* We are raising our estimates for iPod units to 4.5 million this

quarter and 15 million for the year. Although iPod competition is

strengthening, we believe demand for the iPod shuffle continues to

outstrip supply.

* On stronger iPod sales our March quarter EPS estimate increases a

penny to $0.22 and our full year estimate rises $0.05 to $1.05 per

share.

* We believe Napster`s results show that on-line music purchases

continue to grow. We do not see the small rise in absolute number of

subscribers (now at 270,000) as taking share from Apple`s iTunes. Apple

just reported passing the 300 million mark in song sales, which was

faster than we had modeled.

* Best Buy reported MP3 players saw triple-digit gains in its just

reported quarter. Notebook computers were also cited as being strong.

Our retail checks in the local area continue to show strong traffic and

demand an Apple stores.

* Apple store managers tell us that iPod interest is translating

into Mac sales. Also, a survey by Envisioneering Group finds that the

average iPod user in the U.S. spends $150 on accessories. That`s about

half the average iPod price (pre-shuffle). Our iPod accessories revenue

estimate for March is $82 million.

* We reiterate our Buy rating with a price objective of $51 per

share. This is supported by a two-stage discounted earnings model that

assumes post-F2006 earnings per share growth of 33% for five years

followed by sustained EPS growth of 5% per year. Alternatively, there

should be an increasing real option value embedded in the stock as Apple

leverages iPod success into new product lines.

* Risks are poor execution, an absence of compelling new products,

lack of PC share gain, and increased iPod competition.