Apple (AAPL)

Fiscal Year 2004 versus 2003

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

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

·       Net sales of iPods rose $961 million or 279% during 2004 compared to 2003. Unit sales of iPods totaled 4.4 million in 2004, which represents an increase of 370% from the 939,000 iPod units sold in 2003. Strong demand for the iPods during 2004 were experienced in all of the Company’s operating segments and was driven by enhancements to the iPod, the introduction of the iPod mini, increased expansion of the Company’s iPod distribution network, and continued success of the iTunes Music Store due largely to making it available to both Macintosh and Windows users in the U.S., U.K., France, and Germany.

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

·       Net sales of peripherals and other hardware rose by 38% during 2004 compared to 2003 primarily due to an increase in net sales of displays and other computer accessories. Net sales of other

33

computer accessories include AirPort cards and base stations, iSight digital video cameras, and third-party hardware products. The increase in total net sales of peripherals and other hardware was related to the overall increase in Macintosh unit sales and the introduction of new and updated peripheral products and was experienced predominantly by the Company’s Americas, Europe, and Retail segments.

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

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

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

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

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

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

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

34

additional comments below related to the Japan segment under the heading “Segment Operating Performance.”

Fiscal Year 2004 versus 2003

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

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

·       Net sales of iPods rose $961 million or 279% during 2004 compared
to 2003. Unit sales of iPods totaled 4.4 million in 2004, which represents an
increase of 370% from the 939,000 iPod units sold in 2003. Strong demand for
the iPods during 2004 were experienced in all of the Company’s operating
segments and was driven by enhancements to the iPod, the introduction of the
iPod mini, increased expansion of the Company’s iPod distribution network, and
continued success of the iTunes Music Store due largely to making it available
to both Macintosh and Windows users in the U.S., U.K., France, and Germany.

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

·       Net
sales of peripherals and other hardware rose by 38% during 2004 compared to
2003 primarily due to an increase in net sales of displays and other computer
accessories. Net sales of other

33

computer accessories
include AirPort cards and base stations, iSight digital video cameras, and
third-party hardware products. The increase in total net sales of peripherals
and other hardware was related to the overall increase in Macintosh unit sales
and the introduction of new and updated peripheral products and was experienced
predominantly by the Company’s Americas, Europe, and Retail segments.

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

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

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

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

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

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

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

34

additional comments
below related to the Japan segment under the heading “Segment Operating
Performance.”

Fiscal Year 2004 versus 2003

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

•

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



•

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

29

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

•

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



•

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



•

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



•

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



•

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


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

•

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

30

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

•

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



•

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

Fiscal Year 2004 versus 2003

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

•

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




•

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

29

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










•

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




•

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




•

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




•

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




•

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





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





•

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

30

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

•

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




•

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