42  The financial position and results of operations of the Company's significant foreign subsidiaries are measured using local  currency as the functional currency. Assets and liabilities of such subsidiaries have been translated at current exchange rates and  related revenues and expenses have been translated at weighted average exchange rates. The aggregate effect of translation  adjustments so calculated is included as a component of accumulated other comprehensive loss within shareholders’ equity.  Transaction gains and losses are included in other expense, net. Deferred income taxes are provided for revenue and expenses which are recognized in different periods for income tax and  financial statement purposes. Deferred income taxes are not provided on undistributed earnings of foreign affiliated companies  which are considered to be permanently invested. Deferred tax assets are regularly assessed for recoverability based on both  historical and anticipated earnings levels and a valuation allowance is recorded when it is more likely than not that these amounts  will not be recovered. The weighted-average fair values of options granted during 2004, 2003 and 2002 were $9.15, $6.50 and $8.54,  respectively. The fair value of stock options has been estimated at the date of grant using the Black-Scholes option-pricing model with  the following weighted-average assumptions: The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees," and related interpretations in  accounting for stock options. Accordingly, no compensation cost has been recognized for the Plans. Had compensation cost for  stock options been determined based on the fair value of the option at date of grant consistent with the provisions of FAS No. 123,  "Accounting for Stock-Based Compensation," the Company's net income and earnings per share would have been reduced to the pro  forma amounts indicated below: Stock Options Income Taxes Foreign Currency Translation  2004  2003 2002 Risk free interest rate  3.4%  3.2% 2.7% Expected life  5 years  5 years 5 years Expected volatility  27.0%  30.0% 40.0% Expected dividend yield  0.0%  0.0% 0.0% 2004  2003 2002 Net income  $163,311 $103,990 $80,344 Less: Total stock based compensation expense determined under  Black-Scholes option pricing model, net of related tax effects  (4,714)  (5,148) (6,559) Pro forma net income  $158,597  $ 98,842  $73,785  Earnings Per Share:   Basic-as  reported  $1.86  $1.21  $0.95   Basic-pro  forma  $1.80  $1.15  $0.87  Diluted-as reported  $1.82  $1.18  $0.93  Diluted-pro forma  $1.77  $1.12  $0.85  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 