APPLE COMPUTER INC - 10-K Annual Report

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

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FORM 10-K
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(MARK ONE)

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

FOR THE FISCAL YEAR ENDED SEPTEMBER 26, 1997 OR

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 0-10030
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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
Cupertino, California 95014
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

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 $2,271,883,063 as of November 28, 1997, 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.

127,993,412 shares of Common Stock Issued and Outstanding as of November 28,
1997

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement dated December 5, 1997 (the
"Proxy Statement"), to be delivered to shareholders in connection with the
Annual Meeting of Shareholders to be held February 3, 1998, are incorporated by
reference into Parts I and III.

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PART I

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

ITEM 1. BUSINESS

GENERAL

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

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

During 1997, the Company continued to implement certain restructuring
actions aimed at reducing its cost structure, improving its competitiveness, and
restoring sustainable profitability. The Company's restructuring actions have
included the termination of employees, closure of facilities and cancellation of
contracts. Further information regarding these restructuring actions may be
found in Part II, Item 7 of this Annual Report on Form 10-K (the "Form 10-K")
under the subheading "Restructuring of Operations" included under the heading
"Factors That May Affect Future Results and Financial Condition," and in Part
II, Item 8 on this Form 10-K in the Notes to Consolidated Financial Statements
under the heading "Restructuring of Operations," which information is hereby
incorporated by reference.

PRINCIPAL PRODUCTS

Apple Macintosh personal computers were first introduced in 1984, and are
characterized by their intuitive ease of use, innovative applications base, and
built-in networking, graphics and multimedia capabilities.

The Company offers a wide range of personal computing products, including
personal computers, related peripherals, software, and networking and
connectivity products. All of the Company's Macintosh products employ
PowerPC-TM- RISC-based microprocessors.

POWER MACINTOSH

The Power Macintosh "Flagship" line of high-performance personal computers
is targeted at business and professional users and is designed to meet the
speed, expansion and networking needs of the most demanding Macintosh user.
These Power Macintosh products not only support virtually all existing Macintosh
applications, but can also run MS-DOS and Windows applications when using
SoftWindows-TM- software from Insignia Solutions or Virtual PC-TM- software from
Connectix Corporation.

The Power Macintosh "Value" line of personal computers is designed to appeal
primarily to academic, consumer and first-time personal computer users. Many of
these products feature all-in-one box computing solutions, including software
and hardware chosen specifically with home and education users in mind.

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MACINTOSH POWERBOOK

The PowerBook family of portable computer products is specifically designed
for mobile computing needs. All PowerBook personal computers include software
designed to enhance mobile computing.

PERIPHERAL PRODUCTS

The Company sells certain associated computer peripherals including
LaserWriter-Registered Trademark- printers and a range of color monitors.

MESSAGEPAD AND EMATE

The Apple MessagePad-Registered Trademark- 2100 communications assistant
employs the Company's proprietary Newton-Registered Trademark-technology in a
hand-held mobile computer that intelligently assists the user in capturing,
organizing and communicating information using built-in business software
programs, including word processing, Internet e-mail and spreadsheet
applications. The Apple eMate 300 integrates Newton technology in a mobile
computer designed for use primarily in education. The eMate 300 allows students
to enter data by keyboard or stylus and share data and files with each other,
and with Mac OS-Registered Trademark- and Windows-Registered Trademark-
software-based computers, send and receive e-mail, and access the Internet. The
eMate 300 includes built-in word processing, drawing and spreadsheet
applications.

OPERATING SYSTEM SOFTWARE AND APPLICATION SOFTWARE

The Company's operating system software, its proprietary Macintosh system
software called Mac OS, provides Macintosh computers with an easy, consistent
user interface and built-in networking capability based on its AppleTalk
networking standard, as well as other industry networking standards, and ensures
integration of hardware and software. The Company also develops and distributes
extensions to the Macintosh system software, such as utilities, languages,
developer tools, and educational software. Claris Corporation, a wholly-owned
subsidiary of the Company, develops, publishes, and distributes application
software in a variety of established personal productivity categories, such as
database management, for Mac OS and Windows-based systems. Claris-Registered
Trademark- products are distributed primarily through independent software
resellers. The Company plans to continue to introduce major upgrades to the
current Mac OS and later introduce a new operating system (code named
"Rhapsody") which is expected to offer advanced functionality based on software
technologies of Apple and those of NeXT Software, Inc. ("NeXT") which the
Company acquired in 1997.

The Company previously entered into agreements to license its Mac OS to
other personal computer vendors (the "Clone Vendors") as part of an effort to
increase the installed base for the Macintosh platform. The Company recently
determined that the benefits of licensing the Mac OS to the Clone Vendors under
these agreements were more than offset by the impact and costs of the licensing
program. As a result, the Company agreed to acquire certain assets, including
the license to distribute the Mac OS, of Power Computing Corporation ("PCC"), a
Clone Vendor, and has no plans to renew its other Mac OS licensing agreements.

SERVERS

The Workgroup Server family of products provides file, print, Internet, and
application services, to varying size workgroups. These products also provide
Apple system connectivity to local area networks, and interoperability with
other computers and computing environments.

INTERNET INTEGRATION

Apple's Internet strategy is focused on delivering seamless integration with
and access to the Internet throughout the Company's product lines.

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

MARKETS AND DISTRIBUTION

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

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

The U.S. represents the Company's largest geographic marketplace. The U.S.
is part of the Apple Americas organization which focuses on the Company's sales,
marketing, and support efforts in North and South America. Products sold in the
western hemisphere are primarily manufactured in the Company's facilities in
California and Singapore, and under contract by SCI Systems, Inc. ("SCI") at a
facility in Colorado, and are distributed from the Company's facility in
California and from a third-party facility in Illinois.

Approximately 48% to 52% of the Company's revenues in recent years have come
from its international operations. The Company's international sales and
services divisions consist of: Apple Americas; Apple Europe, Middle East and
Africa ("Apple EMEA"); Apple Japan; and Apple Asia Pacific (which does not
include Japan). The marketing divisions focus on sales, marketing and
distribution in their regions. Products sold by Apple EMEA are manufactured
primarily in the Company's facility in Cork, Ireland. Products sold by Apple
Americas, Apple Japan, and Apple Asia Pacific are manufactured primarily in the
Company's facilities in California and Singapore, and in the SCI facility in
Colorado.

The Company distributes its products through wholesalers, resellers, mass
merchants, cataloguers, and direct to education institutions (collectively
referred to as "resellers"). In addition, in November 1997 the Company began
selling many of its products directly to end users in the U.S. through the
Company's on-line store. The Company has recently revised its channel program,
including decreasing the number of resellers and reducing returns, price
protection and certain rebate programs, in an effort to reduce channel
inventory, increase inventory turns, and increase product support within the
channel.

A summary of the Company's geographic financial information may be found in
Part II, Item 8 of this Form 10-K under Notes to Consolidated Financial
Statements under the heading "Industry Segment and Geographic Information,"
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 sources. Any availability
limitations, interruption in supplies, or price increases relative to these and
other components could adversely affect the Company's business and financial
results. 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 additional suppliers. In situations where
a component or product utilizes new technologies, there may be initial capacity
constraints until such time as the suppliers' yields have matured. Components
are normally acquired through purchase orders, as is common in the industry,
typically

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covering the Company's requirements for periods from 90 to 180 days. However,
the Company continues to evaluate the need for a supply contract in each
situation.

If the supply of a key single-sourced component to the Company were to be
delayed or curtailed, the Company's ability to ship the related product
utilizing that component in desired quantities and in a timely manner could be
adversely affected. The Company's business and financial performance could also
be adversely affected, depending on the time required to obtain sufficient
quantities from the original source, or to identify and obtain sufficient
quantities from an alternate source. The Company believes that the suppliers
whose loss to the Company could have a material adverse effect upon the
Company's business and financial position include, at this time: Canon, Inc.,
General Electric Co., IBM Corporation, Motorola, Inc., Sharp Corporation, Sony
Corporation, Texas Instruments, Inc., VLSI Technology, Inc., Quanta Computer,
Inc., Quantum Corporation, NatSteel Electronics Pte. Ltd., and SCI. 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 manufacturing schedules and levels. The
Company believes that many of its single-source suppliers, including most of the
foregoing companies, are reliable multinational corporations. The Company also
believes most of these suppliers manufacture the relevant components in multiple
plants. The Company further believes that its long-standing business
relationships with these and other key suppliers are strong and mutually
beneficial in nature.

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

The Company is obligated to purchase certain percentages of its total annual
volumes of CPUs and logic boards from SCI over each of the next two years.

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 on this Form
10-K in the Notes to Consolidated Financial Statements under the subheading
"Concentrations in the Available Sources of Supply of Materials and Product"
included under the heading "Concentrations of Risk," and under the subheading
"Purchase Commitments" included under the heading "Commitments and
Contingencies," which information is hereby incorporated by reference.

PATENTS, TRADEMARKS, COPYRIGHTS AND LICENSES

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

Because of technological changes in the computer industry, current extensive
patent coverage, and the rapid rate of issuance of new patents, it is possible
that certain components of the Company's products may unknowingly infringe
existing patents of others. The Company believes the resolution of any claim of
infringements would not have a material adverse effect on its financial
condition and results of operations as reported in the accompanying financial
statements. However, depending on the amount and timing of an unfavorable
resolution of any such claims of infringement, it is possible that the Company's
future results of operations or cash flow could be materially affected in a
particular period. The Company has from time to time entered into
cross-licensing agreements with other companies.

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

WARRANTY

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

SIGNIFICANT CUSTOMERS

No customer accounted for more than 10% of the Company's net sales in 1997,
1996 or 1995.

BACKLOG

For information regarding the Company's backlog, refer to Part II, Item 7 of
this Form 10-K, under the subheading "Backlog", which is included under the
heading "Net Sales", which information is hereby incorporated by reference.

COMPETITION

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

The Company is currently the primary maker of hardware that uses the Mac OS.
The Mac OS has a minority market share in the personal computer market, which is
dominated by makers of computers that run the Microsoft Windows 95 and Windows
NT operating systems. The Company believes that the Mac OS, with its perceived
advantages over Windows, and the general reluctance of the Macintosh installed
base to incur the costs of switching platforms, have been driving forces behind
sales of the Company's personal computer hardware for the past several years.
Recent innovations in the Windows platform, including those included in Windows
95 and Windows NT, or those expected to be included in a new version of Windows
to be introduced in 1998, have added features to the Windows platform that make
the differences between the Mac OS and Microsoft's Windows operating systems
less significant. The Company is currently taking and will continue to take
steps to respond to the competitive pressures being placed on its personal
computer sales as a result of the recent innovations in the Windows platform.
The Company's future consolidated operating results and financial condition is
substantially dependent on its ability to maintain continuing improvements on
the Macintosh platform in order to maintain perceived functional advantages over
competing platforms.

Further discussion relating to the competitive conditions of the personal
computing industry and the Company's competitive position in the market place
may be found in Part II, Item 7 of this Form 10-K under the subheading
"Competition," included under the heading "Factors That May Affect Future
Results and Financial Condition," and in Part II, Item 8 on this Form 10-K in
the Notes to Consolidated

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Financial Statements under the subheading "Provisions for Inventory Write-downs
and Related Accruals" under the heading "Significant Accounting Estimates",
which information is hereby incorporated by reference.

RESEARCH AND DEVELOPMENT

Because the personal computer industry is characterized by rapid
technological advances, the Company's ability to compete successfully is heavily
dependent upon its ability to ensure a continuing and timely flow of competitive
products to the marketplace. The Company continues to develop new products and
technologies and to enhance existing products in the areas of hardware and
peripherals, system software, networking and communications, and the Internet.
The Company's research and development expenditures, before a charge for
in-process research and development in 1997, totaled $485 million, $604 million,
and $614 million in 1997, 1996, and 1995, respectively.

Further information regarding the Company's R&D expenditures for 1997, 1996
and 1995 is set forth in Part II, Item 7 of this Form 10-K under the heading
"Research and Development," which information is hereby incorporated by
reference. For information regarding in-process research and development charges
taken in 1997 refer to Part II, Item 7 of this Form 10-K under the subheading
"In-Process Research and Development," under the heading "Special Charges."

ENVIRONMENTAL LAWS

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

EMPLOYEES

As of September 26, 1997, Apple and its subsidiaries worldwide had 8,437
regular employees, and an additional 1,739 temporary or part-time contractors
and employees.

FOREIGN AND DOMESTIC OPERATIONS AND GEOGRAPHIC DATA

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

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

ITEM 2. PROPERTIES

The Company's headquarters are located in Cupertino, California. The Company
has manufacturing facilities in Sacramento, California, Cork and Dublin,
Ireland, and Singapore. As of September 26, 1997, the Company leased
approximately 3.7 million square feet of space, primarily in the U.S., and to a
lesser extent, in Europe and the Asia/Pacific region. Leases are generally for
terms of five to ten years, and usually provide renewal options for terms of up
to five additional years.

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The Company owns its manufacturing facilities in Cork and Dublin, Ireland,
and Singapore, which total approximately one million square feet. The Company
also owns a 725,000 square-foot facility in Sacramento, California, which is
used as a manufacturing, warehousing and distribution center. In addition, the
Company owns 930,000 square feet of facilities located in Cupertino, California,
used for research and development and corporate functions. Outside the U.S., the
Company owns additional facilities totaling approximately 400,000 square feet.

Certain of the Company's office, manufacturing and distribution facilities
owned by the Company in Sacramento, California, Singapore and the United Kingdom
are currently being held for sale as part of the Company's restructuring plan,
which includes increasing the proportion of the Company's products manufactured
and distributed under outsourcing arrangements. Further information regarding
the Company's restructuring plan may be found in Part II, Item 7 of this Form
10-K under the subheadings "Restructuring of Operations " included under the
heading "Factors That May Affect Future Results and Financial Condition," and in
Part II, Item 8 on this Form 10-K in the Notes to Consolidated Financial
Statements under the heading "Restructuring of Operations," which information is
hereby incorporated by reference.

The Company believes that its existing facilities and equipment are well
maintained and in good operating condition. The Company has invested in internal
capacity and external partnerships, and therefore believes it has adequate
manufacturing capacity for the foreseeable future even after the sale of the
foregoing facilities. The Company continues to make investments in capital
equipment as needed to meet anticipated demand for its products.

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

ITEM 3. LEGAL PROCEEDINGS

Information regarding legal proceedings is set forth in Part II, Item 8 of
this Form 10-K under the subheading "Litigation," included under the heading
"Commitments and Contingencies," which information is hereby incorporated by
reference.

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

No matters were submitted to a vote of security holders during the fourth
quarter of the Company's fiscal year ended September 26, 1997.

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PART II

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

The Company's common stock is traded on the over-the-counter market and is
quoted on the Nasdaq National Market under the symbol AAPL, on the Tokyo Stock
Exchange under the symbol APPLE, and on the Frankfurt Stock Exchange under the
symbol APCD. Options are traded on the Chicago Board Options Exchange and the
American Stock Exchange. Information regarding the Company's high and low
reported closing prices for its common stock and the number of shareholders of
record is set forth in Part II, Item 8 of this Form 10-K under the heading
"Selected Quarterly Financial Information (Unaudited)", which information is
hereby incorporated by reference.

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 "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and related
notes thereto included elsewhere in this Form 10-K.

FIVE FISCAL YEARS ENDED SEPTEMBER 26, 1997 1997 1996 1995 1994 1993
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(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)

Net sales.................................................. $ 7,081 $ 9,833 $ 11,062 $ 9,189 $ 7,977
Net income (loss).......................................... $ (1,045) $ (816) $ 424 $ 310 $ 87
Earnings (loss) per common and common equivalent share..... $ (8.29) $ (6.59) $ 3.45 $ 2.61 $ 0.73
Cash dividends declared per common share................... $ -- $ 0.12 $ 0.48 $ 0.48 $ 0.48
Common and common equivalent shares used in the
calculations of earnings (loss) per share (in
thousands)............................................... 126,062 123,734 123,047 118,735 119,125

Cash, cash equivalents, and short-term investments......... $ 1,459 $ 1,745 $ 952 $ 1,258 $ 892
Total assets............................................... $ 4,233 $ 5,364 $ 6,231 $ 5,303 $ 5,171
Long-term debt............................................. $ 951 $ 949 $ 303 $ 305 $ 7
Shareholders' equity....................................... $ 1,200 $ 2,058 $ 2,901 $ 2,383 $ 2,026

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

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

THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS FORM 10-K. ALL
INFORMATION IS BASED ON THE COMPANY'S FISCAL CALENDAR.

OVERVIEW

During 1997, the Company continued to experience declines in net sales,
units shipped and share of the personal computer market compared to prior years.
The decline in demand and the resulting losses, coupled with intense price
competition throughout the industry, led to the Company's decision to continue
to restructure its business during 1997 aimed at reducing its core structure,
improving its competitiveness and restoring sustainable profitability. The
Company's restructuring efforts have included significant headcount reductions,
simplifications and modifications of the Company's product lines, increases in
the proportion of products manufactured under outsourcing arrangements and the
implementation of an on-line store in the U.S. In addition, the Company plans to
increase the proportion of products manufactured on a made-to-order basis The
Company believes that restructuring actions effected through the fourth quarter
of 1997, as well as those currently planned to be effected during 1998, will
decrease operating expenses in 1998 compared with 1997. There is no assurance
that such decreases in operating expenses will be achieved or that, if achieved,
such reductions will be sufficient to offset the decline in the Company's net
sales.

In February 1997, the Company acquired NeXT. NeXT developed, marketed and
supported software that enables customers to implement business applications on
the Internet/World Wide Web, intranets and enterprise-wide client/server
networks. The acquisition was accounted for as a purchase and, accordingly, the
operating results pertaining to NeXT subsequent to the date of acquisition have
been included in the Company's consolidated operating results. The total
purchase price, including the fair value of the net liabilities assumed, was
$427 million of which $375 million was allocated to purchased in-process
research and development and $52 million was allocated to goodwill and other
intangible assets. The purchased in-process research and development was charged
to operations upon acquisition, and the goodwill and other tangible assets are
being amortized on a straight-line basis over two years.

The Company had previously entered into agreements to license its Mac OS to
other personal computer vendors (the "Clone Vendors") as part of an effort to
increase the installed base for the Macintosh platform. The Company recently
determined that the benefits of licensing the Mac OS to the Clone Vendors under
these agreements were more than offset by the impact and costs of the licensing
program. As a result, the Company agreed to acquire certain assets, including
the license to distribute the Mac OS, of PCC, a clone vendor, and has no plans
to renew its other Mac OS licensing agreements.

The Company's future operating results and financial condition are dependent
upon the Company's ability to successfully develop, manufacture, and market
technologically innovative products in order to meet dynamic customer demand
patterns, and are also dependent upon its ability to effect a change in
marketplace perception of the Company's prospects, including the viability of
the Macintosh platform. Inherent in this process are a number of factors that
the Company must successfully manage in order to achieve favorable future
operating results and a favorable financial condition. Potential risks and
uncertainties that could affect the Company's future operating results and
financial condition include, among other things, continued competitive pressures
in the marketplace and the effect of any reaction by the Company to such
competitive pressures, including pricing actions by the Company; the
availability of key components on terms acceptable to the Company; the Company's
ability to supply products in certain categories; the Company's ability to
supply products free of latent defects or other faults; the Company's

9

ability to make timely delivery to the marketplace of technological innovations,
including its ability to continue to make timely delivery of planned
enhancements to the current Mac OS and to make timely delivery of a new and
substantially backward-compatible operating system; the Company's ability to
successfully integrate NeXT technologies, processes and employees with those at
Apple; the Company's ability to successfully implement its strategic direction
and restructuring actions, including reducing its expenditures; the Company's
ability to attract, motivate and retain employees, including a new Chief
Executive Officer; the effects of significant adverse publicity; the
availability of third-party software for particular applications; and the impact
on the Company's sales, market share and gross margins as a result of the
Company winding down its Mac OS licensing program.

RESULTS OF OPERATIONS

1997 CHANGE 1996 CHANGE 1995
--------- ----------- --------- ----------- ---------
(TABULAR INFORMATION: DOLLARS IN MILLIONS, EXCEPT PER
SHARE AMOUNTS)

Net sales................................................ $ 7,081 (28%) $ 9,833 (11%) $ 11,062
Gross margin............................................. $ 1,368 41% $ 968 (66%) $ 2,858
Percentage of net sales................................ 19% 10% 26%
Research and development................................. $ 485 (20%) $ 604 (2%) $ 614
Percentage of net sales................................ 7% 6% 6%
Selling, general and administrative...................... $ 1,286 (18%) $ 1,568 (1%) $ 1,583
Percentage of net sales................................ 18% 16% 14%
Special Charges
In-process research and development.................... $ 375 NM $ -- NM $ --
Percentage of net sales.............................. 5% --% --%
Restructuring costs.................................... $ 217 21% $ 179 NM $ (23)
Percentage of net sales.............................. 3% 2% --%
Termination of license agreement....................... $ 75 NM $ -- NM $ --
Percentage of net sales.............................. 1% --% --%
Interest and other income (expense), net................. $ 25 (72%) $ 88 NM $ (10)
Net income (loss)........................................ $ (1,045) (28%) $ (816) (292%) $ 424
Earnings (loss) per share................................ $ (8.29) (26%) $ (6.59) (291%) $ 3.45

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

NM: Not Meaningful

NET SALES

YEAR ENDED SEPTEMBER 26, 1997 COMPARED WITH YEAR ENDED SEPTEMBER 27, 1996

Net sales represent the Company's gross sales net of returns, rebates and
discounts. Net sales decreased 28% in 1997 compared with 1996. Total Macintosh
computer unit sales and peripheral unit sales decreased 27% and 33%,
respectively, during 1997, compared with 1996, as a result of a decline in
worldwide demand for most of the Company's product families, which the Company
believes was due principally to continued customer concerns regarding the
Company's strategic direction, financial condition and future prospects, and the
viability of the Macintosh platform, and to competitive pressures in the
marketplace. The average aggregate revenue per Macintosh unit decreased slightly
in 1997 compared with 1996, primarily due to continued pricing actions,
including increased rebates, across most product lines, substantially offset by
a shift in product mix toward the Company's newer and higher priced PowerBook
products. The average aggregate revenue per peripheral unit did not change in
1997 compared with 1996. For information regarding quarterly net sales, see
"Selected Quarterly Financial Information (Unaudited)" in Part II, Item 8 of
this Form 10-K.

10

International net sales represented 50% of total net sales in 1997 compared
with 52% of net sales in 1996. International net sales declined 30% in 1997
compared with 1996. Net sales in European markets and Japan decreased during
1997 compared with 1996, as a result of decreases in Macintosh computer and
peripheral unit sales and the average aggregate revenue per Macintosh unit in
Japan, which were partially offset by an increase in the average aggregate
revenue per peripheral unit. Further discussion relating to factors contributing
to the decline in net sales in the Japanese market may be found in this Part II,
Item 7 of 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.

Domestic net sales declined 26% during 1997 compared with 1996, due to
decreases in unit sales of Macintosh computers and peripheral products and in
the average aggregate revenue per peripheral unit. The average aggregate revenue
per Macintosh unit in the U.S. did not change in 1997 compared with 1996.

During 1997, as compared with 1996, the Company's estimated share of the
worldwide and U.S. personal computer markets declined to 3.6% from 5.7%, and to
4.6% from 7.4%, respectively, based upon current market information provided by
industry sources.

The Company believes that net sales will be below the level of the prior
year's comparable periods through at least the second fiscal quarter of 1998, if
not longer.

Q4 97 COMPARED WITH Q4 96

Net sales decreased 30% in the fourth quarter of 1997 compared with the same
quarter of 1996. Total Macintosh computer unit sales and peripheral unit sales
decreased 30% and 32%, respectively, in the fourth quarter of 1997, compared
with the same period of 1996, which the Company believes was due principally to
continued customer concerns regarding the Company's strategic direction,
financial condition and future prospects, and the viability of the Macintosh
platform, and to competitive pressures in the marketplace. The average aggregate
revenue per Macintosh unit decreased slightly in the fourth quarter of 1997
compared with the same period of 1996, as a result of continued pricing actions,
including increased rebates, across most product lines, partially offset by an
increase in the average aggregate revenue per Powerbook unit. The average
aggregate revenue per peripheral product also decreased slightly for the
foregoing reasons. The average aggregate revenue per Macintosh computer unit and
per peripheral unit will remain under significant downward pressure due to a
variety of factors, including industrywide pricing pressures, increased
competition, and the need to stimulate demand for the Company's products.

International net sales represented 42% of total net sales in the fourth
quarter of 1997 compared with 47% of net sales in the same period of 1996.
International net sales declined 38% in the fourth quarter of 1997 compared with
the same period of 1996. Net sales decreased in the European markets and
decreased significantly in Japan during the fourth quarter of 1997 compared with
the same period of 1996, as a result of decreases in Macintosh and peripheral
unit sales in Europe and Japan and in the average aggregate revenue per
peripheral unit in the European markets and the average aggregate revenue per
Macintosh unit in Japan. These decreases were partially offset by increases in
the average aggregate revenue per Macintosh unit in Europe and the average
aggregate revenue per peripheral unit in Japan. Further discussion relating to
factors contributing to the decline in net sales in the Japanese market may be
found in this Part II, Item 7 of 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.

Domestic net sales declined 24% in the fourth quarter of 1997 over the
comparable period of 1996, due to decreases in unit sales of Macintosh computers
and peripheral products and in the average aggregate revenue per Macintosh unit,
partially offset by an increase in the average aggregate revenue per peripheral
unit.

11

During the fourth quarter of 1997 compared with the comparable period of
1996, the Company's estimated share of the worldwide and U.S. personal computer
markets declined to 3.1% from 5.2%, and to 4.3% from 6.6%, respectively, based
upon current market information provided by industry sources.

Q4 97 COMPARED WITH Q3 97

Net sales decreased 7% in the fourth quarter of 1997 compared with the third
quarter of 1997. Total Macintosh computer unit sales decreased 8% in the fourth
quarter of 1997 compared with the prior quarter which the Company believes was
due principally to continued customer concerns regarding the Company's strategic
direction, financial condition and future prospects, and the viability of the
Macintosh platform, and to competitive pressures in the marketplace, as well as
continued easing of pent-up demand for new PowerBook products which were
introduced in the second quarter. In addition, unit sales in Japan decreased
significantly in the fourth quarter of 1997 compared with the third quarter of
1997, primarily as a result of a weaker personal computer market. Unit sales of
peripheral products decreased slightly in the fourth quarter of 1997 compared
with the third quarter of 1997. The average aggregate revenue per Macintosh
computer unit remained constant as higher average aggregate revenue per "Value"
(entry level Power Macintosh) unit was offset by a lower average aggregate
revenue per Powerbook unit and aggressive pricing on discontinued products. The
average aggregate revenue per peripheral unit decreased 5% in the fourth quarter
of 1997 compared with the third quarter of 1997. Furthermore, the average
aggregate revenue per Macintosh computer and peripheral unit was unfavorably
affected by pricing actions, including increased rebates, across most product
lines.

International net sales represented 42% of total net sales in the fourth
quarter of 1997, compared with 53% in the third quarter of 1997. International
net sales decreased 27% in the fourth quarter compared with the third quarter of
1997, primarily as a result of a significant decrease in net sales of Macintosh
computers and peripheral products in Japan and a decrease in the average
aggregate revenue per Macintosh unit, slightly offset by an increase in the
average aggregate revenue per peripheral unit. Further discussion relating to
factors contributing to the decline in net sales in the Japanese market may be
found in this Part II, Item 7 of 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.

Domestic net sales increased 15% in the fourth quarter of 1997 compared with
the prior quarter, due to increases in Macintosh and peripheral unit sales and
the average aggregate revenue per Macintosh computer unit, which increases were
slightly offset by a decrease in the average aggregate revenue per peripheral
unit.

During the fourth quarter of 1997 compared with the third quarter of 1997,
the Company's estimated share of the worldwide and U.S. personal computer
markets decreased to 3.1% from 3.7%, and to 4.3% from 4.7%, respectively, based
upon current market information provided by industry sources.

YEAR ENDED SEPTEMBER 27, 1996 COMPARED WITH YEAR ENDED SEPTEMBER 29, 1995

Net sales trended downward beginning in the second quarter of 1996,
decreasing $1,229 million, or 11%; $1,545 million, or 19%; and $682 million, or
23%; during the twelve, nine, and three months ended September 27, 1996,
respectively, compared with the same periods in 1995, due to a decrease in net
sales of Macintosh computers and of peripheral products. Total Macintosh
computer unit sales trended downward beginning in the second quarter of 1996,
decreasing 11%, 19%, and 26% during the twelve, nine, and three months ended
September 27, 1996, respectively, compared with the same periods in 1995. This
decline in unit sales was a result of a decline or lack of growth in worldwide
demand for all product families, which the Company believes was due principally
to customer concerns regarding the Company's strategic direction, financial
condition, and future prospects, and due to delays in the shipment of certain
PowerBook products as a result of quality problems. In addition, unit sales of
peripheral products trended

12

downward beginning in the second quarter of 1996, decreasing 20%, 24%, and 30%
during the twelve, nine and three months ended September 27, 1996, respectively,
compared with the same periods in 1995, for the reasons noted above. The average
aggregate revenue per Macintosh unit increased slightly during the twelve and
three months ended September 27, 1996, and decreased slightly during the nine
months ended September 27, 1996, compared with the same periods in 1995,
primarily due to a continued shift in product mix toward the Company's newer
products and products with multimedia configurations, offset to varying degrees
by pricing actions across all product lines. The average aggregate revenue per
peripheral product was flat during the twelve, nine, and three months ended
September 27, 1996 compared with the same periods in 1995.

International net sales represented 52% of net sales in 1996 compared with
48% of net sales in 1995. International net sales trended downward beginning in
the second quarter of 1996, decreasing 3%, 11% and 13% during the twelve, nine,
and three months ended September 27, 1996, respectively, compared with the same
periods in 1995. Net sales in European markets trended downward beginning in the
second quarter of 1996, decreasing during the twelve, nine, and three months
ended September 27, 1996 compared with the same periods in 1995, as a result of
a decrease in Macintosh and peripheral unit sales, partially offset by an
increase in the average aggregate revenue per Macintosh and per peripheral unit,
primarily during the first part of the year. Net sales in Japan trended downward
beginning in the second quarter of 1996, decreasing during the twelve, nine, and
three months ended September 27, 1996 compared with the same periods in 1995. An
increase in Macintosh unit sales during these periods was more than offset by a
decrease in the average aggregate revenue per Macintosh and per peripheral unit
and a decrease in peripheral unit sales. Domestic net sales trended downward
beginning in the second quarter of 1996, decreasing by 18%, 26%, and 30% for the
twelve, nine, and three months ended September 27, 1996, respectively, compared
with the corresponding periods in 1995, resulting from a decline or lack of
growth in demand for all product families.

In the fourth quarter of 1996 compared with the fourth quarter of 1995, the
Company's share of the worldwide and U.S. personal computer markets declined to
5.4% from 8.7%, and to 7.3% from 13.2%, respectively, based on current
information provided by industry sources.

BACKLOG

In general, the Company's resellers purchase products on an as-needed basis.
Resellers frequently change delivery schedules and order rates depending on
changing market conditions. Unfilled orders (backlog) can be, and often are,
canceled at will. The Company attempts to fill orders on the requested delivery
schedules. However, products may be in relatively short supply from time to time
until production volumes have reached a level sufficient to meet demand or if
other production or fulfillment constraints exist. The Company's backlog of
unfilled orders decreased to approximately $230 million at November 28, 1997
from approximately $563 million at November 29, 1996 and consisted primarily of
the Company's "Flagship" line of higher-end Power Macintosh products. The
Company's backlog at November 29, 1996 consisted primarily of the Company's
PowerBook products, as well as the Company's "Flagship" line of higher-end Power
Macintosh products. The Company expects that substantially all of its orders in
backlog at November 28, 1997 will be either shipped or canceled during fiscal
1998.

In the Company's experience, the actual amount of product backlog at any
particular time is not a meaningful indication of its future business prospects.
In particular, backlog often increases in anticipation of or immediately
following introduction of new products because of overordering by dealers
anticipating shortages. Backlog often is reduced once dealers and customers
believe they can obtain sufficient supply. Because of the foregoing, as well as
other factors affecting the Company's backlog, 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 in Part II, Item 7 of this Form 10-K under the subheading
"Product Introductions and Transitions" included under

13

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

GROSS MARGIN

Gross margin represents the difference between the Company's net sales and
its cost of goods sold. The amount of revenue generated per unit sold is
influenced by the price set by the Company for its products. The cost of goods
sold is based primarily on the cost of components and, to a lesser extent,
direct labor costs. The type and cost of components included in particular
configurations of the Company's products (such as memory and disk drives) are
often directly related to the need to market products in configurations
competitive with other manufacturers. Competition in the personal computer
industry is intense and, in the short term, frequent changes in pricing and
product configuration are often necessary in order to remain competitive.
Accordingly, gross margin as a percentage of net sales can be significantly
influenced in the short term by actions undertaken by the Company in response to
industrywide competitive pressures.

Gross margin increased from 10% to 19% of sales during 1997 compared to
1996, primarily as a result of a $616 million charge in the second quarter of
1996 that related principally to the write-down of certain inventory, as well as
to the cost of cancelling excess component orders necessitated by significantly
lower than expected demand for many of the Company's products, primarily its
"Value" line of Power Macintosh products (formerly generally referred to as
entry level and Performa-Registered Trademark- products). The Company separately
incurred approximately $145 million in charges during 1996 to provide for the
estimated costs of correcting certain quality problems in certain of its "Value"
line of Power Macintosh products, as well as PowerBook and peripheral products,
covering both goods held in inventory and shipped goods. In addition, gross
margins in the second quarter of 1996, and to a lesser degree the first quarter
of that year, were adversely affected by aggressive pricing actions in Japan in
response to extreme competitive actions by other companies, as well as price
reductions in the United States and Europe across all product lines in order to
stimulate demand.

Gross margin decreased from 22% to 20% of sales during the fourth quarter of
1997 compared to the same period of 1996, and remained constant compared to the
third quarter of 1997. This was primarily as a result of certain pricing actions
effected by the Company as noted above, as well as the Company's inability to
fulfill all purchase orders of certain high-margin Power Macintosh product due
to the unavailability of sufficient quantities of certain components, which were
offset to varying degrees by sales of the Company's new operating system, Mac OS
8, during the fourth quarter of 1997.

The gross margin levels in the fourth quarter of 1997 compared with the
third quarter of 1997 and the fourth quarter of 1996, and in 1997 compared with
1996, were also adversely affected by a stronger U.S. dollar relative to certain
foreign currencies. This negative impact was offset by currency hedging. The
Company's operating strategy and pricing take into account changes in exchange
rates over time; however, the Company's results of operations can be
significantly affected in the short term by fluctuations in foreign currency
exchange rates.

There can be no assurance that the Company will be able to sustain the gross
margin levels achieved in 1997. Gross margins will remain under significant
downward pressure due to a variety of factors, including continued industrywide
global pricing pressures, increased competition, and compressed product life
cycles. In response to these downward pressures, the Company expects it will
continue to take pricing actions with respect to its products. The Company
expects to experience additional pricing pressure through at least the first
fiscal quarter of 1998 as a result of the Company winding down its Mac OS
licensing program, including the acquisition of its Mac OS license and other
assets of Power Computing Corporation ("PCC"), as the Company expects certain
Mac OS licensees to sell aggressively their remaining inventory in early fiscal
1998. Gross margins could also be affected by the Company's ability to

14

effectively manage quality problems and warranty costs, and to stimulate demand
for certain of its products.

Gross margin decreased to 10% in 1996 compared with 26% in 1995. This
decrease is primarily the result of a $616 million charge in the second quarter
of 1996 for the write-down of certain inventory, as well as the costs of
cancelling excess component orders, necessitated by significantly lower than
expected demand for many of the Company's products, primarily its entry-level
products. The Company separately incurred approximately $145 million in charges
during the last nine months of 1996 to provide for the estimated costs of
correcting certain quality problems in certain of the "Value" line of Power
Macintosh products as well as PowerBook and peripheral products, covering both
goods held in inventory and shipped goods. The Company also incurred greater
warranty expenses per unit sold during 1996 compared with 1995. The decrease in
gross margin was also due to the Company's response to extreme competitive
actions by other companies attempting to gain market share, including the
Company's pricing actions in the U.S., Japan and Europe across most product
lines, which were partially offset by a decrease in the cost of certain product
components.

RESEARCH AND DEVELOPMENT

1997 CHANGE 1996 CHANGE 1995
--------- ----------- --------- ------------- ---------

Research and development......................................... $ 485 (20%) $ 604 (2%) $ 614
Percentage of net sales........................................ 7% 6% 6%

Research and development expenditures decreased in dollar amounts in 1997
when compared with 1996, primarily due to certain restructuring actions,
including a reduction in headcount and the cancellation of certain research and
development related contracts, taken during 1997. The increase in research and
development expenses as a percentage of net sales resulted from a decrease in
the level of net sales. There was a slight decrease in research and development
expenditures during 1996 compared with 1995. The slight increase as a percentage
of net sales in 1996 over 1995 was the result of a decrease in net sales during
1996.

The Company believes that continued and focused investments in research and
development are critical to its future growth and competitive position in the
marketplace and are directly related to continued, timely development of new and
enhanced products that are central to the Company's core business strategy. The
Company believes that research and development expenditures will decrease in
1998 compared to 1997 as the Company completes and more fully realizes the cost
reduction benefits of its restructuring plan.

Information relating to in-process research and development may be found in
this Part II, Item 7 of Form 10-K under the subheading "In-process Research and
Development" included under the heading "Special Charges," which information is
hereby incorporated by reference.

SELLING, GENERAL AND ADMINISTRATIVE

1997 CHANGE 1996 CHANGE 1995
--------- ----------- --------- ------------- ---------

Selling, general and administrative......................... $ 1,286 (18%) $ 1,568 (1%) $ 1,583
Percentage of net sales................................... 18% 16% 14%

Selling, general and administrative expenditures decreased in dollar amounts
in 1997 when compared to 1996, primarily due to certain restructuring actions,
including a reduction in headcount, the closing of facilities, and the writedown
of assets, taken during 1997, and to lower variable expenses. The increase in
selling, general and administrative expenditures as a percentage of net sales
resulted from a decrease in the level of net sales. In 1996, selling, general
and administrative expenditures remained essentially flat when

15

compared to 1995. The increase as a percentage of net sales in 1996 over 1995
was the result of a decrease in net sales during 1996.

The Company believes that selling, general and administrative expenditures
will decrease in 1998 compared to 1997 as the Company completes and more fully
realizes the cost reduction benefits of its restructuring plan. The Company
believes that selling, general and administrative expenditures will decrease
only slightly in the first quarter of 1998 compared to the fourth quarter of
1997 as a result of continued cost reduction benefits from the restructuring
plan, partially offset by planned advertising spending.

SPECIAL CHARGES

IN-PROCESS RESEARCH AND DEVELOPMENT

As a result of the NeXT acquisition, the Company took a substantial charge
for in-process research and development during 1997. Further discussion relating
to the Company's acquisition of NeXT, including the related in-process research
and development charge, may be found in Part II, Item 8 of this Form 10-K in the
Notes to Consolidated Financial Statements under the subheading "NeXT
Acquisition" included under the heading "Special Charges", which information is
hereby incorporated by reference. Information relating to the Company's research
and development expenditures, may be found in Part I, Item 1 of this Form 10-K
under the heading "Research and Development" and in Part II, Item 7 of this Form
10-K under the heading "Research and Development," which information is hereby
incorporated by reference.

RESTRUCTURING COSTS

Information relating to the Company's restructuring costs may be found in
this Part II, Item 7 of Form 10-K under the subheading "Restructuring of
Operations" 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 under the subheading "Restructuring of
Operations" included under the heading "Special Charges," which information is
hereby incorporated by reference.

TERMINATION OF LICENSE AGREEMENT

Information relating to the Company's termination of license agreement may
be found in this Part II, Item 7 of Form 10-K under the subheading "Competition"
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 under the subheading "Termination of License
Agreement" included under the heading "Special Charges," which information is
hereby incorporated by reference.

INTEREST AND OTHER INCOME (EXPENSE), NET

1997 CHANGE 1996 CHANGE 1995
----- ----------- ----- ----------- ---------

Interest and other income (expense), net............................ $ 25 (72%) $ 88 NM $ (10)

Interest and other income (expense), net, decreased to $25 million in 1997
from $88 million in 1996. The decrease is primarily due to gains realized in
1996 on sales of available-for-sale and other securities. Interest and other
income (expense), net, also decreased compared to the prior year due to
decreased foreign exchange gains, net of cost, in 1997 compared to 1996,
partially offset by higher average cash balances during 1997. Over the last two
years, the Company's debt ratings have been downgraded to non-investment grade.
The Company's cost of funds may increase as a result of the downgrading in the
second quarter of 1997 of its senior and subordinated long-term debt to B3 and
Caa2, respectively, by Moody's Investor Services, and the downgrading in October
1997 of its senior and subordinated long-term debt to B- and CCC, respectively,
by Standard and Poor's Rating Agency.

16

In 1996, interest and other income (expense), net, increased to $88 million
in income from $10 million in expense in 1995. This $98 million favorable change
was primarily composed of a favorable variance of $78 million related to net
realized and unrealized foreign exchange hedging gains and lower foreign
exchange hedging costs, primarily as a result of lower market and option
volatility, higher U.S. interest rates compared with rates abroad, and reduced
foreign currency cash flows; an increase of $73 million related to realized
gains on the sale of most of the Company's available-for-sale and other equity
securities during 1996, partially offset by a $52 million unfavorable variance,
as a result of higher average debt balances and lower average cash balances
during 1996, and an overall decline in average interest rate yields.

A summary of the Company's interest and other income (expense), net, hedge
horizons and accounting for financial instruments, and notes payable to banks
and long-term debt, may be found in Part II, Item 8 of this Form 10-K in the
Notes to Consolidated Financial Statements.

PROVISION (BENEFIT) FOR INCOME TAXES

As of September 26, 1997, the Company had deferred tax assets arising from
deductible temporary differences, tax losses, and tax credits of $695 million
before being offset against certain deferred tax liabilities for presentation on
the Company's balance sheet. A substantial portion of this asset is realizable
based on the ability to offset existing deferred tax liabilities. In 1997, an
increase in the valuation allowance of $208 million was recorded against the
deferred tax asset for the benefits of tax losses which may not be realized.
Realization of approximately $85 million of the asset representing tax loss and
credit carryforwards is dependent on the Company's ability to generate
approximately $245 million of future U.S. taxable income. Management believes
that it is more likely than not that forecasted U.S. income, including income
that may be generated as a result of certain tax-planning strategies, will be
sufficient to utilize the tax carryforwards prior to their expiration in 2011
and 2012 to fully recover this asset. However, there can be no assurance that
the Company will meet its expectations of future U.S. income. As a result, the
amount of the deferred tax assets considered realizable could be reduced in the
near and long term if estimates of future taxable U.S. income are reduced. Such
an occurrence could materially adversely affect the Company's financial results.
The Company will continue to evaluate the realizability of the deferred tax
assets quarterly by assessing the need for and amount of the valuation
allowance. Additional information relating to income taxes, may be found in Part
II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements.

FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION

RESTRUCTURING OF OPERATIONS

During 1996, the Company began to implement certain restructuring actions
aimed at reducing its cost structure, improving its competitiveness, and
restoring sustainable profitability. During 1997, the Company announced and
began to implement supplemental restructuring actions, including significant
headcount reductions, to meet the foregoing objectives. There are several risks
inherent in the Company's efforts to transition to a new cost structure. These
include the risk that the Company will not be able to reduce expenditures
quickly enough to restore sustainable profitability and the risk that
cost-cutting initiatives will impair the Company's ability to innovate and
remain competitive in the computer industry.

Implementation of this restructuring involves several risks, including the
risk that by simplifying and modifying its product line the Company will
increase its dependence on fewer products, potentially reduce overall sales, and
increase its reliance on unproven products and technology. Another risk of the
restructuring is that by increasing the proportion of the Company's products to
be manufactured under outsourcing arrangements, the Company could lose control
of the quality or quantity of the products manufactured and distributed, or lose
the flexibility to make timely changes in production schedules in order to
respond to changing market conditions. As part of its restructuring, the Company
announced and

17

opened its on-line store, which makes available most of its products to
end-users in the U.S., in November 1997. There can be no assurance the on-line
store will result in greater sales. The Company also began manufacturing
products on a build-to-order basis in November 1997. There can be no assurance
this manufacturing process will result in decreased costs or increased gross
margins. The Company is also reducing the number of wholesale and retail channel
partners, particularly in the Americas, which places a greater volume of sales
through fewer partners. There can be no assurance that this will not adversely
impact the Company. In addition, the actions taken in connection with the
restructuring could adversely affect employee morale, thereby damaging the
Company's ability to retain and motivate employees. Also, because the Company
contemplates relying to a greater extent on collaboration and licensing
arrangements with third parties, the Company will have less direct control over
certain of its research and development efforts, and its ability to create
innovative new products may be reduced. In addition, there can be no assurance
that the technologies acquired from NeXT will be successfully exploited, or that
key NeXT employees and processes will be retained and successfully integrated
with those at Apple. Also, the restructuring includes the winding down of the
Company's Mac OS licensing program. There can be no assurance that the winding
down of this program will result in greater sales, market share, and increased
gross margins to the Company. In addition, there can be no assurance that this
action will not result in the availability of fewer application software titles
for the Mac OS, which may result in a decrease to the Company's sales, market
share and gross margins. Finally, even if the restructuring is successfully
implemented, there can be no assurance that it will effectively resolve the
various issues currently facing the Company. Although the Company believes that
the actions it is taking in connection with the restructuring, including its
acquisition of NeXT and the winding down of its Mac OS licensing program, should
help restore marketplace confidence in the Company, there can be no assurance
that such actions will enable the Company to achieve its objectives of reducing
its cost structure, improving its competitiveness, and restoring sustainable
profitability. The Company's future consolidated operating results and financial
condition could be adversely affected should it encounter difficulty in
effectively managing the restructuring and new cost structure.

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

PRODUCT INTRODUCTIONS AND TRANSITIONS

Due to the highly volatile nature of the personal computer industry, which
is characterized by dynamic customer demand patterns and rapid technological
advances, the Company must continuously introduce new products and technologies
and enhance existing products in order to remain competitive. Recent
introductions include certain PowerBook and Power Macintosh products, and the
introduction of Mac OS 8 in July 1997. 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 the ultimate effect that
new products will have on its sales or results of operations. In addition,
although the number of new product introductions may decrease as a result of the
Company's restructuring actions, the risks and uncertainties associated with new
product introductions may increase as the Company refocuses its product
offerings on key growth segments and to the extent new product introductions are
in markets that are new to the Company.

The rate of product shipments immediately following introduction of a new
product is not necessarily an indication of the future rate of shipments for
that product, which depends on many factors, some of which are not under the
control of the Company. These factors may include initial large purchases by a

18

small segment of the user population that tends to purchase new technology prior
to its acceptance by the majority of users ("early adopters"); purchases in
satisfaction of pent-up demand by users who anticipated new technology and, as a
result, deferred purchases of other products; and overordering by dealers who
anticipate shortages due to the aforementioned factors. These factors may be
offset by others, such as the deferral of purchases by many users until new
technology is accepted as "proven" and for which commonly used software products
are available; and the reduction of orders by dealers once they believe they can
obtain sufficient supply of products previously in backlog.

Backlog is often volatile after new product introductions due to the
aforementioned demand factors, often increasing coincident with introduction,
and then decreasing once dealers and customers believe they can obtain
sufficient supply of the new products. The Company has in the past experienced
difficulty in anticipating demand for new products, resulting in product
shortages which have adversely affected the Company's operating results.

The measurement of demand for newly introduced products is further
complicated by the availability of different product configurations, which may
include various types of built-in peripherals and software. Configurations may
also require certain localization (such as language) for various markets and, as
a result, demand in different geographic areas may be a function of the
availability of third-party software in those localized versions. For example,
the availability of European-language versions of software products manufactured
by U.S. producers may lag behind the availability of U.S. versions by a quarter
or more. This may result in lower initial demand for the Company's new products
outside the U.S., even though localized versions of the Company's products may
be available.

The increasing integration of new or enhanced functions and complexity of
operations of the Company's products also increase the risk that latent defects
or other faults could be discovered by customers or end-users after volumes of
products have been produced or shipped. If such defects were significant, the
Company could incur material recall and replacement costs under product
warranties.

The Company has announced plans for two operating systems. The Company plans
to continue to introduce major upgrades to the current Mac OS and later
introduce a new operating system (code named "Rhapsody") which is expected to
offer advanced functionality based on Apple and NeXT software technologies.
However, the NeXT software technologies that the Company plans to use in the
development of Rhapsody were not originally designed to be compatible with the
Mac OS. As a result, there can be no assurance that the development of Rhapsody
can be completed at reasonable cost or at all. In addition, Rhapsody may not be
fully backward-compatible with all existing applications, which could result in
a loss of existing customers. Finally, it is uncertain whether Rhapsody or the
planned enhancements to the current Mac OS will gain developer support and
market acceptance. Inability to successfully develop and make timely delivery of
a substantially backward-compatible Rhapsody or of planned enhancements to the
current Mac OS, or to gain developer support and market acceptance for those
operating systems, may have an adverse impact on the Company's consolidated
operating results and financial condition.

COMPETITION

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

19

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

The Company is currently the primary maker of hardware that uses the Mac OS.
The Mac OS has a minority market share in the personal computer market, which is
dominated by makers of computers that run the Microsoft Windows 95 and Windows
NT operating systems. The Company believes that the Mac OS, with its perceived
advantages over Windows, and the general reluctance of the Macintosh installed
base to incur the costs of switching platforms, have been driving forces behind
sales of the Company's personal computer hardware for the past several years.
Recent innovations in the Windows platform, including those included in Windows
95 and Windows NT, or those expected to be included in a new version of Windows
to be introduced in 1998, have added features to the Windows platform that make
the differences between the Mac OS and Microsoft's Windows operating systems
less significant. The Company is currently taking and will continue to take
steps to respond to the competitive pressures being placed on its personal
computer sales as a result of the recent innovations in the Windows platform.
The Company's future operating results and financial condition will be
substantially dependent on its ability to maintain continuing improvements of
the Macintosh platform in order to maintain perceived functional advantages over
competing platforms.

The Company had previously entered into agreements to license its Mac OS to
other personal computer vendors (the "Clone Vendors") as part of an effort to
increase the installed base for the Macintosh platform. The Company recently
determined that the benefits of licensing the Mac OS to the Clone Vendors under
these agreements were more than offset by the impact and costs of the licensing
program. As a result, the Company agreed to acquire certain assets, including
the license to distribute the Mac OS, of PCC, a Clone Vendor, and has no plans
to renew its other Mac OS licensing agreements. Although the Company believes
that this winding down of its licensing program will help reduce the adverse
impact of the licensing program on the Company's sales, market share and gross
margins, there can be no assurance that this will occur. In addition, there can
be no assurance that this winding down of the licensing program will not result
in the availability of fewer application software titles for the Mac OS, which
may result in a decrease to the Company's sales, market share and gross margins.

As a supplemental means of addressing the competition from Windows and other
platforms, the Company had previously devoted substantial resources toward
developing personal computer products capable of running application software
designed for the Windows operating systems. These products include an add-on
card containing a Pentium or 586-class microprocessor that enables users to run
applications concurrently that require the Mac OS, Windows 3.1 or Windows 95
operating systems. The Company plans to transition the cross-platform business
to third-parties during 1998. There can be no assurance that this transition
will be successful.

The Company, International Business Machines Corporation and Motorola, Inc.
had agreed upon and announced the availability of specifications for a PowerPC
microprocessor-based hardware platform (the "Platform"). These specifications
defined a "unified" personal computer architecture that would have given the
Clone Vendors broad access to the Power Macintosh platform and would have
utilized standard industry components. The Company had intended to license the
Mac OS to manufacturers of the Platform. However, the Company has decided it
will no longer support the Platform based upon its decision to wind down its Mac
OS licensing program, and because of little industry support for the Platform.
The decision not to further develop this Platform may affect the Company's
ability to increase the installed base for the Macintosh platform.

Several competitors of the Company have either targeted or announced their
intention to target certain of the Company's key market segments, including
education and publishing. Many of these companies have greater financial,
marketing, manufacturing, and technological resources than the Company.

20

In August 1997, the Company and Microsoft entered into patent cross
licensing and technology agreements. Under these agreements, the companies
provided patent cross licenses to each other. In addition, for a period of five
years from August 1997, Microsoft will make future versions of its Microsoft
Office and Internet Explorer products for the Mac OS, and the Company will
bundle the Internet Explorer product with Mac OS system software releases and
make that product the default Internet browser for such releases. In addition,
Microsoft purchased 150,000 shares of Apple Series 'A' non-voting convertible
preferred stock for $150 million. While the Company believes that its
relationship with Microsoft will 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. 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.

SUPPORT FROM THIRD-PARTY SOFTWARE DEVELOPERS

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

Microsoft is an important developer of application software for the
Company's products. Although the Company has entered into a relationship with
Microsoft, which includes Microsoft's agreement to develop and ship future
versions of its Microsoft Office and Internet Explorer products and certain
other Microsoft tools for the Mac OS, such relationship is for a limited term
and does not cover many areas in which the Company competes with Microsoft.
Accordingly, Microsoft's interest in producing application software for the Mac
OS not covered by the relationship or upon expiration of the relationship may be
influenced by Microsoft's perception of its interests as the vendor of the
Windows operating system.

GLOBAL MARKET RISKS

A large portion of the Company's revenue is derived from its international
operations. As a result, the Company's consolidated operations and financial
results 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.

Countries in the Asia Pacific region, including Japan, have recently
experienced weaknesses in their currency, banking and equity markets. These
weaknesses could adversely affect consumer demand for the Company's product, the
U.S. dollar value of the Company's foreign currency denominated sales, the

21

availability and supply of product components to the Company, and ultimately the
Company's consolidated results of operations.

When the U.S. dollar strengthens against other currencies, the U.S. dollar
value of non-U.S. dollar-based sales decreases. When the U.S. dollar weakens,
the U.S. dollar value of non-U.S. dollar-based sales increases. Correspondingly,
the U.S. dollar value of non-U.S. dollar-based costs increases when the U.S.
dollar weakens and decreases when the U.S. dollar strengthens. Overall, the
Company is a net receiver of currencies other than the U.S. dollar and, as such,
benefits from a weaker dollar and is adversely affected by a stronger dollar
relative to major currencies worldwide. Accordingly, changes in exchange rates,
and in particular a strengthening of the U.S. dollar, may negatively affect the
Company's consolidated sales and gross margins (as expressed in U.S. dollars).

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

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

The Company's current financial condition may increase the costs of its
hedging transactions, as well as affect the nature of the hedging transactions
into which the Company's counterparties are willing to enter.

Additional information regarding the Company's foreign exchange and interest
rate risk management programs and the accounting thereon, may be found in Part
II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements.

INVENTORY AND SUPPLY

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

The Company must order components for its products and build inventory well
in advance of product shipments. Because the Company's markets are volatile and
subject to rapid technology and price changes, there is a risk that the Company
will forecast incorrectly and produce excess or insufficient inventories of
particular products. The Company's consolidated operating results and financial
condition have been in

22

the past and may in the future be materially adversely affected by the Company's
ability to manage its inventory levels and respond to short-term shifts in
customer demand patterns.

Certain of the Company's products are manufactured in whole or in part by
third-party manufacturers, either pursuant to design specifications of the
Company or otherwise. As part of its restructuring actions, the Company sold its
Fountain, Colorado, manufacturing facility to SCI and entered into a related
manufacturing outsourcing agreement with SCI; sold its Singapore printed circuit
board manufacturing assets to NatSteel Electronics Pte., Ltd., which is expected
to supply main logic boards to the Company under a manufacturing outsourcing
agreement; entered into an agreement with Ryder Integrated Logistics, Inc. to
outsource the Company's domestic operations transportation and logistics
management; and has entered into other similar agreements to outsource the
Company's European operations transportation and logistics management. As a
result of the foregoing actions, the proportion of the Company's products
produced and distributed under outsourcing arrangements will continue to
increase. While outsourcing arrangements may lower the fixed cost of operations,
they will also reduce the direct control the Company has over production and
distribution. It is uncertain what effect such diminished control will have on
the quality or quantity of the products manufactured, or the flexibility of the
Company to respond to changing market conditions. Furthermore, any efforts by
the Company to manage its inventory under outsourcing arrangements could subject
the Company to liquidated damages or cancellation of the arrangement. Moreover,
although arrangements with such manufacturers may contain provisions for
warranty expense reimbursement, the Company remains at least initially
responsible to the ultimate consumer for warranty service. Accordingly, in the
event of product defects or warranty liability, the Company may remain primarily
liable. Any unanticipated product defect or warranty liability, whether pursuant
to arrangements with contract manufacturers or otherwise, could adversely affect
the Company's future consolidated operating results and financial condition.

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

The Company's ability to produce and market competitive products is also
dependent on the ability and desire of IBM and Motorola, the sole suppliers of
the PowerPC RISC microprocessor for the Company's Macintosh computers, to supply
to Company in adequate numbers microprocessors that produce superior
price/performance results compared with those supplied to the Company's
competitors by Intel Corporation, and other developers and producers of the
microprocessors used by most personal computers using the Windows operating
systems. The desire of IBM and Motorola to continue producing these
microprocessors may be influenced by Microsoft's decision not to adapt its
Windows NT operating

23

system software to run on the PowerPC microprocessor. IBM produces personal
computers based on Intel microprocessors as well as workstations based on the
PowerPC microprocessor, and is also the developer of OS/2, a competing operating
system to the Company's Mac OS. Accordingly, IBM's interest in supplying the
Company with microprocessors for the Company's products may be influenced by
IBM's perception of its interests as a competing manufacturer of personal
computers and as a competing operating system vendor. In addition, Motorola has
recently announced its intention to stop producing Mac clones. As a result,
Motorola may be less inclined to continue to produce PowerPC microprocessors.

The Company's current financial condition and uncertainties related to
recent events could affect the terms on which suppliers are willing to supply
the Company with their products. There can be no assurance that the Company's
current suppliers will continue to supply the Company on terms acceptable to the
Company or that the Company will be able to obtain comparable products from
alternate sources on such terms. The Company's future operating results and
financial condition could be adversely affected if the Company is unable to
continue to obtain key components on terms substantially similar to those
currently available to the Company.

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 under the subheading "Concentrations in the
Available Sources of Supply and Material Product" included under the heading
"Concentrations of Risk" and under the subheading "Purchase Commitments"
included under the heading "Commitments and Contingencies," which information is
hereby incorporated by reference.

MARKETING AND DISTRIBUTION

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

Uncertainty over demand for the Company's products may continue to cause
resellers to reduce their ordering and marketing of the Company's products. In
addition, the Company has in the past and may in the future experience delays in
ordering by resellers in light of uncertain demand for the Company's products.
Under the Company's arrangements with its resellers, resellers have the option
to reduce or eliminate unfilled orders previously placed, in most instances
without financial penalty. Resellers also have the option to return products to
the Company without penalty within certain limits, beyond which they may be
assessed fees. The Company has recently revised its channel program, including
decreasing the number of resellers and reducing returns, price protection and
certain rebate programs, in an effort to reduce channel inventory, increase
inventory turns, increase product support within the channel and improve gross
margins. In addition, in November 1997 the Company opened its on-line store in
the U.S. which makes many of the Company's products available directly to the
end-user. Although the Company believes the foregoing changes will improve its
consolidated operating results and financial condition, there can be no
assurance that this will occur.

Further discussion relating to 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.

24

CHANGE IN SENIOR MANAGEMENT

On July 9, 1997, the Company announced that Dr. Gilbert F. Amelio had
resigned his positions as Chairman of the Board and Chief Executive Officer and
that the Company was initiating a search for a new Chief Executive Officer.
While the Company intends to name a new Chief Executive Officer as soon as
practicable, there can be no assurance that the change in senior management and
related uncertainties will not adversely affect the Company's consolidated
operating results and financial condition during the period until a new Chief
Executive Officer is hired and afterward. In addition, certain members of the
Company's senior management have been with the Company for less than six months.
There can be no assurance that new members of the management team can be
successfully assimilated, that the Company will be able to satisfactorily
allocate responsibilities or that such new members of its management will
succeed in their roles in a timely and efficient manner. The Company's failure
to recruit, retain and assimilate new executives, or the failure of any such
executive to perform effectively, or the loss of any such executive, could have
a material adverse impact on the Company's business, financial condition and
results of operations.

CHANGES TO BOARD OF DIRECTORS

The Company announced on August 6, 1997 significant changes to its Board of
Directors, replacing all but two former directors. The continuing directors are
Gareth C.C. Chang, Corporate Senior Vice President, Marketing, Hughes
Electronics and President, Hughes International, and Edgar S. Woolard, Jr.,
retired Chairman of E.I. DuPont de Nemours & Company. The new directors are
William V. Campbell, President and CEO of Intuit Corp.; Lawrence J. Ellison,
Chairman and Chief Executive Officer of Oracle Corp.; Steven P. Jobs, Chairman
and Chief Executive Officer of Pixar Animation Studios; and Jerome B. York, Vice
Chairman of Tracinda Corporation and former Chief Financial Officer of IBM and
Chrysler Corporation.

DEPENDENCE ON KEY EMPLOYEES

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

OTHER FACTORS

The Company is in the process of identifying operating and application
software challenges related to the year 2000. While the Company expects to
resolve year 2000 compliance issues substantially through normal replacement and
upgrades of software, there can be no assurance that there will not be
interruption of operations or other limitations of system functionality or that
the Company will not incur substantial costs to avoid such limitations. Any
failure to effectively monitor, implement or improve the Company's operational,
financial, management and technical support systems could have a material
adverse effect on the Company's business and consolidated results of operations.

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

Production and marketing of products in certain states and countries may
subject the Company to environmental and other regulations which include, in
some instances, the requirement that the Company provide consumers with the
ability to return to the Company product at the end of its useful life, and
leave

25

responsibility for environmentally safe disposal or recycling with the Company.
It is unclear what effect such regulations will have on the Company's future
consolidated operating results and financial condition.

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

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

LIQUIDITY AND CAPITAL RESOURCES

The Company's consolidated financial position with respect to cash, cash
equivalents, and short-term investments, net of notes payable to banks,
decreased to $1,434 million as of September 26, 1997, from $1,559 million as of
September 27, 1996. The Company's consolidated financial position with respect
to cash, cash equivalents, and short-term investments decreased to $1,459
million as of September 26, 1997, from $1,745 million as of September 27, 1996.
The Company's cash and cash equivalent balances as of September 26, 1997 and
September 27, 1996 include $165 million and $177 million, respectively, pledged
as collateral to support letters of credit primarily associated with the
Company's purchase commitments under the terms of the sale of the Company's
Fountain, Colorado, manufacturing facility to SCI.

Cash generated by operations during 1997 totaled $188 million. Cash
generated by operations was primarily the result of decreases in accounts
receivable and inventories, partially offset by the Company's net loss, adjusted
for non-cash expenditures such as in-process research and development, as well
as decreases in accounts payable.

Cash used to acquire NeXT totaled $384 million in 1997. The Company expects
no additional cash expenditures related to the NeXT acquisition. Net cash used
for the purchase of property, plant, and equipment totaled $53 million in 1997,
and consisted primarily of increases in manufacturing machinery and equipment.
The Company expects that the level of capital expenditures in 1998 will be
comparable to 1997.

Cash generated by financing activities in 1997 included the sale of $150
million of Apple Series A non-voting convertible preferred stock to Microsoft
Corporation. Cash used by financing activities in 1997 included $161 million to
retire notes payable to banks.

Over the last two years, the Company's debt ratings have been downgraded to
non-investment grade. In October 1997, the Company's senior and subordinated
long-term debt were downgraded to B- and CCC, respectively, by Standard and
Poor's Rating Agency. In the second quarter of 1997, the Company's debt ratings
were downgraded to B3 and Caa2, respectively, by Moody's Investor Services. Both
Standard and Poor's Rating Agency and Moody's Investor Services have the Company
on negative outlook. These actions may increase the Company's cost of funds in
future periods. In addition, the Company may be required to pledge additional
collateral with respect to certain of its borrowings and letters of credit and
to agree to more stringent covenants than in the past.

The Company believes that its balances of cash and cash equivalents and
short-term investments, and continued short-term borrowings from banks, will be
sufficient to meet its cash requirements over the next twelve months. Expected
cash requirements over the next twelve months include an estimated $130 million
to effect actions under the restructuring plan, most of which will be effected
during the first half of fiscal

26

1998. No assurance can be given that the $25 million in short-term borrowings
from banks can be continued, or that any additional required financing could be
obtained should the restructuring plan take longer to implement than anticipated
or be unsuccessful. If the Company is unable to obtain such financing, its
liquidity, results of operations, and financial condition would be materially
adversely affected.

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

27

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
- ----------------------------------------------------------------------------------------------------------- -----

Financial Statements:
Report of KPMG Peat Marwick LLP, Independent Auditors.................................................... 29
Report of Ernst & Young LLP, Independent Auditors........................................................ 30
Consolidated Balance Sheets as of September 26, 1997, and September 27, 1996............................. 31
Consolidated Statements of Operations for the three fiscal years ended September 26, 1997................ 32
Consolidated Statements of Shareholders' Equity for the three fiscal years ended September 26, 1997...... 33
Consolidated Statements of Cash Flows for the three fiscal years ended September 26, 1997................ 34
Notes to Consolidated Financial Statements............................................................... 35
Selected Quarterly Financial Information (Unaudited)..................................................... 58

Financial Statement Schedule:
For the three fiscal years ended September 26, 1997
Schedule II - Valuation and qualifying accounts........................................................ 59

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

28

REPORT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS

The Board of Directors
Apple Computer, Inc.:

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

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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 26, 1997, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.

/s/ KPMG PEAT MARWICK LLP
------------------------------------------
KPMG Peat Marwick LLP

San Jose, California
October 15, 1997

29

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

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

We have audited the accompanying consolidated balance sheet of Apple
Computer, Inc. as of September 27, 1996, and the related consolidated statements
of operations, shareholders' equity, and cash flows for each of the two years in
the period ended September 27, 1996. Our audits also include the financial
statement schedule for each of the two years in the period ended September 27,
1996 listed in the Index to the Consolidated Financial Statements. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.

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

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

/s/ ERNST & YOUNG LLP
------------------------------------------
Ernst & Young LLP

San Jose, California
October 14, 1996

30

CONSOLIDATED BALANCE SHEETS

(DOLLARS IN MILLIONS)

ASSETS:

SEPTEMBER 26, 1997 AND SEPTEMBER 27, 1996 1997 1996
- ------------------------------------------------------------------------------------------------ --------- ---------

Current assets:
Cash and cash equivalents..................................................................... $ 1,230 $ 1,552
Short-term investments........................................................................ 229 193
Accounts receivable, net of allowance for doubtful accounts of $99 ($91 in 1996).............. 1,035 1,496
Inventories:
Purchased parts............................................................................. 141 213
Work in process............................................................................. 15 43
Finished goods.............................................................................. 281 406
--------- ---------
437 662
Deferred tax assets........................................................................... 259 342
Other current assets.......................................................................... 234 270
--------- ---------
Total current assets...................................................................... 3,424 4,515
--------- ---------
Property, plant, and equipment:
Land and buildings............................................................................ 453 480
Machinery and equipment....................................................................... 460 544
Office furniture and equipment................................................................ 110 136
Leasehold improvements........................................................................ 172 188
--------- ---------
1,195 1,348
Accumulated depreciation and amortization..................................................... (709) (750)
--------- ---------
Net property, plant, and equipment........................................................ 486 598
--------- ---------
Other assets.................................................................................... 323 251
--------- ---------
$ 4,233 $ 5,364
--------- ---------
--------- ---------

LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Notes payable to banks........................................................................ $ 25 $ 186
Accounts payable.............................................................................. 685 791
Accrued compensation and employee benefits.................................................... 99 120
Accrued marketing and distribution............................................................ 278 257
Accrued warranty and related.................................................................. 128 181
Accrued restructuring costs................................................................... 180 117
Other current liabilities..................................................................... 423 351
--------- ---------
Total current liabilities................................................................. 1,818 2,003
--------- ---------
Long-term debt.................................................................................. 951 949
Deferred tax liabilities........................................................................ 264 354

Commitments and contingencies

Shareholders' equity:
Series A non-voting convertible preferred stock, no par value; 150,000 shares authorized,
issued and outstanding...................................................................... 150 --
Common stock, no par value; 320,000,000 shares authorized; 127,949,220 shares issued and
outstanding in 1997 (124,496,972 shares in 1996)............................................ 498 439
Retained earnings............................................................................. 589 1,634
Other......................................................................................... (37) (15)
--------- ---------
Total shareholders' equity................................................................ 1,200 2,058
--------- ---------
$ 4,233 $ 5,364
--------- ---------
--------- ---------

See accompanying notes to consolidated financial statements.

31

CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

THREE FISCAL YEARS ENDED SEPTEMBER 26, 1997 1997 1996 1995
- --------------------------------------------------------------------------------- --------- --------- ---------

Net sales........................................................................ $ 7,081 $ 9,833 $ 11,062
--------- --------- ---------
Costs and expenses:
Cost of sales.................................................................. 5,713 8,865 8,204
Research and development....................................................... 485 604 614
Selling, general and administrative............................................ 1,286 1,568 1,583
Special charges:
In-process research and development.......................................... 375 -- --
Restructuring costs.......................................................... 217 179 (23)
Termination of license agreement............................................. 75 -- --
--------- --------- ---------
8,151 11,216 10,378
--------- --------- ---------
Operating income (loss).......................................................... (1,070) (1,383) 684
Interest and other income (expense), net 25 88 (10)
--------- --------- ---------
Income (loss) before provision (benefit) for income taxes........................ (1,045) (1,295) 674
Provision (benefit) for income taxes............................................. -- (479) 250
--------- --------- ---------
Net income (loss)................................................................ $ (1,045) $ (816) $ 424
--------- --------- ---------
--------- --------- ---------
Earnings (loss) per common and common equivalent share........................... $ (8.29) $ (6.59) $ 3.45
--------- --------- ---------
--------- --------- ---------
Common and common equivalent shares used in the calculations of earnings (loss)
per share (in thousands)....................................................... 126,062 123,734 123,047
--------- --------- ---------
--------- --------- ---------

See accompanying notes to consolidated financial statements.

32

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

PREFERRED STOCK COMMON STOCK TOTAL
------------------------- ------------------------- RETAINED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT EARNINGS OTHER EQUITY
---------------- ------- ---------------- ------- -------- ----- -------------
(IN THOUSANDS) (IN THOUSANDS)

Balance as of September 30, 1994.... -- $ -- 119,543 $ 298 $ 2,096 $(11) $ 2,383
Common stock issued under stock
option and purchase plans,
including related tax
benefits........................ -- -- 3,379 100 -- -- 100
Cash dividends of $0.48 per common
share........................... -- -- -- -- (58) -- (58)
Accumulated translation
adjustment...................... -- -- -- -- -- 6 6
Change in unrealized gains on
available-for-sale securities... -- -- -- -- -- 44 44
Net income........................ -- -- -- -- 424 -- 424
Other............................. -- -- -- -- 2 -- 2
--- ------- ------- ------- -------- ----- -------------
Balance as of September 29, 1995.... -- -- 122,922 398 2,464 39 2,901
--- ------- ------- ------- -------- ----- -------------
Common stock issued under stock
option and purchase plans,
including related tax
benefits........................ -- -- 1,575 41 -- -- 41
Cash dividends of $0.12 per common
share........................... -- -- -- -- (14) -- (14)
Accumulated translation
adjustment...................... -- -- -- -- -- (12) (12)
Change in unrealized gains
(losses) on available-for-sale
securities...................... -- -- -- -- -- (42) (42)
Net loss.......................... -- -- -- -- (816) -- (816)
--- ------- ------- ------- -------- ----- -------------
Balance as of September 27, 1996.... -- -- 124,497 439 1,634 (15) 2,058
--- ------- ------- ------- -------- ----- -------------
Common stock issued under stock
option and purchase plans and
other, and in connection with
the acquisition of NeXT......... -- -- 3,452 59 -- -- 59
Series A non-voting convertible
preferred stock issued.......... 150 150 -- -- -- -- 150
Accumulated translation
adjustment...................... -- -- -- -- -- (22) (22)
Net loss.......................... -- -- -- -- (1,045) -- (1,045)
--- ------- ------- ------- -------- ----- -------------
Balance as of September 26, 1997.... 150 $ 150 127,949 $ 498 $ 589 $(37) $ 1,200
--- ------- ------- ------- -------- ----- -------------
--- ------- ------- ------- -------- ----- -------------

See accompanying notes to consolidated financial statements.

33

CONSOLIDATED STATEMENTS OF CASH FLOWS

(DOLLARS IN MILLIONS)

THREE FISCAL YEARS ENDED SEPTEMBER 26, 1997 1997 1996 1995
- ----------------------------------------------------------------------------------- ------- ------ -------

Cash and cash equivalents, beginning of the period................................. $ 1,552 $ 756 $ 1,203
------- ------ -------
Operating:
Net income (loss).................................................................. (1,045) (816) 424
Adjustments to reconcile net income (loss) to cash generated by (used for)
operating activities:
Depreciation and amortization.................................................... 118 156 127
Net book value of property, plant, and equipment retirements..................... 70 70 6
In-process research and development.............................................. 375 -- --
Changes in operating assets and liabilities, net of effects of the acquisition of
NeXT:
Accounts receivable.............................................................. 469 435 (350)
Inventories...................................................................... 225 1,113 (687)
Deferred tax assets.............................................................. 83 (91) 42
Other current assets............................................................. 36 45 (59)
Accounts payable................................................................. (107) (374) 283
Accrued restructuring costs...................................................... 63 117 (47)
Other current liabilities........................................................ (9) 212 (10)
Deferred tax liabilities......................................................... (90) (348) 31
------- ------ -------
Cash generated by (used for) operating activities.............................. 188 519 (240)
------- ------ -------
Investing:
Purchase of short-term investments................................................. (999) (437) (1,672)
Proceeds from sales and maturities of short-term investments....................... 963 440 1,531
Purchase of property, plant, and equipment......................................... (53) (67) (159)
Cash used to acquire NeXT.......................................................... (384) -- --
Other.............................................................................. (60) (55) (102)
------- ------ -------
Cash used for investing activities............................................. (533) (119) (402)
------- ------ -------
Financing:
Increase (decrease) in notes payable to banks...................................... (161) (275) 169
Increase (decrease) in long-term borrowings........................................ -- 646 (2)
Proceeds from issuance of preferred stock.......................................... 150 -- --
Increases in common stock, net of acquisition of NeXT.............................. 34 39 86
Cash dividends..................................................................... -- (14) (58)
------- ------ -------
Cash generated by financing activities......................................... 23 396 195
------- ------ -------
Total cash generated (used)........................................................ (322) 796 (447)
------- ------ -------
Cash and cash equivalents, end of the period....................................... $ 1,230 $1,552 $ 756
------- ------ -------
------- ------ -------
Supplemental cash flow disclosures:
Cash paid during the year for interest........................................... $ 61 $ 49 $ 49
Cash paid (received) for income taxes, net....................................... $ (11) $ 33 $ 188

Noncash transactions:
Tax benefit from stock options................................................. $ -- $ 2 $ 15
Issuance of common stock for acquisition of NeXT............................... $ 25 $ -- $ --

See accompanying notes to consolidated financial statements.

34

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NATURE OF OPERATIONS

Apple Computer (the "Company") designs, manufactures, and markets
microprocessor-based personal computers and related personal computing products
for sale primarily to education, creative, home, business, and government
customers.

BASIS OF PRESENTATION

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

ACCOUNTING ESTIMATES

GENERAL

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.

SIGNIFICANT ACCOUNTING ESTIMATES

PROVISIONS FOR INVENTORY WRITE-DOWNS AND RELATED ACCRUALS

The Company's provisions for inventory write-downs, as well as accruals for
the cost to cancel excess component orders, are based on the Company's best
estimates of product sales prices and customer demand patterns, and/or its plans
to transition its products. However, the Company participates in a highly
competitive industry that is characterized by aggressive pricing practices,
downward pressures on gross margins, frequent introductions of new products,
short product life cycles, rapid technological advances, continual improvement
in product price/performance characteristics, and price sensitivity and changing
demand patterns on the part of consumers. As a result of the industry's
ever-changing and dynamic nature, it is at least reasonably possible that the
estimates used by the Company to determine its provisions for inventory
write-downs, as well as its accruals for the cost to cancel excess component
orders, will be materially different from the actual amounts or results. These
differences could result in materially higher than expected inventory provisions
and related costs, which could have a materially adverse effect on the Company's
consolidated results of operations and financial condition in the near term.

WARRANTY AND RELATED ACCRUALS

The Company's warranty and related accruals are based on the Company's best
estimates of product failure rates and unit costs to repair. However, the
Company is continually releasing new and ever-more complex and technologically
advanced products. As a result, it is at least reasonably possible that product
could be released with certain unknown quality and/or design problems. Such an
occurrence could result in materially higher than expected warranty and related
costs, which could have a materially adverse effect on the Company's
consolidated results of operations and financial condition in the near term.

DEFERRED TAX ASSETS

Realization of approximately $85 million of the total deferred tax assets
representing tax loss and credit carryforwards is dependent on the Company's
ability to generate approximately $245 million of future U.S. taxable income.
Management believes that it is more likely than not that forecasted U.S. taxable
income, including income that may be generated as a result of certain tax
planning strategies, will

35

be sufficient to utilize the tax carryforwards prior to their expiration in 2011
and 2012 to fully recover the asset. However, there can be no assurance that the
Company will meet its expectations of future U.S. income. As a result, the
amount of the deferred tax assets considered realizable could be reduced in the
near and long term if estimates of future taxable U.S. income are reduced. Such
an occurrence could materially adversely affect the Company's consolidated
results of operations and financial condition. The Company will continue to
evaluate the realizability of the deferred tax assets quarterly by assessing the
need for and amount of a valuation allowance.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

FINANCIAL INSTRUMENTS

INVESTMENTS

All highly liquid investments with a maturity of three months or less at the
date of purchase are considered to be cash equivalents; investments with
maturities between three and twelve months are considered to be short-term
investments. As of September 26, 1997 there are no investments with maturities
greater than twelve months. The Company's U.S. corporate securities include
commercial paper and corporate debt securities. Foreign securities include
foreign commercial paper, loan participation and certificates of deposit with
foreign institutions, most of which are denominated in U.S. dollars. The
Company's cash equivalents and short-term investments are generally held until
maturity.

Management determines the appropriate classification of its investments in
debt and marketable equity securities at the time of purchase and reevaluates
such designation as of each balance sheet date. The Company's debt and
marketable equity securities have been classified and accounted for as
available-for-sale. These securities are carried at fair value, with the
unrealized gains and losses reported as a component of shareholders' equity.
These unrealized gains or losses include any unrealized losses and gains on
interest rate contracts accounted for as hedges against the available-for-sale
securities. The cost of securities sold is based upon the specific
identification method.

FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

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

INTEREST RATE DERIVATIVES

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.

In addition, the Company has entered into foreign exchange forward contracts
to hedge certain intercompany loan transactions. These forward contracts
effectively change certain foreign currency denominated debt into U.S. dollar
denominated debt, which better matches against the Company's U.S. dollar
denominated cash equivalents and short-term investments. No such contracts
existed as of September 26, 1997.

36

FOREIGN CURRENCY INSTRUMENTS

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, and certain firmly committed
and probable but not firmly committed transactions. The Company's foreign
exchange risk management policy requires it to hedge a majority of its existing
material foreign exchange transaction exposures. However, the Company may not
hedge certain foreign exchange transaction exposures that are immaterial either
in terms of their minimal U.S. dollar value or in terms of their historically
high correlation with the U.S. dollar.

Probable but not firmly committed transactions comprise sales of the
Company's products in currencies other than the U.S. dollar. A majority of these
non-U.S. dollar-based sales are made through the Company's subsidiaries in
Europe, Asia (particularly Japan), Canada, and Australia. The Company purchases
foreign exchange option contracts to hedge the currency exchange risks
associated with these and other transactions. The Company also sells foreign
exchange option contracts, in order to partially finance the purchase of these
foreign exchange option contracts. In addition, the Company enters into other
foreign exchange transactions, which are intended to reduce the costs associated
with its foreign exchange risk management programs. The duration of foreign
exchange hedging instruments, whether for firmly committed transactions or for
probable but not firmly committed transactions, currently does not exceed one
year.

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. Sold
interest rate and foreign exchange instruments do not qualify as accounting
hedges. Gains and losses on accounting hedges of existing assets or liabilities
are generally recorded currently in income or shareholders' equity against the
losses and gains on the hedged transactions. Gains and losses related to
qualifying accounting hedges of firmly committed or probable but not firmly
committed transactions are deferred and recognized in income in the same period
as the hedged transactions. Gains and losses on interest rate and foreign
exchange contracts that do not qualify as accounting hedges are recorded
currently in income. 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.

The Company monitors its interest rate and foreign exchange positions daily
based on applicable and commonly used pricing models. The correlation between
the changes in the fair value of hedging instruments and the changes in the
underlying hedged items is assessed periodically over the life of the hedged
instrument. In the event that it is determined that a hedge is ineffective,
including if and when the hedged transactions no longer exists, the Company
recognizes in income the change in market value of the instrument beginning on
the date it was no longer an effective hedge.

Further information regarding the Company's accounting treatment of its
financial instruments may be found under the heading "Interest Rate Derivatives
and Foreign Currency Instruments" included in these Notes to Consolidated
Financial Statements.

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.

37

PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment is stated at cost. Depreciation and
amortization 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 and from two to ten years for all other assets.

LONG-LIVED ASSETS

In accordance with the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("FAS 121"), the Company reviews for the
impairment of long-lived assets and certain identifiable intangibles whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Under FAS 121, an impairment loss would be recognized
when estimated future cash flows expected to result from the use of the asset
and its eventual disposition is less than its carrying amount. The only such
impairment losses identified by the Company as of September 26, 1997 and
September 27, 1996 were those recorded in connection with the restructuring of
its operations. Information regarding the Company's restructuring of operations
may be found under the heading "Restructuring of Operations" included in these
Notes to Consolidated Financial Statements.

STOCK-BASED COMPENSATION

In accordance with the provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"), which
the Company adopted in 1997, the Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and related interpretations in accounting for its employee stock
option plans. Under APB 25, if the exercise price of the Company's employee
stock options equals or exceeds the fair value of the underlying stock on the
date of grant, no compensation expense is recognized.

Information regarding the Company's pro forma disclosure of stock-based
compensation pursuant to FAS 123 may be found under the heading "Shareholders'
Equity" in these Notes to Consolidated Financial Statements.

FOREIGN CURRENCY TRANSLATION

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

REVENUE RECOGNITION

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

WARRANTY EXPENSE

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

38

ADVERTISING COSTS

Advertising costs are charged to expense the first time the advertising
takes place.

EARNINGS (LOSS) PER SHARE

Earnings (loss) per share is computed using the weighted average number of
common shares outstanding and (in 1995 only) the dilutive effect of common stock
options using the treasury stock method. Common stock options, the convertible
subordinated notes, the preferred stock, and certain common shares issued
pending shareholder approval were not included in the computations of loss per
share in 1997 and/or 1996 as their effect was antidilutive.

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS 128").
Under the provisions of FAS 128, primary earnings per share will be replaced
with basic earnings per share, and fully diluted earnings per share will be
replaced with diluted earnings per share for companies with potentially dilutive
securities such as outstanding options, convertible debt and preferred stock.
FAS 128 is effective for annual and interim periods ending after December 15,
1997 and will require restatement of all comparative per share amounts. The
basic loss per share will be no different than the primary loss per share as
presented in the accompanying consolidated statements of operations as neither
consider outstanding options, convertible debt or preferred stock. If and when
the Company becomes profitable, it will be required to present both basic and
diluted earnings per share. Basic earnings per share, which does not consider
potentially dilutive securities, will be greater than the replaced primary
earnings per share which did consider those securities. Diluted earnings per
share will not differ materially from the replaced fully diluted earnings per
share.

RECLASSIFICATIONS

Certain prior year amounts in the Industry Segment and Geographic
Information footnote have been reclassified to conform to the current year's
presentation.

FINANCIAL INSTRUMENTS

INVESTMENTS

The following table summarizes the Company's available-for-sale securities
at amortized cost, which approximates fair value, as of September 26, 1997 and
September 27, 1996:

1997 1996
AMORTIZED COST AMORTIZED COST
--------------- ---------------
(IN MILLIONS)

U.S. Treasury securities............................................... $ 100 $ 86
U.S. corporate securities.............................................. 327 330
Foreign securities..................................................... 705 1,098
------ ------
Total included in cash and cash equivalents.......................... 1,132 1,514

U.S. corporate securities.............................................. 29 --
Foreign securities..................................................... 200 193
------ ------
Total included in short-term investments............................. 229 193
------ ------
Total................................................................ $ 1,361 $ 1,707
------ ------
------ ------

Gross unrealized gains and losses were negligible as of September 26, 1997
and September 27, 1996.

39

The Company's cash and cash equivalent balances as of September 26, 1997 and
September 27, 1996, include $165 million and $177 million, respectively, pledged
primarily as collateral to support letters of credit.

INTEREST RATE DERIVATIVES AND FOREIGN CURRENCY INSTRUMENTS

The table below shows the notional principal, fair value, and credit risk
amounts of the Company's interest rate derivative and foreign currency
instruments as of September 26, 1997, and September 27, 1996. 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 below 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 26,
1997, and September 27, 1996. 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 below reflects the
notional principal, fair value, and credit risk amounts of the Company's
interest rate and sforeign 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.

1997 1996
--------------------------------------- ------------------------
NOTIONAL CREDIT RISK NOTIONAL
PRINCIPAL FAIR VALUE AMOUNT PRINCIPAL FAIR VALUE
----------- ----- ------------- ----------- -----
(IN MILLIONS)

Transactions Qualifying as Accounting Hedges

Interest rate instruments
Swaps.......................................... $ 340 $ (4) $ -- $ 315 $ (13)
Interest rate collars.......................... $ 105 $ -- $ -- $ 80 $ --
Purchased floors............................... $ 455 $ (1) $ -- $ 475 $ 1

Foreign exchange instruments
Spot/Forward contracts......................... $ 741 $ 1 $ 7 $ 2,035 $ 9
Purchased options.............................. $ 890 $ 11 $ 11 $ 1,475 $ 9

Transactions Other Than Accounting Hedges

Interest rate instruments
Swaps.......................................... $ 100 $ -- $ -- $ -- $ --

Foreign exchange instruments
Spot/Forward contracts......................... $ 89 $ -- $ 1 $ 182 $ --
Purchased options.............................. $ 1,075 $ 8 $ 8 $ 606 $ 8
Sold options................................... $ 840 $ (11) $ -- $ 506 $ (6)

CREDIT RISK
AMOUNT
-------------

Transactions Qualifying as Accounting Hedges
Interest rate instruments
Swaps.......................................... $ --
Interest rate collars.......................... $ --
Purchased floors............................... $ 1
Foreign exchange instruments
Spot/Forward contracts......................... $ 16
Purchased options.............................. $ 9
Transactions Other Than Accounting Hedges
Interest rate instruments
Swaps.......................................... $ --
Foreign exchange instruments
Spot/Forward contracts......................... $ --
Purchased options.............................. $ 8
Sold options................................... $ --

The interest rate swaps which qualify as accounting hedges generally require
the Company to pay a floating interest rate based on the three- or six-month
U.S. dollar LIBOR and receive a fixed rate of interest without exchanges of the
underlying notional amounts. As a result, these swaps effectively convert the
Company's fixed-rate ten-year debt to floating-rate debt and generally qualify
for hedge accounting

40

treatment. The maturity date for these swaps is in February 2004. As of
September 26, 1997, and September 27, 1996, interest rate swaps classified as
receive-fixed swaps had a weighted average receive rate of 6.04%. Weighted
average pay rates on these swaps were 5.66% and 5.82% as of September 26, 1997,
and September 27, 1996, 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 $4 million and $13 million as of
September 26, 1997, and September 27, 1996, respectively.

The $100 million interest rate swap not qualifying as an accounting hedge
requires the Company to pay Japanese yen at a fixed 0.6% interest rate and
receive Japanese yen at a floating rate based on 3 month LIBOR. This swap was
intended to hedge against the interest rate risk related to the Company's yen-
denominated notes payable to banks. As most of the notes payable to banks were
not renewed, the swap is no longer effective as a hedge and therefore no longer
qualifies as an accounting hedge.

Interest rate collars limit the Company's exposure to fluctuations in
short-term interest rates by locking in a range of interest rates. An interest
rate collar is a no-cost structure that consists of a purchased option and a
sold option. The Company receives a payment when the three-month LIBOR falls
below predetermined levels, and makes a payment when the three-month LIBOR rises
above predetermined levels. Purchased floors limit the Company's exposure to
falling interest rates on its cash equivalents and short-term investments by
locking in a minimum interest rate. The Company receives a payment when interest
rates fall below a predetermined level. A purchased floor generally qualifies
for hedge accounting treatment and is reported on the balance sheet at its
premium cost, which is amortized over the life of the floor. The interest rate
collars and purchased floors are generally designated and effective as hedges
against interest rate risk on the Company's securities classified as
available-for-sale and are carried at fair value in other current liabilities
with the unrealized gains and losses recorded as a component of shareholders'
equity. Gains and losses are recognized in income as a component of interest and
other income (expense), net in the same period as the hedged transaction.
Unrealized gains and losses on such contracts were immaterial as of September
26, 1997, and September 27, 1996.

Sold interest rate option contracts require the Company to make payments
should certain interest rates either fall below or rise above predetermined
levels. These contracts are generally not accounted for as hedges and 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 not accounted for as hedges are
carried at fair value in other current liabilities with the gains and losses
recorded currently in income as a component of interest and other income
(expense), net. The foreign exchange forward contracts that are designated and
effective as hedges are also carried at fair value in other current liabilities
with gains and losses recorded currently in income as a component of interest
and other income (expense), net, against the losses and gains on the hedged
transactions. All foreign exchange forward contracts expire within one year.

The premium costs of purchased foreign exchange option contracts that are
designated and effective as hedges are recorded in other current assets and
amortized over the life of the option. If the option contract is designated and
effective as a hedge of a firmly committed transaction, or a probable but not
firmly committed transaction, then any gain or loss is deferred until the
occurrence of the hedged transaction. Deferred gains and losses on such
contracts were immaterial as of September 26, 1997, and September 27, 1996. 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 26, 1997, maturity dates for purchased foreign exchange option
contracts ranged from one to twelve months.

The net premium costs of purchased and sold foreign exchange option
contracts not accounted for as hedges are recorded in other current assets and
amortized over the life of the option. The options are

41

carried at fair value in other current liabilities with gains and losses
recorded currently in income. As of September 26, 1997, maturity dates for sold
option contracts ranged from one to six months.

The Company monitors its interest rate and foreign exchange positions daily
based on applicable and commonly used pricing models. The correlation between
the changes in the fair value of hedging instruments and the changes in the
underlying hedged items is assessed periodically over the life of the hedged
instrument. In the event that it is determined that a hedge is ineffective, the
Company recognizes in income the change in market value of the instrument
beginning on the date it was no longer an effective hedge.

NOTES PAYABLE TO BANKS

The weighted average interest rate for Japanese yen-denominated notes
payable to banks as of September 26, 1997, and September 27, 1996, was
approximately 1.3%. The Company had no U.S. dollar-denominated notes payable to
banks as of September 26, 1997 or September 27, 1996. The carrying amount of
notes payable to banks approximates their fair value due to their less than
90-day maturities.

LONG-TERM DEBT

During 1996, the Company issued $661 million aggregate principal amount of
6% unsecured convertible subordinated notes (the "Notes") to certain qualified
parties in a private placement. The Notes were sold at 100% of par. The Notes
pay interest semi-annually and mature on June 1, 2001. The Notes are convertible
by their holders at any time after September 5, 1996 at a conversion price of
$29.205 per share subject to adjustments as defined in the Note agreement. No
Notes had been converted as of September 26, 1997. The Notes are 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. The Notes are subordinated to all present and future senior indebtedness
of the Company as defined in the Note agreement. In addition, the Company
incurred approximately $15 million of costs associated with the issuance of the
Notes. These costs are accounted for as a deduction from the face amount of the
Notes and are being amortized over the life of the Notes. In October 1996, the
Company registered with the Securities and Exchange Commission ("SEC") $569
million of the aggregate principal amount of the Notes, including the related
common shares issuable upon conversion of these 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 semi-annually and mature on February 15, 2004.

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

1997 1996
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- --------- ----------- ---------
(IN MILLIONS)

Ten-year unsecured notes........................................... $ 300 $ 269 $ 300 $ 259
Convertible subordinated notes (1)................................. $ 661 $ 656 $ 661 $ 656
Other.............................................................. $ 3 $ 3 $ 3 $ 3

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

(1) The carrying amount of the convertible subordinated notes is prior to
consideration of the related issuance costs.

The fair value of the ten-year unsecured notes is based on their listed
market values as of September 26, 1997 and September 27, 1996. The fair value of
the convertible subordinated notes is based on an estimate from a financial
institution.

42

INTEREST AND OTHER INCOME (EXPENSE), NET

Interest and other income (expense), net, consisted of the following:

1997 1996 1995
--------- --------- ---------
(IN MILLIONS)

Interest income.................................................................. $ 82 $ 60 $ 100
Interest expense................................................................. (71) (60) (48)
Foreign currency gain (loss)..................................................... 13 30 (15)
Net premiums and discounts on foreign exchange instruments....................... (4) (13) (46)
Realized gains on the sale of available-for-sale and other securities............ 2 74 1
Other income (expense), net...................................................... 3 (3) (2)
--- --- ---
$ 25 $ 88 $ (10)
--- --- ---
--- --- ---

CONCENTRATIONS OF RISK

CONCENTRATIONS OF CREDIT RISK

The Company distributes its products principally through third-party
computer resellers and various education and consumer channels. Concentrations
of credit risk with respect to trade receivables are limited because of flooring
arrangements for selected customers with third-party financing companies and
because the Company's customer base consists of large numbers of geographically
diverse customers dispersed across several industries. As such, the Company
generally does not require collateral from its customers.

The counterparties to the agreements relating to the Company's investments
and foreign exchange and interest rate instruments consist of a number of major
international financial institutions. To date, no such counterparty has failed
to meet its financial obligations to the Company. The Company does not believe
that there is significant risk of nonperformance by these counterparties because
the Company continually monitors its positions and the credit ratings of such
counterparties, and limits the financial exposure and the number of agreements
and contracts it enters into with any one party. The Company generally does not
require collateral from counterparties, except for margin agreements associated
with the ten-year interest rate swaps on the Company's ten-year unsecured notes.
To mitigate the credit risk associated with these ten-year swap transactions
which mature in 2004, the Company entered into margining agreements with its
third-party bank counterparties. These agreements require the Company or the
counterparty to post margin only if certain credit risk thresholds are exceeded.
The amounts held in margin accounts were not material as of September 26, 1997.

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 sources. If the supply of a key
single-sourced component to the Company were to be delayed or curtailed, the
Company's ability to ship the related product utilizing such component in
desired quantities and in a timely manner could be adversely affected, depending
on the time required to obtain sufficient quantities from the original source,
or to identify and obtain sufficient quantities from an alternate source. In
addition, the Company uses some components that are not common to the rest of
the personal computer industry. Continued availability of these components may
be affected if producers were to decide to concentrate on the production of
common components instead of components customized to meet the Company's
requirements. Finally, a significant portion of the Company's CPUs and logic
boards are now manufactured by outsourcing partners. Although the Company works
closely with its outsourcing partners on manufacturing

43

schedules and levels, the Company's operating results could be adversely
affected if its outsourcing partners were unable to meet their production
obligations.

SIGNIFICANT CUSTOMERS

No customer accounted for more than 10% of the Company's net sales in 1997,
1996, or 1995.

ADVERTISING COSTS

Advertising expense was $143 million, $183 million, and $205 million for
1997, 1996, and 1995, respectively.

SPECIAL CHARGES

NEXT ACQUISITION

On February 4, 1997, the Company acquired all of the outstanding shares of
NeXT Software, Inc. ("NeXT"). NeXT, headquartered in Redwood City, California,
had developed, marketed and supported software that enables customers to
implement business applications on the Internet/World Wide Web, intranets and
enterprise-wide client/server networks. The total purchase price was $427
million and was comprised of cash payments of $319 million and the issuance of
1.5 million shares of the Company's common stock to the NeXT shareholders valued
at approximately $25 million according to the terms of the purchase agreement;
the issuance of approximately 1.9 million options to purchase the Company's
common stock to the NeXT optionholders valued at approximately $16 million; cash
payments of $56 million to the NeXT debtholders; cash payments of $9 million for
closing and related costs, and $2 million of net liabilities assumed. The
acquisition was accounted for as a purchase and, accordingly, the operating
results pertaining to NeXT subsequent to the date of acquisition have been
included in the Company's consolidated operating results. The total purchase
price was allocated to purchased in-process research and development ($375
million) and to goodwill and other intangible assets ($52 million). The
purchased in-process research and development was charged to operations upon
acquisition, and the goodwill and other intangible assets are being amortized on
a straight-line basis over 2 to 3 years.

The following unaudited proforma summary combines the consolidated results
of operations of the Company and NeXT as if the acquisition had occurred at the
beginning of the years ended September 26, 1997 and September 27, 1996, after
giving effect to certain adjustments, including in-process research and
development, amortization of intangible assets, lower interest income as a
result of lower cash investment balances, and lower interest expense as a result
of the settlement of the NeXT debt, as well as related income tax effects in
1996 only. The proforma summary does not necessarily reflect the results of
operations as they would have been had the Company and NeXT been combined as of
the beginning of those years.

PROFORMA RESULTS OF OPERATIONS

FOR THE YEARS ENDED
--------------------------------------
SEPTEMBER 26, 1997 SEPTEMBER 27, 1996
------------------ ------------------
(IN MILLIONS, EXCEPT PER SHARE
AMOUNTS)

Net sales....................................................... $ 7,098 $ 9,879
------- -------
------- -------
Net loss........................................................ $ (1,061) $ (1,234)
------- -------
------- -------
Loss per common share........................................... $ (8.38) $ (9.85)
------- -------
------- -------

44

RESTRUCTURING OF OPERATIONS

In the second quarter of 1996, the Company announced and began to implement
a restructuring plan aimed at reducing costs and restoring profitability to the
Company's operations. The restructuring plan was necessitated by decreased
demand for the Company's products and the Company's adoption of a new strategic
direction. These actions resulted in a net charge of $179 million after
subsequent adjustments recorded in the fourth quarter of 1996. 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,
including approximately $8 million of costs related to the termination of the
Company's former Chief Executive Officer. The combined restructuring actions
consist of terminating approximately 3,600 full-time employees, approximately
2,600 of whom have been terminated from the second quarter of 1996 through
September 26, 1997, excluding employees who were not paid severance bonuses and
who were hired by SCI Systems, Inc. or MCI Systemhouse, the purchasers of the
Company's Fountain, Colorado manufacturing facility and the Napa, California
data center facility, respectively; canceling or vacating certain facility
leases as a result of those employee terminations; writing down certain land,
buildings and equipment to be sold as a result of downsizing operations and
outsourcing various operational functions; and canceling contracts for projects
and technologies that are not central to the Company's core business strategy.
The restructuring actions under the plan have resulted in cash expenditures of
$163 million and noncash asset write-downs of $53 million from the second
quarter of 1996 through September 26, 1997. The Company expects that the
remaining $180 million accrued balance as of September 26, 1997 will result in
cash expenditures of approximately $130 million over the next twelve months and
$11 million thereafter. The Company expects that most of the contemplated
restructuring actions related to the plan will be completed during the first
half of fiscal 1998 and will be financed through current working capital and, if
necessary, continued short-term borrowings.

The following table depicts the restructuring activity through September 26,
1997:

RESTRUCTURING ACTIVITY

NET BALANCE AS OF NET BALANCE AS OF
ADDITIONS SPENDING SEPTEMBER 27, ADDITIONS SPENDING SEPTEMBER 26,
CATEGORY DURING 1996 DURING 1996 1996 DURING 1997 DURING 1997 1997
- --------------------------------------- ----------- ------------- --------------- ----------- ----------- ---------------
(IN MILLIONS)

Payments to employees involuntarily
terminated (C)....................... $ 81 $ 48 $ 33 $ 131 $ 88 $ 76
Payments on canceled or vacated
facility leases (C).................. 19 4 15 19 9 25
Write-down of operating assets to be
sold (N)............................. 54 7 47 38 46 39
Payments on canceled contracts (C)..... 25 3 22 29 11 40
----- --- ----- ----- ----- -----
$ 179 $ 62 $ 117 $ 217 $ 154 $ 180
----- --- ----- ----- ----- -----
----- --- ----- ----- ----- -----

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

(C): Cash; (N): Noncash.

45

TERMINATION OF LICENSE AGREEMENT

In August 1997, the Company agreed to acquire certain assets of Power
Computing Corporation (PCC), a company which Apple had licensed to distribute
Macintosh operating systems. In addition to the acquisition of certain assets
such as PCC's customer database and the license to distribute Macintosh
operating systems, the Company also has the right to retain certain key
employees of PCC. The agreement with PCC also includes a release of claims
between the parties.

The Company anticipates it will complete its acquisition of the assets of
PCC in the first quarter of 1998 once all regulatory approvals are received. The
total purchase price, which is comprised of shares of the Company's common stock
valued at $100 million; the Company's forgiveness of receivables from PCC; the
assumption of certain PCC obligations; and closing and related costs, is
expected to be approximately $110 million. The total purchase price is expected
to require total cash expenditures of approximately $5 million over the next 12
months. The acquisition will be treated as a purchase for accounting purposes.
The difference between the total purchase price and the amount expensed as
"Termination of License Agreement" on the accompanying consolidated statement of
operations will be capitalized in the first quarter of 1998, and then amortized
over a period of two years.

INCOME TAXES

The provision (benefit) for income taxes consists of the following:

1997 1996 1995
--------- --------- ---------
(IN MILLIONS)

Federal:
Current............................................................. $ -- $ (125) $ 26
Deferred............................................................ -- (279) 113
--------- --------- ---------
-- (404) 139
--------- --------- ---------

State:
Current............................................................. -- (2) 1
Deferred............................................................ -- (71) 15
--------- --------- ---------
-- (73) 16
--------- --------- ---------

Foreign:
Current............................................................. -- (1) 89
Deferred............................................................ -- (1) 6
--------- --------- ---------
-- (2) 95
--------- --------- ---------
Provision (benefit) for income taxes.................................. $ -- $ (479) $ 250
--------- --------- ---------
--------- --------- ---------

The foreign provision (benefit) for income taxes is based on foreign pretax
earnings (loss) of approximately $(265) million, $(141) million, and $572
million in 1997, 1996, and 1995, 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 $395 million of such earnings. It is not practicable to
determine the income tax liability that might be incurred if these earnings were
to be distributed. Except for such

46

indefinitely reinvested earnings, the Company provides for federal and state
income taxes currently on undistributed earnings of foreign subsidiaries.

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

As of September 26, 1997, and September 27, 1996, the significant components
of the Company's deferred tax assets and liabilities were:

SEPTEMBER 26, SEPTEMBER 27,
1997 1996
--------------- ---------------
(IN MILLIONS)

Deferred tax assets:
Accounts receivable and inventory reserves.................... $ 151 $ 105
Accrued liabilities and other reserves........................ 126 139
Basis of capital assets and investments....................... 103 82
Tax losses and credits........................................ 315 175
----- -----
Total deferred tax assets..................................... 695 501
Less: Valuation allowance....................................... 218 14
----- -----
Net deferred tax assets......................................... 477 487
----- -----

Deferred tax liabilities:
Unremitted earnings of subsidiaries........................... 410 467
Other......................................................... 7 11
----- -----
Total deferred tax liabilities.................................. 417 478
----- -----
Net deferred tax asset.......................................... $ 60 $ 9
----- -----
----- -----

The increase in net deferred tax assets of $51 million in 1997 is primarily
the result of reclassifying certain benefits of tax losses and credits from
other current assets to deferred tax assets in the consolidated balance sheet.

As of September 26, 1997, the Company had operating loss carryforwards for
tax purposes of approximately $451 million, which expire principally in 2011 and
2012. Most of the remaining benefits from tax losses and credits do not expire.

The net change in the total valuation allowance in 1997 was an increase of
$204 million, which is net of a $4 million adjustment related to the acquisition
of NeXT.

47

A reconciliation of the provision (benefit) for income taxes, with the
amount computed by applying the statutory federal income tax rate (35% in 1997,
1996, and 1995) to income (loss) before provision (benefit) for income taxes, is
as follows:

1997 1996 1995
--------- --------- ---------
(IN MILLIONS)

Computed expected tax (benefit)............................................... $ (366) $ (453) $ 236
State taxes, net of federal effect............................................ (3) (48) 10
Research and development tax credit........................................... -- -- (1)
Indefinitely invested earnings of foreign subsidiaries........................ -- -- (21)
Purchase accounting and asset acquisitions.................................... 158 -- --
Valuation allowance........................................................... 208 -- 3
Other individually immaterial items........................................... 3 22 23
--------- --------- ---------
Provision (benefit) for income taxes.......................................... $ -- $ (479) $ 250
--------- --------- ---------
Effective tax rate............................................................ 0% 37% 37%
--------- --------- ---------
--------- --------- ---------

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

SHAREHOLDERS' EQUITY

PREFERRED STOCK

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

STOCK OPTION PLANS

1990 STOCK OPTION PLAN

The Company has in effect a 1990 Stock Option Plan (the "1990 Plan"), which
replaced the 1981 Stock Option Plan terminated in October 1990 and the 1987
Executive Long Term Stock Option Plan (the "1987 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 1990 Plan to
employees, including officers and directors who are employees, at not less than
the fair market value on the date of grant. These options generally become
exercisable over a period of three years, based on continued

48

employment, and generally expire ten years after the grant date. In November
1997, the Company's Board of Directors passed a resolution requiring all future
option grants be vested over a period of four years. The 1990 Plan permits the
granting of incentive stock options, nonstatutory stock options, and stock
appreciation rights.

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

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

In December 1996, the Board of Directors adopted an amendment to the 1990
Plan to increase the number of shares reserved for issuance by 1 million. The
amendment was approved by the Company's shareholders in February 1997.

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. Terms and conditions of the 1997 Plan are
substantially the same as the 1990 Plan. 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 three years, based
on continued employment, and generally expire ten years after the grant date. In
November 1997, the Company's Board of Directors passed a resolution requiring
all future option grants be vested over a period of four years. The Company's
Board of Directors has reserved 5 million shares for issuance under the
provisions of the 1997 Plan.

1990 STOCK OPTION PLAN OF NEXT

On February 4, 1997, the Company acquired all of the outstanding shares of
NeXT. Under the terms of the acquisition agreement, approximately 1.9 million
options to purchase the Company's common stock were issued to the existing NeXT
optionholders. The options have the same terms and conditions as the options
issued by NeXT. The NeXT options were granted under the NeXT Plan to employees,
including officers and directors who were employees, at not less than the fair
market value on the date of grant. The options become exercisable over various
periods, as previously determined by the Board of Directors of NeXT at the time
of issuance.

DIRECTOR STOCK OPTION PLAN

In August 1997, the Company's Board of Directors approved a Director Stock
Plan ("DSOP") for which directors of the Company are eligible. Options granted
under the DSOP vest in three equal installments, on each of the first through
third anniversaries of the date of grant. The Company's Board of Directors has
reserved 400,000 shares for issuance under the provisions of the DSOP. As of
September 26, 1997, 150,000 options had been granted and were outstanding under
the DSOP, subject to shareholder approval at the Annual Meeting of Shareholders
scheduled for February 1998. Supplementally and separate from the DSOP (the
"Prior Plan"), 30,000 options had been granted in total to two members of the
Company's Board of Directors, and were outstanding as of September 26, 1997.
These options are also subject to shareholder approval at the Annual Meeting of
Shareholders scheduled for February 1998. The

49

options granted and available for future grant under the DSOP and Prior Plan are
not included as outstanding or available for future grant in the tables and
narrative below as they are subject to shareholder approval.

STOCK OPTION ACCOUNTING

The Company has elected to follow APB 25 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 FAS 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 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.

Pro forma information regarding net loss and loss per share is required by
FAS 123 and has been determined as if the Company had accounted for its employee
stock options granted and employee stock purchase plan purchases subsequent to
September 29, 1995, under the fair value method of that Statement. The fair
values for these options and stock purchases were estimated at the date of grant
and beginning of the period, respectively, using a Black-Scholes option pricing
model for the single option approach with the following weighted-average
assumptions for 1997 and 1996: risk-free interest rate of 6.3% and 5.3% for the
options and stock purchases, respectively; an average volatility factor of the
expected market price of the Company's common stock of 74% and 52% for the
options and stock purchases, respectively; and weighted-average expected lives
of three years from the grant date and six months from the beginning of the plan
period for the options and stock purchases, respectively. No dividend payments
are expected.

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

For purposes of pro forma disclosures, the estimated fair value of the
options and shares are amortized to pro forma net loss over the options' vesting
period and the shares' plan period. The Company's pro forma information follows:

FOR THE YEARS ENDED
---------------------------------------
SEPTEMBER 26, 1997 SEPTEMBER 27, 1996
------------------ -------------------
(IN MILLIONS, EXCEPT LOSS PER SHARE
INFORMATION)

Net loss........................................................ $ (1,082) $ (840)
------- ------
------- ------
Loss per common share........................................... $ (8.58) $ (6.79)
------- ------
------- ------

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

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

50

A summary of the Company's stock option activity and related information for
the years ended September 26, 1997 and September 27, 1996 follows:

YEAR ENDED YEAR ENDED
SEPTEMBER 26, 1997 SEPTEMBER 27, 1996
------------------------------ ------------------------------
OPTIONS WEIGHTED-AVERAGE OPTIONS WEIGHTED-AVERAGE
(IN 000'S) EXERCISE PRICE (IN 000'S) EXERCISE PRICE
----------- ----------------- ----------- -----------------

Outstanding--beginning of period....................... 14,112 $ 27.23 13,877 $ 34.79
Granted (Price equals fair market value, the
"FMV")............................................. 20,629 $ 16.91 8,873 $ 24.29
Granted (Price less than FMV)........................ 1,853 $ 6.54 -- $ --
Exercised............................................ (1,049) $ 13.71 (450) $ 22.91
Forfeited............................................ (16,896) $ 24.19 (8,188) $ 36.89
----------- ------ ----------- ------
Outstanding--end of period............................. 18,649 $ 17.24 14,112 $ 27.23
----------- ------ ----------- ------
----------- ------ ----------- ------
Exercisable at end of period........................... 1,996 4,284
----------- -----------
----------- -----------
Weighted-average fair value per share of options
granted during the period............................ $ 7.49 $ 12.66
----------- -----------
----------- -----------

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

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

The options outstanding as of September 26, 1997 have been segregated into
six ranges for additional disclosure as follows (option amounts are recorded in
thousands):

OPTIONS OUTSTANDING
------------------------------------------- OPTIONS EXERCISABLE
OPTIONS WEIGHTED ----------------------------
OUTSTANDING AVERAGE WEIGHTED OPTIONS WEIGHTED
AS OF REMAINING AVERAGE EXERCISABLE AS AVERAGE
SEPTEMBER 26, CONTRACTUAL EXERCISE OF SEPTEMBER EXERCISE
1997 LIFE IN YEARS PRICE 26, 1997 PRICE
------------- --------------- ----------- --------------- -----------

$1.66 - $9.97................................... 937 8.0 $ 6.32 526 $ 5.14
$9.98 - $13.25.................................. 7,848 9.8 $ 13.25 3 $ 13.25
$13.26 - $18.38................................. 922 9.4 $ 16.78 -- $ --
$18.39 - $19.87................................. 6,088 9.9 $ 19.75 -- $ --
$19.88 - $26.38................................. 2,180 7.9 $ 24.29 871 $ 24.27
$26.39 - $64.75................................. 674 4.5 $ 34.04 596 $ 33.67
------ -----
$1.66 - $64.75.................................. 18,649 9.3 $ 17.24 1,996 $ 22.02
------ -----
------ -----

As of September 26, 1997, approximately 2.5 million options were reserved
for future grant under the Company's stock option plans.

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. In December 1996, the Board of
Directors adopted an amendment to the Purchase

51

Plan to increase the number of shares reserved for issuance by 3.5 million,
which was approved at the Company's Annual Meeting of Shareholders in February
1997. As of September 26, 1997, approximately 3.1 million shares were reserved
for future issuance under the Purchase Plan.

SENIOR OFFICERS RESTRICTED PERFORMANCE SHARE PLAN

In November 1997, the Company's Board of Directors issued approximately
24,000 fully vested shares and cash in settlement of shares to certain officers
of the Company under the Senior Officers Restricted Performance Share Plan (the
"PSP") based upon the achievement of certain performance goals established in
advance by the Compensation Committee of the Board. Immediately after these
shares were issued, the Company's Board of Directors terminated the PSP. No
shares had been previously issued under the PSP. Supplementally and separate
from the PSP, during the year ended September 26, 1997 the Company's Board of
Directors issued approximately 131,000 fully vested shares to the Company's
former Chief Executive Officer based upon the achievement of certain performance
goals established in advance by the Compensation Committee of the Board.

SHAREHOLDER RIGHTS PLAN

In May 1989, the Company adopted a shareholder rights plan and distributed a
dividend of one right to purchase one share of common stock (a "Right") for each
outstanding share of common stock of the Company. The Rights become exercisable
in certain limited circumstances involving a potential business combination
transaction of the Company and are initially exercisable at a price of $200 per
share. Following certain other events after the Rights have become exercisable,
each Right entitles its holder to purchase for $200 an amount of common stock of
the Company, or, in certain circumstances, securities of the acquiror, having a
then-current market value of two times the exercise price of the Right. The
Rights are redeemable and may be amended at the Company's option before they
become exercisable. Until a Right is exercised, the holder of a Right, as such,
has no rights as a shareholder of the Company. The Rights expire on April 19,
1999.

STOCK REPURCHASE PROGRAMS

In November 1992, the Board of Directors authorized the purchase of up to 10
million shares of the Company's common stock in the open market. Approximately
4.9 million shares remain authorized for repurchase. No shares were repurchased
under this authorization in 1997, 1996, or 1995.

EMPLOYEE SAVINGS PLAN

The Company has an employee savings plan (the "Savings Plan") that qualifies
as a deferred salary arrangement under Section 401(k) of the Internal Revenue
Code. Under the Savings Plan, participating U.S. employees may defer a portion
of their pretax earnings, up to the Internal Revenue Service annual contribution
limit ($9,500 for calendar year 1997). Effective October 1, 1995, 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. Prior to October 1,
1995, the Company matched 30% to 70% of each employee's contributions, depending
on length of service, up to a maximum 6% of the employee's earnings. The
Company's matching contributions to the Savings Plan were approximately $19
million, $22 million, and $15 million in 1997, 1996, and 1995, respectively.

COMMITMENTS AND CONTINGENCIES

LEASE COMMITMENTS

The Company leases various facilities and equipment under noncancelable
operating lease arrangements. The major facilities leases are for terms of five
to ten years and generally provide renewal options for terms of up to five
additional years. Rent expense under all operating leases was approximately $106

52

million, $129 million, and $127 million in 1997, 1996, and 1995, respectively.
Future minimum lease payments under noncancelable operating leases having
remaining terms in excess of one year as of September 26, 1997, are as follows:

(IN MILLIONS)
---------------

1998............................................................................ $ 58
1999............................................................................ 49
2000............................................................................ 37
2001............................................................................ 26
2002............................................................................ 17
Later years..................................................................... 20
-----
Total minimum lease payments.................................................... $ 207
-----
-----

PURCHASE COMMITMENTS

In connection with the sale of its Fountain, Colorado, manufacturing
facility to SCI Systems, Inc. ("SCI"), the Company is obligated to purchase
certain percentages of its total annual volumes of CPUs and logic boards from
SCI over each of the next two years. The Company has met these obligations
through September 26, 1997, and believes it will meet them in the future. In
addition, in the ordinary course of business, the Company has entered into
agreements with vendors which obligate it to purchase product components which
may not be common to the rest of the personal computer industry. For discussion
regarding the accruals included in the consolidated balance sheets for the cost
to cancel excess purchase orders, refer to the subheading "Significant
Accounting Estimates", under the heading "Accounting Estimates" in these Notes
to Consolidated Financial Statements.

LITIGATION

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

In January 1996, a purported shareholder class action styled Abraham and
Evelyn Kostick Trust v. Peter Crisp et. al was filed in the California Superior
Court for Santa Clara County naming the Company and its then directors as
defendants. The complaint sought injunctive relief and damages and alleged that
acts of mismanagement resulted in a depressed price for the Company. In February
1996, the complaint was amended to add a former director as a defendant and to
add purported class and derivative claims based on theories such as breach of
fiduciary duty, misrepresentation, and insider trading. In July 1996, the Court
sustained defendants' demurrer and dismissed the amended complaint on a variety
of grounds and granted plaintiffs leave to amend the complaint. In October 1996,
the plaintiffs filed a second amended complaint naming the Company's then
directors and certain former directors as defendants and again alleging
purported class and derivative claims, seeking injunctive relief and damages
(compensatory and punitive) based on theories such as breach of fiduciary duty,
misrepresentation, and insider trading. In July 1997, the Court granted in part
and denied in part the Company's motion to strike most of the substantive
allegations of the second amended complaint. The Court sustained the demurrer to
plaintiffs' class claims but overruled the demurrer to the shareholder
derivative claims. In September 1997, the Company brought a motion to reconsider
portions of the court's order. The Third Amended Complaint was filed in October
1997, and eliminated the class action claims and restated claims against certain
directors and former directors. In November 1997, the Company's Board of
Directors appointed a special investigation committee and engaged independent
counsel to assist in the investigation of the claims made in the Third Amended
Complaint. Also in November 1997, the Company filed a demurrer to the Third
Amended Complaint.

53

DEREK PRITCHARD V. MICHAEL SPINDLER ET AL.

In March 1996, a purported shareholder class action was filed in the
California Superior Court for Santa Clara County naming certain current and
former directors of the Company as defendants. The complaint sought damages and
alleged that the defendants breached their fiduciary duty by allegedly rejecting
an offer from a computer company (not named in the complaint) to acquire the
Company at a price in excess of $50 per share. In August 1996, the Court
sustained defendants' demurrer and dismissed the complaint on a variety of
grounds, and granted plaintiff leave to amend the complaint. In October 1996,
the plaintiff filed his first amended complaint in which he asserted the same
purported cause of action as the original complaint, alleged additional facts
purportedly in support thereof, and added the Company as a defendant. In March
1997, the Court sustained defendants' demurrer without leave to amend.

LS MEN'S CLOTHING DEFINED BENEFIT PENSION FUND V. MICHAEL SPINDLER ET AL.

In May 1996, an action was filed in the California Superior Court for
Alameda County naming as defendants the Company and certain of its current and
former officers and directors. The complaint seeks compensatory and punitive
damages and generally alleges that the defendants misrepresented or omitted
material facts about the Company's operations and financial results, which
plaintiff contends artificially inflated the price of the Company's stock. The
case was transferred to the California Superior Court for Santa Clara County. In
July 1997, the Court sustained the Company's demurrer dismissing the amended
complaint with leave to amend, after which plaintiff served a second amended
complaint. In September 1997, the Company and the two remaining individual
defendants (former directors Markkula and Spindler) brought a motion to dismiss
the second amended complaint. In October 1997, the Court granted the motion to
dismiss in its entirety with leave to amend as to certain defendants and claims.
In November 1997, the plaintiff filed a third amended complaint, adding a former
director as a defendant and alleging further misrepresentations by the
defendants about the Company's operations and financial results.

"REPETITIVE STRESS INJURY" LITIGATION

The Company is named in approximately 60 lawsuits, alleging that plaintiffs
incurred so-called "repetitive stress" injuries to their upper extremities as a
result of using keyboards and/or mouse input devices sold by the Company. These
actions are similar to those filed against other major suppliers of personal
computers. In October 1996, the Company prevailed in the first full trial to go
to verdict against the Company. Since then, approximately ten lawsuits have been
dismissed with prejudice by the plaintiffs, and two others have been dismissed
by court order. The remaining actions are in various stages of pretrial
activity. Ultimate resolution of these cases may depend on industry-wide
progress in resolving similar litigation, as well as on resolution of major
questions of law currently before the state appellate court in New York, where a
majority of the cases were filed.

MONITOR-SIZE LITIGATION

In August 1995, the Company was named, along with 41 other entities,
including computer manufacturers and computer monitor vendors, in a putative
nationwide class action filed in the California Superior Court for Orange
County, styled Keith Long et al. v. AAmazing Technologies Corp. et al. The
complaint alleges that each of the defendants engaged in false or misleading
advertising with respect to the size of computer monitor screens. Also in August
1995, the Company was named as the sole defendant in a purported class action
alleging similar claims filed in the New Jersey Superior Court for Camden
County, entitled Mahendri Shah v. Apple Computer, Inc. Subsequently, in November
1995, the Company, along with 26 other entities, was named in a purported class
action alleging similar claims filed in the New Jersey Superior Court for Essex
County, entitled Maizes & Maizes v. Apple Computer, Inc. et al. Similar putative
class actions have been filed in other California counties in which the Company
was not named as a

54

defendant. The complaints in all of these cases seek restitution in the form of
refunds or product exchange, damages, punitive damages, and attorneys fees. In
December 1995, the California Judicial Council ordered all of the California
actions, including Long, coordinated for purposes of pretrial proceedings and
trial before a single judge, the Honorable William Cahill, sitting in the County
of San Francisco. All of the California actions were subsequently coordinated
under the name In re Computer Monitor Litigation and a master consolidated
complaint filed superseding all of the individual complaints in those actions.
In July 1996, Judge Cahill ordered all of the California cases dismissed without
leave to amend as to plaintiffs residing in California on the ground that a
stipulated judgment entered in September 1995 in a prior action brought by the
California Attorney General alleging the same cause of action was res judicata
as to the plaintiffs in the consolidated California class action suits. This
order may be subject to appellate review at a later stage of the proceedings.
Both the New Jersey cases and the consolidated California cases are at a
preliminary stage, with no discovery having taken place. In March 1997, the
Court in the case styled In re Computer Monitor Litigation preliminarily
approved a proposed settlement to which the Company and all but three of the
other defendants in the action would be parties and provisionally certified a
nationwide settlement class with respect thereto. A hearing regarding final
approval of the proposed settlement was held on June 30, 1997 and the Court's
decision is pending. If approved, the Company does not anticipate its
obligations pursuant to the proposed settlement will have a material adverse
effect on its consolidated results of operations or financial condition as
reported in the accompanying financial statements.

EXPONENTIAL TECHNOLOGY V. APPLE

Plaintiff alleges in a lawsuit styled Exponential Technology, Inc. v. Apple
Computer, Inc. that the Company, which was an investor in Exponential, breached
its fiduciary duty to Exponential Technology by misusing confidential
information about its financial situation to cause Exponential to fail, and that
the Company fraudulently misrepresented the facts about allowing Exponential to
sell its processors to the Company's Mac OS licensees. The lawsuit is filed in
California State Court in Santa Clara County. In November 1997, the Company
filed a demurrer to portions of the complaint.

OTHER

On August 21, 1997, the Federal Trade Commission issued a consent decree
against the Company, regarding the Company's past processor upgrade practices,
specifically certain advertisements which the Commission deemed to have
misrepresented the Company's marketing of certain microprocessor upgrade
products. Pursuant to the order, the Company is ordered to cease and desist from
any such allegedly misleading advertising, to give notice to consumers, and to
implement certain programs enabling consumers who are within the order's scope
to obtain upgrade kits or rebates, in connection with any purchases within the
scope of the order. The Company has complied with all provisions of the order
currently effective, and has filed its 60-day compliance with the Commission on
October 17, 1997.

The Company has various other claims, lawsuits, disputes with third parties,
investigations and pending actions involving allegations of false or misleading
advertising, product defects, discrimination, infringement of intellectual
property rights, and breach of contract and other matters against the Company
and its subsidiaries incident to the operation of its business. The liability,
if any, associated with these matters is not determinable.

The Company believes the resolution of the matters cited above will not have
a material adverse effect on its financial condition as reported in the
accompanying financial statements. However, depending on the amount and timing
of any unfavorable resolution of these lawsuits, it is possible that the
Company's future results of operations or cash flows could be materially
affected in a particular period.

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

55

INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION

Geographic financial information is as follows:

1997 1996 1995
--------- --------- ---------
(IN MILLIONS)

Net sales to unaffiliated customers:
United States......................................................... $ 3,507 $ 4,735 $ 5,791
EMEA.................................................................. 1,667 2,222 2,365
Japan................................................................. 1,070 1,792 1,822
Asia Pacific.......................................................... 490 563 519
Other................................................................. 347 521 565
--------- --------- ---------
Total net sales..................................................... $ 7,081 $ 9,833 $ 11,062
--------- --------- ---------
--------- --------- ---------

Transfers between geographic areas (eliminated in consolidation):
United States......................................................... $ 206 $ 517 $ 511
EMEA.................................................................. 207 121 178
Japan................................................................. 5 -- --
Asia Pacific.......................................................... 1,270 3,035 3,619
Other................................................................. -- -- --
--------- --------- ---------
Total transfers..................................................... $ 1,688 $ 3,673 $ 4,308
--------- --------- ---------
--------- --------- ---------
Operating income (loss):
United States......................................................... $ (913) $ (1,198) $ (74)
EMEA.................................................................. (129) (186) 245
Japan................................................................. (86) (4) 47
Asia Pacific.......................................................... 104 3 388
Other................................................................. (29) -- 48
Eliminations.......................................................... (17) 2 30
Corporate income (expense), net......................................... 25 88 (10)
--------- --------- ---------
Income (loss) before provision (benefit) for income taxes........... $ (1,045) $ (1,295) $ 674
--------- --------- ---------
--------- --------- ---------

Identifiable assets:
United States......................................................... $ 1,543 $ 1,935 $ 2,955
EMEA.................................................................. 557 648 927
Japan................................................................. 383 559 686
Asia Pacific.......................................................... 286 312 581
Other................................................................. 119 171 157
Eliminations.......................................................... (135) (26) (34)
Corporate assets...................................................... 1,480 1,765 959
--------- --------- ---------
Total assets........................................................ $ 4,233 $ 5,364 $ 6,231
--------- --------- ---------
--------- --------- ---------

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

Transfers between geographic areas are recorded at amounts generally above
cost and in accordance with the rules and regulations of the respective
governing tax authorities. Operating income (loss) by geographic area consists
of total net sales less operating expenses, and does not include an allocation
of

56

general corporate expenses. The restructuring charges recorded in 1997 and 1996,
and the adjustments recorded in 1995 to the restructuring charges recorded in
1993, are included in the calculation of operating income (loss) for each
geographic area. Identifiable assets of geographic areas are those assets used
in the Company's operations in each area. Corporate assets include cash and cash
equivalents, short-term investments and equity securities.

A large portion of the Company's revenue is derived from its international
operations, and a majority of the products sold internationally are manufactured
in the Company's facilities in Cork, Ireland and Singapore. As a result, the
Company is subject to risks associated with foreign operations, such as
obtaining governmental permits and approvals, currency exchange fluctuations,
currency restrictions, political instability, labor problems, trade
restrictions, and changes in tariff and freight charges.

57

SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

FOURTH QUARTER THIRD QUARTER SECOND QUARTER FIRST QUARTER
--------------- --------------- --------------- ---------------
(TABULAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

1997
Net sales................................... $ 1,614 $ 1,737 $ 1,601 $ 2,129
Gross margin................................ $ 320 $ 348 $ 303 $ 397
Net loss.................................... $ (161) $ (56) $ (708) $ (120)
Loss per common share....................... $ (1.26) $ (0.44) $ (5.64) $ (0.96)
Price range per common share................ $ 29.75-$12.75 $ 19.88-$14.63 $ 23.25-$15.12 $ 27.75-$21.38

1996
Net sales................................... $ 2,321 $ 2,179 $ 2,185 $ 3,148
Gross margin................................ $ 511 $ 403 $ (421) $ 475
Net income (loss)........................... $ 25 $ (32) $ (740) $ (69)
Earnings (loss) per common and common
equivalent share.......................... $ 0.20 $ (0.26) $ (5.99) $ (0.56)
Cash dividends declared per common share.... $ -- $ -- $ -- $ 0.12
Price range per common share................ $ 25.00-$16.00 $ 28.88-$19.63 $ 35.50-$23.00 $ 42.50-$31.44

As of September 26, 1997, there were 31,724 shareholders of record.

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

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

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

Net income for the fourth quarter of 1996 includes an adjustment to the 1996
restructuring charge that increased income by $28 million. Net loss for the
second quarter of 1996 includes a $616 million charge for the write-down of
certain inventory and related actions, as well as a $207 million restructuring
charge.

58

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

CHARGED TO
ALLOWANCE FOR BEGINNING COSTS AND ENDING
DOUBTFUL ACCOUNTS: BALANCE EXPENSES DEDUCTIONS(1) BALANCE
- ----------------------------------------------------------------- ------------- --------------- ----------------- -----------

Year Ended September 26, 1997.................................... $ 91 $ 35 $ 27 $ 99
Year Ended September 27, 1996.................................... $ 87 $ 28 $ 24 $ 91
Year Ended September 29, 1995.................................... $ 91 $ 17 $ 21 $ 87

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

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

59

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

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information regarding directors of the Registrant will be set forth in a
Proxy Statement under Regulation 14A to be filed by the Company within 120 days
of the end of the fiscal year covered by this report (the "Proxy Statement")
under the heading "Information About Apple Computer, Inc.--Directors" and under
the heading "Election of Directors", which information is hereby incorporated by
reference. Information regarding executive officers of the Registrant will be
set forth in the Proxy Statement under the caption "Executive Officers," which
information is hereby incorporated by reference.

ITEM 11. EXECUTIVE COMPENSATION

Information regarding executive compensation will be set forth in the Proxy
Statement under the heading "Report of the Compensation Committee of the Board
of Directors on Executive Compensation," and "Information Regarding Executive
Compensation", and is hereby incorporated by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information regarding security ownership of certain beneficial owners and
management will be set forth in the Proxy Statement under the heading
"Information About Apple Computer, Inc.--Security Ownership of Certain
Beneficial Owners and Management", and is hereby incorporated by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information regarding certain relationships and related transactions will be
set forth in the Proxy Statement under the heading "Report of the Compensation
Committee of the Board of Directors on Executive Compensation--Compensation
Committee Interlocks and Insider Participation", and is hereby incorporated by
reference.

60

PART IV

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

(a) ITEMS FILED AS PART OF REPORT:

1. FINANCIAL STATEMENTS

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

2. FINANCIAL STATEMENT SCHEDULE

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

3. EXHIBITS

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

(b) REPORTS ON FORM 8-K

A Current Report on Form 8-K dated July 28, 1997 was filed by the Registrant
with the Securities and Exchange Commission to report under Item 5 thereof the
press releases issued to the public on July 9, 1997 regarding the resignation of
Chairman and Chief Executive Officer Dr. Gilbert F. Amelio.

A Current Report on Form 8-K dated September 5, 1997 was filed by the
Registrant with the Securities and Exchange Commission to report under Item 5
thereof the press releases issued to the public on September 2, 1997 regarding
the agreement to acquire certain assets of Power Computing Corporation.

A Current Report on Form 8-K dated September 25, 1997 was filed by the
Registrant with the Securities and Exchange Commission to report under Item 5
thereof the press releases issued to the public on September 16, 1997 regarding
the Registrant's naming of Steve Jobs as Interim Chief Executive Officer.

(c) EXHIBITS

EXHIBIT
NUMBER NOTES* DESCRIPTION
- ------------------ ------------------ ------------------------------------------------------------------------

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

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

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

3.3 By-Laws of the Company, as amended through December 1, 1997.

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

*Notes appear on pages 65-66.

61

EXHIBIT
NUMBER NOTES* DESCRIPTION
- ------------------ ------------------ ------------------------------------------------------------------------

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

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

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

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

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

4.3.1 96-S3/A Specimen Certificate of Common Stock of Apple Computer,
Inc.

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

4.10 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 97/2Q** 1990 Stock Option Plan, as amended through December 4,
1996.

10.A.6 97/2Q** Apple Computer, Inc. Employee Stock Purchase Plan, as
amended through December 4, 1996.

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

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

*Notes appear on pages 65-66.

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

62

EXHIBIT
NUMBER NOTES* DESCRIPTION
- --------------- --------------- ----------------------------------------------------------

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

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

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

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

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

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

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

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

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.

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

*Notes appear on pages 65-66.

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

63

EXHIBIT
NUMBER NOTES* DESCRIPTION
- ------------------ ------------------ ------------------------------------------------------------------------

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

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

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

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

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

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 Preferred Stock Purchase Agreement, dated as of August 5, 1997, between
Apple Computer, Inc. and Microsoft Corporation.

11 Computation of earnings (loss) per common share.

21 Subsidiaries of the Company.

23.1 Consent of KPMG Peat Marwick LLP, Independent Auditors.

23.2 Consent of Ernst & Young LLP, Independent Auditors.

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

*Notes appear on pages 65-66.

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

64

EXHIBIT
NUMBER NOTES* DESCRIPTION
- ------------------ ------------------ ------------------------------------------------------------------------

24 Power of Attorney (included on page 66).

27 Financial Data Schedule.

NOTES
- ---------------

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.

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

*Notes appear on pages 65-66.

65

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

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,
- -4.2.1, -4.3.1, and 4.8, respectively, in the Company's Registration
- -4.8 Statement on Form S-3/A (file no. 333-10961) filed
October 30, 1996.
96K Incorporated by reference to the exhibit of that number in
the Company's Annual Report on Form 10-K for the fiscal
year ended September 27, 1996 (the "1996 Form 10-K").
97/1Q Incorporated by reference to the exhibit of that number in
the Company's Quarterly Report on Form 10-Q for the
quarter ended December 27, 1996.
97/2Q Incorporated by reference to the exhibit of that number in
the Company's Quarterly Report on Form 10-Q for the
quarter ended March 28, 1997.
97/3Q Incorporated by reference to the exhibit of that number in
the Company's Quarterly Report on Form 10-Q for the
quarter ended June 27, 1997.

(d) FINANCIAL STATEMENT SCHEDULE

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

66

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 4th day of
December 1997.

APPLE COMPUTER, INC.

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

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:

NAME TITLE DATE
- -------------------------- ------------------------------ -------------------

Interim Chief Executive
/s/ STEVEN P. JOBS Officer and Director
- -------------------------- (Principal Executive December 4, 1997
STEVEN P. JOBS Officer)

Executive Vice President and
/s/ FRED D. ANDERSON Chief Financial Officer
- -------------------------- (Principal Financial December 4, 1997
FRED D. ANDERSON Officer)

/s/ WILLIAM V. CAMPBELL
- -------------------------- Director December 4, 1997
WILLIAM V. CAMPBELL

/s/ GARETH C.C. CHANG
- -------------------------- Director December 4, 1997
GARETH C.C. CHANG

/s/ LAWRENCE J. ELLISON
- -------------------------- Director December 4, 1997
LAWRENCE J. ELLISON

/s/ EDGAR S. WOOLARD,
JR.
- -------------------------- Director December 4, 1997
EDGAR S. WOOLARD, JR.

/s/ JEROME B. YORK
- -------------------------- Director December 4, 1997
JEROME B. YORK

67