1999



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



OVERVIEW

During 1999, the Company experienced a 25% rise in Macintosh unit sales. This increase is primarily attributable to the success of iMac, the Company's moderately priced desktop Macintosh system designed for the education and consumer markets. The Company sold approximately 1.8 million iMac units in 1999, an increase of approximately 730,000 units or 68% over unit sales of similar products in 1998. Growth in unit sales was strong in all of the Company's geographic operating segments, particularly in Japan and Asia Pacific due to strong acceptance of iMac in those regions and the general economic improvements experienced in much of Asia during the year. The Company also experienced improved profitability in 1999. Operating income before special charges rose 44% or $118 million to $386 million in 1999 from $268 million in 1998. Contributing to the improvement in operating margin in 1999 was a rise in gross margin as a percentage of net sales to 28% as compared to 25% in 1998. The impact of improved gross margins was partially offset by planned increases in recurring operating expenses during 1999 of 8% to a total of $1.337 billion.

Despite improved unit sales and improved profitability, the Company's net sales rose only 3% in 1999 to $6.134 billion. Growth in net sales was negatively impacted during the year by declines in the average revenue per Macintosh system for both Power Macintosh and iMac systems and by a shift in unit mix towards the lower priced iMac systems. Net sales were also negatively impacted during the fourth quarter of 1999 due to lower than planned deliveries of PowerPC G4 processors from Motorola. The primary focus of the Company during fiscal 2000 remains achieving meaningful year-over-year growth in both unit sales and net sales.

The Company's future operating results and financial condition are dependent upon the Company's ability to successfully develop, manufacture, and market technologically innovative products in order to meet the dynamic conditions within the highly competitive market for personal computers. Potential risks and uncertainties that could affect the Company's future operating results and financial condition are discussed throughout this Item 7, including the discussion under the heading "Factors That May Affect Future Results and Financial Condition."

NET SALES

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

(a) Unit sales figures for iMac in 1998 and 1997 include sales of the Company's previous consumer and education oriented Macintosh products.

Net sales increased $193 million or 3% to $6.134 billion in 1999 compared to 1998. The primary source of this growth was an overall 25% increase in Macintosh unit sales, which was reflective of strong unit growth in all of the Company's geographic operating segments. Offsetting the rise in unit shipments was a decline in the average revenue per Macintosh system, a function of total net sales generated by hardware shipments and total