RESULTS OF OPERATIONS — 2005 VS. 2004

Our net sales for fiscal 2005 were $11.2 billion, an increase of 2 percent for the year compared to sales in fiscal 2004. Excluding the effect of the 53rd week in 2004, net sales increased 3 percent. The components of net sales growth are shown in the following table:

    The unit volume growth in fiscal 2005 contributed approximately $17 million in gross margin improvement (net sales less cost of sales) over fiscal 2004. However, overall gross margin decreased by $77 million, primarily due to increased cost of sales driven primarily by approximately $170 million in commodity cost increases. As a result, gross margin as a percent of net sales decreased 130 basis points versus fiscal 2004 to 39 percent in fiscal 2005.

    Selling, general and administrative costs decreased by $25 million from fiscal 2004 to fiscal 2005, primarily driven by four factors: a $54 million decrease in consumer marketing expense, a $37 million increase in distribution costs, a $32 million increase in unallocated corporate items and a $34 million decrease in merger-related costs. These merger-related costs were items related to the planning and execution of the integration of Pillsbury.

    Net interest expense decreased 10 percent from $508 million in fiscal 2004 to $455 million in fiscal 2005, primarily due to reduction of debt levels. Interest expense includes preferred distributions paid on subsidiary minority interests. We have in place a net amount of interest rate swaps that convert $645 million of fixed-rate debt to floating rates. Taking into account the effect of our interest rate swaps, the average interest rate on our total outstanding debt and subsidiary minority interests was 5.4 percent.

    Restructuring and other exit costs were $84 million in fiscal 2005. These charges were primarily associated with the supply chain initiatives to further increase asset utilization and reduce manufacturing and sourcing costs. The actions included plant closures and production realignment resulting in asset write-downs, severance and related costs. Our fiscal 2004 results included restructuring and other exit costs of $26 million.

    We recorded a gain of $499 million on two divestitures in fiscal 2005. On February 28, 2005, Snack Ventures Europe (SVE), our snacks joint venture with PepsiCo, Inc., was terminated and our 40.5 percent interest was redeemed. On April 4, 2005, we sold our Lloyd’s barbecue business to Hormel Foods Corporation. We received $799 million in cash proceeds from these dispositions and the proceeds were used to repurchase debt. In fiscal 2005, we earned $28 million after tax from SVE and Lloyd’s.

    We incurred $137 million in debt repurchase costs in fiscal 2005 resulting from the repurchase of $760 million in aggregate principal amount of our outstanding 6% Notes due in 2012. The costs consisted of $73 million of noncash interest rate swap losses reclassified from Accumulated Other Comprehensive Income, $59 million of purchase premium and $5 million of non-cash unamortized cost of issuance expense.

    In fiscal 2005 our effective income tax rate increased to 36.6 percent, driven primarily by the tax impacts of our fiscal 2005 divestitures. The higher book tax expense related to the fiscal 2005 divestitures did not result in the payment of significant cash taxes. Our effective income tax rate was 35 percent in fiscal 2004. We expect our effective tax rate in fiscal 2006 to be approximately 35.5 percent.

    After-tax earnings from joint venture operations grew 20 percent to reach $89 million in fiscal 2005, compared with $74 million reported a year earlier. This increase was primarily due to unit volume gains by our continuing joint ventures. As of May 29, 2005, we were a 50 percent partner in several joint ventures. Our international joint ventures include Cereal Partners Worldwide (CPW), our joint venture with Nestlé, and Häagen-Dazs joint ventures in Asia. 8 ^th Continent is our domestic joint venture with DuPont to develop and market soy beverages. On February 28, 2005, we announced the redemption of our 40.5 percent share of SVE as described above.

    Our results of operations reflect the adoption of Emerging Issues Task Force Issue No. 04–8 (EITF 04–8), “The Effect of Contingently Convertible Debt on Diluted Earnings per Share.” The effect of EITF 04-8 reduced our fiscal 2005 diluted earnings per share by $0.19, and

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reduced previously reported diluted earnings per share by $0.15 and $0.08 for fiscal 2004 and 2003, respectively, related to our contingently convertible debt issued in 2002.

    Average diluted shares outstanding were 409 million in fiscal 2005, down 1 percent from 413 million in fiscal 2004 as the repurchase of 17 million shares from Diageo was partially offset by stock option exercises.

    Net income increased to $1.24 billion in fiscal 2005, from $1.06 billion in 2004. Earnings per diluted share of $3.08 in 2005 were up 18 percent from $2.60 in 2004 primarily due to the redemption of our SVE interest, the sale of Lloyd’s and the reduction in interest expense.

    Unit volume grew 1 percent versus fiscal 2004. Excluding the prior year’s extra week, unit volume grew 3 percent. All of our U.S. Retail divisions with the exception of Big G cereals experienced volume growth for the year:

    Big G cereal volume fell 5 percent in fiscal 2005, with contributions from new products including reduced-sugar versions of Cinnamon Toast Crunch , Trix and Cocoa Puffs more than offset by the loss of volume associated with the increases in list and/or promoted prices. Yoplait yogurt volume increased 11 percent with continued growth from established cup yogurt lines. Snacks division volume was up 2 percent, led by the introduction of new Nature Valley granola bar products. Meals division unit volume rose 1 percent with growth in our Progresso , Hamburger Helper and Old El Paso businesses. Unit volume growth of 1 percent for Pillsbury USA reflected gains for refrigerated cookies and bread and Totino’s pizza and hot snacks. Baking Products division unit volume was up 1 percent behind growth in mass merchandising channels.

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    Retail dollar sales for our major brands grew 2 percent overall on a 52 versus 52-week basis as measured by ACNielsen including panel projections for Wal-Mart:

    The unit volume growth in fiscal 2005 contributed approximately $13 million in gross margin improvement over fiscal 2004, but overall gross margin decreased by $144 million. Cost of sales increased by $161 million, driven primarily by commodity cost increases, and net pricing realization (defined as the impact of list and promoted price increases net of increases in trade promotion costs) did not contribute to offset those increased costs. Gross margin as a percent of net sales decreased 200 basis points versus fiscal 2004 to 43 percent in fiscal 2005.

    Selling, general and administrative costs decreased by $54 million, primarily due to decreases in consumer marketing spending.

    Operating profits declined to $1.72 billion, down from $1.81 billion in fiscal 2004.

    Unit volume was down 5 percent, or down 3 percent on a comparable 52-week basis, reflecting softness in shipments to our foodservice distributors and bakery customers that was partially offset by growth in sales to convenience stores. Unit volume by major customer category was:

    The unit volume decline in fiscal 2005 reduced gross margin by approximately $22 million compared to fiscal 2004. However, overall gross margin increased by $5 million as an increase in cost of sales was offset by positive net pricing realization. Gross margin as a percent of net sales increased slightly versus fiscal 2004 to 26 percent in fiscal 2005.

    Selling, general and administrative costs increased by only $3 million.

    Operating profits increased from $132 million in fiscal 2004 to $134 million in fiscal 2005.

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International Segment

Net sales for our International operations totaled $1.72 billion in fiscal 2005 compared to $1.55 billion in 2004. The components of net sales growth are shown in the following table:

    Unit volume grew 5 percent for the year and comparable 52-week volume was up 6 percent. International unit volume growth was driven by 12 percent growth in the Asia/Pacific region:

    Using constant exchange rates to translate components of earnings, the unit volume increase in fiscal 2005 improved gross margin by approximately $27 million; overall gross margin increased by $52 million, as net price realization more than offset increases in cost of sales; gross margin as a percent of sales improved to 35 percent; selling, general and administrative costs increased $10 million; and operating profit increased $42 million, or 35 percent over fiscal 2004.

    Operating profits including the favorable effects of foreign currency rate changes grew to $171 million, 44 percent above last year’s $119 million.

UNALLOCATED CORPORATE ITEMS

Unallocated corporate items were $32 million in expense in fiscal 2005, including $18 million in costs (classified as cost of sales) associated with restructuring and other exit activities. Fiscal 2004 expense was $17 million, including merger-related costs of $34 million. The primary factors accounting for the remaining variance were severance costs of $21 million in fiscal 2005 that were not associated with restructuring and other exit activities, and an increase of $9 million in stock-based compensation expense.

    Our interest in SVE was redeemed in February 2005, and therefore is excluded from the table above.

    Our joint ventures do not share our fiscal year, and therefore did not have the benefit of a 53rd week in fiscal 2004.

RESULTS OF OPERATIONS — 2004 VS. 2003

Net earnings for the 53-week fiscal 2004 were $1.06 billion, up 15 percent from fiscal 2003. Diluted earnings per share were $2.60 compared to $2.35 in fiscal 2003, as adjusted for the effects of EITF 04-8. Annual net sales rose 5 percent, to $11.1 billion, driven by a 3 percent increase in worldwide unit volume and a 2 percent increase in net price realization, including foreign exchange. Excluding the effect of the 53rd week, net sales increased 4 percent. This performance reflected improvement in our U.S. Retail and International segments, but was constrained by economic and internal factors limiting growth in our Bakeries and Foodservice segment.

    U.S. Retail unit volume grew 4 percent in fiscal 2004, or 2 percent excluding the 53rd week. All of our U.S. Retail divisions experienced volume growth, fueled by an increase in product and marketing innovation. Net sales

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for these operations totaled $7.76 billion in fiscal 2004, compared to $7.41 billion in fiscal 2003. Operating profits totaled $1.81 billion, up 3 percent from $1.75 billion in the prior year.

    Bakeries and Foodservice results in fiscal 2004 included a unit volume decline of 3 percent, or 4 percent excluding the extra week, reflecting softness in our bakery business and elimination of low-margin product lines. Net sales fell slightly to $1.76 billion in fiscal 2004 compared to $1.80 billion in fiscal 2003, while operating profit declined 15 percent from $156 million in fiscal 2003 to $132 million in fiscal 2004.

    International unit volume increased 5 percent in fiscal 2004, or 4 percent excluding the extra week, driven by growth in the Asia/Pacific region, Canada and Europe. Net sales totaled $1.55 billion in fiscal 2004 compared to $1.30 billion in 2003, and operating profits grew to $119 million, up 31 percent from the prior year’s $91 million total.

    Unallocated corporate items decreased from $76 million in fiscal 2003 to $17 million in fiscal 2004, primarily driven by a $36 million decrease in merger-related costs as the integration of Pillsbury was completed during the year.

    Our share of after-tax joint venture earnings increased from $61 million in fiscal 2003 to $74 million in fiscal 2004, primarily due to unit volume gains.

IMPACT OF INFLATION

It is our view that changes in the general rate of inflation have not had a significant effect on profitability over the three most recent years other than as noted above related to commodities. We attempt to minimize the effects of inflation through appropriate planning and operating practices. Our risk management practices are discussed in the “Market Risk Management” section below.

CASH FLOWS

Sources and uses of cash in the past three years are shown in the following table. Over the most recent three-year period, General Mills’ operations have generated $4.8 billion in cash. In fiscal 2005, cash flow from operations totaled over $1.7 billion. That was up from the previous year due primarily to the change in current assets and liabilities included in cash flows from operations providing $258 million cash in 2005 versus using $186 million cash in 2004. The fiscal 2005 source of cash was due primarily to an increase in accrued taxes as the result of receiving cash benefits from the utilization of capital losses for tax purposes. The fiscal 2004 use of cash was primarily due to lower accrued liabilities, payments against integration and restructuring liabilities, and changes in accrued taxes.

    In fiscal 2005, capital investment for land, buildings, equipment and intangibles decreased to $434 million from $653 million in fiscal 2004. We expect capital expenditures of approximately $450 million in fiscal 2006.

    Dividends in 2005 totaled $1.24 per share, a payout of 40 percent of diluted earnings per share, or 48 percent of diluted earnings per share excluding the net gain from divestitures and debt repurchases. Our board of directors announced a 6 percent dividend increase to an annual rate of $1.32 per share, effective with the dividend payable on August 1, 2005.

    The decrease in outstanding debt in fiscal 2005 includes the results of debt repurchases. On March 23, 2005, we commenced a cash tender offer for our outstanding 6% Notes due in 2012. The tender offer resulted in the purchase of $500 million principal amount

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of the Notes. Subsequent to the expiration of the tender offer, we purchased an additional $260 million principal amount of the Notes in the open market. The aggregate purchases resulted in the debt repurchase costs described earlier in the “Results of Operations – 2005 vs. 2004” section.

    In May 2002, a wholly owned subsidiary of General Mills sold 150,000 Class A preferred membership interests in General Mills Cereals LLC (GMC) to an unrelated third-party investor in exchange for $150 million. On October 8, 2004, a wholly owned subsidiary of General Mills sold 835,000 Series B-1 preferred membership interests in GMC in exchange for $835 million. Currently, all interests in GMC, other than the aforementioned interests, but including all managing member interests, are held by wholly owned subsidiaries of General Mills. We used $750 million of the proceeds from the sale of GMC Series B-1 interests to purchase approximately 17 million shares of our common stock from Diageo plc at $45.20 per share in October 2004. This share repurchase was made in conjunction with Diageo’s sale of approximately 33 million additional shares of General Mills common stock in an underwritten public offering. Following these transactions, Diageo and its affiliates held approximately 29 million shares of General Mills common stock.

    Concurrently in October 2004, Lehman Brothers Holdings Inc. issued $750 million of notes, which are mandatorily exchangeable for General Mills common stock. In connection with the issuance of those notes, an affiliate of Lehman Brothers entered into a forward purchase contract with General Mills, under which we are obligated to deliver to such affiliate between approximately 14 million and 17 million shares of General Mills common stock, subject to adjustment under certain circumstances. These shares will generally be deliverable by us in October 2007, in exchange for $750 million in cash or, in certain circumstances, securities of an affiliate of Lehman Brothers. We recorded a $43 million fee for this forward purchase contract as an adjustment to stockholders’ equity.

    With respect to the holders of minority interests in GMC, the Series B-1 interests will be exchanged for shares of our perpetual preferred stock upon the occurrence of certain events, including a decrease in our long-term debt rating below either Ba3 as rated by Moody’s or BB- as rated by Standard & Poor’s or Fitch, Inc., or a failure to pay a quarterly dividend on our common stock. In addition, if GMC fails to make certain required distributions, we will be restricted from paying any dividend (other than dividends in the form of shares of common stock) or other distributions on shares of our common stock, and may not repurchase or redeem shares of our common stock, until such distributions are paid. The Class A interests have the right to request the dissolution and liquidation of GMC upon the occurrence of certain events, including the bankruptcy of GMC or its subsidiaries, failure to deliver the preferred distributions, failure to comply with portfolio requirements, breaches of certain covenants, lowering of our senior debt rating below either Baa3 by Moody’s or BBB by Standard & Poor’s, and a failed attempt to remarket the Class A interests as a result of a breach of GMC’s obligations to assist in such remarketing. In the event of a liquidation of GMC, each member of GMC would receive the amount of its then capital account balance. The managing member may avoid liquidation in most circumstances by exercising an option to purchase the Class A interests. An election to purchase the preferred membership interests could impact our liquidity by requiring us to refinance the purchase price.

    Our board of directors has authorized the repurchase from time to time of shares of our common stock subject to a maximum of 170 million shares held in our treasury. We did not repurchase a significant number of our shares on the open market in fiscal 2005. With the completion of our $2 billion debt reduction plan in fiscal 2005, we intend to resume open-market share repurchases in fiscal 2006.

FINANCIAL CONDITION

Our total debt was $6.2 billion as of May 29, 2005, a decrease of $2.0 billion from May 30, 2004. We also consider our leases and deferred income taxes related to tax leases as part of our debt structure, and include them in our measurement of “adjusted debt plus certain minority interests,” as shown in the table below. In fiscal 2005, our adjusted debt plus certain minority interests declined by $1.7 billion, to $6.7 billion, and our stockholders’ equity grew to $5.7 billion. The market value of our stockholders’ equity increased as well, as an increase in share price was partially offset by a decrease in shares outstanding. As of May 29, 2005, our equity market capitalization was $18.3 billion, based on a price of $49.68 per share and 369 million basic shares

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outstanding. Our total market capitalization, including adjusted debt, minority interests and equity capital, was $25.8 billion as of May 29, 2005, down slightly from the total as of May 30, 2004.

    At the end of fiscal 2005, approximately 68 percent of our adjusted debt plus certain minority interests was long-term. This includes classifying the zero coupon convertible debentures as short-term due to put provisions exercisable in October 2005.

    We consider our leases and deferred income taxes related to tax leases as part of our fixed-rate obligations. The following table, when reviewed in conjunction with the capital structure table, shows the composition of our debt structure including the impact of using derivative instruments.

    Commercial paper is a continuing source of short-term financing. We can issue commercial paper in the United States, Canada and Europe, through a program established in fiscal 1999. Our commercial paper borrowings are supported by $1.85 billion in committed credit lines. Currently, we have no outstanding borrowings under these credit lines. The following table details the fee-paid credit lines we had available as of May 29, 2005.

    On June 23, 2004, we filed a Universal Shelf Registration Statement (the Shelf) with the SEC covering the sale of up to $5.9 billion of debt securities, common stock, preference stock, depository shares, securities warrants, purchase contracts, purchase units and units (all described in the Shelf). In addition, the Shelf covered the resale of approximately 50 million shares of our common stock owned by an affiliate of Diageo plc, which was completed in October 2004 as described in the “Cash Flows” section above. The SEC declared the Shelf effective on September 20, 2004. As of May 29, 2005,

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approximately $5.1 billion remained available under the Shelf for future use.

    We believe that two important measures of financial strength are the ratios of fixed charge coverage and cash flows from operations to adjusted debt plus certain minority interests. Our fixed charge coverage in fiscal 2005 was 4.7 times compared to 3.8 times in fiscal 2004, and cash flows from operations to adjusted debt plus certain minority interests increased to 26 percent. We expect to pay down between $100 and $200 million of adjusted debt plus certain minority interests in fiscal 2006. Our goal is to return to a mid single-A rating for our long-term debt, and to the top tier short-term rating, that we held prior to our announcement of the Pillsbury acquisition. Currently, Standard and Poor’s Corporation has ratings of BBB+ on our publicly held long-term debt and A-2 on our commercial paper. Moody’s Investors Services, Inc. has ratings of Baa2 for our long-term debt and P-2 for our commercial paper. Fitch Ratings, Inc. rates our long-term debt BBB+ and our commercial paper F-2. Dominion Bond Rating Service in Canada currently rates General Mills as A-low.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

It is not our general business practice to enter into off-balance sheet arrangements nor is it our policy to issue guarantees to third parties. We have, however, issued guarantees of approximately $168 million for the debt and other obligations of unconsolidated affiliates, primarily CPW. In addition, off-balance sheet arrangements are generally limited to the future payments under noncancelable operating leases, which totaled approximately $462 million at May 29, 2005.

    The following table summarizes our future estimated cash payments under existing contractual obligations, including payments due by period. The majority of the purchase obligations represent commitments for projected raw material and packaging needs to be utilized in the normal course of business and for consumer-directed marketing commitments that support our brands. The fair value of our interest rate swaps was $221 million at May 29, 2005, based on interest rates as of that date. Future changes in interest rates will impact the amount of cash ultimately paid or received to settle those liabilities in the future. Other long-term obligations primarily consist of income taxes, accrued compensation and benefits, miscellaneous liabilities and minority interests. We are unable to estimate the timing of the payments for these items. We do not have significant statutory or contractual funding requirements for our defined-benefit retirement and other postretirement benefit plans. Further information on these plans, including our expected contributions for fiscal 2006, is set forth in Note Fourteen to the Consolidated Financial Statements appearing on pages 47 through 51 in Item Eight of this report.

    If holders of the zero coupon convertible debentures exercise their rights to require us to repurchase the notes in October 2005, we intend to refinance that obligation using sources of financing discussed previously.

CRITICAL ACCOUNTING POLICIES

For a complete description of our significant accounting policies, please see Note One to the Consolidated Financial Statements appearing on pages 31 through 34 in Item Eight of this report. Our critical accounting policies are those that have meaningful impact on the reporting of our financial condition and results, and that may require significant management judgment and estimates. These policies include our accounting for trade and consumer promotion activities; asset impairments; income taxes; and pension and postretirement liabilities.

Trade and Consumer Promotion Activities

We report sales net of certain coupon and trade promotion costs. The trade promotion costs include payments to customers to perform merchandising activities on our behalf, such as advertising or in-store displays, discounts

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to our list prices to lower retail shelf prices, and payments to gain distribution of new products.

    The amount and timing of expense recognition for trade and consumer promotion activities involve management judgment related to estimated participation and performance levels. The vast majority of year-end liabilities associated with these activities are resolved within the following fiscal year and therefore do not require highly uncertain long-term estimates. For interim reporting, we estimate the annual trade promotion expense and recognize pro rata period expense generally in proportion to revenue, adjusted for estimated year-to-date expenditures if greater than the pro rata amount. Certain trade and consumer promotion expenses are recorded as reductions of net sales.

    Promotional funds for our retail businesses are initially established at the beginning of each year, and paid out over the course of the year based on the customer’s performance of agreed-upon merchandising activity. During the year, additional funds may also be used in response to competitive activities, as a result of changes in the mix of our marketing support, or to help achieve interim unit volume targets.

    We set annual sales objectives and interim targets as a regular practice to manage our business. Our sales employees are salaried, and are eligible for annual cash incentives based on performance against objectives including goals for unit volume and the trade promotion cost per unit required to achieve the unit volume goal. Our sales employees have discretion to plan and adjust the timing of merchandising activity over the course of the year, and they also have some discretion to adjust the level of trade promotion funding applied to a particular event.

    Our unit volume in the last week of each quarter is consistently higher than the average for the preceding weeks of the quarter. In comparison to the average daily shipments in the first 12 weeks of a quarter, the final week of each quarter has approximately two to four days’ worth of incremental shipments (based on a five-day week), reflecting increased promotional activity at the end of the quarter. This increased activity includes promotions to assure that our customers have sufficient inventory on hand to support major marketing events or increased seasonal demand early in the next quarter, as well as promotions intended to help achieve interim unit volume targets. This increased sales activity results in shipments that are in direct response to orders from customers or authorized pursuant to prearranged inventory-management agreements, and accordingly are recognized as revenue within that quarter. The two to four day range of increased unit volume in the last week of each quarter has been generally consistent from quarter to quarter over the last three years, except that in the third quarter of fiscal 2005, we were slightly below the two to four day range, primarily as actions to raise promoted prices on Big G cereals resulted in declines in promoted volume. If incremental shipments had been within the two to four day range, our reported U.S. Retail volume growth for the quarter would have remained unchanged.

    As part of our effort to assess the results of our promotional activities, we regularly estimate the amount of “retailer inventory” in the system — defined as product that we have shipped to our customers that has not yet been purchased from our customers by the end-consumer. While it is not possible for us to measure the absolute level of inventory, we are able to estimate the change that occurs each month by comparing our shipments to retail customers with their sales to end-consumers as reported by ACNielsen. Our estimate indicates inventory levels peak in November when retailers have increased inventories to meet seasonal demand for products like refrigerated dough and ready-to-serve soup. This seasonal trend is generally consistent from year to year, even as retailers have taken actions to reduce their ongoing inventory levels.

    We also assess the effectiveness of our promotional activities by evaluating the end-consumer purchases of our products subsequent to the reporting period. If, due to quarter-end promotions or other reasons, our customers purchase more product in any reporting period than end-consumer demand will require in future periods, then our sales level in future reporting periods would be adversely affected.

    As part of our ongoing evaluation of sales, we also monitor customer returns. We generally do not allow a right of return on our products. However, on a limited case-by-case basis with prior approval, we may allow customers to return products in saleable condition for redistribution to other customers or outlets. These returns are recorded as reductions of net sales in the period of the return. Monthly returns are consistently below 1 percent of sales, and have averaged approximately 0.5 percent of total monthly shipments over the last three years.

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Asset Impairments

We are required to evaluate our long-lived assets, including goodwill, for impairment and write down the value of any assets when they are determined to be impaired. Evaluating the impairment of long-lived assets involves management judgment in estimating the fair values and future cash flows related to these assets. Although the predictability of long-term cash flows may be uncertain, our evaluations indicate fair values for our long-lived assets and goodwill that are significantly in excess of stated book values. Therefore, we believe the risk of unrecognized impairment is low.

Income Taxes

Income tax expense involves management judgment as to the ultimate resolution of any tax issues. Historically, our assessments of the ultimate resolution of tax issues have been reasonably accurate. The current open tax issues are not dissimilar in size or substance from historical items, except for the accounting for losses recorded as part of the Pillsbury transaction. The finalization of the tax benefits related to these losses would be accounted for as a reduction of goodwill.

Pension Accounting

The accounting for pension and other postretirement liabilities requires the estimation of several critical factors. Key assumptions that determine this liability and related income or expense include the discount rate and expected rate of return on plan assets.

    Our discount rate assumption is determined annually based on the interest rate for long-term high-quality corporate bonds using yields for maturities that match the expected benefit obligations. The discount rate used to determine the pension and other postretirement obligations as of the balance sheet date is the rate in effect as of that measurement date. That same discount rate also is used to determine pension and other postretirement expense for the following fiscal year.

    Our expected rate of return on plan assets is determined by our asset allocation, our historical long-term investment performance, our estimate of future long-term returns by asset class (using input from our actuaries, investment services and investment managers), and long-term inflation assumptions. Our historical investment performance compound annual growth rates are 18%, 7%, 11%, 11%, 12% and 13% for the 1, 5, 10, 15, 20 and 30 year periods ended May 29, 2005.

    In addition to our assumptions about the discount rate and the expected rate of return on plan assets, we base our determination of pension expense or income on a market-related valuation of assets which reduces year-to-year volatility in accordance with SFAS No. 87, “Employers’ Accounting for Pensions.” This market-related valuation recognizes investment gains or losses over a five-year period from the year in which they occur. Investment gains or losses for this purpose are the difference between the expected return calculated using the market-related value of assets and the actual return based on the market-related value of assets. Since the market-related value of assets recognizes gains or losses over a five-year period, the future value of assets will be impacted as previously deferred gains or losses are recorded. As of May 29, 2005, we had cumulative unrecognized actuarial net losses of approximately $993 million on our pension plans and $393 million on our postretirement plans, primarily as the result of decreases in our discount rate assumptions. These unrecognized actuarial net losses will result in decreases in our future pension income and increases in postretirement expense since they currently exceed the corridors defined by SFAS No. 87 and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.”

    In fiscal 2005, we recorded net pension and postretirement expense of $6 million compared to $5 million in fiscal 2004. The discount rates used in our pension and other postretirement assumptions were 6.0 percent for the obligation as of May 25, 2003 and for our fiscal 2004 income and expense, and 6.65 percent for the obligation as of May 30, 2004 and for our fiscal 2005 income and expense. For fiscal 2004 and 2005, we assumed a rate of return of 9.6 percent on our pension plan assets and our other postretirement plan assets.

    For our fiscal 2006 pension and other postretirement income and expense estimate, we have reduced the discount rate to 5.55 percent for our pension liabilities and 5.50 percent for our postretirement liabilities, based on interest rates as of May 29, 2005. The expected rate of return on plan assets remains 9.6 percent. Actual future net pension and postretirement income or expense will depend on investment performance,

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changes in future discount rates and various other factors related to the populations participating in our pension and postretirement plans.

    Lowering the expected long-term rate of return on assets by 50 basis points would increase our net pension and postretirement expense for fiscal 2006 by approximately $18 million. Lowering the discount rate by 50 basis points would increase our net pension and postretirement expense for fiscal 2006 by approximately $24 million.

NEW ACCOUNTING RULES

The FASB issued SFAS No. 123(R), “Share-Based Payment,” in December 2004, which will require the cost of employee compensation paid with equity instruments to be measured based on grant-date fair values and recognized over the vesting period. In April 2005, the Securities and Exchange Commission announced the adoption of a new rule that amends the compliance dates for SFAS No. 123(R). The new rule allows companies to implement SFAS No. 123(R) at the beginning of their fiscal year that begins after June 15, 2005. Under the new rule, SFAS No. 123(R) will become effective for us in the first quarter of fiscal 2007. We are still evaluating the impact of adopting SFAS 123(R) on our consolidated financial statements.

    In November 2004, the FASB issued SFAS No. 151, “Inventory Costs – An Amendment of ARB No. 43, Chapter 4.” SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). SFAS No. 151 is effective for the fiscal year beginning after June 15, 2005, and is effective for us in fiscal 2007. We do not expect SFAS No. 151 to have a material impact on our results of operations or financial condition.

    In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets – An Amendment of APB Opinion No. 29.” SFAS No. 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets and replaces it with an exception for exchanges that do not have commercial substance. SFAS No. 153 is effective for the first fiscal period beginning after June 15, 2005, and is effective for us in the second quarter of fiscal 2006. We do not expect SFAS No. 153 to have a material impact on our results of operations or financial condition.

    In December 2004, the FASB issued Staff Position No. 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004,” (FSP No. 109-2). FSP No. 109-2 provides guidance with respect to recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 (the Jobs Act) on income tax expense and deferred tax liability. FSP No. 109-2 includes a one year reduced tax rate on repatriation of foreign earnings and a phased-in tax deduction provided for qualifying domestic production activities. We are currently evaluating the impact of repatriation provisions as Treasury guidance is provided. However, the range of reasonably possible amounts of unremitted earnings that is being considered for repatriation in fiscal year 2006 is between $0 and $60 million with the respective income tax impact ranging from $0 to $3 million based on a 5.25 percent tax rate.

    In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations," (FIN 47). FIN 47 requires that liabilities be recognized for the fair value of a legal obligation to perform asset retirement activities that are conditional on a future event if the amount can be reasonably estimated. We will adopt FIN 47 at the end of fiscal 2006 and do not expect it to have a material impact on our results of operations or financial condition.