Last week, we dueled over the prospects for Apple Computer (NASDAQ:AAPL) here at I contended then that Apple is a Rule Breaker, and I see no reason to change that opinion after yesterday's earnings report.

Indeed, Apple's Pod people are back. Fans of the cultish music players bought more than 2 million iPods during the quarter, accounting for $537 million in sales. That led all other Apple products.

Let me say that again, because it's crucial: Apple made more money off of the iPod than it did any other product. The PowerBook portable came in second at $419 million. That appears to be a first for the Mac maker, and the transformation ought to be a bit frightening for investors. I mean, after all, Apple is a computer company, and it isn't doing all that great a job of selling desktop computers. So far, however, they're showing no fear. Apple's shares are trading more than 13% higher as of this writing.

Yet sales of the iMac and Power Mac computer lines were down substantially, in terms of both dollars earned and units shipped. Part of the problem may be that Apple was late bringing its latest desktop -- the cleverly designed iMac G5 -- to market, missing much of the critical back-to-school season.

But I also think concerns over Apple's flagging desktop sales may be overblown. After all, portable computer sales continue to rise. Overall sales of the consumerish iBook and the more upscale PowerBook were down slightly from last quarter but up huge over last year. Unit sales of the iBook, for example, were up 74% over 2003.

Still, Apple has argued incessantly that iPod sales are leading Microsoft (NASDAQ:MSFT) Windows users to Macs, yet there's no proof that's happening. Certainly declining unit shipments don't bode well -- unless all these so-called Windows converts are buying mobile Macs.

For argument's sake, let's say they aren't. Does it matter? Not according to my calculations. Even with increased competition from other digital music players and declining desktop sales, Apple is doing a phenomenal job converting its sales into moolah:

Metric ($ in millions) Q1 2004 Q2 2004 Q3 2004 Q4 2004 est.
Sales $2,006 $3,915 $5,929 $8,279
Net income $63 $109 $170 $276
Depreciation and amortization $33 $69 $110 $139*
Capital expenditures $44 $79 $117 $154*
Structural free cash flow $52 $99 $163 $261*
Free cash flow margin 2.59% 2.53% 2.75% 3.15%*
* Estimated using current and prior financial statements.

Yeah, I know my numbers for the current quarter are pure estimates, and Apple didn't report how favorable currency rates may have affected earnings. Still, Apple ended its 2003 fiscal year with a structural free cash flow margin of just .29%. While nowhere near market leader Dell's (NASDAQ:DELL) current SFCF margin of 6.35%, the Mac maker's improvement in pulling cash through its channels is remarkable.

So I'll say it again: Apple's stock may be ripe and worm-ridden from every traditional valuation method, but its business is now as golden and delicious as it has ever been.

For more Apple-related Foolishness:

David Gardner selected Dell for subscribers of Motley Fool Stock Advisor . Overall, his picks are slapping the market silly. You can get a six-month free trial just by asking. Or if rule breaking is more your style, you can try David's Motley Fool Rule Breakers free for 30 days.

Fool contributor Tim Beyers is too much of a straight arrow to be a Rule Breaker in real life, but he loves companies that defy the odds for his portfolio. Tim owns no shares in any company mentioned, and you can view his Fool profile and stock holdings here.