Safeway (SWY)

General

Base Compensation Adjustments.   Any change in eligibility or annual base compensation effected after the first day of the fiscal year is taken into account, on a proportionate basis, in computing any bonus award for the fiscal year.

Method of Payment.   Each bonus under the Capital Bonus Plan will be paid in cash.

Amendment.   The Capital Bonus Plan may be wholly or partially amended or otherwise modified, suspended or terminated at any time or from time to time by the Board. However, to the extent required by Section 162(m) of the Code with respect to bonus awards that the Committee determines should be “qualified

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Table of Contents

performance-based compensation” as described in Section 162(m)(4)(C) of the Code, no action of the Board may modify the performance targets after the commencement of the fiscal year with respect to which such bonus awards relate.

GENERAL

1.1 Defined Terms. Wherever the following terms are used in this Agreement they shall have the meanings specified below notwithstanding meanings that may be otherwise specified in the Plan, unless the context clearly indicates otherwise. Capitalized terms not specifically defined herein shall have the meanings specified in the Grant Notice or, if not defined therein, the Plan.

“Demotion” shall mean the demotion of Participant to a position within the Company or a Subsidiary which is not then eligible for grants of stock options or to a position that is eligible for stock option grants at a lower level than the level for which Participant was eligible on the Grant Date. Notwithstanding the foregoing, the Chief Executive Officer of the Company may make adjustments, in his discretion, to the foregoing definition in the event of the transfer, illness or disability of Participant, the occurrence of a force majeure event (including without limitation acts of God, strikes or labor disturbances) affecting Participant’s position or other similar circumstances.

“Retirement Date” shall mean the date Participant attains the age of 55.

“Termination of Employment” shall mean the time when the employment of Participant with the Company or any Subsidiary ceases for any reason, with or without cause, including, without limitation, a termination by resignation, discharge, death, disability or retirement; but excluding: (a) any termination of employment where there is a simultaneous reemployment or continuing employment of Participant by the Company or any Subsidiary, and (b) any termination of employment which is followed by the simultaneous establishment of a consulting relationship by the Company or a Subsidiary with the former employee. For greater certainty and for the purposes of the Company’s obligations and Participant’s entitlements hereunder, upon termination without just cause, Termination of Employment shall be effective as of the date on which the Company notifies Participant of the termination of Participant’s employment, without regard to any period of notice, salary continuation, pay in lieu of notice or other payment to which Participant may be entitled on a Termination of Employment, and no such period of notice or entitlement to any payment shall extend the employee-employer relationship between Participant and the Company or any Subsidiary for purposes of the Plan. The Administrator, in its discretion, shall determine the effect of all matters and questions relating to Termination of Employment, including, without limitation, the question of whether a Termination of Employment resulted from a discharge for cause; provided, however, that, with respect to Incentive Stock Options, unless the Administrator otherwise provides in the terms of the Award Agreement or otherwise, a leave of absence, change in status from an employee to an independent contractor or other change in the employee-employer relationship shall constitute a Termination of Employment if, and to the extent that, such leave

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of absence, change in status or other change interrupts employment for the purposes of Section 422(a)(2) of the Code and the then applicable regulations and revenue rulings under said Section. For purposes of the Plan, Participant’s employee-employer relationship shall be deemed to be terminated in the event that the Subsidiary employing Participant ceases to remain a Subsidiary following any merger, sale of stock or other corporate transaction or event (including, without limitation, a spin-off).

1.2 Incorporation of Terms of Plan. The Option is subject to the terms and conditions of the Plan which are incorporated herein by reference.

GENERAL

1.1 Defined Terms. Wherever the following terms are used in this Agreement they shall have the meanings specified below, unless the context clearly indicates otherwise. Capitalized terms not specifically defined herein shall have the meanings specified in the Grant Notice or, if not defined therein, the Plan.

“Demotion” shall mean the demotion of Participant to a position within the Company or a Subsidiary which is not then eligible for grants of stock options or to a position that is eligible for stock option grants at a lower level than the level for which Participant was eligible on the Grant Date. Notwithstanding the foregoing, the Chief Executive Officer of the Company may make adjustments, in his discretion, to the foregoing definition in the event of the transfer, illness or disability of Participant, the occurrence of a force majeure event (including without limitation acts of God, strikes or labor disturbances) affecting Participant’s position or other similar circumstances.

“Retirement Date” shall mean the date Participant attains the age of 55.

1.2 Incorporation of Terms of Plan. The Option is subject to the terms and conditions of the Plan which are incorporated herein by reference.

General

Base Compensation Adjustments.  Any change in eligibility or annual base compensation effected after the first day of the fiscal year is taken into account, on a proportionate basis, in computing any bonus award for the fiscal year.

Method of Payment.  Each bonus under the Capital Bonus Plan will be paid in cash.

Amendment.  The Capital Bonus Plan may be wholly or partially amended or otherwise modified, suspended or terminated at any time or from time to time by the Board. However, to the extent required by Section 162(m) of the Code with respect to bonus awards that the Committee determines should be “qualified performance-based

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compensation” as described in Section 162(m)(4)(C) of the Code, no action of the Board may modify the performance targets after the commencement of the fiscal year with respect to which such bonus awards relate.

GENERAL

1.1 Defined Terms. Wherever the following terms are used in this Agreement they shall have the meanings specified below, unless the context clearly indicates otherwise. Capitalized terms not specifically defined herein shall have the meanings specified in the Grant Notice or, if not defined therein, the Plan.

“Demotion” shall mean the demotion of Participant to a position within the Company or a Subsidiary which is not then eligible for grants of stock options or to a position that is eligible for stock option grants at a lower level than the level for which Participant was eligible on the Grant Date. Notwithstanding the foregoing, the Chief Executive Officer of the Company may make adjustments, in his discretion, to the foregoing definition in the event of the transfer, illness or disability of Participant, the occurrence of a force majeure event (including without limitation acts of God, strikes or labor disturbances) affecting Participant’s position or other similar circumstances.

“Retirement Date” shall mean the date Participant attains the age of 55.

1.2 Incorporation of Terms of Plan. The Option is subject to the terms and conditions of the Plan which are incorporated herein by reference.

GENERAL

1.1 Defined Terms. Wherever the following terms are used in this Agreement they shall have the meanings specified below notwithstanding meanings that may be otherwise specified in the Plan, unless the context clearly indicates otherwise. Capitalized terms not specifically defined herein shall have the meanings specified in the Grant Notice or, if not defined therein, the Plan.

“Demotion” shall mean the demotion of Participant to a position within the Company or a Subsidiary which is not then eligible for grants of stock options or to a position that is eligible for stock option grants at a lower level than the level for which Participant was eligible on the Grant Date. Notwithstanding the foregoing, the Chief Executive Officer of the Company may make adjustments, in his discretion, to the foregoing definition in the event of the transfer, illness or disability of Participant, the occurrence of a force majeure event (including without limitation acts of God, strikes or labor disturbances) affecting Participant’s position or other similar circumstances.

“Retirement Date” shall mean the date Participant attains the age of 55.

“Termination of Employment” shall mean the time when the employment of Participant with the Company or any Subsidiary ceases for any reason, with or without cause, including, without limitation, a termination by resignation, discharge, death, disability or retirement; but excluding: (a) any termination of employment where there is a simultaneous reemployment or continuing employment of Participant by the Company or any Subsidiary, and (b) any termination of employment which is followed by the simultaneous establishment of a consulting relationship by the Company or a Subsidiary with the former employee. For greater certainty and for the purposes of the Company’s obligations and Participant’s entitlements hereunder, upon termination without just cause, Termination of Employment shall be effective as of the date on which the Company notifies Participant of the termination of Participant’s employment, without regard to any period of notice, salary continuation, pay in lieu of notice or other payment to which Participant may be entitled on a Termination of Employment, and no such period of notice or entitlement to any payment shall extend the employee-employer relationship between Participant and the Company or any Subsidiary for purposes of the Plan. The Administrator, in its discretion, shall determine the effect of all matters and questions relating to Termination of Employment, including, without limitation, the question of whether a Termination of Employment resulted from a discharge for cause; provided, however, that, with respect to Incentive Stock Options, unless the Administrator otherwise provides in the terms of the Award Agreement or otherwise, a leave of absence, change in status from an employee to an independent contractor or other change in the employee-employer relationship shall constitute a Termination of Employment if, and to the extent that, such leave

A-1

of absence, change in status or other change interrupts employment for the purposes of Section 422(a)(2) of the Code and the then applicable regulations and revenue rulings under said Section. For purposes of the Plan, Participant’s employee-employer relationship shall be deemed to be terminated in the event that the Subsidiary employing Participant ceases to remain a Subsidiary following any merger, sale of stock or other corporate transaction or event (including, without limitation, a spin-off).

1.2 Incorporation of Terms of Plan. The Option is subject to the terms and conditions of the Plan which are incorporated herein by reference.

GENERAL

1.1 Defined Terms. Capitalized terms not specifically defined herein shall have the meanings specified in the Grant Notice or, if not defined therein, the Plan.

1.2 Incorporation of Terms of Plan. The Option is subject to the terms and conditions of the Plan which are incorporated herein by reference.

GENERAL

1.1 Defined Terms. Capitalized terms not specifically defined herein shall have the meanings specified in the Grant Notice or, if not defined therein, the Plan.

1.2 Incorporation of Terms of Plan. The Shares are subject to the terms and conditions of the Plan which are incorporated herein by reference.

GENERAL

1.1 Defined Terms. Wherever the following terms are used in this Agreement they shall have the meanings specified below, unless the context clearly indicates otherwise. Capitalized terms not specifically defined herein shall have the meanings specified in the Grant Notice or, if not defined therein, the Plan.

“Retirement Date” shall mean the date Participant attains the age of 55.

1.2 Incorporation of Terms of Plan. The Option is subject to the terms and conditions of the Plan which are incorporated herein by reference.

General

Base Compensation Adjustments.  Any change in eligibility or annual base compensation effected after the first day of the fiscal year is taken into account, on a proportionate basis, in computing any bonus award for the fiscal year.

Method of Payment.  Each bonus under the Capital Bonus Plan will be paid in cash.

Amendment.  The Capital Bonus Plan may be wholly or partially amended or otherwise modified, suspended or terminated at any time or from time to time by the Board. However, to the extent required by Section 162(m) of the Code with respect to bonus awards which the Committee determines should be “qualified performance-

34

based compensation” as described in Section 162(m)(4)(C) of the Code, no action of the Board may modify the performance targets after the commencement of the fiscal year with respect to which such bonus award relate.

The foregoing is a description of the Capital Bonus Plan as in effect during the 2006 fiscal year. On March 27, 2007, the Board of Directors approved an amendment and restatement of the Capital Bonus Plan, subject to the approval of our stockholders. See “Proposal 3, Approval of Amended and Restated Capital Performance Bonus Plan for Executive Officers and Key Employees of Safeway Inc.” for a description of the Capital Bonus Plan as it is proposed to be amended and restated.

General

Base Salary Adjustments.  Any change in base salary effected after the first day of the fiscal year may be taken into account, on a proportionate basis, in computing any bonus award for the fiscal year.

Method of Payment.  Each bonus award may be paid, at the option of the recipient, in cash or in stock, or in any combination of cash and stock. Stock bonuses shall be awarded in accordance with the provisions of the 1999 Amended and Restated Equity Participation Plan.

Accounting Practices.  The components of a performance target will be determined in accordance with the Company’s accounting practices in effect on the first day of the fiscal year, subject to the adjustments described above.

Amendment.  The Amended Bonus Plan may be wholly or partially amended or otherwise modified, suspended or terminated at any time or from time to time by the Board. However, to the extent required by Section 162(m) with respect to bonus awards which the Executive Committee determines should qualify as performance-based compensation as described in Section 162(m)(4)(C), no action of the Board may modify the performance targets, target bonus awards, or the percentages to be used to determine such bonus awards after the commencement of the fiscal year with respect to which such bonus awards relate.

Board Recommendation

The Board of Directors believes it is in the best interests of the Company to qualify performance-based compensation for deductibility under Section 162(m) in order to maximize the Company’s income tax deductions. The re-approval of the Amended Bonus Plan is necessary to qualify performance-based compensation for such deductibility.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THIS PROPOSAL, and your proxy will be so voted unless you specify otherwise.

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General

There are nine nominees for election to the Board this year. All of the nominees except Ms. Grove, Mr. Gyani, Mr. Mackenzie and Mr. Viault have served as directors since the last annual meeting.

Each of the current directors has been nominated by the Nominating and Corporate Governance Committee for election. Ms. Grove and Mr. Gyani were appointed to the Board of Directors in October 2004, Mr. Viault in December 2004, and Mr. Mackenzie in March 2005, upon the recommendation of the Nominating and Corporate Governance Committee. Ms. Grove, Mr. Gyani and Mr. Viault were each brought to the attention of the Nominating and Corporate Governance Committee by a third-party search firm. Mr. Mackenzie was brought to the Committee’s attention by Mr. Gyani and Mr. Hazen.

Proxies may be voted for no more than nine directors. The nine nominees receiving the highest number of affirmative votes of the shares entitled to vote at the meeting will be elected to the Board of Directors to serve until the next annual meeting of stockholders and until their successors have been elected and qualified.

The Board has determined that each of the current directors standing for election, except the Chairman of the Board and Chief Executive Officer, has no material relationship with Safeway and is independent within the meaning of Safeway’s Director Independence Standards and the listing standards of the NYSE, as currently in effect.

The shares represented by proxies, whether in the accompanying form, by telephone or through the Internet, will be voted for the election of the nine nominees named below unless authority to so vote is withheld. All of the nominees have consented to being named and to serve if elected. If any of them should become unavailable prior to the Annual Meeting, the proxy will be voted for a substitute nominee or nominees designated by the Board of Directors, or the number of directors may be reduced accordingly.

The following information, which has been provided by the directors, sets forth for each of the nominees for election to the Board of Directors such person’s age (as of the Record Date), principal occupation, employment and business experience during the past five years, and the period during which such person has served as a Safeway director. There are no family relationships among the executive officers and directors.

General:

Information appearing on pages 15 through 17 of the 2004 Annual Report to Stockholders of Safeway Inc. (“Safeway” or the “Company”) is incorporated herein by this reference.

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

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

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SAFEWAY INC. AND SUBSIDIARIES

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