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 ~~June 19~~March 26, ~~2005~~2006

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

For the transition period from to

Commission File Number 001-10811

SMART & FINAL INC.

(Exact name of registrant as specified in its charter)

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

600 Citadel DriveCity of Commerce, California		90040
600 Citadel Drive City of Commerce, California		90040
(Address of principal executive offices)		(Zip 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 a large accelerated filer, an accelerated filer, ~~(as~~or ~~defined~~a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act). ~~Yes x No ¨.~~

AsLarge ofaccelerated ~~July~~filer ¨ Accelerated ~~15,~~filer x Non-accelerated ~~2005,~~filer ¨ ~~the registrant had outstanding 30,998,515 shares of common stock.~~

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

As of April 26, 2006, the registrant had outstanding 31,623,803 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 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	19
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	3028
Item 4.	Controls and Procedures	3129
Part II	OTHER INFORMATION
Item 1.	Legal Proceedings	3230
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 1A.	Risk Factors	30
Item 3.	Defaults upon Senior Securities	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 4.	Submission of Matters to a Vote of Security Holders	33
Item 3.	Defaults upon Senior Securities	31
Item 5.	Other Information	34
Item 4.	Submission of Matters to a Vote of Security Holders	31
Item 6.	Exhibits	35
Item 5.	Other Information	31
SIGNATURES		36
Item 6.	Exhibits	32
SIGNATURES		33

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 meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. 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;

•

inability to fund or execute our store expansion plan;

• interruption of the supply chain 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.; and

~~Many~~• ofimplementation ~~these factors are beyond our control. Comparability~~ of ~~current~~key ~~and~~information ~~future~~system ~~operating~~initiatives ~~trends~~ and ~~results~~their ~~may be also impacted by other important factors, including the~~ effect ofon 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~~operations. 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” of our 2004 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.

Many of these factors are beyond our control. Current and future operating trends and results may be impacted by other important factors.

Additionally, we have engaged a financial advisor to assist us in studying potential strategic alternatives. There can be no assurance as to the timing of this process or that any specific transaction will result.

Furthermore, there can be no assurance that we will not incur new or additional unforeseen costs in connection with the ongoing conduct of our business, including costs associated with the study of potential strategic alternatives. 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 Part I, Item 1A. “Risk Factors” of our 2005 Annual Report on Form 10-K. Except as specifically set forth below in Part II, Item 1A. “Risk Factors” and in Part II, Item 5. “Other Information” for material changes, if applicable, during the quarter ended March 26, 2006, 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)

	June 19,2005			January 2,2005
	March 26,2006			January 1,2006
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	3733,~~544~~327		$	2831,~~672~~887
Accounts receivable, less allowance for doubtful accounts of $226 in 2005 and $254 in 2004		12,638			16,717
Accounts receivable, less allowance for doubtful accounts of $256 in 2006 and $273 in 2005		12,521			18,410
Inventories		~~143~~158,~~952~~408			~~142~~158,~~360~~553
Prepaid expenses and other current assets		1315,~~780~~536			16,~~428~~333
Deferred tax assets		1113,~~646~~161			1113,~~646~~036
Assets of discontinued operations		2,131			2,129
Assets held for sale		2,129			2,129
Total current assets		~~221~~235,~~691~~082			~~217~~240,~~952~~348
Property, plant and equipment:
Land		7170,~~603~~858			6670,~~275~~860
Buildings and improvements		62,~~583~~306			62,~~583~~335
Leasehold improvements		~~127~~137,~~279~~211			~~125~~137,~~206~~467
Fixtures and equipment		~~200~~212,~~878~~862			~~194~~209,~~554~~751
		462,343			448,618
		483,237			480,413
Less – Accumulated depreciation and amortization		~~209~~227,~~910~~987			~~197~~221,~~443~~951
Net property, plant and equipment		~~252~~255,~~433~~250			~~251~~258,~~175~~462
Assets under capital leases, net of accumulated amortization of $7,610 in 2005 and $7,669 in 2004		1,796			2,085
Assets under capital leases, net of accumulated amortization of $5,220 in 2006 and $5,106 in 2005		1,309			1,423
Goodwill		34,775			34,775
Deferred tax assets		1828,~~271~~749			1828,~~237~~749
Equity investment in joint venture		67,~~465~~766			67,~~258~~481
Cash held in real estate trust		~~118~~120			~~116~~120
Other assets		6067,~~047~~479			5666,~~833~~960
Total assets	$	~~595~~630,~~596~~530		$	~~587~~638,~~431~~318
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt and capital leases	$	153,~~154~~997		$	154,~~353~~076
Accounts payable		93,857			83,103
Notes payable to affiliate		33,141			33,146
Accrued salaries and wages		12,874			20,166
Accounts payable		92,331			99,694
Other accrued liabilities		34,212			47,863
Accrued salaries and wages		14,270			19,898
Liabilities of discontinued operations		1,436			2,476
Other accrued liabilities		35,293			56,251
Total current liabilities		143,533			154,961
Liabilities of discontinued operations		990			1,101
Total current liabilities		230,022			264,166
Long-term liabilities:
Obligations under capital leases		21,~~273~~712			21,~~638~~848
Bank debt		3040,000			2520,000
Notes payable		53,336			53,396
Other long-term liabilities		35,903			35,086
Notes payable to affiliate		33,134			33,133
Postretirement and postemployment benefits		43,382			43,275
Other long-term liabilities		31,190			30,324
Total long-term liabilities		120,997			100,209
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; 31,171,056 shares issued and outstanding in 2005 and 30,752,118 in 2004)		312			308
Common stock, $0.01 par value (authorized 100,000,000 shares; 32,278,102 shares issued and outstanding in 2006 and 31,903,478 in 2005)		320			319
Additional paid-in capital		~~223~~235,~~127~~101			~~219~~231,~~768~~775
Retained earnings		5770,~~443~~035			4667,~~157~~523
Accumulated other comprehensive loss		(1215,~~305~~805	)		(1215,~~361~~822	)
Notes receivable for common stock		(18	)		(7518	)
Treasury stock, at cost, 261,725 shares in 2005 and 86,475 in 2004		(3,710	)		(1,384	)
Treasury stock, at cost, 751,432 shares in 2006 and 729,475 in 2005		(10,122	)		(9,834	)
Total stockholders’ equity		~~264~~279,~~849~~511			~~252~~273,~~413~~943
Total liabilities and stockholders’ equity	$	~~595~~630,~~596~~530		$	~~587~~638,~~431~~318

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

SMART & FINAL INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands, except per share amounts)

Twelve Weeks Ended

~~Twenty-four Weeks Ended~~

June 19,2005

June 13,2004

June 19,2005

June 13,2004

March 26,2006

March 27,2005

(Unaudited)

~~(Unaudited)~~

Sales

~~484~~446,~~105~~779

~~457~~427,~~794~~625

~~911,730~~

~~881,267~~

Cost of sales, buying and occupancy

~~404~~375,~~373~~962

~~380~~359,~~603~~450

~~763,823~~

~~731,101~~

Gross margin

7970,~~732~~817

7768,~~191~~175

~~147,907~~

~~150,166~~

Operating and administrative expenses

64,~~324~~720

60,~~352~~217

~~124,541~~

~~118,462~~

Income from operations

156,~~408~~097

167,~~839~~958

~~23,366~~

~~31,704~~

Interest expense, net

2,~~171~~405

32,~~722~~209

~~4,380~~

~~7,411~~

Income from continuing operations before income taxes

133,~~237~~692

135,~~117~~749

~~18,986~~

~~24,293~~

Income tax provision

(51,~~211~~443

)

(52,~~247~~238

)

~~(7,449~~

)

~~(9,721~~

)

Equity earnings of joint venture

165

460

155

354

Equity earnings (loss) of joint venture

263

(10

)

Income from continuing operations

82,~~191~~512

83,~~330~~501

~~11,692~~

~~14,926~~

Discontinued operations, net of tax

~~(100~~—

)

(~~221~~306

)

~~(406~~

)

~~(620~~

)

Net income

82,~~091~~512

83,~~109~~195

~~11,286~~

~~14,306~~

Earnings per common share*

Earnings (loss) per common share:

Earnings per common share from continuing operations

0.2708

0.2811

~~0.38~~

~~0.50~~

Loss per common share from discontinued operations

—

(0.01

)

~~(0.01~~

)

~~(0.02~~

)

Earnings per common share

0.2608

0.2710

~~0.37~~

~~0.48~~

Weighted average common shares

3031,~~742~~111,~~029~~983

30,~~051~~640,~~810~~607

~~30,691,318~~

~~29,961,360~~

Earnings per common share, assuming dilution*

Earnings (loss) per common share, assuming dilution:

Earnings per common share, assuming dilution, from continuing operations

0.2608

0.2611

~~0.36~~

~~0.48~~

Loss per common share, assuming dilution, from discontinued operations

—

(0.01

)

~~(0.01~~

)

~~(0.02~~

)

Earnings per common share, assuming dilution

0.2508

0.2610

~~0.35~~

~~0.46~~

Weighted average common shares and common share equivalents

31,~~830~~811,~~075~~594

3132,~~557~~273,~~253~~240

~~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)

	Twenty-four Weeks Ended
	Twelve Weeks Ended
	June 19,2005			June 13,2004
	March 26,2006			March 27,2005
	(Unaudited)
Cash Flows from Operating Activities:
Income from continuing operations	$	112,~~692~~512		$	143,~~926~~501
Adjustments to reconcile income from continuing operations to net cash provided by continuing activities:
Adjustments to reconcile income from continuing operations to net cash (used in) provided by continuing activities:
Gain on disposal of property, plant and equipment		(35	)		(600	)
Asset impairment, at gross		142			—
Depreciation		8,464			8,400
Loss (gain) on disposal of property, plant and equipment		1			(30	)
Amortization		6,309			5,987
Depreciation		4,296			4,171
Amortization of deferred financing costs		132			1,326
Amortization		3,832			2,731
Deferred tax (benefit) provision		(33	)		478
Amortization of deferred financing costs		115			66
Equity earnings of joint venture		(155	)		(354	)
Share-based compensation		338			141
Excess tax benefit from share-based compensation		(438	)		—
Deferred tax benefit		(124	)		(33	)
Equity (earnings) loss of joint venture		(263	)		10
Decrease (increase) in:
Accounts receivable		46,~~079~~064			23,~~126~~298
Inventories		~~(1,592~~145	)		(~~6,944~~300	)
Prepaid expenses and other assets		21,~~063~~024			~~5,556~~513
Increase (decrease) in:
Accounts payable		10(7,~~754~~362	)		(5,~~068~~898	)
Accrued salaries and wages		(75,~~292~~628	)		~~292~~(8,866	)
Other accrued liabilities		(117,~~813~~739	)		~~(10,660~~44	)
Net cash provided by continuing activities		32,573			15,465
Net cash (used in) provided by continuing activities		(13,085	)		11,144
Net cash used in discontinued activities		~~(1,447~~—	)		(~~2,444~~775	)
Net cash provided by operating activities		31,126			13,021
Net cash (used in) provided by operating activities		(13,085	)		10,369
Cash Flows from Investing Activities:
Acquisition of property, plant and equipment		(216,~~749~~227	)		(612,~~962~~943	)
Proceeds from disposal of property, plant and equipment		2122			~~2,662~~17
Investment in capitalized software		(51,~~025~~317	)		(42,~~451~~402	)
Change in cash held in real estate trust		(2—	)		~~14,241~~(1	)
Other		(9714	)		~~4,559~~(90	)
Net cash (used in) provided by continuing activities		(26,852	)		10,049
Net cash used in investing activities		(7,536	)		(15,419	)
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		(520,000	)		(305,000	)
Borrowings on bank line of credit		1040,000			510,000
Payments on notes payable		(~~622~~219	)		(~~900~~320	)
Proceeds from issuance of common stock, net of costs		220			1,513
Excess tax benefits from share-based compensation		438			—
Net cash provided by (used in) financing activities		4,598			(24,387	)
Stock repurchases		(289	)		—
Increase (decrease) in cash and cash equivalents		8,872			(913	)
Proceeds from issuance of common stock, net of costs		2,131			197
Cash and cash equivalents at beginning of the period		28,672			36,592
Net cash provided by financing activities		22,061			4,877
Cash and cash equivalents at end of the period	$	37,544		$	35,679
Increase (decrease) in cash and cash equivalents		1,440			(173	)
Cash and cash equivalents at beginning of the period		31,887			28,672
Cash and cash equivalents at end of the period	$	33,327		$	28,499

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

SMART & FINAL INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.	Accounting Policies

Basis of presentation

Smart & Final Inc. is a Delaware corporation and at ~~June 19~~March 26, ~~2005~~2006 was a 5452.09 percent owned subsidiary of Casino USA, Inc. (“Casino USA”), a California corporation. References in this report to “we”,” “our” and “us” are to Smart & Final Inc. and its subsidiaries, collectively.

Casino Guichard-Perrachon, S.A. (“Groupe Casino”), a publicly traded French joint stock limited liability company, is the principal shareholder of Casino USA. Collectively, Groupe Casino and its subsidiaries own approximately 5655.98 percent of our common stock as of ~~June 19~~March 26, ~~2005~~2006.

The accompanying consolidated financial statements are unaudited except for the consolidated balance sheet as of January 1, 22006, ~~2005~~ which was derived from audited financial statements. InThese unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements, and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Securities Act of 1933, as amended. 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~~2005 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.~~

Treasury stock

~~Our~~On ~~Long-Term~~September 14, ~~Equity~~2005, ~~Compensation~~our ~~Plan~~Board of ~~permits~~Directors authorized the ~~exercise~~repurchase ~~price~~ of ~~options~~up ~~granted~~to ~~under~~$20.0 ~~this~~million ~~plan~~of toour becommon ~~paid~~stock by(the ~~our~~“Repurchase ~~acceptance~~Program”). ofThe ~~our~~repurchases ~~common~~have ~~stock previously~~been ~~held~~made byin the ~~participants~~open ~~exercising~~market ~~the~~or ~~options.~~in Inprivately ~~connection~~negotiated ~~with~~transactions, ~~any~~at ~~option~~management’s ~~exercise,~~discretion according ~~the~~to ~~plan~~market ~~also~~conditions ~~allows~~and usthe toprice ~~accept~~of our common stock. ~~resulting~~The ~~from~~Repurchase ~~the~~Program ~~option~~will ~~exercise~~expire ~~and/or~~December 31, ~~cash~~2006 inor ~~payment~~earlier ofif ~~applicable~~the ~~payroll~~$20.0 ~~taxes~~million ~~due~~aggregate cap on the ~~transactions~~ repurchase is achieved. ~~These~~Additionally, ~~shares~~authorizations ~~are~~under ~~recorded~~the Repurchase asProgram ~~“Treasury~~may ~~Stock”~~be ~~using~~amended ~~the~~or ~~cost~~terminated ~~method~~at ~~under~~any ~~“Stockholders’~~time ~~equity”~~by onaction of our ~~consolidated~~Board ~~balance~~of ~~sheets~~Directors.

AtOur ~~the~~Long-Term ~~beginning~~Equity ofCompensation ~~our fiscal year 2005~~Plan, as ~~the~~amended ~~balance~~and ofrestated (the ~~treasury~~“Equity ~~stock~~Compensation ~~was $1.4 million~~Plan”), orpermits ~~86,475 shares of our common stock, representing~~ the ~~shares we accepted from our Chairman upon his option~~ exercise ~~during~~price ~~2004.~~of ~~During~~options ~~the~~granted 24under ~~weeks~~this ~~ended~~plan ~~June 19, 2005, our Chairman exercised options~~ to ~~purchase~~be ~~247,750 shares of our common stock. The exercise price for the options was~~ paid by our ~~Chairman’s~~acceptance ~~transfer to us~~ of ~~153,750 shares of~~ our common stock previously held by ~~him~~the participants exercising the options. In connection with ~~the~~any ~~stock~~ option ~~exercises~~exercise, wethe plan also ~~accepted~~allows ~~from~~us ~~our~~to ~~Chairman~~accept ~~21,500 shares of~~ our common stock resulting from the ~~exercises,~~option ~~plus~~exercise and/or cash ~~for a remainder amount,~~ in payment of applicable payroll taxes due on the ~~transaction~~transactions. ~~These~~

We record the repurchase of our common stock, as well as our common stock accepted from stock option ~~shares~~exercises, ~~were~~as ~~recorded~~“Treasury stock” under “Stockholders’ equity” on our consolidated balance sheets using the cost method. atAt athe ~~cost~~beginning ~~per-share-price~~of our fiscal year 2006, the balance of treasury stock was $139.658 ~~for~~million, 45or 729,~~250~~475 shares of common stock, representing 181,329 shares ~~and~~of our common stock repurchased for an aggregate cost $132.144 ~~for~~million ~~130~~and 548,~~000~~146 shares of our common stock accepted in connection with stock option exercises for an aggregate of $7.4 million. During the 12 weeks ended March 26, 2006, we repurchased 21,957 shares of our common stock at an average cost of $13.14 per share for aan ~~total~~aggregate of $20.3 million. At ~~June 19~~March 26, ~~2005~~2006, the balance of treasury stock was $310.71 million, or 751,432 shares of our common stock.

~~Stock options~~Share-based compensation

InEffective ~~1996~~beginning January 2, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004) “Share-Based Payment,” which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation,.” We adopted SFAS No. 123(R) using the modified prospective application method, under which ~~encourages~~compensation cost is recognized beginning with the effective date based on (a) the requirements of SFAS No. 123(R) for all share-based payment awards granted after the effective date and (b) based on the requirements of SFAS No. 123 for awards granted to employees prior to the effective date that remain unvested on the effective date. Accordingly, prior period amounts are not restated. Generally the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123, which encouraged, but ~~does~~did not require, the recognition of compensation expense for employee stock-based compensation arrangements using the fair value method of accounting. InHowever, ~~December~~SFAS ~~2002,~~No. 123(R) requires all share-based payments to be recognized in the ~~Financial~~income ~~Accounting~~statement ~~Standards~~based ~~Board~~on ~~(“FASB”)~~their ~~issued~~fair ~~SFAS~~values. NoPro forma disclosure is no longer an alternative. ~~148,~~Cash ~~“Accounting~~retained ~~for~~as ~~Stock-Based~~a ~~Compensation~~result -of ~~Transition~~the ~~and~~tax ~~Disclosure~~deductibility -of anincreases ~~amendment~~in the value of ~~FASB~~the ~~Statement~~share-based ~~No.~~payment, ~~123.” SFAS~~or ~~No.~~excess ~~148~~tax ~~amends~~benefit, ~~SFAS~~should ~~No.~~be ~~123~~reported toas ~~provide~~a ~~alternative~~cash ~~methods~~inflow offrom ~~transition~~financing ~~for~~activities, ~~companies~~as ~~that~~well ~~change~~as a cash outflow from ~~the~~operating ~~intrinsic~~activities. ~~value~~In ~~method~~March to2005, the ~~fair~~Securities ~~value~~and ~~method~~Exchange ofCommission ~~accounting~~(“SEC”) ~~for~~issued ~~stock-based~~Staff ~~compensation~~Accounting ~~and~~Bulletin ~~requires~~No. 107, ~~additional~~which ~~disclosure~~expresses views of ~~pro forma~~the ~~information~~SEC ~~when~~staff aand ~~company~~provides ~~uses~~interpretive guidance regarding the application ~~intrinsic~~of ~~value~~SFAS ~~method~~No. 123(R).

We ~~account~~currently ~~for~~have ~~stock~~two active share-based compensation ~~using~~plans, the ~~intrinsic~~Equity ~~value~~Compensation ~~method~~Plan aswith 5,100,000 ~~allowed~~shares ~~under~~of ~~Accounting~~our ~~Principles~~common ~~Board~~stock ~~Opinion~~authorized ~~No.~~for 25awards ~~“Accounting~~and the Long-Term Equity Compensation Plan for ~~Stock~~Non-Employee ~~Issued~~Directors towith ~~Employees~~375,000 shares authorized for awards.” ~~Disclosures~~The numbers of ~~pro~~shares ~~forma~~available ~~information~~under ~~regarding~~both ~~net~~plans increase each year by the ~~income~~total number of awards exercised and/or ~~earnings~~in ~~per~~the ~~share~~case ~~are~~of ~~required~~restricted stock awards, vested, under ~~SFAS~~each ~~No.~~plan ~~123,~~not ~~which~~exceeding ~~uses~~the maximum amounts prescribed by the ~~fair~~plans. ~~value~~Under ~~method~~these plans, asoptions ~~well~~and asstock ~~the~~appreciation ~~additional~~rights ~~disclosure~~(“SAR”) ~~requirements~~are generally ~~required~~granted ~~under~~at ~~SFAS~~a ~~No.~~price ~~148.~~equal ~~The~~to the fair market value of ~~each~~our ~~option~~common stock on the date of grant, ~~was~~vesting ~~estimated~~over ona four-year period beginning one year from the date of grant ~~using~~, ~~the~~and ~~Black-Scholes~~have ~~option~~a ten-~~pricing~~year ~~model~~term ~~with~~for the ~~following~~options ~~weighted~~and an eight-~~average~~year ~~assumptions:~~term for the SAR. Restricted stock granted under these plans may have different terms. Currently, new shares are issued upon exercises of options and SAR. We also offer an Employee Stock Purchase Plan (the “ESPP”) to all associates, except officers, who are at least 18 years old.

	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~~Under ~~following~~the isESPP, the ~~pro~~associates ~~forma~~purchase ~~information~~our ~~had~~common stock at the fair market value ~~method~~through ~~under~~regular ~~SFAS~~payroll Nodeductions. ~~123,~~We pay asthe ~~amended~~commission ~~by SFAS~~and Nofees for such stock purchases. ~~148,~~Our ~~been~~ESPP ~~adopted~~does not provide more favorable terms nor does it provide a purchase discount plus fees paid of greater than five percent. Accordingly, ~~dollars~~we indetermined ~~thousands~~that ~~except~~our ~~per~~ESPP ~~share~~qualifies ~~amounts:~~as a noncompensatory plan under SFAS No. 123(R).

	Twelve Weeks Ended				Twenty-four Weeks Ended
	June 19,2005		June 13,2004		June 19,2005		June 13,2004
Net income as reported	$	8,091	$	8,109	$	11,286	$	14,306
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		261		35		297		77
Deduct: Total stock-based compensation expense determined under fair value method for all awards, net of related tax effects		371		393		752		737
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

Prior to the adoption of SFAS No. 123(R), we applied Accounting Principles Board Opinion (“APB”) No. 25 “Accounting for Stock Issued to Employees” and accounted for share-based compensation using the intrinsic value method at the date of grant and provided disclosures of pro forma information regarding net income and earnings per share. Under APB No. 25, we only recorded costs related to restricted stock or when award modifications resulted in cost recognition.

~~The~~Had ~~impact~~we ofpreviously ~~applying SFAS~~recognized ~~No.~~share-based ~~123,~~compensation costs based on the fair value method as ~~amended~~prescribed by SFAS No. ~~148~~ 123, inpreviously ~~this~~reported ~~pro~~net ~~forma~~income, ~~disclosure~~basic isearnings ~~not~~per ~~necessarily~~share ~~indicative~~and ofdiluted ~~the~~earnings ~~effect~~per onshare would ~~income~~have inbeen the ~~future.~~pro ~~SFAS~~forma ~~No.~~amounts ~~123,~~shown ~~as amended by SFAS No. 148~~below, ~~does~~dollars ~~not~~in ~~apply~~thousands toexcept ~~awards~~per ~~granted~~share ~~prior~~amounts: ~~to 1995.~~

On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment.” 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. In March 2005, the U.S. Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 107, which expresses views of the SEC staff and provides interpretive guidance regarding the application of SFAS No. 123(R). Additional discussion regarding SFAS No. 123(R) and SAB No. 107 is included in Note 2 “New Accounting Pronouncements” below.


	Twelve Weeks Ended
	March 26, 2006		March 27, 2005
Net income as reported	$	2,512	$	3,195
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		187		71
Deduct: Total stock-based compensation expense determined under fair value method for all awards, net of related tax effects		187		401

Pro forma net income	$	2,512	$	2,865

Earnings per common share:
Basic, as reported	$	0.08	$	0.10

Basic, pro forma	$	0.08	$	0.09

Diluted, as reported	$	0.08	$	0.10

Diluted, pro forma	$	0.08	$	0.09

~~Earnings~~The ~~per~~reported ~~common~~and pro forma information for the 12 weeks ended March 26, 2006 in the table above are the same since share-based compensation cost is calculated under the provisions of SFAS No. 123(R). These amounts for the 12 weeks ended March 26, 2006 are included in the table above only to provide the details for a comparative presentation to the 12 weeks ended March 27, 2005.

~~Earnings~~Upon ~~per~~adoption ~~common~~of ~~share~~SFAS isNo. 123(R), ~~calculated~~we ~~based~~selected on the ~~weighted~~Black-Scholes ~~average common~~multiple ~~shares~~option-pricing ~~outstanding.~~model ~~Earnings~~to ~~per~~determine ~~common~~the ~~share,~~grant ~~assuming~~date ~~dilution,~~fair isvalue ~~based~~for oneach ~~the~~stock ~~weighted~~option ~~average common shares~~ and ~~common~~SAR ~~share~~grant. ~~equivalents~~The ~~outstanding.~~Black-Scholes ~~Common~~multiple ~~share~~option-pricing ~~equivalents~~model ~~relate~~requires toextensive ~~stock~~use ~~options~~of ~~for~~subjective ~~our~~assumptions. ~~common~~Application ~~stock~~of ~~and~~alternative ~~restricted~~assumptions ~~stock.~~could produce ~~The~~significantly ~~number~~different estimates of ~~shares~~the ~~issued~~fair ~~upon~~value ~~exercise~~of ~~during~~share-based compensation and consequently, the 24related ~~weeks~~amounts ~~ended~~recognized ~~June~~in ~~19,~~our ~~2005~~consolidated ~~was~~statement ~~333,910~~of operations.

InWe ~~accordance~~reported ~~with~~the ~~SFAS~~share-based ~~No.~~compensation ~~128,~~under “~~Earnings~~Operating ~~Per~~and ~~Share,~~administrative expenses” on our consolidated statements of operations and under “Additional paid-in capital” in the ~~following~~“Stockholders’ ~~table~~equity” ~~reconciles~~section on our consolidated balance sheets. We recognized share-based compensation costs of $0.3 million for the ~~amounts~~first ~~utilized~~quarter to2006 ~~calculate~~and ~~earnings~~$0.1 ~~per~~million ~~common~~for ~~share~~the first quarter 2005. The related income tax benefit recognized was $0.1 million for the first quarter 2006 and ~~earnings~~insignificant for the first quarter 2005. The net impact of adopting SFAS No. 123(R) on our income from continuing operations and net income for the first quarter 2006 was $0.1 million, or $0.00 per ~~common~~diluted share. This net impact represents compensation related to the stock option and SAR awards that would have not been recognized under SFAS No. 123 and does not include compensation related to the restricted stock awards and award modifications that have always been recognized. The remaining unrecognized compensation cost related to the nonvested awards at March 26, 2006 ~~assuming~~was ~~dilution:~~$4.8 million to be recognized over a weighted-average period of 2.87 years. Of this remaining cost, $2.1 million is related to the stock options and SAR award that would have not been recognized under SFAS No. 123.

	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

During 2005 we modified and accelerated the vesting of 438,200 shares of unvested stock options to reduce the future expense to be recognized after the adoption of SFAS No. 123(R). The expense recognized in 2005 as a result of this modification was immaterial. Additionally, in the first quarter 2006, we reduced the stock option grants, awarded SAR grants for the first time and used only service term as the vesting condition for the new restricted stock grants.

2.Stock ~~New~~option ~~Accounting~~and ~~Pronouncements~~ SAR

~~SFAS~~The ~~No.~~table ~~123(R)~~below details the weighted average assumptions used for the stock option and SAR grants issued in the periods presented and their weighted average fair value derived from the Black-Scholes multiple option-pricing model.

On December 16, 2004, the FASB 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 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.


	Twelve Weeks Ended
	March 26, 2006			March 27, 2005
Dividend yield		0.0	%		0.0	%
Expected volatility		41	%		39	%
Risk-free interest rates		4.6	%		4.2	%
Weighted average expected terms
Executives		5.12 years			5.15 years
Non executives		4.94 years			4.82 years
Weighted average grant date fair value	$	6.22		$	6.26

We applied the same valuation methodologies and assumptions used in estimating the fair value of share-based compensation for pro forma disclosures under SFAS No. 123 upon adoption of SFAS No. 123(R). ~~permits~~The ~~public~~expected ~~companies~~volatility towas ~~adopt~~based ~~its~~on ~~requirements~~the ~~using~~daily ~~one~~historical volatility of our publicly traded common stock for a period equal to the grant’s expected life. The risk-free interest rate was based on the traded zero-coupon U.S. Treasury bond with a term equal to the grant’s expected life. The expected term of ~~two~~the ~~methods:~~grant was estimated using the historical exercise

1. 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.

2. 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.

Webehavior ~~plan~~of toassociates ~~adopt~~refined ~~SFAS~~between Nothe executive associate group and the non-executive associate group. ~~123(R)~~The ~~using~~expected term was determined to equal the ~~modified~~award ~~prospective~~vesting ~~method~~periods ~~beginning~~plus inthe ~~fiscal~~historical ~~year~~average ~~2006~~of each group from vesting date to exercise date. We also estimated forfeitures in calculating the cost related to share-based compensation as opposed to recognizing these forfeitures as they occur.

AsThe ~~permitted~~following bytable ~~SFAS~~summarizes ~~No.~~the ~~123,~~stock weoption ~~currently account for share-based payments to employees using APB Opinion 25’s intrinsic value method~~ and asSAR ~~such,~~transactions ~~generally recognize no compensation cost~~ for ~~employee stock options. Accordingly,~~ the ~~adoption~~12 ofweeks ~~SFAS No. 123(R)’s fair value method will have a~~ended 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. HoweverMarch 26, ~~had we adopted SFAS No. 123(R) in prior periods~~2006, ~~the~~dollars ~~impact of that standard could reasonably be expected to have approximated the impact of SFAS No. 123 as described~~ in ~~the~~thousands ~~disclosure~~except ofweighted ~~pro~~average ~~forma~~exercise ~~net~~price: 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.

We 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.


Options and SAR	Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at January 1, 2006	3,434,236	$	9.79
Granted	243,400		14.39
Exercised	275,824		8.36
Forfeited or expired	12,919		7.72

Outstanding at March 26, 2006	3,388,893	$	10.24	6.34 Years	$	21,324

Exercisable at March 26, 2006	2,575,236	$	10.66	5.91 Years	$	15,189

InThe ~~March~~intrinsic ~~2005,~~value ~~the~~of ~~SEC~~a ~~issued~~stock ~~SAB~~option ~~No.~~or ~~107,~~SAR ~~which~~is ~~expresses~~the ~~views~~amount ofby which the ~~SEC~~market ~~staff~~value ~~regarding~~of the underlying ~~interaction~~stock ~~between~~exceeds ~~SFAS~~the ~~No. 123(R)~~exercise ~~and~~price ~~certain~~of ~~SEC~~the ~~rules~~option ~~and~~or ~~regulations~~SAR. ~~Additionally,~~The ~~SAB~~total ~~No.~~intrinsic ~~107~~value ~~provides~~of ~~the~~options ~~staff’s~~exercised ~~view~~was ~~regarding~~$1.8 million for the ~~valuation~~first ofquarter ~~share-based~~2006 ~~payment~~and ~~arrangements~~$1.6 million for ~~public~~the ~~companies~~first ~~and~~quarter ~~interpretive~~2005. ~~guidance~~Cash inreceived ~~implementation~~from exercise of ~~SFAS~~stock Nooptions was $2.3 ~~123(R)~~ million and ~~disclosures~~the intax ~~MD&A~~benefit ~~subsequent~~related to ~~adoption~~stock ofoptions ~~SFAS~~exercised ~~No.~~was ~~123(R)~~$0.7 ~~SAB~~million Noduring the first quarter 2006. ~~107~~Total ~~does~~fair ~~not~~value ~~change~~for options vested was $0.7 million during the ~~accounting~~first ~~required~~quarter by2006 ~~SFAS~~and No$0.9 ~~123(R)~~million during the first quarter 2005. No SAR were exercised during the first quarter 2006 and there were no exercisable SAR at March 26, 2006.

~~The~~Restricted ~~FASB~~stock 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~~We measure the restricted stock grant based on the grant date fair market value of our common stock, generally the grant date closing price as defined within the plans. We do not expect any forfeiture from the restricted stock awards outstanding at the effective date for which we had recognized the costs for the elapsed term prior to the effective date of SFAS 123(R). Accordingly, upon the adoption of SFAS No. 123(R), 47we did not record any cumulative effect adjustment to reverse part of those compensation costs recognized prior to the effective date. We used to recognize deferred compensation as a contra-equity account representing the amount of unrecognized restricted stock expense that was reduced as expense was recognized. Under the provisions of SFAS No. 123(R), the recording of deferred compensation is not permissible and we were required to reverse the amount recorded to such contra-equity account in the prior periods.

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.

~~SFAS~~The ~~No.~~following ~~154~~table summarizes the restricted stock transactions for the 12 weeks ended March 26, 2006:

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.


	Number of Shares	Weighted Average Exercise Price
Outstanding restricted stock at January 1, 2006	135,833	$	13.97
Restricted stock granted	98,800		14.39
Outstanding restricted stock at March 26, 2006	234,633		14.15

3The weighted average fair value for restricted stock granted was $14.39 ~~Discontinued~~for the 12 weeks ended ~~Operations~~March 26, 2006 and $15.20 for the 12 weeks ended March 27, 2005.

~~During~~Earnings ~~2003,~~per wecommon ~~completed~~share the sale and divestiture 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 Operations”). 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.

~~The~~Earnings ~~assets~~per ofcommon ~~the~~share ~~discontinued~~is ~~operations~~calculated ~~represent~~based ~~primarily~~on the ~~land~~weighted ~~and~~average ~~building~~common ~~improvements~~shares ~~retained~~outstanding. inEarnings ~~the~~per ~~Northern~~common ~~California~~share, ~~Foodservice~~assuming dilution, is based on ~~Operations~~the weighted average common shares and ~~are~~common ~~presented~~share inequivalents ~~the~~outstanding. ~~consolidated~~Common ~~balance~~share ~~sheets~~equivalents ~~under~~relate ~~the~~to ~~caption~~outstanding ~~“Assets~~stock ofoptions ~~discontinued~~and ~~operations~~SAR for our common stock and unvested restricted stock.” The ~~liabilities~~number of ~~the~~shares ~~discontinued~~issued ~~operations~~upon ~~are~~exercise ~~comprised~~during the of12 ~~the~~weeks ~~remaining~~ended ~~accounts~~March 26, ~~payable~~2006 ~~and~~was ~~accrued liabilities~~275,824.

~~Loss~~In ~~from~~accordance ~~discontinued~~with ~~operations~~SFAS ~~for~~No. 128, ~~each period~~“Earnings ~~primarily~~Per ~~represents~~Share,” the ~~residual~~following table ~~activities~~reconciles inshare ~~the~~amounts ~~Northern~~utilized ~~California~~to ~~Foodservice~~calculate ~~Operations~~earnings ~~and~~or ~~other~~loss ~~adjustments~~per tocommon ~~reserves~~share ofand ~~exiting~~earnings ~~the~~or ~~foodservice~~loss ~~operations.~~per common share, assuming dilution:

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.


	Twelve Weeks Ended
	March 26, 2006		March 27, 2005
Net income, in thousands	$	2,512	$	3,195

Earnings per common share	$	0.08		0.10
Effect of dilutive stock equivalents		—		—

Earnings per common share, assuming dilution	$	0.08	$	0.10

Weighted average common shares		31,111,983		30,640,607
Effect of dilutive stock equivalents		699,611		1,632,633

Weighted average common shares and common share equivalents		31,811,594		32,273,240

	Balance atJanuary 2,2005		Adjustments		Payments			Balance atJune 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

Outstanding stock options and SAR with exercise prices greater than the average market price of the common stock during the reporting periods and those outstanding awards that were anti-dilutive after the treasury method was applied were not included in the computation of diluted earnings per share.

42. ~~Debt~~New Accounting Pronouncements

~~Amended~~SFAS ~~Credit~~No. 156 ~~Facility~~

~~Effective~~In ~~November~~March 182006, ~~2004~~the FASB issued SFAS No. 156, we“Accounting ~~entered~~for ~~into~~Servicing aof ~~$150.0~~Financial ~~million~~Assets ~~Amended~~– ~~and~~an ~~Restated~~amendment ~~Credit~~of ~~Facility~~FASB (Statement No. 140,” which amends SFAS No. 140, “~~Amended~~Accounting ~~Credit~~for ~~Facility”)~~Transfers ~~with~~and aServicing ~~syndicate~~ of ~~banks~~Financial Assets and Extinguishment of Liabilities.” ~~The~~SFAS ~~Amended~~No. 156 ~~Credit~~requires ~~Facility~~an ~~replaced~~entity to recognize a ~~senior~~servicing ~~secured~~asset ~~revolving~~or ~~credit~~a ~~facility.~~servicing liability ~~The~~each ~~Amended~~time ~~Credit~~it ~~Facility~~undertakes ~~has~~an obligation to service a ~~five-year~~financial ~~term~~asset ~~expiring~~by onentering ~~November~~into ~~18,~~a ~~2009~~servicing contract in certain situations. ~~Interest~~Such ~~for~~separately ~~the~~recognized ~~Amended~~servicing ~~Credit~~assets ~~Facility~~and isservicing atliabilities ~~the~~shall ~~base~~be ~~rate~~initially ormeasured at ~~the reserve~~fair ~~adjusted~~value, ~~Eurodollar~~if ~~rate~~practical. ~~plus,~~SFAS inNo. 140 provides subsequent measurement methods of each ~~case,~~class anof ~~applicable~~separately ~~margin~~recognized servicing assets and servicing liabilities. ~~Commitment~~SFAS ~~fees~~No. 156 ~~are~~should ~~charged~~be onadopted as of the ~~undrawn~~beginning ~~amount~~of atan ~~rates~~entity’s ~~ranging~~first fiscal ~~from~~year 0.that begins after September 15, ~~percent~~2006. We are required to ~~0.50~~adopt ~~percent~~SFAS No. 156 Atas ~~June~~of 19January 1, ~~2005,~~2007. ~~the~~We ~~six-month~~do ~~Eurodollar~~not ~~LIBOR~~believe ~~rate~~the ~~was~~adoption ~~2.12~~of ~~percent~~SFAS No. 156 will have a material impact on our results of operations or financial condition.

~~At our option, the Amended Credit Facility can be used to support up to $15~~3.0 ~~million~~Discontinued 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. Operations

~~Lease~~During ~~Agreement~~2003, we completed the sale and divestiture of our broadline foodservice operations and stores businesses in Florida (collectively, the “Florida Operations”) and our Northern California Foodservice Operations. The sale and divestiture allow us to further concentrate our management focus on our core store operations and concentrate our resources to strengthen our balance sheet and on continued development of our 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,” our 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.

InThe ~~November~~assets ~~2001,~~of wethe ~~entered~~discontinued ~~into~~operations ainclude ~~five-year~~land ~~operating~~and ~~lease~~building ~~agreement~~improvements ~~(“Lease~~of ~~Agreement”) with~~ a ~~national banking~~distribution ~~association~~facility aspreviously autilized ~~real estate trust. Participants~~ in the ~~Lease~~Northern ~~Agreement~~California ~~structure~~Foodservice ~~include~~Operations ~~several banks~~ and ~~financing~~are ~~institutions~~presented asin ~~well~~the asconsolidated balance ~~Casino~~sheets ~~USA.~~under ~~The~~the ~~Lease~~caption ~~Agreement~~“Assets ~~expires~~held onfor ~~November 30, 2006~~sale.” AtThe ~~the~~liabilities ~~end~~ of the ~~term,~~discontinued ~~the~~operations ~~Lease Agreement~~are ~~requires~~comprised usof ~~to elect to purchase all~~ the ~~properties~~remaining byaccounts apayable ~~final~~and ~~payment~~accrued ~~of $86~~liabilities.4 ~~million~~Loss orfrom ~~sell~~discontinued ~~all~~operations for the ~~properties~~12 toweeks aended March 27, ~~third~~2005 ~~party.~~primarily Ifrepresents the ~~properties~~residual ~~are~~activities ~~sold~~in ~~to a third party and~~ the ~~aggregate~~Northern ~~sales~~California ~~price~~Foodservice isOperations ~~less~~and ~~than~~other ~~$69.2~~adjustments ~~million, we are obligated~~ to ~~pay~~reserves ~~the difference~~ of exiting the ~~aggregate~~foodservice ~~sales price and $69~~operations.2 ~~million.~~Such Asactivities ofwere ~~June~~insignificant ~~19,~~during ~~2005,~~ the ~~Lease~~12 ~~Agreement~~weeks ~~as amended~~ended March 26, ~~with~~2006 ~~a value of $86.6 million~~ and atherefore, ~~composite~~were ~~interest~~reported ~~rate~~under of“Operating ~~9.07~~and ~~percent,~~administrative ~~provides~~expenses” ~~for~~on ~~the~~our ~~financing~~consolidated statement of ~~two distribution facilities and 20 store locations~~operations.

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.

The following table sets forth the activities and the remaining balances as of March 26, 2006, related to reserves for exiting the Florida Operations and the Northern California Foodservice Operations, in thousands.


	Balance at January 1, 2006		Adjustments			Payments			Balance at March 26, 2006
Lease termination costs	$	1,392	$	(38	)	$	(306	)	$	1,048
Employee severance and related obligations		131		2			(24	)		109

	$	1,523	$	(36	)	$	(330	)	$	1,157

4.	Litigation and Other Charges

In the third quarter 2005, we recorded $19.0 million of pre-tax charges related to the settlement of a class action lawsuit involving wage and hour claims by our non-exempt employees in our California stores. Based on the fairness hearing and final court approval of the settlement on February 16, 2006, we reversed $4.3 million, pre-tax, of the reserves in our fourth quarter 2005 which resulted in a full year 2005 pre-tax charge of $14.7 million (see Note 9 “Legal Actions”). At January 1, 2006, we had a litigation reserve of $15.4 million related to this class settlement, which included a previously recorded reserve of $0.7 million.

During first quarter 2006, we made $15.0 million of settlement distribution payments and reversed $0.1 million, pre-tax, of the reserves. The remaining balance of $0.3 million at March 26, 2006 and $15.4 million at January 1, 2006 are reflected in “Other accrued liabilities” on our consolidated balance sheets.

Debt

Amended Credit Facility

In November 2004, we entered into a $150.0 million Amended and Restated Credit Agreement (“Amended Credit Facility”) with a syndicate of banks. The Amended Credit Facility is a secured revolving credit facility with 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 March 24, 2006, the six-month Eurodollar LIBOR rate was 2.91 percent.

At 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 March 26, 2006, $40.0 million of revolving loan and $5.6 million of letters of credit were outstanding. At March 26, 2006, we had $104.4 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 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 March 26, 2006, the Lease Agreement as amended, with a value of $86.5 million and a composite interest rate of 9.07 percent, provides for the financing of two distribution facilities and 20 store locations.

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” and under current liabilities as “Current maturities of long-term debt and capital leases” and, for the Casino USA participation, “Notes payable to affiliate.”

As of March 26, 2006, 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.

Collateral

Borrowings under both the Amended Credit Facility and the Lease Agreement are collateralized by security interests in our receivables, inventory and owned properties. Principal collateral for our obligations under the Lease Agreement includes specific properties and their fixtures and equipment, and additionally a collateral position, subordinate to the Amended Credit Facility, on receivables, inventory and owned properties not serving as principal collateral under the Lease Agreement. The Amended Credit Facility has as principal collateral, our cash and cash equivalents, receivables, inventory and owned properties that are not part of the principal collateral of the Lease Agreement, and has as a subordinate collateral position, on the properties 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 are currently in compliance with the covenants, as amended.

We14 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.

The Amended Credit Facility expires on November 18, 2009 and accordingly, our obligation under this agreement has been classified as long-term liabilities in our consolidated balance sheets as of March 26, 2006 and January 1, 2006. The Lease Agreement expires on November 30, 2006 and accordingly, our obligation under this agreement has been classified as short-term liabilities in our consolidated balance sheets as of March 26, 2006 and January 1, 2006. However, it is our intention to finance the election of the option discussed above to purchase the properties under the Lease Agreement prior to its expiration.

Interest

Interest paid on our long-term debt aggregated $42.13 million for the 2412 weeks ended ~~June 19~~March 26, ~~2005~~2006 and $72.92 million for the 2412 weeks ended ~~June 13~~March 27, ~~2004~~2005.

The fair value of our debt, estimated based upon current interest rates offered for debt instruments of the same remaining maturity, approximates the carrying amount.

136. Retirement Benefit Plans and Postretirement and Postemployment Benefit Obligations

5. Retirement Benefit Plans and Postretirement and Postemployment Benefit Obligations

Defined benefit plan

We have a funded noncontributory defined benefit retirement plan covering substantially all of our full time employees following a vesting period of five years of service. We fund this plan with 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						Twenty-four Weeks Ended
	June 19,2005			June 13,2004			June 19,2005			June 13,2004
Service cost	$	825		$	747		$	1,596		$	1,515
Interest cost		1,273			1,134			2,461			2,301
Expected return on plan assets		(1,345	)		(1,074	)		(2,557	)		(2,179	)
Amortization of prior service cost		90			90			173			183
Amortization of net actuarial loss		568			481			1,099			976
Net periodic benefit cost	$	1,411		$	1,378		$	2,772		$	2,796

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

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.


	Twelve Weeks Ended
	March 26, 2006			March 27, 2005
Service cost	$	916		$	771
Interest cost		1,325			1,188
Expected return on plan assets		(1,351	)		(1,212	)
Amortization of prior service cost		49			83
Amortization of net actuarial loss		733			531

Net periodic benefit cost	$	1,672		$	1,361

As we previously disclosed in our 2005 Annual Report on Form 10-K, we are not required to make any contributions for the 2006 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 2006. During first quarter 2006, we made a $2.0 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
	March 26,2006		March 27,2005
Service cost	$	83128	$	8983	$	~~166~~	$	~~178~~
Interest cost		~~175~~184		~~145~~175		~~350~~		~~290~~
Amortization of prior service cost		30		30		60		60
Amortization of net actuarial loss		54		24		108		48
Amortization of actuarial loss		58		54
Net periodic benefit cost	$	~~342~~400	$	~~288~~342	$	~~684~~	$	~~576~~

Postretirement and postemployment benefit obligations

We provide certain health care benefits for retired employees. Substantially all of our full time employees may become eligible for those benefits if they reach retirement age while still working for us. This postretirement health care plan is contributory with participants’ contributions adjusted annually. The plan limits benefits to the lesser of actual cost for the medical coverage selected or a defined dollar benefit based on years of service. In addition, on a postemployment basis, we provide certain disability-related benefits to our employees.

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 for the effects of the Act. FSP 106-1 was effective for interim or annual financial statements of fiscal years ending after December 7, 2003. The election to defer accounting for the Act was 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 requirements of SFAS No. 106. In accordance with FSP 106-1, we elected to defer accounting for 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 consolidated financial statements and accompanying notes do not reflect the effects of the Act.

The components included in the postretirement 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
	March 26,2006		March 27,2005
Service cost	$	~~143~~182	$	~~131~~142		$	~~285~~	$	~~262~~
Interest cost		~~232~~276		~~230~~232			~~464~~		~~460~~
Amortization of prior service cost		4		34			8		6
Amortization of net actuarial gain		—		(18	)		—		(36	)
Net periodic benefit cost	$	462	$	378
Net periodic benefit cost	$	379	$	346		$	757	$	692

1516

67. Comprehensive Income

Comprehensive income or loss was computed as follows, in thousands:

	Twelve Weeks Ended						~~Twenty-four Weeks Ended~~
	June 19,2005				June 13,2004		June 19,2005		June 13,2004
	March 26,2006			March 27,2005
Net income	$	82,~~091~~512		$	$3,195	~~8,109~~	$	~~11,286~~	$	~~14,306~~
Other comprehensive (loss) income:
Other comprehensive income:
Net gain on derivative instruments, net of tax		—				235		—		184
Foreign currency translation adjustments		17			75
Reclassification adjustments, net of tax, included in net income		—				261		—		533
Total other comprehensive income		17			75
Foreign currency translation adjustments		(19	)			137		56		60
Total comprehensive income	$	2,529		$	3,270
Total other comprehensive (loss) income		(19	)			633		56		777
Total comprehensive income	$	8,072			$	8,742	$	11,342	$	15,083

WeIn ~~had~~accordance anwith ~~interest rate~~accounting ~~collar~~principles ~~agreement~~generally ataccepted ~~June~~in ~~13,~~the ~~2004~~United ~~that~~States, ~~was~~the ~~designed~~functional currency asfor aour ~~cash~~Mexico ~~flow~~operations ~~hedge~~has ~~and~~been ~~was~~the ~~considered~~Mexican ~~fully effective~~Peso. ~~This~~As ~~agreement~~such, ~~was~~foreign ~~marked~~currency totranslation ~~market~~gains ~~every~~and ~~quarter,~~losses ~~with~~are ~~the~~included ~~changes~~ in ~~fair value recorded as~~ other comprehensive income ~~(“OCI”) and the ineffective portion reclassified from OCI to current earnings and included under “Interest expense, net” on our consolidated statement of operations~~. ~~This agreement expired in November 2004.~~

~~In accordance with accounting principles generally accepted in the United States, the functional currency for our Mexico operations has been the Mexican Peso~~8. AsIncome ~~such, foreign currency translation gains and losses are included in OCI.~~ Taxes

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.

Tax payments made to governments and Casino USA for the periods indicated are as follows, in thousands:

	Twenty-four Weeks Ended
	Twelve Weeks Ended
	June 19,2005				June 13,2004
	March 26,2006			March 27,2005
Tax sharing (benefits received from) payments to Casino USA	$	(574	)		$	1,638
Tax sharing payments made to (benefits received from) Casino USA	$	443		$	(1,307	)
Taxes paid to states other than California		73				17
Taxes paid to federal government		—			—
Taxes paid to federal government		4,950				5,000
Taxes paid to states other than California		—			—
Total taxes paid	$	4,449			$	6,655
Total taxes paid (benefits received)	$	443		$	(1,307	)

89. Legal Actions

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~~sought to be classified as a “class action” and ~~seeks~~ sought unspecified monetary damages and statutory penalties thereon. OnIn ~~August~~September 92005, ~~2001,~~ we ~~filed~~reached aan ~~general~~agreement ~~denial~~in toprinciple ~~these claims and asserted numerous defenses. A hearing on plaintiff’s motion for class certification was heard and certification as~~ to ~~nine~~ ~~sub-classes~~settle ~~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~~lawsuit. ~~The~~On ~~class consists of approximately 13~~November 4,~~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~~granted ~~the~~preliminary ~~parties~~approval toof the ~~commence mediation~~settlement. InWe ~~March~~recorded ~~2005, the court set~~ a ~~trial date~~pre-tax charge of ~~March 6, 2006~~$19.0 ~~Mediations~~million ~~have~~in ~~been~~our ~~held on April 27,~~ 2005, ~~June~~third 6,quarter ~~2005 and July 14, 2005 with no resolution~~ to ~~the~~account ~~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

for the class member wage and hour claims, attorney fees, and administrative expenses of the settlement. Based on the ~~ultimate~~fairness ~~determination~~hearing and final court approval of ~~these~~the ~~other~~settlement ~~cases~~on ~~will~~February 16, ~~either~~2006, ~~individually~~we orreversed in$4.3 million, pre-tax, of the ~~aggregate~~reserves ~~have~~in our fourth quarter 2005 which resulted in a ~~material~~full ~~adverse~~year ~~effect~~2005 pre-tax charge of $14.7 million. Based on ~~our~~the terms ~~results~~of the settlement, we made $15.0 million of ~~operations~~settlement ~~or financial~~distribution ~~position~~payments in the first fiscal quarter of 2006.

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 of 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 ~~2004~~2005 Annual Report on Form 10-K. Our MD&A provides an overview of our results of operations for the 12 weeks ~~and 24 weeks~~ ended ~~June 19~~March 26, ~~2005~~2006 as compared to the equivalent ~~periods~~period of ~~2004~~2005. 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~~ 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

The major factors that impacted our results of operations and financial position for the 12-week quarters ended ~~June 19~~March 26, ~~2005~~ 2006 and ~~June 13~~March 27, ~~2004~~2005 are as follows:

• Our ~~second~~first quarter ~~2005~~2006 sales increased 54.75 percent over the ~~second~~first quarter ~~2004~~2005, ~~driven~~reflecting bygrowth anfrom ~~increase~~the inopening ~~our~~of ~~average~~new ~~transaction~~stores ~~supported~~and byrelocated ~~promotional~~stores ~~activities~~since the end of the first quarter 2005, as well as the comparable store sales growth of 1.8 percent.

• ~~Gross~~We ~~margin~~opened ~~for~~one new store during the ~~second~~first quarter ~~2005~~2006 ~~was~~and ~~adversely~~at ~~impacted~~March by26, 2006, operated 237 stores in the ~~increased~~United ~~distribution~~States, ~~costs~~as ~~due~~compared to ~~the~~226 ~~increased~~stores ~~volume,~~at ~~labor~~March ~~costs~~27, ~~fuel~~2005. ~~costs~~While ~~and~~the ~~expenditures~~sales ~~associated~~increase ~~with~~attributable ~~improving~~to ~~our~~the ~~distribution~~new ~~network~~stores tofor ~~efficiently~~the ~~support~~first quarter 2006 helped increase our sales, the ~~increased~~increase ~~volume~~in our cost structure from these stores reduced our operating income generated from existing stores.

• WeImproved ~~opened~~gross ~~one~~profit ~~new~~rate ~~store~~from ~~during~~sales for the ~~second~~first quarter ~~2005 and at June 19~~2006, ~~2005, operated 227 stores,~~ as compared to ~~220~~the ~~stores~~first atquarter ~~June 13~~2005, ~~2004. Additionally, one store~~ was ~~relocated~~offset ~~since~~by ~~the~~increased ~~end~~distribution ofcosts ~~the~~and ~~second~~higher ~~quarter~~store ~~2004.~~occupancy ~~While~~costs including the ~~sales~~impact ~~increase~~of ~~attributable to the~~ new ~~and relocated~~ stores ~~helped~~opened ~~improve~~since ~~our~~the ~~total~~end ~~sales~~of ~~performance in~~ the ~~second~~first quarter 2005~~, the operating loss from these stores reduced our operating income generated from existing stores~~.

• ~~Interest~~Operating ~~expense,~~and ~~net~~administrative ~~decreased~~expense infor the ~~second~~first quarter ~~2005~~2006 increased in dollars and as a percentage of sales as compared to the ~~second~~first quarter ~~2004~~2005 aslargely aattributable ~~result~~to ofincreased ~~lower~~store ~~average~~operating ~~debt~~costs ~~outstanding~~ and information system costs, partially offset by lower ~~effective~~administrative ~~interest~~expenses ~~rate~~including lower incentive compensation.

•We ~~Cash~~reported ~~flows~~income ~~provided~~from bycontinuing ~~operating~~operations ~~activities~~of ~~increased~~$2.5 ~~over~~million, or $0.08 per diluted share, for the ~~equivalent~~12 ~~period~~weeks inended ~~2004~~March 26, ~~and~~2006, ~~was~~a ~~reinvested~~decrease of $1.0 million in ~~our~~income ~~expansion~~from ~~plan~~continuing ~~and~~operations ~~technology~~of ~~improvement~~$3.5 tomillion, or ~~support~~$0.11 ~~our~~per ~~future~~diluted ~~growth~~share, for the 12 weeks ended March 27, 2005.

We reported net income ~~from continuing operations~~ of $8.2.5 million, or $0.2608 per diluted share, for the 12 weeks ended ~~June 19~~March 26, ~~2005~~2006, acompared ~~slight~~to ~~decrease~~net ~~from~~income ~~the~~of $8.3.2 million, or $0.2610 per diluted share, ~~reported~~ for the 12 weeks ended ~~June 13~~March 27, ~~2004~~2005. Loss from discontinued operations was $0.3 million, net of

Wetax ~~reported net income of $8.1 million~~benefit, ~~or $0.25 per diluted share,~~ for the 12first ~~weeks~~quarter ~~ended June 19,~~ 2005~~, compared~~; tosuch ~~net~~activities ~~income~~were ofinsignificant ~~$8.1~~during ~~million, or $0.26 per diluted share, for~~ the 12first ~~weeks~~quarter ~~ended~~2006 ~~June~~and 13therefore, were ~~2004.~~reported ~~The~~under ~~year-to-year~~“Operating ~~increase in sales~~ and ~~decrease~~administrative inexpenses” ~~interest~~on ~~expense~~our ~~were~~consolidated ~~offset~~statement byof ~~the~~operation ~~lower~~for ~~gross margin rate, primarily attributable to~~ the ~~increased~~ ~~distribution~~first ~~costs,~~quarter ~~other volume-driven costs and spending in information technology and legal fees~~2006.

We ~~reported~~believe ~~income~~that ~~from~~our ~~continuing~~future ~~operations~~growth ofdepends ~~$11.7~~on ~~million,~~our orability ~~$0.36~~to ~~per~~expand ~~diluted~~by ~~share~~opening new and relocated stores, ~~for~~undergoing remodels in the ~~first~~current ~~half~~stores ofto ~~2005~~better serve our customers, aand ~~$3.2~~increasing ~~million~~our ~~decrease~~market ~~from~~presence ~~the~~by expanding our store ~~$14~~formats.9 ~~million,~~With orthe ~~$0.48~~increasing ~~per~~competition ~~diluted~~within ~~share~~the retail grocery market, ~~reported~~there ~~for~~is no assurance that our sales growth will maintain at the ~~first~~current ~~half~~level, ofand ~~2004~~our profitability is dependent upon our leveraging sales growth while implementing effective cost controls.

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 consolidated statements of operations data, expressed as a percentage of sales. Totals may not aggregate due to rounding.

	Twelve Weeks Ended				~~Twenty-four Weeks Ended~~
	June 19,2005		June 13,2004		June 19,2005		June 13,2004
	March 26,2006		March 27,2005
Sales	100.0	%	100.0	%	~~100.0~~	%	~~100.0~~	%
Cost of sales, buying and occupancy	8384.51		8384.1		~~83.8~~		~~83.0~~
Gross margin	1615.59		1615.9		~~16.2~~		~~17.0~~
Operating and administrative expenses	1314.35		1314.21		~~13.7~~		~~13.4~~
Income from operations	31.24		31.79		~~2.6~~		~~3.6~~
Interest expense, net	0.45		0.85		~~0.5~~		~~0.8~~
Income from continuing operations before income taxes	20.78		21.93		~~2.1~~		~~2.8~~
Income tax provision	(10.13	)	(10.15	)	~~(0.8~~	)	~~(1.1~~	)
Equity earnings of joint venture	—		0.1		—		—
Equity earnings (loss) of joint venture	0.1		—
Income from continuing operations	10.76		10.8		~~1.3~~		~~1.7~~
Discontinued operations, net of tax	—		—(0.1	)	—		~~(0.1~~	)
Net income	10.76	%	10.87	%	~~1.2~~	%	~~1.6~~	%

Comparison of Twelve Weeks Ended March 26, 2006 with Twelve Weeks Ended March 27, 2005.

Sales

Sales from continuing operations in the first quarter 2006 were $446.8 million, an increase of 4.5 percent over the first quarter 2005 sales of $427.6 million. Our first quarter 2006 comparable store sales increased by 1.8 percent compared to the 2005 level. We define comparable stores as those that have been in operation for 52 full weeks, including stores that have been remodeled or relocated within their same market area.

The year-to-year increase in comparable store sales was primarily attributable to the favorable increase in our average transaction. In the first quarter 2006, the comparable average transaction increased by 3.9 percent to $43.58 from $41.94 for the first quarter 2005 while the transaction counts decreased by 2.1 percent.

Comparison of Twelve Weeks Ended June 19, 2005 with Twelve Weeks Ended June 13, 2004.

Sales

Sales from continuing operations in the second quarter 2005 were $484.1 million, an increase of 5.7 percent over the second quarter 2004 sales of $457.8 million. Our second quarter 2005 comparable store sales increased by 4.1 percent compared to the 2004 level. We define comparable stores as those that have been in operation for 52 full weeks, including stores that have been remodeled or relocated within their same market 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 represents sales less cost of sales, buying and occupancy. The major categories of costs included in cost of sales, buying and occupancy are cost of goods, distribution costs, costs of our buying department and store occupancy costs, net of earned vendor rebates and other allowances. Distribution costs consist of all warehouse receiving and inspection costs, warehousing costs, all transportation costs associated with shipping goods from our warehouses to our stores, and other costs of our distribution network. We do not exclude any portion of these costs from cost of sales.

Gross margin from continuing operations increased $2.56 million, or 3.3 9 percent, to $7970.78 million for the ~~second~~first quarter ~~2005~~2006 as compared to $7768.2 million for the ~~second~~first quarter ~~2004~~2005. The increase in gross margin was ~~the~~primarily ~~result~~related of to increased sales and merchandise margin, partially offset by ~~the~~ increased distribution ~~and occupancy~~ costs and ~~lower~~ ~~merchandise~~occupancy ~~margins~~costs.

As a percentage of sales, ~~gross~~ gross margin ~~decreased~~was ~~to 16~~15.59 percent for the ~~second~~first quarter ~~2005~~of ~~compared~~both to2006 16and 2005.9 ~~percent~~Gross ~~for~~profit ~~the~~rate ~~second~~from ~~quarter~~sales ~~2004.~~improved ~~The~~by 0.486 ~~percentage~~percent ~~point~~but ~~decrease~~ was ~~partially~~offset ~~attributable~~by to a 0.3565 percent increase in distribution costs and a 0.22 percent increase in occupancy costs. The increased distribution cost was primarily due to the start up activities associated with the new warehouse facility that started deliveries in late fourth quarter 2005 to accommodate our future growth, increased volume, ~~labor~~ ~~costs,~~higher fuel costs and expenditures and inefficiencies in distribution associated with ~~improving~~the ~~our~~implementation ~~distribution~~of ~~network~~our tonew ~~efficiently~~supply ~~support~~chain ~~the~~management ~~increased~~system ~~volume.~~to ~~Additionally,~~improve anour ~~approximate~~distribution 0network.06 ~~percent~~The ~~decrease~~increase in ~~margin~~occupancy cost was due to athe ~~sales~~new ~~mix~~and ~~change~~relocated ~~resulting~~stores, ~~from~~store ~~stronger~~remodeling ~~sales~~and ~~growth~~relatively infixed ~~Cash~~nature &of ~~Carry~~these ~~stores~~costs ~~that~~against ~~target~~the ~~only~~sales ~~business customers and generate lower gross margins~~base.

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 $4.5 million, or 7.5 percent, to $64.7 million for the first quarter 2006 as compared to $60.2 million for the first quarter 2005.

As a percentage of sales, operating and administrative expenses increased to 14.5 percent for the first quarter 2006 from 14.1 percent for the first quarter 2005. The 0.4 percent increase is comprised of a 0.65 percent increase in store labor cost and service expense, primarily attributable to the new and relocated stores, and a 0.24 percent increase in information system costs and the expense associated with our new supply chain management system that was implemented in the third quarter 2005. These increases were partially offset by a 0.34 percent decrease in corporate and store administrative expenses, including lower incentive compensation.

~~Operating~~As of January 2, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Accounting,” which requires all share-based payments to be recognized in the income statement based on their fair values. The net impact of the adoption of SFAS No. 123(R) was $0.2 million of share-based compensation expense reported under operating and administrative expenses for the first quarter 2006. Had SFAS No. 123(R) been effective for the first quarter 2005, the net impact would have been an increase of $0.6 million, or 0.1 percent of sales, to 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 ~~decreased~~increased to $2.24 million for the ~~second~~first quarter ~~2005~~ 2006 as compared to $32.72 million for the ~~second~~first quarter ~~2004~~2005. The ~~year-to-year~~increase ~~decrease~~ was primarily due to the ~~lower~~higher ~~average~~ debt outstanding and ~~lower~~slightly ~~effective~~higher ~~rate resulting from the expiration of an interest collar agreement in the fourth quarter 2004~~rates. At the end of the ~~second~~first quarter ~~2005~~2006, the outstanding balance on the revolving credit facility was $3040.0 million, compared with $3530.0 million at the end of the ~~second~~first quarter ~~2004~~ 2005.

Income tax provision

Income tax expense was $51.24 million for ~~both~~ the ~~second~~first quarter ~~2005~~2006 ~~and~~as compared to $2.2 million for the ~~second~~first quarter ~~2004~~2005. The effective tax rate for the ~~second~~first quarter ~~2005~~2006 was 39.41 percent and the effective tax rate for the ~~second~~first quarter ~~2004~~ 2005 was 4038.09 percent.

Equity earnings (loss) of joint venture

Our ~~100-percent~~ wholly-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 1113 stores in Mexico as a Mexican domestic corporation as of ~~June 19~~March 26, ~~2005~~2006. Our interest in the joint venture is not consolidated and is reported on the equity basis of accounting. During the first ~~second~~ quarter ~~2005~~2006, the equity earnings from the joint venture was $0.23 million, as compared to the equity ~~earnings~~loss of $0.50 million in the ~~second~~first quarter ~~2004~~2005.

Discontinued Operations

During 2003, we completed the sale and divestiture of our ~~Florida~~ broadline foodservice operations and ~~our Florida~~ stores businesses in Florida (collectively, the “Florida Operations”) and our ~~broadline~~Northern ~~foodservice~~California Foodservice Operations. The sale and divestiture allow us to further concentrate our management focus on our core store operations and concentrate our resources to strengthen our balance sheet and on continued development of our store formats. We retained certain residual assets, liabilities and contingencies in ~~northern~~conjunction with the sale transactions and divestitures. In accordance ~~California~~with (the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” our 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.

Loss from discontinued operations was $0.3 million, net of tax benefit of $0.2 million, for the first quarter 2005. Loss from discontinued operations represented primarily the run-off

~~Operations”).~~activities ~~This~~in ~~allowed~~the usfoodservice ~~to focus on our core store~~ operations~~, concentrate our resources to strengthen our balance sheets and continue development of our two store formats~~. WeSuch ~~retained~~activities ~~certain~~were ~~residual~~insignificant ~~assets,~~during ~~liabilities and contingencies in conjunction with~~ the ~~sale~~first ~~transactions~~quarter 2006 and ~~divestitures.~~therefore, were Inreported ~~accordance~~under ~~with the provisions of SFAS No. 144,~~ “~~Accounting~~Operating ~~for~~and ~~the~~administrative ~~Impairment or Disposal of Long-Lived Assets,~~expenses” ~~the~~on ~~accompanying~~our consolidated ~~financial~~statement ~~statements reflect the results~~ of ~~operations~~operation ~~and~~for ~~financial position of~~ the ~~Florida~~first ~~Operations~~quarter ~~and the Northern California Foodservice separately as discontinued operations~~2006.

~~Loss~~Accounting ~~from~~Change ~~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 runShare-~~off~~based ~~activities~~compensation ~~in the foodservice operations.~~

~~Comparison~~Effective ofbeginning ~~Twenty-Four~~January 2, ~~Weeks~~2006, ~~Ended~~we ~~June~~adopted 19SFAS No. 123(R) using the modified prospective application method, ~~2005~~under which compensation cost is recognized beginning with ~~Twenty~~the effective date based on (a) the requirements of SFAS No. 123(R) for all share-~~Four~~based ~~Weeks~~payment awards granted ~~Ended~~after ~~June~~the ~~13,~~effective ~~2004~~date and (b) based on the requirements of SFAS No. 123 for awards granted to employees prior to the effective date that remain unvested on the effective date. Accordingly, prior period amounts are not restated.

~~Sales~~Prior to the adoption of SFAS No. 123(R), we applied Accounting Principles Board Opinion (“APB”) No. 25 “Accounting for Stock Issued to Employees” and accounted for share-based compensation using the intrinsic value method at the date of grant and provided disclosures of pro forma information regarding net income and earnings per share. Under APB No. 25, we only recorded costs related to restricted stock or when award modifications resulted in cost recognition.

~~Sales~~Upon adoption ~~from continuing operations in the first half~~ of ~~2005~~SFAS ~~were $911~~No.~~7 million~~ 123(R), anwe ~~increase~~selected ~~of 3.5 percent over~~ the ~~first~~Black-Scholes ~~half~~multiple ofoption-pricing ~~2004~~model ~~sales~~to ofdetermine ~~$881.3~~the ~~million.~~grant ~~Our~~date ~~first~~fair ~~half~~value offor ~~2005~~each ~~comparable~~stock ~~store~~option ~~sales~~and ~~increased~~SAR ~~by 2~~grant.0 ~~percent compared to the 2004 level.~~ The ~~year~~Black-~~to-year~~Scholes ~~increase~~multiple inoption-pricing ~~comparable~~model ~~store~~requires ~~sales~~extensive ~~was~~use of ~~primarily~~subjective ~~attributable~~assumptions. toApplication anof ~~increase~~alternative inassumptions ~~our~~could ~~comparable~~produce ~~average~~significantly ~~transaction~~different estimates of ~~4.6 percent to $42.89 for~~ the ~~first~~fair ~~half~~value of ~~2005~~share-based ascompensation ~~compared~~and toconsequently, ~~$40.99 for~~ the ~~first~~related ~~half~~amounts ofrecognized ~~2004~~in ~~while~~our ~~the~~consolidated ~~year-to-year~~statement ~~comparable transaction counts decreased by 2.5~~of ~~percent~~operations.

~~The~~We ~~year~~reported the share-tobased compensation under “Operating and administrative expenses” on our consolidated statements of operations and under “Additional paid-~~year~~in ~~increase~~capital” in ~~comparable~~the ~~store~~“Stockholders’ ~~sales~~ equity” section on our consolidated balance sheets. We recognized share-based compensation costs of 2$0.3 million for the first quarter 2006 and $0.1 ~~percent~~million isfor ~~noteworthy~~the ~~considering~~first ~~that~~quarter ~~our~~2005. ~~sales~~The inrelated income tax benefit recognized was $0.1 million for the first quarter 2006 and ~~second~~insignificant ~~quarters~~for the first quarter 2005. The net impact of ~~2004~~adopting ~~were~~SFAS ~~favorably~~No. 123(R) ~~impacted~~on byour income from continuing operations and net income for the ~~effect~~first ofquarter a2006 ~~labor~~was ~~action~~$0.1 million, or $0.00 per diluted share. This net impact represents compensation related to the stock option and ~~its~~SAR ~~residual~~awards ~~effect,~~that ~~against~~would ~~three~~have ~~southern~~not ~~California~~been ~~supermarket~~recognized ~~chains~~under SFAS No. 123 and does not include compensation related to the restricted stock awards and award modifications that ~~ended~~have inalways ~~late~~been recognized. The remaining unrecognized compensation cost related to the nonvested awards at March 26, 2006 was ~~February~~$4.8 ~~2004~~million to be recognized over a weighted-average period of 2.87 years. Of this remaining cost, $2.1 million is related to the stock options and SAR award that would have not been recognized under SFAS No. 123.

~~Gross~~During ~~margin~~2005 we modified and accelerated the vesting of 438,200 shares of unvested stock options to reduce the future expense to be recognized after the adoption of SFAS No. 123(R). The expense recognized in 2005 as a result of this modification was immaterial. Additionally, in the first quarter 2006, we reduced the stock option grants, awarded SAR grants for the first time and used only service term as the vesting condition for the new restricted stock grants.

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~~We applied the same valuation methodologies and ~~administrative~~assumptions ~~expenses~~used in estimating the fair value of share-based compensation for pro forma reporting under SFAS No. 123 upon adoption of SFAS No. 123(R). We also estimated forfeitures in calculating the cost related to share-based compensation as opposed to recognizing these forfeitures as they occur. We do not expect any forfeiture from the restricted awards outstanding at the effective date for which we had recognized the costs for the elapsed term prior to the effective date of SFAS 123(R). Accordingly, upon the adoption of SFAS No. 123(R), we did not record any cumulative effect adjustment to reverse part of those compensation costs recognized prior to the effective date.

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~~used byin operating activities from continuing operations was $3213.61 million in the first ~~half~~quarter ~~of 2005~~2006, anas ~~increase~~compared ofto ~~$17.1~~net ~~million~~cash ~~compared~~provided toby operating activities of $1511.51 million in the comparable ~~2004~~2005 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 ~~half~~quarter ~~of 2004~~2006, we utilized cash to ~~increase inventory~~fund ~~levels to support~~ the ~~higher~~payment ~~sales and to achieve higher levels~~ of ~~store~~a ~~inventory~~litigation ~~“in-stock”~~settlement ~~conditions.~~and Inlower ~~the~~our ~~first~~accounts ~~half~~payable ofbalance ~~2004,~~due ~~we also utilized cash~~ to ~~fund~~inventory ~~the~~purchases ~~payment~~for ofnew astores ~~litigation~~opened ~~settlement~~disproportionately ~~and~~towards the ~~divestiture activities~~latter ~~and~~part ~~lower~~of ~~our~~2005. ~~accounts~~

Net cash used in investing activities from continuing operations was $7.5 million in the first quarter 2006 as compared to $15.4 million in the comparable 2005 period. In the first quarter 2006, our capital expenditures decreased by $7.9 million as compared to the first quarter 2005, primarily due to lower property investment for future store sites, investment in store construction and equipment and investment in information system hardware and software.

Net cash provided by financing activities from continuing activities was $22.1 million in the first quarter 2006 as compared to $4.9 million in the comparable 2005 period, primarily due to the borrowing on our outstanding obligation under a revolving bank credit facility. The additional borrowing made in the first quarter 2006 was $20.0 million to increase the total borrowing under this credit facility, as amended, from $20.0 million at the beginning of 2006 to $40.0 million at March 26, 2006. During the first quarter 2005, the additional borrowing under this credit facility was $5.0 million and at March 27, 2005, the total borrowing under this credit facility was $30.0 million.

At March 26, 2006, we had cash and cash equivalents of $33.3 million, stockholders’ equity of $279.5 million and debt, excluding capital leases, of $126.5 million. At March 26, 2006, we had working capital of $5.1 million, compared to a deficit in working capital of $23.8 million at January 1, 2006. The increase in working capital was primarily due to payments in the first quarter 2006 for litigation settlement distributions and lowering of accounts payable and incentive compensation payable balances that were funded by the bank credit facility. Our $86.5 obligation under a lease facility, which expires in November 2006, was reported under current liabilities on our consolidated balance sheets at March 26, 2006 and January 1, 2006. For further discussion about the bank credit facility and the lease facility, see “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 offor ~~the building~~buildings, 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 ~~first~~12 ~~half~~weeks ended ofMarch 26, ~~2005~~2006, we opened ~~four~~one new ~~stores~~store. ~~New~~During ~~store~~2005 ~~growth and~~in ~~store~~the ~~remodeling~~western ~~are~~United ~~planned~~States, towe ~~continue~~opened in13 ~~the~~stores ~~remainder~~and ofrelocated ~~2005~~two stores. We plan to ~~open~~proceed orwith ~~relocate~~another ayear ~~total~~ of 15similar togrowth 20in ~~stores~~our ~~during~~store ~~2005 and to continue at this pace of~~ development ~~for~~program in 2006. We estimate that the capital expenditure requirement for improvements and equipment for a new store is approximately $10.29 million to $23.20 million. We typically enter into lease arrangements 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. 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 14 major remodels to existing stores in 2006 which generally require capital expenditures in excess of $0.4 million per major remodel. Total capital expenditures for 2006, including investment in capitalized software, are currently estimated at $50 million to $55 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 2005 Annual Report on Form 10-K, we are not required to make any contributions for the 2006 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 2006. During the first quarter 2006, we made a $2.0 million contribution to this plan.

On September 14, 2005, our Board of Directors authorized the Repurchase Program. The repurchases will be made in the open market or in privately negotiated transactions, at management’s discretion according to market conditions and the price of our common stock. The Repurchase Program will expire December 31, 2006 or earlier if the $20.0 million aggregate cap on repurchases is achieved. Additionally, authorizations under the Repurchase Program may be amended or terminated at any time by action of our Board of Directors. Through March 26, 2006, we repurchased 203,286 shares of our common stock for an aggregate cost of $2.7 million and an additional $17.3 million of our common stock may be repurchased under the Repurchase Program for 2006.

As discussed in Part II, Item 1. “Legal Proceedings,” regarding a settlement agreement approved on February 16, 2006, we made $15.0 million of settlement distribution payments in the first fiscal quarter of 2006 according to the terms of such agreement.

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

Amended Credit Facility

~~Effective~~In November ~~18,~~ 2004, we entered into a $150.0 million Amended and Restated Credit ~~Facility~~Agreement (“Amended Credit Facility”) with a syndicate of banks. The Amended Credit Facility ~~replaced~~is a ~~senior~~ secured revolving credit facility. ~~The~~with ~~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~~March 24, ~~2005~~2006, the six-month Eurodollar LIBOR rate was 2.1291 percent.

At 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~~March 26, ~~2005~~2006, $3040.0 million of revolving loan and $5.6 million of letters of credit were outstanding. At ~~June 19~~March 26, ~~2005~~2006, we had $~~114~~104.4 million available under our Amended Credit Facility.

Lease Agreement

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” and under current liabilities as “Current maturities of long-term debt and capital leases” and, for the Casino USA participation, “Notes payable to affiliate.”

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.

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 residual of $14.3 million proceeds generated in 2003 from the sale of a Florida distribution facility and a Florida store property previously owned by the real estate trust that were subsequently utilized in 2004 for the purchase of six of our owned store properties by the real estate trust in the amount of $14.2 million.

Collateral

Borrowings under both the Amended Credit Facility and the Lease Agreement are collateralized by security interests in our receivables, inventory and owned properties. Principal collateral for our obligations under the Lease Agreement includes specific properties and their fixtures and equipment, and additionally a collateral position, subordinate to the Amended Credit Facility, on receivables, inventory and owned properties not serving as principal collateral under the Lease Agreement. The Amended Credit Facility has as principal collateral, our cash and cash equivalents, receivables, inventory and owned properties that are not part of the principal collateral of the Lease Agreement, and has aas a subordinate collateral position, on the properties and related assets that are the principal collateral of the Lease Agreement.

Covenants

WeThe Amended Credit Facility expires on ~~were~~November 18, in2009 ~~compliance~~and ~~with~~accordingly, ~~the~~our ~~covenants~~obligation ~~within~~under ~~both~~this ~~the~~agreement ~~Amended~~has ~~Credit~~been ~~Facility~~classified as ~~amended~~long-term ~~and~~liabilities ~~the~~in ~~Lease~~our ~~Agreement~~consolidated asbalance ~~amended~~sheets as of ~~June 19~~March 26, ~~2005~~2006 and January 2 1, ~~2005~~2006. The ~~Amended Credit Facility expires on November 18, 2009 and the~~ Lease Agreement expires on November 30, 2006; and accordingly, our ~~obligations~~obligation under ~~these~~this ~~agreements~~agreement ~~were~~has been classified as ~~long~~short-term ~~debt~~liabilities in our consolidated balance sheets atas ~~June~~of 19March 26, ~~2005~~2006 and January 1, 22006. However, ~~2005~~it is our intention to finance the election of the option discussed above to purchase the properties under the Lease Agreement prior to its expiration.

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

SFAS No. 156

In March 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 156, “Accounting for Servicing of Financial Assets – an amendment of FASB Statement No. 140,” which amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities.” SFAS No. 156 requires an entity to recognize a servicing asset or a servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in certain situations. Such separately recognized servicing assets and servicing liabilities shall be initially measured at fair value, if practical. SFAS No.

~~future~~140 ~~capital~~provides ~~expenditures~~subsequent ~~and~~measurement ~~other~~methods ~~cash~~of ~~requirements~~each byclass aof ~~combination~~separately ofrecognized ~~available~~servicing ~~cash,~~assets ~~cash~~and ~~from~~servicing liabilities. ~~operations~~SFAS ~~and~~No. 156 ~~other~~should ~~borrowings~~be ~~and~~adopted ~~proceeds~~as ~~from~~of the ~~issuance~~ beginning of ~~equity~~an ~~securities.~~entity’s Wefirst ~~believe~~fiscal year that ~~our~~begins ~~sources~~after ofSeptember 15, ~~funds~~2006. We are ~~adequate~~required to ~~provide~~adopt ~~for~~SFAS ~~working~~No. 156 ~~capital,~~as ~~capital~~of ~~expenditures~~January 1, ~~and~~2007. ~~debt~~We ~~service~~do ~~requirements~~not ~~for~~believe the adoption ~~foreseeable~~of ~~future~~SFAS No. 156 will have a material impact on our results of operations or financial condition.

New Accounting Pronouncements

SFAS No. 123(R)

On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment”, which is a revision of SFAS No. 123, “Accounting 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.

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

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

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.

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

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States ~~requires~~ requires management to make estimates and assumptions that affect the reported assets, liabilities, sales and expenses in the accompanying financial statements. Critical accounting policies are those that require the most subjective and complex judgments, often employing the use of estimates about the effect of matters that are inherently uncertain. These critical accounting policies, under different conditions or using different assumption or estimates, could show materially different results on our financial condition and results of operations. Our critical accounting policies are described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” in our ~~2004~~2005 Annual Report on Form 10-K. Asexcept offor ~~June~~the ~~19,~~accounting ~~2005,~~policy werelated ~~did~~to ~~not~~share-based ~~make~~compensation ~~any~~as ~~changes~~discussed ~~in our critical accounting policies~~below.

As of January 2, 2006, we adopted SFAS No. 123(R), which requires all share-based payments to be recognized in the income statement based on their fair values. Upon adoption of SFAS No. 123(R), we selected the Black-Scholes multiple option-pricing model to determine the grant date fair value for each stock option and SAR grant. The Black-Scholes multiple option-pricing model requires extensive use of subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock option before exercising them (“expected term”), the estimated volatility of the our stock price over the expected term and the number of options that will ultimately not complete their vesting requirements. Application of alternative assumptions could produce significantly different estimates of the fair value of share-based compensation and consequently, the related amounts recognized in our consolidated statement of operations.

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~~March 26, ~~2005~~2006, our exposure to foreign currency risk was limited.

Interest Rate Risk

We may manage interest rate risk through the use of interest rate collar agreements to limit the effect of interest rate fluctuations from time to time. We presently have no program in place. An earlier interest rate collar agreement was terminated in November 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 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 limited to our operations under Smart & Final Mexico and the equity earnings of its Mexico joint venture. As of ~~June 19~~March 26, ~~2005~~2006, such exposure was the $6.8.3 million net investment in Smart & Final Mexico which was comprised primarily of the Mexico joint venture. Our other transactions are conducted in U.S. ~~dollars~~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.

Additional information regarding a report of management’s assessment of the effectiveness of our internal control as of January 2 1, ~~2005~~2006 and our independent registered public accounting firm’s report dated March 2 1, ~~2005~~2006 on management’s assessment as of January 2 1, ~~2005~~ 2006 were included in ~~“Item~~Part II, Item 8. “Financial Statements and Supplementary Data” of our ~~2004~~2005 Annual Report on Form 10-K.

3129

PART II - OTHER INFORMATION

Item 1.

Legal Proceedings

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~~sought to be classified as a “class action” and ~~seeks~~sought unspecified monetary damages and statutory penalties thereon. OnIn ~~August~~September 92005, ~~2001,~~ we ~~filed~~reached aan ~~general~~agreement ~~denial~~in principle to ~~these~~settle ~~claims~~the ~~and asserted numerous defenses~~lawsuit. AOn ~~hearing~~November 4, on2005, ~~plaintiff’s~~the ~~motion~~court ~~for class certification was heard and certification as to nine sub-classes was~~ granted onpreliminary ~~January~~approval ~~22,~~of the ~~2004~~settlement. We ~~continue~~recorded toa ~~believe~~pre-tax ~~the~~charge ~~merits~~ of ~~this~~$19.0 ~~action~~million doin ~~not~~our ~~warrant~~2005 ~~class~~third ~~action~~quarter ~~status~~to ~~and~~account wefor ~~believe we have certain defenses to~~ the ~~claim. The~~ class ~~consists~~member ofwage ~~approximately 13,200 current~~ and ~~former~~hour ~~hourly~~claims, ~~store~~attorney ~~employees~~fees, ~~in California~~ and ~~the~~administrative ~~suit~~expenses ~~covers~~of the ~~period~~settlement. ~~May~~Based ~~1997~~on ~~through~~the ~~January~~fairness ~~2004.~~hearing ~~Discovery~~and isfinal ~~now~~court approval ~~underway~~of in the ~~case.~~settlement Inon February 16, ~~2005~~2006, ~~the~~we ~~court~~reversed ~~ordered the parties to commence mediation~~$4.3 Inmillion, ~~March 2005~~pre-tax, ~~the court set a trial date~~ of ~~March~~the 6,reserves ~~2006.~~in ~~Mediations~~our ~~have~~fourth ~~been~~quarter ~~held~~2005 onwhich ~~April~~resulted ~~27,~~in ~~2005,~~a ~~June~~full 6,year 2005 ~~and~~pre-tax ~~July~~charge of $14,.7 ~~2005~~million. ~~with~~Based noon ~~resolution~~the toterms of the ~~matter~~settlement, ~~reached~~we made $15.0 ~~The~~million ~~court~~of ~~has~~settlement ~~ordered~~distribution ~~the~~payments ~~parties~~in tothe ~~engage~~first ~~in further~~fiscal ~~settlement~~quarter ~~discussions~~of 2006.

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~~named toas 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~~defendant ~~possibility that resolution of the matter could result~~ in a ~~loss~~number ~~which could be materially in excess~~ of ~~presently~~other lawsuits ~~established reserves~~ or ~~which~~are ~~individually~~otherwise ora inparty ~~the~~to ~~aggregate~~certain ~~could~~litigation ~~result~~arising in athe ~~material~~ordinary ~~loss~~course ~~for~~of ~~which~~our ~~there is no reserve~~operations. ~~Litigation~~We ~~matters~~do ~~are subject to inherent uncertainties; and accordingly, with respect to the Olivas action we are~~ not ~~able~~believe tothat ~~quantify~~ the ~~estimated~~ultimate ~~amount~~determination ~~or range~~ of ~~such~~these ~~additional~~other ~~loss~~cases orwill ~~loss. However, such additional loss or loss,~~ either individually or in the aggregate, ~~could~~ have a material adverse effect ~~upon~~on our results of operations ~~and net cash flows in the period in which it is recorded~~ or ~~paid~~financial position.

WeItem ~~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~~1A. WeRisk ~~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.~~ Factors

32We did not experience any material changes from risk factors previously disclosed in Part I, Item 1A. “Risk Factors” of our 2005 Annual Report on Form 10-K for the period covered by this quarterly report on Form 10-Q.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

AsThe ~~described~~following ~~below~~table insummarizes ~~Part~~the IIstock -repurchases ~~Item~~we 4,made ~~“Submission~~ of ~~Matters~~our toshares ~~a Vote~~ of ~~Security~~common ~~Holders”,~~stock ~~our~~during ~~stockholders on May 19, 2005 approved our Long-Term Equity Compensation Plan for Non-Employee Directors (~~the ~~“Non-Employee~~ ~~Director~~12 ~~Plan”).~~weeks Weended ~~sought approval of such plan because our Amended and Restated Non-Employee Director Stock Plan expired February 22~~March 26, ~~2005. Concurrently with such approval~~2006, ~~and~~ in ~~accordance~~thousands, ~~with~~except ~~our~~share ~~policy regarding compensation of non-employee directors for their service as members of our Board~~ and ~~its~~per ~~committees,~~share ~~five~~amounts: ~~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.


Period	Total Number of Shares Purchased¹	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Program²	Approximate Dollar Value of Shares that May Yet be Purchased Under the Program²
January 2 through
January 29, 2006	20,000	$	13.06	20,000	17,310,000
January 30 through
February 26, 2006	1,957	$	14.03	1,957	17,283,000
February 27 through
March 27, 2006	—	$	—	—	17,283,000

Total	21,957	$	13.14	21,957

~~The~~¹ ~~shares~~On ofSeptember ~~restricted~~14, ~~common~~2005, ~~stock granted to~~ our ~~non-employee~~Board ~~directors~~of inDirectors ~~May~~authorized ~~were~~the ~~issued~~repurchase inof ~~reliance~~up ~~upon~~to ~~the~~$20.0 ~~exemption~~million ~~from~~of ~~registration~~our ~~provided in~~common ~~Section~~stock 4(2the “Repurchase Program”). ofThe ~~the~~Repurchase ~~Securities~~Program ~~Act~~will ofexpire ~~1933~~December 31, as2006 ~~amended~~or ~~(the~~earlier ~~“Securities~~if ~~Act”)~~the $20.0 ~~Each~~million ofaggregate cap on the ~~non-employee~~repurchase ~~directors~~is ~~that~~achieved. ~~received~~Additionally, ~~such~~authorizations aunder ~~grant~~the isRepurchase anProgram ~~“accredited~~may ~~investor”,~~be asamended ~~that~~or ~~term~~terminated isat ~~defined~~any intime ~~Rule~~by ~~501~~action ~~promulgated~~of ~~under the~~our ~~Securities~~Board ~~Act,~~of ~~and~~Directors. ~~was~~The ~~provided~~21,957 ~~with~~shares ~~all~~were ~~material~~purchased ~~financial~~by ~~and~~us ~~other~~in ~~information~~the ~~concerning~~open usmarket atduring the ~~time~~first ofquarter ~~such~~2006 ~~grant.~~under the Repurchase Program.

The 21,957 shares of common stock acquired pursuant to the Repurchase Program for the first quarter 2006 were acquired at an aggregate cost of $0.3 million (or $13.14 per share on average), leaving (after including shares acquired pursuant to the Repurchase Program through the fourth quarter of 2005) $17.3 million of remaining authorized value for further share repurchases.

Item 3.

Defaults upon Senior Securities

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

1. 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

2. 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
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.

34Item 5. Other Information

On April 4, 2006, we filed a Report on Form 8-K regarding a press release we issued on April 2, 2006 announcing the decision by our Board of Directors to review our strategic alternatives in view of an announcement by Casino Guichard-Perrachon S.A. (“Groupe Casino”), our majority shareholder, of its intention to sell a significant portion of its non-core assets by the end of 2007. Groupe Casino did not announce any specific plan with respect to its ownership in us.

Item 6.

Exhibits

Exhibit Number		Description of Exhibit
ExhibitNumber		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

*	Filed herewith.

**32 ~~Management contracts and compensatory plans, contracts and arrangements of the Company.~~

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: July 20, 2005			By:	/s/ RICHARD N. PHEGLEY
Date: May 1, 2006	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~~

3633

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Filing Compare · SMART & FINAL INC/DE