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This excerpt taken from the KR 10-Q filed Sep 27, 2007.

   Basis of Presentation and Principles of Consolidation

     The accompanying financial statements include the consolidated accounts of The Kroger Co. and its subsidiaries. The February 3, 2007 balance sheet was derived from audited financial statements and, due to its summary nature, does not include all disclosures required by generally accepted accounting principles (“GAAP”). Significant intercompany transactions and balances have been eliminated. References to the “Company” in these Consolidated Financial Statements mean the consolidated company.

     In the opinion of management, the accompanying unaudited Consolidated Financial Statements include all normal, recurring adjustments that are necessary for a fair presentation of results of operations for such periods but should not be considered as indicative of results for a full year. The financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted, pursuant to SEC regulations. Accordingly, the accompanying Consolidated Financial Statements should be read in conjunction with the fiscal 2006 Annual Report on Form 10-K of The Kroger Co. filed with the SEC on April 4, 2007.

     The unaudited information in the Consolidated Financial Statements for the second quarter and two quarters ended August 18, 2007 and August 12, 2006 includes the results of operations of the Company for the 12-week and 28-week periods then ended.

   Store Closing and Other Expense Allowances

     All closed store liabilities related to exit or disposal activities initiated after December 31, 2002, are accounted for in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. The Company provides for closed store liabilities relating to the present value of the estimated remaining noncancellable lease payments after the closing date, net of estimated subtenant income. The Company estimates the net lease liabilities using a discount rate to calculate the present value of the remaining net rent payments on closed stores. The closed store lease liabilities usually are paid over the lease terms associated with the closed stores, which generally have remaining terms ranging from one up to 20 years. Adjustments to closed store liabilities primarily relate to changes in subtenant income and lease buyouts. Adjustments are made for changes in estimates in the period in which the change becomes known. Store closing liabilities are reviewed quarterly to ensure that any accrued amount that is not a sufficient estimate of future costs, or that no longer is needed for its originally intended purpose, is adjusted to income in the proper period.

     Owned stores held for disposal are reduced to their estimated net realizable value. Costs to reduce the carrying values of property, equipment and leasehold improvements are accounted for in accordance with the Company’s policy on impairment of long-lived assets. Inventory write-downs, if any, in connection with store closings, are classified in “Merchandise costs.” Costs to transfer inventory and equipment from closed stores are expensed as incurred.

     The Company recorded asset impairments in the normal course of business totaling $4 in the second quarter of 2007 and $28 in the second quarter of 2006. During the first two quarters of 2007 and 2006, the Company recorded asset impairments in the normal course of business totaling $11 and $38, respectively.

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     The following table summarizes accrual activity for future lease obligations of stores closed in the normal course of business.

   Future Lease Obligations
   2007       2006
Balance at beginning of year  $       33     $       65  
           Additions    4     7  
           Payments    (7 )   (4 )
           Adjustments    (6 )   (19 )
Balance at end of second quarter  $  24   $  49  

     In addition, the Company maintains a $46 liability for facility closure costs for locations closed in California prior to the Fred Meyer merger in 1999 and a $5 liability for store closing costs related to two distinct, formalized plans that coordinated the closing of several locations over relatively short periods of time in 2000 and 2001.

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