APPLE COMPUTER INC, 10-K, 2000-12-14

APPLE COMPUTER INC
10-K, 2000-12-14
ELECTRONIC COMPUTERS

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

(MARK ONE)

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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15( ) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000

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

FOR THE TRANSITION PERIOD FROM ______________ TO ______________

COMMISSION FILE NUMBER 0-10030

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APPLE COMPUTER, INC.

(Exact name of Registrant as specified in its charter)

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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)
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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)

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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 $5,383,542,545 as of December 1, 2000, 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.

335,881,977 shares of Common Stock Issued and Outstanding as of December 1, 2000
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PART I

FORWARD-LOOKING STATEMENTS

The Business section and other parts of this Annual Report on Form 10-K ("Form
10K") contain forward-looking statements that involve risks and uncertainties.
Such statements include those addressing future products and product features,
anticipated operating results during all or portions of 2001, anticipated
capital expenditures during 2001, and the Company's future liquidity. 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 Future Results and Financial Condition" under Part II,
Item 7 of this Form 10-K.

ITEM 1. BUSINESS

GENERAL

Apple Computer, Inc.-Registered Trademark- ("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's
fiscal year ends on or about the last Saturday of September. Unless otherwise
stated, all information presented in this Form 10-K is based on the Company's
fiscal calendar.

The Company designs, manufactures and markets personal computers and related
personal computing and communicating solutions for sale primarily to education,
creative, consumer, and business customers. Substantially all of the Company's
net sales to date have been derived from the sale of its Apple
Macintosh-Registered Trademark- line of personal computers and related software
and peripherals. The Company manages its business primarily on a geographic
basis. The Company's geographic segments include the Americas, Europe, Japan,
and Asia Pacific. The Americas segment includes both North and South America.
The European segment includes European countries as well as the Middle East and
Africa. The Japan segment includes only Japan, while the Asia Pacific segment
includes Australia and Asia except for Japan. Each geographic operating segment
provides similar hardware and software products and similar services. Further
information regarding the Company's operating segments may be found in Part II,
Item 7 of this Form 10-K under the heading "Net Sales," and in Part II, Item 8
on this Form 10-K in the Notes to Consolidated Financial Statements at Note 10,
"Segment Information and Geographic Data," 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 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-Registered Trademark- RISC-based microprocessors.

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.

POWER MAC-TM-

The Power Mac line of desktop 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 server
and networking software, Power Mac systems can be used as workgroup servers. The
Company's current Power Mac line features two models that come standard with
dual PowerPC G4 processors.

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POWER MAC-TM- G4 CUBE

The Power Mac G4 Cube system, introduced by Apple in July 2000, delivers the
performance of a Power Mac G4 in an eight-inch cube. The G4 Cube was designed to
appeal to both professional users and high-end consumer users seeking more power
coupled with a small design.

POWERBOOK-Registered Trademark- G3

The PowerBook G3 family of portable computers is specifically designed to meet
the mobile computing needs of professionals and advanced consumer users. Current
PowerBooks incorporate PowerPC G3 processors, active-matrix displays, and long
battery lives.

iMAC-TM-

The iMac line of desktop computers is targeted at education and consumer
markets. Current iMacs feature innovative industrial design, easy Internet
access, and PowerPC G3 processors, making them suitable for a wide range of
education and consumer applications.

iBOOK-TM-

Designed specifically for the portable computing needs of education and consumer
users, current iBook features include an active-matrix display, long battery
life, and a PowerPC G3 processor.

PERIPHERAL PRODUCTS

The Company sells certain associated Apple-branded computer hardware
peripherals, including a range of high quality precision color displays and
AirPort-TM- wireless networking base stations and add-in cards. The Company also
sells a variety of third-party hardware products directly to end users through
its on-line store including computer printers, storage devices, memory, and
imaging products such as digital camcorders and scanners.

PRINCIPAL SOFTWARE PRODUCTS

OPERATING SYSTEM SOFTWARE

Apple's operating system software, Mac OS-Registered Trademark-, provides
Macintosh computers with an easy, consistent user interface. The current
version, Mac OS 9, began shipping in October 1999. Mac OS 9 includes numerous
advanced features including Sherlock-Registered Trademark- 2, the Company's
advanced Internet search engine, features for faster and more efficient Internet
usage, enhanced system and network security, and auto updating of Apple software
over the Internet. The Company also develops and distributes extensions to the
Macintosh system software including utilities, languages, and developer tools.

During 2001, the Company plans to introduce the first customer release of its
new client operating system, Mac OS X, which will offer advanced functionality
based on an open-source UNIX-Registered Trademark--based foundation. Mac OS X
will incorporate the most fundamental changes in both core technology and user
interface design made by the Company to the Mac OS in a single upgrade since the
original introduction of the Macintosh in 1984. Mac OS X will feature memory
protection, pre-emptive multi-tasking, and symmetric multiprocessing. Mac OS X
includes Apple's new Quartz-TM- 2D graphics engine (based on the Internet-
standard Portable Document Format) for enhanced graphics and broad font support,
OpenGL for enhanced 3D graphics and gaming, and QuickTime-TM- for streaming
audio and video. In addition, Mac OS X features Apple's new user interface named
Aqua-TM-, which combines superior ease-of-use with new functionality such as the
"Dock," a new interface for organizing applications, documents and miniaturized
windows. On September 13, 2000, Apple released Mac OS X Public Beta. Mac OS X
Public Beta includes certain new or updated applications, including Apple's new
Mail client and new versions of the QuickTime player and Sherlock, as well as a
beta version of Microsoft's Internet Explorer written for Mac OS X.

Further information regarding the introduction of Mac OS X may be found in
Part II, Item 7 of this Form 10-K under the subheadings "Product Introductions
and Transitions" and "Support from Third-Party

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Software Developers" included under the heading "Factors That May Affect Future
Results and Financial Condition," which information is hereby incorporated by
reference.

In March 1999, the Company introduced Mac OS X Server, which combines the
strength of UNIX-Registered Trademark- and simplicity of the Macintosh. Mac OS X
Server is based on the Mach 2.5 microkernel and the BSD-Registered Trademark-
4.4 operating system. It provides performance and stability through full
pre-emptive multi-tasking, protected memory, advanced virtual memory, QuickTime
Streaming Server software, and NetBoot; a Mac OS X server feature allowing a
network of Macs to be booted and configured from a single server.

APPLICATION SOFTWARE

The Company has two primary digital video authoring/editing software titles.
Final Cut Pro-Registered Trademark- 1.2.5 is video authoring software designed
to meet the demanding needs of the professional video editing environment that
combines professional-quality video editing, compositing, and special effects in
one package. Apple introduced iMovie-TM- 2, an update to its easy-to-use
consumer digital video editing software, in July 2000. iMovie 2 makes it easy to
create home and classroom movies and features an enhanced user interface,
improved audio editing capabilities, enhanced controls for titling and
transitions, and added special effects. iMovie 2 is preinstalled on all
FireWire-Registered Trademark- enabled Macintoshes.

AppleWorks-Registered Trademark- 6 is an integrated productivity application
that incorporates word processing, spreadsheet, database, drawing, painting, and
presentation features in a single software package. Intended to be an
easy-to-use product for the Company's consumer and education customers,
AppleWorks 6 makes it simple to create professional looking documents in the
classroom and at home.

FileMaker-Registered Trademark- Corporation, a wholly owned subsidiary of the
Company, develops, publishes, and distributes desktop based database management
application software for Mac OS and Windows-based systems. Filemaker's FileMaker
Pro-TM- database software and related products offers strong relational
databases and advanced desktop-to-web publishing capabilities.

INTERNET SOFTWARE, INTEGRATION, AND SERVICES

Apple's Internet strategy is focused on delivering seamless integration with and
access to the Internet throughout the Company's product lines. In addition to
Sherlock 2, an easy Internet Setup Assistant is an integral part of Mac OS 9,
the current version of the Macintosh operating system.

QuickTime-TM- 4 Player, the Company's current version of its multimedia software
for Macintosh and Windows platforms, features streaming of live and stored video
and audio over the Internet. Since its release in June 1999, over 100 million
copies of QuickTime 4 software have been distributed free to Macintosh and
Windows users worldwide. QuickTime 4 Pro is a suite of software that allows
QuickTime files to be created and edited and allows a user to add special
effects to QuickTime movies. QuickTime Streaming Server software is the
underlying server technology that powers QuickTime 4's ability to stream live
and stored video and audio over the Internet. QuickTime Streaming Server can be
downloaded for free as Open Source software and is included in Mac OS X Server.

In July 1999, Apple introduced QuickTime TV (QTV), a high quality network for
Internet-based video and audio streaming. QTV integrates four key elements:
Apple's QuickTime 4 Player software, Apple's open-source QuickTime Streaming
Server software, video and audio content from leading providers, and the
streamed content delivery service offered by Apple and Akamai
Technologies, Inc. QTV currently has over 50 channels encompassing many leading
news, entertainment, music, radio, and educational content providers.

WebObjects-Registered Trademark-, the Company's web application server software,
offers a complete solution for rapid development and deployment of web
applications. WebObjects features sophisticated graphical development tools,
comprehensive prebuilt and reusable components, integration with numerous data
sources, and robust deployment tools.

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Apple currently offers four free Internet services collectively called iTools.
KidSafe is a service designed to control children's use of the Internet by
making only approved websites available to them. Mac.Com is an email service run
by Apple. iDisk offers users 20 megabytes of private or public storage on
Apple's Internet servers. HomePage allows users to create their own personal
website hosted by Apple with personalized content including data, pictures, and
movies. In addition to the four iTools, Apple also offers on its corporate
website iReview, an Internet site review guide, and iCards, an electronic
greeting card service.

In January 2000, the Company and EarthLink Network Inc. (EarthLink), an Internet
service provider (ISP), entered into a multi-year agreement to deliver ISP
service to Macintosh users in the United States. Under the terms of the
agreement, the Company profits from each new Mac customer that subscribes to
EarthLink's ISP service, for a specified period of time, and EarthLink is the
default ISP in Apple's Internet Setup Software included with all Macintosh
computers sold in the United States.

THIRD-PARTY SOFTWARE PRODUCTS

Thousands of third-party software titles and solutions are available for the
Macintosh platform. The Company sells a variety of these third-party software
products directly to end users through its on-line store. Additional information
regarding the Company's relationship with and dependence upon third-party
software developers, including Microsoft Corporation, may be found in Part II,
Item 7 of this Form 10-K under the subheading "Support from Third-Party Software
Developers" 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, and
business 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, advanced graphics capabilities,
industrial design features of the Company's hardware products, ability of
Macintosh computers to network and communicate with other computer systems and
environments, and availability of application software. Apple personal computers
were first introduced to education customers in the late 1970s. In the United
States, 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 United States.

The Company distributes its products through wholesalers, resellers, national
and regional retailers and cataloguers. During 2000, a single distributor,
Ingram Micro Inc., accounted for approximately 11.5% of net sales. No other
customer accounted for more than 10% of net sales during 2000, and no individual
customer accounted for more than 10% of net sales in 1999 or 1998. The Company
also sells many of its products and resells certain third-party products in most
of its major markets to consumers, certain education customers, and certain
resellers either directly or through one of its on-line stores around the world.
During 2000, net sales attributable to the Company's on-line stores totaled
approximately $1.7 billion.

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, which have substantially increased the capabilities and
applications of these products, and has resulted in the frequent introduction of
new products and significant price, feature, and performance competition.
Further, as the personal computer industry and its customers place more reliance
on the Internet, an increasing number of Internet devices that are smaller,
simpler, and less expensive than traditional personal computers may compete for
market share with the

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Company's existing products. The principal competitive factors in this market
are relative price/performance, product quality and reliability, design
innovation, availability of software, product features, marketing and
distribution capability, service and support, availability of hardware
peripherals, and corporate reputation. 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 innovations in the Windows platform.
The Company's future 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 and design advantages over
competing platforms.

Further information relating to the competitive conditions of the personal
computing industry and the Company's competitive position in that 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.

RAW MATERIALS

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 ("ASICs")) are currently obtained
by the Company from single or limited sources. Some other key components, while
currently available to the Company from multiple sources, are at times subject
to industry wide availability and pricing pressures. In addition, the Company
uses some components that are not common to the rest of the personal computer
industry, and new products introduced by the Company often initially utilize
custom components obtained from only one source until the Company has evaluated
whether there is a need for and subsequently qualifies additional suppliers. If
the supply of a key or 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 affected depending on the time required to obtain sufficient
quantities from the original source, or to identify and obtain sufficient
quantities from an alternative source. 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. 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. Consistent with industry
practice, components are normally acquired through purchase orders typically
covering the Company's forecasted requirements for periods from 30 to 130 days.
However, the Company continues to evaluate the need for a supply contract in
each situation.

The Company believes there are several component suppliers and manufacturing
vendors whose loss to the Company could have a material adverse effect upon the
Company's business and financial position. At this time, such vendors include
Alpha-Top Corporation, Ambit Microsystems Corporation, ATI Technologies, Inc.,
Darfon Electronics Corporation, Hon Hai Precision Industry Co., Ltd., IBM
Corporation, LG Electronics, Lucent Technologies Inc., Matsushita, Mitsubishi
Electric Corporation, Motorola, Inc., NatSteel Electronics PTE Ltd., Philips
Semiconductors, Samsung Electronics, and Quanta Computer, Inc.

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 9 under the
subheading "Concentrations in the Available Sources of Supply of Materials and
Product," which information is hereby incorporated by reference.

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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
and technology 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, applications software, networking and
communications software and solutions, and the Internet. The Company's research
and development expenditures, before any charges for in-process research and
development, totaled $380 million, $314 million, and $303 million in 2000, 1999,
and 1998, respectively.

PATENTS, TRADEMARKS, COPYRIGHTS AND LICENSES

The Company currently holds rights to patents and copyrights relating to certain
aspects of its computer systems, peripheral systems, and software. In addition,
the Company has registered, and/or has applied to register, trademarks in the
United States and a number of foreign countries for
"Apple-Registered Trademark-", the Apple silhouette logo, the Apple color logo,
"Macintosh-Registered Trademark-," 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 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.

Many of the Company's products are designed to include intellectual property
obtained from third parties. While it may be necessary in the future to seek or
renew licenses relating to various aspects of its products and business methods,
the Company believes that based upon past experience and industry practice, such
licenses generally could be obtained on commercially reasonable terms. Because
of technological changes in the computer industry, current extensive patent
coverage, and the rapid rate of issuance of new patents, it is possible certain
components of the Company's products and business methods may unknowingly
infringe existing patents of others. The Company has from time to time been
notified that it may be infringing certain patents or other intellectual
property rights of others. However, no litigation has arisen out of any of these
claims that has had, or is expected to have, an adverse impact on the Company's
operating results and financial condition. The Company believes that any
necessary patent or other rights could be obtained on commercially reasonable
terms. However, there can be no assurance that the necessary licenses would be
available on acceptable terms, if at all, or that the Company would prevail in
any such challenge. The failure to obtain necessary licenses or other rights, or
litigation arising out of such claims, could adversely affect the Company's
results of operations and financial condition.

FOREIGN AND DOMESTIC OPERATIONS AND GEOGRAPHIC DATA

The United States represents the Company's largest geographic marketplace.
Approximately 52% of the Company's net sales in fiscal 2000 came from operations
inside the United States. Final assembly of products sold by the Company is
conducted in the Company's manufacturing facilities in Sacramento, California,
Cork, Ireland, and Singapore and by external vendors in Taiwan, Korea, Mexico,
the People's Republic of China, and the Czech Republic. Margins on sales of
Apple products in foreign countries, and on 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 antidumping penalties.

Information regarding financial data by geographic segment is set forth in
Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial
Statements at Note 10, "Segment Information and Geographic Data," which
information is hereby incorporated by reference. Additional information
regarding the risks associated with international operations is set forth 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.

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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 holiday season and the school year. However, past performance
should not be considered a reliable indicator of the Company's future net sales
or financial performance.

WARRANTY

The Company offers a limited parts and labor 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 software and for Apple
service parts used to repair Apple hardware products. In addition, consumers may
purchase extended service coverage on most Apple hardware products in all of the
Company's major markets.

BACKLOG

ENVIRONMENTAL LAWS

Compliance with federal, state, local, 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 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 30, 2000, Apple and its subsidiaries worldwide had 8,568
employees and an additional 3,160 temporary employees and contractors.

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 30, 2000, the Company leased approximately 3 million
square feet of space, primarily in the United States, 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 three to five
additional years.

The Company owns its manufacturing facilities in Cork, Ireland, and Singapore,
which total approximately 617,000 square feet. The Company also owns a 748,000
square-foot facility in Sacramento, California, which is used as a
manufacturing, warehousing and distribution center. The Sacramento and Cork
facilities also house customer call centers. 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 United States, the
Company owns additional facilities totaling approximately 169,000 square feet.

The Company believes 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.

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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

The Company is subject to certain legal proceedings and claims, including those
described below, which have arisen in the ordinary course of business and 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 current legal proceedings and claims that
would have a material adverse effect on its financial condition or results of
operations.

FTC INQUIRY-PRADO V. APPLE COMPUTER, INC. (AND RELATED ACTIONS)

In October 1997, Apple began charging all U.S. 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 certain customers. Four
purported class action lawsuits were filed against Apple related to this change.
During the fourth quarter of 1999, the regional and national offices of the FTC
approved a settlement with the Company, and a settlement was approved by the
Court in three of the class action suits. In November 1999, two appeals were
filed objecting to the settlement and the settlement is stayed pending
resolution of the appeals.

MICROWARE SYSTEMS CORPORATION V. APPLE COMPUTER, INC.

Plaintiff, Microware Systems Corporation (Microware), filed this action against
the Company on September 1, 1999, in the United States District Court for the
Southern District of Iowa. Microware alleged that the Company's current release
of its Mac OS operating system, Mac OS 9, infringed Microware's trademark for
its real time operating system, OS-9. Microware asserted claims for trademark
infringement, false designation of origin, dilution and common law trademark
infringement and unfair competition. On October 14, 1999, Microware filed a
motion for preliminary injunction seeking to enjoin the Company from using the
designation "Mac OS 9" and to order the Company to cancel and withdraw all
packaging and advertisements that mention "Mac OS 9." The Company opposed the
motion for preliminary injunction and filed a motion for summary judgment
against all of Microware's claims. The Court denied Microware's request for a
preliminary injunction and granted Apple's motion for summary judgment.
Microware has filed an appeal which will be heard in January 2001.

STERNBERG V. APPLE COMPUTER, INC. AND GORDON ET AL. V. APPLE COMPUTER, INC.

Plaintiff Sternberg filed this action against the Company on March 17, 2000 in
the Santa Clara County Superior Court. The case is a purported nationwide
consumer class action brought on behalf of certain purchasers of iMac DV and
iMac DV SE computers. Plaintiff alleges that Apple engaged in false advertising,
unfair competition and breach of warranty, among other causes of action, by
marketing and selling a DVD player with iMac DV and iMac DV SE computers where
the playback was unacceptable. A companion case, GORDON ET AL. V. APPLE
COMPUTER, INC. was filed by largely the same plaintiffs on June 14, 2000. This
case is essentially the same as Sternberg but with respect to a different
computer model--the Power Macintosh G4. The Company has answered both
complaints, denying all allegations and alleging numerous affirmative defenses.
The Company has responded to written discovery and has produced documents. The
parties have agreed to mediate the cases. The mediation is expected to occur at
the end of January 2001.

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PIERCE ET AL. V. APPLE COMPUTER, INC.

Plaintiff Pierce filed this action on June 15, 2000 in Santa Clara County
Superior Court. This case is a purported nationwide consumer class action
brought on behalf of purchasers of the Company's AirPort Card and AirPort Base
Station ("AirPort System"). Plaintiffs allege that the Company engaged in false
advertising and unfair business practices (among other causes of action) by
advertising that the Airport System is Internet-ready and failing to disclose
that the Airport System is incompatible with certain Internet service providers,
primarily America Online. The Company has answered the complaint, denying all
allegations and alleging numerous affirmative defenses. The Company has
responded to written discovery.

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 30, 2000.

9
<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. As of December 1, 2000, there were 24,998 shareholders of record.

On June 21, 2000, the Company effected a two-for-one stock split in the form of
a Common Stock dividend to shareholders of record as of May 19, 2000. All share
price and per share data and numbers of Common shares have been retroactively
adjusted to reflect the stock split.

The Company did not pay cash dividends in either fiscal 2000 or 1999. 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 share of common stock 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 2000 price range per common
share............................ $64.13-$25.38 $69.75-$40.19 $75.19-$43.25 $59.00-$28.72
Fiscal 1999 price range per common
share............................ $40.07-$21.19 $25.00-$16.72 $23.66-$16.00 $20.66-$14.25
</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 30, 2000 2000 1999 1998 1997 1996
(In millions, except share and per share amounts) -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales.................................... $ 7,983 $ 6,134 $ 5,941 $ 7,081 $ 9,833
Net income (loss)............................ $ 786 $ 601 $ 309 $ (1,045) $ (816)
Earnings (loss) per common share:
Basic...................................... $ 2.42 $ 2.10 $ 1.17 $ (4.15) $ (3.30)
Diluted.................................... $ 2.18 $ 1.81 $ 1.05 $ (4.15) $ (3.30)
Cash dividends declared per common share..... $ -- $ -- $ -- $ -- $ 0.12
Shares used in computing earnings (loss) per
share (in thousands):
Basic...................................... 324,568 286,314 263,948 252,124 247,468
Diluted.................................... 360,324 348,328 335,834 252,124 247,468

Cash, cash equivalents, and short-term
investments................................ $ 4,027 $ 3,226 $ 2,300 $ 1,459 $ 1,745
Total assets................................. $ 6,803 $ 5,161 $ 4,289 $ 4,233 $ 5,364
Long-term debt............................... $ 300 $ 300 $ 954 $ 951 $ 949
Shareholders' equity......................... $ 4,107 $ 3,104 $ 1,642 $ 1,200 $ 2,058
</TABLE>

Net gains before taxes resulting from sales of an equity investment of
$367 million, $230 million, and $40 million were recognized in 2000, 1999, and
1998, respectively. Net charges related to Company

10
<PAGE>
restructuring actions of $8 million, $27 million, $217 million, and
$179 million were recognized in 2000, 1999, 1997, and 1996, respectively. During
2000, the Company recognized the cost of a special executive bonus for the
Company's Chief Executive Officer for past services in the form of an aircraft
with a total cost to the Company of approximately $90 million. In 1997, the
Company acquired NeXT Software, Inc., 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 use. Also in 1997, the Company agreed to
acquire certain assets from Power Computing Corporation (PCC). The total
purchase price was approximately $110 million, of which $75 million was expensed
in 1997 as "termination of license agreement."

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
Future 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 presented herein
is based on the Company's fiscal calendar.

RESULTS OF OPERATIONS

The following table sets forth annual results of operations for fiscal years
2000, 1999, and 1998 (in millions, except unit shipment and per share amounts):

<TABLE>
<CAPTION>
2000 CHANGE 1999 CHANGE 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales....................................... $7,983 30% $6,134 3% $5,941
Macintosh CPU unit sales (in thousands)....... 4,558 32% 3,448 25% 2,763
Gross margin.................................... $2,166 28% $1,696 15% $1,479
Percentage of net sales....................... 27% 28% 25%
Research and development........................ $ 380 21% $ 314 4% $ 303
Percentage of net sales....................... 5% 5% 5%
Selling, general and administrative............. $1,166 17% $ 996 10% $ 908
Percentage of net sales....................... 15% 16% 15%
Operating income before special charges......... $ 620 61% $ 386 44% $ 268
Special charges:
In-process research and development........... $ -- $ -- $ 7
Restructuring costs........................... $ 8 $ 27 $ --
Special charges............................... $ 90 $ -- $ --
Operating income................................ $ 522 31% $ 359 38% $ 261
Gains from sales of investment.................. $ 367 $ 230 $ 40
Interest and other income, net.................. $ 203 133% $ 87 211% $ 28
Provision for income taxes...................... $ 306 308% $ 75 275% $ 20
Net income...................................... $ 786 31% $ 601 94% $ 309
Earnings per common share:
Basic......................................... $ 2.42 15% $ 2.10 79% $ 1.17
Diluted....................................... $ 2.18 20% $ 1.81 72% $ 1.05
</TABLE>

11
<PAGE>
The following table sets forth quarterly results of operations for fiscal 2000
and 1999 (in millions, except unit sales and per share amounts):

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 2000 YEAR ENDED SEPTEMBER 25, 1999
----------------------------------------- -----------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................... $1,870 $1,825 $1,945 $2,343 $1,336 $1,558 $1,530 $1,710
Macintosh CPU unit sales
(in thousands).......... 1,122 1,016 1,043 1,377 772 905 827 944
Gross margin................ $ 467 $ 543 $ 549 $ 607 $ 384 $ 427 $ 403 $ 482
Gross margin percentage... 25% 30% 28% 26% 29% 27% 26% 28%

Operating expenses.......... $ 383 $ 375 $ 379 $ 409 $ 317 $ 323 $ 315 $ 355
Special charges............. -- -- -- 98 18 -- 9 --
Operating income............ 84 168 170 100 49 104 79 127
Operating margin
percentage.............. 4% 9% 9% 4% 4% 7% 5% 7%
Gains from sales of
investment................ $ 83 $ 50 $ 100 $ 134 $ 42 $ 101 $ 55 $ 32
Interest and other income,
net....................... $ 62 $ 52 $ 49 $ 40 $ 34 $ 24 $ 19 $ 10
Provision for income
taxes..................... $ 59 $ 70 $ 86 $ 91 $ 14 $ 26 $ 18 $ 17

Net income.................. $ 170 $ 200 $ 233 $ 183 $ 111 $ 203 $ 135 $ 152

Earnings per common share:
Basic..................... $ 0.52 $ 0.62 $ 0.72 $ 0.57 $ 0.35 $ 0.70 $ 0.49 $ 0.56
Diluted................... $ 0.47 $ 0.55 $ 0.64 $ 0.51 $ 0.31 $ 0.60 $ 0.42 $ 0.47
</TABLE>

FISCAL 2000 OVERVIEW

SALES

During 2000, the Company experienced a 30% increase in net sales over 1999 which
was the result of a 32% rise in Macintosh unit sales. This increase in Macintosh
unit sales is primarily attributable to increased sales of iMac, the company's
moderately priced desktop Macintosh system designed for the education and
consumer markets, and the introduction of iBook, the Company's consumer and
education oriented notebook computer introduced at the end of 1999. The Company
sold approximately 2.2 million iMacs in 2000, an increase of approximately
400,000 units or 22% over iMac unit sales in 1999. During 2000, the Company sold
approximately 545,000 iBooks. iBook contributed $809 million to net sales during
2000. The Company also experienced modest gains in combined unit sales of its
professionally oriented Macintosh systems, PowerMacs and PowerBooks. Growth in
net sales and unit sales was strong in all of the Company's geographic operating
segments, particularly in Europe and Japan.

PROFITABILITY

The Company experienced improved profitability in 2000. Operating income before
special charges rose 61% to $620 million in 2000 from $386 million in 1999.
Improved profitability was driven by the 30% increase in net sales, stable
overall gross margins in 2000 as compared to 1999, and a relatively modest
increase in operating expenses before special charges of 18%.

OPERATING TRENDS

Despite overall increases during 2000 in net sales, unit sales, and
profitability, the Company's performance in the fourth quarter of fiscal 2000
was disappointing. Net sales during the fourth quarter fell short of the
Company's expectations by approximately $180 million causing operating margin
before special charges to fall to 4% for the quarter as compared to the 9%
experienced during the first nine months of fiscal 2000. The fourth quarter
revenue shortfall was primarily the result of three factors. First, fourth
quarter net sales

12
<PAGE>
of the G4 Cube, a new Macintosh system announced and introduced by the Company
during the fourth quarter, did not meet the Company's expectations. In
combination with related displays, G4 Cube sales were approximately $90 million
short of expectations. Second, net sales in the Company's education market fell
short of expectations by approximately $60 million. Third, although total fourth
quarter Power Mac unit sales were close to expectations, the Company experienced
an unanticipated mix shift towards lower priced Power Mac configurations
resulting in lower than anticipated net sales for the quarter of approximately
$30 million. The Company ended 2000 with substantially more inventory in its
distribution channels than planned due to the lower than expected sell-through
of the Company's products during the fourth quarter.

OUTLOOK

The Company currently anticipates a significant sequential decline in quarterly
net sales during the first quarter of fiscal 2001 to approximately
$1.0 billion. This decline is anticipated because of a continued deterioration
in demand experienced by the Company during the first two months of fiscal 2001,
rebate programs and price cuts instituted during the first quarter that will
cost the Company approximately $135 million, and a plan to reduce substantially
by the end of the first quarter the level of inventory in the Company's
distribution channels from the amounts at the end of fiscal 2000. In addition,
the Company expects to incur approximately $115 million of cancellation charges
related to purchase orders for proprietary components due to the reduced sales
outlook. As a result of these factors, the Company anticipates reporting a net
loss, before the effect of any investment gains, in the range of $225 million to
$250 million for the first quarter of 2001.

For all of 2001, the Company anticipates net sales will decline as compared to
2000, falling in the range of $6.0 billion to $6.5 billion. The Company
currently expects that it will be profitable, before the effect of any
investment gains, during each of the last three quarters of 2001.

The foregoing statements concerning the Company's anticipated operating results
during the first quarter of 2001 and the Company's anticipated operating result
for all of 2001 are forward-looking. The Company's actual results could differ.
The Company's future operating results and financial condition are dependent
upon general economic conditions, market conditions within the PC industry, and
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. Some of the
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 Future
Results and Financial Condition."

13
<PAGE>
NET SALES

Net sales for geographic segments and Macintosh unit sales by geographic segment
and by product follow (net sales in millions and Macintosh unit sales in
thousands):

<TABLE>
<CAPTION>
2000 CHANGE 1999 CHANGE 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Americas net sales................................... $4,298 22 % $3,527 2 % $3,468
Europe net sales..................................... 1,817 38 % 1,317 2 % 1,295
Japan net sales...................................... 1,345 57 % 858 17 % 731
Asia Pacific net sales............................... 355 16 % 306 4 % 293
Other segments net sales............................. 168 33 % 126 (18)% 154
------ ------ ------
Total net sales.................................... $7,983 30 % $6,134 3 % $5,941
====== ====== ======

Americas Macintosh unit sales........................ 2,507 24 % 2,021 22 % 1,655
Europe Macintosh unit sales.......................... 1,110 53 % 724 23 % 588
Japan Macintosh unit sales........................... 730 39 % 524 35 % 389
Asia Pacific Macintosh unit sales.................... 211 18 % 179 37 % 131
------ ------ ------
Total Macintosh unit sales......................... 4,558 32 % 3,448 25 % 2,763
====== ====== ======

Power Macintosh unit sales........................... 1,329 3 % 1,296 2 % 1,266
PowerBook unit sales................................. 383 11 % 344 (19)% 427
G4 Cube unit sales................................... 107 -- -- -- --
iMac unit sales(a)................................... 2,194 22 % 1,802 68 % 1,070
iBook unit sales..................................... 545 -- 6 -- --
------ ------ ------
Total Macintosh unit sales......................... 4,558 32 % 3,448 25 % 2,763
====== ====== ======
</TABLE>

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

(a) Unit sales figures for iMac in 1998 include sales of the Company's previous
consumer and education oriented Macintosh products.

Net sales rose 30% to a total of $7.983 billion in 2000 as compared to 1999. The
increase in net sales resulted directly from a 32% increase in Macintosh unit
sales. Driving unit sales growth was a 51% increase in combined unit sales of
the Company's consumer and education Macintosh systems, iMac and iBook, and a
modest increase of 11% in combined units sales of the Company's professionally
oriented Macintosh systems. Combined unit sales of iMac and iBook systems
accounted for 52% of total Macintosh unit sales in 1999 and 60% in 2000. This
trend highlights the increasing importance to the Company of its consumer and
education markets. During 2000, the average revenue per Macintosh system, a
function of total net sales generated by hardware shipments and total Macintosh
CPU unit sales, of $1,715 was relatively unchanged from 1999. This was due to
increased unit sales of higher priced Power Mac, PowerBook, iBook, and G4 Cube
systems offset by increases in unit sales of lower priced iMac systems.
Additional comments regarding net sales for 2000 may be found above under the
heading "Fiscal 2000 Overview."

Net sales increased $193 million or 3% to $6.134 billion in 1999 compared to
1998. The primary source of this growth was an overall 25% increase in Macintosh
unit sales, which was reflective of strong unit growth in all of the Company's
geographic operating segments. Offsetting the rise in unit shipments during 1999
was a decline in the average revenue per Macintosh system which fell 17% to
$1,739 from $2,095 in 1998. The decline during 1999 in the average revenue per
Macintosh system was attributable to lower pricing for both iMac and Power Mac
products, which reflects the continuing overall industry trend towards lower
pricing. The decline was also attributable to the shift in the Company's unit
mix toward lower-priced consumer products such that iMac units and comparable
products comprised 52% of total Macintosh unit sales in 1999 versus 39% in 1998.

14
<PAGE>
Net sales declined sequentially during the fourth quarter of 1999 compared to
the third quarter by $222 million or 14%, and declined $220 million or 14%
compared to the same period in 1998. Similarly, Macintosh unit sales declined
15% and 7% during the fourth quarter of 1999 compared to the third quarter of
1999 and the same period in 1998, respectively. The primary causes for these
declines in both net sales and unit sales were lower than planned deliveries of
PowerPC G4 processors from Motorola and production interruptions at vendors
supplying PowerBooks and iBooks experienced during the last week of the fourth
quarter of 1999 as a result of the earthquake in Taiwan on September 20, 1999.
The shortage of G4 processors reduced Power Macintosh net sales by approximately
$200 million during the fourth quarter of 1999.

SEGMENT OPERATING PERFORMANCE

The Company manages its business primarily on a geographic basis. The Company's
geographic segments include the Americas, Europe, Japan, and Asia Pacific. The
Americas segment includes both North and South America. The European segment
includes European countries as well as the Middle East and Africa. The Japan
segment includes only Japan, while the Asia Pacific segment includes Australia
and Asia except for Japan. Each geographic operating segment provides similar
hardware and software products and similar services. Further information
regarding the Company's operating segments may be found in Part II, Item 8 on
this Form 10-K in the Notes to Consolidated Financial Statements at Note 10,
"Segment Information and Geographic Data," which information is hereby
incorporated by reference.

AMERICAS

Net sales and unit sales in the Americas segment increased 22% and 24%,
respectively, during 2000 as compared to 1999. During 2000, the Americas segment
represented approximately 54% and 55% of the Company's total net sales and total
Macintosh unit sales, respectively. The growth of the Americas' net sales in
2000 was indicative of strong growth in unit sales of iMac and iBook and
relatively flat unit sales of professionally oriented Macintosh systems.

Net sales in the Americas segment increased 2% to $3.527 billion during 1999 as
compared to 1998, while Macintosh unit sales increased 22%. This followed a 5%
decline in net sales in the Americas between 1998 and 1997. During 1999, the
Americas segment represented approximately 57% and 59% of the Company's total
net sales and total Macintosh unit sales, respectively. The results experienced
by this segment in 1999 reflect the overall trends experienced by the Company
during 1999 of increasing Macintosh unit sales offset by declines in the average
revenue per Macintosh system.

EUROPE

Net sales in the Europe segment increased 38% during 2000 driven by a 53%
increase in Macintosh unit sales. Growth in unit sales resulted from a 96%
increase in combined unit sales of iMac and iBook, and an increase of 19% in
combined units sales of the Company's professionally oriented Macintosh systems.

Net sales in the Europe segment increased 2% to $1.317 billion during 1999 as
compared to 1998, while Macintosh unit sales increased 23%. This followed a 16%
decline in net sales in the Europe segment between 1998 and 1997. Like the
Americas segment, Europe's results in 1999 as compared to 1998 were indicative
of strong growth in Macintosh unit sales offset by declines in the average
revenue per Macintosh system.

JAPAN AND ASIA PACIFIC

Net sales in the Japan segment increased 57% to $1.345 billion in 2000 as
compared to 1999, while Japan's Macintosh unit sales increased 39%. The fact
that Japan's net sales rose at a higher rate than its unit sales reflects
several factors. First, iMac unit sales in Japan were relatively flat
year-over-year. Second, unit sales of iBook, which generally carry a higher
price than iMac units and which were first sold in Japan during 2000, accounted
for approximately 17% of Japan's total Macintosh unit sales during 2000. Third,
Japan saw a 43% increase in combined unit sales of the Company's professionally
oriented Macintosh systems.

15
<PAGE>
The majority of the increase in both net sales and unit sales in the Asia
Pacific segment can be attributed to sales of the G4 Cube and iBook, both of
which were introduced in the region during 2000.

Macintosh unit sales and net sales in Asia, particularly in Japan, recovered
during 1999 from the declines experienced in 1998. Net sales in the Japan
segment increased 17% or $127 million to a total of $858 million in 1999 as
compared to 1998. Macintosh unit sales in Japan increased 35% during 1999
compared to 1998 while Macintosh unit sales in the Asia Pacific segment
increased 37%. The increases in net sales and Macintosh unit sales in both Japan
and Asia Pacific are the result of strong iMac sales experienced by these
operating segments, strong growth in Japanese consumer sales, and the general
economic recovery experienced in the region.

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 new product introductions because of over-ordering 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. Further
information regarding the Company's backlog may be found below under the
subheading "Product Introductions and Transitions" included under the heading
"Factors That May Affect Future Results and Financial Condition," which
information is hereby incorporated by reference.

GROSS MARGIN

Gross margin was relatively stable during 2000 as compared to 1999, declining to
27.1% during 2000 from 27.6% during 1999. The half point decline is primarily
the result of a shift in mix of unit sales away from the Company's higher
priced, higher margin professionally oriented Macintosh systems towards its
lower priced, lower margin consumer and education oriented Macintosh systems.
Also contributing to the relative stability of its gross margin, the Company
experienced relatively stable component pricing during 2000 as compared to 1999.

Gross margin increased as a percentage of net sales during 1999 to 27.6% as
compared to 24.9% in 1998. This increase was primarily attributable to declines
in the cost of various components of the Company's products, improvements in
manufacturing efficiencies brought about by selective outsourcing of final
assembly of certain of the Company's products, improved design of products
leading to lower manufacturing and warranty costs, and relatively stable pricing
of the Company's products over the last six months of 1999. During 1999, the
Company was also able to fully realize the benefits of actions taken primarily
in 1998 and 1997 that led to improved inventory management and a more efficient
distribution model for its products.

There can be no assurance current gross margins will be maintained, targeted
gross margin levels will be achieved, or 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 and
availability 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 it will continue to take
pricing actions with respect to its products. Gross margins could also be
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.

16
<PAGE>
RESEARCH AND DEVELOPMENT

The Company recognizes 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 that are
central to the Company's core business strategy. Expenditures on research and
development increased 21% or $66 million to $380 million in 2000 as compared to
1999. This followed a $11 million or 4% increase in 1999 as compared to 1998.
Spending on R&D has remained at approximately 5% of net sales during each of the
last three years. The overall increase in R&D spending over the last two years
is directly related to increases in R&D headcount of approximately 13% over that
time to support expanded product development efforts.

SELLING, GENERAL, AND ADMINISTRATIVE

Selling, general, and administrative expenditures increased 17% to
$1,166 million in 2000 as compared to 1999 and decreased to 15% of net sales in
2000 from 16% in 1999. This increase in total expenditures resulted from higher
spending for promotional and marketing activities, increased sales expenses
resulting from higher net sales, and a 21% increase in combined sales,
marketing, and general and administrative headcount from the end of 1999 to the
end of 2000.

Selling, general, and administrative expenditures increased 10% to $996 million
in 1999 as compared to 1998 and increased to 16% of net sales in 1999 from 15%
in 1998. These increases are primarily the result of increased spending on
marketing and promotional activities throughout 1999 and a 12% increase in
combined sales, marketing, and general and administrative headcount from the end
of 1998 to the end of 1999.

SPECIAL CHARGES

2000 RESTRUCTURING ACTIONS

1999 RESTRUCTURING ACTIONS

During the fourth quarter of 1999, the Company initiated restructuring actions
resulting in a charge to operations of $21 million. The net restructuring charge
of $18 million recognized during the fourth quarter of 1999 reflects $3 million
of excess reserves related to prior restructuring actions. The $21 million cost
of these actions was comprised of $11 million for contract cancellation charges
associated with the closure of the Company's outsourced data center and
$10 million for contract cancellation charges related to supply and development
agreements previously discontinued.

During the second quarter of 1999, the Company took certain actions to improve
the flexibility and efficiency of its manufacturing operations by moving final
assembly of certain of its products to third-party manufacturers. These
restructuring actions resulted in the Company recognizing a charge to operations
of approximately $9 million during the second quarter of 1999. The charge was
comprised of $6 million for severance benefits to be paid to employees
involuntarily terminated, $2 million for the write-down of operating assets to
be disposed of, and $1 million for payments on canceled contracts. These actions
resulted in the termination of approximately 580 employees.

EXECUTIVE BONUS

17
<PAGE>
the total charge is the cost of the aircraft. The other half represents all
other costs and taxes associated with the bonus.

INTEREST AND OTHER INCOME (EXPENSE), NET

Net interest income increased $116 million or 133% to $203 million during 2000
as compared to 1999. This increase is attributable to three principal factors.
First, the Company's cash, cash equivalents, and short-term investments
increased $801 million or 25% during 2000. Second, the weighted-average interest
rate earned by the Company on its cash equivalents and short-term investments
increased to 6.55% as of the end of 2000 compared to 5.38% at the end of 1999.
The combination of these first two factors increased interest income during 2000
by $66 million. Third, interest expense declined $26 million during 2000 as a
result of the conversion of approximately $661 million of the Company's
convertible subordinated notes to common stock during the third quarter of 1999.

During 1999, the Company experienced a $59 million increase in net interest
income, primarily the result of higher cash and investment balances, and by
decreased interest expense associated with the conversion of the convertible
subordinated notes during the third quarter of 1999.

GAIN FROM SALE OF INVESTMENT

The Company holds a significant equity investment in ARM Holdings plc (ARM), a
publicly held company in the United Kingdom involved in the design and licensing
of high performance microprocessors and related technology. As of September 30,
2000, the Company holds 34.8 million shares of ARM stock valued at
$383 million.

During 2000, the Company sold a total of 45.2 million shares of ARM stock for
net proceeds of approximately $372 million, recorded a gain before taxes of
approximately $367 million, and recognized related income tax of approximately
$94 million. During 1999, the Company sold a total of 163 million shares of ARM
stock for net proceeds of approximately $245 million, recorded a gain before
taxes of approximately $230 million, and recognized related income tax of
approximately $25 million.

During 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 the
shares it held in ARM at that time for a gain before foreign taxes of
approximately $24 million. The Company also recognized during 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.

Further information related to the Company's investment in ARM and gains
recognized related to that investment may be found in Part II, Item 8 of this
Form 10-K at Note 2 of Notes to Consolidated Financial Statements, which
information is hereby incorporated by reference.

PROVISION FOR INCOME TAXES

As of September 30, 2000, the Company had deferred tax assets arising from
deductible temporary differences, tax losses, and tax credits of $466 million
before being offset against certain deferred tax liabilities for presentation on
the Company's balance sheet. This asset is generally realizable based on the
ability to offset existing deferred tax liabilities. As of September 30, 2000, a
valuation allowance of $33 million was recorded against the deferred tax asset
for the benefits of tax losses that may not be realized. The valuation allowance
relates principally to the operating loss carryforwards acquired from NeXT, the
utilization of which is subject to certain limitations imposed by the Internal
Revenue Code. 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 2000 was 28% compared
to the higher statutory rate 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.

18
<PAGE>
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 most of the issues for these years have been
resolved, certain issues still remain in dispute and are being contested by the
Company. Management believes adequate provision has been made for any
adjustments that may result from tax examinations.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, Statement of Financial Accounting Standards (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
an entity to recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
fair value will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings, or recognized in
other comprehensive income until the hedged item is recognized in earnings. In
June 1999, SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133," was
issued. The statement deferred the effective date of SFAS No. 133 until the
first quarter of fiscal 2001. The Company will adopt SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as of October 1, 2000. Net
of the related income tax effect, the adoption of SFAS No. 133 is expected to
have a favorable cumulative-effect-type adjustment to net income of
approximately $12 million and a favorable cumulative-effect-type adjustment to
other comprehensive income of $15 million. Management does not believe that
adoption of SFAS No. 133 will significantly alter the Company's hedging
strategies. However, its application may increase the volatility of other income
and expense and other comprehensive income.

In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." SAB 101,
as amended, summarizes certain of the SEC's views in applying generally accepted
accounting principles to revenue recognition in financial statements and
provides guidance on revenue recognition issues in the absence of authoritative
literature addressing a specific arrangement or a specific industry. The Company
will adopt SAB 101 in the first quarter of fiscal year 2001. Adoption of this
guidance is not expected to have a material impact on the Company's financial
position or results of operations.

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>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Cash, cash equivalents, and short-term investments.......... $4,027 $3,226 $2,300
Accounts receivable, net.................................... $ 953 $ 681 $ 955
Inventory................................................... $ 33 $ 20 $ 78
Working capital............................................. $3,494 $2,736 $2,178
Days sales in accounts receivable(a)........................ 46 46 56
Days of supply in inventory(b).............................. 2 2 6
Operating cash flow......................................... $ 826 $ 798 $ 775
</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.

19
<PAGE>
As of September 30, 2000, the Company had $4.027 billion in cash, cash
equivalents, and short-term investments, an increase of $801 million or 25% over
the same balances at the end of 1999. During 2000, the Company's primary source
of cash was $826 million in cash flows from operating activities. Cash generated
by operations was primarily from net income and increases in accounts payable
and other current liabilities partially offset by an increase in accounts
receivable. The Company's cash and cash equivalent balances as of September 30,
2000 and September 25, 1999 include $7 million and $4 million, respectively,
pledged primarily as collateral against outstanding derivative positions.

In addition to the net purchase of short-term investments of $936 million, net
cash used by investing activities consisted primarily of $232 million for the
purchase of long-term investments, including $200 million invested in EarthLink
Network, Inc. (EarthLink) discussed below, and $107 million for the purchase of
fixed assets. These uses of cash were partially offset by proceeds from sales of
ARM shares of $372 million. The Company currently expects capital expenditures
to increase to approximately $225 million during 2001 to accommodate information
systems enhancements and strategic initiatives.

In July 1999, the Company's Board of Directors authorized a plan for the Company
to repurchase up to $500 million of its common stock. This repurchase plan does
not obligate the Company to acquire any specific number of shares or acquire
shares over any specified period of time. During 2000, the Company repurchased a
total of 2.55 million shares of its common stock at a cost of $116 million.
Since inception of the plan, the Company has repurchased a total of
5.05 million shares of its common stock at a cost of $191 million.

The Company believes its balances of cash, cash equivalents, and short-term
investments will be sufficient to meet its cash requirements over the next
twelve months, including any cash utilized by its stock repurchase plan.
However, given the Company's current non-investment grade debt ratings (Standard
and Poor's Rating Agency of BB and Moody's Investor Services of Ba2), if the
Company should need to obtain short-term borrowings, there can be no assurance
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.

NON-CURRENT DEBT AND EQUITY INVESTMENTS

The Company holds significant investments in ARM, Samsung Electronics Co., Ltd,
Akamai Technologies, Inc., and EarthLink. These investments are reflected in the
consolidated balance sheets as non-current debt and equity investments and have
been categorized as available-for-sale requiring that they be carried at fair
value with unrealized gains and losses, net of taxes, reported in equity as a
component of accumulated other comprehensive income. All realized gains on the
sale of these investments have been included in other income. The combined fair
value of these investments was $786 million and $339 million as of
September 30, 2000, and September 25, 1999, respectively. The Company believes
it is likely there will continue to be significant fluctuations in the fair
value of these investments in the future.

Further information related to the Company's non-current debt and equity
investments may be found in Part II, Item 8 of this Form 10-K at Note 2 of Notes
to Consolidated Financial Statements, which information is hereby incorporated
by reference.

FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION

Because of the following factors, as well as other factors affecting the
Company's 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.

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,

20
<PAGE>
continual improvement in product price/performance characteristics, price
sensitivity on the part of consumers, and a large number of competitors. The
Company's 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 personal computer industry has also
been characterized by rapid technological advances in software functionality,
hardware performance, and features based on existing or emerging industry
standards. Further, as the personal computer industry and its customers place
more reliance on the Internet, an increasing number of Internet devices that are
smaller and simpler than traditional personal computers may compete for market
share with the Company's existing products. Several competitors of the Company
have either targeted or announced their intention to target certain of the
Company's key market segments, including consumer, education, and design and
publishing. Additionally, several of the Company's competitors have introduced
or announced plans to introduce products that mimic many of the unique design,
technical features, and solutions of the Company's products. 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. Additionally, the Company's future
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 only maker of hardware using the Mac OS. The Mac OS
has a minority market share in the personal computer market, which is dominated
by makers of computers utilizing Microsoft Windows operating systems. The
Company's future 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 design and functional advantages over
competing platforms.

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. The success of new
product introductions is dependent on a number of factors, 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 in advance the ultimate effect that new products will have on its
sales or results of operations.

During 2001, the Company plans to introduce a new client operating system, Mac
OS X, which will offer advanced functionality based on Apple and NeXT software
technologies. Inability to successfully introduce Mac OS X on a timely basis,
gain customer acceptance, obtain the commitment of developers to transition
existing applications to run on Mac OS X, or ensure adequate
backward-compatibility of Mac OS X with applications authored for previous
version of the Mac OS, may have an adverse impact on the Company's operating
results and financial condition.

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 or net realizable
value and accrues necessary reserves for 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 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
financial position and results of operations.

21
<PAGE>
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 the Company will
forecast incorrectly and produce or order from third parties excess or
insufficient inventories of particular products. Consistent with industry
practice, components are normally acquired through purchase orders typically
covering the Company's requirements for periods from 30 to 130 days. The
Company's 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.

The Company ended 2000 with substantially more inventory in its distribution
channels than planned due to the lower than expected sell-through of the
Company's products during the fourth quarter. The Company currently anticipates
a significant sequential decline in quarterly net sales during the first quarter
of fiscal 2001, in part due to the Company's plan to reduce substantially the
level of inventory in its distribution channels from the amounts at the end of
fiscal 2000 to more normal levels by the end of the first quarter.

Many 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. While outsourcing arrangements may
lower the fixed cost of operations, they also reduce the Company's direct
control 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 may remain at least
initially responsible to the ultimate consumer for warranty service or in the
event of product defects. Any unanticipated product defect or warranty
liability, whether pursuant to arrangements with contract manufacturers or
otherwise, could adversely affect the Company's future 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 ("ASICs")) are currently obtained
by the Company from single or limited sources. Some other key components
(including without limitation DRAM, TFT-LCD flat-panel displays, and optical and
magnetic disk drives), while currently available to the Company from multiple
sources, are at times subject to industry wide availability and pricing
pressures. In addition, new products introduced by the Company often initially
utilize custom components obtained from only one source until the Company has
evaluated whether there is a need for and subsequently qualifies additional
suppliers. In situations where a component or product utilizes new technologies,
initial capacity constraints may exist until such time as the suppliers' yields
have matured. The Company and other producers in the personal computer industry
also compete for various components with other industries (such as the cellular
phone and automotive industries) that have experienced increased demand for
their products. 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 components other than those
customized to meet the Company's requirements. If the supply of a key component
were to be delayed or constrained on a new or existing product, the Company's
results of operations and financial condition could be adversely affected,
depending on the time required to obtain sufficient quantities from the original
source, or, if possible, to identify and obtain sufficient quantities from an
alternate source.

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-based microprocessor for the Company's Macintosh computers, to
provide the Company with a sufficient supply of microprocessors with
price/performance features that compare favorably to those supplied to the
Company's competitors by Intel Corporation, and other developers and producers
of microprocessors used by personal computers using the Windows operating
systems. Apple has been unable to ship Macintosh systems with PowerPC G4

22
<PAGE>
microprocessors running above 500 megahertz since such systems were first
announced in August of 1999 due to its G4 microprocessor supplier's inability to
provide the Company with faster G4 microprocessors. Similar but less pronounced
supply issues have also arisen with the Company's supply of faster PowerPC G3
microprocessors. The Company believes that this inability to obtain faster
microprocessors had an adverse impact on the Company's results of operations
during 2000, particularly towards the end of the fiscal year. The Company has
been informed by its suppliers that faster microprocessors will be available in
sufficient quantity beginning in the first half of calendar 2001. However, no
assurance can be given that such faster microprocessors will actually be
available or be available in sufficient quantities, and the inability of the
Company to obtain faster microprocessors in sufficient quantities during 2001
may have an adverse impact on the Company's results of operations and financial
condition.

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 9 under the subheading "Concentrations
in the Available Sources of Supply of Materials and Product," which information
is hereby incorporated by reference.

EDUCATION MARKET

Several competitors of the Company have either targeted or announced their
intention to target the education market for personal computers. As a result,
the Company's overall share of this market has declined. Additionally, net sales
in the Company's education market fell short of expectations by approximately
$60 million during the fourth quarter of 2000, primarily as a result of the
Company's transition to a more direct sales model from a model heavily dependent
on third party sales agents. Although the Company has initiated a plan to
strengthen its position in the education market, there can be no assurance that
the Company will be able to increase its share of the education market or
maintain its existing share of that market. Failure to increase or maintain
market share in the education market may have an adverse impact on the Company's
operating results and financial condition.

MARKETING AND DISTRIBUTION

The Company distributes its products through wholesalers, resellers, national
and regional retailers and cataloguers. In addition, the Company also sells many
of its products and resells certain third-party products in most of its major
markets to consumers, certain education customers, and certain resellers either
directly or through its on-line stores around the world. Many of the Company's
significant resellers operate on narrow product margins, and may distribute
products from competing manufacturers. The Company's business and financial
results could be adversely affected if the financial condition of these
resellers weakened, if resellers within consumer channels were to cease
distribution of the Company's products, or if uncertainty regarding demand for
the Company's products caused 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.

GLOBAL MARKET RISKS

A large portion of the Company's revenue is derived from its international
operations. As a result, the Company's 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. Historically, the Company's primary exposure
to movements in foreign currency exchange rates relate to non-dollar denominated
sales in Europe, Japan, Australia, Canada, and certain parts of Asia and
non-dollar denominated operating expenses incurred throughout the world.
Weaknesses in foreign currencies, particularly the Japanese Yen

23
<PAGE>
and the Euro, can adversely impact consumer demand for the Company's products
and the U.S. dollar value of the Company's foreign currency denominated sales.
Conversely, strengthening in these and other foreign currencies can effect the
cost to the Company of product components, negatively impacting the Company's
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 Form 10-K at Notes 1 and 2 of Notes
to Consolidated Financial Statements, which information is hereby incorporated
by reference.

SUPPORT FROM THIRD-PARTY SOFTWARE DEVELOPERS

The Company believes that 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
also believes 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 the minority market
share held by the Company in the personal computer market, as well as the
Company's decision to end 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. In
addition, past and future development by the Company of its own software
applications and solutions may negatively impact the decision of software
developers to develop, maintain, and upgrade similar or competitive software for
the Company's products. Moreover, the Company's current plan to introduce Mac OS
X during 2001 could cause software developers to stop developing software for
the current Mac OS, and there can be no assurance software developers will
decide to develop software for Mac OS X on a timely basis or at all.

In August 1997, the Company and Microsoft Corporation entered into patent cross
licensing and technology agreements. In addition, for a period of five years
from August 1997, and 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. Although
Microsoft has announced its intention to do so, these agreements do not require
Microsoft to produce future versions of its products that are optimized to run
on Mac OS X. The Company will bundle the Internet Explorer product with Mac OS
system software releases and make that product the default Internet browser for
such Mac OS releases. While the Company believes 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, including Mac OS X,
not covered by the relationship or following expiration of the agreements 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.

PATENTS AND INTELLECTUAL PROPERTY

24
<PAGE>
in the computer industry, current extensive patent coverage, and the rapid rate
of issuance of new patents, it is possible certain components of the Company's
products and business methods may unknowingly infringe existing patents of
others. The Company has from time to time been notified that it may be
infringing certain patents or other intellectual property rights of others.
However, no litigation has arisen out of any of these claims that has had, or is
expected to have, an adverse impact on the Company's operating results and
financial condition. The Company believes that any necessary patent or other
rights could be obtained on commercially reasonable terms. However, there can be
no assurance that the necessary licenses would be available on acceptable terms,
if at all, or that the Company would prevail in any such challenge. The failure
to obtain necessary licenses or other rights, or litigation arising out of such
claims, could adversely affect the Company's results of operations and financial
condition.

PRODUCT, GEOGRAPHIC, AND CHANNEL MIX

The Company's profit margins vary among its products, its geographic markets,
and its distribution channels. As a result, the overall profitability of the
Company in any given period will depend, in part, on the product, geographic,
and channel mix reflected in that period's net sales.

INTRA-QUARTER SALES CYCLE

Apple generally sells more products during the third month of each quarter than
it does during either of the first two months, a pattern typical in the personal
computer industry. This sales pattern can produce pressure on the Company's
internal infrastructure during the third month of a quarter and may adversely
impact the Company's ability to predict its financial results accurately.
Developments late in a quarter, such as lower-than-anticipated demand for the
Company's products, an internal systems failure, or failure of one of the
Company's key logistics or components suppliers, can have significant adverse
impacts on the Company and its results of operations and financial condition.

DEPENDENCE ON KEY PERSONNEL

Much of the future success of the Company depends on the continued service and
availability of skilled personnel, including those in technical, marketing and
staff positions. Experienced personnel in the information technology industry
are in high demand and competition for their talents is intense, especially in
the Silicon Valley, where many of the Company's employees are located. There can
be no assurance that the company will be able to successfully attract and retain
the key personnel it needs. Additionally, volatility or a lack of positive
performance in the Company's stock price may adversely affect its ability to
retain key employees.

MINORITY INVESTMENTS

The Company holds minority investments in several public companies including
Samsung Electronics Co., Akamai Technologies, Inc., EarthLink, and ARM Holdings
plc. The combined fair market value of these investments was approximately
$786 million as of September 30, 2000. The Company has categorized its
investments in these companies as available-for-sale requiring the investments
be carried at fair value, with unrealized gains and losses net of taxes reported
as a component of accumulated other comprehensive income. These investments are
in publicly traded companies whose share prices are subject to significant
volatility. While the overall financial impact of these investments has been
positive through the end of 2000, adverse changes in general market conditions
or poor operating results of the underlying companies could result in the
Company's inability to ultimately realize the gains associated with the carrying
value of these investments. Permanent impairment in the value of one or all of
these investments could cause the Company to recognize a loss on some portion of
its original $316 million investment remaining in these four companies.

EURO TRANSITION

On January 1, 1999, eleven of the fifteen member countries of the European Union
adopted the Euro as their common legal currency and established fixed conversion
rates between their existing sovereign currencies and the Euro. The Euro is now
traded on currency exchanges and is available for non-cash transactions. The
transition period for introduction of the Euro ends on January 1, 2002.

25
<PAGE>
The Company has taken 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. Additionally, the Company has begun the process of updating its
internal systems and processes to accommodate full transition to the Euro as the
transaction and reporting currency for its affected European subsidiaries. The
transition 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 transition. Adoption of the Euro and the costs incurred to prepare for that
adoption are not expected to have a material adverse effect on the Company's
results of operations or financial condition. However, there can be no assurance
all issues related to the Euro conversion have been identified or that adoption
issues identified will be addressed properly or on a timely basis. Failure to
properly identify and address issues associated with adoption of the Euro could
have a material adverse affect on the Company's results of operations and
financial condition.

VOLATILITY OF STOCK PRICE

The Company's stock has experienced substantial price volatility as a result of
variations between its actual and anticipated financial results and as a result
of announcements by the Company and its competitors. In addition, the stock
market has experienced extreme price and volume fluctuations that have affected
the market price of many technology companies in ways that have been unrelated
to the operating performance of these companies. These factors, as well as
general economic and political conditions, may materially adversely affect the
market price of the Company's common stock in the future.

OTHER FACTORS

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 including, 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 such laws, or any future laws enacted for the protection of the
environment, will not have a material adverse effect on the Company.

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 non-hedge 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 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 gains and losses related to the
underlying economic exposures and, therefore, may adversely affect the Company's
operating results and financial position. The Company will adopt SFAS No. 133 as
of October 1, 2000. Management does not believe that adoption of the new
accounting standard will

26
<PAGE>
significantly alter the Company's hedging strategies. However, its application
may increase the volatility of other income and expense and other comprehensive
income.

INTEREST RATE RISK

While the Company is exposed to interest rate fluctuations in 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 30, 2000, substantially all of the Company's
investments have maturities less than 12 months.

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 $300 million of
unsecured notes described above, which mature in February 2004. The Company's
U.S. corporate securities include commercial paper, loan participations,
certificates of deposit, time deposits and corporate debt securities. Foreign
securities include foreign commercial paper, loan participation, certificates of
deposit and time deposits with foreign institutions, most of which are
denominated in U.S. dollars. The Company's cash equivalents and short-term
investments have generally

27
<PAGE>
been held until maturity. Gross unrealized gains and losses were negligible as
of September 30, 2000 and September 25, 1999.

In millions, except weighted-average interest rates

<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 SEPTEMBER 25, 1999
-------------------- --------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
CARRYING INTEREST CARRYING INTEREST
AMOUNT RATE AMOUNT RATE
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Assets:
Cash equivalents:
U.S. Treasury and Agency securities................ $ -- --% $ 3 5.00%
U.S. corporate securities.......................... 921 6.46% 517 5.16%
Foreign securities................................. 222 6.05% 636 4.84%
------ ------
Total cash equivalents........................... 1,143 6.38% 1,156 4.98%
------ ------

Short-term investments:
U.S. Treasury and Agency securities................ $ 293 6.11% $ 298 5.56%
U.S. corporate securities.......................... 2,059 6.63% 780 5.89%
Foreign securities................................. 484 6.86% 822 5.40%
------ ------
Total short-term investments..................... 2,836 6.62% 1,900 5.63%
------ ------
Total investment securities.......................... $3,979 6.55% $3,056 5.38%
====== ======

Debt:
Fixed rate........................................... $ 300 5.97% $ 300 5.98%
====== ======
</TABLE>

During the last two years, the Company has entered into interest rate swaps 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. These swaps effectively convert the Company's
fixed-rate 10 year debt to floating-rate debt and convert a portion of the
floating rate investments to fixed rate. The maturity date of the asset swaps is
September 2001 with the remaining debt swaps maturing in February of 2004. As of
September 30, 2000 and September 25, 1999, interest rate debt swaps had a
weighted-average receive rate of 7.21% and 6.04%, respectively. The
weighted-average pay rate on the debt swaps was 6.68% and 5.45% as of
September 30, 2000 and September 25, 1999, respectively. As of September 30,
2000 and September 25, 1999, interest rate asset swaps had a weighted-average
receive rate of 5.50% and 5.53%, respectively; and a weighted-average pay rates
of 6.66% and 5.24%, 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
losses on such contracts totaled approximately $1 million as of September 30,
2000 and $5 million as of September 25, 1999.

28
<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 net 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. Generally, the
Company's practice is to hedge a majority of its existing material foreign
exchange transaction exposures. However, the Company may not hedge certain
foreign exchange transaction exposures due to immateriality, prohibitive
economic cost of hedging particular exposures, and availability of appropriate
hedging instruments. Foreign exchange forward contracts are carried at fair
value in other current assets and liabilities. The premium costs of purchased
foreign exchange option contracts are recorded in other current assets and
marked to market through earnings.

Probable but not firmly committed transactions comprise sales of the Company's
products and purchases of raw material, sub-assemblies, and assembled finished
goods 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. The term of the Company's foreign
exchange hedging instruments, whether for firmly committed transactions,
probable but not firmly committed transactions, or to partially finance the
foreign risk management program, currently does not extend beyond six months.

Gains and losses on accounting hedges of existing assets or liabilities are
generally recorded 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 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.

The following table provides information about the Company's foreign currency
derivative financial instruments outstanding as of September 30, 2000 and
September 25, 1999. 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

29
<PAGE>
weighted-average contractual foreign currency exchange rates. Generally, all
instruments mature within 6 months. Miscellaneous other currencies consist
primarily of the Canadian and Australian dollars.

<TABLE>
<CAPTION>
2000 1999
----------------------------- -----------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
NOTIONAL CONTRACT RATE OR NOTIONAL CONTRACT RATE OR
AMOUNT STRIKE PRICE AMOUNT STRIKE PRICE
--------- ----------------- --------- -----------------
In millions, except average contract rates and strike prices
<S> <C> <C> <C> <C>
Foreign currency spot/forward contracts:
Japanese Yen.............................. $ 607 105.61 $ 590 105.70
British Pound Sterling.................... 115 1.47 86 1.62
Euro...................................... 313 .89 177 1.05
Miscellaneous other currencies............ 66 62
------ ------
Total currency spot/forward contracts....... $1,101 $ 915
====== ======
Estimated fair value........................ $ 9 $ (9)
====== ======

Foreign currency purchased call options:
Japanese Yen.............................. $ 335 95.55 $ 250 104.80
British Pound Sterling.................... -- -- --
Euro...................................... 375 1.00 105 1.14
Miscellaneous other currencies............ -- 55
------ ------
Total purchased call options............ $ 710 $ 410
------ ------

Foreign currency purchased put options:
Japanese Yen.............................. $ 465 107.28 $ 860 118.31
British Pound Sterling.................... 90 1.49 75 1.59
Euro...................................... 326 .92 505 1.00
Miscellaneous other currencies............ 75 100
------ ------
Total purchased put options............. $ 956 $1,540
------ ------
Total foreign currency purchased options.... $1,666 $1,950
====== ======
Estimated fair value........................ $ 25 $ 12
====== ======

Foreign currency sold call options:
Japanese Yen.............................. $ 365 98.78 $ 290 106.18
British Pound Sterling.................... 90 1.55 25 1.69
Euro...................................... 350 .98 120 1.09
Miscellaneous other currencies............ 45 50
------ ------
Total sold call options................. $ 850 $ 485
------ ------

Foreign currency sold put options:
Japanese Yen.............................. $ 280 107.11 -- --
British Pound Sterling.................... 20 1.44 -- --
Euro...................................... 51 .85 75 1.00
Miscellaneous other currencies............ -- 25
------ ------
Total sold put options.................. $ 351 100
------ ------
Total foreign currency sold options......... $1,201 $ 585
====== ======
Estimated fair value........................ $ (5) $ (17)
====== ======
</TABLE>

30
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
------------------------------------------ --------
<S> <C>
Financial Statements:
Report of Independent Auditors, KPMG LLP.................. 32
Consolidated Balance Sheets as of September 30, 2000, and
September 25, 1999...................................... 33
Consolidated Statements of Operations for the three fiscal
years ended September 30, 2000.......................... 34
Consolidated Statements of Shareholders' Equity for the
three fiscal years ended September 30, 2000............. 35
Consolidated Statements of Cash Flows for the three fiscal
years ended September 30, 2000.......................... 36
Notes to Consolidated Financial Statements................ 37
Selected Quarterly Financial Information (Unaudited)...... 61
Financial Statement Schedule:
For the three fiscal years ended September 30, 2000
Schedule II--Valuation and qualifying accounts.......... 62
</TABLE>

31
<PAGE>
REPORT OF 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 30, 2000 and September 25, 1999,
and the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the years in the three-year period ended September 30,
2000. 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 audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 30, 2000 and September 25, 1999,
and the results of their operations and their cash flows for each of the years
in the three-year period ended September 30, 2000, in conformity with accounting
principles generally accepted in the United States of America. 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 LLP

Mountain View, California
October 17, 2000

32
<PAGE>
CONSOLIDATED BALANCE SHEETS

(IN MILLIONS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 SEPTEMBER 25, 1999
------------------ ------------------
<S> <C> <C>
ASSETS:

Current assets:
Cash and cash equivalents................................. $1,191 $1,326
Short-term investments.................................... 2,836 1,900
Accounts receivable, less allowances of $64 and $68,
respectively............................................ 953 681
Inventories............................................... 33 20
Deferred tax assets....................................... 162 143
Other current assets...................................... 252 215
------ ------
Total current assets.................................... 5,427 4,285
Property, plant, and equipment, net....................... 313 318
Non-current debt and equity investments................... 786 339
Other assets.............................................. 277 219
------ ------
Total assets............................................ $6,803 $5,161
====== ======

LIABILITIES AND SHAREHOLDERS' EQUITY:

Current liabilities:
Accounts payable.......................................... $1,157 $ 812
Accrued expenses.......................................... 776 737
------ ------
Total current liabilities............................... 1,933 1,549
Long-term debt.............................................. 300 300
Deferred tax liabilities.................................... 463 208
------ ------
Total liabilities....................................... 2,696 2,057
------ ------

Commitments and contingencies

Shareholders' equity:
Series A nonvoting convertible preferred stock, no par
value; 150,000 shares authorized, 75,750 and 150,000
issued and outstanding, respectively.................... 76 150
Common stock, no par value; 900,000,000 shares authorized;
335,676,889 and 321,598,122 shares issued and
outstanding, respectively............................... 1,502 1,349
Retained earnings......................................... 2,285 1,499
Accumulated other comprehensive income.................... 244 106
------ ------
Total shareholders' equity.............................. 4,107 3,104
------ ------
Total liabilities and shareholders' equity.............. $6,803 $5,161
====== ======
</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 30, 2000 2000 1999 1998
------------------------------------------- -------- -------- ---------
<S> <C> <C> <C>
Net sales................................................... $ 7,983 $ 6,134 $ 5,941
Cost of sales............................................... 5,817 4,438 4,462
-------- -------- ---------
Gross margin................................................ 2,166 1,696 1,479
-------- -------- ---------
Operating expenses:
Research and development.................................. 380 314 303
Selling, general, and administrative...................... 1,166 996 908
Special charges:
Executive bonus......................................... 90 -- --
Restructuring costs..................................... 8 27 --
In-process research and development..................... -- -- 7
-------- -------- ---------
Total operating expenses.............................. 1,644 1,337 1,218
-------- -------- ---------
Operating income............................................ 522 359 261
Gains from sales of investment.............................. 367 230 40
Interest and other income, net.............................. 203 87 28
-------- -------- ---------
Total interest and other income, net........................ 570 317 68
-------- -------- ---------
Income before provision for income taxes.................... 1,092 676 329
Provision for income taxes.................................. 306 75 20
-------- -------- ---------
Net income.................................................. $ 786 $ 601 $ 309
======== ======== =========
Earnings per common share:
Basic..................................................... $ 2.42 $ 2.10 $ 1.17
Diluted................................................... $ 2.18 $ 1.81 $ 1.05
Shares used in computing earnings per share (in thousands):
Basic..................................................... 324,568 286,314 263,948
Diluted................................................... 360,324 348,328 335,834
</TABLE>

See accompanying notes to consolidated financial statements

34
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN MILLIONS, EXCEPT SHARE AMOUNTS WHICH ARE IN THOUSANDS)

<TABLE>
<CAPTION>
ACCUMULATED
PREFERRED STOCK COMMON STOCK OTHER TOTAL
------------------- ------------------- RETAINED COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT EARNINGS INCOME (LOSS) EQUITY
-------- -------- -------- -------- -------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances as of September 26, 1997......... 150 $150 255,898 $ 498 $ 589 $ (37) $1,200
Components of comprehensive income:
Net income............................ -- -- -- -- 309 -- 309
Foreign currency translation.......... -- -- -- -- -- (2) (2)
------
Total comprehensive income.......... 307
Common stock issued under stock option
and purchase plans.................... -- -- 6,170 41 -- -- 41
Common stock issued in connection with
the acquisition of certain assets of
PCC................................... -- -- 8,318 80 -- -- 80
Tax benefit related to disqualifying
dispositions of stock options......... -- -- -- 14 -- -- 14
--- ---- ------- ------ ------ ----- ------
Balances as of September 25, 1998......... 150 150 270,386 633 898 (39) 1,642
Components of comprehensive income:
Net income............................ 601 601
Foreign currency translation.......... -- -- -- -- -- 3 3
Unrealized gain on available-for-sale
securities, net of tax.............. -- -- -- -- -- 318 318
Reclassification adjustment for gains
on available- for-sale securities
included in net income.............. -- -- -- -- -- (176) (176)
------
Total comprehensive income.......... 746
Common stock issued under stock option
and purchase plans.................... -- -- 8,428 86 -- -- 86
Common stock issued in connection with
the Company's redemption of long-term
debt.................................. -- -- 45,284 654 -- -- 654
Common stock repurchased................ -- -- (2,500) (75) -- -- (75)
Tax benefit related to disqualifying
dispositions of stock options......... -- -- -- 51 -- -- 51
--- ---- ------- ------ ------ ----- ------
Balances as of September 25, 1999......... 150 150 321,598 1,349 1,499 106 3,104
Components of comprehensive income:
Net income............................ 786 786
Foreign currency translation.......... -- -- -- -- -- (17) (17)
Unrealized gain on available-for-sale
securities, net of tax.............. -- -- -- -- -- 427 427
Reclassification adjustment for gains
on available- for-sale securities
included in net income.............. -- -- -- -- -- (272) (272)
------
Total comprehensive income.......... 924
Common stock issued under stock option
and purchase plans.................... -- -- 7,632 85 -- -- 85
Conversion of Series A preferred
stock................................. (74) (74) 9,000 74 -- -- --
Common stock repurchased................ -- -- (2,553) (116) -- -- (116)
Tax benefit related to disqualifying
dispositions of stock options......... -- -- -- 110 -- -- 110
--- ---- ------- ------ ------ ----- ------
Balances as of September 30, 2000......... 76 $ 76 335,677 $1,502 $2,285 $ 244 $4,107
=== ==== ======= ====== ====== ===== ======
</TABLE>

See accompanying notes to consolidated financial statements.

35
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)

<TABLE>
<CAPTION>
THREE FISCAL YEARS ENDED SEPTEMBER 30, 2000 2000 1999 1998
------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
Cash and cash equivalents, beginning of the year............ $1,326 $1,481 $1,230
------ ------ ------

Operating:
Net income.................................................. 786 601 309
Adjustments to reconcile net income to cash generated by
operating activities:
Depreciation and amortization............................. 84 85 111
Provision for deferred income taxes....................... 163 (35) 1
Loss on sale of property, plant, and equipment............ 3 -- --
Gains from sales of equity investment..................... (367) (230) (40)
In-process research and development....................... -- -- 7
Changes in operating assets and liabilities:
Accounts receivable....................................... (272) 274 72
Inventories............................................... (13) 58 359
Other current assets...................................... (37) (32) 31
Other assets.............................................. (15) (3) 83
Accounts payable.......................................... 345 93 34
Accrued restructuring costs............................... (27) 2 (107)
Other current liabilities................................. 176 (15) (85)
------ ------ ------
Cash generated by operating activities.................. 826 798 775
------ ------ ------

Investing:
Purchase of short-term investments.......................... (4,267) (4,236) (2,313)
Proceeds from maturities of short-term investments.......... 3,331 3,155 1,723
Purchases of long-term investments.......................... (232) (112) --
Proceeds from sale of property, plant and equipment......... 11 23 89
Purchase of property, plant, and equipment.................. (107) (47) (46)
Proceeds from sales of equity investment.................... 372 245 24
Other....................................................... (38) 8 (20)
------ ------ ------
Cash used for investing activities...................... (930) (964) (543)
------ ------ ------

Financing:
Decrease in notes payable to banks.......................... -- -- (22)
Proceeds from issuance of common stock...................... 85 86 41
Cash used for repurchase of common stock.................... (116) (75) --
------ ------ ------
Cash generated by (used for) financing activities....... (31) 11 19
------ ------ ------
Increase (decrease) in cash and cash equivalents............ (135) (155) 251
------ ------ ------
Cash and cash equivalents, end of the year.................. $1,191 $1,326 $1,481
====== ====== ======
Supplemental cash flow disclosures:
Cash paid during the year for interest.................... $ 10 $ 58 $ 59
Cash paid (received) for income taxes, net................ $ 47 $ 33 $ (15)
Noncash transactions:
Issuance of common stock for redemption of long-term
debt.................................................. -- $ 654 --
Issuance of common stock for acquisition of PCC
assets................................................ -- -- $ 80
Issuance of common stock for conversion of Series A
Preferred Stock....................................... $ 74 -- --
</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 personal computers and related software and peripherals for sale
primarily to education, creative, consumer, and business customers.

BASIS OF PRESENTATION AND PREPARATION

The accompanying consolidated financial statements include the accounts of the
Company. Intercompany accounts and transactions have been eliminated. 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.

During the first quarter of 1999, the Company amended its by-laws to provide
that beginning in 1999 its fiscal year would end on the last Saturday in
September rather than the last Friday. Likewise, beginning with the first fiscal
quarter of 1999 each of the Company's fiscal quarters now also end on Saturday
rather than Friday. Accordingly, one day was added to the first quarter of 1999
so that the quarter ended on Saturday, December 26, 1998. These changes did not
have a material effect on the Company's revenue or results of operations for any
quarter during fiscal 1999. Fiscal years 1999 and 1998, each 52-week years, both
ended on September 25th. Approximately every six years, the Company reports a
53-week fiscal year to align its fiscal quarters with calendar quarters by
adding a week to its first fiscal quarter. Consequently, an additional week was
added to the first quarter of fiscal 2000. All information presented herein is
based on the Company's fiscal calendar.

FINANCIAL INSTRUMENTS

The carrying amounts of cash and cash equivalents, short-term investments,
accounts receivable, accounts payable, and accrued liabilities approximate their
fair value due to the short maturities of those 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. Investments with maturities greater than twelve months are
classified as long-term assets. 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, net of taxes, 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.

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

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

Probable but not firmly committed transactions comprise sales of the Company's
products and purchases of raw material, subassemblies, and assembled finished
goods 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. The term of the Company's foreign
exchange hedging instruments, whether for firmly committed transactions,
probable but not firmly committed transactions, or to partially finance the
foreign exchange risk management program currently does 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.

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 it is determined a hedge is ineffective, including if and when the
hedged transactions no longer exist, the Company recognizes in income the change
in market value of the instrument beginning on the date it was no longer an
effective hedge.

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

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Gains and losses on interest rate and foreign exchange instruments not accounted
for as hedges are recorded 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 marked to market
through earnings.

In June 1998, Statement of Financial Accounting Standards (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
an entity to recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
fair value will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings, or recognized in
other comprehensive income until the hedged item is recognized in earnings. In
June 1999, SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133," was
issued. The statement deferred the effective date of SFAS No. 133 until the
first quarter of 2001. The Company will adopt SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as of October 1, 2000. Net of
the related income tax effect, the adoption of SFAS No. 133 is expected to have
a favorable cumulative-effect-type adjustment to net income of approximately
$12 million and a favorable cumulative-effect-type adjustment to other
comprehensive income of $15 million. Management does not believe that adoption
of SFAS No. 133 will significantly alter the Company's hedging strategies.
However, its application may increase the volatility of other income and expense
and other comprehensive income.

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 is 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, from 2 to 5 years for
equipment, and the shorter of lease terms or estimated useful lives for
leasehold improvements.

INTERNAL-USE SOFTWARE

Software acquired or developed for internal use is stated at cost and classified
on the balance sheet in other assets. Depreciation is computed on a
straight-line basis using an estimated useful life of no more than 5 years.
During fiscal year 2000, the Company adopted the American Institute of Certified
Public Accountants (AICPA) Statement of Position (SOP) 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1
requires the capitalization of certain internal costs incurred in the
acquisition or development of internal-use software. The adoption of SOP 98-1
did not have a material impact on the Company's consolidated results of
operations or financial position during 2000. As of September 30, 2000 and
September 25, 1999, the net carrying amount of software was $106 million and
$44 million, respectively.

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

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS

The Company reviews property, plant, and equipment and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
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 equals the amount by which the carrying value 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 the asset may be impaired. 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 30, 2000, the Company has made no
material adjustments to its long-lived assets except those made in connection
with the restructuring actions described in Note 4.

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 "accumulated other comprehensive income (loss)" in shareholders'
equity. The Company's foreign manufacturing subsidiaries and certain other
entities use the U.S. dollar as their functional currency and remeasure monetary
assets and liabilities at year-end exchange rates, and inventories, property,
and nonmonetary assets and liabilities at historical rates. Gains and losses
from these translations are included in the Company's results of operations and
were not significant in 2000, 1999 or 1998.

REVENUE RECOGNITION

The Company recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred, the sales price is fixed or determinable, and
collectibility is probable. Generally, these criteria are met at the time
product is shipped. Provisions are made currently for estimated product returns,
price protection, rebates, and other sales programs.

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 $281 million, $208 million, and $152 million for
2000, 1999, and 1998, respectively.

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

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT

Research and development costs are expensed as incurred. Software development
costs are subject to capitalization beginning when a product's technological
feasibility has been established and ending when a product is available for
release to customers. Generally, the Company's products are released soon after
technological feasibility has been established. As a result, costs subsequent to
achieving technological feasibility have not been significant and all software
development costs have been expensed.

STOCK-BASED COMPENSATION

The Company measures compensation expense for its employee stock-based
compensation plans using the intrinsic value method and has provided in Note 8
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.

EARNINGS PER COMMON SHARE

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.

STOCK SPLIT

On June 21, 2000, the Company effected a two-for-one stock split in the form of
a Common Stock dividend to shareholders of record as of May 19, 2000. All per
share data and numbers of Common shares have been retroactively adjusted to
reflect the stock split.

COMPREHENSIVE INCOME

Comprehensive income consists of two components, net income and other
comprehensive income. Other comprehensive income refers to revenue, expenses,
gains and losses that under generally accepted accounting principles are
recorded as an element of shareholders' equity but are excluded from net income.
The Company's other comprehensive income is comprised of foreign currency
translation adjustments from those subsidiaries not using the U.S. dollar as
their functional currency and from unrealized gains and losses on marketable
securities categorized as available-for-sale. See Note 2 for additional
information regarding available-for-sale securities.

SEGMENT INFORMATION

The Company reports segment information based on the "management" approach. The
management approach designates the internal reporting used by management for
making decisions and assessing performance as the source of the Company's
reportable segments. Information about the Company's products, major customers,
and geographic areas on a company-wide basis is also disclosed.

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

NOTE 2--FINANCIAL INSTRUMENTS

INVESTMENTS

The following table summarizes the Company's available-for-sale securities at
amortized cost, which approximates fair value, recorded as cash and cash
equivalents or short-term investments as of September 30, 2000, and
September 25, 1999 (in millions):

<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 SEPTEMBER 25, 1999
AMORTIZED COST AMORTIZED COST
------------------ ------------------
<S> <C> <C>
U.S. Treasury securities.................... $ -- $ 3
U.S. corporate securities................... 921 517
Foreign securities.......................... 222 636
------ ------
Total included in cash and cash
equivalents............................. 1,143 1,156

U.S. Treasury securities.................... 293 298
U.S. corporate securities................... 2,059 780
Foreign securities.......................... 484 822
------ ------
Total included in short-term
investments............................. 2,836 1,900
------ ------
Total..................................... $3,979 $3,056
====== ======
</TABLE>

As of September 30, 2000 and September 25, 1999, substantially all of the
Company's investments had maturities less than twelve months. The Company's U.S.
corporate securities include U.S. Government Agency notes, certificates of
deposit, commercial paper and corporate debt securities. Foreign securities
include foreign commercial paper, loan participations, time deposits 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 are
generally held until maturity. Gross unrealized gains and losses were negligible
as of September 30, 2000 and September 25, 1999. The Company's cash and cash
equivalent balances as of September 30, 2000 and September 25, 1999 include
$7 million and $4 million, respectively, pledged primarily as collateral against
outstanding derivative positions.

TRADE RECEIVABLES

The Company distributes its products principally through third-party computer
resellers and directly to certain education and consumer customers. 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.
However, considerable trade receivables which are not covered by collateral or
credit insurance are outstanding with the Company's distribution and retail
channel partners.

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

NOTE 2--FINANCIAL INSTRUMENTS (CONTINUED)
INTEREST RATE DERIVATIVES AND FOREIGN CURRENCY INSTRUMENTS

The following table shows the notional principal, net fair value, and credit
risk amounts of the Company's interest rate derivative and foreign currency
instruments as of September 30, 2000 and September 25, 1999 (in millions).

<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 SEPTEMBER 25, 1999
----------------------------------- ----------------------------------
NOTIONAL FAIR CREDIT RISK NOTIONAL FAIR CREDIT RISK
PRINCIPAL VALUE AMOUNTS PRINCIPAL VALUE AMOUNTS
--------- --------- ----------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Transactions qualifying as accounting hedges:
Interest rate instruments:
Swaps....................................... $ 800 $ (1) $ 4 $ 790 $ (5) $ --
Foreign exchange instruments:
Spot/Forward contracts, net................. $ 826 $ 10 $ 10 $ 730 $ (8) $ 4
Purchased options, net...................... $ 615 $ 21 $ -- $1,305 $ 4 $ --
Transactions other than accounting hedges:
Foreign exchange instruments:
Spot/Forward contracts, net................. $ 275 $ -- $ -- $ 185 $ (1) $ --
Purchased options, net...................... $1,051 $ 4 $ 4 $ 645 $ 8 $ 8
Sold options, net........................... $1,201 $ (5) $ -- $ 585 $(17) $ --
</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 30, 2000
and September 25, 1999. 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
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. These swaps effectively convert the Company's
fixed-rate 10 year debt to floating-rate debt and convert the floating rate
investments to fixed rate. The maturity date of the asset swaps is
September 2001 and the debt swaps mature in February of 2004. As of
September 30, 2000 and September 25, 1999, interest rate debt swaps had a
weighted-average receive rate of 7.21% and 6.04%, respectively. The
weighted-average pay rate on the debt swaps was 6.68% and 5.45% as of
September 30, 2000, and September 25, 1999, respectively. As of September 30,
2000 and September 25, 1999, interest rate asset swaps had a weighted-average
receive rate of 5.50% and 5.53% respectively; and a weighted-average pay rate of
6.66% and 5.24%, respectively. The unrealized gains and

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

NOTE 2--FINANCIAL INSTRUMENTS (CONTINUED)
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 losses on such contracts totaled approximately $1 million
as of September 30, 2000 and $5 million as of September 25, 1999.

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 assets and 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 30, 2000, maturity dates for foreign exchange
forward contracts held by the Company ranged from one to five 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 not significant as of
September 30, 2000, and September 25, 1999. 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 30, 2000, maturity dates for
purchased foreign exchange option contracts and sold option contracts ranged
from one to five months.

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
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 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 significant as of September 30,
2000.

LONG-TERM DEBT

UNSECURED NOTES

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. As of September 30,
2000 and September 25, 1999, the carrying amount of these notes was
$300 million, while the fair value was $279 million and $280 million,
respectively. The fair value of the notes is based on their listed market values
as of September 30, 2000 and September 25, 1999.

CONVERTIBLE NOTES

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, paid
interest semiannually, and matured on June 1, 2001 if not converted earlier. The
Notes

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

NOTE 2--FINANCIAL INSTRUMENTS (CONTINUED)
were 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
were redeemable by the Company at 102.4% of the principal amount, plus accrued
interest, for the twelve month period beginning June 1, 1999, and at 101.2% of
the principal amount, plus accrued interest, for the twelve month period
beginning June 1, 2000. On April 14, 1999, the Company called for redemption of
the Notes. Not including approximately $7 million of unamortized debt issuance
costs, debentures in an aggregate principal amount outstanding totaled
approximately $661 million as of March 27, 1999. During the third quarter of
1999, debenture holders chose to convert virtually all of the outstanding
debentures to common stock at a rate of $29.205 per share resulting in the
issuance of approximately 22.6 million shares of the Company's common stock.

NON-CURRENT DEBT AND EQUITY INVESTMENTS AND RELATED GAINS

The Company holds significant investments in ARM Holdings plc (ARM), Samsung
Electronics Co., Ltd (Samsung), Akamai Technologies, Inc. (Akamai) and EarthLink
Network, Inc. (EarthLink). These investments are reflected in the consolidated
balance sheets as non-current debt and equity investments and have been
categorized as available-for-sale requiring that they be carried at fair value
with unrealized gains and losses, net of taxes, reported in equity as a
component of accumulated other comprehensive income. All realized gains on the
sale of these investments have been included in other income. The combined fair
value of these investments was $786 million and $339 million as of
September 30, 2000, and September 25, 1999, respectively. The Company believes
it is likely there will continue to be significant fluctuations in the fair
value of these investments in the future.

ARM HOLDINGS

ARM is a publicly held company in the United Kingdom involved in the design and
licensing of high performance microprocessors and related technology. As of
September 25, 1999, the Company held approximately 80 million shares of ARM
stock with a fair value of $226 million. Share data for ARM presented in this
Form 10-K has been adjusted to reflect ARM's four-for-one stock split in April
of 1999 and its five-for-one stock split in April of 2000. During 2000, the
Company sold a total of approximately 45.2 million shares of ARM stock for net
proceeds of approximately $372 million, recorded a gain before taxes of
approximately $367 million, and recognized related income tax of approximately
$94 million. As of September 30, 2000, the Company holds 34.8 million shares of
ARM stock valued at $383 million.

During 1999, the Company sold a total of approximately 163 million shares of ARM
stock for net proceeds of approximately $245 million, recorded a gain before
taxes of approximately $230 million, and recognized related income tax of
approximately $25 million. As of September 25, 1999, the Company held
80 million shares of ARM stock valued at $226 million.

As of September 26, 1997, the Company owned 42.3% of the outstanding stock of
ARM. The Company had 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. Foreign tax 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 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

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

NOTE 2--FINANCIAL INSTRUMENTS (CONTINUED)
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. On October 14, 1998, the Company sold 58 million shares (split
adjusted) of ARM stock. As a result of this sale, the Company's ownership
interest in ARM fell to 19.7%. Consequently, beginning in the first quarter of
fiscal 1999, the Company ceased accounting for its remaining investment in ARM
using the equity method and categorized its remaining shares as
available-for-sale.

EARTHLINK

In January 2000, the Company invested $200 million in EarthLink, an Internet
service provider (ISP). The investment is in EarthLink's Series C Convertible
Preferred Stock, which is convertible by the Company after January 4, 2001, into
approximately 7.1 million shares of EarthLink common stock. Concurrent with this
investment, EarthLink and the Company entered into a multi-year agreement to
deliver ISP service to Macintosh users in the United States. Under the terms of
the agreement, the Company profits from each new Mac customer that subscribes to
EarthLink's ISP service for a specified period of time, and EarthLink is the
default ISP in Apple's Internet Setup Software included with all Macintosh
computers sold in the United States. The fair value of the Company's investment
in EarthLink is approximately $64 million as of September 30, 2000.

SAMSUNG

During the fourth quarter of 1999, the Company invested $100 million in Samsung
to assist in the further expansion of Samsung's TFT-LCD flat-panel display
production capacity. The investment, in the form of three year unsecured bonds,
is convertible into approximately 550,000 shares of Samsung common stock
beginning in July 2000. The bonds carry an annual coupon rate of 2% and pay a
total yield to maturity of 5% if redeemed at their maturity. The fair value of
the Company's investment in Samsung is approximately $123 million as of
September 30, 2000.

AKAMAI

In June 1999, the Company invested $12.5 million in Akamai, a global Internet
content delivery service. The investment was in the form of convertible
preferred stock that converted into 4.1 million shares of Akamai common stock
(adjusted for subsequent stock splits) at the time of Akamai's initial public
offering in October 1999. Beginning in the first quarter of 2000, the Company
categorized its shares in Akamai as available-for-sale. The fair value of the
Company's investment in Akamai is approximately $216 million as of
September 30, 2000.

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

NOTE 3--CONSOLIDATED FINANCIAL STATEMENT DETAILS (IN MILLIONS)

INVENTORIES

<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Purchased parts............................................. $ 1 $ 4
Work in process............................................. 2 3
Finished goods.............................................. 30 13
--- ---
Total inventories........................................... $33 $20
=== ===
</TABLE>

PROPERTY, PLANT, AND EQUIPMENT

<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Land and buildings.......................................... $ 324 $ 323
Machinery and equipment..................................... 185 220
Office furniture and equipment.............................. 60 61
Leasehold improvements...................................... 131 125
----- -----
700 729
Accumulated depreciation and amortization................... (387) (411)
----- -----
Net property, plant, and equipment.......................... $ 313 $ 318
===== =====
</TABLE>

ACCRUED EXPENSES

<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Accrued compensation and employee benefits.................. $176 $ 84
Accrued marketing and distribution.......................... 149 170
Accrued warranty and related costs.......................... 108 105
Other current liabilities................................... 343 378
---- ----
Total accrued expenses...................................... $776 $737
==== ====
</TABLE>

INTEREST AND OTHER INCOME, NET

<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Interest income......................................... $210 $144 $100
Interest expense........................................ (21) (47) (62)
Foreign currency gain (loss)............................ 1 (4) (2)
Net premiums and discounts on foreign exchange
instruments........................................... 7 (4) (1)
Other income (expense), net............................. 6 (2) (7)
---- ---- ----
$203 $ 87 $ 28
==== ==== ====
</TABLE>

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

NOTE 4--SPECIAL CHARGES

RESTRUCTURING OF OPERATIONS

1996 AND 1997 RESTRUCTURING ACTIONS

In the second quarter of 1996, the Company announced and began to implement a
restructuring plan designed to reduce costs and return 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 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. All material restructuring actions contemplated under the plan were
essentially complete at the end of 1998. The combined 1996 and 1997
restructuring actions consisted of terminating approximately 4,200 full-time
employees; 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 were not
critical to the Company's core business strategy. The restructuring actions
under the plan resulted in cash expenditures of $297 million and noncash asset
write-downs of $95 million from the second quarter of 1996 through
September 30, 2000. Of the combined 1996 and 1997 restructuring charges of
$396 million, approximately $3 million was determined to be excess during the
fourth quarter of 1999 and was reversed. The Company expects the remaining
accrual for payments on canceled facility leases will result in cash
expenditures of approximately $1 million in 2001.

The following table depicts the restructuring activity through September 30,
2000, associated with the 1996 and 1997 restructuring actions described above
(in millions):

<TABLE>
<CAPTION>
PAYMENTS TO
EMPLOYEES PAYMENTS ON WRITE-DOWN OF PAYMENTS ON
INVOLUNTARILY CANCELED FACILITY OPERATING ASSETS CANCELED
TERMINATED (A) LEASES (A) TO BE SOLD (B) CONTRACTS (A) TOTAL
-------------- ----------------- ---------------- ------------- --------
<S> <C> <C> <C> <C> <C>
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

Adjustments during 1999........ (2) (2) -- 1 (3)
Spending during 1999........... (8) (8) -- (7) (23)
---- ---- ---- ---- -----
Balances as of September 25,
1999......................... -- 4 -- 1 5

Adjustments during 2000........ -- -- -- -- --
Spending during 2000........... -- (3) -- (1) (4)
---- ---- ---- ---- -----
Balances as of September 30,
2000......................... $ -- $ 1 $ -- $ -- $ 1
==== ==== ==== ==== =====
</TABLE>

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

(a): Cash

(b): Noncash

1999 RESTRUCTURING ACTIONS

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

NOTE 4--SPECIAL CHARGES (CONTINUED)
of 1999 reflects $3 million of excess reserves related to prior restructuring
actions. The $21 million cost of these actions was comprised of $11 million for
contract cancellation charges associated with the closure of the Company's
outsourced data center, substantially all of which had been spent by the end of
the third quarter of 2000, and $10 million for contract cancellation charges
related to supply and development agreements previously discontinued,
substantially all of which had been utilized by the end of the first quarter of
fiscal 2000.

2000 RESTRUCTURING ACTIONS

During the first quarter of 2000, the Company initiated restructuring actions
resulting in recognition of an $8 million restructuring charge. This charge was
comprised of $3 million for the write-off of various operating assets and
$5 million for severance payments to approximately 95 employees associated with
consolidation of various domestic and international sales and marketing
functions. Of the $5 million accrued for severance, $2.5 million had been spent
by September 30, 2000, and the remainder is expected to be spent over the
following two quarters. Of the $3 million accrued for the write-off of various
assets, substantially all was utilized by the end of the second quarter of 2000.

EXECUTIVE BONUS

During the first quarter of 2000, the Company's Board of Directors approved a
special executive bonus for the Company's Chief Executive Officer for past
services in the form of an aircraft with a total cost to the company of
approximately $90 million, the majority of which is not tax deductible.
Approximately half of the total charge is the cost of the aircraft. The other
half represents all other costs and taxes associated with the bonus. This
executive bonus has been presented outside selling, general, and administrative
expenses as a special charge.

TECHNOLOGY ACQUISITION

In May 1998, the Company acquired certain technology that was under development
and 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.

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

NOTE 5--INCOME TAXES

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

<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Federal:
Current................................................. $ 9 $ 4 $--
Deferred................................................ 239 30 --
---- --- ---
248 34 --
---- --- ---
State:
Current................................................. -- -- --
Deferred................................................ 23 11 --
---- --- ---
23 11 --
---- --- ---
Foreign:
Current................................................. 37 33 11
Deferred................................................ (2) (3) 9
---- --- ---
35 30 20
---- --- ---
Provision for income taxes................................ $306 $75 $20
==== === ===
</TABLE>

The foreign provision for income taxes is based on foreign pretax earnings of
approximately $1,019 million, $612 million, and $315 million in 2000, 1999, and
1998, 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 $755 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.

Deferred tax assets and liabilities reflect the effects of tax losses, credits,
and 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 30, 2000 and September 25, 1999, the significant components of
the Company's deferred tax assets and liabilities were (in millions):

<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Deferred tax assets:
Accounts receivable and inventory reserves................ $ 24 $ 31
Accrued liabilities and other reserves.................... 97 77
Basis of capital assets and investments................... 65 67
Tax losses and credits.................................... 280 438
----- ----
Total deferred tax assets................................. 466 613
Less valuation allowance.................................... 33 60
----- ----
Net deferred tax assets..................................... 433 553
----- ----

Deferred tax liabilities:
Unremitted earnings of subsidiaries....................... 480 442
Available-for-sale securities............................. 174 84
Other..................................................... 19 12
----- ----
Total deferred tax liabilities............................ 673 538
----- ----
Net deferred tax asset (liability).......................... $(240) $ 15
===== ====
</TABLE>

As of September 30, 2000, the Company had operating loss carryforwards for
federal tax purposes of approximately $54 million, which expire in 2012. This
does not include approximately $79 million of remaining operating loss
carryforwards acquired from NeXT, which expire in 2009 - 2012, and the
utilization of which is subject to certain limitations imposed by the Internal
Revenue Code. The Company also has Federal credit carryforwards and various
state and foreign tax loss and credit carryforwards, the tax effect of which is
approximately $129 million and which expire between 2001 and 2015. The remaining
benefits from tax losses and credits do not expire. As of September 30, 2000, a
valuation allowance of $33 million was recorded against the deferred tax asset
for the benefits of tax losses that may not be realized. The valuation allowance
relates primarily to the operating loss carryforwards acquired from NeXT. The
net change in the total valuation allowance in 2000 was a decrease of
$27 million. Management believes it is more likely than not that forecasted
income, including income that may be generated as a result of certain tax
planning strategies, will be sufficient to fully recover the remaining net
deferred tax assets.

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

NOTE 5--INCOME TAXES (CONTINUED)
A reconciliation of the provision for income taxes, with the amount computed by
applying the statutory federal income tax rate (35% in 2000, 1999, and 1998) to
income before provision for income taxes, is as follows (in millions):

<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Computed expected tax.................................. $382 $236 $115
State taxes, net of federal effect..................... 15 12 10
Indefinitely invested earnings of foreign
subsidiaries......................................... (82) (29) (15)
Nondeductible executive compensation................... 32 -- 8
Change in valuation allowance.......................... (27) (153) (97)
Other individually immaterial items.................... (14) 9 (1)
---- ---- ----
Provision for income taxes............................. $306 $ 75 $ 20
==== ==== ====
Effective tax rate..................................... 28% 11% 6%
</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 most of the issues for these years have been
resolved, certain issues still remain in dispute and are being contested by the
Company. Management believes adequate provision has been made for any
adjustments that may result from tax examinations.

NOTE 6--SHAREHOLDERS' EQUITY

STOCK REPURCHASE PLAN

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 nonvoting convertible preferred stock
("preferred stock") for $150 million. 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. Additionally, 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. On September 15, 2000,
approximately 74,000 shares of preferred stock were converted to 9 million
shares of the Company's common stock.

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

NOTE 7--EMPLOYEE BENEFIT PLANS

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 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. A total of 38,000,000 shares have been authorized for issuance
under the 1998 Plan, of which 7,181,104 shares are reserved for future issuance
as of September 30, 2000.

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. A
total of 43,000,000 shares have been authorized for issuance under the 1997
Plan, of which 3,929,356 shares are reserved for future issuance as of
September 30, 2000.

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. A total of 800,000 shares have
been authorized for issuance under the DSOP, of which 420,000 shares remain
reserved for future issuance. Supplementally and separate from the DSOP, 60,000
options had been granted in total to two members of the Company's Board of
Directors, of which 30,000 shares remain outstanding as of September 30, 2000.

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 2000, 1999, and 1998, 766,000,
1.1 million and 2.2 million shares, respectively, were issued under the Purchase
Plan. As of September 30, 2000, approximately 5.76 million shares were reserved
for future issuance under the Purchase Plan.

EMPLOYEE SAVINGS PLAN

The Company has an employee savings plan (the Savings Plan) qualifying 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 pre-tax earnings, up to the Internal Revenue Service annual contribution
limit ($10,500 for calendar year 2000). 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

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

NOTE 7--EMPLOYEE BENEFIT PLANS (CONTINUED)
matching contributions to the Savings Plan were approximately $16 million,
$13 million, and $14 million in 2000, 1999, and 1998, respectively.

STOCK OPTION ACTIVITY

A summary of the Company's stock option activity and related information for the
years ended September 30, 2000 and September 25, 1999 and 1998, follows (option
amounts are presented in thousands):

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, 2000 SEPTEMBER 25, 1999 SEPTEMBER 25, 1998
------------------------- ------------------------- -------------------------
NUMBER WEIGHTED- NUMBER WEIGHTED- NUMBER WEIGHTED-
OF AVERAGE OF AVERAGE OF AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
-------- -------------- -------- -------------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding--beginning of
year............................... 36,808 $13.20 37,388 $10.24 37,298 $ 8.62
Granted............................ 45,662 $46.52 11,910 $19.44 27,758 $11.56
Exercised.......................... (6,866) $ 9.62 (7,348) $ 8.36 (3,764) $ 7.18
Forfeited.......................... (4,846) $28.42 (5,142) $13.01 (23,904) $ 9.70
------ ------ -------
Options outstanding--end of year..... 70,758 $34.01 36,808 $13.20 37,388 $10.24
====== ====== =======
Options exercisable at end of year... 23,659 $31.94 5,466 $ 9.58 2,870 $ 7.51
</TABLE>

The options outstanding as of September 30, 2000, have been segregated into five
ranges for additional disclosure as follows (option amounts are presented in
thousands):

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ----------------------------
WEIGHTED-
OPTIONS AVERAGE WEIGHTED OPTIONS WEIGHTED
OUTSTANDING AS OF REMAINING AVERAGE EXERCISABLE AS OF AVERAGE
SEPTEMBER 30, CONTRACTUAL LIFE EXERCISE SEPTEMBER 30, EXERCISE
2000 IN YEARS PRICE 2000 PRICE
----------------- ---------------- -------- ----------------- --------
<S> <C> <C> <C> <C> <C>
$0.83-$15.59................... 14,957 7.28 $ 9.82 7,092 $ 9.22
$15.60-$38.19.................. 12,854 8.37 $19.74 1,394 $20.27
$38.20-$47.28.................. 20,783 9.28 $43.52 15,005 $43.59
$47.29-$47.44.................. 14,389 9.21 $47.44 168 $47.44
$47.45-$69.78.................. 7,775 9.67 $53.91 -- $ --
------ ------
$0.83-$69.78................... 70,758 8.72 $34.01 23,659 $31.94
====== ======
</TABLE>

As of September 30, 2000, approximately 11.5 million options were reserved for
future grant under the Company's stock option plans.

NOTE 8--STOCK-BASED COMPENSATION

The Company has elected to follow Accounting Principles Board (APB) Opinion
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 Opinion 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.

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

NOTE 8--STOCK-BASED COMPENSATION (CONTINUED)
Pro forma information regarding net income (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. The weighted-average fair value per share of options granted during 1998
includes the excess value of the repriced options granted during the fiscal year
less the value of the related forfeited options on the date the repriced options
were granted. 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>
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Expected life of options.................... 4 years 4 years 3.5 years
Expected life of stock purchases............ 6 months 6 months 6 months
Interest rate--stock options................ 6.20% 5.02% 5.54%
Interest rate--stock purchases.............. 6.21% 4.89% 5.37%
Volatility--stock options................... 67% 55% 78%
Volatility--stock purchases................. 60% 59% 56%
Dividend yields............................. -- -- --

Weighted-average fair value of options
granted during the year................... $ 25.92 $ 9.61 $ 6.49
</TABLE>

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that 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 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>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Net income--as reported................................ $ 786 $ 601 $ 309

Net income--pro forma.................................. $ 483 $ 528 $ 266

Net income per common share--as reported
Basic................................................ $2.42 $2.10 $1.17
Diluted.............................................. $2.18 $1.81 $1.05

Net income per common share--pro forma
Basic................................................ $1.49 $1.84 $1.01
Diluted.............................................. $1.38 $1.61 $0.93
</TABLE>

As SFAS No. 123 is applicable only to options granted or shares issued
subsequent to September 29, 1995, its pro forma effect was not fully reflected
until 1999.

55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9--COMMITMENTS, CONTINGENCIES, AND RELATED PARTY TRANSACTIONS

LEASE COMMITMENTS

The Company leases various facilities, equipment, and data transmission capacity
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 3 to 5 additional years. Rent expense under all operating leases was
approximately $93 million, $61 million, and $63 million in 2000, 1999, and 1998,
respectively. Future minimum lease payments under noncancelable operating leases
having remaining terms in excess of one year as of September 30, 2000, are as
follows (in millions):

<TABLE>
<CAPTION>
FISCAL YEARS
------------
<S> <C>
2001........................................................ $ 61
2002........................................................ 55
2003........................................................ 40
2004........................................................ 30
2005........................................................ 18
Later years................................................. 51
----
Total minimum lease payments................................ $255
====
</TABLE>

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. Some other key
components, while currently available to the Company from multiple sources, are
at times subject to industry wide availability and pricing pressures. In
addition, the Company uses some components that are not common to the rest of
the personal computer industry, and new products introduced by the Company often
initially utilize custom components obtained from only one source until the
Company has evaluated whether there is a need for and subsequently qualifies
additional suppliers.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 affected depending on the time required to obtain
sufficient quantities from the original source, or to identify and obtain
sufficient quantities from an alternative source. 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, significant portions of the Company's CPUs,
logic boards, and assembled products 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.

LITIGATION

The Company is subject to certain legal proceedings and claims that have arisen
in the ordinary course of business and 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.

56
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9--COMMITMENTS, CONTINGENCIES, AND RELATED PARTY TRANSACTIONS (CONTINUED)
RELATED PARTY TRANSACTIONS

Mr. Jerome York, a member of the Board of the Directors of the Company, is a
member of an investment group that purchased MicroWarehouse, Inc.
(MICROWAREHOUSE) in January 2000. He also serves as its Chairman, President and
Chief Executive Officer. MicroWarehouse is a multi-billion dollar specialty
catalog and online retailer and direct marketer of computer products, including
products made by the Company, through its MacWarehouse catalogue. During fiscal
year 2000, MicroWarehouse accounted for 3.26% of the Company's net sales.

NOTE 10--SEGMENT INFORMATION AND GEOGRAPHIC DATA

The Company manages its business primarily on a geographic basis. The Company's
reportable segments are comprised of the Americas, Europe, and Japan. The
Americas segment includes both North and South America. The European segment
includes European countries as well as the Middle East and Africa. Other
operating segments include Asia-Pacific, which includes Australia and Asia
except for Japan, and the Company's subsidiary, Filemaker, Inc. Each reportable
operating segment provides similar products and services, and the accounting
policies of the various segments are the same as those described in the Summary
of Significant Accounting Policies in Note 1.

The Company evaluates the performance of its operating segments based on net
sales and operating income. Operating income for each segment includes revenue,
cost of sales, and operating expenses directly attributable to the segment. Net
sales are based on the location of the customers. Operating income for each
segment excludes other income and expense and certain expenses that are managed
outside the reportable segment. Costs excluded from segment operating income
include various corporate expenses, income taxes, and nonrecurring charges for
purchased in-process research and development, restructuring, and acquisition
related costs. Corporate expenses include research and development,
manufacturing expenses not included in segment cost of sales, corporate
marketing expenses, and other separately managed general and administrative
expenses. The Company does not include intercompany transfers between segments
for management reporting purposes. Segment assets exclude corporate assets.
Corporate assets include cash, short-term and long-term investments,
manufacturing facilities, and intangible assets. Capital expenditures for
long-lived assets are not reported to management by segment.

57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10--SEGMENT INFORMATION AND GEOGRAPHIC DATA (CONTINUED)
Summary information by segment follows (in millions):

<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Americas:
Net sales................................................. $4,298 $3,527 $3,468
Operating income.......................................... $ 614 $ 493 $ 345
Depreciation and amortization............................. $ 5 $ 4 $ 4
Segment assets (a)........................................ $ 618 $ 468 $ 671

Europe:
Net sales................................................. $1,817 $1,317 $1,295
Operating income.......................................... $ 243 $ 156 $ 69
Depreciation and amortization............................. $ 4 $ 3 $ 5
Segment assets............................................ $ 248 $ 169 $ 262

Japan:
Net sales................................................. $1,345 $ 858 $ 731
Operating income.......................................... $ 352 $ 173 $ 97
Depreciation and amortization............................. $ 2 $ 2 $ 2
Segment assets............................................ $ 137 $ 94 $ 178

Other segments:
Net sales................................................. $ 523 $ 432 $ 447
Operating income.......................................... $ 137 $ 82 $ 59
Depreciation and amortization............................. $ 3 $ 3 $ 5
Segment assets............................................ $ 95 $ 104 $ 82
</TABLE>

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

(a) The Americas asset figures do not include fixed assets held in the United
States. Such fixed assets are not allocated specifically to the Americas
segment and are included in the corporate assets figures below.

A reconciliation of the Company's segment operating income, and assets to the
consolidated financial statements follows (in millions):

<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Segment operating income............................ $1,346 $ 904 $ 570
Corporate expenses, net............................. (726) (518) (302)
In-process research and development................. -- -- (7)
Restructuring....................................... (8) (27) --
Executive bonus..................................... (90) -- --
------ ------ ------
Total operating income............................ $ 522 $ 359 $ 261
====== ====== ======

Segment assets...................................... $1,098 $ 835 $1,193
Corporate assets.................................... $5,705 4,326 3,096
------ ------ ------
Total assets...................................... $6,803 $5,161 $4,289
====== ====== ======

Segment depreciation and amortization............... $ 14 $ 12 $ 16
Corporate depreciation and amortization............. 70 73 95
------ ------ ------
Total depreciation and amortization............... $ 84 $ 85 $ 111
====== ====== ======
</TABLE>

58
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10--SEGMENT INFORMATION AND GEOGRAPHIC DATA (CONTINUED)
A large portion of the Company's net sales is derived from its international
operations. Also, a majority of the raw materials used in the Company's products
is obtained from sources outside of the United States, and a majority of the
products sold by the Company is assembled internationally in the Company's
facilities in Cork, Ireland and Singapore or by third-part vendors in Taiwan,
Korea, Mexico, the People's Republic of China, and the Czech Republic. As a
result, the Company is subject to risks associated with foreign operations, such
as obtaining governmental permits and approvals, currency exchange fluctuations,
currency restrictions, political instability, labor problems, trade
restrictions, and changes in tariff and freight charges. During 2000, a single
distributor, Ingram Micro Inc. accounted for approximately 11.5% of the
Company's net sales. Net sales during 2000 to Ingram Micro Inc. in the Americas
and Europe segments were $651 million and $255 million, respectively. Net sales
to Ingram Micro Inc. in all other segments were $14 million. No other single
customer accounted for more than 10% of net sales in 2000. No single customer
accounted for more than 10% of net sales in 1999 or 1998.

Net sales and long-lived assets related to operations in the United States,
Japan, and other foreign countries are as follows (in millions):

<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Net sales:
United States....................................... $4,145 $3,394 $3,287
Japan............................................... 1,345 858 731
Other foreign countries............................. 2,493 1,882 1,923
------ ------ ------
Total net sales................................... $7,983 $6,134 $5,941
====== ====== ======

Long-Lived assets:
United States....................................... $ 387 $ 335 $ 336
Japan............................................... 5 7 5
Other foreign countries............................. 52 62 94
------ ------ ------
Total long-lived assets........................... $ 444 $ 404 $ 435
====== ====== ======
</TABLE>

Information regarding net sales by product is as follows (in millions):

<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Net sales:
Power Macintosh..................................... $2,582 $2,345 $2,421
PowerBook........................................... 948 823 913
G4 Cube............................................. 165 -- --
iMac (a)............................................ 2,381 1,905 1,528
iBook............................................... 809 9 --
Software, service, and other net sales.............. 1,098 1,052 1,079
------ ------ ------
Total net sales................................... $7,983 $6,134 $5,941
====== ====== ======
</TABLE>

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

(a) Net sales figures for iMac in 1998 include sales of the Company's previous
consumer and education oriented Macintosh products.

59
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 11--EARNINGS PER COMMON SHARE

The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except net income (loss) and per share amounts):

<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 25, SEPTEMBER 25,
FOR THE YEARS ENDED 2000 1999 1998
------------------- -------------- -------------- --------------
<S> <C> <C> <C>
Numerator (in millions):
Numerator for basic earnings per
share--net income.................. $ 786 $ 601 $ 309
Interest expense on convertible
debt............................... -- 28 43
-------- -------- --------
Numerator for diluted earnings per
share--adjusted net income......... $ 786 $ 629 $ 352
-------- -------- --------

Denominator:
Denominator for basic earnings per
share--weighted-average shares
outstanding........................ 324,568 286,314 263,948

Effect of dilutive securities:
Convertible preferred stock........ 17,914 18,182 18,182
Dilutive options................... 17,842 11,638 8,420
Convertible debt................... -- 32,194 45,284
-------- -------- --------
Dilutive potential common shares..... 35,756 62,014 71,886
-------- -------- --------
Denominator for diluted earnings per
share--adjusted weighted-average
shares and assumed conversions..... 360,324 348,328 335,834
======== ======== ========

Basic earnings per share............... $ 2.42 $ 2.10 $ 1.17
======== ======== ========

Diluted earnings per share............. $ 2.18 $ 1.81 $ 1.05
======== ======== ========
</TABLE>

Options to purchase 2.5 million, 2.4 million and 13.4 million shares of common
stock were outstanding at the end of 2000, 1999, and 1998 respectively, 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 for those years and, therefore, the effect would be
antidilutive.

60
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 12--SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
FOURTH QUARTER THIRD QUARTER SECOND QUARTER FIRST QUARTER
-------------- ------------- -------------- -------------
(TABULAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
2000
Net sales................................ $1,870 $1,825 $1,945 $2,343
Gross margin............................. $ 467 $ 543 $ 549 $ 607
Net income............................... $ 170 $ 200 $ 233 $ 183
Earnings per common share:
Basic.................................. $ 0.52 $ 0.62 $ 0.72 $ 0.57
Diluted................................ $ 0.47 $ 0.55 $ 0.64 $ 0.51

1999
Net sales................................ $1,336 $1,558 $1,530 $1,710
Gross margin............................. $ 384 $ 427 $ 403 $ 482
Net income............................... $ 111 $ 203 $ 135 $ 152
Earnings per common share:
Basic.................................. $ 0.35 $ 0.70 $ 0.49 $ 0.56
Diluted................................ $ 0.31 $ 0.60 $ 0.42 $ 0.47
</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 during the fourth, third, second, and first quarters of 2000 included
after tax gains resulting from the sale of shares of the Company's investment in
ARM of $61 million, $37 million, $74 million, and $101 million, respectively.
Gains before tax on the sale of ARM shares are recognized as other income. Net
income for the first quarter of 2000 included a net $8 million restructuring
charge for the write-off of various operating assets and for severance payments
associated with consolidation of various domestic and international sales and
marketing functions and a $90 million special executive bonus for the Company's
Chief Executive Officer for past services in the form of an aircraft.

Net income during the fourth, third, second, and first quarters of 1999 included
after tax gains resulting from the sale of shares of the Company's investment in
ARM of $37 million, $89 million, $50 million, and $29 million, respectively.
Gains before tax on the sale of ARM shares are recognized as other income. Net
income for the fourth quarter of 1999 included a net $18 million restructuring
charge for contract cancellation charges related to previously outsourced
services and previously discontinued business. Net income for the second quarter
of 1999 included a $9 million restructuring charge resulting from actions by the
Company to improve the flexibility and efficiency of its manufacturing
operations, which included moving final assembly of certain of its products to
third-party manufacturers.

61
<PAGE>
SCHEDULE II

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

<TABLE>
<CAPTION>
CHARGED TO
ALLOWANCE FOR BEGINNING COSTS AND ENDING
DOUBTFUL ACCOUNTS: BALANCE EXPENSES DEDUCTIONS(A) BALANCE
------------------ --------- ---------- ------------- --------
<S> <C> <C> <C> <C>
Year Ended September 30, 2000....................... $68 $ 5 $ 9 $64
Year Ended September 25, 1999....................... $81 $ 2 $15 $68
Year Ended September 25, 1998....................... $99 $11 $29 $81
</TABLE>

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

(a) 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.

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<PAGE>
PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS

Listed below are the Company's directors whose terms expire at the next annual
meeting of shareholders.

<TABLE>
<CAPTION>
NAME POSITION WITH THE COMPANY AGE DIRECTOR SINCE
---- ------------------------- -------- --------------
<S> <C> <C> <C>
William V. Campbell................. Director 60 1997
Gareth C.C. Chang................... Director 57 1996
Millard S. Drexler.................. Director 56 1999
Lawrence J. Ellison................. Director 56 1997
Arthur D. Levinson.................. Director 50 2000
Steven P. Jobs...................... Director and Chief Executive Officer 45 1997
Jerome B. York...................... Director 62 1997
</TABLE>

WILLIAM V. CAMPBELL has been Chairman of the Board of Directors of Intuit, Inc.
("INTUIT") since August 1998. From September 1999 to January 2000, Mr. Campbell
acted as Chief Executive Officer of Intuit. From April 1994 to August 1998,
Mr. Campbell was President and Chief Executive Officer and a director of Intuit.
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 SanDisk Corporation.

GARETH C. C. CHANG is the Chief Executive Officer and Chairman of the Board of
PingPong Technology. He is also the Executive Chairman of Click2Asia.com.
Formerly, Mr. Chang served as Chairman and Chief Executive Officer of STAR TV
and Executive Director of News Corporation. Prior to joining STAR TV, Mr. Chang
was President of Hughes Electronics International and President of Direct TV
International from 1993 to 1998. Previously, he was Corporate Vice President of
McDonnell Douglas Corporation. He is currently a member of the Advisory Council
of Nike Inc. and serves on the board of SRS Labs Inc.

MILLARD S. DREXLER has been Chief Executive Officer of Gap Inc. since 1995, and
President since 1987. Mr. Drexler has been a member of the Board of Directors of
Gap Inc. since November 1983. He also served as the President of the Gap
Division from 1983 to 1987.

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.

STEVEN P. JOBS is one of the Company's co-founders and currently serves as its
Chief Executive Officer. Mr. Jobs is 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. Mr. Jobs is
currently a director of Gap Inc.

ARTHUR D. LEVINSON, PH.D. has been President, Chief Executive Officer and a
director of Genentech Inc. ("GENENTECH") since July 1995. Dr. Levinson has been
Chairman of the Board of Directors of Genentech since September 1999. He joined
Genentech in 1980 and served in a number of executive positions, including
Senior Vice President of R&D from 1993 to 1995.

JEROME B. YORK is Chairman and Chief Executive Officer of Micro Warehouse, Inc.
Previously, he was Vice Chairman of Tracinda Corporation from September 1995 to
October 1999. 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 served as a director of

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<PAGE>
Chrysler Corporation from 1992 to 1993. Mr. York is also a director, MGM
Mirage, Inc., Metro-Goldwyn-Mayer, Inc. and National TechTeam, 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 56),
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.

TIMOTHY D. COOK, Senior Vice President, Worldwide Operations and interim Senior
Vice President, Worldwide Sales, Service & Support (age 40), joined the Company
in February 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 44),
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.

RONALD B. JOHNSON, Senior Vice President, New Business Development (age 42),
joined the Company in January 2000. Prior to joining the Company, Mr. Johnson
spent 10 years with Target Stores, most recently as Senior Merchandising
Executive.

JONATHAN RUBINSTEIN, Senior Vice President, Hardware Engineering (age 44),
joined the Company in February 1997. Before joining the Company, Mr. Rubinstein
was Executive Vice President and Chief Operating Officer of FirePower Systems
Incorporated, from May 1993 to August 1996. Mr. Rubinstein also serves as a
member of the Board of Directors of Immersion Corporation.

AVADIS TEVANIAN, JR., PH.D., Senior Vice President, Software Engineering (age
39), 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, Applications (age 43), joined the Company
in September 1997. Mr. Tamaddon has also served with the Company in the position
of Senior Vice President Worldwide Service and Support, and 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, Mr. Tamaddon held the position of
Vice President, Professional Services with NeXT.

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

64
<PAGE>
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, 4 or 5 or written representations that no Forms 5 were
required, the Company believes that, during fiscal year 2000, its officers,
directors and greater than ten percent beneficial owners complied with all
applicable Section 16(a) filing requirements.

ITEM 11. EXECUTIVE COMPENSATION

INFORMATION REGARDING EXECUTIVE COMPENSATION

The following table summarizes compensation information for the last three
fiscal years for (i) Mr. Jobs, 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 the fiscal year
(collectively, the "NAMED EXECUTIVE OFFICERS").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
SECURITIES
UNDERLYING ALL OTHER
NAME AND FISCAL SALARY BONUS OPTIONS* COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) (#) ($)
------------------ -------- -------- ---------- ------------ ------------
ANNUAL COMPENSATION LONG-TERM
COMPENSATION
<S> <C> <C> <C> <C> <C>
Steven P. Jobs................................ 2000 1 90,000,000(1) 20,000,000 --
Chief Executive Officer 1999 1 -- -- --
1998 1 -- -- --

Fred D. Anderson.............................. 2000 660,414 -- -- 6,750(2)
Executive Vice President 1999 605,260 -- 950,000 29,700(3)
and Chief Financial Officer 1998 604,283 -- 500,000(4) 60,123(5)

Ronald B. Johnson............................. 2000 328,719 500,000(6) 1,200,000 111,444(7)
Senior Vice President, 1999 -- -- --
New Business Development 1998 -- -- --

Mitchell Mandich.............................. 2000 453,444 -- -- 7,650(2)
Senior Vice President, 1999 402,941 -- 775,752 7,200(2)
Worldwide Sales(8) 1998 402,253 -- 916,668(4) 8,118(2)

Jonathan Rubinstein........................... 2000 451,949 -- -- 6,577(2)
Senior Vice President, 1999 402,200 -- 458,334 5,888(9)
Hardware Engineering 1998 402,095 -- 600,000(4) 4,804(2)
</TABLE>

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

* Adjusted to reflect the Company's two-for-one stock split in June 2000

(1) In December 1999, Mr. Jobs was given a special executive bonus for serving
as the Company's interim Chief Executive Officer for the past 2 1/2 years
without compensation, in the form of an aircraft with a total cost to the
Company of approximately $90,000,000. In January 2000, Mr. Jobs accepted the
position of Chief Executive Officer of the Company.

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

(3) Consists of $22,500 in relocation assistance and $7,200 in matching
contributions made by the Company in accordance with the terms of the 401(k)
plan.

(4) Includes the replacement of 500,000, 448,500 and 600,000 options that were
previously granted to Messrs. Anderson, Mandich and Rubinstein,
respectively, and canceled in fiscal 1998 pursuant to the December 1997
stock option exchange program.

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<PAGE>
(5) Includes $55,000 in relocation assistance and $5,123 in matching
contributions made by the Company in accordance with the terms of the 401(k)
plan.

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

(7) Consists of $111,444 in relocation assistance.

(8) Mr. Mandich resigned from his position of Senior Vice President, Worldwide
Sales on October 9, 2000.

(9) Includes $3,465 from the disqualifying disposition of shares of Company
stock acquired through the Company's Employee Stock Purchase Plan and $2,423
in matching contributions made by the Company in accordance with the terms
of the 401(k) plan.

OPTION GRANTS IN LAST FISCAL YEAR

The following table provides information about option grants to the Named
Executive Officers during fiscal year 2000.

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------------- POTENTIAL REALIZABLE VALUE AT
NUMBER OF ASSUMED ANNUAL RATES OF STOCK
SECURITIES PERCENT OF TOTAL PRICE APPRECIATION FOR OPTION
UNDERLYING OPTIONS GRANTED EXERCISE TERM(3)
OPTIONS TO EMPLOYEES IN OR BASE EXPIRATION -----------------------------
NAME GRANTED (#) FISCAL YEAR(1) PRICE ($/SH)(2) DATE 5% ($) 10% ($)
---- ----------- ---------------- --------------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Steven P. Jobs........ 20,000,000 43.80% $43.5938 1/12/10 $548,317,503 $1,389,544,207
Fred D. Anderson...... -- -- -- -- -- --
Ronald B. Johnson..... 1,200,000 2.63% $47.4375 12/14/09 $ 35,799,827 $ 90,723,790
Mitchell Mandich(4)... -- -- -- -- -- --
Jonathan Rubinstein... -- -- -- -- -- --
</TABLE>

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

(1) Based on an aggregate of 45,662,484 options granted to all employees during
fiscal year 2000. Options granted in fiscal year 2000, including those
granted to Mr. Johnson, typically vest in four equal annual installments
commencing on the first anniversary of the date of grant. Of the options
granted to Mr. Jobs, 10 million options were immediately vested and
exercisable on the date of grant; 5 million vested in July 2000; and the
remaining 5 million will vest in July 2001.

(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) Mr. Mandich resigned from his position of Senior Vice President, Worldwide
Sales on October 9, 2000.

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<PAGE>
OPTIONS EXERCISED AND YEAR-END OPTION HOLDINGS

The following table provides information about stock option exercises by the
Named Executive Officers during fiscal year 2000 and stock options held by each
of them at fiscal year-end.

AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-
SHARES OPTIONS AT FISCAL YEAR-END MONEY OPTIONS AT FISCAL
ACQUIRED ON VALUE (#) YEAR-END ($)(2)
EXERCISE REALIZED ---------------------------- ----------------------------
NAME (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Steven P. Jobs.......... -- -- 15,060,000(3) 5,000,000 $ 855,000 $ 0
Fred D. Anderson........ 458,332 $16,821,525 333,332 1,200,000 $6,374,975 $12,742,188
Ronald B. Johnson....... -- -- -- 1,200,000 -- $ 0
Mitchell Mandich(4)..... 395,960 $20,987,967 63,432 1,200,000 $1,287,484 $14,622,596
Jonathan Rubinstein..... 233,334 $ 9,575,949 200,000 1,200,000 $3,803,125 $13,265,625
</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 2000 (based on $25.75 per share, the closing price of Common
Stock on the Nasdaq National Market on September 29, 2000), minus the
exercise price.

(3) Includes 60,000 options granted to Mr. Jobs in his capacity as a director
pursuant to the 1997 Director Stock Option Plan.

(4) Mr. Mandich resigned from his position of Senior Vice President, Worldwide
Sales on October 9, 2000.

DIRECTOR COMPENSATION

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 800,000 shares have been reserved for issuance under the Director
Plan. Pursuant to the Director Plan, the Company's non-employee directors are
granted an option to acquire 30,000 shares of Common Stock upon their initial
election to the Board ("INITIAL OPTIONS"). 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 an option to acquire
10,000 shares of Common Stock ("ANNUAL OPTIONS"). Initial Options vest and
become exercisable in equal annual installments on each of the first through
third anniversaries of the date of grant. Annual Options are fully vested and
immediately exercisable on their date of grant. As of the end of the fiscal
year, there were options for 360,000 shares outstanding under the Director Plan.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Until April 2000, the members of the Compensation Committee were Messrs. Edgar
S. Woolard and Gareth C.C. Chang. Mr. Woolard retired from the Board of
Directors in April 2000 and the Company ceased to have an active Compensation
Committee. Since that time, the entire Board of Directors has acted with respect
to matters previously considered by the Compensation Committee. Neither
Messrs. Woolard or Chang were employees of the Company. No person who was an
employee of the Company in fiscal year 2000 served on the Compensation Committee
in fiscal year 2000. During fiscal year 2000, 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

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<PAGE>
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.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information as of October 31, 2000 (the
"TABLE DATE") 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, 335,766,444 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
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) COMMON STOCK OUTSTANDING
------------------------ ---------------------- ------------------------
<S> <C> <C>
AIM Management Group............. 20,363,000(2) 6.06%
Steven P. Jobs................... 15,060,002(3) 4.48%
Fred D. Anderson................. 461,004(4) *
William V. Campbell.............. 60,502(5) *
Gareth C. C. Chang............... 64,000(5) *
Millard S. Drexler............... 40,000(6) *
Lawrence J. Ellison.............. 60,000(5) *
Ronald B. Johnson................ 0 *
Arthur D. Levinson............... 101,600(7) *
Mitchell Mandich................. 275,556(8) *
Jonathan Rubinstein.............. 355,183(9) *
Jerome B. York................... 80,000(5) *
All executive officers and
directors as a group (15
persons)....................... 17,699,109 5.27%
</TABLE>

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

(1) Represents shares of Common Stock held and/or options held by such
individuals that were exercisable at the Table Date or within 60 days
thereafter.

(2) Based on a Form 13F dated September 30, 2000, filed by AIM Management
Group, Inc., 11 Greenway Plaza, Suite 100, Houston, TX 77046. The Form 13F
filing for AIM Management Group, an institutional investment advisor, also
includes AIM Advisors, Inc., AIM Capital Management, Inc. and AIM Funds
Management, Inc. Collectively, they are the beneficial owners of 20,363,000
shares or 6.06% of the Common Stock.

(3) Includes 15,060,000 shares of Common Stock which Mr. Jobs has the right to
acquire by exercise of stock options.

(4) Includes 458,332 shares of Common Stock which Mr. Anderson has the right to
acquire by exercise of stock options.

(5) Includes 60,000 shares of Common Stock which Messrs. Campbell, Chang,
Ellison and York each have the right to acquire by exercise of stock
options.

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<PAGE>
(6) Includes 20,000 shares of Common Stock which Mr. Drexler has the right to
acquire by exercise of stock options.

(7) Includes 1,400 shares which Mr. Levinson holds indirectly.

(8) Includes 275,556 shares of Common Stock which Mr. Mandich has the right to
acquire by exercise of stock options.

(9) Includes 350,000 shares of Common Stock which Mr. Rubinstein has the right
to acquire by exercise of stock options.

* Represents 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.

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, except the Director Plan, 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. The Director Plan provides
that upon a "change in control" of the Company, all unvested options held by
non-employee directors will automatically become fully vested and exercisable
and will be cashed out at an amount equal to the difference between the
applicable "change in control price" and the exercise price of the options. 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 Fred D. Anderson, Timothy D. Cook, Nancy R.
Heinen, Mitchell Mandich, Sina Tamaddon, Jonathan Rubinstein and Avadis Tevanian
provide 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.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In connection with the Company's use of aircraft to transport its executive
officers, the Company paid approximately $179,278 during fiscal year 2000 to
Wing & A Prayer, a company wholly-owned by Lawrence J. Ellison.

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<PAGE>
In connection with a relocation assistance package, the Company loaned
Mr. Johnson (Senior Vice President, New Business Development) $1,500,000 for the
purchase of his principal residence. The loan is secured by a deed of trust and
is due and payable in May 2004. Under the terms of the loan, Mr. Johnson agreed
that should he exercise any of his stock options prior to the due date of the
loan, that he would pay the Company an amount equal to the lessor of (1) an
amount equal to 50% of the total net gain realized from the exercise of the
options; or (2) $375,000 multiplied by the number of years between the exercise
date and the date of the loan. The largest amount of the indebtedness
outstanding on this loan during fiscal year 2000 was $1,500,000.

Mr. Jerome York, a member of the Board of the Directors of the Company, is a
member of an investment group that purchased MicroWarehouse, Inc.
("MICROWAREHOUSE") in January 2000. He also serves as its Chairman, President
and Chief Executive Officer. MicroWarehouse is a multi-billion dollar specialty
catalog and online retailer and direct marketer of computer products, including
products made by the Company, through its MacWarehouse catalogue. During fiscal
year 2000, MicroWarehouse accounted for 3.26% of the Company's net sales.

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

Until April 2000, the members of the Compensation Committee were Messrs. Edgar
S. Woolard and Gareth C.C. Chang. Mr. Woolard retired from the Board of
Directors in April 2000 and the Company ceased to have an active Compensation
Committee. As a result, the Company's executive compensation program is
presently administered by the Board. The Board reviews and approves the base
salaries, bonuses, stock options and other compensation of the executive
officers and management-level employees of the Company and administers the
Company's stock option plans. Mr. Jobs who is both a member of the Board and the
Company's Chief Executive Officer, does not participate in deliberations of the
Board concerning executive compensation.

The Company's executive compensation program focuses on Company performance,
individual performance and increases 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 competitive levels so that
the Company can continue 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 is reviewed annually.

BONUSES

For fiscal year 2000, the Board established a FY00 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,
unit shipments and profit targets for the Company. Because the Company achieved
the metrics specified in the Bonus Plan, payments were made thereunder.
Executive officers and members of the Board were not eligible to participate in
the Bonus Plan and received no other bonuses for fiscal year 2000.

EQUITY-BASED COMPENSATION

In fiscal year 2000, the Board 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 Board based on
industry surveys, each officer's individual performance and achievements, market
factors and the recommendations of management. In fiscal year 2000, executive
officers were eligible to receive grants of stock options under the 1998
Executive Officer Stock Plan ("1998 PLAN"). In addition, executive officers were
eligible to participate in the Company's Employee Stock Purchase Plan.

During fiscal year 2000, options were granted under the 1998 Plan to
Messrs. Jobs, Johnson, and Tamaddon and Ms. Heinen. The options granted under
the 1998 Plan were at an exercise price equal to the fair market value of the
Common Stock on the date of grant and generally vest in increments over a
four-year period after grant, subject to the participant's continued employment
with the Company. However, the options granted to Mr. Jobs will vest in full in
July 2001. All options granted under the 1998 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 terminates before the end of such
ten-year period.

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<PAGE>
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER

In December 1999, in recognition of Mr. Jobs' outstanding performance over the
previous two and a half years, the Board awarded Mr. Jobs a special executive
bonus in the form of a Gulfstream V airplane. The Board anticipates delivering
the plane to Mr. Jobs during fiscal 2001. In January 2000, Mr. Jobs accepted the
position of Chief Executive Officer, which he had previously held on an interim
basis. The Board at that time granted Mr. Jobs 20 million options under the 1998
Plan. Mr. Jobs will continue to receive a salary of $1 per year for the services
he performs as the Company's Chief Executive Officer.

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 BOARD OF DIRECTORS (EXCLUDING MR. JOBS)

<TABLE>
<S> <C> <C>
William V. Campbell Gareth C.C. Chang Millard S. Drexler
Lawrence J. Ellison Arthur D. Levinson Jerome B. York
</TABLE>

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<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

The Company filed a current report on Form 8-K dated January 19, 2000, to
report under Item 5 (Other Events) that the Company's Board of Directors had
granted the Company's CEO, Steven P. Jobs, stock options to purchase twenty
million shares (split adjusted) of the Apple common stock and to give Mr.
Jobs a Gulfstream V airplane in recognition of his service to the Company
during the preceding two and a half years.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER NOTES*
--------------------- ------ DESCRIPTION
<S> <C> <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 00/3Q Amendment to Restated Articles of Incorporation, filed with
the Secretary of State of the State of California on May 4,
2000.
3.3 00/3Q By-Laws of the Company, as amended through April 20, 2000.
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.
</TABLE>

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

* Explanatory notes to Item 14. appear on pages 77-78.

73
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER NOTES*
------- ------ DESCRIPTION
<S> <C> <C>
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 Statement on Form S-3 (file no. 33-62310) filed
with the Securities and Exchange Commission on May 6,
1993.).
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.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 May 3, 2000.
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.
</TABLE>

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

* Explanatory notes to Item 14. appear on pages 77-78.

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

74
<PAGE>

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

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

* Explanatory notes to Item 14. appear on pages 77-78.

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

75
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER NOTES*
------- ------ DESCRIPTION
<S> <C> <C>
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 00/3Q** 1997 Employee Stock Option Plan, as amended through June 27,
2000.
10.A.50 98/2Q** 1997 Director Stock Option Plan
10.A.51 00/3Q** 1998 Executive Officer Stock Plan, as amended through June
27, 2000.
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 LLP.
24 Power of Attorney.
27 Financial Data Schedule
</TABLE>

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

* Explanatory notes to Item 14. appear on pages 77-78.

** Represents a management contract or compensatory plan or arrangement

76
<PAGE>

<TABLE>
<CAPTION>
NOTES
-----
<C> <S>
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, Incorporated by reference to the exhibit 4.1, 4.2, 4.3, and
-4.2.1, -4.3.1, 4.8, respectively, in the Company's Registration Statement
-4.8 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.
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>

77
<PAGE>

<TABLE>
<CAPTION>
NOTES
-----
<C> <S>
99/2Q 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, 1999.
99/3Q Incorporated by reference to the exhibit of that number in
the Company's Quarterly Report on Form 10-Q for the quarter
ended June 26, 1999.
99K 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, 1999 (the "1999 Form 10-K").
00/3Q Incorporated by reference to the exhibit of that number in
the Company's Quarterly Report on Form 10-Q for the quarter
ended July 1, 2000.
</TABLE>

(d) Financial Statement Schedule

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

78
<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 13th day of
December 2000.

<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>
/s/ STEVEN P. JOBS Chief Executive Officer and
------------------------------------------- Director (Principal December 13, 2000
STEVEN P. JOBS Executive Officer)

Executive Vice President
/s/ FRED D. ANDERSON and Chief Financial
------------------------------------------- Officer (Principal December 13, 2000
FRED D. ANDERSON Financial Officer)

/s/ WILLIAM V. CAMPBELL
------------------------------------------- Director December 13, 2000
WILLIAM V. CAMPBELL

/s/ GARETH C.C. CHANG
------------------------------------------- Director December 13, 2000
GARETH C.C. CHANG

/s/ MILLARD S. DREXLER
------------------------------------------- Director December 13, 2000
MILLARD S. DREXLER

/s/ LAWRENCE J. ELLISON
------------------------------------------- Director December 13, 2000
LAWRENCE J. ELLISON

/s/ ARTHUR D. LEVINSON
------------------------------------------- Director December 13, 2000
ARTHUR D. LEVINSON

/s/ JEROME B. YORK
------------------------------------------- Director December 13, 2000
JEROME B. YORK
</TABLE>