# UNITED	STATES

# SECURITIES	AND	EXCHANGE	COMMISSION

# (Mark	One)

For	the	fiscal	year	ended	September	24,	2005

Commission	file	number	0-10030

# APPLE	COMPUTER,	INC.

(Exact	name	of	registrant	as	specified	in	its	charter)

CALIFORNIA

(State	or	other	jurisdiction of	incorporation	or	organization)

1	Infinite	Loop

Cupertino,	California

(Address	of	principal	executive	offices)

(I.R.S.	Employer

Identification	No.)

(Zip	Code)

Registrant's	telephone	number,	including	area	code:	(408)	996-1010

Securities	registered	pursuant	to	Section	12(b)	of	the	Act:	None

Securities	registered	pursuant	to	Section	12(g)	of	the	Act:

Common	Stock,	no	par	value

(Titles	of	classes)

Indicate	by	check	mark	whether	the	registrant	(1)	has	filed	all	reports	required	to	be	filed	by	Section	13	or	15(d)	of	the	Securities	Exchange	Act	of	1934	during	the preceding	12	months	(or	for	such	shorter	period	that	the	registrant	was	required	to	file	such	reports),	and	(2)	has	been	subject	to	such	filing	requirements	for	the	past 90	days.	Yes	x			No	o

Indicate	by	check	mark	if	disclosure	of	delinquent	filers	pursuant	to	Item	405	of	Regulation	S-K	(section	229.405	of	this	chapter)	is	not	contained	herein,	and	will	not	be contained,	to	the	best	of	the	registrant's	knowledge,	in	definitive	proxy	or	information	statements	incorporated	by	reference	in	Part	III	of	this	Form	10-K	or	any

amendment	to	this	Form	10-K.	x

Indicate	by	check	mark	whether	the	registrant	is	an	accelerated	filer	(as	defined	in	Rule	12b-2	of	the	Act).	Yes	x			No	o

Indicate	by	check	mark	whether	the	registrant	is	a	shell	company	(as	defined	in	Rule	12b-2	of	the	Act).	Yes	o			No	x

The	aggregate	market	value	of	the	voting	and	non-voting	stock	held	by	non-affiliates	of	the	registrant,	as	of	March	26,	2005,	was	approximately	$29,434,521,480	based upon	the	closing	price	reported	for	such	date	on	the	NASDAQ	National	Market.	For	purposes	of	this	disclosure,	shares	of	Common	Stock	held	by	persons	who	hold more	than	5%	of	the	outstanding	shares	of	Common	Stock	and	shares	held	by	executive	officers	and	directors	of	the	registrant	have	been	excluded	because	such	persons may	be	deemed	to	be	affiliates.	This	determination	of	executive	officer	or	affiliate	status	is	not	necessarily	a	conclusive	determination	for	other	purposes.

# PART	I

The	Business	section	and	other	parts	of	this	Annual	Report	on	Form	10-K	("Form	10-K")	contain	forward-looking	statements	that	involve	risks	and	uncertainties.	Many of	the	forward-looking	statements	are	located	in	"Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations."	Forward-looking statements	can	also	be	identified	by	words	such	as	"anticipates,"	"expects,"	"believes,"	"plans,"	"predicts,"	and	similar	terms.	Forward-looking	statements	are	not guarantees	of	future	performance	and	the	Company's	actual	results	may	differ	significantly	from	the	results	discussed	in	the	forward-looking	statements.	Factors	that might	cause	such	differences	include,	but	are	not	limited	to,	those	discussed	in	the	subsection	entitled	"Factors	That	May	Affect	Future	Results	and	Financial Condition"	under	Part	II,	Item	7	of	this	Form	10-K.	The	Company	assumes	no	obligation	to	revise	or	update	any	forward-looking	statements	for	any	reason,	except	as required	by	law.

# Item	1.	Business

# Company	Background

Apple	Computer,	Inc.	("Apple"	or	the	"Company")	was	incorporated	under	the	laws	of	the	State	of	California	on	January	3,	1977.	The	Company	designs,	manufactures, and	markets	personal	computers	and	related	software,	services,	peripherals,	and	networking	solutions.	The	Company	also	designs,	develops,	and	markets	a	line	of portable	digital	music	players	along	with	related	accessories	and	services	including	the	online	distribution	of	third-party	music,	audio	books,	music	videos,	short	films, and	television	shows.	The	Company's	products	and	services	include	the	Macintosh	line	of	desktop	and	notebook	computers,	the	iPod	digital	music	player,	the	Xserve G5	server	and	Xserve	RAID	storage	products,	a	portfolio	of	consumer	and	professional	software	applications,	the	Mac	OS	X	operating	system,	the	iTunes	Music	Store, a	portfolio	of	peripherals	that	support	and	enhance	the	Macintosh	and	iPod	product	lines,	and	a	variety	of	other	service	and	support	offerings.	The	Company	sells	its products	worldwide	through	its	online	stores,	its	own	retail	stores,	its	direct	sales	force,	and	third-party	wholesalers,	resellers,	and	value	added	resellers.	The	Company also	sells	a	variety	of	third-party	products	that	are	compatible	with	the	Company's	Macintosh	and	iPod	product	lines,	including	computer	printers	and	printing	supplies, storage	devices,	computer	memory,	digital	camcorders	and	still	cameras,	personal	digital	assistants,	iPod	accessories,	and	various	other	computing	products	and	supplies through	its	online	and	retail	stores.	The	Company's	fiscal	year	ends	on	the	last	Saturday	of	September.	Unless	otherwise	stated,	all	information	presented	in	this Form	10-K	is	based	on	the	Company's	fiscal	calendar.

# Business	Strategy

The	Company	is	committed	to	bringing	the	best	personal	computing	and	music	experience	to	students,	educators,	creative	professionals,	businesses,	government agencies,	and	consumers	through	its	innovative	hardware,	software,	peripherals,	services,	and	Internet	offerings.	The	Company's	business	strategy	leverages	its	unique ability,	through	the	design	and	development	of	its	own	operating	system,	hardware,	and	many	software	applications	and	technologies,	to	bring	to	its	customers	new products	and	solutions	with	superior	ease-of-use,	seamless	integration,	and	innovative	industrial	design.	The	Company	believes	continual	investment	in	research	and development	is	critical	to	facilitate	innovation	of	new	and	improved	products	and	technologies.	Besides	updates	to	its	existing	line	of	personal	computers	and	related

software,	services,	peripherals,	and	networking	solutions,	the	Company	continues	to	capitalize	on	the	convergence	of	digital	consumer	electronics	and	the	computer	by creating	innovations	like	the	iPod	and	iTunes	Music	Store.	The	Company's	strategy	also	includes	expanding	its	distribution	network	to	effectively	reach	more	of	its targeted	customers	and	provide	them	a	high-quality	sales	and	after-sales	support	experience.

# Digital	Hub

The	Company	believes	personal	computing	is	in	an	era	in	which	the	personal	computer	functions	for	both	professionals	and	consumers	as	the	digital	hub	for	advanced new	digital	devices	such	as	the	Company's

iPod	digital	music	players,	personal	digital	assistants,	cellular	phones,	digital	camcorders	and	still	cameras,	CD	and	DVD	players,	televisions,	and	other	consumer electronic	devices.	The	attributes	of	the	personal	computer	include	a	high	quality	user	interface,	relatively	inexpensive	data	storage,	and	the	ability	to	run	complex applications	and	easily	connect	to	the	Internet.	Apple	is	the	only	company	in	the	personal	computer	industry	that	controls	the	design	and	development	of	the	entire personal	computer—from	the	hardware	and	operating	system	to	sophisticated	applications.	Additionally,	the	Company's	products	provide	innovative	industrial	design, intuitive	ease-of-use,	and	built-in	networking,	graphics	and	multimedia	capabilities.	Thus,	the	Company	is	uniquely	positioned	to	offer	integrated	digital	hub	products and	solutions.

The	Company	develops	products	and	technologies	that	adhere	to	many	industry	standards	in	order	to	provide	an	optimized	user	experience	through	interoperability	with peripherals	and	devices	from	other	companies.	The	Company	has	played	a	role	in	the	development,	enhancement,	promotion,	and/or	use	of	numerous	of	these	industry standards.

# Expanded	Distribution

The	Company	believes	that	a	high	quality	buying	experience	with	knowledgeable	salespersons	who	can	convey	the	value	of	the	Company's	products	and	services	is critical	to	attracting	and	retaining	customers.	The	Company	sells	many	of	its	products	and	resells	certain	third-party	products	in	most	of	its	major	markets	directly	to consumers,	education	customers,	and	businesses	through	its	retail	and	online	stores	in	the	U.S.	and	internationally.	The	Company	has	also	invested	in	programs	to enhance	reseller	sales,	including	the	Apple	Sales	Consultant	Program,	which	consists	of	the	deployment	of	Apple	employees	and	contractors	to	selected	third-party reseller	locations.	The	Company	believes	providing	direct	contact	with	its	targeted	customers	is	an	efficient	way	to	demonstrate	the	advantages	of	its	Macintosh computer	and	other	products	over	those	of	its	competitors.	The	Company	has	significantly	increased	the	points	of	distribution	for	the	iPod	product	family	in	order	to make	its	products	available	at	locations	where	its	customers	shop.

From	inception	of	the	retail	initiative	in	2001	through	2005,	the	Company	had	opened	116	retail	stores	in	the	U.S.	and	8	international	stores	in	Canada,	Japan,	and	the U.K.	The	Company	opened	2	additional	stores	in	October	2005.		The	Company	has	typically	located	its	stores	at	high	traffic	locations	in	quality	shopping	malls	and urban	shopping	districts.

One	of	the	goals	of	the	retail	initiative	is	to	bring	new	customers	to	the	Company	and	expand	its	installed	base	through	sales	to	computer	users	who	currently	do	not	own a	Macintosh	computer	and	first	time	personal	computer	buyers.	By	operating	its	own	stores	and	building	them	in	desirable	high	traffic	locations,	the	Company	is	able	to better	control	the	customer	retail	experience	and	attract	new	customers.	The	stores	are	designed	to	simplify	and	enhance	the	presentation	and	marketing	of	personal computing	products.	To	that	end,	retail	store	configurations	have	evolved	into	various	sizes	in	order	to	accommodate	market	demands.	The	stores	employ	experienced and	knowledgeable	personnel	who	provide	product	advice	and	certain	hardware	support	services.	The	stores	offer	a	wide	selection	of	third-party	hardware,	software, and	various	other	computing	products	and	supplies	selected	to	complement	the	Company's	own	products.	Additionally,	the	stores	provide	a	forum	in	which	the Company	is	able	to	present	computing	solutions	to	users	in	areas	such	as	digital	photography,	digital	video,	music,	children's	software,	and	home	and	small	business computing.

# Education

For	more	than	25	years,	the	Company	has	focused	on	the	use	of	technology	in	education	and	has	been	committed	to	delivering	tools	to	help	educators	teach	and	students learn.	The	Company	believes	effective	integration	of	technology	into	classroom	instruction	can	result	in	higher	levels	of	student	achievement,	especially	when	used	to support	collaboration,	information	access,	and	the	expression	and	representation

of	student	thought	and	ideas.	The	Company	creates	solutions	that	enable	new	modes	of	curriculum	delivery,	better	ways	of	conducting	research,	and	opportunities	for professional	development	of	faculty,	students,	and	staff.	The	Company	has	designed	a	range	of	products	and	services	to	help	schools	maximize	their	investments	in technology.	This	is	manifested	in	many	of	the	Company's	products	and	services	that	are	designed	to	meet	the	needs	of	education	customers.	These	products	and	services include	the	eMac™,	iMac™,	and	the	iBook®,	video	creation	and	editing	solutions,	wireless	networking,	student	information	systems,		high-quality	curriculum	and professional	development	solutions,	and	one-to-one	(1:1)	learning	solutions	(primarily	in	K-12).	1:1	learning	solutions	typically	consist	of	iBook	portable	computers	for every	student	and	teacher	along	with	a	wireless	network	connected	to	a	central	server.

# Creative	Professionals

Creative	professionals	constitute	one	of	the	Company's	most	important	markets	for	both	hardware	and	software	products.	This	market	is	also	important	to	many	third- party	developers	who	provide	Macintosh-compatible	hardware	and	software	solutions.	Creative	customers	utilize	the	Company's	products	for	a	variety	of	creative activities	including	digital	video	and	film	production	and	editing;	digital	video	and	film	special	effects,	compositing,	and	titling;	digital	still	photography	and	workflow management;	graphic	design,	publishing,	and	print	production;	music	creation	and	production;	audio	production	and	sound	design;	and	web	design,	development,	and administration.

The	Company	designs	its	high-end	hardware	solutions,	including	servers,	desktops,	and	portable	Macintosh	systems,	to	incorporate	the	power,	expandability,	and features	desired	by	creative	professionals.	The	Company's	operating	system,	Mac	OS	X,	incorporates	powerful	graphics	and	audio	technologies	and	features	developer tools	to	optimize	system	and	application	performance	when	running	powerful	creative	solutions	provided	by	the	Company	or	third-party	developers.	The	Company	also offers	various	software	solutions	to	meet	the	needs	of	its	creative	customers.

# Business	Organization

The	Company	manages	its	business	primarily	on	a	geographic	basis.	The	Company's	reportable	operating	segments	are	comprised	of	the	Americas,	Europe,	Japan,	and Retail.	The	Americas,	Europe,	and	Japan	reportable	segments	do	not	include	activities	related	to	the	Retail	segment.	The	Americas	segment	includes	both	North	and South	America.	The	Europe	segment	includes	European	countries	as	well	as	the	Middle	East	and	Africa.	The	Retail	segment	currently	operates	Apple-owned	retail stores	in	the	U.S.,	Canada,	Japan,	and	the	U.K.	Other	operating	segments	include	Asia-Pacific,	which	includes	Australia	and	Asia	except	for	Japan,	and	the	Company's subsidiary,	FileMaker,	Inc.	Each	reportable	geographic	operating	segment	provides	similar	hardware	and	software	products	and	similar	services.	Further	information regarding	the	Company's	operating	segments	may	be	found	in	Part	II,	Item	7	of	this	Form	10-K	under	the	heading	"Segment	Operating	Performance,"	and	in	Part	II, Item	8	of	this	Form	10-K	in	the	Notes	to	Consolidated	Financial	Statements	at	Note	11,	"Segment	Information	and	Geographic	Data."

# Hardware	Products

The	Company	offers	a	range	of	personal	computing	products	including	desktop	and	notebook	computers,	server	and	storage	products,	related	devices	and	peripherals, and	various	third-party	hardware	products.	The	Company's	entire	line	of	Macintosh®	systems,	excluding	servers	and	storage	systems,	features	the	Company's	Mac

OS®	X	Version	10.4	Tiger™	and	iLife®	suite	of	software	for	digital	photography,	music,	movies,	and	music	creation.

# Macintosh®	Computers

In	June	2005,	the	Company	announced	its	plan	to	begin	using	Intel	microprocessors	in	its	Macintosh	computers.	The	Company	plans	to	begin	shipping	certain	models with	Intel	microprocessors	by	June	2006

and	to	complete	the	transition	of	all	of	its	Macintosh	computers	to	Intel	microprocessors	by	the	end	of	calendar	year	2007.	The	Company	also	announced	its	new translation	technology,	Rosetta™,	which	will	allow	most	PowerPC-based	Macintosh	applications	to	run	on	new	Intel-based	Macintosh	computers.		There	are	potential risks	and	uncertainties	associated	with	this	transition,	which	are	further	discussed	in	Part	II,	Item	7	of	this	10-K	under	the	heading	"Factors	That	May	Affect	Future Results	and	Financial	Condition."

# Power	Mac®

The	Power	Mac	line	of	desktop	personal	computers	is	targeted	at	business	and	professional	users	and	is	designed	to	meet	the	speed,	expansion,	and	networking	needs	of the	most	demanding	Macintosh	user.	Powered	by	the	PowerPC	G5	processor,	the	Power	Mac	G5	utilizes	64-bit	processing	technology	for	memory	expansion	up	to 16GB	and	advanced	64-bit	computation	while	also	running	existing	32-bit	applications	natively.	In	October	2005,	the	Company	updated	the	Power	Mac	G5	product	line, which	now	comes	in	three	processor	configurations—dual	2.0GHz,	dual	2.3GHz,	and	a	quad	2.5GHz	that	features	two	2.5GHz	dual	processors.	All	Power	Mac	G5 desktops	feature	a	SuperDrive™	and	a	NVIDIA	GeForce	6600	graphics	card.	In	addition,	all	Power	Mac	G5	desktops	deliver	connectivity	and	high-performance input/output	(I/O),	including	dual	Gigabit	Ethernet,	FireWire®	800	and	FireWire	400	ports,	USB	2.0	ports,	optical	digital	I/O,	PCI	Express	expansion,	and	optional AirPort®	Extreme	wireless	networking	and	Bluetooth	connectivity.	The	new	Power	Mac	G5	product	line	also	includes	Mighty	Mouse,	the	Company's	next	generation mouse,	featuring	up	to	four	programmable	buttons	and	a	Scroll	Ball	that	lets	users	scroll	vertically,	horizontally,	and	diagonally.

# Xserve®	and	Xserve	RAID	Storage	System

Xserve	is	a	rack-mount	server	product	designed	for	simple	setup	and	remote	management	of	intensive	I/O	applications	such	as	digital	video,	high-resolution	digital imagery,	and	large	databases.	In	January	2005,	the	Company	upgraded	Xserve	G5,	which	is	now	available	with	either	a	single	2.0GHz	or	dual	2.3GHz	PowerPC	G5 processor.	Xserve	G5	includes	a	system	controller	with	up	to	16GB	of	PC3200	error	correcting	code	memory;	three	hot-plug	Serial	ATA	drive	modules	that	deliver	up	to 1.5TB	of	storage;	and	dual	on-board	Gigabit	Ethernet	for	high-performance	networking.	The	Company's	Xserve	RAID	storage	system	was	updated	in	September	2005 to	deliver	up	to	7	terabytes	of	storage	capacity	and	also	expanded	support	for	heterogeneous	environments.	The	dual	independent	RAID	controllers	with	512MB	cache per	controller	offer	sustained	throughput	of	over	385	Mbps—high	enough	to	support		media	production	environments	using	protected	RAID	level	5.

# iMac®

The	iMac	line	of	desktop	computers	is	targeted	at	consumer	and	education	markets.	In	October	2005,	the	Company	introduced	the	new	iMac	G5,	featuring	the	PowerPC G5	processor,	a	built-in	iSight™	video	camera,	and	a	design	that	integrates	the	entire	computer	into	either	a	17-inch	or	20-inch	widescreen	LCD	flat-panel	display.	The 17-inch	and	20-inch	models	come	with	1.9GHz	and	2.1GHz	PowerPC	G5	Processors,	respectively.	The	iMac	G5	offers	512MB	of	533MHz	DDR2	memory	expandable to	2.5GB	and	7200	rpm	Serial	ATA	drives	expandable	up	to	500GB.	The	iMac	G5	comes	standard	with	ATI	Radeon	X600	Pro	or	XT	graphics,	video	memory,	a SuperDrive,	built-in	Airport	Extreme	wireless	networking,	an	internal	Bluetooth	module,	built-in	stereo	speakers	and	microphone,	and	Mighty	Mouse.	The	iMac	G5	also offers	built-in	Ethernet	(10/100/1000BASE-T),	three	USB	2.0	and	two	FireWire	400	ports.	The	iMac	G5	also	features	Front	Row	media	experience	with	the	Apple Remote,	which	allows	users	to	play	music	and	view	photos	and	videos	via	a	remote	control.

# eMac™

The	eMac,	a	desktop	personal	computer	targeted	at	the	Company's	education	customers,	features	a	PowerPC	G4	processor,	a	high	resolution	17-inch	flat	cathode	ray tube	display,	and	preserves	the	all-in-one

compact	design	of	the	original	iMac.	The	eMac	offers	PowerPC	G4	processors	running	at	up	to	1.42GHz,	333MHz	DDR	memory,	an	optional	SuperDrive,	built-in modem	and	Ethernet	(10/100BASE-T),	ATI	Radeon	graphics,	AirPort	Extreme-ready,	and	USB	2.0	and	1.1	ports	for	connectivity	to	peripherals.

# Mac®	mini

In	January	2005,	the	Company	introduced	Mac	mini,	a	desktop	personal	computer	with	a	starting	price	of	$499	and	weighing	as	little	as	2.9	pounds.	In	July	2005,	the Company	updated	its	Mac	mini	lineup,	expanding	to	three	models	and	increasing	memory	to	512MB.	The	first	model	includes	a	1.25GHz	PowerPC	G4	processor,	a 40GB	hard	drive,	and	a	Combo	drive.	The	second	model	includes	a	1.42GHz	PowerPC	G4	processor,	an	80GB	hard	drive,	and	a	Combo	drive.	The	third	model	includes a	1.42GHz	PowerPC	G4	processor,	an	80GB	hard	drive,	and	a	SuperDrive.	All	models	include	ATI	Radeon	9200	graphics	with	32MB	of	dedicated	DDR	memory,	built- in	Ethernet	(10/100	BASE-T),	one	FireWire	400	and	two	USB	2.0	ports,	and	a	DVI	interface	that	also	supports	VGA	so	consumers	can	connect	to	LCD	or	CRT displays.	The	1.42GHz	models	of	the	Mac	mini	also	include	built-in	AirPort	Extreme	for	54	Mbps	802.11g	wireless	networking	along	with	an	internal	Bluetooth module.

# PowerBook®

The	PowerBook	family	of	portable	computers	is	designed	to	meet	the	mobile	computing	needs	of	professionals	and	advanced	consumer	users.	In	October	2005,	the Company	updated	its	PowerBook	G4	notebooks	with	extended	battery	life	as	well	as	higher	resolution	displays,	including	1440	by	960	pixels	in	the	15-inch	model	and 1680	by	1050	pixels	in	the	17-inch	model.	Both	the	15-inch	and	17-inch	PowerBook	G4	offer	a	1.67GHz	PowerPC	G4	processor	and	the	ATI	Mobility	Radeon	9700 graphics	processor.	The	12-inch	PowerBook	G4	features	a	1.5GHz	PowerPC	processor,	and	the	NVIDIA	GeForce	FX	Go5200	graphics	processor.	Every	PowerBook	G4 notebook	comes	with	a	SuperDrive,	512MB	of	DDR	memory,	built-in	AirPort	Extreme	wireless	networking,	an	internal	Bluetooth	module	for	wireless	connectivity,	as well	as	a	full	complement	of	I/O	ports	including	FireWire	400,	USB	2.0,	and	a	built-in	56K	V.92	modem	and	Ethernet	(10/100BASE-T),	for	connectivity	to	a	wide	range of	peripherals.	The	15-inch	and	17-inch	PowerBook	G4	models	also	include	built-in	Gigabit	Ethernet	and	FireWire	800.

# iBook®

The	iBook	is	designed	to	meet	the	portable	computing	needs	of	education	and	consumer	users.	In	July	2005,	the	Company	upgraded	its	iBook®	G4	line	to	include	faster PowerPC	G4	processors	running	up	to	1.42GHz,	built-in	AirPort	Extreme	54	Mpbs	802.11g	wireless	networking	and	an	available	slot-load	SuperDrive.	The	12-inch model	features	a	1.33GHz	PowerPC	G4	processor	and	a	slot-load	Combo	drive,	while	the	14-inch	model	includes	a	1.42GHz	G4	processor	and	a	SuperDrive.	All	iBook G4	models	offer	a	full	complement	of	I/O	ports	including	FireWire	400,	USB	2.0,	a	built-in	56K	V.92	modem	and	Ethernet	(10/100BASE-T),	as	well	as	a	built-in internal	wireless	Bluetooth	module,	for	connectivity	to	a	wide	range	of	peripherals.

# Music	Products	and	Services

The	Company	offers	its	iPod®	line	of	digital	music	players	and	related	accessories	to	Macintosh	and	Windows	users.	The	Company	also	provides	an	online	service	to distribute	third-party	music,	audio	books,	music	videos,	short	films,	and	television	shows	through	its	iTunes	Music	Store®.

# iPod®

The	iPod	is	the	Company's	portable	digital	music	player,	featuring	the	Company's	patent	pending	Click	Wheel,	which	combines	a	touch-sensitive	wheel	with	five	push buttons	for	one-handed	navigation.	In	October	2005,	the	Company	introduced	the	new	iPod	containing	a	2.5-inch	color	screen	that	can	display	album	artwork	and	photos and	play	video	including	music	videos,	video	podcasts,	home	movies,	short	films,	and	television	shows.		The	iPod	lineup	includes	a	30GB	model	holding	up	to	7,500 songs,	25,000	photos,	or

75	hours	of	video,	and	a	60GB	model	holding	up	to	15,000	songs,	25,000	photos,	or	150	hours	of	video.	The	iPod	features	the	Company's	patent	pending	Auto-Sync technology	that	automatically	downloads	digital	music,	podcasts,	photos,	audio	books,	home	movies,	music	videos,	short	films,	and	television	shows	onto	the	iPod	and keeps	it	up-to-date	whenever	it	is	plugged	into	a	Macintosh	or	Windows	computer	using	USB.	The	iPod	also	features	Shuffle	Songs,	which	randomly	plays	songs	in	a selected	playlist	or	across	the	entire	library.	All	iPods	work	with	the	Company's	iTunes®	digital	music	management	software	on	either	a	Macintosh	or	Windows computer.

The	iPod's	functionality	extends	beyond	playing	music,	listening	to	audio	books,	and	watching	music	videos,	short	films,	home	movies,	and	television	shows.	Other	key capabilities	include	data	storage,	calendar	and	contact	information	utility,	and	a	selection	of	games.	With	the	addition	of	third-party	iPod	peripherals,	the	capabilities	of certain	iPods	can	be	enhanced	to	include	photo	downloading	directly	from	certain	digital	cameras.	The	Company	has	also	entered	into	alliances	with	many	automobile manufacturers	to	offer	seamless	integration	of	the	iPod	in	certain	automobiles.	Along	with	the	iPod,	the	Company	has	developed	the	iTunes	software	and	the	iTunes Music	Store,	a	service	that	consumers	may	use	to	purchase	third-party	music,	audio	books,	music	videos,	short	films,	and	television	shows	over	the	Internet.

# iPod®	nano

In	September	2005,	the	Company	introduced	iPod	nano,	a	flash-memory	based	digital	music	player.	The	iPod	nano	is	available	in	either	a	2GB	model	holding	up	to	500 songs	or	25,000	photos,	or	a	4GB	model	holding	up	to	1,000	songs	or	25,000	photos.	The	iPod	nano,	which	weighs	as	little	as	1.5	ounces	and	is	.27	inches	thin,	features a	color	screen	and	the	Company's	patent	pending	Click	Wheel.

# iPod®	shuffle

In	January	2005,	the	Company	introduced	iPod	shuffle,	a	flash-memory	based	digital	music	player,	which	is	based	on	iPod's	shuffle	feature	that	randomly	selects	songs from	the	user's	music	library	or	playlists.	iPod	shuffle	works	with	iTunes	and	its	patent-pending	AutoFill	feature	that	automatically	selects	songs	to	fill	iPod	shuffle	from a	user's	music	library	on	their	computer.	iPod	shuffle	can	also	be	used	as	a	portable	USB	flash	drive	with	up	to	1GB	of	storage	space.	It	is	available	in	a	512MB	model holding	up	to	120	songs	and	a	1GB	model	holding	up	to	240	songs.

# iTunes	Music	Store®

The	Company's	iTunes	Music	Store,	available	for	both	Windows-based	and	Macintosh	computers,	is	a	service	that	allows	customers	to	find,	purchase,	and	download third-party	digital	music,	audio	books,	music	videos,	short	films,	and	television	shows.	The	iTunes	Music	Store	also	offers	Podcast	Directory	that	allows	users	to	search for	and	download	audio	programs	to	their	computer	and	automatically	receive	new	episodes	over	the	Internet.	Users	can	search	the	contents	of	the	store	catalog	to	locate works	by	title,	artist,	or	album,	or	browse	the	entire	contents	of	the	store	by	genre	and	artist.	Users	can	also	listen	to	a	free	30-second	preview	of	content	available through	the	store.	The	iTunes	Music	Store	was	originally	introduced	in	the	U.S.	in	April	2003	and	now	serves	customers	in	21	countries.

The	iTunes	Music	Store	is	fully	integrated	directly	into	the	iTunes	software	allowing	customers	to	preview,	purchase,	download,	organize,	share,	and	transfer	digital content	to	an	iPod	using	a	single	software	application.	Further	discussion	on	the	iTunes	software	may	be	found	below	under	the	heading	"Software	Products	and Computer	Technologies."	The	iTunes	Music	Store	offers	customers	a	broad	range	of	personal	rights	to	the	third-party	content	they	have	purchased.	Content	purchased through	the	store	may	also	be	used	in	certain	applications	such	as	iPhoto®,	iMovie®,	and	iDVD®.	Additional	features	of	the	iTunes	Music	Store	include	gift	certificates that	can	be	sent	via	e-mail;	prepaid	gift	cards;	an	"allowance"	feature	that	enables	users	to	automatically	deposit	funds	into	an	iTunes	Music	Store	account	every	month; online	gift	options	that	let	customers	give	specific	songs,	albums,	music	videos,	or	their	own	playlists	to	anyone	with	an	email	address;	parental	controls;	and	album reviews.

# Peripheral	Products

The	Company	sells	various	Apple-branded	computer	hardware	peripherals,	including	iSight™	digital	video	cameras	and	a	range	of	high	quality	flat	panel	TFT	active- matrix	digital	color	displays.	The	Company	also	sells	a	variety	of	third-party	Macintosh	compatible	hardware	products	directly	to	end	users	through	both	its	retail	and online	stores,	including	computer	printers	and	printing	supplies,	storage	devices,	computer	memory,	digital	video	and	still	cameras,	personal	digital	assistants,	and various	other	computing	products	and	supplies.

# iSight™

The	Company's	iSight	digital	video	camera	enables	video	conferencing	over	broadband	connections.	iSight	is	a	small,	portable	aluminum	alloy	camera	with	all	audio, video,	and	power	provided	by	a	single	FireWire	cable.	iSight	is	designed	to	be	center-mounted	on	the	top	of	a	computer	screen	and	uses	its	integrated	tilt	and	rotate mechanism	to	easily	position	the	camera	for	natural,	face-to-face	video	conferencing.	iSight	features	an	auto	focusing	auto	exposure	F/2.8	lens	that	captures	high-quality pictures	and	full-motion	video.	With	its	on-board	processor,	iSight	automatically	adjusts	color,	white	balance,	sharpness	and	contrast	to	provide	high-quality	images	with accurate	color	reproduction	in	most	lighting	conditions.	iSight	also	includes	a	dual-element	microphone	that	suppresses	ambient	noise	for	clear	digital	audio.

# Displays

The	Company	offers	a	family	of	widescreen	flat	panel	displays	featuring	the	30-inch	Apple	Cinema	HD	Display™,	a	widescreen	active-matrix	LCD	with	2560-by-1600 pixel	resolution,	a	23-inch	widescreen	Apple	Cinema	Display	with	1920-by-1200	pixel	resolution	and	a	20-inch	widescreen	Apple	Cinema	Display®	with	1680-by-1050 pixel	resolution.	The	displays	feature	dual	FireWire	and	dual	USB	2.0	ports	built	into	the	display	and	use	the	industry	standard	DVI	interface	for	a	pure	digital connection	with	the	Company's	latest	Power	Mac	and	PowerBook	systems.	The	Cinema	Displays	feature	an	aluminum	design	with	a	very	thin	bezel,	suspended	by	an aluminum	stand	that	allows	viewing	angle	adjustment.

# Software	Products	and	Computer	Technologies

The	Company	offers	a	range	of	software	products	for	education,	creative,	consumer	and	business	customers,	including	Mac	OS	X,	the	Company's	proprietary	operating system	software	for	the	Macintosh;	server	software	and	related	solutions;	professional	application	software;	and	consumer,	education	and	business	oriented	application software.

# Operating	System	Software

In	April	2005,	the	Company	began	shipping	Mac	OS	X	Tiger,	the	Company's	fifth	major	version	of	Mac	OS	X.	Tiger	incorporates	more	than	200	new	features	and innovations	including	Spotlight™,	a	desktop	search	technology	that	lets	users	find	items	stored	on	their	Macintosh	computers,	including	documents,	emails,	contacts	and images;	and	Dashboard,	a	new	way	to	instantly	access	information	such	as	weather	forecasts	and	stock	quotes,	using	a	new	class	of	mini-applications	called	widgets.	The server	version	of	the	Mac	OS	operating	system,	Mac	OS	X	Server	version	10.4,	also	began	shipping	in	April	2005.

Server	Software	and	Server	Solutions

Apple	Remote	Desktop™	2	is	the	second	generation	of	the	Company's	asset	management,	software	distribution,	and	help	desk	support	software.	Apple	Remote	Desktop 2	includes	more	than	50	features	for	centrally	managing	Mac	OS	X	systems.	Apple	Remote	Desktop	2	can	perform	a	wide	range	of	desktop	management	tasks	such	as installing	operating	system	and	application	software,	running	hardware	and	software	inventory	reports,	and	executing	commands	on	one	or	more	remote	Mac	OS	X systems	on	the	network.	Remote	software	installation	tools	allow	IT	professionals	to	install	single	or	multiple	software	packages	immediately	or	at	specific	dates	and times.	Comprehensive	hardware	and	software	reports	based	on	more	than	200	system	information	attributes	allow	administrators	to	keep	track	of	their	Mac	OS	X

systems.	In	addition,	built-in	real-time	screen	sharing	enables	help	desk	professionals	to	provide	online	assistance	by	observing	and	controlling	the	desktops	of	any remote	Macintosh	or	Virtual	Network	Computing-enabled	computer,	including	Windows	and	Linux	systems.

Xsan®,	the	Company's	enterprise-class	Storage	Area	Network	(SAN)	file	system,	began	shipping	in	January	2005.	Xsan	is	a	64-bit	cluster	file	system	for	Mac	OS	X that	enables	organizations	to	consolidate	storage	resources	and	provide	multiple	computers	with	concurrent	file-level	read/write	access	to	shared	volumes	over	Fibre Channel.	Advanced	features	such	as	metadata	controller	failover	and	Fibre	Channel	multipathing	ensure	high	availability;	file-level	locking	allows	multiple	systems	to read	and	write	concurrently	to	the	same	volume	which	is	ideal	for	complex	workflows;	bandwidth	reservation	provides	for	effective	ingestion	of	bandwidth-intensive data	streams,	such	as	high	resolution	video;	and	flexible	volume	management	results	in	more	efficient	use	of	storage	resources.	Since	Xsan	is	interoperable	with	ADIC's StorNext	File	System,	it	can	be	used	in	heterogeneous	environments	that	include	Windows,	UNIX,	and	Linux	server	operating	system	platforms.

# Professional	Application	Software

In	April	2005,	the	Company	announced	Final	Cut	Studio™,	a	High	Definition	(HD)	video	production	suite	that	features	Final	Cut	Pro®	5,	the	Company's	editing software	for	Digital	Video	(DV),	Standard	Definition	(SD),	HD,	and	film.	Final	Cut	Studio	also	includes	tools	that	complement	Final	Cut	Pro	5	such	as	Soundtrack® Pro,	a	new	application	that	gives	audio	and	video	professionals	a	way	to	create,	control	and	repair	audio;	Motion	2,	an	application	that	allows	real-time	motion	graphics design;	and	DVD	Studio	Pro®	4,	DVD	authoring	software	that	burns	DVDs,	including	high	definition	DVDs	to	the	latest	HD	DVD	specification.	These	components	of Final	Cut	Studio	are	also	sold	separately.

Final	Cut	Pro®	5,	the	latest	version	of	the	Company's	video	editing	software,	which	began	shipping	in	April	2005,	includes	editing	tools	that	work	with	most	formats, from	DV	and	native	High	Definition	Video	(HDV)	to	fully	uncompressed	HD.	Final	Cut	Pro	5	acquires	HDV	media	via	FireWire	and	keeps	it	in	the	original	format, transferring	it	into	the	system	without	any	generation	loss.	With	a	real-time	multi-stream	effects	architecture,	multicam	editing	tools,	and	advanced	color	correction, Final	Cut	Pro	5	enables	users	to	view	and	cut	from	multiple	sources	in	real	time,	group	up	to	128	sources	together	into	multi-clips,	then	add	or	subtract	cameras	at	any time.	Final	Cut	Pro	5	allows	users	to	use	external	audio	control	surfaces	to	mix	and	record	multiple	fader	automations	simultaneously.

Soundtrack®	Pro	is	a	new	audio	editing	and	sound	design	application	that	gives	audio	and	video	professionals	a	way	to	create,	control,	and	repair	audio.	Soundtrack	Pro features	a	waveform	editor	with	flexible	Action	Layers	that	allow	users	to	re-order,	bypass,	or	change	any	edit,	effect,	or	process.	Find-and-Fix	features	identify	and repair	common	audio	problems	such	as	background	noise,	pops,	clicks,	and	hum.	An	integrated	multitrack	mixer	allows	editors	to	apply	common	effects	to	multiple tracks	and	group	common	tracks	using	busses.	Soundtrack	Pro	also	features	over	50	professional	plug-ins	for	creating	sounds,	over	5,000	loops,	an	integrated	mixer,	and integration	with	Final	Cut	Studio.

Motion	2	is	a	real-time	motion	graphics	software	that	enables	Final	Cut	Pro	editors	to	add	motion	graphics	to	their	projects.	Motion	2	features	interactive	animation	of text	and	graphics	for	DVD	motion	menus,	video	or	film	in	real	time,	and	quick	output	rendering	by	built-in	GPU	acceleration	at	8-bit,	16-bit,	or	32-bit	float	film	quality. With	Motion	2's	new	design	tool,	Replicator,	users	can	automatically	generate	and	animate	multiple	copies	of	a	graphic,	shape,	or	movie.

DVD	Studio	Pro®	4	is	the	latest	version	of	the	Company's	professional	DVD	authoring	application.	With	DVD	Studio	Pro	4	and	its	integrated,	scalable	H.264	encoding, users	can	author	SD	or	HD	DVDs.	DVD	Studio	Pro	4	allows	users	to	preview	HD	content	in	real	time	with	a	second	Digital	Cinema	Desktop	and	audition	surround sound	using	S/PDIF	(digital	audio)	out	to	an	external	DTS	or	Dolby	Digital	(AC-3)	decoder.	Its	interactive	graphical	view	also	enables	users	to	edit/display	menus, tracks,	slideshows,	scripts,

and	stories	of	a	DVD	project	in	a	storyboard	layout.	DVD	Studio	Pro	4	includes	Compressor	2,	a	full-featured	video	and	audio	compression	application.	Compressor gives	users	control	over	encoding,	including	the	ability	to	encode	several	clips	in	one	batch	operation	to	a	wide	variety	of	formats	and	perform	advanced	format conversions	at	the	same	time.

In	April	2005,	the	Company	announced	Shake®	4,	an	upgrade	to	the	Company's	compositing	software,	which	began	shipping	in	June	2005.	Used	to	create	visual	effects for	film	and	television,	Shake	4	features	3D	multi-plane	compositing,	optical	flow	image	processing	and	integration	with	Final	Cut	Pro	5.	Users	can	composite	live action	and	3D	CGI	layers	with	added	realism	using	OpenGL	accelerated	3D	multi-plane	compositing	node.	Other	features	include	advanced	optical	flow	technology	that uses	pixel-by-pixel	image	analysis	to	create	smooth	retiming	and	automatic	stabilization.	Shake	4	also	integrates	Truelight	monitor	calibration	to	maintain	color consistency	between	the	computer	screen	and	the	final	look	on	film.

Logic®	Pro	7	is	used	by	musicians	around	the	world	and	by	professionals	in	music	production	and	film	scoring.	It	combines	digital	music	composition,	notation,	and audio	production	facilities	in	one	comprehensive	product	and	includes	software	instruments	such	as	Sculpture,	a	component-modeling	based	synthesizer;	UltraBeat™,	a drum	synthesizer	with	built-in	step	sequencer;	and	digital	signal	processing	(DSP)	plug-ins	including	Guitar	Amp	Pro,	a	full-featured	guitar	amplifier	simulator.	Along with	workflow	enhancements,	mastering	plug-ins,	and	support	for	Apple	Loops,	Logic	Pro	7	adds	distributed	audio	processing,	a	technology	that	allows	professionals	to utilize	multiple	Macintosh	systems	to	expand	available	DSP	power	via	an	Ethernet	network.

In	October	2005,	the	Company	announced	Aperture™,	began	shipping	in	November	2005.	Aperture	is	an	application	designed	to	provide	professional	photographers with	post-production	tools	to	manage,	edit,	and	publish	digital	pictures.	Features	include	compare	and	select	tools,	nondestructive	image	processing,	color	managed printing,	and	custom	web	and	book	publishing.	Compare	and	select	tools	in	Aperture	allow	photographers	to	sift	through	photo	projects	and	identify	their	final selections.	RAW	images	are	maintained	natively	throughout	Aperture	without	any	intermediate	conversion	process,	and	can	be	retouched	using	a	suite	of	adjustment tools	designed	especially	for	photographers.	Print	options	include	customizable	contact	sheets,	high-quality	local	printing,	and	color-managed	online	prints.	Aperture also	provides	a	layout	environment	where	photographers	can	create	and	order	custom	books	and	publish	web	galleries.

# Consumer,	Education	and	Business	Oriented	Application	Software

In	January	2005,	the	Company	introduced	iLife	'05,	an	upgrade	to	its	digital	lifestyle	suite,	which	features	iPhoto®,	iMovie®,	iDVD®,	GarageBand™,	and	iTunes®.

iPhoto®	5	is	the	Company's	consumer-oriented	digital	photo	software	application.	iPhoto	5	includes	advanced	editing	tools,	adds	support	for	uncompressed	RAW photos,	and	includes	a	slideshow	builder	allowing	users	to	apply	effects,	transitions	and	durations	to	each	individual	slide.	iPhoto	5	allows	users	to	create	and	order hardcover	and	softcover	photo	books	using	a	variety	of	book	layouts	with	double-sided	printing,	directly	within	the	application.

iMovie®	HD,	a	consumer-oriented	digital	video	editing	software	application,	enables	users	to	import	HDV	from	HDV	camcorders	and	edit	digital	videos	on	their Macintosh	computers.	iMovie	HD	also	includes	Magic	iMovie,	which	automatically	imports	video	into	separate	clips	and	adds	titles,	transitions	and	music.	iMovie HD	imports	video	from	HDV	and	standard	DV	camcorders,	and	from	video	cameras	that	generate	MPEG-4	video.

iDVD®	is	a	consumer-oriented	software	application	that	enables	users	to	turn	iMovie	files,	QuickTime®	files,	and	digital	pictures	into	DVDs	that	can	be	played	on most	consumer	DVD	players.	iDVD	5	includes	15	new	themes	featuring	moving	drop	zones	that	can	display	video	clips	or	photos	in	motion	across	DVD	menus. iDVD	5	also	features	OneStep	DVD,	which	automatically	creates	a	DVD	from	footage	directly	from	a	user's	camcorder.	With	a	compatible	SuperDrive™,	iDVD	5 supports	all	recordable	single-layer	and	double-layer	DVD	format	standards.

GarageBand™	is	a	consumer-oriented	music	creation	software	application.	GarageBand	2	adds	8-track	recording	so	that	users	can	record	multiple	digital	audio tracks	at	once.	GarageBand	2	can	improve	out-of-tune	notes	and	timing	in	both	vocal	and	real-instrument	recordings.	GarageBand	2	displays	and	edits	musical notation	in	real	time	for	software	instrument	tracks	for	people	who	know	how	to	read	and	write	music	or	want	to	learn.	With	GarageBand	Jam	Packs,	including	the latest,	Jam	Pack	4:	Symphony	Orchestra,	GarageBand	users	can	create	music	in	their	favorite	genres.

iLife	'05	also	includes	iTunes,	the	Company's	digital	music	jukebox	software	application	that	allows	users	to	purchase	a	variety	of	digital	content	available	through	the Company's	iTunes	Music	Store.	iTunes	organizes	content	using	searching,	browsing,	and	playlists,	and	also	includes	features	such	as	iMix	playlist	sharing	and	provides integration	with	the	complete	family	of	iPods.	In	October	2005,	the	Company	introduced	iTunes	6,	the	latest	version	of	its	iTunes	software.	iTunes	6	allows	users	to purchase	and	download	music	videos,	short	films,	and	television	shows	from	the	iTunes	Music	Store,	watch	them	on	their	computers,	and	Auto-Sync	them	onto	their iPod.

In	September	2005,	the	Company,	Motorola	Inc.,	and	Cingular	Wireless	LLC	announced	the	availability	of	a	mobile	phone	with	iTunes	software	(Motorola	ROKR), enabling	users	to	transfer	up	to	100	songs	from	the	iTunes	library	on	their	Macintosh	or	Windows-based	computers	to	their	Motorola	ROKR	mobile	phones.

In	January	2005,	the	Company	introduced	iWork	'05,	productivity	software	designed	to	take	advantage	of	both	Mac	OS	X	and	iLife	'05	to	help	users	create,	present, and	publish	documents	and	presentations.	iWork	'05	introduced	Pages™,	a	word	processor,	and	also	features	Keynote™	2,	an	updated	version	of	the	Company's presentation	software.

Pages™	gives	users	the	tools	to	create	letters,	newsletters,	reports,	brochures	and	resumes	with	advanced	typography,	multiple	columns,	footnotes,	tables	of	content and	styles.	With	features	like	dynamic	text	wrapping	and	alignment	guides,	Pages	lets	users	create	free-form	arrangements	of	text,	graphics,	photos,	tables,	and charts.	An	integrated	iLife	media	browser	lets	users	drag	and	drop	photos	from	the	iPhoto	library	directly	into	documents.

Keynote™	2	is	the	Company's	presentation	software	that	gives	users	the	ability	to	create	presentations,	portfolios,	interactive	slideshows,	and	storyboards.	Keynote 2	contains	slide	animations	to	synchronize	the	movement	of	multiple	objects	and	cinematic	real-time	animated	text.	The	iLife	media	browser	within	Keynote	allows users	to	insert	photos,	movies,	and	music	directly	into	presentations,	and	with	image	masking,	users	can	frame	the	exact	part	of	the	photo	they	want	to	display. Keynote	2	can	also	work	with	a	second	monitor	to	display	upcoming	slides,	notes,	and	a	timer.

In	January	2005,	the	Company	announced	Final	Cut®	Express	HD,	an	update	to	Final	Cut	Express,	which	began	shipping	in	February	2005.	Final	Cut	Express	HD enables	users	to	capture,	edit,	and	output	HDV	over	a	single	FireWire	cable,	and	supports	Digital	Cinema	Desktop	with	multiple	displays.	Final	Cut	Express	HD	features sound	editing	tools	including	99	audio	tracks,	real-time	volume	and	audio	filter	adjustment,	a	voice-over	tool,	and	Soundtrack	music	creation	software	that	allows	users to	compose	musical	scores	for	their	videos.	Final	Cut	Express	HD	includes	LiveType™,	which	can	add	HD-quality

animated	text	and	motion	graphics	to	videos.	In	addition,	iMovie	projects	can	be	imported	directly	into	Final	Cut	Express	HD	with	all	of	their	effects,	transitions,	and audio	levels	intact.

Logic®	Express	7	is	a	streamlined	version	of	Logic	Pro	7	that	provides	a	basic	set	of	professional	tools	to	compose	and	produce	music	for	students,	educators,	and advanced	hobbyists.	Its	high-resolution	audio	of	up	to	24-bit/96kHz,	the	adaptive	self-configuring	track	mixer,	and	32-bit	floating-point	math	provide	professional	sound quality.	Logic	Express	7	comes	with	support	for	projects	from	GarageBand	offering	users	a	smooth	migration	path	to	high-end	audio	production.

FileMaker,	Inc.,	a	wholly	owned	subsidiary	of	the	Company,	develops,	publishes,	and	distributes	desktop-based	database	management	application	software	for	either	a Macintosh	or	Windows-based	computer.	The	FileMaker®	Pro	database	software	and	related	products	offer	relational	databases	and	desktop-to-web	publishing capabilities.	FileMaker	Pro	8,	the	newest	version	of	the	desktop	database	introduced	in	August	2005,	features	new	ways	to	share	and	manage	information	of	various types.	FileMaker	Pro	8	allows	users	to	convert	graphic-rich	reports	of	their	data	into	alternative	file	formats,	which	can	be	emailed	for	sharing	with	non-FileMaker	users.

# Internet	Software	and	Services

The	Company	is	focused	on	delivering	seamless	integration	with	and	access	to	the	Internet	throughout	the	Company's	products	and	services.	The	Company's	Internet solutions	adhere	to	many	industry	standards	in	order	to	provide	an	optimized	user	experience	through	interoperability.

# Safari™

Safari,	the	Company's	Mac	OS	X	compatible	web	browser,	uses	the	advanced	interface	technologies	underlying	Mac	OS	X	and	includes	built-in	Google	search;

SnapBack™	to	instantly	return	to	search	results;	a	way	to	name,	organize	and	present	bookmarks;	tabbed	browsing;	and	automatic	"pop-up"	ad	blocking.

# QuickTime®

QuickTime,	the	Company's	multimedia	software	for	Macintosh	or	Windows-based	computers,	features	streaming	of	live	and	stored	video	and	audio	over	the	Internet and	playback	of	high-quality	audio	and	video	on	computers.	QuickTime	7	features	a	new	video	codec	called	H.264,	which	delivers	high	video	quality	at	low	data	rates. QuickTime	7	automatically	determines	a	user's	connection	speed	to	ensure	they	are	getting	the	highest-quality	content	stream	possible.	QuickTime	7	also	delivers	multi- channel	audio	and	supports	audio	formats,	including	AIFF,	WAV,	MOV,	MP4	(AAC	only),	CAF,	and	AAC/ADTS.

The	Company	offers	several	other	QuickTime	products.	QuickTime	7	Pro,	a	suite	of	software	tools,	allows	creation	and	editing	of	Internet-ready	audio	and	video	files. QuickTime	7	Pro	allows	users	to	create	H.264	video,	capture	audio	and	video,	create	multi-channel	audio,	and	export	multiple	files	while	playing	back	or	editing	video. QuickTime	Streaming	Server	facilitates	the	broadcasting	of	streaming	digital	video.	QuickTime	Broadcaster	allows	users	to	produce	professional-quality	live	events	for online	delivery.

The	Company's	.Mac	offering	is	a	suite	of	Internet	services	that	for	an	annual	fee	provides	Macintosh	users	with	a	powerful	set	of	Internet	tools.	.Mac	services	include: HomePage,	for	personal	web	sites;	iDisk,	a	virtual	hard	drive	accessible	anywhere	with	Internet	access;	.Mac	Sync,	which	keeps	Safari	bookmarks,	iCal®	calendars, Address	Book	information,	Keychain®	(passwords),	and	Mac	OS	X	Mail	preferences	up-to-date	across	multiple	Macintosh	computers	and	available	via	web	browser when	users	are	away	from	their	Mac;	.Mac	Mail,	an	ad-free	email	service;	and	Learning	Center,	featuring	tutorials	for	certain	software	applications.	The	current	version of	.Mac	includes	.Mac	Groups,	a	service	that	helps	members	communicate,	coordinate	schedules,	and	stay	in	sync	with	private	groups	of	friends	or	colleagues;	an

updated	version	of	.Mac	Backup	software	that	allows	members	to	archive	the	content	of	their	iLife	Home	folder;	and	a	four-fold	increase	in	combined	iDisk	and	email storage	to	1GB	for	individuals	and	2GB	for	families.

# Wireless	Connectivity	and	Networking

# AirPort	Extreme®

AirPort	Extreme	is	the	Company's	next	generation	Wi-Fi	wireless	networking	technology.	AirPort	Extreme	is	based	on	the	802.11g	standard,	which	supports	speeds	up to	54	Mbps,	and	is	fully	compatible	with	most	Wi-Fi	devices	that	use	the	802.11b	standard.	AirPort	Extreme	Base	Stations	can	serve	up	to	50	Macintosh	and	Windows users	simultaneously,	provide	wireless	bridging	to	extend	the	range	beyond	just	one	base	station,	and	support	USB	printer	sharing	to	allow	multiple	users	to	wirelessly share	USB	printers	connected	directly	to	the	base	station.

# AirPort®	Express

AirPort®	Express	is	the	first	802.11g	mobile	base	station	that	can	be	plugged	directly	into	the	wall	for	wireless	Internet	connections	and	USB	printing.	Airport	Express also	features	analog	and	digital	audio	outputs	that	can	be	connected	to	a	stereo	and	AirTunes™	music	networking	software	which	works	with	iTunes,	giving	users	a	way to	wirelessly	stream	iTunes	music	from	their	Macintosh	or	Windows-based	computer	to	any	room	in	the	house.	AirPort	Express	features	a	single	piece	design	weighing 6.7	ounces.

# Other	Connectivity	and	Networking	Solutions

Mac	OS	X	includes	capabilities	for	Bluetooth	technology.	Bluetooth	is	an	industry	standard	for	wirelessly	connecting	computers	and	peripherals	that	supports transmission	of	data	at	up	to	3	Mbps	within	a	range	of	approximately	30	feet.	The	Company's	Bluetooth	technology	for	Mac	OS	X	lets	customers	wirelessly	share	files between	Macintosh	systems,	synchronize	and	share	contact	information	with	Palm-OS	based	PDAs,	and	access	the	Internet	through	Bluetooth-enabled	cell	phones.	A Bluetooth	USB	adaptor	can	Bluetooth-enable	any	USB-based	Macintosh	computer	running	in	Mac	OS	X	version	10.1.4	or	higher.

Bonjour™,	the	Company's	zero	configuration	networking	technology,	is	based	on	open	Internet	Engineering	Task	Force	(IETF)	Standard	Protocols	such	as	IP,	ARP, and	DNS	and	is	built	into	Mac	OS	X.	This	technology	uses	industry	standard	networking	protocols	and	zero	configuration	technology	including	Ethernet	or	802.11- based	wireless	networks	like	the	Company's	AirPort	products.	The	source	code	for	this	technology	also	includes	software	to	support	UNIX,	Linux,	and	Windows-based systems	and	devices.

The	Company	developed	FireWire	technology,	also	referred	to	as	IEEE	1394,	which	is	a	high-speed	serial	I/O	technology	for	connecting	digital	devices	such	as	digital camcorders	and	cameras	to	desktop	and	portable	computers.	With	its	high	data-transfer	speed	and	"hot	plug-and-play"	capability,	FireWire	has	become	an	established cross-platform	industry	standard	for	both	consumers	and	professionals.	FireWire	is	currently	integrated	in	all	Macintosh	systems.

# Product	Support	and	Services

AppleCare®	offers	a	range	of	support	options	for	the	Company's	customers.	These	options	include	assistance	that	is	built	into	software	products,	printed	and	electronic product	manuals,	online	support	including	comprehensive	product	information	as	well	as	technical	assistance,	and	the	AppleCare	Protection	Plan.	The	AppleCare Protection	Plan	is	a	fee-based	service	that	typically	includes	three	years	of	phone	support	and	hardware	repairs,	dedicated	web-based	support	resources,	and	user diagnostic	tools.

# Markets	and	Distribution

The	Company's	customers	are	primarily	in	the	education,	creative,	consumer,	and	business	markets.	The	Company	distributes	its	products	through	wholesalers, resellers,	national	and	regional	retailers	and

cataloguers.	No	individual	customer	accounted	for	more	than	10%	of	net	sales	in	2005,	2004,	or	2003.	The	Company	also	sells	many	of	its	products	and	resells	certain third-party	products	in	most	of	its	major	markets	directly	to	consumers,	education	customers,	and	businesses	through	its	retail	and	online	stores	in	the	U.S.	and internationally.	Over	12%	of	the	Company's	net	sales	in	2005	were	through	its	U.S.	education	channel,	including	sales	to	elementary	and	secondary	schools,	higher education	institutions,	and	individual	customers.

# Competition

The	Company	is	confronted	by	aggressive	competition	in	all	areas	of	its	business.	The	market	for	personal	computers	and	related	software	and	peripheral	products	is highly	competitive.	This	market	continues	to	be	characterized	by	rapid	technological	advances	in	both	hardware	and	software	that	have	substantially	increased	the capabilities	and	use	of	personal	computers	and	have	resulted	in	the	frequent	introduction	of	new	products	with	competitive	price,	feature,	and	performance characteristics.	Over	the	past	several	years,	price	competition	in	the	market	for	personal	computers	has	been	particularly	intense.	The	Company's	competitors	who	sell personal	computers	based	on	other	operating	systems	have	aggressively	cut	prices	and	lowered	their	product	margins	to	gain	or	maintain	market	share.	The	Company's results	of	operations	and	financial	condition	can	be	adversely	affected	by	these	and	other	industry-wide	downward	pressures	on	gross	margins.

The	principal	competitive	factors	in	the	market	for	personal	computers	include	price,	relative	price/performance,	product	quality	and	reliability,	design	innovation, availability	of	software,	product	features,	marketing	and	distribution	capability,	service	and	support,	availability	of	hardware	peripherals,	and	corporate	reputation. Further,	as	the	personal	computer	industry	and	its	customers	place	more	reliance	on	the	Internet,	an	increasing	number	of	Internet	devices	that	are	smaller,	simpler,	and less	expensive	than	traditional	personal	computers	may	compete	for	market	share	with	the	Company's	existing	products.

The	Company	is	currently	taking	and	will	continue	to	take	steps	to	respond	to	the	competitive	pressures	being	placed	on	its	personal	computer	sales	as	a	result	of innovations	from	competing	platforms.	The	Company's	future	operating	results	and	financial	condition	are	substantially	dependent	on	its	ability	to	continue	to	develop improvements	to	the	Macintosh	platform	in	order	to	maintain	perceived	functional	and	design	advantages	over	competing	platforms.

The	Company's	services	and	products	relating	to	music	and	other	creative	content	have	already	encouraged	significant	competition	from	other	companies,	many	of whom	have	greater	financial,	marketing,	and	manufacturing	resources	than	those	of	the	Company.	The	Company	faces	increasing	competition	from	other	companies promoting	their	own	digital	music	products	and	distribution	services,	subscription	services,	and	free	peer-to-peer	music	services.	The	Company	anticipates	that competition	will	intensify	as	hardware,	software,	and	content	providers	work	more	collaboratively	to	offer	integrated	products	competing	with	the	Company's	offerings. However,	the	Company	believes	it	currently	maintains	a	competitive	advantage	by	more	effectively	integrating	an	entire	solution,	including	the	hardware	(iPod), software	(iTunes),	and	distribution	of	third-party	digital	content	(iTunes	Music	Store).

# Raw	Materials

Although	most	components	essential	to	the	Company's	business	are	generally	available	from	multiple	sources,	certain	key	components	(including	microprocessors	and application-specific	integrated	circuits	("ASICs"))	are	currently	obtained	by	the	Company	from	single	or	limited	sources.	Some	other	key	components,	while	currently available	to	the	Company	from	multiple	sources,	are	at	times	subject	to	industry-wide	availability	constraints	and	pricing	pressures.	In	addition,	the	Company	uses	some components	that	are	not	common	to	the	rest	of	the	personal	computer	and	consumer	electronics	industries,	and	new	products	introduced	by	the	Company	often	initially utilize	custom	components

obtained	from	only	one	source	until	the	Company	has	evaluated	whether	there	is	a	need	for,	and	subsequently	qualifies,	additional	suppliers.	If	the	supply	of	a	key	or single-sourced	component	to	the	Company	were	to	be	delayed	or	curtailed	or	in	the	event	a	key	manufacturing	vendor	delays	shipments	of	completed	products	to	the Company,	the	Company's	ability	to	ship	related	products	in	desired	quantities	and	in	a	timely	manner	could	be	adversely	affected.	The	Company	did	experience	such delays	during	2004	and	2005	related	to	PowerPC	G5	processors,	which	resulted	in	the	constrained	availability	of	certain	products.	The	Company's	business	and	financial performance	could	also	be	adversely	affected	depending	on	the	time	required	to	obtain	sufficient	quantities	from	the	original	source,	or	to	identify	and	obtain	sufficient quantities	from	an	alternative	source.	Continued	availability	of	these	components	may	be	affected	if	producers	were	to	decide	to	concentrate	on	the	production	of common	components	instead	of	components	customized	to	meet	the	Company's	requirements.	In	June	2005,	the	Company	announced	its	intention	to	transition	its Macintosh	computers	using	the	PowerPC	G5	and	G4	microprocessors,	which	are	currently	single-sourced,	to	Intel	microprocessors	by	the	end	of	calendar	year	2007. The	announcement	of	this	transition	may	impact	the	continued	availability	on	acceptable	terms	of	certain	components	and	services,	including	PowerPC	G5	and	G4 microprocessors.	The	Company	attempts	to	mitigate	these	potential	risks	by	working	closely	with	these	and	other	key	suppliers	on	product	introduction	plans,	strategic inventories,	coordinated	product	introductions,	and	internal	and	external	manufacturing	schedules	and	levels.	Consistent	with	industry	practice,	the	Company	acquires components	through	a	combination	of	formal	purchase	orders,	supplier	contracts,	and	open	orders	based	on	projected	demand	information.	The	Company's	purchase commitments	typically	cover	its	requirements	for	periods	ranging	from	30	to	150	days.

The	Company	believes	there	are	several	component	suppliers	and	manufacturing	vendors	whose	loss	to	the	Company	could	have	a	material	adverse	effect	upon	the Company's	business	and	financial	position.	At	this	time,	such	vendors	include	Agere	Systems,	Inc.,	Ambit	Microsystems	Corporation,	ASUSTeK	Corporation,	ATI Technologies,	Inc.,	Broadcom	Corporation,	Cypress	Semiconductor	Corporation,	Freescale	Semiconductor,	Inc.,	Hitachi	Global	Storage	Technologies,	Hon	Hai Precision	Industry	Co.,	Ltd.,	IBM	Corporation,	Intel	Corporation,	International	Display	Technology,	Inventec	Appliances	Corporation,	LG.	Phillips	Co.,	Ltd.,

Matsushita,	Mitsubishi	Electric	Corporation,	NVIDIA	Corp.,	PortalPlayer,	Inc.,	Quanta	Computer,	Inc.,	Samsung	Electronics,	Synaptics,	Inc.,	and	Toshiba	Corporation.

# Research	and	Development

Because	the	personal	computer	and	consumer	electronics	industries	are	characterized	by	rapid	technological	advances,	the	Company's	ability	to	compete	successfully	is heavily	dependent	upon	its	ability	to	ensure	a	continuing	and	timely	flow	of	competitive	products	and	technology	to	the	marketplace.	The	Company	continues	to	develop new	products	and	technologies	and	to	enhance	existing	products	in	the	areas	of	hardware	and	peripherals,	consumer	electronic	products,	system	software,	applications software,	networking	and	communications	software	and	solutions,	and	the	Internet.	The	Company	may	expand	the	range	of	its	product	offerings	and	intellectual	property through	licensing	and/or	acquisition	of	third-party	business	and	technology.	The	Company's	research	and	development	expenditures	totaled	$534	million,	$489	million, and	$471	million	in	2005,	2004,	and	2003,	respectively.

# Patents,	Trademarks,	Copyrights	and	Licenses

The	Company	currently	holds	rights	to	patents	and	copyrights	relating	to	certain	aspects	of	its	computer	systems,	iPods,	peripherals	and	software.	In	addition,	the Company	has	registered,	and/or	has	applied	to	register,	trademarks	and	service	marks	in	the	U.S.	and	a	number	of	foreign	countries	for	"Apple,"	the	Apple	logo, "Macintosh,"	"iPod,"	"iTunes,"	"iTunes	Music	Store,"	and	numerous	other	trademarks	and	service	marks.	Although	the	Company	believes	the	ownership	of	such patents,	copyrights,	trademarks	and	service	marks	is	an	important	factor	in	its	business	and	that	its	success	does	depend	in	part	on	the

ownership	thereof,	the	Company	relies	primarily	on	the	innovative	skills,	technical	competence,	and	marketing	abilities	of	its	personnel.

Many	of	the	Company's	products	are	designed	to	include	intellectual	property	obtained	from	third-parties.	While	it	may	be	necessary	in	the	future	to	seek	or	renew licenses	relating	to	various	aspects	of	its	products	and	business	methods,	the	Company	believes	that,	based	upon	past	experience	and	industry	practice,	such	licenses generally	could	be	obtained	on	commercially	reasonable	terms;	however,	there	is	no	guarantee	that	such	licenses	could	be	obtained	at	all.	Because	of	technological changes	in	the	computer	industry,	current	extensive	patent	coverage,	and	the	rapid	rate	of	issuance	of	new	patents,	it	is	possible	certain	components	of	the	Company's products	and	business	methods	may	unknowingly	infringe	existing	patents	of	others.	From	time	to	time,	the	Company	has	been	notified	that	it	may	be	infringing	certain patents	or	other	intellectual	property	rights	of	third-parties.

# Foreign	and	Domestic	Operations	and	Geographic	Data

The	U.S.	represents	the	Company's	largest	geographic	marketplace.	Approximately	60%	of	the	Company's	net	sales	in	2005	came	from	sales	to	customers	inside	the U.S.	Final	assembly	of	products	sold	by	the	Company	is	conducted	in	the	Company's	manufacturing	facility	in	Cork,	Ireland,	and	by	external	vendors	in	Fremont, California,	Fullerton,	California,	Taiwan,	Korea,	the	People's	Republic	of	China,	and	the	Czech	Republic.	Currently,	manufacture	of	many	of	the	components	used	in	the Company's	products	and	final	assembly	of	substantially	all	of	the	Company's	portable	products	including	PowerBooks,	iBooks,	and	iPods	are	performed	by	third-party vendors	in	China.	Margins	on	sales	of	the	Company's	products	in	foreign	countries,	and	on	sales	of	products	that	include	components	obtained	from	foreign	suppliers, can	be	adversely	affected	by	foreign	currency	exchange	rate	fluctuations	and	by	international	trade	regulations,	including	tariffs	and	antidumping	penalties.

Information	regarding	financial	data	by	geographic	segment	is	set	forth	in	Part	II,	Item	8	of	this	Form	10-K	in	the	Notes	to	Consolidated	Financial	Statements	at	Note 11,	"Segment	Information	and	Geographic	Data."

# Seasonal	Business

The	Company	has	historically	experienced	increased	net	sales	in	its	first	and	fourth	fiscal	quarters	compared	to	other	quarters	in	its	fiscal	year	due	to	seasonal	demand related	to	the	holiday	season	and	the	beginning	of	the	school	year.	This	historical	pattern	should	not	be	considered	a	reliable	indicator	of	the	Company's	future	net	sales or	financial	performance.

# Warranty

The	Company	offers	a	basic	limited	parts	and	labor	warranty	on	its	hardware	products.	The	basic	warranty	period	for	hardware	products	is	typically	one	year	from	the date	of	purchase	by	the	end-user.	The	Company	also	offers	a	90-day	basic	warranty	for	its	service	parts	used	to	repair	the	Company's	hardware	products.	In	addition, consumers	may	purchase	extended	service	coverage	on	most	of	the	Company's	hardware	products	in	all	of	its	major	markets.

# Backlog

In	the	Company's	experience,	the	actual	amount	of	product	backlog	at	any	particular	time	is	not	a	meaningful	indication	of	its	future	business	prospects.	In	particular, backlog	often	increases	in	anticipation	of	or	immediately	following	new	product	introductions	because	of	over-ordering	by	dealers	anticipating	shortages.	Backlog	often is	reduced	once	dealers	and	customers	believe	they	can	obtain	sufficient	supply.	Because	of	the	foregoing,	backlog	should	not	be	considered	a	reliable	indicator	of	the Company's	ability	to	achieve	any	particular	level	of	revenue	or	financial	performance.

# Environmental	Laws

Compliance	with	federal,	state,	local,	and	foreign	laws	enacted	for	the	protection	of	the	environment	has	to	date	had	no	material	effect	on	the	Company's	capital expenditures,	earnings,	or	competitive	position.	In	the	future,	these	laws	could	have	a	material	adverse	effect	on	the	Company.

Production	and	marketing	of	products	in	certain	states	and	countries	may	subject	the	Company	to	environmental	and	other	regulations	including,	in	some	instances,	the

requirement	that	the	Company	provide	consumers	with	the	ability	to	return	to	the	Company	product	at	the	end	of	its	useful	life,	and	place	responsibility	for environmentally	safe	disposal	or	recycling	with	the	Company.	Such	laws	and	regulations	have	recently	been	passed	in	several	jurisdictions	in	which	the	Company operates,	including	various	European	Union	member	states,	Japan,	and	California.	In	the	future,	these	laws	could	have	a	material	adverse	effect	on	the	Company.

# Employees

As	of	September	24,	2005,	the	Company	had	approximately	14,800	full-time	equivalent	employees	and	an	additional	2,020	temporary	employees	and	contractors.

# Available	Information

The	Company's	Annual	Report	on	Form	10-K,	Quarterly	Reports	on	Form	10-Q,	Current	Reports	on	Form	8-K,	and	amendments	to	reports	filed	pursuant	to	Sections 13(a)	and	15(d)	of	the	Securities	Exchange	Act	of	1934,	as	amended,	are	available	on	its	website	at	http://www.apple.com/investor	when	such	reports	are	available	on	the U.S.	Securities	and	Exchange	Commission	(SEC)	website.	The	public	may	read	and	copy	any	materials	filed	by	the	Company	with	the	SEC	at	the	SEC's	Public Reference	Room	at	100	F	Street,	NE,	Room	1580,	Washington,	DC	20549.	The	public	may	obtain	information	on	the	operation	of	the	Public	Reference	Room	by	calling the	SEC	at	1-800-SEC-0330.	The	SEC	maintains	an	Internet	site	that	contains	reports,	proxy	and	information	statements	and	other	information	regarding	issuers	that file	electronically	with	the	SEC	at	http://www.sec.gov.	The	contents	of	these	websites	are	not	incorporated	into	this	filing.	Further,	the	Company's	references	to	the URLs	for	these	websites	are	intended	to	be	inactive	textual	references	only.

# Item	2.	Properties

The	Company's	headquarters	are	located	in	Cupertino,	California.	The	Company	has	manufacturing	facilities	in	Cork,	Ireland.	As	of	September	24,	2005,	the	Company leased	approximately	3.6	million	square	feet	of	space,	primarily	in	the	U.S.,	and	to	a	lesser	extent,	in	Europe,	Japan,	Canada,	and	the	Asia	Pacific	region.	The	major facility	leases	are	for	terms	of	5	to	15	years	and	generally	provide	renewal	options	for	terms	of	3	to	5	additional	years.	Leased	space	includes	approximately	902,000 square	feet	of	retail	space,	a	majority	of	which	is	in	the	U.S.	Lease	terms	for	retail	space	range	from	5	to	20	years,	the	majority	of	which	are	for	10	years,	and	often contain	multi-year	renewal	options.

The	Company	owns	a	352,000	square-foot	manufacturing	facility	in	Cork,	Ireland	that	also	houses	a	customer	support	call	center.	The	Company	also	owns	a	752,000 square-foot	facility	in	Sacramento,	California	that	houses	warehousing	and	distribution	operations	as	well	as	a	customer	support	call	center.	In	addition,	the	Company owns	approximately	942,000	square	feet	of	facilities	located	in	Cupertino,	California,	used	for	research	and	development	and	corporate	functions.	Outside	the	U.S.,	the Company	owns	additional	facilities	totaling	approximately	169,000	square	feet.

The	Company	believes	its	existing	facilities	and	equipment	are	well	maintained	and	in	good	operating	condition.	The	Company	has	invested	in	internal	capacity	and strategic	relationships	with	outside	manufacturing	vendors,	and	therefore	believes	it	has	adequate	manufacturing	capacity	for	the	foreseeable	future.	The	Company continues	to	make	investments	in	capital	equipment	as	needed	to	meet	anticipated	demand	for	its	products.

# Item	3.	Legal	Proceedings

The	Company	is	subject	to	various	legal	proceedings	and	claims	that	are	discussed	below.	The	Company	is	also	subject	to	certain	other	legal	proceedings	and	claims	that have	arisen	in	the	ordinary	course	of	business	and	which	have	not	been	fully	adjudicated.	In	the	opinion	of	management,	the	Company	does	not	have	a	potential	liability related	to	any	current	legal	proceedings	and	claims	that	would	individually	or	in	the	aggregate	have	a	material	adverse	effect	on	its	financial	condition,	liquidity	or results	of	operations.	However,	the	results	of	legal	proceedings	cannot	be	predicted	with	certainty.	Should	the	Company	fail	to	prevail	in	any	of	these	legal	matters	or should	several	of	these	legal	matters	be	resolved	against	the	Company	in	the	same	reporting	period,	the	operating	results	of	a	particular	reporting	period	could	be materially	adversely	affected.	The	Company	settled	certain	matters	during	2005	that	did	not	individually	or	in	the	aggregate	have	a	material	impact	on	the	Company's results	of	operations.

# Advanced	Audio	Devices	LLC	v.	Apple	Computer,	Inc.

Plaintiff	Advanced	Audio	Devices	(AAD)	filed	this	action	on	March	3,	2005	in	the	United	States	District	Court	for	the	Northern	District	of	Illinois,	Eastern	Division, alleging	infringement	by	the	Company	of	U.S.	Patent	6,587,403	entitled	"Music	Jukebox."	The	complaint	sought	unspecified	damages	and	other	relief.	The	Company filed	an	answer	on	May	4,	2005	denying	all	material	allegations	and	asserting	numerous	affirmative	defenses.	The	parties	have	reached	a	settlement.	Settlement	of	this matter	did	not	have	a	material	effect	on	the	Company's	financial	position	or	results	of	operation.

# Apple	Corps	Ltd.	v.	Apple	Computer,	Inc.;	Apple	Computer,	Inc.	v.	Apple	Corps	Ltd.

Plaintiff	Apple	Corps	filed	this	action	on	July	4,	2003	in	the	High	Court	of	Justice,	Chancery	Division,	in	London	alleging	that	the	Company	has	breached	a	1991 agreement	that	resolved	earlier	trademark	litigation	between	the	parties	regarding	use	of	certain	Apple	marks.	Plaintiff	seeks	an	injunction,	unspecified	damages,	and other	relief.	The	Company	filed	a	motion	on	October	13,	2003,	challenging	jurisdiction	in	the	U.K.	The	Court	denied	this	motion	on	April	7,	2004.	The	Company	filed an	appeal	of	the	Court's	decision	but	subsequently	withdrew	the	appeal.	In	November	2004,	Plaintiff	served	the	Company	with	an	Amended	Bill	of	Particulars	and	on December	23,	2004	the	Company	filed	a	Defence.	Plaintiff	has	indicated	its	intention	to	file	a	Re-Amended	Bill	of	Particulars.	The	Company's	Defence	to	the	Re- Amended	Bill	of	Particulars	is	not	yet	due.	Trial	is	set	for	the	week	of	March	27,	2006.

On	October	8,	2003,	the	Company	filed	a	lawsuit	against	Apple	Corps	in	the	United	States	District	Court	for	the	Northern	District	of	California	requesting	a	declaratory judgment	that	the	Company	has	not	breached	the	1991	agreement.	Apple	Corps	challenged	jurisdiction	in	the	California	case	but	the	Court	denied	that	challenge	on March	25,	2004.	Apple	Corps	subsequently	prevailed	on	a	motion	to	stay	the	California	case	during	the	pendency	of	the	U.K.	action.	The	Company	has	dismissed	the California	lawsuit	without	prejudice.

# Bader	v.	Anderson;	Bader	v.	Apple	Computer,	Inc.	et.	al.

Plaintiff	filed	this	purported	shareholder	derivative	action	against	the	Company	and	each	of	its	current	executive	officers	and	members	of	its	Board	of	Directors	on May	19,	2005	in	Santa	Clara	County	Superior	Court	asserting	claims	for	breach	of	fiduciary	duty,	material	misstatements	and	omissions,	and	violations	of	California Businesses	and	Professions	Code	§17200	(unfair	competition).	Plaintiff	alleges	that	the	Company's	March	14,	2005	proxy	statement	was	false	and	misleading	for	failure to	disclose	certain	information	relating	to	the	Apple	Computer,	Inc.	Performance	Bonus	Plan	which	was	approved	by	shareholders	at	the	annual	meeting	held	on April	21,	2005.	Plaintiff,	who	ostensibly	brings	suit	on	the	Company's	behalf,	has	made	no	demand	on	the	Board	of	Directors	and	alleges	that	such	demand	is	excused. Plaintiff	seeks	injunctive	and	other	relief	for	purported	injury	to	the	Company.	On	July	27,	2005,	Plaintiff	filed	an	amended	complaint	alleging	that,	in	addition	to	the purported	derivative	claims,	adoption	of	the	bonus	plan	and	distribution	of	the	proxy	statement	describing	that	plan	also	inflicted	injury	on	her

directly	as	an	individual	shareholder.	Defendants	filed	a	demurrer	which	is	scheduled	to	be	heard	on	December	6,	2005.

Baghdasarian,	et	al.	v.	Apple	Computer,	Inc.

Plaintiffs	filed	this	action	in	Los	Angeles	County	Superior	Court	on	October	31,	2005,	on	behalf	of	a	purported	nationwide	class	of	all	purchasers	of	all	Apple	wireless products	(router,	modem,	or	adaptor)	sold	at	any	time.	The	complaint	alleges	that	the	Company	misrepresented	the	transmission	rates	of	these	products.	The	complaint alleges	causes	of	action	for	breach	of	express	warranty	and	for	violations	of	the	Consumer	Legal	Remedies	Act,	California	Business	&	Professions	Code	§17200	(unfair

competition)	and	California	Business	&	Professions	Code	§17500	(false	advertising).	The	complaint	seeks	damages	and	equitable	remedies.	The	Company's	response	to the	complaint	is	not	yet	due.

# Branning	et	al.	v.	Apple	Computer,	Inc.

Plaintiffs	filed	this	purported	class	action	in	San	Francisco	County	Superior	Court	on	February	17,	2005.	The	complaint	alleges	violations	of	California	Business	& Professions	Code	§17200	(unfair	competition)	and	violation	of	the	Consumer	Legal	Remedies	Act	(CLRA)	regarding	a	variety	of	purportedly	unfair	and	unlawful conduct	including,	but	not	limited	to,	allegedly	selling	used	computers	as	new	and	failing	to	honor	warranties.	Plantiffs	also	bring	causes	of	action	for	misappropriation of	trade	secrets,	breach	of	contract,	and	violation	of	the	Song	Beverly	Act.	Plaintiffs	request	unspecified	damages	and	other	relief.	The	Company	received	service	of	the complaint	on	March	12,	2005,	and	on	March	13,	2005	the	Company	filed	a	motion	to	transfer	the	case	to	Santa	Clara	County	Superior	Court.	On	May	9,	2005,	the	Court granted	the	motion	and	transferred	the	case	to	Santa	Clara	County	Superior	Court.	On	May	2,	2005,	Plaintiffs	filed	an	amended	complaint	adding	two	new	named Plaintiffs	and	three	new	causes	of	action	including	a	claim	for	treble	damages	under	the	Cartwright	Act	(California	Business	and	Professions	Code	§16700	et	seq.)	and	a claim	for	false	advertising.	The	Company	filed	a	demurrer	to	the	amended	complaint	which	the	Court	sustained	in	its	entirety	on	November	10,	2005.	The	Court	granted Plaintiffs	leave	to	amend	their	complaint.

# Burrow	v.	Apple	Computer,	Inc.

Plaintiff	filed	this	purported	class	action	in	Orange	County	Superior	Court	on	February	17,	2005	alleging	false	advertising	regarding	the	copy	protection	capabilities	of DVD	Studio	Pro.	The	Complaint	alleged	violations	of	California	Business	&	Professions	Code	§17200	(unfair	competition),	California	Business	&	Professions	Code §17500	(false	advertising)	and	negligent	misrepresentation.	Plaintiff	requested	unspecified	damages	and	other	relief.	The	Company	filed	an	answer	on	April	7,	2005 denying	all	allegations	and	asserting	numerous	affirmative	defenses.	The	parties	have	reached	a	settlement.	Settlement	of	this	matter	did	not	have	a	material	effect	on	the Company's	financial	position	or	results	of	operation.

# Butzer,	et	al.,	v.	Apple	Computer,	Inc.

Plaintiffs	filed	this	action	on	August	23,	2005,	in	the	United	States	District	Court	for	the	Northern	District	of	California,	San	Jose	Division,	on	behalf	of	a	purported nationwide	class	of	all	purchasers	of	the	Company's	PowerBook	G4	portable	computers.	The	complaint	alleges	defects	in	the	memory	of	the	computers.	The	complaint alleges	that	this	purported	defect	extends	to	other	series	of	the	Company's	portables	and	states	that	plaintiffs	reserve	the	right	to	amend	the	complaint	to	include	these other	series.	Plaintiffs	assert	claims	for	alleged	violations	of	California	Business	&	Professions	Code	§17200	(unfair	competition),	California	Business	&	Professions Code	§17500	(false	advertising),	the	Consumer	Legal	Remedies	Act	and	the	Song-Beverly	Consumer	Warranty	Act.	The	complaint	seeks	remedies	including	restitution and/or	damages	and	injunctive	relief.	The	Company	filed	an	answer	on	October	19,	2005	denying	the	material	allegations	and	asserting	numerous	affirmative	defenses.

# Cagney	v.	Apple	Computer,	Inc.

Plaintiff	filed	this	purported	class	action	on	January	9,	2004	in	Los	Angeles	County	Superior	Court,	alleging	improper	collection	of	sales	tax	in	transactions	involving mail-in	rebates.	The	complaint	alleges	violations	of	California	Business	and	Professions	Code	§17200	(unfair	competition)	and	seeks	restitution	and	other	relief.	The Company	filed	an	answer	on	February	20,	2004,	denying	all	allegations	and	asserting	numerous	affirmative	defenses.	The	Company	filed	a	motion	to	disqualify Plaintiff's	counsel,	which	the	Court	denied.	The	Company	filed	a	petition	for	a	writ	of	mandate	with	respect	to	this	ruling	and	the	Court	of	Appeal	issued	an	order	to show	cause	as	to	why	the	writ	should	not	issue.	Plaintiff's	lead	counsel	subsequently	withdrew.	On	February	17,	2005	the	Court	of	Appeal	ruled	that	the	trial	court abused	its	discretion	in	failing	to	grant	the	Company's	motion	to	disqualify	and	ordered	the	trial	court	to	disqualify	both	of	Plaintiff's	law	firms	upon	remand.	The	trial court	issued	the	disqualification	order	on	May	12,	2005.	On	May	9,	2005	Plaintiff	substituted	new	counsel.	The	Company	has	obtained	an	opinion	on	the	tax	issue	from the	State	Board	of	Equalization.	Discovery	is	stayed.

# Clark	v.	Apple	Computer,	Inc.

Plaintiff	filed	this	purported	class	action	on	February	2,	2005	in	Santa	Clara	County	Superior	Court	alleging	defects	in	the	Company's	"yo-yo"	power	adapters.	Plaintiffs request	unspecified	damages	and	other	relief.	The	parties	reached	a	tentative	settlement	in	this	matter.	The	Court	granted	preliminary	approval	of	the	settlement	on April	19,	2005.	On	November	29,	2005,	the	Court	continued	the	hearing	on	final	settlement	approval	until	January	10,	2006,	when	all	claims	will	have	been	received and	completely	processed	and	relevant	claim	information	has	been	reported	to	the	Court.	Settlement	of	this	matter	on	the	terms	preliminarily	approved	by	the	Court	will not	have	a	material	effect	on	the	Company's	financial	position	or	results	of	operation.

# Compression	Labs,	Inc.	v.	Apple	Computer,	Inc.,	et	al.;	Apple	v.	Compression	Labs,	Inc.,	et	al.

Plaintiff	Compression	Labs,	Inc.	filed	this	patent	infringement	action	on	April	22,	2004	against	the	Company	and	twenty-seven	other	defendants	in	the	United	States District	Court	for	the	Eastern	District	of	Texas,	Marshall	Division,	alleging	infringement	of	U.S.	patent	4,698,672	(the	'672	patent).	Plaintiff	alleges	that	the	Company infringes	the	patent	by	complying	with	the	JPEG	standard	as	defined	by	CCITT	Recommendation	T.81	entitled	"Information	Technology—Digital	Compression	and Coding	of	Continuous	Tone	Still	Images—Requirements	and	Guidelines."	Plaintiff	seeks	unspecified	damages	and	other	relief.

On	July	2,	2004,	the	Company	and	several	other	defendants	in	the	Texas	action	filed	a	lawsuit	in	the	United	States	District	Court	in	Delaware	against	Compression Labs,	Inc.	and	two	other	companies,	requesting	a	declaratory	judgment	of	noninfringement,	invalidity,	implied	license,	and	unenforceability	with	respect	to	the	'672 patent.	Additional	actions	regarding	this	patent	have	been	filed	in	other	jurisdictions.	On	February	16,	2005,	the	Panel	on	Multi-District	Litigation	(MDL)	granted	a petition	filed	by	certain	defendants,	seeking	coordination	and	transfer	of	all	of	these	cases	to	one	court	for	pre-trial	proceedings.	The	MDL	Panel	has	transferred	all	of the	cases	to	the	Northern	District	of	California.	The	defendants	in	the	Texas	and	Delaware	actions	had	filed	motions	to	dismiss	prior	to	the	transfer	and	both	motions	are still	pending.	A	Markman	hearing	is	set	for	February	13,	2006.

# Contois	Music	Technology	LLC	v.	Apple	Computer,	Inc.

Plaintiff	Contois	Music	Technology	("Contois")	filed	this	action	on	June	13,	2005	in	the	United	States	District	Court	for	Vermont,	alleging	infringement	by	the Company	of	U.S.	Patent	No.	5,864,868,	entitled	"Computer	Control	System	and	User	Interface	for	Media	Playing	Devices."	The	complaint,	which	was	served	on October	4,	2005,	seeks	unspecified	damages	and	other	relief.	The	Company	filed	an	answer	on	November	23,	2005	denying	all	material	allegations	and	asserting numerous	affirmative	defenses.

Craft	v.	Apple	Computer,	Inc.	(filed	December	23,	2003,	Santa	Clara	County	Superior	Court);	Chin	v.	Apple	Computer,	Inc.	(filed	December	23,	2003,	San	Mateo County	Superior	Court);	Hughes	v.	Apple	Computer,	Inc.	(filed	December	23,	2003,	Santa	Clara	County	Superior	Court);	Westley	v.	Apple	Computer,	Inc.	(filed December	26,	2003,	San	Francisco	County	Superior	Court);	Keegan	v.	Apple	Computer,	Inc.	(filed	December	30,	2003,	Alameda	County	Superior	Court);	Wagya	v. Apple	Computer,	Inc.	(filed	February	19,	2004,	Alameda	County	Superior	Court);	Yamin	v.	Apple	Computer,	Inc.	(filed	February	24,	2004,	Los	Angeles	County Superior	Court);	Kieta	v.	Apple	Computer,	Inc.	(filed	July	8,	2004,	Alameda	County	Superior	Court)

Eight	separate	plaintiffs	filed	purported	class	action	cases	in	various	California	courts	alleging	misrepresentations	by	the	Company	relative	to	iPod	battery	life.	The complaints	include	causes	of	action	for	violation	of	California	Business	and	Professions	Code	§17200	(unfair	competition),	the	Consumer	Legal	Remedies	Action	and claims	for	false	advertising,	fraudulent	concealment,	and	breach	of	warranty.	The	complaints	seek	unspecified	damages	and	other	relief.	The	cases	were	consolidated	in San	Mateo	County	and	Plaintiffs	thereafter	filed	a	consolidated	complaint.	On	August	25,	2004,	the	Company	filed	an	answer	denying	all	allegations	and	asserting numerous	affirmative	defenses.	The	parties	reached	a	tentative	settlement	and	the	Court	granted	preliminary	approval	of	the	settlement	on	May	20,	2005.	The	trial	court

entered	an	order	granting	final	approval	to	the	settlement	on	August	25,	2005.	An	appeal	challenging	the	trial	court's	approval	of	the	settlement	was	filed	on	October	24, 2005;	the	appeal	is	pending.	Settlement	of	this	matter	on	the	terms	approved	by	the	Court	will	not	have	a	material	effect	on	the	Company's	financial	position	or	results	of operations.

A	similar	complaint	relative	to	iPod	battery	life,	Mosley	v.	Apple	Computer,	Inc.	was	filed	in	Westchester	County,	New	York	on	June	23,	2004	alleging	violations	of New	York	General	Business	Law	Sections	349	(unfair	competition)	and	350	(false	advertising).	The	Company	removed	the	case	to	Federal	Court	and	Plaintiff	filed	a motion	for	remand,	which	the	Court	has	not	yet	decided.	This	case	is	stayed	and	is	part	of	the	settlement,	now	on	appeal,	referred	to	above.

A	similar	complaint	related	to	the	iPod	battery	life,	Lenzi	v.	Apple	Canada,	Inc.,	was	filed	in	Montreal,	Quebec,	Canada,	on	June	7,	2005,	seeking	authorization	to institute	a	class	action	on	behalf	of	Generations	1,	2	and	3	iPod	owners	in	Quebec.	A	class	certification	hearing	has	been	scheduled	for	January	12,	2006.

Two	similar	complaints	relative	to	iPod	battery	life,	Wolfe	v.	Apple	and	Hirst	v.	Apple,	were	filed	in	Toronto,	Ontario,	Canada	on	August	15,	2005	and	September	12, 2005,	respectively.	Both	actions	define	the	class	as	a	national	class	consisting	of	all	persons	in	Canada	who	have	purchased	or	who	own	an	iPod.	A	motion	for certification	of	the	class	proceeding	has	been	scheduled	for	the	Spring	of	2006.

# Davis	v.	Apple	Computer,	Inc.

Plaintiff	filed	this	purported	class	action	in	San	Francisco	County	Superior	Court	on	December	5,	2002,	alleging	that	the	Company	engaged	in	unfair	and	deceptive business	practices	relating	to	its	AppleCare	Extended	Service	and	Warranty	Plan.	Plaintiff	asserts	causes	of	action	for	violation	of	the	California	Business	and Professions	Code	§17200	(unfair	competition)	and	§17500	(false	advertising),	breach	of	the	Song-Beverly	Warranty	Act,	intentional	misrepresentation	and	concealment. Plaintiff	requests	unspecified	damages	and	other	relief.	The	Company	filed	a	demurrer	and	motion	to	strike	which	were	granted,	in	part,	and	Plaintiff	filed	an	amended complaint.	The	Company	filed	an	answer	on	April	17,	2003	denying	all	allegations	and	asserting	numerous	affirmative	defenses.	Plaintiff	subsequently	amended	its complaint.	On	October	29,	2003,	the	Company	filed	a	motion	to	disqualify	Plaintiff's	counsel	in	his	role	as	counsel	to	the	purported	class	and	to	the	general	public.	The Court	granted	the	motion	but	allowed	Plaintiff	to	retain	substitute	counsel.	Plaintiff	did	engage	new	counsel	for	the	general	public,	but	not	for	the	class.	The	Company moved	to	disqualify	Plaintiff's	new	counsel	and	to	have	the	Court	dismiss	the	general	public	claims	for	equitable	relief.	The	Court	declined	to	disqualify	Plaintiff's	new counsel	or	to	dismiss	the	equitable	claims,	but	did	confirm	that	the	class	action	claims	are	dismissed.	The	Company	appealed	the	ruling	and	the	case	was	stayed	pending the	outcome	of	the	appeal.	The	Court	of	Appeal	denied	the	appeal

on	August	17,	2005,	affirming	the	trial	court's	decision.	The	Company	filed	a	Petition	for	review	with	the	California	Supreme	Court	which	was	denied	on	November	23, 2005.

# European	Commission	Investigation

The	European	Commission	has	notified	the	Company	that	it	is	investigating	certain	matters	relating	to	the	iTunes	Music	Store	in	the	European	Union	(EU).	The European	Commission	is	investigating	claims	made	by	Which?,	a	United	Kingdom	(UK)	consumer	association,	that	the	Company	is	violating	EU	competition	law	by charging	more	for	online	music	in	the	UK	than	in	Eurozone	countries	and	preventing	UK	consumers	from	purchasing	online	music	from	the	iTunes	Music	Store	for Eurozone	countries.	The	Which?	claims	were	originally	lodged	with	the	UK	Office	of	Fair	Trading,	which	subsequently	referred	them	to	the	European	Commission.	The European	Commission	is	investigating	the	charges	under	Articles	81	and	82	of	the	European	Commission	Treaty.

# Gobeli	Research	Ltd.	v.	Apple	Computer,	Inc.,	et	al.

Plaintiff	Gobeli	Research	Ltd.	filed	this	patent	infringement	action	against	the	Company	and	Sun	Microsystems,	Inc.	on	April	15,	2004	in	the	United	States	District Court	for	the	Eastern	District	of	Texas,	Marshall	Division,	alleging	infringement	of	U.S.	patent	5,418,968	related	to	a	"System	and	Method	of	Controlling	Interrupt Processing."	Plaintiff	alleges	that	the	Company's	Mac	OS	9	and	Mac	OS	X	operating	systems	infringe	Plaintiff's	patent.	Plaintiff	seeks	unspecified	damages	and	other relief.	The	Company	filed	an	answer	on	June	9,	2004,	denying	all	material	allegations	and	asserting	numerous	affirmative	defenses.	The	Company	also	asserted counterclaims	requesting	declaratory	judgment	of	non-infringement	and	invalidity.	A	Markman	hearing	took	place	August	9,	2005,	and	the	Court	issued	a	ruling	on August	26,	2005	invalidating	one	of	Plantiff's	two	claims.	On	October	18,	2005,	a	Stipulation	entered	into	by	the	parties	was	filed	removing	Mac	OS	9	from	the	case. The	trial	is	scheduled	for	February	6,	2006.

Plaintiffs	filed	this	purported	class	action	on	September	22,	2003	in	Los	Angeles	County	Superior	Court	against	the	Company	and	other	members	of	the	computer industry	on	behalf	of	an	alleged	nationwide	class	of	purchasers	of	certain	computer	hard	drives.	The	case	alleges	violations	of	California	Business	and	Professions	Code §17200	(unfair	competition),	the	Consumer	Legal	Remedies	Act	and	false	advertising	related	to	the	size	of	the	drives.	Plaintiffs	allege	that	calculation	of	hard	drive	size using	the	decimal	method	misrepresents	the	actual	size	of	the	drive.	The	complaint	seeks	restitution	and	other	relief.	Plaintiff	filed	an	amended	complaint	on	March	30, 2004	and	the	Company	filed	an	answer	on	September	23,	2004,	denying	all	allegations	and	asserting	numerous	affirmative	defenses.	Defendants	filed	a	motion	to	strike portions	of	the	complaint	based	on	sales	by	resellers	and	filed	a	motion	for	judgment	on	the	pleadings	based	upon	Proposition	64.	The	Court	granted	both	motions	at	a hearing	on	April	6,	2005.	Plaintiff	filed	an	amended	complaint	on	May	6,	2005.	The	Defendants	filed	a	demurrer	on	June	6,	2005,	which	was	heard	on	August	22,	2005. The	Court	granted	the	demurrer	in	part	and	denied	it	in	part.	Plaintiff	filed	an	amended	complaint.	The	Company's	response	is	not	yet	due.

# Honeywell	International,	Inc.,	et	al.	v.	Apple	Computer,	Inc.,	et	al.

Plaintiffs	Honeywell	International,	Inc.	and	Honeywell	Intellectual	Properties,	Inc.	filed	this	action	on	October	6,	2004	in	the	United	States	District	Court	in	Delaware alleging	infringement	by	the	Company	and	other	defendants	of	U.S.	patent	5,280,371	entitled	"Directional	Diffuser	for	a	Liquid	Crystal	Display."	Plaintiffs	seek unspecified	damages	and	other	relief.	The	Company	filed	an	answer	on	December	21,	2004	denying	all	material	allegations	and	asserting	numerous	affirmative defenses.	The	Company	has	tendered	the	case	to	several	suppliers.	On	May	18,	2005	the	Court	stayed	the	case	against	the	Company	and	the	other	supplier	defendants. Plantiffs	filed	an	amended	complaint	on	November	7,	2005	adding	additional	defendants	and	expanding	the	scope	of	the	accused	products.	Given	the	stay,	the Company's	response	to	the	amended	complaint	is	not	yet	due.

MacTech	Systems	v.	Apple	Computer,	Inc.;	Macadam	v.	Apple	Computer,	Inc.;	Computer	International,	Inc.	v.	Apple	Computer,	Inc.;	Elite	Computers	and Software,	Inc.	v.	Apple	Computer,	Inc.;	The	Neighborhood	Computer	Store	v.	Apple	Computer,	Inc.	MacAccessory	Center,	Inc.	v.	Apple	Computer,	Inc.;	MacAccessory Center,	Inc.	v.	Apple	Computer,	Inc.	(all	in	Santa	Clara	County	Superior	Court)

Six	resellers	have	filed	similar	lawsuits	against	the	Company	for	various	causes	of	action	including	breach	of	contract,	fraud,	negligent	and	intentional	interference	with economic	relationship,	negligent	misrepresentation,	trade	libel,	unfair	competition	and	false	advertising.	Plaintiffs	request	unspecified	damages	and	other	relief.	The Company	answered	the	Computer	International	complaint	on	November	12,	2003,	denying	all	allegations	and	asserting	numerous	affirmative	defenses.	The	Company filed	an	answer	in	the	Macadam	case	on	December	3,	2004	denying	all	allegations	and	asserting	numerous	defenses.	Three	of	the	other	plaintiffs	filed	amended complaints	on	February	7,	2005,	and	on	March	16,	2005	the	Company	filed	answers	to	these	claims	denying	all	allegations	and	asserting	numerous	affirmative	defenses. A	sixth	Plaintiff,	MacAccessory	Center,	filed	a	complaint	on	February	23,	2005.	The	Company	filed	an	answer	to	this	complaint	on	April	20,	2005	denying	all allegations	and	asserting	numerous	affirmative	defenses.	These	cases	are	in	discovery.

On	October	1,	2003,	one	of	the	reseller	Plaintiffs,	Macadam,	was	deauthorized	as	an	Apple	reseller.	Macadam	filed	a	motion	for	a	temporary	order	to	reinstate	it	as	a reseller,	which	the	Court	denied.	The	Court	denied	Macadam's	motion	for	a	preliminary	injunction	on	December	19,	2003.	On	December	6,	2004	Macadam	filed	for Chapter	11	Bankruptcy	in	the	Northern	District	of	California,	which	placed	a	stay	on	the	litigation	as	to	Macadam	only.	The	Company	filed	a	claim	in	the	bankruptcy

proceedings	on	February	16,	2005.	The	Company	took	Macadam's	debtor	examination	in	April	2005.	The	Company,	joined	by	another	creditor	of	Macadam,	filed	a motion	to	convert	the	bankruptcy	to	Chapter	7	(liquidation)	on	April	29,	2005	and	that	motion	was	granted.	Plantiffs'	counsel	in	four	of	the	six	other	reseller	cases,	was recently	appointed	litigation	counsel	for	the	Macadam	Estate	by	the	bankruptcy	court.	The	Company	has	moved	for	reconsideration	of	that	decision.

# Premier	International	Associates	LLC	v.	Apple	Computer,	Inc.

Plaintiff	Premier	International	Associates	LLC	(Premier)	filed	this	action	on	November	3,	2005	in	the	United	States	District	Court	for	the	Eastern	District	of	Texas, Marshall	Division,	alleging	infringement	by	the	Company	of	U.S.	Patents	6,243,725	and	6,763,345	both	entitled	"List	Building	System."	The	complaint	seeks unspecified	damages	and	other	relief.	The	Company's	response	is	not	yet	due.

# Slattery	v.	Apple	Computer,	Inc.

Plaintiff	filed	this	purported	class	action	on	January	3,	2005	in	the	United	States	District	Court	for	the	Northern	District	of	California	alleging	various	claims	including alleged	unlawful	tying	of	music	purchased	on	the	iTunes	Music	Store	with	the	purchase	of	iPods	and	vice	versa	and	unlawful	acquisition	or	maintenance	of	monopoly market	power.	Plaintiff's	complaint	alleged	violations	of	§§1	and	2	of	the	Sherman	Act	(15	U.S.C.	§§1	and	2),	California	Business	and	Professions	Code	§16700	et	seq. (the	Cartwright	Act),	California	Business	and	Professions	Code	§17200	(unfair	competition),	common	law	unjust	enrichment	and	common	law	monopolization.	Plaintiff seeks	unspecified	damages	and	other	relief.	The	Company	filed	a	motion	to	dismiss	on	February	10,	2005.	On	September	9,	2005,	the	Court	denied	the	motion	in	part and	granted	it	in	part.	Plaintiff	filed	an	amended	complaint	on	September	23,	2005	and	the	Company	filed	an	answer	on	October	11,	2005.	The	case	is	in	discovery.

# Stamm	v.	Apple	Computer,	Inc./Allen	v.	Apple	Computer,	Inc.

Plaintiff	Stamm	filed	a	purported	class	action	on	November	12,	2004	in	Circuit	Court,	Cook	County,	Illinois	alleging	that	a	defect	in	Apple's	17-inch	Studio	Display monitors	results	in	dimming	of	half	of	the	screen	and	constant	blinking	of	the	power	light.	The	Company	removed	the	case	to	Federal	Court	on	December	22,	2004.	The Court	remanded	it	to	State	Court	on	March	22,	2005	on	Plaintiff's	motion.	The	Company	had	filed	a	motion	to	dismiss	on	January	27,	2005	which	was	taken	off	calendar due	to	the

remand.	On	January	28,	2005	a	second	plaintiff,	Allen,	filed	a	purported	nationwide	class	action	in	Los	Angeles	Superior	Court	alleging	identical	claims.	Plaintiff	Stamm dismissed	the	Stamm	case	on	September	2,	2005.	An	amended	complaint	in	the	Allen	case	was	filed	on	October	24,	2005,	adding	additional	named	plaintiffs	and expanding	the	alleged	class	to	include	purchasers	of	the	20-inch	Apple	Cinema	Display	and	the	23-inch	Apple	Cinema	HD	Display.	The	amended	complaint	alleges	that the	displays	have	a	purported	defect	that	causes	dimming	of	one-half	of	the	screen,	and	that	the	Company	misrepresented	the	quality	of	the	displays	and/or	concealed	the purported	defect.	Plaintiffs	assert	claims	under	California	Business	&	Professions	Code	§17200	(unfair	competition);	California	Business	&	Professions	Code	§17500 (false	advertising)	and	the	Consumer	Legal	Remedies	Act.	The	amended	complaint	seeks	remedies	including	damages	and	equitable	relief.	On	November	14,	2005,	the Company	filed	an	answer	to	the	amended	complaint	as	to	the	allegations	regarding	the	17-inch	display	and	a	demurrer/motion	to	strike	as	to	the	allegations	regarding	the 20-inch	and	23-inch	displays	on	the	ground	that	plaintiffs	failed	to	allege	that	they	purchased	those	displays.	At	a	status	conference	on	November	21,	2005,	the	Court ordered	Plantiffs	to	amend	their	complaint.	The	Company's	demurrer	is	off	calendar	pending	this	amendment.

# St-Germain	v.	Apple	Canada,	Inc.

Plaintiff	filed	this	case	in	Montreal,	Quebec,	Canada,	on	August	5,	2005,	seeking	authorization	to	institute	a	class	action	for	the	refund	by	the	Company	of	the	Canadian Private	Copying	Levy	that	was	applied	to	the	iPod	purchase	price	in	Quebec	between	December	12,	2003	and	December	14,	2004	but	later	declared	invalid	by	the Canadian	Court.	A	class	certification	hearing	is	scheduled	for	January	13,	2006.	The	Company	has	already	begun	a	refund	program	for	this	levy.

# Teleshuttle	Technologies,	LLC	and	BTG	International	Inc.	v.	Microsoft	and	Apple	Computer,	Inc.

Plaintiffs	filed	this	case	on	July	20,	2004	in	United	States	District	Court	for	the	Northern	District	of	California	alleging	infringement	of	U.S.	patent	6,557,054,	entitled "Method	and	System	for	Distributing	Updates	by	Presenting	Directory	of	Software	Available	for	User	Installation	That	is	Not	Already	Installed	on	User	Station." Plaintiffs	filed	an	amended	complaint	on	September	7,	2004,	adding	a	second	patent,	U.S.	patent	6,769,009	entitled	"Method	and	System	for	Selecting	a	Personalized Set	of	Information	Channels."	Plaintiffs	seek	unspecified	damages	and	other	relief.	The	Company	filed	an	answer	on	October	18,	2004,	denying	all	material	allegations and	asserting	numerous	affirmative	defenses.	On	August	22,	2005,	the	Company	filed	an	amended	answer	to	add	charges	of	inequitable	conduct.	The	case	is	in discovery.	Markman	briefing	is	completed.	A	technology	tutorial	and	Markman	hearing	are	tentatively	scheduled	for	January	13,	20,	and	27,	2006.

# Tiger	Direct,	Inc.	v.	Apple	Computer,	Inc.

Plaintiff	Tiger	Direct,	Inc.	filed	this	trademark	infringement	action	in	the	United	States	District	Court	for	the	Southern	District	of	Florida	on	April	26,	2005	alleging infringement	of	the	word	mark	TIGER.	Plaintiff	claims	to	have	a	valid	registration	in	the	mark	TIGER	and	alleges	that	the	Company's	use	of	TIGER	in	reference	to	the latest	version	of	Mac	OS	X	infringes	the	mark	allegedly	owned	by	Plaintiff.	Plaintiff	attempted	to	obtain	an	ex	parte	preliminary	injunction	barring	the	Company's	use of	the	TIGER	mark	on	April	27,	2005	but	the	motion	was	denied.	Plaintiff	served	the	Company	on	April	27,	2005	and	again	moved	for	a	preliminary	injunction. Plaintiff's	motion	was	heard	on	May	3,	2005.	On	May	11,	2005,	the	Court	denied	Plaintiff's	motion.	The	Company	filed	a	response	to	the	complaint	on	May	17,	2005, denying	all	material	allegations	and	asserting	counterclaims	for	cancellation	of	certain	marks	registered	to	Tiger	Direct.	On	June	10,	2005,	Plaintiff	filed	an	appeal,	but subsequently	withdrew	it.	Plaintiff	filed	a	response	to	the	Company's	counterclaims.	The	parties	have	reached	a	settlement.	Settlement	of	this	matter	did	not	have	a material	effect	on	the	Company's	financial	position	or	results	of	operation.

# Tse	v.	Apple	Computer,	Inc.	et	al.

Plaintiff	Ho	Keung	Tse	filed	this	action	against	the	Company	and	other	defendants	on	August	5,	2005	in	the	United	States	District	Court	for	the	District	of	Maryland alleging	infringement	by	the	Company	of	U.S.	Patent	6,665,797	entitled	"Protection	of	Software	Again	[sic]	Against	Unauthorized	Use."	The	complaint	seeks unspecified	damages	and	other	relief.	The	Company	filed	an	answer	on	October	31,	2005	denying	all	material	allegations	and	asserting	numerous	affirmative	defenses. On	October	28,	2005,	the	Company	and	the	other	defendants	filed	a	motion	to	transfer	the	case	to	the	Northern	District	of	California.

Wimmer	v.	Apple	Computer,	Inc.	(originally	filed	as	Tomczak	v.	Apple	Computer,	Inc.	on	October	19,	2005	in	the	United	States	District	Court	for	the	Northern	District of	California,	San	Jose	Division;	amended	complaint	filed	October	26,	2005);	Moschella,	et	al.,	v.	Apple	Computer,	Inc.	(filed	October	26,	2005	United	States	District Court	for	the	Northern	District	of	California,	San	Jose	Division);	Calado,	et	al.	v.	Apple	Computer,	Inc.	(filed	October	26,	2005,	Los	Angeles	County	Superior	Court); Kahan,	 et	 al.,	 v.	 Apple	 Computer, Inc.	 (filed	October	31,	2005,	United	States	District	 Court	 for	 the	 Southern	 District	 of	 New	York);	 Jennings,	 et	 al.,	 v.	Apple Computer,	Inc.	(filed	November	4,	2005,	United	States	District	Court	for	the	Northern	District	of	California,	San	Jose	Division).

These	federal	and	state	court	complaints	allege	that	the	Company's	iPod	nano	was	defectively	designed	so	that	it	scratches	excessively	during	normal	use	which	renders the	screen	unreadable.	The	Wimmer	and	Moschella	actions	were	brought	on	behalf	of	purported	nationwide	classes	of	iPod	nano	purchasers,	with	the	exception	of California	purchasers,	and	allege	violations	of	the	consumer	protection,	express	and	implied	warranty	statutes	of	each	state	covered	by	the	putative	class	definition,	as well	as	negligent	misrepresentation	and	unjust	enrichment	under	the	common	laws	of	these	jurisdictions.	The	Calado	action	was	brought	on	behalf	of	a	purported California	class	of	iPod	nano	purchasers	and	asserts	claims	for	alleged	violation	of	California	Business	&	Professions	Code	§17200	(unfair	competition),	California Business	&	Professions	Code	§17500	(false	advertising),	the	Consumer	Legal	Remedies	Act,	breaches	of	express	and	implied	warranties,	negligent	misrepresentation and	unjust	enrichment.	The	Jennings	action	was	filed	on	behalf	of	a	purported	class	of	all	iPod	nano	purchasers	outside	of	the	United	States,	based	upon	alleged violations	of	the	same	California	statutes	as	in	the	Calado	complaint.	The	Kahan	action	was	brought	on	behalf	of	a	purported	New	York	class	of	iPod	nano	purchasers and	alleges	claims	under	the	New	York	unfair	competition	law,	breach	of	express	warranty	and	unjust	enrichment.	The	complaints	seek	damages	and	various	other

remedies.	The	Company's	responses	to	these	complaints	are	not	yet	due.

Two	similar	complaints,	Carpentier	v.	Apple	Canada,	Inc.,	and	Royer-	Brennan	v.	Apple	Computer,	Inc.	and	Apple	Canada,	Inc.	were	filed	in	Montreal,	Quebec,

Canada,	on	October	27,	2005	and	November	9,	2005,	respectively,	seeking	authorization	to	institute	a	class	action	on	behalf	of	iPod	nano	purchasers	in	Quebec.

# Union	Federale	des	Consummateurs—Que	Choisir	v.	Apple	Computer	France	S.A.R.L.	and	iTunes	S.A.R.L.

Plaintiff,	a	consumer	association	in	France,	filed	this	complaint	on	February	9,	2005	alleging	that	the	entities	above	are	violating	consumer	law	by	1)	omitting	to	mention that	the	iPod	is	allegedly	not	compatible	with	music	from	online	music	services	other	than	the	iTunes	Music	Store	and	that	the	music	from	the	iTunes	Music	Store	is only	compatible	with	the	iPod	and	2)	allegedly	tying	the	sales	of	iPods	to	the	iTunes	Music	Store	and	vice	versa.	Plaintiff	seeks	damages,	injunctive	relief	and	other relief.	The	first	hearing	on	the	case	took	place	on	May	24,	2005.	The	Company's	response	to	the	complaint	was	served	on	November	8,	2005.

# Item	4.	Submission	of	Matters	to	a	Vote	of	Security	Holders

No	matters	were	submitted	to	a	vote	of	security	holders	during	the	fourth	quarter	of	the	Company's	fiscal	year	ended	September	24,	2005.

# PART	II

# Item	5.	Market	for	the	Registrant's	Common	Equity,	Related	Shareholder	Matters	and	Issuer	Purchases	of	Equity	Securities

# (a)			Stock	Market	Information

The	Company's	common	stock	is	traded	on	the	over-the-counter	market	and	is	quoted	on	the	NASDAQ	National	Market	under	the	symbol	AAPL	and	on	the	Frankfurt Stock	Exchange	under	the	symbol	APCD.	In	December	2004,	the	Company	delisted	its	shares	from	trading	on	the	Tokyo	Stock	Exchange.	As	of	November	18,	2005, there	were	28,333	shareholders	of	record.

The	Company	did	not	pay	cash	dividends	in	either	2005	or	2004.	The	Company	anticipates	that,	for	the	foreseeable	future,	it	will	retain	any	earnings	for	use	in	the operation	of	its	business.	The	price	range	per	share	of	common	stock	presented	below	represents	the	highest	and	lowest	closing	prices	for	the	Company's	common	stock on	the	NASDAQ	National	Market	during	each	quarter.

On	February	28,	2005,	the	Company	effected	a	two-for-one	stock	split	to	shareholders	of	record	as	of	February	18,	2005.	All	share	and	per	share	information	has	been retroactively	adjusted	to	reflect	the	stock	split.

# (b)			Related	Shareholder	Matters

# None.

# (c)			Issuer	Purchases	of	Equity	Securities

# Item	6.	Selected	Financial	Data

The	following	selected	financial	information	has	been	derived	from	the	audited	consolidated	financial	statements.	The	information	set	forth	below	is	not	necessarily indicative	of	results	of	future	operations,	and	should	be	read	in	conjunction	with	Item	7,	"Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of Operations"	and	the	consolidated	financial	statements	and	related	notes	thereto	included	in	Item	8	of	this	Form	10-K	in	order	to	fully	understand	factors	that	may	affect the	comparability	of	the	information	presented	below.

Net	gains	before	taxes	related	to	the	Company's	non-current	debt	and	equity	investments	of	$4	million,	$10	million,	and	$75	million	were	recognized	in	2004,	2003,	and 2001,	respectively.	A	net	loss	before	taxes	related	to	the	Company's	non-current	debt	and	equity	investments	of	$42	million	was	recognized	in	2002.	In	2002,	the Company	acquired	Emagic	resulting	in	a	charge	of	approximately	$1	million	for	acquired	in-process	technologies	with	no	alternative	future	use.	The	Company recognized	a	similar	charge	of	$11	million	in	2001	related	to	its	acquisition	of	PowerSchool.	Net	charges	related	to	Company	restructuring	actions	of	$23	million,	$26 million,	and	$30	million	were	recognized	in	2004,	2003,	and	2002,	respectively.	In	2003,	settlement	of	the	Company's	forward	stock	purchase	agreement	resulted	in	a gain	of	$6	million.	Net	income	during	2005	benefited	by	$81	million	from	the	reversal	of	certain	tax	contingency	reserves	and	adjustments	to	net	deferred	tax	assets, including	reductions	to	valuation	allowances.	Favorable	cumulative-effect	type	adjustments	from	the	adoption	of	new	accounting	standards,	net	of	taxes,	of	$1	million and	$12	million	were	recognized	in	2003	and	2001,	respectively.

# Item	7.	Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations

This	section	and	other	parts	of	this	Form	10-K	contain	forward-looking	statements	that	involve	risks	and	uncertainties.	Forward-looking	statements	can	also	be identified	by	words	such	as	"anticipates,"	"expects,"	"believes,"	"plans,"	"predicts,"	and	similar	terms.	Forward-looking	statements	are	not	guarantees	of	future performance	and	the	Company's	actual	results	may	differ	significantly	from	the	results	discussed	in	the	forward-looking	statements.	Factors	that	might	cause	such differences	include,	but	are	not	limited	to,	those	discussed	in	the	subsection	entitled	"Factors	That	May	Affect	Future	Results	and	Financial	Condition"	below.	The following	discussion	should	be	read	in	conjunction	with	the	consolidated	financial	statements	and	notes	thereto	included	in	Item	8	of	this	Form	10-K.	All	information presented	herein	is	based	on	the	Company's	fiscal

calendar.	The	Company	assumes	no	obligation	to	revise	or	update	any	forward-looking	statements	for	any	reason,	except	as	required	by	law.

# Executive	Overview

The	Company	designs,	manufactures,	and	markets	personal	computers	and	related	software,	services,	peripherals,	and	networking	solutions.	The	Company	also	designs, develops,	and	markets	a	line	of	portable	digital	music	players	along	with	related	accessories	and	services	including	the	online	distribution	of	third-party	music,	audio books,	music	videos,	short	films,	and	television	shows.	The	Company's	products	and	services	include	the	Macintosh	line	of	desktop	and	notebook	computers,	the	iPod digital	music	player,	the	Xserve	G5	server	and	Xserve	RAID	storage	products,	a	portfolio	of	consumer	and	professional	software	applications,	the	Mac	OS	X	operating system,	the	iTunes	Music	Store,	a	portfolio	of	peripherals	that	support	and	enhance	the	Macintosh	and	iPod	product	lines,	and	a	variety	of	other	service	and	support offerings.	The	Company	sells	its	products	worldwide	through	its	online	stores,	its	own	retail	stores,	its	direct	sales	force,	and	third-party	wholesalers,	resellers,	and	value added	resellers.	In	addition,	the	Company	sells	a	variety	of	third-party	Macintosh	compatible	products,	including	computer	printers	and	printing	supplies,	storage devices,	computer	memory,	digital	camcorders	and	still	cameras,	personal	digital	assistants,	and	various	other	computing	products	and	supplies	through	its	online	and retail	stores.	The	Company	sells	to	education,	consumer,	creative	professional,	business,	and	government	customers.	A	further	description	of	the	Company's	products may	be	found	in	Part	I,	Item	1	of	this	document	under	the	heading	"Business."

The	Company's	business	strategy	leverages	its	ability,	through	the	design	and	development	of	its	own	operating	system,	hardware,	and	many	software	applications	and technologies,	to	bring	to	its	customers	around	the	world	compelling	new	products	and	solutions	with	superior	ease-of-use,	seamless	integration,	and	innovative	industrial design.

The	Company	participates	in	several	highly	competitive	markets,	including	personal	computers	with	its	Macintosh	line	of	computers,	consumer	electronics	with	its	iPod line	of	digital	music	players,	and	distribution	of	third-party	digital	content	through	its	online	iTunes	Music	Store.	While	the	Company	is	widely	recognized	as	an innovator	in	the	personal	computer	and	consumer	electronic	markets	as	well	as	a	leader	in	the	emerging	market	for	distribution	of	digital	content,	these	are	all	highly competitive	markets	that	are	subject	to	aggressive	pricing	and	increased	competition.	To	remain	competitive,	the	Company	believes	that	increased	investment	in	research and	development	(R&D)	and	marketing	and	advertising	is	necessary	to	maintain	and	extend	its	position	in	the	markets	where	it	competes.	The	Company's	R&D spending	is	focused	on	delivering	timely	updates	and	enhancements	to	its	existing	line	of	personal	computers,	displays,	operating	systems,	software	applications,	and portable	music	players;	developing	new	digital	lifestyle	consumer	and	professional	software	applications;	and	investing	in	new	product	areas	such	as	rack-mount	servers, RAID	storage	systems,	and	wireless	technologies.	The	Company	also	believes	investment	in	marketing	and	advertising	programs	is	critical	to	increasing	product	and brand	awareness.

In	June	2005,	the	Company	announced	its	plan	to	begin	using	Intel	microprocessors	in	its	Macintosh	computers.	The	Company	plans	to	begin	shipping	certain	models with	Intel	microprocessors	by	June	2006	and	to	complete	the	transition	of	all	of	its	Macintosh	computers	to	Intel	microprocessors	by	the	end	of	calendar	year	2007. There	are	potential	risks	and	uncertainties	that	may	occur	during	this	transition,	which	are	further	discussed	under	the	heading	"Factors	That	May	Affect	Future	Results and	Financial	Condition."

The	Company	utilizes	a	variety	of	direct	and	indirect	distribution	channels.	The	Company	believes	that	sales	of	its	innovative	and	differentiated	products	are	enhanced by	knowledgeable	salespersons	who	can	convey	the	value	of	the	hardware,	software,	and	peripheral	integration,	demonstrate	the	unique	digital	lifestyle	solutions	that	are available	only	on	Macintosh	computers,	and	demonstrate	the	compatibility	of	the	Macintosh	with	the	Windows	platform	and	networks.	The	Company	further	believes that	providing	a

high-quality	sales	and	after-sales	support	experience	is	critical	to	attracting	and	retaining	customers.	To	ensure	a	high-quality	buying	experience	for	its	products	in	which service	and	education	are	emphasized,	the	Company	has	expanded	and	improved	its	distribution	capabilities	by	opening	its	own	retail	stores	in	the	U.S.	and internationally.	The	Company	had	124	stores	open	as	of	September	24,	2005.

The	Company	also	staffs	selected	third-party	stores	with	the	Company's	own	employees	to	improve	the	buying	experience	through	reseller	channels.	The	Company	has deployed	Apple	employees	and	contractors	in	reseller	locations	around	the	world	including	the	U.S.,	Europe,	Japan,	and	Australia.	The	Company	also	sells	to	customers directly	through	its	online	stores	around	the	world.

To	improve	access	to	the	iPod	product	line,	the	Company	has	significantly	expanded	the	number	of	distribution	points	where	iPods	are	sold.	The	iPod	product	line	can be	purchased	in	certain	department	stores,	member-only	warehouse	stores,	large	retail	chains,	and	specialty	retail	stores,	as	well	as	through	the	channels	listed	above.

# Critical	Accounting	Policies	and	Estimates

The	preparation	of	financial	statements	and	related	disclosures	in	conformity	with	U.S.	generally	accepted	accounting	principles	and	the	Company's	discussion	and analysis	of	its	financial	condition	and	results	of	operations	require	the	Company's	management	to	make	judgments,	assumptions,	and	estimates	that	affect	the	amounts reported	in	its	consolidated	financial	statements	and	accompanying	notes.	Note	1	of	the	Notes	to	Consolidated	Financial	Statements	of	this	Form	10-K	describes	the significant	accounting	policies	and	methods	used	in	the	preparation	of	the	Company's	consolidated	financial	statements.	Management	bases	its	estimates	on	historical experience	and	on	various	other	assumptions	it	believes	to	be	reasonable	under	the	circumstances,	the	results	of	which	form	the	basis	for	making	judgments	about	the carrying	values	of	assets	and	liabilities.	Actual	results	may	differ	from	these	estimates	and	such	differences	may	be	material.

Management	believes	the	Company's	critical	accounting	policies	and	estimates	are	those	related	to	revenue	recognition,	allowance	for	doubtful	accounts,	inventory valuation	and	inventory	purchase	commitments,	warranty	costs,	and	income	taxes.	Management	believes	these	policies	to	be	critical	because	they	are	both	important	to the	portrayal	of	the	Company's	financial	condition	and	results,	and	they	require	management	to	make	judgments	and	estimates	about	matters	that	are	inherently uncertain.	The	Company's	senior	management	has	reviewed	these	critical	accounting	policies	and	related	disclosures	with	the	Audit	and	Finance	Committee	of	the Company's	Board	of	Directors.

# Revenue	Recognition

Net	sales	consist	primarily	of	revenue	from	the	sale	of	hardware,	software,	peripherals,	digital	content,	and	service	and	support	contracts.	The	Company	recognizes revenue	pursuant	to	applicable	accounting	standards,	including	Statement	of	Position	(SOP)	No.	97-2,	Software	Revenue	Recognition,	as	amended,	and	Securities	and Exchange	Commission	(SEC)	Staff	Accounting	Bulletin	(SAB)	No.	104,	Revenue	Recognition.

The	Company	recognizes	revenue	when	persuasive	evidence	of	an	arrangement	exists,	delivery	has	occurred,	the	sales	price	is	fixed	or	determinable,	and	collection	is probable.	Product	is	considered	delivered	to	the	customer	once	it	has	been	shipped,	and	title	and	risk	of	loss	have	been	transferred.	For	most	of	the	Company's	product

sales,	these	criteria	are	met	at	the	time	the	product	is	shipped.	For	online	sales	to	individuals,	for	some	sales	to	education	customers	in	the	U.S.,	and	for	certain	other sales,	the	Company	defers	revenue	until	the	customer	receives	the	product	because	the	Company	legally	retains	a	portion	of	the	risk	of	loss	on	these	sales	during	transit. If	at	the	outset	of	an	arrangement	the	Company	determines	the	arrangement	fee	is	not,	or	is	presumed	not	to	be,	fixed	or	determinable,	revenue	is	deferred	and subsequently	recognized	as	amounts	become	due	and	payable.

The	Company	records	reductions	to	revenue	for	estimated	commitments	related	to	price	protection	and	for	customer	incentive	programs,	including	reseller	and	end-user rebates,	and	other	sales	programs	and	volume-based	incentives.	The	estimated	cost	of	these	programs	is	accrued	as	a	reduction	to	revenue	in	the	period	the	Company	has sold	the	product	and	committed	to	the	relevant	program.	The	Company	also	records	reductions	to	revenue	for	expected	future	product	returns	based	on	the	Company's historical	experience.	Future	market	conditions	and	product	transitions	may	require	the	Company	to	increase	customer	incentive	programs	and	incur	incremental	price protection	obligations	that	could	result	in	additional	reductions	to	revenue	at	the	time	such	programs	are	offered.	Additionally,	certain	customer	incentive	programs require	management	to	estimate	the	number	of	customers	who	will	actually	redeem	the	incentive	based	on	historical	experience	and	the	specific	terms	and	conditions	of particular	incentive	programs.	If	a	greater	than	estimated	proportion	of	customers	redeem	such	incentives,	the	Company	would	be	required	to	record	additional reductions	to	revenue,	which	could	have	a	material	adverse	impact	on	the	Company's	results	of	operations.

# Allowance	for	Doubtful	Accounts

The	Company	distributes	its	products	through	third-party	resellers	and	directly	to	certain	education,	consumer,	and	commercial	customers.	The	Company	generally	does not	require	collateral	from	its	customers.	However,	when	possible	the	Company	does	attempt	to	limit	credit	risk	on	trade	receivables	with	credit	insurance	for	certain customers	in	Latin	America,	Europe,	and	Asia	and	by	arranging	with	third-party	financing	companies	to	provide	flooring	arrangements	and	other	loan	and	lease programs	to	the	Company's	direct	customers.	These	credit-financing	arrangements	are	directly	between	the	third-party	financing	company	and	the	end	customer.	As such,	the	Company	generally	does	not	assume	any	recourse	or	credit	risk	sharing	related	to	any	of	these	arrangements.	However,	considerable	trade	receivables	that	are not	covered	by	collateral,	third-party	flooring	arrangements,	or	credit	insurance	are	outstanding	with	the	Company's	distribution	and	retail	channel	partners.

The	allowance	for	doubtful	accounts	is	based	on	management's	assessment	of	the	collectibility	of	specific	customer	accounts	and	includes	consideration	of	the	credit worthiness	and	financial	condition	of	those	specific	customers.	The	Company	records	an	allowance	to	reduce	the	specific	receivables	to	the	amount	that	is	reasonably believed	to	be	collectible.	The	Company	also	records	an	allowance	for	all	other	trade	receivables	based	on	multiple	factors	including	historical	experience	with	bad debts,	the	general	economic	environment,	the	financial	condition	of	the	Company's	distribution	channels,	and	the	aging	of	such	receivables.	If	there	is	a	deterioration	of a	major	customer's	financial	condition,	if	the	Company	becomes	aware	of	additional	information	related	to	the	credit	worthiness	of	a	major	customer,	or	if	future	actual default	rates	on	trade	receivables	in	general	differ	from	those	currently	anticipated,	the	Company	may	have	to	adjust	its	allowance	for	doubtful	accounts,	which	would affect	earnings	in	the	period	the	adjustments	are	made.

# Inventory	Valuation	and	Inventory	Purchase	Commitments

The	Company	must	order	components	for	its	products	and	build	inventory	in	advance	of	product	shipments.	The	Company	records	a	write-down	for	inventories	of components	and	products,	including	third-party	products	held	for	resale,	which	have	become	obsolete	or	are	in	excess	of	anticipated	demand	or	net	realizable	value.	The Company	performs	a	detailed	review	of	inventory	each	fiscal	quarter	that	considers	multiple	factors	including	demand	forecasts,	product	life	cycle	status,	product development	plans,	current	sales	levels,	and	component	cost	trends.	The	personal	computer	and	consumer	electronic	industries	are	subject	to	a	rapid	and	unpredictable pace	of	product	and	component	obsolescence	and	demand	changes.	If	future	demand	or	market	conditions	for	the	Company's	products	are	less	favorable	than	forecasted or	if	unforeseen	technological	changes	negatively	impact	the	utility	of	component	inventory,	the	Company	may	be	required	to	record	additional	write-downs	which would	negatively	affect	gross	margins	in	the	period	when	the	write-downs	are	recorded.

The	Company	accrues	necessary	reserves	for	cancellation	fees	related	to	component	orders	that	have	been	cancelled.	Consistent	with	industry	practice,	the	Company acquires	components	through	a	combination	of	purchase	orders,	supplier	contracts,	and	open	orders	based	on	projected	demand	information.	These	commitments typically	cover	the	Company's	requirements	for	periods	ranging	from	30	to	150	days.	If	there	is	an	abrupt	and	substantial	decline	in	demand	for	one	or	more	of	the Company's	products	or	an	unanticipated	change	in	technological	requirements	for	any	of	the	Company's	products,	the	Company	may	be	required	to	record	additional reserves	for	cancellation	fees	that	would	negatively	affect	gross	margins	in	the	period	when	the	cancellation	fees	are	identified.

# Warranty	Costs

The	Company	provides	currently	for	the	estimated	cost	for	product	warranties	at	the	time	the	related	revenue	is	recognized	based	on	historical	and	projected	warranty claim	rates,	historical	and	projected	cost-per-claim,	and	knowledge	of	specific	product	failures	that	are	outside	of	the	Company's	typical	experience.	Each	quarter,	the Company	reevaluates	its	estimates	to	assess	the	adequacy	of	its	recorded	warranty	liabilities	considering	the	size	of	the	installed	base	of	products	subject	to	warranty protection,	and	adjusts	the	amounts	as	necessary.	If	actual	product	failure	rates	or	repair	costs	differ	from	estimates,	revisions	to	the	estimated	warranty	liability	would be	required	and	could	negatively	affect	the	Company's	results	of	operations.

# Income	Taxes

The	Company	records	a	tax	provision	for	the	anticipated	tax	consequences	of	the	reported	results	of	operations.	In	accordance	with	Statement	of	Financial	Accounting Standards	(SFAS)	No.	109,	Accounting	for	Income	Taxes,	the	provision	for	income	taxes	is	computed	using	the	asset	and	liability	method,	under	which	deferred	tax assets	and	liabilities	are	recognized	for	the	expected	future	tax	consequences	of	temporary	differences	between	the	financial	reporting	and	tax	bases	of	assets	and liabilities,	and	for	operating	losses	and	tax	credit	carryforwards.	Deferred	tax	assets	and	liabilities	are	measured	using	the	currently	enacted	tax	rates	that	apply	to	taxable income	in	effect	for	the	years	in	which	those	tax	assets	are	expected	to	be	realized	or	settled.	The	Company	records	a	valuation	allowance	to	reduce	deferred	tax	assets	to the	amount	that	is	believed	more	likely	than	not	to	be	realized.	The	Company	is	currently	evaluating	the	repatriation	provisions	of	the	American	Jobs	Creation	Act	of 2004,	which,	if	implemented	by	the	Company,	would	affect	the	Company's	tax	provision	and	deferred	tax	assets	and	liabilities.

Management	believes	it	is	more	likely	than	not	that	forecasted	income,	including	income	that	may	be	generated	as	a	result	of	certain	tax	planning	strategies,	together with	the	tax	effects	of	the	deferred	tax	liabilities,	will	be	sufficient	to	fully	recover	the	remaining	deferred	tax	assets.	In	the	event	that	all	or	part	of	the	net	deferred	tax assets	are	determined	not	to	be	realizable	in	the	future,	an	adjustment	to	the	valuation	allowance	would	be	charged	to	earnings	in	the	period	such	determination	is	made. Similarly,	if	the	Company	subsequently	realizes	deferred	tax	assets	that	were	previously	determined	to	be	unrealizable,	the	respective	valuation	allowance	would	be reversed,	resulting	in	a	positive	adjustment	to	earnings	or	a	decrease	in	goodwill	in	the	period	such	determination	is	made.	In	addition,	the	calculation	of	tax	liabilities involves	significant	judgment	in	estimating	the	impact	of	uncertainties	in	the	application	of	complex	tax	laws.	Resolution	of	these	uncertainties	in	a	manner	inconsistent with	management's	expectations	could	have	a	material	impact	on	the	Company's	results	of	operations	and	financial	position.

Net	Sales

Net	sales	and	Macintosh	unit	sales	by	operating	segment	and	net	sales	and	unit	sales	by	product	follow	(net	sales	in	millions	and	unit	sales	in	thousands):

(a)					Other	Segments	include	Asia	Pacific	and	FileMaker.

(b)				Includes	iMac,	eMac,	Mac	mini,	Power	Mac	and	Xserve	product	lines.

(c)					Includes	iBook	and	PowerBook	product	lines.

(d)				Consists	of	iTunes	Music	Store	sales,	iPod	services,	and	Apple-branded	and	third-party	iPod	accessories.

(e)					Includes	sales	of	Apple-branded	and	third-party	displays,	wireless	connectivity	and	networking	solutions,	and	other	hardware	accessories.

(f)					Includes	sales	of	Apple-branded	operating	system,	application	software,	third-party	software,	AppleCare,	and	Internet	services.

(g)					Derived	by	dividing	total	Macintosh	net	sales	by	total	Macintosh	unit	sales.

(h)				Derived	by	dividing	total	iPod	net	sales	by	total	iPod	unit	sales.

During	2005,	net	sales	increased	68%	or	$5.7	billion	from	2004.	Several	factors	contributed	favorably	to	net	sales	during	2005:

·							Net	sales	of	iPods	rose	$3.2	billion	or	248%	during	2005	compared	to	2004.	Unit	sales	of	iPods	totaled	22.5	million	in	2005,	which	represents	an	increase	of 409%	from	the	4.4	million	iPod	units	sold	in	2004.	Strong	sales	of	iPods	during	2005	continued	to	be	experienced	in	all	of	the	Company's	operating	segments and	was	driven	by	strong	demand	for	the	iPod	shuffle	introduced	in	January	2005,	the	release	of	an	updated	version	of	the	iPod	mini	in	February	2005,	the	release of	the	iPod	nano	in	September	2005,	and	expansion	of	the	iPod's	distribution	network.	Net	sales	per	iPod	unit	sold	decreased	32%	primarily	due	to	the introduction	of	the	lower	priced	iPod	shuffle	in	January	2005	and	iPod	mini	pricing	reductions	in	February	2005.	From	the	introduction	of	the	iPod	in	2002 through	2005,	the	Company	has	sold	approximately	28	million	iPods.

·							Other	music	related	products	and	services	consists	of	sales	associated	with	the	iTunes	Music	Store	and	iPod	services	and	accessories.	Net	sales	of	other	music related	products	and	services	increased	$621	million	or	223%	during	2005	compared	to	2004.	The	Company	has	experienced	strong	growth	in	sales	of	iPod services	and	accessories	consistent	with	the	increase	in	overall	iPod	unit	sales	for	2005.	The	increased	sales	from	the	iTunes	Music	Store	is	primarily	due	to substantial	growth	of	net	sales	in	the	U.S.	and	expansion	in	Europe,	Canada,	and	Japan.

·							Total	Macintosh	net	sales	increased	$1.4	billion	or	27%	during	2005	compared	to	2004.	Unit	sales	of	Macintosh	systems	increased	1.2	million	units	or	38% during	2005	compared	to	2004.	The	increases	in	Macintosh	net	sales	and	unit	sales	relate	primarily	to	strong	demand	for	the	Company's	desktop	products,	which was	experienced	in	all	of	the	Company's	operating	segments.	The	Company	believes	that	the	success	of	the	iPod	is	having	a	positive	impact	on	Macintosh	net sales	by	introducing	new	customers	to	the	Company's	other	products.	Desktop	demand	was	stimulated	in	2005	due	to	the	new	iMac	G5	and	the	introduction	of the	Mac	mini	in	January	2005.	Net	sales	and	unit	sales	of	desktop	products	increased	45%	and	55%,	respectively,	during	2005	compared	to	2004.	Macintosh	net sales	and	unit	sales	also	include	sales	of	the	Company's	portable	products,	which	increased	11%	and	21%,	respectively,	compared	to	2004.

Net	sales	per	Macintosh	unit	sold	decreased	7%	on	a	year-over-year	basis.	The	decrease	was	the	result	of	changes	in	the	overall	unit	mix	towards	relatively	lower- priced	consumer	products,	specifically	the	impact	of	the	Mac	mini	product,	and	desktop	and	portable	price	reductions.	This	decrease	was	partially	offset	by	an increase	in	the	proportion	of	direct	sales.

·							The	Retail	segment's	net	sales	grew	98%	to	$2.4	billion	during	2005	compared	to	2004.	This	increase	is	largely	attributable	to	the	increase	in	total	stores	from	86 at	the	end	of	2004	to	124	at	the	end	of	2005,	as	well	as	44%	year-over-year	increase	in	average	revenue	per	store.	While	the	Company's	customers	in	areas	where the	Retail	segment	has	opened	stores	may	elect	to	purchase	from	the	Retail	segment	stores	rather	than	the	Company's	preexisting	sales	channels	in	the	U.S., Canada,	Japan,	and	the	U.K.,	the	Company	believes	that	a	substantial	portion	of	the	Retail	segment's	net	sales	is	incremental	to	the	Company's	total	net	sales. See	additional	comments	below	related	to	the	Retail	segment	under	the	heading	"Segment	Operating	Performance."

·							Net	sales	of	peripherals	and	other	hardware	rose	by	18%	during	2005	compared	to	2004	primarily	due	to	an	increase	in	net	sales	of	displays	and	other	computer accessories.	Net	sales	of	other	hardware	include	AirPort	cards	and	base	stations,	Xserve	RAID	storage,	iSight	digital	video	cameras,	and	third-party	hardware products.

·							The	Company's	U.S.	education	channel	experienced	year-over-year	growth	in	both	net	sales	and	unit	sales	of	approximately	21%	for	2005.	The	increase	in	U.S.

education	net	sales	for	2005	relates

primarily	to	a	32%	year-over-year	increase	in	higher	education	net	sales	due	to	increased	iMac	shipments,	portable	system	shipments,	and	online	sales.	The Company	also	experienced	11%	growth	in	K-12	net	sales	due	to	increased	iBook	sales	and	education	1:1	sales.	While	net	sales	to	the	K-12	market	were	slightly higher	during	2005	than	2004,	the	Company	believes	this	market	continues	to	be	subject	to	budget	constraints	and	competitive	pressures.

·							Net	sales	of	software,	service	and	other	sales	rose	$270	million	or	33%	during	2005	compared	to	2004.	This	growth	was	primarily	attributable	to	increased	net sales	in	AppleCare	Protection	Plan	(APP)	extended	service	and	support	contracts,	driven	primarily	by	higher	associated	Macintosh	computer	sales.	Additionally, the	Company	experienced	increases	in	net	sales	of	.Mac	Internet	service,	professional	and	consumer	applications,	third-party	software,	and	Mac	OS	X	that	was primarily	attributable	to	the	release	of	version	10.4	Tiger	in	April	2005.

·							Net	sales	of	Macintosh	systems	increased	$432	million	or	10%	during	2004	compared	to	2003	while	net	sales	per	Macintosh	unit	sold	remained	relatively	flat	on a	year-over-year	basis.	Unit	sales	of	Macintosh	systems	increased	278,000	units	or	9%	during	2004	compared	to	2003.	These	increases	in	net	sales	and	unit	sales were	a	result	of	strong	demand	for	all	of	the	Company's	Macintosh	systems,	except	the	iMac.	The	Company's	portable	systems,	consisting	of	the	PowerBook and	iBook,	produced	the	strongest	revenue	and	unit	growth	during	2004	compared	to	2003	of	approximately	26%	and	33%,	respectively.	Unit	sales	of	portable systems	accounted	for	51%	of	all	Macintosh	systems	sold	during	2004	compared	to	only	42%	during	2003.	The	Company	believes	that	these	results	reflected	an overall	trend	in	the	industry	towards	portable	systems.	Performance	of	the	Company's	Power	Macintosh	systems	also	yielded	positive	results	in	2004	over	2003, including	a	15%	and	6%	increase	in	net	sales	and	unit	sales,	respectively.	The	increase	in	Power	Macintosh	sales	in	2004	was	due	primarily	to	the	introduction	of the	Power	Mac	G5,	which	began	shipping	at	the	end	of	2003.	Although	Power	Macintosh	sales	increased	from	2003,	sales	of	this	product	were	constrained	in	the second	half	of	2004	as	a	result	of	manufacturing	problems	at	IBM,	the	Company's	sole	supplier	of	the	PowerPC	G5	processor.

·							Net	sales	of	iPods	rose	$961	million	or	279%	during	2004	compared	to	2003.	Unit	sales	of	iPods	totaled	4.4	million	in	2004,	which	represents	an	increase	of 370%	from	the	939,000	iPod	units	sold	in	2003.	Strong	demand	for	the	iPods	during	2004	were	experienced	in	all	of	the	Company's	operating	segments	and	was driven	by	enhancements	to	the	iPod,	the	introduction	of	the	iPod	mini,	increased	expansion	of	the	Company's	iPod	distribution	network,	and	continued	success	of the	iTunes	Music	Store	due	largely	to	making	it	available	to	both	Macintosh	and	Windows	users	in	the	U.S.,	U.K.,	France,	and	Germany.

·							The	Retail	segment's	net	sales	grew	91%	to	$1.2	billion	during	2004	compared	to	2003.	This	increase	was	largely	attributable	to	the	increase	in	total	stores	from 65	at	the	end	of	2003	to	86	at	the	end	of	2004,	as	well	as	a	36%	year-over-year	increase	in	average	revenue	per	store.	While	the	Company's	customers	in	areas where	the	Retail	segment	has	opened	stores	may	have	elected	to	purchase	from	the	Retail	segment	stores	rather	than	the	Company's	preexisting	sales	channels	in the	U.S.	and	Japan,	the	Company	believes	that	a	substantial	portion	of	the	Retail	segment's	net	sales	is	incremental	to	the	Company's	total	net	sales.	See additional	comments	below	related	to	the	Retail	segment	under	the	heading	"Segment	Operating	Performance."

·							Net	sales	of	peripherals	and	other	hardware	rose	by	38%	during	2004	compared	to	2003	primarily	due	to	an	increase	in	net	sales	of	displays	and	other	computer accessories.	Net	sales	of	other

computer	accessories	include	AirPort	cards	and	base	stations,	iSight	digital	video	cameras,	and	third-party	hardware	products.	The	increase	in	total	net	sales	of peripherals	and	other	hardware	was	related	to	the	overall	increase	in	Macintosh	unit	sales	and	the	introduction	of	new	and	updated	peripheral	products	and	was experienced	predominantly	by	the	Company's	Americas,	Europe,	and	Retail	segments.

·							Net	sales	of	other	music	related	products	and	services	increased	$242	million	or	672%	during	2004	compared	to	2003.	The	Company	experienced	strong	growth in	sales	of	iPod	services	and	accessories	consistent	with	the	increase	in	overall	iPod	unit	sales	for	2004.	The	increased	sales	from	the	iTunes	Music	Store,	which was	originally	introduced	in	April	2003,	was	primarily	due	to	making	the	service	available	for	Windows	in	October	2003	and	the	introduction	of	the	service	in the	U.K.,	France,	and	Germany	in	June	2004.

·							Net	sales	of	software	rose	$140	million	or	39%	during	2004	compared	to	2003	due	primarily	to	higher	net	sales	of	the	Company's	Apple-branded	software	and	in particular,	higher	net	sales	of	the	Company's	operating	system	software,	including	Mac	OS	X	version	10.3	"Panther,"	which	was	released	in	October	2003.	Net sales	of	Panther	accounted	for	approximately	$74	million	or	over	50%	of	the	increase	in	software	net	sales	for	2004	compared	to	2003.

·							The	Company's	U.S.	education	channel	experienced	year-over-year	growth	in	net	sales	of	approximately	19%	for	2004	compared	to	2003.	Unit	sales	also increased	by	10%	during	2004	compared	to	2003.	The	increase	in	U.S.	education	net	sales	for	2004	related	primarily	to	a	40%	year-over-year	increase	in	higher education	net	sales	and	to	a	lesser	extent	the	Company's	3%	growth	in	K-12	net	sales.

·							Service	and	other	sales	increased	$37	million	or	13%	during	2004	compared	to	2003.	These	increases	were	the	result	of	significant	year-over-year	increases	in	net sales	associated	with	APP	extended	maintenance	and	support	services,	as	well	as	increased	net	sales	associated	with	the	Company's	.Mac	Internet	service. Increased	net	sales	associated	with	APP	were	primarily	the	result	of	higher	Macintosh	unit	sales	and	higher	attach	rates	on	APP	over	the	last	several	years.

Offsetting	the	favorable	factors	discussed	above,	the	Company's	net	sales	during	2004	were	negatively	impacted	by	the	following:

·							Net	sales	and	unit	sales	of	iMac	systems	were	down	23%	and	16%,	respectively,	during	2004	versus	2003.	The	decrease	in	iMac	net	sales	and	unit	sales	was largely	due	to	the	delay	in	the	introduction	of	the	new	iMac,	based	on	the	PowerPC	G5	processor,	primarily	as	a	result	of	manufacturing	problems	experienced	by IBM.	The	delays	in	the	new	iMac	resulted	in	the	depletion	of	inventory	of	the	old	iMac	flat	panel	prior	to	availability	of	the	new	iMac	G5.	The	old	flat	panel iMac	form	factor,	which	was	available	during	most	of	2004,	was	nearly	3	years	old	by	the	time	the	new	iMac	G5	began	shipping	in	September	2004	and	had experienced	declines	in	sales	as	a	result	of	the	age	of	this	product.	The	Company	believes	that	sales	of	iMac	systems	have	also	declined	due	to	a	shift	in	consumer preference	to	portable	systems	and	desktop	models	from	competitors	with	price	points	below	$1,000.

·							Net	sales	and	unit	sales	in	the	Company's	Japan	segment	decreased	3%	and	14%,	respectively,	during	2004	versus	2003.	The	Company	believes	these	declines related	to	a	shift	in	sales	from	the	Japan	segment	to	the	Retail	segment	as	a	result	of	the	Tokyo	and	Osaka	store	openings	in	2004.	Declines	in	net	sales	in	Japan may	have	also	related	to	delays	in	computer	upgrades	by	certain	professional	and	creative	customers	pending	release	in	Japan	of	certain	Mac	OS	X	native applications,	such	as	Quark	Xpress	6,	which	did	not	become	available	until	September	2004.	When	sales	from	the	Japan	retail	stores	are	included	in	the	results for	the	Japan	segment,	the	combined	revenue	in	Japan	resulted	in	a	3%	year-over-year	increase	in	2004	as	compared	to	2003.	See

additional	comments	below	related	to	the	Japan	segment	under	the	heading	"Segment	Operating	Performance."

# Segment	Operating	Performance

The	Company	manages	its	business	primarily	on	a	geographic	basis.	The	Company's	reportable	operating	segments	are	comprised	of	the	Americas,	Europe,	Japan,	and Retail.	The	Americas,	Europe,	and	Japan	reportable	segments	do	not	include	activities	related	to	the	Retail	segment.	The	Americas	segment	includes	both	North	and South	America.	The	Europe	segment	includes	European	countries	as	well	as	the	Middle	East	and	Africa.	The	Retail	segment	operated	Apple-owned	retail	stores	in	the U.S.,	Canada,	Japan,	and	the	U.K.	during	2005.	Each	reportable	geographic	operating	segment	provides	similar	hardware	and	software	products	and	similar	services. Further	information	regarding	the	Company's	operating	segments	may	be	found	in	Item	8	of	this	Form	10-K	in	the	Notes	to	Consolidated	Financial	Statements	at	Note 11,	"Segment	Information	and	Geographic	Data."

# Americas

During	2005,	net	sales	in	the	Americas	segment	grew	64%	or	$2.6	billion	compared	to	2004.	The	increase	in	net	sales	during	2005	was	primarily	attributable	to	the significant	year-over-year	increase	in	iPod	sales,	sales	of	other	music	related	products	and	services,	and	strong	sales	of	desktop	and	portable	Macintosh	systems.	This increase	was	partially	offset	by	a	shift	in	sales	to	the	Retail	segment,	which	had	117	stores	in	the	U.S.	and	Canada	as	of	the	end	of	2005.	Macintosh	unit	sales	also increased	by	30%	in	2005	compared	to	2004,	driven	primarily	by	strong	sales	of	desktop	systems	largely	attributable	to	strong	sales	from	the	new	iMac,	which	began shipping	in	September	2004,	and	the	Mac	mini,	which	was	introduced	in	January	2005.	During	2005	and	2004,	the	Americas	segment	represented	approximately	47% and	49%,	respectively,	of	the	Company's	total	net	sales	and	represented	approximately	48%	and	51%,	respectively,	of	total	Macintosh	unit	sales.	As	noted	above,	the Company	experienced	an	increase	in	both	U.S.	education	channel	net	sales	and	unit	sales	of	21%	for	2005	compared	to	2004.	Strength	in	higher	education	sales	related primarily	to	strong	iMac	shipments,	portable	system	shipments,	and	online	sales.	This	strength	drove	year-over-year	growth	in	net	sales	of	32%	for	the	higher	education channel	during	2005.	Despite	challenges	in	the	K-12	market	from	continued	budget	constraints	and	competitive	pressures,	the	Company's	K-12	net	sales	grew	year- over-year	by	11%	during	2005	due	to	increased	iBook	sales	and	1:1	education	sales.

During	2004,	net	sales	in	the	Americas	segment	grew	26%	or	$838	million	compared	to	2003.	The	increase	in	net	sales	during	2004	was	primarily	attributable	to	the significant	year-over-year	increase	in	iPod	sales	as	well	as	strong	sales	of	peripherals,	software,	and	services.	This	increase	was	partially	offset	by	a	shift	in	sales	to	the Retail	segment,	which	had	84	stores	in	the	U.S.	as	of	the	end	of	2004.	Macintosh	unit	sales	also	increased	by	4%	in	2004	compared	to	2003,	driven	primarily	by	strong sales	of	portable	and	Power	Macintosh	systems,	partially	offset	by	weakness	in	iMac	sales.	During	2004	and	2003,	the	Americas	segment	represented	approximately 49%	and	51%,	respectively,	of	the	Company's	total	net	sales	and	represented	approximately	51%	and	54%,	respectively,	of	total	Macintosh	unit	sales.	The	Company experienced	an	increase	in	U.S.	education	channel	net	sales	of	19%	for	2004	compared	to	2003.	Strong	U.S.	education	net	sales	for	2004	related	primarily	to	strength	in higher	education	net	sales	that	resulted	from	a	successful	back-to-school	selling	season	with	strong	demand	for	the	Company's	portables.	This	strength	drove	year-over- year	growth	in	net	sales	of	40%	for	the	higher	education	channel	during	2004.	The	Company's	K-12	net	sales	grew	year-over-year	by	3%	during	2004,	despite	the challenges	in	the	K-12	market	from	continued	budget	constraints	and	increased	competition.

# Europe

During	2005,	net	sales	in	the	Europe	segment	grew	$1.3	billion	or	71%	from	2004.	Total	Macintosh	unit	sales	in	Europe	also	experienced	growth	during	the	current	year by	increasing	47%	in	2005	compared	to

2004.	Consistent	with	the	Americas	segment,	Europe	experienced	strong	net	sales	of	desktop	products,	iPod,	other	music	related	products	and	services,	and	software	and service	sales.	Demand	in	Europe	during	2005	was	particularly	strong	for	the	Company's	desktop	computers,	which	experienced	a	year-over-year	increase	of	56%. Similar	to	the	results	of	the	Company's	other	segments,	net	sales	of	iPods,	peripherals	and	software	were	strong	in	2005.

Net	sales	in	Europe	rebounded	in	2004	increasing	$490	million	or	37%	from	2003.	Total	Macintosh	unit	sales	in	Europe	also	experienced	growth	in	2004	by	increasing 13%	compared	to	2003.	Consistent	with	the	Americas	segment,	Europe	experienced	strong	net	sales	across	all	product	lines,	except	the	iMac	systems.	Demand	in Europe	during	2004	was	particularly	strong	for	the	Company's	Power	Macintosh	systems	and	portable	Macintosh	systems,	which	experienced	year-over-year	increases of	29%	and	42%,	respectively.	Similar	to	the	results	of	the	Company's	other	segments,	net	sales	of	iPods,	peripherals	and	software	were	strong	in	2004	over	2003.

# Japan

Japan's	net	sales	and	Macintosh	unit	sales	were	up	36%	and	8%,	respectively,	during	2005	compared	to	2004.	Japan	experienced	increased	net	sales	in	desktop	products, iPod,	and	other	music	related	products	and	services.	Desktop	net	sales	and	unit	sales	increased	by	31%	and	41%,	respectively,	and	iPod	sales	increased	by	220%	during 2005	compared	to	2004.	The	overall	increase	in	net	sales	was	partially	offset	by	a	decline	in	portable	system	net	sales	during	2005	compared	to	2004,	which	the Company	believes	might	be	attributable	to	a	shift	in	sales	from	portables	to	the	new	iMac	G5	and	Mac	mini,	and	a	shift	to	the	Retail	segment	as	a	result	of	opening	two additional	stores	in	Japan	during	2005.

Japan's	net	sales	and	Macintosh	unit	sales	were	down	3%	and	14%,	respectively,	during	2004	compared	to	2003,	which	lagged	behind	all	of	the	Company's	other operating	segments.	These	decreases	in	net	sales	and	unit	sales	were	believed	to	be	attributable	in	part	to	a	shift	in	sales	from	the	Japan	segment	to	the	Retail	segment	as	a result	of	the	opening	of	two	stores	in	Japan	in	2004.	In	addition,	such	decreases	may	have	been	related	to	delayed	computer	system	upgrades	by	some	professional	and creative	customers	who	were	awaiting	the	release	of	Quark	XPress	6	for	Mac	OS	X,	which	did	not	occur	until	September	2004.	The	decrease	in	net	sales	was	partially offset	by	strong	iPod	and	iBook	sales	during	2004	compared	to	2003.

# Retail

The	Company	opened	38	new	retail	stores	during	2005,	including	6	international	stores	in	the	U.K,	Japan,	and	Canada,	bringing	the	total	number	of	open	stores	to	124 as	of	September	24,	2005.	This	compares	to	86	open	stores	as	of	September	25,	2004	and	65	open	stores	as	of	September	27,	2003.

Net	sales	of	the	Retail	segment	grew	to	$2.4	billion	during	2005	from	$1.2	billion	and	$621	million	in	2004	and	2003,	respectively.	The	increases	in	net	sales	during	both 2005	and	2004	reflect	the	impact	of	new	store	openings	for	each	year,	including	the	opening	of	38	new	stores	in	2005	and	21	new	stores	in	2004.	An	increase	in	average revenue	per	store	also	contributed	to	the	segment's	strong	sales	in	2005.	With	an	average	of	105	stores	open	during	2005,	the	Retail	segment	achieved	annualized revenue	per	store	of	approximately	$22.4	million,	as	compared	to	$15.6	million	in	2004	with	a	76	store	average,	and	$11.5	million	in	2003	with	a	54	store	average.

As	measured	by	the	Company's	operating	segment	reporting,	the	Retail	segment	reported	operating	income	of	$151	million	during	2005	as	compared	to	operating income	of	$39	million	during	2004	and	an	operating	loss	of	$5	million	during	2003.	This	improvement	is	primarily	attributable	to	the	segment's	year-over-year	increase in	average	revenue	per	store,	the	impact	of	opening	new	stores,	and	the	segment's	year-over-year	increase	in	net	sales,	which	resulted	in	higher	leverage	on	occupancy, depreciation,	and	other	fixed	costs.

Expansion	of	the	Retail	segment	has	required	and	will	continue	to	require	a	substantial	investment	in	fixed	assets	and	related	infrastructure,	operating	lease commitments,	personnel,	and	other	operating	expenses.	Capital	expenditures	associated	with	the	Retail	segment	were	$132	million	in	2005,	bringing	the	total	capital expenditures	since	inception	of	the	Retail	segment	to	approximately	$529	million.	As	of	September	24,	2005,	the	Retail	segment	had	approximately	3,673	employees and	had	outstanding	operating	lease	commitments	associated	with	retail	store	space	and	related	facilities	of	approximately	$606	million.	The	Company	would	incur substantial	costs	should	it	choose	to	terminate	its	Retail	segment	or	close	individual	stores.	Such	costs	could	adversely	affect	the	Company's	results	of	operations	and

financial	condition.

# Gross	Margin

Gross	margin	for	each	of	the	last	three	fiscal	years	are	as	follows	(in	millions,	except	gross	margin	percentages):

|  | September	24,<br>2005 | September	25,<br>2004 | September	27,<br>2003 |
| :--- | :--- | :--- | :--- |
| Net\tsales | $13,931 | $ 8,279 | $ 6,207 |
| Cost\tof\tsales | 9,888 | 6,020 | 4,499 |
| Gross\tmargin | $4,043 | $ 2,259 | $ 1,708 |
| Gross\tmargin\tpercentage | 29.0% | 27.3% | 27.5% |

Gross	margin	increased	in	2005	to	29.0%	of	net	sales	from	27.3%	of	net	sales	in	2004.	The	Company's	gross	margin	during	2005	increased	due	to	more	favorable	pricing on	certain	commodity	components	including	LCD	flat-panel	displays	and	DRAM	memory;	an	increase	in	higher	margin	software	sales;	a	favorable	shift	in	direct	sales related	primarily	to	the	Company's	Retail	and	online	stores;	and	higher	overall	revenue	that	provided	for	more	leverage	on	fixed	production	costs.	These	increases	to gross	margin	were	partially	offset	by	an	increase	in	lower	margin	iPod	sales.

The	Company	anticipates	that	its	gross	margin	and	the	gross	margin	of	the	overall	personal	computer	and	consumer	electronics	industries	will	remain	under	pressure	in light	of	price	competition,	especially	for	the	iPod	product	line.	The	Company	expects	gross	margin	percentage	to	decline	in	the	first	quarter	of	2006	primarily	as	a	result of	a	shift	in	the	mix	of	revenue	toward	lower	margin	products	such	as	the	iPod	and	content	from	the	iTunes	Music	Store.

The	foregoing	statements	regarding	the	Company's	expected	gross	margin	are	forward-looking.	There	can	be	no	assurance	that	current	gross	margins	will	be	maintained or	targeted	gross	margin	levels	will	be	achieved.	In	general,	gross	margins	and	margins	on	individual	products,	including	iPods,	will	remain	under	significant	downward pressure	due	to	a	variety	of	factors,	including	continued	industry	wide	global	pricing	pressures,	increased	competition,	compressed	product	life	cycles,	potential increases	in	the	cost	and	availability	of	raw	material	and	outside	manufacturing	services,	and	potential	changes	to	the	Company's	product	mix,	including	higher	unit sales	of	consumer	products	with	lower	average	selling	prices	and	lower	gross	margins.	In	response	to	these	downward	pressures,	the	Company	expects	it	will	continue	to take	pricing	actions	with	respect	to	its	products.	Gross	margins	could	also	be	affected	by	the	Company's	ability	to	effectively	manage	product	quality	and	warranty	costs and	to	stimulate	demand	for	certain	of	its	products.	Due	to	the	Company's	significant	international	operations,	financial	results	can	be	significantly	affected	in	the	short- term	by	fluctuations	in	exchange	rates.

The	Company	orders	components	for	its	products	and	builds	inventory	in	advance	of	product	shipments.	Because	the	Company's	markets	are	volatile	and	subject	to rapid	technology	and	price	changes,	there	is	a	risk	the	Company	will	forecast	incorrectly	and	produce	or	order	from	third-parties	excess	or	insufficient	inventories	of particular	products	or	components.	The	Company's	operating	results	and	financial	condition	in	the	past	have	been	and	may	in	the	future	be	materially	adversely	affected by	the	Company's	ability	to	manage	its	inventory	levels	and	outstanding	purchase	commitments	and	to	respond	to	short-term	shifts	in	customer	demand	patterns.

Gross	margin	declined	in	2004	to	27.3%	of	net	sales	from	27.5%	of	net	sales	in	2003.	The	Company's	gross	margin	during	2004	declined	due	to	an	increase	in	mix towards	lower	margin	iPod	and	iBook	sales,	pricing	actions	on	certain	Power	Macintosh	G5	models	that	were	transitioned	during	the	beginning	of	2004,	higher	warranty costs	on	certain	portable	Macintosh	products,	and	higher	freight	and	duty	costs	during	2004.	These	unfavorable	factors	were	partially	offset	by	an	increase	in	direct	sales and	a	39%	year-over-year	increase	in	higher	margin	software	sales.

# Operating	Expenses

Operating	expenses	for	each	of	the	last	three	fiscal	years	are	as	follows	(in	millions,	except	for	percentages):

|  | September	24,<br>2005 | September	25,<br>2004 | September	27,<br>2003 |
| :--- | :--- | :--- | :--- |
| Research\tand\tdevelopment | $534 | $489 | $471 |
| Percentage\tof\tnet\tsales | 4% | 6% | 8% |
| Selling,\tgeneral,\tand\tadministrative\texpenses | $ 1,859 | $ 1,421 | $ 1,212 |
| Percentage\tof\tnet\tsales | 13% | 17% | 20% |
| Restructuring\tcosts | $— | $23 | $26 |

# Research	and	Development	(R&D)

The	Company	recognizes	that	focused	investments	in	R&D	are	critical	to	its	future	growth	and	competitive	position	in	the	marketplace	and	are	directly	related	to	timely development	of	new	and	enhanced	products	that	are	central	to	the	Company's	core	business	strategy.	The	Company	has	historically	relied	upon	innovation	to	remain competitive.	R&D	expense	amounted	to	approximately	4%	of	total	net	sales	during	2005	down	from	6%	and	8%	of	total	net	sales	in	2004	and	2003,	respectively.	This decrease	is	due	to	the	significant	increase	of	68%	in	total	net	sales	of	the	Company	for	2005.	Although	R&D	expense	decreased	as	a	percentage	of	total	net	sales	in	2005, actual	expense	for	R&D	in	2005	increased	$45	million	or	9%	from	2004,	which	follows	an	$18	million	or	4%	increase	in	2004	compared	to	2003.	The	overall	increase in	R&D	expense	relates	primarily	to	increased	headcount	and	support	for	new	product	development	activities	and	the	impact	of	employee	salary	increases	in	2005.	R&D expense	does	not	include	capitalized	software	development	costs	of	approximately	$29.7	million	related	to	the	development	of	Mac	OS	X	Tiger	during	2005;	$4.5 million	related	to	the	development	of	Mac	OS	X	Tiger	and	$2.3	million	related	to	the	development	of	FileMaker	Pro	7	in	2004;	and	$14.7	million	related	to	the development	of	Mac	OS	X	Panther	in	2003.	Further	information	related	to	the	Company's	capitalization	of	software	development	costs	may	be	found	in	Part	II,	Item	8 of	this	Form	10-K	at	Note	1	of	Notes	to	Consolidated	Financial	Statements.

# Selling,	General,	and	Administrative	Expense	(SG&A)

Expenditures	for	SG&A	increased	$438	million	or	31%	during	2005	compared	to	2004.	These	increases	are	due	primarily	to	the	Company's	continued	expansion	of	its Retail	segment	in	both	domestic	and	international	markets,	a	current	year	increase	in	discretionary	spending	on	marketing	and	advertising,	and	higher	direct	and	channel selling	expenses	resulting	from	the	increase	in	net	sales	and	employee	salary

merit	increases.	SG&A	as	a	percentage	of	total	net	sales	in	2005	was	13%,	down	from	17%	in	2004,	which	is	due	to	the	increase	in	total	net	sales	of	68%	for	the Company	during	2005.

Expenditures	for	SG&A	increased	$209	million	or	17%	during	2004	compared	to	2003.	These	increases	were	due	primarily	to	the	Company's	continued	expansion	of	its Retail	segment	in	both	domestic	and	international	markets,	an	increase	in	discretionary	spending	on	marketing	and	advertising,	an	increase	in	amortization	costs associated	with	restricted	stock	compensation,	and	higher	direct	and	channel	selling	expenses	resulting	from	the	increase	in	net	sales	and	employee	salary	merit increases.	SG&A	as	a	percentage	of	total	net	sales	in	2004	was	17%,	down	from	20%	in	2003	due	to	the	increase	in	total	net	sales	for	the	Company	of	33%	during	2004.

Fiscal	2004	Restructuring	Actions

The	Company	recorded	total	restructuring	charges	of	approximately	$23	million	during	2004,	including	approximately	$14	million	in	severance	costs,	$5.5	million	in asset	impairments,	and	a	$3.5	million	charge	for	lease	cancellations	in	conjunction	with	the	vacating	of	a	leased	sales	facility	in	Europe	during	the	fourth	quarter	of	2004 related	to	a	European	workforce	reduction.	Of	the	$23	million	charge,	$19.7	million	had	been	utilized	by	the	end	of	2005,	with	the	remaining	$3.3	million	consisting	of $0.7	million	for	employee	severance	benefits	and	$2.6	million	for	lease	cancellations.	These	actions	will	result	in	the	termination	of	461	employees,	448	of	which	had been	terminated	prior	to	the	end	of	2005.

The	Company	recorded	total	restructuring	charges	of	approximately	$26.8	million	during	2003,	including	approximately	$7.4	million	in	severance	costs,	a	$5.0	million charge	to	write-off	deferred	compensation,	$7.1	million	in	asset	impairments,	and	a	$7.3	million	charge	for	lease	cancellations	primarily	related	to	the	closure	of	the Company's	Singapore	manufacturing	operations	during	the	first	quarter	of	2003.	Of	the	$26.8	million	charge,	all	had	been	utilized	by	the	end	of	2005,	except	for approximately	$1.7	million	related	to	operating	lease	costs	on	abandoned	facilities.	These	actions	resulted	in	the	termination	of	353	employees.

# Other	Income	and	Expense

Other	income	and	expense	for	each	of	the	last	three	fiscal	years	are	as	follows	(in	millions):

|  | September	24,<br>2005 | September	25,<br>2004 | September	27,<br>2003 |
| :--- | :--- | :--- | :--- |
| Gains\ton\tnon-current\tinvestments,\tnet | $— | $4 | $10 |
| Interest\tincome | $183 | $64 | $69 |
| Interest\texpense | — | (3) | (8) |
| Gains\ton\tsales\tof\tshort\tterm\tinvestments,\tnet | — | 1 | 21 |
| Other\tincome\t(expense),\tnet | (18) | (9) | 1 |
| Interest\tand\tOther\tIncome,\tnet | $165 | $53 | $83 |
| Total\tother\tincome\tand\texpense | $165 | $57 | $93 |

# Gains	and	Losses	on	Non-current	Investments

The	Company	previously	held	significant	investments	in	ARM	Holdings	plc	(ARM),	Akamai	Technologies,	Inc.	(Akamai),	and	EarthLink	Network,	Inc.	(EarthLink). The	Company	sold	all	of	the	remaining	holdings	in	these	non-current	investments	in	2004	and	2003.	Pretax	gains	recorded	upon	the	sale	of	these	non-current investments	were	$4	million	and	$10	million	in	2004	and	2003,	respectively.

# Interest	and	Other	Income,	Net

Total	interest	and	other	income,	net	increased	$112	million	or	211%	to	$165	million	during	2005	compared	to	$53	million	in	2004	and	$83	million	in	2003.	These increases	are	attributable	primarily	to	increasing	investment	yields	on	the	Company's	cash	and	short-term	investments	and	higher	invested	balances.	The	weighted average	interest	rate	earned	by	the	Company	on	its	cash,	cash	equivalents,	and	short-term	investments	increased	to	2.70%	in	2005	compared	to	the	1.38%	and	1.89% rates	earned	during	2004	and	2003,	respectively.	The	Company	occasionally	sells	short-term	investments	prior	to	their	stated	maturities.	As	a	result	of	such	sales,	the Company	recognized	net	losses	of	$137,000	in	2005	and	net	gains	of	$1	million	and	$21	million	during	2004	and	2003,	respectively.	Partially	offsetting	the	increase	in other	income	were	higher	foreign	currency	hedging	expenses.

Interest	expense	consisted	primarily	of	interest	on	the	Company's	$300	million	aggregate	principal	amount	unsecured	notes,	which	were	repaid	upon	their	maturity	in February	2004.	The	unsecured	notes	were	sold	at	99.925%	of	par	for	an	effective	yield	to	maturity	of	6.51%.	Total	deferred	gain	resulting	from	the	closure	of	debt swaps	of	approximately	$23	million	was	fully	amortized	as	of	the	notes'	maturity	in	February	2004.

# Provision	for	Income	Taxes

The	Company's	effective	tax	rate	for	the	year	ended	September	24,	2005	was	approximately	26%.	The	Company's	effective	rate	differs	from	the	statutory	federal income	tax	rate	of	35%	due	primarily	to	certain	undistributed	foreign	earnings	for	which	no	U.S.	taxes	are	provided	because	such	earnings	are	intended	to	be	indefinitely reinvested	outside	the	U.S.,	research	and	development	tax	credits,	and	a	reduction	of	certain	tax	contingency	reserves	and	adjustments	to	net	deferred	tax	assets.	The benefit	from	adjustments	to	tax	contingency	reserves	and	net	deferred	tax	assets	was	$67	million.	In	addition,	the	Company	recorded	a	$25	million	reduction	of	the valuation	allowance	associated	with	deferred	tax	assets	that,	in	management's	opinion,	are	now	more	likely	than	not	to	be	realized	in	the	future.	$14	million	of	the valuation	allowance	reduction	was	recorded	as	a	credit	to	income	tax	expense,	and	the	remainder	was	recorded	as	a	credit	to	goodwill.

As	of	September	24,	2005,	the	Company	had	deferred	tax	assets	arising	from	deductible	temporary	differences,	tax	losses,	and	tax	credits	of	$767	million	before	being offset	against	certain	deferred	tax	liabilities	and	a	valuation	allowance	for	presentation	on	the	Company's	balance	sheet.	Management	believes	it	is	more	likely	than	not that	forecasted	income,	including	income	that	may	be	generated	as	a	result	of	certain	tax	planning	strategies,	will	be	sufficient	to	fully	recover	the	remaining	net deferred	tax	assets.	As	of	September	24,	2005	and	September	25,	2004,	a	valuation	allowance	of	$5	million	and	$30	million,	respectively,	was	recorded	against	the deferred	tax	asset	for	the	benefits	of	tax	loss	carryforwards	that	may	not	be	realized.	The	remaining	valuation	allowance	at	September	24,	2005	relates	principally	to certain	state	operating	loss	carryforwards.	The	Company	will	continue	to	evaluate	the	realizability	of	the	deferred	tax	assets	quarterly	by	assessing	the	need	for	and amount	of	the	valuation	allowance.

The	Internal	Revenue	Service	(IRS)	has	completed	its	field	audit	of	the	Company's	federal	income	tax	returns	for	all	years	prior	to	2002	and	proposed	certain adjustments.	Certain	of	these	adjustments	are	being	contested	through	the	IRS	Appeals	Office.	Substantially	all	IRS	audit	issues	for	these	years	have	been	resolved.	In addition,	the	Company	is	also	subject	to	audits	by	state,	local,	and	foreign	tax	authorities.	Management	believes	that	adequate	provision	has	been	made	for	any adjustments	that	may	result	from	tax	examinations.	However,	the	outcome	of	tax	audits	cannot	be	predicted	with	certainty.	Should	any	issues	addressed	in	the Company's	tax	audits	be	resolved	in	a	manner	not	consistent	with	management's	expectations,	the	Company	could	be	required	to	adjust	its	provision	for	income	tax	in the	period	such	resolution	occurs.

On	October	22,	2004,	the	American	Jobs	Creation	Act	(AJCA)	was	signed	into	law.	The	AJCA	includes	a	provision	for	the	deduction	of	85%	of	certain	foreign	earnings that	are	repatriated,	as	defined	in	the

AJCA.	The	legislation	provided	the	Company	with	the	option	to	apply	this	provision	to	repatriations	of	qualifying	earnings	in	either	2005	or	2006.	The	Company	is continuing	to	evaluate	the	effects	of	the	repatriation	provision	and	expects	to	complete	the	evaluation	in	2006.	A	maximum	of	$755	million	may	be	eligible	for repatriation	under	the	reduced	tax	rate	provided	by	AJCA.	However,	given	the	uncertainties	and	complexities	of	the	repatriation	provision	and	the	Company's	continuing evaluation,	the	Company	has	not	yet	determined	the	amount	that	may	be	repatriated	or	the	related	potential	income	tax	effects	of	such	repatriation.

# Recent	Accounting	Pronouncements

In	November	2005,	the	FASB	issued	FASB	Staff	Position	(FSP)	Nos.	FAS	115-1	and	FAS	124-1,	The	Meaning	of	Other-Than-Temporary	Impairment	and	its Application	to	Certain	Investments.	FSP	Nos.	FAS	115-1	and	FAS	124-1	amend	SFAS	No.	115,	Accounting	for	Certain	Investments	in	Debt	and	Equity	Securities,

SFAS	No.	124,	Accounting	for	Certain	Investments	Held	by	Not-for-Profit	Organizations,	as	well	as	APB	Opinion	No.	18,	The	Equity	Method	of	Accounting	for Investments	in	Common	Stock.	This	guidance	nullifies	certain	requirements	of	EITF	03-1,	The	Meaning	of	Other-Than-Temporary	Impairment	and	its	Application	to Certain	Investments.	FSP	Nos.	FAS	115-1	and	FAS	124-1	include	guidance	for	evaluating	and	recording	impairment	losses	on	debt	and	equity	investments,	as	well	as new	disclosure	requirements	for	investments	that	are	deemed	to	be	temporarily	impaired.	FSP	Nos.	FAS	115-1	and	FAS	124-1	also	require	other-than-temporary impaired	debt	securities	to	be	written	down	to	its	impaired	value,	which	becomes	the	new	cost	basis.	FSP	Nos.	FAS	115-1	and	FAS	124-1	are	effective	for	fiscal	years beginning	after	December	15,	2005.	Although	the	Company	will	continue	to	evaluate	the	application	of	FSP	Nos.	FAS	115-1	and	FAS	124-1,	management	does	not currently	believe	adoption	will	have	a	material	impact	on	the	Company's	results	of	operations	or	financial	position.

In	November	2004,	the	FASB	issued	SFAS	No.	151,	Inventory	Costs,	which	amends	the	guidance	in	Accounting	Research	Bulletin	(ARB)	No.	43,	Chapter	4,	Inventory Pricing,	to	clarify	the	accounting	for	abnormal	amounts	of	facility	expense,	freight,	handling	costs,	and	wasted	material	(spoilage).	ARB	43,	Chapter	4,	previously	stated that	"under	some	circumstances,	items	such	as	idle	facility	expense,	excessive	spoilage,	double	freight,	and	rehandling	costs	may	be	so	abnormal	as	to	require	treatment as	current	period	charges."	SFAS	151	requires	that	those	items	be	recognized	as	current-period	charges	regardless	of	whether	they	meet	the	criterion	of	"so	abnormal." In	addition,	SFAS	151	requires	that	allocation	of	fixed	production	overhead	to	the	costs	of	conversion	be	based	on	the	normal	capacity	of	the	production	facilities.	SFAS 151	is	effective	for	fiscal	years	beginning	after	June	15,	2005.	Although	the	Company	will	continue	to	evaluate	the	application	of	SFAS	151,	management	does	not currently	believe	adoption	will	have	a	material	impact	on	the	Company's	results	of	operations	or	financial	position.

In	December	2004,	the	FASB	issued	FSP	109-2,	Accounting	and	Disclosure	Guidance	for	the	Foreign	Earnings	Repatriation	Provision	within	the	American	Jobs Creation	Act	of	2004.	FSP	109-2	provides	additional	time	to	companies	beyond	the	financial	reporting	period	of	enactment	to	evaluate	the	effects	of	the	AJCA	on	their plans	for	repatriation	of	foreign	earnings	for	purposes	of	applying	SFAS	109,	Accounting	for	Income	Taxes.	The	Company	is	currently	evaluating	the	repatriation provisions	of	AJCA,	which	if	implemented	by	the	Company	would	affect	the	Company's	tax	provision	and	deferred	tax	assets	and	liabilities.	However,	given	the uncertainties	and	complexities	of	the	repatriation	provision	and	the	Company's	continuing	evaluation,	it	is	not	possible	at	this	time	to	determine	the	amount,	if	any,	that will	be	repatriated	or	the	related	potential	income	tax	effects	of	such	repatriation.	The	Company	expects	to	complete	the	evaluation	in	2006.

In	December	2004,	the	FASB	issued	SFAS	No.	123	(revised	2004)	(SFAS	No.	123R),	Share-Based	Payment,	that	addresses	the	accounting	for	share-based	payment transactions	in	which	an	enterprise	receives	employee	services	in	exchange	for	(a)	equity	instruments	of	the	enterprise	or	(b)	liabilities	that	are	based	on	the	fair	value	of the	enterprise's	equity	instruments	or	that	may	be	settled	by	the	issuance	of	such

equity	instruments.	SFAS	No.	123R	eliminates	the	ability	to	account	for	share-based	compensation	transactions	using	the	intrinsic	value	method	under	Accounting Principles	Board	(APB)	Opinion	No.	25,	Accounting	for	Stock	Issued	to	Employees,	and	instead	requires	such	transactions	be	accounted	for	using	a	fair-value-based method.	The	Company	will	recognize	stock-based	compensation	expense	on	all	awards	on	a	straight-line	basis	over	the	requisite	service	period	using	the	modified prospective	method.	In	January	2005,	the	SEC	issued	SAB	No.	107,	which	provides	supplemental	implementation	guidance	for	SFAS	No.	123R.	SFAS	No.	123R	will be	effective	for	the	Company	beginning	in	the	first	quarter	of	fiscal	2006.	The	Company	expects	the	adoption	of	SFAS	No.	123R	will	result	in	a	reduction	of	diluted earnings	per	common	share	of	approximately	$0.03	for	the	first	quarter	of	fiscal	2006.

In	March	2005,	the	FASB	issued	Interpretation	No.	(FIN)	47,	Accounting	for	Conditional	Asset	Retirement	Obligations,	to	clarify	the	requirement	to	record	liabilities stemming	from	a	legal	obligation	to	perform	an	asset	retirement	activity	in	which	the	timing	or	method	of	settlement	is	conditional	on	a	future	event.	The	Company plans	to	adopt	FIN	47	in	the	first	quarter	of	fiscal	2006,	and	does	not	expect	the	application	of	FIN	47	to	have	a	material	impact	on	its	results	of	operations,	cash	flows	or financial	position.

In	May	2005,	the	FASB	issued	SFAS	No.	154,	Accounting	Changes	and	Error	Corrections	which	replaces	APB	Opinion	No.	20	Accounting	Changes	and	SFAS	No.	3, Reporting	Accounting	Changes	in	Interim	Financial	Statements—An	Amendment	of	APB	Opinion	No.	28.	SFAS	No.	154	requires	retrospective	application	to	prior periods'	financial	statements	of	a	voluntary	change	in	accounting	principal	unless	it	is	not	practicable.	SFAS	No.	154	is	effective	for	accounting	changes	and	corrections of	errors	made	in	fiscal	years	beginning	after	December	15,	2005	and	is	required	to	be	adopted	by	the	Company	in	the	first	quarter	of	fiscal	2007.	Although	the	Company will	continue	to	evaluate	the	application	of	SFAS	No.	154,	management	does	not	currently	believe	adoption	will	have	a	material	impact	on	the	Company's	results	of operations	or	financial	position.

# Liquidity	and	Capital	Resources

The	following	table	presents	selected	financial	information	and	statistics	for	each	of	the	last	three	fiscal	years	(dollars	in	millions):

|  | September	24,<br>2005 | September	25,<br>2004 | September	27,<br>2003 |
| :--- | :--- | :--- | :--- |
| Cash,\tcash\tequivalents,\tand\tshort-term\tinvestments | $ 8,261 | $ 5,464 | $ 4,566 |
| Accounts\treceivable,\tnet | $895 | $774 | $766 |
| Inventory | $165 | $101 | $56 |
| Working\tcapital | $ 6,816 | $ 4,404 | $ 3,530 |
| Days\tsales\tin\taccounts\treceivable\t(DSO)\t(a) | 22 | 30 | 41 |
| Days\tof\tsupply\tin\tinventory\t(b) | 6 | 5 | 4 |
| Days\tpayables\toutstanding\t(DPO)\t(c) | 62 | 76 | 82 |
| Annual\toperating\tcash\tflow | $ 2,535 | $934 | $289 |

(a)										DSO	is	based	on	ending	net	trade	receivables	and	most	recent	quarterly	net	sales	for	each	period.

(b)									Days	supply	of	inventory	is	based	on	ending	inventory	and	most	recent	quarterly	cost	of	sales	for	each	period.

(c)										DPO	is	based	on	ending	accounts	payable	and	most	recent	quarterly	cost	of	sales	adjusted	for	the	change	in	inventory.

As	of	September	24,	2005,	the	Company	had	$8.261	billion	in	cash,	cash	equivalents,	and	short-term	investments,	an	increase	of	$2.797	billion	over	the	same	balances at	the	end	of	2004.	The	principal	components	of	this	increase	were	​cash	generated	by	operating	activities	of	$2.535	billion	and	proceeds	of	$543	million	from	the issuance	of	common	stock	under	stock	plans,	partially	offset	by	cash	used	to

purchase	property,	plant,	and	equipment	of	$260	million.	The	Company's	short-term	investment	portfolio	is	primarily	invested	in	high	credit	quality,	liquid	investments. As	of	September	24,	2005,	approximately	$4.3	billion	of	the	Company's	cash,	cash	equivalents,	and	short-term	investments	were	held	by	foreign	subsidiaries	and	are generally	based	in	U.S.	dollar-denominated	holdings.	Amounts	held	by	foreign	subsidiaries	are	generally	subject	to	U.S.	income	taxation	on	repatriation	to	the	U.S.	The Company	is	currently	assessing	the	impact	of	the	one-time	favorable	foreign	dividend	provisions	recently	enacted	as	part	of	the	American	Jobs	Creation	Act	of	2004, and	may	decide	to	repatriate	earnings	from	some	of	its	foreign	subsidiaries.

The	Company	believes	its	existing	balances	of	cash,	cash	equivalents,	and	short-term	investments	will	be	sufficient	to	satisfy	its	working	capital	needs,	capital expenditures,	stock	repurchase	activity,	outstanding	commitments,	and	other	liquidity	requirements	associated	with	its	existing	operations	over	the	next	12	months.

Capital	Expenditures

The	Company's	total	capital	expenditures	were	$260	million	during	2005,	$132	million	of	which	were	for	retail	store	facilities	and	equipment	related	to	the	Company's Retail	segment	and	$128	million	of	which	were	primarily	for	corporate	infrastructure,	including	information	systems	enhancements	and	operating	facilities enhancements	and	expansions.	The	Company	currently	anticipates	it	will	utilize	approximately	$390	million	for	capital	expenditures	during	2006,	approximately	$210 million	of	which	is	expected	to	be	utilized	for	further	expansion	of	the	Company's	Retail	segment	and	the	remainder	utilized	to	support	normal	replacement	of	existing capital	assets	and	enhancements	to	general	information	technology	infrastructure.

# Stock	Repurchase	Plan

In	July	1999,	the	Company's	Board	of	Directors	authorized	a	plan	for	the	Company	to	repurchase	up	to	$500	million	of	its	common	stock.	This	repurchase	plan	does	not obligate	the	Company	to	acquire	any	specific	number	of	shares	or	acquire	shares	over	any	specified	period	of	time.	Since	inception	of	the	stock	repurchase	plan,	the Company	had	repurchased	a	total	of	13.1	million	shares	at	a	cost	of	$217	million.	The	Company	has	not	engaged	in	any	transactions	to	repurchase	its	common	stock during	2005	or	2004.	The	Company	was	authorized	to	repurchase	up	to	an	additional	$283	million	of	its	common	stock	as	of	September	24,	2005.

# Off-Balance	Sheet	Arrangements	and	Contractual	Obligations

The	Company	has	not	entered	into	any	transactions	with	unconsolidated	entities	whereby	the	Company	has	financial	guarantees,	subordinated	retained	interests, derivative	instruments,	or	other	contingent	arrangements	that	expose	the	Company	to	material	continuing	risks,	contingent	liabilities,	or	any	other	obligation	under	a variable	interest	in	an	unconsolidated	entity	that	provides	financing,	liquidity,	market	risk,	or	credit	risk	support	to	the	Company.

The	following	table	presents	certain	payments	due	by	the	Company	under	contractual	obligations	with	minimum	firm	commitments	as	of	September	24,	2005	and excludes	amounts	already	recorded	on	the	Company's	balance	sheet	as	current	liabilities	(in	millions):

|  |  | Payments<br>Due	in	Less<br>Than | Payments<br>Due	in | Payments<br>Due	in | Payments<br>Due	in	More<br>Than |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | Total | 1\tyear | 1-3\tyears | 4-5\tyears | 5\tyears |
| Operating\tLeases | $865 | $108 | $211 | $192 | $354 |
| Purchase\tObligations | 1,994 | 1,994 | — | — | — |
| Asset\tRetirement\tObligations | 14 | — | 2 | 2 | 10 |
| Other\tObligations | 4 | 4 | — | — | — |
| Total | $ 2,877 | $ 2,106 | $213 | $194 | $364 |

# Lease	Commitments

As	of	September	24,	2005,	the	Company	had	total	outstanding	commitments	on	noncancelable	operating	leases	of	approximately	$865	million,	$606	million	of	which related	to	the	lease	of	retail	space	and	related	facilities.	Lease	terms	on	the	Company's	existing	major	facility	operating	leases	range	from	5	to	20	years.

# Purchase	Commitments	with	Contract	Manufacturers	and	Component	Suppliers

The	Company	utilizes	several	contract	manufacturers	to	manufacture	sub-assemblies	for	the	Company's	products	and	to	perform	final	assembly	and	test	of	finished products.	These	contract	manufacturers	acquire	components	and	build	product	based	on	demand	information	supplied	by	the	Company,	which	typically	covers	periods ranging	from	30	to	150	days.	The	Company	also	obtains	individual	components	for	its	products	from	a	wide	variety	of	individual	suppliers.	Consistent	with	industry practice,	the	Company	acquires	components	through	a	combination	of	purchase	orders,	supplier	contracts,	and	open	orders	based	on	projected	demand	information.	Such purchase	commitments	typically	cover	the	Company's	forecasted	component	and	manufacturing	requirements	for	periods	ranging	from	30	to	150	days.	As	of September	24,	2005,	the	Company	had	outstanding	third-party	manufacturing	commitments	and	component	purchase	commitments	of	approximately	$2.0	billion.

Subsequent	to	September	24,	2005,	the	Company	entered	into	long-term	supply	agreements	with	Hynix	Semiconductor,	Inc.,	Intel	Corporation,	Micron Technology,	Inc.,	Samsung	Electronics	Co.,	Ltd.,	and	Toshiba	Corporation	to	secure	supply	of	NAND	flash	memory	through	calendar	year	2010.	As	part	of	these agreements,	the	Company	intends	to	prepay	a	total	of	$1.25	billion	for	flash	memory	components	by	the	end	of	the	second	quarter	of	2006.

# Asset	Retirement	Obligations

The	Company's	asset	retirement	obligations	are	associated	with	commitments	to	return	property	subject	to	operating	leases	to	original	condition	upon	lease	termination. As	of	September	24,	2005,	the	Company	estimates	that	gross	expected	future	cash	flows	of	approximately	$14	million	will	be	required	to	fulfill	these	obligations.

# Other	Obligations

The	Company's	other	obligations	of	approximately	$4	million	are	primarily	related	to	Internet	and	telecommunications	services.

# Indemnifications

The	Company	generally	does	not	indemnify	end-users	of	its	operating	system	and	application	software	against	legal	claims	that	the	software	infringes	third-party intellectual	property	rights.	Other	agreements	entered	into	by	the	Company	sometimes	include	indemnification	provisions	under	which	the	Company

could	be	subject	to	costs	and/or	damages	in	the	event	of	an	infringement	claim	against	the	Company	or	an	indemnified	third-party.	However,	the	Company	has	not	been required	to	make	any	significant	payments	resulting	from	such	an	infringement	claim	asserted	against	itself	or	an	indemnified	third-party	and,	in	the	opinion	of management,	does	not	have	a	liability	related	to	unresolved	infringement	claims	subject	to	indemnification	that	would	have	a	material	adverse	effect	on	its	financial condition,	liquidity	or	results	of	operations.

# Factors	That	May	Affect	Future	Results	and	Financial	Condition

Because	of	the	following	factors,	as	well	as	other	factors	affecting	the	Company's	operating	results	and	financial	condition,	past	financial	performance	should	not	be considered	to	be	a	reliable	indicator	of	future	performance,	and	investors	should	not	use	historical	trends	to	anticipate	results	or	trends	in	future	periods.

General	economic	conditions	and	current	economic	and	political	uncertainty	could	adversely	affect	the	demand	for	the	Company's	products	and	the	financial	health	of its	suppliers,	distributors,	and	resellers.

The	Company's	operating	performance	depends	significantly	on	general	economic	conditions	in	the	U.S.	and	abroad.	At	times	in	the	past,	demand	for	the	Company's products	has	been	negatively	impacted	by	difficult	global	economic	conditions.	Additionally,	some	of	the	Company's	education	customers	appeared	to	be	delaying technology	purchases	due	to	concerns	about	the	overall	impact	of	the	weaker	economy	and	state	budget	deficits	on	their	available	funding.	Although	recent macroeconomic	trends	seem	to	indicate	an	economic	recovery,	continued	uncertainty	about	future	economic	conditions	makes	it	difficult	to	forecast	future	demand	for the	Company's	products	and	related	operating	results.	Should	global	and/or	regional	economic	conditions	deteriorate,	demand	for	the	Company's	products	could	be

adversely	affected,	as	could	the	financial	health	of	its	suppliers,	distributors,	and	resellers.

War,	terrorism,	public	health	issues	or	other	business	interruptions	could	disrupt	supply,	delivery	or	demand	of	products,	which	could	negatively	affect	the	Company's operations	and	performance.

War,	terrorism,	public	health	issues	and	other	business	interruptions	whether	in	the	U.S.	or	abroad,	have	caused	and	could	cause	damage	or	disruption	to	international commerce	by	creating	economic	and	political	uncertainties	that	may	have	a	strong	negative	impact	on	the	global	economy,	the	Company,	and	the	Company's	suppliers or	customers.	The	Company's	major	business	operations	are	subject	to	interruption	by	earthquake,	other	natural	disasters,	fire,	power	shortages,	terrorist	attacks	and other	hostile	acts,	labor	disputes,	public	health	issues,	and	other	events	beyond	its	control.	The	majority	of	the	Company's	research	and	development	activities,	its corporate	headquarters,	information	technology	systems,	and	other	critical	business	operations,	including	certain	component	suppliers	and	manufacturing	vendors,	are located	near	major	seismic	faults.	Because	the	Company	does	not	carry	earthquake	insurance	for	direct	quake-related	losses,	the	Company's	operating	results	and financial	condition	could	be	materially	adversely	affected	in	the	event	of	a	major	earthquake	or	other	natural	or	manmade	disaster.

Although	it	is	impossible	to	predict	the	occurrences	or	consequences	of	any	such	events,	such	events	could	result	in	a	decrease	in	demand	for	the	Company's	products, make	it	difficult	or	impossible	for	the	Company	to	deliver	products	to	its	customers	or	to	receive	components	from	its	suppliers,	and	could	create	delays	and inefficiencies	in	the	Company's	supply	chain.	In	addition,	should	major	public	health	issues,	including	pandemics,	arise,	the	Company	could	be	negatively	impacted	by the	need	for	more	stringent	employee	travel	restrictions,	additional	limitations	in	the	availability	of	freight	services,	governmental	actions	limiting	the	movement	of products	between	various	regions,	delays	in	production	ramps	of	new	products,	and	disruptions	in	the	operations	of	the	Company's	manufacturing	vendors	and component	suppliers.	The	Company's	operating	results	and	financial	condition	have	been,	and	in	the	future	may	be,	adversely	affected	by	these	events.

The	market	for	personal	computers	and	related	peripherals	and	services,	as	well	as	digital	music	devices	and	related	services,	is	highly	competitive.	If	the	Company	is unable	to	effectively	compete	in	these	markets,	its	results	of	operations	could	be	adversely	affected.

The	personal	computer	industry	is	highly	competitive	and	is	characterized	by	aggressive	pricing	practices,	downward	pressure	on	gross	margins,	frequent	introduction	of new	products,	short	product	life	cycles,	evolving	industry	standards,	continual	improvement	in	product	price/performance	characteristics,	rapid	adoption	of technological	and	product	advancements	by	competitors,	price	sensitivity	on	the	part	of	consumers,	and	a	large	number	of	competitors.	Over	the	past	several	years,	price competition	in	the	market	for	personal	computers	and	related	peripherals	has	been	particularly	intense	as	competitors	who	sell	Windows	and	Linux	based	personal computers	have	aggressively	cut	prices	and	lowered	their	product	margins	for	personal	computing	products.	The	Company's	results	of	operations	and	financial	condition have	been,	and	in	the	future	may	continue	to	be,	adversely	affected	by	these	and	other	industry-wide	pricing	pressures	and	downward	pressures	on	gross	margins.

The	personal	computer	industry	has	also	been	characterized	by	rapid	technological	advances	in	software	functionality,	hardware	performance,	and	features	based	on existing	or	emerging	industry	standards.	Further,	as	the	personal	computer	industry	and	its	customers	place	more	reliance	on	the	Internet,	an	increasing	number	of Internet	devices	that	are	smaller	and	simpler	than	traditional	personal	computers	may	compete	for	market	share	with	the	Company's	existing	products.	Several competitors	of	the	Company	have	either	targeted	or	announced	their	intention	to	target	certain	of	the	Company's	key	market	segments,	including	consumer,	education, professional	and	consumer	digital	video	editing,	and	design	and	publishing.	Several	of	the	Company's	competitors	have	introduced	or	announced	plans	to	introduce digital	music	products	and/or	online	stores	offering	digital	music	distribution	that	mimic	many	of	the	unique	design,	technical	features,	and	solutions	of	the	Company's products.	The	Company	has	a	significant	number	of	competitors,	many	of	whom	have	greater	financial,	marketing,	manufacturing,	and	technological	resources,	as	well as	broader	product	lines	and	larger	installed	customer	bases	than	those	of	the	Company.	Additionally,	there	has	been	a	trend	towards	consolidation	in	the	personal computer	industry	that	has	resulted	in	larger	and	potentially	stronger	competitors	in	the	Company's	markets.

The	Company	is	currently	the	only	maker	of	hardware	using	the	Mac	OS.	The	Mac	OS	has	a	minority	market	share	in	the	personal	computer	market,	which	is	dominated by	makers	of	computers	utilizing	other	competing	operating	systems,	including	Windows	and	Linux.	The	Company's	future	operating	results	and	financial	condition	are substantially	dependent	on	its	ability	to	continue	to	develop	improvements	to	the	Macintosh	platform	in	order	to	maintain	perceived	design	and	functional	advantages over	competing	platforms.	Additionally,	if	unauthorized	copies	of	the	Mac	OS	are	used	on	other	companies'	hardware	products	and	result	in	decreased	demand	for	the Company's	hardware	products,	the	Company's	results	of	operations	may	be	adversely	affected.

The	Company	is	currently	focused	on	market	opportunities	related	to	digital	music	distribution	and	related	consumer	electronic	devices,	including	iPods.	The	Company faces	increasing	competition	from	other	companies	promoting	their	own	digital	music	products,	including	music	enabled	cell	phones,	distribution	services,	and	free	peer- to-peer	music	services.	These	competitors	include	both	new	entrants	with	different	market	approaches,	such	as	subscription	services	models,	and	also	larger	companies that	may	have	greater	technical,	marketing,	distribution,	and	other	resources	than	those	of	the	Company,	as	well	as	established	hardware,	software,	and	digital	content supplier	relationships.	Failure	to	effectively	compete	could	negatively	affect	the	Company's	operating	results	and	financial	position.	There	can	be	no	assurance	that	the Company	will	be	able	to	continue	to	provide	products	and	services	that	effectively	compete	in	these	markets	or	successfully	distribute	and	sell	digital	music	outside	the U.S.	The	Company	may	also	have	to	respond	to	price	competition	by	lowering	prices	and/or	increasing	features	which	could	adversely	affect	the	Company's	music product	gross	margins	as	well	as	overall	Company	gross	margins.

The	Company	also	faces	increased	competition	in	the	U.S.	education	market.	U.S.	elementary	and	secondary	schools,	as	well	as	college	and	university	customers,	remain a	core	market	for	the	Company.	Uncertainty	in	this	channel	remains	as	several	competitors	of	the	Company	have	either	targeted	or	announced	their	intention	to	target	the education	market	for	personal	computers,	which	could	negatively	affect	the	Company's	market	share.	In	an	effort	to	regain	market	share	and	remain	competitive,	the Company	has	been	and	will	continue	to	pursue	one-to-one	(1:1)	learning	solutions	in	education.	1:1	learning	solutions	typically	consist	of	iBook	portable	systems	for every	student	and	teacher	along	with	a	wireless	network	connected	to	a	central	server.	These	1:1	learning	solutions	and	other	strategic	sales	are	generally	priced	more aggressively	and	could	result	in	significantly	less	profitability	or	even	in	financial	losses,	particularly	for	larger	deals.	Although	the	Company	believes	it	has	taken certain	steps	to	strengthen	its	position	in	the	education	market,	there	can	be	no	assurance	that	the	Company	will	be	able	to	increase	or	maintain	its	share	of	the	education market	or	execute	profitably	on	large	strategic	arrangements.	Failure	to	do	so	may	have	an	adverse	impact	on	the	Company's	operating	results	and	financial	condition.

The	Company's	transition	from	PowerPC	microprocessors	used	by	Macintosh	computers	to	microprocessors	built	by	Intel	is	subject	to	numerous	risks.

In	June	2005,	the	Company	announced	its	intention	to	transition	from	the	use	of	PowerPC	microprocessors	to	the	use	of	Intel	microprocessors	in	all	of	its	Macintosh computers	by	the	end	of	calendar	year	2007.	This	transition	is	subject	to	numerous	risks	and	uncertainties,	including	the	Company's	ability	to	timely	develop	and	deliver new	products	using	Intel	microprocessors,	the	timely	innovation	and	delivery	of	related	hardware	and	software	products,	including	the	Company's	applications,	to support	Intel	microprocessors,	market	acceptance	of	Intel-based	Macintosh	computers,	the	development	and	availability	on	acceptable	terms	of	components	and	services essential	to	enable	the	Company	to	timely	deliver	Intel-based	Macintosh	computers,	and	the	effective	management	of	inventory	levels	in	line	with	anticipated	product demand	for	both	PowerPC	and	Intel-based	Macintosh	computers.	In	addition,	the	Company	is	dependent	on	third-party	software	developers	such	as	Microsoft	and Adobe	continuing	to	support	current	applications	that	run	on	PowerPC-based	computers	and	timely	developing	versions	of	current	and	future	applications	that	run	on Intel	and	PowerPC-based	Macintosh	computers.	The	Company's	inability	to	timely	deliver	new	Intel-based	products	or	obtain	developer	commitment	both	to	continue supporting	applications	that	run	on	PowerPC	microprocessors	and	timely	transition	their	applications	to	run	natively	on	Intel-based	products	may	have	an	adverse impact	on	the	Company's	results	of	operations.	The	Company's	announcement	of	its	intention	to	transition	to	Intel	microprocessors	may	negatively	impact	sales	of current	and	future	Macintosh	products	containing	PowerPC	microprocessors,	as	customers	may	elect	to	delay	purchases	until	the	Intel-based	products	are	available. Additionally,	there	can	be	no	assurance	that	the	Company	will	be	able	to	maintain	its	historical	gross	margin	percentages	on	its	products,	including	Intel-based Macintosh	computers,	which	may	adversely	impact	the	Company's	results	of	operations.

Future	operating	results	are	dependent	upon	the	Company's	ability	to	obtain	a	sufficient	supply	of	components,	including	microprocessors,	some	of	which	are	in	short supply	or	available	only	from	limited	sources.

Although	most	components	essential	to	the	Company's	business	are	generally	available	from	multiple	sources,	certain	key	components	including	microprocessors	and ASICs	are	currently	obtained	by	the	Company	from	single	or	limited	sources.	Some	key	components	(including	without	limitation	DRAM,	NAND	flash-memory,	and TFT-LCD	flat-panel	displays),	while	currently	available	to	the	Company	from	multiple	sources,	are	at	times	subject	to	industry-wide	availability	and	pricing	pressures. In	addition,	new	products	introduced	by	the	Company	often	initially	utilize	custom	components	obtained	from	only	one	source	until	the	Company	has	evaluated	whether there	is	a	need	for,	and	subsequently	qualifies,	additional	suppliers.	In	situations	where	a	component	or	product	utilizes	new	technologies,	initial	capacity	constraints may	exist	until	such	time	as	the	suppliers'	yields	have	matured.	The	Company	and	other	producers	in	the	personal	computer	industry	also	compete	for	various components	with	other	industries	that	have

experienced	increased	demand	for	their	products.	The	Company	uses	some	components	that	are	not	common	to	the	rest	of	the	personal	computer	industry	including certain	microprocessors	and	ASICs.	Continued	availability	of	these	components	may	be	affected	if	producers	were	to	decide	to	concentrate	on	the	production	of components	other	than	those	customized	to	meet	the	Company's	requirements.	If	the	supply	of	a	key	component	were	to	be	delayed	or	constrained	on	a	new	or	existing product,	the	Company's	results	of	operations	and	financial	condition	could	be	adversely	affected.

The	Company's	ability	to	produce	and	market	competitive	products	is	dependent	on	the	ability	and	desire	of	IBM	and	Freescale	Semiconductor,	Inc.	(Freescale)	to supply	PowerPC	microprocessors	and	Intel	to	supply	its	microprocessors	for	the	Company's	Macintosh	computers	and	to	provide	the	Company	with	a	sufficient	supply of	microprocessors	with	price/performance	features	that	compare	favorably	to	those	supplied	to	the	Company's	competitors.	While	the	Company	has	supply	agreements with	IBM	and	Freescale,	the	Company's	recent	announcement	of	plans	to	transition	to	Intel	microprocessors	may	impact	the	continued	availability	on	acceptable	terms of	certain	components	and	services,	including	PowerPC	G4	and	G5	microprocessors,	which	are	essential	to	the	Company's	business	and	are	currently	obtained	by	the Company	from	sole	or	limited	sources.	Additionally,	there	have	been	instances	in	recent	years	where	the	inability	of	the	Company's	suppliers	to	provide	advanced PowerPC	microprocessors	in	sufficient	quantity	has	had	significant	adverse	effects	on	the	Company's	results	of	operations.	In	addition,	IBM	is	currently	the	Company's sole	supplier	of	the	PowerPC	G5	processor,	which	is	used	in	the	Company's	current	Power	Mac,	Xserve,	and	iMac	G5	products.	Freescale	is	the	sole	supplier	of	the	G4 processor,	which	is	used	in	the	Company's	eMac,	Mac	mini,	and	portable	products.	IBM	experienced	manufacturing	problems	with	the	PowerPC	G5	processor,	which resulted	in	the	Company	delaying	the	shipment	of	various	products	and	constrained	certain	product	shipments	during	the	second	half	of	2004	and	the	first	quarter	of 2005.	Manufacturing	problems	experienced	by	any	of	the	Company's	suppliers	in	the	future	or	failure	by	them	to	deliver	components	to	the	Company	in	sufficient quantities	with	competitive	price/performance	features	could	adversely	affect	the	Company's	results	of	operations	and	financial	condition.

The	Company	must	successfully	manage	frequent	product	introductions	and	transitions	to	remain	competitive	and	effectively	stimulate	customer	demand.

Due	to	the	highly	volatile	and	competitive	nature	of	the	personal	computer	and	consumer	electronics	industries,	which	are	characterized	by	dynamic	customer	demand patterns	and	rapid	technological	advances,	the	Company	must	continually	introduce	new	products	and	technologies,	enhance	existing	products	in	order	to	remain competitive,	and	effectively	stimulate	customer	demand	for	new	products	and	upgraded	versions	of	the	Company's	existing	products.	The	success	of	new	product introductions	is	dependent	on	a	number	of	factors,	including	market	acceptance;	the	Company's	ability	to	manage	the	risks	associated	with	product	transitions,	including the	transition	to	Intel-based	Macintosh	computers,	and	production	ramp	issues;	the	availability	of	application	software	for	new	products;	the	effective	management	of inventory	levels	in	line	with	anticipated	product	demand,	including	anticipated	demand	for	PowerPC-based	and	Intel-based	Macintosh	computers;	the	availability	of products	in	appropriate	quantities	to	meet	anticipated	demand;	and	the	risk	that	new	products	may	have	quality	or	other	defects	in	the	early	stages	of	introduction. Accordingly,	the	Company	cannot	determine	in	advance	the	ultimate	effect	that	new	products	will	have	on	its	sales	or	results	of	operations.

The	Company's	products	from	time	to	time	experience	quality	problems	that	can	result	in	decreased	net	sales	and	operating	profits.

The	Company	sells	highly	complex	hardware	and	software	products	that	can	contain	defects	in	design	and	manufacture.	Sophisticated	operating	system	software	and applications,	such	as	those	sold	by	the	Company,	often	contain	"bugs"	that	can	unexpectedly	interfere	with	the	operation	of	the	software.	Defects	may	also	occur	in components	and	products	the	Company	purchases	from	third-parties.	There	can	be	no	assurance	that	the	Company	will	be	able	to	detect	and	fix	all	defects	in	the hardware	and	software	it	sells.

Failure	to	do	so	could	result	in	lost	revenue,	loss	of	reputation,	and	significant	warranty	and	other	expense	to	remedy.

Because	orders	for	components,	and	in	some	cases	commitments	to	purchase	components,	must	be	placed	in	advance	of	customer	orders,	the	Company	faces	substantial inventory	risk.

The	Company	records	a	write-down	for	inventories	of	components	and	products	that	have	become	obsolete	or	are	in	excess	of	anticipated	demand	or	net	realizable	value and	accrues	necessary	reserves	for	cancellation	fees	of	orders	for	inventories	that	have	been	cancelled.	Although	the	Company	believes	its	inventory	and	related provisions	are	currently	adequate,	given	the	rapid	and	unpredictable	pace	of	product	obsolescence	in	the	computer	and	consumer	electronics	industries	and	the	transition to	Intel-based	Macintosh	computers,	no	assurance	can	be	given	that	the	Company	will	not	incur	additional	inventory	and	related	charges.	In	addition,	such	charges	have had,	and	may	have,	a	material	effect	on	the	Company's	financial	position	and	results	of	operations.

The	Company	must	order	components	for	its	products	and	build	inventory	in	advance	of	product	shipments.	Because	the	Company's	markets	are	volatile	and	subject	to rapid	technology	and	price	changes,	and	because	of	the	transition	to	Intel-based	Macintosh	computers,	there	is	a	risk	the	Company	will	forecast	incorrectly	and	produce or	order	from	third	parties	excess	or	insufficient	inventories	of	particular	products.	Consistent	with	industry	practice,	components	are	normally	acquired	through	a combination	of	purchase	orders,	supplier	contracts,	and	open	orders	based	on	projected	demand	information.	Such	purchase	commitments	typically	cover	the	Company's forecasted	component	and	manufacturing	requirements	for	periods	ranging	from	30	to	150	days.	The	Company's	operating	results	and	financial	condition	have	been	in the	past	and	may	in	the	future	be	materially	adversely	affected	by	the	Company's	ability	to	manage	its	inventory	levels	and	respond	to	short-term	shifts	in	customer demand	patterns.

The	Company	is	dependent	on	manufacturing	and	logistics	services	provided	by	third	parties,	many	of	whom	are	located	outside	of	the	U.S.

Most	of	the	Company's	products	are	manufactured	in	whole	or	in	part	by	third-party	manufacturers.	In	addition,	the	Company	has	outsourced	much	of	its	transportation and	logistics	management.	While	outsourcing	arrangements	may	lower	the	cost	of	operations,	they	also	reduce	the	Company's	direct	control	over	production	and distribution.	It	is	uncertain	what	effect	such	diminished	control	will	have	on	the	quality	or	quantity	of	the	products	manufactured	or	services	rendered,	or	the	flexibility of	the	Company	to	respond	to	changing	market	conditions.	Moreover,	although	arrangements	with	such	manufacturers	may	contain	provisions	for	warranty	expense reimbursement,	the	Company	may	remain	at	least	initially	responsible	to	the	consumer	for	warranty	service	in	the	event	of	product	defects.	Any	unanticipated	product defect	or	warranty	liability,	whether	pursuant	to	arrangements	with	contract	manufacturers	or	otherwise,	could	adversely	affect	the	Company's	future	operating	results and	financial	condition.

Final	assembly	of	products	sold	by	the	Company	is	currently	performed	in	the	Company's	manufacturing	facility	in	Cork,	Ireland,	and	by	external	vendors	in	Fremont, California,	Fullerton,	California,	Taiwan,	Korea,	the	People's	Republic	of	China,	and	the	Czech	Republic.	Currently,	manufacturing	of	many	of	the	components	used	in the	Company's	products	is	performed	by	third-party	vendors	in	Taiwan,	China,	Japan,	Korea,	and	Singapore.	Final	assembly	of	substantially	all	of	the	Company's portable	products	including	PowerBooks,	iBooks,	and	iPods	is	performed	by	third-party	vendors	in	China.	If	for	any	reason	manufacturing	or	logistics	in	any	of	these locations	is	disrupted	by	regional	economic,	business,	labor,	environmental,	public	health,	or	political	issues,	as	well	as	information	technology	system	failures	or

military	actions,	the	Company's	results	of	operations	and	financial	condition	could	be	adversely	affected.

The	Company's	future	operating	performance	is	dependent	on	the	performance	of	distributors	and	other	resellers	of	the	Company's	products.

The	Company	distributes	its	products	through	wholesalers,	resellers,	national	and	regional	retailers,	and	cataloguers,	many	of	whom	distribute	products	from	competing manufacturers.	In	addition,	the	Company	sells	many	of	its	products	and	resells	certain	third-party	products	in	most	of	its	major	markets	directly	to	end	users,	certain education	customers,	and	certain	resellers	through	its	online	stores	around	the	world	and	its	retail	stores.	Many	of	the	Company's	resellers	operate	on	narrow	product margins	and	have	been	negatively	affected	by	weak	economic	conditions	over	the	last	several	years.	Considerable	trade	receivables	that	are	not	covered	by	collateral	or credit	insurance	are	outstanding	with	the	Company's	distribution	and	retail	channel	partners.	The	Company's	business	and	financial	results	could	be	adversely	affected	if the	financial	condition	of	these	resellers	weakens,	if	resellers	within	consumer	channels	were	to	cease	distribution	of	the	Company's	products,	or	if	uncertainty	regarding demand	for	the	Company's	products	caused	resellers	to	reduce	their	ordering	and	marketing	of	the	Company's	products.	The	Company	has	invested	and	will	continue	to invest	in	various	programs	to	enhance	reseller	sales,	including	staffing	selected	resellers'	stores	with	Company	employees	and	contractors.	These	programs	could	require a	substantial	investment	from	the	Company,	while	providing	no	assurance	of	return	or	incremental	revenue	to	offset	this	investment.

Over	the	past	several	years,	an	increasing	proportion	of	the	Company's	net	sales	has	been	made	by	the	Company	directly	to	end-users	through	its	online	stores	around the	world	and	through	its	retail	stores	in	the	U.S.,	Canada,	Japan,	and	the	U.K.	Some	of	the	Company's	resellers	have	perceived	this	expansion	of	the	Company's	direct sales	as	conflicting	with	their	own	businesses	and	economic	interests	as	distributors	and	resellers	of	the	Company's	products.	Perception	of	such	a	conflict	could discourage	the	Company's	resellers	from	investing	additional	resources	in	the	distribution	and	sale	of	the	Company's	products	or	lead	them	to	limit	or	cease	distribution of	the	Company's	products.	The	Company's	business	and	financial	results	could	be	adversely	affected	if	expansion	of	its	direct	sales	to	end-users	causes	some	or	all	of its	resellers	to	cease	or	limit	distribution	of	the	Company's	products.

Further	information	regarding	risks	associated	with	Marketing	and	Distribution	may	be	found	in	Part	I,	Item	1	of	this	Form	10-K	under	the	heading	"Markets	and Distribution."

The	Company	relies	on	third-party	digital	content,	which	may	not	be	available	to	the	Company	on	commercially	reasonable	terms	or	at	all.

The	Company	contracts	with	third	parties	to	offer	their	digital	content	to	customers	through	the	Company's	iTunes	Music	Store.	The	Company	pays	substantial	fees	to obtain	the	rights	to	offer	to	its	customers	this	third-party	digital	content.	The	Company's	licensing	arrangements	with	these	third-party	content	providers	are	short-term in	nature	and	do	not	guarantee	the	future	renewal	of	these	arrangements	at	commercially	reasonable	terms,	if	at	all.	Certain	parties	in	the	music	industry	have consolidated	and	formed	alliances,	which	could	limit	the	availability	and	increase	the	fees	required	to	offer	digital	content	to	customers	through	the	iTunes	Music	Store. Further,	some	third-party	content	providers	currently,	or	may	in	the	future,	offer	music	products	and	services	that	compete	with	the	Company's	music	products	and services,	and	could	take	action	to	make	it	more	difficult	or	impossible	for	the	Company	to	license	their	digital	content	in	the	future.	If	the	Company	is	unable	to	continue to	offer	a	wide	variety	of	digital	content	at	reasonable	prices	with	acceptable	usage	rules,	or	continue	to	expand	its	geographic	reach	outside	the	U.S.,	then	sales	and gross	margins	of	the	Company's	iTunes	Music	Store	as	well	as	related	hardware	and	peripherals,	including	iPods,	may	be	adversely	affected.

Third-party	content	providers	and	artists	require	that	the	Company	provide	certain	digital	rights	management	solutions	and	other	security	mechanisms.	If	the requirements	from	content	providers	or	artists	change,	then	the	Company	may	be	required	to	further	develop	or	license	technology	to	address	such	new	rights	and requirements.	There	is	no	assurance	that	the	Company	will	be	able	to	develop	or	license

such	solutions	at	a	reasonable	cost	and	in	a	timely	manner,	if	at	all,	which	could	have	a	materially	adverse	effect	on	the	Company's	operating	results	and	financial position.

The	Company's	future	performance	is	dependent	upon	support	from	third-party	software	developers.	If	third-party	software	applications	cease	to	be	developed	or available	for	the	Company's	hardware	products,	then	customers	may	choose	not	to	buy	the	Company's	products.

The	Company	believes	that	decisions	by	customers	to	purchase	the	Company's	personal	computers,	as	opposed	to	Windows-based	systems,	are	often	based	on	the availability	of	third-party	software	for	particular	applications	such	as	Microsoft	Office.	The	Company	also	believes	the	availability	of	third-party	application	software	for the	Company's	hardware	products	depends	in	part	on	third-party	developers'	perception	and	analysis	of	the	relative	benefits	of	developing,	maintaining,	and	upgrading such	software	for	the	Company's	products	versus	software	for	the	larger	Windows	market	or	growing	Linux	market.	This	analysis	may	be	based	on	factors	such	as	the perceived	strength	of	the	Company	and	its	products,	the	anticipated	potential	revenue	that	may	be	generated,	continued	acceptance	by	customers	of	Mac	OS	X,	and	the costs	of	developing	such	software	products.	To	the	extent	the	minority	market	share	held	by	the	Company	in	the	personal	computer	market	has	caused	software developers	to	question	the	Company's	prospects	in	the	personal	computer	market,	developers	could	be	less	inclined	to	develop	new	application	software	or	upgrade existing	software	for	the	Company's	products	and	more	inclined	to	devote	their	resources	to	developing	and	upgrading	software	for	the	larger	Windows	market	or growing	Linux	market.	Moreover,	there	can	be	no	assurance	software	developers	will	continue	to	develop	software	for	Mac	OS	X,	the	Company's	operating	system,	on	a timely	basis	or	at	all.

In	June	2005,	the	Company	announced	its	plan	to	begin	using	Intel	microprocessors	in	its	Macintosh	computers.	The	Company	plans	to	begin	shipping	certain	models with	Intel	microprocessors	by	June	2006	and	to	complete	this	transition	to	Intel	microprocessors	for	all	of	its	Macintosh	computers	by	the	end	of	calendar	year	2007.	The Company	depends	on	third-party	software	developers	to	timely	develop	current	and	future	applications	that	run	on	Intel	and	PowerPC	microprocessors.	The	Company's inability	to	timely	deliver	new	Intel-based	products,	or	a	decline	in	available	applications	that	run	on	the	Company's	PowerPC	products	or	the	lack	of	applications	that run	on	Intel-based	Macintosh	systems	could	have	a	materially	adverse	effect	on	the	Company's	operating	results	and	financial	position.

In	addition,	past	and	future	development	by	the	Company	of	its	own	software	applications	and	solutions	may	negatively	impact	the	decision	of	software	developers, such	as	Microsoft	and	Adobe,	to	develop,	maintain,	and	upgrade	similar	or	competitive	software	for	the	Company's	products.	The	Company	currently	markets	and	sells	a variety	of	software	applications	for	use	by	professionals,	consumers,	and	education	customers	that	could	influence	the	decisions	of	third-party	software	developers	to develop	or	upgrade	Macintosh-compatible	software	products.	Software	applications	currently	marketed	by	the	Company	include	software	for	professional	film	and	video editing,	professional	compositing	and	visual	effects	for	large	format	film	and	video	productions,	professional	music	production	and	music	post	production,	professional and	consumer	DVD	encoding	and	authoring,	professional	digital	photo	editing	and	workflow	management,	consumer	digital	video	and	digital	photo	editing	and management,	digital	music	management,	desktop-based	database	management,	word	processing,	and	high-quality	presentations.	The	Company	also	markets	an integrated	productivity	application	that	incorporates	word	processing,	page	layout,	image	manipulation,	spreadsheets,	databases,	and	presentations	in	a	single application.	Discontinuance	of	third-party	products	for	the	Macintosh	platform,	including	Microsoft	Office	could	have	an	adverse	effect	on	the	Company's	net	sales	and results	of	operations.

The	Company's	business	relies	on	access	to	patents	and	intellectual	property	obtained	from	third	parties,	and	the	Company's	future	results	could	be	adversely	affected	if it	is	alleged	or	found	to	have	infringed	on	the	intellectual	property	rights	of	others.

Many	of	the	Company's	products	are	designed	to	include	intellectual	property	obtained	from	third	parties.	While	it	may	be	necessary	in	the	future	to	seek	or	renew licenses	relating	to	various	aspects	of	its	products	and	business	methods,	the	Company	believes	that	based	upon	past	experience	and	industry	practice,	such	licenses generally	could	be	obtained	on	commercially	reasonable	terms.	However,	there	can	be	no	assurance	that	the	necessary	licenses	would	be	available	or	available	on acceptable	terms.

Because	of	technological	changes	in	the	computer	and	consumer	electronics	industries,	current	extensive	patent	coverage,	and	the	rapid	rate	of	issuance	of	new	patents,	it is	possible	certain	components	of	the	Company's	products	and	business	methods	may	unknowingly	infringe	existing	patents	of	others.	The	Company	has	from	time	to time	been	notified	that	it	may	be	infringing	certain	patents	or	other	intellectual	property	rights	of	others.	Responding	to	such	claims,	regardless	of	their	merit,	can	be time-consuming,	result	in	significant	expenses,	and	cause	the	diversion	of	management	and	technical	personnel.	Several	pending	claims	are	in	various	stages	of evaluation.	The	Company	may	consider	the	desirability	of	entering	into	licensing	agreements	in	certain	of	these	cases.	However,	no	assurance	can	be	given	that	such licenses	can	be	obtained	on	acceptable	terms	or	that	litigation	will	not	occur.	In	the	event	there	is	a	temporary	or	permanent	injunction	entered	prohibiting	the	Company from	marketing	or	selling	certain	of	its	products	or	a	successful	claim	of	infringement	against	the	Company	requiring	it	to	pay	royalties	to	a	third-party,	the	Company's future	operating	results	and	financial	condition	could	be	adversely	affected.	Information	regarding	certain	claims	and	litigation	involving	the	Company	related	to	alleged patent	infringement	and	other	matters	is	set	forth	in	Part	I,	Item	3	of	this	Form	10-K.	In	the	opinion	of	management,	the	Company	does	not	have	a	potential	liability	for damages	or	royalties	from	any	current	legal	proceedings	or	claims	related	to	the	infringement	of	patent	or	other	intellectual	property	rights	of	others	that	would individually	or	in	the	aggregate	have	a	material	adverse	effect	on	its	results	of	operations,	or	financial	condition.	However,	the	results	of	such	legal	proceedings	cannot be	predicted	with	certainty.	Should	the	Company	fail	to	prevail	in	any	of	the	matters	related	to	infringement	of	patent	or	other	intellectual	property	rights	of	others described	in	Part	I,	Item	3	of	this	Form	10-K	or	should	several	of	these	matters	be	resolved	against	the	Company	in	the	same	reporting	period,	the	operating	results	of	a particular	reporting	period	could	be	materially	adversely	affected.

The	Company's	retail	initiative	has	required	and	will	continue	to	require	a	substantial	investment	and	commitment	of	resources	and	is	subject	to	numerous	risks	and uncertainties.

Through	October	2005,	the	Company	had	opened	126	retail	stores.	The	Company's	retail	initiative	has	required	substantial	investment	in	equipment	and	leasehold improvements,	information	systems,	inventory,	and	personnel.	The	Company	has	also	entered	into	substantial	operating	lease	commitments	for	retail	space	with	lease terms	ranging	from	5	to	20	years,	the	majority	of	which	are	for	10	years.	The	Company	could	incur	substantial	costs	should	it	choose	to	terminate	this	initiative	or	close individual	stores.	Such	costs	could	adversely	affect	the	Company's	results	of	operations	and	financial	condition.	Additionally,	a	relatively	high	proportion	of	the	Retail segment's	costs	are	fixed	because	of	depreciation	on	store	construction	costs	and	lease	expense.	As	a	result,	significant	losses	would	result	should	the	Retail	segment experience	a	significant	decline	in	sales	for	any	reason.

Certain	of	the	Company's	stores	have	been	designed	and	built	to	serve	as	high	profile	venues	that	function	as	vehicles	for	general	corporate	marketing,	corporate	events, and	brand	awareness.	Because	of	their	unique	design	elements,	locations	and	size,	these	stores	require	substantially	more	investment	in	equipment	and	leasehold improvements	than	the	Company's	more	typical	retail	stores.	The	Company	has	opened	seven	such	stores	through	October	2005.	Because	of	their	location	and	size, these	high	profile	stores	also	require	the	Company	to	enter	into	substantially	larger	operating	lease	commitments	compared	to	those	required	for	its	more	typical	stores. Current	leases	on	such	locations	have	terms	ranging	from	10	to	14	years	with	total

remaining	commitments	per	location	ranging	from	$4	million	to	$46	million.	Closure	or	poor	performance	of	one	of	these	high	profile	stores	could	have	a	particularly significant	negative	impact	on	the	Company's	results	of	operations	and	financial	condition.

Many	of	the	general	risks	and	uncertainties	the	Company	faces	could	also	have	an	adverse	impact	on	its	Retail	segment.	Also,	many	factors	unique	to	retail	operations present	risks	and	uncertainties,	some	of	which	are	beyond	the	Company's	control,	that	could	adversely	affect	the	Retail	segment's	future	results,	cause	its	actual	results to	differ	from	those	currently	expected,	and/or	have	an	adverse	effect	on	the	Company's	consolidated	results	of	operations.	Potential	risks	and	uncertainties	unique	to retail	operations	that	could	have	an	adverse	impact	on	the	Retail	segment	include,	among	other	things,	macro-economic	factors	that	have	a	negative	impact	on	general retail	activity;	inability	to	manage	costs	associated	with	store	construction	and	operation;	failure	to	attract	new	users	to	the	Macintosh	platform;	inability	to	sell	third- party	hardware	and	software	products	at	adequate	margins;	failure	to	manage	relationships	with	existing	retail	channel	partners;	lack	of	experience	in	managing	retail operations	outside	the	U.S.;	costs	associated	with	unanticipated	fluctuations	in	the	value	of	Apple-branded	and	third-party	retail	inventory;	and	inability	to	obtain	quality retail	locations	at	reasonable	cost.

Investment	in	new	business	strategies	and	initiatives	could	disrupt	the	Company's	ongoing	business	and	may	present	risks	not	originally	contemplated.

The	Company	has	and	may	in	the	future	invest	in	new	business	strategies	or	engage	in	acquisitions	that	complement	the	Company's	strategic	direction	and	product roadmap.	Such	endeavors	may	involve	significant	risks	and	uncertainties,	including	distraction	of	management's	attention	away	from	normal	business	operations; insufficient	revenue	generation	to	offset	liabilities	assumed	and	expenses	associated	with	the	strategy;	and	unidentified	issues	not	discovered	in	the	Company's	due diligence	process.	Because	these	new	ventures	are	inherently	risky,	no	assurance	can	be	given	that	such	strategies	and	initiatives	will	be	successful	and	will	not materially	adversely	affect	the	Company's	business,	operating	results	or	financial	condition.

Declines	in	the	sales	of	the	Company's	professional	products,	software,	accessories,	or	service	and	support	contracts,	or	increases	in	sales	of	consumer	products, including	iPods,	may	negatively	impact	the	Company's	gross	margin	and	operating	margin	percentages.

The	Company's	professional	products,	including	Power	Macintosh	and	PowerBook	systems,	software,	accessories,	and	service	and	support	contracts,	generally	have higher	gross	margins	than	the	Company's	consumer	products,	including	iMacs,	iBooks,	iPods,	and	content	from	the	iTunes	Music	Store.	A	shift	in	sales	mix	away	from higher	margin	professional	products	towards	lower	margin	consumer	products	could	adversely	affect	the	Company's	future	gross	margin	and	operating	margin percentages.	The	Company's	traditional	professional	customers	may	choose	to	buy	consumer	products,	specifically	the	iMac	G5	and	iBook,	instead	of	professional products.	Professional	users	may	choose	to	buy	the	iMac	G5	due	to	its	relative	price	performance,	use	of	the	same	PowerPC	G5	processor	used	in	the	Company's	Power Macs,	and	unique	design	featuring	a	flat	panel	screen.	Potential	PowerBook	customers	may	also	choose	to	purchase	iBooks	instead	due	to	their	price	performance	and screen	size.	Additionally,	significant	future	growth	in	iPod	sales	without	corresponding	growth	in	higher	margin	product	sales	could	also	reduce	gross	margin	and operating	margin	percentages.

It	is	likely	that	some	of	the	Company's	current	and	potential	professional,	creative,	and	small	business	customers,	who	are	most	likely	to	utilize	professional	systems, believe	that	the	relatively	slower	MHz	rating	or	clock	speed	of	the	microprocessors	the	Company	utilizes	in	its	Macintosh	systems	compares	unfavorably	to	those utilized	by	other	computer	manufacturers	and	translates	to	slower	overall	system	performance.	These	factors	may	result	in	an	adverse	impact	to	sales	of	the	Company's professional	products	as	well	as	to	gross	margin	and	operating	margin	percentages.

The	Company	expects	its	quarterly	revenue	and	operating	results	to	fluctuate	for	a	variety	of	reasons.

The	Company's	profit	margins	vary	among	its	products	and	its	distribution	channels.	The	Company's	direct	sales,	primarily	through	its	retail	and	online	stores, generally	have	higher	associated	profitability	than	its	indirect	sales.	Additionally,	the	Company's	direct	channels	have	traditionally	had	more	sales	of	software	and higher	priced	hardware	products,	which	generally	have	higher	gross	margins,	than	its	indirect	channels.	As	a	result,	the	Company's	gross	margin	and	operating	margin percentages	as	well	as	overall	profitability	may	be	adversely	impacted	as	a	result	of	a	shift	in	product,	geographic,	or	channel	mix,	or	new	product	announcements, including	the	transition	to	Intel-based	Macintosh	computers.	In	addition,	the	Company	generally	sells	more	products	during	the	third	month	of	each	quarter	than	it	does during	either	of	the	first	two	months,	a	pattern	typical	in	the	personal	computer	industry.	This	sales	pattern	can	produce	pressure	on	the	Company's	internal	infrastructure

during	the	third	month	of	a	quarter	and	may	adversely	impact	the	Company's	ability	to	predict	its	financial	results	accurately.	Developments	late	in	a	quarter,	such	as lower-than-anticipated	demand	for	the	Company's	products,	an	internal	systems	failure,	or	failure	of	one	of	the	Company's	key	logistics,	components	suppliers,	or manufacturing	partners,	can	have	significant	adverse	impacts	on	the	Company	and	its	results	of	operations	and	financial	condition.

The	Company	has	higher	research	and	development	and	selling,	general	and	administrative	costs,	as	a	percentage	of	revenue,	than	many	of	its	competitors.

The	Company's	ability	to	compete	successfully	and	maintain	attractive	gross	margins	and	revenue	growth	is	heavily	dependent	upon	its	ability	to	ensure	a	continuing and	timely	flow	of	innovative	and	competitive	products	and	technologies	to	the	marketplace.	As	a	result,	the	Company	incurs	higher	research	and	development	costs	as	a percentage	of	revenue	than	its	competitors	who	sell	personal	computers	based	on	other	operating	systems.	Many	of	these	competitors	seek	to	compete	aggressively	on price	and	maintain	very	low	cost	structures.	Further,	as	a	result	of	the	expansion	of	the	Company's	Retail	segment	and	costs	associated	with	marketing	the	Company's brand	including	its	unique	operating	system,	the	Company	incurs	higher	selling	costs	as	a	percentage	of	revenue	than	many	of	its	competitors.	If	the	Company	is	unable to	continue	to	develop	and	sell	innovative	new	products	with	attractive	gross	margins,	its	results	of	operations	may	be	materially	adversely	affected	by	its	operating	cost structure.

The	Company	is	exposed	to	credit	risk	on	its	accounts	receivable	and	prepayments	related	to	long-term	supply	agreements.	This	risk	is	heightened	during	periods	when economic	conditions	worsen.

The	Company	distributes	its	products	through	third-party	computer	resellers	and	retailers	and	directly	to	certain	educational	institutions	and	commercial	customers.	A substantial	majority	of	the	Company's	outstanding	trade	receivables	are	not	covered	by	collateral	or	credit	insurance.	The	Company	also	has	unsecured	non-trade receivables	from	certain	of	its	manufacturing	vendors	resulting	from	the	sale	by	the	Company	of	raw	material	components	to	these	manufacturing	vendors	who manufacture	sub-assemblies	or	assemble	final	products	for	the	Company.	In	addition,	the	Company	has	entered	into	long-term	supply	agreements	to	secure	supply	of NAND	flash-memory	and	intends	to	prepay	a	total	of	$1.25	billion	under	these	agreements.	While	the	Company	has	procedures	in	place	to	monitor	and	limit	exposure	to credit	risk	on	its	trade	and	non-trade	receivables	as	well	as	long-term	prepayments,	there	can	be	no	assurance	that	such	procedures	will	be	effective	in	limiting	its	credit risk	and	avoiding	losses.	Additionally,	if	the	global	economy	and	regional	economies	fail	to	improve	or	continue	to	deteriorate,	it	becomes	more	likely	that	the	Company will	incur	a	material	loss	or	losses	as	a	result	of	the	weakening	financial	condition	of	one	or	more	of	its	customers	or	manufacturing	vendors.

# The	Company's	success	depends	largely	on	its	ability	to	attract	and	retain	key	personnel.

Much	of	the	future	success	of	the	Company	depends	on	the	continued	service	and	availability	of	skilled	personnel,	including	its	Chief	Executive	Officer,	members	of	its executive	team,	and	those	in	technical,	marketing	and	staff	positions.	Experienced	personnel	in	the	information	technology	industry	are	in	high	demand	and	competition for	their	talents	is	intense,	especially	in	the	Silicon	Valley,	where	the	majority	of

the	Company's	key	employees	are	located.	The	Company	has	relied	on	its	ability	to	grant	stock	options	as	one	mechanism	for	recruiting	and	retaining	this	highly	skilled talent.	Recent	accounting	regulations	requiring	the	expensing	of	stock	options	will	impair	the	Company's	future	ability	to	provide	these	incentives	without	incurring significant	compensation	costs.	There	can	be	no	assurance	that	the	Company	will	continue	to	successfully	attract	and	retain	key	personnel.

# The	Company	is	subject	to	risks	associated	with	the	selection,	availability,	and	cost	of	insurance.

The	Company	has	observed	rapidly	changing	conditions	in	the	insurance	markets	relating	to	nearly	all	areas	of	traditional	commercial	insurance.	Such	conditions	have and	may	continue	to	result	in	higher	premium	costs,	higher	policy	deductibles,	lower	coverage	limits	and	may	also	yield	possible	policy	form	exclusions.	For	some	risks, because	of	cost	and/or	availability,	the	Company	does	not	have	insurance	coverage.	Because	the	Company	retains	some	portion	of	its	insurable	risks,	and	in	some	cases self	insures	completely,	unforeseen	or	catastrophic	losses	in	excess	of	insured	limits	may	have	a	material	adverse	effect	on	the	Company's	results	of	operations	and financial	position.

Failure	of	information	technology	systems	and	breaches	in	the	security	of	data	upon	which	the	Company	relies	could	adversely	affect	the	Company's	future	operating results.

Information	technology	system	failures	and	breaches	of	data	security	could	disrupt	the	Company's	ability	to	function	in	the	normal	course	of	business	by	potentially causing	delays	or	cancellation	of	customer	orders,	impeding	the	manufacture	or	shipment	of	products,	or	resulting	in	the	unintentional	disclosure	of	customer	or Company	information.	Management	has	taken	steps	to	address	these	concerns	for	its	own	systems	by	implementing	sophisticated	network	security	and	internal	control measures.	However,	there	can	be	no	assurance	that	a	system	failure	or	data	security	breach	of	the	Company	or	a	third-party	vendor	will	not	have	a	material	adverse effect	on	the	Company's	results	of	operations.

# The	Company's	business	is	subject	to	the	risks	of	international	operations.

A	large	portion	of	the	Company's	revenue	is	derived	from	its	international	operations.	As	a	result,	the	Company's	operating	results	and	financial	condition	could	be significantly	affected	by	risks	associated	with	international	activities,	including	economic	and	labor	conditions,	political	instability,	tax	laws	(including	U.S.	taxes	on foreign	subsidiaries),	and	changes	in	the	value	of	the	U.S.	dollar	versus	the	local	currency	in	which	the	products	are	sold	and	goods	and	services	are	purchased.	The Company's	primary	exposure	to	movements	in	foreign	currency	exchange	rates	relate	to	non-dollar	denominated	sales	in	Europe,	Japan,	Australia,	Canada,	and	certain parts	of	Asia	and	non-dollar	denominated	operating	expenses	incurred	throughout	the	world.	Weaknesses	in	foreign	currencies,	particularly	the	Japanese	Yen	and	the Euro,	can	adversely	impact	consumer	demand	for	the	Company's	products	and	the	U.S.	dollar	value	of	the	Company's	foreign	currency	denominated	sales.	Conversely, a	strengthening	in	these	and	other	foreign	currencies	can	cause	the	Company	to	modify	international	pricing	and	affect	the	value	of	the	Company's	foreign	denominated sales,	and	in	some	cases,	may	also	increase	the	cost	to	the	Company	of	some	product	components.

Margins	on	sales	of	the	Company's	products	in	foreign	countries,	and	on	sales	of	products	that	include	components	obtained	from	foreign	suppliers,	can	be	adversely affected	by	foreign	currency	exchange	rate	fluctuations	and	by	international	trade	regulations,	including	tariffs	and	antidumping	penalties.

Derivative	instruments,	such	as	foreign	exchange	forward	and	option	positions	have	been	utilized	by	the	Company	to	hedge	exposures	to	fluctuations	in	foreign	currency exchange	rates.	The	use	of	such	hedging	activities	may	not	offset	more	than	a	portion	of	the	adverse	financial	impact	resulting	from	unfavorable	movements	in	foreign exchange	rates.

Further	information	related	to	the	Company's	global	market	risks	may	be	found	in	Part	II,	Item	7A	of	this	Form	10-K	under	the	subheading	"Foreign	Currency	Risk" and	may	be	found	in	Part	II,	Item	8	of	this	Form	10-K	at	Notes	1	and	2	of	Notes	to	Consolidated	Financial	Statements.

The	Company	is	subject	to	risks	associated	with	environmental	regulations.

Production	and	marketing	of	products	in	certain	states	and	countries	may	subject	the	Company	to	environmental	and	other	regulations	including,	in	some	instances,	the requirement	to	provide	customers	the	ability	to	return	product	at	the	end	of	its	useful	life,	and	place	responsibility	for	environmentally	safe	disposal	or	recycling	with	the Company.	Such	laws	and	regulations	have	recently	been	passed	in	several	jurisdictions	in	which	the	Company	operates,	including	various	European	Union	member countries,	Japan,	and	certain	states	within	the	U.S.	In	the	future,	these	laws	could	have	a	material	adverse	effect	on	the	Company's	results	of	operations.

Changes	in	accounting	rules	could	affect	the	Company's	future	operating	results.

Financial	statements	are	prepared	in	accordance	with	U.S.	generally	accepted	accounting	principles.	These	principles	are	subject	to	interpretation	by	various	governing

bodies,	including	the	FASB	and	the	SEC,	who	create	and	interpret	appropriate	accounting	standards.	A	change	from	current	accounting	standards	could	have	a significant	effect	on	the	Company's	results	of	operations.	In	December	2004,	the	FASB	issued	new	guidance	that	addresses	the	accounting	for	share-based	payments, SFAS	No.	123R.	In	April	2005,	the	SEC	deferred	the	effective	date	of	SFAS	No.	123R	to	years	beginning	after	June	15,	2005.	Therefore,	SFAS	No.	123R	will	be effective	for	the	Company	beginning	in	its	first	quarter	of	fiscal	2006.	The	Company	expects	the	adoption	of	SFAS	No.	123R	will	result	in	a	reduction	of	diluted	earnings per	common	share	of	approximately	$0.03	for	the	first	quarter	of	fiscal	2006.	Although	the	effect	from	the	adoption	of	SFAS	No.	123R	is	expected	to	have	a	material impact	on	the	Company's	results	of	operations,	future	changes	to	various	assumptions	used	to	determine	the	fair-value	of	awards	issued	or	the	amount	and	type	of	equity awards	granted	create	uncertainty	as	to	the	amount	of	future	stock-based	compensation	expense.

# Changes	in	the	Company's	tax	rates	could	affect	its	future	results.

The	Company's	future	effective	tax	rates	could	be	favorably	or	unfavorably	affected	by	changes	in	the	mix	of	earnings	in	countries	with	differing	statutory	tax	rates, changes	in	the	valuation	of	the	Company's	deferred	tax	assets	and	liabilities,	or	by	changes	in	tax	laws	or	their	interpretation.	In	addition,	the	Company	is	subject	to	the continuous	examination	of	its	income	tax	returns	by	the	Internal	Revenue	Service	and	other	tax	authorities.	The	Company	regularly	assesses	the	likelihood	of	adverse outcomes	resulting	from	these	examinations	to	determine	the	adequacy	of	its	provision	for	income	taxes.	There	can	be	no	assurance	that	the	outcomes	from	these continuous	examinations	will	not	have	an	adverse	affect	on	the	Company's	net	income	and	financial	condition.

# The	Company's	stock	price	may	be	volatile.

The	Company's	stock	has	at	times	experienced	substantial	price	volatility	as	a	result	of	variations	between	its	actual	and	anticipated	financial	results	and	as	a	result	of announcements	by	the	Company	and	its	competitors.	The	stock	market	has	experienced	extreme	price	and	volume	fluctuations	that	have	affected	the	market	price	of many	technology	companies	in	ways	that	may	have	been	unrelated	to	the	operating	performance	of	these	companies.	These	factors,	including	lack	of	positive	general economic	and	political	conditions	and	investors'	concerns	regarding	the	credibility	of	corporate	financial	reporting	and	integrity	of	financial	markets,	may	materially adversely	affect	the	market	price	of	the	Company's	stock	in	the	future.	In	addition,	increases	in	the	Company's	stock	price	may	result	in	greater	dilution	of	earnings	per share.

# Item	7A.	Quantitative	and	Qualitative	Disclosures	About	Market	Risk

# Interest	Rate	and	Foreign	Currency	Risk	Management

The	Company	regularly	reviews	its	foreign	exchange	forward	and	option	positions	and	its	interest	rate	swap	and	option	positions,	both	on	a	stand-alone	basis	and	in conjunction	with	its	underlying	foreign	currency	and	interest	rate	related	exposures.	However,	given	the	effective	horizons	of	the	Company's	risk	management	activities and	the	anticipatory	nature	of	the	exposures,	there	can	be	no	assurance	the	hedges	will	offset	more	than	a	portion	of	the	financial	impact	resulting	from	movements	in either	foreign	exchange	or	interest	rates.	In	addition,	the	timing	of	the	accounting	for	recognition	of	gains	and	losses	related	to	mark-to-market	instruments	for	any	given period	may	not	coincide	with	the	timing	of	gains	and	losses	related	to	the	underlying	economic	exposures	and,	therefore,	may	adversely	affect	the	Company's	operating results	and	financial	position.

# Interest	Rate	Risk

While	the	Company	is	exposed	to	interest	rate	fluctuations	in	many	of	the	world's	leading	industrialized	countries,	the	Company's	interest	income	and	expense	is	most sensitive	to	fluctuations	in	the	general	level	of	U.S.	interest	rates.	In	this	regard,	changes	in	U.S.	interest	rates	affect	the	interest	earned	on	the	Company's	cash,	cash equivalents,	and	short-term	investments	as	well	as	costs	associated	with	foreign	currency	hedges.

The	Company's	short-term	investment	policy	and	strategy	is	to	ensure	the	preservation	of	capital,	meet	liquidity	requirements,	and	optimize	return	in	light	of	the	current credit	and	interest	rate	environment.	The	Company	benchmarks	its	performance	by	utilizing	external	money	managers	to	manage	a	small	portion	of	the	aggregate investment	portfolio.	The	external	managers	adhere	to	the	Company's	investment	policies	and	also	provide	occasional	research	and	market	information	that	supplements internal	research	used	to	make	credit	decisions	in	the	investment	process.

The	Company's	exposure	to	market	risk	for	changes	in	interest	rates	relates	primarily	to	the	Company's	investment	portfolio.	The	Company	places	its	short-term investments	in	highly	liquid	securities	issued	by	high	credit	quality	issuers	and,	by	policy,	limits	the	amount	of	credit	exposure	to	any	one	issuer.	The	Company's	general policy	is	to	limit	the	risk	of	principal	loss	and	ensure	the	safety	of	invested	funds	by	limiting	market	and	credit	risk.	All	highly	liquid	investments	with	maturities	of	three months	or	less	are	classified	as	cash	equivalents;	highly	liquid	investments	with	maturities	greater	than	three	months	are	classified	as	short-term	investments.	As	of September	24,	2005,	approximately	$287	million	of	the	Company's	short-term	investments	had	underlying	maturities	ranging	from	1	to	5	years.	As	of	September	25, 2004,	$180	million	of	the	Company's	investment	portfolio	classified	as	short-term	investments	had	maturities	ranging	from	1	to	5	years.	The	remainder	all	had underlying	maturities	between	3	and	12	months.	The	Company	may	sell	its	investments	prior	to	their	stated	maturities,	due	to	liquidity	needs,	in	anticipation	of	credit deterioration,	or	for	duration	management.	The	Company	recognized	a	net	loss	before	taxes	of	$137,000	in	2005,	and	net	gains	before	taxes	of	$1	million	and	$21 million	in	2004,	and	2003,	respectively	as	a	result	of	such	sales.

In	order	to	provide	a	meaningful	assessment	of	the	interest	rate	risk	associated	with	the	Company's	investment	portfolio,	the	Company	performed	a	sensitivity	analysis to	determine	the	impact	that	a	change	in	interest	rates	would	have	on	the	value	of	the	investment	portfolio	assuming	a	100	basis	point	parallel	shift	in	the	yield	curve. Based	on	investment	positions	as	of	September	24,	2005,	a	hypothetical	100	basis	point	increase	in	interest	rates	across	all	maturities	would	result	in	a	$19.9	million decline	in	the	fair	market	value	of	the	portfolio.	As	of	September	25,	2004,	a	similar	100	basis	point	shift	in	the	yield	curve	would	have	resulted	in	a	$14.4	million decline	in	fair	value.	Such	losses	would	only	be	realized	if	the	Company	sold	the	investments	prior	to	maturity.	Except	in	instances	noted	above,	the	Company's	policy is	to	hold	investments	to	maturity.

From	time	to	time,	the	Company	has	entered	into	interest	rate	derivative	transactions	with	financial	institutions	in	order	to	better	match	the	Company's	floating-rate interest	income	on	its	cash	equivalents	and	short-term	investments	with	its	fixed-rate	interest	expense	on	its	debt,	and/or	to	diversify	a	portion	of	the	Company's exposure	away	from	fluctuations	in	short-term	U.S.	interest	rates.	The	Company	did	not	enter	into	any	interest	rate	derivatives	during	2005	or	2004	and	had	no	open interest	rate	derivatives	at	September	24,	2005.

# Foreign	Currency	Risk

In	general,	the	Company	is	a	net	receiver	of	currencies	other	than	the	U.S.	dollar.	Accordingly,	changes	in	exchange	rates,	and	in	particular	a	strengthening	of	the	U.S. dollar,	may	negatively	affect	the	Company's	net	sales	and	gross	margins	as	expressed	in	U.S.	dollars.	There	is	also	a	risk	that	the	Company	will	have	to	adjust	local currency	product	pricing	due	to	competitive	pressures	when	there	has	been	significant	volatility	in	foreign	currency	exchange	rates.

The	Company	may	enter	into	foreign	currency	forward	and	option	contracts	with	financial	institutions	to	protect	against	foreign	exchange	risks	associated	with	existing assets	and	liabilities,	certain	firmly	committed	transactions,	forecasted	future	cash	flows,	and	net	investments	in	foreign	subsidiaries.	Generally,	the	Company's	practice is	to	hedge	a	majority	of	its	existing	material	foreign	exchange	transaction	exposures.	However,	the	Company	may	not	hedge	certain	foreign	exchange	transaction exposures	due	to	immateriality,	prohibitive	economic	cost	of	hedging	particular	exposures,	and	limited	availability	of	appropriate	hedging	instruments.

In	order	to	provide	a	meaningful	assessment	of	the	foreign	currency	risk	associated	with	certain	of	the	Company's	foreign	currency	derivative	positions,	the	Company performed	a	sensitivity	analysis	using	a	value-at-risk	(VAR)	model	to	assess	the	potential	impact	of	fluctuations	in	exchange	rates.	The	VAR	model	consisted	of	using	a Monte	Carlo	simulation	to	generate	3000	random	market	price	paths.	The	VAR	is	the	maximum	expected	loss	in	fair	value,	for	a	given	confidence	interval,	to	the

Company's	foreign	exchange	portfolio	due	to	adverse	movements	in	rates.	The	VAR	model	is	not	intended	to	represent	actual	losses	but	is	used	as	a	risk	estimation	and management	tool.	The	model	assumes	normal	market	conditions.	Forecasted	transactions,	firm	commitments,	and	assets	and	liabilities	denominated	in	foreign currencies	were	excluded	from	the	model.	Based	on	the	results	of	the	model,	the	Company	estimates	with	95%	confidence	a	maximum	one-day	loss	in	fair	value	of	$10.0 million	as	of	September	24,	2005	compared	to	a	maximum	one-day	loss	of	$3.2	million	as	of	September	25,	2004.	Because	the	Company	uses	foreign	currency instruments	for	hedging	purposes,	losses	incurred	on	those	instruments	are	generally	offset	by	increases	in	the	fair	value	of	the	underlying	exposures.

Actual	future	gains	and	losses	associated	with	the	Company's	investment	portfolio	and	derivative	positions	may	differ	materially	from	the	sensitivity	analyses	performed as	of	September	24,	2005	due	to	the	inherent	limitations	associated	with	predicting	the	changes	in	the	timing	and	amount	of	interest	rates,	foreign	currency	exchanges rates,	and	the	Company's	actual	exposures	and	positions.

# Item	8.	Financial	Statements	and	Supplementary	Data

| Consolidated	Balance	Sheets	as	of	September	24,	2005	and	September	25,	2004 | 60 |
| :--- | :--- |
| Consolidated\tStatements\tof\tOperations\tfor\tthe\tthree\tfiscal\tyears\tended\tSeptember\t24,\t2005 | 61 |
| Consolidated\tStatements\tof\tShareholders'\tEquity\tfor\tthe\tthree\tfiscal\tyears\tended\tSeptember\t24,\t2005 | 62 |
| Consolidated\tStatements\tof\tCash\tFlows\tfor\tthe\tthree\tfiscal\tyears\tended\tSeptember\t24,\t2005 | 63 |
| Notes\tto\tConsolidated\tFinancial\tStatements | 64 |
| Selected\tQuarterly\tFinancial\tInformation\t(Unaudited) | 97 |
| Reports\tof\tIndependent\tRegistered\tPublic\tAccounting\tFirm,\tKPMG\tLLP | 98 |

All	financial	statement	schedules	have	been	omitted,	since	the	required	information	is	not	applicable	or	is	not	present	in	amounts	sufficient	to	require	submission	of	the schedule,	or	because	the	information	required	is	included	in	the	Consolidated	Financial	Statements	and	Notes	thereto.

# CONSOLIDATED	BALANCE	SHEETS

# (In	millions,	except	share	amounts)

| ASSETS: | September	24,	2005 | September	25,	2004 |
| :--- | :--- | :--- |
| Current\tassets: |  |  |
| Cash\tand\tcash\tequivalents | $3,491 | $ 2,969 |
| Short-term\tinvestments | 4,770 | 2,495 |
| Accounts\treceivable,\tless\tallowances\tof\t$46\tand\t$47,\trespectively | 895 | 774 |
| Inventories | 165 | 101 |
| Deferred\ttax\tassets | 331 | 231 |
| Other\tcurrent\tassets | 648 | 485 |
| Total\tcurrent\tassets | 10,300 | 7,055 |
| Property,\tplant,\tand\tequipment,\tnet | 817 | 707 |
| Goodwill | 69 | 80 |
| Acquired\tintangible\tassets,\tnet | 27 | 17 |
| Other\tassets | 338 | 191 |
| Total\tassets | $ 11,551 | $ 8,050 |
| LIABILITIES\tAND\tSHAREHOLDERS'\tEQUITY: |  |  |
| Current\tliabilities: |  |  |
| Accounts\tpayable | $1,779 | $ 1,451 |
| Accrued\texpenses | 1,705 | 1,200 |
| Total\tcurrent\tliabilities | 3,484 | 2,651 |
| Non-current\tliabilities | 601 | 323 |
| Total\tliabilities | 4,085 | 2,974 |
| Commitments\tand\tcontingencies |  |  |
| Shareholders'\tequity: |  |  |
| Common\tstock,\tno\tpar\tvalue;\t1,800,000,000\tshares\tauthorized; |  |  |
| 835,019,364\tand\t782,887,234\tshares\tissued\tand\toutstanding, |  |  |
| respectively | 3,521 | 2,514 |
| Deferred\tstock\tcompensation | (60) | (93) |
| Retained\tearnings | 4,005 | 2,670 |
| Accumulated\tother\tcomprehensive\tincome\t(loss) | — | (15) |
| Total\tshareholders'\tequity | 7,466 | 5,076 |
| Total\tliabilities\tand\tshareholders'\tequity | $ 11,551 | $ 8,050 |

See	accompanying	notes	to	consolidated	financial	statements.

CONSOLIDATED	STATEMENTS	OF	OPERATIONS

# (In	millions,	except	share	and	per	share	amounts)

| Three	fiscal	years	ended	September	24,	2005 | 2005 | 2004 | 2003 |
| :--- | :--- | :--- | :--- |
| Net\tsales | $13,931 | $8,279 | $6,207 |
| Cost\tof\tsales | 9,888 | 6,020 | 4,499 |
| Gross\tmargin | 4,043 | 2,259 | 1,708 |
| Operating\texpenses: |  |  |  |
| Research\tand\tdevelopment | 534 | 489 | 471 |
| Selling,\tgeneral,\tand\tadministrative | 1,859 | 1,421 | 1,212 |
| Restructuring\tcosts | — | 23 | 26 |
| Total\toperating\texpenses | 2,393 | 1,933 | 1,709 |
| Operating\tincome\t(loss) | 1,650 | 326 | (1) |
| Other\tincome\tand\texpense: |  |  |  |
| Gains\ton\tnon-current\tinvestments,\tnet | — | 4 | 10 |
| Interest\tand\tother\tincome,\tnet | 165 | 53 | 83 |
| Total\tother\tincome\tand\texpense | 165 | 57 | 93 |
| Income\tbefore\tprovision\tfor\tincome\ttaxes | 1,815 | 383 | 92 |
| Provision\tfor\tincome\ttaxes | 480 | 107 | 24 |
| Income\tbefore\taccounting\tchanges | 1,335 | 276 | 68 |
| Cumulative\teffects\tof\taccounting\tchanges,\tnet\tof\tincome\ttaxes | — | — | 1 |
| Net\tincome | $1,335 | $276 | $69 |
| Earnings\tper\tcommon\tshare\tbefore\taccounting\tchanges: |  |  |  |
| Basic | $1.65 | $0.37 | $0.09 |
| Diluted | $1.56 | $0.36 | $0.09 |
| Earnings\tper\tcommon\tshare: |  |  |  |
| Basic | $1.65 | $0.37 | $0.10 |
| Diluted | $1.56 | $0.36 | $0.09 |
| Shares\tused\tin\tcomputing\tearnings\tper\tshare\t(in\tthousands): |  |  |  |
| Basic | 808,439 | 743,180 | 721,262 |
| Diluted | 856,780 | 774,622 | 726,932 |

# CONSOLIDATED	STATEMENTS	OF	SHAREHOLDERS'	EQUITY

# (In	millions,	except	share	amounts	which	are	in	thousands)

|  | Shares | Common	Stock<br>Amount | Deferred	Stock<br>Compensation | Retained<br>Earnings | Accumulated<br>Other<br>Comprehensive<br>Income	(Loss) | Total<br>Shareholders'<br>Equity |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Balances\tas\tof\tSeptember\t28,\t2002 | 717,918 | $1,826 | $(7) | $2,325 | $(49) | $4,095 |
| Components\tof\tcomprehensive\tincome: |  |  |  |  |  |  |
| Net\tincome | — | — | — | 69 | — | 69 |
| Change\tin\tforeign\tcurrency\ttranslation | — | — | — | — | 31 | 31 |
| Change\tin\tunrealized\tgain\ton\tavailable- |  |  |  |  |  |  |
| for-sale\tsecurities,\tnet\tof\ttax | — | — | — | — | (12) | (12) |
| Change\tin\tunrealized\tgain\ton\tderivative |  |  |  |  |  |  |
| investments,\tnet\tof\ttax | — | — | — | — | (5) | (5) |
| Total\tcomprehensive\tincome |  |  |  |  |  | 83 |
| Amortization\tof\tdeferred\tstock |  |  |  |  |  |  |
| compensation | — | — | 15 | — | — | 15 |
| Write-off\tof\tdeferred\tstock |  |  |  |  |  |  |
| compensation | — | — | 5 | — | — | 5 |
| Common\tstock\tissued\tunder\tstock\tplans | 18,598 | 128 | (75) | — | — | 53 |
| Settlement\tof\tforward\tpurchase |  |  |  |  |  |  |
| agreement | (3,062) | (35) | — | — | — | (35) |
| Tax\tbenefit\trelated\tto\tstock\toptions | — | 7 | — | — | — | 7 |
| Balances\tas\tof\tSeptember\t27,\t2003 | 733,454 | $1,926 | $(62) | $2,394 | $(35) | $4,223 |
| Components\tof\tcomprehensive\tincome: |  |  |  |  |  |  |
| Net\tincome | — | — | — | 276 | — | 276 |
| Change\tin\tforeign\tcurrency\ttranslation | — | — | — | — | 13 | 13 |
| Change\tin\tunrealized\tgain\ton\tavailable- |  |  |  |  |  |  |
| for-sale\tsecurities,\tnet\tof\ttax | — | — | — | — | (5) | (5) |
| Change\tin\tunrealized\tloss\ton\tderivative |  |  |  |  |  |  |
| investments,\tnet\tof\ttax | — | — | — | — | 12 | 12 |
| Total\tcomprehensive\tincome |  |  |  |  |  | 296 |
| Issuance\tof\trestricted\tstock\tunits | — | 64 | (64) | — | — | — |
| Adjustment\tto\tcommon\tstock\trelated\tto\ta |  |  |  |  |  |  |
| prior\tyear\tacquisition | (159) | (2) | — | — | — | (2) |
| Amortization\tof\tdeferred\tstock |  |  |  |  |  |  |
| compensation | — | — | 33 | — | — | 33 |
| Common\tstock\tissued\tunder\tstock\tplans | 49,592 | 427 | — | — | — | 427 |
| Tax\tbenefit\trelated\tto\tstock\toptions | — | 99 | — | — | — | 99 |
| Balances\tas\tof\tSeptember\t25,\t2004 | 782,887 | $2,514 | $(93) | $2,670 | $(15) | $5,076 |
| Components\tof\tcomprehensive\tincome: |  |  |  |  |  |  |
| Net\tincome | — | — | — | 1,335 | — | 1,335 |
| Change\tin\tforeign\tcurrency\ttranslation | — | — | — | — | 7 | 7 |
| Change\tin\tunrealized\tgain\ton\tderivative |  |  |  |  |  |  |
| investments,\tnet\tof\ttax | — | — | — | — | 8 | 8 |
| Total\tcomprehensive\tincome |  |  |  |  |  | 1,350 |
| Issuance\tof\trestricted\tstock\tunits,\tnet | — | 7 | (7) | — | — | — |
| Amortization\tof\tdeferred\tstock\tcompensation | — | — | 40 | — | — | 40 |

| Common	stock	issued	under	stock	plans | 52,132 | 547 | — |  | — | — | 547 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Tax\tbenefit\trelated\tto\tstock\toptions | — | 453 | — |  | — | — | 453 |
| Balances\tas\tof\tSeptember\t24,\t2005 | 835,019 | $3,521 | $(60 | ) | $4,005 | $ — | $7,466 |

# CONSOLIDATED	STATEMENTS	OF	CASH	FLOWS

# (In	millions)

| Three	fiscal	years	ended	September	24,	2005 | 2005 | 2004 | 2003 |
| :--- | :--- | :--- | :--- |
| Cash\tand\tcash\tequivalents,\tbeginning\tof\tthe\tyear | $2,969 | $3,396 | $2,252 |
| Operating\tActivities: |  |  |  |
| Net\tincome | 1,335 | 276 | 69 |
| Cumulative\teffects\tof\taccounting\tchanges,\tnet\tof\ttaxes | — | — | (1) |
| Adjustments\tto\treconcile\tnet\tincome\tto\tcash\tgenerated\tby\toperating\tactivities: |  |  |  |
| Depreciation,\tamortization\tand\taccretion | 179 | 150 | 113 |
| Stock-based\tcompensation\texpense | 42 | 33 | 16 |
| Non-cash\trestructuring | — | 5 | 12 |
| Provision\tfor\t(benefit\tfrom)\tdeferred\tincome\ttaxes | 52 | 20 | (11) |
| Tax\tbenefit\tfrom\tstock\toptions | 453 | 99 | 7 |
| Loss\ton\tdisposition\tof\tproperty,\tplant,\tand\tequipment | 9 | 7 | 2 |
| Gains\ton\tsales\tof\tshort-term\tinvestments,\tnet | — | (1) | (21) |
| Gains\ton\tnon-current\tinvestments,\tnet | — | (4) | (10) |
| Gain\ton\tforward\tpurchase\tagreement | — | — | (6) |
| Changes\tin\toperating\tassets\tand\tliabilities: |  |  |  |
| Accounts\treceivable | (121) | (8) | (201) |
| Inventories | (64) | (45) | (11) |
| Other\tcurrent\tassets | (150) | (176) | (34) |
| Other\tassets | (61) | (39) | (30) |
| Accounts\tpayable | 328 | 297 | 243 |
| Other\tliabilities | 533 | 320 | 152 |
| Cash\tgenerated\tby\toperating\tactivities | 2,535 | 934 | 289 |
| Investing\tActivities: |  |  |  |
| Purchases\tof\tshort-term\tinvestments | (11,470) | (3,270) | (2,648) |
| Proceeds\tfrom\tmaturities\tof\tshort-term\tinvestments | 8,609 | 1,141 | 2,446 |
| Proceeds\tfrom\tsales\tof\tshort-term\tinvestments | 586 | 801 | 1,116 |
| Proceeds\tfrom\tsales\tof\tnon-current\tinvestments | — | 5 | 45 |
| Purchases\tof\tproperty,\tplant,\tand\tequipment | (260) | (176) | (164) |
| Other | (21) | 11 | 33 |
| Cash\t(used\tfor)\tgenerated\tby\tinvesting\tactivities | (2,556) | (1,488) | 828 |
| Financing\tActivities: |  |  |  |
| Payment\tof\tlong-term\tdebt | — | (300) | — |
| Proceeds\tfrom\tissuance\tof\tcommon\tstock | 543 | 427 | 53 |
| Cash\tused\tfor\trepurchase\tof\tcommon\tstock | — | — | (26) |
| Cash\tgenerated\tby\tfinancing\tactivities | 543 | 127 | 27 |
| Increase\t(decrease)\tin\tcash\tand\tcash\tequivalents | 522 | (427) | 1,144 |
| Cash\tand\tcash\tequivalents,\tend\tof\tthe\tyear | $3,491 | $2,969 | $3,396 |
| Supplemental\tcash\tflow\tdisclosures: |  |  |  |
| Cash\tpaid\tduring\tthe\tyear\tfor\tinterest | $— | $10 | $20 |
| Cash\tpaid\t(received)\tfor\tincome\ttaxes,\tnet | $17 | $(7) | $45 |

# NOTES	TO	CONSOLIDATED	FINANCIAL	STATEMENTS

# Note	1—Summary	of	Significant	Accounting	Policies

Apple	Computer,	Inc.	and	its	subsidiaries	(the	Company)	designs,	manufactures,	and	markets	personal	computers	and	related	software,	services,	peripherals,	and networking	solutions.	The	Company	also	designs,	develops,	and	markets	a	line	of	portable	digital	music	players	along	with	related	accessories	and	services	including	the online	distribution	of	third-party	music,	audio	books,	music	videos,	short	films,	and	television	shows.	The	Company	sells	its	products	worldwide	through	its	online stores,	its	own	retail	stores,	its	direct	sales	force,	and	third-party	wholesalers,	resellers,	and	value-added	resellers.	In	addition	to	its	own	hardware,	software,	and peripheral	products,	the	Company	sells	a	variety	of	third-party	hardware	and	software	products	through	its	online	and	retail	stores.	The	Company	sells	to	education, consumer,	creative	professional,	business,	and	government	customers.

# Basis	of	Presentation	and	Preparation

The	accompanying	consolidated	financial	statements	include	the	accounts	of	the	Company.	Intercompany	accounts	and	transactions	have	been	eliminated.	The preparation	of	these	consolidated	financial	statements	in	conformity	with	U.S.	generally	accepted	accounting	principles	requires	management	to	make	estimates	and assumptions	that	affect	the	amounts	reported	in	these	consolidated	financial	statements	and	accompanying	notes.	Actual	results	could	differ	materially	from	those estimates.	Certain	prior	year	amounts	in	the	consolidated	financial	statements	and	notes	thereto	have	been	reclassified	to	conform	to	the	current	year	presentation.

Typically,	the	Company's	fiscal	year	ends	on	the	last	Saturday	of	September.	Fiscal	years	2005,	2004,	and	2003	were	each	52-week	years.	However,	approximately every	six	years,	the	Company	reports	a	53-week	fiscal	year	to	align	its	fiscal	quarters	with	calendar	quarters	by	adding	a	week	to	its	first	fiscal	quarter.	The	Company

will	add	this	additional	week	in	the	first	fiscal	quarter	of	its	fiscal	year	2006.	All	information	presented	herein	is	based	on	the	Company's	fiscal	calendar.

# Common	Stock	Split

# Financial	Instruments

# Cash	Equivalents	and	Short-term	Investments

All	highly	liquid	investments	with	maturities	of	three	months	or	less	at	the	date	of	purchase	are	classified	as	cash	equivalents.	Highly	liquid	investments	with	maturities greater	than	three	months	are	classified	as	short-term	investments.	The	Company's	debt	and	marketable	equity	securities	have	been	classified	and	accounted	for	as available-for-sale.	Management	determines	the	appropriate	classification	of	its	investments	in	debt	and	marketable	equity	securities	at	the	time	of	purchase	and reevaluates	available-for-sale	designation	as	of	each	balance	sheet	date.	These	securities	are	carried	at	fair	value,	with	the	unrealized	gains	and	losses,	net	of	taxes, reported	as	a	component	of	shareholders'	equity.	The	cost	of	securities	sold	is	based	upon	the	specific	identification	method.

# Derivative	Financial	Instruments

The	Company	accounts	for	its	derivative	instruments	as	either	assets	or	liabilities	and	carries	them	at	fair	value.	Derivatives	that	are	not	defined	as	hedges	in	SFAS	133, Accounting	for	Derivative	Instruments	and	Hedging	Activities,	must	be	adjusted	to	fair	value	through	earnings.	If	the	derivative	is	a	hedge,	depending	on	the	nature	of the	hedge,	changes	in	fair	value	will	either	be	offset	against	the	change	in	fair	value	of	the

# NOTES	TO	CONSOLIDATED	FINANCIAL	STATEMENTS	(Continued)

# Note	1—Summary	of	Significant	Accounting	Policies	(Continued)

hedged	assets,	liabilities,	or	firm	commitments	through	earnings,	or	recognized	in	other	comprehensive	income	until	the	hedged	item	is	recognized	in	earnings.

For	derivative	instruments	that	hedge	the	exposure	to	variability	in	expected	future	cash	flows	that	are	designated	as	cash	flow	hedges,	the	net	gain	or	loss	on	the derivative	instrument	is	reported	as	a	component	of	accumulated	other	comprehensive	income	in	shareholders'	equity	and	reclassified	into	earnings	in	the	same	period	or periods	during	which	the	hedged	transaction	affects	earnings.	To	receive	hedge	accounting	treatment,	cash	flow	hedges	must	be	highly	effective	in	offsetting	changes	to expected	future	cash	flows	on	hedged	transactions.	For	derivative	instruments	that	hedge	the	exposure	to	changes	in	the	fair	value	of	an	asset	or	a	liability	and	that	are designated	as	fair	value	hedges,	the	net	gain	or	loss	on	the	derivative	instrument	as	well	as	the	offsetting	gain	or	loss	on	the	hedged	item	attributable	to	the	hedged	risk are	recognized	in	earnings	in	the	current	period.	The	net	gain	or	loss	on	the	effective	portion	of	a	derivative	instrument	that	is	designated	as	an	economic	hedge	of	the foreign	currency	translation	exposure	of	the	net	investment	in	a	foreign	operation	is	reported	in	the	same	manner	as	a	foreign	currency	translation	adjustment.	For forward	contracts	designated	as	net	investment	hedges,	the	Company	excludes	changes	in	fair	value	relating	to	changes	in	the	forward	carry	component	from	its definition	of	effectiveness.	Accordingly,	any	gains	or	losses	related	to	this	component	are	recognized	in	current	earnings.

The	Company	may	enter	into	foreign	currency	forward	contracts	to	hedge	the	translation	and	economic	exposure	of	a	net	investment	position	in	a	foreign	subsidiary.	For such	contracts,	hedge	effectiveness	is	measured	based	on	changes	in	the	fair	value	of	the	contract	attributable	to	changes	in	the	spot	exchange	rate.	The	effective	portion of	the	net	gain	or	loss	on	a	derivative	instrument	designated	as	a	hedge	of	the	net	investment	position	in	a	foreign	subsidiary	is	reported	in	the	same	manner	as	a	foreign currency	translation	adjustment.	Any	residual	changes	in	fair	value	of	the	forward	contract,	including	changes	in	fair	value	based	on	the	differential	between	the	spot	and forward	exchange	rates,	are	recognized	in	current	earnings	in	other	income	and	expense.

# Inventories

Inventories	are	stated	at	the	lower	of	cost,	computed	using	the	first-in,	first-out	method,	or	market.	If	the	cost	of	the	inventories	exceeds	their	market	value,	provisions are	made	currently	for	the	difference	between	the	cost	and	the	market	value.	The	Company's	inventories	consist	primarily	of	finished	goods	for	all	periods	presented.

# Property,	Plant,	and	Equipment

Property,	plant,	and	equipment	are	stated	at	cost.	Depreciation	is	computed	by	use	of	the	straight-line	method	over	the	estimated	useful	lives	of	the	assets,	which	are	30 years	for	buildings,	up	to	5	years	for	equipment,	and	the	shorter	of	lease	terms	or	10	years	for	leasehold	improvements.	The	Company	capitalizes	eligible	costs	to	acquire or	develop	internal-use	software	that	are	incurred	subsequent	to	the	preliminary	project	stage.	Capitalized	costs	related	to	internal-use	software	are	amortized	using	the straight-line	method	over	the	estimated	useful	lives	of	the	assets,	which	range	from	3	to	5	years.	Depreciation	and	amortization	expense	on	property	and	equipment	was $141	million,	$126	million,	and	$108	million	during	2005,	2004,	and	2003,	respectively.

The	Company	records	obligations	associated	with	the	retirement	of	tangible	long-lived	assets	and	the	associated	asset	retirement	costs	in	accordance	with	SFAS	No.	143, Accounting	for	Asset	Retirement	Obligations.	The	Company	reviews	legal	obligations	associated	with	the	retirement	of	long-lived	assets	that	result	from	the	acquisition, construction,	development	and/or	normal	use	of	the	assets.	If	it	is	determined	that	a	legal	obligation	exists,	the	fair	value	of	the	liability	for	an	asset	retirement	obligation is	recognized	in	the	period	in	which	it	is	incurred	if	a	reasonable	estimate	of	fair	value	can	be	made.	The	fair	value	of	the	liability	is	added	to	the	carrying	amount	of	the associated	asset	and	this	additional	carrying	amount	is	depreciated	over	the	life	of	the	asset.	The	difference	between	the	gross	expected	future	cash	flow	and	its	present value	is	accreted	over	the	life	of	the	related	lease	as	an	operating	expense.	All	of	the	Company's	existing	asset	retirement	obligations	are	associated	with	commitments	to return	property	subject	to	operating	leases	to	original	condition	upon	lease	termination.

The	following	table	reconciles	changes	in	the	Company's	asset	retirement	liabilities	for	fiscal	2004	and	2005	(in	millions):

| Asset	retirement	liability	as	of	September	27,	2003<br>Additional	asset	retirement	obligations	recognized<br>Accretion	recognized | $7.2<br>0.5<br>0.5 |
| :--- | :--- |
| Asset\tretirement\tliability\tas\tof\tSeptember\t25,\t2004 | $8.2 |
| Additional\tasset\tretirement\tobligations\trecognized | 2.8 |
| Accretion\trecognized | 0.7 |
| Asset\tretirement\tliability\tas\tof\tSeptember\t24,\t2005 | $11.7 |

# Cumulative	Effects	of	Accounting	Changes

In	2003,	the	Company	recognized	a	net	favorable	cumulative	effect	type	adjustment	of	approximately	$1	million	from	the	adoption	of	SFAS	No.	150,	Accounting	for

Certain	Financial	Instruments	with	Characteristic	of	Both	Liabilities	and	Equity	and	SFAS	No.	143.

# Long-Lived	Assets	Including	Goodwill	and	Other	Acquired	Intangible	Assets

The	Company	reviews	property,	plant,	and	equipment	and	certain	identifiable	intangibles,	excluding	goodwill,	for	impairment	whenever	events	or	changes	in circumstances	indicate	the	carrying	amount	of	an	asset	may	not	be	recoverable.	Recoverability	of	these	assets	is	measured	by	comparison	of	its	carrying	amount	to future	undiscounted	cash	flows	the	assets	are	expected	to	generate.	If	property,	plant,	and	equipment	and	certain	identifiable	intangibles	are	considered	to	be	impaired, the	impairment	to	be	recognized	equals	the	amount	by	which	the	carrying	value	of	the	assets	exceeds	its	fair	market	value.	For	the	three	fiscal	years	ended	September	24, 2005,	the	Company	had	no	material	impairment	of	its	long-lived	assets,	except	for	the	impairment	of	certain	assets	in	connection	with	the	restructuring	actions	described in	Note	5	of	these	Notes	to	Consolidated	Financial	Statements.

SFAS	No.	142,	Goodwill	and	Other	Intangible	Assets	requires	that	goodwill	and	intangible	assets	with	indefinite	useful	lives	should	not	be	amortized	but	rather	be tested	for	impairment	at	least	annually	or	sooner	whenever	events	or	changes	in	circumstances	indicate	that	they	may	be	impaired.	The	Company	performs	its	goodwill impairment	tests	on	or	about	August	30	of	each	year.	The	Company	did	not	recognize	any	goodwill	or	intangible	asset	impairment	charges	in	2005,	2004,	or	2003.	The Company	established	reporting	units	based	on	its	current	reporting	structure.	For	purposes	of	testing	goodwill	for

impairment,	goodwill	has	been	allocated	to	these	reporting	units	to	the	extent	it	relates	to	each	reporting	unit.SFAS	No.	142	also	requires	that	intangible	assets	with definite	lives	be	amortized	over	their	estimated	useful	lives	and	reviewed	for	impairment	in	accordance	with	SFAS	No.	144,	Accounting	for	the	Impairment	of	Long- Lived	Assets	and	for	Long-Lived	Assets	to	Be	Disposed	Of.	The	Company	is	currently	amortizing	its	acquired	intangible	assets	with	definite	lives	over	periods	ranging from	3	to	10	years.

# Foreign	Currency	Translation

The	Company	translates	the	assets	and	liabilities	of	its	international	non-U.S.	functional	currency	subsidiaries	into	U.S.	dollars	using	exchange	rates	in	effect	at	the	end of	each	period.	Revenue	and	expenses	for	these	subsidiaries	are	translated	using	rates	that	approximate	those	in	effect	during	the	period.	Gains	and	losses	from	these translations	are	credited	or	charged	to	foreign	currency	translation	included	in	"accumulated	other	comprehensive	income	(loss)"	in	shareholders'	equity.	The Company's	foreign	manufacturing	subsidiaries	and	certain	other	international	subsidiaries	that	use	the	U.S.	dollar	as	their	functional	currency	remeasure	monetary assets	and	liabilities	at	exchange	rates	in	effect	at	the	end	of	each	period,	and	inventories,	property,	and	nonmonetary	assets	and	liabilities	at	historical	rates.	Gains	and losses	from	these	translations	were	insignificant	and	have	been	included	in	the	Company's	results	of	operations.

The	Company	recognizes	revenue	when	persuasive	evidence	of	an	arrangement	exists,	delivery	has	occurred,	the	sales	price	is	fixed	or	determinable,	and	collection	is probable.	Product	is	considered	delivered	to	the	customer	once	it	has	been	shipped	and	title	and	risk	of	loss	have	been	transferred.	For	most	of	the	Company's	product sales,	these	criteria	are	met	at	the	time	the	product	is	shipped.	For	online	sales	to	individuals,	for	some	sales	to	education	customers	in	the	U.S.,	and	for	certain	other sales,	the	Company	defers	revenue	until	the	customer	receives	the	product	because	the	Company	legally	retains	a	portion	of	the	risk	of	loss	on	these	sales	during	transit. If	at	the	outset	of	an	arrangement	the	Company	determines	the	arrangement	fee	is	not,	or	is	presumed	to	not	be,	fixed	or	determinable,	revenue	is	deferred	and subsequently	recognized	as	amounts	become	due	and	payable.

Revenue	from	service	and	support	contracts	is	deferred	and	recognized	ratably	over	the	service	coverage	periods.	These	contracts	typically	include	extended	phone support,	repair	services,	web-based	support	resources,	diagnostic	tools,	and	extend	the	service	coverage	offered	under	the	Company's	one-year	limited	warranty.

The	Company	sells	software	and	peripheral	products	obtained	from	other	companies.	The	Company	establishes	its	own	pricing	and	retains	related	inventory	risk,	is	the primary	obligor	in	sales	transactions	with	its	customers,	and	assumes	the	credit	risk	for	amounts	billed	to	its	customers.	Accordingly,	the	Company	recognizes	revenue for	the	sale	of	products	obtained	from	other	companies	at	the	gross	amount	billed.

Revenue	on	arrangements	that	include	multiple	elements	such	as	hardware,	software,	and	services	is	allocated	to	each	element	based	on	the	relative	fair	value	of	each element.	Each	element's	allocated	revenue	is	recognized	when	revenue	recognition	criteria	for	that	element	has	been	met.	Fair	value	is	generally	determined	by	vendor specific	objective	evidence	(VSOE),	which	is	based	on	the	price	charged	when	each	element	is	sold	separately.	If	the	Company	cannot	objectively	determine	the	fair value	of	any	undelivered	element	included	in	a	multiple-element	arrangement,	the	Company	defers	revenue	until	all	elements	are	delivered	and	services	have	been performed,	or	until	fair	value	can	objectively	be	determined	for	any	remaining	undelivered	elements.	When	the	fair	value	of	a	delivered	element	has	not	been established,	the	Company	uses	the	residual	method	to	recognize	revenue	if	the	fair	value	of	all	undelivered	elements	is	determinable.	Under	the	residual	method,	the	fair value	of	the	undelivered	elements	is	deferred	and	the	remaining	portion	of	the	arrangement	fee	is	allocated	to	the	delivered	elements	and	is	recognized	as	revenue.

The	Company	records	reductions	to	revenue	for	estimated	commitments	related	to	price	protection	and	for	customer	incentive	programs,	including	reseller	and	end	user rebates,	and	other	sales	programs	and	volume-based	incentives.	The	estimated	cost	of	these	programs	is	accrued	as	a	reduction	to	revenue	in	the	period	the	Company	has sold	the	product	and	committed	to	a	plan.	The	Company	also	records	reductions	to	revenue	for	expected	future	product	returns	based	on	the	Company's	historical experience.

Generally,	the	Company	does	not	offer	specified	or	unspecified	upgrade	rights	to	its	customers	in	connection	with	software	sales	or	the	sale	of	extended	warranty	and support	contracts.	When	the	Company	does	offer	specified	upgrade	rights,	the	Company	defers	revenue	for	the	fair	value	of	the	specified	upgrade	right	until	the	future obligation	is	fulfilled	or	when	the	right	to	the	specified	upgrade	expires.	Additionally,	a	limited	number	of	the	Company's	software	products	are	available	with maintenance	agreements	that	grant	customers	rights	to	unspecified	future	upgrades	over	the	maintenance	term	on	a	when	and	if	available	basis.	Revenue	associated	with such	maintenance	is	recognized	ratably	over	the	maintenance	term.

The	Company	records	its	allowance	for	doubtful	accounts	based	upon	its	assessment	of	various	factors.	The	Company	considers	historical	experience,	the	age	of	the accounts	receivable	balances,	credit	quality	of	the	Company's	customers,	current	economic	conditions	and	other	factors	that	may	affect	customers'	ability	to	pay.

# Shipping	Costs

The	Company's	shipping	and	handling	costs	are	included	in	cost	of	sales	for	all	periods	presented.

# Warranty	Expense

The	Company	provides	currently	for	the	estimated	cost	for	product	warranties	at	the	time	the	related	revenue	is	recognized.	The	Company	assesses	the	adequacy	of	its preexisting	warranty	liabilities	and	adjusts	the	amounts	as	necessary	based	on	actual	experience	and	changes	in	future	estimates.

# Software	Development	Costs

Research	and	development	costs	are	expensed	as	incurred.	Development	costs	of	computer	software	to	be	sold,	leased,	or	otherwise	marketed	are	subject	to capitalization	beginning	when	a	product's	technological	feasibility	has	been	established	and	ending	when	a	product	is	available	for	general	release	to	customers

pursuant	to	SFAS	No.	86,	Computer	Software	to	be	Sold,	Leased,	or	Otherwise	Marketed.	In	most	instances,	the	Company's	products	are	released	soon	after technological	feasibility	has	been	established.	Therefore,	costs	incurred	subsequent	to	achievement	of	technological	feasibility	are	usually	not	significant,	and	generally all	software	development	costs	have	been	expensed.

In	the	fourth	quarter	of	2004,	the	Company	began	incurring	substantial	development	costs	associated	with	Mac	OS	X	version	10.4	Tiger	subsequent	to	achievement	of technological	feasibility	as	evidenced	by	public	demonstration	in	August	2004	and	the	subsequent	release	of	a	developer	beta	version	of	the	product.	The	Company capitalized	approximately	$29.7	and	$4.5	million	during	2005	and	2004,	respectively,	of	costs	associated	with	the	development	of	Tiger.	In	accordance	with	SFAS No.	86,	amortization	of	this	asset	to	cost	of	sales	began	in	April	2005	when	the	Company	began	shipping	Tiger	and	is	being	recognized	on	a	straight-line	basis	over	a	3 year	estimated	useful	life.

During	the	second	quarter	of	2004,	the	Company	incurred	substantial	development	costs	associated	with	FileMaker	Pro	7	subsequent	to	achievement	of	technological feasibility	as	evidenced	by	public	demonstration	and	release	of	a	developer	beta	version,	and	prior	to	the	release	of	the	final	version	of	the	product	in	March	2004. Therefore,	during	the	second	quarter	of	2004,	the	Company	capitalized	approximately	$2.3	million	of	costs	associated	with	the	development	of	FileMaker	Pro	7.	In accordance	with	SFAS	No.	86,	amortization	of	this	asset	to	cost	of	sales	began	in	March	2004	when	the	Company	began	shipping	FileMaker	Pro	7	and	is	being recognized	on	a	straight-line	basis	over	a	3	year	estimated	useful	life.

During	the	third	and	fourth	quarters	of	2003,	the	Company	incurred	substantial	development	costs	associated	with	the	development	of	Mac	OS	X	version	10.3	(code- named	"Panther"),	subsequent	to	achievement	of	technological	feasibility	as	evidenced	by	public	demonstration	and	release	of	a	developer	beta	in	June	2003,	and	prior to	release	of	the	final	version	of	the	product	in	the	first	quarter	of	2004.	Therefore,	during	2003	the	Company	capitalized	approximately	$14.7	million	of	development costs	associated	with	the	development	of	Panther.	Amortization	of	this	asset	began	in	the	first	quarter	of	2004	when	Panther	was	shipped	and	is	being	recognized	on	a straight-line	basis	in	accordance	with	SFAS	No.	86	over	a	3	year	estimated	useful	life.

Total	amortization	related	to	capitalized	software	development	costs	was	$15.7	million,	$10.7	million,	and	$5.8	million	in	2005,	2004,	and	2003,	respectively.

# Advertising	Costs

Advertising	costs	are	expensed	as	incurred.	Advertising	expense	was	$287	million,	$206	million,	and	$193	million	for	2005,	2004,	and	2003,	respectively.

# Stock-Based	Compensation

The	Company	currently	measures	compensation	expense	for	its	employee	stock-based	compensation	plans	using	the	intrinsic	value	method	prescribed	by	Accounting Principles	Board	(APB)	Opinion	No.	25,	Accounting	for	Stock	Issued	to	Employees.	The	Company	applies	the	disclosure	provisions	of	SFAS	No.	123,	Accounting	for Stock-based	Compensation,	as	amended	by	SFAS	No.	148,	Accounting	for	Stock-based	Compensation—Transition	and	Disclosure	as	if	the	fair-value-based	method	had been	applied	in	measuring	compensation	expense.	Under	APB	Opinion	No.	25,	when	the	exercise	price	of	the	Company's	employee	stock	options	equals	the	market price	of	the	underlying	stock	on	the	date	of	the	grant,	no	compensation	expense	is	recognized.

As	required	under	SFAS	No.	123,	the	pro	forma	effects	of	stock-based	compensation	on	net	income	and	earnings	per	common	share	for	employee	stock	options	granted and	employee	stock	purchase	plan	share	purchases	have	been	estimated	at	the	date	of	grant	and	beginning	of	the	period,	respectively,	using	a	Black-Scholes	option pricing	model.	For	purposes	of	pro	forma	disclosures,	the	estimated	fair	value	of	the	options	and	shares	is	amortized	to	pro	forma	net	income	over	the	options'	vesting period	and	the	shares'	plan	period.

The	Company's	pro	forma	information	for	each	of	the	last	three	fiscal	years	follows	(in	millions,	except	per	share	amounts):

|  | 2005 | 2004 | 2003 |
| :--- | :--- | :--- | :--- |
| Net\tincome—as\treported | $ 1,335 | $276 | $69 |
| Add:\tStock-based\temployee\tcompensation\texpense\tincluded\tin\treported |  |  |  |
| net\tincome,\tnet\tof\ttax | 38 | 33 | 15 |
| Deduct:\tStock-based\temployee\tcompensation\texpense\tdetermined\tunder |  |  |  |
| the\tfair\tvalue\tbased\tmethod\tfor\tall\tawards,\tnet\tof\ttax | (114) | (141) | (181) |
| Net\tincome\t(loss)—pro\tforma | $ 1,259 | $168 | $(97) |
| Net\tincome\tper\tcommon\tshare—as\treported |  |  |  |
| Basic | $1.65 | $0.37 | $0.10 |
| Diluted | $1.56 | $0.36 | $0.09 |

| Basic | $1.56 | $0.23 | $ (0.13) |
| :--- | :--- | :--- | :--- |
| Diluted | $1.47 | $0.22 | $ (0.13) |

In	December	2004,	the	FASB	issued	SFAS	No.	123	(revised	2004)	(SFAS	No.	123R),	Share-Based	Payment,	which	addresses	the	accounting	for	share-based	payment transactions	in	which	an	enterprise	receives	employee	services	in	exchange	for	(a)	equity	instruments	of	the	enterprise	or	(b)	liabilities	that	are	based	on	the	fair	value	of the	enterprise's	equity	instruments	or	that	may	be	settled	by	the	issuance	of	such	equity	instruments.	SFAS	No.	123R	eliminates	the	ability	to	account	for	share-based compensation	transactions	using	the	intrinsic	value	method	under	APB	Opinion	No.	25,	and	requires	instead	that	such	transactions	be	accounted	for	using	a	fair-value- based	method.	In	January	2005,	the	SEC	issued	SAB	No.	107,	which	provides	supplemental	implementation	guidance	for	SFAS	No.	123R.	SFAS	No.	123R	will	be effective	for	the	Company	beginning	in	the	first	quarter	of	its	fiscal	2006.	The	Company's	assessment	of	the	estimated	stock-based	compensation	expense	is	affected	by the	Company's	stock	price	as	well	as	assumptions	regarding	a	number	of	complex	variables	and	the	related	tax	impact.	These	variables	include,	but	are	not	limited	to, the	Company's	stock	price,	volatility,	and	employee	stock	option	exercise	behaviors	and	the	related	tax	impact.	The	Company	will	recognize	stock-based	compensation expense	on	all	awards	on	a	straight-line	basis	over	the	requisite	service	period	using	the	modified	prospective	method.	Although	the	adoption	of	SFAS	No.	123R	is expected	to	have	a	material	effect	on	the	Company's	results	of	operations,	future	changes	to	various	assumptions	used	to	determine	the	fair-value	of	awards	issued	or	the amount	and	type	of	equity	awards	granted	create	uncertainty	as	to	whether	future	stock-based	compensation	expense	will	be	similar	to	the	historical	SFAS	No.	123	pro forma	expense.

# Earnings	Per	Common	Share

Basic	earnings	per	common	share	is	computed	by	dividing	income	available	to	common	shareholders	by	the	weighted-average	number	of	shares	of	common	stock outstanding	during	the	period.	Diluted	earnings	per	common	share	is	computed	by	dividing	income	available	to	common	shareholders	by	the	weighted-average	number of	shares	of	common	stock	outstanding	during	the	period	increased	to	include	the	number	of	additional	shares	of	common	stock	that	would	have	been	outstanding	if	the dilutive	potential	shares	of	common	stock	had	been	issued.	The	dilutive	effect	of	outstanding	options,	restricted	stock	and	restricted	stock	units	is	reflected	in	diluted earnings	per	share	by	application	of	the	treasury	stock	method.	Under	the	treasury	stock	method,	an	increase	in	the	fair	market	value	of	the	Company's	common	stock can	result	in	a	greater	dilutive	effect	from	outstanding	options,	restricted	stock	and	restricted	stock	units.	Additionally,	the	exercise	of	employee	stock	options	and	the vesting	of	restricted	stock	and	restricted	stock	units	can	result	in	a	greater	dilutive	effect	on	earnings	per	share.

The	following	table	sets	forth	the	computation	of	basic	and	diluted	earnings	per	share:

| Numerator	(in	millions): | 2005 | 2004 | 2003 |
| :--- | :--- | :--- | :--- |
| Income\tbefore\taccounting\tchanges | $1,335 | $276 | $68 |
| Cumulative\teffects\tof\taccounting\tchanges,\tnet\tof\ttax | — | — | 1 |
| Net\tincome | $1,335 | $276 | $69 |
| Denominator\t(in\tthousands): |  |  |  |
| Weighted-average\tshares\toutstanding,\texcluding\tunvested\trestricted\tstock | 808,439 | 743,180 | 721,262 |
| Effect\tof\tdilutive\toptions,\trestricted\tstock\tunits\tand\trestricted\tstock | 48,341 | 31,442 | 5,670 |
| Denominator\tfor\tdiluted\tearnings\tper\tshare | 856,780 | 774,622 | 726,932 |
| Basic\tearnings\tper\tshare\tbefore\taccounting\tchanges | $1.65 | $0.37 | $0.09 |
| Basic\tearnings\tper\tshare\tafter\taccounting\tchanges | $1.65 | $0.37 | $0.10 |
| Diluted\tearnings\tper\tshare\tbefore\taccounting\tchanges | $1.56 | $0.36 | $0.09 |
| Diluted\tearnings\tper\tshare\tafter\taccounting\tchanges | $1.56 | $0.36 | $0.09 |

Potentially	dilutive	securities	representing	approximately	12.4	million,	8.7	million,	and	101.6	million	shares	of	common	stock	for	the	years	ended	September	24,	2005, September	25,	2004,	and	September	27,	2003,	respectively,	were	excluded	from	the	computation	of	diluted	earnings	per	share	for	these	periods	because	their	effect would	have	been	antidilutive.	These	potentially	dilutive	securities	include	stock	options,	restricted	stock,	and	restricted	stock	units.

# Comprehensive	Income

Comprehensive	income	consists	of	two	components,	net	income	and	other	comprehensive	income.	Other	comprehensive	income	refers	to	revenue,	expenses,	gains	and losses	that	under	generally	accepted	accounting	principles	are	recorded	as	an	element	of	shareholders'	equity	but	are	excluded	from	net	income.	The	Company's	other comprehensive	income	is	comprised	of	foreign	currency	translation	adjustments	from	those	subsidiaries	not	using	the	U.S.	dollar	as	their	functional	currency,	unrealized gains	and	losses	on	marketable	securities	categorized	as	available-for-sale,	and	net	deferred	gains	and	losses	on	certain	derivative	instruments	accounted	for	as	cash	flow hedges.

# Segment	Information

The	Company	reports	segment	information	based	on	the	"management"	approach.	The	management	approach	designates	the	internal	reporting	used	by	management	for making	decisions	and	assessing	performance	as	the	source	of	the	Company's	reportable	segments.	Information	about	the	Company's	products,	major	customers,	and geographic	areas	on	a	company-wide	basis	is	also	disclosed.

# Note	2—Financial	Instruments

The	carrying	amounts	of	cash	and	cash	equivalents,	accounts	receivable,	accounts	payable,	and	accrued	expenses	approximate	their	fair	value	due	to	the	short	maturities of	those	instruments.

# Cash,	Cash	Equivalents	and	Short-Term	Investments

The	following	table	summarizes	the	fair	value	of	the	Company's	cash	and	available-for-sale	securities	held	in	its	short-term	investment	portfolio,	recorded	as	cash	and

cash	equivalents	or	short-term	investments	(in	millions):

|  | September	24,<br>2005 | September	25,<br>2004 |
| :--- | :--- | :--- |
| Cash | $127 | $200 |
| U.S.\tTreasury\tand\tAgency\tsecurities | 89 | 87 |
| U.S.\tcorporate\tsecurities | 2,030 | 1,795 |
| Foreign\tsecurities | 1,245 | 887 |
| Total\tcash\tequivalents | 3,364 | 2,769 |
| U.S.\tTreasury\tand\tAgency\tsecurities | 216 | 1,080 |
| U.S.\tcorporate\tsecurities | 3,662 | 1,352 |
| Foreign\tsecurities | 892 | 63 |
| Total\tshort-term\tinvestments | 4,770 | 2,495 |
| Total\tcash,\tcash\tequivalents,\tand\tshort-term\tinvestments | $ 8,261 | $ 5,464 |

The	Company's	U.S.	corporate	securities	consist	primarily	of	commercial	paper,	certificates	of	deposit,	time	deposits	and	corporate	debt	securities.	Foreign	securities consist	primarily	of	foreign	commercial	paper,	certificates	of	deposit	and	time	deposits	with	foreign	institutions,	most	of	which	are	denominated	in	U.S.	dollars.	The Company	had	net	unrealized	losses	totaling	$5.9	million	on	its	investment	portfolio,	approximately	half	of	which	related	to	investments	with	stated	maturities	less	than	1 year	as	of	September	24,	2005	and	net	unrealized	losses	of	$6.3	million	on	its	investment	portfolio,	primarily	related	to	investments	with	stated	maturities	less	than	1 year	as	of	September	25,	2004.	The	Company	occasionally	sells	short-term	investments	prior	to	their	stated	maturities.	The	Company	recognized	a	net	loss	before	taxes of	$137,000	in	2005	and	net	gains	before	taxes	of	$1	million	and	$21	million	in	2004	and	2003,	respectively,	as	a	result	of	such	sales.	These	net	gains	were	included	in interest	and	other	income,	net.

As	of	September	24,	2005,	approximately	$287	million	of	the	Company's	short-term	investments	had	underlying	maturities	ranging	from	1	to	5	years.	The	remaining short-term	investments	as	of	September	24,	2005	had	maturities	of	3	to	12	months.	As	of	September	25,	2004,	approximately	$180	million	of	the	Company's	short-term investments	had	underlying	maturities	ranging	from	1	to	5	years.	The	remaining	short-term	investments	as	of	September	25,	2004	had	maturities	of	3	to	12	months.

# Note	2—Financial	Instruments	(Continued)

In	accordance	with	EITF	03-1,	The	Meaning	of	Other-Than-Temporary	Impairment	and	Its	Application	to	Certain	Investments,	the	following	table	shows	gross unrealized	losses	and	fair	value	for	those	investments	that	were	in	an	unrealized	loss	position	as	of	September	24,	2005	and	September	25,	2004,	aggregated	by investment	category	and	the	length	of	time	that	individual	securities	have	been	in	a	continuous	loss	position	(in	millions):

Market	values	were	determined	for	each	individual	security	in	the	investment	portfolio.	The	decline	in	value	of	these	investments	is	primarily	related	to	changes	in interest	rates	and	is	considered	to	be	temporary	in	nature.	Investments	are	reviewed	periodically	to	identify	possible	impairment.	When	evaluating	the	investments,	the Company	reviews	factors	such	as	the	length	of	time	and	extent	to	which	fair	value	has	been	below	cost	basis,	the	financial	condition	of	the	issuer,	and	the	Company's ability	and	intent	to	hold	the	investment	for	a	period	of	time	which	may	be	sufficient	for	anticipated	recovery	in	market	value.

# Accounts	Receivable

# Trade	Receivables

The	Company	distributes	its	products	through	third-party	resellers	and	directly	to	certain	education,	consumer,	and	commercial	customers.	The	Company	generally	does not	require	collateral	from	its	customers.	However,	when	possible	the	Company	does	attempt	to	limit	credit	risk	on	trade	receivables	with	credit	insurance	for	certain customers	in	Latin	America,	Europe,	and	Asia	and	by	arranging	with	third-party	financing	companies	to	provide	flooring	arrangements	and	other	loan	and	lease programs	to	the	Company's	direct	customers.	These	credit	financing	arrangements	are	directly	between	the	third-party	financing	company	and	the	end	customer.	As such,	the	Company	generally	does	not	assume	any	recourse	or	credit	risk	sharing	related	to	any	of	these	arrangements.	However,	considerable	trade	receivables	that

are	not	covered	by	collateral,	third-party	flooring	arrangements,	or	credit	insurance	are	outstanding	with	the	Company's	distribution	and	retail	channel	partners.	No customer	accounted	for	more	than	10%	of	trade	receivables	as	of	September	24,	2005	or	September	25,	2004.

The	following	table	summarizes	the	activity	in	the	allowance	for	doubtful	accounts	(in	millions):

|  | September	24,<br>2005 | September	25,<br>2004 | September	27,<br>2003 |
| :--- | :--- | :--- | :--- |
| Beginning\tallowance\tbalance | $47 | $49 | $51 |
| Charged\tto\tcosts\tand\texpenses | 8 | 3 | 4 |
| Deductions\t(a) | (9) | (5) | (6) |
| Ending\tallowance\tbalance | $46 | $47 | $49 |

(a)										Represents	amounts	written	off	against	the	allowance,	net	of	recoveries.

# Vendor	Non-Trade	Receivables

The	Company	has	non-trade	receivables	from	certain	of	its	manufacturing	vendors	resulting	from	the	sale	of	raw	material	components	to	these	manufacturing	vendors who	manufacture	sub-assemblies	or	assemble	final	products	for	the	Company.	The	Company	purchases	these	raw	material	components	directly	from	suppliers.	These non-trade	receivables,	which	are	included	in	the	consolidated	balance	sheets	in	other	current	assets,	totaled	$417	million	and	$276	million	as	of	September	24,	2005	and September	25,	2004,	respectively.	The	Company	does	not	reflect	the	sale	of	these	components	in	net	sales	and	does	not	recognize	any	profits	on	these	sales	until	the products	are	sold	through	to	the	end	customer	at	which	time	the	profit	is	recognized	as	a	reduction	of	cost	of	sales.

The	Company	uses	derivatives	to	partially	offset	its	business	exposure	to	foreign	exchange	and	interest	rate	risk.	Foreign	currency	forward	and	option	contracts	are	used to	offset	the	foreign	exchange	risk	on	certain	existing	assets	and	liabilities	and	to	hedge	the	foreign	exchange	risk	on	expected	future	cash	flows	on	certain	forecasted revenue	and	cost	of	sales.	From	time	to	time,	the	Company	enters	into	interest	rate	derivative	agreements	to	modify	the	interest	rate	profile	of	certain	investments	and debt.	The	Company's	accounting	policies	for	these	instruments	are	based	on	whether	the	instruments	are	designated	as	hedge	or	non-hedge	instruments.	The	Company records	all	derivatives	on	the	balance	sheet	at	fair	value.

The	following	table	shows	the	notional	principal,	net	fair	value,	and	credit	risk	amounts	of	the	Company's	foreign	currency	instruments	as	of	September	24,	2005	and September	25,	2004	(in	millions):

| Foreign	exchange	instruments	qualifying	as | Notional<br>Principal | September	24,	2005<br>Fair<br>Value | Credit	Risk<br>Amounts | Notional<br>Principal | September	25,	2004<br>Fair<br>Value | Credit	Risk<br>Amounts |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| accounting\thedges: |  |  |  |  |  |  |
| Spot/Forward\tcontracts | $662 | $10 | $10 | $598 | $(3) | $3 |
| Purchased\toptions | $ 1,668 | $17 | $17 | $482 | $4 | $4 |
| Sold\toptions | $ 1,087 | $(5) | $— | $521 | $(3) | $— |
| Foreign\texchange\tinstruments\tother |  |  |  |  |  |  |
| than\taccounting\thedges: |  |  |  |  |  |  |
| Spot/Forward\tcontracts | $833 | $(3) | $1 | $609 | $3 | $4 |
| Purchased\toptions | $115 | $— | $— | $— | $— | $— |
| Sold\toptions | $— | $— | $— | $— | $— | $— |

The	notional	principal	amounts	for	derivative	instruments	provide	one	measure	of	the	transaction	volume	outstanding	as	of	year-end,	and	do	not	represent	the	amount	of the	Company's	exposure	to	credit	or	market	loss.	The	credit	risk	amount	shown	in	the	table	above	represents	the	Company's	gross	exposure	to	potential	accounting	loss on	these	transactions	if	all	counterparties	failed	to	perform	according	to	the	terms	of	the	contract,	based	on	then-current	currency	exchange	rates	at	each	respective	date. The	Company's	exposure	to	credit	loss	and	market	risk	will	vary	over	time	as	a	function	of	currency	exchange	rates.

The	estimates	of	fair	value	are	based	on	applicable	and	commonly	used	pricing	models	and	prevailing	financial	market	information	as	of	September	24,	2005	and September	25,	2004.	Although	the	table	above	reflects	the	notional	principal,	fair	value,	and	credit	risk	amounts	of	the	Company's	foreign	exchange	instruments,	it	does not	reflect	the	gains	or	losses	associated	with	the	exposures	and	transactions	that	the	foreign	exchange	instruments	are	intended	to	hedge.	The	amounts	ultimately realized	upon	settlement	of	these	financial	instruments,	together	with	the	gains	and	losses	on	the	underlying	exposures,	will	depend	on	actual	market	conditions	during the	remaining	life	of	the	instruments.

# Foreign	Exchange	Risk	Management

The	Company	may	enter	into	foreign	currency	forward	and	option	contracts	with	financial	institutions	to	protect	against	foreign	exchange	risk	associated	with	existing assets	and	liabilities,	certain	firmly	committed	transactions,	forecasted	future	cash	flows,	and	net	investments	in	foreign	subsidiaries.	Generally,	the	Company's	practice is	to	hedge	a	majority	of	its	existing	material	foreign	exchange	transaction	exposures.	However,	the	Company	may	not	hedge	certain	foreign	exchange	transaction exposures	due	to	immateriality,	prohibitive	economic	cost	of	hedging	particular	exposures,	or	limited	availability	of	appropriate	hedging	instruments.

To	help	protect	gross	margins	from	fluctuations	in	foreign	currency	exchange	rates,	the	Company's	U.S.	dollar	functional	subsidiaries	hedge	a	portion	of	forecasted foreign	currency	revenues,	and	the	Company's	non-U.S.	dollar	functional	subsidiaries	selling	in	local	currencies	hedge	a	portion	of	forecasted	inventory	purchases	not denominated	in	the	subsidiaries'	functional	currency.	Other	comprehensive	income	associated	with	hedges	of	foreign	currency	revenues	is	recognized	as	a	component	of net	sales	in	the	same

period	as	the	related	sales	are	recognized,	and	other	comprehensive	income	related	to	inventory	purchases	is	recognized	as	a	component	of	cost	of	sales	in	the	same period	as	the	related	costs	are	recognized.	Typically,	the	Company	hedges	portions	of	its	forecasted	foreign	currency	exposure	associated	with	revenues	and	inventory purchases	over	a	time	horizon	of	3	to	6	months.

Derivative	instruments	designated	as	cash	flow	hedges	must	be	de-designated	as	hedges	when	it	is	probable	that	the	forecasted	hedged	transaction	will	not	occur	in	the initially	identified	time	period	or	within	a	subsequent	2	month	time	period.	Deferred	gains	and	losses	in	other	comprehensive	income	associated	with	such	derivative instruments	are	immediately	reclassified	into	earnings	in	other	income	and	expense.	Any	subsequent	changes	in	fair	value	of	such	derivative	instruments	are	also reflected	in	current	earnings	unless	they	are	re-designated	as	hedges	of	other	transactions.	The	Company	recognized	net	losses	of	$1.6	million	and	$2.8	million	in	2005 and	2004,	respectively,	in	other	income	and	expense	related	to	the	loss	of	hedge	designation	on	discontinued	cash	flow	hedges	due	to	changes	in	the	Company's	forecast of	future	net	sales	and	cost	of	sales	and	due	to	prevailing	market	conditions.	No	net	gains,	or	losses,	of	a	similar	nature	were	recorded	in	2003.	As	of	September	24, 2005,	the	Company	had	a	net	deferred	gain	associated	with	cash	flow	hedges	of	approximately	$3.6	million,	net	of	taxes,	substantially	all	of	which	is	expected	to	be reclassified	to	earnings	by	the	end	of	the	second	quarter	of	fiscal	2006.

The	net	gain	or	loss	on	the	effective	portion	of	a	derivative	instrument	designated	as	a	net	investment	hedge	is	included	in	the	cumulative	translation	adjustment	account of	accumulated	other	comprehensive	income	within	shareholders'	equity.	As	of	September	24,	2005	and	September	25,	2004,	the	Company	had	a	net	gain	of	$673,000 and	a	net	loss	of	$1.8	million,	respectively,	included	in	the	cumulative	translation	adjustment.

The	Company	may	also	enter	into	foreign	currency	forward	and	option	contracts	to	offset	the	foreign	exchange	gains	and	losses	generated	by	the	re-measurement	of certain	assets	and	liabilities	recorded	in	non-functional	currencies.	Changes	in	the	fair	value	of	these	derivatives	are	recognized	in	current	earnings	in	other	income	and expense	as	offsets	to	the	changes	in	the	fair	value	of	the	related	assets	or	liabilities.	Due	to	currency	market	movements,	changes	in	option	time	value	can	lead	to increased	volatility	in	other	income	and	expense.

# Interest	Rate	Risk	Management

From	time	to	time,	the	Company	historically	entered	into	interest	rate	derivative	transactions	with	financial	institutions	in	order	to	better	match	the	Company's	floating- rate	interest	income	on	its	cash	equivalents	and	short-term	investments	with	its	fixed-rate	interest	expense	on	any	outstanding	long-term	debt,	and/or	to	diversify	a portion	of	the	Company's	exposure	away	from	fluctuations	in	short-term	U.S.	interest	rates.

During	2001	and	2002,	the	Company	entered	into	and	then	subsequently	terminated	various	interest	rate	debt	swap	agreements	generating	a	realized	gain	of	$23	million. These	gains	were	deferred	and	amortized	over	the	remaining	life	of	the	underlying	debt,	which	matured	and	was	repaid	in	February	2004.

As	of	September	24,	2005	and	September	25,	2004,	the	Company	had	no	interest	rate	derivatives	outstanding.

# Non-Current	Debt	and	Equity	Investments	and	Related	Gains	and	Losses

# Note	3—Consolidated	Financial	Statement	Details	(in	millions)

# Other	Current	Assets

|  | 2005 | 2004 |
| :--- | :--- | :--- |
| Vendor\tnon-trade\treceivables | $417 | $276 |
| Other\tcurrent\tassets | 231 | 209 |
| Total\tother\tcurrent\tassets | $648 | $485 |

|  | 2005 | 2004 |
| :--- | :--- | :--- |
| Land\tand\tbuildings | $361 | $351 |
| Machinery,\tequipment,\tand\tinternal-use\tsoftware | 494 | 422 |
| Office\tfurniture\tand\tequipment | 81 | 79 |
| Leasehold\timprovements | 545 | 446 |
|  | 1,481 | 1,298 |
| Accumulated\tdepreciation\tand\tamortization | (664) | (591) |
| Net\tproperty,\tplant,\tand\tequipment | $817 | $707 |

# Other	Assets

|  | 2005 | 2004 |
| :--- | :--- | :--- |
| Non-current\tdeferred\ttax\tassets | $183 | $86 |
| Capitalized\tsoftware\tdevelopment\tcosts,\tnet | 38 | 25 |
| Other\tassets | 117 | 80 |
| Total\tother\tassets | $338 | $191 |

# Accrued	Expenses

|  | 2005 | 2004 |
| :--- | :--- | :--- |
| Deferred\trevenue—current | $501 | $342 |
| Accrued\tmarketing\tand\tdistribution | 221 | 147 |
| Accrued\tcompensation\tand\temployee\tbenefits | 167 | 134 |
| Accrued\twarranty\tand\trelated\tcosts | 188 | 105 |
| Other\tcurrent\tliabilities | 628 | 472 |
| Total\taccrued\texpenses | $ 1,705 | $ 1,200 |

# Note	3—Consolidated	Financial	Statement	Details	(in	millions)	(Continued)

# Non-current	Liabilities

|  | 2005 | 2004 |
| :--- | :--- | :--- |
| Deferred\trevenue—non-current | $281 | $202 |
| Deferred\ttax\tliabilities | 308 | 113 |
| Other\tnon-current\tliabilities | 12 | 8 |
| Total\tnon-current\tliabilities | $601 | $323 |

|  | 2005 | 2004 | 2003 |
| :--- | :--- | :--- | :--- |
| Interest\tincome | $183 | $64 | $69 |
| Interest\texpense | — | (3) | (8) |
| Gains\ton\tsales\tof\tshort\tterm\tinvestments | — | 1 | 21 |
| Other\tincome\t(expense),\tnet | (18) | (9) | 1 |
| Total\tinterest\tand\tother\tincome,\tnet | $165 | $53 | $83 |

# Note	4—Goodwill	and	Other	intangible	Assets

The	Company	is	currently	amortizing	its	acquired	intangible	assets	with	definite	lives	over	periods	ranging	from	3	to	10	years.

The	following	table	summarizes	the	components	of	gross	and	net	intangible	asset	balances	(in	millions):

|  | Gross | September	24,	2005 | September	24,	2005 | Net | Gross | September	25,	2004 | September	25,	2004 | Net |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | Carrying\nAmount | Accumulated\nAmortization | Accumulated\nAmortization | Carrying\nAmount | Carrying\nAmount | Accumulated\nAmortization | Accumulated\nAmortization | Carrying\nAmount |
| Goodwill | $69 | $— | $— | $69 | $80 | $— | $— | $80 |
| Other\tacquired\tintangible\tassets | 5 | (5) | (5) | — | 5 | (5) | (5) | — |
| Acquired\ttechnology | 61 | (34) | (34) | 27 | 42 | (25) | (25) | 17 |
| Total\tacquired\tintangible\tassets | $135 | $(39 | ) | $96 | $127 | $(30 | ) | $97 |

During	the	fourth	quarter	of	2005,	the	Company	recorded	an	adjustment	of	approximately	$11	million	to	goodwill	relating	to	a	reduction	of	valuation	allowances	that were	recorded	at	the	time	certain	net	operating	loss	carryforwards	(NOLs)	were	acquired	in	previous	business	combinations.	During	the	fourth	quarter	of	2005,	these NOLs	were	deemed	to	be	more	likely	than	not	to	be	realized	and	accordingly	the	valuation	allowances	were	reversed	against	the	related	goodwill	that	was	recognized	at the	time	of	the	acquisitions.

During	the	third	quarter	of	2004,	the	Company	recorded	an	adjustment	of	approximately	$5	million	to	goodwill	related	to	the	acquisition	of	PowerSchool,	Inc. (PowerSchool)	in	2001.	This	reduction	of	goodwill	included	the	cancellation	of	158,334	shares	of	the	Company's	common	stock,	valued	at	approximately	$2	million, that	were	previously	held	in	escrow	and	were	refunded	upon	resolution	of	certain	matters	arising	out	of	the	acquisition	of	PowerSchool.	This	adjustment	also	included approximately	$3	million	to	adjust	the	original	estimates	of	the	pre-acquisition	PowerSchool	restructuring	liability	to	actual	costs	incurred.

# Note	4—Goodwill	and	Other	intangible	Assets	(Continued)

Expected	annual	amortization	expense	related	to	acquired	technology	is	as	follows	(in	millions):

Amortization	expense	related	to	acquired	intangible	assets	was	$9	million,	$7	million,	and	$10	million	in	2005,	2004,	and	2003,	respectively.

# Note	5—Restructuring	Charges

The	Company	recorded	total	restructuring	charges	of	approximately	$23	million	during	the	year	ended	September	25,	2004,	including	approximately	$14	million	in severance	costs,	$5.5	million	in	asset	impairments,	and	a	$3.5	million	charge	for	lease	cancellations	in	conjunction	with	the	vacating	of	a	leased	sales	facility	related	to	a European	workforce	reduction	during	the	fourth	quarter	of	2004.	Of	the	$23	million	charge,	$19.7	million	had	been	utilized	by	the	end	of	2005,	with	the	remaining	$3.3 million	consisting	of	$0.7	million	for	employee	severance	benefits	and	$2.6	million	for	lease	cancellations.	These	actions	will	result	in	the	termination	of	461	employees, 448	of	which	had	been	terminated	prior	to	the	end	of	2005.

The	following	table	summarizes	activity	associated	with	restructuring	actions	initiated	during	2004	(in	millions):

Totals

| Total	charge | $14.0 | $5.5 | $3.5 | $23.0 |
| :--- | :--- | :--- | :--- | :--- |
| Total\tspending\tthrough\tSeptember\t24,\t2005 | (12.4) | — | (0.9) | (13.3) |
| Total\tnon-cash\titems | — | (5.2) | — | (5.2) |
| Adjustments | (0.9) | (0.3) | — | (1.2) |
| Accrual\tat\tSeptember\t24,\t2005 | $0.7 | $— | $2.6 | $3.3 |

The	Company	recorded	total	restructuring	charges	of	approximately	$26.8	million	during	the	year	ended	September	27,	2003,	including	approximately	$7.4	million	in severance	costs,	a	$5.0	million	charge	to	write-off	deferred	compensation,	$7.1	million	in	asset	impairments,	and	a	$7.3	million	charge	for	lease	cancellations	primarily related	to	the	closure	of	the	Company's	Singapore	manufacturing	operations	during	the	first	quarter	of	2003.	Of	the	$26.8	million	charge,	all	had	been	utilized	by	the	end of	2005,	except	for	approximately	$1.7	million	related	to	operating	lease	costs	on	abandoned	facilities.	During	the	third	quarter	of	2003,	approximately	$500,000	of	the amount	originally	accrued	for	lease	cancellations	was	determined	to	be	in	excess	due	to	the	sublease	of	a	property	sooner	than	originally	expected	and	a	shortfall

# Note	5—Restructuring	Charges	(Continued)

of	approximately	$500,000	was	identified	in	the	severance	accrual	due	to	higher	than	expected	severance	costs	related	to	the	closure	of	the	Company's	Singapore manufacturing	operations.	These	adjustments	had	no	net	effect	on	reported	operating	expense.	These	actions	resulted	in	the	termination	of	353	employees.

|  | Employee<br>Severance<br>Benefits | Deferred<br>Compensation<br>Write-off | Asset<br>Impairments | Lease<br>Cancellations | Totals |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Total\tcharge | $7.4 | $5.0 | $7.1 | $7.3 | $26.8 |
| Total\tspending\tthrough\tSeptember\t24, |  |  |  |  |  |
| 2005 | (7.9) | — | — | (5.1) | (13.0) |
| Total\tnon-cash\titems | — | (5.0) | (7.1) | — | (12.1) |
| Adjustments | 0.5 | — | — | (0.5) | — |
| Accrual\tat\tSeptember\t24,\t2005 | $— | $— | $— | $1.7 | $1.7 |

# Note	6—Income	Taxes

The	provision	for	income	taxes	consisted	of	the	following	(in	millions):

| Federal: | 2005 | 2004 | 2003 |
| :--- | :--- | :--- | :--- |
| Current | $303 | $34 | $18 |
| Deferred | 146 | 56 | (7) |
|  | 449 | 90 | 11 |
| State: |  |  |  |
| Current | 66 | 5 | 4 |
| Deferred | (91) | (18) | (11) |
|  | (25) | (13) | (7) |
| Foreign: |  |  |  |
| Current | 59 | 46 | 21 |
| Deferred | (3) | (16) | (1) |
|  | 56 | 30 | 20 |
| Provision\tfor\tincome\ttaxes | $480 | $107 | $24 |

The	foreign	provision	for	income	taxes	is	based	on	foreign	pretax	earnings	of	approximately	$922	million,	$384	million,	and	$250	million	in	2005,	2004,	and	2003, respectively.	As	of	September	24,	2005,	approximately	$4.3	billion	of	the	Company's	cash,	cash	equivalents,	and	short-term	investments	were	held	by	foreign subsidiaries	and	are	generally	based	in	U.S.	dollar-denominated	holdings.	Amounts	held	by	foreign	subsidiaries	are	generally	subject	to	U.S.	income	taxation	on repatriation	to	the	U.S.	The	Company's	consolidated	financial	statements	fully	provide	for	any	related	tax	liability	on	amounts	that	may	be	repatriated,	aside	from undistributed	earnings	of	certain	of	the	Company's	foreign	subsidiaries	that	are	intended	to	be	indefinitely	reinvested	in	operations	outside	the	U.S.	U.S.	income	taxes have	not	been	provided	on	a	cumulative	total	of	$1.2	billion	of	such	earnings.	It	is	not	practicable	to	determine	the	income	tax	liability	that	might	be	incurred	if	these earnings	were	to	be	distributed.

# Note	6—Income	Taxes	(Continued)

On	October	22,	2004,	the	American	Jobs	Creation	Act	(AJCA)	was	signed	into	law.	The	AJCA	includes	a	provision	for	the	deduction	of	85%	of	certain	foreign	earnings that	are	repatriated,	as	defined	in	the	AJCA.	The	legislation	provided	the	Company	with	the	option	to	apply	this	provision	to	repatriations	of	qualifying	earnings	in	either 2005	or	2006.	The	Company	is	continuing	to	evaluate	the	effects	of	the	repatriation	provision	and	expects	to	complete	the	evaluation	in	2006.	A	maximum	of	$755 million	may	be	eligible	for	repatriation	under	the	reduced	tax	rate	provided	by	AJCA.	However,	given	the	uncertainties	and	complexities	of	the	repatriation	provision and	the	Company's	continuing	evaluation,	the	Company	has	not	yet	determined	the	amount	that	may	be	repatriated	or	the	related	potential	income	tax	effects	of	such repatriation.

Deferred	tax	assets	and	liabilities	reflect	the	effects	of	tax	losses,	credits,	and	the	future	income	tax	effects	of	temporary	differences	between	the	consolidated	financial statement	carrying	amounts	of	existing	assets	and	liabilities	and	their	respective	tax	bases	and	are	measured	using	enacted	tax	rates	that	apply	to	taxable	income	in	the years	in	which	those	temporary	differences	are	expected	to	be	recovered	or	settled.

As	of	September	24,	2005	and	September	25,	2004,	the	significant	components	of	the	Company's	deferred	tax	assets	and	liabilities	were	(in	millions):

| Deferred	tax	assets: | 2005 | 2004 |
| :--- | :--- | :--- |
| Accrued\tliabilities\tand\tother\treserves | $321 | $195 |
| Tax\tlosses\tand\tcredits | 305 | 329 |
| Basis\tof\tcapital\tassets\tand\tinvestments | 96 | 65 |
| Accounts\treceivable\tand\tinventory\treserves | 36 | 32 |
| Other | 9 | 26 |
| Total\tdeferred\ttax\tassets | 767 | 647 |
| Less\tvaluation\tallowance | 5 | 30 |
| Net\tdeferred\ttax\tassets | 762 | 617 |
| Deferred\ttax\tliabilities: |  |  |
| Unremitted\tearnings\tof\tsubsidiaries | 557 | 413 |
| Total\tdeferred\ttax\tliabilities | 557 | 413 |
| Net\tdeferred\ttax\tasset | $205 | $204 |

As	of	September	24,	2005,	the	Company	had	operating	loss	carryforwards	for	federal	tax	purposes	of	approximately	$62	million,	which	expire	from	2011	through	2024. A	portion	of	these	carryforwards	was	acquired	from	the	Company's	previous	acquisitions,	the	utilization	of	which	is	subject	to	certain	limitations	imposed	by	the Internal	Revenue	Code.	The	Company	also	has	Federal	credit	carryforwards	and	various	state	and	foreign	tax	loss	and	credit	carryforwards,	the	tax	effect	of	which	is approximately	$206	million	and	which	expire	between	2010	and	2025.	The	remaining	benefits	from	tax	losses	and	credits	do	not	expire.	As	of	September	24,	2005	and September	25,	2004,	a	valuation	allowance	of	$5	million	and	$30	million,	respectively,	was	recorded	against	the	deferred	tax	asset	for	the	benefits	of	tax	losses	that	may not	be	realized.	The	remaining	valuation	allowance	relates	principally	to	the	state	operating	losses.	Management	believes	it	is	more	likely	than	not	that	forecasted income,	including	income	that	may	be	generated	as	a	result	of	certain	tax	planning	strategies,	together	with	the	tax	effects	of	the	deferred	tax	liabilities,	will	be	sufficient to	fully	recover	the	remaining	deferred	tax	assets.

A	reconciliation	of	the	provision	for	income	taxes,	with	the	amount	computed	by	applying	the	statutory	federal	income	tax	rate	(35%	in	2005,	2004,	and	2003)	to income	before	provision	for	income	taxes,	is	as	follows	(in	millions):

|  | 2005 | 2004 | 2003 |
| :--- | :--- | :--- | :--- |
| Computed\texpected\ttax | $636 | $134 | $32 |
| State\ttaxes,\tnet\tof\tfederal\teffect | (19) | (5) | (4) |
| Indefinitely\tinvested\tearnings\tof\tforeign\tsubsidiaries | (98) | (31) | (13) |
| Nondeductible\texecutive\tcompensation | 11 | 10 | 5 |
| Research\tand\tdevelopment\tcredit,\tnet | (26) | (5) | (7) |
| Other\titems | (24) | 4 | 11 |
| Provision\tfor\tincome\ttaxes | $480 | $107 | $24 |
| Effective\ttax\trate | 26% | 28% | 26% |

During	2005,	the	Company	reversed	certain	tax	contingency	reserves	and	recorded	a	corresponding	benefit	to	income	tax	expense	primarily	as	a	result	of	a	change	in	the estimated	outcome	of	certain	tax	disputes.	Additionally,	during	the	fourth	quarter	of	2005,	the	Company	recorded	a	benefit	to	tax	expense	to	adjust	its	net	deferred	tax assets	as	a	result	of	the	Company's	year-end	review	of	its	deferred	tax	accounts,	the	impact	of	which	was	not	material	to	the	current	or	prior	periods'	results	of operations.	The	total	benefit	to	income	tax	expense	from	the	reversal	of	these	tax	contingency	reserves	and	adjustments	to	net	deferred	tax	assets	was	$67	million.	The Company	also	recorded	a	$14	million	credit	to	income	tax	expense	resulting	from	a	reduction	of	the	valuation	allowance.

The	Internal	Revenue	Service	(IRS)	has	completed	its	field	audit	of	the	Company's	federal	income	tax	returns	for	all	years	prior	to	2002	and	proposed	certain adjustments.	Certain	of	these	adjustments	are	being	contested	through	the	IRS	Appeals	Office.	Substantially	all	IRS	audit	issues	for	these	years	have	been	resolved.	In addition,	the	Company	is	also	subject	to	audits	by	state,	local,	and	foreign	tax	authorities.	Management	believes	that	adequate	provisions	have	been	made	for	any adjustments	that	may	result	from	tax	examinations.	However,	the	outcome	of	tax	audits	cannot	be	predicted	with	certainty.	Should	any	issues	addressed	in	the Company's	tax	audits	be	resolved	in	a	manner	not	consistent	with	management's	expectations,	the	Company	could	be	required	to	adjust	its	provision	for	income	tax	in the	period	such	resolution	occurs.

# Note	7—Shareholders'	Equity

# Preferred	Stock

The	Company	has	5	million	shares	of	authorized	preferred	stock,	none	of	which	is	outstanding.	Under	the	terms	of	the	Company's	Restated	Articles	of	Incorporation, the	Board	of	Directors	is	authorized	to	determine	or	alter	the	rights,	preferences,	privileges	and	restrictions	of	the	Company's	authorized	but	unissued	shares	of	preferred stock.

# Note	7—Shareholders'	Equity	(Continued)

# Restricted	Stock	Units

During	2005	and	2004,	the	Company's	Board	of	Directors	approved	the	grant	of	230,000	and	5.03	million	restricted	stock	units,	respectively,	to	members	of	the Company's	senior	management	team,	excluding	its	CEO.	These	restricted	stock	units	generally	vest	over	four	years	either	in	two	equal	installments	on	the	second	and fourth	anniversaries	of	the	date	of	grant	or	in	equal	installments	on	each	of	the	first	through	fourth	anniversaries	of	the	grant	date.	Upon	vesting,	the	restricted	stock	units will	convert	into	an	equivalent	number	of	shares	of	common	stock.	The	Company	has	recorded	$10.3	million	and	$64.4	million	in	2005	and	2004,	respectively,	in	value for	these	restricted	stock	units	as	a	component	of	shareholders'	equity	and	is	amortizing	the	amounts	on	a	straight-line	basis	over	the	four-year	requisite	service	period. The	value	of	the	restricted	stock	units	was	based	on	the	closing	market	price	of	the	Company's	common	stock	on	the	date	of	grant.	The	restricted	stock	units	have	been included	in	the	calculation	of	diluted	earnings	per	share	utilizing	the	treasury	stock	method.

# CEO	Restricted	Stock	Award

On	March	19,	2003,	the	Company	entered	into	an	Option	Cancellation	and	Restricted	Stock	Award	Agreement	(the	Agreement)	with	Mr.	Steven	P.	Jobs,	its	CEO.	The Agreement	cancelled	stock	option	awards	for	the	purchase	of	55	million	shares	of	the	Company's	common	stock	previously	granted	to	Mr.	Jobs	in	2000	and	2001. Mr.	Jobs	retained	options	to	purchase	120,000	shares	of	the	Company's	common	stock	granted	in	August	of	1997	in	his	capacity	as	a	member	of	the	Company's	Board of	Directors,	prior	to	becoming	the	Company's	CEO.	The	Agreement	replaced	the	cancelled	options	with	a	restricted	stock	award	of	10	million	shares	of	the	Company's common	stock.	The	restricted	stock	award	generally	vests	three	years	from	the	date	of	grant.	Vesting	of	some	or	all	of	the	restricted	shares	will	be	accelerated	in	the event	Mr.	Jobs	is	terminated	without	cause,	dies,	or	has	his	management	role	reduced	following	a	change	in	control	of	the	Company.

The	Company	determined	the	value	of	the	restricted	stock	award	in	accordance	with	APB	Opinion	No.	25	and	has	recorded	the	value	as	deferred	stock	compensation	as a	component	of	shareholders'	equity	and	is	amortizing	that	amount	on	a	straight-line	basis	over	the	3	year	service	period.	The	value	of	the	restricted	stock	award	was based	on	the	closing	market	price	of	the	Company's	common	stock	on	the	date	of	the	award.	The	10	million	restricted	shares	have	been	included	in	the	calculation	of diluted	earnings	per	share	utilizing	the	treasury	stock	method.

In	July	1999,	the	Company's	Board	of	Directors	authorized	a	plan	for	the	Company	to	repurchase	up	to	$500	million	of	its	common	stock.	This	repurchase	plan	does	not obligate	the	Company	to	acquire	any	specific	number	of	shares	or	acquire	shares	over	any	specified	period	of	time.

During	the	fourth	quarter	of	2001,	the	Company	entered	into	a	forward	purchase	agreement	to	acquire	3.1	million	shares	of	its	common	stock	in	September	of	2003	at	an average	price	of	$8.32	per	share	for	a	total	cost	of	$25.5	million.	In	August	2003,	the	Company	settled	this	agreement	prior	to	its	maturity,	at	which	time	the	Company's common	stock	had	a	fair	value	of	$11.41.	Other	than	this	forward	purchase	transaction,	the	Company	has	not	engaged	in	any	transactions	to	repurchase	its	common stock	since	2000.	Since	inception	of	the	stock	repurchase	plan,	the	Company	had	repurchased	a	total	of	13.1	million	shares	at	a	cost	of	$217	million.	The	Company	was authorized	to	repurchase	up	to	an	additional	$283	million	of	its	common	stock	as	of	September	24,	2005.

Comprehensive	income	consists	of	two	components,	net	income	and	other	comprehensive	income.	Other	comprehensive	income	refers	to	revenue,	expenses,	gains	and losses	that	under	U.S.	generally	accepted	accounting	principles	are	recorded	as	an	element	of	shareholders'	equity	but	are	excluded	from	net	income.	The	Company's other	comprehensive	income	consists	of	foreign	currency	translation	adjustments	from	those	subsidiaries	not	using	the	U.S.	dollar	as	their	functional	currency, unrealized	gains	and	losses	on	marketable	securities	categorized	as	available-for-sale,	and	net	deferred	gains	and	losses	on	certain	derivative	instruments	accounted	for	as cash	flow	hedges.

The	following	table	summarizes	the	components	of	accumulated	other	comprehensive	income	(loss),	net	of	taxes	(in	millions):

The	tax	effect	related	to	the	change	in	unrealized	gain	on	available-for-sale	securities	was	$4	million	and	$6	million	for	2004	and	2003,	respectively.	The	tax	effect	on	the reclassification	adjustment	for	net	gains/losses	included	in	net	income	was	$1	million	and	$(8)	million	for	2004	and	2003,	respectively.

The	following	table	summarizes	activity	in	other	comprehensive	income	related	to	derivatives,	net	of	taxes,	held	by	the	Company	(in	millions):

|  | 2005 | 2004 | 2003 |  |
| :--- | :--- | :--- | :--- | :--- |
| Changes\tin\tfair\tvalue\tof\tderivatives | $7 | $ (21) | $ (24) | $ (24) |
| Adjustment\tfor\tnet\tgains\trealized\tand\tincluded\tin\tnet\tincome | 1 | 33 | 19 |  |
| Change\tin\tunrealized\tgain/loss\ton\tderivative\tinstruments | $8 | $12 | $(5 | ) |

The	tax	effect	related	to	the	changes	in	fair	value	of	derivatives	was	$(3)	million,	$10	million,	and	$11	million	for	2005,	2004,	and	2003,	respectively.	The	tax	effect related	to	derivative	gains/losses	reclassified	from	other	comprehensive	income	to	net	income	was	$(2)	million,	$(13)	million,	and	$(7)	million	for	2005,	2004,	and 2003,	respectively.

# Note	8—Employee	Benefit	Plans

# 2003	Employee	Stock	Plan

The	2003	Employee	Stock	Plan	(the	2003	Plan)	is	a	shareholder	approved	plan	that	provides	for	broad-based	grants	to	employees,	including	executive	officers.	Based	on the	terms	of	individual	option	grants,	options	granted	under	the	2003	Plan	generally	expire	7	to	10	years	after	the	grant	date	and	generally	become	exercisable	over	a period	of	4	years,	based	on	continued	employment,	with	either	annual	or	quarterly	vesting.	The	2003	Plan	permits	the	granting	of	incentive	stock	options,	nonstatutory stock	options,	restricted	stock	units,	stock	appreciation	rights,	and	stock	purchase	rights.

1997	Employee	Stock	Option	Plan

In	August	1997,	the	Company's	Board	of	Directors	approved	the	1997	Employee	Stock	Option	Plan	(the	1997	Plan),	a	non-shareholder	approved	plan	for	grants	of	stock options	to	employees	who	are	not	officers	of	the	Company.	Based	on	the	terms	of	individual	option	grants,	options	granted	under	the	1997	Plan	generally	expire	7	to	10 years	after	the	grant	date	and	generally	become	exercisable	over	a	period	of	4	years,	based	on	continued	employment,	with	either	annual	or	quarterly	vesting.	In October	2003,	the	Company	terminated	the	1997	Employee	Stock	Option	Plan	and	cancelled	all	remaining	unissued	shares	totaling	28,590,702.		No	new	options	can	be granted	from	the	1997	Plan.

# Employee	Stock	Option	Exchange	Program

On	March	20,	2003,	the	Company	announced	a	voluntary	employee	stock	option	exchange	program	(the	Exchange	Program)	whereby	eligible	employees,	other	than executive	officers	and	members	of	the	Board	of	Directors,	had	an	opportunity	to	exchange	outstanding	options	with	exercise	prices	at	or	above	$12.50	per	share	for	a predetermined	smaller	number	of	new	stock	options	issued	with	exercise	prices	equal	to	the	fair	market	value	of	one	share	of	the	Company's	common	stock	on	the	day the	new	awards	were	issued,	which	was	to	be	at	least	six	months	plus	one	day	after	the	exchange	options	were	cancelled.	On	April	17,	2003,	in	accordance	with	the Exchange	Program,	the	Company	cancelled	options	to	purchase	33,138,386	shares	of	its	common	stock.	On	October	22,	2003,	new	stock	options	totaling	13,394,736 shares	were	issued	to	employees	at	an	exercise	price	of	$11.38	per	share,	which	is	equivalent	to	the	closing	price	of	the	Company's	stock	on	that	date.	No	financial	or accounting	impact	to	the	Company's	financial	position,	results	of	operations	or	cash	flow	was	associated	with	this	transaction.

# 1997	Director	Stock	Option	Plan

In	August	1997,	the	Company's	Board	of	Directors	adopted	a	shareholder	approved	Director	Stock	Option	Plan	(DSOP)	for	non-employee	directors	of	the	Company. Initial	grants	of	30,000	options	under	the	DSOP	vest	in	three	equal	installments	on	each	of	the	first	through	third	anniversaries	of	the	date	of	grant,	and	subsequent annual	grants	of	10,000	options	are	fully	vested	at	grant.

# Rule	10b5-1	Trading	Plans

Certain	of	the	Company's	executive	officers,	including	Mr.	Timothy	D.	Cook,	Mr.	Peter	Oppenheimer,	Mr.	Jonathan	Rubinstein,	Mr.	Philip	W.	Schiller,	Dr.	Bertrand Serlet,	and	Dr.	Avadis	Tevanian,	Jr.,	have	entered	into	trading	plans	pursuant	to	Rule	10b5-1(c)(1)	of	the	Securities	Exchange	Act	of	1934,	as	amended.	A	trading	plan	is a	written	document	that	pre-establishes	the	amounts,	prices	and	dates	(or	formula	for	determining	the	amounts,	prices	and	dates)	of	future	purchases	or	sales	of	the Company's	stock	including	the	exercise	and	sale	of	employee	stock	options	and	shares	acquired	pursuant	to	the	Company's	employee	stock	purchase	plan	and	upon vesting	of	restricted	stock	units.

# Note	8—Employee	Benefit	Plans	(Continued)

# Employee	Stock	Purchase	Plan

The	Company	has	a	shareholder	approved	employee	stock	purchase	plan	(the	Purchase	Plan),	under	which	substantially	all	employees	may	purchase	common	stock through	payroll	deductions	at	a	price	equal	to	85%	of	the	lower	of	the	fair	market	values	as	of	the	beginning	and	end	of	six	month	offering	periods.	Stock	purchases under	the	Purchase	Plan	are	limited	to	10%	of	an	employee's	compensation,	up	to	a	maximum	of	$25,000	in	any	calendar	year.	Beginning	with	the	six-month	offering period	that	started	on	June	30,	2003,	the	number	of	shares	authorized	for	issuance	is	limited	to	a	total	of	1	million	shares	per	offering	period.	During	2005,	2004,	and 2003,	adjusted	for	the	February	2005	stock	split	2.3	million,	3.9	million,	and	4.3	million	shares,	respectively,	were	issued	under	the	Purchase	Plan.	As	of	September	24, 2005,	approximately	3.8	million	shares	were	reserved	for	future	issuance	under	the	Purchase	Plan.

# Employee	Savings	Plan

The	Company	has	an	employee	savings	plan	(the	Savings	Plan)	qualifying	as	a	deferred	salary	arrangement	under	Section	401(k)	of	the	Internal	Revenue	Code.	Under the	Savings	Plan,	participating	U.S.	employees	may	defer	a	portion	of	their	pre-tax	earnings,	up	to	the	Internal	Revenue	Service	annual	contribution	limit	($14,000	for calendar	year	2005).	The	Company	matches	50%	to	100%	of	each	employee's	contributions,	depending	on	length	of	service,	up	to	a	maximum	6%	of	the	employee's earnings.	The	Company's	matching	contributions	to	the	Savings	Plan	were	approximately	$28	million,	$24	million,	and	$21	million	in	2005,	2004,	and	2003, respectively.

# Stock	Option	Activity

A	summary	of	the	Company's	stock	option	activity	and	related	information	for	the	last	three	fiscal	years	follows	(share	amounts	are	presented	in	thousands):

|  | Shares<br>Available<br>for	Grant | Number	of<br>Shares | Outstanding	Options<br>Weighted	Average<br>Exercise	Price |
| :--- | :--- | :--- | :--- |
| Balance\tat\tSeptember\t28,\t2002 | 13,142 | 218,860 | $14.09 |
| Restricted\tStock\tGranted | (10,000) | — | — |
| Options\tGranted | (8,358) | 8,358 | $8.19 |
| Options\tCancelled | 96,886 | (96,886) | $19.80 |
| Options\tExercised | — | (4,308) | $7.02 |
| Plan\tShares\tExpired | (10) | — | — |
| Balance\tat\tSeptember\t27,\t2003\nRestricted\tStock\tUnits\tGranted | 91,660 | 126,024 | $9.54 |
|  | (5,030) | — | — |
| Options\tGranted | (36,394) | 36,394 | $11.48 |
| Options\tCancelled | 6,010 | (6,010) | $10.35 |
| Options\tExercised | — | (45,686) | $8.60 |
| Plan\tShares\tExpired | (32,196) | — | — |
| Balance\tat\tSeptember\t25,\t2004 | 24,050 | 110,722 | $10.52 |
| Additional\tOptions\tAuthorized | 49,000 | — | — |
| Restricted\tStock\tUnits\tGranted | (460) | — | — |
| Options\tGranted | (16,214) | 16,214 | $42.52 |

| Options	Cancelled | 3,844 | (3,844) | $13.28 |
| :--- | :--- | :--- | :--- |
| Restricted\tStock\tUnits\tCancelled | 230 | — | — |
| Options\tExercised | — | (49,871) | $10.05 |
| Plan\tShares\tExpired | (1,493) | — | — |
| Balance\tat\tSeptember\t24,\t2005 | 58,957 | 73,221 | $17.79 |

In	conjunction	with	the	amendments	to	the	2003	Plan	that	were	approved	at	the	Annual	Meeting	of	Shareholders	held	on	April	21,	2005,	the	number	of	shares	available for	grant	under	the	2003	Plan	will	be	reduced	by	two	times	the	number	of	restricted	shares	and	restricted	stock	units	granted.	This	amendment	is	effective	for	all	grants made	after	April	21,	2005.

The	options	outstanding	as	of	September	24,	2005	have	been	segregated	into	eight	ranges	for	additional	disclosure	as	follows	(option	amounts	are	presented	in thousands):

|  | Options<br>Outstanding	as	of<br>September	24,<br>2005 | Options	Outstanding<br>Weighted-<br>Average<br>Remaining<br>Contractual<br>Life	in	Years | Weighted<br>Average<br>Exercise<br>Price | Options	Exercisable<br>Options<br>Exercisable	as	of<br>September	24,<br>2005 | Weighted<br>Average<br>Exercise	Price |
| :--- | :--- | :--- | :--- | :--- | :--- |
| $0.62-$9.13 | 10,092 | 4.29 | $7.33 | 8,310 | $7.26 |
| $9.14-$10.20 | 14,954 | 5.65 | $9.76 | 13,516 | $9.73 |
| $10.21-$10.80 | 2,284 | 5.19 | $ 10.31 | 996 | $10.37 |
| $10.81-$10.90 | 11,726 | 5.36 | $ 10.89 | 2,858 | $10.89 |
| $10.91-$11.38 | 9,151 | 5.10 | $ 11.37 | 2,920 | $11.37 |
| $11.39-$23.72 | 9,622 | 5.39 | $ 16.52 | 5,797 | $17.50 |
| $23.73-$46.10 | 4,791 | 6.38 | $ 36.04 | 406 | $31.62 |
| $46.11-$49.87 | 10,601 | 6.94 | $ 46.75 | — | $— |
| $0.62-$49.87 | 73,221 | 5.53 | $ 17.79 | 34,803 | $10.94 |

As	of	September	25,	2004,	the	Company	had	exercisable	options	outstanding	to	purchase	60.0	million	shares	with	a	weighted	average	exercise	price	of	$10.30	per	share. As	of	September	27,	2003,	the	Company	had	exercisable	options	outstanding	to	purchase	77.5	million	shares	with	a	weighted	average	exercise	price	of	$9.38	per	share.

The	Company	had	5.03	million	restricted	stock	units	outstanding	as	of	September	24,	2005,	which	were	excluded	from	the	options	outstanding	balances	in	the	preceding tables.	None	of	these	restricted	stock	units	was	vested	as	of	September	24,	2005.	These	restricted	stock	units	have	been	deducted	from	the	shares	available	for	grant under	the	Company's	stock	option	plans.

# Note	9—Stock-Based	Compensation

The	Company	has	provided	pro	forma	disclosures	in	Note	1	of	these	Notes	to	Consolidated	Financial	Statements	of	the	effect	on	net	income	and	earnings	per	share	as	if the	fair	value	method	of	accounting	for	stock	compensation	had	been	used	for	its	employee	stock	option	grants	and	employee	stock	purchase	plan	purchases.	These	pro forma	effects	have	been	estimated	at	the	date	of	grant	and	beginning	of	the	period,	respectively,	using	the	Black-Scholes	option	pricing	model.

For	purposes	of	the	pro	forma	disclosures	provided	pursuant	to	SFAS	No.	123,	the	option	awards	issued	in	October	2003	and	the	awards	cancelled	as	part	of	the Employee	Stock	Option	Exchange	Program	have	been	accounted	for	using	modification	accounting.	In	accordance	with	SFAS	No.	123,	the	grant	date	of	the	awards issued	is	the	date	of	acceptance	of	the	exchange	offer	by	participating	employees.	The	cancellation	of	certain	of	the	Company's	CEO's	options	and	replacement	with restricted	shares	in	March	2003	is	also	being	accounted	for	using	modification	accounting	for	purposes	of	the	pro	forma	disclosures	provided	pursuant	to	SFAS	No.	123.

# Note	9—Stock-Based	Compensation	(Continued)

The	assumptions	used	for	each	of	the	last	three	fiscal	years	and	the	resulting	estimate	of	weighted-average	fair	value	per	share	of	options	granted	during	those	years	are as	follows:

|  | 2005 | 2004 | 2003 |
| :--- | :--- | :--- | :--- |
| Expected\tlife\tof\tstock\toptions | 3.5\t-\t3.6\tyears | 3.5\tyears | 3.5\t-\t4\tyears |
| Expected\tlife\tof\tstock\tpurchases | 6\tmonths | 6\tmonths | 6\tmonths |
| Interest\trate—stock\toptions | 3.13%\t-\t3.88% | 2.33%\t-\t3.15% | 2.14%\t-\t2.45% |
| Interest\trate—stock\tpurchases | 1.67%\t-\t3.30% | 0.96%\t-\t1.67% | 1.10%\t-\t1.77% |
| Volatility—stock\toptions | % | 40% | % |
|  | 39%\t-\t40 |  | 40%\t-\t63 |
| Volatility—stock\tpurchases | 32%\t-\t48% | 32%\t-\t44% | 35%\t-\t44% |
| Dividend\tyields | — | — | — |
| Weighted-average\tfair\tvalue\tof\toptions\tgranted\tduring\tthe |  |  |  |
| year | $14.41 | $3.69 | $3.32 |
| Weighted-average\tfair\tvalue\tof\tstock\tpurchases\tduring\tthe |  |  |  |
| year | $7.55 | $2.78 | $2.12 |

For	purposes	of	the	pro	forma	disclosures	provided	pursuant	to	SFAS	No.	123,	the	expected	volatility	assumptions	used	by	the	Company	are	based	on	the	historical volatility	of	the	Company's	common	stock	over	the	most	recent	period	commensurate	with	the	estimated	expected	life	of	the	Company's	stock	options	and	other relevant	factors	including	implied	volatility	in	market	traded	options	on	the	Company's	common	stock	and	the	impact	of	unusual	fluctuations	not	reasonably	expected	to recur	on	the	historical	volatility	of	the	Company's	common	stock.	The	Company	bases	its	expected	life	assumption	on	its	historical	experience	and	on	the	terms	and

conditions	of	the	stock	options	it	grants	to	employees.

# Note	10—Commitments	and	Contingencies

The	Company	leases	various	equipment	and	facilities,	including	retail	space,	under	noncancelable	operating	lease	arrangements.	The	Company	does	not	currently	utilize any	other	off-balance-sheet	financing	arrangements.	The	major	facility	leases	are	for	terms	of	5	to	15	years	and	generally	provide	renewal	options	for	terms	of	3	to	5 additional	years.	Leases	for	retail	space	are	for	terms	of	5	to	20	years,	the	majority	of	which	are	for	10	years,	and	often	contain	multi-year	renewal	options.	As	of September	24,	2005,	the	Company's	total	future	minimum	lease	payments	under	noncancelable	operating	leases	were	$865	million,	of	which	$606	million	related	to leases	for	retail	space.

# Note	10—Commitments	and	Contingencies	(Continued)

Rent	expense	under	all	operating	leases,	including	both	cancelable	and	noncancelable	leases,	was	$140	million,	$103	million,	and	$97	million	in	2005,	2004,	and	2003, respectively.	Future	minimum	lease	payments	under	noncancelable	operating	leases	having	remaining	terms	in	excess	of	one	year	as	of	September	24,	2005,	are	as follows	(in	millions):

| Fiscal	Years |  |
| :--- | :--- |
| 2006 | $108 |
| 2007 | 110 |
| 2008 | 101 |
| 2009 | 97 |
| 2010 | 95 |
| Later\tyears | 354 |
| Total\tminimum\tlease\tpayments | $865 |

# Accrued	Warranty	and	Indemnifications

The	Company	offers	a	basic	limited	parts	and	labor	warranty	on	its	hardware	products.	The	basic	warranty	period	for	hardware	products	is	typically	one	year	from	the date	of	purchase	by	the	end-user.	The	Company	also	offers	a	90-day	basic	warranty	for	its	service	parts	used	to	repair	the	Company's	hardware	products.	The	Company provides	currently	for	the	estimated	cost	that	may	be	incurred	under	its	basic	limited	product	warranties	at	the	time	related	revenue	is	recognized.	Factors	considered	in determining	appropriate	accruals	for	product	warranty	obligations	include	the	size	of	the	installed	base	of	products	subject	to	warranty	protection,	historical	and projected	warranty	claim	rates,	historical	and	projected	cost-per-claim,	and	knowledge	of	specific	product	failures	that	are	outside	of	the	Company's	typical	experience. The	Company	assesses	the	adequacy	of	its	preexisting	warranty	liabilities	and	adjusts	the	amounts	as	necessary	based	on	actual	experience	and	changes	in	future estimates.

The	following	table	reconciles	changes	in	the	Company's	accrued	warranties	and	related	costs	(in	millions):

|  | 2005 | 2004 | 2003 |
| :--- | :--- | :--- | :--- |
| Beginning\taccrued\twarranty\tand\trelated\tcosts | $105 | $67 | $69 |
| Cost\tof\twarranty\tclaims | (188) | (105) | (71) |
| Accruals\tfor\tproduct\twarranties | 271 | 143 | 69 |
| Ending\taccrued\twarranty\tand\trelated\tcosts | $188 | $105 | $67 |

The	Company	generally	does	not	indemnify	end-users	of	its	operating	system	and	application	software	against	legal	claims	that	the	software	infringes	third-party intellectual	property	rights.	Other	agreements	entered	into	by	the	Company	sometimes	include	indemnification	provisions	under	which	the	Company	could	be	subject	to costs	and/or	damages	in	the	event	of	an	infringement	claim	against	the	Company	or	an	indemnified	third-party.	However,	the	Company	has	not	been	required	to	make any	significant	payments	resulting	from	such	an	infringement	claim	asserted	against	itself	or	an	indemnified	third-party	and,	in	the	opinion	of	management,	does	not have	a	potential	liability	related	to	unresolved	infringement	claims	subject	to	indemnification	that	would	have	a	material	adverse	effect	on	its	financial	condition, liquidity	or	results	of	operations.	Therefore,	the	Company	did	not	record	a	liability	for	infringement	costs	as	of	either	September	24,	2005	or	September	25,	2004.

# Concentrations	in	the	Available	Sources	of	Supply	of	Materials	and	Product

Although	most	components	essential	to	the	Company's	business	are	generally	available	from	multiple	sources,	other	key	components	(including	microprocessors	and application-specific	integrated	circuits	("ASICs"))	are	currently	obtained	by	the	Company	from	single	or	limited	sources.	Some	other	key	components,	while	currently available	to	the	Company	from	multiple	sources,	are	at	times	subject	to	industry-wide	availability	and	pricing	pressures.	In	addition,	the	Company	uses	some components	that	are	not	common	to	the	rest	of	the	personal	computer	industry,	and	new	products	introduced	by	the	Company	often	initially	utilize	custom	components obtained	from	only	one	source	until	the	Company	has	evaluated	whether	there	is	a	need	for	and	subsequently	qualifies	additional	suppliers.	If	the	supply	of	a	key	single- sourced	component	to	the	Company	were	to	be	delayed	or	curtailed,	or	in	the	event	a	key	manufacturing	vendor	delays	shipments	of	completed	products	to	the	Company, the	Company's	ability	to	ship	related	products	in	desired	quantities	and	in	a	timely	manner	could	be	adversely	affected.	The	Company's	business	and	financial performance	could	also	be	adversely	affected	depending	on	the	time	required	to	obtain	sufficient	quantities	from	the	original	source,	or	to	identify	and	obtain	sufficient quantities	from	an	alternative	source.	Continued	availability	of	these	components	may	be	affected	if	producers	were	to	decide	to	concentrate	on	the	production	of common	components	instead	of	components	customized	to	meet	the	Company's	requirements.	Finally,	significant	portions	of	the	Company's	CPUs,	logic	boards,	and assembled	products	are	now	manufactured	by	outsourcing	partners,	primarily	in	various	parts	of	Asia.	Although	the	Company	works	closely	with	its	outsourcing partners	on	manufacturing	schedules,	the	Company's	operating	results	could	be	adversely	affected	if	its	outsourcing	partners	were	unable	to	meet	their	production obligations.

# Long-Term	Supply	Agreements

Subsequent	to	September	24,	2005,	the	Company	entered	into	long-term	supply	agreements	with	Hynix	Semiconductor,	Inc.,	Intel	Corporation,	Micron Technology,	Inc.,	Samsung	Electronics	Co.,	Ltd.,	and	Toshiba	Corporation	to	secure	supply	of	NAND	flash	memory	through	calendar	year	2010.	As	part	of	these

agreements,	the	Company	intends	to	prepay	a	total	of	$1.25	billion	for	flash	memory	components	by	the	end	of	the	second	quarter	of	2006.

# Contingencies

The	Company	is	subject	to	certain	other	legal	proceedings	and	claims	that	have	arisen	in	the	ordinary	course	of	business	and	have	not	been	fully	adjudicated.	In	the opinion	of	management,	the	Company	does	not	have	a	potential	liability	related	to	any	current	legal	proceedings	and	claims	that	would	individually	or	in	the	aggregate have	a	material	adverse	effect	on	its	financial	condition,	liquidity,	or	results	of	operations.	However,	the	results	of	legal	proceedings	cannot	be	predicted	with	certainty. Should	the	Company	fail	to	prevail	in	any	of	these	legal	matters	or	should	several	of	these	legal	matters	be	resolved	against	the	Company	in	the	same	reporting	period, the	operating	results	of	a	particular	reporting	period	could	be	materially	adversely	affected.

Production	and	marketing	of	products	in	certain	states	and	countries	may	subject	the	Company	to	environmental	and	other	regulations	including,	in	some	instances,	the requirement	to	provide	customers	the	ability	to	return	product	at	the	end	of	its	useful	life,	and	place	responsibility	for	environmentally	safe	disposal	or	recycling	with	the Company.	Such	laws	and	regulations	have	recently	been	passed	in	several	jurisdictions	in	which	the	Company	operates	including	various	European	Union	member countries,	Japan	and	certain	states	within	the	U.S.	Although	the	Company	does	not	anticipate	any	material	adverse	effects	in	the	future	based	on	the	nature	of	its operations	and	the	thrust	of	such	laws,	there	is	no	assurance	that

such	existing	laws	or	future	laws	will	not	have	a	material	adverse	effect	on	the	Company's	financial	condition,	liquidity,	or	results	of	operations.

# Note	11—Segment	Information	and	Geographic	Data

In	accordance	with	SFAS	No.	131,	Disclosures	about	Segments	of	an	Enterprise	and	Related	Information,	the	Company	reports	segment	information	based	on	the "management"	approach.	The	management	approach	designates	the	internal	reporting	used	by	management	for	making	decisions	and	assessing	performance	as	the source	of	the	Company's	reportable	segments.

The	Company	manages	its	business	primarily	on	a	geographic	basis.	The	Company's	reportable	operating	segments	are	comprised	of	the	Americas,	Europe,	Japan,	and Retail.	The	Americas,	Europe,	and	Japan	reportable	segments	do	not	include	activities	related	to	the	Retail	segment.	The	Americas	segment	includes	both	North	and South	America.	The	Europe	segment	includes	European	countries	as	well	as	the	Middle	East	and	Africa.	The	Retail	segment	operates	Apple-owned	retail	stores	in	the U.S.,	Canada,	Japan,	and	the	U.K.	Other	operating	segments	include	Asia-Pacific,	which	includes	Australia	and	Asia	except	for	Japan,	and	the	Company's	subsidiary, FileMaker,	Inc.	Each	reportable	geographic	operating	segment	provides	similar	hardware	and	software	products	and	similar	services,	and	the	accounting	policies	of	the various	segments	are	the	same	as	those	described	in	Note	1,	"Summary	of	Significant	Accounting	Policies,"	except	as	described	below	for	the	Retail	segment.

The	Company	evaluates	the	performance	of	its	operating	segments	based	on	net	sales.	The	Retail	segment's	performance	is	also	evaluated	based	on	operating	income. Net	sales	for	geographic	segments	are	generally	based	on	the	location	of	the	customers.	Operating	income	for	each	segment	includes	net	sales	to	third	parties,	related cost	of	sales,	and	operating	expenses	directly	attributable	to	the	segment.	Operating	income	for	each	segment	excludes	other	income	and	expense	and	certain	expenses that	are	managed	outside	the	operating	segments.	Costs	excluded	from	segment	operating	income	include	various	corporate	expenses,	manufacturing	costs	and	variances not	included	in	standard	costs,	income	taxes,	and	various	nonrecurring	charges.	Corporate	expenses	include	research	and	development,	corporate	marketing	expenses, manufacturing	costs	and	variances	not	included	in	standard	costs,	and	other	separately	managed	general	and	administrative	expenses	including	certain	corporate expenses	associated	with	support	of	the	Retail	segment.	The	Company	does	not	include	intercompany	transfers	between	segments	for	management	reporting	purposes. Segment	assets	exclude	corporate	assets.	Corporate	assets	include	cash,	short-term	and	long-term	investments,	manufacturing	facilities,	miscellaneous	corporate infrastructure,	goodwill	and	other	acquired	intangible	assets,	and	retail	store	construction-in-progress	that	is	not	subject	to	depreciation.	Except	for	the	Retail	segment, capital	expenditures	for	long-lived	assets	are	not	reported	to	management	by	segment.	Capital	expenditures	by	the	Retail	segment	were	$132	million,	$104	million,	and $92	million	for	2005,	2004,	and	2003	respectively.

Operating	income	for	all	segments,	except	Retail,	includes	cost	of	sales	at	manufacturing	standard	cost,	other	cost	of	sales,	related	sales	and	marketing	costs,	and	certain general	and	administrative	costs.	This	measure	of	operating	income,	which	includes	manufacturing	profit,	provides	a	comparable	basis	for	comparison	between	the Company's	various	geographic	segments.	Certain	manufacturing	expenses	and	related	adjustments	not	included	in	segment	cost	of	sales,	including	variances	between standard	and	actual	manufacturing	costs	and	the	mark-up	above	standard	cost	for	product	supplied	to	the	Retail	segment,	are	included	in	corporate	expenses.

# Note	11—Segment	Information	and	Geographic	Data	(Continued)

Management	assesses	the	operating	performance	of	the	Retail	segment	differently	than	it	assesses	the	operating	performance	of	the	Company's	geographic	segments. The	Retail	segment	revenue	and	operating	income	is	intended	to	depict	a	measure	comparable	to	that	of	the	Company's	major	channel	partners	in	the	U.S.	operating retail	stores	so	the	Company	can	evaluate	the	Retail	segment	performance	as	if	it	were	a	channel	partner.	Therefore,	the	Company	makes	three	significant	adjustments	to the	Retail	segment	for	management	reporting	purposes	that	are	not	included	in	the	results	of	the	Company's	other	segments.

First,	the	Retail	segment's	operating	income	includes	cost	of	sales	for	Apple	products	at	an	amount	normally	charged	to	major	channel	partners	in	the	U.S.	operating retail	stores,	less	the	cost	of	sales	programs	and	incentives	provided	to	those	channel	partners	and	the	Company's	cost	to	support	those	partners.	For	the	years	ended September	24,	2005,	September	25,	2004,	and	September	27,	2003,	this	resulted	in	the	recognition	of	additional	cost	of	sales	above	standard	cost	by	the	Retail	segment and	an	offsetting	benefit	to	corporate	expenses	of	approximately	$435	million,	$213	million,	and	$106	million,	respectively.

Second,	the	Company's	service	and	support	contracts	are	transferred	to	the	Retail	segment	at	the	same	cost	as	that	charged	to	the	Company's	major	retail	channel partners	in	the	U.S.,	resulting	in	a	measure	of	revenue	and	gross	margin	for	those	items	that	is	comparable	between	the	Company's	Retail	stores	and	those	retail	channel partners.	The	Retail	segment	recognizes	the	full	amount	of	revenue	and	cost	of	sales	of	the	Company's	service	and	support	contracts	at	the	time	of	sale.	Because	the Company	has	not	yet	earned	the	revenue	or	incurred	the	costs	associated	with	the	sale	of	these	contracts,	an	offset	to	these	amounts	is	recognized	in	other	operating segments'	net	sales	and	cost	of	sales.	For	the	year	ended	September	24,	2005,	this	resulted	in	the	recognition	of	net	sales	and	cost	of	sales	by	the	Retail	segment,	with corresponding	offsets	in	other	operating	segments,	of	$92	million	and	$64	million,	respectively.	For	the	year	ended	September	25,	2004,	the	net	sales	and	cost	of	sales recognized	by	the	Retail	segment	for	sales	of	service	and	support	contracts	were	$54	million	and	$37	million,	respectively.	For	the	year	ended	September	27,	2003,	this resulted	in	the	recognition	of	net	sales	and	cost	of	sales	by	the	Retail	segment	of	$30	million	and	$20	million,	respectively.

Third,	the	Company	has	opened	seven	high	profile	stores	in	New	York,	Los	Angeles,	Chicago,	San	Francisco,	Tokyo,	Japan,	Osaka,	Japan,	and	London,	England	as	of September	24,	2005.	These	high	profile	stores	are	larger	than	the	Company's	typical	retail	stores	and	were	designed	to	further	promote	brand	awareness	and	provide	a venue	for	certain	corporate	sales	and	marketing	activities,	including	corporate	briefings.	As	such,	the	Company	allocates	certain	operating	expenses	associated	with	these

stores	to	corporate	marketing	expense	to	reflect	the	estimated	benefit	realized	Company-wide.	The	allocation	of	these	operating	costs	is	based	on	the	amount	incurred	for a	high	profile	store	in	excess	of	that	incurred	by	a	more	typical	Company	retail	location.	Expenses	allocated	to	corporate	marketing	resulting	from	the	operations	of	these stores	were	$31	million,	$16	million,	and	$6	million	for	the	years	ended	September	24,	2005,	September	25,	2004,	and	September	27,	2003,	respectively.

Summary	information	by	operating	segment	follows	(in	millions):

| Americas: | 2005 | 2004 | 2003 |
| :--- | :--- | :--- | :--- |
| Net\tsales | $ 6,590 | $ 4,019 | $ 3,181 |
| Operating\tincome | $798 | $465 | $323 |
| Depreciation,\tamortization,\tand\taccretion | $6 | $6 | $5 |
| Segment\tassets\t(a) | $705 | $563 | $494 |
| Europe: |  |  |  |
| Net\tsales | $ 3,073 | $ 1,799 | $ 1,309 |
| Operating\tincome | $454 | $280 | $130 |
| Depreciation,\tamortization,\tand\taccretion | $4 | $4 | $4 |
| Segment\tassets | $289 | $259 | $252 |
| Japan: |  |  |  |
| Net\tsales | $920 | $677 | $698 |
| Operating\tincome | $140 | $115 | $121 |
| Depreciation,\tamortization,\tand\taccretion | $3 | $2 | $3 |
| Segment\tassets | $199 | $114 | $130 |
| Retail: |  |  |  |
| Net\tsales | $ 2,350 | $ 1,185 | $621 |
| Operating\tincome\t(loss) | $151 | $39 | $(5) |
| Depreciation,\tamortization,\tand\taccretion\t(b) | $43 | $35 | $25 |
| Segment\tassets\t(b) | $555 | $351 | $243 |
| Other\tSegments\t(c): |  |  |  |
| Net\tsales | $998 | $599 | $398 |
| Operating\tincome | $118 | $90 | $51 |
| Depreciation,\tamortization,\tand\taccretion | $2 | $2 | $2 |
| Segment\tassets | $133 | $124 | $78 |

(a)										The	Americas	asset	figures	do	not	include	fixed	assets	held	in	the	U.S.	Such	fixed	assets	are	not	allocated	specifically	to	the	Americas	segment	and	are included	in	the	corporate	assets	figures	below.

(b)									Retail	segment	depreciation	and	asset	figures	reflect	the	cost	and	related	depreciation	of	its	retail	stores	and	related	infrastructure.	Retail	store	construction-in- progress,	which	is	not	subject	to	depreciation,	is	reflected	in	corporate	assets.

(c)										Other	Segments	include	Asia-Pacific	and	FileMaker.

A	reconciliation	of	the	Company's	segment	operating	income	and	assets	to	the	consolidated	financial	statements	follows	(in	millions):

|  | 2005 | 2004 | 2003 |
| :--- | :--- | :--- | :--- |
| Segment\toperating\tincome | $1,661 | $989 | $620 |
| Retail\tmanufacturing\tmargin\t(a) | 435 | 213 | 106 |
| Corporate\texpenses,\tnet\t(b) | (446) | (853) | (701) |
| Restructuring\tcosts | — | (23) | (26) |
| Consolidated\toperating\tincome\t(loss) | $1,650 | $326 | $(1) |
| Segment\tassets | $1,881 | $ 1,411 | $ 1,197 |
| Corporate\tassets | 9,670 | 6,639 | $ 5,618 |
| Consolidated\tassets | $11,551 | $ 8,050 | $ 6,815 |
| Segment\tdepreciation,\tamortization,\tand\taccretion | $58 | $49 | $39 |
| Corporate\tdepreciation,\tamortization,\tand\taccretion | 121 | 101 | 74 |
| Consolidated\tdepreciation,\tamortization,\tand\taccretion | $179 | $150 | $113 |

(a)										Represents	the	excess	of	the	Retail	segment's	cost	of	sales	over	the	Company's	standard	cost	of	sales	for	products	sold	through	the	Retail	segment.

(b)									Corporate	expenses	include	research	and	development,	corporate	marketing	expenses,	manufacturing	costs	and	variances	not	included	in	standard	costs,	and other	separately	managed	general	and	administrative	expenses	including	certain	corporate	expenses	associated	with	support	of	the	Retail	segment.

No	single	customer	accounted	for	more	than	10%	of	net	sales	in	2005,	2004,	or	2003.	Net	sales	and	long-lived	assets	related	to	operations	in	the	U.S.,	Japan,	and	other foreign	countries	are	as	follows	(in	millions):

| U.S. | $8,194 | $ 4,893 | $ 3,627 |
| :--- | :--- | :--- | :--- |
| Japan | 1,021 | 738 | 698 |
| Other\tCountries | 4,716 | 2,648 | 1,882 |
| Total\tNet\tSales | $13,931 | $ 8,279 | $ 6,207 |
| Long-Lived\tAssets: |  |  |  |
| U.S. | $738 | $637 | $635 |
| Japan | 63 | 52 | 19 |
| Other\tCountries | 112 | 72 | 60 |
| Total\tLong-Lived\tAssets | $913 | $761 | $714 |

Information	regarding	net	sales	by	product	is	as	follows	(in	millions):

| Net	Sales: | 2005 | 2004 | 2003 |
| :--- | :--- | :--- | :--- |
| Desktops\t(a) | $3,436 | $ 2,373 | $ 2,475 |
| Portables\t(b) | 2,839 | 2,550 | 2,016 |
| Total\tMacintosh\tnet\tsales | 6,275 | 4,923 | 4,491 |
| iPod | 4,540 | 1,306 | 345 |
| Other\tmusic\trelated\tproducts\tand\tservices\t(c) | 899 | 278 | 36 |
| Peripherals\tand\tother\thardware\t(d) | 1,126 | 951 | 691 |
| Software,\tservice,\tand\tother\tnet\tsales\t(e) | 1,091 | 821 | 644 |
| Total\tNet\tSales | $13,931 | $ 8,279 | $ 6,207 |

(a)										Includes	iMac,	eMac,	Mac	mini,	Power	Mac	and	Xserve	product	lines.

(b)									Includes	iBook	and	PowerBook	product	lines.

(c)										Consists	of	iTunes	Music	Store	sales	and	iPod	services,	and	Apple-branded	and	third-party	iPod	accessories.

(d)									Includes	sales	of	Apple-branded	and	third-party	displays,	wireless	connectivity	and	networking	solutions,	and	other	hardware	accessories.

(e)										Includes	sales	of	Apple-branded	operating	system,	application	software,	third-party	software,	AppleCare,	and	Internet	services.

# Note	12—Related	Party	Transactions	and	Certain	Other	Transactions

In	March	2002,	the	Company	entered	into	a	Reimbursement	Agreement	with	its	CEO,	Mr.	Steven	P.	Jobs,	for	the	reimbursement	of	expenses	incurred	by	Mr.	Jobs	in	the operation	of	his	private	plane	when	used	for	Apple	business.	The	Reimbursement	Agreement	became	effective	for	expenses	incurred	by	Mr.	Jobs	for	Apple	business purposes	since	he	took	delivery	of	the	plane	in	May	2001.	The	Company	recognized	a	total	of	$1.1	million,	$483,000,	and	$404,000	in	expenses	pursuant	to	the Reimbursement	Agreement	during	2005,	2004,	and	2003,	respectively.	All	expenses	recognized	pursuant	to	the	Reimbursement	Agreement	have	been	included	in selling,	general,	and	administrative	expenses	in	the	consolidated	statements	of	operations.

Subsequent	to	September	24,	2005,	the	Company	entered	into	an	agreement	with	Pixar	to	sell	certain	of	Pixar's	short	films	on	the	iTunes	Music	Store.	Mr.	Steven	P. Jobs,	the	Company's	CEO	is	also	the	CEO,	Chairman,	and	a	large	shareholder	of	Pixar.

# Note	13—Selected	Quarterly	Financial	Information	(Unaudited)

| Net	sales | $ 3,678 | $3,520 | $ 3,243 | $ 3,490 |
| :--- | :--- | :--- | :--- | :--- |
| Gross\tmargin | $ 1,035 | $1,044 | $968 | $996 |
| Net\tincome | $430 | $320 | $290 | $295 |
| Earnings\tper\tcommon\tshare: |  |  |  |  |
| Basic | $0.52 | $0.39 | $0.36 | $0.37 |
| Diluted | $0.50 | $0.37 | $0.34 | $0.35 |
| 2004 |  |  |  |  |
| Net\tsales | $ 2,350 | $2,014 | $ 1,909 | $ 2,006 |
| Gross\tmargin | $634 | $559 | $530 | $536 |
| Net\tincome | $106 | $61 | $46 | $63 |
| Earnings\tper\tcommon\tshare: |  |  |  |  |
| Basic | $0.14 | $0.08 | $0.06 | $0.09 |
| Diluted | $0.13 | $0.08 | $0.06 | $0.08 |

Basic	and	diluted	earnings	per	share	are	computed	independently	for	each	of	the	quarters	presented.	Therefore,	the	sum	of	quarterly	basic	and	diluted	per	share information	may	not	equal	annual	basic	and	diluted	earnings	per	share.

Net	income	during	the	fourth	quarter	of	2005	benefited	by	$81	million	from	the	reversal	of	certain	tax	contingency	reserves	and	adjustments	to	net	deferred	tax	assets, including	reductions	to	valuation	allowances.

Net	income	during	the	fourth,	third,	and	second	quarters	of	2004	included	restructuring	charges,	net	of	tax,	of	$4	million,	$6	million,	and	$7	million,	respectively.	Net income	during	the	fourth	quarter	of	2004	included	after-tax	gains	related	to	non-current	investments	of	$3	million.

# REPORT	OF	INDEPENDENT	REGISTERED	PUBLIC	ACCOUNTING	FIRM

# The	Board	of	Directors	and	Shareholders

We	have	audited	the	accompanying	consolidated	balance	sheets	of	Apple	Computer,	Inc.	and	subsidiaries	(the	Company)	as	of	September	24,	2005	and	September	25, 2004,	and	the	related	consolidated	statements	of	operations,	shareholders'	equity	and	cash	flows	for	each	of	the	years	in	the	three-year	period	ended	September	24,	2005. These	consolidated	financial	statements	are	the	responsibility	of	the	Company's	management.	Our	responsibility	is	to	express	an	opinion	on	these	consolidated	financial statements	based	on	our	audits.

We	conducted	our	audits	in	accordance	with	the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States).	Those	standards	require	that	we	plan	and perform	the	audit	to	obtain	reasonable	assurance	about	whether	the	consolidated	financial	statements	are	free	of	material	misstatement.	An	audit	includes	examining,	on a	test	basis,	evidence	supporting	the	amounts	and	disclosures	in	the	consolidated	financial	statements.	An	audit	also	includes	assessing	the	accounting	principles	used	and significant	estimates	made	by	management,	as	well	as	evaluating	the	overall	financial	statement	presentation.	We	believe	that	our	audits	provide	a	reasonable	basis	for our	opinion.

In	our	opinion,	the	consolidated	financial	statements	referred	to	above	present	fairly,	in	all	material	respects,	the	financial	position	of	the	Company	as	of	September	24, 2005	and	September	25,	2004,	and	the	results	of	their	operations	and	their	cash	flows	for	each	of	the	years	in	the	three-year	period	ended	September	24,	2005,	in conformity	with	U.S.	generally	accepted	accounting	principles.

We	also	have	audited,	in	accordance	with	the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States),	the	effectiveness	of	the	Company's	internal control	over	financial	reporting	as	of	September	24,	2005,	based	on	criteria	established	in	Internal	Control-Integrated	Framework	issued	by	the	Committee	of Sponsoring	Organizations	of	the	Treadway	Commission	(COSO),	and	our	report	dated	November	29,	2005	expressed	an	unqualified	opinion	on	management's assessment	of,	and	the	effective	operation	of	internal	control	over	financial	reporting.

As	discussed	in	Note	1	to	the	consolidated	financial	statements,	the	Company	changed	its	method	of	accounting	for	asset	retirement	obligations	and	for	financial instruments	with	characteristics	of	both	liabilities	and	equity	in	2003.

/s/	KPMG	LLP

Mountain	View,	California

We	have	audited	management's	assessment,	included	in	the	accompanying	Management's	Annual	Report	on	Internal	Control	over	Financial	Reporting,	that	Apple Computer,	Inc.	and	subsidiaries	maintained	effective	internal	control	over	financial	reporting	as	of	September	24,	2005,	based	on	criteria	established	in	Internal	Control- Integrated	Framework	issued	by	the	Committee	of	Sponsoring	Organizations	of	the	Treadway	Commission	(COSO).	Apple	Computer,	Inc.'s	management	is	responsible for	maintaining	effective	internal	control	over	financial	reporting	and	for	its	assessment	of	the	effectiveness	of	internal	control	over	financial	reporting.	Our responsibility	is	to	express	an	opinion	on	management's	assessment	and	an	opinion	on	the	effectiveness	of	Apple	Computer,	Inc.'s	internal	control	over	financial reporting	based	on	our	audit.

We	conducted	our	audit	in	accordance	with	the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States).	Those	standards	require	that	we	plan	and perform	the	audit	to	obtain	reasonable	assurance	about	whether	effective	internal	control	over	financial	reporting	was	maintained	in	all	material	respects.	Our	audit included	obtaining	an	understanding	of	internal	control	over	financial	reporting,	evaluating	management's	assessment,	testing	and	evaluating	the	design	and	operating effectiveness	of	internal	control,	and	performing	such	other	procedures	as	we	considered	necessary	in	the	circumstances.	We	believe	that	our	audit	provides	a	reasonable basis	for	our	opinion.

A	company's	internal	control	over	financial	reporting	is	a	process	designed	to	provide	reasonable	assurance	regarding	the	reliability	of	financial	reporting	and	the preparation	of	financial	statements	for	external	purposes	in	accordance	with	generally	accepted	accounting	principles.	A	company's	internal	control	over	financial reporting	includes	those	policies	and	procedures	that	(1)	pertain	to	the	maintenance	of	records	that,	in	reasonable	detail,	accurately	and	fairly	reflect	the	transactions	and dispositions	of	the	assets	of	the	company;	(2)	provide	reasonable	assurance	that	transactions	are	recorded	as	necessary	to	permit	preparation	of	financial	statements	in accordance	with	generally	accepted	accounting	principles,	and	that	receipts	and	expenditures	of	the	company	are	being	made	only	in	accordance	with	authorizations	of management	and	directors	of	the	company;	and	(3)	provide	reasonable	assurance	regarding	prevention	or	timely	detection	of	unauthorized	acquisition,	use,	or disposition	of	the	company's	assets	that	could	have	a	material	effect	on	the	financial	statements.

Because	of	inherent	limitations,	internal	control	over	financial	reporting	may	not	prevent	or	detect	misstatements.	Also,	projections	of	any	evaluation	of	effectiveness	to future	periods	are	subject	to	the	risk	that	controls	may	become	inadequate	because	of	changes	in	conditions,	or	that	the	degree	of	compliance	with	the	policies	or procedures	may	deteriorate.

In	our	opinion,	management's	assessment	that	Apple	Computer,	Inc.	maintained	effective	internal	control	over	financial	reporting	as	of	September	24,	2005,	is	fairly stated,	in	all	material	respects,	based	on	criteria	established	in	Internal	Control-Integrated	Framework	issued	by	COSO.	Also,	in	our	opinion,	Apple	Computer,	Inc. maintained,	in	all	material	respects,	effective	internal	control	over	financial	reporting	as	of	September	24,	2005,	based	on	criteria	established	in	Internal	Control-

Integrated	Framework	issued	by	COSO.

We	also	have	audited,	in	accordance	with	the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States),	the	consolidated	balance	sheets	of	Apple Computer,	Inc.	as	of	September	24,	2005	and	September	25,	2004,	and	the	related	consolidated	statements	of	operations,	shareholders'	equity,	and	cash	flows	for	each	of the	years	in	the	three-year	period	ended	September	24,	2005,	and	our	report	dated	November	29,	2005	expressed	an	unqualified	opinion	on	those	consolidated	financial statements.

# Item	9.	Changes	in	and	Disagreements	with	Accountants	on	Accounting	and	Financial	Disclosure

# Not	applicable.

# Item	9A.	Controls	and	Procedures

# Evaluation	of	Disclosure	Controls	and	Procedures

Based	on	an	evaluation	under	the	supervision	and	with	the	participation	of	the	Company's	management,	the	Company's	principal	executive	officer	and	principal financial	officer	have	concluded	that	the	Company's	disclosure	controls	and	procedures	as	defined	in	rules	13a-15(e)	and	15d-15(e)	under	the	Securities	Exchange	Act	of 1934,	as	amended	(Exchange	Act)	were	effective	as	of	September	24,	2005	to	ensure	that	information	required	to	be	disclosed	by	the	Company	in	reports	that	it	files	or submits	under	the	Exchange	Act	is	(i)	recorded,	processed,	summarized	and	reported	within	the	time	periods	specified	in	the	Securities	and	Exchange	Commission rules	and	forms	and	(ii)	accumulated	and	communicated	to	the	Company's	management,	including	its	principal	executive	officer	and	principal	financial	officer,	as appropriate	to	allow	timely	decisions	regarding	required	disclosure.

# Inherent	Limitations	Over	Internal	Controls

The	Company's	internal	control	over	financial	reporting	is	designed	to	provide	reasonable	assurance	regarding	the	reliability	of	financial	reporting	and	the	preparation	of financial	statements	for	external	purposes	in	accordance	with	generally	accepted	accounting	principles.	The	Company's	internal	control	over	financial	reporting	includes those	policies	and	procedures	that:

(i)				pertain	to	the	maintenance	of	records	that,	in	reasonable	detail,	accurately	and	fairly	reflect	the	transactions	and	dispositions	of	the	Company's	assets;

(ii)			provide	reasonable	assurance	that	transactions	are	recorded	as	necessary	to	permit	preparation	of	financial	statements	in	accordance	with	generally accepted	accounting	principles,	and	that	the	Company's	receipts	and	expenditures	are	being	made	only	in	accordance	with	authorizations	of	the Company's	management	and	directors;	and

(iii)		provide	reasonable	assurance	regarding	prevention	or	timely	detection	of	unauthorized	acquisition,	use,	or	disposition	of	the	Company's	assets	that could	have	a	material	effect	on	the	financial	statements.

Management,	including	the	Company's	Chief	Executive	Officer	and	Chief	Financial	Officer,	does	not	expect	that	the	Company's	internal	controls	will	prevent	or	detect all	errors	and	all	fraud.	A	control	system,	no	matter	how	well	designed	and	operated,	can	provide	only	reasonable,	not	absolute,	assurance	that	the	objectives	of	the control	system	are	met.	Further,	the	design	of	a	control	system	must	reflect	the	fact	that	there	are	resource	constraints,	and	the	benefits	of	controls	must	be	considered relative	to	their	costs.	Because	of	the	inherent	limitations	in	all	control	systems,	no	evaluation	of	internal	controls	can	provide	absolute	assurance	that	all	control	issues and	instances	of	fraud,	if	any,	have	been	detected.	Also,	any	evaluation	of	the	effectiveness	of	controls	in	future	periods	are	subject	to	the	risk	that	those	internal	controls may	become	inadequate	because	of	changes	in	business	conditions,	or	that	the	degree	of	compliance	with	the	policies	or	procedures	may	deteriorate.

# Management's	Annual	Report	on	Internal	Control	Over	Financial	Reporting

The	Company's	management	is	responsible	for	establishing	and	maintaining	adequate	internal	control	over	financial	reporting	(as	defined	in	Rule	13a-15(f)	under	the Securities	Exchange	Act	of	1934,	as	amended).	Management	conducted	an	evaluation	of	the	effectiveness	of	the	Company's	internal	control	over	financial	reporting based	on	the	criteria	set	forth	in	Internal	Control—Integrated	Framework	issued	by	the	Committee	of	Sponsoring	Organizations	of	the	Treadway	Commission	(COSO). Based	on	this	evaluation,	management	has	concluded	that	the	Company's	internal	control	over	financial	reporting	was

effective	as	of	September	24,	2005.	The	Company's	independent	registered	public	accounting	firm,	KPMG	LLP,	has	issued	an	attestation	report	on	the	Company's assessment	of	its	internal	control	over	financial	reporting.	The	report	on	the	audit	of	internal	control	over	financial	reporting	appears	on	page	99	of	this	Form	10-K.

# Changes	in	Internal	Control	Over	Financial	Reporting

There	were	no	significant	changes	in	the	Company's	internal	control	over	financial	reporting	identified	in	management's	evaluation	during	the	fourth	quarter	of	fiscal 2005	that	have	materially	affected,	or	are	reasonably	likely	to	materially	affect,	the	Company's	internal	control	over	financial	reporting.

# Item	9B.	Other	Information

# Item	10.	Directors	and	Executive	Officers	of	the	Registrant

# Directors

Listed	below	are	the	Company's	seven	directors	whose	terms	expire	at	the	next	annual	meeting	of	shareholders.

| Name | Position	With	the	Company | Age | Director	Since |
| :--- | :--- | :--- | :--- |
| Fred\tD.\tAnderson | Director | 61 | 2004 |
| William\tV.\tCampbell | Co-lead\tDirector | 65 | 1997 |
| Millard\tS.\tDrexler | Director | 61 | 1999 |
| Albert\tA.\tGore,\tJr. | Director | 57 | 2003 |
| Steven\tP.\tJobs | Director\tand\tChief\tExecutive\tOfficer | 50 | 1997 |
| Arthur\tD.\tLevinson | Co-lead\tDirector | 55 | 2000 |
| Jerome\tB.\tYork | Director | 67 | 1997 |

Fred	D.	Anderson	has	been	a	founding	partner	of	Elevation	Partners,	a	private	equity	firm	focused	on	the	media	and	entertainment	industry,	since	July	2004. Previously,	Mr.	Anderson	served	as	the	Company's	Executive	Vice	President	and	Chief	Financial	Officer	from	April	1996	to	June	2004.	Mr.	Anderson	also	serves	on the	Board	of	Directors	of	eBay	Inc.

William	V.	Campbell	has	been	Chairman	of	the	Board	of	Directors	of	Intuit,	Inc.	("Intuit")	since	August	1998.	From	September	1999	to	January	2000,	Mr.	Campbell acted	as	Chief	Executive	Officer	of	Intuit.	From	April	1994	to	August	1998,	Mr.	Campbell	was	President	and	Chief	Executive	Officer	and	a	director	of	Intuit.	From January	1991	to	December	1993,	Mr.	Campbell	was	President	and	Chief	Executive	Officer	of	GO	Corporation.	Mr.	Campbell	also	serves	on	the	Board	of	Directors	of

# Opsware,	Inc.

Millard	S.	Drexler	has	been	Chairman	and	Chief	Executive	Officer	of	J.	Crew	Group,	Inc.	since	January	2003.	Previously,	Mr.	Drexler	was	Chief	Executive	Officer	of Gap	Inc.	from	1995	and	President	from	1987	until	September	2002.	Mr.	Drexler	was	also	a	member	of	the	Board	of	Directors	of	Gap	Inc.	from	November	1983	until October	2002.

Albert	A.	Gore,	Jr.	has	served	as	a	Senior	Advisor	to	Google,	Inc.	since	2001.	He	has	also	served	as	Executive	Chairman	of	Current	TV	since	2002	and	as	Chairman	of Generation	Investment	Management	since	2004.	He	is	a	visiting	professor	at	Middle	Tennessee	State	University.	Mr.	Gore	was	inaugurated	as	the	45th	Vice	President	of the	U.S.	in	1993.	He	was	re-elected	in	1996	and	served	for	a	total	of	eight	years	as	President	of	the	Senate,	a	member	of	the	Cabinet	and	the	National	Security	Council. Prior	to	1993,	he	served	eight	years	in	the	U.S.	Senate	and	eight	years	in	the	U.S.	House	of	Representatives.

Steven	P.	Jobs	is	one	of	the	Company's	co-founders	and	currently	serves	as	its	Chief	Executive	Officer.	Mr.	Jobs	is	also	the	Chairman	and	Chief	Executive	Officer	of Pixar	Animation	Studios.

Arthur	D.	Levinson,	Ph.D.	has	been	Chief	Executive	Officer	and	a	Director	of	Genentech	Inc.	("Genentech")	since	July	1995.	Dr.	Levinson	has	been	Chairman	of	the Board	of	Directors	of	Genentech	since	September	1999.	He	joined	Genentech	in	1980	and	served	in	a	number	of	executive	positions,	including	Senior	Vice	President	of R&D	from	1993	to	1995.	Dr.	Levinson	also	serves	on	the	Board	of	Directors	of	Google,	Inc.

Jerome	B.	York	has	been	Chief	Executive	Officer	of	Harwinton	Capital	Corporation,	a	private	investment	company	that	he	controls,	since	September	2003.	From January	2000	until	September	2003,	Mr.	York	was	Chairman	and	Chief	Executive	Officer	of	MicroWarehouse,	Inc.,	a	reseller	of	computer	hardware,	software	and peripheral	products.	From	September	1995	to	October	1999,	he	was	Vice	Chairman	of	Tracinda	Corporation.	From	May	1993	to	September	1995	he	was	Senior	Vice President	and	Chief

Financial	Officer	of	IBM	Corporation,	and	served	as	a	member	of	IBM's	Board	of	Directors	from	January	1995	to	August	1995.	Mr.	York	is	also	a	director	of	Tyco International	Ltd.	and	Exide	Technologies.

# Role	of	the	Board;	Corporate	Governance	Matters

It	is	the	paramount	duty	of	the	Board	of	Directors	to	oversee	the	Chief	Executive	Officer	and	other	senior	management	in	the	competent	and	ethical	operation	of	the Company	on	a	day-to-day	basis	and	to	assure	that	the	long-term	interests	of	the	shareholders	are	being	served.	To	satisfy	this	duty,	the	directors	take	a	proactive,	focused approach	to	their	position,	and	set	standards	to	ensure	that	the	Company	is	committed	to	business	success	through	maintenance	of	the	highest	standards	of	responsibility and	ethics.

Members	of	the	Board	bring	to	the	Company	a	wide	range	of	experience,	knowledge	and	judgment.	These	varied	skills	mean	that	governance	is	far	more	than	a	"check the	box"	approach	to	standards	or	procedures.	The	governance	structure	in	the	Company	is	designed	to	be	a	working	structure	for	principled	actions,	effective	decision- making	and	appropriate	monitoring	of	both	compliance	and	performance.	The	key	practices	and	procedures	of	the	Board	are	outlined	in	the	Corporate	Governance Guidelines	available	on	the	Company's	website	at	www.apple.com/investor.

# Board	Committees

The	Board	has	a	standing	Compensation	Committee,	a	Nominating	and	Corporate	Governance	Committee	("Nominating	Committee")	and	an	Audit	and	Finance Committee	("Audit	Committee").	All	committee	members	are	independent	under	the	listing	standards	of	the	NASDAQ	Stock	Market.

The	Audit	Committee	is	primarily	responsible	for	overseeing	the	services	performed	by	the	Company's	independent	auditors	and	internal	audit	department,	evaluating the	Company's	accounting	policies	and	its	system	of	internal	controls	and	reviewing	significant	financial	transactions.	Members	of	the	Audit	Committee	are Messrs.	Campbell	and	York	and	Dr.	Levinson.

The	Compensation	Committee	is	primarily	responsible	for	reviewing	the	compensation	arrangements	for	the	Company's	executive	officers,	including	the	Chief Executive	Officer,	and	for	administering	the	Company's	equity	compensation	plans.	Members	of	the	Compensation	Committee	are	Messrs.	Campbell,	Drexler,	and Gore.

The	Nominating	Committee	assists	the	Board	in	identifying	qualified	individuals	to	become	directors,	determines	the	composition	of	the	Board	and	its	committees, monitors	the	process	to	assess	Board	effectiveness	and	helps	develop	and	implement	the	Company's	corporate	governance	guidelines.	The	Nominating	Committee	also considers	nominees	proposed	by	shareholders.	Members	of	the	Nominating	Committee	are	Messrs.	Drexler	and	Gore	and	Dr.	Levinson.

The	Audit,	Compensation	and	Nominating	Committees	operate	under	written	charters	adopted	by	the	Board.	These	charters	are	available	on	Apple's	website	at www.apple.com/investor.

# Audit	Committee	Financial	Expert

All	members	of	the	Company's	Audit	Committee,	Messrs.	Campbell	and	York	and	Dr.	Levinson,	qualify	as	"audit	committee	financial	experts"	under	Item	401	(h)	of Regulation	S-K	and	are	considered	"independent"	as	the	term	is	used	in	Item	7(d)(3)(iv)	of	Schedule	14A	under	the	Exchange	Act.

# Code	of	Ethics

The	Company	has	a	code	of	ethics	that	applies	to	all	of	the	Company's	employees,	including	its	principal	executive	officer,	principal	financial	officer,	principal accounting	officer	and	its	Board	of	Directors.	A	copy	of	this	code,	"Ethics:	The	Way	We	Do	Business	Worldwide"	is	available	on	the	Company's

website	at	www.apple.com/investor.	The	Company	intends	to	disclose	any	changes	in	or	waivers	from	its	code	of	ethics	by	posting	such	information	on	its	website	or	by filing	a	Form	8-K.

# Executive	Officers

The	following	sets	forth	certain	information	regarding	executive	officers	of	the	Company.	Information	pertaining	to	Mr.	Jobs,	who	is	both	a	director	and	an	executive officer	of	the	Company,	may	be	found	in	the	section	entitled	"Directors."

Timothy	D.	Cook,	Chief	Operating	Officer	(age	45),	joined	the	Company	in	February	1998.	Mr.	Cook	also	served	with	the	Company	as	Executive	Vice	President, Worldwide	Sales	and	Operations	from	2002	to	2005.	In	2004,	his	responsibilities	were	expanded	to	include	the	Company's	Macintosh	hardware	engineering.	From	1998 to	2002,	Mr.	Cook	served	in	the	position	of	Senior	Vice	President,	Worldwide	Operations,	Sales,	Service	and	Support.	Prior	to	joining	the	Company,	Mr.	Cook	held	the position	of	Vice	President,	Corporate	Materials	for	Compaq	Computer	Corporation	("Compaq").	Previous	to	his	work	at	Compaq,	Mr.	Cook	was	the	Chief	Operating Officer	of	the	Reseller	Division	at	Intelligent	Electronics.	Mr.	Cook	also	spent	12	years	with	IBM,	most	recently	as	Director	of	North	American	Fulfillment.	Mr.	Cook also	serves	as	a	member	of	the	Board	of	Directors	of	Nike,	Inc.

Nancy	R.	Heinen,	Senior	Vice	President,	General	Counsel	and	Secretary	(age	49),	joined	the	Company	in	September	1997.	Prior	to	joining	the	Company,	Ms.	Heinen held	the	position	of	Vice	President,	General	Counsel	and	Secretary	of	the	Board	of	Directors	at	NeXT	Software,	Inc.	("NeXT")	from	February	1994	until	the	acquisition

of	NeXT	by	the	Company	in	February	1997.

Ronald	B.	Johnson,	Senior	Vice	President,	Retail	(age	47),	joined	the	Company	in	January	2000.	Prior	to	joining	the	Company,	Mr.	Johnson	spent	16	years	with	Target Stores,	most	recently	as	Senior	Merchandising	Executive.

Peter	Oppenheimer,	Senior	Vice	President	and	Chief	Financial	Officer	(age	42),	joined	the	Company	in	July	1996.	Mr.	Oppenheimer	also	served	with	the	Company	in the	position	of	Vice	President	and	Corporate	Controller	and	as	Senior	Director	of	Finance	for	the	Americas.	Prior	to	joining	the	Company,	Mr.	Oppenheimer	was	CFO	of one	of	the	four	business	units	for	Automatic	Data	Processing,	Inc.	("ADP").	Prior	to	joining	ADP,	Mr.	Oppenheimer	spent	six	years	in	the	Information	Technology Consulting	Practice	with	Coopers	and	Lybrand.

Jonathan	Rubinstein,	Senior	Vice	President,	iPod	Division	(age	49),	joined	the	Company	in	February	1997.	Mr.	Rubinstein	also	served	with	the	Company	in	the position	of	Senior	Vice	President,	Hardware	Engineering.	Before	joining	the	Company,	Mr.	Rubinstein	was	Executive	Vice	President	and	Chief	Operating	Officer	of FirePower	Systems	Incorporated,	from	May	1993	to	August	1996.	Mr.	Rubinstein	also	serves	as	a	member	of	the	Board	of	Directors	of	Immersion	Corporation.

Philip	W.	Schiller,	Senior	Vice	President,	Worldwide	Product	Marketing	(age	45),	rejoined	the	Company	in	1997.	Prior	to	rejoining	the	Company,	Mr.	Schiller	was Vice	President	of	Product	Marketing	at	Macromedia,	Inc.	from	December	1995	to	March	1997	and	was	Director	of	Product	Marketing	at	FirePower	Systems,	Inc.	from 1993	to	December	1995.	Prior	to	that,	Mr.	Schiller	spent	six	years	at	the	Company	in	various	marketing	positions.

Bertrand	Serlet,	Ph.D.,	Senior	Vice	President,	Software	Engineering	(age	44),	joined	the	Company	in	February	1997	upon	the	Company's	acquisition	of	NeXT.	At NeXT,	Dr.	Serlet	held	several	engineering	and	managerial	positions,	including	Director	of	Web	Engineering.	Prior	to	NeXT,	from	1985	to	1989,	Dr.	Serlet	worked	as	a research	engineer	at	Xerox	PARC.

Sina	Tamaddon,	Senior	Vice	President,	Applications	(age	48),	joined	the	Company	in	September	1997.	Mr.	Tamaddon	has	also	served	with	the	Company	in	the position	of	Senior	Vice	President,	Worldwide	Service	and	Support,	and	Vice	President	and	General	Manager,	Newton	Group.	Before	joining	the

Company,	Mr.	Tamaddon	held	the	position	of	Vice	President,	Europe	with	NeXT	from	September	1996	through	March	1997.	From	August	1994	to	August	1996, Mr.	Tamaddon	held	the	position	of	Vice	President,	Professional	Services	with	NeXT.

Avadis	Tevanian,	Jr.,	Ph.D.,	Senior	Vice	President,	Chief	Software	Technology	Officer	(age	44),	joined	the	Company	in	February	1997	upon	the	Company's acquisition	of	NeXT.	Dr.	Tevanian	served	with	the	Company	in	the	position	of	Senior	Vice	President,	Software	Engineering	from	1997	to	July	2003.	With	NeXT, Dr.	Tevanian	held	several	positions,	including	Vice	President,	Engineering,	from	April	1995	to	February	1997.	Prior	to	April	1995,	Dr.	Tevanian	worked	as	an	engineer with	NeXT	and	held	several	management	positions.

# Section	16(a)	Beneficial	Ownership	Reporting	Compliance

Section	16(a)	of	the	Securities	Exchange	Act	of	1934,	as	amended,	requires	the	Company's	officers	and	directors,	and	persons	who	own	more	than	ten	percent	of	a registered	class	of	the	Company's	equity	securities,	to	file	reports	of	securities	ownership	and	changes	in	such	ownership	with	the	Securities	and	Exchange	Commission ("SEC").	Officers,	directors	and	greater	than	ten	percent	shareholders	also	are	required	by	rules	promulgated	by	the	SEC	to	furnish	the	Company	with	copies	of	all Section	16(a)	forms	they	file.

Based	solely	upon	a	review	of	the	copies	of	such	forms	furnished	to	the	Company	or	written	representations	that	no	Forms	5	were	required,	the	Company	believes	that all	Section	16(a)	filing	requirements	were	met	during	fiscal	year	2005.

# Item	11.	Executive	Compensation

# Information	Regarding	Executive	Compensation

The	following	table	summarizes	compensation	information	for	the	last	three	fiscal	years	for	(i)	Mr.	Jobs,	Chief	Executive	Officer	and	(ii)	the	four	most	highly compensated	executive	officers	other	than	the	Chief	Executive	Officer	who	were	serving	as	executive	officers	of	the	Company	at	the	end	of	the	fiscal	year	(collectively, the	"Named	Executive	Officers").

# SUMMARY	COMPENSATION	TABLE

|  |  | Annual	Compensation | Annual	Compensation | Long-Term<br>Compensation |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | Fiscal | Salary | Bonus | Restricted\nStock\tAward | Securities\nUnderlying\nOptions* | All\tOther\nCompensation |
| Name\tand\tPrincipal\tPosition | Year | ($) | ($) | ($) | (#) | ($) |
| Steven\tP.\tJobs | 2005 | 1 | — | — | — | — |
| Chief\tExecutive\tOfficer | 2004 | 1 | — | — | — | — |
|  | 2003 | 1 | — | 74,750,000(1) | — | — |
| Timothy\tD.\tCook | 2005 | 602,434 | 600,239 | — | — | 12,600(3) |
| Chief\tOperating\tOfficer | 2004 | 602,632 | — | 7,650,000(2) | — | 12,588(3) |
|  | 2003 | 617,673 | — | — | — | 9,929(3) |
| Ronald\tB.\tJohnson | 2005 | 552,795 | 550,202 | — | — | — |
| Senior\tVice\tPresident,\tRetail | 2004 | 484,836 | 1,500,000 | 6,375,000(2) | — | — |
|  | 2003 | 452,404 | 1,500,000 | — | — | — |
| Peter\tOppenheimer | 2005 | 552,189 | 550,202 | — | — | 21,092(3) |
| Senior\tVice\tPresident\tand | 2004 | 450,739 | — | 6,375,000(2) | — | 3,808(3) |
| Chief\tFinancial\tOfficer | 2003 | 402,237 | — | — | — | — |
| Jonathan\tRubinstein | 2005 | 552,795 | 551,239 | — | — | 12,600(3) |
| Senior\tVice\tPresident, | 2004 | 485,216 | — | 6,375,000(2) | — | 12,300(3) |
| iPod\tDivision | 2003 | 452,939 | — | — | — | 11,986(3) |

(1)										In	March	2003,	Mr.	Jobs	voluntarily	cancelled	all	of	his	outstanding	options,	excluding	those	granted	to	him	in	his	capacity	as	a	Director.	In	March	2003,	the	Board awarded	Mr.	Jobs	10	million	(split-adjusted)	restricted	shares	of	the	Company's	Common	Stock	that	generally	vest	in	full	on	the	third	anniversary	of	the	grant	date.

(2)										Market	value	of	restricted	stock	units	granted	on	March	24,	2004	(based	on	$12.75	per	share,	the	closing	price	of	the	Company's	common	stock	on	the	NASDAQ National	Market	on	the	day	of	grant).	Restricted	stock	units	generally	vest	over	four	years	with	50%	of	the	total	number	of	shares	vesting	on	each	of	the	second	and fourth	anniversaries	of	the	grant	date.

(3)										Consists	of	matching	contributions	made	by	the	Company	in	accordance	with	the	terms	of	the	401(k)	plan.

# Option	Grants	in	Last	Fiscal	Year

There	were	no	options,	restricted	stock,	or	restricted	stock	units	granted	to	the	Named	Executive	Officers	during	fiscal	year	2005.

# Options	Exercised	and	Year-End	Option	Holdings

The	following	table	provides	information	about	stock	option	exercises	by	the	Named	Executive	Officers	during	fiscal	year	2005	and	stock	options	held	by	each	of	them at	fiscal	year-end.	The	table	has	been	adjusted	to	reflect	the	Company's	two-for-one	stock	split	in	February	2005.

# AGGREGATED	OPTION	EXERCISES	IN	THE	LAST	FISCAL	YEAR

# AND	FISCAL	YEAR-END	OPTION	VALUES

| Name | Shares<br>Acquired	on<br>Exercise<br>(#) | Value<br>Realized<br>($) | Number	of	Securities<br>Underlying	Unexercised<br>Options	at	Fiscal<br>Year-End	(#)<br>Exercisable | Unexercisable | Value	of	Unexercised<br>In-the-Money	Options	at<br>Fiscal	Year-End	($)(1)<br>Exercisable | Unexercisable |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Steven\tP.\tJobs | — | — | 120,000(2) | —(3) | $5,694,000(2) | — |
| Timothy\tD.\tCook | 500,000 | $ 13,329,677 | — | —(3) | — | — |
| Ronald\tB.\tJohnson | 1,350,000 | $ 32,257,127 | 2,100,000 | 150,000(3) | $ 61,910,625 | $ 6,220,500 |
| Peter\tOppenheimer | — | — | 1,107,500 | 37,500(3) | $ 45,994,859 | $ 1,560,062 |
| Jonathan\tRubinstein | 1,800,000 | $ 31,012,815 | — | —(3) | — | — |

(1)										Market	value	of	securities	underlying	in-the-money	options	at	the	end	of	fiscal	year	2005	(based	on	$53.20	per	share,	the	closing	price	of	Common	Stock	on	the NASDAQ	National	Market	on	September	23,	2005),	minus	the	exercise	price.

(2)										Consists	of	120,000	options	granted	to	Mr.	Jobs	in	his	capacity	as	a	director	pursuant	to	the	1997	Director	Stock	Option	Plan.	Since	accepting	the	position	of	CEO,

Mr.	Jobs	is	no	longer	eligible	to	receive	option	grants	under	the	Director	Plan.	In	March	2003,	Mr.	Jobs	voluntarily	cancelled	all	of	his	outstanding	options, excluding	those	granted	to	him	in	his	capacity	as	a	director.

(3)										This	does	not	include	10	million	restricted	shares	granted	to	Mr.	Jobs,	600,000	restricted	stock	units	granted	to	Mr.	Cook,	and	500,000	restricted	stock	units granted	to	each	of	Messrs.	Johnson,	Oppenheimer,	and	Rubinstein.

# Director	Compensation

The	form	and	amount	of	director	compensation	is	determined	by	the	Board	after	a	review	of	recommendations	made	by	the	Nominating	Committee.	The	current	practice of	the	Board	is	to	base	a	substantial	portion	of	a	director's	annual	retainer	on	equity.	In	1998,	shareholders	approved	the	1997	Director	Stock	Option	Plan	(the	"Director Plan")	and	1,600,000	shares	were	reserved	for	issuance	thereunder.	Pursuant	to	the	Director	Plan,	the	Company's	non-employee	directors	are	granted	an	option	to acquire	30,000	shares	of	Common	Stock	upon	their	initial	election	to	the	Board	("Initial	Options").	The	Initial	Options	vest	and	become	exercisable	in	three	equal annual	installments	on	each	of	the	first	through	third	anniversaries	of	the	grant	date.	On	the	fourth	anniversary	of	a	non-employee	director's	initial	election	to	the	Board and	on	each	subsequent	anniversary	thereafter,	the	director	will	be	entitled	to	receive	an	option	to	acquire	10,000	shares	of	Common	Stock	("Annual	Options").	Annual Options	are	fully	vested	and	immediately	exercisable	on	their	date	of	grant.	As	of	the	end	of	the	fiscal	year,	there	were	options	for	740,000	shares	outstanding	under	the Director	Plan.	Since	accepting	the	position	of	CEO,	Mr.	Jobs	is	no	longer	eligible	for	grants	under	the	Director	Plan.	Non-employee	directors	also	receive	a	$50,000 annual	retainer	paid	in	quarterly	increments.	In	addition,	directors	receive	up	to	two	free	computer	systems	per	year	and	are	eligible	to	purchase	additional	equipment	at a	discount.	Directors	do	not	receive	any	additional	consideration	for	serving	on	committees	or	as	committee	chairperson.

# Compensation	Committee	Interlocks	and	Insider	Participation

The	current	members	of	the	Compensation	Committee	are	Messrs.	Campbell,	Drexler	and	Gore,	none	of	whom	are	employees	of	the	Company	and	all	of	whom	are considered	"independent"	directors	under	the

applicable	NASDAQ	rules.	There	were	no	interlocks	or	insider	participation	between	any	member	of	the	Board	or	Compensation	Committee	and	any	member	of	the board	of	the	directors	or	compensation	committee	of	another	company.

# Arrangements	with	Named	Executive	Officers

# Change	In	Control	Arrangements—Stock	Options,	Restricted	Stock,	and	Restricted	Stock	Units

In	the	event	of	a	"change	in	control"	of	the	Company,	all	outstanding	options	under	the	Company's	stock	option	plans,	except	the	Director	Plan,	will,	unless	otherwise determined	by	the	plan	administrator,	become	fully	exercisable,	and	will	be	cashed	out	at	an	amount	equal	to	the	difference	between	the	applicable	"change	in	control price"	and	the	exercise	price.	The	Director	Plan	provides	that	upon	a	"change	in	control"	of	the	Company,	all	outstanding	options	held	by	non-employee	directors	will automatically	become	fully	exercisable	and	will	be	cashed	out	at	an	amount	equal	to	the	difference	between	the	applicable	"change	in	control	price"	and	the	exercise price	of	the	options.	A	"change	in	control"	under	these	plans	is	generally	defined	as	(i)	the	acquisition	by	any	person	of	50%	or	more	of	the	combined	voting	power	of the	Company's	outstanding	securities	or	(ii)	the	occurrence	of	a	transaction	requiring	shareholder	approval	and	involving	the	sale	of	all	or	substantially	all	of	the	assets of	the	Company	or	the	merger	of	the	Company	with	or	into	another	corporation.

In	addition,	options,	restricted	stock	grants,	and	restricted	stock	units	granted	to	the	Named	Executive	Officers	generally	provide	that	in	the	event	there	is	a	"change	in control,"	as	defined	in	the	Company's	stock	option	plans,	and	if	in	connection	with	or	following	such	"change	in	control,"	their	employment	is	terminated	without "Cause"	or	if	they	should	resign	for	"Good	Reason,"	those	options,	restricted	stock,	and	restricted	stock	units	outstanding	that	are	not	yet	vested	as	of	the	date	of	such "change	in	control"	shall	become	fully	vested.	Further,	restricted	stock	and	restricted	stock	units	granted	to	the	Named	Executive	Officers	also	provide	that,	in	the	event the	Company	terminates	the	Officer	without	cause	at	any	time,	the	restricted	stock	units	and	restricted	stock	will	vest	in	full.	Generally,	"Cause"	is	defined	to	include	a felony	conviction,	willful	disclosure	of	confidential	information	or	willful	and	continued	failure	to	perform	his	or	her	employment	duties.	"Good	Reason"	includes resignation	of	employment	as	a	result	of	a	substantial	diminution	in	position	or	duties,	or	an	adverse	change	in	title	or	reduction	in	annual	base	salary.

# Item	12.	Security	Ownership	of	Certain	Beneficial	Owners	and	Management

The	following	table	sets	forth	certain	information	as	of	October	31,	2005	(the	"Table	Date")	with	respect	to	the	beneficial	ownership	of	the	Company's	Common	Stock by	(i)	each	person	the	Company	believes	beneficially	holds	more	than	5%	of	the	outstanding	shares	of	Common	Stock;	(ii)	each	director;	(iii)	each	Named	Executive Officer	listed	in	the	Summary	Compensation	Table	under	the	heading	"Executive	Compensation;"	and	(iv)	all	directors	and	executive	officers	as	a	group.	On	the	Table Date,	839,776,934	shares	of	Common	Stock	were	issued	and	outstanding.	Unless	otherwise	indicated,	all	persons	named	as	beneficial	owners	of	Common	Stock	have sole	voting	power	and	sole	investment	power	with	respect	to	the	shares	indicated	as	beneficially	owned.	In	addition,	unless	otherwise	indicated,	all	persons	named	below can	be	reached	at	Apple	Computer,	Inc.,	1	Infinite	Loop,	Cupertino,	CA	95014.

# Security	Ownership	of	5%	Holders,	Directors,	Nominees	and	Executive	Officers

(1)										Represents	shares	of	Common	Stock	held	and/or	options	held	by	such	individuals	that	were	exercisable	at	the	Table	Date	or	within	60	days	thereafter.	This	does	not include	options	or	restricted	stock	units	that	vest	after	60	days.	The	share	numbers	have	been	adjusted	to	reflect	the	Company's	two-for-one	stock	split	in February	2005.

(3)										Based	on	a	Form	13F	filed	November	14,	2005,	by	Barclays	Global	Investors.	Barclays	Global	Investors	lists	its	address	as	45	Fremont	Street,	San	Francisco,	CA 94105.

(5)										Includes	120,000	shares	of	Common	Stock	that	Mr.	Jobs	has	the	right	to	acquire	by	exercise	of	stock	options.

(6)										Includes	210,000	shares	of	Common	Stock	that	Mr.	Campbell	has	the	right	to	acquire	by	exercise	of	stock	options.

(8)										Includes	170,000	shares	of	Common	Stock	that	Mr.	Drexler	has	the	right	to	acquire	by	exercise	of	stock	options.

(9)										Consists	of	40,000	shares	of	Common	Stock	that	Mr.	Gore	has	the	right	to	acquire	by	exercise	of	stock	options.

(10)			Includes	2,100,000	shares	of	Common	Stock	that	Mr.	Johnson	has	the	right	to	acquire	by	exercise	of	stock	options	and	excludes	500,000	restricted	stock	units.

(11)			Includes	2,000	shares	of	Common	Stock	that	Dr.	Levinson	holds	indirectly	and	90,000	shares	of	Common	Stock	that	Dr.	Levinson	has	the	right	to	acquire	by exercise	of	stock	options.

(12)			Includes	382,500	shares	of	Common	Stock	that	Mr.	Oppenheimer	has	the	right	to	acquire	by	exercise	of	stock	options	and	excludes	500,000	restricted	stock	units.

(14)			Includes	30,000	shares	of	Common	Stock	that	Mr.	York	has	the	right	to	acquire	by	exercise	of	stock	options.

(15)			Includes	5,870,796	shares	of	Common	Stock	that	executive	officers	or	directors	have	the	right	to	acquire	by	exercise	of	stock	options.	Does	not	include	4.4	million of	restricted	stock	units.

*																				Represents	less	than	1%	of	the	issued	and	outstanding	shares	of	Common	Stock	on	the	Table	Date.

# Equity	Compensation	Plan	Information

The	following	table	sets	forth	certain	information,	as	of	September	24,	2005,	concerning	shares	of	common	stock	authorized	for	issuance	under	all	of	the	Company's equity	compensation	plans.	The	table	has	been	adjusted	to	reflect	the	Company's	two-for-one	stock	split	in	February	2005.

| Equity	compensation	plans	approved	by | (a)<br>Number	of	Securities<br>to	be	Issued	Upon<br>Exercise	of<br>Outstanding	Options,<br>Warrants	and	Rights | (b)<br>Weighted	Average<br>Exercise	Price	of<br>Outstanding	Options,<br>Warrants	and	Rights | Number	of	Securities<br>Remaining	Available	for<br>Future	Issuance	Under<br>Equity	Compensation	Plans<br>(Excluding	Securities<br>Reflected	in	Column	(a)) |
| :--- | :--- | :--- | :--- |
| shareholders | 42,365,700 | $ 23.27 | 62,791,724(1) |
| Equity\tcompensation\tplans\tnot\tapproved |  |  |  |
| by\tshareholders | 30,827,565 | $ 10.27 | — |
| Total\tequity\tcompensation\tplans(2) | 73,193,265 | $ 17.79 | 62,791,724 |

(1)										This	number	includes	3,834,300	shares	of	common	stock	reserved	for	issuance	under	the	Employee	Stock	Purchase	Plan,	440,000	shares	available	for	issuance under	the	1997	Director	Stock	Option	Plan,	and	58,517,424	shares	available	for	issuance	under	the	2003	Employee	Stock	Plan.	The	grant	of	5,260,000	shares	of restricted	stock	units	has	been	deducted	from	the	number	of	shares	available	for	future	issuance.	Shares	of	restricted	stock	and	restricted	stock	units	granted	after April	2005	count	against	the	shares	available	for	grant	as	two	shares	for	every	share	granted.	This	amount		does	not	include	shares	under	the	1990	Stock	Option Plan	that	was	terminated	in	1997.	No	new	options	can	be	granted	under	the	1990	Stock	Option	Plan.

(2)										This	table	does	not	include	28,082	outstanding	options	assumed	in	connection	with	a	prior	acquisition	of	a	company	that	originally	granted	those	options.	These assumed	options	have	a	weighted	average	exercise	price	of	$3.39	per	share.	No	additional	options	may	be	granted	under	the	assumed	plan.

# Item	13.	Certain	Relationships	and	Related	Transactions

In	March	2002,	the	Company	entered	into	a	Reimbursement	Agreement	with	its	Chief	Executive	Officer,	Mr.	Steven	P.	Jobs,	for	the	reimbursement	of	expenses

incurred	by	Mr.	Jobs	in	the	operation	of	his	private	plane	when	used	for	Apple	business.	The	Reimbursement	Agreement	is	effective	for	expenses	incurred	by	Mr.	Jobs for	Apple	business	purposes	since	he	took	delivery	of	the	plane	in	May	2001.	During	2005,	the	Company	recognized	a	total	of	$1,075,545	in	expenses	pursuant	to	this reimbursement	agreement	related	to	expenses	incurred	by	Mr.	Jobs	during	2005.

In	October	2005,	the	Company	entered	into	an	agreement	with	Pixar	to	sell	certain	of	Pixar's	short	films	on	the	iTunes	Music	Store.	Mr.	Jobs,	the	Company's	Chief Executive	Officer	is	also	the	Chief	Executive	Officer,	Chairman,	and	a	large	shareholder	of	Pixar.

# Item	14.	Principal	Accountant	Fees	and	Services

The	following	table	sets	forth	the	fees	paid	to	the	Company's	independent	registered	public	accounting	firm,	KPMG	LLP,	during	fiscal	years	2005	and	2004.

# Audit	and	Non-Audit	Fees

|  | 2005 | 2004 |
| :--- | :--- | :--- |
| Audit\tFees | $ 6,948,800(1) $ 3,402,300 | $ 6,948,800(1) $ 3,402,300 |
| Audit-Related\tFees | 46,700(2) | 57,000 |
| Tax\tFees | 923,000(3) | 784,500 |
| All\tOther\tFees | — | — |
| Total | $ 7,918,500 | $ 4,243,800 |

(1)										Audit	fees	relate	to	professional	services	rendered	in	connection	with	the	audit	of	the	Company's	annual	financial	statements	and	internal	control	over	financial reporting,	quarterly	review	of	financial	statements	included	in	the	Company's	Forms	10-Q,	and	audit	services	provided	in	connection	with	other	statutory	and regulatory	filings.

(2)										Audit-related	fees	primarily	relate	to	professional	services	for	the	audits	of	employee	benefit	plans.

(3)										Tax	fees	include	$690,000	for	professional	services	rendered	in	connection	with	tax	compliance	and	preparation	relating	to	the	Company's	expatriate	program,	tax audits	and	international	tax	compliance;	and	$233,000	for	international	tax	consulting	and	planning	services.	The	Company	does	not	engage	KPMG	to	perform personal	tax	services	for	its	executive	officers.

# Policy	on	Audit	Committee	Pre-Approval	of	Audit	and	Non-Audit	Services	Performed	by	the	Independent	Auditors

Prior	to	the	enactment	of	the	Sarbanes-Oxley	Act	of	2002	(the	"Act"),	the	Company	adopted	an	auditor	independence	policy	that	banned	its	auditors	from	performing non-financial	consulting	services,	such	as	information	technology	consulting	and	internal	audit	services.	This	auditor	policy	also	mandates	that	the	audit	and	non-audit services	and	related	budget	be	approved	by	the	Audit	Committee	in	advance,	and	that	the	Audit	Committee	be	provided	with	quarterly	reporting	on	actual	spending.	In accordance	with	this	policy,	all	services	to	be	performed	by	KPMG	were	pre-approved	by	the	Audit	Committee.

Subsequent	to	the	enactment	of	the	Act,	the	Audit	Committee	met	with	KPMG	to	further	understand	the	provisions	of	that	Act	as	it	relates	to	auditor	independence. KPMG	rotated	the	lead	audit	partner	for	fiscal	year	2005	and	will	rotate	other	partners	as	appropriate	in	compliance	with	the	Act.	The	Audit	Committee	will	continue	to monitor	the	activities	undertaken	by	KPMG	to	comply	with	the	Act.

# Item	15.	Exhibits	and	Financial	Statement	Schedules.

*	Confidential	Treatment	requested	as	to	certain	portions	of	this	exhibit.

# SIGNATURES

Pursuant	to	the	requirements	of	Section	13	or	15(d)	of	the	Securities	Exchange	Act	of	1934,	the	registrant	has	duly	caused	this	report	to	be	signed	on	its	behalf	by	the undersigned,	thereunto	duly	authorized,	this	29 th day	of	November	2005.

/s/	PETER		OPPENHEIMER

Peter	Oppenheimer

Senior	Vice	President	and

Chief	Financial	Officer

KNOW	ALL	PERSONS	BY	THESE	PRESENTS,	that	each	person	whose	signature	appears	below	constitutes	and	appoints	Steven	P.	Jobs	and	Peter	Oppenheimer, jointly	and	severally,	his	attorneys-in-fact,	each	with	the	power	of	substitution,	for	him	in	any	and	all	capacities,	to	sign	any	amendments	to	this	Annual	Report	on Form	10-K,	and	to	file	the	same,	with	exhibits	thereto	and	other	documents	in	connection	therewith,	with	the	Securities	and	Exchange	Commission,	hereby	ratifying	and confirming	all	that	each	of	said	attorneys-in-fact,	or	his	substitute	or	substitutes,	may	do	or	cause	to	be	done	by	virtue	hereof.

Pursuant	to	the	requirements	of	the	Securities	Exchange	Act	of	1934,	this	report	has	been	signed	below	by	the	following	persons	on	behalf	of	the	registrant	and	in	the capacities	and	on	the	dates	indicated:



Question: inventory was what percent of total working capital in 2005?
Calculation: inventory = 165
working_capital = 6816
percent_inventory = inventory / working_capital
answer = percent_inventory * 100
Answer: 2.4%