Stock-Based Compensation

        The Company measures compensation expense for its employee stock-based compensation plans using the intrinsic value method prescribed by Accounting Principles Board (APB) Opinion 25,Accounting for Stock Issued to Employees and has provided pro forma disclosures of the effect on net income and earnings per share as if the fair value-based method had been applied in measuring compensation expense. The Company has elected to follow APB No. 25 because, as discussed below, the alternative fair value accounting provided for under SFAS No. 144 provides guidance123,Accounting for Stock-Based Compensation, requires use of option valuation models that were not developed for use in valuing employee stock options and employee stock purchase plan shares. Under APB Opinion No. 25, when the exercise price of the Company's employee stock options equals the market price of the underlying stock on howthe date of the grant, no compensation expense is recognized.

        As required under SFAS 123, the pro forma effects of stock based compensation on net income and earnings per common share for employee stock options granted and employee stock purchase plan purchases have been estimated at the date of grant and beginning of the period, respectively, using a long-lived assetBlack-Scholes option pricing model. For purposes of pro forma disclosures, the estimated fair value of the options and shares are amortized to pro forma net income over the options' vesting period and the shares' plan period.

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

        For purposes of the pro forma disclosures provided pursuant to SFAS No. 123, the expected volatility assumptions used by the Company have been based solely on historical volatility rates of the Company's common stock. The Company has made no adjustments to its expected volatility assumptions based on current market conditions, current market trends, or expected volatility implicit in market traded options on the Company's stock. The Company will continue to monitor the propriety of this approach to developing its expected volatility assumption and could determine for future periods that adjustments to historical volatility and/or use of a methodology that is usedbased on the expected volatility implicit in market traded options on the Company's common stock are more appropriate based on the facts and circumstances existing in future periods.

        For purposes of pro forma disclosures, the estimated fair value of the options and shares is amortized to pro forma net income over the options' vesting period and the shares' plan period. The

6

Company's pro forma information for the three months ended December 28, 2002 and December 29, 2001 follows (in millions, except per share amounts):

Note 2—Financial Instruments

Cash, Cash Equivalents and Short-Term Investments

        The following table summarizes the fair value of the Company's cash and available-for-sale securities held in its short-term investment portfolio, recorded as partcash and cash equivalents or short-term investments as of December 28, 2002, and September 28, 2002 (in millions):

        The Company's short-term investment portfolio recorded as cash and cash equivalents or short-term investments consists of investments in U.S. Treasury and Agency securities, U.S. corporate securities, and foreign securities. The Company's U.S. corporate securities consist primarily of commercial paper, loan participations, certificates of deposit, time deposits, and corporate debt securities. Foreign securities consist primarily of foreign commercial paper, loan participation, certificates of deposit and time deposits with foreign institutions, most of which are denominated in U.S. dollars. Net unrealized gains on the Company's investment portfolio, primarily related to investments with stated maturities greater than 1 year, were $11 million as of December 28, 2002 and $20 million as of September 28, 2002. The Company occasionally sells short-term investments prior to

7

their stated maturities. As a group should be evaluated for impairment, establishes criteria for when a long-lived asset isresult of such sales, the Company recognized gains of $9 million during the first quarter of 2003 and $3 million during the first quarter of 2002. These gains were included in interest and other income, net.

        As of December 28, 2002, $889 million of the Company's investment portfolio was classified as short-term investments with maturities ranging from 1 to 5 years. As of September 28, 2002, $1.087 billion of the Company's investment portfolio was classified as short-term investments with maturities ranging from 1 to 5 years.

Non-Current Debt and Equity Investments and Related Gains

        The Company has held for sale,significant investments in ARM Holdings plc (ARM), Samsung Electronics Co., Ltd. (Samsung), Akamai Technologies, Inc. (Akamai) and prescribes the accounting for a long-lived asset that will be disposed of other than by sale. SFAS No. 144 retains the basic provisions of Opinion 30 on how to present discontinued operationsEarthLink Network, Inc. (EarthLink). These investments have been reflected in the income statement but broadensconsolidated balance sheets as non-current debt and equity investments and have been categorized as available-for-sale requiring that presentation to includethey be carried at fair value with unrealized gains and losses, net of taxes, reported in equity as a component of accumulated other comprehensive income. All realized gains on the sale of these investments have been included in other income. The combined fair value of these investments held by the Company was $28 million and $39 million as of December 28, 2002, and September 28, 2002, respectively.

        During the first quarter of 2003, the Company sold 2,580,000 shares of EarthLink stock for net proceeds of approximately $13.7 million, an entity (ratheramount that approximated the Company's carrying value of the shares. During the first quarter of 2002, the Company sold 4.7 million shares of ARM stock for both net proceeds and a gain before taxes of $21 million. During the first quarter of 2002, the Company also sold 250,000 shares of Akamai and 117,000 shares of EarthLink stock for net proceeds of approximately $2 million each and a gain before taxes of $710,000 and $223,000, respectively.

Derivative Financial Instruments

        The Company uses derivatives to partially offset its business exposure to foreign exchange and interest rate risk. Foreign currency 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 on expected 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. As of the end of the first quarter of 2003, the general nature of the Company's risk management activities and the general nature and mix of the Company's derivative financial instruments have not changed materially from the end of fiscal 2002.

Foreign Exchange Risk Management

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

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

8

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 a segmentrisk management.

Accounting for Derivative Financial Instruments

        On October 1, 2000, the Company adopted Statement of a business)Financial Accounting Standards (SFAS) No. 133,Accounting for Derivative Instruments and Hedging Activities. Unlike SFAS No. 121, an impairment assessment under133 establishes accounting and reporting standards for derivative instruments, hedging activities, and exposure definition. SFAS No. 144133 requires that all derivatives be recognized as either assets or liabilities 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 never resulteither 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. As of December 28, 2002, the Company had a write-downnet deferred loss associated with cash flow hedges of goodwill. Rather,approximately $6 million net of taxes, substantially all of which is expected to be reclassified to earnings by the end of the third quarter of fiscal 2003.

Note 3—Condensed Consolidated Financial Statement Details (in millions)

Inventories

Property, Plant, and Equipment

9

Accrued Expenses

Interest and Other Income, Net

Non-Trade Receivables

        The Company has non-trade receivables from certain of its manufacturing vendors resulting from the sale by the Company of raw material components to these manufacturing vendors who manufacture sub-assemblies or assemble final products for the Company. The Company purchases these raw material components directly from suppliers. These non-trade receivables, which are included in the condensed consolidated balances sheets in other current assets, totaled $94 million and $142 million as of December 28, 2002, and September 28, 2002, respectively. The Company does not recognize any profits on these sales nor does it reflect the sale of these components in its net sales.

Inventory Prepayment

        In April 2002, the Company made a $100 million prepayment to an Asian supplier for the purchase of components over the following nine months. In return for this deposit, the supplier agreed to supply the Company with a specified level of components in the three consecutive fiscal quarters ending December 28, 2002. If the supplier failed to supply the agreed upon level of components in any of those three fiscal quarters, the Company had the right to cancel the arrangement and receive the amount of the prepayment not utilized plus a penalty. Approximately $14 million and $53 million of this deposit remained unused as of December 28, 2002, and September 28, 2002, respectively, and is reflected in the condensed consolidated balance sheets in other current assets. Although the amount of the prepayment that remains outstanding as of December 28, 2002, was refundable to the Company by January 31, 2003, the Company anticipates that it will utilize this amount for the purchase of components during the second quarter of 2003.

        Although the supplier's existing debt is unrated, its public debt pricing is consistent with other BBB rated companies. The deposit is unsecured and has no stated interest component. The Company is imputing an amount to cost of sales and interest income during each period the deposit is outstanding at an appropriate market interest rate to reflect the economics of this transaction. In light of the supplier's implied debt rating and because the Company's prepayment is unsecured, non-performance by and/or economic deterioration of the supplier could place all or some of the Company's outstanding deposit at risk.

10

Goodwill and Other Intangible Assets

        The Company is currently amortizing its acquired intangible assets with definite lives over periods ranging from 3 to 7 years. The Company ceased amortization of goodwill is evaluated for impairment underat the beginning of fiscal 2002 when it adopted SFAS No. 142,Goodwill and Other Intangible Assets.Assets

. Amortization expense related to acquired intangible assets for the three months ended December 28, 2002, and December 29, 2001, was $3 million and $1 million, respectively. The Company is requiredfollowing table summarizes the components of gross and net intangible asset balances (in millions):

(a)

Accumulated amortization related to adopt SFAS No. 144 no later than its first fiscal year beginning after December 15, 2001. Management does not expectgoodwill of $55 million arising prior to the adoption of SFAS No. 144142 has been reflected in the gross carrying amount of goodwill as of December 28, 2002, and September 28, 2002.

Accrued Warranty and Related Costs

        The Company offers a basic limited parts and labor warranty on its hardware products. The basic warranty period for hardware products is typically one year from the date of purchase by the end user. The Company also offers a 90-day basic warranty for Apple software and for Apple service parts used to repair Apple hardware products. The Company provides currently for the estimated cost that may be incurred under its basic limited product warranties at the time related revenue is recognized. Factors considered in determining appropriate accruals for product warranty obligations include the size of the installed base of products subject to warranty protection, historical warranty claim rates, historical cost-per-claim, and knowledge of specific product failures that are outside of the Company's typical experience. The Company assesses the adequacy of its preexisting warranty liabilities and adjusts the amounts as necessary based on actual experience and changes in future expectations.

        The following table reconciles changes in the Company's accrued warranties and related costs for the three-month periods ended December 28, 2002, and December 29, 2001 (in millions):

Note 4—Restructuring Actions

2003 Restructuring Actions

        During the first quarter of 2003, the Company's management approved and initiated restructuring actions with a total cost of $24 million that resulted in the termination of manufacturing operations at the Company-owned facility in Singapore, further reductions in headcount resulting from the shift in PowerSchool product strategy that took place at the end of fiscal 2002, and termination of various sales and marketing activities in the United States and Europe. These restructuring actions will result in the elimination of 260 positions worldwide, 197 of which were eliminated by the end of the first quarter.

11

        Closure of the Company's Singapore manufacturing operations resulted in severance costs of $1.8 million and costs of $6.7 million to write-off manufacturing related fixed assets. PowerSchool related costs included severance of approximately $550,000 and recognition of $5 million of previously deferred stock compensation that arose when PowerSchool was acquired by the Company in 2001 related to certain PowerSchool employee stockholders who were terminated in the first quarter of 2003. Termination of sales and marketing activities and employees, principally in the United States and Europe, resulted in severance costs of $2.8 million and accrual of costs associated with operating leases on closed facilities of $6.7 million. The total net restructuring charge of $23 million recognized during the first quarter of 2003 also reflects the reversal of $600,000 of unused restructuring accrual originally made during the first quarter of 2002.

        The following table summarizes activity associated with restructuring actions initiated during the first quarter of 2003 (in millions):

        The Company currently anticipates that substantially all of the remaining accrual will be spent by the end of the third quarter of fiscal 2003, except for certain costs associated with operating leases on closed facilities.

2002 Restructuring Actions

        During fiscal 2002, the Company recorded total restructuring charges of approximately $30 million related to actions intended to eliminate certain activities and better align the Company's operating expenses with existing general economic conditions and to partially offset the cost of continuing investments in new product development and investments in the Company's Retail operating segment.

        During the fourth quarter of 2002, the Company's management approved and initiated restructuring actions with a total cost of approximately $6 million designed to reduce headcount costs in corporate operations and sales and to adjust its PowerSchool product strategy. These restructuring actions will result in the elimination of approximately 180 positions worldwide at a cost of $1.8 million, 162 of which were eliminated by December 28, 2002. Eliminated positions were primarily in corporate operations, sales, and PowerSchool related research and development. The shift in product strategy at PowerSchool included discontinuing development and marketing of PowerSchool's PSE product. This shift resulted in the impairment of previously capitalized development costs associated with the PSE product in the amount of $4.5 million. As of December 28, 2002, substantially all of the $6 million accrual had been utilized, except for insignificant severance and related costs associated with the 18 remaining positions.

        During the first quarter of 2002, the Company's management approved and initiated restructuring actions with a total cost of approximately $24 million. These restructuring actions resulted in the elimination of approximately 425 positions worldwide at a cost of $8 million. Positions were eliminated primarily in the Company's operations, information systems, and administrative functions. In addition, these restructuring actions also included significant changes in the Company's information systems strategy resulting in termination of equipment leases and cancellation of existing projects and activities. Related lease and contract cancellation charges totaled $12 million, and charges for asset impairments totaled $4 million. During the first quarter of 2003, the Company reversed the remaining unused accrual of $600,000.

12

Note 5—Shareholders' 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. Since inception of the stock repurchase plan through the end of fiscal 2000, the Company had repurchased a total of 5.05 million shares at a cost of $191 million. No shares have been repurchased since the end of fiscal 2000. During the fourth quarter of 2001, the Company entered into a forward purchase agreement to acquire 1.5 million shares of its common stock in September of 2003 at an average price of $16.64 per share for a total cost of $25.5 million.

Comprehensive Income

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

        The following table summarizes components of total comprehensive income, net of taxes, during the three-month periods ended December 28, 2002, and December 29, 2001 (in millions).

        The following table summarizes activity in other comprehensive income related to derivatives, net of taxes, held by the Company during the three-month periods ended December 28, 2002 and December 29, 2001 (in millions):

13

        The following table summarizes the components of accumulated other comprehensive income, net of taxes, during the three-month periods ended December 28, 2002, and December 29, 2001 (in millions):

Note 6—Employee Benefit Plans

1998 Executive Officer Stock Plan

        The 1998 Executive Officer Stock Plan (the 1998 Plan) is a shareholder approved plan which replaced the 1990 Stock Option Plan terminated in April 1998, the 1981 Stock Option Plan terminated in October 1990, and the 1987 Executive Long Term Stock Option Plan terminated in July 1995. Options granted before these plans' termination dates remain outstanding in accordance with their terms. Options may be granted under the 1998 Plan to the Chairman of the Board of Directors, executive officers of the Company at the level of Senior Vice President and above, and other key employees. These options generally become exercisable over a period of 4 years, based on continued employment, and generally expire 10 years after the grant date. The 1998 Plan permits the granting of incentive stock options, nonstatutory stock options, stock appreciation rights, and stock purchase rights.

1997 Employee Stock Option Plan

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

1997 Director Stock Option Plan

        In August 1997, the Company's Board of Directors adopted a shareholder approved Director Stock Option Plan (DSOP) for non-employee directors of the Company. Initial grants of 30,000 options under the DSOP vest in three equal installments on each of the first through third anniversaries of the date of grant, and subsequent annual grants of 10,000 options are fully vested at grant. Prior to adoption of the DSOP, 60,000 options were granted in total to two then-current members of the Company's Board of Directors.

Employee Stock Purchase Plan

        The Company has a shareholder approved employee stock purchase plan (the Purchase Plan), under which substantially all employees may purchase common stock through payroll deductions at a price equal to 85% of the lower of the fair market values as of the beginning and end of six-month offering periods. Stock purchases under the Purchase Plan are limited to 10% of an employee's compensation, up to a maximum of $25,000 in any calendar year. During the first quarter of 2003 and 2002, 1.1 million and 692,000 shares, respectively, were issued under the Purchase Plan. As of December 28, 2002, approximately 1 million shares were reserved for future issuance under the Purchase Plan.

14

Stock Option Activity

        A summary of the Company's stock option activity and related information for the three-month periods ended December 28, 2002, and December 29, 2001 follows (option amounts are presented in thousands):

        The options outstanding as of December 28, 2002, have been segregated into five ranges for additional disclosure as follows (option amounts are presented in thousands):

Note 7—Stock-Based Compensation

        The Company has provided pro forma disclosures in Note 1 of these Notes to Condensed Consolidated Financial Statements of the effect on net income and earnings per share as if the fair value method of accounting for stock compensation had been used for its employee stock option grants and employee stock purchase plan purchases. These pro forma effects have been estimated at the date of grant and beginning of the period, respectively, using a Black-Scholes option pricing model.

15

        The assumptions used for the three-month periods ended December 28, 2002, and December 29, 2001, and the resulting estimates of weighted-average fair value per share of options granted and for stock purchases during those periods are as follows:

Note 8—Contingencies

Lease Commitments

        The Company leases various equipment and facilities, including retail space, under noncancelable operating lease arrangements. The Company does not currently utilize any other off-balance-sheet financing arrangements. The major facility leases are for terms of 5 to 10 years and generally provide renewal options for terms of 3 to 5 additional years. Leases for retail space are for terms of 5 to 12 years and often contain multi-year renewal options. As of September 28, 2002, the Company's total future minimum lease payments under noncancelable operating leases were $464 million, of which $209 million related to leases for retail space. As of December 28, 2002, total future minimum lease payments related to leases for retail space increased to $269 million.

Contingencies

        Beginning on September 27, 2001, three shareholder class action lawsuits were filed in the United States District Court for the Northern District of California against the Company and its Chief Executive Officer. These lawsuits are substantially identical, and purport to bring suit on behalf of persons who purchased the Company's publicly traded common stock between July 19, 2000, and September 28, 2000. The complaints allege violations of the 1934 Securities Exchange Act and seek unspecified compensatory damages and other relief. The Company believes these claims are without merit and intends to defend them vigorously. The Company filed a motion to dismiss on June 4, 2002, which was heard by the Court on September 13, 2002. On December 11, 2002, the Court granted the Company's motion to dismiss for failure to state a cause of action, with leave to plaintiffs to amend their complaint. Plaintiff filed their amended complaint on January 31, 2003.

        The Company is subject to certain other legal proceedings and claims that have arisen in the ordinary course of business and have not been fully adjudicated. In the opinion of management, the Company does not have a potential liability related to any current legal proceedings and claims that would have a material adverse effect on its financial condition, liquidity or results of operations. However, the results of legal proceedings cannot be predicted with certainty. Should the Company fail to prevail in any of these legal matters or should several of these legal matters be resolved against the Company in the same reporting period, the operating results of a particular reporting period could be materially adversely affected.

16

        The parliament of the European Union is working on finalizing the Waste Electrical and Electronic Equipment Directive (the Directive). The Directive makes producers of electrical goods, including personal computers, financially responsible for the collection, recycling, and safe disposal of past and future products. The Directive must now be approved and implemented by individual European Union governments by June 2004, while the producers' financial obligations are scheduled to start June 2005. The Company's potential liability resulting from the Directive related to past sales of its products and expenses associated with future sales of its product may be substantial. However, because it is likely that specific laws, regulations, and enforcement policies will vary significantly between individual European member states, it is not currently possible to estimate the Company's existing liability or future expenses resulting from the Directive. As the European Union and its individual member states clarify specific requirements and policies with respect to the Directive, the Company will continue to assess its potential financial impact. Similar legislation may be enacted in other geographies, including federal and state legislation in the United States, the cumulative impact of which could be significant.

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, Japan, and Retail. The Americas segment includes both North and South America, except for the activities of the Company's Retail segment. The Europe segment includes European countries as well as the Middle East and Africa. The Japan segment includes only Japan. The Retail segment operates Apple-owned retail stores in the United States. Other operating segments include Asia-Pacific, which includes Australia and Asia except for Japan, and the Company's subsidiary, Filemaker, Inc. Each reportable geographic operating segment provides similar hardware and software products and similar services, and the accounting policies of the various segments are the same as those described in the Summary of Significant Accounting Policies in Note 1, except as described below for the Retail segment.

        The Company evaluates the performance of its operating segments based on net sales and operating income. Net sales for geographic segments are based on the location of the customers. Operating income for each segment includes revenue from third-parties, cost of sales, and operating expenses directly attributable to the segment. Operating income for each segment excludes other income and expense and certain expenses that are managed outside the operating segments. Costs excluded from segment operating income include various corporate expenses, manufacturing costs not included in standard costs, income taxes, and various nonrecurring charges. Corporate expenses include research and development, corporate marketing expenses, and other separately managed general and administrative expenses including certain corporate expenses associated with support of the Retail segment. The Company does not include intercompany transfers between segments for management reporting purposes. Segment assets exclude corporate assets. Corporate assets include cash, short-term and long-term investments, manufacturing facilities, miscellaneous corporate infrastructure, goodwill and other acquired intangible assets, and retail store construction-in-progress that is not subject to depreciation. Except for the Retail segment, capital expenditures for long-lived assets heldare not reported to management by segment. Capital expenditures by the Retail segment were $6 million in the first quarter of 2003 and $27 million in the first quarter of 2002.

        Operating income for useall segments except Retail includes cost of sales at standard cost. Certain manufacturing expenses and related adjustments not included in segment cost of sales, including variances between standard and actual manufacturing costs and the mark-up above standard cost for product supplied to havethe Retail segment, are included in corporate expenses.

        To assess the operating performance of the Retail segment several significant items are included in its results for internal management reporting that are not included in results of the Company's other segments. First, cost of sales for the Retail segment includes a material impactmark-up above the Company's standard

17

cost to approximate the price normally charged to the Company's major channel partners operating retail stores in the United States. For the quarters ended December 28, 2002 and December 29, 2001, this resulted in the recognition of additional cost of sales above standard cost by the Retail segment and an offsetting benefit to corporate expenses of approximately $23 million and $8.6 million, respectively.

        Second, the Retail segment includes in its net sales proceeds from sales of the Company's extended warranty and support contracts and also recognizes related cost of sales based on the amount such contracts are normally sold to the Company's major channel partners operating retail stores in the United States. This treatment is consistent with how the Company's major channel partners account for the sales and cost of the Company's extended warranty and support contracts. Because the Company has not yet earned the revenue or incurred the costs associated with the sale of these contracts, an offset to these amounts is recognized in the Americas segment's net sales and cost of sales. For the first quarter of 2003, this resulted in the recognition of additional net sales and cost of sales by the Retail segment, with corresponding offsets in the Americas segment, of $5.9 million and $4.2 million, respectively. For the first quarter of 2002, the net sales and cost of sales recognized by the Retail segment for sales of extended warranty and support contracts were $1.1 million and $750,000, respectively.

        Third, a portion of the operating expenses associated with certain high profile retail stores are allocated from the Retail segment to corporate marketing expense. Allocation of these expenses reflects the unique nature of these stores which, given their larger size and extraordinary design elements, function as vehicles for general corporate marketing, corporate sales and marketing events, and brand awareness. Allocated operating costs are those in excess of operating costs incurred by one of the Company's more typical retail locations. Stores were open in two such high profile locations in New York and Los Angeles as of December 28, 2002, both of which were opened in fiscal 2002. Expenses allocated to corporate marketing resulting from the operations of these two stores was $1.1 million in the first quarter of 2003.

18

        Summary information by operating segment follows (in millions):

(a)

Other Segments constitutes Asia-Pacific and Filemaker. Certain amounts in the first quarter of 2002 related to recent acquisitions and Internet services have been reclassified from Other Segments to the Americas segment to conform to the first quarter of 2003 presentation.

        A reconciliation of the Company's segment operating income to the consolidated financial statements because the impairment assessment under SFAS No. 144 is largely unchanged from SFAS No. 121. The provisions of the Statement for assets held for sale or other disposal generally are required to be applied prospectively after the adoption date to newly initiated disposal activities. Therefore, management cannot determine the potential effects that adoption of SFAS No. 144 will have on the Company's financial statements.follows (in millions):

Note 2—10—Earnings Per Share

        Basic earnings per common share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per common share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the dilutive potential shares of common stock had been issued. The dilutive effect of outstanding options is reflected in diluted earnings per share by application of the treasury stock method. Dilutive potential shares of common stock related to stock options were excluded from the calculation of diluted loss per common share for the nine months ended June 30, 2001first quarter of 2003 because their effect would have been antidilutive.

619

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

        Options to purchase approximately 45 million shares of common stock were outstanding as of June 29, 2002 and June 30, 2001 that were not included in the computation of diluted earnings per share for the quarters then ended because the options' exercise prices were greater than the average market prices of the Company's common stock during these quarters, and therefore, the effect would have been antidilutive.

        At June 30, 2001,December 28, 2002, the Company had outstanding options to purchase approximately 97.1109.4 million shares of its common stock outstanding, all of which were excluded from the computation of diluted loss per share for the nine-month period then endedfirst quarter of 2003 because the effect would have been antidilutive.

Note 3—Consolidated Financial Statement Details (in millions)

Inventories

7

Property, Plant, and Equipment

Accrued Expenses

Interest and Other Income, Net

Inventory Prepayment

        In April 2002, the Company made a $100 Options to purchase approximately 58.4 million prepayment to an Asian supplier for the purchaseshares of components over the following nine months. In return for this deposit, the supplier agreed to supply the Company with a specified level of componentscommon stock that were outstanding at December 29, 2001, were not included in the three consecutive fiscal quarters ending December 28, 2002. If the supplier fails to supply the agreed upon levelcomputation of components in any of those three fiscal quarters, the Company may cancel the arrangement and receive the amount of the prepayment not utilized plus a penalty. Approximately $83 million of this deposit remained unused as of June 29, 2002, and is reflected in the condensed consolidated balance sheets in other current assets. The amount of the prepayment not utilized by the Company on or before December 31, 2002, is refundable to the Company by January 31, 2003.

        Although the supplier's existing debt is unrated, its public debt pricing is consistent with other BBB rated companies. The deposit is unsecured and has no stated interest component. The Company is imputing an amount to cost of sales and interest income during each period the deposit is outstanding at an appropriate market interest rate to reflect the economics of this transaction. In light

8

of the supplier's implied debt rating and because the Company's prepayment is unsecured, non-performance by and/or economic deterioration of the supplier could place all or some of the Company's deposit at risk.

Capitalized Software Development Costs

        Generally, the Company expenses research and development costs as they are incurred. However, development costs of computer software to be sold, leased or otherwise marketed are subject to capitalization beginning when a product's technological feasibility has been established and ending when a product is availablediluted earnings per share for general release to customers. In almost all instances, the Company's products are released soon after technological feasibility has been established. Therefore, costs incurred subsequent to achieving technological feasibility are usually not significant, and historically most software development costs have been expensed. However, during 2001 the Company incurred substantial development costs associated with the initial release of Mac OS X® operating system subsequent to release of a public beta version of the product and prior to release of the final product version. As a result, during 2001, the Company capitalized approximately $5.4 million of development costs associated with development of Mac OS X. Related amortization is being recognized on a straight-line basis over the estimated 8 year useful life of the asset.

        During the third quarter of 2002, the Company incurred substantial development costs associated with the upgrade of Mac OS X version 10.2 (code named "Jaguar") subsequent to achievement of technological feasibility as evidenced by public demonstration and release of a developer beta version of the software in May 2002. Therefore, during the third quarter of 2002, the Company capitalized approximately $9.1 million of development costs associated with development of Jaguar and anticipates capitalizing additional development costs during the fourth quarter. Amortization of this asset will be recognized on a straight-line basis over 3 years upon completion and release of the final version of Jaguar, which is planned for the fourth quarter of 2002.

        During 2002, the Company also capitalized certain costs related to development of its new PowerSchool® enterprise student information system. Capitalization, which began in the first quarter of 2002 amounted to approximately $6 million duringbecause the first nine months of fiscal 2002. The enterprise student information system is expected to be completed and released in the fourth quarter of 2002. Amortization of this asset will be recognized on a straight-line basis over 3 years.

        All capitalized software development costs and related accumulated amortization are reflected in the condensed consolidated balance sheets in other assets.

Note 4—Financial Instruments

Short-Term Investments

        All highly liquid investments with maturities of three months or less are classified as cash equivalents; highly liquid investments with maturitiesoptions' exercise price was greater than three months are classified as short-term investments. Approximately $942 million and $313 millionthe average market price of the Company's investment portfolio classified as short-term investments was in government agency securities and high investment grade corporate debt with underlying maturities ranging from 1 to 5 years as of the end of the third quarter of 2002 and the end of fiscal 2001, respectively. The remainder of the Company's short-term investments had underlying maturities between 3 and 12 months.

Non-Current Debt and Equity Investments and Related Gains

        The Company has held significant investments in ARM Holdings plc (ARM), Samsung Electronics Co., Ltd. (Samsung), Akamai Technologies, Inc. (Akamai) and EarthLink Network, Inc. (EarthLink). The combined fair value of these investments was $48 million and $128 million as of June 29, 2002 and

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September 29, 2001, respectively. The Company believes it is likely there will continue to be significant fluctuations in the fair value of these investments in the future.

        These investments are reflected in the condensed consolidated balance sheets in 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 Company recognizes an impairment charge to earnings when it judges such investments have experienced a decline in value below cost basis that is other-than-temporary. The Company includes recognized gains and losses resulting from the sale or from other-than-temporary declines in fair value associated with such investments in other income and expense.

        The market values of the Company's investments in EarthLink and Akamai at June 29, 2002, were approximately $36 million and $5 million below their cost bases, respectively. Based on the relatively short time these investments' cost bases have exceeded their fair value and the financial condition and near-term prospects of both EarthLink and Akamai, the Company currently believes these declines in fair value to be temporary. However, should the fair value of these investments remain below the Company's cost bases and/or the financial condition or prospects of EarthLink or Akamai deteriorate, the Company may determine in a future period that this decline in fair value is other-than-temporary, requiring an impairment loss be recognized in the period such a determination is made.

        During the first quarter of 2002, the Company sold 4.7 million shares of ARM stock for both net proceeds and a gain before taxes of $21 million. During the first quarter of 2002, the Company also sold 250,000 shares of Akamai and 117,000 shares of EarthLink stock for net proceeds of approximately $2 million each and a gain before taxes of $710,000 and $223,000, respectively. No sales of the Company's non-current debt and equity investments were made in either the second or the third quarter of 2002.

        During the first, second, and third quarters of fiscal 2001, the Company recognized gains on sale of shares of its investment in ARM of $35 million, $127 million, and $12 million, respectively. During the first quarter of 2001, the Company recognized a gain of $36 million on sale of shares of its investments in Akamai. As of the end of the second quarter of 2001, the Company determined that the decline in the fair value of its investment in EarthLink was other-than-temporary. 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. Also during the second quarter of fiscal 2001, the Company determined that the decline in fair value of certain of its strategic investments in privately held companies was other-than-temporary and, accordingly, recognized a charge to earnings of approximately $8 million.

Samsung

        During the fourth quarter of 1999, the Company invested $100 million in Samsung to assist in the further expansion of Samsung's TFT-LCD flat-panel display production capacity. The investment was in the form of three year unsecured bonds, which were convertible into approximately 550,000 shares of Samsung common stock beginning in July 2000. The bonds carried an annual coupon rate of 2%during this period, and paid a total yield to maturity of 5% if redeemed at their maturity.

        Prior to its sale,therefore, the Company had categorized its investment in Samsung as available-for-sale requiring that iteffect would 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 in the first quarter of 2001, 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 occurred. Included in the $17 million gross SFAS No. 133 transition adjustment recorded in earnings during the

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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. During the second quarter of 2001, the Company sold this investment for book value, including accrued interest, receiving net proceeds of approximately $117 million.antidilutive.

Other Strategic Investments

        The Company has additional minority debt and equity investments in privately held technology companies with a book value of approximately $15 million and $18 million as of June 29, 2002, and September 29, 2001, respectively. These investments, which are reflected in the condensed consolidated balance sheets in other assets, are inherently risky because the products and/or markets of these companies are typically not fully developed.

Derivative Financial Instruments

        The Company uses derivatives to partially offset its business exposure to foreign exchange and interest rate risk. Foreign currency 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 on expected 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 records all derivatives on the balance sheet at fair value. As of the end of the third quarter of 2002, the general nature of the Company's risk management activities and the general nature and mix of the Company's derivative financial instruments have not changed materially from the end of fiscal 2001.

Foreign Exchange Risk Management

        The Company enters into foreign currency forward and option contracts with financial institutions primarily to protect against foreign exchange risk associated with existing assets and liabilities, certain firmly committed transactions and certain probable but not firmly committed transactions. Generally, the Company's practice is to hedge a majority of its existing material foreign exchange exposure associated with existing assets and liabilities and firmly committed transactions, and to hedge a significant portion of its foreign exchange exposure from probable but not firmly committed transactions associated with expected future cash flows on certain forecasted foreign currency revenues and cost of sales expected to occur over the following three to nine months.

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 does not hold or transact in such financial instruments for purposes other than risk management.

        Due to prevailing market conditions, lower interest rates, and uncertainties related to the timing and depth of an economic recovery, the Company entered into interest rate swap agreements in January and February 2002 to convert its $300 million of fixed rate debt to a floating rate based on 6 month LIBOR.

Accounting for Derivative Financial Instruments

        On October 1, 2000, the Company adopted SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, hedging activities, and exposure definition. SFAS No. 133 requires that all derivatives be recognized as either assets or liabilities 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. Net of the related income tax effect of approximately $5 million, adoption of SFAS No. 133 resulted in a favorable cumulative-effect-type adjustment to other comprehensive income of approximately $12 million, substantially all of which was reclassified to earnings by the end of the second quarter of fiscal 2001.

        As of June 29, 2002 the Company had a net deferred loss associated with cash flow hedges of approximately $29 million, net of taxes, substantially all of which is expected to be reclassified to earnings by the end of the first quarter of fiscal 2003.

        The following table summarizes activity in other comprehensive income related to derivatives, net of taxes, held by the Company during the three and nine month periods ended June 29, 2002 and June 30, 2001, respectively (in millions):

Note 5—Shareholders' 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. No shares were repurchased during the first nine months of fiscal 2002. Since inception of the repurchase plan, the Company has repurchased or committed to repurchase a total of 6.55 million shares of its common stock at a cost of $217 million.

Comprehensive Income

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

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        The following table summarizes components of total comprehensive income (loss), net of taxes, during the three and nine month periods ended June 29, 2002 and June 30, 2001, respectively (in millions):

        The following table summarizes the components of accumulated other comprehensive income, net of taxes (in millions):

Note 6—Goodwill and Other Intangible Assets

        The Company adopted SFAS No. 142,Goodwill and Other Intangible Assets, in the first quarter of fiscal 2002. 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. 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. 144,Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.

        The Company established reporting units based on its current reporting structure. For purposes of testing goodwill for impairment, goodwill has been allocated to these reporting units to the extent it relates to each reporting unit. The Company completed the first step of the transitional goodwill impairment test and has determined that no potential impairment existed. As a result, the Company recognized no transitional impairment loss in the first quarter of 2002 in connection with the adoption of SFAS No. 142. The Company will evaluate goodwill for impairment on an annual basis each September and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable from its estimated future cash flow.

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        The following table summarizes the components of gross and net intangible asset balances (in millions):

        Expected annual amortization expense related to acquired technology and other intangible assets is as follows (in millions):

        Amortization expense related to intangible assets is as follows (in millions):

        Net income (loss) and net income (loss) per share adjusted to exclude amortization of goodwill in 2001 fiscal periods follows (in millions, except per share amounts):

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Note 7—Acquisitions

        In February 2002, the Company acquired certain assets of Nothing Real, LLC (Nothing Real), a privately-held company that develops and markets high performance tools designed for the digital image creation market, for $15 million in cash. This acquisition has been accounted for as a purchase. The Company has allocated approximately $7 million of the purchase price to acquired technology, which will be amortized on a straight-line basis over its estimated life of 5 years. The remaining $8 million, which has been identified as contingent consideration rather than recorded as an additional component of the cost of the acquired assets, will be allocated to future compensation expense in the appropriate periods over the next 3 years.

        During the third quarter of 2002, the Company acquired certain assets of Zayante, Inc., Prismo Graphics, and Silicon Grail Corporation for a total of $21 million in cash. These acquisitions have been accounted for as asset acquisitions. The purchase price for these acquisitions, except for $1 million identified as contingent consideration which will be allocated to compensation expense over the next 3 years, has been allocated to acquired technology and will be amortized on a straight-line basis over 3 years, except for certain assets acquired from Zayante associated with patent royalty streams that will be amortized over 10 years.

        On June 30, 2002, the Company acquired Emagic, GmbH, a provider of professional solutions for computer-based music production, for approximately $30 million in cash. This acquisition will be accounted for as a purchase and recorded in the fourth quarter of 2002.

Note 8—Restructuring Action

        During the first quarter of 2002, the Company's management approved and initiated a restructuring plan designed to eliminate certain activities and better align its operating expenses with existing general economic conditions and to partially offset the cost of continuing investments in new product development and investments in the Company's Retail operating segment. Accordingly, the Company recognized a restructuring charge of approximately $24 million during the first quarter of 2002. The restructuring plan includes significant changes in the Company's information systems strategy resulting in termination of equipment leases and cancellation of existing projects and activities. The restructuring plan will result in the elimination of approximately 425 positions worldwide, 400 of which were eliminated by June 29, 2002. Positions were eliminated primarily in the Company's operations, information systems, and administrative functions.

        Of the original $24 million restructuring charge made during the first quarter of 2002, the Company utilized $9 million during that same quarter. Of the $15 million remaining accrual at the end of the first quarter, the Company spent $12 million during the second quarter and made a downward adjustment of approximately $250,000 to the restructuring accrual due to lower actual costs than originally estimated for certain lease commitments and severance benefits. The Company currently anticipates that substantially all of the remaining $2 million accrual, except amounts accrued for future operating lease payments, will be spent by the end of its fiscal 2002.

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        The following table summarizes activity associated with the restructuring plan through June 29, 2002 (in millions):

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, Japan, and Retail. The Americas segment includes both North and South America, except for the activities of the Company's Retail segment. The Europe segment includes European countries as well as the Middle East and Africa. The Japan segment includes only Japan. The Retail segment operates Apple-owned retail stores in the United States. Other operating segments include Asia-Pacific, which includes Australia and Asia except for Japan, and the Company's subsidiary, Filemaker, Inc. Each reportable geographic operating segment provides similar products and services.

        The Company evaluates the performance of its operating segments based on net sales and operating income. Net sales for geographic segments are based on the location of the customers. Operating income for each segment includes revenue from third-parties, cost of sales, and operating expenses directly attributable to the segment. Operating income for each segment excludes other income and expense and certain expenses that are managed outside the operating segments. Costs excluded from segment operating income include various corporate expenses, manufacturing costs not included in standard costs, income taxes, and various nonrecurring charges. Corporate expenses include research and development, corporate marketing expenses, and other separately managed general and administrative expenses including certain corporate expenses associated with support of the Retail segment.

        Operating income for all segments except Retail includes cost of sales at standard cost. Manufacturing expenses and related adjustments not included in segment cost of sales, including variances between standard and actual manufacturing costs, warranty costs, and freight costs, and the mark-up above standard cost for product supplied to the Retail segment, are included in corporate expenses. To assess the operating performance of the Retail segment, cost of sales for this segment includes a mark-up above standard cost to approximate the price normally charged to the Company's major channel partners in the United States. For the nine month period ended June 29, 2002, this resulted in the recognition of additional cost of sales above standard cost by the Retail segment and an offsetting benefit to corporate expenses of approximately $32 million.

        The Retail segment includes in its net sales a commission from the sale of the Company's extended warranty and support contracts. This treatment is consistent with commissions paid to the Company's major channel partners in the United States. Because the revenue from these contracts has yet to be earned by the Company, an offset to this commission is reflected in other segments' net sales. For the nine-month period ended June 29, 2002, this resulted in the recognition of additional net sales

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by the Retail segment, and an offsetting reduction to other segments' net sales of approximately $1.5 million.

        Summary information by operating segment follows (in millions):