~entered into~~maintained three forward-starting interest rate swap agreements, with an aggregate notional amount totaling $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~~As of ~~time. The Company entered into~~May 20, 2006, assets totaling $29 million have been recorded to reflect the ~~forward-starting interest rate swaps~~fair value of these agreements, offset by increases in order to lock in fixed interest rates on the Company’s forecasted issuance of debt in fiscal 2007 and 2008. The forward-starting interest rate swaps were designated as cash-flow hedges as defined by SFAS No. 133.Other Comprehensive Income.
On December 9, 2005, the Company announced a set of corporate governance enhancements. The Company’s board of directors voted to recommend that shareholders approve at the next shareholder meeting in June 2006: the declassification of the board of directors in conjunction with the elimination of cumulative voting; the elimination of the supermajority necessary to engage in certain transactions with shareholders owning 10% or more of the Company’s shares; and opting out of the Ohio control share acquisition statute. The board of directors also will allow the Company’s warrant dividend plan, or poison pill, to expire March 19, 2006; adopted a policy requiring shareholder approval of new severance arrangements with senior executives that would exceed 2.99 times average W-2 earnings over the prior five years; and adopted a policy requiring a director receiving more “withheld” votes than “for” votes to tender his or her resignation, which resignation would be acted on by either the board’s Corporate Governance Committee or the remainder of the board.
~~On December 14, 2005, the Company disclosed on a Current Report on Form 8-K the adoption of the 2006 Long-Term Bonus Plan.~~
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following analysis should be read in conjunction with the Consolidated Financial Statements.
OVERVIEW

O~~VERVIEW~~
~~Third~~First quarter total sales increased ~~9.1%~~8.2% to $19.4 billion. This growth continues to be broad-based across all divisions and ~~identical~~store departments. Growth was particularly strong in Grocery, Produce, Natural Foods, and Fuel. Identical supermarket sales (as defined below) increased ~~6.6%~~7.2% with fuel and ~~3.7%~~5.6% without fuel. ~~This continues a positive trend, as~~Once again, by either measure, this ~~was our ninth consecutive quarter of increased identical supermarket sales, excluding fuel, and our~~represents Kroger’s highest identical supermarket sales since the merger with Fred Meyer in 1999. ~~Further, this growth was broad-based across all of~~It is also the country and across all major categories. The strongest categories included produce, grocery, drug and general merchandise and fuel, in terms of both dollars and gallons. While our retail fuel margins for the quarter were strong, on a year-to-date basis they were more normalized. All but one of our divisions experienced anothereleventh consecutive quarter of positive identical supermarket ~~sales. Identical~~ sales, ~~growth is a core part of our strategy.~~excluding fuel.

Kroger’s ~~business strategy is squarely aimed at consistently meeting the needs of~~strategic plan requires balance among several elements and a consistent approach to managing our ~~customers through service, selection and value.~~business. In the ~~third~~ quarter, ~~our associates continued~~we balanced investments in gross margin and improved customer service with operating cost reductions to ~~focus on improving the~~provide a better shopping experience for our customers. ~~This commitment~~We continue to ~~placing~~believe this strategy is the ~~“customer first” helped drive~~appropriate path to build sustainable earnings growth and long-term value for our ~~growth in customer traffic and average transaction size.~~shareholders.

~~During~~Net earnings were $306.4 million or $0.42 per diluted share. These results included two items that affected our first-quarter earnings by $0.05 per diluted share. Effective January 29, 2006, we adopted the ~~third~~fair value recognition provisions of SFAS 123(R) for recognizing stock option expense. This reduced earnings by $0.02 per diluted share. Also, based on developments during the quarter, we ~~continued to rebuild~~increased our ~~business in southern California, which includes~~reserve associated with the legal proceedings arising from hiring practices at its Ralphs subsidiary during the 2003-2004 labor dispute. The current quarter charge reduced earnings by $0.03 per diluted share and ~~Food 4 Less stores. Identical sales in that region, without fuel, grew 2.9% over~~increased the ~~prior-year period. While the pace~~amount of reserves established for this contingency. The reserves represent our best estimate of our ~~recovery~~exposure in southern California has been slower than we would like, we see additional opportunities for growth in that market and our teams at Ralphs and Food 4 Less are clearly focused on seizing those opportunities.connection with these legal proceedings.

Our results for the third quarter reflected a variety of items that together had little effect on earnings per share. These items include $0.02 of income resulting from the settlement of a previous class-action credit card suit and the reversal of an unrelated tax contingency. These benefits were offset by a combined $0.03 of expense resulting from: the effect of hurricanes Katrina and Rita; an increase in certain legal reserves, some of which are non-deductible for tax purposes; and a writedown to fair market value of assets held for sale.
On the strength of Kroger’s ~~year-to-date~~first quarter financial performance, we are ~~confident we will~~raising our sales guidance. Kroger now expects identical supermarket sales growth, excluding fuel sales, to exceed ~~our earnings estimate of $1.24 per fully diluted share~~4% for ~~fiscal 2005. We expect this earnings growth to be driven by improved results in southern California and~~ the balance of the ~~Company, lower interest expense and fewer shares outstanding as a result of stock buybacks.~~year or approximately 4.5% for the full year. Additionally, our guidance for earning per share growth in 2006 remains at 6-8%, including the legal reserve charge recognized in the first quarter.
RESULTS OF OPERATIONS
R~~ESULTS~~OF O~~PERATIONS~~
Net Earnings

Net earnings totaled ~~$185~~$306 million for the ~~third~~first quarter of ~~2005,~~2006, an increase of ~~29.3%~~4.1% from net earnings of ~~$143 million for the third quarter of 2004. Net earnings totaled $676~~$294 million for the first ~~three quarters~~quarter of ~~2005, an increase of 23.4% from net earnings of $548 million for the first three quarters of 2004.~~2005. The increase in our net earnings was the result of improvement in southern California and the leveraging of fixed costs by strong identical sales ~~growth.~~growth, offset by stock option expensing and charges recorded to increase legal reserves described above.

Earnings of ~~$0.25 per diluted share for the third quarter of 2005 represented an increase of 31.6% over net earnings of $0.19 per diluted share for the third quarter of 2004. Earnings of $0.92~~$0.42 per diluted share for the first ~~three quarters~~quarter of ~~2005~~2006 represented an increase of ~~26.0%~~5.0% over net earnings of ~~$0.73~~$0.40 per diluted share for the first ~~three quarters~~quarter of ~~2004.~~2005. Earnings per share growth resulted from increased net earnings and the repurchase of Company stock. Over the past four quarters, we have repurchased 1612 million shares of the Company’s stock for a total investment of ~~$272~~$233 million.
Sales
Total Sales
(in millions)
~~(In millions)~~

   Third Quarter
Year-To-Date

   2005
   Percentage
Increase
2004
   Percentage
Increase
2005
   Percentage
Increase
2004
   Percentage
Increase

Total supermarket sales without fuel
   $ 12,156.8    4.9 % $ 11,588.4    3.8 % $ 40,413.0    4.4 % $ 38,719.4    2.9 %
Total supermarket fuel sales
   $ 987.9    70.0 % 581.1    59.7 % 2,733.4    55.2 % 1,761.7    59.3 %





Total supermarket sales
   $ 13,144.7    8.0 % $ 12,169.5    5.5 % $ 43,146.4    6.6 % $ 40,481.1    4.6 %
Other sales⁽¹⁾
   875.8    27.9 % 684.5    12.1 % 2,687.0    19.0 % 2,258.0    10.8 %





Total sales
   $ 14,020.5    9.1 % $ 12,854.0    5.9 % $ 45,833.4    7.2 % $ 42,739.1    4.9 %





First Quarter
        Percentage         Percentage
2006 Increase 2005 Increase
Total supermarket sales without fuel $ 16,973.2 5.9% $ 16,027.0 3.9%
Total supermarket fuel sales $ 1,294.5 39.8% 925.7 47.3%

Total supermarket sales $ 18,267.7 7.8% $ 16,952.7 5.6%
Other sales⁽¹⁾ 1,147.5 15.3% 995.0 17.8%

Total sales $ 19,415.2 8.2% $ 17,947.7 6.2%

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

The change in our total sales was primarily the result of identical store sales increases ~~square footage growth,~~ and increased fuel gallons, as well as inflation in fuel and other commodities. Identical store sales growth for the first quarter of 2006 was 7.2% including supermarket fuel operations and 5.6% excluding supermarket fuel operations. Increased customer count and average transaction size in the first ~~three quarters~~quarter of ~~2005~~2006 were ~~primarily~~both responsible for our increases in identical supermarket sales, excluding fuel.
We define a supermarket as identical when it has been in operation without expansion or relocation for five full quarters.Differences between total supermarket sales and identical supermarket sales primarily relate to changes in supermarket square footage. Our identical supermarket sales results are summarized in the table below. The identical supermarket dollar figures presented were used to calculate ~~third~~first quarter ~~2005~~2006 percent changes.
Identical Supermarket Sales
(in millions)
~~(In millions)~~
     First Quarter
2006      2005
Including fuel centers $ 17,462.2 $ 16,293.0
Excluding fuel centers $ 16,248.4 $ 15,387.8

Including fuel centers 7.2 % 3.8 %
Excluding fuel centers 5.6 % 2.4 %



   Third Quarter

   2005
2004

Including fuel centers
   $ 12,481.0 $ 11,712.7
Excluding fuel centers
   $ 11,555.7 $ 11,142.1
Including fuel centers
   6.6 % 3.2 %
Excluding fuel centers
   3.7 % 1.8 %
We define a supermarket as comparable when it has been in operation for five full quarters, including expansions and relocations. Our comparable supermarket sales results are summarized in the table below. The comparable supermarket dollar figures presented were used to calculate the ~~third~~first quarter ~~2005~~2006 percent changes.
Comparable Supermarket Sales
(in millions)
~~(In millions)~~

   Third Quarter

   2005
2004

Including fuel centers
   $ 12,836.1 $ 11,966.5
Excluding fuel centers
   $ 11,874.6 $ 11,389.0
Including fuel centers
   7.3 % 3.7 %
Excluding fuel centers
   4.3 % 2.2 %
First Quarter
    2006     2005
Including fuel centers $ 17,859.5 $ 16,617.9
Excluding fuel centers $ 16,605.8 $ 15,698.4

Including fuel centers 7.5 % 4.4 %
Excluding fuel centers 5.8 % 2.8 %

FIFO Gross Margin

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

Our FIFO gross margin rate declined 6261 basis points to ~~24.48%~~24.55% for the ~~third~~first quarter of ~~2005~~2006 from ~~25.10%~~25.16% for the ~~third~~first quarter of ~~2004.~~2005. Excluding the effect of retail fuel operations, our FIFO gross margin rate decreased ~~six~~nine basis points for the ~~third~~first quarter of ~~2005~~2006 compared to the ~~third~~first quarter of ~~2004.~~2005. The growth in our retail fuel sales lowers our FIFO gross margin rate due to the very low FIFO gross margin on retail fuel sales as compared to non-fuel sales. Improvements in shrink, advertising and warehousing costs helped offset higher energy costs and our investments in targeted retail price reductions for our customers. We estimate higher energy costs decreased our ~~third~~first quarter FIFO gross margin rate ~~eight~~three basis points.
Our FIFO gross margin rate declined 69 basis points to 24.78% for the first three quarters of 2005 from 25.47% for the first three quarters of 2004. Of this decline, the effect of retail fuel operations accounted for a 54 basis point reduction in our FIFO gross margin rate.
Operating, General and Administrative Expenses

Operating, general and administrative (“OG&A”) expenses consist primarily of employee-related costs such as wages, health care benefit costs and retirement plan costs. Among other items, rent expense, depreciation and amortization expense, and interest expense are not included in OG&A. OG&A expenses, as a percent of sales, decreased 6919 basis points to ~~18.23%~~18.17% for the ~~third~~first quarter of ~~2005~~2006 from ~~18.92%~~18.36% for the ~~third~~first quarter of ~~2004. Of this decline, the~~2005. The effect of retail fuel operations accounted for a 6640 basis point reduction in our OG&A rate. The growth in our retail fuel sales lowers our OG&A rate due to the very low OG&A rate on retail fuel sales as compared to non-fuel sales. The ~~declining~~higher rate on non-fuel sales was primarily the result of ~~our continued recovery in southern California, strong sales, labor productivity improvements, lower health care costs,~~stock option expensing and ~~$12.9 million of settlement income related to a previous class-action credit card lawsuit. These improvements were partially offset by~~ increased ~~pension costs, credit card fees and incentive plan expenses, as well as~~legal reserves for the Ralphs hiring matter. Excluding the effect of ~~hurricanes Katrina and Rita, an~~retail fuel operations, the increase in legal reserves ~~for certain legal matters~~ and ~~a writedown to fair market value of assets held for sale. We estimate higher energy costs increased our third quarter~~stock option expense, OG&A ~~rate nine~~declined 16 basis points.
~~OG&A expenses,~~ Leverage from strong identical sales, along with good cost controls in areas such as ~~a percent~~energy usage and labor productivity helped us overcome some of ~~sales, decreased 61 basis points to 18.28% for~~ the ~~first three quarters of 2005 from 18.89% for the first three quarters of 2004. Of this decline, retail~~significant increases in fuel operations accounted for a 46 basis point reduction in our OG&A rate. In addition to the items affecting the third quarter 2005 rate, the year-to-date declining rate on non-fuel sales was negatively affected by increased loss contingencies for some outstanding legal matters.and energy-related costs that many companies are facing.
Rent Expense

Rent expense was ~~$166~~$196 million, or ~~1.19%~~1.01% of sales, for the ~~third~~first quarter of ~~2005,~~2006, compared to ~~$158~~$203 million, or ~~1.23%~~1.13% of sales, for the ~~third~~first quarter of ~~2004.~~2005. The ~~increase~~decrease in rent expense ~~resulted from increased store closing activities during~~was the ~~third~~result of lower closed-store future rent liabilities booked in the first quarter of ~~2005. For~~2006 compared to the ~~year-to-date period, rent expense, as a percent~~first quarter of ~~total sales, was 1.12% and 1.23% for~~ 2005, ~~and 2004, respectively. This decline in rent expense reflects our emphasis on the ownership of real estate combined with a continued focus on the closing of underperforming stores.~~
Depreciation Expense

Depreciation expense was ~~$287~~$388 million, or ~~2.05% of total sales, for the third quarter of 2005 compared to $288 million, or 2.24% of total sales, for the third quarter of 2004. Depreciation expense was $969 million, or 2.12%~~2.00% of total sales, for the first ~~three quarters~~quarter of ~~2005~~2006 compared to ~~$949~~$389 million, or ~~2.22%~~2.17% of total sales, for the first ~~three quarters~~quarter of ~~2004.~~2005. The ~~increase~~decrease in depreciation expense, ~~for~~in total dollars, was the ~~year-to-date period reflects our continued emphasis on~~result of lower capital expenditures in the ~~ownership of real estate.~~previous fiscal year. The decrease in depreciation expense, as a percent of sales, was the result of ~~sales~~ leverage obtained from strong identical ~~supermarket~~ sales growth and improved efficiency in capital investment.
Interest Expense

~~Interest~~Net interest expense was ~~$114~~$155 million, or ~~0.81%~~0.80% of total sales, and ~~$117~~$159 million, or ~~0.90%~~0.89% of total sales, in the ~~third quarters~~first quarter of 2006 and 2005, ~~and 2004,~~ respectively. ~~For the year-to-date period, interest expense was $394 million, or 0.86% of total sales, in 2005 and $442 million, or 1.03% of total sales in 2004.~~ The reduction in net interest expense for ~~2005,~~2006, when compared to ~~2004, reflects~~2005, resulted from a ~~$660~~$318 million reduction in total debt ~~as well as a $24.7~~and an increase in temporary cash investments totaling $463 million ~~prepayment premium paid in the second quarter of 2004 as the result of the call of our $750 million, 7.375% bonds.~~
at May 20, 2006.
Income Taxes

Our effective income tax rate was ~~38.4%~~37.4% for the ~~third~~first quarter of ~~2005~~2006 and ~~35.0%~~35.9% for the ~~third~~first quarter of ~~2004. For the year-to-date period, our~~2005. The 2006 effective income tax rated differed from the federal statutory rate ~~was 37.0% in 2005 and 36.7% in 2004, respectively. In addition~~due to the effect of state ~~taxes, the~~taxes. The 2005 effective income tax rate differed from the federal statutory rate due to the effect of state taxes and a reduction ofin previously recorded tax contingency allowances resulting from a revision of the required allowances based on resolutions with tax authorities during the quarters and the third quarter effect of certain legal expenses that were not deductible for tax purposes.
allowances.
LLIQUIDITYANDCAPITALRESOURCES
Cash Flow Information
Net cash provided by operating activities

We generated ~~$2.0 billion~~$984 million of cash from operating activities during the first ~~three quarters of both 2005 and 2004.~~quarter 2006, compared to $973 million in 2005. The increase in cash ~~generated by our net earnings was offset by a cash contribution of $300 million~~payments to our Company-sponsored pension plan ~~in the first three quarters of 2005 compared~~and higher accounts receivable balances were offset by higher net earnings and non-cash charges to ~~a $35~~record stock option expense and increase legal reserves, as well as increased accounts payable balances. We contributed $150 million ~~cash contribution~~to Company-sponsored pension plans during the first ~~three quarters~~quarter of ~~2004.~~2006 compared to $89 million during the first quarter of 2005.
Net cash used by investing activities

Investing activities used ~~$1.0 billion~~$370 million of cash during the first ~~three quarters~~quarter of ~~2005~~2006 compared to ~~$1.2 billion~~$377 million during the first ~~three quarters~~quarter of ~~2004.~~2005. The amount of cash used by investing activities decreased in ~~2005~~2006 versus ~~2004~~2005 due to ~~decreased~~higher cash proceeds from asset sales, partially offset by an increase in capital ~~expenditures during the first three quarters of 2005.~~spending.
Net cash used by financing activities

Financing activities used ~~$984~~$165 million of cash in the first ~~three quarters~~quarter of ~~2005~~2006 compared to ~~$862~~$605 million in the first ~~three quarters~~quarter of ~~2004.~~2005. The ~~increase~~decrease in the amount of cash used by financing activities was the result of ~~increased~~decreased debt reduction and lower treasury stock purchases, partially offset by an increase in the amount of cash proceeds from the issuance of capital ~~stock and a decrease in stock repurchase activity.~~
stock.
Debt Management

As of ~~November 5, 2005,~~May 20, 2006, we maintained a $1.8 billion, five-year revolving credit facility that terminates in ~~2009~~2010 and a $700 million five-year credit facility that terminates in 2007. Outstanding borrowings under the credit agreements and commercial paper borrowings, and some outstanding letters of credit, reduce funds available under the credit agreements. In addition to the credit agreements, we maintain a ~~$75~~$50 million money market line, borrowings under which also reduce the amount of funds available under our credit agreements. The money market line borrowings allow us to borrow from banks at mutually agreed upon rates, usually at rates below the rates offered under the credit agreements. As of ~~November 5, 2005, our~~May 20, 2006, we had no outstanding commercial paper borrowings under our credit ~~agreement totaled $65 million.~~agreement. We had no borrowings under the money market line as of ~~November 5, 2005.~~May 20, 2006. The outstanding letters of credit that reduced the funds available under our credit agreements totaled ~~$313~~$340 million as of ~~November 5, 2005.~~May 20, 2006.

Our bank credit facilities and the indentures underlying our publicly issued debt contain various restrictive covenants. As of ~~November 5, 2005,~~May 20, 2006, we were in compliance with these financial covenants. Furthermore, management believes it is not reasonably likely that Kroger will fail to comply with these financial covenants in the foreseeable future.

Total debt, including both the current and long-term portions of capital leases and lease-financing obligations, decreased ~~$560~~$318 million to ~~$7.3~~$7.2 billion as of the end of the ~~third~~first quarter of ~~2005,~~2006, from ~~$7.8~~$7.5 billion as of the end of the ~~third~~first quarter of ~~2004.~~2005. Total debt decreased ~~$710~~$46 million as of the end of the ~~third~~first quarter of ~~2005~~2006 from ~~$8.0~~$7.2 billion as of year-end ~~2004.~~2005. The decreases in ~~2005~~2006 resulted from the use of cash flow from operations to reduce outstanding debt and lower mark-to-market adjustments.
We expect to fund current year debt maturities with cash on-hand.
Common Stock Repurchase Program

During the ~~third~~first quarter of ~~2005,~~2006, we invested ~~$12~~$134 million to repurchase ~~0.6~~6.7 million shares of Kroger stock at an average price of ~~$19.97 per share. For the first three quarters of 2005, we invested $202 million to repurchase 12.3 million shares of Kroger stock at an average price of $16.51~~$19.90 per share. These shares were reacquired under ~~two~~three separate stock repurchase programs. The first is a $500 million repurchase program that was authorized by Kroger’s Board of Directors inon September 16, 2004. The second is a $500 million repurchase program, authorized by Kroger’s Board of Directors on May 4, 2006, which replaced the prior $500 million authorization. The third is a program that uses the cash proceeds from the exercises of stock options by participants in Kroger’s stock option and long-term incentive plans as well as the associated tax benefits. During the first ~~three quarters~~quarter of ~~2005,~~2006, we purchased approximately ~~11.8~~6.0 million shares, totaling ~~$195~~$120 million, under our $500 million stock repurchase ~~program~~programs and we purchased an additional ~~0.5~~0.7 million shares, totaling $7$14 million, under our program to repurchase common stock funded by the proceeds and tax benefits from stock option exercises. As of ~~November 5, 2005,~~May 20, 2006, we had approximately ~~$158~~$487 million remaining under the ~~September 2004~~May 2006 repurchase program.
CCAPITALEXPENDITURES

Capital expenditures ~~excluding acquisitions,~~ totaled ~~$1.0 billion~~$450 million for the first ~~three quarters~~quarter of ~~2005 and $1.3 billion~~2006 compared to $401 million for the first ~~three quarters~~quarter of ~~2004. The decrease reflects our continued emphasis on the tightening of capital and our increasing focus on remodel, merchandising and productivity projects.~~
2005. During the ~~third~~first quarter of ~~2005,~~2006, we opened, acquired, expanded or relocated ~~ten~~16 food stores and also completed 4339 within-the-wall remodels. In total, we operated ~~2,510~~2,483 supermarkets and multi-department stores at the end of the ~~third~~first quarter of ~~2005~~2006 versus ~~2,531 food stores in operation~~2,524 at the end of the ~~third~~first quarter of ~~2004.~~2005. Total food store square footage ~~increased 0.6%~~decreased 0.2% over the ~~third~~first quarter of ~~2004.~~2005. Excluding acquisitions and operational closings, total food store square footage increased ~~2.0%~~1.6% over the ~~third~~first quarter of ~~2004.~~
2005.
CCRITICAL 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~~Except as noted below, our critical accounting policies are summarized in ~~the Company’s 2004~~our 2005 Annual Report on Form 10-K ~~as amended.~~filed with the SEC on April 7, 2006.

The preparation of financial statements in conformity with generally accepted accounting principles 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 vary from those estimates.
R~~ECENTLY~~ I~~SSUED~~ A~~CCOUNTING~~ S~~TANDARDS~~Stock-Based Compensation Expense

~~In December 2004,~~Effective January 29, 2006, we adopted the ~~FASB issued SFAS No. 123 (Revised 2004),~~~~Share-Based Payment~~ ~~(“SFAS No. 123R”), which replaces SFAS No. 123, supersedes APB No. 25 and related interpretations and amends SFAS No. 95~~~~Statement of Cash Flows~~~~. The~~fair value recognition provisions of SFAS No. ~~123R are similar~~123(R), using the modified prospective transition method, and therefore have not restated results for prior periods. Under this method, we recognize compensation expense for all share-based payments granted after January 29, 2006, as well as all share-based payments granted prior to, ~~those~~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; however, SFAS No. 123R requires all~~123(R), we recognize share-based ~~payments to employees, including grants~~compensation expense, net of ~~employee stock options, to be recognized in~~an estimated forfeiture rate, over the financial statements as compensation cost based on their fair value on the date of grant. Fair value of share-based awards will be determined using option pricing models (e.g. Black-Scholes or binomial models) and assumptions that appropriately reflect the specific circumstancesrequisite service period of the ~~awards.~~
award. Prior to the adoption of SFAS No. ~~123R,~~123(R), we ~~are accounting~~accounted for share-based ~~compensation expense~~payments under ~~the recognition and measurement provisions of APB No.~~Accounting Principles Board Opinion no. 25 “Accounting for Stock Issued to Employees” and the disclosure provisions of SFAS No. 123. 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 May 20, 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 the first quarters ended May 20, 2006 and May 21, 2005, was $6.90 and $7.70, 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 ~~following~~expected to retain their stock options before exercising them, the ~~accepted practice~~volatility of ~~recognizing share-based~~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 stock-based compensation expense ~~over~~in the ~~explicit vesting period. SFAS No. 123R will require~~Consolidated Statements of Operations.
     The following table reflects the ~~immediate recognition at~~weighted average assumptions used for grants awarded to option holders:
    2006     2005
Risk-free interest rate 5.07% 4.11%
Expected dividend yield 1.50% N/A
Expected volatility 27.60% 30.83%
Expected term 7.50 Years 8.70 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 ~~full~~options. During the year presented, 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. Expected volatility was determined based upon historical stock volatilities. Implied volatility was also considered. Expected term was determined based upon a combination of historical exercise and cancellation experience as well as estimates of expected future exercise and cancellation experience.
     Total stock compensation recognized in the quarter ended May 20, 2006 was $22 million, pre-tax. This included $19 million related to stock options and $3 million related to restricted shares. A total of $1 million of the restricted stock expense was attributable to the wider distribution of restricted shares in the first quarter 2006 grant of share-based awards, and the remaining $2 million of restricted stock expense related to previously issued restricted stock. As a result, the incremental compensation expense ~~for grants~~attributable to ~~retirement eligible employees, as~~ the ~~explicit vesting period is non-substantive. The estimated effect~~adoption of ~~applying the explicit vesting period approach versus the non-substantive approach is not material to any period presented. We expect to adopt~~ SFAS No. ~~123R~~123(R) in the first quarter of ~~fiscal~~2006 was $20 million, pre-tax, or $13 million and $0.02 per basic and diluted share, after tax. Stock compensation expense recognized in the quarter ended May 21, 2005, related entirely to restricted stock grants, was $3 million. These costs were recognized as operating, general and administrative costs in ourConsolidated Statements of Operations for the quarters ended May 20, 2006 and ~~expect~~May 21, 2005. 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 the prior year, in accordance with SFAS No. 123, is described below.
     If compensation cost for our stock option plans for the first quarter ended May 21, 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, our net earnings and diluted earnings per common share would have been reduced to the pro forma amounts below:
First Quarter
(In millions, except per share amounts) 2005
Net earnings, as reported $ 294
Add: Stock-based compensation expense included in net earnings, net of income tax benefits 2
Subtract: Total stock-based compensation expense determined under fair value method for all
              awards, net of income tax benefits (8 )
Pro forma net earnings $ 288
Net earnings per basic common share, as reported $ 0.40
Pro forma earnings per basic common share $ 0.40
Net earnings per diluted common share, as reported $ 0.40
Pro forma earnings per diluted common share $ 0.39

     As of May 20, 2006, there was $134 million of total unrecognized compensation cost related to non-vested stock-based compensation arrangements granted under our stock option plans. This cost is expected to be recognized over a weighted-average period of approximately 2 years. The total fair value of options that vested during the quarter was $34 million in each of the quarters ended May 20, 2006 and May 21, 2005.
     Our stock option grants generally contain retirement-eligibility provisions allowing employees to retire and retain their awards. For share-based awards granted prior to the adoption of SFAS No. 123(R), 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), we continued this method of recognizing compensation expense for those awards granted prior to ~~reduce net earnings by $0.04-$0.06 per diluted share during fiscal 2006.~~the adoption of SFAS No. 123(R). However, for awards granted on or after January 29, 2006, we will recognize expense for stock option grants containing retirement-eligibility provisions over the shorter of the vesting period or the period until employees become retirement-eligible. As a result of retirement-eligibility provisions in stock option awards granted in 2006, approximately $6 million of compensation cost was recognized 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 fund these exercises with treasury shares.
Self-Insurance Costs
     We are 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, which is at a stop-loss of $50 million per claim.
RECENTLYISSUEDACCOUNTINGSTANDARDS
In November 2004, the FASB issued SFAS No. 151,Inventory Costs, an amendment of ARB No. 43 Chapter 4, which clarifies that inventory costs that are “abnormal” are required to be charged to expense as incurred ~~rather than~~as opposed to being capitalized into inventory as a product cost. SFAS No. 151 provides examples of “abnormal” costs to include costs of idle facilities, excess freight and handling costs and spoilage. SFAS No. 151 ~~will become~~became effective for our fiscal year beginning January 29, 2006. The adoption of SFAS No. 151 isdid not ~~expected to~~ have a material effect on our Consolidated Financial Statements.

In ~~May 2005,~~February 2006, the FASB issued ~~SFAS~~Staff Position (“FSP”) No. ~~154,~~~~Accounting Changes~~123(R)-4, “Classification of Options and ~~Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3~~~~. SFAS No. 154 requires retrospective application to prior periods’ financial statements~~Similar Instruments Issued as Employee Compensation that Allow for ~~changes in accounting principle, unless it is impracticable to determine either~~Cash Settlement upon the ~~period-specific effects or the cumulative effect of the change. SFAS No. 154 also requires that retrospective application~~Occurrence of a ~~change in accounting principle be limited to~~Contingent Event.” FSP No. 123(R)-4 addresses the ~~direct effects~~classification of options and similar instruments issued as employee compensation that allow for cash settlement upon the ~~change. Indirect effects~~occurrence of a ~~change in accounting principle should~~contingent event. FSP No. 123(R)-4 provides that cash settlement features that can be ~~recognized in~~exercised only upon the ~~period~~occurrence of a contingent event that is outside the ~~accounting change. SFAS No. 154 further requires a change in depreciation, amortization~~employee’s control does not require classifying the option or ~~depletion method for long-lived, non-financial assets to be accounted for~~similar instrument as a ~~change in accounting estimate effected by a change in accounting principle. SFAS~~liability until it becomes probable that the event will occur. We adopted the provisions of FSP No. ~~154 will become effective for our fiscal year beginning January 29,~~123(R)-4 during the first quarter of 2006.
FASB Interpretation No. 47 (“FIN 47”) “Accounting for Conditional Asset Retirement Obligations” was issued by the FASB in March 2005. FIN 47 provides guidance relating to the identification of and financial reporting for legal obligations to perform an asset retirement activity. The Interpretation requires recognition of a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. The adoption ~~of FIN 47 is~~did not ~~expected to~~ have a material effect on our Consolidated Financial Statements.
In June 2005, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 05-6, “Determining the Amortization Period for Leasehold Improvements Purchased After Lease Inception or Acquired in a Business Combination.” EITF No. 05-6 requires that leasehold improvements acquired in a business combination be amortized over the shorter of the useful life of the assets or a term that includes required lease periods and renewals deemed to be reasonably assured at the date of acquisition. EITF No. 05-6 further requires that leasehold improvements that are placed into service significantly after, and not contemplated at or near the beginning of the lease term, shall be amortized over the shorter of the useful life of the assets or a term that includes the required lease periods and renewals deemed to be reasonably assured at the date of acquisition. EITF No. 05-6 became effective for our second fiscal quarter beginning August 14, 2005. The adoption of EITF No. 05-6 did not have a material effect on the Company’s Consolidated Financial Statements.OUTLOOK

In October 2005, the FASB issued FASB Staff Position FAS 13-1, “Accounting for Rental Costs Incurred during a Construction Period” (“FSP FAS 13-1”). FSP FAS 13-1 requires rental costs associated with building or ground leases incurred during a construction period to be recognized as rental expense and is effective for the first reporting period beginning after December 15, 2005. In addition, FSP FAS 13-1 requires lessees to cease capitalizing rental costs as of December 15, 2005 for operating lease agreements entered into prior to December 15, 2005. Early adoption is permitted. We were already in compliance with the provisions of FSP FAS 13-1, therefore it will have no effect on our Consolidated Financial Statements.
~~OUTLOOK~~
This discussion and analysis contains certain forward-looking statements about Kroger’s future performance. These statements are based on management’s assumptions and beliefs in light of the information currently available. Such statements relate to, among other things: projected change in net earnings; identical sales growth; expected pension plan contributions; our ability to generate operating cash flow; projected capital expenditures; square footage growth; opportunities to reduce costs; cash flow requirements; and our operating plan for the future; and are indicated by words such as ~~“are confident,~~“comfortable,” “committed,” “will,” “expect,” ~~“will,~~“goal,” ~~“plan,” “is focused on,~~“should,” “intend,” “target,” “believe,” ~~and~~ “anticipate,” “plan,” and similar words or phrases. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially.

Statements elsewhere in this report and below regarding our expectations, projections, beliefs, intentions or strategies are forward-looking statements within the meaning of Section 21 E of the Securities Exchange Act of 1934. While we believe that the statements are accurate, uncertainties about the general economy, our labor relations, our ability to execute our plans on a timely basis and other uncertainties described below could cause actual results to differ materially.
We ~~are confident~~expect earnings per share growth of approximately 6%-8% in 2006, including the effect of the increased legal reserves recorded in the first quarter. This estimate includes the effect of a 53^rd week in fiscal 2006, which we anticipate will be approximately $0.05 per diluted share. We expect the expensing of stock options will reduce net earnings ~~in fiscal 2005 will exceed $1.24~~$0.06 per diluted ~~share.~~
share in 2006.
We expect identical ~~supermarket~~food store sales growth, ~~including southern California and~~ excluding ~~retail~~ fuel ~~operations,~~sales, to exceed ~~3.0%~~4.0% for the ~~second half~~balance of ~~2005.~~
the year and to exceed4.5% for all of 2006.
In fiscal 2006, we will continue to focus on driving sales growth and balancing investments in gross margin and ~~improved customer~~improvedcustomer service with operating cost reductions to provide a better shopping experience for our customers. We ~~expect operating~~expectoperating margins in southern California to improve slightly due to the continued recovery in that market, although ~~improvement~~we expectimprovement in 2006 will be less than in 2005. We expect operating margins, inexcluding the effect of fuel sales, to hold steadyin the balance of the ~~Company to hold steady.~~
Company.
We plan to use, over the long-term, one-third of cash flow for debt reduction and two-thirds for stock repurchase or payment ~~of a~~ofa cash dividend.

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

Capital expenditures reflect our strategy of growth through expansion and acquisition, as well as focusing on ~~productivity increase~~productivityincrease from our existing store base through remodels. In addition, we will continue our emphasis on self-development ~~and ownership~~andownership of real estate, logistics and technology improvements. The continued capital spending in technology is focused ~~on improving~~onimproving store operations, logistics, manufacturing procurement, category management, merchandising and buying practices,and should reduce merchandising costs. We intend to continue using cash flow from operations to finance capital ~~expenditure requirements.~~expenditurerequirements. We expect capital investment for ~~2005~~2006 to be atin the ~~lower end of our~~ range of ~~$1.4 - $1.6~~$1.7-$1.9 billion, excluding acquisitions. ~~At this level of capital expenditures, total food store~~Total foodstore square footage is expected to grow ~~at 1-2%~~1.5%-2% before acquisitions and operational closings.

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

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

We expect our effective tax rate for 2006 will be approximately 37.5%.
We expect to fund current year debt maturities with cash on-hand.
We will continue to evaluate under-performing stores. We anticipate operational closings will continue at an above-historicalrate.
We expect rent expense, as a percent of total sales and excluding closed-store activity, will decrease due to the emphasis ~~our current~~ourcurrent strategy places on ownership of real ~~estate.~~
~~We expect that our effective tax rate for 2005 will be approximately 37.5%.~~
~~We expect cash taxes for 2005 to be in the range of $400 - $450 million. This is net of payments made in 2004~~estate and ~~credited to 2005. We expect 2006 cash taxes to increase due to higher net earnings.~~
~~We will continue to evaluate under-performing stores. We anticipate operational closings will continue at an above-historical rate.~~
leverage gained through sales increases.
We believe that in 2006 there will be opportunities to reduce our operating costs in such areas as administration, labor, shrink,warehousing and transportation. These savings will be invested in our core business to drive profitable sales growth and ~~offer improved~~offerimproved value and shopping experiences for our customers.
~~We contributed $300~~
Although we are not required to make cash contributions during fiscal 2006, we made a $150 million cash contribution to ~~our Company-sponsored~~ourqualified pension plans ~~in the first three quarters of 2005.~~on March 27, 2006. Additional contributions may be made if our cash flows from operations exceedour expectations. We expect ~~these~~any elective contributions tomade during 2006 will reduce our ~~minimum required~~ contributions in future years. ~~Among other~~Amongother things, investment performance of plan assets, the interest rates required to be used to calculate pension obligations ~~and future~~andfuture changes in legislation will determine the amounts of any ~~future~~additional contributions. While we have no required contributions due in 2006, we expect to make voluntary contributions to our Company-sponsored pension plans totaling approximately $100 million - $150 million during fiscal 2006, which amount could change if current legislation is modified.
~~In 2005, we~~
We expect our contributions to multi-employer pension plans to increase ~~approximately 20%~~at 5% per year over the ~~$180~~$196 million ~~contributed in 2004. We expect~~we contributedduring fiscal 2005.
      Various uncertainties and other factors could cause us to fail to achieve our ~~contributions to these plans to increase by about 5% each year thereafter.~~
goals. These include:
We have various labor agreements expiring in 2006, covering smaller groups of associates than those contracts negotiated ~~in 2005.~~in2005. In all of these contracts, rising health care and pension costs will continue to be an important issue in negotiations. AAprolonged work stoppage at a substantial number of stores could have a material effect on our results.
~~Various uncertainties and other factors could cause us to fail to achieve our goals. These include:~~

Our ability to achieve sales and earnings goals ~~for the entire Company and southern California in particular,~~ may be affected by: labor disputes; industry consolidation; pricing ~~and promotional~~andpromotional activities of existing and new competitors, including non-traditional competitors; our response to these actions; ~~the state~~thestate of the economy, including the inflationary and deflationary trends in certain commodities; stock repurchases; ~~weather conditions;~~ and ~~the success~~thesuccess of our future growth plans.

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

Our operating margins could fail to improve if our operations in southern California do not improve as expected or if we areunsuccessful at containing our operating costs.
We have estimated our exposure to the claims and litigation arising in the normal course of business, as well as ~~those matters described above,~~in materiallitigation facing the Company, and believe we have made adequate provisions for them where it is reasonably possible ~~to estimate~~toestimate and where we believe an adverse outcome is probable. ~~Adverse~~Unexpected outcomes in these matters, ~~in excess~~including the ultimateresolution of the legal proceedings arising from the hiring practices at our ~~estimates, however, could result in a reduction in~~Ralphs subsidiary during the labor dispute, couldhave an adverse effect on our ~~earnings.~~
results.
The proportion of cash flow used to reduce outstanding debt, repurchase common stock or pay a cash dividend may be ~~affected by~~affectedby the amount of outstanding debt available for pre-payments, changes in borrowing rates and the market price of ~~Kroger common~~Krogercommon stock.

Consolidation in the food industry is likely to continue and the effects on our business, either favorable or unfavorable, ~~cannot be~~cannotbe foreseen.

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

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, or the remaining terms of leases. Use of the straight-line method of depreciation creates a risk that future asset write-offs or potential impairment charges related to store closings would be larger than 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 pending items with various ~~taxing authorities~~taxingauthorities and the deductibility of certain expenses.

We believe the multi-employer pension funds to which we contribute are substantially underfunded, and we believe the ~~effect of~~effectof that underfunding will be the increased contributions we have projected over the next several years. Should asset values ~~in these~~inthese funds deteriorate, or if employers withdraw from these funds without providing for their share of the liability, or ~~should our~~shouldour estimates prove to be understated, our contributions could increase more rapidly than we have anticipated.
The grocery retail industry continues to experience fierce competition from other traditional food retailers, supercenters, ~~mass merchandisers,~~massmerchandisers, club or warehouse stores, drug stores and restaurants. Our continued success is dependent upon our ability ~~to compete~~tocompete in this industry and to reduce operating expenses, including managing health care and pension costs contained in ~~our collective~~ourcollective bargaining agreements. The competitive environment may cause us to reduce our prices in order to gain or ~~maintain share~~maintainshare of sales, thus reducing margins. While we believe our opportunities for sustained profitable growth are considerable,unanticipated actions of competitors could adversely affect our sales.

Changes in laws or regulations, including changes in accounting standards, taxation requirements and environmental laws ~~may have~~mayhave a material effect on our financial statements.

Changes in the general business and economic conditions in our operating regions, including the rate of inflation, ~~population growth~~populationgrowth and employment and job growth in the markets in which we operate, may affect our ability to hire and train ~~qualified employees~~qualifiedemployees to operate our stores. This would negatively affect earnings and sales growth. General economic changes may ~~also affect~~alsoaffect the shopping habits of our customers, which could affect sales and earnings.

Changes in our product mix may negatively affect certain financial indicators. For example, we continue to add ~~supermarket fuel~~supermarketfuel centers to our store base. Since gasoline generates low profit margins, including generating decreased margins as ~~the market~~themarket price increases, we expect to see our FIFO gross profit margins decline as gasoline sales increase. Although ~~this negatively~~thisnegatively affects our FIFO gross margin, gasoline sales provide a positive effect on operating, general and ~~administrative expenses~~administrativeexpenses as a percent of sales.

Our ability to integrate any companies we acquire or have acquired, and achieve operating improvements at those companies,will affect our operations.

Our capital expenditures could differ from our estimate if we are unsuccessful in acquiring suitable sites for new stores, ~~if we are unable to complete construction projects, including remodels, in a timely fashion, if development~~ifdevelopment costs vary from those budgeted or if our logistics and technology projects are not completed in the time ~~frame expected~~frameexpected or on budget.

Our expected square footage growth and the number of store projects completed during the year are dependent upon our abilityto acquire desirable sites for construction of new facilities as well as the timing and completion of projects.
Interest expense could be adversely affected by the interest rate environment, changes in the Company’s credit ratings,fluctuations in the amount of outstanding debt, decisions to incur prepayment penalties on the early redemption of debt and ~~any factor~~anyfactor that adversely ~~impacts~~affects our operations that results in an increase in debt.
~~Our estimated expense of $0.04 - $0.06 per diluted share, from the adoption of SFAS No. 123-R, requiring the expensing of stock options,~~
The amount we contribute to Company-sponsored pension plans could vary if the ~~assumptions~~amount of cash flow that we used to calculate the expense prove to be inaccurate or are changed. We anticipate expensing stock options during our next fiscal year, as GAAP as currently in effect would require us to do so; however, if the accounting pronouncements change prior to our implementation, we may elect not to do so.
generate differsfrom that expected.
Adverse weather conditions could increase the ~~costs~~cost our suppliers charge for their products, or may decrease the ~~customer demand~~customerdemand for certain products. Additionally, increases in the cost of inputs, such as ~~fuel, utilities,~~utility costs or raw ~~materials, could negatively~~material costs, couldnegatively affect ~~our~~ financial ratios and earnings.

Although we presently operate only in the United States, civil unrest in foreign countries in which our suppliers do ~~business may~~businessmay affect the prices we are charged for imported goods. If we are unable to pass on these increases to our customers, our ~~FIFO gross~~FIFOgross margin and net earnings will suffer.

We expect Ralphs Grocery Company to be indicted on charges that it violated federal law in connection with the hiring of certain workers during the 2003 - 2004 labor dispute. The effect of the indictment on employee morale and customer service is unknown but could be adverse. Moreover, management believes that neither the indictment nor any conviction of Ralphs will result in payments that would have a material adverse effect on the financial condition of the Company. Nonetheless, the amounts sought in both the criminal and the related NLRB proceeding are likely to be substantial, and the outcome of any legal proceeding is uncertain.
We cannot fully foresee the effects of changes in economic conditions on Kroger’s business. We have assumed economic and competitive situations will not change ~~significantly.~~significantly for 2006.
     Other factors and assumptions not identified above could also cause actual results to differ materially from those set forth in ~~the~~ forward-looking ~~information.~~statements. 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.

There have been no ~~other~~ significant changes in our exposure to market risk from the information provided in Item 7A. Quantitative and Qualitative Disclosures About Market Risk on our Form 10-K filed with the SEC on April ~~15, 2005, as amended.~~7, 2006.
Item 4. Controls and Procedures.

The Chief Executive Officer and the Chief Financial Officer, together with a disclosure review committee appointed by the Chief Executive Officer, evaluated Kroger’s disclosure controls and procedures as of the quarter ended ~~November 5, 2005.~~May 20, 2006. Based on that evaluation, Kroger’s Chief Executive Officer and Chief Financial Officer concluded that Kroger’s disclosure controls and procedures were effective as of the end of the period covered by this report.

In connection with the evaluation described above, there was no change in Kroger’s internal control over financial reporting during the quarter ended ~~November 5, 2005,~~May 20, 2006, that has materially affected, or is reasonably likely to materially affect, Kroger’s internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.

Litigation — ~~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. Under the Agreement, the Company paid approximately $147 million to the other Retailers. The lawsuit raises claims that could question the validity of those payments, as well as claims that the retailers unlawfully restrained competition. On May 25,In December, 2005, the Court denied a motion for a summary judgment filed by the defendants. Ralphs and the other defendants filed a notice of an interlocutory appeal to the United States Court of Appeals for the Ninth Circuit. On November 29, 2005, the appellate court dismissed the appeal. The Company continues to believe it has strong defenses against this lawsuit and is vigorously defending it. Although this lawsuit is subject to uncertainties inherent to the litigation process, based on the information presently available to the Company, management does not expect that the ultimate resolution of this action will have a material effect, favorable or adverse, on the Company’s financial condition, results of operations or cash flows.
~~The~~ United States Attorney’s Office for the Central District of California ~~is investigating~~notified the ~~hiring practices of~~Company that a federal grand jury had returned an indictment against Ralphs Grocery Company (“Ralphs”), a wholly-owned subsidiary of The Kroger Co., with regard to Ralphs’ hiring practices during the labor dispute from October 2003 through February ~~2004. Among~~2004 (United Statesof America v. Ralphs Grocery Company, United States District Court for the ~~matters under investigation is whether~~Central District of California, CR No. 05-1210 PA). The indictment alleges a criminal conspiracy and other criminal activity resulting in some locked-out employees ~~were~~being allowed or encouraged to work under false identities or false Social Security numbers, despite Company policy forbidding such conduct. ~~A grand jury~~Trial has ~~convened to consider whether such acts violated federal criminal statutes. The Company expects that Ralphs will be indicted on charges that its conduct violated federal law.~~been set for August 15, 2006. In addition, these alleged hiring practices are the subject of claims that Ralphs’ conduct of the lockout was unlawful, and that Ralphs is liable under the National Labor Relations Act (“NLRA”). The Los Angeles Regional Office of the National Labor Relations Board (“NLRB”) has notified the charging parties that all charges alleging that Ralphs’ lockout violated the NLRA have been dismissed. That decision is being appealed by the charging parties to the General Counsel of the NLRB.
     During the first quarter of 2006, the Company increased its reserves associated with legal proceedings arising from these matters. The ~~amounts potentially claimed~~current quarter charge reduced earnings by $0.03 per diluted share and increased the amount of reserves established for this contingency. Ralphs expects to enter into an agreement that will include a plea of guilty to some of the charges in the indictment and will, if approved by the Court, resolve both the criminal litigation with Ralphs and the NLRB ~~matter are substantial, but based on~~proceedings. The Company can provide no assurance that such an agreement will be entered into, or that if it is entered into, it will be approved by the ~~information presently available to~~court. The amount reserved by the Company ~~management does not expect the ultimate resolution~~represents its best estimate of ~~this matter to have a material effect on the financial condition of the Company.~~its exposure in connection with these legal proceedings.

On September 8, 2005, the Los Angeles City Attorney’s office filed a misdemeanor complaint against a subsidiary of the Company, Ralphs Grocery Company (People v. Ralphs Grocery Company, Superior Court of California, County of Los Angeles, Case No. 5CR02616) regarding alleged violations of the California Water Code. Ralphs operates a system at one store location to treat groundwater within an underground basement because of the presence of naturally occurring petroleum associated with the nearby La Brea tar pits, which system is subject to a discharge permit issued by the California Regional Water Quality Control Board. On December 1, 2005, Ralphs executed a civil consent judgment under which the misdemeanor complaint is to be dismissed and Ralphs will pay a civil penalty.
On November 24, 2004, the Company was notified by the office of the United States Attorney for the District of Colorado that the Drug Enforcement Agency (“DEA”) had referred a matter to it for investigation regarding alleged violation of the Controlled Substances Act by the Company’s King Soopers division. The government alleges that ineffective controls and procedures, as well as improper record keeping, permitted controlled substances to be diverted from pharmacies operated by King Soopers. As a result of these allegations, the Company has retained a consultant to assist it in reviewing its policies and procedures, record keeping and training in its pharmacies, and is taking corrective action, as warranted. On October 20, 2005, the Company resolved this matter by agreeing to pay a $7 million civil penalty, agreeing to implement a comprehensive compliance program, and agreeing to an additional $3 million payment if it fails to comply with the compliance program.
Various claims and lawsuits arising in the normal course of business, including suits charging violations of certain antitrust and civil rights laws, are pending against the Company. Some of these purport or have been determined to be class actions and/or seek substantial damages. Any damages that may be awarded in an antitrust case will be automatically trebled. Although it is not possible at this time to evaluate the merits of all 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 ~~therefore.~~therefor. Nonetheless, assessing and predicting the outcomes of these matters involves 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 effect on the Company’s financial condition or results of operation.
~~Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.~~
~~(c)~~

Period⁽¹⁾
   Total Number
of Shares
Purchased
   Average
Price Paid
Per Share
   Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs⁽²⁾
   Maximum
Dollar Value of
Shares that May
Yet Be
Purchased
Under the Plans
or Programs⁽³⁾(in millions)
First four weeks

August 14, 2005 to September 10, 2005
   190,000    $ 19.70    190,000    $ 166
Second four weeks

September 11, 2005 to October 8, 2005
   206,465    $ 20.34    200,000    $ 162
Third four weeks

October 9, 2005 to November 5, 2005
   208,539    $ 19.88    200,000    $ 158



Total
   605,004    $ 19.97    590,000    $ 158

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a) On March 20, 2006, the Company issued 14,985 shares of common stock to Linda McLaughlin Figel and on April 7, 2006, the Company issued 245,163 shares of common stock to the Resnik Family Trust of 1996. These shares were issued upon conversion of warrants that were issued in a private placement transaction not involving a public offering pursuant to Section 4(2) of the Securities Act of 1933, as amended. The conversion of the warrants into common stock was an exempt exchange under Section 3(a)(9) of the Securities Act. The shares issued to Ms. Figel were issued pursuant to a “cashless” exercise of warrants and the Company received no proceeds. The shares issued to the trust were issued pursuant to an exercise in exchange for cash. The proceeds of $2.9 million were used for general corporate purposes.
(c)
ISSUER PURCHASES OF EQUITY SECURITIES
Total Number Maximum
of Shares Dollar Value of
Purchased as Shares that May
Part of Yet Be
Publicly Purchased
Total Number Average Announced Under the Plans
of Shares Price Paid Plans or or Programs⁽³⁾
Period⁽¹⁾ Purchased Per Share Programs⁽²⁾ (in millions)
First four weeks
January 29, 2006 to February 25, 2006 1,625,000 $ 19.00
1,625,000
$ 83
Second four weeks
February 26, 2006 to March 25, 2006 1,670,000 $ 20.41
1,125,000
$ 61
Third four weeks
March 26, 2006 to April 22, 2006 1,615,000 $ 20.20
1,500,000
$ 30
Fourth four weeks
April 23, 2006 to May 20, 2006 1,800,000 $ 19.99
1,800,000
$ 487
Total 6,710,000 $ 19.90
6,050,000
$ 487

⁽¹⁾ The reported periods conform to the Company’s fiscal calendar composed of thirteen 28-day periods. The ~~third~~first quarter of ~~2005 contains three~~2006 contained four 28-day periods.
⁽²⁾ Shares were repurchased under (i) a $500 million stock repurchase program, authorized by the Board of Directors on September 16, 2004, ~~and~~ (ii) a $500 million stock repurchase program, authorized by the Board of Directors on May 4, 2006, replacing the program identified in clause (i), and (iii) a program announced on December 6, 1999, to repurchase common stock to reduce dilution resulting from our employee stock option plans awhich program ~~which~~ is limited ~~based on~~to proceeds received from exercises of stock options and the tax benefits associated therewith. The programs have no expiration date but may be terminated by the Board of Directors at any time. No shares were purchased other than through publicly announced programs during the periods shown.
⁽³⁾ Amounts shown in this column reflect amounts remaining under the $500 million stock repurchase program referenced in clause (ii) of Note 2 above. Amounts ~~remaining~~to be invested under the program ~~seeking to reduce dilution resulting from stock~~utilizing option ~~exercises~~exercise proceeds are ~~not determinable.~~dependent upon option exercise activity.
~~Item 6. Exhibits.~~
EXHIBIT 3.1 - Amended Articles of Incorporation of the Company are hereby incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended October 3, 1998. The Company’s Regulations are incorporated by reference to Exhibit 4.2 of the Company’s Registration Statement on Form S-3 as filed with the Securities and Exchange Commission on January 28, 1993, and bearing Registration No. 33-57552.
EXHIBIT 4.1 - Instruments defining the rights of holders of long-term debt of the Company and its subsidiaries are not filed as Exhibits because the amount of debt under each instrument is less than 10% of the consolidated assets of the Company. The Company undertakes to file these instruments with the Commission upon request.

Item 6. Exhibits.
EXHIBIT ~~31.1~~3.1 – ~~Rule 13a–14(a) / 15d–14(a) Certifications – Chief Executive Officer~~
~~EXHIBIT 31.2~~ – ~~Rule 13a–14(a) / 15d–14(a) Certifications – Chief Financial Officer~~
~~EXHIBIT 32.1~~ – ~~Section 1350 Certifications~~
~~EXHIBIT 99.1~~ – ~~Additional Exhibits~~ - ~~Statement of Computation of Ratio of Earnings to Fixed Charges.~~
~~SIGNATURES~~
~~Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.~~
~~THE KROGER CO.~~
~~Dated: December 15, 2005~~ ~~By:~~
~~/s/ David B. Dillon~~
~~David B. Dillon~~
~~Chairman of the Board and Chief Executive Officer~~
~~Dated: December 15, 2005~~ ~~By:~~
~~/s/ J. Michael Schlotman~~
~~J. Michael Schlotman~~
~~Senior Vice President and Chief Financial Officer~~
~~Exhibit Index~~
~~Exhibit 3.1 -~~     Amended Articles of Incorporation of the Company are hereby incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended October 3, 1998. The Company’s Regulations are incorporated by reference to Exhibit 4.2 of the Company’s Registration Statement on Form S-3 as filed with the ~~Securities and Exchange Commission~~Ohio Secretary of State on ~~January 28, 1993, and bearing Registration No. 33-57552.~~June 22, 2006.
~~Exhibit~~EXHIBIT 3.2 -    Regulations amended as of June 22, 2006.
EXHIBIT 4.1 -     Instruments defining the rights of holders of long-term debt of the Company and its subsidiaries are not filed as Exhibits because the amount of debt under each instrument is less than 10% of the consolidated assets of the Company. The Company undertakes to file these instruments with the Commission upon request.
~~Exhibit~~EXHIBIT 31.1 -     Rule 13a–14(a) / 15d–14(a) Certifications – Chief Executive ~~Officer~~Officer.
~~Exhibit~~EXHIBIT 31.2 -     Rule 13a–14(a) / 15d–14(a) Certifications – Chief Financial ~~Officer~~Officer.
~~Exhibit~~EXHIBIT 32.1 -     Section 1350 ~~Certifications~~Certifications.
~~Exhibit~~EXHIBIT 99.1 -     Additional Exhibits - Statement of Computation of Ratio of Earnings to Fixed Charges.

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
THE KROGER CO.
Dated: June 29, 2006 By: /s/ David B. Dillon
David B. Dillon
Chairman of the Board and Chief Executive Officer
Dated: June 29, 2006 By: /s/ J. Michael Schlotman
J. Michael Schlotman
Senior Vice President and Chief Financial Officer

Exhibit Index
Exhibit 3.1 - Amended Articles of Incorporation as filed with the Ohio Secretary of State on June 22, 2006.
Exhibit 3.2 - Regulations amended as of June 22, 2006.
Exhibit 4.1 - Instruments defining the rights of holders of long-term debt of the Company and its subsidiaries are not filed as Exhibits because the amount of debt under each instrument is less than 10% of the consolidated assets of the Company. The Company undertakes to file these instruments with the Commission upon request.
Exhibit 31.1 - Rule 13a–14(a) / 15d–14(a) Certifications – Chief Executive Officer.
Exhibit 31.2 - Rule 13a–14(a) / 15d–14(a) Certifications – Chief Financial Officer.
Exhibit 32.1 - Section 1350 Certifications.
Exhibit 99.1 - Additional Exhibits - Statement of Computation of Ratio of Earnings to Fixed Charges.

Ohio	31-0345740
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)		~~(I.R.S. Employer~~ Identification No.)

1014 Vine Street, Cincinnati, OH 45202
(Address of principal executive offices)
(Zip Code)

(513) 762-4000
(Registrant’s telephone number, including area code)

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


	Third Quarter Ended				Three Quarters Ended
	November 5, 2005		November 6, 2004		November 5, 2005		November 6, 2004
Sales	$	14,020	$	12,854	$	45,833	$	42,739
Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below		10,596		9,639		34,503		31,883
Operating, general and administrative		2,556		2,433		8,380		8,075
Rent		166		158		514		525
Depreciation and amortization		287		287		969		949

Operating Profit		415		337		1,467		1,307
Interest expense		114		117		394		442

Earnings before income tax expense		301		220		1,073		865
Income tax expense		116		77		397		317

Net earnings	$	185	$	143	$	676	$	548

Net earnings per basic common share	$	0.26	$	0.19	$	0.93	$	0.74

Average number of common shares used in basic calculation		724		736		725		738
Net earnings per diluted common share	$	0.25	$	0.19	$	0.92	$	0.73

Average number of common shares used in diluted calculation		732		742		731		746

	First Quarter Ended

	May 20, 2006		May 21, 2005
Sales	$	19,415	$	17,948
Merchandise costs, including advertising, warehousing, and transportation,
excluding items shown separately below		14,659		13,443
Operating, general and administrative		3,528		3,295
Rent		196		203
Depreciation and amoritzation		388		389
Operating profit		644		618
Interest expense		155		159
Earnings before income tax expense		489		459
Income tax expense		183		165
Net earnings	$	306	$	294
Net earnings per basic common share	$	0.42	$	0.40
Average number of common shares used in basic calculation		722		727
Net earnings per diluted share	$	0.42	$	0.40
Average number of common shares used in diluted calculation		729		732


	November 5, 2005			January 29, 2005
ASSETS
Current assets
Cash – In stores	$	137		$	144
Cash – Temporary cash investments		100			—

Total Cash		237			144

Deposits in-transit		562			506
Receivables		664			661
Receivables - Taxes		—			167
FIFO Inventory		5,186			4,729
LIFO Credit		(400	)		(373	)
Prefunded employee benefits		—			300
Property held for sale		98			23
Prepaid and other current assets		226			249

Total current assets		6,573			6,406
Property, plant and equipment, net		11,381			11,497
Goodwill		2,192			2,191
Other assets and investments		431			397

Total Assets	$	20,577		$	20,491

LIABILITIES
Current liabilities
Current portion of long-term debt, at face value, including obligations under capital leases and financing obligations	$	639		$	71
Accounts payable		3,763			3,598
Deferred income taxes		267			267
Other current liabilities		2,548			2,380

Total current liabilities		7,217			6,316

Long-term debt including obligations under capital leases and financing obligations:
Long-term debt, at face value, including obligations under capital leases and financing obligations		6,596			7,830
Adjustment to reflect fair value interest rate hedges (Note 11)		25			70

Long-term debt including obligations under capital leases and financing obligations		6,621			7,900

Deferred income taxes		879			939
Other long-term liabilities		1,777			1,796

Total Liabilities		16,494			16,951

Commitments and Contingencies (Note 10)

SHAREOWNERS’ EQUITY
Preferred stock, $100 par, 5 shares authorized and unissued		—			—
Common stock, $1 par, 1,000 shares authorized: 926 shares issued in 2005 and 918 shares issued in 2004		926			918
Additional paid-in capital		2,494			2,432
Accumulated other comprehensive loss		(199	)		(202	)
Accumulated earnings		4,211			3,541
Common stock in treasury, at cost, 201 shares in 2005 and 190 shares in 2004		(3,349	)		(3,149	)

Total Shareowners’ Equity		4,083			3,540

Total Liabilities and Shareowners’ Equity	$	20,577		$	20,491

				January 28,
	May 20, 2006			2006
ASSETS
Current assets
Cash - In stores	$	133		$	147
Cash - Temporary cash investments		526			63

Total cash		659			210

Deposits in-transit		523			488
Receivables		696			686
FIFO inventory		4,855			4,886
LIFO credit		(410	)		(400	)
Prefunded employee benefits		22			300
Prepaid and other current assets		311			296

Total current assets		6,656			6,466

Property, plant and equipment, net		11,402			11,365
Goodwill		2,192			2,192
Other assets		485			459

Total Assets	$	20,735		$	20,482

LIABILITIES
Current liabilities
Current portion of long-term debt including obligations under capital leases and financing
obligations	$	743		$	554
obligations	$	743		$	554
Accounts payable		3,564			3,550
Accrued salaries and wages		635			742
Deferred income taxes		217			217
Other current liabilities		1,950			1,652

Total current liabilities		7,109			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		6,431			6,651
Adjustment to reflect fair-value interest rate hedges		12			27

Long-term debt including obligations under capital leases and financing obligations		6,443			6,678

Deferred income taxes		834			843
Other long-term liabilities		1,745			1,856

Total Liabilities		16,131			16,092

Commitments and contingencies

SHAREOWNERS' EQUITY

Preferred stock, $100 par, 5 shares authorized and unissued		-			-
Common stock, $1 par, 1,000 shares authorized; 931 shares issued in 2006 and 927 shares
issued in 2005		931			927
Additional paid-in capital		2,599			2,536
Accumulated other comprehensive loss		(225	)		(243	)
Accumulated earnings		4,832			4,573
Common stock in treasury, at cost, 211 shares in 2006 and 198 shares in 2005		(3,533	)		(3,403	)

Total Shareowners' Equity		4,604			4,390

Total Liabilities and Shareowners' Equity	$	20,735		$	20,482

	Quarter Ended
	May 20,			May 21,
	2006			2005
Cash Flows from Operating Activities
Net earnings	$	306		$	294
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		388			389
LIFO charge		10			11
Stock option expense		22			3
Pension expense for Company-sponsored plans		49			43
Deferred income taxes		(19	)		(20	)
Gain on sale of property		(7	)		(5	)
Other		58			20
Changes in operating assets and liabilities net of effects from acquisitions
of businesses
Store deposits in-transit		(35	)		(15	)
Receivables		(16	)		45
Inventories		32			53
Prepaid expenses		224			265
Accounts payable		68			(135	)
Accrued expenses		(117	)		(59	)
Income taxes receivable (payable)		168			181
Contribution to Company-sponsored pension plans		(150	)		(89	)
Other		3			(8	)

Net cash provided by operating activities		984			973

Cash Flows from Investing Activities
Payments for property and equipment		(420	)		(401	)
Proceeds from sale of assets		53			28
Other		(3	)		(4	)

Net cash used by investing activities		(370	)		(377	)

Cash Flows from Financing Activities
Proceeds from issuance of long-term debt		-			6
Payments on long-term debt		(25	)		(32	)
Payments on bank revolver		-			(428	)
Financing charges incurred		(1	)		-
Proceeds from issuance of capital stock		49			22
Treasury stock purchases		(134	)		(153	)
Decrease in book overdrafts		(54	)		(20	)

Net cash used by financing activities		(165	)		(605	)

Net increase (decrease) in cash and temporary cash investments		449			(9	)

Cash and temporary cash investments:
Beginning of year		210			144

End of quarter	$	659		$	135

Reconciliation of capital expenditures
Payments for property and equipment	$	(420	)	$	(401	)
Changes in construction-in-progress payables		(30	)		-

Total capital expenditures	$	(450	)	$	(401	)

Disclosure of cash flow information
Cash paid during the quarter for interest	$	179		$	190
Cash paid during the quarter for income taxes	$	24		$	5

	Future Lease Obligations
	2006			2005
Balance at beginning of year	$	65		$	65
Additions		—			5
Payments		(2	)		(2	)
Adjustments		—			(4	)

Balance at end of First Quarter	$	63		$	64


	Future Lease Obligations
	2005			2004
Balance at beginning of year	$	65		$	35
Additions		19			23
Payments		(11	)		(7	)
Adjustments		(4	)		3

Balance at end of Third Quarter	$	69		$	54

	Shares subject		Weighted-average
	to option		exercise price
Outstanding, year-end 2005	59.3		$	19.03
Granted	3.1		$	19.94
Exercised	(4.3	)	$	11.21
Canceled or Expired	(0.3	)	$	20.78

Outstanding, May 20, 2006	57.8		$	19.66

		Weighted-
		average
		remaining	Weighted-			Weighted-
	Number	contractual life	average		Options	average
Range of exercise prices	outstanding	(in years)	exercise price		exercisable	exercise price
$ 7.10 - $14.93	11.1	4.40	$	14.11	9.5	$	13.97
$14.94 - $16.39	6.6	8.86	$	16.35	2.4	$	16.32
$16.40 - $17.31	11.5	6.02	$	16.97	8.1	$	16.90
$17.32 - $23.00	15.5	5.24	$	21.66	9.8	$	22.05
$23.01 - $31.91	13.1	3.79	$	26.06	11.1	$	26.06

$ 7.10 - $31.91	57.8	5.32	$	19.66	40.9	$	19.90

	Restricted		Weighted-
	shares		average grant-
	outstanding		date fair value
Outstanding, year-end 2005	0.7		$	17.85
Granted	2.1		$	19.93
Lapsed	(0.1	)	$	17.86
Canceled or Expired	—		$	—

Outstanding, May 20, 2006	2.7		$	19.46


	Third Quarter						Year-To-Date
	2005			2004			2005			2004
Net earnings, as reported	$	185		$	143		$	676		$	548
Add: Stock-based compensation expense included in net earnings, net of income tax benefits		1			1			4			6
Subtract: Total stock-based compensation expense determined under fair value method for all awards, net of income tax benefits		(9	)		(10	)		(26	)		(35	)

Pro forma net earnings	$	177		$	134		$	654		$	519

Net earnings per basic common share, as reported	$	0.26		$	0.19		$	0.93		$	0.74
Pro forma earnings per basic common share	$	0.25		$	0.18		$	0.90		$	0.70

Net earnings per diluted common share, as reported	$	0.25		$	0.19		$	0.92		$	0.73
Pro forma earnings per diluted common share	$	0.24		$	0.18		$	0.89		$	0.70

	2006	2005
Risk-free interest rate	5.07%	4.11%
Expected dividend yield	1.50%	N/A
Expected volatility	27.60%	30.83%
Expected term	7.50 Years	8.70 Years


	2005		2004
Weighted average expected volatility (based on historical volatility)	30.83	%	30.13	%
Weighted average risk-free interest rate	4.11	%	3.99	%
Expected term (based on historical results)	8.7 years		8.7 years

	First Quarter
	2005
Net earnings, as reported	$	294
Add: Stock-based compensation expense included in net earnings, net of income tax benefits		2
Subtract: Total stock-based compensation expense determined under fair value method for all awards, net of income tax benefits		(8	)
		(8	)

Pro forma net earnings	$	288

Net earnings per basic common share, as reported	$	0.40
Pro forma earnings per basic common share	$	0.40

Net earnings per diluted common share, as reported	$	0.40
Pro forma earnings per diluted common share	$	0.39


	November 5, 2005			January 29, 2005
Credit Facility and Commercial Paper borrowings	$	65		$	694
4.95% to 8.92% Senior Notes and Debentures due through 2031		6,391			6,391
5.00% to 10.23% mortgages due in varying amounts through 2017		213			218
Other		177			202

Total debt, excluding capital leases and financing obligations		6,846			7,505

Less current portion		(613	)		(46	)

Total long-term debt, excluding capital leases and financing obligations	$	6,233		$	7,459

	First Quarter Ended
	May 20, 2006		May 21,2005
Net earnings	$	306	$	294
Unrealized gain on hedging activities, net of tax⁽¹⁾		18		1
Comprehensive income	$	324	$	295


	Third Quarter
	Pension Benefits						Other Benefits
	2005			2004			2005			2004
Components of net periodic benefit cost:
Service cost	$	26		$	26		$	3		$	3
Interest cost		27			26			5			5
Expected return on plan assets		(31	)		(28	)		—			—
Amortization of:
Transition asset		—			—			—			—
Prior service cost		1			1			(2	)		(2	)
Actuarial (gain) loss		7			2			—			—

Net periodic benefit cost	$	30		$	27		$	6		$	6

	First Quarter
	Pension Benefits						Other Benefits
		2006		2005			2006			2005
Components of net periodic benefit cost:
Service cost	$	41		$	38		$	4		$	3
Interest cost		41			37			6			6
Expected return on plan assets		(47	)		(39	)		—			—
Amortization of:
Prior service cost		2			2			(2	)		(2	)
Actuarial (gain) loss		12			8			—			—

Net periodic benefit cost	$	49		$	46		$	8		$	7


	Third Quarter Ended November 5, 2005					Third Quarter Ended November 6, 2004
	Earnings (Numerator)		Shares (Denominator)	Per Share Amount		Earnings (Numerator)		Shares (Denominator)	Per Share Amount
Earnings per basic common share	$	185	724	$	0.26	$	143	736	$	0.19
Dilutive effect of stock options and warrants			8					6

Earnings per diluted common share	$	185	732	$	0.25	$	143	742	$	0.19


	Three Quarters Ended November 5, 2005					Three Quarters Ended November 6, 2004
	Earnings (Numerator)		Shares (Denominator)	Per Share Amount		Earnings (Numerator)		Shares (Denominator)	Per Share Amount
Earnings per basic common share	$	676	725	$	0.93	$	548	738	$	0.74
Dilutive effect of stock options and warrants			6					8

Earnings per diluted common share	$	676	731	$	0.92	$	548	746	$	0.73

	The Kroger		Guarantor
	Co.		Subsidiaries		Eliminations			Consolidated
Current assets
Cash, including temporary cash investments	$	495	$	164	$	—		$	659
Deposits in-transit		63		460		—			523
Accounts receivable		166		1,458		(928	)		696
Inventory, net		448		3,995		—			4,443
Prepaid and other current assets		110		225		—			335

Total current assets		1,282		6,302		(928	)		6,656

Property, plant and equipment, net		1,321		10,081		—			11,402
Goodwill		56		2,136		—			2,192
Other assets and investments		590		1,053		(1,158	)		485
Investment in and advances to subsidiaries		11,659		—		(11,659	)		—

Total assets	$	14,908	$	19,572	$	(13,745	)	$	20,735

Current liabilities
Current portion of long-term debt including obligations under capital
leases and financing obligations	$	743	$	—	$	—		$	743
Accounts payable		1,424		4,226		(2,086	)		3,564
Other current liabilities		78		2,724		—			2,802

Total current liabilities		2,245		6,950		(2,086	)		7,109

Long-term debt including obligations under capital leases and financing
obligations
Face value long-term debt including obligations under capital leases
and financing obligations		6,431		—		—			6,431
Adjustment to reflect fair value interest rate hedges		12		—		—			12

Long-term debt including obligations under capital leases and
financing obligations		6,443		—		—			6,443
Other long-term liabilities		1,616		963		—			2,579

Total liabilities		10,304		7,913		(2,086	)		16,131

Shareowners’ Equity		4,604		11,659		(11,659	)		4,604

Total liabilities and shareowners’ equity	$	14,908	$	19,572	$	(13,745	)		$ 20,735


	The Kroger Co.		Guarantor Subsidiaries			Eliminations			Consolidated
Current assets
Cash, including temporary cash investments	$	25	$	212		$	—		$	237
Deposits in-transit		60		502			—			562
Accounts receivable		501		665			(502	)		664
Net inventories		408		4,378			—			4,786
Prepaid and other current assets		69		255			—			324

Total current assets		1,063		6,012			(502	)		6,573

Property, plant and equipment, net		1,303		10,078			—			11,381
Goodwill		56		2,136			—			2,192
Other assets and investments		548		(117	)		—			431
Investment in and advances to subsidiaries		10,719		—			(10,719	)		—

Total assets	$	13,689	$	18,109		$	(11,221	)	$	20,577

Current liabilities
Current portion of long-term debt including obligations under capital leases and financing obligations	$	639	$	—		$	—		$	639
Accounts payable		193		4,072			(502	)		3,763
Other current liabilities		241		2,574			—			2,815

Total current liabilities		1,073		6,646			(502	)		7,217

Long-term debt including obligations under capital leases and financing obligations
Face value long-term debt including obligations under capital leases and financing obligations		6,596		—			—			6,596
Adjustment to reflect fair value interest rate hedges		25		—			—			25

Long-term debt including obligations under capital leases and financing obligations		6,621		—			—			6,621
Other long-term liabilities		1,912		744			—			2,656

Total liabilities		9,606		7,390			(502	)		16,494

Shareowners’ Equity		4,083		10,719			(10,719	)		4,083

Total liabilities and shareowners’ equity	$	13,689	$	18,109		$	(11,221	)	$	20,577

	The Kroger			Guarantor
	Co.			Subsidiaries		Eliminations			Consolidated
Sales	$	2,800		$	16,911	$	(296)		$	19,415
Merchandise costs, including warehousing and transportation		2,252		12,703			(296)			14,659
Operating, general and administrative		521		3,007			—			3,528
Rent		48		148			—			196
Depreciation and amortization		47		341			—			388

Operating profit (loss)		(68	)	712			—			644
Interest expense		153		2			—			155
Equity in earnings of subsidiaries		502		—			(502	)		—

Earnings (loss) before income tax expense		281		710			(502	)		489
Income tax expense		(25	)	208			—			183

Net earnings	$	306		$	502	$	(502	)	$	306


Condensed Consolidating
Statements of Operations
For the Quarter Ended May 21, 2005

	The Kroger			Guarantor
	Co.			Subsidiaries		Eliminations			Consolidated
Sales	$	2,530		$	15,705	$	(287	)	$	17,948
Merchandise costs, including warehousing and transportation		2,116		11,612			(285	)		13,443
Operating, general and administrative		475		2,820			—			3,295
Rent		56		149			(2	)		203
Depreciation and amortization		25		364			—			389

Operating profit (loss)		(142	)	760			—			618
Interest expense		150		9			—			159
Equity in earnings of subsidiaries		489		—			(489	)		—

Earnings (loss) before income tax expense		197		751			(489	)		459
Income tax expense (benefit)		(97	)	262			—			165

Net earnings	$	294		$	489	$	(489	)	$	294


	The Kroger Co.			Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Eliminations			Consolidated
Sales	$	1,611		$	11,516	$	12		$	(285	)	$	12,854
Merchandise costs, including warehousing and transportation		1,306			8,606		—			(273	)		9,639
Operating, general and administrative		374			2,062		(3	)		—			2,433
Rent		28			142		—			(12	)		158
Depreciation and amortization		23			262		2			—			287

Operating profit (loss)		(120	)		444		13			—			337
Interest expense		105			6		6			—			117
Equity in earnings of subsidiaries		317			—		—			(317	)		—

Earnings (loss) before income tax expense		92			438		7			(317	)		220
Income tax expense (benefit)		(51	)		126		2			—			77

Net earnings	$	143		$	312	$	5		$	(317	)	$	143

	First Quarter
			Percentage			Percentage
	2006		Increase	2005		Increase
Total supermarket sales without fuel	$	16,973.2	5.9%	$	16,027.0	3.9%
Total supermarket fuel sales	$	1,294.5	39.8%		925.7	47.3%

Total supermarket sales	$	18,267.7	7.8%	$	16,952.7	5.6%
Other sales⁽¹⁾		1,147.5	15.3%		995.0	17.8%

Total sales	$	19,415.2	8.2%	$	17,947.7	6.2%

	First Quarter
(In millions, except per share amounts)	2005
Net earnings, as reported	$	294
Add: Stock-based compensation expense included in net earnings, net of income tax benefits		2
Subtract: Total stock-based compensation expense determined under fair value method for all
awards, net of income tax benefits		(8	)

Pro forma net earnings	$	288

Net earnings per basic common share, as reported	$	0.40
Pro forma earnings per basic common share	$	0.40

Net earnings per diluted common share, as reported	$	0.40
Pro forma earnings per diluted common share	$	0.39


Period⁽¹⁾	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs⁽²⁾	Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs⁽³⁾(in millions)
First four weeks
August 14, 2005 to September 10, 2005	190,000	$	19.70	190,000	$	166
Second four weeks
September 11, 2005 to October 8, 2005	206,465	$	20.34	200,000	$	162
Third four weeks
October 9, 2005 to November 5, 2005	208,539	$	19.88	200,000	$	158

Total	605,004	$	19.97	590,000	$	158

	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

(a)	On March 20, 2006, the Company issued 14,985 shares of common stock to Linda McLaughlin Figel and on April 7, 2006, the Company issued 245,163 shares of common stock to the Resnik Family Trust of 1996. These shares were issued upon conversion of warrants that were issued in a private placement transaction not involving a public offering pursuant to Section 4(2) of the Securities Act of 1933, as amended. The conversion of the warrants into common stock was an exempt exchange under Section 3(a)(9) of the Securities Act. The shares issued to Ms. Figel were issued pursuant to a “cashless” exercise of warrants and the Company received no proceeds. The shares issued to the trust were issued pursuant to an exercise in exchange for cash. The proceeds of $2.9 million were used for general corporate purposes.

(c)

ISSUER PURCHASES OF EQUITY SECURITIES
				Total Number	Maximum
				of Shares	Dollar Value of
				Purchased as	Shares that May
				Part of	Yet Be
				Publicly	Purchased
	Total Number	Average		Announced	Under the Plans
	of Shares	Price Paid		Plans or	or Programs⁽³⁾
Period⁽¹⁾	Purchased	Per Share		Programs⁽²⁾	(in millions)
First four weeks
January 29, 2006 to February 25, 2006	1,625,000	$	19.00	1,625,000	$	83
Second four weeks
February 26, 2006 to March 25, 2006	1,670,000	$	20.41	1,125,000	$	61
Third four weeks
March 26, 2006 to April 22, 2006	1,615,000	$	20.20	1,500,000	$	30
Fourth four weeks
April 23, 2006 to May 20, 2006	1,800,000	$	19.99	1,800,000	$	487
Total	6,710,000	$	19.90	6,050,000	$	487

Item 6. Exhibits.

EXHIBIT ~~31.1~~3.1	–	~~Rule 13a–14(a) / 15d–14(a) Certifications – Chief Executive Officer~~

~~EXHIBIT 31.2~~	–	~~Rule 13a–14(a) / 15d–14(a) Certifications – Chief Financial Officer~~

~~EXHIBIT 32.1~~	–	~~Section 1350 Certifications~~

~~EXHIBIT 99.1~~	–	~~Additional Exhibits~~ - ~~Statement of Computation of Ratio of Earnings to Fixed Charges.~~