Apple (AAPL)

Competitive Market Study Report

        In 2004, the Committee engaged an outside compensation consultant to provide a comprehensive market study report on the Company's compensation programs including compensation for its executive

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officers. The Company's compensation programs were compared to a peer group of 22 technology companies with similar revenue and market capitalization. Throughout the year, the Committee met with the outside compensation consultant to review, discuss and analyze the data provided by such consultant and to discuss other relevant issues. The Committee periodically requested additional information to help it evaluate relative market position and to assist in designing compensation programs. Based on its own review of the results and in consultation with management and the compensation consultant, the Committee began taking steps to adjust its compensation programs so that the Company can offer a competitive compensation package while continuing to align the interests of its employees with those of its shareholders. Steps taken by the Committee are outlined under the Compensation Program Components and include the adoption of the Apple Computer, Inc. Performance Bonus Plan (Proposal No. 2) and amendments to the 2003 Employee Stock Option Plan (Proposal No. 3) to include, among other things, performance-based compensation.

        The results of the review of the Company's compensation programs completed by the compensation consultant include the following observations:

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Base salaries and total cash compensation for non-executive employees are competitively set at or above the median level of the compensation practices of peer groups.



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Base salaries for executive officers, other than the Chief Executive Officer who receives $1 per year, are competitively set between the median and 75^th percentile (following salary increases in fiscal 2004).



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The grant of stock options and/or other equity awards, when annualized over the term of the vesting period, are generally at market median of grants made by comparable companies.



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The total cash compensation paid to the Company's executive vice president and senior vice presidents is not competitive and falls significantly below market median due to the absence of a cash bonus program.



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The infrequent grant of stock options and/or other equity awards is insufficient to make up for the less than competitive total cash compensation paid to executive officers.



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At current levels, the Company's executive compensation program is not competitive and is not currently structured to attract, retain and reward executive officers whose contributions are critical to the long-term success of the Company. It was recommended that the Committee adopt a performance bonus plan and consider more frequent smaller grants of equity awards.