Note 5 – Shareholders’ Equity and Share-based Compensation

Preferred Stock

The Company has five million shares of authorized preferred stock, none of which is issued or 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.

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 GAAP 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 classified as available-for-sale, and net deferred gains and losses on certain derivative instruments accounted for as cash flow hedges.

The following table presents the components of comprehensive income, net of taxes, during the three- and six-month periods ended March 31, 2012 and March 26, 2011 (in millions):

		September 30,			September 30,			September 30,			September 30,
	Three Months Ended						Six Months Ended
	March 31, 2012			March 26, 2011			March 31, 2012			March 26, 2011
Net income	$	11,622		$	5,987		$	24,686		$	11,991
Other comprehensive income:
Change in unrecognized gains/losses on derivative instruments		(118	)		(82	)		(185	)		161
Change in foreign currency translation		9			74			3			90
Change in unrealized gains/losses on marketable securities		249			20			263			(79	)

Total comprehensive income	$	11,762		$	5,999		$	24,767		$	12,163

The following table summarizes activity in other comprehensive income related to derivatives, net of taxes, held by the Company during the three- and six-month periods ended March 31, 2012 and March 26, 2011 (in millions):

		September 30,			September 30,			September 30,			September 30,
	Three Months Ended						Six Months Ended
	March 31, 2012			March 26, 2011			March 31, 2012			March 26, 2011
Change in fair value of derivatives	$	(21	)	$	(140	)	$	66		$	(183	)
Adjustment for net gains/losses realized and included in net income		(97	)		58			(251	)		344

Change in unrecognized gains/losses on derivative instruments	$	(118	)	$	(82	)	$	(185	)	$	161

The following table shows the components of AOCI, net of taxes, as of March 31, 2012 and September 24, 2011 (in millions):

		September 30, 2009		September 30, 2009
	March 31, 2012		September 24, 2011
Net unrealized gains/losses on marketable securities	$	393	$	130
Net unrecognized gains/losses on derivative instruments		105		290
Cumulative foreign currency translation		26		23

Accumulated other comprehensive income	$	524	$	443

Equity Awards

A summary of the Company’s RSU activity and related information for the six months ended March 31, 2012 is as follows (in thousands, except weighted-average grant date fair value amounts):

		September 30,			September 30,		September 30,
	Number of RSUs			Weighted- Average Grant Date Fair Value		Aggregate Intrinsic Value
Balance at September 24, 2011		14,446		$	231.49
RSUs granted		6,585		$	398.64
RSUs vested		(3,485	)	$	176.83
RSUs cancelled		(632	)	$	229.97

Balance at March 31, 2012		16,914		$	307.88	$	10,140,707

RSUs that vested during the three- and six-month periods ended March 31, 2012 had fair values of $625 million and $1.6 billion, respectively, as of their applicable vesting dates. RSUs that vested during the three- and six-month periods ended March 26, 2011 had fair values of $69 million and $728 million, respectively, as of their applicable vesting dates.

A summary of the Company’s stock option activity and related information for the six months ended March 31, 2012 is as follows (in thousands, except weighted-average exercise price amounts and weighted-average remaining contractual term in years):

		September 30,			September 30,		September 30,		September 30,
	Number of Options			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value
Balance at September 24, 2011		11,866		$	108.64
Options granted		0		$	0
Options assumed		41		$	30.92
Options cancelled		(22	)	$	102.91
Options exercised		(3,243	)	$	85.54

Balance at March 31, 2012		8,642		$	116.95		2.12		4,170,553

Exercisable at March 31, 2012		8,436		$	116.67		2.06		4,073,404
Expected to vest after March 31, 2012		206		$	128.57		4.39		97,150

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 weighted-average exercise price multiplied by the number of options outstanding or exercisable. The total intrinsic value of options at the time of exercise was $719 million and $1.2 billion for the three- and six-month periods ended March 31, 2012, respectively, and $875 million and $1.8 billion for the three- and six-month periods ended March 26, 2011, respectively.

The Company had approximately 39.1 million shares reserved for future issuance under the Company’s stock plans as of March 31, 2012. RSUs granted are deducted from the shares available for grant under the Company’s stock plans utilizing a factor of two times the number of RSUs granted. Similarly, RSUs cancelled are added back to the shares available for grant under the Company’s stock plans utilizing a factor of two times the number of RSUs cancelled.

Share-based Compensation

Share-based compensation cost for RSUs is measured based on the closing fair market value of the Company’s common stock on the date of grant. Share-based compensation cost for stock options and employee stock purchase plan rights (“stock purchase rights”) is estimated at the grant date and offering date, respectively, based on the fair-value as calculated by the Black-Scholes Merton (“BSM”) option-pricing model. The BSM option-pricing model incorporates various assumptions including expected volatility, expected life and interest rates. The expected volatility is 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 awards it grants to employees. The Company recognizes share-based compensation cost as expense on a straight-line basis over the requisite service period.

During the three- and six-month periods ended March 31, 2012, in conjunction with certain business combinations, the Company assumed 41,000 stock options with a weighted-average fair value per share of $400.79.

The weighted-average fair value of stock purchase rights per share was $105.25 and $96.83 during the three- and six-month periods ended March 31, 2012, respectively, and was $68.95 and $65.15 during the three- and six-month periods ended March 26, 2011, respectively.

The following table provides a summary of the share-based compensation expense included in the Condensed Consolidated Statements of Operations for the three- and six-month periods ended March 31, 2012 and March 26, 2011 (in millions):

		September 30,		September 30,		September 30,		September 30,
	Three Months Ended				Six Months Ended
	March 31, 2012		March 26, 2011		March 31, 2012		March 26, 2011
Cost of sales	$	63	$	51	$	126	$	103
Research and development		168		104		328		217
Selling, general and administrative		193		132		390		266

Total share-based compensation expense	$	424	$	287	$	844	$	586

The income tax benefit related to share-based compensation expense was $156 million and $301 million for the three- and six-month periods ended March 31, 2012, respectively, and $140 million and $236 million for the three- and six-month periods ended March 26, 2011, respectively. As of March 31, 2012, the total unrecognized compensation cost related to outstanding stock options and RSUs expected to vest was $4.4 billion, which the Company expects to recognize over a weighted-average period of 3.48 years.

Employee Benefit Plans

Rule 10b5-1 Trading Plans

During the three-month period ended March 31, 2012, executive officers Timothy D. Cook, Peter Oppenheimer, D. Bruce Sewell, Philip W. Schiller, and Jeffrey E. Williams, and director Arthur D. Levinson had trading plans adopted in accordance with Rule 10b5-1(c)(1) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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 shares acquired pursuant to the Company’s employee equity plans.

Dividend and Stock Repurchase Program

In March 2012, the Board of Directors of the Company approved a dividend policy pursuant to which it plans to make, subject to subsequent declaration, quarterly dividends of $2.65 per share, beginning in the fourth quarter of 2012. Additionally, in March 2012, the Company’s Board of Directors authorized a program to repurchase up to $10 billion of the Company’s common stock beginning in 2013. The repurchase program is expected to be executed over a three-year period with the primary objective to neutralize the impact of dilution from future employee equity grants and employee stock purchase programs. The repurchase program does not obligate the Company to acquire any specific number of shares.