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 ended ~~March~~June 2119, ~~2004~~2005

¨	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 001-10811

SMART & FINAL INC.

(Exact name of registrant as specified in its charter)

Delaware		No. 95-4079584
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)
(State or other jurisdiction ofincorporation or organization)		(IRS Employer Identification No.)

600 Citadel Drive City of Commerce, California		90040
600 Citadel DriveCity of Commerce, California		90040
(Address of principal executive offices)		(~~zip~~Zip ~~code~~Code)

(323) 869-7500

(Registrant’s telephone number, including area code)

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 an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨.

As of ~~April~~July 2315, ~~2004~~2005, the registrant had outstanding 30,~~082~~998,~~181~~515 shares of common stock.

SMART & FINAL INC.

Index

Caption		Page
Forward-Looking Statements		2
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Unaudited Consolidated Balance Sheets	3
	Unaudited Consolidated Statements of Income	4
	Unaudited Consolidated Statements of Operations	4
	Unaudited Consolidated Statements of Cash Flows	5
	Notes to Unaudited Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1819
Item 3.	Quantitative and Qualitative ~~Disclosure~~Disclosures about Market Risk	2530
Item 4.	Controls and Procedures	2531
Part II	OTHER INFORMATION
Item 1.	Legal Proceedings	2632
Item 2.	~~Changes~~Unregistered inSales ~~Securities, Use~~ of ~~Proceeds~~Equity Securities and ~~Issuer~~Use ~~Purchases~~ of ~~Equity Securities~~Proceeds	2733
Item 3.	Defaults upon Senior Securities	2733
Item 4.	Submission of Matters to a Vote of Security Holders	2733
Item 5.	Other Information	2734
Item 6.	Exhibits ~~and Reports on Form 8-K~~	2835
SIGNATURES		2936

Forward-Looking Statements

When used in this quarterly report, the words “believe,” “expect,” “anticipate” and similar expressions, together with other discussion of future trends or results, are intended to identify forward-looking statements within ~~the~~ the meaning of Section 27A of the Securities Act of 1933, as amended ~~(the “Securities Act”)~~ and Section 21E of the Securities Exchange Act of 1934, as amended ~~(the “Exchange Act”)~~. Such statements are subject to certain risks and uncertainties, including known and unknown factors as included in the periodic filings by Smart & Final Inc. with the Securities and Exchange Commission and those discussed below that could cause actual results to differ materially from those projected. These forward-looking statements speak only as of the date hereof. All of these forward-looking statements are based on estimates and assumptions made by our management which, although believed to be reasonable, are inherently uncertain and difficult to predict; therefore, undue reliance should not be placed upon such statements. Actual results may differ materially and adversely from such statements due to known and unknown factors. The following important factors, among others, could cause our results of operations to be materially and adversely affected in future periods:

•

increased competitive pressures;

•

deterioration in national or regional economic conditions;

• ~~interruption and/or~~ inability to ~~obtain~~fund ~~adequate~~or ~~supplies~~execute ofour ~~products;~~store ~~and~~expansion plan;

•

interruption and/or inability to obtain adequate supplies of products;

•

resolution of litigation matters; and

•

adverse state or federal legislation or regulation that increases the costs of compliance or adverse findings by a regulator with respect to existing operations.

Many of these factors are beyond our control. Comparability of current and future operating trends and results may be also impacted by other important factors, including the effect of the labor action against the three largest southern California retail supermarket chains which commenced early in the 2003 fourth quarter and which was settled in February 2004. There can be no assurance that we will not incur new or additional unforeseen costs in connection with the ongoing conduct of our business. Accordingly, any forward-looking statements included herein do not purport to be predictions of future events or circumstances and may not be realized. Additional information regarding these factors and other risks is included in “Item 1. Business - Risk Factors” inof our 2004 ~~2003~~ Annual Report on Form 10-K. Except as specifically set forth herein, we undertake no obligation to update any such forward-looking or other statement.

SMART & FINAL INC.

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share amounts)

	March 21,2004			December 28, 2003
	June 19,2005			January 2,2005
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	5137,~~932~~544		$	5028,~~949~~672
Accounts receivable, less allowance for doubtful accounts of $348 in 2004 and $307 in 2003		12,444			15,524
Accounts receivable, less allowance for doubtful accounts of $226 in 2005 and $254 in 2004		12,638			16,717
Inventories		~~127~~143,~~305~~952			~~123~~142,~~428~~360
Prepaid expenses and other current assets		2113,~~621~~780			2716,~~069~~428
Deferred tax assets		1611,~~512~~646			1611,~~660~~646
Assets of discontinued operations		32,~~795~~131			42,~~681~~129
Total current assets		~~233~~221,~~609~~691			~~238~~217,~~311~~952
Property, plant and equipment:
Land		6671,~~798~~603			6866,~~042~~275
Buildings and improvements		6362,~~069~~583			6462,~~237~~583
Leasehold improvements		~~111~~127,~~923~~279			~~113~~125,~~388~~206
Fixtures and equipment		~~179~~200,~~783~~878			~~179~~194,~~079~~554
		421,573			424,746
		462,343			448,618
Less – Accumulated depreciation and amortization		~~182~~209,~~363~~910			~~177~~197,~~706~~443
Net property, plant and equipment		~~239~~252,~~210~~433			~~247~~251,~~040~~175
Assets under capital leases, net of accumulated amortization of $9,699 in 2004 and $9,417 in 2003		3,644			3,926
Assets under capital leases, net of accumulated amortization of $7,610 in 2005 and $7,669 in 2004		1,796			2,085
Goodwill		34,775			34,775
Deferred tax assets		1618,~~123~~271			1618,~~123~~237
Other assets		52,270			55,350
Equity investment in joint venture		6,465			6,258
Total assets	$	579,631		$	595,525
Cash held in real estate trust		118			116
Other assets		60,047			56,833
Total assets	$	595,596		$	587,431
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt and capital leases	$	611,~~970~~154		$	611,~~964~~353
Accounts payable		8693,~~239~~857			9483,~~402~~103
Accrued salaries and wages		1012,~~631~~874			1520,~~827~~166
Other accrued liabilities		3734,~~372~~212			4547,~~646~~863
Liabilities of discontinued operations		41,~~497~~436			72,~~296~~476
Total current liabilities		~~200~~143,~~709~~533			~~225~~154,~~135~~961
Long-term liabilities:
Obligations under capital leases		42,~~084~~273			42,~~511~~638
Notes payable		53,477			53,496
Bank debt		30,000			25,000
Notes payable to affiliate		33,168			33,173
Notes payable		53,336			53,396
Other long-term liabilities		25,389			25,253
Notes payable to affiliate		33,134			33,133
Workers’ compensation reserve, postretirement and postemployment benefits		42,049			40,380
Other long-term liabilities		31,190			30,324
Total long-term liabilities		158,167			156,813
Postretirement and postemployment benefits		37,281			35,566
Total long-term liabilities		187,214			180,057
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $1 par value (authorized 10,000,000 shares; no shares issued)		—			—
Common stock, $0.01 par value (authorized 100,000,000 shares; 30,010,271 shares issued and outstanding in 2004 and 29,922,821 in 2003)		300			299
Common stock, $0.01 par value (authorized 100,000,000 shares; 31,171,056 shares issued and outstanding in 2005 and 30,752,118 in 2004)		312			308
Additional paid-in capital		~~208~~223,~~123~~127			~~207~~219,~~296~~768
Notes receivable for common stock		(91	)		(100	)
Retained earnings		57,443			46,157
Accumulated other comprehensive loss		(912,~~737~~305	)		(912,~~881~~361	)
Retained earnings		22,160			15,963
Notes receivable for common stock		(18	)		(75	)
Total stockholders’ equity		220,755			213,577
Treasury stock, at cost, 261,725 shares in 2005 and 86,475 in 2004		(3,710	)		(1,384	)
Total liabilities and stockholders’ equity	$	579,631		$	595,525
Total stockholders’ equity		264,849			252,413
Total liabilities and stockholders’ equity	$	595,596		$	587,431

The accompanying notes are an integral part of these consolidated financial statements.

SMART & FINAL INC.

CONSOLIDATED STATEMENTS OF ~~INCOME~~OPERATIONS

(dollars in thousands, except per share amounts)

	Twelve Weeks Ended						Twenty-four Weeks Ended
	March 21, 2004			March 23, 2003
	June 19,2005			June 13,2004			June 19,2005			June 13,2004
	(Unaudited)						(Unaudited)
Sales	$	~~423~~484,~~473~~105		$	~~354~~457,~~637~~794		$	911,730		$	881,267
Cost of sales, buying and occupancy		~~350~~404,~~498~~373			~~296~~380,~~963~~603			763,823			731,101
Gross margin		7279,~~975~~732			5777,~~674~~191			147,907			150,166
Operating and administrative expenses		5864,~~110~~324			5060,~~399~~352			124,541			118,462
Income from operations		1415,~~865~~408			716,~~275~~839			23,366			31,704
Interest expense, net		32,~~689~~171			23,~~754~~722			4,380			7,411
Income from continuing operations before provision for income taxes		11,176			4,521
Income from continuing operations before income taxes		13,237			13,117			18,986			24,293
Income tax provision		(45,~~474~~211	)		(15,~~797~~247	)		(7,449	)		(9,721	)
Equity (loss) earnings in unconsolidated subsidiary		(106	)		11
Equity earnings of joint venture		165			460			155			354
Income from continuing operations		68,~~596~~191			28,~~735~~330			11,692			14,926
Discontinued operations, net of tax		(~~399~~100	)		(~~2,572~~221	)		(406	)		(620	)
Net income	$	68,~~197~~091		$	~~163~~8,109		$	11,286		$	14,306
Earnings per common share:
Earnings per common share*
Earnings per common share from continuing operations	$	0.2227		$	0.0928		$	0.38		$	0.50
Loss per common share from discontinued operations		~~(0.01~~—	)		(0.0901	)		(0.01	)		(0.02	)
Earnings per common share	$	0.2126		$	0.0127		$	0.37		$	0.48
Weighted average common shares		2930,~~870~~742,~~909~~029			2930,~~728~~051,~~233~~810			30,691,318			29,961,360
Earnings per common share, assuming dilution:
Earnings per common share, assuming dilution*
Earnings per common share, assuming dilution, from continuing operations	$	0.2126		$	0.0926		$	0.36		$	0.48
Loss per common share, assuming dilution, from discontinued operations		~~(0.01~~—	)		(0.0901	)		(0.01	)		(0.02	)
Earnings per common share, assuming dilution	$	0.2025		$	0.0126		$	0.35		$	0.46
Weighted average common shares and common share equivalents		31,~~259~~830,~~320~~075			2931,~~734~~557,~~260~~253			32,051,658			31,408,287

*	Totals may not aggregate due to rounding.

The accompanying notes are an integral part of these consolidated financial statements.

SMART & FINAL INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

	Twelve Weeks Ended
	Twenty-four Weeks Ended
	March 21, 2004			March 23, 2003
	June 19,2005			June 13,2004
	(Unaudited)
Cash Flows from Operating Activities:
Income from continuing operations	$	611,~~596~~692		$	214,~~735~~926
Adjustments to reconcile income from continuing operations to net cash provided by continuing activities:
Gain on disposal of property, plant and equipment		(~~169~~35	)		(28600	)
Depreciation		48,~~263~~464			48,~~373~~400
Amortization		26,~~930~~309			25,~~688~~987
Amortization of deferred financing costs		~~799~~132			~~614~~1,326
Deferred tax provision		147			246
Deferred tax (benefit) provision		(33	)		478
Equity loss (earnings) in unconsolidated subsidiary		106			(11	)
Equity earnings of joint venture		(155	)		(354	)
Decrease (increase) in:
Accounts receivable		34,~~078~~079			52,~~089~~126
Inventories		(31,~~877~~592	)		7(6,~~057~~944	)
Prepaid expenses and other assets		42,~~794~~063			(25,~~804~~556	)
Increase (decrease) in:
Accounts payable		(610,~~209~~754	)		(15,~~937~~068	)
Accrued salaries and wages		(57,~~197~~292	)		~~(66~~292	)
Other accrued liabilities		(61,~~556~~813	)		~~690~~(10,660	)
Net cash provided by continuing activities		~~705~~32,573			1815,~~646~~465
Net cash (used in) provided by discontinued activities		(2,495	)		294
Net cash used in discontinued activities		(1,447	)		(2,444	)
Net cash (used in) provided by operating activities		(1,790	)		18,940
Net cash provided by operating activities		31,126			13,021
Cash Flows from Investing Activities:
Acquisition of property, plant and equipment		(221,~~164~~749	)		(36,~~657~~962	)
Proceeds from disposal of property, plant and equipment		~~2,661~~21			252,662
Investment in capitalized software		(15,~~249~~025	)		(~~621~~4,451	)
Other		3,251			(378	)
Change in cash held in real estate trust		(2	)		14,241
Net cash provided by (used in) continuing activities		2,499			(4,631	)
Other		(97	)		4,559
Net cash used in discontinued activities		—			(914	)
Net cash (used in) provided by continuing activities		(26,852	)		10,049
Net cash provided by (used in) investing activities		2,499			(5,545	)
Net proceeds from divestitures		—			325
Net cash provided by discontinued activities		—			79
Net cash (used in) provided by investing activities		(26,852	)		10,453
Cash Flows from Financing Activities:
Payments on bank line of credit		(5,000	)		(1230,~~678~~000	)
Borrowings on bank line of credit		510,000			75,~~500~~000
Payments on notes payable		(~~444~~622	)		(~~418~~900	)
Proceeds from issuance of common stock, net of costs		~~718~~220			—1,513
Net cash provided by (used in) continuing activities		274			(5,596	)
Net cash provided by (used in) financing activities		4,598			(24,387	)
Net cash used in discontinued activities		—			(24	)
Increase (decrease) in cash and cash equivalents		8,872			(913	)
Net cash provided by (used in) financing activities		274			(5,620	)
Cash and cash equivalents at beginning of the period		28,672			36,592
Increase in cash and cash equivalents		983			7,775
Cash and cash equivalents at end of the period	$	37,544		$	35,679
Cash and cash equivalents at beginning of period		50,949			23,002
Cash and cash equivalents at end of period	$	51,932		$	30,777

The accompanying notes are an integral part of these consolidated financial statements.

SMART & FINAL INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. ~~Basis~~Accounting ofPolicies ~~Presentation~~

~~Smart~~Basis ~~& Final Inc. is a Delaware corporation and, at March 21, 2004, was a 55.6 percent owned subsidiary~~ of ~~Casino~~presentation ~~USA, Inc. (“Casino USA”). References in this report to “we”, “our” and “us” are to Smart & Final Inc. and its subsidiaries, collectively.~~

~~Casino~~Smart ~~Guichard-Perrachon,~~& SFinal Inc.A. ~~(“Groupe~~is ~~Casino”),~~ a ~~publicly traded~~Delaware ~~French~~corporation ~~joint~~and ~~stock~~at ~~limited~~June ~~liability company~~19, is2005 ~~the~~was ~~principal~~a ~~shareholder~~54.0 percent owned subsidiary of Casino USA~~. Collectively~~, ~~Groupe~~Inc. (“Casino ~~and~~USA”), ~~its~~a California ~~subsidiaries~~corporation. ~~own~~References ~~approximately~~in ~~58.6~~this ~~percent~~report ofto “we”, “our” ~~common~~and ~~stock~~“us” asare ofto ~~March~~Smart 21& Final Inc. and its subsidiaries, ~~2004~~collectively.

~~The~~Casino ~~consolidated~~Guichard-Perrachon, ~~balance~~S.A. ~~sheet~~(“Groupe ~~as of March 21~~Casino”), ~~2004~~a ~~and~~publicly ~~the~~traded ~~consolidated statements~~French ofjoint ~~income~~stock ~~and~~limited ~~cash~~liability ~~flows~~company, is ~~for~~ the ~~twelve~~principal ~~weeks~~shareholder ~~ended~~of ~~March~~Casino 21USA. Collectively, ~~2004~~Groupe Casino and ~~March~~its ~~23,~~subsidiaries ~~2003~~own ~~are~~approximately ~~unaudited~~56.9 Inpercent ~~the opinion~~ of ~~management,~~our ~~all~~common ~~adjustments,~~stock ~~which~~as ~~consisted~~ of ~~normal~~June ~~recurring items necessary for a fair presentation of these financial statements in conformity with accounting principles generally accepted in the United States~~19, ~~have been included~~2005.

The accompanying consolidated financial statements are unaudited except for the consolidated balance sheet as of January 2, 2005 which was derived from audited financial statements. In the opinion of management, these financial statements include all adjustments, which consisted of normal recurring items necessary for a fair presentation for such periods in conformity with accounting principles generally accepted in the United States, but should not be considered as indicative of results for a full year. Certain reclassifications have been made to prior periods to conform to current presentations. Accordingly, these unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our 2004 Annual Report on Form 10-K.

Fiscal years

Our fiscal year ends on the Sunday closest to December 31. Each fiscal year consists of twelve-week periods in the first, second and fourth quarters and a sixteen-week period in the third quarter. Our fiscal year 2004 consists of 53 weeks, with thirteen weeks in the fourth quarter.

~~Earnings~~Treasury ~~per common share are based on the weighted average number of common shares outstanding. Earnings per common share, assuming dilution, includes the weighted average number of common~~ stock ~~equivalents outstanding related to stock options for 4,882,114 shares of common stock.~~

~~These~~Our ~~consolidated~~Long-Term ~~financial~~Equity ~~statements~~Compensation ~~should~~Plan permits the exercise price of options granted under this plan to be ~~read~~paid inby ~~conjunction~~our acceptance of our common stock previously held by the participants exercising the options. In connection with any option exercise, the ~~consolidated~~plan ~~financial~~also ~~statements~~allows ~~and~~us ~~notes~~to ~~thereto~~accept ~~included~~our common stock resulting from the option exercise and/or cash in ~~our~~payment ~~2003~~of applicable payroll taxes due on the ~~Annual~~transactions. ~~Report~~These shares are recorded as “Treasury Stock” using the cost method under “Stockholders’ equity” on our consolidated balance sheets.

2At the beginning of our fiscal year 2005, the balance of the treasury stock was $1.4 ~~Discontinued~~million, ~~Operations~~or 86,475 shares of our common stock, representing the shares we accepted from our Chairman upon his option exercise during 2004. During the 24 weeks ended June 19, 2005, our Chairman exercised options to purchase 247,750 shares of our common stock. The exercise price for the options was paid by our Chairman’s transfer to us of 153,750 shares of our common stock previously held by him. In connection with the stock option exercises, we also accepted from our Chairman 21,500 shares of our common stock resulting from the exercises, plus cash for a remainder amount, in payment of applicable payroll taxes due on the transaction. These

During the second quarter of 2003, we announced the sale and divestiture of our Florida broadline foodservice operations and our Florida stores businesses (collectively, the “Florida Operations”), which was substantially completed during the third quarter of 2003. During the third quarter of 2003, we also announced and completed the sale of our broadline foodservice operations in northern California (the “Northern California Foodservice Operations”). We retained certain residual assets, liabilities and contingencies in conjunction with the sale transactions and divestitures of the Florida Operations and the Northern California Foodservice Operations. In accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the accompanying consolidated financial statements reflect the results of operations and financial position of the Florida Operations and the Northern California Foodservice Operations separately as discontinued operations.

~~The~~ shares ~~assets~~were ~~and~~recorded ~~liabilities~~using of the ~~discontinued~~cost ~~operations~~method ~~are~~at ~~presented~~a incost ~~the~~per-share-price ~~consolidated~~of ~~balance sheets~~$13.65 ~~under~~for ~~the~~45,250 ~~captions~~shares ~~“Assets of discontinued operations”~~ and ~~“Liabilities of discontinued operations~~$13.”14 ~~The~~for ~~underlying~~130,000 ~~assets~~shares, ~~and~~for ~~liabilities~~a total of ~~the~~$2.3 ~~discontinued~~million. At ~~operations~~June ~~for~~19, 2005, the ~~periods~~balance ~~presented~~of ~~are~~treasury asstock ~~follows,~~was ~~in thousands:~~$3.7 million.

	March 21, 2004		December 28, 2003
Cash and cash equivalents	$	49	$	233
Trade notes and accounts receivable, net		211		605
Prepaid expenses and other current assets		1,075		1,200
Property, plant and equipment, net		2,460		2,643
Assets of discontinued operations	$	3,795	$	4,681
Accounts payable	$	93	$	238
Accrued salaries and wages		43		95
Other accrued liabilities		4,361		6,963
Liabilities of discontinued operations	$	4,497	$	7,296

Stock options

~~The~~In ~~following~~1996, ~~table~~we adopted Statement of Financial ~~sets~~Accounting ~~forth~~Standards (“SFAS”) No. 123 “Accounting for Stock-Based Compensation,” which encourages, but does not require, the ~~loss~~recognition ~~from~~of compensation expense for employee stock-based compensation arrangements using the ~~discontinued~~fair value ~~operations~~method of ~~each~~accounting. ~~period~~In ~~presented~~December ~~by segment~~2002, asthe ~~defined~~Financial inAccounting ~~Note~~Standards 10Board (“~~Segment~~FASB”) ~~Reporting~~issued SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123.” SFAS inNo. ~~thousands~~148 amends SFAS No. ~~Related~~123 ~~interest~~to ~~expense~~provide ~~and~~alternative ~~income~~methods ~~tax~~of ~~benefit~~transition for companies that change from the ~~discontinued~~intrinsic ~~operations~~value ~~are~~method to the fair value method of accounting for stock-based compensation and requires additional disclosure of pro ~~included~~forma ~~under~~information ~~Corporate~~when a company uses the intrinsic value method.

	Stores			Foodservice			Corporate			Total
Twelve weeks ended March 21, 2004:
Pre-tax loss from operations	$	(27	)	$	(643	)	$	—		$	(670	)
Income tax benefit		—			—			271			271
Net (loss) income		(27	)		(643	)		271			(399	)
Twelve weeks ended March 23, 2003:
Sales	$	14,262		$	93,509		$	—		$	107,771
Pre-tax loss from operations		(1,736	)		(2,508	)		(29	)		(4,273	)
Income tax benefit		—			—			1,701			1,701
Net (loss) income		(1,736	)		(2,508	)		1,672			(2,572	)

We account for stock-based compensation using the intrinsic value method as allowed under Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees.” Disclosures of pro forma information regarding net income and earnings per share are required under SFAS No. 123, which uses the fair value method, as well as the additional disclosure requirements required under SFAS No. 148. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

Pre-tax loss from discontinued operations does not include an allocation of corporate overhead or costs.


	Twelve Weeks Ended						Twenty-four Weeks Ended
	June 19, 2005			June 13, 2004			June 19, 2005			June 13, 2004
Dividend yield		0.0	%		0.0	%		0.0	%		0.0	%
Expected volatility		39	%		39	%		39	%		39	%
Risk-free interest rates		3.8	%		4.7	%		4.1	%		2.8	%
Weighted average expected lives
Executives		5.2 years			4.9 years			5.2 years			4.9 years
Non-executives		4.8 years			4.6 years			4.8 years			4.6 years
Weighted average fair value of options granted	$	4.35		$	7.89		$	5.85		$	4.96

The following ~~table~~is ~~sets forth~~ the ~~balances~~pro atforma ~~the~~information ~~beginning~~had ~~of 2004,~~ the ~~activities~~fair ~~during~~value ~~the twelve-week~~method ~~quarter~~under ~~ended~~SFAS ~~March~~No. 21123, ~~2004~~as ~~and~~amended ~~the~~by SFAS ~~remaining~~No. ~~balances~~148, atbeen ~~March 21~~adopted, ~~2004,~~dollars ~~related~~in tothousands ~~certain~~except ~~reserves~~per ~~for~~share ~~exiting~~amounts: ~~Florida Operations and Northern California Foodservice Operations, in thousands.~~

			Twelve Weeks EndedMarch 21, 2004
	Twelve Weeks Ended					Twenty-four Weeks Ended
	Balance atDecember 28, 2003		Charges and Adjustments				Payments				Balance atMarch 21, 2004
	June 19,2005		June 13,2004			June 19,2005			June 13,2004
Lease termination costs	$	5,477	$	(181	)		$	(428	)		$	4,868
Net income as reported	$	8,091	$	8,109		$	11,286		$	14,306
Employee severance and related obligations		2,288		383				(769	)			1,902
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		261		35			297			77
Vendor and other obligations		1,300		—				(1,300	)			—
Deduct: Total stock-based compensation expense determined under fair value method for all awards, net of related tax effects		371		393			752			737
Total	$	9,065	$	202			$	(2,497	)		$	6,770
Pro forma net income	$	7,981	$	7,751		$	10,831		$	13,646
Earnings per common share:
Basic, as reported	$	0.26	$	0.27		$	0.37		$	0.48
Basic, pro forma	$	0.26	$	0.25		$	0.34		$	0.44
Diluted, as reported	$	0.25	$	0.26		$	0.35		$	0.46
Diluted, pro forma	$	0.25	$	0.24		$	0.33		$	0.42

3The impact of applying SFAS No. ~~Litigation~~123, ~~and~~as ~~Other~~amended ~~Charges~~ by SFAS No. 148, in this pro forma disclosure is not necessarily indicative of the effect on income in the future. SFAS No. 123, as amended by SFAS No. 148, does not apply to awards granted prior to 1995.

~~During~~On ~~2003~~December 16, we2004, ~~recorded~~the ~~$13~~FASB issued SFAS No.8 ~~million~~123 of(revised ~~pre~~2004), “Share-~~tax~~Based ~~charges related~~Payment.” Generally the approach in SFAS No. 123(R) is similar to ~~litigation~~the ~~reserves~~approach described in SFAS No. 123. However, SFAS No. 123(~~discussed~~R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in ~~Note~~the 11income statement based on their fair values. Pro forma disclosure is no longer an alternative. In March 2005, the U.S. Securities and Exchange Commission (“~~Legal~~SEC”) ~~Actions~~issued Staff Accounting Bulletin (“SAB”) ~~and~~No. 107, ~~financing~~which ~~fees~~expresses ~~associated~~views ~~with~~of the ~~amendments~~SEC staff and ~~waivers~~provides ofinterpretive guidance regarding the ~~financial~~application ~~covenants~~of ~~contained~~SFAS inNo. ~~the~~123(R). ~~revolving~~Additional ~~bank~~discussion ~~credit~~regarding ~~facility~~SFAS No. 123(R) and ~~lease~~SAB ~~facility~~No. 107 is included in Note 2 “New Accounting Pronouncements” below.

~~The~~Earnings ~~remaining~~per ~~balance~~common ofshare these reserves at the beginning of 2004 was $11.0 million. Payments made and applied against the reserves were $7.9 million during the twelve weeks ended March 21, 2004 and the reserve balance at March 21, 2004 was $3.1 million. The remaining reserves balance is reflected in “Other accrued liabilities” on our consolidated balance sheets.

4Earnings per common share is calculated based on the weighted average common shares outstanding. ~~Debt~~Earnings per common share, assuming dilution, is based on the weighted average common shares and common share equivalents outstanding. Common share equivalents relate to stock options for our common stock and restricted stock. The number of shares issued upon exercise during the 24 weeks ended June 19, 2005 was 333,910.

Credit Agreement

In November 2001, we entered into a $175.0 million three-year senior secured revolving credit facility (“Credit Agreement”) with a syndicate of banks. The Credit Agreement expires on November 30, 2004. At our option, the Credit Agreement can be used to support up to $15.0 million of commercial letters of credit. Availability under the Credit Agreement, as amended during the third quarter of 2003, is subject to a formula based on the value of eligible accounts receivable, inventory and real properties. Principal repayments may be required prior to the final maturity. Additionally, under certain conditions, pay-downs toward the facility are treated as permanent reductions to the amount committed. During 2003, we made pay-downs toward the Credit Agreement, primarily with the proceeds generated from the sale and divestiture of the Florida Operations and the Northern California Foodservice Operations. These pay-downs are treated as permanent reductions to the amount available. As a result, the remaining commitment under the Credit Agreement was $127.8 million at March 21, 2004. At March 21, 2004, $60.0 million of revolving loan and $5.6 million of letters of credit were outstanding and the remaining availability was $48.9 million. Interest for the Credit Agreement is at Eurodollar LIBOR or the administrative agent’s reference rate, plus designated amounts. Commitment fees are charged on the undrawn amounts at rates ranging between 0.30 percent to 0.50 percent. As of March 21, 2004, the six-month Eurodollar LIBOR rate was 1.15 percent.

~~Lease~~In ~~Agreement~~accordance with SFAS No. 128, “Earnings Per Share,” the following table reconciles share amounts utilized to calculate earnings per common share and earnings per common share, assuming dilution:

In November 2001, we entered into a five-year operating lease agreement (“Lease Agreement”) with a national banking association. Participants in the Lease Agreement structure include several banks and financing institutions as well as Casino USA. The total Casino USA participation of $33.2 million is presented as “Notes payable to affiliate” in our consolidated balance sheets at March 21, 2004 and December 28, 2003. The Lease Agreement as amended, with a value of $86.8 million and a composite interest rate of 9.07 percent, currently provides for the financing of two distribution facilities and 14 store locations, and additionally holds $14.4 million of available funds as of March 21, 2004. The $14.4 million of available funds was generated through the sale of a Florida distribution facility and a Florida store property during the process of sale and divestiture of the Florida Operations. As of March 21, 2004, the Lease Agreement was amended to allow these proceeds to be held by the real estate trust for future purchases of replacement properties. The Lease Agreement expires on November 30, 2006. At the end of the term, the Lease Agreement requires us to elect to purchase all the properties by a final payment of $86.4 million or sell all the properties to a third party. If the properties are sold to a third party and the aggregate sales price is less than $69.2 million, we are obligated to pay the difference of the aggregate sales price and $69.2 million.


	Twelve Weeks Ended						Twenty-four Weeks Ended
	June 19, 2005			June 13, 2004			June 19, 2005			June 13, 2004
Net income, in thousands	$	8,091		$	8,109		$	11,286		$	14,306

Earnings per common share	$	0.26		$	0.27		$	0.37		$	0.48
Effect of dilutive stock options		(0.01	)		(0.01	)		(0.02	)		(0.02	)

Earnings per common share, assuming dilution	$	0.25		$	0.26		$	0.35		$	0.46

Weighted average common shares		30,742,029			30,051,810			30,691,318			29,961,360
Effect of dilutive stock options		1,088,046			1,505,443			1,360,340			1,446,927

Weighted average common shares and common share equivalents		31,830,075			31,557,253			32,051,658			31,408,287

~~The Lease Agreement is considered a variable interest entity and subject to consolidation under Financial Interpretation (“FIN”) No~~2. ~~46, “Consolidation~~New ~~of Variable Interest Entities,” issued by Financial~~ Accounting ~~Standards Board (“FASB”). We adopted the provisions of FIN No. 46 as of June 15, 2003 and therefore, the related long-term portion of notes payable was~~Pronouncements included in our consolidated balance sheets, under “Notes payable” and “Notes payable to affiliate”. The consolidated income statement for the twelve weeks ended March 21, 2004 included $0.3 million of depreciation and interest expenses in excess of rental income that would have been recorded under the former method, in the results from continuing operations before provision for income taxes. Had consolidation of this variable interest entity been effective for the twelve weeks ended March 23, 2003, the net-of-tax reduction to the operating results would have been $0.2 million, or $0.01 per diluted share.

~~Collateral~~SFAS No. 123(R)

~~Borrowings~~On ~~under~~December ~~both~~16, 2004, the ~~Credit~~FASB ~~Agreement~~issued SFAS No. 123 (R), which is a revision of SFAS No. 123. SFAS No. 123(R) supersedes APB No. 25, and amends SFAS No. 95, “Statement of Cash Flows.” Generally the ~~Lease~~approach ~~Agreement~~in ~~are~~SFAS ~~collateralized~~No. by123(R) ais ~~security~~similar ~~interest~~to the approach described in ~~our~~SFAS ~~receivables~~No. 123. However, ~~inventory~~SFAS ~~and~~No. ~~owned~~123(R) requires ~~properties~~all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.

~~Covenants~~SFAS No. 123(R) permits public companies to adopt its requirements using one of two methods:

~~Both~~1. ~~the~~A ~~Credit~~“modified ~~Agreement~~prospective” ~~and~~method ~~the~~in ~~Lease~~which ~~Agreement~~compensation ~~contain~~cost ~~various~~is ~~customary and~~recognized ~~restrictive~~beginning ~~covenants,~~with ~~including~~the ~~restrictions~~effective ondate ~~cash~~(a) ~~dividends~~based ~~declared~~on orthe ~~paid~~requirements ~~and~~of ~~additional~~SFAS ~~debt~~No. ~~and~~123(R) ~~capital~~for ~~expenditures,~~all ~~and~~share-based ~~require~~payments usgranted toafter ~~maintain~~the ~~certain~~effective ~~fixed~~date ~~charge~~and ~~coverage~~(b) ~~ratios~~based ~~and~~on ~~other~~the ~~financial~~requirements ~~ratios~~of ~~under~~SFAS ~~each agreement~~No. ~~The covenants~~123 dofor ~~not~~all ~~require~~awards usgranted to ~~maintain~~employees aprior ~~public~~to ~~debt~~the ~~rating~~effective ordate aof ~~certain~~SFAS ~~liquidity level~~No. We123(R) ~~are~~that ~~currently~~remain inunvested ~~compliance~~on ~~with~~ the ~~amended~~effective ~~covenants~~date.

A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

~~The~~We ~~Credit~~plan Agreement expires on November 30, 2004, and accordingly, we have classified our obligation under the Credit Agreement as a current liability in our consolidated balance sheets. However, it is our intention to ~~negotiate~~adopt ~~and~~SFAS ~~enter into a new Credit Agreement prior to its expiration~~No. ~~The~~123(R) ~~Lease~~using ~~Agreement expires on November 30, 2006, and our obligations under~~ the ~~Lease~~modified ~~Agreement~~prospective ~~have~~method ~~been~~beginning ~~classified as long-term liabilities. We expect to remain~~ in ~~full~~fiscal ~~compliance~~year ~~with the covenants through the expiration of the respective terms of the facilities~~2006.

~~Interest~~As permitted by SFAS No. 123, we currently account for share-based payments to employees using APB Opinion 25’s intrinsic value method and as such, generally recognize no compensation cost for employee stock options. Accordingly, the adoption of SFAS No. 123(R)’s fair value method will have a significant impact on our reported results of operations. The impact of adopting SFAS No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted SFAS No. 123(R) in prior periods, the impact of that standard could reasonably be expected to have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income and earnings per share in Note 1 “Accounting Policies – Stock options” in this report. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financial cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While we can not estimate what those amounts will be in the future, the amount of such excess tax deductions from option exercises were $0.7 million for the first half of 2005 and $0.3 million for the first half of 2004.

~~Interest~~We ~~paid~~are oncurrently evaluating our ~~debt~~business ~~aggregated~~practices ~~$4.1~~regarding ~~million~~the ~~for~~magnitude ~~the~~or ~~twelve~~form ~~weeks~~of ~~ended~~share-based ~~March~~compensation ~~21,~~to ~~2004~~employees and ~~$3.0~~the ~~million~~choice ~~for~~of the ~~twelve~~ ~~weeks~~option-pricing ~~ended~~model ~~March~~in 23the future. We are also analyzing other potential impacts of adopting SFAS No. 123(R) and presently, ~~2003~~do not expect any other potential impact will be significant.

5In March 2005, the SEC issued SAB No. ~~Retirement~~107, ~~Benefit~~which ~~Plans~~expresses views of the SEC staff regarding the interaction between SFAS No. 123(R) and ~~Postretirement~~certain SEC rules and regulations. Additionally, SAB No. 107 provides the staff’s view regarding the valuation of share-based payment arrangements for public companies and interpretive guidance in implementation of SFAS No. 123(R) and ~~Postemployment~~disclosures ~~Benefit~~in ~~Obligations~~MD&A subsequent to adoption of SFAS No. 123(R). SAB No. 107 does not change the accounting required by SFAS No. 123(R).

~~Defined~~The ~~benefit~~FASB ~~plans~~required SFAS No. 123(R) be adopted in the first interim or annual period beginning after June 15, 2005. On April 14, 2005, the SEC issued a press release amending compliance dates for SFAS No. 123(R). Under the SEC’s new rule, SFAS No. 123(R) will become effective for us beginning in fiscal year 2006.

WeInterpretation ~~have a noncontributory pension plan covering substantially all full time employees~~No. We47 fund this plan with annual contributions as required by the Employee Retirement Income Security Act of 1974 (ERISA). The components included in the net periodic benefit cost for the periods indicated are as follows, in thousands:

	Twelve Weeks Ended
	March 21, 2004			March 23, 2003
Service cost	$	768		$	571
Interest cost		1,167			915
Expected return on plan assets		(1,105	)		(650	)
Amortization of transition obligation		—			20
Amortization of prior service cost		93			81
Amortization of net actuarial loss		495			445
Net periodic benefit cost	$	1,418		$	1,382

In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations,” an interpretation of SFAS No. 143 “Accounting for Asset Retirement Obligations.” Interpretation No. 47 clarifies that an entity is required to recognize a liability for the fair value of conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated and clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. We are required to adopt Interpretation No. 47 as of January 1, 2006. We do not believe the adoption of Interpretation No. 47 will have a material impact on our results of operations or financial condition.

We previously disclosed in our 2003 Annual Report an expected contribution of $8.3 million to this plan in 2004. We did not make a contribution to the plan during the twelve weeks ended March 21, 2004 and continue to anticipate contributing $8.3 million to fund this plan in 2004.

~~Supplemental~~SFAS ~~Executive~~No. ~~Retirement~~154 ~~Plan~~

WeIn ~~have~~May in2005, ~~place~~the aFASB ~~noncontributory~~issued ~~supplemental~~SFAS ~~executive~~No. ~~retirement~~154, ~~plan (~~“~~SERP~~Accounting Changes and Error Corrections.”), ~~which~~SFAS ~~provides~~No. ~~supplemental~~154 requires retrospective application to prior ~~income~~periods’ ~~payments~~financial ~~for~~statements ~~certain~~of ~~officers~~a voluntary change in ~~retirement.~~accounting ~~The~~principle ~~SERP~~and ~~was~~that ~~designed~~a tochange ~~provide~~in method of depreciation, amortization, or depletion for ~~cost~~long-lived, ~~recovery~~nonfinancial ~~through~~assets ~~the~~be ~~purchase~~accounted offor ~~life~~as ~~insurance~~a ~~policies~~change onin ~~the~~accounting ~~lives~~estimate ofthat ~~certain~~is effected ~~current~~by ~~and~~a ~~former~~change ~~executives~~in accounting principle. WeSFAS ~~are~~No. ~~the~~154 ~~sole~~is ~~owner~~effective for accounting changes and ~~beneficiary~~corrections of ~~such~~ ~~policies~~errors made in fiscal years beginning after December 15, 2005. ~~The~~We ~~components~~do ~~included~~not inbelieve the ~~net~~adoption ~~periodic~~of ~~benefit~~SFAS ~~cost~~No. ~~for~~154 ~~the~~will ~~periods~~have ~~indicated~~a ~~are~~material impact ason ~~follows,~~our inresults ~~thousands:~~of operations or financial condition.

	Twelve Weeks Ended
	March 21, 2004		March 23, 2003
Service cost	$	89	$	63
Interest cost		145		122
Amortization of prior service cost		30		27
Amortization of actuarial loss		24		9
Net periodic benefit cost	$	288	$	221

3. Discontinued Operations

~~Postretirement~~During 2003, we completed the sale and divestiture ~~postemployment~~of our Florida broadline foodservice operations and our Florida stores businesses (collectively, the “Florida Operations”) and our broadline foodservice operations in northern California (“Northern California Foodservice ~~benefit~~Operations”). ~~obligations~~This allowed us to focus on our core store operations, concentrate our resources to strengthen our balance sheet and continue development of our two store formats. We retained certain residual assets, liabilities and contingencies in conjunction with the sale transactions and divestitures. In accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the accompanying consolidated financial statements reflect the results of operations and financial position of the Florida Operations and the Northern California Foodservice Operations separately as discontinued operations.

WeThe ~~provide~~assets ~~certain health care benefits for retired employees. Substantially all~~ of ~~our~~the ~~full~~discontinued ~~time~~operations ~~employees~~represent ~~may~~primarily ~~become~~the ~~eligible~~land ~~for~~and ~~those~~building ~~benefits~~improvements ifretained ~~they~~in ~~reach~~the ~~retirement~~Northern ~~age~~California ~~while~~Foodservice Operations ~~still~~and ~~working~~are ~~for~~presented ~~us.~~in ~~This~~the ~~postretirement~~consolidated ~~health~~balance ~~care~~sheets ~~plan~~under isthe ~~contributory~~caption ~~with~~“Assets ~~participants’ contributions~~of ~~adjusted~~discontinued ~~annually~~operations.” The ~~plan~~liabilities ~~limits benefits to the lesser~~ of ~~actual cost for~~ the ~~medical~~discontinued ~~coverage~~operations ~~selected~~are orcomprised ~~a defined dollar benefit based on years~~ of ~~service.~~the Inremaining ~~addition,~~accounts onpayable aand ~~postemployment basis, we provide certain~~accrued ~~disability-related benefits to our employees~~liabilities.

InLoss ~~January~~from ~~2004, the~~discontinued ~~FASB~~operations issued FASB Staff Position (“FSP”) 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act).” FSP 106-1 permits a sponsor of a postretirement health care plan that provides a prescription drug benefit to make a one-time election to defer accounting for ~~the effects of the Act. Regardless of whether a sponsor elects that deferral, FSP 106-1 requires certain disclosures~~each pending further consideration of the underlying accounting issues. FSP 106-1 is effective for interim or annual financial statements of fiscal years ending after December 7, 2003. The election to defer accounting for the Act is a one-time election. The election must be made before net periodic postretirement benefit costs for the period ~~that~~primarily ~~includes~~represents the ~~Act’s~~residual ~~enactment~~activities ~~date are first included~~ in ~~reported financial information pursuant to~~ the ~~requirements~~Northern ofCalifornia ~~SFAS~~Foodservice ~~No.~~Operations ~~106.~~and Inother ~~accordance with~~adjustments ~~FSP~~to ~~106-1,~~reserves ~~the effects~~ of ~~the~~exiting ~~Act are not reflected in~~ the ~~measurement~~foodservice ~~of the accumulated postretirement benefit obligation and net periodic postretirement benefit cost in our financial statements and accompanying notes~~operations. ~~Specific authoritative guidance on the accounting for the federal subsidy is pending and that guidance, when issued, could require us to change previously reported information.~~

The following table sets forth the activities and the remaining balances as of June 19, 2005, related to reserves for exiting the Florida Operations and the Northern California Foodservice Operations, in thousands.


	Balance at January 2, 2005		Adjustments		Payments			Balance at June 19, 2005
Lease termination costs	$	2,791	$	270	$	(657	)	$	2,404
Employee severance and related obligations		672		—		(316	)		356

	$	3,463	$	270	$	(973	)	$	2,760

~~The~~4. ~~components~~Debt ~~included in the postretirement benefit cost for the periods indicated are as follows, in thousands:~~

	Twelve Weeks Ended
	March 21,2004			March 23,2003
Service cost	$	131		$	94
Interest cost		230			190
Amortization of prior service cost		3			2
Amortization of net actuarial gain		(18	)		(27	)
Net periodic benefit cost	$	346		$	259

Amended Credit Facility

6Effective November 18, 2004, we entered into a $150.0 ~~Derivatives~~million Amended and Restated Credit Facility (“Amended Credit Facility”) with a syndicate of banks. The Amended Credit Facility replaced a senior secured revolving credit facility. The Amended Credit Facility has a five-year term expiring on November 18, 2009. Interest for the Amended Credit Facility is at the base rate or at the reserve adjusted Eurodollar rate plus, in each case, an applicable margin. Commitment fees are charged on the undrawn amount at rates ranging from 0.15 percent to 0.50 percent. At June 19, 2005, the six-month Eurodollar LIBOR rate was 2.12 percent.

WeAt ~~have~~our ~~entered~~option, ~~into~~the anAmended ~~interest~~Credit ~~rate~~Facility ~~collar~~can ~~agreement~~be ~~with~~used ~~a major bank~~ to ~~limit~~support ~~the~~up ~~impact~~to ~~of interest rate fluctuations on floating rate debt~~$15.0 ~~This~~million ~~agreement, expiring in November 2004, hedges principal amounts~~ of ancommercial ~~aggregate~~letters of ~~$45~~credit. ~~million~~Principal ~~and~~repayments ~~limits~~may ~~the~~be ~~effect~~required ofprior ~~LIBOR fluctuations~~ to ~~interest~~the ~~rate~~final ~~ranges from 5~~maturity.~~48 percent~~ ~~to 8.00 percent. This interest collar agreement is designed as a cash flow hedge and is considered fully effective. This agreement is marked to market every quarter~~Additionally, ~~with the changes in fair value recorded as other comprehensive income (“OCI”) and any ineffective portion recorded to current earnings and included~~ under ~~“Interest~~certain ~~expense~~conditions, ~~net”~~pay-downs ontoward ~~our~~the ~~consolidated~~facility ~~statements~~are oftreated ~~income.~~as ~~The~~permanent ~~cumulative~~reductions ~~loss recorded~~ to ~~OCI as a result of net changes in~~ the ~~fair~~amount ~~market~~committed. ~~value~~At ofJune ~~this~~19, ~~agreement~~2005, ~~was~~ $130.70 million ~~at the beginning~~ of ~~2004~~revolving loan and $15.46 million ~~at March 21, 2004. The increase in the fair value during the current reporting period is attributable to the reclassification~~ of ~~the~~letters ~~ineffective portion from OCI to current earnings, partially offset by the impact~~ of ~~the~~credit ~~slightly~~were ~~decreased market interest rates~~outstanding. ~~The~~At ~~reclassification~~June ~~aggregated $0.5 million for the twelve weeks ended March 21~~19, ~~2004 and $0.7 million for the twelve weeks ended March 23~~2005, ~~2003.~~ Wewe ~~estimate~~had ~~that~~ $1114.4 million ofavailable ~~net~~under ~~derivative~~our ~~losses~~Amended ~~included~~Credit ~~in OCI will be recognized in results of operations through the expiration of the agreement in November 2004~~Facility.

7.Lease ~~Comprehensive~~Agreement ~~Income~~

~~Comprehensive~~In ~~income~~November ~~was~~2001, ~~computed~~we entered into a five-year operating lease agreement (“Lease Agreement”) with a national banking association as ~~follows,~~a real estate trust. Participants in ~~thousands:~~the Lease Agreement structure include several banks and financing institutions as well as Casino USA. The Lease Agreement expires on November 30, 2006. At the end of the term, the Lease Agreement requires us to elect to purchase all the properties by a final payment of $86.4 million or sell all the properties to a third party. If the properties are sold to a third party and the aggregate sales price is less than $69.2 million, we are obligated to pay the difference of the aggregate sales price and $69.2 million. As of June 19, 2005, the Lease Agreement as amended, with a value of $86.6 million and a composite interest rate of 9.07 percent, provides for the financing of two distribution facilities and 20 store locations.

	Twelve Weeks Ended
	March 21, 2004			March 23, 2003
Net income	$	6,197		$	163
Other comprehensive income:
Net loss on derivative instruments, net of tax		(51	)		(32	)
Reclassification adjustments included in net income		272			400
Foreign currency translation adjustments		(77	)		(136	)
Total other comprehensive income		144			232
Total comprehensive income	$	6,341		$	395

The Lease Agreement is considered a variable interest entity and subject to consolidation under Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51”, as amended. Therefore, the related properties and notes payable are included in our consolidated balance sheets under “Property, plant and equipment”, “Current maturities of long-term debt and capital leases”, “Notes payable” and, for the Casino USA participation, “Notes payable to affiliate”.

As of June 19, 2005, there was $0.1 million cash funds in the real estate trust that are restricted as to their use which were reflected on our consolidated balance sheets as “Cash held in real estate trust.” These cash funds are the remainder of proceeds generated in 2003 from the sale of a Florida distribution facility and a Florida store property originally owned by the real estate trust that were subsequently used in 2004 to purchase six of our owned store properties by the real estate trust.

~~See~~Collateral ~~Note 6 “Derivatives” for the activities recorded to OCI due to changes in fair values of derivative instruments designated as cash flow hedges during the reporting period.~~

InBorrowings ~~accordance~~under ~~with~~both ~~accounting~~the ~~principles~~Amended ~~generally~~Credit ~~accepted~~Facility inand the ~~United~~Lease ~~States~~Agreement are collateralized by security interests in our receivables, ~~the~~inventory ~~functional~~and ~~currency~~owned properties. Principal collateral for our ~~Mexico~~obligations ~~operations~~under ~~has~~the ~~been~~Lease Agreement includes specific properties and their fixtures and equipment, and additionally a collateral position, subordinate to the ~~Mexican~~Amended ~~Peso.~~Credit AsFacility, ~~such~~on receivables, inventory ~~foreign~~and ~~currency~~owned ~~translation~~properties ~~gains~~not serving as principal collateral under the Lease Agreement. The Amended Credit Facility has as principal collateral, our receivables, inventory and ~~losses~~owned properties that are not part of the principal collateral of ~~included~~the inLease ~~OCI~~Agreement, and has a subordinate collateral position on the properties and related assets that are the principal collateral of the Lease Agreement.

8.Covenants ~~Income Taxes~~

~~Smart~~The &Amended ~~Final~~Credit ~~Inc.~~Facility and ~~Casino~~the ~~USA~~Lease ~~are~~Agreement ~~parties~~contain tovarious acustomary ~~tax~~and ~~sharing arrangement~~restrictive ~~covering~~covenants, ~~income~~including ~~tax~~restrictions ~~obligations~~on incash ~~the~~dividends ~~state~~declared or ofpaid ~~California.~~and ~~Under~~additional ~~this~~debt ~~arrangement,~~and wecapital ~~make~~expenditures, ~~tax~~and ~~sharing~~require ~~payments~~us to, ormaintain ~~receive~~certain ~~benefits~~fixed ~~from,~~charge ~~Casino~~coverage ~~USA~~ratios ~~based~~and ~~upon~~other ~~pre-tax~~financial ~~income~~ratios orunder ~~loss~~each ~~for~~agreement. ~~financial~~The ~~reporting~~covenants ~~purposes~~do ~~adjusted~~not ~~for certain~~require ~~agreed~~us ~~upon~~to ~~items~~maintain a public debt rating or a certain liquidity level.

~~Tax~~We ~~payments~~were ~~made~~in tocompliance ~~governments~~with the covenants ~~and~~within ~~Casino~~both ~~USA~~the ~~for~~Amended Credit Facility as amended and the ~~periods~~Lease ~~indicated~~Agreement ~~are~~as amended as ~~follows~~of June 19, 2005 and January 2, 2005. The Amended Credit Facility expires on November 18, 2009 and the Lease Agreement expires on November 30, 2006; accordingly, our obligations under these agreements were classified as long-term debt in ~~thousands:~~our consolidated balance sheets at June 19, 2005 and January 2, 2005.

	Twelve Weeks Ended
	March 21, 2004		March 23, 2003
Tax sharing payments to Casino USA	$	800	$	27
Taxes paid for states other than California		15		15
Total taxes paid	$	815	$	42

Interest

9.Interest ~~Stock~~paid on our long-~~Based~~term ~~Compensation~~debt aggregated $4.1 million for the 24 weeks ended June 19, 2005 and $7.9 million for the 24 weeks ended June 13, 2004.

WeThe ~~have~~fair ~~stock~~value ~~options granted to our employees under the Long-Term Equity Compensation Plan and both employees and members~~ of our ~~Board~~debt, ofestimated ~~Directors~~based ~~under~~upon ~~the Stock Incentive Plan. We account for options under these plans using the intrinsic value method as allowed under Accounting Principles Board~~current ~~Opinion~~interest ~~No.~~rates ~~25,~~offered ~~“Accounting~~ for ~~Stock~~debt ~~Issued~~instruments ~~to Employees.” Disclosures~~ of ~~pro~~the ~~forma~~same ~~information~~remaining ~~regarding net income and earnings per share are required under SFAS No. 123~~maturity, ~~“Accounting~~approximates ~~for Stock-Based Compensation,” which uses~~ the ~~fair~~carrying ~~value method as amended by SFAS No~~amount. ~~148, “Accounting for Stock-Based Compensation – Transition and Disclosure.”~~

~~The~~5. ~~fair~~Retirement ~~value~~Benefit ofPlans ~~each~~and ~~option~~Postretirement ~~grant~~and ~~was~~Postemployment ~~estimated~~Benefit onObligations ~~the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:~~

	Twelve Weeks Ended
	March 21, 2004			March 23, 2003
Dividend yield		0.0	%		0.0	%
Expected volatility		39	%		38	%
Risk-free interest rates		2.7	%		5.0	%
Weighted average expected lives
Executives		4.85 years			4.90 years
Non executives		4.57 years			4.60 years
Weighted-average fair value of options granted	$	4.73		$	1.71

Defined benefit plan

~~The~~We ~~following~~have isa ~~the pro~~funded ~~forma~~noncontributory ~~information~~defined ~~had~~benefit ~~the~~retirement ~~fair~~plan ~~value~~covering ~~method~~substantially ~~under~~all ~~SFAS~~of Noour full time employees following a vesting period of five years of service. ~~123,~~We fund this plan with contributions as ~~amended~~required by ~~SFAS~~the ~~No.~~Employee ~~148,~~Retirement ~~been~~Income ~~adopted,~~Security ~~dollars~~Act of 1974 (“ERISA”). The components included in ~~thousands~~the ~~except~~net ~~per~~periodic ~~share~~benefit ~~amounts~~cost for the periods indicated are as follows, in thousands:

	Twelve Weeks Ended							Twenty-four Weeks Ended
	March 21, 2004			March 23, 2003
	June 19,2005				June 13,2004			June 19,2005			June 13,2004
Net income as reported	$	6,197		$	163
Service cost	$	825			$	747		$	1,596		$	1,515
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		42			—
Interest cost		1,273				1,134			2,461			2,301
Deduct: Total stock-based compensation expense determined under fair value method for all awards, net of related tax effects		348			328
Expected return on plan assets		(1,345	)			(1,074	)		(2,557	)		(2,179	)
Pro forma net income (loss)	$	5,891		$	(165	)
Amortization of prior service cost		90				90			173			183
Earnings (loss) per share:
Amortization of net actuarial loss		568				481			1,099			976
Basic, as reported	$	0.21		$	0.01
Net periodic benefit cost	$	1,411			$	1,378		$	2,772		$	2,796
Basic, pro forma	$	0.20		$	(0.01	)
Diluted, as reported	$	0.20		$	0.01
Diluted, pro forma	$	0.19		$	(0.01	)

~~The~~As ~~impact~~we ~~of applying~~previously ~~SFAS~~disclosed ~~No.~~in ~~123,~~our as2004 ~~amended~~Annual byReport ~~SFAS~~on ~~No.~~Form ~~148~~10-K, inwe ~~this~~are ~~pro~~not ~~forma~~required ~~disclosure~~to ismake ~~not~~any ~~necessarily~~contributions ~~indicative~~for of the ~~effect~~2005 onplan ~~income~~year inpursuant to the ~~future.~~minimum ~~SFAS~~funding ~~No.~~requirements ~~123~~of ERISA; however, aswe ~~amended~~may byelect ~~SFAS~~to ~~No.~~contribute ~~148,~~up ~~does~~to ~~not~~$10.0 ~~apply~~million to ~~awards~~this ~~granted~~plan ~~prior~~in 2005. toDuring ~~1995.~~the Wefirst ~~anticipate making~~half ~~additional~~of ~~stock-based~~2005, ~~compensation~~we ~~awards~~made ina ~~the~~$2.0 ~~future~~million contribution to this plan.

Supplemental Executive Retirement Plan

We have in place a noncontributory supplemental executive retirement plan (“SERP”), which provides supplemental income payments for certain officers in retirement. We have invested in corporate-owned life insurance policies, which provide partial funding for the SERP.

The components included in the net periodic benefit cost for the periods indicated are as follows, in thousands:


	Twelve Weeks Ended				Twenty-four Weeks Ended
	June 19, 2005		June 13, 2004		June 19, 2005		June 13, 2004
Service cost	$	83	$	89	$	166	$	178
Interest cost		175		145		350		290
Amortization of prior service cost		30		30		60		60
Amortization of net actuarial loss		54		24		108		48

Net periodic benefit cost	$	342	$	288	$	684	$	576

~~10.~~Postretirement ~~Segment~~and ~~Reporting~~postemployment benefit obligations

~~Our~~We ~~two~~provide ~~reportable~~certain ~~segments~~health ~~have~~care ~~historically~~benefits ~~been~~for ~~Stores~~retired ~~and Foodservice~~employees. ~~The Stores segment provides food and related items in bulk sizes and quantities~~Substantially ~~through~~all ~~non-membership grocery warehouse stores. The Foodservice distribution segment provided delivery~~ of ~~food,~~our ~~restaurant~~full ~~equipment~~time ~~and~~employees ~~supplies~~may tobecome ~~mainly~~eligible ~~restaurant~~for ~~customers.~~those Asbenefits ~~described~~if inthey ~~Note~~reach 2retirement ~~“Discontinued~~age ~~Operations”,~~while westill ~~have completed~~working ~~the~~for ~~sale~~us. ~~and~~This ~~divestiture~~postretirement ofhealth ~~the~~care ~~Foodservice~~plan ~~segment~~is incontributory ~~Florida~~with ~~and~~participants’ ~~northern~~contributions ~~California~~adjusted ~~and have reported the operating results from these two units as discontinued operations~~annually. ~~Corporate~~The ~~is comprised primarily of corporate expenses~~plan ~~incidental~~limits benefits to the ~~activities~~lesser of ~~the~~actual ~~reportable~~cost ~~segments,~~for the ~~variable~~medical ~~interest~~coverage ~~entity~~selected ~~and~~or ~~rental~~a ~~income~~defined ~~from~~dollar ~~Smart~~benefit &based ~~Final~~on ~~stores~~years ~~and~~of ~~Smart & Final Mexico~~service. ~~Assets~~In ~~included under Corporate consist primarily of owned real estate~~addition, ~~leasehold improvements and assets of the variable interest entity. Our 50 percent-owned joint venture in Mexico is reported~~ on ~~the~~a ~~equity~~postemployment basis, ofwe ~~accounting.~~provide ~~These~~certain ~~reportable~~disability-related ~~segments~~benefits ~~are~~to ~~strategic~~our ~~business units that offer different products and services~~employees. They have been managed separately because each segment requires different technology and marketing strategies. We evaluate performance based on profit or loss from operations before income taxes, not including nonrecurring gains and losses.

In December 2003, the Medical Prescription Drug Improvement and Modernization Act of 2003 (the “Act”) was enacted. The Act established a prescription drug benefit under Medicare, known as “Medicare Part D”, and a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. In January 2004, the FASB issued FASB Staff Position (“FSP”) 106-1, which permitted a sponsor of a postretirement health care plan that provides a prescription drug benefit to make a one-time election to defer accounting ~~policies~~for the effects of the ~~segments~~Act. ~~are~~FSP ~~consistent~~106-1 ~~with~~was effective for interim or annual financial statements of fiscal years ending after December 7, 2003. The election to defer accounting for the Act ~~those~~was ~~described~~a one-time election that must have been made before net periodic postretirement benefit costs for the period that includes the Act’s enactment date were first included in reported financial information pursuant to the ~~summary~~requirements of ~~significant~~SFAS No. 106. In accordance with FSP 106-1, we elected to defer accounting ~~policies~~for ~~included~~the Act. FSP 106-2 superseded FSP 106-1 when it became effective for our fourth quarter of 2004. We have not yet determined whether the current benefits provided to certain participants are actuarially equivalent to Medicare Part D. Accordingly, the measurement of the accumulated pension benefit obligation and net periodic postretirement benefit cost in our ~~2003~~consolidated ~~Annual~~financial ~~Report~~statements and accompanying notes do not reflect the effects of the Act.

The ~~sales,~~components ~~profit~~included orin the ~~loss~~postretirement ~~and~~benefit ~~other~~cost ~~information~~for ofthe ~~each~~periods ~~segment~~indicated are as follows, in thousands:

	Stores				Foodservice				CorporateExpense				Total
	Twelve Weeks Ended							Twenty-four Weeks Ended
Twelve Weeks Ended March 21, 2004:
	June 19,2005			June 13,2004				June 19,2005			June 13,2004
Sales to external customers	$	423,473			$	—			$	—			$	423,473
Service cost	$	143		$	131			$	285		$	262
Cost of sales, buying and occupancy		351,910				—				(1,412	)			350,498
Interest cost		232			230				464			460
Intercompany real estate charge (income)		3,053				—				(3,053	)			—
Amortization of prior service cost		4			3				8			6
Interest income		—				—				203				203
Amortization of net actuarial gain		—			(18	)			—			(36	)
Interest expense		—				—				3,892				3,892
Net periodic benefit cost	$	379		$	346			$	757		$	692
Pre-tax income (loss)		15,477				—				(4,301	)			11,176
Discontinued operations, net of tax		(27	)			(643	)			271				(399	)
As of March 21, 2004:
Total assets		421,881				3,795				153,955				579,631
Twelve Weeks Ended March 23, 2003:
Sales to external customers	$	354,637			$	—			$	—			$	354,637
Cost of sales, buying and occupancy		296,963				—				—				296,963
Intercompany real estate charge (income)		3,102				—				(3,102	)			—
Interest income		—				—				135				135
Interest expense		—				—				2,889				2,889
Pre-tax income (loss)		8,813				—				(4,292	)			4,521
Discontinued operations, net of tax		(1,736	)			(2,508	)			1,672				(2,572	)
As of March 23, 2003:
Total assets		418,424				131,740				63,269				613,433

116. ~~Legal~~Comprehensive ~~Actions~~Income

WeComprehensive ~~have~~income ~~been~~or ~~named~~loss ~~as a defendant in a suit filed on September 13, 2001 in the Superior Court of the State of California for the County of Los Angeles. This suit, Camacho vs. Smart & Final Inc.,~~ was ~~filed~~computed byas ~~the plaintiff~~follows, ~~on his behalf and on behalf of all other store managers and assistant managers~~ in ~~California,~~thousands: alleging that we misclassified the status of store managers and assistant managers in California as exempt employees for employment purposes. The action seeks to be classified as a “class action” and seeks unspecified monetary damages.

On February 24, 2003, following an extensive period of investigation and discovery, the plaintiff filed a motion for class certification. On May 2, 2003, we filed our opposing papers to plaintiff’s motion for class certification. We believe the merits of this action do not warrant class action status and we believe we have certain defenses to the claim.


	Twelve Weeks Ended					Twenty-four Weeks Ended
	June 19, 2005			June 13, 2004		June 19, 2005		June 13, 2004
Net income	$	8,091		$	8,109	$	11,286	$	14,306
Other comprehensive (loss) income:
Net gain on derivative instruments, net of tax		—			235		—		184
Reclassification adjustments, net of tax, included in net income		—			261		—		533
Foreign currency translation adjustments		(19	)		137		56		60

Total other comprehensive (loss) income		(19	)		633		56		777

Total comprehensive income	$	8,072		$	8,742	$	11,342	$	15,083

We ~~have~~had ~~been~~an ~~named~~interest rate ascollar aagreement ~~defendant~~at inJune ~~a suit filed on April 7~~13, ~~2003~~2004 inthat ~~the Superior~~was ~~Court~~designed ofas ~~the~~a ~~State~~cash offlow ~~California~~hedge ~~for~~and ~~the~~was ~~County~~considered offully ~~Los Angeles~~effective. This ~~suit,~~agreement ~~Perea~~was ~~vs.~~marked ~~Smart~~to &market ~~Final~~every ~~Inc.~~quarter, ~~was~~with ~~filed by~~ the ~~plaintiff,~~changes onin ~~his~~fair ~~behalf~~value ~~and~~recorded onas ~~behalf of all~~ other ~~employees~~comprehensive ~~who participate in the commission program in~~income ~~California, alleging that we improperly calculated commission payments. The action seeks to be classified as a~~ (“~~class action~~OCI”) and ~~seeks~~the ~~unspecified~~ineffective ~~monetary~~portion ~~damages.~~reclassified Wefrom ~~believe~~OCI ~~the~~to ~~merits~~current ofearnings ~~this~~and ~~action~~included dounder ~~not~~“Interest ~~warrant~~expense, ~~class~~net” ~~action~~on ~~status and~~our weconsolidated ~~believe~~statement weof ~~have~~operations. ~~certain~~This ~~defenses~~agreement toexpired ~~the~~in ~~claim~~November 2004.

In ~~September~~ ~~2003,~~accordance wewith ~~entered~~accounting ~~into~~principles agenerally ~~tentative~~accepted ~~settlement~~in ~~agreement for~~ the ~~resolution of the Camacho and Perea actions. In October 2003~~United States, the ~~court~~functional ~~consolidated~~currency ~~the Camacho and Perea actions and, on October 27, 2003, preliminarily approved the settlement and set a fairness hearing and final court certification of the settlement~~ for January 13, 2004. This court date was subsequently deferred to February 24, 2004. The final approval hearing for the Camacho and Perea actions was heard and granted by the court on February 26, 2004. Under the terms of the settlement, we paid into the settlement fund $7.6 million in cash during the first quarter of 2004 and will issue $1.5 million in scrip redeemable at our ~~Smart~~Mexico &operations ~~Final~~has ~~stores.~~been ~~Plaintiff’s attorney fees, costs and administrative expenses will be paid from~~ the ~~settlement~~Mexican ~~amount~~Peso. InAs ~~addition~~such, weforeign ~~will~~currency ~~pay~~translation ~~our~~gains ~~own attorney fees~~ and ~~certain~~losses ~~other expenses. For the purposes of settlement only, we~~ are ~~not~~included ~~contesting~~in ~~the class action designation~~OCI.

7. Income Taxes

Smart & Final Inc. and Casino USA are parties to a tax sharing arrangement covering income tax obligations in the state of California. Under this arrangement, we make tax sharing payments to, or receive benefits from, Casino USA based upon pre-tax income or loss for financial reporting purposes adjusted for certain agreed upon items.

WeTax ~~have~~payments ~~been~~made named as a defendant in a suit filed on May 24, 2001 in the Orange County Superior Court of the State of California. This suit, Olivas vs. Smart & Final Inc., was filed by the plaintiff and another former non-exempt store employee, on their behalf and on behalf of all non-exempt Smart & Final employees in California alleging that we failed to ~~pay~~governments ~~proper overtime~~ and ~~other~~Casino ~~compensation.~~USA The action seeks to be classified as a “class action” and seeks unspecified monetary damages. On August 9, 2001, we filed a general denial to these claims and asserted numerous defenses. A hearing on plaintiff’s motion for ~~class~~the ~~certification~~periods ~~was~~indicated ~~heard~~are ~~and certification~~ as ~~to nine sub-classes was granted on January 22~~follows, ~~2004.~~in ~~We are pursuing our legal remedies at both the appellate and trial court levels. We believe~~thousands: ~~the merits of this action do not warrant class action status and we believe we have certain defenses to the claim.~~

In the second quarter of 2003, we recorded a litigation charge associated with our assessment of the ultimate resolution of the above-named actions. This charge was adjusted in the fourth quarter of 2003 to reflect our updated assessment of the ultimate resolution of the above-named actions. We did not make any adjustment to the litigation charge in the first quarter of 2004. See Note 3 “Litigation and Other Charges” for further discussion.


	Twenty-four Weeks Ended
	June 19, 2005			June 13, 2004
Tax sharing (benefits received from) payments to Casino USA	$	(574	)	$	1,638
Taxes paid to states other than California		73			17
Taxes paid to federal government		4,950			5,000

Total taxes paid	$	4,449		$	6,655

~~We are named as a defendant in a number of other lawsuits or are otherwise a party to certain litigation arising in the ordinary course from our operations~~8. WeLegal doActions ~~not believe that the ultimate determination of these other cases will either individually or in the aggregate have a material adverse effect on our results of operations or financial position.~~

In May 2001, we were named as a defendant in a suit filed in the Orange County Superior Court of the State of California. This suit, Olivas vs. Smart & Final Inc., was filed by the plaintiff and another former hourly store employee, on their behalf and on behalf of all hourly store employees in California, alleging that we failed to pay proper overtime, failed to pay for all hours worked, failed to pay for certain meal and rest periods, and failed to pay for other compensation. The action seeks to be classified as a “class action” and seeks unspecified monetary damages and statutory penalties thereon. On August 9, 2001, we filed a general denial to these claims and asserted numerous defenses. A hearing on plaintiff’s motion for class certification was heard and certification as to nine sub-classes was granted on January 22, 2004. We continue to believe the merits of this action do not warrant class action status and we believe we have certain defenses to the claim. The class consists of approximately 13,200 current and former hourly store employees in California and the suit covers the period May 1997 through January 2004. Discovery is now underway in the case. In February 2005, the court ordered the parties to commence mediation. In March 2005, the court set a trial date of March 6, 2006. Mediations have been held on April 27, 2005, June 6, 2005 and July 14, 2005 with no resolution to the matter reached. The court has ordered the parties to engage in further settlement discussions.

We have not recorded any charges during the first and second quarters of 2005 associated with the Olivas action. This case and its claims raise difficult and complex factual and legal issues and are subject to many uncertainties and complexities, including, but not limited to, the facts and circumstances of each particular sub-class and claim and the ultimate determination of liability and the applicability of statutory penalties. For certain of the sub-classes we believe there is a reasonable possibility that resolution of the matter could result in a loss which could be materially in excess of presently established reserves or which individually or in the aggregate could result in a material loss for which there is no reserve. Litigation matters are subject to inherent uncertainties; and accordingly, with respect to the Olivas action we are not able to quantify the estimated amount or range of such additional loss or loss. However, such additional loss or loss, either individually or in the aggregate, could have a material adverse effect upon our results of operations and net cash flows in the period in which it is recorded or paid.

We are named as a defendant in a number of other lawsuits or are otherwise a party to certain litigation arising in the ordinary course from our operations. We do not believe that the

ultimate determination of these other cases will either individually or in the aggregate have a material adverse effect on our results of operations or financial position.

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the accompanying unaudited consolidated financial statements and notes thereto and our ~~2003~~2004 Annual Report on Form 10-K. Our MD&A provides an overview of our results of operations for the ~~twelve~~12 weeks and 24 weeks ended ~~March~~June 2119, ~~2004~~2005 as compared to the equivalent ~~prior~~periods ~~year~~of ~~quarter~~2004. This is followed by a discussion and analysis of our cash flows, capital requirements and financing activities. Lastly, we discuss new accounting pronouncements and critical accounting policies incorporated in our reported financial statements.

Each of our fiscal years consists of twelve-week periods in the first, second and fourth quarters of the fiscal year and a sixteen-week period in the third quarter. Our fiscal year 2004 consists of 53 weeks, with thirteen weeks in the fourth quarter.

Summary

~~Income~~The ~~from continuing~~major ~~operations~~factors ~~was~~that ~~$6.6~~impacted ~~million,~~our orresults ~~$0.21~~of ~~per~~operations ~~diluted~~and ~~share,~~financial ~~for~~position ~~the twelve weeks ended March 21, 2004, compared to $2.7 million, or $0.09 per diluted share,~~ for the ~~twelve~~12-week ~~weeks~~quarters ended ~~March~~June 2319, ~~2003. We reported net income of $6.2 million,~~ or2005 ~~$0.20~~and ~~per~~June ~~diluted share~~13, ~~for the twelve weeks ended March 21,~~ 2004, ~~compared~~are toas ~~net~~follows: income of $0.2 million, or $0.01 per diluted share, for the twelve weeks ended March 23, 2003. The improvement was attributable to the increased net earnings from continuing operations and decreased loss from the discontinued operations.

•

Our second quarter 2005 sales increased 5.7 percent over the second quarter 2004, driven by an increase in our average transaction supported by promotional activities.

•

Gross margin for the second quarter 2005 was adversely impacted by the increased distribution costs due to the increased volume, labor costs, fuel costs and expenditures associated with improving our distribution network to efficiently support the increased volume.

•

We opened one new store during the second quarter 2005 and at June 19, 2005, operated 227 stores, as compared to 220 stores at June 13, 2004. Additionally, one store was relocated since the end of the second quarter 2004. While the sales increase attributable to the new and relocated stores helped improve our total sales performance in the second quarter 2005, the operating loss from these stores reduced our operating income generated from existing stores.

•

Interest expense, net decreased in the second quarter 2005 as compared to the second quarter 2004 as a result of lower average debt outstanding and lower effective interest rate.

•

Cash flows provided by operating activities increased over the equivalent period in 2004 and was reinvested in our expansion plan and technology improvement to support our future growth.

We reported income from continuing operations of $8.2 million, or $0.26 per diluted share, for the 12 weeks ended June 19, 2005, a slight decrease from the $8.3 million, or $0.26 per diluted share, reported for the 12 weeks ended June 13, 2004.

We reported net income of $8.1 million, or $0.25 per diluted share, for the 12 weeks ended June 19, 2005, compared to net income of $8.1 million, or $0.26 per diluted share, for the 12 weeks ended June 13, 2004. The year-to-year increase in sales and decrease in interest expense were offset by the lower gross margin rate, primarily attributable to the increased distribution costs, other volume-driven costs and spending in information technology and legal fees.

We reported income from continuing operations of $11.7 million, or $0.36 per diluted share, for the first half of 2005, a $3.2 million decrease from the $14.9 million, or $0.48 per diluted share, reported for the first half of 2004.

We reported net income of $11.3 million, or $0.35 per diluted share, for the first half of 2005, compared to net income of $14.3 million, or $0.46 per diluted share, for the first half of 2004. The year-to-year increase in sales and decrease in interest expense were offset by the lower gross margin rate, primarily attributable to the increased distribution costs and lower product margins, and increases in other volume-driven costs, spending in information technology and legal fees.

We believe that our future growth depends on our ability to expand by opening new and relocated stores, undergoing remodels in the current stores to better serve our customers, and increasing our market presence by expanding our store formats. With the increasing competition within the retail grocery market, there is no assurance that our sales growth will maintain at the current level and our profitability is dependent upon our leveraging sales growth while implementing effective cost controls.

Results of Operations

The following table shows, for the periods indicated, certain ~~condensed~~ consolidated statements of ~~income~~operations data, expressed as a percentage of sales. Totals may not aggregate due to rounding.

	Twelve Weeks Ended				Twenty-four Weeks Ended
	March 21,2004		March 23,2003
	June 19,2005		June 13,2004		June 19,2005		June 13,2004
Sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales, buying and occupancy	8283.85		83.71		83.8		83.0
Gross margin	1716.25		16.39		16.2		17.0
Operating and administrative expenses	13.73		1413.2		13.7		13.4
Income from operations	3.52		23.17		2.6		3.6
Interest expense, net	0.94		0.8		0.5		0.8
Income from continuing operations before provision for income taxes	2.6		1.3
Income from continuing operations before income taxes	2.7		2.9		2.1		2.8
Income tax provision	(1.1	)	(01.51	)	(0.8	)	(1.1	)
Equity (loss) earnings in unconsolidated subsidiary	—		—
Equity earnings of joint venture	—		0.1		—		—
Income from continuing operations	1.67		01.8		1.3		1.7
Discontinued operations, net of tax	~~(0.1~~—	)	~~(0.7~~—	)	—		(0.1	)
Net income	1.57	%	—1.8	%	1.2	%	1.6	%

1820

Comparison of Twelve Weeks Ended ~~March~~June 2119, ~~2004~~2005 with Twelve Weeks Ended ~~March~~June 2313, ~~2003~~2004.

Sales

Sales from continuing operations in ~~first~~the second quarter ~~2004~~2005 were $~~423~~484.51 million, an increase of 195.47 percent over ~~first~~the ~~quarter~~second ~~2003~~quarter 2004 sales of $~~354~~457.68 million. ~~First~~Our second quarter ~~2004~~2005 comparable store sales increased by 184.91 percent, ~~with~~compared ~~sales continuing~~ to ~~benefit from~~ the ~~effect~~2004 ~~of the labor action against the three largest southern California retail supermarket chains~~level. We ~~estimate~~ ~~that~~define ~~approximately~~comparable ~~$40~~stores ~~million~~as ofthose ~~the~~that ~~first~~have ~~quarter~~been ~~sales increase resulted from the labor action which was settled~~ in ~~late~~operation ~~February~~for ~~2004.~~52 Wefull ~~estimate~~weeks, ~~that~~including ~~approximately 105 of our~~ stores ~~were~~that ~~favorably impacted by the labor action. During~~have ~~first~~been ~~quarter~~remodeled ~~2004,~~or werelocated ~~opened~~within ~~one~~their ~~new~~same ~~store~~market ~~and as of March 21, 2004, we operated 220 stores compared to 219 continuing operations stores at March 23, 2003~~area.

The year-to-year increase in comparable store sales was primarily attributable to an increase in our average transaction supported by promotional activities. In the second quarter 2005, the comparable average transaction increased by 4.0 percent to $43.74 from $42.06 for the second quarter 2004 while the comparable customer transaction counts increased by 0.1 percent.

The year-to-year increase in comparable stores sales of 4.1 percent is noteworthy considering that our sales in the second quarter 2004 were favorably impacted by the residual effect of a labor action directed against three southern California supermarket chains that ended in late February 2004. Furthermore, the retail grocery market in southern California has become increasingly competitive as the three major supermarket chains undergo market repositioning to rebuild their sales and market share after the labor action. Therefore, there is no assurance that our sales growth will maintain at the current level.

Gross margin

Gross margin ~~from~~represents ~~continuing~~sales ~~operations~~less ~~increased~~cost ~~$15.3~~of ~~million or 26.5 percent~~sales, tobuying ~~$73~~and occupancy.0 ~~million~~The ~~for~~major ~~first~~categories ~~quarter~~of ~~2004~~costs asincluded ~~compared~~in tocost ~~$57.7 million for~~of ~~first~~sales, ~~quarter~~buying ~~2003.~~and ~~The~~occupancy ~~increase~~are incost ~~gross~~of ~~margin~~goods, ~~was~~distribution ~~primarily~~costs, ~~related~~costs toof ~~the~~our ~~sharp~~buying ~~increase~~department ~~in sales~~ and tostore aoccupancy ~~lesser~~costs, ~~extent~~net ~~the effect~~ of ~~adopting~~earned avendor ~~new~~rebates ~~accounting~~and ~~pronouncement~~other ~~described~~allowances. ~~below~~Distribution ascosts consist of ~~June~~all ~~15,~~warehouse ~~2003.~~receiving Asand ainspection costs, ~~percentage~~warehousing ~~of sales~~costs, ~~gross margin~~all ~~increased~~transportation tocosts ~~17.2~~associated ~~percent~~with ~~for~~shipping ~~first~~goods ~~quarter~~from ~~2004~~our ~~compared~~warehouses to ~~16.3~~our ~~percent~~stores, ~~for~~and ~~first~~other ~~quarter~~costs ~~2003.~~of ~~The~~our ~~increase~~distribution ~~resulted~~network. ~~from~~We ~~improvement~~do innot ~~inventory~~exclude ~~shrinkage~~any ~~rates,~~portion ~~lower~~of ~~occupancy~~these costs asfrom acost ~~percentage~~ of sales~~, and the effect of adopting the new accounting pronouncement~~.

AsGross ofmargin ~~end~~from ofcontinuing ~~second~~operations ~~quarter 2003,~~increased ~~we adopted Financial Accounting Standards Board Interpretation (“FIN”) No~~$2.5 46million, ~~“Consolidation~~or ~~of Variable Interest Entities” which required the consolidation of our real estate synthetic lease facility not previously consolidated~~3. ~~As a result~~3 percent, weto ~~recorded approximately~~ $179.87 million offor ~~costs as interest expense in~~ the ~~first~~second quarter of2005 ~~2004 that, prior to adoption, were recorded in cost of sales~~ as ~~rental~~compared ~~expense. In addition, pursuant~~ to ~~FIN No~~$77.2 ~~46,~~million wefor ~~recorded in~~the ~~first~~second quarter 2004 ~~approximately $0~~.3 ~~million~~The ofincrease ~~depreciation expense~~ in ~~cost~~gross ofmargin ~~sales that previously~~ was ~~not recorded. When compared to first quarter 2003,~~ the ~~net~~result ~~effect~~ of ~~FIN~~increased ~~No.~~sales, 46partially tooffset ~~first~~by ~~quarter~~the ~~2004~~increased ~~was~~distribution toand ~~increase~~occupancy ~~the~~costs ~~gross margin from~~and ~~continuing~~lower ~~operations~~merchandise ~~as a percentage of sales by 0~~margins.4 ~~percent.~~

~~Operating~~As a percentage of sales, gross margin decreased to 16.5 percent for the second quarter 2005 compared to 16.9 percent for the second quarter 2004. The 0.4 percentage point decrease was partially attributable to a 0.35 percent increase in distribution costs due to increased volume, labor costs, fuel costs and ~~administrative~~expenditures ~~expenses~~associated with improving our distribution network to efficiently support the increased volume. Additionally, an approximate 0.06 percent decrease in margin was due to a sales mix change resulting from stronger sales growth in Cash & Carry stores that target only business customers and generate lower gross margins.

~~Operating~~21 and administrative expenses from continuing operations increased $7.7 million or 15.3 percent to $58.1 million for first quarter 2004 as compared to $50.4 million for first quarter 2003. The increase was largely attributable to increased labor costs, fringe benefit and incentive compensation costs, information systems costs and legal expenses. As a percentage of sales, operating and administrative expenses decreased to 13.7 percent for the 2004 first quarter from 14.2 percent for the first quarter 2003. The decrease is primarily attributable to the sharp increase in sales realized during first quarter 2004.

Operating and administrative expenses

The major categories of operating and administrative expenses include store direct expenses associated with displaying and selling at the store level (primarily labor and related fringe benefit costs) advertising and marketing costs, overhead costs and corporate office costs.

Operating and administrative expenses from continuing operations increased $3.9 million, or 6.6 percent, to $64.3 million for the second quarter 2005 as compared to $60.4 million for the second quarter 2004.

As a percentage of sales, operating and administrative expenses increased to 13.3 percent for the second quarter 2005 from 13.2 percent for the second quarter 2004. The 0.1 percent increase primarily related to a 0.37 percent increase in corporate expenses including information technology spending and legal fees, partially offset by a 0.26 percent decrease in incentive compensation costs. The second quarter 2005 expenses for store operations as a percentage of sales decreased slightly from the second quarter 2004.

Interest expense, net

Interest expense, net ~~increased~~decreased to $32.72 million for ~~first~~the second quarter ~~2004~~ 2005 as compared to $23.87 million for ~~first~~the second quarter ~~2003~~2004. The ~~increase~~year-to-year decrease was primarily due to the ~~adoption~~lower ofaverage ~~FIN~~debt ~~No.~~outstanding 46and aslower ~~discussed~~effective ~~above,~~rate ~~partially~~resulting ~~offset~~from bythe ~~lower~~expiration ~~interest~~of ~~expense~~an ~~from~~interest ~~reduced~~collar ~~average~~agreement ~~outstanding~~in ~~debt~~the ~~level~~fourth quarter 2004. At the end of ~~first~~the second quarter ~~2004~~2005, the outstanding balance on ~~our~~the revolving credit facility was $6030.0 million, as compared towith $~~124~~35.80 million at the end of ~~first~~the second quarter ~~2003, a year-to-year reduction of 51~~2004.9 ~~percent.~~

Income tax provision

Income tax expense was $4.5.2 million for ~~first~~both the second quarter ~~2004~~2005 asand ~~compared~~the tosecond $1quarter 2004.8 ~~million~~The effective tax rate for ~~first~~the second quarter ~~2003~~2005 was 39.4 ~~The~~percent ~~quarterly~~and the effective tax rate ~~increased slightly~~for tothe ~~40.0~~second ~~percent~~quarter in 2004 ~~from~~was 3940.70 percent ~~in 2003~~.

Equity earnings inof ~~unconsolidated~~joint ~~subsidiary~~venture

Our 100-percent owned subsidiary, Smart & Final de Mexico S.A. de C.V. (“Smart & Final Mexico”), is a Mexico holding company that owns 50 percent of a joint venture with the operators of the Calimax store chain. The joint venture operated ~~operates~~11 ~~ten~~ stores in Mexico as a Mexican domestic corporation as of ~~March~~June 2119, ~~2004~~2005. Our interest in the joint venture is not consolidated and is reported on the equity basis of accounting. During ~~first~~the second quarter ~~2004~~2005, the equity ~~loss~~earnings from the joint venture was $0.12 million, as compared to the ~~minor~~equity earnings of $0.5 million in ~~first~~the second quarter ~~2003~~2004.

Discontinued ~~operations~~Operations

During ~~the second quarter of~~ 2003, we ~~announced~~completed the sale and divestiture of our Florida broadline foodservice operations and our Florida stores businesses (collectively, the “Florida Operations”). ~~During the third quarter of 2003, the transactions were completed~~ and ~~the Florida Operations were sold and divested. During the third quarter of 2003, we also announced and completed the sale of~~ our broadline foodservice operations in northern ~~California (the “Northern California Foodservice~~ ~~Operations”). We retained certain residual assets and liabilities in conjunction with the sale transactions and divestitures of the Florida Operations and the Northern~~ California ~~Foodservice Operations. In accordance with the provisions related to discontinued operations specified within Statement of Financial Accounting Standards~~ (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the accompanying consolidated financial statements reflect the results of operations and financial position of the Florida Operations and the Northern California Foodservice ~~Operations separately as discontinued operations in our consolidated financial statements and in the related discussions and~~ ~~comparisons between current and prior fiscal periods.~~

2022

~~The~~ Operations”). ~~following~~This isallowed aus ~~summary~~to focus on our core store operations, concentrate our resources to strengthen our balance sheets and continue development of ~~loss~~our two store formats. We retained certain residual assets, liabilities and ~~other~~contingencies ~~information~~in ofconjunction with the ~~discontinued~~sale ~~operations~~transactions and divestitures. In accordance with the provisions of SFAS No. 144, “Accounting for the ~~periods~~Impairment or ~~presented~~Disposal of Long-Lived Assets,” inthe ~~thousands~~accompanying ~~except~~consolidated ~~per~~financial ~~diluted~~statements ~~share~~reflect ~~values.~~the ~~Totals~~results of ~~per~~operations ~~diluted~~and ~~share~~financial ~~values~~position ~~may~~of ~~not~~the ~~aggregate~~Florida ~~due~~Operations toand ~~rounding.~~the Northern California Foodservice separately as discontinued operations.

	Twelve Weeks Ended
	March 21,2004			March 23,2003
Sales	$	—		$	107,771
Pre-tax loss from operations	$	(670	)	$	(4,273	)
Income tax benefit		271			1,701
Net loss	$	(399	)	$	(2,572	)
Per diluted share:
Pre-tax loss from operations	$	(0.02	)	$	(0.14	)
Income tax benefit		0.01			0.06
Net loss	$	(0.01	)	$	(0.09	)

Loss from discontinued operations was $0.1 million, net of tax benefit of $0.1 million, for the second quarter 2005 and $0.2 million, net of tax benefit of $0.1 million, for the second quarter 2004. Loss from discontinued operations primarily represented the run-off activities in the foodservice operations.

~~Pre-tax~~Comparison ~~loss~~of ~~from discontinued~~Twenty-Four ~~operations~~Weeks ~~does~~Ended ~~not~~June ~~include~~19, ~~allocation~~2005 ofwith ~~corporate~~Twenty-Four ~~overhead~~Weeks Ended orJune ~~costs~~13, 2004.

Sales

Sales from continuing operations in the first half of 2005 were $911.7 million, an increase of 3.5 percent over the first half of 2004 sales of $881.3 million. Our first half of 2005 comparable store sales increased by 2.0 percent compared to the 2004 level. The year-to-year increase in comparable store sales was primarily attributable to an increase in our comparable average transaction of 4.6 percent to $42.89 for the first half of 2005 as compared to $40.99 for the first half of 2004 while the year-to-year comparable transaction counts decreased by 2.5 percent.

The year-to-year increase in comparable store sales of 2.0 percent is noteworthy considering that our sales in the first and second quarters of 2004 were favorably impacted by the effect of a labor action and its residual effect, against three southern California supermarket chains that ended in late February 2004.

Gross margin

Gross margin from continuing operations decreased $2.3 million, or 1.5 percent, to $147.9 million for the first half of 2005 as compared to $150.2 million for the first half of 2004. The decrease in gross margin was primarily related to increased distribution costs and lower merchandise margins.

As a percentage of sales, gross margin decreased to 16.2 percent for the first half of 2005 compared to 17.0 percent for the first half of 2004. The 0.8 percentage point decrease was partially attributable to a 0.49 percent increase in distribution costs primarily due to increased volume, labor costs and fuel costs. Other decreases included a 0.18 percent decline in merchandise margins, particularly in beverage and fresh meat, and a 0.13 percent decrease in margin due to a sales mix change resulting from strong sales growth in Cash & Carry stores that target only business customers and generate lower gross margins.

Operating and administrative expenses

Operating and administrative expenses from continuing operations increased $6.0 million, or 5.1 percent, to $124.5 million for the first half of 2005 as compared to $118.5 million for the first half of 2004.

As a percentage of sales, operating and administrative expenses increased to 13.7 percent for the first half of 2005 from 13.4 percent for the first half of 2004. The 0.3 percent increase is primarily comprised of a 0.51 percent increase in corporate expenses, including information technology spending and legal fees, and expenses for store operations, partially offset by a 0.24 percent decrease in incentive compensation costs.

Interest expense, net

Interest expense, net decreased to $4.4 million for the first half of 2005 as compared to $7.4 million for the first half of 2004. The year-to-year decrease was primarily due to the lower average debt outstanding and lower effective rate resulting from the expiration of an interest collar agreement in the fourth quarter 2004.

Income tax provision

Income tax expense was $7.4 million for the first half of 2005 as compared to $9.7 million for the first half of 2004. The effective tax rate for the first half of 2005 was 39.2 percent and the effective tax rate for the first half of 2004 was 40.0 percent.

Equity earnings of joint venture

During the first half of 2005, the equity earnings from our Smart & Final Mexico joint venture was $0.2 million, as compared to the equity earnings of $0.4 million in the first half of 2004.

Discontinued Operations

Loss from discontinued operations was $0.4 million, net of tax benefit of $0.3 million, for the first half of 2005 and $0.6 million, net of tax benefit of $0.4 million, for the first half of 2004.

Liquidity and Capital Resources

Cash flows and financial positions

Net cash provided by operating activities from continuing operations was $032.76 million in the first ~~quarter~~half of ~~2004~~2005, aan ~~decrease~~increase of $17.91 million compared to $1815.65 million in the ~~same~~comparable ~~quarter~~2004 ~~of 2003~~period. The increase or decrease in cash provided by operating activities reflects our operating performance and the timing of receipts and disbursements. In the first ~~quarter~~half of 2004, we utilized cash to increase inventory levels to support the higher sales and to achieve higher levels of store inventory “in-stock” conditions. In the first half of 2004, ~~funded~~we also utilized cash to fund the payment of a litigation settlement and ~~paid~~the ~~certain 2003~~divestiture ~~performance-based~~activities ~~compensation.~~and lower our accounts

~~Net~~24 cash provided by investing activities from continuing operations was $2.5 million in first quarter 2004 compared to $4.6 million of net cash used in investing activities in first quarter 2003. The increase in first quarter 2004, as compared to the same quarter of 2003, was primarily due to the proceeds from the redemption of a certificate of deposit and sale of certain municipal bonds and increased proceeds from disposal of closed or relocated store properties.

Net cash provided by financing activities from continuing activities was $0.3 million in first quarter 2004 compared to $5.6 million of net cash used in financing activities in the first quarter of 2003. Net cash used in financing activities in first quarter 2003 primarily reflected payments on bank debt and capital leases.

At March 21, 2004, we had cash and cash equivalents of $51.9 million, stockholders’ equity of $220.8 million and debt, excluding capital leases, of $146.8 million. Our working capital was $32.9 million at March 21, 2004, compared to $13.2 million at December 28, 2003. Included in our current liabilities is a $60.0 million obligation under our bank credit facility, which we intend to restructure prior to its expiration in November 2004 (see discussion “Bank credit facility, lease facility and other financing activities” below.)

payable balance from 2003 which was atypically higher due to our increased inventory purchases in the fourth quarter 2003 in response to the labor action in southern California. Accounts payable balance was higher at June 19, 2005, reflecting increased inventory purchases toward the end of the second quarter 2005 and the timing of related payments.

Net cash used in investing activities from continuing operations was $26.9 million in the first half of 2005 compared to net cash provided by investing activities from continuing operations of $10.0 million in the comparable 2004 period. In the first half of 2005, our capital expenditures increased by $15.4 million as compared to the first half of 2004, including property investment for future store sites, investment in store construction and equipment and investment in hardware and software to improve our information technology systems. In the first half of 2004, the redemption of a certificate of deposit and sale of certain municipal bonds and increased proceeds from disposal of closed or relocated store properties generated cash of approximately $7.2 million. For the first half of 2004, additional cash of $14.2 million was released from a real estate trust in payment for six of our owned store properties sold to the real estate synthetic lease facility discussed in “Bank credit facility, lease facility and other financial activities – Lease Agreement” below.

Net cash provided by financing activities was $4.6 million in the first half of 2005 compared to net cash used in financing activities of $24.4 million in the comparable 2004 period, primarily due to the borrowing and payment on our outstanding obligation under a revolving bank credit facility. A net borrowing of $5.0 million was made in the first half of 2005 to increase the total borrowing under this credit facility, from $25.0 million at the beginning of 2005 to $30.0 million at June 19, 2005. During the first half of 2004, there was a net payment of $25.0 million toward this credit facility and at June 13, 2004, the total borrowing under this credit facility was $35.0 million. Part of the repayment to the revolving bank credit facility during the first half of 2004 was funded by the proceeds from the sale of six of our owned store properties to the real estate synthetic lease facility discussed under “Bank credit facility, lease facility and other financing activities – Lease Agreement” below.

At June 19, 2005, we had cash and cash equivalents of $37.5 million, stockholders’ equity of $264.8 million and debt, excluding capital leases, of $116.6 million. At June 19, 2005, current assets were $221.7 million, $78.2 million more than our current liabilities of $143.5 million.

Capital expenditure and other capital requirements

Our primary requirement for capital is the financing of the building, leasehold improvements, equipment and initial set-up expenditures for new, relocated and remodeled stores, investment in capitalized software and hardware as well as general working capital requirements.

During the ~~twelve~~first ~~weeks~~half ~~ended~~of ~~March 21~~2005, ~~2004,~~ we opened ~~one~~four new ~~store~~stores. New store growth and store remodeling are planned to continue in the remainder of ~~2004~~2005. We ~~estimate~~plan ~~that~~to ~~new~~open ~~capital~~or ~~expenditures,~~relocate ~~including~~a ~~investment~~total inof ~~capitalized~~15 ~~software,~~to ~~for~~20 ~~2004~~stores ~~will~~during ~~aggregate~~2005 ~~approximately~~and ~~$37~~to ~~million.~~continue ~~However,~~at wethis ~~cannot~~pace ~~assure that~~of ~~these~~development ~~estimates~~for ~~will~~2006. beWe ~~realized~~estimate ~~and~~that ~~our~~the capital ~~program~~expenditure ~~plans~~requirement ~~are~~for improvements ~~subject~~and toequipment ~~change~~for ~~upon~~a ~~our~~new ~~further~~store ~~review~~is ~~and~~approximately ~~may~~$1.2 ~~increase~~million ifto ~~opportunities~~$2.2 ~~develop~~million. We typically enter into lease arrangements

We25 have various retirement plans, which subject us to various funding obligations. Our noncontributory pension plan covers substantially all of our full time employees. We fund this plan with contributions as required by the Employee Retirement Income Security Act of 1974. We previously disclosed in our 2003 Annual Report an expected contribution of $8.3 million to this plan in 2004. We did not make a contribution to the plan during the twelve weeks ended March 21, 2004 and continue to anticipate contributing $8.3 million to fund this plan in 2004.

for our store properties. From time to time we may purchase the properties for an additional capital investment that depends on the property location and market value. During the first quarter 2005, we made $5.3 million in property investments for our future store sites. Working capital investment related to a new store is approximately $0.2 million and primarily relates to inventory net of trade vendor accounts payable. We also plan to perform approximately ten major remodels to existing stores in 2005 which generally require capital expenditures in excess of $400,000 per major remodel. Total capital expenditures for 2005, including investment in capitalized software, are currently estimated at $50 million to $60 million. However, we cannot assure that these estimates will be realized and our capital program plans are subject to change upon our further review.

We have various retirement plans, which subject us to various funding obligations. Our noncontributory defined benefit retirement plan covers substantially all of our full time employees. We fund this plan with contributions as required by the Employee Retirement Income Security Act of 1974 (“ERISA”). As we previously disclosed in our 2004 Annual Report on Form 10-K, we are not required to make any contributions for the 2005 plan year pursuant to the minimum funding requirements of ERISA; however, we may elect to contribute up to $10.0 million to this plan in 2005. During the first half of 2005, we made a $2.0 million contribution to this plan.

Bank credit facility, lease facility and other financing activities

InAmended ~~November 2001, we entered into a $175.0 million three-year senior secured revolving credit facility (“~~Credit ~~Agreement”)~~ ~~with~~Facility a syndicate of banks. The Credit Agreement expires on November 30, 2004. At our option, the Credit Agreement can be used to support up to $15.0 million of commercial letters of credit. Availability under the Credit Agreement, as amended during the third quarter of 2003, is subject to a formula based on the value of eligible accounts receivable, inventory and real properties. Principal repayments may be required prior to the final maturity. Additionally, under certain conditions, pay-downs toward the facility are treated as permanent reductions to the amount committed. During 2003, we made pay-downs toward the Credit Agreement, primarily with the proceeds generated from the sale and divestiture of the Florida Operations and the Northern California Foodservice Operations. These pay-downs are treated as permanent reductions to the amount available. As a result, the remaining commitment under the Credit Agreement was $127.8 million at March 21, 2004. At March 21, 2004, $60.0 million of revolving loan and $5.6 million of letters of credit were outstanding and the remaining availability was $48.9 million. Interest for the Credit Agreement is at Eurodollar LIBOR or the administrative agent’s reference rate, plus designated amounts. Commitment fees are charged on the undrawn amounts at rates ranging between 0.30 percent to 0.50 percent. As of March 21, 2004, the six-month Eurodollar LIBOR rate was 1.15 percent.

InEffective November ~~2001~~18, 2004, we entered into a ~~five-year~~$150.0 ~~operating~~million ~~lease~~Amended ~~agreement~~ and Restated Credit Facility (“~~Lease~~Amended ~~Agreement~~Credit Facility”) with a ~~national~~syndicate of ~~banking~~banks. ~~association~~The Amended Credit Facility replaced a senior secured revolving credit facility. ~~Participants~~The Amended Credit Facility has a five-year term expiring on November 18, 2009. Interest for the Amended Credit Facility is at the base rate or at the reserve adjusted Eurodollar rate plus, in each case, an applicable margin. Commitment fees are charged on the ~~Lease~~undrawn ~~Agreement~~amount ~~structure~~at ~~include~~rates ~~several~~ranging ~~banks~~from ~~and~~0.15 ~~financing~~percent ~~institutions~~to as0.50 ~~well~~percent. asAt ~~Casino~~June ~~USA~~19, ~~which~~2005, ~~owned~~the 55six-month Eurodollar LIBOR rate was 2.612 percent.

22At our option, the Amended Credit Facility can be used to support up to $15.0 million of commercial letters of credit. Principal repayments may be required prior to the final maturity. Additionally, under certain conditions, pay-downs toward the facility are treated as permanent reductions to the amount committed. At June 19, 2005, $30.0 million of revolving loan and $5.6 million of letters of credit were outstanding. At June 19, 2005, we had $114.4 million available under our Amended Credit Facility.

Lease Agreement

In November 2001, we entered into a five-year operating lease agreement (“Lease Agreement”) with a national banking association as a real estate trust. Participants in the Lease Agreement structure include several banks and financing institutions as well as Casino USA. The Lease Agreement expires on November 30, 2006. At the end of the term, the Lease Agreement requires us to elect to purchase all the properties by a final payment of $86.4 million or sell all the properties to a third party. If the properties are sold to a third party and the

~~percent~~ aggregate ofsales ~~our~~price ~~common~~is ~~stock~~less atthan ~~March 21, 2004. The total Casino USA participation of~~ $3369.2 million, iswe ~~presented~~are ~~as “Notes~~obligated ~~payable~~ to ~~affiliate”~~pay inthe ~~our~~difference ~~consolidated~~of ~~balance~~the ~~sheets~~aggregate atsales ~~March~~price ~~21,~~and ~~2004~~$69.2 ~~and~~million. ~~December~~As ~~28,~~of ~~2003.~~June ~~The~~19, 2005, the Lease Agreement as amended, with a value of $86.86 million and a composite interest rate of 9.07 percent, ~~currently~~ provides for the financing of two distribution facilities and 1420 store locations~~, and additionally holds $14~~.4 million of available funds as of March 21, 2004. The $14.4 million of available funds was generated through the sale of a Florida distribution facility and a Florida store property during the process of sale and divestiture of the Florida Operations. As of March 21, 2004, the Lease Agreement was amended to allow these proceeds to be held by the real estate trust for future purchases of replacement properties. The Lease Agreement expires on November 30, 2006. At the end of the term, the Lease Agreement requires us to elect to purchase all the properties by a final payment of $86.4 million or sell all the properties to a third party. If the properties are sold to a third party and the aggregate sales price is less than $69.2 million, we are obligated to pay the difference of the aggregate sales price and $69.2 million.

~~Borrowings~~The ~~under~~Lease ~~both~~Agreement ~~the~~is ~~Credit~~considered ~~Agreement~~a variable interest entity and ~~the~~subject ~~Lease~~to consolidation ~~Agreement~~under ~~are~~Interpretation ~~collateralized~~No. by46, a“Consolidation ~~security~~of ~~interest~~Variable Interest Entities, an Interpretation of ARB No. 51”, as amended. Therefore, the related properties and notes payable are included in our consolidated balance sheets ~~receivables~~under “Property, ~~inventory~~plant and ~~owned~~equipment”, ~~properties~~“Current maturities of long-term debt and capital leases”, “Notes payable” and, for the Casino USA participation, “Notes payable to affiliate”.

~~Both~~As ~~the~~of ~~Credit Agreement~~June ~~and~~19, 2005, there was $0.1 million cash funds in the ~~Lease~~real ~~Agreement~~estate trust ~~contain~~that ~~various~~are ~~customary~~restricted ~~and~~as ~~restrictive~~to ~~covenants,~~their ~~including~~use ~~restrictions~~which were reflected on ~~cash~~our ~~dividends~~consolidated ~~declared~~balance orsheets ~~paid~~as ~~and~~“Cash ~~additional~~held ~~debt~~in ~~and~~real ~~capital~~estate ~~expenditures,~~trust.” ~~and~~These ~~require~~cash usfunds toare ~~maintain~~the ~~certain~~residual ~~fixed~~of ~~charge~~$14.3 ~~coverage~~million proceeds generated in 2003 from the sale of a Florida ~~ratios~~distribution facility and ~~other~~a ~~financial~~Florida ~~ratios~~store ~~under~~property ~~each~~previously ~~agreement.~~owned ~~The~~by ~~covenants~~the doreal ~~not~~estate ~~require~~trust usthat towere ~~maintain~~subsequently autilized ~~public~~in ~~debt~~2004 ~~rating~~for orthe apurchase ~~certain~~of ~~liquidity~~six ~~level.~~of Weour ~~are~~owned ~~currently~~store inproperties ~~compliance~~by ~~with~~the real estate trust in the ~~amended~~amount ~~covenants~~of $14.2 million.

~~The~~Collateral Credit Agreement expires on November 30, 2004, and accordingly, we have classified our obligation under the Credit Agreement as a current liability in our consolidated balance sheets. However, it is our intention to negotiate and enter into a new Credit Agreement prior to its expiration. The Lease Agreement expires on November 30, 2006, and our obligations under the Lease Agreement have been classified as long-term liabilities. We expect to remain in full compliance with the covenants through the expiration of the respective terms of the facilities.

~~Historically,~~Borrowings ~~our~~under ~~primary~~both ~~source~~the ofAmended ~~liquidity~~Credit ~~has~~Facility ~~been~~and ~~cash~~the ~~flows~~Lease ~~from~~Agreement ~~operations.~~are ~~Additionally,~~collateralized weby ~~have~~security ~~availability~~interests ~~under~~in ~~bank~~our ~~credit~~receivables, ~~facilities~~inventory and owned properties. WePrincipal ~~expect~~collateral tofor beour ~~able~~obligations tounder ~~fund~~the ~~future~~Lease ~~acquisitions~~Agreement includes specific properties and ~~other~~their ~~cash~~fixtures ~~requirements~~and byequipment, and additionally a collateral ~~combination~~position, ofsubordinate ~~available~~to ~~cash~~the Amended Credit Facility, ~~cash~~on ~~from~~receivables, ~~operations~~inventory and ~~other~~owned ~~borrowings~~properties ~~and~~not ~~proceeds~~serving ~~from the~~as ~~issuance~~principal ofcollateral ~~equity~~under ~~securities~~the Lease Agreement. WeThe ~~believe~~Amended ~~that~~Credit Facility has as principal collateral, our ~~sources~~receivables, inventory ofand ~~funds~~owned properties that are ~~adequate~~not topart ~~provide~~of ~~for~~the ~~working~~principal ~~capital,~~collateral ~~capital~~of ~~expenditures~~the Lease Agreement, and ~~debt~~has ~~service~~a ~~requirements~~subordinate ~~for~~collateral position on the ~~foreseeable~~properties ~~future~~and related assets that are the principal collateral of the Lease Agreement.

Covenants

The Amended Credit Facility and the Lease Agreement contain various customary and restrictive covenants, including restrictions on cash dividends declared or paid and additional debt and capital expenditures, and require us to maintain certain fixed charge coverage ratios and other financial ratios under each agreement. The covenants do not require us to maintain a public debt rating or a certain liquidity level.

We were in compliance with the covenants within both the Amended Credit Facility as amended and the Lease Agreement as amended as of June 19, 2005 and January 2, 2005. The Amended Credit Facility expires on November 18, 2009 and the Lease Agreement expires on November 30, 2006; accordingly, our obligations under these agreements were classified as long-term debt in our consolidated balance sheets at June 19, 2005 and January 2, 2005.

Historically, our primary source of liquidity has been cash flows from operations. Additionally, we have availability under bank credit facilities. We expect to be able to fund

future capital expenditures and other cash requirements by a combination of available cash, cash from operations and other borrowings and proceeds from the issuance of equity securities. We believe that our sources of funds are adequate to provide for working capital, capital expenditures, and debt service requirements for the foreseeable future.

New Accounting Pronouncements

~~Not~~SFAS ~~applicable~~No. 123(R)

~~Critical~~On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment”, which is a revision of SFAS No. 123, “Accounting ~~Policies~~for Stock-Based Compensation.” SFAS No. 123(R) supersedes APB No. 25, “Accounting for Stock Issued to Employees”, and amends SFAS No. 95, “Statement of Cash Flows.” Generally the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.

~~The preparation of financial statements in conformity with accounting~~SFAS ~~principles~~No. ~~generally~~123(R) ~~accepted~~permits inpublic ~~the~~companies ~~United States requires management~~ to ~~make~~adopt ~~estimates~~its ~~and~~requirements ~~assumptions~~using ~~that~~one ~~affect~~of ~~the~~two ~~reported~~methods: ~~assets, liabilities, sales and expenses in the accompanying financial~~

231. A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date.

We plan to adopt SFAS No. 123(R) using the modified prospective method beginning in fiscal year 2006.

As permitted by SFAS No. 123, we currently account for share-based payments to employees using APB Opinion 25’s intrinsic value method and as such, generally recognize no compensation cost for employee stock options. Accordingly, the adoption of SFAS No. 123(R)’s fair value method will have a significant impact on our reported results of operations. The impact of adopting SFAS No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted SFAS No. 123(R) in prior periods, the impact of that standard could reasonably be expected to have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income and earnings per share in Note 1 “Accounting Policies - Stock options” in this report. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financial cash flow, rather than as an operating cash flow

~~statements.~~ as ~~Critical~~required ~~accounting~~under ~~policies~~current ~~are~~literature. ~~those~~This ~~that~~requirement ~~require~~will ~~the~~reduce ~~most~~net ~~subjective~~operating ~~and~~cash ~~complex~~flows ~~judgments,~~and ~~often employing~~increase ~~the~~net ~~use~~financing ofcash ~~estimates~~flows ~~about~~in ~~the~~periods ~~effect~~after ~~of matters that are inherently uncertain~~adoption. While ~~These~~we ~~critical~~can ~~accounting~~not ~~policies,~~estimate ~~under~~what ~~different~~those ~~conditions~~amounts orwill ~~using~~be ~~different~~in ~~assumption~~the ~~or estimates~~future, ~~could~~the ~~show~~amount ~~materially different results on our financial condition and results~~ of ~~operations.~~such ~~Our~~excess ~~critical~~tax ~~accounting~~deductions ~~policies~~from ~~are~~option ~~described~~exercises inwere ~~“Item 7~~$0.7 ~~Management’s~~million ~~Discussion~~for ~~and~~the ~~Analysis~~first half of ~~Financial~~2005 ~~Condition~~ and ~~Results of Operations – Critical Accounting Policies” in our 2003 Annual Report~~$0.3 Inmillion for the ~~quarter~~first ~~ended~~half ~~March~~of ~~21,~~ 2004~~, we did not make any changes in our critical accounting policies~~.

24We are currently evaluating our business practices regarding the magnitude or form of share-based compensation to employees and the choice of the option-pricing model in the future. We are also analyzing other potential impacts of adopting SFAS No. 123(R) and presently, do not expect any other potential impact will be significant.

In March 2005, the SEC issued SAB No. 107, which expresses views of the SEC staff regarding the interaction between SFAS No. 123(R) and certain SEC rules and regulations. Additionally, SAB No. 107 provides the staff’s view regarding the valuation of share-based payment arrangements for public companies and interpretive guidance in implementation of SFAS No. 123(R) and disclosures in MD&A subsequent to adoption of SFAS No. 123(R). SAB No. 107 does not change the accounting required by SFAS No. 123(R).

The FASB required SFAS No. 123(R) be adopted in the first interim or annual period beginning after June 15, 2005. On April 14, 2005, the SEC issued a press release amending compliance dates for SFAS No. 123(R). Under the SEC’s new rule, SFAS No. 123(R) will become effective for us beginning in fiscal year 2006.

Interpretation No. 47

SFAS No. 154

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.” SFAS No. 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle and that a change in method of depreciation, amortization, or depletion for long-lived, nonfinancial assets be accounted for as a change in accounting estimate that is effected by a change in accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We do not believe the adoption of SFAS No. 154 will have a material impact on our results of operations or financial condition.

~~Item~~Critical 3.Accounting ~~QUANTITATIVE~~Policies ~~AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK~~

WeThe ~~are~~preparation ~~exposed~~of tofinancial ~~market~~statements ~~risks~~in ~~relating~~conformity with accounting principles generally accepted in the United States requires management to ~~fluctuations~~make estimates and assumptions that affect the reported assets, liabilities, sales and expenses in ~~interest~~the ~~rates~~accompanying financial statements. Critical accounting policies are those that require the most subjective and complex judgments, often employing the ~~exchange~~use ~~rate~~of ~~between~~estimates about the Ueffect of matters that are inherently uncertain.S. ~~Dollar~~These critical accounting policies, under different conditions or using different assumption or estimates, could show materially different results on our financial condition and ~~Mexican~~results ~~Peso~~of operations. Our ~~major~~critical ~~financial~~accounting ~~risk~~policies ~~management~~are ~~objective~~described isin to“Item ~~minimize~~7. ~~the~~Management’s ~~negative impact~~Discussion and Analysis of ~~interest~~Financial ~~rate~~Condition ~~fluctuations~~and onResults of Operations – Critical Accounting Policies” in our ~~earnings~~2004 ~~and~~Annual ~~cash~~Report ~~flows~~on Form 10-K. As of ~~March~~June 2119, ~~2004~~2005, ~~our~~we ~~exposure~~did tonot ~~foreign~~make ~~currency~~any ~~risk~~changes ~~was~~in ~~limited~~our critical accounting policies.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks relating to fluctuations in interest rates and the foreign exchange rates between the U.S. Dollar and foreign currencies primarily the Mexican Peso. Our primary market risk management objective is to minimize the negative impact of interest rate fluctuations on our earnings and cash flows. As of June 19, 2005, our exposure to foreign currency risk was limited.

Interest Rate Risk

~~Interest~~We ~~rate~~may ~~risk~~manage isinterest ~~managed~~rate risk through the use of an interest rate collar ~~agreement~~agreements to limit the effect of interest rate fluctuations onfrom ~~floating~~time ~~rate debt~~to time. We ~~The~~presently ~~agreement,~~have ~~expiring~~no program in ~~November~~place. ~~2004,~~An ~~hedges~~earlier ~~principal amounts of an aggregate of $45 million and limits the effect of LIBOR fluctuations to~~ interest rate ~~ranges~~collar ~~from 5.48% to 8.00%. This~~ agreement was ~~entered~~terminated ~~into~~in ~~with~~November ~~a major financial institution thereby minimizing risk of credit loss~~2004.

Credit Risk

We are exposed to credit risk on accounts receivable through the ordinary course of business and we perform ongoing credit evaluations. Concentrations of credit risk with respect to accounts ~~receivables~~receivable are limited due to the number of customers comprising our customer base. We currently believe our allowance for doubtful accounts is sufficient to cover customer credit risks.

Foreign Currency Risk

Our exposure to foreign currency risk is ~~primarily~~ limited to our operations under Smart & Final Mexico and the equity earnings in of its Mexico joint venture. As of ~~March~~June 2119, ~~2004~~2005, such exposure was the $5.6.8 million net investment in Smart & Final Mexico, which was comprised primarily of ~~its~~the Mexico joint venture. Our other transactions are conducted in U.S. dollars and are not exposed to fluctuations in foreign currency. We do not hedge our foreign currency exposure and therefore are not exposed to such hedging risk.

Item 4. CONTROLS AND PROCEDURES

We carried out an evaluation, under the supervision and with the participation of management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to us (including our consolidated subsidiaries) that is required to be included in our periodic Securities and Exchange Commission reports. There was no change in our internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

25Additional information regarding a report of management’s assessment of the effectiveness of our internal control as of January 2, 2005 and our independent registered public accounting firm’s report dated March 2, 2005 on management’s assessment as of January 2, 2005 were included in “Item 8. Financial Statements and Supplementary Data” of our 2004 Annual Report on Form 10-K.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

~~We have~~In ~~been~~May 2001, we were named as a defendant in a suit filed ~~on September 13, 2001~~ in the Orange County Superior Court of the State of California ~~for the County of Los Angeles~~. This suit, ~~Camacho~~Olivas vs. Smart & Final Inc., was filed by the plaintiff and another former hourly store employee, on ~~his~~their behalf and on behalf of all ~~other~~hourly store ~~managers~~employees ~~and assistant managers~~ in California, alleging that we ~~misclassified~~failed ~~the~~to ~~status~~pay ofproper ~~store~~overtime, ~~managers~~failed ~~and~~to ~~assistant~~pay ~~managers~~for inall ~~California~~hours asworked, ~~exempt~~failed ~~employees~~to pay for ~~employment~~certain ~~purposes~~meal and rest periods, and failed to pay for other compensation. The action seeks to be be classified as a “class action” and seeks unspecified monetary damages and statutory penalties thereon. On August 9, 2001, we filed a general denial to these claims and asserted numerous defenses. A hearing on plaintiff’s motion for class certification was heard and certification as to nine sub-classes was granted on January 22, 2004. We continue to believe the merits of this action do not warrant class action status and we believe we have certain defenses to the claim. The class consists of approximately 13,200 current and former hourly store employees in California and the suit covers the period May 1997 through January 2004. Discovery is now underway in the case. In February 2005, the court ordered the parties to commence mediation. In March 2005, the court set a trial date of March 6, 2006. Mediations have been held on April 27, 2005, June 6, 2005 and July 14, 2005 with no resolution to the matter reached. The court has ordered the parties to engage in further settlement discussions.

OnWe ~~February~~have ~~24,~~not ~~2003,~~recorded ~~following~~any charges anduring ~~extensive~~the ~~period~~first and second quarters of ~~investigation~~2005 ~~and~~associated ~~discovery,~~with the ~~plaintiff~~Olivas ~~filed~~action. aThis ~~motion~~case ~~for~~and ~~class~~its ~~certification.~~claims Onraise ~~May~~difficult 2,and ~~2003,~~complex wefactual ~~filed~~and ~~our~~legal ~~opposing~~issues ~~papers~~and are subject to ~~plaintiff’s~~many ~~motion~~uncertainties ~~for~~and complexities, including, but not limited to, the facts and circumstances of each particular sub-class ~~certification~~and claim and the ultimate determination of liability and the applicability of statutory penalties. WeFor certain of the sub-classes we believe there is a reasonable possibility that resolution of the ~~merits~~matter could result in a loss which could be materially in excess of ~~this~~presently ~~action~~established doreserves ~~not~~or ~~warrant~~which ~~class~~individually ~~action~~or ~~status~~in the aggregate could result in a material loss for which there is no reserve. Litigation matters are subject to inherent uncertainties; and weaccordingly, ~~believe~~with respect to the Olivas action we ~~have~~are ~~certain~~not ~~defenses~~able to quantify the ~~claim~~estimated amount or range of such additional loss or loss. However, such additional loss or loss, either individually or in the aggregate, could have a material adverse effect upon our results of operations and net cash flows in the period in which it is recorded or paid.

We have been named as a defendant in a suit filed on April 7, 2003 in the Superior Court of the State of California for the County of Los Angeles. This suit, Perea vs. Smart & Final Inc., was filed by the plaintiff, on his behalf and on behalf of all other employees who participate in the commission program in California, alleging that we improperly calculated commission payments. The action seeks to be classified as a “class action” and seeks unspecified monetary damages. We believe the merits of this action do not warrant class action status and we believe we have certain defenses to the claim.

In September 2003, we entered into a tentative settlement agreement for the resolution of the Camacho and Perea actions. In October 2003, the court consolidated the Camacho and Perea actions and, on October 27, 2003, preliminarily approved the settlement and set a fairness hearing and final court certification of the settlement for January 13, 2004. This court date was subsequently deferred to February 24, 2004. The final approval hearing for the Camacho and Perea actions was heard and granted by the court on February 26, 2004. Under the terms of the settlement, we paid into the settlement fund $7.6 million in cash during the first quarter of 2004 and will issue $1.5 million in scrip redeemable at our Smart & Final stores. Plaintiff’s attorney fees, costs and administrative expenses will be paid from the settlement amount. In addition, we will pay our own attorney fees and certain other expenses. For the purposes of settlement only, we are not contesting the class action designation.

We have been named as a defendant in a suit filed on May 24, 2001 in the Orange County Superior Court of the State of California. This suit, Olivas vs. Smart & Final Inc., was filed by the plaintiff and another former non-exempt store employee, on their behalf and on behalf of all non-exempt Smart & Final employees in California alleging that we failed to pay proper overtime and other compensation. The action seeks to be classified as a “class action” and seeks unspecified monetary damages. On August 9, 2001, we filed a general denial to these claims and asserted numerous defenses. A hearing on plaintiff’s motion for class certification was heard and certification as to nine sub-classes was granted on January 22, 2004. We are pursuing our legal remedies at both the appellate and trial court levels. We believe the merits of this action do not warrant class action status and we believe we have certain defenses to the claim.

In the second quarter of 2003, we recorded a litigation charge associated with our assessment of the ultimate resolution of the above-named actions. This charge was adjusted in the fourth quarter of 2003 to reflect our updated assessment of the ultimate resolution of the above-named actions. We did not make any adjustment to the litigation charge in the first quarter of 2004. See Note 3 of “Notes to Unaudited Consolidated Financial Statements - Litigation and Other Charges” for further discussion.

We are named as a defendant in a number of other lawsuits or are otherwise a party to certain litigation arising in the ordinary course from our operations. We do not believe that the ultimate determination of these other cases will either individually or in the aggregate have a material adverse effect on our results of operations or financial position.

~~Item~~32 ~~2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities~~

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

As described below in Part II - Item 4, “Submission of Matters to a Vote of Security Holders”, our stockholders on May 19, 2005 approved our Long-Term Equity Compensation Plan for Non-Employee Directors (the “Non-Employee Director Plan”). We sought approval of such plan because our Amended and Restated Non-Employee Director Stock Plan expired February 22, 2005. Concurrently with such approval, and in accordance with our policy regarding compensation of non-employee directors for their service as members of our Board and its committees, five of our non-employee directors each received a grant of 1,839 shares of our restricted common stock.

We intend to register all shares available for award under our Non-Employee Director Plan, including registering for resale the shares which have been issued to our non-employee directors as described above, as soon as practicable.

The shares of restricted common stock granted to our non-employee directors in May were issued in reliance upon the exemption from registration provided in Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”). Each of the non-employee directors that received such a grant is an “accredited investor”, as that term is defined in Rule 501 promulgated under the Securities Act, and was provided with all material financial and other information concerning us at the time of such grant.

Item 3. Defaults upon Senior Securities

Not applicable

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

Not applicable.

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

The Annual Meeting of Stockholders of Smart & Final Inc. was held on May 19, 2005. At the meeting, stockholders

elected eight directors, each for a term of one year to serve on our Board of Directors until the 2006 Annual Meeting of Stockholders and until their successors have been duly elected and qualified; and

approved the Long-Term Equity Compensation Plan for Non-Employee Directors.

Six of the nominees listed below were serving on our Board before the 2005 Annual Meeting and two nominees, Pascal Announ and Thierry Bourgeron had never previously served on our Board.

The votes cast for or withheld for each nominee for office as a director were as follows:


	VOTES
	For	Withheld
Pascal Announ	24,479,580	4,359,418
Thierry Bourgeron	24,479,730	4,359,268
Timm F. Crull	26,801,515	2,037,483
David J. McLaughlin	26,803,126	2,035,872
Joël-André Ornstein	24,424,325	4,414,673
Ross E. Roeder	23,757,157	5,081,841
Etienne Snollaerts	23,742,970	5,096,028
Stephen E. Watson	27,106,386	1,732,612

The votes cast for or against, as well as the number of abstentions for the approval of the Long-Term Equity Compensation Plan for Non-Employee Directors was as follows:


	VOTES			Broker Non-Vote
	For	Against	Abstentions	Broker Non-Vote
Approval of Long-Term Equity Compensation Plan For Non-Employee Directors	19,348,828	4,771,690	456,186	4,262,294

Item 5. Other Information

Not applicable.

2734

Item 6. Exhibits ~~and Reports on Form 8-K~~

(a) Exhibits:


Exhibit Number		Description of Exhibit

10.57**		Smart & Final Inc. Long-Term Equity Compensation Plan For Non-Employee Directors, incorporated by reference to Appendix B from our Definitive Proxy Statement on Schedule 14A, filed with the SEC on April 20, 2005.

10.58* **		Form of Award Agreement for Smart & Final Inc. Long-Term Equity Compensation Plan For Non-Employee Directors

10.59* **		Consulting Agreement dated May 19, 2005 between Smart & Final Inc. and Ross Roeder

31.1*		Rule 13a-14(a) / 15d-14(a) Certification of Chief Executive Officer

31.2*		Rule 13a-14(a) / 15d-14(a) Certification of Chief Financial Officer

32.1*		Section 1350 Certification of Chief Executive Officer

32.2*		Section 1350 Certification of Chief Financial Officer

ExhibitNumber		Description of Exhibit
10.49*		First Amendment to Smart & Final Non-Employee Director Stock Plan (amended & restated)
31.1*		Rule 13a-14(a) / 15d-14(a) Certification of Chief Executive Officer
31.2*		Rule 13a-14(a) / 15d-14(a) Certification of Chief Financial Officer
32.1*		Section 1350 Certification of Chief Executive Officer
32.2*		Section 1350 Certification of Chief Financial Officer

*	Filed herewith.

~~(b)~~** ~~Reports~~Management oncontracts ~~Form~~and ~~8-K~~compensatory plans, contracts and arrangements of the Company.

Date Filed		Item Reported
February 19, 2004		Attaching as an Exhibit a News Release dated February 17, 2004 regarding the appointment of Jean-Brice Hernu to board of directors, effective immediately.
February 19, 2004		Attaching as an Exhibit a News Release dated February 18, 2004 regarding the results of operations of Smart & Final Inc. for the fourth quarter ended December 28, 2003.
February 27, 2004		Attaching as an Exhibit a News Release dated February 26, 2004 regarding the succession plans for Chief Executive Officer.

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.

	~~SMART & FINAL INC.~~		SMART & FINAL INC.
Date: April 27, 2004	By:	/s/ RICHARD N. PHEGLEY
Date: July 20, 2005			By:	/s/ RICHARD N. PHEGLEY
		~~Richard N. Phegley~~		Richard N. Phegley
		~~Senior Vice President and~~		Senior Vice President and
		~~Chief Financial Officer~~		Chief Financial Officer

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