For foreign currency forward contracts designated as cash flow hedges, hedge effectiveness is measured based on changes in the fair value of the contract attributable to changes in the forward exchange rate. Changes in the expected future cash flows on the forecasted hedged transaction and changes in the fair value of the forward hedge are both measured from the contract rate to the forward exchange rate associated with the forward contract's maturity date.

    For currency option contracts, hedge effectiveness is assessed based on changes in the option's intrinsic value. Apple defines intrinsic value as the present value of the gain or loss on the option contract calculated from the option's strike price to the forward rate associated with the option's cash settlement date. Hedge effectiveness is assessed by comparing the present value of the cumulative change in expected future cash flows on the forecasted hedged transaction attributable to the hedged risk with the cumulative change in the intrinsic value of the option. Changes in the expected future cash flows on the forecasted transaction and changes in the intrinsic value of the option hedge are both measured from the option strike price to the forward exchange rate. Changes in fair value of the option contract attributable to time value are excluded from the measurement of hedge effectiveness and are recognized in current earnings. For interest rate swap agreements qualifying as fair value hedges, the Company assumes no ineffectiveness as each interest rate swap meets the criteria for accounting under the short-cut method defined in SFAS No. 133.133 and accounting for derivatives may be found in Note 6, "Derivative Financial Instruments."

Recent Accounting Pronouncements

    SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets," were issued in July 2001. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, as well as all purchase method business combinations completed after June 30, 2001. SFAS No. 141 also specifies criteria that intangible assets acquired in a purchase business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with definite lives be amortized over their estimated useful lives and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."

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    The Company is required to adopt the provisions of SFAS No. 141 immediately. The provisions of SFAS No. 142 are effective for fiscal years beginning after December 15, 2001. However, the Company may choose early adoption effective in the first quarter of its fiscal 2002. Prior to adoption of SFAS No. 142, any goodwill and any intangible asset determined to have an indefinite useful life acquired in a purchase business combination completed after June 30, 2001, will not be amortized, but will continue to be evaluated for impairment in accordance with pre-SFAS No. 142 accounting literature. Goodwill and intangible assets acquired in a purchase business combination completed prior to July 1, 2001, will continue to be amortized prior to adoption of SFAS No. 142.

    Adoption of SFAS No. 142 will require that the Company evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and make any necessary reclassifications in order to conform with the new criteria in SFAS No. 141 for recognition apart from goodwill. Upon adoption of SFAS No. 142, the Company will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of SFAS No. 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period.

    As of June 30, 2001, the Company has unamortized goodwill of approximately $52.3 million, and unamortized identifiable intangible assets of approximately $7.3 million. The Company recognized amortization expense related to goodwill of $3.5 million during the third quarter of 2001, and amortization expense of $1.2 million related to identifiable intangible assets. These amounts for both unamortized intangibles balances and quarterly amortization expense reflect accounting pursuant to existing accounting standards. Because of the extensive effort needed to comply with adopting SFAS No. 141 and No. 142, it is not practicable to reasonably estimate the impact of adopting these standards on the Company's financial results at the date of this report, including whether any reclassifications will be necessary in order to conform with the new criteria for recognition of intangible assets apart from goodwill.

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

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. Common stock options and convertible preferred stock were not included in

6

the computation of diluted loss per share for the sixnine month period ended March 31,June 30, 2001, as their effect was antidilutive. On June 21, 2000, the Company effected a two-for-one stock split in the form of a Common Stock dividend to shareholders of record as of May 19, 2000. All per share data and numbers of Common shares have been retroactively adjusted to reflect the stock split.

6

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

    Options to purchase approximately 45 million shares of common stock were outstanding as of March 31,June 30, 2001 that were not included in the computation of diluted earnings per share for the secondthird quarter of 2001 because the options' exercise price was greater than the average market price of the Company's common stock during this period and, therefore, the effect would be antidilutive. At March 31,June 30, 2001, the Company had outstanding options to purchase approximately 94.897.1 million shares of its common stock, all of which were excluded from the computation of diluted loss per share for the sixnine month period then ended because the effect would have been antidilutive.

7

Note 3—Consolidated Financial Statement Details (in millions)

Inventories

7

Property, Plant, and Equipment

Internal-Use Software (included in other assets)

Accrued Expenses

8

Interest and Other Income, Net

Note 4—Non-Current Debt and Equity Investments and Other Strategic Investments

    As of March 31,June 30, 2001, the Company held significant investments in ARM Holdings plc (ARM), 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. If it is determined that a decline in value of any of these investments is other than temporary, then the investment's basis is written down to fair value, and the write down would be included in other income as a loss. Realized gains on the sale of portions of these investments have been classified as gains on

8

non-current investments, net in the condensed consolidated statements of operations. The Company believes it is likely there will be significant fluctuations in the fair value of these investments in the future.

ARM Holdings

    ARM is a publicly held company in the United Kingdom involved in the design and licensing of high performance microprocessors and related technology. As of September 30, 2000, the Company held 34.8 million shares of ARM stock with a fair value of $383 million. As of March 31,June 30, 2001, the Company held 8.15.0 million shares of ARM stock with a fair value of $38$19 million. The following table sets forth information regarding the sales of ARM stock during the first sixnine months of fiscal 2001 and fiscal 2000 (in millions):

Akamai

    In June 1999, the Company invested $12.5 million in Akamai, a global Internet content delivery service. The investment was in the form of convertible preferred stock that converted into 4.1 million shares of Akamai common stock (adjusted for subsequent stock splits) at the time of Akamai's initial public offering in October 1999. Beginning in the first quarter of 2000, the Company categorized its shares in Akamai as available-for-sale. The fair value of the Company's investment in Akamai was approximately $216 million and $27$29 million as of September 30, 2000 and March 31,June 30, 2001, respectively. During the first quarter of 2001, the Company sold 1 million shares of Akamai stock for net proceeds

9

of approximately $39 million and a gain before taxes of approximately $36 million. NoThe Company sold no shares of Akamai stock were sold by the Company during the second quarteror third quarters of 2001.

EarthLink

    In January 2000, the Company invested $200 million in EarthLink, an Internet service provider (ISP). The investment is in EarthLink's Series C Convertible Preferred Stock, which is convertible by the Company after January 4, 2001, into approximately 7.1 million shares of EarthLink common stock. Concurrent with this investment, EarthLink and the Company entered into a multi-year agreement to deliver ISP service to Macintosh users in the United States. Under the terms of the agreement, the Company profits from each new Mac customer that subscribes to EarthLink's ISP service for a specified period of time, and EarthLink is the default ISP in Apple's Internet Setup Software included with all Macintosh computers sold in the United States. As of March 31, 2001, the Company determined that the decline in the fair value of its investment in EarthLink was other than temporary requiring that its cost basis be written down to fair value as a new cost basis and the amount of the write down be included in earnings. As a result, the Company recognized a $114 million charge to earnings to write down the basis of its investment in EarthLink to $86 million. This charge was included in gains on non-current investments, net. The fair value of the Company's investment in EarthLink as of June 30, 2001 was approximately $98 million.

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Samsung

    During the fourth quarter of 1999, the Company invested $100 million in Samsung Electronics Co., Ltd. (Samsung), to assist in the further expansion of Samsung's TFT-LCD flat-panel display production capacity. The investment iswas in the form of three year unsecured bonds which arethat were convertible into approximately 550,000 shares of Samsung common stock, or GDR equivalents, beginning in July 2000. The bonds carrycarried an annual coupon rate of 2% and pay a total yield to maturity of 5% if redeemed at their maturity. During the second quarter of fiscal 2001, the Company sold this investment for book value, including accrued interest. Net proceeds of approximately $117 million were received by the Company on April 2, 2001,during the third quarter and were reflected in other current assets as of March 31, 2001.

    Prior to its sale, the Company had categorized its investment in Samsung as available-for-sale requiring that it be carried at fair value with unrealized gains and losses, net of taxes, reported in equity as a component of accumulated other comprehensive income. With the adoption of SFAS No. 133 on October 1, 2000, the Company was required to account for the conversion option embedded in the Samsung bonds separately from the related debt. The conversion feature was carried at fair value with any changes in fair value recognized in earnings in the period in which they occur. Included in the $17 million gross SFAS No. 133 transition adjustment recorded in earnings during the first quarter of fiscal 2001 was a $23 million favorable adjustment for the restatement to fair value as of October 1, 2000, of the derivative component of the Company's investment in Samsung. To adjust the carrying value of the derivative component of its investment in Samsung to fair value as of December 30, 2000, the Company recognized an unrealized loss of approximately $13 million during the first quarter of 2001.

Other Strategic Investments

    The Company has additional minority debt and equity investments in several privately held technology companies with a book value of approximately $26$18 million as of March 31,June 30, 2001. These investments, which are reflected in the consolidated balance sheets in other assets, are inherently risky because the products and/or markets of these companies may be under development and/or because the markets for the technologies or products these companies have under development are typically in the early stages of development.not fully developed. During the

10

second quarter of fiscal 2001, the Company determined that the decline in fair value of certain of these investments was other than temporary and, accordingly, recognized a charge to earnings of approximately $8 million.

Note 5—Shareholder's Equity

Stock Repurchase Plan

    In July 1999, the Company's Board of Directors authorized a plan for the Company to repurchase up to $500 million of its common stock. This repurchase plan does not obligate the Company to acquire any specific number of shares or acquire shares over any specified period of time. During 2000, the Company repurchased a total of 2.55 million shares of its common stock at a cost of $116 million. No shares were repurchased during the first sixnine months of 2001. Since inception of the plan, the Company has repurchased a total of 5.05 million shares of its common stock at a cost of $191 million.

Preferred Stock

    In August 1997, the Company and Microsoft Corporation (Microsoft) entered into patent cross licensing and technology agreements. In addition, Microsoft purchased 150,000 shares of Apple Series A nonvoting convertible preferred stock ("preferred stock") for $150 million. These shares were convertible by Microsoft after August 5, 2000, into shares of Apple common stock at a conversion price of $8.25 per share. On September 15, 2000, 74,250 shares of preferred stock were converted to 9 million shares of the Company's common stock. In the first quarter of 2001, an additional 72,400

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72,450 shares of preferred stock were converted to 8.8 million shares of the Company's common stock. In the second quarter of 2001, the remaining 3,300 shares of preferred stock were converted to 400,000 shares of the Company's common stock.

Note 6—Derivative Financial Instruments

    The Company uses derivatives to partially offset its business exposure to currency and interest rate risk. Forward and option contracts are used to offset the foreign exchange risk on certain existing assets and liabilities and to hedge the foreign exchange risk of future cash flows on certain forecasted revenues and cost of sales. From time to time, the Company enters into interest rate swap agreements to modify the interest rate profile of certain investments and debt. The Company's accounting policies for these instruments are based on whether the instruments are designated as hedge or non-hedge instruments. The Company records all derivatives on the balance sheet at fair value.

Foreign Exchange Risk Management

    The Company enters into foreign exchange forward and option contracts with financial institutions primarily to protect against currency exchange risk associated with expected future cash flows, existing assets and liabilities, and certain firmly committed transactions. Generally, the Company's practice is to hedge a majority of its existing material foreign exchange transaction exposures. However, the Company may not hedge certain foreign exchange transaction exposures due to immateriality, prohibitive economic cost of hedging particular exposures, and limited availability of appropriate hedging instruments.

    In accordance with SFAS No. 133, hedges related to anticipated transactions are designated and documented at hedge inception as cash flow hedges and evaluated for hedge effectiveness quarterly. For currency forward contracts, hedge effectiveness is measured based on changes in the fair value of the contract attributable to changes in the forward exchange rate. Changes in the expected future cash

11

flows on the forecasted hedged transaction and changes in the fair value of the forward hedge are both measured from the contract rate to the forward exchange rate associated with the forward contract's maturity date. For currency option contracts, hedge effectiveness is measured based on changes in the option's intrinsic value. Apple defines intrinsic value as the present value of the gain or loss on the option contract calculated from the option's strike price to the forward rate associated with the option's cash settlement date. Hedge effectiveness is assessed by comparing the present value of the cumulative change in expected future cash flows on the forecasted transaction attributable to the hedged risk with the cumulative change in the intrinsic value of the option. Changes in the expected future cash flows on the forecasted transaction and changes in the intrinsic value of the option hedge are both measured from the option strike price to the forward exchange rate. Changes in fair value of the option contract attributable to time value are excluded from the measurement of hedge effectiveness and are recognized in current earnings. The effective portions of the net gains or losses on derivative instruments are reported as components of other comprehensive income in stockholders' equity and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Any residual changes in fair value of the instruments, including option time value or other ineffectiveness, are recognized in current earnings in interest and other income and expense.

    To protect gross margins from fluctuations in foreign currency exchange rates, the Company's U.S. dollar functional subsidiaries hedge a portion of forecasted foreign currency revenues, and the Company's non-U.S. dollar functional subsidiaries selling in foreign currencies hedge a portion of forecasted inventory purchases not denominated in the subsidiaries' functional currency. Other comprehensive income associated with hedges of foreign currency sales is recognized as a component of net sales in the same period as the related sales are recognized, and other comprehensive income related to inventory purchases is recognized as a component of cost of sales in the same period as the

11

related costs are recognized. Typically, the Company hedges portions of its forecasted foreign currency exposure associated with revenues and inventory purchases over a time horizon of 3 to 9 months.

    The Company also enters into foreign currency forward and option contracts to offset the foreign exchange gains and losses generated by the remeasurement of certain recorded assets and liabilities in non-functional currencies. Changes in the fair value of these derivatives are recognized in current earnings in interest and other income as offsets to the changes in the fair value of the related assets or liabilities.

    The Company may enter into foreign currency forward contracts to offset the translation and economic exposure of a net investment position in a foreign subsidiary. Hedge effectiveness on forwards designated as net investment hedges is measured based on changes in the fair value of the contract attributable to changes in the spot exchange rate. The effective portion of the net gain or loss on a derivative instrument designated as a hedge of the net investment position in a foreign subsidiary is reported in the same manner as a foreign currency translation adjustment. Any residual changes in fair value of the forward contract, including changes in fair value based on the differential between the spot and forward exchange rates are recognized in current earnings in interest and other income and expense.

    As discussed above, the Company enters into foreign currency option contracts as designated cash flow hedges and, sometimes, as items which provide an offset to the remeasurement of certain recorded assets and liabilities denominated in non-functional currencies. All changes in the fair value of these derivative contracts based on changes in option time value are recorded in current earnings in interest and other income and expense. Due to market movements, changes in option time value can lead to increased volatility in other income and expense.

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    Derivative instruments designated as cash flow hedges must be re-designatedde-designated as hedges when it is probable that the forecasted hedged transaction will not occur in the initially identified time period or within 60 days subsequent to the initial time period. Deferred gains and losses in other comprehensive income associated with such derivative instruments are immediately reclassified into earnings in interest and other income. Any subsequent changes in fair value of such derivative instruments are also reflected in current earnings unless they are re-designated as hedges of other transactions.

Interest Rate Risk Management

    The Company sometimes enters into interest rate derivative transactions, including interest rate swaps, collars, and floors, with financial institutions in order to better match the Company's floating-rate interest income on its cash equivalents and short-term investments with its fixed-rate interest expense on its long-term debt, and/or to diversify a portion of the Company's exposure away from fluctuations in short-term U.S. interest rates. The Company may also enter into interest rate contracts that are intended to reduce the cost of the interest rate risk management program. The Company assumes no ineffectiveness with regard to the debt swaps as each interest rate swap meets the criteria for accounting under the short-cut method defined in SFAS No. 133 for fair value hedges of debt instruments. Accordingly, no net gains or losses were recorded in income relative to the Company's underlying debt and interest rate swaps. The Company's asset swaps do not qualify for hedge accounting treatment and are recorded at fair value on the balance sheet with associated gains and losses recorded in interest and other income. Included in the transition adjustment for SFAS No. 133 was an unfavorable adjustment before tax of approximately $5.7 million that adjusted the asset swaps to fair value as of October 1, 2000.

Derivative Activity in Accumulated Other Comprehensive Income

    As of March 31,June 30, 2001, the Company had net deferred gains associated with cash flow hedges of approximately $29$31 million net of taxes, substantially all of which is expected to be reclassified to

12

earnings by the end of the fourthsecond quarter of fiscal 2001.2002. The following table summarizes activity in other comprehensive income related to derivatives, net of taxes, held by the Company for the three and sixnine months period ended March 31,June 30, 2001 (in millions):

Note 7—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, changes in fair value of derivatives designated as and effective as cash flow hedges, and unrealized gains and losses, net of taxes, on marketable securities categorized as available-for-sale. Refer to "Note 4—Non-CurrentNote 4, "Non-Current Debt and Equity Investments and Other Strategic Investments" for additional

13

information regarding unrealized gains and losses on available-for-sale securities and "Note 6—DerivativeNote 6, "Derivative Financial Instruments" for other information regarding accounting for derivative financial instruments.

    The components of comprehensive income, net of tax, are as follows (in millions):

    The components of accumulated other comprehensive income, net of tax, are as follows (in millions):

13

Note 8—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, $2.5 million had been spent by September 30, 2000, and the remaining $2.5 million was spent by March 31, 2001. Of the $3 million accrued for the write-off of various assets, substantially all was utilized by the end of the second quarter of 2000.

Executive Bonus

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

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Note 9—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., and the Company's recently formed Retail segment. 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 2000 Form 10-K. Additional information regarding the Company's new Retail segment may be found in this Form 10-Q in Item 2 under the headings "Segment Operating Performance," and "Factors That May Affect Future Results and Financial Condition."

    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,development; manufacturing expenses not included in segment cost of sales, including variances between standard and actual manufacturing costs; corporate marketing expenses,expenses; and other separately managed general and administrative expenses. The Company does not

14

include intercompany transfers between segments for management reporting purposes. Summary information by segment follows (in millions):

15

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

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

(a)

Includes amounts previously reported as Power Macintosh G4 Cube

Note 10—Contingencies

    The Company is subject to various legal proceedings and claims that are discussed in detail in the 2000 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

15

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.

    On February 15, 2001, the Internal Revenue Service (IRS) proposed adjustments to the Company's federal income tax returns for the years 1995 through 1997. The Company disagrees with most of the proposed adjustments and is contesting them through the IRS Appeals Office. Substantially all IRS audit issues for years prior to 1995 have been resolved. Management believes that adequate provision has been made for any adjustments that may result from tax examinations.

Note 11—Subsequent Event: Acquisition of PowerSchool, Inc.

    On March 14,In May 2001, the Company announced plansacquired PowerSchool, Inc., a provider of web-based student information systems for K-12 schools and districts that enables schools to acquire privately-held PowerSchool Inc. for $62record, access, report, and manage their student data and performance in real-time, and gives parents real-time web access to track their children's progress.

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    The purchase price of approximately $66.1 million in stock. The acquisition closed on April 30, 2001, and resulted inconsisted of the issuance of approximately 2.4 million shares of Apple common stock with a fair value of $61.2 million, the issuance of stock options with a fair value of $4.5 million, and $300,000 of direct transaction costs. The fair value of the common stock options issued was determined using a Black-Scholes option pricing model with the following assumptions: volatility of 67%, expected life of 4 years, dividend rate of 0%, and risk-free rate of 4.73%. The portion of the purchase consideration related to approximately 445,000 shares that are contingent on the continuing employment of certain employees, and the intrinsic value of assumed stock options related to future services, have been classified as deferred stock compensation within shareholders' equity. Total consideration was allocated as follows (in millions):

    The amount of the purchase price allocated to purchased in-process research and development (IPR&D) was expensed upon acquisition, because the technological feasibility of products under development had not been established and no alternative future uses existed. The IPR&D relates to technologies representing processes and expertise employed to design, develop, and deploy a functioning, scalable web-based student information system for use by K-12 schools. At the date of the acquisition, the product under development was approximately 50% complete, and it was expected that the remaining 50% would be completed during the Company's commonfiscal 2002 at a cost of approximately $9.25 million. The remaining efforts include completion of coding, finalizing user interface design and development, and testing. The fair value of the IPR&D was determined using the income approach, which reflects the projected free cash flows that will be generated by the IPR&D projects and that is attributable to the acquired technology, and discounting the projected net cash flows back to their present value using a discount rate of 25%. The goodwill and acquired intangibles are being amortized over their estimated useful lives of eight and three years, respectively. Deferred stock compensation associated with restricted stock and issuanceoptions is being amortized over the required future vesting period of options to PowerSchool option holders to purchase approximately 225,000 sharesthree years.

Note 12—Subsequent Event: Acquisition of Spruce Technologies, Inc.

    On July 9, 2001, the Company's common stock.Company acquired Spruce Technologies, Inc. for $16 million in cash. The acquisition will be accounted for as a purchasepurchase. Spruce is a privately-held company that develops and is expected to result in a charge to earnings during the third quarter of 2001 of approximately $10 million reflecting the value of acquired in-process research and development costs.markets DVD authoring products.

1617

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 2000 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):

17NM: Not Meaningful

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Net Sales

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

(a)

Includes amounts previously reported as Power Macintosh G4 Cube

    Net sales decreased $1.850$2.2 billion or 43%36% during the first sixnine months of 2001 compared to the same period in 2000.2000, while Macintosh unit sales for the first sixnine months of 2001 fell 42%35% from the same period in 2000. Demand for all of the Company's products, particularly consumer oriented products, has beendemand, continued to be negatively impacted across all geographic operating segmentsregions by unfavorable global economic conditions.

    The first quarter of 2001 was particularly impacted. Net sales decreased 57% to $1.007 billion during the first quarter of 2001 compared to the same quarter in 2000 and decreased 46% from the fourth quarter of 2000.

Both the year-over-year and sequential declines in net sales during the first quarter of 2001 were attributable to several factors including continued deterioration in worldwide demand for personal computers and rebate programs and price cuts instituted by the Company during the quarter that cost the Company approximately $138 million. In addition, the Company implemented a plan during the first quarter to reduce substantially the level of inventory in its distribution channels from the amounts at the end of fiscal 2000 to more normallower levels by the end of the first quarter of 2001. The Company ended fiscal 2000 with substantially more inventory in its distribution channels than planned due to the lower than expected sell-through of the Company's products during the fourth quarter of that year. The Company reduced channel inventory during the first quarter by approximately 300,000 units. These factors contributed to the 52% year-over-year decline during the first quarter in total Macintosh unit sales that were experienced across the Company's entire product line. These factors also reduced the average revenue per Macintosh unit shipped (a function of total net sales generated by hardware shipments and total Macintosh CPU unit sales) during the first quarter of 2001 to $1,476, a decline of approximately 12% from the same period in 2000.

    SecondThird quarter net sales declined 26%19% from the same period last year, a reflection of continued pressure on the overall worldwide demand for personal computers. However,On a year-over-year basis, quarterly net sales and Macintosh unit sales were down in all of the Company's operating segments, and net

19

sales and unit sales by product were down for each Macintosh product category except iBook. Net sales rose sequentially during the secondthird quarter of 2001 by $424$44 million or 42%3% while quarterly Macintosh unit sales rose sequentially by 14%10% to 751,000827,000 units. Several circumstances contributedTwo primary factors led to these sequential increases. First, combined unit sales of the portable systems, PowerBook and iBook, rose 57% during the third quarter from the second quarter, and were 36% higher than in the same quarter in 2000. The increase in unit sales of portable systems is attributable to the strong demand for redesigned iBooks introduced during the third quarter and for the Titanium PowerBook G4 which was introduced during the second quarter. Second, as discussed below, the Americas segment was impacted favorably during the third quarter of 2001 by strong U.S. education sales.

    Despite overall sequential growth in both net sales and unit sales during the third quarter of 2001, several factors combined to partially offset the impact of strong portable systems and education sales during the quarter. First, unit sales of Power Macintosh systems declined sequentially 14% during the third quarter and were down 36% from the third quarter of 2000. In addition to being negatively impacted by general economic conditions, the Company experienced a sequential increasebelieves that many of its professional users are delaying upgrades of their Power Macintosh systems due to the Company's ongoing transition to Mac OS X, its new operating system, and in net sales of

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its higher-priced professionally oriented products of $460 million or 135%. This resulted primarily from the introduction during the second quarteranticipation of new Power Macintosh models and introductionsystems using faster PowerPC G4 microprocessors. Power Macintosh unit sales were also negatively affected by the Company's efforts to exit the third quarter with reduced levels of Power Macintosh units in its distribution channels in anticipation of planned upgrades to Power Macintosh systems early in the Titanium PowerBook G4. The shift towards its professionally oriented products causedfourth quarter of 2001. Second, as discussed below, demand in Europe was particularly weak during the third quarter. Third, the sequential increase in Macintosh unit sales experienced during the third quarter of 2001 was partially offset by a sequential 7% decline in the average revenue per Macintosh system, a function of total net sales generated by hardware shipments and total Macintosh CPU unit shipped to rise 26% to $1,865sales. The decline in the average revenue per Macintosh system reflects the shift in unit mix during the secondthird quarter as compared to the first quarter. Second, Mac OS X, the Company's new operating system introduced at the end of the second quarter, generated $19 million of net sales. Third, the first quarter of 2001 was severely impacted by the factors described above including recognition of extensive rebate programstowards lower priced consumer and price cutseducation oriented iBook and actions taken to significantly reduce channel inventories during that quarter. TheiMac systems. Fourth, sequential increaseincreases in net sales during both the second quarter wasand third quarters were partially mitigatedoffset by a continuation in the Company's plan to reduce inventory in its distribution channels. These efforts resulted in a further reductionreductions in channel inventoryinventories during the second quarterand third quarters of 2001 of approximately 100,000 units.units and 45,000 units, respectively.

Outlook

    For the second halffourth quarter of 2001, the Company anticipates net sales and profitability will improve slightly from the third quarter and that margins and recurring operating expenses will be withincomparable to levels experienced in the range of $3.2 to $3.4 billion. The Company currently expects sequential quarterly improvements in both net sales and profitability, before the effect of any investment gains and other nonrecurring items, for both quarters remaining in 2001.third quarter.

    The foregoing statements concerning the Company's anticipated net sales, profitability, margins, and recurring operating expenses for the remainderfourth quarter of 2001 and profitability for the remainder of fiscal 2001 are forward-looking. The Company's actual results could differ. The Company's future operating results and financial condition are dependent upon general economic conditions, market conditions within the PC industry, and the Company's ability to successfully develop, manufacture, and market technologically innovative products in order to meet the dynamic conditions within the highly competitive market for personal computers. Some of the potential risks and uncertainties that could affect the Company's future operating results and financial condition are discussed throughout this Item 2, including the discussion under the heading "Factors That May Affect Future Results and Financial Condition."

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

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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 9, "Segment Information and Geographic Data."

Americas

    Net sales in the Americas segment during the secondthird quarter of 2001 decreased $222$178 million or 22%17% compared to the same period in 2000. However, secondthird quarter net sales in the Americas segment increased sequentially from the firstsecond quarter $254$76 million or 50%10%. Overall, during the first sixnine months of 2001, the Americas segment's net sales and unit sales both declined 41%34% and 32%, respectively, from the same period in 2000. The operating performance of the Americas segment for both the secondthird quarter and the first sixnine months of 2001 reflects the Company's overall performance characterized by significant declines in year-over-year quarterly net sales and units sales, particularly during the first quarter and particularly forin consumer oriented products,channels, with some sequential recovery in total unit sales during the second and third quarters of 2001. The Americas segment was impacted favorably during the third quarter of 2001 by strong U.S. education sales. Unit sales during the third quarter in the U.S. education channel rose seasonally by 58% from the second quarter and increased from the third quarter of last year by 7%. There was also a pronounced shift in the education market towards portable systems reflecting the acceptance of the Company's new portable products, particularly the iBook, and reflective of a general shift in demand in the U.S. education market towards portable versus desktop systems. During the third quarter of 2001, portable systems accounted for 31% of total unit sales in the Company's U.S. education market as compared to 23% during the second quarter of 2001 as compared toand 20% during the first quarter. During the second quarter of 2001, net sales in the Americas segment represented 54% of total net sales as compared to 51% in the samethird quarter of 2000.