Apple (AAPL)

7. Tax Considerations

Tax Deductibility of Compensation Expense. Section 162(m) (“162(m)”) of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), places a limit of $1,000,000 on the amount of compensation to the Company’s chief executive officer and the three most highly-compensated named executive officers employed by the Company at the end of the year (other than the Company’s chief financial officer) that may be deducted by the Company as a business expense in any tax year unless, among other things, the compensation is

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performance-based and provided under a plan that has been approved by the shareholders. To qualify as performance-based compensation, the compensation generally must be approved by a committee that consists solely of at least two “outside” directors who have never been employed by the Company or its subsidiaries. Two members of the Compensation Committee, Messrs. Drexler and Gore, qualify as outside directors under the Internal Revenue Service (“IRS”) definition. Although Mr. Campbell is an independent director under the applicable NASDAQ and SEC rules, he does not qualify as an outside director under the IRS definition because he was an officer of the Company from 1983 to 1987 and of a subsidiary of the Company from 1987 to 1991. For this reason, he does not vote on any 162(m)-related matters.

Salaries for the named executive officers do not qualify as performance-based compensation. The Company’s performance-based cash incentives, however, are intended to be excluded from the 162(m) limit because they are paid based on predetermined goals established by the Compensation Committee pursuant to the shareholder-approved Performance Bonus Plan. The Company’s stock options also are intended to qualify as performance-based compensation under 162(m). The RSUs do not qualify as performance-based compensation for purposes of 162(m) because vesting is based on continued employment rather than specific performance goals.