A M P H E N O L C O R P O R A T I O N 2 0 0 4 A N N U A L R E P O R T  Research and Development  Environmental Obligations Net Income per Common Share  Derivative Financial Instruments  Recent Accounting Changes  43 In November 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard, No.  151 (“FAS 151”), “Inventory Costs – an amendment of ARB No. 43, Chapter 4,” in an effort to conform U.S. accounting standards  for inventories to International Accounting Standards. FAS 151 requires idle facility expenses, freight, handling costs and wasted  In December 2003, the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the “Act”) was enacted.   The Act introduced a new prescription drug benefit under Medicare (“Medicare Part D”), as well as a federal subsidy to sponsors of  retiree health care benefit plans that provide a prescription drug benefit that is at a minimum actuarially equivalent to Medicare Part  D. FASB Staff Position (“FSP”) 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug  Improvement and Modernization Act of 2003,” was provided by the FASB to offer guidance on accounting and disclosure  requirements for the Act. The Company does not believe the new Act will have a material impact on the Company’s Consolidated  Financial Statements.  Derivative financial instruments, which are periodically used by the Company in the management of its interest rate and  foreign currency exposures, are accounted for on an accrual basis. Income and expense are recorded in the same category as that  arising from the related asset or liability. For example, amounts to be paid or received under interest rate swap agreements are  recognized as an increase or decrease of interest expense in the periods in which they accrue. The Company adopted FAS 133, as  amended by FAS 138, beginning January 1, 2001. Adoption of this new accounting standard resulted in a cumulative after-tax gain  of $291 in accumulated other comprehensive income as of that date. Gains and losses on derivatives designated as cash flow hedges  resulting from changes in fair value are recorded in other comprehensive income, and subsequently reflected in net income in a  manner that matches the timing of the actual income or expense of such instruments with the hedged transaction. At December 31,  2004, the Company had interest rate swap agreements that fix the Company’s LIBOR interest rate on $250,000 and $50,000 of  floating rate bank debt at 2.44% and 3.01%, expiring in May 2006 and June 2006, respectively. These agreements are designated as  cash flow hedges and accounted for as described above. Basic income per common share is based on the net income for the period divided by the weighted average common shares  outstanding. Diluted income per common share assumes the exercise of outstanding, dilutive stock options using the treasury stock  method. On January 21, 2004, the Company announced a 2-for-1 stock split that was effective for shareholders of record as of  March 17, 2004. The additional shares were distributed on March 29, 2004. The share information included herein has been  restated to reflect the effect of such stock split.  The Company recognizes the potential cost for environmental remediation activities when assessments are made, remedial  efforts are probable and related amounts can be reasonably estimated; potential insurance reimbursements are not recorded. The Company regularly assesses its environmental liabilities through reviews of contractual commitments, site assessments, feasibility  studies and formal remedial design and action plans. Research and development expenses for the creation of new and improved products and processes were $32,459, $26,361,  and $24,183, for the years 2004, 2003 and 2002, respectively. In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard, No.  123R (“FAS 123R”) “Share-based payment”. FAS 123R applies to all transactions involving the issuance, by a company, of its own  equity (stock, stock options, or other equity instruments) in exchange for goods or services, including employee services. FAS 123R  requires entities to recognize the cost of employee services received in exchange for the stock-based compensation using the fair  value of those stocks on the grant date (with limited exceptions). This statement is effective for the first interim reporting period  beginning after June 15, 2005. The Company is currently assessing the impact that this statement will have on the Company’s  Consolidated Financial Statements, but does not anticipate the impact to be more than $2 million per quarter based on the options  outstanding as of December 31, 2004. 