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# UNITED	STATES

# SECURITIES	AND	EXCHANGE	COMMISSION

# (Mark	One)

# ANNUAL	REPORT	PURSUANT	TO	SECTION	13	OR	15(d)	OF	THE	SECURITIES	EXCHANGE	ACT	OF	1934

# For	the	fiscal	year	ended	September	25,	2004

o TRANSITION	REPORT	PURSUANT	TO	SECTION	13	OR	15(d)	OF	THE	SECURITIES	EXCHANGE	ACT	OF

Commission	file	number	0-10030

# APPLE	COMPUTER,	INC.

(Exact	name	of	registrant	as	specified	in	its	charter)

CALIFORNIA

(State	or	other	jurisdiction of	incorporation	or	organization)

1	Infinite	Loop

Cupertino,	California (Address	of	principal	executive	offices)

(I.R.S.	Employer Identification	No.)

(Zip	Code)

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

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

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

Common	Stock,	no	par	value

(Titles	of	classes)

Indicate	by	check	mark	whether	the	registrant	(1)	has	filed	all	reports	required	to	be	filed	by	Section	13	or	15(d)	of	the	Securities	Exchange	Act	of	1934	during	the preceding	12	months	(or	for	such	shorter	period	that	the	registrant	was	required	to	file	such	reports),	and	(2)	has	been	subject	to	such	filing	requirements	for	the	past 90	days.	Yes	ý				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	to	Part	III	of	this	Form	10-K	or	any

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

The	aggregate	market	value	of	the	voting	and	non-voting	stock	held	by	non-affiliates	of	the	registrant,	as	of	March	27,	2004,	was	approximately	$8,336,330,708	based upon	the	closing	price	reported	for	such	date	on	the	NASDAQ	National	Market.	For	purposes	of	this	disclosure,	shares	of	Common	Stock	held	by	persons	who	hold more	than	5%	of	the	outstanding	shares	of	Common	Stock	and	shares	held	by	executive	officers	and	directors	of	the	registrant	have	been	excluded	because	such	persons may	be	deemed	to	be	affiliates.	This	determination	of	executive	officer	or	affiliate	status	is	not	necessarily	a	conclusive	determination	for	other	purposes.

# PART	I

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

# Item	1.	Business

# Company	Background

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

# Business	Strategy

Apple	is	committed	to	bringing	the	best	personal	computing	and	music	experience	to	students,	educators,	creative	professionals,	businesses	and	consumers	around	the world	through	its	innovative	hardware,	software,	peripherals	and	Internet	offerings.	The	Company's	business	strategy	leverages	its	unique	ability,	through	the	design	and development	of	its	own	operating	system,	hardware	and	many	software	applications	and	technologies,	to	bring	to	its	customers	around	the	world	meaningful	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,	and	peripherals,	the	Company	continues	to	capitalize	on	the	convergence	of	digital	consumer	electronics	and	the	computer	by	creating	product innovations	like	the	iPod	and	iTunes	Music	Store.	The	Company	has	also	invested	in	new	product	areas	such	as	rack-mount	servers,	RAID	storage	systems	and	wireless technologies.	The	Company's	strategy	also	includes	expanding	its	distribution	network	to	effectively	reach	more	of	its	targeted	customers.

# Digital	Hub

The	Company	believes	personal	computing	is	in	an	era	in	which	the	personal	computer	functions	for	both	professionals	and	consumers	as	the	digital	hub	for	advanced new	digital	devices	such	as	the	Company's	iPod	digital	music	players,	personal	digital	assistants,	cellular	phones,	digital	still	and	movie	cameras,	CD

and	DVD	players,	and	other	consumer	electronic	devices.	The	attributes	of	the	personal	computer,	including	its	ability	to	run	complex	applications,	possess	a	high quality	user	interface,	contain	large	and	relatively	inexpensive	storage,	and	easily	connect	to	the	Internet	in	multiple	ways	and	at	varying	speeds,	can	individually	add value	to	these	devices	and	interconnect	them	as	well.	Apple	is	the	only	company	in	the	personal	computer	industry	that	controls	the	design	and	development	of	the	entire personal	computer—from	the	hardware	and	operating	system	to	sophisticated	applications.	Apple	provides	innovative	industrial	design,	intuitive	ease-of-use,	and	built-in networking,	graphics,	and	multimedia	capabilities.	Thus,	the	Company	is	uniquely	positioned	to	offer	integrated	digital	hub	products	and	solutions.

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

# Expanded	Distribution

The	Company	believes	a	high	quality	buying	experience	with	knowledgeable	salespersons,	who	can	convey	the	value	of	the	Company's	products	and	services,	is	critical to	attracting	and	retaining	customers.	As	such,	in	addition	to	expanding	its	indirect	distribution	channels,	the	Company	has	expanded	its	product	distribution	strategy	to include	its	own	retail	locations,	Apple	online	stores	worldwide,	and	the	Apple	Sales	Consultant	Program.	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	stores	in	the	U.S.	and	internationally,	or through	one	of	its	online	stores	around	the	world.	The	Company	has	also	invested	in	programs	like	the	Apple	Sales	Consultant	Program,	which	is	designed	to	enhance reseller	sales	by	the	placement	of	Apple	badged	employees	at	selected	third-party	reseller	locations.	The	Company	believes	enabling	a	direct	interface	with	its	targeted end	customer	provides	an	efficient	means	to	effectively	demonstrate	the	advantages	of	the	Company's	Macintosh	and	other	products	over	those	of	its	competitors.	For certain	of	its	consumer	electronic	products,	including	the	iPod	product	family,	the	Company	has	also	significantly	expanded	the	points	of	distribution	in	order	to	make available	its	products	at	locations	where	its	customers	shop.

Since	inception	of	its	retail	initiative	in	2001,	the	Company	has	opened	84	retail	stores	in	the	U.S.	and	2	international	stores	in	Tokyo	and	Osaka,	Japan	through	the	end of	fiscal	year	2004.	During	the	first	quarter	of	2005,	the	Company	anticipates	opening	14	additional	stores,	and	expects	to	exit	the	calendar	year	at	approximately	100 stores.	The	Company	has	typically	located	its	stores	at	high	traffic	locations	in	quality	shopping	malls	and	urban	shopping	districts.	Approximately	half	of	the	stores expected	to	open	during	the	first	quarter	of	2005	are	in	the	new	"mini"	store	design,	which	is	the	Company's	smallest	store	format	to	date,	allowing	them	to	be	placed	in a	variety	of	new	locations	to	introduce	the	Company's	products	to	even	more	customers.	The	Company	also	opened	its	third	international	store	in	London,	England during	the	first	quarter	of	2005.

One	of	the	goals	of	the	retail	initiative	is	to	bring	new	customers	to	the	Company	and	expand	its	installed	base	through	sales	to	both	first	time	personal	computer	buyers and	those	switching	to	the	Macintosh	platform	from	competing	operating	system	platforms.	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	Apple	customers.	The	stores	are	designed	to	simplify	and	enhance	the presentation	and	marketing	of	personal	computing	products.	To	that	end,	retail	store	configurations	have	evolved	into	various	sizes	in	order	to	accommodate	market demands.	The	stores	employ	experienced	and	knowledgeable	personnel	who	provide	product	advice	and	certain	hardware	support	services.	The	stores	offer	a	wide selection	of	third-party	hardware	and	software	products	selected	to	complement	the	Company's	own	products.	Additionally,	the	stores	provide	a	forum	in	which	the Company	is	able	to	present	entire	computing	solutions	to	users	in	areas	such	as	digital	photography,	digital	video,	music,	children's	software,	and	home	and	small business	computing.	Apple	retail	stores	host	customer	events	and	free

classes,	including	the	popular	"Getting	Started"	class,	and	have	brought	back	the	concept	of	customer	service	with	innovations	like	the	Genius	Bar.

# Education

For	more	than	25	years,	the	Company	has	focused	on	the	use	of	technology	in	education	and	has	been	committed	to	delivering	tools	to	help	educators	teach	and	students learn.	The	Company	believes	effective	integration	of	technology	into	classroom	instruction	can	result	in	higher	levels	of	student	achievement,	especially	when	used	to support	collaboration,	information	access,	and	the	expression	and	representation	of	student	thought	and	ideas.	The	Company	creates	solutions	that	enable	new	modes	of curriculum	delivery,	better	ways	of	conducting	research,	and	opportunities	for	professional	development	of	faculty,	students,	and	staff.	A	range	of	products	and	services is	designed	by	the	Company	to	help	schools	maximize	their	investments	in	technology.	This	is	manifested	in	many	of	the	Company's	products	and	services	that	are designed	to	meet	the	needs	of	education	customers,	including	the	eMac™	and	the	iBook®,	video	editing	solutions,	wireless	networking	capabilities,	student	information systems,	one-to-one	learning	solutions,	and	high-quality	curriculum	and	professional	development	solutions.

# Creative	Professionals

Creative	professionals	constitute	one	of	the	Company's	most	important	markets	for	both	hardware	and	software	products.	This	market	is	also	important	to	many	third- party	developers	who	provide	Macintosh	compatible	hardware	and	software	solutions.	Creative	customers	utilize	the	Company's	products	for	a	variety	of	creative activities	including	digital	video	and	film	production	and	editing;	digital	video	and	film	special	effects,	compositing,	and	titling;	digital	still	photography;	graphic	design, publishing,	and	print	production;	music	performance	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.	Additionally,	the	Company's	operating	system,	Mac	OS	X,	incorporates	powerful	graphics	and	audio	technologies	and	features developer	tools	to	optimize	system	and	application	performance	when	running	powerful	creative	solutions	provided	by	the	Company	or	third-party	developers.	The Company	also	offers	various	software	solutions	to	meet	the	needs	of	its	creative	customers,	many	of	which	are	described	below.

# 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	segment	includes	both	North	and	South	America,	except	for	the	activities	of	the	Company's	Retail	segment.	The	Europe	segment	includes European	countries	as	well	as	the	Middle	East	and	Africa.	The	Japan	segment	includes	only	Japan	and	excludes	revenue	from	the	Company's	own	retail	stores	in	Japan, which	is	included	in	the	Company's	Retail	segment.	The	Retail	segment	currently	operates	Apple-owned	retail	stores	in	the	U.S.,	Japan	and	England.	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	personal	computers,	related	devices	and	peripherals,	and	various	third- party	hardware	products.	All	of	the	Company's	Macintosh®	products	utilize	PowerPC®	RISC-based	microprocessors.	The	Company's	entire	line	of	Macintosh	systems, excluding	servers	and	storage	systems,	features	the	Company's	Mac	OS®	X

Version	10.3	"Panther"	and	iLife®	suite	of	software	for	digital	photography,	music,	movies,	and	music	creation.

# Power	Mac®

The	Power	Mac	line	of	desktop	personal	computers	is	targeted	at	business	and	professional	users	and	is	designed	to	meet	the	speed,	expansion	and	networking	needs	of the	most	demanding	Macintosh	user.	Powered	by	the	PowerPC	G5	processor,	the	Power	Mac	G5	utilizes	64-bit	processing	technology	for	memory	expansion	up	to	8GB, and	advanced	64-bit	computation	while	also	running	existing	32-bit	applications	natively.	The	Power	Mac	G5	product	line	comes	in	four	processor	configurations— single	1.8GHz,	dual	1.8GHz,	dual	2.0GHz	and	dual	2.5GHz.	All	Power	Mac	G5	desktops	feature	a	SuperDrive™	and	either	the	NVIDIA	GeForceFX	5200	Ultra	or	the ATI	Radeon	9600	XT	graphics	card.	In	addition,	all	Power	Mac	G5	desktops	deliver	connectivity	and	high-performance	input/output	(I/O),	including	Gigabit	Ethernet, FireWire®	800	and	FireWire	400	ports,	USB	2.0	ports,	optical	digital	audio	input	and	output,	built-in	support	for	54	Mbps	AirPort®	Extreme	wireless	networking,	and optional	Bluetooth	connectivity.

# Xserve®	and	Xserve	RAID	Storage	System

Xserve,	the	Company's	first	rack-mount	server	product,	was	designed	for	simple	setup	and	remote	management	of	intensive	I/O	applications	such	as	digital	video,	high- resolution	digital	imagery,	and	large	databases.	In	January	2004,	the	Company	announced	Xserve	G5,	which	is	available	with	either	a	single	or	dual	2.0	GHz	PowerPC G5	processor.	Xserve	G5	includes	a	system	controller	with	up	to	8GB	of	PC3200	error	correcting	code	memory;	three	hot-plug	Serial	ATA	drive	modules	that	deliver	up to	750GB	of	storage;	and	dual	on-board	Gigabit	Ethernet	for	high-performance	networking.	In	January	2004,	the	Company	also	introduced	its	Xserve	RAID	storage system,	a	3U	high-availability	rack	storage	system,	along	with	support	for	Windows	and	Linux-based	computing	environments.	In	October	2004,	the	Company	updated its	Xserve	RAID	storage	system	to	deliver	5.6	terabytes	of	storage	capacity	and	also	expanded	support	for	heterogeneous	environments.	The	dual	independent	RAID controllers	with	512MB	cache	per	controller	offer	sustained	throughput	of	over	380MBps—high	enough	to	support	two	streams	of	uncompressed	10-bit	HD	video editing	using	protected	RAID	level	5.

# PowerBook®

The	PowerBook	family	of	portable	computers	is	designed	to	meet	the	mobile	computing	needs	of	professionals	and	advanced	consumer	users.	In	April	2004,	the Company	updated	its	PowerBook	G4	notebooks	with	faster	PowerPC	G4	processors.	Both	the	15-inch	and	17-inch	PowerBook	G4	offer	up	to	a	1.5	GHz	PowerPC	G4 processor,	an	available	SuperDrive	and	the	ATI	Mobility	Radeon	9700	graphics	processor.	The	12-inch	PowerBook	G4	features	a	1.33	GHz	PowerPC	processor,	an available	SuperDrive,	and	NVIDIA	GeForce	FX	Go5200	graphics.	Every	PowerBook	G4	notebook	comes	with	built-in	AirPort	Extreme	wireless	networking,	an internal	Bluetooth	module	for	wireless	connectivity,	as	well	as	a	full	complement	of	I/O	ports	including	Firewire	400,	USB	2.0.,	a	built-in	56K	v.92	modem	and	Ethernet (10/100BASE-T),	for	connectivity	to	a	wide	range	of	peripherals.	The	15-inch	and	17-inch	PowerBook	G4	models	also	include	built-in	Gigabit	Ethernet	and Firewire	800.

# iMac®

The	iMac	line	of	desktop	computers	is	targeted	to	consumer	and	education	markets.	In	August	2004,	the	Company	introduced	the	iMac®	G5,	featuring	the	PowerPC	G5 processor	and	a	design	that	integrates	the	entire	computer	into	the	flat	panel	display.	The	line	offers	17-	or	20-inch	active	matrix	widescreen	LCDs	and	PowerPC	G5 processors	running	up	to	1.8	GHz.	The	17-inch	models	come	with	either	a	1.8	GHz	PowerPC	G5	processor	and	a	SuperDrive,	or	a	1.6	GHz	PowerPC	G5	processor	and	a Combo	drive.	The	20-inch	model	has	a	1.8	GHz	PowerPC	G5	processor	and	a	SuperDrive.	The	iMac	G5	offers	up	to	a	600	MHz	front-side	bus,	400	MHz	DDR	memory expandable	to	2GB,	AGP	8X	graphics	and	7200	rpm	Serial	ATA	drives	holding	up	to	250GB.	The	iMac	G5	comes	standard	with	NVIDIA	graphics	with	dedicated	video memory.	The	iMac	G5	desktops	offer	a	total	of	five	USB	ports	(three	USB	2.0)	and	two

FireWire®	400	ports,	an	optional	internal	Bluetooth	module,	a	built-in	antenna	and	card	slot	to	support	an	optional	AirPort	Extreme	Card	for	54	Mbps	802.11g	wireless networking,	and	also	includes	built-in	Ethernet	(10/100BASE-T)	and	a	56K	V.92	modem.

# eMac™

The	eMac,	which	is	targeted	primarily	at	the	Company's	education	and	consumer	customers,	features	a	PowerPC	G4	processor,	a	high	resolution	17-inch	flat	cathode	ray tube	display,	and	preserves	the	all-in-one	compact	design	of	the	original	iMac	favored	by	many	of	the	Company's	education	and	consumer	customers.	In	April	2004,	the Company	updated	its	eMac,	which	now	has	a	suggested	retail	price	starting	at	$799	and	is	available	with	a	SuperDrive	for	a	suggested	retail	price	starting	at	$999.	The eMac	offers	PowerPC	G4	processors	running	at	up	to	1.25	GHz,	333	MHz	DDR	memory,	ATI	Radeon	graphics	and	USB	2.0	connectivity	to	peripherals.

# iBook®

The	iBook	is	designed	to	meet	the	portable	computing	needs	of	education	and	consumer	users.	In	October	2004,	the	Company	upgraded	its	iBook®	G4	line	to	include faster	PowerPC	G4	processors	running	up	to	1.33	GHz,	built-in	AirPort	Extreme	54	Mpbs	802.11g	wireless	networking	and	an	available	slot-load	SuperDrive.	The	12- inch	model	features	a	1.2	GHz	PowerPC	G4	processor	and	a	slot-load	Combo	drive,	while	the	14-inch	models	include	a	1.33GHz	G4	processor	and	either	a	Combo	or SuperDrive	optical	drive.	All	iBook	G4	models	offer	a	full	complement	of	I/O	ports	including	FireWire	400,	USB	2.0,	a	built-in	56K	v.92	modem	and	Ethernet (10/100BASE-T),	as	well	as	an	optional	internal	wireless	Bluetooth	module,	for	connectivity	to	a	wide	range	of	peripherals.

# Music	Products	and	Services

The	Company	offers	its	iPod®	line	of	digital	music	players	and	related	accessories	to	Macintosh	and	Windows	users.	The	Company	also	provides	an	online	service	to distribute	third-party	music	and	audio	books	through	its	iTunes®	Music	Store.	Net	sales	of	iPods	and	other	music	products	and	services	generated	year-over-year revenue	growth	of	316%	and	accounted	for	19%	of	the	Company's	total	net	sales	in	fiscal	2004.

# iPod®

In	July	2004,	the	Company	introduced	the	fourth	generation	of	the	iPod,	the	Company's	portable	digital	music	player,	featuring	Apple's	patent	pending	click	wheel, which	combines	a	touch-sensitive	wheel	with	five	push	buttons	for	one	handed	navigation,	and	up	to	12	hours	of	battery	life.	The	iPod	features	Apple's	patent	pending Auto-Sync	technology	that	automatically	downloads	an	entire	digital	music	library	onto	the	iPod	and	keeps	it	up-to-date	whenever	it	is	plugged	into	a	Macintosh	or Windows	computer	using	FireWire	or	USB.	The	iPod	also	features	Shuffle	Songs,	which	randomly	plays	songs	in	a	selected	playlist	or	across	the	entire	library.	All iPods	work	with	Apple's	iTunes	digital	music	management	software	on	either	a	Macintosh	or	Windows	computer.	The	iPod	is	available	in	20GB	and	40GB	models.

The	iPod's	functionality	extends	beyond	playing	music	and	listening	to	audio	books.	Other	key	capabilities	include	data	storage,	calendar	and	contact	information	utility, and	a	selection	of	games.	With	the	addition	of	third-party	iPod	peripherals,	the	capabilities	of	certain	iPods	can	be	enhanced	to	include	voice	recording	and	photo downloading	directly	from	certain	digital	cameras.	Along	with	the	iPod,	the	Company	has	developed	a	seamless	end-to-end	music	solution	with	the	Company's	iTunes software	and	the	iTunes	Music	Store®,	a	service	that	consumers	may	use	to	purchase	third-party	music	and	audio	books	over	the	Internet.

The	Company	has	entered	into	a	strategic	alliance	with	Hewlett-Packard	Company	(HP),	which	provides	for	a	HP-branded	digital	music	player	based	on	the	iPod,	the preinstallation	of	iTunes	software	on	HP's	consumer	PCs	and	notebooks	and	access	to	the	iTunes	Music	Store.	The	Company	has	also	entered	into	an	alliance	with BMW	Group	for	the	BMW	iPod	Adapter,	a	device	that	offers	seamless	integration	of	the	iPod	and	certain	BMW	automobiles	in	North	America.	In	addition,	the Company	formed	an	alliance	with

Founder	Technology	Group	Corporation,	a	supplier	of	PCs	to	the	Chinese	market,	that	provides	for	the	preinstallation	of	iTunes	on	all	Founder	Technology	Windows- based	PCs.	A	similar	alliance	was	formed	with	Synnex	Technology	International	Corporation,	a	Taiwan-based	wholesaler	and	distributor	of	personal	computers,	for	the preinstallation	of	iTunes	on	its	Windows-based	laptop	and	desktop	PCs.

In	October	2004,	the	Company	introduced	the	iPod	U2	Special	Edition	as	part	of	a	strategic	alliance	with	the	musical	band,	U2,	and	Universal	Music	Group.	The	U2 iPod	holds	up	to	5,000	songs,	features	a	black	enclosure	with	a	red	click	wheel	and	custom	engraving	of	U2	band	member	signatures.

# iPod®	photo

In	October	2004,	the	Company	introduced	iPod®	photo.	The	iPod	photo	holds	digital	photos	alongside	the	music	library	and	displays	them	on	its	high-resolution	color screen,	which	allows	users	to	scroll	through	the	photo	library	almost	instantly	using	iPod's	patent	pending	click	wheel.	iPod	photo	can	auto	sync	music	and	photos	with	a Macintosh	or	Windows-based	computer.	The	iPod	photo	also	allows	users	to	simultaneously	play	music	and	view	photo	slideshows	on	the	iPod,	as	well	as	on	televisions and	projectors.	The	iPod	photo	comes	in	40GB	or	60GB	models	and	has	an	extended	battery	life	that	gives	users	up	to	15	hours	of	music	playback	or	up	to	5	hours	of slideshows.	The	iPod	photo	can	hold	up	to	25,000	digital	photos	or	15,000	digital	songs.

# iPod®	mini

In	January	2004,	the	Company	introduced	the	iPod	mini.	Smaller	and	lighter	than	the	iPod,	the	iPod	mini	has	storage	capacity	of	4GB	and	holds	up	to	1,000	songs, utilizes	the	patent	pending	click	wheel	and	is	encased	in	an	anodized	aluminum	case	available	in	a	selection	of	five	colors:	silver,	gold,	pink,	blue	or	green.	The	iPod mini	retains	the	same	user	interface	as	the	iPod	and	works	seamlessly	with	the	Company's	iTunes	Music	Store®	and	the	iTunes	software	for	buying,	managing	and listening	to	digital	music	on	either	a	Macintosh	or	Windows-based	computer.

# iTunes	Music	Store®

The	Company's	iTunes	Music	Store,	available	for	both	Windows-based	and	Macintosh	computers,	is	an	online	music	download	store	that	allows	customers	to	find, purchase,	and	download	third-party	digital	music	and	audio	books.	Users	can	easily	search	the	contents	of	the	music	store	catalog	to	locate	works	by	title,	artist,	or album,	or	browse	the	entire	contents	of	the	store	by	genre	and	artist.	Users	can	also	listen	to	a	free	30-second	preview	of	any	song	in	the	store.	Since	April	2003,	the iTunes	Music	Store	has	been	available	to	U.S.	customers.	A	similar	store	became	available	in	the	U.K.,	France	and	Germany	in	June	2004	and	was	followed	by	the October	2004	launch	of	an	English	language	music	store	covering	nine	additional	European	countries.	The	Company	has	also	announced	its	intention	to	open	an	iTunes Music	Store	in	Canada	during	fiscal	2005.

The	iTunes	Music	Store	is	fully	integrated	directly	into	the	latest	version	of	the	iTunes	software,	allowing	customers	to	preview,	purchase,	download,	organize,	share, and	transfer	their	digital	music	to	an	iPod	using	a	single	software	application.	Further	discussion	on	the	iTunes	software	may	be	found	below	under	the	heading "Software	Products	and	Computer	Technologies."	Requiring	no	subscription	fee,	the	iTunes	Music	Store	with	iTunes	software	offers	customers	a	broad	range	of personal	rights	to	the	third-party	content	they	have	purchased,	including	playing	songs	on	up	to	five	personal	computers,	burning	a	single	song	onto	CDs	an	unlimited number	of	times,	burning	the	same	playlist	up	to	seven	times,	listening	to	their	music	on	an	unlimited	number	of	iPods,	and	using	songs	in	certain	media	applications such	as	iPhoto,	iMovie,	and	iDVD.	The	iTunes	Music	Store	also	features	availability	of	audio	books	for	purchase	directly	from	the	iTunes	Music	Store.

Additional	features	currently	available	within	the	U.S.	iTunes	Music	Store	include	gift	certificates	that	can	be	sent	via	e-mail,	prepaid	gift	cards,	an	"allowance"	feature that	enables	users	to	automatically	deposit

funds	into	an	iTunes	Music	Store	account	every	month;	and	"Radio	Charts,"	a	feature	that	allows	users	to	search	and	buy	the	top	songs	played	on	radio	stations	in	major U.S.	markets.

# Peripheral	Products

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

# iSight™

The	Company's	iSight	digital	video	camera	enables	video	conferencing	over	broadband.	iSight	is	a	small,	portable	aluminum	alloy	camera	with	all	audio,	video	and power	provided	by	a	single	FireWire	cable.	iSight	is	designed	to	be	center-mounted	on	the	top	of	a	computer	screen	and	uses	its	integrated	tilt	and	rotate	mechanism	to easily	position	the	camera	for	natural,	face-to-face	video	conferencing.

iSight	features	an	autofocusing	autoexposure	F/2.8	lens	which	captures	high-quality	pictures	and	full-motion	video.	With	its	on-board	processor,	iSight	automatically adjusts	color,	white	balance,	sharpness	and	contrast	to	provide	high-quality	images	with	accurate	color	reproduction	in	most	lighting	conditions.	iSight	also	includes	a dual-element	microphone	that	suppresses	ambient	noise	for	clear	digital	audio.

# Displays

In	June	2004,	the	Company	announced	a	family	of	widescreen	flat	panel	displays	featuring	the	30-inch	Apple	Cinema	HD	Display,	a	widescreen	active-matrix	LCD with	2560-by-1600	pixel	resolution,	a	23-inch	widescreen	Apple	Cinema	Display	with	1920-by-1200	pixel	resolution	and	a	20-inch	widescreen	Apple	Cinema	Display with	1680-by-1050	pixel	resolution.	The	displays	feature	dual	FireWire	and	dual	USB	2.0	ports	built	into	the	display	and	use	the	industry	standard	DVI	interface	for	a pure	digital	connection	with	the	Company's	latest	Power	Mac	and	PowerBook	systems.	The	Cinema	Displays	feature	an	aluminum	design	with	a	very	thin	bezel, suspended	by	an	aluminum	stand	that	allows	viewing	angle	adjustment.

# Software	Products	and	Computer	Technologies

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

# Operating	System	Software

The	Company	released	Mac	OS	X	version	10.3	(code-named	"Panther"),	the	Company's	current	version	of	Mac	OS	X,	in	October	2003.	Panther	incorporates	features including	a	new	version	of	Finder™;	Exposé™,	a	way	to	organize	windows	and	instantly	see	all	open	windows	at	once;	FileVault,	a	feature	that	secures	the	contents	of a	home	directory	with	128-bit	AES	encryption;	iChat	AV;	and	enhanced	support	for	use	on	Windows-based	networks.

In	June	2004,	the	Company	previewed	Mac	OS	X	version	10.4	(code-named	"Tiger"),	the	fifth	major	version	of	Mac	OS	X	that	is	expected	to	ship	in	the	first	half	of calendar	2005.	Tiger	will	contain	new	features	including	Spotlight,	a	new	way	to	instantly	find	any	file,	document	or	information	on	a	Macintosh	created	by	any application	on	the	Macintosh;	Safari™	RSS,	a	new	version	of	Apple's	web	browser	that	incorporates	instant	access	to	Really	Simple	Syndication	(RSS)	data	feeds	on	the web;	Dashboard,	a	new	way	to	instantly	access	"Widgets,"	a	new	collection	of	desktop	mini	application	accessories,	including	a	datebook,	stock	ticker,	calculator, address	book	and	iTunes	controller;	and	a	new	version	of	iChat	instant	messaging	client	with	multi-person	audio	and	video	conferencing	in	a	3D	interface.

# Server	Software	and	Server	Solutions

In	October	2003,	the	Company	began	shipping	the	current	version	of	its	server	operating	system,	Mac	OS	X	Server	version	10.3	(code-named	"Panther	Server").	This release	integrates	open	source	and	open	standards	server	software	with	easy-to-use	management	tools	that	make	it	easy	to	serve	Macintosh,	Windows	and	Linux	clients. Features	in	Panther	Server	include	Server	Admin	tool	for	easily	setting	up	multiple	servers;	Open	Directory	2	for	hosting	scalable	LDAP	directory	and	Kerberos authentication	services;	Samba	3	for	providing	login	and	home	directory	support	for	Windows	clients;	and	the	JBoss	application	server	for	running	powerful	J2EE applications.

In	June	2004,	the	Company	previewed	Mac	OS	X	Server	version	10.4	(code-named	"Tiger	Server"),	the	next	major	release	of	the	Company's	UNIX-based	server operating	system	that	deploys	open	source	solutions	for	Macintosh,	Windows	and	Linux	clients.	Tiger	Server	includes	native	support	for	64-bit	applications;	iChat Server	to	deploy	private,	encrypted	communications	within	an	organization;	and	migration	tools	to	make	it	easy	to	upgrade	from	legacy	Windows	servers	to	Mac	OS	X Server.

In	June	2004,	the	Company	introduced	Apple	Remote	Desktop™	2,	the	second	generation	of	the	Company's	asset	management,	software	distribution	and	help	desk support	software.	Along	with	improvements	in	screen	sharing	performance,	Apple	Remote	Desktop	2	includes	more	than	50	features	for	centrally	managing	Mac	OS	X systems.	Apple	Remote	Desktop	2	can	perform	a	wide	range	of	desktop	management	tasks	such	as	installing	operating	system	and	application	software,	running hardware	and	software	inventory	reports	and	executing	commands	on	one	or	more	remote	Mac	OS	X	systems	on	the	network.	Remote	software	installation	tools	allow IT	professionals	to	install	single	or	multiple	software	packages	immediately	or	at	specific	dates	and	times.	Comprehensive	hardware	and	software	reports	based	on	more than	200	system	information	attributes	allow	administrators	to	keep	track	of	their	Mac	OS	X	systems.	In	addition,	built-in	real-time	screen	sharing	enables	help	desk professionals	to	provide	online	assistance	by	observing	and	controlling	the	desktops	of	any	remote	Macintosh	or	Virtual	Network	Computing-enabled	computer, including	Windows	and	Linux	systems.

Xsan,	the	Company's	enterprise-class	Storage	Area	Network	(SAN)	file	system,	was	introduced	as	a	beta	version	in	April	2004	and	is	expected	to	be	available	for general	release	in	the	Fall	of	2004.	Xsan	is	a	64-bit	cluster	file	system	for	Mac	OS	X	that	enables	organizations	to	consolidate	storage	resources	and	provide	multiple computers	with	concurrent	file-level	read/write	access	to	shared	volumes	over	Fibre	Channel.	Advanced	features	such	as	metadata	controller	failover	and	Fibre	Channel multipathing	ensure	high	availability;	file-level	locking	allows	multiple	systems	to	read	and	write	concurrently	to	the	same	volume	which	is	ideal	for	complex workflows;	bandwidth	reservation	provides	for	effective	ingestion	of	bandwidth-intensive	data	streams,	such	as	high	resolution	video;	and	flexible	volume	management results	in	more	efficient	use	of	storage	resources.	Since	Xsan	is	interoperable	with	ADIC's	StorNext	File	System,	it	can	be	used	in	heterogeneous	environments	that include	Windows,	UNIX	and	Linux	server	operating	system	platforms.

# Professional	Application	Software

Final	Cut	Pro®	HD,	the	latest	version	of	the	Company's	video	editing	software,	was	introduced	in	April	2004	and	features	real-time	performance	of	high-quality	native DVCPRO	HD,	a	high-definition	video	format,	in	addition	to	real-time	support	for	digital	video	(DV)	and	standard	definition	(SD)	formats.	Final	Cut	Pro	HD	supports native	DVCPRO	HD	editing	with	no	recompression	or	image	degradation	and	enables	HD	preview	monitoring	through	the	computer's	DVI	display	output	via	the	Digital Cinema	Desktop	feature.	Final	Cut	Pro	HD's	support	of	native	DVCPRO	HD	makes	media	conversion	unnecessary,	preserving	the	full	quality	of	the	camera	original. Final	Cut	Pro	HD	includes	precision,	non-modal	editing	and	trimming	tools;	powerful	interface	customization	features;	advanced	real-time	color	correction	and	image control;	and	enhanced	audio	editing	capabilities	with	multi-track	audio	mixing	and	multi-channel	audio	output.

In	April	2004,	the	Company	announced	DVD	Studio	Pro®	3,	the	latest	version	of	the	Company's	professional	DVD	authoring	application.	DVD	Studio	Pro	3	features Alpha	Transitions,	which	are	QuickTime®	based	movie	transitions	that	may	be	used	as	segues	between	DVD	menus	and	as	DVD	slide	show	transitions,	and	a	new Graphical	View	for	easy	visualization	of	a	project's	entire	flow	in	a	storyboard	environment.	Graphical	View	makes	it	easy	to	see	the	relationships	between	menus, tracks,	slideshows,	stories	and	scripts.	DVD	Studio	Pro	3	also	includes	Compressor	1.2,	the	latest	version	of	the	Company's	digital	media	encoding	and	compression software	that	provides	high-quality	constant	and	variable	bit	rate	MPEG-2	encoding.	In	addition	to	DV	and	SD,	DVD	Studio	Pro	3	now	provides	the	ability	to	scale	HD and	encode	directly	to	MPEG-2	all	in	one	step.

In	August	2004,	the	Company	began	shipping	Motion,	a	motion	graphic	design	and	production	application.	Motion	features	interactive	animation	of	text,	graphics	and video,	with	real-time	previewing	of	multiple	filters	and	particle	effects.	Motion	introduces	"Behaviors,"	a	procedural	animation	technology	that	allows	for	the	adding	of natural	looking	movement	to	type	and	graphics,	such	as	gravity	and	wind,	without	the	use	of	complex	keyframes.	Motion's	"Interactive	Dashboard"	gives	users	access	to a	contextual,	semi-transparent	floating	palette	that	provides	the	tools	and	slider	parameters	for	objects	being	manipulated	on	screen.	Motion's	"Project	Pane"	allows	users to	view	and	manage	all	filters,	Behaviors,	masks	and	other	properties	applied	to	all	objects	and	layers	of	objects	within	a	project.

In	August	2004,	the	Company	introduced	Production	Suite,	which	combines	the	latest	versions	of	Final	Cut	Pro	HD,	DVD	Studio	Pro	3	and	Apple	Motion	into	a software	suite	for	film	and	video	production	that	delivers	real-time	production	tools	in	one	comprehensive	and	integrated	package.	Production	Suite	provides	an integrated	workflow	environment	where	content	that	is	updated	in	one	of	the	applications	in	the	suite	is	automatically	updated	in	the	other	applications.

Shake®	3.5,	an	upgrade	of	the	Company's	compositing	and	visual	effects	software	designed	for	large	format	film	and	video	productions	was	introduced	in	April	2004. Shake	3.5	features	shape-based	morphing	and	warping	tools	for	advanced	compositing	and	"shape	shifting"	special	effects.	Morphing	and	warping	further	enhance Shake's	visual	effects	tools,	including	layering,	tracking,	rotoscoping,	painting	and	color	correction.	Shake	3.5	also	improves	upon	the	Shake	Qmaster	network	render manager	that	can	now	handle	distributed	rendering	tasks	for	both	Shake	and	Alias	Systems	Corp.'s	Maya	product,	allowing	for	distribution	of	rendering	tasks	across	a cluster	of	servers	or	computers.

Logic®	Pro	7,	introduced	by	the	Company	in	September	2004	is	actively	used	by	musicians	around	the	world	and	by	professionals	in	music	production,	film	scoring, and	audio	post-production	facilities.	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	over	100	workflow	enhancements,	mastering	plug-ins	and	support	for	Apple Loops,	Logic	Pro	7	debuts	distributed	audio	processing,	a	technology	which	allows	audio	pros	to	tap	into	a	number	of	Macintosh	systems	to	expand	available	DSP power	via	an	Ethernet	network.

# Consumer,	Education	and	Business	Oriented	Application	Software

In	January	2004,	the	Company	introduced	iLife®	'04,	the	next	generation	suite	of	its	digital	lifestyle	applications,	which	features	iPhoto®,	iMovie®,	iDVD®,	iTunes® software,	and	introduced	GarageBand™,	a	music	creation	software	application.	All	of	these	iLife	applications	come	preinstalled	on	the	Company's	Macintosh	systems, excluding	servers	and	storage	systems.	Burning	DVDs	with	iDVD	requires	a	Macintosh	system	configured	with	a	SuperDrive.

iTunes®	software,	available	for	both	Macintosh	and	Windows-based	computers,	lets	users	create	and	manage	their	own	digital	music	library.	iTunes	organizes	music using	searching,	browsing	and	playlist	features	and	supports	automatic	synchronization	with	the	music	stored	on	an	iPod.	iTunes	supports	AAC

and	MP3	encoding	from	audio	CDs,	provides	the	ability	to	burn	custom	playlists	to	CDs	and	MP3	CDs,	and	allows	for	music	sharing	between	networked	computers.	In October	2004,	the	Company's	newest	version,	iTunes	4.7,	included	support	for	copying	photos	to	an	iPod	photo.	Since	April	2003,	the	Company's	iTunes	software	has been	integrated	with	the	Company's	iTunes	Music	Store®	to	facilitate	the	sale	of	third-party	music	and	audio	books.	Further	discussion	of	the	iTunes	Music	Store	may be	found	above	under	the	heading	"Music	Products	and	Services."

iMovie®	is	the	Company's	consumer	digital	video	editing	software	for	creation	of	home	and	classroom	movies.	iMovie	4	features	an	enhanced	user	interface,	improved audio	editing	capabilities,	enhanced	controls	for	titling	and	transitions,	and	added	special	effects.	Users	may	edit	and	trim	audio	and	video	clips	in	the	enhanced	timeline with	click-and-drag	editing	and	even	select	and	edit	multiple	clips	simultaneously.	With	graphical	audio	waveforms	and	live	audio	scrubbing,	users	can	locate	specific edit	points	in	audio	tracks,	and	alignment	guides	make	it	easy	to	precisely	sync	video	and	audio.

iDVD®	is	consumer	oriented	software	that	makes	it	easy	to	turn	iMovie	files,	QuickTime	files	and	digital	pictures	into	DVDs	that	can	be	played	on	most	consumer DVD	players.	iDVD	simplifies	DVD	authoring	by	including	professionally	designed	themes	and	drag-and-drop	simplicity.	iDVD®	4	includes	themes	and	professional effects	that	allow	users	to	use	photos	and	movies	as	buttons,	backgrounds	and	menus.	Movies	from	iMovie,	photos	from	iPhoto	and	music	from	either	iTunes	or GarageBand	can	be	added	directly	to	a	DVD	via	the	media	browser,	and	enhanced	photo	slideshows	can	include	cinematic	transitions	and	iTunes	playlists.	The	DVD Map	provides	an	overview	of	an	entire	DVD	project	and	instant	accessibility	to	all	project	elements.

GarageBand™,	the	Company's	consumer	oriented	music	creation	software,	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	comes	with	more	than	50	software	instruments,	pre- recorded	audio	loops	for	making	complete	songs	or	backing	tracks,	pro-quality	effects	presets	for	mixing,	and	vintage	amplifier	sounds	for	the	guitar.	The	Company	also offers	three	different	Jam	Packs,	which	provide	additional	software	instruments	and	loops	that	enhance	the	use	of	GarageBand	to	create	and	record	music.

iPhoto®	is	consumer	oriented	digital	photo	software	that	makes	it	easy	to	import,	edit,	save,	share,	and	print	digital	photos,	as	well	as	organize	and	manage	an	entire digital	photo	collection	containing	thousands	of	photos.	Users	are	able	to	view	their	photos	in	full-screen;	use	the	slide	show	feature	accompanied	by	their	favorite music;	automatically	create	custom	web	pages	of	their	photos;	email	photos	to	friends	and	family;	order	professionally-processed	prints	and	enlargements	online;	or easily	design	and	order	custom-printed,	linen-covered	hard	bound	photo	books	online.	Customers	in	numerous	countries	can	order	prints,	enlargements,	and	photo	books directly	from	within	iPhoto.	iPhoto®	4	has	features	that	allow	users	to	scroll	through	thousands	of	photos	in	seconds	to	easily	find	a	particular	photo,	contains	Smart Albums	which	automatically	organizes	photos	based	on	date,	keyword	or	the	user's	own	rating,	and	has	controls	for	rotating,	rating	and	deleting	photos.

Final	Cut®	Express,	based	on	Final	Cut	Pro,	enables	small	business	users,	educators,	students	and	advanced	hobbyists	to	perform	professional-quality	digital	video editing.	In	January	2004,	the	Company	introduced	Final	Cut	Express	2,	which	features	RT	Extreme	for	real-time	compositing	and	effects,	an	enhanced	user	interface, real-time	color	correction	tools	and	enhanced	audio	editing	capabilities.

Logic®	Express	7,	introduced	by	the	Company	in	September	2004,	is	a	streamlined	version	of	Logic	Pro	7	that	provides	a	basic	set	of	professional	tools	to	compose	and produce	music	for	students,	educators	and	advanced	hobbyists.	Logic	Express	7	comes	with	support	for	projects	from	GarageBand	offering	users	a	smooth	migration path	to	high-end	audio	production.

Keynote™	is	the	Company's	presentation	software	that	gives	users	the	ability	to	create	high-quality	presentations.	Designed	to	be	easy	to	use,	Keynote	includes professionally	designed	themes,	advanced

typography,	professional-quality	image	resizing,	animated	charts	and	tables	that	can	be	created	quickly,	and	cinematic-quality	transitions.	Keynote	imports	and	exports PowerPoint,	QuickTime,	and	PDF	files	to	simplify	the	creation	and	sharing	of	presentations.

AppleWorks®	6.2	is	an	integrated	productivity	application	that	incorporates	word	processing,	page	layout,	image	manipulation,	spreadsheets,	databases	and presentations	in	a	single	application.	Intended	to	be	an	easy-to-use	product	for	the	Company's	consumer	and	education	customers,	AppleWorks	makes	it	simple	to	create professional-looking	documents	in	the	classroom	and	at	home.

FileMaker,	Inc.,	a	wholly	owned	subsidiary	of	the	Company,	develops,	publishes,	and	distributes	desktop-based	database	management	application	software	for	either	a Macintosh	or	Windows-based	computer.	The	FileMaker®	Pro	database	software	and	related	products	offer	relational	databases	and	desktop-to-web	publishing capabilities.	In	March	2004,	the	Company	introduced	FileMaker	Pro	7	with	new	architecture	and	enhancements	in	ease-of-use,	customizability	and	developer productivity.	FileMaker	Pro	7	has	been	redesigned	using	a	modern,	streamlined	relational	architecture,	which	enables	users	to	simplify	information	management	by storing	multiple	tables	within	a	single	file	and	includes	the	relationships	graph	feature	which	presents	a	visual	"map"	of	the	database	and	lets	users	create	and	modify relationships	with	a	simple	click	and	drag	tool.	FileMaker	Pro	7	has	also	expanded	its	data	capacity	to	8	terabytes	per	file	or	4,000	times	the	former	limit.

# Internet	Software,	Integration,	and	Services

Apple's	Internet	strategy	is	focused	on	delivering	seamless	integration	with	and	access	to	the	Internet	throughout	the	Company's	product	lines.	The	Company's	Internet products	and	technologies	adhere	to	many	industry	standards	in	order	to	provide	an	optimized	user	experience	through	interoperability.	An	easy	to	use	Internet	Setup Assistant	is	included	with	the	Mac	OS.

# Safari™

Safari,	the	Company's	Mac	OS	X	compatible	web	browser,	is	capable	of	loading	web	pages	rapidly.	Safari	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.	The	Company	also	released	a	software	development	kit	that	allows	developers	to	embed	the	Safari	HTML	rendering	engine	directly into	their	applications.

# Quicktime®

QuickTime,	the	Company's	multimedia	software	for	either	a	Macintosh	or	Windows-based	computer,	features	streaming	of	live	and	stored	video	and	audio	over	the Internet	and	playback	of	high-quality	audio	and	video	on	computers.	QuickTime	6	includes	the	Instant-On	Streaming	feature	that	eliminates	buffer	delays	and	provides users	with	the	ability	to	quickly	and	easily	scrub	through	streaming	media	content	to	locate	and	instantly	view	specific	sections.	In	addition,	QuickTime	6	running	on Mac	OS	X	now	supports	JPEG	2000,	the	next	generation	JPEG	standard	that	allows	users	to	capture	still	images	in	a	higher	quality	and	smaller	file	size	than	ever	before. QuickTime	6	also	includes	AAC,	the	standard	MPEG-4	audio	format.	AAC	is	the	next	generation	professional-quality	audio	format	that	delivers	superior	sound	quality with	reduced	file	sizes.

The	Company	also	offers	several	other	QuickTime	products,	including	QuickTime	Pro,	a	suite	of	software	tools	that	allows	creation	and	editing	of	Internet-ready	audio and	video	files	and	allows	a	user	to	add	special	effects	and	other	features	to	QuickTime	movies;	QuickTime	Streaming	Server	which	facilitates	the	broadcasting	of streaming	digital	video;	and	QuickTime	Broadcaster	that	allows	users	to	quickly	and	easily	produce	professional-quality	live	events	for	online	delivery.

The	Company's	.Mac	offering	is	a	suite	of	Internet	services	that	for	an	annual	fee	provides	Macintosh	users	with	powerful	Internet	tools.	.Mac	features	email	service with	IMAP,	POP	or	web-based	access	and	125MB	of	storage,	iDisk	Internet	storage	capacity	of	an	additional	125MB,	and	hosting	for	personalized	homepages	and shared	digital	photo	albums.	Also	included	with	.Mac	is	McAfee's	Virex	anti-virus	software	and	Backup,	a	personal	back-up	solution	allowing	users	to	archive	data	to their	Internet	storage,	CD,	or	DVD.

# Wireless	Connectivity	and	Networking

# AirPort	Extreme®

AirPort	Extreme,	introduced	in	January	2003,	is	the	Company's	next	generation	of	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	which	use	the	802.11b	standard.	AirPort	Extreme	Base	Stations	can serve	up	to	50	Macintosh	and	Windows	users	simultaneously,	provide	wireless	bridging	to	extend	the	range	beyond	just	one	base	station,	and	support	USB	printer sharing	to	allow	multiple	users	to	wirelessly	share	USB	printers	connected	directly	to	the	base	station.

# AirPort®	Express

In	June	2004,	the	Company	introduced	AirPort®	Express,	the	first	802.11g	mobile	base	station	that	can	be	plugged	directly	into	the	wall	for	wireless	Internet connections	and	USB	printing.	Airport	Express	also	features	analog	and	digital	audio	outputs	that	can	be	connected	to	a	stereo	and	AirTunes™	music	networking software	which	works	with	iTunes,	giving	users	a	way	to	wirelessly	stream	iTunes	music	from	their	Macintosh	or	Windows-based	computer	to	any	room	in	the	house. AirPort	Express	features	a	single	piece	design	weighing	6.7	ounces.

# Other	Connectivity	and	Networking	Solutions

Mac	OS	X	includes	capabilities	for	Bluetooth	technology.	Bluetooth	is	an	industry	standard	for	wirelessly	connecting	computers	and	peripherals	that	supports transmission	of	data	at	up	to	1	Mbps	within	a	range	of	approximately	30	feet.	The	Company's	Bluetooth	technology	for	Mac	OS	X	lets	customers	wirelessly	share	files between	Macintosh	systems,	synchronize	and	share	contact	information	with	Palm-OS	based	PDAs,	and	access	the	Internet	through	Bluetooth-enabled	cell	phones.	A Bluetooth	USB	adaptor	can	Bluetooth-enable	any	USB-based	Macintosh	computer	running	in	Mac	OS	X	version	10.1.4	or	higher.

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	to	automatically	discover	and	connect	devices	over any	IP	network,	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.	Major	developers	such	as	Canon,	Epson,	Hewlett-Packard,	Lexmark,	Philips,	Sybase,	World	Book and	Xerox	have	announced	support	for	this	zero	configuration	networking	technology	in	a	broad	range	of	products	including	network	printers,	consumer	electronics, enterprise	database	management	and	educational	applications.	The	Company	has	made	the	source	code	for	this	technology	freely	available	to	developers	for	use	in	their network-enabled	devices	or	software	applications.

The	Company	developed	FireWire®	technology,	also	referred	to	as	IEEE	1394,	which	is	a	high-speed	serial	I/O	technology	for	connecting	digital	devices	such	as	digital camcorders	and	cameras	to	desktop	and	portable	computers.	With	its	high	data-transfer	speed	and	"hot	plug-and-play"	capability,	FireWire	has	become	an	established cross-platform	industry	standard	for	both	consumers	and	professionals	and	is	the	data	interface	of	choice	for	today's	digital	video	and	audio	devices,	as	well	as	external hard	drives	and

other	high-speed	peripherals.	FireWire	is	currently	included	on	all	Macintosh	systems	and	is	a	data	transfer	technology	utilized	by	iPod.

# Product	Support	and	Services

AppleCare®	offers	a	range	of	support	options	for	Apple	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.

# Specialized	Education	Products	and	Services

The	Company	offers	a	variety	of	unique	services	and	products	to	its	education	customers,	including	a	separate	online	store	for	education	customers	offering	special education	price	lists	and	promotions;	special	financing	programs	for	K-12	and	higher	education	students,	faculty,	and	staff;	a	special	edition	of	its	productivity	software suite,	AppleWorks,	that	is	compatible	for	both	Macintosh	and	Windows-based	computers;	Wireless	Mobile	Labs	that	allows	teachers	and	students	to	share	iBook computers,	a	printer,	and	a	wireless	network/Internet	connection	stored	on	a	cart	for	mobility	between	classrooms;	and	three	special	Digital	Media	Studio	solutions designed	for	education,	including	one	that	is	integrated	into	a	mobile	cart.	Additionally,	the	Company	offers	one-to-one	(1:1)	learning	solutions,	which	are	a	complete solution	typically	consisting	of	an	iBook	portable	system	for	every	student	and	teacher	along	with	a	wireless	network	connected	to	a	central	server.

The	Company's	PowerSchool®	software	product	is	a	web-based	student	information	system	for	K-12	schools	and	school	districts.	PowerSchool	software	products	give school	administrators	and	teachers	the	ability	to	easily	and	cost-effectively	manage	student	records	and	give	parents	real-time	access	to	track	their	children's performance	via	the	Internet.	PowerSchool	offers	the	option	of	remote	hosting	with	an	application	service	provider	model.

# Markets	and	Distribution

The	Company's	customers	are	primarily	in	the	education,	creative,	consumer,	and	business	markets.	Apple	customers	are	attracted	to	Macintosh	computers	for	a	variety of	reasons,	including	the	reduced	amount	of	training	resulting	from	the	Macintosh	computer's	intuitive	ease	of	use,	advanced	graphics	capabilities,	industrial	design features	of	the	Company's	hardware	products,	and	ability	of	Macintosh	computers	to	network	and	communicate	with	other	computer	systems	and	environments.	Apple personal	computers	were	first	introduced	to	education	customers	in	the	late	1970s.	Over	16%	of	the	Company's	net	sales	in	2004	were	through	its	U.S.	education channel,	including	sales	to	elementary	and	secondary	schools,	higher	education	institutions	and	individual	customers.

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	2004,	2003	or	2002.	The	Company	also	sells	many	of	its	products	and	resells	certain	third-party	products	in	most	of	its	major	markets	directly	to consumers,	education	customers,	and	businesses	through	its	retail	stores	in	the	U.S.	and	internationally,	or	through	one	of	its	online	stores	around	the	world.	Total	direct and	indirect	sales	transacted	through	the	Company's	online	stores	totaled	approximately	$3.9	billion,	$2.9	billion,	and	$2.4	billion	for	fiscal	years	2004,	2003	and	2002, respectively.

# Competition

The	Company	is	confronted	by	aggressive	competition	in	all	areas	of	its	business.	The	market	for	the	design,	manufacture,	and	sale	of	personal	computers	and	related software	and	peripheral	products	is	highly	competitive.	This	market	continues	to	be	characterized	by	rapid	technological	advances	in	both	hardware	and	software development,	which	have	substantially	increased	the	capabilities	and	applications	of	these	products,	and	have	resulted	in	the	frequent	introduction	of	new	products	and significant	price,

feature,	and	performance	competition.	Over	the	past	several	years,	price	competition	in	the	market	for	personal	computers	has	been	particularly	intense.	The	Company's competitors	who	sell	personal	computers	based	on	other	operating	systems	have	aggressively	cut	prices	and	lowered	their	product	margins	to	gain	or	maintain	market share.	The	Company's	results	of	operations	and	financial	condition	have	been,	and	in	the	future	may	continue	to	be,	adversely	affected	by	these	and	other	industry-wide downward	pressures	on	gross	margins.

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

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

The	Company's	initial	success	with	the	development	of	an	end-to-end	music	offering,	which	includes	the	iTunes	software,	iTunes	Music	Store	and	iPod	digital	music player,	has	already	encouraged	significant	competition	in	this	area	from	other	companies,	many	of	whom	have	greater	financial,	marketing,	and	manufacturing	resources than	those	of	the	Company.	The	Company	anticipates	that	competition	will	intensify	requiring	the	Company	to	respond	as	hardware,	software	and	content	providers work	more	collaboratively	to	offer	integrated	products	that	compete	against	the	Company's	offerings.	The	Company	believes	it	maintains	a	competitive	advantage	by more	effectively	integrating	the	entire	end-to-end	music	solution,	including	the	hardware	(iPod),	software	(iTunes)	and	distribution	of	third-party	music	content	(iTunes Music	Store).

# Raw	Materials

Although	most	components	essential	to	the	Company's	business	are	generally	available	from	multiple	sources,	certain	key	components	(including	microprocessors	and application-specific	integrated	circuits	("ASICs"))	are	currently	obtained	by	the	Company	from	single	or	limited	sources.	Some	other	key	components,	while	currently available	to	the	Company	from	multiple	sources,	are	at	times	subject	to	industry	wide	availability	constraints	and	pricing	pressures.	In	addition,	the	Company	uses	some components	that	are	not	common	to	the	rest	of	the	personal	computer	and	consumer	electronics	industries,	and	new	products	introduced	by	the	Company	often	initially utilize	custom	components	obtained	from	only	one	source	until	the	Company	has	evaluated	whether	there	is	a	need	for,	and	subsequently	qualifies,	additional	suppliers. If	the	supply	of	a	key	or	single-sourced	component	to	the	Company	were	to	be	delayed	or	curtailed	or	in	the	event	a	key	manufacturing	vendor	delays	shipments	of completed	products	to	the	Company,	the	Company's	ability	to	ship	related	products	in	desired	quantities	and	in	a	timely	manner	could	be	adversely	affected.	The Company	did	experience	such	delays	during	fiscal	2004,	which	resulted	in	the	constrained	availability	of	certain	products.	The	Company's	business	and	financial performance	could	also	be	adversely	affected	depending	on	the	time	required	to	obtain	sufficient	quantities	from	the	original	source,	or	to	identify	and	obtain	sufficient quantities	from	an	alternative	source.	Continued	availability	of	these	components	may	be	affected	if	producers	were	to	decide	to	concentrate	on	the	production	of common	components	instead	of	components	customized	to	meet	the	Company's	requirements.	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.	Such	purchase	commitments	typically	cover	the	Company's	requirements	for	periods	ranging	from 30	to	130	days.

The	Company	believes	there	are	several	component	suppliers	and	manufacturing	vendors	whose	loss	to	the	Company	could	have	a	material	adverse	effect	upon	the Company's	business	and	financial	position.	At	this	time,	such	vendors	include	Agere	Systems,	Inc.,	Ambit	Microsystems	Corporation,	ASUSTeK	Corporation,	ATI Technologies,	Inc.,	Broadcom	Corporation,	Freescale	Semiconductor,	Inc.	(formerly	the	Semiconductor	Products	Segment	of	Motorola,	Inc.),	Hitachi	Global	Storage Technologies,	Hon	Hai	Precision	Industry	Co.,	Ltd.,	IBM	Corporation,	International	Display	Technology,	Inventec	Appliances	Corporation,	LG.	Phillips	Co.,	Ltd., Matsushita,	Mitsubishi	Electric	Corporation,	NVIDIA	Corp.,	Portal	Player,	Inc.,	Quanta	Computer,	Inc.,	Samsung	Electronics,	Synaptics,	Inc.,	and	Toshiba	Corporation.

# Research	and	Development

Because	the	personal	computer	industry	is	characterized	by	rapid	technological	advances,	the	Company's	ability	to	compete	successfully	is	heavily	dependent	upon	its ability	to	ensure	a	continuing	and	timely	flow	of	competitive	products	and	technology	to	the	marketplace.	The	Company	continues	to	develop	new	products	and technologies	and	to	enhance	existing	products	in	the	areas	of	hardware	and	peripherals,	consumer	electronic	products,	system	software,	applications	software, networking	and	communications	software	and	solutions,	and	the	Internet.	The	Company	may	expand	the	range	of	its	product	offerings	and	intellectual	property	through licensing	and/or	acquisition	of	third-party	business	and	technology.	The	Company's	research	and	development	expenditures	totaled	$489	million,	$471	million,	and $446	million	in	2004,	2003,	and	2002,	respectively.

# Patents,	Trademarks,	Copyrights	and	Licenses

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

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

# Foreign	and	Domestic	Operations	and	Geographic	Data

The	U.S.	represents	the	Company's	largest	geographic	marketplace.	Approximately	59%	of	the	Company's	net	sales	in	fiscal	2004	came	from	sales	to	customers	inside the	U.S.	Final	assembly	of	products	sold	by	the	Company	is	conducted	in	the	Company's	manufacturing	facility	in	Cork,	Ireland,	and	by	external	vendors	in	Fremont, California,	Fullerton,	California,	Taiwan,	Korea,	the	Netherlands,	the	People's	Republic	of	China,	and	the	Czech	Republic.	Currently,	manufacture	of	many	of	the components	used	in	the	Company's	products	and	final	assembly	of	substantially	all	of	the	Company's	portable	products	including	PowerBooks,	iBooks,	and	the	iPod	are performed	by	third-party	vendors	in	Taiwan	and	China.	Margins	on	sales	of	Apple	products	in	foreign	countries,	and	on	sales	of	products	that	include	components obtained	from	foreign

suppliers,	can	be	adversely	affected	by	foreign	currency	exchange	rate	fluctuations	and	by	international	trade	regulations,	including	tariffs	and	antidumping	penalties.

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

# Seasonal	Business

The	Company	has	historically	experienced	increased	net	sales	in	its	first	and	fourth	fiscal	quarters,	compared	to	other	quarters	in	its	fiscal	year,	due	to	seasonal	demand related	to	the	holiday	season	and	the	school	year,	respectively.	Past	performance	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	Apple	service	parts	used	to	repair	Apple	hardware	products.	In	addition, consumers	may	purchase	extended	service	coverage	on	most	Apple	hardware	products	in	all	of	the	Company's	major	markets.

# Backlog

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

# Environmental	Laws

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

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

# Employees

As	of	September	25,	2004,	Apple	and	its	subsidiaries	worldwide	had	11,695	employees	and	an	additional	1,731	temporary	employees	and	contractors.

# Available	Information

The	Company's	Annual	Report	on	Form	10-K,	Quarterly	Reports	on	Form	10-Q,	Current	Reports	on	Form	8-K,	and	amendments	to	reports	filed	pursuant	to	Sections 13(a)	and	15(d)	of	the	Securities	Exchange	Act	of	1934,	as	amended,	are	available	on	its	website	at	http://www.apple.com/investor	when	such	reports	are	available	on	the U.S.	Securities	and	Exchange	Commission	(SEC)	website.	The	public	may	read	and	copy	any	materials	filed	by	the	Company	with	the	SEC	at	the	SEC's	Public Reference	Room	at	450	Fifth	Street,	NW,	Washington,	DC	20549.	The	public	may	obtain	information	on	the	operation	of

the	Public	Reference	Room	by	calling	the	SEC	at	1-800-SEC-0330.	The	SEC	maintains	an	Internet	site	that	contains	reports,	proxy	and	information	statements	and other	information	regarding	issuers	that	file	electronically	with	the	SEC	at	http://www.sec.gov.	The	contents	of	these	websites	are	not	incorporated	into	this	filing. Further,	the	Company's	references	to	the	URLs	for	these	websites	are	intended	to	be	inactive	textual	references	only.

# Item	2.	Properties

The	Company's	headquarters	are	located	in	Cupertino,	California.	The	Company	has	manufacturing	facilities	in	Cork,	Ireland.	As	of	September	25,	2004,	the	Company leased	approximately	3.3	million	square	feet	of	space,	primarily	in	the	U.S.,	and	to	a	lesser	extent,	in	Europe,	Japan,	and	the	Asia	Pacific	region.	The	major	facility	leases are	for	terms	of	5	to	10	years	and	generally	provide	renewal	options	for	terms	of	2	to	5	additional	years.	Leased	space	includes	660,000	square	feet	of	retail	space,	a majority	of	which	is	in	the	U.S.	Lease	terms	for	retail	space	range	from	5	to	16	years,	the	majority	of	which	are	for	10	years,	and	often	contain	multi-year	renewal options.

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

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

# Item	3.	Legal	Proceedings

The	Company	is	subject	to	various	legal	proceedings	and	claims	that	are	discussed	below.	The	Company	is	also	subject	to	certain	other	legal	proceedings	and	claims	that have	arisen	in	the	ordinary	course	of	business	and	which	have	not	been	fully	adjudicated.	In	the	opinion	of	management,	the	Company	does	not	have	a	potential	liability related	to	any	current	legal	proceedings	and	claims	that	would	individually	or	in	the	aggregate	have	a	material	adverse	effect	on	its	financial	condition,	liquidity	or results	of	operations.	However,	the	results	of	legal	proceedings	cannot	be	predicted	with	certainty.	Should	the	Company	fail	to	prevail	in	any	of	these	legal	matters	or should	several	of	these	legal	matters	be	resolved	against	the	Company	in	the	same	reporting	period,	the	operating	results	of	a	particular	reporting	period	could	be materially	adversely	affected.	The	Company	settled	certain	matters	in	2004,	which	did	not	individually	or	in	the	aggregate	have	a	material	impact	on	the	Company's results	of	operations.

# Antor	Media	Corporation	v.	Apple	Computer,	Inc.,	et	al.

Plaintiff	Antor	Media	filed	this	action	on	September	5,	2003	in	the	United	States	District	Court	in	the	Eastern	District	of	Texas	alleging	infringement	by	the	Company and	other	defendants	of	U.S.	patent	5,754,961	relating	to	a	"Method	and	Apparatus	for	Transmitting	Information	Recorded	on	Information	Storage	Means	from	a	Central Server	to	Subscribers	via	a	High	Data	Rate	Digital	Telecommunications	Network."	The	complaint	seeks	unspecified	damages	and	other	relief.	The	Company	has answered	the	complaint,	denying	all	allegations	and	asserting	numerous	affirmative	defenses.	The	Company	also	asserted	counterclaims	requesting	declaratory	judgment for	non-infringement	and	invalidity.	Trial	is	set	for	March	2005.	The	Court	held	a	Markman	hearing	on	September	16,	2004	but	has	not	yet	issued	a	ruling.

# 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	Apple	marks.	Plaintiff	seeks	an	injunction,	unspecified	damages	and	other relief.	The	Company	filed	a	motion	on	October	13,	2003,	challenging	jurisdiction	in	the	UK,	but	the	Court	denied	the	motion	on	April	7,	2004.	The	Company	filed	an appeal	of	the	Court's	decision	but	subsequently	withdrew	the	appeal	and	is	preparing	its	defense	in	this	matter.

On	October	8,	2003,	the	Company	filed	a	lawsuit	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	UK	action.	The	Company	has	dismissed	the	California	lawsuit without	prejudice.

# Cagney	v.	Apple	Computer,	Inc.

Plaintiff	filed	this	purported	class	action	on	January	9,	2004	in	Los	Angeles	County	Superior	Court,	alleging	improper	collection	of	sales	tax	in	transactions	involving mail-in	rebates.	The	complaint	alleges	violations	of	California	Civil	Code	Section	17200	(unfair	competition)	and	seeks	unspecified	damages	and	other	relief.	The Company	was	served	on	January	21,	2004,	and	filed	an	answer	on	February	20,	2004,	denying	all	allegations	and	asserting	numerous	affirmative	defenses.	The Company	is	investigating	these	allegations.	The	Company	filed	a	motion	to	disqualify	Plaintiff's	counsel,	which	the	Court	denied.	The	Company	filed	a	petition	for	a writ	of	mandate	with	respect	to	this	ruling	and	the	Court	of	Appeal	has	issued	an	order	to	show	cause	as	to	why	the	writ	should	not	issue.	Plaintiffs	lead	counsel subsequently	withdrew.	The	hearing	on	the	show	cause	order	is	scheduled	for	January	29,	2005.	The	Company	also	has	obtained	an	opinion	on	the	tax	issue	from	the State	Board	of	Equalization.

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

Plaintiff	Compression	Labs,	Inc.	filed	this	patent	infringement	action	on	April	22,	2004	against	the	Company	and	twenty-seven	other	defendants	in	the	United	States District	Court	for	the	Eastern	District	of	Texas,	Marshall	Division,	alleging	infringement	of	U.S.	patent	4,698,672.	Plaintiff	alleges	that	the	Company	infringes	the	patent by	complying	with	the	JPEG	standard	as	defined	by	CCITT	Recommendation	T.81	entitled	"Information	Technology—Digital	Compression	and	Coding	of	Continuous Tone	Still	Images—Requirements	and	Guidelines."	Plaintiff	seeks	unspecified	damages	and	other	relief.	The	Company	is	investigating	this	claim.	Defendants	have	filed a	motion	to	dismiss	or,	in	the	alternative,	to	transfer	the	case	to	Delaware.	The	case	is	in	discovery	and	trial	is	expected	in	October	2005.	On	July	2,	2004,	the	Company and	several	other	defendants	in	the	Texas	action	filed	a	lawsuit	in	the	United	States	District	Court	in	Delaware	requesting	declaratory	judgment	of	noninfringement, invalidity,	implied	license	and	unenforceability	with	respect	to	the	'672	patent.	Additional	actions	regarding	this	patent	have	been	filed	in	other	jurisdictions.	A	petition has	been	filed	with	the	Panel	on	Multi-District	Litigation	(MDL),	seeking	coordination	and	transfer	of	all	of	these	cases	to	one	court	for	pre-trial	proceedings.

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

Eight	separate	plaintiffs	filed	purported	class	action	cases	in	various	California	courts	alleging	misrepresentations	by	the	Company	relative	to	iPod	battery	life.	The complaints	include	causes	of	action

for	violation	of	California	Civil	Code	Section	17200	(unfair	competition),	the	Consumer	Legal	Remedies	Action	("CLRA")	and	claims	for	false	advertising,	fraudulent concealment	and	breach	of	warranty.	The	complaints	seek	unspecified	damages	and	other	relief.	The	Company	is	investigating	these	claims.	The	cases	have	been consolidated	in	San	Mateo	County	and	Plaintiffs	have	filed	a	consolidated	complaint.

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

# Davis	v.	Apple	Computer,	Inc.

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

# East	Texas	Technology	Partners	LP	v.	Apple	Computer,	Inc.

Plaintiff	filed	this	patent	infringement	action	on	January	23,	2004	in	the	United	States	District	Court	in	the	Eastern	District	of	Texas	alleging	infringement	by	the Company	and	seven	other	defendants	of	U.S.	patent	6,574,239	relating	to	"Virtual	Connection	of	a	Remote	Unit	to	a	Server."	The	complaint	seeks	unspecified	damages and	other	relief.	The	Plaintiff's	law	firm	withdrew	from	the	case	because	of	a	conflict	of	interest	and	dismissed	the	complaint	without	prejudice.	The	case	was	re-filed	on February	10,	2004	in	the	Northern	District	of	Texas	by	a	new	law	firm.	The	Company	received	service	of	the	new	complaint	on	May	17,	2004	and	filed	a	response	on August	6,	2004,	denying	all	allegations	and	asserting	numerous	affirmative	defenses.	The	Company	is	investigating	this	claim,	and	the	case	is	in	discovery.

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

Plaintiff	Gobeli	Research	Ltd.	filed	this	patent	infringement	action	against	the	Company	and	Sun	Microsystems,	Inc.	on	April	15,	2004	in	the	United	States	District Court	for	the	Eastern	District	of	Texas,	Marshall	Division,	alleging	infringement	of	U.S.	patent	5,418,968	related	to	a	"System	and	Method	of	Controlling	Interrupt Processing."	Plaintiff	alleges	that	the	Company's	Mac	OS	9	and	Mac	OS	X	operating	systems	infringe	Plaintiff's	patent.	Plaintiff	seeks	unspecified	damages	and	other relief.	The	Company	has	answered	the	complaint,	denying	all	allegations	and	asserting	numerous	defenses.	The	Company	is	investigating	this	claim.

Plaintiffs	filed	this	purported	class	action	on	September	22,	2003	in	Los	Angeles	County	Superior	Court	against	the	Company	and	other	members	of	the	industry	on behalf	of	an	alleged	nationwide	class	of	purchasers	of	certain	computer	hard	drives.	The	case	alleges	violations	of	Civil	Code	Section	17200	(unfair	competition),	the Consumer	Legal	Remedies	Act	("CLRA")	and	false	advertising	related	to	the	size	of	the	drives.	Plaintiffs	allege	that	calculation	of	hard	drive	size	using	the	decimal method	misrepresents	the

actual	size	of	the	drive.	The	complaint	seeks	unspecified	damages	and	other	relief.	Plaintiff	filed	an	amended	complaint	on	March	30,	2004	and	the	Company	filed	an answer	on	September	23,	2004,	denying	all	allegations	and	asserting	numerous	affirmative	defenses.	The	Company	is	investigating	this	claim.	The	parties	are	conducting discovery	related	to	class	certification.

Hawaii	Structural	Iron	Workers	and	Pension	Trust	Fund	v.	Apple	Computer,	Inc.	and	Steven	P.	Jobs;	Young	v.	Apple	Computer,	Inc.,	et	al.;	Hsu	v.	Apple Computer	Inc.,	et	al.

Beginning	on	September	27,	2001,	three	shareholder	class	action	lawsuits	were	filed	in	the	United	States	District	Court	for	the	Northern	District	of	California	against	the Company	and	its	Chief	Executive	Officer.	These	lawsuits	are	substantially	identical,	and	purport	to	bring	suit	on	behalf	of	persons	who	purchased	the	Company's publicly	traded	common	stock	between	July	19,	2000,	and	September	28,	2000.	The	complaints	allege	violations	of	the	1934	Securities	Exchange	Act	and	seek unspecified	compensatory	damages	and	other	relief.	The	Company	filed	a	motion	to	dismiss	on	June	4,	2002,	which	was	heard	by	the	Court	on	September	13,	2002.	On December	11,	2002,	the	Court	granted	the	Company's	motion	to	dismiss	for	failure	to	state	a	cause	of	action,	with	leave	to	Plaintiffs	to	amend	their	complaint	within thirty	days.	Plaintiffs	filed	their	amended	complaint	on	January	31,	2003,	and	on	March	17,	2003,	the	Company	filed	a	motion	to	dismiss	the	amended	complaint.	The Court	heard	the	Company's	motion	on	July	11,	2003	and	dismissed	Plaintiffs'	claims	with	prejudice	on	August	12,	2003.	Plaintiffs	have	appealed	the	ruling.

# 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	is	investigating	this	claim	in	connection	with	preparing	its	response	to	the	complaint.

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.	(all	in	Santa	Clara	County	Superior	Court)

Five	resellers	have	filed	similar	lawsuits	against	the	Company	for	various	causes	of	action	including	breach	of	contract,	fraud,	negligent	and	intentional	interference	with economic	relationship,	negligent	misrepresentation,	trade	libel,	unfair	competition	and	false	advertising.	Plaintiffs	request	unspecified	damages	and	other	relief.	The Company	answered	the	Computer	International	complaint	on	November	12,	2003	denying	all	allegations	and	asserting	numerous	affirmative	defenses.	The	parties	are	in discovery	in	that	case.	The	Company	expects	the	other	four	plaintiffs	to	file	amended	complaints.	On	October	1,	2003,	one	of	the	resellers,	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.

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

Plaintiffs	filed	this	case	on	July	20,	2004	in	United	States	District	Court	for	the	Northern	District	of	California	alleging	infringement	of	U.S.	patent	6,557,054,	entitled "Method	and	System	for	Distributing	Updates	by	Presenting	Directory	of	Software	Available	for	User	Installation	That	is	Not	Already	Installed	on	User	Station." Plaintiffs	seek	unspecified	damages	and	other	relief.	Plaintiffs	filed	an	amended	complaint	on	September	7,	2004,	adding	a	second	patent,	US	patent	6,769,009	entitled "Method	and	System	for	Selecting	a	Personalized	Set	of	Information	Channels."	The	Company	filed	an	answer	on	October	18,	2004,	denying	all	allegations	and asserting	numerous	affirmative	defenses.

# VirginMega/French	Competition	Council

On	June	28,	2004,	VirginMega	filed	a	complaint	with	the	French	Competition	Council	against	Apple	Computer	France.	VirginMega	sought	"interim	measures," requiring	the	Company	to	license	its	FairPlay

digital	rights	management	("DRM")	technology	to	VirginMega	and	all	other	interested	parties	within	thirty	days.	A	hearing	on	VirginMega's	request	for	interim measures	took	place	on	October	19,	2004.	On	November	9,	2004,	the	French	Competition	Council	issued	a	decision	denying	VirginMega's	request	for	interim	measures and	rejecting	VirginMega's	complaint.

# 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	25,	2004.

# PART	II

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

# (a) Stock	Market	Information

The	Company's	common	stock	is	traded	on	the	over-the-counter	market	and	is	quoted	on	the	NASDAQ	National	Market	under	the	symbol	AAPL,	on	the	Tokyo	Stock Exchange	(TSE)	under	the	symbol	APPLE,	and	on	the	Frankfurt	Stock	Exchange	under	the	symbol	APCD.	On	November	17,	2004,	the	Company	filed	an	application with	the	TSE	to	delist	the	Company's	shares	from	trading	on	the	TSE.	As	of	November	19,	2004,	there	were	28,518	shareholders	of	record.

The	Company	did	not	pay	cash	dividends	in	either	fiscal	2004	or	2003.	The	Company	anticipates	that,	for	the	foreseeable	future,	it	will	retain	any	earnings	for	use	in	the operation	of	its	business.	The	price	range	per	share	of	common	stock	presented	below	represents	the	highest	and	lowest	closing	prices	for	the	Company's	common	stock on	the	NASDAQ	National	Market	during	each	quarter.

|  | Fourth	Quarter | Third	Quarter | Second	Quarter | First	Quarter |
| :--- | :--- | :--- | :--- | :--- |
| Fiscal\t2004\tprice\trange\tper\tcommon\tshare | $38.01-$29.14 | $33.70-$25.78 | $27.68-$21.15 | $24.82-$19.70 |
| Fiscal\t2003\tprice\trange\tper\tcommon\tshare | $23.10-$19.06 | $19.29-$13.12 | $15.27-$13.80 | $17.22-$13.59 |

# (b)			Related	Shareholder	Matters

# None.

# (c) Issuer	Purchases	of	Equity	Securities

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.	During	the	fourth	quarter	of 2001,	the	Company	entered	into	a	forward	purchase	agreement	to	acquire	1.5	million	shares	of	its	common	stock	in	September	of	2003	at	an	average	price	of	$16.64	per share	for	a	total	cost	of	$25.5	million.	In	August	2003,	the	Company	settled	this	agreement	prior	to	its	maturity,	at	which	time	the	Company's	common	stock	had	a	fair value	of	$22.81.	Since	inception	of	the	stock	repurchase	plan,	the	Company	has	repurchased	a	total	of	6.55	million	shares	at	a	cost	of	$217	million.	The	Company	was authorized	to	repurchase	up	to	an	additional	$283	million	of	its	common	stock	as	of	September	25,	2004.	The	Company	did	not	repurchase	any	shares	of	its	common stock	during	the	fourth	quarter	of	fiscal	2004.

# Item	6.	Selected	Financial	Data

The	following	selected	financial	information	has	been	derived	from	the	audited	consolidated	financial	statements.	The	information	set	forth	below	is	not	necessarily indicative	of	results	of	future	operations,	and	should	be	read	in	conjunction	with	Item	7,	"Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of Operations"	and	the	consolidated	financial	statements	and	related	notes	thereto	included	in

Item	8	of	this	Form	10-K	in	order	to	fully	understand	factors	that	may	affect	the	comparability	of	the	information	presented	below.

Net	gains	before	taxes	related	to	the	Company's	non-current	debt	and	equity	investments	of	$4	million,	$10	million,	$75	million,	and	$367	million	were	recognized	in 2004,	2003,	2001,	and	2000,	respectively.	A	net	loss	before	taxes	related	to	the	Company's	non-current	debt	and	equity	investments	of	$42	million	was	recognized	in 2002.	In	2002,	the	Company	acquired	Emagic	resulting	in	a	charge	of	approximately	$1	million	for	acquired	in-process	technologies	with	no	alternative	future	use.	The Company	recognized	a	similar	charge	of	$11	million	in	2001	related	to	its	acquisition	of	PowerSchool.	Net	charges	related	to	Company	restructuring	actions	of $23	million,	$26	million,	$30	million,	and	$8	million	were	recognized	in	2004,	2003,	2002,	and	2000,	respectively.	During	2000,	the	Company	recognized	the	cost	of	a special	executive	bonus	for	the	Company's	Chief	Executive	Officer	for	past	services	in	the	form	of	an	aircraft	with	a	total	cost	to	the	Company	of	approximately $90	million.	In	2002,	of	the	original	$90	million	accrual,	$2	million	remained	unspent	and	was	reversed.	In	2003,	settlement	of	the	Company's	forward	stock	purchase agreement	resulted	in	a	gain	of	$6	million.	Favorable	cumulative-effect	type	adjustments,	net	of	taxes,	of	$1	million	and	$12	million	were	recognized	in	2003	and	2001, respectively.

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

This	section	and	other	parts	of	this	Form	10-K	contain	forward-looking	statements	that	involve	risks	and	uncertainties.	Forward-looking	statements	can	also	be identified	by	words	such	as	"anticipates,"	"expects,"	"believes,"	"plans,"	"predicts,"	and	similar	terms.	Forward-looking	statements	are	not	guarantees	of	future performance	and	the	Company's	actual	results	may	differ	significantly	from	the	results	discussed	in	the	forward-looking	statements.	Factors	that	might	cause	such differences	include,	but	are	not	limited	to,	those	discussed	in	the	subsection	entitled	"Factors	That	May	Affect	Future	Results	and	Financial	Condition"	below.	The following	discussion	should	be	read	in	conjunction	with	the	consolidated	financial	statements	and	notes	thereto	included	in	Item	8	of	this	Form	10-K.	All	information presented	herein	is	based	on	the	Company's	fiscal	calendar.	The	Company	assumes	no	obligation	to	revise	or	update	any	forward-looking	statements	for	any	reason, except	as	required	by	law.

# Executive	Overview

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

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

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

The	Company	utilizes	a	variety	of	direct	and	indirect	distribution	channels.	The	Company	believes	that	sales	of	its	innovative	and	differentiated	products	are	enhanced by	knowledgeable	salespersons	who	can	convey	the	value	of	the	hardware,	software	and	peripheral	integration,	demonstrate	the	unique	digital	lifestyle	solutions	that	are available	only	on	Macintosh	computers,	and	demonstrate	the	seamless	compatibility	of	the	Macintosh	with	the	Windows	platform	and	networks.	The	Company	further believes	that	providing	a	high-quality	sales	and	after-sales	support	experience	is	critical	to	attracting	and	retaining	customers.	To	ensure	a	high-quality	buying	experience for	its	products	in	which	service	and	education	are	emphasized,	the	Company	has	expanded	and	improved	its	distribution	capabilities	by	opening	its	own	retail	stores	in the	U.S.	and	internationally.	The	Company	had	86	stores	open	as	of	September	25,	2004.

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

To	improve	the	accessibility	of	its	iPod	product	line,	the	Company	has	significantly	expanded	the	number	of	distribution	points	where	iPods	are	sold.	The	iPod	product line	can	now	be	purchased	in	department	stores,	discount	stores	and	specialty	music	and	audio-visual	stores.

# 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	exposures	related	to	inventory	purchase	commitments,	valuation	of	long-lived	assets	including	acquired	intangibles,	warranty	costs,	and	income	taxes. Management	believes	these	policies	to	be	critical	because	they	are	both	important	to	the	portrayal	of	the	Company's	financial	condition	and	results,	and	they	require management	to	make	judgments	and	estimates	about	matters	that	are	inherently	uncertain.	The	Company's	senior	management	has	reviewed	these	critical	accounting policies	and	related	disclosures	with	the	Audit	and	Finance	Committee	of	the	Company's	Board	of	Directors.

# Revenue	Recognition

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

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

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

# Allowance	for	Doubtful	Accounts

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

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

# Inventory	Valuation	and	Inventory	Purchase	Commitments

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

The	Company	accrues	necessary	reserves	for	cancellation	fees	related	to	component	orders	that	have	been	cancelled.	Consistent	with	industry	practice,	the	Company acquires	components	through	a	combination	of	formal	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	130	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.

# Valuation	of	Long-Lived	Assets	Including	Acquired	Intangibles

The	Company	reviews	property,	plant,	and	equipment	and	certain	identifiable	intangible	assets	for	impairment	when	events	or	changes	in	circumstances	indicate	the carrying	amount	of	such	an	asset	may	not	be	recoverable.	Recoverability	of	these	assets	is	measured	by	comparison	of	their	carrying	amount	to	future	undiscounted	cash flows	the	assets	are	expected	to	generate.	If	such	assets	are	considered	to	be	impaired,	the	impairment	to	be	recognized	in	earnings	equals	the	amount	by	which	the carrying	value	of

the	assets	exceeds	their	fair	market	value.	Although	the	Company	has	recognized	no	material	impairment	adjustments	related	to	its	property,	plant,	and	equipment	or identifiable	intangibles	during	the	past	three	fiscal	years,	except	those	made	in	conjunction	with	restructuring	actions,	deterioration	in	the	Company's	business	in	a geographic	region	or	business	segment	in	the	future,	including	deterioration	in	the	performance	of	individual	retail	stores,	could	lead	to	such	impairment	adjustments	in future	periods	in	which	such	business	issues	are	identified.

In	accordance	with	Statement	of	Financial	Accounting	Standards	(SFAS)	No.	142,	Goodwill	and	Other	Intangible	Assets,	the	Company	performs	a	review	of	goodwill for	impairment	annually,	or	earlier	if	indicators	of	potential	impairment	exist.	The	review	of	goodwill	for	potential	impairment	is	highly	subjective	and	requires	that: (1)	goodwill	be	allocated	to	various	reporting	units	of	the	Company's	business	to	which	it	relates;	(2)	the	Company	estimate	the	fair	value	of	those	reporting	units	to which	the	goodwill	relates;	and	(3)	the	Company	determine	the	book	value	of	those	reporting	units.	If	the	estimated	fair	value	of	reporting	units	with	allocated	goodwill is	determined	to	be	less	than	their	book	value,	the	Company	is	required	to	estimate	the	fair	value	of	all	identifiable	assets	and	liabilities	of	those	reporting	units	in	a manner	similar	to	a	purchase	price	allocation	for	an	acquired	business.	This	requires	independent	valuation	of	certain	internally	developed	and	unrecognized	assets including	in-process	research	and	development	and	developed	technology.	Once	this	process	is	complete,	the	amount	of	goodwill	impairment,	if	any,	can	be	determined.

Based	on	the	Company's	estimates	as	of	September	25,	2004	there	was	no	impairment	of	goodwill.	However,	changes	in	various	circumstances	including	changes	in	the Company's	market	capitalization,	changes	in	the	Company's	forecasts,	and	changes	in	the	Company's	internal	business	structure	could	cause	one	or	more	of	the Company's	reporting	units	to	be	valued	differently	thereby	causing	an	impairment	of	goodwill.	Additionally,	in	response	to	changes	in	the	personal	computer	industry and	changes	in	global	or	regional	economic	conditions,	the	Company	may	strategically	realign	its	resources	and	consider	restructuring,	disposing,	or	otherwise	exiting businesses,	which	could	result	in	an	impairment	of	property,	plant,	and	equipment,	identifiable	intangibles,	or	goodwill.

# Warranty	Costs

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

# Income	Taxes

The	Company	records	a	tax	provision	for	the	anticipated	tax	consequences	of	the	reported	results	of	operations.	In	accordance	with	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	or	a	decrease	in	goodwill	in	the	period	such	determination	is	made.	In	addition,	the	calculation	of	tax	liabilities	involves	significant	judgment	in	estimating	the impact	of	uncertainties	in	the	application	of	complex	tax	laws.	Resolution	of	these	uncertainties	in	a	manner	inconsistent	with	management's	expectations	could	have	a material	impact	on	the	Company's	results	of	operations	and	financial	position.

# Net	Sales

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

| Americas	net	sales | $4,019 | 26		% | $3,181 | 2		% | $3,131 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Europe\tnet\tsales | 1,799 | 37\t\t% | 1,309 | 5\t\t% | 1,251 |
| Japan\tnet\tsales | 677 | (3)% | 698 | (2)% | 710 |
| Retail\tnet\tsales | 1,185 | 91\t\t% | 621 | 119\t\t% | 283 |
| Other\tsegments\tnet\tsales\t(a) | 599 | 51\t\t% | 398 | 8\t\t% | 367 |
| Total\tnet\tsales | $8,279 | 33\t\t% | $6,207 | 8\t\t% | $5,742 |
| Unit\tSales\tby\tOperating\tSegment: |  |  |  |  |  |
| Americas\tMacintosh\tunit\tsales | 1,682 | 4\t\t% | 1,620 | (6)% | 1,728 |
| Europe\tMacintosh\tunit\tsales | 773 | 13\t\t% | 684 | (5)% | 722 |
| Japan\tMacintosh\tunit\tsales | 291 | (14)% | 339 | (12)% | 386 |
| Retail\tMacintosh\tunit\tsales | 314 | 68\t\t% | 187 | 103\t\t% | 92 |
| Other\tsegments\tMacintosh\tunit\tsales\t(a) | 230 | 26\t\t% | 182 | 5\t\t% | 173 |
| Total\tMacintosh\tunit\tsales | 3,290 | 9\t\t% | 3,012 | (3)% | 3,101 |
| Net\tSales\tby\tProduct: |  |  |  |  |  |
| Power\tMacintosh\tnet\tsales\t(b) | $1,419 | 15\t\t% | $1,237 | (10)% | $1,380 |
| PowerBook\tnet\tsales | 1,589 | 22\t\t% | 1,299 | 56\t\t% | 831 |
| iMac\tnet\tsales\t(c) | 954 | (23)% | 1,238 | (15)% | 1,448 |
| iBook\tnet\tsales | 961 | 34\t\t% | 717 | (18)% | 875 |
| Total\tMacintosh\tnet\tsales | 4,923 | 10\t\t% | 4,491 | (1)% | 4,534 |
| iPod | 1,306 | 279\t\t% | 345 | 141\t\t% | 143 |
| Other\tMusic\tProducts\t(d) | 278 | 672\t\t% | 36 | 800\t\t% | 4 |
| Peripherals\tand\tOther\tHardware\t(e) | 951 | 38\t\t% | 691 | 31\t\t% | 527 |
| Software\t(f) | 502 | 39\t\t% | 362 | 18\t\t% | 307 |
| Service\tand\tother\tsales | 319 | 13\t\t% | 282 | 24\t\t% | 227 |
| Total\tnet\tsales | $8,279 | 33\t\t% | $6,207 | 8\t\t% | $5,742 |

| Power	Macintosh	unit	sales	(b) | 709 | 6		% | 667 | (13)% | 766 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| PowerBook\tunit\tsales | 785 | 30\t\t% | 604 | 69\t\t% | 357 |
| iMac\tunit\tsales\t(c) | 916 | (16)% | 1,094 | (16)% | 1,301 |
| iBook\tunit\tsales | 880 | 36\t\t% | 647 | (4)% | 677 |
| Total\tMacintosh\tunit\tsales | 3,290 | 9\t\t% | 3,012 | (3)% | 3,101 |
| Net\tsales\tper\tMacintosh\tunit\tsold\t(g) | $1,496 | 0\t\t% | $1,491 | 2\t\t% | $1,462 |
| iPod\tunit\tsales | 4,416 | 370\t\t% | 939 | 146\t\t% | 381 |

# Notes:

(a) Other	Segments	include	Asia	Pacific	and	FileMaker.

(b) Includes	Xserve	product	line.

(c) Includes	eMac	product	line.

(d) Other	Music	Products	consists	of	iTunes	Music	Store	sales,	iPod-related	services,	and	Apple-branded	and	third-party	iPod-related	accessories.

(e) Net	sales	of	Peripherals	and	Other	Hardware	include	sales	of	Apple-branded	and	third-party	displays,	wireless	connectivity	and	networking	solutions,	and	other hardware	accessories.

(f) Net	sales	of	Software	include	sales	of	Apple-branded	operating	system	and	application	software	and	sales	of	third-party	software.

(g) Net	sales	per	Macintosh	unit	sold	is	derived	by	dividing	total	Macintosh	net	sales	by	total	Macintosh	unit	sales.

During	fiscal	2004,	net	sales	increased	33%	or	$2.1	billion	from	fiscal	2003.	Several	factors	have	contributed	favorably	to	net	sales	during	2004:

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

•Net	sales	of	iPods	rose	$961	million	or	279%	during	fiscal	2004	compared	to	2003.	Unit	sales	of	iPods	totaled	4.4	million	in	fiscal	2004,	which	represents an	increase	of	370%	from	the	939,000	iPod	units	sold	in	fiscal	2003.	Strong	demand	for	the	iPods	during	fiscal	2004	continued	to	be

experienced	in	all	of	the	Company's	operating	segments	and	was	driven	by	enhancements	to	the	iPod,	the	introduction	of	the	iPod	mini,	increased expansion	of	the	Company's	iPod	distribution	network,	and	continued	success	of	the	iTunes	Music	Store	due	largely	to	making	it	available	to	both Macintosh	and	Windows	users	in	the	U.S.,	U.K.,	France	and	Germany.	Since	inception	of	the	iPod	product	line	in	fiscal	2002,	the	Company	has	sold approximately	5.7	million	iPods.

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

•Net	sales	of	peripherals	and	other	hardware	rose	by	38%	during	fiscal	2004	compared	to	2003	primarily	due	to	an	increase	in	net	sales	of	displays	and other	computer	accessories.	Net	sales	of	other	computer	accessories	include	AirPort	cards	and	base	stations,	iSight	digital	video	cameras,	and	third	party hardware	products.	The	increase	in	total	net	sales	of	peripherals	and	other	hardware	is	related	to	the	overall	increase	in	Macintosh	unit	sales	and	the introduction	of	new	and	updated	peripheral	products	and	was	experienced	predominantly	by	the	Company's	Americas,	Europe,	and	Retail	segments.

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

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

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

The	Company	believes	the	U.S.	K-12	education	market	remains	challenging	due	to	multiple	factors	including	funding	pressures	due	to	weak	economic conditions,	large	budget	deficits	in	many	states,	and	increased	competition	particularly	for	desktop	computers.	Although	the	Company	has	taken	steps, and	will	continue	to	take	steps,	to	address	weakness	in	the	U.S.	education	channel,	it	remains	difficult	to	anticipate	when	and	if	this	trend	will	reverse.

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

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

•Net	sales	and	unit	sales	of	iMac	systems	were	down	23%	and	16%,	respectively,	during	fiscal	2004	versus	2003.	The	decrease	in	iMac	net	sales	and	unit sales	was	largely	due	to	the	delay	in	the	introduction	of	the	new	iMac,	based	on	the	PowerPC	G5	processor,	primarily	as	a	result	of	manufacturing problems	experienced	by	IBM.	The	delays	in	the	new	iMac	resulted	in	the	depletion	of	inventory	of	the	old	iMac	flat	panel	prior	to	availability	of	the	new iMac	G5.	The	old	flat	panel	iMac	form	factor	which	was	available	during	most	of	fiscal	2004,	was	nearly	3	years	old	by	the	time	the	new	iMac	G5	began shipping	in	September	2004	and	had	experienced	declines	in	sales	as	a	result	of	the	age	of	this	product.	The	Company	believes	that	sales	of	iMac	systems have	also	declined	due	to	a	shift	in	consumer	preference	to	portable	systems	and	competitor	desktop	models	with	price	points	below	$1,000.	The Company	introduced	a	new	version	of	the	eMac	in	April	2004	with	a	suggested	retail	price	starting	at	$799	aimed	at	the	price	sensitive	customer.

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

Net	sales	increased	$465	million	or	8%	during	2003	compared	to	2002	while	Macintosh	unit	sales	declined	3%	year-over-year	to	approximately	3	million	units	in	2003. Several	factors	contributed	favorably	to	net	sales	during	2003	including:

•The	Retail	segment's	net	sales	grew	to	$621	million	during	2003	from	$283	million	in	2002,	an	increase	of	119%.	While	the	Company's	customers	may have	elected	to	purchase	product	from	their	local	Apple	Retail	store	rather	than	through	other	preexisting	sales	channels	in	the	U.S.,	the	Company believes	that	a	substantial	portion	of	the	Retail	segment's	net	sales	was	incremental	to	total	net	sales.	See	additional	comments	below	related	to	the	Retail segment	under	the	heading	"Segment	Operating	Performance."

•Net	sales	of	iPods	rose	$202	million	or	141%	during	2003	compared	to	2002.	This	increase	was	experienced	by	all	of	the	Company's	operating	segments. iPod	sales	during	2003	were	favorably	affected	by	the	introduction	of	substantially	redesigned	new	models,	which	were	compatible	with	both	Macintosh and	Windows	operating	systems.	The	Company's	iPod	digital	music	player	is	sold	by	a	variety	of	resellers,	many	of	which	do	not	currently	market	the Company's	Macintosh	systems.	The	Company	expanded	this	distribution	network	during	2003,	which	contributed	to	the	2003	increase	in	iPod	unit	sales of	146%.

•The	Company	also	experienced	an	increase	in	net	sales	of	peripherals	and	other	hardware	totaling	$164	million	or	31%	during	2003	compared	to	2002, reflecting	an	overall	increase	in	net	sales	of	other	computer	accessories	including	AirPort	cards	and	base	stations,	which	facilitate	wireless	connectivity; third	party	digital	cameras	and	printers;	and	a	number	of	portable	computer	related	accessories.

•Net	sales	of	other	music	products,	including	sales	associated	with	the	iTunes	Music	Store	and	iPod	related	services	and	accessories,	increased	$32	million or	800%	during	2003	compared	to	2002.	This	increase	was	due	primarily	to	the	introduction	of	the	iTunes	Music	Store	for	the	Macintosh

operating	system	in	April	2003	and	higher	sales	of	iPod	services	and	accessories	consistent	with	the	increase	in	iPod	net	sales	and	unit	sales	during	2003.

•Although	total	Macintosh	unit	sales	were	down	3%	in	2003,	unit	sales	of	the	Company's	portable	systems	were	relatively	strong	primarily	due	to	the	69% or	247,000	unit	increase	in	PowerBook	unit	sales,	slightly	offset	by	a	4%	or	30,000	unit	decrease	in	iBook	unit	sales.	The	increase	in	PowerBook	net sales	of	$468	million	or	56%	was	due	primarily	to	the	success	of	the	Company's	new	12-inch,	15-inch	and	17-inch	models	that	were	introduced	during 2003.	The	decline	in	iBook	consumer	portable	sales	during	2003	was	primarily	due	to	a	lower	average	price	per	unit.	Portable	systems	represented	42% of	all	Macintosh	systems	sold	in	2003	versus	33%	in	2002,	which	reflected	an	overall	industry	trend	towards	portable	systems.

•The	Company's	average	net	sales	per	Macintosh	unit	sold	increased	2%	to	$1,491	in	2003	as	a	result	of	various	changes	in	overall	unit	mix	towards relatively	higher-priced	PowerBook	systems	and	increases	direct	sales	primarily	from	the	Company's	retail	and	online	stores,	offset	by	somewhat	lower year-over-year	pricing	on	comparable	Macintosh	systems	for	most	of	the	Company's	Macintosh	product	lines	in	response	to	industry	pricing	pressure, particularly	with	the	Company's	iBook	consumer	portable	systems.	PowerBook	and	Power	Macintosh	systems	accounted	for	42%	of	total	unit	sales	in 2003	versus	36%	in	2002.

•Net	sales	of	software	increased	$55	million	or	18%	during	2003	compared	to	the	prior	year	and	reflected	higher	net	sales	of	Apple-branded	application and	server	software	and	third-party	software.	Net	sales	of	Apple-branded	application	and	server	software	increased	due	to	the	introduction	of	several	new software	titles	during	fiscal	2003	including	Final	Cut	Express,	iLife,	and	Keynote,	as	well	as	from	higher	sales	of	software	related	to	recent	acquisitions including	PowerSchool	and	Emagic.	Growth	in	net	sales	of	third-party	software	during	2003	was	particularly	strong	in	the	Americas	Segment	due	to strong	sales	of	software	by	the	Company's	online	store	and	its	Retail	segment.

•Service	and	other	sales	rose	$55	million	or	24%	during	2003	which	primarily	resulted	from	significant	year-over-year	increases	in	net	sales	associated with	APP	extended	maintenance	and	support	services,	as	well	as	the	Company's	Internet	related	services.	Increased	net	sales	associated	with	APP	were primarily	the	result	of	increasing	attach	rates	over	the	last	several	years.	Increased	net	sales	associated	with	Internet	services	were	due	to	increased	net sales	of	the	Company's	.Mac	Internet	service.

Offsetting	the	favorable	factors	discussed	above,	the	Company's	net	sales	during	2003	were	negatively	impacted	by	the	following	factors:

•Total	unit	sales	of	desktop	systems	fell	15%	during	2003	compared	to	2002.	iMac	systems	unit	sales	declined	16%	from	2003	to	2002	resulting	from	a shift	in	sales	away	from	desktop	systems	in	favor	of	portables.	Also,	the	flat	panel	iMac	form	factor	available	during	fiscal	2003	was	in	the	eighth	quarter of	its	life	cycle	by	the	end	of	2003.

•Unit	sales	of	Power	Macintosh	systems	fell	13%	during	2003	compared	to	2002.	For	the	first	nine	months	of	2003	compared	to	the	same	period	in	2002, unit	sales	of	Power	Macintosh	systems	decreased	24%,	which	was	representative	of	the	decline	of	Power	Macintosh	systems	sales	experienced	by	the Company	during	recent	years	and	was	also	believed	to	be	attributable	to	delays	in	purchasing	pending	the	release	of	the	Power	Mac	G5.	As	expected,	this trend	reversed	in	the	fourth	quarter	of	2003	with	unit	sales	increasing	26%	during	the	quarter	as	compared	to	the	same	period	in	the	prior	year	due	largely to	the	new	Power	Mac	G5,	which	the	Company	introduced	in	June	2003	and	began	shipping	at	the	end	of	fiscal	2003.	The	decline	in	Power	Macintosh sales	over	the	previous	several	years	also	reflects	the	shift	in	sales	to	portable	systems,	particularly	PowerBooks.	In	addition,	the	Company	believes	that weak	economic	conditions	over	the	past

several	years	had	a	pronounced	negative	impact	on	its	professional	and	creative	customers.	Additionally,	some	of	the	Company's	professional	and creative	customers	may	have	delayed	upgrades	of	their	systems	in	anticipation	of	certain	software	vendors	transitioning	their	professionally	oriented Macintosh	software	applications	to	run	natively	on	Mac	OS	X.

•The	Company	experienced	ongoing	weakness	in	its	U.S.	education	channel	during	2003.	Net	sales	and	unit	sales	in	U.S.	education	during	2003	were down	4%	and	6%,	respectively,	as	compared	to	2002.	This	decline	was	due	to	a	decrease	in	K-12	sales,	partially	offset	by	an	increase	in	higher	education sales.	Net	sales	declined	primarily	as	a	result	of	a	continued	shift	in	mix	away	from	higher	priced	Power	Macintosh	and	iMac	systems	towards	lower priced	eMac	and	iBook	systems,	although	the	Company	did	experience	a	significant	increase	in	sales	of	its	PowerBook	systems	primarily	to	higher education	customers.	Portable	systems	accounted	for	approximately	43%	of	total	unit	sales	in	the	education	channel	during	2003,	as	compared	to approximately	34%	in	2002.

# 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	segment	includes	both	North	and	South	America,	except	for	the	activities	of	the	Company's	Retail	segment.	The	Europe	segment	includes European	countries	as	well	as	the	Middle	East	and	Africa.	The	Japan	segment	includes	only	Japan	and	excludes	revenue	from	the	Company's	own	retail	stores	in	Japan, which	is	included	in	the	Company's	Retail	segment.	The	Retail	segment	operated	Apple-owned	retail	stores	in	the	U.S.	and	Japan	during	fiscal	2004.	Each	reportable geographic	operating	segment	provides	similar	hardware	and	software	products	and	similar	services.	Further	information	regarding	the	Company's	operating	segments may	be	found	in	Item	8	of	this	Form	10-K	in	the	Notes	to	Consolidated	Financial	Statements	at	Note	11,	"Segment	Information	and	Geographic	Data."

# Americas

During	fiscal	2004,	net	sales	in	the	Americas	segment	grew	26%	or	$838	million	compared	to	fiscal	2003.	The	increase	in	net	sales	during	2004	was	primarily attributable	to	the	significant	year-over-year	increase	in	iPod	sales	as	well	as	strong	sales	of	peripherals,	software,	and	services.	This	increase	was	partially	offset	by	a shift	in	sales	to	the	Retail	segment,	which	had	84	stores	in	the	U.S.	as	of	the	end	of	fiscal	2004.	Macintosh	unit	sales	also	increased	by	4%	in	fiscal	2004	compared	to 2003,	driven	primarily	by	strong	sales	of	portable	and	Power	Macintosh	systems,	partially	offset	by	continued	weakness	in	iMac	sales.	During	2004	and	2003,	the Americas	segment	represented	approximately	49%	and	51%,	respectively,	of	the	Company's	total	net	sales	and	represented	approximately	51%	and	54%,	respectively,	of total	Macintosh	unit	sales.	As	noted	above,	the	Company	experienced	an	increase	in	U.S.	education	channel	net	sales	of	19%	for	fiscal	2004	compared	to	2003.	Strong U.S.	education	net	sales	for	the	current	year	relate	primarily	to	strength	in	higher	education	net	sales	that	resulted	from	a	successful	back-to-school	selling	season	with strong	demand	for	the	Company's	portables.	This	strength	drove	year-over-year	growth	in	net	sales	of	40%	for	the	higher	education	channel	during	fiscal	2004.	The Company's	K-12	net	sales	grew	year-over-year	by	3%	during	fiscal	2004,	despite	the	challenges	in	the	K-12	market	from	continued	budget	constraints	and	increased competition,	due	to	the	Company's	continued	focus	and	success	with	delivering	1:1	education	solutions.

Net	sales	in	the	Americas	segment	during	2003	increased	$50	million	or	2%	compared	to	2002.	During	2003	and	2002,	the	Americas	segment	represented	approximately 51%	and	55%,	respectively,	of	the	Company's	total	net	sales	and	represented	approximately	54%	and	56%,	respectively,	of	total	Macintosh	unit	sales.	The	results	of	the Americas	segment	are	similar	to	the	overall	results	of	the	Company	as	they	reflect	substantially	lower	unit	sales	and	net	sales	of	Power	Macintosh	systems	and	iMac systems,	partially	offset	by	increases	in	unit	sales	and	net	sales	of	PowerBooks.	The	net	sales	of	the	Americas	segment,	and	the	Company	in	total,	also	reflect substantially	higher	sales	of	iPods,	peripherals,	software,	and	services	during	2003	compared	to	2002.	The	Americas	segment	had	been	negatively	affected	by	weakness in	its	U.S.	education	channel	during	2003.	Total	net	sales	and	unit	sales	in	the	U.S.	education	channel	during	2003

were	down	4%	and	6%,	respectively,	compared	to	the	same	period	in	2002.	The	Company	believes	this	decline	was	caused	by	increased	competition	in	the	education market	and	by	a	reduction	in	spending	by	U.S.	educational	institutions	due	to	federal	and	state	funding	concerns	and	tax	revenue	shortfalls	resulting	from	the	weak economy.	Additionally,	some	of	the	decline	during	2003	in	net	sales	and	unit	sales	of	Macintosh	systems	in	the	Americas	segment	may	be	the	result	of	the	operation	of the	Company's	Retail	segment	whose	net	sales,	all	of	which	occurred	within	the	U.S.,	increased	significantly	during	2003.

# Europe

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

Net	sales	in	Europe	increased	$58	million	or	5%	during	2003	as	compared	to	2002	while	Macintosh	unit	sales	declined	by	5%	during	the	same	period.	Europe's	operating results	were	consistent	with	the	trend	experienced	in	the	Americas	and	by	the	Company	as	a	whole.	Europe	experienced	weakened	demand	for	Power	Macintosh,	iMac and	iBook	systems	in	2003,	partially	offset	by	strong	demand	for	PowerBooks	whose	net	sales	increased	by	48%	or	$100	million	from	2002.	Europe	also	realized increased	sales	of	iPods,	peripherals,	software,	and	services.

# Japan

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

Net	sales	in	Japan	decreased	$12	million	or	2%	during	2003	as	compared	to	the	same	period	in	2002,	the	weakest	year-to-date	performance	of	any	of	the	Company's operating	segments.	Japan's	Macintosh	unit	sales	were	particularly	weak	in	2003,	declining	12%,	and	were	primarily	attributable	to	lower	sales	of	iMac	and	iBook systems,	partially	offset	by	an	increase	in	PowerBook	sales	as	well	as	higher	sales	of	iPods,	and	peripherals	and	other	hardware.	Japan's	Macintosh	unit	sales	remained significantly	below	the	segment's	historic	levels	due	to	economic	conditions	that	remained	particularly	negative	in	Japan.

# Retail

The	Company	opened	21	new	retail	stores	during	2004,	including	its	first	two	international	stores	in	Tokyo	and	Osaka,	Japan,	bringing	the	total	number	of	open	stores	to 86	as	of	September	25,	2004.	This	compares	to	65	open	stores	as	of	September	27,	2003	and	40	open	stores	as	of	September	28,	2002.	During	the	first	quarter	of	2005, the	Company	anticipates	opening	approximately	14	additional	stores	to	end	the	calendar	year	at	approximately	100	stores.	Approximately	half	of	the	stores	expected	to open	during	the	first	quarter	of	2005	will	be	in	the	new	"mini"	store	design,	which	is	the	Company's	smallest	store	format	to	date;	allowing	it	to	be	placed	in	a	variety	of new	locations	to	introduce	the	Company's	innovative	products	to	even	more	customers.	The	Company	also	opened	its	third	international	store	in	London,	England during	the	first	quarter	of	2005.

Net	sales	of	the	Retail	segment	grew	to	$1.185	billion	during	2004	from	$621	million	and	$283	million,	in	2003	and	2002,	respectively.	The	increases	in	net	sales	during both	2004	and	2003	reflect	the	impact	of	new	store	openings	for	each	fiscal	year,	including	the	opening	of	21	new	stores	in	2004	and	25	new	stores	in	2003.	An	increase in	average	revenue	per	store	also	contributed	to	the	segment's	strong	sales	in	fiscal	2004.	With	an	average	of	76	stores	open	during	2004,	the	Retail	segment	achieved annualized	revenue	per	store	of	approximately	$15.6	million,	as	compared	to	$11.5	million	in	2003	with	a	54	store	average	and	$10.2	million	in	2002	with	a	28	store average.

As	measured	by	the	Company's	operating	segment	reporting,	the	Retail	segment	reported	profit	of	$39	million	during	fiscal	2004	as	compared	to	losses	of	$5	million	and $22	million	during	2003	and	2002,	respectively.	This	improvement	is	primarily	attributable	to	the	segment's	year-over-year	increase	in	average	quarterly	revenue	per store,	the	impact	of	opening	new	stores,	and	the	segment's	year-over-year	increase	in	net	sales,	which	resulted	in	higher	leverage	on	occupancy,	depreciation	and	other fixed	costs.

Expansion	of	the	Retail	segment	has	required	and	will	continue	to	require	a	substantial	investment	in	fixed	assets	and	related	infrastructure,	operating	lease commitments,	personnel,	and	other	operating	expenses.	Capital	expenditures	associated	with	the	Retail	segment	were	$104	million	in	fiscal	2004,	bringing	the	total capital	expenditures	since	inception	of	the	Retail	segment	to	approximately	$394	million.	As	of	September	25,	2004,	the	Retail	segment	had	approximately	2,100 employees	and	had	outstanding	operating	lease	commitments	associated	with	retail	store	space	and	related	facilities	of	approximately	$436	million.	The	Company	would incur	substantial	costs	should	it	choose	to	terminate	its	Retail	segment	or	close	individual	stores.	Such	costs	could	adversely	affect	the	Company's	results	of	operations and	financial	condition.

# Gross	Margin

Gross	margin	for	the	three	fiscal	years	ended	September	25,	2004	are	as	follows	(in	millions,	except	gross	margin	percentages):

|  | 2004 | 2003 | 2002 |
| :--- | :--- | :--- | :--- |
| Net\tsales | $8,279 | $6,207 | $5,742 |
| Cost\tof\tsales | 6,020 | 4,499 | 4,139 |
| Gross\tmargin | $2,259 | $1,708 | $1,603 |
| Gross\tmargin\tpercentage | 27.3% | 27.5% | 27.9% |

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

The	Company	anticipates	that	its	gross	margin	and	the	gross	margin	of	the	overall	personal	computer	and	consumer	electronics	industries	will	remain	under	pressure throughout	fiscal	2005	in	light	of	price	competition,	especially	for	the	iPod	product	line.	The	Company	also	expects	to	continue	to	incur	air	freight	charges,	which negatively	impact	gross	margins	on	the	iMac	and	other	products	during	the	first	quarter	of	2005	and	possibly	beyond.

The	foregoing	statements	regarding	the	Company's	expected	gross	margin	during	2005,	general	demand	for	personal	computers,	anticipated	air	freight	charges,	and future	economic	conditions	are	forward-	looking.	There	can	be	no	assurance	that	current	gross	margins	will	be	maintained	or	targeted	gross	margin	levels	will	be achieved.	In	general,	gross	margins	and	margins	on	individual	products,	including	iPods,	will	remain	under	significant	downward	pressure	due	to	a	variety	of	factors, including	continued	industry	wide

global	pricing	pressures,	increased	competition,	compressed	product	life	cycles,	potential	increases	in	the	cost	and	availability	of	raw	material	and	outside manufacturing	services,	and	potential	changes	to	the	Company's	product	mix,	including	higher	unit	sales	of	consumer	products	with	lower	average	selling	prices	and lower	gross	margins.	In	response	to	these	downward	pressures,	the	Company	expects	it	will	continue	to	take	pricing	actions	with	respect	to	its	products.	Gross	margins could	also	be	affected	by	the	Company's	ability	to	effectively	manage	product	quality	and	warranty	costs	and	to	stimulate	demand	for	certain	of	its	products.	The Company's	operating	strategy	and	pricing	take	into	account	anticipated	changes	in	foreign	currency	exchange	rates	over	time;	however,	the	Company's	results	of operations	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	decreased	to	27.5%	of	net	sales	in	2003	from	27.9%	of	net	sales	in	2002.	This	decline	in	gross	margin	reflects	relatively	aggressive	pricing	actions	on several	Macintosh	models	instituted	by	the	Company	beginning	in	late	fiscal	2002	as	a	result	of	continued	pricing	pressure	throughout	the	personal	computer	industry, lower	sales	of	relatively	higher	margin	Power	Macintosh	systems	during	the	first	three	fiscal	quarters	of	2003,	and	increased	air	freight	and	manufacturing	costs associated	with	the	production	ramp-up	of	the	new	Power	Mac	G5	and	15-inch	PowerBook,	both	of	which	began	shipping	in	volume	during	September	2003.	This decline	is	also	attributable	to	a	rise	in	certain	component	costs	as	the	year	progressed.	The	aforementioned	negative	factors	affecting	gross	margins	during	2003	were partially	offset	by	the	increase	in	higher	margin	software	and	direct	sales.

# Operating	Expenses

Operating	expenses	for	the	three	fiscal	years	ended	September	25,	2004	are	as	follows	(in	millions,	except	for	percentages):

|  | 2004 | 2003 | 2002 |
| :--- | :--- | :--- | :--- |
| Research\tand\tdevelopment | $489 | $471 | $446 |
| Percentage\tof\tnet\tsales | 6% | 8% | 8% |
| Selling,\tgeneral,\tand\tadministrative\texpenses | $1,421 | $1,212 | $1,109 |
| Percentage\tof\tnet\tsales | 17% | 20% | 19% |
| Restructuring\tcosts | $23 | $26 | $30 |
| Purchased\tin-process\tresearch\tand\tdevelopment | — | — | $1 |

# Research	and	Development	(R&D)

The	Company	recognizes	that	focused	investments	in	R&D	are	critical	to	its	future	growth	and	competitive	position	in	the	marketplace	and	are	directly	related	to	timely development	of	new	and	enhanced	products	that	are	central	to	the	Company's	core	business	strategy.	The	Company	has	historically	relied	upon	innovation	to	remain competitive.	R&D	expense	amounted	to	approximately	6%	of	total	net	sales	during	fiscal	2004	down	from	8%	of	total	net	sales	in	both	2003	and	2002.	This	decrease	is due	to	the	significant	increase	of	33%	in	total	net	sales	of	the	Company	for	fiscal	2004.	Although	R&D	expense	decreased	as	a	percentage	of	total	net	sales	in	fiscal	2004, actual	expenditures	for	R&D	in	fiscal	2004	increased	$18	million	or	4%	from	fiscal	2003,	which	follows	a	6%	or	$25	million	increase	in	2003	compared	to	2002.	The overall	increase	in	R&D	expense	relates	primarily	to	increased	headcount	and	support	for	new	product	development	activities	and	the	impact	of	employee	salary	merit increases	in	2004.	R&D	spending	also	included	capitalized	software	development	costs	of	approximately	$4.5	million	related	to	the

development	of	Mac	OS	X	Tiger	and	$2.3	million	related	to	the	development	of	FileMaker	Pro	7	in	2004;	$14.7	million	related	to	the	development	of	Mac	OS	X	Panther in	2003;	and	approximately	$13.3	million	associated	with	the	development	of	Mac	OS	X	Jaguar	and	approximately	$6	million	associated	with	the	PowerSchool enterprise	student	information	system	in	2002.	Further	information	related	to	the	Company's	capitalization	of	software	development	costs	may	be	found	in	Part	II,	Item	8 of	this	Form	10-K	at	Note	1	of	Notes	to	Consolidated	Financial	Statements.

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

Expenditures	for	SG&A	increased	$209	million	or	17%	during	2004	compared	to	2003.	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,	an	increase	in	amortization costs	associated	with	restricted	stock	compensation,	and	higher	direct	and	channel	selling	expenses	resulting	from	the	increase	in	net	sales	and	employee	salary	merit increases.	SG&A	as	a	percentage	of	total	net	sales	in	2004	was	17%,	down	from	20%	in	2003.	This	decrease	is	due	to	the	increase	of	33%	in	total	net	sales	of	the Company	for	fiscal	2004,	reflecting	leverage	on	the	Company's	fixed	costs.

SG&A	increased	$103	million	or	9%	during	2003	as	compared	to	2002	due	primarily	to	the	Company's	continued	expansion	of	the	Retail	segment	and	increases	in headcount.	The	overall	increase	was	partially	offset	by	a	decrease	in	2003	discretionary	spending	on	marketing	and	advertising	and	by	savings	resulting	from	the	2003 and	2002	restructuring	activities	described	below.

# Fiscal	2004	Restructuring	Actions

The	Company	recorded	total	restructuring	charges	of	approximately	$23	million	during	the	year	ended	September	25,	2004,	including	approximately	$14	million	in severance	costs,	$5.5	million	in	asset	impairments,	and	a	$3.5	million	charge	for	lease	cancellations.	Of	the	$23	million	charge,	$14.3	million	had	been	spent	by	the	end of	2004,	with	the	remaining	$8.7	million	consisting	of	$5.2	million	for	employee	severance	benefits	and	$3.5	million	for	lease	cancellations.

During	the	fourth	quarter	of	2004,	the	Company	recognized	restructuring	expense	of	$5.5	million.	In	conjunction	with	the	European	workforce	reduction	during	the second	quarter	of	2004,	the	Company	vacated	a	leased	sales	facility	during	the	fourth	quarter	of	2004	resulting	in	a	charge	of	$3.7	million	for	contract	termination	and asset	impairment	costs.	The	Company	also	recognized	employee	termination	costs	of	$1.8	million	related	to	the	elimination	of	non-essential	positions,	principally	in Europe.	In	addition,	the	Company	reversed	$400,000	of	excess	restructuring	expense	from	prior	periods	related	primarily	to	lower	than	expected	disposal	costs	on Sacramento	manufacturing-related	fixed	assets.	The	net	cost	of	the	restructuring	plans	for	the	fourth	quarter	of	2004	was	$5.1	million,	of	which	$300,000	had	been	paid prior	to	the	end	of	2004.	These	actions	will	result	in	the	termination	of	54	positions,	4	of	which	had	been	terminated	prior	to	the	end	of	2004.

During	the	third	quarter	of	2004,	the	Company	finalized	restructuring	plans	related	to	closing	Company-owned	manufacturing	activities	in	Sacramento.	In	addition,	the Company's	management	approved	restructuring	plans	related	to	certain	headcount	reductions	primarily	for	various	sales	and	marketing	activities	principally	in	the	U.S. Total	cost	of	the	restructuring	plan	for	the	third	quarter	of	2004	was	$7.9	million,	of	which	$7.2	million	had	been	paid	prior	to	the	end	of	2004.	These	actions	will	result in	the	termination	of	83	positions,	77	of	which	had	been	terminated	prior	to	the	end	of	2004.

The	closing	of	manufacturing	operations	in	Sacramento	resulted	in	the	elimination	of	67	positions	for	a	severance	cost	of	$1.9	million	and	write-off	of	$5.3	million	in manufacturing-related	fixed	assets	whose	use	ceased	during	the	third	quarter	of	2004.	Termination	of	sales	and	marketing	activities,	principally	in	the	U.S.,	resulted	in severance	of	$0.7	million	for	the	elimination	of	16	positions.

During	the	second	quarter	of	2004,	the	Company's	management	approved	restructuring	plans	related	to	the	termination	of	Company-owned	manufacturing	activities	in Sacramento	and	headcount	reductions

related	primarily	to	various	sales	and	marketing	activities	in	the	U.S.	and	Europe.	Total	cost	of	the	actions	was	$9.6	million	for	the	termination	of	348	positions.	As	of the	end	of	the	fourth	quarter	of	2004,	$6.8	million	had	been	spent	and	310	positions	had	been	eliminated	related	to	these	actions.

The	Company	estimates	the	closing	of	the	Sacramento	manufacturing	operations	will	result	in	reduced	ongoing	quarterly	operating	expenses	of	approximately $2	million.	In	addition,	the	Company	estimates	that	the	remaining	restructuring	actions	taken	in	fiscal	2004	will	ultimately	result	in	reduced	ongoing	quarterly	operating expenses	of	approximately	$6	million.

The	Company	recorded	total	restructuring	charges	of	approximately	$26.8	million	during	the	year	ended	September	27,	2003,	including	approximately	$7.4	million	in severance	costs,	a	$5.0	million	charge	to	write-off	deferred	compensation,	$7.1	million	in	asset	impairments	and	a	$7.3	million	charge	for	lease	cancellations.	Of	the $26.8	million	charge,	all	had	been	spent	by	the	end	of	2004,	except	for	approximately	$3.0	million	related	to	operating	lease	costs	on	abandoned	facilities.	During	the third	quarter	of	2003,	approximately	$500,000	of	the	amount	originally	accrued	for	lease	cancellations	was	determined	to	be	in	excess	due	to	the	sublease	of	a	property sooner	than	originally	estimated	and	an	approximately	$500,000	shortfall	was	identified	in	the	severance	accrual	due	to	higher	than	expected	severance	costs	related	to the	closure	of	the	Company's	Singapore	manufacturing	operations.	These	adjustments	had	no	net	effect	on	reported	operating	expense.

During	the	second	quarter	of	2003,	the	Company's	management	approved	and	initiated	restructuring	actions	that	resulted	in	recognition	of	a	total	restructuring	charge	of $2.8	million,	including	$2.4	million	in	severance	costs	and	$400,000	for	asset	write-offs	and	lease	payments	on	an	abandoned	facility.	Actions	taken	in	the	second quarter	were	for	the	most	part	supplemental	to	actions	initiated	in	the	prior	two	quarters	and	focused	on	further	headcount	reductions	in	various	sales	and	marketing functions	in	the	Company's	Americas	and	Europe	operating	segments	and	further	reductions	associated	with	PowerSchool-related	activities	in	the	Americas	operating segment,	including	an	accrual	for	asset	write-offs	and	lease	payments	on	an	abandoned	facility.	The	second	quarter	actions	resulted	in	the	termination	of	93	employees.

During	the	first	quarter	of	2003,	the	Company's	management	approved	and	initiated	restructuring	actions	with	a	total	cost	of	$24	million	that	resulted	in	the	termination of	manufacturing	operations	at	the	Company-owned	facility	in	Singapore,	further	reductions	in	headcount	resulting	from	the	shift	in	PowerSchool	product	strategy	that took	place	at	the	end	of	fiscal	2002,	and	termination	of	various	sales	and	marketing	activities	in	the	U.S.	and	Europe.	These	restructuring	actions	resulted	in	the elimination	of	260	positions	worldwide.

Closure	of	the	Company's	Singapore	manufacturing	operations	resulted	in	severance	costs	of	$1.8	million	and	costs	of	$6.7	million	to	write-off	manufacturing	related fixed	assets,	whose	use	ceased	during	the	first	quarter.	PowerSchool	related	costs	included	severance	of	approximately	$550,000	and	recognition	of	$5	million	of previously	deferred	stock	compensation	that	arose	when	PowerSchool	was	acquired	by	the	Company	in	2001	related	to	certain	PowerSchool	employee	stockholders who	were	terminated	in	the	first	quarter	of	2003.	Termination	of	sales	and	marketing	activities	and	employees,	principally	in	the	U.S.	and	Europe,	resulted	in	severance costs	of	$2.8	million	and	accrual	of	costs	associated	with	operating	leases	on	closed	facilities	of	$6.7	million.	The	total	net	restructuring	charge	of	$23	million	recognized during	the	first	quarter	of	2003	also	reflects	the	reversal	of	$600,000	of	unused	restructuring	accrual	originally	made	during	the	first	quarter	of	2002.

During	fiscal	2002,	the	Company	recorded	total	restructuring	charges	of	approximately	$30	million	related	to	actions	intended	to	eliminate	certain	activities	and	better align	the	Company's	operating	expenses	with

existing	general	economic	conditions	and	to	partially	offset	the	cost	of	continuing	investments	in	new	product	development	and	investments	in	the	Company's	Retail operating	segment.

During	the	fourth	quarter	of	2002,	the	Company's	management	approved	and	initiated	restructuring	actions	with	a	total	cost	of	approximately	$6	million	designed	to reduce	headcount	costs	in	corporate	operations	and	sales	and	to	adjust	its	PowerSchool	product	strategy.	These	restructuring	actions	resulted	in	the	elimination	of approximately	180	positions	worldwide	at	a	cost	of	$1.8	million,	all	of	which	were	eliminated	by	September	27,	2003.	Eliminated	positions	were	primarily	in	corporate operations,	sales,	and	PowerSchool	related	research	and	development	in	the	Americas	operating	segment.	The	shift	in	product	strategy	at	PowerSchool	included discontinuing	development	and	marketing	of	PowerSchool's	PSE	product.	This	shift	resulted	in	the	impairment	of	previously	capitalized	development	costs	associated with	the	PSE	product	in	the	amount	of	$4.5	million.

During	the	first	quarter	of	2002,	the	Company's	management	approved	and	initiated	restructuring	actions	with	a	total	cost	of	approximately	$24	million.	These restructuring	actions	resulted	in	the	elimination	of	approximately	425	positions	worldwide	at	a	cost	of	$8	million.	Positions	were	eliminated	primarily	in	the	Company's operations,	information	systems,	and	administrative	functions.	In	addition,	these	restructuring	actions	also	included	significant	changes	in	the	Company's	information systems	strategy	resulting	in	termination	of	equipment	leases	and	cancellation	of	existing	projects	and	activities.	The	Company	ceased	using	the	assets	associated	with first	quarter	2002	restructuring	actions	during	that	same	quarter.	Related	lease	and	contract	cancellation	charges	totaled	$12	million,	and	charges	for	asset	impairments totaled	$4	million.	The	first	quarter	2002	restructuring	actions	were	primarily	related	to	corporate	activity	not	allocated	to	operating	segments.	During	the	first	quarter	of 2003,	the	Company	reversed	the	remaining	unused	accrual	of	$600,000.

# Purchased	In-Process	Research	and	Development	(IPR&D)

During	2002,	the	Company	acquired	Emagic	GmbH,	a	provider	of	professional	software	solutions	for	computer	based	music	production,	for	approximately	$30	million in	cash;	$551,000	of	which	was	allocated	to	IPR&D.	The	amount	of	the	purchase	price	allocated	to	IPR&D	was	expensed	upon	acquisition,	because	the	technological feasibility	of	products	under	development	had	not	been	established	and	no	alternative	future	uses	existed.	The	fair	value	of	the	IPR&D	was	determined	using	the	income approach,	which	reflects	the	projected	free	cash	flows	that	will	be	generated	by	the	IPR&D	projects	and	that	are	attributable	to	the	acquired	technology,	and	discounting the	projected	net	cash	flows	back	to	their	present	value	using	a	discount	rate	of	25%.

# Other	Income	and	Expense

Other	income	and	expense	for	the	three	fiscal	years	ended	September	25,	2004	are	as	follows	(in	millions):

|  | 2004 | 2003 | 2002 |
| :--- | :--- | :--- | :--- |
| Gains\t(losses)\ton\tnon-current\tinvestments,\tnet | $4 | $10 | $(42) |
| Interest\tincome | $64 | $69 | $118 |
| Interest\texpense | (3) | (8) | (11) |
| Gains\ton\tsales\tof\tshort\tterm\tinvestments,\tnet | 1 | 21 | 7 |
| Other\tincome\t(expense),\tnet | (9) | (5) | (2) |
| Gain\ton\tforward\tpurchase\tagreement | — | 6 | — |
| Interest\tand\tother\tincome,\tnet | $53 | $83 | $112 |
| Total\tother\tincome\tand\texpense | $57 | $93 | $70 |

# Gains	and	Losses	on	Non-current	Investments

Over	the	course	of	the	last	three	years,	the	Company	has	held	investments	that	were	classified	as	available-for-sale	in	EarthLink	Inc.	(EarthLink),	Akamai Technologies,	Inc.	(Akamai),	ARM	Holdings	plc	(ARM)	and	certain	investments	in	private	companies.	Further	information	related	to	the	Company's	non-current	debt and	equity	investments	may	be	found	in	Part	II,	Item	8	of	this	Form	10-K	at	Note	2	of	Notes	to	Consolidated	Financial	Statements.

During	2004,	the	Company	sold	its	remaining	986,000	shares	of	Akamai	stock.	The	transaction	generated	proceeds	of	approximately	$5	million	and	a	gain	before	taxes of	approximately	$4	million.	As	of	September	25,	2004,	the	Company	does	not	have	any	non-current	public	company	investments	reflected	in	its	consolidated	balance sheet.

During	2003,	the	Company	sold	1,875,000	shares	of	Akamai	stock	for	net	proceeds	of	approximately	$9	million,	and	a	gain	before	taxes	of	approximately	$8	million. Additionally,	the	Company	sold	its	remaining	investment	in	ARM	stock,	278,000	shares,	for	net	proceeds	of	approximately	$295,000,	and	a	gain	before	taxes	of $270,000,	and	sold	its	remaining	investment	in	EarthLink	stock,	6,540,000	shares,	for	net	proceeds	of	approximately	$37	million,	and	a	gain	before	taxes	of	$2	million.

During	2002,	the	Company	determined	that	declines	in	the	fair	value	of	certain	investments	were	other-than-temporary.	As	a	result,	the	Company	recognized	a $44	million	charge	to	earnings	to	writedown	the	basis	of	its	investment	in	EarthLink,	a	$6	million	charge	to	earnings	to	writedown	the	basis	of	its	investment	in	Akamai, and	a	$15	million	charge	to	earnings	to	writedown	the	basis	of	its	investment	in	a	private	company	investment.	These	losses	in	2002	were	partially	offset	by	the	sale	of 117,000	shares	of	EarthLink	stock	for	net	proceeds	of	$2	million	and	a	gain	before	taxes	of	$223,000,	the	sale	of	250,000	shares	of	Akamai	stock	for	net	proceeds	of $2	million	and	a	gain	before	taxes	of	$710,000,	and	the	sale	of	approximately	4.7	million	shares	of	ARM	stock	for	both	net	proceeds	and	a	gain	before	taxes	of $21	million.

# Interest	and	Other	Income,	Net

Total	interest	and	other	income,	net	decreased	$30	million	or	36%	to	$53	million	during	fiscal	2004	compared	to	$83	million	in	2003	and	$112	million	in	2002.	These decreases	are	attributable	primarily	to	declining	investment	yields	on	the	Company's	cash	and	short-term	investments	resulting	from	lower	market	interest	and	a shortening	of	the	average	maturity	of	the	Company's	investment	portfolio,	as	well	as	lower	gains	on	sales	of	short-term	investments	in	fiscal	2004.	The	weighted	average interest	rate	earned	by	the	Company	on	its	cash,	cash	equivalents	and	short-term	investments	fell	to	1.38%	in	2004	compared	to	the	1.89%	and	2.85%	rates	earned during	2003	and	2002,	respectively.	The	Company	occasionally	sells	short-term	investments	prior	to	their	stated	maturities.	As	a	result	of	such	sales,	the	Company recognized	net	gains	of	$1	million,	$21	million	and	$7	million	during	fiscal	2004,	2003	and	2002,	respectively.	The	decrease	in	total	interest	and	other	income,	net during	fiscal	2003	was	also	offset	by	the	$6	million	gain	related	to	the	forward	purchase	agreement	during	the	fourth	quarter	of	2003	which	is	further	discussed	below under	the	heading	"Cumulative	Effects	of	Accounting	Changes."

Interest	expense	consisted	primarily	of	interest	on	the	Company's	$300	million	aggregate	principal	amount	unsecured	notes,	which	were	repaid	upon	their	maturity	in February	2004,	partially	offset	by	amortization	of	deferred	gains	realized	in	2002	and	2001	that	resulted	from	the	closure	of	swap	positions	associated	with	the unsecured	notes.	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	25,	2004	was	approximately	28%.	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.	As	of	September	25,	2004,	the	Company	had	deferred	tax	assets	arising	from	deductible	temporary	differences,	tax	losses, and	tax	credits	of	$647	million	before	being	offset	against	certain	deferred	tax	liabilities	and	a	valuation	allowance	for	presentation	on	the	Company's	balance	sheet. Management	believes	it	is	more	likely	than	not	that	forecasted	income,	including	income	that	may	be	generated	as	a	result	of	certain	tax	planning	strategies,	will	be sufficient	to	fully	recover	the	remaining	net	deferred	tax	assets.	As	of	September	25,	2004,	a	valuation	allowance	of	$30	million	was	recorded	against	the	deferred	tax asset	for	the	benefits	of	tax	losses	that	may	not	be	realized.	The	valuation	allowance	relates	principally	to	the	operating	loss	carryforwards	acquired	from	NeXT	and other	acquisitions,	the	utilization	of	which	is	subject	to	certain	limitations	imposed	by	the	Internal	Revenue	Code.	The	Company	will	continue	to	evaluate	the realizability	of	the	deferred	tax	assets	quarterly	by	assessing	the	need	for	and	amount	of	the	valuation	allowance.

The	Internal	Revenue	Service	(IRS)	has	completed	its	field	audit	of	the	Company's	federal	income	tax	returns	for	all	years	prior	to	2001	and	proposed	certain adjustments.	Certain	of	these	adjustments	are	being	contested	through	the	IRS	Appeals	Office.	Substantially	all	IRS	audit	issues	for	these	years	have	been	resolved.	In addition,	the	Company	is	also	subject	to	audits	by	state,	local,	and	foreign	tax	authorities.	Management	believes	that	adequate	provision	has	been	made	for	any adjustments	that	may	result	from	tax	examinations.	However,	the	outcome	of	tax	audits	cannot	be	predicted	with	certainty.	Should	any	issues	addressed	in	the Company's	tax	audits	be	resolved	in	a	manner	not	consistent	with	management's	expectations,	the	Company	could	be	required	to	adjust	its	provision	for	income	tax	in the	period	such	resolution	occurs.

# Cumulative	Effects	of	Accounting	Changes

# Financial	Instruments	with	Characteristics	of	Both	Liabilities	and	Equity

On	May	15,	2003,	the	Financial	Accounting	Standards	Board	(FASB)	issued	SFAS	No.	150,	Accounting	for	Certain	Financial	Instruments	with	Characteristics	of	Both Liabilities	and	Equity.	SFAS	No.	150	requires	issuers	to	classify	as	liabilities	certain	freestanding	financial	instruments	that	embody	obligations	for	the	issuer	and	have characteristics	of	both	liabilities	and	equity.	The	Company	adopted	the	provisions	of	SFAS	No.	150	on	June	29,	2003,	which	resulted	in	a	favorable	cumulative	effect type	adjustment	of	approximately	$3	million.	This	adjustment	represented	the	mark-to-market	adjustment	to	fair	value	for	a	forward	purchase	agreement	that	allowed	the Company	to	acquire	1.5	million	shares	of	its	common	stock	at	a	price	of	$16.64	per	share.	The	Company	settled	this	forward	purchase	agreement	in	August	2003.	The settlement	resulted	in	an	additional	gain	of	approximately	$6	million,	which	is	included	in	interest	and	other	income,	net.

# Accounting	for	Asset	Retirement	Obligations

On	September	29,	2002,	the	Company	adopted	SFAS	No.	143,	Accounting	for	Asset	Retirement	Obligations,	which	addresses	financial	accounting	and	reporting	for obligations	associated	with	the	retirement	of	tangible	long-lived	assets	and	the	associated	asset	retirement	costs.	Net	of	the	related	income	tax	effect	of	approximately $1	million,	adoption	of	SFAS	No.	143	resulted	in	an	unfavorable	cumulative-effect	type	adjustment	to	net	income	during	2003	of	approximately	$2	million.	This adjustment	represents	cumulative	depreciation	and	accretion	that	would	have	been	recognized	through	the	date	of	adoption	of	SFAS	No.	143	had	the	statement	been applied	to	the	Company's	existing	asset	retirement	obligations	at	the	time	they	were	initially	incurred.

# Recent	Accounting	Pronouncements

In	December	2003,	the	Securities	and	Exchange	Commission	released	Staff	Accounting	Bulletin	(SAB)	No.	104,	Revenue	Recognition,	which	supercedes	SAB	101, Revenue	Recognition	in	Financial	Statements.	SAB	104	clarifies	existing	guidance	regarding	revenue	contracts	that	contain	multiple	deliverables	to	make	it	consistent with	Emerging	Issues	Task	Force	(EITF)	No.	00-21.	The	adoption	of	SAB	104	did	not	have	a	material	impact	on	the	Company's	results	of	operations	or	financial position.

In	December	2003,	the	Financial	Accounting	Standards	Board	(FASB)	issued	Interpretation	No.	(FIN)	46R,	a	revision	to	FIN	46,	Consolidation	of	Variable	Interest Entities.	FIN	46R	clarifies	some	of	the	provisions	of	FIN	46	and	exempts	certain	entities	from	its	requirements.	FIN	46R	is	effective	at	the	end	of	the	first	interim	period ending	after	March	15,	2004.	The	adoption	of	FIN	46R	did	not	have	a	material	impact	on	the	Company's	results	of	operations	or	financial	position.

In	March	2004,	the	FASB	issued	EITF	Issue	No.	03-1,	The	Meaning	of	Other-Than-Temporary	Impairment	and	Its	Application	to	Certain	Investments.	EITF	03-1 includes	new	guidance	for	evaluating	and	recording	impairment	losses	on	debt	and	equity	investments,	as	well	as	new	disclosure	requirements	for	investments	that	are deemed	to	be	temporarily	impaired.	In	September	2004,	the	FASB	issued	FASB	Staff	Position	EITF	03-1-1,	which	delays	the	effective	date	until	additional	guidance	is issued	for	the	application	of	the	recognition	and	measurement	provisions	of	EITF	03-1	to	investments	in	securities	that	are	impaired;	however,	the	disclosure requirements	are	effective	for	annual	periods	ending	after	June	15,	2004.	Although	the	Company	will	continue	to	evaluate	the	application	of	EITF	03-1,	management does	not	currently	believe	adoption	will	have	a	material	impact	on	its	results	of	operations	or	financial	position.

# Accounting	for	Stock-Based	Compensation

The	Company	currently	measures	compensation	expense	for	its	employee	stock-based	compensation	plans	using	the	intrinsic	value	method	prescribed	by	Accounting Principles	Board	(APB)	Opinion	No.	25,	Accounting	for	Stock	Issued	to	Employees	and	provides	pro	forma	disclosures	of	the	effect	on	net	income	and	earnings	per share	as	if	the	fair	value-based	method	had	been	applied	in	measuring	compensation	expense.	The	Company	has	elected	to	follow	APB	Opinion	No.	25	because,	as further	discussed	in	Part	II,	Item	8	of	this	Form	10-K	at	Note	1	of	the	Notes	to	Consolidated	Financial	Statements,	the	alternative	fair	value	accounting	provided	for under	SFAS	No.	123,	Accounting	for	Stock-Based	Compensation,	requires	use	of	option	valuation	models	that	were	not	developed	for	use	in	valuing	employee	stock options	and	employee	stock	purchase	plan	shares.	Under	APB	Opinion	No.	25,	when	the	exercise	price	of	the	Company's	employee	stock	options	equals	the	market price	of	the	underlying	stock	on	the	date	of	the	grant,	no	compensation	expense	is	recognized.

On	March	31,	2004,	the	FASB	issued	a	proposed	Statement,	Share-Based	Payment,	that	addresses	the	accounting	for	share-based	payment	transactions	in	which	an enterprise	receives	employee	services	in	exchange	for	(a)	equity	instruments	of	the	enterprise	or	(b)	liabilities	that	are	based	on	the	fair	value	of	the	enterprise's	equity instruments	or	that	may	be	settled	by	the	issuance	of	such	equity	instruments.	The	proposed	Statement	would	eliminate	the	ability	to	account	for	share-based compensation	transactions	using	APB	Opinion	No.	25	and	generally	would	require	instead	that	such	transactions	be	accounted	for	using	a	fair-value-based	method.	If adopted,	it	is	currently	anticipated	that	the	proposed	Statement	would	be	effective	for	the	Company	beginning	in	its	fourth	fiscal	quarter	of	2005.

At	the	Company's	annual	shareholders	meeting	on	April	24,	2003,	shareholders	approved	a	proposal	requesting	that	the	Company's	Board	of	Directors	(the	Board) establish	a	policy	of	expensing	the	value	of	all	future	employee	stock	options	issued	by	the	Company.	The	Board	and	management	appreciate	and	take	seriously	the views	expressed	by	the	Company's	shareholders.	The	Company	decided	not	to	expense	the	value	of	employee	stock	options	until	the	FASB	finalizes	its	new	accounting standard	on	the	matter,	which	may	play	a	significant	role	in	determining	the	fair	value	of	and	accounting	for	employee	stock	options.	The	Company	monitors	progress	at the	FASB	and	other	developments	with	respect	to	the	general	issue	of	employee	stock	compensation.	The	Company	is	currently	reviewing	the	potential	impact	from	the guidance	of	the	proposed	statement,	which	may	require	the	Company	to	recognize	substantially	more	compensation	expense	in	future	periods	that	could	have	a	material adverse	impact	on	the	Company's	future	results	of	operations.	The	accounting	impact	had	the	Company	chosen	to	apply	the	fair-value	recognition	provisions	of	SFAS No.	123,	instead	of	the	recognition	provisions	under	APB	Opinion	No.	25,	is	described	in	Part	II,	Item	8	of	this	Form	10-K	at	Note	1	of	the	Notes	to	Consolidated Financial	Statements.

# Liquidity	and	Capital	Resources

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

|  | 2004 | 2003 | 2002 |
| :--- | :--- | :--- | :--- |
| Cash,\tcash\tequivalents,\tand\tshort-term\tinvestments | $5,464 | $4,566 | $4,337 |
| Accounts\treceivable,\tnet | $774 | $766 | $565 |
| Inventory | $101 | $56 | $45 |
| Working\tcapital | $4,375 | $3,530 | $3,730 |
| Days\tsales\tin\taccounts\treceivable\t(DSO)\t(a) | 30 | 41 | 36 |
| Days\tof\tsupply\tin\tinventory\t(b) | 5 | 4 | 4 |
| Days\tpayables\toutstanding\t(DPO)\t(c) | 76 | 82 | 77 |
| Annual\toperating\tcash\tflow | $934 | $289 | $89 |

(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	25,	2004,	the	Company	had	$5.464	billion	in	cash,	cash	equivalents,	and	short-term	investments,	an	increase	of	$898	million	over	the	same	balances	at the	end	of	fiscal	2003.	The	principal	components	of	this	increase	were	cash	generated	by	operating	activities	of	$934	million	and	proceeds	of	$427	million	from	the issuance	of	common	stock	under	stock	plans,	partially	offset	by	cash	used	to	repay	the	Company's	outstanding	debt	of	$300	million	and	purchases	of	property,	plant,	and equipment	of	$176	million.	The	Company's	short-term	investment	portfolio	is	primarily	invested	in	high	credit	quality,	liquid	investments.	Approximately	$3.2	billion of	this	cash,	cash	equivalents,	and	short-term	investments	are	held	by	the	Company's	foreign	subsidiaries	and	would	be	subject	to	U.S.	income	taxation	on	repatriation	to the	U.S.	The	Company	is	currently	assessing	the	impact	of	the	one-time	favorable	foreign	dividend	provisions	recently	enacted	as	part	of	the	American	Jobs	Creation	Act of	2004,	and	may	decide	to	repatriate	earnings	from	some	of	its	foreign	subsidiaries.

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

In	February	2004,	the	Company	retired	$300	million	of	debt	outstanding	in	the	form	of	6.5%	unsecured	notes.	The	notes	were	originally	issued	in	1994	and	were	sold	at 99.9925%	of	par	for	an	effective	yield	to	maturity	of	6.51%.	The	Company	currently	has	no	long-term	debt	obligations.

# Capital	Expenditures

The	Company's	total	capital	expenditures	were	$176	million	during	fiscal	2004,	$104	million	of	which	were	for	retail	store	facilities	and	equipment	related	to	the Company's	Retail	segment	and	$72	million	of	which	were	primarily	for	corporate	infrastructure,	including	information	systems	enhancements	and	operating	facilities enhancements	and	expansions.	The	Company	currently	anticipates	it	will	utilize	approximately	$240	million	for	capital	expenditures	during	2005,	approximately $125	million	of	which	is	expected	to	be	utilized	for	further	expansion	of	the	Company's	Retail	segment	and	the	remainder	utilized	to	support	normal	replacement	of existing	capital	assets	and	enhancements	to	general	information	technology	infrastructure.

# Stock	Repurchase	Plan

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

During	the	fourth	quarter	of	2001,	the	Company	entered	into	a	forward	purchase	agreement	to	acquire	1.5	million	shares	of	its	common	stock	in	September	of	2003	at	an average	price	of	$16.64	per	share	for	a	total	cost	of	$25.5	million.	In	August	2003,	the	Company	settled	this	agreement	prior	to	its	maturity,	at	which	time	the	Company's common	stock	had	a	fair	value	of	$22.81.	Other	than	this	forward	purchase	transaction,	the	Company	has	not	engaged	in	any	transactions	to	repurchase	its	common stock	since	fiscal	2000.	Since	inception	of	the	stock	repurchase	plan,	the	Company	had	repurchased	a	total	of	6.55	million	shares	at	a	cost	of	$217	million.	The Company	was	still	authorized	to	repurchase	up	to	an	additional	$283	million	of	its	common	stock	as	of	September	25,	2004.

# 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	25,	2004	and excludes	amounts	already	recorded	on	the	Company's	balance	sheet	as	current	liabilities	(in	millions):

|  |  | Payments | Payments | Payments | Payments |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  |  | Due\tin\tLess | Due\tin | Due\tin | Due\tin\tMore |
|  | TOTAL | Than\t1\tyear | 1-3\tyears | 4-5\tyears | Than\t5\tyears |
| Operating\tLeases | $617 | $89 | $170 | $126 | $232 |
| Purchase\tObligations | 1,112 | 1,112 | — | — | — |
| Asset\tRetirement\tObligations | 12 | — | 1 | 2 | 9 |
| Other\tObligations | 24 | 14 | 10 | — | — |
| Total | $1,765 | $1,215 | $181 | $128 | $241 |

# Lease	Commitments

As	of	September	25,	2004,	the	Company	had	total	outstanding	commitments	on	noncancelable	operating	leases	of	approximately	$617	million,	$436	million	of	which related	to	the	lease	of	retail	space	and	related	facilities.	Remaining	terms	on	the	Company's	existing	operating	leases	range	from	2	to	16	years.

# Purchase	Obligations

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	130	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	130	days.	The	nature	of	the Company's	outstanding	third-party	manufacturing	commitments	and	component	purchase	commitments	has	not	changed	significantly	since	the	end	of	its	fiscal	2003.	As of	September	25,	2004,	the	Company	had

outstanding	third-party	manufacturing	commitments	and	component	purchase	commitments	of	approximately	$1.1	billion.

# 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	25,	2004,	the	Company	estimates	that	gross	expected	future	cash	flows	of	approximately	$12	million	would	be	required	to	fulfill	these	obligations.

# Other	Obligations

The	Company's	other	obligations	of	approximately	$24	million	are	primarily	related	to	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	affect	on	its	financial	condition,	liquidity	or results	of	operations.

# Factors	That	May	Affect	Future	Results	and	Financial	Condition

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

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

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

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

War,	terrorism,	public	health	issues	and	other	business	interruptions	whether	in	the	U.S.	or	abroad,	have	caused	and	could	continue	to	cause	damage	or	disruption	to international	commerce	by	creating	economic	and	political	uncertainties	that	may	have	a	strong	negative	impact	on	the	global	economy,	the	Company,	and	the Company's	suppliers	or	customers.	The	Company's	major	business	operations	are	subject	to	interruption	by	earthquake,	fire,	power	shortages,	terrorist	attacks	and	other hostile	acts,	labor	disputes,	medical	conditions,	and	other	events	beyond	its	control.	The	majority	of	the	Company's	research	and	development	activities,	its	corporate headquarters,	information	technology	systems,	and	other	critical	business	operations,	including	certain	component	suppliers	and	manufacturing	vendors,	are	located	near

major	seismic	faults.	Because	the	Company	does	not	carry	earthquake	insurance	for	direct	quake-related	losses,	the	Company's	operating	results	and	financial	condition could	be	materially	adversely	affected	in	the	event	of	a	major	earthquake	or	other	natural	or	manmade	disaster.

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

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

The	personal	computer	industry	is	highly	competitive	and	is	characterized	by	aggressive	pricing	practices,	downward	pressure	on	gross	margins,	frequent	introduction	of new	products,	short	product	life	cycles,	evolving	industry	standards,	continual	improvement	in	product	price/performance	characteristics,	rapid	adoption	of technological	and	product	advancements	by	competitors,	price	sensitivity	on	the	part	of	consumers,	and	a	large	number	of	competitors.	Over	the	past	several	years,	price competition	in	the	market	for	personal	computers	and	related	peripherals	has	been	particularly	intense.	The	Company's	competitors	who	sell	Windows	and	Linux	based personal	computers	have	aggressively	cut	prices	and	lowered	their	product	margins	in	order	to	gain	or	maintain	market	share	in	response	to	the	weakness	in	demand	that began	in	the	second	half	of	calendar	2000	for	personal	computing	products.	The	Company's	results	of	operations	and	financial	condition	have	been,	and	in	the	future	may continue	to	be,	adversely	affected	by	these	and	other	industry-wide	pricing	pressures	and	downward	pressures	on	gross	margins.

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

The	Company	is	currently	the	only	maker	of	hardware	using	the	Mac	OS.	The	Mac	OS	has	a	minority	market	share	in	the	personal	computer	market,	which	is	dominated by	makers	of	computers	utilizing	other	competing	operating	systems,	including	Windows	and	Linux.	The	Company's	future	operating	results	and	financial	condition	are substantially	dependent	on	its	ability	to	continue	to	develop	improvements	to	the	Macintosh	platform	in	order	to	maintain	perceived	design	and	functional	advantages over	competing	platforms.

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

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

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

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

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

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

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

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

The	Company	records	a	write-down	for	inventories	of	components	and	products	that	have	become	obsolete	or	are	in	excess	of	anticipated	demand	or	net	realizable	value and	accrues	necessary	reserves	for	cancellation	fees	of	orders	for	inventories	that	have	been	cancelled.	Although	the	Company	believes	its	inventory	and	related provisions	are	adequate,	given	the	rapid	and	unpredictable	pace	of	product	obsolescence	in	the	computer	and	consumer	electronics	industries,	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,	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	formal	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	130	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.

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,	and	TFT-LCD	flat-panel displays),	while	currently	available	to	the	Company	from	multiple	sources,	are	at	times	subject	to	industry-wide	availability	and	pricing	pressures.	In	addition,	new products	introduced	by	the	Company	often	initially	utilize	custom	components	obtained	from	only	one	source	until	the	Company	has	evaluated	whether	there	is	a	need for,	and	subsequently	qualifies,	additional	suppliers.	In	situations	where	a	component	or	product	utilizes	new	technologies,	initial	capacity	constraints	may	exist	until such	time	as	the	suppliers'	yields	have	matured.	The	Company	and	other	producers	in	the	personal	computer	industry	also	compete	for	various	components	with	other industries	that	have	experienced	increased	demand	for	their	products.	The	Company	uses	some	components	that	are	not	common	to	the	rest	of	the	personal	computer industry	including	certain	microprocessors	and	ASICs.	Continued	availability	of	these	components	may	be	affected	if	producers	were	to	decide	to	concentrate	on	the production	of	components	other	than	those	customized	to	meet	the	Company's	requirements.	If	the	supply	of	a	key	component	were	to	be	delayed	or	constrained	on	a new	or	existing	product,	the	Company's	results	of	operations	and	financial	condition	could	be	adversely	affected.

The	Company's	ability	to	produce	and	market	competitive	products	is	also	dependent	on	the	ability	and	desire	of	IBM	and	Freescale	Semiconductor,	Inc.	(formerly	the Semiconductor	Products	Segment	of	Motorola,	Inc.),	the	sole	suppliers	of	the	PowerPC	RISC-based	microprocessor	for	the	Company's	Macintosh	computers,	to	provide the	Company	with	a	sufficient	supply	of	microprocessors	with	price/performance	features	that	compare	favorably	to	those	supplied	to	the	Company's	competitors	by Intel	Corporation	and	other	developers	and	producers	of	microprocessors	used	by	personal	computers	using	other	operating	systems.	Further,	despite	its	efforts	to educate	the	marketplace	to	the	contrary,	the	Company	believes	that	many	of	its	current	and	potential	customers	believe	that	the	relatively	slower	MHz

rating	or	clock	speed	of	the	microprocessors	it	utilizes	in	its	Macintosh	systems	compares	unfavorably	to	those	utilized	by	other	operating	systems	and	translates	to slower	overall	system	performance.	There	have	been	instances	in	recent	years	where	the	inability	of	the	Company's	suppliers	to	provide	advanced	PowerPC microprocessors	in	sufficient	quantity	has	had	significant	adverse	effects	on	the	Company's	results	of	operations.	In	addition,	IBM	is	currently	the	Company's	sole supplier	of	the	PowerPC	G5	processor,	which	is	used	in	the	Company's	current	Power	Mac,	Xserve,	and	iMac	products.	Freescale	Semiconductor,	Inc.	is	the	sole supplier	of	the	G4	processor,	which	is	used	in	the	Company's	eMac	and	portable	products.	IBM	has	recently	experienced	manufacturing	problems	with	the	PowerPC	G5 processor,	which	resulted	in	the	Company	delaying	the	shipment	of	various	products	and	constrained	certain	product	shipments	during	the	second	half	of	2004.	The inability	of	IBM	to	remedy	these	problems	in	a	timely	manner,	avoid	manufacturing	problems	in	the	future,	and	to	deliver	to	the	Company	microprocessors	in	sufficient quantities	with	competitive	price/performance	features	could	further	constrain	shipments	of	products	containing	the	G5	processor	and	could	adversely	affect	the Company's	results	of	operations	and	financial	condition.

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

Most	of	the	Company's	products	are	manufactured	in	whole	or	in	part	by	third-party	manufacturers.	In	addition,	the	Company	has	outsourced	much	of	its	transportation and	logistics	management.	While	outsourcing	arrangements	may	lower	the	cost	of	operations,	they	also	reduce	the	Company's	direct	control	over	production	and distribution.	It	is	uncertain	what	effect	such	diminished	control	will	have	on	the	quality	or	quantity	of	the	products	manufactured	or	services	rendered,	or	the	flexibility of	the	Company	to	respond	to	changing	market	conditions.	Moreover,	although	arrangements	with	such	manufacturers	may	contain	provisions	for	warranty	expense reimbursement,	the	Company	may	remain	at	least	initially	responsible	to	the	ultimate	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	conducted	in	the	Company's	manufacturing	facility	in	Cork,	Ireland,	and	by	external	vendors	in	Fremont, California,	Fullerton,	California,	Taiwan,	Korea,	the	Netherlands,	the	People's	Republic	of	China,	and	the	Czech	Republic.	Currently,	manufacture	of	many	of	the components	used	in	the	Company's	products	and	final	assembly	of	substantially	all	of	the	Company's	portable	products	including	PowerBooks,	iBooks,	and	the	iPod	is performed	by	third-party	vendors	in	Taiwan	and	China.	If	for	any	reason	manufacturing	or	logistics	in	any	of	these	locations	is	disrupted	by	events	such	as	regional economic,	business,	environmental,	medical,	political,	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	also	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	significant	resellers	operate	on	narrow product	margins	and	have	been	negatively	affected	by	recent	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	weaken,	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.	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.	and	Japan.	Some	of	the	Company's	resellers	have	perceived	this	expansion	of	the	Company's	direct	sales	as	conflicting with	their	own	business	and	economic	interests	as	distributors	and	resellers	of	the	Company's	products.	Perception	of	such	a	conflict	could	discourage	the	Company's resellers	from	investing	additional	resources	in	the	distribution	and	sale	of	the	Company's	products	or	lead	them	to	limit	or	cease	distribution	of	the	Company's	products. The	Company's	business	and	financial	results	could	be	adversely	affected	if	expansion	of	its	direct	sales	to	end-users	causes	some	or	all	of	its	resellers	to	cease	or	limit distribution	of	the	Company's	products.

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

The	Company	relies	on	third-party	music	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	music	content	to	customers	through	the	Company's	iTunes	Music	Store.	The	Company	pays	substantial	fees	to obtain	the	rights	to	offer	to	its	customers	this	third-party	music.	Many	of	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	announced their	intent	to	consolidate	their	music	distribution	operations,	which	could	limit	the	availability	and	increase	the	fees	required	to	offer	music	content	to	customers through	the	iTunes	Music	Store.	Further,	some	third-party	content	providers	currently,	or	may	in	the	future,	offer	music	products	and	services	that	compete	with	the Company's	music	products	and	services,	and	could	take	action	to	make	it	more	difficult	or	impossible	for	the	Company	to	license	their	music	content	in	the	future.	If	the Company	is	unable	to	continue	to	offer	a	wide	variety	of	music	content	at	reasonable	prices	with	acceptable	usage	rules,	or	continue	to	expand	its	geographic	reach outside	the	U.S.,	then	sales	and	gross	margins	of	the	Company's	iTunes	Music	Store	as	well	as	related	hardware	and	peripherals,	including	iPods,	may	be	adversely affected.

Third-party	content	providers	and	artists	require	that	the	Company	provide	certain	digital	rights	management	solutions	and	other	security	mechanisms.	If	the requirements	from	content	providers	or	artists	change,	then	the	Company	may	be	required	to	further	develop	or	license	technology	to	address	such	new	rights	and requirements.	There	is	no	assurance	that	the	Company	will	be	able	to	develop	or	license	such	solutions	at	a	reasonable	cost	and	in	a	timely	manner,	if	at	all,	which	could have	a	materially	adverse	effect	on	the	Company's	operating	results	and	financial	position.

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

The	Company	believes	that	decisions	by	customers	to	purchase	the	Company's	personal	computers,	as	opposed	to	Windows-based	systems,	are	often	based	on	the availability	of	third-party	software	for	particular	applications	such	as	Microsoft	Office.	The	Company	also	believes	the	availability	of	third-party	application	software	for the	Company's	hardware	products	depends	in	part	on	third-party	developers'	perception	and	analysis	of	the	relative	benefits	of	developing,	maintaining,	and	upgrading such	software	for	the	Company's	products	versus	software	for	the	larger	Windows	market.	This	analysis	is	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	Company's	financial	losses	in	prior	years	and	the	minority	market	share	held	by	the	Company	in	the	personal	computer	market,	as well	as	the	Company's	decision	to	end	its	Mac	OS	licensing	program,	have	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.	Moreover,	there	can	be	no	assurance	software	developers	will	continue	to	develop software	for	Mac	OS	X,	the	Company's	operating	system,	on	a	timely	basis	or	at	all.

In	addition,	past	and	future	development	by	the	Company	of	its	own	software	applications	and	solutions	may	negatively	impact	the	decision	of	software	developers	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,	consumer	digital	video	and	digital	photo	editing	and	management,	digital	music	management,	desktop-based	database	management,	and	high- quality	presentations.	The	Company	also	markets	an	integrated	productivity	application	that	incorporates	word	processing,	page	layout,	image	manipulation, spreadsheets,	databases,	and	presentations	in	a	single	application.

In	August	1997,	the	Company	and	Microsoft	Corporation	entered	into	patent	cross	license	and	technology	agreements.	In	addition,	for	a	period	of	five	years	through August	2002,	and	subject	to	certain	limitations	related	to	the	number	of	Macintosh	computers	sold	by	the	Company,	Microsoft	was	required	to	make	versions	of	its Microsoft	Office	and	Internet	Explorer	products	for	the	Mac	OS.	Although	Microsoft	has	released	Microsoft	Office	and	Internet	Explorer	for	Mac	OS	X,	Microsoft	has not	been	obligated	to	produce	future	versions	of	its	products	subsequent	to	August	2002.	While	the	Company	believes	its	relationship	with	Microsoft	has	been	and	will continue	to	be	beneficial	to	the	Company	and	to	its	efforts	to	increase	the	installed	base	for	the	Mac	OS,	the	Company	does	compete	directly	with	Microsoft	in	a	number of	key	areas.	Accordingly,	Microsoft's	interest	in	producing	application	software	for	the	Mac	OS	following	expiration	of	the	agreements	may	be	influenced	by Microsoft's	perception	of	its	interests	as	the	vendor	of	the	Windows	operating	system	and	competing	digital	media	applications,	including	music	distribution	service	and technology.	In	June	of	2003,	Microsoft	stated	that	it	would	no	longer	develop	new	versions	of	Internet	Explorer	for	the	Mac	OS,	subsequent	to	the	Company's introduction	during	2003	of	its	own	web	browser,	Safari.	Further	discontinuance	of	products	for	the	Macintosh	platform,	including	Microsoft	Office	and	other	Microsoft products	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	2004,	the	Company	has	opened	86	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	16	years,	the	majority	of	which	are	for	10	years.	The	Company	could	incur	substantial	costs	should	it	choose	to	terminate	this	initiative	or	close individual	stores.	Such	costs	could	adversely	affect	the	Company's	results	of	operations	and	financial	condition.	Additionally,	a	relatively	high	proportion	of	the	Retail segment's	costs	are	fixed	because	of	depreciation	on	store	construction	costs	and	lease	expense.	As	a	result,	significant	losses	would	result	should	the	Retail	segment experience	a	decline	in	sales	for	any	reason.

Certain	of	the	Company's	stores	have	been	designed	and	built	to	serve	as	high	profile	venues	that	function	as	vehicles	for	general	corporate	marketing,	corporate	events, and	brand	awareness.	Because	of	their	unique	design	elements,	locations	and	size,	these	stores	require	substantially	more	investment	in	equipment	and	leasehold improvements	than	the	Company's	more	typical	retail	stores.	The	Company	has	opened	seven	such	stores	through	November	2004.	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	16	years	with	total	commitments	per	location	over	the	lease	terms	ranging	from	$25	million	to $50	million.	Closure	or	poor	performance	of	one	of	these	high	profile	stores	could	have	a	particularly	significant	negative	impact	on	the	Company's	results	of	operations and	financial	condition.

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

in	managing	retail	operations	outside	the	U.S.;	costs	associated	with	unanticipated	fluctuations	in	the	value	of	Apple-branded	and	third-party	retail	inventory;	and inability	to	obtain	quality	retail	locations	at	reasonable	cost.

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

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

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

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

The	Company	believes	that	weak	economic	conditions	over	the	past	several	years	are	having	a	pronounced	negative	impact	on	its	professional	and	creative	customers who	are	significant	users	of	its	professional	systems.	Also,	it	is	likely	that	many	of	the	Company's	current	and	potential	professional,	creative,	and	small	business customers,	who	are	most	likely	to	utilize	professional	systems,	believe	that	the	relatively	slower	MHz	rating	or	clock	speed	of	the	microprocessors	the	Company	utilizes in	its	Macintosh	systems	compares	unfavorably	to	those	utilized	by	other	computer	manufacturers	and	translates	to	slower	overall	system	performance.	These	factors may	result	in	an	adverse	impact	to	sales	of	the	Company's	professional	products	as	well	as	to	gross	margin	and	operating	margin	percentages.

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

The	Company's	profit	margins	vary	among	its	products	and	its	distribution	channels.	The	Company's	direct	sales,	primarily	through	its	retail	and	online	stores,	generally have	higher	associated	profitability	than	its	indirect	sales.	Additionally,	the	Company's	direct	channels	have	traditionally	had	more	sales	of	software	and	higher	priced hardware	products,	which	generally	have	higher	gross	margins,	than	through	its	indirect	channels.	As	a	result,	the	Company's	gross	margin	and	operating	margin percentages	as	well	as	overall	profitability	may	be	adversely	impacted	as	a	result	of	a	shift	in	product,	geographic	or	channel	mix.	In	addition,	the	Company	generally sells	more	products	during	the	third	month	of	each	quarter	than	it	does	during	either	of	the	first	two	months,	a	pattern	typical	in	the	personal	computer	industry.	This sales	pattern	can	produce	pressure	on	the	Company's	internal	infrastructure	during	the	third	month	of	a	quarter	and	may	adversely	impact	the	Company's	ability	to	predict its	financial	results	accurately.	Developments	late	in	a	quarter,	such	as	lower-than-anticipated	demand	for	the	Company's	products,	an	internal	systems	failure,	or	failure of	one	of	the	Company's	key	logistics,	components	suppliers,	or	manufacturing	partners,	can	have	significant	adverse	impacts	on	the	Company	and	its	results	of operations	and	financial	condition.

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

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

The	Company	is	exposed	to	credit	risk	on	its	accounts	receivables.	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.	While	the	Company	has	procedures	in	place	to	monitor	and	limit	exposure	to	credit	risk	on	its trade	and	non-trade	receivables,	there	can	be	no	assurance	that	such	procedures	will	be	effective	in	limiting	its	credit	risk	and	avoiding	losses.	Additionally,	if	the	global economy	and	regional	economies	fail	to	improve	or	continue	to	deteriorate,	it	becomes	more	likely	that	the	Company	will	incur	a	material	loss	or	losses	as	a	result	of	the weakening	financial	condition	of	one	or	more	of	its	customers	or	manufacturing	vendors.

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

Much	of	the	future	success	of	the	Company	depends	on	the	continued	service	and	availability	of	skilled	personnel,	including	its	Chief	Executive	Officer,	members	of	its executive	team,	and	those	in	technical,	marketing	and	staff	positions.	Experienced	personnel	in	the	information	technology	industry	are	in	high	demand	and	competition for	their	talents	is	intense,	especially	in	the	Silicon	Valley,	where	the	majority	of	the	Company's	key	employees	are	located.	The	Company	has	relied	on	its	ability	to grant	stock	options	as	one	mechanism	for	recruiting	and	retaining	this	highly	skilled	talent.	Potential	accounting	regulations	requiring	the	expensing	of	stock	options may	impair	the	Company's	future	ability	to	provide	these	incentives	without	incurring	significant	compensation	costs.	There	can	be	no	assurance	that	the	Company	will continue	to	successfully	attract	and	retain	key	personnel.

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

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

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

Information	technology	system	failures	and	breaches	of	data	security	could	disrupt	the	Company's	ability	to	function	in	the	normal	course	of	business	by	potentially causing	delays	or	cancellation	of	customer

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

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

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

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

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

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

# The	Company	is	subject	to	risks	associated	with	environmental	regulations.

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

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

Financial	statements	are	prepared	in	accordance	with	U.S.	generally	accepted	accounting	principles.	These	principles	are	subject	to	interpretation	by	various	governing bodies,	including	the	FASB	and	the	Securities	and	Exchange	Commission	(SEC),	who	interpret	and	create	appropriate	accounting	regulations.	A	change	from	current accounting	regulations,	including	accounting	for	stock-based	compensation,	could	have	a	significant	effect	on	the	Company's	results	of	operations	and	could	impact	the manner	in	which	the	Company	conducts	business.

# Unanticipated	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	unanticipated	changes	in	the	mix	of	earnings	in	countries	with	differing	statutory tax	rates,	changes	in	the	valuation	of	the	Company's	deferred	tax	assets	and	liabilities,	or	by	changes	in	tax	laws	or	their	interpretation.	In	addition,	the	Company	is subject	to	the	continuous	examination	of	its	income	tax	returns	by	the	Internal	Revenue	Service	and	other	tax	authorities.	The	Company	regularly	assesses	the	likelihood of	adverse	outcomes	resulting	from	these	examinations	to	determine	the	adequacy	of	its	provision	for	income	taxes.	There	can	be	no	assurance	that	the	outcomes	from these	continuous	examinations	will	not	have	an	adverse	effect	on	the	Company's	operating	results	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	have	been	unrelated	to	the	operating	performance	of	these	companies.	These	factors,	including	lack	of	positive	performance	in the	Company's	stock	price,	as	well	as	general	economic	and	political	conditions	and	investors'	concerns	regarding	the	credibility	of	corporate	financial	reporting	and integrity	of	financial	markets,	may	materially	adversely	affect	the	market	price	of	the	Company's	stock	in	the	future.	In	addition,	increases	in	the	Company's	stock	price may	result	in	greater	dilution	of	earnings	per	share.

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

# Interest	Rate	and	Foreign	Currency	Risk	Management

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

# Interest	Rate	Risk

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

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

The	Company's	exposure	to	market	risk	for	changes	in	interest	rates	relates	primarily	to	the	Company's	investment	portfolio.	The	Company	places	its	short-term investments	in	highly	liquid	securities	issued	by	high	credit	quality	issuers	and,	by	policy,	limits	the	amount	of	credit	exposure	to	any	one	issuer.	The	Company's	general policy	is	to	limit	the	risk	of	principal	loss	and	ensure	the	safety	of	invested	funds	by	limiting	market	and	credit	risk.	All	highly	liquid	investments	with	maturities	of	three months	or	less	are	classified	as	cash	equivalents;	highly	liquid	investments	with	maturities	greater	than	three	months	are	classified	as	short-term	investments.	As	of September	25,	2004,	approximately	$180	million	of	the	Company's	short-term	investments	had	underlying	maturities	ranging	from	1	to	5	years.	As	of	September	27, 2003,	$629	million	of	the	Company's	investment	portfolio	classified	as	short-term	investments	had	maturities	ranging	from	1	to	5	years.	The	remainder	all	had underlying	maturities	between	3	and	12	months.	The	Company	may	sell	its	investments	prior	to	their	stated	maturities,	due	to	liquidity	needs,	in	anticipation	of	credit deterioration,	or	for	duration	management.	As	a	result	of	such	activity,	the	Company	recognized	net	gains	of	$1	million	in	2004,	$21	million	in	2003,	and	$7	million	in 2002.

In	order	to	provide	a	meaningful	assessment	of	the	interest	rate	risk	associated	with	the	Company's	investment	portfolio,	the	Company	performed	a	sensitivity	analysis	to determine	the	impact	that	a	change	in	interest	rates	would	have	on	the	value	of	the	investment	portfolio	assuming	a	100	basis	point	parallel	shift	in	the	yield	curve.	Based on	investment	positions	as	of	September	25,	2004,	a	hypothetical	100	basis	point	increase	in	interest	rates	across	all	maturities	would	result	in	a	$14.4	million	decline	in the	fair	market	value	of	the	portfolio.	As	of	September	27,	2003,	a	similar	100	basis	point	shift	in	the	yield	curve	would	have	resulted	in	a	$12.9	million	decline	in	fair value.	Such	losses	would	only	be	realized	if	the	Company	sold	the	investments	prior	to	maturity.	Except	in	instances	noted	above,	the	Company's	policy	is	to	hold investments	to	maturity.

From	time	to	time,	the	Company	has	entered	into	interest	rate	derivative	transactions	with	financial	institutions	in	order	to	better	match	the	Company's	floating-rate interest	income	on	its	cash	equivalents

and	short-term	investments	with	its	fixed-rate	interest	expense	on	its	debt,	and/or	to	diversify	a	portion	of	the	Company's	exposure	away	from	fluctuations	in	short-term U.S.	interest	rates.	The	Company	did	not	enter	into	any	interest	rate	derivatives	during	2004	or	2003	and	had	no	open	interest	rate	derivatives	at	September	25,	2004.

In	prior	years,	the	Company	had	entered	into	interest	rate	debt	swaps	with	financial	institutions.	The	interest	rate	debt	swaps	required	the	Company	to	pay	a	floating interest	rate	based	on	the	three-	or	six-month	U.S.	dollar	LIBOR	and	receive	a	fixed	rate	of	interest	without	exchanges	of	the	underlying	notional	amounts.	These	swaps effectively	converted	the	Company's	fixed-rate	10-year	debt	to	floating-rate	debt.	Due	to	prevailing	market	interest	rates,	during	2001	and	2002	the	Company	entered	into and	then	subsequently	closed	out	interest	rate	debt	swap	positions	realizing	gains	of	$23	million.	The	gains	were	deferred,	recognized	in	long-term	debt	and	were amortized	to	other	income	and	expense	over	the	remaining	life	of	the	debt.

# Foreign	Currency	Risk

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

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

In	order	to	provide	a	meaningful	assessment	of	the	foreign	currency	risk	associated	with	certain	of	the	Company's	foreign	currency	derivative	positions,	the	Company performed	a	sensitivity	analysis	using	a	value-at-risk	(VAR)	model	to	assess	the	potential	impact	of	fluctuations	in	exchange	rates.	The	VAR	model	consisted	of	using	a Monte	Carlo	simulation	to	generate	3000	random	market	price	paths.	The	VAR	is	the	maximum	expected	loss	in	fair	value,	for	a	given	confidence	interval,	to	the Company's	foreign	exchange	portfolio	due	to	adverse	movements	in	rates.	The	VAR	model	is	not	intended	to	represent	actual	losses	but	is	used	as	a	risk	estimation	and management	tool.	The	model	assumes	normal	market	conditions.	Forecasted	transactions,	firm	commitments,	and	assets	and	liabilities	denominated	in	foreign currencies	were	excluded	from	the	model.	Based	on	the	results	of	the	model,	the	Company	estimates	with	95%	confidence	a	maximum	one-day	loss	in	fair	value	of $3.2	million	as	of	September	25,	2004	compared	to	a	maximum	one-day	loss	of	$7.5	million	as	of	September	27,	2003.	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	gains	and	losses	in	the	future	associated	with	the	Company's	investment	portfolio	and	derivative	positions	may	differ	materially	from	the	sensitivity	analyses performed	as	of	September	25,	2004	due	to	the	inherent	limitations	associated	with	predicting	the	changes	in	the	timing	and	amount	of	interest	rates,	foreign	currency exchanges	rates,	and	the	Company's	actual	exposures	and	positions.

# Item	8.	Financial	Statements	and	Supplementary	Data

| Consolidated	Balance	Sheets	as	of	September	25,	2004	and	September	27,	2003 | 60 |
| :--- | :--- |
| Consolidated\tStatements\tof\tOperations\tfor\tthe\tthree\tfiscal\tyears\tended\tSeptember\t25,\t2004 | 61 |
| Consolidated\tStatements\tof\tShareholders'\tEquity\tfor\tthe\tthree\tfiscal\tyears\tended\tSeptember\t25,\t2004 | 62 |
| Consolidated\tStatements\tof\tCash\tFlows\tfor\tthe\tthree\tfiscal\tyears\tended\tSeptember\t25,\t2004 | 63 |
| Notes\tto\tConsolidated\tFinancial\tStatements | 64 |
| Selected\tQuarterly\tFinancial\tInformation\t(Unaudited) | 102 |
| Report\tof\tIndependent\tRegistered\tPublic\tAccounting\tFirm,\tKPMG\tLLP | 103 |

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

# CONSOLIDATED	BALANCE	SHEETS

# (In	millions,	except	share	amounts)

| ASSETS: | September	25,	2004 | September	27,	2003 |
| :--- | :--- | :--- |
| Current\tassets: |  |  |
| Cash\tand\tcash\tequivalents | $2,969 | $3,396 |
| Short-term\tinvestments | 2,495 | 1,170 |
| Accounts\treceivable,\tless\tallowances\tof\t$47\tand\t$49,\trespectively | 774 | 766 |
| Inventories | 101 | 56 |
| Deferred\ttax\tassets | 231 | 190 |
| Other\tcurrent\tassets | 485 | 309 |
| Total\tcurrent\tassets | 7,055 | 5,887 |
| Property,\tplant,\tand\tequipment,\tnet | 707 | 669 |
| Goodwill | 80 | 85 |
| Acquired\tintangible\tassets | 17 | 24 |
| Other\tassets | 191 | 150 |
| Total\tassets | $8,050 | $6,815 |
| LIABILITIES\tAND\tSHAREHOLDERS'\tEQUITY: |  |  |
| Current\tliabilities: |  |  |
| Accounts\tpayable | $1,451 | $1,154 |
| Accrued\texpenses | 1,229 | 899 |
| Current\tdebt | — | 304 |
| Total\tcurrent\tliabilities | 2,680 | 2,357 |
| Deferred\ttax\tliabilities\tand\tother\tnon-current\tliabilities | 294 | 235 |
| Total\tliabilities | 2,974 | 2,592 |
| Commitments\tand\tcontingencies |  |  |
| Shareholders'\tequity: |  |  |
| Common\tstock,\tno\tpar\tvalue;\t900,000,000\tshares\tauthorized;\t391,443,617\tand\t366,726,584\tshares |  |  |
| issued\tand\toutstanding,\trespectively | 2,514 | 1,926 |
| Deferred\tstock\tcompensation | (93) | (62) |
|  | 2,670 | 2,394 |
| Retained\tearnings\nAccumulated\tother\tcomprehensive\tincome\t(loss) | (15) | (35) |
| Total\tshareholders'\tequity | 5,076 | 4,223 |
| Total\tliabilities\tand\tshareholders'\tequity | $8,050 | $6,815 |

# CONSOLIDATED	STATEMENTS	OF	OPERATIONS

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

| Three	fiscal	years	ended	September	25,	2004 | 2004 | 2003 | 2002 |
| :--- | :--- | :--- | :--- |
| Net\tsales | $8,279 | $6,207 | $5,742 |
| Cost\tof\tsales | 6,020 | 4,499 | 4,139 |
| Gross\tmargin | 2,259 | 1,708 | 1,603 |
| Operating\texpenses: |  |  |  |
| Research\tand\tdevelopment | 489 | 471 | 446 |
| Selling,\tgeneral,\tand\tadministrative | 1,421 | 1,212 | 1,109 |
| Restructuring\tcosts | 23 | 26 | 30 |
| Purchased\tin-process\tresearch\tand\tdevelopment | — | — | 1 |
| Total\toperating\texpenses | 1,933 | 1,709 | 1,586 |
| Operating\tincome\t(loss) | 326 | (1) | 17 |
| Other\tincome\tand\texpense: |  |  |  |
| Gains\t(losses)\ton\tnon-current\tinvestments,\tnet | 4 | 10 | (42) |
| Interest\tand\tother\tincome,\tnet | 53 | 83 | 112 |
| Total\tother\tincome\tand\texpense | 57 | 93 | 70 |
| Income\tbefore\tprovision\tfor\tincome\ttaxes | 383 | 92 | 87 |
| Provision\tfor\tincome\ttaxes | 107 | 24 | 22 |
| Income\tbefore\taccounting\tchanges | 276 | 68 | 65 |
| Cumulative\teffects\tof\taccounting\tchanges,\tnet\tof\tincome\ttaxes | — | 1 | — |
| Net\tincome | $276 | $69 | $65 |
| Earnings\tper\tcommon\tshare\tbefore\taccounting\tchanges: |  |  |  |
| Basic | $0.74 | $0.19 | $0.18 |
| Diluted | $0.71 | $0.19 | $0.18 |
| Earnings\tper\tcommon\tshare: |  |  |  |
| Basic | $0.74 | $0.19 | $0.18 |
| Diluted | $0.71 | $0.19 | $0.18 |
| Shares\tused\tin\tcomputing\tearnings\tper\tshare\t(in\tthousands): |  |  |  |
| Basic | 371,590 | 360,631 | 355,022 |
| Diluted | 387,311 | 363,466 | 361,785 |

See	accompanying	notes	to	consolidated	financial	statements.

# CONSOLIDATED	STATEMENTS	OF	SHAREHOLDERS'	EQUITY

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

|  | Common	Stock<br>Shares | Amount | Deferred	Stock<br>Compensation | Retained<br>Earnings | Accumulated<br>Other<br>Comprehensive<br>Income	(Loss) | Total<br>Shareholders'<br>Equity |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Balances\tas\tof\tSeptember\t29,\t2001 | 350,922 | $1,693 | $(11) $ | 2,260 | $(22) $ | 3,920 |
| Components\tof\tcomprehensive\tincome: |  |  |  |  |  |  |
| Net\tincome | — | — | — | 65 | — | 65 |
| Change\tin\tforeign\tcurrency\ttranslation | — | — | — | — | 5 | 5 |
| Change\tin\tunrealized\tgain\ton\tavailable-for- |  |  |  |  |  |  |
| sale\tsecurities,\tnet\tof\ttax | — | — | — | — | (17) | (17) |
| Change\tin\tunrealized\tgain\ton\tderivative |  |  |  |  |  |  |
| investments,\tnet\tof\ttax | — | — | — | — | (15) | (15) |
| Total\tcomprehensive\tincome |  |  |  |  |  | 38 |
| Amortization\tof\tdeferred\tstock\tcompensation | — | — | 4 | — | — | 4 |
| Common\tstock\tissued\tunder\tstock\tplans | 8,037 | 105 | — | — | — | 105 |
| Tax\tbenefit\trelated\tto\tstock\toptions | — | 28 | — | — | — | 28 |
| Balances\tas\tof\tSeptember\t28,\t2002 | 358,959 | $1,826 | $(7) $ | 2,325 | $(49) $ | 4,095 |
| Components\tof\tcomprehensive\tincome: |  |  |  |  |  |  |
| Net\tincome | — | — | — | 69 | — | 69 |
| Change\tin\tforeign\tcurrency\ttranslation | — | — | — | — | 31 | 31 |
| Change\tin\tunrealized\tgain\ton\tavailable-for- |  |  |  |  |  |  |
| sale\tsecurities,\tnet\tof\ttax | — | — | — | — | (12) | (12) |
| Change\tin\tunrealized\tgain\ton\tderivative |  |  |  |  |  |  |
| investments,\tnet\tof\ttax | — | — | — | — | (5) | (5) |
| Total\tcomprehensive\tincome |  |  |  |  |  | 83 |
| Amortization\tof\tdeferred\tstock\tcompensation | — | — | 15 | — | — | 15 |
| Write-off\tof\tdeferred\tstock\tcompensation | — | — | 5 | — | — | 5 |
| Common\tstock\tissued\tunder\tstock\tplans | 9,299 | 128 | (75) | — | — | 53 |
| Settlement\tof\tforward\tpurchase\tagreement | (1,531) | (35) | — | — | — | (35) |
| Tax\tbenefit\trelated\tto\tstock\toptions | — | 7 | — | — | — | 7 |
| Balances\tas\tof\tSeptember\t27,\t2003 | 366,727 | $1,926 | $(62) $ | 2,394 | $(35) $ | 4,223 |
| Components\tof\tcomprehensive\tincome: |  |  |  |  |  |  |
| Net\tincome | — | — | — | 276 | — | 276 |
| Change\tin\tforeign\tcurrency\ttranslation | — | — | — | — | 13 | 13 |
| Change\tin\tunrealized\tgain\ton\tavailable-for- |  |  |  |  |  |  |
| sale\tsecurities,\tnet\tof\ttax | — | — | — | — | (5) | (5) |
| Change\tin\tunrealized\tloss\ton\tderivative |  |  |  |  |  |  |
| investments,\tnet\tof\ttax | — | — | — | — | 12 | 12 |
| Total\tcomprehensive\tincome |  |  |  |  |  | 296 |
| Issuance\tof\trestricted\tstock\tunits | — | 64 | (64) | — | — | — |
| Adjustment\tto\tcommon\tstock\trelated\tto\ta\tprior |  |  |  |  |  |  |
| year\tacquisition | (79) | (2) | — | — | — | (2) |
| Amortization\tof\tdeferred\tstock\tcompensation | — | — | 33 | — | — | 33 |
| Common\tstock\tissued\tunder\tstock\tplans | 24,796 | 427 | — | — | — | 427 |
| Tax\tbenefit\trelated\tto\tstock\toptions | — | 99 | — | — | — | 99 |
| Balances\tas\tof\tSeptember\t25,\t2004 | 391,444 | $2,514 | $(93) $ | 2,670 | $(15) $ | 5,076 |

# CONSOLIDATED	STATEMENTS	OF	CASH	FLOWS

# (In	millions)

| Three	fiscal	years	ended	September	25,	2004 | 2004 | 2003 | 2002 |
| :--- | :--- | :--- | :--- |
| Cash\tand\tcash\tequivalents,\tbeginning\tof\tthe\tyear | $3,396 | $2,252 | $2,310 |
| Operating\tActivities: |  |  |  |
| Net\tincome | 276 | 69 | 65 |
| Cumulative\teffects\tof\taccounting\tchanges,\tnet\tof\ttaxes | — | (1) | — |
| Adjustments\tto\treconcile\tnet\tincome\tto\tcash\tgenerated\tby\toperating\tactivities: |  |  |  |
| Depreciation,\tamortization\tand\taccretion | 150 | 113 | 114 |
| Stock-based\tcompensation\texpense | 33 | 16 | 5 |
| Non-cash\trestructuring | 5 | 12 | 8 |
| Provision\tfor\t(benefit\tfrom)\tdeferred\tincome\ttaxes | 20 | (11) | (34) |
| Loss\ton\tdisposition\tof\tproperty,\tplant,\tand\tequipment | 7 | 2 | 7 |
| Gains\ton\tsales\tof\tshort-term\tinvestments,\tnet | (1) | (21) | (7) |
| (Gains)\tlosses\ton\tnon-current\tinvestments,\tnet | (4) | (10) | 42 |
| Gain\ton\tforward\tpurchase\tagreement | — | (6) | — |
| Purchased\tin-process\tresearch\tand\tdevelopment | — | — | 1 |
| Changes\tin\toperating\tassets\tand\tliabilities: |  |  |  |
| Accounts\treceivable | (8) | (201) | (99) |
| Inventories | (45) | (11) | (34) |
| Other\tcurrent\tassets | (176) | (34) | (114) |
| Other\tassets | (39) | (30) | (11) |
| Accounts\tpayable | 297 | 243 | 110 |
| Other\tliabilities | 419 | 159 | 36 |
| Cash\tgenerated\tby\toperating\tactivities | 934 | 289 | 89 |
| Investing\tActivities: |  |  |  |
| Purchases\tof\tshort-term\tinvestments | (3,270) | (2,648) | (4,144) |
| Proceeds\tfrom\tmaturities\tof\tshort-term\tinvestments | 1,141 | 2,446 | 2,846 |
| Proceeds\tfrom\tsales\tof\tshort-term\tinvestments | 801 | 1,116 | 1,254 |
| Proceeds\tfrom\tsales\tof\tnon-current\tinvestments | 5 | 45 | 25 |
| Purchases\tof\tproperty,\tplant,\tand\tequipment | (176) | (164) | (174) |
| Cash\tused\tfor\tbusiness\tacquisitions | — | — | (52) |
| Other | 11 | 33 | (7) |
| Cash\tgenerated\tby\t(used\tfor)\tinvesting\tactivities | (1,488) | 828 | (252) |
| Financing\tActivities: |  |  |  |
| Payment\tof\tlong-term\tdebt | (300) | — | — |
| Proceeds\tfrom\tissuance\tof\tcommon\tstock | 427 | 53 | 105 |
| Cash\tused\tfor\trepurchase\tof\tcommon\tstock | — | (26) | — |
| Cash\tgenerated\tby\tfinancing\tactivities | 127 | 27 | 105 |
| Increase\t(decrease)\tin\tcash\tand\tcash\tequivalents | (427) | 1,144 | (58) |
| Cash\tand\tcash\tequivalents,\tend\tof\tthe\tyear | $2,969 | $3,396 | $2,252 |
| Supplemental\tcash\tflow\tdisclosures: |  |  |  |
| Cash\tpaid\tduring\tthe\tyear\tfor\tinterest | $10 | $20 | $20 |
| Cash\tpaid\t(received)\tfor\tincome\ttaxes,\tnet | $(7) | $45 | $11 |

# NOTES	TO	CONSOLIDATED	FINANCIAL	STATEMENTS

# Note	1—Summary	of	Significant	Accounting	Policies

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

# Basis	of	Presentation	and	Preparation

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

Typically,	the	Company's	fiscal	year	ends	on	the	last	Saturday	of	September.	Fiscal	years	2004,	2003	and	2002	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	expects to	add	this	additional	week	in	its	first	fiscal	quarter	of	2006.	All	information	presented	herein	is	based	on	the	Company's	fiscal	calendar.

# Financial	Instruments

# Cash	Equivalents	and	Short-term	Investments

All	highly	liquid	investments	with	maturities	of	three	months	or	less	at	the	date	of	purchase	are	classified	as	cash	equivalents.	Highly	liquid	investments	with	maturities greater	than	three	months	are	classified	as	short-term	investments.	Management	determines	the	appropriate	classification	of	its	investments	in	debt	and	marketable equity	securities	at	the	time	of	purchase	and	reevaluates	such	designation	as	of	each	balance	sheet	date.	The	Company's	debt	and	marketable	equity	securities	have	been classified	and	accounted	for	as	available-for-sale.	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.

On	May	15,	2003,	the	Financial	Accounting	Standards	Board	(FASB)	issued	Statement	of	Financial	Accounting	Standards	(SFAS)	No.	150,	Accounting	for	Certain Financial	Instruments	with	Characteristics	of	Both	Liabilities	and	Equity.	SFAS	No.	150	requires	issuers	to	classify	as	liabilities	(or	assets	in	some	circumstances) certain	freestanding	financial	instruments	that	embody	obligations	for	the	issuer	and	have	characteristics	of	both	liabilities	and	equity.	The	Company	adopted	the provisions	of	SFAS	No.	150	on	June	29,	2003,	which	resulted	in	a	favorable	cumulative-effect	type	adjustment	of	approximately	$3	million.	This	adjustment	related	to	a forward	purchase	agreement	that	allowed	the	Company	to	acquire	1.5	million	shares	of	its	common	stock	at	an	average	price	of	$16.64	per	share	for	a	total	cost	of $25.5	million.	The	Company	settled	this	forward	purchase	agreement	in	August	2003,	which	resulted	in	an	additional	gain	of

approximately	$6	million	representing	the	increase	in	fair	value	of	the	agreement	from	June	29,	2003	through	the	settlement	date.

# 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	hedges	must	be	adjusted	to	fair value	through	income.	If	the	derivative	is	a	hedge,	depending	on	the	nature	of	the	hedge,	changes	in	fair	value	will	either	be	offset	against	the	change	in	fair	value	of	the hedged	assets,	liabilities,	or	firm	commitments	through	earnings,	or	recognized	in	other	comprehensive	income	until	the	hedged	item	is	recognized	in	earnings.

For	derivative	instruments	that	hedge	the	exposure	to	variability	in	expected	future	cash	flows	that	are	designated	as	cash	flow	hedges,	the	net	gain	or	loss	on	the derivative	instrument	is	reported	as	a	component	of	other	comprehensive	income	in	shareholders'	equity	and	reclassified	into	earnings	in	the	same	period	or	periods during	which	the	hedged	transaction	affects	earnings.	To	receive	hedge	accounting	treatment,	cash	flow	hedges	must	be	highly	effective	in	achieving	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.	For	derivative	instruments	not	designated	as hedging	instruments,	changes	in	fair	value	are	recognized	in	earnings	in	the	current	period.

In	accordance	with	SFAS	No.	133,	hedges	related	to	probable	but	not	firmly	committed	transactions	of	an	anticipatory	nature	are	designated	and	documented	at	hedge inception	as	cash	flow	hedges	and	evaluated	for	hedge	effectiveness	quarterly.	For	foreign	currency	forward	contracts	designated	as	cash	flow	hedges,	hedge effectiveness	is	measured	based	on	changes	in	the	fair	value	of	the	contract	attributable	to	changes	in	the	forward	exchange	rate.	Changes	in	the	expected	future	cash flows	on	the	forecasted	hedged	transaction	and	changes	in	the	fair	value	of	the	forward	hedge	are	both	measured	from	the	contract	rate	to	the	forward	exchange	rate associated	with	the	forward	contract's	maturity	date.	For	currency	option	contracts,	hedge	effectiveness	is	assessed	by	comparing	the	present	value	of	the	cumulative change	in	expected	future	cash	flows	on	the	hedged	transaction	to	changes	in	expected	cash	flow	of	the	option	hedge	at	maturity.	The	net	gains	or	losses	on	derivative instruments	qualifying	as	cash	flow	hedges	are	reported	as	components	of	other	comprehensive	income	in	shareholders'	equity	and	reclassified	into	earnings	in	the	same period	or	periods	during	which	the	hedged	transaction	affects	earnings.	Any	hedge	ineffectiveness	is	recognized	in	current	earnings	in	other	income	and	expense.	For interest	rate	swap	agreements	qualifying	as	fair	value	hedges,	the	Company	assumes	no	ineffectiveness	because	these	swaps	meet	the	criteria	for	accounting	under	the short-cut	method.

The	Company	may	enter	into	foreign	currency	forward	contracts	to	hedge	the	translation	and	economic	exposure	of	a	net	investment	position	in	a	foreign	subsidiary.	For such	contracts,	hedge	effectiveness	is	measured	based	on	changes	in	the	fair	value	of	the	contract	attributable	to	changes	in	the	spot	exchange	rate.	The	effective	portion of	the	net	gain	or	loss	on	a	derivative	instrument	designated	as	a	hedge	of	the	net	investment	position	in	a	foreign	subsidiary	is	reported	in	the	same	manner	as	a	foreign currency

translation	adjustment.	Any	residual	changes	in	fair	value	of	the	forward	contract,	including	changes	in	fair	value	based	on	the	differential	between	the	spot	and	forward exchange	rates,	are	recognized	in	current	earnings	in	other	income	and	expense.

# Inventories

Inventories	are	stated	at	the	lower	of	cost	(first-in,	first-out)	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.

# Property,	Plant,	and	Equipment

Property,	plant,	and	equipment	are	stated	at	cost.	Depreciation	is	computed	by	use	of	the	straight-line	method	over	the	estimated	useful	lives	of	the	assets,	which	are 30	years	for	buildings,	from	2	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.

On	September	29,	2002,	the	Company	adopted	SFAS	No.	143,	Accounting	for	Asset	Retirement	Obligations,	which	addresses	financial	accounting	and	reporting	for obligations	associated	with	the	retirement	of	tangible	long-lived	assets	and	the	associated	asset	retirement	costs.	The	standard	applies	to	legal	obligations	associated	with the	retirement	of	long-lived	assets	that	result	from	the	acquisition,	construction,	development	and/or	normal	use	of	the	assets.	SFAS	No.	143	requires	that	the	fair	value of	a	liability	for	an	asset	retirement	obligation	be	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.	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	Company estimated	that	as	of	September	29,	2002,	gross	expected	future	cash	flows	of	$9.5	million	would	be	required	to	fulfill	these	obligations.

As	of	the	date	of	adoption,	the	Company	recorded	a	$6	million	long-term	asset	retirement	liability	and	a	corresponding	increase	in	leasehold	improvements.	This	amount represents	the	present	value	of	expected	future	cash	flows	associated	with	returning	certain	of	the	Company's	leased	properties	to	original	condition.	The	difference between	the	gross	expected	future	cash	flow	of	$9.5	million	and	its	present	value	of	$6	million	at	September	29,	2002,	is	being	accreted	over	the	life	of	the	related	leases as	an	operating	expense.	Net	of	the	related	income	tax	effect	of	approximately	$1	million,	adoption	of	SFAS	No.	143	resulted	in	an	unfavorable	cumulative-effect	type adjustment	to	net	income	during	the	first	quarter	of	2003	of	approximately	$2	million.	This	adjustment	represents	cumulative	depreciation	and	accretion	that	would	have been	recognized	through	the	date	of	adoption	of	SFAS	No.	143	had	the	statement	been	applied	to	the	Company's	existing	asset	retirement	obligations	at	the	time	they were	initially	incurred.

The	following	table	reconciles	changes	in	the	Company's	asset	retirement	liabilities	for	fiscal	2003	and	2004	(in	millions):

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

The	Company	reviews	property,	plant,	and	equipment	and	certain	identifiable	intangibles,	excluding	goodwill,	for	impairment	whenever	events	or	changes	in circumstances	indicate	the	carrying	amount	of	an	asset	may	not	be	recoverable.	Recoverability	of	these	assets	is	measured	by	comparison	of	its	carrying	amount	to future	undiscounted	cash	flows	the	assets	are	expected	to	generate.	If	property,	plant,	and	equipment	and	certain	identifiable	intangibles	are	considered	to	be	impaired, the	impairment	to	be	recognized	equals	the	amount	by	which	the	carrying	value	of	the	assets	exceeds	its	fair	market	value.	For	the	three	years	ended	September	25,	2004, September	27,	2003,	and	September	28,	2002	the	Company	had	no	material	impairment	of	its	long-lived	assets,	except	for	the	impairment	of	certain	assets	in	connection with	the	restructuring	actions	described	in	Note	5.

The	Company	adopted	SFAS	No.	142,	Goodwill	and	Other	Intangible	Assets,	in	the	first	quarter	of	fiscal	2002.	SFAS	No.	142	requires	that	goodwill	and	intangible assets	with	indefinite	useful	lives	no	longer	be	amortized,	but	instead	be	tested	for	impairment	at	least	annually	or	sooner	whenever	events	or	changes	in	circumstances indicate	that	they	may	be	impaired.	Prior	to	fiscal	2002,	goodwill	was	amortized	using	the	straight-line	method	over	its	estimated	useful	life.	The	Company	completed	its transitional	goodwill	impairment	test	as	of	October	1,	2001,	and	its	annual	goodwill	impairment	tests	on	August	30	of	each	year	thereafter	and	found	no	impairment.	The Company	established	reporting	units	based	on	its	current	reporting	structure.	For	purposes	of	testing	goodwill	for	impairment,	goodwill	has	been	allocated	to	these reporting	units	to	the	extent	it	relates	to	each	reporting	unit.

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

# Foreign	Currency	Translation

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

losses	from	these	translations	were	insignificant	and	have	been	included	in	the	Company's	results	of	operations.

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

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

Revenue	from	extended	warranty	and	support	contracts	is	deferred	and	recognized	ratably	over	the	warranty	and	support	periods.	These	contracts	typically	include extended	phone	support,	certain	repairs,	web-based	support	resources,	diagnostic	tools,	and	extend	the	Company's	one-year	basic	limited	parts	and	labor	warranty.

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

Revenue	on	arrangements	that	include	multiple	elements	such	as	hardware,	software,	and	services	is	allocated	to	each	element	based	on	the	relative	fair	value	of	each element,	which	is	generally	determined	by	vendor	specific	objective	evidence	(VSOE).	Allocated	revenue	for	each	element	is	recognized	when	revenue	recognition criteria	have	been	met	for	each	element.	VSOE	is	determined	based	on	the	price	charged	when	each	element	is	sold	separately.

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.	However,	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.

# Shipping	Costs

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

# Warranty	Expense

The	Company	provides	currently	for	the	estimated	cost	for	product	warranties	at	the	time	the	related	revenue	is	recognized.

Research	and	development	costs	are	expensed	as	incurred.	Development	costs	of	computer	software	to	be	sold,	leased	or	otherwise	marketed	are	subject	to	capitalization beginning	when	a	product's	technological	feasibility	has	been	established	and	ending	when	a	product	is	available	for	general	release	to	customers	pursuant	to	SFAS No.	86,	Computer	Software	to	be	Sold,	Leased,	or	Otherwise	Marketed.	In	most	instances,	the	Company's	products	are	released	soon	after	technological	feasibility	has been	established.	Therefore,	costs	incurred	subsequent	to	achievement	of	technological	feasibility	are	usually	not	significant,	and	generally	all	software	development costs	have	been	expensed.

During	the	fourth	quarter	of	2004,	the	Company	incurred	substantial	development	costs	associated	with	the	development	of	Mac	OS	X	version	10.4	(code-named "Tiger"),	which	enhances	the	features	and	functionality	of	the	previous	version	of	Mac	OS	X,	subsequent	to	achievement	of	technological	feasibility	as	evidenced	by public	demonstration	in	August	2004	and	subsequent	release	of	a	developer	beta	version	of	the	product,	both	of	which	were	prior	to	the	planned	release	of	the	final version	of	the	product	in	the	first	half	of	calendar	year	2005.	Therefore,	during	the	fourth	quarter	of	2004,	the	Company	capitalized	approximately	$4.5	million	of	costs associated	with	development	of	Tiger.	Amortization	of	this	asset	will	begin	when	Tiger	begins	shipping	and	will	be	recognized	straight-line	over	a	3	year	estimated useful	life.

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

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

During	the	third	and	fourth	quarters	of	2002,	the	Company	incurred	substantial	development	costs	associated	with	the	development	of	Mac	OS	X	version	10.2	(code- named	"Jaguar")	subsequent	to	achievement	of	technological	feasibility	as	evidenced	by	public	demonstration	and	release	of	a	developer	beta	in	May	2002,	and	prior	to release	of	the	final	version	of	the	product	in	the	fourth	quarter	of	2002.	As	such,	the	Company	capitalized	approximately	$13.3	million	of	development	costs	associated with	development	of	Jaguar.	Amortization	of	this	asset	began	in	the	fourth	quarter	of	2002	when	Jaguar	was

shipped	and	is	being	recognized	on	a	straight-line	basis	in	accordance	with	SFAS	No.	86	over	a	3	year	estimated	useful	life.	In	addition,	during	2002,	the	Company	also began	capitalizing	certain	costs	related	to	development	of	its	new	PowerSchool	enterprise	student	information	system.	Capitalization	of	approximately	$6	million	began upon	achievement	of	technological	feasibility	in	the	first	quarter	of	2002.	The	final	version	of	the	enterprise	student	information	system	was	released	in	July	2002.

Total	amortization	related	to	capitalized	software	development	costs	was	$10.7	million,	$5.8	million,	and	$1.2	million	in	2004,	2003	and	2002,	respectively.

# Advertising	Costs

Advertising	costs	are	expensed	as	incurred.	Advertising	expense	was	$206	million,	$193	million,	and	$209	million	for	2004,	2003,	and	2002,	respectively.

# Restructuring	Charges

In	June	2002,	the	FASB	issued	SFAS	No.	146,	Accounting	for	Costs	Associated	with	Exit	or	Disposal	Activities.	SFAS	No.	146	supersedes	Emerging	Issues	Task	Force (EITF)	Issue	No.	94-3,	Liability	Recognition	for	Certain	Employee	Termination	Benefits	and	Other	Costs	To	Exit	an	Activity	(Including	Certain	Costs	Associated	with	a Restructuring)	and	requires	that	a	liability	for	a	cost	associated	with	an	exit	or	disposal	activity	be	recognized	when	the	liability	is	incurred,	as	opposed	to	when management	commits	to	an	exit	plan.	SFAS	No.	146	also	establishes	that	the	liability	should	initially	be	measured	and	recorded	at	fair	value.	This	Statement	was effective	for	exit	or	disposal	activities	initiated	after	December	31,	2002.	The	provisions	of	SFAS	No.	146	were	required	to	be	applied	prospectively	after	the	adoption date	to	newly	initiated	exit	activities.

# Stock-Based	Compensation

The	Company	measures	compensation	expense	for	its	employee	stock-based	compensation	plans	using	the	intrinsic	value	method	prescribed	by	Accounting	Principles Board	(APB)	Opinion	No.	25,	Accounting	for	Stock	Issued	to	Employees.	The	Company	applies	the	disclosure	provisions	of	SFAS	No.	123,	Accounting	for	Stock-based Compensation,	as	amended	by	SFAS	No.	148,	Accounting	for	Stock-based	Compensation—Transition	and	Disclosure	as	if	the	fair	value-based	method	had	been	applied in	measuring	compensation	expense.	The	Company	has	elected	to	follow	APB	Opinion	No.	25	because,	as	discussed	below,	the	alternative	fair	value	accounting provided	for	under	SFAS	No.	123	requires	use	of	option	valuation	models	that	were	not	developed	for	use	in	valuing	employee	stock	options	and	employee	stock purchase	plan	shares.	Under	APB	Opinion	No.	25,	when	the	exercise	price	of	the	Company's	employee	stock	options	equals	the	market	price	of	the	underlying	stock	on the	date	of	the	grant,	no	compensation	expense	is	recognized.

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

The	Black-Scholes	option	valuation	model	was	developed	for	use	in	estimating	the	fair	value	of	freely	traded	options	that	have	no	vesting	restrictions	and	are	fully transferable.	In	addition,	option	valuation	models	require	the	input	of	highly	subjective	assumptions	including	the	expected	life	of	options	and	the	Company's	expected stock	price	volatility.	Because	the	Company's	employee	stock	options	and	employee

stock	purchase	plan	shares	have	characteristics	significantly	different	from	those	of	freely	traded	options,	and	because	changes	in	the	subjective	input	assumptions	can materially	affect	the	fair	value	estimate,	in	management's	opinion,	the	existing	models	do	not	provide	a	reliable	measure	of	the	fair	value	of	the	Company's	employee stock	options	and	employee	stock	purchase	plan	shares.

For	purposes	of	pro	forma	disclosures,	the	estimated	fair	value	of	the	options	and	shares	is	amortized	to	pro	forma	net	income	(loss)	over	the	options'	vesting	period	and the	shares'	plan	period.	The	Company's	pro	forma	information	for	each	of	the	last	three	fiscal	years	follows	(in	millions,	except	per	share	amounts):

|  | 2004 | 2003 | 2002 |
| :--- | :--- | :--- | :--- |
| Net\tincome—as\treported | $276 | $69 | $65 |
| Add:\tStock-based\temployee\tcompensation\texpense\tincluded\tin\treported\tnet\tincome, |  |  |  |
| net\tof\ttax | 33 | 15 | 5 |
| Deduct:\tStock-based\temployee\tcompensation\texpense\tdetermined\tunder\tthe\tfair |  |  |  |
| value\tbased\tmethod\tfor\tall\tawards,\tnet\tof\ttax | (141) | (181) | (234) |
| Net\tincome\t(loss)—pro\tforma | $168 | $(97) | $(164) |
| Net\tincome\tper\tcommon\tshare—as\treported |  |  |  |
| Basic | $0.74 | $0.19 | $0.18 |
| Diluted | $0.71 | $0.19 | $0.18 |
| Net\tincome\t(loss)\tper\tcommon\tshare—pro\tforma |  |  |  |
| Basic | $0.45 | $(0.27) | $(0.46) |
| Diluted | $0.44 | $(0.27) | $(0.46) |

# 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:

| For	the	Years	Ended | September	25,<br>2004 | September	27,<br>2003 | September	28,<br>2002 |
| :--- | :--- | :--- | :--- |
| Numerator\t(in\tmillions): |  |  |  |
| Income\tbefore\taccounting\tchanges | $276 | $68 | $65 |
| Cumulative\teffects\tof\taccounting\tchanges,\tnet\tof\ttax | — | 1 | — |
| Net\tincome | $276 | $69 | $65 |
| Denominator\t(in\tthousands): |  |  |  |
| Weighted-average\tshares\toutstanding,\texcluding\tunvested\trestricted\tstock | 371,590 | 360,631 | 355,022 |
| Effect\tof\tdilutive\toptions,\trestricted\tstock\tunits\tand\trestricted\tstock | 15,721 | 2,835 | 6,763 |
| Denominator\tfor\tdiluted\tearnings\tper\tshare | 387,311 | 363,466 | 361,785 |
| Basic\tearnings\tper\tshare\tbefore\taccounting\tchanges | $0.74 | $0.19 | $0.18 |
| Cumulative\teffects\tof\taccounting\tchanges,\tnet\tof\ttax | — | — | — |
| Basic\tearnings\tper\tshare\tafter\taccounting\tchanges | $0.74 | $0.19 | $0.18 |
| Diluted\tearnings\tper\tshare\tbefore\taccounting\tchanges | $0.71 | $0.19 | $0.18 |
| Cumulative\teffects\tof\taccounting\tchanges,\tnet\tof\ttax | — | — | — |
| Diluted\tearnings\tper\tshare\tafter\taccounting\tchanges | $0.71 | $0.19 | $0.18 |

Potentially	dilutive	securities,	including	stock	options;	restricted	stock	units;	and	restricted	stock,	to	purchase	approximately	4.4	million,	50.8	million,	and	58.0	million shares	of	common	stock	for	the	years	ended	September	25,	2004,	September	27,	2003,	and	September	28,	2002,	respectively,	were	excluded	from	the	computation	of diluted	earnings	per	share	for	these	periods	because	their	effect	would	have	been	antidilutive.

# Comprehensive	Income

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

# Segment	Information

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

# Note	2—Financial	Instruments

The	carrying	amounts	of	cash	and	cash	equivalents,	accounts	receivable,	accounts	payable,	and	accrued	liabilities	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	as	of	September	25,	2004,	and	September	27,	2003	(in	millions):

|  | September	25,	2004 | September	27,	2003 |
| :--- | :--- | :--- |
| Cash | $200 | $158 |
| U.S.\tTreasury\tand\tAgency\tsecurities | 87 | 87 |
| U.S.\tcorporate\tsecurities | 1,795 | 2,368 |
| Foreign\tsecurities | 887 | 783 |
| Total\tcash\tequivalents | 2,769 | 3,238 |
| U.S.\tTreasury\tand\tAgency\tsecurities | 1,080 | 454 |
| U.S.\tcorporate\tsecurities | 1,352 | 623 |
| Foreign\tsecurities | 63 | 93 |
| Total\tshort-term\tinvestments | 2,495 | 1,170 |
| Total\tcash,\tcash\tequivalents,\tand\tshort-term\tinvestments | $5,464 | $4,566 |

The	Company's	short-term	investment	portfolio	consists	of	investments	in	U.S.	Treasury	and	Agency	securities,	U.S.	corporate	securities,	and	foreign	securities.	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	$4	million	on	its	investment	portfolio,	primarily	related	to	investments	with	stated	maturities	less	than	1	year	as	of	September	25,	2004 and	net	unrealized	gains	of	$1	million	on	its	investment	portfolio,	primarily	related	to	investments	with	stated	maturities	greater	than	1	year,	as	of	September	27,	2003. The	Company	occasionally	sells	short-term	investments	prior	to	their	stated	maturities.	As	a	result	of	such	sales,	the	Company	recognized	net	gains	before	taxes	of $1	million	in	2004,	$21	million	in	2003	and	$7	million	in	2002.	These	net	gains	were	included	in	interest	and	other	income,	net.

As	of	September	25,	2004,	approximately	$180	million	of	the	Company's	short-term	investments	had	underlying	maturities	ranging	from	1	to	5	years.	The	remaining short-term	investments	as	of	September	25,	2004	had	maturities	of	3	to	12	months.	As	of	September	27,	2003,	approximately	$629	million	of	the	Company's	short-term investments	had	underlying	maturities	ranging	from	1	to	5	years.	The	remaining	short-term	investments	as	of	September	27,	2003	had	maturities	of	3	to	12	months.

In	accordance	with	EITF	03-1,	The	Meaning	of	Other-Than-Temporary	Impairment	and	Its	Application	to	Certain	Investments,	the	following	table	shows	the	gross unrealized	losses	and	fair	value	of	the	Company's

investments,	aggregated	by	investment	category	and	length	of	time	that	individual	securities	have	been	in	a	continuous	unrealized	loss	position	as	of	September	25,	2004 (in	millions):

| Security	Description | Fair<br>Value | Unrealized<br>Loss | Fair<br>Value | Unrealized<br>Loss | Fair<br>Value | Unrealized<br>Loss |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| U.S.\tTreasury\tand\tAgencies | $1,126 | $(4) $ | —\t $— | —\t $— | $1,126 | $(4) |
| Corporate\tbonds | 134 | — | 144 | (1) | 278 | (1) |
| Certificate\tof\tdeposits | 420 | (1) | — | — | 420 | (1) |
| Asset\tbacked\tsecurities | 426 | — | — | — | 426 | — |
| Commercial\tpaper | 2,407 | (1) | — | — | 2,407 | (1) |
| Total | $4,513 | $(6) $ | 144 | $(1) $ | 4,657 | $(7) |

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

# Accounts	Receivable

# Trade	Receivables

The	Company	distributes	its	products	through	third-party	resellers	and	directly	to	certain	education,	consumer,	and	commercial	customers.	The	Company	generally	does not	require	collateral	from	its	customers.	However,	when	possible	the	Company	does	attempt	to	limit	credit	risk	on	trade	receivables	with	credit	insurance	for	certain customers	in	Latin	America,	Europe	and	Asia	and	by	arranging	with	third-party	financing	companies	to	provide	flooring	arrangements	and	other	loan	and	lease	programs to	the	Company's	direct	customers.	These	credit	financing	arrangements	are	directly	between	the	third-party	financing	company	and	the	end	customer.	As	such,	the Company	generally	does	not	assume	any	recourse	or	credit	risk	sharing	related	to	any	of	these	arrangements.	However,	considerable	trade	receivables	that	are	not covered	by	collateral,	third-party	flooring	arrangements,	or	credit	insurance	are	outstanding	with	the	Company's	distribution	and	retail	channel	partners.	No	customer accounted	for	more	than	10%	of	trade	receivables	as	of	September	25,	2004.	Trade	receivables	from	a	single	customer,	Ingram	Micro,	Inc.,	accounted	for	approximately 10.3%	of	net	accounts	receivable	as	of	September	27,	2003.

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

|  | 2004 | 2003 | 2002 |
| :--- | :--- | :--- | :--- |
| Beginning\tallowance\tbalance | $49 | $51 | $51 |
| Charged\tto\tcosts\tand\texpenses | 3 | 4 | 10 |
| Deductions\t(a) | (5) | (6) | (10) |
| Ending\tallowance\tbalance | $47 | $49 | $51 |

(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	$276	million	and	$184	million	as	of	September	25,	2004	and September	27,	2003,	respectively.	The	Company	does	not	recognize	any	profits	on	these	sales	or	reflect	the	sale	of	these	components	in	its	net	sales.

# Inventory	Prepayment

In	April	2002,	the	Company	made	a	$100	million	prepayment	to	an	Asian	supplier	for	the	purchase	of	components	over	the	following	nine	months.	In	return	for	this deposit,	the	supplier	agreed	to	supply	the	Company	with	a	specified	level	of	components	during	the	three	consecutive	fiscal	quarters	ended	December	28,	2002.	During the	first	six	months	of	2003,	the	remaining	$53	million	of	the	deposit	balance	was	fully	utilized	for	the	purchase	of	components.	The	deposit	was	unsecured	and	had	no stated	interest	component.	The	Company	imputed	an	amount	to	cost	of	sales	and	interest	income	during	each	period	the	deposit	was	outstanding	at	a	3.25%	interest	rate to	reflect	the	economics	of	this	transaction.

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

The	following	table	shows	the	notional	principal,	net	fair	value,	and	credit	risk	amounts	of	the	Company's	foreign	currency	instruments	as	of	September	25,	2004	and September	27,	2003	(in	millions):

|  | Notional<br>Principal | Fair<br>Value | Credit	Risk<br>Amounts | Notional<br>Principal | Fair<br>Value | Credit	Risk<br>Amounts |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Foreign\texchange\tinstruments\tqualifying\tas\taccounting\thedges: |  |  |  |  |  |  |
| Spot/Forward\tcontracts | $598 | $(3) | $3 | $464 | $(21) $ | — |
| Purchased\toptions | $482 | $4 | $4 | $512 | $3 | $3 |
| Sold\toptions | $521 | $(3) | $— | $645 | $(8) $ | — |
| Foreign\texchange\tinstruments\tother\tthan\taccounting\thedges: |  |  |  |  |  |  |
| Spot/Forward\tcontracts | $609 | $3 | $4 | $445 | $3 | $3 |
| Purchased\toptions | $—\t $—\t $— | $—\t $—\t $— | $—\t $—\t $— | $8 | $—\t $— | $—\t $— |
| Sold\toptions | $—\t $—\t $— | $—\t $—\t $— | $—\t $—\t $— | $5 | $—\t $— | $—\t $— |

The	notional	principal	amounts	for	derivative	instruments	provide	one	measure	of	the	transaction	volume	outstanding	as	of	year-end,	and	do	not	represent	the	amount	of the	Company's	exposure	to	credit	or	market	loss.	The	credit	risk	amount	shown	in	the	table	above	represents	the	Company's	gross	exposure	to

potential	accounting	loss	on	these	transactions	if	all	counterparties	failed	to	perform	according	to	the	terms	of	the	contract,	based	on	then-current	currency	exchange	rates at	each	respective	date.	The	Company's	exposure	to	credit	loss	and	market	risk	will	vary	over	time	as	a	function	of	currency	exchange	rates.

The	estimates	of	fair	value	are	based	on	applicable	and	commonly	used	pricing	models	using	prevailing	financial	market	information	as	of	September	25,	2004	and September	27,	2003.	In	certain	instances	where	judgment	is	required	in	estimating	fair	value,	price	quotes	were	obtained	from	several	of	the	Company's	counterparty financial	institutions.	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	and	forecasted	future	cash	flows.	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	protect	gross	margins	from	fluctuations	in	foreign	currency	exchange	rates,	the	Company's	U.S.	dollar	functional	subsidiaries	hedge	a	portion	of	forecasted	foreign currency	revenues,	and	the	Company's	non-U.S.	dollar	functional	subsidiaries	selling	in	local	currencies	hedge	a	portion	of	forecasted	inventory	purchases	not denominated	in	the	subsidiaries'	functional	currency.	Other	comprehensive	income	associated	with	hedges	of	foreign	currency	revenues	is	recognized	as	a	component	of net	sales	in	the	same	period	as	the	related	sales	are	recognized,	and	other	comprehensive	income	related	to	inventory	purchases	is	recognized	as	a	component	of	cost	of sales	in	the	same	period	as	the	related	costs	are	recognized.	Typically,	the	Company	hedges	portions	of	its	forecasted	foreign	currency	exposure	associated	with	revenues and	inventory	purchases	over	a	time	horizon	of	3	to	9	months.

Derivative	instruments	designated	as	cash	flow	hedges	must	be	dedesignated	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	redesignated	as	hedges	of	other	transactions.	During	2004,	the	Company	recorded	net	losses	of	$2.8	million	in	other	income and	expense	related	to	the	loss	of	hedge	designation	on	discontinued	cash	flow	hedges	due	to	changes	in	the	Company's	forecast	of	future	net	sales	and	cost	of	sales	and due	to	prevailing	market	conditions.	No	net	gains,	or	losses,	of	a	similar	nature	were	recorded	in	2003.	During	2002,	the	Company	recorded	net	gains	of	$2.5	million	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	25,	2004,	the	Company	had	a	net	deferred	loss	associated	with	cash	flow	hedges	of	approximately $4.4	million,	net	of	taxes,	substantially	all	of	which	is	expected	to	be	reclassified	to	earnings	by	the	end	of	the	second	quarter	of	fiscal	2005.

The	Company	may	enter	into	foreign	currency	forward	contracts	to	hedge	the	translation	and	economic	exposure	of	a	net	investment	position	in	a	foreign	subsidiary.	The Company	may	also	enter	into	foreign	currency	forward	and	option	contracts	to	offset	the	foreign	exchange	gains	and	losses	generated	by	the	remeasurement	of	certain recorded	assets	and	liabilities	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	market	movements,	changes	in	option	time	value	can	lead	to	increased	volatility	in other	income	and	expense.

# Interest	Rate	Risk	Management

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

In	prior	years,	the	Company	had	entered	into	interest	rate	debt	swaps	with	financial	institutions	in	order	to	better	match	the	Company's	floating-rate	interest	income	on cash	equivalents	and	short	term	investments	with	its	fixed	rate	interest	expense	on	its	long	term	debt,	and/or	to	diversify	a	portion	of	the	Company's	exposure	away	from fluctuations	in	short	term	U.S.	interest	rates.	The	interest	rate	swaps	required	the	Company	to	pay	a	floating	interest	rate	based	on	the	three-	or	six-month	U.S.	dollar LIBOR	and	receive	a	fixed	rate	of	interest	without	exchanges	of	the	underlying	notional	amounts.	These	swaps	effectively	converted	the	Company's	fixed-rate	10-year debt	to	floating-rate	debt.	Due	to	prevailing	market	interest	rates,	during	2001	and	2002	the	Company	entered	into	and	then	subsequently	closed	out	interest	rate	debt swap	positions	realizing	gains	of	$23	million	which	were	deferred	over	the	remaining	life	of	the	debt.

As	of	September	25,	2004	and	September	27,	2003,	the	Company	had	no	interest	rate	derivatives	outstanding.

In	February	2004,	the	Company	retired	$300	million	of	debt	outstanding	in	the	form	of	6.5%	unsecured	notes.	The	notes	were	originally	issued	in	1994	and	were	sold	at 99.9925%	of	par	for	an	effective	yield	to	maturity	of	6.51%.	As	of	September	27,	2003,	the	carrying	amount	of	these	notes,	including	unamortized	deferred	gains associated	with	closed	debt	interest	rate	swaps,	was	$304	million,	respectively,	while	the	fair	value	was	$302	million.	The	fair	value	of	the	notes	was	based	on	their	listed market	values	as	of	September	27,	2003.

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

The	Company	has	held	significant	investments	in	ARM	Holdings	plc	(ARM),	Akamai	Technologies,	Inc.	(Akamai)	and	EarthLink	Network,	Inc.	(EarthLink).	These investments	have	been	reflected	in	the	consolidated	balance	sheets	as	long	term	assets	within	other	assets	and	have	been	categorized	as	available-for-sale	requiring	that they	be	carried	at	fair	value	with	unrealized	gains	and	losses,	net	of	taxes,	reported	in	equity	as	a	component	of	accumulated	other	comprehensive	income.	All	realized gains	on	the	sale	of	these	investments	have	been	included	in	other	income	and	expense.	In	fiscal	2004,	the	Company	sold	all	of	its	remaining	non-current	investments	in public	companies.

# EarthLink

In	January	2000,	the	Company	invested	$200	million	in	EarthLink,	an	Internet	service	provider	(ISP).	The	investment	was	in	EarthLink's	Series	C	Convertible	Preferred Stock,	which	was	convertible	by	the	Company	after	January	4,	2001,	into	approximately	7.1	million	shares	of	EarthLink	common	stock.	Concurrent	with	this investment,	EarthLink	and	the	Company	entered	into	a	multi-year	agreement	to	deliver	ISP	service	to	Macintosh	users	in	the	U.S.	Under	the	terms	of	the	agreement,	the Company	profits	from	each	new	Macintosh	customer	that	subscribes	to	EarthLink's	ISP	service	for	a	specified	period	of	time,	and	EarthLink	is	the	default	ISP	in	the Company's	Internet	Setup	Software	included	with	all	Macintosh	computers	sold	in	the	U.S.

During	the	first	quarter	of	2003,	the	Company	sold	2,580,000	shares	of	EarthLink	stock	for	net	proceeds	of	approximately	$13.7	million,	an	amount	that	approximated the	Company's	carrying	value	of	the	shares.	During	the	third	quarter	of	2003,	the	Company	sold	all	of	its	remaining	holdings	in	EarthLink,	consisting	of	3,960,000 shares	of	stock	for	net	proceeds	of	approximately	$23	million,	and	a	gain	before	taxes	of	$2	million.

During	the	first	quarter	of	2002,	the	Company	sold	117,000	shares	of	EarthLink	stock	for	net	proceeds	of	$2	million	and	a	gain	before	taxes	of	$223,000.	No	sales	of EarthLink	were	made	in	any	of	the	subsequent	quarters	of	fiscal	2002.	However,	during	the	fourth	quarter	of	2002,	the	Company	determined	that	the	then	current	decline in	the	fair	value	of	its	investment	in	EarthLink	was	other-than-temporary.	As	a	result,	the	Company	recognized	a	$44	million	charge	to	earnings	to	write-down	the	basis of	its	investment	in	EarthLink	to	$35	million.	This	charge	was	included	in	gains	(losses)	on	non-current	investments,	net.	As	of	September	28,	2002,	the	Company	held 6.5	million	shares	of	EarthLink	stock	valued	at	$35	million.

# Akamai

In	June	1999,	the	Company	invested	$12.5	million	in	Akamai,	a	global	Internet	content	delivery	service.	The	investment	was	in	the	form	of	convertible	preferred	stock that	converted	into	4.1	million	shares	of	Akamai	common	stock	(adjusted	for	subsequent	stock	splits)	at	the	time	of	Akamai's	initial	public	offering	in	October	1999. Beginning	in	the	first	quarter	of	2000,	the	Company	categorized	its	shares	in	Akamai	as	available-for-sale.

During	2004,	the	Company	sold	its	remaining	986,000	shares	of	Akamai	stock.	The	transaction	generated	proceeds	of	approximately	$5	million	and	a	gain	before	taxes of	approximately	$4	million.

During	the	fourth	quarter	of	2003,	the	Company	sold	1,875,000	shares	of	Akamai	stock	for	net	proceeds	of	$9	million	and	a	gain	before	taxes	of	$8	million.	As	of September	27,	2003,	the	Company's	remaining	investment	in	Akamai	consisted	of	986,000	shares	of	Akamai	stock	valued	at	$5	million.

During	the	first	quarter	of	2002,	the	Company	sold	250,000	shares	of	Akamai	stock	for	net	proceeds	of	$2	million	and	a	gain	before	taxes	of	$710,000.	No	sales	of Akamai	were	made	in	any	of	the	subsequent	quarters	of	fiscal	2002.	However,	during	the	fourth	quarter	of	2002,	the	Company	determined	the	decline	in	the	fair	value	of its	investment	in	Akamai	was	other-than-temporary.	As	a	result,	the	Company	recognized	a	$6	million	charge	to	earnings	to	write-down	the	basis	of	its	investment	in Akamai	to	$3	million.	This	charge	was	included	in	gains	(losses)	on	non-current	investments,	net.

ARM	is	a	publicly	held	company	in	the	U.K.	involved	in	the	design	and	licensing	of	high	performance	microprocessors	and	related	technology.

During	the	third	quarter	of	2003,	the	Company	sold	all	of	its	remaining	holdings	in	ARM	stock,	consisting	of	278,000	shares	for	net	proceeds	of	approximately $295,000,	and	a	gain	before	taxes	of	$270,000.

During	the	first	quarter	of	2002,	the	Company	sold	4.7	million	shares	of	ARM	stock	for	both	net	proceeds	and	a	gain	before	taxes	of	$21	million.	No	sales	of	ARM	were made	in	any	of	the	subsequent	quarters	of	fiscal	2002.

# Other	Strategic	Investments

The	Company	has	made	additional	minority	debt	and	equity	investments	in	several	privately	held	technology	companies,	which	were	reflected	in	the	consolidated balance	sheets	in	other	assets.	These	investments	were	inherently	risky	because	the	products	and/or	markets	of	these	companies	were	typically	not	fully	developed. During	2002,	the	Company	determined	the	decline	in	fair	value	of	certain	of	these	investments	was	other-than-temporary	and,	accordingly,	recognized	a	charge	to earnings	of	$15	million.	These	charges	were	included	in	gains	(losses)	on	non-current	investments,	net.	As	of	September	25,	2004,	the	Company	had	$1.4	million	of equity	investments	reflected	in	its	consolidated	balance	sheet.	As	of	September	27,	2003,	the	Company	had	no	private	debt	or	equity	investments	reflected	in	its consolidated	balance	sheet.

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

|  | 2004 | 2003 |
| :--- | :--- | :--- |
| Purchased\tparts | $1 | $2 |
| Work\tin\tprocess | — | 4 |
| Finished\tgoods | 100 | 50 |
| Total\tinventories | $101 | $56 |

# Other	Current	Assets

|  | 2004 | 2003 |
| :--- | :--- | :--- |
| Vendor\tnon-trade\treceivables | $276 | $184 |
| Other\tcurrent\tassets | 209 | 125 |
| Total\tother\tcurrent\tassets | $485 | $309 |

|  | 2004 | 2003 |
| :--- | :--- | :--- |
| Land\tand\tbuildings | $351 | $350 |
| Machinery,\tequipment,\tand\tinternal-use\tsoftware | 422 | 393 |
| Office\tfurniture\tand\tequipment | 79 | 74 |
| Leasehold\timprovements | 446 | 357 |
|  | 1,298 | 1,174 |
| Accumulated\tdepreciation\tand\tamortization | (591) | (505) |
| Net\tproperty,\tplant,\tand\tequipment | $707 | $669 |

# Other	Assets

|  | 2004 | 2003 |
| :--- | :--- | :--- |
| Non-current\tdeferred\ttax\tassets | $86 | $60 |
| Capitalized\tsoftware\tdevelopment\tcosts,\tnet | 25 | 28 |
| Other\tassets | 80 | 62 |
| Total\tother\tassets | $191 | $150 |

# Accrued	Expenses

|  | 2004 | 2003 |
| :--- | :--- | :--- |
| Deferred\trevenue | $544 | $368 |
| Accrued\tmarketing\tand\tdistribution | 147 | 124 |
| Accrued\tcompensation\tand\temployee\tbenefits | 134 | 101 |
| Accrued\twarranty\tand\trelated\tcosts | 105 | 67 |
| Other\tcurrent\tliabilities | 299 | 239 |
| Total\taccrued\texpenses | $1,229 | $899 |

|  | 2004 | 2003 | 2002 |
| :--- | :--- | :--- | :--- |
| Interest\tincome | $64 | $69 | $118 |
| Interest\texpense | (3) | (8) | (11) |
| Gains\ton\tsales\tof\tshort\tterm\tinvestments | 1 | 21 | 7 |
| Other\tincome\t(expense),\tnet | (9) | (5) | (2) |
| Gain\ton\tforward\tpurchase\tagreement | — | 6 | — |
| Total\tinterest\tand\tother\tincome,\tnet | $53 | $83 | $112 |

# Note	4—Acquisitions

# 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	Company	ceased	amortization	of goodwill	at	the	beginning	of	fiscal	2002	when	it	adopted	SFAS	No.	142.

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

|  | Gross<br>Carrying<br>Amount | Accumulated<br>Amortization | Net<br>Carrying<br>Amount | Gross<br>Carrying<br>Amount | Accumulated<br>Amortization | Net	Carrying<br>Amount |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Goodwill\t(a) | $80 | — | $80 | $85 | — | $85 |
| Other\tacquired\tintangible\tassets | 5 | (5) | — | 5 | (5) | — |
| Acquired\ttechnology | 42 | (25) | 17 | 42 | (18) | 24 |
| Total\tacquired\tintangible\tassets | $127 | $(30) | $97 | $132 | $(23) $ | 109 |

(a) Accumulated	amortization	related	to	goodwill	of	$55	million	arising	prior	to	the	adoption	of	SFAS	No.	142	has	been	reflected	in	the	gross	carrying	amount	of goodwill	as	of	September	25,	2004	and	September	27,	2003.

During	the	third	quarter	of	2004,	the	Company	recorded	an	adjustment	of	approximately	$5	million	to	goodwill	related	to	the	acquisition	of	PowerSchool,	Inc (PowerSchool)	in	fiscal	2001.	This	reduction	of	goodwill	included	the	cancellation	of	79,167	shares	of	Apple	common	stock,	valued	at	approximately	$2	million,	that were	previously	held	in	escrow	and	were	refunded	upon	resolution	of	certain	matters	arising	out	of	the	acquisition	of	PowerSchool.	This	adjustment	also	included approximately	$3	million	to	adjust	the	original	estimates	of	the	pre-acquisition	PowerSchool	restructuring	liability	to	actual	costs	incurred.

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

Amortization	expense	related	to	acquired	intangible	assets	is	as	follows	(in	millions):

|  | 2004 | 2003 | 2002 |
| :--- | :--- | :--- | :--- |
| Other\tacquired\tintangible\tassets\tamortization | $—\t $— | $—\t $— | $1 |
| Acquired\ttechnology\tamortization | 7 | 10 | 5 |
| Total\tamortization | $7 | $10 | $6 |

# Acquisition	of	Emagic	GmbH

During	the	fourth	quarter	of	2002,	the	Company	acquired	Emagic	GmbH	(Emagic),	a	provider	of	professional	software	solutions	for	computer	based	music	production, for	approximately	$30	million	in	cash;	$26	million	of	which	was	paid	immediately	upon	closing	of	the	deal	and	$4	million	of	which	was	held-back	for	future	payment contingent	on	continued	employment	by	certain	employees	that	would	be	allocated	to	future	compensation	expense	in	the	appropriate	periods	over	the	following	3	years. During	fiscal	2003,	contingent	consideration	totaling	$1.3	million	was	paid.	The	acquisition	has	been	accounted	for	as	a	purchase.	The	portion	of	the	purchase	price allocated	to	purchased	in-process	research	and	development	(IPR&D)	was	expensed	immediately,	and	the	portion	of	the	purchase	price	allocated	to	acquired	technology and	to	tradename	will	be	amortized	over	their	estimated	useful	lives	of	3	years.	Goodwill	associated	with	the	acquisition	of	Emagic	is	not	subject	to	amortization pursuant	to	the	provisions	of	SFAS	No.	142.	Total	consideration	was	allocated	as	follows	(in	millions):

The	amount	of	the	purchase	price	allocated	to	IPR&D	was	expensed	upon	acquisition,	because	the	technological	feasibility	of	products	under	development	had	not	been established	and	no	alternative	future	uses	existed.	The	IPR&D	relates	primarily	to	Emagic's	Logic	series	technology	and	extensions.	At	the	date	of	the	acquisition,	the products	under	development	were	between	43%-83%	complete,	and	it	was	expected	that	the	remaining	work	would	be	completed	during	the	Company's	fiscal	2003	at	a cost	of	approximately	$415,000.	The	remaining	efforts,	which	were	completed	in	2003,	included	finalizing	user	interface	design	and	development,	and	testing.	The	fair value	of	the	IPR&D	was	determined	using	an	income	approach,	which	reflects	the	projected	free	cash	flows	that	will	be	generated	by	the	IPR&D	projects	and	that	are attributable	to	the	acquired	technology,	and	discounting	the	projected	net	cash	flows	back	to	their	present	value	using	a	discount	rate	of	25%.

# Acquisition	of	certain	assets	of	Zayante,	Inc.,	Prismo	Graphics,	and	Silicon	Grail

During	fiscal	2002	the	Company	acquired	certain	technology	and	patent	rights	of	Zayante,	Inc.,	Prismo	Graphics,	and	Silicon	Grail	Corporation	for	a	total	of	$20	million in	cash.	These	transactions	have	been	accounted	for	as	asset	acquisitions.	The	purchase	price	for	these	asset	acquisitions,	except	for	$1	million	identified	as	contingent consideration	which	would	be	allocated	to	compensation	expense	over	the	following	3	years,	has	been	allocated	to	acquired	technology	and	would	be	amortized	on	a straight-line	basis	over	3	years,	except	for	certain	assets	acquired	from	Zayante	associated	with	patent	royalty	streams	that	would	be	amortized	over	10	years.

# Acquisition	of	Nothing	Real,	LLC

During	the	second	quarter	of	2002,	the	Company	acquired	certain	assets	of	Nothing	Real,	LLC	(Nothing	Real),	a	privately-held	company	that	develops	and	markets	high performance	tools	designed	for	the	digital	image	creation	market.	Of	the	$15	million	purchase	price,	the	Company	has	allocated	$7	million	to	acquired	technology, which	will	be	amortized	over	its	estimated	life	of	5	years.	The	remaining	$8	million,	which	has	been	identified	as	contingent	consideration,	rather	than	recorded	as	an additional	component	of

the	cost	of	the	acquired	assets,	would	be	allocated	to	future	compensation	expense	in	the	appropriate	periods	over	the	following	3	years.

# Note	5—Restructuring	Charges

During	the	second	quarter	of	2004,	the	Company's	management	approved	restructuring	plans	related	to	the	termination	of	Company-owned	manufacturing	activities	in Sacramento	and	headcount	reductions	related	primarily	to	various	sales	and	marketing	activities	in	the	U.S.	and	Europe.	Total	cost	of	the	actions	was	$9.6	million	for	the termination	of	348	positions.	As	of	the	end	of	the	fourth	quarter	of	2004,	$6.8	million	had	been	spent	and	310	positions	had	been	eliminated	related	to	these	actions.

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

|  | Severance<br>Benefits | Asset<br>Impairments | Lease<br>Cancellations | Totals |
| :--- | :--- | :--- | :--- | :--- |
| Total\tcharge | $14.0 | $5.5 | $3.5 | $23.0 |
| Total\tspending\tthrough\tSeptember\t25,\t2004 | (8.7) | — | — | (8.7) |
| Total\tnon-cash\titems | — | (5.2) | — | (5.2) |
| Adjustments | (0.1) | (0.3) | — | (0.4) |
| Accrual\tat\tSeptember\t25,\t2004 | $5.2 | $— | $3.5 | $8.7 |

The	Company	recorded	total	restructuring	charges	of	approximately	$26.8	million	during	the	year	ended	September	27,	2003,	including	approximately	$7.4	million	in severance	costs,	a	$5.0	million	charge	to	write-off	deferred	compensation,	$7.1	million	in	asset	impairments	and	a	$7.3	million	charge	for	lease	cancellations.	Of	the $26.8	million	charge,	all	had	been	spent	by	the	end	of	2004,	except	for	approximately	$3.0	million	related	to	operating	lease	costs	on	abandoned	facilities.	During	the third	quarter	of	2003,	approximately	$500,000	of	the	amount	originally	accrued	for	lease	cancellations	was	determined	to	be	in	excess	due	to	the	sublease	of	a	property sooner	than	originally	estimated	and	a	shortfall	of	approximately	$500,000	was	identified	in	the	severance	accrual	due	to	higher	than	expected	severance	costs	related	to the	closure	of	the	Company's	Singapore	manufacturing	operations.	These	adjustments	had	no	net	effect	on	reported	operating	expense.

Closure	of	the	Company's	Singapore	manufacturing	operations	resulted	in	severance	costs	of	$1.8	million	and	costs	of	$6.7	million	to	write-off	manufacturing	related fixed	assets,	whose	use	ceased	during	the	first	quarter.	PowerSchool	related	costs	included	severance	of	approximately	$550,000	and	recognition	of	$5	million	of previously	deferred	stock	compensation	that	arose	when	PowerSchool	was	acquired	by	the	Company	in	2001	related	to	certain	PowerSchool	employee	stockholders who	were	terminated	in	the	first	quarter	of	2003.	Termination	of	sales	and	marketing	activities	and	employees,	principally	in	the	U.S.	and	Europe,	resulted	in	severance costs	of	$2.8	million	and	accrual	of	costs	associated	with	operating	leases	on

closed	facilities	of	$6.7	million.	The	total	net	restructuring	charge	of	$23	million	recognized	during	the	first	quarter	of	2003	also	reflects	the	reversal	of	$600,000	of unused	restructuring	accrual	originally	made	during	the	first	quarter	of	2002.

|  | Employee<br>Severance<br>Benefits | Deferred<br>Compensation<br>Write-off | Asset<br>Impairments | Lease<br>Cancellations | Totals |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Total\tcharge | $7.4 | $5.0 | $7.1 | $7.3 | $26.8 |
| Total\tspending\tthrough\tSeptember\t25,\t2004 | (7.9) | — | — | (3.8) | (11.7) |
| Total\tnon-cash\titems | — | (5.0) | (7.1) | — | (12.1) |
| Adjustments | 0.5 | — | — | (0.5) | — |
| Accrual\tat\tSeptember\t25,\t2004 | $— | $— | $— | $3.0 | $3.0 |

During	fiscal	2002,	the	Company	recorded	total	restructuring	charges	of	approximately	$30	million	related	to	actions	intended	to	eliminate	certain	activities	and	better align	the	Company's	operating	expenses	with	existing	general	economic	conditions	and	to	partially	offset	the	cost	of	continuing	investments	in	new	product	development and	investments	in	the	Company's	Retail	operating	segment.

During	the	first	quarter	of	2002,	the	Company's	management	approved	and	initiated	restructuring	actions	with	a	total	cost	of	approximately	$24	million.	These restructuring	actions	resulted	in	the	elimination	of	approximately	425	positions	worldwide	at	a	cost	of	$8	million.	Positions	were	eliminated	primarily	in	the	Company's operations,	information	systems,	and	administrative	functions.	In	addition,	these	restructuring	actions	also	included	significant	changes	in	the	Company's	information systems	strategy	resulting	in	termination	of	equipment	leases	and	cancellation	of	existing	projects	and	activities.	The	Company	ceased	using	the	assets	associated	with first	quarter	2002	restructuring	actions	during	that	same	quarter.	Related	lease	and	contract	cancellation	charges	totaled	$12	million,	and	charges	for	asset	impairments totaled	$4	million.	The	first	quarter	2002	restructuring	actions	were	primarily	related	to	corporate	activity	not	allocated	to	operating	segments.	During	the	first	quarter	of 2003,	the	Company	reversed	the	remaining	unused	accrual	of	$600,000.	All	amounts	associated	with	the	fiscal	2002	restructuring	actions	had	been	spent	by	the	end	of fiscal	2003.

# Note	6—Income	Taxes

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

|  | 2004 | 2003 | 2002 |
| :--- | :--- | :--- | :--- |
| Federal: |  |  |  |
| Current | $34 | $18 | $12 |
| Deferred | 56 | (7) | (32) |
|  | 90 | 11 | (20) |
| State: |  |  |  |
| Current | 5 | 4 | 3 |
| Deferred | (18) | (11) | 6 |
|  | (13) | (7) | 9 |
| Foreign: |  |  |  |
| Current | 46 | 21 | 29 |
| Deferred | (16) | (1) | 4 |
|  | 30 | 20 | 33 |
| Provision\tfor\tincome\ttaxes | $107 | $24 | $22 |

The	foreign	provision	for	income	taxes	is	based	on	foreign	pretax	earnings	of	approximately	$384	million,	$250	million	and	$284	million	in	2004,	2003,	and	2002, respectively.	As	of	September	25,	2004,	approximately	$3.2	billion	of	the	Company's	cash,	cash	equivalents,	and	short-term	investments	are	held	by	foreign	subsidiaries and	are	generally	based	in	U.S.	dollar-denominated	holdings.	Amounts	held	by	foreign	subsidiaries	are	generally	subject	to	U.S.	income	taxation	on	repatriation	to	the U.S.	The	Company's	consolidated	financial	statements	fully	provide	for	any	related	tax	liability	on	amounts	that	may	be	repatriated,	aside	from	undistributed	earnings	of certain	of	the	Company's	foreign	subsidiaries	that	are	intended	to	be	indefinitely	reinvested	in	operations	outside	the	U.S.	U.S.	income	taxes	have	not	been	provided	on	a cumulative	total	of	$972	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.

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	25,	2004	and	September	27,	2003,	the	significant	components	of	the	Company's	deferred	tax	assets	and	liabilities	were	(in	millions):

|  | 2004 | 2003 |
| :--- | :--- | :--- |
| Deferred\ttax\tassets: |  |  |
| Accounts\treceivable\tand\tinventory\treserves | $32 | $35 |
| Accrued\tliabilities\tand\tother\treserves | 195 | 155 |
| Basis\tof\tcapital\tassets\tand\tinvestments | 65 | 47 |
| Tax\tlosses\tand\tcredits | 329 | 204 |
| Other | 26 | 11 |
| Total\tdeferred\ttax\tassets | 647 | 452 |
| Less\tvaluation\tallowance | 30 | 30 |
| Net\tdeferred\ttax\tassets | 617 | 422 |
| Deferred\ttax\tliabilities:\nUnremitted\tearnings\tof\tsubsidiaries | 413 | 398 |
| Total\tdeferred\ttax\tliabilities | 413 | 398 |
| Net\tdeferred\ttax\tasset | $204 | $24 |

As	of	September	25,	2004,	the	Company	had	operating	loss	carryforwards	for	federal	tax	purposes	of	approximately	$446	million,	which	expire	from	2011	through 2024.	A	portion	of	these	carryforwards	was	acquired	from	NeXT	and	other	acquisitions,	the	utilization	of	which	is	subject	to	certain	limitations	imposed	by	the	Internal Revenue	Code.	The	Company	also	has	Federal	credit	carryforwards	and	various	state	and	foreign	tax	loss	and	credit	carryforwards,	the	tax	effect	of	which	is approximately	$132	million	and	which	expire	between	2005	and	2024.	The	remaining	benefits	from	tax	losses	and	credits	do	not	expire.	As	of	September	25,	2004,	a valuation	allowance	of	$30	million	was	recorded	against	the	deferred	tax	asset	for	the	benefits	of	tax	losses	that	may	not	be	realized.	The	valuation	allowance	relates primarily	to	the	operating	loss	carryforwards	acquired	from	NeXT	and	other	acquisitions.	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	2004,	2003,	and	2002)	to income	before	provision	for	income	taxes,	is	as	follows	(in	millions):

|  | 2004 | 2003 | 2002 |
| :--- | :--- | :--- | :--- |
| Computed\texpected\ttax | $134 | $32 | $30 |
| State\ttaxes,\tnet\tof\tfederal\teffect | (5) | (4) | 7 |
| Indefinitely\tinvested\tearnings\tof\tforeign\tsubsidiaries | (31) | (13) | — |
| Nondeductible\texecutive\tcompensation | 10 | 5 | (1) |
| Stock\trepurchase | — | (2) | — |
| Purchase\taccounting\tand\tasset\tacquisitions | — | 4 | 3 |
| Change\tin\tvaluation\tallowance | — | — | (16) |
| Research\tand\tdevelopment\tcredit,\tnet | (5) | (7) | (8) |
| Nondeductible\texpenses | 2 | 6 | 4 |
| Other\titems | 2 | 3 | 3 |
| Provision\tfor\tincome\ttaxes | $107 | $24 | $22 |
| Effective\ttax\trate | 28% | 26% | 25% |

# Note	7—Shareholders'	Equity

# Restricted	Stock	Units

During	fiscal	2004,	the	Company's	Board	of	Directors	approved	the	grant	of	2.515	million	restricted	stock	units	to	selected	members	of	the	Company's	senior management,	excluding	its	Chief	Executive	Officer	(CEO).	These	restricted	stock	units	generally	vest	in	two	equal	installments	on	the	second	and	fourth	anniversaries of	the	date	of	grant.	The	Company	has	recorded	the	$64.4	million	value	of	these	restricted	stock	units	as	a	component	of	shareholders'	equity	and	will	amortize	that amount	on	a	straight-line	basis	over	the	4	year	requisite	service	period.	The	value	of	the	restricted	stock	units	was	based	on	the	closing	market	price	of	the	Company's common	stock	on	the	date	of	grant.	Quarterly	amortization	will	be	approximately	$4.0	million,	of	which	approximately	$0.5	million	will	be	included	in	cost	of	sales; $1.3	million	will	be	included	in	research	and	development	expense;	and	the	remaining	$2.2	million	will	be	included	in	selling,	general	and	administrative	expense.	The restricted	stock	units	have	been	included	in	the	calculation	of	diluted	earnings	per	share	utilizing	the	treasury	stock	method.

# CEO	Restricted	Stock	Award

On	March	19,	2003,	the	Company	entered	into	an	Option	Cancellation	and	Restricted	Stock	Award	Agreement	(the	Agreement)	with	Mr.	Steven	P.	Jobs,	its	CEO.	The Agreement	cancelled	stock	option

awards	for	the	purchase	of	27.5	million	shares	of	the	Company's	common	stock	previously	granted	to	Mr.	Jobs	in	2000	and	2001.	Mr.	Jobs	retained	options	to	purchase 60,000	shares	of	the	Company's	common	stock	granted	in	August	of	1997	in	his	capacity	as	a	member	of	the	Company's	Board	of	Directors,	prior	to	becoming	the Company's	CEO.	The	Agreement	replaced	the	cancelled	options	with	a	restricted	stock	award	of	5	million	shares	of	the	Company's	common	stock.	The	restricted	stock award	generally	vests	three	years	from	date	of	grant.	Vesting	of	some	or	all	of	the	restricted	shares	will	be	accelerated	in	the	event	Mr.	Jobs	is	terminated	without	cause, dies,	or	has	his	management	role	reduced	following	a	change	in	control	of	the	Company.

The	Company	has	recorded	the	value	of	the	restricted	stock	award	of	$74.75	million	as	a	component	of	shareholders'	equity	and	is	amortizing	that	amount	on	a	straight- line	basis	over	the	3	year	service	period.	The	value	of	the	restricted	stock	award	was	based	on	the	closing	market	price	of	the	Company's	common	stock	of	$14.95	on	the date	of	the	award.	Amortization	expense	for	this	award,	which	amounts	to	approximately	$6.2	million	per	quarter,	has	been	included	in	selling,	general,	and administrative	expense	beginning	in	March	2003	and	will	continue	to	be	included	through	March	2006.	The	5	million	restricted	shares	have	been	included	in	the calculation	of	diluted	earnings	per	share	utilizing	the	treasury	stock	method.

During	the	fourth	quarter	of	2001,	the	Company	entered	into	a	forward	purchase	agreement	to	acquire	1.5	million	shares	of	its	common	stock	in	September	of	2003	at	an average	price	of	$16.64	per	share	for	a	total	cost	of	$25.5	million.	In	August	2003,	the	Company	settled	this	agreement	prior	to	its	maturity,	at	which	time	the	Company's common	stock	had	a	fair	value	of	$22.81.	Other	than	this	forward	purchase	transaction,	the	Company	has	not	engaged	in	any	transactions	to	repurchase	its	common stock	since	fiscal	2000.	Since	inception	of	the	stock	repurchase	plan,	the	Company	had	repurchased	a	total	of	6.55	million	shares	at	a	cost	of	$217	million.	The Company	was	authorized	to	repurchase	up	to	an	additional	$283	million	of	its	common	stock	as	of	September	25,	2004.

# Preferred	Stock

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

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	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):

|  | 2004 | 2003 | 2002 |
| :--- | :--- | :--- | :--- |
| Unrealized\tgains\t(losses)\ton\tavailable-for-sale\tsecurities | $(4) | $1 | $13 |
| Unrealized\tlosses\ton\tderivative\tinvestments | (4) | (16) | (11) |
| Cumulative\tforeign\tcurrency\ttranslation | (7) | (20) | (51) |
| Accumulated\tother\tcomprehensive\tincome\t(loss) | $(15) | $(35) | $(49) |

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

|  | 2004 | 2003 | 2002 |
| :--- | :--- | :--- | :--- |
| Change\tin\tfair\tvalue\tof\tavailable-for-sale\tsecurities | $(1) | $11 | $(49) |
| Adjustment\tfor\tnet\t(gains)\tlosses\trealized\tand\tincluded\tin\tnet\tincome | (4) | (23) | 32 |
| Change\tin\tunrealized\tgain/loss\ton\tavailable-for-sale\tsecurities | $(5) | $(12) | $(17) |

The	tax	effect	related	to	the	change	in	unrealized	gain	on	available-for-sale	securities	was	$4	million,	$6	million,	and	$10	million	for	fiscal	2004,	2003,	and	2002, respectively.	The	tax	effect	on	the	reclassification	adjustment	for	net	gains	(losses)	included	in	net	income	was	$1	million,	$(8)	million	and	$10	million	for	fiscal	2004, 2003,	and	2002,	respectively.

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

|  | 2004 | 2003 | 2002 |
| :--- | :--- | :--- | :--- |
| Changes\tin\tfair\tvalue\tof\tderivatives | $(21) | $(24) | $4 |
| Adjustment\tfor\tnet\tgains(losses)\trealized\tand\tincluded\tin\tnet\tincome | 33 | 19 | (19) |
| Change\tin\tunrealized\tgain/loss\ton\tderivative\tinstruments | $12 | $(5) | $(15) |

The	tax	effect	related	to	the	changes	in	fair	value	of	derivatives	was	$10	million,	$11million	and	$(2)	million	for	fiscal	2004,	2003,	and	2002,	respectively.	The	tax	effect related	to	derivative	gains	(losses)	reclassified	from	other	comprehensive	income	was	$(13)	million,	$(7)	million	and	$8	million	for	fiscal	2004,	2003,	and	2002, respectively.

# Note	8—Employee	Benefit	Plans

# 2003	Employee	Stock	Option	Plan

At	the	Annual	Meeting	of	Shareholders	held	on	April	24,	2003,	the	shareholders	approved	an	amendment	to	the	1998	Executive	Officer	Stock	Plan	to	change	the	name of	the	plan	to	the	2003	Employee	Stock	Option	Plan	(the	2003	Plan),	to	provide	for	broad-based	grants	to	all	employees	in	addition	to	executive	officers	and	other	key employees	and	to	prohibit	future	"repricings"	of	employee	stock	options,	including	6-months-plus-1-day	option	exchange	programs,	without	shareholder	approval. 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.	As	a result	of	shareholder	approval	of	amendments	to	the	1998	Executive	Officer	Stock	Plan	in	April	2003,	the	Company	terminated	the	1997	Employee	Stock	Option	Plan and	cancelled	all	remaining	unissued	shares	totaling	14,295,351	following	the	completion	of	an	employee	stock	option	exchange	program	in	October	2003.

# 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	$25.00	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	are	issued,	which	was	to	be	at	least	six	months	plus	one	day	after	the	exchange	options	are	cancelled.	On	April	17,	2003,	in	accordance	with	the Exchange	Program,	the	Company	cancelled	options	to	purchase	16,569,193	shares	of	its	common	stock.	On	October	22,	2003,	new	stock	options	totaling	6,697,368 shares	were	issued	to	employees	at	an	exercise	price	of	$22.76	per	share,	which	is	equivalent	to	the	closing	price	of	the	Company's	stock	on	that	date.	No	financial	or accounting	impact	to	the	Company's	financial	position,	results	of	operations	or	cash	flow	was	associated	with	this	transaction.

# 1997	Director	Stock	Option	Plan

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

# Rule	10b5-1	Trading	Plans

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

# Employee	Stock	Purchase	Plan

The	Company	has	a	shareholder	approved	employee	stock	purchase	plan	(the	Purchase	Plan),	under	which	substantially	all	employees	may	purchase	common	stock through	payroll	deductions	at	a	price	equal	to	85%	of	the	lower	of	the	fair	market	values	as	of	the	beginning	and	end	of	six	month	offering	periods.	Stock	purchases under	the	Purchase	Plan	are	limited	to	10%	of	an	employee's	compensation,	up	to	a	maximum

of	$25,000	in	any	calendar	year.	Beginning	with	the	six-month	offering	period	that	started	on	June	30,	2003,	the	number	of	shares	authorized	for	issuance	is	limited	to	a total	of	1	million	shares	per	offering	period.	During	2004,	2003,	and	2002,	2.0	million,	2.1	million,	and	1.8	million,	respectively	were	issued	under	the	Purchase	Plan. As	of	September	25,	2004,	approximately	2	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	($13,000	for calendar	year	2004).	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	$24	million,	$21	million,	and	$19	million	in	2004,	2003,	and	2002, respectively.

# Stock	Option	Activity

A	summary	of	the	Company's	stock	option	activity	and	related	information	for	the	years	ended	September	25,	2004,	September	27,	2003	and	September	28,	2002 follows	(option	amounts	are	presented	in	thousands):

|  | Available<br>for	Grant | Number	of<br>Shares | Weighted	Average<br>Exercise	Price |
| :--- | :--- | :--- | :--- |
| Balance\tat\tSeptember\t29,\t2001 | 10,075 | 97,179 | $29.24 |
| Additional\tOptions\tAuthorized | 15,000 | — | — |
| Options\tGranted | (23,239) | 23,239 | $19.89 |
| Options\tCancelled | 4,737 | (4,737) | $30.98 |
| Options\tExercised | — | (6,251) | $11.99 |
| Plan\tShares\tExpired | (2) | — | — |
| Balance\tat\tSeptember\t28,\t2002 | 6,571 | 109,430 | $28.17 |
| Restricted\tStock\tGranted | (5,000) | — | — |
| Options\tGranted | (4,179) | 4,179 | $16.38 |
| Options\tCancelled | 48,443 | (48,443) | $39.61 |
| Options\tExercised | — | (2,154) | $14.04 |
| Plan\tShares\tExpired | (5) | — | — |
| Balance\tat\tSeptember\t27,\t2003 | 45,830 | 63,012 | $19.08 |
| Restricted\tStock\tUnits\tGranted | (2,515) | — | — |
| Options\tGranted | (18,197) | 18,197 | $22.97 |
| Options\tCancelled | 3,005 | (3,005) | $20.70 |
| Options\tExercised | — | (22,843) | $17.20 |
| Plan\tShares\tExpired | (16,098) | — | — |
| Balance\tat\tSeptember\t25,\t2004 | 12,025 | 55,361 | $21.05 |

The	options	outstanding	as	of	September	25,	2004	have	been	segregated	into	five	ranges	for	additional	disclosure	as	follows	(option	amounts	are	presented	in	thousands):

|  | Options<br>Outstanding	as	of<br>September	25,<br>2004 | Weighted-<br>Average<br>Remaining<br>Contractual<br>Life	in	Years | Weighted<br>Average<br>Exercise<br>Price | Options<br>Exercisable	as	of<br>September	25,<br>2004 | Weighted<br>Average<br>Exercise<br>Price |
| :--- | :--- | :--- | :--- | :--- | :--- |
| $0.83-$15.59 | 6,426 | 4.65 | $12.26 | 4,958 | $11.59 |
| $15.60-$18.50 | 15,729 | 5.87 | $17.94 | 12,969 | $18.04 |
| $18.51-$20.54 | 9,998 | 6.91 | $20.26 | 5,769 | $20.25 |
| $20.55-$22.76 | 15,109 | 6.23 | $22.20 | 1,401 | $21.77 |
| $22.77-$69.78 | 8,099 | 6.24 | $32.90 | 4,926 | $36.46 |
| $0.83-$69.78 | 55,361 | 6.07 | $21.05 | 30,023 | $20.59 |

As	of	September	27,	2003,	the	Company	had	exercisable	options	to	purchase	38.8	million	shares	outstanding	with	a	weighted	average	exercise	price	of	$18.75	per	share. As	of	September	28,	2002,	the	Company	had	exercisable	options	to	purchase	57.9	million	shares	outstanding	with	a	weighted	average	exercise	price	of	$30.85	per	share.

The	Company	had	2.515	million	restricted	stock	units	outstanding	as	of	September	25,	2004,	which	were	excluded	from	the	options	outstanding	balances	in	the preceding	tables.	None	of	these	restricted	stock	units	were	vested	as	of	September	25,	2004.	The	grant	of	these	restricted	stock	units	has	been	deducted	from	the	shares available	for	grant	under	the	Company's	stock	option	plans.

# Note	9—Stock-Based	Compensation

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

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

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

|  | 2004 | 2003 | 2002 |
| :--- | :--- | :--- | :--- |
| Expected\tlife\tof\tstock\toptions | 3.5\tyears | 3.5-4\tyears | 4\tyears |
| Expected\tlife\tof\tstock\tpurchases | 6\tmonths | 6\tmonths | 6\tmonths |
| Interest\trate—stock\toptions | 2.33%-3.15% | 2.14%-2.45% | 2.90% |
| Interest\trate—stock\tpurchases | 0.96%-1.67% | 1.10%-1.77% | 2.71% |
| Volatility—stock\toptions | 40% | 40%-63% | 64% |
| Volatility—stock\tpurchases | 32%-44% | 35%-44% | 51% |
| Dividend\tyields | — | — | — |
| Weighted-average\tfair\tvalue\tof\toptions\tgranted\tduring\tthe\tyear | $7.37 | $6.63 | $10.11 |
| Weighted-average\tfair\tvalue\tof\tstock\tpurchases\tduring\tthe\tyear | $5.56 | $4.24 | $6.73 |

For	purposes	of	the	pro	forma	disclosures	provided	pursuant	to	SFAS	No.	123,	the	expected	volatility	assumptions	used	by	the	Company	prior	to	the	third	quarter	of 2003	had	been	based	solely	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.	Beginning	in	the	third	quarter	of	2003,	the	Company	has	modified	this	approach	to	consider	other	relevant	factors	including	implied	volatility in	market	traded	options	on	the	Company's	common	stock	and	the	impact	of	unusual	fluctuations	not	reasonably	expected	to	recur	on	the	historical	volatility	of	the Company's	common	stock.	The	Company	will	continue	to	monitor	these	and	other	relevant	factors	in	developing	the	expected	volatility	assumption	used	to	value	future awards.

Beginning	in	the	third	quarter	of	2003,	the	Company	shortened	its	estimate	of	the	expected	life	of	new	options	granted	to	its	employees	from	4	years	to	3.5	years.	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.	The	change	in	the expected	life	assumption	made	during	the	third	quarter	of	2003	was	the	result	of	the	expected	impact	of	shortening	the	contractual	life	of	new	options	granted	to employees	from	10	years	to	7	years	and	changing	the	vesting	provisions	of	new	options	granted	to	employees	from	4	year	straight-line	annual	vesting	to	4	year	straight- line	quarterly	vesting.

# 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	10	years	and	generally	provide	renewal	options	for	terms	of	3	to	5 additional	years.	Leases	for	retail	space	are	for	terms	of	5	to	16	years	and	often	contain	multi-year	renewal	options.	As	of	September	25,	2004,	the	Company's	total future	minimum	lease	payments	under	noncancelable	operating	leases	were	$617	million,	of	which	$436	million	related	to	leases	for	retail	space.

Rent	expense	under	all	operating	leases,	including	both	cancelable	and	noncancelable	leases,	was	$103	million,	$97	million,	and	$92	million	in	2004,	2003,	and	2002, respectively.	Future	minimum	lease

payments	under	noncancelable	operating	leases	having	remaining	terms	in	excess	of	one	year	as	of	September	25,	2004,	are	as	follows	(in	millions):

| 2005 | $89 |
| :--- | :--- |
| 2006 | 91 |
| 2007 | 79 |
| 2008 | 65 |
| 2009 | 61 |
| Later\tyears | 232 |
| Total\tminimum\tlease\tpayments | $617 |

# 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	Apple	service	parts	used	to	repair	Apple	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 expectations.

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

|  | 2004 | 2003 | 2002 |
| :--- | :--- | :--- | :--- |
| Beginning\taccrued\twarranty\tand\trelated\tcosts | $67 | $69 | $87 |
| Cost\tof\twarranty\tclaims | (105) | (71) | (79) |
| Accruals\tfor\tproduct\twarranties | 143 | 69 | 61 |
| Ending\taccrued\twarranty\tand\trelated\tcosts | $105 | $67 | $69 |

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	25,	2004	or	September	27,	2003.

# 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,	or	("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,	the	majority	of	which	occurs	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.

# Contingencies

Beginning	on	September	27,	2001,	three	shareholder	class	action	lawsuits	were	filed	in	the	U.S.	District	Court	for	the	Northern	District	of	California	against	the Company	and	its	Chief	Executive	Officer.	These	lawsuits	are	substantially	identical,	and	purport	to	bring	suit	on	behalf	of	persons	who	purchased	the	Company's publicly	traded	common	stock	between	July	19,	2000,	and	September	28,	2000.	The	complaints	allege	violations	of	the	1934	Securities	Exchange	Act	and	seek unspecified	compensatory	damages	and	other	relief.	The	Company	believes	these	claims	are	without	merit	and	intends	to	defend	them	vigorously.	The	Company	filed	a motion	to	dismiss	on	June	4,	2002,	which	was	heard	by	the	Court	on	September	13,	2002.	On	December	11,	2002,	the	Court	granted	the	Company's	motion	to	dismiss for	failure	to	state	a	cause	of	action,	with	leave	to	Plaintiffs	to	amend	their	complaint	within	thirty	days.	Plaintiffs	filed	their	amended	complaint	on	January	31,	2003,	and on	March	17,	2003,	the	Company	filed	a	motion	to	dismiss	the	amended	complaint.	The	Court	heard	the	Company's	motion	on	July	11,	2003	and	dismissed	Plaintiffs' claims	with	prejudice	on	August	12,	2003.	Plaintiffs	have	appealed	the	ruling.

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

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

the	ability	to	return	product	at	the	end	of	its	useful	life,	and	place	responsibility	for	environmentally	safe	disposal	or	recycling	with	the	Company.	Such	laws	and regulations	have	recently	been	passed	in	several	jurisdictions	in	which	the	Company	operates	including	various	European	Union	member	countries,	Japan	and	certain states	within	the	U.S.	Although	the	Company	does	not	anticipate	any	material	adverse	effects	in	the	future	based	on	the	nature	of	its	operations	and	the	thrust	of	such laws,	there	is	no	assurance	that	such	existing	laws	or	future	laws	will	not	have	a	material	adverse	effect	on	the	Company's	results	of	operations	and	financial	position.

# 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	segment	includes	both	North	and	South	America,	except	for	the	activities	of	the	Company's	Retail	segment.	The	Europe	segment	includes European	countries	as	well	as	the	Middle	East	and	Africa.	The	Japan	segment	includes	only	Japan	and	excludes	revenue	from	the	Company's	own	retail	stores	in	Japan, which	is	included	in	the	Company's	Retail	segment.	The	Retail	segment	operated	Apple-owned	retail	stores	in	the	U.S.	and	Japan	during	fiscal	2004.	Other	operating segments	include	Asia-Pacific,	which	includes	Australia	and	Asia	except	for	Japan,	and	the	Company's	subsidiary,	FileMaker,	Inc.	Each	reportable	geographic	operating segment	provides	similar	hardware	and	software	products	and	similar	services,	and	the	accounting	policies	of	the	various	segments	are	the	same	as	those	described	in Note	1,	"Summary	of	Significant	Accounting	Policies,"	except	as	described	below	for	the	Retail	segment.

The	Company	evaluates	the	performance	of	its	operating	segments	based	on	net	sales.	The	Retail	segment's	performance	is	also	evaluated	based	on	operating	income. Net	sales	for	geographic	segments	are	generally	based	on	the	location	of	the	customers.	Operating	income	for	each	segment	includes	net	sales	to	third	parties,	related cost	of	sales,	and	operating	expenses	directly	attributable	to	the	segment.	Operating	income	for	each	segment	excludes	other	income	and	expense	and	certain	expenses that	are	managed	outside	the	operating	segments.	Costs	excluded	from	segment	operating	income	include	various	corporate	expenses,	manufacturing	costs	not	included in	standard	costs,	income	taxes,	and	various	nonrecurring	charges.	Corporate	expenses	include	research	and	development,	corporate	marketing	expenses,	and	other separately	managed	general	and	administrative	expenses	including	certain	corporate	expenses	associated	with	support	of	the	Retail	segment.	The	Company	does	not include	intercompany	transfers	between	segments	for	management	reporting	purposes.	Segment	assets	exclude	corporate	assets.	Corporate	assets	include	cash,	short- term	and	long-term	investments,	manufacturing	facilities,	miscellaneous	corporate	infrastructure,	goodwill	and	other	acquired	intangible	assets,	and	retail	store construction-in-progress	that	is	not	subject	to	depreciation.	Except	for	the	Retail	segment,	capital	expenditures	for	long-lived	assets	are	not	reported	to	management	by segment.	Capital	expenditures	by	the	Retail	segment	were	$104	million,	$92	million	and	$106	million	for	2004,	2003	and	2002,	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	comparable	measure	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	25,	2004,	September	27,	2003,	and	September	28,	2002,	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	$213	million,	$106	million,	and	$52	million,	respectively.

Second,	the	Company's	extended	warranty,	support	and	service	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	comparable	measure	of	revenue	and	gross	margin	between	the	Company's	Retail	stores	and	those	retail	channel partners.	The	Retail	segment	recognizes	the	full	amount	of	revenue	and	cost	of	sales	at	the	time	of	sale	of	the	Company's	extended	warranty,	support	and	service contracts.	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	25,	2004,	this	resulted	in	the	recognition	of	net	sales	and	cost	of	sales	by	the	Retail segment,	with	corresponding	offsets	in	other	operating	segments,	of	$54	million	and	$37	million,	respectively.	For	the	year	ended	September	27,	2003,	the	net	sales	and cost	of	sales	recognized	by	the	Retail	segment	for	sales	of	extended	warranty,	support	and	service	contracts	were	$30	million	and	$20	million,	respectively.	For	the	year ended	September	28,	2002,	this	resulted	in	the	recognition	of	net	sales	and	cost	of	sales	by	the	Retail	segment	of	$8	million	and	$6	million,	respectively.

Third,	the	Company	has	opened	six	high	profile	stores	in	New	York,	Los	Angeles,	Chicago,	San	Francisco,	Tokyo,	Japan	and	Osaka,	Japan	as	of	September	25,	2004 and	has	an	additional	store	under	development	in	London,	England,	which	is	expected	to	open	by	the	end	of	calendar	year	2004.	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	excess	amount	incurred	for	a	high	profile	store	to	that	of	a	more	typical Company	retail	location.	Expenses	allocated	to	corporate	marketing	resulting	from	the	operations	of	these	stores	were	$16	million,	$6	million	and	$1	million	for	the years	ended	September	25,	2004,	September	27,	2003,	and	September	28,	2002	respectively.

Summary	information	by	operating	segment	follows	(in	millions):

|  | 2004 | 2003 | 2002 |
| :--- | :--- | :--- | :--- |
| Americas: |  |  |  |
| Net\tsales | $4,019 | $3,181 | $3,131 |
| Operating\tincome | $465 | $323 | $278 |
| Depreciation,\tamortization\tand\taccretion | $6 | $5 | $4 |
| Segment\tassets\t(a) | $563 | $494 | $395 |
| Europe: |  |  |  |
| Net\tsales | $1,799 | $1,309 | $1,251 |
| Operating\tincome | $280 | $130 | $122 |
| Depreciation,\tamortization\tand\taccretion | $4 | $4 | $4 |
| Segment\tassets | $259 | $252 | $165 |
| Japan: |  |  |  |
| Net\tsales | $677 | $698 | $710 |
| Operating\tincome | $115 | $121 | $140 |
| Depreciation,\tamortization\tand\taccretion | $2 | $3 | $2 |
| Segment\tassets | $114 | $130 | $50 |
| Retail: |  |  |  |
| Net\tsales | $1,185 | $621 | $283 |
| Operating\tincome\t(loss) | $39 | $(5) | $(22) |
| Depreciation,\tamortization\tand\taccretion\t(b) | $35 | $25 | $16 |
| Segment\tassets\t(b) | $351 | $243 | $141 |
| Other\tSegments\t(c): |  |  |  |
| Net\tsales | $599 | $398 | $367 |
| Operating\tincome | $90 | $51 | $44 |
| Depreciation,\tamortization\tand\taccretion | $2 | $2 | $2 |
| Segment\tassets | $124 | $78 | $67 |

(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):

|  | 2004 | 2003 | 2002 |
| :--- | :--- | :--- | :--- |
| Segment\toperating\tincome | $989 | $620 | $562 |
| Corporate\texpenses,\tnet | (640) | (595) | (514) |
| Purchased\tin-process\tresearch\tand\tdevelopment | — | — | (1) |
| Restructuring\tcosts | (23) | (26) | (30) |
| Consolidated\toperating\tincome\t(loss) | $326 | $(1) | $17 |
| Segment\tassets | $1,411 | $1,197 | $818 |
| Corporate\tassets | 6,639 | $5,618 | $5,480 |
| Consolidated\tassets | $8,050 | $6,815 | $6,298 |
| Segment\tdepreciation,\tamortization\tand\taccretion | $49 | $39 | $28 |
| Corporate\tdepreciation,\tamortization\tand\taccretion | 101 | 74 | 86 |
| Consolidated\tdepreciation,\tamortization\tand\taccretion | $150 | $113 | $114 |

A	large	portion	of	the	Company's	net	sales	is	derived	from	its	international	operations.	Also,	a	majority	of	the	raw	materials	used	in	the	Company's	products	is	obtained from	sources	outside	of	the	U.S.,	and	a	majority	of	the	products	sold	by	the	Company	is	assembled	internationally	in	the	Company's	facility	in	Cork,	Ireland	or	by	third- party	vendors	in	Taiwan,	Korea,	the	Netherlands,	the	People's	Republic	of	China,	and	the	Czech	Republic.	As	a	result,	the	Company	is	subject	to	risks	associated	with foreign	operations,	such	as	obtaining	governmental	permits	and	approvals,	currency	exchange	fluctuations,	currency	restrictions,	political	instability,	labor	problems, trade	restrictions,	and	changes	in	tariff	and	freight	charges.	No	single	customer	accounted	for	more	than	10%	of	net	sales	in	2004,	2003	or	2002.

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

|  | 2004 | 2003 | 2002 |
| :--- | :--- | :--- | :--- |
| Net\tSales: |  |  |  |
| U.S. | $4,893 | $3,627 | $3,272 |
| Japan | 738 | 698 | 710 |
| Other\tCountries | 2,648 | 1,882 | 1,760 |
| Total\tNet\tSales | $8,279 | $6,207 | $5,742 |
| Long-Lived\tAssets: |  |  |  |
| U.S. | $637 | $635 | $561 |
| Japan | 52 | 19 | 2 |
| Other\tCountries | 72 | 60 | 69 |
| Total\tLong-Lived\tAssets | $761 | $714 | $632 |

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

|  | 2004 | 2003 | 2002 |
| :--- | :--- | :--- | :--- |
| Net\tSales: |  |  |  |
| Power\tMacintosh\t(a) | $1,419 | $1,237 | $1,380 |
| PowerBook | 1,589 | 1,299 | 831 |
| iMac\t(b) | 954 | 1,238 | 1,448 |
| iBook | 961 | 717 | 875 |
| Total\tMacintosh\tNet\tSales | $4,923 | $4,491 | $4,534 |
| iPod | 1,306 | 345 | 143 |
| Other\tMusic\tProducts\t(c) | 278 | 36 | 4 |
| Peripherals\tand\tother\thardware\t(d) | 951 | 691 | 527 |
| Software\t(e) | 502 | 362 | 307 |
| Service\tand\tother\tNet\tSales | 319 | 282 | 227 |
| Total\tNet\tSales | $8,279 | $6,207 | $5,742 |

# (a) Includes	Xserve	product	line.

(b) Includes	eMac	product	line.

(c) Other	Music	Products	includes	iTunes	Music	Store	sales	and	iPod	related	services,	and	Apple-branded	and	third-party	iPod-related	accessories.

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

(e) Net	sales	of	software	include	sales	of	Apple-branded	operating	system	and	application	software	and	sales	of	third-party	software.

# Note	12—Related	Party	Transactions	and	Certain	Other	Transactions

In	March	2002,	the	Company	entered	into	a	Reimbursement	Agreement	with	its	CEO,	Mr.	Steven	P.	Jobs,	for	the	reimbursement	of	expenses	incurred	by	Mr.	Jobs	in	the operation	of	his	private	plane	when	used	for	Apple	business.	The	Reimbursement	Agreement	became	effective	for	expenses	incurred	by	Mr.	Jobs	for	Apple	business purposes	since	he	took	delivery	of	the	plane	in	May	2001.	The	Company	recognized	a	total	of	$483,000,	$404,000,	and	$1,168,000	in	expenses	pursuant	to	the Reimbursement	Agreement	during	2004,	2003	and	2002,	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	connection	with	a	relocation	assistance	package,	the	Company	in	May	2000	loaned	Mr.	Ronald	B.	Johnson,	Senior	Vice	President,	Retail,	$1.5	million	for	the purchase	of	his	principal	residence.	The	loan	was	secured	by	a	deed	of	trust	and	was	due	and	payable	in	May	2004.	Under	the	terms	of	the	loan,	Mr.	Johnson	agreed	that should	he	exercise	any	of	his	stock	options	prior	to	the	due	date	of	the	loan,	he	would	pay	the	Company	an	amount	equal	to	the	lesser	of	(1)	an	amount	equal	to	50%	of the	total	net	gain	realized	from	the	exercise	of	the	options;	or	(2)	$375,000	multiplied	by	the	number	of	years	between	the	exercise	date	and	the	date	of	the	loan. Mr.	Johnson	repaid	$750,000	of	this	loan	in	fiscal	2003	and	repaid	the	remaining	balance	of	$750,000	in	fiscal	2004.

Mr.	Jerome	York,	a	member	of	the	Board	of	Directors	of	the	Company,	is	a	member	of	an	investment	group	that	purchased	MicroWarehouse,	Inc.	(MicroWarehouse)	in January	2000.	Until	September	7,	2003,	he	also	served	as	Microwarehouse's	Chairman,	President	and	Chief	Executive	Officer.	MicroWarehouse	was	a	reseller	of computer	hardware,	software	and	peripheral	products,	including	products	made	by	the

Company.	On	September	8,	2003,	CDW	Corporation	(CDW),	acquired	selected	North	American	assets	of	MicroWarehouse.	MicroWarehouse	subsequently	filed	for Chapter	11	bankruptcy	protection	in	the	U.S.	MicroWarehouse	accounted	for	approximately	0.3%,	2.4%	and	3.3%	of	the	Company's	net	sales	for	the	years	ended September	25,	2004,	September	27,	2003,	and	September	28,	2002,	respectively.	Trade	receivables	from	MicroWarehouse	were	$4.3	million	and	$9.9	million	as	of September	25,	2004	and	September	27,	2003,	respectively.	The	Company	has	provided	what	it	believes	to	be	an	adequate	allowance	on	the	outstanding	receivable	based on	the	Company's	secured	interest	position	in	selected	MicroWarehouse	assets	and	the	expected	payments	to	unsecured	creditors.	Sales	to	MicroWarehouse	and	related trade	receivables	were	generally	subject	to	the	same	terms	and	conditions	as	those	with	the	Company's	other	resellers.	In	addition,	the	Company	has	purchased miscellaneous	equipment	and	supplies	from	MicroWarehouse.	Total	purchases	amounted	to	approximately	$2.3	million	and	$2.9	million	for	the	years	ended September	27,	2003	and	September	28,	2002,	respectively.	No	purchases	were	made	by	the	Company	from	MicroWarehouse	in	fiscal	2004.

# Note	13—Selected	Quarterly	Financial	Information	(Unaudited)

| Net	sales | $2,350 | $2,014 | $1,909 | $2,006 |
| :--- | :--- | :--- | :--- | :--- |
| Gross\tmargin | $634 | $559 | $530 | $536 |
| Net\tincome | $106 | $61 | $46 | $63 |
| Earnings\tper\tcommon\tshare: |  |  |  |  |
| Basic | $0.28 | $0.16 | $0.13 | $0.17 |
| Diluted | $0.26 | $0.16 | $0.12 | $0.17 |
| 2003 |  |  |  |  |
| Net\tsales | $1,715 | $1,545 | $1,475 | $1,472 |
| Gross\tmargin | $456 | $428 | $418 | $406 |
| Net\tincome\t(loss) | $44 | $19 | $14 | $(8) |
| Earnings\t(loss)\tper\tcommon\tshare: |  |  |  |  |
| Basic | $0.12 | $0.05 | $0.04 | $(0.02) |
| Diluted | $0.12 | $0.05 | $0.04 | $(0.02) |

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

Net	income	during	the	fourth,	third,	and	second	quarters	of	2004	included	restructuring	charges,	net	of	tax,	of	$4	million,	$6	million,	and	$7	million,	respectively.

Net	income	during	the	fourth	and	third	quarters	of	2003	included	after-tax	net	gains	related	to	non-current	investments	of	$5	million	and	$1	million,	respectively.	Net income	for	the	fourth	quarter	also	included	settlement	of	the	Company's	forward	purchase	agreement	resulting	in	a	gain	of	$6	million	and	a	favorable	cumulative-effect type	adjustment	related	to	the	adoption	of	SFAS	No.	150	of	$3	million.	Net	income	(loss)	during	the	second	and	first	quarters	of	2003	included	restructuring	charges,	net of	tax,	of	$2	million	and	$18	million,	respectively.	Net	loss	for	the	first	quarter	of	2003	included	an	after-tax	unfavorable	cumulative-effect	type	adjustment	for	the adoption	of	SFAS	No.143	of	$2	million.

# REPORT	OF	INDEPENDENT	REGISTERED	PUBLIC	ACCOUNTING	FIRM

# The	Board	of	Directors	and	Shareholders

We	have	audited	the	accompanying	consolidated	balance	sheets	of	Apple	Computer,	Inc.	and	subsidiaries	(the	Company)	as	of	September	25,	2004	and	September	27, 2003,	and	the	related	consolidated	statements	of	operations,	shareholders'	equity,	and	cash	flows	for	each	of	the	years	in	the	three-year	period	ended	September	25,	2004. 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	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	Apple	Computer,	Inc.	and subsidiaries	as	of	September	25,	2004	and	September	27,	2003,	and	the	results	of	their	operations	and	their	cash	flows	for	each	of	the	years	in	the	three-year	period	ended September	25,	2004,	in	conformity	with	U.S.	generally	accepted	accounting	principles.

As	discussed	in	Note	1	to	the	consolidated	financial	statements,	the	Company	changed	its	method	of	accounting	for	asset	retirement	obligations	and	for	financial instruments	with	characteristics	of	both	liabilities	and	equity	in	2003	and	changed	its	method	of	accounting	for	goodwill	in	2002.

Mountain	View,	California

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

Not	applicable.

# Item	9A.	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	under	the	Securities	Exchange	Act	of	1934,	as	amended	(Exchange	Act))	were effective	as	of	September	25,	2004	to	ensure	that	information	required	to	be	disclosed	by	the	Company	in	reports	that	it	files	or	submits	under	the	Exchange	Act	is recorded,	processed,	summarized	and	reported	within	the	time	periods	specified	in	Securities	and	Exchange	Commission	rules	and	forms.

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 2004	that	have	materially	affected	or	are	reasonably	likely	to	materially	affect	the	Company's	internal	control	over	financial	reporting.

# PART	III

# Item	10.	Directors	and	Executive	Officers	of	the	Registrant

# Directors

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

| Name | Position	With	the	Company | Age |  | Director	Since |
| :--- | :--- | :--- | :--- | :--- |
| Fred\tD.\tAnderson | Director |  | 60 | 2004 |
| William\tV.\tCampbell | Director |  | 64 | 1997 |
| Millard\tS.\tDrexler | Director |  | 60 | 1999 |
| Albert\tGore,\tJr. | Director |  | 57 | 2003 |
| Steven\tP.\tJobs | Director\tand\tChief\tExecutive\tOfficer |  | 49 | 1997 |
| Arthur\tD.\tLevinson | Director |  | 54 | 2000 |
| Jerome\tB.\tYork | Director |  | 66 | 1997 |

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

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

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

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

Steven	P.	Jobs	is	one	of	the	Company's	co-founders	and	currently	serves	as	its	Chief	Executive	Officer.	Mr.	Jobs	is	also	the	Chairman	and	Chief	Executive	Officer	of Pixar	Animation	Studios.	In	addition,	Mr.	Jobs	co-founded	NeXT	Software,	Inc.	("NeXT")	and	served	as	the	Chairman	and	Chief	Executive	Officer	of	NeXT	from	1985 until	1997	when	NeXT	was	acquired	by	the	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.	Mr.	Levinson	also	serves	on	the	Board	of	Directors	of	Google,	Inc.

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

Corporation.	From	May	1993	to	September	1995	he	was	Senior	Vice	President	and	Chief	Financial	Officer	of	IBM	Corporation,	and	served	as	a	member	of	IBM's	Board of	Directors	from	January	1995	to	August	1995.	Mr.	York	is	also	a	director	of	Tyco	International	Ltd.	and	Metro-Goldwyn-Mayer,	Inc.

# 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	good	governance	depends	on	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").

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	stock	option	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.	Members	of	the	Nominating Committee	are	Messrs.	Drexler	and	Gore	and	Dr.	Levinson.

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

# Audit	Committee	Financial	Expert

While	more	than	one	member	of	the	Company's	Audit	Committee	qualifies	as	an	"audit	committee	financial	expert"	under	Item	401(h)	of	Regulation	S-K,	Mr.	Jerome B.	York,	the	Committee	chairperson,	is	the	designated	audit	committee	financial	expert.	Mr.	York	is	considered	"independent"	as	the	term	is	used	in	Item	7(d)(3)(iv)	of Schedule	14A	under	the	Exchange	Act.

# Code	of	Ethics

The	Company	has	a	code	of	ethics	that	applies	to	all	of	the	Company's	employees,	including	its	principal	executive	officer,	principal	financial	officer,	principal accounting	officer	and	its	Board	of	Directors.	A	copy	of	this	code,	"Ethics:	The	Way	We	Do	Business	Worldwide"	is	available	on	the	Company's	website	at www.apple.com/investor.	The	Company	intends	to	disclose	any	changes	in	or	waivers	from	its	code	of	ethics	by	posting	such	information	on	its	website	or	by	filing	a Form	8-K.

# Executive	Officers

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

Timothy	D.	Cook,	Executive	Vice	President,	Worldwide	Sales	and	Operations	(age	44),	joined	the	Company	in	February	1998.	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.

Nancy	R.	Heinen,	Senior	Vice	President,	General	Counsel	and	Secretary	(age	48),	joined	the	Company	in	September	1997.	Prior	to	joining	the	Company,	Ms.	Heinen held	the	position	of	Vice	President,	General	Counsel	and	Secretary	of	the	Board	of	Directors	at	NeXT	from	February	1994	until	the	acquisition	of	NeXT	by	the Company	in	February	1997.

Ronald	B.	Johnson,	Senior	Vice	President,	Retail	(age	46),	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	41),	joined	the	Company	in	July	1996.	Mr.	Oppenheimer	also	served	with	the	Company	in the	position	of	Vice	President	and	Corporate	Controller	and	as	Senior	Director	of	Finance	for	the	Americas.	Prior	to	joining	the	Company,	Mr.	Oppenheimer	was	CFO	of one	of	the	four	business	units	for	Automatic	Data	Processing,	Inc.	("ADP").	Prior	to	joining	ADP,	Mr.	Oppenheimer	spent	six	years	in	the	Information	Technology Consulting	Practice	with	Coopers	and	Lybrand.

Jonathan	Rubinstein,	Senior	Vice	President,	iPod	Division	(age	48),	joined	the	Company	in	February	1997.	Mr.	Rubinstein	also	served	with	the	Company	in	the position	of	Senior	Vice	President,	Hardware	Engineering.	Before	joining	the	Company,	Mr.	Rubinstein	was	Executive	Vice	President	and	Chief	Operating	Officer	of FirePower	Systems	Incorporated,	from	May	1993	to	August	1996.	Mr.	Rubinstein	also	serves	as	a	member	of	the	Board	of	Directors	of	Immersion	Corporation.

Philip	W.	Schiller,	Senior	Vice	President,	Worldwide	Product	Marketing	(age	44),	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	43),	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	47),	joined	the	Company	in	September	1997.	Mr.	Tamaddon	has	also	served	with	the	Company	in	the position	of	Senior	Vice	President	Worldwide	Service	and	Support,	and	Vice	President	and	General	Manager,	Newton	Group.	Before	joining	the	Company, Mr.	Tamaddon	held	the	position	of	Vice	President,	Europe	with	NeXT	from	September	1996	through	March	1997.	From	August	1994	to	August	1996,	Mr.	Tamaddon held	the	position	of	Vice	President,	Professional	Services	with	NeXT.

Avadis	Tevanian,	Jr.,	Ph.D.,	Senior	Vice	President,	Chief	Software	Technology	Officer	(age	43),	joined	the	Company	in	February	1997	upon	the	Company's acquisition	of	NeXT.	Dr.	Tevanian	served	with	the	Company	in	the	position	of	Senior	Vice	President,	Software	Engineering	from	1997	to	July	2003.	With	NeXT, Dr.	Tevanian	held	several	positions,	including	Vice	President,	Engineering,	from	April	1995	to

February	1997.	Prior	to	April	1995,	Dr.	Tevanian	worked	as	an	engineer	with	NeXT	and	held	several	management	positions.

# 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

| Steven	P.	Jobs | 2004 | 1 | — | — |  | — | — |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Chief\tExecutive\tOfficer | 2003 | 1 | — | 74,750,000 | (1) | — | — |  |
|  | 2002 | 1 | 2,268,698(2) | — |  | 7,500,000(1) | 1,302,795(2) | 1,302,795(2) |
| Timothy\tD.\tCook | 2004 | 602,632 | — | 7,650,000 | (3) | —\n—\n— | 12,588 | (4) |
| Executive\tVice\tPresident,\tWorldwide | 2003 | 617,673 | — | — |  |  | 9,929 | (4) |
| Sales\tand\tOperations | 2002 | 563,829 | — | — |  |  | 8,025 | (4) |
| Ronald\tB.\tJohnson | 2004 | 484,836 | 1,500,000 | 6,375,000 |  |  |  |  |
|  | 2003 | 452,404 | 1,500,000 | — |  |  |  |  |
| Senior\tVice\tPresident,\tRetail |  |  |  |  | (3) | —\n—\n300,000 | — |  |
|  | 2002 | 452,404 | — | — |  |  |  |  |
| Jonathan\tRubinstein\nSenior\tVice\tPresident,\tiPod\tDivision | 2004 | 485,216 | — | 6,375,000 | (3) | —\n—\n— | 12,300 | (4) |
|  | 2003 | 452,939 | — | — |  |  | 11,986 | (4) |
|  | 2002 | 452,558 | — | — |  |  | 9,996 | (4) |
| Avadis\tTevanian,\tJr.\tPh.D\nSenior\tVice\tPresident,\tChief\tSoftware\nTechnology\tOfficer | 2004 | 469,681 | 1,000 | 5,100,000 | (3) | —\n—\n— | 12,338\n11,962\n10,700 | (4)\n(4)\n(4) |
|  | 2003 | 456,731 | — | — |  |  |  |  |
|  | 2002 | 492,212 | — | — |  |  |  |  |

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

(2) In	December	1999,	Mr.	Jobs	was	given	a	special	executive	bonus	for	past	services	as	the	Company's	interim	Chief	Executive	Officer,	in	the	form	of	an	aircraft with	a	total	cost	to	the	Company	of	approximately	$90,000,000.	In	fiscal	2002,	approximately	$2.27	million	paid	by	the	Company	towards	the	purchase	of	the plane	and	approximately	$1.3	million	in	related	tax	assistance	was	reported	as	income	to	Mr.	Jobs.

(3) Market	value	of	restricted	stock	units	granted	on	March	24,	2004	(based	on	$25.50	per	share,	the	closing	price	of	the	Company's	common	stock	on	the	NASDAQ National	Market	on	the	day	of	grant).	Restricted	stock	units	generally	vest	over	four	years	with	50%	of	the	total	number	of	shares	vesting	on	each	of	the	second and	fourth	anniversary	of	the	grant	date.

(4) 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	2004,	although	restricted	stock	units	which	are	shown	above	in	the	Summary Compensation	Table,	were	granted.

# Options	Exercised	and	Year-End	Option	Holdings

The	following	table	provides	information	about	stock	option	exercises	by	the	Named	Executive	Officers	during	fiscal	year	2004	and	stock	options	held	by	each	of	them at	fiscal	year-end.

# AGGREGATED	OPTION	EXERCISES	IN	THE	LAST	FISCAL	YEAR

# AND	FISCAL	YEAR-END	OPTION	VALUES

| Steven	P.	Jobs | — | — | 60,000(2) | — | $1,547,400(2)$ | — |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Timothy\tD.\tCook | 1,350,000 | 14,719,950 | — | 250,000 | $— | $5,119,375 |
| Ronald\tB.\tJohnson | — | — | 1,631,250 | 168,750 | $7,359,188 | $2,426,813 |
| Jonathan\tJ.\tRubinstein | 1,500,000 | 26,370,700 | 650,000 | 250,000 | $12,985,375 | $5,119,375 |
| Avadis\tTevanian,\tJr. | 350,000 | 8,828,328 | 1,800,000 | 250,000 | $36,652,959 | $5,119,375 |

(1) Market	value	of	securities	underlying	in-the-money	options	at	the	end	of	fiscal	year	2004	(based	on	$37.29	per	share,	the	closing	price	of	Common	Stock	on	the NASDAQ	National	Market	on	September	24,	2004),	minus	the	exercise	price.

(2) Consists	of	60,000	options	granted	to	Mr.	Jobs	in	his	capacity	as	a	director	pursuant	to	the	1997	Director	Stock	Option	Plan.	In	March	2003,	Mr.	Jobs	voluntarily cancelled	all	of	his	outstanding	options,	excluding	those	granted	to	him	in	his	capacity	as	a	director.

# Director	Compensation

The	form	and	amount	of	director	compensation	is	determined	by	the	Board	after	a	review	of	recommendations	made	by	the	Nominating	Committee.	The	current	practice of	the	Board	is	to	base	a	substantial	portion	of	a	director's	annual	retainer	on	equity.	In	1998,	shareholders	approved	the	1997	Director	Stock	Option	Plan	(the	"Director Plan")	and	800,000	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	440,000	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.	William	V.	Campbell,	Millard	S.	Drexler,	and	Albert	Gore,	Jr.,	none	of	whom	are	employees	of	the Company	and	all	of	whom	are	considered	"independent"	directors	under	the	applicable	NASDAQ	rules.	No	person	who	was	an	employee	of	the	Company	in	fiscal	year 2004	served	on	the	Compensation	Committee.	No	executive	officer	of	the	Company	(i)	served	as	a	member	of	the	compensation	committee	(or	other	board	committee performing	similar	functions	or,	in	the	absence	of	any	such	committee,	the	board	of	directors)	of	another	entity,	one	of	whose	executive	officers	served	on	the	Company's Compensation	Committee,	(ii)	served	as	a

director	of	another	entity,	one	of	whose	executive	officers	served	on	the	Company's	Compensation	Committee,	or	(iii)	served	as	a	member	of	the	compensation committee	(or	other	board	committee	performing	similar	functions	or,	in	the	absence	of	any	such	committee,	the	board	of	directors)	of	another	entity,	one	of	whose executive	officers	served	as	a	director	of	the	Company.

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

The	following	table	sets	forth	certain	information	as	of	November	10,	2004	(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,	401,476,094	shares	of	Common	Stock	were	issued	and	outstanding.	Unless	otherwise	indicated,	all	persons	named	as	beneficial	owners	of	Common Stock	have	sole	voting	power	and	sole	investment	power	with	respect	to	the	shares	indicated	as	beneficially	owned.	In	addition,	unless	otherwise	indicated,	all	persons named	below	can	be	reached	at	Apple	Computer,	Inc.,	1	Infinite	Loop,	Cupertino,	CA	95014.

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

(1) Represents	shares	of	Common	Stock	held	and/or	options	held	by	such	individuals	that	were	exercisable	at	the	Table	Date	or	within	60	days	thereafter.

(2) Based	on	a	Form	13-F	showing	holdings	as	of	September	30,	2004	by	Private	Capital	Management,	Inc.	Private	Capital	Management,	Inc.	lists	its	address	as 8889	Pelican	Bay	Blvd.,	Naples,	FL,	34108,	in	such	filing.

(3) Includes	60,000	shares	of	Common	Stock	that	Mr.	Jobs	has	the	right	to	acquire	by	exercise	of	stock	options.

(4) Includes	100,000	shares	of	Common	Stock	that	Mr.	Campbell	has	the	right	to	acquire	by	exercise	of	stock	options.

(5) Includes	80,000	shares	of	Common	Stock	that	Mr.	Drexler	has	the	right	to	acquire	by	exercise	of	stock	options.

(6) Includes	10,000	shares	of	Common	Stock	that	Mr.	Gore	has	the	right	to	acquire	by	exercise	of	stock	options.

(7) Includes	1,350,000	shares	of	Common	Stock	that	Mr.	Johnson	has	the	right	to	acquire	by	exercise	of	stock	options.

(8) Includes	1,400	shares	of	Common	Stock	that	Dr.	Levinson	holds	indirectly	and	40,000	shares	of	Common	Stock	that	Dr.	Levinson	has	the	right	to	acquire	by exercise	of	stock	options.

(9) Includes	150,000	shares	of	Common	Stock	that	Mr.	Rubinstein	has	the	right	to	acquire	by	exercise	of	stock	options.

(10) Includes	1,500,000	shares	of	Common	Stock	that	Dr.	Tevanian	has	the	right	to	acquire	by	exercise	of	stock	options.

(11) Includes	10,000	shares	of	Common	Stock	that	Mr.	York	has	the	right	to	acquire	by	exercise	of	stock	options.

(12) Includes	4,956,148	shares	of	Common	Stock	that	executive	officers	or	directors	have	the	right	to	acquire	by	exercise	of	stock	options.

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

# 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	2004.

# Equity	Compensation	Plan	Information

The	following	table	sets	forth	certain	information,	as	of	September	25,	2004,	concerning	shares	of	common	stock	authorized	for	issuance	under	all	of	the	Company's equity	compensation	plans.

|  | (a)<br>Number	of	Securities<br>to	be	Issued	Upon<br>Exercise	of	Options | (b)<br>Weighted	Average<br>Exercise	Price	of<br>Outstanding	Options | Available	for	Future	Issuance<br>Under	Equity	Compensation<br>Plans	(Excluding	Securities<br>Reflected	in	Column	(a)) |
| :--- | :--- | :--- | :--- |
| Equity\tcompensation\tplans\tapproved\tby |  |  |  |
| shareholders | 21,992,912 | $22.32 | 14,072,423(1) |
| Equity\tcompensation\tplans\tnot\tapproved\tby |  |  |  |
| shareholders | 33,286,253 | $20.25 | — |
| Total\tequity\tcompensation\tplans(2) | 55,279,165 | $21.07 | 14,072,423 |

(1) This	number	includes	2,047,911	shares	of	common	stock	reserved	for	issuance	under	the	Employee	Stock	Purchase	Plan,	240,000	shares	available	for	issuance under	the	1997	Director	Stock	Option	Plan	and	14,299,512	shares	available	for	issuance	under	the	2003	Employee	Stock	Plan.	The	grant	of	2,515,000	shares	of restricted	stock	units	have	been	deducted	from	the	number	of	shares	available	for	future	issuance.	It	does	not	include	shares	under	the	1990	Stock	Option	Plan which	was	terminated	in	1997.	No	new	options	can	be	granted	under	the	1990	Stock	Option	Plan.

(2) This	table	does	not	include	81,642	outstanding	options	assumed	in	connection	with	mergers	and	acquisitions	of	the	companies	which	originally	established	those plans.	These	assumed	options	have	a	weighted	average	exercise	price	of	$4.39	per	share.	No	additional	options	may	be	granted	under	those	assumed	plans.

# Arrangements	with	Named	Executive	Officers

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

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

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

# Item	13.	Certain	Relationships	and	Related	Transactions

In	connection	with	a	relocation	assistance	package,	the	Company	loaned	Mr.	Johnson	(Senior	Vice	President,	Retail)	$1,500,000	for	the	purchase	of	his	principal residence.	The	loan	was	secured	by	a	deed	of	trust	and	was	due	and	payable	in	May	2004.	The	largest	amount	of	the	indebtedness	outstanding	on	this	loan	during	fiscal year	2004	was	$750,000.	Mr.	Johnson	repaid	the	Company	$750,000	during	the	fiscal	year	and	the	loan	has	been	repaid	in	full.

In	March	2002,	the	Company	entered	into	a	Reimbursement	Agreement	with	its	Chief	Executive	Officer,	Mr.	Steven	P.	Jobs,	for	the	reimbursement	of	expenses incurred	by	Mr.	Jobs	in	the	operation	of	his	private	plane	when	used	for	Apple	business.	The	Reimbursement	Agreement	is	effective	for	expenses	incurred	by	Mr.	Jobs for	Apple	business	purposes	since	he	took	delivery	of	the	plane	in	May	2001.	During	2004,	the	Company	recognized	a	total	of	$483,000	in	expenses	pursuant	to	this reimbursement	agreement	related	to	expenses	incurred	by	Mr.	Jobs	during	2004.

# Item	14.	Principal	Accountant	Fees	and	Services

The	following	table	sets	forth	the	fees	paid	to	the	Company's	independent	registered	public	accounting	firm,	KPMG	LLP,	during	fiscal	years	2004	and	2003.

|  | 2004 | 2003 |
| :--- | :--- | :--- |
| Audit\tFees | $3,402,300(1) | $3,028,000 |
| Audit-Related\tFees | 57,000(2) | 144,600 |
| Tax\tFees | 784,500(3) | 1,017,100 |
| All\tOther\tFees | — | — |
| Total | $4,243,800 | $4,189,700 |

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

(2) Audit-related	fees	include	professional	services	related	to	the	audit	of	the	Company's	financial	statements,	consultation	on	accounting	standards	or	transactions, and	audits	of	employee	benefit	plans.

(3) Tax	fees	include	$667,600	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	$116,900	for	tax	consulting	and	planning	services	relating	to	interest	computations	and	international	tax	changes. 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	Registered	Public	Accounting	Firm

Prior	to	the	enactment	of	the	Sarbanes-Oxley	Act	of	2002	(the	"Act"),	the	Company	adopted	an	auditor	independence	policy	that	banned	its	auditors	from	performing non-financial	consulting	services,	such	as	information	technology	consulting	and	internal	audit	services.	This	auditor	policy	also	mandates	that	the	audit	and	non-audit services	and	the	related	budget	be	approved	by	the	Audit	Committee	in	advance,	and	that	the	Audit	Committee	be	provided	with	quarterly	reporting	on	actual	spending. This	policy	also	mandates	that	no	auditor	engagements	for	non-audit	services	may	be	entered	into	without	the	express	approval	of	the	Audit	Committee.

# PART	IV

# Item	15.	Exhibits,	Financial	Statement	Schedules.

# (a) Index	to	Exhibits

# 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	30th	day	of	November	2004.

By: /s/		PETER	OPPENHEIMER

Peter	Oppenheimer

Senior	Vice	President	and

Chief	Financial	Officer

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

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

| /s/		PETER	OPPENHEIMER | Senior	Vice	President	and	Chief	Financial	Officer | November	30,	2004 |
| :--- | :--- | :--- |
|  | (Principal\tFinancial\tand\tPrincipal\tAccounting\tOfficer) |  |
| PETER\tOPPENHEIMER |  |  |
| /s/\t\tFRED\tANDERSON |  |  |
| FRED\tANDERSON | Director | November\t30,\t2004 |
| /s/\t\tWILLIAM\tV.\tCAMPBELL |  |  |
| WILLIAM\tV.\tCAMPBELL | Director | November\t30,\t2004 |
| /s/\t\tMILLARD\tS.\tDREXLER |  |  |
| MILLARD\tS.\tDREXLER | Director | November\t30,\t2004 |
| /s/\t\tALBERT\tGORE,\tJR. |  |  |
| ALBERT\tGORE,\tJR. | Director | November\t30,\t2004 |
| /s/\t\tARTHUR\tD.\tLEVINSON |  |  |
| ARTHUR\tD.\tLEVINSON | Director | November\t30,\t2004 |

# QuickLinks

Item	1.	Business Item	2.	Properties Item	3.	Legal	Proceedings

Item	5.	Market	for	the	Registrant's	Common	Equity,	Related	Shareholder	Matters	and	Issuer	Purchases	of	Equity	Securities Item	6.	Selected	Financial	Data

# CONSOLIDATED	BALANCE	SHEETS	(In	millions,	except	share	amounts)

CONSOLIDATED	STATEMENTS	OF	SHAREHOLDERS'	EQUITY	(In	millions,	except	share	amounts	which	are	in	thousands)

# CONSOLIDATED	STATEMENTS	OF	CASH	FLOWS	(In	millions)

Item	9.	Changes	in	and	Disagreements	with	Accountants	on	Accounting	and	Financial	Disclosure Item	9A.	Controls	and	Procedures

Item	10.	Directors	and	Executive	Officers	of	the	Registrant Item	11.	Executive	Compensation

AGGREGATED	OPTION	EXERCISES	IN	THE	LAST	FISCAL	YEAR	AND	FISCAL	YEAR-END	OPTION	VALUES

Item	13.	Certain	Relationships	and	Related	Transactions Item	14.	Principal	Accountant	Fees	and	Services

Audit	and	Non-Audit	Fees PART	IV


what was the net change in asset retirement liability between 2002 and september 25 2004 , in millions?