Employee Stock and Savings Plans

Employee Stock Purchase Plan
The Company has an employee stock purchase plan for all eligible employees. Under the plan, shares of the Company’s common stock may be purchased at six-month intervals at 85% of the lower of the fair market value on the first or the last day of each six-month period. Employees may purchase shares having a value not exceeding 10% of their gross compensation during an offering period. During 1999, 2000, and 2001, employees purchased 2.7 million, 2.5 million, and 5.7 million shares at average prices of $52.59, $72.38, and $36.87 per share. At June 30, 2001, 62.7 million shares were reserved for future issuance.

Savings Plan
The Company has a savings plan, which qualifies under Section 401(k) of the Internal Revenue Code. Participating employees may contribute up to 15% of their pretax salary, but not more than statutory limits. The Company contributes fifty cents for each dollar a participant contributes, with a maximum contribution of 3% of a participant’s earnings. Matching contributions were $49 million, $65 million, and $86 million in 1999, 2000, and 2001.

Stock Option Plans
The Company has stock option plans for directors, officers, and employees, which provide for nonqualified and incentive stock options. Options granted prior to 1995 generally vest over four and one-half years and expire 10 years from the date of grant. Options granted between 1995 and 2000 generally vest over four and one-half years and expire seven years from the date of grant, while certain options vest either over four and one-half years or over seven and one-half years and expire after 10 years. Options granted during 2001vest over four and one-half years and expire 10 years from the date of grant. At June 30, 2001, options for 331 million shares were vested and 550 million shares were available for future grants under the plans.

Stock options outstanding were as follows:

Balance, June 30, 1998		893		$  0.56	–	$ 43.63		$11.94
	Granted	78		45.59	–	83.28		54.62
	Exercised	(175	)	0.56	–	53.63		6.29
	Canceled	(30	)	4.25	–	74.28		21.06
Balance, June 30, 1999		766		0.56	–	83.28		23.87
	Granted	304		65.56	–	119.13		79.87
	Exercised	(198	)	0.56	–	82.94		9.54
	Canceled	(40	)	4.63	–	116.56		36.50
Balance, June 30, 2000		832		0.56	–	119.13		41.23
	Granted	224		41.50	–	80.00		60.84
	Exercised	(123	)	0.59	–	85.81		11.13
	Canceled	(35	)	13.83	–	119.13		63.57
Balance, June 30, 2001		898		0.56	–	119.13		49.54

For various price ranges, weighted average characteristics of outstanding stock options at June 30, 2001 were as follows:

$  0.56	–	$    5.97	73	1.6	$  4.75		67	$  4.71
5.98	–	13.62	75	1.3	11.01		72	11.02
13.63	–	29.80	110	3.0	15.06		92	14.92
29.81	–	43.62	84	3.6	32.20		52	32.08
43.63	–	60.00	191	7.8	55.82		25	53.17
60.01	–	83.28	210	6.1	68.28		11	69.20
83.29	–	119.13	155	5.5	89.91		12	87.39

The Company follows Accounting Principles Board Opinion 25, Accounting for Stock Issued to Employees, to account for stock option and employee stock purchase plans. An alternative method of accounting for stock options is SFAS 123, Accounting for Stock-Based Compensation. Under SFAS 123, employee stock options are valued at grant date using the Black-Scholes valuation model, and this compensation cost is recognized ratably over the vesting period. Had compensation cost for the Company’s stock option and employee stock purchase plans been determined as prescribed by SFAS 123, pro forma income statements for 1999, 2000, and 2001 would have been as follows:

Revenue				$	19,747		$	19,747		$	22,956		$	22,956		$	25,296		$	25,296
Operating expenses:
	Cost of revenue			2,814			3,013			3,002			3,277			3,455			3,775
	Research and
		development		2,970			3,479			3,772			4,814			4,379			6,106
	Sales and marketing			3,238			3,445			4,126			4,468			4,885			5,888
	General and
		administrative		715			841			1,050			1,284			857			1,184
		Total operating
			expenses	9,737			10,778			11,950			13,843			13,576			16,953
Operating income				10,010			8,969			11,006			9,113			11,720			8,343
Losses on equity
	investees and other			(70		)	(70		)	(57		)	(57		)	(159		)	(159		)
Investment
	income/(loss)			1,951			1,951			3,326			3,326			(36		)	(36		)
Income before income
	taxes			11,891			10,850			14,275			12,382			11,525			8,148
Provision for income
	taxes			4,106			3,741			4,854			4,210			3,804			2,689
Income before
	accounting change			7,785			7,109			9,421			8,172			7,721			5,459
Cumulative effect
	of accounting change			–			–			–			–			(375		)	(375		)
Net income				$	7,785		$	7,109		$	9,421		$	8,172		$	7,346		$	5,084
Basic earnings per
	share			$	1.54		$	1.41		$	1.81		$	1.57		$	1.38		$	0.95
Diluted earnings per
	share			$	1.42		$	1.30		$	1.70		$	1.48		$	1.32		$	0.91

The weighted average Black-Scholes value of options granted under the stock option plans during 1999, 2000, and 2001 was $20.90, $36.67, and $29.31. Value was estimated using a weighted average expected life of 5.0 years in 1999, 6.2 years in 2000, and 6.4 years in 2001, no dividends, volatility of .32 in 1999, .33 in 2000, and .39 in 2001, and risk-free interest rates of 4.9%, 6.2%, and 5.3% in 1999, 2000, and 2001.