QuickLinks	--	Click	here	to	rapidly	navigate	through	this	document

# 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	27,	2003

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

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	amendment	to	this	Form	10-K.				o

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	29,	2003,	was	approximately	$4,479,669,616	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,	peripherals	and	personal	computing	and	communicating	solutions.	The	Company's	products	include	the	Macintosh®	line	of	desktop	and notebook	computers,	the	Mac	OS®	X	operating	system,	the	iPod™	digital	music	player,	and	a	portfolio	of	software	and	peripheral	products	for	education,	creative,	consumer	and business	customers.	The	Company	sells	its	products	through	its	online	stores,	direct	sales	force,	third-party	wholesalers	and	resellers,	and	its	own	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

# Digital	Hub

Apple	is	committed	to	bringing	the	best	possible	personal	computing	experience	to	students,	educators,	creative	professionals,	businesses	and	consumers	around	the	world	through	its innovative	hardware,	software,	peripherals	and	Internet	offerings,	including	.Mac™	and	the	iTunes®	Music	Store™.	The	Company	believes	that	personal	computing	has	entered	a	new 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	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	designs	and	manufactures 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	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.

# Retail

Since	inception	of	its	retail	initiative	in	2001,	the	Company	has	opened	65	retail	stores	in	the	United	States	through	fiscal	year	2003	and	during	the	first	quarter	of	2004	opened	9 additional	stores,	including	its	first	international	store	in	the	Ginza	in	Tokyo,	Japan.	The	Company	has	located	its	stores	at	high	traffic

locations	in	quality	shopping	malls	and	urban	shopping	districts.	In	addition	to	its	own	hardware,	software	and	peripheral	products,	the	Company's	stores	carry	a	variety	of	third-party hardware	and	software	products.

One	of	the	main	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,	the	Company	is	able	to	better	control	the	customer	retail	experience.	The stores	are	designed	to	simplify	and	enhance	the	presentation	and	marketing	of	personal	computing	products.	To	that	end,	retail	store	configurations	have	expanded	to	various	sizes	in order	to	accommodate	market	demands.	The	stores	employ	experienced	and	knowledgeable	personnel,	provide	post-sale	advice	and	support,	offer	a	wide	selection	of	third-party products	selected	to	complement	the	Company's	own	products,	host	training	and	marketing	presentations,	and	provide	certain	hardware	support	services.	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.

# Education

For	more	than	25	years,	the	Company	has	focused	on	the	use	of	technology	in	education.	The	Company	believes	that	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	provides	a	range	of	products	and	services	designed	to	help	schools	maximize	their	investments	in	technology.	This	is	manifested	in	many	of	the	Company's	products	and services,	including	hardware	products	like	the	eMac™	and	the	iBook®	that	are	designed	to	meet	the	needs	of	education	customers,	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	and	desktop	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	by	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	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,	except	for	the	activities	of	the	Company's	Retail	segment.	The	Retail	segment	currently	operates	Apple-owned	retail	stores	in	the	United States	and	in	the	first	quarter	of	fiscal	2004,	opened	its	first	international	store	in	Tokyo,	Japan.	Other	operating	segments	include	Asia-Pacific,	which	includes	Australia	and	Asia except	for

Japan,	and	the	Company's	subsidiary,	FileMaker,	Inc.	Each	reportable	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	on	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,	networking	and	connectivity products,	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,	features	the	Company's	suite	of	software	for	digital	photography,	music,	and	movies.

# 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,	designed	by	IBM	and	Apple,	and	featuring	up	to	a	1	GHz	front-side	bus	and	the	ability	to	address	up	to	8GB	of memory,	the	current	Power	Mac	G5	utilizes	64-bit	processing	technology	for	advanced	64-bit	computation,	while	running	existing	32-bit	applications	natively.	The	PowerPC	G5 processor	architecture	is	based	on	a	completely	new	execution	core	that	features	massively	parallel	computation,	full	symmetric	multi-processing,	two	double	precision	floating	point units	and	an	optimized	Velocity	Engine™.	Power	Mac	G5	systems,	encased	in	a	professional	aluminum	enclosure	with	computer	controlled	cooling	for	quiet	operation,	also	include	on all	models	SuperDrive	CD-RW/DVD-R	drives,	digital	audio	and	PCI-X	expansion,	and	advanced	input	and	output	technologies	including	Gigabit	Ethernet,	FireWire®	and	USB	ports. The	system	also	supports	54	Mbps	AirPort	Extreme®	wireless	networking	and	is	Bluetooth	ready	for	wireless	connections	to	a	host	of	Bluetooth-enabled	peripherals.	Prior	to	the availability	of	the	Power	Mac	G5	in	August	2003,	the	Company's	Power	Mac	line	during	most	of	fiscal	2003	featured	PowerPC	G4	processors	in	all	models.	The	Company	continues	to offer	a	Power	Macintosh	G4	system	with	a	single	or	dual	1.25	Ghz	processor	configuration.

# Xserve®	and	Xserve	RAID	Storage	System

Xserve,	the	Company's	first	ever	rack-mount	server	product,	was	designed	for	simple	setup	and	remote	management	of	intensive	input/output	(I/O)	applications	such	as	digital	video, high-resolution	digital	imagery,	and	large	databases.	In	February	2003,	the	Company	upgraded	its	Xserve	1U	rack	servers	with	more	powerful	processors,	more	storage	capacity,	and	a FireWire	800	interface.	At	the	same	time,	the	Company	introduced	the	Xserve	RAID	Storage	System,	a	rack	storage	system	that	holds	up	to	14	hot-swapable	drive	modules	capable	of holding	up	to	3.5	terabytes	of	data.	Xserve	RAID	architecture	combines	affordable,	high-capacity	ATA/100	drive	technology	with	a	Fibre	Channel	interface	for	reliable	and	fast	data access.	Xserve	RAID	provides	RAID	level	5	throughput	that	supports	affordable	real-time	high	definition	(HD)	1080i	video	editing.

# PowerBook®

The	PowerBook	family	of	portable	computers	is	designed	to	meet	the	mobile	computing	needs	of	professionals	and	advanced	consumer	users.	The	17-inch	PowerBook	G4	features	a 17-inch	wide-format	active-matrix	display,	is	encased	in	a	durable	aluminum	alloy	enclosure,	is	1-inch	thick,	and	weighs	as	little	as	6.9	pounds.	The	17-inch	PowerBook	G4	also features	built-in	support	for	AirPort	Extreme	54	Mbps	802.11g	wireless	networking,	new	high-speed	FireWire	800,	a	backlit	keyboard	with	ambient	light	sensors,	and	built-in Bluetooth	for	wireless	connection	to	cell	phones	and	other	Bluetooth	equipped	peripherals.	The	12-inch	PowerBook	G4	features	a	12-inch,	active-matrix	display	housed	in	a lightweight,	durable	aluminum	alloy	enclosure	weighing	approximately	4.6	pounds.	The	12-inch	PowerBook	G4	features	a	high-speed	PowerPC	G4	processor,	NVIDIA	graphics,	built- in	Bluetooth	wireless	networking,	and	battery

life	of	up	to	five	hours	on	a	single	charge.	In	September	2003,	the	Company	introduced	a	new	15-inch	PowerBook	G4,	which	features	a	15.2-inch	widescreen	display,	and	is	encased	in a	sleek	aluminum	design	weighing	as	little	as	5.6	pounds.	This	product	line	addition	complements	the	Company's	other	two	PowerBook	models,	the	12-inch	and	17-inch	PowerBook G4s	that	were	introduced	in	January	2003	and	updated	in	September	2003.

# iMac®

The	iMac	line	of	desktop	computers	is	targeted	to	education	and	consumer	markets.	The	Company's	iMac	product	line	features	an	innovative	industrial	design	that	incorporates	an adjustable	15-inch	or	17-inch	thin	film	transistor	(TFT)	active-matrix	flat	panel	display	and	an	ultra-compact	base.	In	November	2003,	a	new	20-inch	iMac	model	was	released.	All models	utilize	PowerPC	G4	processors,	fast	333	MHz	DDR	memory,	NVIDIA	graphics,	two	FireWire	400	and	three	high-speed	USB	2.0	ports.	The	iMac	also	offers	the	latest	in wireless	communications	with	support	for	54	Mbps	AirPort	Extreme	and	Bluetooth	wireless	connectivity.

# 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	(CRT) display,	a	SuperDrive	option,	and	preserves	the	all-in-one	compact	design	of	the	original	iMac	favored	by	many	of	the	Company's	education	and	consumer	customers.

# iBook®

The	iBook	is	designed	to	meet	the	portable	computing	needs	of	education	and	consumer	users.	The	current	iBooks,	upgraded	in	October	2003,	feature	PowerPC	G4	processors	and either	a	12-inch	or	14-inch	display.	These	systems	offer	advanced	connectivity	with	AirPort	Extreme	and	Bluetooth,	and	certain	models	include	256	MB	of	DDR	memory	and	slot-load Combo	drives	for	burning	CDs	and	watching	DVDs.	Each	iBook	is	outfitted	with	a	sleek	polycarbonate	plastic	enclosure	and	weighs	as	little	as	4.9	pounds.

# Peripheral	Products

The	Company	sells	certain	associated	Apple-branded	computer	hardware	peripherals,	including	iPod™	digital	music	players,	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.

# iPod™

The	Company's	newest	iPod	portable	music	player,	compatible	with	both	the	Macintosh	and	Windows	platforms,	is	smaller	and	lighter	than	previous	versions	and	is	available	in	three models	with	storage	capacity	of	either	10GB,	20GB,	or	40GB;	the	latter	holding	up	to	10,000	songs.	In	addition	to	MP3,	iPod	now	supports	the	Advanced	Audio	Coding	(AAC)	audio format.	The	new	iPod	models	also	feature	solid-state	interfaces	and	the	20GB	and	40GB	models	include	the	iPod	Dock,	which	facilitates	fast	and	easy	connection	to	a	computer	or stereo.	The	iPod's	functionality	extends	well	beyond	playing	music.	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	from	certain	digital	cameras.	Along with	the	iPod,	the	Company	has	developed	a	seamless	end-to-end	music	solution	with	the	Company's	iTunes®	digital	music	management	software	and	the	iTunes	Music	Store,	a	service that	consumers	may	use	to	purchase	music	over	the	Internet.	Further	discussion	on	these	related	music	offerings	may	be	found	below	under	the	headings	"Software	Products	and Computer	Technologies"	and	"Internet	Software,	Integration,	and	Services."

# iSight™

The	Company	introduced	the	iSight	digital	video	camera	and	the	beta	version	of	its	iChat™	AV	software	application	in	June	2003.	Together	they	enable	high-quality	audio	and videoconferences	between	two	Macintosh	systems	over	broadband	connections.	iSight	is	a	small,	portable	aluminum	alloy	camera	with	all	audio,	video	and	power	provided	by	a	single FireWire	cable.	iSight	features	a	custom	designed	lens	with	auto-focus	and	a	high-end	CCD	sensor	to	provide	high-resolution	images	and	full-motion	video	at	up	to	30	frames	per second.	iSight	includes	an	integrated	microphone	that	suppresses	ambient	noise	for	clear	digital	audio.	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	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.

# Displays

The	Company's	all-digital,	active-matrix	LCD	flat	panel	displays,	including	the	23-inch	Cinema	HD	Display®,	20-inch	Apple	Cinema	Display®	and	the	17-inch	Apple	Studio Display®,	produce	flicker-free	images	with	twice	the	brightness,	sharpness,	and	contrast	ratio	of	a	typical	CRT	display.

# 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

During	2001,	the	Company	introduced	the	first	customer	release	of	its	new	client	operating	system,	Mac	OS	X,	and	its	first	significant	upgrade,	Mac	OS	X	version	10.1.	At	its introduction,	Mac	OS	X	offered	advanced	functionality	built	on	an	open-source	UNIX-based	foundation	and	incorporated	the	most	fundamental	changes	in	both	core	technology	and user	interface	design	made	by	the	Company	to	the	Mac	OS	in	a	single	upgrade	since	the	original	introduction	of	the	Macintosh	in	1984.	Mac	OS	X	features	memory	protection,	pre- emptive	multi-tasking,	and	symmetric	multiprocessing.	Mac	OS	X	includes	Apple's	Quartz™®	2D	graphics	engine	(based	on	the	Internet-standard	Portable	Document	Format)	for enhanced	graphics	and	broad	font	support,	OpenGL	for	enhanced	3D	graphics	and	gaming,	and	Apple's	new	user	interface	named	"Aqua®,"	which	combines	superior	ease-of-use	with new	functionality.	In	January	2002,	the	Company	made	Mac	OS	X	the	default	operating	system	on	all	new	Macintosh	systems.

In	August	2002,	the	Company	introduced	Mac	OS	X	version	10.2	(code	named	"Jaguar"),	the	second	significant	upgrade	to	the	original	Mac	OS	X	version.	Jaguar	included	a	new	Mail application	designed	to	manage	junk	mail;	iChat,	an	AIM-compatible	instant	messenger;	a	system-wide	Address	Book;	Inkwell™	handwriting	recognition;	improved	Universal	Access; an	enhanced	Finder™;	an	updated	version	of	QuickTime®,	the	Company's	multimedia	software	for	playing,	interacting	with	or	viewing	video,	audio,	and	graphics	files;	and	an	updated version	of	Sherlock®,	the	Company's	advanced	Internet	search	engine.	Jaguar	also	featured	accelerated	graphics	performance,	increased	compatibility	with	Windows	networks,	and	a UNIX-based	foundation	with	enhancements	including	FreeBSD	4.4	and	GCC	3.1-based	developer	tools.

In	October	2003,	the	Company	released	Mac	OS	X	version	10.3	(code	named	"Panther"),	the	Company's	current	version	of	Mac	OS	X.	Panther	incorporates	more	than	150	new features	including	a	completely	new	Finder™;	Exposé,	a	new	way	to	organize	windows	and	instantly	see	all	open	windows	at	once;	FileVault™,	a	new	feature	that	secures	the	contents of	a	home	directory	with	128-bit	AES	encryption;	iChat	AV,	a	complete	desktop	video	conferencing	solution;	and	enhanced	support	for	use	on	Windows-based	networks.

# Server	Software	and	Server	Solutions

Mac	OS	X	server	software	was	initially	introduced	in	May	2001,	followed	by	Mac	OS	X	Server	version	10.2	(code	named	"Jaguar	Server")	that	was	released	in	August	2002.	Jaguar Server	delivers	high-performance	services	for	Internet	and	web	serving,	filing,	printing,	and	networking	services	needed	to	manage	a	network	of	Mac,	UNIX,	and	Windows	clients.	It provides	performance	and	stability	through	full	pre-emptive	multi-tasking,	symmetric	multiprocessing,	protected	memory,	advanced	virtual	memory,	software	RAID	support,	and support	for	networking	and	security	standards.	Jaguar	Server	also	includes	Apple's	Open	Directory	architecture	for	centralized	management	of	network	resources	using	LDAPv3 directory	services	and	a	suite	of	built-in,	standards-based	Internet	services	like	an	optimized	Apache	web	server	for	high-performance	hosting	of	secure	dynamic	web	sites	and QuickTime	Streaming	Server	and	QuickTime	Broadcaster	for	streaming	live	events	over	the	Internet.	Jaguar	Server	also	comes	with	a	flexible	mail	server	that	supports	POP	and	secure IMAP,	as	well	as	WebMail	for	browser-based	email	access.

In	October	2003,	the	Company	began	shipping	the	current	version	of	its	server	operating	system,	which	is	called	Mac	OS	X	Server	version	10.3	"Panther	Server."	This	release integrates	leading	open	source	and	open	standards	server	software	with	easy-to-use	management	tools	that	make	it	easy	to	serve	Macintosh,	Windows	and	Linux	clients.	Panther	Server includes	powerful	open	source	solutions	and	easy-to-use	server	management	capabilities.	New	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.

Apple	Remote	Desktop™	for	Mac	OS	X	software	enables	users,	teachers	and	administrators	to	remotely	manage	other	Macintosh	systems	anywhere	on	a	local	network,	AirPort® wireless	network	or	across	the	Internet.	With	Apple	Remote	Desktop,	teachers	can	view	students'	computer	screens,	perform	group	demonstrations	and	help	individuals	with	real-time screen-sharing,	text	chat	and	the	"request	attention"	command.	System	administrators	can	provide	remote	assistance,	get	comprehensive	system	profiles,	reconfigure	system	settings and	quickly	and	easily	distribute	software	applications	across	hundreds	of	computers—all	from	one	central	location	over	both	Ethernet	and	AirPort	wireless	networks.	Apple	Remote Desktop	supports	multiple	levels	of	administrator	access,	each	with	its	own	password,	providing	a	secure	way	for	teachers	or	department-level	administrators	to	assist	users	while restricting	privileges	for	deleting	items	or	changing	system	settings.

# Professional	Application	Software

Final	Cut	Pro®	is	a	video	editing	application	designed	to	meet	the	demanding	needs	of	professional	video	editors	by	providing	them	with	a	high-performance,	scalable,	and	cost- effective	solution	for	editing	in	virtually	any	format:	DV,	SD,	HD	and	film.	Final	Cut	Pro	includes	tools	for	editing,	compositing	and	effects,	color-correction	and	audio.	Final	Cut	Pro 4,	released	in	June	2003,	introduced	RT	Extreme,	a	multi-stream	real-time	effects	engine,	new	interface	customization	tools,	high	performance	codecs	for	uncompressed	SD	and	HD video,	and	32-bit	floating	point	(per	channel)	image	processing.	Final	Cut	Pro	4	also	includes	three	completely	new	integrated	tools—LiveType	for	creating	animated,	broadcast-quality titles,	Soundtrack	for	music	composition,	and	Compressor	for	batch	encoding	and	output	of	high-quality	MPEG-2,	MPEG-4,	and	QuickTime	files	directly	from	Final	Cut	Pro	4's timeline.	Version	4.1	of	Final	Cut	Pro	was	released	in	November	2003	and	included	optimizations	for	the	Power	Mac	G5	and	Mac	OS	X	Panther.

Shake®	3,	an	upgrade	of	the	Company's	compositing	and	visual	effects	software	designed	for	large	format	film	and	video	productions,	was	announced	in	April	2003	and	released	in June	2003.	Shake	3	includes	new	Mac	OS	X	only	features	such	as	the	Shake	Qmaster	network	render	management	software	and	unlimited	network	rendering	licenses	which	allow visual	effects	artists	to	easily	distribute	rendering	tasks	across	a	cluster	of	Apple's	Xserve	rack	servers	or	desktop	Power	Macintosh	computers	for	enhanced	performance

and	efficiency.	Shake	3	also	includes	new	visual	effects	features	available	to	Mac	OS	X,	Linux	and	IRIX	customers	including	motion-tracking	and	real-time	broadcast	preview.

The	Company	acquired	Emagic,	a	leading	provider	of	professional	software	and	hardware	solutions	for	computer	based	music	production,	during	the	fourth	quarter	of	2002.	Emagic's most	popular	product,	Logic®,	is	actively	used	by	musicians	around	the	world	and	by	professionals	in	music	production,	film	scoring,	and	post-production	facilities.	It	combines composition,	notation	and	audio	production	facilities	in	one	comprehensive	product.	Logic	Platinum	offers	a	comprehensive	set	of	music	creation	tools	featuring	rock-solid	MIDI timing	and	synchronization,	mixing	and	automation	with	total	recall,	and	non-destructive	real-time	editing	of	both	audio	and	MIDI.	It	also	offers	MIDI	timing	with	960	PPQN	and	sends and	receives	synchronized	MIDI	clock,	MTC,	MMC	and	word	clock	signals,	making	it	ideal	for	film,	TV	and	video	post-production	facilities.

DVD	Studio	Pro®	2	was	announced	in	April	2003	and	released	in	August	2003.	It	is	a	completely	new	DVD	authoring	product,	rebuilt	from	the	ground	up	with	a	new	user	interface, professionally	designed	and	fully	customizable	templates,	an	innovative	new	menu	editor,	timeline-based	track	editing	and	a	new	software-based	MPEG-2	encoder.

# Consumer,	Education	and	Business	Oriented	Application	Software

Introduced	in	January	2003,	iLife™	is	the	Company's	integrated	suite	of	digital	lifestyle	applications	that	features	the	Company's	iTunes®,	iPhoto™,	iMovie™®,	and	iDVD™	software applications.	These	applications	are	integrated	to	allow	users	easy	access	to	their	digital	music,	photos	and	movies	from	within	each	application.	All	of	these	iLife	applications	come preinstalled	on	the	Company's	Macintosh	systems,	except	for	iDVD,	which	is	only	available	on	Macintosh	systems	configured	with	a	SuperDrive.

iTunes®	is	a	digital	music	management	application	that	lets	users	create	and	manage	their	own	digital	music	library.	iTunes	organizes	music	using	searching,	browsing	and	playlist features.	It	supports	both	audio	and	MP3	CD	burning,	features	a	graphic	equalizer	and	cross	fading	between	songs,	and	supports	automatic	synchronization	with	the	music	stored	on	an iPod.	In	July	2002,	the	Company	introduced	iTunes	3,	featuring	Smart	Playlists,	which	automatically	and	dynamically	updates	playlists	based	on	simple	rules	set	by	the	user,	and	Sound Check	for	consistent	volume	playback.	In	April	2003,	the	Company	launched	iTunes	4,	which	integrated	the	Company's	iTunes	Music	Store.	Further	discussion	on	the	iTunes	Music Store	may	be	found	below	under	the	heading	"Internet	Software,	Integration,	and	Services."	In	October	2003,	the	Company	launched	iTunes	for	Windows,	the	first	version	of	the Company's	digital	music	management	software	for	users	of	Windows-based	personal	computers.	iTunes	for	Windows	includes	all	of	the	same	features	as	the	Macintosh	version, including	MP3	and	AAC	encoding	from	audio	CDs,	Smart	Playlists,	free	Internet	radio	stations,	and	the	ability	to	burn	custom	playlists	to	CDs	and	MP3	CDs,	burn	content	to	DVDs	to back-up	an	entire	music	collection	and	share	music	between	networked	computers	via	Rendezvous™,	the	Company's	zero	configuration	networking	technology.

iMovie®,	the	Company's	easy-to-use	consumer	digital	video	editing	software	for	creation	of	home	and	classroom	movies,	features	an	enhanced	user	interface,	improved	audio	editing capabilities,	enhanced	controls	for	titling	and	transitions,	and	added	special	effects.

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.

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.	Prints,	enlargements,	and	hardbound	book	production	are	currently	only	available	to	U.S.	and	Canadian	customers.

The	Company's	iChat	AV	software	application	and	the	iSight	digital	video	camera	together	enable	high-quality	audio	and	video	conferences	between	two	Macintosh	systems	over broadband	connections.	iChat	AV	also	enables	audio	conferences	over	dial-up	connections	to	the	Internet.	iChat	AV	requires	no	setup	or	configuration	beyond	installing	the	software and	plugging	in	a	FireWire	video	camera	and	microphone,	such	as	iSight	or	certain	third-party	FireWire	based	cameras	with	microphones.

Final	Cut®	Express,	introduced	in	January	2003,	is	based	on	Apple's	award-winning	Final	Cut	Pro	software.	Final	Cut	Express	enables	small	business	users,	educators,	students	and advanced	hobbyists	to	perform	professional-quality	digital	video	editing.	Final	Cut	Express	includes	key	features	used	by	video	editors	such	as	the	same	interface	and	workflow	as	Final Cut	Pro,	powerful	video	editing	tools,	hundreds	of	special	effects,	and	easy	delivery	of	output	to	DVD,	the	Internet,	or	tape.

Keynote™	is	the	Company's	presentation	software	introduced	in	January	2003	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	Corporation,	a	wholly	owned	subsidiary	of	the	Company,	develops,	publishes,	and	distributes	desktop-based	database	management	application	software	for	Mac	OS	and Windows-based	systems.	The	FileMaker®	Pro	database	software	and	related	products	offer	strong	relational	databases	and	advanced	desktop-to-web	publishing	capabilities.

# Third-Party	Software	Products

Thousands	of	third-party	software	titles	and	solutions	are	available	for	the	Macintosh	platform.	The	Company	sells	a	variety	of	these	third-party	software	products	directly	to	end	users through	both	its	retail	and	online	stores.

# 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	Internet	Setup	Assistant	is	included	with	the	Mac OS.

# iTunes	Music	Store™

In	April	2003,	the	Company	launched	the	iTunes	Music	Store	in	the	United	States,	an	online	music	store	that	allows	Macintosh	customers	to	find,	purchase,	and	download	music	for	99 cents	per	song	or,	in	most	cases,	$9.99	per	album.	The	iTunes	Music	Store	is	fully	integrated	with	a	one-click	download	directly	into	the	latest	version	of	the	iTunes	software,	allowing customers	to	purchase,	download,	organize,	share,	and	transfer	their	digital	music	to	an	iPod	using	a	single	software	application.	Requiring	no	subscription	fee,	the	iTunes	Music	Store with	iTunes	software	offers	customers	a	broad	range	of	personal	rights	to	the	songs	purchased,	including	playing	songs	on	up	to	three	computers,	burning	songs	onto	an	unlimited number	of	CDs	for	personal	use,	playing	songs	on	an	unlimited	number	of	iPods,	and	using	songs	in	certain	applications	such	as	iPhoto,	iMovie,	and	iDVD.	Users	can	easily	search	the contents	of	the	entire	music

store	to	locate	songs	by	title,	artist,	or	album,	or	browse	the	entire	contents	of	the	music	store	by	genre	and	artist.	Users	can	also	listen	to	a	free	30-second	preview	of	any	song	in	the store.

The	second	generation	of	the	iTunes	Music	Store	for	both	Macintosh	and	Windows	users	became	available	in	October	2003.	New	features	of	the	music	store	include	online	gift certificates	that	can	be	sent	to	family	and	friends	via	e-mail,	an	"allowance"	feature	that	enables	users	to	automatically	deposit	funds	into	an	iTunes	Music	Store	account	every	month, and	the	availability	of	audio	books	for	purchase	directly	from	the	iTunes	Music	Store.	The	Company	is	exploring	ways	to	enhance	awareness	and	promote	use	of	the	iTunes	Music Store,	including	arrangements	with	America	Online,	Inc.	(AOL)	to	integrate	links	to	the	iTunes	Music	Store	into	AOL's	Music	site	and	Pepsi-Cola	North	America	to	give	away	songs from	the	iTunes	Music	Store.

# Safari™

In	June	2003,	the	Company	introduced	Safari	1.0,	the	Company's	new	Mac	OS	X	compatible	web	browser	that	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	new	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	Macintosh	and	Windows	platforms,	features	streaming	of	live	and	stored	video	and	audio	over	the	Internet	and	playback	of	high- quality	audio	and	video	on	computers.	The	current	version	of	QuickTime,	QuickTime	6,	features	support	for	the	open-standard	MPEG	4	format.	QuickTime	6	includes	the	new	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,	100MB	of	iDisk	Internet	storage,	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	based	on	the	new	ultra-fast	802.11g	standard.	With	speeds	up to	54	Mbps,	AirPort	Extreme	delivers	almost	five	times	the	data	rate	of	today's	802.11b	based	products,	yet	is	fully	compatible	with	the	millions	of	802.11b	Wi-Fi	devices	around	the world.	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.

Embedded	into	Mac	OS	X	is	Bluetooth	technology.	Bluetooth	is	an	emerging	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	Rendezvous™	networking	technology	is	based	on	open	Internet	Engineering	Task	Force	(IETF)	Standard	Protocols	such	as	IP,	ARP	and	DNS.	Rendezvous	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	product.	Major	developers	such	as	Canon,	Epson,	Hewlett-Packard,	Lexmark,	Philips,	Sybase,	World	Book	and	Xerox	have	announced support	for	Rendezvous	in	a	broad	range	of	products	including	network	printers,	consumer	electronics,	enterprise	database	management	and	educational	applications.	The	Company	has made	the	Rendezvous	source	code	freely	available	allowing	developers	to	use	Rendezvous	technology	in	their	network-enabled	devices	or	software	applications.	The	Rendezvous source	code	includes	software	to	support	UNIX,	Linux,	and	Windows-based	systems	and	devices.	Rendezvous	support	is	built	into	Mac	OS	X.

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.

Apple	Training	offers	comprehensive	system	administration	and	development	training	on	Apple	technologies,	together	with	certification	programs	that	test	customers'	skills	and	verify their	technical	proficiency.	Apple	Professional	Services	offers	a	range	of	custom,	personalized	technical	services,	including	Internet	consulting	and	setup,	installation	and	integration services.	The	Company	also	offers	specialized	loan	programs	including	loans	for	consumers,	students,	and	educators.	Apple	also	provides	leasing	solutions	for	its	education	institution customers	and	its	business	and	professional	customers.	The	Company	uses	several	third-party	lenders	to	originate	and	carry	these	loans	and	leases,	all	of	which	are	non-recourse	to	the Company.

# 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	cross platform	for	both	Macintosh	and	Windows	computers;	the	iBook	Wireless	Mobile	Lab	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,	Apple	Professional	Services	offers	a	range	of technical	services	to	education	customers.

In	2001,	Apple	acquired	PowerSchool	Inc.,	a	privately	held	provider	of	web-based	student	information	systems	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.	Certain	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	18%	of	the	Company's	net	sales	in	2003	were	to	education	customers	in	the	United	States,	including	sales	to	elementary	and	secondary schools	and	college	and	university	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 2003,	2002	or	2001.	The	Company	also	sells	many	of	its	products	and	resells	certain	third-party	products	in	most	of	its	major	markets	directly	to	education	customers,	consumers, businesses,	and	certain	resellers	through	its	retail	stores	in	the	United	States,	or	through	one	of	its	online	stores	around	the	world.	Total	direct	and	indirect	sales	attributable	to	the Company's	online	stores	totaled	approximately	$2.9	billion,	$2.4	billion,	and	$2.0	billion	for	fiscal	years	2003,	2002	and	2001,	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	digital	music	management	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	believes	it	maintains	a	competitive	advantage	by	more	effectively	integrating	the	entire	end-to-end	music	solution,	including	the	hardware (iPod),	software	(iTunes)	and	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	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	or	single-sourced	component	to	the	Company	were	to	be	delayed	or curtailed	or	in	the	event	a	key	manufacturing	vendor	delays	shipments	of	completed	products	to	the	Company,	the	Company's	ability	to	ship	related	products	in	desired	quantities	and	in a	timely	manner	could	be	adversely	affected.	The	Company's	business	and	financial	performance	could	also	be	adversely	affected	depending	on	the	time	required	to	obtain	sufficient quantities	from	the	original	source,	or	to	identify	and	obtain	sufficient	quantities	from	an	alternative	source.	Continued	availability	of	these	components	may	be	affected	if	producers were	to	decide	to	concentrate	on	the	production	of	common	components	instead	of	components	customized	to	meet	the	Company's	requirements.	The	Company	attempts	to	mitigate these	potential	risks	by	working	closely	with	these	and	other	key	suppliers	on	product	introduction	plans,	strategic	inventories,	coordinated	product	introductions,	and	internal	and external	manufacturing	schedules	and	levels.	Consistent	with	industry	practice,	the	Company	acquires	components	through	a	combination	of	formal	purchase	orders,	supplier	contracts,

and	open	orders	based	on	projected	demand	information.	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,	Compal	Corporation,	Hon	Hai	Precision	Industry	Co.,	Ltd.,	IBM	Corporation,	International	Display	Technology,	Inventec	Appliances	Corporation,	LG.	Phillips	Co.,	Ltd., Matsushita,	Mitsubishi	Electric	Corporation,	Motorola,	Inc.,	Nvidia	Corp.,	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,	system	software,	applications	software,	networking	and	communications	software	and	solutions,	and	the	Internet.	The	Company's research	and	development	expenditures,	before	any	charges	for	purchased	in-process	research	and	development,	totaled	$471	million,	$446	million,	and	$430	million	in	2003,	2002, and	2001,	respectively.

# Patents,	Trademarks,	Copyrights	and	Licenses

The	Company	currently	holds	rights	to	patents	and	copyrights	relating	to	certain	aspects	of	its	computer	systems,	peripheral	systems,	and	software.	In	addition,	the	Company	has registered,	and/or	has	applied	to	register,	trademarks	and	service	marks	in	the	United	States	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	United	States	represents	the	Company's	largest	geographic	marketplace.	Approximately	58%	of	the	Company's	net	sales	in	fiscal	2003	came	from	sales	to	customers	inside	the United	States.	Final	assembly	of	products	sold	by	the	Company	is	conducted	in	the	Company's	manufacturing	facilities	in	Sacramento,	California,	and	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	Japan,	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

Although	the	Company	does	not	consider	its	business	to	be	highly	seasonal,	it	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	software	and	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	upon	the	Company's	capital	expenditures, earnings,	or	competitive	position.	Although	the	Company	does	not	anticipate	any	material	adverse	effects	in	the	future	based	on	the	nature	of	its	operations	and	the	subject	of	these laws,	there	is	no	assurance	that	such	existing	laws	or	future	laws	will	not	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.	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	affect	on	the	Company.

# Employees

As	of	September	27,	2003,	Apple	and	its	subsidiaries	worldwide	had	10,912	employees	and	an	additional	2,654	temporary	employees	and	contractors.

# Available	Information

Beginning	in	fiscal	2003,	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	www.apple.com/investor	when	such	reports	are	available	on	the	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	Sacramento,	California	and	Cork,	Ireland.	As	of	September	27,	2003, the	Company	leased	approximately	3.2	million	square	feet	of	space,	primarily	in	the	United	States,	and	to	a	lesser	extent,	in	Europe,	Japan,	and	the	Asia	Pacific	region.	Leased	space	in the	United	States	includes	538,000	square	feet	of	retail	space.	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	15	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	Company	also	owns	a	752,000	square-foot	facility	in	Sacramento, California,	which	is	used	as	a	manufacturing,	warehousing	and	distribution	center.	The	Sacramento	and	Cork	facilities	also	house

customer	support	call	centers.	In	addition,	the	Company	owns	930,000	square	feet	of	facilities	located	in	Cupertino,	California,	used	for	research	and	development	and	corporate functions.	Outside	the	United	States,	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	legal	matters	in	2003, 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	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."	Plaintiff	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.

# 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	which resolved	earlier	trademark	litigation	regarding	use	of	the	Apple	marks.	Plaintiff	seeks	unspecified	damages	and	other	relief.	The	Company	filed	a	motion	on	October	13,	2003, challenging	jurisdiction	in	the	U.K.	On	October	8,	2003,	the	Company	filed	a	case	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.

# Articulate	Systems,	Inc.	v.	Apple	Computer,	Inc.

Plaintiff	Articulate	filed	this	action	in	March	1996	in	the	United	States	District	Court	in	Massachusetts	claiming	patent	infringement	relating	to	voice	recognition	technology.	Plaintiff 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,	unenforceability	and	invalidity.	The	case	was	stayed	for	several	months	pending	resolution	of	four	summary judgment	motions	filed	by	the	Company,	all	of	which	were	denied	by	the	Court.	Through	a	series	of	corporate	transactions	the	assets	belonging	to	Plaintiff	were	acquired	by	a subsidiary,	Lernout	&	Hauspie	Speech	Products	N.V.	("L&H").	L&H	filed	for	bankruptcy	in	November	2000	and	is	being	liquidated	as	part	of	the	bankruptcy.	The	case	has	been inactive	since	approximately	May	2002,	pending	the	resolution	of	the	L&H	bankruptcy	and	liquidation.

# Bancroft	v.	Apple	Computer,	Inc.

Plaintiff	Bancroft	filed	this	purported	class	action	on	January	30,	2002	in	Los	Angeles	Superior	Court	on	behalf	of	a	potentially	nationwide	class	of	purchasers	of	certain	Power Macintosh	G3	computers.	Plaintiff	alleged	violation	of	the	Consumer	Legal	Remedies	Act	("CLRA")	arising	from	allegedly	poor	performance	while	running	the	Company's	Mac	OS	X operating	system,	specifically	relating	to	2D	hardware	acceleration,	QuickTime	movie	hardware	acceleration,	3D	graphics	performance	and	DVD	movie	playback.	The	parties	reached a	settlement	and	the	Court	granted	preliminary	approval	on	September	2,	2003.	The	final	approval	hearing	is	set	for	January	26,	2004.	Settlement	of	the	matter	will	not	have	a	material effect	on	the	Company's	financial	position	or	results	of	operations.

# BIAX	Corporation	v.	Apple	Computer,	Inc.

Plaintiff	BIAX	filed	this	action	on	September	5,	2001	in	the	United	States	District	Court	in	Delaware	claiming	patent	infringement	relating	to	dual	processor	technology.	IBM	and Motorola	were	added	as	defendants	in	an	amended	complaint.	Plaintiff	sought	unspecified	damages	and	other	relief.	The	Company	answered	the	complaint,	denied	all	allegations	and asserted	numerous	affirmative	defenses.	The	Company	also	asserted	counterclaims	for	declaratory	judgment	for	non-infringement,	unenforceability	and	invalidity.	The	parties	settled this	case	in	August	2003	and	the	matter	is	concluded.	Settlement	of	this	matter	did	not	have	a	material	effect	on	the	Company's	financial	position	or	results	of	operations.

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

Plaintiffs	filed	this	purported	class	action	on	September	22,	2003	in	Los	Angeles	Superior	Court	against	the	Company	and	other	members	of	the	industry	on	behalf	of	a	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.	The	case	is	stayed	pending	resolution	of	whether	the	case	will	be	considered	"complex"	and	potentially	a	new	judge	assigned.	The	Company	is beginning	its	investigation	of	these	allegations.

# Digital	Development	Corporation	v.	Apple	Computer,	Inc.

Plaintiff,	Digital	Development	Corporation	filed	this	action	on	April	25,	2003	in	the	United	States	District	Court	in	New	Jersey,	claiming	patent	infringement	of	two	patents,	4,975,950 and	5,121,345,	related	to	a	"System	and	Method	of	Protecting	Integrity	of	Computer	Data	and	Software."	Plaintiff	requests	unspecified	damages	and	other	relief.	The	complaint	has	not yet	been	served	on	the	Company.

# Dowhal	v.	Apple	Computer,	Inc.

Plaintiff	filed	this	representative	action	in	San	Francisco	County	Superior	Court	on	February	4,	2003	alleging	that	the	Company	and	numerous	other	defendants	have	participated	in false	advertising	and	unfair	business	practices	related	to	alleged	misrepresentation	of	printer	speed.	Plaintiff	asserts	causes	of	action	for	violation	of	California	Business	and	Professions Code	§17200	and	§17500.	Plaintiff	requests	an	injunction,	restitution	and	other	unspecified	damages	and	relief.	The	Company	was	served	on	February	10,	2003.	Apple	filed	a	response

# Dynacore	Holdings	Corp.	v.	Apple	Computer,	Inc.

Plaintiff	Dynacore	filed	this	action	on	June	6,	2001	in	United	States	District	Court	for	the	Southern	District	of	New	York	against	the	Company	and	thirteen	other	defendants	claiming patent	infringement	relating	to	IEEE	1394	technology,	also	known	as	FireWire.	Plaintiff	claims	that	any	computer	system	or	other	electronic	product	that	uses	or	complies	with	the IEEE	1394	standard	violates	the	patent.	Plaintiff	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.	Defendants	are	seeking	to	amend	the

pleading	to	assert	a	counterclaim	for	inequitable	conduct	against	Dynacore.	The	case	was	initially	stayed	pending	the	Federal	Circuit's	decision	in	Datapoint	Corp.	v.	Standard Microsystems	Corp.,	a	related	case	in	which	plaintiff	claimed	that	its	patent	was	infringed	by	products	complying	with	the	fast	Ethernet	standard.	In	February	2002,	the	Federal	Circuit affirmed	the	judgment	of	non-infringement	in	Datapoint,	and	the	District	Court	lifted	the	stay	in	this	action.	The	defendants	in	this	action	filed	a	joint	motion	for	summary	judgment based	upon	the	decision	in	Datapoint.	The	Court	heard	the	motion	on	October	4,	2002	and	granted	summary	judgment	in	favor	of	the	defendants	on	February	11,	2003.	Dynacore	has appealed	the	ruling.	The	parties	have	filed	their	respective	briefs,	and	the	case	is	scheduled	for	oral	argument	before	the	Federal	Circuit	Court	on	January	5,	2004.

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	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	Plaintiff's	claims	with	prejudice	on	August	12,	2003.	Plaintiffs	have	appealed	the	ruling.

# John	W.	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	has	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.	The	Company	was	served	on	December	11,	2002	and	is	continuing	its	investigation of	the	allegations.	Plaintiff	requests	unspecified	damages	and	other	relief.	Apple	filed	a	motion	on	October	29,	2003	to	disqualify	Plaintiff's	counsel,	which	the	Court	approved.	The case	is	set	for	trial	on	February	23,	2004.

MacTech	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	parties	are	in	discovery.	On October	1,	2003,	one	of	the	resellers,	Macadam	was	deauthorized	as	an	Apple	reseller.	Macadam	filed	a	motion	for	a	temporary	order	to	re-instate	it	as	a	reseller,	which	the	Court denied.	A	hearing	on	its	motion	for	a	preliminary	injunction	is	scheduled	for	December	18,	2003.

# Palmieri	v.	Apple	Computer,	Inc.

Plaintiff	filed	this	purported	class	action	on	September	5,	2003	in	Los	Angeles	Superior	Court	on	behalf	of	a	nationwide	class	of	purchasers	of	certain	PowerBooks.	The	case	alleges violations	of	Civil	Code	Section	17200	(Unfair	Competition)	and	the	Consumer	Legal	Remedies	Act	("CLRA")	arising	from	an	alleged	design	defect	in	the	PowerBooks	which purportedly	causes	marks	and	dead	pixels	in	the	LCD

screens.	Plaintiffs	amended	their	complaint	to	allege	an	additional	defect	in	the	new	15"	PowerBook,	introduced	in	September,	2003,	which	purportedly	causes	"white	spots"	on	the screen.	The	complaint	seeks	unspecified	damages	and	other	relief.	The	Company's	response	is	not	yet	due.	The	Company	is	beginning	its	investigation	of	these	allegations.

# TIBCO	Software,	Inc.	v.	Apple	Computer,	Inc.

Plaintiff	filed	this	case	on	August	27,	2003	in	United	States	District	Court	for	the	Northern	District	of	California	alleging	trademark	infringement	by	the	Company	for	using	the	mark "Rendezvous."	Plaintiff's	mark	is	"TIBCO	Rendezvous."	The	complaint	seeks	unspecified	damages	and	other	relief.	The	Company	answered	the	complaint	denying	all	allegations	and asserting	numerous	affirmative	defenses.	The	Company	also	asserted	counterclaims	requesting	a	declaratory	judgment	for	non-infringement,	invalidity	and	no	dilution.

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

Plaintiff	UNOVA	filed	this	patent	infringement	action	against	the	Company	and	six	other	defendants	on	May	8,	2002	in	the	Central	District	of	California	for	infringement	of	eight UNOVA	patents	related	to	"Smart	Battery	Management."	Plaintiff	alleges	that	the	Company's	portable	computers	manufactured	since	1996	infringe	these	eight	patents.	Plaintiff	has filed	similar	lawsuits	against	other	companies	in	addition	to	the	co-defendants	in	this	case.	Plaintiff	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	a	declaratory	judgment	for	non-infringement, invalidity	and	unenforceability.	The	case	is	in	discovery	and	is	set	for	trial	on	March	16,	2004.

# 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	27,	2003.

# PART	II

# Item	5.	Market	for	the	Registrant's	Common	Equity	and	Related	Shareholder	Matters

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	under	the symbol	APPLE,	and	on	the	Frankfurt	Stock	Exchange	under	the	symbol	APCD.	As	of	December	5,	2003,	there	were	29,015	shareholders	of	record.

On	June	21,	2000,	the	Company	effected	a	two-for-one	stock	split	in	the	form	of	a	Common	Stock	dividend	to	shareholders	of	record	as	of	May	19,	2000.	All	share	price	and	per	share data	and	numbers	of	common	shares	have	been	retroactively	adjusted	to	reflect	the	stock	split.	The	Company	did	not	pay	cash	dividends	in	either	fiscal	2003	or	2002.	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\t2003\tprice\trange\tper\tcommon\tshare | $23.10-$19.06 | $19.29-$13.12 | $15.27-$13.80 | $17.22-$13.59 |
| Fiscal\t2002\tprice\trange\tper\tcommon\tshare | $18.74-$13.99 | $26.11-$16.55 | $25.45-$20.78 | $23.76-$14.98 |

# 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	$10	million,	$75	million,	$367	million,	and	$230	million	were	recognized	in	2003,	2001, 2000,	and	1999,	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	$26	million, $30	million,	$8	million,	and	$27	million	were	recognized	in	2003,	2002,	2000,	and	1999,	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	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.

# Critical	Accounting	Policies

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	requires	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	in	Item	8	of	this	Form	10-K	describe	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	that	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.

Management	believes	the	following	to	be	critical	accounting	policies.	That	is,	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.

# 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.	101,	Revenue	Recognition	in	Financial	Statements.

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	United	States,	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	and 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	of 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	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	lifecycle	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	whenever	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	the	future	periods	in	which	such	business	issues	are	identified.

The	Company	adopted	Statement	of	Financial	Accounting	Standards	(SFAS)	No.	142,	Goodwill	and	Other	Intangible	Assets,	in	the	first	quarter	of	fiscal	2002.	As	a	result,	the Company	no	longer	amortizes	goodwill	but	instead	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	27,	2003,	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	experience	of	failure	rates.	Each	quarter, the	Company	reevaluates	its	estimates	to	assess	the	adequacy	of	its	recorded	warranty	liabilities	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	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	(a) | $3,181 | 2		% $ | 3,131 | 3		% $ | 3,037 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Europe\tnet\tsales | 1,309 | 5\t\t% | 1,251 | 0\t\t% | 1,249 |
| Japan\tnet\tsales | 698 | (2)% | 710 | 0\t\t% | 713 |
| Retail\tnet\tsales | 621 | 119\t\t% | 283 | — | 19 |
| Other\tsegments\tnet\tsales\t(a) | 398 | 8\t\t% | 367 | 6\t\t% | 345 |
| Total\tnet\tsales | $6,207 | 8\t\t% $ | 5,742 | 7\t\t% $ | 5,363 |
| Unit\tSales\tby\tOperating\tSegment: |  |  |  |  |  |
| Americas\tMacintosh\tunit\tsales | 1,620 | (6)% | 1,728 | (2)% | 1,768 |
| Europe\tMacintosh\tunit\tsales | 684 | (5)% | 722 | (4)% | 754 |
| Japan\tMacintosh\tunit\tsales | 339 | (12)% | 386 | (2)% | 394 |
| Retail\tMacintosh\tunit\tsales | 187 | 103\t\t% | 92 | — | 7 |
| Other\tsegments\tMacintosh\tunit\tsales\t(a) | 182 | 5\t\t% | 173 | 5\t\t% | 164 |
| Total\tMacintosh\tunit\tsales | 3,012 | (3)% | 3,101 | 0\t\t% | 3,087 |
| Net\tSales\tby\tProduct: |  |  |  |  |  |
| Power\tMacintosh\tnet\tsales\t(b) | $1,237 | (10)% | $1,380 | (17)% | $1,664 |
| PowerBook\tnet\tsales | 1,299 | 56\t\t% | 831 | 2\t\t% | 813 |
| iMac\tnet\tsales | 1,238 | (15)% | 1,448 | 30\t\t% | 1,117 |
| iBook\tnet\tsales | 717 | (18)% | 875 | 8\t\t% | 809 |
| Total\tMacintosh\tnet\tsales | 4,491 | (1)% | 4,534 | 3\t\t% | 4,403 |
| Peripherals\tand\tother\thardware\t(c) | 1,058 | 57\t\t% | 674 | 74\t\t% | 387 |
| Software\t(d) | 362 | 18\t\t% | 307 | 33\t\t% | 230 |
| Service\tand\tother\tsales | 296 | 30\t\t% | 227 | (34)% | 343 |
| Total\tnet\tsales | $6,207 | 8\t\t% $ | 5,742 | 7\t\t% $ | 5,363 |
| Unit\tSales\tby\tProduct: |  |  |  |  |  |
| Power\tMacintosh\tunit\tsales\t(b) | 667 | (13)% | 766 | (18)% | 937 |
| PowerBook\tunit\tsales | 604 | 69\t\t% | 357 | 3\t\t% | 346 |
| iMac\tunit\tsales | 1,094 | (16)% | 1,301 | 8\t\t% | 1,208 |
| iBook\tunit\tsales | 647 | (4)% | 677 | 14\t\t% | 596 |
| Total\tMacintosh\tunit\tsales | 3,012 | (3)% | 3,101 | 0\t\t% | 3,087 |
| Net\tsales\tper\tMacintosh\tunit\tsold\t(e) | $1,491 | 2\t\t% $ | 1,462 | 3\t\t% $ | 1,426 |
| iPod\tunit\tsales | 939 | 146\t\t% | 381 | — | — |
| iPod\tnet\tsales | $345 | 141\t\t% $ | 143 | — | — |

(a) Other	segments	consists	of	Asia	Pacific	and	FileMaker.	Certain	net	sales	in	2002	and	2001	related	to	recent	acquisitions	and	Internet	services	have	been	reclassified	from	Other segments	net	sales	to	Americas	segment	net	sales	to	conform	to	the	2003	presentation.

(b) Power	Macintosh	figures	include	server	sales.

(c) Net	sales	of	peripherals	and	other	hardware	include	sales	of	iPod,	Apple-branded	and	third-party	displays,	and	other	hardware	accessories.

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

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

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 have	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	elect	to	purchase product	from	their	local	Apple	Retail	store	rather	than	through	other	preexisting	sales	channels	in	the	United	States,	the	Company	believes	that	a	substantial	portion	of the	Retail	segment's	net	sales	is	incremental	to	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	$384	million	or	57%	during	2003	compared	2002,	which	follows	a	$287	million	or	74%	increase	in	2002	as	compared to	2001.	The	current	year	increase	was	primarily	driven	by	the	$202	million,	or	141%,	year-over-year	increase	in	iPod	net	sales	to	$345	million.	All	of	the	Company's operating	segments	experienced	substantial	increases	in	iPod	net	sales	and	unit	sales	during	2003.	iPod	sales	during	2003	were	favorably	affected	by	the	introduction	of substantially	redesigned	new	models,	which	are	compatible	with	both	Macintosh	and	Windows	operating	systems	and	by	the	Company's	introduction	of	its	iTunes Music	Store	for	the	Macintosh	operating	system	in	April	2003.	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	has	expanded	this	distribution	network	during	2003,	which	has	contributed	to	the	current	year	increase	in	iPod unit	sales	of	146%.

In	addition	to	the	iPod,	the	increase	in	net	sales	of	peripherals	and	other	hardware	during	2003	also	reflects	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.

•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%	is	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	is	primarily	due	to	a	lower	average	price	per	unit.	Portable	systems	represented	42%	of	all	Macintosh	systems	sold	in	2003	versus	33%	in	2002	and	31%	in 2001,	which	reflects	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	an	increase	in	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	reflects	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	the	year 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	$69	million	or	30%	during	2003	and	results	from	significant	year-over-year	increases	in	net	sales	associated	with	AppleCare	Protection	Plan (APP)	extended	maintenance	and	support	services,	as	well	as	the	Company's	Internet	related	services.	Increased	net	sales	associated	with	APP	are	primarily	the	result	of increasing	attach	rates	over	the	last	several	years.	Increased	net	sales	associated	with	Internet	services	are	due	to	net	sales	from	the	iTunes	Music	Store	introduced	in April	2003	and	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	current	flat	panel	iMac	form	factor	was	in	the	eighth	quarter	of	its	life	cycle	by	the	end	of	2003	and	did	not experience	significant	enhancements	until	the	release	of	the	20-inch	flat-panel	iMac	in	November	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	is	representative	of	the	decline	of	Power	Macintosh	systems	sales	experienced	by	the	Company	during	recent	years	and is	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	last	several	years	also	reflects	the	shift	in	sales	to	portable systems,	particularly	PowerBooks.	In	addition,	the	Company	continues	to	believe	that	weak	economic	conditions	over	the	past	several	years	are	having	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. Currently	there	are	many	applications	that	run	natively	on	Mac	OS	X,	including	Adobe's	PhotoShop	7	and	QuarkXPress	6;	however,	there	is	no	assurance	that	this	will result	in	additional	sales	of	Macintosh	systems,	particularly	Power	Macintosh	units.

•The	Company	has	continued	to	experience	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.

The	Company's	one-to-one	(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.	The	Company	has	experienced	significant	competition	in	1:1	learning	solutions	and,	accordingly,	has	experienced	a	lower	sales price	per	unit,	on	average,	in	these	transactions.

The	Company	believes	weakness	in	its	U.S.	education	channel,	particularly	K-12,	has	been	caused	by	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	negative	trend	will	reverse.

•The	personal	computer	industry	in	general,	and	the	Company	specifically,	continue	to	see	relatively	soft	demand	for	their	products.	Sales	of	professional	and	consumer oriented	Macintosh	systems	remain	far	below	levels	experienced	in	fiscal	2000	and	earlier.	Difficult	global	economic	conditions	during	the	past	several	years exacerbated	by	the	economic	and	political	uncertainties	caused	by	terrorist	activities	and	the	associated	international	responses	have	clearly	had	a	pronounced	negative effect	on	the	overall	demand	for	the	Company's	products	in	virtually	all	of	its	markets.	Further,	growth	in	the	overall	personal	computer	industry	has	slowed	due	to	the high	market	penetration	of	personal	computers	and	a	lengthening	of	consumer,	creative,	and	business	personal	computer	upgrade	cycles.

Net	sales	increased	$379	million	or	7%	during	2002	compared	to	2001,	while	Macintosh	unit	sales	were	relatively	flat	year-over-year	at	approximately	3.1	million	units.	On	a geographic	basis,	performance	in	the	domestic	market	was	relatively	strong,	especially	when	considering	the	performance	of	the	Company's	Retail	segment,	which	operated	during	2002 exclusively	in	the	United	States.	However,	the	European	and	Japanese	markets	remained	sluggish	throughout	2002.	The	Company's	net	sales	in	2002	were	positively	influenced	by	a number	of	factors.

•First,	net	sales	from	software,	service,	peripherals,	and	other	sources	rose	$248	million	or	26%	in	2002	versus	2001.	This	increase	was	driven	by	several	factors	including a	28%	increase	in	combined	third-party	and	Apple-branded	software	sales;	$143	million	in	net	sales	of	iPod,	the	Company's	portable	digital	music	player	that	was introduced	in	the	first	half	of	2002;	a	9%	increase	in	the	sale	of	computer	accessories;	and	a	14%	increase	in	service	revenue	caused	primarily	by	increased	revenue associated	with	extended	maintenance	and	support	contracts.	The	growth	in	software	revenue	was	primarily	the	result	of	increased	sales	of	third-party	software	in	the Company's	retail	and	online	stores	and	expansion	in	recent	years	in	the	number	of	Apple-branded	software	titles.

•Second,	overall	unit	sales	of	Macintosh	portable	systems	grew	by	92,000	units	or	10%	in	2002	reflecting	a	general	trend	in	the	personal	computer	market	away	from desktop	systems	towards	portable	systems.	During	2002,	portable	Macintosh	systems	represented	33%	of	total	systems	sales	versus	31%	in	2001	and	20%	in	2000.

Growth	in	this	area	has	been	most	pronounced	for	iBook,	the	Company's	education	and	consumer	oriented	portable	Macintosh	system.	iBook	unit	sales	increased	14%	in 2002	and	9%	in	2001.

•Third,	the	Company's	Retail	segment	grew	from	8	stores	at	the	end	of	2001	to	40	stores	at	the	end	of	2002.	The	Retail	segment's	net	sales	grew	from	$19	million	in	2001 to	$283	million	in	2002.	While	the	Retail	segment	may	have	cannibalized	some	net	sales	from	the	Company's	preexisting	sales	channels	in	the	U.S.,	the	Company believed	that	a	substantial	portion	of	the	Retail	segment's	net	sales	was	incremental	to	the	Company's	total	net	sales.	See	additional	comments	below	related	to	the	Retail segment	under	the	heading	"Segment	Operating	Performance."

•Fourth,	the	Company's	average	unit	pricing	increased	3%	during	2002	as	a	result	of	various	changes	in	overall	unit	mix	offset	by	somewhat	lower	pricing	year-over-year on	comparative	Macintosh	systems.	Net	sales	per	Macintosh	unit	sold	during	2002	of	$1,462	per	unit	reflected	the	shift	in	mix	towards	relatively	higher-priced	portable Macintosh	systems	and	reflected	the	impact	on	net	sales	of	the	relatively	higher-priced	new	iMac	design	introduced	during	2002.	The	impact	of	these	changes	in	mix were	offset	by	the	decline	in	unit	sales	of	relatively	higher-priced	Power	Macintosh	systems	and	by	lower	pricing	on	comparative	Macintosh	systems	during	2002	for most	of	the	Company's	Macintosh	product	lines	in	response	to	industry	pricing	pressure.

•Fifth,	any	comparison	of	net	sales	in	2002	versus	2001	must	consider	the	effect	of	unusually	low	net	sales	during	the	first	quarter	of	2001.	This	was	attributable	to	several factors	at	the	beginning	of	2001,	including	continued	deterioration	in	worldwide	demand	for	personal	computers,	rebate	programs	and	price	cuts	instituted	by	the Company	during	that	quarter	that	cost	the	Company	approximately	$138	million,	and	a	plan	implemented	by	the	Company	during	the	first	quarter	of	2001	that	reduced substantially	the	level	of	inventory	in	its	distribution	channels	that	resulted	in	a	decline	in	channel	inventory	of	approximately	300,000	units	during	that	quarter.

Offsetting	the	favorable	factors	discussed	above,	the	Company's	net	sales	in	2002	were	negatively	impacted	by	several	notable	factors.

•First,	unit	sales	of	Power	Macintosh	systems	fell	18%	during	2002	as	compared	to	2001.	This	followed	a	35%	decline	in	Power	Macintosh	unit	sales	in	2001	from	2000. The	Company	believed	that	weak	economic	conditions	over	the	past	several	years	had	a	pronounced	negative	impact	on	its	professional	and	creative	customers	and	that many	of	these	customers	continued	to	delay	upgrades	of	their	Power	Macintosh	systems	due	to	the	Company's	ongoing	transition	to	Mac	OS	X,	its	new	operating system,	and	in	anticipation	of	certain	software	vendors	transitioning	their	Macintosh	applications	to	run	natively	in	Mac	OS	X.	Further,	the	Company	did	not	experience the	anticipated	increase	in	Power	Macintosh	sales	that	it	expected	following	the	introduction	of	Adobe's	PhotoShop	7	during	2002.	Additionally,	many	professional	users may	have	postponed	upgrading	their	systems	until	after	the	introduction	of	Mac	OS	X	Jaguar	released	in	the	fourth	quarter	of	2002.	Others	may	have	delayed	upgrading until	after	the	availability	of	other	professionally	oriented	software	applications	for	Mac	OS	X	such	as	QuarkXPress.

•Second,	despite	the	overall	increase	in	net	sales	during	2002	in	the	Americas,	the	Company	continued	to	see	weakness	in	its	U.S.	education	channel.	Total	net	sales	in this	channel	fell	15%	in	2002	and	4%	in	2001.	These	declines	were	consistent	with	industry	data	that	showed	the	Company	losing	market	share	in	the	U.S.	education market	in	each	of	the	last	two	fiscal	years.	The	Company	believed	this	weakness	was	caused	by	multiple	factors,	including	increased	price	competition	in	this	price sensitive	market	from	the	Company's	competitors	who	sell	Windows-based	personal	computers.	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	on	their	available	funding.

•Third,	the	personal	computer	industry	in	general	and	the	Company	specifically	experienced	soft	demand	for	its	products	due	to	adverse	global	economic	conditions, political	uncertainties,	and	a	lengthening	of	consumer,	creative,	and	business	personal	computer	upgrade	cycles.

# 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,	except	for	the	activities	of	the	Company's	Retail	segment.	The	Retail	segment	currently	operates

Apple-owned	retail	stores	in	the	United	States	and	opened	its	first	international	store	in	Tokyo,	Japan	in	the	first	quarter	of	2004.	Each	reportable	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

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	peripherals,	software,	and	services	during	2003 compared	to	2002	due	primarily	to	higher	sales	of	iPods	and	Internet	services.	The	Americas	segment	has	been	negatively	affected	by	weakness	in	its	U.S.	education	channel.	As	noted above,	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	is	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.

Net	sales	for	the	Americas	segment	increased	3%	or	$94	million	in	2002	compared	to	2001.	The	Americas	segment	was	negatively	affected	by	a	decline	in	U.S.	education	sales	in	2002 of	$215	million.	The	Americas	segment	also	experienced	a	17%	decline	in	Power	Macintosh	unit	sales.	However,	outside	of	the	U.S.	education	channel,	unit	sales	of	consumer	desktop and	portable	systems	rebounded	from	the	substantial	declines	experienced	in	2001,	rising	a	combined	31%	in	2002.	Sales	of	software,	peripherals,	and	accessories	were	also	up	in	the Americas	during	2002.	Growth	in	unit	sales	of	consumer	oriented	systems	during	2002	in	the	Americas	is	somewhat	attributable	to	the	significantly	depressed	level	of	net	sales experienced	in	the	first	quarter	of	2001	as	discussed	above.	However,	growth	in	the	Americas	was	somewhat	negatively	affected,	particularly	with	respect	to	consumer-oriented systems,	by	the	significant	growth	of	the	Company's	Retail	segment	in	the	U.S.	More	than	70%	of	the	Retail	segment's	Macintosh	unit	sales	during	2002	were	for	iMacs	and	iBooks.

# Europe

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	peripherals,	software,	and service,	primarily	attributable	to	higher	sales	of	iPods,	accessories	and	APP.

Economic	conditions	in	Europe	remained	weak	throughout	2002,	and	the	overall	demand	for	the	Company's	products	in	that	region	remained	flat	during	2002	versus	2001.	Unit	sales	in Europe	for	2002	reflect	relatively	stronger	demand	for	consumer-oriented	products,	particularly	iBook	whose	unit	sales	increased	27%	in	2002,	offset	by	declines	in	Power	Macintosh unit	sales.

# Japan

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	peripherals	and	other	hardware.	Japan's	Macintosh	unit	sales	remain	significantly	below	the	segment's	historic	levels	due	to	current	economic	conditions	that remain	particularly	negative	in	Japan.

Net	sales	in	Japan	remained	flat	during	2002	versus	2001,	with	a	slight	decline	in	unit	sales	of	2%.	Consistent	with	the	Company's	other	geographic	operating	segments,	during	2002 Japan	showed	growth	in	unit	sales	of	consumer	systems	and	a	decline	in	unit	sales	of	Power	Macintosh	systems.	Japan's	iMac	unit	sales	increased	85%	in	2002.	However,	in	the	case	of Japan	the	increase	in	iMac	unit	shipments	in	2002	versus	2001	was	primarily	the	result	of	the	unusually	depressed	level	of	net	sales	experienced	by	the	Company	in	the	first	quarter	of 2001	as	discussed	above.	Additionally,	net	sales	in	Japan	on	a	sequential	and	year-over-year	comparative	basis	generally	worsened	as	2002	progressed	reflecting	particularly	poor economic	conditions	in	Japan.

The	Company	opened	25	new	retail	stores	during	2003,	bringing	the	total	number	of	open	stores	to	65	as	of	September	27,	2003,	which	compares	to	40	open	stores	as	of	September	28, 2002	and	8	open	stores	as	of	September	29,	2001.	During	the	first	quarter	of	fiscal	2004,	the	Company	opened	9	additional	stores	including	its	first	international	store	in	the	Ginza	in Tokyo,	Japan.	The	Retail	segment's	net	sales	grew	to	$621	million	during	2003	from	$283	million	in	2002	and	from	$19	million	in	2001.	The	$338	million	or	119%	increase	in	net	sales during	2003	reflects	the	impact	from	opening	25	new	stores	in	2003,	the	full	year	impact	of	2002	store	openings,	as	well	as	an	increase	in	average	revenue	per	store.	Total	Macintosh sales	increased	by	approximately	$170	million	of	which	$108	million	related	to	year-over-year	increases	in	PowerBook	sales.	The	Retail	segment	has	also	contributed	strongly	to	the increases	in	net	sales	of	peripherals,	software	and	services	experienced	by	the	Company	during	2003.	During	2003,	approximately	45%	of	the	Retail	segment's	net	sales	came	from	the sale	of	Apple-branded	and	third-party	peripherals,	software	and	services	as	compared	to	28%	for	the	Company	as	a	whole.	With	an	average	of	54	stores	open	during	2003,	the	Retail segment	achieved	annualized	revenue	per	store	of	approximately	$11.5	million,	as	compared	to	approximately	$10.2	million	based	on	an	average	of	28	stores	open	in	2002.

As	measured	by	the	Company's	operating	segment	reporting,	the	Retail	segment	improved	from	a	loss	of	$22	million	during	2002	to	a	loss	of	$5	million	during	2003.	This	improvement is	primarily	attributable	to	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	since	its	inception	totaled	approximately	$290	million	through	the	end	of	fiscal	2003,	$92	million of	which	was	incurred	during	2003.	As	of	September	27,	2003,	the	Retail	segment	had	approximately	1,300	employees	and	had	outstanding	operating	lease	commitments	associated with	retail	store	space	and	related	facilities	of	$354	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.	Investment	in	a	new	business	model	such	as	the	Retail	segment	is	inherently	risky,	particularly in	light	of	the	significant	investment	involved,	the	current	economic	climate,	and	the	fixed	nature	of	a	substantial	portion	of	the	Retail	segment's	operating	expenses.

# Gross	Margin

Gross	margin	for	the	three	fiscal	years	ended	September	27,	2003	are	as	follows	(in	millions,	except	gross	margin	percentages):

|  | 2003 | 2002 | 2001 |
| :--- | :--- | :--- | :--- |
| Net\tsales | $6,207 | $5,742 | $5,363 |
| Cost\tof\tsales | 4,499 | 4,139 | 4,128 |
| Gross\tmargin | $1,708 | $1,603 | $1,235 |
| Gross\tmargin\tpercentage | 27.5% | 27.9% | 23.0% |

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.

The	Company	anticipates	that	its	gross	margin	and	the	gross	margin	of	the	overall	personal	computer	industry	will	remain	under	pressure	throughout	fiscal	2004	in	light	of	weak economic	conditions,	price	competition	in	the	personal	computer	industry,	and	potential	increases	in	component	pricing.	The	Company	also	expects	to	continue	to	incur	air	freight charges	on	the	Power	Mac	G5	and	other	products	during	2004.

The	foregoing	statements	regarding	the	Company's	expected	gross	margin	during	2004,	general	demand	for	personal	computers,	anticipated	industry	component	pricing,	anticipated	air freight	charges,	and	future	economic	conditions	are	forward-looking.	There	can	be	no	assurance	that	current	gross	margins	will	be	maintained,	targeted	gross	margin	levels	will	be achieved,	or	current	margins	on	existing	individual	products	will	be	maintained.	In	general,	gross	margins	and	margins	on	individual	products	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	increased	to	27.9%	of	net	sales	in	2002	from	23.0%	in	2001.	Gross	margin	in	2001	was	unusually	low	resulting	from	negative	gross	margin	of	2%	experienced	in	the	first quarter	of	2001.	As	a

percentage	of	net	sales,	the	Company's	quarterly	gross	margins	declined	during	fiscal	2002	from	31%	in	the	first	quarter	down	to	26%	in	the	fourth	quarter.	This	decline	resulted	from several	factors	including	a	rise	in	component	costs	as	the	year	progressed	and	aggressive	pricing	by	the	Company	across	its	products	lines	instituted	as	a	result	of	continued	pricing pressures	in	the	personal	computer	industry.

# Operating	Expenses

Operating	expenses	for	the	three	fiscal	years	ended	September	27,	2003	are	as	follows	(in	millions,	except	for	percentages):

| Research	and	development | $471 | $446 | $430 |
| :--- | :--- | :--- | :--- |
| Percentage\tof\tnet\tsales | 8% | 8% | 8% |
| Selling,\tgeneral,\tand\tadministrative\texpenses | $1,212 | $1,109 | $1,138 |
| Percentage\tof\tnet\tsales | 20% | 19% | 21% |
| Restructuring\tcosts | $26 | $30 | — |
| Purchased\tin-process\tresearch\tand\tdevelopment | — | $1 | $11 |

# 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	8%	of	total	net	sales	during	2003,	2002	and	2001,	up	substantially	from	approximately	5%	of	total	net	sales	in	fiscal	year	2000	and	recent	earlier	periods. The	Company's	management	believes	that	maintaining	or	increasing	the	pace	of	innovation	and	product	development	is	the	best	way	to	respond	to	current	economic	and	market conditions	and	will	continue	to	position	the	Company	for	future	growth	as	conditions	improve.	R&D	expense	increased	6%	or	$25	million	to	$471	million	in	2003	as	compared	to	2002, which	follows	a	$16	million	increase	in	2002	as	compared	to	2001.	The	overall	increase	in	R&D	expense	relates	primarily	to	increased	headcount	and	support	for	new	product development	activities.	R&D	spending	also	included	capitalized	software	development	costs	of	approximately	$14.7	million	related	to	the	development	of	Mac	OS	X	Panther	in	2003; 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;	and	approximately	$5.4	million	associated	with	the	development	of	the	original	version	of	Mac	OS	X	in	2001.	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)

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	current	year	discretionary	spending	on	marketing	and	advertising	and	by	savings	resulting	from	the	2003	and	2002	restructuring activities	described	below.

SG&A	decreased	$29	million	or	3%	during	2002	as	compared	to	2001.	The	decrease	in	SG&A	in	2002	was	primarily	the	result	of	lower	discretionary	spending	on	marketing	and advertising	expenses,	decreased	spending	related	to	information	systems,	and	benefits	directly	related	to	the	Company's	restructuring	actions	in	2002	and	2001.	The	decreases	were partially	offset	by	higher	sales	expense	in	2002	resulting	from	increased	operating	expenses	associated	with	expansion	of	the	Company's	Retail	segment.

# Restructuring	Actions

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. The	primary	focus	of	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.	The	second	quarter	actions	resulted	in	recognition	of	severance	costs	of	$2.4	million	for	termination	of	93	employees,	92	of	whom	were	terminated	prior	to	the	end of	2003	at	a	cost	of	$2.2	million.	During	the	second	quarter	of	2003,	an	additional	$400,000	was	accrued	for	asset	write-offs	and	lease	payments	on	an	abandoned	facility	in	the Americas	operating	segment.	The	Company	estimates	these	restructuring	actions	will	reduce	quarterly	operating	expenses	by	$1.5	million.

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	United	States	and	Europe.	These	restructuring	actions	will	ultimately	result	in	the	elimination	of	260 positions	worldwide,	all	but	one	was	eliminated	by	the	end	of	2003.	The	Company	estimates	these	restructuring	actions	will	reduce	quarterly	operating	expenses	by	$6	million.

During	fiscal	2002,	the	Company	recorded	total	restructuring	charges	of	$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.	The	Company	estimates	these	restructuring	actions	will	result	in	reduced	quarterly	operating	expenses	of	approximately	$10	million.

Of	the	$30	million	restructuring	charge	for	fiscal	2002,	$6	million	was	incurred	in	the	fourth	quarter	of	2002	related	to	actions	designed	to	reduce	headcount	costs	in	corporate operations	and	sales	and	to	adjust	its	PowerSchool	product	strategy.	Headcount	actions,	primarily	in	corporate	operations,	sales,	and	PowerSchool	related	research	and	development, resulted	in	the	elimination	of	approximately	180	positions	worldwide	at	a	cost	of	$1.8	million.	The	shift	in	product	strategy	at	PowerSchool	included	discontinuing	development	and marketing	of	a	PowerSchool	product	that	resulted	in	the	impairment	of	previously	capitalized	development	costs	associated	with	the	product	in	the	amount	of	$4.5	million.	The remaining	charge	in	2002	of	$24	million	was	incurred	in	the	first	quarter	of	2002	and	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.	Related	lease	and	contract cancellation	charges	totaled	$12	million,	and	charges	for	asset	impairments	totaled	$4	million.	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	the	fourth	quarter	of	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	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	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%.

In	May	2001,	the	Company	acquired	PowerSchool,	Inc.,	a	provider	of	web-based	student	information	systems	for	K-12	schools	and	districts	that	enables	schools	to	record,	access, report,	and	manage	their	student	data	and	performance	in	real-time,	and	gives	parents	real-time	web	access	to	track	their	children's	progress.	Of	total	purchase	consideration	of $66.1	million,	$10.8	million	was	allocated	to	IPR&D	and	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	to	technologies	representing	processes	and	expertise	employed	to	design,	develop,	and	deploy	a	functioning,	scalable	web- based	student	information	system	for	use	by	K-12	schools.	At	the	date	of	the	acquisition,	the	PowerSchool	product	under	development	was	approximately	50%	complete,	and	it	was expected	that	the	remaining	50%	would	be	completed	during	the	Company's	fiscal	2002	at	a	cost	of	approximately	$9.25	million.	The	remaining	efforts,	which	were	completed	during 2002,	included	completion	of	coding,	finalizing	user	interface	design	and	development,	and	testing.	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	27,	2003	are	as	follows	(in	millions):

|  | 2003 | 2002 | 2001 |
| :--- | :--- | :--- | :--- |
| Gains\t(losses)\ton\tnon-current\tinvestments,\tnet | $10 | $(42) | $88 |
| Unrealized\tloss\ton\tconvertible\tsecurities | $—\t $— | $—\t $— | $(13) |
| Interest\tincome | $69 | $118 | $218 |
| Interest\texpense | (8) | (11) | (16) |
| Gains\ton\tsales\tof\tshort\tterm\tinvestments,\tnet | 21 | 7 | — |
| Other\tincome\t(expense),\tnet | (5) | (2) | 15 |
| Gain\ton\tforward\tpurchase\tagreement | 6 | — | — |
| Interest\tand\tother\tincome,\tnet | $83 | $112 | $217 |
| Total\tother\tincome\tand\texpense | $93 | $70 | $292 |

# Gains	and	Losses	on	Non-current	Investments

The	Company	has	held	investments	in	EarthLink	Inc.	(EarthLink),	Akamai	Technologies,	Inc.	(Akamai),	ARM	Holdings	plc	(ARM)	and	certain	investments	in	private	companies. 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.	The	Company	recognizes	an impairment	charge	to	earnings	in	the	event	a	decline	in	fair	value	below	the	cost	basis	of	one	of	these	investments	is	determined	to	be	other-than-temporary.	The	Company	includes recognized	gains	and	losses	resulting	from	the	sale	or	from	other-than-temporary	declines	in	fair	value	associated	with	these	investments	in	other	income	and	expense.	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	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.	The	fair	value	of	the	Company's	remaining	investment	in	Akamai	as	of	September	27,	2003,	was	approximately	$5	million.

During	2002,	the	Company	determined	that	declines	in	the	fair	value	of	certain	of	these	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.

During	2001,	the	Company	sold	a	total	of	approximately	1	million	shares	of	Akamai	stock	for	net	proceeds	of	$39	million	and	recorded	a	gain	before	taxes	of	$36	million,	and	sold	a total	of	approximately	29.8	million	shares	of	ARM	stock	for	net	proceeds	of	$176	million	and	recorded	a	gain	before	taxes	of	$174	million.	These	gains	during	2001	were	partially offset	by	a	$114	million	charge	to	earnings	that	reflected	an	other-than-temporary	decline	in	the	fair	value	of	the	Company's	investment	in	EarthLink	and	an	$8	million	charge	that reflected	an	other-than-temporary	decline	in	the	fair	value	of	certain	private	company	investments.

# Unrealized	Loss	on	Convertible	Securities

On	October	1,	2000,	the	Company	adopted	Statement	of	Financial	Accounting	Standard	(SFAS)	No.	133,	Accounting	for	Derivative	Instruments	and	Hedging	Activities.	SFAS	No.	133 established	accounting	and	reporting	standards	for	derivative	instruments,	hedging	activities,	and	exposure	definition.	SFAS	No.	133	required	the	Company	to	adjust	the	carrying	value of	the	derivative	component	of	its	investment	in	Samsung	to	earnings	during	the	first	quarter	of	2001,	the	before	tax	effect	of	which	was	an	unrealized	loss	of	approximately $13	million.

# Interest	and	Other	Income,	Net

Net	interest	and	other	income	decreased	$29	million	or	26%	to	$83	million	during	2003.	The	decrease	is	primarily	the	result	of	declining	investment	yields	on	the	Company's	cash	and short-term	investments	resulting	from	substantially	lower	market	interest	rates.	The	weighted	average	interest	rate	earned	by	the	Company	on	its	cash,	cash	equivalents	and	short-term investments	fell	to	1.89%	in	2003	compared	to	2.85%	in	2002.	The	decrease	is	offset	by	the	increase	of	$14	million	from	the	gain	on	the	sales	of	short	term	investments	from	the Company's	fixed	income	portfolio,	and	the	increase	of	$6	million	from	the	gain	on	the	forward	purchase	agreement	during	the	fourth	quarter	of	2003.

Net	interest	and	other	income	was	$112	million	in	fiscal	2002,	compared	to	$217	million	in	fiscal	2001.	This	$105	million	or	48%	decrease	was	primarily	the	result	of	declining investment	yields	on	the	Company's	cash	and	short-term	investments	resulting	from	substantially	lower	market	interest	rates.	The	weighted	average	interest	rate	earned	by	the	Company on	its	cash,	cash	equivalents	and	short-term	investments	fell	to	2.85%	in	2002	compared	to	5.38%	in	2001.

# Provision	for	Income	Taxes

The	Company's	effective	tax	rate	for	2003	was	26%	compared	to	the	higher	statutory	rate	due	primarily	to	research	and	development	credits,	a	non-taxable	gain	on	stock	repurchase	and certain	undistributed	foreign	earnings	for	which	no	U.S.	taxes	were	provided.	As	of	September	27,	2003,	the	Company	had	deferred	tax	assets	arising	from	deductible	temporary differences,	tax	losses,	and	tax	credits	of	$452	million	before	being	offset	against	certain	deferred	tax	liabilities	and	a	valuation	allowance	for	presentation	on	the	Company's consolidated	balance	sheet.	As	of	September	27,	2003,	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.	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.	The Company	will	continue	to	evaluate	the	realizability	of	the	deferred	tax	assets	quarterly	by	assessing	the	need	for	and	amount	of	the	valuation	allowance.

On	April	10,	2003,	the	Internal	Revenue	Service	(IRS)	proposed	adjustments	to	the	Company's	federal	income	tax	returns	for	the	years	1998	through	2000,	and	the	Company	has	made certain	prepayments	thereon.	Certain	of	these	adjustments	are	being	contested	through	the	IRS	Appeals	Office.	Substantially	all	IRS	audit	issues	for	years	prior	to	1998	have	been resolved.	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.

# Accounting	for	Derivatives

The	adoption	of	SFAS	133	during	2001	resulted	in	a	favorable	cumulative-effect	type	adjustment	of	approximately	$12	million,	net	of	a	related	income	tax	effect	of	approximately $5	million.

Further	information	related	to	the	adoption	of	SFAS	Nos.	133,	143	and	150	and	the	resulting	cumulative	accounting	effects	may	be	found	in	Part	II,	Item	8	of	this	Form	10-K	at	Note	1 of	Notes	to	Consolidated	Financial	Statements.

# 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.

The	FASB	decided	on	April	22,	2003	to	require	all	companies	to	expense	the	value	of	employee	stock	options.	Companies	will	be	required	to	measure	the	cost	of	employee	stock options	according	to	their	fair	value.	The	FASB	has	indicated	that	it	plans	to	issue	in	the	first	quarter	of	calendar	year	2004	an	exposure	draft	of	a	new	accounting	standard	addressing this	matter.	Prior	to	issuance	of	this	exposure	draft,	the	FASB	has	indicated	it	will	be	addressing	several	significant	technical	issues.	Among	other	things,	the	FASB	must	determine	the extent	to	which	the	new	accounting	standard	will	permit	adjustments	to	recognized	expense	for	actual	option	forfeitures	and	actual	performance	outcomes.	This	determination	will	affect the	timing	and	amount	of	compensation	expense	recognized.	Also,	a	method	to	determine	the	fair	value	of	employee	stock	options	must	be	established.	Current	accounting	standards require	use	of	an	option-pricing	model,	such	as	the	Black-Scholes	formula,	to	determine	fair	value	and	provide	guidance	on	adjusting	some	of	the	input	factors	used	in	the	model.	This valuation	approach	has	received	significant	criticism	and	may	be	subject	to	changes	that	could	have	a	significant	impact	on	the	calculated	fair	value	of	employee	stock	options	under the	new	standard.

At	the	Company's	annual	shareholder's	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.	As	discussed	in	the	Company's	Form	10-Q	for	the	period	ended	March	29,	2003,	the	Company	had	decided	not	to	expense	the	value	of	employee	stock	options	until	the FASB	finalizes	its	new	accounting	standard	on	the	matter.	The	Company	based	this	decision	on	the	FASB's	announced	intention	to	soon	require	all	companies	to	expense	the	value	of employee	stock	options	and	the	FASB's	near-term	review	of	technical	issues	that	will	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.	In	the	future,	should	the	Company	expense	the value	of	employee	stock	options,	either	out	of	choice	or	due	to	new	requirements	issued	by	the	FASB,	the	Company	may	have	to	recognize	substantially	more	compensation	expense	in future	periods	that	could	have	a	material	adverse	impact	on	the	Company's	future	results	of	operations.

# Recent	Accounting	Pronouncements

In	January	2003,	the	FASB	issued	Interpretation	No.	46	(FIN	46),	Consolidation	of	Variable	Interest	Entities.	FIN	46	clarifies	the	application	of	Accounting	Research	Bulletin	No.	51 and	applied	immediately	to	any	variable	interest	entities	created	after	January	31,	2003	and	to	variable	interest	entities	in	which	an	interest	is	obtained	after	that	date.	For	variable interest	entities	created	or	acquired	prior	to	February	1,	2003,	the	provisions	of	FIN	46	must	be	applied	for	the	first	interim	or	annual	period	beginning	after	December	15,	2003.	The adoption	of	the	provision	of	FIN	46	related	to	variable	interests	created	after	January	31,	2003	did	not	have	a	material	impact	on	the	Company's	results	of	operations	or	financial position.	The	Company	continues	to	evaluate	the	provisions	of	FIN	46,	and	does	not	believe	that	the	adoption	of	the	remaining	provisions	will	have	a	material	impact	on	its	results	of operations	or	financial	position.

In	May	2003,	the	FASB's	Emerging	Issues	Task	Force	(EITF)	reached	consensus	on	EITF	Issue	No.	00-21,	Revenue	Arrangements	with	Multiple	Deliverables.	EITF	Issue	No.	00-21 provides	guidance	on	how	to	account	for	certain	arrangements	that	involve	the	delivery	or	performance	of	multiple	products,	services,	and/or	rights	to	use	assets.	The	provisions	of EITF	Issue	No.	00-21	apply	to	revenue	transactions	entered	into	in	fiscal	periods	beginning	after	June	15,	2003.	Additionally,	in	August	2003,	the	EITF	reached	consensus	on	EITF Issue	No.	03-5,	Applicability	of	AICPA	Statement	of	Position	97-2,	"Software	Revenue	Recognition,"	to	Non-Software	Deliverables	in	an	Arrangement	Containing	More-than- Incidental	Software.	EITF	Issue	No.	03-5	provides	guidance	on	determining	whether	non-software	deliverables	are	included	within	the	scope	of	SOP	97-2,	and	accordingly,	whether multiple	element	arrangements	are	to	be	accounted	for	in	accordance	with	EITF	Issue	No.	00-21	or	SOP	97-2.	The	Company	currently	applies	the	requirements	of	SOP	No.	97-2	when accounting	for	all	multiple	element	transactions.	The	Company	does	not	anticipate	the	application	of	either	EITF	Issue	Nos.	00-21	or	03-5	will	have	a	significant	impact	on	its	results	of operations	or	financial	position.

# Liquidity	and	Capital	Resources

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

|  | 2003 | 2002 | 2001 |
| :--- | :--- | :--- | :--- |
| Cash,\tcash\tequivalents,\tand\tshort-term\tinvestments | $4,566 | $4,337 | $4,336 |
| Accounts\treceivable,\tnet | $766 | $565 | $466 |
| Inventory | $56 | $45 | $11 |
| Working\tcapital | $3,530 | $3,730 | $3,625 |
| Days\tsales\tin\taccounts\treceivable\t(DSO)\t(a) | 41 | 36 | 29 |
| Days\tof\tsupply\tin\tinventory\t(b) | 4 | 4 | 1 |
| Days\tpayables\toutstanding\t(DPO)\t(c) | 82 | 77 | 73 |
| Annual\toperating\tcash\tflow | $289 | $89 | $185 |

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

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	27,	2003,	the	Company's	cash,	cash	equivalents,	and	short-term	investments	portfolio	totaled	$4.566	billion,	an	increase	of	$229	million	from	the	end	of	fiscal	2002. The	Company's	short-term	investment	portfolio	consists	primarily	of	investments	in	U.S.	Treasury	and	Agency	securities,	U.S.	corporate	securities,	and	foreign	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's	investments	are	generally	liquid	and	investment	grade.

As	a	result	of	declining	investment	yields	on	the	Company's	cash	equivalents	and	short-term	investments	resulting	from	substantially	lower	market	interest	rates	during	2003,	the Company	has	elected	to	reduce	the	average	maturity	of	its	portfolio	to	maintain	liquidity	for	future	investment	opportunities	when	market	interest	rates	increase.	Accordingly,	during 2003	the	Company	increased	its	holdings	in	short-term	investment	grade	instruments,	both	in	U.S.	corporate	and	foreign	securities,	that	are	classified	as	cash	equivalents	and	has reduced	its	holdings	in	longer-term	U.S.	corporate	securities	classified	as	short-term	investments.

Although	the	Company's	cash,	cash	equivalents,	and	short-term	investments	increased	in	2003,	the	Company's	working	capital	at	September	27,	2003	decreased	by	$200	million	as compared	to	the	end	of

fiscal	2002	due	primarily	to	the	current	year	reclassification	of	the	Company's	long-term	debt	as	a	current	obligation	resulting	from	its	scheduled	maturity	in	February	2004.

The	primary	sources	of	total	cash	and	cash	equivalents	in	fiscal	2003	were	$289	million	in	cash	generated	by	operating	activities	and	$53	million	in	proceeds	from	the	issuance	of common	stock,	partially	offset	by	$164	million	utilized	for	capital	expenditures	and	$26	million	for	the	repurchase	of	common	stock.

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,	debt obligations,	stock	repurchase	activity,	outstanding	commitments,	and	other	liquidity	requirements	associated	with	its	existing	operations	over	the	next	12	months.

The	Company	currently	has	debt	outstanding	in	the	form	of	$300	million	of	aggregate	principal	amount	6.5%	unsecured	notes	that	were	originally	issued	in	1994.	The	notes,	which	pay interest	semiannually,	were	sold	at	99.925%	of	par,	for	an	effective	yield	to	maturity	of	6.51%.	The	notes,	along	with	approximately	$4	million	of	unamortized	deferred	gains	on	closed interest	rate	swaps,	are	due	in	February	2004	and	therefore	have	been	classified	as	current	debt	as	of	September	27,	2003.	The	Company	currently	anticipates	utilizing	its	existing	cash balances	to	settle	these	notes	when	due.

# Capital	Expenditures

The	Company's	total	capital	expenditures	were	$164	million	during	fiscal	2003,	$92	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	$160	million	for	capital	expenditures	during	2004,	approximately	$85	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	27,	2003.

# Off-Balance	Sheet	Arrangements

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.

# Lease	Commitments

As	of	September	27,	2003,	the	Company	had	total	outstanding	commitments	on	noncancelable	operating	leases	of	approximately	$600	million,	$354	million	of	which	related	to	the lease	of	retail	space	and	related	facilities.	Remaining	terms	on	the	Company's	existing	operating	leases	range	from	1	to	12	years.	Subsequent	to	September	27,	2003,	the	Company entered	into	additional	operating	lease	commitments	for	retail	space	with	future	lease	commitments	totaling	$64	million	for	periods	ranging	from	10	to	12	years.

# Purchase	Commitments	with	Contract	Manufacturers	and	Component	Suppliers

The	Company	utilizes	several	contract	manufacturers	to	manufacture	sub-assemblies	for	the	Company's	products	and	to	perform	final	assembly	and	test	of	finished	products.	These contract	manufacturers	acquire	components	and	build	product	based	on	demand	information	supplied	by	the	Company,	which	typically	covers	periods	ranging	from	1	to	3	months.	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.	As	of	September	27,	2003,	the	Company	had	outstanding	third-party	manufacturing	commitments and	component	purchase	commitments	of	approximately	$848	million.

# 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	licensing	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	that	would	have	a	material	adverse	effect	on	its	financial	condition,	liquidity	or	results	of	operations.

# Factors	That	May	Affect	Future	Results	and	Financial	Condition

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

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

# distributors,	and	resellers.

The	Company's	operating	performance	depends	significantly	on	general	economic	conditions.	For	much	of	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	appear	to	be	delaying	technology	purchases	due	to	concerns about	the	overall	impact	of	the	weaker	economy	on	their	available	funding.	Continued	uncertainty	about	future	economic	conditions	continues	to	make	it	difficult	to	forecast	future operating	results.	Should	global	and	regional	economic	conditions	fail	to	improve	or	continue	to	deteriorate,	demand	for	the	Company's	products	could	continue	to	be	adversely affected,	as	could	the	financial	health	of	its	suppliers,	distributors,	and	resellers.

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

War,	terrorism	or	public	health	issues,	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.	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.	The	Company's	operating	results	and	financial	condition	have	been, and	in	the	future	may	continue	to	be,	adversely	affected	by	these	events.

The	Company	and	some	of	its	manufacturing	vendors	and	component	suppliers	have	significant	operations	in	various	locations	throughout	Asia,	including	locations	in	mainland	China, the	Hong	Kong	Special	Administrative	Region,	and	Singapore,	all	of	which	were	subject	to	the	World	Health	Organization	and	Centers	for	Disease	Control	and	Prevention	severe	acute respiratory	syndrome	(SARS)	travel	advisories	at	times	during	the	second	and	third	quarters	of	fiscal	2003.	Similar	travel	advisories	were	issued	for	Taiwan,	where	a	significant	amount of	the	Company's	portable	Macintosh	systems	and	the	iPod	are	assembled.	Should	the	severity	of	the	SARs	threat	increase	or	other	public	health	issues	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	market	for	personal	computers	and	related	peripherals	and	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-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	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	Microsoft's	Windows	operating	systems.	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,	including	Windows.

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	distribution	services,	free	peer-to-peer	music	services,	emerging	companies,	and	larger	companies	that	may	have greater	resources,	including	technical	and	marketing	resources,	and	supplier	relationships.	There	can	be	no	assurance	that	the	Company	will	be	able	to	provide	products	and	services that	effectively	compete	in	these	markets.	Failure	to	effectively	compete	could	negatively	affect	the	Company's	operating	results	and	financial	position.

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

Due	to	the	highly	volatile	nature	of	the	personal	computer	industry,	which	is	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.

During	2001,	the	Company	introduced	a	new	client	operating	system,	Mac	OS	X,	and	delivered	its	first	major	upgrade,	Mac	OS	X	version	10.1.	Other	major	upgrades	include	Mac	OS X	Jaguar	in	2002	and	most	recently	Mac	OS	X	Panther	in	October	2003.	Inability	of	the	Company	to	provide	additional	improvements	in	the	performance	and	functionality	of	Mac	OS X,	advance	customer	acceptance	of	the	new	operating	system	and	its	upgrades,	obtain	the	continued	commitment	of	software	developers	to	transition	existing	applications	to	run	on Mac	OS	X,	or	create	new	applications	to	run	on	Mac	OS	X,	may	have	an	adverse	impact	on	the	Company's	operating	results	and	financial	condition.

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	industry,	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,	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,	TFT-LCD	flat-panel	displays,	and	optical	and	magnetic disk	drives),	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	Motorola,	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	G4	and	G3	microprocessors	with	higher clock	speeds	in	sufficient	quantity	has	had	significant	adverse	effects	on	the	Company's	results	of	operations.	In	addition,	currently	IBM	is	the	Company's	sole	supplier	of	the	G5 processor	used	in	current	Power	Macintosh	products	and	Motorola	is	the	sole	supplier	of	the	G4	processors.	The	inability	in	the	future	of	the	Company	to	obtain	microprocessors	in sufficient	quantities	with	competitive	price/performance	features	could	have	an	adverse	impact	on	the	Company's	results	of	operations	and	financial	condition.

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.	If	the	Company	is	unable	to	continue	to offer	a	wide	variety	of	music	content	at	reasonable	prices	with	acceptable	usage	rules,	or	expand	its	geographic	reach	outside	the	United	States,	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	affect	on	the	Company's	operating results	and	financial	position.

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

Many	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	fixed	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	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	conducted	in	the	Company's	manufacturing	facilities	in	Sacramento,	California,	and	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	Japan,	Taiwan	and	China.	If	for	any	reason	manufacturing	or	logistics	in	any	of	these	locations	is	disrupted	by	regional	economic,	business,	environmental,	medical, political,	or	military	conditions	or	events,	the	Company's	results	of	operations	and	financial	condition	could	be	adversely	affected.

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	that	may	be	beyond	its	control.	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	expense	to	remedy.

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	November	2003,	the	Company	has	opened	74	retail	stores	including	its	first	international	store	in	Tokyo,	Japan.	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	15	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	four	such	stores	and	has	one	under	construction.	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	15	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	United States;	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.

Unit	sales	of	the	Company's	professionally	oriented	desktop	systems	have	declined	sharply	over	the	past	several	years	negatively	impacting	net	sales	and	gross	margin.

Unit	sales	of	Power	Macintosh	systems	fell	13%	during	2003	as	compared	to	2002	and	fell	18%	in	2002	from	2001.	Power	Macintosh	unit	sales	have	fallen	as	a	percentage	of	total Macintosh	unit	sales	from	30%	in	2001	to	22%	in	2003.	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	the	primary	users	of	such	systems.	Also,	it	is	likely	that	many	of	the	Company's	current	and	potential	customers,	particularly professional	and	creative	customers	who	are	most	likely	to	utilize	the	Company's	Power	Macintosh	systems,	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.	In	addition to	the	negative	impact	on	net	sales,	declining	sales	of	Power	Macintosh	systems	also	have	a	negative	effect	on	the	Company's	overall	gross	margin	because	Power	Macintosh	systems generally	have	higher	individual	gross	margins	than	the	Company's	other	Macintosh	systems.	Continued	deterioration	in	Power	Macintosh	unit	sales	could	adversely	affect	the Company's	future	net	sales	and	gross	margin.	If	future	unit	sales	of	Power	Macintosh	systems	fail	to

partially	or	fully	recover,	it	will	be	difficult	for	the	Company	to	improve	its	overall	profitability.	While	the	Company	has	introduced	faster	Power	Macintosh	systems	utilizing	64-bit PowerPC	G5	processors	during	2003,	there	can	be	no	assurance	that	introduction	of	such	systems	will	favorably	impact	net	sales	either	in	the	short	or	long	term.

# The	Company	faces	increasing	competition	in	the	U.S.	education	market.

Sales	in	the	United	States	to	both	elementary	and	secondary	schools,	as	well	as	for	college	and	university	customers,	remain	a	core	market	for	Apple.	Net	sales	in	these	markets	fell	to 18%	of	the	Company's	total	net	sales	in	2003	from	21%	and	26%	in	2002	and	2001,	respectively.	The	drop	in	2003	reflects	declines	in	both	net	sales	and	Macintosh	unit	sales	in	these markets	of	4%	and	6%,	respectively,	in	fiscal	2003	compared	to	2002.	Additionally,	several	competitors	of	the	Company	have	either	targeted	or	announced	their	intention	to	target	the education	market	for	personal	computers,	which	could	also	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	1:1	learning	solutions	in	education.	These	1:1	solutions	and	other	strategic	sales	are	generally	priced	more	aggressively	and	could	result	in	significantly less	profitability	or	even	in	financial	losses,	particularly	for	larger	deals.	Although	the	Company	believes	it	has	taken	certain	steps	to	strengthen	its	position	in	the	education	market, there	can	be	no	assurance	that	the	Company	will	be	able	to	increase	or	maintain	its	share	of	the	education	market	or	execute	profitably	on	large	strategic	arrangements.	Failure	to	do	so may	have	an	adverse	impact	on	the	Company's	operating	results	and	financial	condition.

The	Company's	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.	The	Company	also	sells	its	own	products	and	certain	third-party	products	through	its	retail	stores.	Many	of	the	Company's significant	resellers	operate	on	narrow	product	margins	and	have	been	negatively	affected	by	current	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	United	States.	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,"	which information	is	hereby	incorporated	by	reference.

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	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.

Derivative	instruments,	such	as	foreign	exchange	forward	and	option	positions,	and	interest	rate	swap	and	option	positions	have	been	utilized	by	the	Company	to	hedge	exposures	to fluctuations	in	interest	rates	and	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	either	foreign	exchange	or	interest	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,	which	information	is	hereby	incorporated	by	reference.

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,	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	decision	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	is	not	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.	Discontinuance	of Microsoft	Office	and	other	Microsoft	products	for	the	Macintosh	platform	would	have	an	adverse	effect	on	the	Company's	net	sales	and	results	of	operations.	In	June	of	2003,	Microsoft stated	that	it	would	no	longer	develop	new	versions	of	Internet	Explorer	for	the	Mac	OS.	Microsoft's	decision	to	discontinue	development	of	Internet	Explorer	for	Mac	OS	X	appears	to have	been	influenced	in	part	by	the	Company's	introduction	during	2003	of	its	own	web	browser,	Safari.	It	is	unclear	what	impact,	if	any,	Microsoft's	decision	to	cease	further development	of	Internet	Explorer	for	Mac	OS	X	will	have	on	the	Company.	However,	if	customers	chose	not	to	purchase	the	Company's	products	because	Internet	Explorer	is	not available	on	the	Macintosh	platform	or	should	websites	fail	to	provide	support	for	web	browsers	other	than	Internet	Explorer,	the	Company's	net	sales	and	results	of	operations	could	be materially	adversely	affected.

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	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.	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	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	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.	As	a	result,	the	overall	profitability	of	the	Company	in	any	given	period	will	depend,	in	part,	on	the product,	geographic,	and	channel	mix	reflected	in	that	period's	net	sales.

The	typical	concentration	of	net	sales	in	the	third	month	of	the	Company's	fiscal	quarters	can	adversely	affect	the	Company's	business	and	operating	results.

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'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	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	corporate	insurance.	Such	conditions	have	resulted	in	higher premium	costs,	higher	policy	deductibles,	and	lower	coverage	limits.	For	some	risks,	because	of	cost	and/or	availability,	the	Company	does	not	have	insurance	coverage.	For	these reasons,	the	Company	is	retaining	a	greater	portion	of	its	insurable	risks	than	it	has	in	the	past	at	relatively	greater	cost.

Business	interruptions	could	adversely	affect	the	Company's	future	operating	results.

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.	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.

Failure	of	the	Company's	information	technology	systems	and	breaches	in	the	security	of	data	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	by	its	implementation	of	sophisticated	network	security	and	internal	control	measures.	However,	there	can	be	no	assurance	that	a	system	failure	or data	security	breach	will	not	have	a	material	adverse	effect	on	the	Company's	results	of	operations.

# The	Company	is	exposed	to	credit	risk	on	its	accounts	receivables.	This	risk	is	heightened	as	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	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	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	California.	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	operation	and	financial	position.

# 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	SEC,	who	interpret	and	create	appropriate	accounting	regulations.	A	change	from	current	accounting	regulations	can	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	our	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	our	provision	for	income	taxes.	There	can	be	no	assurance	that	the	outcomes	from	these	continuous	examinations	will not	have	an	adverse	effect	on	its	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.	In	addition,	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.

The	Company's	acquisition	activity	could	disrupt	its	ongoing	business	and	may	present	risks	not	contemplated	at	the	time	of	the	transaction.

The	Company	has	acquired	and	may	continue	to	acquire	companies	that	have	products,	services,	personnel	and	technologies	that	complement	the	Company's	strategic	direction	and product	roadmap.	These	acquisitions	may	involve	significant	risks	and	uncertainties,	including	difficulties	in	incorporating	the	acquired	companies'	operations	and	technologies; distraction	of	management's	attention	away	from	normal	business	operations;	insufficient	revenue	generation	to	offset	liabilities	assumed	and	expenses	associated	with	acquisition;	and unidentified	issues	not	discovered	in	the	Company's	due	diligence	process,	including	product	quality	issues	and	legal	contingencies.	Acquisitions	are	inherently	risky,	and	no	assurance can	be	given	that	the	Company's	previous	or	future	acquisitions	will	be	successful	and	will	not	materially	adversely	affect	business,	operating	results	or	financial	condition.	The Company	has	generally	paid	cash	for	its	acquisitions.	Should	the	Company	issue	its	common	stock	or	other	equity	related	purchase	rights	as	consideration	in	an	acquisition,	current shareholders'	percentage	ownership	and	earnings	per	share	may	become	diluted.

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

# Interest	Rate	and	Foreign	Currency	Risk	Management

To	ensure	the	adequacy	and	effectiveness	of	the	Company's	foreign	exchange	and	interest	rate	hedge	positions,	as	well	as	to	monitor	the	risks	and	opportunities	of	the	non-hedge portfolios,	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,	respectively,	from	both	an	accounting	and	an	economic	perspective.	However,	given	the	effective horizons	of	the	Company's	risk	management	activities	and	the	anticipatory	nature	of	the	exposures	intended	to	hedge,	there	can	be	no	assurance	the	aforementioned	programs	will	offset more	than	a	portion	of	the	adverse	financial	impact	resulting	from	unfavorable	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.	The	Company	adopted	SFAS	No.	133	as	of	October	1,	2000.	SFAS	No.	133 established	accounting	and	reporting	standards	for	derivative	instruments,	hedging	activities,	and	exposure	definition.	Management	does	not	believe	that	ongoing	application	of	SFAS No.	133	will	significantly	alter	the	Company's	hedging	strategies.	However,	its	application	may	increase	the	volatility	of	other	income	and	expense	and	other	comprehensive	income.

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

# decisions	in	the	investment	process.

During	1994,	the	Company	issued	$300	million	aggregate	principal	amount	of	6.5%	unsecured	notes	in	a	public	offering	registered	with	the	SEC.	The	notes	were	sold	at	99.925%	of par,	for	an	effective	yield	to	maturity	of	6.51%.	The	notes	pay	interest	semiannually	and	mature	on	February	15,	2004.

The	Company's	exposure	to	market	risk	for	changes	in	interest	rates	relates	primarily	to	the	Company's	investment	portfolio	and	debt	obligations	and	related	derivative	financial instruments.	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	27,	2003,	approximately	$629	million	of	the	Company's	short-term	investments	had	underlying	maturities	ranging	from	1	and	5	years.	As	of	September	28,	2002, $1.087	billion	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.	Due	to	liquidity	needs,	or	in	anticipation	of	credit	deterioration,	or	for	the	purpose	of	duration	management	of	the	Company's	investment	portfolio,	the	Company	may sell	investments	prior	to	their	stated	maturities.	As	a	result	of	such	activity,	the	Company	recognized	net	gains	of	$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	27,	2003,	a	hypothetical	100	basis	point	increase	in	interest	rates	across	all	maturities	would	result	in	a	$12.9	million	decline	in	the	fair	market	value	of	the	portfolio.	As	of September	28,	2002,	a	similar	100	basis	point	shift	in	the	yield	curve	would	have	resulted	in	a	$37.7	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.

The	Company	sometimes	enters	into	interest	rate	derivative	transactions,	including	interest	rate	swaps,	collars,	and	floors,	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	may	also	enter	into	interest	rate	contracts	that	are	intended	to	reduce	the	cost	of	the	interest	rate	risk management	program.	The	Company	entered	into	no	interest	rate	asset	swaps	during	2003	or	2002	and	had	no	open	interest	rate	asset	swaps	at	September	27,	2003.

In	prior	years,	the	Company	had	entered	into	interest	rate	debt	swaps	with	financial	institutions.	The	interest	rate	debt	swaps,	which	qualified	as	accounting	hedges,	generally	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	and	convert	a	portion	of	the	floating	rate	investments	to	fixed	rate.	Due	to prevailing	market	interest	rates,	during	2002	the	Company	entered	into	and	then	subsequently	closed	out	debt	swap	positions	realizing	a	gain	of	$6	million.	During	2001	the	Company closed	out	all	of	its	then	existing	debt	swap	positions	realizing	a	gain	of	$17	million.	Both	the	gains	in	2002	and	2001	were	deferred,	recognized	in	long-term	debt	and	are	being amortized	to	other	income	and	expense	over	the	remaining	life	of	the	debt.

# Foreign	Currency	Risk

Overall,	the	Company	is	a	net	receiver	of	currencies	other	than	the	U.S.	dollar	and,	as	such,	generally	benefits	from	a	weaker	dollar	and	is	adversely	affected	by	a	stronger	dollar relative	to	major	currencies	worldwide.	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	within	the	time	frame	of	our	hedged	positions	due	to competitive	pressures	when	there	has	been	significant	volatility	in	foreign	currency	exchange	rates.

The	Company	enters	into	foreign	currency	forward	and	option	contracts	with	financial	institutions	primarily	to	protect	against	foreign	exchange	risks	associated	with	existing	assets	and liabilities,	certain	firmly	committed	transactions,	and	probable	but	not	firmly	committed	transactions.	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.	The	Company	also	enters	into	foreign	currency	forward	and	option	contracts	to	offset	the foreign	exchange	gains	and	losses	generated	by	the	re-measurement	of	certain	recorded	assets	and	liabilities	denominated	in	non-functional	currencies	of	its	foreign	subsidiaries.

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	$7.5	million	as	of	September	27,	2003	compared	to	a	maximum	one-day loss	of	$3.8	million	as	of	September	28,	2002.	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	27,	2003	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	27,	2003	and	September	28,	2002 | 56 |
| :--- | :--- |
| Consolidated\tStatements\tof\tOperations\tfor\tthe\tthree\tfiscal\tyears\tended\tSeptember\t27,\t2003 | 57 |
| Consolidated\tStatements\tof\tShareholders'\tEquity\tfor\tthe\tthree\tfiscal\tyears\tended\tSeptember\t27,\t2003 | 58 |
| Consolidated\tStatements\tof\tCash\tFlows\tfor\tthe\tthree\tfiscal\tyears\tended\tSeptember\t27,\t2003 | 59 |
| Notes\tto\tConsolidated\tFinancial\tStatements | 60 |
| Selected\tQuarterly\tFinancial\tInformation\t(Unaudited) | 100 |
| Report\tof\tIndependent\tAuditors,\tKPMG\tLLP | 102 |

All	financial	statement	schedules	have	been	omitted,	since	the	required	information	is	not	present	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	27,	2003 | September	28,	2002 |
| :--- | :--- | :--- |
| Current\tassets: |  |  |
| Cash\tand\tcash\tequivalents | $3,396 | $2,252 |
| Short-term\tinvestments | 1,170 | 2,085 |
| Accounts\treceivable,\tless\tallowances\tof\t$49\tand\t$51,\trespectively | 766 | 565 |
| Inventories | 56 | 45 |
| Deferred\ttax\tassets | 190 | 166 |
| Other\tcurrent\tassets | 309 | 275 |
| Total\tcurrent\tassets | 5,887 | 5,388 |
| Property,\tplant,\tand\tequipment,\tnet | 669 | 621 |
| Goodwill | 85 | 85 |
| Acquired\tintangible\tassets | 24 | 34 |
| Other\tassets | 150 | 170 |
| Total\tassets | $6,815 | $6,298 |
| LIABILITIES\tAND\tSHAREHOLDERS'\tEQUITY: |  |  |
| Current\tliabilities: |  |  |
| Accounts\tpayable | $1,154 | $911 |
| Accrued\texpenses | 899 | 747 |
| Current\tdebt | 304 | — |
| Total\tcurrent\tliabilities | 2,357 | 1,658 |
| Long-term\tdebt | — | 316 |
| Deferred\ttax\tliabilities\tand\tother\tnon-current\tliabilities | 235 | 229 |
| Total\tliabilities | 2,592 | 2,203 |
| Commitments\tand\tcontingencies |  |  |
| Shareholders'\tequity: |  |  |
| Common\tstock,\tno\tpar\tvalue;\t900,000,000\tshares\tauthorized;\t366,726,584\tand\t358,958,989\tshares\tissued\tand |  |  |
| outstanding,\trespectively | 1,926 | 1,826 |
| Deferred\tstock\tcompensation | (62) | (7) |
| Retained\tearnings | 2,394 | 2,325 |
| Accumulated\tother\tcomprehensive\tincome\t(loss) | (35) | (49) |
| Total\tshareholders'\tequity | 4,223 | 4,095 |
| Total\tliabilities\tand\tshareholders'\tequity | $6,815 | $6,298 |

# CONSOLIDATED	STATEMENTS	OF	OPERATIONS

(In	millions,	except	share	and	per	share	amounts)

| Three	fiscal	years	ended	September	27,	2003 | 2003 | 2002 | 2001 |
| :--- | :--- | :--- | :--- |
| Net\tsales | $6,207 | $5,742 | $5,363 |
| Cost\tof\tsales | 4,499 | 4,139 | 4,128 |
| Gross\tmargin | 1,708 | 1,603 | 1,235 |
| Operating\texpenses: |  |  |  |
| Research\tand\tdevelopment | 471 | 446 | 430 |
| Selling,\tgeneral,\tand\tadministrative | 1,212 | 1,109 | 1,138 |
| Restructuring\tcosts | 26 | 30 | — |
| Purchased\tin-process\tresearch\tand\tdevelopment | — | 1 | 11 |
| Total\toperating\texpenses | 1,709 | 1,586 | 1,579 |
| Operating\tincome\t(loss) | (1) | 17 | (344) |

| Gains	(losses)	on	non-current	investments,	net | 10 | (42) | 88 |
| :--- | :--- | :--- | :--- |
| Unrealized\tloss\ton\tconvertible\tsecurities | — | — | (13) |
| Interest\tand\tother\tincome,\tnet | 83 | 112 | 217 |
| Total\tother\tincome\tand\texpense | 93 | 70 | 292 |
| Income\t(loss)\tbefore\tprovision\tfor\t(benefit\tfrom)\tincome\ttaxes | 92 | 87 | (52) |
| Provision\tfor\t(benefit\tfrom)\tincome\ttaxes | 24 | 22 | (15) |
| Income\t(loss)\tbefore\taccounting\tchanges | 68 | 65 | (37) |
| Cumulative\teffects\tof\taccounting\tchanges,\tnet\tof\tincome\ttaxes | 1 | — | 12 |
| Net\tincome\t(loss) | $69 | $65 | $(25) |
| Earnings\t(loss)\tper\tcommon\tshare\tbefore\taccounting\tchanges: |  |  |  |
| Basic | $0.19 | $0.18 | $(0.11) |
| Diluted | $0.19 | $0.18 | $(0.11) |
| Earnings\t(loss)\tper\tcommon\tshare: |  |  |  |
| Basic | $0.19 | $0.18 | $(0.07) |
| Diluted | $0.19 | $0.18 | $(0.07) |
| Shares\tused\tin\tcomputing\tearnings\t(loss)\tper\tshare\t(in\tthousands): |  |  |  |
| Basic | 360,631 | 355,022 | 345,613 |
| Diluted | 363,466 | 361,785 | 345,613 |

See	accompanying	notes	to	consolidated	financial	statements.

# CONSOLIDATED	STATEMENTS	OF	SHAREHOLDERS'	EQUITY

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

|  | Shares | Preferred	Stock | Amount | Common	Stock<br>Shares | Amount | Retained<br>Earnings | Deferred	Stock<br>Compensation | Accumulated<br>Other<br>Comprehensive<br>Income	(Loss) |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Balances\tas\tof\tSeptember\t30,\t2000 |  | 76 | $76 | 335,677 | $1,502 | $2,285 | $— | $244 |
| Components\tof\tcomprehensive\tloss: |  |  |  |  |  |  |  |  |
| Net\tloss |  | — | — | — | — | (25) | — | — |
| Change\tin\tforeign\tcurrency\ttranslation |  | — | — | — | — | — | — | (3 |
| Change\tin\tunrealized\tgain\ton\tavailable-for-sale |  |  |  |  |  |  |  |  |
| securities,\tnet\tof\ttax |  | — | — | — | — | — | — | (267 |
| Change\tin\tunrealized\tgain\ton\tderivative |  |  |  |  |  |  |  |  |
| investments,\tnet\tof\ttax |  | — | — | — | — | — | — |  |
| Total\tcomprehensive\tloss |  |  |  |  |  |  |  |  |
| Issuance\tof\tcommon\tstock\tand\tassumption\tof\tstock |  |  |  |  |  |  |  |  |
| options\tin\tconnection\twith\tacquisition |  | — | — | 2,403 | 66 | — | (13) | — |
| Amortization\tof\tdeferred\tstock\tcompensation |  | — | — | — | — | — | 2 | — |
| Common\tstock\tissued\tunder\tstock\tplans |  | — | — | 3,660 | 42 | — | — | — |
| Conversion\tof\tSeries\tA\tpreferred\tstock |  | (76) | (76) | 9,182 | 76 | — | — | — |
| Tax\tbenefit\trelated\tto\tstock\toptions |  | — | — | — | 7 | — | — | — |
| Balances\tas\tof\tSeptember\t29,\t2001 |  | — | $— | 350,922 | $1,693 | $2,260 | $(11) | $(22 |
| Components\tof\tcomprehensive\tincome: |  |  |  |  |  |  |  |  |
| Net\tincome |  | — | — | — | — | 65 | — | — |
| Change\tin\tforeign\tcurrency\ttranslation |  | — | — | — | — | — | — |  |
| Change\tin\tunrealized\tgain\ton\tavailable-for-sale |  |  |  |  |  |  |  |  |
| securities,\tnet\tof\ttax |  | — | — | — | — | — | — | (17 |
| Change\tin\tunrealized\tgain\ton\tderivative |  |  |  |  |  |  |  |  |
| investments,\tnet\tof\ttax |  | — | — | — | — | — | — | (15 |
| Total\tcomprehensive\tincome |  |  |  |  |  |  |  |  |
| Amortization\tof\tdeferred\tstock\tcompensation |  | — | — | — | — | — | 4 | — |
| Common\tstock\tissued\tunder\tstock\tplans |  | — | — | 8,037 | 105 | — | — | — |
| Tax\tbenefit\trelated\tto\tstock\toptions |  | — | — | — | 28 | — | — | — |
| Balances\tas\tof\tSeptember\t28,\t2002 |  | — | $— | 358,959 | $1,826 | $2,325 | $(7) | $(49 |
| Components\tof\tcomprehensive\tincome: |  |  |  |  |  |  |  |  |
| Net\tincome |  | — | — | — | — | 69 | — | — |
| Change\tin\tforeign\tcurrency\ttranslation |  | — | — | — | — | — | — | 31 |
| Change\tin\tunrealized\tgain\ton\tavailable-for-sale |  |  |  |  |  |  |  |  |
| securities,\tnet\tof\ttax |  | — | — | — | — | — | — | (12 |
| Change\tin\tunrealized\tgain\ton\tderivative |  |  |  |  |  |  |  |  |
| investments,\tnet\tof\ttax |  | — | — | — | — | — | — | (5 |
| Total\tcomprehensive\tincome |  |  |  |  |  |  |  |  |
| Amortization\tof\tdeferred\tstock\tcompensation |  | — | — | — | — | — | 15 | — |
| Write-off\tof\tdeferred\tstock\tcompensation |  | — | — | — | — | — | 5 | — |
| Common\tstock\tissued\tunder\tstock\tplans |  | — | — | 9,299 | 128 | — | (75) | — |
| Settlement\tof\tforward\tpurchase\tagreement |  | — | — | (1,531) | (35) | — | — | — |
| Tax\tbenefit\trelated\tto\tstock\toptions |  | — | — | — | 7 | — | — | — |

# CONSOLIDATED	STATEMENTS	OF	CASH	FLOWS

# (In	millions)

| Three	fiscal	years	ended	September	27,	2003 | 2003 | 2002 | 2001 |
| :--- | :--- | :--- | :--- |
| Cash\tand\tcash\tequivalents,\tbeginning\tof\tthe\tyear | $2,252 | $2,310 | $1,191 |
| Operating\tActivities: |  |  |  |
| Net\tincome\t(loss) | 69 | 65 | (25) |
| Cumulative\teffects\tof\taccounting\tchanges,\tnet\tof\ttaxes | (1) | — | (12) |
| Adjustments\tto\treconcile\tnet\tincome\t(loss)\tto\tcash\tgenerated\tby\toperating\tactivities: |  |  |  |
| Depreciation,\tamortization\tand\taccretion | 113 | 114 | 100 |
| Stock\tbased\tcompensation\texpense | 16 | 5 | 2 |
| Non-cash\trestructuring | 12 | 8 | — |
| Benefit\tfrom\tdeferred\tincome\ttaxes | (11) | (34) | (36) |
| Loss\ton\tdisposition\tof\tproperty,\tplant,\tand\tequipment | 2 | 7 | 9 |
| Gains\ton\tsales\tof\tshort-term\tinvestments,\tnet | (21) | (7) | — |
| (Gains)\tlosses\ton\tsales\tof\tnon-current\tinvestments,\tnet | (10) | 42 | (88) |
| Gain\ton\tforward\tpurchase\tagreement | (6) | — | — |
| Unrealized\tloss\ton\tconvertible\tsecurities | — | — | 13 |
| Purchased\tin-process\tresearch\tand\tdevelopment\nChanges\tin\toperating\tassets\tand\tliabilities: | — | 1 | 11 |
| Accounts\treceivable | (201) | (99) | 487 |
| Inventories | (11) | (34) | 22 |
| Other\tcurrent\tassets | (34) | (114) | 106 |
| Other\tassets | (30) | (11) | 12 |
| Accounts\tpayable | 243 | 110 | (356) |
| Other\tliabilities | 159 | 36 | (60) |
| Cash\tgenerated\tby\toperating\tactivities | 289 | 89 | 185 |
| Investing\tActivities: |  |  |  |
| Purchases\tof\tshort-term\tinvestments | (2,648) | (4,144) | (4,268) |
| Proceeds\tfrom\tmaturities\tof\tshort-term\tinvestments | 2,446 | 2,846 | 4,811 |
| Proceeds\tfrom\tsales\tof\tshort-term\tinvestments | 1,116 | 1,254 | 278 |
| Proceeds\tfrom\tsales\tof\tnon-current\tinvestments | 45 | 25 | 340 |
| Purchases\tof\tproperty,\tplant,\tand\tequipment | (164) | (174) | (232) |
| Cash\tused\tfor\tbusiness\tacquisitions | — | (52) | (19) |
| Other | 33 | (7) | (18) |
| Cash\tgenerated\tby\t(used\tfor)\tinvesting\tactivities | 828 | (252) | 892 |
| Financing\tActivities: |  |  |  |
| Proceeds\tfrom\tissuance\tof\tcommon\tstock | 53 | 105 | 42 |
| Cash\tused\tfor\trepurchase\tof\tcommon\tstock | (26) | — | — |
| Cash\tgenerated\tby\tfinancing\tactivities | 27 | 105 | 42 |
| Increase\t(decrease)\tin\tcash\tand\tcash\tequivalents | 1,144 | (58) | 1,119 |
| Cash\tand\tcash\tequivalents,\tend\tof\tthe\tyear | $3,396 | $2,252 | $2,310 |
| Supplemental\tcash\tflow\tdisclosures: |  |  |  |
| Cash\tpaid\tduring\tthe\tyear\tfor\tinterest | $20 | $20 | $20 |
| Cash\tpaid\tfor\tincome\ttaxes,\tnet | $45 | $11 | $42 |
| Noncash\ttransactions: |  |  |  |
| Issuance\tof\tcommon\tstock\tfor\tconversion\tof\tSeries\tA\tpreferred\tstock | $— | $— | $76 |
| Issuance\tof\tcommon\tstock\tin\tconnection\twith\tacquisition | $— | $— | $66 |

# NOTES	TO	CONSOLIDATED	FINANCIAL	STATEMENTS

# Note	1—Summary	of	Significant	Accounting	Policies

Apple	Computer,	Inc.	and	its	subsidiaries	(the	Company)	designs,	manufactures	and	markets	personal	computers	and	related	software,	peripherals	and	personal	computing	and communicating	solutions.	The	Company's	products	include	the	Macintosh	line	of	desktop	and	notebook	computers,	the	Mac	OS	X	operating	system,	the	iPod	digital	music	player,	and	a portfolio	of	software	products	and	peripherals	for	education,	creative,	consumer	and	business	customers.	The	Company	sells	its	products	through	its	online	stores,	direct	sales	force, third-party	wholesalers	and	resellers,	and	its	own	retail	stores.

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	2003,	2002	and	2001	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.	All	information	presented	herein	is	based	on	the Company's	fiscal	calendar.

# Financial	Instruments

# Cash	Equivalents	and	Short-term	Investments

The	Company	places	its	short-term	investments	in	highly	liquid	securities	issued	by	high	credit	quality	issuers.	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.

# Non-Current	Debt	and	Equity	Investments

The	Company	has	made	investments	in	non-current	debt	and	equity	investments	of	public	and	privately	held	companies	that	have	been	reflected	in	the	consolidated	balance	sheets	as long-term	assets	within	other	assets.	They	are	not	categorized	as	current	assets	either	because,	given	their	nature,	they	are	not	readily	convertible	into	cash	or	because	they	represent potentially	longer-term	investments	by	the	Company.	Further,	the	fair	value	of	these	investments	has	been	subject	to	a	high	degree	of	volatility.	The	Company's	non-current	debt	and equity	investments	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.	However,	the	Company	recognizes	an	impairment	charge	to	earnings	in	the	event	a	decline	in	fair	value	below	the	cost	basis	of one	of	these	investments	is	determined	to	be	other-than-temporary.	The	Company	includes	recognized	gains	and	losses	resulting	from	the	sale	or	from	other-than-temporary	declines	in fair	value	associated	with	these	investments	in	other	income	and	expense.	Occasionally,	the	Company	uses	short-term	equity	derivatives	to

manage	potential	dispositions	of	non-current	debt	and	equity	investments.	Any	gains	or	losses	associated	with	such	derivatives	are	recognized	currently	in	other	income	and	expense.

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

On	October	1,	2000,	the	Company	adopted	SFAS	No.	133,	Accounting	for	Derivative	Instruments	and	Hedging	Activities.	SFAS	No.	133	establishes	accounting	and	reporting	standards for	derivative	instruments,	hedging	activities,	and	exposure	definition.	SFAS	No.	133	requires	that	all	derivatives	be	recognized	as	either	assets	or	liabilities	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.	Net	of	the	related	income	tax	effect	of	approximately	$5	million,	adoption	of	SFAS	No.	133	resulted	in	a	favorable	cumulative-effect	type	adjustment	to	net	income	of approximately	$12	million.	Net	of	the	related	income	tax	effect	of	approximately	$5	million,	adoption	of	SFAS	No.	133	resulted	in	a	favorable	cumulative-effect-type	adjustment	to other	comprehensive	income	of	approximately	$12	million,	all	of	which	was	reclassified	to	earnings	during	2001.	Management	does	not	believe	that	ongoing	application	of	SFAS No.	133	will	significantly	alter	the	Company's	hedging	strategies.	However,	its	application	may	increase	the	volatility	of	other	income	and	expense	and	other	comprehensive	income.

For	derivative	instruments	that	hedge	the	exposure	to	variability	in	expected	future	cash	flows	that	are	attributable	to	a	particular	risk	and	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	or	an	identified	portion	thereof	that	are attributable	to	a	particular	risk	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.

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	measured	based	on	changes	in	the total	fair	value	of	the	option	contract.	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	defined	in	SFAS	No.	133.

# 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	declining	balance	and	straight-line	methods	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.

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.	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	liability	for	fiscal	2003	(in	millions):

| Asset	retirement	liability	recorded	at	September	29,	2002 | $5.5 |
| :--- | :--- |
| Additional\tasset\tretirement\tobligations\trecognized | 0.5 |
| Accretion\trecognized | 1.2 |
| Asset\tretirement\tliability\tas\tof\tSeptember\t27,\t2003 | $7.2 |

# 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	27,	2003,	the	Company	has	made	no	material	adjustments	to	its	long-lived	assets, except	those	made	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	at	August	30,	2003	and	August	30,	2002,	respectively,	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.	101,	Revenue	Recognition	in	Financial	Statements.

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	United	States,	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	and	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	vendor	specific	objective	evidence	(VSOE)	of the	fair	value	of	each	element.	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	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"), 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	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.

During	2001	the	Company	incurred	substantial	development	costs	associated	with	the	development	of	the	original	version	of	Mac	OS	X,	subsequent	to	release	of	a	public	beta	version of	the	product	and	prior	to	release	of	the	final	product	version.	As	a	result,	the	Company	capitalized	approximately	$5.4	million	of	development	costs	during	2001	associated	with development	of	Mac	OS	X.	Related	amortization	is

computed	by	use	of	the	straight-line	method	in	accordance	with	SFAS	No.	86	over	a	8	year	estimated	useful	life.

Total	amortization	related	to	capitalized	software	development	costs	was	$5.8	million,	$1.2	million	and	$350,000	in	2003,	2002	and	2001,	respectively.

# Advertising	Costs

Advertising	costs	are	expensed	as	incurred.	Advertising	expense	was	$193	million,	$209	million,	and	$261	million	for	2003,	2002,	and	2001,	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	purchases	have	been	estimated	at	the	date	of	grant	and	beginning	of	the	period,	respectively,	using	a	Black-Scholes	option	pricing	model.	For	purposes	of	pro	forma disclosures,	the	estimated	fair	value	of	the	options	and	shares	is	amortized	to	pro	forma	net	income	over	the	options'	vesting	period	and	the	shares'	plan	period.

The	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):

|  | 2003 | 2002 | 2001 |
| :--- | :--- | :--- | :--- |
| Net\tincome\t(loss)—as\treported | $69 | $65 | $(25) |
| Add:\tStock-based\temployee\tcompensation\texpense\tincluded\tin\treported\tnet\tincome\t(loss), |  |  |  |
| net\tof\ttax | 15 | 5 | 2 |
| Deduct:\tStock-based\temployee\tcompensation\texpense\tdetermined\tunder\tthe\tfair\tvalue |  |  |  |
| based\tmethod\tfor\tall\tawards,\tnet\tof\ttax | (181) | (234) | (373) |

| Net	loss—pro	forma | $(97) | $(164) | $(396) |
| :--- | :--- | :--- | :--- |
| Net\tincome\t(loss)\tper\tcommon\tshare—as\treported |  |  |  |
| Basic | $0.19 | $0.18 | $(0.07) |
| Diluted | $0.19 | $0.18 | $(0.07) |
| Net\tloss\tper\tcommon\tshare—pro\tforma |  |  |  |
| Basic | $(0.27) | $(0.46) | $(1.15) |
| Diluted | $(0.27) | $(0.46) | $(1.15) |

# 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	and	restricted	stock	is	reflected	in	diluted	earnings	per	share	by	application	of	the	treasury	stock	method.	Dilutive	potential shares	of	common	stock	related	to	stock	options	were	excluded	from	the	calculation	of	diluted	loss	per	common	share	for	fiscal	2001	because	their	effect	would	have	been	antidilutive.

| For	the	Years	Ended | September	27,<br>2003 | September	28,<br>2002 | September	29,<br>2001 |
| :--- | :--- | :--- | :--- |
| Numerator\t(in\tmillions): |  |  |  |
| Income\t(loss)\tbefore\taccounting\tchanges | $68 | $65 | $(37) |
| Cumulative\teffects\tof\taccounting\tchanges,\tnet\tof\tincome\ttaxes | $1 | $— | $12 |
| Net\tincome\t(loss) | $69 | $65 | $(25) |
| Denominator\t(in\tthousands): |  |  |  |
| Weighted-average\tshares\toutstanding | 360,631 | 355,022 | 345,613 |
| Effect\tof\tdilutive\toptions\tand\tdilutive\trestricted\tstock | 2,835 | 6,763 | — |
| Denominator\tfor\tdiluted\tearnings\t(loss)\tper\tshare | 363,466 | 361,785 | 345,613 |
| Basic\tearnings\t(loss)\tper\tshare\tbefore\taccounting\tchanges | $0.19 | $0.18 | $(0.11) |
| Cumulative\teffects\tof\taccounting\tchanges,\tnet\tof\ttax | — | — | $0.04 |
| Basic\tearnings\t(loss)\tper\tshare\tafter\taccounting\tchanges | $0.19 | $0.18 | $(0.07) |
| Diluted\tearnings\t(loss)\tper\tshare\tbefore\taccounting\tchanges | $0.19 | $0.18 | $(0.11) |
| Cumulative\teffects\tof\taccounting\tchanges,\tnet\tof\ttax | — | — | $0.04 |
| Diluted\tearnings\t(loss)\tper\tshare\tafter\taccounting\tchanges | $0.19 | $0.18 | $(0.07) |

Options	to	purchase	50.8	million	and	58.0	million	shares	of	common	stock	were	outstanding	at	the	end	of	2003	and	2002,	respectively,	that	were	not	included	in	the	computation	of diluted	earnings	per	share	for	that	year	because	the	options'	exercise	price	was	greater	than	the	average	market	price	of	the	Company's	common	shares	for	that	year	and,	therefore,	the effect	would	be	antidilutive.	At	September	29,	2001,	the	Company	had	options	to	purchase	97.2	million	shares	of	its	common	stock	outstanding,	all	of	which	were	excluded	from	the computation	of	diluted	loss	per	share	for	2001	because	the	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	27,	2003,	and	September	28,	2002	(in	millions):

| U.S.	Treasury	and	Agency	securities | 87 | 47 |
| :--- | :--- | :--- |
| U.S.\tcorporate\tsecurities | 2,368 | 1,828 |
| Foreign\tsecurities | 783 | 216 |
| Total\tcash\tequivalents | 3,238 | 2,091 |
| U.S.\tTreasury\tand\tAgency\tsecurities | 454 | 674 |
| U.S.\tcorporate\tsecurities | 623 | 1,330 |
| Foreign\tsecurities | 93 | 81 |
| Total\tshort-term\tinvestments | 1,170 | 2,085 |
| Total\tcash,\tcash\tequivalents,\tand\tshort-term\tinvestments | $4,566 | $4,337 |

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	$1	million	on its	investment	portfolio,	primarily	related	to	investments	with	stated	maturities	greater	than	1	year	as	of	September	27,	2003	and	net	unrealized	gains	of	$20	million	on	its	investment portfolio,	primarily	related	to	investments	with	stated	maturities	greater	than	1	year,	as	of	September	28,	2002.	The	Company	occasionally	sells	short-term	investments	prior	to	their stated	maturities.	As	a	result	of	such	sales,	the	Company	recognized	net	gains	of	$21	million	in	2003	and	$7	million	in	2002.	These	net	gains	were	included	in	interest	and	other	income, net.

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.	As	of	September	28,	2002,	approximately	$1.087	billion	of	the	Company's	short-term	investments	had underlying	maturities	ranging	from	1	to	5	years.	The	remaining	short-term	investments	as	of	September	28,	2002	had	maturities	of	3	to	12	months.

# 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	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.	Trade	receivables	from	a	single	customer,	Ingram	Micro,	Inc.,	accounted	for	approximately	10.3%	and	10.8%	of	net	accounts	receivable	as	of	September	27, 2003,	and	September	28,	2002,	respectively.

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

|  | 2003 | 2002 | 2001 |
| :--- | :--- | :--- | :--- |
| Beginning\tallowance\tbalance | $51 | $51 | $64 |
| Charged\tto\tcosts\tand\texpenses | 4 | 10 | 7 |
| Deductions\t(a) | (6) | (10) | (20) |
| Ending\tallowance\tbalance | $49 | $51 | $51 |

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

# 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	$184	million	and	$142	million	as	of	September	27,	2003,	and	September	28,	2002,	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.	Approximately	$53	million	of	this deposit	remained	unused	as	of	September	28,	2002	and	was	reflected	in	the	consolidated	balance	sheets	in	other	current	assets.	During	the	first	six	months	of	2003,	the	remainder	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	revenues	and	cost	of	sales. From	time	to	time,	the	Company	enters	into	interest	rate	swap	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	27,	2003	and	September	28, 2002	(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 | $464 | $(21) | $— | $462 | $1 | $1 |
| Purchased\toptions | $512 | $3 | $3 | $196 | $— | $— |
| Sold\toptions | $645 | $(8) | $— | $392 | $(4) | $— |
| Foreign\texchange\tinstruments\tother\tthan\taccounting\thedges: |  |  |  |  |  |  |
| Spot/Forward\tcontracts | $445 | $3 | $3 | $302 | $— | $— |
| Purchased\toptions | $8 | $— | $— | $— | $— | $— |
| Sold\toptions | $5 | $— | $— | $— | $— | $— |

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	27,	2003	and	September	28,	2002. 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	enters	into	foreign	currency	forward	and	option	contracts	with	financial	institutions	primarily	to	protect	against	foreign	exchange	risk	associated	with	existing	assets	and liabilities,	certain	firmly	committed	transactions	and	certain	probable	but	not	firmly	committed	transactions.	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.

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	currency	forward	contracts,	hedge	effectiveness	is	measured	based	on	changes	in	the	total	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	measured	based	on	changes	in	the	total	fair	value	of	the	option	contract.	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.

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.

The	Company	also	enters	into	foreign	currency	forward	and	option	contracts	to	offset	the	foreign	exchange	gains	and	losses	generated	by	the	re-measurement	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.

The	Company	may	enter	into	foreign	currency	forward	contracts	to	offset	the	translation	and	economic	exposure	of	a	net	investment	position	in	a	foreign	subsidiary.	Hedge effectiveness	on	forwards	designated	as	net	investment	hedges	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.

As	discussed	above,	the	Company	enters	into	foreign	currency	option	contracts	as	items	that	provide	an	offset	to	the	re-measurement	of	certain	recorded	assets	and	liabilities denominated	in	non-functional	currencies.	All	changes	in	the	fair	value	of	these	derivative	contracts	based	on	changes	in	option	time	value	are	recorded	in	current	earnings	in	other income	and	expense.	Due	to	market	movements,	changes	in	option	time	value	can	lead	to	increased	volatility	in	other	income	and	expense.

Derivative	instruments	designated	as	cash	flow	hedges	must	be	de-designated	as	hedges	when	it	is	probable	that	the	forecasted	hedged	transaction	will	not	occur	in	the	initially identified	time	period	or	within	a	subsequent	2	month	time	period.	Deferred	gains	and	losses	in	other	comprehensive	income	associated	with

such	derivative	instruments	are	immediately	reclassified	into	earnings	in	other	income	and	expense.	Any	subsequent	changes	in	fair	value	of	such	derivative	instruments	are	also reflected	in	current	earnings	unless	they	are	re-designated	as	hedges	of	other	transactions.	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.	During	2001,	the	Company	recorded	a	net	gain	of	$5.1	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.	No	net	gains,	or	losses,	of	a	similar	nature	were	recorded	in	2003.

# Interest	Rate	Risk	Management

The	Company	sometimes	enters	into	interest	rate	derivative	transactions,	including	interest	rate	swaps,	collars,	and	floors,	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	long-term	debt,	and/or	to	diversify	a	portion	of	the Company's	exposure	away	from	fluctuations	in	short-term	U.S.	interest	rates.

As	of	September	30,	2000,	the	Company	had	entered	into	interest	rate	swaps	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	long-term	debt,	and	to	diversify	a	portion	of	the	Company's	exposure	away	from	fluctuations	in	short- term	U.S.	interest	rates.	The	interest	rate	swaps	generally	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	and	converted	a portion	of	the	floating	rate	investments	to	fixed	rate.	The	Company	assumed	no	ineffectiveness	with	regard	to	the	debt	interest	swaps	as	each	debt	interest	rate	swap	met	the	criteria	for accounting	under	the	short-cut	method	defined	in	SFAS	No.	133	for	fair	value	hedges	of	debt	instruments.	Accordingly,	no	net	gains	or	losses	were	recorded	in	income	relative	to	the Company's	underlying	debt	interest	rate	swaps.	During	fiscal	2001,	the	Company	closed	out	all	of	its	existing	debt	interest	rate	swap	positions	due	to	prevailing	market	interest	rates

realizing	a	gain	of	$17	million.	This	gain	was	deferred,	recognized	in	long-term	debt	and	is	being	amortized	to	other	income	and	expense	over	the	remaining	life	of	the	debt.

The	unrealized	loss	on	the	asset	swaps	as	of	September	30,	2000,	of	$5.7	million	was	deferred	and	then	recognized	in	income	in	2001	as	part	of	the	SFAS	No.	133	transition	adjustment effective	on	October	1,	2000.	The	Company	closed	out	all	of	its	existing	interest	rate	asset	swaps	during	2001	realizing	a	gain	of	$1.1	million.

As	of	September	27,	2003	and	September	28,	2002,	the	Company	had	no	interest	rate	derivatives	outstanding.	Due	to	perceived	market	risk,	the	Company	entered	into	interest	rate swaps	in	early	2002.	The	interest	rate	swaps	required	the	Company	to	pay	a	floating	interest	rate	based	on	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.	The	Company	assumed	no	ineffectiveness with	regard	to	the	debt	interest	swaps	as	each	debt	interest	rate	swap	met	the	criteria	for	accounting	under	the	short-cut	method	defined	in	SFAS	No.	133	for	fair	value	hedges	of	debt instruments.	Accordingly,	no	net	gains	or	losses	were	recorded	in	income	relative	to	the	Company's	underlying	debt	interest	rate	swaps	during	fiscal	2002	until	the	Company	closed	out the	positions	in	late	2002	due	to	prevailing	market	interest	rates.	Closing	the	debt	interest	rate	swaps	resulted	in	a	realized	gain

of	$6	million.	This	gain	was	deferred,	recognized	in	long-term	debt	and	is	being	amortized	to	other	income	and	expense	over	the	remaining	life	of	the	debt.

The	Company	currently	has	debt	outstanding	in	the	form	of	$300	million	of	aggregate	principal	amount	6.5%	unsecured	notes	that	were	originally	issued	in	1994.	The	notes,	which	pay interest	semiannually,	were	sold	at	99.925%	of	par,	for	an	effective	yield	to	maturity	of	6.51%.	The	notes,	along	with	approximately	$4	million	of	related	unamortized	deferred	gains	on closed	interest	rate	swaps,	are	due	in	February	of	2004	and	therefore	have	been	classified	as	current	debt	as	of	September	27,	2003.	As	of	September	27,	2003	and	September	28,	2002, the	carrying	amount	of	these	notes,	including	unamortized	deferred	gains	associated	with	closed	debt	interest	rate	swaps,	was	$304	million	and	$316	million,	respectively,	while	the	fair value	was	$302	million	and	$299	million,	respectively.	The	fair	value	of	the	notes	is	based	on	their	listed	market	values	as	of	September	27,	2003	and	September	28,	2002.

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

The	Company	has	held	investments	in	EarthLink,	Inc.	(EarthLink),	Akamai	Technologies,	Inc.	(Akamai),	ARM	Holdings	plc	(ARM),	and	Samsung	Electronics	Co.,	Ltd	(Samsung). 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	total	other	income	and	expense.	The	combined	fair	value	of	these	investments	held	by	the	Company	was	$5	million	and	$39	million	as	of September	27,	2003	and	September	28,	2002,	respectively.

# 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	United	States.	Under	the	terms	of	the	agreement,	the	Company	profits	from	each	new	Mac 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	United	States.

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.

During	the	second	quarter	of	2001,	the	Company	determined	that	the	decline	in	the	fair	value	of	its	investment	in	EarthLink	was	other-than-temporary	requiring	that	its	cost	basis	be written	down	to	fair	value	as	a	new	cost	basis	and	the	amount	of	the	write-down	be	included	in	earnings.	As	a	result,	the	Company	recognized	a	$114	million	charge	to	earnings	to write-down	the	basis	of	its	investment	in	EarthLink	to	$86	million.	This	charge	was	included	in	gains	(losses)	on	non-current	investments,	net.	During	the	fourth	quarter	of	2001,	the Company	sold	a	total	of	approximately	425,000	shares	of	EarthLink	stock	for	net	proceeds	of	approximately	$6	million,	recorded	a	gain	before	taxes	of	approximately	$800,000,	and recognized	related	income	tax	of	approximately	$200,000.

# 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	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	consists	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	that	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.	As	of	September	28,	2002,	the	Company	held	2.9	million	shares	of	Akamai	stock	valued	at	$3	million.

During	2001,	the	Company	sold	a	total	of	approximately	1	million	shares	of	Akamai	stock	for	net	proceeds	of	approximately	$39	million	and	recorded	a	gain	before	taxes	of approximately	$36	million.

ARM	is	a	publicly	held	company	in	the	United	Kingdom	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.	As	of	September	28,	2002,	the	Company	held	278,000	shares	of	ARM	stock	valued	at	$578,000.

During	2001,	the	Company	sold	a	total	of	approximately	29.8	million	shares	of	ARM	stock	for	net	proceeds	of	approximately	$176	million,	recorded	a	gain	before	taxes	of approximately	$174	million,	and	recognized	related	income	tax	expense	of	approximately	$52	million.

# Samsung

During	the	fourth	quarter	of	1999,	the	Company	invested	$100	million	in	Samsung	to	assist	in	the	further	expansion	of	Samsung's	TFT-LCD	flat-panel	display	production	capacity.	The investment	was	in	the	form	of	three	year	unsecured	bonds,	which	were	convertible	into	approximately	550,000	shares	of	Samsung	common	stock	beginning	in	July	2000.	The	bonds carried	an	annual	coupon	rate	of	2%	and	paid	a	total	yield	to	maturity	of	5%	if	redeemed	at	maturity.

Prior	to	its	sale,	the	Company	had	categorized	its	investment	in	Samsung	as	available-for-sale	requiring	that	it	be	carried	at	fair	value	with	unrealized	gains	and	losses,	net	of	taxes, reported	in	equity	as	a	component	of	accumulated	other	comprehensive	income.	The	fair	value	of	the	Company's	investment	in	Samsung	was	approximately	$123	million	as	of September	30,	2000.	With	the	adoption	of	SFAS	No.	133	on	October	1,	2000,	the	Company	was	required	to	account	for	the	conversion	option	embedded	in	the	Samsung	bonds separately	from	the	related	debt.	The	conversion	feature	was	carried	at	fair	value	with	any	changes	in	fair	value	recognized	in	earnings	in	the	period	in	which	they	occur.	Included	in	the $17	million	gross	SFAS	No.	133	transition	adjustment	recorded	in	earnings	during	the	first	quarter	of	fiscal	2001	was	a	$23	million	favorable	adjustment	for	the	restatement	to	fair	value as	of	October	1,	2000,	of	the	derivative	component	of	the	Company's	investment	in	Samsung.	To	adjust	the	carrying	value	of	the	derivative	component	of	its	investment	in	Samsung	to fair	value	as	of	December	30,	2000,	the	Company	recognized	an	unrealized	loss	of	approximately	$13	million	during	the	first	quarter	of	2001.	During	the	second	quarter	of	2001,	the Company	sold	this	investment	for	book	value,	including	accrued	interest,	and	received	net	proceeds	of	approximately	$117	million.

# 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	and	2001,	the	Company determined	that	the	decline	in	fair	value	of	certain	of	these	investments	was	other-than-temporary	and,	accordingly,	recognized	a	charge	to	earnings	of	$15	million	and	$8	million, respectively.	These	charges	were	included	in	gains	(losses)	on	non-current	investments,	net.	As	of	September	27,	2003	and	September	28,	2002,	the	Company	had	no	private	debt	or equity	investments	reflected	in	its	consolidated	balance	sheets.

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

|  | 2003 | 2002 |
| :--- | :--- | :--- |
| Purchased\tparts | $2 | $9 |
| Work\tin\tprocess | 4 | — |
| Finished\tgoods | 50 | 36 |
| Total\tinventories | $56 | $45 |

# Other	Current	Assets

|  | 2003 | 2002 |
| :--- | :--- | :--- |
| Vendor\tnon-trade\treceivables | $184 | $142 |
| Other\tcurrent\tassets | 125 | 133 |
| Total\tother\tcurrent\tassets | $309 | $275 |

|  | 2003 | 2002 |
| :--- | :--- | :--- |
| Land\tand\tbuildings | $350 | $342 |
| Machinery,\tequipment,\tand\tinternal-use\tsoftware | 393 | 367 |
| Office\tfurniture\tand\tequipment | 74 | 67 |
| Leasehold\timprovements | 357 | 281 |
|  | 1,174 | 1,057 |
| Accumulated\tdepreciation\tand\tamortization | (505) | (436) |
| Net\tproperty,\tplant,\tand\tequipment | $669 | $621 |

# Other	Assets

|  | 2003 | 2002 |
| :--- | :--- | :--- |
| Non-current\tdeferred\ttax\tassets | $60 | $70 |
| Non-current\tdebt\tand\tequity\tinvestments | 5 | 39 |
| Capitalized\tsoftware\tdevelopment\tcosts,\tnet | 28 | 19 |
| Other\tassets | 57 | 42 |
| Total\tother\tassets | $150 | $170 |

# Accrued	Expenses

|  | 2003 | 2002 |
| :--- | :--- | :--- |
| Deferred\trevenue | $368 | $240 |
| Accrued\tmarketing\tand\tdistribution | 124 | 136 |
| Accrued\tcompensation\tand\temployee\tbenefits | 101 | 93 |
| Accrued\twarranty\tand\trelated\tcosts | 67 | 69 |
| Other\tcurrent\tliabilities | 239 | 209 |

|  | 2003 | 2002 | 2001 |
| :--- | :--- | :--- | :--- |
| Interest\tincome | $69 | $118 | $218 |
| Interest\texpense | (8) | (11) | (16) |
| Gains\ton\tsales\tof\tshort\tterm\tinvestments | 21 | 7 | — |
| Other\tincome\t(expense)\tnet | (5) | (2) | 15 |
| Gain\ton\tforward\tpurchase\tagreement | 6 | — | — |
| Total\tinterest\tand\tother\tincome,\tnet | $83 | $112 | $217 |

# 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	Carrying<br>Amount | Accumulated<br>Amortization | Net<br>Carrying<br>Amount | Gross	Carrying<br>Amount | Accumulated<br>Amortization | Net	Carrying<br>Amount |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Goodwill\t(a) | $85 | — | $85 | $85 | — | $85 |
| Other\tacquired\tintangible\tassets | 5 | (5) | — | 5 | (5) | — |
| Acquired\ttechnology | 42 | (18) | 24 | 42 | (8) | 34 |
| Total\tacquired\tintangible\tassets | $132 | $(23) | $109 | $132 | $(13) | $119 |

(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	27,	2003	and	September	28,	2002.

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

| (a) |  |
| :--- | :--- |
| September\t27,\t2003\tand\tSeptember\t28,\t2002. |  |
| Expected\tannual\tamortization\texpense\trelated\tto\tacquired\ttechnology\tis\tas\tfollows\t(in\tmillions): |  |
| Fiscal\tYears: |  |
| 2004 | $7 |
| 2005 | 5 |
| 2006 | 3 |
| 2007 | 2 |
| Thereafter | 7 |
| Total\texpected\tannual\tamortization\texpense | $24 |

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

|  | 2003 | 2002 | 2001 |
| :--- | :--- | :--- | :--- |
| Goodwill\tamortization | $—\t $— | $—\t $— | $16 |
| Other\tacquired\tintangible\tassets\tamortization | — | 1 | 3 |
| Acquired\ttechnology\tamortization | 10 | 5 | 2 |
| Total\tamortization | $10 | $6 | $21 |

Net	loss	and	net	loss	per	share	adjusted	to	exclude	amortization	of	goodwill	in	fiscal	periods	prior	to	the	adoption	of	SFAS	No.	142	in	fiscal	2002	follows	(in	millions,	except	per	share amounts):

| Diluted	loss	per	share,	as	reported | $(0.07) |
| :--- | :--- |
| Add:\tgoodwill\tamortization | $0.04 |
| Diluted\tloss\tper\tshare,\tas\tadjusted | $(0.03) |

# 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	will	be	allocated	to	future	compensation	expense	in	the	appropriate	periods	over	the	next	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	will	be allocated	to	compensation	expense	over	the	next	3	years,	has	been	allocated	to	acquired	technology	and	will	be	amortized	on	a	straight-line	basis	over	3	years,	except	for	certain	assets acquired	from	Zayante	associated	with	patent	royalty	streams	that	will	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,	will	be	allocated	to	future	compensation	expense	in	the	appropriate	periods	over	the	next	3	years.

# Acquisition	of	Spruce	Technologies,	Inc.

In	July	2001,	the	Company	acquired	Spruce	Technologies,	Inc.	(Spruce),	a	privately-held	company	that	develops	and	markets	DVD	authoring	products,	for	$14.9	million	in	cash. Goodwill	associated	with	the	acquisition	of	Spruce	is	not	subject	to	amortization	pursuant	to	the	transition	provisions	of	SFAS	No.	142.	The	consolidated	financial	statements	include the	operating	results	of	Spruce	from	the	date	of	acquisition.	Total	consideration	was	allocated	as	follows	(in	millions):

# Acquisition	of	PowerSchool,	Inc.

In	May	2001,	the	Company	acquired	PowerSchool,	Inc.	(PowerSchool),	a	provider	of	web-based	student	information	systems	for	K-12	schools	and	districts	that	enable	schools	to record,	access,	report,	and	manage	their	student	data	and	performance	in	real-time,	and	gives	parents	real-time	web	access	to	track

their	children's	progress.	The	consolidated	financial	statements	include	the	operating	results	of	PowerSchool	from	the	date	of	acquisition.

The	purchase	price	of	approximately	$66.1	million	consisted	of	the	issuance	of	approximately	2.4	million	shares	of	the	Company's	common	stock	with	a	fair	value	of	$61.2	million,	the issuance	of	stock	options	with	a	fair	value	of	$4.5	million,	and	$300,000	of	direct	transaction	costs.	The	fair	value	of	the	common	stock	options	issued	was	determined	using	a	Black-

Scholes	option	pricing	model	with	the	following	assumptions:	volatility	of	67%,	expected	life	of	4	years,	dividend	rate	of	0%,	and	risk-free	rate	of	4.73%.

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	to	technologies	representing	processes	and	expertise	employed	to	design,	develop,	and	deploy	a	functioning,	scalable	web-based student	information	system	for	use	by	K-12	schools.	At	the	date	of	the	acquisition,	the	product	under	development	was	approximately	50%	complete,	and	it	was	expected	that	the remaining	50%	would	be	completed	during	the	Company's	fiscal	2002	at	a	cost	of	approximately	$9.25	million.	The	remaining	efforts,	which	were	completed	in	2002,	included completion	of	coding,	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%.	The	acquired	intangibles	are	being	amortized	over	their	estimated	useful	lives	of	3	years.	Deferred	stock	compensation	associated	with restricted	stock	and	options	is	being	amortized	over	the	required	future	vesting	period	of	3	years.

In	the	fourth	quarter	of	2001,	an	adjustment	was	made	to	increase	goodwill	associated	with	the	acquisition	of	PowerSchool	by	$5.9	million	due	to	the	identification	of	previously unidentified	loss	contingencies	that	were	in	existence	prior	to	consummation	of	the	acquisition.

The	Company	allocated	$12.8	million	of	its	purchase	consideration	for	PowerSchool	to	deferred	stock	compensation	within	shareholders'	equity.	This	amount	represented	the	intrinsic value	of	stock	options	assumed	that	vest	as	future	services	are	provided	by	employees	and	related	to	445,000	common	shares	issued	contingent	on	continued	employment	of	certain PowerSchool	employee	stockholders.	Certain	PowerSchool	employee	stockholders	were	terminated	in	the	first	quarter	of	2003	resulting	in	the	$5	million	recognition	of	previously deferred	stock	compensation	as	part	of	the	Company's	first	quarter	restructuring	action.	Unamortized	PowerSchool	related	deferred	stock	compensation	of	approximately	$294,000 remains	as	of	September	27,	2003.

# Pro	Forma	Financial	Information

The	unaudited	pro	forma	financial	information	below	presents	the	condensed	consolidated	financial	results	of	the	Company	assuming	that	PowerSchool	and	Spruce,	acquired	in	2001, had	been	acquired	at	the

beginning	of	2001	and	includes	the	effect	of	amortization	of	goodwill	and	other	acquired	identifiable	intangible	assets	from	that	date.	The	impact	of	the	charge	for	IPR&D	associated with	the	acquisition	of	PowerSchool	has	been	excluded.	This	pro	forma	financial	information	is	presented	for	informational	purposes	only	and	is	not	necessarily	indicative	of	the	results of	future	operations	that	would	have	been	achieved	had	the	acquisitions	taken	place	at	the	beginning	of	2001.	Pro	forma	information	follows	(in	millions,	except	per	share	amounts):

# Note	5—Restructuring	Charges

# Fiscal	2003	Restructuring	Actions

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,	nearly	all	had	been spent	by	the	end	of	2003,	except	for	approximately	$400,000	of	severance	costs	and	approximately	$4.5	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,	92	were	terminated	prior	to	the	end	of	2003.

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	United	States	and	Europe.	These	restructuring	actions	will	ultimately	result	in	the	elimination	of	260 positions	worldwide,	all	but	one	of	which	were	eliminated	by	the	end	of	2003.

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	United	States	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.

Except	for	certain	costs	associated	with	operating	leases	on	closed	facilities,	the	Company	currently	anticipates	that	all	of	the	remaining	accrual	for	severance	costs	of	approximately $400,000	will	be	spent	by	the	end	of	the	first	quarter	of	fiscal	2004.

The	following	table	summarizes	activity	associated	with	restructuring	actions	initiated	during	fiscal	2003	(in	millions):

|  | 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\t27,\t2003 | (7.5) | — | — | (2.3) | (9.8) |
| Total\tnon-cash\titems | — | (5.0) | (7.1) | — | (12.1) |
| Adjustments | 0.5 | — | — | (0.5) | — |
| Accrual\tat\tSeptember\t27,\t2003 | $0.4 | $— | $— | $4.5 | $4.9 |

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.

|  | Employee<br>Severance<br>Benefits | Asset<br>Impairments | Lease	and<br>Contract<br>Cancellations | Totals |
| :--- | :--- | :--- | :--- | :--- |
| Total\tcharge | $10 | $8 | $12 | $30 |
| Total\tspending\tthrough\tSeptember\t27,\t2003 | (10) | — | (11) | (21) |
| Total\tnon-cash\titems | — | (8) | — | (8) |
| Adjustments | — | — | (1) | (1) |
| Accrual\tat\tSeptember\t27,\t2003 | $— | $— | $— | $— |

# Note	6—Income	Taxes

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

|  | 2003 | 2002 | 2001 |
| :--- | :--- | :--- | :--- |
| Federal: |  |  |  |
| Current | $18 | $12 | $(20) |
| Deferred | (7) | (32) | (8) |
|  | 11 | (20) | (28) |
| State: |  |  |  |
| Current | 4 | 3 | — |
| Deferred | (11) | 6 | (10) |
|  | (7) | 9 | (10) |
| Foreign: |  |  |  |
| Current | 21 | 29 | 21 |
| Deferred | (1) | 4 | 2 |
|  | 20 | 33 | 23 |
| Provision\tfor\tincome\ttaxes | $24 | $22 | $(15) |

The	foreign	provision	for	income	taxes	is	based	on	foreign	pretax	earnings	of	approximately	$250	million,	$284	million	and	$363	million	in	2003,	2002,	and	2001,	respectively.	As	of September	27,	2003,	approximately	$2.5	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	would	be	subject	to	U.S.	income	taxation	on	repatriation	to	the	United	States.	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	United	States.	U.S.	income	taxes	have	not	been	provided	on	a	cumulative	total	of	$822	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	27,	2003	and	September	28,	2002,	the	significant	components	of	the	Company's	deferred	tax	assets	and	liabilities	were	(in	millions):

|  | 2003 | 2002 |
| :--- | :--- | :--- |
| Deferred\ttax\tassets: |  |  |
| Accounts\treceivable\tand\tinventory\treserves | $35 | $32 |
| Accrued\tliabilities\tand\tother\treserves | 155 | 126 |
| Basis\tof\tcapital\tassets\tand\tinvestments | 47 | 34 |
| Tax\tlosses\tand\tcredits | 204 | 125 |
| Other | 11 | 11 |
| Total\tdeferred\ttax\tassets | 452 | 328 |
| Less\tvaluation\tallowance | 30 | 30 |

| Net	deferred	tax	assets | 422 | 298 |
| :--- | :--- | :--- |
| Deferred\ttax\tliabilities: |  |  |
| Unremitted\tearnings\tof\tsubsidiaries | 398 | 293 |
| Available-for-sale\tsecurities | — | 1 |
| Total\tdeferred\ttax\tliabilities | 398 | 294 |
| Net\tdeferred\ttax\tasset | $24 | $4 |

As	of	September	27,	2003,	the	Company	had	operating	loss	carryforwards	for	federal	tax	purposes	of	approximately	$189	million,	which	expire	from	2011	through	2023.	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	$117	million	and	which	expire	between	2004 and	2023.	The	remaining	benefits	from	tax	losses	and	credits	do	not	expire.	As	of	September	27,	2003,	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	2003,	2002,	and	2001)	to	income	(loss)	before provision	for	(benefit	from)	income	taxes,	is	as	follows	(in	millions):

|  | 2003 | 2002 | 2001 |
| :--- | :--- | :--- | :--- |
| Computed\texpected\ttax\t(benefit) | $32 | $30 | $(18) |
| State\ttaxes,\tnet\tof\tfederal\teffect | (4) | 7 | (7) |
| Indefinitely\tinvested\tearnings\tof\tforeign\tsubsidiaries | (13) | — | — |
| Nondeductible\texecutive\tcompensation | 5 | (1) | — |
| Stock\trepurchase | (2) | — | — |
| Purchase\taccounting\tand\tasset\tacquisitions | 4 | 3 | 10 |
| Change\tin\tvaluation\tallowance | — | (16) | — |
| Research\t&amp;\tdevelopment\tcredit,\tnet | (7) | (8) | (5) |
| Nondeductible\texpenses | 6 | 4 | 3 |
| Other\titems | 3 | 3 | 2 |
| Provision\tfor\t(benefit\tfrom)\tincome\ttaxes | $24 | $22 | $(15) |
| Effective\ttax\trate | 26% | 25% | 30% |

On	April	10,	2003,	the	Internal	Revenue	Service	(IRS)	completed	its	audit	of	the	Company's	federal	income	tax	returns	for	the	years	1998	through	2000	and	proposed	certain adjustments.	Certain	of	these	adjustments	are	being	contested	through	the	IRS	Appeals	Office.	Substantially	all	IRS	audit	issues	for	years	prior	to	1998	have	been	resolved.

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.

# Note	7—Shareholders'	Equity

# CEO	Restricted	Stock	Award

On	March	19,	2003,	the	Company	entered	into	an	Option	Cancellation	and	Restricted	Stock	Award	Agreement	(the	Agreement)	with	Steven	P.	Jobs,	its	Chief	Executive	Officer	(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/vesting	period.	The	value	of	the	restricted	stock	award	was	based	on	the	closing	market	price	of	the	Company's

common	stock	on	the	date	of	the	award.	Total	amortization	of	approximately	$13	million	has	been	included	in	selling,	general,	and	administrative	expense	in	2003	and	will	continue	to be	included	at	approximately	$6.2	million	per	quarter	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	27,	2003.

# Preferred	Stock

In	August	1997,	the	Company	and	Microsoft	Corporation	(Microsoft)	entered	into	patent	cross	license	and	technology	agreements.	In	addition,	Microsoft	purchased	150,000	shares	of Apple	Series	A	nonvoting	convertible	preferred	stock	("preferred	stock")	for	$150	million.	These	shares	were	convertible	by	Microsoft	after	August	5,	2000,	into	shares	of	the Company's	common	stock	at	a	conversion	price	of	$8.25	per	share.	During	2000,	74,250	shares	of	preferred	stock	were	converted	to	9	million	shares	of	the	Company's	common	stock.

During	2001,	the	remaining	75,750	preferred	shares	were	converted	into	9.2	million	shares	of	the	Company's	common	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):

|  | 2003 | 2002 | 2001 |
| :--- | :--- | :--- | :--- |
| Unrealized\tgains\ton\tavailable-for-sale\tsecurities | $1 | $13 | $30 |
| Unrealized\tgains\t(losses)\ton\tderivative\tinvestments | (16) | (11) | 4 |
| Cumulative\tforeign\tcurrency\ttranslation | (20) | (51) | (56) |
| Accumulated\tother\tcomprehensive\tincome\t(loss) | $(35) | $(49) | $(22) |

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

|  | 2003 | 2002 | 2001 |
| :--- | :--- | :--- | :--- |
| Change\tin\tfair\tvalue\tof\tavailable-for-sale\tsecurities | $11 | $(49) | $(183) |
| Adjustment\tfor\tnet\t(gains)\tlosses\trealized\tand\tincluded\tin\tnet\tincome\t(loss) | (23) | 32 | (84) |
| Change\tin\tunrealized\tgain\ton\tavailable-for-sale\tsecurities | $(12) | $(17) | $(267) |

The	tax	effect	related	to	the	change	in	unrealized	gain	on	available-for-sale	securities	was	$6	million,	$10	million,	$157	million	for	fiscal	2003,	2002,	and	2001,	respectively.	The	tax effect	on	the	reclassification	adjustment	for	net	gains	(losses)	included	in	net	income	(loss)	was	$(8)	million,	$10	million	and	$35	million	for	fiscal	2003,	2002,	and	2001,	respectively.

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

|  | 2003 | 2002 | 2001 |
| :--- | :--- | :--- | :--- |
| Changes\tin\tfair\tvalue\tof\tderivatives | $(24) | $4 | $45 |
| Adjustment\tfor\tnet\tgains\trealized\tand\tincluded\tin\tnet\tincome\t(loss) | 19 | (19) | (53) |
| Cumulative\teffect\tof\tadopting\tSFAS\tNo.\t133 | — | — | 12 |
| Change\tin\tunrealized\tgain\ton\tderivative\tinstruments | $(5) | $(15) | $4 |

The	tax	effect	related	to	the	cumulative	effect	of	adopting	SFAS	No.	133	was	$(5)	as	of	September	29,	2001.	The	tax	effect	related	to	the	changes	in	fair	value	of	derivatives	was $11	million,	$(2)	million	and	$(19)	million	for	fiscal	2003,	2002,	and	2001,	respectively.	The	tax	effect	related	to	derivative	gains	(losses)	reclassified	from	other	comprehensive income	was	$(7)	million,	$8	million	and	$23	million	for	fiscal	2003,	2002,	and	2001,	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,	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.	Options	may	be	granted	under	the	1997	Plan	to	employees	at	not	less	than	the	fair	market	value	on	the	date	of	grant.	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,	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	would	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	accepted	and	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	and	Mr.	Fred	D.	Anderson,	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	Apple	stock	including	the	exercise	and	sale	of	employee	stock	options	and	shares	acquired	pursuant	to	the	Company's	Employee	Stock	Purchase	Plan.

# 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.	In	the	third	quarter	of	2003,	the	Company's	shareholders	also	approved	an	amendment	to	the Employee	Stock	Purchase	Plan	to	increase	the	number	of	shares	authorized	for	issuance	by	4	million	shares.	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	2003,	2002,	and	2001,	2.1	million,	1.8	million	and	1.8	million	shares, respectively,	were	issued	under	the	Purchase	Plan.	As	of	September	27,	2003,	approximately	4.0	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	($12,000	for	calendar	year	2003).	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	$21	million,	$19	million,	and	$17	million	in	2003,	2002,	and	2001,	respectively.

# Stock	Option	Activity

A	summary	of	the	Company's	stock	option	activity	and	related	information	for	the	years	ended	September	27,	2003,	September	28,	2002	and	September	29,	2001	follows	(option amounts	are	presented	in	thousands):

|  | Shares	Available<br>for	Grant | Number	of<br>Shares | Weighted	Average<br>Exercise	Price |
| :--- | :--- | :--- | :--- |
| Balance\tat\t9/30/00 | 11,530 | 70,758 | $34.01 |
| Additional\tOptions\tAuthorized | 27,000 | — | — |
| Options\tGranted | (34,857) | 34,857 | $18.58 |
| Options\tCancelled | 6,605 | (6,605) | $29.32 |
| Options\tExercised | — | (1,831) | $10.05 |
| Plan\tShares\tExpired | (203) | — | — |
| Balance\tat\t9/29/01 | 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\t9/28/02 | 6,571 | 109,430 | $28.17 |
| Restricted\tStock\tGranted | (5,000) | — | $14.95 |
| 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\t9/27/03 | 45,830 | 63,012 | $19.08 |

Total	options	outstanding	at	September	27,	2003	to	purchase	approximately	63	million	shares	do	not	include	options	to	purchase	approximately	6.7	million	shares	that	were	issued	in October	2003	pursuant	to	the	Exchange	Program	described	above.

The	options	outstanding	as	of	September	27,	2003	have	been	segregated	into	six	ranges	for	additional	disclosure	as	follows	(option	amounts	are	presented	in	thousands):

|  | Options<br>Outstanding	as	of<br>September	27,<br>2003 | 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	27,<br>2003 | Weighted<br>Average<br>Exercise<br>Price |
| :--- | :--- | :--- | :--- | :--- | :--- |
| $0.83-$15.59 | 11,216 | 5.49 | $11.83 | 8,237 | $10.83 |
| $15.60-$17.31 | 11,936 | 6.41 | $17.00 | 7,022 | $17.07 |
| $17.32-$18.50 | 17,843 | 7.04 | $18.43 | 11,903 | $18.43 |
| $18.51-$22.21 | 14,416 | 7.88 | $20.31 | 6,886 | $20.27 |
| $22.22-$38.81 | 5,006 | 7.49 | $24.03 | 2,844 | $24.29 |
| $38.82-$69.78 | 2,595 | 6.28 | $48.08 | 1,864 | $48.11 |
| $0.83-$69.78 | 63,012 | 6.84 | $19.08 | 38,756 | $18.75 |

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.	As	of September	29,	2001,	the	Company	had	exercisable	options	to	purchase	42.1	million	shares	outstanding	with	a	weighted	average	exercise	price	of	$32.15.

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	(loss)	and	earnings	(loss)	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	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	Chief	Executive	Officer'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:

|  | 2003 | 2002 | 2001 |
| :--- | :--- | :--- | :--- |
| Expected\tlife\tof\tstock\toptions | 3.5-4\tyears | 4\tyears | 4\tyears |
| Expected\tlife\tof\tstock\tpurchases | 6\tmonths | 6\tmonths | 6\tmonths |
| Interest\trate—stock\toptions | 2.14%-2.45% | 2.90% | 4.90% |
| Interest\trate—stock\tpurchases | 1.10%-1.77% | 2.71% | 5.97% |
| Volatility—stock\toptions | 40%-63% | 64% | 66% |
| Volatility—stock\tpurchases | 35%-44% | 51% | 90% |
| Dividend\tyields | 0 | 0 | 0 |
| Weighted-average\tfair\tvalue\tof\toptions\tgranted\tduring\tthe\tyear | $6.63 | $10.11 | $10.15 |
| Weighted-average\tfair\tvalue\tof\tstock\tpurchases\tduring\tthe\tyear | $4.24 | $6.73 | $11.15 |

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	have	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	15	years	and	often	contain	multi-year	renewal	options.	As	of	September	27,	2003,	the	Company's	total	future	minimum	lease	payments	under	noncancelable operating	leases	were	$600	million,	of	which	$354	million	related	to	leases	for	retail	space.

Rent	expense	under	all	operating	leases,	including	both	cancelable	and	noncancelable	leases,	was	$97	million,	$92	million,	and	$80	million	in	2003,	2002,	and	2001,	respectively. Future	minimum	lease

payments	under	noncancelable	operating	leases	having	remaining	terms	in	excess	of	one	year	as	of	September	27,	2003,	are	as	follows	(in	millions):

# Fiscal	Years

| 2004 | $100 |
| :--- | :--- |
| 2005 | 100 |
| 2006 | 83 |
| 2007 | 64 |
| 2008 | 51 |
| Later\tyears | 202 |
| Total\tminimum\tlease\tpayments | $600 |

# 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	software	and	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	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):

|  | 2003 | 2002 | 2001 |
| :--- | :--- | :--- | :--- |
| Beginning\taccrued\twarranty\tand\trelated\tcosts | $69 | $87 | $108 |
| Cost\tof\twarranty\tclaims | (71) | (79) | (92) |
| Accruals\tfor\tproduct\twarranties | 69 | 61 | 71 |
| Ending\taccrued\twarranty\tand\trelated\tcosts | $67 | $69 | $87 |

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	licensing	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	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	27,	2003	or	September	28,	2002.

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

Although	certain	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

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	that	the	Company	operates	including	various	European	Union	member	countries,	Japan	and	California.	Although	the	Company	does	not anticipate	any	material	adverse	affects	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

The	Company	manages	its	business	primarily	on	a	geographic	basis.	The	Company's	reportable	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.	As	of	September	27,	2003,	the	Retail	segment	currently	operates	Apple-owned	retail	stores	in	the	United	States.	Other operating	segments	include	Asia-Pacific,	which	includes	Australia	and	Asia	except	for	Japan,	and	the	Company's	subsidiary,	Filemaker,	Inc.	Each	reportable	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	the	Summary	of Significant	Accounting	Policies	in	Note	1,	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	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	$92	million,	$106	million,	and	$92	million	in	2003,	2002,	and	2001, respectively.

Operating	income	for	all	segments	except	Retail	includes	cost	of	sales	at	standard	cost.	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.

To	assess	the	operating	performance	of	the	Retail	segment	several	significant	items	are	included	in	its	results	for	internal	management	reporting	that	are	not	included	in	results	of	the Company's	other	segments.	First,	cost	of	sales	for	the	Retail	segment	includes	a	mark-up	above	the	Company's	standard	cost	to	approximate	the	price	normally	charged	to	the Company's	major	channel	partners	in	the	United	States.	For	the	years	ended	September	27,	2003,	September	28,	2002,	and	September	29,	2001	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	$106	million,	$52	million,	and $4	million,	respectively.

Second,	the	Retail	segment	includes	in	its	net	sales	proceeds	from	sales	of	the	Company's	extended	warranty	and	support	contracts	and	also	recognizes	related	cost	of	sales	based	on	the amount	at	which	such	contracts	are	normally	sold	to	the	Company's	resellers	operating	retail	stores	in	the	United	States.	This	treatment	is	consistent	with	how	the	Company's	major resellers	account	for	the	sales	and	cost	of	the	Company's	extended	warranty	and	support	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	the	Americas	segment's	net	sales	and	cost	of	sales.	For	the	year	ended	September	27,	2003,	this	resulted	in	the

recognition	of	net	sales	and	cost	of	sales	by	the	Retail	segment,	with	corresponding	offsets	in	the	Americas	segment,	of	$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,	with	corresponding	offsets	in	the	Americas	segment,	of	$8	million	and $6	million,	respectively.	These	amounts	were	insignificant	in	fiscal	2001.

Third,	a	portion	of	the	operating	expenses	associated	with	certain	high	profile	retail	stores	are	allocated	from	the	Retail	segment	to	corporate	marketing	expense.	Allocation	of	these expenses	reflects	the	unique	nature	of	these	stores	which,	given	their	larger	size	and	extraordinary	design	elements,	function	as	vehicles	for	general	corporate	marketing,	corporate	sales and	marketing	events,	and	brand	awareness.	Allocated	operating	costs	are	those	in	excess	of	operating	costs	incurred	by	one	of	the	Company's	more	typical	retail	locations.	Stores	were open	in	three	such	high	profile	locations	in	New	York,	Los	Angeles,	and	Chicago	as	of	September	27,	2003.	Expenses	allocated	to	corporate	marketing	resulting	from	the	operations	of these	three	stores	were	$6	million	and	$1	million	in	fiscal	2003	and	2002,	respectively.

Summary	information	by	operating	segment	follows	(in	millions):

|  | 2003 | 2002 | 2001 |
| :--- | :--- | :--- | :--- |
| Americas: |  |  |  |
| Net\tsales | $3,181 | $3,131 | $3,037 |
| Operating\tincome | $323 | $278 | $128 |
| Depreciation,\tamortization\tand\taccretion | $5 | $4 | $4 |
| Segment\tassets(a) | $494 | $395 | $334 |
| Europe: |  |  |  |
| Net\tsales | $1,309 | $1,251 | $1,249 |
| Operating\tincome | $130 | $122 | $68 |
| Depreciation\tand\tamortization | $4 | $4 | $6 |
| Segment\tassets | $252 | $165 | $137 |
| Japan: |  |  |  |
| Net\tsales | $698 | $710 | $713 |
| Operating\tincome | $121 | $140 | $98 |
| Depreciation,\tamortization\tand\taccretion | $3 | $2 | $2 |
| Segment\tassets | $130 | $50 | $44 |
| Retail: |  |  |  |
| Net\tsales | $621 | $283 | $19 |
| Operating\tloss | $(5) | $(22) | $(21) |
| Depreciation,\tamortization\tand\taccretion(b) | $25 | $16 | $2 |
| Segment\tassets(b) | $243 | $141 | $46 |
| Other\tSegments(c):\nNet\tsales | $398 | $367 | $345 |
| Operating\tincome | $51 | $44 | $24 |
| Depreciation,\tamortization\tand\taccretion | $2 | $2 | $2 |
| Segment\tassets | $78 | $67 | $70 |

(a) The	Americas	asset	figures	do	not	include	fixed	assets	held	in	the	United	States.	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	consists	of	Asia-Pacific	and	FileMaker.	Certain	amounts	in	prior	fiscal	periods	related	to	recent	acquisitions	and	Internet	services	have	been	reclassified from	Other	Segments	to	the	Americas	segment	to	conform	to	the	2003	presentation.

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

|  | 2003 | 2002 | 2001 |
| :--- | :--- | :--- | :--- |
| Segment\toperating\tincome | $620 | $562 | $297 |
| Corporate\texpenses,\tnet | (595) | (514) | (630) |
| Purchased\tin-process\tresearch\tand\tdevelopment | — | (1) | (11) |
| Restructuring\tcosts | (26) | (30) | — |
| Consolidated\toperating\tincome\t(loss) | $(1) | $17 | $(344) |
| Segment\tassets | $1,197 | $818 | $631 |
| Corporate\tassets | $5,618 | $5,480 | $5,390 |
| Consolidated\tassets | $6,815 | $6,298 | $6,021 |
| Segment\tdepreciation,\tamortization\tand\taccretion | $39 | $28 | $16 |
| Corporate\tdepreciation,\tamortization\tand\taccretion | 74 | 86 | 84 |
| Consolidated\tdepreciation,\tamortization\tand\taccretion | $113 | $114 | $100 |

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	United	States,	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	2003,	2002	or	2001.

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

|  | 2003 | 2002 | 2001 |
| :--- | :--- | :--- | :--- |
| Net\tSales: |  |  |  |
| United\tStates | $3,627 | $3,272 | $2,936 |
| Japan | 698 | 710 | 713 |
| Other\tForeign\tCountries | 1,882 | 1,760 | 1,714 |
| Total\tNet\tSales | $6,207 | $5,742 | $5,363 |
| Long-Lived\tAssets: |  |  |  |
| United\tStates | $635 | $561 | $498 |
| Japan | 19 | 2 | 3 |
| Other\tForeign\tCountries | 60 | 69 | 77 |
| Total\tLong-Lived\tAssets | $714 | $632 | $578 |

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

|  | 2003 | 2002 | 2001 |
| :--- | :--- | :--- | :--- |
| Net\tSales: |  |  |  |
| Power\tMacintosh(a) | $1,237 | $1,380 | $1,664 |
| PowerBook | 1,299 | 831 | 813 |
| iMac | 1,238 | 1,448 | 1,117 |
| iBook | 717 | 875 | 809 |
| Total\tMacintosh\tNet\tSales | $4,491 | $4,534 | $4,403 |
| Peripherals\tand\tother\thardware(b) | 1,058 | 674 | 387 |
| Software(c) | 362 | 307 | 230 |
| Service\tand\tother\tNet\tSales | 296 | 227 | 343 |
| Total\tNet\tSales | $6,207 | $5,742 | $5,363 |

(a) Power	Macintosh	figures	include	server	sales.

(b) Net	sales	of	peripherals	and	other	hardware	include	sales	of	iPod,	Apple-branded	and	third-party	displays,	and	other	hardware	accessories.

(c) 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

During	the	first	quarter	of	2000,	the	Company's	Board	of	Directors	approved	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,	the	majority	of	which	was	not	tax	deductible.	Approximately	half	of	the	total	charge	was	for	the	cost	of	the aircraft.	The	other	half	represented	all	other	costs	and	taxes	associated	with	the	bonus.	In	the	fourth	quarter	of	2002,	all	significant	work	and	payments	associated	with	the	aircraft	were completed.	Of	the	original	$90	million	accrual,	$2.4	million	remained	unspent	at	the	end	of	fiscal	2002	and	was	reversed.

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.	The	Company	recognized	a	total	of	$404,000	in	expenses	pursuant	to	the	Reimbursement	Agreement	during	fiscal	2003.	For	fiscal	2002,	the Company	recognized	a	total	of	$1,168,000	in	expenses	pursuant	to	the	Reimbursement	Agreement	related	to	expenses	incurred	by	Mr.	Jobs	during	2001	and	2002.	All	expenses recognized	pursuant	to	the	Reimbursement	Agreement	have	been	included	by	the	Company	in	selling,	general,	and	administrative	expenses.

In	connection	with	a	relocation	assistance	package,	the	Company	loaned	Mr.	Ronald	B.	Johnson,	Senior	Vice	President,	Retail,	$1.5	million	for	the	purchase	of	his	principal	residence. The	loan	is	secured	by	a	deed	of	trust	and	is	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

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	its	Chairman,	President	and	Chief	Executive	Officer.	MicroWarehouse	is	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	United	States.	MicroWarehouse	accounted	for	2.4%,	3.3%,	and	2.9%	of	the	Company's	net	sales	in	fiscal	2003,	2002	and 2001,	respectively.	Trade	receivables	from	MicroWarehouse	were	$9.9	million	and	$20.9	million	as	of	September	27,	2003,	and	September	28,	2002,	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	purchases	miscellaneous	equipment	and	supplies	from	MicroWarehouse.	Total	purchases	amounted	to	approximately	$2.3	million, $2.9	million,	and	$3.4	million	in	fiscal	2003,	2002,	and	2001,	respectively.

Note	13—Selected	Quarterly	Financial	Information	(Unaudited)

| Net	sales | $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) |
| 2002 |  |  |  |  |
| Net\tsales | $1,443 | $1,429 | $1,495 | $1,375 |
| Gross\tmargin | $381 | $391 | $409 | $422 |
| Net\tincome\t(loss) | $(45) | $32 | $40 | $38 |
| Earnings\t(loss)\tper\tcommon\tshare: |  |  |  |  |
| Basic | $(0.13) | $0.09 | $0.11 | $0.11 |
| Diluted | $(0.13) | $0.09 | $0.11 | $0.11 |

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	(loss)	per	share.

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	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.

Net	loss	for	the	fourth	quarter	of	2002	included	the	following	items,	net	of	tax:	the	write-down	of	certain	equity	investments	totaling	$49	million;	a	restructuring	charge	of	$4	million; an	in-process	research	and	development	charge	of	approximately	$1	million;	and	the	reversal	of	a	portion	of	a	previous	executive	compensation	expense	resulting	in	a	favorable	impact of	$2	million.	Net	income	for	the	first	quarter	of	2002	included	a	restructuring	charge,	net	of	tax,	of	$18	million.	Net	income	during	the	first	quarter	of	2002	also	included	gains,	net	of tax,	of	$17	million	related	to	non-current	investments.

# REPORT	OF	INDEPENDENT	AUDITORS

# The	Board	of	Directors	and	Shareholders

We	have	audited	the	accompanying	consolidated	balance	sheets	of	Apple	Computer,	Inc.	and	subsidiaries	as	of	September	27,	2003	and	September	28,	2002,	and	the	related consolidated	statements	of	operations,	shareholders'	equity,	and	cash	flows	for	each	of	the	years	in	the	three-year	period	ended	September	27,	2003.	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	auditing	standards	generally	accepted	in	the	United	States	of	America.	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	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	27,	2003	and	September	28,	2002,	and	the	results	of	their	operations	and	their	cash	flows	for	each	of	the	years	in	the	three-year	period	ended	September	27,	2003,	in conformity	with	accounting	principles	generally	accepted	in	the	United	States	of	America.

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,	changed	its	method	of	accounting	for	goodwill	in	2002,	and	changed	its	method	of	accounting	for	hedging	activities	in	2001.

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	in	Rules	13a-14(c)	and	15d-14(c)	under	the	Securities	Exchange	Act	of	1934,	as	amended	(Exchange	Act)) were	effective	as	of	September	27,	2003	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	2003	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	six	directors	whose	terms	expire	at	the	next	annual	meeting	of	shareholders.

| Name | Position	With	the	Company | Age |  | Director	Since |
| :--- | :--- | :--- | :--- | :--- |
| William\tV.\tCampbell | Director |  | 63 | 1997 |
| Millard\tS.\tDrexler | Director |  | 59 | 1999 |
| Albert\tGore,\tJr. | Director |  | 56 | 2003 |
| Steven\tP.\tJobs | Director\tand\tChief\tExecutive\tOfficer |  | 48 | 1997 |
| Arthur\tD.\tLevinson | Director |  | 53 | 2000 |
| Jerome\tB.\tYork | Director |  | 65 | 1997 |

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.

Albert	Gore,	Jr.	has	served	as	a	Senior	Advisor	to	Google,	Inc.	and	Vice	Chairman	of	Metropolitan	West	Financial	LLC	since	2001.	He	is	a	visiting	professor	at	the	University	of California	Los	Angeles,	Fisk	University	and	Middle	Tennessee	State	University.	Mr.	Gore	was	inaugurated	as	the	45th	Vice	President	of	the	United	States	in	1993.	He	was	re-elected	in 1996	and	served	for	a	total	of	eight	years	as	President	of	the	Senate,	a	member	of	the	cabinet	and	the	National	Security	Council,	and	as	the	leader	of	a	wide	range	of	Administration initiatives	including	environmental	policy,	technology,	science,	communications	and	government	cost	reduction.

Millard	S.	Drexler	has	been	Chairman	and	Chief	Executive	Officer	of	J.	Crew	Group,	Inc.	since	March	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.

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	President,	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.

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.	Previously	his	career	was	in	the	automotive	industry,	with	his	last	position being	Executive	Vice	President-Finance	and	Chief	Financial	Officer	and	a	member	of	the	Board	of	Directors	of	Chrysler	Corporation.	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,	Gore	and	Dr.	Levinson.

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.	Campbell,	Drexler, 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.	Consistent	with	the	Nasdaq	audit	committee	structure	and	membership requirements,	the	Audit	Committee	is	comprised	of	three	members:	Messrs.	Campbell,	York	and	Dr.	Levinson.	Because	of	Mr.	York's	affiliation	with	MicroWarehouse,	(see	Item	13. Certain	Relationships	and	Related	Transactions),	he	is	deemed	to	be	a	"non-independent"	director.	As	permitted	under	the	Nasdaq	requirements,	the	Board	carefully	considered Mr.	York's	affiliation	with	MicroWarehouse	as	well	as	his	accounting	and	financial	expertise	and	determined	that	it	is	in	the	best	interest	of	the	Company	and	its	shareholders	that	he continue	to	serve	as	a	member	of	the	Audit	Committee.	Both	Mr.	Campbell	and	Dr.	Levinson	are	independent	directors.

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.	William	V.	Campbell, the	Committee	chairperson,	is	the	designated	audit	committee	financial	expert.	Mr.	Campbell	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	and	principal	accounting	officer.	A

copy	of	this	code,	"Ethics:	The	Way	We	Do	Business	Worldwide"	is	available	on	the	Company's	website	at	www.apple.com/investor	and	is	filed	as	an	exhibit	to	this	annual	report	on Form	10-K.	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."

Fred	D.	Anderson,	Executive	Vice	President	and	Chief	Financial	Officer	(age	59),	joined	the	Company	in	April	1996.	Prior	to	joining	the	Company,	Mr.	Anderson	was	Corporate	Vice President	and	Chief	Financial	Officer	of	Automatic	Data	Processing,	Inc.,	a	position	he	held	from	August	1992	to	March	1996.	Mr.	Anderson	also	serves	as	a	director	of	eBay	Inc.	and E.piphany,	Inc.

Timothy	D.	Cook,	Executive	Vice	President,	Worldwide	Sales	and	Operations	(age	43),	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	47),	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	45),	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	of	Finance	and	Corporate	Controller	(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,	Hardware	Engineering	(age	47),	joined	the	Company	in	February	1997.	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	43),	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	42),	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	46),	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	42),	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 | 2003 | 1 | — |  | 74,750,000(1) | — |  | — |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Chief\tExecutive\tOfficer | 2002 | 1 | 2,268,698 | (2) |  | 7,500,000 | (1) | 1,302,795 | (2) |
|  | 2001 | 1 | 43,511,534 | (2) |  | — |  | 40,484,594 | (2) |
|  |  | 656,631 | — |  | — | — |  | 11,450 |  |
| Executive\tVice\tPresident\tand\tChief\tFinancial | 2002 | 656,631 | — |  | — | — |  | 11,000 |  |
| Fred\tD.\tAnderson\nOfficer | 2003\n2001 | 657,039 | — |  | — | 1,000,000 |  | 7,312 | (3)\n(3)\n(3) |
| Timothy\tD.\tCook | 2003 | 617,673 | — |  | — | — |  | 9,929 | (3)\n(3)\n(3) |
| Executive\tVice\tPresident,\tWorldwide\tSales | 2002 | 563,829 | — |  | — | — |  | 8,025 |  |
| and\tOperations | 2001 | 452,219 | 500,000 |  | — | 1,000,000 |  | 7,875 |  |
| Ronald\tB.\tJohnson | 2003 | 452,404 | 1,500,000 |  | — | — |  | — |  |
| Senior\tVice\tPresident,\tRetail | 2002 | 452,404 | — |  | — | 300,000 |  | — |  |
|  | 2001 | 452,429 | — |  | — | 300,000 |  | — |  |

| Avadis	Tevanian,	Jr.	Ph.D | 2003 | 456,731 | — | — | — | 11,962 | (3) |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Senior\tVice\tPresident,\tChief\tSoftware | 2002 | 492,212 | — | — | — | 10,700 | (3) |
| Technology\tOfficer | 2001 | 460,873 | 500 | — | 1,000,000 | 10,200 | (3) |

(1) In	March	2003,	Mr.	Jobs	voluntarily	cancelled	all	of	his	outstanding	options,	excluding	those	granted	to	him	in	his	capacity	as	a	director.	In	March	2003,	the	Board	awarded Mr.	Jobs	five	million	restricted	shares	of	the	Company's	Common	Stock	which	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.	Because	the	aircraft	was	transferred	to	Mr.	Jobs	in	2001,	the	amount	of	approximately	$43.5	million	paid	by	the	Company during	fiscal	year	2001	towards	the	purchase	of	the	plane	and	the	related	tax	assistance	of	approximately	$40.5	million	was	reported	as	income	to	Mr.	Jobs.	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) 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	2003.

# Options	Exercised	and	Year-End	Option	Holdings

The	following	table	provides	information	about	stock	option	exercises	by	the	Named	Executive	Officers	during	fiscal	year	2003	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

|  |  |  |  | Number	of	Securities	Underlying	Unexercised |  |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Name | Shares\nAcquired\non\tExercise\t(#) | Value\nRealized\n($) |  | Options\tat\tFiscal\nYear-End\t(#)\nExercisable | Unexercisable | Value\tof\tUnexercised\nIn-the-Money\tOptions\tat\tFiscal\tYear-End\t($)(1)\nExercisable | Unexercisable |
| Steven\tP.\tJobs | — |  | — | 60,000(2) | — | $551,400 | — |
| Fred\tD.\tAnderson | — |  | — | 1,150,000 | 800,000 | $4,134,125 | $2,952,000 |
| Timothy\tD.\tCook | — |  | — | 800,000 | 800,000 | $2,952,000 | $2,952,000 |
| Ronald\tB.\tJohnson | — |  | — | 1,181,250 | 618,750 | $451,687 | $205,312 |
| Avadis\tTevanian,\tJr. | — |  | — | 1,600,000 | 800,000 | $9,636,522 | $2,952,000 |

(1) Market	value	of	securities	underlying	in-the-money	options	at	the	end	of	fiscal	year	2003	(based	on	$20.69	per	share,	the	closing	price	of	Common	Stock	on	the	Nasdaq National	Market	on	September	27,	2003),	minus	the	exercise	price.

(2) Includes	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 that	a	substantial	portion	of	a	director's	annual	retainer	be	equity-based.	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	370,000	shares	outstanding	under	the	Director	Plan.	Since	accepting	the	position	of	CEO,	Mr.	Jobs	is	no	longer	eligible	for	grants	under	the	Director	Plan. Directors	also	receive	a	$50,000	annual	retainer	paid	in	quarterly	increments.	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,	Albert	Gore,	Jr.	and	Dr.	Arthur	B.	Levinson,	none	of	whom	are	employees of	the	Company	and	all	of	whom	are	considered	"independent"	directors	under	the	applicable	NASDAQ	rules.	At	the	beginning	of	the	fiscal	year,	Mr.	Jerome	B.	York	served	on	the Committee	until	his	resignation	in	November	2002	at	which	time	Mr.	Drexler	was	appointed	as	a	member	of	the	Committee.	No	person	who

was	an	employee	of	the	Company	in	fiscal	year	2003	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	October	31,	2003	(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,	367,490,665	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.

Security	Ownership	of	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.

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

(4) Includes	1,150,000	shares	of	Common	Stock	which	Mr.	Anderson	has	the	right	to	acquire	by	exercise	of	stock	options.

(5) Includes	90,000	shares	of	Common	Stock	which	Messrs.	Campbell	and	York	each	have	the	right	to	acquire	by	exercise	of	stock	options.

(6) Includes	800,000	shares	of	Common	Stock	which	Mr.	Cook	has	the	right	to	acquire	by	exercise	of	stock	options.

(7) Includes	70,000	shares	of	Common	Stock	which	Mr.	Drexler	has	the	right	to	acquire	by	exercise	of	stock	options.

(8) Includes	1,200,000	shares	of	Common	Stock	which	Mr.	Johnson	has	the	right	to	acquire	by	exercise	of	stock	options.

(9) Includes	1,400	shares	of	Common	Stock	which	Dr.	Levinson	holds	indirectly	and	30,000	shares	of	Common	Stock	which	Dr.	Levinson	has	the	right	to	acquire	by	exercise	of stock	options.

(10) Includes	1,600,000	shares	of	Common	Stock	which	Dr.	Tevanian	has	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	2003,	except	that	Messrs.	Campbell	and	York	each	filed	one	Form	4	late	under	the	new	two-day	reporting	requirements.

# Equity	Compensation	Plan	Information

The	following	table	sets	forth	certain	information,	as	of	September	27,	2003,	concerning	shares	of	common	stock	authorized	for	issuance	under	all	of	the	Company's	equity compensation	plans.

|  | (a)<br>Number	of	Securities	to	be<br>Issued	Upon	Exercise	of<br>Options | (b)<br>Weighted	Average	Exercise<br>Price	of	Outstanding<br>Options | (c)<br>Number	of	Securities	Remaining<br>Available	for	Future	Issuance	Under<br>Equity	Compensation	Plans<br>(Excluding	Securities	Reflected	in<br>Column	(a)) |
| :--- | :--- | :--- | :--- |
| Equity\tcompensation\tplans\tapproved\tby |  |  |  |
| shareholders | 19,507,624 | $18.75 | 29,142,907(1) |
| Equity\tcompensation\tplans\tnot\tapproved\tby |  |  |  |
| shareholders | 43,343,560 | $19.29 | 20,689,245(2) |
| Total\tequity\tcompensation\tplans\t(3) | 62,851,184 | $19.12 | 49,832,152(2) |

(1) This	number	includes	4,002,123	shares	of	common	stock	reserved	for	issuance	under	the	Employee	Stock	Purchase	Plan,	310,000	shares	available	for	issuance	under	the	1997 Director	Stock	Option	Plan	and	24,830,784	shares	available	for	issuance	under	the	2003	Employee	Stock	Plan.	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) On	October	22,	2003,	the	Company	granted	6,697,368	shares	under	the	1997	Employee	Stock	Option	Plan	(the	"1997	Plan")	pursuant	to	the	stock	option	exchange	program	(see Part	II,	Item	8	of	this

Form	10-K	in	the	Notes	to	Consolidated	Financial	Statements	at	Note	8,	under	the	heading	"Employee	Stock	Option	Exchange	Program").	Following	that	grant,	the	Company terminated	the	1997	Plan,	its	only	non-shareholder	approved	equity	plan.	All	remaining	unissued	shares	in	that	plan	were	cancelled	and	no	new	options	can	be	granted	under that	plan.

(3) This	table	does	not	include	160,975	outstanding	options	assumed	in	connection	with	mergers	with	and	acquisitions	of	the	companies	which	originally	established	those	plans. These	assumed	options	have	a	weighted	average	exercise	price	of	$3.69	per	share.	No	additional	options	may	be	granted	under	those	assumed	plans.

# Arrangements	with	Named	Executive	Officers

Change	In	Control	Arrangements—Stock	Options

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	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	outstanding	that	are not	yet	vested	and	exercisable	as	of	the	date	of	such	"change	in	control"	shall	become	fully	vested	and	exercisable.	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	is secured	by	a	deed	of	trust	and	is	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.	The	largest	amount	of	the	indebtedness	outstanding	on	this	loan	during	fiscal	year	2003	was $1,500,000.	Mr.	Johnson	repaid	the	Company	$750,000	during	the	fiscal	year	and	the	amount	remaining	on	the	loan	is	$750,000.

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	2003,	he	served	as	its	Chairman,	President	and	Chief	Executive	Officer.	MicroWarehouse	is	a	reseller	of	computer	hardware,	software	and	peripheral products,	including	products	made	by	the	Company.	During	fiscal	year	2003,	MicroWarehouse	accounted	for	2.4%	of	the	Company's	net	sales.	The	Company	also	purchased	products from	MicroWarehouse	for	its	own	internal	use.

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	2003,	the	Company	recognized	a	total	of	$403,766	in	expenses	pursuant	to	this	reimbursement	agreement	related	to	expenses	incurred by	Mr.	Jobs	during	2003.

# Item	14.	Principal	Accountant	Fees	and	Services

The	following	table	sets	forth	the	fees	paid	to	the	Company's	independent	auditor,	KPMG	LLP,	during	fiscal	years	2003	and	2002.

# Audit	and	Non-Audit	Fees

|  | 2003 | 2002 |
| :--- | :--- | :--- |
| Audit\tFees | $3,028,000(1) | $2,635,000 |
| Audit-Related\tFees | $144,600(2) | $140,000 |
| Tax\tFees | $1,017,100(3) | $1,055,000 |
| All\tOther\tFees | $— | $75,000 |
| Total | $4,189,700 | $3,905,000 |

(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	$901,500	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	$115,600	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	Auditors

Prior	to	the	enactment	of	the	Sarbanes-Oxley	Act	of	2002	(the	"Act"),	the	Company	adopted	an	auditor	independence	policy	that	banned	its	auditors	from	performing	non-financial consulting	services,	such	as	information	technology	consulting	and	internal	audit	services.	This	auditor	policy	also	mandates	that	an	annual	budget	for	both	audit	and	non-audit	services 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,	and	Reports	on	Form	8-K.

# (a) Items	Filed	as	Part	of	Report:

# 1. Financial	Statements

The	financial	statements	of	the	Company	filed	as	part	of	this	report	on	Form	10-K	are	set	forth	in	the	Index	to	Consolidated	Financial	Statements	under	Part	II,	Item	8	of this	Form	10-K.

2. Financial	Statement	Schedules

All	financial	statement	schedules	have	been	omitted,	since	the	required	information	is	not	present	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	under	Part	II,	Item	8	of	this	Form	10-K.

# 3. Exhibits

# (b) Reports	on	Form	8-K

The	Company	filed	a	current	report	on	Form	8-K	on	October	15,	2003,	to	reference	and	furnish	as	exhibits	a	press	release	and	data	sheet	issued	to	the	public	by	the	Company	on October	15,	2003.

The	Company	filed	a	current	report	on	Form	8-K	on	July	16,	2003,	to	reference	and	furnish	as	exhibits	a	press	release	and	data	sheet	issued	to	the	public	by	the	Company	on July	16,	2003.

# 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	18th	day	of	December	2003.

# /s/		FRED	D.	ANDERSON

# Fred	D.	Anderson

# Executive	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	Fred	D.	Anderson,	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:

# QuickLinks

Item	5.	Market	for	the	Registrant's	Common	Equity	and	Related	Shareholder	Matters Item	6.	Selected	Financial	Data Item	7.	Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations

CONSOLIDATED	BALANCE	SHEETS	(In	millions,	except	share	amounts)

CONSOLIDATED	STATEMENTS	OF	OPERATIONS	(In	millions,	except	share	and	per	share	amounts)

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

CONSOLIDATED	STATEMENTS	OF	CASH	FLOWS	(In	millions) NOTES	TO	CONSOLIDATED	FINANCIAL	STATEMENTS

# 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 millions of asset retirement liability in the year ended september 27 2003?