Safeway (SWY)

NOTE F—TAXES ON INCOME

The Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”) on December 31, 2006, the first day of the 2007 fiscal year. The Company recorded the cumulative effect of adopting FIN 48 by increasing stockholders’ equity by $139.7 million.

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SAFEWAY INC. AND SUBSIDIARIES

NOTE F–TAXES ON INCOME

As announced on April 10, 2006, Safeway settled a federal income tax refund claim of approximately $318 million. The settlement relates to Safeway’s claim for refunds in the years 1992 through 1999 for costs associated with debt financing. The refund, received in August 2006, consisted of a tax refund of $259.2 million and interest earned on that refund of approximately $97 million. The Company will pay approximately $38 million in income taxes related to the interest earned on the tax refund in the fourth quarter of 2006.

The tax refund of $259.2 million was recorded in the second quarter of 2006 as an increase to additional paid-in capital since the associated tax deductions exceeded the previously recognized book expense. The interest earned, net of tax, reduced income tax expense by $59 million in the second quarter of 2006.

NOTE F–TAXES ON INCOME

Income tax expense in the second quarter of 2006 was reduced by $58.5 million of accrued interest, net of tax, on the federal income tax refund described below.

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SAFEWAY INC. AND SUBSIDIARIES