UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K
(Mark One)
! ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2006
or
" TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 000-10030

APPLE COMPUTER, INC.

(Exact name of registrant as specified in its charter)
CALIFORNIA 942404110
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1 Infinite Loop
Cupertino, California 95014
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (408) 996-1010
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, no par value
(Title of class)
Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes " No !
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes " No !
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 ! No "
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (section 229.405 of this
chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. "
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See
definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ! Accelerated filer " Non-accelerated filer "
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes " No !
The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant, as of April 1, 2006, was
approximately $45,716,583,100 based upon the closing price reported for such date on the NASDAQ Global Select Market.
For purposes of this disclosure, shares of Common Stock held by persons who hold more than 5% of the outstanding shares
of Common Stock and shares held by executive officers and directors of the registrant have been excluded because such
persons may be deemed to be affiliates. This determination of executive officer or affiliate status is not necessarily a
conclusive determination for other purposes.
859,273,757 shares of Common Stock Issued and Outstanding as of December 13, 2006
 e B u n e e c n a n e a n n u a l e n c n a n
a l n a e e n a n l e a n u n c e a n e a n e a l n a e e n a e
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a l n a e e n e c u e n e e c a n u u e e e n a e n c e a n a u n a n
n c lu e a n a e e n a e n e c l e la e a n c a l c u e n a c a l n a e e n
c a n a l e e n e u c a a n c a e e l e e e a e e e c n e n la n
e c a n la e a l n a e e n a e n u a a n e e u u e e a n c e a n e
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Explanatory Note
In this Form 10-K, Apple Computer, Inc. (“Apple” or “the Company”) is restating its consolidated balance
sheet as of September 24, 2005, and the related consolidated statements of operations, shareholders’
equity, and cash flows for each of the fiscal years ended September 24, 2005 and September 25, 2004, and
each of the quarters in fiscal year 2005.
This Form 10-K also reflects the restatement of “Selected Consolidated Financial Data” in Item 6 for the
fiscal years ended September 2005, 2004, 2003, and 2002, and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” in Item 7 for the fiscal years ended September 24, 2005
and September 25, 2004.
Previously filed annual reports on Form 10-K and quarterly reports on Form 10-Q affected by the
restatements have not been amended and should not be relied on.
On June 29, 2006, the Company announced that an internal review had discovered irregularities related to
the issuance of certain stock option grants made between 1997 and 2001, including a grant to its Chief
Executive Officer (“CEO”) Steve Jobs. The Company also announced that a Special Committee of outside
directors (“Special Committee”) had been formed and had hired independent counsel to conduct a full
investigation of the Company’s past stock option granting practices. On October 4, 2006, the Company
announced the key results of the Special Committee’s investigation, which are set forth in the Company’s
Form 8-K filed on that date.
As a result of the internal review and the independent investigation, management has concluded, and the
Audit and Finance Committee of the Board of Directors agrees, that incorrect measurement dates were
used for financial accounting purposes for certain stock option grants made in prior periods. Therefore,
the Company has recorded additional non-cash stock-based compensation expense and related tax effects
with regard to past stock option grants, and the Company is restating previously filed financial statements
in this Form 10-K. These adjustments, after tax, amounted to $4 million, $7 million, and $10 million in
fiscal years 2006, 2005 and 2004, respectively. The adjustment to 2006 was recorded in the fourth quarter of
fiscal year 2006 due to its insignificance.
The independent counsel and its forensic accountants (“Investigative Team”) reviewed the facts and
circumstances surrounding stock option grants made on 259 dates. The Investigative Team spent over
26,500 person-hours searching more than one million physical and electronic documents and interviewing
more than 40 current and former directors, officers, employees, and advisors. Based on a review of the
totality of evidence and the applicable law, the Special Committee found no misconduct by current
management. The Special Committee’s investigation identified a number of grants for which grant dates
were intentionally selected in order to obtain favorable exercise prices. The terms of these and certain
other grants, as discussed below, were finalized after the originally assigned grant dates. The Special
Committee concluded that the procedures for granting, accounting for, and reporting stock option grants

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did not include sufficient safeguards to prevent manipulation. Although the investigation found that CEO
Steve Jobs was aware or recommended the selection of some favorable grant dates, he did not receive or
financially benefit from these grants or appreciate the accounting implications. The Special Committee
also found that the investigation had raised serious concerns regarding the actions of two former officers in
connection with the accounting, recording and reporting of stock option grants.
Based on the evidence and findings from the Company’s internal review and the Special Committee’s
independent investigation, an analysis was performed of the measurement dates for the 42,077 stock
option grants made on 259 dates between October 1996 and January 2003 (the “relevant period”). The
Company believes that the analysis was properly limited to the relevant period. In addition to analyzing all
grants made during the relevant period, the Company sampled certain grants between 1994 and 1997 and
found none that required accounting adjustments. The first grants for which stock-based compensation
expense is required are dated December 29, 1997. The Company also examined grants made after the
relevant period and found none that required accounting adjustments. Moreover, in the years after 2002,
Apple made significant changes in its stock option granting practices in response to evolving legal,
regulatory and accounting requirements.
Consistent with the accounting literature and recent guidance from the Securities and Exchange
Commission (“SEC”), the grants during the relevant period were organized into categories based on grant
type and process by which the grant was finalized. The Company analyzed the evidence related to each
category of grants including, but not limited to, electronic and physical documents, document metadata,
and witness interviews. Based on the relevant facts and circumstances, the Company applied the
controlling accounting standards to determine, for every grant within each category, the proper
measurement date. If the measurement date is not the originally assigned grant date, accounting
adjustments were made as required, resulting in stock-based compensation expense and related tax effects.
The 42,077 grants were classified as follows: (1) 17 grants to persons elected or appointed to the Board of
Directors (“director grants”); (2) 3,892 grants to employees under the Monday/Tuesday Plan described
below (“Monday/Tuesday grants”); (3) 27,096 grants made in broad-based awards to large numbers of
employees, usually on an annual basis (“focal grants”); (4) 9,988 other grants ratified at meetings of the
Board or Compensation Committee (“meeting grants”); (5) 1,082 other grants ratified by unanimous
written consent (“UWC”) of the Board or Compensation Committee (“other UWC grants”); and (6) two
grants to the CEO (“CEO grants”). All references to the number of option shares, option exercise prices,
and share prices in this Explanatory Note have not been adjusted for any subsequent stock splits.
With the exception of director grants, all stock option grants were subject to ratification by the Board or
Compensation Committee at a meeting or by UWC. Following approval of the grants at a meeting or by
UWC, the Company’s legal staff would prepare a Secretary’s Certificate certifying the ratification of the
grants. Based on the facts and circumstances described below, the Company has concluded that the
recipients and terms of certain grants were fixed for accounting purposes before ratification pursuant to
parameters previously approved by the Board or Compensation Committee through the Monday/Tuesday
Plan and the focal process. As further discussed below, within these parameters, management had the
authority to determine the recipients and terms for each grant. Thus, the Company has concluded that the
measurement dates for these grants occurred when management’s process for allocating these grants was
completed and the grants were ready for ratification, which was considered perfunctory. With regard to all
other grants, the Company has concluded that the grants were finalized and the measurement dates
occurred when the grants were ratified. For many grants, however, the dates of ratification cannot be
established because the dates the UWCs were executed by the Board or Compensation Committee
members or received by the Company are not available. For such grants, the Company has concluded that
the date of the preparation of the Secretary’s Certificate is the best alternative for determining the actual
date of ratification.

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As discussed below, the Company’s analysis determined that the originally assigned grant dates for 6,428
grants on 42 dates are not the proper measurement dates. Accordingly, after accounting for forfeitures, the
Company has recognized stock-based compensation expense of $105 million on a pre-tax basis over the
respective awards’ vesting terms. No adjustments were required for the remaining 35,649 grants. The
adjustments were determined by category as follows:
Director Grants—Seventeen director grants were made during the relevant period. Two director grants
were made pursuant to a 1997 plan that dated the grants on the enactment of the plan. The remaining
fifteen grants were automatically made under the Director Stock Option Plan for non-employee directors,
which was approved by shareholders in 1998, on the date of a director’s election or appointment to the
Board and on subsequent anniversaries, beginning on the fourth anniversary. Accordingly, the analysis
determined that the originally assigned grant date for each director grant is the measurement date, and no
accounting adjustments are required.
Monday/Tuesday Grants—Beginning in December 1998, 3,892 new hire grants and grants for promotion
and retention purposes (“promotion/retention grants”) were made during the relevant period under the
“Monday/Tuesday Plan.” Under the Monday/Tuesday Plan, new hire grants made within pre-established
guidelines approved by the Board or Compensation Committee were dated on the Monday that the
recipient started work (or the following Monday, if the recipient started on another day). The Company’s
analysis showed this process to be reliable with very low error rates. Promotion/retention grants, also based
on pre-established guidelines, were made generally on the first Tuesday of each month. The Company has
concluded that the new hire and promotion/retention grants made pursuant to the Monday/Tuesday Plan
within pre-established guidelines do not require adjustment, with the exception of six grants that were
erroneously dated before the employees’ start dates. For 120 new hire and promotion/retention grants
made outside the guidelines, however, the Company has concluded that the measurement dates are the
dates of ratification by the Board or Compensation Committee rather than the dates used for grants within
guidelines. Accordingly, based on the methodology described above, the Company has recognized stock-
based compensation expense of $6 million from 126 grants. If other dates in the period between the
preparation of the UWC and the preparation of the Secretary’s Certificate had been used as measurement
dates for grants whose actual ratification dates are unknown, the total stock-based compensation expense
would have ranged from approximately $3 million to $7 million.
Focal Grants—During the relevant period, 27,096 focal grants were made to employees typically on an
annual basis as part of an extensive process that required several months to complete. Pursuant to limits,
guidelines and practices previously approved by the Board or Compensation Committee, managers
throughout the Company would make recommendations for grants to employees in their areas of
responsibility. After senior management had determined that the grants were made in accordance with
these established limits, guidelines and practices, management treated the grants as final when they were
submitted to the Board or Compensation Committee for ratification. The Company has concluded that for
5,595 grants on five dates, the originally assigned grant dates are not the proper measurement dates. For
these grants, management’s process for finalizing the grants was completed after the originally assigned
grant dates. As a result, the Company has recognized $29 million of stock-based compensation expense.
For two of the five grant dates comprising 3,744 grants, the evidence shows that the grants were finalized
and the measurement date occurred one day after the originally assigned grant dates. The grants on these
two dates represent more than $16 million of the total $29 million of stock-based compensation expense
resulting from focal grants.
Other Meeting Grants—During the relevant period, meetings of the Board or Compensation Committee
were held to ratify 9,988 grants that are not Monday/Tuesday, focal or CEO grants. The grant dates and
measurement dates for these grants are the meeting dates when the grants were ratified, with the exception
of 46 grants. Forty-two of these 46 grants are dated concurrent with a meeting that considered and
approved certain grants, but the evidence indicates that all of the grants may not have been finalized until a

4
later date. One of the 46 grants was approved and dated at another meeting, but the recipient, who was
becoming employed by the Company as part of a corporate acquisition, did not start until a later date. Two
other grants were approved before the employees’ start dates. Another grant was mistakenly cancelled and
subsequently reinstated, requiring an accounting adjustment. Thus, for these 46 grants the Company has
concluded that the originally assigned grant dates are not the proper measurement dates. As a result, the
Company has recognized $2 million of stock-based compensation expense.
Other UWC Grants—During the relevant period, 1,082 grants were approved by UWCs for a variety of
purposes, including executive recruitment, retention, promotion and new hires outside the
Monday/Tuesday process. These grants were not made pursuant to pre-established guidelines adopted by
the Board or Compensation Committee. Therefore, the Company has concluded that these grants were
not finalized for accounting purposes until ratification by the Board or Compensation Committee.
Accordingly, for 660 grants, the Company has concluded that the originally assigned grant dates are not
the proper measurement dates. As a result, the Company has recognized $48 million of stock-based
compensation expense. If other dates in the period from the preparation of the UWC to the preparation of
the Secretary’s Certificate had been used as measurement dates for grants whose actual ratification dates
are unknown, the total stock-based compensation would have ranged from approximately $35 million to
$56 million.
CEO Grants—During the relevant period, the Company made two grants to CEO Steve Jobs. The first
grant, dated January 12, 2000, was for 10 million option shares. The second grant, dated October 19, 2001,
was for 7.5 million option shares. Both grants were cancelled in March 2003 prior to being exercised, when
Mr. Jobs received 5 million shares of restricted stock.
With respect to the grant dated January 12, 2000, the Board on December 2, 1999, authorized a special
“CEO Compensation Committee” to grant Mr. Jobs up to 15 million shares. The evidence indicates that
the CEO Compensation Committee finalized the terms of the grant on January 12, 2000, although the
Committee’s action was memorialized in a UWC transmitted on January 18, 2000. Because the
measurement date is the originally assigned grant date, the Company has not recognized any stock-based
compensation expense from this grant. If the Company had determined that the measurement date was the
date when the UWC was executed or received, then additional stock-based compensation would have been
recognized.
The grant dated October 19, 2001 was originally approved at a Board meeting on August 29, 2001, with an
exercise price of $17.83. The terms of the grant, however, were not finalized until December 18, 2001. The
grant was dated October 19, 2001, with an exercise price of $18.30. The approval for the grant was
improperly recorded as occurring at a special Board meeting on October 19, 2001. Such a special Board
meeting did not occur. There was no evidence, however, that any current member of management was
aware of this irregularity. The Company has recognized $20 million in stock-based compensation expense
for this grant, reflecting the difference between the exercise price of $18.30 and the share price on
December 18, 2001 of $21.01.

5
The incremental impact from recognizing stock-based compensation expense resulting from the
investigation of past stock option grants is as follows (dollars in millions):

Pre-Tax
Expense After Tax
Fiscal Year (Income) Expense
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1) $—
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 6
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 9
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 13
2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 23
2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 12
Total 1998 – 2003 impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 63
2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 10
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 7
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 4
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $105 $ 84

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

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 PART I
Item 1. Business
Company Background
Apple Computer, Inc. (“Apple” or the “Company”) was incorporated under the laws of the State of
California on January 3, 1977. The Company designs, manufactures, and markets personal computers and
related software, services, peripherals, and networking solutions. The Company also designs, develops, and
markets a line of portable digital music players along with related accessories and services, including the
online sale of third-party audio and video products. The Company’s products and services include the
Macintosh® line of desktop and portable computers, the Mac OS® X operating system, the iPod® line of
portable digital music players, the iTunes Store®, a portfolio of peripherals that support and enhance the
Macintosh and iPod product lines, a portfolio of consumer and professional software applications, a variety
of other service and support offerings, and the Xserve® and Xserve RAID server and storage products.
The Company sells its products worldwide through its online stores, its retail stores, its direct sales force,
and third-party wholesalers, resellers, and value-added resellers. In addition, the Company sells a variety of
third-party Macintosh and iPod compatible products including application software, printers, storage
devices, speakers, headphones, and various other accessories and supplies through its online and retail
stores. The Company sells to education, consumer, creative professional, business, and government
customers. The Company’s fiscal year ends on the last Saturday of September. Unless otherwise stated, all
information presented in this Form 10-K is based on the Company’s fiscal calendar.

Business Strategy
The Company is committed to bringing the best personal computing and portable digital music experience
to students, educators, creative professionals, businesses, government agencies, and consumers through its
innovative hardware, software, peripherals, services, and Internet offerings. The Company’s business
strategy leverages its unique ability to design and develop its own operating system, hardware, application
software, and services to provide its customers new products and solutions with superior ease-of-use,
seamless integration, and innovative industrial design. The Company believes continual investment in
research and development is critical to facilitate innovation of new and improved products and
technologies. Besides updates to its existing line of personal computers and related software, services,
peripherals, and networking solutions, the Company continues to capitalize on the convergence of digital
consumer electronics and the personal computer by creating and refining innovations like the iPod and
iTunes Store. The Company’s strategy also includes expanding its distribution network to effectively reach
more of its targeted customers and provide them with a high-quality sales and after-sales support
experience.

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

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Expanded Distribution
The Company believes a high-quality buying experience with knowledgeable salespersons that can convey
the value of the Company’s products and services greatly enhances its ability to attract and retain
customers. The Company sells many of its products and resells certain third-party products in most of its
major markets directly to consumers, education customers, and businesses through its retail and online
stores. The Company has also invested in programs to enhance reseller sales, including the Apple Sales
Consultant Program, which places Apple employees and contractors at selected third-party reseller
locations. The Company believes providing direct contact with its targeted customers is an efficient way to
demonstrate the advantages of its Macintosh computer and other products over those of its competitors.
The Company has significantly increased the points of distribution for the iPod product family in order to
make its products available at locations where its customers shop.
By the end of fiscal 2006, the Company had opened a total of 165 retail stores, including 147 stores in the
U.S. and a total of 18 stores in Canada, Japan, and the U.K. The Company opened 5 additional stores in
October and November 2006. The Company has typically located its stores at high-traffic locations in
quality shopping malls and urban shopping districts.
One of the goals of the retail initiative is to bring new customers to the Company and expand its installed
base through sales to computer users who currently do not own a Macintosh computer and first time
personal computer buyers. By operating its own stores and building them in desirable high-traffic locations,
the Company is able to better control the customer retail experience and attract new customers. The stores
are designed to simplify and enhance the presentation and marketing of personal computers and related
products. To that end, retail store configurations have evolved into various sizes in order to accommodate
market demands. The stores employ experienced and knowledgeable personnel who provide product
advice and certain hardware support services. The stores offer a wide selection of third-party hardware,
software, and various other computing products and supplies selected to complement the Company’s own
products. Additionally, the stores provide a forum in which the Company is able to offer specialized service
and personalized training.

Education
Throughout its history, the Company has focused on the use of technology in education and has been
committed to delivering tools to help educators teach and students learn. The Company believes effective
integration of technology into classroom instruction can result in higher levels of student achievement,
especially when used to support collaboration, information access, and the expression and representation
of student thought and ideas. The Company creates solutions that enable new modes of curriculum
delivery, better ways of conducting research, and opportunities for professional development of faculty,
students, and staff. The Company has designed a range of products and services to meet the needs of
education customers. These products and services include the iMac™ and the MacBook®, video creation
and editing solutions, wireless networking, professional development solutions, and one-to-one (1:1)
learning solutions. A 1:1 learning solution typically consist of a portable computer for every student and
teacher along with the installation of a wireless network.

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

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

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

Hardware Products
The Company offers a range of personal computing products including desktop and notebook computers,
server and storage products, related devices and peripherals, and various third-party hardware products.
The Company’s Macintosh® systems, excluding servers and storage systems, features the Company’s Mac
OS® X Version 10.4 Tiger™ and iLife® suite of software for digital photography, music, movies, and
music and website creation.

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

MacBook™ Pro
The MacBook Pro family of notebook computers is designed for professionals and advanced consumer
users. Introduced in January 2006, the MacBook Pro includes either a 15-inch or 17-inch widescreen
display, a built-in iSight video camera, Front Row with the Apple Remote, and the MagSafe™ power
adapter. Current MacBook Pro models include Intel Core 2 Duo processors at 2.16GHz or 2.33GHz, ATI
Mobility Radeon X1600 graphics, 667MHz DDR2 main memory, a Serial ATA hard drive, and a slot-
loading double-layer SuperDrive™. Every MacBook Pro features a 1-inch thin aluminum enclosure and
includes AirPort Extreme wireless networking, Bluetooth 2.0+EDR, Gigabit Ethernet, two or three USB
2.0 ports, FireWire 400 and 800 ports, combination analog and optical digital audio input and output ports,
a full-sized DVI video-out port, an ExpressCard/34 slot, scrolling trackpad, and backlit keyboard.

9
MacBook™
The MacBook is designed for consumer and education users. Introduced in May 2006, the MacBook
includes a 13-inch widescreen display, a built-in iSight video camera, Front Row with the Apple Remote,
and the MagSafe magnetic power adapter. Current MacBook models include Intel Core 2 Duo processors
at 1.83GHz and 2.0GHz, Intel integrated GMA 950 graphics, 667MHz DDR2 main memory, a Serial ATA
hard drive, and a slot-loading Combo optical drive or double-layer SuperDrive. Available in either black or
white, every MacBook includes built-in AirPort Extreme wireless networking, Bluetooth 2.0+EDR,
Gigabit Ethernet, two USB 2.0 ports, one FireWire 400 port, combination analog and optical digital audio
input and output ports, a mini-DVI video output port, and scrolling trackpad.

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

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

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

Xserve® and Xserve RAID Storage System

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

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throughput each to support fibre channel, networking, and graphics cards. Xserve supports up to 2.25TB of
hot-plug storage. The Company’s Xserve RAID storage system delivers up to 7TB of storage capacity and
also expanded support for heterogeneous environments. The dual independent RAID controllers with
512MB cache per controller offer sustained throughput of over 385 Mbps.

Music Products and Services

The Company offers its iPod® line of portable digital music players and related accessories to Macintosh
and Windows users. The Company also provides an online service to distribute third-party music, audio
books, music videos, short films, television shows, movies, and iPod games through its iTunes Store. In
addition to the Company’s own iPod accessories, thousands of third-party iPod compatible products are
available, including portable and desktop speaker systems, headphones, car radio solutions, voice
recorders, cables and docks, power supplies and chargers, and carrying cases and armbands.

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

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

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

iTunes® Store
The Company’s iTunes Store, available for both Macintosh and Windows-based computers, is a service
that allows customers to find, purchase, and download third-party digital music, audio books, music videos,
short films, television shows and movies, and iPod games. The iTunes Store also features the Podcast
Directory that allows customers to search for and download audio programs to their computers and
automatically receive new episodes over the Internet. Customers can search the contents of the store
catalog to locate works by title, artist, or album, or browse the entire contents of the store by genre and

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artist. Originally introduced in the U.S. in April 2003, the iTunes Store now serves customers in
22 countries.
The iTunes Store is fully integrated with iTunes software allowing customers to preview, purchase,
download, organize, share, and transfer digital content to an iPod using a single software application.
Further discussion of the iTunes software may be found below under the heading “Software Products and
Computer Technologies.” The iTunes Store offers customers a broad range of personal rights to the third-
party content they have purchased. Content purchased through the store may also be used in certain
applications such as iPhoto®, iMovie®, and iDVD®. Additional features of the iTunes Store include gift
certificates that can be sent via e-mail; prepaid music cards; an “allowance” feature that enables users to
automatically deposit funds into an iTunes Store account every month; online gift options that let
customers give specific content to anyone with an email address; parental controls; and album reviews.

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

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

Software Products and Computer Technologies

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

Operating System Software

Mac OS X is built on an open-source UNIX-based foundation. The most recent version, Mac OS X Tiger,
is the fifth major release of Mac OS X. Tiger incorporates innovations including Spotlight™, a desktop
search technology that lets users find items stored on their Macintosh computers, including documents,
emails, contacts, and images; and Dashboard, a way to instantly access information such as weather
forecasts and stock quotes, using a new class of mini-applications called widgets. Mac OS X Server version
10.4 is the server version of the Mac OS operating system.

Server Software and Server Solutions

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

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

Professional Application Software

In March 2006, the Company introduced Final Cut Studio® 5.1, the Company’s High Definition (“HD”)
video production suite. Final Cut Studio features Final Cut Pro® 5, Soundtrack® Pro, Motion 2, and
DVD Studio Pro® 4. All of these applications are Universal.
Final Cut Pro® 5.1, the latest version of the Company’s video editing software, includes editing tools
that work natively with most formats, from Digital Video (“DV”) and High Definition Video
(“HDV”) to fully uncompressed HD. With a real-time multi-stream effects architecture, multicam
editing tools, and advanced color correction, Final Cut Pro 5.1 enables users to view and cut from
multiple sources in real time, group up to 128 sources together into multi-clips, then add or subtract
cameras at any time.
DVD Studio Pro® 4 is the latest version of the Company’s professional DVD authoring application.
With DVD Studio Pro 4 users can author Standard Definition (“SD”) or HD DVDs in a graphic
interactive environment. DVD Studio Pro 4 includes Compressor 2, a full-featured video and audio
compression application. Compressor gives users control over encoding, including the ability to
encode several clips in one batch operation to a wide variety of formats including H.264.
Motion 2 is a real-time motion graphics software application that enables Final Cut Pro editors to add
motion graphics to their projects. Motion 2 features interactive animation of text and graphics for
DVD motion menus, video or film in real time, and quick output rendering by built-in GPU
acceleration at 8-bit, 16-bit, or 32-bit float film quality. With Motion 2’s design tool, Replicator, users
can automatically generate and animate multiple copies of a graphic, shape, or movie.
Soundtrack® Pro is an audio editing and sound design application that gives audio and video
professionals a way to edit, mix, and repair audio. Soundtrack Pro features a waveform editor with
flexible Action Layers that allow users to re-order, bypass, or change any edit, effect, or process. Find-
and-Fix features identify and repair common audio problems such as background noise, pops, clicks,
and hum. An integrated multitrack mixer allows editors to apply common effects to multiple tracks
and group common tracks. Soundtrack Pro also features over 50 professional plug-ins for enhancing
sounds, and over 5,000 music and sound effect loops.
In February 2006, the Company introduced Logic® Pro 7.2, a Universal version of the Company’s music
creation and audio production software. Logic Pro 7.2 is used by musicians around the world and by
professionals in music production and film scoring. It combines digital music composition, notation, and
audio production facilities in one comprehensive product and includes software instruments such as
Sculpture®, a component-modeling based synthesizer; UltraBeat®, a drum synthesizer with built-in step
sequencer; and digital signal processing (DSP) plug-ins including Guitar Amp Pro, a full-featured guitar
amplifier simulator. Along with workflow enhancements, mastering plug-ins, and support for Apple Loops,
Logic Pro 7 adds distributed audio processing, a technology that allows professionals to utilize multiple
Macintosh systems to expand available DSP power via an Ethernet network.

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Consumer, Education, and Business Oriented Application Software
iLife® ‘06
In January 2006, the Company introduced iLife ‘06, an upgrade to its consumer-oriented digital lifestyle
application suite, which features iWeb™, iPhoto® 6, iMovie® HD 6, iDVD® 6, GarageBand™ 3, and
iTunes®. All of these applications are Universal.
iWeb™ is a new application in the iLife ‘06 suite. iWeb allows users to create online photo albums,
blogs, and podcasts and customize websites using editing tools.
iPhoto® is the Company’s consumer-oriented digital photo software application. iPhoto 6 adds new
photo management and editing features, supports up to 250,000 photos, and introduces
Photocasting™. Photocasting allows .Mac users to share and automatically update photo albums over
the Internet with anyone who uses a Macintosh or Windows-based computer.
iMovie® HD is the Company’s consumer-oriented digital video editing software application. iMovie
HD 6 includes new real-time effects that take advantage of Core Video technology, which uses the
computer’s video card’s graphics processing unit to deliver hardware acceleration to quickly preview
video effects. iMovie HD 6 also provides a solution to make video podcasts, which can be published
with iWeb, and includes audio enhancement tools and sound effects.
iDVD® is the Company’s consumer-oriented software application that enables users to turn iMovie
files, QuickTime® files, and digital pictures into DVDs that can be played on most consumer DVD
players. iDVD® 6 allows users to take content shot with HDV and widescreen DV cameras and
author custom DVDs with widescreen menus, movies, and high resolution slideshows. iDVD 6
features 10 new Apple-designed menu themes in both widescreen (16:9) and standard (4:3) formats.
GarageBand™ is the Company’s consumer-oriented music creation software application that allows
users to play, record and create music using a simple interface. With GarageBand, recorded
performances, digital audio and looping tracks can be arranged and edited to create songs.
GarageBand 3 allows users to record, produce, and publish through iWeb their own podcasts,
including artwork, sound effects, and music jingles.
iLife ‘06 also includes iTunes, the Company’s digital music jukebox software application that allows users
to purchase a variety of digital content available through the Company’s iTunes Store. iTunes organizes
content using searching, browsing, and playlists, and also includes features such as iMix playlist sharing and
provides integration with the complete family of iPods. In September 2006, the Company introduced
iTunes 7, the latest version of its iTunes software. iTunes 7 delivers new features such as album and Cover
Flow views of music, television shows, and movies, enabling users to quickly find titles in their library as
well as casually browse through titles they already own.

iWork™ ‘06
In January 2006, the Company introduced iWork ‘06, a new Universal version of the Company’s suite of
productivity software designed to help users create, present, and publish documents and presentations.
iWork ‘06 includes Pages® 2 and Keynote® 3.
Pages® gives users the tools to create letters, newsletters, reports, brochures and resumes with
advanced typography, multiple columns, footnotes, tables of content and styles. Pages 2 features mail
merge with Mac OS X Address Book, which allows users to personalize documents by dragging and
dropping individual contacts into documents using templates with predefined fields. Pages 2 also
features new templates for newsletters, flyers, posters, school reports, scrapbooks, brochures, business
proposals, and invoices. Pages 2 allows users to insert tables that have basic calculation functionality
within any document and users can export their Pages 2 document to other formats.

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 Keynote® is the Company’s presentation software that gives users the ability to create presentations,
portfolios, interactive slideshows, and storyboards. Keynote 3 offers additional ways to create
presentations and interactive slideshows. It features new cinematic transitions including vertical and
horizontal blinds, revolving door, and swoosh. A new view mode, Light Table, allows users to view an
entire presentation and reorganize slides using drag and drop.
Final Cut® Express HD enables users to capture, edit, and output DV and HDV over a single FireWire
cable, and supports Digital Cinema Desktop with multiple displays. In May 2006, the Company introduced
a Universal version of Final Cut Express HD 3.5. Features introduced in this version include Dynamic RT
for real-time playback of multi-stream effects, Soundtrack 1.5 with a suite of audio production tools, and
LiveType 2.1 with animated text and titles.
In March 2006, the Company introduced Logic® Express 7.2, a Universal version of the Company’s
streamlined version of Logic Pro 7.2 that provides a basic set of professional tools to compose and produce
music for students, educators, and advanced hobbyists. Its high-resolution audio of up to 24-bit/96kHz, the
adaptive self-configuring track mixer, and 32-bit floating-point math provides professional sound quality.
Logic Express 7 comes with support for projects from GarageBand, offering users a smooth migration path
to high-end audio production.
FileMaker, Inc., a wholly owned subsidiary of the Company, develops, publishes, and distributes desktop-
based database management application software for both Macintosh and Windows-based computers. The
FileMaker® Pro database software and related products offer relational databases and desktop-to-web
publishing capabilities. In July 2006, the Company introduced FileMaker Pro 8.5, a Universal version of its
database management application. New features of FileMaker Pro 8.5 include FileMaker Web Viewer,
which allows for a live web browser to be put into a database.

Internet Software and Services

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

Safari™
Safari, the Company’s Mac OS X compatible web browser, uses the advanced interface technologies
underlying Mac OS X and includes built-in Google search; SnapBack™ to instantly return to search results;
a way to name, organize and present bookmarks; tabbed browsing; and automatic “pop-up” ad blocking.

QuickTime®
QuickTime, the Company’s multimedia software for Macintosh or Windows-based computers, features
streaming of live and stored video and audio over the Internet and playback of high-quality audio and
video on computers. QuickTime 7 features H.264 encoding and can automatically determine a user’s
connection speed to ensure they are getting the highest-quality content stream possible. QuickTime 7 also
delivers multi-channel audio and supports audio formats, including AIFF, WAV, MOV, MP4 (AAC only),
CAF, and AAC/ADTS.
The Company offers several other QuickTime products. QuickTime 7 Pro, a suite of software tools, allows
creation and editing of Internet-ready audio and video files. QuickTime 7 Pro allows users to create H.264
video, capture audio and video, create multi-channel audio, and export multiple files while playing back or
editing video.

.Mac™
The Company’s .Mac offering is a suite of Internet services that for an annual fee provides Macintosh users
with a powerful set of Internet tools. .Mac services include: HomePage, for personal web sites; iDisk, a

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virtual hard drive accessible anywhere with Internet access; .Mac Sync, which keeps Safari bookmarks,
iCal® calendars, Address Book information, Keychain® (passwords), and Mac OS X Mail preferences up-
to-date across multiple Macintosh computers and available via web browser when users are away from
their Mac; .Mac Mail, an ad-free email service; and Learning Center, featuring tutorials for certain
software applications. The current version of .Mac includes .Mac Groups, a service that helps members
communicate, coordinate schedules, and stay in sync with private groups of friends or colleagues; an
updated version of .Mac Backup software that allows members to archive the content of their iLife Home
folder; and combined iDisk and email storage of up to 1GB for individuals and 2GB for families.

Wireless Connectivity and Networking

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

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

Other Connectivity and Networking Solutions

Mac OS X includes capabilities for Bluetooth technology. Bluetooth is an industry standard for wirelessly
connecting computers and peripherals that supports transmission of data at up to 3 Mbps within a range of
approximately 30 feet. Bluetooth technology for Mac OS X lets customers wirelessly share files between
Macintosh systems, synchronize and share contact information with Palm-OS based PDAs, and access the
Internet through Bluetooth-enabled cell phones. Bluetooth is built into most Macintosh models.
Bonjour®, the Company’s zero configuration networking technology, is based on open Internet
Engineering Task Force (“IETF”) Standard Protocols such as IP, ARP, and DNS and is built into
Mac OS X. This technology uses industry standard networking protocols and zero configuration
technology including Ethernet or 802.11-based wireless networks like the Company’s AirPort products.
The source code for this technology also includes software to support UNIX, Linux, and Windows-based
systems and devices.
The Company developed FireWire, a high-speed serial I/O technology for connecting digital devices such
as digital camcorders and cameras to desktop and portable computers. FireWire has high data-transfer
speed and “hot plug-and-play” capability and is currently integrated in all Macintosh systems.

Product Support and Services

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

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Markets and Distribution
The Company’s customers are primarily in the education, creative, consumer, and business markets. The
Company distributes its products through wholesalers, resellers, national and regional retailers and
cataloguers. No individual customer accounted for more than 10% of net sales in 2006, 2005, or 2004. The
Company also sells many of its products and resells certain third-party products in most of its major
markets directly to consumers, education customers, and businesses through its own sales force and retail
and online stores. Ten percent of the Company’s net sales in 2006 were through its U.S. education channel,
including sales to elementary and secondary schools, higher education institutions, and individual
customers.

Competition
The Company is confronted by aggressive competition in all areas of its business. The markets for
consumer electronics, personal computers and related software and peripheral products are highly
competitive. These markets are characterized by rapid technological advances in both hardware and
software that have substantially increased the capabilities and use of personal computers and other digital
electronic devices and have resulted in the frequent introduction of new products with competitive price,
feature, and performance characteristics. Over the past several years, price competition in these markets
have been particularly intense. The Company’s competitors who sell personal computers based on other
operating systems have aggressively cut prices and lowered their product margins to gain or maintain
market share. The Company’s results of operations and financial condition can be adversely affected by
these and other industry-wide downward pressures on gross margins. The principal competitive factors
include price, relative price/performance, product quality and reliability, design innovation, availability of
software, product features, marketing and distribution capability, service and support, availability of
hardware peripherals, and corporate reputation. Further, as the personal computer industry and its
customers place more reliance on the Internet, an increasing number of Internet devices that are smaller,
simpler, and less expensive than traditional personal computers may compete for market share with the
Company’s existing products.
The Company’s music products and services have faced significant competition from other companies
promoting their own digital music and content products and services, including those offering free peer-to-
peer music and video services. The Company believes it currently retains a competitive advantage from
innovation and by more effectively integrating the entire solution including the hardware (personal
computer and iPod), software (iTunes), and distribution of content (iTunes Store). However, the Company
expects competition in this space to intensify as competitors attempt to imitate the Company’s approach to
tightly integrate these components within their individual offerings or, alternatively, collaborate with each
other to offer solutions that are more integrated than those they currently offer. Some of these current and
potential competitors have substantial resources and may be able to provide such products and services at
little or no profit or even at a loss to compete with the Company’s offerings.
The Company’s future operating results and financial condition are substantially dependent on the
Company’s ability to continue to develop improvements to the Macintosh platform and to the Company’s
hardware, software and services related to digital content to maintain perceived functional and design
advantages over competing platforms.

Raw Materials
Although most components essential to the Company’s business are generally available from multiple
sources, certain key components including microprocessors and application-specific integrated circuits
(“ASICs”) are currently obtained by the Company from single or limited sources. Some key components,
while currently available to the Company from multiple sources, are at times subject to industry-wide
availability constraints and pricing pressures. In addition, the Company uses some components uncommon
to the rest of the personal computer and consumer electronics industries, and new products introduced by

17
the Company often initially utilize custom components obtained from only one source until the Company
has evaluated whether there is a need for, and subsequently qualifies, additional suppliers. If the supply of
a key or single-sourced component to the Company were to be delayed or curtailed or in the event a key
manufacturing vendor delays shipments of completed products to the Company, the Company’s ability to
ship related products in desired quantities and in a timely manner could be adversely affected. The
Company’s business and financial performance could also be adversely affected depending on the time
required to obtain sufficient quantities from the original source, or to identify and obtain sufficient
quantities from an alternative source. Continued availability of these components may be affected if
producers were to decide to concentrate on the production of common components instead of components
customized to meet the Company’s requirements. The Company attempts to mitigate these potential risks
by working closely with these and other key suppliers on product introduction plans, strategic inventories,
coordinated product introductions, and internal and external manufacturing schedules and levels.
Consistent with industry practice, the Company acquires components through a combination of formal
purchase orders, supplier contracts, and open orders based on projected demand information. The
Company’s purchase commitments typically cover its requirements for periods ranging from 30 to 150 days.
The Company believes there are several component suppliers and manufacturing vendors whose loss to the
Company could have a material adverse effect upon the Company’s business and financial position. At this
time, such vendors include Agere Systems, Inc., Ambit Microsystems Corporation, Amperex Technology
Limited, ASUSTeK Corporation, ATI Technologies, Inc., Atheros Communications Inc., AU Optronics
Corporation, Broadcom Corporation, Chi Mei Optoelectronics Corporation, Cypress Semiconductor
Corporation, Hitachi Global Storage Technologies, Hon Hai Precision Industry Co., Ltd., Intel
Corporation, Inventec Appliances Corporation, LG. Phillips Co., Ltd., Matsushita, NVIDIA Corp.,
PortalPlayer, Inc., Quanta Computer, Inc., Renesas Semiconductor Co. Ltd., Samsung Electronics, Sony
Corporation, Synaptics, Inc., Texas Instruments, and Toshiba Corporation.

Research and Development

Because the personal computer and consumer electronics industries are characterized by rapid
technological advances, the Company’s ability to compete successfully is heavily dependent upon its ability
to ensure a continuing and timely flow of competitive products, services, and technologies to the
marketplace. The Company continues to develop new products and technologies and to enhance existing
products in the areas of hardware and peripherals, consumer electronic products, system software,
applications software, networking and communications software and solutions, and the Internet. The
Company may expand the range of its product offerings and intellectual property through licensing and/or
acquisition of third-party business and technology. The Company’s research and development expenditures
totaled $712 million, $535 million (as restated(1)), and $491 million (as restated(1)) in 2006, 2005, and 2004,
respectively.

Patents, Trademarks, Copyrights and Licenses

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

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

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

Foreign and Domestic Operations and Geographic Data

The U.S. represents the Company’s largest geographic marketplace. Approximately 60% of the Company’s
net sales in 2006 came from sales to customers inside the U.S. Final assembly of products sold by the
Company is currently performed in the Company’s manufacturing facility in Cork, Ireland, and by external
vendors in Fremont, California; Fullerton, California; Taiwan; the Republic of Korea; the People’s
Republic of China; and the Czech Republic. Currently, manufacturing of many of the components used in
the Company’s products is performed by third-party vendors in Taiwan, China, Japan, Korea, and
Singapore. Final assembly of substantially all of the Company’s portable products, including MacBook
Pros, MacBooks, and iPods, is performed by third-party vendors in China. Margins on sales of the
Company’s products in foreign countries, and on sales of products that include components obtained from
foreign suppliers, can be adversely affected by foreign currency exchange rate fluctuations and by
international trade regulations, including tariffs and antidumping penalties.
Information regarding financial data by geographic segment is set forth in Part II, Item 8 of this Form 10-K
and in the Notes to Consolidated Financial Statements at Note 11, “Segment Information and Geographic
Data.”

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

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

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

19
Environmental Laws
Compliance with federal, state, local, and foreign laws enacted for the protection of the environment has to
date had no material effect on the Company’s capital expenditures, earnings, or competitive position. In
the future, these laws could have a material adverse effect on the Company.
Production and marketing of products in certain states and countries may subject the Company to
environmental and other regulations including, in some instances, the requirement to provide customers
the ability to return product at the end of its useful life, and place responsibility for environmentally safe
disposal or recycling with the Company. Such laws and regulations have recently been passed in several
jurisdictions in which the Company operates including various European Union member countries, Japan
and certain states within the U.S. Although the Company does not anticipate any material adverse effects
in the future based on the nature of its operations and the thrust of such laws, there is no assurance that
such existing laws or future laws will not have a material adverse effect on the Company’s financial
condition, liquidity, or results of operations.

Employees
As of September 30, 2006, the Company had 17,787 full-time equivalent employees and an additional 2,399
temporary equivalent employees and contractors.

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

Item 1A. Risk Factors

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

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

20
certain prior periods. As a result, the Company has recorded additional non-cash stock-based
compensation expense, and related tax effects, with regard to certain past stock option grants, and the
Company has restated certain previously filed financial statements included in this Form 10-K.
The internal review, the independent investigation, and related activities have required the Company to
incur substantial expenses for legal, accounting, tax and other professional services, have diverted
management’s attention from the Company’s business, and could in the future harm its business, financial
condition, results of operations and cash flows.
While the Company believes it has made appropriate judgments in determining the correct measurement
dates for its stock option grants, the SEC may disagree with the manner in which the Company has
accounted for and reported, or not reported, the financial impact. Accordingly, there is a risk the Company
may have to further restate its prior financial statements, amend prior filings with the SEC, or take other
actions not currently contemplated.
The Company’s past stock option granting practices and the restatement of prior financial statements have
exposed the Company to greater risks associated with litigation, regulatory proceedings and government
enforcement actions. As described in Part I, Item 3, “Legal Proceedings”, several derivative complaints
and a class action complaint have been filed in state and federal courts against the Company’s directors
and certain of its executive officers pertaining to allegations relating to stock option grants. The Company
has provided the results of its internal review and independent investigation to the SEC and the United
States Attorney’s Office for the Northern District of California, and in that regard the Company has
responded to informal requests for documents and additional information. The Company intends to
continue full cooperation. No assurance can be given regarding the outcomes from litigation, regulatory
proceedings or government enforcement actions relating to the Company’s past stock option practices. The
resolution of these matters will be time consuming, expensive, and will distract management from the
conduct of the Company’s business. Furthermore, if the Company is subject to adverse findings in
litigation, regulatory proceedings or government enforcement actions, the Company could be required to
pay damages or penalties or have other remedies imposed, which could harm its business, financial
condition, results of operations and cash flows.
In August 2006, the Company received a NASDAQ Staff Determination letter stating that, as a result of
the delayed filing of the Company’s Form 10-Q for the quarter ended July 1, 2006 (the “Third Quarter
Form 10-Q”), the Company was not in compliance with the filing requirements for continued listing as set
forth in Marketplace Rule 4310(c)(14) and was therefore subject to delisting from the NASDAQ Stock
Market. On October 24, 2006, the NASDAQ Listing Qualifications Panel granted the Company’s request
for continued listing, subject to the Company filing the Third Quarter Form 10-Q, and any required
restatements, with the SEC by December 29, 2006. On December 29, 2006, the Company filed the Third
Quarter Form 10-Q with the SEC. With the filing of this Form 10-K, the Company believes that it has
remedied its non-compliance with Marketplace Rule 4310(c)(14), subject to NASDAQ’s affirmative
completion of its compliance protocols and its notification of the Company accordingly. However, if the
SEC disagrees with the manner in which the Company has accounted for and reported, or not reported,
the financial impact of past stock option grants, there could be further delays in filing subsequent SEC
reports that might result in delisting of the Company’s common stock from the NASDAQ Global Select
Market.

Unfavorable results of legal proceedings could adversely affect the Company’s results of operations.
The Company is subject to various legal proceedings and claims that are discussed in Part I, Item 3 of this
Form 10-K. The Company is also subject to certain other legal proceedings and claims that have arisen in
the ordinary course of business and which have not been fully adjudicated. Results of legal proceedings
cannot be predicted with certainty. In addition, litigation may be disruptive to the Company’s normal

21
business operations. Should the Company fail to prevail in certain legal matters, the Company’s financial
condition, liquidity, or results of operations could be adversely affected.

Economic conditions and political events could adversely affect the demand for the Company’s products and
the financial health of its suppliers, distributors, and resellers.
The Company’s operating performance depends significantly on economic conditions in the U.S. and
abroad. At times in the past, demand for the Company’s products has been negatively impacted by difficult
global economic conditions. Uncertainty about future economic conditions makes it difficult to forecast
future demand for the Company’s products and related operating results. Should global and/or regional
economic conditions deteriorate, demand for the Company’s products could be adversely affected, as could
the financial health of its suppliers, distributors, and resellers.

War, terrorism, public health issues, and other circumstances could disrupt supply, delivery, or demand of
products, which could negatively affect the Company’s operations and performance.
War, terrorism, public health issues, and other business interruptions, whether in the U.S. or abroad, have
caused and could cause damage or disruption to international commerce and global economy, and thus may
have a strong negative impact on the global economy, the Company, and the Company’s suppliers or
customers. The Company’s major business operations are subject to interruption by earthquake, other
natural disasters, fire, power shortages, terrorist attacks and other hostile acts, labor disputes, public health
issues, and other events beyond its control. The majority of the Company’s research and development
activities, its corporate headquarters, information technology systems, and other critical business
operations, including certain component suppliers and manufacturing vendors, are located near major
seismic faults. Because the Company does not carry earthquake insurance for direct quake-related losses,
the Company’s operating results and financial condition could be materially adversely affected in the event
of a major earthquake or other natural or man-made disaster.
Although it is impossible to predict the occurrences or consequences of any such events, such events could
result in a decrease in demand for the Company’s products, make it difficult or impossible for the
Company to deliver products to its customers or to receive components from its suppliers, and create
delays and inefficiencies in the Company’s supply chain. In addition, should major public health issues
including pandemics arise, the Company could be negatively affected by more stringent employee travel
restrictions, additional limitations in the availability of freight services, governmental actions limiting the
movement of products between various regions, delays in production ramps of new products, and
disruptions in the operations of the Company’s manufacturing vendors and component suppliers. The
Company’s operating results and financial condition have been, and in the future may be, adversely
affected by such events.

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

22
The personal computer industry has also been characterized by rapid technological advances in software
functionality, hardware performance, and features based on existing or emerging industry standards.
Further, as the personal computer industry and its customers place more reliance on the Internet, an
increasing number of Internet devices that are smaller and simpler than traditional personal computers
may compete for market share with the Company’s existing products. Several competitors of the Company
have targeted certain of the Company’s key market segments, including consumer, education, professional
and consumer digital video editing, and design and publishing. Several of the Company’s competitors have
introduced digital music products and/or online stores offering digital music distribution that mimic many
of the unique design, technical features, and solutions of the Company’s products. The Company has a
significant number of competitors, many of whom have broader product lines and larger installed customer
bases than those of the Company. Additionally, there has been a trend towards consolidation in the
personal computer industry that has resulted in larger and potentially stronger competitors in the
Company’s markets.
The Company is currently the only maker of hardware using the Mac OS. The Mac OS has a minority
market share in the personal computer market, which is dominated by makers of computers utilizing
competing operating systems, including Windows and Linux. The Company’s future operating results and
financial condition are substantially dependent on its ability to continue to develop improvements to the
Macintosh platform to maintain perceived design and functional advantages over competing platforms.
Additionally, if unauthorized copies of the Mac OS are used on other companies’ hardware products and
result in decreased demand for the Company’s hardware products, the Company’s results of operations
may be adversely affected.
The Company is currently focused on market opportunities related to digital music distribution and related
consumer electronic devices, including iPods. The Company faces significant competition from other
companies promoting their own digital music products including MP3 players, music enabled cell phones,
free peer-to-peer music and video services, and free streaming of digital content via the Internet. These
competitors include both new entrants with different market approaches, such as subscription services
models, and also larger companies that may have significant technical, marketing, distribution, and other
resources, as well as established hardware, software, and digital content supplier relationships. Failure to
effectively compete could negatively affect the Company’s operating results and financial position. The
Company expects competition in this space to intensify as competitors attempt to imitate the Company’s
approach to tightly integrating these components within their individual offerings or work more
collaboratively with each other to offer solutions that are more integrated than those they offer currently.
Some of these current and potential competitors have substantial resources and may be able to provide
such products and services at little or no profit or even at a loss to compete with the Company’s offerings.
There can be no assurance the Company will be able to continue to provide products and services that
effectively compete in these markets. The Company may also have to respond to price competition by
lowering prices and/or increasing features which could adversely affect the Company’s music product gross
margins as well as overall Company gross margins.
The Company also faces significant competition in the U.S. education market. U.S. elementary and
secondary schools, as well as college and university customers, remain a core market for the Company. In
an effort to gain market share and remain competitive, the Company will continue to pursue one-to-one
(1:1) learning solutions in education. 1:1 learning solutions typically consist of a portable computer for every
student and teacher along with the installation of a wireless network. These 1:1 learning solutions and other
strategic sales are generally priced more aggressively and could result in significantly less profitability or
financial losses, particularly for larger deals. Although the Company believes it has taken certain steps to
strengthen its position in the education market, there can be no assurance that the Company will be able to
increase or maintain its share of the education market or execute profitably on large strategic

23
arrangements. Failure to do so may have an adverse impact on the Company’s operating results and
financial condition.

Future operating results are dependent upon the Company’s ability to obtain a sufficient supply of components,
including microprocessors, some of which are in short supply or available only from limited sources.
Although most components essential to the Company’s business are generally available from multiple
sources, certain key components including microprocessors and ASICs are currently obtained by the
Company from single or limited sources. Some key components (including without limitation DRAM,
NAND flash-memory, and TFT-LCD flat-panel displays), while currently available to the Company from
multiple sources, are at times subject to industry-wide availability and pricing pressures. In addition, new
products introduced by the Company often initially utilize custom components obtained from only one
source until the Company has evaluated whether there is a need for, and subsequently qualifies, additional
suppliers. In situations where a component or product utilizes new technologies, initial capacity constraints
may exist until such time as the suppliers’ yields have matured. The Company and other producers in the
personal computer and consumer electronics industries also compete for various components with other
industries that have experienced increased demand for their products. The Company uses some
components that are not common to the rest of the personal computer or consumer electronics industries.
Continued availability of these components may be affected if producers decided to concentrate on the
production of components other than those customized to meet the Company’s requirements. If the supply
of a key component were delayed or constrained on a new or existing product, the Company’s results of
operations and financial condition could be adversely affected.

The Company must successfully manage frequent product introductions and transitions to remain competitive
and effectively stimulate customer demand.
Due to the highly volatile and competitive nature of the personal computer and consumer electronics
industries, which are characterized by dynamic customer demand patterns and rapid technological
advances, the Company must continually introduce new products and technologies, enhance existing
products to remain competitive, and effectively stimulate customer demand for new products and
upgraded versions of the Company’s existing products. The success of new product introductions is
dependent on a number of factors, including market acceptance; the Company’s ability to manage the risks
associated with product transitions, including the transition to Intel-based Macintosh computers, and
production ramp issues; the availability of application software for new products; the effective
management of purchase commitments and inventory levels in line with anticipated product demand; the
availability of products in appropriate quantities and costs to meet anticipated demand; and the risk that
new products may have quality or other defects in the early stages of introduction. Accordingly, the
Company cannot determine in advance the ultimate effect new products will have on its sales or results of
operations.
In June 2005, the Company announced its plan to begin using Intel microprocessors in its computers.
During 2006, the Company introduced new Intel-based models of the MacBook Pro, MacBook, Mac Pro,
iMac, and Mac mini computers. The Company’s transition to Intel microprocessors for Macintosh systems
was completed in August 2006, and its transition for Xserve was completed in November 2006. This
transition has been and will continue to be subject to numerous risks and uncertainties including the timely
innovation and delivery of related hardware and software products to support Intel microprocessors,
market acceptance of Intel-based Macintosh computers, and the development and availability on
acceptable terms of components and services essential to enable the Company to timely deliver Intel-based
Macintosh computers. In addition, the Company is dependent on third-party software developers such as
Microsoft and Adobe to timely develop current and future applications that run on Intel-based Macintosh
computers. Universal versions of Microsoft Office and Adobe’s Creative Suite applications are not
currently available. Additionally, there can be no assurance that the Company will be able to maintain its

24
historical gross margin percentages on its products, including Intel-based Macintosh computers, which may
adversely impact the Company’s results of operations.

The Company’s products from time to time experience quality problems that can result in decreased net sales
and operating profits.
The Company sells highly complex hardware and software products that can contain defects in design and
manufacture. Sophisticated operating system software and applications, such as those sold by the
Company, often contain “bugs” that can unexpectedly interfere with the operation of the software. Defects
may also occur in components and products the Company purchases from third-parties. There can be no
assurance that the Company will be able to detect and fix all defects in the hardware and software it sells.
Failure to do so could result in lost revenue, loss of reputation, and significant warranty and other expense
to remedy.

Because orders for components, and in some cases commitments to purchase components, must be placed in
advance of customer orders, the Company faces substantial inventory risk.
The Company records a write-down for inventories of components and products that have become
obsolete or are in excess of anticipated demand or net realizable value and accrues necessary reserves for
cancellation fees for orders of products and components that have been cancelled. Although the Company
believes its inventory and related provisions are currently adequate, given the rapid and unpredictable pace
of product obsolescence in the computer and consumer electronics industries and the transition to Intel-
based Macintosh computers, no assurance can be given that the Company will not incur additional
inventory and related charges. In addition, such charges have had, and may have, a material effect on the
Company’s financial position and results of operations.
The Company must order components for its products and build inventory in advance of product
shipments. Because the Company’s markets are volatile and subject to rapid technology and price changes,
and because of the transition to Intel-based Macintosh computers, there is a risk the Company will forecast
incorrectly and produce or order from third parties excess or insufficient inventories of particular products.
Consistent with industry practice, components are normally acquired through a combination of purchase
orders, supplier contracts, and open orders based on projected demand information. Such purchase
commitments typically cover the Company’s forecasted component and manufacturing requirements for
periods ranging from 30 to 150 days. The Company’s operating results and financial condition have been in
the past and may in the future be materially adversely affected by the Company’s ability to manage its
inventory levels and respond to short-term shifts in customer demand patterns.

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

25
Final assembly of products sold by the Company is currently performed in the Company’s manufacturing
facility in Cork, Ireland, and by external vendors in Fremont, California; Fullerton, California; Taiwan; the
Republic of Korea; the People’s Republic of China; and the Czech Republic. Currently, manufacturing of
many of the components used in the Company’s products is performed by third-party vendors in Taiwan,
China, Japan, Korea, and Singapore. Final assembly of substantially all of the Company’s portable
products, including MacBook Pros, MacBooks, and iPods, is performed by third-party vendors in China. If
for any reason manufacturing or logistics in any of these locations is disrupted by regional economic,
business, labor, environmental, public health, or political issues, or due to information technology system
failures or military actions, the Company’s results of operations and financial condition could be adversely
affected.

The Company’s future operating performance is dependent on the performance of distributors and other
resellers of the Company’s products.
The Company distributes its products through wholesalers, resellers, national and regional retailers, and
cataloguers, many of whom distribute products from competing manufacturers. In addition, the Company
sells many of its products and resells certain third-party products in most of its major markets directly to
end-users, certain education customers, and certain resellers through its online stores around the world
and its retail stores. Many of the Company’s resellers operate on narrow product margins and have been
negatively impacted in the past by weak economic conditions. Considerable trade receivables that are not
covered by collateral or credit insurance are outstanding with the Company’s distribution and retail
channel partners. The Company’s business and financial results could be adversely affected if the financial
condition of these resellers weakens, if resellers within consumer channels were to cease distribution of the
Company’s products, or if uncertainty regarding demand for the Company’s products caused resellers to
reduce their ordering and marketing of the Company’s products. The Company has invested and will
continue to invest in various programs to enhance reseller sales, including staffing selected resellers’ stores
with Company employees and contractors. These programs could require a substantial investment from the
Company, while providing no assurance of return or incremental revenue to offset this investment.
Over the past several years, an increasing proportion of the Company’s net sales have been made by the
Company directly to end-users through its online stores around the world and through its retail stores in
the U.S., Canada, Japan, and the U.K. Some of the Company’s resellers have perceived this expansion of
the Company’s direct sales as conflicting with their own businesses and economic interests as distributors
and resellers of the Company’s products. Perception of such a conflict could discourage the Company’s
resellers from investing additional resources in the distribution and sale of the Company’s products or lead
them to limit or cease distribution of the Company’s products. The Company’s business and financial
results could be adversely affected if expansion of its direct sales to end-users causes some or all of its
resellers to cease or limit distribution of the Company’s products.

The Company relies on third-party digital content, which may not be available to the Company on commercially
reasonable terms or at all.
The Company contracts with third parties to offer their digital content to customers through the
Company’s iTunes Store. The Company pays substantial fees to obtain the rights to offer to its customers
this third-party digital content. The Company’s licensing arrangements with these third-party content
providers are short-term in nature and do not guarantee the future renewal of these arrangements at
commercially reasonable terms, if at all. Certain parties in the music industry have consolidated and
formed alliances, which could limit the availability and increase the fees required to offer digital content to
customers through the iTunes Store. Some third-party content providers currently or may in the future
offer music products and services that compete with the Company’s music products and services, and could
take action to make it more difficult or impossible for the Company to license their digital content in the
future. Further, other distributors of third-party content or third-party content owners may seek to limit

26
the Company’s access to or increase the total cost of such content. If the Company is unable to continue to
offer a wide variety of digital content at reasonable prices with acceptable usage rules, or continue to
expand its geographic reach outside the U.S., then sales and gross margins of the Company’s iTunes Store,
as well as related hardware and peripherals, including iPods, may be adversely affected.
Third-party content providers and artists require that the Company provide certain digital rights
management (“DRM”) solutions and other security mechanisms. If the requirements from content
providers or artists change, then the Company may be required to further develop or license technology to
address such new rights and requirements. In addition, certain countries have passed legislation or may
propose legislation that would force the Company to license its DRM solutions so that content would be
interoperable with competitor devices, which could lessen the protection of content subjecting it to piracy
and could affect arrangements with the Company’s content suppliers. There is no assurance the Company
will be able to develop or license such solutions at a reasonable cost and in a timely manner, if at all, which
could have a materially adverse effect on the Company’s operating results and financial position.

The Company’s future performance is dependent upon support from third-party software developers. If third-
party software applications cease to be developed or available for the Company’s hardware products, then
customers may choose not to buy the Company’s products.
The Company believes decisions by customers to purchase the Company’s personal computers, as opposed
to Windows-based systems, are often based on the availability of third-party software applications such as
Microsoft Office. The Company also believes the availability of third-party application software for the
Company’s hardware products depends in part on third-party developers’ perception and analysis of the
relative benefits of developing, maintaining, and upgrading such software for the Company’s products
versus software for the larger Windows market or growing Linux market. This analysis may be based on
factors such as the perceived strength of the Company and its products, the anticipated potential revenue
that may be generated, continued acceptance by customers of Mac OS X, and the costs of developing such
software products. To the extent the minority market share held by the Company in the personal computer
market has caused software developers to question the Company’s prospects in the personal computer
market, developers could be less inclined to develop new application software or upgrade existing software
for the Company’s products and more inclined to devote their resources to developing and upgrading
software for the larger Windows market or growing Linux market. The Company’s recent announcement
that it plans to add a feature to the next version of Mac OS X that will enable Intel-based Macintosh
systems to run Windows XP may deter developers from creating software applications for Mac OS X if
such applications are available for the Windows platform. Moreover, there can be no assurance software
developers will continue to develop software for Mac OS X on a timely basis or at all.
In June 2005, the Company announced its plan to begin using Intel microprocessors in its computers.
During 2006, the Company introduced new Intel-based models of the MacBook Pro, MacBook, Mac Pro,
iMac, and Mac mini computers. The Company’s transition to Intel microprocessors for Macintosh systems
was completed in August 2006, and its transition for Xserve was completed in November 2006. The
Company depends on third-party software developers to timely develop current and future applications
that run on Intel microprocessors. Universal versions of Microsoft Office and Adobe’s Creative
Suite applications are not currently available. The lack of applications that run on Intel-based Macintosh
systems, including Microsoft Office and Adobe Creative Suite, could have a materially adverse effect on
the Company’s operating results and financial position.
In addition, past and future development by the Company of its own software applications and solutions
may negatively impact the decision of software developers, such as Microsoft and Adobe, to develop,
maintain, and upgrade similar or competitive software for the Company’s products. The Company
currently markets and sells a variety of software applications for use by professionals, consumers, and
education customers that could influence the decisions of third-party software developers to develop or

27
upgrade Macintosh-compatible software products. Software applications currently marketed by the
Company include software for professional film and video editing, professional compositing and visual
effects for large format film and video productions, professional music production and music post
production, professional and consumer DVD encoding and authoring, professional digital photo editing
and workflow management, consumer digital video and digital photo editing and management, digital
music management, desktop-based database management, word processing, and high-quality
presentations. Discontinuance of third-party software products for the Macintosh platform could have an
adverse effect on the Company’s net sales and results of operations.

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

The Company’s retail initiative has required and will continue to require a substantial investment and
commitment of resources and is subject to numerous risks and uncertainties.
Through September 30, 2006, the Company had opened 165 retail stores. The Company’s retail initiative
has required substantial investment in equipment and leasehold improvements, information systems,
inventory, and personnel. The Company has also entered into substantial operating lease commitments for
retail space with lease terms ranging from 5 to 20 years, the majority of which are for 10 years. The
Company could incur substantial costs should it choose to terminate these commitments or close individual
stores. Such costs could adversely affect the Company’s results of operations and financial condition.
Additionally, a relatively high proportion of the Retail segment’s costs are fixed because of personnel costs,

28
depreciation of store construction costs, and lease expense. As a result, significant losses would result
should the Retail segment experience a significant decline in sales for any reason.
Certain of the Company’s stores have been designed and built to serve as high-profile venues that function as
vehicles for general corporate marketing, corporate events, and brand awareness. Because of their unique
design elements, locations and size, these stores require substantially more investment in equipment and
leasehold improvements than the Company’s more typical retail stores. The Company has opened eight such
stores through September 2006. Because of their location and size, these high-profile stores also require the
Company to enter into substantially larger operating lease commitments compared to those required for its
more typical stores. Current leases on such locations have terms ranging from 10 to 14 years with total
remaining commitments per location ranging from $4 million to $33 million. Closure or poor performance of
one of these high-profile stores could have a significant negative impact on the Company’s results of
operations and financial condition.
Many of the general risks and uncertainties the Company faces could also have an adverse impact on its
Retail segment. Also, many factors unique to retail operations present risks and uncertainties, some of
which are beyond the Company’s control, that could adversely affect the Retail segment’s future results,
cause its actual results to differ from those currently expected, and/or have an adverse effect on the
Company’s consolidated results of operations. Potential risks and uncertainties unique to retail operations
that could have an adverse impact on the Retail segment include, among other things, macro-economic
factors that have a negative impact on general retail activity; inability to manage costs associated with store
construction and operation; inability to sell third-party hardware and software products at adequate
margins; failure to manage relationships with existing retail channel partners; lack of experience in
managing retail operations outside the U.S.; costs associated with unanticipated fluctuations in the value of
Apple-branded and third-party retail inventory; and inability to obtain and renew leases in quality retail
locations at a reasonable cost.

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

Declines in the sales of the Company’s professional products, software, accessories, or service and support
contracts, or increases in sales of consumer products, including iPods, may negatively impact the Company’s
gross margin and operating margin percentages.
The Company’s professional products, including MacBook Pro and Mac Pro systems, software, accessories,
and service and support contracts, generally have higher gross margins than the Company’s consumer
products, including the iMac, Mac mini, MacBook, iPod, and content from the iTunes Store. A shift in
sales mix away from higher margin professional products towards lower margin consumer products could
adversely affect the Company’s future gross margin and operating margin percentages. The Company’s
traditional professional customers may choose to buy consumer products, specifically the iMac and
MacBook, instead of professional products. Professional users may choose to buy the iMac due to its
relative price performance and unique design featuring a flat panel screen. Professional users may also
choose to purchase MacBooks instead of the Company’s professional-oriented portable products due to
their price performance and screen size. Additionally, significant future growth in iPod sales without

29
corresponding growth in higher margin product sales could also reduce gross margin and operating margin
percentages.
The Company expects its quarterly revenue and operating results to fluctuate for a variety of reasons.
The Company’s profit margins vary among its products and its distribution channels. The Company’s direct
sales, primarily through its retail and online stores, generally have higher associated profitability than its
indirect sales. As a result, the Company’s gross margin and operating margin percentages, as well as overall
profitability may be adversely impacted as a result of a shift in product, geographic or channel mix, or new
product announcements, including the transition to Intel-based Macintosh computers. In addition, the
Company generally sells more product during the third month of each quarter than it does during either of
the first two months, a pattern typical in the personal computer and consumer electronics industries. This
sales pattern can produce pressure on the Company’s internal infrastructure during the third month of a
quarter and may adversely impact the Company’s ability to predict its financial results accurately.
Furthermore, the Company has typically experienced greater net sales in the first and fourth fiscal quarters
compared to other quarters in the fiscal year due to seasonal demand related to the holiday season and the
beginning of the school year. Developments late in a quarter, such as lower-than-anticipated demand for
the Company’s products, an internal systems failure, or failure of one of the Company’s key logistics,
components suppliers, or manufacturing partners, could have significant adverse impacts on the Company
and its results of operations and financial condition.

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

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

30
The Company’s success depends largely on its ability to attract and retain key personnel.
Much of the future success of the Company depends on the continued service and availability of skilled
personnel, including its Chief Executive Officer, members of its executive team, and those in technical,
marketing and staff positions. Experienced personnel in the information technology industry are in high
demand and competition for their talents is intense, especially in the Silicon Valley, where the majority of
the Company’s key employees are located. The Company has relied on its ability to grant stock options as
one mechanism for recruiting and retaining this highly skilled talent. Recent accounting regulations
requiring the expensing of stock options have resulted in increased stock-based compensation expense,
which may cause the Company to reduce the amount of stock-based awards issued to employees. There
can be no assurance that the Company will continue to successfully attract and retain key personnel.

The Company is subject to risks associated with the availability and coverage of insurance.
For certain risks, the Company does not maintain insurance coverage because of cost and/or availability.
Because the Company retains some portion of its insurable risks, and in some cases self insures completely,
unforeseen or catastrophic losses in excess of insured limits may have a material adverse effect on the
Company’s results of operations and financial position.

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

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

A large portion of the Company’s revenue is derived from its international operations. As a result, the
Company’s operating results and financial condition could be significantly affected by risks associated with
international activities, including economic and labor conditions, political instability, tax laws (including
U.S. taxes on foreign subsidiaries), and changes in the value of the U.S. dollar versus the local currency in
which the products are sold and goods and services are purchased. The Company’s primary exposure to
movements in foreign currency exchange rates relate to non-U.S. dollar denominated sales in Europe,
Japan, Australia, Canada, and certain parts of Asia and non-dollar denominated operating expenses
incurred throughout the world. Weaknesses in foreign currencies, particularly the Japanese Yen and the
Euro, can adversely impact consumer demand for the Company’s products and the U.S. dollar value of the
Company’s foreign currency denominated sales. Conversely, a strengthening in these and other foreign
currencies can cause the Company to modify international pricing and affect the value of the Company’s
foreign denominated sales, and in some cases, may also increase the cost to the Company of some product
components.
Margins on sales of the Company’s products in foreign countries, and on sales of products that include
components obtained from foreign suppliers, can be adversely affected by foreign currency exchange rate
fluctuations and by international trade regulations, including tariffs and antidumping penalties.
Derivative instruments, such as foreign exchange forward and option positions have been utilized by the
Company to hedge exposures to fluctuations in foreign currency exchange rates. The use of such hedging
activities may not offset more than a portion of the adverse financial impact resulting from unfavorable
movements in foreign exchange rates.

31
Further information related to the Company’s global market risks may be found in Part II, Item 7A of this
Form 10-K under the subheading “Foreign Currency Risk” and may be found in Part II, Item 8 of this
Form 10-K at Notes 1 and 3 of Notes to Consolidated Financial Statements.

The Company is subject to risks associated with environmental regulations.

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

Changes in accounting rules could affect the Company’s future operating results.
Financial statements are prepared in accordance with U.S. generally accepted accounting principles. These
principles are subject to interpretation by various governing bodies, including the Financial Accounting
Standards Board (“FASB”) and the SEC, who create and interpret appropriate accounting standards. A
change from current accounting standards could have a significant effect on the Company’s results of
operations. In December 2004, the FASB issued new guidance that addresses the accounting for share-
based payments, Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004)
(“SFAS No. 123R”), Share-Based Payment, which the Company adopted in 2006. In 2006, stock-based
compensation expense reduced diluted earnings per common share by approximately $0.14. Although the
adoption of SFAS No. 123R is expected to continue to have a significant impact on the Company’s results
of operations, future changes to various assumptions used to determine the fair-value of awards issued or
the amount and type of equity awards granted create uncertainty as to the amount of future stock-based
compensation expense.

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

The Company’s stock price may be volatile.

The Company’s stock has at times experienced substantial price volatility as a result of variations between
its actual and anticipated financial results and as a result of announcements by the Company and its
competitors. The stock market has experienced extreme price and volume fluctuations that have affected
the market price of many technology companies in ways that may have been unrelated to the operating
performance of these companies. Furthermore, the Company believes its stock price reflects high future
growth and profitability expectations. If the Company fails to meet these expectations its stock price may
significantly decline. In addition, increases in the Company’s stock price may result in greater dilution of
earnings per share.

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Item 1B. Unresolved Staff Comments
None.

Item 2. Properties
The Company’s headquarters are located in Cupertino, California. The Company has a manufacturing
facility in Cork, Ireland. As of September 30, 2006, the Company leased approximately 3.6 million square
feet of space, primarily in the U.S., and to a lesser extent, in Europe, Japan, Canada, and the Asia Pacific
region. The major facility leases are for terms of 5 to 15 years and generally provide renewal options for
terms of 3 to 5 additional years. Leased space includes approximately 1.2 million square feet of retail
space, a majority of which is in the U.S. Lease terms for retail space range from 5 to 20 years, the majority
of which are for 10 years, and often contain multi-year renewal options.
The Company owns a 352,000 square-foot manufacturing facility in Cork, Ireland that also houses a
customer support call center. The Company also owns 805,000 square feet of facilities in Sacramento,
California that include warehousing and distribution operations as well as a customer support call center.
In addition, the Company owns approximately 1.9 million square feet of facilities for research and
development and corporate functions in Cupertino, California, including approximately 948,000 square
feet purchased during 2006 for the future development of the Company’s second corporate campus, and
approximately 107,000 square feet for a data center in Newark, California. Outside the U.S., the Company
owns additional facilities totaling approximately 169,000 square feet. The Company believes its existing
facilities and equipment are well maintained and in good operating condition.
The Company has invested in internal capacity and strategic relationships with outside manufacturing
vendors, and therefore believes it has adequate manufacturing capacity for the foreseeable future. The
Company continues to make investments in capital equipment as needed to meet anticipated demand for
its products.

Item 3. Legal Proceedings

The Company is subject to various legal proceedings and claims that are discussed below. The Company is
also subject to certain other legal proceedings and claims that have arisen in the ordinary course of
business and which have not been fully adjudicated. In the opinion of management, the Company does not
have a potential liability related to any current legal proceedings and claims that would individually or in
the aggregate have a material adverse effect on its financial condition, liquidity or results of operations.
However, the results of legal proceedings cannot be predicted with certainty. Should the Company fail to
prevail in any of these legal matters or should several of these legal matters be resolved against the
Company in the same reporting period, the operating results of a particular reporting period could be
materially adversely affected. The Company settled certain matters during 2006 that did not individually or
in the aggregate have a material impact on the Company’s results of operations.

Allen v. Apple Computer, Inc.

On January 28, 2005, a plaintiff filed a purported nationwide class action in Los Angeles Superior Court
alleging that a defect in the Company’s 17-inch Studio Display monitors results in dimming of half of the
screen and constant blinking of the power light. Plaintiff filed an amended complaint on October 24, 2005,
adding additional named plaintiffs and expanding the alleged class to include purchasers of the 20-inch
Apple Cinema Display and the 23-inch Apple Cinema HD Display. The amended complaint alleges that
the displays have a purported defect that causes dimming of one-half of the screen, and that the Company
misrepresented the quality of the displays and/or concealed the purported defect. Plaintiffs assert claims
under California Business & Professions Code §17200 (unfair competition); California Business &
Professions Code §17500 (false advertising) and the Consumer Legal Remedies Act. The amended
complaint seeks remedies including damages and equitable relief. On November 14, 2005, the Company

33
filed an answer to the amended complaint as to the allegations regarding the 17-inch display and a
demurrer/motion to strike as to the allegations regarding the 20-inch and 23-inch displays on the ground
that plaintiffs failed to allege that they purchased those displays. At a status conference on November 1,
2005, the Court ordered Plaintiffs to amend their complaint. Plaintiff filed an amended complaint on
December 12, 2005, and the Company answered on January 5, 2006 denying all allegations and asserting
numerous affirmative defenses. The Company has reached a settlement in this matter, which was given
preliminary approval by the Court on September 18, 2006. The final approval hearing is scheduled for
February 15, 2007. Settlement of this matter will not have a material effect on the Company’s financial
position or results of operations.

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

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

Apple Corps Ltd. v. Apple Computer, Inc.; Apple Computer, Inc. v. Apple Corps Ltd.
Plaintiff Apple Corps filed this action on July 4, 2003 in the High Court of Justice, Chancery Division, in
London alleging that the Company has breached a 1991 agreement that resolved earlier trademark
litigation between the parties regarding use of certain Apple marks. Plaintiff seeks an injunction,
unspecified damages, and other relief. The Company filed a motion on October 13, 2003, challenging
jurisdiction in the U.K. The Court denied this motion on April 7, 2004. The Company filed an appeal of
the Court’s decision but subsequently withdrew the appeal. In November 2004, Plaintiff served the
Company with an Amended Bill of Particulars and on December 23, 2004, the Company filed a Defence.
On November 24, 2005, Plaintiff filed a Re-Amended Bill of Particulars and the Company filed its Defence
on December 16, 2005. Trial took place from March 29, 2006 through April 5, 2006. Judgment was given in
favor of the Company on May 8, 2006 and Apple Corps was ordered to pay a portion of the Company’s
fees, the amount to be agreed or determined in a subsequent proceeding. Apple Corps has filed an appeal,
which is scheduled to be heard in late February 2007.
On October 8, 2003, the Company filed a lawsuit against Apple Corps in the United States District Court
for the Northern District of California requesting a declaratory judgment that the Company has not
breached the 1991 agreement. Apple Corps challenged jurisdiction in the California case but the Court
denied that challenge on March 25, 2004. Apple Corps subsequently prevailed on a motion to stay the
California case during the pendency of the U.K. action. The Company has dismissed the California lawsuit
without prejudice.

Bader v. Anderson, et al.

Plaintiff filed this purported shareholder derivative action against the Company and each of its then
current executive officers and members of its Board of Directors on May 19, 2005 in Santa Clara County
Superior Court asserting claims for breach of fiduciary duty, material misstatements and omissions, and
violations of California Businesses & Professions Code §17200 (unfair competition). Plaintiff alleges that
the Company’s March 14, 2005, proxy statement was false and misleading for failure to disclose certain
information relating to the Apple Computer, Inc. Performance Bonus Plan, which was approved by

34
shareholders at the annual meeting held on April 21, 2005. Plaintiff, who ostensibly brings suit on the
Company’s behalf, has made no demand on the Board of Directors and alleges that such demand is
excused. Plaintiff seeks injunctive and other relief for purported injury to the Company. On July 27, 2005,
Plaintiff filed an amended complaint alleging that, in addition to the purported derivative claims, adoption
of the bonus plan and distribution of the proxy statement describing that plan also inflicted injury on her
directly as an individual shareholder. On January 10, 2006, the Court sustained defendants’ demurrer to
the amended complaint, with leave to amend. Plaintiff filed a second amended complaint on February 7,
2006, and the Company filed a demurrer. After a hearing on June 13, 2006, the Court sustained the
demurrer without leave to amend as to the non-director officers and with leave to amend as to the
directors. On July 24, 2006, plaintiff filed a third amended complaint, which purports to bring claims
derivatively as well as directly on behalf of a class of common stock holders who have been or will be
harmed by virtue of the allegedly misleading proxy statement. In addition to reasserting prior causes of
action, the third amended complaint includes a claim that the Company violated the terms of the plan, and
a claim for waste related to restricted stock unit grants to certain officers in 2003 and 2004 and an option
grant to the Company’s CEO in January 2000. A demurrer that the Company filed to the third amended
complaint as well as a motion to disqualify the Company’s lawyers will be heard on January 30, 2007.

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

Plaintiffs filed this action in Los Angeles County Superior Court on October 31, 2005, on behalf of a
purported nationwide class of all purchasers of all Apple wireless products (router, modem, or adaptor)
sold at any time. The complaint alleges that the Company misrepresented the transmission rates of these
products. The complaint alleges causes of action for breach of express warranty and for violations of the
Consumer Legal Remedies Act, California Business & Professions Code §17200 (unfair competition) and
California Business & Professions Code §17500 (false advertising). The complaint seeks damages and
equitable remedies. On December 15, 2005, the Company filed an answer denying all allegations and
asserting numerous affirmative defenses. The parties have reached a tentative settlement, which is not
expected to have a material effect on the Company’s financial position or results of operations.

Barry et al. v. Apple Computer, Inc.

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

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

These federal court complaints allege that the Company’s iPod music players, and the ear bud headphones
sold with them, are inherently defective in design and are sold without adequate warnings concerning the
risk of noise-induced hearing loss by iPod users. The Birdsong action was initially filed on January 30, 2006
in the United States District Court for the Western District of Louisiana on behalf of a purported
Louisiana class of iPod purchasers and alleges violations of the Louisiana Products Liability Act, breaches
of implied warranties, unjust enrichment, and negligent misrepresentation. The Patterson action was filed
on January 31, 2006 in the United States District Court for the Northern District of California on behalf of
a purported class of all iPod purchasers within the four-year period before January 31, 2006. That action
alleged breaches of implied and express warranties, violations of California Business & Professions Code
§17200 (unfair competition), California Business & Professions Code §17500 (false advertising), the
Consumer Legal Remedies Act, breaches of express and implied warranties, negligent misrepresentation
and unjust enrichment. The Birdsong action was transferred to the Northern District of California, and the

35
Patterson action was dismissed. An amended complaint was subsequently filed in Birdsong, dropping the
Louisiana law-based claims and adding California law-based claims equivalent to those in Patterson. The
Company filed a motion to dismiss on November 3, 2006. Plaintiffs will not oppose the motion but instead
will file a second amended complaint by January 15, 2007.
A similar complaint, Royer-Brennan v. Apple Computer, Inc. and Apple Canada, Inc., was filed in Montreal,
Quebec, Canada, on February 1, 2006, seeking authorization to institute a class action on behalf of iPod
purchasers in Quebec. A hearing on the motion for class certification is scheduled for February 8
and 9, 2007, although Plaintiff counsel has now requested that the hearing be delayed pending a ruling on
the motion to dismiss in the U.S. case.

Branning et al. v. Apple Computer, Inc.

Plaintiffs originally filed this purported class action in San Francisco County Superior Court on
February 17, 2005. The initial complaint alleged violations of California Business & Professions Code
§17200 (unfair competition) and violation of the Consumer Legal Remedies Act (CLRA) regarding a
variety of purportedly unfair and unlawful conduct including, but not limited to, allegedly selling used
computers as new and failing to honor warranties. Plaintiffs also brought causes of action for
misappropriation of trade secrets, breach of contract, and violation of the Song-Beverly Consumer
Warranty Act. Plaintiffs requested unspecified damages and other relief. On May 9, 2005, the Court
granted the Company’s motion to transfer the case to Santa Clara County Superior Court. On May 2, 2005,
Plaintiffs filed an amended complaint adding two new named plaintiffs and three new causes of action
including a claim for treble damages under the Cartwright Act (California Business & Professions Code
§16700 et seq.) and a claim for false advertising. The Company filed a demurrer to the amended
complaint, which the Court sustained in its entirety on November 10, 2005. The Court granted Plaintiffs
leave to amend and they filed an amended complaint on December 29, 2005. Plaintiffs’ amended
complaint added three plaintiffs and alleged many of the same factual claims as the previous complaints,
such as alleged selling of used equipment as new, alleged failure to honor warranties and service contracts
for the consumer plaintiffs, and alleged fraud related to the opening of the Apple retail stores. Plaintiffs
continued to assert causes of action for unfair competition (§17200), violations of the CLRA, breach of
contract, misappropriation of trade secrets, violations of the Cartwright Act and alleged new causes of
action for fraud, conversion and breach of the implied covenant of good faith and fair dealing. The
Company filed a demurrer to the amended complaint on January 31, 2006, which the Court sustained on
March 3, 2006 on sixteen of seventeen causes of action. Plaintiffs filed an amended complaint adding one
new plaintiff. The Company filed a demurrer, which was granted in part on September 9, 2006. Plaintiffs
filed a further amended complaint on September 21, 2006. On October 2, 2006, the Company filed an
answer denying all allegations and asserting numerous affirmative defenses. The case is in discovery.

Butzer, et al. v. Apple Computer, Inc.;Wirges v. Apple Computer, Inc.; Blackwell v. Apple Computer, Inc.
Plaintiffs filed the Butzer action on August 23, 2005 in the United States District Court for the Northern
District of California, San Jose Division, on behalf of a purported nationwide class of all purchasers of the
Company’s PowerBook G4 portable computers. The complaint alleged defects in the memory of the
computers. The complaint alleged that this purported defect extends to other series of the Company’s
portables and stated that plaintiffs reserved the right to amend the complaint to include these other series.
Plaintiffs asserted claims for alleged violations of California Business & Professions Code §17200 (unfair
competition), California Business & Professions Code §17500 (false advertising), the Consumer Legal
Remedies Act (CLRA) and the Song-Beverly Consumer Warranty Act. The complaint sought remedies
including restitution and/or damages and injunctive relief. The Wirges action was filed on January 20, 2006
in the United States District Court for the Eastern District of Arkansas, also on behalf of a purported
nationwide class, and made similar allegations. Plaintiffs asserted claims for breach of warranties, violation
of the Magnuson—Moss Act, strict products liability and unjust enrichment. The complaint sought
restitution, damages and other remedies. The Blackwell action was filed on February 10, 2006 in the

36
United States District Court for the Northern District of California, on behalf of a purported nationwide
class, and made identical allegations to those made in the Butzer case. Plaintiffs asserted claims for breach
of express and implied warranties, violation of the CLRA, violation of the Song-Beverly Act, false
advertising and unfair competition. The complaint sought restitution, an injunction and other remedies.
The Company filed an answer to the Butzer complaint on October 19, 2005 denying all material allegations
and asserting numerous affirmative defenses. The Company filed an answer to the Wirges action on
February 28, 2006, and also filed a motion to transfer the Wirges case to the Northern District of
California. The Company filed an answer to the Blackwell complaint on March 15, 2006 denying all
material allegations and asserting numerous affirmative defenses. The Company has reached a settlement
with the named plaintiffs in all three cases and these matters are concluded. Settlement of these matters
did not have a material effect on the Company’s financial position or results of operations.

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

The original Plaintiff (Slattery) filed this purported class action on January 3, 2005 in the United States
District Court for the Northern District of California alleging various claims including alleged unlawful
tying of music purchased on the iTunes Store with the purchase of iPods and vice versa and unlawful
acquisition or maintenance of monopoly market power. Plaintiff’s complaint alleged violations of §§1 and
2 of the Sherman Act (15 U.S.C. §§1 and 2), California Business and Professions Code §16700 et seq. (the
Cartwright Act), California Business and Professions Code §17200 (unfair competition), common law
unjust enrichment and common law monopolization. Plaintiff sought unspecified damages and other relief.
The Company filed a motion to dismiss on February 10, 2005. On September 9, 2005, the Court denied the
motion in part and granted it in part. Plaintiff filed an amended complaint on September 23, 2005 and the
Company filed an answer on October 18, 2005. On May 8, 2006, the Court heard Plaintiff’s motion for
leave to file a second amended complaint to substitute two new plaintiffs for Slattery. In August 2006, the
court dismissed Slattery without prejudice and allowed plaintiffs to file an amended complaint naming two
new plaintiffs (Charoensak and Rosen). On November 2, 2006, the Company filed an answer to the
amended complaint denying all material allegations and asserting numerous affirmative defenses. The
hearing on class certification is set for April 16, 2007.

Contois Music Technology LLC v. Apple Computer, Inc.

Plaintiff Contois Music Technology filed this action on June 13, 2005 in the United States District Court
for Vermont, alleging infringement by the Company of U.S. Patent No. 5,864,868, entitled “Computer
Control System and User Interface for Media Playing Devices.” The complaint sought unspecified
damages and other relief. The Company filed an answer on November 23, 2005 denying all material
allegations and asserting numerous affirmative defenses. A Markman hearing was held on June 13, 2006
and the court issued a claim construction ruling on July 24, 2006. The parties agreed to a settlement and
the case was dismissed on August 18, 2006. This matter is now concluded. Settlement of this matter did not
have a material effect on the Company’s financial position or results of operations.

Creative Technology Ltd. and Creative Labs, Inc. v. Apple Computer, Inc. (filed on May 15, 2006,
International Trade Comission), Creative Technology Ltd. v. Apple Computer, Inc. (filed on May 15, 2006,
United States District Court for the Northern District of California), Apple Computer, Inc. v. Creative
Technology Ltd. and Creative Labs, Inc. (filed May 15, 2006, United States District Court for the Western
District of Wisconsin), Apple Computer, Inc. v. Creative Technology Ltd. and Creative Labs, Inc. (filed on
June 1, 2007, International Trade Comission), Apple Computer, Inc. v. Creative Technology Ltd. and
Creative Labs (filed on June 1, 2006, United States District Court for the Eastern District of Texas)
On May 15, 2006, Creative Labs, Inc., and Creative Technology Ltd. (collectively “Creative”) filed a
complaint with the U.S. International Trade Commission (“ITC”) alleging that the Company infringed
U.S. patent number 6,928,433 (“‘433 patent”) and seeking an order permanently barring iPods from
importation into the United States. On May 15, 2006, Creative also brought suit against the Company in

37
the United States District Court for the Northern District of California, also alleging that the iPod
infringed the ‘433 patent. The District Court action was stayed pending resolution of the Creative ITC
Action.
On May 15, 2006, the Company brought suit against Creative in the United States District Court for the
Western District of Wisconsin (“Wisconsin Action”), alleging that Creative infringed U.S. patent number
5,479,602 (“‘602 patent”), U.S. patent number 5,586,237 (“‘237 patent”), U.S. patent number 5,898,434
(“‘434 patent”), and U.S. patent number 6,731,312 (“‘312 patent”). On May 17, 2006, the Company filed an
amended complaint in the Wisconsin Action alleging that Creative also infringed U.S. patent number
5,341,293 (“‘293 patent”), U.S. patent number 6,047,342 (“‘342 patent”), and U.S. patent number 5,799,280
(“‘280 patent”).
On June 1, 2006, the Company brought suit against Creative in the United States District Court for the
Eastern District of Texas, (“Texas Action”), alleging that Creative infringed U.S. patent number 6,157,363
(“‘363 patent”), U.S. patent number 5,640,566 (“‘566 patent”), and U.S. patent number 5,504,852 (“‘852
patent”). On June 27, 2006, the Company filed an amended complaint in the Texas Action alleging that
Creative also infringed U.S. patent number 7,046,230 (“‘230 patent”) and U.S. patent number 6,282,646
(“‘646 patent”). At the suggestion of the District Court, the Company filed separate actions in the Eastern
District of Texas regarding the Company’s allegations relating to the ‘230 patent and the ‘646 patent.
On June 1, 2006, the Company filed a complaint with the ITC alleging that Creative infringed the ‘230
patent, the ‘293 patent, and the ‘434 patent. On June 5, 2006, the Company filed an amended complaint
with the ITC alleging that Creative also infringed the ‘646 patent.
The parties reached a settlement of all of the above matters and all cases were dismissed as of October 13,
2006. These matters are concluded. Settlement of these matters did not have a material effect on the
Company’s financial position or results of operations.

Davis v. Apple Computer, Inc.

Plaintiff filed this purported class action in San Francisco County Superior Court on December 5, 2002,
alleging that the Company engaged in unfair and deceptive business practices relating to its AppleCare
Extended Service and Warranty Plan. Plaintiff asserts causes of action for violation of California
Business & Professions Code §17200 (unfair competition), California Business & Professions Code §17500
(false advertising), breach of the Song-Beverly Warranty Act, intentional misrepresentation and
concealment. Plaintiff requests unspecified damages and other relief. The Company filed a demurrer and
motion to strike, which were granted, in part, and Plaintiff filed an amended complaint. The Company
filed an answer on April 17, 2003 denying all allegations and asserting numerous affirmative defenses.
Plaintiff subsequently amended his complaint. On October 29, 2003, the Company filed a motion to
disqualify Plaintiff’s counsel in his role as counsel to the purported class and to the general public. The
Court granted the motion but allowed Plaintiff to retain substitute counsel. Plaintiff did engage new
counsel for the general public, but not for the class. The Company moved to disqualify Plaintiff’s new
counsel and to have the Court dismiss the general public claims for equitable relief. The Court declined to
disqualify Plaintiff’s new counsel or to dismiss the equitable claims, but did confirm that the class action
claims were dismissed. The Company appealed the ruling and the case was stayed pending the outcome of
the appeal. The Court of Appeals denied the appeal on August 17, 2005, affirming the trial court’s
decision. The Company filed a Petition for review with the California Supreme Court, which was denied on
November 23, 2005. The case was remanded back to the trial court. The parties have reached a settlement
and the matter is concluded. Settlement of this matter did not have a material effect on the Company’s
financial position or results of operations.

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

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

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

Gillis et al. v. Apple Computer, Inc.

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

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

Plaintiffs filed this purported class action on September 22, 2003 in Los Angeles County Superior Court
against the Company and other members of the computer industry on behalf of an alleged nationwide class
of purchasers of certain computer hard drives. The case alleged violations of California Business &
Professions Code §17200 (unfair competition), the Consumer Legal Remedies Act and false advertising
related to the size of the drives. Plaintiffs alleged that calculation of hard drive size using the decimal
method misrepresents the actual size of the drive. The complaint sought restitution and other relief.
Plaintiffs filed an amended complaint on March 30, 2004 and the Company filed an answer on
September 23, 2004, denying all allegations and asserting numerous affirmative defenses. Defendants filed
a motion to strike portions of the complaint based on sales by resellers and filed a motion for judgment on
the pleadings based upon Proposition 64. The Court granted both motions at a hearing on April 6, 2005.
Plaintiffs thereafter filed an amended complaint on May 6, 2005. The Defendants filed a demurrer on
June 6, 2005, which the Court granted in part and denied in part. Plaintiffs filed an amended complaint
and the Company filed an answer on December 15, 2005 denying all allegations and asserting numerous
assertive defenses. The Company reached a Court-approved settlement with the Plaintiffs in this action

39
and the matter is concluded. The settlement of this matter did not have a material effect on the Company’s
financial position or results of operations.

Gordon v. Apple Computer, Inc.

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

Greaves v. Apple Computer, Inc.

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

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

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

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

40
announcement on June 29, 2006 that an internal investigation had discovered irregularities related to the
issuance of certain stock option grants made between 1997 and 2001, that a special committee of the
Company’s outside directors had retained independent counsel to perform an investigation, and that the
Company had informed the Securities and Exchange Commission. The Company’s response to the
Consolidated Complaint is not yet due.

In re Apple Computer, Inc. Derivative Litigation (formerly Plumbers and Pipefitters v. Jobs, et al. and Related
Actions) (State Action); Boston Retirement Board v. Apple Computer, Inc.
On July 5, 2006, a putative derivative action captioned Plumbers and Pipefitters v. Jobs, et. al., was filed in
California Superior Court for the County of Santa Clara. A number of related actions were filed in the
subsequent weeks, and have been consolidated into a single action captioned In re Apple Computer, Inc.
Derivative Litigation, No. 1:06CV066692, assigned to the Hon. Joseph Huber. These actions purport to
assert claims on behalf of the Company against several current and former executive officers and members
of the Board of Directors alleging improper backdating of stock option grants to maximize certain
defendants’ profits, failing to properly account for and take tax deductions for those grants and issuing
false financial statements. The Company is named as a nominal defendant. A consolidated complaint was
filed on October 5, 2006, alleging a variety of causes of action under California law, including claims for
unjust enrichment, breach of fiduciary duty, violation of the California Corporations Code, abuse of
control, accounting, constructive trust, rescission, deceit, gross mismanagement and waste of corporate
assets. On December 7, 2006, the Court granted the Company’s motion to stay these actions.
On November 3, 2006, the Boston Retirement Board, a purported shareholder, filed a petition for writ of
mandate against the Company in California Superior Court for the County of Santa Clara County (Boston
Retirement Board v. Apple Computer Inc.). The petition seeks to compel the Company to allow inspection
of certain corporate records relating to the Company’s option practices and the Special Committee’s
investigation. The Company’s response to the petition is not yet due.

Lenzi v. Apple Canada, Inc.; Wolfe v. Apple Computer, Inc. and Apple Canada, Inc.; Hirst v. Apple
Canada, Inc.; Hamilton v. Apple Computer, Inc. and Apple Canada, Inc.
Plaintiff filed a purported class action on June 7, 2005, in Superior Court, in Montreal, Quebec, Canada
allegedly on behalf of Quebec customers claiming false advertising and breach of warranty relating to iPod
battery life. Plaintiff sought authorization to institute a class action on behalf of Generations 1, 2 and 3
iPod owners in Quebec. On February 2, 2006, the Court dismissed Plaintiff’s motion for authorization to
institute a class action. Plaintiff has appealed this ruling, and the appeal will be heard on
February 22, 2007.
Two similar complaints relative to iPod battery life, Wolfe v. Apple and Hirst v. Apple, were filed in Toronto,
Ontario, Canada on August 15, 2005 and September 12, 2005, respectively. Both actions define the
purported class as a national class consisting of all persons in Canada who have purchased or who own an
iPod. Counsel has proposed an amended complaint to which the Company has not consented. In addition,
a similar complaint regarding iPod battery life, Hamilton v. Apple Computer, Inc. and Apple Canada, Inc.
was filed in Alberta, Calgary, Canada on October 5, 2005, purportedly on behalf of all purchasers of iPods
in Alberta, Canada. That complaint has not been served.

MacTech Systems v. Apple Computer, Inc.; Macadam v. Apple Computer, Inc.; Computer International, Inc. v.
Apple Computer, Inc.; Elite Computers and Software, Inc. v. Apple Computer, Inc.; The Neighborhood
Computer Store v. Apple Computer, Inc.; MacAccessory Center, Inc. v. Apple Computer, Inc.; Creative Online
Computer Services, Inc., DBA MacOnline v. Apple Computer, Inc.; MacGuys, Inc. v. Apple Computer, Inc. (all
in Santa Clara County Superior Court)
Eight resellers filed similar lawsuits against the Company between late 2002 and early 2006 asserting
various causes of action including breach of contract, fraud, negligent and intentional interference with

41
economic relationship, negligent misrepresentation, trade libel, unfair competition and false advertising.
Plaintiffs requested unspecified damages and other relief. The Company answered the Computer
International complaint on November 12, 2003, denying all allegations and asserting numerous affirmative
defenses. The Company filed an answer in the Macadam case on December 3, 2004 denying all allegations
and asserting numerous defenses. Three of the other Plaintiffs filed amended complaints on February 7,
2005, and on March 16, 2005 the Company filed answers to these claims denying all allegations and
asserting numerous affirmative defenses. A sixth Plaintiff, MacAccessory Center, filed a complaint on
February 23, 2005. The Company filed an answer to this complaint on April 20, 2005 denying all
allegations and asserting numerous affirmative defenses. On February 28, 2006, MacGuys and Creative
Online filed complaints against the Company. All of these cases with the exception of Macadam were
coordinated for discovery (along with the Branning class action) in Santa Clara Superior Court. The Elite,
Neighborhood Computer Store, MacTech and MacAccessory cases were set for trial on November 27,
2006. The Company has reached settlements with Computer International, MacTech Systems, Elite
Computers and Software, Inc., MacAccessory Center, Inc., The Neighborhood Computer Store, Creative
Online Computer Services, Inc., and MacGuys, Inc. and these matters are concluded. These settlements
did not have a material effect on the Company’s financial position or results of operations.
On October 1, 2003, one of the reseller Plaintiffs, Macadam, was deauthorized as an Apple reseller.
Macadam filed a motion for a temporary order to reinstate it as a reseller, which the Court denied. The
Court denied Macadam’s motion for a preliminary injunction on December 19, 2003. On December 6,
2004, Macadam filed for Chapter 11 Bankruptcy in the Northern District of California, which placed a stay
on the litigation as to Macadam only. The Company filed a claim in the bankruptcy proceedings on
February 16, 2005. The Macadam bankruptcy case was converted to Chapter 7 (liquidation) on April 29,
2005. The Company has reached a settlement of the Macadam case with the Chapter 7 Bankruptcy
Trustee. The Bankruptcy Court approved the settlement on July 17, 2006 over the objection of Tom
Santos, MacAdam’s principal. Santos has appealed the ruling approving the settlement.
On December 19, 2005, Tom Santos, who was an original plaintiff in the Macadam case, filed a Fifth
Amended Complaint on his own behalf (not on behalf of Macadam) alleging fraud, violations of California
Business & Professions Code §17200 (unfair competition), California Business & Professions Code §17500
(false advertising) and the Consumer Legal Remedies Act. The Company filed a demurrer to Santos’
amended complaint and a special motion to strike the defamation cause of action on January 20, 2006.
Those motions were heard on February 17, 2006, and the Court sustained the demurrer without leave to
amend as to one cause of action, overruled the demurrer as to one cause of action and sustained the
demurrer with leave to amend as to two causes of action. The Court also denied the special motion to
strike. Santos filed a further amended complaint on July 14, 2006. The Company filed a demurrer, which
was granted on September 9, 2006. Santos filed an amended complaint. The Company filed a motion to
strike, which was granted in part and denied in part on December 15, 2006. The Company also filed a cross
complaint against Santos on January 20, 2006 alleging violations of California Business & Professions
Code §17200 and California Penal Code §502, fraud and deceit, and breach of contract.

Macsolutions, Inc. v. Apple Computer, Inc.

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

42
defendant. The Company filed an answer on July 5, 2006 generally denying all allegations and asserting
numerous affirmative defenses. The case is in discovery. The case is set for trial on June 18, 2007.

PhatRat Technology LLC v. Apple Computer, Inc.

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

Premier International Associates LLC v. Apple Computer, Inc.

Plaintiff Premier International Associates LLC filed this action on November 3, 2005 in the United States
District Court for the Eastern District of Texas, Marshall Division, alleging infringement by the Company
of U.S. Patent numbers 6,243,725 and 6,763,345 both entitled “List Building System.” The complaint seeks
unspecified damages and other relief. The Company filed an answer on January 13, 2006 denying all
material allegations and asserting numerous affirmative defenses. The Company also asserted counter
claims for a declaratory judgment of noninfringement and invalidity. A Markman hearing is set for May 17,
2007 and trial is scheduled for December 3, 2007.

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

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

St-Germain v. Apple Canada, Inc.

Plaintiff filed this case in Montreal, Quebec, Canada, on August 5, 2005, seeking authorization to institute
a class action for the refund by the Company of the Canadian Private Copying Levy that was applied to the
iPod purchase price in Quebec between December 12, 2003 and December 14, 2004 but later declared
invalid by the Canadian Court. The Company has completed a refund program for this levy. A class
certification hearing took place January 13, 2006. On February 24, 2006, the Court granted class
certification and notice was published during the last week of March 2006. Discovery is closed and the case
is prepared for trial, which the Company anticipates will take place in 2007.

Tse v. Apple Computer, Inc. et al.

Plaintiff Ho Keung Tse filed this action against the Company and other defendants on August 5, 2005 in
the United States District Court for the District of Maryland alleging infringement by the Company of U.S.
Patent number 6,665,797 entitled “Protection of Software Again [sic] Against Unauthorized Use.” The
complaint seeks unspecified damages and other relief. The Company filed an answer on October 31, 2005
denying all material allegations and asserting numerous affirmative defenses. On October 28, 2005, the
Company and the other defendants filed a motion to transfer the case to the Northern District of
California, which was granted on August 31, 2006.

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

Union Federale des Consummateurs - Que Choisir v. Apple Computer France s.à.r.l. and iTunes s.à.r.l.
Plaintiff, a consumer association in France, filed this complaint on February 9, 2005 alleging that the
above-listed entities are violating consumer law by (1) omitting to mention that the iPod is allegedly not
compatible with music from online music services other than the iTunes Store and that the music from the
iTunes Store is only compatible with the iPod and (2) allegedly tying the sales of iPods to the iTunes Store
and vice versa. Plaintiff seeks damages, injunctive relief and other relief. The first hearing on the case took
place on May 24, 2005. The Company’s response to the complaint was served on November 8, 2005.
Plaintiff’s responsive pleading was filed on February 10, 2006. The Company filed a reply on June 6, 2006
and UFC filed a response on September 19, 2006.

Vitt v. Apple Computer, Inc.

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

Vogel v. Jobs et al.

Plaintiff filed this purported class action on August 24, 2006, in the United States District Court for the
Northern District of California against the Company and certain of the Company’s current and former
officers and directors alleging improper backdating of stock option grants to maximize certain defendants’
profits, failing to properly account for those grants and issuing false financial statements. The lawsuit
purports to be brought on behalf of all purchasers of the Company’s stock from December 1, 2005 through
August 11, 2006, and asserts claims under Sections 10(b) and 14(a) of the Securities Exchange Act as well
as control person claims. A motion for appointment of lead plaintiff and counsel was scheduled to be
heard on December 4, 2006 but was taken off calendar when the case was re-assigned to the Hon. Jeremy
Fogel. The motion therefore is still pending. Defendants’ responses to the complaint are not yet due.
Wimmer v. Apple Computer, Inc. (originally filed as Tomczak v. Apple Computer, Inc. on October 19, 2005 in
the United States District Court for the Northern District of California, San Jose Division; amended
complaint filed October 26, 2005); Moschella, et al., v. Apple Computer, Inc. (filed October 26, 2005 United
States District Court for the Northern District of California, San Jose Division); Calado, et al. v. Apple
Computer, Inc. (filed October 26, 2005, Los Angeles County Superior Court); Kahan, et al., v. Apple
Computer, Inc. (filed October 31, 2005, United States District Court for the Southern District of New
York); Jennings, et al., v. Apple Computer, Inc. (filed November 4, 2005, United States District Court for
the Northern District of California, San Jose Division); Rappel v. Apple Computer, Inc. (filed on
November 23, 2005, United States District Court for the District of New Jersey); Mayo v. Apple
Computer, Inc. (filed on December 7, 2005, United States District Court for the Middle District of
Louisiana); Valencia v. Apple Computer, Inc. (filed on December 22, 2005, United States District Court for

44
the Northern District of California); Williamson v. Apple Computer, Inc. (filed on December 29, 2005,
United States District Court for the Middle District of Louisiana); Sioson v. Apple Computer, Inc. (filed on
February 9, 2006, San Mateo County Superior Court; First Amended Complaint filed March 16, 2006)
These federal and state court complaints allege that the Company’s iPod nano was defectively designed so
that it scratches excessively during normal use, rendering the screen unreadable. The federal actions were
coordinated in the United States District Court for the Northern District of California and assigned to the
Hon. Ronald Whyte pursuant to an April 17, 2006, order of the Judicial Panel on Multidistrict Litigation.
Plaintiffs filed a First Consolidated and Amended Master Complaint on September 21, 2006, alleging
violations of California and other states’ consumer protection and warranty laws and claiming unjust
enrichment. The Master Complaint alleges two putative plaintiff classes: (1) all U.S. residents (excluding
California residents) who purchased an iPod nano that was not manufactured or designed using processes
necessary to ensure normal resistance to scratching of the screen; and (2) all iPod nano purchasers other
than U.S. residents who purchased an iPod nano that was not manufactured or designed using processes
necessary to ensure normal resistance to scratching of the screen. Pursuant to stipulation, the Wimmer,
Valencia, and Rappel federal complaints were dismissed without prejudice and the Mayo and Williamson
complaints were administratively closed without prejudice. The Company answered the Master Complaint
on November 20, 2006.
The two California state actions were coordinated on May 4, 2006, and assigned to the Hon. West in Los
Angeles Superior Court. Plaintiffs filed a Consolidated Amended Class Action Complaint on June 8, 2006,
alleging violations of California state consumer protection, unfair competition, false advertising, and
warranty laws and claiming unjust enrichment. The Consolidated Complaint alleges a putative plaintiff
class of all California residents who own an iPod nano containing a manufacturing defect that results in the
nano being susceptible to excessive scratching. The Company answered the Consolidated Amended
Complaint on October 6, 2006.
Two similar complaints, Carpentier v. Apple Canada, Inc., and Royer-Brennan v. Apple Computer, Inc. and
Apple Canada, Inc. were filed in Montreal, Quebec, Canada on October 27, 2005 and November 9, 2005,
respectively, seeking authorization to institute class actions on behalf of iPod nano purchasers in Quebec.
The Royer-Brennan file was stayed in May 2006 in favor of the Carpentier file, in which Apple’s
preliminary motion for leave to file evidence will be heard on December 18, 2006. No further dates have
been set. A similar complaint, Mund v. Apple Canada Inc. and Apple Computer, Inc., was filed in Ontario,
Canada on January 9, 2006 seeking authorization to institute a class action on behalf of iPod nano
purchasers in Canada. In the two Quebec class actions, a motion to stay the Royer-Brennan case is stayed
in favor of the previously filed Carpentier case. In the Ontario Action, Apple Canada Inc. and Apple
Computer, Inc., have served Notices of Intent to defend. On December 18, 2006, plaintiff’s counsel advised
that a substitution of attorneys will occur, most likely in January 2007. The file is now stayed, and the
Company’s motion to examine petitioner and for leave to file evidence at certification will be set after the
new counsel appears.

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

No matters were submitted to a vote of security holders during the fourth quarter of the Company’s fiscal
year ended September 30, 2006.

45
 PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of
Equity Securities
The Company’s common stock is traded on the over-the-counter market and is quoted on the NASDAQ
Global Select Market under the symbol AAPL and on the Frankfurt Stock Exchange under the symbol
APCD.

Price Range of Common Stock

The price range per share of common stock presented below represents the highest and lowest sales prices
for the Company’s common stock on the NASDAQ Global Select Market during each quarter of the two
most recent fiscal years.
On February 28, 2005, the Company effected a two-for-one stock split to shareholders of record as of
February 18, 2005. All share and per share information has been retroactively adjusted to reflect the
stock split.

Fourth Quarter Third Quarter Second Quarter First Quarter

Fiscal 2006 price range per common share $77.78-$50.16 $ 73.80-$55.41 $86.40-$57.67 $75.46-$47.87
Fiscal 2005 price range per common share $53.20-$36.37 $ 43.74-$34.13 $45.06-$31.58 $34.22-$18.65

Holders
As of December 13, 2006, there were 29,317 shareholders of record.

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

Securities Authorized for Issuance under Equity Compensation Plans

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

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None.

Item 6. Selected Financial Data

The consolidated balance sheet as of September 24, 2005 and the consolidated statements of operations
for the fiscal years ended September 24, 2005 and September 25, 2004 have been restated as set forth in
the 2006 Form 10-K. The data for the consolidated balance sheets as of September 2004, 2003, and 2002
and the consolidated statements of operations for the fiscal years ended September 2003 and 2002 have
been restated to reflect the impact of the stock-based compensation adjustments, but such restated data
have not been audited and is derived from the books and records of the Company. The information set
forth below is not necessarily indicative of results of future operations, and should be read in conjunction
with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
and the consolidated financial statements and related notes thereto included in Item 8 of this Form 10-K
to fully understand factors that may affect the comparability of the information presented below. The
information presented in the following tables has been adjusted to reflect the restatement of the
Company’s financial results, which is more fully described in the “Explanatory Note” immediately
preceding Part I, Item 1 and in Note 2, “Restatement of Consolidated Financial Statements” in Notes to
Consolidated Financial Statements of this Form 10-K.

46
The Company has not amended its previously-filed Annual Reports on Form 10-K or Quarterly Reports
on Form 10-Q for the periods affected by this restatement. The financial information that has been
previously filed or otherwise reported for these periods is superseded by the information in this Annual
Report on Form 10-K, and the financial statements and related financial information contained in such
previously-filed reports should no longer be relied upon.

Five fiscal years ended September 30, 2006

(In millions, except share and per share amounts) 2006 2005 2004 2003 2002
As As As As
Restated (1) Restated (1) Restated (2) Restated (2)
Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,315 $ 13,931 $ 8,279 $ 6,207 $ 5,742
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,989 $ 1,328 $ 266 $ 57 $ 42
Earnings per common share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.36 $ 1.64 $ 0.36 $ 0.08 $ 0.06
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.27 $ 1.55 $ 0.34 $ 0.08 $ 0.06
Cash dividends declared per common share . . $ — $ — $ — $ — $ —
Shares used in computing earnings per share
(in thousands):
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 844,058 808,439 743,180 721,262 710,044
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 877,526 856,878 774,776 723,352 721,445
Cash, cash equivalents, and short-term
investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,110 $ 8,261 $ 5,464 $ 4,566 $ 4,337
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,205 $ 11,516 $ 8,039 $ 6,817 $ 6,305
Long-term debt (including current
maturities) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ — $ — $ 304 $ 316
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,221 $ 4,088 $ 2,976 $ 2,594 $ 2,205
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . $ 9,984 $ 7,428 $ 5,063 $ 4,223 $ 4,100

Net gains before taxes related to the Company’s non-current debt and equity investments of $4 million and
$10 million were recognized in 2004 and 2003, respectively. A net loss before taxes related to the
Company’s non-current debt and equity investments of $42 million was recognized in 2002. Net charges
related to Company restructuring actions of $23 million, $26 million, and $30 million were recognized in
2004, 2003, and 2002, respectively. In 2003, settlement of the Company’s forward stock purchase
agreement resulted in a gain of $6 million. Net income during 2005 benefited by $81 million from the
reversal of certain tax contingency reserves and adjustments to net deferred tax assets, including reductions
to valuation allowances. Favorable cumulative-effect type adjustments from the adoption of new
accounting standards, net of taxes of $1 million was recognized in 2003.

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

47
(2) The Selected Financial Data for 2003 and 2002 has been restated to reflect adjustments related to
stock-based compensation expense and the associated tax impact as further described in the
“Explanatory Note” immediately preceding Part I, Item 1 of this Form 10-K. As a result of these
adjustments, net income was reduced by $12 million and $23 million for the years ended
September 27, 2003 and September 28, 2002, respectively as follows:

Fiscal Year Ended September 27, Fiscal Year Ended September 28,
2003 2002
As As As As
Reported Adjustments Restated Reported Adjustments Restated
Net sales . . . . . . . . . . . . . . . . . . . $ 6,207 $ — $ 6,207 $ 5,742 $ — $ 5,742
Cost of sales . . . . . . . . . . . . . . . . 4,499 1 4,500 4,139 3 4,142
Gross margin . . . . . . . . . . . . . . . 1,708 (1) 1,707 1,603 (3) 1,600
Total operating expenses . . . . . 1,709 15 1,724 1,586 26 1,612
Operating income (loss) . . . . . . (1) (16) (17) 17 (29) (12)
Income before accounting
changes . . . . . . . . . . . . . . . . . . 68 (12) 56 65 (23) 42
Cumulative effects of
accounting changes, net of
income taxes . . . . . . . . . . . . . . 1 — 1 — — —
Net income . . . . . . . . . . . . . . . . . $ 69 $ (12) $ 57 $ 65 $ (23) $ 42
Earnings (loss) per common
share before accounting
changes:
Basic. . . . . . . . . . . . . . . . . . . . . $ 0.09 $(0.01) $ 0.08 $ 0.09 $(0.03) $ 0.06
Diluted. . . . . . . . . . . . . . . . . . . $ 0.09 $(0.01) $ 0.08 $ 0.09 $ (0.03) $ 0.06
Earnings per common share:
Basic. . . . . . . . . . . . . . . . . . . . . $ 0.10 $(0.02) $ 0.08 $ 0.09 $(0.03) $ 0.06
Diluted. . . . . . . . . . . . . . . . . . . $ 0.09 $(0.01) $ 0.08 $ 0.09 $ (0.03) $ 0.06

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This section and other parts of this Form 10-K contain forward-looking statements that involve risks and
uncertainties. Forward-looking statements can also be identified by words such as “anticipates,” “expects,”
“believes,” “plans,” “predicts,” and similar terms. Forward-looking statements are not guarantees of future
performance and the Company’s actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such differences include, but are not limited to, those
discussed in the subsection entitled “Risk Factors” above. The following discussion should be read in
conjunction with the consolidated financial statements and notes thereto included in Item 8 of this Form 10-K.
All information presented herein is based on the Company’s fiscal calendar. Unless otherwise stated, references
in this report to particular years or quarters refer to the Company’s fiscal years ended in September and the
associated quarters of those fiscal years. The Company assumes no obligation to revise or update any forward-
looking statements for any reason, except as required by law.
The following information has been adjusted to reflect the restatement of the Company’s financial results,
which is more fully described in the “Explanatory Note” immediately preceding Part I, Item 1 and in
Note 2, “Restatement of Consolidated Financial Statements” in Notes to Consolidated Financial
Statements of this Form 10-K. The net of tax impact of the adjustments, which amounted to $4 million in
2006, was recorded by the Company in its fourth quarter of 2006. The net of tax impact of the restatements
on the Company’s results of operations amounted to $7 million and $10 million in 2005 and 2004,

48
respectively. The impact of these adjustments was not significant to the Company’s operating results,
trends, or liquidity for the annual or quarterly periods in 2006, 2005, and 2004.

Executive Overview
The Company designs, manufactures, and markets personal computers and related software, services,
peripherals, and networking solutions. The Company also designs, develops, and markets a line of portable
digital music players along with related accessories and services including the online distribution of third-
party music, audio books, music videos, short films, television shows, movies, and iPod games. The
Company’s products and services include the Macintosh line of desktop and notebook computers, the iPod
line of portable digital music players, the Xserve server and Xserve RAID storage products, a portfolio of
consumer and professional software applications, the Mac OS X operating system, the iTunes Store, a
portfolio of peripherals that support and enhance the Macintosh and iPod product lines, and a variety of
other service and support offerings. The Company sells its products worldwide through its online stores, its
retail stores, its direct sales force, and third-party wholesalers, resellers, and value-added resellers. In
addition, the Company sells a variety of third-party Macintosh and iPod compatible products including
application software, printers, storage devices, speakers, headphones, and various other accessories and
supplies through its online and retail stores. The Company sells to education, consumer, creative
professional, business, and government customers. A further description of the Company’s products may
be found in Part I, Item 1 of this Form 10-K under the heading “Business.”
The Company believes that for both professionals and consumers the personal computer has become the
center of an evolving digital lifestyle by integrating and enhancing the utility of advanced digital devices
such as the Company’s iPods, digital video and still cameras, televisions, CD and DVD players, cellular
phones, personal digital assistants, and other consumer electronic devices. The attributes of the personal
computer that enable this functionality include a high-quality user interface, easy access to relatively
inexpensive data storage, the ability to run complex applications, and the ability to connect easily to a wide
variety of other digital devices and to the Internet. The Company is the only participant in the personal
computer industry that controls the design and development of the entire personal computer—from the
hardware and operating system to sophisticated applications. This, along with its products’ innovative
industrial designs, intuitive ease-of-use, built-in graphics, multimedia and networking capabilities, uniquely
positions the Company to offer innovative integrated digital lifestyle solutions.
The Company’s business strategy leverages its ability, through the design and development of its own
operating system, hardware, and many software applications and technologies, to bring to its customers
around the world compelling new products and solutions with superior ease-of-use, seamless integration,
and innovative industrial design.
The Company participates in several highly competitive markets, including personal computers with its
Macintosh line of computers, consumer electronics with its iPod line of portable digital music players, and
distribution of third-party digital content through its online iTunes Store. While the Company is widely
recognized as an innovator in the personal computer and consumer electronic markets as well as a leader
in the emerging market for distribution of digital content, these are all highly competitive markets that are
subject to aggressive pricing and increased competition. To remain competitive, the Company believes
increased investment in research and development (“R&D”) and marketing and advertising is necessary to
maintain and extend its position in the markets where it competes. The Company’s R&D spending is
focused on delivering timely updates and enhancements to its existing line of personal computers, displays,
operating systems, software applications, and portable digital music players; developing new digital lifestyle
consumer and professional software applications; and investing in new product areas such as rack-mount
servers, RAID storage systems, and wireless technologies. The Company also believes investment in
marketing and advertising programs is critical to increasing product and brand awareness.

49
In June 2005, the Company announced its plan to begin using Intel microprocessors in its computers.
During 2006, the Company introduced new Intel-based models of the MacBook Pro, MacBook, Mac Pro,
iMac, and Mac mini computers. The Company’s transition to Intel microprocessors for Macintosh systems
was completed in August 2006, and its transition for Xserve was completed in November 2006. The
MacBook Pro, MacBook, Mac Pro, iMac, and Mac mini feature Mac OS X version 10.4 Tiger, iLife ‘06,
and the Company’s new translation technology, Rosetta, which allows most PowerPC-based Macintosh
applications to run on Intel-based Macintosh computers. There are potential risks and uncertainties that
may occur due to this transition, which are further discussed in Item 1A under the heading “Risk Factors.”
The Company utilizes a variety of direct and indirect distribution channels. The Company believes sales of
its innovative and differentiated products are enhanced by knowledgeable salespersons who can convey the
value of the hardware, software, and peripheral integration, demonstrate the unique digital lifestyle
solutions that are available only on Macintosh computers, and demonstrate the compatibility of the
Macintosh with the Windows platform and networks. The Company further believes providing a high-
quality sales and after-sales support experience is critical to attracting and retaining customers. To ensure a
high-quality buying experience for its products in which service and education are emphasized, the
Company has expanded and improved its distribution capabilities by opening its own retail stores in the
U.S. and internationally. The Company had 165 stores open as of September 30, 2006.
The Company also staffs selected third-party stores with the Company’s own employees to improve the
buying experience through reseller channels. The Company has deployed Apple employees and
contractors in reseller locations around the world including the U.S., Europe, Japan, and Australia. The
Company also sells to customers directly through its online stores around the world.
To improve access to the iPod product line, the Company has significantly expanded the number of
distribution points where iPods are sold. The iPod product line can be purchased in certain department
stores, member-only warehouse stores, large retail chains, and specialty retail stores, as well as through the
channels listed above.

Critical Accounting Policies and Estimates

The preparation of financial statements and related disclosures in conformity with U.S. generally accepted
accounting principles and the Company’s discussion and analysis of its financial condition and results of
operations require the Company’s management to make judgments, assumptions, and estimates that affect
the amounts reported in its consolidated financial statements and accompanying notes. Note 1 of the Notes
to Consolidated Financial Statements of this Form 10-K describes the significant accounting policies and
methods used in the preparation of the Company’s consolidated financial statements. Management bases
its estimates on historical experience and on various other assumptions it believes to be reasonable under
the circumstances, the results of which form the basis for making judgments about the carrying values of
assets and liabilities. Actual results may differ from these estimates and such differences may be material.
Management believes the Company’s critical accounting policies and estimates are those related to
revenue recognition, allowance for doubtful accounts, inventory valuation and inventory purchase
commitments, warranty costs, stock-based compensation, and income taxes. Management believes these
policies to be critical because they are both important to the portrayal of the Company’s financial
condition and results, and they require management to make judgments and estimates about matters that
are inherently uncertain. The Company’s senior management has reviewed these critical accounting
policies and related disclosures with the Audit and Finance Committee of the Company’s Board of
Directors.

Revenue Recognition
Net sales consist primarily of revenue from the sale of hardware, software, peripherals, digital content, and
service and support contracts. The Company recognizes revenue pursuant to applicable accounting

50
standards, including American Institute of Certified Public Accountants Statement of Position (“SOP”)
No. 97-2, Software Revenue Recognition, as amended, and SEC Staff Accounting Bulletin (“SAB”) No. 104,
Revenue Recognition.
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has
occurred, the sales price is fixed or determinable, and collection is probable. Product is considered
delivered to the customer once it has been shipped, and title and risk of loss have been transferred. For
most of the Company’s product sales, these criteria are met at the time the product is shipped. For online
sales to individuals, for some sales to education customers in the U.S., and for certain other sales, the
Company defers revenue until the customer receives the product because the Company retains a portion of
the risk of loss on these sales during transit. If at the outset of an arrangement the Company determines
the arrangement fee is not, or is presumed not to be, fixed or determinable, revenue is deferred and
subsequently recognized as amounts become due and payable and all other criteria for revenue recognition
have been met.
The Company records reductions to revenue for estimated commitments related to price protection and
for customer incentive programs, including reseller and end-user rebates, and other sales programs and
volume-based incentives. For transactions involving price protection, the Company recognizes revenue net
of the estimated amount to be refunded, provided the refund amount can be reasonably and reliably
estimated and the other conditions for revenue recognition have been met. If refunds cannot be reliably
estimated, revenue is not recognized until reliable estimates can be made or the price protection lapses.
For customer incentive programs, the estimated cost of these programs is recognized at the later of the
date at which the Company has sold the product or the date at which the program is offered. The Company
also records reductions to revenue for expected future product returns based on the Company’s historical
experience. Future market conditions and product transitions may require the Company to increase
customer incentive programs and incur incremental price protection obligations that could result in
additional reductions to revenue at the time such programs are offered. Additionally, certain customer
incentive programs require management to estimate the number of customers who will actually redeem the
incentive based on historical experience and the specific terms and conditions of particular incentive
programs. If a greater than estimated proportion of customers redeem such incentives, the Company
would be required to record additional reductions to revenue, which could have a material adverse impact
on the Company’s results of operations.

Allowance for Doubtful Accounts

The Company distributes its products through third-party distributors and resellers and directly to certain
education, consumer, and commercial customers. The Company generally does not require collateral from
its customers; however, the Company will require collateral in certain instances to limit credit risk. In
addition, when possible, the Company does attempt to limit credit risk on trade receivables with credit
insurance for certain customers in Latin America, Europe, Asia, and Australia and by arranging with third-
party financing companies to provide flooring arrangements and other loan and lease programs to the
Company’s direct customers. These credit-financing arrangements are directly between the third-party
financing company and the end customer. As such, the Company generally does not assume any recourse
or credit risk sharing related to any of these arrangements. However, considerable trade receivables that
are not covered by collateral, third-party flooring arrangements, or credit insurance are outstanding with
the Company’s distribution and retail channel partners.
The allowance for doubtful accounts is based on management’s assessment of the collectibility of specific
customer accounts and includes consideration of the credit worthiness and financial condition of those
specific customers. The Company records an allowance to reduce the specific receivables to the amount
that is reasonably believed to be collectible. The Company also records an allowance for all other trade
receivables based on multiple factors including historical experience with bad debts, the general economic

51
environment, the financial condition of the Company’s distribution channels, and the aging of such
receivables. If there is a deterioration of a major customer’s financial condition, if the Company becomes
aware of additional information related to the credit worthiness of a major customer, or if future actual
default rates on trade receivables in general differ from those currently anticipated, the Company may
have to adjust its allowance for doubtful accounts, which would affect earnings in the period the
adjustments were made.

Inventory Valuation and Inventory Purchase Commitments

The Company must order components for its products and build inventory in advance of product
shipments. The Company records a write-down for inventories of components and products, including
third-party products held for resale, which have become obsolete or are in excess of anticipated demand or
net realizable value. The Company performs a detailed review of inventory each fiscal quarter that
considers multiple factors including demand forecasts, product life cycle status, product development
plans, current sales levels, and component cost trends. The personal computer and consumer electronic
industries are subject to a rapid and unpredictable pace of product and component obsolescence and
demand changes. If future demand or market conditions for the Company’s products are less favorable
than forecasted or if unforeseen technological changes negatively impact the utility of component
inventory, the Company may be required to record additional write-downs which would negatively affect
gross margins in the period when the write-downs were recorded.
The Company accrues reserves for estimated cancellation fees related to component orders that have been
cancelled or are expected to be cancelled. Consistent with industry practice, the Company acquires
components through a combination of purchase orders, supplier contracts, and open orders based on
projected demand information. These commitments typically cover the Company’s requirements for
periods ranging from 30 to 150 days. If there is an abrupt and substantial decline in demand for one or
more of the Company’s products or an unanticipated change in technological requirements for any of the
Company’s products, the Company may be required to record additional reserves for cancellation fees that
would negatively affect gross margins in the period when the cancellation fees are identified.

Warranty Costs
The Company provides currently for the estimated cost for hardware and software warranties at the time
the related revenue is recognized based on historical and projected warranty claim rates, historical and
projected cost-per-claim, and knowledge of specific product failures that are outside of the Company’s
typical experience. Each quarter, the Company reevaluates its estimates to assess the adequacy of its
recorded warranty liabilities considering the size of the installed base of products subject to warranty
protection and adjusts the amounts as necessary. If actual product failure rates or repair costs differ from
estimates, revisions to the estimated warranty liability would be required and could negatively affect the
Company’s results of operations.
The Company periodically provides updates to its applications and system software to maintain the
software’s compliance with specifications. The estimated cost to develop such updates is accounted for as
warranty costs that are recognized at the time related software revenue is recognized. Factors considered
in determining appropriate accruals related to such updates include the number of units delivered, the
number of updates expected to occur, and the historical cost and estimated future cost of the resources
necessary to develop these updates.

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

52
judgmental assumptions including volatility, forfeiture rates, and expected option life. If any of the
assumptions used in the BSM model change significantly, stock-based compensation expense may differ
materially in the future from that recorded in the current period.
In connection with the Company’s restatement of its consolidated financial statements, the Company has
applied judgment in choosing whether to revise measurement dates for prior option grants. Information
regarding the restatement, including ranges of possible additional stock-based compensation expense if
other measurement dates had been selected for certain grants, is set forth in the “Explanatory Note”
immediately preceding Part I, Item 1 and in Note 2, “Restatement of Consolidated Financial Statements”
in Notes to Consolidated Financial Statements of this Form 10-K.

Income Taxes
The Company records a tax provision for the anticipated tax consequences of the reported results of
operations. In accordance with SFAS No. 109, Accounting for Income Taxes, the provision for income taxes
is computed using the asset and liability method, under which deferred tax assets and liabilities are
recognized for the expected future tax consequences of temporary differences between the financial
reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards.
Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable
income in effect for the years in which those tax assets are expected to be realized or settled. The Company
records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than
not to be realized.
Management believes it is more likely than not that forecasted income, including income that may be
generated as a result of certain tax planning strategies, together with the tax effects of the deferred tax
liabilities, will be sufficient to fully recover the remaining deferred tax assets. In the event that all or part of
the net deferred tax assets are determined not to be realizable in the future, an adjustment to the valuation
allowance would be charged to earnings in the period such determination is made. Similarly, if the
Company subsequently realizes deferred tax assets that were previously determined to be unrealizable, the
respective valuation allowance would be reversed, resulting in a positive adjustment to earnings in the
period such determination is made. In addition, the calculation of tax liabilities involves significant
judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of
these uncertainties in a manner inconsistent with management’s expectations could have a material impact
on the Company’s results of operations and financial position.

53
Net Sales
Net sales and Macintosh unit sales by operating segment and net sales and unit sales by product follow (net
sales in millions and unit sales in thousands):

September 30, September 24, September 25,

2006 Change 2005 Change 2004
Net Sales by Operating Segment:
Americas net sales . . . . . . . . . . . . . . . . . . . . . $ 9,307 41% $ 6,590 64% $ 4,019
Europe net sales. . . . . . . . . . . . . . . . . . . . . . . 4,094 33% 3,073 71% 1,799
Japan net sales . . . . . . . . . . . . . . . . . . . . . . . . 1,208 31% 920 36% 677
Retail net sales. . . . . . . . . . . . . . . . . . . . . . . . 3,359 43% 2,350 98% 1,185
Other Segments net sales (a) . . . . . . . . . . . . . 1,347 35% 998 67% 599
Total net sales . . . . . . . . . . . . . . . . . . . . . . $ 19,315 39% $ 13,931 68% $ 8,279
Unit Sales by Operating Segment:
Americas Macintosh unit sales. . . . . . . . . . . . 2,432 11% 2,184 30% 1,682
Europe Macintosh unit sales . . . . . . . . . . . . . 1,346 18% 1,138 47% 773
Japan Macintosh unit sales . . . . . . . . . . . . . . 304 (3)% 313 8% 291
Retail Macintosh unit sales . . . . . . . . . . . . . . 886 45% 609 94% 314
Other Segments Macintosh unit sales (a). . . . 335 16% 290 26% 230
Total Macintosh unit sales . . . . . . . . . . . . . 5,303 17% 4,534 38% 3,290
Net Sales by Product:
Desktops (b) . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,319 (3)% $ 3,436 45% $ 2,373
Portables (c). . . . . . . . . . . . . . . . . . . . . . . . . . 4,056 43% 2,839 11% 2,550
Total Macintosh net sales. . . . . . . . . . . . . . 7,375 18% 6,275 27% 4,923
iPod . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,676 69% 4,540 248% 1,306
Other music related products and services (d). . 1,885 110% 899 223% 278
Peripherals and other hardware (e) . . . . . . . . . . 1,100 (2)% 1,126 18% 951
Software, service, and other sales (f) . . . . . . . . . 1,279 17% 1,091 33% 821
Total net sales . . . . . . . . . . . . . . . . . . . . . . $ 19,315 39% $ 13,931 68% $ 8,279
Unit Sales by Product:
Desktops (b) . . . . . . . . . . . . . . . . . . . . . . . . . 2,434 (3)% 2,520 55% 1,625
Portables (c). . . . . . . . . . . . . . . . . . . . . . . . . . 2,869 42% 2,014 21% 1,665
Total Macintosh unit sales . . . . . . . . . . . . . 5,303 17% 4,534 38% 3,290

Net sales per Macintosh unit sold (g) . . . . . . . . $ 1,391 1% $ 1,384 (7)% $ 1,496

iPod unit sales . . . . . . . . . . . . . . . . . . . . . . . . . . 39,409 75% 22,497 409% 4,416

Net sales per iPod unit sold (h) . . . . . . . . . . . . . $ 195 (3)% $ 202 (32)% $ 296

Notes:
(a) Other Segments include Asia Pacific and FileMaker.
(b) Includes iMac, eMac, Mac mini, Mac Pro, Power Mac, and Xserve product lines.
(c) Includes MacBook, iBook, MacBook Pro, and PowerBook product lines.
(d) Consists of iTunes Store sales, iPod services, and Apple-branded and third-party iPod accessories.
(e) Includes sales of Apple-branded and third-party displays, wireless connectivity and networking solutions, and other hardware
accessories.
(f) Includes sales of Apple-branded operating system, application software, third-party software, AppleCare, and Internet services.
(g) Derived by dividing total Macintosh net sales by total Macintosh unit sales.
(h) Derived by dividing total iPod net sales by total iPod unit sales.

54
Fiscal Year 2006 versus 2005
Net sales during 2006 increased 39% or $5.4 billion from 2005. This increase was due in part to the fact
that 2006 spanned 53 weeks while 2005 spanned 52 weeks. Several other factors contributed to these
increases including the following:
• Net sales of iPods increased $3.1 billion or 69% during 2006 compared to 2005. Unit sales of iPods
totaled 39.4 million in 2006, which represents an increase of 75% from 22.5 million iPod units sold
in 2005. Strong iPod sales during 2006 reflected significant sales of both the hard-drive based iPod
that supports video, first introduced in October of 2005 and the iPod nano, introduced in
September 2005, as well as continued expansion of iPod distribution points. During 2006, the net
sales per iPod unit sold decreased by 3% compared to 2005 primarily due to an overall decrease in
average selling prices for all iPods as well as a shift in product mix to the iPod nano. From the
introduction of the iPod in 2002 through 2006, the Company has sold approximately 68 million
iPods.
• Macintosh net sales increased $1.1 billion or 18% during 2006 compared to 2005. Macintosh unit
sales increased by 769,000 units or 17% during 2006 compared to 2005. These increases were mainly
due to strong demand for the Intel-based MacBook and MacBook Pro systems and reflect a shift in
product mix to portable products in all of the Company’s operating segments. Net sales and unit sales
of the Company’s portable products increased 43% and 42%, respectively, during 2006 compared to
2005. Macintosh desktop net sales and unit sales both decreased by 3% during 2006 compared to
2005. The decrease in sales of the Company’s Macintosh desktops was due to declines in sales of the
Company’s professional-oriented desktop products. The Company believes the decline in the
Company’s professional-oriented desktop products was due to customers delaying purchases of such
products in anticipation of the release of the Intel-based Mac Pro, which did not begin shipping until
August 2006, and updated software applications capable of running on Intel-based Macintosh
computers, and the trend toward portable computers. A slight increase of 1% during 2006 in net sales
per Macintosh unit sold was due to a shift in mix to higher-priced portable products, partially offset by
price reductions on certain Macintosh systems.
• Other music related products and services consists of sales associated with the iTunes Store and
iPod services and accessories. Net sales of other music related products and services increased $986
million or 110% during 2006 compared to 2005. The increase was primarily due to increased net
sales from the iTunes Store and Apple-branded and third-party iPod accessories and services. The
increase in sales from the iTunes Store stemmed from significant growth in U.S. sales and the
opening of The iTunes Store in Japan during August 2005 and Australia during October 2005. The
increased sales from the iTunes Store were also attributable to the availability of videos, television
shows, and feature-length movie downloads.
• Net sales of software, service, and other sales increased $188 million or 17% during 2006 compared
to 2005. The growth was primarily attributable to increased net sales of AppleCare Protection Plan
(“APP”) extended service and support contracts and application software, partially offset by a
decrease in sales of Mac OS X. Mac OS X sales were particularly high in 2005 due to the release of
Mac OS X Tiger in April 2005.
Offsetting the favorable factors discussed above, the Company’s net sales during 2006 were negatively
impacted by the following:
• Net sales of peripherals and other hardware declined $26 million or 2% compared to 2005 primarily
due to price decreases and a decrease in net sales of displays relating to a shift in mix from desktop
to portable systems. The decrease in net sales of displays for 2006 is consistent with the overall
decrease in unit sales of Macintosh professional desktop systems.

55
Fiscal Year 2005 versus 2004
During 2005, net sales increased 68% or $5.7 billion from 2004. Several factors contributed favorably to net
sales during 2005:
• Net sales of iPods rose $3.2 billion or 248% during 2005 compared to 2004. Unit sales of iPods
totaled 22.5 million in 2005, which represented an increase of 409% from the 4.4 million iPod units
sold in 2004. Strong sales of iPods during 2005 were experienced in all of the Company’s operating
segments and was driven by strong demand for the iPod shuffle introduced in January 2005, the
release of an updated version of the iPod mini in February 2005, the release of the iPod nano in
September 2005, and expansion of the iPod’s distribution network. Net sales per iPod unit sold
decreased 32% primarily due to the introduction of the lower priced iPod shuffle in January 2005
and iPod mini pricing reductions in February 2005. From the introduction of the iPod in 2002
through 2005, the Company had sold approximately 28 million iPods.
• Net sales of other music related products and services increased $621 million or 223% during 2005
compared to 2004. The Company experienced strong growth in sales of iPod services and
accessories consistent with the increase in overall iPod unit sales for 2005. The increased sales from
the iTunes Store were primarily due to substantial growth of net sales in the U.S. and expansion in
Europe, Canada, and Japan.
• Total Macintosh net sales increased $1.4 billion or 27% during 2005 compared to 2004. Unit sales
of Macintosh systems increased 1.2 million units or 38% during 2005 compared to 2004. The
increases in Macintosh net sales and unit sales related primarily to strong demand for the
Company’s desktop products, which was experienced in all of the Company’s operating segments.
The Company believes that the success of the iPod had a positive impact on Macintosh net sales by
introducing new customers to the Company’s other products. Desktop demand was stimulated in
2005 due to the iMac G5 and the introduction of the Mac mini in January 2005. Net sales and unit
sales of desktop products increased 45% and 55%, respectively, during 2005 compared to 2004.
Macintosh net sales and unit sales also included sales of the Company’s portable products, which
increased 11% and 21%, respectively, compared to 2004.
Net sales per Macintosh unit sold decreased 7% on a year-over-year basis. The decrease was the
result of changes in the overall unit mix towards relatively lower-priced consumer products,
specifically the impact of the Mac mini product, and desktop and portable price reductions. This
decrease was partially offset by an increase in the proportion of direct sales.
• Net sales of peripherals and other hardware rose by 18% during 2005 compared to 2004 primarily
due to an increase in net sales of displays and other computer accessories. Net sales of other
hardware include AirPort cards and base stations, Xserve RAID storage, iSight digital video
cameras, and third-party hardware products.
• Net sales of software, service and other sales rose $270 million or 33% during 2005 compared to
2004. This growth was primarily attributable to increased net sales in APP extended service and
support contracts, driven primarily by higher associated Macintosh computer sales. Additionally,
the Company experienced increases in net sales of .Mac Internet service, professional and consumer
applications, third-party software, and Mac OS X that was primarily attributable to the release of
version 10.4 Tiger in April 2005.

Segment Operating Performance

The Company manages its business primarily on a geographic basis. The Company’s reportable operating
segments are comprised of the Americas, Europe, Japan, and Retail. The Americas, Europe, and Japan
reportable segments do not include activities related to the Retail segment. The Americas segment
includes both North and South America. The Europe segment includes European countries as well as the

56
Middle East and Africa. The Retail segment operated Apple-owned retail stores in the U.S., Canada,
Japan, and the U.K. during 2006. Each reportable geographic operating segment provides similar
hardware and software products and similar services. Further information regarding the Company’s
operating segments may be found in Note 11, “Segment Information and Geographic Data” in Notes to
Consolidated Financial Statements of this Form 10-K.

Americas
During 2006, net sales in the Americas segment increased $2.7 billion, or 41%, compared to 2005. The
main factors for this increase were significant increases in net sales of iPods, other music related products
and services, Macintosh portable systems, and APP. Sales of iPods increased primarily due to the
introduction of the updated iPod with video-playing capabilities in October 2005 and the iPod nano during
September 2005. The increase in other music related products and services was due to increases in sales of
Apple-branded and third-party iPod accessories and sales from the iTunes Store. The increase in sales of
Macintosh portable systems in the Americas was due to strong sales of the Intel-based MacBook and
MacBook Pro during 2006. The overall increase in net sales was partially offset by a decline in net sales of
desktops, displays, and Mac OS X. The decrease in desktop products and displays net sales reflects the
overall shift in product mix toward portable Macintosh systems. Mac OS X sales decreased from 2005 since
the Company has not released a new version of Mac OS X since Tiger began shipping in April 2005.
During 2006, the Americas segment represented approximately 48% of the Company’s total net sales as
compared to 47% in the same period of 2005. During 2006, U.S. education channel net sales and
Macintosh unit sales increased by 13% and 11%, respectively, compared to 2005. Net sales from the higher
education market grew 22% during 2006 compared to 2005 due to strong sales of Macintosh portable
products and iPods. Net sales were relatively flat for K-12 due to continued budget constraints.
During 2005, net sales in the Americas segment grew 64% or $2.6 billion compared to 2004. The increase
in net sales during 2005 was primarily attributable to the significant year-over-year increase in iPod sales,
sales of other music related products and services, and strong sales of desktop and portable Macintosh
systems. This increase was partially offset by a shift in sales to the Retail segment, which had 117 stores in
the U.S. and Canada as of the end of 2005. Macintosh unit sales also increased by 30% in 2005 compared
to 2004, driven primarily by strong sales of desktop systems largely attributable to strong sales from the
updated iMac, which began shipping in September 2004, and the Mac mini, which was introduced in
January 2005. During 2005 and 2004, the Americas segment represented approximately 47% and 49%,
respectively, of the Company’s total net sales and represented approximately 48% and 51%, respectively,
of total Macintosh unit sales. The Company experienced an increase in both U.S. education channel net
sales and unit sales of 21% for 2005 compared to 2004. Strength in higher education sales related primarily
to strong iMac and portable system shipments. This strength drove year-over-year growth in net sales of
32% for the higher education channel during 2005. Despite challenges in the K-12 market from continued
budget constraints and competitive pressures, the Company’s K-12 net sales grew year-over-year by 11%
during 2005 due to increased iBook sales and 1:1 education sales.

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

57
Mac OS X net sales during 2006 compared to 2005. The decrease in desktop net sales was due to the shift
in product mix toward portable Macintosh systems. Mac OS X sales have decreased from 2005 since the
Company has not released a new version of Mac OS X since Tiger began shipping in April 2005.
During 2005, net sales in the Europe segment grew $1.3 billion or 71% from 2004. Total Macintosh unit
sales in Europe also experienced growth during the current year by increasing 47% in 2005 compared to
2004. Consistent with the Americas segment, Europe experienced strong net sales of desktop products,
iPod, other music related products and services, and software and service sales. Demand in Europe during
2005 was particularly strong for the Company’s desktop computers, which experienced a year-over-year
increase of 56% from 2004. Similar to the results of the Company’s other segments, net sales of iPods,
peripherals and software were strong in 2005.

Japan
Japan’s net sales increased $288 million or 31% during 2006 compared to 2005. The Japan segment
experienced increased net sales in iPods, Macintosh portable products, and other music related products
and services. Consistent with the Company’s other segments, Japan experienced increases in sales of iPods
due to the introduction of the iPod with video-playing capabilities and the iPod nano in October and
September of 2005, respectively. Japan also experienced strong sales of the Intel-based MacBook and
increased sales from the iTunes Store. These increases were partially offset by decreases in net sales of
Macintosh desktop products, displays, and Mac OS X. The decreases in desktop products and displays
reflect the overall shift in product mix toward portable Macintosh systems. Mac OS X sales have decreased
from 2005 since the Company has not released a new version of Mac OS X since Tiger began shipping in
April 2005. Total Macintosh unit sales during 2006 remained relatively flat compared to 2005. The
relatively flat growth in Macintosh unit sales is partially attributable to Japan’s overall slow consumer PC
market growth. The Company is continuing to evaluate ways to improve its indirect and direct channel
sales in Japan.
Japan’s net sales and Macintosh unit sales were up 36% and 8%, respectively, during 2005 compared to
2004. Japan experienced increased net sales in desktop products, iPod, and other music related products
and services. Desktop net sales and unit sales increased by 31% and 41%, respectively, and iPod sales
increased by 220% during 2005 compared to 2004. The overall increase in net sales was partially offset by a
decline in portable system net sales during 2005 compared to 2004, which the Company believes might
have been attributable to a shift in sales from portables to the iMac G5 and Mac mini, and a shift to the
Retail segment as a result of opening two additional stores in Japan during 2005.

Retail
The Company opened 41 new retail stores during 2006, including a total of 10 international stores in the
U.K., Japan, and Canada, bringing the total number of open stores to 165 as of September 30, 2006. This
compares to 124 open stores as of September 24, 2005 and 86 open stores as of September 25, 2004.
The Retail segment’s net sales increased by 43% to $3.4 billion during 2006 compared to 2005. Retail
segment Macintosh unit sales increased 45% during 2006 compared to 2005. With an average of 142 stores
open during 2006, average revenue per store increased to $23.6 million compared to $22.4 million during 2005
and $15.6 million in 2004. The current year increase was primarily due to strong sales of Macintosh portable
and desktop products, iPods, and other music related products and services. Sales of iPods increased
primarily due to the introduction of the updated iPod with video-playing capabilities in October 2005 and the
iPod nano during September 2005. The increase in other music related products and services was due to
increased sales of Apple-branded and third-party iPod accessories. Macintosh portable and desktop sales
increased due to strong sales of the Intel-based MacBook, MacBook Pro, and iMac.
As measured by the Company’s operating segment reporting, the Retail segment reported operating
income of $198 million during 2006 as compared to operating income of $151 million during 2005 and

58
operating income of $39 million during 2004. This improvement was primarily attributable to the impact of
opening new stores and the segment’s year-over-year increase in average revenue per store, which resulted
in higher leverage on occupancy, depreciation, and other fixed costs.
Expansion of the Retail segment has required and will continue to require a substantial investment in fixed
assets and related infrastructure, operating lease commitments, personnel, and other operating expenses.
Capital expenditures associated with the Retail segment were $200 million in 2006, bringing the total
capital expenditures since inception of the Retail segment to approximately $729 million. As of
September 30, 2006, the Retail segment had approximately 5,787 employees and had outstanding
operating lease commitments associated with retail store space and related facilities of approximately $887
million. The Company would incur substantial costs if it were to close its retail stores. Such costs could
adversely affect the Company’s results of operations and financial condition.

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

September 30, September 24, September 25,

2006 2005 2004
As Restated (1) As Restated (1)
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,315 $ 13,931 $8,279
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,717 9,889 6,022
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,598 $ 4,042 $ 2,257
Gross margin percentage . . . . . . . . . . . . . . . . . . . . 29.0% 29.0% 27.3%

(1) See the “Explanatory Note” immediately preceding Part I, Item 1 and Note 2, “Restatement of
Consolidated Financial Statements” in Notes to Consolidated Financial Statements of this Form 10-K.
Gross margin percentage of 29.0% in 2006 remained flat as compared to 2005. The Company experienced
more favorable pricing on certain commodity components including LCD flat-panel displays and DRAM
memory and higher overall revenue that provided for more leverage on fixed production costs, offset by an
increase in lower margin iPod sales and other music-related services.
The Company anticipates that its gross margin and the gross margins of the personal computer and
consumer electronics industries will be under pressure due to price competition. The Company expects
gross margin percentage to decline sequentially in the first quarter of 2007 primarily as a result of a shift in
the mix of revenue toward lower margin products such as the iPod and content from the iTunes Store.
The foregoing statements regarding the Company’s expected gross margin percentage are forward-looking.
There can be no assurance that current gross margin percentage will be maintained or targeted gross
margin percentage levels will be achieved. In general, gross margins and margins on individual products,
including iPods, will remain under significant downward pressure due to a variety of factors, including
continued industry wide global pricing pressures, increased competition, compressed product life cycles,
potential increases in the cost and availability of raw material and outside manufacturing services, and
potential changes to the Company’s product mix, including higher unit sales of consumer products with
lower average selling prices and lower gross margins. In response to these competitive pressures, the
Company expects it will continue to take pricing actions with respect to its products. Gross margins could
also be affected by the Company’s ability to effectively manage product quality and warranty costs and to
stimulate demand for certain of its products. Due to the Company’s significant international operations,
financial results can be significantly affected in the short-term by fluctuations in exchange rates.
The Company orders components for its products and builds inventory in advance of product shipments.
Because the Company’s markets are volatile and subject to rapid technology and price changes, there is a

59
risk the Company will forecast incorrectly and produce or order from third-parties excess or insufficient
inventories of particular products or components. The Company’s operating results and financial condition
in the past have been and may in the future be materially adversely affected by the Company’s ability to
manage its inventory levels and outstanding purchase commitments and to respond to short-term shifts in
customer demand patterns.
Gross margin percentage increased in 2005 to 29.0% of net sales from 27.3% of net sales in 2004. The
Company’s gross margin during 2005 increased due to more favorable pricing on certain commodity
components including LCD flat-panel displays and DRAM memory; an increase in higher margin software
sales; a favorable shift in direct sales related primarily to the Company’s retail and online stores; and
higher overall revenue that provided for more leverage on fixed production costs. These increases to gross
margin were partially offset by an increase in lower margin iPod sales.

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

September 30, September 24, September 25,

2006 2005 2004
As Restated (1) As Restated (1)
Research and development . . . . . . . . . . . . . . . . . . $ 712 $ 535 $ 491
Percentage of net sales . . . . . . . . . . . . . . . . . . . . 4% 4% 6%
Selling, general, and administrative expenses . . . $ 2,433 $ 1,864 $1,430
Percentage of net sales . . . . . . . . . . . . . . . . . . . . 13% 13% 17%
Restructuring costs . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ — $ 23

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

Research and Development (R&D)

Expenditures for R&D increased 33% or $177 million to $712 million in 2006 compared to $535 million in
2005. The increase was due primarily to an increase in R&D headcount in the current year to support
expanded R&D activities, an increase of $46 million in stock-based compensation recognized as R&D
expense resulting from the adoption of SFAS No. 123R, and higher overall expenses due to the 14th week
added to the first fiscal quarter of 2006 to realign the Company’s fiscal quarters with calendar quarters. In
addition, during 2005, the Company capitalized approximately $29.7 million of costs associated with the
development of Mac OS X Tiger. No software development costs were capitalized during 2006. Further
information related to the Company’s capitalization of software development costs may be found in
Part II, Item 8 of this Form 10-K at Note 1 of Notes to Consolidated Financial Statements. Despite the
increase in expenditures, R&D as a percentage of net sales remained relatively flat in 2006 as compared to
2005 due to the significant increase in revenue. The Company continues to believe that focused
investments in R&D are critical to its future growth and competitive position in the marketplace and are
directly related to timely development of new and enhanced products that are central to the Company’s
core business strategy. As such, the Company expects to make further investments in R&D to remain
competitive.

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

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

60
SG&A expense resulting from the adoption of SFAS No. 123R, a current year increase in discretionary
spending on marketing and advertising, higher direct and channel selling expenses resulting from the
increase in net sales and employee salary merit increases, and the expenses associated with the 14th week
added to the first fiscal quarter of 2006. Despite the increase in expenditures, SG&A as a percentage of
total net sales in 2006 remained flat as compared to 2005.
Expenditures for SG&A increased $434 million or 30% during 2005 compared to 2004. These increases are
due primarily to the Company’s continued expansion of its Retail segment in both domestic and
international markets, a current year increase in discretionary spending on marketing and advertising, and
higher direct and channel selling expenses resulting from the increase in net sales and employee salary
merit increases. SG&A as a percentage of total net sales in 2005 was 13%, down from 17% in 2004, which
is due to the increase in total net sales of 68% for the Company during 2005.

Fiscal 2004 Restructuring Actions

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

Other Income and Expense

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

September 30, September 24, September 25,

2006 2005 2004
Gains on non-current investments, net . . . . . . . . . . . $ — $ — $ 4
Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $394 $183 $64
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — (3)
Other income (expense), net . . . . . . . . . . . . . . . . . . . . (29) (18) (8)
Interest and other income, net . . . . . . . . . . . . . . . . . . $365 $165 $53
Total other income and expense . . . . . . . . . . . . . . . . . $365 $165 $57

Gains and Losses on Non-current Investments

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

Interest and Other Income, Net

Total interest and other income, net increased $200 million or 121% to $365 million during 2006 compared
to $165 million in 2005 and $53 million in 2004. These increases are attributable primarily to higher cash
and short-term investment balances and increasing investment yields resulting from higher market interest
rates and the 14th week added to the first fiscal quarter of 2006. The weighted average interest rate earned
by the Company on its cash, cash equivalents, and short-term investments increased to 4.58% in 2006
compared to the 2.70% and 1.38% rates earned during 2005 and 2004, respectively. The current year
increase in other income was partially offset by higher foreign currency hedging expenses.
Interest expense in 2004 consisted primarily of interest on the Company’s $300 million aggregate principal
amount unsecured notes, which were repaid upon their maturity in February 2004. The unsecured notes

61
were sold at 99.925% of par for an effective yield to maturity of 6.51%. Total deferred gain resulting from
the closure of debt swaps of approximately $23 million was fully amortized as of the notes’ maturity in
February 2004.

Provision for Income Taxes

The Company’s effective tax rate for the year ended September 30, 2006 was approximately 29%. The
Company’s effective rate differs from the statutory federal income tax rate of 35% due primarily to certain
undistributed foreign earnings for which no U.S. taxes are provided because such earnings are intended to
be indefinitely reinvested outside the U.S. In addition, the Company recorded a tax benefit of $20 million
due to settlement of prior year tax audits in the U.S., and a net benefit of $20 million resulting from the
dividend repatriation under the American Jobs Creation Act of 2004 (“AJCA”) and international tax
planning strategies associated with the repatriation as further discussed below.
As of September 30, 2006, the Company had deferred tax assets arising from deductible temporary
differences, tax losses, and tax credits of $739 million before being offset against certain deferred liabilities
and a valuation allowance for presentation on the Company’s balance sheet. Management believes it is
more likely than not that forecasted income, including income that may be generated as a result of certain
tax planning strategies, together with the tax effects of the deferred tax liabilities, will be sufficient to fully
recover the remaining deferred tax assets. As of September 30, 2006 and September 24, 2005, a valuation
allowance of $5 million was recorded against the deferred tax asset for the benefits of state operating losses
that may not be realized. The Company will continue to evaluate the realizability of the deferred tax assets
quarterly by assessing the need for and amount of the valuation allowance.
On October 22, 2004, the AJCA was signed into law. The AJCA included a provision for the deduction of
85% of certain foreign earnings that were repatriated, as defined in the AJCA, within a specified time
frame. Among other requirements, dividends qualifying for the 85% deduction must be reinvested in the
United States in certain qualified investments pursuant to a domestic reinvestment plan approved by the
CEO and Board of Directors. During 2006, the Company repatriated approximately $1.6 billion of foreign
earnings. Of the earnings repatriated, $755 million is eligible for the reduced tax rate provided by the
AJCA. Accordingly, the Company recorded a tax charge of $51 million related to the repatriation of
foreign earnings under the provisions of the AJCA. In addition, the Company recorded a tax benefit of
$71 million resulting from the implementation of tax planning strategies to recognize deferred tax assets
that were previously not recognizable within certain foreign subsidiaries.
The Internal Revenue Service (“IRS”) has substantially completed its field audit of the Company’s federal
income tax returns for the years 2002 through 2003 and proposed certain adjustments. The Company
intends to contest certain of these adjustments through the IRS Appeals Office. Substantially all IRS audit
issues for years prior to 2002 have been resolved. In addition, the Company is subject to audits by state,
local, and foreign tax authorities. Management believes that adequate provision has been made for any
adjustments that may result from tax examinations. However, the outcome of tax audits cannot be
predicted with certainty. Should any issues addressed in the Company’s tax audits be resolved in a manner
not consistent with management’s expectations, the Company could be required to adjust its provision for
income tax in the period such resolution occurs.

62
Quarterly Financial Information
The following tables set forth a summary of the Company’s quarterly financial information for each of the
four quarters in the years ended September 30, 2006 and September 24, 2005 (in millions, except share and
per share amounts):

2006 Fourth Quarter Third Quarter Second Quarter First Quarter

Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,837 $ 4,370 $ 4,359 $ 5,749
Cost of sales (1) . . . . . . . . . . . . . . . . . . . . 3,425 3,045 3,062 4,185
Gross margin . . . . . . . . . . . . . . . . . . . . 1,412 1,325 1,297 1,564
Operating expenses:
Research and development (1) . . . . . 179 175 176 182
Selling, general, and
administrative (1) . . . . . . . . . . . . . . 625 584 592 632
Total operating expenses . . . . . . . . 804 759 768 814
Operating income . . . . . . . . . . . . . . . . . . 608 566 529 750
Other income and expense. . . . . . . . . . . 113 95 76 81
Income before provision for income
taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 721 661 605 831
Provision for income taxes . . . . . . . . . . . 179 189 195 266
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 542 $ 472 $ 410 $ 565
Earnings per common share:
Basic. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.63 $ 0.55 $ 0.49 $ 0.68
Diluted. . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.62 $ 0.54 $ 0.47 $ 0.65
Shares used in computing earnings
per share (in thousands):
Basic. . . . . . . . . . . . . . . . . . . . . . . . . . . . 854,187 851,375 840,910 830,781
Diluted. . . . . . . . . . . . . . . . . . . . . . . . . . 878,757 876,368 878,537 874,207

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

Cost of sales . . . . . . . . . . . . . . . . . . . . . $ 5 $ 6 $ 5 $ 5
Research and development . . . . . . . . $ 13 $ 12 $ 13 $ 15
Selling, general, and
administrative. . . . . . . . . . . . . . . . . . $ 22 $ 19 $ 24 $ 24

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

63
 2005 Fourth Quarter Third Quarter Second Quarter First Quarter
As Restated (1) As Restated (1) As Restated (1) As Restated (1)
Net sales . . . . . . . . . . . . . . . . . . . . . . . $ 3,678 $ 3,520 $ 3,243 $ 3,490
Cost of sales (2) . . . . . . . . . . . . . . . . . 2,643 2,476 2,275 2,495
Gross margin . . . . . . . . . . . . . . . . . 1,035 1,044 968 995
Operating expenses:
Research and development (2) . . 147 145 120 123
Selling, general, and
administrative (2) . . . . . . . . . . . 471 473 448 472
Total operating expenses . . . . . 618 618 568 595
Operating income . . . . . . . . . . . . . . . 417 426 400 400
Other income and expense. . . . . . . . 60 46 33 26
Income before provision for income
taxes . . . . . . . . . . . . . . . . . . . . . . . . . 477 472 433 426
Provision for income taxes . . . . . . . . 49 153 145 133
Net income . . . . . . . . . . . . . . . . . . . . . $ 428 $ 319 $ 288 $ 293
Earnings per common share:
Basic. . . . . . . . . . . . . . . . . . . . . . . . . $ 0.52 $ 0.39 $ 0.36 $ 0.37
Diluted. . . . . . . . . . . . . . . . . . . . . . . $ 0.49 $ 0.37 $ 0.34 $ 0.35
Shares used in computing earnings
per share (in thousands):
Basic. . . . . . . . . . . . . . . . . . . . . . . . . 821,420 815,092 808,172 789,032
Diluted. . . . . . . . . . . . . . . . . . . . . . . 866,483 860,803 857,568 838,805

(1) See the “Explanatory Note” immediately preceding Part I, Item 1 and Note 2, “Restatement of
Consolidated Financial Statements,” in Notes to Consolidated Financial Statements of this
Form 10-K.
(2) Includes stock-based compensation expense, which was allocated as follows:
Cost of sales . . . . . . . . . . . . . . . . $ 1 $ — $ 1 $ 1
Research and development . . . $ 1 $ 2 $ 2 $ 2
Selling, general, and
administrative. . . . . . . . . . . . . $ 10 $ 10 $ 9 $ 10

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

64
The following tables present the effects of adjustments made to the Company’s previously reported
quarterly financial information during 2005 (in millions, except per share amounts):

Three Months Ended September 24, 2005 Three Months Ended June 25, 2005
As Adjustments As As Adjustments As
Reported (1) Restated Reported (1) Restated
Net sales. . . . . . . . . . . . . . . . . . . . . . . . $ 3,678 $ — $ 3,678 $ 3,520 $ — $ 3,520
Cost of sales (2) . . . . . . . . . . . . . . . . . 2,643 — 2,643 2,476 — 2,476
Gross margin. . . . . . . . . . . . . . . . . . 1,035 — 1,035 1,044 — 1,044
Operating expenses:
Research and development (2) . . 147 — 147 145 — 145
Selling, general, and
administrative (2). . . . . . . . . . . . 470 1 471 472 1 473
Total operating expenses . . . . . 617 1 618 617 1 618
Operating income. . . . . . . . . . . . . . . . 418 (1) 417 427 (1) 426
Other income and expense . . . . . . . . 60 — 60 46 — 46
Income before provision for
income taxes . . . . . . . . . . . . . . . . . . 478 (1) 477 473 (1) 472
Provision for income taxes . . . . . . . . 48 1 49 153 — 153
Net income . . . . . . . . . . . . . . . . . . . . . $ 430 $ (2) $ 428 $ 320 $ (1) $ 319
Earnings per common share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.52 $ — $ 0.52 $ 0.39 $ — $ 0.39
Diluted . . . . . . . . . . . . . . . . . . . . . . . $ 0.50 $(0.01) $ 0.49 $ 0.37 $ — $ 0.37
Shares used in computing earnings
per share (in thousands):
Basic . . . . . . . . . . . . . . . . . . . . . . . . . 821,420 — 821,420 815,092 — 815,092
Diluted . . . . . . . . . . . . . . . . . . . . . . . 866,404 79 866,483 860,688 115 860,803

(1) See the “Explanatory Note” immediately preceding Part I, Item 1 and Note 2, “Restatement of
Consolidated Financial Statements,” in Notes to Consolidated Financial Statements of this
Form 10-K.
(2) Includes stock-based compensation expense, which was allocated as follows:

Cost of sales . . . . . . . . . . . . . . . . $ 1 $ — $ 1 $ — $ — $ —
Research and development . . . $ 1 $ — $ 1 $ 2 $ — $ 2
Selling, general, and
administrative. . . . . . . . . . . . . $ 9 $ 1 $ 10 $ 9 $ 1 $ 10

65
 Three Months Ended March 26, 2005 Three Months Ended December 25, 2004
As Adjustments As As As
Reported (1) Restated Reported Adjustments (1) Restated
Net sales. . . . . . . . . . . . . . . . . . . . . . . . $ 3,243 $ — $ 3,243 $ 3,490 $ — $ 3,490
Cost of sales (2) . . . . . . . . . . . . . . . . . 2,275 — 2,275 2,494 1 2,495
Gross margin. . . . . . . . . . . . . . . . . . . . 968 — 968 996 (1) 995
Operating expenses:
Research and development (2) . . 119 1 120 123 — 123
Selling, general, and
administrative (2). . . . . . . . . . . . 447 1 448 470 2 472
Total operating expenses . . . . . 566 2 568 593 2 595
Operating income. . . . . . . . . . . . . . . . 402 (2) 400 403 (3) 400
Other income and expense . . . . . . . . 33 — 33 26 — 26
Income before provision for income
taxes . . . . . . . . . . . . . . . . . . . . . . . . . 435 (2) 433 429 (3) 426
Provision for income taxes . . . . . . . . 145 — 145 134 (1) 133
Net income . . . . . . . . . . . . . . . . . . . . . $ 290 $ (2) $ 288 $ 295 $ (2) $ 293
Earnings per common share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.36 $ — $ 0.36 $ 0.37 $ — $ 0.37
Diluted . . . . . . . . . . . . . . . . . . . . . . . $ 0.34 $ — $ 0.34 $ 0.35 $ — $ 0.35
Shares used in computing earnings
per share (in thousands):
Basic . . . . . . . . . . . . . . . . . . . . . . . . . 808,172 — 808,172 789,032 — 789,032
Diluted . . . . . . . . . . . . . . . . . . . . . . . 857,011 557 857,568 838,174 631 838,805

(1) See the “Explanatory Note” immediately preceding Part I, Item 1 and Note 2, “Restatement of
Consolidated Financial Statements,” in Notes to Consolidated Financial Statements of this
Form 10-K.
(2) Includes stock-based compensation expense, which was allocated as follows:

Cost of sales . . . . . . . . . . . . . . . $ 1 $ — $ 1 $ — $ 1 $ 1
Research and development . . $ 1 $ 1 $ 2 $ 2 $ — $ 2
Selling, general, and
administrative. . . . . . . . . . . . $ 8 $ 1 $ 9 $ 8 $ 2 $ 10

Recent Accounting Pronouncements

In September 2006, the SEC issued SAB No. 108, Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements. SAB No. 108 provides guidance on how
prior year misstatements should be considered when quantifying misstatements in current year financial
statements for purposes of determining whether the current year’s financial statements are materially
misstated. SAB No. 108 is effective for fiscal years ending after November 15, 2006. Although the
Company will continue to evaluate the application of SAB No. 108, management does not currently believe
adoption will have a material impact on the Company’s results of operations or financial position.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value,
provides a framework for measuring fair value, and expands the disclosures required for fair value
measurements. SFAS No. 157 applies to other accounting pronouncements that require fair value
measurements; it does not require any new fair value measurements. SFAS No. 157 is effective for fiscal
years beginning after November 15, 2007 and is required to be adopted by the Company beginning in the

66
first quarter of fiscal 2009. Although the Company will continue to evaluate the application of SFAS
No. 157, management does not currently believe adoption will have a material impact on the Company’s
results of operations or financial position.
In June 2006, the FASB issued FASB Interpretation No. (“FIN”) 48, Accounting for Uncertainty in Income
Taxes-an Interpretation of FASB Statement No. 109. FIN No. 48 clarifies the accounting for uncertainty in
income taxes by creating a framework for how companies should recognize, measure, present, and disclose
in their financial statements uncertain tax positions that they have taken or expect to take in a tax return.
FIN No. 48 is effective for fiscal years beginning after December 15, 2006 and is required to be adopted by
the Company beginning in the first quarter of fiscal 2008. Although the Company will continue to evaluate
the application of FIN No. 48, management does not currently believe adoption will have a material
impact on the Company’s results of operations or financial position.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, which replaces
APB Opinion No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim
Financial Statements—An Amendment of APB Opinion No. 28. SFAS No. 154 requires retrospective
application to prior periods’ financial statements of a voluntary change in accounting principal unless it is
not practicable. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005 and is required to be adopted by the Company in the first quarter
of fiscal 2007. Although the Company will continue to evaluate the application of SFAS No. 154,
management does not currently believe adoption will have a material impact on the Company’s results of
operations or financial position.

Liquidity and Capital Resources

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

September 30, September 24, September 25,

2006 2005 2004
As Restated (1) As Restated (1)
Cash, cash equivalents, and short-term
investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,110 $ 8,261 $ 5,464
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . $ 1,252 $ 895 $ 774
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 270 $ 165 $ 101
Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,038 $ 6,813 $ 4,403
Days sales in accounts receivable (DSO) (a) . . . . . 24 22 30
Days of supply in inventory (b) . . . . . . . . . . . . . . . . . 7 6 5
Days payables outstanding (DPO) (c) . . . . . . . . . . . 89 62 76
Annual operating cash flow . . . . . . . . . . . . . . . . . . . . $ 2,220 $2,535 $ 934

(1) See the “Explanatory Note” immediately preceding Part I, Item 1 and Note 2, “Restatement of
Consolidated Financial Statements,” in Notes to Consolidated Financial Statements of this
Form 10-K.
(a) DSO is based on ending net trade receivables and most recent quarterly net sales for each period.
(b) Days supply of inventory is based on ending inventory and most recent quarterly cost of sales for
each period.
(c) DPO is based on ending accounts payable and most recent quarterly cost of sales adjusted for the
change in inventory.
As of September 30, 2006, the Company had $10.11 billion in cash, cash equivalents, and short-term
investments, an increase of $1.85 billion over the same balances at the end of 2005. The principal

67
components of this increase were cash generated by operating activities of $2.22 billion, proceeds of $318
million from the issuance of common stock under stock plans, and excess tax benefits from stock-based
compensation of $361 million, partially offset by cash used to purchase property, plant, and equipment of
$657 million and repurchases of common stock of $355 million in conjunction with net-share settlements
on vested restricted stock and restricted stock units. Cash generated from operating activities includes the
impact of the $1.25 billion prepayment for NAND flash memory components. The Company’s short-term
investment portfolio is primarily invested in high credit quality, liquid investments. As of September 30,
2006, approximately $4.1 billion of the Company’s cash, cash equivalents, and short-term investments were
held by foreign subsidiaries and are generally based in U.S. dollar-denominated holdings. Amounts held by
foreign subsidiaries are generally subject to U.S. income taxation on repatriation to the U.S.
The Company believes its existing balances of cash, cash equivalents, and short-term investments will be
sufficient to satisfy its working capital needs, capital expenditures, stock repurchase activity, outstanding
commitments, and other liquidity requirements associated with its existing operations over the next 12
months.

Capital Expenditures
The Company’s total capital expenditures were $657 million during 2006, consisting of $200 million for
retail store facilities and equipment related to the Company’s Retail segment, $263 million for real estate
acquisitions for the Company’s second corporate campus and for a new data center, and $194 million for
corporate infrastructure, including information systems enhancements. The Company currently anticipates
it will utilize approximately $675 million for capital expenditures during 2007, including approximately $360
million for expansion of the Company’s Retail segment, approximately $50 million for real estate acquisitions
including the Company’s second corporate campus and its new data center, and approximately $265 million to
support normal replacement of existing capital assets and enhancements to general information technology
infrastructure.

Stock Repurchase Plan

In July 1999, the Company’s Board of Directors authorized a plan for the Company to repurchase up to
$500 million of its common stock. This repurchase plan does not obligate the Company to acquire any
specific number of shares or acquire shares over any specified period of time. The Company has
repurchased a total of 13.1 million shares at a cost of $217 million under this plan and was authorized to
repurchase up to an additional $283 million of its common stock as of September 30, 2006.

Off-Balance Sheet Arrangements and Contractual Obligations

The Company has not entered into any transactions with unconsolidated entities whereby the Company
has financial guarantees, subordinated retained interests, derivative instruments, or other contingent
arrangements that expose the Company to material continuing risks, contingent liabilities, or any other
obligation under a variable interest in an unconsolidated entity that provides financing, liquidity, market
risk, or credit risk support to the Company.
The following table presents certain payments due by the Company under contractual obligations with
minimum firm commitments as of September 30, 2006 and excludes amounts already recorded on the
Company’s balance sheet as current liabilities (in millions):

Payments Due Payments Payments Due Payments Due

in Less Due in in in More
Total Than 1 Year 1-3 Years 4-5 Years Than 5 Years
Operating Leases . . . . . . . . . . . . . . . . . . . . . . $ 1,154 $ 134 $ 268 $ 254 $498
Purchase Obligations. . . . . . . . . . . . . . . . . . . 2,306 2,306 — — —
Asset Retirement Obligations . . . . . . . . . . . 19 3 3 7 6
Other Obligations . . . . . . . . . . . . . . . . . . . . . 39 29 10 — —
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,518 $ 2,472 $ 281 $ 261 $504

68
Lease Commitments
As of September 30, 2006, the Company had total outstanding commitments on noncancelable operating
leases of approximately $1.2 billion, $887 million of which related to the lease of retail space and related
facilities. Lease terms on the Company’s existing major facility operating leases range from 5 to 15 years.

Purchase Commitments with Contract Manufacturers and Component Suppliers

The Company utilizes several contract manufacturers to manufacture sub-assemblies for the Company’s
products and to perform final assembly and test of finished products. These contract manufacturers
acquire components and build product based on demand information supplied by the Company, which
typically covers periods ranging from 30 to 150 days. The Company also obtains individual components for
its products from a wide variety of individual suppliers. Consistent with industry practice, the Company
acquires components through a combination of purchase orders, supplier contracts, and open orders based
on projected demand information. Such purchase commitments typically cover the Company’s forecasted
component and manufacturing requirements for periods ranging from 30 to 150 days. As of September 30,
2006, the Company had outstanding third-party manufacturing commitments and component purchase
commitments of approximately $2.3 billion.
During 2006, the Company entered into long-term supply agreements with Hynix Semiconductor, Inc.,
Intel Corporation, Micron Technology, Inc., Samsung Electronics Co., Ltd., and Toshiba Corporation to
secure supply of NAND flash memory through calendar year 2010. As part of these agreements, the
Company prepaid $1.25 billion for flash memory components during 2006. These prepayments will be
applied to inventory purchases made over the life of each respective agreement.

Asset Retirement Obligations

The Company’s asset retirement obligations are associated with commitments to return property subject to
operating leases to original condition upon lease termination. As of September 30, 2006, the Company
estimates that gross expected future cash flows of approximately $19 million will be required to fulfill these
obligations.

Other Obligations
The Company’s other obligations of approximately $39 million are primarily related to Internet and
telecommunications services.

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

69
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate and Foreign Currency Risk Management
The Company regularly reviews its foreign exchange forward and option positions and its interest rate
swap and option positions, both on a stand-alone basis and in conjunction with its underlying foreign
currency and interest rate related exposures. However, given the effective horizons of the Company’s risk
management activities and the anticipatory nature of the exposures, there can be no assurance the hedges
will offset more than a portion of the financial impact resulting from movements in either foreign exchange
or interest rates. In addition, the timing of the accounting for recognition of gains and losses related to
mark-to-market instruments for any given period may not coincide with the timing of gains and losses
related to the underlying economic exposures and, therefore, may adversely affect the Company’s
operating results and financial position.

Interest Rate Risk

While the Company is exposed to interest rate fluctuations in many of the world’s leading industrialized
countries, the Company’s interest income and expense is most sensitive to fluctuations in the general level
of U.S. interest rates. In this regard, changes in U.S. interest rates affect the interest earned on the
Company’s cash, cash equivalents, and short-term investments as well as costs associated with foreign
currency hedges.
The Company’s short-term investment policy and strategy is to ensure the preservation of capital, meet
liquidity requirements, and optimize return in light of the current credit and interest rate environment. A
portion of the Company’s cash is managed by external managers within the guidelines of the Company’s
investment policy and to an objective market benchmark. The Company’s internal portfolio is
benchmarked against external manager performance, allowing for differences in liquidity needs.
The Company’s exposure to market risk for changes in interest rates relates primarily to the Company’s
investment portfolio. The Company places its short-term investments in highly liquid securities issued by
high credit quality issuers and, by policy, limits the amount of credit exposure to any one issuer. The
Company’s general policy is to limit the risk of principal loss and ensure the safety of invested funds by
limiting market and credit risk. All highly liquid investments with initial maturities of three months or less
are classified as cash equivalents; highly liquid investments with initial maturities greater than three
months are classified as short-term investments. As of September 30, 2006, approximately $921 million of
the Company’s short-term investments had underlying maturities ranging from 1 to 5 years. As of
September 24, 2005, $287 million of the Company’s short-term investments had underlying maturities
ranging from 1 to 5 years. The remainder all had underlying maturities of less than 12 months. The
Company may sell its investments prior to their stated maturities for strategic purposes, in anticipation of
credit deterioration or for duration management. The Company recognized net losses before taxes of
$434,000 and $137,000 in 2006 and 2005, respectively, and a net gain before taxes of $1 million in 2004 as a
result of such sales.
To provide a meaningful assessment of the interest rate risk associated with the Company’s investment
portfolio, the Company performed a sensitivity analysis to determine the impact a change in interest rates
would have on the value of the investment portfolio assuming a 100 basis point parallel shift in the yield
curve. Based on investment positions as of September 30, 2006, a hypothetical 100 basis point increase in
interest rates across all maturities would result in a $15.2 million decline in the fair market value of the
portfolio. As of September 24, 2005, a similar 100 basis point shift in the yield curve would have resulted in
a $19.9 million decline in fair value. Such losses would only be realized if the Company sold the
investments prior to maturity.

70
Foreign Currency Risk
In general, the Company is a net receiver of foreign currencies. Accordingly, changes in exchange rates,
and in particular a strengthening of the U.S. dollar, may negatively affect the Company’s net sales and
gross margins as expressed in U.S. dollars. There is also a risk the Company will have to adjust local
currency product pricing due to competitive pressures when there has been significant volatility in foreign
currency exchange rates.
The Company may enter into foreign currency forward and option contracts with financial institutions to
protect against foreign exchange risks associated with existing assets and liabilities, certain firmly
committed transactions, forecasted future cash flows, and net investments in foreign subsidiaries.
Generally, the Company’s practice is to hedge a majority of its existing material foreign exchange
transaction exposures. However, the Company may not hedge certain foreign exchange transaction
exposures due to immateriality, prohibitive economic cost of hedging particular exposures, and limited
availability of appropriate hedging instruments.
To provide a meaningful assessment of the foreign currency risk associated with certain of the Company’s
foreign currency derivative positions, the Company performed a sensitivity analysis using a value-at-risk
(“VAR”) model to assess the potential impact of fluctuations in exchange rates. The VAR model consisted
of using a Monte Carlo simulation to generate 3,000 random market price paths. The VAR is the
maximum expected loss in fair value, for a given confidence interval, to the Company’s foreign exchange
portfolio due to adverse movements in rates. The VAR model is not intended to represent actual losses
but is used as a risk estimation and management tool. The model assumes normal market conditions.
Forecasted transactions, firm commitments, and assets and liabilities denominated in foreign currencies
were excluded from the model. Based on the results of the model, the Company estimates with 95%
confidence a maximum one-day loss in fair value of $9.2 million as of September 30, 2006 compared to a
maximum one-day loss of $10.0 million as of September 24, 2005. Because the Company uses foreign
currency instruments for hedging purposes, losses incurred on those instruments are generally offset by
increases in the fair value of the underlying exposures.
Actual future gains and losses associated with the Company’s investment portfolio and derivative positions
may differ materially from the sensitivity analyses performed as of September 30, 2006 due to the inherent
limitations associated with predicting the changes in the timing and amount of interest rates, foreign
currency exchanges rates, and the Company’s actual exposures and positions.

71
Item 8. Financial Statements and Supplementary Data

Index to Consolidated Financial Statements Page

Consolidated Balance Sheets as of September 30, 2006 and September 24, 2005 . . . . . . . . . . . . . . . 73
Consolidated Statements of Operations for the three fiscal years ended September 30, 2006. . . . . 74
Consolidated Statements of Shareholders’ Equity for the three fiscal years ended
September 30, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Consolidated Statements of Cash Flows for the three fiscal years ended September 30, 2006 . . . . 76
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Selected Quarterly Financial Information (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
Reports of Independent Registered Public Accounting Firm, KPMG LLP . . . . . . . . . . . . . . . . . . . . 118
All financial statement schedules have been omitted, since the required information is not applicable or is
not present in amounts sufficient to require submission of the schedule, or because the information
required is included in the Consolidated Financial Statements and Notes thereto.

72
 CONSOLIDATED BALANCE SHEETS
(In millions, except share amounts)

September 30, 2006 September 24, 2005

As Restated(1)
ASSETS:
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,392 $ 3,491
Short-term investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,718 4,770
Accounts receivable, less allowances of $52 and $46, respectively . 1,252 895
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270 165
Deferred tax assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 607 331
Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,270 648
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,509 10,300
Property, plant, and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,281 817
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 69
Acquired intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139 27
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,238 303
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $17,205 $11,516
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,390 $ 1,779
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,081 1,708
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,471 3,487
Non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 750 601
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,221 4,088
Commitments and contingencies
Shareholders’ equity:
Common stock, no par value; 1,800,000,000 shares authorized;
855,262,568 and 835,019,364 shares issued and outstanding,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,355 3,564
Deferred stock compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (61)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,607 3,925
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . 22 —
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,984 7,428
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . $17,205 $11,516

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

73
 CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except share and per share amounts)

Three fiscal years ended September 30, 2006 2006 2005 2004
As Restated (1) As Restated (1)
Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,315 $ 13,931 $ 8,279
Cost of sales (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,717 9,889 6,022
Gross margin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,598 4,042 2,257
Operating expenses:
Research and development (2) . . . . . . . . . . . . . . . . . . . . . . . . . . 712 535 491
Selling, general, and administrative (2) . . . . . . . . . . . . . . . . . . . 2,433 1,864 1,430
Restructuring costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 23
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . 3,145 2,399 1,944
Operating income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,453 1,643 313
Other income and expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 365 165 57
Income before provision for income taxes. . . . . . . . . . . . . . . . . . . 2,818 1,808 370
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 829 480 104
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,989 $ 1,328 $ 266
Earnings per common share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.36 $ 1.64 $ 0.36
Diluted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.27 $ 1.55 $ 0.34
Shares used in computing earnings per share (in thousands):
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 844,058 808,439 743,180
Diluted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 877,526 856,878 774,776

(1) See Note 2, “Restatement of Consolidated Financial Statements,” in Notes to Consolidated Financial
Statements.
(2) Includes stock-based compensation expense, which was allocated as follows:

Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21 $ 3 $ 3
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . $ 53 $ 7 $ 6
Selling, general, and administrative . . . . . . . . . . . . . . . . . . . $ 89 $ 39 $ 37

See accompanying Notes to Consolidated Financial Statements.

74
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In millions, except share amounts which are in thousands)

Accumulated
Other Total
Common Stock Deferred Stock Retained Comprehensive Shareholders’
Shares Amount Compensation Earnings Income (Loss) Equity
As As As As
Restated (1) Restated (1) Restated (1) Restated (1)
Balances as of September 27, 2003 as previously
reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 733,454 $ 1,926 $ (62) $ 2,394 $ (35) $ 4,223
Adjustments to opening shareholders’ equity . . . . . . . — 85 (22) (63) — —
Balance as of September 27, 2003 as restated . . . . . . . 733,454 $ 2,011 $ (84) $ 2,331 $ (35) $ 4,223
Components of comprehensive income:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — 266 — 266
Change in foreign currency translation . . . . . . . . — — — — 13 13
Change in unrealized gain on available-for-sale
securities, net of tax . . . . . . . . . . . . . . . . . . . . — — — — (5) (5)
Change in unrealized loss on derivative
investments, net of tax. . . . . . . . . . . . . . . . . . . — — — — 12 12
Total comprehensive income. . . . . . . . . . . . . . 286
Issuance of stock-based compensation awards . . . . . — 63 (63) — — —
Adjustment to common stock related to a prior year
acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (159) (2) — — — (2)
Stock-based compensation . . . . . . . . . . . . . . . . . . . — — 46 — — 46
Common stock issued under stock plans . . . . . . . . . 49,592 427 — — — 427
Tax benefit related to stock options . . . . . . . . . . . . — 83 — — — 83
Balances as of September 25, 2004 . . . . . . . . . . . . . . . 782,887 $ 2,582 $ (101) $ 2,597 $ (15) $ 5,063
Components of comprehensive income:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — 1,328 — 1,328
Change in foreign currency translation . . . . . . . . — — — — 7 7
Change in unrealized gain on derivative
investments, net of tax. . . . . . . . . . . . . . . . . . . — — — — 8 8
Total comprehensive income. . . . . . . . . . . . . . 1,343
Issuance of stock-based compensation awards. . . . . . . — 7 (7) — — —
Stock-based compensation. . . . . . . . . . . . . . . . . . . . . — — 47 — — 47
Common stock issued under stock plans . . . . . . . . . . . 52,132 547 — — — 547
Tax benefit related to stock options . . . . . . . . . . . . . . — 428 — — — 428
Balances as of September 24, 2005 . . . . . . . . . . . . . . . 835,019 $ 3,564 $ (61) $ 3,925 $ — $ 7,428
Components of comprehensive income:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — 1,989 — 1,989
Change in foreign currency translation . . . . . . . . — — — — 19 19
Change in unrealized gain on available-for-sale
securities, net of tax . . . . . . . . . . . . . . . . . . . . — — — — 4 4
Change in unrealized loss on derivative
investments, net of tax. . . . . . . . . . . . . . . . . . . — — — — (1) (1)
Total comprehensive income. . . . . . . . . . . . . . 2,011
Common stock repurchased. . . . . . . . . . . . . . . . . . . . (4,574) (48) — (307) — (355)
Stock-based compensation. . . . . . . . . . . . . . . . . . . . . — 163 — — — 163
Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . — (61) 61 — — —
Common stock issued under stock plans . . . . . . . . . . . 24,818 318 — — — 318
Tax benefit related to stock-based compensation . . . . — 419 — — — 419
Balances as of September 30, 2006 . . . . . . . . . . . . . . . 855,263 $ 4,355 $ — $ 5,607 $ 22 $ 9,984

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

See accompanying Notes to Consolidated Financial Statements.

75
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)

Three fiscal years ended September 30, 2006 2006 2005 2004
As Restated (1) As Restated (1)
Cash and cash equivalents, beginning of the year . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,491 $ 2,969 $ 3,396
Operating Activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,989 1,328 266
Adjustments to reconcile net income to cash generated by operating activities:
Depreciation, amortization and accretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225 179 150
Stock-based compensation expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163 49 46
Provision for deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 50 19
Excess tax benefits from stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 428 83
Gain on sale of PowerSchool net assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4) — —
Loss on disposition of property, plant, and equipment . . . . . . . . . . . . . . . . . . . . 15 9 7
Gains on sales of investments, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — (5)
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (357) (121) (8)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (105) (64) (45)
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,626) (150) (176)
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,040) (35) (25)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,611 328 297
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,296 534 325
Cash generated by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,220 2,535 934
Investing Activities:
Purchases of short-term investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,255) (11,470) (3,270)
Proceeds from maturities of short-term investments . . . . . . . . . . . . . . . . . . . . . . . 7,226 8,609 1,141
Proceeds from sales of investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,086 586 806
Purchases of long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25) — —
Proceeds from sale of PowerSchool net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 — —
Purchases of property, plant, and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (657) (260) (176)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (58) (21) 11
Cash generated by (used for) investing activities . . . . . . . . . . . . . . . . . . . . . . . 357 (2,556) (1,488)
Financing Activities:
Payment of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — (300)
Proceeds from issuance of common stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 318 543 427
Excess tax benefits from stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . 361 — —
Repurchases of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (355) — —
Cash generated by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 324 543 127
Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . 2,901 522 (427)
Cash and cash equivalents, end of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,392 $ 3,491 $ 2,969
Supplemental cash flow disclosures:
Cash paid during the year for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ — $ 10
Cash paid (received) for income taxes, net . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 194 $ 17 $ (7)

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

See accompanying Notes to Consolidated Financial Statements.

76
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1—Summary of Significant Accounting Policies

Apple Computer, Inc. and its wholly-owned subsidiaries (the Company) designs, manufactures, and
markets personal computers and related software, services, peripherals, and networking solutions. The
Company also designs, develops, and markets a line of portable digital music players along with related
accessories and services including the online sale of third-party audio and video products. The Company
sells its products worldwide through its online stores, its retail stores, its direct sales force, and third-party
wholesalers, resellers, and value-added resellers. In addition, the Company sells a variety of third-party
Macintosh and iPod compatible products including application software, printers, storage devices,
speakers, headphones, and various other accessories and supplies through its online and retail stores. The
Company sells to education, consumer, creative professional, business, and government customers.

Basis of Presentation and Preparation

The accompanying consolidated financial statements include the accounts of the Company. Intercompany
accounts and transactions have been eliminated. The preparation of these consolidated financial
statements in conformity with U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in these consolidated financial statements and
accompanying notes. Actual results could differ materially from those estimates. Certain prior year
amounts in the consolidated financial statements and notes thereto have been reclassified to conform to
the current year presentation.
Typically, the Company’s fiscal year ends on the last Saturday of September. Fiscal years 2005 and 2004
were each 52-week years. However, approximately every six years, the Company reports a 53-week fiscal
year to align its fiscal quarters with calendar quarters by adding a week to its first fiscal quarter. The
Company added this additional week in the first fiscal quarter of its fiscal year 2006. All information
presented herein is based on the Company’s fiscal calendar.

Common Stock Split

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

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

Derivative Financial Instruments

The Company accounts for its derivative instruments as either assets or liabilities and carries them at fair
value. Derivatives that are not defined as hedges in Statement of Financial Accounting Standards
(“SFAS”) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, must be
adjusted to fair value through earnings. If the derivative is a hedge, depending on the nature of the hedge,

77
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 1—Summary of Significant Accounting Policies (Continued)

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

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

Property, Plant, and Equipment

Property, plant, and equipment are stated at cost. Depreciation is computed by use of the straight-line
method over the estimated useful lives of the assets, which for buildings is the lesser of 30 years or the
remaining life of the underlying building, up to 5 years for equipment, and the shorter of lease terms or 10
years for leasehold improvements. The Company capitalizes eligible costs to acquire or develop internal-
use software that are incurred subsequent to the preliminary project stage. Capitalized costs related to
internal-use software are amortized using the straight-line method over the estimated useful lives of the
assets, which range from 3 to 5 years. Depreciation and amortization expense on property and equipment
was $180 million, $141 million, and $126 million during 2006, 2005, and 2004, respectively.

Asset Retirement Obligations

The Company records obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs in accordance with SFAS No. 143, Accounting for Asset Retirement
Obligations. The Company reviews legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and/or normal use of the assets. If it is determined
that a legal obligation exists, the fair value of the liability for an asset retirement obligation is recognized in
the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the
liability is added to the carrying amount of the associated asset and this additional carrying amount is
depreciated over the life of the asset. The difference between the gross expected future cash flow and its

78
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 1—Summary of Significant Accounting Policies (Continued)

present value is accreted over the life of the related lease as an operating expense. All of the Company’s
existing asset retirement obligations are associated with commitments to return property subject to
operating leases to original condition upon lease termination.
The following table reconciles changes in the Company’s asset retirement liabilities for fiscal 2006 and
2005 (in millions):

Asset retirement liability as of September 25, 2004. . . . . . . . . . . . . . . . . . . . . . . . . $ 8.2

Additional asset retirement obligations recognized . . . . . . . . . . . . . . . . . . . . . . 2.8
Accretion recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.7
Asset retirement liability as of September 24, 2005. . . . . . . . . . . . . . . . . . . . . . . . . $11.7
Additional asset retirement obligations recognized . . . . . . . . . . . . . . . . . . . . . . 2.5
Accretion recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.5
Asset retirement liability as of September 30, 2006. . . . . . . . . . . . . . . . . . . . . . . . . $14.7

Long-Lived Assets Including Goodwill and Other Acquired Intangible Assets

The Company reviews property, plant, and equipment and certain identifiable intangibles, excluding
goodwill, for impairment in accordance with SFAS No. 144, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of. Long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate the carrying amount of an asset may not be
recoverable. Recoverability of these assets is measured by comparison of its carrying amount to future
undiscounted cash flows the assets are expected to generate. If property, plant, and equipment and certain
identifiable intangibles are considered to be impaired, the impairment to be recognized equals the amount
by which the carrying value of the assets exceeds its fair market value. For the three fiscal years ended
September 30, 2006, the Company had no material impairment of its long-lived assets, except for the
impairment of certain assets in connection with the restructuring actions described in Note 6 of these
Notes to Consolidated Financial Statements.
SFAS No. 142, Goodwill and Other Intangible Assets requires that goodwill and intangible assets with
indefinite useful lives should not be amortized but rather be tested for impairment at least annually or
sooner whenever events or changes in circumstances indicate that they may be impaired. The Company
performs its goodwill impairment tests on or about August 30 of each year. The Company did not
recognize any goodwill or intangible asset impairment charges in 2006, 2005, or 2004. The Company
established reporting units based on its current reporting structure. For purposes of testing goodwill for
impairment, goodwill has been allocated to these reporting units to the extent it relates to each reporting
unit.
SFAS No. 142 also requires that intangible assets with definite lives be amortized over their estimated
useful lives and reviewed for impairment in accordance with SFAS No. 144. The Company is currently
amortizing its acquired intangible assets with definite lives over periods ranging from 3 to 10 years.

Foreign Currency Translation

The Company translates the assets and liabilities of its international non-U.S. functional currency
subsidiaries into U.S. dollars using exchange rates in effect at the end of each period. Revenue and
expenses for these subsidiaries are translated using rates that approximate those in effect during the
period. Gains and losses from these translations are credited or charged to foreign currency translation

79
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 1—Summary of Significant Accounting Policies (Continued)

included in “accumulated other comprehensive income” in shareholders’ equity. The Company’s foreign
manufacturing subsidiaries and certain other international subsidiaries that use the U.S. dollar as their
functional currency remeasure monetary assets and liabilities at exchange rates in effect at the end of each
period, and inventories, property, and nonmonetary assets and liabilities at historical rates. Gains and
losses from these translations were insignificant and have been included in the Company’s results of
operations.

Revenue Recognition
Net sales consist primarily of revenue from the sale of hardware, software, peripherals, digital content, and
service and support contracts. The Company recognizes revenue pursuant to applicable accounting
standards, including American Institute of Certified Public Accountants Statement of Position (“SOP”)
No. 97-2, Software Revenue Recognition, as amended, and Securities and Exchange Commission (“SEC”)
Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition.
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has
occurred, the sales price is fixed or determinable, and collection is probable. Product is considered
delivered to the customer once it has been shipped and title and risk of loss have been transferred. For
most of the Company’s product sales, these criteria are met at the time the product is shipped. For online
sales to individuals, for some sales to education customers in the U.S., and for certain other sales, the
Company defers revenue until the customer receives the product because the Company legally retains a
portion of the risk of loss on these sales during transit. If at the outset of an arrangement the Company
determines the arrangement fee is not, or is presumed not to be, fixed or determinable, revenue is deferred
and subsequently recognized as amounts become due and payable.
Revenue from service and support contracts is deferred and recognized ratably over the service coverage
periods. These contracts typically include extended phone support, repair services, web-based support
resources, diagnostic tools, and extend the service coverage offered under the Company’s one-year limited
warranty.
The Company sells software and peripheral products obtained from other companies. The Company
establishes its own pricing and retains related inventory risk, is the primary obligor in sales transactions
with its customers, and assumes the credit risk for amounts billed to its customers. Accordingly, the
Company recognizes revenue for the sale of products obtained from other companies based on the gross
amount billed.
Revenue on arrangements that include multiple elements such as hardware, software, and services is
allocated to each element based on the relative fair value of each element. Each element’s allocated
revenue is recognized when revenue recognition criteria for that element have been met. Fair value is
generally determined by vendor specific objective evidence (“VSOE”), which is based on the price charged
when each element is sold separately. If the Company cannot objectively determine the fair value of any
undelivered element included in a multiple-element arrangement, the Company defers revenue until all
elements are delivered and services have been performed, or until fair value can objectively be determined
for any remaining undelivered elements. When the fair value of a delivered element has not been
established, the Company uses the residual method to recognize revenue if the fair value of all undelivered
elements is determinable. Under the residual method, the fair value of the undelivered elements is
deferred and the remaining portion of the arrangement fee is allocated to the delivered elements and is
recognized as revenue.

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 1—Summary of Significant Accounting Policies (Continued)

The Company records reductions to revenue for estimated commitments related to price protection and
for customer incentive programs, including reseller and end-user rebates, and other sales programs and
volume-based incentives. The estimated cost of these programs is accrued as a reduction to revenue in the
period the Company has sold the product and committed to a plan. The Company also records reductions
to revenue for expected future product returns based on the Company’s historical experience.
Generally, the Company does not offer specified or unspecified upgrade rights to its customers in
connection with software sales or the sale of extended warranty and support contracts. When the Company
does offer specified upgrade rights, the Company defers revenue for the fair value of the specified upgrade
right until the future obligation is fulfilled or when the right to the specified upgrade expires. Additionally,
a limited number of the Company’s software products are available with maintenance agreements that
grant customers rights to unspecified future upgrades over the maintenance term on a when and if
available basis. Revenue associated with such maintenance is recognized ratably over the maintenance
term.

Allowance for Doubtful Accounts

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

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

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

Software Development Costs

Research and development costs are expensed as incurred. Development costs of computer software to be
sold, leased, or otherwise marketed are subject to capitalization beginning when a product’s technological
feasibility has been established and ending when a product is available for general release to customers
pursuant to SFAS No. 86, Computer Software to be Sold, Leased, or Otherwise Marketed. In most instances,
the Company’s products are released soon after technological feasibility has been established. Therefore,
costs incurred subsequent to achievement of technological feasibility are usually not significant, and
generally all software development costs have been immediately expensed.
In 2004, the Company began incurring substantial development costs associated with Mac OS X version
10.4 Tiger (“Tiger”) subsequent to achievement of technological feasibility as evidenced by public
demonstration in August 2004 and the subsequent release of a developer beta version of the product. The
Company capitalized approximately $29.7 million and $4.5 million during 2005 and 2004, respectively, of
costs associated with the development of Tiger. In accordance with SFAS No. 86, amortization of this asset
to cost of sales began in April 2005 when the Company began shipping Tiger and is being recognized on a
straight-line basis over a three-year estimated useful life.

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 1—Summary of Significant Accounting Policies (Continued)

During 2004, the Company incurred substantial development costs associated with FileMaker Pro 7
subsequent to achievement of technological feasibility as evidenced by public demonstration and release of
a developer beta version, and prior to the release of the final version of the product in March 2004.
Therefore, during 2004, the Company capitalized approximately $2.3 million of costs associated with the
development of FileMaker Pro 7. In accordance with SFAS No. 86, amortization of this asset to cost of
sales began in March 2004 when the Company began shipping FileMaker Pro 7 and is being recognized on
a straight-line basis over a three-year estimated useful life.
Total amortization related to capitalized software development costs was $17.8 million, $15.7 million, and
$10.7 million in 2006, 2005, and 2004, respectively.

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

Stock-Based Compensation
On September 25, 2005, the Company adopted SFAS No. 123 (revised 2004) (“SFAS No. 123R”), Share-
Based Payment, which addresses the accounting for stock-based payment transactions in which an
enterprise receives employee services in exchange for (a) equity instruments of the enterprise or
(b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled
by the issuance of such equity instruments. In January 2005, the SEC issued SAB No. 107, which provides
supplemental implementation guidance for SFAS No. 123R. SFAS No. 123R eliminates the ability to
account for stock-based compensation transactions using the intrinsic value method under Accounting
Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and instead generally
requires that such transactions be accounted for using a fair-value-based method. The Company uses the
Black-Scholes-Merton (“BSM”) option-pricing model to determine the fair-value of stock-based awards
under SFAS No. 123R, consistent with that used for pro forma disclosures under SFAS No. 123,
Accounting for Stock-Based Compensation. The Company has elected to use the modified prospective
transition method as permitted by SFAS No. 123R and accordingly prior periods have not been restated to
reflect the impact of SFAS No. 123R. The modified prospective transition method requires that stock-
based compensation expense be recorded for all new and unvested stock options, restricted stock,
restricted stock units, and employee stock purchase plan shares that are ultimately expected to vest as the
requisite service is rendered beginning on September 25, 2005, the first day of the Company’s fiscal year
2006. Stock-based compensation expense for awards granted prior to September 25, 2005 is based on the
grant-date fair-value as determined under the pro forma provisions of SFAS No. 123. The Company
recognized incremental stock-based compensation expense of $117 million during 2006 as a result of the
adoption of SFAS No. 123R. Diluted earnings per common share was reduced by $0.10 for the year ended
September 30, 2006 due to the adoption of SFAS No. 123R. In accordance with SFAS No. 123R, beginning
in 2006 the Company has presented excess tax benefits from the exercise of stock-based compensation
awards as a financing activity in the consolidated statement of cash flows.
No stock-based compensation costs have been capitalized as of September 30, 2006. The income tax
benefit related to stock-based compensation expense was $39 million for the year ended September 30,
2006. As of September 30, 2006, $375.2 million of total unrecognized compensation cost related to stock
options and restricted stock units is expected to be recognized over a weighted-average period of 2.91
years.

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 1—Summary of Significant Accounting Policies (Continued)

SFAS No. 123R prohibits recognition of a deferred tax asset for an excess tax benefit that has not been
realized. The Company will recognize a benefit from stock-based compensation in equity if an incremental
tax benefit is realized by following the ordering provisions of the tax law. In addition, the Company
accounts for the indirect effects of stock-based compensation on the research tax credit, the foreign tax
credit, and the domestic manufacturing deduction through the income statement.
Prior to the adoption of SFAS No. 123R, the Company measured compensation expense for its employee
stock-based compensation plans using the intrinsic value method prescribed by APB Opinion No. 25. The
Company applied the disclosure provisions of SFAS No. 123 as amended by SFAS No. 148, Accounting for
Stock-Based Compensation—Transition and Disclosure, as if the fair-value-based method had been applied
in measuring compensation expense. Under APB Opinion No. 25, when the exercise price of the
Company’s employee stock options was equal to the market price of the underlying stock on the date of
the grant, no compensation expense was recognized.
The following table illustrates the effect on net income after taxes and net income per common share as if
the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based
compensation during 2005 and 2004 (in millions, except per share amounts):

2005 2004
As Restated (1) As Restated (1)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,328 $ 266
Add: Stock-based employee compensation expense included in
reported net income, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 43
Deduct: Stock-based employee compensation expense
determined under the fair value based method for all awards,
net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (118) (148)
Net income—pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,255 $ 161

Net income per common share

Basic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.64 $ 0.36
Diluted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.55 $ 0.34
Net income per common share—pro forma
Basic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.55 $ 0.22
Diluted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.47 $ 0.21

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

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

Earnings Per Common Share

Basic earnings per common share is computed by dividing income available to common shareholders by
the weighted-average number of shares of common stock outstanding during the period. Diluted earnings
per common share is computed by dividing income available to common shareholders by the weighted-
average number of shares of common stock outstanding during the period increased to include the number
of additional shares of common stock that would have been outstanding if the dilutive potential shares of
common stock had been issued. The dilutive effect of outstanding options, restricted stock, and restricted
stock units is reflected in diluted earnings per share by application of the treasury stock method. Under the

83
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 1—Summary of Significant Accounting Policies (Continued)

treasury stock method, an increase in the fair market value of the Company’s common stock can result in a
greater dilutive effect from outstanding options, restricted stock, and restricted stock units. Additionally,
the exercise of employee stock options and the vesting of restricted stock and restricted stock units can
result in a greater dilutive effect on earnings per share.
The following table sets forth the computation of basic and diluted earnings per share:

Three fiscal years ended September 30, 2006 2006 2005 2004
As Restated (1) As Restated (1)
Numerator (in millions):
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,989 $ 1,328 $ 266
Denominator (in thousands):
Weighted-average shares outstanding, excluding unvested
restricted stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 844,058 808,439 743,180
Effect of dilutive options, restricted stock units and unvested
restricted stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,468 48,439 31,596
Denominator for diluted earnings per share . . . . . . . . . . . . . . . . 877,526 856,878 774,776
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.36 $ 1.64 $ 0.36
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.27 $ 1.55 $ 0.34

Potentially dilutive securities representing approximately 3.9 million, 12.7 million (as restated(1)), and
8.9 million (as restated(1)) shares of common stock for the years ended September 30, 2006, September 24,
2005, and September 25, 2004, respectively, were excluded from the computation of diluted earnings per
share for these periods because their effect would have been antidilutive. These potentially dilutive
securities include stock options, unvested restricted stock, and restricted stock units.

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

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.

84
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 2—Restatement of Consolidated Financial Statements

The Company is restating its consolidated balance sheet as of September 24, 2005, and the related
consolidated statements of operations, shareholders’ equity, and cash flows for each of the fiscal years
ended September 24, 2005 and September 25, 2004, and each of the quarters in fiscal year 2005.
Previously filed annual reports on Form 10-K and quarterly reports on Form 10-Q affected by the
restatements have not been amended and should not be relied on.
On June 29, 2006, the Company announced that an internal review had discovered irregularities related to
the issuance of certain stock option grants made between 1997 and 2001, including a grant to its Chief
Executive Officer (“CEO”) Steve Jobs. The Company also announced that a Special Committee of outside
directors (“Special Committee”) had been formed and had hired independent counsel to conduct a full
investigation of the Company’s past stock option granting practices.
As a result of the internal review and the independent investigation, management has concluded, and the
Audit and Finance Committee of the Board of Directors agrees, that incorrect measurement dates were
used for financial accounting purposes for certain stock option grants made in prior periods. Therefore,
the Company has recorded additional non-cash stock-based compensation expense and related tax effects
with regard to past stock option grants, and the Company is restating previously filed financial statements
in this Form 10-K. These adjustments, after tax, amounted to $4 million, $7 million, and $10 million in
fiscal years 2006, 2005 and 2004, respectively. The adjustment to 2006 was recorded in the fourth quarter of
fiscal year 2006 due to its insignificance.
The independent counsel and its forensic accountants (“Investigative Team”) reviewed the facts and
circumstances surrounding stock option grants made on 259 dates. Based on a review of the totality of
evidence and the applicable law, the Special Committee found no misconduct by current management. The
Special Committee’s investigation identified a number of grants for which grant dates were intentionally
selected in order to obtain favorable exercise prices. The terms of these and certain other grants, as
discussed below, were finalized after the originally assigned grant dates. The Special Committee concluded
that the procedures for granting, accounting for, and reporting stock option grants did not include
sufficient safeguards to prevent manipulation. Although the investigation found that CEO Steve Jobs was
aware or recommended the selection of some favorable grant dates, he did not receive or financially
benefit from these grants or appreciate the accounting implications. The Special Committee also found
that the investigation had raised serious concerns regarding the actions of two former officers in
connection with the accounting, recording and reporting of stock option grants.
Based on the evidence and findings from the Company’s internal review and the Special Committee’s
independent investigation, an analysis was performed of the measurement dates for the 42,077 stock
option grants made on 259 dates between October 1996 and January 2003 (the “relevant period”). The
Company believes that the analysis was properly limited to the relevant period. In addition to analyzing all
grants made during the relevant period, the Company sampled certain grants between 1994 and 1997 and
found none that required accounting adjustments. The first grants for which stock-based compensation
expense is required are dated December 29, 1997. The Company also examined grants made after the
relevant period and found none that required accounting adjustments. Moreover, in the years after 2002,
Apple made significant changes in its stock option granting practices in response to evolving legal,
regulatory and accounting requirements.
Consistent with the accounting literature and recent guidance from the Securities and Exchange
Commission (“SEC”), the grants during the relevant period were organized into categories based on grant

85
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 2—Restatement of Consolidated Financial Statements (Continued)

type and process by which the grant was finalized. The Company analyzed the evidence related to each
category of grants including, but not limited to, electronic and physical documents, document metadata,
and witness interviews. Based on the relevant facts and circumstances, the Company applied the
controlling accounting standards to determine, for every grant within each category, the proper
measurement date. If the measurement date is not the originally assigned grant date, accounting
adjustments were made as required, resulting in stock-based compensation expense and related tax effects.
The 42,077 grants were classified as follows: (1) 17 grants to persons elected or appointed to the Board of
Directors (“director grants”); (2) 3,892 grants to employees under the Monday/Tuesday Plan described
below (“Monday/Tuesday grants”); (3) 27,096 grants made in broad-based awards to large numbers of
employees, usually on an annual basis (“focal grants”); (4) 9,988 other grants ratified at meetings of the
Board or Compensation Committee (“meeting grants”); (5) 1,082 other grants ratified by unanimous
written consent (“UWC”) of the Board or Compensation Committee (“other UWC grants”); and (6) two
grants to the CEO (“CEO grants”). All references to the number of option shares, option exercise prices,
and share prices in this Note 2 have not been adjusted for any subsequent stock splits.
With the exception of director grants, all stock option grants were subject to ratification by the Board or
Compensation Committee at a meeting or by UWC. Following approval of the grants at a meeting or by
UWC, the Company’s legal staff would prepare a Secretary’s Certificate certifying the ratification of the
grants. Based on the facts and circumstances described below, the Company has concluded that the
recipients and terms of certain grants were fixed for accounting purposes before ratification pursuant to
parameters previously approved by the Board or Compensation Committee through the Monday/Tuesday
Plan and the focal process. As further discussed below, within these parameters, management had the
authority to determine the recipients and terms for each grant. Thus, the Company has concluded that the
measurement dates for these grants occurred when management’s process for allocating these grants was
completed and the grants were ready for ratification, which was considered perfunctory. With regard to all
other grants, the Company has concluded that the grants were finalized and the measurement dates
occurred when the grants were ratified. For many grants, however, the dates of ratification cannot be
established because the dates the UWCs were executed by the Board or Compensation Committee
members or received by the Company are not available. For such grants, the Company has concluded that
the date of the preparation of the Secretary’s Certificate is the best alternative for determining the actual
date of ratification.
As discussed below, the Company’s analysis determined that the originally assigned grant dates for 6,428
grants on 42 dates are not the proper measurement dates. Accordingly, after accounting for forfeitures, the
Company has recognized stock-based compensation expense of $105 million on a pre-tax basis over the
respective awards’ vesting terms. No adjustments were required for the remaining 35,649 grants. The
adjustments were determined by category as follows:
Director Grants—Seventeen director grants were made during the relevant period. Two director grants
were made pursuant to a 1997 plan that dated the grants on the enactment of the plan. The remaining
fifteen grants were automatically made under the Director Stock Option Plan for non-employee directors,
which was approved by shareholders in 1998, on the date of a director’s election or appointment to the
Board and on subsequent anniversaries, beginning on the fourth anniversary. Accordingly, the analysis
determined that the originally assigned grant date for each director grant is the measurement date, and no
accounting adjustments are required.

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 2—Restatement of Consolidated Financial Statements (Continued)

Monday/Tuesday Grants—Beginning in December 1998, 3,892 new hire grants and grants for promotion
and retention purposes (“promotion/retention grants”) were made during the relevant period under the
“Monday/Tuesday Plan.” Under the Monday/Tuesday Plan, new hire grants made within pre-established
guidelines approved by the Board or Compensation Committee were dated on the Monday that the
recipient started work (or the following Monday, if the recipient started on another day). The Company’s
analysis showed this process to be reliable with very low error rates. Promotion/retention grants, also based
on pre-established guidelines, were made generally on the first Tuesday of each month. The Company has
concluded that the new hire and promotion/retention grants made pursuant to the Monday/Tuesday Plan
within pre-established guidelines do not require adjustment, with the exception of six grants that were
erroneously dated before the employees’ start dates. For 120 new hire and promotion/retention grants
made outside the guidelines, however, the Company has concluded that the measurement dates are the
dates of ratification by the Board or Compensation Committee rather than the dates used for grants within
guidelines. Accordingly, based on the methodology described above, the Company has recognized stock-
based compensation expense of $6 million from 126 grants.
Focal Grants—During the relevant period, 27,096 focal grants were made to employees typically on an
annual basis as part of an extensive process that required several months to complete. Pursuant to limits,
guidelines and practices previously approved by the Board or Compensation Committee, managers
throughout the Company would make recommendations for grants to employees in their areas of
responsibility. After senior management had determined that the grants were made in accordance with
these established limits, guidelines and practices, management treated the grants as final when they were
submitted to the Board or Compensation Committee for ratification. The Company has concluded that for
5,595 grants on five dates, the originally assigned grant dates are not the proper measurement dates. For
these grants, management’s process for finalizing the grants was completed after the originally assigned
grant dates. As a result, the Company has recognized $29 million of stock-based compensation expense.
For two of the five grant dates comprising 3,744 grants, the evidence shows that the grants were finalized
and the measurement date occurred one day after the originally assigned grant dates. The grants on these
two dates represent more than $16 million of the total $29 million of stock-based compensation expense
resulting from focal grants.
Other Meeting Grants—During the relevant period, meetings of the Board or Compensation Committee
were held to ratify 9,988 grants that are not Monday/Tuesday, focal or CEO grants. The grant dates and
measurement dates for these grants are the meeting dates when the grants were ratified, with the exception
of 46 grants. Forty-two of these 46 grants are dated concurrent with a meeting that considered and
approved certain grants, but the evidence indicates that all of the grants may not have been finalized until a
later date. One of the 46 grants was approved and dated at another meeting, but the recipient, who was
becoming employed by the Company as part of a corporate acquisition, did not start until a later date. Two
other grants were approved before the employees’ start dates. Another grant was mistakenly cancelled and
subsequently reinstated, requiring an accounting adjustment. Thus, for these 46 grants the Company has
concluded that the originally assigned grant dates are not the proper measurement dates. As a result, the
Company has recognized $2 million of stock-based compensation expense.
Other UWC Grants—During the relevant period, 1,082 grants were approved by UWCs for a variety of
purposes, including executive recruitment, retention, promotion and new hires outside the
Monday/Tuesday process. These grants were not made pursuant to pre-established guidelines adopted by
the Board or Compensation Committee. Therefore, the Company has concluded that these grants were

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 2—Restatement of Consolidated Financial Statements (Continued)

not finalized for accounting purposes until ratification by the Board or Compensation Committee.
Accordingly, for 660 grants, the Company has concluded that the originally assigned grant dates are not
the proper measurement dates. As a result, the Company has recognized $48 million of stock-based
compensation expense.
CEO Grants—During the relevant period, the Company made two grants to CEO Steve Jobs. The first
grant, dated January 12, 2000, was for 10 million option shares. The second grant, dated October 19, 2001,
was for 7.5 million option shares. Both grants were cancelled in March 2003 prior to being exercised, when
Mr. Jobs received 5 million shares of restricted stock.
With respect to the grant dated January 12, 2000, the Board on December 2, 1999, authorized a special
“CEO Compensation Committee” to grant Mr. Jobs up to 15 million shares. The evidence indicates that
the CEO Compensation Committee finalized the terms of the grant on January 12, 2000, although the
Committee’s action was memorialized in a UWC transmitted on January 18, 2000. Because the
measurement date is the originally assigned grant date, the Company has not recognized any stock-based
compensation expense from this grant. If the Company had determined that the measurement date was the
date when the UWC was executed or received, then additional stock-based compensation would have been
recognized.
The grant dated October 19, 2001 was originally approved at a Board meeting on August 29, 2001, with an
exercise price of $17.83. The terms of the grant, however, were not finalized until December 18, 2001. The
grant was dated October 19, 2001, with an exercise price of $18.30. The approval for the grant was
improperly recorded as occurring at a special Board meeting on October 19, 2001. Such a special Board
meeting did not occur. There was no evidence, however, that any current member of management was
aware of this irregularity. The Company has recognized $20 million in stock-based compensation expense
for this grant, reflecting the difference between the exercise price of $18.30 and the share price on
December 18, 2001 of $21.01.
The incremental impact from recognizing stock-based compensation expense resulting from the
investigation of past stock option grants is as follows (dollars in millions):

Pre-Tax
Expense After Tax
Fiscal Year (Income) Expense
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1) $—
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 6
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 9
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 13
2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 23
2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 12
Total 1998 – 2003 impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 63
2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 10
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 7
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 4
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $105 $ 84

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

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 2—Restatement of Consolidated Financial Statements (Continued)

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

September 24, 2005

As Reported Adjustments As Restated
ASSETS:
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,491 $ — $ 3,491
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,770 — 4,770
Accounts receivable, less allowance of $46 . . . . . . . . . . . . . . . . . . . . 895 — 895
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165 — 165
Deferred tax assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 331 — 331
Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 648 — 648
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,300 — 10,300
Property, plant, and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . 817 — 817
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 — 69
Acquired intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 — 27
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 338 (35) 303
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,551 (35) $ 11,516
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,779 $ — $ 1,779
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,705 3 1,708
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,484 3 3,487
Non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 601 — 601
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,085 3 4,088
Commitments and contingencies
Shareholders’ equity:
Common stock, no par value; 1,800,000,000 shares authorized;
835,019,364 shares issued and outstanding . . . . . . . . . . . . . . . . . . 3,521 43 3,564
Deferred stock compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (60) (1) (61)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,005 (80) 3,925
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . — — —
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,466 (38) 7,428
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . $11,551 (35) $11,516

89
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 2—Restatement of Consolidated Financial Statements (Continued)

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

Fiscal Year Ended September 24, 2005 Fiscal Year Ended September 25, 2004
As As As As
Reported Adjustments Restated Reported Adjustments Restated
Net sales. . . . . . . . . . . . . . . . . . . . . . . . $ 13,931 $ — $ 13,931 $ 8,279 $ — $ 8,279
Cost of sales (1) . . . . . . . . . . . . . . . . . 9,888 1 9,889 6,020 2 6,022
Gross margin. . . . . . . . . . . . . . . . . . 4,043 (1) 4,042 2,259 (2) 2,257
Operating expenses:
Research and development (1) . . 534 1 535 489 2 491
Selling, general, and
administrative (1). . . . . . . . . . . . 1,859 5 1,864 1,421 9 1,430
Restructuring costs . . . . . . . . . . . . — — — 23 — 23
Total operating expenses . . . . . 2,393 6 2,399 1,933 11 1,944
Operating income. . . . . . . . . . . . . . . . 1,650 (7) 1,643 326 (13) 313
Other income and expense . . . . . . . . 165 — 165 57 — 57
Income before provision for
income taxes . . . . . . . . . . . . . . . . . . 1,815 (7) 1,808 383 (13) 370
Provision for income taxes . . . . . . . . 480 — 480 107 (3) 104
Net income . . . . . . . . . . . . . . . . . . . . . $ 1,335 $ (7) $ 1,328 $ 276 $ (10) $ 266
Earnings per common share:
Basic . . . . . . . . . . . . . . . . . . . . . . . $ 1.65 $(0.01) $ 1.64 $ 0.37 $(0.01) $ 0.36
Diluted. . . . . . . . . . . . . . . . . . . . . $ 1.56 $(0.01) $ 1.55 $ 0.36 $(0.02) $ 0.34
Shares used in computing earnings
per share (in thousands):
Basic . . . . . . . . . . . . . . . . . . . . . . . 808,439 — 808,439 743,180 — 743,180
Diluted. . . . . . . . . . . . . . . . . . . . . 856,780 98 856,878 774,622 154 774,776

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

Cost of sales . . . . . . . . . . . . . . . . $ 2 $ 1 $ 3 $ 1 $ 2 $ 3
Research and development . . . $ 6 $ 1 $ 7 $ 4 $ 2 $ 6
Selling, general, and
administrative. . . . . . . . . . . . . $ 34 $ 5 $ 39 $ 28 $ 9 $ 37

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 2—Restatement of Consolidated Financial Statements (Continued)

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

Deferred Stock Net Impact to

Fiscal Year Common Stock Compensation Retained Earnings Shareholders’ Equity
1998 ................... $ 26 $ (27) $ — $ (1)
1999 ................... 36 (32) (6) (2)
2000 ................... 56 (43) (15) (2)
2001 ................... 81 (49) (28) 4
2002 ................... 105 (49) (51) 5
2003 ................... 85 (22) (63) —
2004 ................... 68 (8) (73) (13)
2005 ................... 43 (1) (80) (38)

Note 3—Financial Instruments

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

Cash, Cash Equivalents and Short-Term Investments

The following table summarizes the fair value of the Company’s cash and available-for-sale securities held
in its short-term investment portfolio, recorded as cash and cash equivalents or short-term investments (in
millions):

September 30, September 24,

2006 2005
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 200 $ 127
U.S. Treasury and Agency securities . . . . . . . . . . . . . . . . . . 52 89
U.S. Corporate Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,309 2,030
Foreign Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,831 1,245
Total cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . 6,192 3,364
U.S. Treasury and Agency securities . . . . . . . . . . . . . . . . . . 447 216
U.S. Corporate Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,701 3,662
Foreign Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 570 892
Total short-term investments . . . . . . . . . . . . . . . . . . 3,718 4,770
Total cash, cash equivalents, and short-term
investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,110 $ 8,261

The Company’s U.S. corporate securities consist primarily of commercial paper, certificates of deposit,
time deposits, and corporate debt securities. Foreign securities consist primarily of foreign commercial
paper, certificates of deposit, and time deposits with foreign institutions, most of which are denominated in
U.S. dollars. The Company had net unrealized losses totaling $687,000 on its investment portfolio,
primarily related to investments with stated maturities less than 1 year, as of September 30, 2006, and net
unrealized losses of $5.9 million on its investment portfolio, approximately half of which related to
investments with stated maturities less than 1 year, as of September 24, 2005. The Company may sell its
investments prior to their stated maturities for strategic purposes, in anticipation of credit deterioration, or

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 3—Financial Instruments (Continued)

for duration management. The Company recognized net losses before taxes of $434,000 and $137,000 in
2006 and 2005, respectively, and a net gain before taxes of $1 million in 2004 as a result of such sales.
These net gains were included in interest and other income, net.
As of September 30, 2006 and September 24, 2005, approximately $921 million and $287 million,
respectively, of the Company’s short-term investments had underlying maturities ranging from 1 to 5 years.
The remaining short-term investments as of September 30, 2006 and September 24, 2005 had maturities
less than 12 months.
In accordance with FASB Staff Position (“FSP”) FAS 115-1 and FAS 124-1, The Meaning of Other-Than-
Temporary Impairment and Its Application to Certain Investments, the following table shows the gross
unrealized losses and fair value for those investments that were in an unrealized loss position as of
September 30, 2006 and September 24, 2005, aggregated by investment category and the length of time
that individual securities have been in a continuous loss position (in millions):
2006
Less than 12 Months 12 Months or Greater Total
Fair Unrealized Fair Unrealized Fair Unrealized
Security Description Value Loss Value Loss Value Loss
U.S. Treasury and Agency Securities . . $ 234 $— $ 26 $— $ 260 $—
U.S. Corporate Securities . . . . . . . . . . . . 943 — 102 (1) 1,045 (1)
Foreign Securities . . . . . . . . . . . . . . . . . . 164 — 34 — 198 —
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,341 $— $ 162 $ (1) $ 1,503 $ (1)

2005
Less than 12 Months 12 Months or Greater Total
Fair Unrealized Fair Unrealized Fair Unrealized
Security Description Value Loss Value Loss Value Loss
U.S. Treasury and Agency securities. . . . $ 160 $(1) $ 2 $— $ 162 $ (1)
U.S. corporate securities. . . . . . . . . . . . . . 3,960 (4) 25 — 3,985 (4)
Foreign Securities . . . . . . . . . . . . . . . . . . . 1,382 (1) 1 — 1,383 (1)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,502 $ (6) $28 $— $ 5,530 $ (6)

The unrealized losses on the Company’s investments during 2006 in U.S. Government securities and
during 2005 in U.S. Government securities, U.S. corporate securities, and foreign securities were caused
primarily by changes in interest rates. The Company typically invests in highly-rated securities with low
probabilities of default. The Company’s investment policy requires investments to be rated single-A or
better. Therefore, the Company considers the declines to be temporary in nature. As of September 30,
2006, the Company does not consider the investments to be other-than-temporarily impaired.
Market values were determined for each individual security in the investment portfolio. When evaluating
the investments for other-than-temporary impairment, the Company reviews factors such as the length of
time and extent to which fair value has been below cost basis, the financial condition of the issuer, and the
Company’s ability and intent to hold the investment for a period of time, which may be sufficient for
anticipated recovery in market value.

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 3—Financial Instruments (Continued)

Accounts Receivable
Trade Receivables
The Company distributes its products through third-party distributors and resellers and directly to certain
education, consumer, and commercial customers. The Company generally does not require collateral from
its customers; however, the Company will require collateral in certain instances to limit credit risk. In
addition, when possible, the Company does attempt to limit credit risk on trade receivables with credit
insurance for certain customers in Latin America, Europe, Asia, and Australia and by arranging with third-
party financing companies to provide flooring arrangements and other loan and lease programs to the
Company’s direct customers. These credit-financing arrangements are directly between the third-party
financing company and the end customer. As such, the Company generally does not assume any recourse
or credit risk sharing related to any of these arrangements. However, considerable trade receivables that
are not covered by collateral, third-party flooring arrangements, or credit insurance are outstanding with
the Company’s distribution and retail channel partners. No customer accounted for more than 10% of
trade receivables as of September 30, 2006 or September 24, 2005.
The following table summarizes the activity in the allowance for doubtful accounts (in millions):

September 30, September 24, September 25,

2006 2005 2004
Beginning allowance balance . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 46 $ 47 $ 49
Charged to costs and expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 17 8 3
Deductions(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (11) (9) (5)
Ending allowance balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 52 $ 46 $ 47

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

Vendor Non-Trade Receivables

The Company has non-trade receivables from certain of its manufacturing vendors resulting from the sale
of raw material components to these manufacturing vendors who manufacture sub-assemblies or assemble
final products for the Company. The Company purchases these raw material components directly from
suppliers. These non-trade receivables, which are included in the consolidated balance sheets in other
current assets, totaled $1.6 billion and $417 million as of September 30, 2006 and September 24, 2005,
respectively. The Company does not reflect the sale of these components in net sales and does not
recognize any profits on these sales until the products are sold through to the end customer at which time
the profit is recognized as a reduction of cost of sales.

Derivative Financial Instruments

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

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 3—Financial Instruments (Continued)

The following table shows the notional principal, net fair value, and credit risk amounts of the Company’s
foreign currency instruments as of September 30, 2006 and September 24, 2005 (in millions):

September 30, 2006 September 24, 2005

Notional Fair Credit Risk Notional Fair Creit Risk
Principal Value Amounts Principal Value Amounts
Foreign exchange instruments qualifying
as accounting hedges:
Spot/Forward contracts. . . . . . . . . . . . . . . $ 351 $ 6 $ 6 $ 662 $ 10 $ 10
Purchased options . . . . . . . . . . . . . . . . . . . $ 1,256 $ 9 $ 9 $ 1,668 $ 17 $ 17
Sold options . . . . . . . . . . . . . . . . . . . . . . . . $ 80 $ (1) $— $1,087 $ (5) $—
Foreign exchange instruments other than
accounting hedges:
Spot/Forward contracts. . . . . . . . . . . . . . . $ 1,103 $ 2 $ 2 $ 833 $ (3) $ 1
Purchased options . . . . . . . . . . . . . . . . . . . $ 167 $ 1 $— $ 115 $— $—
Sold options . . . . . . . . . . . . . . . . . . . . . . . . $ — $— $— $ — $— $—

The notional principal amounts for derivative instruments provide one measure of the transaction volume
outstanding as of year-end, and do not represent the amount of the Company’s exposure to credit or
market loss. The credit risk amounts shown in the table above represents the Company’s gross exposure to
potential accounting loss on these transactions if all counterparties failed to perform according to the
terms of the contract, based on then-current currency exchange rates at each respective date. The
Company’s exposure to credit loss and market risk will vary over time as a function of currency exchange
rates.
The estimates of fair value are based on applicable and commonly used pricing models and prevailing
financial market information as of September 30, 2006 and September 24, 2005. Although the table above
reflects the notional principal, fair value, and credit risk amounts of the Company’s foreign exchange
instruments, it does not reflect the gains or losses associated with the exposures and transactions that the
foreign exchange instruments are intended to hedge. The amounts ultimately realized upon settlement of
these financial instruments, together with the gains and losses on the underlying exposures, will depend on
actual market conditions during the remaining life of the instruments.

Foreign Exchange Risk Management

The Company may enter into foreign currency forward and option contracts with financial institutions to
protect against foreign exchange risk associated with existing assets and liabilities, certain firmly committed
transactions, forecasted future cash flows, and net investments in foreign subsidiaries. Generally, the
Company’s practice is to hedge a majority of its existing material foreign exchange transaction exposures.
However, the Company may not hedge certain foreign exchange transaction exposures due to
immateriality, prohibitive economic cost of hedging particular exposures, or limited availability of
appropriate hedging instruments.
To help protect gross margins from fluctuations in foreign currency exchange rates, the Company’s U.S.
dollar functional subsidiaries hedge a portion of forecasted foreign currency revenue, and the Company’s
non-U.S. dollar functional subsidiaries selling in local currencies hedge a portion of forecasted inventory
purchases not denominated in the subsidiaries’ functional currency. Other comprehensive income

94
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 3—Financial Instruments (Continued)

associated with hedges of foreign currency revenue is recognized as a component of net sales in the same
period as the related sales are recognized, and other comprehensive income related to inventory purchases
is recognized as a component of cost of sales in the same period as the related costs are recognized.
Typically, the Company hedges portions of its forecasted foreign currency exposure associated with
revenue and inventory purchases over a time horizon of up to 6 months.
Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable
that the forecasted hedged transaction will not occur in the initially identified time period or within a
subsequent 2 month time period. Deferred gains and losses in other comprehensive income associated with
such derivative instruments are immediately reclassified into earnings in other income and expense. Any
subsequent changes in fair value of such derivative instruments are also reflected in current earnings unless
they are re-designated as hedges of other transactions. The Company recognized a net gain of
approximately $421,000 in 2006 and net losses of $1.6 million and $2.8 million in 2005 and 2004,
respectively, in other income and expense related to the loss of hedge designation on discontinued cash
flow hedges due to changes in the Company’s forecast of future net sales and cost of sales and due to
prevailing market conditions. As of September 30, 2006, the Company had a net deferred gain associated
with cash flow hedges of approximately $2.8 million, net of taxes, substantially all of which is expected to be
reclassified to earnings by the end of the second quarter of fiscal 2007.
The net gain or loss on the effective portion of a derivative instrument designated as a net investment
hedge is included in the cumulative translation adjustment account of accumulated other comprehensive
income within shareholders’ equity. For the years ended September 30, 2006 and September 24, 2005, the
Company had net gains of $7.4 million and $673,000, respectively, included in the cumulative translation
adjustment.
The Company may also enter into foreign currency forward and option contracts to offset the foreign
exchange gains and losses generated by the re-measurement of certain assets and liabilities recorded in
non-functional currencies. Changes in the fair value of these derivatives are recognized in current earnings
in other income and expense as offsets to the changes in the fair value of the related assets or liabilities.
Due to currency market movements, changes in option time value can lead to increased volatility in other
income and expense.

Note 4—Consolidated Financial Statement Details (in millions)

Other Current Assets

2006 2005
Vendor non-trade receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,593 $ 417
NAND flash memory prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208 —
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 469 231
Total other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,270 $ 648

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

Property, Plant, and Equipment

2006 2005
Land and buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 626 $ 361
Machinery, equipment, and internal-use software. . . . . . . . . . . . . . . . 595 470
Office furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 81
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 760 569
2,075 1,481
Accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . (794) (664)
Net property, plant, and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,281 $ 817

Other Assets

2006 2005
As Restated(1)
Long-term NAND flash memory prepayments . . . . . . . . . . . . . . $1,042 $ —
Non-current deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . — 148
Capitalized software development costs, net . . . . . . . . . . . . . . . . 21 38
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175 117
Total other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,238 $303

Accrued Expenses

2006 2005
As Restated(1)
Deferred revenue—current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 746 $ 501
Accrued warranty and related costs . . . . . . . . . . . . . . . . . . . . . . . 284 188
Accrued marketing and distribution . . . . . . . . . . . . . . . . . . . . . . 298 221
Accrued compensation and employee benefits . . . . . . . . . . . . . 221 167
Other accrued tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 388 196
Deferred margin on component sales . . . . . . . . . . . . . . . . . . . . . 324 26
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 820 409
Total accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,081 $ 1,708

Non-Current Liabilities

2006 2005
Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 381 $ 308
Deferred revenue—non-current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 355 281
Other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 12
Total non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $750 $601

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

Other Income and Expense

2006 2005 2004

Gains on non-current investments, net . . . . . . . . . . . . . . . . . . . . $ — $ — $ 4
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 394 $ 183 $ 64
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — (3)
Other income (expense), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (29) (18) (8)
Total interest and other income, net . . . . . . . . . . . . . . . . . . . . . . 365 165 53
Total other income and expense . . . . . . . . . . . . . . . . . . . . . . . . . . $365 $165 $ 57

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

Note 5—Goodwill and Other Intangible Assets

The Company is currently amortizing its acquired intangible assets with definite lives over periods ranging
from 3 to 10 years.
The following table summarizes the components of gross and net intangible asset balances (in millions):

September 30, 2006 September 24, 2005

Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
Goodwill . . . . . . . . . . . . . . . . . . . . . $ 38 $ — $ 38 $ 69 $ — $69
Acquired technology . . . . . . . . . . . 181 (42) 139 61 (34) 27
Total acquired intangible assets. . $ 219 $ (42) $ 177 $ 130 $ (34) $96

As of September 30, 2006, and September 24, 2005, the weighted-average amortization period for acquired
technology was 8.5 years and 5.5 years, respectively.
During 2006, the Company sold certain assets related to its PowerSchool web-based student information
system operations. In connection with this sale, the Company reduced goodwill by $31 million for the
outstanding balance from the acquisition of PowerSchool, Inc. in 2001 and recognized a $4 million pre-tax
gain, which is reflected in other income and expense in the consolidated statement of operations.
During 2005, the Company recorded an adjustment of approximately $11 million to goodwill relating to a
reduction of valuation allowances that were recorded at the time certain net operating loss carryforwards
(“NOLs”) were acquired in previous business combinations. During 2005, these NOLs were deemed to be
more likely than not to be realized and accordingly the valuation allowances were reversed against the
related goodwill that was recognized at the time of the acquisitions.

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 5—Goodwill and Other Intangible Assets (Continued)

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

Fiscal Years:
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Thereafter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 139

Amortization expense related to acquired intangible assets was $12 million, $9 million, and $7 million in
2006, 2005, and 2004, respectively.

Note 6—Restructuring Charges

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

Note 7—Income Taxes

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

2006 2005 2004

As Restated (1) As Restated (1)
Federal:
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $619 $ 305 $ 34
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 144 53
675 449 87
State:
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 66 5
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 (91) (18)
70 (25) (13)
Foreign:
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 59 46
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17) (3) (16)
84 56 30
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . $829 $ 480 $104

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

The foreign provision for income taxes is based on foreign pretax earnings of approximately $1.5 billion,
$922 million, and $384 million in 2006, 2005, and 2004, respectively. As of September 30, 2006,

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 7—Income Taxes (Continued)

approximately $4.1 billion of the Company’s cash, cash equivalents, and short-term investments were held
by foreign subsidiaries and are generally based in U.S. dollar-denominated holdings. Amounts held by
foreign subsidiaries are generally subject to U.S. income taxation on repatriation to the U.S. The
Company’s consolidated financial statements provide for any related tax liability on amounts that may be
repatriated, aside from undistributed earnings of certain of the Company’s foreign subsidiaries that are
intended to be indefinitely reinvested in operations outside the U.S. U.S. income taxes have not been
provided on a cumulative total of $823 million of such earnings. It is not practicable to determine the
income tax liability that might be incurred if these earnings were to be distributed.
On October 22, 2004, the American Jobs Creation Act of 2004 (“AJCA”) was signed into law. The AJCA
included a provision for the deduction of 85% of certain foreign earnings that were repatriated, as defined
in the AJCA, within a specified time frame. Among other requirements, dividends qualifying for the 85%
deduction must be reinvested in the United States in certain qualified investments pursuant to a domestic
reinvestment plan approved by the Chief Executive Officer (“CEO”) and Board of Directors. During 2006,
the Company repatriated approximately $1.6 billion of foreign earnings. Of the earnings repatriated,
$755 million is eligible for the reduced tax rate provided by the AJCA. Accordingly, the Company recorded
a tax charge of $51 million related to the repatriation of foreign earnings under the provisions of the
AJCA. In addition, the Company recorded a tax benefit of $71 million resulting from the implementation
of tax planning strategies to recognize deferred tax assets that were previously not recognizable within
certain foreign subsidiaries.
Deferred tax assets and liabilities reflect the effects of tax losses, credits, and the future income tax effects
of temporary differences between the consolidated financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and are measured using enacted tax rates that apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled.
As of September 30, 2006 and September 24, 2005, the significant components of the Company’s deferred
tax assets and liabilities were (in millions):

2006 2005
As Restated (1)
Deferred tax assets:
Accrued liabilities and other reserves . . . . . . . . . . . . . . . . . . . . . $ 485 $321
Tax losses and credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 262
Basis of capital assets and investments . . . . . . . . . . . . . . . . . . . . 124 96
Accounts receivable and inventory reserves . . . . . . . . . . . . . . . . 45 36
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 17
Total deferred tax assets 739 732
Less valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 5
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 734 727
Deferred tax liabilities:
Unremitted earnings of subsidiaries . . . . . . . . . . . . . . . . . . . . . . 514 557
Total deferred tax liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 514 557
Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 220 $170

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

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 7—Income Taxes (Continued)

As of September 30, 2006, the Company has state and foreign tax loss and state credit carryforwards, the
tax effect of which is $55 million. Certain of those carryforwards, the tax effect of which is $12 million,
expire between 2016 and 2019. A portion of these carryforwards was acquired from the Company’s
previous acquisitions, the utilization of which is subject to certain limitations imposed by the Internal
Revenue Code. The remaining benefits from tax losses and credits do not expire. As of September 30, 2006
and September 24, 2005, a valuation allowance of $5 million was recorded against the deferred tax asset for
the benefits of state operating losses that may not be realized. Management believes it is more likely than
not that forecasted income, including income that may be generated as a result of certain tax planning
strategies, together with the tax effects of the deferred tax liabilities, will be sufficient to fully recover the
remaining deferred tax assets.
A reconciliation of the provision for income taxes, with the amount computed by applying the statutory
federal income tax rate (35% in 2006, 2005, and 2004) to income before provision for income taxes, is as
follows (in millions):

2006 2005 2004

As Restated (1) As Restated (1)
Computed expected tax . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 987 $ 633 $ 129
State taxes, net of federal effect . . . . . . . . . . . . . . . . . . . . 86 (19) (5)
Indefinitely invested earnings of foreign subsidiaries . . (224) (98) (31)
Nondeductible executive compensation. . . . . . . . . . . . . . 11 14 12
Research and development credit, net. . . . . . . . . . . . . . . (12) (26) (5)
Other items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (19) (24) 4
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . $ 829 $ 480 $ 104
Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29% 27% 28%

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

The Company’s income taxes payable has been reduced by the tax benefits from employee stock options.
The Company receives an income tax benefit calculated as the difference between the fair market value of
the stock issued at the time of the exercise and the option price, tax effected. The net tax benefits from
employee stock option transactions were $419 million, $428 million (as restated(1)), and $83 million (as
restated(1)) in 2006, 2005, and 2004, respectively, and were reflected as an increase to common stock in the
consolidated statements of shareholders’ equity.

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 7—Income Taxes (Continued)

The Internal Revenue Service (“IRS”) has substantially completed its field audit of the Company’s federal
income tax returns for the years 2002 through 2003 and proposed certain adjustments. The Company
intends to contest certain of these adjustments through the IRS Appeals Office. Substantially all IRS audit
issues for years prior to 2002 have been resolved. In addition, the Company is also subject to audits by
state, local, and foreign tax authorities. Management believes that adequate provisions have been made for
any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be
predicted with certainty. Should any issues addressed in the Company’s tax audits be resolved in a manner
not consistent with management’s expectations, the Company could be required to adjust its provision for
income tax in the period such resolution occurs. In 2006, the Company recorded a tax benefit of
$20 million due to the settlement of prior year tax audits in the U.S.

Note 8—Shareholders’ Equity

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

Restricted Stock Units

The Company’s Board of Directors has granted restricted stock units to members of the Company’s senior
management team, excluding its CEO. These restricted stock units generally vest over four years either at
the end of the four-year service period, in two equal installments on the second and fourth anniversaries of
the date of grant, or in equal installments on each of the first through fourth anniversaries of the grant
date. Upon vesting, the restricted stock units will convert into an equivalent number of shares of common
stock. The amounts of the restricted stock units expensed by the Company are based on the closing market
price of the Company’s common stock on the date of grant and are amortized on a straight-line basis over
the four-year requisite service period. The restricted stock units have been reflected in the calculation of
diluted earnings per share utilizing the treasury stock method.
2.47 million previously granted restricted stock units vested during 2006. A majority of these vested
restricted stock units were net-share settled such that the Company withheld shares with value equivalent
to the employees’ minimum statutory obligation for the applicable income and other employment taxes,
and remitted the cash to the appropriate taxing authorities. The total shares withheld of 985,833 for 2006
was based on the value of the restricted stock units on their vesting date as determined by the Company’s
closing stock price. Total payments for the employees’ tax obligations to the taxing authorities were
approximately $59 million. These net-share settlements had the effect of share repurchases by the
Company as they reduced and retired the number of shares that would have otherwise been issued as a
result of the vesting and did not represent an expense to the Company.

CEO Restricted Stock Award

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

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 8—Shareholders’ Equity (Continued)

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

Stock Repurchase Plan

In July 1999, the Company’s Board of Directors authorized a plan for the Company to repurchase up to
$500 million of its common stock. This repurchase plan does not obligate the Company to acquire any
specific number of shares or acquire shares over any specified period of time. The Company has
repurchased a total of 13.1 million shares at a cost of $217 million under this plan and was authorized to
repurchase up to an additional $283 million of its common stock as of September 30, 2006.

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 U.S. generally accepted
accounting principles are recorded as an element of shareholders’ equity but are excluded from net
income. The Company’s other comprehensive income consists of foreign currency translation adjustments
from those subsidiaries not using the U.S. dollar as their functional currency, unrealized gains and losses
on marketable securities categorized as available-for-sale, and net deferred gains and losses on certain
derivative instruments accounted for as cash flow hedges.
The following table summarizes the components of accumulated other comprehensive income (loss), net of
taxes (in millions):

2006 2005 2004

Unrealized losses on available-for-sale securities . . . . . . . . . . . . . . . . . . . . $— $ (4) $ (4)
Unrealized gains/(losses) on derivative investments . . . . . . . . . . . . . . . . . . 3 4 (4)
Cumulative foreign currency translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 — (7)
Accumulated other comprehensive income/(loss) . . . . . . . . . . . . . . . . . . . . $22 $— $(15)

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

2006 2005 2004

Change in fair value of available-for-sale securities. . . . . . . . . . . . . . . . . . $ 4 $— $(1)
Adjustment for net gains/losses realized and included in net income. . . — — (4)
Change in unrealized gain/loss on available-for-sale securities . . . . . . . . $ 4 $— $ (5)

The tax effect related to the change in unrealized gain/loss on available-for-sale securities was $(2) million,
zero, and $4 million for 2006, 2005, and 2004, respectively. The tax effect on the reclassification adjustment
for net gains/losses realized and included in net income was $1 million for 2004.

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 8—Shareholders’ Equity (Continued)

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

2006 2005 2004

Changes in fair value of derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11 $7 $(21)
Adjustment for net losses realized and included in net income. . . . . . . . . . . (12) 1 33
Change in unrealized gain/loss on derivative instruments . . . . . . . . . . . . . . . $ (1) $8 $ 12

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

Employee Benefit Plans

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

1997 Employee Stock Option Plan

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

Employee Stock Option Exchange Program

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

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 8—Shareholders’ Equity (Continued)

1997 Director Stock Option Plan
In August 1997, the Company’s Board of Directors adopted a Director Stock Option Plan (“Director
Plan”) for non-employee directors of the Company, which was approved by shareholders in 1998. Pursuant
to the Director Plan, the Company’s non-employee directors are granted an option to acquire 30,000 shares
of Common Stock upon their initial election to the Board (“Initial Options”). The Initial Options vest and
become exercisable in three equal annual installments on each of the first through third anniversaries of the
grant date. On the fourth anniversary of a non-employee director’s initial election to the Board and on each
subsequent anniversary thereafter, the director will be entitled to receive an option to acquire 10,000 shares
of Common Stock (“Annual Options”). Annual Options are fully vested and immediately exercisable on their
date of grant.

Rule 10b5-1 Trading Plans

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

Employee Stock Purchase Plan

The Company has a shareholder approved employee stock purchase plan (the “Purchase Plan”), under
which substantially all employees may purchase common stock through payroll deductions at a price equal
to 85% of the lower of the fair market values as of the beginning and end of six month offering periods.
Stock purchases under the Purchase Plan are limited to 10% of an employee’s compensation, up to a
maximum of $25,000 in any calendar year. The number of shares authorized for issuance is limited to a
total of 1 million shares per offering period. During 2006, 2005, and 2004, adjusted for the February 2005
stock split, 1.5 million, 2.3 million, and 3.9 million shares, respectively, were issued under the Purchase
Plan. As of September 30, 2006, approximately 2.3 million shares were reserved for future issuance under
the Purchase Plan.

Employee Savings Plan

The Company has an employee savings plan (the “Savings Plan”) qualifying as a deferred salary
arrangement under Section 401(k) of the Internal Revenue Code. Under the Savings Plan, participating
U.S. employees may defer a portion of their pre-tax earnings, up to the Internal Revenue Service annual
contribution limit ($15,000 for calendar year 2006). The Company matches 50% to 100% of each
employee’s contributions, depending on length of service, up to a maximum 6% of the employee’s
earnings. The Company’s matching contributions to the Savings Plan were approximately $33 million,
$28 million, and $24 million in 2006, 2005, and 2004, respectively.

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 8—Shareholders' Equity (Continued)

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

Outstanding Options
Shares Weighted-Average
Available Number of Weighted-Average Remaining Aggregate
for Grant Shares Exercise Price Contractual Term Intrinsic Value
Balance at September 27, 2003 . . . . . . . . 91,660 126,024 $ 9.54
Restricted Stock Granted . . . . . . . . . . (5,030) — —
Options Granted . . . . . . . . . . . . . . . . . (36,394) 36,394 $11.48
Options Cancelled . . . . . . . . . . . . . . . . 6,010 (6,010) $ 10.35
Options Exercised . . . . . . . . . . . . . . . . — (45,686) $ 8.60
Plan Shares Expired. . . . . . . . . . . . . . . (32,196) — —
Balance at September 25, 2004 . . . . . . . . 24,050 110,722 $ 10.52
Additional Options Authorized . . . . . 49,000 — —
Restricted Stock Units Granted . . . . . (460) — —
Options Granted . . . . . . . . . . . . . . . . . (16,214) 16,214 $42.52
Options Cancelled . . . . . . . . . . . . . . . . 3,844 (3,844) $ 13.28
Restricted Stock Units Cancelled. . . . 230 — —
Options Exercised . . . . . . . . . . . . . . . . — (49,871) $ 10.05
Plan Shares Expired. . . . . . . . . . . . . . . (1,493) — —
Balance at September 24, 2005 . . . . . . . . 58,957 73,221 $17.79
Restricted Stock Units Granted . . . . . (2,950) —
Options Granted . . . . . . . . . . . . . . . . . (3,881) 3,881 $65.28
Options Cancelled . . . . . . . . . . . . . . . . 2,325 (2,325) $ 29.32
Restricted Stock Units Cancelled. . . . 625 — —
Options Exercised . . . . . . . . . . . . . . . . — (21,795) $ 11.78
Plan Shares Expired. . . . . . . . . . . . . . . (82) — —
Balance at September 30, 2006 . . . . . . . . 54,994 52,982 $ 23.23 4.78 $ 2,848,896
Exercisable at September 30, 2006 . . . . . 31,184 $ 14.69 4.35 $ 1,942,486
Expected to Vest after September 30,
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,798 $ 35.40 5.40 $ 906,410

In conjunction with the amendments to the 2003 Plan that were approved at the Annual Meeting of
Shareholders held on April 21, 2005, the number of shares available for grant under the 2003 Plan will be
reduced by two times the number of restricted shares and restricted stock units granted. This amendment
is effective for all grants made after April 21, 2005.
Aggregate intrinsic value represents the value of the Company’s closing stock price on the last trading day
of the fiscal period in excess of the exercise price multiplied by the number of options outstanding or
exercisable. Total intrinsic value of options at time of exercise was $1.2 billion, $1.1 billion, and $266.9
million for 2006, 2005, and 2004, respectively.
As of September 30, 2006, the Company had 3.41 million restricted stock units outstanding with a total
grant-date fair value of $135.1 million that were excluded from the options outstanding balances in the
preceding table. The weighted-average grant date fair value of restricted stock units granted during 2006,
2005, and 2004 was $70.92, $45.04, and $12.81, respectively. Aggregate intrinsic value of unvested restricted
stock units at September 30, 2006 was $262.5 million. Restricted stock units that vested during 2006 totaled
2.47 million and had a fair value of $148.5 million as of the vesting date. Granted restricted stock units
have been deducted from the shares available for grant under the Company’s stock option plans.

105
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 8—Shareholders' Equity (Continued)

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

Note 9—Stock-Based Compensation

The Company has provided pro forma disclosures in Note 1 of these Notes to Consolidated Financial
Statements of the effect on net income and earnings per share for the years ended September 24, 2005 and
September 25, 2004 as if the fair value method of accounting for stock compensation had been used for its
employee stock option grants and employee stock purchase plan purchases. These pro forma effects have
been estimated at the date of grant and beginning of the period, respectively, using the BSM option pricing
model.
The weighted average assumptions used for 2006, 2005, and 2004 and the resulting estimates of
weighted-average fair value per share of options granted and for stock purchases during those periods are
as follows:

2006 2005 2004

Expected life of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.56 years 3.57 years 3.50 years
Expected life of stock purchases . . . . . . . . . . . . . . . . . . . . . . . . . . 6 months 6 months 6 months
Interest rate—stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.60% 3.73% 2.40%
Interest rate—stock purchases. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.29% 2.54% 1.18%
Volatility—stock options. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40.34% 39.52% 40.00%
Volatility—stock purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39.56% 40.88% 35.82%
Dividend yields . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — —
Weighted-average fair value of options granted during the
year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23.16 $ 14.41 $ 3.69
Weighted-average fair value of stock purchases during the
year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14.06 $ 7.55 $ 2.78

Pursuant to SFAS No. 123R, the expected volatility assumptions used by the Company are based on the
historical volatility of the Company’s common stock over the most recent period commensurate with the
estimated expected life of the Company’s stock options and other relevant factors including implied
volatility in market traded options on the Company’s common stock. The Company bases its expected life
assumption on its historical experience and on the terms and conditions of the stock options it grants to
employees.

Note 10—Commitments and Contingencies

Lease Commitments
The Company leases various equipment and facilities, including retail space, under noncancelable
operating lease arrangements. The Company does not currently utilize any other off-balance-sheet
financing arrangements. The major facility leases are for terms of 5 to 15 years and generally provide

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 10—Commitments and Contingencies (Continued)

renewal options for terms of 3 to 5 additional years. Leases for retail space are for terms of 5 to 20 years,
the majority of which are for 10 years, and often contain multi-year renewal options. As of September 30,
2006, the Company’s total future minimum lease payments under noncancelable operating leases were
approximately $1.2 billion, of which $887 million related to leases for retail space.
Rent expense under all operating leases, including both cancelable and noncancelable leases, was $138
million, $140 million, and $103 million in 2006, 2005, and 2004, respectively. Future minimum lease
payments under noncancelable operating leases having remaining terms in excess of one year as of
September 30, 2006, are as follows (in millions):

Fiscal Years
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 134
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 498
Total minimum lease payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,154

Accrued Warranty and Indemnifications

The Company offers a basic limited parts and labor warranty on its hardware products. The basic warranty
period for hardware products is typically one year from the date of purchase by the end-user. The
Company also offers a 90-day basic warranty for its service parts used to repair the Company’s hardware
products. The Company provides currently for the estimated cost that may be incurred under its basic
limited product warranties at the time related revenue is recognized. Factors considered in determining
appropriate accruals for product warranty obligations include the size of the installed base of products
subject to warranty protection, historical and projected warranty claim rates, historical and projected cost-
per-claim, and knowledge of specific product failures that are outside of the Company’s typical experience.
The Company assesses the adequacy of its preexisting warranty liabilities and adjusts the amounts as
necessary based on actual experience and changes in future estimates.
The Company periodically provides updates to its applications and system software to maintain the
software’s compliance with specifications. The estimated cost to develop such updates is accounted for as
warranty costs that are recognized at the time related software revenue is recognized. Factors considered
in determining appropriate accruals related to such updates include the number of units delivered, the
number of updates expected to occur, and the historical cost and estimated future cost of the resources
necessary to develop these updates.
The following table reconciles changes in the Company’s accrued warranties and related costs (in millions):

2006 2005 2004

Beginning accrued warranty and related costs . . . . . . . . . . . . . . . . . . . . . $ 188 $ 105 $ 67
Cost of warranty claims. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (267) (188) (105)
Accruals for product warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 363 271 143
Ending accrued warranty and related costs . . . . . . . . . . . . . . . . . . . . . . . . $ 284 $ 188 $ 105

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 10—Commitments and Contingencies (Continued)

The Company generally does not indemnify end-users of its operating system and application software
against legal claims that the software infringes third-party intellectual property rights. Other agreements
entered into by the Company sometimes include indemnification provisions under which the Company
could be subject to costs and/or damages in the event of an infringement claim against the Company or an
indemnified third-party. However, the Company has not been required to make any significant payments
resulting from such an infringement claim asserted against itself or an indemnified third-party and, in the
opinion of management, does not have a potential liability related to unresolved infringement claims
subject to indemnification that would have a material adverse effect on its financial condition, liquidity or
results of operations. Therefore, the Company did not record a liability for infringement costs as of either
September 30, 2006 or September 24, 2005.

Concentrations in the Available Sources of Supply of Materials and Product

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

Long-Term Supply Agreements

During 2006, the Company entered into long-term supply agreements with Hynix Semiconductor, Inc.,
Intel Corporation, Micron Technology, Inc., Samsung Electronics Co., Ltd., and Toshiba Corporation to
secure supply of NAND flash memory through calendar year 2010. As part of these agreements, the
Company prepaid $1.25 billion for flash memory components during 2006. These prepayments will be
applied to inventory purchases made over the life of each respective agreement.

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.

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 10—Commitments and Contingencies (Continued)

However, the results of legal proceedings cannot be predicted with certainty. Should the Company fail to
prevail in any of these legal matters or should several of these legal matters be resolved against the
Company in the same reporting period, the operating results of a particular reporting period could be
materially adversely affected.
Production and marketing of products in certain states and countries may subject the Company to
environmental and other regulations including, in some instances, the requirement to provide customers
the ability to return product at the end of its useful life, and place responsibility for environmentally safe
disposal or recycling with the Company. Such laws and regulations have recently been passed in several
jurisdictions in which the Company operates including various European Union member countries, Japan
and certain states within the U.S. Although the Company does not anticipate any material adverse effects
in the future based on the nature of its operations and the thrust of such laws, there is no assurance that
such existing laws or future laws will not have a material adverse effect on the Company’s financial
condition, liquidity, or results of operations.

Note 11—Segment Information and Geographic Data

In accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, the
Company reports segment information based on the “management” approach. The management approach
designates the internal reporting used by management for making decisions and assessing performance as
the source of the Company’s reportable segments.
The Company manages its business primarily on a geographic basis. The Company’s reportable operating
segments are comprised of the Americas, Europe, Japan, and Retail. The Americas, Europe, and Japan
reportable segments do not include activities related to the Retail segment. The Americas segment
includes both North and South America. The Europe segment includes European countries as well as the
Middle East and Africa. The Retail segment operates Apple-owned retail stores in the U.S., Canada,
Japan, and the U.K. Other operating segments include Asia-Pacific, which includes Australia and Asia
except for Japan, and the Company’s subsidiary, FileMaker, Inc. Each reportable geographic operating
segment provides similar hardware and software products and similar services, and the accounting policies
of the various segments are the same as those described in Note 1, “Summary of Significant Accounting
Policies,” except as described below for the Retail segment.
The Company evaluates the performance of its operating segments based on net sales. The Retail
segment’s performance is also evaluated based on operating income. Net sales for geographic segments are
generally based on the location of the customers. Operating income for each segment includes net sales to
third parties, related cost of sales, and operating expenses directly attributable to the segment. Operating
income for each segment excludes other income and expense and certain expenses that are managed
outside the operating segments. Costs excluded from segment operating income include various corporate
expenses such as manufacturing costs and variances not included in standard costs, research and
development, corporate marketing expenses, stock-based compensation expense, income taxes, various
nonrecurring charges, and other separately managed general and administrative expenses including certain
corporate expenses associated with support of the Retail segment. The Company does not include
intercompany transfers between segments for management reporting purposes. Segment assets exclude
corporate assets. Corporate assets include cash, short-term and long-term investments, manufacturing
facilities, miscellaneous corporate infrastructure, goodwill and other acquired intangible assets, and retail
store construction-in-progress that is not subject to depreciation. Except for the Retail segment, capital

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 11—Segment Information and Geographic Data (Continued)

expenditures for long-lived assets are not reported to management by segment. Capital expenditures by the
Retail segment were $200 million, $132 million, and $104 million for 2006, 2005, and 2004,
respectively.Operating income for all segments, except Retail, includes cost of sales at manufacturing
standard cost, other cost of sales, related sales and marketing costs, and certain general and administrative
costs. This measure of operating income, which includes manufacturing profit, provides a comparable basis
for comparison between the Company’s various geographic segments. Certain manufacturing expenses and
related adjustments not included in segment cost of sales, including variances between standard and actual
manufacturing costs and the mark-up above standard cost for product supplied to the Retail segment, are
included in corporate expenses.
Management assesses the operating performance of the Retail segment differently than it assesses the
operating performance of the Company’s geographic segments. The Retail segment revenue and operating
income is intended to depict a measure comparable to that of the Company’s major channel partners in the
U.S. operating retail stores so the Company can evaluate the Retail segment performance as if it were a
channel partner. Therefore, the Company makes three significant adjustments to the Retail segment for
management reporting purposes that are not included in the results of the Company’s other segments.
First, the Retail segment’s operating income includes cost of sales for Apple products at an amount
normally charged to major channel partners in the U.S. operating retail stores, less the cost of sales
programs and incentives provided to those channel partners and the Company’s cost to support those
partners. For the years ended September 30, 2006, September 24, 2005, and September 25, 2004, this
resulted in the recognition of additional cost of sales above standard cost by the Retail segment and an
offsetting benefit to corporate expenses of approximately $663 million, $435 million, and $213 million,
respectively.
Second, the Company’s service and support contracts are transferred to the Retail segment at the same
cost as that charged to the Company’s major retail channel partners in the U.S., resulting in a measure of
revenue and gross margin for those items that is comparable between the Company’s retail stores and
those retail channel partners. The Retail segment recognizes the full amount of revenue and cost of sales
of the Company’s service and support contracts at the time of sale. Because the Company has not yet
earned the revenue or incurred the costs associated with the sale of these contracts, an offset to these
amounts is recognized in other operating segments’ net sales and cost of sales. For the year ended
September 30, 2006, this resulted in the recognition of net sales and cost of sales by the Retail segment,
with corresponding offsets in other operating segments, of $159 million and $109 million, respectively. For
the year ended September 24, 2005, this resulted in the recognition of net sales and cost of sales by the
Retail segment of $92 million and $64 million, respectively. For the year ended September 25, 2004, this
resulted in the recognition of net sales and cost of sales by the Retail segment of $54 million and $37
million, respectively.
Third, the Company had opened a total of eight high-profile stores as of September 30, 2006. These high-
profile stores are larger than the Company’s typical retail stores and were designed to further promote
brand awareness and provide a venue for certain corporate sales and marketing activities, including
corporate briefings. As such, the Company allocates certain operating expenses associated with these
stores to corporate marketing expense to reflect the estimated benefit realized Company-wide. The
allocation of these operating costs is based on the amount incurred for a high-profile store in excess of that
incurred by a more typical Company retail location. Expenses allocated to corporate marketing resulting

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 11—Segment Information and Geographic Data (Continued)

from the operations of these stores were $33 million, $31 million, and $16 million for the years ended
September 30, 2006, September 24, 2005, and September 25, 2004, respectively.Summary information by
operating segment follows (in millions):
2006 2005 2004
Americas:
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,307 $ 6,590 $4,019
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,665 $ 798 $ 465
Depreciation, amortization, and accretion . . . . . . . . . . . . . . . . . . . . $ 6 $ 6 $ 6
Segment assets (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 896 $ 705 $ 563
Europe:
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,094 $ 3,073 $1,799
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 607 $ 454 $ 280
Depreciation, amortization, and accretion . . . . . . . . . . . . . . . . . . . . $ 4 $ 4 $ 4
Segment assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 471 $ 289 $ 259
Japan:
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,208 $ 920 $ 677
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 201 $ 140 $ 115
Depreciation, amortization, and accretion . . . . . . . . . . . . . . . . . . . . $ 3 $ 3 $ 2
Segment assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 181 $ 165 $ 114
Retail:
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,359 $ 2,350 $1,185
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 198 $ 151 $ 39
Depreciation, amortization, and accretion (b) . . . . . . . . . . . . . . . . . $ 59 $ 43 $ 35
Segment assets (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 651 $ 589 $ 351
Other Segments (c):
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,347 $ 998 $ 599
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 235 $ 118 $ 90
Depreciation, amortization, and accretion . . . . . . . . . . . . . . . . . . . . $ 3 $ 2 $ 2
Segment assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 180 $ 133 $ 124

(a) The Americas asset figures do not include fixed assets held in the U.S. Such fixed assets are not
allocated specifically to the Americas segment and are included in the corporate assets figures
below.
(b) Retail segment depreciation and asset figures reflect the cost and related depreciation of its retail
stores and related infrastructure. Retail store construction-in-progress, which is not subject to
depreciation, is reflected in corporate assets.
(c) Other Segments include Asia-Pacific and FileMaker.

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 11—Segment Information and Geographic Data (Continued)

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

2006 2005 2004

As Restated (1) As Restated (1)
Segment operating income. . . . . . . . . . . . . . . . . . . . . . . . $ 2,906 $ 1,661 $ 989
Retail manufacturing margin (a). . . . . . . . . . . . . . . . . . . 663 435 213
Other corporate expenses, net (b) . . . . . . . . . . . . . . . . . (953) (404) (820)
Stock-based compensation expense . . . . . . . . . . . . . . . . (163) (49) (46)
Restructuring costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — (23)
Consolidated operating income . . . . . . . . . . . . . . . . . $ 2,453 $ 1,643 $ 313
Segment assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,379 $ 1,881 $1,411
Corporate assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,826 9,635 6,628
Consolidated assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,205 $ 11,516 $ 8,039
Segment depreciation, amortization, and accretion. . . $ 75 $ 58 $ 49
Corporate depreciation, amortization, and accretion . 150 121 101
Consolidated depreciation, amortization, and
accretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 225 $ 179 $ 150

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

(a) Represents the excess of the Retail segment’s cost of sales over the Company’s standard cost of
sales for products sold through the Retail segment.
(b) Corporate expenses include research and development, corporate marketing expenses,
manufacturing costs and variances not included in standard costs, and other separately managed
general and administrative expenses including certain corporate expenses associated with support
of the Retail segment.
No single customer accounted for more than 10% of net sales in 2006, 2005, or 2004. Net sales and long-
lived assets related to operations in the U.S., Japan, and other foreign countries are as follows (in
millions):

2006 2005 2004

Net sales:
U.S.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,486 $ 8,194 $4,893
Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,327 1,021 738
Other countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,502 4,716 2,648
Total net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,315 $ 13,931 $ 8,279
Long-lived assets:
U.S.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,150 $ 738 $ 637
Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 63 52
Other countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154 112 72
Total long-lived assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,368 $ 913 $ 761

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 11—Segment Information and Geographic Data (Continued)

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

2006 2005 2004

Net sales:
Desktops (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,319 $ 3,436 $2,373
Portables (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,056 2,839 2,550
Total Macintosh net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,375 6,275 4,923
iPod . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,676 4,540 1,306
Other music related products and services (c) . . . . . . . . . . . . . . . . . 1,885 899 278
Peripherals and other hardware (d) . . . . . . . . . . . . . . . . . . . . . . . . . . 1,100 1,126 951
Software, service, and other net sales (e). . . . . . . . . . . . . . . . . . . . . . 1,279 1,091 821
Total net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $19,315 $13,931 $8,279

(a) Includes iMac, eMac, Mac mini, Power Mac, Mac Pro, and Xserve product lines.
(b) Includes MacBook, iBook, MacBook Pro, and PowerBook product lines.
(c) Consists of iTunes Store sales and iPod services, and Apple-branded and third-party iPod
accessories.
(d) Includes sales of Apple-branded and third-party displays, wireless connectivity and networking
solutions, and other hardware accessories.
(e) Includes sales of Apple-branded operating system and application software, third-party software,
AppleCare, and Internet services.

Note 12—Related Party Transactions and Certain Other Transactions

In March 2002, the Company entered into a Reimbursement Agreement with its CEO, Steve Jobs, for the
reimbursement of expenses incurred by Mr. Jobs in the operation of his private plane when used for
Company business. The Reimbursement Agreement became effective for expenses incurred by Mr. Jobs
for Company business purposes since he took delivery of the plane in May 2001. The Company recognized
a total of $202,000, $1,100,000, and $483,000 in expenses pursuant to the Reimbursement Agreement
during 2006, 2005, and 2004, respectively. All expenses recognized pursuant to the Reimbursement
Agreement have been included in selling, general, and administrative expenses in the consolidated
statements of operations.
In 2006, the Company entered into an agreement with Pixar to sell certain of Pixar’s short films on the
iTunes Store. Mr. Jobs was the CEO, Chairman, and a large shareholder of Pixar. On May 5, 2006, The
Walt Disney Company (“Disney”) acquired Pixar, which resulted in Pixar becoming a wholly-owned
subsidiary of Disney. Upon Disney’s acquisition of Pixar, Mr. Jobs’ shares of Pixar common stock were
exchanged for Disney’s common stock and he was elected to the Disney Board of Directors. Royalty
expense recognized by the Company under the arrangement with Pixar from September 25, 2005 through
May 5, 2006 was less than $1 million.

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 13—Selected Quarterly Financial Information (Unaudited)

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

2006 Fourth Quarter Third Quarter Second Quarter First Quarter

Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,837 $ 4,370 $ 4,359 $ 5,749
Cost of sales (1) . . . . . . . . . . . . . . . . . . . . . . . . . . 3,425 3,045 3,062 4,185
Gross margin. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,412 1,325 1,297 1,564
Operating expenses:
Research and development (1) . . . . . . . . . . . 179 175 176 182
Selling, general, and administrative (1) . . . . 625 584 592 632
Total operating expenses . . . . . . . . . . . . . . 804 759 768 814
Operating income. . . . . . . . . . . . . . . . . . . . . . . . . 608 566 529 750
Other income and expense . . . . . . . . . . . . . . . . . 113 95 76 81
Income before provision for income taxes. . . . 721 661 605 831
Provision for income taxes . . . . . . . . . . . . . . . . . 179 189 195 266
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 542 $ 472 $ 410 $ 565
Earnings per common share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.63 $ 0.55 $ 0.49 $ 0.68
Diluted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.62 $ 0.54 $ 0.47 $ 0.65
Shares used in computing earnings per
share (in thousands):
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 854,187 851,375 840,910 830,781
Diluted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 878,757 876,368 878,537 874,207

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

Cost of sales . . . . . . . . . . . . . . . . $ 5 $ 6 $ 5 $ 5
Research and development . . . $ 13 $ 12 $ 13 $ 15
Selling, general, and
administrative. . . . . . . . . . . . . $ 22 $ 19 $ 24 $ 24

The net of tax impact of the stock-based compensation adjustments in 2006, which amounted to $4 million,
was recorded by the Company in its fourth quarter of 2006 and is described in Note 2, “Restatement of
Consolidated Financial Statements.”
Basic and diluted earnings per share are computed independently for each of the quarters presented.
Therefore, the sum of quarterly basic and diluted per share information may not equal annual basic and
diluted earnings per share.
Net income during the third quarter of 2006 benefited by $20 million resulting from the dividend
repatriation under the AJCA and international tax planning strategies associated with the repatriation. Net

114
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

2005 Fourth Quarter Third Quarter Second Quarter First Quarter

As Restated (1) As Restated (1) As Restated (1) As Restated (1)
Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,678 $ 3,520 $ 3,243 $ 3,490
Cost of sales (2) . . . . . . . . . . . . . . . . . . . . . . . . 2,643 2,476 2,275 2,495
Gross margin. . . . . . . . . . . . . . . . . . . . . . . . . 1,035 1,044 968 995
Operating expenses:
Research and development (2) . . . . . . . . . 147 145 120 123
Selling, general, and administrative (2) . . 471 473 448 472
Total operating expenses . . . . . . . . . . . . 618 618 568 595
Operating income. . . . . . . . . . . . . . . . . . . . . . . 417 426 400 400
Other income and expense . . . . . . . . . . . . . . . 60 46 33 26
Income before provision for income taxes. . 477 472 433 426
Provision for income taxes . . . . . . . . . . . . . . . 49 153 145 133
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 428 $ 319 $ 288 $ 293
Earnings per common share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.52 $ 0.39 $ 0.36 $ 0.37
Diluted. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.49 $ 0.37 $ 0.34 $ 0.35
Shares used in computing earnings per
share (in thousands):
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 821,420 815,092 808,172 789,032
Diluted. . . . . . . . . . . . . . . . . . . . . . . . . . . . 866,483 860,803 857,568 838,805

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

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

Cost of sales . . . . . . . . . . . . . . . $ 1 $ — $ 1 $ 1
Research and development . . $ 1 $ 2 $ 2 $ 2
Selling, general, and
administrative. . . . . . . . . . . . $ 10 $ 10 $ 9 $ 10

The impact of the stock-based compensation adjustments was not significant to any of the interim balance
sheets for fiscal year 2005.
Basic and diluted earnings per share are computed independently for each of the quarters presented.
Therefore, the sum of quarterly basic and diluted per share information may not equal annual basic and
diluted earnings per share.
Net income during the fourth quarter of 2005 benefited by $81 million from the reversal of certain tax
contingency reserves and adjustments to net deferred tax assets, including reductions to valuation
allowances.

115
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

Three Months Ended September 24, 2005 Three Months Ended June 25, 2005
As As As As
Reported Adjustments (1) Restated Reported Adjustments (1) Restated
Net sales . . . . . . . . . . . . . . . . . . . . . . . . $ 3,678 $ — $ 3,678 $ 3,520 $ — $ 3,520
Cost of sales (2) . . . . . . . . . . . . . . . . . . 2,643 — 2,643 2,476 — 2,476
Gross margin . . . . . . . . . . . . . . . . . . 1,035 — 1,035 1,044 — 1,044
Operating expenses:
Research and development (2) . . . . 147 — 147 145 — 145
Selling, general, and
administrative (2) . . . . . . . . . . . . . 470 1 471 472 1 473
Total operating
expenses . . . . . . . . . . . . . . . . . . . . 617 1 618 617 1 618
Operating income . . . . . . . . . . . . . . . . . 418 (1) 417 427 (1) 426
Other income and
expense . . . . . . . . . . . . . . . . . . . . . . . 60 — 60 46 — 46
Income before provision
for income taxes . . . . . . . . . . . . . . . . 478 (1) 477 473 (1) 472
Provision for income
taxes. . . . . . . . . . . . . . . . . . . . . . . . . . 48 1 49 153 — 153
Net income . . . . . . . . . . . . . . . . . . . . . . $ 430 $ (2) $ 428 $ 320 $ (1) $ 319
Earnings per common share:
Basic . . . . . . . . . . . . . . . . . . . . . . . $ 0.52 $ — $ 0.52 $ 0.39 $ — $ 0.39
Diluted . . . . . . . . . . . . . . . . . . . . . $ 0.50 $(0.01) $ 0.49 $ 0.37 $ — $ 0.37
Shares used in computing earnings
per share (in thousands):
Basic . . . . . . . . . . . . . . . . . . . . . . . 821,420 — 821,420 815,092 — 815,092
Diluted . . . . . . . . . . . . . . . . . . . . . 866,404 79 866,483 860,688 115 860,803

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

(2) Includes stock-based compensation expense, which was allocated as follows:
Cost of sales. . . . . . . $ 1 $ — $ 1 $ — $ — $ —
Research and
development . . . . $ 1 $ — $ 1 $ 2 $ — $ 2
Selling, general, and
administrative . . . $ 9 $ 1 $ 10 $ 9 $ 1 $ 10

116
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

Three Months Ended March 26, 2005 Three Months Ended December 25, 2004
As As As As
Reported Adjustments (1) Restated Reported Adjustments (1) Restated
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,243 $ — $ 3,243 $ 3,490 $ — $ 3,490
Cost of sales (2) . . . . . . . . . . . . . . . . . . . . 2,275 — 2,275 2,494 1 2,495
Gross margin. . . . . . . . . . . . . . . . . . . . . 968 — 968 996 (1) 995
Operating expenses:
Research and development (2) . . . . . . 119 1 120 123 — 123
Selling, general, and
administrative (2) . . . . . . . . . . . . . . . 447 1 448 470 2 472
Total operating expenses . . . . . . . . . . . 566 2 568 593 2 595
Operating income . . . . . . . . . . . . . . . . . . . 402 (2) 400 403 (3) 400
Other income and expense . . . . . . . . . . . 33 — 33 26 — 26
Income before provision for income
taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 435 (2) 433 429 (3) 426
Provision for income taxes. . . . . . . . . . . . 145 — 145 134 (1) 133
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 290 $ (2) $ 288 $ 295 $ (2) $ 293
Earnings per common share:
Basic. . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.36 $ — $ 0.36 $ 0.37 $ — $ 0.37
Diluted. . . . . . . . . . . . . . . . . . . . . . . . $ 0.34 $ — $ 0.34 $ 0.35 $ — $ 0.35
Shares used in computing earnings
per share (in thousands):
Basic. . . . . . . . . . . . . . . . . . . . . . . . . . 808,172 — 808,172 789,032 — 789,032
Diluted. . . . . . . . . . . . . . . . . . . . . . . . 857,011 557 857,568 838,174 631 838,805

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

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

Cost of sales. . . . . . . . . $ 1 $ — $ 1 $ — $ 1 $ 1
Research and
development . . . . . . $ 1 $ 1 $ 2 $ 2 $ — $ 2
Selling, general, and
administrative . . . . . $ 8 $ 1 $ 9 $ 8 $ 2 $ 10

117
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Apple Computer, Inc.:
We have audited the accompanying consolidated balance sheets of Apple Computer, Inc. and subsidiaries
(the Company) as of September 30, 2006 and September 24, 2005, and the related consolidated statements
of operations, shareholders’ equity and cash flows for each of the years in the three-year period ended
September 30, 2006. These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated financial statements based
on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of the Company as of September 30, 2006 and September 24, 2005, and the
results of their operations and their cash flows for each of the years in the three-year period ended
September 30, 2006, in conformity with accounting principles generally accepted in the United States of
America.
As discussed in Note 2 to the Consolidated Financial Statements, the consolidated financial statements as
of September 24, 2005 and for each of the years in the two-year period ended September 24, 2005 have
been restated.
As discussed in Note 1 to the Consolidated Financial Statements, effective September 25, 2005, the
Company adopted the provision of Statement of Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of the Company’s internal control over financial reporting as of
September 30, 2006, based on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated
December 29, 2006 expressed an unqualified opinion on management’s assessment of, and the effective
operation of internal control over financial reporting.

/s/ KPMG LLP

Mountain View, California
December 29, 2006

118
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Apple Computer, Inc.:
We have audited management’s assessment, included in the accompanying Management’s Annual Report
on Internal Control over Financial Reporting, that Apple Computer, Inc. and subsidiaries maintained
effective internal control over financial reporting as of September 30, 2006, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Apple Computer, Inc.’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on management’s assessment
and an opinion on the effectiveness of the Apple Computer, Inc.’s internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting,
evaluating management’s assessment, testing and evaluating the design and operating effectiveness of
internal control, and performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have
a material effect on the financial statements.
Because of inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Apple Computer, Inc. maintained effective internal control
over financial reporting as of September 30, 2006, is fairly stated, in all material respects, based on criteria
established in Internal Control-Integrated Framework issued by COSO. Also, in our opinion, Apple
Computer, Inc. maintained, in all material respects, effective internal control over financial reporting as of
September 30, 2006, based on criteria established in Internal Control-Integrated Framework issued by
COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Apple Computer, Inc. as of September 30, 2006
and September 24, 2005, and the related consolidated statements of operations, shareholders’ equity, and
cash flows for each of the years in the three-year period ended September 30, 2006, and our report dated
December 29, 2006 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

Mountain View, California
December 29, 2006

119
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.

Item 9A. Controls and Procedures

Special Committee Review into Stock Option Grant Practices and Restatement
As discussed in the Explanatory Note preceding Part I and in Note 2 in Notes to Consolidated Financial
Statements of this Form 10-K, the Company on June 29, 2006, announced that an internal review had
discovered irregularities related to the issuance of certain past stock option grants, including a grant to its
CEO Steve Jobs. The Company also announced that a Special Committee of outside directors (“Special
Committee”) had been formed and had hired independent counsel to conduct a full investigation of the
Company’s past stock option granting practices. As a result of the internal review and the independent
investigation, management has concluded, and the Audit and Finance Committee of the Board of
Directors agrees, that incorrect measurement dates were used for financial accounting purposes for certain
stock option grants made in prior periods. Therefore, the Company has recorded additional non-cash
stock-based compensation expense and related tax effects with regard to past stock option grants, and the
Company is restating previously filed financial statements in this Form 10-K.
The internal review and the Special Committee’s independent investigation identified a number of
occasions between October 1996 and January 2003 (the “relevant period”) when the Company used
incorrect measurement dates for stock option grants. The independent investigation also found that during
the relevant period:
• Procedures for granting, accounting, and reporting of stock option grants did not include sufficient
safeguards to prevent manipulation
• The grant dates for a number of grants were intentionally selected in order to obtain favorable
exercise prices
• Two former officers of the Corporation engaged in conduct that raises serious concerns in
connection with the granting, accounting, recording, and reporting of stock options
• CEO Steve Jobs was aware or recommended the selection of some favorable grant dates, but he did
not receive or financially benefit from these grants or appreciate the accounting implications
From 2003 through 2005, the Company implemented improvements to procedures, processes, and systems
to provide additional safeguards and greater internal control over the stock option granting and
administration function in compliance with the Sarbanes-Oxley Act (“SOX”) and evolving accounting
guidance. These improvements included:
• Documenting and assessing the design and operation of internal controls
• Segregating responsibilities, adding reviews and reconciliations, and redefining roles and
responsibilities
• Upgrading systems and system controls that support the processes
• Obtaining training in the stock administration function
• Implementing before the adoption of SFAS No. 123R the practice of using the receipt of the final
Board or Compensation Committee approval as the grant and measurement date for stock option
grants
• Identifying key controls, developing test plans, and testing controls in the stock granting and
administration function

120
 • Certifying stock administration and other controls for SOX Section 404 compliance in fiscal year
2005
The internal review and the independent investigation discovered no stock option grant after January 2003
that required accounting adjustments.
In coming to the conclusion that the Company’s disclosure controls and procedures and the Company’s
internal control over financial reporting were effective as of September 30, 2006, management considered,
among other things, the impact of the restatement to the financial statements and the effectiveness of the
internal controls in this area as of the fiscal years ended 2006 and 2005. Management has concluded,
therefore, that control deficiencies resulting in the restatement of previously issued financial statements
did not constitute a material weakness in disclosure controls and procedures, or internal controls and
procedures over financial reporting, as of September 30, 2006.
In addition to the significant improvements implemented between 2003 and 2005 discussed above, the
Company will adopt other measures identified by the Special Committee and management to enhance the
oversight of the stock option granting and administration function and the review and preparation of
financial statements, including:
• The Company will engage experienced General Counsel, increase the resources of the Corporate
Legal Department, and review the adequacy of its procedures and practices
• The CFO will arrange for senior management to undertake professional training to enhance
awareness and understanding of standards and principles for accounting and financial reporting,
particularly those relevant to stock options
• The Company will review all current policies, practices, and controls related to the granting of stock
options and provide education and training to those who implement those policies and processes, as
needed
• The Company will establish improved procedures for regular communication among the General
Counsel, the CFO, and stock administrators to improve monitoring of all Company practices with
regard to stock option grants, including formal written confirmation that all grant dates correspond
precisely with the dates authorized
• The Company will also establish improved procedures for the review of the preparation and
presentation of financial statements by senior management

Evaluation of Disclosure Controls and Procedures

Based on an evaluation under the supervision and with the participation of the Company’s management,
the Company’s principal executive officer and principal financial officer have concluded that the
Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (Exchange Act) were effective as of September 30, 2006 to
ensure that information required to be disclosed by the Company in reports that it files or submits under
the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in
the Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to the
Company’s management, including its principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.

121
Inherent Limitations Over Internal Controls
The Company’s internal control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. The Company’s internal control
over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the Company’s assets;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles, and that the Company’s receipts and expenditures are being made only in
accordance with authorizations of the Company’s management and directors; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the Company’s assets that could have a material effect
on the financial statements.
Management, including the Company’s CEO and CFO, does not expect that the Company’s internal
controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are
met. Further, the design of a control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of internal controls can provide absolute assurance that all control issues
and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in
future periods are subject to the risk that those internal controls may become inadequate because of
changes in business conditions, or that the degree of compliance with the policies or procedures may
deteriorate.

Management’s Annual Report on Internal Control Over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control
over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as
amended). Management conducted an evaluation of the effectiveness of the Company’s internal control
over financial reporting based on the criteria set forth in Internal Control—Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this
evaluation, management has concluded that the Company’s internal control over financial reporting was
effective as of September 30, 2006. The Company’s independent registered public accounting firm, KPMG
LLP, has issued an attestation report on the Company’s assessment of its internal control over financial
reporting. The report on the audit of internal control over financial reporting appears on page 119 of this
Form 10-K.

Changes in Internal Control Over Financial Reporting

There were no significant changes in the Company’s internal control over financial reporting identified in
management’s evaluation during the fourth quarter of fiscal 2006 that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B. Other Information

None.

122
 PART III
Item 10. Directors and Executive Officers of the Registrant
Directors
Listed below are the Company’s seven directors whose terms expire at the next annual meeting of
shareholders.

Name Position With the Company Age Director Since

William V. Campbell . . . . . . . . . . . . . . . . . . . Co-lead Director 66 1997
Millard S. Drexler . . . . . . . . . . . . . . . . . . . . . Director 62 1999
Albert A. Gore, Jr. . . . . . . . . . . . . . . . . . . . . . Director 58 2003
Steven P. Jobs . . . . . . . . . . . . . . . . . . . . . . . . . Director and Chief Executive Officer 51 1997
Arthur D. Levinson . . . . . . . . . . . . . . . . . . . . Co-lead Director 56 2000
Eric E. Schmidt. . . . . . . . . . . . . . . . . . . . . . . . Director 51 2006
Jerome B. York . . . . . . . . . . . . . . . . . . . . . . . Director 68 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.
Millard S. Drexler has been Chairman and Chief Executive Officer of J. Crew Group, Inc. since
January 2003. Previously, Mr. Drexler was Chief Executive Officer of Gap Inc. from 1995 and President
from 1987 until September 2002. Mr. Drexler was also a member of the Board of Directors of Gap Inc.
from November 1983 until October 2002.
Albert A. Gore, Jr. has served as a Senior Advisor to Google, Inc. since 2001. He has also served as
Executive Chairman of Current TV since 2002 and as Chairman of Generation Investment Management
since 2004. He is a visiting professor at Middle Tennessee State University. Mr. Gore was inaugurated as
the 45th Vice President of the United States in 1993. He was re-elected in 1996 and served for a total of
eight years as President of the Senate, a member of the Cabinet and the National Security Council. Prior to
1993, he served eight years in the U.S. Senate and eight years in the U.S. House of Representatives.
Steven P. Jobs is one of the Company’s co-founders and currently serves as its Chief Executive Officer.
Mr. Jobs is also a director of The Walt Disney Company.
Arthur D. Levinson, Ph.D. has been Chief Executive Officer and a Director of Genentech Inc.
(“Genentech”) since July 1995. Dr. Levinson has been Chairman of the Board of Directors of Genentech
since September 1999. He joined Genentech in 1980 and served in a number of executive positions,
including Senior Vice President of R&D from 1993 to 1995. Dr. Levinson also serves on the Board of
Directors of Google, Inc.
Eric E. Schmidt, Ph.D. has served as the Chief Executive Officer of Google, Inc. (“Google”) since
July 2001 and as a member of Google’s Board of Directors since March 2001, where he served as
Chairman of the Board from March 2001 to April 2004. In April 2004, Dr. Schmidt was named Chairman
of the Executive Committee of Google’s Board of Directors. From April 1997 to November 2001,
Dr. Schmidt served as Chairman of the Board of Directors of Novell, Inc., a computer networking
company, and, from April 1997 to July 2001, as the Chief Executive Officer of Novell. Dr. Schmidt was a
director of Siebel Systems until January 2006.
Jerome B. York has been Chief Executive Officer of Harwinton Capital Corporation, a private investment
company that he controls, since September 2003. From January 2000 until September 2003, Mr. York was

123
Chairman and Chief Executive Officer of MicroWarehouse, Inc., a reseller of computer hardware,
software and peripheral products. From September 1995 to October 1999, he was Vice Chairman of
Tracinda Corporation. From May 1993 to September 1995 he was Senior Vice President and Chief
Financial Officer of IBM Corporation, and served as a member of IBM’s Board of Directors from
January 1995 to August 1995. Mr. York is also a director of Tyco International Ltd.

Role of the Board; Corporate Governance Matters

It is the paramount duty of the Board of Directors to oversee the Chief Executive Officer and other senior
management in the competent and ethical operation of the Company on a day-to-day basis and to assure
that the long-term interests of the shareholders are being served. To satisfy this duty, the directors take a
proactive, focused approach to their position, and set standards to ensure that the Company is committed
to business success through maintenance of the highest standards of responsibility and ethics.
Members of the Board bring to the Company a wide range of experience, knowledge and judgment. These
varied skills mean that governance is far more than a “check the box” approach to standards or
procedures. The governance structure in the Company is designed to be a working structure for principled
actions, effective decision-making and appropriate monitoring of both compliance and performance. The
key practices and procedures of the Board are outlined in the Corporate Governance Guidelines available
on the Company’s website at www.apple.com/investor.

Board Committees
The Board has a standing Compensation Committee, a Nominating and Corporate Governance
Committee (“Nominating Committee”) and an Audit and Finance Committee (“Audit Committee”). All
committee members are independent under the listing standards of the NASDAQ Global Select Market.
The Audit Committee is primarily responsible for overseeing the services performed by the Company’s
independent auditors and internal audit department, evaluating the Company’s accounting policies and its
system of internal controls and reviewing significant financial transactions. Members of the Audit
Committee are Messrs. Campbell and York and Dr. Levinson.
The Compensation Committee is primarily responsible for reviewing the compensation arrangements for
the Company’s executive officers, including the Chief Executive Officer, and for administering the
Company’s equity compensation plans. Members of the Compensation Committee are Messrs. Campbell,
Drexler, and Gore.
The Nominating Committee assists the Board in identifying qualified individuals to become directors,
determines the composition of the Board and its committees, monitors the process to assess Board
effectiveness and helps develop and implement the Company’s corporate governance guidelines. The
Nominating Committee also considers nominees proposed by shareholders. Members of the Nominating
Committee are Messrs. Drexler and Gore and Dr. Levinson.
The Audit, Compensation and Nominating Committees operate under written charters adopted by the
Board. These charters are available on Apple’s website at www.apple.com/investor.

Audit Committee Financial Expert

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

Code of Ethics
The Company has a code of ethics that applies to all of the Company’s employees, including its principal
executive officer, principal financial officer, principal accounting officer and its Board. A copy of this code,

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“Ethics: The Way We Do Business Worldwide,” is available on the Company’s website at
www.apple.com/investor. The Company intends to disclose any changes in or waivers from its code of
ethics by posting such information on its website or by filing a Form 8-K.

Executive Officers
The following sets forth certain information regarding executive officers of the Company. Information
pertaining to Mr. Jobs, who is both a director and an executive officer of the Company, may be found in
the section entitled “Directors.”
Timothy D. Cook, Chief Operating Officer (age 46), joined the Company in March 1998. Mr. Cook also
served with the Company as Executive Vice President, Worldwide Sales and Operations from 2002 to
2005. In 2004, his responsibilities were expanded to include the Company’s Macintosh hardware
engineering. From 2000 to 2002, Mr. Cook served in the role of Senior Vice President, Worldwide
Operations, Sales, Service and Support. From 1998 to 2000, Mr. Cook served in the position of Senior Vice
President, Worldwide Operations. Prior to joining the Company, Mr. Cook held the position of Vice
President, Corporate Materials for Compaq Computer Corporation (“Compaq”). Previous to his work at
Compaq, Mr. Cook was the Chief Operating Officer of the Reseller Division at Intelligent Electronics.
Mr. Cook also spent 12 years with IBM, most recently as Director of North American Fulfillment.
Mr. Cook also serves as a member of the Board of Directors of Nike, Inc.
Anthony Fadell, Senior Vice President, iPod Division (age 37), joined the Company in 2001. From 2004 to
April 2006, Mr. Fadell was Vice President of iPod Engineering. From 2001 to 2004, Mr. Fadell was the
Senior Director of the Company’s iPod Engineering Team. Prior to joining Apple, Mr. Fadell was a co-
founder, CTO, and director of engineering of the Mobile Computing Group at Philips Electronics where
he was responsible for all aspects of business and product development for a variety of products.
Mr. Fadell later became VP of Business Development for Philips U.S. Strategy & Ventures, focusing on
building the company’s digital media strategy and investment portfolio. Prior to joining Philips, Mr. Fadell
was a hardware and software architect at General Magic.
Ronald B. Johnson, Senior Vice President, Retail (age 48), joined the Company in January 2000. Prior to
joining the Company, Mr. Johnson spent 16 years with Target Stores, most recently as Senior
Merchandising Executive.
Peter Oppenheimer, Senior Vice President and Chief Financial Officer (age 44), joined the Company in
July 1996. Mr. Oppenheimer also served with the Company in the position of Vice President and
Corporate Controller, and as Senior Director of Finance for the Americas. Prior to joining the Company,
Mr. Oppenheimer was CFO of one of the four business units for Automatic Data Processing, Inc.
(“ADP”). Prior to joining ADP, Mr. Oppenheimer spent six years in the Information Technology
Consulting Practice with Coopers and Lybrand.
Donald J. Rosenberg, Senior Vice President, General Counsel and Secretary (age 55), joined the Company
in December 2006. Prior to joining the Company Mr. Rosenberg spent 31 years with IBM, most recently as
Senior Vice President and General Counsel. Prior to that he held a number of senior positions at IBM,
including over ten years as Vice President and Assistant General Counsel for litigation.
Philip W. Schiller, Senior Vice President, Worldwide Product Marketing (age 46), rejoined the Company
in 1997. Prior to rejoining the Company, Mr. Schiller was Vice President of Product Marketing at
Macromedia, Inc. from December 1995 to March 1997, and was Director of Product Marketing at
FirePower Systems, Inc. from 1993 to December 1995. Prior to that, Mr. Schiller spent six years at the
Company in various marketing positions.
Bertrand Serlet, Ph.D., Senior Vice President, Software Engineering (age 46), joined the Company in
February 1997 upon the Company’s acquisition of NeXT. At NeXT, Dr. Serlet held several engineering

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and managerial positions, including Director of Web Engineering. Prior to NeXT, from 1985 to 1989,
Dr. Serlet worked as a research engineer at Xerox PARC.
Sina Tamaddon, Senior Vice President, Applications (age 49), joined the Company in September 1997.
Mr. Tamaddon has also served with the Company in the position of Senior Vice President, Worldwide
Service and Support, and Vice President and General Manager, Newton Group. Before joining the
Company, Mr. Tamaddon held the position of Vice President, Europe with NeXT from September 1996
through March 1997. From August 1994 to August 1996, Mr. Tamaddon held the position of Vice
President, Professional Services with NeXT.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s officers and
directors, and persons who own more than ten percent of a registered class of the Company’s equity
securities, to file reports of securities ownership and changes in such ownership with the Securities and
Exchange Commission (“SEC”). Officers, directors and greater than ten percent shareholders also are
required by rules promulgated by the SEC to furnish the Company with copies of all Section 16(a) forms
they file.
Based solely upon a review of the copies of such forms furnished to the Company or written
representations that no Forms 5 were required, the Company believes that all Section 16(a) filing
requirements were met during fiscal year 2006, except for the following: (i) one Form 4 was filed for
Arthur D. Levinson on August 17, 2006 to report an automatic stock option grant under the Company’s
1997 Director Stock Option Plan made on August 14, 2006; and (ii) one Form 4 was filed for Anthony
Fadell on September 1, 2006 with respect to the purchase and sale by Mr. Fadell’s trust of 300 and 25
shares, respectively, of the Company’s Common Stock in June 2006 and August 2006.

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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

Long-Term
Annual Compensation Compensation
Securities
Restricted Underlying All Other
Fiscal Salary Bonus Stock Award Options* Compensation
Name and Principal Position Year ($) ($) ($)(1) (#) ($)
Steven P. Jobs . . . . . . . . . . . . . . . 2006 1 — —(2) — —
Chief Executive Officer 2005 1 — — — —
2004 1 — — — —
Timothy D. Cook . . . . . . . . . . . . 2006 696,880 525,000 21,603,000(3) — 13,200(5)
Chief Operating Officer 2005 602,434 600,239 — — 12,600(5)
2004 602,632 — 7,650,000(4) — 12,588(5)
Peter Oppenheimer . . . . . . . . . . 2006 615,006 450,000 14,402,000(3) — 13,200(5)
Senior Vice President and 2005 552,189 550,202 — — 21,092(5)
Chief Financial Officer 2004 450,739 — 6,375,000(4) — 3,808(5)
Ronald B. Johnson. . . . . . . . . . . 2006 592,476 450,000 14,402,000(3) — —
Senior Vice President, Retail 2005 552,795 550,202 — — —
2004 484,836 1,500,000 6,375,000(4) — —
Philip W. Schiller . . . . . . . . . . . . 2006 494,942 375,000 10,801,500(3) — 5,769(5)
Senior Vice President, 2005 402,244 400,239 — — 5,539(5)
Worldwide Product Marketing 2004 402,277 — 6,375,000(4) — 5,308(5)

(1) The following table reflects the aggregated restricted stock holdings for each of the Company’s
Named Executive Officers as of the end of the 2006 fiscal year and the value of such restricted stock
based on $76.98 per share, the closing price of the Company’s common stock on the NASDAQ Global
Select Market on September 29, 2006 (the last day of trading for the 2006 fiscal year). The table has
been adjusted to reflect the Company’s two-for-one stock split in February 2005.

Number of Unvested Value of Unvested

Restricted Shares at Restricted Shares at
September 30, 2006 September 30, 2006
Named Executive Officer (#) ($)
Steven P. Jobs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0
Timothy D. Cook (a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000 46,188,000
Peter Oppenheimer (b). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 450,000 34,641,000
Ronald B. Johnson (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 450,000 34,641,000
Philip W. Schiller (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400,000 30,792,000
(a) Includes 300,000 unvested restricted stock units that are part of a grant of 600,000 restricted stock
units (split-adjusted) made on March 24, 2004. Fifty percent (50%) of such units vested in
March 2006, and the remainder is scheduled to vest in March 2008. Also includes 300,000
unvested restricted stock units that were granted on December 14, 2005, and are scheduled to

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 vest in their entirety in March 2010. The restricted stock units do not include the right to receive
dividends prior to vesting.
(b) Includes 250,000 unvested restricted stock units that are part of a grant of 500,000 restricted stock
units (split-adjusted) made on March 24, 2004. Fifty percent (50%) of such units vested in
March 2006, and the remainder is scheduled to vest in March 2008. Also includes 200,000
unvested restricted stock units that were granted on December 14, 2005, and are scheduled to
vest in their entirety in March 2010. The restricted stock units do not include the right to receive
dividends prior to vesting.
(c) Includes 250,000 unvested restricted stock units that are part of a grant of 500,000 restricted stock
units (split-adjusted) made on March 24, 2004. Fifty percent (50%) of such units vested in
March 2006, and the remainder is scheduled to vest in March 2008. Also includes 150,000
unvested restricted stock units that were granted on December 14, 2005, and are scheduled to
vest in their entirety in March 2010. The restricted stock units do not include the right to receive
dividends prior to vesting.
(2) In March 2003, Mr. Jobs voluntarily cancelled all of his outstanding options, excluding those granted
to him in his capacity as a Director. In March 2003, the Board awarded Mr. Jobs 10 million (split-
adjusted) restricted shares of the Company’s Common Stock, which vested in full in March 2006.
(3) Market value of restricted stock units granted on December 14, 2005 (based on $72.01 per share, the
closing price of the Company’s common stock on the NASDAQ Global Select Market on the day of
grant). The restricted stock units vest in March 2010.
(4) Market value of restricted stock units granted on March 24, 2004 (based on $12.75 per share, the split-
adjusted closing price of the Company’s common stock on the NASDAQ Global Select Market on the
day of grant). The restricted stock units granted on this date generally vest over four years with 50% of
the total number of shares vesting on each of the second and fourth anniversaries of the grant date.
(5) Consists of matching contributions made by the Company in accordance with the terms of the
401(k) plan.

Option Grants in Last Fiscal Year

There were no options granted to the Named Executive Officers during fiscal year 2006. Grants of
restricted stock units to the Named Executive Officers are disclosed above in the Summary Compensation
Table.

Options Exercised and Year-End Option Holdings

The following table provides information about stock option exercises by the Named Executive Officers
during fiscal year 2006 and stock options held by each of them at fiscal year-end. The table has been
adjusted to reflect the Company’s two-for-one stock split in February 2005.

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

Number of Securities
Underlying Value of Unexercised
Shares Unexercised In-the-Money Options
Acquired on Value Options at Fiscal at Fiscal
Exercise Realized Year-End (#) Year-End ($)(1)
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
Steven P. Jobs . . . . . . . — — 120,000(2) — $ 8,547,600(2) —
Timothy D. Cook . . . . — — — —(3) — —
Peter Oppenheimer . . 1,145,000 $ 55,851,613 — —(3) — —
Ronald B. Johnson. . . 350,000 $ 15,653,210 1,900,000 —(3) $ 102,994,688 —
Philip W. Schiller . . . . 162,500 $ 9,454,728 — —(3) — —

(1) Market value of securities underlying in-the-money options at the end of fiscal year 2006 (based on
$76.98 per share, the closing price of Common Stock on the NASDAQ Global Select Market on
September 29, 2006), minus the exercise price.
(2) Consists of 120,000 options granted to Mr. Jobs in his capacity as a director pursuant to the 1997
Director Stock Option Plan. Since accepting the position of CEO, Mr. Jobs is no longer eligible to
receive option grants under the Director Plan. In March 2003, Mr. Jobs voluntarily cancelled all of his
outstanding options, excluding those granted to him in his capacity as a director.
(3) Excludes 600,000 restricted stock units granted to Mr. Cook that are currently unvested, 450,000
restricted stock units granted to each of Messrs. Oppenheimer and Johnson that are currently
unvested, and 400,000 restricted stock units granted to Mr. Schiller that are currently unvested.

Director Compensation
The form and amount of director compensation are determined by the Board after a review of
recommendations made by the Nominating Committee. The current practice of the Board is to base a
substantial portion of a director’s annual retainer on equity. In 1998, shareholders approved the 1997
Director Stock Option Plan (the “Director Plan”) and 1,600,000 shares were reserved for issuance
thereunder. Pursuant to the Director Plan, the Company’s non-employee directors are granted an option
to acquire 30,000 shares of Common Stock upon their initial election to the Board (“Initial Options”). The
Initial Options vest and become exercisable in three equal annual installments on each of the first through
third anniversaries of the grant date. On the fourth anniversary of a non-employee director’s initial
election to the Board and on each subsequent anniversary thereafter, the director will be entitled to
receive an option to acquire 10,000 shares of Common Stock (“Annual Options”). Annual Options are fully
vested and immediately exercisable on their date of grant. As of the end of the fiscal year, there were
options for 760,000 shares outstanding under the Director Plan. Since accepting the position of CEO,
Mr. Jobs is no longer eligible for grants under the Director Plan. Non-employee directors also receive a
$50,000 annual retainer paid in quarterly increments. In addition, directors receive up to two free
computer systems per year and are eligible to purchase additional equipment at a discount. Directors do
not receive any additional consideration for serving on committees or as committee chairperson.

Compensation Committee Interlocks and Insider Participation

The current members of the Compensation Committee are Messrs. Campbell, Drexler and Gore, none of
whom are employees of the Company and all of whom are considered “independent” directors under the
applicable NASDAQ rules. There were no interlocks or insider participation between any member of the
Board or Compensation Committee and any member of the board of directors or compensation committee
of another company.

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Arrangements with Named Executive Officers
Change In Control Arrangements—Stock Options and Restricted Stock Units
In the event of a “change in control” of the Company, all outstanding options under the Company’s stock
option plans, except the Director Plan, and all restricted stock units granted on or after January 1, 2005,
will, unless otherwise determined by the plan administrator, become fully exercisable, and will be cashed
out at an amount equal to the difference between the applicable “change in control price” and the exercise
price. The Director Plan provides that upon a “change in control” of the Company, all outstanding options
held by non-employee directors will automatically become fully exercisable and will be cashed out at an
amount equal to the difference between the applicable “change in control price” and the exercise price of
the options. A “change in control” under these plans is generally defined as (i) the acquisition by any
person of 50% or more of the combined voting power of the Company’s outstanding securities, or (ii) the
occurrence of a transaction requiring shareholder approval and involving the sale of all or substantially all
of the assets of the Company or the merger of the Company with or into another corporation.
Agreements governing certain restricted stock units granted to the Named Executive Officers and other
officers prior to January 1, 2005 generally provide that in the event there is a “change in control,” as
defined in the Company’s stock option plans, and if in connection with or following such “change in
control,” their employment is terminated without “Cause” or if they should resign for “Good Reason,”
those options, restricted stock, and restricted stock units outstanding that are not yet vested as of the date
of such “change in control” shall become fully vested. Further, these restricted stock unit agreements also
provide that, in the event the Company terminates the Officer without cause at any time, the restricted
stock and restricted stock units will vest in full. Generally, “Cause” is defined to include a felony
conviction, willful disclosure of confidential information, or willful and continued failure to perform his or
her employment duties. “Good Reason” includes resignation of employment as a result of a substantial
diminution in position or duties, or an adverse change in title or reduction in annual base salary.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The following table sets forth certain information as of November 30, 2006 (the “Table Date”) with respect
to the beneficial ownership of the Company’s Common Stock by (i) each person the Company believes
beneficially holds more than 5% of the outstanding shares of Common Stock; (ii) each director; (iii) each
Named Executive Officer listed in the Summary Compensation Table under the heading “Executive
Compensation;” and (iv) all directors and executive officers as a group. On the Table Date, 859,202,448
shares of Common Stock were issued and outstanding. Unless otherwise indicated, all persons named as
beneficial owners of Common Stock have sole voting power and sole investment power with respect to the
shares indicated as beneficially owned. In addition, unless otherwise indicated, all persons named below can
be reached at Apple Computer, Inc., 1 Infinite Loop, Cupertino, CA 95014.

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

Shares of Common Stock Percent of Common Stock

Name of Beneficial Owner Beneficially Owned(1) Outstanding
Fidelity Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,162,311(2) 6.65%
AllianceBernstein LP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,637,731(3) 5.66%
Steven P. Jobs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,546,451(4) *
William V. Campbell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221,004(5) *
Timothy D. Cook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,597(6) *
Millard S. Drexler . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220,000(7) *
Albert A. Gore, Jr. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000(8) *
Ronald B. Johnson. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,049,890(9) *
Arthur D. Levinson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 362,400(10) *
Peter Oppenheimer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149,768(11) *
Philip W. Schiller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 256(12) *
Eric E. Schmidt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,284(13) *
Jerome B. York . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,000(14) *
All current executive officers and directors as a group
(15 persons). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,378,423(15) 1.09%

(1) Represents shares of Common Stock held and/or options held by such individuals that were
exercisable at the Table Date or within 60 days thereafter. This does not include options or restricted
stock units that vest after 60 days. The share numbers have been adjusted to reflect the Company’s
two-for-one stock split in February 2005.
(2) Based on a Form 13G/A filed February 14, 2005 by FMR Corp. FMR Corp. lists its address as
82 Devonshire Street, Boston, MA 02109, in such filing.
(3) Based on a Form 13F filed January 25, 2006, by Barclays Global Investors. Barclays Global Investors
lists its address as 45 Fremont Street, San Francisco, CA 94105.
(4) Includes 120,000 shares of Common Stock that Mr. Jobs has the right to acquire by exercise of stock
options.
(5) Includes 220,000 shares of Common Stock that Mr. Campbell has the right to acquire by exercise of
stock options.
(6) Excludes 600,000 unvested restricted stock units.
(7) Includes 40,000 shares of Common Stock that Mr. Drexler holds indirectly and 180,000 shares of
Common Stock that Mr. Drexler has the right to acquire by exercise of stock options.
(8) Consists of 60,000 shares of Common Stock that Mr. Gore has the right to acquire by exercise of stock
options.
(9) Includes 1,900,000 shares of Common Stock that Mr. Johnson has the right to acquire by exercise of
stock options and excludes 450,000 unvested restricted stock units.
(10) Includes 2,000 shares of Common Stock that Dr. Levinson holds indirectly and 100,000 shares of
Common Stock that Dr. Levinson has the right to acquire by exercise of stock options.
(11) Excludes 450,000 unvested restricted stock units.
(12) Excludes 400,000 unvested restricted stock units.

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(13) Consists of 12,284 shares of Common Stock that Dr. Schmidt holds indirectly. Dr. Schmidt has
declined to participate in the 1997 Director Stock Option Plan.
(14) Includes 40,000 shares of Common Stock that Mr. York has the right to acquire by exercise of stock
options.
(15) Includes 3,063,371 shares of Common Stock that executive officers or directors have the right to
acquire by exercise of stock options. Does not include 2.7 million unvested restricted stock units.
* Represents less than 1% of the issued and outstanding shares of Common Stock on the Table Date.

Equity Compensation Plan Information

The following table sets forth certain information, as of September 30, 2006, concerning shares of common
stock authorized for issuance under all of the Company’s equity compensation plans. The table has been
adjusted to reflect the Company’s two-for-one stock split in February 2005.

Number of Securities
Number of Securities Remaining Available for
to be Issued Upon Weighted Average Future Issuance Under
Exercise of Exercise Price of Equity Compensation Plans
Outstanding Options, Outstanding Options, (Excluding Securities
Warrants and Rights Warrants and Rights Reflected in Column (a))
(a) (b) (c)
Equity compensation plans approved
by shareholders. . . . . . . . . . . . . . . . . . 34,827,183 $ 30.03 57,290,691(1)
Equity compensation plans not
approved by shareholders. . . . . . . . . 18,137,049 $ 10.19 —
Total equity compensation plans (2). . 52,964,232 $ 23.24 57,290,691

(1) This number includes 2,297,225 shares of common stock reserved for issuance under the Employee
Stock Purchase Plan, 400,000 shares available for issuance under the 1997 Director Stock Option Plan,
and 54,593,466 shares available for issuance under the 2003 Employee Stock Plan. The grant of
3,410,000 restricted stock units has been deducted from the number of shares available for future
issuance. Shares of restricted stock and restricted stock units granted after April 2005 count against
the shares available for grant as two shares for every share granted. This amount does not include
shares under the 1990 Stock Option Plan that was terminated in 1997. No new options can be granted
under the 1990 Stock Option Plan.
(2) This table does not include 17,266 shares of Common Stock underlying options assumed in connection
with a prior acquisition of a company that originally granted those options. These assumed options
have a weighted average exercise price of $4.30 per share. No additional options may be granted
under the assumed plan.

Item 13. Certain Relationships and Related Transactions

In March 2002, the Company entered into a Reimbursement Agreement with its CEO, Steve Jobs, for the
reimbursement of expenses incurred by Mr. Jobs in the operation of his private plane when used for
Company business. The Reimbursement Agreement became effective for expenses incurred by Mr. Jobs
for Company business purposes since he took delivery of the plane in May 2001. The Company recognized
a total of $202,000 in expenses pursuant to the Reimbursement Agreement during 2006.
In 2006, the Company entered into an agreement with Pixar to sell certain of Pixar’s short films on the
iTunes Store. Mr. Jobs was the CEO, Chairman, and a large shareholder of Pixar. On May 5, 2006, The
Walt Disney Company (“Disney”) acquired Pixar, which resulted in Pixar becoming a wholly-owned
subsidiary of Disney. Upon Disney’s acquisition of Pixar, Mr. Jobs’ shares of Pixar common stock were

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

Item 14. Principal Accountant Fees and Services

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

Audit and Non-Audit Fees

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

(1) Audit fees relate to professional services rendered in connection with the audit of the Company’s
annual financial statements and internal control over financial reporting, quarterly review of financial
statements included in the Company’s Forms 10-Q, and audit services provided in connection with
other statutory and regulatory filings. Fiscal year 2006 also includes fees incurred in connection with
the Special Committee of the Company’s Board of Directors’ investigation into stock option practices,
no such fees were incurred during 2005.
(2) Audit-related fees primarily relate to professional services for the audits of employee benefit plans.
(3) 2006 tax fees include $728,600 for professional services rendered in connection with tax compliance
and preparation relating to the Company’s expatriate program, tax audits and international tax
compliance; and $91,900 for international tax consulting and planning services. The Company does
not engage KPMG to perform personal tax services for its executive officers.

Policy on Audit Committee Pre-Approval of Audit and Non-Audit Services Performed by the Independent
Auditors
Prior to the enactment of the Sarbanes-Oxley Act of 2002 (the “Act”), the Company adopted an auditor
independence policy that banned its auditors from performing non-financial consulting services, such as
information technology consulting and internal audit services. This auditor independence policy also
mandates that the audit and non-audit services and related budget be approved by the Audit Committee in
advance, and that the Audit Committee be provided with quarterly reporting on actual spending. In
accordance with this policy, all services to be performed by KPMG were pre-approved by the Audit
Committee.
Subsequent to the enactment of the Act, the Audit Committee met with KPMG to further understand the
provisions of that Act as it relates to auditor independence. KPMG previously rotated the lead audit
partner in fiscal year 2005, rotated other partners in 2006, and will rotate additional partners as
appropriate in compliance with the Act. The Audit Committee will continue to monitor the activities
undertaken by KPMG to comply with the Act.

133
 PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) Documents filed as part of this report
(1) All financial statements

Index to Consolidated Financial Statements Page

Consolidated Balance Sheets as of September 30, 2006 and September 24, 2005 . . . . . . . . . . . . . . . 73
Consolidated Statements of Operations for the three fiscal years ended September 30, 2006. . . . . 74
Consolidated Statements of Shareholders’ Equity for the three fiscal years ended
September 30, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Consolidated Statements of Cash Flows for the three fiscal years ended September 30, 2006 . . . . 76
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Selected Quarterly Financial Information (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
Reports of Independent Registered Public Accounting Firm, KPMG LLP . . . . . . . . . . . . . . . . . . . . 118
All financial statement schedules have been omitted, since the required information is not applicable or is
not present in amounts sufficient to require submission of the schedule, or because the information
required is included in the Consolidated Financial Statements and Notes thereto.

(2) Index to Exhibits

Incorporated by
Reference
Filed/
Exhibit Filing Date/ Furnished
Number Exhibit Description Form Period End Date Herewith
3.1 Restated Articles of Incorporation, filed with the S-3 7/27/88
Secretary of State of the State of California on
January 27, 1988.
3.2 Amendment to Restated Articles of Incorporation, 10-Q 5/11/00
filed with the Secretary of State of the State of
California on May 4, 2000.
3.3 By-Laws of the Company, as amended through 10-Q 6/26/04
June 7, 2004.
3.4 Certificate of Amendment to Restated Articles of 10-Q 3/26/05
Incorporation, as amended, filed with the Secretary of
State of the State of California on February 25, 2005.
4.8 Registration Rights Agreement, dated June 7, 1996 S-3 8/28/96
among the Company and Goldman, Sachs & Co. and
Morgan Stanley & Co. Incorporated.
4.9 Certificate of Determination of Preferences of 10-K 9/26/97
Series A Non-Voting Convertible Preferred Stock of
Apple Computer, Inc.
10.A.3** Apple Computer, Inc. Savings and Investment Plan, as 10-K 9/27/91
amended and restated effective as of October 1, 1990.
10.A.3-1** Amendment of Apple Computer, Inc. Savings and 10-K 9/25/92
Investment Plan dated March 1, 1992.
10.A.3-2** Amendment No. 2 to the Apple Computer, Inc. 10-Q 3/28/97
Savings and Investment Plan.

134
 Incorporated by
Reference
Filed/
Exhibit Filing Date/ Furnished
Number Exhibit Description Form Period End Date Herewith
10.A.5** 1990 Stock Option Plan, as amended through 10-Q 12/26/97
November 5, 1997.
10.A.6** Apple Computer, Inc. Employee Stock Purchase Plan, 10-Q 3/26/05
as amended through April 21, 2005.
10.A.8** Form of Indemnification Agreement between the 10-K 9/26/97
Registrant and each officer of the Registrant.
10.A.43** NeXT Computer, Inc. 1990 Stock Option Plan, as S-8 3/21/97
amended.
10.A.49** 1997 Employee Stock Option Plan, as amended 10-K 9/28/02
through October 19, 2001.
10.A.50** 1997 Director Stock Option Plan. 10-Q 3/27/98
10.A.51** 2003 Employee Stock Plan, as amended through 10-K 9/24/05
November 9, 2005.
10.A.52** Reimbursement Agreement dated as of May 25, 2001 10-Q 6/29/02
by and between the Registrant and Steven P. Jobs.
10.A.53** Option Cancellation and Restricted Stock Award 10-Q 6/28/03
Agreement dated as of March 19, 2003 by and
between the Registrant and Steven P. Jobs.
10.A.54** Form of Restricted Stock Unit Award Agreement. 10-Q 3/27/04
10.A.54-1** Alternative Form of Restricted Stock Unit Award 10-K 9/24/05
Agreement.
10.A.55** Apple Computer, Inc. Performance Bonus Plan dated 10-Q 3/26/05
April 21, 2005.
10.A.56** Form of Election to Satisfy Tax Withholding with 8-K 8/15/05
Stock.
10.A.57** Form of Option Agreements. 10-K 9/24/05
10.B.18* Custom Sales Agreement effective October 21, 2002 10-K 9/27/03
between the Registrant and International Business
Machines Corporation.
10.B.19* Purchase Agreement effective August 10, 2005 10-K 9/24/05
between the Registrant and Freescale
Semiconductor, Inc.
10.B.20 Consulting Agreement dated as of April 17, 2006 by 10-Q 7/1/06
and between the Registrant and J.R. Ruby Consulting
Corp.
14.1 Code of Ethics of the Company. 10-K 9/27/03
21*** Subsidiaries of Apple Computer, Inc. !
23.1*** Consent of Independent Registered Public !
Accounting Firm.

135
 Incorporated by
Reference
Filed/
Exhibit Filing Date/ Furnished
Number Exhibit Description Form Period End Date Herewith
24.1*** Power of Attorney (included on page 137 of this !
Annual Report on Form 10-K).
31.1*** Rule13a-14(a) / 15d-14(a) Certification of Chief !
Executive Officer.
31.2*** Rule13a-14(a) / 15d-14(a) Certification of Chief !
Financial Officer.
32.1**** Section 1350 Certifications of Chief Executive Officer !
and Chief Financial Officer.

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

** Indicates management contract or compensatory plan or arrangement.
*** Filed herewith.
**** Furnished herewith.

136
 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
29th day of December 2006.

APPLE COMPUTER, INC.

By: /s/ PETER OPPENHEIMER
Peter Oppenheimer
Senior Vice President and
Chief Financial Officer

Power of Attorney
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Steven P. Jobs and Peter Oppenheimer, jointly and severally, his attorneys-in-fact,
each with the power of substitution, for him in any and all capacities, to sign any amendments to this
Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all
that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on the dates indicated:

Name Title Date

/s/ STEVEN P. JOBS Chief Executive Officer and Director

December 29, 2006
STEVEN P. JOBS (Principal Executive Officer)

Senior Vice President and Chief Financial

/s/ PETER OPPENHEIMER Officer (Principal Financial and December 29, 2006
PETER OPPENHEIMER Principal Accounting Officer)

/s/ WILLIAM V. CAMPBELL

Director December 29, 2006
WILLIAM V. CAMPBELL

/s/ MILLARD S. DREXLER

Director December 29, 2006
MILLARD S. DREXLER

/s/ ALBERT GORE, JR.

Director December 29, 2006
ALBERT GORE, JR.

/s/ ARTHUR D. LEVINSON

Director December 29, 2006
ARTHUR D. LEVINSON

/s/ ERIC E. SCHMIDT

Director December 29, 2006
ERIC E. SCHMIDT

/s/ JEROME B. YORK

Director December 29, 2006
JEROME B. YORK

137
 Exhibit 21
SUBSIDIARIES OF
APPLE COMPUTER, INC.*

Jurisdiction
Name of Incorporation
Apple Operations International (formerly Apple Computer Inc. Limited). . . . . . . . . . . . . . Ireland
Apple Operations Europe (formerly Apple Computer Limited) . . . . . . . . . . . . . . . . . . . . . . Ireland
Apple Computer International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ireland
Braeburn Capital, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States

* Pursuant to Item 601(b)(21)(ii) of Regulation S-K, the names of other subsidiaries of Apple
Computer, Inc. are omitted because, considered in the aggregate, they would not constitute a
significant subsidiary as of the end of the year covered by this report.
 Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
The Board of Directors
Apple Computer, Inc.:
We consent to the incorporation by reference in the registration statements on Forms S-8 (Nos. 2-70449,
2-77563, 2-85095, 33-00866, 33-23650, 33-31075, 33-40877, 33-47596, 33-57092, 33-57080, 33-53873,
33-53879, 33-53895, 33-60279, 33-60281, 333-07437, 333-23719, 333-23725, 333-60455, 333-82603,
333-93471, 333-37012, 333-52116, 333-61276, 333-70506, 333-75930, 333-102184, 333-106421, and
333-125148) and the registration statements on Forms S-3 (Nos. 33-23317, 33-29578, and 33-62310) of
Apple Computer, Inc. of our reports dated December 29, 2006 with respect to the consolidated balance
sheets of Apple Computer, Inc. and subsidiaries as of September 30, 2006 and September 24, 2005, and the
related consolidated statements of operations, shareholders’ equity, and cash flows for each of the years in
the three-year period ended September 30, 2006, and management’s assessment of the effectiveness of
internal control over financial reporting as of September 30, 2006 and the effectiveness of internal control
over financial reporting as of September 30, 2006, which reports appear in the September 30, 2006 annual
report on Form 10-K of Apple Computer, Inc.
As discussed in Note 2 to the Consolidated Financial Statements, the consolidated financial statements as
of September 24, 2005 and for each of the years in the two-year period ended September 24, 2005 have
been restated.
As discussed in Note 1 to the Consolidated Financial Statements, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, on
September 25, 2005.

/s/ KPMG LLP

Mountain View, California
December 29, 2006
 Exhibit 31.1
CERTIFICATIONS
I, Steven P. Jobs, certify that:
1. I have reviewed this annual report on Form 10-K of Apple Computer, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal
quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize, and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: December 29, 2006
By: /s/ STEVEN P. JOBS
Steven P. Jobs
Chief Executive Officer
 Exhibit 31.2
CERTIFICATIONS
I, Peter Oppenheimer, certify that:
1. I have reviewed this annual report on Form 10-K of Apple Computer, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal
quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of
registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize, and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: December 29, 2006
By: /s/ PETER OPPENHEIMER
Peter Oppenheimer
Senior Vice President and
Chief Financial Officer
 Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Steven P. Jobs, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that the Annual Report of Apple Computer, Inc. on Form 10-K for the fiscal
year ended September 30, 2006 fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 and that information contained in such Form 10-K fairly presents in all
material respects the financial condition and results of operations of Apple Computer, Inc.
December 29, 2006

By: /s/ STEVEN P. JOBS

Steven P. Jobs
Chief Executive Officer

I, Peter Oppenheimer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, that the Annual Report of Apple Computer, Inc. on Form 10-K for the
fiscal year ended September 30, 2006 fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 and that information contained in such Form 10-K fairly presents in all
material respects the financial condition and results of operations of Apple Computer, Inc.
December 29, 2006

By: /s/ PETER OPPENHEIMER

Peter Oppenheimer
Senior Vice President and Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to Apple
Computer, Inc. and will be retained by Apple Computer, Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.