material impact on the Company’s results of operations or financial position. 

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, which replaces APB Opinion No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements—An Amendment of APB Opinion No. 28.

SFAS No. 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principal unless it is not practicable. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005 and is required to be adopted by the Company in the first quarter of fiscal 2007. Although the Company will continue to evaluate the application of SFAS No. 154, management does not currently believe adoption will have a material impact on the Company’s results of operations or financial position. 

Liquidity and Capital Resources 

See the “Explanatory Note” immediately preceding Part I, Item 1 and Note 2, “Restatement of Consolidated Financial Statements,” in Notes to Consolidated Financial Statements of this Form 10-K. 

DSO is based on ending net trade receivables and most recent quarterly net sales for each period.

Days supply of inventory is based on ending inventory and most recent quarterly cost of sales for each period.

DPO is based on ending accounts payable and most recent quarterly cost of sales adjusted for the change in inventory. 

As of September 30, 2006, the Company had $10.11 billion in cash, cash equivalents, and short-term investments, an increase of $1.85 billion over the same balances at the end of 2005. The principal components of this increase were cash generated by operating activities of $2.22 billion, proceeds of $318 million from the issuance of common stock under stock plans, and excess tax benefits from stock-based compensation of $361 million, partially offset by cash used to purchase property, plant, and equipment of $657 million and repurchases of common stock of $355 million in conjunction with net-share settlements on vested restricted stock and restricted stock units. Cash generated from operating activities includes the impact of the $1.25 billion prepayment for NAND flash memory components. The Company’s short-term investment portfolio is primarily invested in high credit quality, liquid investments. As of September 30, 2006, approximately $4.1 billion of the Company’s cash, cash equivalents, and short-term investments were held by foreign subsidiaries and are generally based in U.S. dollar-denominated holdings. Amounts held by foreign subsidiaries are generally subject to U.S. income taxation on repatriation to the U.S. 

The Company believes its existing balances of cash, cash equivalents, and short-term investments will be sufficient to satisfy its working capital needs, capital expenditures, stock repurchase activity, outstanding commitments, and other liquidity requirements associated with its existing operations over the next 12 months. 

Capital Expenditures 

The Company’s total capital expenditures were $657 million during 2006, consisting of $200 million for retail store