Apple
APPLE COMPUTER INC (Form: 10-Q, Received: 05/11/2000 17:17:16)

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


FORM 10-Q


(MARK ONE)

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

For the quarterly period ended April 1, 2000 OR

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

For the transition period from _______ to ________.

Commission file number 0-10030


APPLE COMPUTER, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


           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)


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

162,743,706 shares of Common Stock Issued and Outstanding as of May 5, 2000


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

APPLE COMPUTER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in millions, except share and per share amounts)

                                                                     Three Months Ended                Six Months Ended
                                                                     ------------------                ----------------
                                                               April 1, 2000   March 27, 1999    April 1, 2000   March 27, 1999
                                                               -------------  ---------------    -------------  ---------------
Net sales                                                           $  1,945         $  1,530         $  4,288         $  3,240
Cost of sales                                                          1,396            1,127            3,132            2,355
                                                                    --------         --------         --------         --------
   Gross margin                                                          549              403            1,156              885
                                                                    --------         --------         --------         --------
Operating expenses:
   Research and development                                               92               76              182              152
   Selling, general, and administrative                                  287              239              606              518
   Special charges:
       Restructuring costs                                                 0                9                8                9
       Executive bonus                                                     0                0               90                0
                                                                    --------         --------         --------         --------
             Total operating expenses                                    379              324              886              679
                                                                    --------         --------         --------         --------
Operating income                                                         170               79              270              206

Gains from sales of investment                                           100               55              234               87
Interest and other income (expense), net                                  49               19               89               29
                                                                    --------         --------         --------         --------
     Total interest and other income (expense), net                      149               74              323              116
                                                                    --------         --------         --------         --------
Income before provision for income taxes                                 319              153              593              322
Provision for income taxes                                                86               18              177               35
                                                                    --------         --------         --------         --------
Net income                                                          $    233         $    135         $    416         $    287
                                                                    ========         ========         ========         ========

Earnings per common share:

      Basic                                                        $   1.44          $   0.99         $   2.57         $   2.11

      Diluted                                                      $   1.28          $   0.84         $   2.32         $   1.79

Shares used in computing earnings per share (in thousands):

      Basic                                                         162,172           136,371          161,597          135,820

      Diluted                                                       181,993           173,204          179,626          172,619

See accompanying notes to condensed consolidated financial statements.

2

APPLE COMPUTER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in millions, except share amounts)

ASSETS

                                                                               April 1, 2000   September 25, 1999
                                                                               -------------   ------------------
Current assets:
   Cash and cash equivalents                                                          $1,662         $1,326
   Short-term investments                                                              1,947          1,900
   Accounts receivable, less allowances of $64 and $68, respectively                     940            681
   Inventories                                                                            10             20
   Deferred tax assets                                                                   131            143
   Other current assets                                                                  222            215
                                                                                      ------         ------
        Total current assets                                                           4,912          4,285
Property, plant and equipment, net                                                       314            318
Non-current debt and equity investments                                                1,544            339
Other assets                                                                             237            219
                                                                                      ------         ------
        Total assets                                                                  $7,007         $5,161
                                                                                      ======         ======


                              LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
   Accounts payable                                                                   $1,111         $  812
   Accrued expenses                                                                      742            737
                                                                                      ------         ------
        Total current liabilities                                                      1,853          1,549
Long-term debt                                                                           300            300
Deferred tax liabilities                                                                 639            208
                                                                                      ------         ------
        Total liabilities                                                              2,792          2,057
                                                                                      ------         ------
Commitments and contingencies

Shareholders' equity:

   Series A non-voting convertible preferred stock, no par value; 150,000
   shares authorized, issued and outstanding                                             150            150
   Common stock, no par value; 320,000,000 shares authorized; 162,679,893
   and 160,799,061 shares issued and outstanding, respectively                         1,419          1,349
   Retained earnings                                                                   1,915          1,499
   Accumulated other comprehensive income                                                731            106
                                                                                      ------         ------
        Total shareholders' equity                                                     4,215          3,104
                                                                                      ------         ------
        Total liabilities and shareholders' equity                                    $7,007         $5,161
                                                                                      ======         ======

See accompanying notes to condensed consolidated financial statements.

3

APPLE COMPUTER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in millions)

                                                                                           Six Months Ended
                                                                                           ----------------
                                                                                    April 1, 2000        March 27, 1999
                                                                                    -------------        --------------
Cash and cash equivalents, beginning of the period                                         $ 1,326          $ 1,481
                                                                                           -------          -------
Operating:
Net income                                                                                     416              287
Adjustments to reconcile net income to cash generated by operating activities:
   Depreciation and amortization                                                                41               47
   Provision for deferred income taxes                                                         105                6
    Gains on sales of ARM shares                                                              (234)             (87)
    Loss on sale of property, plant, and equipment                                               1             --
Changes in operating assets and liabilities:
   Accounts receivable                                                                        (259)             151
   Inventories                                                                                  10               60
   Other current assets                                                                         (7)             (11)
   Other assets                                                                                 (7)              11
   Accounts payable                                                                            299               72
   Other current liabilities                                                                    69              (44)
                                                                                           -------          -------
      Cash generated by operating activities                                                   434              492
                                                                                           -------          -------
Investing:
Purchase of short-term investments                                                          (1,843)          (2,254)
Proceeds from maturities of short-term investments                                           1,796            1,509
Proceeds from sale of ARM shares                                                               237               96
Purchase of long-term investments                                                             (216)            --
Net proceeds from property, plant, and equipment retirements                                    10               20
Purchase of property, plant, and equipment                                                     (65)             (24)
Other                                                                                          (23)               2
                                                                                           -------          -------
      Cash used for investing activities                                                      (104)            (651)
                                                                                           -------          -------
Financing:
Proceeds from issuance of common stock                                                          47               36
Cash used for repurchase of common stock                                                       (41)            --
                                                                                           -------          -------
      Cash generated by financing activities                                                     6               36
                                                                                           -------          -------
Total cash generated (used)                                                                    336             (123)
                                                                                           -------          -------
Cash and cash equivalents, end of the period                                               $ 1,662          $ 1,358
                                                                                           =======          =======
Supplemental cash flow disclosures:
   Cash paid for interest                                                                  $    10          $    30
   Cash paid (received) for income taxes, net                                              $    37          $    (1)

See accompanying notes to condensed consolidated financial statements.

4

APPLE COMPUTER, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE 1 - BASIS OF PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS

Interim information is unaudited; however, in the opinion of the Company's management, all adjustments of a normal recurring nature necessary for a fair statement of interim periods presented have been included. The results for interim periods are not necessarily indicative of results to be expected for the entire year. These condensed consolidated financial statements and accompanying notes should be read in conjunction with the Company's annual consolidated financial statements and the notes thereto for the year ended September 25, 1999, included in its Annual Report on Form 10-K for the year ended September 25, 1999 (the 1999 Form 10-K). All information is based on the Company's fiscal calendar.

NOTE 2 - EARNINGS PER SHARE

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

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

                                                       FOR THE THREE MONTHS ENDED       FOR THE SIX MONTHS ENDED
                                                     ----------------------------     ---------------------------
                                                        4/1/00           3/27/99          4/1/00          3/27/99
Numerator (in millions):
Numerator for basic earnings per share -
  Net income                                           $    233         $    135         $    416         $    287
  Interest expense on convertible debt                     --                 11             --                 22
                                                       --------         --------         --------         --------
  Numerator for diluted earnings per share
    - Adjusted net income                              $    233         $    146         $    416         $    309
                                                       ========         ========         ========         ========
Denominator:
  Denominator for basic earnings per share
    -- weighted average-shares outstanding              162,172          136,371          161,597          135,820

  Effect of dilutive securities:
    Convertible preferred stock                           9,091            9,091            9,091            9,091
    Convertible debt                                       --             22,642             --             22,642
    Dilutive options                                     10,730            5,100            8,938            5,066
                                                       --------         --------         --------         --------
  Dilutive potential common shares                       19,821           36,833           18,029           36,799
                                                       --------         --------         --------         --------
Denominator for diluted earnings per share
-- adjusted weighted-average shares and
assumed conversions                                     181,993          173,204          179,626          172,619
                                                       ========         ========         ========         ========
Basic earnings per share                               $   1.44         $   0.99         $   2.57         $   2.11
                                                       ========         ========         ========         ========

Diluted earnings per share                             $   1.28         $   0.84         $   2.32         $   1.79
                                                       ========         ========         ========         ========

5

Options to purchase approximately 209,750 and 253,000 shares of common stock were outstanding as of April 1, 2000, and March 27, 1999, respectively, that were not included in the computation of diluted earnings per share for these quarters because the options' exercise price was greater than the average market price of the Company's common stock during those periods and, therefore, the effect would be antidilutive.

During the first two quarters of 1999, the Company had outstanding $661 million of unsecured convertible subordinated debentures (the Debentures) which were convertible by their holders into approximately 22.6 million shares of common stock at a conversion price of $29.205 per share. The weighted average common shares represented by the Debentures upon conversion were included in the computation of diluted earnings per share for the three and six month periods ended March 27, 1999, using the if-converted method. On April 14, 1999, the Company called for redemption the Debentures. As a result, debenture holders converted virtually all of the outstanding debentures to 22.6 million shares of the Company's common stock in 1999. For additional disclosures regarding the Debentures, see the 1999 Form 10-K.

NOTE 3 - CONSOLIDATED FINANCIAL STATEMENT DETAILS (IN MILLIONS)

INVENTORIES

                                                   4/1/00      9/25/99
                                                   ------      -------
Purchased parts                                    $   2          $   4
Work in process                                     --                3
Finished goods                                         8             13
                                                   -----          -----
Total inventories                                  $  10          $  20
                                                   =====          =====

PROPERTY, PLANT, AND EQUIPMENT

                                                   4/1/00      9/25/99
                                                   ------      -------
Land and buildings                                 $ 321          $ 323
Machinery and equipment                              208            220
Office furniture and equipment                        61             61
Leasehold improvements                               133            125
Accumulated depreciation and amortization           (409)          (411)
                                                   -----          -----
Net property, plant, and equipment                 $ 314          $ 318
                                                   =====          =====

ACCRUED EXPENSES

                                                   4/1/00      9/25/99
                                                   ------      -------
Accrued compensation and employee benefits         $ 178          $  84
Accrued marketing and distribution                   146            170
Accrued warranty and related costs                   106            105
Other current liabilities                            312            378
                                                   -----          -----
Total accrued expenses                             $ 742          $ 737
                                                   =====          =====

6

INTEREST AND OTHER INCOME (EXPENSE)

                                                     SIX MONTHS ENDED
                                                     ----------------
                                                   4/1/00      3/27/99
                                                   ------      -------
Interest income                                    $  96          $  65
Interest expense                                     (10)           (31)
Other income (expense), net                            3             (5)
                                                   -----          -----
Interest and other income (expense), net           $  89          $  29
                                                   =====          =====

NOTE 4 - NON-CURRENT DEBT AND EQUITY INVESTMENTS

The Company holds significant investments in ARM Holdings plc (ARM), Samsung Electronics Co., Ltd (Samsung), Akamai Technologies, Inc. (Akamai) and EarthLink Network, Inc. (EarthLink). These investments are reflected in the consolidated balance sheets as non-current debt and equity investments and have been categorized as available-for-sale requiring that they be carried at fair value with unrealized gains and losses, net of taxes, reported in equity as a component of accumulated other comprehensive income. The combined fair value of these investments was $1.544 billion and $339 million as of April 1, 2000, and September 25, 1999, respectively. The combined fair value of these investments has declined to approximately $1.215 billion as of May 5, 2000. The Company believes it is likely there will continue to be significant fluctuations in the fair value of these investments in the future.

ARM is a publicly held company in the United Kingdom involved in the design and licensing of high performance microprocessors and related technology. As of September 25, 1999, the Company held approximately 16 million shares of ARM stock with a fair value of $226 million. During the first quarter of 2000, the Company sold approximately 5.2 million shares of ARM stock for net proceeds of approximately $136 million and a gain before taxes of $134 million. During the second quarter of 2000, the Company sold approximately 1.5 million shares of ARM stock for net proceeds of $101 million and a gain before taxes of $100 million. During the first quarter of 1999, the Company sold approximately 11.6 million shares of ARM stock for net proceeds of approximately $37 million and a gain before taxes of $32 million. During the second quarter of 1999, the Company sold 8 million shares of ARM stock for net proceeds of approximately $59 million and a gain before taxes of approximately $55 million. As of April 1, 2000, the Company holds 9.4 million shares of ARM stock with a fair value of $566 million. Share data for ARM presented in this Form 10-Q has not been adjusted to reflect ARM's five-for-one split in April of 2000.

In January 2000, the Company invested $200 million in EarthLink, an Internet service provider (ISP). The investment is in EarthLink's Series C Convertible Preferred Stock, which is convertible by the Company after January 4, 2001, into approximately 7.1 million shares of EarthLink common stock. Apple also received a seat on EarthLink's Board of Directors. Concurrent with this investment, Earthlink and the Company entered into a multi-year agreement to deliver ISP service to Macintosh users in the United States. Under the terms of the agreement, the Company will profit from each new Mac customer that subscribes to EarthLink's ISP service, and EarthLink will become the default ISP in Apple's Internet Setup Software included with all Macintosh computers sold in the United States. The fair value of the Company's investment in EarthLink is approximately $138 million as of April 1, 2000.

During the fourth quarter of 1999, the Company invested $100 million in Samsung to assist in the further expansion of Samsung's TFT-LCD flat-panel display production capacity. The investment, in the form of three year unsecured bonds, is convertible into approximately 550,000 shares of Samsung common stock beginning in June 2000. The bonds carry an annual coupon rate of 2% and pay a total yield to maturity of 5% if redeemed at their maturity. The fair value of the Company's investment in Samsung is approximately $179 million as of Apri1 1, 2000.

7

In June 1999, the Company invested $12.5 million in Akamai, a global Internet content delivery service. The investment was in the form of convertible preferred stock that converted into 4.1 million shares of Akamai common stock (adjusted for subsequent stock splits) at the time of Akamai's initial public offering in October 1999. The Company is restricted from selling more than 25% of its shares within one year after the date of the closing of the public offering of Akamai's stock. Beginning in the first quarter of 2000, the Company categorized its shares in Akamai as available-for-sale. As of April 1, 2000, the Company's investment in Akamai has a fair value of $661 million.

NOTE 5 - SHAREHOLDERS' EQUITY

During the second quarter of 2000, the Company's Board of Directors granted the Company's Chief Executive Officer options under the Company's 1998 Executive Officer Stock Plan to purchase 10 million shares of common stock at an exercise price of $87.1875 per share, the then fair value of the underlying common stock. A summary of the Company's stock option activity and related information for the six-month period ended April 1, 2000, follows (option amounts are presented in thousands):

                                      NUMBER OF      WEIGHTED-AVERAGE
                                       OPTIONS        EXERCISE PRICE
                                      ---------      ----------------
Options outstanding at 9/25/99          18,404          $   26.39
   Granted                              19,536          $   90.72
   Exercised                            (2,123)         $   17.96
   Forfeited                            (1,227)         $   46.40
                                        ------
Options outstanding at 4/1/00           34,590          $   62.53
                                        ======

Options exercisable at 4/1/00            7,362          $   65.46

In July 1999, the Company's Board of Directors authorized a plan for the Company to repurchase up to $500 million of its common stock. This repurchase plan does not obligate the Company to acquire any specific number of shares or acquire shares over any specified period of time. During the second quarter of 2000, no shares of common stock were repurchased. Since inception of the stock repurchase plan, the Company has repurchased a total of 1.75 million shares of its common stock at a total cost of $116 million.

NOTE 6 - COMPREHENSIVE INCOME

Comprehensive income is comprised of two components, net income and other comprehensive income. Other comprehensive income refers to revenue, expenses, gains and losses that under generally accepted accounting principles are recorded as an element of shareholders' equity but are excluded from net income. The Company's other comprehensive income is comprised of foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency and from unrealized gains and losses, net of taxes, on marketable securities categorized as available-for-sale. See Note 4 regarding unrealized gains on available-for-sale securities. The components of comprehensive income, net of tax, are as follows (in millions):

8

                                                      FOR THE THREE MONTHS       FOR THE SIX MONTHS
                                                              ENDED                     ENDED
                                                       4/1/00       3/27/99       4/1/00     3/27/99
                                                  --------------------------  ------------------------
Net income                                            $   233      $   135      $   416      $   287
Other comprehensive income (loss):
    Change in accumulated translation
         adjustment                                        (5)         (10)          (6)           2
    Unrealized gains (losses) on
         investments, net of taxes                       (428)         142          805          255
    Reclassification adjustment for gains
         included in net income                           (73)         (50)        (174)         (50)
                                                      -------      -------      -------      -------
 Total comprehensive income (loss)                    $  (273)     $   217      $ 1,041      $   494
                                                      =======      =======      =======      =======

NOTE 7 - SPECIAL CHARGES

RESTRUCTURING ACTIONS

During the first quarter of 2000, the Company initiated restructuring actions resulting in recognition of an $8 million restructuring charge. This charge was comprised of $3 million for the write-off of various operating assets and $5 million for severance payments to approximately 95 employees associated with consolidation of various domestic and international sales and marketing functions. Of the $5 million accrued for severance, $1.7 million had been spent by April 1, 2000, and the remainder is expected to be spent over the following two quarters. Of the $3 million accrued for the write-off of various assets, substantially all was utilized by April 1, 2000.

During the fourth quarter of 1999, the Company initiated restructuring actions resulting in a charge to operations of $21 million comprised of $11 million for contract cancellation charges associated with the closure of the Company's outsourced data center, $9.2 million of which had been spent by the end of the second quarter of 2000, and $10 million for contract cancellation charges related to supply and development agreements previously discontinued, all of which had been spent by the end of the first quarter of fiscal 2000.

EXECUTIVE BONUS

In December 1999, the Company's Board of Directors approved a special executive bonus for past services for the Company's Chief Executive Officer in the form of an aircraft with a total cost to the company of approximately $90 million, the majority of which is not tax deductible. Approximately half of the total charge is the cost of the aircraft. The other half represents all other costs and taxes associated with the purchase.

NOTE 8 - SEGMENT INFORMATION AND GEOGRAPHIC DATA

The Company manages its business primarily on a geographic basis. The Company's reportable segments are comprised of the Americas, Europe, and Japan. The Americas segment includes both North and South America. The European segment includes European countries as well as the Middle East and Africa. Other operating segments include Asia-Pacific, which includes Australia and Asia except for Japan, and the Company's subsidiary, Filemaker, Inc. Each reportable operating segment provides similar products and services, and the accounting policies of the various segments are the same as those described in the 1999 Form 10-K.

9

The Company evaluates the performance of its operating segments based on net sales and operating income. Operating income for each segment includes revenue, cost of sales, and operating expenses directly attributable to the segment. Net sales are based on the location of the customers. Operating income for each segment excludes other income and expense and certain expenses that are managed outside the reportable segment. Costs excluded from segment operating income include various corporate expenses, income taxes, and nonrecurring charges for purchased in-process research and development, restructuring, and acquisition related costs. Corporate expenses include research and development, manufacturing expenses not included in segment cost of sales, corporate marketing expenses, and other separately managed general and administrative expenses. The Company does not include intercompany transfers between segments for management reporting purposes. Summary information by segment follows (in millions):

                        THREE MONTHS ENDED    SIX MONTHS ENDED
                        4/1/00    3/27/99    4/1/00    3/27/99
                    -----------------------------------------------
Americas:
   Net sales              989       787     2,178     1,747
   Operating income       137       101       303       222

Europe:
   Net sales              469       368     1,095       820
   Operating income        63        52       177       115

Japan:
   Net sales              349       262       761       454
   Operating income        97        70       211        97

Other segments:
   Net sales              138       113       254       219
   Operating income        39        18        64        38

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

                                                    THREE MONTHS ENDED    SIX MONTHS ENDED
                                                     4/1/00  3/27/99     4/1/00    3/27/99
                                                  ----------------------------------------
Segment operating income                               336      241        755      472
Corporate expenses, net                                166      153        387      257
Restructuring costs                                    --         9          8        9
Executive bonus                                        --       --          90       --
                                                      ----     ----       ----     ----
   Total operating income                             $170     $ 79       $270     $206
                                                      ====     ====       ====     ====

10

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

                                           THREE MONTHS ENDED     SIX MONTHS ENDED
                                            4/1/00    3/27/99    4/1/00     3/27/99
                                     ----------------------------------------------------
Power Macintosh                            $  686     $  730     $1,380     $1,321
PowerBook                                     252        146        464        403
iMac                                          540        358      1,335        932
iBook                                         174       --          525       --
Software, service, and other net sales        293        296        584        584
                                           ------     ------     ------     ------
   Total net sales                         $1,945     $1,530     $4,288     $3,240
                                           ======     ======     ======     ======

NOTE 9 - RECENT ACCOUNTING PRONOUNCEMENTS

In March 1998, the AICPA issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," which provides guidance on accounting for the costs of computer software intended for internal use. The adoption of SOP 98-1 did not have a material impact on the Company's consolidated results of operations or financial position during the quarter and six-months ended April 1, 2000.

In June 1998, Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, hedging activities, and exposure definition. SFAS No. 133 requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in fair value will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. In June 1999, SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities- Deferral of the Effective Date of FASB Statement No. 133" was issued. The statement defers the effective date of SFAS No. 133 until the first quarter of fiscal 2001. Although the Company continues to review the effect of the implementation of SFAS No. 133, the Company does not currently believe its adoption will have a material impact on its financial position or overall trends in results of operations and does not believe adoption will result in significant changes to its financial risk management practices. However, the impact of adoption of SFAS No. 133 on the Company's results of operations is dependent upon the fair values of the Company's derivatives and related financial instruments at the date of adoption and may result in more pronounced quarterly fluctuations in other income and expense.

In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." The objective of this SAB is to provide further guidance on revenue recognition issues in the absence of authoritative literature addressing a specific arrangement or a specific industry. The Company is required to follow the guidance in the SAB no later than the first quarter of its fiscal year 2001. Adoption of this guidance is not expected to have a material impact on the Company's financial position or results of operations. The SEC has recently indicated it intends to issue further guidance with respect to adoption of specific issues addressed by SAB No. 101. Until such time as this additional guidance is issued, the Company is unable to assess the impact, if any, it may have on its financial position or results of operations.

11

NOTE 10 - CONTINGENCIES

The Company is subject to various legal proceedings and claims that are discussed in detail in the 1999 Form 10-K. The Company is also subject to certain other legal proceedings and claims which have arisen in the ordinary course of business and which have not been fully adjudicated. The results of legal proceedings cannot be predicted with certainty; however, in the opinion of management, the Company does not have a potential liability related to any legal proceedings and claims that would have a material adverse effect on its financial condition or results of operations.

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

NOTE 11 - RECLASSIFICATIONS

Certain amounts in the Condensed Consolidated Balance Sheet as of September 25, 1999, have been reclassified to conform to the 2000 presentation.

NOTE 12 - SUBSEQUENT EVENTS

On April 19, 2000, the Company's Board of Directors authorized a two-for-one stock split, to be effected in the form of a stock dividend, subject to shareholder approval of an amendment to the Company's Restated Articles of Incorporation to increase the number of shares of Common Stock to 900,000,000. Such approval was received at the Company's Annual Meeting of Shareholders held on April 20, 2000. Shareholders of record on May 19, 2000 will be entitled to one additional share of common stock for each share of the Company's common stock held on that date. Share and per share data presented in this Form 10-Q have not been adjusted to give effect to this stock split.

12

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THIS SECTION AND OTHER PARTS OF THIS FORM 10-Q CONTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE SUBSECTION ENTITLED "FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION" BELOW. THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE 1999 FORM 10-K AND THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS FORM 10-Q. ALL INFORMATION IS BASED ON THE COMPANY'S FISCAL CALENDAR.

RESULTS OF OPERATIONS

Tabular information (dollars in millions, except per share amounts):

                                             THREE MONTHS ENDED                 SIX MONTHS ENDED
                                             ------------------                 ----------------
                                       4/01/00     3/27/99     CHANGE      4/01/00    3/27/99     CHANGE
                                      -------------------------------     --------------------------------
Macintosh CPU unit sales
(in thousands)                          1,043         827          26%      2,420       1,771          37%
Avg. revenue per Macintosh shipped     $1,820      $1,813           0%     $1,737      $1,793          (3%)

Net sales                              $1,945      $1,530          27%     $4,288      $3,240          32%

Gross margin                           $  549      $  403          36%     $1,156      $  885          31%
   Percentage of net sales               28.2%       26.3%                   27.0%       27.3%

Operating expense                      $  379      $  315          20%     $  788      $  670          18%
   Percentage of net sales               19.5%       20.6%                   18.4%       20.7%
Special charges                        $ --        $    9                  $   98      $    9
Gains from sales of investment         $  100      $   55                  $  234      $   87
Interest and other income, net         $   49      $   19         158%     $   89      $   29         207%
Provision for income taxes             $   86      $   18         378%     $  177      $   35         406%
   Effective tax rate                   27.0%        11.8%                   29.8%       11.0%
Net income                             $  233      $  135          73%     $  416      $  287          45%
Diluted earnings per share             $ 1.28      $ 0.84          52%     $ 2.32      $ 1.79          30%

NET SALES

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

13

                                                     THREE MONTHS ENDED                   SIX MONTHS ENDED
                                                     ------------------                   ----------------
                                               4/1/00    3/27/99      CHANGE      4/1/00    3/27/99      CHANGE
                                               ------    -------      ------      ------    -------      ------
Americas net sales                             $  989     $  787         26%      $2,178     $1,747         25%
Europe net sales                               $  469     $  368         27%      $1,095     $  820         34%
Japan net sales                                $  349     $  262         33%      $  761     $  454         68%
Asia Pacific net sales                         $   92     $   82         12%      $  169     $  157          8%

Americas Macintosh unit sales                     541        421         29%       1,249        946         32%
Europe Macintosh unit sales                       275        203         35%         664        455         46%
Japan Macintosh unit sales                        174        156         12%         409        275         49%
Asia Pacific Macintosh unit sales                  53         47         13%          98         95          3%
                                               ------     ------     ------       ------     ------
     Total Macintosh unit sales                 1,043        827         26%       2,420      1,771         37%
                                               ======     ======      ======      ======     ======

Power Macintosh unit sales                        354        401        (12%)        709        727         (2%)
PowerBook unit sales                              100         75         33%         184        174          6%
iMac unit sales                                   474        351         35%       1,176        870         35%
iBook unit sales                                  115       --          100%         351       --          100%
                                               ------     ------     ------       ------     ------
     Total Macintosh unit sales                 1,043        827         26%       2,420      1,771         37%
                                               ======     ======      ======      ======     ======

Net sales increased $415 million or 27% to $1.945 billion in the second quarter of 2000 compared to the same quarter in 1999. The primary source of this growth was an overall 26% increase in Macintosh unit sales, which reflects strong unit growth in the Company's three largest geographic operating segments. Approximately half of the year-over-year increase in quarterly Macintosh unit shipments was attributable to sales of iBook, the Company's new education and consumer oriented portable computer, which was not shipped until the fourth quarter of 1999. The average revenue per Macintosh system, a function of total net sales generated by hardware shipments and total Macintosh CPU unit sales, for the second quarter of 2000 of $1,820 was comparable to the $1,813 experienced in the same quarter in 1999.

For the first six months of 2000, net sales increased $1.048 billion or 32% over the same period in 1999. A 37% increase in year-to-date Macintosh unit sales, also reflective of strong growth in the Company's three largest geographic operating segments, was the principal cause of the increase in net sales during the first six months of 2000.

Net sales declined sequentially during the second quarter of 2000 compared to the first quarter of 2000 by $398 million or 17%. Similarly, Macintosh unit sales decreased 24% during the second quarter of 2000 compared to the first quarter. The sequential decline in both net sales and unit sales during the second quarter is consistent with the historical pattern experienced by the Company due to lower demand in the Company's consumer markets following the holiday season. The sequential decrease in unit sales was somewhat offset by a sequential increase in the average revenue per Macintosh system, which rose from $1,673 during the first quarter of 2000 to $1,820 during the second quarter. The increase during the current quarter in the average revenue per Macintosh system is primarily attributable to the shift in the Company's unit mix towards higher-priced professional oriented products such that Power Macintosh and PowerBook units comprised 44% of total Macintosh units sales during the second quarter of 2000 versus 32% during the first quarter.

SEGMENT OPERATING PERFORMANCE

The Company manages its business primarily on a geographic basis. The Company's reportable geographic segments include the Americas, Europe, and Japan. The Americas segment includes both North and South America. The European segment includes European countries as well as the Middle East and Africa. The Japan segment includes only Japan. Each geographic operating segment provides similar hardware and software products and similar services. Further information regarding the Company's operating segments may be found in this Form 10-Q in the Notes to Condensed Consolidated Financial Statements at Note 8, "Segment Information and Geographic Data."

14

AMERICAS

Net sales in the Americas segment during the second quarter of 2000 increased $202 million or 26% compared to the same period in 1999. Macintosh unit sales in the Americas increased 29% on a year-over-year basis, reflecting strong growth in iMac unit sales and unit sales of the recently introduced iBook. During the second quarters of both 2000 and 1999, the Americas segment represented approximately 51% of the Company's total net sales. The results experienced by the Americas segment in the second quarter of 2000 versus the same quarter in 1999 reflect the Company's overall results characterized by strong growth in unit sales and net sales of the Company's consumer and education oriented products and moderate growth in net sales of the Company's professional oriented products.

EUROPE

Net sales in the Europe segment increased $101 million or 27% during the second quarter of 2000 as compared to the same quarter in 1999, while the segment's Macintosh unit sales increased 35%. Like the Americas segment, Europe's results in the second quarter of 2000 as compared to 1999 are indicative of strong growth in Macintosh unit sales, particularly unit sales of iMac and iBook.

JAPAN

Net sales in Japan rose 33% or $87 million during the second quarter of 2000 as compared to the same quarter in 1999 while Macintosh unit sales increased 12%. The increase in net sales was primarily the result of increased unit sales of professional oriented products and iBook, partially offset by a moderate decline in unit sales of iMac.

GROSS MARGIN

Gross margin for the second quarter of 2000 was 28.2% compared to 26.3% for the same quarter in 1999 and 25.9% for the first quarter of 2000. Gross margin during the second quarter of 2000 was favorably impacted by three principal factors. First, component costs were lower during the second quarter of 2000 compared to previous quarters. In particular, costs for DRAM fell close to levels not experienced since the fourth quarter of 1999. Second, freight costs declined sequentially from the first quarter of 2000 because substantially higher air freight costs were incurred during the first quarter of 2000 compared to the second quarter in order to get products introduced during the first quarter into the sales channel in time for the holiday selling season. Third, the Company's overall product mix shifted towards higher-priced, higher margin professional products. Net sales of Power Macintosh and PowerBook products accounted for 48.2% of total net sales during the second quarter of 2000 and 39.2% of net sales during the first quarter of 2000.

There can be no assurance targeted gross margin levels will be achieved or current margins on existing individual products will be maintained. In general, gross margins and margins on individual products will remain under significant downward pressure due to a variety of factors, including continued industry wide global pricing pressures, increased competition, compressed product life cycles, potential increases in the cost and availability of raw material and outside manufacturing services, fluctuations in freight costs incurred to deliver the Company's products to market, and potential changes to the Company's product mix, including higher unit sales of consumer products with lower average selling prices and lower gross margins. In response to these downward pressures, the Company expects it will continue to take pricing actions with respect to its products. Gross margins could also be affected by the Company's ability to effectively manage quality problems and warranty costs and to stimulate demand for certain of its products. The Company's operating strategy and pricing take into account anticipated changes in foreign currency exchange rates over time; however, the Company's results of operations can be significantly affected in the short term by fluctuations in exchange rates.

OPERATING EXPENSES

Selling, general and administrative expenses, excluding special charges, increased $48 million or 20% during second quarter of 2000 as compared to the same period in 1999 and decreased sequentially $32 million or 10% from the first quarter of 2000. The sequential decline from the first quarter of 2000 reflects

15

the typical seasonal decline in advertising and promotional activity associated with the 1999 holiday season. Selling, general and administrative expenses for the first six months of 2000 increased $88 million or 17% as compared to the same period in 1999. However, as a result of growing net sales, selling, general and administrative expenses fell to 14% of net sales during the first six months of 2000 compared to 16% during the same period in 1999. The absolute year-over-year increases in selling, general and administrative expenses for both the second quarter and the first six months of 2000 is the result of higher variable selling and marketing expenses resulting from the year-over-year increase in net sales and due to higher discretionary spending on marketing and advertising in 2000 as compared to 1999.

Expenditures for research and development increased 21% between the second quarter of fiscal 2000 and the same quarter in 1999 and increased 20% during the first six months of 2000 compared to the same period in 1999. These increases resulted primarily from increased spending in 2000 to support product development activities and increased research and development headcount.

SPECIAL CHARGES

During the first quarter of 2000, the Company initiated restructuring actions resulting in recognition of an $8 million restructuring charge. This charge was comprised of $3 million for the write-off of various operating assets and $5 million for severance payments to approximately 95 employees associated with consolidation of various domestic and international sales and marketing functions. Of the $5 million accrued for severance, $1.7 million had been spent by April 1, 2000, and the remainder is expected to be spent over the following two quarters. Of the $3 million accrued for the write-off of various assets, substantially all was utilized by April 1, 2000.

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

TOTAL INTEREST AND OTHER INCOME, NET

Interest and other income and expense (net) increased $30 million or 158% to $49 million during the second quarter of 2000 compared to the same quarter in 1999 and increased $60 million or 207% for the first six months of 2000 over the same period in 1999. These increases are attributable to two factors. First, the Company's cash, cash equivalents, and short-term investments were higher by approximately $687 million or 24% at the end of the second quarter of 2000 versus the same balances at the end the second quarter of 1999. This resulted in a $16 million or 48% increase in interest income between the second quarter of 2000 and the second quarter of 1999 and an increase of $31 million or 48% for the comparable six month periods. Second, as the result of conversion to common stock of the Company's convertible subordinated debentures during the third quarter of 1999, interest expense declined $10 million or 67% during the second quarter of 2000 compared to the same quarter in 1999 and decreased $21 million or 68% for the comparable six month periods.

During the second quarter of 2000, the Company sold approximately 1.5 million shares of ARM stock for net proceeds of approximately $101 million and a gain before taxes of $100 million. For the six-month period ended on April 1, 2000, the Company sold approximately 6.7 million shares of ARM stock for net proceeds of $237 million and a gain before taxes of $234 million. During the second quarter of 1999, the Company sold approximately 8.0 million shares of ARM stock for net proceeds of approximately $59 million and a gain before taxes of $55 million. For the six-month period ended on March 27, 1999, the Company sold approximately 19.6 million shares of ARM stock for net proceeds of $96 million and a gain before taxes of $87 million.

PROVISION FOR INCOME TAXES

As of April 1, 2000, the Company had deferred tax assets arising from deductible temporary differences, tax losses, and tax credits of $580 million before being offset against certain deferred tax liabilities for presentation on the Company's balance sheet. A substantial portion of this asset is realizable based on the ability to offset existing deferred tax liabilities. As of April 1, 2000, a valuation allowance of $45 million was recorded against the deferred tax asset for the benefits of tax losses that may not be realized. The valuation allowance

16

primarily relates to the operating loss carryforwards acquired from NeXT and to tax benefits in certain foreign jurisdictions. The Company will continue to evaluate the realizability of the deferred tax assets quarterly by assessing the need for and amount of the valuation allowance.

The Company's effective tax rate for the first quarter of 2000, was approximately 33% and includes the effect of the special executive bonus accrued during that quarter. The effective tax rate during the first quarter of 2000 without this charge was approximately 25%. The Company's effective tax rate for the three months ended April 1, 2000, was approximately 27% which brings the effective tax rate without the special executive bonus for the six months ended April 1, 2000, to 26%. This effective rate is less than the statutory federal income tax rate of 35% due primarily to the reversal of a portion of the previously established valuation allowance for tax loss and credit carryforwards and certain undistributed foreign earnings for which no U.S. taxes were provided.

THE COMPANY CURRENTLY BELIEVES THAT ITS EFFECTIVE TAX RATE FOR THE REMAINDER OF 2000 WILL BE APPROXIMATELY 26%. THE COMPANY ANTICIPATES THAT ITS EFFECTIVE TAX RATE WILL INCREASE IN 2001. THE FOREGOING STATEMENTS ARE FORWARD-LOOKING. THE COMPANY'S ACTUAL RESULTS COULD DIFFER BECAUSE OF SEVERAL FACTORS, INCLUDING THOSE SET FORTH BELOW IN THE SUBSECTION ENTITLED "FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION." ADDITIONALLY, THE ACTUAL FUTURE TAX RATE WILL BE SIGNIFICANTLY IMPACTED BY THE AMOUNT OF AND JURISDICTION IN WHICH THE COMPANY'S FOREIGN PROFITS ARE EARNED.

LIQUIDITY AND CAPITAL RESOURCES

The following table presents selected financial information and statistics for each of the quarters ending on the dates indicated (dollars in millions):

                                                            4/1/00         1/1/00         9/25/99
                                                            ------         ------         -------
Cash, cash equivalents, and short-term investments          $3,609          $3,660          $3,226
Accounts receivable, net                                    $  940          $  892          $  681
Inventory                                                   $   10          $   15          $   20
Working capital                                             $3,059          $2,944          $2,736
Non-current debt and equity investments                     $1,544          $2,140          $  339
Long-term debt                                              $  300          $  300          $  300
Days sales in accounts receivable (a)                           44              37              46
Days of supply in inventory (b)                                  1               1               2
Days payables outstanding (c)                                   73              66              77
Operating cash flow (quarterly)                             $   61          $  373          $  218

(a) Based on ending net trade receivables and most recent quarterly net sales for each period.
(b) Based on ending inventory and most recent quarterly cost of sales for each period.
(c) Based on ending accounts payable and most recent quarterly cost of sales adjusted for the change in inventory.

As of April 1, 2000, the Company had approximately $3.6 billion in cash, cash equivalents, and short-term investments, an increase of $383 million over the same balances at the end of 1999. For the six months ended April 1, 2000, the Company's primary source of cash was $434 million in cash flows from operating activities. Cash generated by operations was primarily from net income of $416 million and a combined increase in accounts payable and other current liabilities of $368 million partially offset by an increase in accounts receivable of $259 million. In addition to operating cash flow, other significant cash flow items during the six months ended April 1, 2000 included net purchases of short-term investments of $47 million, $216 million utilized for the purchase of long-term investments, $65 million for the purchase of property, plant and equipment, and cash proceeds from the sale of ARM stock of $237 million.

In July 1999, the Company's Board of Directors authorized a plan for the Company to repurchase up to $500 million of its common stock. This repurchase plan does not obligate the Company to acquire any specific number of shares or acquire shares over any specified period of time. During the second quarter of 2000, no shares of common stock were repurchased. Since inception of the repurchase plan, the Company has repurchased 1.75 million shares at a cost of $116 million.

On November 18, 1999, the Company entered into a $100 million revolving credit agreement with Bank of America. Loans under the agreement pay interest at LIBOR

17

plus 1%, and the Company is required to pay a commitment fee of 0.2% of the unused portion of the credit facility. No advances have been made against this credit facility. This revolving credit agreement is intended to provide the Company with an additional source of short-term liquidity.

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

OTHER INVESTMENTS

The Company holds significant investments in ARM, Samsung, Akamai and Earthlink. These investments are reflected in the consolidated balances sheets as non-current debt and equity investments and have been categorized as available-for-sale requiring that they be carried at fair value with unrealized gains and losses, net of taxes, reported in equity as a component of accumulated other comprehensive income. The combined fair value of these investments was $1.544 billion and $339 million as of April 1, 2000, and September 25, 1999, respectively. The combined fair value of these investments has declined to approximately $1.215 billion as of May 5, 2000. The Company believes it is likely there will continue to be significant fluctuations in the fair value of these investments in the future. Additional information regarding these investment may be found in this Form 10-Q in the Notes to Condensed Consolidated Financial Statements at Note 4, "Non-Current Debt and Equity Investments."

FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION

The Company operates in a rapidly changing environment that involves a number of uncertainties, some of which are beyond the Company's control. In addition to the uncertainties described elsewhere in this report, there are many factors that will affect the Company's future results and business, which may cause the actual results to differ from those currently expected. The Company's future operating results and financial condition is dependent upon the Company's ability to successfully develop, manufacture, and market technologically innovative products in order to meet dynamic customer demand patterns. 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; risks associated with international operations, including economic and labor conditions, regional economic problems, political instability, tax laws, and currency fluctuations; increasing dependence on third-parties for manufacturing and other outsourced functions such as logistics; the availability of key components on terms acceptable to the Company; the continued availability of certain components and services essential to the Company's business currently obtained by the Company from sole or limited sources, including PowerPC RISC microprocessors developed by and obtained from IBM and Motorola and the final assembly of certain of the Company's products; the Company's ability to supply products in certain categories; the Company's ability to supply products free of latent defects or other faults; the Company's ability to make timely delivery to the marketplace of technological innovations, including its ability to continue to make timely delivery of planned enhancements to the current Mac OS and timely delivery of future versions of the Mac OS; the availability of third-party software for particular applications; the Company's ability to attract, motivate and retain key employees; the effect of previously undetected Y2K compliance issues; managing the continuing impact of the European Union's transition to the Euro as its common legal currency; continuing fluctuations in the fair value of the Company's non-current debt and equity investments, and the Company's ability to retain the operational and cost benefits derived from its recently completed restructuring programs.

For a discussion of these and other factors affecting the Company's future results and financial condition, see "Item 7 -- Management's Discussion and Analysis -- Factors That May Affect Future Results and Financial Condition" in the Company's 1999 Form 10-K.

18

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

THE INFORMATION PRESENTED BELOW REGARDING MARKET RISK CONTAINS FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THOSE DISCUSSED BELOW AND ELSEWHERE IN THIS FORM 10-Q REGARDING MARKET RISK. THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE 1999 FORM 10-K AND THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS FORM 10-Q.

The Company's exposure to market risk for changes in interest rates relates primarily to the Company's investments and long-term debt obligations and related derivative financial instruments. The Company places its investments with high credit quality issuers and, by policy, limits the amount of credit exposure to any one issuer. The Company's general policy is to limit the risk of principal loss and ensure the safety of invested funds by limiting market and credit risk. Excluding those investments classified as non-current debt and equity 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 April 1, 2000, substantially all of the Company's investments have maturities less than 12 months.

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

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

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

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

19

For a complete description of the Company's interest rate and foreign currency related market risks, see the discussion in Part II, Item 7A of the Company's 1999 Form 10-K. There has not been a material change in the Company's exposure to interest rate and foreign currency risks since the date of the 1999 Form 10-K.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is subject to various legal proceedings and claims which are discussed in the 1999 Form 10-K. The Company is also subject to certain other legal proceedings and claims which have arisen in the ordinary course of business and which have not been fully adjudicated. The results of legal proceedings cannot be predicted with certainty; however, in the opinion of management, the Company does not have a potential liability related to any legal proceedings and claims that would have a material adverse effect on its financial condition or results of operations.

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

The annual meeting of shareholders was held on April 20, 2000. All matters voted on were approved. The results are as follows:

PROPOSAL I

The following directors were elected at the meeting to serve a one-year term as directors:

                           For                       Authority Withheld
William V. Campbell        139,530,349                 1,526,408
Gareth C.C. Chang          139,671,948                 1,384,809
Millard S. Drexler         139,281,278                 1,775,479
Lawrence J. Ellison        130,301,339                10,755,418
Steven P. Jobs             139,687,954                 1,368,803
Jerome B. York             139,682,237                 1,374,520

PROPOSAL II

The proposal to amend the Company's Restated Articles of Incorporation to increase the number of authorized shares of Common Stock from 320,000,000 to 900,000,000 shares was approved. As a result, the Company's Restated Articles of Incorporation were amended to increase the number of authorized shares to 900,000,000.

For                    Against          Abstained         Broker Non-Vote
120,834,875            19,682,413       537,666           1,803

PROPOSAL III

The proposal to amend the Company's 1998 Executive Officer Stock Plan (the 1998 Plan) to increase the number of shares reserved for issuance thereunder by 2,000,000 shares, bringing the total number of shares of Common Stock reserved for issuance under the 1998 Plan to 19,000,000, was approved. As a result, the 1998 Plan was amended to reserve an additional 2,000,000 shares of Common Stock for issuance thereunder.

For                    Against          Abstained         Broker Non-Vote
87,975,961             52,315,384       761,685           3,727

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PROPOSAL IV

Ratification of appointment of KPMG LLP as the Company's independent auditors for fiscal year 2000.

For                    Against          Abstained         Broker Non-Vote
140,342,114            168,893          545,750           -0-

The proposals above are described in detail in the Registrant's definitive proxy statement dated March 6, 2000, for the Annual Meeting of Shareholders held on April 20, 2000.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS

The following exhibits are filed as part of this Report:

Exhibit
Number            Description
------            -----------
3.2               Amendment to Restated Articles of Incorporation, filed with
                  the Secretary of State of the State of California on May 4,
                  2000.
10.A.49           1997 Employee Stock Option Plan, as amended through May 3, 2000.
10.A.51           1998 Executive Officer Stock Plan, as amended through May 3, 2000.
27                Financial Data Schedule.

(b) REPORTS ON FORM 8-K

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

21

SIGNATURES

Pursuant to the requirements 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.

APPLE COMPUTER, INC.
(Registrant)

              By: /s/ Fred D. Anderson
                 ------------------------
                  Fred D. Anderson
Executive Vice President and Chief Financial Officer

                    May 11, 2000

22

INDEX TO EXHIBITS

Exhibit
Index
Number        Description
------        -----------
3.2           Amendment to Restated Articles of Incorporation, filed with the
              Secretary of State of the State of California on May 4, 2000.
10.A.49       1997 Employee Stock Option Plan, as amended through May 3, 2000.
10.A.51       1998 Executive Officer Stock Plan, as amended through May 3, 2000.
27            Financial Data Schedule.


EXHIBIT 3.2

CONFORMED COPY AS FILED WITH
THE SECRETARY OF STATE OF THE STATE OF
California on May 4, 2000

CERTIFICATE OF AMENDMENT
OF
RESTATED ARTICLES OF INCORPORATION
OF
APPLE COMPUTER, INC.

Fred D. Anderson and Nancy R. Heinen certify that:

1. They are the Executive Vice President and Chief Financial Officer, and the Senior Vice President, General Counsel and Secretary, respectively, of Apple Computer, Inc., a California corporation.

2. Articles III of the Restated Articles of Incorporation of this corporation is amended to read in its entirety as follows:

"III.

This corporation is authorized to issue two classes of shares designated respectively "Common Stock" and "Preferred Stock". The number of shares of Common Stock which this corporation is authorized to issue is 900,000,000 and the number of shares of Preferred Stock which this corporation is authorized to issue is 5,000,000."

3. The foregoing amendment of the Restated Articles of Incorporation of this corporation was duly approved by unanimous written consent of the Board of Directors on February 11, 2000.

4. The foregoing amendment of the Restated Articles of Incorporation of this corporation was duly approved by the required vote of shareholders in accordance with Sections 902 and 301.5 of the California Corporations Code, at a meeting held on April 20, 2000. The corporation has 150,000 shares of non-voting Preferred Stock outstanding. The total number of shares of Common Stock outstanding at the record date for determining shareholders entitled to vote was 162,298,567. The number of shares of Common Stock voting in favor of the amendment equaled or exceeded the vote required, which was more than 50% of the Common Stock.


5. This corporation is a "listed corporation" within the meaning of subdivision (d) of Section 301.5 of the California Corporations Code because it has outstanding Common Stock designated as qualified for trading as a national market system security on the National Association of Securities Dealers Automatic Quotation System and had at least 800 holders of its Common Stock as of the record date of its most recent annual meeting of shareholders, which was held on April 20, 2000.

The undersigned declare under penalty of perjury that the matters set forth in the foregoing certificate are true of their own knowledge.

Executed at Cupertino, California on May 1, 2000.

        /s/ Fred D. Anderson
        --------------------
            Fred D. Anderson
      EXECUTIVE VICE PRESIDENT AND
         CHIEF FINANCIAL OFFICER

         /s/ Nancy R. Heinen
         -------------------
             Nancy R. Heinen
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND

               SECRETARY


EXHIBIT 10.A.49

APPLE COMPUTER, INC.
1997 EMPLOYEE STOCK OPTION PLAN
(AS AMENDED THROUGH 5/3/00)

1. PURPOSES OF THE PLAN. The purposes of this 1997 Employee Stock Option Plan are to assist the Company in attracting and retaining high quality personnel, to provide additional incentive to Employees who are not Directors or Officers of the Company and to promote the success of the Company's business. Options granted under the Plan shall be Nonstatutory Stock Options. SARs granted under the Plan may be granted in connection with Options or independently of Options.

2. DEFINITIONS. As used herein, the following definitions shall apply:

"ADMINISTRATOR" means the Board or any of its Committees, as shall be administering the Plan from time to time pursuant to Section 4 of the Plan.

"AFFILIATED COMPANY" means a corporation which is not a Subsidiary but with respect to which the Company owns, directly or indirectly through one or more Subsidiaries, at least twenty percent of the total voting power, unless the Administrator determines in its discretion that such corporation is not an Affiliated Company.

"APPLICABLE LAWS" shall have the meaning set forth in Section 4 of the Plan.

"BOARD" means the Board of Directors of the Company.

"CHANGE IN CONTROL" shall have the meaning set forth in Section 10 of the Plan.

"CHANGE IN CONTROL PRICE" shall have the meaning set forth in
Section 12 of the Plan.

"COMMON STOCK" means the common stock, no par value, of the Company.

"COMPANY" means Apple Computer, Inc., a California corporation, or its successor.

"COMMITTEE" means a Committee, if any, appointed by the Board in accordance with Section 4(a) of the Plan.

"CODE" means the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto.

"Continuous Status as an Employee" means the absence of any interruption or termination of the employment relationship with the Company or any Subsidiary or Affiliated Company. Continuous Status as an Employee shall not be considered interrupted in the case of (i) medical leave, military leave, family leave, or any other leave of absence approved by the Administrator, provided, in each case, that such leave does not result in termination of the employment relationship with the Company or any Subsidiary or Affiliated Company, as the case may be, under the terms of the respective Company policy for such leave; however, vesting may be tolled while an employee is on an approved leave of absence under the terms of the respective Company policy for such leave; or (ii) in the case of transfers between locations of the Company or between the Company, its Subsidiaries, its successor or its Affiliated Companies;


"DIRECTOR" means a member of the Board.

"EMPLOYEE" means any person, employed by and on the payroll of the Company, any Subsidiary or any Affiliated Company.

"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.

"FAIR MARKET VALUE" means the value of Common Stock determined as follows:

(i) If the Common Stock is listed on any established stock exchange or a national market system (including without limitation the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System), its Fair Market Value shall be the closing sales price for such stock or the closing bid if no sales were reported, as quoted on such system or exchange (or the exchange with the greatest volume of trading in the Common Stock) for the date of determination or, if the date of determination is not a trading day, the immediately preceding trading day, as reported in THE WALL STREET JOURNAL or such other source as the Administrator deems reliable.

(ii) If the Common Stock is regularly quoted on the NASDAQ System (but not on the National Market System) or quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean between the high and low asked prices for the Common Stock on the date of determination or, if there are no quoted prices on the date of determination, on the last day on which there are quoted prices prior to the date of determination.

(iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Administrator.

"NONSTATUTORY STOCK OPTION" means an Option that is not intended to be an incentive stock option within the meaning of Section 422 of the Code.

"OFFICER" means any individual designated by the Board as an elected officer of the Company.

"OPTION" means an option granted pursuant to the Plan.

"OPTIONED STOCK" means the Common Stock subject to an Option or
SAR.

"OPTIONEE" means an Employee who receives an Option or SAR.

"PARENT" corporation shall have the meaning defined in Section 424(e) of the Code.

"PLAN" means this Apple Computer, Inc. 1997 Employee Stock Option Plan.

"SAR" means a stock appreciation right granted pursuant to Section 9 below.

"SECTION 3 LIMIT" shall have the meaning set forth in Section 3 of the Plan.

"SHARE" means a share of the Common Stock, as adjusted in accordance with Section 12 of the Plan.


"SIXTY-DAY PERIOD " shall have the meaning set forth in Section 12(f) of the Plan.

"SUBSIDIARY" corporation has the meaning defined in Section 424(f) of the Code.

"TAX DATE" shall have the meaning set forth in Section 9 of the Plan.

3. STOCK SUBJECT TO THE PLAN.

(a) LIMIT. Subject to the provisions of Section 12 of the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan or for which SARs may be granted and exercised is 21,500,000 Shares (the "SECTION 3 LIMIT"). The Shares may be authorized but unissued or reacquired Common Stock. In the discretion of the Administrator, any or all of the Shares authorized under the Plan may be subject to SARs issued pursuant to the Plan.

(b) RULES APPLICABLE TO THE CALCULATION OF THE SECTION 3 LIMIT. In calculating the number of Shares available for issuance under the Plan, the following rules shall apply:

(i) The Section 3 Limit shall be reduced by the number of Shares of Optioned Stock subject to each outstanding Option or freestanding SAR.

(ii) The Section 3 Limit shall be increased by the number of Shares of Optioned Stock subject to the portion of an Option or SAR that expires unexercised or is forfeited for any reason.

(iii) The Section 3 Limit shall be increased by the number of Shares tendered to pay the exercise price of an Option or the number of Shares of Optioned Stock withheld to satisfy an Optionee's tax liability in connection with the exercise of an Option or SAR.

(iv) Option Stock subject to both an outstanding Option and SAR granted in connection with the Option shall be counted only once in calculating the Section 3 Limit.

4. ADMINISTRATION OF THE PLAN.

(a) COMPOSITION OF ADMINISTRATOR. The Plan may be administered by (i) the Board or (ii) a Committee designated by the Board, which Committee shall be constituted in such a manner as to satisfy the applicable securities laws, California corporate law and the Code (collectively, "APPLICABLE LAWS").

Once a Committee has been appointed pursuant to this
Section 4(a), such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. From time to time the Board may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies (however caused) and remove all members of the Committee and thereafter directly administer the Plan, all to the extent permitted by the Applicable Laws.

(b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the Plan and, in the case of the Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion: (i) to determine the Fair Market Value of the Common Stock in accordance with the Plan; (ii) to determine, in accordance with
Section 8(a) of the Plan, the exercise price per Share of Options and SARs to be granted; (iii) to determine the Employees to whom, and the time or times at which, Options and SARs shall be granted and the number of Shares to be represented by each Option or SAR (including, without limitation, whether or not a corporation shall be excluded


from the definition of Affiliated Company); (iv) to construe and interpret the provisions of the Plan and any agreements or certificates issued under or in connection with the Plan; (v) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Option or SAR granted hereunder (including, but not limited to, any restriction or limitation, or any vesting acceleration or waiver of forfeiture restrictions regarding any Option or SAR or the Shares relating thereto, based in each case on such factors as the Administrator shall determine, in its sole discretion); (vi) to approve forms of agreement for use under the Plan; (vii) to prescribe, amend and rescind rules and regulations relating to the Plan; (viii) to modify or amend each Option or SAR or accelerate the exercise date of any Option or SAR; (ix) to reduce the exercise price of any Option or SAR to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option or SAR shall have declined since the date the Option or SAR was granted; (x) to authorize any person to execute on behalf of the Company any instrument required to effectuate the grant of an Option or SAR previously granted by the Administrator; and (xi) to make all other determinations deemed necessary or advisable for the administration of the Plan.

(c) EFFECT OF DECISIONS BY THE ADMINISTRATOR. All decisions, determinations and interpretations of the Administrator shall be final and binding on all Optionees and any other holders of any Options.

5. ELIGIBILITY. The Administrator may grant Options and SARs only to individuals who are Employees or who are consultants to the Company, or a Subsidiary or Affiliated Company. In no event may an Option or SAR be granted to any individual who, at the time of grant, is an Officer or Director. An Employee who has been granted an Option or SAR may, if he or she is otherwise eligible, be granted an additional Option or Options, SAR or SARs. Each Option shall be evidenced by a written Option agreement, which shall be in such form and contain such provisions as the Administrator shall from time to time deem appropriate. Without limiting the foregoing, the Administrator may, at any time, or from time to time, authorize the Company, with the consent of the respective recipients, to issue new Options or Options in exchange for the surrender and cancellation of any or all outstanding Options, other options, SARs or other stock appreciation rights.

Neither the Plan nor any Option or SAR agreement shall confer upon any Optionee any right with respect to continuation of employment by the Company (or any Parent, Subsidiary or Affiliated Company), nor shall it interfere in any way with the Optionee's right or the right of the Company (or any Parent, Subsidiary or Affiliated Company) to terminate the Optionee's employment at any time or for any reason.

If an Option or SAR is granted to an individual who is a consultant to the Company or any Subsidiary or Affiliate, all references in the Plan to "Employee" shall be deemed to include the term "consultant" and all references in the Plan to "employment," "Continuous Status as an Employee" and "termination of employment" shall be deemed to refer to the individual's consultancy or status as a consultant.

6. TERM OF PLAN. The Plan shall become effective upon its adoption by the Board. It shall continue in effect for a term of ten years unless sooner terminated under Section 14 of the Plan.

7. TERM OF OPTION. The term of each Option shall be ten (10) years from the date of grant thereof or such shorter term as may be provided in the Option agreement.

8. EXERCISE PRICE AND CONSIDERATION.

(a) EXERCISE PRICE. The per Share exercise price for the Shares issuable pursuant to an Option shall be such price as is determined by the Administrator, but shall in no event be less than 100% of the Fair Market


Value of Common Stock, determined as of the date of grant of the Option. In the event that the Administrator shall reduce the exercise price, the exercise price shall be no less than 100% of the Fair Market Value as of the date of that reduction.

(b) METHOD OF PAYMENT. The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Administrator and may consist of (i) cash, (ii) check, (iii) promissory note, (iv) other Shares which have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised, (v) delivery of a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company the amount of sale or loan proceeds required to pay the exercise price, or (vi) any combination of the foregoing methods of payment and/or any other consideration or method of payment as shall be permitted under applicable corporate law.

9. STOCK APPRECIATION RIGHTS.

(a) GRANTED IN CONNECTION WITH OPTIONS. At the sole discretion of the Administrator, SARs may be granted in connection with all or any part of an Option, either concurrently with the grant of the Option or at any time thereafter during the term of the Option. The following provisions apply to SARs that are granted in connection with Options:

(i) The SAR shall entitle the Optionee to exercise the SAR by surrendering to the Company unexercised a portion of the related Option. The Optionee shall receive in exchange from the Company an amount equal to the excess of (x) the Fair Market Value on the date of exercise of the SAR of the Common Stock covered by the surrendered portion of the related Option over (y) the exercise price of the Common Stock covered by the surrendered portion of the related Option. Notwithstanding the foregoing, the Administrator may place limits on the amount that may be paid upon exercise of an SAR; PROVIDED, HOWEVER, that such limit shall not restrict the exercisability of the related Option.

(ii) When an SAR is exercised, the related Option, to the extent surrendered, shall no longer be exercisable.

(iii) An SAR shall be exercisable only when and to the extent that the related Option is exercisable and shall expire no later than the date on which the related Option expires.

(iv) An SAR may only be exercised at a time when the Fair Market Value of the Common Stock covered by the related Option exceeds the exercise price of the Common Stock covered by the related Option.

(b) INDEPENDENT SARS. At the sole discretion of the Administrator, SARs may be granted without related Options. The following provisions apply to SARs that are not granted in connection with Options:

(i) The SAR shall entitle the Optionee, by exercising the SAR, to receive from the Company an amount equal to the excess of (x) the Fair Market Value of the Common Stock covered by exercised portion of the SAR, as of the date of such exercise, over (y) the Fair Market Value of the Common Stock covered by the exercised portion of the SAR, as of the date on which the SAR was granted; PROVIDED, HOWEVER, that the Administrator may place limits on the amount that may be paid upon exercise of an SAR.

(ii) SARs shall be exercisable, in whole or in part, at such times as the Administrator shall specify in the Optionee's SAR agreement.


(c) FORM OF PAYMENT. The Company's obligation arising upon the exercise of an SAR may be paid in Common Stock or in cash, or in any combination of Common Stock and cash, as the Administrator, in its sole discretion, may determine. Shares issued upon the exercise of an SAR shall be valued at their Fair Market Value as of the date of exercise.

10. METHOD OF EXERCISE.

(a) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any Option or SAR granted hereunder shall be exercisable at such times and under such conditions as determined by the Administrator and as shall be permissible under the terms of the Plan.

An Option or SAR shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option or SAR by the person entitled to exercise the Option or SAR and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may, as authorized by the Administrator and permitted by the Option agreement, consist of any consideration and method of payment allowable under Section 8(b) of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 12 of the Plan. An Option or SAR may not be exercised with respect to a fraction of a Share.

(b) TERMINATION OF CONTINUOUS EMPLOYMENT. Upon termination of an Optionee's Continuous Status as Employee (other than termination by reason of the Optionee's death), the Optionee may, but only within ninety days after the date of such termination, exercise his or her Option or SAR to the extent that it was exercisable at the date of such termination. Notwithstanding the foregoing, however, an Option or SAR may not be exercised after the date the Option or SAR would otherwise expire by its terms due to the passage of time from the date of grant.

(c) DEATH OF OPTIONEE. In the event of the death of an Optionee:

(i) Who is at the time of death an Employee and who shall have been in Continuous Status as an Employee since the date of grant of the Option, the Option or SAR may be exercised at any time within six (6) months (or such other period of time not exceeding twelve (12) months as determined by the Administrator) following the date of death by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that would have accrued had the Optionee continued living and terminated his or her employment six (6) months (or such other period of time not exceeding twelve (12) months as determined by the Administrator) after the date of death; or

(ii) Within ninety days after the termination of Continuous Status as an Employee, the Option or SAR may be exercised, at any time within six
(6) months (or such other period of time not exceeding twelve (12) months as determined by the Administrator) following the date of death by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of termination.

Notwithstanding the foregoing, however, an Option or SAR may not be exercised after the date the Option or SAR would otherwise expire by its terms due to the passage of time from the date of grant.


(d) STOCK WITHHOLDING TO SATISFY WITHHOLDING TAX OBLIGATIONS. When an Optionee incurs tax liability in connection with the exercise of an Option or SAR, which tax liability is subject to tax withholding under applicable tax laws, and the Optionee is obligated to pay the Company an amount required to be withheld under applicable tax laws, the Optionee may satisfy the withholding tax obligation (including, at the election of the Optionee, any additional amount which the Optionee desires to have withheld in order to satisfy in whole or in part the Optionee's full estimated tax in connection with the exercise) by electing to have the Company withhold from the Shares to be issued upon exercise of the Option, or the Shares to be issued upon exercise of the SAR, if any, that number of Shares having a Fair Market Value equal to the amount required to be withheld (and any additional amount desired to be withheld, as aforesaid). The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined (the "TAX DATE").

All elections by an Optionee to have Shares withheld for this purpose shall be made in writing in a form acceptable to the Administrator and shall be subject to the following restrictions:

(i) the election must be made on or prior to the applicable Tax Date; and

(ii) all elections shall be subject to the consent or disapproval of the Administrator.

11. NON-TRANSFERABILITY OF OPTIONS. Options and SARs may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent or distribution or pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act, or the rules thereunder; PROVIDED, HOWEVER, that the Administrator may grant Nonstatutory Stock Options that are freely transferable. The designation of a beneficiary by an Optionee or holder of an SAR does not constitute a transfer. An Option or an SAR may be exercised, during the lifetime of the Optionee or SAR holder, only by the Optionee or SAR holder or by a transferee permitted by this Section 11.

12. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER.

(a) CHANGES IN CAPITALIZATION. Subject to any required action by the shareholders of the Company, the number of Shares covered by each outstanding Option and SAR, and the number of Shares which have been authorized for issuance under the Plan but as to which no Options or SARs have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option or SAR, as well as the price per Share covered by each such outstanding Option or SAR, shall be proportionately adjusted for any increase or decrease in the number of issued Shares resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the aggregate number of issued Shares effected without receipt of consideration by the Company; PROVIDED, HOWEVER, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Administrator, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares subject to an Option or SAR.

(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed dissolution or liquidation of the Company, all outstanding Options and SARs will terminate immediately prior to the consummation of such proposed action, unless


otherwise provided by the Administrator. The Administrator may, in the exercise of its sole discretion in such instances, declare that any Option or SAR shall terminate as of a date fixed by the Administrator and give each Optionee the right to exercise his or her Option or SAR as to all or any part of the Optioned Stock or SAR, including Shares as to which the Option or SAR would not otherwise be exercisable.

(c) SALE OF ASSETS OR MERGER. Subject to the provisions of
Section 12(d), in the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, each outstanding Option and SAR shall be assumed or an equivalent option or stock appreciation right shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation, unless the Administrator determines, in the exercise of its sole discretion and in lieu of such assumption or substitution, that the Optionee shall have the right to exercise the Option or SAR as to all of the Optioned Stock, including Shares as to which the Option or SAR would not otherwise be exercisable. If the Administrator makes an Option or SAR fully exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Company shall notify the Optionee that the Option or SAR shall be fully exercisable for a period of thirty (30) days from the date of such notice, and the Option or SAR will terminate upon the expiration of such period. For purposes of this paragraph, an Option granted under the Plan shall be deemed to be assumed if, following the sale of assets or merger, the Option confers the right to purchase, for each Share of Optioned Stock subject to the Option immediately prior to the sale of assets or merger, the consideration (whether stock, cash or other securities or property) received in the sale of assets or merger by holders of Common Stock for each Share held on the effective date of the transaction (and if such holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the sale of assets or merger was not solely Common Stock of the successor corporation or its parent, the Administrator may, with the consent of the successor corporation and the participant, provide for the per share consideration to be received upon exercise of te Option to be solely Common Stock of the successor corporation or its parent equal in Fair Market Value to the per share consideration received by holders of Common Stock in the sale of assets or merger.

(d) CHANGE IN CONTROL. In the event of a "Change in Control" of the Company, as defined in Section 12(e), unless otherwise determined by the Administrator prior to the occurrence of such Change in Control, the following acceleration and valuation provisions shall apply:

(i) Any Options and SARs outstanding as of the date such Change in Control is determined to have occurred that are not yet exercisable and vested on such date shall become fully exercisable and vested; and

(ii) The value of all outstanding Options and SARs shall, unless otherwise determined by the Administrator at or after grant, be cashed-out. The amount at which such Options and SARs shall be cashed out shall be equal to the excess of (x) the Change in Control Price (as defined below) over (y) the exercise price of the Common Stock covered by the Option or SAR. The cash-out proceeds shall be paid to the Optionee or, in the event of death of an Optionee prior to payment, to the estate of the Optionee or to a person who acquired the right to exercise the Option or SAR by bequest or inheritance.

(e) "DEFINITION OF "CHANGE IN CONTROL". For purposes of this
Section 12, a "Change in Control" means the happening of any of the following:

( i ) When any "person", as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than the Company, a Subsidiary or a Company employee benefit plan, including any trustee of such plan acting as trustee) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing


fifty percent (50%) or more of the combined voting power of the Company's then outstanding securities; or

(ii) The occurrence of a transaction requiring shareholder approval, and involving the sale of all or substantially all of the assets of the Company or the merger of the Company with or into another corporation.

(f) CHANGE IN CONTROL PRICE. For purposes of this Section 12, "Change in Control Price" shall be, as determined by the Administrator, (i) the highest Fair Market Value at any time within the sixty-day period immediately preceding the date of determination of the Change in Control Price by the Administrator (the "SIXTY-DAY PERIOD"), or (ii) the highest price paid or offered, as determined by the Administrator, in any bona fide transaction or bona fide offer related to the Change in Control of the Company, at any time within the Sixty-Day Period.

13. TIME OF GRANTING OPTIONS AND SARS. The date of grant of an Option or SAR shall, for all purposes, be the date on which the Administrator makes the determination granting such Option or SAR. Notice of the determination shall be given to each Employee to whom an Option or SAR is so granted within a reasonable time after the date of such grant.

14. AMENDMENT AND TERMINATION OF THE PLAN.

(a) AMENDMENT AND TERMINATION. The Board may at any time amend, alter, suspend or terminate the Plan, as it may deem advisable.

(b) EFFECT OF AMENDMENT OR TERMINATION. Any such amendment, alteration, suspension or termination of the Plan shall not impair the rights of any Optionee or SAR holder under any grant theretofore made without his or her consent. Such Options and SARs shall remain in full force and effect as if this Plan had not been amended or terminated.

15. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued with respect to an Option or SAR unless the exercise of such Option or SAR and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange or quotation system upon which the Shares may then be listed or quoted, and shall be further subject to the approval of counsel for the Company with respect to such compliance.

As a condition to the exercise of an Option or SAR or the issuance of Shares upon exercise of an Option or SAR, the Company may require the person exercising such Option or SAR to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned relevant provisions of law.

Inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the non-issuance or sale of such Shares as to which such requisite authority shall not have been obtained.

16. RESERVATION OF SHARES. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan.

17. NON-U.S. EMPLOYEES. Notwithstanding anything in the Plan to the contrary, with respect to any employee who is resident outside of the United States, the Committee may, in its sole discretion, amend the terms of the Plan in order to conform such terms with the requirements of local law or to meet the objectives of the Plan. The Committee may, where appropriate, establish one or more sub-plans for this purpose.


EXHIBIT 10.A.51

APPLE COMPUTER, INC.
1998 EXECUTIVE OFFICER STOCK PLAN
(AS AMENDED THROUGH 5/3/00)

1. PURPOSES OF THE PLAN. The purposes of this Stock Plan are:

to attract and retain the best available personnel for positions of substantial responsibility;

to provide additional incentive to the Chairman and/or Executive Officers and other key employees; and

to promote the success of the Company's business.

Options granted under the Plan may be Incentive Stock Options (as defined under Section 422 of the Code) or Nonstatutory Stock Options, as determined by the Administrator at the time of grant. Stock appreciation rights ("SARs") may be granted under the Plan in connection with Options or independently of Options. Stock Purchase Rights may also be granted under the Plan.

2. DEFINITIONS. As used herein, the following definitions shall apply:

(a) "ADMINISTRATOR" means the Board or any of its Committees as shall be administering the Plan, in accordance with Section 4 of the Plan.

(b) "AGREEMENT" means an agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option, SAR or Stock Purchase Right grant. The Agreement is subject to the terms and conditions of the Plan.

(c) "APPLICABLE LAWS" means the requirements relating to the administration of stock option plans under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction where Options, SARs or Stock Purchase Rights are, or will be, granted under the Plan.

(d) "BOARD" means the Board of Directors of the Company.

(e) "CHAIRMAN" means the Chairman of the Board.

(f) "CODE" means the Internal Revenue Code of 1986, as amended.

(g) "COMMITTEE" means a committee of Directors appointed by the Board in accordance with Section 4 of the Plan.

(h) "COMMON STOCK" means the common stock of the Company.

(i) "COMPANY" means Apple Computer, Inc., a California corporation.

(j) "CONTINUOUS STATUS AS CHAIRMAN" unless determined otherwise by the Administrator, means the absence of any interruption or termination as Chairman of the Board with the Company. Continuous Status as Chairman shall not be considered interrupted in the case of medical leave, military leave, family leave, or any other leave of absence approved by the Administrator, provided, in each case, that such leave does not result in termination as Chairman with the Company. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute status as "Chairman" by the Company.

(k) "CONTINUOUS STATUS AS AN EMPLOYEE" means the absence of any interruption or termination of the employment relationship with the Company or any Subsidiary. Continuous Status as an Employee shall not be


considered interrupted in the case of (i) medical leave, military leave, family leave, or any other leave of absence approved by the Administrator, provided, in each case, that such leave does not result in termination of the employment relationship with the Company or any Subsidiary, as the case may be, under the terms of the respective Company policy for such leave; however, vesting may be tolled while an employee is on an approved leave of absence under the terms of the respective Company policy for such leave; or (ii) in the case of transfers between locations of the Company or between the Company, its Subsidiaries, or its successor; For purposes of Incentive Stock Options, no such leave may exceed ninety days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, on the 91st day of such leave any Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option. Neither service as a Chairman nor as a Director nor payment of a director's fee by the Company shall be sufficient to constitute 'employment' by the Company.

(l) "Director" means a member of the Board.

(m) "Employee" means any person employed by the Company or any Parent or Subsidiary of the Company subject to (k) above.

(n) "Exchange Act" means the Securities Exchange Act of 1934, as amended.

(o) "Executive Officer" means any person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.

(p) "Fair Market Value" means, as of any date, the value of Common Stock determined as follows:

(i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system, on the date of determination or, if the date of determination is not a trading day, the immediately preceding trading day, as reported in THE WALL STREET JOURNAL or such other source as the Administrator deems reliable;

(ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the date of determination or, if there are no quoted prices on the date of determination, on the last day on which there are quoted prices prior to the date of determination, as reported in THE WALL STREET JOURNAL or such other source as the Administrator deems reliable; or

(iii) In the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Administrator.

(q) "Incentive Stock Option"means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder and is expressly designated by the Administrator at the time of grant as an incentive stock option.

(r) "Nonstatutory Stock Option" means an Option not intended to qualify as an Incentive Stock Option.

(s) "Option" means a stock option granted pursuant to the Plan.

(t) "Optioned Stock" means the Common Stock subject to an Option, SAR or Stock Purchase Right.


(u) "Optionee" means the holder of an outstanding Option, SAR or Stock Purchase Right.

(v) "Parent" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code.

(w) "Plan" means this 1998 Executive Officer Stock Plan.

(x) "Restricted Stock" means shares of Common Stock acquired pursuant to a grant of Stock Purchase Rights under Section 12 of the Plan.

(y) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan.

(z) "SAR" means a stock appreciation right granted pursuant to Section 10 below.

(aa) "Section 16(b)" means Section 16(b) of the Exchange Act.

(bb) "Share" means a share of the Common Stock, as adjusted in accordance with Section 15 of the Plan.

(cc) "Stock Purchase Right" means the right to purchase Common Stock pursuant to Section 12 of the Plan, as evidenced by an Agreement.

(dd) "Subsidiary" means a 'subsidiary corporation', whether now or hereafter existing, as defined in Section 424(f) of the Code.

3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 15 of the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan or for which SARs or Stock Purchase Rights may be granted and exercised is 19,000,000 Shares. The Shares may be authorized, but unissued, or reacquired Common Stock.

In the discretion of the Administrator, any or all of the Shares authorized under the Plan may be subject to SARs issued pursuant to the Plan.

If an Option, SAR or Stock Purchase Right issued under the Plan should expire or become unexercisable for any reason without having been exercised in full, the unpurchased Shares which were subject thereto shall become available for other Options, SARs or Stock Purchase Rights under this Plan (unless the Plan has terminated); however, should the Company reacquire Shares which were issued pursuant to the exercise of an Option or SAR, such Shares shall not become available for future grant under the Plan. If Shares of Restricted Stock are repurchased by the Company at their original purchase price, such shares shall become available for future grant under the Plan.

4. ADMINISTRATION OF THE PLAN.

(a) PROCEDURE.

(i) MULTIPLE ADMINISTRATIVE BODIES. If permitted by Rule 16b-3 promulgated under the Exchange Act or any successor rule thereto, as in effect at the time that discretion is being exercised with respect to the Plan, and by the legal requirements of the Applicable Laws relating to the administration of stock plans such as the Plan, if any, the Plan may (but need not) be administered by different administrative bodies with respect to (A) Directors who are not Employees, (B) Directors who are Employees, (C) Officers who are not Directors and (D) Employees who are neither Directors nor Officers.

(ii) SECTION 162(m). To the extent that the Administrator determines it to be desirable to qualify Options or SARs granted hereunder as "performance-based compensation" within the meaning of Section 162(m) of the Code, the Plan shall be administered by a Committee of two or more "outside directors" within the meaning of Section 162(m) of the Code.


(iii) RULE 16b-3. To the extent desirable to qualify transactions hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder shall be structured to satisfy the requirements for exemption under Rule 16b-3.

(iv) OTHER ADMINISTRATION. Other than as provided above, the Plan shall be administered by (A) the Board or (B) a Committee, which committee shall be constituted to satisfy Applicable Laws.

(b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the Plan, and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion:

(i) to determine the Fair Market Value;

(ii) to select the person(s) to whom Options, SARs and Stock Purchase Rights may be granted hereunder;

(iii) to determine the number of shares of Common Stock to be covered by each Option, SAR or Stock Purchase Right granted hereunder;

(iv) to approve forms of agreement for use under the Plan;

(v) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Option, SAR or Stock Purchase Right granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the date of grant, the time or times when Options, SARs or Stock Purchase Rights may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option, SAR or Stock Purchase Right or the shares of Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine;

(vi) to reduce the exercise price of any Option, SAR or Stock Purchase Right to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option, SAR or Stock Purchase Right shall have declined since the date the Option, SAR or Stock Purchase Right was granted;

(vii) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan;

(viii) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws;

(ix) to modify or amend each Option, SAR or Stock Purchase Right (subject to Section 17(c) of the Plan), including the discretionary authority to extend the post-termination exercisability period of Options longer than is otherwise provided for in the Plan;

(x) to allow Optionees to satisfy withholding tax obligations by electing to have the Company withhold from the Shares to be issued upon exercise of an Option, SAR or Stock Purchase Right that number of Shares having a Fair Market Value equal to the amount required to be withheld. The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by an Optionee to have Shares withheld for this purpose shall be made in such form and under such conditions as the Administrator may deem necessary or advisable;

(xi) to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Option, SAR or Stock Purchase Right previously granted by the Administrator; and


(xii) to make all other determinations deemed necessary or advisable for administering the Plan.

(c) EFFECT OF ADMINISTRATOR'S DECISION. The Administrator's decisions, determinations and interpretations shall be final and binding on all Optionees and any other holders of Options, SARs or Stock Purchase Rights.

5. ELIGIBILITY. Nonstatutory Stock Options, SARs and Stock Purchase Rights may be granted to the Chairman, Executive Officers and other key employees or to such other individuals as determined by the Administrator whom the Company has offered a position of Chairman or Executive Officer. Incentive Stock Options may be granted only to Executive Officers and other key employees.

6. LIMITATIONS.

(a) Each Option shall be designated in the Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 6(a), Incentive Stock Options shall be taken into account in the order in which they were granted. The Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted.

(b) Neither the Plan nor any Option, SAR or Stock Purchase Right shall confer upon an Optionee any right with respect to continuing the Optionee's relationship as an Employee with or Chairman of the Company, nor shall they interfere in any way with the Optionee's right or the Company's right to terminate such relationship at any time, with or without cause.

(c) The following limitations shall apply to grants of Options and SARs:

(i) No participant shall be granted, in any fiscal year of the Company, Options or SARs to purchase more than 17,000,000 Shares;

(ii) The foregoing limitations shall be adjusted proportionately in connection with any change in the Company's capitalization as described in Section 15;

(iii) If an Option or SAR is canceled in the same fiscal year of the Company in which it was granted (other than in connection with a transaction described in Section 15), the canceled Option will be counted against the limits set forth in subsections (i) above. For this purpose, if the exercise price of an Option or SAR is reduced, the transaction will be treated as a cancellation of the Option or SAR and the grant of a new Option or SAR.

7. TERM OF PLAN. Subject to Section 21 of the Plan, the Plan shall become effective upon its adoption by the Board. It shall continue in effect for a term of ten (10) years unless terminated earlier under Section 16 of the Plan.

8. TERM OF OPTION. The term of each Option shall be stated in the Agreement. In the case of an Incentive Stock Option, the term shall be ten (10) years from the date of grant or such shorter term as may be provided in the Agreement. Moreover, in the case of an Incentive Stock Option granted to an Optionee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option shall be five (5) years from the date of grant or such shorter term as may be provided in the Agreement.


9. OPTION EXERCISE PRICE AND CONSIDERATION.

(a) EXERCISE PRICE. The per share exercise price for the Shares to be issued pursuant to exercise of an Option shall be determined by the Administrator, subject to the following:

(i) In the case of an Incentive Stock Option;

(A) granted to an Employee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant; or

(B) granted to any Employee other than an Employee described in paragraph (A) immediately above, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant;

(ii) In the case of a Nonstatutory Stock Option, the per Share exercise price shall be determined by the Administrator. In the case of a Nonstatutory Stock Option intended to qualify as 'performance-based compensation' within the meaning of Section 162(m) of the Code, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant;

(iii) Notwithstanding the foregoing, Options may be granted with a per Share exercise price of less than 100% of the Fair Market Value per Share on the date of grant as determined by the Administrator or pursuant to a merger or other corporate transaction.

(b) WAITING PERIOD AND EXERCISE DATES. At the time an Option is granted, the Administrator shall fix the period within which the Option may be exercised and shall determine any conditions which must be satisfied before the Option may be exercised.

(c) FORM OF CONSIDERATION. The Administrator shall determine the acceptable form of consideration for exercising an Option, including the method of payment. In the case of an Incentive Stock Option, the Administrator shall determine the acceptable form of consideration at the time of grant. Such consideration may consist entirely of:

(i) cash;

(ii) check;

(iii) promissory note;

(iv) other Shares which (A) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six months on the date of surrender, and (B) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised;

(v) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan;

(vi) a reduction in the amount of any Company liability to the Optionee, including any liability attributable to the Optionee's participation in any Company-sponsored deferred compensation program or arrangement;

(vii) any combination of the foregoing methods of payment; or

(viii) such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws.


10. STOCK APPRECIATION RIGHTS.

(a) GRANTED IN CONNECTION WITH OPTIONS. At the sole discretion of the Administrator, SARs may be granted in connection with all or any part of an Option, either concurrently with the grant of the Option or at any time thereafter during the term of the Option. The following provisions apply to SARs that are granted in connection with Options:

(i) The SAR shall entitle the Optionee to exercise the SAR by surrendering to the Company unexercised a portion of the related Option. The Optionee shall receive in exchange from the Company an amount equal to the excess of (x) the Fair Market Value on the date of exercise of the SAR of the Common Stock covered by the surrendered portion of the related Option over (y) the exercise price of the Common Stock covered by the surrendered portion of the related Option. Notwithstanding the foregoing, the Administrator may place limits on the amount that may be paid upon exercise of a SAR; provided, however, that such limit shall not restrict the exercisability of the related Option;

(ii) When a SAR is exercised, the related Option, to the extent surrendered, shall no longer be exercisable;

(iii) A SAR shall be exercisable only when and to the extent that the related Option is exercisable and shall expire no later than the date on which the related Option expires; and

(iv) A SAR may only be exercised at a time when the Fair Market Value of the Common Stock covered by the related Option exceeds the exercise price of the Common Stock covered by the related Option.

(b) INDEPENDENT SARS. At the sole discretion of the Administrator, SARs may be granted without related Options. The following provisions apply to SARs that are not granted in connection with Options:

(i) The SAR shall entitle the Optionee, by exercising the SAR, to receive from the Company an amount equal to the excess of (x) the Fair Market Value of the Common Stock covered by exercised portion of the SAR, as of the date of such exercise, over (y) the Fair Market Value of the Common Stock covered by the exercised portion of the SAR, as of the date on which the SAR was granted; provided, however, that the Administrator may place limits on the amount that may be paid upon exercise of a SAR; and

(ii) SARs shall be exercisable, in whole or in part, at such times as the Administrator shall specify in the Optionee's Agreement.

(c) FORM OF PAYMENT. The Company's obligation arising upon the exercise of a SAR may be paid in Common Stock or in cash, or in any combination of Common Stock and cash, as the Administrator, in its sole discretion, may determine. Shares issued upon the exercise of a SAR shall be valued at their Fair Market Value as of the date of exercise.

(d) RULE 16b-3. SARs granted hereunder shall contain such additional restrictions as may be required to be contained in the Plan or Agreement in order for the SAR to qualify for the maximum exemption provided by Rule 16b-3.

11. EXERCISE OF OPTION OR SAR.

(a) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any Option or SAR granted hereunder shall be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Agreement. An Option may not be exercised for a fraction of a Share.


An Option or SAR shall be deemed exercised when the Company receives:
(i) written or electronic notice of exercise (in accordance with the terms of the Option or SAR) from the person entitled to exercise the Option or SAR, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 15 of the Plan.

Exercising an Option in any manner shall decrease the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. Exercise of a SAR in any manner shall, to the extent the SAR is exercised, result in a decrease in the number of Shares which thereafter shall be available for purposes of the Plan, and the SAR shall cease to be exercisable to the extent it has been exercised.

(b) TERMINATION OF CONTINUOUS STATUS AS CHAIRMAN. Upon termination of an Optionee's Continuous Status as Chairman (other than termination by reason of the Optionee's death), the Optionee may, but only within ninety (90) days after the date of such termination, exercise his or her Option or SAR to the extent that it was exercisable at the date of such termination. Notwithstanding the foregoing, however, an Option or SAR may not be exercised after the date the Option or SAR would otherwise expire by its terms due to the passage of time from the date of grant.

(c) TERMINATION OF CONTINUOUS EMPLOYMENT. Upon termination of an Optionee's Continuous Status as Employee (other than termination by reason of the Optionee's death), the Optionee may, but only within ninety (90) days after the date of such termination, exercise his or her Option or SAR to the extent that it was exercisable at the date of such termination. Notwithstanding the foregoing, however, an Option or SAR may not be exercised after the date the Option or SAR would otherwise expire by its terms due to the passage of time from the date of grant.

(d) DEATH OF OPTIONEE. If an Optionee dies (i) while an Employee or Chairman, the Option or SAR may be exercised at any time within six (6) months (or such other period of time not exceeding twelve (12) months as determined by the Administrator) following the date of death by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that would have accrued had the Optionee continued living and terminated his or her employment six (6) months (or such other period of time not exceeding twelve (12) months as determined by the Administrator) after the date of death; or (ii) within ninety (90) days after the termination of Continuous Status as an Employee or Chairman, the Option or SAR may be exercised, at any time within six (6) months (or such other period of time not exceeding twelve (12) months as determined by the Administrator) following the date of death by the Optionee's estate or by a person who acquired the right to exercise the Option or SAR by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of termination. If the Option or SAR is not so exercised within the time specified herein, the Option or SAR shall terminate, and the Shares covered by such Option or SAR shall revert to the Plan.

Notwithstanding the foregoing, however, an Option or SAR may not be exercised after the date the Option or SAR would otherwise expire by its terms due to the passage of time from the date of grant.


(e) BUYOUT PROVISIONS. The Administrator may at any time offer to buy out for a payment in cash or Shares an Option or SAR previously granted based on such terms and conditions as the Administrator shall establish and communicate to the Optionee at the time that such offer is made.

12. STOCK PURCHASE RIGHTS.

(a) RIGHTS TO PURCHASE. Stock Purchase Rights may be issued either alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. After the Administrator determines that it will offer Stock Purchase Rights under the Plan, it shall advise the Optionee in writing or electronically, of the terms, conditions and restrictions related to the offer, including the number of Shares that the Optionee shall be entitled to purchase, the price to be paid, and the time within which the Optionee must accept such offer. The offer shall be accepted by execution of an Agreement in the form determined by the Administrator.

(b) REPURCHASE OPTION. Unless the Administrator determines otherwise, the Agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's service with the Company for any reason (including death or Disability). The purchase price for Shares repurchased pursuant to the Agreement shall be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company. The repurchase option shall lapse at a rate determined by the Administrator.

(c) OTHER PROVISIONS. The Agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion.

(d) RIGHTS AS A SHAREHOLDER. Once the Stock Purchase Right is exercised, the purchaser shall have the rights equivalent to those of a shareholder, and shall be a shareholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Section 15 of the Plan.

13. TRANSFERABILITY OF OPTIONS, SARS AND STOCK PURCHASE RIGHTS. Unless determined otherwise by the Administrator, an Option, SAR or Stock Purchase Right may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution or pursuant to a qualified domestic relations order as defined by the Code or Title 1 of the Employee Retirement Income Security Act, and may be exercised, during the lifetime of the Optionee, only by the Optionee. If the Administrator makes an Option, SAR or Stock Purchase Right transferable, such Option, SAR or Stock Purchase Right shall contain such additional terms and conditions as the Administrator deems appropriate.

14. STOCK WITHHOLDING TO SATISFY WITHHOLDING TAX OBLIGATIONS. When an Optionee incurs tax liability in connection with the exercise of an Option, SAR or Stock Purchase Right, which tax liability is subject to tax withholding under applicable tax laws, and the Optionee is obligated to pay the Company an amount required to be withheld under applicable tax laws, the Optionee may satisfy the withholding tax obligation (including, at the election of the Optionee, any additional amount which the Optionee desires to have withheld in order to satisfy in whole or in part the Optionee's full estimated tax in connection with the exercise) by electing to have the Company withhold from the Shares to be issued upon exercise of the Option, or the Shares to be issued upon exercise of the SAR or Stock Purchase Right, if any, that number of Shares having a Fair Market Value equal to the amount required to be withheld (and any additional amount desired to be withheld, as aforesaid). The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined (the "Tax Date").

All elections by an Optionee to have Shares withheld for this purpose shall be made in writing in a form acceptable to the Administrator and shall be subject to the following restrictions:

(i) the election must be made on or prior to the applicable Tax Date;

and


(ii) all elections shall be subject to the consent or disapproval of the Administrator.

In the event the election to have Shares withheld is made by an Optionee and the Tax Date is deferred under Section 83 of the Code because no election is filed under Section 83(b) of the Code, the Optionee shall receive the full number of Shares with respect to which the Option, SAR or Stock Purchase Right is exercised but such Optionee shall be unconditionally obligated to tender back to the Company the proper number of Shares on the Tax Date.

15. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, MERGER OR ASSET SALE.

(a) CHANGES IN CAPITALIZATION. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option, SAR or Stock Purchase Right, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options, SARs or Stock Purchase Rights have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, SAR or Stock Purchase Right, as well as the price per share of Common Stock covered by each such outstanding Option, SAR or Stock Purchase Right, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option, SAR or Stock Purchase Right.

(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed dissolution or liquidation of the Company, all outstanding Options, SARs and Stock Purchase Rights will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Administrator. The Administrator may, in the exercise of its sole discretion in such instances, declare that any Option, SAR or Stock Purchase Right shall terminate as of a date fixed by the Administrator and give each Optionee the right to exercise his or her Option, SAR or Stock Purchase Right as to all or any part of the Optioned Stock, including Shares as to which the Option, SAR or Stock Purchase Right would not otherwise be exercisable.

(c) MERGER OR ASSET SALE. Unless otherwise determined by the Administrator, in the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, each outstanding Option, SAR and Stock Purchase Right shall be assumed or an equivalent option or right substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the Option, SAR or Stock Purchase Right, the Optionee shall fully vest in and have the right to exercise the Option, SAR or Stock Purchase Right as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or exercisable. If an Option, SAR or Stock Purchase Right becomes fully vested and exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Administrator shall notify the Optionee in writing or electronically that the Option, SAR or Stock Purchase Right shall be fully vested and exercisable for a period of thirty (30) days from the date of such notice, and the Option, SAR or Stock Purchase Right shall terminate upon the expiration of such period. For the purposes of this paragraph, the Option, SAR or Stock Purchase Right shall be considered assumed if, following the merger or sale of assets, the option or right confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option, SAR or Stock Purchase Right immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other


securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets is not solely common stock of the succesor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option, SAR or Stock Purchase Right, for each Share of Optioned Stock subject to the Option, SAR or Stock Purchase Right, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets.

(d) CHANGE IN CONTROL. In the event of a "Change in Control" of the Company, as defined in paragraph (e) below, unless otherwise determined by the Administrator prior to the occurrence of such Change in Control, the following acceleration and valuation provisions shall apply:

(i) Any Options, SARs and Stock Purchase Rights outstanding as of the date such Change in Control is determined to have occurred that are not yet exercisable and vested on such date shall become fully exercisable and vested; and

(ii) The value of all outstanding Options, SARs and Stock Purchase Rights shall, unless otherwise determined by the Administrator at or after grant, be cashed-out. The amount at which such Options, SARs and Stock Purchase Rights shall be cashed out shall be equal to the excess of
(x) the Change in Control Price (as defined below) over (y) the exercise price of the Common Stock covered by the Option, SAR or Stock Purchase Right. The cash-out proceeds shall be paid to the Optionee or, in the event of death of an Optionee prior to payment, to the estate of the Optionee or to a person who acquired the right to exercise the Option, SAR or Stock Purchase Right by bequest or inheritance.

(e) DEFINITION OF "CHANGE IN CONTROL". For purposes of this
Section 15, a "Change in Control" means the happening of any of the following:

(i) When any "person", as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than the Company, a Subsidiary or a Company employee benefit plan, including any trustee of such plan acting as trustee) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company's then outstanding securities; or

(ii) The occurrence of a transaction requiring shareholder approval, and involving the sale of all or substantially all of the assets of the Company or the merger of the Company with or into another corporation.

(f) CHANGE IN CONTROL PRICE. For purposes of this Section 15, "Change in Control Price" shall be, as determined by the Administrator, (i) the highest Fair Market Value at any time within the 60-day period immediately preceding the date of determination of the Change in Control Price by the Administrator (the "60-Day Period"), or (ii) the highest price paid or offered, as determined by the Administrator, in any bona fide transaction or bona fide offer related to the Change in Control of the Company, at any time within the 60-Day Period.

16. DATE OF GRANT. The date of grant of an Option, SAR or Stock Purchase Right shall be, for all purposes, the date on which the Administrator makes the determination granting such Option, SAR or Stock Purchase Right, or such other later date as is determined by the Administrator. Notice of the determination shall be provided to each Optionee within a reasonable time after the date of such grant.


17. AMENDMENT AND TERMINATION OF THE PLAN.

(a) AMENDMENT AND TERMINATION. The Board may at any time amend, alter, suspend or terminate the Plan.

(b) SHAREHOLDER APPROVAL. The Company shall obtain shareholder approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws.

(c) EFFECT OF AMENDMENT OR TERMINATION. No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company. Termination of the Plan shall not affect the Administrator's ability to exercise the powers granted to it hereunder with respect to Options, SARs or Stock Purchase Rights granted under the Plan prior to the date of such termination.

18. CONDITIONS UPON ISSUANCE OF SHARES.

(a) LEGAL COMPLIANCE. Shares shall not be issued pursuant to the exercise of an Option, SAR or Stock Purchase Right unless the exercise of such Option, SAR or Stock Purchase Right and the issuance and delivery of such Shares shall comply with Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance.

(b) INVESTMENT REPRESENTATIONS. As a condition to the exercise of an Option, SAR or Stock Purchase Right, the Company may require the person exercising such Option, SAR or Stock Purchase Right to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required.

19. INABILITY TO OBTAIN AUTHORITY. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained.

20. RESERVATION OF SHARES. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan.

21. SHAREHOLDER APPROVAL. The Plan shall be subject to approval by the shareholders of the Company within twelve (12) months after the date the Plan is adopted. Such shareholder approval shall be obtained in the manner and to the degree required under Applicable Laws.

22. NON-U.S. EMPLOYEES. Notwithstanding anything in the Plan to the contrary, with respect to any employee who is resident outside of the United States, the Committee may, in its sole discretion, amend the terms of the Plan in order to conform such terms with the requirements of local law or to meet the objectives of the Plan. The Committee may, where appropriate, establish one or more sub-plans for this purpose.


ARTICLE 5
MULTIPLIER: 1,000,000


PERIOD TYPE 3 MOS
FISCAL YEAR END SEP 30 2000
PERIOD END APR 01 2000
CASH 1,662
SECURITIES 1,947
RECEIVABLES 1,004
ALLOWANCES 64
INVENTORY 10
CURRENT ASSETS 4,912
PP&E 723
DEPRECIATION 409
TOTAL ASSETS 7,007
CURRENT LIABILITIES 1,853
BONDS 300
PREFERRED MANDATORY 1,419
PREFERRED 0
COMMON 150
OTHER SE 731
TOTAL LIABILITY AND EQUITY 7,007
SALES 1,945
TOTAL REVENUES 1,945
CGS 1,396
TOTAL COSTS 1,396
OTHER EXPENSES 379
LOSS PROVISION 0
INTEREST EXPENSE 5
INCOME PRETAX 319
INCOME TAX 86
INCOME CONTINUING 233
DISCONTINUED 0
EXTRAORDINARY 0
CHANGES 0
NET INCOME 233
EPS BASIC 1.44
EPS DILUTED 1.28