APPLE COMPUTER INC, 10-K405, 1998-12-23

APPLE COMPUTER INC
10-K405, 1998-12-23
ELECTRONIC COMPUTERS

Previous: APPLE COMPUTER INC, 8-K, 1998-12-23

Next: UNITED STATES AIRCRAFT CORP, 8-K, 1998-12-23

<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549
------------------------

FORM 10-K

(MARK ONE)

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED SEPTEMBER 25, 1998
OR

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ______________ TO ______________

COMMISSION FILE NUMBER 0-10030
------------------------

APPLE COMPUTER, INC.
(Exact name of Registrant as specified in its charter)

<TABLE>
<S> <C>
CALIFORNIA 942404110
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)

1 INFINITE LOOP 95014
CUPERTINO, CALIFORNIA (Zip Code)
(Address of principal executive offices)
</TABLE>

Registrant's telephone number, including area code: (408) 996-1010

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
Common Share Purchase Rights
(Titles of classes)
------------------------

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference to Part III of this Form 10-K or any
amendment to this Form 10-K. /X/

The aggregate market value of voting stock held by nonaffiliates of the
Registrant was approximately $4,003,770,634 as of December 11, 1998, based upon
the closing price on the Nasdaq National Market reported for such date. Shares
of Common Stock held by each executive officer and director and by each person
who beneficially owns more than 5% of the outstanding Common Stock have been
excluded in that such persons may under certain circumstances be deemed to be
affiliates. This determination of executive officer or affiliate status is not
necessarily a conclusive determination for other purposes.

135,319,779 shares of Common Stock Issued and Outstanding as of December 11,
1998
<PAGE>
PART I

THE BUSINESS SECTION AND OTHER PARTS OF THIS FORM 10-K CONTAIN
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH DIFFERENCES INCLUDE,
BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE SUBSECTION ENTITLED "FACTORS THAT
MAY AFFECT OPERATING RESULTS AND FINANCIAL CONDITION" UNDER PART II, ITEM 7 OF
THIS ANNUAL REPORT ON FORM 10-K.

ITEM 1. BUSINESS

GENERAL

Apple Computer, Inc. ("Apple" or the "Company") was incorporated under the
laws of the State of California on January 3, 1977. The Company's principal
executive offices are located at 1 Infinite Loop, Cupertino, California, 95014
and its telephone number is (408) 996-1010.

The Company designs, manufactures and markets microprocessor-based personal
computers and related personal computing and communicating solutions for sale
primarily to education, creative, consumer, business and government customers.
Substantially all of the Company's net sales to date have been derived from the
sale of personal computers from its Apple Macintosh-Registered Trademark- line
of computers and related software and peripherals. The Company operates in one
principal industry segment across geographically diverse marketplaces.

During 1998, the Company continued and essentially completed a restructuring
plan commenced in 1996 aimed at reducing its cost structure, improving its
competitiveness, and restoring sustainable profitability. The Company's
restructuring actions included the termination of employees, closure of
facilities, and cancellation of contracts. Further information regarding these
restructuring actions may be found in Part II, Item 7 of this Annual Report on
Form 10-K (the "Form 10-K") under the heading "Factors That May Affect Future
Results and Financial Condition," and in Part II, Item 8 on this Form 10-K at
Note 4 to the Notes to Consolidated Financial Statements, which information is
hereby incorporated by reference.

PRINCIPAL HARDWARE PRODUCTS

Apple Macintosh personal computers were first introduced in 1984, and are
characterized by their intuitive ease of use, innovative industrial designs and
applications base, and built-in networking, graphics and multimedia
capabilities. The Company offers a wide range of personal computing products,
including personal computers, related peripherals, software, and networking and
connectivity products. All of the Company's Macintosh products employ PowerPC
RISC-based microprocessors.

POWER MACINTOSH

The Power Macintosh G3 line of high-performance personal computers is
targeted at business and professional users and is designed to meet the speed,
expansion and networking needs of the most demanding Macintosh user. With the
addition of Apple networking software, Power Macintosh G3 systems can be used as
workgroup servers.

IMAC

Introduced in August 1998, iMac is targeted at the education and consumer
markets. With an innovative industrial design, easy internet access and a
powerful PowerPC G3 microprocessor, iMac is suitable for a wide range of
education and consumer applications.

1
<PAGE>
POWERBOOK G3

The PowerBook G3 family of portable computer products is specifically
designed for mobile computing needs. All PowerBook personal computers include
software designed to enhance mobile computing. The Company currently plans to
introduce a portable Macintosh product in 1999 aimed at the education and
consumer market.

PERIPHERAL PRODUCTS

The Company sells certain associated computer peripherals including
LaserWriter-Registered Trademark- printers and a range of high quality,
precision color monitors. During fiscal 1998, the Company significantly reduced
the number of its imaging and display products. The Company also discontinued
its MessagePad and eMate product lines. The discontinuance of these peripheral
products and portable computing products was part of the overall effort by the
Company to simplify and focus its efforts on those products perceived as
critical to the Company's future success.

PRINCIPAL SOFTWARE PRODUCTS

OPERATING SYSTEM SOFTWARE AND APPLICATION SOFTWARE

The Company's operating system software, Mac OS, provides Macintosh
computers with an easy, consistent user interface. The latest version, Mac OS
8.5, began shipping in October 1998 and delivers Sherlock, Apple's new search
feature; fast network copy performance; and PowerPC native AppleScript for
greater speed and system automation. The Company plans to continue to introduce
major upgrades to the current Mac OS and later to introduce a new operating
system, Mac OS X, which is expected to offer advanced functionality based on
software technologies of Apple and certain technologies of NeXT Software, Inc.
("NeXT") which the Company acquired in 1997.

The Company also develops and distributes extensions to the Macintosh system
software, such as utilities, languages and developer tools. The Company
continues to develop QuickTime, its market-leading cross platform digital media
technology. With the launch of QuickTime 3 in 1998, the Company received
revenues for QuickTime for the first time. WebObjects, a leading software
product in the emerging application server market, is also part of Apple's
software portfolio. Targeted at Windows NT and UNIX platforms, future versions
will also run on Apple hardware. FileMaker Corporation (formerly Claris
Corporation), a wholly-owned subsidiary of the Company, develops, publishes, and
distributes database management application software for Mac OS and
Windows-based systems. Further, the Company has developed and currently markets
Appleworks 5, formerly Clarisworks, an integrated suite of software applications
that combines word processing, database, spreadsheet, drawing and communications
capabilities in a single software package for both Mac OS and Windows.

INTERNET INTEGRATION

Apple's Internet strategy is focused on delivering seamless integration with
and access to the Internet throughout the Company's product lines. An easy
Internet Setup Assistant is an integral part of Mac OS 8.5, the latest version
of the Macintosh operating system.

THIRD PARTY SOFTWARE DEVELOPERS

Over the past year, particularly since the announcement of iMac, software
developers have demonstrated renewed interest in the Macintosh platform.
Microsoft delivered a new version of their productivity software--Office 98:
Macintosh Edition--in early 1998, and since iMac was announced in May 1998 over
1,000 new or revised software titles have been announced for the Macintosh
platform.

The Company previously entered into agreements to license its Mac OS to
other personal computer vendors (the "Clone Vendors") as part of an effort to
increase the installed base for the Macintosh

2
<PAGE>
platform. In fiscal 1997, the Company determined that the benefits of licensing
the Mac OS to the Clone Vendors under these agreements were more than offset by
the impact and costs of the licensing program. As a result, the Company acquired
certain assets, including the license to distribute the Mac OS, of Power
Computing Corporation ("PCC"), a Clone Vendor, and does not plan to extend or
reinstate its other Mac OS licensing agreements.

Further information regarding the Company's products may be found in Part
II, Item 7 of this Form 10-K under the subheading "Competition" included under
the heading "Factors That May Affect Future Results and Financial Condition,"
which information is hereby incorporated by reference.

MARKETS AND DISTRIBUTION

The Company's customers are primarily in the education, creative, consumer,
business and government markets. Certain customers are attracted to Macintosh
computers for a variety of reasons, including the reduced amount of training
resulting from the Macintosh computer's intuitive ease of use, industrial design
features of the Company's hardware products, the ability of Macintosh computers
to network and communicate with other computer systems and environments, and the
availability of a wide variety of certain user-friendly application software.

Apple personal computers were first introduced to education customers in the
late 1970s. In the U.S., the Company is one of the major suppliers of personal
computers for both elementary and secondary school customers, as well as for
college and university customers. The Company is also a supplier to institutions
of higher education outside of the U.S.

The U.S. represents the Company's largest geographic marketplace. The U.S.
is part of the Apple Americas organization which focuses on the Company's sales,
marketing, and support efforts in North and South America. Products sold in the
western hemisphere are primarily manufactured in the Company's facilities in
California and Singapore and under contract by external manufacturing vendors.

Approximately 45% of the Company's net sales in fiscal 1998 came from its
international operations. The Company's international sales and services
divisions consist of: Apple Americas; Apple Europe, Middle East and Africa
("Apple EMEA"); Apple Japan; and Apple Asia Pacific (which does not include
Japan). The marketing divisions focus on sales, marketing and distribution in
their regions. Products sold by Apple EMEA are manufactured primarily in the
Company's facility in Cork, Ireland, and by external manufacturing vendors.
Products sold by Apple Japan and Apple Asia Pacific are manufactured primarily
in the Company's facility in Singapore and by external manufacturing vendors.

The Company distributes its products through wholesalers, resellers,
national and regional retailers, cataloguers, and directly to education
institutions for resale (collectively referred to as "resellers"). In November
1997, the Company began selling many of its products directly to end users in
the U.S. through the Company's on-line store. Throughout fiscal 1998, the
Company revised its distribution channel model and related policies. As a
result, the Company has significantly reduced the number of its distributors,
authorized resellers, and national retail channel partners, particularly in the
United States. The Company also revised its distribution channel policies by
decreasing the price protection and stock return privileges of its remaining
distributors and resellers.

RAW MATERIALS

3
<PAGE>
whether there is a need for additional suppliers. In situations where a
component or product utilizes new technologies, there may be initial capacity
constraints until such time as the suppliers' yields have matured. Components
are normally acquired through purchase orders, as is common in the industry,
typically covering the Company's requirements for periods from 60 to 120 days.
However, the Company continues to evaluate the need for a supply contract in
each situation.

If the supply of a key single-sourced component to the Company were to be
delayed or curtailed or in the event a key manufacturing vendor delays shipment
of completed products to the Company, the Company's ability to ship products in
desired quantities and in a timely manner could be adversely affected. The
Company's business and financial performance could also be adversely affected,
depending on the time required to obtain sufficient quantities from the original
source, or to identify and obtain sufficient quantities from an alternate
source. The Company believes that the component suppliers and manufacturing
vendors whose loss to the Company could have a material adverse effect upon the
Company's business and financial position include, at this time: IBM
Corporation, Motorola, Inc, Canon, Inc., Matsushita, Samsung Electronics, Alps
Electronics, Logitech, OPTi, Inc., ATI Technologies, Inc., Quanta Computer,
Inc., NatSteel Electronics PTE Ltd., Singapore Technologies PTE Ltd., Jabil
Circuits Inc., and LG Electronics. The Company attempts to mitigate these
potential risks by working closely with these and other key suppliers on product
introduction plans, strategic inventories, coordinated product introductions,
and internal and external manufacturing schedules and levels. The Company
believes that many of its single-source suppliers, including most of the
foregoing companies, are reliable multinational corporations. The Company also
believes most of these suppliers manufacture the relevant components in multiple
plants. The Company further believes that its long-standing business
relationships with these and other key suppliers are strong and mutually
beneficial in nature.

The Company has from time to time experienced significant price increases
and limited availability of certain components that are available from multiple
sources. Any similar occurrences in the future could have an adverse affect on
the Company's operating results.

Further discussion relating to availability and supply of components and
product may be found in Part II, Item 7 of this Form 10-K under the subheading
"Inventory and Supply" included under the heading "Factors That May Affect
Future Results and Financial Condition," and in Part II, Item 8 of this Form
10-K in the Notes to Consolidated Financial Statements at Note 10,
"Concentrations of Risk," which information is hereby incorporated by reference.

PATENTS, TRADEMARKS, COPYRIGHTS AND LICENSES

The Company currently holds rights to patents and copyrights relating to
certain aspects of its computer and peripheral systems. In addition, the Company
has registered, and/or has applied to register, trademarks in the U.S. and a
number of foreign countries for "Apple", the Apple silhouette logo, the Apple
color logo, "Macintosh", and numerous other product trademarks. In 1986, the
Company acquired ownership of the trademark "Macintosh" for use in connection
with computer products. Although the Company believes that the ownership of such
patents, copyrights, and trademarks is an important factor in its business and
that its success does depend in part on the ownership thereof, the Company
relies primarily on the innovative skills, technical competence, and marketing
abilities of its personnel.

Because of technological changes in the computer industry, current extensive
patent coverage, and the rapid rate of issuance of new patents, it is possible
that certain components of the Company's products may unknowingly infringe
existing patents of others; although, the Company is not aware of any such
instances currently. The Company has from time to time entered into
cross-licensing agreements with other companies.

4
<PAGE>
SEASONAL BUSINESS

Although the Company does not consider its business to be highly seasonal,
it has historically experienced increased sales in its first and fourth fiscal
quarters, compared to other quarters in its fiscal year, due to seasonal demand
related to the beginning of the school year and the holiday season. However,
past performance should not be considered a reliable indicator of the Company's
future revenue or financial performance.

WARRANTY

The Company offers a parts and labor limited warranty on its hardware
products. The warranty period is typically one year from the date of purchase by
the end user. The Company also offers a 90-day warranty for Apple service parts
used to repair Apple hardware products. In addition, consumers may purchase
extended service coverage on all Apple hardware products.

SIGNIFICANT CUSTOMERS

No customer accounted for more than 10% of the Company's net sales in 1998,
1997 or 1996.

BACKLOG

In the Company's experience, the actual amount of product backlog at any
particular time is not a meaningful indication of its future business prospects.
In particular, backlog often increases in anticipation of or immediately
following introduction of new products because of overordering by dealers
anticipating shortages. Backlog often is reduced once dealers and customers
believe they can obtain sufficient supply. Because of the foregoing, backlog
should not be considered a reliable indicator of the Company's ability to
achieve any particular level of revenue or financial performance.

COMPETITION

The market for the design, manufacture and sale of personal computers and
related software and peripheral products is highly competitive. It continues to
be characterized by rapid technological advances in both hardware and software
development that have substantially increased the capabilities and applications
of these products, and has resulted in the frequent introduction of new
products. The principal competitive factors in this market are relative
price/performance, product quality and reliability, availability of software,
product features, marketing and distribution capability, service and support,
availability of hardware peripherals, and corporate reputation.

The Company is currently the primary maker of hardware that uses the Mac OS.
The Mac OS has a minority market share in the personal computer market, which is
dominated by makers of computers that run Microsoft operating systems. The
Company believes that the Mac OS, with its perceived advantages over Windows,
and the general reluctance of the Macintosh installed base to incur the costs of
switching platforms, have been driving forces behind sales of the Company's
personal computer hardware for the past several years. Recent innovations in the
Windows platform, including those included in Windows 98 and Windows NT, or
those expected to be included in new versions of Windows to be introduced in the
future, have added features to the Windows platform that make the differences
between the Mac OS and Microsoft's Windows operating systems less significant.
The Company is currently taking and will continue to take steps to respond to
the competitive pressures being placed on its personal computer sales as a
result of the recent innovations in the Windows platform. The Company's future
consolidated operating results and financial condition are substantially
dependent on its ability to continue to develop improvements to the Macintosh
platform in order to maintain perceived functional advantages over competing
platforms.

5
<PAGE>
Further discussion relating to the competitive conditions of the personal
computing industry and the Company's competitive position in the market place
may be found in Part II, Item 7 of this Form 10-K under the subheading
"Competition," included under the heading "Factors That May Affect Future
Results and Financial Condition," which information is hereby incorporated by
reference.

RESEARCH AND DEVELOPMENT

Because the personal computer industry is characterized by rapid
technological advances, the Company's ability to compete successfully is heavily
dependent upon its ability to ensure a continuing and timely flow of competitive
products to the marketplace. The Company continues to develop new products and
technologies and to enhance existing products in the areas of hardware and
peripherals, system software, networking and communications, and the Internet.
The Company's research and development expenditures, before charges for
in-process research and development, totaled $303 million, $485 million, and
$604 million in 1998, 1997, and 1996, respectively. The declines in total
expenditures for research and development over the last two years were
principally due to continued restructuring actions intended to focus the
Company's research and development efforts on those projects perceived as
critical to the Company's future success.

ENVIRONMENTAL LAWS

Compliance with U.S. federal, state, and local laws and foreign laws enacted
for the protection of the environment has to date had no material effect upon
the Company's capital expenditures, earnings, or competitive position. Although
the Company does not anticipate any material adverse effects in the future based
on the nature of its operations and the thrust of such laws, no assurance can be
given that such laws, or any future laws enacted for the protection of the
environment, will not have a material adverse effect on the Company.

EMPLOYEES

As of September 25, 1998, Apple and its subsidiaries worldwide had 6,658
regular employees, and an additional 3,005 temporary or part-time contractors
and employees.

FOREIGN AND DOMESTIC OPERATIONS AND GEOGRAPHIC DATA

Information regarding financial data by geographic area and the risks
associated with international operations is set forth in Part II, Item 8 of this
Form 10-K at Note 11, "Industry Segment and Geographic Information," and in Part
II, Item 7 of this Form 10-K under the subheading "Global Market Risks,"
included under the heading "Factors That May Affect Future Results and Financial
Condition," which information is hereby incorporated by reference.

Margins on sales of Apple products in foreign countries, and on domestic
sales of products that include components obtained from foreign suppliers, can
be adversely affected by foreign currency exchange rate fluctuations and by
international trade regulations, including tariffs and anti-dumping penalties.

ITEM 2. PROPERTIES

The Company's headquarters are located in Cupertino, California. The Company
has manufacturing facilities in Sacramento, California, Cork, Ireland, and
Singapore. As of September 25, 1998, the Company leased approximately 2.9
million square feet of space, primarily in the U.S., and to a lesser extent, in
Europe and the Asia/Pacific region. Leases are generally for terms of five to
ten years, and usually provide renewal options for terms of up to five
additional years.

6
<PAGE>
The Company owns its manufacturing facilities in Cork, Ireland, and
Singapore, which total approximately 785,000 square feet. The Company also owns
a 725,000 square-foot facility in Sacramento, California, which is used as a
manufacturing, warehousing and distribution center. In addition, the Company
owns 930,000 square feet of facilities located in Cupertino, California, used
for research and development and corporate functions. Outside the U.S., the
Company owns additional facilities totaling approximately 347,000 square feet.

The Company believes that its existing facilities and equipment are well
maintained and in good operating condition. The Company has invested in internal
capacity and strategic relationships with outside manufacturing vendors, and
therefore believes it has adequate manufacturing capacity for the foreseeable
future. The Company continues to make investments in capital equipment as needed
to meet anticipated demand for its products.

Information regarding critical business operations that are located near
major earthquake faults is set forth in Part II, Item 7 of this Form 10-K under
the subheading "Other Factors" included under the heading "Factors That May
Affect Future Results and Financial Condition," which information is hereby
incorporated by reference.

ITEM 3. LEGAL PROCEEDINGS

Information regarding legal proceedings is set forth in Part II, Item 8 of
this Form 10-K at Note 9 under the subheading "Litigation," which information is
hereby incorporated by reference.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth
quarter of the Company's fiscal year ended September 25, 1998.

7
<PAGE>
PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS

The Company's common stock is traded on the over-the-counter market and is
quoted on the Nasdaq National Market under the symbol AAPL, on the Tokyo Stock
Exchange under the symbol APPLE, and on the Frankfurt Stock Exchange under the
symbol APCD. Options are traded on the Chicago Board Options Exchange and the
American Stock Exchange. As of December 11, 1998, there were 28,021 shareholders
of record.

The Company began declaring quarterly cash dividends on its common stock in
April 1987 and subsequently suspended paying dividends in the second quarter of
1996. The dividend policy is determined by the Board of Directors and is
dependent on the Company's earnings, capital requirements, financial condition
and other factors. The Company anticipates that, for the foreseeable future, it
will retain any earnings for use in the operation of its business.

The price range per common share represents the highest and lowest prices
for the Company's common stock on the Nasdaq National Market during each
quarter.

<TABLE>
<CAPTION>
FOURTH QUARTER THIRD QUARTER SECOND QUARTER FIRST QUARTER
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Fiscal 1998 price range per common
share.............................. $ 43.75 - $28.06 $ 31.63 - $24.69 $ 28.00 - $12.75 $ 24.75 - $12.94
Fiscal 1997 price range per common
share.............................. $ 29.75 - $12.75 $ 19.88 - $14.63 $ 23.25 - $15.12 $ 27.75 - $21.38
</TABLE>

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial information has been derived from the
audited consolidated financial statements. The information set forth below is
not necessarily indicative of results of future operations, and should be read
in conjunction with Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
and related notes thereto included in Item 8 of this Form 10-K in order to fully
understand factors that may affect the comparability of the information
presented below.

<TABLE>
<CAPTION>
FIVE FISCAL YEARS ENDED SEPTEMBER 25, 1998
- -----------------------------------------------------------
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS) 1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales.................................................. $ 5,941 $ 7,081 $ 9,833 $ 11,062 $ 9,189
Net income (loss).......................................... $ 309 $ (1,045) $ (816) $ 424 $ 310

Earnings (loss) per common share:
Basic.................................................... $ 2.34 $ (8.29) $ (6.59) $ 3.50 $ 2.63
Diluted.................................................. $ 2.10 $ (8.29) $ (6.59) $ 3.45 $ 2.61
Cash dividends declared per common share................... $ -- $ -- $ 0.12 $ 0.48 $ 0.48

Shares used in computing earnings (loss) per share (in
thousands):
Basic.................................................... 131,974 126,062 123,734 121,192 117,808
Diluted.................................................. 167,917 126,062 123,734 123,047 118,735
Cash, cash equivalents, and short-term investments......... $ 2,300 $ 1,459 $ 1,745 $ 952 $ 1,258
Total assets............................................... $ 4,289 $ 4,233 $ 5,364 $ 6,231 $ 5,303
Long-term debt............................................. $ 954 $ 951 $ 949 $ 303 $ 305
Shareholders' equity....................................... $ 1,642 $ 1,200 $ 2,058 $ 2,901 $ 2,383
</TABLE>

In fiscal 1997, the Company acquired NeXT, resulting in the allocation to
in-process research and development of a charge of $375 million for acquired
in-process technologies with no alternative future

8
<PAGE>
use. Net charges related to the Company's restructuring plan of $217 million and
$179 million were recognized in 1997 and 1996, respectively.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

This section and other parts of this Form 10-K contain forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such differences include, but are not
limited to, those discussed in the subsection entitled "Factors That May Affect
Operating Results and Financial Condition" below. The following discussion
should be read in conjunction with the consolidated financial statements and
notes thereto included in Item 8 of this Form 10-K. All information is based on
the Company's fiscal calendar.

RESULTS OF OPERATIONS

The following table sets forth annual results of operations for fiscal years
1998, 1997, and 1996 (in millions except unit shipment and per share amounts):

<TABLE>
<CAPTION>
1998 CHANGE 1997 CHANGE 1996
--------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Net sales.......................................... $ 5,941 (16)% $ 7,081 (28)% $ 9,833
Macintosh CPU unit sales (in thousands).......... 2,763 (4)% 2,874 (27)% 3,960
Gross margin....................................... $ 1,479 8% $ 1,368 41% $ 968
Percentage of net sales.......................... 25% 19% 10%
Research and development........................... $ 303 (38)% $ 485 (20)% $ 604
Percentage of net sales.......................... 5% 7% 6%
Selling, general and administrative................ $ 908 (29)% $ 1,286 (18)% $ 1,568
Percentage of net sales.......................... 15% 18% 16%

Special charges:
In-process research and development.............. $ 7 (98)% $ 375 NM $ --
Percentage of net sales........................ -- % 5% -- %
Restructuring costs.............................. $ -- (100)% $ 217 21% $ 179
Percentage of net sales........................ -- % 3% 2%
Termination of license agreement................. $ -- (100)% $ 75 NM $ --
Percentage of net sales........................ -- % 1% -- %
Interest and other income (expense), net........... $ 68 172% $ 25 (72)% $ 88
Provision (benefit) for income taxes............... $ 20 NM $ -- 100% $ (479)
Net income (loss).................................. $ 309 NM $ (1,045) (28)% $ (816)

Earnings (loss) per common share:
Basic............................................ $ 2.34 NM $ (8.29) (26)% $ (6.59)
Diluted.......................................... $ 2.10 NM $ (8.29) (26)% $ (6.59)
</TABLE>

- ------------------------

NM: Not Meaningful

9
<PAGE>
The following table sets forth quarterly results of operations for fiscal
1998 and 1997 (in millions except unit shipment and per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 25, 1998 YEAR ENDED SEPTEMBER 26, 1997
-------------------------------------------------- -------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.......................... $ 1,556 $ 1,402 $ 1,405 $ 1,578 $ 1,614 $ 1,737 $ 1,601
Macintosh CPU unit sales (in
thousands)..................... 834 644 650 635 652 697 602
Gross margin....................... $ 417 $ 360 $ 349 $ 353 $ 320 $ 348 $ 303
Gross margin percentage.......... 27% 26% 25% 22% 20% 20% 19%
Operating expenses................. $ 308 $ 292 $ 298 $ 313 $ 353 $ 408 $ 489
Special charges.................... -- 7 -- -- 137 -- 530
Operating margin................... 109 61 51 40 (170) (60) (716)
Operating margin percentage...... 7% 4% 4% 3% (11)% (3)% (45)%
Other income and (expense), net.... $ 5 $ 48 $ 8 $ 7 $ 9 $ 4 $ 8
Income tax expense................. 8 8 4 -- -- -- --
Net income (loss).................. $ 106 $ 101 $ 55 $ 47 $ (161) $ (56) $ (708)

Earnings (loss) per common share:
Basic............................ $ 0.79 $ 0.76 $ 0.42 $ 0.37 $ (1.26) $ (0.44) $ (5.64)
Diluted.......................... $ 0.68 $ 0.65 $ 0.38 $ 0.33 $ (1.26) $ (0.44) $ (5.64)

FIRST
QUARTER
-----------
<S> <C>
Net sales.......................... $ 2,129
Macintosh CPU unit sales (in
thousands)..................... 923
Gross margin....................... $ 397
Gross margin percentage.......... 19%
Operating expenses................. $ 521
Special charges.................... --
Operating margin................... (124)
Operating margin percentage...... (6)%
Other income and (expense), net.... $ 4
Income tax expense................. --
Net income (loss).................. $ (120)
Earnings (loss) per common share:
Basic............................ $ (0.96)
Diluted.......................... $ (0.96)
</TABLE>

OVERVIEW

During 1998, the Company returned to profitability, reporting net income in
all four quarters of the fiscal year. Profitability was achieved for several
major reasons. First, the Company continued and essentially completed a
restructuring plan which it began in 1996. The restructuring plan has led to
reductions in headcount and related expenses in all areas of the Company's
business and the write-down and disposal of certain operating assets.
Consequently, operating expenses, not including cost of sales and special
charges, declined $560 million or 32% to $1.21 billion in 1998 compared to 1997.
Second, gross margin improved in 1998, rising to 25% of net sales in 1998
compared to 19% in 1997. In addition to benefits derived from the restructuring
plan and an overall decline in component costs, margins were favorably affected
by actions which improved overall inventory management and actions taken to
simplify and focus the Company's product line. Third, the Company made changes
to its distribution channel policies which further contributed to the decline in
selling, general and administrative expenses and the increased gross margin.

Despite the return to profitability in 1998, the Company reported sequential
declines in quarterly net sales in each of the first three quarters of the
fiscal year and reported year-over-year declines in net sales during every
quarter of 1998. Despite positive signs of growth in the fourth quarter,
including a sequential rise in net sales and unit sales over the third quarter
and a year-over-over increase in unit sales over the fourth quarter of 1997,
total net sales declined 16% in fiscal 1998 compared to 1997.

The Company's future operating results and financial condition are dependent
upon the Company's ability to successfully develop, manufacture, and market
technologically innovative products in order to meet the dynamic conditions
within the highly competitive market for personal computers. Potential risks and
uncertainties that could affect the Company's future operating results and
financial condition include, among other things, continued competitive pressures
in the marketplace and the effect of any reaction by the Company to such
competitive pressures, including pricing actions by the Company; the
availability of

10
<PAGE>
key components on terms acceptable to the Company; the Company's ability to
supply products in certain categories; the Company's ability to supply products
free of latent defects or other faults; the Company's ability to make timely
delivery to the marketplace of technological innovations, including its ability
to continue to make timely delivery of planned enhancements to the current Mac
OS and to make timely delivery of a new and substantially backward-compatible
operating system; the Company's ability to successfully integrate technologies
obtained from NeXT with those at Apple; the Company's ability to maintain the
benefits derived from its restructuring actions, including maintaining the
reduced level of expenditures; the Company's ability to attract, motivate and
retain employees; and the availability of third-party software for particular
applications. Potential risks and uncertainties that could affect the Company's
future operating results and financial condition are discussed throughout this
Item 7, including the discussion under the heading "Factors That May Affect
Results and Financial Condition."

NET SALES

Net sales decreased $1.1 billion, or 16%, to $5,941 million in 1998,
compared to a 28% decline in 1997. The decline during 1998 in net sales is
attributable to several factors. The Company experienced a $454 million decrease
in net sales of peripheral products during 1998 compared to 1997 principally due
to the discontinuance by the Company of certain imaging and display products.
The average revenue per Macintosh system, a function of total net sales
generated by hardware shipments and total Macintosh CPU unit sales, fell 11% to
$2,095 during 1998 as compared to 1997, reflecting the effect of aggressive
pricing of the Company's Power Macintosh G3 systems introduced in the first
quarter of fiscal 1998, the decline in net sales from the phase out of certain
peripheral products, the overall industry trend towards lower-priced products,
and the Company's reentry during the fourth quarter of 1998 into the
lower-priced consumer market. Lastly, overall Macintosh CPU units sales for 1998
declined approximately 4% from 1997. As discussed below, international net sales
were particularly affected by these factors and by the economic conditions in
Asia. The 28% decline in net sales in 1997 as compared to 1996 was due to
declines in Macintosh CPU and peripheral unit sales of 27% and 33%,
respectively, primarily as a result of a decline in worldwide demand for most of
the Company's product families.

Net sales increased sequentially during the fourth quarter of 1998 compared
with the third quarter of 1998 by $154 million or 11%. Macintosh unit sales also
increased sequentially during the fourth quarter, rising 190,000 units or 30% to
a total of 834,000 units. The sequential increases in both net sales and unit
sales experienced during the fourth quarter of 1998 are primarily attributable
to introduction by the Company of the iMac, a moderately priced Macintosh system
designed for the education and consumer markets. Sales of iMac accounted for 33%
or 278,000 of the total Macintosh units shipped in the fourth quarter. While the
Company did experience year-over-year growth in Macintosh unit shipments in the
fourth quarter of 1998 as compared to the same period in 1997 of 182,000 units
or 28%, net sales for the same period declined $58 million or 4%, reflecting the
overall decline in the average revenue per Macintosh system discussed above.
During the fourth quarter of 1998, the Company's product mix continued to shift
towards products incorporating the Power Macintosh G3 microprocessor. Sales of
G3 powered Macintosh systems accounted for approximately 98% of Macintosh units
shipped during the fourth quarter of 1998 as compared to 84% during the prior
quarter. Net sales of imaging and display products decreased by $10 million to
$117 million in the fourth quarter of 1998 compared with the prior quarter
reflecting the continuing phase-out of most imaging and many display products.

International sales represented 45% of net sales in 1998 compared with 50%
of net sales in 1997 and 52% of net sales in 1996. International net sales
declined $920 million or 26% in 1998 compared to 1997, while over the same time
frame, domestic net sales declined by 6% or $220 million. The decline in
international net sales is primarily due to decreased revenue in the European
and Japanese markets as a result of significant decreases in Macintosh unit
sales and the average revenue per Macintosh system. Overall sales in the
European and Japanese markets were negatively affected during the fiscal year by
the lack of available consumer oriented products at various times during 1998.
Sales in Asia, including Japan,

11
<PAGE>
were also negatively affected by the region's continuing economic problems,
declining 34% or $536 million during 1998 compared to 1997.

BACKLOG

GROSS MARGIN

Gross margin increased as a percentage of net sales during 1998 to 25%
compared to 19% in 1997. This increase is primarily the result of a shift in
revenue mix towards the Company's higher margin Power Macintosh G3 systems and
newer PowerBook G3 systems, the low volume of lower margin consumer products
shipped during the first three quarters of 1998, and the declining cost of
various components of the Company's products, particularly those sourced from
Asia.

Improvements in the Company's inventory management also contributed to the
increase in gross margins. During 1998, the Company simplified its product line,
moving from approximately 15 separate individual products to three main product
families. Further, the Company attempted to use as many industry standard parts
in its newer products as possible, expanded the use of supplier hubs at
manufacturing sites, and outsourced the manufacture of printed circuit boards
and some systems assembly. These changes have allowed the Company to more
accurately forecast demand, reduce inventory carrying levels and related costs,
lessen the financial exposure resulting from inventory obsolescence and excess
inventory levels, and reduce the component cost of obtaining certain
standardized parts.

The Company also made changes to its distribution model which has
contributed to the increase in gross margins. The Company reduced the number of
locations at which it stages finished goods, generally holding inventory on a
regional basis rather than in each country. Also, the Company reduced the number
of its distributors, authorized resellers, and national retail channel partners,
particularly in the United States. These changes have allowed the Company to
reduce inventory and related financial exposures, and has reduced the inventory
and related financial exposure associated with inventory held in the Company's
distribution channels. The Company has also revised its distribution channel
policies by decreasing the price protection and stock return privileges of its
distributors and resellers.

With its reentry into the consumer market, the Company anticipates that
lower priced consumer products will comprise a larger portion of net sales in
fiscal 1999. This may negatively impact gross margins. The foregoing statements
are forward looking. The Company's actual results could differ because of
several factors, including those set forth in the following paragraph and below
in the subsection entitled "Factors That May Affect Future Results and Financial
Condition."

There can be no assurance that targeted consolidated gross margin levels
will be achieved or that current margins on existing individual products will be
maintained. In general, gross margins and margins on individual products will
remain under significant downward pressure due to a variety of factors,
including continued industry wide global pricing pressures, increased
competition, compressed product life cycles, potential increases in the cost of
raw material and outside manufacturing services, and potential changes to the
Company's product mix, including higher unit sales of consumer products with
lower average selling prices and lower gross margins. In response to these
downward pressures, the Company expects that it will continue to take pricing
actions with respect to its products. Gross margins could also be

12
<PAGE>
affected by the Company's ability to effectively manage quality problems and
warranty costs and to stimulate demand for certain of its products. The
Company's operating strategy and pricing take into account anticipated changes
in foreign currency exchange rates over time; however, the Company's results of
operations can be significantly affected in the short term by fluctuations in
exchange rates.

Gross margin increased from 10% to 19% of net sales during 1997 compared to
1996, primarily because margins were unusually low in 1996 as a result of
inventory write-downs, cancellation of component orders, and higher than usual
costs associated with certain product quality problems. Further, margins in 1996
were adversely affected by aggressive pricing actions in Japan in response to
extreme competitive actions by other companies, as well as price reductions in
the United States and Europe across all product lines in order to stimulate
demand.

RESEARCH AND DEVELOPMENT

Expenditures on research and development declined $182 million or 38% in
1998 compared to 1997 and declined to 5% of net sales in 1998 compared to 7% in
1997. These declines are principally due to continued restructuring actions over
the last two years intended to focus the Company's research and development
efforts on those projects perceived as critical to the Company's future success.
These restructuring actions have led to significant reductions in research and
development related headcount and the cancellation of many research and
development projects. The $119 million decrease in research and development
expenditures in 1997 compared to 1996 was also primarily the result of
restructuring related actions.

The Company recognizes that focused investments in research and development
are critical to its future growth and competitive position in the marketplace
and are directly related to timely development of new and enhanced products. The
Company anticipates that research and development expenditures will increase
slightly in terms of absolute dollars but decrease as a percentage of net sales
during fiscal 1999. The foregoing statements are forward looking. The Company's
actual results could differ because of several factors, including those set
forth below in the subsection entitled "Factors That May Affect Future Results
and Financial Condition".

SELLING, GENERAL, AND ADMINISTRATIVE

Selling, general, and administrative expenditures declined $378 million or
29% in 1998 compared to 1997 and declined to 15% of net sales in 1998 from 18%
of net sales in 1997. These decreases, and those experienced in 1997 as compared
to 1996, are primarily the result of continuing restructuring actions that have
resulted in reductions in headcount, closing of facilities, and write-down and
disposal of operating assets during 1996, 1997, and 1998. Declining revenue has
also led to a decrease in variable selling, general, and administrative expenses
during both 1997 and 1998. Additionally, changes during 1998 in the Company's
distribution channel policies and business model, including contraction and
focus of the Company's product line and simplification of the Company's internal
and external distribution channels, led to a reduction in selling expenses
during 1998.

The Company believes that selling, general, and administrative expenditures
will increase in absolute dollars in 1999 compared to 1998 but decrease slightly
as a percentage of net sales. The foregoing statements are forward looking. The
Company's actual results could differ because of several factors, including
those set forth below in the subsection entitled "Factors That May Affect Future
Results and Financial Condition."

13
<PAGE>
SPECIAL CHARGES

IN-PROCESS RESEARCH AND DEVELOPMENT

In May 1998, the Company acquired certain technology that was under
development and had no alternative future uses. The acquisition resulted in the
recognition of $7 million of purchased in-process research and development,
which was charged to operations upon acquisition.

In February 1997, the Company acquired all of the outstanding shares of NeXT
Software, Inc. (NeXT). NeXT had developed, marketed, and supported software that
enables customers to implement business applications on the Internet/World Wide
Web, intranets and enterprise-wide client/server networks. Of the total purchase
price of $427 million, $375 million was allocated to purchased in-process
research and development and $52 million was allocated to goodwill and other
intangible assets. The purchased in-process research and development was charged
to operations upon acquisition, and the goodwill and other intangible assets are
being amortized on a straight-line basis over two to three years.

RESTRUCTURING COSTS

In 1996, the Company announced, and began to implement, a restructuring plan
aimed at reducing costs and returning the Company to profitability. These
actions resulted in a net charge during 1996 of $179 million. During 1997, the
Company announced and began to implement supplemental restructuring actions to
meet the objectives of the plan. The Company recognized a $217 million charge
during 1997 for the estimated incremental costs of those actions. The combined
restructuring actions consist of terminating approximately 4,200 full-time
employees, approximately 4,000 of whom have been terminated from the second
quarter of 1996 through September 25, 1998; canceling or vacating certain
facility leases as a result of those employee terminations; writing down certain
land, buildings, and equipment to be sold as a result of downsizing operations
and outsourcing various operational functions; and canceling contracts for
projects and technologies that are not critical to the Company's core business
strategy. As of September 25, 1998, a balance of $31 million remains in accrued
restructuring costs of which $10 million remains for severance payments to
employees who have already been terminated as of September 25, 1998, or who will
be terminated in the first quarter of fiscal 1999, and $21 million for payments
over the next three years on leases and contracts that have already been
terminated.

TERMINATION OF LICENSE AGREEMENT

In August 1997, the Company agreed to acquire certain assets of Power
Computing Corporation (PCC), a licensed distributor of the Mac OS operating
system, including PCC's customer database and its license to distribute the Mac
OS. The agreement with PCC also included a release of claims between the
parties. On January 28, 1998, the Company completed its acquisition of those
certain assets from PCC. The total purchase price was approximately $110
million, of which $75 million was expensed in the fourth quarter of 1997 as
"termination of license agreement" and $35 million was recorded as goodwill in
the second quarter of 1998. The goodwill will be amortized over three years.

INTEREST AND OTHER INCOME (EXPENSE), NET

Total interest and other income (expense), net, increased $43 million or
172% to a total of $68 million in 1998 compared to $25 million in 1997. The
primary cause of this increase was gains recognized on the sale of an equity
investment. As of September 26, 1997, the Company owned 42.3% of the outstanding
stock of ARM Holdings plc (ARM), a then privately held company in the United
Kingdom involved in the design of high performance microprocessors and related
technology. The Company has accounted for this investment using the equity
method through September 25, 1998. On April 17, 1998, ARM completed an initial
public offering of its stock on the London Stock Exchange and the NASDAQ
National Market. The Company sold 18.9% of its shares in the offering for a gain
before foreign taxes of approximately $24 million, which was recognized as other
income. Foreign tax recognized on this gain was approximately

14
<PAGE>
$7 million. At the time an equity method investee sells existing or newly issued
common stock to unrelated parties in excess of its book value, the equity method
requires that the net book value of the investment be adjusted to reflect the
investor's share of the change in the investee's shareholders' equity resulting
from the sale. Consequently, the Company also recognized in the third quarter of
1998 other income of approximately $16 million to reflect its remaining 25.9%
ownership interest in the increased net book value of ARM following its initial
public offering. As of September 25, 1998, the carrying value of the Company's
investment in ARM was approximately $22 million. The fair value of this
investment as of September 25, 1998, based on listed market quotes was
approximately $186 million.

On October 14, 1998, the Company sold an additional 2.9 million shares of
ARM stock for net proceeds of approximately $37.5 million and a gain before
foreign taxes of approximately $32 million, which will be recognized as other
income by the Company in the first quarter of fiscal 1999. As a result of this
sale, the Company's ownership interest in ARM has fallen to 19.7%, and the
Company no longer has significant influence over the management or operating
policies of ARM. Consequently, beginning in the first quarter of fiscal 1999,
the Company will no longer account for its remaining investment in ARM using the
equity method and has categorized its remaining shares as available for sale
requiring they be carried at fair value, with future unrealized gains and losses
reported as a component of shareholders' equity. Subsequent to the sale of
shares, on October 14, 1998, the carrying value of the Company's investment in
ARM was approximately $17 million, and the fair value, based on listed market
quotes, was approximately $135 million.

During 1998, the Company experienced a $27 million increase in interest
income net of interest expense as a result of higher cash and investment
balances and lower average short-term borrowings that was offset by decreased
foreign exchange gains and increased other expense.

Interest and other income (expense), net, decreased to $25 million in 1997
from $88 million in 1996. The decrease was primarily due to gains realized in
1996 on sales of available-for-sale and other securities and decreased foreign
exchange gains in 1997 compared to 1996 partially offset by higher average cash
balances during 1997.

PROVISION (BENEFIT) FOR INCOME TAXES

As of September 25, 1998, the Company had deferred tax assets arising from
deductible temporary differences, tax losses, and tax credits of $688 million
before being offset against certain deferred tax liabilities for presentation on
the Company's balance sheet. A substantial portion of this asset is realizable
based on the ability to offset existing deferred tax liabilities. As of
September 25, 1998, a valuation allowance of $213 million was recorded against
the deferred tax asset for the benefits of tax losses that may not be realized.
Realization of approximately $73 million of the asset representing tax loss and
credit carryforwards is dependent on the Company's ability to generate
approximately $209 million of future U.S. taxable income. Management believes
that it is more likely than not that forecasted U.S. income, including income
that may be generated as a result of certain tax planning strategies, will be
sufficient to utilize the tax carryforwards prior to their expiration in 2011
and 2012 to fully recover this asset. However, there can be no assurance that
the Company will meet its expectations of future U.S. taxable income. As a
result, the amount of the deferred tax assets considered realizable could be
reduced in the near and long term if estimates of future U.S. taxable income are
reduced. Such an occurrence could materially adversely affect the Company's
consolidated financial results. The Company will continue to evaluate the
realizability of the deferred tax assets quarterly by assessing the need for and
amount of the valuation allowance. The Company's effective tax rate for fiscal
1998 was only 6.1% due primarily to the reversal of a portion of the previously
established valuation allowance and certain undistributed foreign earnings for
which no U.S. taxes were provided.

The Internal Revenue Service (IRS) has proposed federal income tax
deficiencies for the years 1984 through 1991, and the Company has made certain
prepayments thereon. The Company contested the

15
<PAGE>
proposed deficiencies by filing petitions with the United States Tax Court, and
most of the issues in dispute have now been resolved. On June 30, 1997, the IRS
proposed income tax adjustments for the years 1992 through 1994. Although a
substantial number of issues for these years have been resolved, certain issues
still remain in dispute and are being contested by the Company. Management
believes that adequate provision has been made for any adjustments that may
result from tax examinations.

The Company anticipates its effective tax rate for fiscal 1999 will be
between 10% and 15%. The foregoing statements are forward looking. The Company's
actual results could differ because of several factors, including those set
forth below in the subsection entitled "Factors That May Affect Future Results
and Financial Condition." Additionally, the actual future tax rate will be
significantly impacted by the amount of and jurisdiction in which the Company's
foreign profits are earned.

LIQUIDITY AND CAPITAL RESOURCES

The following table presents selected financial information and statistics
for each of the last three fiscal years (dollars in millions):

<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash, cash equivalents, and short-term investments................................... $ 2,300 $ 1,459 $ 1,745
Accounts receivable, net............................................................. $ 955 $ 1,035 $ 1,496
Inventory............................................................................ $ 78 $ 437 $ 662
Working capital...................................................................... $ 2,178 $ 1,606 $ 2,512
Days sales in accounts receivable (a)................................................ 56 58 59
Days of supply in inventory (b)...................................................... 6 31 33
Operating cash flow.................................................................. $ 775 $ 154 $ 408
</TABLE>

- ------------------------

(a) Based on ending net trade receivables and most recent quarterly net
sales for each period

(b) Based on ending inventory and most recent quarterly cost of sales for
each period

As of September 25, 1998, the Company had $2.3 billion in cash, cash
equivalents, and short-term investments, an increase of $841 million or 58% over
the same balances at the end of fiscal 1997. During fiscal 1998, the Company's
primary source of cash was $775 million in cash flows from operating activities.
Cash generated by operations was primarily from net income, declines in
inventory and accounts receivable resulting from improved asset management, and
by a decline in other assets. These were partially offset by cash expenditures
of $107 million associated with the Company's restructuring program and a
decrease in other current liabilities of $85 million. The Company's cash and
cash equivalent balances as of September 25, 1998, and September 26, 1997,
include $56 million and $165 million, respectively, pledged as collateral to
support letters of credit.

In addition to the net purchase of short-term investments of $590 million,
net cash used by investing activities included $46 million for the purchase of
property, plant, and equipment and $10 million paid for the acquisition of
technology offset by proceeds of $89 million from the sale of fixed assets and
proceeds of $24 million from the sale of ARM stock. The Company expects that the
level of capital expenditures in 1999 will be comparable to 1998.

Over the last three years, the Company's debt ratings have been downgraded
to non-investment grade. As of March 27, 1998, the Company's senior and
subordinated long-term debt ratings were B- and CCC, respectively, by Standard
and Poor's (S&P) Rating Agency, and B3 and Caa2, respectively, by Moody's
Investor Services (Moody's). In June 1998, Moody's upgraded the Company's senior
debt to B2 from B3 and subordinated debt to Caa1 from Caa2 citing strengthened
debtholder protection measurements as the major reason for the upgrade. On
November 9, 1998, S&P upgraded the Company's senior debt to B+ from B- and
upgraded its subordinated debt to B- from CCC citing the Company's improved
profitability and financial profile for the upgrade. Despite these recent
upgrades, the Company's continued non-

16
<PAGE>
investment grade debt ratings will maintain pressure on the Company's cost of
funds in future periods and may require the Company to pledge additional
collateral or agree to more stringent debt covenants.

The Company believes that its balances of cash, cash equivalents, and
short-term investments will be sufficient to meet its cash requirements over the
next twelve months. However, given the Company's current debt ratings, if the
Company should need to obtain short-term borrowings, there can be no assurance
that such borrowings could be obtained at favorable rates. The inability to
obtain such borrowings at favorable rates could materially adversely affect the
Company's results of operations, financial condition, and liquidity.

YEAR 2000 COMPLIANCE

The information presented below related to Year 2000 compliance contains
forward looking statements that are subject to risks and uncertainties. The
Company's actual results may differ significantly from the results discussed
below and elsewhere in this Form 10-K regarding Year 2000 compliance.

YEAR 2000

The Year 2000 (Y2K) issue is the result of certain computer hardware,
operating system software and software application programs having been
developed using two digits rather than four to define a year. For example the
clock circuit in the hardware may be incapable of holding a date beyond the year
1999; some operating systems may recognize a date using "00" as the year 1900
rather than 2000 and certain applications may have limited date processing
capabilities. These problems could result in the failure of major systems or
miscalculations, which could have a material impact on companies through
business interruption or shutdown, financial loss, damage to reputation, and
legal liability to third parties.

STATE OF READINESS

The Company's Information Systems and Technology department ("IS&T") began
addressing the Y2K issue in 1996 as part of its Next Generation strategy, which
addressed the need for ongoing enhancement and replacement of the Company's
various disparate legacy information technology (IT) Systems. In 1998, the
Company established a Year 2000 Executive Steering Committee (Steering
Committee) comprised of senior executives of the Company and the Company's Year
2000 Project Management Office ("PMO"). The PMO reports to the Executive Vice
President and Chief Financial Officer, the Steering Committee, and the Audit and
Finance Committee of the Board of Directors.

The PMO developed and manages the Company's worldwide strategic plan ("Y2K
Plan") to address the potential impact of Y2K on the Company's operations and
business processes. In particular, the Y2K Plan addresses four principal areas
that may be impacted by the Y2K issue: Apple Branded Products; Third Party
Relationships; Non-IT Business Systems; and IT Systems. With respect to the IT
Systems and Non-IT Business Systems, the Y2K Plan consists of four separate but
overlapping phases: Phase I-- Inventory and Risk Assessments; Phase
II--Remediation Cost Estimation; Phase III--Remediation; and Phase
IV--Remediation Testing. In addition, the Company has an ongoing Y2K Awareness
Program designed to keep employees informed about Y2K issues. The Company's goal
is to substantially complete Phase III--Remediation during the third quarter of
fiscal 1999; complete Phase IV-- Remediation Testing during the fourth quarter
of fiscal 1999, and to continue compliance efforts throughout the remainder of
1999. The Company is currently on schedule to meet these goals.

17
<PAGE>
APPLE PRODUCTS

The Company designs and manufacturers microprocessor-based personal
computers, related peripherals, operating system software and application
software, including Macintosh personal computers and the Mac OS which are
marketed under the "Apple" brand (collectively "Apple Branded Products"). The
Company tested certain Apple Branded Products to determine Y2K compliance,
although such testing did not include third party products bundled with Apple
Branded Products and certain Apple Branded Products no longer supported by the
Company. Information regarding the Y2K readiness of all Apple Branded Products
is available on the Apple corporate web site at www.apple.com. Such information
is not to be considered part of this annual report. The Company believes that
the unsupported Apple Branded Products are Y2K compliant because, unlike other
companies' personal computers and related products, the Company did not rely
upon the two digit date format but used a long word approach which allows the
correct representation of dates up to the year 2040. The current date and time
utilities utilized by Apple Branded Products are 64 bit signed value which
covers dates from 30081 BC to 29940 AD. Since the Company does not control the
design of non-Apple Branded Products or third party products bundled with Apple
Branded Products, it cannot assure they are Y2K compliant. Certain products
acquired from NeXT Software, Inc., including OpenStep and NextStep, are not
currently Y2K compliant. The Company intends to develop and make available
during the third quarter of fiscal 1999 a software patch intended to allow such
products to become Y2K compliant. For purposes of this discussion, Y2K compliant
means a product will not produce errors processing date data in connection with
the year change from December 31, 1999, to January 1, 2000, when used with
accurate date data in accordance with its documentation, provided all other
products (including other software, firmware and hardware) used with it properly
exchange date data with it. A Y2K compliant product will recognize the Year 2000
as a leap year.

THIRD PARTY RELATIONSHIPS

The Company's business operations are heavily dependent on third party
corporate service vendors, materials suppliers, outsourced operations partners,
distributors and others. The Company is working with key external parties to
identify and attempt to mitigate the potential risks to it of Y2K. The failure
of external parties to resolve their own Y2K issues in a timely manner could
result in a material financial risk to the Company. As part of its overall Y2K
program, the Company is actively communicating with third parties through face
to face meetings and correspondence, on an ongoing basis, to ascertain their
state of readiness. Although numerous third parties have indicated to the
Company in writing that they are addressing their Y2K issues on a timely basis,
the readiness of third parties overall varies widely. Because the Company's Y2K
compliance is dependent on the timely Y2K compliance of third parties, there can
be no assurances that the Company's efforts alone will resolve all Y2K issues.

IT SYSTEMS AND NON-IT BUSINESS SYSTEMS

Phase I--Inventory and Risk Assessment:

This Phase requires an inventory and assessment of the Non-IT Business
systems used by the Company including systems with embedded technology, building
access systems, and health and safety systems. This Phase also includes
inventory and assessment of IT Systems used by the Company which include large
IS&T systems, desktop hardware and software, and network hardware and software.
Each such system is evaluated and the business risk is quantified as being High,
Medium or Low Risk to the Company's Business. Systems which are High Risk are
those which if uncorrected would cause an interruption or complete failure to
conduct the Company's business. Medium Risks are those which would negatively
impact the business but complete cessation could be avoided with some
inconvenience. Low Risks are those where the risk to business interruption or
cessation are remote. High and Medium Risk items will be remediated or replaced,
and Low risk items will likely not be addressed prior to the Year 2000.
Currently, the Company has completed this Phase for the IT Systems and is
approximately 80%

18
<PAGE>
complete for the Non-IT Business Systems. The Company anticipates that this
Phase will be completed during the second quarter of fiscal 1999.

Phase II--Remediation Cost Estimation:

This Phase involves the analysis of each High and Medium Risk to determine
how such risks will be remediated and the cost of such remediation. The Company
has completed this Phase for the IT Systems and is approximately 70% complete
for the identified Non-IT Business Systems. The Company anticipates that this
Phase will be completed during the second quarter of fiscal 1999.

Phase III--Remediation:

This Phase includes the replacement or correction of the High and Medium
Risk Non-IT Business Systems and IT Systems. A detailed project plan for the
remediation has been developed and is currently being implemented. This Phase is
approximately 90% complete for the IT Systems and is approximately 10% complete
for the Non-IT Business Systems. The Company anticipates that this Phase will be
completed during the third quarter of fiscal 1999.

Phase IV--Remediation Testing:

This Phase includes the future date testing of all remediation efforts made
in Phase III to confirm that the changes made bring the affected systems into
compliance, no new problems have arisen as a result of the remediation, and that
all new systems which replaced noncompliant systems are Y2K compliant regardless
of whether vendors represent that such systems are Y2K compliant. This Phase has
just commenced for the IT Systems and will commence for the Non-IT Business
Systems in the second fiscal quarter of 1999. The Company anticipates that this
Phase will be completed during the fourth quarter of fiscal 1999.

COST TO ADDRESS Y2K

The costs of the Y2K program are primarily costs associated with the
utilization of existing internal resources and incremental external spending.
The Company estimates it has incurred approximately $4.1 million of incremental
external spending directly associated with Y2K issues through September 25,
1998. Based on the current status of the Company's remediation cost estimation
as discussed above, the Company estimates that it will incur future incremental
external spending associated with Y2K issues of approximately $5.1 million to
address those risks identified as High and Medium. However, as the Company's Y2K
Plan continues, the actual future incremental spending may prove to be higher.
Also, this estimate does not include the costs that could be incurred by the
Company if one or more of its significant third party service providers fails to
achieve Y2K compliance. The Company is not separately identifying Y2K costs
incurred that are the result of utilization of existing internal resources.

RISK FACTORS

Based on current information, the Company believes the Y2K issue will not
have a material adverse effect on the Company, its consolidated financial
position, results of operations or cash flows. However, there can be no
assurance that the Y2K remediation by the Company or third parties will be
properly and timely completed, and the failure to do so could have a material
adverse effect on the Company, its business, results of operations, and its
financial condition. In particular, the Company has not yet completed its
assessment of the Y2K readiness of its significant third party service
providers. Completion of this assessment may result in the identification of
additional issues which could have a material adverse effect on the Company's
results of operations. In addition, important factors that could cause results
to differ materially include, but are not limited to, the ability of the Company
to successfully identify systems which have a Y2K issue, the nature and amount
of remediation effort required to fix the affected system, and the costs and
availability of labor and resources to successfully address the Y2K issues.

19
<PAGE>
CONTINGENCY PLANS

The Company has not completed its assessment of the reasonably likely worst
case scenario of Non-IT Business System and/or IT Systems failures and related
consequences. However, the Company is in the process of preparing specific Y2K
contingency plans to mitigate the potential impact of such failures. This effort
includes both internal and external resources under the guidance and management
of the PMO. The Company's contingency plans, which will be based in part on the
assessment of the magnitude and probability of potential risks, will primarily
focus on steps to prevent Y2K failures from occurring, or if they should occur,
to detect them quickly, minimize their impact and expedite their repair. The Y2K
contingency plans are expected to include measures such as selecting alternative
suppliers and channels of distribution. Development of the Y2K contingency plans
is expected to be substantially complete by the end of September 1999.

FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION

RESTRUCTURING OF OPERATIONS

During 1996, the Company began to implement certain restructuring actions
aimed at reducing its cost structure, improving its competitiveness, and
restoring sustainable profitability. During 1997, the Company announced and
began to implement supplemental restructuring actions, including significant
headcount reductions, to meet the foregoing objectives. All material
restructuring actions contemplated under the plan are essentially complete as of
September 25, 1998. Implementation of this restructuring involved several risks,
including the risk that by simplifying and modifying its product line the
Company has increased its dependence on fewer products, reduced overall sales,
and increased its reliance on unproven products and technology. Another risk of
the restructuring is that by increasing the proportion of the Company's products
to be manufactured under outsourcing arrangements, the Company has less control
over the quality and quantity of the products manufactured and distributed, and
has less flexibility to make timely changes in production schedules in order to
respond to changing market conditions. As part of its restructuring plan, the
Company also significantly reduced the number of its wholesale and retail
channel partners, particularly in the Americas, which places a greater volume of
sales through fewer partners. There can be no assurance that this will not
adversely impact the Company. In addition, the restructuring included the
winding down of the Company's Mac OS licensing program. There can be no
assurance that the winding down of this program will result in any greater
sales, market share, or increased gross margins to the Company. Although the
Company believes that the actions it has taken in connection with the
restructuring, including the winding down of its Mac OS licensing program, have
contributed to reductions in the company's cost structure and increased gross
margins experienced in fiscal 1998, there can be no assurance that such actions
have restored the Company to sustainable profitability. The Company's future
consolidated operating results and financial condition could be adversely
affected should it encounter difficulty in effectively maintaining its new cost
structure.

Additional information relating to the restructuring of operations may be
found in Part II, Item 8 of this Form 10-K in the Notes to Consolidated
Financial Statements at Note 4 under the subheading "Restructuring of
Operations," which information is hereby incorporated by reference.

PRODUCT INTRODUCTIONS AND TRANSITIONS

Due to the highly volatile nature of the personal computer industry, which
is characterized by dynamic customer demand patterns and rapid technological
advances, the Company must continually introduce new products and technologies
and enhance existing products in order to remain competitive. Recent
introductions include iMac, an innovatively designed lower priced desktop
computer aimed at the education and consumer markets, certain PowerBook and G3
Power Macintosh products, and the introduction of Mac OS 8.5 in October 1998.
The success of new product introductions is dependent on a number of factors,

20
<PAGE>
including market acceptance, the Company's ability to manage the risks
associated with product transitions, the availability of application software
for new products, the effective management of inventory levels in line with
anticipated product demand, the availability of products in appropriate
quantities to meet anticipated demand, and the risk that new products may have
quality or other defects in the early stages of introduction. Accordingly, the
Company cannot determine the ultimate effect that new products will have on its
sales or results of operations. In addition, although the number of new product
introductions may decrease as a result of the Company's restructuring actions,
the risks and uncertainties associated with new product introductions may
increase as the Company refocuses its product offerings on key growth segments
and to the extent new product introductions are in markets that are new to the
Company.

The Company plans to continue to introduce major upgrades to the current Mac
OS and later introduce a new operating system, Mac OS X, which is expected to
offer advanced functionality based on Apple and NeXT software technologies. It
is uncertain whether Mac OS X will gain developer support and market acceptance.
Inability to successfully develop and make timely delivery of a substantially
backward-compatible Mac OS X or of planned enhancements to the current Mac OS,
or to gain developer support and market acceptance for those operating systems,
may have an adverse impact on the Company's consolidated operating results and
financial condition.

COMPETITION

The personal computer industry is highly competitive and is characterized by
aggressive pricing practices, downward pressure on gross margins, frequent
introduction of new products, short product life cycles, continual improvement
in product price/performance characteristics, price sensitivity on the part of
consumers, and a large number of competitors. The Company's consolidated results
of operations and financial condition have been, and in the future may continue
to be, adversely affected by industry-wide pricing pressures and downward
pressures on gross margins. The industry has also been characterized by rapid
technological advances in software functionality and hardware performance and
features based on existing or emerging industry standards. Many of the Company's
competitors have greater financial, marketing, manufacturing, and technological
resources, as well as broader product lines and larger installed customer bases
than those of the Company.

The Company's future consolidated operating results and financial condition
may be affected by overall demand for personal computers and general customer
preferences for one platform over another or one set of product features over
another.

The Company is currently the primary maker of hardware that uses the Mac OS.
The Mac OS has a minority market share in the personal computer market, which is
dominated by makers of computers that run Microsoft operating systems. The
Company believes that the Mac OS, with its perceived advantages over Windows,
and the general reluctance of the Macintosh installed base to incur the costs of
switching platforms, have been driving forces behind sales of the Company's
personal computer hardware for the past several years. Recent innovations in the
Windows platform, including those expected to be included in new versions of
Windows, have added features to the Windows platform that make the differences
between the Mac OS and Microsoft's Windows operating systems less significant.
The Company is currently taking and will continue to take steps to respond to
the competitive pressures being placed on its personal computer sales as a
result of the recent innovations in the Windows platform. The Company's future
operating results and financial condition will be substantially dependent on its
ability to continue to develop improvements of the Macintosh platform in order
to maintain perceived functional advantages over competing platforms.

Several competitors of the Company have either targeted or announced their
intention to target certain of the Company's key market segments, including
education and publishing. Many of these

21
<PAGE>
companies have greater financial, marketing, manufacturing, and technological
resources than the Company.

SUPPORT FROM THIRD-PARTY SOFTWARE DEVELOPERS

Decisions by customers to purchase the Company's personal computers, as
opposed to Windows-based systems, are often based on the availability of
third-party software for particular applications. The Company believes that the
availability of third-party application software for the Company's hardware
products depends in part on third-party developers' perception and analysis of
the relative benefits of developing, maintaining, and upgrading such software
for the Company's products versus software for the larger Windows market. This
analysis is based on factors such as the perceived strength of the Company and
its products, the anticipated potential revenue that may be generated, and the
costs of developing such software products. To the extent the Company's
financial losses in prior years and declining demand for the Company's products,
as well as the Company's decision to wind down its Mac OS licensing program,
have caused software developers to question the Company's prospects in the
personal computer market, developers could be less inclined to develop new
application software or upgrade existing software for the Company's products and
more inclined to devote their resources to developing and upgrading software for
the larger Windows market. Moreover, the Company's current plan to introduce Mac
OS X could cause software developers to stop developing software for the current
Mac OS. In addition, there can be no assurance that software developers will
decide to develop software for the new operating system on a timely basis or at
all.

In August 1997, the Company and Microsoft entered into patent cross
licensing and technology agreements. In addition, for a period of five years
from August 1997 as subject to certain limitations related to the number of
Macintosh computers sold by the Company, Microsoft will make future versions of
its Microsoft Office and Internet Explorer products for the Mac OS, and the
Company will bundle the Internet Explorer product with Mac OS system software
releases and make that product the default Internet browser for such releases.
While the Company believes that its relationship with Microsoft has been and
will continue to be beneficial to the Company and to its efforts to increase the
installed base for the Mac OS, the Microsoft relationship is for a limited term
and does not cover many of the areas in which the Company competes with
Microsoft, including the Windows platform. Accordingly, Microsoft's interest in
producing application software for the Mac OS not covered by the relationship or
upon expiration of the relationship may be influenced by Microsoft's perception
of its interests as the vendor of the Windows operating system. In addition, the
Microsoft relationship may have an adverse effect on, among other things, the
Company's relationship with other partners. There can be no assurance that the
benefits to the Company of the Microsoft relationship will not be offset by the
disadvantages.

GLOBAL MARKET RISKS

A large portion of the Company's revenue is derived from its international
operations. As a result, the Company's consolidated operating results and
financial condition could be significantly affected by risks associated with
international activities, including economic and labor conditions, political
instability, tax laws (including U.S. taxes on foreign subsidiaries), and
changes in the value of the U.S. dollar versus the local currency in which the
products are sold and goods and services are purchased.

Countries in the Asia Pacific region, including Japan, have recently
experienced weaknesses in their currency, banking and equity markets. These
weaknesses have adversely affected and may continue to adversely affect consumer
demand for the Company's products, the U.S. dollar value of the Company's
foreign currency denominated sales, the availability and cost of product
components to the Company, and ultimately the Company's consolidated results of
operations.

Further information related to the Company's global market risks may be
found in Part II, Item 7A of this Form 10-K under the subheading "Foreign
Currency Risk" and may be found in Part II, Item 8 of this

22
<PAGE>
Form 10-K at Notes 1 and 2 of Notes to Consolidated Financial Statements, which
information is hereby incorporated by reference.

INVENTORY AND SUPPLY

The Company records a write-down for inventories of components and products
that have become obsolete or are in excess of anticipated demand and accrues for
any cancellation fees of orders for inventories that have been canceled.
Although the Company believes its inventory and related provisions are adequate,
given the rapid and unpredictable pace of product obsolescence in the computer
industry, no assurance can be given that the Company will not incur additional
inventory and related charges. In addition, such charges have had, and may again
have, a material effect on the Company's consolidated financial position and
results of operations.

The Company must order components for its products and build inventory in
advance of product shipments. Because the Company's markets are volatile and
subject to rapid technology and price changes, there is a risk that the Company
will forecast incorrectly and produce excess or insufficient inventories of
particular products. The Company's consolidated operating results and financial
condition have been in the past and may in the future be materially adversely
affected by the Company's ability to manage its inventory levels and respond to
short-term shifts in customer demand patterns.

Certain of the Company's products are manufactured in whole or in part by
third-party manufacturers. In addition, the Company has outsourced much of its
transportation and logistics management, particularly in North America and
Europe. The Company expects that the proportion of the Company's products
produced and distributed under outsourcing arrangements will continue to
increase. While outsourcing arrangements may lower the fixed cost of operations,
they will also reduce the direct control the Company has over production and
distribution. It is uncertain what effect such diminished control will have on
the quality or quantity of the products manufactured, or the flexibility of the
Company to respond to changing market conditions. Moreover, although
arrangements with such manufacturers may contain provisions for warranty expense
reimbursement, the Company remains at least initially responsible to the
ultimate consumer for warranty service based on the Company's limited
warranties. Accordingly, in the event of certain product defects or warranty
liability, the Company may remain primarily liable. Any unanticipated product
defect for which the Company is held liable or warranty liability, whether
pursuant to arrangements with contract manufacturers or otherwise, could
adversely affect the Company's future consolidated operating results and
financial condition.

Although certain components essential to the Company's business are
generally available from multiple sources, other key components (including
microprocessors and application specific integrated circuits) are currently
obtained by the Company from single or limited sources. If the supply of a key
single-sourced component were to be delayed or curtailed, the Company's business
and financial performance could be adversely affected, depending on the time
required to obtain sufficient quantities from the original source, or to
identify and obtain sufficient quantities from an alternate source. The Company
and other producers in the personal computer industry also compete for other
semiconductor products with other industries that have experienced increased
demand for such products, due to either increased consumer demand or increased
use of semiconductors in their products (such as the cellular phone and
automotive industries). Finally, the Company uses some components that are not
common to the rest of the personal computer industry (including certain
microprocessors and ASICs). Continued availability of these components may be
affected if producers were to decide to concentrate on the production of common
components instead of components customized to meet the Company's requirements.
Such product supply constraints and corresponding increased costs could decrease
the Company's net sales and adversely affect the Company's consolidated
operating results and financial condition.

The Company's ability to produce and market competitive products is also
dependent on the ability and desire of IBM and Motorola, the sole suppliers of
the PowerPC RISC microprocessor for the

23
<PAGE>
Company's Macintosh computers, to supply to the Company in adequate numbers
microprocessors that produce superior price/performance results compared with
those supplied to the Company's competitors by Intel Corporation, and other
developers and producers of the microprocessors used by most personal computers
using the Windows operating systems. The desire of IBM and Motorola to continue
producing these microprocessors may be influenced by Microsoft's decision not to
adapt its Windows NT operating system software to run on the PowerPC
microprocessor. IBM produces personal computers based on Intel microprocessors
and is also the developer of OS/2, a competing operating system to the Company's
Mac OS. Accordingly, IBM's interest in supplying the Company with
microprocessors for the Company's products may be influenced by IBM's perception
of its interests as a competing manufacturer of personal computers and as a
competing operating system vendor.

Further discussion relating to availability and supply of components and
product may be found in Part I, Item 1 of this Form 10-K under the heading "Raw
Materials," and in Part II, Item 8 of this Form 10-K in the Notes to
Consolidated Financial Statements at Note 10 under the subheading
"Concentrations in the Available Sources of Supply of Materials and Product,"
which information is hereby incorporated by reference.

MARKETING AND DISTRIBUTION

Currently, the Company distributes its products through wholesalers,
resellers, mass merchants, cataloguers and direct to education institutions for
resale (collectively referred to as "resellers"). In addition, in November 1997
the Company began selling many of its products directly to end users in the U.S.
through the Company's on-line store. Many of the Company's significant resellers
operate on narrow product margins. Most such resellers also distribute products
from competing manufacturers. The Company's business and financial results could
be adversely affected if the financial condition of these resellers weakened, or
if resellers within consumer channels were to decide not to continue to
distribute the Company's products, or if uncertainty regarding demand for the
Company's products causes resellers to reduce their ordering and marketing of
the Company's products.

Further information regarding risks associated with Marketing and
Distribution may be found in Part I, Item 1 of this Form 10-K under the heading
"Markets and Distribution," which information is hereby incorporated by
reference.

EURO CONVERSION

On January 1, 1999, eleven of the fifteen member countries of the European
Union are scheduled to adopt the Euro as their common legal currency and
establish fixed conversion rates between their existing sovereign currencies and
the Euro. The Euro will then trade on currency exchanges and be available for
non-cash transactions. A three year transition period is expected during which
transactions can be made in the old currencies.

The Company is taking steps to evaluate internal system capabilities, review
the ability of financial institution vendors to support Euro transactions, and
examine current marketing and pricing policies and strategies in light of the
Euro conversion. The cost of this effort is not expected to have a material
adverse effect on the Company's results of operations or financial condition.
There can be no assurance, however, that all issues related to the Euro
conversion have been identified and that any additional issues would not have a
material effect on the Company's results of operations or financial condition.
The conversion to the Euro may have competitive implications on the Company's
pricing and marketing strategies, the impact of which are not known at this
time. Additionally, the Company is at risk to the extent its principal European
suppliers and customers are unable to deal effectively with the impact of the
Euro conversion. The Company has not yet completed its evaluation of the impact
of the Euro conversion on its functional currency designations.

24
<PAGE>
DEPENDENCE ON KEY EMPLOYEES

During the past several years, the Company has experienced significant
voluntary employee turnover as a result of employees' concerns over the
Company's prospects, as well as the abundance of career opportunities available
elsewhere. The Company is dependent on its key employees in order to achieve its
business plan. While the Company experienced reduced voluntary turnover during
1998, there can be no assurance the Company will be able to continue to attract,
motivate and retain key employees. Failure to do so may have a significant
effect on the Company's consolidated operating results and financial condition.

OTHER FACTORS

The potential risks associated with the Company's Y2K Plan are discussed
above under the heading "Year 2000 Compliance."

The majority of the Company's research and development activities, its
corporate headquarters, and other critical business operations, including
certain major vendors, are located near major seismic faults. The Company's
operating results and financial condition could be materially adversely affected
in the event of a major earthquake.

Production and marketing of products in certain states and countries may
subject the Company to environmental and other regulations which include, in
some instances, the requirement that the Company provide consumers with the
ability to return to the Company product at the end of its useful life, and
leave responsibility for environmentally safe disposal or recycling with the
Company. Although the Company does not anticipate any material adverse effects
in the future based on the nature of its operations and the thrust of such laws,
no assurance can be given that such laws, or any future laws enacted for the
protection of the environment, will not have a material adverse effect on the
Company.

The Company is in the process of replacing its existing transaction systems
in the U.S. (which include order management, product procurement, distribution,
and finance) with a single integrated system as part of its ongoing effort to
increase operational efficiency. Substantially all of the transaction systems in
the European operations were replaced with the same integrated system in 1997.
The Company's future consolidated operating results and financial condition
could be adversely affected if the Company is unable to implement and
effectively manage the transition to this new integrated system.

Because of the foregoing factors, as well as other factors affecting the
Company's consolidated operating results and financial condition, past financial
performance should not be considered to be a reliable indicator of future
performance, and investors should not use historical trends to anticipate
results or trends in future periods. In addition, the Company's participation in
a highly dynamic industry often results in significant volatility of the
Company's common stock price.

ITEM 7A. DISCLOSURES ABOUT MARKET RISK

INTEREST RATE AND FOREIGN CURRENCY RISK MANAGEMENT

To ensure the adequacy and effectiveness of the Company's foreign exchange
and interest rate hedge positions, as well as to monitor the risks and
opportunities of the nonhedge portfolios, the Company continually monitors its
foreign exchange forward and option positions, and its interest rate swap,
option and floor positions both on a stand-alone basis and in conjunction with
its underlying foreign currency and interest rate-related exposures,
respectively, from both an accounting and an economic perspective. However,
given the effective horizons of the Company's risk management activities and the
anticipatory nature of the exposures intended to hedge, there can be no
assurance that the aforementioned programs will offset more than a portion of
the adverse financial impact resulting from unfavorable movements in either
foreign exchange or interest rates. In addition, the timing of the accounting
for recognition of gains and losses related to mark-to-market instruments for
any given period may not coincide with the timing of

25
<PAGE>
gains and losses related to the underlying economic exposures and, therefore,
may adversely affect the Company's consolidated operating results and financial
position.

INTEREST RATE RISK

While the Company is exposed with respect to fluctuations in the interest
rates of many of the world's leading industrialized countries, the Company's
interest income and expense is most sensitive to fluctuations in the general
level of U.S. interest rates. In this regard, changes in U.S. interest rates
affect the interest earned on the Company's cash, cash equivalents, and
short-term investments as well as costs associated with foreign currency hedges.

The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investments and long-term debt obligations and
related derivative financial instruments. The Company places its investments
with high credit quality issuers and, by policy, limits the amount of credit
exposure to any one issuer. The Company's general policy is to limit the risk of
principal loss and ensure the safety of invested funds by limiting market and
credit risk. All highly liquid investments with a maturity of three months or
less at the date of purchase are considered to be cash equivalents; investments
with maturities between three and twelve months are considered to be short-term
investments. As of September 25, 1998, there are no investments with maturities
greater than 12 months.

During 1996, the Company issued $661 million aggregate principal amount of
6% unsecured convertible subordinated notes (the Notes) to certain qualified
parties in a private placement. The Notes were sold at 100% of par. The Notes
pay interest semiannually and mature on June 1, 2001. The Notes are convertible
by their holders at any time after September 5, 1996, at a conversion price of
$29.205 per share subject to adjustments as defined in the Note agreement. No
Notes had been converted as of September 25, 1998. The Notes are redeemable by
the Company at 102.4% of the principal amount, plus accrued interest, for the 12
month period beginning June 1, 1999, and at 101.2% of the principal amount, plus
accrued interest, for the 12 month period beginning June 1, 2000. The Notes are
subordinated to all present and future senior indebtedness of the Company as
defined in the Note agreement. In addition, the Company incurred approximately
$15 million of costs associated with the issuance of the Notes. These costs are
accounted for as a deduction from the face amount of the Notes and are being
amortized over the life of the Notes. In October 1996, the Company registered
with the Securities and Exchange Commission (SEC) $569 million of the aggregate
principal amount of the Notes, including the related shares of common stock
issuable upon conversion of these Notes.

The following table presents the principal (or notional) amounts and related
weighted-average interest rates for the Company's investment portfolio and its
long-term debt obligations. The long-term debt is comprised of $654 million of
unsecured convertible subordinated notes which, if not converted, mature in June
of 2001 and $300 million of unsecured notes which mature in February 2004. The
Company's investments in U.S. corporate securities include commercial paper and
corporate debt securities. Foreign securities include foreign commercial paper,
loan participation and certificates of deposit with foreign institutions, most
of which are denominated in U.S. dollars. The Company's cash equivalents and
short-term investments have generally been held until maturity. Gross unrealized
gains and losses were negligible as of September 25, 1998.

26
<PAGE>
During 1994, the Company issued $300 million aggregate principal amount of
6.5% unsecured notes in a public offering registered with the SEC. The notes
were sold at 99.925% of par, for an effective yield to maturity of 6.51%. The
notes pay interest semiannually and mature on February 15, 2004.

<TABLE>
<CAPTION>
AVERAGE
CARRYING INTEREST
In millions, except average interest rates AMOUNT RATE
----------- -----------
<S> <C> <C>
Assets:
Cash Equivalents:
U.S. Treasury securities....................................... $ 10 5.45%
U.S. corporate securities...................................... 785 5.55%
Foreign securities............................................. 613 5.55%
-----------
Total cash equivalents....................................... 1,408 5.55%
-----------
Short-term investments:
U.S. corporate securities...................................... 163 5.56%
Foreign securities............................................. 656 5.54%
-----------
Total short-term investments................................. 819 5.54%
-----------
Total investment securities.................................... $ 2,227 5.55%
-----------
-----------
Debt:
Fixed rate..................................................... $ 954 6.07%
-----------
-----------
</TABLE>

Purchased floors are options which limit the Company's exposure to falling
interest rates on its cash equivalents and short-term investments by locking in
a minimum interest rate. The Company receives a payment when interest rates fall
below a predetermined level. A purchased floor generally qualifies for hedge
accounting treatment and is reported on the balance sheet at its premium cost,
which is amortized over the life of the floor. The purchased floors are
generally designated and effective as hedges against interest rate risk on the
Company's securities classified as available-for-sale and are carried at fair
value in other current liabilities with the unrealized gains and losses recorded
as a component of shareholders' equity. Purchased floors outstanding as of
September 25, 1998, provide the Company with the option of a weighted-average
interest rate of 5.15% on the notional amount of $525 million. Gains and losses
are recognized in income as a component of interest and other income (expense),
net in the same period as the hedged transaction. Unrealized gains and losses on
such contracts were immaterial during fiscal 1998.

The Company also enters into interest rate derivative transactions,
including interest rate swaps, collars, and floors, with financial institutions
in order to better match the Company's floating-rate interest income on its cash
equivalents and short-term investments with its fixed-rate interest expense on
its long-term debt, and/or to diversify a portion of the Company's exposure away
from fluctuations in short-term U.S. interest rates. The Company may also enter
into interest rate contracts that are intended to reduce the cost of the
interest rate risk management program. The Company does not hold or transact in
such financial instruments for purposes other than risk management.

The interest rate swaps which qualify as accounting hedges generally require
the Company to pay a floating interest rate based on the three- or six-month
U.S. dollar LIBOR and receive a fixed rate of interest without exchanges of the
underlying notional amounts. As a result, these swaps effectively convert the
Company's fixed-rate 10 year debt to floating-rate debt and generally qualify
for hedge accounting treatment. The notional amount of such interest rate swaps
was approximately $340 million as of September 25, 1998. The maturity date for
these swaps is in February 2001. As of September 25, 1998, interest rate swaps
classified as receive-fixed swaps had a weighted-average receive rate of 6.04%.
Weighted-average pay rates on these swaps were 5.73% as of September 25, 1998.
The unrealized gains and losses on these swaps are deferred and recognized in
income as a component of interest and other income (expense), net in the same
period as the hedged transaction. Deferred gains on such contracts totaled
approximately $7 million as of September 25, 1998.

27
<PAGE>
FOREIGN CURRENCY RISK

Overall, the Company is a net receiver of currencies other than the U.S.
dollar and, as such, benefits from a weaker dollar and is adversely affected by
a stronger dollar relative to major currencies worldwide. Accordingly, changes
in exchange rates, and in particular a strengthening of the U.S. dollar, may
negatively affect the Company's consolidated sales and gross margins as
expressed in U.S. dollars.

The Company enters into foreign exchange forward and option contracts with
financial institutions primarily to protect against currency exchange risks
associated with existing assets and liabilities, certain firmly committed
transactions, and probable but not firmly committed transactions. The Company's
foreign exchange risk management policy requires it to hedge a majority of its
existing material foreign exchange transaction exposures. However, the Company
may not hedge certain foreign exchange transaction exposures that are immaterial
either in terms of their minimal U.S. dollar value or in terms of the related
currency's historically high correlation with the U.S. dollar. Foreign exchange
forward contracts are carried at fair value in other current liabilities. The
premium costs of purchased foreign exchange option contracts are recorded in
other current assets and amortized over the life of the option.

Probable but not firmly committed transactions comprise sales of the
Company's products and purchases of raw material in currencies other than the
functional currency. A majority of these sales are made through the Company's
subsidiaries in Europe, Asia (particularly Japan), Canada, and Australia. The
Company purchases foreign exchange option contracts to hedge the currency
exchange risks associated with these probable but not firmly committed
transactions. The Company also sells foreign exchange option contracts, in order
to partially finance the purchase of these foreign exchange option contracts.
Although the Company entered into no such transactions in fiscal 1998, the
Company occasionally enters into other foreign exchange transactions, which are
intended to reduce the costs associated with its foreign exchange risk
management programs. The duration of foreign exchange hedging instruments,
whether for firmly committed transactions, for probable but not firmly committed
transactions, or to partially finance the foreign currency risk management
program, currently does not exceed one year.

Gains and losses on accounting hedges of existing assets or liabilities are
generally recorded currently in income or shareholders' equity against the
losses and gains on the hedged transactions. Gains and losses related to
qualifying accounting hedges of firmly committed or probable but not firmly
committed transactions are deferred and recognized in income in the same period
as the hedged transactions. Gains and losses on foreign exchange instruments not
accounted for as hedges are recorded currently in income as a component of
interest and other income (expense), net.

The following table provides information about the Company's foreign
currency derivative financial instruments outstanding as of September 25, 1998.
The information is provided in U.S. dollar amounts, as presented in the
Company's consolidated financial statements. For foreign currency exchange
contracts, the table presents the notional amount (at contract exchange rates)
and the weighted-average contractual foreign currency exchange rates. Generally,
all instruments mature within 6 months. The German mark is used as a proxy for
the eleven currencies which will participate in the Euro as of January 1, 1999.
In

28
<PAGE>
subsequent disclosures, the Euro may replace the German mark for this purpose.
Miscellaneous other currencies are primarily the Canadian dollar and Australian
dollar.

<TABLE>
<CAPTION>
AVERAGE
CONTRACT RATE
NOTIONAL OR STRIKE
In millions, except average contract rates and strike prices AMOUNT PRICE
----------- -------------
<S> <C> <C>
Foreign currency spot/forward contracts:
Japanese Yen...................................................... $ 98 139.45
British Pound Sterling............................................ 10 1.68
German Marks...................................................... 138 1.72
Miscellaneous other currencies.................................... 49 n/a
-----------
Total currency spot/forward contracts............................... $ 295
-----------
-----------
Estimated fair value................................................ $ (8)
-----------
-----------

Foreign currency purchased call options:
Japanese Yen...................................................... $ 255 130.22
British Pound Sterling............................................ 75 1.68
German Marks...................................................... 180 1.71
Miscellaneous other currencies.................................... 85 n/a
-----------
Total purchased call options.................................... 595
-----------

Foreign currency purchased put options:
Japanese Yen...................................................... 525 139.05
British Pound Sterling............................................ 205 1.64
German Marks...................................................... 450 1.79
Miscellaneous other currencies.................................... 105 n/a
-----------
Total purchased put options..................................... 1,285
-----------
Total foreign currency purchased options............................ $ 1,880
-----------
-----------
Estimated fair value................................................ $ 22
-----------
-----------

Foreign currency sold call options:
Japanese Yen...................................................... $ 240 128.08
British Pound Sterling............................................ 150 1.70
German Marks...................................................... 110 1.71
Miscellaneous other currencies.................................... 180 n/a
-----------
Total sold call options......................................... 680
-----------

Foreign currency sold put options:
Japanese Yen...................................................... 135 145.46
British Pound Sterling............................................ 0 n/a
German Marks...................................................... 25 1.80
Miscellaneous other currencies.................................... 40 n/a
-----------
Total sold put options.......................................... 200
-----------
Total foreign currency sold options................................... $ 880
-----------
-----------
Estimated fair value................................................ $ (15)
-----------
-----------
</TABLE>

29
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
- ----------------------------------------------------------------------------------------------------------- -----
<S> <C>
Financial Statements:
Report of KPMG Peat Marwick LLP, Independent Auditors.................................................... 31
Report of Ernst & Young LLP, Independent Auditors........................................................ 32
Consolidated Balance Sheets as of September 25, 1998, and September 26, 1997............................. 33
Consolidated Statements of Operations for the three fiscal years ended September 25, 1998................ 34
Consolidated Statements of Shareholders' Equity for the three fiscal years ended September 25, 1998...... 35
Consolidated Statements of Cash Flows for the three fiscal years ended September 25, 1998................ 36
Notes to Consolidated Financial Statements............................................................... 37
Selected Quarterly Financial Information (Unaudited)..................................................... 62

Financial Statement Schedule:
For the three fiscal years ended September 25, 1998 Schedule II--Valuation and qualifying accounts....... 63
</TABLE>

All other schedules have been omitted, since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the Consolidated
Financial Statements and Notes thereto.

30
<PAGE>
REPORT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS

The Board of Directors
Apple Computer, Inc.:

We have audited the accompanying consolidated balance sheets of Apple
Computer, Inc. and subsidiaries as of September 25, 1998 and September 26, 1997,
and the related consolidated statements of operations, shareholders' equity and
cash flows for the years then ended. In connection with our audits of the
consolidated financial statements, we have also audited the accompanying
financial statement schedule. These consolidated financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Apple
Computer, Inc. and subsidiaries as of September 25, 1998 and September 26, 1997,
and the results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles. Also in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.

KPMG Peat Marwick LLP

Mountain View, California
October 14, 1998

31
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Shareholders and Board of Directors of Apple Computer, Inc.

We have audited the accompanying consolidated of statements of operations,
shareholders' equity, and cash flows of Apple Computer, Inc. for the year ended
September 27, 1996. Our audit also includes the financial statement schedule for
year ended September 27, 1996, listed in the Index to the Consolidated Financial
Statements. These consolidated financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and schedule based on our
audit.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Apple Computer, Inc. for the year ended September 27, 1996, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.

Ernst & Young LLP

San Jose, California
October 14, 1996

32
<PAGE>
CONSOLIDATED BALANCE SHEETS

(IN MILLIONS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
SEPTEMBER 25, 1998 AND SEPTEMBER 26, 1997 1998 1997
- ----------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents.................................................................... $ 1,481 $ 1,230
Short-term investments....................................................................... 819 229
Accounts receivable, less allowances of $81 and $99, respectively............................ 955 1,035
Inventories.................................................................................. 78 437
Deferred tax assets.......................................................................... 182 259
Other current assets......................................................................... 183 234
--------- ---------
Total current assets....................................................................... 3,698 3,424
Property, plant, and equipment, net.......................................................... 348 486
Other assets................................................................................. 243 323
--------- ---------
Total assets............................................................................... $ 4,289 $ 4,233
--------- ---------
--------- ---------

LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Notes payable to banks....................................................................... $ -- $ 25
Accounts payable............................................................................. 719 685
Accrued expenses............................................................................. 801 1,108
--------- ---------
Total current liabilities.................................................................. 1,520 1,818
Long-term debt................................................................................. 954 951
Deferred tax liabilities....................................................................... 173 264
--------- ---------
Total liabilities.......................................................................... 2,647 3,033
--------- ---------

Commitments and contingencies

Shareholders' equity:
Series A non-voting convertible preferred stock, no par value; 150,000 shares authorized,
issued and outstanding..................................................................... 150 150
Common stock, no par value; 320,000,000 shares authorized; 135,192,769 and 127,949,220 shares
issued and outstanding, respectively....................................................... 633 498
Retained earnings............................................................................ 898 589
Other........................................................................................ (39) (37)
--------- ---------
Total shareholders' equity................................................................. 1,642 1,200
--------- ---------
Total liabilities and shareholders' equity................................................. $ 4,289 $ 4,233
--------- ---------
--------- ---------
</TABLE>

See accompanying notes to consolidated financial statements.

33
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS

(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
THREE FISCAL YEARS ENDED SEPTEMBER 25, 1998 1998 1997 1996
- ----------------------------------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Net sales.................................................................... $ 5,941 $ 7,081 $ 9,833
Cost of sales................................................................ 4,462 5,713 8,865
---------- ---------- ----------
Gross margin............................................................... 1,479 1,368 968
---------- ---------- ----------
Operating expenses:
Research and development................................................... 303 485 604
Selling, general, and administrative....................................... 908 1,286 1,568
Special charges:
In-process research and development...................................... 7 375 --
Restructuring costs...................................................... -- 217 179
Termination of license agreement......................................... -- 75 --
---------- ---------- ----------
Total operating expenses............................................... 1,218 2,438 2,351
---------- ---------- ----------
Operating income (loss)...................................................... 261 (1,070) (1,383)
---------- ---------- ----------

Gains arising from equity investment......................................... 40 -- --
Interest and other income (expense), net..................................... 28 25 88
---------- ---------- ----------
Total interest and other income (expense), net............................. 68 25 88
---------- ---------- ----------
Income (loss) before provision (benefit) for income taxes.................... 329 (1,045) (1,295)

Provision (benefit) for income taxes......................................... 20 -- (479)
---------- ---------- ----------
Net income (loss)............................................................ $ 309 $ (1,045) $ (816)
---------- ---------- ----------
---------- ---------- ----------
Earnings (loss) per common share:

Basic...................................................................... $ 2.34 $ (8.29) $ (6.59)

Diluted.................................................................... $ 2.10 $ (8.29) $ (6.59)

Shares used in computing earnings (loss) per share (in thousands):
Basic...................................................................... 131,974 126,062 123,734

Diluted.................................................................... 167,917 126,062 123,734
</TABLE>

See accompanying notes to consolidated financial statements.

34
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------------------ -------------------------- RETAINED
AMOUNT SHARES AMOUNT EARNINGS OTHER
----------- ------------- ----------- ----------- ---------
(IN
SHARES THOUSANDS)
-----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balances as of September 29, 1995..... -- $ -- 122,922 $ 398 $ 2,464 $ 39
Common stock issued under stock
option and purchase plans,
including related tax benefits.... -- -- 1,575 41 -- --
Cash dividends of $0.12 per common
share............................. -- -- -- -- (14) --
Accumulated translation
adjustment........................ -- -- -- -- -- (12)
Change in unrealized gains (losses)
on available-for-sale
securities........................ -- -- -- -- -- (42)
Net loss............................ -- -- -- -- (816) --
--- ----- ------------- ----- ----------- ---------
Balances as of September 27, 1996..... -- -- 124,497 439 1,634 (15)
Common stock issued under stock
option and purchase plans and
other, and in connection with the
acquisition of NeXT............... -- -- 3,452 59 -- --
Series A non-voting convertible
preferred stock issued............ 150 150 -- -- -- --
Accumulated translation
adjustment........................ -- -- -- -- -- (22)
Net loss............................ -- -- -- -- (1,045) --
--- ----- ------------- ----- ----------- ---------
Balances as of September 26, 1997..... 150 150 127,949 498 589 (37)
Common stock issued under stock
option and purchase plans and
other............................. -- -- 3,085 41 -- --
Common stock issued in connection
with the acquisition of certain
assets of PCC..................... -- -- 4,159 80 -- --
Tax benefit related to disqualifying
dispositions of stock options..... -- -- -- 14 -- --
Accumulated translation
adjustment........................ -- -- -- -- -- (2)
Net income.......................... -- -- -- -- 309 --
--- ----- ------------- ----- ----------- ---------
Balances as of September 25, 1998..... 150 $ 150 135,193 $ 633 $ 898 $ (39)
--- ----- ------------- ----- ----------- ---------
--- ----- ------------- ----- ----------- ---------

<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
-------------

<S> <C>
Balances as of September 29, 1995..... $ 2,901
Common stock issued under stock
option and purchase plans,
including related tax benefits.... 41
Cash dividends of $0.12 per common
share............................. (14)
Accumulated translation
adjustment........................ (12)
Change in unrealized gains (losses)
on available-for-sale
securities........................ (42)
Net loss............................ (816)
-------------
Balances as of September 27, 1996..... 2,058
Common stock issued under stock
option and purchase plans and
other, and in connection with the
acquisition of NeXT............... 59
Series A non-voting convertible
preferred stock issued............ 150
Accumulated translation
adjustment........................ (22)
Net loss............................ (1,045)
-------------
Balances as of September 26, 1997..... 1,200
Common stock issued under stock
option and purchase plans and
other............................. 41
Common stock issued in connection
with the acquisition of certain
assets of PCC..................... 80
Tax benefit related to disqualifying
dispositions of stock options..... 14
Accumulated translation
adjustment........................ (2)
Net income.......................... 309
-------------
Balances as of September 25, 1998..... $ 1,642
-------------
-------------
</TABLE>

See accompanying notes to consolidated financial statements.

35
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN MILLIONS)

<TABLE>
<CAPTION>
THREE FISCAL YEARS ENDED SEPTEMBER 25, 1998 1998 1997 1996
- ----------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Cash and cash equivalents, beginning of the year................................... $ 1,230 $ 1,552 $ 756
--------- --------- ---------
Operating:
Net income (loss).................................................................. 309 (1,045) (816)
Adjustments to reconcile net income (loss) to cash generated by operating
activities:
Depreciation and amortization.................................................... 111 118 116
Provision for deferred income taxes.............................................. 1 (50) (437)
Loss on sale of property, plant, and equipment................................... -- 37 16
Gains arising from equity investment............................................. (40) -- --
In-process research and development.............................................. 7 375 --
Changes in operating assets and liabilities, net of effects of the acquisition of
NeXT:
Accounts receivable.............................................................. 72 469 435
Inventories...................................................................... 359 225 1,113
Other current assets............................................................. 31 36 45
Other assets..................................................................... 83 (4) (24)
Accounts payable................................................................. 34 (107) (373)
Accrued restructuring costs...................................................... (107) 109 124
Other current liabilities........................................................ (85) (9) 209
--------- --------- ---------
Cash generated by operating activities......................................... 775 154 408
--------- --------- ---------
Investing:
Purchase of short-term investments................................................. (2,313) (999) (437)
Proceeds from sales and maturities of short-term investments....................... 1,723 963 440
Proceeds from sale of property, plant, and equipment............................... 89 47 47
Purchase of property, plant, and equipment......................................... (46) (53) (67)
Cash used for acquisition of technology............................................ (10) (384) --
Proceeds from sale of equity investment............................................ 24 -- --
Other.............................................................................. (10) (73) 9
--------- --------- ---------
Cash used for investing activities........................................... (543) (499) (8)
--------- --------- ---------
Financing:
Decrease in notes payable to banks................................................. (25) (161) (275)
Increase in long-term borrowings................................................... 3 -- 646
Proceeds from issuance of preferred stock.......................................... -- 150 --
Increases in common stock, net of acquisitions..................................... 41 34 39
Cash dividends..................................................................... -- -- (14)
--------- --------- ---------
Cash generated by financing activities....................................... 19 23 396
--------- --------- ---------
Total cash generated (used)........................................................ 251 (322) 796
--------- --------- ---------
Cash and cash equivalents, end of the year......................................... $ 1,481 $ 1,230 $ 1,552
--------- --------- ---------
--------- --------- ---------

Supplemental cash flow disclosures:
Cash paid during the year for interest........................................... $ 59 $ 61 $ 49
Cash paid (received) for income taxes, net....................................... $ (15) $ (11) $ 33
Noncash transactions:
Tax benefit from stock options................................................. $ 14 -- $ 2
Issuance of common stock for acquisition of PCC assets......................... $ 80 -- --
Increase in value of equity investment......................................... $ 16 -- --
Issuance of common stock for acquisition of NeXT............................... -- $ 25 --
</TABLE>

See accompanying notes to consolidated financial statements.

36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Apple Computer, Inc., and its subsidiaries (the Company), designs,
manufactures, and markets microprocessor-based personal computers and related
software and peripherals for sale primarily to education, creative, consumer,
business, and government customers.

BASIS OF PRESENTATION AND PREPARATION

The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. Intercompany accounts and transactions have
been eliminated. The Company's fiscal year-end is the last Friday in September.

The preparation of these consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in these consolidated
financial statements and accompanying notes. Actual results could differ
materially from those estimates.

FINANCIAL INSTRUMENTS

INVESTMENTS

All highly liquid investments with a maturity of three months or less at the
date of purchase are considered to be cash equivalents; investments with
maturities between three and twelve months are considered to be short-term
investments. Management determines the appropriate classification of its
investments in debt and marketable equity securities at the time of purchase and
reevaluates such designation as of each balance sheet date. The Company's debt
and marketable equity securities have been classified and accounted for as
available-for-sale. These securities are carried at fair value, with the
unrealized gains and losses reported as a component of shareholders' equity.
These unrealized gains or losses include any unrealized losses and gains on
interest rate contracts accounted for as hedges against the available-for-sale
securities. The cost of securities sold is based upon the specific
identification method.

FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

In the ordinary course of business and as part of the Company's asset and
liability management, the Company enters into various types of transactions that
involve contracts and financial instruments with off-balance-sheet risk. These
instruments are entered into in order to manage financial market risk, primarily
interest rate and foreign exchange risk. The Company enters into these financial
instruments with major international financial institutions utilizing
over-the-counter as opposed to exchange traded instruments. The Company does not
hold or transact in financial instruments for purposes other than risk
management.

The Company enters into interest rate derivative transactions, including
interest rate swaps, collars, and floors, with financial institutions in order
to better match the Company's floating-rate interest income on its cash
equivalents and short-term investments with its fixed-rate interest expense on
its long-term debt, and/or to diversify a portion of the Company's exposure away
from fluctuations in short-term U.S. interest rates. The Company may also enter
into interest rate contracts that are intended to reduce the cost of the
interest rate risk management program.

37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
exposures that are immaterial either in terms of their minimal U.S. dollar value
or in terms of the related currency's historically high correlation with the
U.S. dollar. Foreign exchange forward contracts are carried at fair value in
other current liabilities. The premium costs of purchased foreign exchange
option contracts are recorded in other current assets and amortized over the
life of the option.

Probable but not firmly committed transactions comprise sales of the
Company's products and purchases of raw material in currencies other than the
functional currency. A majority of these transactions are made through the
Company's subsidiaries in Europe, Asia (particularly Japan), Canada, and
Australia. The Company purchases foreign exchange option contracts to hedge the
currency exchange risks associated with these probable but not firmly committed
transactions. The Company also sells foreign exchange option contracts, in order
to partially finance the purchase of these foreign exchange option contracts.
Although the Company entered into no such transactions in fiscal 1998, the
Company occasionally enters into other foreign exchange transactions, which are
intended to reduce the costs associated with its foreign exchange risk
management programs. The duration of the Company's foreign exchange hedging
instruments, whether for firmly committed transactions or for probable but not
firmly committed transactions, normally do not extend beyond six months.

In addition, the Company has entered into foreign exchange forward contracts
to hedge certain intercompany loan transactions. These forward contracts
effectively change certain foreign currency denominated debt into U.S. dollar
denominated debt, which better matches against the Company's U.S. dollar
denominated cash equivalents and short-term investments. No such contracts
existed as of September 25, 1998.

Interest rate and foreign exchange instruments generally qualify as
accounting hedges if their maturity dates are the same as the hedged
transactions and if the hedged transactions meet certain requirements. The
Company monitors its interest rate and foreign exchange positions on a regular
basis based on applicable and commonly used pricing models. The correlation
between the changes in the fair value of hedging instruments and the changes in
the underlying hedged items is assessed periodically over the life of the hedged
instrument. In the event that it is determined that a hedge is ineffective,
including if and when the hedged transactions no longer exists, the Company
recognizes in income the change in market value of the instrument beginning on
the date it was no longer an effective hedge.

Gains and losses on accounting hedges of existing assets or liabilities are
generally recorded currently in income or shareholders' equity against the
losses and gains on the hedged transactions. Gains and losses related to
qualifying accounting hedges of firmly committed or probable but not firmly
committed transactions are deferred and recognized in income in the same period
as the hedged transactions. Gains and losses on accounting hedges realized
before the settlement date of the related hedged transaction are also generally
deferred and recognized in income in the same period as the hedged transactions.

Gains and losses on interest rate and foreign exchange instruments not
accounted for as hedges are recorded currently in income as a component of
interest and other income (expense), net. Sold interest rate and foreign
exchange instruments do not qualify as accounting hedges. Premiums associated
with sold foreign exchange option contracts are recorded in other current assets
and amortized over the life of the option.

38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out) or market.
If the cost of the inventories exceeds their market value, provisions are made
currently for the difference between the cost and the market value.

PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment are stated at cost. Depreciation and
amortization are computed by use of the declining balance and straight-line
methods over the estimated useful lives of the assets, which are 30 years for
buildings and from 2 to 5 years for equipment.

LONG-LIVED ASSETS

The Company reviews property, plant, and equipment and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
these assets is measured by comparison of its carrying amount, including the
unamortized portion of any allocated goodwill, to future undiscounted cash flows
the assets are expected to generate. If property, plant, and equipment and
certain identifiable intangibles are considered to be impaired, the impairment
to be recognized is measured by the amount by which the carrying amount of the
assets, including any allocated goodwill, exceeds its fair market value. The
recoverability of enterprise level goodwill is assessed whenever the facts and
circumstances suggest that the asset may be impaired and a write-down material.
The Company assesses the recoverability of enterprise level goodwill by
determining whether the unamortized goodwill balance can be recovered through
undiscounted future cash flows. For the three years ended September 25, 1998,
the Company has made no adjustments to its long-lived assets except those made
in connection with its restructuring of operations.

STOCK-BASED COMPENSATION

The Company measures compensation expense for its stock-based compensation
plans using the intrinsic value method and has provided in Note 6 pro forma
disclosures of the effect on net income and earnings per share as if the fair
value-based method had been applied in measuring compensation expense.

FOREIGN CURRENCY TRANSLATION

The Company translates the assets and liabilities of its foreign sales
subsidiaries at year-end exchange rates. Gains and losses from these
translations are credited or charged to "accumulated translation adjustment"
included in "other" in shareholders' equity. The Company's foreign manufacturing
subsidiaries and certain other entities use the U.S. dollar as the functional
currency and translate monetary assets and liabilities at year-end exchange
rates, and inventories, property, and non-monetary assets and liabilities at
historical rates. Gains and losses from these translations are included in the
consolidated results of operations and are immaterial.

REVENUE RECOGNITION

The Company recognizes revenue at the time products are shipped. Provisions
are made currently for estimated product returns, price protection, rebates, and
other sales programs that may occur. Historically, actual amounts recorded for
product returns and price protection have not varied significantly from
estimated amounts.

39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
WARRANTY EXPENSE

The Company provides currently for the estimated cost that may be incurred
under product warranties when products are shipped.

ADVERTISING COSTS

Advertising costs are charged to expense the first time the advertising
takes place. Advertising expense was $152 million, $143 million, and $183
million for 1998, 1997, and 1996, respectively.

EARNINGS (LOSS) PER SHARE

The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 128, "Earnings Per Share." In accordance with SFAS No. 128, primary earnings
per share has been replaced with basic earnings per share, and fully diluted
earnings per share has been replaced with diluted earnings per share which
includes potentially dilutive securities such as outstanding options and
convertible securities. Prior periods presented have been presented to conform
to SFAS No. 128; however, as the Company had a net loss in those periods, basic
and diluted loss per share are the same as the primary loss per share previously
reported.

Basic earnings per common share is computed by dividing income available to
common shareholders by the weighted-average number of shares of common stock
outstanding during the period. Diluted earnings per common share is computed by
dividing income available to common shareholders by the weighted-average number
of shares of common stock outstanding during the period increased to include the
number of additional shares of common stock that would have been outstanding if
the dilutive potential shares of common stock had been issued. The dilutive
effect of outstanding options is reflected in diluted earnings per share by
application of the treasury stock method. The dilutive effect of convertible
securities is reflected using the if-converted method.

40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table sets forth the computation of basic and diluted earnings
(loss) per share (in thousands, except net income (loss) and per share amounts):

FOR THE YEARS ENDED

<TABLE>
<CAPTION>
SEPTEMBER 25, SEPTEMBER 26, SEPTEMBER 27,
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Numerator (in millions):
Numerator for basic earnings (loss) per share--Net income
(loss).......................................................... $ 309 $ (1,045) $ (816)
Interest expense on convertible debt.............................. 43 -- --
------------- ------------- -------------
Numerator for diluted earnings (loss) per share--Adjusted net
income (loss)................................................... $ 352 $ (1,045) $ (816)
------------- ------------- -------------
------------- ------------- -------------
Denominator:
Denominator for basic earnings (loss) per share-- weighted-average
shares outstanding.............................................. 131,974 126,062 123,734
Effect of dilutive securities:
Convertible preferred stock..................................... 9,091 -- --
Dilutive options................................................ 4,210 -- --
Convertible debt................................................ 22,642 -- --
------------- ------------- -------------
Dilutive potential common shares.................................. 35,943 -- --
------------- ------------- -------------
Denominator for diluted earnings (loss) per share-- adjusted
weighted-average shares and assumed conversions................. 167,917 126,062 123,734
------------- ------------- -------------
------------- ------------- -------------
Basic earnings (loss) per share..................................... $ 2.34 $ (8.29) $ (6.59)
------------- ------------- -------------
------------- ------------- -------------
Diluted earnings (loss) per share................................... $ 2.10 $ (8.29) $ (6.59)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>

Options to purchase 6.7 million shares of common stock were outstanding at
the end of 1998 that were not included in the computation of diluted earnings
per share because the options' exercise price was greater than the average
market price of the Company's common shares and, therefore, the effect would be
antidulitive. No options outstanding in 1997 or 1996 were included in the
calculation of diluted earnings per share for those years because the Company
had a net loss in each of those years and to do so would have been antidilutive.

RECLASSIFICATIONS

Certain prior year amounts in the accompanying 1997 and 1996 consolidated
statements of cash flows have been reclassified in order to conform to the 1998
presentation.

RECENT ACCOUNTING PRONOUNCEMENTS

The Company intends to adopt SFAS No. 130, "Reporting Comprehensive Income"
and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information", in fiscal 1999. Both statements will require additional disclosure
but will not have a material impact on the Company's consolidated results of
operations or financial position. SFAS No. 130 will be reflected in the
Company's

41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
first quarter fiscal 1999 interim financial statements. Components of
comprehensive income for the Company include such items as net income, foreign
currency translation items, and changes in the value of available-for-sale
securities. SFAS No. 131 requires segments to be determined and reported based
upon how management measures performance and makes decisions about allocating
resources. SFAS No. 131 will first be reflected in the Company's fiscal 1999
consolidated financial statements.

In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, hedging activities, and exposure
definition. SFAS No. 133 requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The Statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. Earlier application of
the Statement is permitted. The Company is still in the process of assessing the
impact that the Statement will have on the Company's results of operations,
consolidated financial position, and operating policies.

In October 1997, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 97-2, "Software Revenue Recognition."
SOP 97-2 establishes standards relating to the recognition of software revenue.
SOP 97-2 is effective for transactions entered into by the Company beginning in
the first quarter of fiscal 1999. The Company does not expect the adoption of
SOP 97-2 to have a material impact on the Company's consolidated results of
operations.

In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," which provides
guidance on accounting for the costs of computer software intended for internal
use. SOP 98-1 must be adopted by the Company effective as of fiscal 2000 and is
not expected to have a material impact on the Company's consolidated results of
operations or financial position.

NOTE 2--FINANCIAL INSTRUMENTS

INVESTMENTS

The following table summarizes the Company's available-for-sale securities
at amortized cost, which approximates fair value, as of September 25, 1998, and
September 26, 1997 (in millions):

<TABLE>
<CAPTION>
SEPTEMBER 25, 1998 SEPTEMBER 26, 1997
AMORTIZED COST AMORTIZED COST
------------------- -------------------
<S> <C> <C>
U.S. Treasury securities.............................. $ 10 $ 100
U.S. corporate securities............................. 785 327
Foreign securities.................................... 613 705
------ ------
Total included in cash and cash equivalents......... 1,408 1,132

U.S. corporate securities............................. 163 29
Foreign securities.................................... 656 200
------ ------
Total included in short-term investments............ 819 229
------ ------
Total............................................... $ 2,227 $ 1,361
------ ------
------ ------
</TABLE>

As of September 25, 1998, there are no investments with maturities greater
than 12 months. The Company's U.S. corporate securities include commercial paper
and corporate debt securities. Foreign

42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2--FINANCIAL INSTRUMENTS (CONTINUED)
securities include foreign commercial paper, loan participation and certificates
of deposit with foreign institutions, most of which are denominated in U.S.
dollars. The Company's cash equivalents and short-term investments have
generally been held until maturity. Gross unrealized gains and losses were
negligible as of September 25, 1998, and September 26, 1997.

The Company's cash and cash equivalent balances as of September 25, 1998,
and September 26, 1997, include $56 million and $165 million, respectively,
pledged primarily as collateral to support letters of credit.

INTEREST RATE DERIVATIVES AND FOREIGN CURRENCY INSTRUMENTS

The following table shows the notional principal, fair value, and credit
risk amounts of the Company's interest rate derivative and foreign currency
instruments as of September 25, 1998, and September 26, 1997 (in millions).
<TABLE>
<CAPTION>
NOTIONAL FAIR CREDIT RISK NOTIONAL FAIR
PRINCIPAL VALUE AMOUNTS PRINCIPAL VALUE
----------- ----- ------------- ----------- -----
<S> <C> <C> <C> <C> <C>
SEPTEMBER 25, 1998 SEPTEMBER 26, 1997
--------------------------------------- ------------------------
Transactions qualifying as accounting hedges:
Interest rate instruments:
Swaps................................................... $ 340 $ 7 $ 1 $ 340 $ (4)
Interest rate collars................................... $ -- $ -- $ -- $ 105 $ --
Purchased floors........................................ $ 525 $ 1 $ 1 $ 455 $ (1)
Foreign exchange instruments:
Spot/Forward contracts.................................. $ 295 $ (8) $ -- $ 741 $ 1
Purchased options....................................... $ 1,045 $ 14 $ 14 $ 890 $ 11
Transactions other than accounting hedges:
Interest rate instruments:
Swaps................................................... $ -- $ -- $ -- $ 100 $ --
Foreign exchange instruments:
Spot/forward contracts.................................. $ -- $ -- $ -- $ 89 $ --
Purchased options....................................... $ 835 $ 8 $ 8 $ 1,075 $ 8
Sold options............................................ $ 880 $ (15) $ -- $ 840 $ (11)

<CAPTION>
CREDIT RISK
AMOUNTS
---------------
<S> <C>

Transactions qualifying as accounting hedges:
Interest rate instruments:
Swaps................................................... $ --
Interest rate collars................................... $ --
Purchased floors........................................ $ --
Foreign exchange instruments:
Spot/Forward contracts.................................. $ 7
Purchased options....................................... $ 11
Transactions other than accounting hedges:
Interest rate instruments:
Swaps................................................... $ --
Foreign exchange instruments:
Spot/forward contracts.................................. $ 1
Purchased options....................................... $ 8
Sold options............................................ $ --
</TABLE>

The notional principal amounts for off-balance-sheet instruments provide one
measure of the transaction volume outstanding as of year end, and do not
represent the amount of the Company's exposure to credit or market loss. The
credit risk amount shown in the table above represents the Company's gross
exposure to potential accounting loss on these transactions if all
counterparties failed to perform according to the terms of the contract, based
on then-current currency exchange and interest rates at each respective date.
The Company's exposure to credit loss and market risk will vary over time as a
function of interest rates and currency exchange rates.

The estimates of fair value are based on applicable and commonly used
pricing models using prevailing financial market information as of September 25,
1998, and September 26, 1997. In certain instances where judgment is required in
estimating fair value, price quotes were obtained from several of the Company's
counterparty financial institutions. Although the table above reflects the
notional principal, fair value, and credit risk amounts of the Company's
interest rate and foreign exchange instruments, it does not reflect the gains or
losses associated with the exposures and transactions that the interest rate and

43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2--FINANCIAL INSTRUMENTS (CONTINUED)
foreign exchange instruments are intended to hedge. The amounts ultimately
realized upon settlement of these financial instruments, together with the gains
and losses on the underlying exposures, will depend on actual market conditions
during the remaining life of the instruments.

The interest rate swaps which qualify as accounting hedges generally require
the Company to pay a floating interest rate based on the three- or six-month
U.S. dollar LIBOR and receive a fixed rate of interest without exchanges of the
underlying notional amounts. As a result, these swaps effectively convert the
Company's fixed-rate 10 year debt to floating-rate debt and generally qualify
for hedge accounting treatment. The maturity date for these swaps is in February
2001. As of September 25, 1998, and September 26, 1997, interest rate swaps
classified as receive-fixed swaps had a weighted-average receive rate of 6.04%.
Weighted-average pay rates on these swaps were 5.73% and 5.66% as of September
25, 1998, and September 26, 1997, respectively. The unrealized gains and losses
on these swaps are deferred and recognized in income as a component of interest
and other income (expense), net in the same period as the hedged transaction.
Deferred gains on such contracts totaled approximately $7 million as of
September 25, 1998, and deferred losses totaled approximately $4 million as of
September 26, 1997.

Interest rate collars limit the Company's exposure to fluctuations in
short-term interest rates by locking in a range of interest rates. An interest
rate collar is a no-cost structure that consists of a purchased option and a
sold option. The Company receives a payment when the three-month LIBOR falls
below predetermined levels, and makes a payment when the three-month LIBOR rises
above predetermined levels. There were no interest rate collars outstanding as
of September 25, 1998.

Purchased floors limit the Company's exposure to falling interest rates on
its cash equivalents and short-term investments by locking in a minimum interest
rate. The Company receives a payment when interest rates fall below a
predetermined level. A purchased floor generally qualifies for hedge accounting
treatment and is reported on the balance sheet at its premium cost, which is
amortized over the life of the floor. The purchased floors are generally
designated and effective as hedges against interest rate risk on the Company's
securities classified as available-for-sale and are carried at fair value in
other current liabilities with the unrealized gains and losses recorded as a
component of shareholders' equity. Gains and losses are recognized in income as
a component of interest and other income (expense), net in the same period as
the hedged transaction. Unrealized gains and losses on such contracts were
immaterial as of September 25, 1998, and September 26, 1997.

The foreign exchange forward contracts not accounted for as hedges are
carried at fair value in other current liabilities with the gains and losses
recorded currently in income as a component of interest and other income
(expense), net. The foreign exchange forward contracts that are designated and
effective as hedges are also carried at fair value in other current liabilities
with gains and losses recorded currently in income as a component of interest
and other income (expense), net, against the losses and gains on the hedged
transactions. As of September 25, 1998, all foreign exchange forward contracts
held by the Company mature within six months.

If the option contract is designated and effective as a hedge of a firmly
committed transaction, or a probable but not firmly committed transaction, then
any gain or loss is deferred until the occurrence of the hedged transaction.
Deferred gains and losses on such contracts were immaterial as of September 25,
1998, and September 26, 1997. If the option contract is used to hedge an asset
or liability, then the option is carried at fair value in other current
liabilities with the gains and losses recorded currently in income as a
component of interest and other income (expense), net, against the losses and
gains on the hedged transaction. As of September 25, 1998, maturity dates for
purchased foreign exchange option contracts ranged from 1 to 12 months, and
maturity dates for sold option contracts ranged from 1 to 6 months.

44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2--FINANCIAL INSTRUMENTS (CONTINUED)
The $100 million interest rate swap not qualifying as an accounting hedge
held as of September 26, 1997, required the Company to pay Japanese yen at a
fixed 0.6% interest rate and receive Japanese yen at a floating rate based on
three month LIBOR. This swap was intended to hedge against the interest rate
risk related to the Company's yen-denominated notes payable to banks. As most of
the notes payable to banks were not renewed, the swap was no longer effective as
a hedge and was allowed to expire during 1998.

NOTES PAYABLE TO BANKS

The weighted-average interest rate for Japanese yen-denominated notes
payable to banks as of September 26, 1997, was approximately 1.3%. The Company
had no U.S. dollar-denominated notes payable to banks as of September 25, 1998,
or September 26, 1997. The carrying amount of notes payable to banks as of
September 26, 1997, approximated their fair value due to their less than 90-day
maturities.

LONG-TERM DEBT

During 1994, the Company issued $300 million aggregate principal amount of
6.5% unsecured notes in a public offering registered with the SEC. The notes
were sold at 99.925% of par, for an effective yield to maturity of 6.51%. The
notes pay interest semiannually and mature on February 15, 2004.

The carrying amounts and estimated fair values of the Company's long-term
debt are as follows (in millions):

<TABLE>
<CAPTION>
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- --------- ----------- ---------
SEPTEMBER 26, 1997
SEPTEMBER 25, 1998 ----------------------
----------------------
<S> <C> <C> <C> <C>
Ten-year unsecured notes................................................. $ 300 $ 266 $ 300 $ 269
Convertible subordinated notes (a)....................................... $ 661 $ 887 $ 661 $ 656
Other.................................................................... $ 1 $ 1 $ 3 $ 3
</TABLE>

- ------------------------

(a) The carrying amount of the convertible subordinated notes is prior to
consideration of the related issuance costs and is reflective of the
underlying conversion feature of the Notes.

45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2--FINANCIAL INSTRUMENTS (CONTINUED)
The fair value of the 10 year unsecured notes is based on their listed
market values as of September 25, 1998, and September 26, 1997. The fair value
of the convertible subordinated notes is based on an estimate from a financial
institution.

EQUITY INVESTMENT AND RELATED GAINS

As of September 26, 1997, the Company owned 42.3% of the outstanding stock
of ARM Holdings plc (ARM), a privately held company in the United Kingdom
involved in the design of high performance microprocessors and related
technology. The Company has accounted for this investment using the equity
method through September 25, 1998. On April 17, 1998, ARM completed an initial
public offering of its stock on the London Stock Exchange and the NASDAQ
National Market. The Company sold 18.9% of its shares in the offering for a gain
before foreign taxes of approximately $24 million, which was recognized as other
income. Foreign taxes recognized on this gain was approximately $7 million.

At the time an equity method investee sells existing or newly issued common
stock to unrelated parties in excess of its book value, the equity method
requires that the net book value of the investment be adjusted to reflect the
investor's share of the change in the investee's shareholders' equity resulting
from the sale. It is the Company's policy to record an adjustment reflecting its
share of the change in the investee's shareholders' equity resulting from such a
sale as a gain or loss in other income. Consequently, the Company also
recognized in the third quarter of 1998 other income of approximately $16
million to reflect its remaining 25.9% ownership interest in the increased net
book value of ARM following its initial public offering. As of September 25,
1998, the carrying value of the Company's investment in ARM carried in other
assets in the consolidated balance sheet was approximately $22 million. The fair
value of this investment as of September 25, 1998, based on listed market quotes
was approximately $186 million.

On October 14, 1998, the Company sold an additional 2.9 million shares of
ARM stock for net proceeds of approximately $37.5 million and a gain before
foreign taxes of approximately $32 million which will be recognized as other
income by the Company in the first quarter of fiscal 1999. As a result of this
sale, the Company's ownership interest in ARM has fallen to 19.7%, and the
Company no longer has significant influence over the management or operating
policies of ARM. Consequently, beginning in the first quarter of fiscal 1999,
the Company will no longer account for its remaining investment in ARM using the
equity method and has categorized its remaining shares as available for sale
requiring the shares be carried at fair value, with unrealized gains and losses
reported as a component of shareholders' equity. Subsequent to the sale of
shares on October 14, 1998, the carrying value of the Company's investment in
ARM was approximately $16.9 million, and the fair value, based on listed market
quotes, was approximately $135 million. The Company is subject to a "lock-up"
agreement under which it is restricted from selling any of its remaining ARM
shares before January 12, 1999.

46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--CONSOLIDATED FINANCIAL STATEMENT DETAILS

INVENTORIES (in millions)

<TABLE>
<CAPTION>
1998 1997
----- ---------
<S> <C> <C>
Purchased parts................................................................ $ 32 $ 141
Work in process................................................................ 5 15
Finished goods................................................................. 41 281
--- ---------
Total inventories.............................................................. $ 78 $ 437
--- ---------
--- ---------
</TABLE>

PROPERTY, PLANT, AND EQUIPMENT (in millions)

<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Land and buildings.......................................................... $ 338 $ 453
Machinery and equipment..................................................... 277 460
Office furniture and equipment.............................................. 80 110
Leasehold improvements...................................................... 129 172
--------- ---------
824 1,195
Accumulated depreciation and amortization................................... (476) (709)
--------- ---------
Net property, plant, and equipment.......................................... $ 348 $ 486
--------- ---------
--------- ---------
</TABLE>

ACCRUED EXPENSES (in millions)

<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Accrued compensation and employee benefits................................... $ 99 $ 99
Accrued marketing and distribution........................................... 205 278
Accrued warranty and related costs........................................... 132 128
Accrued restructuring costs.................................................. 31 180
Other current liabilities.................................................... 334 423
--------- ---------
Total accrued expenses....................................................... $ 801 $ 1,108
--------- ---------
--------- ---------
</TABLE>

INTEREST AND OTHER INCOME (EXPENSE) (in millions)

<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Interest income............................................................................ $ 100 $ 82 $ 60
Interest expense........................................................................... (62) (71) (60)
Foreign currency gain (loss)............................................................... (2) 13 30
Net premiums and discounts on foreign exchange instruments................................. (1) (4) (13)
Realized gains on the sale of available-for-sale and other securities...................... 1 2 74
Other income (expense), net................................................................ (8) 3 (3)
--------- --- ---
$ 28 $ 25 $ 88
--------- --- ---
--------- --- ---
</TABLE>

47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4--SPECIAL CHARGES

RESTRUCTURING OF OPERATIONS

In the second quarter of 1996, the Company announced and began to implement
a restructuring plan aimed at reducing costs and returning the Company to
profitability. The restructuring plan was necessitated by decreased demand for
the Company's products and the Company's adoption of a new strategic direction.
These actions resulted in a net charge during 1996 of $179 million. During 1997,
the Company announced and began to implement supplemental restructuring actions
to meet the foregoing objectives of the plan. The Company recognized a $217
million charge during 1997 for the estimated incremental costs of those actions.
The combined restructuring actions consist of terminating approximately 4,200
full-time employees, approximately 4,000 of whom have been terminated from the
second quarter of 1996 through September 25, 1998; canceling or vacating certain
facility leases as a result of those employee terminations; writing down certain
land, buildings, and equipment to be sold as a result of downsizing operations
and outsourcing various operational functions; and canceling contracts for
projects and technologies that are not critical to the Company's core business
strategy. The restructuring actions under the plan have resulted in cash
expenditures of $270 million and noncash asset write-downs of $95 million from
the second quarter of 1996 through September 25, 1998.

All material restructuring actions contemplated under the plan are
essentially complete as of September 25, 1998. The remaining balance of $31
million in accrued restructuring costs as of September 25, 1998, is comprised of
$10 million for severance payments to employees who have already been terminated
as of September 25, 1998, or who will be terminated in the first quarter of
fiscal 1999, and $21 million for payments over the next three years on leases
and contracts which have already been terminated. The Company expects that the
remaining accrual will result in cash expenditures of $31 million over the next
three years that will be financed through current working capital.

The following table depicts the restructuring activity through September 25,
1998 (in millions):

<TABLE>
<CAPTION>
PAYMENTS TO
EMPLOYEES PAYMENTS ON WRITE-DOWN OF PAYMENTS ON
INVOLUNTARILY CANCELED FACILITY OPERATING ASSETS TO CANCELED
TERMINATED(A) LEASES(A) BE SOLD(B) CONTRACTS(A) TOTAL
----------------- ------------------- --------------------- --------------- ---------
<S> <C> <C> <C> <C> <C>
Net Additions during 1996............ $ 81 $ 19 $ 54 $ 25 $ 179
Spending during 1996................. (48) (4) (7) (3) (62)
----- --- --- ----- ---------
Balances as of September 27, 1996.... 33 15 47 22 117

Net Additions during 1997............ 131 19 38 29 217
Spending during 1997................. (88) (9) (46) (11) (154)
----- --- --- ----- ---------
Balances as of September 26, 1997.... 76 25 39 40 180

Adjustments during 1998.............. 6 4 3 (13) --
Spending during 1998................. (72) (15) (42) (20) (149)
----- --- --- ----- ---------
Balances as of September 25, 1998.... $ 10 $ 14 $ -- $ 7 $ 31
----- --- --- ----- ---------
----- --- --- ----- ---------
</TABLE>

- ------------------------

(a): Cash; (b): Noncash.

48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4--SPECIAL CHARGES (CONTINUED)
TECHNOLOGY ACQUISITION

In May 1998, the Company acquired certain technology that was under
development that had no alternative future use. The acquisition resulted in the
recognition of $7 million of purchased in-process research and development,
which was charged to operations upon acquisition.

TERMINATION OF LICENSE AGREEMENT

On January 28, 1998, the Company completed its acquisition of certain assets
from PCC. The total purchase price was approximately $110 million, of which $75
million was expensed in the fourth quarter of 1997 as "termination of license
agreement" and $35 million was recorded as goodwill in the second quarter of
1998. The goodwill will be amortized over three years. The purchase price was
comprised of approximately 4.2 million shares of the Company's common stock
valued at $80 million, forgiveness of $28 million of receivables due from PCC,
and assumption by the Company of $2 million of certain customer support
liabilities of PCC.

NEXT ACQUISITION

On February 4, 1997, the Company acquired all of the outstanding shares of
NeXT Software, Inc. (NeXT). NeXT, headquartered in Redwood City, California, had
developed, marketed and supported software that enables customers to implement
business applications on the Internet/World Wide Web, intranets and
enterprise-wide client/server networks. The total purchase price was $427
million and was comprised of cash payments of $319 million and the issuance of
1.5 million shares of the Company's common stock to the NeXT shareholders valued
at approximately $25 million according to the terms of the purchase agreement;
the issuance of approximately 1.9 million options to purchase the Company's
common stock to the NeXT optionholders valued at approximately $16 million; cash
payments of $56 million to the NeXT debtholders; cash payments of $9 million for
closing and related costs, and $2 million of net liabilities assumed. The
acquisition was accounted for as a purchase and, accordingly, the operating
results pertaining to NeXT subsequent to the date of acquisition have been
included in the Company's consolidated operating results. The total purchase
price was allocated to purchased in-process research and development ($375
million) and to goodwill and other intangible assets ($52 million). The
purchased in-process research and development was charged to operations upon
acquisition, and the goodwill and other intangible assets are being amortized on
a straight-line basis over two to three years.

49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5--INCOME TAXES

The provision (benefit) for income taxes consisted of the following (in
millions):

<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Federal:
Current............................................................. $ -- $ -- $ (125)
Deferred............................................................ -- -- (279)
--------- --------- ---------
-- -- (404)
--------- --------- ---------
State:
Current............................................................. -- -- (2)
Deferred............................................................ -- -- (71)
--------- --------- ---------
-- -- (73)
--------- --------- ---------
Foreign:
Current............................................................. 11 -- (1)
Deferred............................................................ 9 -- (1)
--------- --------- ---------
20 -- (2)
--------- --------- ---------
Provision (benefit) for income taxes.................................. $ 20 $ -- $ (479)
--------- --------- ---------
--------- --------- ---------
</TABLE>

The foreign provision (benefit) for income taxes is based on foreign pretax
earnings (loss) of approximately $315 million, $(265) million, and $(141)
million in 1998, 1997, and 1996, respectively. A substantial portion of the
Company's cash, cash equivalents, and short-term investments is held by foreign
subsidiaries and is generally based in U.S. dollar-denominated holdings. Amounts
held by foreign subsidiaries would be subject to U.S. income taxation on
repatriation to the United States. The Company's consolidated financial
statements fully provide for any related tax liability on amounts that may be
repatriated, aside from undistributed earnings of certain of the Company's
foreign subsidiaries that are intended to be indefinitely reinvested in
operations outside the United States. U.S. income taxes have not been provided
on a cumulative total of $437 million of such earnings. It is not practicable to
determine the income tax liability that might be incurred if these earnings were
to be distributed. Except for such indefinitely reinvested earnings, the Company
provides for federal and state income taxes currently on undistributed earnings
of foreign subsidiaries.

Deferred tax assets and liabilities reflect the future income tax effects of
temporary differences between the consolidated financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and
are measured using enacted tax rates that apply to taxable income in the years
in which those temporary differences are expected to be recovered or settled.

50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5--INCOME TAXES (CONTINUED)
As of September 25, 1998, and September 26, 1997, the significant components
of the Company's deferred tax assets and liabilities were (in millions):

<TABLE>
<CAPTION>
SEPTEMBER 25, SEPTEMBER 26,
1998 1997
--------------- ---------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable and inventory reserves.................... $ 87 $ 151
Accrued liabilities and other reserves........................ 83 126
Basis of capital assets and investments....................... 71 103
Tax losses and credits........................................ 447 315
----- -----
Total deferred tax assets..................................... 688 695
Less valuation allowance........................................ 213 218
----- -----
Net deferred tax assets......................................... 475 477
----- -----
Deferred tax liabilities:
Unremitted earnings of subsidiaries........................... 390 410
Other......................................................... 20 7
----- -----
Total deferred tax liabilities.................................. 410 417
----- -----
Net deferred tax asset.......................................... $ 65 $ 60
----- -----
----- -----
</TABLE>

As of September 25, 1998, the Company had operating loss carryforwards for
federal tax purposes of approximately $492 million, which expire in 2011 and
2012, not including $264 million of operating loss carryforwards acquired from
NeXT which expire in 2002 through 2012. Utilization of the NeXT carryforwards is
subject to certain limitations imposed by the Internal Revenue Code; $138
million is available for immediate utilization as of September 25, 1998. The
Company also has various state and foreign tax loss and credit carryforwards,
the tax effect of which is approximately $78 million and which expire between
2001 and 2013. Most of the remaining benefits from tax losses and credits do not
expire. As of September 25, 1998, a valuation allowance of $213 million was
recorded against the deferred tax asset for the benefits of tax losses that may
not be realized. Realization of approximately $73 million of the asset
representing tax loss and credit carryforwards is dependent on the Company's
ability to generate approximately $209 million of future U.S. taxable income.
Management believes that it is more likely than not that forecasted U.S. income,
including income that may be generated as a result of certain tax planning
strategies, will be sufficient to utilize the tax carryforwards prior to their
expiration in 2011 and 2012 to fully recover this asset.

The net change in the total valuation allowance in 1998 was a decrease of $5
million. During 1998, the Company recorded a deferred tax asset and an
offsetting valuation allowance of $92 million with respect to operating loss
carryforwards acquired from NeXT.

51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5--INCOME TAXES (CONTINUED)
A reconciliation of the provision (benefit) for income taxes, with the
amount computed by applying the statutory federal income tax rate (35% in 1998,
1997, and 1996) to income (loss) before provision (benefit) for income taxes, is
as follows (in millions):

<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Computed expected tax (benefit)...................................... $ 115 $ (366) $ (453)
State taxes, net of federal effect................................... 10 (3) (48)
Indefinitely invested earnings of foreign subsidiaries............... (15) -- --
Purchase accounting and asset acquisitions........................... 8 158 --
Valuation allowance.................................................. (97) 208 --
Other individually immaterial items.................................. (1) 3 22
--------- --------- ---------
Provision (benefit) for income taxes................................. $ 20 $ -- $ (479)
--------- --------- ---------
--------- --------- ---------
Effective tax rate................................................... 6% 0% (37)%
</TABLE>

The Internal Revenue Service (IRS) has proposed federal income tax
deficiencies for the years 1984 through 1991, and the Company has made certain
prepayments thereon. The Company contested the proposed deficiencies by filing
petitions with the United States Tax Court, and most of the issues in dispute
have now been resolved. On June 30, 1997, the IRS proposed income tax
adjustments for the years 1992 through 1994. Although a substantial number of
issues for these years have been resolved, certain issues still remain in
dispute and are being contested by the Company. Management believes that
adequate provision has been made for any adjustments that may result from tax
examinations.

NOTE 6--SHAREHOLDERS' EQUITY

PREFERRED STOCK

In August 1997, the Company and Microsoft Corporation (Microsoft) entered
into patent cross licensing and technology agreements. In addition, Microsoft
purchased 150,000 shares of Apple Series "A' non-voting convertible preferred
stock ("preferred stock") for $150 million. Except under limited circumstances,
the shares of preferred stock may not be sold by Microsoft prior to August 5,
2000. Upon any sale of the preferred stock by Microsoft, the shares will
automatically be converted into shares of Apple common stock at a conversion
price of $16.50 per share and the shares can be converted at Microsoft's option
at such price after August 5, 2000. Each share of preferred stock is entitled to
receive, if and when declared by the Company's Board of Directors, a dividend of
$30.00 per share per annum, payable in preference to any dividend on the
Company's common stock, plus, if the dividends per share paid on the common
stock are greater than the dividends per share paid on the preferred stock on an
"as if converted" basis, then the Board of Directors shall declare an additional
dividend such that the dividends per share paid on the preferred stock on an "as
if converted" basis, shall equal the dividends per share paid on the common
stock.

1998 EXECUTIVE OFFICER STOCK PLAN

The Company has in effect a 1998 Executive Officer Stock Plan (the 1998
Plan), which replaced the 1990 Stock Option Plan terminated in April 1998, the
1981 Stock Option Plan terminated in October 1990, and the 1987 Executive Long
Term Stock Option Plan terminated in July 1995. Options granted before these
plans' termination dates remain outstanding in accordance with their terms.
Options may be granted under the 1998 Plan to the Chairman of the Board of
Directors, executive officers of the Company at the

52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6--SHAREHOLDERS' EQUITY (CONTINUED)
level of Senior Vice President and above and other key employees. These options
generally become exercisable over a period of 4 years, based on continued
employment, and generally expire 10 years after the grant date. The 1998 Plan
permits the granting of incentive stock options, nonstatutory stock options,
stock appreciation rights, and stock purchase rights.

1997 EMPLOYEE STOCK OPTION PLAN

In August 1997, the Company's Board of Directors approved the 1997 Employee
Stock Option Plan (the 1997 Plan), for grants of stock options to employees who
are not officers of the Company. Options may be granted under the 1997 Plan to
employees at not less than the fair market value on the date of grant. These
options generally become exercisable over a period of 4 years, based on
continued employment, and generally expire 10 years after the grant date. The
Company's Board of Directors has reserved 9 million shares for issuance under
the provisions of the 1997 Plan.

1997 DIRECTOR STOCK OPTION PLAN

In August 1997, the Company's Board of Directors approved a Director Stock
Option Plan (DSOP) for which directors of the Company are eligible. Options
granted under the DSOP vest in three equal installments, on each of the first
through third anniversaries of the date of grant. The Company's Board of
Directors has reserved 400,000 shares for issuance under the provisions of the
DSOP. As of September 25, 1998, 150,000 options had been granted and were
outstanding under the DSOP. Supplementally and separate from the DSOP, 30,000
options had been granted in total to two members of the Company's Board of
Directors, and were outstanding as of September 25, 1998.

EMPLOYEE STOCK PURCHASE PLAN

The Company has an employee stock purchase plan (the Purchase Plan) under
which substantially all employees may purchase common stock through payroll
deductions at a price equal to 85% of the lower of the fair market values as of
the beginning and end of the six-month offering period. Stock purchases under
the Purchase Plan are limited to 10% of an employee's compensation, up to a
maximum of $25,000 in any calendar year. During 1998 and 1997, 1.1 million and
775,000 shares, respectively, were issued under the Purchase Plan. As of
September 25, 1998, approximately 3.5 million shares were reserved for future
issuance under the Purchase Plan.

SENIOR OFFICERS RESTRICTED PERFORMANCE SHARE PLAN

In November 1997, the Company's Board of Directors issued approximately
24,000 fully vested shares and cash in settlement of shares to certain officers
of the Company under the Senior Officers Restricted Performance Share Plan (the
PSP) based upon the achievement of certain performance goals established in
advance by the Compensation Committee of the Board. Immediately after these
shares were issued, the Company's Board of Directors terminated the PSP.

SHAREHOLDER RIGHTS PLAN

In May 1989, the Company adopted a shareholder rights plan and distributed a
dividend of one right to purchase one share of common stock (a Right) for each
outstanding share of common stock of the Company. The Rights become exercisable
in certain limited circumstances involving a potential business combination
transaction of the Company and are initially exercisable at a price of $200 per
share. Following certain other events after the Rights have become exercisable,
each Right entitles its holder to

53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6--SHAREHOLDERS' EQUITY (CONTINUED)
purchase for $200 an amount of common stock of the Company, or, in certain
circumstances, securities of the acquiror, having a then-current market value of
two times the exercise price of the Right. The Rights are redeemable and may be
amended at the Company's option before they become exercisable. Until a Right is
exercised, the holder of a Right, as such, has no rights as a shareholder of the
Company. The Rights expire on April 19, 1999.

STOCK OPTION ACTIVITY

A summary of the Company's stock option activity and related information for
the years ended September 25, 1998, and September 26, 1997, follows (option
amounts are presented in thousands):

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 25, 1998 SEPTEMBER 26, 1997 SEPTEMBER 27, 1996
------------------------ ------------------------ ------------------------
WGT-AVG WGT-AVG WGT-AVG
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding--beginning of year......... 18,649 $ 17.24 14,112 $ 27.23 13,877 $ 34.79
Granted (price equals FMV)................... 13,879 $ 23.11 20,629 $ 16.91 8,873 $ 24.29
Granted (price less than FMV)................ -- $ -- 1,853 $ 6.54 -- $ --
Exercised.................................... (1,882) $ 14.35 (1,049) $ 13.71 (450) $ 22.91
Forfeited.................................... (11,952) $ 19.40 (16,896) $ 24.19 (8,188) $ 36.89
----------- ----------- -----------
Options outstanding--end of year............... 18,694 $ 20.47 18,649 $ 17.24 14,112 $ 27.23
----------- ----------- -----------
----------- ----------- -----------
Options exercisable at end of year............. 1,435 $ 15.01 1,996 $ 22.02 4,284 $ 31.24
----------- ----------- -----------
----------- ----------- -----------
</TABLE>

The options granted in fiscal 1997 at a price less than fair market value
were to existing NeXT optionholders as part of the total purchase price paid for
NeXT. See Note 4.

The weighted-average fair value per share of options granted during the
period includes the value of the repriced options granted during the period less
the value of the related forfeited options on the date the repriced options were
granted.

The options outstanding as of September 25, 1998, have been segregated into
seven ranges for additional disclosure as follows (option amounts are presented
in thousands):

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- ------------------------------
OPTIONS WGT AVERAGE WEIGHTED OPTIONS WEIGHTED
OUTSTANDING AS OF REMAINING AVERAGE EXERCISABLE AS OF AVERAGE
SEPTEMBER 25, CONTRACTUAL LIFE EXERCISE SEPTEMBER 25, EXERCISE
1998 IN YEARS PRICE 1998 PRICE
----------------- ------------------- ----------- ----------------- -----------
<S> <C> <C> <C> <C> <C>
$1.66--$9.97........................... 576 7.41 $ 6.66 200 $ 5.69
$9.98--$13.25.......................... 4,705 8.82 $ 13.24 796 $ 13.25
$13.26--$13.69......................... 4,468 9.23 $ 13.69 -- $ --
$13.70--$19.87......................... 1,999 9.00 $ 18.51 283 $ 19.35
$19.88--$30.75......................... 1,085 9.18 $ 26.81 124 $ 25.35
$30.76--$31.19......................... 3,758 9.93 $ 31.19 -- $ --
$31.20--$64.75......................... 2,103 9.78 $ 34.26 32 $ 38.61
------ -----
$1.66--$64.75.......................... 18,694 9.24 $ 20.47 1,435 $ 15.01
------ -----
------ -----
</TABLE>

54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6--SHAREHOLDERS' EQUITY (CONTINUED)
As of September 25, 1998, approximately 15.7 million options were reserved
for future grant under the Company's stock option plans.

In December 1997, the Board of Directors approved an option exchange program
which allowed employees to exchange all (but not less than all) of their
existing options (vested and unvested) with an exercise price greater than
$13.6875, on a one-for-one basis for new options with an exercise price of
$13.6875, the fair market value of the Company's common stock on December 19,
1997, and a new four year vesting schedule beginning in December 1997. A total
of 4.7 million options with a weighted-average exercise price of $19.90 per
share were exchanged for new options as a result of this program.

In July 1997, the Board of Directors approved an option exchange program
which allowed employees to exchange all (but not less than all) of their
existing options (vested and unvested) to purchase Apple common stock (other
than options granted and assumed from NeXT) for options having an exercise price
of $13.25 and a new three year vesting period beginning in July of 1997.
Approximately 7.9 million options were repriced under this program.

On May 14, 1996, the Board of Directors adopted a resolution allowing
employees up to and including the level of Vice President to exchange 1.25
options at their existing option price for 1.0 new options having an exercise
price of $26.375 per share, the fair market value of the Company's common stock
at May 29, 1996. Options received under this program are subject to one year of
additional vesting such that the new vesting date for each vesting portion will
be the later of May 29, 1997 or the original vesting date plus one year.
Approximately 2.9 million options were exchanged and repriced under this
program.

NOTE 7--STOCK-BASED COMPENSATION

The Company has elected to follow Accounting Principles Board (APB) No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its employee stock options and employee stock purchase plan
shares because, as discussed below, the alternative fair value accounting
provided for under SFAS No. 123 requires use of option valuation models that
were not developed for use in valuing employee stock options and employee stock
purchase plan shares. Under APB No. 25, when the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of the grant, no compensation expense is recognized.

55
<PAGE>
NOTE 7--STOCK-BASED COMPENSATION (CONTINUED)

Pro forma information regarding net income and loss per share is required by
SFAS No. 123 and has been determined as if the Company had accounted for its
employee stock options granted and employee stock purchase plan purchases
subsequent to September 29, 1995, under the fair value method of that Statement.
The fair values for these options and stock purchases were estimated at the date
of grant and beginning of the period, respectively, using a Black-Scholes option
pricing model for the single option approach. The assumptions used for each of
the last three fiscal years and the resulting estimate of weighted-average fair
value per share of options granted during those years are as follows:

<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Expected life of options......................................... 3 years 3 years 3 years
Expected life of stock purchases................................. 6 months 6 months 6 months
Risk free interest rate--stock options........................... 5.54% 6.3% 6.3%
Risk free interest rate--stock purchases......................... 5.37% 5.3% 5.3%
Expected volatility--stock options............................... 78% 74% 74%
Expected volatility--stock purchases............................. 56% 52% 52%
Dividend yields.................................................. 0 0 0
Weighted-average fair value of options granted during the year... $12.98 $7.49 $12.66
</TABLE>

The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options and employee stock purchase plan
shares have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of the
Company's employee stock options and employee stock purchase plan shares.

For purposes of pro forma disclosures, the estimated fair value of the
options and shares are amortized to pro forma net income (loss) over the
options' vesting period and the shares' plan period. The Company's pro forma
information for each of the last three fiscal years follows (in millions, except
per share amounts):

<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net income (loss)--as reported................................... $ 309 $ (1,045) $ (816)
Net income (loss)--pro forma..................................... $ 266 $ (1,082) $ (840)

Net income (loss) per common share--as reported
Basic.......................................................... $ 2.34 $ (8.29) $ (6.59)
Diluted........................................................ $ 2.10 $ (8.29) $ (6.59)

Net income (loss) per common share--pro forma
Basic.......................................................... $ 2.02 $ (8.58) $ (6.79)
Diluted........................................................ $ 1.83 $ (8.58) $ (6.79)
</TABLE>

The value of the options granted to NeXT optionholders have been included in
the total purchase price paid for NeXT and, therefore, are not included in the
adjustment to arrive at the pro forma net loss.

As FAS 123 is applicable only to options granted or shares issued subsequent
to September 29, 1995, its pro forma effect will not be fully reflected until
1999.

56
<PAGE>
NOTE 8--EMPLOYEE SAVINGS PLAN

The Company has an employee savings plan (the Savings Plan) that qualifies
as a deferred salary arrangement under Section 401(k) of the Internal Revenue
Code. Under the Savings Plan, participating U.S. employees may defer a portion
of their pretax earnings, up to the Internal Revenue Service annual contribution
limit ($10,000 for calendar year 1998). The Company matches 50% to 100% of each
employee's contributions, depending on length of service, up to a maximum 6% of
the employee's earnings. The Company's matching contributions to the Savings
Plan were approximately $14 million, $19 million, and $22 million in 1998, 1997,
and 1996, respectively.

NOTE 9--COMMITMENTS AND CONTINGENCIES

LEASE COMMITMENTS

The Company leases various facilities and equipment under noncancelable
operating lease arrangements. The major facilities leases are for terms of 5 to
10 years and generally provide renewal options for terms of up to 5 additional
years. Rent expense under all operating leases was approximately $63 million,
$106 million, and $129 million in 1998, 1997, and 1996, respectively. Future
minimum lease payments under noncancelable operating leases having remaining
terms in excess of one year as of September 25, 1998, are as follows (in
millions):

<TABLE>
<CAPTION>
FISCAL YEARS
- ----------------------------------------------------------------------------
<S> <C>
1999........................................................................ $ 44
2000........................................................................ 39
2001........................................................................ 27
2002........................................................................ 15
2003........................................................................ 7
Later years................................................................. 39
---------
Total minimum lease payments................................................ $ 171
---------
---------
</TABLE>

PURCHASE COMMITMENTS

In the ordinary course of business, the Company has entered into agreements
with vendors which obligate it to purchase product components which may not be
common to the rest of the personal computer industry.

LITIGATION

ABRAHAM AND EVELYN KOSTICK TRUST V. PETER CRISP ET AL.

In January 1996, a purported shareholder derivative action was filed in the
California Superior Court for Santa Clara County naming the Company and its then
directors as defendants, seeking injunctive relief and damages for alleged acts
of mismanagement. Between February 1996 and October 1997, the complaint has been
amended several times as a result of the Courts' rulings upon various demurrers
filed by the Company. The Third Amended Complaint was filed in October 1997, and
eliminated the class action claims and restated claims against certain directors
and former directors. In November 1997, the Company's Board of Directors
appointed a special investigation committee and engaged independent counsel to
assist in the investigation of the claims made in the Third Amended Complaint.
Also in November 1997, the Company filed a demurrer to the Third Amended
Complaint. The special investigative committee continues its investigation.

57
<PAGE>
NOTE 9--COMMITMENTS AND CONTINGENCIES (CONTINUED)
LS MEN'S CLOTHING DEFINED BENEFIT PENSION FUND V. MICHAEL SPINDLER ET AL.

In May 1996, an action was filed in the California Superior Court naming as
defendants the Company and certain of its current and former officers and
directors and seeking compensatory and punitive damages for alleged
misrepresentation and omission of material facts about the Company's operations
and financial results. Between May 1996 and November 1997, the complaint has
been amended several times as a result of the Court's rulings upon various
demurrers of the Company. In January 1998, the Company and three individual
defendants brought a motion to dismiss the third amended complaint, and, in
March 1998, the Court granted the motion to dismiss the third amended complaint
without leave to amend. The plaintiffs filed an appeal in the Sixth Appellate
District in June 1998. Oral arguments related to this appeal have not yet been
scheduled, and the Court has not yet ruled.

"REPETITIVE STRESS INJURY" LITIGATION

The Company was named in approximately 60 lawsuits between 1991 to 1995,
alleging that plaintiffs incurred so-called "repetitive stress" injuries to
their upper extremities as a result of using keyboards and/ or mouse input
devices sold by the Company. These actions are similar to those filed against
other major suppliers of personal computers. All but three of the cases against
the Company have been dismissed, either voluntarily or by Court order. The
remaining cases are inactive and the Company believes they are likely to be
dismissed.

MONITOR-SIZE LITIGATION

In August 1995, the Company was named, along with 41 other entities,
including computer manufacturers and computer monitor vendors, in a putative
nationwide class action filed in the California Superior Court for Orange
County, styled Keith Long et al. v. AAmazing Technologies Corp. et al. The
complaint alleges that each of the defendants engaged in false or misleading
advertising with respect to the size of computer monitor screens. Also in August
1995, the Company was named as the sole defendant in a purported class action
alleging similar claims filed in the New Jersey Superior Court for Camden
County, entitled Mahendri Shah v. Apple Computer, Inc. Subsequently, in November
1995, the Company, along with 26 other entities, was named in a purported class
action alleging similar claims filed in the New Jersey Superior Court for Essex
County, entitled Maizes & Maizes v. Apple Computer, Inc. et al.. The complaints
in all of these cases seek restitution in the form of refunds or product
exchange, damages, punitive damages, and attorneys fees. In December 1995, the
California Judicial Council ordered all of the California actions, including
Long, coordinated for purposes of pretrial proceedings and trial before a single
judge and were subsequently coordinated under the name In re Computer Monitor
Litigation. In July 1996, Judge Cahill ordered all of the California cases
dismissed without leave to amend as to plaintiffs residing in California. In
March 1998, the Court granted final approval of a settlement resolving all
claims. Objectors to the settlement filed appeals from the Court's order
approving the settlement; one such appeal remains pending.

EXPONENTIAL TECHNOLOGY INC. V. APPLE

Plaintiff alleges that the Company, which was an investor in Exponential
Technology (Exponential), breached its fiduciary duty to Exponential by misusing
confidential information about its financial situation to cause Exponential to
fail, and that the Company fraudulently misrepresented the facts about allowing
Exponential to sell its processors to the Company's Mac OS licensees. The
lawsuit is filed in California State Court. In November 1997, the Company filed
a demurrer to portions of the complaint, which the Court granted in part. In
January 1998, plaintiff filed an Amended Complaint. In March 1998, the Company
filed a cross-complaint for damages against plaintiff alleging breach of
contract, negligent

58
<PAGE>
NOTE 9--COMMITMENTS AND CONTINGENCIES (CONTINUED)
misrepresentation and violations of the California Corporations Code. The
parties are currently conducting discovery.

FTC INQUIRY--PRADO VS. APPLE COMPUTER (AND RELATED ACTIONS)

In October 1997, Apple began charging all US non-education customers for
live telephone technical support beyond 90 days after purchase of Apple
products. In late 1997, the Federal Trade Commission (FTC) commenced an
investigation into customer complaints that Apple's change in technical support
practices was either unfair or contrary to earlier representations to customers.
Three class action lawsuits were filed against Apple related to this change. The
District Office of the FTC has recommended to regional and national FTC that a
tentative settlement be approved. Settlement discussions with the plaintiffs in
the three class actions are in progress.

OTHER

On August 21, 1997, the FTC issued a consent decree against the Company,
regarding the Company's past processor upgrade practices, specifically certain
advertisements which the Commission deemed to have misrepresented the Company's
marketing of certain microprocessor upgrade products. Pursuant to the order, the
Company is ordered to cease and desist from any such allegedly misleading
advertising, to give notice to consumers, and to implement certain programs
enabling consumers who are within the order's scope to obtain upgrade kits or
rebates, in connection with any purchases within the scope of the order. The
Company has now completed the fulfillment program pursuant to the consent decree
and filed its final report with the Commission in April 1998.

The Company is also subject to certain other legal proceedings and claims
which have arisen in the ordinary course of business and which have not been
fully adjudicated. The results of legal proceedings cannot be predicted with
certainty; however, in the opinion of management, the Company does not have a
potential liability related to any legal proceedings and claims that would have
a material adverse effect on its financial condition or results of operations.

NOTE 10--CONCENTRATIONS OF RISK

CONCENTRATIONS OF CREDIT RISK

The Company distributes its products principally through third-party
computer resellers and various education and consumer channels. The Company
generally does not require collateral from its customers. However, when possible
the Company does attempt to limit credit risk on trade receivables through the
use of flooring arrangements for selected customers with third-party financing
companies and credit insurance for certain customers in Latin America and Asia.
Although none of the Company's customers accounted for more than 10% of net
sales in any of the last three fiscal years, at times considerable trade
receivables which are not covered by collateral are outstanding with the
Company's distribution and retail channel partners.

The counterparties to the agreements relating to the Company's investments
and foreign exchange and interest rate instruments consist of a number of major
international financial institutions. To date, no such counterparty has failed
to meet its financial obligations to the Company. The Company does not believe
that there is significant risk of nonperformance by these counterparties because
the Company continually monitors its positions and the credit ratings of such
counterparties, and limits the financial exposure and the number of agreements
and contracts it enters into with any one party. The Company generally does not
require collateral from counterparties, except for margin agreements associated
with the ten-year interest rate swaps on the Company's ten-year unsecured notes.
To mitigate the credit risk

59
<PAGE>
NOTE 10--CONCENTRATIONS OF RISK (CONTINUED)
associated with these ten-year swap transactions which mature in 2004, the
Company entered into margining agreements with its third-party bank
counterparties. These agreements require the Company or the counterparty to post
margin only if certain credit risk thresholds are exceeded. The amounts held in
margin accounts were not material as of September 25, 1998.

CONCENTRATIONS IN THE AVAILABLE SOURCES OF SUPPLY OF MATERIALS AND PRODUCT

Although certain components essential to the Company's business are
generally available from multiple sources, other key components (including
microprocessors and application-specific integrated circuits, or "ASICs") are
currently obtained by the Company from single or limited sources. If the supply
of a key single-sourced component to the Company were to be delayed or curtailed
or in the event a key manufacturing vendor delays shipments of completed
products to the Company, the Company's ability to ship related products in
desired quantities and in a timely manner could be adversely affected. The
Company's business and financial performance could also be adversely affect,
depending on the time required to obtain sufficient quantities from the original
source, or to identify and obtain sufficient quantities from an alternate
source. In addition, the Company uses some components that are not common to the
rest of the personal computer industry. Continued availability of these
components may be affected if producers were to decide to concentrate on the
production of common components instead of components customized to meet the
Company's requirements. Finally, a significant portion of the Company's CPUs and
logic boards are now manufactured by outsourcing partners. Although the Company
works closely with its outsourcing partners on manufacturing schedules and
levels, the Company's operating results could be adversely affected if its
outsourcing partners were unable to meet their production obligations.

NOTE 11--INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION

The Company operates in one principal industry segment: the design,
manufacture, and sale of personal computing products. The Company's products are
sold primarily to the business, education, consumer, and government markets.

60
<PAGE>
NOTE 11--INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
Geographic financial information is as follows (in millions):

<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net sales to unaffiliated customers:
United States.......................................................... $ 3,287 $ 3,507 $ 4,735
EMEA................................................................... 1,345 1,667 2,222
Japan.................................................................. 731 1,070 1,792
Asia Pacific........................................................... 293 490 563
Other.................................................................. 285 347 521
--------- --------- ---------
Total net sales...................................................... $ 5,941 $ 7,081 $ 9,833
--------- --------- ---------
--------- --------- ---------
Transfers between geographic areas (eliminated in consolidation):
United States.......................................................... $ 50 $ 206 $ 517
EMEA................................................................... 398 207 121
Japan.................................................................. 1 5 --
Asia Pacific........................................................... 854 1,270 3,035
--------- --------- ---------
Total transfers...................................................... $ 1,303 $ 1,688 $ 3,673
--------- --------- ---------
--------- --------- ---------
Operating income (loss):
United States.......................................................... $ 45 $ (913) $ (1,198)
EMEA................................................................... 117 (129) (186)
Japan.................................................................. 3 (86) (4)
Asia Pacific........................................................... 56 104 3
Other.................................................................. 8 (29) --
Eliminations........................................................... 32 (17) 2
Corporate income (expense), net.......................................... 68 25 88
--------- --------- ---------
Income (loss) before provision (benefit) for income taxes................ $ 329 $ (1,045) $ (1,295)
--------- --------- ---------
--------- --------- ---------
Identifiable assets:
United States.......................................................... $ 1,205 $ 1,543 $ 1,935
EMEA................................................................... 342 557 648
Japan.................................................................. 242 383 559
Asia Pacific........................................................... 104 286 312
Other.................................................................. 68 119 171
Eliminations........................................................... (3) (135) (26)
Corporate assets....................................................... 2,331 1,480 1,765
--------- --------- ---------
Total assets......................................................... $ 4,289 $ 4,233 $ 5,364
--------- --------- ---------
--------- --------- ---------
</TABLE>

"EMEA" is an abbreviation for Europe, the Middle East, and Africa. Revenues
in Africa and the Middle East were not significant. "Asia Pacific" does not
include Japan. "Other" is comprised of all North and South America sites
excluding the United States. Prior year amounts have been restated to conform to
the current year's presentation. "Net sales to unaffiliated customers" is based
on the location of the customers.

Transfers between geographic areas are recorded at amounts generally above
cost and in accordance with the rules and regulations of the respective
governing tax authorities. Operating income (loss) by geographic area consists
of total net sales less operating expenses, and does not include an allocation
of general corporate expenses. The restructuring charges recorded in 1997 and
1996 are included in the calculation of operating income (loss) for each
geographic area. Identifiable assets of geographic areas are those assets used
in the Company's operations in each area. Corporate assets include cash and cash
equivalents, short-term investments and equity securities.

A large portion of the Company's revenue is derived from its international
operations, and a majority of the products sold internationally are manufactured
in the Company's facilities in Cork, Ireland and Singapore. As a result, the
Company is subject to risks associated with foreign operations, such as

61
<PAGE>
NOTE 11--INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
obtaining governmental permits and approvals, currency exchange fluctuations,
currency restrictions, political instability, labor problems, trade
restrictions, and changes in tariff and freight charges.

NOTE 12--SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
FOURTH QUARTER THIRD QUARTER SECOND QUARTER FIRST QUARTER
--------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
(TABULAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
1998
Net sales.......................................... $ 1,556 $ 1,402 $ 1,405 $ 1,578
Gross margin....................................... $ 417 $ 360 $ 349 $ 353
Net income......................................... $ 106 $ 101 $ 55 $ 47
Earnings per common share:
Basic............................................ $ 0.79 $ 0.76 $ 0.42 $ 0.37
Diluted.......................................... $ 0.68 $ 0.65 $ 0.38 $ 0.33

1997
Net sales.......................................... $ 1,614 $ 1,737 $ 1,601 $ 2,129
Gross margin....................................... $ 320 $ 348 $ 303 $ 397
Net loss........................................... $ (161) $ (56) $ (708) $ (120)
Loss per common share:
Basic............................................ $ (1.26) $ (0.44) $ (5.64) $ (0.96)
Diluted.......................................... $ (1.26) $ (0.44) $ (5.64) $ (0.96)
</TABLE>

Basic and diluted earnings per share are computed independently for each of
the quarters presented. Therefore, the sum of quarterly basic and diluted per
share information may not equal annual basic and diluted earnings per share.

Net income for the third quarter of 1998 includes a $40 million gain before
foreign taxes on gains associated with the Company's investment in ARM which
were recognized as other income. Foreign taxes recognized in the third quarter
on these gains were approximately $7 million. The third quarter of 1998 also
includes the recognition of $7 million of purchased in-process research and
development which was charged to operations upon acquisition.

Net loss for the fourth quarter of 1997 includes a $62 million charge to
increase the Company's restructuring reserves, as well as a $75 million charge
related to the termination of the license agreement with PCC. Net loss for the
second quarter of 1997 includes a $155 million restructuring charge, as well as
a $375 million write-off of purchased in-process research and development
related to the Company's acquisition of NeXT.

62
<PAGE>
SCHEDULE II

APPLE COMPUTER, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN MILLIONS)

<TABLE>
<CAPTION>
CHARGED TO
BEGINNING COSTS AND ENDING
ALLOWANCE FOR DOUBTFUL ACCOUNTS: BALANCE EXPENSES DEDUCTIONS(1) BALANCE
- ----------------------------------------------------------------- ------------- --------------- ----------------- -----------
<S> <C> <C> <C> <C>
Year Ended September 25, 1998.................................... $ 99 $ 11 $ 29 $ 81
Year Ended September 26, 1997.................................... $ 91 $ 35 $ 27 $ 99
Year Ended September 27, 1996.................................... $ 87 $ 28 $ 24 $ 91
</TABLE>

- ------------------------

(1) Represents amounts written off against the allowance, net of recoveries.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

63
<PAGE>
PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS

Listed below are the Class I directors whose two-year terms expire in 1999.

<TABLE>
<CAPTION>
NAME POSITION WITH THE COMPANY AGE DIRECTOR SINCE
- -------------------------------------------- -------------------------- --- ---------------
<S> <C> <C> <C>
Gareth C.C. Chang Director 55 1996
William V. Campbell Director 58 1997
Jerome B. York Director 60 1997
</TABLE>

Listed below are the Class II directors whose two-year terms do not expire
until 2000.

<TABLE>
<CAPTION>
NAME POSITION WITH THE COMPANY AGE DIRECTOR SINCE
- -------------------------------------------- -------------------------- --- ---------------
<S> <C> <C> <C>
Steven P. Jobs Director and interim Chief 43 1997
Executive Officer
Lawrence J. Ellison Director 54 1997
Edgar S. Woolard, Jr. Director 64 1996
</TABLE>

WILLIAM V. CAMPBELL has been chairman of the Board of Directors of Intuit,
Inc. since August 1998. Mr. Campbell was President and Chief Executive Officer
and a director of Intuit Inc. from April 1994 to August 1998. From January 1991
to December 1993, Mr. Campbell was President and Chief Executive Officer of GO
Corporation. Mr. Campbell also serves on the board of directors of Netscape
Communications Corporation, SanDisk Corporation and Great Plains Software.

GARETH C. C. CHANG was appointed September 1, 1998 as Executive Chairman of
STAR TV. Prior to joining STAR TV, Mr. Chang was President of Hughes Electronics
International and Corporate Senior Vice President of Hughes Electronics since
1993. Previously, he was Corporate Vice President of McDonnell Douglas
Corporation. He is currently a director of News Corporation, Mallinckrodt, Inc.
and sits on the advisory council of Nike Inc.

LAWRENCE J. ELLISON has been Chief Executive Officer and a director of
Oracle Corporation (Oracle) since he co-founded Oracle in May 1977, and was
President of Oracle until June 1996. Mr. Ellison has been Chairman of the Board
of Oracle since June 1995. Mr. Ellison is a director of SuperGen, Inc., the Dian
Fossey Gorilla Fund, and is Co-Chairman of California's Council on Information
Technology.

STEVEN P. JOBS is one of the Company's co-founders and currently serves as
its interim Chief Executive Officer. Mr. Jobs is the also the Chairman and Chief
Executive Officer of Pixar Animation Studios. In addition, Mr. Jobs co-founded
NeXT Software, Inc. ("NeXT") and served as the Chairman and Chief Executive
Officer of NeXT from 1985 until 1997 when NeXT was acquired by the Company.

EDGAR S. WOOLARD, JR. has served as Chairman of the Board of Director of
Conoco Inc. since July 1998. He served as Chairman of the Board of Directors of
E. I. DuPont de Nemours & Co. ("DuPont") until October 1997. Previously, he held
the positions of President and Chief Executive Officer of DuPont. He is
currently a director of CITIGROUP, Inc. and DuPont.

JEROME B. YORK has served as Vice Chairman of Tracinda Corporation since
September 1995. In May 1993, he joined International Business Machines
Corporation (IBM) as Senior Vice President and Chief Financial Officer, and he
served as a director of IBM from January 1995 to August 1995. Prior to joining
IBM, Mr. York served in a number of executive positions at Chrysler Corporation,
including Executive Vice President--Finance and Chief Financial Officer from May
1990 to May 1993. He also

64
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
served as a director of Chrysler Corporation from 1992 to 1993. Mr. York is also
a director Waste Management, Inc., and MGM Grand, Inc. and Metro-Goldwyn-Mayer,
Inc.

EXECUTIVE OFFICERS

The following sets forth certain information regarding executive officers of
the Company. Information pertaining to Mr. Jobs, who is both a director and an
executive officer of the Company, may be found in the section entitled
"Directors".

FRED D. ANDERSON, Executive Vice President and Chief Financial Officer (age
54) joined the Company in April 1996. Prior to joining the Company, Mr. Anderson
was Corporate Vice President and Chief Financial Officer of Automatic Data
Processing, Inc. ("ADP"), a position he held from August 1992 to March 1996.
Prior to joining ADP, Mr. Anderson held several domestic and international
executive positions at MAI Basic Four, Inc., including President and Chief
Operating Officer.

TIMOTHY D. COOK, Senior Vice President, Worldwide Operations (age 38) joined
the company in March 1998. Prior to joining the Company, Mr. Cook held the
position of Vice President, Corporate Materials for Compaq Computer Corporation
("Compaq"). Previous to his work at Compaq, Mr. Cook was the Chief Operating
Officer of the Reseller Division at Intelligent Electronics. Mr. Cook also spent
12 years with IBM, most recently as Director of North American Fulfillment.

NANCY R. HEINEN, Senior Vice President, General Counsel and Secretary (age
42) joined the Company in September 1997. Prior to joining the Company, Ms.
Heinen held the position of Vice President, General Counsel and Secretary of the
Board of Directors at NeXT from February 1994 until the acquisition of NeXT by
the Company in February 1997. Prior to joining NeXT, Ms. Heinen was Group
Counsel and Assistant Secretary at Tandem Computers Incorporated from 1989 to
1994, and previously had been employed in private legal practice.

MITCHELL MANDICH, Senior Vice President, Worldwide Sales (age 50) joined the
Company in February 1997 upon the Company's acquisition of NeXT. Mr. Mandich has
also served the Company in the position of Vice President, North American
Business Division. Prior to joining the Company, Mr. Mandich held the position
of Vice President, Worldwide Sales and Service with NeXT from December 1995
through February 1997. Before joining NeXT, Mr. Mandich served in the position
of Senior Vice President, Americas Sales and Marketing with Pyramid Technology
Corporation from January 1993 to November 1995.

JONATHAN RUBINSTEIN, Senior Vice President, Hardware Engineering (age 42),
joined the Company in February 1997. Before joining the Company, Mr. Rubinstein
was Executive Vice President and Chief Operating Officer of FirePower Systems
Incorporated ("FirePower"), from May 1993 to August 1996. Before joining
FirePower, Mr. Rubinstein was Vice President and General Manager, Hardware and
Vice President, Hardware Engineering at NeXT.

AVADIS TEVANIAN, JR., PH.D., Senior Vice President, Software Engineering
(age 37), joined the Company in February 1997 upon the Company's acquisition of
NeXT. With NeXT, Dr. Tevanian held several positions, including Vice President,
Engineering, from April 1995 to February 1997. Prior to April 1995, Dr. Tevanian
worked as an engineer with NeXT and held several management positions.

SINA TAMADDON, Senior Vice President, Service & Support (age 41) joined the
Company in September 1997. Mr. Tamaddon has also served with the Company in the
position of Vice President and General Manager, Newton Group. Before joining the
Company, Mr. Tamaddon held the position of Vice President, Europe with NeXT from
September 1996 through March 1997. From August 1994 to August 1996,

65
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
Mr. Tamaddon held the position of Vice President, Professional Services with
NeXT. Prior to joining NeXT, Mr. Tamaddon served as Vice President, Advanced
Technology for Software Alliance Incorporated.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers and directors, and persons who own more than ten percent
of a registered class of the Company's equity securities, to file reports of
securities ownership and changes in such ownership with the Securities and
Exchange Commission (the "SEC"). Officers, directors and greater than ten
percent shareholders also are required by rules promulgated by the SEC to
furnish the Company with copies of all Section 16(a) forms they file.

Based solely upon a review of the copies of such forms furnished to the
Company, the absence of a Form 3 or Form 5 or written representations that no
Forms 5 were required, the Company believes that, during fiscal year 1998, its
officers, directors and greater than ten percent beneficial owners complied with
all applicable Section 16(a) filing requirements.

66
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION

INFORMATION REGARDING EXECUTIVE COMPENSATION

The following table summarizes compensation information for the last three
fiscal years for (i) Mr. Jobs, interim Chief Executive Officer and (ii) the four
most highly compensated executive officers other than the Chief Executive
Officer who were serving as executive officers of the Company at the end of
fiscal year (collectively, the "Named Executive Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
----------------------------------------------------
ANNUAL COMPENSATION SECURITIES ALL
---------------------------------- RESTRICTED UNDERLYING OTHER
FISCAL SALARY BONUS STOCK AWARDS OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) (#) ($)
- -------------------------------------- ----------- --------- ---------- ----------------- -------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Steven P. Jobs........................ 1998 -- -- -- -- --
interim Chief Executive
Officer............................. 1997 -- -- -- 30,000(1) --
1996 -- -- -- -- --

Fred D. Anderson...................... 1998 604,283 -- -- 250,000(2) 60,123(3)
Executive Vice President.............. 1997 520,311 -- 40,748(4) 850,000(5) 250,489(6)
and Chief Financial Officer........... 1996 252,156 1,275,000 -- 400,000 141,361(7)

Timothy D. Cook....................... 1998 223,953 500,000(8) -- 700,000 90,849(9)
Senior Vice President,................ 1997 -- -- -- -- --
Worldwide Operations.................. 1996 -- -- -- -- --

Jonathan Rubinstein................... 1998 402,095 -- -- 300,000(2) 4,804(10)
Senior Vice President,................ 1997 250,262 100,000 19,108(4) 700,000(5) 1,864(10)
Hardware Engineering.................. 1996 -- -- -- -- --

Mitchell Mandich...................... 1998 402,253 -- -- 424,250(2) 8,118(10)
Senior Vice President,................ 1997 174,348 104,000 -- 565,050(5 11) --
Worldwide Sales....................... 1996
</TABLE>

- --------------------------

(1) Mr. Jobs was granted 30,000 stock options in his capacity as a director of
the Company pursuant to the 1997 Director Stock Option Plan.

(2) Replacement of 250,000, 224,250 and 300,000 options that were previously
granted to Messrs. Anderson, Mandich and Rubinstein, respectively, and
canceled pursuant to the stock option exchange program. Other than the
replacement options, Messrs. Anderson and Rubinstein were not granted any
options during the fiscal year.

(3) Includes $45,000 in relocation assistance and $5,123 in matching
contributions made by the Company in accordance with the terms of the 401(k)
plan.

(4) For fiscal year 1997, these amounts represent the values on February 5, 1997
of the Common Stock underlying the Performance Shares earned by the Named
Executive Officers under the terms of the Senior Officers Restricted
Performance Share Plan.

The amounts of Common Stock earned by participating Named Executive Officers
are as follows: Mr. Anderson - 2,672; Mr. Rubinstein - 1,253. No dividends
were paid on the Performance Shares. As of the last day of fiscal year 1997,
the Named Executive Officers held no other Performance Shares or restricted
stock.

67
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION (CONTINUED)
(5) Includes the replacement of 500,000, 50,000 and 200,000 options that were
previously granted to Messrs. Anderson, Mandich and Rubinstein,
respectively, and canceled pursuant to the stock option exchange program.

(6) Consists of $245,497 in relocation assistance and $4,992 in matching
contributions made by the Company in accordance with the terms of its 401(k)
plan.

(7) Consists of $140,155 in relocation assistance and $1,206 in matching
contributions made by the Company in accordance with the terms of its 401(k)
plan.

(8) In connection with his employment, Mr. Cook received a one-time hiring bonus
in the amount of $500,000.

(9) Consists of $86,049 in relocation assistance and $4,800 in matching
contributions made by the Company in accordance with the terms of its 401(k)
plan.

(10) Consists of matching contributions made by the Company in accordance with
the terms of its 401(k) plan.

(11) Includes 240,800 NeXT options which were converted into Apple options
during fiscal year 1997 in connection with Apple's acquisition of NeXT.

68
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR

The following table provides information about option grants to the Named
Executive Officers during fiscal year 1998.

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------ ANNUAL RATES OF
NUMBER OF PERCENT OF TOTAL STOCK PRICE
SECURITIES OPTIONS GRANTED APPRECIATION FOR
UNDERLYING TO EMPLOYEES IN OPTION TERM (3)
OPTIONS GRANTED FISCAL YEAR EXERCISE OR EXPIRATION --------------------
NAME (#) (1) ($/SH)(2) BASE PRICE DATE 5% ($) 10% ($)
- --------------------------------- ----------------- ----------------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Steven P. Jobs................... -- 0.00% -- -- -- --

Fred D. Anderson................. 250,000(4) 1.80% 13.6875 12/19/07 2,151,999 5,453,587

Timothy D. Cook.................. 700,000 5.04% 17.6875 2/02/08 7,786,502 19,732,524

Jonathan Rubinstein.............. 300,000(4) 2.16% 13.6875 12/19/07 2,582,399 6,544,305

Mitchell Mandich................. 224,250(4) 1.61% 13.6875 12/19/07 1,930,343 4,891,868
200,000 1.44% 13.125 12/29/07 1,650,848 4,183,574
</TABLE>

- ------------------------------

(1) Based on an aggregate of 13,879,349 options granted to all employees during
fiscal year 1998, including 4,707,220 options granted in exchange for the
cancellation of the same number of outstanding options as of December 19,
1997 on a one-for-one basis pursuant to the stock option exchange program.
Options typically vest in four equal annual installments commencing on the
first anniversary of the date of grant.

(2) All options were granted at an exercise price equal to the fair market value
based on the closing market value of Common Stock on the Nasdaq National
Market on the date of grant.

(3) Potential gains are net of exercise price, but before taxes associated with
exercise. These amounts represent certain assumed rates of appreciation
only, based on SEC rules, and do not represent the Company's estimate or
projection of the price of the Company's stock in the future. Actual gains,
if any, on stock option exercises depend upon the actual future price of
Common Stock and the continued employment of the option holders throughout
the vesting period. Accordingly, the potential realizable values set forth
in this table may not be achieved.

(4) Grants of stock options pursuant to the stock option exchange program in
exchange for the cancellation of outstanding stock options. Messrs.
Anderson, Mandich and Rubinstein did not receive any new grants of stock
options in fiscal 1998.

OPTIONS EXERCISED AND YEAR-END OPTION HOLDINGS

The following table provides information about stock option exercises by the
Named Executive Officers during fiscal year 1998 and stock options held by each
of them at fiscal year-end.

69
<PAGE>
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT FISCAL
SHARES VALUE FISCAL YEAR-END (#) YEAR-END ($)(2)
ACQUIRED ON REALIZED ---------------------------- --------------------------
NAME EXERCISE (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------- ------------- --------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Steven P. Jobs................... -- -- 10,000 20,000 157,500 315,000
Fred D. Anderson................. 133,334 3,108,349 33,334 583,332 850,017 14,765,591
Timothy D. Cook.................. -- -- 0 700,000 0 14,743,750
Jonathan Rubinstein.............. 66,667 1,552,661 0 433,333 0 10,918,741
Mitchell Mandich................. 78,717 1,779,641 13,200 608,083 423,852 16,377,545
</TABLE>

- ------------------------------

(1) Market value of underlying securities (based on the fair market value of
Common Stock on the Nasdaq National Market) at the time of exercise, minus
the exercise price.

(2) Market value of securities underlying in-the-money options at the end of
fiscal year 1998 (based on $38.75 per share, the closing price of Common
Stock on the Nasdaq National Market on September 25, 1998), minus the
exercise price.

STOCK OPTION EXCHANGE PROGRAM

The following table sets forth certain information concerning the Exchange
Program, including (i) the name and position of each executive officer who
participated in the exchange program, (ii) the date of any such exchange, (iii)
the number of securities underlying exchanged options, (iv) the per share market
price of the underlying security at the time of the exchange, (v) the original
exercise price or base price of the canceled option at the time of exchange,
(vi) the per share exercise price of the option received in exchange for the
existing option and (vii) the original option term remaining at the date of
exchange.

70
<PAGE>
10-YEAR OPTION REPRICINGS
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES EXERCISE
UNDERLYING MARKET PRICE PRICE AT
OPTIONS OF STOCK AT TIME OF NEW
DATE OF REPRICED TIME OF REPRICING EXERCISE
NAME AND POSITION REPRICING (#) REPRICING ($) ($) PRICE ($)
- --------------------------------------------------- ----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Fred D. Anderson Executive Vice President and Chief 12/19/97 250,000 13.6875 19.75 13.6875
Financial Officer 7/11/97 400,000 13.25 24.56 13.25
7/11/97 100,000 13.25 18.375 13.25

Guerrino De Luca (1) 7/11/97 200,000 13.25 17.00 13.25
Executive Vice President, Marketing 7/11/97 28,000 13.25 26.38 13.25
7/11/97 20,000 13.25 19.88 13.25
7/11/97 15,000 13.25 29.50 13.25
7/11/97 8,000 13.25 26.38 13.25
7/11/97 8,000 13.25 26.38 13.25
7/11/97 7,500 13.25 23.75 13.25
7/11/97 5,600 13.25 26.38 13.25
7/11/97 5,600 13.25 26.38 13.25
7/11/97 5,000 13.25 29.75 13.25
7/11/97 2,914 13.25 29.75 13.25
7/11/97 2,800 13.25 26.38 13.25
7/11/97 1,336 13.25 29.75 13.25

John B. Douglas, III (1) 7/11/97 100,000 13.25 17.50 13.25
Senior Vice President, General Counsel And 7/11/97 40,000 13.25 18.375 13.25
Secretary 7/11/97 25,000 13.25 16.50 13.25

Nancy R. Heinen 12/19/97 250,000 13.6875 21.31 13.6875
Senior Vice President, General Counsel and
Secretary

Mitchell Mandich 12/19/97 59,200 13.6875 19.75 13.6875
Senior Vice President, Worldwide Sales 12/19/97 165,050 13.6875 22.94 13.6875

David Manovich (1) 7/11/97 200,000 13.25 16.50 13.25
Senior Vice President, International Sales and
Service

Jonathan Rubinstein 12/19/97 300,000 13.6875 19.75 13.6875
Senior Vice President, Hardware Engineering 7/11/97 200,000 13.25 17.00 13.25

Sina Tamaddon 12/19/97 250,000 13.6875 18.125 13.6875
Senior Vice President, Service and Support

LENGTH OF
ORIGINAL OPTION
TERM REMAINING
AT DATE OF
NAME AND POSITION REPRICING
- --------------------------------------------------- ---------------
<S> <C>
Fred D. Anderson Executive Vice President and Chief 9 years
Financial Officer 8 months
8 years
9 months
9 years
9 months
Guerrino De Luca (1) 9 years
Executive Vice President, Marketing 7 months
7 years
9 months
8 years
11 months
6 years
5 months
6 years
7 months
7 years
4 months
6 years
3 months
4 years
7 months
5 years
6 months
1 year
0 months
2 years
9 months
4 years
2 months
1 year
9 months
John B. Douglas, III (1) 9 years
Senior Vice President, General Counsel And 6 months
Secretary 9 years
9 months
9 years
8 months
Nancy R. Heinen 9 years
Senior Vice President, General Counsel and 9 months
Secretary
Mitchell Mandich 9 years
Senior Vice President, Worldwide Sales 8 months
9 years
9 months
David Manovich (1) 9 years
Senior Vice President, International Sales and 8 months
Service
Jonathan Rubinstein 9 years
Senior Vice President, Hardware Engineering 8 months
9 years
7 months
Sina Tamaddon 9 years
Senior Vice President, Service and Support 11 months
</TABLE>

71
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES EXERCISE
UNDERLYING MARKET PRICE PRICE AT
OPTIONS OF STOCK AT TIME OF NEW
DATE OF REPRICED TIME OF REPRICING EXERCISE
NAME AND POSITION REPRICING (#) REPRICING ($) ($) PRICE ($)
- --------------------------------------------------- ----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Avadis Tevanian, Jr. 12/19/97 275,837 13.6875 19.75 13.6875
Senior Vice President, Software Engineering 7/11/97 100,000 13.25 17.00 13.25

LENGTH OF
ORIGINAL OPTION
TERM REMAINING
AT DATE OF
NAME AND POSITION REPRICING
- --------------------------------------------------- ---------------
<S> <C>
Avadis Tevanian, Jr. 9 years
Senior Vice President, Software Engineering 8 months
9 years
7 months
</TABLE>

- ------------------------------

(1) All options received by Messrs. De Luca, Manovich and Douglas pursuant to
the stock option exchange program were forfeited upon termination of
employment.

COMPENSATION COMMITTEE REPORT ON THE STOCK OPTION EXCHANGE PROGRAM

In order to address concerns regarding the retention of the Company's key
employees, the Compensation Committee approved a stock option exchange program
(the "Exchange Program") on December 21, 1997. Pursuant to the Exchange Program,
all individuals who held stock options granted under one of the Company's stock
option plans, excluding the Directors Stock Option Plan, were offered the
opportunity to exchange all of their stock options with an exercise price of
greater than $13.6875 on a one-for-one basis for new stock options with an
exercise price of $13.6875, the fair market value of the Common Stock on
December 19, 1997, and a new four year vesting schedule. All stock options
issued under the Exchange Program will expire on December 19, 2007. The
Company's employees exchanged approximately 4.7 million stock options.

MEMBERS OF THE COMPENSATION COMMITTEE

Edgar S. Woolard, Jr. (Chairman) Gareth C.C. Chang

COMPENSATION OF DIRECTORS

In 1997, the Company ended its practice of paying cash retainers and fees to
directors, and approved the Apple Computer, Inc. 1997 Director Stock Option Plan
(the "Director Plan"). The Director Plan was approved by the shareholders in
April 1998 and 400,000 shares have been reserved for issuance under the Director
Plan. Pursuant to the Director Plan, the Company's non-employee directors are
granted 30,000 stock options upon their initial election to the Board. On the
fourth anniversary of a non-employee director's initial election to the Board
and on each subsequent anniversary, the director will be entitled to receive
10,000 vested stock options. As of October 31, 1998, there were 150,000 shares
outstanding under the Director Plan.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The current members of the Board's Compensation Committee are Messrs.
Woolard and Chang, neither of whom is an employee of the Company. No person who
was an employee of the Company in fiscal year 1998 served on the Compensation
Committee in fiscal year 1998. During fiscal year 1998, no executive officer of
the Company (i) served as a member of the compensation committee (or other board
committee performing similar functions or, in the absence of any such committee,
the board of directors) of another entity, one of whose executive officers
served on the Company's Compensation Committee, (ii) served as a director of
another entity, one of whose executive officers served on the Company's
Compensation Committee, or (iii) served as a member of the compensation
committee (or other board committee performing similar functions or, in the
absence of any such committee, the board of directors) of another entity, one of
whose executive officers served as a director of the Company.

72
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information as of October 31, 1998
with respect to the beneficial ownership of the Company's Common Stock by (i)
each person the Company believes beneficially holds more than 5% of the
outstanding shares of Common Stock; (ii) each director; (iii) each Named
Executive Officer listed in the Summary Compensation Table under the heading
"Executive Compensation" and (iv) all directors and executive officers as a
group. On the Table Date, 135,248,323 shares of Common Stock were issued and
outstanding. Unless otherwise indicated, all persons named as beneficial owners
of Common Stock have sole voting power and sole investment power with respect to
the shares indicated as beneficially owned.

SECURITY OWNERSHIP OF DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS

<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK PERCENT OF
BENEFICIALLY COMMON STOCK
NAME OF BENEFICIAL OWNER OWNED OUTSTANDING
- ------------------------------------------------------------------------------ ----------------- ---------------
<S> <C> <C>
Fidelity Management & Research Company........................................ 16,665,531(1) 12.32%
Fred D. Anderson.............................................................. 97,170(2) *
William V. Campbell........................................................... 10,251(3) *
Gareth C. C. Chang............................................................ 12,000(3) *
Timothy D. Cook............................................................... 0
Lawrence J. Ellison........................................................... 10,000(3) *
Steven P. Jobs................................................................ 10,001(3) *
Jonathan Rubinstein........................................................... 76,793(4) *
Mitchell Mandich.............................................................. 179,463(5) *
Edgar S. Woolard, Jr.......................................................... 18,000(3) *
Jerome B. York................................................................ 20,000(3) *
All executive officers and directors as a group (13 persons).................. 628,264(6) *
</TABLE>

- ------------------------

(1) Based on a Schedule 13G dated August 10, 1998, filed by FMR Corp., 82
Devonshire Street, Boston, MA 02109. Fidelity Management & Research Company
("Fidelity"), a wholly--owned subsidiary of FMR Corp and an investment
advisor, is the beneficial owner of 14,078,334 shares or 10.38% of the
Common Stock as a result of acting as an investment adviser to various
investment companies registered under Section 8 of the Investment Company
Act of 1940, and as a result of acting as sub-advisor to Fidelity American
Special Situations Trust ("FASST"). Fidelity Management Trust Company, also
a wholly-owned subsidiary of FMR Corp. and a bank is the beneficial owner of
2,170,138 shares or 1.60% of the Common Stock. Edward C. Johnson 3rd,
Chairman of FMR Corp., and FMR Corp. through its control of Fidelity, the
funds, FASST, and Fidelity Management Trust Company, each has sole power to
dispose of the shares and sole power to vote or to direct the voting of
1,484,974 shares. Neither FMR Corp. or Edward C. Johnson 3rd, has the sole
power to vote or direct the voting of the shares owned directly by the
Fidelity Funds.

(2) Includes 95,834 shares of Common Stock which Mr. Anderson has the right to
acquire by exercise of stock options.

(3) Includes 10,000 shares of Common Stock which Messrs. Campbell, Chang,
Ellison, Jobs, Woolard and York have the right to acquire by exercise of
stock options.

(4) Includes 75,000 shares of Common Stock which Mr. Rubinstein has the right to
acquire by exercise of stock options.

(5) Includes 179,463 shares of Common Stock which Mr. Mandich has the right to
acquire by exercise of stock options.

73
<PAGE>
(6) Represents shares of Common Stock held by 13 executive officers and
directors and options held by such individuals that were exercisable at the
Table Date or within 60 days thereafter.

* Amount represent less than 1% of the issued and outstanding shares of Common
Stock on the Table Date.

ITEM 13. ARRANGEMENTS WITH NAMED EXECUTIVE OFFICERS

EMPLOYMENT AGREEMENTS WITH NAMED EXECUTIVE OFFICERS

The Company entered into an employment agreement with Mr. Anderson effective
April 1, 1996, pursuant to which he serves as Executive Vice President and Chief
Financial Officer of the Company. Pursuant to his agreement, Mr. Anderson is
entitled to an annual base salary of no less than $500,000. If Mr. Anderson's
employment is terminated by the Company without "Cause" at any time during the
five-year period following April 1, 1996, he will be entitled to receive a lump
sum severance payment equal to the sum of his annual base salary and target
bonus, if any. Mr. Anderson's agreement generally defines "Cause" to include a
felony conviction, willful disclosure of confidential information or willful and
continued failure to perform his employment duties.

In February 1998, Mr. Cook joined the Company as Senior Vice President,
Operations. Under the terms of his employment, he is entitled to an annual base
salary of no less than $400,000. In addition, Mr. Cook received a one-time
hiring bonus in the amount of $500,000 and a stock option grant with a sell-back
provision. The sell-back provision provides that during the five day period
starting on the second anniversary of his commencement of employment, he may
elect to sell all of his remaining vested and unvested options and shares
(obtained through the exercise of such options) back to the Company for the sum
of $3 million less any profits Mr. Cook has realized to date through the
exercise and sale of such options. If Mr. Cook's employment is terminated by the
Company without "Cause" during the first two years of his employment, he will be
entitled to receive an amount equal to $800,000 minus the total base salary he
has received since the start of his employment. In addition, he will be allowed
to immediately exercise the stock option sell-back provision described above.

CHANGE IN CONTROL ARRANGEMENTS--STOCK OPTIONS

In the event of a "change in control" of the Company, all outstanding
options under the Company's stock option plans will, unless otherwise determined
by the plan administrator, become exercisable in full, and will be cashed out at
an amount equal to the difference between the applicable "change in control
price" and the exercise price. A "change in control" under these plans is
generally defined as (i) the acquisition by any person of 50% or more of the
combined voting power of the Company's outstanding securities or (ii) the
occurrence of a transaction requiring shareholder approval and involving the
sale of all or substantially all of the assets of the Company or the merger of
the Company with or into another corporation.

In addition, options granted to Nancy R. Heinen, Timothy D. Cook, Mitchell
Mandich and Sina Tamaddon have a provision so that in the event there is a
Change in Control, as defined in the Company's stock option plans, and if in
connection with or following such Change in Control, their employment is
terminated without "Cause" or if they should resign for "Good Reason", those
options outstanding that are not yet vested and exercisable as of the date of
such change in control, shall become fully vested and exercisable. Generally,
"Cause" is defined to include a felony conviction, willful disclosure of
confidential information or willful and continued failure to perform his or her
employment duties. "Good Reason" includes resignation of employment as a result
of a substantial diminution in position or duties, or an adverse change in title
or reduction in annual base salary.

74
<PAGE>
CHANGE IN CONTROL ARRANGEMENTS--RETENTION AGREEMENTS

The Company is currently party to retention agreements (The "Retention
Agreements") with three Named Executive Officers (Messrs. Anderson, Rubinstein
and Tevanian) providing for certain cash payments in the event of a termination
of an executive's employment following a change in control of the Company. For
purposes of the Retention Agreements, a "change in control" is defined as (i) a
reorganization, merger, consolidation or other corporate transaction in which
the holders of voting stock of the Company immediately before the corporate
transaction will not own more than 50% of the voting shares of the continuing or
surviving corporation immediately after such corporate transaction, (ii) the
acquisition of 30% or more of the combined voting power of the Company's
then-outstanding securities, (iii) a change of 50% in the membership of the
Board within a two-year period, unless the election or nomination for election
by shareholders of an adequate number of directors within such period was
approved by the vote of at least three-fourths of the directors then still in
office who either were directors at the beginning of the period or whose
election or nomination for election was previously so approved, (iv) all or
substantially all of the assets of the Company are sold, liquidated or
distributed, or (v) a "change in control" or a "change in the effective control"
of the Company within the meaning of Section 280G of the Code.

In the event of an Involuntary Termination (as defined in the Retention
Agreements) of any executive officer who is a party to a Retention Agreement
within two years following a change in control, such executive officer will
receive a cash payment equal to the sum of (i) three times his annual base
salary immediately prior to the date of his termination or, if greater, the
highest annualized base salary in effect during the three-year period ending on
the change in control, and (ii) three times his target bonus for the year in
which the termination occurs or, if greater, the highest target annual bonus
applicable to the executive officer in any of the three years ending prior to
the change in control. In addition, the executive officer would be eligible to
participate in the medical, dental, health, life and other fringe benefit plans
and arrangements applicable to him until the second anniversary of his date of
termination.

The Retention Agreements further provide that, in the event of an
Involuntary Termination of an executive officer on or following a change in
control, such executive officer's equity awards granted to him under the
Company's equity-based incentive plans (the "Equity Plans") will vest and become
exercisable. All equity awards also will vest and become exercisable as of the
date of a change in control as defined in the Equity Plans, regardless of
whether the executive officer's employment has then terminated. Subject to
certain limits on payments, the Retention Agreements also require tax gross-up
payments to the executive officers to mitigate any excise tax imposed on the
executive officers under Section 4999 of the Code in connection with a change in
control.

75
<PAGE>
REPORT OF THE COMPENSATION COMMITTEE OF THE
BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION

The Company's executive compensation program is administered by the
Compensation Committee of the Board of Directors (the "Committee"). The role of
the Committee, which is comprised of two outside non-employee directors, is to
review and approve the base salaries, bonuses, stock options and other
compensation of the executive officers and management-level employees of the
Company. The Committee also administers the Company's stock option plans and
makes grants to executive officers under the 1998 Executive Officer Stock Plan.

The Company's executive compensation program utilizes Company performance,
individual performance and an increase in stockholder value over time as
determinants of executive pay levels. These principles are intended to motivate
executive officers to improve the financial position of the Company, to hold
executives accountable for the performance of the organizations for which they
are responsible, to attract key executives into the service of the Company and
to create value for the Company's shareholders. The compensation for executive
officers is based on two elements: Cash compensation and equity-based
compensation.

CASH COMPENSATION

The Company reviews executive compensation surveys in both the computer
industry and general industry to ensure that the total cash compensation
provided to executive officers and senior management remains at a competitive
level to enable the Company to attract and retain management personnel with the
talents and skills required to meet the challenges of a highly competitive
industry. The compensation of executive officers, other than Mr. Jobs, interim
Chief Executive Officer, who receives no compensation, is reviewed annually by
the Committee.

BONUSES

For fiscal year 1998, the Compensation Committee approved the FY98 Vice
Presidents and Directors Incentive Bonus Plan (the "Bonus Plan"), under which
cash bonuses for employees at the level of director and above were determined
based on specified revenue and profit targets for the Company. Executive
officers are not eligible to participate in the Bonus Plan.

EQUITY-BASED COMPENSATION

In fiscal year 1998, the Compensation Committee emphasized equity-based
compensation, principally in the form of options, as the cornerstone of the
Company's executive compensation program. Equity awards are typically set by the
Compensation Committee based on industry surveys, each officer's individual
performance and achievements, market factors and the recommendations of
management. In fiscal year 1998, executive officers were eligible to receive
grants of stock options under the Apple Computer, Inc. 1998 Executive Officer
Stock Plan and its predecessor plan, the 1990 Stock Option Plan. In addition,
executive officers were eligible to participate in the Company's Employee Stock
Purchase Plan.

During fiscal year 1998, four executive officers of the Company received new
option grants under the 1990 Stock Option Plan. No executive officers received
options under the 1998 Executive Officer Stock Plan. The Options granted under
the 1990 Stock Option Plan were at an exercise price equal to the fair market
value of the Common Stock and generally vest in equal increments over a
four-year period after grant, subject to the participant's continued employment
with the Company. All options granted under the 1990 Stock Option Plan expire
ten years from the date of grant, unless a shorter term is provided in the
option agreement or the participant's employment with the Company ends before
the end of such ten-year period.

76
<PAGE>
In December 1997, the Compensation Committee also reviewed the employees'
outstanding options and determined that many employees of the Company held
options at exercise prices that limited their effectiveness as a tool for
employee retention and as a long-term incentive. To address this problem, the
Compensation Committee consulted with an independent benefits consultant and,
after considering various methods of dealing with this problem, approved the
stock option exchange program (the "Exchange Program"). Under the Exchange
Program, current employees of the Company were permitted to exchange all of
their options with an exercise price of greater than $13.6875 on a one-for-one
basis for new stock options with an exercise price of $13.6875, the fair market
value of the Common Stock on December 19, 1997, and a new four year vesting
schedule. Six executive officers elected to participate in the Exchange Program.
The terms of the Exchange Program are described in the section entitled "Stock
Option Exchange Program".

COMPENSATION OF THE CHIEF EXECUTIVE OFFICER

Mr. Jobs, the Company's interim Chief Executive Officer, did not receive any
compensation for the services he performed for the Company in fiscal year 1998.

SECTION 162(M)

The Company intends that options granted under the Company's stock option
plans be deductible by the Company under Section 162(m) of the Internal Revenue
Code of 1986, as amended.

MEMBERS OF THE COMPENSATION COMMITTEE

Edgar S. Woolard, Jr., Chairman Gareth C.C. Chang

77
<PAGE>
PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) Items Filed as Part of Report:

1. Financial Statements
The financial statements of the Company as set forth in the Index to
Consolidated Financial Statements under Part II, Item 8 of this Form 10-K
are hereby incorporated by reference.

2. Financial Statement Schedule
The financial statement schedule of the Company as set forth in the Index to
Consolidated Financial Statements under Part II, Item 8 of this Form 10-K is
hereby incorporated by reference.

3. Exhibits
The exhibits listed under Item 14(c) are filed as part of this Form 10-K.

(b) Reports on Form 8-K

A current report on form 8-K dated January 8, 1998, was filed by the
Registrant with the Securities and Exchange Commission to report under Item
5 thereof the press release issued to the public on January 6, 1998,
regarding the Company's expected profits and revenues for the first quarter
of fiscal 1998.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER NOTES* DESCRIPTION
- ----------- ---------------- -----------------------------------------------------------------------------------
<C> <S> <C>

2 97/1Q Agreement and Plan of Merger Among Apple Computer, Inc., Blackbird Acquisition
Corporation and NeXT Software, Inc., dated as of December 20, 1996

3.1 88-S3 Restated Articles of Incorporation, filed with the Secretary of State of the State
of California on January 27, 1988.

3.2 90/2Q Amendment to Restated Articles of Incorporation, filed with the Secretary of State
of the State of California on February 5, 1990.

3.3 95/1Q By-Laws of the Company, as amended through April 20, 1994.

4.1 89-8A Common Shares Rights Agreement dated as of May 15, 1989 between the Company and the
First National Bank of Boston, as Rights Agent.

4.1.1 96-S3/A Indenture, dated as of June 1, 1996, between the Company and Marine Midland Bank,
as Trustee, relating to the 6% Convertible Subordinated Notes due June 1, 2001.

4.2 94/2Q Indenture dated as of February 1, 1994, between the Company and Morgan Guaranty
Trust Company of New York (the "Indenture").

4.2.1 96-S3/A Form of the 6% Convertible Subordinated Notes due June 1, 2001 included in Exhibit
4.1.1.

4.3 94/2Q Supplemental Indenture dated as of February 1, 1994, among the Company, Morgan
Guaranty Trust Company of New York, as resigning trustee, and Citibank, N.A., as
successor trustee.

4.3.1 96-S3/A Specimen Certificate of Common Stock of Apple Computer, Inc. (Incorporated by
reference to Exhibit 4.5 to the Company's Registration
</TABLE>

- ------------------------

* Notes appear on pages 82-83.

78
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER NOTES* DESCRIPTION
- ----------- ---------------- -----------------------------------------------------------------------------------
Statement on Form S-3 (file no. 33-62310) filed with the Securities and Exchange
Commission on May 6, 1993.).
<C> <S> <C>

4.4 94/2Q Officers' Certificate, without exhibits, pursuant to Section 301 of the Indenture,
establishing the terms of the Company's 6 1/2% Notes due 2004.

4.5 94/2Q Form of the Company's 6 1/2% Notes due 2004.

4.8 96-S3/A Registration Rights Agreement, dated June 7, 1996 among the Company and Goldman,
Sachs & Co. and Morgan Stanley & Co. Incorporated.

4.9 97K Certificate of Determination of Preferences of Series A Non-Voting Convertible
Preferred Stock of Apple Computer, Inc.

4.10 97K Registration Rights Agreement, dated as of August 11, 1997, between Apple Computer,
Inc. and Microsoft Corporation.

10.A.1 93/3Q** 1981 Stock Option Plan, as amended.

10.A.2 91K** 1987 Executive Long Term Stock Option Plan.

10.A.3 91K** Apple Computer, Inc. Savings and Investment Plan, as amended and restated effective
as of October 1, 1990.

10.A.3-1 92K** Amendment of Apple Computer, Inc. Savings and Investment Plan dated March 1, 1992.

10.A.3-2 97/2Q** Amendment No. 2 to the Apple Computer, Inc. Savings and Investment Plan.

10.A.4 88K** Form of Director Warrant.

10.A.5 98/1Q** 1990 Stock Option Plan, as amended through November 5, 1997.

10.A.6 97K** Apple Computer, Inc. Employee Stock Purchase Plan, as amended through September 9,
1996.

10.A.7 96/1Q** 1996 Senior/Executive Incentive Bonus Plan.

10.A.8 91K** Form of Indemnification Agreement between the Registrant and each officer of the
Registrant.

10.A.15-1 93K-10A.15** 1993 Executive Restricted Stock Plan.

10.A.25 96/1Q** Summary of Principal Terms of Employment between Registrant and Gilbert F. Amelio.

10.A.26 96/2Q** Employment Agreement dated February 28, 1996, between Registrant and Gilbert F.
Amelio.

10.A.26-1 97/3Q** Amendment to Employment Agreement, dated May 1, 1997, between Apple Computer, Inc.
and Gilbert F. Amelio.

10.A.27 96/2Q** Employment Agreement dated February 26, 1996, between Registrant and George M.
Scalise.

10.A.28 96/2Q** Employment Agreement dated March 4, 1996, between Registrant and Fred D. Anderson,
Jr.

10.A.29 96/2Q** Retention Agreement dated March 4, 1996, between Registrant and Fred D. Anderson,
Jr.
</TABLE>

- ------------------------

* Notes appear on pages 82-83.

** Represents a management contract or compensatory plan or arrangement.

79
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER NOTES* DESCRIPTION
- ----------- ---------------- -----------------------------------------------------------------------------------
<C> <S> <C>
10.A.30 96/2Q** Employment Agreement dated April 2, 1996, between Registrant and John Floisand.

10.A.31 96/2Q** Employment Agreement dated April 3, 1996, between Apple Japan, Inc. and John
Floisand.

10.A.32 96/3Q** Employment Agreement dated June 13, 1996, between Registrant and Robert M.
Calderoni.

10.A.33 96/3Q** Employment Agreement dated June 25, 1996, between Registrant and Ellen M. Hancock.

10.A.34 96/3Q** Retention Agreement dated June 25, 1996, between Registrant and Ellen M. Hancock.

10.A.35 96/3Q** Retention Agreement dated June 27, 1996, between Registrant and George M. Scalise.

10.A.36 96/3Q** Airplane Use Agreement dated June 27, 1996, among Registrant, Gilbert F. Amelio and
Aero Ventures.

10.A.37 96/3Q** Letter Agreement dated May 1, 1996, between Registrant and Jeanne Seeley.

10.A.38 (1)96/3Q** Separation Agreement effective March 28, 1996, between Registrant and Michael H.
Spindler.

10.A.39 96/3Q** Letter Agreement effective June 3, 1996, between Registrant and James J. Buckley.

10.A.40 96K** Employment Agreement effective June 3, 1996, between Registrant and G. Frederick
Forsyth.

10.A.41 97/1Q** Employment Agreement effective December 2, 1996, between Registrant and John B.
Douglas III.

10.A.42 97/2Q** Senior Officers Restricted Performance Share Plan, as amended through March 25,
1997.

10.A.43 97/2Q** NeXT Computer, Inc. 1990 Stock Option Plan, as amended.

10.A.44 97/2Q** Non-Employee Director Stock Plan.

10.A.45 97/3Q** Retention Agreement dated May 1, 1997 between Apple Computer, Inc. and Fred D.
Anderson.

10.A.46 97K** Resignation Agreement dated September 22, 1997 between Registrant and Gilbert F.
Amelio.

10.A.47 97K** Retention Agreement dated May 1, 1997 between Registrant and Jon Rubenstein.

10.A.48 97K** Retention Agreement dated May 1, 1997 between Registrant and Avie Tevanian.

10.A.49 97K** 1997 Employee Stock Option Plan, as amended through November 5, 1997.

10.A.50 98/2Q** 1997 Director Stock Option Plan

10.A.51 98/2Q** 1998 Executive Officer Stock Plan
</TABLE>

- ------------------------

* Notes appear on pages 82-83.

** Represents a management contract or compensatory plan or arrangement.

80
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER NOTES* DESCRIPTION
- ----------- ---------------- -----------------------------------------------------------------------------------
<C> <S> <C>
10.B.1 88K-10.1 Master OEM Agreement dated as of January 26, 1988 between the Company and Tokyo
Electric Co. Ltd.

10.B.7 91-8K-7 Know-how and Copyright License Agreement (Power PC Architecture) dated as of
September 30, 1991 between IBM and the Registrant.

10.B.8 91-8K-8 Participation in the Customer Design Center by the Registrant dated as of September
30, 1991 between IBM and the Registrant.

10.B.9 91-8K-9 Agreement for Purchase of IBM Products (Original Equipment Manufacturer) dated as
of September 30, 1991 between IBM and the Registrant.

10.B.11 91K Agreement dated October 9, 1991 between Apple Corps Limited and the Registrant.

10.B.12 92K Microprocessor Requirements Agreement dated January 31, 1992 between the Registrant
and Motorola, Inc.

10.B.13 96/2Q Restructuring Agreement dated December 14, 1995, among Registrant, Taligent, Inc.
and International Business Machines Corporation.

10.B.14 96/2Q Stock Purchase Agreement dated April 4, 1996 between Registrant and SCI Systems,
Inc.

10.B.16 96/3Q Fountain Manufacturing Agreement dated May 31, 1996 between Registrant and SCI
Systems, Inc.

10.B.17 97K Preferred Stock Purchase Agreement, dated as of August 5, 1997, between Apple
Computer, Inc. and Microsoft Corporation.

21 Subsidiaries of the Company.

23.1 Consent of KPMG Peat Marwick LLP, Independent Auditors.

23.2 Consent of Ernst & Young LLP, Independent Auditors.

24 Power of Attorney (included at page 84).

27 Financial Data Schedule
</TABLE>

- ------------------------

* Notes appear on pages 82-83.

81
<PAGE>

<TABLE>
<CAPTION>
NOTES
- -----------------
<S> <C>
88K Incorporated by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1988 (the "1988 Form 10-K").

88-S3 Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-3
(file no. 33-23317) filed July 27, 1988.

88K-10.1 Incorporated by reference to Exhibit 10.1 to the 1988 Form 10-K. Confidential treatment as to
certain portions of these agreements has been granted.

89-8A Incorporated by reference to Exhibit 1 to the Company's Registration Statement on Form 8-A
filed with the Securities and Exchange Commission on May 26, 1989.

90/2Q Incorporated by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 30, 1990.

91K Incorporated by reference to the exhibit of that number in the Company's Annual Report on Form
10-K for the fiscal year ended September 27, 1991 (the "1991 Form 10-K").

91-8K-7 Incorporated by reference to Exhibit 7 to the October 1991 Form 8-K.

91-8K-8 Incorporated by reference to Exhibit 8 to the October 1991 Form 8-K.

91-8K-9 Incorporated by reference to Exhibit 9 to the October 1991 Form 8-K.

92K Incorporated by reference to the exhibit of that number in the Company's Annual Report on Form
10-K for the fiscal year ended September 25, 1992 (the "1992 Form 10-K").

93K-10.A.15 Incorporated by reference to Exhibit 10.A.15 to the 1993 Form 10-K.

93/3Q Incorporated by reference to Exhibit 10.A.1 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 25, 1993.

94/2Q Incorporated by reference to the exhibit of that number in the Company's Quarterly Report on
Form 10-Q for the quarter ended April 1, 1994.

96/1Q Incorporated by reference to the exhibit of that number in the Company's Quarterly Report on
Form 10-Q for the quarter ended December 29, 1995.

96/2Q Incorporated by reference to the exhibit of that number in the Company's Quarterly Report on
Form 10-Q for the quarter ended March 29, 1996.

96/3Q Incorporated by reference to the exhibit of that number in the Company's Quarterly Report on
Form 10-Q for the quarter ended June 28, 1996.

96-S3/A-4.1.1,
- -4.2.1,-4.3.1, Incorporated by reference to the exhibit 4.1, 4.2, 4.3, and 4.8, respectively, in the Company's
- -4.8 Registration Statement on Form S-3/A (file no. 333-10961) filed October 30, 1996.

96K Incorporated by reference to the exhibit of that number in the Company's Annual Report on Form
10-K for the fiscal year ended September 27, 1996 (the "1996 Form 10-K").

97/1Q Incorporated by reference to the exhibit of that number in the Company's Quarterly Report on
Form 10-Q for the quarter ended December 27, 1996.

97/2Q Incorporated by reference to the exhibit of that number in the Company's Quarterly Report on
Form 10-Q for the quarter ended March 28, 1997.

97/3Q Incorporated by reference to the exhibit of that number in the Company's Quarterly Report on
Form 10-Q for the quarter ended June 27, 1997.
</TABLE>

82
<PAGE>
<TABLE>
<CAPTION>
NOTES
- -----------------
<S> <C>
97K Incorporated by reference to the exhibit of that number in the Company's Annual Report on Form
10-K for the fiscal year ended September 26, 1997 (the "1997 Form 10-K").

98/1Q Incorporated by reference to the exhibit of that number in the Company's Quarterly Report on
Form 10-Q for the quarter ended December 26, 1997.

98/2Q Incorporated by reference to the exhibit of that number in the Company's Quarterly Report on
Form 10-Q for the quarter ended March 27, 1998.
</TABLE>

(d) Financial Statement Schedule

See Item 14(a)(2) of this Form 10-K

83
<PAGE>
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, this 21st day of
December 1998.

<TABLE>
<S> <C> <C>
APPLE COMPUTER, INC.

By: /s/ FRED D. ANDERSON
-----------------------------------------
Fred D. Anderson
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
</TABLE>

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Steven P. Jobs and Fred D. Anderson, jointly and
severally, his attorneys-in-fact, each with the power of substitution, for him
in any and all capacities, to sign any amendments to this Annual Report on Form
10-K, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:

<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------

<C> <S> <C>
interim Chief Executive
Officer and Director
- ------------------------------ (Principal Executive December 21, 1998
STEVEN P. JOBS Officer)

Executive Vice President
/s/ FRED D. ANDERSON and Chief Financial
- ------------------------------ Officer (Principal December 21, 1998
FRED D. ANDERSON Financial Officer)

/s/ WILLIAM V. CAMPBELL
- ------------------------------ Director December 21, 1998
WILLIAM V. CAMPBELL

/s/ GARETH C.C. CHANG
- ------------------------------ Director December 21, 1998
GARETH C.C. CHANG

- ------------------------------ Director December 21, 1998
LAWRENCE J. ELLISON

/s/ EDGAR S. WOOLARD, JR.
- ------------------------------ Director December 21, 1998
EDGAR S. WOOLARD, JR.

/s/ JEROME B. YORK
- ------------------------------ Director December 21, 1998
JEROME B. YORK
</TABLE>

<PAGE>
EXHIBIT 21

SUBSIDIARIES OF
APPLE COMPUTER, INC*

<TABLE>
<CAPTION>
JURISDICTION
OF
NAME INCORPORATION
- ------------------------------------------------- ---------------
<S> <C>

Apple Computer B.V. Netherlands

Apple Computer, Inc. Limited Ireland

Apple Computer Limited Ireland

Apple Japan, Inc. Japan
</TABLE>

- ------------------------

* Pursuant to Item 601(b)(21)(ii) of Regulation S-K, the names of other
subsidiaries of Apple Computer, Inc. are omitted because, considered in the
aggregate, they would not constitute a significant subsidiary as of the end
of the year covered by this report.

<PAGE>
EXHIBIT 23.1

CONSENT OF INDEPENDENT AUDITORS

The Board of Directors
Apple Computer, Inc.

We consent to incorporation by reference in the registration statements
(Nos. 2-70449, 2-77563, 2-85095, 33-00866, 33-24650, 33-31075, 33-40877,
33-47596, 33-57092, 33-57080, 33-53873, 33-53879, 33-53895, 33-60279, 33-60281,
333-07437, 333-23719, 333-23725, and 333-60455) on Forms S-8 and registration
statements (No. 33-62310) on Form S-3 and (Nos 333-10961 and 333-28191) on Forms
S-3/A of Apple Computer, Inc. of our report dated October 14, 1998, relating to
the consolidated balance sheets of Apple Computer, Inc. and subsidiaries as of
September 25, 1998 and September 26, 1997, and the related consolidated
statements of operations, shareholders' equity, and cash flows for the years
then ended, and the related schedule, which report appears in the September 25,
1998 annual report on Form 10-K of Apple Computer, Inc.

KPMG Peat Marwick LLP

Mountain View, California
December 21, 1998

<PAGE>
EXHIBIT 23.2

CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 2-70449, 2-77563, 2-85095, 33-00866, 33-23650, 33-31075,
33-40877, 33-47596, 33-57092 33-57080, 33-53873, 33-53879, 33-53895, 33-60279,
33-60281, 333-07437, 333-23719, 333-23725, and 333-60455) pertaining to the 1981
and 1990 Stock Option Plans, the Employee Stock Purchase Plan, the 1980 Key
Employee Stock Purchase Plan, the 1986 Employee Incentive Stock Option Plan, the
1987 Executive Long Term Stock Option Plan, the 1993 Executive Restricted Stock
Plan, the Form of Director Warrant of Apple Computer, Inc., the NeXT Software,
Inc. 1990 Stock Option Plan, the 1997 Employee Stock Option Plan, the 1997
Director Stock Option Plan, the 1998 Executive Officer Stock Plan and the Senior
Officers Restricted Performance Share Plan, and Form S-3 No. 33-62310, Form
S-3/A No. 333-10961 and Form S-3/A No. 333-28191 in the related Prospectuses of
our report dated October 14, 1996 with respect to the consolidated financial
statements and schedule of Apple Computer, Inc. included in this Annual Report
(Form 10-K) for the year ended September 25, 1998.

Ernst & Young LLP

San Jose, California
December 21, 1998

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE PERIOD ENDED SEPTEMBER 25,
1998.
</LEGEND>
<MULTIPLIER> 1,000,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-25-1998
<PERIOD-END> SEP-25-1998
<CASH> 1,481
<SECURITIES> 819
<RECEIVABLES> 1,036
<ALLOWANCES> 81
<INVENTORY> 78
<CURRENT-ASSETS> 3,698
<PP&E> 824
<DEPRECIATION> 476
<TOTAL-ASSETS> 4,289
<CURRENT-LIABILITIES> 1,520
<BONDS> 954
0
150
<COMMON> 633
<OTHER-SE> 859
<TOTAL-LIABILITY-AND-EQUITY> 4,289
<SALES> 5,941
<TOTAL-REVENUES> 5,941
<CGS> 4,462
<TOTAL-COSTS> 4,462
<OTHER-EXPENSES> 1,218
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (62)
<INCOME-PRETAX> 329
<INCOME-TAX> 20
<INCOME-CONTINUING> 309
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 309
<EPS-PRIMARY> 2.34
<EPS-DILUTED> 2.10

</TABLE>