10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended January 3, 2004

OR

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

For the transition period from                      to                     

Commission file number 1-41

SAFEWAY INC.

(Exact name of Registrant as specified in its charter)

Delaware	94-3019135
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

5918 Stoneridge Mall Road Pleasanton, California	94588
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (925) 467-3000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
Common Stock, $0.01 par value per share	New York Stock Exchange
9.30%      Senior Secured Debentures due 2007	New York Stock Exchange
9.875%      Senior Subordinated Debentures due 2007	New York Stock Exchange
6.85%      Senior Notes due 2004	New York Stock Exchange
7.00%      Senior Notes due 2007	New York Stock Exchange
7.45%      Senior Debentures due 2027	New York Stock Exchange

(Cover continued on following page)

(Cover continued from previous page)

Securities registered pursuant to Section 12(g) of the Act:

NONE

(Title of Class)

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.    Yes  x    No  ¨.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K .

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes  x    No  ¨.

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked for price of such common equity, as of the last business day of the Registrant’s most recently completed second fiscal quarter. Aggregate market value of the voting stock held by non-affiliates of Registrant as of June 14, 2003 was approximately $8.4 billion.

As of March 12, 2004, there were issued and outstanding 444.8 million shares of the Registrant’s common stock.

DOCUMENTS INCORPORATED BY REFERENCE

The following documents are incorporated by reference to the extent specified herein:

Document Description	10-K Part
2003 Annual Report to Stockholders	I, II, III, IV
Proxy Statement for Annual Meeting of Stockholders to be held May 20, 2004, to be filed within 120 days after the end of the fiscal year ended January 3, 2004	III

SAFEWAY INC. AND SUBSIDIARIES

PART I

Item 1. Business and Item 2. Properties

General:

Information appearing on pages 13 through 15 of the 2003 Annual Report to Stockholders of Safeway Inc. (“Safeway” or the “Company”) is incorporated herein by this reference.

Safeway was incorporated in the state of Delaware in July 1986 as SSI Holdings Corporation and, thereafter, its name was changed to Safeway Stores, Incorporated. In February 1990, the Company changed its name to Safeway Inc.

Safeway’s corporate website is located at www.safeway.com. You may access our SEC filings free of charge at our corporate website promptly after such material is electronically filed with, or furnished to, the SEC. We also maintain certain corporate governance documents on our website, including the Company’s Corporate Governance Guidelines, our Director Independence Standards, the Code of Business Conduct and Ethics for the Company’s Senior Officers, and the charters for our Audit, Nominating and Corporate Governance, and Executive Compensation Committees. We will provide a copy of any such documents to any stockholder who requests it. We do not intend for information found on the Company’s website to be part of this document.

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SAFEWAY INC. AND SUBSIDIARIES

Item 1. Business and Item 2. Properties (continued)

Capital Expenditures:

Information appearing under the caption “Capital Expenditure Program” on pages 14 and 15 of the Company’s 2003 Annual Report to Stockholders is incorporated herein by this reference.

Safeway stores opened, remodels completed, acquired stores and stores closed during the last five years were as follows:

	Total Five Years	2003	2002	2001	2000	1999
Stores opened:
New locations	193	22	51	57	31	32
Replacements	159	18	24	38	44	35
	352	40	75	95	75	67
Remodels completed: (Note A)
Expansions	136	7	34	33	29	33
“Four-Wall” remodels	923	68	169	222	246	218
	1,059	75	203	255	275	251
Genuardi’s stores acquired	39	—	—	39	—	—
Randall’s stores acquired	117	—	—	—	—	117
Carrs stores acquired	32	—	—	—	—	32
Stores closed	220	31	40	49	46	54
Total stores at year-end		1,817	1,808	1,773	1,688	1,659

Note A. Defined as store projects (other than maintenance) generally requiring expenditures in excess of $200,000.

Financial Information About Industry Segments:

Note N to the consolidated financial statements, included on page 49 of the Company’s 2003 Annual Report to Stockholders, is incorporated herein by this reference.

Trademarks:

Safeway has invested significantly in the development and protection of the “Safeway” name. The right to use the “Safeway” name is considered to be an important asset. Safeway also owns approximately 400 other trademarks registered or pending in the United States Patent and Trademark Office, including its product line names such as Safeway, Safeway SELECT, Rancher’s Reserve, Lucerne and Mrs. Wright’s, and the marks Pak n’ Save Foods, Vons, Pavilions, Dominick’s, Carrs, Randalls, Tom Thumb and Genuardi’s Family Markets. Each trademark registration is for an initial period of 10 or 20 years, depending on its age, and is renewable for as long as the use of the trademark continues. Safeway considers certain of its trademarks to be of material importance to its business and actively defends and enforces such trademarks. Canada Safeway has also registered certain of its trademarks in Canada.

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SAFEWAY INC. AND SUBSIDIARIES

Item 1. Business and Item 2. Properties (continued)

Working Capital:

At year-end 2003, working capital consisted of $3.5 billion in each of current assets and current liabilities. Normal operating fluctuations in these substantial balances can result in changes to cash flow from operations presented in the consolidated statements of cash flows that are not necessarily indicative of long-term operating trends. There are no unusual industry practices or requirements relating to working capital items.

Competition:

Food retailing is intensely competitive. The number of competitors and the amount of competition experienced by Safeway’s stores varies by market area. The principal competitive factors that affect the Company’s business are location, quality, service, price and consumer loyalty to other brands and stores.

Local, regional and national food chains, as well as independent food stores and markets, comprise the Company’s principal competition. Safeway also faces substantial competition from convenience stores, liquor retailers, membership warehouse clubs, specialty retailers, supercenters, and large-scale drug and pharmaceutical chains. Safeway and its competitors engage in price competition which, from time to time, has adversely affected operating margins in many of the Company’s markets.

Raw Materials:

Various agricultural commodities constitute the principal raw materials used by the Company in the manufacture of its food products. Management believes that raw materials for its products are not in short supply, and all are readily available from a wide variety of independent suppliers.

Compliance with Environmental Laws:

The Company’s compliance with the federal, state, and local provisions which have been enacted or adopted regulating the discharge of materials into the environment or otherwise related to the protection of the environment has not had and is not expected to have a material adverse effect upon the financial position or results of operations of the Company.

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SAFEWAY INC. AND SUBSIDIARIES

Item 1. Business and Item 2. Properties (continued)

Employees:

At year-end 2003, Safeway had more than 208,000 full and part-time employees. Approximately 69% of Safeway’s employees in the United States and Canada are covered by collective bargaining agreements negotiated with local unions affiliated with one of 12 different international unions. There are approximately 400 such agreements, typically having three-year terms, with some agreements having terms of up to five years. Accordingly, Safeway renegotiates a significant number of these agreements every year.

During 2004, collective bargaining agreements covering employees in the Company’s stores in northern California, Colorado, Hawaii, Maryland, Nevada, Washington, Washington DC and Manitoba come up for renewal. In addition, certain collective bargaining agreements covering Dominick’s employees expired in 2003 and certain collective bargaining agreements in Arizona are on an indefinite extension.

Other Labor Matters:

On October 11, 2003, seven UFCW local unions struck the Company’s 289 stores in southern California. Safeway estimates the overall cost of the strike reduced 2003 earnings by $167.5 million before taxes ($0.23 per share). An agreement ending the strike was reached on February 26, 2004 and was ratified by the unions on February 28, 2004. Employees returned to work beginning March 5, 2004. Additional information concerning the strike is set forth under the caption “Strike Impact” on page 19 of the Company’s 2003 Annual Report to Stockholders and is incorporated herein by this reference.

Financial Information About Foreign and Domestic Operations and Export Sales:

Note N to the consolidated financial statements, included on page 49 of the Company’s 2003 Annual Report to Stockholders and incorporated herein by this reference, contains financial information by geographic area.

Item 3. Legal Proceedings

Information about legal proceedings appearing under the captions “Legal Matters” and “Furr’s and Homeland Charge” as reported in Note L to the consolidated financial statements on pages 48 and 49 of the Company’s 2003 Annual Report to Stockholders is incorporated herein by this reference.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of the stockholders during the fourth quarter of 2003.

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SAFEWAY INC. AND SUBSIDIARIES

PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

The Company’s common stock, $0.01 par value, is listed on the New York Stock Exchange. Information as to quarterly sales prices for the Company’s common stock appears in Note Q to the consolidated financial statements on page 51 of the Company’s 2003 Annual Report to Stockholders and is incorporated herein by this reference. There were 20,559 stockholders of record as of March 12, 2004; however, approximately 97% of the Company’s outstanding stock is held in “street name” by depositories or nominees on behalf of beneficial holders. The price per share of common stock, as reported on the New York Stock Exchange Composite Tape, was $20.45 at the close of business on March 12, 2004.

Holders of common stock are entitled to receive dividends if, as, and when declared by the Board of Directors out of funds legally available therefor, subject to the dividend and liquidation rights of any preferred stock that may be issued. The Company has not paid dividends on common stock through 2003 and has no current plans for dividend payments.

During the 2003 fiscal year, 305,640 shares of Safeway common stock were sold to participants under the Safeway 401(k) Savings Plan (formerly named “The Vons Companies, Inc. 401(k) Savings Plan”) for an aggregate price of $6.1 million. These shares were purchased by the Plan’s trustee on the open market. Such shares, and interests in the Plan, were not registered under the Securities Act. The Plan covers only those employees of The Vons Companies, Inc. who were eligible to participate as of July 1, 1998.

Item 6. Selected Financial Data

The “Five-Year Summary Financial Information” included on pages 16 and 17 of the Company’s 2003 Annual Report to Stockholders is incorporated herein by this reference. The Five-Year Summary should be read in conjunction with the Company’s consolidated financial statements and accompanying notes incorporated by reference in Item 8, consolidated financial statements.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Information appearing under the caption “Financial Review” on pages 18 through 26 and under the captions “Capital Expenditure Program” and “Market Risk from Financial Instruments” on pages 14 and 15 of the Company’s 2003 Annual Report to Stockholders is incorporated herein by this reference.

Information regarding the terms of outstanding indebtedness appearing in Note D to the consolidated financial statements on pages 39 and 40 of the Company’s 2003 Annual Report to Stockholders is incorporated herein by this reference.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Information appearing under the caption “Market Risk from Financial Instruments” on page 15 of the Company’s 2003 Annual Report to Stockholders is incorporated herein by this reference.

Item 8. Consolidated Financial Statements

Pages 27 through 53 of the Company’s 2003 Annual Report to Stockholders, which include the consolidated financial statements and the Independent Auditors’ Report as listed in Item 15(a)1 below, are incorporated herein by this reference.

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SAFEWAY INC. AND SUBSIDIARIES

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

Item 9A. Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its President and Chief Executive Officer and Principal Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures which, by their nature, can provide only reasonable assurance regarding management’s control objectives. Management, including the Company’s President and Chief Executive Officer along with the Company’s Principal Financial Officer, concluded that the Company’s disclosure controls and procedures are effective in reaching the level of reasonable assurance regarding management’s control objectives. The Company also has investments in certain unconsolidated entities, including Casa Ley. As the Company does not control or manage these entities, its disclosure controls and procedures with respect to such entities are necessarily more limited than those it maintains with respect to its consolidated subsidiaries.

The Company has carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s President and Chief Executive Officer along with the Company’s Principal Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon the foregoing, as of January 3, 2004, the Company’s President and Chief Executive Officer along with the Company’s Principal Financial Officer, or persons performing similar functions, concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s Exchange Act reports. There has been no change during the Company’s fiscal quarter ended January 3, 2004 in the Company’s internal control over financial reporting that was identified in connection with the foregoing evaluation which has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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SAFEWAY INC. AND SUBSIDIARIES

PART III

Item 10. Directors and Executive Officers of the Registrant

Directors of the Company. Information on the nominees for election as Directors and the continuing Directors of the Company is incorporated by reference from the Company’s definitive proxy statement for the 2004 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act no later than 120 days after the end of the Company’s 2003 fiscal year.

Executive Officers of the Company. The names and ages of the current executive officers of the Company and their positions as of March 12, 2004, are set forth below. Unless otherwise indicated, each of the executive officers served in various managerial capacities with the Company over the past five years. None of the executive officers named below is related to any other executive officer or director by blood, marriage or adoption. Officers serve at the discretion of the Board of Directors.

Name and all Positions with the Company Held at March 12, 2004		Year First Elected
	Age	Officer	Present Office
Steven A. Burd Chairman, President and Chief Executive Officer	54	1992	1993
Bruce L. Everette (1) Executive Vice President	52	1991	2001
Larree M. Renda Executive Vice President Retail Operations, Human Resources, Public Affairs, Labor and Government Relations, Reengineering and Communications	45	1991	1999
David F. Bond (2) Senior Vice President Finance and Control (Principal Financial Officer and Principal Accounting Officer)	50	1997	1997
David T. Ching Senior Vice President and Chief Information Officer	51	1994	1994
Dick W. Gonzales (3) Senior Vice President Human Resources	57	1998	1998
Robert A. Gordon (4) Senior Vice President and General Counsel	52	2000	2000
Rojon D. Hasker (5) Senior Vice President Marketing and Merchandising	47	2000	2002
Kenneth M. Shachmut Senior Vice President Corporate Reengineering and Marketing Analysis	55	1994	1999

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SAFEWAY INC. AND SUBSIDIARIES

Executive Officers of the Company (continued)

Name and all Positions with the Company Held at March 12, 2004		Year First Elected
	Age	Officer	Present Office
David R. Stern (6) Senior Vice President Planning and Business Development	49	1994	2002
Jerry Tidwell (7) Senior Vice President Supply Operations	52	2001	2003
Donald P. Wright Senior Vice President Real Estate and Engineering	51	1991	1991

(1) Mr. Everette held the positions of President, Northern California Division, and Division Manager, Northern California Division, at Safeway Inc. from 1998 to 2001, and President, Phoenix Division, from 1995 to 1998. Mr. Everette was the Vice President of Retail Operations at the Phoenix Division from 1991 to 1995.

(2) Mr. Bond was a partner at the accounting firm of Deloitte & Touche LLP from 1988 to 1997.

(3) Mr. Gonzales held the positions of Group Vice President, Human Resources and Senior Vice President, Human Resources at The Vons Companies, Inc. from 1993 to 1998.

(4) Mr. Gordon was previously a partner in the law firm of Pillsbury Winthrop LLP.

(5) Ms. Hasker held the position of Retail Operations Manager in the Phoenix Division of Safeway Inc. from 1997 to 2000. She was named Vice President and Marketing Operations Manager of the Phoenix Division in January 2000 and later that year, she was promoted to Phoenix Division President.

(6) Mr. Stern held the position of Vice President, Financial Planning and Analysis, at Safeway Inc. from December 19, 1994 until his election as Senior Vice President in April 2002.

(7) Mr. Tidwell held the position of Vice President of Milk and Beverage Manufacturing from 2001 to 2003, director of grocery business unit from 2000 to 2001, and director of beverage business unit from 1998 to 2000.

Audit Committee Financial Expert. This information is incorporated by reference from the Company’s definitive proxy statement for the 2004 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act no later than 120 days after the end of the Company’s 2003 fiscal year.

Identification of the Audit Committee. This information is incorporated by reference from the Company’s definitive proxy statement for the 2004 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act no later than 120 days after the end of the Company’s 2003 fiscal year.

Section 16(a) Beneficial Ownership. The information called for is incorporated by reference from the Company’s definitive proxy statement for the 2004 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act no later than 120 days after the end of the Company’s 2003 fiscal year.

Code of Ethics. The Company has adopted a Code of Business Conduct and Ethics for Senior Officers, which is posted on the Company’s website at www.safeway.com/investor_relations. The Code applies to the Company’s principal executive officer, principal financial officer, principal accounting officer, controller and other persons who perform similar functions for the Company.

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SAFEWAY INC. AND SUBSIDIARIES

Item 11. Executive Compensation

The information called for by Item 11 is incorporated by reference from the Company’s definitive proxy statement for the 2004 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act no later than 120 days after the end of the Company’s 2003 fiscal year. Information appearing under the captions “Report of the Compensation Committee; Report of the Section 162(m) subcommittee”; “Report of the Audit Committee” and “Stock Performance Graph” to be included in the Company’s 2004 Proxy Statement is not incorporated herein by this reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information called for by Item 12 is incorporated by reference from the Company’s definitive proxy statement for the 2004 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act no later than 120 days after the end of the Company’s 2003 fiscal year.

Item 13. Certain Relationships and Related Transactions

Note K to the consolidated financial statements, included on pages 47 and 48 of the Company’s 2003 Annual Report to Stockholders, is incorporated herein by this reference. The information called for by Item 13 is incorporated by reference from the Company’s definitive proxy statement for the 2004 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act no later than 120 days after the end of the Company’s 2003 fiscal year.

Item 14. Principal Accountant Fees and Services

The information called for by Item 14 is incorporated by reference from the Company’s definitive proxy statement for the 2004 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act no later than 120 days after the end of the Company’s 2003 fiscal year.

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SAFEWAY INC. AND SUBSIDIARIES

PART IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a) The following documents are filed as a part of this report:

1. Consolidated Financial Statements of the Company are incorporated by reference in PART II, Item 8:

Consolidated Statements of Operations for fiscal 2003, 2002, and 2001.

Consolidated Balance Sheets as of the end of fiscal 2003 and 2002.

Consolidated Statements of Cash Flows for fiscal 2003, 2002, and 2001.

Consolidated Statements of Stockholders’ Equity for fiscal 2003, 2002, and 2001.

Notes to Consolidated Financial Statements.

Independent Auditors’ Report.

2. Consolidated Financial Statement Schedules:

None required.

3. The following exhibits are filed as part of this report:

Exhibit 2.1	Agreement and Plan of Merger, dated as of July 22, 1999, among Safeway Inc., SI Merger Sub, Inc. and Randall’s Food Markets Inc. (incorporated by reference to Exhibit 2 to the Registrant’s Form 8-K dated August 3, 1999).
Exhibit 2.2	Agreement and Plan of Merger dated as of August 6, 1998 among Carr-Gottstein Foods Co., Safeway Inc. and ACG Merger Sub, Inc. and Stockholder Support Agreement dated August 6, 1998 entered into by Green Equity Investors, L.P. for the benefit of Safeway Inc. (incorporated by reference to Exhibit 2.1 of the Registrant’s Form 10-Q for the quarterly period ended September 12, 1998).
Exhibit 2.3	Agreement and Plan of Merger dated as of October 13, 1998, by and among Safeway Inc., Windy City Acquisition Corp. and Dominick’s Supermarkets, Inc. (incorporated by reference to Exhibit (c)(1) to Registrant’s Schedule 14D-1 dated October 19, 1998), and Stockholders Agreement dated as of October 12, 1998 between Safeway Inc., Windy City Acquisition Corp., and each of the stockholders of Dominick’s Supermarkets, Inc. named on the signature pages thereto (incorporated by reference to Exhibit (c)(2) to Registrant’s Schedule 14D-1 dated October 19, 1998).
Exhibit 3.1	Restated Certificate of Incorporation of the Company and Certificate of Amendment of Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 15, 1996) and Certificate of Amendment of Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 20, 1998).
Exhibit 3.2	Form of By-laws of the Company as amended and restated (incorporated by reference to Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 9, 2000).

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SAFEWAY INC. AND SUBSIDIARIES

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (continued)

Exhibit 4(i).1	Specimen Common Stock Certificate (incorporated by reference to Exhibit 4(i).2 to Registration Statement No. 33-33388).
Exhibit 4(i).2	Registration Rights Agreement dated November 25, 1986 between the Company and certain limited partnerships (incorporated by reference to Exhibit 4(i).4 to Registration Statement No. 33-33388) and Amendment to the Registration Rights Agreement dated as of July 22, 1999 by and between the Company, certain limited partnerships and RFM Acquisition LLC (incorporated by reference to Exhibit 4.5 to Registration Statement No. 333-84749).
Exhibit 4(i).3	Indenture dated as of September 1, 1992 between the Company and The Chase Manhattan Bank (National Association), as Trustee, relating to the Company’s Debt Securities (incorporated by reference to Exhibit 4.1 of Registrant’s Form 8-K dated September 16, 1992), as supplemented by the Supplemental Indenture dated as of September 4, 1997 (incorporated by reference to Exhibit 4(i).9 to Registrant’s Form 10-K for the year ended January 3, 1998).
Exhibit 4(i).4	Form of Officers’ Certificate relating to the Company’s Fixed Rate Medium-Term Notes and the Company’s Floating Rate Medium-Term Notes, form of Fixed Rate Note and form of Floating Rate Note (incorporated by reference to Exhibits 4.2, 4.3 and 4.4 of Registrant’s Form 8-K dated September 16, 1992).
Exhibit 4(i).5	Common Stock Purchase Warrants to purchase shares of Safeway Inc. common stock (incorporated by reference to Exhibit 4(i).13 to Registrant’s Form 10-K for the year ended January 3, 1998) and Amendment to Safeway Inc. Common Stock Purchase Warrant dated as of January 29, 1999 (incorporated by reference to Exhibit A to Registrant’s Form 8-K dated February 11, 1999).
Exhibit 4(i).6	Credit Agreement dated as of May 24, 2001 among Safeway Inc. and Canada Safeway Limited as Borrowers; Deutsche Bank Alex. Brown Inc. and J.P. Morgan Securities Inc. as Co-Arrangers; The Bank of Nova Scotia as Administrative Agent; Deutsche Bank AG New York Branch, The Chase Manhattan Bank, Bank of America, NA and Citicorp USA, Inc. as Co-Syndication Agents, US Bank National Association as Documentation Agent; the agents listed therein as Agents; and the lenders listed therein as Lenders. (incorporated by reference to Exhibit 4(i).1 of the Registrant’s Form 10-Q for the quarterly period ended June 16, 2001).
Exhibit 4(i).7	Indenture, dated as of September 10, 1997, between Safeway Inc. and The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.1 to Registrant’s Form 8-K dated September 10, 1997).
Exhibit 4(i).8	Form of Officers’ Certificate establishing the terms of the Registrant’s 6.85% Senior Notes due 2004, the Registrant’s 7.00% Senior Notes due 2007 and the Company’s 7.45% Senior Debentures due 2027, including the forms of Notes (incorporated by reference to Exhibits 4.2, 4.3, 4.4, 4.5 and 4.6 to Registrant’s Form 8-K dated September 10, 1997).

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SAFEWAY INC. AND SUBSIDIARIES

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (continued)

Exhibit 4(i).9	Form of Officers’ Certificate establishing the terms of the Registrant’s 6.05% Notes due 2003 and 6.50% Notes due 2008, including forms of Notes (incorporated by reference to Exhibits 4.2, 4.5 and 4.6 to Registrant’s Form 8-K dated November 9, 1998).
Exhibit 4(i).10	Form of Officers’ Certificate establishing terms of the Registrant’s 7.25% Notes due 2004 and 7.5% Notes due 2009, including the forms of Notes (incorporated by reference to Exhibits 4.2, 4.4, 4.5 and 4.6 to Registrant’s Form 8-K dated September 14, 1999).
Exhibit 4(i).11	Form of Officers’ Certificate establishing terms of the Registrant’s 7.25% Debentures due 2031, including the forms of Notes (incorporated by reference to Exhibits 4.2, 4.3, 4.4, 4.5 and 4.6 to Registrant’s Form 8-K dated January 31, 2001).
Exhibit 4(i).12	Form of Officers’ Certificate establishing terms of the Registrant’s 6.15% Notes due 2006 and 6.50% Notes due 2011, including the forms of Notes (incorporated by reference to Exhibits 4.2, 4.3, 4.4, 4.5 and 4.6 to Registrant’s Form 8-K dated March 5, 2001).
Exhibit 4(i).13	Form of Officers’ Certificate establishing terms of the Registrant’s 4.80% Notes due 2007, including the forms of Notes (incorporated by reference to Exhibits 4.2, 4.3, 4.4, 4.5 and 4.6 to Registrant’s Form 8-K dated July 16, 2002).
Exhibit 4(i).14	Form of Officers’ Certificate establishing terms of the Registrant’s 3.80% Notes due 2005 and 5.80% Notes due 2012, including the forms of Notes (incorporated by reference to Exhibits 4.2, 4.3, 4.4, 4.5 and 4.6 to Registrant’s Form 8-K dated August 13, 2002).
Exhibit 4(i).15	Form of Officers’ Certificate establishing terms of the Registrant’s Floating Rate Notes due 2005, 2.50% Notes due 2005, and 4.125% Notes due 2008 including the forms of Notes (incorporated by reference to Exhibits 4.2, 4.3, 4.4 and 4.5 to Registrant’s Form 8-K dated October 29, 2003).
Exhibit 4(iii)	Registrant agrees to provide the Securities and Exchange Commission, upon request, with copies of instruments defining the rights of holders of long-term debt of the Registrant and all of its subsidiaries for which consolidated financial statements are required to be filed with the Securities and Exchange Commission.
Exhibit 10(iii).1*	1999 Amended and Restated Equity Participation Plan of Safeway Inc. (incorporated by reference to Exhibit 10(iii).1 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ending June 19, 1999), and Amendment to the 1999 Amended and Restated Equity Participation Plan (incorporated by reference to Exhibit 4.3 to the Registrant’s Registration Statement on Form S-8 (333-112976)).
Exhibit 10(iii).2*	Share Appreciation Rights Plan of Canada Safeway Limited (incorporated by reference to Exhibit 10(iii).17 to Registrant’s Form 10-K for the year ended December 29, 1990) and Amendment No. 1 thereto dated December 13, 1991 (incorporated by reference to Exhibit 10(iii).17 to Registrant’s Form 10-K for the year ended December 28, 1991).
Exhibit 10(iii).3*	Share Appreciation Rights Plan of Lucerne Foods Ltd. (incorporated by reference to Exhibit 10(iii).18 to Registrant’s Form 10-K for the year ended December 29, 1990) and Amendment No. 1 thereto dated December 13, 1991 (incorporated by reference to Exhibit 10(iii).18 to Registrant’s Form 10-K for the year ended December 28, 1991).

* Management contract, or compensatory plan or arrangement.

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SAFEWAY INC. AND SUBSIDIARIES

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (continued)

Exhibit 10(iii).4*	Amended and Restated 1997 Stock Purchase and Option Plan for Key Employees for Randall’s Food Markets, Inc. and Subsidiaries (incorporated by reference to Exhibit 4.3 to Randall’s Food Markets, Inc.’s Registration Statement on Form S-8 dated January 19, 1999).
Exhibit 10(iii).5*	Randall’s Food Markets, Inc. Stock Option Plan and Restricted Stock Plan (incorporated by reference to Exhibit 4.2 of Registration Statement 333-84749).
Exhibit 10(iii).6*	Amendment dated September 11, 1999 to the Randall’s Food Markets, Inc. Stock Option and Restricted Stock and the Amended and Restated 1997 Stock Purchase and Option Plan for Randall’s Food Markets, Inc. and Subsidiaries (incorporated by reference to Exhibit 4.3 of Registration Statement 333-84749).
Exhibit 10(iii).7*	The 1996 Equity Participation Plan of Dominick’s Supermarkets, Inc. (incorporated by reference to Exhibit 10.13 to Dominick’s Supermarkets, Inc.’s Form 10-K for the year ended November 1, 1996).
Exhibit 10(iii).8*	The 1995 Amended and Restated Stock Option Plan of Dominick’s Supermarkets, Inc. (incorporated by reference to Exhibit 10.12 to Dominick’s Supermarkets, Inc.’s Form 10-K for the year ended November 1, 1996).
Exhibit 10(iii).9*	Form of Amendment to Stock Option Agreements under The 1996 Equity Participation Plan of Dominick’s Supermarkets, Inc., and the 1995 Amended and Restated Stock Option Plan of Dominick’s Supermarkets, Inc. (incorporated by reference to Exhibit 4.5 to Registrant’s Registration on Form S-8 No. 333-67575 dated November 19, 1998).
Exhibit 10(iii).10*	The 2001 Amended and Restated Operating Performance Bonus Plan for Executive Officers of Safeway Inc. (incorporated by reference to Exhibit 10(ii).10 of Registrant’s Form 10-K for the year ended December 30, 2000).
Exhibit 10(iii).11*	Capital Performance Bonus Plan for Executive Officers of Safeway Inc. (incorporated by reference to Exhibit 10(iii).8 of Registrant’s Form 10-K for the year ended January 2, 1998).
Exhibit 10(iii).12*	Retirement Restoration Plan of Safeway Inc. (incorporated by reference to Exhibit 10(iii).11 to Registrant’s Form 10-K for the year ended January 1, 1994).
Exhibit 10(iii).13*	Deferred Compensation Plan for Safeway Directors (incorporated by reference to Exhibit 10(iii).11 of Registrant’s Form 10-K for the year ended December 31, 1994).
Exhibit 10(iii).14*	Form of stock option agreement for former directors of The Vons Companies, Inc. (incorporated by reference to Exhibit 10(iii).12 of Registrant’s Form 10-K for the year ended December 28, 1996).
Exhibit 10(iii).15*	The Vons Companies, Inc. Management Stock Option Plan (incorporated by reference to Exhibit 10.3 to The Vons Companies, Inc. Annual Report on Form 10-K for the twenty-seven weeks ended January 3, 1988).
Exhibit 10(iii).16*	The Vons Companies, Inc. 1990 Stock Option and Restricted Stock Plan (incorporated by reference to Appendix A to The Vons Companies, Inc. Proxy Statement for its May 17, 1990 Annual Meeting of Shareholders).

* Management contract, or compensatory plan or arrangement.

15

SAFEWAY INC. AND SUBSIDIARIES

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (continued)

Exhibit 10(iii).17*	Amendment, dated February 17, 1993, to The Vons Companies, Inc. 1990 Stock Option and Restricted Stock Plan (incorporated by reference to Exhibit 10.13.1 to The Vons Companies, Inc. Form 10-Q for the quarterly period ended March 28, 1993).
Exhibit 10(iii).18*	Safeway Executive Deferred Compensation Plan and Deferral Election Form (incorporated by reference to Exhibit 10(iii).18 to the Registrant’s Form 10-K for the year ended January 1, 2000).
Exhibit 10(iii).19*	Canada Safeway Limited Executive Deferred Compensation Plan and Deferral Election Form (incorporated by reference to Exhibit 10(iii).19 to the Registrant’s Form 10-K for the year ended January 1, 2000).
Exhibit 10(iii).20*	Safeway Inc. Stock Option Gain Deferred Compensation Plan and Deferral Election Form (incorporated by reference to Exhibit 10(iii).20 to the Registrant’s Form 10-K for the year ended January 1, 2000).
Exhibit 10(iii).21*	Amendment, effective as of December 13, 1996, to The Vons Companies, Inc. 1990 Stock Option and Restricted Stock Plan (incorporated by reference to Exhibit 10.7.2 to The Vons Companies, Inc. Form 10-K for the fiscal year ended December 29, 1996).
Exhibit 10(iii).22*	Form of Amendments, dated April 8, 1997, to The Vons Companies, Inc. Management Stock Option Plan and The Vons Companies, Inc. 1990 Stock Option and Restricted Stock Plan (incorporated by reference to Exhibit 4.5 to Registrant’s Form S-4 filed on March 5, 1997).
Exhibit 10(iii).23*	Employment Agreement made and entered into as of August 14, 2000 by and between Safeway Inc. and Vasant Prabhu. (incorporated by reference to Exhibit 10(iii).23 of Registrant’s Form 10-K for the year ended December 30, 2000).
Exhibit 10(iii).24*	Separation Agreement between Safeway Inc. and Richard W. Dreiling, effective January 5, 2003 (incorporated by reference to Exhibit 10(iii).24 to the Registrant’s Form 10-K for the year ended December 28, 2002).
Exhibit 10(iii).25*	Separation Agreement between Safeway Inc. and Vasant M. Prabhu, effective December 31, 2003.
Exhibit 10(iii).26*	The 2002 Equity Incentive Plan of Safeway Inc. (incorporated by reference to Exhibit 4.1 of Registrant’s Registration Statement No. 333-98103 on Form S-8 dated August 14, 2002).
Exhibit 11.1	Computation of Earnings per Share (incorporated by reference to page 50 of the Company’s 2003 Annual Report to Stockholders).
Exhibit 12.1	Computation of Ratio of Earnings to Fixed Charges.
Exhibit 13.1	Registrant’s 2003 Annual Report to Stockholders (considered filed to the extent specified in Item 1, Item 2, Item 3, Item 5, Item 6, Item 7, Item 7A, Item 8, Item 13 and Item 15 above).

* Management contract, or compensatory plan or arrangement.

16

SAFEWAY INC. AND SUBSIDIARIES

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (continued)

Exhibit 21.1	Schedule of Subsidiaries.
Exhibit 23.1	Independent Auditors’ Consent.
Exhibit 31	Rule 13(a)-14(a)/15d-14(a) Certifications.
Exhibit 32	Section 1350 Certifications.

(b) Reports on Form 8-K:

On December 5, 2003, the Company filed a current report on Form 8-K under “Item 7. Financial Statements and Exhibits” and “Item 9. Regulation FD Disclosure (Information provided under Item 12. Results of Operations and Financial Condition).”

On December 4, 2003, the Company filed a current report on Form 8-K under “Item 7. Financial Statements and Exhibits” and “Item 9. Regulation FD Disclosure (Information provided under Item 12. Results of Operations and Financial Condition).”

On November 5, 2003, the Company filed a current report on Form 8-K under “Item 5. Other Events” and “Item 7. Financial Statements and Exhibits.”

On October 29, 2003, the Company filed a current report on Form 8-K under “Item 5. Other Events” and “Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.”

On October 16, 2003, the Company filed a current report on Form 8-K under “Item 7. Financial Statements and Exhibits” and “Item 12. Results of Operations and Financial Condition.”

17

SAFEWAY INC. AND SUBSIDIARIES

Signatures

Pursuant to the requirements of Section 13 or 15(d) 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.

SAFEWAY INC.
By:	/s/    Steven A. Burd	Date: March 18, 2004
	Steven A. Burd Chairman, President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

By:	/s/    David F. Bond	Date: March 18, 2004
	Senior Vice President, Finance and Control (Principal Financial and Accounting Officer)

Director	Date
/s/    Steven A. Burd Steven A. Burd	March 18, 2004
/s/    James H. Greene, Jr. James H. Greene, Jr.	March 18, 2004
/s/    Paul Hazen Paul Hazen	March 18, 2004
/s/    Hector Ley Lopez Hector Ley Lopez	March 18, 2004
Robert I. MacDonnell	March     , 2004
/s/    Peter A. Magowan Peter A. Magowan	March 18, 2004
George R. Roberts	March     , 2004
/s/    Rebecca A. Stirn Rebecca A. Stirn	March 18, 2004
William Y. Tauscher	March     , 2004

18

SAFEWAY INC. AND SUBSIDIARIES

Exhibit Index

LIST OF EXHIBITS FILED WITH FORM 10-K FOR THE PERIOD

ENDED January 3, 2004

Exhibit 10(iii).25	Separation Agreement between Safeway Inc. and Vasant M. Prabhu, effective December 31, 2003.
Exhibit 12.1	Computation of Ratio of Earnings to Fixed Charges.
Exhibit 13.1	Registrant’s 2003 Annual Report to Stockholders (considered filed to the extent specified in Item 1, Item 2, Item 3, Item 5, Item 6, Item 7, Item 7A, Item 8, Item 13 and Item 15 above).
Exhibit 21.1	Schedule of Subsidiaries.
Exhibit 23.1	Independent Auditors’ Consent.
Exhibit 31	Rule 13(a)-14(a)/15d-14(a) Certifications.
Exhibit 32	Section 1350 Certifications.

EX-10.(III)25

Exhibit 10(iii).25

SEPARATION AGREEMENT

PRABHU, as used herein, refers to Vasant M. Prabhu, and his marital community, heirs, executors, administrators and assigns.

SAFEWAY, as used herein, refers to Safeway Inc., and its successors and assigns, subsidiaries, divisions, directors, officers, managers, agents and employees, and each of them.

WHEREAS Prabhu and Safeway desire to terminate their employment relationship on mutually agreeable terms, as set forth in this Separation Agreement (“Agreement”); and

WHEREAS Safeway desires to acknowledge Prabhu’s contributions to the company during the course of his employment; and

WHEREAS Prabhu desires to compromise, settle and fully release any and all claims which he may have against Safeway related in any way to his employment with Safeway, any term or condition of that employment, or the termination of that employment;

NOW THEREFORE, Prabhu and Safeway freely and voluntarily enter into and execute this Agreement in consideration of the following terms and conditions:

1. Resignation. Prabhu agrees to, and hereby does, resign his employment with and his position as an officer of Safeway effective December 31, 2003 (“Resignation Date”).

2. Release of Claims. Prabhu hereby releases and forever discharges Safeway of and from any and all claims, demands, actions, causes of action, damages and liabilities (all hereinafter referred to as “claims”), whether or not now known, suspected or claimed, which Prabhu ever had, now has, or may hereafter claim to have had against Safeway, relating in any way to his employment with Safeway, his Employment Agreement dated August 14, 2000 (“Employment Agreement”), or any status, term or condition of such employment or the termination of that employment. This release of claims is expressly intended to, and does, extend to and include, but is not limited to, claims under: Title VII of the Civil Rights Act of 1964, as amended; the Equal Pay Act, as amended; the Fair Labor Standards Act, as amended; the Age Discrimination in Employment Act of 1967, as amended; the Americans With Disabilities Act, as amended; the Employee Retirement Income Security Act, as amended; the Older Workers Benefit Protection Act, as amended; the California Fair Employment and Housing Act, as amended; the California Labor Code; and any other federal, state or local statutes, ordinances or regulations prohibiting any form or forms of discrimination in employment and/or relating to the payment of wages and benefits. This release also extends to and includes, but is not limited to, any claims by Prabhu for: breach of any express or implied written or oral contract, including his Employment Agreement; intentional or negligent infliction of emotional distress; impairment or interference with economic

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activities or opportunities; unlawful interference with employment rights; defamation; wrongful termination; wrongful discharge in violation of public policy; breach of any express or implied covenant of good faith and fair dealing; and any and all other common law contract and/or tort claims. This release does not apply to any claim for indemnification under the Delaware General Corporation Law, or Safeway’s certificate of incorporation or bylaws.

3. Covenant Not to Sue. Prabhu covenants and agrees never, individually or with any other person or in any way, voluntarily to commence, aid in any way, prosecute or cause or permit to be commenced or prosecuted against Safeway any action or other proceeding based upon any claim which is covered by this Agreement.

4. Sole Right to Claims. Prabhu represents and warrants that no other person had or has any interest in the claims referred to in this Agreement; that he has the sole right and exclusive authority to execute this Agreement; and that he has not sold, assigned, transferred, conveyed or otherwise disposed of any claim or demand relating to any matter covered by this Agreement.

5. No Admission of Liability. Prabhu acknowledges and understands that the consideration referred to herein is provided without admission or concession by Safeway of any violation of any law or liability to Prabhu; that said consideration satisfies and fully extinguishes any obligations owed to him by Safeway under any prior contract or agreement, and that said consideration provides him with valuable benefits in addition to any to which he already is entitled under Safeway’s employee benefit plans or otherwise.

6. Release of Unknown Claims. Prabhu expressly waives any right or benefit available in any capacity under the provisions of Section 1542 of the California Civil Code, which section provides:

“A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor.”

7. No Other Consideration. Prabhu acknowledges and agrees that no consideration other than as provided for in this Agreement has been or will be paid or furnished by Safeway; that he will make no claim and hereby waives any right he may now have or may hereafter have, based upon any alleged oral alteration, amendment, modification or any other alleged change in this Agreement; and that Prabhu understands and has freely and voluntarily entered into and executed this Agreement.

8. Prabhu’s Rights. Prabhu understands and agrees that:

a. he has a period of twenty-one (21) days to consider this Agreement and determine whether he wishes to execute the same;

2

b. any rights or claims that may arise after the date of this Agreement are not waived by his execution of the Agreement;

c. he is advised carefully to consider the terms of this Agreement and to consult with an attorney of his choice before signing this Agreement;

d. he has a period of seven (7) days after his execution of the Agreement within which he may revoke the Agreement and that the Agreement shall not become effective or enforceable until the seven-day revocation period has expired; and

e. in the event that Prabhu fails timely to execute this Agreement and return the executed original thereof to Safeway, or if Prabhu timely exercises the right of revocation provided for in Paragraph 8(d), above, then Safeway shall be relieved of any and all obligations to Prabhu under this Agreement.

9. Repayment of Loan. Prabhu will pay to Safeway the unpaid portion of the Promissory Note on his Northern California residence, in the amount of $400,000, no later than March 31, 2004.

10. Confidential Information. Prabhu covenants and agrees that, without the express written consent of an executive officer of Safeway, he will not divulge or otherwise disclose any trade secret or other confidential information concerning the business operations, policies or plans of Safeway which he has learned as a result of his employment with Safeway, or may have learned prior thereto, except to the extent that such information is lawfully obtainable from public sources or such use or disclosure is required by applicable laws.

11. Cooperation in Lawsuits. Prabhu covenants and agrees that he will cooperate fully when and as reasonably required by Safeway in the defense or prosecution of any claims, charges, complaints or lawsuits that have been or may hereafter be filed by or against Safeway, in which event Safeway will indemnify Prabhu in the same manner and to the same extent as he if were still employed by Safeway (as provided under the Delaware General Corporation Law, and/or Safeway certificate of incorporation or bylaws). Such cooperation will include, but is not limited to, meeting with Safeway’s counsel and being available for deposition and/or trial testimony upon reasonable notice. Safeway agrees to reimburse Prabhu for reasonable expenses incurred by him in furnishing such cooperation.

12. Non-Disparagement and Non-Solicitation. Prabhu covenants and agrees that for a period of two years after his Resignation Date, he shall not, whether acting for himself or for any third party: (i) disparage the image or reputation of Safeway; (ii) interfere with the contractual relationship between Safeway and any of its vendors or suppliers; or (iii) without the advance written approval of an executive officer of Safeway, employ or solicit for employment any person who is employed by Safeway.

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13. Injunctive Relief. Prabhu understands and agrees that a breach of any of the covenants set forth in paragraphs 3, 10, 11 and 12, above, shall be a material breach of the Agreement, for which Safeway, in addition to any other remedies that may be allowed by law or equity, may, at its sole option: i) immediately cease providing to Prabhu, and seek the recovery of, any of the benefits provided for in this Agreement; and/or ii) seek injunctive relief, damages, attorneys’ fees and costs.

15. Severability. In the event that any term(s) or provision(s) of this Agreement shall, for any reason, be found to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other term or provision of the Agreement, and the parties hereto shall make good faith efforts to substitute one or more valid, legal and enforceable terms which implement the parties’ original purpose and intent.

In consideration of the foregoing, the parties also agree:

A. Compensation. Prabhu’s regular salary shall cease as of his Resignation Date, as defined in Paragraph 1 above. Except as provided in Paragraph E below, Prabhu shall receive the compensation provided for in this paragraph. On or about January 1, 2004, Safeway shall pay to Prabhu a lump sum equal to one-half (six months’ worth) of his current annual base salary, subject to any required tax withholdings and deductions. On or about July 1, 2004, Safeway shall pay Prabhu a lump sum equal to one half (six months’ worth) of his current annual base salary, subject to any required tax withholdings and deductions. Prabhu shall also receive a retention bonus payment of $250,000, to be paid on or about March 31, 2004, subject to any required tax withholdings and deductions. In consideration of services rendered in 2003, Prabhu shall receive the bonus payment, if any, he would have received if he had remained with Safeway until March 2004, based on the bonus amount, if any, actually paid to Safeway executive officers for calendar year 2003, such bonus amount to be paid at the time such bonuses are paid to other Safeway executives and subject to any required tax withholdings and deductions. Except as set forth above, Prabhu shall not be entitled to any other salary or bonus compensation from Safeway.

B. Vacation. Prabhu acknowledges and agrees that the payment to be made on or about January 1, 2004 in accordance with Paragraph A above includes payment for all unused vacation benefits accrued during his Safeway employment.

C. Benefits. Prabhu shall cease participation in all Safeway employee benefit plans as of his Resignation Date, except to the extent of any account balance of his that exists as of the Resignation Date in Safeway’s Deferred Compensation Plan for Executives, in which event his participation in such plan shall cease when he cashes out of this plan . Prabhu’s right to continued group health plan coverage after his Resignation Date shall be governed by COBRA.

4

D. Stock Options. Prabhu’s vesting in stock options shall cease as of his Resignation Date. Pursuant to Safeway’s stock option plan, he shall have until March 31, 2004 to exercise any vested stock options.

E. Termination of Payments. Prabhu’s entitlement to the benefits set forth in Paragraph A is conditioned upon the following: (i) without the express written consent of an executive officer of Safeway, he will not divulge or otherwise disclose any trade secret or other confidential information concerning the business operations, policies or plans of Safeway which he has learned as a result of his employment with Safeway, or may have learned prior thereto, except to the extent that such information is lawfully obtainable from public sources or such use or disclosure is required by applicable laws; (ii) he will not, directly or indirectly, own, manage, operate, join, control or participate in the ownership, management, operation or control, or be connected as a director, officer, employee, partner, consultant or otherwise, with any Competing Food or Drug Retailing Business (as defined below), other than as a shareholder or beneficial owner of 5% or less of the outstanding securities of a Competing Food or Drug Retailing Business that is a public company; and (iii) he will not, whether acting for himself or for any third party: (a) disparage the image or reputation of Safeway; (b) interfere with the contractual relationship between Safeway and any of its vendors or suppliers; or (c) without the advance written approval of an executive officer of Safeway, employ or solicit for employment any person who is employed by Safeway. For purposes of this Agreement, “Competing Food or Drug Retailing Business” shall mean any business, firm or enterprise engaged in a food and drug retailing business substantially similar to that of either Safeway, or any of its subsidiaries, within any geographical location(s) in which Safeway operates. In the event that Prabhu fails to abide by any of these conditions, Safeway, in addition to any other remedies that may be allowed by law or equity, shall have the right to cease providing to Prabhu the benefits set forth in Paragraph A and to recover any payments made to Prabhu pursuant to Paragraph A, except for the bonus (if any) attributable to services rendered in 2003.

F. Employment Agreement. Prabhu’s Employment Agreement, dated August 14, 2000, is hereby terminated and of no further force or effect. The parties shall no longer have any rights or obligations pursuant to that agreement.

G. Entire Agreement. This Agreement constitutes the entire agreement of the parties hereto with respect to the subject matter of the Agreement, and the Agreement supersedes all prior agreements between the parties with respect to the subject matter covered herein, whether written or oral, except as otherwise expressly provided herein.

Dated: November 25, 2003	/s/    Vasant M. Prabhu
	Vasant M. Prabhu

5

Dated: November 25, 2003	Safeway Inc.
	/s/    Robert A. Gordon
	By:	Robert A. Gordon
	Its:	Senior Vice President & General Counsel

6

EX-12.1

Exhibit 12.1

SAFEWAY INC.

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

(Dollars in millions)

	Fiscal Year
	53 Weeks 2003			52 Weeks 2002			52 Weeks 2001			52 Weeks 2000			52 Weeks 1999
Income before income taxes and cumulative effect of accounting change	$	141.1		$	532.3		$	2,095.0		$	1,866.5		$	1,674.0
Add interest expense		442.4			430.8			446.9			457.2			362.2
Add interest on rental expense (a)		258.6			257.6			242.4			218.7			183.0
Add (less) equity in losses (earnings) of unconsolidated affiliates, net		7.1			0.2			(20.2	)		(31.2	)		(34.5	)
(Less) add minority interest in subsidiary		(10.4	)		(5.5	)		—			1.1			5.9
Earnings	$	838.8		$	1,215.4		$	2,764.1		$	2,512.3		$	2,190.6
Interest expense	$	442.4		$	430.8		$	446.9		$	457.2		$	362.2
Add capitalized interest		21.9			31.0			25.7			17.0			9.3
Add interest on rental expense (a)		258.6			257.6			242.4			218.7			183.0
Fixed charges	$	722.9		$	719.4		$	715.0		$	692.9		$	554.5
Ratio of earnings to fixed charges		1.16			1.69			3.87			3.63			3.95

(a) Based on a 10% discount factor on the estimated present value of future operating lease payments.

EX-13.1

Exhibit 13.1

COMPANY IN REVIEW

SAFEWAY INC. AND SUBSIDIARIES

Safeway Inc. (“Safeway” or the “Company”) is one of the largest food and drug retailers in North America, with 1,817 stores at year-end 2003.

The Company’s U.S. retail operations are located principally in California, Oregon, Washington, Alaska, Colorado, Arizona, Texas, the Chicago metropolitan area and the Mid-Atlantic region. The Company’s Canadian retail operations are located principally in British Columbia, Alberta and Manitoba/Saskatchewan. In support of its retail operations, the Company has an extensive network of distribution, manufacturing and food processing facilities.

Safeway also has a 49% interest in Casa Ley, S.A. de C.V. (“Casa Ley”) which operates 108 food and general merchandise stores in Western Mexico.

In addition, the Company has a strategic alliance with and a 53.1% ownership interest in GroceryWorks Holdings, Inc., an Internet grocer.

DOMINICK’S In November 2002, Safeway announced the decision to sell Dominick’s and exit the Chicago market due to labor issues. In November 2003, Safeway announced that it was taking Dominick’s off the market after the winning bidder and the unions representing Dominick’s could not reach an agreement on a labor contract. Accordingly, Dominick’s previously reported losses from discontinued operations have been reclassified to continuing operations and estimated losses on the disposal have been reclassified as an impairment of long-lived assets and goodwill in the Company’s consolidated financial statements. The accompanying notes to the consolidated financial statements and the rest of the financial information included herein have also been adjusted to include Dominick’s.

Dominick’s incurred operating losses and declining sales while held for sale in 2003 and faces substantial hurdles to achieving satisfactory operating profit in the future. These hurdles include a highly competitive market and an unfavorable labor contract. In an effort to improve the performance of Dominick’s, Safeway appointed a new division president in November 2003 and closed 12 under-performing stores in the first quarter of 2004. Dominick’s is operating under a labor contract that expired in 2003 and is currently negotiating a new labor contract.

STORES Safeway’s average store size is approximately 45,000 square feet. Safeway’s primary new store prototype is 55,000 square feet and is designed both to accommodate changing consumer needs and to achieve certain operating efficiencies. The Company determines the size of a new store based on a number of considerations, including the needs of the community the store serves, the location and site plan, and the estimated return on capital invested.

Most stores offer a wide selection of food and general merchandise and feature a variety of specialty departments such as bakery, delicatessen, floral, pharmacy, Starbucks coffee shops and adjacent fuel centers.

Safeway continues to operate a number of smaller stores that also offer an extensive selection of food and general merchandise, and generally include one or more specialty departments. These stores remain an important part of the Company’s store network in smaller communities and certain other locations where larger stores may not be feasible because of space limitations and/or community needs or restrictions.

The following table summarizes Safeway’s stores by size at year-end 2003:

	Number of Stores	Percent of Total
Less than 30,000 square feet	283	16	%
30,000 to 50,000	773	42
More than 50,000	761	42
Total stores	1,817	100	%

STORE OWNERSHIP At year-end 2003, Safeway owned approximately one-third of its stores and leased its remaining stores. In recent years, the Company has preferred to own stores because it provides control and flexibility with respect to financing terms, remodeling, expansions and closures.

MERCHANDISING Safeway’s operating strategy is to provide value to its customers by maintaining high store standards and a wide selection of high quality products at competitive prices. To provide one-stop shopping for today’s busy shoppers, the Company emphasizes high quality produce and meat, and offers many specialty items through its various specialty departments.

Safeway Inc. 2003 Annual Report 13

Safeway is focused on differentiating its offering with quality perishables. The Company is striving to develop a reputation for having the absolute best produce in the market and the most tender and flavorful meat, through the Company’s Rancher’s Reserve Tender Beef offering. To accomplish this initiative, Safeway is introducing a higher standard of merchandising, revisiting product quality and selection and enhancing the in-store environment.

Safeway has developed a line of some 1,369 premium corporate brand products since 1993 under the “Safeway SELECT” banner. The award-winning Safeway SELECT line is designed to offer premium quality products that the Company believes are equal or superior in quality to comparable best-selling nationally advertised brands, or are unique to the category and not available from national brand manufacturers.

The Safeway SELECT line of products includes carbonated soft drinks; unique salsas; bagged salads; whole bean coffees; the Indulgence line of cookies and other sweets; the Verdi line of frozen pizzas, fresh and frozen pastas, pasta sauces and olive oils; Milena’s take & bake pizzas; the Primo Taglio line of meats, cheeses and sandwiches; Signature soups and sandwiches; Artisan fresh-baked breads; NutraBalance pet food; and Ultra laundry detergents and dish soaps. The Safeway SELECT line also includes an extensive array of ice creams, frozen yogurts and sorbets; Healthy Advantage items such as low-fat ice creams, cereals and low-fat cereal bars; and Gourmet Club frozen entrees and hors d’oeuvres.

MANUFACTURING AND WHOLESALE The principal function of manufacturing operations is to purchase, manufacture and process private label merchandise sold in stores operated by the Company. As measured by sales dollars, approximately 24% of Safeway’s private label merchandise is currently manufactured in Company-owned plants, and the remainder is purchased from third parties.

Safeway’s Canadian subsidiary has a wholesale operation that distributes both national brands and private label products to independent grocery stores and institutional customers.

Safeway operated the following manufacturing and processing facilities at year-end 2003:

	U.S.	Canada
Milk plants	6	3
Bread baking plants	6	2
Ice cream plants	2	2
Cheese and meat packaging plants	—	2
Soft drink bottling plants	4	—
Fruit and vegetable processing plants	1	3
Other food processing plants	2	—
Pet food plant	1	—
Total	22	12

In addition, the Company operates laboratory facilities for quality assurance and research and development in certain of its plants and at its corporate offices.

DISTRIBUTION Each of Safeway’s 12 retail operating areas is served by a regional distribution center consisting of one or more facilities. Safeway has 17 distribution/warehousing centers (13 in the United States and four in Canada), which collectively provide the majority of all products to Safeway stores. The Company’s distribution centers in Maryland, Alberta and British Columbia are operated by third parties.

Capital Expenditure Program

A key component of the Safeway’s long-term strategy is its capital expenditure program. The Company’s capital expenditure program funds, among other things, new stores, remodels, manufacturing plants, distribution facilities and information technology advances. Over the last several years, Safeway management has continued to strengthen its program to select and approve new capital investments.

14 Safeway Inc. 2003 Annual Report

The table below presents the Company’s cash capital expenditures and details changes in the Company’s store base over the last three years:

(Dollars in millions)	2003			2002			2001
Cash capital expenditures (Note 1)	$	935.8		$	1,467.4		$	1,793.0
Cash capital expenditures as a percentage of sales		2.6	%		4.2	%		5.2	%
Stores opened (Note 1)		40			75			95
Stores closed		31			40			49
Remodels (Note 2)		75			203			255
Total retail square footage at year end (in millions)		82.6			81.5			78.8
Number of fuel stations at year end		270			214			152

Note 1: Excludes acquisitions. Includes 11 former ABCO stores purchased in 2001.

Note 2: Defined as store remodel projects (other than maintenance) generally requiring expenditures in excess of $200,000.

Capital expenditures were gradually scaled back in 2003 and 2002 as the economy softened. In 2004, Safeway expects to spend between $1.2 billion and $1.4 billion in cash capital expenditures and open approximately 45 stores and complete between 160 to 165 remodels.

Performance-Based Compensation

The Company has performance-based compensation plans that cover more than 21,000 management and professional employees. Performance-based compensation plans set overall bonus levels based upon both operating results and working capital management. Individual bonuses are based on job performance. Certain employees are covered by capital investment bonus plans that measure the performance of capital projects based on operating performance over several years, and other employees are covered by supply division results.

Market Risk from Financial Instruments

Safeway manages interest rate risk through the strategic use of fixed and variable interest rate debt and, from time to time, interest rate swaps. As of year-end 2003, the Company had effectively converted $300 million of its fixed-rate debt to floating-rate debt through an interest rate swap agreement. Under the swap agreement, Safeway pays a variable interest rate based on LIBOR and receives 4.125% interest on a $300 million notional amount.

The Company does not utilize financial instruments for trading or other speculative purposes, nor does it utilize leveraged financial instruments. The Company does not consider the potential declines in future earnings, fair values and cash flows from reasonably possible near-term changes in interest rates and exchange rates to be material.

The table below presents principal amounts and related weighted average rates by year of maturity for the Company’s debt obligations (excluding capital lease obligations) at year-end 2003:

(Dollars in millions)	2004			2005			2006			2007			2008			Thereafter			Total			Fair value
Commercial paper:
Principal		—			—		$	1,210.6			—			—			—		$	1,210.6		$	1,210.6
Weighted average interest rate		—			—			1.18	%		—			—			—			1.18	%
Long–term debt:(1)
Principal	$	699.5		$	583.4		$	711.9		$	785.1		$	553.5		$	2,559.5		$	5,892.9		$	6,251.6
Weighted average interest rate		7.41	%		2.83	%		6.13	%		5.78	%		5.21	%		6.71	%		6.08	%

⁽¹⁾ Primarily fixed-rate debt

Safeway Inc. 2003 Annual Report 15

FIVE-YEAR SUMMARY FINANCIAL INFORMATION

SAFEWAY INC. AND SUBSIDIARIES

(Dollars in millions, except per-share amounts)	53 Weeks 2003			52 Weeks 2002			52 Weeks 2001			52 Weeks 2000			52 Weeks 1999
RESULTS OF OPERATIONS
Sales	$	35,552.7		$	34,767.5		$	34,301.0		$	31,976.9		$	28,859.9
Gross profit		10,533.8			10,812.0			10,604.3			9,494.5			8,510.7
Operating and administrative expense		(9,230.8	)		(8,576.4	)		(7,875.1	)		(7,086.6	)		(6,411.4	)
Goodwill impairment charges		(729.1	)		(1,288.0	)		—			—			—
Goodwill amortization		—			—			(140.4	)		(126.2	)		(101.4	)
Operating profit		573.9			947.6			2,588.8			2,281.7			1,997.9
Interest expense		(442.4	)		(430.8	)		(446.9	)		(457.2	)		(362.2	)
Other income (expense), net		9.6			15.5			(46.9	)		42.0			38.3
Income before income taxes and cumulative effect of accounting change		141.1			532.3			2,095.0			1,866.5			1,674.0
Income taxes		(310.9	)		(660.4	)		(841.1	)		(774.6	)		(703.1	)
(Loss) income before cumulative effect of accounting change		(169.8	)		(128.1	)		1,253.9			1,091.9			970.9
Cumulative effect of accounting change		—			(700.0	)		—			—			—
Net (loss) income	$	(169.8	)	$	(828.1	)	$	1,253.9		$	1,091.9		$	970.9
Basic (loss) earnings per share:
(Loss) income before cumulative effect of accounting change	$	(0.38	)	$	(0.27	)	$	2.49		$	2.19		$	1.95
Cumulative effect of accounting change		—			(1.50	)		—			—			—
Net (loss) income	$	(0.38	)	$	(1.77	)	$	2.49		$	2.19		$	1.95
Diluted (loss) earnings per share:
(Loss) income before cumulative effect of accounting change	$	(0.38	)	$	(0.27	)	$	2.44		$	2.13		$	1.88
Cumulative effect of accounting change		—			(1.50	)		—			—			—
Net (loss) income	$	(0.38	)	$	(1.77	)	$	2.44		$	2.13		$	1.88

16 Safeway Inc. 2003 Annual Report

FIVE-YEAR SUMMARY FINANCIAL INFORMATION

SAFEWAY INC. AND SUBSIDIARIES

(Dollars in millions, except per-share amounts)	53 Weeks 2003			52 Weeks 2002			52 Weeks 2001			52 Weeks 2000			52 Weeks 1999
FINANCIAL STATISTICS
Comparable-store sales (decreases) increases (Note 1)		(2.5	%)		(0.7	%)		2.3	%		2.8	%		2.2	%
Identical-store sales (decreases) increases (Note 1)		(2.9	%)		(1.7	%)		1.6	%		2.2	%		1.7	%
Gross profit margin		29.63	%		31.10	%		30.92	%		29.69	%		29.49	%
Operating and administrative expense as a percentage of sales (Note 2)		25.96	%		24.67	%		22.96	%		22.16	%		22.22	%
Operating profit as a percentage of sales		1.6	%		2.7	%		7.5	%		7.1	%		6.9	%
Cash capital expenditures	$	935.8		$	1,467.4		$	1,793.0		$	1,572.5		$	1,333.6
Depreciation		863.6			888.3			797.3			704.5			594.2
Total assets		15,096.7			16,047.2			17,462.6			15,965.2			14,900.3
Total debt		7,822.3			8,435.6			7,399.8			6,495.9			6,956.3
Total stockholders’ equity		3,644.3			3,627.5			5,889.6			5,389.8			4,085.8
Weighted average shares outstanding – basic (in millions)		441.9			467.3			503.3			497.9			498.6
Weighted average shares outstanding – diluted (in millions)		441.9			467.3			513.2			511.6			515.4
OTHER STATISTICS
Genuardi’s stores acquired during the year		—			—			39			—			—
Randall’s stores acquired during the year		—			—			—			—			117
Carrs stores acquired during the year		—			—			—			—			32
Stores opened during the year		40			75			95			75			67
Stores closed during the year		31			40			49			46			54
Total stores at year-end		1,817			1,808			1,773			1,688			1,659
Remodels completed during the year (Note 3)		75			203			255			275			251
Total retail square footage at year-end (in millions)		82.6			81.5			78.8			73.6			70.8

Note 1. Defined as stores operating the same periods in both the current year and the previous year. Comparable stores include replacement stores while identical stores do not. 2003 sales decrease includes the estimated 240 basis-point impact of southern California strike. 2001 and 2000 sales increases include the estimated 50-basis-point impact of the 2000 northern California distribution center strike.

Note 2. Management believes this ratio is relevant because it assists investors in evaluating Safeway’s ability to control costs.

Note 3. Defined as store projects (other than maintenance) generally requiring expenditures in excess of $200,000.

Safeway Inc. 2003 Annual Report 17

FINANCIAL REVIEW

SAFEWAY INC. AND SUBSIDIARIES

Overview

Despite the adverse effects of a prolonged labor dispute in southern California and continued challenges at Dominick’s and Randall’s, Safeway steadily improved overall same-store sales in the Company’s other, non-strike-affected areas in 2003. In an effort to continue this sales momentum, Safeway is currently focused on redesigning its perishable departments, as well as enhancing the Company’s quality specifications and handling techniques for perishables to further differentiate its product offerings. At the same time, Safeway is working towards narrowing the gap in its everyday pricing between the Company and discount operators.

Results of Operations

Safeway’s net (loss) income was a loss of $169.8 million ($0.38 per share) in 2003, a loss of $828.1 million ($1.77 per share) in 2002 and income of $1,253.9 million ($2.44 per share) in 2001. The 2003 and 2002 results were significantly affected by goodwill and asset impairments at Dominick’s and Randall’s, a strike in southern California and other significant charges described below.

DOMINICK’S In the first quarter of 2002, Safeway adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” and recorded a pre-tax goodwill impairment charge of $589.0 million at Dominick’s. In the fourth quarter of 2002, Safeway performed its annual review of goodwill and recorded a pre-tax impairment charge of $583.8 million for Dominick’s. Also in the fourth quarter of 2002, Safeway announced the decision to sell Dominick’s and exit the Chicago market due to labor issues. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” Safeway recorded a pre-tax charge for the impairment of long-lived assets of $201.3 million in the fourth quarter of 2002 to adjust Dominick’s to its estimated fair market value less cost to sell.

In the first 36 weeks of 2003, Safeway reduced the carrying value of Dominick’s by writing down an additional $256.5 million of goodwill and $120.7 million of long-lived assets, based on indications of value received during the sale process. In November 2003, Safeway announced that it was taking Dominick’s off the market after the winning bidder and the unions representing Dominick’s could not reach an agreement on a labor contract. Safeway reclassified Dominick’s from an “asset held for sale” to “assets held and used” and adjusted Dominick’s individual long-lived assets to the lower of cost or fair value. As a result, in the fourth quarter of 2003 Safeway incurred a pre-tax, goodwill impairment charge of $24.9 million and a long-lived asset impairment charge of $190.7 million. As of year-end 2003, there is no goodwill remaining on Safeway’s consolidated balance sheet related to Dominick’s. These impairments reflect declining fair-market value multiples in the retail grocery business in 2002 and declining operating performance at Dominick’s in 2002 and 2003.

As a result of the decision not to sell Dominick’s, previously reported losses from discontinued operations have been reclassified to continuing operations and estimated losses on the disposal of Dominick’s have been reclassified as impairment of long-lived assets and goodwill. Pre-tax long-lived asset and goodwill impairment charges at Dominick’s are summarized below (dollars in millions):

	2003		2002
Cumulative effect of adopting SFAS No. 142 (goodwill impairment)		—	$	589.0
Goodwill impairment	$	281.4		583.8
Impairment of long-lived assets (included in operating and administrative expense)		311.4		201.3

Dominick’s incurred operating losses and declining sales in each of the last three fiscal years and faces substantial hurdles to achieving satisfactory operating profit in the future. These hurdles include a highly competitive market and an unfavorable labor contract. In an effort to improve the performance of Dominick’s, Safeway appointed a new division president in November 2003 and announced the closure of 12 under-performing stores in the first quarter of 2004, which will result in a store-lease exit charge of approximately $50 million to $55 million in the first quarter of 2004. Dominick’s is operating under a labor contract that expired in 2003 and is currently negotiating a new labor contract. Additional store closures may be necessary depending upon the outcome of those negotiations. Safeway believes a more competitive labor contract is vital to Dominick’s future viability.

18 Safeway Inc. 2003 Annual Report

RANDALL’S In the first quarter of 2002, Safeway recorded a pre-tax goodwill impairment charge of $111.0 million at Randall’s when it adopted SFAS No. 142. During the fourth quarter of 2002. Safeway performed its annual review of goodwill and recorded a pre-tax impairment charge at Randall’s of $704.2 million. In the fourth quarter of 2003, Safeway again performed its annual review of goodwill and wrote off the remaining $447.7 million of goodwill at Randall’s. Pre-tax goodwill impairment charges at Randall’s are summarized below (dollars in millions):

	2003		2002
Cumulative effect of adopting SFAS No. 142 (goodwill impairment)		—	$	111.0
Goodwill impairment	$	447.7		704.2

These goodwill impairment charges reflect declining fair-market value multiples in the retail grocery business during 2002 and declining operating performance at Randall’s in 2002 and 2003. Randall’s has been adversely affected by over-storing in Texas where 314 grocery or drug retailers, including 80 supercenters and 20 club stores have opened over the last four years. Retail square footage growth over the last four years has been more than twice the annual population growth. Historically, other markets which were over-stored eventually self-corrected through population growth or as operators left the market. There can be no assurance that the Texas market will experience such a correction and operating conditions in Texas are expected to remain extremely competitive in 2004.

STRIKE IMPACT On October 11, 2003, seven UFCW local unions struck the Company’s 289 stores in southern California. On October 12, 2003, pursuant to the terms of a multi-employer bargaining arrangement, Kroger and Albertson’s locked out certain of their retail union employees in southern California food stores. Safeway estimates the overall cost of the strike reduced 2003 earnings by $167.5 million before taxes ($0.23 per share). Safeway estimated the impact of the strike by comparing internal forecasts immediately before the strike with actual results during the strike, at strike-affected stores. The estimate also includes the Company’s expected benefit under an agreement with Kroger and Albertson’s that arises out of the multi-employer bargaining process in southern California. An agreement ending the strike was reached on February 26, 2004 and was ratified by the unions on February 28, 2004. Employees returned to work beginning March 5, 2004. As a result of this settlement, Safeway is required to make a contribution of approximately $34 million to the union health and welfare trust fund and a contract ratification bonus of approximately $9 million to employees, both of which will be expensed in the first quarter of 2004.

OTHER CHARGES Other significant pre-tax charges (credits) consist of the following (dollars in millions):

	2003		2002			2001
Inventory loss adjustment	$	71.0		—			—
Impairment of miscellaneous equity investments		10.6		—			—
Employee buyouts, severance costs and other related costs		25.5		—			—
Termination of in-store banking agreement		—	$	(32.7	)		—
Lease liability (credits) charges related to Furr’s and Homeland bankruptcy		—		(12.1	)	$	42.7
Future Beef Operations bankruptcy		—		—			51.0
GroceryWorks impairment		—		—			30.1

In 2003, Safeway changed its accounting policy to adjust for the estimated physical inventory losses for the period between the last physical inventory count and the balance sheet date. Safeway also made a change to its physical inventory loss calculation methodology to reflect more precise data from new financial software implemented in 2003. The effect of these changes was recorded in cost of goods sold in 2003. However, most of the adjustment was accumulated over many prior years. These charges reduced earnings by $71.0 million pre-tax ($0.10 per share).

Safeway wrote off miscellaneous equity investments in 2003 totaling $10.6 million pre-tax ($0.01 per share) in other income (expense), after determining they were impaired. Safeway also incurred pre-tax charges totaling $25.5 million ($0.03 per share) in operating and administrative expense for employee buyouts, severance costs and other related costs related to the restructuring of the Company’s administrative offices.

In 2002, Safeway received $32.7 million pre-tax ($0.04 per share) from Canadian Imperial Bank of Commerce for the termination of an in-store banking agreement with Safeway. This credit was recorded in operating and administrative expense.

In 1987, Safeway assigned a number of leases to Furr’s Inc. (“Furr’s”) and Homeland Stores, Inc. (“Homeland”) as part of the sale of the Company’s former El Paso, Texas

Safeway Inc. 2003 Annual Report 19

and Oklahoma City, Oklahoma divisions. Safeway is contingently liable if Furr’s and Homeland are unable to continue making rental payments on these leases. In 2001, Furr’s and Homeland declared bankruptcy and Safeway recorded a pre-tax charge to earnings of $42.7 million ($0.05 per share) in operating and administrative expense to recognize the estimated lease liabilities associated with these bankruptcies and for a single lease from Safeway’s former Florida division. In 2002, Furr’s and Homeland emerged from bankruptcy and, based on the resolution of various leases, Safeway reversed $12.1 million of this accrual.

Safeway is unable to determine its maximum potential obligation with respect to other divested operations, should there be any similar defaults, because information about the total number of assigned leases from these divestitures that are still outstanding is not available. Based on an internal assessment by the Company, performed by taking the original inventory of assigned leases at the time of the divestitures and accounting for the passage of time, Safeway expects that any potential losses beyond those recorded, should there be any similar defaults, would not be material to Safeway’s operating results, cash flow or financial position.

In 2001, Safeway incurred a pre-tax charge of $51.0 million ($0.06 per share) in other income (expense) related to the bankruptcy of Future Beef Operations Holding, LLC (“FBO”), a meat processing company based in Denver, Colorado. Safeway was a 15% equity investor in FBO.

Safeway also recorded a pre-tax charge of $30.1 million ($0.04 per share) in other income (expense) in 2001 to reduce the carrying amount of the Company’s investment in GroceryWorks Holdings, Inc. (“GroceryWorks”) to its estimated fair value. In June 2001, GroceryWorks underwent significant changes to its capital structure and governance including a buyout of the common shareholders’ interests and an investment of cash and assets by Safeway, cash by other preferred shareholders, and cash and technology by Tesco PLC, a new third-party strategic investor. The impairment charge was equal to the difference in Safeway’s recorded investment in GroceryWorks and Safeway’s share of the estimated fair value of GroceryWorks based on the valuations indicated by preferred stock investments in June 2001 (having substantially the same terms as Safeway’s preferred stock) made by other preferred shareholders.

SALES Total sales increased 2.3% to $35.6 billion in 2003 from $34.8 billion in 2002 due primarily to the additional week in 2003, new store openings and additional fuel sales, partly offset by the estimated impact of the strike in southern California. Same-store sales declines for 2003 were as follows:

	Comparable - Store Sales (includes replacement stores)		Identical - Store Sales (excludes replacement stores)
INCLUDING FUEL:
Excluding strike-affected stores	(0.1	%)	(0.5	%)
Including strike-affected stores	(2.5	%)	(2.9	%)
EXCLUDING FUEL:
Excluding strike-affected stores	(1.7	%)	(2.1	%)
Including strike-affected stores	(4.1	%)	(4.5	%)

Sales growth in 2003 was restrained by softness in the economy and increased competitive activity, particularly in Texas. However, aggregate same-store sales trends in non-strike-affected areas improved in each of the last three quarters as the economy appeared to rebound.

In 2002, total sales increased 1.4% to $34.8 billion from $34.3 billion in 2001. Comparable-store sales decreased by 0.7%, while identical-store sales declined 1.7% in 2002. Excluding the effects of fuel sales, 2002 comparable-store sales decreased 1.3% and identical-store sales decreased 2.2%. Sales in 2002 were impacted by continued softness in the economy, an increase in competitive activity, an overly aggressive shrink-reduction effort and disruptions associated with the centralization of buying and merchandising.

In 2001, strong store operations helped to increase comparable-store sales 2.3%, while identical-store sales increased 1.6%. Excluding the effects of fuel sales, 2001 comparable-store sales increased 1.9% and identical-store sales increased 1.2%. The 2000 Teamsters’ strike against Summit, the Company’s former third-party operator of its northern California distribution center, increased 2001 comparable and identical-store sales by an estimated 50 basis points.

20 Safeway Inc. 2003 Annual Report

GROSS PROFIT Gross profit represents the portion of sales revenue remaining after deducting the cost of goods sold during the period, including purchase and distribution costs. These costs include inbound freight charges, purchasing and receiving costs, warehouse inspection costs, warehousing costs and other costs of Safeway’s distribution network. Advertising and promotional expenses are also a component of cost of goods sold.

Gross profit margin was 29.63% of sales in 2003, 31.10% in 2002, and 30.92% in 2001.

Gross profit declined 147 basis points in 2003. While increased fuel sales added to gross margin dollars, its low margin reduced gross profit as a percentage of sales by 40 basis points. The $71.0 million inventory loss adjustment reduced gross profit 20 basis points. Safeway estimates that the strike in southern California reduced gross profit by 6 basis points. The remaining 81-basis-point decline was primarily the result of targeted pricing and promotion.

Gross profit improved 18 basis points to 31.10% of sales in 2002 primarily due to shrink control, improved buying practices and private-label growth, which was largely reinvested in targeted pricing and promotion.

Gross profit improved 123 basis points in 2001. Safeway estimates that approximately 24 basis points of the 2001 increase in the gross profit margin was attributable to the Summit strike in 2000. The remaining 99-basis-point improvement was due primarily to continuing improvements in shrink control, buying practices and private-label growth.

Vendor allowances totaled $2.2 billion in 2003, $2.2 billion in 2002 and $2.3 billion in 2001. Vendor allowances did not materially impact the Company’s gross profit in 2003, 2002 and 2001 because Safeway spends the allowances received on pricing promotions, advertising expenses and slotting expenses. Vendor allowances can be grouped into the following broad categories: promotional allowances, slotting allowances and contract allowances. All vendor allowances are classified as an element of cost of goods sold.

Promotional allowances make up nearly three-quarters of all allowances. With promotional allowances, vendors pay Safeway to promote their product. The promotion may be any combination of a temporary price reduction, a feature in print ads, a feature in a Safeway circular or a preferred location in the store. The promotions are typically one to two weeks long.

Slotting allowances are a small portion of total allowances (typically less than 5% of all allowances). With slotting allowances, the vendor reimburses Safeway for the cost of placing new product on the shelf. Safeway has no obligation or commitment to keep the product on the shelf for a minimum period.

Contract allowances make up the remainder of all allowances. Under the typical contract allowance, a vendor pays Safeway to keep product on the shelf for a minimum period of time or when volume thresholds are achieved.

Prior to the adoption of Emerging Issues Task Force (“EITF”) No. 02-16, slotting allowances were considered a reimbursement of Safeway’s costs and recognized when the product was first stocked, which is generally the point at which all the related expenses have been incurred. Promotional allowances were recognized when the promotion ran. Beginning with the adoption of EITF No. 02-16 in the first quarter of 2003, slotting and promotional allowances are accounted for as a reduction in the cost of purchased inventory and recognized when the related inventory is sold. Contract allowances are recognized as a reduction in the cost of goods sold as volume thresholds are achieved or through the passage of time.

To reduce the complexity and administrative expense of managing vendor allowances, the Company intends to emphasize lower net pricing from its vendors instead of allowances. Therefore, Safeway expects vendor allowances to decline gradually over time.

OPERATING AND ADMINISTRATIVE EXPENSE Operating and administrative expense consists primarily of store occupancy costs and backstage expenses, which, in turn, consist primarily of wages, employee benefits, rent, depreciation and utilities.

Operating and administrative expense was 25.96% of sales in 2003 compared to 24.67% in 2002 and 22.96% in 2001.

Operating and administrative expense as a percentage of sales increased 129 basis points in 2003. Higher Dominick’s impairment charges increased operating and administrative expense 30 basis points. Reduced sales from the southern California strike increased operating and administrative expense by an estimated 28 basis points. Higher pension expense added 28 basis points, and higher workers’ compensation expense added 13 basis points. The remaining 30-basis-point increase was primarily due to higher employee benefit costs, soft sales and settlement income from the termination of an in-store banking agreement recorded in 2002 operating and administrative expense.

Operating and administrative expense increased 171 basis points in 2002. The Dominick’s impairment charge added 58 basis points. The remaining increases were primarily due to higher employee benefit costs, higher real estate

Safeway Inc. 2003 Annual Report 21

occupancy costs, higher pension expense and soft sales. These increases were partially offset by a decrease of approximately nine basis points due to income received from Canadian Imperial Bank of Commerce for the termination of an in-store banking agreement with Safeway.

Operating and administrative expense increased 81 basis points in 2001. Approximately 12 basis points of the 2001 increase was attributable to the charge related to the Furr’s and Homeland bankruptcies. Another 12 basis points was attributable to the acquisition of Genuardi’s Family Markets, Inc. Approximately 64 basis points of the increase was due primarily to unfavorable comparisons in pension income and property gains, higher real estate occupancy costs, utility cost increases and higher workers’ compensation expense. These increases were partially offset by an estimated decrease of approximately seven basis points attributable to the Summit strike.

Goodwill amortization was $140.4 million in 2001. Beginning in 2002, Safeway stopped amortizing goodwill and began testing goodwill for impairment annually in accordance with the provisions of SFAS No. 142.

INTEREST EXPENSE Interest expense was $442.4 million in 2003, compared to $430.8 million in 2002 and $446.9 million in 2001. Interest expense increased in 2003 primarily due to higher average borrowings in 2003 compared to 2002. Interest expense declined in 2002 primarily due to lower interest rates in 2002. Interest expense increased in 2001 primarily due to higher average borrowings primarily from debt incurred to finance the repurchase of Safeway stock and the Genuardi’s acquisition, partially offset by lower interest rates in 2001.

OTHER INCOME (EXPENSE) Other income (expense) consists of interest income, minority interest in a consolidated affiliate and equity in (losses) earnings from Safeway’s unconsolidated affiliates. Equity in (losses) earnings of unconsolidated affiliates was a loss of $7.1 million in 2003, a loss of $0.2 million in 2002 and income of $20.2 million in 2001. Equity in losses of unconsolidated affiliates in 2002 includes approximately $15.8 million in charges related to the resolution of physical inventory count discrepancies at Casa Ley. Additionally, Safeway recorded a $30.1 million impairment charge in other income (expense) in 2001 to reduce the carrying amount of the Company’s investment in GroceryWorks to its estimated fair value. Safeway also recorded a $51.0 million charge related to the FBO bankruptcy in 2001.

RELATED-PARTY TRANSACTIONS Safeway’s 2003, 2002 and 2001 transactions with related parties are not considered material. See Note K of the Company’s consolidated financial statements.

Critical Accounting Policies

Critical accounting policies are those accounting policies that management believes are important to the portrayal of Safeway’s financial condition and results and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

WORKERS’ COMPENSATION The Company is primarily self-insured for workers’ compensation, automobile and general liability costs. It is the Company’s policy to record its self-insurance liability, as determined actuarially, based on claims filed and an estimate of claims incurred but not yet reported, discounted at a risk-free interest rate. Any actuarial projection of losses concerning workers’ compensation and general liability is subject to a high degree of variability. Among the causes of this variability are unpredictable external factors affecting future inflation rates, discount rates, litigation trends, legal interpretations, benefit level changes and claim settlement patterns. An example of how change in discount rates can affect Safeway’s reserve occurred in 2003 when a 100-basis-point reduction in the Company’s discount rate, based on changes in market rates, increased its liability by approximately $11.8 million.

The majority of the Company’s workers’ compensation liability is from claims occurring in California. California workers’ compensation has received intense scrutiny from the state’s politicians, insurers, employers and providers, as well as the public in general. Recent years have seen escalation in the number of legislative reforms, judicial rulings and social phenomena affecting this business. Some of the many sources of uncertainty in the Company’s reserve estimates include changes in benefit levels and medical fee schedules.

STORE CLOSING AND IMPAIRMENT CHARGES It is the Company’s policy to recognize losses relating to the impairment of long-lived assets when expected net future cash flows are less than the assets’ carrying values. At the time a store is closed or because of changes in circumstances that indicate the carrying value of an asset may not be recoverable, the Company evaluates the carrying value of the asset in relation to its expected future cash flows. If the carrying value is greater than the future cash flows, a

22 Safeway Inc. 2003 Annual Report

provision is made for the impairment of the assets to write the assets down to estimated fair value. Fair value is determined by estimating net future cash flows, discounted using a risk-adjusted rate of interest. The Company calculates its liability for impairment on a store-by-store basis. For closed stores that are under long-term leases, the Company records a liability for the future minimum lease payments and related ancillary costs from the date of closure to the end of the remaining lease term, net of estimated cost recoveries. The Company estimates future cash flows based on its experience and knowledge of the market in which the store is located and, when necessary, uses real estate brokers. However, these estimates project future cash flow several years into the future and are affected by variable factors such as inflation, real estate markets and economic conditions.

EMPLOYEE BENEFIT PLANS The determination of Safeway’s obligation and expense for pension and other post-retirement benefits is dependent, in part, on the Company’s selection of certain assumptions used by its actuaries in calculating these amounts. These assumptions are disclosed in Note I to the consolidated financial statements and include, among other things, the discount rate, the expected long-term rate of return on plan assets and the rates of compensation and health care costs. In accordance with generally accepted accounting principles, actual results that differ from the Company’s assumptions are accumulated and amortized over future periods and, therefore, affect recognized expense and the recorded obligation in such future periods. While Safeway believes its assumptions are appropriate, significant differences in Safeway’s actual experience or significant changes in the Company’s assumptions may materially affect Safeway’s pension and other post-retirement obligations and its future expense.

An example of how changes in these assumptions can affect Safeway’s financial statements occurred in 2002. Based on the Company’s review of market rates, actual return on plan assets and other factors, Safeway lowered its discount rate for U.S. plans to 6.5% at year-end 2002 from 7.5% at year-end 2001. The Company also lowered expected return on plan assets for U.S. plans to 8.5% at year-end 2002 from 9.0% at year-end 2001. These rates are applied to the calculated value of plan assets and liabilities which result in an amount that is included in pension income or expense in the following years. When not considering other changes in assumptions or actual return on plan assets, the 100-basis-point change in the discount rate alone negatively impacted 2003 U.S. pension expense by approximately $19.8 million and the 50-basis-point change in expected return on plan assets alone negatively impacted 2003 U.S. pension expense by $6.5 million.

While changes in assumptions may materially affect the Company’s future expense, the most significant factor in determining this amount is the fair value of plan assets at year-end. Not considering any changes in assumptions, a $100 million change in plan assets in 2003 would impact 2004 U.S. pension expense by approximately $8.5 million. The fair value of plan assets can vary significantly from year to year.

GOODWILL SFAS No. 142 became effective for Safeway in the first quarter of 2002. Adoption of this standard changed the Company’s method of accounting for goodwill. Goodwill is no longer amortized and instead is reviewed for impairment on an annual basis. Safeway recorded a $700 million charge for the cumulative effect of adoption of SFAS No. 142 in the first quarter of 2002, another $1,288 million goodwill impairment charge after completing its annual impairment test in the fourth quarter of 2002 and another $447.7 million after completing its annual impairment test in the fourth quarter of 2003. Safeway also recorded an additional $281.4 million of goodwill impairment in 2003 as it reduced the carrying value of Dominick’s based on indications of value received during the sale process.

Safeway reviews goodwill for impairment at the operating division level. All of the Company’s 2003 and 2002 goodwill impairment related to Dominick’s and Randall’s, which both had no remaining goodwill balances on the consolidated balance sheet at year-end 2003. Fair value was determined by an independent third-party appraiser which primarily used the discounted cash flow method and the guideline company method.

The annual impairment review required by SFAS No. 142 requires a two-step approach with extensive use of accounting judgments and estimates of future operating results. Changes in estimates or application of alternative assumptions could produce significantly different results. The factors that most significantly affect the fair value calculation are market multiples and estimates of future cash flows.

Liquidity and Financial Resources

Net cash flow from operating activities was $1,609.6 million in 2003, $2,034.7 million in 2002 and $2,232.3 million in 2001. Net cash flow from operating activities decreased in 2003 and 2002 primarily due to lower operating results and changes in working capital. Net cash flow from operating activities increased in 2001 largely due to increased net income and changes in working capital.

Cash flow used by investing activities was $795.0 million in 2003, $1,395.7 million in 2002 and $2,242.3 million in 2001. Cash flow used by investing activities decreased in 2003 compared to 2002 because of reduced capital expenditures. Cash flow used by investing activities declined in 2002

Safeway Inc. 2003 Annual Report 23

compared to 2001 primarily because of cash used to acquire Genuardi’s in 2001, as well as reduced capital expenditures.

Cash flow used by financing activities was $724.0 million in 2003, $631.3 million in 2002 and $12.8 million in 2001. Cash flow used by financing activities increased in 2003 and 2002 compared to 2001 as 2001 additional borrowings related to the Genuardi’s acquisition almost entirely offset the cash flow from operations that was used to pay down existing debt.

Capital expenditures were gradually scaled back in 2003 and 2002 as the economy softened. Safeway opened 40 new stores and remodeled 75 stores in 2003. In 2002, Safeway opened 75 new stores and remodeled 203 stores. In 2004, Safeway expects to spend between $1.2 billion and $1.4 billion in cash capital expenditures, open approximately 45 new stores and complete approximately 160 to 165 remodels.

Based upon the current level of operations, Safeway believes that net cash flow from operating activities and other sources of liquidity, including borrowing under the Company’s commercial paper program and bank credit agreement, will be adequate to meet anticipated requirements for working capital, capital expenditures, interest payments and scheduled principal payments for the foreseeable future. There can be no assurance, however, that Safeway’s business will continue to generate cash flow at or above current levels or that the Company will be able to maintain its ability to borrow under the commercial paper program and bank credit agreement.

If the Company’s credit rating were to decline below its current level of Baa2/BBB, the ability to borrow under the commercial paper program would be adversely affected. Safeway’s ability to borrow under the bank credit agreement is unaffected by Safeway’s credit rating. However, Safeway is required under a material covenant in its bank credit agreement to maintain certain interest coverage and debt coverage ratios. If Safeway’s 2003 Adjusted EBITDA to interest ratio of 5.82 to 1 were to decline to 2.0 to 1, or if Safeway’s year-end 2003 debt to Adjusted EBITDA ratio of 3.04 to 1 were to grow to 3.5 to 1, Safeway’s ability to borrow under the bank credit agreement would be impaired. Safeway’s 2002 Adjusted EBITDA to interest ratio was 7.68 to 1 and the Company’s 2002 debt to Adjusted EBITDA ratio was 2.55 to 1. A computation of Adjusted EBITDA, as defined by the bank credit agreement, is set forth below solely to provide an understanding of the impact that Adjusted EBITDA has on Safeway’s ability to borrow under its bank credit agreement. Adjusted EBITDA is not being presented as an indicator of the Company’s operating performance or a measure of the Company’s liquidity or any financial measure calculated in accordance with generally accepted accounting principles.

(Dollars in millions)	53 Weeks 2003
Adjusted EBITDA:
Net loss	$	(169.8	)
Add (subtract):
Income taxes		310.9
LIFO income		(1.3	)
Interest expense		442.4
Depreciation		863.6
Goodwill impairment charges		729.1
SFAS No. 144 impairment charges		322.0
Inventory loss adjustment		71.0
Equity in losses of unconsolidated affiliates		7.1
Total Adjusted EBITDA	$	2,575.0
Adjusted EBITDA as a multiple of interest expense		5.82x
Total debt at year-end 2003	$	7,822.3
Debt to Adjusted EBITDA		3.04x

The strike in southern California reduced cash flow from operating activities and Adjusted EBITDA in 2003 by an estimated $167.5 million.

Total debt, including capital leases, was $7.82 billion in 2003, $8.44 billion in 2002 and $7.40 billion in 2001. Total debt declined in 2003 as Safeway used cash flow from operations to pay down debt. Total debt increased in 2002 primarily because of debt incurred to finance the purchase of Safeway stock, partially offset by debt paid down with cash flow from operations. Total debt increased in 2001 primarily due to the Genuardi’s acquisition and Safeway stock repurchases, partially offset by debt paid down with cash flow from operations. Annual debt maturities over the next five years are set forth in Note D of the Company’s 2003 consolidated financial statements.

The table below presents significant contractual obligations of the Company at year-end 2003:

(In millions)	2004		2005		2006		2007		2008		Thereafter		Total
Long-term debt	$	699.5	$	583.4	$	1,922.5	$	785.1	$	553.5	$	2,559.5	$	7,103.5
Capital lease obligations(1)		50.5		41.6		38.6		39.0		39.6		509.5		718.8
Operating leases		400.1		394.6		379.2		358.4		340.7		2,885.7		4,758.7
Self-insurance liability		124.7		95.2		52.2		36.1		25.7		75.6		409.5
Contracts for purchase of property, equipment and construction of buildings		120.5		—		—		—		—		—		120.5
Contracts for purchase of inventory		489.3		—		—		—		—		—		489.3

⁽¹⁾ Minimum lease payments, less amounts representing interest.

24 Safeway Inc. 2003 Annual Report

New Accounting Standards

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” This statement eliminates extraordinary accounting treatment for a gain or loss reported on the extinguishment of debt, eliminates inconsistencies in the accounting required for sale-leaseback transactions and certain lease modifications with similar effects, and amends other existing authoritative pronouncements to make technical corrections, clarify meanings or describe their applicability under changed conditions. SFAS No. 145 became effective for Safeway in the first quarter of 2003 and did not have a material effect on the Company’s financial statements.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities Summary.” This statement amends and clarifies the accounting and reporting for derivative instruments, including embedded derivatives, and for hedging activities under SFAS No. 133. SFAS No. 149 amends SFAS No. 133 to reflect the decisions made as part of the Derivatives Implementation Group (“DIG”) and in other FASB projects or deliberations. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The Company had applied the pertinent DIG interpretations as they were issued and does not expect SFAS No. 149 will have any material impact on the Company’s financial statements or disclosures.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” This statement establishes standards on the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. The provisions of SFAS No. 150 are effective for financial instruments entered into or modified after May 31, 2003 and to all other instruments that exist as of the first interim financial reporting period beginning after June 15, 2003. The adoption of this standard did not have a material effect on the Company’s financial statements.

In December 2003, the FASB revised SFAS No. 132, “Employer’s Disclosures about Pensions and Other Postretirement Benefits.” This revised statement requires new annual disclosures about the types of plan assets, investment strategy, measurement date, plan obligations and cash flows as well as components of the net periodic benefit cost recognized in interim periods. The new annual disclosure requirements apply to fiscal years ending after December 15, 2003, except for the disclosure of expected future benefit payment, which must be disclosed for fiscal years ending after June 15, 2004. Interim period disclosures are generally effective for interim periods beginning after December 15, 2003. The Company has included the disclosures required by SFAS No. 132 in its financial statements for the year ended January 3, 2004.

In January 2004, the FASB issued SFAS No. 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.” This statement permits a sponsor to make a one-time election to defer accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003, or the Prescription Drug Act. The Prescription Drug Act, signed into law in December 2003, establishes a prescription drug benefit under Medicare (Medicare Part D) and a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. SFAS No. 106-1 does not provide specific guidance as to whether a sponsor should recognize the effects of the Prescription Drug Act in its financial statements. The Prescription Drug Act introduces two new features to Medicare that must be considered when measuring accumulated postretirement benefit costs. The new features include a subsidy to the plan sponsors that is based on 28% of an individual beneficiary’s annual prescription drug costs between $250 and $5,000 and an opportunity for a retiree to obtain a prescription drug benefit under Medicare. The Prescription Drug Act is not expected to reduce Safeway’s net postretirement benefit costs.

Safeway has elected to defer adoption of SFAS No. 106-1 due to the lack of specific guidance. Therefore, the net postretirement benefit costs disclosed in the Company’s financial statements do not reflect the impacts of the Prescription Drug Act on the plans. The deferral will continue to apply until specific authoritative accounting guidance for the federal subsidy is issued. Authoritative guidance on the accounting for the federal subsidy is pending and, when issued, could require information previously reported in the Company’s financial statements to change. Safeway is currently investigating the impacts of SFAS 106-1’s initial recognition, measurement and disclosure provisions on its financial statements.

EITF No. 02-16, “Accounting by a Reseller for Cash Consideration Received from a Vendor,” provides that cash consideration received from a vendor is presumed to be a reduction in the prices of the vendor’s products or services and should, therefore, be characterized as a reduction in cost of sales unless it is a payment for assets or services delivered to the vendor, in which case the cash consideration should be characterized as revenue, or it is a reimbursement of costs incurred to sell the vendor’s products, in which case the cash consideration should be characterized as a reduction of that cost.

Safeway Inc. 2003 Annual Report 25

EITF No. 02-16 became effective for the Company in the first quarter of 2003. The Company applied the provisions of EITF No. 02-16 prospectively which resulted in deferring recognition of $10.3 million of allowances from the first quarter to the second quarter of 2003.

In November 2003, the EITF reached a consensus on EITF No. 03-10, “Application of Issue No. 02-16 by Resellers to Sales Incentives Offered to Consumers by Manufacturers.” EITF No. 03-10 addresses the accounting for manufacturer sales incentives offered directly to consumers, including manufacturer coupons. The consensus applies to new arrangements, including modifications to existing arrangements, entered into in fiscal periods beginning after November 25, 2003. Adoption of EITF No. 03-10 did not have a material effect on the Company’s financial statements.

In November 2002, FASB Interpretation (“FIN”) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others,” was issued. This interpretation requires initial measurement and recognition, on a prospective basis only, to guarantees issued or modified after December 31, 2002. Additionally, certain disclosure requirements became effective for financial statements ending after December 15, 2002. The Company complies with the disclosure provisions of FIN No. 45, and adoption of FIN No. 45 did not have a material effect on the Company’s financial statements.

During January 2003, FIN No. 46, “Consolidation of Variable Interest Entities,” was issued. FIN No. 46 requires that if an entity has a controlling interest in a variable interest entity, the assets, liabilities and results of activities of the variable interest entity should be included in the consolidated financial statements of the entity. The provisions of FIN No. 46 are effective for all arrangements entered into after January 31, 2003. For those arrangements entered into prior to February 1, 2003, the provisions of FIN No. 46 were required to be adopted at the beginning of the first interim or annual period beginning after June 15, 2003. However, in December 2003 the FASB published a revision to FIN No. 46 (hereafter referred to as (“FIN No. 46R”) to clarify some of the provisions of FIN No. 46, and to exempt certain entities from its requirements. Under the new guidance, there are new effective dates for companies that have interests in structures that are commonly referred to as special-purpose entities. These rules are effective for financial statements for periods ending after March 15, 2004. The adoption of FIN No. 46R is not expected to have any impact on Safeway’s financial statements, as the Company does not have any variable interest entities.

Forward-Looking Statements

This Annual Report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such statements relate to, among other things, capital expenditures, performance of acquired companies, the valuation of Safeway’s investments, operating improvements and costs, financial and other effects of the southern California labor strike and obligations with respect to divested operations and are indicated by words or phrases such as “continuing,” “ongoing,” “expects” and similar words or phrases. The following are among the principal factors that could cause actual results to differ materially from the forward-looking statements: general business and economic conditions in our operating regions, including the rate of inflation, consumer spending levels, population, employment and job growth in our markets; pricing pressures and competitive factors, which could include pricing strategies, store openings and remodels by our competitors; results of our programs to control or reduce costs, improve buying practices and control shrink; results of our programs to increase sales, including private-label sales, improvements in our perishable departments and our pricing and promotional programs; results of our programs to improve capital management; the ability to integrate any companies we have acquired and achieve operating improvements at those companies, including Dominick’s and Randall’s; various uncertainties concerning the reclassification of Dominick’s to continuing operations; changes in financial performance of our equity investments; our ability to manage potential lease obligations in closed stores and divested operations and to estimate those obligations; increases in labor costs and relations with union bargaining units representing our employees or employees of third-party operators of our distribution centers; the effects on operating performance at stores affected by the southern California labor strike, including the time it takes to return to pre-strike operating performance and the resolution of lawsuits challenging certain provisions of the agreement with Kroger and Albertson’s that arise out of the multi-employer bargaining process in southern California; changes in legislation or regulations, including changes, if any, in workers’ compensation legislation; the cost and stability of power sources; the rate of return on our pension assets; and the availability and terms of financing. Consequently, actual events and results may vary significantly from those included in or contemplated or implied by such statements. The Company undertakes no obligation to update forward-looking statements to reflect developments or information obtained after the date hereof and disclaims any obligation to do so.

26 Safeway Inc. 2003 Annual Report

CONSOLIDATED STATEMENTS OF OPERATIONS

SAFEWAY INC. AND SUBSIDIARIES

(In millions, except per-share amounts)	53 Weeks 2003			52 Weeks 2002			52 Weeks 2001
Sales	$	35,552.7		$	34,767.5		$	34,301.0
Cost of goods sold		(25,018.9	)		(23,955.5	)		(23,696.7	)
Gross profit		10,533.8			10,812.0			10,604.3
Operating and administrative expense		(9,230.8	)		(8,576.4	)		(7,875.1	)
Goodwill impairment charges		(729.1	)		(1,288.0	)		—
Goodwill amortization		—			—			(140.4	)
Operating profit		573.9			947.6			2,588.8
Interest expense		(442.4	)		(430.8	)		(446.9	)
Other income (expense), net		9.6			15.5			(46.9	)
Income before income taxes and cumulative effect of accounting change		141.1			532.3			2,095.0
Income taxes		(310.9	)		(660.4	)		(841.1	)
(Loss) income before cumulative effect of accounting change		(169.8	)		(128.1	)		1,253.9
Cumulative effect of accounting change		—			(700.0	)		—
Net (loss) income	$	(169.8	)	$	(828.1	)	$	1,253.9
BASIC (LOSS) EARNINGS PER SHARE:
(Loss) income before cumulative effect of accounting change	$	(0.38	)	$	(0.27	)	$	2.49
Cumulative effect of accounting change		—			(1.50	)		—
Net (loss) income	$	(0.38	)	$	(1.77	)	$	2.49
DILUTED (LOSS) EARNINGS PER SHARE:
(Loss) income before cumulative effect of accounting change	$	(0.38	)	$	(0.27	)	$	2.44
Cumulative effect of accounting change		—			(1.50	)		—
Net (loss) income	$	(0.38	)	$	(1.77	)	$	2.44
Weighted average shares outstanding – basic		441.9			467.3			503.3
Weighted average shares outstanding – diluted		441.9			467.3			513.2

See accompanying notes to consolidated financial statements.

Safeway Inc. 2003 Annual Report 27

CONSOLIDATED BALANCE SHEETS

SAFEWAY INC. AND SUBSIDIARIES

(In millions)	Year-end 2003			Year-end 2002
ASSETS
Current assets:
Cash and equivalents	$	174.8		$	76.0
Receivables		383.2			431.6
Merchandise inventories, net of LIFO reserve of $63.8 and $65.1		2,642.2			2,717.8
Prepaid expenses and other current assets		307.5			233.1
Total current assets		3,507.7			3,458.5
Property:
Land		1,384.9			1,348.7
Buildings		3,847.2			3,597.1
Leasehold improvements		2,494.8			2,467.7
Fixtures and equipment		5,539.8			5,195.3
Property under capital leases		758.1			684.3
		14,024.8			13,293.1
Less accumulated depreciation and amortization		(5,619.0	)		(4,762.3	)
Total property, net		8,405.8			8,530.8
Goodwill		2,404.9			3,125.7
Prepaid pension costs		418.7			535.2
Investments in unconsolidated affiliates		191.8			208.3
Other assets		167.8			188.7
Total assets	$	15,096.7		$	16,047.2

28 Safeway Inc. 2003 Annual Report

CONSOLIDATED BALANCE SHEETS

SAFEWAY INC. AND SUBSIDIARIES

(In millions)	Year-end 2003			Year-end 2002
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of notes and debentures	$	699.5		$	780.5
Current obligations under capital leases		50.5			42.5
Accounts payable		1,509.6			1,811.5
Accrued salaries and wages		406.0			400.9
Other accrued liabilities		798.7			757.2
Total current liabilities		3,464.3			3,792.6
Long-term debt:
Notes and debentures		6,404.0			7,009.9
Obligations under capital leases		668.3			602.7
Total long-term debt		7,072.3			7,612.6
Deferred income taxes		421.9			577.9
Accrued claims and other liabilities		493.9			436.6
Total liabilities		11,452.4			12,419.7
Commitments and contingencies
Stockholders’ equity:
Common stock: par value $0.01 per share;
1,500 shares authorized; 575.4 and 573.0 shares outstanding		5.8			5.7
Additional paid-in capital		3,334.6			3,307.2
Treasury stock at cost; 131.2 and 132.0 shares		(3,887.4	)		(3,904.7	)
Deferred stock compensation		(14.0	)		—
Accumulated other comprehensive income (loss)		87.5			(68.3	)
Retained earnings		4,117.8			4,287.6
Total stockholders’ equity		3,644.3			3,627.5
Total liabilities and stockholders’ equity	$	15,096.7		$	16,047.2

See accompanying notes to consolidated financial statements.

Safeway Inc. 2003 Annual Report 29

CONSOLIDATED STATEMENTS OF CASH FLOWS

SAFEWAY INC. AND SUBSIDIARIES

(In millions)	53 Weeks 2003			52 Weeks 2002			52 Weeks 2001
OPERATING ACTIVITIES:
Net (loss) income	$	(169.8	)	$	(828.1	)	$	1,253.9
Cumulative effect of accounting change		—			700.0			—
(Loss) income before cumulative effect of accounting change		(169.8	)		(128.1	)		1,253.9
Reconciliation to net cash flow from operating activities:
Goodwill impairment charges		729.1			1,288.0			—
Property impairment charges		311.4			201.3			—
Miscellaneous equity investment impairment charges		10.6			—			—
Depreciation and amortization		863.6			888.3			937.7
Amortization of deferred finance costs		8.0			7.8			8.0
Deferred income taxes		(77.9	)		64.9			68.8
LIFO (income) expense		(1.3	)		(17.6	)		2.2
FBO bankruptcy charge		—			—			51.0
Furr’s and Homeland bankruptcy charge		—			—			42.7
GroceryWorks impairment charge		—			—			30.1
Equity in losses (earnings) of unconsolidated affiliates		7.1			0.2			(20.2	)
Net pension expense (income)		130.9			30.3			(27.3	)
Gain on pension settlement		—			—			(9.3	)
Contributions to pension plans		(12.1	)		(32.0	)		(3.5	)
Restricted stock expense		0.2			—			1.0
Increase in accrued claims and other liabilities		52.7			11.0			18.6
Loss (gain) on property retirements		20.1			31.1			(34.6	)
Changes in working capital items:
Receivables		56.6			(39.9	)		35.9
Inventories at FIFO cost		144.4			(107.7	)		(57.6	)
Prepaid expenses and other current assets		(72.8	)		55.6			(23.5	)
Payables and accruals		(391.2	)		(218.5	)		(41.6	)
Net cash flow from operating activities		1,609.6			2,034.7			2,232.3
INVESTING ACTIVITIES:
Cash paid for property additions		(935.8	)		(1,467.4	)		(1,793.0	)
Proceeds from sale of property		189.0			113.2			132.9
Net cash used to acquire Genuardi’s		—			—			(523.1	)
Other		(48.2	)		(41.5	)		(59.1	)
Net cash flow used by investing activities		(795.0	)		(1,395.7	)		(2,242.3	)

30 Safeway Inc. 2003 Annual Report

CONSOLIDATED STATEMENTS OF CASH FLOWS

SAFEWAY INC. AND SUBSIDIARIES

(In millions)	53 Weeks 2003			52 Weeks 2002			52 Weeks 2001
FINANCING ACTIVITIES:
Additions to short-term borrowings	$	2.6		$	1.4		$	34.6
Payments on short-term borrowings		(3.1	)		(3.5	)		(121.5	)
Additions to long-term borrowings		1,592.0			2,919.3			3,475.9
Payments on long-term borrowings		(2,331.0	)		(2,063.2	)		(2,662.4	)
Purchase of treasury stock		—			(1,502.6	)		(767.9	)
Net proceeds from exercise of stock options		19.1			31.5			50.5
Other		(3.6	)		(14.2	)		(22.0	)
Net cash flow used by financing activities		(724.0	)		(631.3	)		(12.8	)
Effect of changes in exchange rates on cash		8.2			(0.2	)		(0.4	)
Increase (decrease) in cash and equivalents		98.8			7.5			(23.2	)
CASH AND EQUIVALENTS:
Beginning of year		76.0			68.5			91.7
End of year	$	174.8		$	76.0		$	68.5
OTHER CASH FLOW INFORMATION:
Cash payments during the year for:
Interest	$	464.2		$	440.6		$	456.4
Income taxes, net of refunds		361.6			686.2			728.6
NONCASH INVESTING AND FINANCING ACTIVITIES:
Tax benefit from stock options exercised		13.6			29.2			34.8
Capital lease obligations entered into		113.2			174.9			82.3
Mortgage notes assumed in property additions		—			5.9			4.8

See accompanying notes to consolidated financial statements.

Safeway Inc. 2003 Annual Report 31

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

SAFEWAY INC. AND SUBSIDIARIES

(In Millions)	Common Stock			Additional Paid-in Capital		Treasury Stock					Deferred Stock Compensation			Unexercised Warrants Purchased			Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Total Stockholders’ Equity			Comprehensive Income (Loss)
	Shares	Amount				Shares		Cost
Balance, year-end 2000	568.4	$	5.7	$	3,194.9	(64.3	)	$	(1,646.9	)		—		$	(126.0	)	$	3,987.8		$	(25.7	)	$	5,389.8
Net income	—		—		—	—			—			—			—			1,253.9			—			1,253.9		$	1,253.9
Translation adjustments	—		—		—	—			—			—			—			—			(49.4	)		(49.4	)		(49.4	)
Loss on settlement of interest rate swap, net of tax	—		—		—	—			—			—			—			—			(4.2	)		(4.2	)		(4.2	)
Treasury stock purchased	—		—		—	(18.9	)		(781.3	)		—			—			—			—			(781.3	)		—
Options exercised	2.4		—		72.2	0.5			8.6			—			—			—			—			80.8			—
Warrants expired	—		—		—	—			—			—			126.0			(126.0	)		—			—			—
Balance, year-end 2001	570.8		5.7		3,267.1	(82.7	)		(2,419.6	)		—			—			5,115.7			(79.3	)		5,889.6		$	1,200.3
Net loss	—		—		—	—			—			—			—			(828.1	)		—			(828.1	)	$	(828.1	)
Translation adjustments	—		—		—	—			—			—			—			—			10.3			10.3			10.3
Amortization of loss on settlement of interest rate hedge	—		—		—	—			—			—			—			—			0.7			0.7			0.7
Treasury stock purchased	—		—		—	(50.1	)		(1,502.9	)		—			—			—			—			(1,502.9	)		—
Options exercised	2.2		—		40.1	0.8			17.8			—			—			—			—			57.9			—
Balance, year-end 2002	573.0		5.7		3,307.2	(132.0	)		(3,904.7	)		—			—			4,287.6			(68.3	)		3,627.5		$	(817.1	)
Net loss	—		—		—	—			—			—			—			(169.8	)		—			(169.8	)	$	(169.8	)
Translation adjustments	—		—		—	—			—			—			—			—			154.9			154.9			154.9
Market adjustment on interest rate hedge	—		—		—	—			—			—			—			—			0.2			0.2			0.2
Amortization of loss on settlement of interest rate hedge	—		—		—	—			—			—			—			—			0.7			0.7			0.7
Restricted stock granted	0.7		—		14.2	—			—			(14.2	)		—			—			—			—			—
Amortization of restricted stock	—		—		—	—			—			0.2			—			—			—			0.2			—
Options exercised	1.7		0.1		13.2	0.8			17.3			—			—			—			—			30.6			—
Balance, year-end 2003	575.4	$	5.8	$	3,334.6	(131.2	)	$	(3,887.4	)	$	(14.0	)	$	—		$	4,117.8		$	87.5		$	3,644.3		$	(14.0	)

See accompanying notes to consolidated financial statements.

32 Safeway Inc. 2003 Annual Report

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SAFEWAY INC. AND SUBSIDIARIES

Note A: The Company and Significant Accounting Policies

THE COMPANY Safeway Inc. (“Safeway” or the “Company”) is one of the largest food and drug retailers in North America, with 1,817 stores as of year-end 2003. Safeway’s U.S. retail operations are located principally in California, Oregon, Washington, Alaska, Colorado, Arizona, Texas, the Chicago metropolitan area and the Mid-Atlantic region. The Company’s Canadian retail operations are located principally in British Columbia, Alberta and Manitoba/Saskatchewan. In support of its retail operations, the Company has an extensive network of distribution, manufacturing and food processing facilities.

In November 2002, Safeway announced the decision to sell Dominick’s and exit the Chicago market due to labor issues. In November 2003, Safeway announced that it was taking Dominick’s off the market after the winning bidder and the unions representing Dominick’s could not reach an agreement on a labor contract. Accordingly, Dominick’s previously reported losses from discontinued operations have been reclassified to continuing operations and estimated losses on the disposal have been reclassified as an impairment of long-lived assets and goodwill in the Company’s consolidated financial statements. The accompanying notes to the consolidated financial statements have also been adjusted to include Dominick’s financial information.

In February 2001, Safeway acquired all of the assets of Genuardi’s for approximately $530 million in cash (the “Genuardi’s Acquisition”). The Genuardi’s Acquisition was accounted for as a purchase and resulted in goodwill of approximately $521 million. Safeway funded the acquisition through the issuance of commercial paper and debentures. Safeway’s 2001 statement of operations includes 47 weeks of Genuardi’s operating results.

The Company also has a 49% ownership interest in Casa Ley, S.A. de C.V. (“Casa Ley”), which operates 108 food and general merchandise stores in western Mexico.

In addition, Safeway has a strategic alliance with and a 53.1% ownership interest in GroceryWorks Holdings, Inc. (“GroceryWorks”), an Internet grocer.

BASIS OF CONSOLIDATION The consolidated financial statements include Safeway Inc., a Delaware corporation, and all majority-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. The Company’s investment in Casa Ley is reported using the equity method and is recorded on a one-month delay basis because financial information for the latest month is not available from Casa Ley in time to be included in Safeway’s consolidated financial statements until the following reporting period.

FISCAL YEAR The Company’s fiscal year ends on the Saturday nearest December 31. The last three fiscal years consist of the 53-week period ended January 3, 2004, the 52-week period ended December 28, 2002 and the 52-week period ended December 29, 2001.

REVENUE RECOGNITION Revenue is recognized at the point of sale for retail sales. Discounts provided to customers in connection with loyalty cards are accounted for as a reduction of sales.

COST OF GOODS SOLD Cost of goods sold includes cost of inventory sold during the period, including purchase and distribution costs. These costs include inbound freight charges, purchasing and receiving costs, warehouse inspection costs, warehousing costs and other costs of Safeway’s distribution network. Advertising and promotional expenses are also included as a component of cost of goods sold. Advertising costs are expensed in the period the advertisement occurs. Advertising expenses totaled $419.9 million in 2003, $384.6 million in 2002 and $422.1 million in 2001.

Vendor allowances totaled $2.2 billion in 2003, $2.2 billion in 2002 and $2.3 billion in 2001. Vendor allowances did not materially impact the Company’s gross profit in 2003, 2002 and 2001 because Safeway spends the allowances received on pricing promotions, advertising expenses and slotting expenses. Vendor allowances can be grouped into the following broad categories: promotional allowances, slotting allowances, and contract allowances. All vendor allowances are classified as an element of cost of goods sold.

Promotional allowances make up nearly three-quarters of all allowances. With promotional allowances, vendors pay Safeway to promote their product. The promotion may be any combination of a temporary price reduction, a feature in print ads, a feature in a Safeway circular, or a preferred location in the store. The promotions are typically one to two weeks long.

Slotting allowances are a small portion of total allowances (typically less than 5% of all allowances). With slotting allowances, the vendor reimburses Safeway for the cost of placing new product on the shelf. Safeway has no obligation or commitment to keep the product on the shelf for a minimum period.

Safeway Inc. 2003 Annual Report 33

Contract allowances make up the remainder of all allowances. Under the typical contract allowance, a vendors pays Safeway to keep product on the shelf for a minimum period of time or when volume thresholds are achieved.

Prior to the adoption of Emerging Issues Task Force (“EITF”) No. 02-16, slotting allowances were considered a reimbursement of Safeway’s costs and recognized when the product was first stocked, which is generally the point at which all the related expenses have been incurred. Promotional allowances were recognized when the promotion ran. Beginning with the adoption of EITF No. 02-16 in the first quarter of 2003, slotting and promotional allowances are accounted for as a reduction in the cost of purchased inventory and recognized when the related inventory is sold. Contract allowances are recognized as a reduction in the cost of goods sold as volume thresholds are achieved or through the passage of time.

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

TRANSLATION OF FOREIGN CURRENCIES Assets and liabilities of the Company’s Canadian subsidiaries and Casa Ley are translated into U.S. dollars at year-end rates of exchange, and income and expenses are translated at average rates during the year. Adjustments resulting from translating financial statements into U.S. dollars are reported, net of applicable income taxes, as a separate component of comprehensive income in the consolidated statements of stockholders’ equity.

CASH AND CASH EQUIVALENTS Short-term investments with original maturities of less than three months are considered to be cash equivalents.

MERCHANDISE INVENTORIES Merchandise inventory of $1,903 million at year-end 2003 and $2,013 million at year-end 2002 is valued at the lower of cost on a last-in, first-out (“LIFO”) basis or market value. Such LIFO inventory had a replacement or current cost of $1,967 million at year-end 2003 and $2,078 million at year-end 2002. Liquidations of LIFO layers resulted in expense of $1.9 million in 2003, income of $5.3 million in 2002 and income of $1.8 million in 2001. All remaining inventory is valued at the lower of cost on a first-in, first-out (“FIFO”) basis or market value. The FIFO cost of inventory approximates replacement or current cost. Physical inventories are taken on a cycle basis. The Company records an estimated inventory shrink adjustment for the period between the last physical inventory and the balance sheet date.

PROPERTY AND DEPRECIATION Property is stated at cost. Depreciation expense on buildings and equipment is computed on the straight-line method using the following lives:

Stores and other buildings	7 to 40 years
Fixtures and equipment	3 to 15 years

Property under capital leases and leasehold improvements are amortized on a straight-line basis over the shorter of the remaining terms of the lease or the estimated useful lives of the assets.

SELF-INSURANCE The Company is primarily self-insured for workers’ compensation, automobile and general liability costs. The self-insurance liability is determined actuarially, based on claims filed and an estimate of claims incurred but not yet reported, and is discounted using a risk-free rate of interest. The present value of such claims was calculated using a discount rate of 3.0% in 2003 and 4.0% in 2002. A summary of changes in Safeway’s self-insurance liability is as follows (in millions):

	2003			2002			2001
Beginning balance	$	340.6		$	320.4		$	299.1
Expense		235.2			166.5			149.1
Claim payments		(166.3	)		(146.3	)		(139.8	)
Genuardi’s acquisition		—			—			12.0
Ending balance	$	409.5		$	340.6		$	320.4
Less: current portion		(124.7	)		(119.5	)		(102.1	)
Long-term portion	$	284.8		$	221.1		$	218.3

The current portion of the self-insurance liability is included in other accrued liabilities and the long-term portion is included in accrued claims and other liabilities in the consolidated balance sheets. The total undiscounted liability was $451.4 million at year-end 2003 and $388.6 million at year-end 2002.

34 Safeway Inc. 2003 Annual Report

INCOME TAXES The Company provides a deferred tax expense or benefit equal to the change in the deferred tax liability during the year in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes.” Deferred income taxes represent tax credit carryforwards and future net tax effects resulting from temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

OFF-BALANCE SHEET FINANCIAL INSTRUMENTS The Company has, from time to time, entered into interest rate swap agreements to change its portfolio mix of fixed and floating-rate debt to more desirable levels. Interest rate swap agreements involve the exchange with a counterparty of fixed and floating-rate interest payments periodically over the life of the agreements without exchange of the underlying notional principal amounts. The differential to be paid or received is recognized over the life of the agreements as an adjustment to interest expense. The Company’s counter-parties have been major financial institutions.

FAIR VALUE OF FINANCIAL INSTRUMENTS Generally accepted accounting principles require the disclosure of the fair value of certain financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate fair value. Safeway estimated the fair values presented below using appropriate valuation methodologies and market information available as of year-end. Considerable judgment is required to develop estimates of fair value, and the estimates presented are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions or estimation methodologies could have a material effect on the estimated fair values. Additionally, these fair values were estimated at year-end, and current estimates of fair value may differ significantly from the amounts presented.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

Cash and equivalents, accounts receivable, accounts payable and short-term debt. The carrying amount of these items approximates fair value.

Long-term debt. Market values quoted on the New York Stock Exchange are used to estimate the fair value of publicly traded debt. To estimate the fair value of debt issues that are not quoted on an exchange, the Company uses those interest rates that are currently available to it for issuance of debt with similar terms and remaining maturities. At year-end 2003, the estimated fair value of debt was $7.5 billion compared to a carrying value of $7.1 billion. At year-end 2002, the estimated fair value of debt was $8.3 billion compared to carrying value of $7.8 billion.

Off-balance sheet instruments. The fair value of interest rate swap agreements are the amounts at which they could be settled based on estimates obtained from dealers. The net unrealized gain on such agreements was $0.3 million at year-end 2003.

STORE CLOSING AND IMPAIRMENT CHARGES Safeway continually reviews its stores’ operating performance and assesses the Company’s plans for certain store and plant closures. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” losses related to the impairment of long-lived assets are recognized when expected future cash flows are less than the assets’ carrying value. At the time a store is closed or because of changes in circumstances that indicate the carrying value of an asset may not be recoverable, the Company evaluates the carrying value of the asset in relation to its expected future cash flows. If the carrying value is greater than the future cash flows, a provision is made for the impairment of the assets to write the assets down to estimated fair value. Fair value is determined by estimating net future cash flows, discounted using a risk-adjusted rate of return. The Company calculates its liability for impairment on a store-by-store basis. These provisions are recorded as a component of operating and administrative expense and are disclosed in Note C.

For closed stores that are under long-term leases, the Company records a liability for the future minimum lease payments and related ancillary costs, from the date of closure to the end of the remaining lease term, net of estimated cost recoveries that may be achieved through subletting properties or through favorable lease terminations, discounted using a risk-adjusted rate of interest. This liability is recorded at the time the store is closed. Activity included in the reserve for store lease exit costs is disclosed in Note C.

STOCK-BASED COMPENSATION Safeway accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees.” The following table illustrates the effect on net (loss) income and (loss) earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, as amended by SFAS No. 148:

Safeway Inc. 2003 Annual Report 35

(In millions, except per-share amounts)	2003			2002			2001
Net (loss) income – as reported	$	(169.8	)	$	(828.1	)	$	1,253.9
Less:
Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects		(51.1	)		(49.6	)		(45.0	)
Net (loss) income – pro forma	$	(220.9	)	$	(877.7	)	$	1,208.9
Basic (loss) earnings per share:
As reported	$	(0.38	)	$	(1.77	)	$	2.49
Pro forma		(0.50	)		(1.88	)		2.40
Diluted (loss) earnings per share:
As reported	$	(0.38	)	$	(1.77	)	$	2.44
Pro forma		(0.50	)		(1.88	)		2.36

NEW ACCOUNTING STANDARDS In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” This statement eliminates extraordinary accounting treatment for a gain or loss reported on the extinguishment of debt, eliminates inconsistencies in the accounting required for sale-leaseback transactions and certain lease modifications with similar effects, and amends other existing authoritative pronouncements to make technical corrections, clarify meanings or describe their applicability under changed conditions. SFAS No. 145 became effective for Safeway in the first quarter of 2003 and did not have a material effect on the Company’s financial statements.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities Summary.” This statement amends and clarifies the accounting and reporting for derivative instruments, including embedded derivatives, and for hedging activities under SFAS No. 133. SFAS No. 149 amends SFAS No. 133 to reflect the decisions made as part of the Derivatives Implementation Group (“DIG”) and in other FASB projects or deliberations. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The Company had applied the pertinent DIG interpretations as they were issued and does not expect SFAS No. 149 will have any material impact on the Company’s financial statements or disclosures.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” This statement establishes standards on the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. The provisions of SFAS No. 150 are effective for financial instruments entered into or modified after May 31, 2003 and to all other instruments that exist as of the first interim financial reporting period beginning after June 15, 2003. The adoption of this standard did not have a material effect on the Company’s financial statements.

In December 2003, the FASB revised SFAS No. 132, “Employer’s Disclosures about Pensions and Other Postretirement Benefits.” This revised statement requires new annual disclosures about the types of plan assets, investment strategy, measurement date, plan obligations and cash flows as well as components of the net periodic benefit cost recognized in interim periods. The new annual disclosure requirements apply to fiscal years ending after December 15, 2003, except for the disclosure of expected future benefit payment, which must be disclosed for fiscal years ending after June 15, 2004. Interim period disclosures are generally effective for interim periods beginning after December 15, 2003. The Company has included the disclosures required by SFAS No. 132 in its financial statements for the year ended January 3, 2004.

In January 2004, the FASB issued SFAS No. 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.” This statement permits a sponsor to make a one-time election to defer accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003, or the Prescription Drug Act. The Prescription Drug Act, signed into law in December 2003, establishes a prescription drug benefit under Medicare (Medicare Part D) and a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. SFAS No. 106-1 does not provide specific guidance as to whether a sponsor should recognize the effects of the Prescription Drug Act in its financial statements. The Prescription Drug Act introduces two new features to Medicare that must be considered when measuring accumulated postretirement benefit costs. The new features include a subsidy to the plan sponsors that is based on 28% of an individual beneficiary’s annual prescription drug costs between $250 and $5,000 and an opportunity for a retiree to obtain a prescription drug benefit under Medicare. The Prescription Drug Act is not expected to reduce Safeway’s net postretirement benefit costs.

Safeway has elected to defer adoption of SFAS No. 106-1 due to the lack of specific guidance. Therefore, the net postretirement benefit costs disclosed in the Company’s financial statements do not reflect the impacts of the Prescription Drug Act on the plans. The deferral will

36 Safeway Inc. 2003 Annual Report

continue to apply until specific authoritative accounting guidance for the federal subsidy is issued. Authoritative guidance on the accounting for the federal subsidy is pending and, when issued, could require information previously reported in the Company’s financial statements to change. Safeway is currently investigating the impacts of SFAS 106-1’s initial recognition, measurement and disclosure provisions on its financial statements.

EITF No. 02-16, “Accounting by a Reseller for Cash Consideration Received from a Vendor,” provides that cash consideration received from a vendor is presumed to be a reduction in the prices of the vendor’s products or services and should, therefore, be characterized as a reduction in cost of sales unless it is a payment for assets or services delivered to the vendor, in which case the cash consideration should be characterized as revenue, or it is a reimbursement of costs incurred to sell the vendor’s products, in which case the cash consideration should be characterized as a reduction of that cost. EITF No. 02-16 became effective for the Company in the first quarter of 2003. The Company applied the provisions of EITF No. 02-16 prospectively which resulted in deferring recognition of $10.3 million of allowances from the first quarter to the second quarter of 2003.

In November 2003, the EITF reached a consensus on EITF No. 03-10, “Application of Issue No. 02-16 by Resellers to Sales Incentives Offered to Consumers by Manufacturers.” EITF No. 03-10 addresses the accounting for manufacturer sales incentives offered directly to consumers, including manufacturer coupons. The consensus applies to new arrangements, including modifications to existing arrangements, entered into in fiscal periods beginning after November 25, 2003. Adoption of EITF No. 03-10 did not have a material effect on the Company’s financial statements.

In November 2002, FASB Interpretation (“FIN”) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others,” was issued. This interpretation requires initial measurement and recognition, on a prospective basis only, to guarantees issued or modified after December 31, 2002. Additionally, certain disclosure requirements became effective for financial statements ending after December 15, 2002. The Company complies with the disclosure provisions of FIN No. 45, and adoption of FIN No. 45 did not have a material effect on the Company’s financial statements.

During January 2003, FIN No. 46, “Consolidation of Variable Interest Entities,” was issued. FIN No. 46 requires that if an entity has a controlling interest in a variable interest entity, the assets, liabilities and results of activities of the variable interest entity should be included in the consolidated financial statements of the entity. The provisions of FIN No. 46 are effective for all arrangements entered into after January 31, 2003. For those arrangements entered into prior to February 1, 2003, the provisions of FIN No. 46 were required to be adopted at the beginning of the first interim or annual period beginning after June 15, 2003. However, in December 2003 the FASB published a revision to FIN No. 46 (hereafter referred to as “FIN No. 46R”) to clarify some of the provisions of FIN No. 46, and to exempt certain entities from its requirements. Under the new guidance, there are new effective dates for companies that have interests in structures that are commonly referred to as special-purpose entities. These rules are effective for financial statements for periods ending after March 15, 2004. The adoption of FIN No. 46R is not expected to have any impact on Safeway’s financial statements, as the Company does not have any variable interest entities.

Note B: Goodwill

A summary of changes in Safeway’s goodwill during 2003 and 2002 by geographic area is as follows:

	2003									2002
(In millions)	U.S.			Canada			Total			U.S.			Canada			Total
Balance – beginning of the year	$	3,062.9		$	62.8		$	3,125.7		$	5,011.7		$	62.1		$	5,073.8
Cumulative effect of accounting change		—			—			—			(700.0	)		—			(700.0	)
Genuardi’s acquisition		—			—			—			23.4			—			23.4
Impairment charges		(729.1	)		—			(729.1	)		(1,288.0	)		—			(1,288.0	)
Other adjustments		(5.5	)(3)		13.8	(2)		8.3			15.8	(1)		0.7	(2)		16.5
Balance – end of year	$	2,328.3		$	76.6		$	2,404.9		$	3,062.9		$	62.8		$	3,125.7

⁽¹⁾ Primarily represents a reclassification in connection with the consolidation of an affiliate due to an increase in Safeway’s ownership.

⁽²⁾ Represents foreign currency translation adjustments.

⁽³⁾ Primarily represents revised estimate of pre-acquisition tax accrual.

Safeway Inc. 2003 Annual Report 37

The Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” on December 30, 2001. Under the transitional provisions of SFAS No. 142, the Company’s goodwill was tested for impairment as of December 30, 2001. Each of the Company’s reporting units were tested for impairment by comparing the fair value of each reporting unit with its carrying value. Fair value was determined based on a valuation study performed by an independent third party which primarily considered the discounted cash flow, guideline company and similar transaction methods. As a result of the Company’s impairment test, the Company recorded an impairment loss to reduce the carrying value of goodwill at Dominick’s by $589.0 million and Randall’s by $111.0 million to its implied fair value. Impairment in both cases was due to a combination of factors including acquisition price, post-acquisition capital expenditures and operating performance. In accordance with SFAS No. 142, the impairment charge was reflected as a cumulative effect of accounting change in the Company’s statement of operations.

As required by SFAS No. 142, Safeway tested goodwill for impairment again in the fourth quarter of 2002, which represents the annual impairment testing date selected by Safeway. Fair value was determined based on a valuation study performed by an independent third party which primarily considered the discounted cash flow and guideline company method. As a result of this annual review, Safeway recorded an impairment charge for Dominick’s goodwill of $583.8 million and for Randall’s goodwill of $704.2 million. These additional charges reflect declining multiples in the retail grocery industry and operating performance.

In the first 36 weeks of 2003, Safeway reduced the carrying value of Dominick’s in part by writing down an additional $256.5 million of goodwill, based on indications of value received during the sale process. In November 2003, Safeway announced that it was taking Dominick’s off the market. As a result, in the fourth quarter of 2003 Safeway incurred an additional goodwill impairment charge of $24.9 million relating to Dominick’s.

Also in the fourth quarter of 2003, Safeway performed its annual review of goodwill. Fair value was determined based on a valuation study performed by an independent third party which primarily considered the discounted cash flow and guideline company method. As a result of this annual review, Safeway recorded an impairment charge for Randall’s goodwill of $447.7 million. The additional charges reflect declining multiples in the retail grocery industry and operating performance. There is no remaining goodwill for Dominick’s or Randall’s on Safeway’s consolidated balance sheet at year-end 2003.

Safeway’s adoption of SFAS No. 142 eliminated the amortization of goodwill beginning in the first quarter of 2002. The following table adjusts net (loss) income and net (loss) income per share for the elimination of goodwill amortization as required by SFAS No. 142 (in millions, except per–share amounts):

	2003			2002			2001
Reported net (loss) income	$	(169.8	)	$	(828.1	)	$	1,253.9
Add back:
Goodwill amortization		—			—			140.4
Adjusted net (loss) income	$	(169.8	)	$	(828.1	)	$	1,394.3
Basic (loss) earnings per share:
Reported net (loss) income	$	(0.38	)	$	(1.77	)	$	2.49
Add back:
Goodwill amortization		—			—			0.28
Adjusted net (loss) income	$	(0.38	)	$	(1.77	)	$	2.77
Diluted (loss) earnings per share:
Reported net (loss) income	$	(0.38	)	$	(1.77	)	$	2.44
Add back:
Goodwill amortization		—			—			0.28
Adjusted net (loss) income	$	(0.38	)	$	(1.77	)	$	2.72

Note C: Store Closing and Impairment Charges

IMPAIRMENT WRITE-DOWNS Safeway recognized impairment charges on the write-down of long-lived assets of $344.9 million in 2003, $213.1 million in 2002 and $6.7 million in 2001. This includes Dominick’s impairment charges of $311.4 million in 2003 and $201.3 million in 2002. These charges are included as a component of operating and administrative expense.

38 Safeway Inc. 2003 Annual Report

In November 2002, Safeway announced the decision to sell the Dominick’s division and exit the Chicago market due to labor issues. In accordance with SFAS No. 144, Safeway recorded a pre-tax charge for the impairment of long-lived assets of $201.3 million in the fourth quarter of 2002 to adjust Dominick’s to its estimated fair market value less cost to sell.

In the first 36 weeks of 2003, Safeway reduced the carrying value of Dominick’s in part by writing down an additional $120.7 million of long-lived assets, based on indications of value received during the sale process. In November 2003, Safeway announced that it was taking Dominick’s off the market. Safeway reclassified Dominick’s from an “asset held for sale” to “assets held and used” and adjusted Dominick’s individual long-lived assets to the lower of cost or fair value. As a result, in the fourth quarter of 2003 Safeway incurred a pre-tax, long-lived asset impairment charge of $190.7 million.

STORE LEASE EXIT COSTS The reserve for store lease exit costs includes the following activity for 2003, 2002 and 2001 (in millions):

	2003			2002			2001
Beginning balance	$	132.1		$	132.4		$	144.6
Provision for estimated net future cash flows(1) of additional closed stores		3.7			30.6			10.1
Estimated net future cash flows(1) of stores assumed through acquisitions that are closed or designated to be closed		—			—			6.5
Net cash flows, interest accretion, changes in estimates of net future cash flows		(6.7	)		(30.9	)		(28.8	)
Ending balance	$	129.1		$	132.1		$	132.4

⁽¹⁾ Estimated net future cash flows represents future minimum lease payments and related ancillary costs from the date of closure to the end of the remaining lease term, net of estimated cost recoveries that may be achieved through subletting properties or through favorable lease terminations.

Store lease exits costs are included as a component of operating and administrative expense. Store lease exit costs related to the Furr’s and Homeland bankruptcies are not included above but are discussed in Note L.

Note D: Financing

Notes and debentures were composed of the following at year-end (in millions):

	2003			2002
Commercial paper	$	1,210.6		$	1,744.1
Bank credit agreement, unsecured		—			25.3
9.30% Senior Secured Debentures due 2007		24.3			24.3
6.85% Senior Notes due 2004, unsecured		200.0			200.0
7.00% Senior Notes due 2007, unsecured		250.0			250.0
7.45% Senior Debentures due 2027, unsecured		150.0			150.0
6.05% Senior Notes due 2003, unsecured		—			350.0
6.50% Senior Notes due 2008, unsecured		250.0			250.0
7.25% Senior Notes due 2004, unsecured		400.0			400.0
7.50% Senior Notes due 2009, unsecured		500.0			500.0
6.15% Senior Notes due 2006, unsecured		700.0			700.0
6.50% Senior Notes due 2011, unsecured		500.0			500.0
7.25% Senior Debentures due 2031, unsecured		600.0			600.0
3.625% Senior Notes due 2003, unsecured		—			400.0
3.80% Senior Notes due 2005, unsecured		225.0			225.0
4.80% Senior Notes due 2007, unsecured		480.0			480.0
5.80% Senior Notes due 2012, unsecured		800.0			800.0
Floating Rate Senior Notes due 2005, unsecured		150.0			—
2.50% Senior Notes due 2005, unsecured		200.0			—
4.125% Senior Notes due 2008, unsecured		300.0			—
9.875% Senior Subordinated Debentures due 2007, unsecured		24.2			24.2
9.65% Senior Subordinated Debentures due 2004, unsecured		81.2			81.2
Mortgage notes payable, secured		33.7			40.6
Other notes payable, unsecured		16.5			21.6
Medium-term notes, unsecured		—			16.5
Short-term bank borrowings, unsecured		8.0			7.6
		7,103.5			7,790.4
Less current maturities		(699.5	)		(780.5	)
Long-term portion	$	6,404.0		$	7,009.9

COMMERCIAL PAPER The amount of commercial paper borrowings is limited to the unused borrowing capacity under the bank credit agreement. Commercial paper is classified as long-term because the Company intends to and has the ability to refinance these borrowings on a long-term basis through either continued commercial paper borrowings or utilization of the bank credit agreement, which matures in 2006. The weighted average interest rate on commercial paper borrowings was 1.29% during 2003 and 1.18% at year-end 2003.

Safeway Inc. 2003 Annual Report 39

BANK CREDIT AGREEMENT Safeway’s total borrowing capacity under the bank credit agreement is $2,437.5 million. Of the $2,437.5 million credit line, $1,250.0 million matures in 2006 and has a one-year extension option requiring lender consent. Another $1,187.5 million is renewable annually through 2006 and can be extended by the Company for an additional year through a term-loan conversion feature or through a one-year extension option requiring lender consent. The restrictive covenants of the bank credit agreement limit Safeway with respect to, among other things, creating liens upon its assets and disposing of material amounts of assets other than in the ordinary course of business. Safeway is also required to maintain a minimum Adjusted EBITDA to interest expense ratio of 2.0 to 1 and a maximum debt to Adjusted EBITDA ratio of 3.5 to 1. At year-end 2003, the Company had total unused borrowing capacity under the bank credit agreement of $1,188.4 million.

U.S. borrowings under the bank credit agreement carry interest at one of the following rates selected by the Company: (i) the prime rate; (ii) a rate based on rates at which Eurodollar deposits are offered to first-class banks by the lenders in the bank credit agreement plus a pricing margin based on the Company’s debt rating or interest coverage ratio (the “Pricing Margin”); or (iii) rates quoted at the discretion of the lenders. Canadian borrowings denominated in U.S. dollars carry interest at one of the following rates selected by the Company: (a) the Canadian base rate; or (b) the Canadian Eurodollar rate plus the Pricing Margin. Canadian borrowings denominated in Canadian dollars carry interest at one of the following rates selected by the Company: (i) the Canadian prime rate or (ii) the rate for Canadian bankers acceptances plus the Pricing Margin.

The weighted average interest rate on borrowings under the bank credit agreement was 2.91% during 2003.

SENIOR SECURED INDEBTEDNESS The 9.30% Senior Secured Debentures due 2007 are secured by a deed of trust that created a lien on the land, buildings and equipment owned by Safeway at its distribution center in Tracy, California.

SENIOR UNSECURED INDEBTEDNESS In October 2003, Safeway issued senior unsecured debt facilities consisting of Floating Rate Notes (LIBOR plus 0.47%) due 2005, 2.50% Notes due 2005 and 4.125% Notes due 2008.

In August 2002, Safeway issued senior unsecured debt facilities consisting of 3.80% Notes due 2005 and 5.80% Notes due 2012.

In July 2002, Safeway issued senior unsecured debt facilities consisting of 4.80% Notes due 2007.

SENIOR SUBORDINATED INDEBTEDNESS The 9.65% Senior Subordinated Debentures due 2004 and 9.875% Senior Subordinated Debentures due 2007 are subordinated in right of payment to, among other things, the Company’s borrowings under the bank credit agreement, the 9.30% Senior Secured Debentures, the Senior Unsecured Indebtedness and mortgage notes payable.

MORTGAGE NOTES PAYABLE Mortgage notes payable at year-end 2003 have remaining terms ranging from one to 20 years, have a weighted average interest rate of 9.04% and are secured by properties with a net book value of approximately $164.9 million.

OTHER NOTES PAYABLE Other notes payable at year-end 2003 have remaining terms ranging from one to six years and a weighted average interest rate of 1.44%.

ANNUAL DEBT MATURITIES As of year-end 2003, annual debt maturities were as follows (in millions):

2004	$	699.5
2005		583.4
2006		1,922.5
2007		785.1
2008		553.5
Thereafter		2,559.5
	$	7,103.5

LETTERS OF CREDIT The Company had letters of credit of $82.0 million outstanding at year-end 2003, of which $38.5 million were issued under the bank credit agreement. The letters of credit are maintained primarily to support performance, payment, deposit or surety obligations of the Company. The Company pays commitment fees ranging from 0.15% to 1.00% on the outstanding portion of the letters of credit.

Note E: Lease Obligations

Approximately two-thirds of the premises that the Company occupies are leased. The Company had approximately 1,625 leases at year-end 2003, including approximately 225 that are capitalized for financial reporting purposes. Most leases have renewal options, some with terms and conditions similar to the original lease, others with reduced rental rates during the option periods. Certain of these leases contain options to purchase the property at amounts that approximate fair market value.

40 Safeway Inc. 2003 Annual Report

As of year-end 2003, future minimum rental payments applicable to non-cancelable capital and operating leases with remaining terms in excess of one year were as follows (in millions):

	Capital Leases			Operating Leases
2004	$	118.0		$	400.1
2005		104.6			394.6
2006		97.7			379.2
2007		94.2			358.4
2008		90.9			340.7
Thereafter		907.0			2,885.7
Total minimum lease payments		1,412.4		$	4,758.7
Less amounts representing interest		(693.6	)
Present value of net minimum lease payments		718.8
Less current obligations		(50.5	)
Long-term obligations	$	668.3

Future minimum lease payments under non-cancelable capital and operating lease agreements have not been reduced by minimum sublease rental income of $202.3 million.

Amortization expense for property under capital leases was $35.4 million in 2003, $42.4 million in 2002 and $38.9 million in 2001. Accumulated amortization of property under capital leases was $181.6 million at year-end 2003 and $151.6 million at year-end 2002.

The following schedule shows the composition of total rental expense for all operating leases (in millions). In general, contingent rentals are based on individual store sales.

	2003			2002			2001
Property leases:
Minimum rentals	$	411.4		$	388.7		$	369.0
Contingent rentals		25.6			17.0			16.5
Less rentals from subleases		(31.4	)		(31.3	)		(34.1	)
		405.6			374.4			351.4
Equipment leases		25.2			25.6			31.0
	$	430.8		$	400.0		$	382.4

Note F: Interest Expense

Interest expense consisted of the following (in millions):

	2003			2002			2001
Commercial paper	$	16.4		$	32.0		$	61.3
Bank credit agreement		3.5			3.1			6.8
9.30% Senior Secured Debentures		2.3			2.3			2.3
6.85% Senior Notes		13.7			13.7			13.7
7.00% Senior Notes		17.5			17.5			17.5
7.45% Senior Debentures		11.2			11.2			11.2
5.875% Senior Notes		—			—			20.3
6.05% Senior Notes		18.3			21.2			21.2
6.50% Senior Notes		16.3			16.3			16.3
7.00% Senior Notes		—			29.4			42.0
7.25% Senior Notes		29.0			29.0			29.0
7.50% Senior Notes		37.5			37.5			37.5
6.15% Senior Notes		43.1			43.1			35.5
6.50% Senior Notes		32.5			32.5			26.8
7.25% Senior Debentures		43.5			43.5			39.8
3.625% Senior Notes		12.3			14.5			2.2
3.80% Senior Notes		8.6			3.3			—
4.80% Senior Notes		23.0			10.5			—
5.80% Senior Notes		46.4			17.7			—
Floating Rate Senior Notes		0.4			—			—
2.50% Senior Notes		0.9			—			—
4.125% Senior Notes		2.3			—			—
10% Senior Subordinated Notes		—			—			7.2
9.65% Senior Subordinated Debentures		7.8			7.8			7.8
9.875% Senior Subordinated Debentures		2.4			2.4			2.4
10% Senior Notes		—			0.5			0.6
Mortgage notes payable		3.3			4.2			6.0
Other notes payable		0.7			1.8			3.0
Medium-term notes		0.4			1.4			1.4
Short-term bank borrowings		0.4			—			0.9
Obligations under capital leases		63.1			57.0			50.1
Amortization of deferred finance costs		8.0			7.8			8.0
Interest rate swap agreements		(0.5	)		0.6			1.8
Capitalized interest		(21.9	)		(31.0	)		(25.7	)
	$	442.4		$	430.8		$	446.9

The Company effectively converted $300.0 million of its 4.125% fixed-rate debt to floating rate debt through an interest rate swap agreement in 2003. Interest rate swap agreements decreased interest expense by $0.5 million in 2003, increased interest expense by $0.6 million in 2002 and increased interest expense by $1.8 million in 2001.

Safeway Inc. 2003 Annual Report 41

Note G: Capital Stock

SHARES AUTHORIZED AND ISSUED Authorized preferred stock consists of 25 million shares of which none was outstanding during 2003, 2002 or 2001. Authorized common stock consists of 1.5 billion shares at $0.01 par value. Common stock outstanding at year-end 2003 was 444.2 million shares (net of 131.2 million shares of treasury stock) compared to 441.0 million shares (net of 132.0 million shares of treasury stock) at year-end 2002.

STOCK OPTION PLANS Under Safeway’s stock option plans, the Company may grant incentive and non-qualified options to purchase common stock at an exercise price equal to or greater than the fair market value at the grant date, as determined by the Executive Compensation Committee of the Board of Directors. Options generally vest over five or seven years. Vested options are exercisable in part or in full at any time prior to the expiration date of 10 to 15 years from the date of the grant. Options to purchase 18.3 million shares were available for grant at year-end 2003.

On July 31, 2002, the Board of Directors adopted the 2002 Equity Incentive Plan of Safeway Inc. (the “2002 Plan”), under which awards of non-qualified stock options and stock-based awards may be made. There are 2.0 million shares of common stock authorized for issuance pursuant to grants under the 2002 Plan. As of year-end 2003, no options have been granted under this plan.

In 2000, the Company granted an option to purchase 100,000 shares of common stock to a member of the Company’s Board of Directors as compensation for services to Safeway as a consultant regarding the Company’s equity investment in Future Beef Operations Holdings, LLC (“FBO”). The option has an exercise price of $41.00 per share and vests ratably over five years. The Company estimates the fair value of the option granted using the Black-Scholes option pricing model with assumptions similar to those used by the Company to value employee stock options. The Company charged $0.2 million to compensation expense in 2003, reversed $0.2 million from compensation expense in 2002 and charged $0.4 million to compensation expense in 2001 for this option.

RESTRICTED STOCK The Company awarded 706,236 shares of restricted stock to certain officers and key employees in 2003. These shares vest over a five-year period and are subject to certain transfer restrictions and forfeiture prior to vesting. Deferred stock compensation, representing the fair value of the stock at the measurement date of the award, is amortized to compensation expense over the vesting period. The amortization of this restricted stock resulted in $0.2 million in compensation expense in 2003. As of January 3, 2004, 706,236 shares were restricted and unvested.

No restricted stock awards were granted in 2002 or 2001. The Company charged $1.0 million to compensation expense in 2001 relating to a restricted stock award granted in 2000 to an executive officer.

42 Safeway Inc. 2003 Annual Report

Activity in the Company’s stock option plans for the three-year period ended January 3, 2004 was as follows:

	Options		Weighted-Average Exercise Price
Outstanding, year-end 2000	37,179,741		$	25.66
2001 Activity:
Granted	5,463,474			50.06
Canceled	(1,073,248	)		40.99
Exercised	(2,923,086	)		12.85
Outstanding, year-end 2001	38,646,881			29.61
2002 Activity:
Granted	5,044,297			39.57
Canceled	(2,727,671	)		39.08
Exercised	(3,019,997	)		10.64
Outstanding, year-end 2002	37,943,510			31.70
2003 Activity:
Granted	4,936,354			21.52
Canceled	(3,355,444	)		38.42
Exercised	(2,511,557	)		6.85
Outstanding, year-end 2003	37,012,863			31.29
Exercisable, year-end 2001	18,758,616			16.20
Exercisable, year-end 2002	19,960,460			21.79
Exercisable, year-end 2003	21,697,133			27.24
Weighted average fair value of options granted during the year:
2001 $22.99
2002   18.46
2003     9.64

The following table summarizes stock option information at year-end 2003:

Range of Exercise Prices	Options Outstanding					Options Exercisable
	Number of Options	Weighted-Average Remaining Contractual Life		Weighted-Average Exercise Price		Number of Options	Weighted-Average Exercise Price
$  1.57 to $   4.63	4,350,369	3.52	years	$	3.03	4,350,369	$	3.03
4.72 to   11.09	3,833,093	1.19			7.38	3,833,093		7.38
11.61 to   20.15	3,772,990	6.20			19.01	827,398		15.61
20.25 to   27.40	4,067,447	7.17			25.09	1,566,153		25.10
29.69 to   38.00	4,411,932	5.89			34.07	2,518,439		34.34
38.19 to   42.69	4,441,341	5.82			41.44	2,640,776		41.25
42.81 to   46.09	3,778,701	7.46			44.78	1,346,277		44.33
46.10 to   52.20	4,260,616	6.74			49.77	2,304,368		49.61
52.56 to   62.50	4,096,374	6.47			55.45	2,310,260		55.37
1.57 to   62.50	37,012,863	5.61			31.29	21,697,133		27.24

Safeway Inc. 2003 Annual Report 43

ADDITIONAL STOCK PLAN INFORMATION The Company accounts for its stock-based awards using the intrinsic value method in accordance with APB No. 25, and its related interpretations. Accordingly, no compensation expense has been recognized in the financial statements for employee stock option awards granted at fair market value.

SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, requires the disclosure of pro forma net income and earnings per share as if the Company had adopted the fair value method as of the beginning of fiscal 1995. Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company’s stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company’s calculations were made using the Black-Scholes option pricing model with the following weighted average assumptions: seven years expected life; stock volatility of 37% in 2003, 36% in 2002 and 34% in 2000; risk-free interest rates of 3.53% in 2003, 4.35% in 2002 and 4.86% in 2001; and no dividends during the expected term.

The Company’s calculations are based on a single-option valuation approach and forfeitures are recognized as they occur. However, the impact of outstanding unvested stock options granted prior to 1995 has been excluded from the pro forma calculation; accordingly, the pro forma results are not indicative of future period pro forma results. Had compensation cost for Safeway’s stock option plans been determined based on the fair value at the grant date for awards from 1996 through 2002, consistent with the provisions of SFAS No. 123, the Company’s net income and earnings per share would have been reduced to the pro forma amounts disclosed in Note A.

Note H: Taxes on Income

The components of income tax expense are as follows (in millions):

	2003			2002			2001
Current:
Federal	$	251.5		$	470.0		$	597.9
State		51.8			63.6			96.6
Foreign		85.5			61.9			77.8
		388.8			595.5			772.3
Deferred:
Federal		(48.5	)		81.6			48.8
State		(24.5	)		(15.1	)		13.7
Foreign		(4.9	)		(1.6	)		6.3
		(77.9	)		64.9			68.8
	$	310.9		$	660.4		$	841.1

The reconciliation of the provision for income taxes at the U.S. federal statutory income tax rate to the Company’s income taxes is as follows (dollars in millions):

	2003			2002			2001
Statutory rate		35	%		35	%		35	%
Income tax expense using federal statutory rate	$	49.4		$	186.3		$	733.3
State taxes on income net of federal benefit		17.7			31.5			71.7
Nondeductible goodwill impairment and amortization		255.2			450.8			45.1
Equity earnings of foreign affiliates		7.0			(2.7	)		(9.9	)
Charitable donations of inventory		(8.5	)		(7.4	)		(7.0	)
Affiliate’s losses not currently benefitted		4.1			18.4			—
Tax settlements		(6.2	)		(19.2	)		(4.7	)
Other		(7.8	)		2.7			12.6
	$	310.9		$	660.4		$	841.1

Significant components of the Company’s net deferred tax liability at year-end were as follows (in millions):

	2003			2002
Deferred tax assets:
Workers’ compensation and other claims	$	166.5		$	133.9
Reserves not currently deductible		66.3			74.9
Accrued claims and other liabilities		38.6			41.3
Employee benefits		24.6			43.6
Operating loss carryforwards		66.3			60.1
Other assets		108.4			137.3
		470.7			491.1
Valuation allowance		(66.3	)		(60.1	)
		404.4			431.0

44 Safeway Inc. 2003 Annual Report

	2003			2002
Deferred tax liabilities:
Property		(440.4	)		(487.3	)
Prepaid pension costs		(176.5	)		(215.0	)
Inventory		(175.3	)		(197.9	)
Investments in foreign operations		(114.8	)		(97.2	)
		(907.0	)		(997.4	)
Net deferred tax liability	$	(502.6	)	$	(566.4	)
Less current (liability) asset		(80.7	)		11.5
Long-term portion	$	(421.9	)	$	(577.9	)

At January 3, 2004, certain undistributed earnings of the Company’s foreign operations totaling $1,029.7 million were considered to be permanently reinvested. No deferred tax liability has been recognized for the remittance of such earnings to the United States since it is the Company’s intention to utilize those earnings in the foreign operations for an indefinite period of time, or to repatriate such earnings only when tax efficient to do so. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable; however, unrecognized foreign tax credit carryovers may be available to reduce some portion of the U.S. income tax liability.

As of January 3, 2004, GroceryWorks’ net operating loss (“NOL”) carryforwards were approximately $189.5 million. These net operating loss carryforwards expire at various dates from 2019 to 2023. Until sufficient evidence exists that GroceryWorks will have future taxable income to absorb the NOL carryforwards, Safeway will provide a valuation allowance for the entire deferred tax asset relating to these carryforwards. In the case of any subsequent reversal of this valuation allowance, approximately $23.0 million of the tax benefit realized will result in a reduction of GroceryWorks’ goodwill or other noncurrent intangible assets.

Note I: Employee Benefit Plans and Collective Bargaining Agreements

RETIREMENT PLANS The Company maintains defined benefit, non-contributory retirement plans for substantially all of its employees not participating in multi-employer pension plans.

In connection with the Genuardi’s acquisition in 2001, the Randall’s acquisition in 1999 and the Vons merger in 1997, the Company assumed the sponsorship and obligations of Genuardi’s, Randall’s and Vons’ retirement plans. The Randall’s retirement plan was merged with the Safeway retirement plan in 2003. The actuarial assumptions for the existing Genuardi’s and Vons’ retirement plans are comparable to those for the Safeway retirement plan. Genuardi’s and Vons’ retirement plans have been combined with Safeway’s for financial statement presentation.

The following tables provide a reconciliation of the changes in the retirement plans’ benefit obligation and fair value of assets over the two-year period ended January 3, 2004 and a statement of the funded status as of year-end 2003 and 2002 (in millions):

	2003			2002
Change in benefit obligation:
Beginning balance	$	1,519.2		$	1,286.9
Service cost		95.8			74.6
Interest cost		102.2			82.9
Plan amendments		7.3			19.4
Actuarial loss		129.1			138.9
Benefit payments		(93.5	)		(86.0	)
Currency translation adjustment		60.5			2.5
Ending balance	$	1,820.6		$	1,519.2
	2003			2002
Change in fair value of plan assets:
Beginning balance	$	1,572.4		$	1,782.8
Actual return (loss) on plan assets		357.1			(158.5	)
Employer contributions		14.2			31.8
Benefit payments		(93.5	)		(86.0	)
Currency translation adjustment		55.3			2.3
Ending balance	$	1,905.5		$	1,572.4
	2003			2002
Funded status:
Fair value of plan assets	$	1,905.5		$	1,572.4
Projected benefit obligation		(1,820.6	)		(1,519.2	)
Funded status		84.9			53.2
Adjustment for difference in book and tax basis of assets		(165.1	)		(165.1	)
Unamortized prior service cost		95.9			104.0
Unrecognized loss		403.0			543.1
Prepaid pension cost	$	418.7		$	535.2

The following table provides the components of 2003, 2002 and 2001 net pension (expense) income for the retirement plans (in millions):

	2003			2002			2001
Estimated return on assets	$	132.5		$	143.7		$	158.9
Service cost		(95.8	)		(74.6	)		(58.2	)
Interest cost		(102.2	)		(82.9	)		(76.4	)
Amortization of prior service cost		(15.5	)		(14.7	)		(14.0	)
Amortization of unrecognized (losses) gains		(49.9	)		(1.8	)		17.0
Net pension (expense) income	$	(130.9	)	$	(30.3	)	$	27.3

Prior service costs are amortized on a straight-line basis over the average remaining service period of active participants.

Safeway Inc. 2003 Annual Report 45

Actuarial gains and losses are amortized over the average remaining service life of active participants when the accumulation of such gains and losses exceeds 10% of the greater of the projected benefit obligation and the fair value of plan assets. The Company uses its fiscal year-end date as the measurement date for its plans. The accumulated benefit obligation for all U.S. plans was $1,328.1 million at year-end 2003 and $1,163.2 million at year-end 2002.

The actuarial assumptions used to determine year-end projected benefit obligation were as follows:

	2003		2002		2001
Discount rate:
United States plans	6.0	%	6.5	%	7.5	%
Canadian plans	6.0		6.5		7.0
Combined weighted average rate	6.0		6.5		7.4
Rate of compensation increase:
United States plans	5.0	%	5.0	%	5.0	%
Canadian plans	3.5		3.5		5.0

The actuarial assumptions used to determine net periodic benefit cost were as follows:

	2003		2002		2001
Discount rate:
United States plans	6.5	%	7.5	%	7.8	%
Canadian plans	6.5		7.0		7.0
Combined weighted average rate	6.5		7.4		7.6
Expected return of plan assets:
United States plans	8.5	%	9.0	%	9.0	%
Canadian plans	7.5		8.0		7.0
Rate of compensation increase:
United States plans	5.0	%	5.0	%	5.0	%
Canadian plans	3.5		5.0		5.0

The Company had adopted and implemented an investment policy for the defined benefit pension plans that incorporates a strategic long-term asset allocation mix designed to meet the Company’s long-term pension requirements. This asset allocation policy mix is reviewed annually and, on a regular basis, actual allocations are rebalanced to the prevailing targets. The following table summarizes actual allocations for U.S. plans as of January 3, 2004 and December 28, 2002:

			Plan Assets
Asset Category	Target		2003		2002
Domestic equity	50	%	51.9	%	48.7	%
International equity	15	%	17.9	%	15.9	%
Domestic fixed income	35	%	28.9	%	34.0	%
Cash and other	—		1.3	%	1.4	%
Total	100	%	100.0	%	100.0	%

The investment policy also emphasizes the following key objectives: (1) maintain a diversified portfolio among asset classes and investment styles, (2) maintain an acceptable level of risk in pursuit of long-term economic benefit, (3) maximize the opportunity for value added returns from active management, and (4) maintain adequate controls over administrative costs.

To meet these objectives, the Company’s investment policy reflects the following major themes: (1) diversify holdings to achieve broad coverage of both stock and bond markets; and (2) use active investment managers with disciplined, clearly defined strategies, while establishing investment guidelines and monitoring procedures for each investment manager to ensure the characteristics of the portfolio is consistent with the original investment mandate.

Expected rates of return on plan assets were developed by determining projected stock and bond returns and then applying these returns to the target asset allocations of the employee benefit trusts, resulting in a weighted-average rate of return on plan assets. Equity returns were based primarily on historical returns of the S&P 500 Index. Fixed income projected returns were based primarily on historical returns for the broad U.S. bond market.

Safeway expects to contribute approximately $1.0 million to its U.S. defined benefit pension plan trusts in 2004.

RETIREMENT RESTORATION PLAN The Retirement Restoration Plan provides death benefits and supplemental income payments for senior executives after retirement. The Company recognized expense of $6.7 million in 2003, $5.7 million in 2002 and $5.5 million in 2001. The aggregate projected benefit obligation of the Retirement Restoration Plan was approximately $73.3 million at year-end 2003 and $64.2 million at year-end 2002.

POSTRETIREMENT BENEFITS OTHER THAN PENSION In addition to the Company’s retirement plans and the Retirement Restoration Plan benefits, the Company sponsors plans that provide postretirement medical and life insurance benefits to certain salaried employees. Retirees share a portion of the cost of the postretirement medical plans. Safeway pays all the costs of the life insurance plans. The plans are not funded.

The Company’s APBO was $67.8 million at year-end 2003 and $63.9 million at year-end 2002. The APBO represents the actuarial present value of the benefits expected to be paid after retirement. Postretirement benefit expense was $9.2 million in 2003, $8.0 million in 2002 and $2.6 million in 2001.

MULTI-EMPLOYER PENSION PLANS Safeway participates in various multi-employer retirement plans, covering substantially

46 Safeway Inc. 2003 Annual Report

all Company employees not covered under the Company’s non-contributory retirement plans, pursuant to agreements between the Company and various unions. These plans are generally defined benefit plans; however, in many cases, specific benefit levels are not negotiated with or known by the employer-contributors. Contributions of $172.1 million in 2003, $158.6 million in 2002 and $151.6 million in 2001 were made and charged to expense.

Under U.S. law applicable to such pension plans, a company is required to continue funding its proportionate share of a plan’s unfunded vested benefits in the event of withdrawal (as defined by the law) from a plan or plan termination. Safeway participates in a number of these pension plans, and the potential liability as a participant in these plans may be significant. The information required to determine the total amount of this contingent liability, as well as the total amount of accumulated benefits and net assets of such plans, is not readily available. During 1988 and 1987, the Company sold certain operations. In most cases, the party acquiring the operation agreed to continue making contributions to the plans. Safeway is relieved of the obligations related to these sold operations to the extent that the acquiring parties continue to make contributions. Whether such sales could result in withdrawal under ERISA and, if so, whether such withdrawals could result in liability to the Company, is not determinable at this time.

COLLECTIVE BARGAINING AGREEMENTS At year-end 2003, Safeway had more than 208,000 full and part-time employees. Approximately 69% of Safeway’s employees in the United States and Canada are covered by collective bargaining agreements negotiated with local unions affiliated with one of 12 different international unions. There are approximately 400 such agreements, typically having three-year terms, with some agreements having terms of up to five years. Accordingly, Safeway negotiates a significant number of these agreements every year.

Note J: Investment In Unconsolidated Affiliates

At year-end 2003, 2002 and 2001, Safeway’s investment in unconsolidated affiliates included a 49% ownership interest in Casa Ley, which operates 108 food and general merchandise stores in western Mexico. At year-end 2001, Safeway’s investment in unconsolidated affiliates also included a 50% voting interest in GroceryWorks, an Internet grocer, and a 15% interest in Future Beef Operations Holdings, LLC (“FBO”), a beef processing operation. During the second and third quarters of 2002, Safeway invested $11.9 million in GroceryWorks, bringing Safeway’s ownership interest to 52.5%. Therefore, Safeway changed its method of accounting for its investment in GroceryWorks from the equity method to consolidation beginning in the third quarter of 2002. Safeway invested an additional $7.1 million in GroceryWorks during the first quarter of 2003 that increased the Company’s ownership interest to 53.1%.

Equity in (losses) earnings from Safeway’s unconsolidated affiliates, which is included in other income (expense), was a loss of $7.1 million in 2003, a loss of $0.2 million in 2002 and income of $20.2 million in 2001. Equity in income in 2002 includes approximately $15.8 million in charges related to the resolution of physical inventory count discrepancies at Casa Ley. Additionally, Safeway recorded a $30.1 million impairment charge in other income (expense) in 2001 to reduce the carrying amount of the Company’s investment in GroceryWorks to its estimated fair value.

FBO was placed in bankruptcy in March 2002. Safeway was a 15% equity investor in FBO, had a supply contract for the purchase of beef from FBO and had a common board member with FBO. Safeway also had a first-loss deficiency agreement with FBO’s principal lender which provided that, under certain circumstances and in the event of a liquidation of FBO being initiated, Safeway would pay the lender up to $40 million if proceeds from the sale of collateral did not fully repay the amount owed by FBO to the lender. Safeway accrued a pre-tax charge of $51 million in other income (expense) related to the bankruptcy in 2001. The charge was primarily for payments under contractual obligations and the first-loss deficiency agreement in the event FBO was liquidated. FBO is currently in the process of being liquidated and Safeway paid the lender $40 million in January 2003.

Note K: Related-Party Transactions

Pacific Realty Associates, L.P. ( “PacTrust”), is a limited partnership, the sole general partner of which is a corporation owned by approximately 45 individuals, including three of the Company’s directors. Through their ownership in the corporate general partner, these three directors’ ownership interest in PacTrust is approximately 4.9%. None of the directors is involved in the day-to-day management of PacTrust or in the negotiations related to the purchase of properties.

During 2002, Safeway sold eight properties to PacTrust with an aggregate carrying value of $0.3 million for $2.6 million cash, resulting in an aggregate gain of $2.3 million. During 2001, Safeway sold 22 properties to PacTrust with an aggregate carrying value of $7.5 million for $13.9 million cash, resulting in an aggregate gain of $6.4 million. In 2003, Safeway did not sell any properties to PacTrust.

Safeway Inc. 2003 Annual Report 47

Safeway also leases three stores from companies that are either wholly-owned or controlled by PacTrust. The Company paid PacTrust $0.5 million in 2003, $0.6 million in 2002 and $0.3 million in 2001 for rent for these stores. The Company also contributed $1.8 million for site improvements for one of these stores in 2002.

PRIMEMEDIA, a targeted media company of which Kohlberg Kravis Roberts & Co. (“KKR”) is the controlling stockholder, made payments to Safeway during 2003 in the amount of $5.0 million for use of advertising space. Three of the Company’s directors are affiliated with KKR.

HBS Limited Partnership (“HBS”) was a limited partnership formed in 1996 to own, develop and operate a shopping center in Hawaii. Safeway was the sole general partner of HBS. Safeway had a note receivable of $26.5 million at year-end 2002 from HBS for funding the development of the shopping center. In connection with HBS being dissolved in 2003, Safeway purchased the Safeway store in the shopping center from HBS and the note receivable was repaid by HBS.

Safeway had a supply contract to purchase beef from FBO, which had a common board member with Safeway. In March 2002, FBO was placed in bankruptcy. See Note J.

The Company has made loans to certain of its executive officers in connection with their relocations. The promissory notes bear no interest and are secured by personal residences. At year-end 2003, $0.8 million was outstanding on these notes which are due in 2004.

Safeway sold products to Casa Ley totaling approximately $12.0 million in 2003, $19.0 million in 2002 and $13.7 million in 2001 for resale in Casa Ley’s retail stores.

Note L: Commitments and Contingencies

LEGAL MATTERS In July 1988, there was a major fire at the Company’s dry grocery warehouse in Richmond, California. Through February 26, 2004, in excess of 126,000 claims for personal injury and property damage arising from the fire have been settled for an aggregate amount of approximately $125 million. The Company’s loss as a result of the fire damage to its property and settlement of the above claims was substantially covered by insurance.

As of February 26, 2004, there were still pending approximately 775 claims against the Company for personal injury (including punitive damages), and approximately 290 separate active claims for property damage, arising from the smoke, ash and embers generated by the fire. A substantial percentage of these claims have been asserted in lawsuits against the Company filed in the Superior Court for Alameda County, California. There can be no assurance that the pending claims will be settled or otherwise disposed of for amounts and on terms comparable to those settled to date. Safeway continues to believe that coverage under its insurance policy will be sufficient and available for resolution of all remaining personal injury and property damage claims arising out of the fire.

On August 23, 2000, a lawsuit entitled Baker, et al. v. Jewel Food Stores, Inc., et al. was filed in the Circuit Court of Cook County, Illinois, against the Company’s subsidiary, Dominick’s Finer Foods, Inc. (predecessor of Dominick’s Finer Foods, LLC), and Jewel Food Stores, a subsidiary of Albertson’s, Inc. The complaint alleges, among other things, that Dominick’s and Jewel conspired to fix the retail price of milk in nine Illinois counties in the Chicago area, in violation of the Illinois Antitrust Act. The court certified the lawsuit as a class action on behalf of all persons residing in the nine-county area who purchased milk from the defendants’ retail stores in these counties during August 1996 to August 2000. In January 2003, trial began to a judge, without a jury. At trial plaintiffs’ expert calculated damages against both defendants in amounts ranging from $51 million to $126 million, which amount would be trebled under applicable law. The judge, after hearing three weeks of testimony, dismissed the action at the end of plaintiffs’ case, without requiring Dominick’s and Jewel to present the defense case. Plaintiffs filed an appeal in the Illinois Appellate Court, which is currently pending.

On or about November 21, 2003, four shareholder derivative lawsuits were filed in the California State Superior Court for San Mateo County, which actions have been consolidated into a single action entitled In re Safeway, Inc. Derivative Litigation, with a single shareholder plaintiff. The action is brought against the Company’s nine directors, Kohlberg Kravis Roberts & Co. (“KKR”), two Company officers and the Company as a nominal defendant. The consolidated complaint alleges, among other things, that the Company’s directors concealed information about poor performance at some of the Company’s divisions in order to enable KKR and certain directors and officers to sell shares of Company stock at an inflated price. The complaint asserts causes of action for breach of fiduciary duty, abuse of control, violations of the California Corporations Code and other claims. Neither the Company nor the other defendants have filed a response to the complaint.

There are also pending against the Company various claims and lawsuits arising in the normal course of business, some of which seek damages and other relief, which, if granted, would require very large expenditures.

It is management’s opinion that although the amount of liability with respect to all of the above matters cannot be ascertained at this time, any resulting liability, including any punitive damages, will not have a material adverse effect on the Company’s financial statements taken as a whole.

48 Safeway Inc. 2003 Annual Report

FURR’S AND HOMELAND CHARGE In 1987, Safeway assigned a number of leases to Furr’s Inc. (“Furr’s”) and Homeland Stores, Inc. (“Homeland”) as part of the sale of the Company’s former El Paso, Texas and Oklahoma City, Oklahoma divisions. Safeway is contingently liable if Furr’s and Homeland are unable to continue making rental payments on these leases. In 2001, Furr’s and Homeland declared bankruptcy and Safeway recorded a pre-tax charge to earnings of $42.7 million ($0.05 per share) to recognize the estimated lease liabilities associated with these bankruptcies and for a single lease from Safeway’s former Florida division. In 2002, Furr’s began the liquidation process and Homeland emerged from bankruptcy and, based on the resolution of various leases, Safeway reversed $12.1 million of this accrual.

Safeway is unable to determine its maximum potential obligation with respect to other divested operations, should there be any similar defaults, because information about the total numbers of leases from these divestitures that are still outstanding is not available. Based on an internal assessment by the Company, performed by taking the original inventory of assigned leases at the time of the divestitures and accounting for the passage of time, Safeway expects that any potential losses beyond those recorded, should there be any similar defaults, would not be material to Safeway’s operating results, cash flow or financial position.

COMMITMENTS The Company has commitments under contracts for the purchase of property and equipment and for the construction of buildings. Portions of such contracts not completed at year-end are not reflected in the consolidated financial statements. These unrecorded commitments were $120.5 million at year-end 2003.

Note M: Subsequent Events

On October 11, 2003, seven UFCW local unions struck the Company’s 289 stores in southern California. On October 12, 2003, pursuant to the terms of a multi-employer bargaining arrangement, Kroger and Albertson’s locked out certain of their retail union employees in Southern California food stores. An agreement ending the strike was reached on February 26, 2004 and was ratified by the unions on February 28, 2004. Employees returned to work beginning March 5, 2004. As a result of this settlement, Safeway is required to make a contribution of approximately $34 million to the union health and welfare trust fund and a contract ratification bonus of approximately $9 million to employees, both of which will be expensed in the first quarter of 2004.

In November 2003, Safeway announced the closure of 12 under-performing Dominick’s stores in the first quarter of 2004, which will result in a store-lease exit charge of approximately $50 million to $55 million in the first quarter of 2004.

Note N: Segments

Safeway’s retail grocery business, which represents more than 98% of consolidated sales and operates in the United States and Canada, is its only reportable segment.

The following table presents information about the Company by geographic area (in millions):

	U.S.			Canada		Total
2003
Sales	$	31,509.3		$	4,043.4	$	35,552.7
Operating profit		344.1			229.8		573.9
(Loss) income before income taxes		(86.2	)		227.3		141.1
Long-lived assets		7,607.9			797.9		8,405.8
Total assets		13,679.8			1,416.9		15,096.7
2002
Sales	$	31,290.7		$	3,476.8	$	34,767.5
Operating profit		773.0			174.6		947.6
Income before income taxes and cumulative effect of accounting change		363.3			169.0		532.3
Long-lived assets		7,876.8			654.0		8,530.8
Total assets		14,948.8			1,098.4		16,047.2
2001
Sales	$	30,866.2		$	3,434.8	$	34,301.0
Operating profit		2,383.1			205.7		2,588.8
Income before income taxes		1,899.8			195.2		2,095.0
Long-lived assets		7,499.0			642.7		8,141.7
Total assets		16,417.5			1,045.1		17,462.6

Safeway Inc. 2003 Annual Report 49

Note O: Computation of (Loss) Earnings Per Share

	2003						2002						2001
(In millions, except per-share amounts)	Diluted			Basic			Diluted			Basic			Diluted			Basic
(Loss) income before cumulative effect of accounting change	$	(169.8	)	$	(169.8	)	$	(128.1	)	$	(128.1	)	$	1,253.9		$	1,253.9
Cumulative effect of accounting change		—			—			(700.0	)		(700.0	)		—			—
Net (loss) income	$	(169.8	)	$	(169.8	)	$	(828.1	)	$	(828.1	)	$	1,253.9		$	1,253.9
Weighted average common shares outstanding		441.9			441.9			467.3			467.3			503.3			503.3
Common share equivalents														9.9
Weighted average shares outstanding														513.2
(Loss) earnings per common share and common share equivalent:
(Loss) income before cumulative effect of accounting change	$	(0.38	)	$	(0.38	)	$	(0.27	)	$	(0.27	)	$	2.44		$	2.49
Cumulative effect of accounting change		—			—			(1.50	)		(1.50	)		—			—
Net (loss) income	$	(0.38	)	$	(0.38	)	$	(1.77	)	$	(1.77	)	$	2.44		$	2.49
Calculation of common share equivalents:
Options to purchase common shares														29.1
Common shares assumed purchased with potential proceeds														(19.2	)
Common share equivalents														9.9
Calculation of common shares assumed purchased with potential proceeds:
Potential proceeds from exercise of options to purchase common shares													$	918.9
Common stock price used under the treasury stock method													$	47.85
Common shares assumed purchased with potential proceeds														19.2

Anti–dilutive shares totaling 26.2 million in 2003, 21.7 million in 2002 and 9.0 million in 2001 have been excluded from diluted weighted average shares outstanding.

Note P: Guarantees

Safeway has applied the measurement and disclosure provisions of FIN No. 45 to the Company’s agreements that contain guarantee and indemnification clauses. FIN No. 45 requires that upon issuance of a guarantee, the guarantor must disclose and recognize a liability for the fair value of the obligation it assumes under the guarantee. The initial recognition and measurement provisions of FIN No. 45 are effective for guarantees issued or modified after December 31, 2002. As of January 3, 2004, Safeway did not have any material guarantees that were issued or modified subsequent to December 31, 2002.

However, the Company is party to a variety of contractual agreements under which Safeway may be obligated to indemnify the other party for certain matters. Those contracts primarily relate to Safeway’s commercial contracts, operating leases and other real estate contracts, trademarks, intellectual property, financial agreements and various other agreements. Under these agreements, the Company may provide certain routine indemnifications relating to representations and warranties (for example ownership of assets, environmental or tax indemnifications) or personal injury matters. The terms of these indemnifications range in duration and may not be explicitly defined. Historically, Safeway has not made significant payments for these indemnifications. The Company believes that if it were to incur a loss in any of these matters, the loss would not have a material effect on the Company’s financial condition or results of operations.

50 Safeway Inc. 2003 Annual Report

Note Q: Quarterly Information (Unaudited)

The summarized quarterly financial data presented below reflect all adjustments which, in the opinion of management, are of a normal and recurring nature necessary to present fairly the results of operations for the periods presented.

(In millions, except per-share amounts)	53 Weeks			Last 17 Weeks(1)			Third 12 Weeks(2)		Second 12 Weeks(3)		First 12 Weeks(4)
2003
Sales	$	35,552.7		$	10,984.7		$	8,276.7	$	8,248.0	$	8,043.3
Gross profit		10,533.8			3,187.3			2,474.3		2,483.7		2,388.4
Operating profit (loss)		573.9			(321.7	)		426.1		357.4		112.1
Income (loss) before income taxes		141.1			(458.0	)		330.1		258.1		10.9
Net (loss) income		(169.8	)		(695.9	)		202.5		161.0		162.6
(Loss) income per share – basic	$	(0.38	)	$	(1.57	)	$	0.46	$	0.36	$	(0.37	)
(Loss) income per share – diluted		(0.38	)		(1.57	)		0.45		0.36		(0.36	)
Price range, New York Stock Exchange		25.80			25.76			25.66		20.50		25.80
		to 16.45			to 19.87			to 19.79		to 16.45		to 17.59
(In millions, except per-share amounts)	52 Weeks			Last 16 Weeks(5)			Third 12 Weeks		Second 12 Weeks		First 12 Weeks(6)
2002
Sales	$	34,767.5		$	10,696.9		$	8,057.0	$	8,081.3	$	7,932.3
Gross profit		10,812.0			3,300.9			2,472.3		2,551.8		2,487.1
Operating profit (loss)		947.6			(795.8	)		545.1		586.7		611.5
Income (loss) before income taxes and cumulative effect of accounting change		532.3			(937.9	)		448.7		495.6		525.9
Cumulative effect of accounting change		(700.0	)		—			—		—		(700.0	)
Net (loss) income		(828.1	)		(1,050.8	)		281.3		309.3		(367.9	)
(Loss) income before cumulative effect of accounting change – basic	$	(0.27	)	$	(2.37	)	$	0.60	$	0.64	$	0.68
(Loss) income before cumulative effect of accounting change – diluted		(0.27	)		(2.37	)		0.60		0.63		0.67
Net (loss) income per share – basic	$	(1.77	)	$	(2.37	)	$	0.60	$	0.64	$	(0.76	)
Net (loss) income per share – diluted		(1.77	)		(2.37	)		0.60		0.63		(0.74	)
Price range, New York Stock Exchange		46.09			27.80			30.85		45.02		46.09
		to 19.08			to 19.08			to 25.35		to 30.67		to 38.89

⁽¹⁾ Net loss for the last 17 weeks of 2003 includes an estimated $167.5 million pre-tax impact of the southern California strike, a $447.7 million pre-tax goodwill impairment charge for Randall’s, a $24.9 million pre-tax goodwill impairment charge and a $190.7 million pre-tax property impairment charge for Dominick’s, a $249.6 million reversal of tax benefits included in the tax provision as Safeway recognized a tax benefit on the proposed sale of Dominick’s during the first 36 weeks of 2003 and reversed that benefit when Dominick’s was taken off the market, a pre-tax charge of $10.6 million to write off miscellaneous investments and a $71.0 million pre-tax charge for inventory adjustments.

⁽²⁾ Net income for the third 12 weeks of 2003 includes a $4.8 million pre-tax property impairment charge for Dominick’s.

⁽³⁾ Net income for the second 12 weeks of 2003 includes a $69.8 million pre-tax property impairment charge for Dominick’s.

⁽⁴⁾ Net income for the first 12 weeks of 2003 includes a $256.5 million pre-tax goodwill impairment charge and a $46.2 million pre-tax property impairment charge for Dominick’s.

⁽⁵⁾ Net loss for the last 16 weeks of 2002 includes a $704.2 million pre-tax goodwill impairment charge for Randall’s, a $583.8 million pre-tax goodwill impairment charge and a $201.3 million pre-tax property impairment charge for Dominick’s, $32.7 million of pre-tax income from Canadian Imperial Bank of Commerce for the termination of in-store banking with Safeway and a pre-tax charge of approximately $15.8 million related to the resolution of physical inventory count discrepancies at Casa Ley.

⁽⁶⁾ Net income for the first 12 weeks of 2002 includes a $700 million charge for the cumulative effect of adopting SFAS No. 142.

Safeway Inc. 2003 Annual Report 51

MANAGEMENT’S REPORT

SAFEWAY INC. AND SUBSIDIARIES

Financial Statements

Safeway Inc. is responsible for the preparation, integrity and fair presentation of its published financial statements. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and necessarily include amounts that are based on judgments and estimates made by management. Safeway also prepared the other information included in the annual report and is responsible for its accuracy and consistency with the financial statements.

The financial statements have been audited by Deloitte & Touche LLP, independent auditors, which were given unrestricted access to all financial records and related data, including minutes of all meetings of stockholders, the Board of Directors, and committees of the Board. Safeway believes that all representations made to the independent auditors during their audit were valid and appropriate. The report of Deloitte & Touche LLP is presented on the following page.

Internal Control System

Safeway maintains a system of internal control over financial reporting, which is designed to provide reasonable assurance to management, the Audit Committee and the Board of Directors regarding the preparation of reliable published financial statements. The system includes a documented organizational structure and division of responsibility; established policies and procedures including a code of conduct to foster a strong ethical climate, which are communicated throughout Safeway; and the careful selection, training and development of employees. Internal auditors monitor the operation of the internal control system and report findings and recommendations to management and the Audit Committee of the Board, and corrective actions are taken to address control deficiencies and other opportunities for improving the system as they are identified. The Board, operating through its Audit Committee, which is composed entirely of outside directors, provides oversight to the financial reporting process.

There are inherent limitations in the effectiveness of any system of internal control, including the possibility of circumvention or overriding of controls. Accordingly, even an effective internal control system can provide only reasonable assurance with respect to financial statement preparation. Furthermore, the effectiveness of an internal control system can change with circumstances. As of January 3, 2004 Safeway believes its system of internal controls over financial reporting was effective for providing reliable financial statements.

/s/    STEVEN A. BURD	/s/    DAVID F. BOND
Steven A. Burd Chairman, President and Chief Executive Officer	David F. Bond Senior Vice President Finance and Control

52 Safeway Inc. 2003 Annual Report

INDEPENDENT AUDITORS’ REPORT

The Board of Directors and Stockholders of Safeway Inc:

We have audited the accompanying consolidated balance sheets of Safeway Inc. and subsidiaries as of January 3, 2004 and December 28, 2002, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three fiscal years in the period ended January 3, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Safeway Inc. and subsidiaries as of January 3, 2004 and December 28, 2002, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 3, 2004 in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note A to the consolidated financial statements, in fiscal 2002 the Company changed its method of accounting for goodwill and other intangible assets to conform to Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.”

/s/    DELOITTE & TOUCHE LLP

San Francisco, California

March 17, 2004

Safeway Inc. 2003 Annual Report 53

EX-21.1

Exhibit 21.1

SAFEWAY INC.

SCHEDULE OF SUBSIDIARIES

As of January 3, 2004

The following is a list of the Company’s wholly-owned subsidiaries and includes all subsidiaries deemed significant. Twenty-four companies are not listed because they are maintained solely for the purpose of holding licenses or because they are non-wholly owned.

Blackhawk Marketing, LLC

Blackhawk Marketing Services, Inc.

Cayam Energy, LLC

ePOS! Marketing Company

GFM Holdings I, Inc. and its subsidiary:

GFM Holdings LLC and its subsidiary:

Genuardi’s Family Markets LP

GFM Holdings II, Inc.

Milford Insurance (Bermuda) Ltd.

Milford Insurance Brokerage Services, Inc.

Oakland Property Brokerage

Omnibrands, Inc.

Pak ‘N Save, Inc.

Photo Acquisition I, Inc. and its subsidiary:

Everett Realty Advisors, Inc.

Photo Acquisition II, Inc.

Randall’s Holdings, Inc. and its subsidiaries:

Randall’s Finance Company, Inc.

Randall’s Food Markets, Inc. and its subsidiary:

Randall’s Food & Drugs LP and its subsidiary:

Randall’s Management Company, Inc. and its subsidiary:

Randall’s Beverage Company, Inc.

Randall’s Investments, Inc.

SSI—AK Holdings, Inc. and its subsidiary:

Carr-Gottstein Foods Co. and its subsidiaries:

AOL Express, Inc.

APR Forwarders, Inc.

Alaska Advertisers, Inc.

Seldovia Mart, Inc.

Safeway Australia Holdings, Inc.

Safeway Canada Holdings, Inc. and its subsidiary:

Safeway New Canada, Inc. and its subsidiary:

Safeway Foreign Sales Limited and its subsidiary:

Canada Safeway Holdings Limited and its subsidiaries:

Safeway Ontario Finance Corporation

Canada Safeway Ltd. and its subsidiaries:

Canada Safeway Liquor Stores Limited

The Canada Safeway Foundation

Safeway Int’l Finance Corp of Canada Ltd.

Spud Holdings East Coast Ltd.

Safeway Claim Services, Inc.

Safeway Corporate, Inc. and its subsidiaries:

Safeway Stores 67, Inc.

Safeway Stores 68, Inc.

Safeway Stores 69, Inc.

Safeway Stores 70, Inc.

Safeway Dallas, Inc. and its subsidiaries:

Safeway Stores 78, Inc.

Safeway Stores 79, Inc.

Safeway Stores 80, Inc.

Safeway Stores 82, Inc.

Safeway Stores 85, Inc.

Safeway Stores 86, Inc.

Safeway Stores 87, Inc.

Safeway Stores 88, Inc.

Safeway Stores 89, Inc.

Safeway Stores 90, Inc.

Safeway Stores 91, Inc.

Safeway Stores 92, Inc.

Safeway Stores 96, Inc.

Safeway Stores 97, Inc.

Safeway Stores 98, Inc.

SMC Rx, Inc.

Safeway Denver, Inc. and its subsidiaries:

Safeway Stores 44, Inc.

Safeway Stores 45, Inc.

Safeway Stores 46, Inc.

Safeway Stores 47, Inc.

Safeway Stores 48, Inc.

Safeway Stores 49, Inc.

Safeway Stores 50, Inc.

Safeway Holdings I, Inc.

Safeway Leasing, Inc.

Safeway Liquor Stores, Inc.

Safeway of Western Nebraska, Inc.

Safeway Philtech Holdings, Inc. and its subsidiary:

Safeway Philtech Inc.

Safeway Richmond, Inc. and its subsidiaries:

Safeway Stores 59, Inc.

Safeway Stores 58, Inc. and its subsidiary:

Safelease, Inc.

Safeway Select Gift Source, Inc.

Safeway Southern California, Inc. and its subsidiaries:

Safeway Stores 18, Inc.

Safeway Stores 26, Inc.

Safeway Stores 28, Inc.

Safeway Stores 31, Inc.

The Vons Companies, Inc. and its subsidiary:

Vons Food Services, Inc.

Safeway Stores 42, Inc.

Safeway Stores 43, Inc.

Safeway Stores 64, Inc.

Safeway Stores 99, Inc.

Safeway Stores, Incorporated

Safeway Supply, Inc. and its subsidiaries:

Consolidated Procurement Services, Inc.

Safeway Stores 71, Inc.

Safeway Stores 72, Inc.

Safeway Stores 73, Inc.

Safeway Stores 74, Inc.

Safeway Stores 75, Inc.

Safeway Stores 76, Inc.

Safeway Stores 77, Inc.

Safeway Trucking, Inc.

Taylor Properties, Inc.

The Safeway Foundation

Vons REIT, Inc. and its subsidiary

Dominick’s Supermarkets, Inc. and its subsidiaries:

Blackhawk Properties, Inc.

Blackhawk Developments, Inc.

Dominick’s Finer Foods, LLC and its subsidiaries:

Dominick’s Finer Foods, Inc. of Illinois

The Dominick’s/Omni Foundation

Dodi Hazelcrest, Inc.

Kohl’s of Bloomingdale, Inc.

Save-It Discount Foods Corporation

EX-23.1

EXHIBIT 23.1

INDEPENDENT AUDITORS’ CONSENT

We consent to the incorporation by reference of our report dated March 16, 2004 (which report expresses an unqualified opinion and includes an emphasis paragraph relating to the adoption of a new accounting principle), incorporated by reference in this Annual Report on Form 10-K of Safeway Inc. and subsidiaries for the fiscal year ended January 3, 2004, in the following Registration Statements of Safeway Inc. and subsidiaries:

• No. 33-36753 on Form S-8 regarding the Safeway Inc. Outside Director Equity Purchase Plan,

• No. 33-37207 on Form S-8 regarding the Profit Sharing Plan of Safeway Inc. and its United States Subsidiaries,

• No. 33-42232 on Forms S-3 and S-8 regarding the Amended and Restated Stock Option and Incentive Plan for Key Employees of Safeway Inc.,

• No. 33-48884 on Form S-8 regarding the Amended and Restated Stock Option and Incentive Plan for Key Employees of Safeway Inc.,

• No. 33-51119 on Form S-8 regarding the Stock Option Plan for Consultants of Safeway Inc.,

• No. 33-54581 on Form S-8 regarding the Employee Stock Purchase Plan of Safeway Inc.,

• No. 33-63803 on Form S-8 regarding the 1994 Amended and Restated Stock Option and Incentive Plan for Key Employees of Safeway Inc.,

• No. 333-13677 on Form S-8 regarding the 1987 Plan for Consultants of Safeway Stores, Inc.,

• No. 333-22837 on Form S-8 regarding The Vons Companies, Inc. Management Stock Option Plan, The Vons Companies, Inc. 1990 Stock Option and Restricted Stock Plan and Safeway Inc. Stock Option Plan for former Directors of the Vons Companies, Inc.,

• No. 333-67575 on Form S-8 regarding the 1996 Equity Participation Plan of Dominick’s Supermarkets, Inc. and the 1995 Amended and Restricted Stock Option Plan of Dominick’s Supermarkets, Inc.,

• No. 333-84749 on Form S-8 regarding Randall’s Food Markets, Inc. Stock Option and Restricted Stock Plan and Amended and Restated 1997 Stock Purchase and Option Plan for Key Employees for Randall’s Food Markets, Inc. and Subsidiaries,

• No. 333-87289 on Form S-8 regarding the 1999 Amended and Restated Equity Participation Plan,

• No. 333-112976 on Form S-8 regarding the 1999 Amended and Restated Equity Participation Plan,

• No. 333-91975 on Form S-8 regarding Dominick’s Finer Foods, Inc. 401(k) Retirement Plan for Union Employees, as Amended,

• No. 333-30820 on Form S-8 regarding the Safeway Executive Deferred Compensation Plan and Canada Safeway Limited Executive Deferred Compensation Plan,

• No. 333-45920 on Form S-8 regarding the Safeway 401(k) Plan and Trust,

• No. 333-64354 on Form S-8 regarding the 2001 Restatement of the Von’s Companies, Inc. Pharmacists’ 401(k) Plan and Trust,

• No. 333-85132 on Form S-8 regarding the 2002 Restatement of the Safeway 401(k) Savings Plan and Trust,

• No. 333-96685 on Form S-3 regarding Debt and Equity Securities, and

• No. 333-98103 on Form S-8 regarding the 2002 Equity Incentive Plan of Safeway Inc.

/s/    Deloitte & Touche LLP

San Francisco, California

March 17, 2004

EX-31

Exhibit 31

Certifications

I, Steven A. Burd, Chairman, President and Chief Executive Officer of Safeway Inc., certify that:

1. I have reviewed this annual report on Form 10-K of Safeway Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 18, 2004	/s/    Steven A. Burd
	Steven A. Burd Chairman, President and Chief Executive Officer

Exhibit 31

Certifications

I, David F. Bond, Senior Vice President of Finance and Control (Principal Financial Officer) of Safeway Inc., certify that:

1. I have reviewed this annual report on Form 10-K of Safeway Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 18, 2004	/s/    David F. Bond
	David F. Bond Senior Vice President – Finance & Control (Principal Financial Officer)

EX-32

Exhibit 32

Certification of Chief Executive Officer

Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Safeway Inc. (the “Company”) hereby certifies that:

(i) the Annual Report on Form 10-K of the Company for the fiscal year ended January 3, 2004 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: March 18, 2004	/s/    Steven A. Burd
	Steven A. Burd
	Chief Executive Officer

Certification of Principal Financial Officer

Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Safeway Inc. (the “Company”) hereby certifies that:

(i) the Annual Report on Form 10-K of the Company for the fiscal year ended January 3, 2004 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: March 18, 2004	/s/    David F. Bond
	David F. Bond
	Senior Vice President, Finance & Control
	(Principal Financial Officer)

The foregoing certifications are being furnished solely to accompany the Report pursuant to 18 U.S.C. § 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

A signed original of this written statement required by Section 906 has been provided to Safeway Inc. and will be retained by Safeway Inc. and furnished to the Securities and Exchange Commission or its staff upon request.