# UNITED	STATES

# SECURITIES	AND	EXCHANGE	COMMISSION

# (Mark	One)

# SECURITIES	EXCHANGE	ACT	OF	1934

For	the	fiscal	year	ended	September	30,	2006

# 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:

Common	Stock,	no	par	value

(Title	of	class)

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

Indicate	by	check	mark	if	the	registrant	is	a	well-known	seasoned	issuer,	as	defined	in	Rule	405	of	the	Securities	Act.	Yes	o			No	x

Indicate	by	check	mark	if	the	registrant	is	not	required	to	file	reports	pursuant	to	Section	13	or	Section	15(d)	of	the	Act.	Yes	o			No	x

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.	o Indicate	by	check	mark	whether	the	registrant	is	a	large	accelerated	filer,	an	accelerated	filer,	or	a	non-accelerated	filer.	See	definition	of		"accelerated	filer	and	large	accelerated	filer" in	Rule	12b-2	of	the	Exchange	Act.	(Check	one):

Large	accelerated	filer	x

Accelerated	filer	o

Non-accelerated	filer	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	April	1,	2006,	was	approximately	$45,716,583,100	based	upon	the	closing price	reported	for	such	date	on	the	NASDAQ	Global	Select	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.

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	provide	current	expectations	of	future	events	based	on	certain	assumptions	and	include	any	statement	that	does	not	directly	relate	to	any	historical	or	current fact.	Forward-looking	statements	can	also	be	identified	by	words	such	as	"anticipates,"	"believes,"	"estimates,"	"expects,"	"intends,"	"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	"Risk Factors"	under	Part	I,	Item	1A	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.

# Explanatory	Note

In	this	Form	10-K,	Apple	Computer,	Inc.	("Apple"	or	"the	Company")	is	restating	its	consolidated	balance	sheet	as	of	September	24,	2005,	and	the	related	consolidated statements	of	operations,	shareholders'	equity,	and	cash	flows	for	each	of	the	fiscal	years	ended	September	24,	2005	and	September	25,	2004,	and	each	of	the	quarters	in fiscal	year	2005.

This	Form	10-K	also	reflects	the	restatement	of	"Selected	Consolidated	Financial	Data"	in	Item	6	for	the	fiscal	years	ended	September	2005,	2004,	2003,	and	2002,	and "Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations"	in	Item	7	for	the	fiscal	years	ended	September	24,	2005	and	September	25, 2004.

Previously	filed	annual	reports	on	Form	10-K	and	quarterly	reports	on	Form	10-Q	affected	by	the	restatements	have	not	been	amended	and	should	not	be	relied	on.

On	June	29,	2006,	the	Company	announced	that	an	internal	review	had	discovered	irregularities	related	to	the	issuance	of	certain	stock	option	grants	made	between 1997	and	2001,	including	a	grant	to	its	Chief	Executive	Officer	("CEO")	Steve	Jobs.	The	Company	also	announced	that	a	Special	Committee	of	outside	directors ("Special	Committee")	had	been	formed	and	had	hired	independent	counsel	to	conduct	a	full	investigation	of	the	Company's	past	stock	option	granting	practices.	On October	4,	2006,	the	Company	announced	the	key	results	of	the	Special	Committee's	investigation,	which	are	set	forth	in	the	Company's	Form	8-K	filed	on	that	date.

As	a	result	of	the	internal	review	and	the	independent	investigation,	management	has	concluded,	and	the	Audit	and	Finance	Committee	of	the	Board	of	Directors	agrees, that	incorrect	measurement	dates	were	used	for	financial	accounting	purposes	for	certain	stock	option	grants	made	in	prior	periods.	Therefore,	the	Company	has	recorded additional	non-cash	stock-based	compensation	expense	and	related	tax	effects	with	regard	to	past	stock	option	grants,	and	the	Company	is	restating	previously	filed financial	statements	in	this	Form	10-K.	These	adjustments,	after	tax,	amounted	to	$4	million,	$7	million,	and	$10	million	in	fiscal	years	2006,	2005	and	2004,

respectively.	The	adjustment	to	2006	was	recorded	in	the	fourth	quarter	of	fiscal	year	2006	due	to	its	insignificance.

The	independent	counsel	and	its	forensic	accountants	("Investigative	Team")	reviewed	the	facts	and	circumstances	surrounding	stock	option	grants	made	on	259	dates. The	Investigative	Team	spent	over	26,500	person-hours	searching	more	than	one	million	physical	and	electronic	documents	and	interviewing	more	than	40	current	and former	directors,	officers,	employees,	and	advisors.	Based	on	a	review	of	the	totality	of	evidence	and	the	applicable	law,	the	Special	Committee	found	no	misconduct	by current	management.	The	Special	Committee's	investigation	identified	a	number	of	grants	for	which	grant	dates	were	intentionally	selected	in	order	to	obtain	favorable exercise	prices.	The	terms	of	these	and	certain	other	grants,	as	discussed	below,	were	finalized	after	the	originally	assigned	grant	dates.	The	Special	Committee concluded	that	the	procedures	for	granting,	accounting	for,	and	reporting	stock	option	grants

did	not	include	sufficient	safeguards	to	prevent	manipulation.	Although	the	investigation	found	that	CEO	Steve	Jobs	was	aware	or	recommended	the	selection	of	some favorable	grant	dates,	he	did	not	receive	or	financially	benefit	from	these	grants	or	appreciate	the	accounting	implications.	The	Special	Committee	also	found	that	the investigation	had	raised	serious	concerns	regarding	the	actions	of	two	former	officers	in	connection	with	the	accounting,	recording	and	reporting	of	stock	option	grants.

Based	on	the	evidence	and	findings	from	the	Company's	internal	review	and	the	Special	Committee's	independent	investigation,	an	analysis	was	performed	of	the measurement	dates	for	the	42,077	stock	option	grants	made	on	259	dates	between	October	1996	and	January	2003	(the	"relevant	period").	The	Company	believes	that the	analysis	was	properly	limited	to	the	relevant	period.	In	addition	to	analyzing	all	grants	made	during	the	relevant	period,	the	Company	sampled	certain	grants	between 1994	and	1997	and	found	none	that	required	accounting	adjustments.	The	first	grants	for	which	stock-based	compensation	expense	is	required	are	dated	December	29, 1997.	The	Company	also	examined	grants	made	after	the	relevant	period	and	found	none	that	required	accounting	adjustments.	Moreover,	in	the	years	after	2002,	Apple made	significant	changes	in	its	stock	option	granting	practices	in	response	to	evolving	legal,	regulatory	and	accounting	requirements.

Consistent	with	the	accounting	literature	and	recent	guidance	from	the	Securities	and	Exchange	Commission	("SEC"),	the	grants	during	the	relevant	period	were organized	into	categories	based	on	grant	type	and	process	by	which	the	grant	was	finalized.	The	Company	analyzed	the	evidence	related	to	each	category	of	grants including,	but	not	limited	to,	electronic	and	physical	documents,	document	metadata,	and	witness	interviews.	Based	on	the	relevant	facts	and	circumstances,	the Company	applied	the	controlling	accounting	standards	to	determine,	for	every	grant	within	each	category,	the	proper	measurement	date.	If	the	measurement	date	is	not the	originally	assigned	grant	date,	accounting	adjustments	were	made	as	required,	resulting	in	stock-based	compensation	expense	and	related	tax	effects.

The	42,077	grants	were	classified	as	follows:	(1)	17	grants	to	persons	elected	or	appointed	to	the	Board	of	Directors	("director	grants");	(2)	3,892	grants	to	employees under	the	Monday/Tuesday	Plan	described	below	("Monday/Tuesday	grants");	(3)	27,096	grants	made	in	broad-based	awards	to	large	numbers	of	employees,	usually	on an	annual	basis	("focal	grants");	(4)	9,988	other	grants	ratified	at	meetings	of	the	Board	or	Compensation	Committee	("meeting	grants");	(5)	1,082	other	grants	ratified by	unanimous	written	consent	("UWC")	of	the	Board	or	Compensation	Committee	("other	UWC	grants");	and	(6)	two	grants	to	the	CEO	("CEO	grants").	All	references to	the	number	of	option	shares,	option	exercise	prices,	and	share	prices	in	this	Explanatory	Note	have	not	been	adjusted	for	any	subsequent	stock	splits.

With	the	exception	of	director	grants,	all	stock	option	grants	were	subject	to	ratification	by	the	Board	or	Compensation	Committee	at	a	meeting	or	by	UWC.	Following approval	of	the	grants	at	a	meeting	or	by	UWC,	the	Company's	legal	staff	would	prepare	a	Secretary's	Certificate	certifying	the	ratification	of	the	grants.	Based	on	the facts	and	circumstances	described	below,	the	Company	has	concluded	that	the	recipients	and	terms	of	certain	grants	were	fixed	for	accounting	purposes	before ratification	pursuant	to	parameters	previously	approved	by	the	Board	or	Compensation	Committee	through	the	Monday/Tuesday	Plan	and	the	focal	process.	As	further discussed	below,	within	these	parameters,	management	had	the	authority	to	determine	the	recipients	and	terms	for	each	grant.	Thus,	the	Company	has	concluded	that	the measurement	dates	for	these	grants	occurred	when	management's	process	for	allocating	these	grants	was	completed	and	the	grants	were	ready	for	ratification,	which	was considered	perfunctory.	With	regard	to	all	other	grants,	the	Company	has	concluded	that	the	grants	were	finalized	and	the	measurement	dates	occurred	when	the	grants were	ratified.	For	many	grants,	however,	the	dates	of	ratification	cannot	be	established	because	the	dates	the	UWCs	were	executed	by	the	Board	or	Compensation Committee	members	or	received	by	the	Company	are	not	available.	For	such	grants,	the	Company	has	concluded	that	the	date	of	the	preparation	of	the	Secretary's Certificate	is	the	best	alternative	for	determining	the	actual	date	of	ratification.

As	discussed	below,	the	Company's	analysis	determined	that	the	originally	assigned	grant	dates	for	6,428	grants	on	42	dates	are	not	the	proper	measurement	dates. Accordingly,	after	accounting	for	forfeitures,	the	Company	has	recognized	stock-based	compensation	expense	of	$105	million	on	a	pre-tax	basis	over	the	respective awards'	vesting	terms.	No	adjustments	were	required	for	the	remaining	35,649	grants.	The	adjustments	were	determined	by	category	as	follows:

Director	Grants—Seventeen	director	grants	were	made	during	the	relevant	period.	Two	director	grants	were	made	pursuant	to	a	1997	plan	that	dated	the	grants	on	the enactment	of	the	plan.	The	remaining	fifteen	grants	were	automatically	made	under	the	Director	Stock	Option	Plan	for	non-employee	directors,	which	was	approved	by shareholders	in	1998,	on	the	date	of	a	director's	election	or	appointment	to	the	Board	and	on	subsequent	anniversaries,	beginning	on	the	fourth	anniversary.	Accordingly, the	analysis	determined	that	the	originally	assigned	grant	date	for	each	director	grant	is	the	measurement	date,	and	no	accounting	adjustments	are	required.

Monday/Tuesday	Grants—Beginning	in	December	1998,	3,892	new	hire	grants	and	grants	for	promotion	and	retention	purposes	("promotion/retention	grants")	were made	during	the	relevant	period	under	the	"Monday/Tuesday	Plan."	Under	the	Monday/Tuesday	Plan,	new	hire	grants	made	within	pre-established	guidelines	approved by	the	Board	or	Compensation	Committee	were	dated	on	the	Monday	that	the	recipient	started	work	(or	the	following	Monday,	if	the	recipient	started	on	another	day). The	Company's	analysis	showed	this	process	to	be	reliable	with	very	low	error	rates.	Promotion/retention	grants,	also	based	on	pre-established	guidelines,	were	made generally	on	the	first	Tuesday	of	each	month.	The	Company	has	concluded	that	the	new	hire	and	promotion/retention	grants	made	pursuant	to	the	Monday/Tuesday	Plan within	pre-established	guidelines	do	not	require	adjustment,	with	the	exception	of	six	grants	that	were	erroneously	dated	before	the	employees'	start	dates.	For	120	new hire	and	promotion/retention	grants	made	outside	the	guidelines,	however,	the	Company	has	concluded	that	the	measurement	dates	are	the	dates	of	ratification	by	the Board	or	Compensation	Committee	rather	than	the	dates	used	for	grants	within	guidelines.	Accordingly,	based	on	the	methodology	described	above,	the	Company	has recognized	stock-based	compensation	expense	of	$6	million	from	126	grants.	If	other	dates	in	the	period	between	the	preparation	of	the	UWC	and	the	preparation	of	the Secretary's	Certificate	had	been	used	as	measurement	dates	for	grants	whose	actual	ratification	dates	are	unknown,	the	total	stock-based	compensation	expense	would have	ranged	from	approximately	$3	million	to	$7	million.

Focal	Grants—During	the	relevant	period,	27,096	focal	grants	were	made	to	employees	typically	on	an	annual	basis	as	part	of	an	extensive	process	that	required	several months	to	complete.	Pursuant	to	limits,	guidelines	and	practices	previously	approved	by	the	Board	or	Compensation	Committee,	managers	throughout	the	Company would	make	recommendations	for	grants	to	employees	in	their	areas	of	responsibility.	After	senior	management	had	determined	that	the	grants	were	made	in	accordance with	these	established	limits,	guidelines	and	practices,	management	treated	the	grants	as	final	when	they	were	submitted	to	the	Board	or	Compensation	Committee	for ratification.	The	Company	has	concluded	that	for	5,595	grants	on	five	dates,	the	originally	assigned	grant	dates	are	not	the	proper	measurement	dates.	For	these	grants, management's	process	for	finalizing	the	grants	was	completed	after	the	originally	assigned	grant	dates.	As	a	result,	the	Company	has	recognized	$29	million	of	stock- based	compensation	expense.	For	two	of	the	five	grant	dates	comprising	3,744	grants,	the	evidence	shows	that	the	grants	were	finalized	and	the	measurement	date occurred	one	day	after	the	originally	assigned	grant	dates.	The	grants	on	these	two	dates	represent	more	than	$16	million	of	the	total	$29	million	of	stock-based compensation	expense	resulting	from	focal	grants.

Other	Meeting	Grants—During	the	relevant	period,	meetings	of	the	Board	or	Compensation	Committee	were	held	to	ratify	9,988	grants	that	are	not	Monday/Tuesday, focal	or	CEO	grants.	The	grant	dates	and	measurement	dates	for	these	grants	are	the	meeting	dates	when	the	grants	were	ratified,	with	the	exception	of	46	grants.	Forty- two	of	these	46	grants	are	dated	concurrent	with	a	meeting	that	considered	and	approved	certain	grants,	but	the	evidence	indicates	that	all	of	the	grants	may	not	have been	finalized	until	a

later	date.	One	of	the	46	grants	was	approved	and	dated	at	another	meeting,	but	the	recipient,	who	was	becoming	employed	by	the	Company	as	part	of	a	corporate acquisition,	did	not	start	until	a	later	date.	Two	other	grants	were	approved	before	the	employees'	start	dates.	Another	grant	was	mistakenly	cancelled	and	subsequently reinstated,	requiring	an	accounting	adjustment.	Thus,	for	these	46	grants	the	Company	has	concluded	that	the	originally	assigned	grant	dates	are	not	the	proper measurement	dates.	As	a	result,	the	Company	has	recognized	$2	million	of	stock-based	compensation	expense.

Other	UWC	Grants—During	the	relevant	period,	1,082	grants	were	approved	by	UWCs	for	a	variety	of	purposes,	including	executive	recruitment,	retention,	promotion and	new	hires	outside	the	Monday/Tuesday	process.	These	grants	were	not	made	pursuant	to	pre-established	guidelines	adopted	by	the	Board	or	Compensation Committee.	Therefore,	the	Company	has	concluded	that	these	grants	were	not	finalized	for	accounting	purposes	until	ratification	by	the	Board	or	Compensation Committee.	Accordingly,	for	660	grants,	the	Company	has	concluded	that	the	originally	assigned	grant	dates	are	not	the	proper	measurement	dates.	As	a	result,	the Company	has	recognized	$48	million	of	stock-based	compensation	expense.	If	other	dates	in	the	period	from	the	preparation	of	the	UWC	to	the	preparation	of	the Secretary's	Certificate	had	been	used	as	measurement	dates	for	grants	whose	actual	ratification	dates	are	unknown,	the	total	stock-based	compensation	would	have ranged	from	approximately	$35	million	to	$56	million.

CEO	Grants—During	the	relevant	period,	the	Company	made	two	grants	to	CEO	Steve	Jobs.	The	first	grant,	dated	January	12,	2000,	was	for	10	million	option	shares. The	second	grant,	dated	October	19,	2001,	was	for	7.5	million	option	shares.	Both	grants	were	cancelled	in	March	2003	prior	to	being	exercised,	when	Mr.	Jobs	received 5	million	shares	of	restricted	stock.

With	respect	to	the	grant	dated	January	12,	2000,	the	Board	on	December	2,	1999,	authorized	a	special	"CEO	Compensation	Committee"	to	grant	Mr.	Jobs	up	to	15 million	shares.	The	evidence	indicates	that	the	CEO	Compensation	Committee	finalized	the	terms	of	the	grant	on	January	12,	2000,	although	the	Committee's	action	was memorialized	in	a	UWC	transmitted	on	January	18,	2000.	Because	the	measurement	date	is	the	originally	assigned	grant	date,	the	Company	has	not	recognized	any stock-based	compensation	expense	from	this	grant.	If	the	Company	had	determined	that	the	measurement	date	was	the	date	when	the	UWC	was	executed	or	received, then	additional	stock-based	compensation	would	have	been	recognized.

The	grant	dated	October	19,	2001	was	originally	approved	at	a	Board	meeting	on	August	29,	2001,	with	an	exercise	price	of	$17.83.	The	terms	of	the	grant,	however, were	not	finalized	until	December	18,	2001.	The	grant	was	dated	October	19,	2001,	with	an	exercise	price	of	$18.30.	The	approval	for	the	grant	was	improperly	recorded as	occurring	at	a	special	Board	meeting	on	October	19,	2001.	Such	a	special	Board	meeting	did	not	occur.	There	was	no	evidence,	however,	that	any	current	member	of management	was	aware	of	this	irregularity.	The	Company	has	recognized	$20	million	in	stock-based	compensation	expense	for	this	grant,	reflecting	the	difference between	the	exercise	price	of	$18.30	and	the	share	price	on	December	18,	2001	of	$21.01.

The	incremental	impact	from	recognizing	stock-based	compensation	expense	resulting	from	the	investigation	of	past	stock	option	grants	is	as	follows	(dollars	in millions):

| Fiscal	Year | Pre-Tax<br>Expense<br>(Income) | After	Tax<br>Expense |
| :--- | :--- | :--- |
| 1998 | $(1) | $ — |
| 1999 | 8 | 6 |
| 2000 | 13 | 9 |
| 2001 | 19 | 13 |
| 2002 | 29 | 23 |
| 2003 | 16 | 12 |
| Total\t1998\t–\t2003\timpact | 84 | 63 |
| 2004 | 13 | 10 |
| 2005 | 7 | 7 |
| 2006 | 1 | 4 |
| Total | $105 | $ 84 |

Additionally,	the	Company	has	restated	the	pro	forma	expense	under	Statement	of	Financial	Accounting	Standards	("SFAS")	No.	123	in	Note	1	of	the	Notes	to Consolidated	Financial	Statements	of	this	Form	10-K	to	reflect	the	impact	of	these	adjustments	for	the	years	ended	September	24,	2005	and	September	25,	2004.

# PART	I

# 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	sale	of	third-party	audio	and	video	products.	The	Company's	products	and services	include	the	Macintosh®	line	of	desktop	and	portable	computers,	the	Mac	OS®	X	operating	system,	the	iPod®	line	of	portable	digital	music	players,	the	iTunes Store®,	a	portfolio	of	peripherals	that	support	and	enhance	the	Macintosh	and	iPod	product	lines,	a	portfolio	of	consumer	and	professional	software	applications,	a variety	of	other	service	and	support	offerings,	and	the	Xserve®	and	Xserve	RAID	server	and	storage	products.	The	Company	sells	its	products	worldwide	through	its online	stores,	its	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	and	iPod	compatible	products	including	application	software,	printers,	storage	devices,	speakers,	headphones,	and	various	other	accessories	and supplies	through	its	online	and	retail	stores.	The	Company	sells	to	education,	consumer,	creative	professional,	business,	and	government	customers.	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	portable	digital	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	to	design	and	develop	its	own	operating	system,	hardware,	application	software,	and	services	to	provide	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	personal	computer	by	creating and	refining	innovations	like	the	iPod	and	iTunes	Store.	The	Company's	strategy	also	includes	expanding	its	distribution	network	to	effectively	reach	more	of	its

targeted	customers	and	provide	them	with	a	high-quality	sales	and	after-sales	support	experience.

# Digital	Lifestyle

The	Company	believes	that	for	both	professionals	and	consumers	the	personal	computer	has	become	the	center	of	an	evolving	digital	lifestyle	by	integrating	and enhancing	the	utility	of	advanced	digital	devices	such	as	the	Company's	iPods,	digital	video	and	still	cameras,	televisions,	CD	and	DVD	players,	cellular	phones, personal	digital	assistants,	and	other	consumer	electronic	devices.	The	attributes	of	the	personal	computer	that	enable	this	functionality	include	a	high-quality	user interface,	easy	access	to	relatively	inexpensive	data	storage,	the	ability	to	run	complex	applications,	and	the	ability	to	connect	easily	to	a	wide	variety	of	other	digital devices	and	to	the	Internet.	The	Company	is	the	only	participant	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.	This,	along	with	its	products'	original	industrial	designs,	intuitive	ease-of-use,	built-in graphics,	multimedia	and	networking	capabilities,	uniquely	positions	the	Company	to	offer	innovative	integrated	digital	lifestyle	solutions.

# Expanded	Distribution

The	Company	believes	a	high-quality	buying	experience	with	knowledgeable	salespersons	that	can	convey	the	value	of	the	Company's	products	and	services	greatly enhances	its	ability	to	attract	and	retain	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.	The	Company	has	also	invested	in	programs	to	enhance	reseller	sales,	including the	Apple	Sales	Consultant	Program,	which	places	Apple	employees	and	contractors	at	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.

By	the	end	of	fiscal	2006,	the	Company	had	opened	a	total	of	165	retail	stores,	including	147	stores	in	the	U.S.	and	a	total	of	18	stores	in	Canada,	Japan,	and	the	U.K. The	Company	opened	5	additional	stores	in	October	and	November	2006.	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 computers	and	related	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	offer	specialized	service	and	personalized	training.

# Education

Throughout	its	history,	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	meet	the	needs	of	education	customers.	These	products	and	services	include	the	iMac™	and	the	MacBook®,	video	creation	and	editing solutions,	wireless	networking,	professional	development	solutions,	and	one-to-one	(1:1)	learning	solutions.	A	1:1	learning	solution	typically	consist	of	a	portable computer	for	every	student	and	teacher	along	with	the	installation	of	a	wireless	network.

# 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	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	creative	solutions	provided	by	the	Company	or	third-party	developers.

# 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	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	and	website	creation.

# Macintosh®	Computers

In	June	2005,	the	Company	announced	its	plan	to	begin	using	Intel	microprocessors	in	its	computers.	During	2006,	the	Company	introduced	new	Intel-based	models	of the	MacBook™	Pro,	MacBook,	Mac®	Pro,	iMac®,	and	Mac	mini	computers.	All	Intel-based	Macintosh	systems	feature	a	fully	native	version	of	Mac	OS	X	Version 10.4	Tiger,	including	the	Rosetta™	translation	technology,	which	allows	most	PowerPC-based	Macintosh	applications	to	run	on	Intel-based	Macintosh	computers.	The Company's	transition	to	Intel	microprocessors	for	Macintosh	systems	was	completed	in	August	2006,	and	its	transition	for	Xserve®	was	completed	in	November	2006. There	are	potential	risks	and	uncertainties	associated	with	the	transition	to	Intel	microprocessors,	which	are	further	discussed	in	Item	1A	of	this	10-K	under	the	heading "Risk	Factors."

# MacBook™	Pro

The	MacBook	Pro	family	of	notebook	computers	is	designed	for	professionals	and	advanced	consumer	users.	Introduced	in	January	2006,	the	MacBook	Pro	includes either	a	15-inch	or	17-inch	widescreen	display,	a	built-in	iSight	video	camera,	Front	Row	with	the	Apple	Remote,	and	the	MagSafe™	power	adapter.	Current	MacBook

Pro	models	include	Intel	Core	2	Duo	processors	at	2.16GHz	or	2.33GHz,	ATI	Mobility	Radeon	X1600	graphics,	667MHz	DDR2	main	memory,	a	Serial	ATA	hard drive,	and	a	slot-loading	double-layer	SuperDrive™.	Every	MacBook	Pro	features	a	1-inch	thin	aluminum	enclosure	and	includes	AirPort	Extreme	wireless	networking, Bluetooth	2.0+EDR,	Gigabit	Ethernet,	two	or	three	USB	2.0	ports,	FireWire	400	and	800	ports,	combination	analog	and	optical	digital	audio	input	and	output	ports,	a full-sized	DVI	video-out	port,	an	ExpressCard/34	slot,	scrolling	trackpad,	and	backlit	keyboard.

# MacBook™

The	MacBook	is	designed	for	consumer	and	education	users.	Introduced	in	May	2006,	the	MacBook	includes	a	13-inch	widescreen	display,	a	built-in	iSight	video camera,	Front	Row	with	the	Apple	Remote,	and	the	MagSafe	magnetic	power	adapter.	Current	MacBook	models	include	Intel	Core	2	Duo	processors	at	1.83GHz	and 2.0GHz,	Intel	integrated	GMA	950	graphics,	667MHz	DDR2	main	memory,	a	Serial	ATA	hard	drive,	and	a	slot-loading	Combo	optical	drive	or	double-layer SuperDrive.	Available	in	either	black	or	white,	every	MacBook	includes	built-in	AirPort	Extreme	wireless	networking,	Bluetooth	2.0+EDR,	Gigabit	Ethernet,	two	USB 2.0	ports,	one	FireWire	400	port,	combination	analog	and	optical	digital	audio	input	and	output	ports,	a	mini-DVI	video	output	port,	and	scrolling	trackpad.

# Mac®	Pro

The	Mac	Pro	desktop	computer	is	targeted	at	business	and	professional	users	and	is	designed	to	meet	the	performance,	expansion,	and	networking	needs	of	the	most demanding	Macintosh	user.	Introduced	in	August	2006,	the	Mac	Pro	features	two	Intel	Xeon	dual-core	processors	running	up	to	3.0GHz,	each	with	4MB	of	shared	Level 2	cache	and	independent	1.33GHz	front-side	buses,	667MHz	fully	buffered	memory,	and	a	256-bit	wide	memory	architecture.	The	Mac	Pro	also	features	a	direct	attach storage	solution	for	snap-in	installation	of	up	to	four	750GB	Serial	ATA	hard	drives	for	a	total	of	3TB	of	internal	storage	and	support	for	two	optical	drives	to simultaneously	read	and/or	write	to	CDs	and	DVDs.	Every	Mac	Pro	includes	three	full-length	PCI	Express	expansion	slots	and	one	double-wide	PCI	Express	graphics slot	to	support	double-wide	graphics	cards.	The	Mac	Pro	also	includes	dual	Gigabit	Ethernet	ports,	optical	digital	input	and	output	ports,	analog	audio	input	and	output ports,	and	multiple	FireWire	400,	FireWire	800	and	USB	2.0	ports.

# iMac®

The	iMac	desktop	computer	is	targeted	at	consumer	and	education	markets.	Introduced	in	January	2006	and	updated	in	September	2006,	the	Intel-based	iMac	is currently	available	with	an	integrated	17-inch	widescreen	LCD	display,	512MB	or	1GB	of	667MHz	DDR2	memory	expandable	to	2GB	or	3GB,	a	1.83GHz	or	2.0GHz Intel	Core	2	Duo	processor,	Intel	integrated	GMA	950	or	ATI	Radeon	X1600	graphics,	and	a	160GB	Serial	ATA	hard	drive.	The	iMac	is	also	available	with	a	20-inch or	24-inch	widescreen	LCD	display,	1GB	of	667MHz	memory	expandable	to	3GB,	a	2.16GHz	processor,	ATI	Radeon	X1600	or	NVIDIA	GeForce	7300	GT	graphics, and	250GB	Serial	ATA	hard	drive.	All	models	include	a	built-in	iSight	video	camera,	mini-DVI	video-out	port,	multiple	USB	2.0	and	FireWire	ports,	built-in	Gigabit Ethernet,	and	AirPort	Extreme	802.11g	wireless	networking.	Most	models	also	include	built-in	Bluetooth	2.0+EDR,	the	Apple	Remote,	and	a	slot-loading	double-layer SuperDrive.

# Mac®	mini

In	February	2006,	the	Company	introduced	the	Intel-based	Mac	mini	that	includes	Front	Row	with	the	Apple	Remote.	The	new	Mac	mini	offers	512MB	of	667MHz memory	expandable	to	2GB	and	either	a	1.66GHz	or	1.83GHz	Intel	Core	Duo	processor.	Every	Mac	mini	now	includes	built-in	Gigabit	Ethernet,	AirPort	Extreme 802.11g	wireless	networking,	Bluetooth	2.0+EDR,	and	a	total	of	four	USB	2.0	ports.	Mac	mini	includes	a	full-size	DVI	interface	and	a	VGA-out	adapter	to	connect	to	a variety	of	displays,	including	televisions,	and	features	both	analog	and	digital	audio	outputs.

# Xserve®	and	Xserve	RAID	Storage	System

Xserve	is	a	rack-mount	server	product	designed	for	simple	setup	and	remote	management	of	intensive	input/output	(I/O)	applications	such	as	digital	video,	high- resolution	digital	imagery,	and	large	databases.	In	November	2006,	the	Company	began	shipping	Xserve,	a	64-bit	server	featuring	Mac	OS®	X	Server	10.4	on	two	Intel Xeon	dual-core	processors	running	at	2.0GHz,	2.66GHz,	or	3.0GHz,	with	support	for	up	to	32GB	of	memory.	Xserve	includes	PCI	Express	and	independent	1.33GHz front	side	buses	with	4MB	of	shared	Level	2	memory	cache.	Two	eight-lane	PCI	Express	expansion	slots	provide	up	to	2GB	of

throughput	each	to	support	fibre	channel,	networking,	and	graphics	cards.	Xserve	supports	up	to	2.25TB	of	hot-plug	storage.	The	Company's	Xserve	RAID	storage system	delivers	up	to	7TB	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.

# Music	Products	and	Services

The	Company	offers	its	iPod®	line	of	portable	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,	television	shows,	movies,	and	iPod	games	through	its	iTunes	Store.	In	addition	to	the Company's	own	iPod	accessories,	thousands	of	third-party	iPod	compatible	products	are	available,	including	portable	and	desktop	speaker	systems,	headphones,	car radio	solutions,	voice	recorders,	cables	and	docks,	power	supplies	and	chargers,	and	carrying	cases	and	armbands.

# iPod®

The	iPod	is	the	Company's	hard-drive	based	portable	digital	music	player	and	was	updated	in	September	2006.	The	iPod	is	available	in	a	30GB	model	capable	of holding	up	to	7,500	songs,	25,000	photos,	or	75	hours	of	video,	and	an	80GB	model	capable	of	holding	up	to	20,000	songs,	25,000	photos,	or	100	hours	of	video.	The iPod	features	up	to	20	hours	of	battery	life	and	includes	a	2.5-inch	color	screen	that	can	display	album	artwork,	photos,	and	video	content	including	music	videos,	video and	audio	podcasts,	short	films,	television	shows,	movies,	and	games.	Other	key	features	of	the	iPod	include	a	calendar,	contact	utility,	and	data	storage	capability.	The iPod	features	the	Company's	patent-pending	Click	Wheel,	a	touch-sensitive	wheel	with	five	push	buttons	for	one-handed	navigation.	The	iPod	also	includes	the Company's	patent-pending	Auto-Sync	technology	that	automatically	synchronizes	and	updates	the	iPod's	digital	music	and	other	content	whenever	it	is	connected	to	a Macintosh	or	Windows	computer	via	USB.	All	iPods	work	with	the	Company's	iTunes	digital	music	management	software	("iTunes	software")	available	for	both Macintosh	and	Windows-based	computers.

# iPod®	nano

In	September	2006,	the	Company	introduced	the	second-generation	version	of	its	flash-memory-based	iPod	nano	featuring	an	aluminum	body	and	up	to	24	hours	of battery	life.	The	second-generation	iPod	nano	includes	the	Click	Wheel,	a	smaller	and	lighter	design,	a	brighter	color	screen	than	its	predecessor,	and	new	Search	and Quick	Scroll	features	that	make	it	easier	to	find	content.	The	iPod	nano	is	available	in	2GB,	4GB	and	8GB	configurations	and	in	a	variety	of	colors.

# iPod®	shuffle

In	September	2006,	the	Company	introduced	a	new	version	of	its	flash-memory-based	iPod	shuffle.	The	new	iPod	shuffle	weighs	half	an	ounce	and	features	an	all-new aluminum	design	and	a	built-in	clip.	The	new	iPod	shuffle	contains	one	gigabyte	of	flash	memory	capable	of	holding	up	to	240	songs	and	provides	up	to	12	hours	of battery	life.	The	iPod	shuffle	is	based	on	the	Company's	shuffle	feature	that	allows	users	to	listen	to	their	music	in	random	order.	iPod	shuffle	works	with	iTunes	and	its patent-pending	AutoFill	option	that	automatically	selects	songs	to	fill	the	iPod	shuffle	from	a	user's	iTunes	library.

# iTunes®	Store

The	Company's	iTunes	Store,	available	for	both	Macintosh	and	Windows-based	computers,	is	a	service	that	allows	customers	to	find,	purchase,	and	download	third-

party	digital	music,	audio	books,	music	videos,	short	films,	television	shows	and	movies,	and	iPod	games.	The	iTunes	Store	also	features	the	Podcast	Directory	that allows	customers	to	search	for	and	download	audio	programs	to	their	computers	and	automatically	receive	new	episodes	over	the	Internet.	Customers	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.	Originally	introduced	in	the	U.S.	in	April	2003,	the	iTunes	Store	now	serves	customers	in	22	countries.

The	iTunes	Store	is	fully	integrated	with	iTunes	software	allowing	customers	to	preview,	purchase,	download,	organize,	share,	and	transfer	digital	content	to	an	iPod using	a	single	software	application.	Further	discussion	of	the	iTunes	software	may	be	found	below	under	the	heading	"Software	Products	and	Computer	Technologies." The	iTunes	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	Store	include	gift	certificates	that	can	be	sent	via	e-mail;	prepaid	music cards;	an	"allowance"	feature	that	enables	users	to	automatically	deposit	funds	into	an	iTunes	Store	account	every	month;	online	gift	options	that	let	customers	give specific	content	to	anyone	with	an	email	address;	parental	controls;	and	album	reviews.

# Peripheral	Products

The	Company	sells	a	variety	of	Apple-branded	and	third-party	computer	hardware	peripheral	products	directly	to	end-users	through	its	retail	and	online	stores,	including printers,	storage	devices,	computer	memory,	digital	video	and	still	cameras,	and	various	other	computing	products	and	supplies.

# Displays

The	Company	manufactures	a	family	of	widescreen	flat	panel	displays	including	the	30-inch	Apple	Cinema	HD	Display™,	a	widescreen	active-matrix	LCD	with	2560- by-1600	pixel	resolution,	the	23-inch	Apple	Cinema	HD	Display	with	1920-by-1200	pixel	resolution	and	the	20-inch	Apple	Cinema	Display®	with	1680-by-1050	pixel resolution.	These	displays	feature	built-in	dual	FireWire	and	dual	USB	2.0	ports	and	use	the	industry	standard	DVI	interface	for	a	pure	digital	connection	with	the Company's	latest	Mac	Pro,	MacBook	Pro,	and	MacBook	systems.	The	Cinema	Displays	feature	an	aluminum	design	with	a	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

Mac	OS	X	is	built	on	an	open-source	UNIX-based	foundation.	The	most	recent	version,	Mac	OS	X	Tiger,	is	the	fifth	major	release	of	Mac	OS	X.	Tiger	incorporates 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	way	to	instantly	access	information	such	as	weather	forecasts	and	stock	quotes,	using	a	new	class	of	mini-applications	called	widgets.	Mac OS	X	Server	version	10.4	is	the	server	version	of	the	Mac	OS	operating	system.

# Server	Software	and	Server	Solutions

In	April	2006,	the	Company	introduced	Apple	Remote	Desktop	3,	the	Company's	third	generation	desktop	management	application.	Apple	Remote	Desktop	3	is	a Universal	application,	meaning	that	it	runs	natively	on	both	Intel	and	PowerPC-based	Macintosh	computers	(Universal)	for	asset	management	and	remote	assistance	that enables	Spotlight	searches	across	multiple	Tiger	systems	and	includes	over	30	Automator	actions	for	automating	repetitive	system	administration	tasks,	a	Dashboard Widget	that	provides	observation	of	remote	systems,	and	AutoInstall	for	installing	software	automatically	on	mobile	systems	when	they	return	online.

Xsan®,	the	Company's	enterprise-class	Storage	Area	Network	("SAN")	file	system,	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.	Xsan	can	be	used	in	heterogeneous	environments	that	include	Windows, UNIX,	and	Linux	server	operating	system	platforms.

# Professional	Application	Software

In	March	2006,	the	Company	introduced	Final	Cut	Studio®	5.1,	the	Company's	High	Definition	("HD")	video	production	suite.	Final	Cut	Studio	features	Final	Cut Pro®	5,	Soundtrack®	Pro,	Motion	2,	and	DVD	Studio	Pro®	4.	All	of	these	applications	are	Universal.

Final	Cut	Pro®	5.1,	the	latest	version	of	the	Company's	video	editing	software,	includes	editing	tools	that	work	natively	with	most	formats,	from	Digital	Video ("DV")	and	High	Definition	Video	("HDV")	to	fully	uncompressed	HD.	With	a	real-time	multi-stream	effects	architecture,	multicam	editing	tools,	and	advanced color	correction,	Final	Cut	Pro	5.1	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.

DVD	Studio	Pro®	4	is	the	latest	version	of	the	Company's	professional	DVD	authoring	application.	With	DVD	Studio	Pro	4	users	can	author	Standard	Definition ("SD")	or	HD	DVDs	in	a	graphic	interactive	environment.	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	including	H.264.

Motion	2	is	a	real-time	motion	graphics	software	application	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	design	tool,	Replicator,	users	can	automatically	generate	and	animate	multiple	copies	of	a	graphic,	shape,	or	movie.

Soundtrack®	Pro	is	an	audio	editing	and	sound	design	application	that	gives	audio	and	video	professionals	a	way	to	edit,	mix,	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.	Soundtrack	Pro	also	features	over	50	professional	plug-ins	for	enhancing	sounds,	and	over	5,000	music	and	sound	effect loops.

In	February	2006,	the	Company	introduced	Logic®	Pro	7.2,	a	Universal	version	of	the	Company's	music	creation	and	audio	production	software.	Logic	Pro	7.2	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.

# Consumer,	Education,	and	Business	Oriented	Application	Software

In	January	2006,	the	Company	introduced	iLife	'06,	an	upgrade	to	its	consumer-oriented	digital	lifestyle	application	suite,	which	features	iWeb™,	iPhoto®	6,	iMovie® HD	6,	iDVD®	6,	GarageBand™	3,	and	iTunes®.	All	of	these	applications	are	Universal.

iWeb™	is	a	new	application	in	the	iLife	'06	suite.	iWeb	allows	users	to	create	online	photo	albums,	blogs,	and	podcasts	and	customize	websites	using	editing	tools.

iPhoto®	is	the	Company's	consumer-oriented	digital	photo	software	application.	iPhoto	6	adds	new	photo	management	and	editing	features,	supports	up	to	250,000 photos,	and	introduces	Photocasting™.	Photocasting	allows	.Mac	users	to	share	and	automatically	update	photo	albums	over	the	Internet	with	anyone	who	uses	a Macintosh	or	Windows-based	computer.

iMovie®	HD	is	the	Company's	consumer-oriented	digital	video	editing	software	application.	iMovie	HD	6	includes	new	real-time	effects	that	take	advantage	of Core	Video	technology,	which	uses	the	computer's	video	card's	graphics	processing	unit	to	deliver	hardware	acceleration	to	quickly	preview	video	effects.	iMovie HD	6	also	provides	a	solution	to	make	video	podcasts,	which	can	be	published	with	iWeb,	and	includes	audio	enhancement	tools	and	sound	effects.

iDVD®	is	the	Company's	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®	6	allows	users	to	take	content	shot	with	HDV	and	widescreen	DV	cameras	and	author	custom	DVDs	with widescreen	menus,	movies,	and	high	resolution	slideshows.	iDVD	6	features	10	new	Apple-designed	menu	themes	in	both	widescreen	(16:9)	and	standard	(4:3) formats.

GarageBand™	is	the	Company's	consumer-oriented	music	creation	software	application	that	allows	users	to	play,	record	and	create	music	using	a	simple	interface. With	GarageBand,	recorded	performances,	digital	audio	and	looping	tracks	can	be	arranged	and	edited	to	create	songs.	GarageBand	3	allows	users	to	record, produce,	and	publish	through	iWeb	their	own	podcasts,	including	artwork,	sound	effects,	and	music	jingles.

iLife	'06	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	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	September	2006,	the	Company	introduced	iTunes	7,	the	latest	version	of	its	iTunes	software.	iTunes	7	delivers	new features	such	as	album	and	Cover	Flow	views	of	music,	television	shows,	and	movies,	enabling	users	to	quickly	find	titles	in	their	library	as	well	as	casually	browse through	titles	they	already	own.

In	January	2006,	the	Company	introduced	iWork	'06,	a	new	Universal	version	of	the	Company's	suite	of	productivity	software	designed	to	help	users	create,	present, and	publish	documents	and	presentations.	iWork	'06	includes	Pages®	2	and	Keynote®	3.

Pages®	gives	users	the	tools	to	create	letters,	newsletters,	reports,	brochures	and	resumes	with	advanced	typography,	multiple	columns,	footnotes,	tables	of	content and	styles.	Pages	2	features	mail	merge	with	Mac	OS	X	Address	Book,	which	allows	users	to	personalize	documents	by	dragging	and	dropping	individual	contacts into	documents	using	templates	with	predefined	fields.	Pages	2	also	features	new	templates	for	newsletters,	flyers,	posters,	school	reports,	scrapbooks,	brochures, business	proposals,	and	invoices.	Pages	2	allows	users	to	insert	tables	that	have	basic	calculation	functionality	within	any	document	and	users	can	export	their Pages	2	document	to	other	formats.

Keynote®	is	the	Company's	presentation	software	that	gives	users	the	ability	to	create	presentations,	portfolios,	interactive	slideshows,	and	storyboards.	Keynote	3 offers	additional	ways	to	create	presentations	and	interactive	slideshows.	It	features	new	cinematic	transitions	including	vertical	and	horizontal	blinds,	revolving door,	and	swoosh.	A	new	view	mode,	Light	Table,	allows	users	to	view	an	entire	presentation	and	reorganize	slides	using	drag	and	drop.

Final	Cut®	Express	HD	enables	users	to	capture,	edit,	and	output	DV	and	HDV	over	a	single	FireWire	cable,	and	supports	Digital	Cinema	Desktop	with	multiple displays.	In	May	2006,	the	Company	introduced	a	Universal	version	of	Final	Cut	Express	HD	3.5.	Features	introduced	in	this	version	include	Dynamic	RT	for	real-time playback	of	multi-stream	effects,	Soundtrack	1.5	with	a	suite	of	audio	production	tools,	and	LiveType	2.1	with	animated	text	and	titles.

In	March	2006,	the	Company	introduced	Logic®	Express	7.2,	a	Universal	version	of	the	Company's	streamlined	version	of	Logic	Pro	7.2	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	provides	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	both Macintosh	and	Windows-based	computers.	The	FileMaker®	Pro	database	software	and	related	products	offer	relational	databases	and	desktop-to-web	publishing capabilities.	In	July	2006,	the	Company	introduced	FileMaker	Pro	8.5,	a	Universal	version	of	its	database	management	application.	New	features	of	FileMaker	Pro	8.5 include	FileMaker	Web	Viewer,	which	allows	for	a	live	web	browser	to	be	put	into	a	database.

# 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	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	H.264	encoding	and	can	automatically	determine	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.

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	combined	iDisk	and	email	storage	of	up	to	1GB	for	individuals	and	2GB	for families.

# Wireless	Connectivity	and	Networking

# AirPort	Extreme®

AirPort	Extreme	is	the	Company's	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	Extreme	client	technology	is	built	into	most	Macintosh	models,	and	is	an	available	option	for	all.

# 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	that	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.	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.	Bluetooth	is built	into	most	Macintosh	models.

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,	a	high-speed	serial	I/O	technology	for	connecting	digital	devices	such	as	digital	camcorders	and	cameras	to	desktop	and	portable computers.	FireWire	has	high	data-transfer	speed	and	"hot	plug-and-play"	capability	and	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	2006,	2005,	or	2004.	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 own	sales	force	and	retail	and	online	stores.	Ten	percent	of	the	Company's	net	sales	in	2006	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	markets	for	consumer	electronics,	personal	computers	and	related	software	and peripheral	products	are	highly	competitive.	These	markets	are	characterized	by	rapid	technological	advances	in	both	hardware	and	software	that	have	substantially increased	the	capabilities	and	use	of	personal	computers	and	other	digital	electronic	devices	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	these	markets	have	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	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's	music	products	and	services	have	faced	significant	competition	from	other	companies	promoting	their	own	digital	music	and	content	products	and services,	including	those	offering	free	peer-to-peer	music	and	video	services.	The	Company	believes	it	currently	retains	a	competitive	advantage	from	innovation	and	by more	effectively	integrating	the	entire	solution	including	the	hardware	(personal	computer	and	iPod),	software	(iTunes),	and	distribution	of	content	(iTunes	Store). However,	the	Company	expects	competition	in	this	space	to	intensify	as	competitors	attempt	to	imitate	the	Company's	approach	to	tightly	integrate	these	components within	their	individual	offerings	or,	alternatively,	collaborate	with	each	other	to	offer	solutions	that	are	more	integrated	than	those	they	currently	offer.	Some	of	these current	and	potential	competitors	have	substantial	resources	and	may	be	able	to	provide	such	products	and	services	at	little	or	no	profit	or	even	at	a	loss	to	compete	with the	Company's	offerings.

The	Company's	future	operating	results	and	financial	condition	are	substantially	dependent	on	the	Company's	ability	to	continue	to	develop	improvements	to	the Macintosh	platform	and	to	the	Company's	hardware,	software	and	services	related	to	digital	content	to	maintain	perceived	functional	and	design	advantages	over competing	platforms.

# 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	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	uncommon	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'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.	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,	Amperex	Technology	Limited, ASUSTeK	Corporation,	ATI	Technologies,	Inc.,	Atheros	Communications	Inc.,	AU	Optronics	Corporation,	Broadcom	Corporation,	Chi	Mei	Optoelectronics Corporation,	Cypress	Semiconductor	Corporation,	Hitachi	Global	Storage	Technologies,	Hon	Hai	Precision	Industry	Co.,	Ltd.,	Intel	Corporation,	Inventec	Appliances Corporation,	LG.	Phillips	Co.,	Ltd.,	Matsushita,	NVIDIA	Corp.,	PortalPlayer,	Inc.,	Quanta	Computer,	Inc.,	Renesas	Semiconductor	Co.	Ltd.,	Samsung	Electronics, Sony	Corporation,	Synaptics,	Inc.,	Texas	Instruments,	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,	services,	and	technologies	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 $712	million,	$535	million	(as	restated^(1) ),	and	$491	million	(as	restated^(1) )	in	2006,	2005,	and	2004,	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,	software,	and	services.	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	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.

(1)										See	the	"Explanatory	Note"	immediately	preceding	Part	I,	Item	1	and	Note	2,	"Restatement	of	Consolidated	Financial	Statements"	in	Notes	to	Consolidated Financial	Statements	of	this	Form	10-K.

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,	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	2006	came	from	sales	to	customers	inside	the U.S.	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;	the	Republic	of	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	MacBook	Pros,	MacBooks,	and	iPods,	is	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	and	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	as	dealers	anticipate	shortages.	Backlog	is	often	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	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.

# Employees

As	of	September	30,	2006,	the	Company	had	17,787	full-time	equivalent	employees	and	an	additional	2,399	temporary	equivalent	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	filed	with	the	U.S.	Securities	and	Exchange	Commission	(SEC).	Such	reports	and	other information	filed	by	the	Company	with	the	SEC	are	available	on	the	Company's	website	at	http://www.apple.com/investor	when	such	reports	are	available	on	the	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	1A.	Risk	Factors

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.

The	matters	relating	to	the	investigation	by	the	Special	Committee	of	the	Board	of	Directors	and	the	restatement	of	the	Company's	consolidated	financial	statements	may result	in	additional	litigation	and	governmental	enforcement	actions.

On	June	29,	2006,	the	Company	announced	that	an	internal	review	had	discovered	irregularities	related	to	the	issuance	of	certain	stock	option	grants	made	between 1997	and	2001,	including	a	grant	to	its	Chief	Executive	Officer	("CEO"),	Steve	Jobs.	The	Company	also	announced	a	Special	Committee	of	outside	directors	("Special Committee")	had	been	formed	and	had	hired	independent	counsel	to	conduct	a	full	investigation	of	the	Company's	past	stock	option	granting	practices.	As	described	in the	Explanatory	Note	immediately	preceding	Part	I,	Item	1,	and	in	Note	2	"Restatement	of	Consolidated	Financial	Statements"	in	Notes	to	Consolidated	Financial Statements	in	this	Form	10-K,	as	a	result	of	the	internal	review	and	independent	investigation,	management	has	concluded,	and	the	Audit	and	Finance	Committee agrees,	that	incorrect	measurement	dates	were	used	for	financial	accounting	purposes	for	stock	option	grants	made	in

certain	prior	periods.	As	a	result,	the	Company	has	recorded	additional	non-cash	stock-based	compensation	expense,	and	related	tax	effects,	with	regard	to	certain	past stock	option	grants,	and	the	Company	has	restated	certain	previously	filed	financial	statements	included	in	this	Form	10-K.

The	internal	review,	the	independent	investigation,	and	related	activities	have	required	the	Company	to	incur	substantial	expenses	for	legal,	accounting,	tax	and	other professional	services,	have	diverted	management's	attention	from	the	Company's	business,	and	could	in	the	future	harm	its	business,	financial	condition,	results	of operations	and	cash	flows.

While	the	Company	believes	it	has	made	appropriate	judgments	in	determining	the	correct	measurement	dates	for	its	stock	option	grants,	the	SEC	may	disagree	with	the manner	in	which	the	Company	has	accounted	for	and	reported,	or	not	reported,	the	financial	impact.	Accordingly,	there	is	a	risk	the	Company	may	have	to	further restate	its	prior	financial	statements,	amend	prior	filings	with	the	SEC,	or	take	other	actions	not	currently	contemplated.

The	Company's	past	stock	option	granting	practices	and	the	restatement	of	prior	financial	statements	have	exposed	the	Company	to	greater	risks	associated	with litigation,	regulatory	proceedings	and	government	enforcement	actions.	As	described	in	Part	I,	Item	3,	"Legal	Proceedings",	several	derivative	complaints	and	a	class action	complaint	have	been	filed	in	state	and	federal	courts	against	the	Company's	directors	and	certain	of	its	executive	officers	pertaining	to	allegations	relating	to	stock option	grants.	The	Company	has	provided	the	results	of	its	internal	review	and	independent	investigation	to	the	SEC	and	the	United	States	Attorney's	Office	for	the Northern	District	of	California,	and	in	that	regard	the	Company	has	responded	to	informal	requests	for	documents	and	additional	information.	The	Company	intends	to continue	full	cooperation.	No	assurance	can	be	given	regarding	the	outcomes	from	litigation,	regulatory	proceedings	or	government	enforcement	actions	relating	to	the Company's	past	stock	option	practices.	The	resolution	of	these	matters	will	be	time	consuming,	expensive,	and	will	distract	management	from	the	conduct	of	the Company's	business.	Furthermore,	if	the	Company	is	subject	to	adverse	findings	in	litigation,	regulatory	proceedings	or	government	enforcement	actions,	the	Company could	be	required	to	pay	damages	or	penalties	or	have	other	remedies	imposed,	which	could	harm	its	business,	financial	condition,	results	of	operations	and	cash	flows.

In	August	2006,	the	Company	received	a	NASDAQ	Staff	Determination	letter	stating	that,	as	a	result	of	the	delayed	filing	of	the	Company's	Form	10-Q	for	the	quarter ended	July	1,	2006	(the	"Third	Quarter	Form	10-Q"),	the	Company	was	not	in	compliance	with	the	filing	requirements	for	continued	listing	as	set	forth	in	Marketplace Rule	4310(c)(14)	and	was	therefore	subject	to	delisting	from	the	NASDAQ	Stock	Market.	On	October	24,	2006,	the	NASDAQ	Listing	Qualifications	Panel	granted	the Company's	request	for	continued	listing,	subject	to	the	Company	filing	the	Third	Quarter	Form	10-Q,	and	any	required	restatements,	with	the	SEC	by	December	29, 2006.	On	December	29,	2006,	the	Company	filed	the	Third	Quarter	Form	10-Q	with	the	SEC.	With	the	filing	of	this	Form	10-K,	the	Company	believes	that	it	has remedied	its	non-compliance	with	Marketplace	Rule	4310(c)(14),	subject	to	NASDAQ's	affirmative	completion	of	its	compliance	protocols	and	its	notification	of	the Company	accordingly.	However,	if	the	SEC	disagrees	with	the	manner	in	which	the	Company	has	accounted	for	and	reported,	or	not	reported,	the	financial	impact	of past	stock	option	grants,	there	could	be	further	delays	in	filing	subsequent	SEC	reports	that	might	result	in	delisting	of	the	Company's	common	stock	from	the	NASDAQ Global	Select	Market.

# Unfavorable	results	of	legal	proceedings	could	adversely	affect	the	Company's	results	of	operations.

The	Company	is	subject	to	various	legal	proceedings	and	claims	that	are	discussed	in	Part	I,	Item	3	of	this	Form	10-K.	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.	Results	of	legal	proceedings	cannot	be	predicted with	certainty.	In	addition,	litigation	may	be	disruptive	to	the	Company's	normal

business	operations.	Should	the	Company	fail	to	prevail	in	certain	legal	matters,	the	Company's	financial	condition,	liquidity,	or	results	of	operations	could	be	adversely affected.

Economic	conditions	and	political	events	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	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.	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,	and	other	circumstances	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	and	global	economy,	and	thus	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	man-made	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	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	affected	by	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	such	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.	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	targeted	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	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	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	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	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	significant	competition	from	other	companies	promoting	their	own	digital	music	products	including	MP3	players,	music	enabled	cell	phones,	free	peer-to-peer music	and	video	services,	and	free	streaming	of	digital	content	via	the	Internet.	These	competitors	include	both	new	entrants	with	different	market	approaches,	such	as subscription	services	models,	and	also	larger	companies	that	may	have	significant	technical,	marketing,	distribution,	and	other	resources,	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.	The	Company	expects	competition	in	this	space	to	intensify	as	competitors	attempt	to	imitate	the	Company's	approach	to	tightly	integrating	these	components within	their	individual	offerings	or	work	more	collaboratively	with	each	other	to	offer	solutions	that	are	more	integrated	than	those	they	offer	currently.	Some	of	these current	and	potential	competitors	have	substantial	resources	and	may	be	able	to	provide	such	products	and	services	at	little	or	no	profit	or	even	at	a	loss	to	compete	with the	Company's	offerings.	There	can	be	no	assurance	the	Company	will	be	able	to	continue	to	provide	products	and	services	that	effectively	compete	in	these	markets. 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	significant	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.	In	an	effort	to	gain	market	share	and	remain	competitive,	the	Company	will	continue	to	pursue	one-to-one	(1:1)	learning solutions	in	education.	1:1	learning	solutions	typically	consist	of	a	portable	computer	for	every	student	and	teacher	along	with	the	installation	of	a	wireless	network. These	1:1	learning	solutions	and	other	strategic	sales	are	generally	priced	more	aggressively	and	could	result	in	significantly	less	profitability	or	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.

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	and	consumer	electronics	industries	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	or	consumer	electronics	industries.	Continued	availability	of	these	components	may	be	affected	if	producers	decided	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	delayed	or constrained	on	a	new	or	existing	product,	the	Company's	results	of	operations	and	financial	condition	could	be	adversely	affected.

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	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	purchase commitments	and	inventory	levels	in	line	with	anticipated	product	demand;	the	availability	of	products	in	appropriate	quantities	and	costs	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	new	products	will	have	on	its	sales	or	results	of	operations.

In	June	2005,	the	Company	announced	its	plan	to	begin	using	Intel	microprocessors	in	its	computers.	During	2006,	the	Company	introduced	new	Intel-based	models	of the	MacBook	Pro,	MacBook,	Mac	Pro,	iMac,	and	Mac	mini	computers.	The	Company's	transition	to	Intel	microprocessors	for	Macintosh	systems	was	completed	in August	2006,	and	its	transition	for	Xserve	was	completed	in	November	2006.	This	transition	has	been	and	will	continue	to	be	subject	to	numerous	risks	and	uncertainties including	the	timely	innovation	and	delivery	of	related	hardware	and	software	products	to	support	Intel	microprocessors,	market	acceptance	of	Intel-based	Macintosh computers,	and	the	development	and	availability	on	acceptable	terms	of	components	and	services	essential	to	enable	the	Company	to	timely	deliver	Intel-based Macintosh	computers.	In	addition,	the	Company	is	dependent	on	third-party	software	developers	such	as	Microsoft	and	Adobe	to	timely	develop	current	and	future applications	that	run	on	Intel-based	Macintosh	computers.	Universal	versions	of	Microsoft	Office	and	Adobe's	Creative	Suite	applications	are	not	currently	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.

# 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	for	orders	of	products	and	components	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.	In	addition,	the	Company	is	reliant	on	third-party	manufacturers	to	adhere	to	the	Company's	supplier	code	of conduct.	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;	the	Republic	of	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	MacBook	Pros,	MacBooks,	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,	or	due	to	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	impacted	in	the	past	by	weak	economic	conditions.	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	have	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.

# 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	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	Store.	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.	Further,	other	distributors	of	third-party	content	or	third-party content	owners	may	seek	to	limit

the	Company's	access	to	or	increase	the	total	cost	of	such	content.	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	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	("DRM")	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.	In	addition,	certain	countries	have	passed	legislation	or	may	propose	legislation	that	would	force	the	Company	to	license	its	DRM	solutions	so	that content	would	be	interoperable	with	competitor	devices,	which	could	lessen	the	protection	of	content	subjecting	it	to	piracy	and	could	affect	arrangements	with	the Company's	content	suppliers.	There	is	no	assurance	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	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	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.	The	Company's	recent	announcement	that	it	plans	to	add	a	feature	to	the	next	version	of	Mac	OS	X	that	will	enable	Intel-based	Macintosh systems	to	run	Windows	XP	may	deter	developers	from	creating	software	applications	for	Mac	OS	X	if	such	applications	are	available	for	the	Windows	platform. Moreover,	there	can	be	no	assurance	software	developers	will	continue	to	develop	software	for	Mac	OS	X	on	a	timely	basis	or	at	all.

In	June	2005,	the	Company	announced	its	plan	to	begin	using	Intel	microprocessors	in	its	computers.	During	2006,	the	Company	introduced	new	Intel-based	models	of the	MacBook	Pro,	MacBook,	Mac	Pro,	iMac,	and	Mac	mini	computers.	The	Company's	transition	to	Intel	microprocessors	for	Macintosh	systems	was	completed	in August	2006,	and	its	transition	for	Xserve	was	completed	in	November	2006.	The	Company	depends	on	third-party	software	developers	to	timely	develop	current	and future	applications	that	run	on	Intel	microprocessors.	Universal	versions	of	Microsoft	Office	and	Adobe's	Creative	Suite	applications	are	not	currently	available.	The lack	of	applications	that	run	on	Intel-based	Macintosh	systems,	including	Microsoft	Office	and	Adobe	Creative	Suite,	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.	Discontinuance	of	third-party	software products	for	the	Macintosh	platform	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	September	30,	2006,	the	Company	had	opened	165	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	these	commitments	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	personnel	costs,

depreciation	of	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	eight	such	stores	through	September	2006.	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	$33	million.	Closure or	poor	performance	of	one	of	these	high-profile	stores	could	have	a	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;	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	and	renew	leases	in	quality	retail	locations	at	a 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	current	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	MacBook	Pro	and	Mac	Pro	systems,	software,	accessories,	and	service	and	support	contracts,	generally	have	higher gross	margins	than	the	Company's	consumer	products,	including	the	iMac,	Mac	mini,	MacBook,	iPod,	and	content	from	the	iTunes	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	and	MacBook,	instead	of	professional products.	Professional	users	may	choose	to	buy	the	iMac	due	to	its	relative	price	performance	and	unique	design	featuring	a	flat	panel	screen.	Professional	users	may also	choose	to	purchase	MacBooks	instead	of	the	Company's	professional-oriented	portable	products	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.

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.	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	product	during	the	third	month	of	each	quarter	than	it	does	during	either	of	the	first	two months,	a	pattern	typical	in	the	personal	computer	and	consumer	electronics	industries.	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.	Furthermore,	the	Company	has	typically experienced	greater	net	sales	in	the	first	and	fourth	fiscal	quarters	compared	to	other	quarters	in	the	fiscal	year	due	to	seasonal	demand	related	to	the	holiday	season	and the	beginning	of	the	school	year.	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,	could	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	generally	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	has	prepaid	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	such	procedures	will	be	effective	in	limiting	its	credit	risk and	avoiding	losses.	Additionally,	if	the	global	economy	or	regional	economies	deteriorate,	the	Company	would	be	more	likely	to	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	have resulted	in	increased	stock-based	compensation	expense,	which	may	cause	the	Company	to	reduce	the	amount	of	stock-based	awards	issued	to	employees.	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	availability	and	coverage	of	insurance.

For	certain	risks,	the	Company	does	not	maintain	insurance	coverage	because	of	cost	and/or	availability.	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-U.S.	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	3	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.	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	such	existing	laws	or	future	laws	will	not	have	a	material	adverse	effect	on	the	Company's	financial condition,	liquidity,	or	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	Financial	Accounting	Standards	Board	("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,	Statement	of	Financial	Accounting	Standards	("SFAS")	No.	123	(revised	2004)	("SFAS	No.	123R"),	Share-Based	Payment, which	the	Company	adopted	in	2006.	In	2006,	stock-based	compensation	expense	reduced	diluted	earnings	per	common	share	by	approximately	$0.14.	Although	the adoption	of	SFAS	No.	123R	is	expected	to	continue	to	have	a	significant	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	the	outcomes	from	these	continuous examinations	will	not	have	an	adverse	effect	on	the	Company's	results	of	operations	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.	Furthermore,	the	Company	believes	its	stock	price reflects	high	future	growth	and	profitability	expectations.	If	the	Company	fails	to	meet	these	expectations	its	stock	price	may	significantly	decline.	In	addition,	increases in	the	Company's	stock	price	may	result	in	greater	dilution	of	earnings	per	share.

# Item	1B.	Unresolved	Staff	Comments

# None.

# Item	2.	Properties

The	Company's	headquarters	are	located	in	Cupertino,	California.	The	Company	has	a	manufacturing	facility	in	Cork,	Ireland.	As	of	September	30,	2006,	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	1.2	million 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	805,000 square	feet	of	facilities	in	Sacramento,	California	that	include	warehousing	and	distribution	operations	as	well	as	a	customer	support	call	center.	In	addition,	the Company	owns	approximately	1.9	million	square	feet	of	facilities	for	research	and	development	and	corporate	functions	in	Cupertino,	California,	including approximately	948,000	square	feet	purchased	during	2006	for	the	future	development	of	the	Company's	second	corporate	campus,	and	approximately	107,000	square feet	for	a	data	center	in	Newark,	California.	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	2006	that	did	not	individually	or	in	the	aggregate	have	a	material	impact	on	the	Company's results	of	operations.

# Allen	v.	Apple	Computer,	Inc.

On	January	28,	2005,	a	plaintiff	filed	a	purported	nationwide	class	action	in	Los	Angeles	Superior	Court	alleging	that	a	defect	in	the	Company's	17-inch	Studio	Display monitors	results	in	dimming	of	half	of	the	screen	and	constant	blinking	of	the	power	light.	Plaintiff	filed	an	amended	complaint	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	1,	2005,	the	Court	ordered Plaintiffs	to	amend	their	complaint.	Plaintiff	filed	an	amended	complaint	on	December	12,	2005,	and	the	Company	answered	on	January	5,	2006	denying	all	allegations and	asserting	numerous	affirmative	defenses.	The	Company	has	reached	a	settlement	in	this	matter,	which	was	given	preliminary	approval	by	the	Court	on September	18,	2006.	The	final	approval	hearing	is	scheduled	for	February	15,	2007.	Settlement	of	this	matter	will	not	have	a	material	effect	on	the	Company's	financial position	or	results	of	operations.

# Apple	Computer,	Inc.	v.	Burst.com,	Inc.

The	Company	filed	an	action	for	declaratory	judgment	against	Defendant	Burst.com,	Inc.	on	January	4,	2006	in	the	United	States	District	Court	for	the	Northern	District of	California.	The	Company	seeks	declaratory	judgment	that	U.S.	Patent	Nos.	4,963,995,	5,164,839,	5,057,932	and	5,995,705	("Burst	patents")	are	invalid	and	not infringed	by	the	Company.	Burst	filed	an	answer	and	counterclaim	on	April	17,	2006.	Burst	alleges	that	the	following	Apple	products	and	services	infringe	U.S.	Patent Nos.	4,963,995,	5,057,932,	5,164,839,	and	5,995,705;	iTunes	Store,	iPod	devices,	QuickTime	products	(including	QuickTime	player	and	QuickTime	Streaming	Server), iTunes	software,	other	Apple	software	products	(Final	Cut	Studio,	GarageBand,	iMovie,	iDVD,	iWeb),	the	use	of	the	.Mac	services	and	Apple	computers	and	servers running	iTunes,	QuickTime,	or	the	other	named	Apple	software	products.	The	Burst	patents	allegedly	relate	to	methods	and	devices	used	for	"burst"	transmission	of audio	or	video	files.	The	case	is	in	discovery.	A	claim	construction	hearing	is	set	for	February	8,	2007.	Trial	is	set	for	February	26,	2008.

# 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.	On	November	24,	2005,	Plaintiff	filed	a	Re-Amended	Bill	of	Particulars	and	the	Company	filed	its	Defence	on December	16,	2005.	Trial	took	place	from	March	29,	2006	through	April	5,	2006.	Judgment	was	given	in	favor	of	the	Company	on	May	8,	2006	and	Apple	Corps	was ordered	to	pay	a	portion	of	the	Company's	fees,	the	amount	to	be	agreed	or	determined	in	a	subsequent	proceeding.	Apple	Corps	has	filed	an	appeal,	which	is	scheduled to	be	heard	in	late	February	2007.

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,	et	al.

Plaintiff	filed	this	purported	shareholder	derivative	action	against	the	Company	and	each	of	its	then	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	&	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.	On	January	10,	2006,	the	Court	sustained	defendants'	demurrer	to	the	amended	complaint,	with	leave	to amend.	Plaintiff	filed	a	second	amended	complaint	on	February	7,	2006,	and	the	Company	filed	a	demurrer.	After	a	hearing	on	June	13,	2006,	the	Court	sustained	the demurrer	without	leave	to	amend	as	to	the	non-director	officers	and	with	leave	to	amend	as	to	the	directors.	On	July	24,	2006,	plaintiff	filed	a	third	amended	complaint, which	purports	to	bring	claims	derivatively	as	well	as	directly	on	behalf	of	a	class	of	common	stock	holders	who	have	been	or	will	be	harmed	by	virtue	of	the	allegedly misleading	proxy	statement.	In	addition	to	reasserting	prior	causes	of	action,	the	third	amended	complaint	includes	a	claim	that	the	Company	violated	the	terms	of	the plan,	and	a	claim	for	waste	related	to	restricted	stock	unit	grants	to	certain	officers	in	2003	and	2004	and	an	option	grant	to	the	Company's	CEO	in	January	2000.	A demurrer	that	the	Company	filed	to	the	third	amended	complaint	as	well	as	a	motion	to	disqualify	the	Company's	lawyers	will	be	heard	on	January	30,	2007.

# 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.	On	December	15,	2005,	the Company	filed	an	answer	denying	all	allegations	and	asserting	numerous	affirmative	defenses.	The	parties	have	reached	a	tentative	settlement,	which	is	not	expected	to have	a	material	effect	on	the	Company's	financial	position	or	results	of	operations.

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

Two	Plaintiffs	filed	this	purported	class	action	on	May	16,	2006	in	the	United	States	District	Court	for	the	Northern	District	of	California,	San	Jose	Division,	on	behalf of	a	nationwide	class	of	iPod	purchasers	between	May	2002	and	the	present.	The	complaint	alleged	various	problems	with	the	iPod	hard	drive,	including	skipping	and limited	lifespan.	Plaintiffs	alleged	violations	of	California	Business	&	Professions	Code	§17200	(unfair	competition),	the	Consumer	Legal	Remedies	Act,	the	Song- Beverly	Consumer	Warranty	Act	and	breach	of	warranties.	The	complaint	sought	damages	and	equitable	relief.	The	plaintiffs	voluntarily	dismissed	this	case,	without prejudice,	on	September	18,	2006.

# Birdsong	v.	Apple	Computer,	Inc.;	Patterson	v.	Apple	Computer,	Inc.

These	federal	court	complaints	allege	that	the	Company's	iPod	music	players,	and	the	ear	bud	headphones	sold	with	them,	are	inherently	defective	in	design	and	are	sold without	adequate	warnings	concerning	the	risk	of	noise-induced	hearing	loss	by	iPod	users.	The	Birdsong	action	was	initially	filed	on	January	30,	2006	in	the	United States	District	Court	for	the	Western	District	of	Louisiana	on	behalf	of	a	purported	Louisiana	class	of	iPod	purchasers	and	alleges	violations	of	the	Louisiana	Products Liability	Act,	breaches	of	implied	warranties,	unjust	enrichment,	and	negligent	misrepresentation.	The	Patterson	action	was	filed	on	January	31,	2006	in	the	United States	District	Court	for	the	Northern	District	of	California	on	behalf	of	a	purported	class	of	all	iPod	purchasers	within	the	four-year	period	before	January	31,	2006.	That action	alleged	breaches	of	implied	and	express	warranties,	violations	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	Birdsong	action	was	transferred	to	the	Northern	District	of	California,	and	the

Patterson	action	was	dismissed.	An	amended	complaint	was	subsequently	filed	in	Birdsong,	dropping	the	Louisiana	law-based	claims	and	adding	California	law-based claims	equivalent	to	those	in	Patterson.	The	Company	filed	a	motion	to	dismiss	on	November	3,	2006.	Plaintiffs	will	not	oppose	the	motion	but	instead	will	file	a	second amended	complaint	by	January	15,	2007.

A	similar	complaint,	Royer-Brennan	v.	Apple	Computer,	Inc.	and	Apple	Canada,	Inc.,	was	filed	in	Montreal,	Quebec,	Canada,	on	February	1,	2006,	seeking authorization	to	institute	a	class	action	on	behalf	of	iPod	purchasers	in	Quebec.	A	hearing	on	the	motion	for	class	certification	is	scheduled	for	February	8	and	9,	2007, although	Plaintiff	counsel	has	now	requested	that	the	hearing	be	delayed	pending	a	ruling	on	the	motion	to	dismiss	in	the	U.S.	case.

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

Plaintiffs	originally	filed	this	purported	class	action	in	San	Francisco	County	Superior	Court	on	February	17,	2005.	The	initial	complaint	alleged	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.	Plaintiffs	also	brought	causes	of	action	for misappropriation	of	trade	secrets,	breach	of	contract,	and	violation	of	the	Song-Beverly	Consumer	Warranty	Act.	Plaintiffs	requested	unspecified	damages	and	other relief.	On	May	9,	2005,	the	Court	granted	the	Company's	motion	to	transfer	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	& 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	and	they	filed	an	amended	complaint	on	December	29,	2005.	Plaintiffs'	amended	complaint	added three	plaintiffs	and	alleged	many	of	the	same	factual	claims	as	the	previous	complaints,	such	as	alleged	selling	of	used	equipment	as	new,	alleged	failure	to	honor warranties	and	service	contracts	for	the	consumer	plaintiffs,	and	alleged	fraud	related	to	the	opening	of	the	Apple	retail	stores.	Plaintiffs	continued	to	assert	causes	of action	for	unfair	competition	(§17200),	violations	of	the	CLRA,	breach	of	contract,	misappropriation	of	trade	secrets,	violations	of	the	Cartwright	Act	and	alleged	new causes	of	action	for	fraud,	conversion	and	breach	of	the	implied	covenant	of	good	faith	and	fair	dealing.	The	Company	filed	a	demurrer	to	the	amended	complaint	on January	31,	2006,	which	the	Court	sustained	on	March	3,	2006	on	sixteen	of	seventeen	causes	of	action.	Plaintiffs	filed	an	amended	complaint	adding	one	new	plaintiff. The	Company	filed	a	demurrer,	which	was	granted	in	part	on	September	9,	2006.	Plaintiffs	filed	a	further	amended	complaint	on	September	21,	2006.	On	October	2, 2006,	the	Company	filed	an	answer	denying	all	allegations	and	asserting	numerous	affirmative	defenses.	The	case	is	in	discovery.

Butzer,	et	al.	v.	Apple	Computer,	Inc.;Wirges	v.	Apple	Computer,	Inc.;	Blackwell	v.	Apple	Computer,	Inc.

Plaintiffs	filed	the	Butzer	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	alleged	defects	in	the	memory	of	the	computers.	The complaint	alleged	that	this	purported	defect	extends	to	other	series	of	the	Company's	portables	and	stated	that	plaintiffs	reserved	the	right	to	amend	the	complaint	to include	these	other	series.	Plaintiffs	asserted	claims	for	alleged	violations	of	California	Business	&	Professions	Code	§17200	(unfair	competition),	California Business	&	Professions	Code	§17500	(false	advertising),	the	Consumer	Legal	Remedies	Act	(CLRA)	and	the	Song-Beverly	Consumer	Warranty	Act.	The	complaint sought	remedies	including	restitution	and/or	damages	and	injunctive	relief.	The	Wirges	action	was	filed	on	January	20,	2006	in	the	United	States	District	Court	for	the Eastern	District	of	Arkansas,	also	on	behalf	of	a	purported	nationwide	class,	and	made	similar	allegations.	Plaintiffs	asserted	claims	for	breach	of	warranties,	violation	of the	Magnuson—Moss	Act,	strict	products	liability	and	unjust	enrichment.	The	complaint	sought	restitution,	damages	and	other	remedies.	The	Blackwell	action	was	filed on	February	10,	2006	in	the

United	States	District	Court	for	the	Northern	District	of	California,	on	behalf	of	a	purported	nationwide	class,	and	made	identical	allegations	to	those	made	in	the	Butzer

case.	Plaintiffs	asserted	claims	for	breach	of	express	and	implied	warranties,	violation	of	the	CLRA,	violation	of	the	Song-Beverly	Act,	false	advertising	and	unfair competition.	The	complaint	sought	restitution,	an	injunction	and	other	remedies.	The	Company	filed	an	answer	to	the	Butzer	complaint	on	October	19,	2005	denying	all material	allegations	and	asserting	numerous	affirmative	defenses.	The	Company	filed	an	answer	to	the	Wirges	action	on	February	28,	2006,	and	also	filed	a	motion	to transfer	the	Wirges	case	to	the	Northern	District	of	California.	The	Company	filed	an	answer	to	the	Blackwell	complaint	on	March	15,	2006	denying	all	material allegations	and	asserting	numerous	affirmative	defenses.	The	Company	has	reached	a	settlement	with	the	named	plaintiffs	in	all	three	cases	and	these	matters	are concluded.	Settlement	of	these	matters	did	not	have	a	material	effect	on	the	Company's	financial	position	or	results	of	operations.

# Charoensak	v.	Apple	Computer,	Inc.	(formerly	Slattery	v.	Apple	Computer,	Inc.)

The	original	Plaintiff	(Slattery)	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	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	sought	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	18,	2005.	On	May	8,	2006,	the	Court	heard	Plaintiff's	motion	for	leave	to	file	a	second	amended	complaint	to	substitute	two	new	plaintiffs	for	Slattery.	In August	2006,	the	court	dismissed	Slattery	without	prejudice	and	allowed	plaintiffs	to	file	an	amended	complaint	naming	two	new	plaintiffs	(Charoensak	and	Rosen).	On November	2,	2006,	the	Company	filed	an	answer	to	the	amended	complaint	denying	all	material	allegations	and	asserting	numerous	affirmative	defenses.	The	hearing	on class	certification	is	set	for	April	16,	2007.

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

Plaintiff	Contois	Music	Technology	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	sought	unspecified	damages	and	other	relief. The	Company	filed	an	answer	on	November	23,	2005	denying	all	material	allegations	and	asserting	numerous	affirmative	defenses.	A	Markman	hearing	was	held	on June	13,	2006	and	the	court	issued	a	claim	construction	ruling	on	July	24,	2006.	The	parties	agreed	to	a	settlement	and	the	case	was	dismissed	on	August	18,	2006.	This matter	is	now	concluded.	Settlement	of	this	matter	did	not	have	a	material	effect	on	the	Company's	financial	position	or	results	of	operations.

Creative	Technology	Ltd.	and	Creative	Labs,	Inc.	v.	Apple	Computer,	Inc.	(filed	on	May	15,	2006,	International	Trade	Comission),	Creative	Technology	Ltd.	v.	Apple Computer,	Inc.	(filed	on	May	15,	2006,	United	States	District	Court	for	the	Northern	District	of	California),	Apple	Computer,	Inc.	v.	Creative	Technology	Ltd.	and Creative	Labs,	Inc.	(filed	May	15,	2006,	United	States	District	Court	for	the	Western	District	of	Wisconsin),	Apple	Computer,	Inc.	v.	Creative	Technology	Ltd.	and Creative	Labs,	Inc.	(filed	on	June	1,	2007,	International	Trade	Comission),	Apple	Computer,	Inc.	v.	Creative	Technology	Ltd.	and	Creative	Labs	(filed	on	June	1,	2006,

United	States	District	Court	for	the	Eastern	District	of	Texas)

On	May	15,	2006,	Creative	Labs,	Inc.,	and	Creative	Technology	Ltd.	(collectively	"Creative")	filed	a	complaint	with	the	U.S.	International	Trade	Commission	("ITC") alleging	that	the	Company	infringed	U.S.	patent	number	6,928,433	("'433	patent")	and	seeking	an	order	permanently	barring	iPods	from	importation	into	the	United States.	On	May	15,	2006,	Creative	also	brought	suit	against	the	Company	in

the	United	States	District	Court	for	the	Northern	District	of	California,	also	alleging	that	the	iPod	infringed	the	'433	patent.	The	District	Court	action	was	stayed	pending resolution	of	the	Creative	ITC	Action.

On	June	1,	2006,	the	Company	brought	suit	against	Creative	in	the	United	States	District	Court	for	the	Eastern	District	of	Texas,	("Texas	Action"),	alleging	that	Creative infringed	U.S.	patent	number	6,157,363	("'363	patent"),	U.S.	patent	number	5,640,566	("'566	patent"),	and	U.S.	patent	number	5,504,852	("'852	patent").	On	June	27, 2006,	the	Company	filed	an	amended	complaint	in	the	Texas	Action	alleging	that	Creative	also	infringed	U.S.	patent	number	7,046,230	("'230	patent")	and	U.S.	patent number	6,282,646	("'646	patent").	At	the	suggestion	of	the	District	Court,	the	Company	filed	separate	actions	in	the	Eastern	District	of	Texas	regarding	the	Company's allegations	relating	to	the	'230	patent	and	the	'646	patent.

On	June	1,	2006,	the	Company	filed	a	complaint	with	the	ITC	alleging	that	Creative	infringed	the	'230	patent,	the	'293	patent,	and	the	'434	patent.	On	June	5,	2006,	the Company	filed	an	amended	complaint	with	the	ITC	alleging	that	Creative	also	infringed	the	'646	patent.

The	parties	reached	a	settlement	of	all	of	the	above	matters	and	all	cases	were	dismissed	as	of	October	13,	2006.	These	matters	are	concluded.	Settlement	of	these matters	did	not	have	a	material	effect	on	the	Company's	financial	position	or	results	of	operations.

# 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	California	Business	&	Professions Code	§17200	(unfair	competition),	California	Business	&	Professions	Code	§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	his	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	were	dismissed.	The	Company	appealed	the ruling	and	the	case	was	stayed	pending	the	outcome	of	the	appeal.	The	Court	of	Appeals	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.	The	case	was	remanded	back	to	the	trial	court.	The parties	have	reached	a	settlement	and	the	matter	is	concluded.	Settlement	of	this	matter	did	not	have	a	material	effect	on	the	Company's	financial	position	or	results	of operations.

# European	Commission	Investigation

The	European	Commission	has	notified	the	Company	it	is	investigating	certain	matters	relating	to	the	iTunes	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	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.

Euro	Tec	Enterprises,	Inc.	et	al.	v.	Apple	Computer,	Inc.	et	al.

This	is	a	purported	class	action	copyright	infringement	case	filed	on	May	16,	2006	in	the	United	States	District	Court	for	the	Central	District	of	California	by	certain independent	music	publishers	against	the	Company	and	several	other	defendants	for	allegedly	failing	to	secure	a	compulsory	license	for	copyrighted	musical compositions	being	sold	as	downloads.	Plaintiffs'	complaint	seeks	an	injunction,	damages	and	other	relief.	The	Company	filed	an	answer	on	July	28,	2006	denying	all material	allegations	and	asserting	numerous	affirmative	defenses.	The	case	is	in	discovery	and	is	set	for	trial	on	November	13,	2007	if	no	class	is	certified	or	on	June	10, 2008	if	a	class	is	certified.	Plaintiffs	filed	an	amended	complaint	on	October	23,	2006	and	the	Company	filed	an	amended	answer	on	November	28,	2006	denying	all material	allegations	and	asserting	numerous	affirmative	defenses.

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

Plaintiffs	filed	this	purported	class	action	on	December	23,	2005	in	San	Diego	County	Superior	Court	alleging	the	Company	has	misrepresented	the	hard	drive	capacity of	two	Powerbook	G4	computers:	the	12-inch,	1.5GHz	computer	with	512MB	of	memory	and	a	100GB	hard	drive;	and	the	15-inch,	1.67GHz	computer	with	1GB	of memory	and	a	100GB	hard	drive.	Plaintiffs	alleged	that	the	Company's	standard	disclosure	on	its	packaging	regarding	hard	drive	size	was	not	present	on	the	packaging for	these	two	models.	The	complaint	alleged	violations	of	the	California	Business	&	Professions	Code	§17200	(unfair	competition),	California	Business	&	Professions Code	§17500	(false	advertising),	the	Consumer	Legal	Remedies	Act,	and	causes	of	action	for	deceit	and	negligent	misrepresentation.	Plaintiffs	sought	restitution	and other	relief.	On	February	28,	2006,	the	Company	filed	a	demurrer	and	a	motion	to	strike.	The	Company	withdrew	the	demurrer	and	motion	to	strike	per	stipulation.	The Company	has	reached	a	Court-approved	settlement	with	the	Plaintiffs	in	this	action	and	the	matter	is	concluded.	The	settlement	of	this	matter	did	not	have	a	material effect	on	the	Company's	financial	position	or	results	of	operations.

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

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	alleged	violations	of	California	Business	&	Professions	Code §17200	(unfair	competition),	the	Consumer	Legal	Remedies	Act	and	false	advertising	related	to	the	size	of	the	drives.	Plaintiffs	alleged	that	calculation	of	hard	drive	size using	the	decimal	method	misrepresents	the	actual	size	of	the	drive.	The	complaint	sought	restitution	and	other	relief.	Plaintiffs	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.	Plaintiffs	thereafter	filed	an	amended	complaint	on	May	6,	2005.	The	Defendants	filed	a	demurrer	on	June	6,	2005,	which	the	Court	granted	in part	and	denied	in	part.	Plaintiffs	filed	an	amended	complaint	and	the	Company	filed	an	answer	on	December	15,	2005	denying	all	allegations	and	asserting	numerous assertive	defenses.	The	Company	reached	a	Court-approved	settlement	with	the	Plaintiffs	in	this	action

and	the	matter	is	concluded.	The	settlement	of	this	matter	did	not	have	a	material	effect	on	the	Company's	financial	position	or	results	of	operations.

# Gordon	v.	Apple	Computer,	Inc.

Plaintiff	filed	this	purported	class	action	on	August	31,	2006	in	the	United	States	District	Court	for	the	Northern	District	of	California,	San	Jose	Division,	on	behalf	of	a purported	nationwide	class	of	consumers	who	purchased	65W	Power	Adapters	for	iBooks	and	Powerbooks	between	November	2002	and	the	present.	The	complaint alleges	various	problems	with	the	65W	Adapter,	including	fraying,	sparking	and	premature	failure.	Plaintiffs	allege	violations	of	California	Business	&	Professions Code	§17200	(unfair	competition),	the	Consumer	Legal	Remedies	Act,	the	Song-Beverly	Consumer	Warranty	Act	and	breach	of	warranties.	The	complaint	seeks damages	and	equitable	relief.	The	Company	filed	an	answer	on	October	20,	2006	denying	the	material	allegations	and	asserting	numerous	affirmative	defenses. Mediation	is	set	for	March	13,	2007.

# Greaves	v.	Apple	Computer,	Inc.

On	June	30,	2006	Plaintiff	filed	this	purported	class	action	in	San	Diego	Superior	Court	on	behalf	of	a	purported	class	of	California	purchasers	alleging	discoloration	of the	MacBook	case.	Plaintiff	asserts	claims	under	California	Business	&	Professions	Code	§17500	(false	advertising),	California	Business	&	Professions	Code	§17200 (unfair	competition),	the	Consumer	Legal	Remedies	Act	and	misrepresentation.	Plaintiff's	complaint	seeks	damages	and	equitable	relief.	Plaintiff	filed	a	First	Amended Complaint	on	August	16,	2006.	The	Company	filed	an	answer	on	October	3,	2006	denying	all	allegations	and	asserting	numerous	affirmative	defenses.

# 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	LCD	manufacturer	suppliers.	On	May	18,	2005	the	Court	stayed	the	case	against	the	Company	and	the	other non-manufacturer	defendants.	Plaintiffs	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.

In	re	Apple	Computer,	Inc.	Derivative	Litigation	(formerly	Karant	v.	Jobs,	et	al.	and	Related	Actions)	(Federal	Action)

On	June	30,	2006,	a	putative	derivative	action	captioned	Karant	v.	Jobs,	et.	al.,	was	filed	in	the	United	States	District	Court	for	the	Northern	District	of	California,	San Jose	Division.	A	number	of	related	actions	were	filed	in	the	subsequent	weeks	and	have	been	consolidated	into	a	single	action	captioned	In	re	Apple	Computer,	Inc. Derivative	Litigation,	Master	File	No.	C-06-04128-JF	before	the	Hon.	Jeremy	Fogel.	A	Consolidated	Shareholder	Derivative	Complaint	was	filed	on	December	18, 2006.	The	action	purports	to	assert	claims	on	behalf	of	the	Company	against	several	current	and	former	executive	officers	and	members	of	the	Board	of	Directors alleging	improper	backdating	of	stock	option	grants	to	maximize	certain	defendants'	profits,	failing	to	properly	account	for	and	take	tax	deductions	for	those	grants, insider	trading	and	issuing	false	financial	statements.	The	Company	is	named	as	a	nominal	defendant.	The	consolidated	complaint	alleges	various	causes	of	action	under federal	and	California	law,	including	claims	for	unjust	enrichment,	breach	of	fiduciary	duty,	violation	of	the	California	Corporations	Code,	abuse	of	control,	gross mismanagement,	rescission,	constructive	fraud	and	waste	of	corporate	assets,	as	well	as	claims	under	Sections	10(b),	14(a)	and	20(a)	of	the	Securities	Exchange	Act. Plaintiffs	seek	damages,	disgorgement,	restitution	and	imposition	of	a	constructive	trust.	The	actions	were	filed	after	the	Company's

announcement	on	June	29,	2006	that	an	internal	investigation	had	discovered	irregularities	related	to	the	issuance	of	certain	stock	option	grants	made	between	1997	and 2001,	that	a	special	committee	of	the	Company's	outside	directors	had	retained	independent	counsel	to	perform	an	investigation,	and	that	the	Company	had	informed	the Securities	and	Exchange	Commission.	The	Company's	response	to	the	Consolidated	Complaint	is	not	yet	due.

In	re	Apple	Computer,	Inc.	Derivative	Litigation	(formerly	Plumbers	and	Pipefitters	v.	Jobs,	et	al.	and	Related	Actions)	(State	Action);	Boston	Retirement	Board	v. Apple	Computer,	Inc.

On	July	5,	2006,	a	putative	derivative	action	captioned	Plumbers	and	Pipefitters	v.	Jobs,	et.	al.,	was	filed	in	California	Superior	Court	for	the	County	of	Santa	Clara.	A number	of	related	actions	were	filed	in	the	subsequent	weeks,	and	have	been	consolidated	into	a	single	action	captioned	In	re	Apple	Computer,	Inc.	Derivative Litigation,	No.	1:06CV066692,	assigned	to	the	Hon.	Joseph	Huber.	These	actions	purport	to	assert	claims	on	behalf	of	the	Company	against	several	current	and	former executive	officers	and	members	of	the	Board	of	Directors	alleging	improper	backdating	of	stock	option	grants	to	maximize	certain	defendants'	profits,	failing	to	properly account	for	and	take	tax	deductions	for	those	grants	and	issuing	false	financial	statements.	The	Company	is	named	as	a	nominal	defendant.	A	consolidated	complaint was	filed	on	October	5,	2006,	alleging	a	variety	of	causes	of	action	under	California	law,	including	claims	for	unjust	enrichment,	breach	of	fiduciary	duty,	violation	of the	California	Corporations	Code,	abuse	of	control,	accounting,	constructive	trust,	rescission,	deceit,	gross	mismanagement	and	waste	of	corporate	assets.	On

# December	7,	2006,	the	Court	granted	the	Company's	motion	to	stay	these	actions.

On	November	3,	2006,	the	Boston	Retirement	Board,	a	purported	shareholder,	filed	a	petition	for	writ	of	mandate	against	the	Company	in	California	Superior	Court	for the	County	of	Santa	Clara	County	(Boston	Retirement	Board	v.	Apple	Computer	Inc.).	The	petition	seeks	to	compel	the	Company	to	allow	inspection	of	certain corporate	records	relating	to	the	Company's	option	practices	and	the	Special	Committee's	investigation.	The	Company's	response	to	the	petition	is	not	yet	due.

Lenzi	v.	Apple	Canada,	Inc.;	Wolfe	v.	Apple	Computer,	Inc.	and	Apple	Canada,	Inc.;	Hirst	v.	Apple	Canada,	Inc.;	Hamilton	v.	Apple	Computer,	Inc.	and	Apple Canada,	Inc.

Plaintiff	filed	a	purported	class	action	on	June	7,	2005,	in	Superior	Court,	in	Montreal,	Quebec,	Canada	allegedly	on	behalf	of	Quebec	customers	claiming	false advertising	and	breach	of	warranty	relating	to	iPod	battery	life.	Plaintiff	sought	authorization	to	institute	a	class	action	on	behalf	of	Generations	1,	2	and	3	iPod	owners in	Quebec.	On	February	2,	2006,	the	Court	dismissed	Plaintiff's	motion	for	authorization	to	institute	a	class	action.	Plaintiff	has	appealed	this	ruling,	and	the	appeal	will be	heard	on	February	22,	2007.

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	purported	class	as	a	national	class	consisting	of	all	persons	in	Canada	who	have	purchased	or	who	own	an	iPod.	Counsel	has proposed	an	amended	complaint	to	which	the	Company	has	not	consented.	In	addition,	a	similar	complaint	regarding	iPod	battery	life,	Hamilton	v.	Apple	Computer,	Inc. and	Apple	Canada,	Inc.	was	filed	in	Alberta,	Calgary,	Canada	on	October	5,	2005,	purportedly	on	behalf	of	all	purchasers	of	iPods	in	Alberta,	Canada.	That	complaint has	not	been	served.

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.;	Creative Online	Computer	Services,	Inc.,	DBA	MacOnline	v.	Apple	Computer,	Inc.;	MacGuys,	Inc.	v.	Apple	Computer,	Inc.	(all	in	Santa	Clara	County	Superior	Court)

Eight	resellers	filed	similar	lawsuits	against	the	Company	between	late	2002	and	early	2006	asserting	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	requested	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.	On	February	28,	2006,	MacGuys	and	Creative	Online	filed	complaints	against	the	Company.	All	of	these	cases with	the	exception	of	Macadam	were	coordinated	for	discovery	(along	with	the	Branning	class	action)	in	Santa	Clara	Superior	Court.	The	Elite,	Neighborhood	Computer Store,	MacTech	and	MacAccessory	cases	were	set	for	trial	on	November	27,	2006.	The	Company	has	reached	settlements	with	Computer	International,	MacTech Systems,	Elite	Computers	and	Software,	Inc.,	MacAccessory	Center,	Inc.,	The	Neighborhood	Computer	Store,	Creative	Online	Computer	Services,	Inc.,	and MacGuys,	Inc.	and	these	matters	are	concluded.	These	settlements	did	not	have	a	material	effect	on	the	Company's	financial	position	or	results	of	operations.

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	Macadam	bankruptcy	case	was	converted	to	Chapter	7	(liquidation)	on	April	29,	2005.	The	Company	has	reached	a	settlement	of the	Macadam	case	with	the	Chapter	7	Bankruptcy	Trustee.	The	Bankruptcy	Court	approved	the	settlement	on	July	17,	2006	over	the	objection	of	Tom	Santos, MacAdam's	principal.	Santos	has	appealed	the	ruling	approving	the	settlement.

On	December	19,	2005,	Tom	Santos,	who	was	an	original	plaintiff	in	the	Macadam	case,	filed	a	Fifth	Amended	Complaint	on	his	own	behalf	(not	on	behalf	of Macadam)	alleging	fraud,	violations	of	California	Business	&	Professions	Code	§17200	(unfair	competition),	California	Business	&	Professions	Code	§17500	(false advertising)	and	the	Consumer	Legal	Remedies	Act.	The	Company	filed	a	demurrer	to	Santos'	amended	complaint	and	a	special	motion	to	strike	the	defamation	cause	of action	on	January	20,	2006.	Those	motions	were	heard	on	February	17,	2006,	and	the	Court	sustained	the	demurrer	without	leave	to	amend	as	to	one	cause	of	action, overruled	the	demurrer	as	to	one	cause	of	action	and	sustained	the	demurrer	with	leave	to	amend	as	to	two	causes	of	action.	The	Court	also	denied	the	special	motion	to strike.	Santos	filed	a	further	amended	complaint	on	July	14,	2006.	The	Company	filed	a	demurrer,	which	was	granted	on	September	9,	2006.	Santos	filed	an	amended complaint.	The	Company	filed	a	motion	to	strike,	which	was	granted	in	part	and	denied	in	part	on	December	15,	2006.	The	Company	also	filed	a	cross	complaint	against Santos	on	January	20,	2006	alleging	violations	of	California	Business	&	Professions	Code	§17200	and	California	Penal	Code	§502,	fraud	and	deceit,	and	breach	of contract.

# Macsolutions,	Inc.	v.	Apple	Computer,	Inc.

Plaintiff	Macsolutions,	Inc.,	a	former	Apple	authorized	reseller,	filed	this	lawsuit	against	the	Company	on	January	20,	2006	alleging	breach	of	contract,	fraud, misappropriation	of	trade	secrets,	intentional	interference	with	economic	advantage,	violation	of	the	Cartwright	Act,	violation	of	California	Business	&	Professions	Code §17200	(unfair	competition)	and	fraudulent	concealment.	The	factual	allegations	in	this	complaint	are	similar	to	those	in	the	eight	other	reseller	cases	and	the	Branning class	action.	Principally,	Plaintiffs	allege	that	the	Company	treated	Macsolutions	unfairly	compared	to	other	resellers,	that	the	Company	has	competed	unfairly	in opening	the	Apple	retail	stores,	and	has	allegedly	sold	used	goods	as	new.	Macsolutions	filed	an	amended	complaint	on	June	5,	2006,	adding	Tech	Data	Corporation	as	a

defendant.	The	Company	filed	an	answer	on	July	5,	2006	generally	denying	all	allegations	and	asserting	numerous	affirmative	defenses.	The	case	is	in	discovery.	The case	is	set	for	trial	on	June	18,	2007.

# PhatRat	Technology	LLC	v.	Apple	Computer,	Inc.

Plaintiff	PhatRat	Technology	LLC	filed	this	action	on	October	24,	2006	in	the	United	States	District	Court	for	the	District	of	Colorado	alleging	infringement	of	U.S. Patent	number	6,499,000	entitled	"System	and	Method	for	Determining	Loft	Time,	Speed,	Height	and	Distance,"	U.S.	Patent	number	6,885,971	entitled	"Methods	and Systems	for	Assessing	Athletics	Performance,"	U.S.	Patent	number	6,963,818	entitled	"Mobile	Speedometer	Systems	and	Associated	Methods,"	and	U.S.	Patent	number 7,092,846	entitled	"Systems	and	Methods	for	Determining	Performance	Data,"	as	well	as	allowed	U.S.	Patent	Application	number	11/358,508	entitled	"Shoes Employing	Monitoring	Devices,	and	Associated	Methods."	Plaintiff	asserts	that	the	Nike+iPod	products	infringe	these	patents.	The	Company's	response	to	the complaint	is	not	yet	due.

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

Plaintiff	Premier	International	Associates	LLC	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.	Patent	numbers	6,243,725	and	6,763,345	both	entitled	"List	Building	System."	The	complaint	seeks	unspecified damages	and	other	relief.	The	Company	filed	an	answer	on	January	13,	2006	denying	all	material	allegations	and	asserting	numerous	affirmative	defenses.	The Company	also	asserted	counter	claims	for	a	declaratory	judgment	of	noninfringement	and	invalidity.	A	Markman	hearing	is	set	for	May	17,	2007	and	trial	is	scheduled for	December	3,	2007.

# Quantum	Technology	Management,	Ltd.	v.	Apple	Computer,	Inc.

Plaintiff	filed	this	action	on	December	21,	2005	in	the	United	States	District	Court	for	the	District	of	Maryland	against	the	Company	and	Fingerworks,	Ltd.,	alleging infringement	of	U.S.	Patent	number	5,730,165	entitled	"Time	Domain	Capacitive	Field	Detector."	The	complaint	seeks	unspecified	damages	and	other	relief.	On May	11,	2006,	Quantum	filed	an	amended	complaint	adding	Cypress	Semiconductor/MicroSystems,	Inc.	as	a	defendant.	On	July	31,	2006,	the	Company	filed	an	answer denying	all	material	allegations	and	asserting	numerous	affirmative	defenses	and	also	filed	counterclaims	for	non-infringment	and	invalidity.	On	November	30,	2006 Plaintiff	filed	a	reply	to	the	Company's	counterclaims	and	a	More	Definite	Statement.

# 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.	The	Company	has	completed	a	refund	program	for	this	levy.	A	class	certification	hearing	took	place	January	13,	2006.	On	February	24,	2006,	the	Court granted	class	certification	and	notice	was	published	during	the	last	week	of	March	2006.	Discovery	is	closed	and	the	case	is	prepared	for	trial,	which	the	Company anticipates	will	take	place	in	2007.

# 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	number	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,	which	was	granted	on	August	31, 2006.

# Tucker	v.	Apple	Computer,	Inc.

Plaintiff	filed	this	purported	class	action	on	July	21,	2006	in	the	United	States	District	Court	for	the	Northern	District	of	California	alleging	various	claims	including alleged	unlawful	tying	of	music	and	videos	purchased	on	the	iTunes	Store	with	the	purchase	of	iPods	and	vice	versa	and	unlawful	acquisition	or	maintenance	of monopoly	market	power.	The	complaint	alleges	violations	of	§§1	and	2	of	the	Sherman	Act	(15	U.S.C.	§§1	and	2),	California	Business	&	Professions	Code	§16700	et seq.	(the	Cartwright	Act),	California	Business	&	Professions	Code	§17200	(unfair	competition),	and	the	California	Consumer	Legal	Remedies	Act.	Plaintiff	seeks unspecified	damages	and	other	relief.	On	November	3,	2006,	the	Company	filed	a	motion	to	dismiss	the	complaint,	which	was	heard	on	November	20,	2006.	On December	20,	2006,	the	Court	denied	the	motion	to	dismiss.

# Union	Federale	des	Consummateurs	-	Que	Choisir	v.	Apple	Computer	France	s.à.r.l.	and	iTunes	s.à.r.l.

Plaintiff,	a	consumer	association	in	France,	filed	this	complaint	on	February	9,	2005	alleging	that	the	above-listed	entities	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	Store	and	that	the	music	from	the	iTunes	Store	is	only compatible	with	the	iPod	and	(2)	allegedly	tying	the	sales	of	iPods	to	the	iTunes	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.	Plaintiff's	responsive	pleading	was	filed on	February	10,	2006.	The	Company	filed	a	reply	on	June	6,	2006	and	UFC	filed	a	response	on	September	19,	2006.

# Vitt	v.	Apple	Computer,	Inc.

Plaintiff	filed	this	purported	class	action	on	November	7,	2006	in	the	United	States	District	Court	for	the	Central	District	of	California	on	behalf	of	a	purported nationwide	class	of	all	purchasers	of	the	iBook	G4	alleging	that	the	computer's	logic	board	fails	at	an	abnormally	high	rate.	The	complaint	alleges	violations	of California	Business	&	Professions	Code	§17200	(unfair	competition)	and	California	Business	&	Professions	Code	§17500	(false	advertising).	Plaintiff	seeks	unspecified damages	and	other	relief.	The	Company's	response	to	the	complaint	is	not	yet	due.

# Vogel	v.	Jobs	et	al.

Plaintiff	filed	this	purported	class	action	on	August	24,	2006,	in	the	United	States	District	Court	for	the	Northern	District	of	California	against	the	Company	and	certain of	the	Company's	current	and	former	officers	and	directors	alleging	improper	backdating	of	stock	option	grants	to	maximize	certain	defendants'	profits,	failing	to properly	account	for	those	grants	and	issuing	false	financial	statements.	The	lawsuit	purports	to	be	brought	on	behalf	of	all	purchasers	of	the	Company's	stock	from December	1,	2005	through	August	11,	2006,	and	asserts	claims	under	Sections	10(b)	and	14(a)	of	the	Securities	Exchange	Act	as	well	as	control	person	claims.	A motion	for	appointment	of	lead	plaintiff	and	counsel	was	scheduled	to	be	heard	on	December	4,	2006	but	was	taken	off	calendar	when	the	case	was	re-assigned	to	the Hon.	Jeremy	Fogel.	The	motion	therefore	is	still	pending.	Defendants'	responses	to	the	complaint	are	not	yet	due.

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);	Rappel	v.	Apple	Computer,	Inc.	(filed on	November	23,	2005,	United	States	District	Court	for	the	District	of	New	Jersey);	Mayo	v.	Apple	Computer,	Inc.	(filed	on	December	7,	2005,	United	States	District Court	for	the	Middle	District	of	Louisiana);	Valencia	v.	Apple	Computer,	Inc.	(filed	on	December	22,	2005,	United	States	District	Court	for

the	Northern	District	of	California);	Williamson	v.	Apple	Computer,	Inc.	(filed	on	December	29,	2005,	United	States	District	Court	for	the	Middle	District	of	Louisiana); Sioson	v.	Apple	Computer,	Inc.	(filed	on	February	9,	2006,	San	Mateo	County	Superior	Court;	First	Amended	Complaint	filed	March	16,	2006)

These	federal	and	state	court	complaints	allege	that	the	Company's	iPod	nano	was	defectively	designed	so	that	it	scratches	excessively	during	normal	use,	rendering	the screen	unreadable.	The	federal	actions	were	coordinated	in	the	United	States	District	Court	for	the	Northern	District	of	California	and	assigned	to	the	Hon.	Ronald Whyte	pursuant	to	an	April	17,	2006,	order	of	the	Judicial	Panel	on	Multidistrict	Litigation.	Plaintiffs	filed	a	First	Consolidated	and	Amended	Master	Complaint	on September	21,	2006,	alleging	violations	of	California	and	other	states'	consumer	protection	and	warranty	laws	and	claiming	unjust	enrichment.	The	Master	Complaint alleges	two	putative	plaintiff	classes:	(1)	all	U.S.	residents	(excluding	California	residents)	who	purchased	an	iPod	nano	that	was	not	manufactured	or	designed	using processes	necessary	to	ensure	normal	resistance	to	scratching	of	the	screen;	and	(2)	all	iPod	nano	purchasers	other	than	U.S.	residents	who	purchased	an	iPod	nano	that was	not	manufactured	or	designed	using	processes	necessary	to	ensure	normal	resistance	to	scratching	of	the	screen.	Pursuant	to	stipulation,	the	Wimmer,	Valencia,	and Rappel	federal	complaints	were	dismissed	without	prejudice	and	the	Mayo	and	Williamson	complaints	were	administratively	closed	without	prejudice.	The	Company answered	the	Master	Complaint	on	November	20,	2006.

The	two	California	state	actions	were	coordinated	on	May	4,	2006,	and	assigned	to	the	Hon.	West	in	Los	Angeles	Superior	Court.	Plaintiffs	filed	a	Consolidated Amended	Class	Action	Complaint	on	June	8,	2006,	alleging	violations	of	California	state	consumer	protection,	unfair	competition,	false	advertising,	and	warranty	laws and	claiming	unjust	enrichment.	The	Consolidated	Complaint	alleges	a	putative	plaintiff	class	of	all	California	residents	who	own	an	iPod	nano	containing	a manufacturing	defect	that	results	in	the	nano	being	susceptible	to	excessive	scratching.	The	Company	answered	the	Consolidated	Amended	Complaint	on	October	6, 2006.

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	class	actions	on	behalf	of	iPod	nano	purchasers	in	Quebec.	The	Royer- Brennan	file	was	stayed	in	May	2006	in	favor	of	the	Carpentier	file,	in	which	Apple's	preliminary	motion	for	leave	to	file	evidence	will	be	heard	on	December	18,	2006. No	further	dates	have	been	set.	A	similar	complaint,	Mund	v.	Apple	Canada	Inc.	and	Apple	Computer,	Inc.,	was	filed	in	Ontario,	Canada	on	January	9,	2006	seeking authorization	to	institute	a	class	action	on	behalf	of	iPod	nano	purchasers	in	Canada.	In	the	two	Quebec	class	actions,	a	motion	to	stay	the	Royer-Brennan	case	is	stayed in	favor	of	the	previously	filed	Carpentier	case.	In	the	Ontario	Action,	Apple	Canada	Inc.	and	Apple	Computer,	Inc.,	have	served	Notices	of	Intent	to	defend.	On December	18,	2006,	plaintiff's	counsel	advised	that	a	substitution	of	attorneys	will	occur,	most	likely	in	January	2007.	The	file	is	now	stayed,	and	the	Company's motion	to	examine	petitioner	and	for	leave	to	file	evidence	at	certification	will	be	set	after	the	new	counsel	appears.

# 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	30,	2006.

# PART	II

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

The	Company's	common	stock	is	traded	on	the	over-the-counter	market	and	is	quoted	on	the	NASDAQ	Global	Select	Market	under	the	symbol	AAPL	and	on	the Frankfurt	Stock	Exchange	under	the	symbol	APCD.

# Price	Range	of	Common	Stock

The	price	range	per	share	of	common	stock	presented	below	represents	the	highest	and	lowest	sales	prices	for	the	Company's	common	stock	on	the	NASDAQ	Global Select	Market	during	each	quarter	of	the	two	most	recent	fiscal	years.

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.

|  | Fourth	Quarter | Third	Quarter | Second	Quarter | First	Quarter |
| :--- | :--- | :--- | :--- | :--- |
| Fiscal\t2006\tprice\trange\tper\tcommon\tshare | $ 77.78-$50.16 | $ 73.80-$55.41 | $ 86.40-$57.67 | $ 75.46-$47.87 |
| Fiscal\t2005\tprice\trange\tper\tcommon\tshare | $ 53.20-$36.37 | $ 43.74-$34.13 | $ 45.06-$31.58 | $ 34.22-$18.65 |

# Holders

# Dividends

The	Company	did	not	declare	or	pay	cash	dividends	in	either	2006	or	2005.	The	Company	anticipates	that,	for	the	foreseeable	future,	it	will	retain	any	earnings	for	use	in the	operation	of	its	business.

# Securities	Authorized	for	Issuance	under	Equity	Compensation	Plans

The	description	of	equity	compensation	plans	required	by	Regulation	S-K,	Item	201(d)	is	incorporated	herein	by	reference	to	Part	III,	Item	12	of	this	Form	10-K.

# Purchases	of	Equity	Securities	by	the	Issuer	and	Affiliated	Purchasers

# Item	6.	Selected	Financial	Data

The	consolidated	balance	sheet	as	of	September	24,	2005	and	the	consolidated	statements	of	operations	for	the	fiscal	years	ended	September	24,	2005	and	September	25, 2004	have	been	restated	as	set	forth	in	the	2006	Form	10-K.	The	data	for	the	consolidated	balance	sheets	as	of	September	2004,	2003,	and	2002	and	the	consolidated statements	of	operations	for	the	fiscal	years	ended	September	2003	and	2002	have	been	restated	to	reflect	the	impact	of	the	stock-based	compensation	adjustments,	but such	restated	data	have	not	been	audited	and	is	derived	from	the	books	and	records	of	the	Company.	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	to	fully	understand	factors	that	may	affect	the	comparability	of the	information	presented	below.	The	information	presented	in	the	following	tables	has	been	adjusted	to	reflect	the	restatement	of	the	Company's	financial	results,	which is	more	fully	described	in	the	"Explanatory	Note"	immediately	preceding	Part	I,	Item	1	and	in	Note	2,	"Restatement	of	Consolidated	Financial	Statements"	in	Notes	to Consolidated	Financial	Statements	of	this	Form	10-K.

The	Company	has	not	amended	its	previously-filed	Annual	Reports	on	Form	10-K	or	Quarterly	Reports	on	Form	10-Q	for	the	periods	affected	by	this	restatement.	The financial	information	that	has	been	previously	filed	or	otherwise	reported	for	these	periods	is	superseded	by	the	information	in	this	Annual	Report	on	Form	10-K,	and the	financial	statements	and	related	financial	information	contained	in	such	previously-filed	reports	should	no	longer	be	relied	upon.

Net	gains	before	taxes	related	to	the	Company's	non-current	debt	and	equity	investments	of	$4	million	and	$10	million	were	recognized	in	2004	and	2003,	respectively. A	net	loss	before	taxes	related	to	the	Company's	non-current	debt	and	equity	investments	of	$42	million	was	recognized	in	2002.	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	was	recognized	in	2003.

(2)										The	Selected	Financial	Data	for	2003	and	2002	has	been	restated	to	reflect	adjustments	related	to	stock-based	compensation	expense	and	the	associated	tax	impact as	further	described	in	the	"Explanatory	Note"	immediately	preceding	Part	I,	Item	1	of	this	Form	10-K.	As	a	result	of	these	adjustments,	net	income	was	reduced	by $12	million	and	$23	million	for	the	years	ended	September	27,	2003	and	September	28,	2002,	respectively	as	follows:

|  | Fiscal	Year	Ended	September	27, | Fiscal	Year	Ended	September	27, | Fiscal	Year	Ended	September	27, | Fiscal	Year	Ended	September	28, | Fiscal	Year	Ended	September	28, | Fiscal	Year	Ended	September	28, |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | As\nReported | 2003\nAdjustments | As\nRestated | As\nReported | 2002\nAdjustments | As\nRestated |
| Net\tsales | $ 6,207 | $— | $ 6,207 | $ 5,742 | $— | $ 5,742 |
| Cost\tof\tsales | 4,499 | 1 | 4,500 | 4,139 | 3 | 4,142 |
| Gross\tmargin | 1,708 | (1) | 1,707 | 1,603 | (3) | 1,600 |
| Total\toperating\texpenses | 1,709 | 15 | 1,724 | 1,586 | 26 | 1,612 |
| Operating\tincome\t(loss) | (1) | (16) | (17) | 17 | (29) | (12) |
| Income\tbefore\taccounting\tchanges | 68 | (12) | 56 | 65 | (23) | 42 |
| Cumulative\teffects\tof\taccounting |  |  |  |  |  |  |
| changes,\tnet\tof\tincome\ttaxes | 1 | — | 1 | — | — | — |
| Net\tincome | $69 | $(12) | $57 | $65 | $(23) | $42 |
| Earnings\t(loss)\tper\tcommon\tshare |  |  |  |  |  |  |
| before\taccounting\tchanges: |  |  |  |  |  |  |
| Basic | $0.09 | $ (0.01) | $0.08 | $0.09 | $ (0.03) | $0.06 |
| Diluted | $0.09 | $ (0.01) | $0.08 | $0.09 | $ (0.03) | $0.06 |
| Earnings\tper\tcommon\tshare: |  |  |  |  |  |  |
| Basic | $0.10 | $ (0.02) | $0.08 | $0.09 | $ (0.03) | $0.06 |
| Diluted | $0.09 | $ (0.01) | $0.08 | $0.09 | $ (0.03) | $0.06 |

# 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	"Risk	Factors"	above.	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.	Unless	otherwise	stated,	references	in	this	report	to	particular	years	or	quarters	refer	to	the	Company's	fiscal	years	ended	in	September	and	the	associated quarters	of	those	fiscal	years.	The	Company	assumes	no	obligation	to	revise	or	update	any	forward-looking	statements	for	any	reason,	except	as	required	by	law.

The	following	information	has	been	adjusted	to	reflect	the	restatement	of	the	Company's	financial	results,	which	is	more	fully	described	in	the	"Explanatory	Note" immediately	preceding	Part	I,	Item	1	and	in	Note	2,	"Restatement	of	Consolidated	Financial	Statements"	in	Notes	to	Consolidated	Financial	Statements	of	this	Form	10- K.	The	net	of	tax	impact	of	the	adjustments,	which	amounted	to	$4	million	in	2006,	was	recorded	by	the	Company	in	its	fourth	quarter	of	2006.	The	net	of	tax	impact	of the	restatements	on	the	Company's	results	of	operations	amounted	to	$7	million	and	$10	million	in	2005	and	2004,

respectively.	The	impact	of	these	adjustments	was	not	significant	to	the	Company's	operating	results,	trends,	or	liquidity	for	the	annual	or	quarterly	periods	in	2006, 2005,	and	2004.

# 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,	television	shows,	movies,	and	iPod	games.	The	Company's	products	and	services	include	the	Macintosh	line	of	desktop	and	notebook computers,	the	iPod	line	of	portable	digital	music	players,	the	Xserve	server	and	Xserve	RAID	storage	products,	a	portfolio	of	consumer	and	professional	software applications,	the	Mac	OS	X	operating	system,	the	iTunes	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	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	and	iPod	compatible	products	including	application software,	printers,	storage	devices,	speakers,	headphones,	and	various	other	accessories	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 Form	10-K	under	the	heading	"Business."

The	Company	believes	that	for	both	professionals	and	consumers	the	personal	computer	has	become	the	center	of	an	evolving	digital	lifestyle	by	integrating	and enhancing	the	utility	of	advanced	digital	devices	such	as	the	Company's	iPods,	digital	video	and	still	cameras,	televisions,	CD	and	DVD	players,	cellular	phones, personal	digital	assistants,	and	other	consumer	electronic	devices.	The	attributes	of	the	personal	computer	that	enable	this	functionality	include	a	high-quality	user interface,	easy	access	to	relatively	inexpensive	data	storage,	the	ability	to	run	complex	applications,	and	the	ability	to	connect	easily	to	a	wide	variety	of	other	digital devices	and	to	the	Internet.	The	Company	is	the	only	participant	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.	This,	along	with	its	products'	innovative	industrial	designs,	intuitive	ease-of-use,	built- in	graphics,	multimedia	and	networking	capabilities,	uniquely	positions	the	Company	to	offer	innovative	integrated	digital	lifestyle	solutions.

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	portable	digital	music	players,	and	distribution	of	third-party	digital	content	through	its	online	iTunes	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	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 digital	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	computers.	During	2006,	the	Company	introduced	new	Intel-based	models	of the	MacBook	Pro,	MacBook,	Mac	Pro,	iMac,	and	Mac	mini	computers.	The	Company's	transition	to	Intel	microprocessors	for	Macintosh	systems	was	completed	in August	2006,	and	its	transition	for	Xserve	was	completed	in	November	2006.	The	MacBook	Pro,	MacBook,	Mac	Pro,	iMac,	and	Mac	mini	feature	Mac	OS	X	version 10.4	Tiger,	iLife	'06,	and	the	Company's	new	translation	technology,	Rosetta,	which	allows	most	PowerPC-based	Macintosh	applications	to	run	on	Intel-based Macintosh	computers.	There	are	potential	risks	and	uncertainties	that	may	occur	due	to	this	transition,	which	are	further	discussed	in	Item	1A	under	the	heading	"Risk Factors."

The	Company	utilizes	a	variety	of	direct	and	indirect	distribution	channels.	The	Company	believes	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 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	165	stores	open	as	of	September	30,	2006.

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,	stock-based	compensation,	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	American	Institute	of	Certified	Public	Accountants	Statement	of	Position	("SOP")	No.	97-2,	Software	Revenue	Recognition,	as	amended,	and	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	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	and	all	other	criteria	for	revenue	recognition	have	been	met.

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.	For	transactions	involving	price	protection,	the	Company	recognizes	revenue	net	of	the	estimated	amount to	be	refunded,	provided	the	refund	amount	can	be	reasonably	and	reliably	estimated	and	the	other	conditions	for	revenue	recognition	have	been	met.	If	refunds	cannot be	reliably	estimated,	revenue	is	not	recognized	until	reliable	estimates	can	be	made	or	the	price	protection	lapses.	For	customer	incentive	programs,	the	estimated	cost of	these	programs	is	recognized	at	the	later	of	the	date	at	which	the	Company	has	sold	the	product	or	the	date	at	which	the	program	is	offered.	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	distributors	and	resellers	and	directly	to	certain	education,	consumer,	and	commercial	customers.	The Company	generally	does	not	require	collateral	from	its	customers;	however,	the	Company	will	require	collateral	in	certain	instances	to	limit	credit	risk.	In	addition,

when	possible,	the	Company	does	attempt	to	limit	credit	risk	on	trade	receivables	with	credit	insurance	for	certain	customers	in	Latin	America,	Europe,	Asia,	and Australia	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	were	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	were	recorded.

The	Company	accrues	reserves	for	estimated	cancellation	fees	related	to	component	orders	that	have	been	cancelled	or	are	expected	to	be	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	hardware	and	software	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.

The	Company	periodically	provides	updates	to	its	applications	and	system	software	to	maintain	the	software's	compliance	with	specifications.	The	estimated	cost	to develop	such	updates	is	accounted	for	as	warranty	costs	that	are	recognized	at	the	time	related	software	revenue	is	recognized.	Factors	considered	in	determining appropriate	accruals	related	to	such	updates	include	the	number	of	units	delivered,	the	number	of	updates	expected	to	occur,	and	the	historical	cost	and	estimated	future cost	of	the	resources	necessary	to	develop	these	updates.

# Stock-Based	Compensation

The	Company	accounts	for	stock-based	compensation	in	accordance	with	SFAS	No.	123R.	Under	the	provisions	of	SFAS	No.	123R,	stock-based	compensation	cost	is estimated	at	the	grant	date	based	on	the	award's	fair	value	as	calculated	by	the	Black-Scholes-Merton	("BSM")	option-pricing	model	and	is	recognized	as	expense ratably	over	the	requisite	service	period.	The	BSM	model	requires	various	highly

judgmental	assumptions	including	volatility,	forfeiture	rates,	and	expected	option	life.	If	any	of	the	assumptions	used	in	the	BSM	model	change	significantly,	stock-based compensation	expense	may	differ	materially	in	the	future	from	that	recorded	in	the	current	period.

In	connection	with	the	Company's	restatement	of	its	consolidated	financial	statements,	the	Company	has	applied	judgment	in	choosing	whether	to	revise	measurement dates	for	prior	option	grants.	Information	regarding	the	restatement,	including	ranges	of	possible	additional	stock-based	compensation	expense	if	other	measurement dates	had	been	selected	for	certain	grants,	is	set	forth	in	the	"Explanatory	Note"	immediately	preceding	Part	I,	Item	1	and	in	Note	2,	"Restatement	of	Consolidated Financial	Statements"	in	Notes	to	Consolidated	Financial	Statements	of	this	Form	10-K.

# Income	Taxes

The	Company	records	a	tax	provision	for	the	anticipated	tax	consequences	of	the	reported	results	of	operations.	In	accordance	with	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.

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	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.

(c)														Includes	MacBook,	iBook,	MacBook	Pro,	and	PowerBook	product	lines.

(d)													Consists	of	iTunes	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.

Net	sales	during	2006	increased	39%	or	$5.4	billion	from	2005.	This	increase	was	due	in	part	to	the	fact	that	2006	spanned	53	weeks	while	2005	spanned	52	weeks. Several	other	factors	contributed	to	these	increases	including	the	following:

·							Net	sales	of	iPods	increased	$3.1	billion	or	69%	during	2006	compared	to	2005.	Unit	sales	of	iPods	totaled	39.4	million	in	2006,	which	represents	an	increase	of 75%	from	22.5	million	iPod	units	sold	in	2005.	Strong	iPod	sales	during	2006	reflected	significant	sales	of	both	the	hard-drive	based	iPod	that	supports	video, first	introduced	in	October	of	2005	and	the	iPod	nano,	introduced	in	September	2005,	as	well	as	continued	expansion	of	iPod	distribution	points.	During	2006, the	net	sales	per	iPod	unit	sold	decreased	by	3%	compared	to	2005	primarily	due	to	an	overall	decrease	in	average	selling	prices	for	all	iPods	as	well	as	a	shift	in product	mix	to	the	iPod	nano.	From	the	introduction	of	the	iPod	in	2002	through	2006,	the	Company	has	sold	approximately	68	million	iPods.

·							Macintosh	net	sales	increased	$1.1	billion	or	18%	during	2006	compared	to	2005.	Macintosh	unit	sales	increased	by	769,000	units	or	17%	during	2006	compared to	2005.	These	increases	were	mainly	due	to	strong	demand	for	the	Intel-based	MacBook	and	MacBook	Pro	systems	and	reflect	a	shift	in	product	mix	to	portable products	in	all	of	the	Company's	operating	segments.	Net	sales	and	unit	sales	of	the	Company's	portable	products	increased	43%	and	42%,	respectively,	during 2006	compared	to	2005.	Macintosh	desktop	net	sales	and	unit	sales	both	decreased	by	3%	during	2006	compared	to	2005.	The	decrease	in	sales	of	the	Company's Macintosh	desktops	was	due	to	declines	in	sales	of	the	Company's	professional-oriented	desktop	products.	The	Company	believes	the	decline	in	the	Company's professional-oriented	desktop	products	was	due	to	customers	delaying	purchases	of	such	products	in	anticipation	of	the	release	of	the	Intel-based	Mac	Pro,	which did	not	begin	shipping	until	August	2006,	and	updated	software	applications	capable	of	running	on	Intel-based	Macintosh	computers,	and	the	trend	toward portable	computers.	A	slight	increase	of	1%	during	2006	in	net	sales	per	Macintosh	unit	sold	was	due	to	a	shift	in	mix	to	higher-priced	portable	products, partially	offset	by	price	reductions	on	certain	Macintosh	systems.

·							Other	music	related	products	and	services	consists	of	sales	associated	with	the	iTunes	Store	and	iPod	services	and	accessories.	Net	sales	of	other	music	related products	and	services	increased	$986	million	or	110%	during	2006	compared	to	2005.	The	increase	was	primarily	due	to	increased	net	sales	from	the	iTunes Store	and	Apple-branded	and	third-party	iPod	accessories	and	services.	The	increase	in	sales	from	the	iTunes	Store	stemmed	from	significant	growth	in	U.S. sales	and	the	opening	of	The	iTunes	Store	in	Japan	during	August	2005	and	Australia	during	October	2005.	The	increased	sales	from	the	iTunes	Store	were	also attributable	to	the	availability	of	videos,	television	shows,	and	feature-length	movie	downloads.

·							Net	sales	of	software,	service,	and	other	sales	increased	$188	million	or	17%	during	2006	compared	to	2005.	The	growth	was	primarily	attributable	to	increased net	sales	of	AppleCare	Protection	Plan	("APP")	extended	service	and	support	contracts	and	application	software,	partially	offset	by	a	decrease	in	sales	of	Mac	OS X.	Mac	OS	X	sales	were	particularly	high	in	2005	due	to	the	release	of	Mac	OS	X	Tiger	in	April	2005.

Offsetting	the	favorable	factors	discussed	above,	the	Company's	net	sales	during	2006	were	negatively	impacted	by	the	following:

·							Net	sales	of	peripherals	and	other	hardware	declined	$26	million	or	2%	compared	to	2005	primarily	due	to	price	decreases	and	a	decrease	in	net	sales	of	displays relating	to	a	shift	in	mix	from	desktop	to	portable	systems.	The	decrease	in	net	sales	of	displays	for	2006	is	consistent	with	the	overall	decrease	in	unit	sales	of

Macintosh	professional	desktop	systems.

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	represented	an	increase	of 409%	from	the	4.4	million	iPod	units	sold	in	2004.	Strong	sales	of	iPods	during	2005	were	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	had	sold	approximately	28	million	iPods.

·							Net	sales	of	other	music	related	products	and	services	increased	$621	million	or	223%	during	2005	compared	to	2004.	The	Company	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	Store	were	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	related	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	had	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	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	included	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.

·							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.

·							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	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.

# 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	2006.	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	Note	11,	"Segment	Information	and	Geographic	Data"	in	Notes	to	Consolidated	Financial	Statements	of	this	Form	10-K.

# Americas

During	2006,	net	sales	in	the	Americas	segment	increased	$2.7	billion,	or	41%,	compared	to	2005.	The	main	factors	for	this	increase	were	significant	increases	in	net sales	of	iPods,	other	music	related	products	and	services,	Macintosh	portable	systems,	and	APP.	Sales	of	iPods	increased	primarily	due	to	the	introduction	of	the	updated iPod	with	video-playing	capabilities	in	October	2005	and	the	iPod	nano	during	September	2005.	The	increase	in	other	music	related	products	and	services	was	due	to increases	in	sales	of	Apple-branded	and	third-party	iPod	accessories	and	sales	from	the	iTunes	Store.	The	increase	in	sales	of	Macintosh	portable	systems	in	the Americas	was	due	to	strong	sales	of	the	Intel-based	MacBook	and	MacBook	Pro	during	2006.	The	overall	increase	in	net	sales	was	partially	offset	by	a	decline	in	net sales	of	desktops,	displays,	and	Mac	OS	X.	The	decrease	in	desktop	products	and	displays	net	sales	reflects	the	overall	shift	in	product	mix	toward	portable	Macintosh systems.	Mac	OS	X	sales	decreased	from	2005	since	the	Company	has	not	released	a	new	version	of	Mac	OS	X	since	Tiger	began	shipping	in	April	2005.	During	2006, the	Americas	segment	represented	approximately	48%	of	the	Company's	total	net	sales	as	compared	to	47%	in	the	same	period	of	2005.	During	2006,	U.S.	education channel	net	sales	and	Macintosh	unit	sales	increased	by	13%	and	11%,	respectively,	compared	to	2005.	Net	sales	from	the	higher	education	market	grew	22%	during 2006	compared	to	2005	due	to	strong	sales	of	Macintosh	portable	products	and	iPods.	Net	sales	were	relatively	flat	for	K-12	due	to	continued	budget	constraints.

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	updated	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.	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	and	portable	system	shipments.	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.

# Europe

Europe	segment	net	sales	increased	$1.0	billion	or	33%	during	2006	compared	to	2005.	Consistent	with	the	Americas	segment,	these	increases	were	a	result	of	strong growth	in	iPod	sales,	other	music	related	products	and	services,	and	Macintosh	portable	systems.	Sales	of	iPods	increased	primarily	due	to	the	introduction	of	the updated	iPod	with	video-playing	capabilities	in	October	2005	and	the	iPod	nano	during	September	2005.	The	increase	in	other	music	related	products	and	services	was due	to	increases	in	sales	of	Apple-branded	and	third-party	iPod	accessories	and	sales	from	the	iTunes	Store.	The	increase	in	sales	of	portable	systems	in	Europe	was	due to	strong	sales	of	the	Intel-based	MacBook	and	MacBook	Pro	that	were	introduced	during	2006.	In	addition,	Europe	also	reported	increased	sales	in	APP	related	to	the increase	in	Macintosh	unit	sales.	These	increases	were	partially	offset	by	a	decrease	in	desktop	and

Mac	OS	X	net	sales	during	2006	compared	to	2005.	The	decrease	in	desktop	net	sales	was	due	to	the	shift	in	product	mix	toward	portable	Macintosh	systems.	Mac	OS	X sales	have	decreased	from	2005	since	the	Company	has	not	released	a	new	version	of	Mac	OS	X	since	Tiger	began	shipping	in	April	2005.

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%	from	2004.	Similar	to	the	results	of	the	Company's	other	segments,	net	sales	of	iPods,	peripherals	and	software	were	strong	in	2005.

# Japan

Japan's	net	sales	increased	$288	million	or	31%	during	2006	compared	to	2005.	The	Japan	segment	experienced	increased	net	sales	in	iPods,	Macintosh	portable products,	and	other	music	related	products	and	services.	Consistent	with	the	Company's	other	segments,	Japan	experienced	increases	in	sales	of	iPods	due	to	the introduction	of	the	iPod	with	video-playing	capabilities	and	the	iPod	nano	in	October	and	September	of	2005,	respectively.	Japan	also	experienced	strong	sales	of	the Intel-based	MacBook	and	increased	sales	from	the	iTunes	Store.	These	increases	were	partially	offset	by	decreases	in	net	sales	of	Macintosh	desktop	products,	displays, and	Mac	OS	X.	The	decreases	in	desktop	products	and	displays	reflect	the	overall	shift	in	product	mix	toward	portable	Macintosh	systems.	Mac	OS	X	sales	have decreased	from	2005	since	the	Company	has	not	released	a	new	version	of	Mac	OS	X	since	Tiger	began	shipping	in	April	2005.	Total	Macintosh	unit	sales	during	2006 remained	relatively	flat	compared	to	2005.	The	relatively	flat	growth	in	Macintosh	unit	sales	is	partially	attributable	to	Japan's	overall	slow	consumer	PC	market	growth. The	Company	is	continuing	to	evaluate	ways	to	improve	its	indirect	and	direct	channel	sales	in	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	have	been	attributable	to	a	shift	in	sales	from	portables	to	the	iMac	G5	and	Mac	mini,	and	a	shift	to	the	Retail	segment	as	a	result	of	opening two	additional	stores	in	Japan	during	2005.

# Retail

The	Company	opened	41	new	retail	stores	during	2006,	including	a	total	of	10	international	stores	in	the	U.K.,	Japan,	and	Canada,	bringing	the	total	number	of	open stores	to	165	as	of	September	30,	2006.	This	compares	to	124	open	stores	as	of	September	24,	2005	and	86	open	stores	as	of	September	25,	2004.

The	Retail	segment's	net	sales	increased	by	43%	to	$3.4	billion	during	2006	compared	to	2005.	Retail	segment	Macintosh	unit	sales	increased	45%	during	2006 compared	to	2005.	With	an	average	of	142	stores	open	during	2006,	average	revenue	per	store	increased	to	$23.6	million	compared	to	$22.4	million	during	2005	and $15.6	million	in	2004.	The	current	year	increase	was	primarily	due	to	strong	sales	of	Macintosh	portable	and	desktop	products,	iPods,	and	other	music	related	products and	services.	Sales	of	iPods	increased	primarily	due	to	the	introduction	of	the	updated	iPod	with	video-playing	capabilities	in	October	2005	and	the	iPod	nano	during September	2005.	The	increase	in	other	music	related	products	and	services	was	due	to	increased	sales	of	Apple-branded	and	third-party	iPod	accessories.	Macintosh portable	and	desktop	sales	increased	due	to	strong	sales	of	the	Intel-based	MacBook,	MacBook	Pro,	and	iMac.

As	measured	by	the	Company's	operating	segment	reporting,	the	Retail	segment	reported	operating	income	of	$198	million	during	2006	as	compared	to	operating income	of	$151	million	during	2005	and

operating	income	of	$39	million	during	2004.	This	improvement	was	primarily	attributable	to	the	impact	of	opening	new	stores	and	the	segment's	year-over-year increase	in	average	revenue	per	store,	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	$200	million	in	2006,	bringing	the	total	capital expenditures	since	inception	of	the	Retail	segment	to	approximately	$729	million.	As	of	September	30,	2006,	the	Retail	segment	had	approximately	5,787	employees and	had	outstanding	operating	lease	commitments	associated	with	retail	store	space	and	related	facilities	of	approximately	$887	million.	The	Company	would	incur substantial	costs	if	it	were	to	close	its	retail	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	30,<br>2006 | September	24,<br>2005<br>As	Restated	(1) | September	25,<br>2004<br>As	Restated	(1) |
| :--- | :--- | :--- | :--- |
| Net\tsales | $19,315 | $13,931 | $ 8,279 |
| Cost\tof\tsales | 13,717 | 9,889 | 6,022 |
| Gross\tmargin | $5,598 | $4,042 | $ 2,257 |
| Gross\tmargin\tpercentage | 29.0% | 29.0% | 27.3% |

Gross	margin	percentage	of	29.0%	in	2006	remained	flat	as	compared	to	2005.	The	Company	experienced	more	favorable	pricing	on	certain	commodity	components including	LCD	flat-panel	displays	and	DRAM	memory	and	higher	overall	revenue	that	provided	for	more	leverage	on	fixed	production	costs,	offset	by	an	increase	in lower	margin	iPod	sales	and	other	music-related	services.

The	Company	anticipates	that	its	gross	margin	and	the	gross	margins	of	the	personal	computer	and	consumer	electronics	industries	will	be	under	pressure	due	to	price competition.	The	Company	expects	gross	margin	percentage	to	decline	sequentially	in	the	first	quarter	of	2007	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	Store.

The	foregoing	statements	regarding	the	Company's	expected	gross	margin	percentage	are	forward-looking.	There	can	be	no	assurance	that	current	gross	margin percentage	will	be	maintained	or	targeted	gross	margin	percentage	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	competitive 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	percentage	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.

# Operating	Expenses

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

|  | September	30,<br>2006 | September	24,<br>2005<br>As	Restated	(1) | September	25,<br>2004<br>As	Restated	(1) |
| :--- | :--- | :--- | :--- |
| Research\tand\tdevelopment | $712 | $535 | $491 |
| Percentage\tof\tnet\tsales | 4% | 4% | 6% |
| Selling,\tgeneral,\tand\tadministrative\texpenses | $ 2,433 | $ 1,864 | $ 1,430 |
| Percentage\tof\tnet\tsales | 13% | 13% | 17% |
| Restructuring\tcosts | $— | $— | $23 |

# Research	and	Development	(R&D)

Expenditures	for	R&D	increased	33%	or	$177	million	to	$712	million	in	2006	compared	to	$535	million	in	2005.	The	increase	was	due	primarily	to	an	increase	in	R&D headcount	in	the	current	year	to	support	expanded	R&D	activities,	an	increase	of	$46	million	in	stock-based	compensation	recognized	as	R&D	expense	resulting	from the	adoption	of	SFAS	No.	123R,	and	higher	overall	expenses	due	to	the	14th	week	added	to	the	first	fiscal	quarter	of	2006	to	realign	the	Company's	fiscal	quarters	with calendar	quarters.	In	addition,	during	2005,	the	Company	capitalized	approximately	$29.7	million	of	costs	associated	with	the	development	of	Mac	OS	X	Tiger.	No software	development	costs	were	capitalized	during	2006.	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.	Despite	the	increase	in	expenditures,	R&D	as	a	percentage	of	net	sales remained	relatively	flat	in	2006	as	compared	to	2005	due	to	the	significant	increase	in	revenue.	The	Company	continues	to	believe	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.	As	such,	the	Company	expects	to	make	further	investments	in	R&D	to	remain	competitive.

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

Expenditures	for	SG&A	increased	$569	million	or	31%	during	2006	compared	to	2005.	These	increases	are	due	primarily	to	the	Company's	continued	expansion	of	its Retail	segment	in	both	domestic	and	international	markets,	an	increase	of	$50	million	in	stock-based	compensation	expense	recognized	as

SG&A	expense	resulting	from	the	adoption	of	SFAS	No.	123R,	a	current	year	increase	in	discretionary	spending	on	marketing	and	advertising,	higher	direct	and	channel selling	expenses	resulting	from	the	increase	in	net	sales	and	employee	salary	merit	increases,	and	the	expenses	associated	with	the	14th	week	added	to	the	first	fiscal quarter	of	2006.	Despite	the	increase	in	expenditures,	SG&A	as	a	percentage	of	total	net	sales	in	2006	remained	flat	as	compared	to	2005.

Expenditures	for	SG&A	increased	$434	million	or	30%	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.

# Fiscal	2004	Restructuring	Actions

During	2004,	the	Company	recorded	total	restructuring	charges	of	approximately	$23.0	million,	including	approximately	$14.0	million	in	severance	costs,	$5.5	million in	asset	impairments,	and	$3.5	million	for	lease	cancellations.	The	lease	cancellations	relate	to	vacating	a	leased	sales	facility	as	a	result	of	a	European	workforce reduction	during	2004.	Of	the	$23.0	million	charges,	$21.3	million	had	been	utilized	by	the	end	of	2006,	with	the	remainder	consisting	of	$1.7	million	for	lease cancellations.	These	actions	resulted	in	the	termination	of	452	positions.

# Other	Income	and	Expense

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

|  | September	30,<br>2006 | September	24,<br>2005 | September	25,<br>2004 |
| :--- | :--- | :--- | :--- |
| Gains\ton\tnon-current\tinvestments,\tnet | $— | $— | $4 |
| Interest\tincome | $394 | $183 | $64 |
| Interest\texpense | — | — | (3) |
| Other\tincome\t(expense),\tnet | (29) | (18) | (8) |
| Interest\tand\tother\tincome,\tnet | $365 | $165 | $53 |
| Total\tother\tincome\tand\texpense | $365 | $165 | $57 |

# 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	in	2004.

# Interest	and	Other	Income,	Net

Total	interest	and	other	income,	net	increased	$200	million	or	121%	to	$365	million	during	2006	compared	to	$165	million	in	2005	and	$53	million	in	2004.	These increases	are	attributable	primarily	to	higher	cash	and	short-term	investment	balances	and	increasing	investment	yields	resulting	from	higher	market	interest	rates	and	the 14th	week	added	to	the	first	fiscal	quarter	of	2006.	The	weighted	average	interest	rate	earned	by	the	Company	on	its	cash,	cash	equivalents,	and	short-term	investments increased	to	4.58%	in	2006	compared	to	the	2.70%	and	1.38%	rates	earned	during	2005	and	2004,	respectively.	The	current	year	increase	in	other	income	was	partially offset	by	higher	foreign	currency	hedging	expenses.

Interest	expense	in	2004	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	30,	2006	was	approximately	29%.	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.	In	addition,	the	Company	recorded	a	tax	benefit	of	$20	million	due	to	settlement	of	prior	year	tax	audits	in	the	U.S.,	and	a	net	benefit	of	$20 million	resulting	from	the	dividend	repatriation	under	the	American	Jobs	Creation	Act	of	2004	("AJCA")	and	international	tax	planning	strategies	associated	with	the repatriation	as	further	discussed	below.

As	of	September	30,	2006,	the	Company	had	deferred	tax	assets	arising	from	deductible	temporary	differences,	tax	losses,	and	tax	credits	of	$739	million	before	being offset	against	certain	deferred	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,	together	with	the	tax	effects	of	the	deferred	tax	liabilities,	will be	sufficient	to	fully	recover	the	remaining	deferred	tax	assets.	As	of	September	30,	2006	and	September	24,	2005,	a	valuation	allowance	of	$5	million	was	recorded against	the	deferred	tax	asset	for	the	benefits	of	state	operating	losses	that	may	not	be	realized.	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.

On	October	22,	2004,	the	AJCA	was	signed	into	law.	The	AJCA	included	a	provision	for	the	deduction	of	85%	of	certain	foreign	earnings	that	were	repatriated,	as defined	in	the	AJCA,	within	a	specified	time	frame.	Among	other	requirements,	dividends	qualifying	for	the	85%	deduction	must	be	reinvested	in	the	United	States	in certain	qualified	investments	pursuant	to	a	domestic	reinvestment	plan	approved	by	the	CEO	and	Board	of	Directors.	During	2006,	the	Company	repatriated approximately	$1.6	billion	of	foreign	earnings.	Of	the	earnings	repatriated,	$755	million	is	eligible	for	the	reduced	tax	rate	provided	by	the	AJCA.	Accordingly,	the Company	recorded	a	tax	charge	of	$51	million	related	to	the	repatriation	of	foreign	earnings	under	the	provisions	of	the	AJCA.	In	addition,	the	Company	recorded	a	tax benefit	of	$71	million	resulting	from	the	implementation	of	tax	planning	strategies	to	recognize	deferred	tax	assets	that	were	previously	not	recognizable	within	certain foreign	subsidiaries.

The	Internal	Revenue	Service	("IRS")	has	substantially	completed	its	field	audit	of	the	Company's	federal	income	tax	returns	for	the	years	2002	through	2003	and proposed	certain	adjustments.	The	Company	intends	to	contest	certain	of	these	adjustments	through	the	IRS	Appeals	Office.	Substantially	all	IRS	audit	issues	for	years prior	to	2002	have	been	resolved.	In	addition,	the	Company	is	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.

# Quarterly	Financial	Information

The	following	tables	set	forth	a	summary	of	the	Company's	quarterly	financial	information	for	each	of	the	four	quarters	in	the	years	ended	September	30,	2006	and September	24,	2005	(in	millions,	except	share	and	per	share	amounts):

| 2006 | Fourth	Quarter | Third	Quarter | Second	Quarter | First	Quarter |
| :--- | :--- | :--- | :--- | :--- |
| Net\tsales | $4,837 | $4,370 | $4,359 | $5,749 |
| Cost\tof\tsales\t(1) | 3,425 | 3,045 | 3,062 | 4,185 |
| Gross\tmargin | 1,412 | 1,325 | 1,297 | 1,564 |
| Operating\texpenses: |  |  |  |  |
| Research\tand\tdevelopment\t(1) | 179 | 175 | 176 | 182 |
| Selling,\tgeneral,\tand\tadministrative\t(1) | 625 | 584 | 592 | 632 |
| Total\toperating\texpenses | 804 | 759 | 768 | 814 |
| Operating\tincome | 608 | 566 | 529 | 750 |
| Other\tincome\tand\texpense | 113 | 95 | 76 | 81 |
| Income\tbefore\tprovision\tfor\tincome\ttaxes | 721 | 661 | 605 | 831 |
| Provision\tfor\tincome\ttaxes | 179 | 189 | 195 | 266 |
| Net\tincome | $542 | $472 | $410 | $565 |
| Earnings\tper\tcommon\tshare: |  |  |  |  |
| Basic | $0.63 | $0.55 | $0.49 | $0.68 |
| Diluted | $0.62 | $0.54 | $0.47 | $0.65 |
| Shares\tused\tin\tcomputing\tearnings |  |  |  |  |
| per\tshare\t(in\tthousands): |  |  |  |  |
| Basic | 854,187 | 851,375 | 840,910 | 830,781 |
| Diluted | 878,757 | 876,368 | 878,537 | 874,207 |
| (1)\t\t\t\t\t\t\t\t\t\tIncludes\tstock-based\tcompensation\texpense,\twhich\twas\tallocated\tas\tfollows: |  |  |  |  |
| Cost\tof\tsales | $5 | $6 | $5 | $5 |
| Research\tand\tdevelopment | $13 | $12 | $13 | $15 |
| Selling,\tgeneral,\tand |  |  |  |  |
| administrative | $22 | $19 | $24 | $24 |

The	net	of	tax	impact	of	the	stock-based	compensation	adjustments	in	2006,	which	amounted	to	$4	million,	was	recorded	by	the	Company	in	its	fourth	quarter	of	2006 and	are	described	in	the	Explanatory	Note	immediately	preceding	Part	I,	Item	1	and	Note	2,	"Restatement	of	Consolidated	Financial	Statements,"	in	Notes	to Consolidated	Financial	Statements	of	this	Form	10-K.

| 2005 | Fourth	Quarter<br>As	Restated	(1) | Third	Quarter<br>As	Restated	(1) | Second	Quarter<br>As	Restated	(1) | First	Quarter<br>As	Restated	(1) |
| :--- | :--- | :--- | :--- | :--- |
| Net\tsales | $3,678 | $3,520 | $3,243 | $3,490 |
| Cost\tof\tsales\t(2) | 2,643 | 2,476 | 2,275 | 2,495 |
| Gross\tmargin | 1,035 | 1,044 | 968 | 995 |
| Operating\texpenses: |  |  |  |  |
| Research\tand\tdevelopment\t(2) | 147 | 145 | 120 | 123 |
| Selling,\tgeneral,\tand\tadministrative |  |  |  |  |
| (2) | 471 | 473 | 448 | 472 |
| Total\toperating\texpenses | 618 | 618 | 568 | 595 |
| Operating\tincome | 417 | 426 | 400 | 400 |
| Other\tincome\tand\texpense | 60 | 46 | 33 | 26 |
| Income\tbefore\tprovision\tfor\tincome |  |  |  |  |
| taxes | 477 | 472 | 433 | 426 |
| Provision\tfor\tincome\ttaxes | 49 | 153 | 145 | 133 |
| Net\tincome | $428 | $319 | $288 | $293 |
| Earnings\tper\tcommon\tshare: |  |  |  |  |
| Basic | $0.52 | $0.39 | $0.36 | $0.37 |
| Diluted | $0.49 | $0.37 | $0.34 | $0.35 |
| Shares\tused\tin\tcomputing\tearnings\tper |  |  |  |  |
| share\t(in\tthousands): |  |  |  |  |
| Basic | 821,420 | 815,092 | 808,172 | 789,032 |
| Diluted | 866,483 | 860,803 | 857,568 | 838,805 |
| (1)\t\t\t\t\t\t\t\t\t\tSee\tthe\t"Explanatory\tNote"\timmediately\tpreceding\tPart\tI,\tItem\t1\tand\tNote\t2,\t"Restatement\tof\tConsolidated\tFinancial\tStatements,"\tin\tNotes\tto\tConsolidated\nFinancial\tStatements\tof\tthis\tForm\t10-K. |  |  |  |  |
| (2)\t\t\t\t\t\t\t\t\t\tIncludes\tstock-based\tcompensation\texpense,\twhich\twas\tallocated\tas\tfollows: |  |  |  |  |
| Cost\tof\tsales | $1 | $— | $1 | $1 |
| Research\tand\tdevelopment | $1 | $2 | $2 | $2 |
| Selling,\tgeneral,\tand |  |  |  |  |
| administrative | $10 | $10 | $9 | $10 |

(2)										Includes	stock-based	compensation	expense,	which	was	allocated	as	follows:

The	impact	of	the	stock-based	compensation	adjustments	as	described	in	the	Explanatory	Note	immediately	preceding	Part	I,	Item	1	and	Note	2,	"Restatement	of Consolidated	Financial	Statements,"	in	Notes	to	Consolidated	Financial	Statements	of	this	Form	10-K	was	not	significant	to	the	interim	balance	sheets	of	2006	and 2005.

The	following	tables	present	the	effects	of	adjustments	made	to	the	Company's	previously	reported	quarterly	financial	information	during	2005	(in	millions,	except	per share	amounts):

|  | Three	Months	Ended	September	24,	2005 | Three	Months	Ended	September	24,	2005 | Three	Months	Ended	September	24,	2005 | Three	Months	Ended	June	25,	2005 | Three	Months	Ended	June	25,	2005 | Three	Months	Ended	June	25,	2005 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | As\n\t\tReported | Adjustments\n(1) | As\n\t\tRestated | As\nReported | Adjustments\n(1) | As\nRestated |
| Net\tsales | $3,678 | $— | $3,678 | $3,520 | $— | $3,520 |
| Cost\tof\tsales\t(2) | 2,643 | — | 2,643 | 2,476 | — | 2,476 |
| Gross\tmargin | 1,035 | — | 1,035 | 1,044 | — | 1,044 |
| Operating\texpenses: |  |  |  |  |  |  |
| Research\tand\tdevelopment\t(2) | 147 | — | 147 | 145 | — | 145 |
| Selling,\tgeneral,\tand |  |  |  |  |  |  |
| administrative\t(2) | 470 | 1 | 471 | 472 | 1 | 473 |
| Total\toperating\texpenses | 617 | 1 | 618 | 617 | 1 | 618 |
| Operating\tincome | 418 | (1) | 417 | 427 | (1) | 426 |
| Other\tincome\tand\texpense | 60 | — | 60 | 46 | — | 46 |
| Income\tbefore\tprovision\tfor |  |  |  |  |  |  |
| income\ttaxes | 478 | (1) | 477 | 473 | (1) | 472 |
| Provision\tfor\tincome\ttaxes | 48 | 1 | 49 | 153 | — | 153 |
| Net\tincome | $430 | $(2) | $428 | $320 | $(1) | $319 |
| Earnings\tper\tcommon\tshare: |  |  |  |  |  |  |
| Basic | $0.52 | $— | $0.52 | $0.39 | $— | $0.39 |
| Diluted | $0.50 | $ (0.01) | $0.49 | $0.37 | $— | $0.37 |
| Shares\tused\tin\tcomputing\tearnings\tper |  |  |  |  |  |  |
| share\t(in\tthousands): |  |  |  |  |  |  |
| Basic | 821,420 | — | 821,420 | 815,092 | — | 815,092 |
| Diluted | 866,404 | 79 | 866,483 | 860,688 | 115 | 860,803 |
| (1)\t\t\t\t\t\t\t\t\t\tSee\tthe\t"Explanatory\tNote"\timmediately\tpreceding\tPart\tI,\tItem\t1\tand\tNote\t2,\t"Restatement\tof\tConsolidated\tFinancial\tStatements,"\tin\tNotes\tto\tConsolidated\nFinancial\tStatements\tof\tthis\tForm\t10-K. |  |  |  |  |  |  |
| (2)\t\t\t\t\t\t\t\t\t\tIncludes\tstock-based\tcompensation\texpense,\twhich\twas\tallocated\tas\tfollows: |  |  |  |  |  |  |
| Cost\tof\tsales | $1 | $— | $1 | $— $— $— | $— $— $— | $— $— $— |
| Research\tand\tdevelopment | $1 | $— | $1 | $2 | $— | $2 |
| Selling,\tgeneral,\tand |  |  |  |  |  |  |
| administrative | $9 | $1 | $10 | $9 | $1 | $10 |

|  | Three	Months	Ended	March	26,	2005 | Three	Months	Ended	March	26,	2005 | Three	Months	Ended	March	26,	2005 | Three	Months	Ended	December	25,	2004 | Three	Months	Ended	December	25,	2004 | Three	Months	Ended	December	25,	2004 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | As\nReported | Adjustments\n(1) | As\nRestated | As\nReported | Adjustments\t(1) | As\nRestated |
| Net\tsales | $3,243 | $— | $3,243 | $3,490 | $— | $3,490 |
| Cost\tof\tsales\t(2) | 2,275 | — | 2,275 | 2,494 | 1 | 2,495 |
| Gross\tmargin | 968 | — | 968 | 996 | (1) | 995 |
| Operating\texpenses: |  |  |  |  |  |  |
| Research\tand\tdevelopment\t(2) | 119 | 1 | 120 | 123 | — | 123 |
| Selling,\tgeneral,\tand\tadministrative |  |  |  |  |  |  |
| (2) | 447 | 1 | 448 | 470 | 2 | 472 |
| Total\toperating\texpenses | 566 | 2 | 568 | 593 | 2 | 595 |
| Operating\tincome | 402 | (2) | 400 | 403 | (3) | 400 |
| Other\tincome\tand\texpense | 33 | — | 33 | 26 | — | 26 |
| Income\tbefore\tprovision\tfor\tincome |  |  |  |  |  |  |
| taxes | 435 | (2) | 433 | 429 | (3) | 426 |
| Provision\tfor\tincome\ttaxes | 145 | — | 145 | 134 | (1) | 133 |
| Net\tincome | $290 | $(2) | $288 | $295 | $(2) | $293 |
| Earnings\tper\tcommon\tshare: |  |  |  |  |  |  |
| Basic | $0.36 | $— | $0.36 | $0.37 | $— | $0.37 |
| Diluted | $0.34 | $— | $0.34 | $0.35 | $— | $0.35 |
| Shares\tused\tin\tcomputing\tearnings\tper |  |  |  |  |  |  |
| share\t(in\tthousands): |  |  |  |  |  |  |
| Basic | 808,172 | — | 808,172 | 789,032 | — | 789,032 |
| Diluted | 857,011 | 557 | 857,568 | 838,174 | 631 | 838,805 |
| (1)\t\t\t\t\t\t\t\t\t\tSee\tthe\t"Explanatory\tNote"\timmediately\tpreceding\tPart\tI,\tItem\t1\tand\tNote\t2,\t"Restatement\tof\tConsolidated\tFinancial\tStatements,"\tin\tNotes\tto\tConsolidated\nFinancial\tStatements\tof\tthis\tForm\t10-K. |  |  |  |  |  |  |
| (2)\t\t\t\t\t\t\t\t\t\tIncludes\tstock-based\tcompensation\texpense,\twhich\twas\tallocated\tas\tfollows: |  |  |  |  |  |  |
| Cost\tof\tsales | $1 | $— | $1 | $— | $1 | $1 |
| Research\tand\tdevelopment | $1 | $1 | $2 | $2 | $— | $2 |
| Selling,\tgeneral,\tand\tadministrative | $8 | $1 | $9 | $8 | $2 | $10 |

# Recent	Accounting	Pronouncements

In	September	2006,	the	SEC	issued	SAB	No.	108,	Considering	the	Effects	of	Prior	Year	Misstatements	when	Quantifying	Misstatements	in	Current	Year	Financial Statements.	SAB	No.	108	provides	guidance	on	how	prior	year	misstatements	should	be	considered	when	quantifying	misstatements	in	current	year	financial	statements for	purposes	of	determining	whether	the	current	year's	financial	statements	are	materially	misstated.	SAB	No.	108	is	effective	for	fiscal	years	ending	after	November	15, 2006.	Although	the	Company	will	continue	to	evaluate	the	application	of	SAB	No.	108,	management	does	not	currently	believe	adoption	will	have	a	material	impact	on the	Company's	results	of	operations	or	financial	position.

In	September	2006,	the	FASB	issued	SFAS	No.	157,	Fair	Value	Measurements,	which	defines	fair	value,	provides	a	framework	for	measuring	fair	value,	and	expands the	disclosures	required	for	fair	value	measurements.	SFAS	No.	157	applies	to	other	accounting	pronouncements	that	require	fair	value	measurements;	it	does	not	require any	new	fair	value	measurements.	SFAS	No.	157	is	effective	for	fiscal	years	beginning	after	November	15,	2007	and	is	required	to	be	adopted	by	the	Company beginning	in	the

first	quarter	of	fiscal	2009.	Although	the	Company	will	continue	to	evaluate	the	application	of	SFAS	No.	157,	management	does	not	currently	believe	adoption	will	have a	material	impact	on	the	Company's	results	of	operations	or	financial	position.

In	June	2006,	the	FASB	issued	FASB	Interpretation	No.	("FIN")	48,	Accounting	for	Uncertainty	in	Income	Taxes-an	Interpretation	of	FASB	Statement	No.	109.	FIN No.	48	clarifies	the	accounting	for	uncertainty	in	income	taxes	by	creating	a	framework	for	how	companies	should	recognize,	measure,	present,	and	disclose	in	their financial	statements	uncertain	tax	positions	that	they	have	taken	or	expect	to	take	in	a	tax	return.	FIN	No.	48	is	effective	for	fiscal	years	beginning	after	December	15, 2006	and	is	required	to	be	adopted	by	the	Company	beginning	in	the	first	quarter	of	fiscal	2008.	Although	the	Company	will	continue	to	evaluate	the	application	of	FIN No.	48,	management	does	not	currently	believe	adoption	will	have	a	material	impact	on	the	Company's	results	of	operations	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	30,<br>2006 | September	24,<br>2005<br>As	Restated	(1) | September	25,<br>2004<br>As	Restated	(1) |
| :--- | :--- | :--- | :--- |
| Cash,\tcash\tequivalents,\tand\tshort-term\tinvestments | $ 10,110 | $ 8,261 | $ 5,464 |
| Accounts\treceivable,\tnet | $1,252 | $895 | $774 |
| Inventory | $270 | $165 | $101 |
| Working\tcapital | $8,038 | $ 6,813 | $ 4,403 |
| Days\tsales\tin\taccounts\treceivable\t(DSO)\t(a) | 24 | 22 | 30 |
| Days\tof\tsupply\tin\tinventory\t(b) | 7 | 6 | 5 |
| Days\tpayables\toutstanding\t(DPO)\t(c) | 89 | 62 | 76 |
| Annual\toperating\tcash\tflow | $2,220 | $ 2,535 | $934 |

(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	30,	2006,	the	Company	had	$10.11	billion	in	cash,	cash	equivalents,	and	short-term	investments,	an	increase	of	$1.85	billion	over	the	same	balances	at the	end	of	2005.	The	principal

components	of	this	increase	were	cash	generated	by	operating	activities	of	$2.22	billion,	proceeds	of	$318	million	from	the	issuance	of	common	stock	under	stock	plans, and	excess	tax	benefits	from	stock-based	compensation	of	$361	million,	partially	offset	by	cash	used	to	purchase	property,	plant,	and	equipment	of	$657	million	and repurchases	of	common	stock	of	$355	million	in	conjunction	with	net-share	settlements	on	vested	restricted	stock	and	restricted	stock	units.	Cash	generated	from operating	activities	includes	the	impact	of	the	$1.25	billion	prepayment	for	NAND	flash	memory	components.	The	Company's	short-term	investment	portfolio	is primarily	invested	in	high	credit	quality,	liquid	investments.	As	of	September	30,	2006,	approximately	$4.1	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	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	$657	million	during	2006,	consisting	of	$200	million	for	retail	store	facilities	and	equipment	related	to	the	Company's Retail	segment,	$263	million	for	real	estate	acquisitions	for	the	Company's	second	corporate	campus	and	for	a	new	data	center,	and	$194	million	for	corporate infrastructure,	including	information	systems	enhancements.	The	Company	currently	anticipates	it	will	utilize	approximately	$675	million	for	capital	expenditures	during 2007,	including	approximately	$360	million	for	expansion	of	the	Company's	Retail	segment,	approximately	$50	million	for	real	estate	acquisitions	including	the Company's	second	corporate	campus	and	its	new	data	center,	and	approximately	$265	million	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.	The	Company	has	repurchased	a	total	of	13.1	million shares	at	a	cost	of	$217	million	under	this	plan	and	was	authorized	to	repurchase	up	to	an	additional	$283	million	of	its	common	stock	as	of	September	30,	2006.

# 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	30,	2006	and excludes	amounts	already	recorded	on	the	Company's	balance	sheet	as	current	liabilities	(in	millions):

|  |  | Payments	Due<br>in	Less | Payments<br>Due	in | Payments	Due<br>in | Payments	Due<br>in	More |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | Total | Than\t1\tYear | 1-3\tYears | 4-5\tYears | Than\t5\tYears |
| Operating\tLeases | $ 1,154 | $134 | $268 | $254 | $ 498 |
| Purchase\tObligations | 2,306 | 2,306 | — | — | — |
| Asset\tRetirement\tObligations | 19 | 3 | 3 | 7 | 6 |
| Other\tObligations | 39 | 29 | 10 | — | — |
| Total | $ 3,518 | $ 2,472 | $281 | $261 | $ 504 |

# Lease	Commitments

As	of	September	30,	2006,	the	Company	had	total	outstanding	commitments	on	noncancelable	operating	leases	of	approximately	$1.2	billion,	$887	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	15	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	30,	2006,	the	Company	had	outstanding	third-party	manufacturing	commitments	and	component	purchase	commitments	of	approximately	$2.3	billion.

During	2006,	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	prepaid $1.25	billion	for	flash	memory	components	during	2006.	These	prepayments	will	be	applied	to	inventory	purchases	made	over	the	life	of	each	respective	agreement.

# 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	30,	2006,	the	Company	estimates	that	gross	expected	future	cash	flows	of	approximately	$19	million	will	be	required	to	fulfill	these	obligations.

# Other	Obligations

The	Company's	other	obligations	of	approximately	$39	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.

# 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.	A	portion	of	the	Company's	cash	is	managed	by	external	managers	within	the	guidelines	of	the	Company's	investment	policy	and	to an	objective	market	benchmark.	The	Company's	internal	portfolio	is	benchmarked	against	external	manager	performance,	allowing	for	differences	in	liquidity	needs.

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	initial	maturities of	three	months	or	less	are	classified	as	cash	equivalents;	highly	liquid	investments	with	initial	maturities	greater	than	three	months	are	classified	as	short-term investments.	As	of	September	30,	2006,	approximately	$921	million	of	the	Company's	short-term	investments	had	underlying	maturities	ranging	from	1	to	5	years.	As of	September	24,	2005,	$287	million	of	the	Company's	short-term	investments	had	underlying	maturities	ranging	from	1	to	5	years.	The	remainder	all	had	underlying maturities	of	less	than	12	months.	The	Company	may	sell	its	investments	prior	to	their	stated	maturities	for	strategic	purposes,	in	anticipation	of	credit	deterioration	or for	duration	management.	The	Company	recognized	net	losses	before	taxes	of	$434,000	and	$137,000	in	2006	and	2005,	respectively,	and	a	net	gain	before	taxes	of	$1 million	in	2004	as	a	result	of	such	sales.

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	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	30,	2006,	a	hypothetical	100	basis	point	increase	in	interest	rates	across	all	maturities	would	result	in	a	$15.2	million	decline	in	the fair	market	value	of	the	portfolio.	As	of	September	24,	2005,	a	similar	100	basis	point	shift	in	the	yield	curve	would	have	resulted	in	a	$19.9	million	decline	in	fair	value. Such	losses	would	only	be	realized	if	the	Company	sold	the	investments	prior	to	maturity.

# Foreign	Currency	Risk

In	general,	the	Company	is	a	net	receiver	of	foreign	currencies.	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	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.

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	3,000	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	$9.2 million	as	of	September	30,	2006	compared	to	a	maximum	one-day	loss	of	$10.0	million	as	of	September	24,	2005.	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	30,	2006	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

| Index	to	Consolidated	Financial	Statements | Page |
| :--- | :--- |
| Consolidated\tBalance\tSheets\tas\tof\tSeptember\t30,\t2006\tand\tSeptember\t24,\t2005 | 73 |
| Consolidated\tStatements\tof\tOperations\tfor\tthe\tthree\tfiscal\tyears\tended\tSeptember\t30,\t2006 | 74 |
| Consolidated\tStatements\tof\tShareholders'\tEquity\tfor\tthe\tthree\tfiscal\tyears\tended\tSeptember\t30,\t2006 | 75 |
| Consolidated\tStatements\tof\tCash\tFlows\tfor\tthe\tthree\tfiscal\tyears\tended\tSeptember\t30,\t2006 | 76 |
| Notes\tto\tConsolidated\tFinancial\tStatements | 77 |
| Selected\tQuarterly\tFinancial\tInformation\t(Unaudited) | 114 |
| Reports\tof\tIndependent\tRegistered\tPublic\tAccounting\tFirm,\tKPMG\tLLP | 118 |

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)

| Cash	and	cash	equivalents | $6,392 | $3,491 |
| :--- | :--- | :--- |
| Short-term\tinvestments | 3,718 | 4,770 |
| Accounts\treceivable,\tless\tallowances\tof\t$52\tand\t$46,\trespectively | 1,252 | 895 |
| Inventories | 270 | 165 |
| Deferred\ttax\tassets | 607 | 331 |
| Other\tcurrent\tassets | 2,270 | 648 |
| Total\tcurrent\tassets | 14,509 | 10,300 |
| Property,\tplant,\tand\tequipment,\tnet | 1,281 | 817 |
| Goodwill | 38 | 69 |
| Acquired\tintangible\tassets,\tnet | 139 | 27 |
| Other\tassets | 1,238 | 303 |
| Total\tassets | $ 17,205 | $ 11,516 |
| LIABILITIES\tAND\tSHAREHOLDERS'\tEQUITY: |  |  |
| Current\tliabilities: |  |  |
| Accounts\tpayable | $3,390 | $1,779 |
| Accrued\texpenses | 3,081 | 1,708 |
| Total\tcurrent\tliabilities | 6,471 | 3,487 |
| Non-current\tliabilities | 750 | 601 |
| Total\tliabilities | 7,221 | 4,088 |
| Commitments\tand\tcontingencies |  |  |
| Shareholders'\tequity: |  |  |
| Common\tstock,\tno\tpar\tvalue;\t1,800,000,000\tshares\tauthorized; |  |  |
| 855,262,568\tand\t835,019,364\tshares\tissued\tand\toutstanding, |  |  |
| respectively | 4,355 | 3,564 |
| Deferred\tstock\tcompensation | — | (61) |
| Retained\tearnings | 5,607 | 3,925 |
| Accumulated\tother\tcomprehensive\tincome | 22 | — |
| Total\tshareholders'\tequity | 9,984 | 7,428 |
| Total\tliabilities\tand\tshareholders'\tequity | $ 17,205 | $ 11,516 |

(1)										See	Note	2,	"Restatement	of	Consolidated	Financial	Statements,"	in	Notes	to	Consolidated	Financial	Statements.

See	accompanying	Notes	to	Consolidated	Financial	Statements.

# CONSOLIDATED	STATEMENTS	OF	OPERATIONS

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

| Three	fiscal	years	ended	September	30,	2006 | 2006 | 2005<br>As	Restated	(1) | 2004<br>As	Restated	(1) |
| :--- | :--- | :--- | :--- |
| Net\tsales | $19,315 | $13,931 | $8,279 |
| Cost\tof\tsales\t(2) | 13,717 | 9,889 | 6,022 |
| Gross\tmargin | 5,598 | 4,042 | 2,257 |
| Operating\texpenses: |  |  |  |
| Research\tand\tdevelopment\t(2) | 712 | 535 | 491 |
| Selling,\tgeneral,\tand\tadministrative\t(2) | 2,433 | 1,864 | 1,430 |
| Restructuring\tcosts | — | — | 23 |
| Total\toperating\texpenses | 3,145 | 2,399 | 1,944 |
| Operating\tincome | 2,453 | 1,643 | 313 |
| Other\tincome\tand\texpense | 365 | 165 | 57 |
| Income\tbefore\tprovision\tfor\tincome\ttaxes | 2,818 | 1,808 | 370 |
| Provision\tfor\tincome\ttaxes | 829 | 480 | 104 |
| Net\tincome | $1,989 | $1,328 | $266 |
| Earnings\tper\tcommon\tshare: |  |  |  |
| Basic | $2.36 | $1.64 | $0.36 |
| Diluted | $2.27 | $1.55 | $0.34 |
| Shares\tused\tin\tcomputing\tearnings\tper\tshare\t(in\tthousands):\nBasic | 844,058 | 808,439 | 743,180 |
| Diluted | 877,526 | 856,878 | 774,776 |

| Cost	of	sales | $21 | $3 | $3 |
| :--- | :--- | :--- | :--- |
| Research\tand\tdevelopment | $53 | $7 | $6 |
| Selling,\tgeneral,\tand\tadministrative | $89 | $39 | $37 |

# CONSOLIDATED	STATEMENTS	OF	SHAREHOLDERS'	EQUITY

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

|  | Common	Stock |  | Deferred	Stock | Retained | Other<br>Comprehensive | Total<br>Shareholders' |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | Shares | Amount | Compensation | Earnings | Income\t(Loss) | Equity |
|  |  | As | As | As |  | As |
|  |  | Restated\t(1) | Restated\t(1) | Restated\t(1) |  | Restated\t(1) |
| Balances\tas\tof\tSeptember\t27,\t2003\tas\tpreviously\treported | 733,454 | $1,926 | $(62) | $2,394 | $(35) | $4,223 |
| Adjustments\tto\topening\tshareholders'\tequity | — | 85 | (22) | (63) | — | — |
| Balance\tas\tof\tSeptember\t27,\t2003\tas\trestated | 733,454 | $2,011 | $(84) | $2,331 | $(35) | $4,223 |
| Components\tof\tcomprehensive\tincome: |  |  |  |  |  |  |
| Net\tincome | — | — | — | 266 | — | 266 |
| Change\tin\tforeign\tcurrency\ttranslation | — | — | — | — | 13 | 13 |
| Change\tin\tunrealized\tgain\ton\tavailable-for-sale |  |  |  |  |  |  |
| securities,\tnet\tof\ttax | — | — | — | — | (5) | (5) |
| Change\tin\tunrealized\tloss\ton\tderivative\tinvestments, |  |  |  |  |  |  |
| net\tof\ttax | — | — | — | — | 12 | 12 |
| Total\tcomprehensive\tincome |  |  |  |  |  | 286 |
| Issuance\tof\tstock-based\tcompensation\tawards | — | 63 | (63) | — | — | — |
| Adjustment\tto\tcommon\tstock\trelated\tto\ta\tprior\tyear |  |  |  |  |  |  |
| acquisition | (159) | (2) | — | — | — | (2) |
| Stock-based\tcompensation | — | — | 46 | — | — | 46 |
| Common\tstock\tissued\tunder\tstock\tplans | 49,592 | 427 | — | — | — | 427 |
| Tax\tbenefit\trelated\tto\tstock\toptions | — | 83 | — | — | — | 83 |
| Balances\tas\tof\tSeptember\t25,\t2004 | 782,887 | $2,582 | $(101) | $2,597 | $(15) | $5,063 |
| Components\tof\tcomprehensive\tincome: |  |  |  |  |  |  |
| Net\tincome | — | — | — | 1,328 | — | 1,328 |
| Change\tin\tforeign\tcurrency\ttranslation | — | — | — | — | 7 | 7 |
| Change\tin\tunrealized\tgain\ton\tderivative\tinvestments,\tnet |  |  |  |  |  |  |
| of\ttax | — | — | — | — | 8 | 8 |
| Total\tcomprehensive\tincome |  |  |  |  |  | 1,343 |
| Issuance\tof\tstock-based\tcompensation\tawards | — | 7 | (7) | — | — | — |
| Stock-based\tcompensation | — | — | 47 | — | — | 47 |
| Common\tstock\tissued\tunder\tstock\tplans | 52,132 | 547 | — | — | — | 547 |
| Tax\tbenefit\trelated\tto\tstock\toptions | — | 428 | — | — | — | 428 |
| Balances\tas\tof\tSeptember\t24,\t2005 | 835,019 | $3,564 | $(61) | $3,925 | $— | $7,428 |
| Components\tof\tcomprehensive\tincome: |  |  |  |  |  |  |
| Net\tincome | — | — | — | 1,989 | — | 1,989 |
| Change\tin\tforeign\tcurrency\ttranslation | — | — | — | — | 19 | 19 |
| Change\tin\tunrealized\tgain\ton\tavailable-for-sale |  |  |  |  |  |  |
| securities,\tnet\tof\ttax | — | — | — | — | 4 | 4 |
| Change\tin\tunrealized\tloss\ton\tderivative\tinvestments,\tnet |  |  |  |  |  |  |
| of\ttax | — | — | — | — | (1) | (1) |
| Total\tcomprehensive\tincome |  |  |  |  |  | 2,011 |
| Common\tstock\trepurchased | (4,574) | (48) | — | (307) | — | (355) |
| Stock-based\tcompensation | — | 163 | — | — | — | 163 |
| Deferred\tcompensation | — | (61) | 61 | — | — | — |
| Common\tstock\tissued\tunder\tstock\tplans | 24,818 | 318 | — | — | — | 318 |
| Tax\tbenefit\trelated\tto\tstock-based\tcompensation | — | 419 | — | — | — | 419 |
| Balances\tas\tof\tSeptember\t30,\t2006 | 855,263 | $4,355 | $— | $5,607 | $22 | $9,984 |

# CONSOLIDATED	STATEMENTS	OF	CASH	FLOWS

# (In	millions)

| Three	fiscal	years	ended	September	30,	2006 | 2006 | 2005<br>As	Restated	(1) | 2004<br>As	Restated	(1) |
| :--- | :--- | :--- | :--- |
| Cash\tand\tcash\tequivalents,\tbeginning\tof\tthe\tyear | $3,491 | $2,969 | $3,396 |
| Operating\tActivities: |  |  |  |
| Net\tincome | 1,989 | 1,328 | 266 |
| Adjustments\tto\treconcile\tnet\tincome\tto\tcash\tgenerated\tby\toperating\tactivities: |  |  |  |
| Depreciation,\tamortization\tand\taccretion | 225 | 179 | 150 |
| Stock-based\tcompensation\texpense | 163 | 49 | 46 |
| Provision\tfor\tdeferred\tincome\ttaxes | 53 | 50 | 19 |
| Excess\ttax\tbenefits\tfrom\tstock\toptions | — | 428 | 83 |
| Gain\ton\tsale\tof\tPowerSchool\tnet\tassets | (4) | — | — |
| Loss\ton\tdisposition\tof\tproperty,\tplant,\tand\tequipment | 15 | 9 | 7 |
| Gains\ton\tsales\tof\tinvestments,\tnet | — | — | (5) |
| Changes\tin\toperating\tassets\tand\tliabilities: |  |  |  |
| Accounts\treceivable | (357) | (121) | (8) |
| Inventories | (105) | (64) | (45) |
| Other\tcurrent\tassets | (1,626) | (150) | (176) |
| Other\tassets | (1,040) | (35) | (25) |
| Accounts\tpayable | 1,611 | 328 | 297 |
| Other\tliabilities | 1,296 | 534 | 325 |

| Cash	generated	by	operating	activities | 2,220 | 2,535 | 934 |
| :--- | :--- | :--- | :--- |
| Investing\tActivities: |  |  |  |
| Purchases\tof\tshort-term\tinvestments | (7,255) | (11,470) | (3,270) |
| Proceeds\tfrom\tmaturities\tof\tshort-term\tinvestments | 7,226 | 8,609 | 1,141 |
| Proceeds\tfrom\tsales\tof\tinvestments | 1,086 | 586 | 806 |
| Purchases\tof\tlong-term\tinvestments | (25) | — | — |
| Proceeds\tfrom\tsale\tof\tPowerSchool\tnet\tassets | 40 | — | — |
| Purchases\tof\tproperty,\tplant,\tand\tequipment | (657) | (260) | (176) |
| Other | (58) | (21) | 11 |
| Cash\tgenerated\tby\t(used\tfor)\tinvesting\tactivities | 357 | (2,556) | (1,488) |
| Financing\tActivities: |  |  |  |
| Payment\tof\tlong-term\tdebt | — | — | (300) |
| Proceeds\tfrom\tissuance\tof\tcommon\tstock | 318 | 543 | 427 |
| Excess\ttax\tbenefits\tfrom\tstock-based\tcompensation | 361 | — | — |
| Repurchases\tof\tcommon\tstock | (355) | — | — |
| Cash\tgenerated\tby\tfinancing\tactivities | 324 | 543 | 127 |
| Increase\t(decrease)\tin\tcash\tand\tcash\tequivalents | 2,901 | 522 | (427) |
| Cash\tand\tcash\tequivalents,\tend\tof\tthe\tyear | $6,392 | $3,491 | $2,969 |

# NOTES	TO	CONSOLIDATED	FINANCIAL	STATEMENTS

# Note	1—Summary	of	Significant	Accounting	Policies

Apple	Computer,	Inc.	and	its	wholly-owned	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	sale	of	third-party	audio	and	video	products.	The	Company	sells	its	products	worldwide	through	its	online	stores,	its	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	and	iPod	compatible products	including	application	software,	printers,	storage	devices,	speakers,	headphones,	and	various	other	accessories	and	supplies	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	and	2004	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	added	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	at	the	date	of	purchase	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	the	available-for-sale	designations	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	Statement of	Financial	Accounting	Standards	("SFAS")	No.	133,	Accounting	for	Derivative	Instruments	and	Hedging	Activities,	as	amended,	must	be	adjusted	to	fair	value	through earnings.	If	the	derivative	is	a	hedge,	depending	on	the	nature	of	the	hedge,

# NOTES	TO	CONSOLIDATED	FINANCIAL	STATEMENTS	(Continued)

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

changes	in	fair	value	will	either	be	offset	against	the	change	in	fair	value	of	the	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	effective	portion	of	the	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.	The	ineffective	portion	of	the	gain	or	loss	on	the	derivative	instrument	is	recognized	in current	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.

# 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	for buildings	is	the	lesser	of	30	years	or	the	remaining	life	of	the	underlying	building,	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	$180	million,	$141	million,	and	$126	million	during	2006,	2005,	and	2004,	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	2006	and	2005	(in	millions):

| Asset	retirement	liability	as	of	September	25,	2004<br>Additional	asset	retirement	obligations	recognized<br>Accretion	recognized | $8.2<br>2.8<br>0.7 |
| :--- | :--- |
| Asset\tretirement\tliability\tas\tof\tSeptember\t24,\t2005 | $11.7 |
| Additional\tasset\tretirement\tobligations\trecognized | 2.5 |
| Accretion\trecognized | 0.5 |
| Asset\tretirement\tliability\tas\tof\tSeptember\t30,\t2006 | $14.7 |

# 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	in	accordance	with	SFAS	No.	144, Accounting	for	the	Impairment	of	Long-Lived	Assets	and	for	Long-Lived	Assets	to	Be	Disposed	Of.	Long-lived	assets	are	reviewed	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	30,	2006,	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	6	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	2006,	2005,	or	2004.	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.	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"	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.

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	American	Institute	of	Certified	Public	Accountants	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.

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	based	on	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	have	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

For	all	periods	presented,	amounts	billed	to	customers	related	to	shipping	and	handling	are	classified	as	revenue,	and	the	Company's	shipping	and	handling	costs	are included	in	cost	of	sales.

# Warranty	Expense

The	Company	provides	for	the	estimated	cost	of	hardware	and	software	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	immediately	expensed.

In	2004,	the	Company	began	incurring	substantial	development	costs	associated	with	Mac	OS	X	version	10.4	Tiger	("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	million	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	three-year	estimated	useful	life.

During	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	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	three-year estimated	useful	life.

Total	amortization	related	to	capitalized	software	development	costs	was	$17.8	million,	$15.7	million,	and	$10.7	million	in	2006,	2005,	and	2004,	respectively.

# Advertising	Costs

Advertising	costs	are	expensed	as	incurred.	Advertising	expense	was	$338	million,	$287	million,	and	$206	million	for	2006,	2005,	and	2004,	respectively.

On	September	25,	2005,	the	Company	adopted	SFAS	No.	123	(revised	2004)	("SFAS	No.	123R"),	Share-Based	Payment,	which	addresses	the	accounting	for	stock- 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.	In	January	2005,	the	SEC	issued	SAB	No.	107, which	provides	supplemental	implementation	guidance	for	SFAS	No.	123R.	SFAS	No.	123R	eliminates	the	ability	to	account	for	stock-based	compensation	transactions using	the	intrinsic	value	method	under	Accounting	Principles	Board	("APB")	Opinion	No.	25,	Accounting	for	Stock	Issued	to	Employees,	and	instead	generally	requires that	such	transactions	be	accounted	for	using	a	fair-value-based	method.	The	Company	uses	the	Black-Scholes-Merton	("BSM")	option-pricing	model	to	determine	the fair-value	of	stock-based	awards	under	SFAS	No.	123R,	consistent	with	that	used	for	pro	forma	disclosures	under	SFAS	No.	123,	Accounting	for	Stock-Based Compensation.	The	Company	has	elected	to	use	the	modified	prospective	transition	method	as	permitted	by	SFAS	No.	123R	and	accordingly	prior	periods	have	not been	restated	to	reflect	the	impact	of	SFAS	No.	123R.	The	modified	prospective	transition	method	requires	that	stock-based	compensation	expense	be	recorded	for	all new	and	unvested	stock	options,	restricted	stock,	restricted	stock	units,	and	employee	stock	purchase	plan	shares	that	are	ultimately	expected	to	vest	as	the	requisite service	is	rendered	beginning	on	September	25,	2005,	the	first	day	of	the	Company's	fiscal	year	2006.	Stock-based	compensation	expense	for	awards	granted	prior	to September	25,	2005	is	based	on	the	grant-date	fair-value	as	determined	under	the	pro	forma	provisions	of	SFAS	No.	123.	The	Company	recognized	incremental	stock- based	compensation	expense	of	$117	million	during	2006	as	a	result	of	the	adoption	of	SFAS	No.	123R.	Diluted	earnings	per	common	share	was	reduced	by	$0.10	for the	year	ended	September	30,	2006	due	to	the	adoption	of	SFAS	No.	123R.	In	accordance	with	SFAS	No.	123R,	beginning	in	2006	the	Company	has	presented	excess tax	benefits	from	the	exercise	of	stock-based	compensation	awards	as	a	financing	activity	in	the	consolidated	statement	of	cash	flows.

No	stock-based	compensation	costs	have	been	capitalized	as	of	September	30,	2006.	The	income	tax	benefit	related	to	stock-based	compensation	expense	was	$39 million	for	the	year	ended	September	30,	2006.	As	of	September	30,	2006,	$375.2	million	of	total	unrecognized	compensation	cost	related	to	stock	options	and	restricted stock	units	is	expected	to	be	recognized	over	a	weighted-average	period	of	2.91	years.

SFAS	No.	123R	prohibits	recognition	of	a	deferred	tax	asset	for	an	excess	tax	benefit	that	has	not	been	realized.	The	Company	will	recognize	a	benefit	from	stock-based compensation	in	equity	if	an	incremental	tax	benefit	is	realized	by	following	the	ordering	provisions	of	the	tax	law.	In	addition,	the	Company	accounts	for	the	indirect effects	of	stock-based	compensation	on	the	research	tax	credit,	the	foreign	tax	credit,	and	the	domestic	manufacturing	deduction	through	the	income	statement.

Prior	to	the	adoption	of	SFAS	No.	123R,	the	Company	measured	compensation	expense	for	its	employee	stock-based	compensation	plans	using	the	intrinsic	value method	prescribed	by	APB	Opinion	No.	25.	The	Company	applied	the	disclosure	provisions	of	SFAS	No.	123	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	was	equal	to	the	market	price	of	the	underlying	stock	on	the	date	of	the	grant,	no	compensation expense	was	recognized.

The	following	table	illustrates	the	effect	on	net	income	after	taxes	and	net	income	per	common	share	as	if	the	Company	had	applied	the	fair	value	recognition	provisions of	SFAS	No.	123	to	stock-based	compensation	during	2005	and	2004	(in	millions,	except	per	share	amounts):

|  | 2005<br>As	Restated	(1) | 2004<br>As	Restated	(1) |
| :--- | :--- | :--- |
| Net\tincome | $ 1,328 | $266 |
| Add:\tStock-based\temployee\tcompensation\texpense\tincluded\tin |  |  |
| reported\tnet\tincome,\tnet\tof\ttax | 45 | 43 |
| Deduct:\tStock-based\temployee\tcompensation\texpense\tdetermined |  |  |
| under\tthe\tfair\tvalue\tbased\tmethod\tfor\tall\tawards,\tnet\tof\ttax | (118) | (148) |
| Net\tincome—pro\tforma | $ 1,255 | $161 |
| Net\tincome\tper\tcommon\tshare |  |  |
| Basic | $1.64 | $0.36 |
| Diluted | $1.55 | $0.34 |
| Net\tincome\tper\tcommon\tshare—pro\tforma |  |  |
| Basic | $1.55 | $0.22 |
| Diluted | $1.47 | $0.21 |

(1)										See	Note	2,	"Restatement	of	Consolidated	Financial	Statements."

Further	information	regarding	stock-based	compensation	can	be	found	in	Note	9.

# 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:

| Three	fiscal	years	ended	September	30,	2006 | 2006 | 2005<br>As	Restated	(1) | 2004<br>As	Restated	(1) |
| :--- | :--- | :--- | :--- |
| Numerator\t(in\tmillions):\nNet\tincome | $1,989 | $1,328 | $266 |
| Denominator\t(in\tthousands): |  |  |  |
| Weighted-average\tshares\toutstanding,\texcluding\tunvested\trestricted |  |  |  |
| stock | 844,058 | 808,439 | 743,180 |
| Effect\tof\tdilutive\toptions,\trestricted\tstock\tunits\tand\tunvested |  |  |  |
| restricted\tstock | 33,468 | 48,439 | 31,596 |
| Denominator\tfor\tdiluted\tearnings\tper\tshare | 877,526 | 856,878 | 774,776 |
| Basic\tearnings\tper\tshare | $2.36 | $1.64 | $0.36 |
| Diluted\tearnings\tper\tshare | $2.27 | $1.55 | $0.34 |

Potentially	dilutive	securities	representing	approximately	3.9	million,	12.7	million	(as	restated(1)),	and	8.9	million	(as	restated(1))	shares	of	common	stock	for	the	years ended	September	30,	2006,	September	24,	2005,	and	September	25,	2004,	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,	unvested	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—Restatement	of	Consolidated	Financial	Statements

The	Company	is	restating	its	consolidated	balance	sheet	as	of	September	24,	2005,	and	the	related	consolidated	statements	of	operations,	shareholders'	equity,	and	cash flows	for	each	of	the	fiscal	years	ended	September	24,	2005	and	September	25,	2004,	and	each	of	the	quarters	in	fiscal	year	2005.

On	June	29,	2006,	the	Company	announced	that	an	internal	review	had	discovered	irregularities	related	to	the	issuance	of	certain	stock	option	grants	made	between 1997	and	2001,	including	a	grant	to	its	Chief	Executive	Officer	("CEO")	Steve	Jobs.	The	Company	also	announced	that	a	Special	Committee	of	outside	directors ("Special	Committee")	had	been	formed	and	had	hired	independent	counsel	to	conduct	a	full	investigation	of	the	Company's	past	stock	option	granting	practices.

As	a	result	of	the	internal	review	and	the	independent	investigation,	management	has	concluded,	and	the	Audit	and	Finance	Committee	of	the	Board	of	Directors	agrees, that	incorrect	measurement	dates	were	used	for	financial	accounting	purposes	for	certain	stock	option	grants	made	in	prior	periods.	Therefore,	the	Company	has	recorded additional	non-cash	stock-based	compensation	expense	and	related	tax	effects	with	regard	to	past	stock	option	grants,	and	the	Company	is	restating	previously	filed financial	statements	in	this	Form	10-K.	These	adjustments,	after	tax,	amounted	to	$4	million,	$7	million,	and	$10	million	in	fiscal	years	2006,	2005	and	2004, respectively.	The	adjustment	to	2006	was	recorded	in	the	fourth	quarter	of	fiscal	year	2006	due	to	its	insignificance.

The	independent	counsel	and	its	forensic	accountants	("Investigative	Team")	reviewed	the	facts	and	circumstances	surrounding	stock	option	grants	made	on	259	dates. Based	on	a	review	of	the	totality	of	evidence	and	the	applicable	law,	the	Special	Committee	found	no	misconduct	by	current	management.	The	Special	Committee's investigation	identified	a	number	of	grants	for	which	grant	dates	were	intentionally	selected	in	order	to	obtain	favorable	exercise	prices.	The	terms	of	these	and	certain other	grants,	as	discussed	below,	were	finalized	after	the	originally	assigned	grant	dates.	The	Special	Committee	concluded	that	the	procedures	for	granting,	accounting for,	and	reporting	stock	option	grants	did	not	include	sufficient	safeguards	to	prevent	manipulation.	Although	the	investigation	found	that	CEO	Steve	Jobs	was	aware	or recommended	the	selection	of	some	favorable	grant	dates,	he	did	not	receive	or	financially	benefit	from	these	grants	or	appreciate	the	accounting	implications.	The Special	Committee	also	found	that	the	investigation	had	raised	serious	concerns	regarding	the	actions	of	two	former	officers	in	connection	with	the	accounting,	recording and	reporting	of	stock	option	grants.

Consistent	with	the	accounting	literature	and	recent	guidance	from	the	Securities	and	Exchange	Commission	("SEC"),	the	grants	during	the	relevant	period	were organized	into	categories	based	on	grant

# Note	2—Restatement	of	Consolidated	Financial	Statements	(Continued)

type	and	process	by	which	the	grant	was	finalized.	The	Company	analyzed	the	evidence	related	to	each	category	of	grants	including,	but	not	limited	to,	electronic	and physical	documents,	document	metadata,	and	witness	interviews.	Based	on	the	relevant	facts	and	circumstances,	the	Company	applied	the	controlling	accounting standards	to	determine,	for	every	grant	within	each	category,	the	proper	measurement	date.	If	the	measurement	date	is	not	the	originally	assigned	grant	date,	accounting adjustments	were	made	as	required,	resulting	in	stock-based	compensation	expense	and	related	tax	effects.

The	42,077	grants	were	classified	as	follows:	(1)	17	grants	to	persons	elected	or	appointed	to	the	Board	of	Directors	("director	grants");	(2)	3,892	grants	to	employees under	the	Monday/Tuesday	Plan	described	below	("Monday/Tuesday	grants");	(3)	27,096	grants	made	in	broad-based	awards	to	large	numbers	of	employees,	usually	on an	annual	basis	("focal	grants");	(4)	9,988	other	grants	ratified	at	meetings	of	the	Board	or	Compensation	Committee	("meeting	grants");	(5)	1,082	other	grants	ratified by	unanimous	written	consent	("UWC")	of	the	Board	or	Compensation	Committee	("other	UWC	grants");	and	(6)	two	grants	to	the	CEO	("CEO	grants").	All	references to	the	number	of	option	shares,	option	exercise	prices,	and	share	prices	in	this	Note	2	have	not	been	adjusted	for	any	subsequent	stock	splits.

Monday/Tuesday	Grants—Beginning	in	December	1998,	3,892	new	hire	grants	and	grants	for	promotion	and	retention	purposes	("promotion/retention	grants")	were made	during	the	relevant	period	under	the	"Monday/Tuesday	Plan."	Under	the	Monday/Tuesday	Plan,	new	hire	grants	made	within	pre-established	guidelines	approved by	the	Board	or	Compensation	Committee	were	dated	on	the	Monday	that	the	recipient	started	work	(or	the	following	Monday,	if	the	recipient	started	on	another	day). The	Company's	analysis	showed	this	process	to	be	reliable	with	very	low	error	rates.	Promotion/retention	grants,	also	based	on	pre-established	guidelines,	were	made generally	on	the	first	Tuesday	of	each	month.	The	Company	has	concluded	that	the	new	hire	and	promotion/retention	grants	made	pursuant	to	the	Monday/Tuesday	Plan within	pre-established	guidelines	do	not	require	adjustment,	with	the	exception	of	six	grants	that	were	erroneously	dated	before	the	employees'	start	dates.	For	120	new hire	and	promotion/retention	grants	made	outside	the	guidelines,	however,	the	Company	has	concluded	that	the	measurement	dates	are	the	dates	of	ratification	by	the Board	or	Compensation	Committee	rather	than	the	dates	used	for	grants	within	guidelines.	Accordingly,	based	on	the	methodology	described	above,	the	Company	has recognized	stock-based	compensation	expense	of	$6	million	from	126	grants.

Other	Meeting	Grants—During	the	relevant	period,	meetings	of	the	Board	or	Compensation	Committee	were	held	to	ratify	9,988	grants	that	are	not	Monday/Tuesday, focal	or	CEO	grants.	The	grant	dates	and	measurement	dates	for	these	grants	are	the	meeting	dates	when	the	grants	were	ratified,	with	the	exception	of	46	grants.	Forty- two	of	these	46	grants	are	dated	concurrent	with	a	meeting	that	considered	and	approved	certain	grants,	but	the	evidence	indicates	that	all	of	the	grants	may	not	have been	finalized	until	a	later	date.	One	of	the	46	grants	was	approved	and	dated	at	another	meeting,	but	the	recipient,	who	was	becoming	employed	by	the	Company	as	part of	a	corporate	acquisition,	did	not	start	until	a	later	date.	Two	other	grants	were	approved	before	the	employees'	start	dates.	Another	grant	was	mistakenly	cancelled	and subsequently	reinstated,	requiring	an	accounting	adjustment.	Thus,	for	these	46	grants	the	Company	has	concluded	that	the	originally	assigned	grant	dates	are	not	the proper	measurement	dates.	As	a	result,	the	Company	has	recognized	$2	million	of	stock-based	compensation	expense.

Other	UWC	Grants—During	the	relevant	period,	1,082	grants	were	approved	by	UWCs	for	a	variety	of	purposes,	including	executive	recruitment,	retention,	promotion and	new	hires	outside	the	Monday/Tuesday	process.	These	grants	were	not	made	pursuant	to	pre-established	guidelines	adopted	by	the	Board	or	Compensation Committee.	Therefore,	the	Company	has	concluded	that	these	grants	were

not	finalized	for	accounting	purposes	until	ratification	by	the	Board	or	Compensation	Committee.	Accordingly,	for	660	grants,	the	Company	has	concluded	that	the originally	assigned	grant	dates	are	not	the	proper	measurement	dates.	As	a	result,	the	Company	has	recognized	$48	million	of	stock-based	compensation	expense.

CEO	Grants—During	the	relevant	period,	the	Company	made	two	grants	to	CEO	Steve	Jobs.	The	first	grant,	dated	January	12,	2000,	was	for	10	million	option	shares.

The	second	grant,	dated	October	19,	2001,	was	for	7.5	million	option	shares.	Both	grants	were	cancelled	in	March	2003	prior	to	being	exercised,	when	Mr.	Jobs	received 5	million	shares	of	restricted	stock.

Additionally,	the	Company	has	restated	the	pro	forma	expense	under	Statement	of	Financial	Accounting	Standards	(SFAS)	No.	123	in	Note	1	to	reflect	the	impact	of these	adjustments.

The	following	table	presents	the	effects	of	the	stock-based	compensation	and	related	tax	adjustments	made	to	the	Company's	previously	reported	consolidated	balance sheet	as	of	September	24,	2005	(in	millions,	except	share	amounts):

| ASSETS: | As	Reported | September	24,	2005<br>Adjustments | As	Restated |
| :--- | :--- | :--- | :--- |
| Current\tassets: |  |  |  |
| Cash\tand\tcash\tequivalents | $3,491 | $ — | $3,491 |
| Short-term\tinvestments | 4,770 | — | 4,770 |
| Accounts\treceivable,\tless\tallowance\tof\t$46 | 895 | — | 895 |
| Inventories | 165 | — | 165 |
| Deferred\ttax\tassets | 331 | — | 331 |
| Other\tcurrent\tassets | 648 | — | 648 |
| Total\tcurrent\tassets | 10,300 | — | 10,300 |
| Property,\tplant,\tand\tequipment,\tnet | 817 | — | 817 |
| Goodwill | 69 | — | 69 |
| Acquired\tintangible\tassets,\tnet | 27 | — | 27 |
| Other\tassets | 338 | (35) | 303 |
| Total\tassets | $ 11,551 | (35) | $11,516 |
| LIABILITIES\tAND\tSHAREHOLDERS'\tEQUITY: |  |  |  |
| Current\tliabilities: |  |  |  |
| Accounts\tpayable | $1,779 | $ — | $1,779 |
| Accrued\texpenses | 1,705 | 3 | 1,708 |
| Total\tcurrent\tliabilities | 3,484 | 3 | 3,487 |
| Non-current\tliabilities | 601 | — | 601 |
| Total\tliabilities | 4,085 | 3 | 4,088 |
| Commitments\tand\tcontingencies |  |  |  |
| Shareholders'\tequity: |  |  |  |
| Common\tstock,\tno\tpar\tvalue;\t1,800,000,000\tshares\tauthorized; |  |  |  |
| 835,019,364\tshares\tissued\tand\toutstanding |  |  |  |
|  | 3,521 | 43 | 3,564 |

The	following	table	presents	the	effects	of	the	stock-based	compensation	and	related	tax	adjustments	made	to	the	Company's	previously	reported	consolidated statements	of	operations	(in	millions,	except	share	and	per	share	amounts):

|  | Fiscal	Year	Ended	September	24,	2005 | Fiscal	Year	Ended	September	24,	2005 | Fiscal	Year	Ended	September	24,	2005 | Fiscal	Year	Ended	September	25,	2004 | Fiscal	Year	Ended	September	25,	2004 | Fiscal	Year	Ended	September	25,	2004 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | As\nReported | Adjustments | As\nRestated | As\nReported | Adjustments | As\nRestated |
| Net\tsales | $13,931 | $— | $13,931 | $8,279 | $— | $8,279 |
| Cost\tof\tsales\t(1) | 9,888 | 1 | 9,889 | 6,020 | 2 | 6,022 |
| Gross\tmargin | 4,043 | (1) | 4,042 | 2,259 | (2) | 2,257 |
| Operating\texpenses: |  |  |  |  |  |  |
| Research\tand\tdevelopment\t(1) | 534 | 1 | 535 | 489 | 2 | 491 |
| Selling,\tgeneral,\tand\tadministrative |  |  |  |  |  |  |
| (1) | 1,859 | 5 | 1,864 | 1,421 | 9 | 1,430 |
| Restructuring\tcosts | — | — | — | 23 | — | 23 |
| Total\toperating\texpenses | 2,393 | 6 | 2,399 | 1,933 | 11 | 1,944 |
| Operating\tincome | 1,650 | (7) | 1,643 | 326 | (13) | 313 |
| Other\tincome\tand\texpense | 165 | — | 165 | 57 | — | 57 |
| Income\tbefore\tprovision\tfor |  |  |  |  |  |  |
| income\ttaxes | 1,815 | (7) | 1,808 | 383 | (13) | 370 |
| Provision\tfor\tincome\ttaxes | 480 | — | 480 | 107 | (3) | 104 |
| Net\tincome | $1,335 | $(7) | $1,328 | $276 | $(10) | $266 |
| Earnings\tper\tcommon\tshare: |  |  |  |  |  |  |
| Basic | $1.65 | $ (0.01) | $1.64 | $0.37 | $ (0.01) | $0.36 |
| Diluted | $1.56 | $ (0.01) | $1.55 | $0.36 | $ (0.02) | $0.34 |
| Shares\tused\tin\tcomputing\tearnings\tper |  |  |  |  |  |  |
| share\t(in\tthousands): |  |  |  |  |  |  |
| Basic | 808,439 | — | 808,439 | 743,180 | — | 743,180 |
| Diluted | 856,780 | 98 | 856,878 | 774,622 | 154 | 774,776 |
| (1)\t\t\t\t\t\t\t\t\t\tIncludes\tstock-based\tcompensation\texpense,\twhich\twas\tallocated\tas\tfollows: |  |  |  |  |  |  |
| Cost\tof\tsales | $2 | $1 | $3 | $1 | $2 | $3 |
| Research\tand\tdevelopment | $6 | $1 | $7 | $4 | $2 | $6 |
| Selling,\tgeneral,\tand |  |  |  |  |  |  |
| administrative | $34 | $5 | $39 | $28 | $9 | $37 |

The	following	table	presents	the	cumulative	adjustments	of	each	component	of	shareholders'	equity	at	the	end	of	each	fiscal	year	(in	millions):

| Fiscal	Year | Common	Stock | Deferred	Stock<br>Compensation | Retained	Earnings | Net	Impact	to<br>Shareholders'	Equity |
| :--- | :--- | :--- | :--- | :--- |
| 1998 | $26 | $ (27) | $ — | $(1) |
| 1999 | 36 | (32) | (6) | (2) |
| 2000 | 56 | (43) | (15) | (2) |
| 2001 | 81 | (49) | (28) | 4 |
| 2002 | 105 | (49) | (51) | 5 |
| 2003 | 85 | (22) | (63) | — |
| 2004 | 68 | (8) | (73) | (13) |
| 2005 | 43 | (1) | (80) | (38) |

# Note	3—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	30,<br>2006 | September	24,<br>2005 |
| :--- | :--- | :--- |
| Cash | $200 | $127 |
| U.S.\tTreasury\tand\tAgency\tsecurities | 52 | 89 |
| U.S.\tCorporate\tSecurities | 4,309 | 2,030 |
| Foreign\tSecurities | 1,831 | 1,245 |
| Total\tcash\tequivalents | 6,192 | 3,364 |
| U.S.\tTreasury\tand\tAgency\tsecurities | 447 | 216 |

| U.S.	Corporate	Securities | 2,701 | 3,662 |
| :--- | :--- | :--- |
| Foreign\tSecurities | 570 | 892 |
| Total\tshort-term\tinvestments | 3,718 | 4,770 |
| Total\tcash,\tcash\tequivalents,\tand\tshort-term\ninvestments | $10,110 | $ 8,261 |

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	$687,000	on	its	investment	portfolio,	primarily	related	to	investments	with	stated	maturities	less	than	1	year,	as	of September	30,	2006,	and	net	unrealized	losses	of	$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.	The	Company	may	sell	its	investments	prior	to	their	stated	maturities	for	strategic	purposes,	in	anticipation	of	credit	deterioration, or

# Note	3—Financial	Instruments	(Continued)

for	duration	management.	The	Company	recognized	net	losses	before	taxes	of	$434,000	and	$137,000	in	2006	and	2005,	respectively,	and	a	net	gain	before	taxes	of	$1 million	in	2004	as	a	result	of	such	sales.	These	net	gains	were	included	in	interest	and	other	income,	net.

As	of	September	30,	2006	and	September	24,	2005,	approximately	$921	million	and	$287	million,	respectively,	of	the	Company's	short-term	investments	had underlying	maturities	ranging	from	1	to	5	years.	The	remaining	short-term	investments	as	of	September	30,	2006	and	September	24,	2005	had	maturities	less	than	12 months.

In	accordance	with	FASB	Staff	Position	("FSP")	FAS	115-1	and	FAS	124-1,	The	Meaning	of	Other-Than-Temporary	Impairment	and	Its	Application	to	Certain Investments,	the	following	table	shows	the	gross	unrealized	losses	and	fair	value	for	those	investments	that	were	in	an	unrealized	loss	position	as	of	September	30,	2006 and	September	24,	2005,	aggregated	by	investment	category	and	the	length	of	time	that	individual	securities	have	been	in	a	continuous	loss	position	(in	millions):

The	unrealized	losses	on	the	Company's	investments	during	2006	in	U.S.	Government	securities	and	during	2005	in	U.S.	Government	securities,	U.S.	corporate securities,	and	foreign	securities	were	caused	primarily	by	changes	in	interest	rates.	The	Company	typically	invests	in	highly-rated	securities	with	low	probabilities	of default.	The	Company's	investment	policy	requires	investments	to	be	rated	single-A	or	better.	Therefore,	the	Company	considers	the	declines	to	be	temporary	in	nature. As	of	September	30,	2006,	the	Company	does	not	consider	the	investments	to	be	other-than-temporarily	impaired.

Market	values	were	determined	for	each	individual	security	in	the	investment	portfolio.	When	evaluating	the	investments	for	other-than-temporary	impairment,	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	distributors	and	resellers	and	directly	to	certain	education,	consumer,	and	commercial	customers.	The Company	generally	does	not	require	collateral	from	its	customers;	however,	the	Company	will	require	collateral	in	certain	instances	to	limit	credit	risk.	In	addition, when	possible,	the	Company	does	attempt	to	limit	credit	risk	on	trade	receivables	with	credit	insurance	for	certain	customers	in	Latin	America,	Europe,	Asia,	and Australia	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	30,	2006	or	September	24,	2005.

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

|  | September	30,<br>2006 | September	24,<br>2005 | September	25,<br>2004 |
| :--- | :--- | :--- | :--- |
| Beginning\tallowance\tbalance | $46 | $47 | $49 |

| Charged	to	costs	and	expenses | 17 | 8 | 3 |
| :--- | :--- | :--- | :--- |
| Deductions(a) | (11) | (9) | (5) |
| Ending\tallowance\tbalance | $52 | $46 | $47 |

(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	$1.6	billion	and	$417	million	as	of	September	30,	2006	and September	24,	2005,	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	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	30,	2006	and September	24,	2005	(in	millions):

| Foreign	exchange	instruments	qualifying	as<br>accounting	hedges: | Notional<br>Principal | September	30,	2006<br>Fair<br>Value | Credit	Risk<br>Amounts | Notional<br>Principal | September	24,	2005<br>Fair<br>Value | Creit	Risk<br>Amounts |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Spot/Forward\tcontracts | $351 | $6 | $6 | $662 | $10 | $ 10 |
| Purchased\toptions | $ 1,256 | $9 | $9 | $ 1,668 | $17 | $ 17 |
| Sold\toptions | $80 | $(1) | $— | $ 1,087 | $(5) | $ — |
| Foreign\texchange\tinstruments\tother\tthan\naccounting\thedges: |  |  |  |  |  |  |
| Spot/Forward\tcontracts | $ 1,103 | $2 | $2 | $833 | $(3) | $1 |
| Purchased\toptions | $167 | $1 | $— | $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	amounts	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	30,	2006	and September	24,	2005.	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	revenue,	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	revenue	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	revenue	and	inventory	purchases	over	a	time	horizon	of	up	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	a	net	gain	of	approximately	$421,000	in	2006	and 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.	As	of	September	30,	2006,	the Company	had	a	net	deferred	gain	associated	with	cash	flow	hedges	of	approximately	$2.8	million,	net	of	taxes,	substantially	all	of	which	is	expected	to	be	reclassified	to earnings	by	the	end	of	the	second	quarter	of	fiscal	2007.

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.	For	the	years	ended	September	30,	2006	and	September	24,	2005,	the	Company	had	net	gains of	$7.4	million	and	$673,000,	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.

# Note	4—Consolidated	Financial	Statement	Details	(in	millions)

# Other	Current	Assets

|  | 2006 | 2005 |
| :--- | :--- | :--- |
| Vendor\tnon-trade\treceivables | $ 1,593 | $417 |
| NAND\tflash\tmemory\tprepayments | 208 | — |
| Other\tcurrent\tassets | 469 | 231 |
| Total\tother\tcurrent\tassets | $ 2,270 | $648 |

# Note	4—Consolidated	Financial	Statement	Details	(in	millions)	(Continued)

|  | 2006 | 2005 |
| :--- | :--- | :--- |
| Land\tand\tbuildings | $626 | $361 |
| Machinery,\tequipment,\tand\tinternal-use\tsoftware | 595 | 470 |
| Office\tfurniture\tand\tequipment | 94 | 81 |
| Leasehold\timprovements | 760 | 569 |
|  | 2,075 | 1,481 |
| Accumulated\tdepreciation\tand\tamortization | (794) | (664) |
| Net\tproperty,\tplant,\tand\tequipment | $ 1,281 | $817 |

# Other	Assets

|  | 2006 | 2005 |
| :--- | :--- | :--- |
|  |  | As\tRestated(1) |
| Long-term\tNAND\tflash\tmemory\tprepayments | $ 1,042 | $— |
| Non-current\tdeferred\ttax\tassets | — | 148 |
| Capitalized\tsoftware\tdevelopment\tcosts,\tnet | 21 | 38 |
| Other\tassets | 175 | 117 |
| Total\tother\tassets | $ 1,238 | $303 |

# Accrued	Expenses

|  | 2006 | 2005 |
| :--- | :--- | :--- |
|  |  | As\tRestated(1) |
| Deferred\trevenue—current | $746 | $501 |
| Accrued\twarranty\tand\trelated\tcosts | 284 | 188 |
| Accrued\tmarketing\tand\tdistribution | 298 | 221 |
| Accrued\tcompensation\tand\temployee\tbenefits | 221 | 167 |
| Other\taccrued\ttax\tliability | 388 | 196 |
| Deferred\tmargin\ton\tcomponent\tsales | 324 | 26 |
| Other\tcurrent\tliabilities | 820 | 409 |
| Total\taccrued\texpenses | $ 3,081 | $ 1,708 |

# Non-Current	Liabilities

|  | 2006 | 2005 |
| :--- | :--- | :--- |
| Deferred\ttax\tliabilities | $381 | $308 |
| Deferred\trevenue—non-current | 355 | 281 |
| Other\tnon-current\tliabilities | 14 | 12 |
| Total\tnon-current\tliabilities | $750 | $601 |

|  | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Gains\ton\tnon-current\tinvestments,\tnet | $— | $— | $4 |
| Interest\tincome | $394 | $183 | $64 |
| Interest\texpense | — | — | (3) |
| Other\tincome\t(expense),\tnet | (29) | (18) | (8) |
| Total\tinterest\tand\tother\tincome,\tnet | 365 | 165 | 53 |
| Total\tother\tincome\tand\texpense | $365 | $165 | $57 |

# Note	5—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<br>Carrying<br>Amount | September	30,	2006<br>Accumulated<br>Amortization | Net<br>Carrying<br>Amount | Gross<br>Carrying<br>Amount | September	24,	2005<br>Accumulated<br>Amortization | Net<br>Carrying<br>Amount |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Goodwill | $38 | $— | $38 | $69 | $— | $ 69 |
| Acquired\ttechnology | 181 | (42) | 139 | 61 | (34) | 27 |
| Total\tacquired\tintangible\tassets | $219 | $(42) | $177 | $130 | $(34) | $ 96 |

As	of	September	30,	2006,	and	September	24,	2005,	the	weighted-average	amortization	period	for	acquired	technology	was	8.5	years	and	5.5	years,	respectively.

During	2006,	the	Company	sold	certain	assets	related	to	its	PowerSchool	web-based	student	information	system	operations.	In	connection	with	this	sale,	the	Company reduced	goodwill	by	$31	million	for	the	outstanding	balance	from	the	acquisition	of	PowerSchool,	Inc.	in	2001	and	recognized	a	$4	million	pre-tax	gain,	which	is reflected	in	other	income	and	expense	in	the	consolidated	statement	of	operations.

During	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	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.

# Note	5—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	$12	million,	$9	million,	and	$7	million	in	2006,	2005,	and	2004,	respectively.

# Note	6—Restructuring	Charges

During	2004,	the	Company	recorded	total	restructuring	charges	of	approximately	$23.0	million,	including	approximately	$14.0	million	in	severance	costs,	$5.5	million in	asset	impairments,	and	$3.5	million	for	lease	cancellations.	The	lease	cancellations	relate	to	vacating	a	leased	sales	facility	from	a	European	workforce	reduction during	2004.	Of	the	$23.0	million	charges,	$21.3	million	had	been	utilized	by	the	end	of	2006,	with	the	remainder	consisting	of	$1.7	million	for	lease	cancellations. These	actions	have	resulted	in	the	termination	of	452	positions.

# Note	7—Income	Taxes

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

| Federal: | 2006 | 2005<br>As	Restated	(1) | 2004<br>As	Restated	(1) |
| :--- | :--- | :--- | :--- |
| Current | $619 | $305 | $34 |
| Deferred | 56 | 144 | 53 |
|  | 675 | 449 | 87 |
| State: |  |  |  |
| Current | 56 | 66 | 5 |
| Deferred | 14 | (91) | (18) |
|  | 70 | (25) | (13) |
| Foreign: |  |  |  |
| Current | 101 | 59 | 46 |
| Deferred | (17) | (3) | (16) |
|  | 84 | 56 | 30 |
| Provision\tfor\tincome\ttaxes | $829 | $480 | $104 |

The	foreign	provision	for	income	taxes	is	based	on	foreign	pretax	earnings	of	approximately	$1.5	billion,	$922	million,	and	$384	million	in	2006,	2005,	and	2004,

# Note	7—Income	Taxes	(Continued)

approximately	$4.1	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	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	$823	million of	such	earnings.	It	is	not	practicable	to	determine	the	income	tax	liability	that	might	be	incurred	if	these	earnings	were	to	be	distributed.

On	October	22,	2004,	the	American	Jobs	Creation	Act	of	2004	("AJCA")	was	signed	into	law.	The	AJCA	included	a	provision	for	the	deduction	of	85%	of	certain foreign	earnings	that	were	repatriated,	as	defined	in	the	AJCA,	within	a	specified	time	frame.	Among	other	requirements,	dividends	qualifying	for	the	85%	deduction must	be	reinvested	in	the	United	States	in	certain	qualified	investments	pursuant	to	a	domestic	reinvestment	plan	approved	by	the	Chief	Executive	Officer	("CEO")	and Board	of	Directors.	During	2006,	the	Company	repatriated	approximately	$1.6	billion	of	foreign	earnings.	Of	the	earnings	repatriated,	$755	million	is	eligible	for	the reduced	tax	rate	provided	by	the	AJCA.	Accordingly,	the	Company	recorded	a	tax	charge	of	$51	million	related	to	the	repatriation	of	foreign	earnings	under	the provisions	of	the	AJCA.	In	addition,	the	Company	recorded	a	tax	benefit	of	$71	million	resulting	from	the	implementation	of	tax	planning	strategies	to	recognize deferred	tax	assets	that	were	previously	not	recognizable	within	certain	foreign	subsidiaries.

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	30,	2006	and	September	24,	2005,	the	significant	components	of	the	Company's	deferred	tax	assets	and	liabilities	were	(in	millions):

|  | 2006 | 2005 |
| :--- | :--- | :--- |
|  |  | As\tRestated\t(1) |
| Deferred\ttax\tassets: |  |  |
| Accrued\tliabilities\tand\tother\treserves | $485 | $321 |
| Tax\tlosses\tand\tcredits | 55 | 262 |
| Basis\tof\tcapital\tassets\tand\tinvestments | 124 | 96 |
| Accounts\treceivable\tand\tinventory\treserves | 45 | 36 |
| Other | 30 | 17 |
| Total\tdeferred\ttax\tassets | 739 | 732 |
| Less\tvaluation\tallowance | 5 | 5 |
| Net\tdeferred\ttax\tassets | 734 | 727 |
| Deferred\ttax\tliabilities: |  |  |
| Unremitted\tearnings\tof\tsubsidiaries | 514 | 557 |
| Total\tdeferred\ttax\tliabilities | 514 | 557 |
| Net\tdeferred\ttax\tasset | $220 | $170 |

As	of	September	30,	2006,	the	Company	has	state	and	foreign	tax	loss	and	state	credit	carryforwards,	the	tax	effect	of	which	is	$55	million.	Certain	of	those carryforwards,	the	tax	effect	of	which	is	$12	million,	expire	between	2016	and	2019.	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	remaining	benefits	from	tax	losses	and	credits	do	not expire.	As	of	September	30,	2006	and	September	24,	2005,	a	valuation	allowance	of	$5	million	was	recorded	against	the	deferred	tax	asset	for	the	benefits	of	state operating	losses	that	may	not	be	realized.	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	2006,	2005,	and	2004)	to income	before	provision	for	income	taxes,	is	as	follows	(in	millions):

|  | 2006 | 2005<br>As	Restated	(1) | 2004<br>As	Restated	(1) |
| :--- | :--- | :--- | :--- |
| Computed\texpected\ttax | $987 | $633 | $129 |
| State\ttaxes,\tnet\tof\tfederal\teffect | 86 | (19) | (5) |
| Indefinitely\tinvested\tearnings\tof\tforeign\tsubsidiaries | (224) | (98) | (31) |
| Nondeductible\texecutive\tcompensation | 11 | 14 | 12 |
| Research\tand\tdevelopment\tcredit,\tnet | (12) | (26) | (5) |
| Other\titems | (19) | (24) | 4 |
| Provision\tfor\tincome\ttaxes | $829 | $480 | $104 |
| Effective\ttax\trate | 29% | 27% | 28% |

The	Company's	income	taxes	payable	has	been	reduced	by	the	tax	benefits	from	employee	stock	options.	The	Company	receives	an	income	tax	benefit	calculated	as	the difference	between	the	fair	market	value	of	the	stock	issued	at	the	time	of	the	exercise	and	the	option	price,	tax	effected.	The	net	tax	benefits	from	employee	stock	option

transactions	were	$419	million,	$428	million	(as	restated(1)),	and	$83	million	(as	restated(1))	in	2006,	2005,	and	2004,	respectively,	and	were	reflected	as	an	increase	to common	stock	in	the	consolidated	statements	of	shareholders'	equity.

The	Internal	Revenue	Service	("IRS")	has	substantially	completed	its	field	audit	of	the	Company's	federal	income	tax	returns	for	the	years	2002	through	2003	and proposed	certain	adjustments.	The	Company	intends	to	contest	certain	of	these	adjustments	through	the	IRS	Appeals	Office.	Substantially	all	IRS	audit	issues	for	years prior	to	2002	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.	In	2006,	the	Company	recorded	a	tax	benefit	of	$20	million	due	to	the	settlement	of	prior	year	tax	audits	in the	U.S.

# Note	8—Shareholders'	Equity

# Preferred	Stock

The	Company	has	five	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.

# Restricted	Stock	Units

The	Company's	Board	of	Directors	has	granted	restricted	stock	units	to	members	of	the	Company's	senior	management	team,	excluding	its	CEO.	These	restricted	stock units	generally	vest	over	four	years	either	at	the	end	of	the	four-year	service	period,	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	amounts	of	the	restricted	stock	units	expensed	by	the	Company	are	based	on	the	closing	market	price	of	the	Company's	common	stock on	the	date	of	grant	and	are	amortized	on	a	straight-line	basis	over	the	four-year	requisite	service	period.	The	restricted	stock	units	have	been	reflected	in	the	calculation of	diluted	earnings	per	share	utilizing	the	treasury	stock	method.

2.47	million	previously	granted	restricted	stock	units	vested	during	2006.	A	majority	of	these	vested	restricted	stock	units	were	net-share	settled	such	that	the	Company withheld	shares	with	value	equivalent	to	the	employees'	minimum	statutory	obligation	for	the	applicable	income	and	other	employment	taxes,	and	remitted	the	cash	to the	appropriate	taxing	authorities.	The	total	shares	withheld	of	985,833	for	2006	was	based	on	the	value	of	the	restricted	stock	units	on	their	vesting	date	as	determined by	the	Company's	closing	stock	price.	Total	payments	for	the	employees'	tax	obligations	to	the	taxing	authorities	were	approximately	$59	million.	These	net-share settlements	had	the	effect	of	share	repurchases	by	the	Company	as	they	reduced	and	retired	the	number	of	shares	that	would	have	otherwise	been	issued	as	a	result	of	the vesting	and	did	not	represent	an	expense	to	the	Company.

# CEO	Restricted	Stock	Award

On	March	19,	2003,	the	Company's	Board	of	Directors	granted	10	million	shares	of	restricted	stock	to	the	Company's	CEO	that	vested	on	March	19,	2006.	The	amount of	the	restricted	stock	award	expensed	by	the	Company	was	based	on	the	closing	market	price	of	the	Company's	common	stock	on	the	date	of	grant	and	was	amortized on	a	straight-line	basis	over	the	three-year	requisite	service	period.

# Note	8—Shareholders'	Equity	(Continued)

Upon	vesting	during	2006,	the	restricted	stock	award	was	net-share	settled	such	that	the	Company	withheld	shares	with	value	equivalent	to	the	CEO's	minimum statutory	obligation	for	the	applicable	income	and	other	employment	taxes,	and	remitted	the	cash	to	the	appropriate	taxing	authorities.	The	total	shares	withheld	of	4.6 million	was	based	on	the	value	of	the	restricted	stock	award	on	the	vesting	date	as	determined	by	the	Company's	closing	stock	price	of	$64.66.	The	remaining	shares	net of	those	withheld	were	delivered	to	the	Company's	CEO.	Total	payments	for	the	CEO's	tax	obligations	to	the	taxing	authorities	were	approximately	$296	million.	The net-share	settlement	had	the	effect	of	share	repurchases	by	the	Company	as	it	reduced	and	retired	the	number	of	shares	outstanding	and	did	not	represent	an	expense	to the	Company.

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):

|  | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Unrealized\tlosses\ton\tavailable-for-sale\tsecurities | $— | $(4) | $(4) |
| Unrealized\tgains/(losses)\ton\tderivative\tinvestments | 3 | 4 | (4) |
| Cumulative\tforeign\tcurrency\ttranslation | 19 | — | (7) |
| Accumulated\tother\tcomprehensive\tincome/(loss) | $22 | $— | $ (15) |

The	following	table	summarizes	activity	in	other	comprehensive	income	related	to	available-for-sale	securities,	net	of	taxes	(in	millions):

|  | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Change\tin\tfair\tvalue\tof\tavailable-for-sale\tsecurities | $4 | $— | $(1) |
| Adjustment\tfor\tnet\tgains/losses\trealized\tand\tincluded\tin\tnet\tincome | — | — | (4) |
| Change\tin\tunrealized\tgain/loss\ton\tavailable-for-sale\tsecurities | $4 | $— | $(5) |

The	tax	effect	related	to	the	change	in	unrealized	gain/loss	on	available-for-sale	securities	was	$(2)	million,	zero,	and	$4	million	for	2006,	2005,	and	2004,	respectively.

The	tax	effect	on	the	reclassification	adjustment	for	net	gains/losses	realized	and	included	in	net	income	was	$1	million	for	2004.

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

|  | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Changes\tin\tfair\tvalue\tof\tderivatives | $11 | $7 | $ (21) |
| Adjustment\tfor\tnet\tlosses\trealized\tand\tincluded\tin\tnet\tincome | (12) | 1 | 33 |
| Change\tin\tunrealized\tgain/loss\ton\tderivative\tinstruments | $(1) | $8 | $12 |

The	tax	effect	related	to	the	changes	in	fair	value	of	derivatives	was	$(8)	million,	$(3)	million,	and	$10	million	for	2006,	2005,	and	2004,	respectively.	The	tax	effect related	to	derivative	gains/losses	reclassified	from	other	comprehensive	income	to	net	income	was	$8	million,	$(2)	million,	and	$(13)	million	for	2006,	2005,	and	2004, respectively.

# 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	flows	was	associated	with	this	transaction.

# 1997	Director	Stock	Option	Plan

In	August	1997,	the	Company's	Board	of	Directors	adopted	a	Director	Stock	Option	Plan	("Director	Plan")	for	non-employee	directors	of	the	Company,	which	was approved	by	shareholders	in	1998.	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.

# Rule	10b5-1	Trading	Plans

Certain	of	the	Company's	executive	officers,	including	Mr.	Timothy	D.	Cook,	Mr.	Peter	Oppenheimer,	Mr.	Philip	W.	Schiller,	and	Dr.	Bertrand	Serlet,	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.

# 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.	The	number	of	shares	authorized	for issuance	is	limited	to	a	total	of	1	million	shares	per	offering	period.	During	2006,	2005,	and	2004,	adjusted	for	the	February	2005	stock	split,	1.5	million,	2.3	million, and	3.9	million	shares,	respectively,	were	issued	under	the	Purchase	Plan.	As	of	September	30,	2006,	approximately	2.3	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	($15,000	for calendar	year	2006).	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	$33	million,	$28	million,	and	$24	million	in	2006,	2005,	and	2004, respectively.

# Stock	Option	Activity

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

|  | Shares<br>Available<br>for	Grant | Number	of<br>Shares | Weighted-<br>Average<br>Exercise	Price | Outstanding	Options<br>Weighted-<br>Average<br>Remaining<br>Contractual	Term | Aggregate<br>Intrinsic	Value |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Balance\tat\tSeptember\t27,\t2003 | 91,660 | 126,024 | $9.54 |  |  |
| Restricted\tStock\tGranted | (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\tCancelled | 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 |  |  |
| Restricted\tStock\tUnits\tGranted | (2,950) | — |  |  |  |
| Options\tGranted | (3,881) | 3,881 | $65.28 |  |  |
| Options\tCancelled | 2,325 | (2,325) | $29.32 |  |  |
| Restricted\tStock\tUnits\tCancelled | 625 | — | — |  |  |
| Options\tExercised | — | (21,795) | $11.78 |  |  |
| Plan\tShares\tExpired | (82) | — | — |  |  |
| Balance\tat\tSeptember\t30,\t2006 | 54,994 | 52,982 | $23.23 | 4.78 | $2,848,896 |
| Exercisable\tat\tSeptember\t30,\t2006 |  | 31,184 | $14.69 | 4.35 | $1,942,486 |
| Expected\tto\tVest\tafter\tSeptember\t30,\t2006 |  | 21,798 | $35.40 | 5.40 | $906,410 |

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.

Aggregate	intrinsic	value	represents	the	value	of	the	Company's	closing	stock	price	on	the	last	trading	day	of	the	fiscal	period	in	excess	of	the	exercise	price	multiplied by	the	number	of	options	outstanding	or	exercisable.	Total	intrinsic	value	of	options	at	time	of	exercise	was	$1.2	billion,	$1.1	billion,	and	$266.9	million	for	2006,	2005, and	2004,	respectively.

As	of	September	30,	2006,	the	Company	had	3.41	million	restricted	stock	units	outstanding	with	a	total	grant-date	fair	value	of	$135.1	million	that	were	excluded	from the	options	outstanding	balances	in	the	preceding	table.	The	weighted-average	grant	date	fair	value	of	restricted	stock	units	granted	during	2006,	2005,	and	2004	was $70.92,	$45.04,	and	$12.81,	respectively.	Aggregate	intrinsic	value	of	unvested	restricted	stock	units	at	September	30,	2006	was	$262.5	million.	Restricted	stock	units that	vested	during	2006	totaled	2.47	million	and	had	a	fair	value	of	$148.5	million	as	of	the	vesting	date.	Granted	restricted	stock	units	have	been	deducted	from	the shares	available	for	grant	under	the	Company's	stock	option	plans.

The	number	of	shares	of	restricted	stock	that	vested	during	2006	was	10	million,	which	had	a	fair	value	of	$646.6	million.	The	grant-date	fair	value	of	restricted	stock that	fully	vested	during	2006	was	$7.48	per	share.	For	the	years	ended	September	30,	2006,	September	24,	2005,	and	September	25,	2004,	compensation	expense	related to	restricted	stock	was	$4.6	million,	$24.9	million,	and	$24.9	million,	respectively.

# 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	for the	years	ended	September	24,	2005	and	September	25,	2004	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	BSM	option	pricing	model.

The	weighted	average	assumptions	used	for	2006,	2005,	and	2004	and	the	resulting	estimates	of	weighted-average	fair	value	per	share	of	options	granted	and	for	stock purchases	during	those	periods	are	as	follows:

| Expected	life	of	stock	options | 3.56	years | 3.57	years | 3.50	years |
| :--- | :--- | :--- | :--- |
| Expected\tlife\tof\tstock\tpurchases | 6\tmonths | 6\tmonths | 6\tmonths |
| Interest\trate—stock\toptions | 4.60% | 3.73% | 2.40% |
| Interest\trate—stock\tpurchases | 4.29% | 2.54% | 1.18% |
| Volatility—stock\toptions | 40.34% | 39.52% | 40.00% |
| Volatility—stock\tpurchases | 39.56% | 40.88% | 35.82% |
| Dividend\tyields | — | — | — |
| Weighted-average\tfair\tvalue\tof\toptions\tgranted\tduring\tthe\tyear | $23.16 | $14.41 | $3.69 |
| Weighted-average\tfair\tvalue\tof\tstock\tpurchases\tduring\tthe\tyear | $14.06 | $7.55 | $2.78 |

Pursuant	to	SFAS	No.	123R,	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.	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

# Note	10—Commitments	and	Contingencies	(Continued)

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	30,	2006,	the	Company's	total	future	minimum	lease	payments	under	noncancelable	operating	leases	were	approximately	$1.2 billion,	of	which	$887	million	related	to	leases	for	retail	space.

Rent	expense	under	all	operating	leases,	including	both	cancelable	and	noncancelable	leases,	was	$138	million,	$140	million,	and	$103	million	in	2006,	2005,	and	2004, respectively.	Future	minimum	lease	payments	under	noncancelable	operating	leases	having	remaining	terms	in	excess	of	one	year	as	of	September	30,	2006,	are	as follows	(in	millions):

| Fiscal	Years |  |
| :--- | :--- |
| 2007 | $134 |
| 2008 | 134 |
| 2009 | 134 |
| 2010 | 132 |
| 2011 | 122 |
| Thereafter | 498 |
| Total\tminimum\tlease\tpayments | $ 1,154 |

# 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):

|  | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Beginning\taccrued\twarranty\tand\trelated\tcosts | $188 | $105 | $67 |
| Cost\tof\twarranty\tclaims | (267) | (188) | (105) |
| Accruals\tfor\tproduct\twarranties | 363 | 271 | 143 |
| Ending\taccrued\twarranty\tand\trelated\tcosts | $284 | $188 | $105 |

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	30,	2006	or	September	24,	2005.

# 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

# 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.

# 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	such	as	manufacturing	costs	and variances	not	included	in	standard	costs,	research	and	development,	corporate	marketing	expenses,	stock-based	compensation	expense,	income	taxes,	various nonrecurring	charges,	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

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

expenditures	for	long-lived	assets	are	not	reported	to	management	by	segment.	Capital	expenditures	by	the	Retail	segment	were	$200	million,	$132	million,	and	$104 million	for	2006,	2005,	and	2004,	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.

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	30,	2006,	September	24,	2005,	and	September	25,	2004,	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	$663	million,	$435	million,	and	$213	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	30,	2006,	this	resulted	in	the	recognition	of	net	sales	and	cost	of	sales	by	the	Retail	segment,	with corresponding	offsets	in	other	operating	segments,	of	$159	million	and	$109	million,	respectively.	For	the	year	ended	September	24,	2005,	this	resulted	in	the recognition	of	net	sales	and	cost	of	sales	by	the	Retail	segment	of	$92	million	and	$64	million,	respectively.	For	the	year	ended	September	25,	2004,	this	resulted	in	the recognition	of	net	sales	and	cost	of	sales	by	the	Retail	segment	of	$54	million	and	$37	million,	respectively.

Third,	the	Company	had	opened	a	total	of	eight	high-profile	stores	as	of	September	30,	2006.	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	$33	million,	$31	million,	and	$16	million	for	the	years	ended	September	30,	2006,	September	24,	2005,	and	September	25, 2004,	respectively.Summary	information	by	operating	segment	follows	(in	millions):

| Americas: | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Net\tsales | $ 9,307 | $ 6,590 | $ 4,019 |
| Operating\tincome | $ 1,665 | $798 | $465 |
| Depreciation,\tamortization,\tand\taccretion | $6 | $6 | $6 |
| Segment\tassets\t(a) | $896 | $705 | $563 |
| Europe: |  |  |  |
| Net\tsales | $ 4,094 | $ 3,073 | $ 1,799 |
| Operating\tincome | $607 | $454 | $280 |
| Depreciation,\tamortization,\tand\taccretion | $4 | $4 | $4 |
| Segment\tassets | $471 | $289 | $259 |
| Japan: |  |  |  |
| Net\tsales | $ 1,208 | $920 | $677 |
| Operating\tincome | $201 | $140 | $115 |
| Depreciation,\tamortization,\tand\taccretion | $3 | $3 | $2 |
| Segment\tassets | $181 | $165 | $114 |
| Retail: |  |  |  |
| Net\tsales | $ 3,359 | $ 2,350 | $ 1,185 |
| Operating\tincome | $198 | $151 | $39 |
| Depreciation,\tamortization,\tand\taccretion\t(b) | $59 | $43 | $35 |
| Segment\tassets\t(b) | $651 | $589 | $351 |
| Other\tSegments\t(c): |  |  |  |
| Net\tsales | $ 1,347 | $998 | $599 |
| Operating\tincome | $235 | $118 | $90 |
| Depreciation,\tamortization,\tand\taccretion | $3 | $2 | $2 |
| Segment\tassets | $180 | $133 | $124 |

(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):

|  | $2,906 | $1,661 | $989 |
| :--- | :--- | :--- | :--- |
| Retail\tmanufacturing\tmargin\t(a) | 663 | 435 | 213 |
| Other\tcorporate\texpenses,\tnet\t(b) | (953) | (404) | (820) |
| Stock-based\tcompensation\texpense | (163) | (49) | (46) |
| Restructuring\tcosts | — | — | (23) |
| Consolidated\toperating\tincome | $2,453 | $1,643 | $313 |
| Segment\tassets | $2,379 | $1,881 | $ 1,411 |
| Corporate\tassets | 14,826 | 9,635 | 6,628 |
| Consolidated\tassets | $17,205 | $11,516 | $ 8,039 |
| Segment\tdepreciation,\tamortization,\tand\taccretion | $75 | $58 | $49 |
| Corporate\tdepreciation,\tamortization,\tand\taccretion | 150 | 121 | 101 |
| Consolidated\tdepreciation,\tamortization,\tand\taccretion | $225 | $179 | $150 |

(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	2006,	2005,	or	2004.	Net	sales	and	long-lived	assets	related	to	operations	in	the	U.S.,	Japan,	and	other foreign	countries	are	as	follows	(in	millions):

| Net	sales: | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| U.S. | $11,486 | $8,194 | $ 4,893 |
| Japan | 1,327 | 1,021 | 738 |
| Other\tcountries | 6,502 | 4,716 | 2,648 |
| Total\tnet\tsales | $19,315 | $13,931 | $ 8,279 |
| Long-lived\tassets: |  |  |  |
| U.S. | $1,150 | $738 | $637 |
| Japan | 64 | 63 | 52 |
| Other\tcountries | 154 | 112 | 72 |
| Total\tlong-lived\tassets | $1,368 | $913 | $761 |

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

| Net	sales: | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Desktops\t(a) | $3,319 | $3,436 | $ 2,373 |
| Portables\t(b) | 4,056 | 2,839 | 2,550 |
| Total\tMacintosh\tnet\tsales | 7,375 | 6,275 | 4,923 |
| iPod | 7,676 | 4,540 | 1,306 |
| Other\tmusic\trelated\tproducts\tand\tservices\t(c) | 1,885 | 899 | 278 |
| Peripherals\tand\tother\thardware\t(d) | 1,100 | 1,126 | 951 |
| Software,\tservice,\tand\tother\tnet\tsales\t(e) | 1,279 | 1,091 | 821 |
| Total\tnet\tsales | $19,315 | $13,931 | $ 8,279 |

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

(b)									Includes	MacBook,	iBook,	MacBook	Pro,	and	PowerBook	product	lines.

(c)										Consists	of	iTunes	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	and	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,	Steve	Jobs,	for	the	reimbursement	of	expenses	incurred	by	Mr.	Jobs	in	the operation	of	his	private	plane	when	used	for	Company	business.	The	Reimbursement	Agreement	became	effective	for	expenses	incurred	by	Mr.	Jobs	for	Company business	purposes	since	he	took	delivery	of	the	plane	in	May	2001.	The	Company	recognized	a	total	of	$202,000,	$1,100,000,	and	$483,000	in	expenses	pursuant	to	the Reimbursement	Agreement	during	2006,	2005,	and	2004,	respectively.	All	expenses	recognized	pursuant	to	the	Reimbursement	Agreement	have	been	included	in selling,	general,	and	administrative	expenses	in	the	consolidated	statements	of	operations.

In	2006,	the	Company	entered	into	an	agreement	with	Pixar	to	sell	certain	of	Pixar's	short	films	on	the	iTunes	Store.	Mr.	Jobs	was	the	CEO,	Chairman,	and	a	large shareholder	of	Pixar.	On	May	5,	2006,	The	Walt	Disney	Company	("Disney")	acquired	Pixar,	which	resulted	in	Pixar	becoming	a	wholly-owned	subsidiary	of	Disney. Upon	Disney's	acquisition	of	Pixar,	Mr.	Jobs'	shares	of	Pixar	common	stock	were	exchanged	for	Disney's	common	stock	and	he	was	elected	to	the	Disney	Board	of Directors.	Royalty	expense	recognized	by	the	Company	under	the	arrangement	with	Pixar	from	September	25,	2005	through	May	5,	2006	was	less	than	$1	million.

# Note	13—Selected	Quarterly	Financial	Information	(Unaudited)

The	following	tables	set	forth	a	summary	of	the	Company's	quarterly	financial	information	for	each	of	the	four	quarters	ended	September	30,	2006	and	September	24, 2005	(in	millions,	except	share	and	per	share	amounts):

| 2006 | Fourth	Quarter | Third	Quarter | Second	Quarter | First	Quarter |
| :--- | :--- | :--- | :--- | :--- |
| Net\tsales | $4,837 | $4,370 | $4,359 | $5,749 |
| Cost\tof\tsales\t(1) | 3,425 | 3,045 | 3,062 | 4,185 |
| Gross\tmargin | 1,412 | 1,325 | 1,297 | 1,564 |
| Operating\texpenses: |  |  |  |  |
| Research\tand\tdevelopment\t(1) | 179 | 175 | 176 | 182 |
| Selling,\tgeneral,\tand\tadministrative\t(1) | 625 | 584 | 592 | 632 |
| Total\toperating\texpenses | 804 | 759 | 768 | 814 |
| Operating\tincome | 608 | 566 | 529 | 750 |
| Other\tincome\tand\texpense | 113 | 95 | 76 | 81 |
| Income\tbefore\tprovision\tfor\tincome\ttaxes | 721 | 661 | 605 | 831 |
| Provision\tfor\tincome\ttaxes | 179 | 189 | 195 | 266 |
| Net\tincome | $542 | $472 | $410 | $565 |
| Earnings\tper\tcommon\tshare: |  |  |  |  |
| Basic | $0.63 | $0.55 | $0.49 | $0.68 |
| Diluted | $0.62 | $0.54 | $0.47 | $0.65 |
| Shares\tused\tin\tcomputing\tearnings\tper\tshare\t(in |  |  |  |  |
| thousands): |  |  |  |  |
| Basic | 854,187 | 851,375 | 840,910 | 830,781 |
| Diluted | 878,757 | 876,368 | 878,537 | 874,207 |
| (1)\t\t\t\t\t\t\t\t\t\tIncludes\tstock-based\tcompensation\texpense,\twhich\twas\tallocated\tas\tfollows: |  |  |  |  |
| Cost\tof\tsales | $5 | $6 | $5 | $5 |
| Research\tand\tdevelopment | $13 | $12 | $13 | $15 |
| Selling,\tgeneral,\tand\tadministrative | $22 | $19 | $24 | $24 |

The	net	of	tax	impact	of	the	stock-based	compensation	adjustments	in	2006,	which	amounted	to	$4	million,	was	recorded	by	the	Company	in	its	fourth	quarter	of	2006 and	is	described	in	Note	2,	"Restatement	of	Consolidated	Financial	Statements."

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	third	quarter	of	2006	benefited	by	$20	million	resulting	from	the	dividend	repatriation	under	the	AJCA	and	international	tax	planning	strategies associated	with	the	repatriation.	Net

# Note	13—Selected	Quarterly	Financial	Information	(Unaudited)	(Continued)

income	during	the	fourth	quarter	of	2006	benefited	by	$20	million	due	to	the	settlement	of	prior	year	tax	audits	in	the	U.S.

| 2005 | Fourth	Quarter<br>As	Restated	(1) | Third	Quarter<br>As	Restated	(1) | Second	Quarter<br>As	Restated	(1) | First	Quarter<br>As	Restated	(1) |
| :--- | :--- | :--- | :--- | :--- |
| Net\tsales | $3,678 | $3,520 | $3,243 | $3,490 |
| Cost\tof\tsales\t(2) | 2,643 | 2,476 | 2,275 | 2,495 |
| Gross\tmargin | 1,035 | 1,044 | 968 | 995 |
| Operating\texpenses: |  |  |  |  |
| Research\tand\tdevelopment\t(2) | 147 | 145 | 120 | 123 |
| Selling,\tgeneral,\tand\tadministrative\t(2) | 471 | 473 | 448 | 472 |
| Total\toperating\texpenses | 618 | 618 | 568 | 595 |
| Operating\tincome | 417 | 426 | 400 | 400 |
| Other\tincome\tand\texpense | 60 | 46 | 33 | 26 |
| Income\tbefore\tprovision\tfor\tincome\ttaxes | 477 | 472 | 433 | 426 |
| Provision\tfor\tincome\ttaxes | 49 | 153 | 145 | 133 |
| Net\tincome | $428 | $319 | $288 | $293 |
| Earnings\tper\tcommon\tshare:\nBasic | $0.52 | $0.39 | $0.36 | $0.37 |
| Diluted | $0.49 | $0.37 | $0.34 | $0.35 |
| Shares\tused\tin\tcomputing\tearnings\tper\tshare\t(in |  |  |  |  |
| thousands): |  |  |  |  |
| Basic | 821,420 | 815,092 | 808,172 | 789,032 |
| Diluted | 866,483 | 860,803 | 857,568 | 838,805 |
| (1)\t\t\t\t\t\t\t\t\t\tSee\tNote\t2,\t"Restatement\tof\tConsolidated\tFinancial\tStatements." |  |  |  |  |
| (2)\t\t\t\t\t\t\t\t\t\tIncludes\tstock-based\tcompensation\texpense,\twhich\twas\tallocated\tas\tfollows: |  |  |  |  |
| Cost\tof\tsales | $1 | $— | $1 | $1 |
| Research\tand\tdevelopment | $1 | $2 | $2 | $2 |

The	impact	of	the	stock-based	compensation	adjustments	was	not	significant	to	any	of	the	interim	balance	sheets	for	fiscal	year	2005.

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.

The	following	tables	present	the	effects	of	adjustments	made	to	the	Company's	previously	reported	quarterly	financial	information	as	of	September	24,	2005	(in millions,	expect	per	share	amounts):

|  | Three	Months	Ended	September	24,	2005 | Three	Months	Ended	September	24,	2005 | Three	Months	Ended	September	24,	2005 | Three	Months	Ended	September	24,	2005 | Three	Months	Ended	June	25,	2005 | Three	Months	Ended	June	25,	2005 | Three	Months	Ended	June	25,	2005 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | As\n\tReported | \t Adjustments\t(1) | \t Adjustments\t(1) | As\nRestated | As\nReported | \t Adjustments\t(1) | As\nRestated |
| Net\tsales | $3,678 | $— |  | $3,678 | $3,520 | $— | $3,520 |
| Cost\tof\tsales\t(2) | 2,643 | — |  | 2,643 | 2,476 | — | 2,476 |
| Gross\tmargin | 1,035 | — |  | 1,035 | 1,044 | — | 1,044 |
| Operating\texpenses: |  |  |  |  |  |  |  |
| Research\tand\tdevelopment\t(2) | 147 | — |  | 147 | 145 | — | 145 |
| Selling,\tgeneral,\tand\tadministrative\t(2) | 470 | 1 | 1 | 471 | 472 | 1 | 473 |
| Total\toperating |  |  |  |  |  |  |  |
| expenses | 617 | 1 |  | 618 | 617 | 1 | 618 |
| Operating\tincome | 418 | (1) | (1) | 417 | 427 | (1) | 426 |
| Other\tincome\tand |  |  |  |  |  |  |  |
| expense | 60 | — |  | 60 | 46 | — | 46 |
| Income\tbefore\tprovision |  |  |  |  |  |  |  |
| for\tincome\ttaxes | 478 | (1) | (1) | 477 | 473 | (1) | 472 |
| Provision\tfor\tincome |  |  |  |  |  |  |  |
| taxes | 48 | 1 |  | 49 | 153 | — | 153 |
| Net\tincome | $430 | $(2) |  | $428 | $320 | $(1) | $319 |
| Earnings\tper\tcommon\tshare: |  |  |  |  |  |  |  |
| Basic | $0.52 | $— |  | $0.52 | $0.39 | $— | $0.39 |
| Diluted | $0.50 | $ (0.01) |  | $0.49 | $0.37 | $— | $0.37 |
| Shares\tused\tin\tcomputing\tearnings\tper |  |  |  |  |  |  |  |
| share\t(in\tthousands): |  |  |  |  |  |  |  |
| Basic | 821,420 | — |  | 821,420 | 815,092 | — | 815,092 |
| Diluted | 866,404 | 79 |  | 866,483 | 860,688 | 115 | 860,803 |
| (1)\t\t\t\t\t\t\t\t\t\t\tSee\tNote\t2,\t"Restatement\tof\tConsolidated\tFinancial\tStatements." |  |  |  |  |  |  |  |
| (2)\t\t\t\t\t\t\t\t\t\t\tIncludes\tstock-based\tcompensation\texpense,\twhich\twas\tallocated\tas\tfollows: |  |  |  |  |  |  |  |
| Cost\tof\tsales | $1 | $— | $1 | $— | $— | $— |  |
| Research\tand |  |  |  |  |  |  |  |
| development | $1 | $— | $1 | $2 | $— | $2 |  |
| Selling,\tgeneral,\tand |  |  |  |  |  |  |  |
| administrative | $9 | $1 | $10 | $9 | $1 | $10 |  |

|  | Three	Months	Ended	March	26,	2005 | Three	Months	Ended	March	26,	2005 | Three	Months	Ended	March	26,	2005 | Three	Months	Ended	December	25,	2004 | Three	Months	Ended	December	25,	2004 | Three	Months	Ended	December	25,	2004 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | As\nReported | \t Adjustments\t(1) | As\nRestated | As\nReported | Adjustments\t(1) | As\nRestated |
| Net\tsales | $3,243 | $— | $3,243 | $3,490 | $— | $3,490 |
| Cost\tof\tsales\t(2) | 2,275 | — | 2,275 | 2,494 | 1 | 2,495 |
| Gross\tmargin | 968 | — | 968 | 996 | (1) | 995 |
| Operating\texpenses: |  |  |  |  |  |  |
| Research\tand\tdevelopment\t(2) | 119 | 1 | 120 | 123 | — | 123 |
| Selling,\tgeneral,\tand\tadministrative\t(2) | 447 | 1 | 448 | 470 | 2 | 472 |
| Total\toperating\texpenses | 566 | 2 | 568 | 593 | 2 | 595 |
| Operating\tincome | 402 | (2) | 400 | 403 | (3) | 400 |
| Other\tincome\tand\texpense | 33 | — | 33 | 26 | — | 26 |
| Income\tbefore\tprovision\tfor\tincome\ttaxes | 435 | (2) | 433 | 429 | (3) | 426 |
| Provision\tfor\tincome\ttaxes | 145 | — | 145 | 134 | (1) | 133 |
| Net\tincome | $290 | $(2) | $288 | $295 | $(2) | $293 |
| Earnings\tper\tcommon\tshare:\nBasic | $0.36 | $— | $0.36 | $0.37 | $— | $0.37 |

| Diluted | $0.34 |  | $— | $0.34 | $0.35 | $— | $0.35 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Shares\tused\tin\tcomputing\tearnings |  |  |  |  |  |  |  |
| per\tshare\t(in\tthousands): |  |  |  |  |  |  |  |
| Basic | 808,172 |  | — | 808,172 | 789,032 | — | 789,032 |
| Diluted | 857,011 |  | 557 | 857,568 | 838,174 | 631 | 838,805 |
| (1)\t\t\t\t\t\t\t\t\t\t\tSee\tNote\t2,\t"Restatement\tof\tConsolidated\tFinancial\tStatements." |  |  |  |  |  |  |  |
| (2)\t\t\t\t\t\t\t\t\t\t\tIncludes\tstock-based\tcompensation\texpense,\twhich\twas\tallocated\tas\tfollows: |  |  |  |  |  |  |  |
| Cost\tof\tsales | $1 | $— | $1 | $— | $1 | $1 |  |
| Research\tand\tdevelopment | $1 | $1 | $2 | $2 | $— | $2 |  |
| Selling,\tgeneral,\tand |  |  |  |  |  |  |  |
| administrative | $8 | $1 | $9 | $8 | $2 | $10 |  |

# 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	30,	2006	and	September	24, 2005,	and	the	related	consolidated	statements	of	operations,	shareholders'	equity	and	cash	flows	for	each	of	the	years	in	the	three-year	period	ended	September	30,	2006. 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	30, 2006	and	September	24,	2005,	and	the	results	of	their	operations	and	their	cash	flows	for	each	of	the	years	in	the	three-year	period	ended	September	30,	2006,	in conformity	with	accounting	principles	generally	accepted	in	the	United	States	of	America.

As	discussed	in	Note	2	to	the	Consolidated	Financial	Statements,	the	consolidated	financial	statements	as	of	September	24,	2005	and	for	each	of	the	years	in	the	two- year	period	ended	September	24,	2005	have	been	restated.

As	discussed	in	Note	1	to	the	Consolidated	Financial	Statements,	effective	September	25,	2005,	the	Company	adopted	the	provision	of	Statement	of	Financial Accounting	Standards	No.	123	(revised	2004),	Share-Based	Payment.

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	30,	2006,	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	December	29,	2006	expressed	an	unqualified	opinion	on	management's assessment	of,	and	the	effective	operation	of	internal	control	over	financial	reporting.

/s/	KPMG	LLP

Mountain	View,	California December	29,	2006

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	30,	2006,	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	the	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	30,	2006,	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	30,	2006,	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	30,	2006	and	September	24,	2005,	and	the	related	consolidated	statements	of	operations,	shareholders'	equity,	and	cash	flows	for	each	of the	years	in	the	three-year	period	ended	September	30,	2006,	and	our	report	dated	December	29,	2006	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

# Special	Committee	Review	into	Stock	Option	Grant	Practices	and	Restatement

As	discussed	in	the	Explanatory	Note	preceding	Part	I	and	in	Note	2	in	Notes	to	Consolidated	Financial	Statements	of	this	Form	10-K,	the	Company	on	June	29,	2006, announced	that	an	internal	review	had	discovered	irregularities	related	to	the	issuance	of	certain	past	stock	option	grants,	including	a	grant	to	its	CEO	Steve	Jobs.	The Company	also	announced	that	a	Special	Committee	of	outside	directors	("Special	Committee")	had	been	formed	and	had	hired	independent	counsel	to	conduct	a	full investigation	of	the	Company's	past	stock	option	granting	practices.	As	a	result	of	the	internal	review	and	the	independent	investigation,	management	has	concluded, and	the	Audit	and	Finance	Committee	of	the	Board	of	Directors	agrees,	that	incorrect	measurement	dates	were	used	for	financial	accounting	purposes	for	certain	stock option	grants	made	in	prior	periods.	Therefore,	the	Company	has	recorded	additional	non-cash	stock-based	compensation	expense	and	related	tax	effects	with	regard	to past	stock	option	grants,	and	the	Company	is	restating	previously	filed	financial	statements	in	this	Form	10-K.

The	internal	review	and	the	Special	Committee's	independent	investigation	identified	a	number	of	occasions	between	October	1996	and	January	2003	(the	"relevant period")	when	the	Company	used	incorrect	measurement	dates	for	stock	option	grants.	The	independent	investigation	also	found	that	during	the	relevant	period:

·							Procedures	for	granting,	accounting,	and	reporting	of	stock	option	grants	did	not	include	sufficient	safeguards	to	prevent	manipulation

·							The	grant	dates	for	a	number	of	grants	were	intentionally	selected	in	order	to	obtain	favorable	exercise	prices

·							Two	former	officers	of	the	Corporation	engaged	in	conduct	that	raises	serious	concerns	in	connection	with	the	granting,	accounting,	recording,	and	reporting	of stock	options

·							CEO	Steve	Jobs	was	aware	or	recommended	the	selection	of	some	favorable	grant	dates,	but	he	did	not	receive	or	financially	benefit	from	these	grants	or appreciate	the	accounting	implications

From	2003	through	2005,	the	Company	implemented	improvements	to	procedures,	processes,	and	systems	to	provide	additional	safeguards	and	greater	internal	control over	the	stock	option	granting	and	administration	function	in	compliance	with	the	Sarbanes-Oxley	Act	("SOX")	and	evolving	accounting	guidance.	These	improvements included:

·							Documenting	and	assessing	the	design	and	operation	of	internal	controls

·							Segregating	responsibilities,	adding	reviews	and	reconciliations,	and	redefining	roles	and	responsibilities

·							Upgrading	systems	and	system	controls	that	support	the	processes

·							Obtaining	training	in	the	stock	administration	function

·							Implementing	before	the	adoption	of	SFAS	No.	123R	the	practice	of	using	the	receipt	of	the	final	Board	or	Compensation	Committee	approval	as	the	grant	and measurement	date	for	stock	option	grants

·							Identifying	key	controls,	developing	test	plans,	and	testing	controls	in	the	stock	granting	and	administration	function

·							Certifying	stock	administration	and	other	controls	for	SOX	Section	404	compliance	in	fiscal	year	2005

The	internal	review	and	the	independent	investigation	discovered	no	stock	option	grant	after	January	2003	that	required	accounting	adjustments.

In	coming	to	the	conclusion	that	the	Company's	disclosure	controls	and	procedures	and	the	Company's	internal	control	over	financial	reporting	were	effective	as	of September	30,	2006,	management	considered,	among	other	things,	the	impact	of	the	restatement	to	the	financial	statements	and	the	effectiveness	of	the	internal	controls in	this	area	as	of	the	fiscal	years	ended	2006	and	2005.	Management	has	concluded,	therefore,	that	control	deficiencies	resulting	in	the	restatement	of	previously	issued financial	statements	did	not	constitute	a	material	weakness	in	disclosure	controls	and	procedures,	or	internal	controls	and	procedures	over	financial	reporting,	as	of September	30,	2006.

In	addition	to	the	significant	improvements	implemented	between	2003	and	2005	discussed	above,	the	Company	will	adopt	other	measures	identified	by	the	Special Committee	and	management	to	enhance	the	oversight	of	the	stock	option	granting	and	administration	function	and	the	review	and	preparation	of	financial	statements, including:

·							The	Company	will	engage	experienced	General	Counsel,	increase	the	resources	of	the	Corporate	Legal	Department,	and	review	the	adequacy	of	its	procedures and	practices

·							The	CFO	will	arrange	for	senior	management	to	undertake	professional	training	to	enhance	awareness	and	understanding	of	standards	and	principles	for accounting	and	financial	reporting,	particularly	those	relevant	to	stock	options

·							The	Company	will	review	all	current	policies,	practices,	and	controls	related	to	the	granting	of	stock	options	and	provide	education	and	training	to	those	who implement	those	policies	and	processes,	as	needed

·							The	Company	will	establish	improved	procedures	for	regular	communication	among	the	General	Counsel,	the	CFO,	and	stock	administrators	to	improve monitoring	of	all	Company	practices	with	regard	to	stock	option	grants,	including	formal	written	confirmation	that	all	grant	dates	correspond	precisely	with	the dates	authorized

·							The	Company	will	also	establish	improved	procedures	for	the	review	of	the	preparation	and	presentation	of	financial	statements	by	senior	management

# 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	30,	2006	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	CEO	and	CFO,	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	30,	2006.	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	119	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 2006	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.

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	United	States	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	a	director	of	The	Walt	Disney	Company.

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.

Eric	E.	Schmidt,	Ph.D.	has	served	as	the	Chief	Executive	Officer	of	Google,	Inc.	("Google")	since	July	2001	and	as	a	member	of	Google's	Board	of	Directors	since March	2001,	where	he	served	as	Chairman	of	the	Board	from	March	2001	to	April	2004.	In	April	2004,	Dr.	Schmidt	was	named	Chairman	of	the	Executive	Committee of	Google's	Board	of	Directors.	From	April	1997	to	November	2001,	Dr.	Schmidt	served	as	Chairman	of	the	Board	of	Directors	of	Novell,	Inc.,	a	computer	networking company,	and,	from	April	1997	to	July	2001,	as	the	Chief	Executive	Officer	of	Novell.	Dr.	Schmidt	was	a	director	of	Siebel	Systems	until	January	2006.

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.

# 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	Global	Select	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.	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	46),	joined	the	Company	in	March	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	2000 to	2002,	Mr.	Cook	served	in	the	role	of	Senior	Vice	President,	Worldwide	Operations,	Sales,	Service	and	Support.	From	1998	to	2000,	Mr.	Cook	served	in	the	position of	Senior	Vice	President,	Worldwide	Operations.	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.

Anthony	Fadell,	Senior	Vice	President,	iPod	Division	(age	37),	joined	the	Company	in	2001.	From	2004	to	April	2006,	Mr.	Fadell	was	Vice	President	of	iPod Engineering.	From	2001	to	2004,	Mr.	Fadell	was	the	Senior	Director	of	the	Company's	iPod	Engineering	Team.	Prior	to	joining	Apple,	Mr.	Fadell	was	a	co-founder, CTO,	and	director	of	engineering	of	the	Mobile	Computing	Group	at	Philips	Electronics	where	he	was	responsible	for	all	aspects	of	business	and	product	development for	a	variety	of	products.	Mr.	Fadell	later	became	VP	of	Business	Development	for	Philips	U.S.	Strategy	&	Ventures,	focusing	on	building	the	company's	digital	media strategy	and	investment	portfolio.	Prior	to	joining	Philips,	Mr.	Fadell	was	a	hardware	and	software	architect	at	General	Magic.

Ronald	B.	Johnson,	Senior	Vice	President,	Retail	(age	48),	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	44),	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.

Donald	J.	Rosenberg,	Senior	Vice	President,	General	Counsel	and	Secretary	(age	55),	joined	the	Company	in	December	2006.	Prior	to	joining	the	Company Mr.	Rosenberg	spent	31	years	with	IBM,	most	recently	as	Senior	Vice	President	and	General	Counsel.	Prior	to	that	he	held	a	number	of	senior	positions	at	IBM, including	over	ten	years	as	Vice	President	and	Assistant	General	Counsel	for	litigation.

Philip	W.	Schiller,	Senior	Vice	President,	Worldwide	Product	Marketing	(age	46),	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	46),	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	49),	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.

# 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	2006,	except	for	the	following:	(i)	one	Form	4	was	filed	for	Arthur	D.	Levinson	on	August	17,	2006	to report	an	automatic	stock	option	grant	under	the	Company's	1997	Director	Stock	Option	Plan	made	on	August	14,	2006;	and	(ii)	one	Form	4	was	filed	for	Anthony Fadell	on	September	1,	2006	with	respect	to	the	purchase	and	sale	by	Mr.	Fadell's	trust	of	300	and	25	shares,	respectively,	of	the	Company's	Common	Stock	in June	2006	and	August	2006.

# 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 | ($) | ($) | ($)(1) | (#) | ($) |
| Steven\tP.\tJobs | 2006 | 1 | — | —(2) | — | — |
| Chief\tExecutive\tOfficer | 2005 | 1 | — | — | — | — |
|  | 2004 | 1 | — | — | — | — |
| Timothy\tD.\tCook | 2006 | 696,880 | 525,000 | 21,603,000(3) | — | 13,200(5) |
| Chief\tOperating\tOfficer | 2005 | 602,434 | 600,239 | — | — | 12,600(5) |
|  | 2004 | 602,632 | — | 7,650,000(4) | — | 12,588(5) |
| Peter\tOppenheimer | 2006 | 615,006 | 450,000 | 14,402,000(3) | — | 13,200(5) |
| Senior\tVice\tPresident\tand | 2005 | 552,189 | 550,202 | — | — | 21,092(5) |
| Chief\tFinancial\tOfficer | 2004 | 450,739 | — | 6,375,000(4) | — | 3,808(5) |
| Ronald\tB.\tJohnson | 2006 | 592,476 | 450,000 | 14,402,000(3) | — | — |
| Senior\tVice\tPresident,\tRetail | 2005 | 552,795 | 550,202 | — | — | — |
|  | 2004 | 484,836 | 1,500,000 | 6,375,000(4) | — | — |
| Philip\tW.\tSchiller | 2006 | 494,942 | 375,000 | 10,801,500(3) | — | 5,769(5) |
| Senior\tVice\tPresident, | 2005 | 402,244 | 400,239 | — | — | 5,539(5) |
| Worldwide\tProduct\tMarketing | 2004 | 402,277 | — | 6,375,000(4) | — | 5,308(5) |

(1)										The	following	table	reflects	the	aggregated	restricted	stock	holdings	for	each	of	the	Company's	Named	Executive	Officers	as	of	the	end	of	the	2006	fiscal	year	and the	value	of	such	restricted	stock	based	on	$76.98	per	share,	the	closing	price	of	the	Company's	common	stock	on	the	NASDAQ	Global	Select	Market	on

September	29,	2006	(the	last	day	of	trading	for	the	2006	fiscal	year).	The	table	has	been	adjusted	to	reflect	the	Company's	two-for-one	stock	split	in	February	2005.

|  | Number	of	Unvested<br>Restricted	Shares	at<br>September	30,	2006 | Value	of	Unvested<br>Restricted	Shares	at<br>September	30,	2006 |
| :--- | :--- | :--- |
| Named\tExecutive\tOfficer | (#) | ($) |
| Steven\tP.\tJobs | 0 | 0 |
| Timothy\tD.\tCook\t(a) | 600,000 | 46,188,000 |
| Peter\tOppenheimer\t(b) | 450,000 | 34,641,000 |
| Ronald\tB.\tJohnson\t(b) | 450,000 | 34,641,000 |

(a)										Includes	300,000	unvested	restricted	stock	units	that	are	part	of	a	grant	of	600,000	restricted	stock	units	(split-adjusted)	made	on	March	24,	2004.	Fifty percent	(50%)	of	such	units	vested	in	March	2006,	and	the	remainder	is	scheduled	to	vest	in	March	2008.	Also	includes	300,000	unvested	restricted	stock units	that	were	granted	on	December	14,	2005,	and	are	scheduled	to

vest	in	their	entirety	in	March	2010.	The	restricted	stock	units	do	not	include	the	right	to	receive	dividends	prior	to	vesting.

(b)									Includes	250,000	unvested	restricted	stock	units	that	are	part	of	a	grant	of	500,000	restricted	stock	units	(split-adjusted)	made	on	March	24,	2004.	Fifty percent	(50%)	of	such	units	vested	in	March	2006,	and	the	remainder	is	scheduled	to	vest	in	March	2008.	Also	includes	200,000	unvested	restricted	stock units	that	were	granted	on	December	14,	2005,	and	are	scheduled	to	vest	in	their	entirety	in	March	2010.	The	restricted	stock	units	do	not	include	the	right	to receive	dividends	prior	to	vesting.

(c)										Includes	250,000	unvested	restricted	stock	units	that	are	part	of	a	grant	of	500,000	restricted	stock	units	(split-adjusted)	made	on	March	24,	2004.	Fifty percent	(50%)	of	such	units	vested	in	March	2006,	and	the	remainder	is	scheduled	to	vest	in	March	2008.	Also	includes	150,000	unvested	restricted	stock units	that	were	granted	on	December	14,	2005,	and	are	scheduled	to	vest	in	their	entirety	in	March	2010.	The	restricted	stock	units	do	not	include	the	right	to receive	dividends	prior	to	vesting.

(2)										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,	which	vested	in	full	in	March	2006.

(3)										Market	value	of	restricted	stock	units	granted	on	December	14,	2005	(based	on	$72.01	per	share,	the	closing	price	of	the	Company's	common	stock	on	the NASDAQ	Global	Select	Market	on	the	day	of	grant).	The	restricted	stock	units	vest	in	March	2010.

(4)										Market	value	of	restricted	stock	units	granted	on	March	24,	2004	(based	on	$12.75	per	share,	the	split-adjusted	closing	price	of	the	Company's	common	stock	on the	NASDAQ	Global	Select	Market	on	the	day	of	grant).	The	restricted	stock	units	granted	on	this	date	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.

(5)										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	granted	to	the	Named	Executive	Officers	during	fiscal	year	2006.	Grants	of	restricted	stock	units	to	the	Named	Executive	Officers	are	disclosed above	in	the	Summary	Compensation	Table.

# Options	Exercised	and	Year-End	Option	Holdings

The	following	table	provides	information	about	stock	option	exercises	by	the	Named	Executive	Officers	during	fiscal	year	2006	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>($) | Number	of	Securities<br>Underlying<br>Unexercised<br>Options	at	Fiscal<br>Year-End	(#)<br>Exercisable | Unexercisable | Value	of	Unexercised<br>In-the-Money	Options<br>at	Fiscal<br>Year-End	($)(1)<br>Exercisable | Unexercisable |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Steven\tP.\tJobs | — | — | 120,000(2) | — | $\t8,547,600(2) | — |
| Timothy\tD.\tCook | — | — | — | —(3) | — | — |
| Peter\tOppenheimer | 1,145,000 | $ 55,851,613 | — | —(3) | — | — |
| Ronald\tB.\tJohnson | 350,000 | $ 15,653,210 | 1,900,000 | —(3) | $102,994,688 | — |
| Philip\tW.\tSchiller | 162,500 | $9,454,728 | — | —(3) | — | — |

(1)										Market	value	of	securities	underlying	in-the-money	options	at	the	end	of	fiscal	year	2006	(based	on	$76.98	per	share,	the	closing	price	of	Common	Stock	on	the NASDAQ	Global	Select	Market	on	September	29,	2006),	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)										Excludes	600,000	restricted	stock	units	granted	to	Mr.	Cook	that	are	currently	unvested,	450,000	restricted	stock	units	granted	to	each	of	Messrs.	Oppenheimer	and Johnson	that	are	currently	unvested,	and	400,000	restricted	stock	units	granted	to	Mr.	Schiller	that	are	currently	unvested.

# Director	Compensation

The	form	and	amount	of	director	compensation	are	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	760,000	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	directors	or	compensation	committee	of	another	company.

# Arrangements	with	Named	Executive	Officers

# Change	In	Control	Arrangements—Stock	Options	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,	and	all	restricted	stock units	granted	on	or	after	January	1,	2005,	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.

Agreements	governing	certain	restricted	stock	units	granted	to	the	Named	Executive	Officers	and	other	officers	prior	to	January	1,	2005	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,	these	restricted	stock	unit	agreements	also	provide	that,	in	the	event	the	Company	terminates the	Officer	without	cause	at	any	time,	the	restricted	stock	and	restricted	stock	units	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	November	30,	2006	(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,	859,202,448	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

| Name	of	Beneficial	Owner | Shares	of	Common	Stock<br>Beneficially	Owned(1) | Percent	of	Common	Stock<br>Outstanding |
| :--- | :--- | :--- |
| Fidelity\tInvestments | 57,162,311(2) | 6.65% |
| AllianceBernstein\tLP | 48,637,731(3) | 5.66% |
| Steven\tP.\tJobs | 5,546,451(4) | * |
| William\tV.\tCampbell | 221,004(5) | * |
| Timothy\tD.\tCook | 12,597(6) | * |
| Millard\tS.\tDrexler | 220,000(7) | * |
| Albert\tA.\tGore,\tJr. | 60,000(8) | * |
| Ronald\tB.\tJohnson | 2,049,890(9) | * |
| Arthur\tD.\tLevinson | 362,400(10) | * |
| Peter\tOppenheimer | 149,768(11) | * |
| Philip\tW.\tSchiller | 256(12) | * |
| Eric\tE.\tSchmidt | 12,284(13) | * |
| Jerome\tB.\tYork | 80,000(14) | * |
| All\tcurrent\texecutive\tofficers\tand\tdirectors\tas\ta\tgroup |  |  |
| (15\tpersons) | 9,378,423(15) | 1.09% |

(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	January	25,	2006,	by	Barclays	Global	Investors.	Barclays	Global	Investors	lists	its	address	as	45	Fremont	Street,	San	Francisco,	CA 94105.

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

(5)										Includes	220,000	shares	of	Common	Stock	that	Mr.	Campbell	has	the	right	to	acquire	by	exercise	of	stock	options.

(7)										Includes	40,000	shares	of	Common	Stock	that	Mr.	Drexler	holds	indirectly	and	180,000	shares	of	Common	Stock	that	Mr.	Drexler	has	the	right	to	acquire	by exercise	of	stock	options.

(8)										Consists	of	60,000	shares	of	Common	Stock	that	Mr.	Gore	has	the	right	to	acquire	by	exercise	of	stock	options.

(9)										Includes	1,900,000	shares	of	Common	Stock	that	Mr.	Johnson	has	the	right	to	acquire	by	exercise	of	stock	options	and	excludes	450,000	unvested	restricted	stock units.

(10)			Includes	2,000	shares	of	Common	Stock	that	Dr.	Levinson	holds	indirectly	and	100,000	shares	of	Common	Stock	that	Dr.	Levinson	has	the	right	to	acquire	by exercise	of	stock	options.

(13)			Consists	of	12,284	shares	of	Common	Stock	that	Dr.	Schmidt	holds	indirectly.	Dr.	Schmidt	has	declined	to	participate	in	the	1997	Director	Stock	Option	Plan.

(14)			Includes	40,000	shares	of	Common	Stock	that	Mr.	York	has	the	right	to	acquire	by	exercise	of	stock	options.

(15)			Includes	3,063,371	shares	of	Common	Stock	that	executive	officers	or	directors	have	the	right	to	acquire	by	exercise	of	stock	options.	Does	not	include	2.7	million unvested	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	30,	2006,	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 | Number	of	Securities<br>to	be	Issued	Upon<br>Exercise	of<br>Outstanding	Options,<br>Warrants	and	Rights<br>(a) | Weighted	Average<br>Exercise	Price	of<br>Outstanding	Options,<br>Warrants	and	Rights<br>(b) | Number	of	Securities<br>Remaining	Available	for<br>Future	Issuance	Under<br>Equity	Compensation	Plans<br>(Excluding	Securities<br>Reflected	in	Column	(a))<br>(c) |
| :--- | :--- | :--- | :--- |
| shareholders | 34,827,183 | $ 30.03 | 57,290,691(1) |
| Equity\tcompensation\tplans\tnot\tapproved |  |  |  |
| by\tshareholders | 18,137,049 | $ 10.19 | — |
| Total\tequity\tcompensation\tplans\t(2) | 52,964,232 | $ 23.24 | 57,290,691 |

(1)										This	number	includes	2,297,225	shares	of	common	stock	reserved	for	issuance	under	the	Employee	Stock	Purchase	Plan,	400,000	shares	available	for	issuance under	the	1997	Director	Stock	Option	Plan,	and	54,593,466	shares	available	for	issuance	under	the	2003	Employee	Stock	Plan.	The	grant	of	3,410,000	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	17,266	shares	of	Common	Stock	underlying	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	$4.30	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	CEO,	Steve	Jobs,	for	the	reimbursement	of	expenses	incurred	by	Mr.	Jobs	in	the operation	of	his	private	plane	when	used	for	Company	business.	The	Reimbursement	Agreement	became	effective	for	expenses	incurred	by	Mr.	Jobs	for	Company business	purposes	since	he	took	delivery	of	the	plane	in	May	2001.	The	Company	recognized	a	total	of	$202,000	in	expenses	pursuant	to	the	Reimbursement	Agreement during	2006.

In	2006,	the	Company	entered	into	an	agreement	with	Pixar	to	sell	certain	of	Pixar's	short	films	on	the	iTunes	Store.	Mr.	Jobs	was	the	CEO,	Chairman,	and	a	large shareholder	of	Pixar.	On	May	5,	2006,	The	Walt	Disney	Company	("Disney")	acquired	Pixar,	which	resulted	in	Pixar	becoming	a	wholly-owned	subsidiary	of	Disney. Upon	Disney's	acquisition	of	Pixar,	Mr.	Jobs'	shares	of	Pixar	common	stock	were

exchanged	for	Disney's	common	stock	and	he	was	elected	to	the	Disney	Board	of	Directors.	Royalty	expense	recognized	by	the	Company	under	the	arrangement	with Pixar	from	September	25,	2005	through	May	5,	2006	was	less	than	$1	million.

# Item	14.	Principal	Accountant	Fees	and	Services

The	following	table	sets	forth	the	fees	accrued	or	paid	to	the	Company's	independent	registered	public	accounting	firm,	KPMG	LLP,	during	fiscal	years	2006	and	2005.

# Audit	and	Non-Audit	Fees

|  | 2006 | 2005 |
| :--- | :--- | :--- |
| Audit\tFees | $ 7,912,700(1) $ 6,948,800 | $ 7,912,700(1) $ 6,948,800 |
| Audit-Related\tFees | 28,000(2) | 46,700 |
| Tax\tFees | 820,500(3) | 923,000 |
| All\tOther\tFees | — | — |
| Total | $ 8,761,200 | $ 7,918,500 |

(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.	Fiscal	year	2006	also	includes	fees	incurred	in	connection	with	the	Special	Committee	of	the	Company's	Board	of	Directors'	investigation	into stock	option	practices,	no	such	fees	were	incurred	during	2005.

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

(3)										2006	tax	fees	include	$728,600	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	$91,900	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	independence	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	previously	rotated	the	lead	audit	partner	in	fiscal	year	2005,	rotated	other	partners	in	2006,	and	will	rotate	additional	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.

# PART	IV

# Item	15.	Exhibits	and	Financial	Statement	Schedules.

**																	Indicates	management	contract	or	compensatory	plan	or	arrangement.

****	Furnished	herewith.

# 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 	day	of	December	2006. th

By: /s/	PETER	OPPENHEIMER

Peter	Oppenheimer

Senior	Vice	President	and

Chief	Financial	Officer

# Power	of	Attorney

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:

/s/	ARTHUR	D.	LEVINSON

Director ARTHUR	D.	LEVINSON

# /s/	ERIC	E.	SCHMIDT

Director ERIC	E.	SCHMIDT /s/	JEROME	B.	YORK Director JEROME	B.	YORK



Question: what was the lowest effective tax rate in the three year period?
Calculation:   table_row = [29, 27, 28] # row labeled effective tax rate
 lowest_rate = min(table_row)
answer = lowest_rate
Answer: 27%