10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period (12 weeks) ended December 2, 2006.

¨ 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 1-5418

SUPERVALU INC.

(Exact name of registrant as specified in its Charter)

DELAWARE	41-0617000
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer identification No.)
11840 VALLEY VIEW ROAD EDEN PRAIRIE, MINNESOTA	55344
(Address of principal executive offices)	(Zip Code)

(952) 828-4000

(Registrant’s telephone number, including area code)

N/A

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

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of January 5, 2007, there were 207,809,870 shares of the issuer’s common stock outstanding.

SUPERVALU INC. and Sub sidiaries

INDEX

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Statements of Earnings for the 12 weeks ended December 2, 2006 and December 3, 2005	3
	Condensed Consolidated Statements of Earnings for the 40 weeks ended December 2, 2006 and December 3, 2005	4
	Condensed Consolidated Composition of Net Sales and Operating Earnings for the 12 weeks and 40 weeks ended December 2, 2006 and December 3, 2005	5
	Condensed Consolidated Balance Sheets as of December 2, 2006 and February 25, 2006	6
	Condensed Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the 40 weeks ended December 2, 2006 and 52 weeks ended February 25, 2006	7
	Condensed Consolidated Statements of Cash Flows for the 40 weeks ended December 2, 2006 and December 3, 2005	8
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40
Item 4.	Controls and Procedures	40
PART II.	OTHER INFORMATION	41
Item 1.	Legal Proceedings	41
Item 1A.	Risk Factors	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 3.	Defaults Upon Senior Securities	45
Item 4.	Submission of Matters to a Vote of Security Holders	45
Item 5.	Other Information	45
Item 6.	Exhibits	46

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PART I—FINANCI AL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SUPERVALU INC. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(unaudited)

(In millions, except percent and per share data)

	Third Quarter (12 weeks) Ended
	December 2, 2006		% of Net sales		December 3, 2005		% of Net sales
Net sales	$	10,657	100.0	%	$	4,695	100.0	%
Cost of sales		8,219	77.1			4,020	85.6
Gross profit		2,438	22.9			675	14.4
Selling and administrative expenses		2,071	19.4			533	11.3
Operating earnings		367	3.5			142	3.1
Interest expense, net		183	1.7			23	0.5
Earnings before income taxes		184	1.8			119	2.6
Income tax expense		71	0.7			44	1.0
Net earnings	$	113	1.1	%	$	75	1.6	%
Net earnings per common share—basic	$	0.55			$	0.55
Net earnings per common share—diluted		0.54				0.53
Dividends declared per common share		0.1650				0.1625
Weighted average number of common shares outstanding:
Basic		207				136
Diluted		209				146

See Notes to Condensed Consolidated Financial Statements.

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SUPERVALU INC. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(unaudited)

(In millions, except percent and per share data)

	Year-to-date (40 weeks) Ended
	December 2, 2006		% of Net sales		December 3, 2005		% of Net sales
Net sales	$	27,106	100.0	%	$	15,223	100.0	%
Cost of sales		21,391	78.9			13,018	85.5
Gross profit		5,715	21.1			2,205	14.5
Selling and administrative expenses		4,789	17.7			1,803	11.8
Operating earnings		926	3.4			402	2.7
Interest expense, net		385	1.4			84	0.6
Earnings before income taxes		541	2.0			318	2.1
Income tax expense		209	0.8			118	0.8
Net earnings	$	332	1.2	%	$	200	1.3	%
Net earnings per common share—basic	$	1.81			$	1.47
Net earnings per common share—diluted		1.75				1.41
Dividends declared per common share		0.4925				0.4775
Weighted average number of common shares outstanding:
Basic		184				136
Diluted		191				146

See Notes to Condensed Consolidated Financial Statements.

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SUPERVALU INC. and Subsidiaries

CONDENSED CONSOLIDATED COMPOSITION OF NET SALES AND OPERATING EARNINGS

(unaudited)

(In millions, except percent data)

	Third Quarter (12 weeks) Ended						Year-to-date (40 weeks) Ended
	December 2, 2006			December 3, 2005			December 2, 2006			December 3, 2005
Net sales
Retail food	$	8,412		$	2,476		$	19,863		$	8,107
% of total		78.9	%		52.7	%		73.3	%		53.3	%
Supply chain services		2,245			2,219			7,243			7,116
% of total		21.1	%		47.3	%		26.7	%		46.7	%
Total net sales	$	10,657		$	4,695		$	27,106		$	15,223
		100.0	%		100.0	%		100.0	%		100.0	%
Operating earnings
Retail food operating earnings	$	327		$	104		$	816		$	271
% of sales		3.9	%		4.2	%		4.1	%		3.3	%
Supply chain services operating earnings		70			54			202			173
% of sales		3.1	%		2.4	%		2.8	%		2.4	%
General corporate expenses		30			16			92			42
Total operating earnings		367			142			926			402
% of sales		3.5	%		3.1	%		3.4	%		2.7	%
Interest expense, net		183			23			385			84
Earnings before income taxes		184			119			541			318
Income tax expense		71			44			209			118
Net earnings	$	113		$	75		$	332		$	200

The Company’s business is classified by management into two reportable segments: Retail food and Supply chain services. Retail food operations include results of combination stores (defined as food and drug), food stores, owned limited assortment food stores and sales to limited assortment food stores licensed by the Company. Supply chain services operations include results of sales to affiliated food stores, mass merchants and other customers and logistics arrangements. Substantially all of the Company’s operations are domestic. Management utilizes more than one measurement and multiple views of data to assess segment performance and to allocate resources to the segments. However, the dominant measurements are consistent with the consolidated financial statements.

See Notes to Condensed Consolidated Financial Statements.

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SUPERVALU INC. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except par value data)

	Third Quarter December 2, 2006			Fiscal Year End February 25, 2006
	(unaudited)
ASSETS
Current Assets
Cash and cash equivalents	$	275		$	801
Receivables, less allowances for doubtful accounts of $22 and $16, respectively		938			439
Inventories, net		3,194			954
Other current assets		446			89
Total Current Assets		4,853			2,283
Property, plant and equipment, less accumulated depreciation and amortization of $2,491 and $2,127, respectively		8,760			1,969
Goodwill		5,871			1,614
Intangibles, net		2,667			94
Other assets		537			193
Total Assets	$	22,688		$	6,153
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable and accrued liabilities	$	2,901		$	1,377
Current maturities of long-term debt and capital lease obligations		268			112
Other current liabilities		1,880			133
Total Current Liabilities		5,049			1,622
Long-term debt		8,303			974
Capital lease obligations		1,124			432
Deferred income taxes		1,021			54
Other liabilities		1,952			452
Commitments and contingencies
Stockholders’ Equity
Common stock, $1.00 par value: Authorized - 400 shares; issued – 228 and 151 shares, respectively		228			151
Capital in excess of par value		2,636			132
Accumulated other comprehensive loss		(128	)		(128	)
Retained earnings		3,018			2,777
Treasury stock, at cost, 21 and 14 shares, respectively		(515	)		(313	)
Total Stockholders’ Equity		5,239			2,619
Total Liabilities and Stockholders’ Equity	$	22,688		$	6,153

See Notes to Condensed Consolidated Financial Statements.

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SUPERVALU INC. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME

(unaudited)

(In millions)

	Common Stock		Capital in Excess of Par Value		Treasury Stock			Accumulated Other Comprehensive Loss			Retained Earnings			Total Stockholders’ Equity			Comprehensive Income
Balances at February 26, 2005	$	151	$	116	$	(310	)	$	(104	)	$	2,658		$	2,511
Net earnings		—		—		—			—			206			206		$	206
Minimum pension liability adjustment (net of tax of $16)		—		—		—			(24	)		—			(24	)		(24	)
Sales of common stock under option plans		—		14		23			—			—			37			—
Cash dividends declared on common stock $0.6400 per share		—		—		—			—			(87	)		(87	)		—
Compensation under employee incentive plans		—		2		3			—			—			5			—
Purchase of shares for treasury		—		—		(29	)		—			—			(29	)		—
Balances at February 25, 2006		151		132		(313	)		(128	)		2,777			2,619		$	182
Net earnings		—		—		—			—			332			332		$	332
Stock, options and restricted stock units issued in connection with acquisition of New Albertsons		69		2,279		—			—			—			2,348			—
Sales of common stock under option plans		8		197		13			—			—			218			—
Cash dividends declared on common stock $0.4925 per share		—		—		—			—			(91	)		(91	)		—
Compensation under employee incentive plans		—		28		5			—			—			33			—
Purchase of shares for treasury		—		—		(220	)		—			—			(220	)		—
Balances at December 2, 2006	$	228	$	2,636	$	(515	)	$	(128	)	$	3,018		$	5,239		$	332

See Notes to Condensed Consolidated Financial Statements.

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SUPERVALU INC. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(In millions)

	Year-to-date (40 weeks) Ended
	December 2, 2006			December 3, 2005
Cash flows from operating activities
Net earnings	$	332		$	200
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		624			239
Impairment charge		—			55
LIFO charge		18			7
(Gain) loss on sale of assets		(12	)		4
Deferred income taxes		(165	)		(57	)
Stock-based compensation		29			7
Other adjustments, net		(29	)		(2	)
Changes in assets and liabilities, excluding net assets of Acquired Operations as of June 2, 2006		(459	)		26
Net cash provided by operating activities		338			479
Cash flows from investing activities
Proceeds from sale of assets		116			12
Purchases of property, plant and equipment		(601	)		(217	)
Business acquisition, net of cash acquired		(2,336	)		—
Other		107			—
Net cash used in investing activities		(2,714	)		(205	)
Cash flows from financing activities
Proceeds from issuance of long-term debt		3,411			—
Repayment of long-term debt		(1,141	)		(56	)
Settlement of Albertsons standalone drug business payables		(299	)		—
Reduction of obligations under capital leases		(33	)		(26	)
Net proceeds from the sale of common stock under option plans		211			23
Dividends paid		(79	)		(64	)
Payment for purchase of treasury shares		(220	)		(29	)
Net cash provided by (used in) financing activities		1,850			(152	)
Net (decrease) increase in cash and cash equivalents		(526	)		122
Cash and cash equivalents at beginning of period		801			464
Cash and cash equivalents at the end of period	$	275		$	586

See Notes to Condensed Consolidated Financial Statements.

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SUPERVALU INC. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars, shares, stock options and restricted stock units in millions, except per share data)

NOTE 1 – THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES

Business Description

SUPERVALU INC. (“SUPERVALU” or the “Company”), a Delaware corporation, was organized in 1925 as the successor of two wholesale grocery firms established in the 1870’s. SUPERVALU is one of the largest companies in the United States grocery channel.

On June 2, 2006 (the “Acquisition Date”), the Company acquired New Albertson’s, Inc. (“New Albertsons”) consisting of the core supermarket businesses (the “Acquired Operations”) formerly owned by Albertson’s, Inc. (“Albertsons”) operating under the banners of Acme Markets, Bristol Farms, Jewel-Osco, Shaw’s Supermarkets, Star Markets, the Albertson’s banner in the Intermountain, Northwest and Southern California regions, the related in-store pharmacies under the Osco and Sav-On banners, 10 distribution centers, certain regional offices and certain corporate offices in Boise, Idaho; Glendale, Arizona and Salt Lake City, Utah.

As of the close of the third quarter ended December 2, 2006, the Company conducted its retail operations through 2,499 stores including 928 combination stores (defined as food and drug), 393 food stores and 1,178 limited assortment food stores. Included in the total store counts are 856 licensed limited assortment food stores and 120 fuel centers. Additionally, the Company provides supply chain services and related logistics support services across the United States retail grocery channel. As of the close of the third quarter ended December 2, 2006, the Company served as the primary grocery supplier to approximately 2,200 retail food stores in 48 states, in addition to its own regional banner store network, and as a secondary supplier to approximately 400 stores. The Company’s supply chain activities are supported by 35 major Company distribution operations, located throughout the United States.

Accounting Policies

The summary of significant accounting policies is included in the notes to consolidated financial statements set forth in the Company’s Annual Report on Form 10-K for its fiscal year ended February 25, 2006. References to SUPERVALU and the Company refer to SUPERVALU INC. and its subsidiaries.

Fiscal Year

The Company’s fiscal year ends on the last Saturday in February. The Company’s first quarter consists of 16 weeks while the second, third and fourth quarters each consist of 12 weeks for a total of 52 weeks. Because of differences in the accounting calendars of the Acquired Operations and the Company, the accompanying December 2, 2006 Condensed Consolidated Balance Sheet includes the assets and liabilities related to the Acquired Operations as of November 30, 2006. The thirteen week operating results for the period September 1, 2006 through November 30, 2006 of the Acquired Operations are included in the third quarter results of the Condensed Consolidated Statements of Earnings. The twenty-six week operating results for the period June 2, 2006 through November 30, 2006 of the Acquired Operations are included in the December 2, 2006 year-to-date results of the Condensed Consolidated Statements of Earnings. The fourth quarter’s reporting period for the Acquired Operations will be the 12 weeks ending February 22, 2006. Starting with the third quarter of fiscal 2007, the end of each fiscal quarter for the Acquired Operations will be two days preceding the rest of the Company.

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. The Company’s banking arrangements allow the Company to fund outstanding checks when presented to the financial institution for payment. This cash management practice frequently results in a net cash book overdraft position, which occurs when total outstanding issued checks exceed available cash balances at a single financial institution. The Company records its cash disbursement accounts with a net cash book overdraft position in Accounts payable and accrued liabilities in the Condensed Consolidated Balance Sheets, and the net change in cash book overdrafts in the Changes in assets and liabilities line item within the Cash flows from operating activities section of the Condensed Consolidated Statements of Cash Flows. At December 2, 2006 and February 25, 2006, the Company had net book overdrafts of $486 and $198, respectively.

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Statement of Registrant

The accompanying condensed consolidated financial statements of the Company for the 12 weeks and 40 weeks ended December 2, 2006 and December 3, 2005 are unaudited and, in the opinion of management, contain all adjustments that are of a normal and recurring nature necessary to present fairly the financial position and results of operations for such periods. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes in the Company’s Annual Report on Form 10-K for the fiscal year ended February 25, 2006. The results of operations for the 12 weeks and 40 weeks ended December 2, 2006 are not necessarily indicative of the results expected for the full year. The Condensed Consolidated Balance Sheet as of February 25, 2006 has been derived from the audited Consolidated Balance Sheet as of that date.

Reclassifications

Certain reclassifications have been made to conform prior year’s data to current presentation. These reclassifications had no effect on reported net earnings.

Use of Estimates

The preparation of the Company’s condensed consolidated 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. Some of those estimates require difficult, subjective or complex judgments about matters that are inherently uncertain. Actual results could differ from those estimates.

Net Earnings Per Share (EPS)

Basic EPS is calculated using net earnings available to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted EPS is similar to basic EPS except that the weighted average number of common shares outstanding is after giving affect to the dilutive impacts of stock options, restricted stock awards and outstanding convertible securities. In addition, for the calculation of diluted earnings per share, net earnings is adjusted to eliminate the after tax interest expense recognized during the period related to contingently convertible debentures. Effective on August 31, 2006, in conjunction with the Company’s announcement of its intent to use cash to repurchase the contingently convertible debentures, the debentures were no longer considered dilutive for the calculation of diluted earnings per share.

The following table reflects the calculation of basic and diluted earnings per share:

	Third Quarter (12 weeks) Ended				Year-to-date (40 weeks) Ended
	December 2, 2006		December 3, 2005		December 2, 2006		December 3, 2005
Earnings per share—basic
Net earnings	$	113	$	75	$	332	$	200
Weighted average shares outstanding—basic		207		136		184		136
Earnings per share—basic	$	0.55	$	0.55	$	1.81	$	1.47
Earnings per share—diluted
Net earnings	$	113	$	75	$	332	$	200
Interest related to dilutive contingently convertible debentures, net of tax		—		2		3		6
Net earnings used for diluted earnings per share calculation	$	113	$	77	$	335	$	206
Weighted average shares outstanding		207		136		184		136
Dilutive impact of options and restricted stock outstanding		2		2		2		2
Dilutive impact of convertible securities		—		8		5		8
Weighted average shares—diluted		209		146		191		146
Earnings per share—diluted	$	0.54	$	0.53	$	1.75	$	1.41

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Options to purchase 12 shares of common stock were outstanding during both the 12 week and 40 week periods ended December 2, 2006, but were excluded from the computation of diluted earnings per share because they were not dilutive.

Options to purchase 3 shares of common stock were outstanding during both the 12 week and 40 week periods ended December 3, 2005, but were excluded from the computation of diluted earnings per share because they were not dilutive.

NOTE 2 – BUSINESS ACQUISITION

On the Acquisition Date, the Company, CVS Corporation (“CVS”), an investment group led by Cerberus Capital Management, L.P. (the “Cerberus Group”) and Albertsons entered into a series of agreements providing for the sale of Albertsons to the Company, CVS and the Cerberus Group. Those agreements provided for the following:

• First, Albertsons became a subsidiary of New Albertsons.

• Next, Albertsons was converted to a limited liability company (“Albertsons LLC”) and a series of reorganizations occurred. As a result of those reorganizations, New Albertsons held substantially all of the assets and liabilities of the Acquired Operations. Albertsons LLC and its subsidiaries held substantially all of the assets of Albertsons’ standalone drug store business (the “Standalone Drug Business”) and the non-core supermarket business (the “Non-Core Business”) and certain liabilities of Albertsons’ historical business.

• Next, CVS purchased substantially all of the assets and assumed specified liabilities of the Standalone Drug Business.

• The Cerberus Group then acquired the equity interests of Albertsons LLC.

• Then, the Company acquired New Albertsons (the “Acquisition”).

The Acquisition allowed the Company to acquire the premier retail operations of Albertsons adding approximately 1,125 stores to the Company’s retail footprint. The Acquisition was a unique strategic opportunity to acquire those assets of Albertsons that the Company viewed as the most attractive and profitable. The acquired stores give the Company a strong market presence in many key urban markets with little overlap with the Company’s legacy business.

The Company purchased the Acquired Operations using a combination of stock, debt assumption and cash comprised of:

Acquisition of approximately 372 shares of outstanding Albertsons common stock:
In cash	$	7,572
In exchange for approximately 68.5 shares of SUPERVALU common stock		2,252
Debt assumed		6,119
Cash settlement of restricted stock unit and stock option awards		148
Restricted stock unit and stock option awards assumed		96
Direct costs of the acquisition		46
Total purchase price	$	16,233

The sale of the Standalone Drug Business to CVS and the sale of the Non-Core Business to the Cerberus Group generated $4,911 in cash that was combined with the Company’s relative portion of the purchase price of approximately $11,300 in cash and equity to complete the Albertsons acquisition.

Acquisition of New Albertsons Common Stock

Pursuant to the Acquisition agreement, each share of New Albertsons common stock was acquired for $20.35 in cash and 0.182 shares of SUPERVALU common stock (the “Acquisition Consideration”). The cash portion of the Acquisition Consideration was funded using $556 of cash on hand, $135 of the Acquired Operations’ cash on hand, $1,970 of debt financing provided by new credit facilities (see Note 8 – Debt), and the cash proceeds of $4,911 from the simultaneous sale of the Standalone Drug and the Non-Core Businesses historically operated by Albertsons. The fair value of SUPERVALU common stock issued was $32.73 per share, which represented the average closing price of the Company’s common stock beginning two days before and ending two days after the January 23, 2006 announcement date of the Acquisition.

Transition Services Agreement

In connection with the purchase of Albertsons LLC by the Cerberus Group, the Company entered into a transition services agreement. The transition services agreement provides for a two-year term and fixed payments to the Company of $155 in the aggregate in the first year and $135 in the aggregate in the second year and, in addition, quarterly variable payments of $8.75 for a total of $35 of variable payments per year. During the second quarter of fiscal 2007 the fixed payments provided for under the transition services agreement were modified to reflect the transfer of certain personnel from

11

the Company to Albertsons LLC. The transfer of personnel resulted in a reduction in Company-incurred expense and transition services agreement fixed payments of approximately $10.6 in year one and $10.6 in year two. After the initial quarter of the transition services agreement, the quarterly variable payments may be reduced by $0.4375 for each increment of 35 stores that will no longer be supported under the terms of the agreement. Based on stores that are closed as of December 2, 2006, the future quarterly variable payment amount is $7.4. Albertsons LLC is required to provide the Company with 60 days advance notice of stores that will no longer be supported under the transition services agreement, during which time the Company intends to reduce the support infrastructure and related costs.

Debt Assumed

The Company assumed $6,119 of the Acquired Operations’ outstanding debt. This debt consisted primarily of publicly issued notes and debentures (including mandatory convertible securities), medium term notes, and capital lease obligations (see Note 8 – Debt). As of the Acquisition Date, the estimated fair value of the debt assumed by the Company was $5,888. The fair value of the public notes and debentures were estimated based on market quotes. The fair value of the mandatory convertible securities was estimated based on the closing market price of the security. The fair value for the remaining debt was estimated based on the market yields of publicly traded debt with similar credit ratings, interest rates, and maturity dates.

Cash Settlement of Stock Options and Restricted Stock Units

As of the Acquisition Date, Albertsons had approximately 31 stock options and 7 restricted stock units outstanding. As a result of the Acquisition, all outstanding awards fully vested other than approximately 0.4 restricted stock unit awards. In accordance with the Acquisition agreement, the Company agreed to settle all of the Albertsons stock options held by Albertsons employees who did not become employees of the Company. The Company also agreed to settle all of the Albertsons fully vested restricted stock units in cash or a combination of cash and SUPERVALU common stock. Included in Other current assets in the Condensed Consolidated Balance Sheet as of December 2, 2006 is $186 of short-term investments that are contractually restricted for future payments related to change-in-control severance benefits and restricted stock units.

Stock Options and Restricted Stock Units Assumed

In accordance with the Acquisition agreement, the Company assumed the obligation of stock options and approximately 0.4 unvested restricted stock units of individuals who became employees of the Company. The stock options became fully vested and were converted into the right to acquire a total of 22 shares of SUPERVALU stock, using an exchange ratio based on the Acquisition Consideration.

Direct Costs of the Acquisition

Direct costs of the Acquisition include investment banking fees, legal and accounting fees and other external costs directly related to the Acquisition.

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Preliminary Purchase Price Allocation

The Acquisition was accounted for under the purchase method of accounting with the Company as the acquirer in accordance with Statement of Financial Accounting Standards No. 141, Business Combinations (“SFAS No. 141”). As a result, the Company applied the purchase method of accounting to the separable assets, including goodwill, and liabilities of New Albertsons. The following summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the Acquisition Date. These preliminary purchase price allocations are estimates as of December 2, 2006 based on a combination of third-party valuations and internal analyses and will be further adjusted during the allocation period as defined in SFAS No. 141. The primary areas of the purchase price allocation that are not yet finalized relate to the valuation of long-lived assets, inventories, intangible assets, capital and operating lease obligations, income taxes and deferred income taxes, and residual goodwill. Additionally, the Company is in the process of gathering data and making assessments in other areas that could have an impact on the final purchase price allocation. The valuations are preliminary due to the size and timing of the Acquisition.

	Preliminary Purchase Price Allocation
Current assets	$	3,315
Property, plant and equipment		6,882
Goodwill		4,266
Intangibles		2,610
Other assets		408
Total assets acquired		17,481
Current liabilities		3,911
Long-term debt		5,853
Deferred income taxes		1,099
Other liabilities		1,550
Total liabilities assumed		12,413
Net assets acquired	$	5,068
Reconciliation to total purchase price for Albertsons:
Cash funding provided by New Albertsons		135
Cash proceeds from the sale of the Standalone Drug Business and Non-Core Business of Albertsons		4,911
Debt assumed		6,119
Total purchase price	$	16,233

Preliminary values of intangible assets include the following:

	Preliminary Purchase Price Allocation		Weighted Average Useful Lives (Years)
Non-amortizing:
Trade names	$	1,822
Liquor licenses		11
Total non-amortizing		1,833
Amortizing:
Favorable operating leases		667	18
Customer loyalty programs		98	7
Customer lists and other		12	6
Total amortizing		777	17
Total	$	2,610

The preliminary purchase price allocation to intangible assets is based on estimated fair values determined by internal analyses pending revision based on further fair valuation analyses to be performed by third-party valuation specialists. Amortizing intangible assets are amortized on a straight-line basis over their remaining expected useful lives of less than one to 37 years.

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The estimated values of operating leases with unfavorable terms compared with current market conditions totaled $338. These leases have an estimated weighted average life of 19 years and are included in other liabilities.

The excess of the purchase price over the fair value of assets acquired and liabilities assumed was allocated to Goodwill. Goodwill is nonamortizing for financial statement purposes and is not tax deductible.

The Acquired Operations include significant operating and capital leases consisting of the following future minimum payments for noncancelable leases (which exclude the amortization of acquisition-related fair value adjustments):

	Total Amount Committed		Fiscal 2007 (remaining)		Fiscal 2008 - 2009		Fiscal 2010 - 2011		Thereafter
Operating leases	$	3,148	$	72	$	488	$	444	$	2,144
Capital leases		699		20		83		82		514
Total lease commitments	$	3,847	$	92	$	571	$	526	$	2,658

Unaudited Pro Forma Financial Information

The following unaudited pro forma financial information presents the combined historical results of the operations of SUPERVALU and the Acquired Operations as if the Acquisition had occurred at the beginning of fiscal 2007 and 2006. Certain adjustments have been made to reflect changes in depreciation, income taxes and interest expense that would have resulted from the change in the accounting base of certain assets and liabilities due to the Acquisition, based on the Company’s preliminary estimates of fair value and increased debt to fund the acquisition. These adjustments are subject to change as the initial estimates are refined over time. Because of differences in the accounting calendars of SUPERVALU and the Acquired Operations, the pro forma results below for the 40 weeks ended December 2, 2006 include SUPERVALU results for the 40 weeks and results of the Acquired Operations for 39 weeks. The pro forma results below for the 12 weeks ended December 3, 2005 include SUPERVALU results for 12 weeks and results for the Acquired Operations for 13 weeks. This pro forma financial information is not intended to represent or be indicative of what would have occurred if the transactions had taken place on the dates presented and should not be taken as representative of the Company’s future consolidated results of operations or financial position. The pro forma financial information does not reflect any potential synergies.

	Year-to-date				Third Quarter Ended
	December 2, 2006		December 3, 2005		December 3, 2005
Net sales	$	33,056	$	33,476	$	10,734
Net earnings		416		303		108
Weighted average common shares:
Basic		209		205		205
Diluted		215		215		215
Earnings per share:
Basic	$	1.99	$	1.48	$	0.52
Diluted		1.95		1.43		0.51

(1) Certain items impacting the comparability of this pro forma financial information include: (a) a $29 after-tax curtailment gain recognized in the 40 weeks ended December 2, 2006 that resulted from amendments to certain of Albertsons’ defined benefit pension plans; (b) $35 after-tax expense recognized in the 40 weeks ended December 2, 2006 due to Acquisition-related costs (defined as one-time transaction costs which primarily include retention bonuses and consultant fees); (c) a charge of $38 after-tax related to the plan to sell 20 Shop ‘n Save stores in Pittsburgh in the 40 weeks ended December 3, 2005; and (d) a charge of $3 after-tax for the impact of Hurricane Katrina in the 40 weeks ended December 3, 2005.

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NOTE 3 – NEW AND RECENTLY ADOPTED ACCOUNTING STANDARDS

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004), “Share Based Payment” (“SFAS No. 123(R)”). SFAS No. 123(R) addresses the accounting for share-based payments, including grants of employee stock options. Under the new standard, companies are no longer able to account for share-based compensation transactions using the intrinsic value method in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB Opinion No. 25”). Instead, companies are required to account for such transactions using a fair-value method and recognize the expense in their consolidated statements of earnings. SFAS No. 123(R) and related FASB Staff Positions became effective for the Company on February 26, 2006. The adoption of SFAS No. 123(R) and its effects are described in Note 9—Stock-Based Compensation.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an Amendment of ARB No. 43, Chapter 4” (“SFAS No. 151”). SFAS No. 151 clarifies that inventory costs that are “abnormal” are required to be charged to expense as incurred as opposed to being capitalized into inventory as a product cost. SFAS No. 151 provides examples of “abnormal” costs to include costs of idle facilities, excess freight and handling costs, and wasted materials (spoilage). SFAS No. 151 became effective for the Company on February 26, 2006 and did not have a material effect on the Company’s condensed consolidated financial statements.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29” (“SFAS No. 153”). SFAS No. 153 amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 became effective for the Company on February 26, 2006 and did not have a material effect on the Company’s condensed consolidated financial statements.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections – a Replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS No. 154”). SFAS No. 154 requires retrospective application as the required method for reporting a change in accounting principle, unless impracticable or unless a pronouncement includes alternative transition provisions. SFAS No. 154 also requires that a change in depreciation, amortization or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. This statement carries forward the guidance in APB Opinion No. 20, “Accounting Changes,” for the reporting of a correction of an error and a change in accounting estimate. SFAS No. 154 became effective for the Company on February 26, 2006 and did not have a material effect on the Company’s condensed consolidated financial statements.

In June 2006, the FASB ratified the consensuses of Emerging Issues Task Force (“EITF”) Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)” (“EITF 06-3”). EITF 06-3 indicates that the income statement presentation on either a gross basis or a net basis of the taxes within the scope of the issue is an accounting policy decision. The Company’s accounting policy is to present the taxes within the scope of EITF 06-3 on a net basis. The adoption of EITF 06-3 in the first fiscal quarter of 2007 did not result in a change to the Company’s accounting policy and, accordingly, did not have a material effect on the Company’s condensed consolidated financial statements.

In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes,” and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Additionally, FIN 48 provides guidance on subsequent derecognition of tax positions, financial statement classification, recognition of interest and penalties, accounting in interim periods, and disclosure and transition requirements. FIN 48 is effective for the Company’s fiscal year beginning February 25, 2007, with early adoption permitted. The Company is in the process of evaluating the impact of adoption of FIN 48.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS 157 is effective for the Company’s fiscal year beginning February 24, 2008, with early adoption permitted. The Company is in the process of evaluating the impact of adoption of SFAS No. 157.

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In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (“SFAS No. 158”). SFAS No. 158 requires an employer that sponsors one or more single-employer defined benefit plans to (a) recognize the overfunded or underfunded status of a benefit plan in its statement of financial position, (b) recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost pursuant to SFAS No. 87, “Employers’ Accounting for Pensions”, or SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions”, (c) measure defined benefit plan assets and obligations as of the date of the employer’s fiscal year-end, and (d) disclose in the notes to financial statements additional information about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset or obligation. SFAS No. 158 is effective for the Company’s fiscal year ending February 24, 2007. The Company is in the process of evaluating the impact of adoption of SFAS No. 158.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The Securities and Exchange Commission staff believes that registrants should quantify errors using both a balance sheet and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. SAB 108 is effective for the Company’s fiscal year ending February 24, 2007, with early application encouraged. The Company is in the process of evaluating the impact of adoption of SAB 108.

NOTE 4 – BENEFIT PLANS

Net Periodic Pension and Postretirement Benefit Cost

Net periodic pension and postretirement benefit cost for the Company-sponsored pension and postretirement benefit plans were as follows:

	Third Quarter (12 weeks) Ended
	Pension Benefits						Postretirement Benefits
	December 2, 2006			December 3, 2005			December 2, 2006			December 3, 2005
Service cost	$	7		$	5		$	—		$	—
Interest cost		24			9			2			2
Expected return on plan assets		(25	)		(9	)		—			—
Amortization of:
Unrecognized net loss		6			5			1			2
Unrecognized prior service cost		—			—			—			—
Net periodic benefit cost	$	12		$	10		$	3		$	4
	Year-to-Date (40 weeks) Ended
	Pension Benefits						Postretirement Benefits
	December 2, 2006			December 3, 2005			December 2, 2006			December 3, 2005
Service cost	$	25		$	16		$	1		$	1
Interest cost		71			31			6			7
Expected return on plan assets		(75	)		(31	)		—			—
Amortization of:
Unrecognized net loss		20			17			4			5
Unrecognized prior service cost		1			1			(1	)		(1	)
Net periodic benefit cost	$	42		$	34		$	10		$	12

The Company contributed $39 and $25 to its non-union defined benefit pension plans during the 40 weeks ended December 2, 2006 and December 3, 2005, respectively. The Company has not yet reassessed contributions in light of the Pension Protection Act of 2006 signed into law August 17, 2006.

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Employee Benefit Plan Obligations Assumed in the Acquisition

The following disclosures address the employee benefit plans assumed in the Acquisition, which should be read in conjunction with the benefit plans disclosures in the Notes to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the fiscal year ended February 25, 2006.

Substantially all of the employees of the Acquired Operations working over 20 hours per week are covered by retirement plans. New Albertsons sponsors both defined benefit and defined contribution pension plans. Union employees participate in multi-employer retirement plans under collective bargaining agreements, unless the collective bargaining agreement provides for participation in plans sponsored by the Acquired Operations. The assumed plans also offer health and life insurance to retirees under postretirement benefit plans, and short-term and long-term disability benefits to former and inactive employees prior to retirement under post employment benefit plans.

The benefit obligation, fair value of plan assets and funded status of the assumed defined benefit pension plans and other postretirement benefit plans were as follows:

	Defined Benefit Pension Plans December 2, 2006			Postretirement Benefit Plans December 2, 2006
Benefit obligation (1)	$	1,201		$	26
Fair value of plan assets		1,041			—
Funded status		(160	)		(26	)
Unrecognized net actuarial loss (gain)		—			—
Unrecognized prior service cost (benefit)		—			—
Net amount recognized (2)	$	(160	)	$	(26	)

(1) For the defined benefit pension plans, the benefit obligation is the projected benefit obligation. For other postretirement benefit plans, the benefit obligation is the accumulated postretirement benefit obligation.

(2) Reflects amounts recognized in the Condensed Consolidated Balance Sheet as of December 2, 2006 for the Acquired Operations. In connection with the Acquisition, the projected benefit obligations for all of the assumed defined benefit pension plans and other postretirement plans were remeasured as of June 2, 2006 and accordingly, the accumulated benefit obligation equaled the projected benefit obligation. No additional minimum liability for the defined benefit pension plans is recognized because the net amount recognized was equal to the unfunded amount of the plans.

As of December 2, 2006, the estimated future benefit payments to be paid from the New Albertsons’ defined benefit pension plans and other postretirement benefit plans, which reflect expected future service, were as follows:

Fiscal Year	Defined Benefit Pension Plans		Other Postretirement Benefit Plans
2007 (remaining)	$	38	$	1
2008		35		3
2009		38		3
2010		43		3
2011		46		3
2012-2016		301		12

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NOTE 5 – RESERVES FOR CLOSED PROPERTIES AND ASSET IMPAIRMENT CHARGES

Reserves for Closed Properties

The Company maintains reserves for estimated losses on retail stores, distribution warehouses and other properties that are no longer being utilized in current operations. The reserves for closed properties include management’s estimates for lease subsidies, lease terminations and future payments on exited real estate. Additions include approximately $29 of reserves for closed properties acquired from Albertsons, which were recorded in purchase accounting. Adjustments in the table below include approximately $54 related to the fair value of liabilities recognized in purchase accounting at the Acquisition Date for lease liabilities of former Albertsons stores for which management had a plan to close and which have been closed subsequent to the Acquisition.

At December 2, 2006, the remaining 2001 restructuring reserve of $14 million included $11 million representing the estimated fair value of future lease payments less estimated sublease income related to properties exited and $3 million related to a multi-employer pension plan withdrawal liability. Future lease payments related to facilities primarily under operating leases that were exited as part of the 2001 restructuring plan will continue through fiscal 2027 and we expect the multi-employer pension plan withdrawal liability will be paid in full by the end of fiscal 2007.

Details of these reserves were as follows:

	Balance February 25, 2006		Additions		Usage			Adjustments		Balance December 2, 2006
Reserves for closed properties and 2001 restructuring	$	63	$	33	$	(33	)	$	56	$	119

Asset Impairment

The Company recognized asset impairment charges of $1 for the 40 weeks ended December 2, 2006 for the write-down of property, plant and equipment for closed properties. There were no asset impairment charges for the 12 weeks ended December 2, 2006. During the third quarter and year-to-date ended December 3, 2005, the Company recognized asset impairment charges of $0 and $55, respectively, primarily related to the plan to sell twenty corporate Shop ‘n Save stores in Pittsburgh. Impairment charges, a component of Selling and administrative expenses in the Condensed Consolidated Statements of Earnings, reflect the difference between the carrying value of the assets and the estimated fair values, which were based on the estimated market values for similar assets.

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NOTE 6 – GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS

Due to the Acquisition, the Company recorded $2,610 of intangible assets primarily related to tradenames, leasehold rights and customer relationships. The Company also recorded $4,266 of goodwill based on preliminary purchase price allocations (see Note 2 – Business Acquisition).

At December 2, 2006, the Company had approximately $5,057 of goodwill related to its Retail food segment and $814 related to its Supply chain services segment.

A summary of changes in the Company’s goodwill and other acquired intangible assets year-to-date fiscal 2007 follows:

	February 25, 2006			Amortization			Net Additions		Other Adjustments			December 2, 2006
Goodwill	$	1,614		$	—		$	4,266	$	(9	)	$	5,871
Other acquired intangible assets:
Trademarks and tradenames		22			—			1,833		—			1,855
Leasehold rights, customer lists and other (accumulated amortization of $44 and $24 at December 2, 2006 and February 25, 2006, respectively)		50			—			674		(8	)		716
Customer relationships (accumulated amortization of $14 and $5 at December 2, 2006 and February 25, 2006, respectively)		48			—			98		(1	)		145
Non-compete agreements (accumulated amortization of $6 and $5 at December 2, 2006 and at February 25, 2006)		8			—			7		—			15
Total other acquired intangible assets		128			—			2,612		(9	)		2,731
Accumulated amortization		(34	)		(34	)		—		4			(64	)
Total other acquired intangible assets, net	$	94		$	(34	)	$	2,612	$	(5	)	$	2,667

Intangible assets with a definite life are amortized on a straight-line basis with estimated useful lives ranging from less than one to 37 years. Year-to-date, for fiscal 2007 and 2006, the Company recorded amortization expense relating to definite-lived intangible assets of approximately $34 and $5, respectively. All intangible assets are amortizable with the exception of the trademarks and tradenames. Goodwill and intangible assets determined to have indefinite useful lives are not amortized, but are tested for impairment at least annually in the Company’s fourth quarter.

NOTE 7 – FINANCIAL INSTRUMENTS

The Company has limited involvement with derivative financial instruments and uses them only to manage well-defined interest rate risks. The Company does not use financial instruments or derivatives for any trading or other speculative purposes.

In fiscal 2003, the Company entered into swap agreements in the aggregate notional amount of $225 relating to the Company’s 7.875 percent fixed interest rate promissory notes due fiscal 2010. The Company receives a fixed interest rate of 7.875 percent on the notional amount of the swaps and pays interest based on the three-month U.S. dollar LIBOR rate (5.37 percent and 4.68 percent as of December 2, 2006 and February 25, 2006, respectively) plus 2.55 percent to 2.60 percent. The swaps have been designated as a fair value hedge on long-term fixed rate debt of the Company and are a component of Other assets in the Condensed Consolidated Balance Sheets. On a quarterly basis, the Company performs an assessment of effectiveness and a measurement of ineffectiveness. Through December 2, 2006, the net earnings impact was zero.

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NOTE 8 – DEBT

As a result of the Acquisition, the Company assumed $6,119 of the Acquired Operations’ outstanding debt (see Note 2 – Business Acquisition). In accordance with the application of the purchase method of accounting, the Company estimated the fair value of the debt assumed from New Albertsons as a result of the Acquisition. This resulted in an aggregate net discount related to the New Albertsons debt of $231 as of the Acquisition Date, which will be amortized to Interest expense using the effective interest method over the remaining terms of the respective debt instruments. In the table below, the stated interest rates for the debt assumed from New Albertsons are followed by the effective rates in parentheses resulting from the discounts and premiums due to purchase accounting fair value adjustments. Borrowings are unsecured unless indicated otherwise.

	December 2, 2006
Variable Rate Note, currently 7.19%, due fiscal 2013	$	1,244
Variable Rate Note, currently 6.94%, due fiscal 2012		731
Revolving Credit Facility, currently 7.08%		780
7.50% (7.49%) Notes due fiscal 2011		700
Notes due fiscal 2008-2029, average interest rate of 6.68% (7.89%)		592
7.45% (8.73%) Debentures due fiscal 2030		569
7.50% Note due fiscal 2015		500
8.00% (8.86%) Debentures due fiscal 2032		366
6.95% (6.71%) Notes due fiscal 2010		352
7.88% Notes due fiscal 2010		350
7.50% Notes due fiscal 2013		300
8.35% (7.15%) Notes due fiscal 2011		285
3.75% (7.40%) Senior Notes due fiscal 2010		278
8.00% (8.46%) Debentures due fiscal 2027		260
8.70% (8.97%) Debentures due fiscal 2031		219
7.50% (5.44%) Debentures due fiscal 2038		209
7.25% (7.53%) Notes due fiscal 2014		197
7.75% (8.76%) Debentures due fiscal 2027		181
Accounts Receivable Securitization Facility, currently 5.35%		160
7.90% (7.98%) Debentures due fiscal 2018		95
4.50% Yield Zero-coupon Convertible Debentures due fiscal 2032		52
Variable Rate Industrial Revenue Bonds due fiscal 2007-2015, average interest rate of 3.68%		49
Secured Mortgages and other Notes due fiscal 2007-2020, average interest rate of 8.61% (7.53%), secured by real estate with a book value of $61		38
Other		10
		8,517
Less current maturities		(214	)
Long-term debt	$	8,303

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Aggregate contractual maturities of debt as of December 2, 2006 were:

Fiscal Year
2007 (remaining)	$	24
2008		299
2009		195
2010		1,194
2011		1,122
Thereafter		5,683

The maturities above reflect contractual maturities and do not include the potential accelerations due to debt holders’ ability to cause the Company to repurchase the debt.

The debt agreements contain various financial covenants including ratios for interest coverage and debt leverage as defined in the Company’s debt agreements. The Company was in compliance with the financial covenants under the debt agreements as of December 2, 2006.

On October 31, 2006, the Company issued $500 in senior notes. The notes bear interest at a rate of 7.50 percent and are due 2014. The notes are senior obligations and rank equally with all of the Company’s other senior unsecured indebtedness.

On June 1, 2006, the Company executed senior secured credit facilities in the amount of $4,000. These facilities were provided by a group of lenders and consist of a $2,000 five-year Revolving Credit Facility, a $750 five-year Term Loan A, and a $1,250 six-year Term Loan B. Rates on the facilities are tied to LIBOR plus 0.50 percent to 2.00 percent with facility fees ranging from 0.10 percent to 0.50 percent, both based on the Company’s credit ratings. The rates in effect on December 2, 2006, based on the Company’s current credit ratings, are 0.40 percent for the facility fee, LIBOR plus 1.50 percent for the Revolving Credit Facility and Term Loan A, and LIBOR plus 1.75 percent for the Term Loan B.

All obligations under the senior secured credit facilities are guaranteed by each material subsidiary of the Company. The obligations are also secured by a pledge of the equity interests in those same material subsidiaries, limited as required by the existing public indentures of SUPERVALU and subsidiaries, such that the respective debt issued need not be equally and ratably secured.

The senior secured credit facilities also contain various financial covenants including a minimum interest expense coverage ratio and a maximum debt leverage ratio. The interest expense coverage ratio shall not be less than 2.10 to 1 for each of the fiscal quarters ending up through December 30, 2006, and moves progressively to a ratio of not less than 2.30 to 1 for the fiscal quarters ending after December 31, 2009. The debt leverage ratio shall not exceed 4.50 to 1 for each of the fiscal quarters ending up through December 30, 2007, and moves progressively to a ratio not to exceed 3.75 to 1 for each of the fiscal quarters ending after December 31, 2009.

In conjunction with the new $4,000 senior secured credit facilities, the Company terminated its previous five-year unsecured $750 revolving credit agreement dated February 2005. Also terminated were the previous Albertsons credit facilities: $400 dated June 2005, $900 dated June 2004, and $100 dated July 2004. All letters of credit that had been issued and outstanding under the previous credit facilities were transferred under the new credit facility.

Borrowings under the Term Loan A and Term Loan B may be repaid, in full or in part, at any time without penalty. The Term Loan A has required repayments, payable quarterly, equal to 2.50 percent of the initial drawn balance for the first four quarterly payments (year one) and 3.75 percent of the initial drawn balance for each quarterly payment in years two through five, with the entire remaining balance due at the five year anniversary of the inception date. The Term Loan B has required repayments, payable quarterly, equal to 0.25 percent of the initial drawn balance, with the entire remaining balance due at the six year anniversary of the inception date.

As of December 2, 2006, there were $780 of outstanding borrowings under the Revolving Credit Facility, the Term Loan A had a remaining principal balance of $731, of which $84 was classified as current, and the Term Loan B had a remaining principal balance of $1,244, of which $13 was classified as current. Letters of credit outstanding under the Revolving Credit Facility were $344 and the unused available credit under the Revolving Credit Facility was $876. The Company also had $67 of outstanding letters of credit issued under separate agreements with financial institutions.

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In November 2006, the Company executed a 364-day accounts receivable securitization program, under which the Company can borrow up to $200 on a revolving basis, with borrowings secured by eligible accounts receivable, which remain under the Company’s control. Facility fees under this program range from 0.15 percent to 1.50 percent, based on the Company’s credit ratings. The facility fee in effect on December 2, 2006, based on the Company’s current credit ratings, is 0.20 percent. As of December 2, 2006, there was $160 of outstanding borrowings under this program. As of December 2, 2006 there was $230 of accounts receivable pledged as collateral, classified in Accounts receivable in the Company’s December 2, 2006 Condensed Consolidated Balance Sheet. Due to the Company’s intent to renew the facility or refinance it with the Revolving Credit Facility, the facility is classified in Long-term debt in the December 2, 2006 Condensed Consolidated Balance Sheet.

In November 2001, the Company sold zero-coupon convertible debentures due 2031. On October 2, 2006, the Company purchased $213 of these debentures when over 80 percent of the holders put their debentures to the Company for cash. Holders of the debentures may require the Company to purchase all or a portion of the remaining $52 debentures on the first day of October 2011 at a purchase price equal to the accreted value of the debentures (which would include accrued but unpaid interest) at $409.08 (not in millions) per debenture. Since the current credit ratings of the Company are BB or lower as rated by Standard & Poor’s rating service, and Ba3 or lower as rated by Moody’s rating service, the debentures are currently convertible into shares of the Company’s common stock at the option of the holders. In the event of conversion, 9.6434 (not in millions) shares of the Company’s common stock will be issued per each thousand dollars of debentures, or approximately 1.5 shares, should all remaining debentures be converted. As of December 2, 2006, no holders have elected conversion of the debentures. The Company may redeem all or a portion of the remaining debentures at any time at a purchase price equal to the sum of the issue price plus accrued original issue discount as of the redemption date. Due to the holders’ ability to convert the debentures to common stock, the Company’s previous announcement of its intent to use cash to settle the debentures in cash and the Company’s ability to call the debentures for cash at any time, the debentures are classified as current debt.

Medium-term notes of $30 due July 2027 contain put options that would require the Company to repay the notes in July 2007 if the holders of the notes so elect by giving the Company 60-days notice. Medium-term notes of $48 due April 2028 contain put options that would require the Company to repay the notes in April 2008 if the holders of the notes so elect by giving the Company 60-days notice. The $209 of 7.5 percent debentures due May 2037 contain put options that would require the Company to repay the notes in May 2009 if the holders of the notes so elect by giving the Company 60-days notice.

Mandatory Convertible Securities

The Company assumed 46,000,000 of 7.25 percent mandatory convertible securities (“Corporate Units”) upon the Acquisition of New Albertsons. As more fully described below, each Corporate Unit consists of a purchase contract and, initially, a 2.5 percent ownership interest in one of the Company’s senior notes with a principal amount of one thousand dollars, which corresponds to a twenty-five dollar principal amount of senior notes.

Subsequent to consummation of the Acquisition, the holders of the Corporate Units had an option to settle their purchase contract obligations early at the settlement rate then in effect under the provisions of the Corporate Units. In connection with the Acquisition, twenty-nine thousand purchase contracts were settled early. As a result, the Company received $0.148 of net cash and issued approximately 0.005 shares of the Company’s common stock.

On October 23, 2006, the Company commenced an offer to purchase any and all of the outstanding Corporate Units at a purchase price in cash of $25.22 per Corporate Unit (the “Tender Offer”). The Tender Offer expired on November 20, 2006. As a result of the Tender Offer, 34,783,232 Corporate Units, or approximately 75.7 percent of the 45,970,800 issued and outstanding Corporate Units, were validly tendered and were accepted for purchase. The Company paid an aggregate of approximately $877 in cash to tendering holders in the Tender Offer. The Company recognized a gain on extinguishment of less than $1 in the 12 weeks ended December 2, 2006. The balance of the Corporate Units recorded as debt in the Condensed Consolidated Balance Sheet at December 2, 2006 was $278.

Subsequent to the repurchase of these Corporate Units, under the terms of the purchase contracts, the Company would be required to issue a minimum of 1.8 shares and a maximum of 2.2 shares of its common stock for the remaining Corporate Units. If the purchase contracts had been settled at December 2, 2006, the Company would have received approximately $65 of net cash and would have issued approximately 1.9 shares of its common stock. The holders of the Corporate Units have the option to settle their obligations under the purchase contracts at any time on or prior to the fifth business day immediately preceding the Purchase Contract Settlement Date. Upon settlement of each purchase contract, the Company will receive the stated amount of twenty-five dollars on the purchase contract and will issue the requisite amount of Acquisition Consideration ($20.35 in cash and 0.182 SUPERVALU shares per share of Albertsons common stock subject to the settlement rate). The net amount of cash received will be recorded as an increase to stockholders’ equity.

The ownership interest in the senior notes is pledged to secure the Corporate Unit holders’ obligation to purchase Company common stock under the related purchase contract. The holders of the Corporate Units may elect to substitute the senior notes with zero-coupon U.S. treasury securities that mature on May 15, 2007 having a principal amount at maturity equal to the aggregate principal amount of the senior notes to secure the purchase contracts. The senior notes bear an annual interest rate of 3.75 percent.

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In February 2007, the aggregate principal amount of the senior notes is required to be remarketed by the remarketing agent, which may result in a change in the interest rate and maturity date of the senior notes. If this remarketing is not successful there will be a subsequent remarketing in May 2007. Proceeds from a successful remarketing would be used to satisfy in full each Corporate Unit holder’s obligation to purchase Company common stock under the related purchase contract.

As consideration for assuming the downside market risk without participating in all of the potential appreciation of the Company’s common stock, the holders of the Corporate Units receive a quarterly purchase contract adjustment payment equal to 3.5 percent per annum of the stated value of the Corporate Units. As of December 2, 2006, the liability for the purchase contract adjustment payments was approximately $5, which represents the present value of the remaining purchase contract adjustment payments. As contract adjustment payments are made, this liability will be reduced, with a portion of the payments recognized as interest expense. Subsequent to a successful remarketing, the senior notes will remain outstanding and the Company will settle its obligations on the maturity date of the senior notes in February 2009 or at a later date if the maturity date is extended in connection with the remarketing of the senior notes under the terms of the Corporate Units. If the senior notes are not successfully remarketed, the holders will have the right to put their senior notes to the Company to satisfy their obligations under the purchase contracts.

Each purchase contract originally obligated the holder to purchase, and Albertsons to sell, at a purchase price of twenty-five dollars in cash, shares of Albertsons common stock on or before May 16, 2007 (the “Purchase Contract Settlement Date”). However, as a result of the Acquisition, rather than receiving Albertsons common stock the holders will receive what the Albertsons shareholders received as Acquisition Consideration subject to the settlement rate. Generally, the number of shares each holder of the Corporate Units is obligated to purchase depends on the average closing price per share of the Company’s common stock over a 20-day trading period ending on the third trading day immediately preceding the Purchase Contract Settlement Date (the “Trading Period”), subject to anti-dilution adjustments. Also, as a result of the Acquisition, the settlement rate was adjusted as follows:

(a) If the Company’s common stock price is greater than or equal to $46.54, the settlement rate will be $17.65 in cash plus 0.1579 shares of the Company’s common stock, per purchase contract settled. This is equivalent to the Acquisition Consideration multiplied by 0.8675 shares of Albertsons common stock, the settlement rate that, had the Acquisition not occurred, would have been applicable if the Albertsons common stock price was greater than or equal to $28.82.

(b) If the Company’s common stock price is greater than $14.89 but less than $46.54, the settlement rate will be an amount of cash and shares of the Company’s common stock in the ratio of $20.35 of cash for each 0.182 shares of the Company’s common stock, such that the amount of cash plus the value of the Company’s common stock is equal to the $25.00 stated amount of the purchase contracts per purchase contract settled. This is equivalent to the Acquisition Consideration multiplied by the number of shares of Albertsons common stock with value equal to the $25.00 stated amount of the purchase contracts, the settlement rate that, had the Acquisition not occurred, would have been applicable if the Albertsons common stock price was greater than $23.06 and less than $28.82.

(c) If the Company’s common stock price is less than or equal to $14.89, the settlement rate will be $22.06 in cash plus 0.1973 shares of the Company’s common stock, per purchase contract settled. This is equivalent to the Acquisition Consideration multiplied by 1.0841 shares of Albertsons common stock, the settlement rate that, had the Acquisition not occurred, would have been applicable if the Albertsons common stock price was less than or equal to $23.06.

Before the issuance of common stock upon settlement of the purchase contracts, the Corporate Units will be reflected in the diluted earnings per share calculations using the treasury stock method as defined by SFAS No. 128, “Earnings Per Share.” Under this method, the number of shares of common stock used in calculating diluted earnings per share (based on the settlement formula applied at the end of the reporting period) is deemed to be increased by the excess, if any, of the number of shares that would be issued upon settlement of the purchase contracts less the number of shares that could be purchased by the Company in the market at the average market price during the period using the proceeds to be received upon settlement. Therefore, dilution will occur for periods when the average market price of the Company’s common stock for the 20-day trading period preceding the end of the reporting period is above $46.54, and will potentially occur when the average market price of the Company’s common stock for the 20-day trading period preceding the end of the reporting period is lower than the average price of the Company’s common stock for the full reporting period. For the year-to-date as of December 2, 2006, the Corporate Units were dilutive by approximately 0.119 shares.

The remarketing agent is required to attempt to remarket the senior notes on behalf of the holders of the remaining Corporate Units in February 2007 (three months prior to the Purchase Contract Settlement Date in May 2007). If this initial remarketing is unsuccessful, the remarketing agent is required to attempt to remarket the senior notes again in May 2007

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prior to the Purchase Contract Settlement Date in a final remarketing. If the initial remarketing is successful, the cash proceeds will be delivered to the collateral agent and will be used to purchase U.S. treasury securities maturing on or about the Purchase Contract Settlement Date that will serve as collateral for the obligations under the purchase contracts until the Purchase Contract Settlement Date. If the final remarketing is required and is successful, the cash proceeds will be delivered to the collateral agent and will serve as collateral for the obligations under the purchase contracts. In the case of any successful remarketing, the collateral agent will use the cash in the collateral account to settle the purchase contracts on the Purchase Contract Settlement Date on behalf of the holders of the Corporate Units. Upon settlement of the purchase contracts, the Company will receive approximately $280 and will issue the requisite amount of Acquisition Consideration (if the purchase contracts had been settled on December 2, 2006, this would have been approximately $215 in cash and 1.9 shares). The Company also will have an obligation to pay the principal amount of the senior notes of approximately $280 at the maturity date in February 2009 or at a later date if the maturity date is extended in connection with the remarketing of the senior notes under the terms of the Corporate Units.

If the senior notes are not successfully remarketed, the Company will not receive cash from the holders of the Corporate Units. Rather, the holders may elect to put the senior notes to the Company on the Purchase Contract Settlement Date to satisfy their obligations under the purchase contracts, and the Company will issue the requisite amount of Acquisition Consideration. Thereafter, the shares of common stock issued will be included in the calculation of basic earnings per share.

NOTE 9 – STOCK-BASED COMPENSATION

Adoption of New Standard

Effective February 26, 2006, the Company adopted the provisions of SFAS No. 123(R) using the modified-prospective transition method. Under this transition method, compensation expense recognized during the 40 weeks ended December 2, 2006 included: (1) compensation expense for all stock-based awards granted prior to, but not yet vested as of February 25, 2006 based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”) and (2) compensation expense for all stock-based awards granted on or after February 26, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). The Company used the straight-line method to recognize the expense related to the option plan prior to and subsequent to the adoption of SFAS No. 123(R). As stock-based compensation expense recognized in the Condensed Consolidated Statement of Earnings for the 40 weeks ended December 2, 2006 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. The effect of adopting SFAS No. 123(R) was an additional after tax expense of $2 and $13 ($0.01 and $0.07 per basic and diluted share), respectively, recognized in the Condensed Consolidated Statement of Earnings for the 12 weeks and 40 weeks ended December 2, 2006.

Stock Options

The Company currently has options outstanding under multiple stock plans. The Company’s 2002 Stock Plan allows the granting of non-qualified stock options and incentive stock options to purchase shares of the Company’s common stock, to key salaried employees at prices not less than 100 percent of their fair market value, determined based on the average of the opening and closing sale price of the Company’s common stock on the date of grant. The Company’s 1997 Stock Plan allows only the granting of non-qualified stock options to purchase common shares to salaried employees at fair market value determined on the same basis. In April 2005, the Board of Directors reserved an additional 9 shares for issuance under the 2002 Stock Plan, which was approved by the shareholders of the Company on June 15, 2005. 7.5 of these shares are reserved for issuance as stock options and the remaining 1.5 shares are reserved for restricted stock awards. In addition, in June 2006, as part of the Acquisition, the Company may issue 10 shares that had formerly been available for issuance under the Albertson’s, Inc. 2004 Equity and Performance Incentive Plan. The Company also has options outstanding under its 1983 Employee Stock Option Plan, 1993 Stock Plan, the SUPERVALU/Richfood Stock Incentive Plan, the Albertson’s, Inc. Amended and Restated 1995 Stock-Based Incentive Plan, and the Albertson’s, Inc. 2004 Equity and Performance Incentive Plan, but no further options may be granted under these plans. The plans provide that the Board of Directors or the Executive Personnel and Compensation Committee of the Board (the “Compensation Committee”) may determine at the time of granting whether each option granted, except those granted under the 1997 Stock Plan, will be a non-qualified or incentive stock option under the Internal Revenue Code. The terms of each option will be determined by the Board of Directors or the Compensation Committee. Generally, options issued prior to fiscal 2006 have a term of ten years. Effective in fiscal 2006, options issued shall not be for more than a term of seven years. Generally, options vest over four years. The exercise provisions of future awards may change as the Board of Directors or the Compensation Committee may determine.

In accordance with the Acquisition agreement, the Company issued approximately 22 fully vested stock options to holders of Albertsons stock options who became employees of the Company after the Acquisition. The fair value of the stock options issued was determined in accordance with SFAS No. 123(R).

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Prior to February 26, 2006, the Company applied APB Opinion No. 25 and related interpretations in accounting for stock option and stock unit awards made under the 2002 Stock Plan and previous plans. Stock options previously granted under these plans had an exercise price equal to not less than the fair market value of the common stock on the date of the grant, and accordingly, no compensation expense was recognized.

Options granted, exercised and outstanding were as follows:

	Shares Under Option		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
	(In thousands)					(In thousands)
Outstanding, February 25, 2006	11,800		$	26.89	5.6	$	64,825
Granted	2,985			29.35
Assumed in Acquisition	21,521			33.15
Exercised	(9,216	)		24.38
Canceled and forfeited	(3,040	)		40.20
Outstanding, December 2, 2006	24,050		$	32.08	5.0	$	111,046
Vested and expected to vest in future at December 2, 2006	23,707		$	31.37	4.9	$	109,691
Exercisable at December 2, 2006	19,768		$	31.75	4.7	$	91,355

The weighted average grant date fair value of stock options granted to holders of Albertsons stock options who became employees of the Company after the Acquisition was $4.14. The weighted average grant date fair value of all other stock options granted during the 40 weeks ended December 2, 2006 was $6.92. The weighted average grant date fair value of all stock options granted during the 40 weeks ended December 2, 2006 and December 3, 2005 was $4.49 and $8.46 per share, respectively. The total intrinsic value of stock options exercised during the 40 weeks ended December 2, 2006 and December 3, 2005 was $53 and $24, respectively. Intrinsic value is measured using the fair market value at the date of exercise (for stock options exercised) or at December 2, 2006 (for outstanding stock options) less the applicable exercise price.

To calculate the fair value of stock options, the Company uses the Black-Scholes option pricing model. The significant weighted average assumptions relating to the valuation of the Company’s stock options for the 40-week periods ended December 2, 2006 and December 3, 2005 were as follows:

	40 Weeks Ended
	December 2, 2006		December 3, 2005
Dividend yield	2.00	%	2.00	%
Volatility rate	20.65 - 29.55	%	28.87	%
Risk-free interest rate	4.61 - 5.19	%	3.89	%
Expected option life (years)	1.0 - 5.4 years		4.8 years

Compensation Expense

The components of pre-tax stock-based compensation expense related to stock options (included primarily in Selling, general and administrative expenses in the Condensed Consolidated Statement of Earnings) and related tax benefits were as follows:

	12 Weeks Ended					40 Weeks Ended
	December 2, 2006			December 3, 2005		December 2, 2006			December 3, 2005
Stock option expense	$	4		$	—	$	21		$	—
Income tax benefits		(2	)		—		(8	)		—
	$	2		$	—	$	13		$	—

The Company realized excess tax benefits of $4 related to tax deductions in excess of compensation expense recognized in the Condensed Consolidated Statement of Earnings from the exercise of stock options during the 40 weeks ended December 2, 2006. This amount is included in net proceeds from the sale of common stock under option plans in Cash flows from financing activities in the Condensed Consolidated Statement of Cash Flows.

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Unrecognized Compensation Expense

Stock Options

As of December 2, 2006 there was $29 of unrecognized compensation expense related to nonvested options granted under the Company’s stock-based compensation plans. The expense related to these nonvested awards is expected to be charged to expense over a weighted-average remaining vesting period of approximately 2 years.

Option shares available for grant were 17 and 10 at December 2, 2006 and February 25, 2006, respectively. As of December 2, 2006, the Company has reserved 43 shares, in aggregate, for the plans.

Other Stock-Based Awards

As of December 2, 2006, limited stock appreciation rights have been granted and are outstanding under the 1989 Stock Appreciation Rights Plan and the 1993 Stock Plan. Such rights relate to options granted under which holders may purchase 0.2 shares of common stock and are exercisable only upon a change in control.

The Company incurs expenses under long-term incentive and restricted stock plans at the discretion of the Board of Directors. Compensation expense under these plans was $3 and $8 for the 12 weeks and 40 weeks ended December 2, 2006, respectively. Compensation under these plans was $3 and $7 for the 12 weeks and 40 weeks ended December 3, 2005, respectively. As of December 2, 2006 there was $31 of unrecognized compensation expense related to nonvested awards granted under the Company’s long-term incentive and restricted stock plans. These awards are expected to be charged to expense over a weighted-average vesting period of approximately 3 years.

Pro Forma Compensation Expense

Had compensation expense for the 12 and 40 weeks ended December 3, 2005 been determined based on the fair value at the grant dates of stock-based awards, consistent with SFAS No. 123(R), net income, basic earnings per share, and diluted earnings per share would have been as follows:

	Third Quarter (12 weeks) Ended December 3, 2005			Year-to-Date (40 weeks) Ended December 3, 2005
Net earnings, as reported	$	75		$	200
Add: stock-based compensation expense included in reported net earnings, net of related tax effect		2			5
Deduct: total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effect		(5	)		(19	)
Pro forma net earnings		72			186
Add: interest on dilutive convertible debentures, net of related tax effect		2			6
Pro forma net earnings for diluted earnings per share	$	74		$	192
Earnings per share—basic:
As reported	$	0.55		$	1.47
Pro forma		0.53			1.38
Earnings per share—diluted:
As reported		0.53			1.41
Pro forma		0.51			1.33

NOTE 10 – TREASURY STOCK PURCHASE PROGRAM

In July 2006, the Board of Directors authorized a stock repurchase program under which the Company is authorized to purchase up to the number of shares of common stock issued by the Company upon the exercise of employee stock options by the former employees of Albertsons who became employees of the Company. The term of this program is from June 2, 2006 to June 1, 2007, and shall not exceed 10 shares. During the 12 weeks and 40 weeks ending December 2, 2006, the Company purchased 3 and 8 shares under the program at an average cost of $30.82 and $29.26 per share, respectively. This authorization is in addition to the Company’s existing 5 share repurchase program under which 4 shares remain available for purchase as of December 2, 2006.

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NOTE 11 - COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET ARRANGEMENTS

The Company has guaranteed certain leases, fixture financing loans and other debt obligations of various retailers at December 2, 2006. These guarantees were generally made to support the business growth of affiliated retailers. The guarantees are generally for the entire terms of the leases or other debt obligations with remaining terms that range from less than one year to eighteen years, with a weighted average remaining term of approximately twelve years. For each guarantee issued, if the affiliated retailer defaults on a payment, the Company would be required to make payments under its guarantee. Generally, the guarantees are secured by indemnification agreements or personal guarantees of the affiliated retailer. At December 2, 2006, the maximum amount of undiscounted payments the Company would be required to make in the event of default of all guarantees was approximately $224 and represented approximately $146 on a discounted basis. No amount has been recorded in the Condensed Consolidated Balance Sheets for these contingent obligations under the Company’s guarantee arrangements.

The Company is contingently liable for leases that have been assigned to various third parties in connection with facility closings and dispositions. The Company could be required to satisfy the obligations under the leases if any of the assignees are unable to fulfill their lease obligations. Due to the wide distribution of the Company’s assignments among third parties, and various other remedies available, the Company believes the likelihood that it will be required to assume a material amount of these obligations is remote.

The Company is party to a synthetic leasing program for one of its major warehouses. The lease expires in April 2008, may be renewed with the lessor’s consent through April 2013, and has a purchase option of $60. At December 2, 2006, the estimated market value of the property underlying this lease approximately equaled the purchase option.

The Company had $411 of outstanding letters of credit as of December 2, 2006, of which $344 were issued under the credit facility and $67 were issued under separate agreements with financial institutions. These letters of credit primarily support workers’ compensation, merchandise import programs and payment obligations. The Company pays fees, which vary by instrument, of up to 1.75 percent on the outstanding balance of the letters of credit.

The Company is a party to a variety of contractual agreements under which the Company may be obligated to indemnify the other party for certain matters, which indemnities may be secured by operation of law or otherwise, in the ordinary course of business. These contracts primarily relate to the Company’s commercial contracts, operating leases and other real estate contracts, financial agreements, agreements to provide services to the Company, and agreements to indemnify officers, directors and employees in the performance of their work. While the Company’s aggregate indemnification obligation could result in a material liability, the Company is aware of no current matter that it expects to result in a material liability.

Legal Proceedings

The Company is subject to various lawsuits, claims and other legal matters that arise in the ordinary course of conducting business, including certain matters of the Acquired Operations, none of which, in management’s opinion, is expected to have a material adverse impact on the Company’s financial condition, results of operations or cash flows. Accruals for certain pre-acquisition legal contingencies were established through purchase accounting. Certain changes to accruals related to pre-acquisition legal contingencies may be adjusted through purchase accounting for up to one year from the date of Acquisition.

In September 2000 an agreement was reached and court approval granted to settle ten purported class and/or collective actions which were consolidated in the United States District Court in Boise, Idaho and which raised various issues including “off-the-clock” work allegations and allegations regarding certain salaried grocery managers’ exempt status. Under the settlement agreement, current and former employees who met eligibility criteria have been allowed to present their off-the-clock work claims to a claims administrator. Additionally, current and former grocery managers employed in the State of California have been allowed to present their exempt status claims to a claims administrator. The claims administrator has assigned values to claims. The value of these claims can be challenged by either party. The parties have agreed to resolve all outstanding claims subject to final approval by the Court, which held a hearing on December 29, 2006 and indicated that preliminary approval would be given to the settlement agreement. Notice will be sent to all class members prior to hearing for final approval which may occur as early as April 2007. Management believes that the settlement will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

On October 13, 2000 a complaint was filed in Los Angeles County Superior Court (Joanne Kay Ward et al. v. Albertson’s, Inc. et al.) alleging that Albertsons, Lucky Stores and Sav-on Drug Stores paid terminating employees their final paychecks in an untimely manner. The lawsuit seeks statutory penalties. On January 4, 2005, the case was certified as a class action. The Company is vigorously defending this lawsuit. Although this lawsuit is subject to the uncertainties inherent in the litigation process, based on the information presently available to the Company, management does not expect that the ultimate resolution of this lawsuit will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

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On February 2, 2004 the Attorney General for the State of California filed an action in Los Angeles federal court (California, ex rel Lockyer v. Safeway, Inc. dba Vons, a Safeway Company, Albertson’s, Inc. and Ralphs Grocery Company, a division of The Kroger Co., United States District Court Central District of California, Case No. CV04-0687) claiming that certain provisions of the agreements (the “Labor Dispute Agreements”) between the Company, The Kroger Co. and Safeway Inc. (the “Retailers”), which provided for “lock-outs” in the event that any Retailer was struck at any or all of its Southern California facilities during the 2003-2004 labor dispute in Southern California when the other Retailers were not and contained a provision designed to prevent the union from placing disproportionate pressure on one or more Retailer by picketing such Retailer(s) but not the other Retailer(s) during the labor dispute violate Section 1 of the Sherman Act. The lawsuit seeks declarative, injunctive and other legal and equitable relief. The Retailers’ motion for summary judgment was denied on May 26, 2005 and the Retailers’ appeal of that decision was dismissed on November 29, 2005. On December 7, 2006, the Attorney General’s motion for Summary Judgment was denied. The Company continues to believe it has strong defenses against this lawsuit and is vigorously defending it. Although this lawsuit is subject to uncertainties inherent in the litigation process, based on the information presently available to the Company, management does not expect that the ultimate resolution of this action will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

In March 2004 a lawsuit seeking class action status was filed against Albertsons in the Superior Court of the State of California in and for the County of Alameda, California (Dunbar v. Albertson’s, Inc.) by a grocery manager seeking recovery including overtime pay based upon plaintiff’s allegation that he and other grocery managers were improperly classified as exempt under California law. Class certification was denied in June 2005 and plaintiffs have appealed; the appeal was denied and the time period for further appeal by plaintiffs has now passed. The Company continues to believe it has strong defenses against this lawsuit and is vigorously defending it. Although this lawsuit is subject to the uncertainties inherent in the litigation process, based on the information presently available to the Company, management does not expect that the ultimate resolution of this lawsuit will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

On January 24, 2006 a putative class action complaint was filed in the Fourth Judicial District of the State of Idaho in and for the County of Ada, naming Albertsons and its directors as defendants. The action (Christopher Carmona v. Henry Bryant et al., No. CV-OC-0601251), which was removed to the United States District Court for the District of Idaho and subsequently remanded to Idaho state court, challenges the agreements entered into in connection with the series of transactions facilitating the sale of Albertsons to SUPERVALU, CVS and the Cerberus Group (the “Transactions”). Specifically, the complaint alleges that Albertsons and its directors violated applicable law by directly breaching and/or aiding the other defendants’ breaches of their fiduciary duties, including by failing to value Albertsons properly and by ignoring conflicts of interest. Among other things, the complaint seeks preliminary and permanent injunctive relief to enjoin the completion of the Transactions and rescission of the Transactions to the extent implemented. On May 18, 2006, the defendants entered into a memorandum of understanding for a full settlement with the plaintiff. In connection with executing the memorandum of understanding, which remains subject to the approval of the Court, Albertsons filed a Form 8-K with the Securities and Exchange Commission in which it made disclosure of additional details of the circumstances and events leading up to the Company’s entry into the sale and related transactions that are the subject of the legal action. In addition, Albertsons agreed, subject to Court approval, to pay certain fees and expenses of plaintiff’s counsel. On August 17, 2006, over the objection of a former shareholder who sought but was refused status as an intervenor, the Court preliminarily approved the Carmona settlement; certified a no-opt-out settlement class consisting of all former Albertsons shareholders and their successors in interest, assigns and transferees who held Albertsons shares at any time between September 2, 2005 through June 2, 2006 excluding the Defendants and their immediate families; appointed Christopher Carmona as the representative for the settlement class; set a schedule for final approval of the settlement; and approved notices to be published and sent to the former shareholders advising them of the schedule and an opportunity to object to the settlement. On December 13, 2006, the Court held a hearing for final approval of the settlement. After hearing argument from counsel and testimony on behalf of a shareholder, the Court took the matter under advisement. Although this lawsuit is subject to the uncertainties inherent in the litigation process, based on the information presently available to the Company, management does not expect that the ultimate resolution of this lawsuit will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

The Company is also involved in routine legal proceedings incidental to its operations. Some of these routine proceedings involve class allegations, many of which are ultimately dismissed. Management does not expect that the ultimate resolution of these legal proceedings will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

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The statements above reflect management’s current expectations based on the information presently available to the Company. However, predicting the outcomes of claims and litigation and estimating related costs and exposures involves substantial uncertainties that could cause actual outcomes, costs and exposures to vary materially from current expectations. In addition, the Company regularly monitors its exposure to the loss contingencies associated with these matters and may from time to time change its predictions with respect to outcomes and its estimates with respect to related costs and exposures. It is possible that material differences in actual outcomes, costs and exposures relative to current predictions and estimates, or material changes in such predictions or estimates, could have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

Insurance Contingencies

The Company has outstanding workers’ compensation and general liability claims with a former insurance carrier that is experiencing financial difficulties. If the insurer fails to pay any covered claims that exceed deductible limits, creating “excess claims,” the Company may have the ability to present these excess claims to guarantee funds in certain states in which the claims originated. In the state where the Company faces the largest potential exposure, legislation was enacted that the Company believes increases the likelihood of state guarantee fund protection. The Company currently cannot estimate the amount of the covered claims in excess of deductible limits which will not be paid by the insurance carrier or otherwise. As of December 2, 2006, the insurance carrier continues to pay the Company’s claims. Based on information presently available to the Company, management does not expect that the ultimate resolution of this matter will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

Pension Plan / Health and Welfare Plan Contingencies

The Company contributes to various multi-employer pension plans under collective bargaining agreements, primarily for defined benefit pension plans. These plans generally provide retirement benefits to participants based on their service to contributing employers. Based on available information, the Company believes that some of the multi-employer plans to which it contributes are under-funded. Company contributions to these plans are likely to continue to increase in the near term. However, the amount of any increase or decrease in contributions will depend on a variety of factors, including the results of the Company’s collective bargaining efforts, return on the assets held in the plans, actions taken by trustees who manage the plans and the potential payment of a withdrawal liability if the Company chooses to exit a market or another employer withdraws from a plan without provision for their share of the pension liability. Many recently completed labor negotiations have positively affected the Company’s future contributions to these plans.

The Company also makes payments to multi-employer health and welfare plans in amounts representing mandatory contributions which are based on reserve requirements set forth in the related collective bargaining agreements. Some of the collective bargaining agreements up for renewal in the next several years contain reserve requirements that may trigger unanticipated contributions resulting in increased health care expenses. If these health care provisions cannot be renegotiated in a manner that reduces the prospective health care cost as the Company intends, the Company’s selling and administrative expenses could increase, possibly significantly, in the future.

NOTE 12 – SEGMENT INFORMATION

Refer to page 5 for the Company’s segment information.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Dollars and shares in millions, except per share data)

OVERVIEW

On June 2, 2006 (the “Acquisition Date”), we acquired the premier retail operations of Albertson’s, Inc. (“Albertsons”), adding approximately 1,125 stores to our retail footprint (the “Acquisition”). The Acquisition was a unique strategic opportunity to acquire those assets of Albertsons that we viewed as the most attractive and profitable. The acquired stores give us a strong market presence in many key urban markets with little overlap with our legacy business.

In connection with the Acquisition, we issued approximately 68.5 shares of common stock. We also assumed $6,119 of debt and issued $1,970 of new debt.

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As a result of the Acquisition, we are expected to have revenues of approximately $37,000 for the 2007 fiscal year. The Company now has approximately 200,000 employees, 2,500 owned and licensed stores, 900 in-store pharmacies and 120 fuel centers. The Acquisition has significantly changed the mix of the Company’s segment revenues and operating results going forward.

As described in Note 1 – The Company and Significant Accounting Policies, the Company’s Condensed Statement of Earnings for the third quarter of fiscal 2007 reflects 13 weeks of the Acquired Operations and 12 weeks of the legacy-SUPERVALU business. The Company’s Condensed Consolidated Statement of Earnings for year-to-date fiscal 2007 reflects 26 weeks of Acquired Operations and 40 weeks of the legacy-SUPERVALU business. See Note 1 – The Company and Significant Accounting Policies for the definition of Acquired Operations and Note 2 – Business Acquisition for disclosure of assets acquired and liabilities assumed in connection with the Acquisition. The Company’s consolidated balance sheet was significantly impacted by the Acquisition. Consolidated net assets reflect an increase of approximately $2,600 from the fiscal 2006 year-end. The increase in net assets is primarily due to business combination activity. See Note 2 – Business Acquisition for more information on the impact of the Acquisition on the Condensed Consolidated Balance Sheet.

The sale of the Standalone Drug Business to CVS and the sale of the Non-Core Business to an investment group led by Cerberus Capital Management, LP (the “Cerberus Group”) generated $4,911 in cash that was combined with the Company’s relative portion of the purchase price of approximately $11,300 in cash and equity to complete the Albertsons acquisition. See Note 2 – Business Acquisition for the definitions of Standalone Drug Business and Non-Core Business. The purchase price does not include approximately $1,100 to settle the obligations related to the mandatory convertible securities on or before May 2007 (see Note 8 – Debt).

Identical store retail sales growth, including store expansions and excluding fuel, for the third quarter of fiscal 2007 compared to last year, for stores in existence prior to the Acquisition combined with stores assumed in the Acquisition, increased 0.6 percent. Identical store retail sales growth, including store expansions and excluding fuel, for fiscal 2007 year-to-date compared to fiscal 2006 third quarter year-to-date, for stores in existence prior to the Acquisition and assumed in the Acquisition, was flat.

RESULTS OF OPERATIONS

In the third quarter of fiscal 2007, net sales increased to $10,657 from $4,695 in the prior year. Net earnings for the third quarter of fiscal 2007 were $113, basic earnings per share were $0.55 and diluted earnings per share were $0.54 compared with net earnings of $75, basic earnings per share of $0.55 and diluted earnings per share of $0.53 last year. Results for the third quarter of fiscal 2007 include Acquisition-related costs of $10 after-tax and incremental stock-based compensation expense related to the Company’s adoption of SFAS No. 123(R) of $2 after-tax resulting in diluted earnings per share impacts of $0.05 and $0.01, respectively.

Year-to-date for fiscal 2007, net sales increased to $27,106 from $15,223 in the prior year. Net earnings for fiscal 2007 were $332 year-to-date, basic earnings per share were $1.81 year-to-date and diluted earnings per share were $1.75 year-to-date compared with net earnings of $200, basic earnings per share of $1.47 and diluted earnings per share of $1.41 last year. Results for fiscal 2007 year-to-date include Acquisition-related costs (defined as one-time transaction costs which primarily include retention bonuses and consultant fees) of $29 after-tax and incremental stock-based compensation expense related to the Company’s adoption of SFAS No. 123(R) of $13 after-tax resulting in diluted earnings per share impacts of $0.15 and $0.07, respectively. Total fiscal 2007 stock-based compensation expense related to stock options is expected to be approximately $15, after-tax.

THIRD QUARTER RESULTS

Net Sales

Net sales for the third quarter of fiscal 2007 were $10,657 compared with $4,695 last year. Retail food and drug sales were approximately 79 percent of net sales and supply chain services were approximately 21 percent of net sales for the third quarter of fiscal 2007, compared with approximately 53 percent and approximately 47 percent, respectively, last year.

Retail food sales for the third quarter of fiscal 2007 were $8,412 compared with $2,476 last year. The increase was due to the Acquisition. Identical store retail sales growth defined as stores operating for four full quarters, including store expansions and excluding fuel, for the third quarter of fiscal 2007 compared to last year, for stores in existence prior to the Acquisition, was negative 1.3 percent.

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Total retail square footage, including acquired stores and licensed stores and excluding the divested stores of Cub Foods Chicago and Shop ‘n Save Pittsburgh from the prior year, increased to approximately 86 million square feet, an increase of approximately 186 percent from prior year’s third quarter.

Supply chain services sales for the third quarter of fiscal 2007 were $2,245 compared with $2,219, an increase of 1.2 percent over last year. The increase in sales is primarily due to new business from the traditional food distribution business of 7 percent, partially offset by customer attrition of 5 percent and transition of temporary business of 1 percent.

Gross Profit

Gross profit, as a percent of Net sales, was 22.9 percent for the third quarter of fiscal 2007 compared with 14.4 percent last year. The increase in Gross profit as a percent of Net sales primarily reflects the increase in Net sales for Retail food to approximately 79 percent of total Net sales compared to approximately 53 percent for last year as a result of the Net Acquisition. Retail food has a higher Gross profit percentage than supply chain services.

Selling and Administrative Expenses

Selling and administrative expenses, as a percent of Net sales, were 19.4 percent for the third quarter of fiscal 2007 compared with 11.3 percent last year. The increase in Selling and administrative expenses, as a percent of Net sales, primarily reflects the higher percentage of retail food Net sales as a percentage of total Net sales as a result of the Acquisition. In addition, Selling and administrative expenses for the third quarter of fiscal 2007 included Acquisition-related costs of $16.

Operating Earnings

Operating earnings for the third quarter of fiscal 2007 increased to $367 compared with $142 last year, primarily reflecting the results from the Acquisition. Operating earnings for the third quarter of fiscal 2007 were impacted by $16 of Acquisition-related costs and $4 of incremental stock option expense associated with the Company’s adoption of SFAS No. 123(R). Retail food Operating earnings for the third quarter of fiscal 2007 were $327, or 3.9 percent of Net sales, compared with $104 or 4.2 percent of Net sales last year. The decrease in Retail food Operating earnings as a percent of sales is primarily due to the new blend of retail operations which is driven by the Acquired Operations consistent with its historical operating margins. Supply chain services Operating earnings for the third quarter of fiscal 2007 increased 30 percent to $70 or 3.1 percent of Net sales from last year’s Operating earnings of $54 or 2.4 percent of Net sales. The increase as a percent of Net sales primarily reflects contract cancellation fees from exited supply arrangements and improved sales leverage.

Net Interest Expense

Net interest expense was $183 in the third quarter of fiscal 2007 compared with $23 last year. The increase primarily reflects interest expense related to assumed debt and new borrowings related to the Acquisition.

Income Taxes

The effective tax rate was 38.6 percent and 37.0 percent in the third quarters of fiscal 2007 and fiscal 2006, respectively. The increase is reflective of the estimated effective tax rate for fiscal 2007 as a result of the Acquisition.

Net Earnings

Net earnings were $113, or $0.55 per basic share and $0.54 per diluted share, in the third quarter of fiscal 2007 compared with Net earnings of $75, or $0.55 per basic share and $0.53 per diluted share last year.

Weighted average basic shares increased to 207 in the third quarter of fiscal 2007 compared with 136 shares last year and weighted average diluted shares increased to 209 in the third quarter of fiscal 2007 compared with 146 shares last year. The increase is primarily due to the shares issued for the Acquisition on June 2, 2006.

YEAR-TO-DATE RESULTS

Net Sales

Net sales for fiscal 2007 year-to-date were $27,106 compared with $15,223 last year. Retail food sales were approximately 73 percent of Net sales and Supply chain services were approximately 27 percent of Net sales for fiscal 2007 year-to-date, compared with approximately 53 percent and approximately 47 percent, respectively, last year.

Retail food sales for fiscal 2007 year-to-date were $19,863 compared with $8,107 last year. The increase was due to the Acquisition. Identical store retail sales growth, including store expansions and excluding fuel, for fiscal 2007 year-to-date, for stores in existence prior to the Acquisition, was negative 1.6 percent.

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Supply chain services Net sales for fiscal 2007 year-to-date were $7,243, an increase of 1.8 percent over last year. This increase is primarily due to new business from the traditional food distribution business and temporary business, including Cub Foods stores in Chicago, of 6 percent and 1 percent, respectively, partially offset by customer attrition of 4 percent.

Gross Profit

Gross profit, as a percent of Net sales, was 21.1 percent for fiscal 2007 year-to-date compared with 14.5 percent last year. The increase in gross profit as a percent of Net sales reflects the increase in Net sales for Retail food to approximately 73 percent of total Net sales compared to approximately 53 percent for last year as a result of the Acquisition. Retail food has a higher gross profit percentage than Supply chain services.

Selling and Administrative Expenses

Selling and administrative expenses, as a percent of Net sales, were 17.7 percent for fiscal 2007 year-to-date compared with 11.8 percent last year. The increase in Selling and administrative expenses, as a percent of Net sales, primarily reflects the higher percentage of Retail food Net sales as a percentage of total Net sales as a result of the Acquisition. In addition, fiscal 2007 included Acquisition-related costs of $46 and $21 of incremental stock option expense associated with the Company’s adoption of SFAS No. 123(R). Fiscal 2006 included charges of $57 related to the plan to sell 20 Pittsburgh Shop ‘n Save stores.

Operating Earnings

Operating earnings for fiscal 2007 year-to-date were $926 compared with $402 last year, primarily reflecting the results from the Acquisition. Operating earnings for fiscal 2007 year-to-date were impacted by $46 of Acquisition-related costs and $21 of incremental stock option expense associated with the Company’s adoption of SFAS No. 123(R). Retail food operating earnings for fiscal 2007 year-to-date were $816, or 4.1 percent of Net sales, compared with last year’s operating earnings of $271, or 3.3 percent of Net sales. The increase in Retail food Operating earnings, as a percent of Net sales, is due to the results from the Acquisition and last year’s $57 of charges related to the plan to sell 20 Pittsburgh Shop ‘n Save stores and losses from Hurricane Katrina. Supply chain services Operating earnings for fiscal 2007 year-to-date increased 16.8 percent to $202 from last year’s Operating earnings of $173, or 2.8 percent of Net sales, compared with last years 2.4 percent of Net sales. The increase as a percent of Net sales primarily reflects contract cancellation fees from exited supply arrangements and improved sales leverage.

Net Interest Expense

Net interest expense was $385 in fiscal 2007 year-to-date compared with $84 last year. The increase primarily reflects interest expense related to assumed debt and new borrowings related to the Acquisition.

Income Taxes

The effective tax rate was 38.6 percent and 37.0 percent in fiscal 2007 year-to-date and fiscal 2006 year-to-date, respectively. The increase is reflective of the estimated effective tax rate for fiscal 2007 as a result of the Acquisition.

Net Earnings

Net earnings were $332, or $1.81 per basic share and $1.75 per diluted share for fiscal 2007 year-to-date compared with Net earnings of $200, or $1.47 per basic share and $1.41 per diluted share last year. Results for fiscal 2007 year-to-date include Acquisition-related costs of $29 after-tax and incremental stock-based compensation expense related to the Company’s adoption of SFAS No. 123(R) of $13 after-tax resulting in diluted earnings per share impacts of $0.15 and $0.07, respectively. Results for fiscal 2006 year-to-date included charges of $0.25 per diluted share related to the plan to sell 20 Pittsburgh Shop ‘n Save stores and $0.02 per diluted share related to Hurricane Katrina.

Weighted average basic shares increased to 184 for fiscal 2007 year-to-date compared with 136 shares last year. Weighted average diluted shares increased to 191 for fiscal 2007 year-to-date compared with 146 shares last year. The increase is primarily due to the shares issued for the Acquisition on June 2, 2006.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities was $338 for fiscal 2007 year-to-date compared with $479 last year. The decrease was primarily due to changes in assets and liabilities, excluding the net assets of acquired operations as of June 2, 2006. These changes were primarily due to the decrease in payables, including the net cash book overdraft, resulting from the disposition of the Non-Core and Standalone Drug Businesses together with the impact of the seasonal inventory build.

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Net cash used in investing activities was $2,714 for fiscal 2007 year-to-date compared to $205 last year. Fiscal 2007 year-to-date investing activities primarily relate to the net assets acquired in the Acquisition and capital spending to fund retail store expansion and store remodeling. Fiscal 2006 year-to-date investing activities primarily reflect capital spending to fund retail store expansion and store remodeling.

Net cash provided by financing activities was $1,850 for fiscal 2007 year-to-date compared with net cash used of $152 last year. Fiscal 2007 year-to-date financing activities relate primarily to the debt obtained to facilitate the Acquisition, and senior notes issued in October, 2006 partially offset by repayment of long-term debt and settlements of Albertsons Standalone Drug Business payables related to the sale of Albertsons. Fiscal 2006 year-to-date financing activities primarily reflect the payment of dividends of $64 and repayment of long-term debt of $56. During the 12 weeks and 40 weeks ending December 2, 2006, the Company purchased 3 and 8 shares, respectively, under its stock repurchase program at an average cost of $30.82 and $29.26 per share, respectively.

Management expects that the Company will continue to replenish operating assets with internally generated funds. There can be no assurance, however, that the Company’s business will continue to generate cash flow at current levels. The Company will continue to obtain short-term financing from its credit facilities. Long-term financing will be maintained through existing and new debt issuances. The Company’s short-term and long-term financing abilities are believed to be adequate as a supplement to internally generated cash flows to fund its capital expenditures and acquisitions as opportunities arise. Maturities of debt issued will depend on management’s views with respect to the relative attractiveness of interest rates at the time of issuance and other debt maturities.

On October 31, 2006, the Company issued $500 in senior notes. The notes bear interest at a rate of 7.50 percent and are due 2014. The notes are senior obligations and rank equally with all of the Company’s other senior unsecured indebtedness.

On June 1, 2006, the Company executed senior secured credit facilities in the amount of $4,000. These facilities were provided by a group of lenders and consist of a $2,000 five-year Revolving Credit Facility, a $750 five-year Term Loan A, and a $1,250 six-year Term Loan B. Rates on the facilities are tied to LIBOR plus 0.50 percent to 2.00 percent with facility fees ranging from 0.10 percent to 0.50 percent, both based on the Company’s credit ratings. The rates in effect on December 2, 2006, based on the Company’s current credit ratings, are 0.40 percent for the facility fee, LIBOR plus 1.50 percent for the Revolving Credit Facility and Term Loan A, and LIBOR plus 1.75 percent for the Term Loan B.

All obligations under the senior secured credit facilities are guaranteed by each material subsidiary of the Company. The obligations are also secured by a pledge of the equity interests in those same material subsidiaries, limited as required by the existing public indentures of the Company and subsidiaries such that the respective debt issued need not be equally and ratably secured.

The senior secured credit facilities also contain various financial covenants including a minimum interest expense coverage ratio and a maximum debt leverage ratio. The interest expense coverage ratio shall not be less than 2.10 to 1 for each of the fiscal quarters ending up through December 30, 2006, and moves progressively to a ratio of not less than 2.30 to 1 for the fiscal quarters ending after December 31, 2009. The debt leverage ratio shall not exceed 4.50 to 1 for each of the fiscal quarters ending up through December 30, 2007, and moves progressively to a ratio not to exceed 3.75 to 1 for each of the fiscal quarters ending after December 31, 2009. As of December 2, 2006, the Company is in compliance with the covenants of the senior secured credit facilities.

In conjunction with the $4,000 senior secured credit facilities, the Company terminated its previous five year unsecured $750 revolving credit agreement dated February 2005. Also terminated were the previous Albertsons credit facilities: $400 dated June 2005, $900 dated June 2004, and $100 dated July 2004. All letters of credit that had been issued and outstanding under the previous credit facilities were transferred under the new credit facility. For a discussion of the Company’s continuing obligations under its mandatory convertible securities following the Acquisition, see Note 8 – Debt.

Borrowings under the Term Loan A and Term Loan B may be repaid, in full or in part, at any time without penalty. The Term Loan A has required repayments, payable quarterly, equal to 2.50 percent of the initial drawn balance for the first four quarterly payments (year one) and 3.75 percent of the initial drawn balance for each quarterly payment in years two through five, with the entire remaining balance due at the five year anniversary of the inception date. The Term Loan B has required repayments, payable quarterly, equal to 0.25 percent of the initial drawn balance, with the entire remaining balance due at the six year anniversary of the inception date.

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As of December 2, 2006, there were $780 of outstanding borrowings under the Revolving Credit Facility, the Term Loan A had a remaining principal balance of $731 (of which $84 was classified as current) and the Term Loan B had a remaining principal balance of $1,244 (of which $13 was classified as current). Letters of credit outstanding under the Revolving Credit Facility were $344 and the unused available credit under the Revolving Credit Facility was $876. The Company also had $67 of outstanding letters of credit issued under separate agreements with financial institutions.

In November 2006, the Company executed a 364-day accounts receivable securitization program, under which the Company can borrow up to $200 on a revolving basis, with borrowings secured by eligible accounts receivable, which remain under the Company’s control. Facility fees under this program range from 0.15 percent to 1.50 percent, based on the Company’s credit ratings. The facility fee in effect on December 2, 2006, based on the Company’s current credit ratings, is 0.20 percent. As of December 2, 2006, there was $160 of outstanding borrowings under this program. As of December 2, 2006 there was $230 of accounts receivable pledged as collateral, classified in Accounts receivable in the Company’s December 2, 2006 Condensed Consolidated Balance Sheet. Due to the Company’s intent to renew the facility or refinance it with the Revolving Credit Facility, the facility is classified in Long-term debt in the December 2, 2006 Condensed Consolidated Balance Sheet.

In November 2001, the Company sold zero-coupon convertible debentures due 2031. On October 2, 2006, the Company purchased $213 of these debentures when over 80 percent of the holders put their debentures to the Company for cash. Holders of the debentures may require the Company to purchase all or a portion of the remaining $52 debentures on the first day of October 2011 at a purchase price equal to the accreted value of the debentures (which would include accrued but unpaid interest) at $409.08 (not in millions) per debenture. Since the current credit ratings of the Company are BB or lower as rated by Standard & Poor’s rating service, and Ba3 or lower as rated by Moody’s rating service, the debentures are currently convertible into shares of the Company’s common stock at the option of the holders. In the event of conversion, 9.6434 (not in millions) shares of the Company’s common stock will be issued per each thousand dollars of debentures, or approximately 1.5 shares, should all remaining debentures be converted. As of December 2, 2006, no holders have elected conversion of the debentures. The Company may redeem all or a portion of the remaining debentures at any time at a purchase price equal to the sum of the issue price plus accrued original issue discount as of the redemption date. Due to the holders’ ability to convert the debentures to common stock, the Company’s previous announcement of its intent to use cash to settle the debentures in cash and the Company’s ability to call the debentures for cash at any time, the debentures are classified as current debt.

Medium-term notes of $30 due July 2027 contain put options that would require the Company to repay the notes in July 2007 if the holders of the notes so elect by giving the Company 60-days notice. Medium-term notes of $48 due April 2028 contain put options that would require the Company to repay the notes in April 2008 if the holders of the notes so elect by giving the Company 60-days notice. The $209 of 7.5 percent debentures due May 2037 contain put options that would require the Company to repay the notes in May 2009 if the holders of the notes so elect by giving the Company 60-days notice.

In conjunction with the Acquisition, the Company assumed $6,119 of existing New Albertsons, Inc. (“New Albertsons”) debt. This debt consisted primarily of publicly issued notes and debentures including mandatory convertible securities (“Corporate Units”), medium term notes, and capital lease obligations. On October 23, 2006, the Company commenced an offer to purchase any and all of the outstanding Corporate Units at a purchase price in cash of $25.22 per Corporate Unit (the “Tender Offer”). The Tender Offer expired on November 20, 2006. As a result of the Tender Offer, 34,783,232 Corporate Units, or approximately 75.7 percent of the 45,970,800 issued and outstanding Corporate Units, were validly tendered and were accepted for purchase. The Company paid an aggregate of approximately $877 in cash to tendering holders in the Tender Offer. The Company recognized a gain on extinguishment of less than $1 in the 12 weeks ended December 2, 2006. The balance of the Corporate Units recorded as debt in the Condensed Consolidated Balance Sheet at December 2, 2006 was $278. Subsequent to the repurchase of these Corporate Units, under the terms of the purchase contracts, the Company would be required to issue a minimum of 1.8 shares and a maximum of 2.2 shares of its common stock for the remaining Corporate Units. If the purchase contracts had been settled at December 2, 2006, the Company would have received approximately $65 of net cash and would have issued approximately 1.9 shares of its common stock.

The Company is party to a synthetic leasing program for a major warehouse. The lease expires in April 2008 and may be renewed with the lessor’s consent through April 2013, and has a purchase option of $60.

Capital spending during the third quarter of fiscal 2007 was $306, including $12 in capital leases. Capital spending for year-to-date fiscal 2007 was $659, including $42 of capital leases. Capital spending primarily included retail store expansion and store remodeling. The Company’s capital spending for fiscal 2007 is projected to be approximately $950, including capital leases.

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COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET ARRANGEMENTS

The Company has guaranteed certain leases, fixture financing loans and other debt obligations of various retailers at December 2, 2006. These guarantees were generally made to support the business growth of affiliated retailers. The guarantees are generally for the entire terms of the leases or other debt obligations with remaining terms that range from less than one year to eighteen years, with a weighted average remaining term of approximately twelve years. For each guarantee issued, if the affiliated retailer defaults on a payment, the Company would be required to make payments under its guarantee. Generally, the guarantees are secured by indemnification agreements or personal guarantees of the affiliated retailer. At December 2, 2006, the maximum amount of undiscounted payments the Company would be required to make in the event of default of all guarantees was approximately $224 and represented approximately $146 on a discounted basis. No amount has been recorded in the accompanying condensed consolidated balance sheets for these contingent obligations under the Company’s guarantee arrangements.

The Company is contingently liable for leases that have been assigned to various third parties in connection with facility closings and dispositions. The Company could be required to satisfy the obligations under the leases if any of the assignees are unable to fulfill their lease obligations. Due to the wide distribution of the Company’s assignments among third parties, and various other remedies available, the Company believes the likelihood that it will be required to assume a material amount of these obligations is remote.

The Company is party to a synthetic leasing program for one of its major warehouses. The lease expires in April 2008, may be renewed with the lessor’s consent through April 2013, and has a purchase option of $60. At December 2, 2006, the estimated market value of the property underlying this lease approximately equaled the purchase option.

The Company had $411 of outstanding letters of credit as of December 2, 2006, of which $344 were issued under the credit facility and $67 were issued under separate agreements with financial institutions. These letters of credit primarily support workers’ compensation, merchandise import programs and payment obligations. The Company pays fees, which vary by instrument, of up to 1.75 percent on the outstanding balance of the letters of credit.

The Company is a party to a variety of contractual agreements under which the Company may be obligated to indemnify the other party for certain matters, which indemnities may be secured by operation of law or otherwise, in the ordinary course of business. These contracts primarily relate to the Company’s commercial contracts, operating leases and other real estate contracts, financial agreements, agreements to provide services to the Company, and agreements to indemnify officers, directors and employees in the performance of their work. While the Company’s aggregate indemnification obligation could result in a material liability, the Company is not aware of any current matter that it expects to result in a material liability.

The Company is a party to various legal proceedings arising from the normal course of business as described in Part II—Other Information, Item 1, under the caption “Legal Proceedings” and in Note 11 – Commitments, Contingencies and Off-Balance Sheet Arrangements, none of which, in management’s opinion, is expected to have a material adverse impact on the Company’s financial condition, results of operations or cash flows.

Insurance Contingencies

The Company has outstanding workers’ compensation and general liability claims with a former insurance carrier that is experiencing financial difficulties. If the insurer fails to pay any covered claims that exceed deductible limits, creating “excess claims,” the Company may have the ability to present these excess claims to guarantee funds in certain states in which the claims originated. In the state where the Company faces the largest potential exposure, legislation was enacted that the Company believes increases the likelihood of state guarantee fund protection. The Company currently cannot estimate the amount of the covered claims in excess of deductible limits which will not be paid by the insurance carrier or otherwise. As of December 2, 2006, the insurance carrier continues to pay the Company’s claims. Based on information presently available to the Company, management does not expect that the ultimate resolution of this matter will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

Pension Plan / Health and Welfare Plan Contingencies

The Company contributes to various multi-employer pension plans under collective bargaining agreements, primarily for defined benefit pension plans. These plans generally provide retirement benefits to participants based on their service to contributing employers. Based on available information, the Company believes that some of the multi-employer plans to which it contributes are under-funded. Company contributions to these plans are likely to continue to increase in the near

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term. However, the amount of any increase or decrease in contributions will depend on a variety of factors, including the results of the Company’s collective bargaining efforts, return on the assets held in the plans, actions taken by trustees who manage the plans and the potential payment of a withdrawal liability if the Company chooses to exit a market or another employer withdraws from a plan without provision for their share of the pension liability. Many recently completed labor negotiations have positively affected the Company’s future contributions to these plans.

The Company also makes payments to multi-employer health and welfare plans in amounts representing mandatory contributions which are based on reserve requirements set forth in the related collective bargaining agreements. Some of the collective bargaining agreements up for renewal in the next several years contain reserve requirements that may trigger unanticipated contributions resulting in increased health care expenses. If these health care provisions cannot be renegotiated in a manner that reduces the prospective health care cost as the Company intends, the Company’s Selling and administrative expenses could increase, possibly significantly, in the future.

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The following table represents the Company’s significant contractual obligations and off-balance sheet arrangements at December 2, 2006.

	Amount of Commitment Expiration Per Period
	Total Amount Committed		Fiscal 2007 (remainder)		Fiscal 2008-2009		Fiscal 2010-2011		Thereafter
Contractual obligations & off-balance sheet arrangements:
Debt (1)	$	8,517	$	24	$	494	$	2,316	$	5,683
Operating leases (2)		4,002		96		783		621		2,502
Interest on long-term debt (3)		6,593		155		1,224		1,065		4,149
Capital and direct financing leases (4)		1,178		53		160		154		811
Benefit obligations		1,014		209		150		133		522
Construction commitments		214		76		138		—		—
Retailer loan and lease guarantees		224		8		56		38		122
Deferred income taxes		1,002		75		216		258		453
Purchase option on synthetic lease		60		—		60		—		—
Purchase obligations (5)		2,453		428		1,583		442		—
Self-insurance obligations		893		86		421		194		192
Other long-term liabilities		27		1		3		3		20
	$	26,177	$	1,211	$	5,288	$	5,224	$	14,454

(1) The Company has medium-term notes and debentures that contain put options that would require the Company to repay borrowed amounts prior to maturity. Medium-term notes of $30 and $48 mature in July 2027 and April 2028, respectively, and have put options exercisable in July 2007 and April 2008, respectively. Debentures in the amount of $209 mature in May 2037 and have put options exercisable in May 2009. Convertible debentures in the amount of $52 mature in 2031 and the holders have the ability to convert the debentures into shares of the Company’s common stock and the Company has announced its intent to use cash to settle the debentures. For the purpose of the table above, payments of these obligations are assumed to occur at scheduled maturity.

(2) Represents the minimum rents payable under operating leases, offset by expected sublease income.

(3) The interest on long-term debt reflects the Company’s zero-coupon debentures accreted interest for fiscal 2007 through fiscal 2032 for debentures not put back to the Company on October 1, 2006 (see Note 8 – Debt), should the debentures remain outstanding to maturity. Amounts also include contractual interest payments applicable to the Company’s debt instruments as well as accreted interest related to the fair value adjustments recognized through purchase accounting.

(4) Excludes expected sublease income of $110.

(5) The Company’s purchase obligations include various obligations that have annual purchase commitments of $1 or greater. As of December 2, 2006, future purchase obligations existed that primarily related to supply contracts, technology and advertising. In the ordinary course of business, the company enters into supply contracts to purchase products for resale. These supply contracts typically include either a volume commitment or a fixed expiration date, termination provisions and other standard contractual considerations. The supply contracts that are cancelable have not been included above.

NEW AND RECENTLY ADOPTED ACCOUNTING STANDARDS

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004), “Share Based Payment” (“SFAS No. 123(R)”). SFAS No. 123(R) addresses the accounting for share-based payments, including grants of employee stock options. Under the new standard, companies are no longer able to account for share-based compensation transactions using the intrinsic value method in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB Opinion No. 25”). Instead, companies are required to account for such transactions using a fair-value method and recognize the expense in their consolidated statements of earnings. SFAS No. 123(R) and related FASB Staff Positions became effective for the Company on February 26, 2006. The adoption of SFAS No. 123(R) and its effects are described in Note 9—Stock-Based Compensation.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an Amendment of ARB No. 43, Chapter 4” (“SFAS No. 151”). SFAS No. 151 clarifies that inventory costs that are “abnormal” are required to be charged to expense as incurred as opposed to being capitalized into inventory as a product cost. SFAS No. 151 provides examples of “abnormal” costs to include costs of idle facilities, excess freight and handling costs, and wasted materials (spoilage). SFAS No. 151 became effective for the Company on February 26, 2006 and did not have a material effect on the Company’s condensed consolidated financial statements.

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In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29” (“SFAS No. 153”). SFAS No. 153 amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 became effective for the Company on February 26, 2006 and did not have a material effect on the Company’s condensed consolidated financial statements.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections – a Replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS No. 154”). SFAS No. 154 requires retrospective application as the required method for reporting a change in accounting principle, unless impracticable or unless a pronouncement includes alternative transition provisions. SFAS No. 154 also requires that a change in depreciation, amortization or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. This statement carries forward the guidance in APB Opinion No. 20, “Accounting Changes,” for the reporting of a correction of an error and a change in accounting estimate. SFAS No. 154 became effective for the Company on February 26, 2006 and did not have a material effect on the Company’s condensed consolidated financial statements.

In June 2006, the FASB ratified the consensuses of Emerging Issues Task Force (“EITF”) Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)” (“EITF 06-3”). EITF 06-3 indicates that the income statement presentation on either a gross basis or a net basis of the taxes within the scope of the issue is an accounting policy decision. The Company’s accounting policy is to present the taxes within the scope of EITF 06-3 on a net basis. The adoption of EITF 06-3 in the first fiscal quarter of 2007 did not result in a change to the Company’s accounting policy and, accordingly, did not have a material effect on the Company’s condensed consolidated financial statements.

In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes,” and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Additionally, FIN 48 provides guidance on subsequent derecognition of tax positions, financial statement classification, recognition of interest and penalties, accounting in interim periods, and disclosure and transition requirements. FIN 48 is effective for the Company’s fiscal year beginning February 25, 2007, with early adoption permitted. The Company is in the process of evaluating the impact of adoption of FIN 48.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS 157 is effective for the Company’s fiscal year beginning February 24, 2008, with early adoption permitted. The Company is in the process of evaluating the impact of adoption of SFAS No. 157.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (“SFAS No. 158”). SFAS No. 158 requires an employer that sponsors one or more single-employer defined benefit plans to (a) recognize the overfunded or underfunded status of a benefit plan in its statement of financial position, (b) recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost pursuant to SFAS No. 87, “Employers’ Accounting for Pensions”, or SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions”, (c) measure defined benefit plan assets and obligations as of the date of the employer’s fiscal year-end, and (d) disclose in the notes to financial statements additional information about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset or obligation. SFAS No. 158 is effective for the Company’s fiscal year ending February 24, 2007. The Company is in the process of evaluating the impact of adoption of SFAS No. 158.

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In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The Securities and Exchange Commission staff believes that registrants should quantify errors using both a balance sheet and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. SAB 108 is effective for the Company’s fiscal year ending February 24, 2007, with early application encouraged. The Company is in the process of evaluating the impact of adoption of SAB 108.

CAUTIONARY STATEMENTS FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE SECURITIES LITIGATION REFORM ACT

Any statements contained in this report regarding the outlook for our businesses and their respective markets, such as projections of future performance, statements of our plans and objectives, forecasts of market trends and other matters, are forward-looking statements based on our assumptions and beliefs. Such statements may be identified by such words or phrases as “will likely result,” “are expected to,” “will continue,” “outlook,” “will benefit,” “is anticipated,” “estimate,” “project,” “management believes” or similar expressions. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those discussed in such statements and no assurance can be given that the results in any forward-looking statement will be achieved. For these statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Any forward-looking statement speaks only as of the date on which it is made, and we disclaim any obligation to subsequently revise any forward-looking statement to reflect events or circumstances after such date or to reflect the occurrence of anticipated or unanticipated events.

Certain factors could cause our future results to differ materially from those expressed or implied in any forward-looking statements contained in this report. These factors include the factors discussed in Part II, Item 1A of this Form 10-Q under the caption “Risk Factors,” the factors discussed below and any other cautionary statements, written or oral, which may be made or referred to in connection with any such forward-looking statements. Since it not possible to foresee all such factors, these factors should not be considered as complete or exhaustive.

Economic and Industry Conditions

• Adverse changes in economic conditions that affect consumer spending or buying habits

• Food and drug price inflation or deflation

• Increases in energy costs and commodity prices, which could impact consumer spending and buying habits and the cost of doing business.

• The availability of favorable credit and trade terms

• Softness in national and local economies

• Changes in interest rates

Competitive Practices

• Competition from other food and/or drug retail chains, supercenters, non-traditional competitors and emerging alternative formats in our retail markets

• The impact of consolidation in the retail food and drug and supply chain services industries

• Declines in the retail sales activity of our supply chain services customers due to competition or increased self-distribution

• Changes in demographics or consumer preferences that affect consumer spending habits

Security and Food and Drug Safety

• Business disruptions or losses resulting from wartime activities, acts or threats of terror, or other criminal activity directed at the food and drug industry, the transportation industry, or computer or communications systems

• Other events that give rise to actual or potential food contamination, drug contamination or food-borne illness

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Labor Relations and Employee Benefit Costs

• Potential work disruptions resulting from labor disputes

• Increased operating costs resulting from rising employee benefit costs or pension funding obligations

• The ability to hire, train or retain employees

Expansion and Acquisitions

• Our ability to successfully combine our operations with the Acquired Operations, to achieve expected synergies and to minimize the diversion of management’s attention and resources

• The adequacy of our capital resources for future acquisitions, the expansion of existing operations or improvements to facilities

• Our ability to locate suitable store or distribution center sites, negotiate acceptable purchase or lease terms, and build or expand facilities in a manner that achieves appropriate returns on our capital investment

• Our ability to make acquisitions at acceptable rates of return, assimilate acquired operations and integrate the personnel of the acquired businesses

Liquidity

• Additional funding requirements to meet anticipated debt payment and capital needs

• The impact of acquisitions, including our recent acquisition of the Acquired Operations, on our level of indebtedness, debt ratings, costs and future financial flexibility

Legal and Administrative Proceedings, Regulatory and Accounting Matters

• Unfavorable outcomes in litigation, governmental or administrative proceedings, or other disputes

• Changes in applicable laws and regulations that impose additional requirements or restrictions on the operation of our businesses

• The ability to timely obtain permits, comply with government regulations or make capital expenditures required to maintain compliance with government regulations

• Changes in accounting standards that impact our financial statements

Operating Conditions

• Changes in our business plans, operations, results and prospects

• Potential delays in the development, construction or start-up of planned projects

• Difficulties in developing, maintaining or upgrading information technology systems

• The outcome of negotiations with partners, governments, suppliers, unions, or customers

• Property damage or business disruption resulting from severe weather conditions and natural disasters that affect the Company, its customers or suppliers

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There were no material changes in market risk for the Company in the period covered by this report. See the discussion of market risk in Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended February 25, 2006 under the heading “Quantitative and Qualitative Disclosures About Market Risk.”

ITEM 4. CONTROLS AND PROCEDURES

Management of the Company, including the Chief Executive Officer and the Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) as of December 2, 2006. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms.

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On June 2, 2006 the Company completed the Acquisition. Based on management’s evaluation, this Acquisition and the incorporation of the system of internal controls of the Acquired Operations with that of the Company will not negatively affect the design or operation of the Company’s overall internal control over financial reporting.

Other than as described above, there were no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is subject to various lawsuits, claims and other legal matters that arise in the ordinary course of conducting business, including certain matters of the Acquired Operations, none of which, in management’s opinion, is expected to have a material adverse impact on the Company’s consolidated financial position. Accruals for pre-acquisition legal contingencies were established through purchase accounting. Certain changes to accruals related to pre-acquisition legal contingencies may be adjusted through purchase accounting for up to one year from the date of Acquisition.

As previously discussed in the Quarterly Reports on Form 10-Q of the Company for the 12 weeks ended September 9, 2006 and the 16 weeks ended June 17, 2006, in September 2000 an agreement was reached and court approval granted to settle ten purported class and/or collective actions which were consolidated in the United States District Court in Boise, Idaho and which raised various issues including “off-the-clock” work allegations and allegations regarding certain salaried grocery managers’ exempt status. Under the settlement agreement, current and former employees who met eligibility criteria have been allowed to present their off-the-clock work claims to a claims administrator. Additionally, current and former grocery managers employed in the State of California have been allowed to present their exempt status claims to a claims administrator. The claims administrator has assigned values to claims. The value of these claims can be challenged by either party. The parties have agreed to resolve all outstanding claims subject to final approval by the Court, which held a hearing on December 29, 2006 and indicated that preliminary approval would be given to the settlement agreement. Notice will be sent to all class members prior to hearing for final approval which may occur as early as April 2007. Management believes that the settlement will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

On February 2, 2004 the Attorney General for the State of California filed an action in Los Angeles federal court (California, ex rel Lockyer v. Safeway, Inc. dba Vons, a Safeway Company, Albertson’s, Inc. and Ralphs Grocery Company, a division of The Kroger Co., United States District Court Central District of California, Case No. CV04-0687) claiming that certain provisions of the agreements (the “Labor Dispute Agreements”) between the Company, The Kroger Co. and Safeway Inc. (the “Retailers”), which provided for “lock-outs” in the event that any Retailer was struck at any or all of its Southern California facilities during the 2003-2004 labor dispute in Southern California when the other Retailers were not and contained a provision designed to prevent the union from placing disproportionate pressure on one or more Retailer by picketing such Retailer(s) but not the other Retailer(s) during the labor dispute violate Section 1 of the Sherman Act. The lawsuit seeks declarative, injunctive and other legal and equitable relief. The Retailers’ motion for summary judgment was denied on May 26, 2005 and the Retailers’ appeal of that decision was dismissed on November 29, 2005. On December 7, 2006, the Attorney General’s motion for Summary Judgment was denied. The Company continues to believe it has strong defenses against this lawsuit and is vigorously defending it. Although this lawsuit is subject to uncertainties inherent in the litigation process, based on the information presently available to the Company, management does not expect that the ultimate resolution of this action will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

As previously discussed in the Quarterly Reports on Form 10-Q of the Company for the 12 weeks ended September 9, 2006 and the 16 weeks ended June 17, 2006, on January 24, 2006 a putative class action complaint was filed in the Fourth Judicial District of the State of Idaho in and for the County of Ada, naming Albertsons and its directors as defendants. The action (Christopher Carmona v. Henry Bryant et al., No. CV-OC-0601251), which was removed to the United States District Court for the District of Idaho and subsequently remanded to Idaho state court, challenges the agreements entered into in connection with the series of transactions facilitating the sale of Albertsons to SUPERVALU, CVS and the Cerberus Group (the “Transactions”). Specifically, the complaint alleges that Albertsons and its directors violated applicable law by directly breaching and/or aiding the other defendants’ breaches of their fiduciary duties, including by failing to value Albertsons properly and by ignoring conflicts of interest. Among other things, the complaint seeks preliminary and permanent injunctive relief to enjoin the completion of the Transactions and rescission of the Transactions to the extent implemented. On May 18, 2006, the defendants entered into a memorandum of understanding for a full settlement with the plaintiff. In connection with executing the memorandum of understanding, which remains subject to the approval of the Court, Albertsons filed a Form 8-K with the Securities and Exchange Commission in which it made disclosure of additional details of the circumstances and

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events leading up to the Company’s entry into the sale and related transactions that are the subject of the legal action. In addition, Albertsons agreed, subject to Court approval, to pay certain fees and expenses of plaintiff’s counsel. On August 17, 2006, over the objection of a former shareholder who sought but was refused status as an intervenor, the Court preliminarily approved the Carmona settlement; certified a no-opt-out settlement class consisting of all former Albertsons shareholders and their successors in interest, assigns and transferees who held Albertsons shares at any time between September 2, 2005 through June 2, 2006 excluding the Defendants and their immediate families; appointed Christopher Carmona as the representative for the settlement class; set a schedule for final approval of the settlement; and approved notices to be published and sent to the former shareholders advising them of the schedule and an opportunity to object to the settlement. On December 13, 2006, the Court held a hearing for final approval of the settlement. After hearing argument from counsel and testimony on behalf of a shareholder, the Court took the matter under advisement. Although this lawsuit is subject to the uncertainties inherent in the litigation process, based on the information presently available to the Company, management does not expect that the ultimate resolution of this lawsuit will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

The Company is also involved in routine legal proceedings incidental to its operations. Some of these routine proceedings involve class allegations, many of which are ultimately dismissed. Management does not expect that the ultimate resolution of these legal proceedings will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

The statements above reflect management’s current expectations based on the information presently available to the Company. However, predicting the outcomes of claims and litigation and estimating related costs and exposures involves substantial uncertainties that could cause actual outcomes, costs and exposures to vary materially from current expectations. In addition, the Company regularly monitors its exposure to the loss contingencies associated with these matters and may from time to time change its predictions with respect to outcomes and its estimates with respect to related costs and exposures. It is possible that material differences in actual outcomes, costs and exposures relative to current predictions and estimates, or material changes in such predictions or estimates, could have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

ITEM 1A. RISK FACTORS

Various risks and uncertainties could affect our business. Any of the risks described below or elsewhere in this report or our other SEC filings could have a material impact on our business, financial condition or results of operations. It is not possible to predict or identify all risk factors. Additional risks and uncertainties not presently known to us or that we believe to be immaterial may also impair our business operations. Therefore, the following is not intended to be a complete discussion of all potential risks or uncertainties.

General economic conditions affecting the food industry may affect our business.

The retail food and supply chain services segments are sensitive to a number of economic conditions that may affect our businesses such as: (i) food and drug price inflation or deflation, (ii) softness in national and local economies, (iii) increases in energy costs and commodity prices, (iv) changes in interest rates, (v) the availability of favorable credit and trade terms, and (vi) other economic conditions that may affect consumer spending or buying habits. Any one or more of these economic conditions can affect our retail sales, the demand for products we distribute to our retailer customers, our operating costs and other aspects of our businesses.

Various operating factors may affect our business plans or costs of operations.

The operation of our businesses may be affected by a number of factors, such as: (i) changes in business plans, operations, results and prospects, (ii) potential delays in the development, construction or start-up of planned projects, (iii) labor relations, (iv) changes in operating conditions and costs, including fuel price increases, (v) the level of capital resources required for future acquisitions ,operations or debt reduction (vi) difficulties in developing, maintaining or upgrading information technology systems as needed, and (vii) the outcome of negotiations with partners, governments, suppliers, unions, customers or others, any one or more of which can affect our operating costs, plans for the opening or remodeling of stores, acquisitions and other aspects of our businesses.

Unfavorable outcomes in legal, governmental or administrative proceedings or disputes, or unfavorable changes in government regulations or accounting standards may affect our businesses and operating results.

Unfavorable outcomes in litigation, governmental or administrative proceedings or other disputes may result in significant liability to the Company and affect our profitability or impose restrictions on the manner in which we conduct our business. Our businesses are also subject to various federal, state and local laws and regulations with which we must comply.

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Our inability to timely obtain permits, comply with government regulations or make capital expenditures required to maintain compliance with governmental regulations may affect our ability to open new stores or expand existing facilities, which could adversely impact our business operations and prospects. Changes in applicable laws and regulations that impose additional requirements or restrictions on the manner in which we operate our businesses could increase our operating costs. In addition, changes in accounting standards could impact our financial statements.

We face a high level of competition in the retail food and supply chain services businesses, which could adversely affect our financial performance.

The industries in which we compete are extremely competitive. Our retail food business faces competition from regional and national chains operating under a variety of formats that devote square footage to selling food (i.e. supercenters, supermarkets, extreme value stores, membership warehouse clubs, dollar stores, drug stores, convenience stores, various formats selling prepared foods, and other specialty and discount retailers), as well as from independent food store operators in the markets where we have retail operations. The Company’s third party logistics business competes nationwide in a highly fragmented marketplace, which includes a number of large international and domestic companies, as well as many smaller, more regional competitors.

Both the retail food and supply chain services businesses are subject to competitive practices that may affect: (i) the prices at which we are able to sell products at our retail locations, (ii) sales volume, (iii) the ability of our distribution customers to sell products we supply, which may affect future orders, (iv) changes in demographics and consumer preferences, and (v) our ability to attract and retain customers. In addition, the nature and extent of consolidation in the retail food and food distribution industries could affect our competitive position or that of our distribution customers in the markets we serve.

Threats or potential threats to security or food safety may adversely affect our business.

Wartime activities, threats of terror, acts of terror or other criminal activity directed at the grocery or drug store industry, the transportation industry, or computer or communications systems, could increase security costs, adversely affect our operations, or impact consumer behavior and spending and customer orders. Other events that give rise to actual or potential food contamination, drug contamination, or food-borne illness could have an adverse effect on our operating results.

Severe weather and natural disasters can adversely impact the areas in which we conduct business.

Severe weather conditions such as hurricanes or tornadoes, as well as other natural disasters, could damage our properties, adversely impact the areas in which we conduct our business or the suppliers from whom we obtain products or otherwise cause disruptions to operations or affect our supply chain efficiencies.

Our failure to combine our businesses with the businesses we acquired from Albertsons in a successful and timely manner could have a material adverse effect on our business, financial condition or results of operations.

On June 2, 2006, we acquired New Albertson’s, Inc. (the “Acquisition’) consisting of the core supermarket businesses (the “Acquired Operations”) formerly owned by Albertson’s, Inc. (“Albertsons”) operating under the banners of Acme Markets, Bristol Farms, Jewel-Osco, Shaw’s Supermarkets, Star Markets, the Albertsons’ banner in the Intermountain, Northwest and Southern California regions, the related in-store pharmacies under the Osco and Sav-On banners, 10 distribution centers, certain region offices and certain corporate offices in Boise, Idaho; Glendale, Arizona and Salt Lake City, Utah.

We may not be able to realize the synergies, business opportunities and growth prospects anticipated in connection with the Acquisition. We may experience increased competition that limits our ability to expand our business, we may not be able to capitalize on expected business opportunities including retaining our current customers, assumptions underlying estimates of expected cost savings may be inaccurate or general industry and business conditions may deteriorate. In addition, combining certain operations of our Company with the Acquired Operations will require significant efforts and expenses. Personnel have left and may continue to leave or be terminated because of the Acquisition. Our management may have its attention diverted while trying to combine certain operations of both companies. If these factors limit our ability to combine such operations successfully or on a timely basis, our expectations of future results of operations, including certain cost savings and synergies expected to result from the Acquisition, may not be met. If such difficulties are encountered or if such synergies, business opportunities and growth prospects are not realized, it could have a material adverse effect on our business, financial condition and results of operations.

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The obligation to provide transition support services to the purchasers of the non-core supermarket operations of Albertsons could adversely affect our financial performance.

In connection with the Business Combination, we entered into a Transition Services Agreement (“TSA”) with the purchaser of the non-core supermarket business of Albertson’s, Inc. That agreement is structured to provide us payments from the purchaser to cover the historical costs of providing support services to the operations. There is no assurance that the payments will be sufficient to cover our costs of providing the services or that we will be able to reduce our costs as fast as those payments may decrease during the terms of the TSA. Our management may have its attention diverted while trying to provide the services required by the TSA and the TSA may otherwise limit our ability to achieve the synergies and other cost savings anticipated in the Business Combination. Disputes in connection with the TSA could lead to reductions in the payments due to us under the agreement or unanticipated costs that could adversely affect our financial performance.

We have a lower debt coverage ratio as a result of the Acquisition, which will decrease our business flexibility and increase our borrowing costs.

As a result of the Acquisition we have a significantly lower debt coverage ratio than before the Acquisition. The lower debt coverage, as compared to that which has existed on a historical basis, will have the effect, among other things, of reducing our flexibility to respond to changing business and economic conditions and increasing borrowing costs. Our debt no longer has an investment-grade rating.

Escalating costs of providing employee benefits and other labor relations issues may lead to labor disputes and disruption of our businesses.

Potential work disruptions from labor disputes may affect sales at our stores as well as our ability to distribute products. We contribute to various multi-employer healthcare and pension plans covering certain union-represented employees in both our retail and distribution operations. A significant number of our employees are subject to collective bargaining agreements, and a majority of those employees are participants in multi-employer pension plans. The costs of providing benefits through such plans have escalated rapidly in recent years. Based upon information available to us, we believe that certain of these multi-employer plans are underfunded. The decline in the value of assets supporting these plans, in addition to the high level of benefits generally provided, has led to the underfunding. As a result, contributions to these plans will continue to increase and the benefit levels and other issues will continue to create collective bargaining challenges, which could increase our costs and materially affect our financial condition and results of operations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Period (1)	Total Number of Shares Purchased (2)	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Treasury Stock Purchase Program (3)	Maximum Number of Shares that May Yet be Purchased Under the Treasury Stock Purchase Program (3)
First four weeks
September 10, 2006 to October 7, 2006	2,282,321	$	30.00	2,280,582	6,762,218
Second four weeks
October 8, 2006 to November 4, 2006	39,643	$	33.22	—	6,762,218
Third four weeks
November 5, 2006 to December 2, 2006	681,146	$	33.96	594,200	6,168,018
Totals	3,003,110	$	30.94	2,874,782	6,168,018

(1) The reported periods conform to the Company’s fiscal calendar composed of thirteen 28-day periods. The third quarter of fiscal 2007 contains three 28-day periods.

(2) These amounts include the deemed surrender by participants in the Company’s compensatory stock plans of 128,328 shares of previously issued common stock in payment of the purchase price for shares acquired pursuant to the exercise of stock options and satisfaction of tax obligations arising from such exercises as well as the vesting of restricted stock granted under such plans.

(3) On June 26, 2006, the Company announced a treasury stock purchase program authorized by the Board of Directors to repurchase up to 10,000,000 additional shares of the Company’s common stock upon the exercise of employee stock options by former employees of Albertsons. The term of the program is from June 2, 2006 to June 1, 2007. This is in addition to the 5,000,000 share repurchase program authorized on May 26, 2004 for reissuance upon the exercise of employee stock options and for other compensation programs utilizing the Company’s stock. As of December 2, 2006, 2,474,718 shares remain available for repurchase under the 10,000,000 share repurchase program and 3,693,300 shares remain available for repurchase under the 5,000,000 share repurchase program.

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ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5. OTHER INFORMATION

On January 11, 2007, the Company entered into amended Change of Control Severance Agreements (the “Amended Agreements”) with each of the following executive officers of the Company: Jeffrey Noddle, Chairman and Chief Executive Officer; Michael L. Jackson, President and Chief Operating Officer; David L. Boehnen, Executive Vice President; John H. Hooley, Executive Vice President, Retail East; and Pamela K. Knous, Executive Vice President, Chief Financial Officer (collectively, the “Named Executive Officers”). The Amended Agreements replace the Change of Control Severance Agreements previously entered into with each of the Named Executive Officers, the form of which was filed as Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the year ended February 27, 1999 (the “Existing Agreements”), which were described under the heading “Change-of-Control Agreements” in the Company’s Proxy Statement for the 2006 Annual Meeting of Shareholders filed May 30, 2006.

In general, the Existing Agreements entitled the Named Executive Officers to receive a lump-sum cash payment if the Named Executive Officer’s employment is terminated by the Company (other than for cause or disability, as defined in the agreements) or by the Named Executive Officer for “good reason” within two years after or in anticipation of a change-of-control (as defined in the agreements). In addition, Mr. Noddle is entitled to receive this payment if he terminates his employment for any reason during the seven months following a change in control. The lump-sum cash payment is equal to a multiple of three times the Named Executive Officer’s annual base salary, annual bonus (calculated in accordance with the agreements) and the value of the Named Executive Officer’s annual perquisites. Each Named Executive Officer would also receive a lump-sum retirement benefit equal to the present value of the additional qualified pension plan benefits the Named Executive Officer would have accrued under the plan absent the early termination. Generally, the Named Executive Officer would also be entitled to continued family medical, dental and life insurance coverage until the earlier of 36 months after termination or the commencement of comparable coverage with a subsequent employer. Each agreement includes a covenant not to compete with the Company. Due to the possible imposition of excise taxes on the payments, the agreements also provide that the severance benefits payable to a Named Executive Officer will be increased by an amount equal to the excise tax imposed on such payments.

The Amended Agreements contain substantially the same terms as the Existing Agreements, but were amended to comply with certain provisions of the amendments to Section 409A of the Internal Revenue Code of 1986, as amended. The foregoing description of the terms and conditions of the Amended Agreements is qualified in its entirety by reference to the Form of Amended Agreement, a copy of which is included as Exhibit 10.2 to this Quarterly Report on Form 10-Q.

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ITEM 6. EXHIBITS

Exhibits filed with this Form 10-Q:

10.1	Restricted Stock Unit Award Agreement, executed October 12, 2006, between SUPERVALU INC. and Jeffrey Noddle (incorporated herein by reference to Exhibit 99.1 of the Current Report on Form 8-K of SUPERVALU INC. filed with the SEC on October 13, 2006).*
10.2	Form of Change of Control Severance Agreements entered into with certain executives of the Company, as amended.*
31.1	Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Chief Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Chief Executive Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Chief Financial Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Indicates managements contracts, compensatory plans or arrangements required to be filed pursuant to Item 601(b)(10)(iii)(A) of Regulation S-K.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	SUPERVALU INC. (Registrant)
Dated: January 11, 2007	/s/ PAMELA K. KNOUS
	Pamela K. Knous Executive Vice President and Chief Financial Officer (principal financial and accounting officer)

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EXHIBIT INDEX

Exhibit

Exhibits filed with this Form 10-Q:

10.1	Restricted Stock Unit Award Agreement, executed October 12, 2006, between SUPERVALU INC. and Jeffrey Noddle (incorporated herein by reference to Exhibit 99.1 of the Current Report on Form 8-K of SUPERVALU INC. filed with the SEC on October 13, 2006).*
10.2	Form of Change of Control Severance Agreements entered into with certain executives of the Company, as amended.*
31.1	Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Chief Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Chief Executive Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Chief Financial Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Indicates managements contracts, compensatory plans or arrangements required to be filed pursuant to Item 601(b)(10)(iii)(A) of Regulation S-K.

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EX-10.2

Exhibit 10.2

CHANGE OF CONTROL SEVERANCE AGREEMENT

AS AMENDED

[TIERS I, II & III]

This Agreement (“Agreement”) is dated as of             , 2007, by and between SUPERVALU INC., a Delaware corporation (the “Company”), and             (the “Executive”).

WHEREAS, the Company’s Board of Directors (the “Board”) considers the continued services of key executives of the Company to be in the best interests of the Company and its stockholders; and

WHEREAS, the Board desires to assure, and has determined that it is appropriate and in the best interests of the Company and its stockholders to reinforce and encourage the continued attention and dedication of key executives of the Company to their duties of employment without personal distraction or conflict of interest in circumstances arising from the possibility or occurrence of a change of control of the Company; and

WHEREAS, the Board has authorized the Company to enter into continuity agreements with those key executives of the Company who are designated by the Executive Personnel and Compensation Committee of the Board of Directors (the “Committee”), such agreements to set forth the severance compensation which the Company agrees under certain circumstances to pay such executives; and

WHEREAS, the Executive is a key executive of the Company and has been designated by the Committee as an executive to be offered such a continuity compensation agreement with the Company.

NOW, THEREFORE, in consideration of the promises and the mutual covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company and the Executive agree as follows:

1. General Principles. This Agreement is effective on the date that it is signed by the Company and the Executive. For the purpose of this Agreement, the date on which a Change of Control occurs is the “COC Date.” If Executive ceases to be employed prior to a Change of Control by reason of an Anticipatory Separation (as defined in Section 3(c)), then Executive shall receive the severance benefits provided herein as if the COC Date for the Executive were the date immediately preceding the occurrence of that Anticipatory Separation. If Executive ceases to be employed prior to a Change of Control for any reason other than an Anticipatory Separation, this Agreement shall terminate and have no effect and Executive shall receive such severance payments, if any, as are provided in any existing agreement between the Executive and the Company.

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If a Change of Control occurs, the Executive’s employment shall be continued hereunder for the period (the “Employment Period”) commencing on the COC Date and ending on the second anniversary of the COC Date, subject to the Executive’s Separation from Service as described hereinafter. Any existing employment agreement between the Executive and the Company shall continue to be effective following the Change of Control, but severance amounts under this Agreement shall be reduced by amounts payable under any such employment agreement.

For purposes of this Agreement, a “Change of Control” shall be deemed to have occurred upon any of the following events:

(i) the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the then outstanding shares of common stock of the Company or (B) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors; provided, however, that for purposes of this subsection (i), the following acquisitions shall not constitute a Change of Control: (A) any acquisition directly from the Company or (B) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; or

(ii) the consummation of any merger or other business combination of the Company, sale or lease of all or substantially all of the Company’s assets or combination of the foregoing transactions (the “Transactions”) other than a Transaction immediately following which the shareholders of the Company and any trustee or fiduciary of any Company employee benefit plan immediately prior to the Transaction own at least 60% of the voting power, directly or indirectly, of (A) the surviving corporation in any such merger or other business combination; (B) the purchaser or lessee of the Company’s assets; or (C) both the surviving corporation and the purchaser or lessee in the event of any combination of Transactions; or

(iii) within any 24-month period, the persons who were directors immediately before the beginning of such period (the “Incumbent Directors”) shall cease (for any reason other than death) to constitute at least a majority of the Board or the board of directors of a successor to the Company. For this purpose, any director who was not a director at the beginning of such period shall be deemed to be an Incumbent Director if such director was elected to the Board by, or on the recommendation of or with the approval of, at least three-fourths

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of the directors who then qualified as Incumbent Directors (so long as such director was not nominated by a person who has expressed an intent to effect a Change of Control or engage in a proxy or other control contest); or

(iv) such other event or transaction as the Board shall determine constitutes a Change of Control.

2. Employment following Change of Control. Executive shall have at least the same titles and responsibilities as those in effect immediately prior to the Change of Control. Executive shall receive an annual base salary which is not less than the highest base salary in effect for Executive at any time in the 12 months preceding the Change of Control, and the Company shall review the salary annually with a view to increasing it; provided any such increase shall be in the sole discretion of the Board. Once increased, base salary cannot be decreased. If Executive has not been terminated, for the year of the Change of Control and for each year thereafter during which Executive is employed, the Executive shall be paid an annual bonus which shall be no less than the higher of (i) the bonus which the Executive would have received under the Company’s bonus plans as they were in effect prior to the Change of Control (based upon actual performance in the year up to the Change of Control), (ii) the average of the annual bonuses paid or payable in respect of the three years prior to the Change of Control, or (iii) the Executive’s target bonus immediately prior to the Change of Control (the highest of (i), (ii) and (iii) being the “Bonus”). In addition, the Executive shall be provided with incentive compensation, pension, general insurance, vacation, fringe benefits, perquisites (including an automobile allowance, if any), the use of an office and support staff that are commensurate with the benefits, vacation, expense reimbursement, fringe benefits, perquisites, office and support staff provided to Executive immediately prior to the Change of Control or, if more favorable to Executive, at the level made available to other similarly situated executive officers of the Company after the Change of Control. In addition, the Executive’s place of employment following a Change of Control shall be no farther than 45 miles from the Executive’s place of employment prior to the Change of Control.

3. Separation from Service Following Change of Control.

(a) The Executive shall be entitled to the severance benefits provided in Section 4 hereof if the Executive’s Separation from Service occurs (A) within two years following a Change of Control (i) by the Company without Cause, or (ii) by Executive for Good Reason, or (B) prior to a Change of Control, as a result of an Anticipatory Separation.

Notwithstanding the foregoing, Executive shall not be entitled to severance benefits under this Agreement if Executive’s Separation from Service is on account of Executive’s death or Disability. Executive’s death or Disability subsequent to a Separation from Service which would otherwise give rise to severance benefits under this Agreement will not disqualify Executive from receiving the severance benefits. For purposes of this Agreement:

(i) “Disability” shall have the same meaning as in the Company’s long-term disability plan.

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(ii) “Retirement” shall mean a termination of employment by Executive pursuant to late, normal or early retirement under a pension plan sponsored by the Company, as defined in such plan.

(ii) “Separation from Service” shall mean a severance of the Executive’s employment under circumstances that would qualify as a separation from service as that term is used and defined under Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”).

(b) Cause. For purposes of this Agreement, “Cause” shall mean:

(i) the willful and continued failure of Executive to perform substantially Executive’s duties with the Company (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to Executive by the Board or an officer of the Company which specifically identifies the manner in which the Board or the officer believes that Executive has not substantially performed Executive’s duties;

(ii) (A) the conviction of, or plea of guilty or nolo contendere to, a felony or (B) the willful engaging by Executive in gross misconduct which is materially and demonstrably injurious to the Company; or

(iii) Executive’s commission of an act or acts of personal dishonesty intended to result in substantial personal enrichment of the Executive at the expense of the Company;

provided, however, that in no event shall Cause exist by virtue of any action taken by the Executive (A) in compliance with express written directions of the Board, [the Company’s Chief Executive Officer or the officer to whom the Executive reports,]¹ or (B) in reliance upon the express written consent of the Company’s counsel. In each case above, for a Separation from Service to be for Cause: (a) the Executive must be provided with a Notice of Termination (as described in Section 3(d)) within six (6) months after the Company has actual knowledge of the act or omission constituting Cause; (b) the Executive must be provided with an opportunity to be heard by the Board

¹ Not to be included in CEO’s Agreement, and, for those Executives reporting directly to the CEO, “the officer to whom the Executive reports” shall not be included.

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no earlier than 30 days following the Notice of Termination (during which notice period Executive has failed to cure or resolve the behavior in question); and (c) there must be a good faith determination of Cause by at least 2/3rds of the non-employee outside directors of the Company.

(c) Good Reason and Anticipatory Separation. For purposes of this Agreement, “Good Reason” shall mean:

(i) Executive’s annual base salary is reduced below the higher of (A) the amount in effect on the COC Date, or (B) the highest amount in effect at any time thereafter;

(ii) Executive’s annual bonus is reduced below the Bonus;

(iii) Executive’s duties and responsibilities or the program of incentive compensation (including, without limitation, long term incentive plans and equity incentive programs), vacation, fringe benefits, perquisites, retirement and general insurance benefits offered to Executive are materially and adversely diminished in comparison to the duties and responsibilities or the program of such benefits enjoyed by Executive on the COC Date;

(iv) Executive is required to be based at a location more than 45 miles from the location where Executive was based and performed services on the COC Date or Executive’s business travel obligations are significantly increased over those in effect immediately prior to the COC Date; [or]²

(v) failure to provide for the assumption of this Agreement by any successor entity; [or

(vi) Executive’s termination of employment for any reason during the seventh month following the Change of Control;]³

provided, however, that any diminution of duties or responsibilities that occurs solely as a result of the fact that the Company ceases to be a public company shall not, in and of itself, constitute Good Reason.

Any event or condition described in clauses (i) through (iv) or a Separation from Service without Cause, either of which occurs prior to a Change of Control but which Executive reasonably demonstrates (A) was at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change of Control (a “Third Party”), or (B) otherwise arose in connection with, or in anticipation of a Change of Control, shall constitute Good Reason for purposes of this Agreement, notwithstanding that it occurred prior to a Change of Control (“Anticipatory Separation”).

² Not to be included in CEO’s agreement.

³ For CEO only.

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Executive shall give the Company written notice of any event which Executive claims is the basis for Good Reason [(other than a Separation from Service pursuant to Section 3(c)(vi))]⁴, within 6 months of such event, and the Company shall have 30 days from its receipt of such notice within which to cure or resolve the behavior in question before Executive can terminate for Good Reason.

(d) Notice of Termination. Any purported termination of the Executive’s employment with the Company [(other than a Separation from Service pursuant to Section 3(c)(vi))]⁵ shall be communicated by a Notice of Termination to the Executive, if such termination is by the Company, or to the Company, if such termination is by the Executive. For purposes of this Agreement, “Notice of Termination” shall mean a written notice which shall indicate the specific provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive’s employment under the provisions so indicated. For purposes of this Agreement, no purported termination of Executive’s employment with the Company shall be effective without such a Notice of Termination having been given.

(e) Dispute Resolution. Disputes arising from the operation of this Agreement, including, but not necessarily being limited to, the manner of giving the Notice of Termination, the reasons or cause for the Executive’s termination or the amount of severance compensation due to the Executive subsequent to the Executive’s termination, shall be resolved by arbitration; provided, however, that disputes arising under Section 11 of this Agreement shall not be resolved under this Section 3(e). In the event that any dispute which shall be resolved by arbitration is not able to be resolved by mutual agreement of the parties within sixty calendar (60) days of the giving of such notice, the Executive and the Company hereby agree to promptly submit such a dispute to binding arbitration in Minnesota in accordance with Delaware law and the rules and procedures of the American Arbitration Association. During any period in which a dispute is pending, the Executive shall continue to receive Executive’s salary (including any Bonus) and benefits as if Executive’s employment with the Company had continued through the date of the arbiters’ determination, and any such payments or benefits shall not be offset against any severance, either under this Agreement or otherwise, to which Executive may be entitled.

⁴ For CEO only.

⁵ For CEO only.

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4. Compensation Upon Separation from Service After a Change of Control.

If within two (2) years after the COC Date, the Executive has a Separation from Service, the Executive shall be entitled to the following payments and benefits:

(a) Severance. On the 10^th business day following such Separation from Service (or at such later time as may be provided under Section 4(g)), the Company shall pay or cause to be paid to the Executive a lump sum cash amount equal to [three (3) times][two (2) times]⁶ the sum of (i) the Executive’s annual base salary on the COC Date (the “Base Salary”), (ii) the Bonus, and (iii) the value of the perquisites (e.g., car allowance, club dues, etc., including any ordinary tax gross-ups for perquisites) provided to Executive in respect of the year prior to the Change of Control. In addition, at the time of the above payment, the Executive shall be entitled to an additional lump sum cash payment equal to the sum of (A) Executive’s earned but unpaid salary through the date of Separation from Service, (B) a pro rata portion of the Bonus (calculated through the date of Separation from Service), and (C) an amount, if any, of accrued vacation pay, in each case, in full satisfaction of Executive’s rights thereto.

Except as specifically provided in this Agreement, nothing in this Agreement shall be interpreted or relied upon as a basis to amend, modify, accelerate or defer, or otherwise change any contributions to or payments that may be due from any other deferred compensation plan subject to Section 409A of the Code.

(b) Welfare Benefits. The Executive shall be entitled to continued medical, dental and life insurance coverage for the Executive and the Executive’s eligible dependents on the same basis as in effect prior to the Change of Control or the Executive’s Separation from Service, whichever is deemed to provide for more substantial benefits, until the earlier of (A) [thirty-six (36)][twenty-four (24)][twelve (12)]⁷ months (the “Separation Period”) after the Executive’s Separation from Service or (B) the commencement of comparable coverage with a subsequent employer; provided, however, that such continued coverage shall not count against any continued coverage required by law; provided, further, that if the Company is not able to provide the coverage required above under the general terms and provisions of the Company’s plans, then the Company shall reimburse Executive for the cost of obtaining substantially similar benefits (the “Benefit Payment”) and shall pay Executive an additional amount, such that after payment of all applicable federal, state and local income and payroll taxes imposed upon Executive as a result of the Benefit Payment, the Executive retains an amount equal to the amount of the Benefit Payment.

(c) Pension Benefits. The Executive shall also receive additional credit for service and age (including, benefit accrual and vesting credit) for the Separation

⁶ Three times for Tier I (CEO & EVPs); Two times for Tier II (SVPs); one time for Tier III (remaining participants).

⁷ Thirty-six months for Tier I; twenty-four months for Tier II; twelve months for Tier III.

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Period under any Company pension plan in which Executive participates based on the Executive’s Base Salary and Bonus in effect at the of termination of employment; provided, however, that in the case of a qualified pension plan, the Executive shall be paid on the 30^th day after Executive’s last day of employment (or at such later time as may be provided under Section 4(g)) a cash lump sum equal to the present value of the additional benefits Executive would have accrued if Executive had been credited for all purposes with the additional years of service and age under such plan. In addition, at the time of the above payment, the Executive shall receive an additional payment (the “401(k) Payment”) equal to the product of (i) [three (3)] [two (2)][one (1)]⁸, (ii) 0.0225, and (iii) the sum of the Base Salary and the Bonus.

(d) Outplacement. If so requested by the Executive, outplacement services shall be provided by a professional outplacement provider at a cost to the Company of not more than 10% of the Executive’s Base Salary. Such services may be provided either by direct payment to the outplacement provider or by reimbursement to Executive. However, services shall be paid or reimbursed only if the services are provided during the period beginning with the Separation from Service and ending on the December 31 of the second calendar year following the calendar year in which the Separation from Service occurred.

(e) Indemnification; Liability Insurance. The Company shall maintain, for a period not less than 6 years following Executive’s termination of employment, indemnification policies and liability insurance coverage for Executive’s benefit comparable to those indemnification policies and liability insurance coverage provided by the Company for Executive’s benefit prior to the Change of Control.

(f) Withholding. Payments and benefits provided pursuant to this Section 4 or any other provision of this Agreement shall be subject to any applicable payroll and other taxes required to be withheld.

(g) Limitations on Payment of Deferred Compensation. To the extent that any payments or benefits to be provided to the Executive under this Agreement would be considered deferred compensation under Section 409A of the Code and the Executive is a “Key Employee” as defined in Section 416(i) of the Code, then any such payments that would otherwise be due and payable during the first six months following and on account of a Separation from Service shall instead be paid to the Executive upon the earlier of (i) six months and one day after the date the Executive’s Separation from Service or (ii) any other date permitted under Section 409A(a)(2) and Section 409A(a)(3). To the extent that any payments or benefits to be provided to the Executive under this Agreement would be considered deferred compensation under Section 409A of the Code, the provisions of this Agreement pertaining thereto shall be construed and administered to comply with Section 409A. Neither the Company nor any of its officers,

⁸ Three for Tier I; two for Tier II; and one for Tier III.

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directors, agents or affiliates shall be obligated, directly or indirectly, to any Executive or any other person for any taxes, penalties, interest or like amounts that may be imposed on the Executive or other person on account of any amounts paid or payable under this Agreement or on account of any failure to comply with Section 409A.

5. Certain Additional Payments by the Company:

(a) Anything in this Agreement to the contrary notwithstanding, if it is determined (as hereafter provided) that any payment or distribution by the Company to or for the benefit of the Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise pursuant to or by reason of any other agreement, policy, plan, program or arrangement, including without limitation any stock option, stock appreciation right or similar right, or the lapse or termination of any restriction on or the vesting or exercisability of any of the foregoing (a “Payment”), would be subject to the excise tax imposed by Section 4999 of the Code (or any successor provision thereto) by reason of being “contingent on a change in ownership or control” of the Company, within the meaning of Section 280G of the Code (or any successor provision thereto) or to any similar tax imposed by state or local law, or any interest or penalties with respect to such excise tax (such tax or taxes, together with any such interest and penalties, are hereafter collectively referred to as the “Excise Tax”), then the Executive shall be entitled to receive an additional payment or payments (a “Gross-Up Payment”) in an amount such that, after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax, imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments.

(b) Subject to the provisions of Section 5(f) hereof, all determinations required to be made under this Section 5, including whether an Excise Tax is payable by the Executive and the amount of such Excise Tax and whether a Gross-Up Payment is required and the amount of such Gross-Up Payment, shall be made by the nationally recognized firm of certified public accountants (the “Accounting Firm”) used by the Company prior to the Change of Control (or, if such Accounting Firm declines to serve, the Accounting Firm shall be a nationally recognized firm of certified public accountants selected by the Executive). The Accounting Firm shall be directed by the Company or the Executive to submit its determination and detailed supporting calculations to both the Company and the Executive within 15 calendar days after the Separation from Service, if applicable, and any other such time or times as may be requested by the Company or the Executive. If the Accounting Firm determines that any Excise Tax is payable by the Executive, the Company shall pay the required Gross-Up Payment to the Executive on the fifth business day after receipt of such determination and calculations. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall, at the same time as it makes such determination, furnish the Executive with an opinion that Executive has substantial authority not to report any

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Excise Tax on Executive’s federal, state, local income or other tax return. Any determination by the Accounting Firm as to the amount of the Gross-Up Payment shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code (or any successor provision thereto) and the possibility of similar uncertainty regarding applicable state or local tax law at the time of any determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments that will not have been made by the Company should have been made (an “Underpayment”), consistent with the calculations required to be made hereunder. In the event that the Company exhausts or fails to pursue its remedies pursuant to Section 5(f) hereof and the Executive thereafter is required to make a payment of any Excise Tax, the Executive shall direct the Accounting Firm to determine the amount of the Underpayment that has occurred and to submit its determination and detailed supporting calculations to both the Company and the Executive as promptly as possible. Any such Underpayment shall be promptly paid by the Company to, or for the benefit of, the Executive on the fifth business day after receipt of such determination and calculations.

(c) The Company and the Executive shall each provide the Accounting Firm access to and copies of any books, records and documents in the possession of the Company or the Executive, as the case may be, reasonably requested by the Accounting Firm, and otherwise cooperate with the Accounting Firm in connection with the preparation and issuance of the determination contemplated by Section 5(b) hereof.

(d) The federal, state and local income or other tax returns filed by the Executive and the Company (or any filing made by a consolidated tax group which includes the Company) shall be prepared and filed on a consistent basis with the determination of the Accounting Firm with respect to the Excise Tax payable by the Executive. The Executive shall make proper payment of the amount of any Excise Tax, and at the request of the Company, provide to the Company true and correct copies (with any amendments) of Executive’s federal income tax return as filed with the Internal Revenue Service and corresponding state and local tax returns, if relevant, as filed with the applicable taxing authority, and such other documents reasonably requested by the Company, evidencing such payment. If prior to the filing of the Executive’s federal income tax return, or corresponding state or local tax return, if relevant, the Accounting Firm determines that the amount of the Gross-Up Payment should be reduced, the Executive shall within five business days pay to the Company the amount of such reduction.

(e) The fees and expenses of the Accounting Firm for its services in connection with the determinations and calculations contemplated by Sections 5(b) and (d) hereof shall be borne by the Company. If such fees and expenses are initially advanced by the Executive, the Company shall reimburse the Executive the full amount of such fees and expenses on the fifth business day after receipt from the Executive of a statement therefore and reasonable evidence of Executive’s payment thereof.

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(f) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification shall be given as promptly as practicable but no later than 10 business days after the Executive actually receives notice of such claim and the Executive shall further apprise the Company of the nature of such claim and the date on which such claim is requested to be paid (in each case, to the extent known by the Executive). The Executive shall not pay such claim prior to the earlier of (a) the expiration of the 30-calendar-day period following the date on which Executive gives such notice to the Company and (b) the date that any payment of amount with respect to such claim is due. If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall:

(i) provide the Company with any written records or documents in Executive’s possession relating to such claim reasonably requested by the Company;

(ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including without limitation accepting legal representation with respect to such claim by an attorney competent in respect of the subject matter and reasonably selected by the Company;

(iii) cooperate with the Company in good faith in order to effectively contest such claim; and

(iv) permit the Company to participate in any proceedings relating to such claim;

provided, however, that the Company shall bear and pay directly all costs and expenses (including interest and penalties) incurred in connection with such contest and shall indemnify and hold harmless the Executive, on an after-tax basis, for and against any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limiting the foregoing provisions of this Section 5(f), the Company shall control all proceedings taken in connection with the contest of any claim contemplated by this Section 5(f) and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim (provided, however, that the Executive may participate therein at Executive’s own cost and expense) and may, at its option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in

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one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay the tax claimed and sue for a refund, the Company shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax, including interest or penalties with respect thereto, imposed with respect thereto; and provided further, however, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which the contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company’s control of any such contested claim shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.

(g) If the Executive receives any refund with respect to such claim, the Executive shall be entitled to retain same (together with any interest paid or credited thereon after any taxes applicable thereto).

6. Obligations Absolute; No Mitigation; No Effect On Other Rights.

(a) The obligations of the Company to make the payment to the Executive, and to make the arrangements, provided for herein are absolute and unconditional and may not be reduced by any circumstances, including without limitation any set-off, counterclaim, recoupment, defense or other right which the Company may have against the Executive or any third party at any time.

(b) The Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, and no such payment shall be offset or reduced by the amount of any compensation or benefits provided to the Executive in any subsequent employment.

(c) The provisions of this Agreement, and any payment provided for herein, shall not supersede or in any way limit the rights, benefits, duties or obligations which the Executive may now or in the future have under any benefit, incentive or other plan or arrangement of the Company or any other agreement with the Company.

7. Not an Employment Agreement. Subject to the terms of this or any other agreement or arrangement between the Company and the Executive that may then be in effect, nothing herein shall prevent the Company from terminating the Executive’s employment.

8. Successors; Binding Agreement, Assignment.

(a) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business of the Company, by agreement to expressly, absolutely and unconditionally

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assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a material breach of this Agreement and shall entitle the Executive to terminate the Executive’s employment with the Company or such successor for Good Reason immediately prior to or at any time after such succession. As used in this Agreement, “Company” shall mean (i) the Company as hereinbefore defined, and (ii) any successor to all or substantially all of the Company’s business or assets which executes and delivers an agreement provided for in this Section 8(a) or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law, including any parent or subsidiary of such a successor.

(b) This Agreement shall inure to the benefit of and be enforceable by the Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amount would be payable to the Executive hereunder if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive’s estate or designated beneficiary. Neither this Agreement nor any right arising hereunder may be assigned or pledged by the Executive.

9. Notice. For purpose of this Agreement, notices and all other communications provided for in this Agreement or contemplated hereby shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed United States certified or registered mail, return receipt requested, postage prepaid, and addressed, in the case of the Company, to the Company at:

P.O. Box 990

Minneapolis, MN 55440

Attention: Corporate Secretary

and in the case of the Executive, to the Executive at the most current address shown on the Executive’s employment records. Either party may designate a different address by giving notice of change of address in the manner provided above, except that notices of change of address shall be effective only upon receipt.

10. Expenses. In addition to all other amounts payable to the Executive under this Agreement, the Company shall pay or reimburse the Executive for legal fees (including without limitation, any and all court costs and attorneys’ fees and expenses), incurred by the Executive in connection with or as a result of any claim, action or proceeding brought by the Company or the Executive with respect to or arising out of this Agreement or any provision hereof; unless, (i) in the case of an action brought by the Executive, it is determined by an arbitrator or by a court of competent jurisdiction that such action was frivolous and was not brought in good faith, or (ii) in the case of a claim arising under section 11 hereof, the Company prevails on the merits of such claim.

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11. Nondisclosure of Confidential Information; Non-Competition.

(a) Executive shall not, without the prior written consent of the Company, use, divulge, disclose or make accessible to any other person, firm, partnership, corporation or other entity any Confidential Information pertaining to the business of the Company or any of its affiliates, except (i) while employed by the Company, in the business of and for the benefit of the Company, or (ii) when required to do so by a court of competent jurisdiction, by any governmental agency having supervisory authority over the business of the Company, or by any administrative body or legislative body (including a committee thereof) with jurisdiction to order Executive to divulge, disclose or make accessible such information. For purposes of this Section 11(a), “Confidential Information” shall mean non-public information concerning the financial data, strategic business plans, product development (or other proprietary product data), customer lists, marketing plans and other non-public, proprietary and confidential information of the Company or its affiliates (the “Restricted Group”) or customers, that, in any case, is not otherwise available to the public (other than by Executive’s breach of the terms hereof).

[Note: Sections 11(b-d) below shall apply only to those Executives in Tier I (the CEO, President or any Executive Vice President of the Company ); or Tier II (Senior Vice Presidents of the Company) who have executed this Agreement in the form hereof.]

(b) During the period of Executive’s employment hereunder and for one (1) year thereafter, Executive agrees that, without the prior written consent of the Company, (A) Executive will not, directly or indirectly, either as principal, manager, agent, consultant, officer, stockholder, partner, investor, lender or employee or in any other capacity, carry on, be engaged in or have any financial interest in, any business which is in competition with the business of the Restricted Group and (B) Executive shall not, on Executive’s own behalf or on behalf of any person, firm or company, directly or indirectly, solicit or offer employment to any person who has been employed by the Restricted Group at any time during the 12 months immediately preceding such solicitation.

(c) For purposes of this Section 11, a business shall be deemed to be in competition with the Restricted Group if it or any of its material affiliates is in the business of selling food (fresh, packaged and/or frozen), retail or wholesale, within the continental United States. Nothing in this Section 11 shall be construed so as to preclude Executive from investing in any publicly or privately held company, provided Executive’s beneficial ownership of any class of such company’s securities does not exceed 1% of the outstanding securities of such class. Executive shall retain the right

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to seek the written approval of the Company’s [successor]⁹ Chief Executive Officer waiving the requirements of Section 11(b) with respect to any particular activity in which Executive seeks to engage.

(d) Executive and the Company agree that this covenant not to compete is a reasonable covenant under the circumstances, and further agree that if in the opinion of any court of competent jurisdiction such restraint is not reasonable in any respect, such court shall have the right, power and authority to excise or modify such provision or provisions of this covenant as to the court shall appear not reasonable and to enforce the remainder of the covenant as so amended.

(e) Executive agrees that any breach of the covenants contained in this Section 11 would irreparably injure the Company. Accordingly, Executive agrees that the Company may, in addition to pursuing any other remedies it may have in law or in equity, cease making any payments otherwise required by this Agreement and obtain an injunction against Executive from any court having jurisdiction over the matter restraining any further violation of this Agreement by Executive; provided, however, that the Company may not cease making any payments required by this Agreement until a court or arbitrator(s) having jurisdiction over the matter has made a final non-appealable determination on the merits of such action in the Company’s favor.

12. Miscellaneous. No provision of this Agreement may be amended, altered, modified, waived or discharged unless such amendment, alteration, modification, waiver or discharge is agreed to in writing signed by the Executive and such officer of the Company as shall be specifically designated by the Committee or by the Board.

(a) Notwithstanding the foregoing, if the Company determines from time to time in good faith that any provision of this Agreement is not or may not be in compliance with Section 409A of the Code and that such provisions can be amended to comply with Section 409A without causing any violation of any other provision of law, the Company may, but shall not be obligated to, amend such provision without the consent of the Executive for the purpose eliminating or modifying the provision in such manner as the Company determines to be necessary and appropriate to comply with Section 409A of the Code. In effecting any such amendment, the Company shall replace any benefits that may be lost with economic consideration of its choosing that is of equal cost or of equal value, as determined in its reasonable discretion. Unless under the circumstances it is impracticable to do so, the Executive shall be given reasonable advance notice of the Company’s intention to amend. Any such amendment shall applied on a reasonably uniform basis to all similar agreements and shall be evidenced in writing. The Executive shall receive such written notice as soon as practicable after its effective date.

⁹ For CEO only.

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(b) No waiver by either party, at any time, of any breach by the other party of, or of compliance by the other party with, any condition or provision of this Agreement to be performed or complied with by such other party shall be deemed a waiver of any similar or dissimilar provision or condition of this Agreement or any other breach of or failure to comply with the same condition or provision at the same time or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Delaware without giving effect to its conflict of laws rules. Any action brought by the Executive or the Company shall be brought and maintained in a court of competent jurisdiction in the State of Minnesota.

13. Severability. If any one or more of the provisions of this Agreement shall be held to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions of this Agreement shall not be affected thereby. To the extent permitted by applicable law, each party hereto waives any provision of law which renders any provision of this Agreement invalid, illegal or unenforceable in any respect.

14. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be an original and all of which shall be deemed to constitute one and the same instrument.

15. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof, and supersedes all prior oral or written agreements, commitments or understanding with respect to the matters provided for herein (except that any other non-disclosure, non-competition or non-solicitation agreements or provisions the parties hereto have entered into shall continue to be in effect).

16. Grantor Trust. Immediately prior to a Change of Control, the Company shall contribute to a grantor trust an amount equal to 125% of the payments Executive would receive from the Company, pursuant to Section 4 hereof, if Executive were terminated without Cause by the Company or if Executive were to terminate Executive’s employment for Good Reason, in either case, immediately following the Change of Control.

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.

Witnesses:	SUPERVALU INC.
	Name:
	Title:
	Executive

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EX-31.1

Exhibit 31.1

Certification Pursuant to Section 302

of the Sarbanes-Oxley Act of 2002

I, Jeffrey Noddle, certify that:

1. I have reviewed this quarterly report on Form 10-Q of SUPERVALU INC. for the quarterly fiscal period ended December 2, 2006;

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 period 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 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) 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

d) 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 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: January 11, 2007	/s/ JEFFREY NODDLE
	Jeffrey Noddle Chief Executive Officer

EX-31.2

Exhibit 31.2

Certification Pursuant to Section 302

of the Sarbanes-Oxley Act of 2002

I, Pamela K. Knous, certify that:

1. I have reviewed this quarterly report on Form 10-Q of SUPERVALU INC. for the quarterly fiscal period ended December 2, 2006;

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 period 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 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) 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

d) 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 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: January 11, 2007	/s/ PAMELA K. KNOUS
	Pamela K. Knous Executive Vice President and Chief Financial Officer (principal financial and accounting officer)

EX-32.1

Exhibit 32.1

Certification Pursuant to Section 906

of the Sarbanes-Oxley Act of 2002

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of SUPERVALU INC. (the “Company”) certifies that the quarterly report on Form 10-Q of the Company for the quarter ended December 2, 2006, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in that Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company for the period and as of the dates covered thereby.

Dated: January 11, 2007	/s/ JEFFREY NODDLE
	Jeffrey Noddle Chief Executive Officer

EX-32.2

Exhibit 32.2

Certification Pursuant to Section 906

of the Sarbanes-Oxley Act of 2002

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of SUPERVALU INC. (the “Company”) certifies that the quarterly report on Form 10-Q of the Company for the quarter ended December 2, 2006, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in that Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company for the period and as of the dates covered thereby.

Dated: January 11, 2007	/s/ PAMELA K. KNOUS
	Pamela K. Knous Executive Vice President and Chief Financial Officer (principal financial and accounting officer)