NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Stock-Based Compensation The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees , and related Interpretations in accounting for its fixed stock option plans. As such, compensation expense would be recorded on the date of grant only if the current market price  of the underlying stock exceeded the exercise price. SFAS No. 123, Accounting for Stock-Based Compensation , established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic value- based method of accounting described above, and has adopted the disclosure only requirements of SFAS No. 123. If the accounting provisions of SFAS No. 123 had been adopted, the Company’s net income (loss) and net income (loss) per share would have been as indicated in the following table: These pro forma amounts for SFAS No. 123 may not be representative of future disclosures because compensation cost is reflected over the options’ vesting periods and because additional options may be granted  in future years. the amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures either for all periods presented or as of the beginning of the year of adoption. The prospective method requires that compensation expense be recognized beginning with the effective date, based on the requirements of this statement, for all share- based payments granted after the effective date, and based on the requirements of SFAS No. 123, for all awards granted to employees prior to the effective date of this statement that remain unvested on the effective date. In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123R). This statement is  a revision of SFAS No. 123, Accounting for Stock-Based Compensation , and supersedes Accounting Principles Board Opinion No. 25. SFAS 123R requires all share- based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. Under the provisions of this statement, the Company must determine the appropriate fair value model to be used for valuing share- based payments, the amortization method for compensation cost and the transition method to be used at the date of adoption. The transition alternatives include retrospective and prospective adoption methods. Under the retro- spective method, prior periods may be restated based on The provisions of this statement are effective for fiscal 2006 and the Company is currently evaluating the requirements of this revision and has not determined the method of adoption. Basic net income per share has been computed by dividing net income by the weighted average number of shares outstanding. Diluted net income per share reflects the potential dilution that could occur assuming the inclusion of dilutive potential shares and has been 34 DOLLAR TREE STORES, INC. • 2004 ANNUAL REPORT Net Income Per Share Year Ended Year Ended Month Ended Year Ended January 29, January 31, February 1, December 31, 2005 2004 2003 2002 Net income (loss) as reported $ 180,250 $177,583 $(10,525) $154,647 Deduct: Total stock-based employee compensation  expense determined under fair value based method, net of related tax effects 13,007 13,181 1,108 12,625 Net income (loss) under SFAS No. 123 $ 167,243 $164,402 $(11,633) $142,022 Net income (loss) per share: Basic, as reported $ 1.59  $ 1.55 $ (0.09) $ 1.36 Basic, pro forma under SFAS No. 123 $ 1.48 $ 1.43 $ (0.10) $ 1.25 Diluted, as reported $ 1.58 $ 1.54 $ (0.09) $ 1.35 Diluted, pro forma under SFAS No. 123 $ 1.47 $ 1.43 $ (0.10) $ 1.24