Kri



155 North Wacker Drive ( Chicago, IL 60606

|Knight Ridder, Inc. |(KRI-NYSE) |$61.69 |

Note: All new material since the last report is highlighted.

Reason for report: Change in Estimates Previous edition: May 1, 2006

Overview

Headquartered in San Jose, California, Knight-Ridder, Inc. (KRI) is a communications company engaged primarily in newspaper and Internet publishing. It is one of the nation’s leading newspaper publishers in terms of circulation. Its Newspaper Division oversees 32 dailies in 29 U.S. markets, with 8.5 million readers daily and 11 million on Sunday. The company also publishes two dozen non-daily newspapers, as well as shoppers and special publications. Knight Ridder Digital operates the company’s newspaper websites and manages the Real Cities Network of affiliated sites in more than 110 U.S. markets. It jointly owns several classified ad listings and shopping services sites. KRI’s newspapers have won 84 Pulitzer Prizes and 14 Gold Medals for Meritorious Public Service. Additional information is available on KRI’s website at: . The fiscal year ends December 31.

Recent Development

Knight Ridder Inc.'s largest shareholder, Private Capital Management L.P. (19% stake), wants the nation's second-biggest newspaper publisher to seek a buyer, contending there are few other options left for a company that has been rapidly losing favor with investors as advertising shifts to the Internet. On November 3, 2005, Harris Associates LP, the third-largest investor with an 8 percent stake, said in a government filing that it has asked the company's Board to begin an open auction immediately.

Analysts have identified the following issues as critical to an evaluation of the investment merits of KRI:

|Key Positive Arguments |Key Negative Arguments |

|Classified ad revenue: Classified ad revenue (2nd largest revenue category |Increased competition: Advertising market is highly competitive. |

|for the company) has strengthened, including the help wanted category. |Advertisers seek the most productive use of the ad dollar, which threatens |

| |KRI’s revenue stream. |

|Share Buybacks: Management states that free cash flow will continue to be |Circulation remains weak: Circulation revenue is weak year to date; the |

|used for share buybacks. |company’s discounting strategy has not yielded results. |

|Management guidance: Management indicated that it is focused on its goal of|Weak analyst confidence: Many analysts do not share management’s optimistic|

|achieving 25% operating margin. |view about a permanent rebound in ad revenue. |

|Reduction in costs: Several analysts applaud the company for its |Ad market dependency: KRI’s long-term growth is dependent on a strong ad |

|cost-cutting efforts over the past couple of years. |market recovery. Advertising represented 79% of total 1H05 revenues. |

|Circulation price hike: The company is considering circulation price hikes |Newsprint price: Newsprint costs (15% of operating costs) were up almost |

|at several properties, which could help circulation revenue. |10% in 2Q05, despite the use of lower-weight newsprint at most of KRI’s |

| |properties. |

|National advertising: The outlook for national advertising appears to be |Revenue stream: KRI’s revenue stream is subject to encroachment from other |

|undergoing steady, if gradual, improvement. |forms of media such as television, radio, Cable, and the Internet. |

Recent Events

On June 20, 2006, the U.S. Department of Justice cleared McClatchy Co. to buy Knight Ridder Inc. after agreeing to sell St. Paul Pioneer Press. The primary concern with the deal related to antitrust issues. The financial terms pertaining to the merger involves McClatchy Co paying $4.5 billion to buy Knight Ridder. The deal involves the sale of those Knight Ridder Inc. newspapers which have low- growth prospects, according to McClatchy Co.

On June 8, 2006, an independent proxy advisory firm recommended that shareholders approve its proposed $4.5 billion acquisition by McClatchy Co. The shareholders were advised to accept the proposal at their meeting on June 26,2006.

Revenue

For the first quarter of 2006 total operating revenue of $739.9 million was up $28.1 million, or 3.9% compared to the same period in the previous fiscal year. Total advertising revenue of $582.7 million was up $24.6 million, or 4.4% on Y-O-Y basis. Total circulation revenue was $135.9 million, up 2.8% on Y-O-Y basis. Other revenue was $24.9 million, up 7.9% compared to the same period in the previous fiscal year.

One analyst (UnionBankSwitz.) expects advertising and total revenue growth to decelerate through the rest of the year, and expects costs to outpace revenue growth. They believe that advertising revenues will be up 3.5% in 2Q06, with online operations continuing to contribute to strong double-digit growth.

For 2Q06, the range is from $769.3M to $782.5M, with an average of $773.9M (compared to the previous estimate of $731.5M). For FY06, the range is from $3,092.4M to $3,169.9M, with an average of $3,114.3M (compared to the previous estimate of $3,085.0M). For FY07, the range is $3,160.5M to $3,191.6M, with an average of $3,177.4M (compared to previous estimate of $3,152.6M). For FY08, one analyst (Goldman) projects the revenue to be $3,268.9M.

|Revenue ($M) |

|Positive |12.5% |

|Neutral |87.5% |

|Negative |0.0% |

|Digest High |$68.00 |

|Digest Low |$61.00 |

|Avg. Target Price |$64.40↓ |

|No. of Analysts with Target Price/Total |5/9 |

Capital Structure/Solvency/Cash Flow/Governance/Other

On April 26, 2006, McClatchy announced that it is selling certain newspapers that are owned by Knight-Rider for $1 billion. This transaction will occur as soon as practicable after McClatchy acquires KRI, which is expected to occur this summer. The sale to is part of a complex set of transactions that will facilitate McClatchy’s $4.3 billion purchase of KRI. On the same day, McClatchy disclosed that it has received a request for additional information from the U.S. Department of Justice (DOJ) pertaining to McClatchy's pending acquisition of KRI.

On April 14, 2006, McClatchy disclosed several new details about its pending acquisition of KRI in a regulatory filing, and mentioned the outcry from Knight Ridder's three largest shareholders. The deal will have to be approved by at least 80 percent of KRI’s shareholders in accordance with Knight Ridder's bylaws.

On March 13, 2006, KRI agreed to sell itself to McClatchy for $4.5 billion in cash and stock, plus the assumption of $2 billion in debt. McClatchy confirmed the merger, saying it expects the deal to add to earnings by 2008.

On February 3, 2006, Gannett Co. Inc. pulled out as a sole bidder in the auction for KRI, and may be planning instead to ally with another group of suitors to buy only the newspapers it wants.

On November 23, 2005, Knight Ridder Inc. announced that it acquired The Employment News, a free recruitment weekly published in Minneapolis and St. Paul, Minn., as well as a separate publication, Minnesota Health & Medical Careers.

On November 14, 2005, Knight Ridder Inc., under pressure from its largest shareholders, said that it would consider selling the company, and take other steps to boost shareholder value.

Potentially Severe Problems

None at the moment

Long-Term Growth

Most analysts anticipate long-term earnings growth to range between 6.5% (Merrill) and 12% (Prudential). The Digest average long-term growth rate is 8.5%.

The increasing competitiveness of other forms of media such as Cable television and the Internet present a significant ongoing risk to KRI’s revenue stream. There is also a high correlation between a growing economy and increasing advertising revenue. If the U.S. economy continues to grow and labor continues to strengthen, KRI’s revenue will continue to be positively impacted. However, if the economy were to slow, or even experience negative growth, the company’s efforts to improve the topline will be hampered.

With nearly 80% of its revenue derived from advertising, KRI is still a pure play newspaper company, despite its attempts to diversify the revenue stream. The ad recovery has been weaker than the economic recovery, meaning that revenues have been curtailed while prices, like that of newsprint, are experiencing significant increases. This negative combination has pressured margins. Furthermore, as interest rates bottom and turn upward, the classified ad segment becomes vulnerable again (help wanted and real estate, to name two large classified categories).

The longer-term challenge for KRI is the performance and growth of its Knight Ridder Digital division, specifically , the CareerBuilder forums, and other online properties. In order to improve topline performance, KRI must garner more revenue from its online division, the segment which ultimately represents the highest growth opportunity for the company.

Upcoming Events

None at the moment

.

Individual Analyst Opinions

POSITIVE RATINGS

J.P. Morgan – Overweight: 04/21/06

NEUTRAL RATINGS

B. of America – Neutral ($66 – target price): 04/17/06 - The analyst maintains a Neutral rating on the stock, based on sluggishness within large markets and a limited number of prospective bidders.

Bear Stearns – Peer perform (No Price target): 05/18/06 – The analyst maintains the Neutral rating fearing that the acquisition is not proving beneficial, despite the company showing strong performance in 1Q06 with an increase in advertisement revenue in1Q06.

Deutsche Bank – Hold ($63 – target price): 06/9/06 - The analyst has maintained a Hold rating, and reduced the price target by a dollar given the persistently soft large market operating environment, and few positive catalysts. The analyst remains concerned about the lack of overall ad revenue acceleration, and persistent decline in circulation.

Prudential – Neutral weight ($64 - target price): 04/17/06 – The analyst believes that the stock is likely to trade more in connection with developments regarding the company’s potential takeover rather than operating fundamentals .

Smith Barney – Hold ($68 – target price): 04/17/06 – The analyst remains concerned about the below-average growth dynamics of the markets KRI serves. Furthermore, the analyst believes, at this stage, the market has largely priced in the recovery in help wanted advertising. The analyst believes that the stock will continue to hold its value well in a turbulent market, but does not see significant upside at its current valuation. All else equal, an improved pace of recovery in retail advertising could move the stock to a more aggressive stance.

Thomas Weisel – Peer perform: 04/17/06 - The analyst believes that KRI’s shares are likely to trade in line with MaClatchy shares except for a small discount that should close as the deal nears finalization.

UnionBankSwitz. – Neutral ($61- target price): 06/9/06 - The analyst believes that the company will continue to struggle owing to the challenging advertising environment with circulation revenue decreasing year on year. However, the analyst is optimistic about the company’s growth prospects based on the belief that KRI will soon start exploring strategic alternatives.

NEGATIVE RATINGS

None

NOT RATED

Goldman: 04/17/06 – The analysts have raised their FY06 ad revenue growth assumption slightly to better reflect the impact from last year’s asset acquisition and divestitures.

Copy Edtior: Maitreyi Sen.

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Zacks Research Digest

June 21, 2006

Research Associate: Soumitra Saha, M.Fin,CA(Inter)

Editor: Marla Harkness, MBA, CFA

Sr. Editor: Ian Madsen, CFA: imadsen@ : 1-800-76-3771:x417

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