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## Notes to Consolidated Financial Statements 

The weighted-average assumptions used in the Black Scholes model were as follows: 

<img src='content_image/123586.jpg'>

Restricted stock and restricted stock unit (RSU) awards are recognized as unearned compensation, a component of stockhold- ers’ equity, based on the fair market value of our common stock on the award date. These amounts are amortized to compensa- tion expense, using the straight-line method, over the vesting period using assumed forfeiture rates for different types of awards. Compensation expense is adjusted in future periods if actual forfeiture rates differ from initial estimates. 

## Net Earnings Per Share 

Basic net earnings per share are computed by dividing net earnings by the weighted-average number of common shares outstanding for the reporting period. Diluted net earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Outstanding stock options issued by us represent the only dilutive effect reflected in diluted weighted-average shares out- standing. Options do not impact the numerator of the diluted net earnings per share computation. 

Options to purchase 4,643,389 shares, 3,952,618 shares, and 161,220 shares of common stock were excluded from the calcula- tion of diluted net earnings per share for fiscal 2004, 2003, and 2002, respectively, because their exercise prices exceeded the average market price of common shares for the period. 

## Comprehensive Income (Loss) 

Comprehensive income (loss) includes net earnings and other comprehensive income (loss) items that are excluded from net earnings under U.S. generally accepted accounting principles. Other comprehensive income (loss) items include foreign currency translation adjustments, the effective unrealized portion of changes in the fair value of cash flow hedges, and amounts associated with minimum pension liability adjustments. 

## Foreign Currency 

The Canadian dollar is the functional currency for our Canadian restaurant operations. Assets and liabilities denominated in Canadian dollars are translated into U.S. dollars using the exchange rates in effect at the balance sheet date. Results of operations are translated using the average exchange rates prevailing throughout the period. Translation gains and losses are reported as a separate component of accumulated other comprehensive income (loss) in stockholders’ equity. Aggregate cumulative translation losses were $9,960 and $10,354 at May 30, 2004, and May 25, 2003, respectively. Gains (losses) from foreign currency transactions, which amounted to $(53), $(105), and $33, are included in the consolidated statements of earnings for fiscal 2004, 2003, and 2002, respectively. 

## Use of Estimates 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make esti- mates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates. 

## Segment Reporting 

As of May 30, 2004, we operated 1,325 Red Lobster, Olive Garden, Bahama Breeze, Smokey Bones Barbeque & Grill and Seasons 52 restaurants in North America as part of a single operating segment. The restaurants operate principally in the U.S. within the casual dining industry, providing similar products to similar customers. The restaurants also possess similar pricing structures, resulting in similar long-term expected financial performance characteristics. Revenues from external customers are derived principally from food and beverage sales. We do not rely on any major customers as a source of revenue. We believe we meet the criteria for aggregat- ing our operations into a single reporting segment. 

## Reclassifications 

Certain reclassifications, including the reclassification of asset impairment charges and credits from selling, general, and admin- istrative expenses, have been made to prior year amounts to con- form to current year presentation. 

