2000



MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FISCAL 2000 OVERVIEW

SALES

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

PROFITABILITY

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

OPERATING TRENDS

Despite overall increases during 2000 in net sales, unit sales, and profitability, the Company's performance in the fourth quarter of fiscal 2000 was disappointing. Net sales during the fourth quarter fell short of the Company's expectations by approximately $180 million causing operating margin before special charges to fall to 4% for the quarter as compared to the 9% experienced during the first nine months of fiscal 2000. The fourth quarter revenue shortfall was primarily the result of three factors. First, fourth quarter net sales of the G4 Cube, a new Macintosh system announced and introduced by the Company during the fourth quarter, did not meet the Company's expectations. In combination with related displays, G4 Cube sales were approximately $90 million short of expectations. Second, net sales in the Company's education market fell short of expectations by approximately $60 million. Third, although total fourth quarter Power Mac unit sales were close to expectations, the Company experienced an unanticipated mix shift towards lower priced Power Mac configurations resulting in lower than anticipated net sales for the quarter of approximately $30 million. The Company ended 2000 with substantially more inventory in its distribution channels than planned due to the lower than expected sell-through of the Company's products during the fourth quarter.

OUTLOOK

The Company currently anticipates a significant sequential decline in quarterly net sales during the first quarter of fiscal 2001 to approximately $1.0 billion. This decline is anticipated because of a continued deterioration in demand experienced by the Company during the first two months of