Peter Oppenheimer - Chief Financial Officer, Senior Vice President Tim Cook - Chief Operating Officer Gary Whistler - Treasurer Nancy Paxton - Senior Director, Investor Relations and Corporate Finance

Andrew Neff - Bear Stearns Shannon Cross - Cross Research Benjamin Reitzes - UBS Keith Bachman - Banc of America Securities Robert Semple - Credit Suisse Harry Blount - Lehman Brothers Richard Farmer - Merrill Lynch Richard Gardner - Citigroup Bill Fearnley - FTN Midwest Securities Rebecca Runkle - Morgan Stanley Jonathan Hoopes - ThinkEquity Chris Whitmore - Deutsche Bank Securities Bill Shope - JP Morgan Kevin Hunt - Thomas Weisel Partners Charles Wolf - Needham & Company Shaw Wu - American Technology Research Gene Munster - Piper Jaffray David Bailey - Goldman Sachs Steve Lidberg - Pacific Crest Securities

Good day, and welcome to this Apple Computer third quarter financial results conference call. Today's conference is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference over to Nancy Paxton, Senior Director, Investor Relations and Corporate Finance. Please go ahead.

Thank you. Good afternoon, and thanks to everyone for joining us. Speaking today is Apple's CFO, Peter Oppenheimer. He will be joined by Apple's COO, Tim Cook, and Apple Treasurer, Gary Whistler for the Q-and-A session with analysts. Please note that some of the information you will hear during our discussion today may consist of forward-looking statements regarding revenue, gross margins, operating expenses, other income and expense, taxes, earnings per share, future products, non-cash stock-based compensation expense, and a special committee investigation relating to the company's past stock option grants. Actual results or trends could differ materially from our forecasts. For more information, please refer to the risk factors discussed in Apple's Form 10-K for 2005, the Form 10-Q for the first and second fiscal quarters of 2006, and our Form 8-K filed with the SEC today. Please also note that any non-GAAP financial measures included in today's call should be viewed in addition to, and not in lieu of, Apple's GAAP results. A reconciliation of any GAAP and non-GAAP measures discussed is posted on Apple's website at www.apple.com/investor. With that, I would like to turn the call over to Peter Oppenheimer for introductory remarks.

Thank you, Nancy. Thank you for joining us. We are very pleased to report the second-highest quarterly revenue and earnings in Apple's history. The quarter's revenue was $4.37 billion, representing 24% year-over-year growth. The strong revenue was fueled by the best Mac unit sales in any 13-week quarter in Apple's history and continued healthy demand for our music products. Operating margin for the quarter was 13% and net income was $472 million, or $0.54 per diluted share on a GAAP basis. Excluding the impacts of $37 million in non-cash, stock-based compensation expense, operating margin was 13.8%, net income was $499 million and diluted earnings per share were $0.57. The quarter's robust operating margin was attributable to the revenue growth, a very favorable component environment and solid expense management. I would like to first talk about our Mac products, which represented 55% of our total quarterly revenue. Mac product revenue increased 11% year over year, fueled by Mac unit shipment growth of 12% year over year, to $1.327 million. Ending channel inventory was within our target range of four to five weeks. We continue to be very happy with our progress and our developers' progress in the transition to Intel. We have now introduced the iMac, MacBook, MacBook Pro and Mac Mini with Intel processors. We are solidly on track to transition the Power Mac and Xserve by the end of this calendar year. We have released universal versions of Apple's consumer and professional software applications and our third-party developers have released over 2,900 universal applications. We expect that over 70% of the 500 applications we consider most critical to our customers will be available in universal versions by the end of September. We have been very pleased with the response to our new Macs, particularly from our consumer and education customers. Intel-based Macs accounted for over 75% of the quarter's Mac shipments. The MacBook, which we introduced in mid-May, has been extremely well-received and, coupled with our very popular MacBook Pro, has contributed to Apple's increased unit market share of portables in U.S. retail from 6% in January to 12% in June, according to NPD. We are also very happy with our Mac ad campaign and feel it is contributing to our momentum, particularly with consumers. We believe that many of our creative professional customers have delayed purchases as they await new Intel-based Mac desktops, universal applications, or both. Our music products posted another quarter of strong results, representing 45% of total company revenue and increasing 45% year-over-year. iPod shipments grew 32% year over year, consistent with our expectations, and we exited the quarter within our target range of four to six weeks of iPod channel inventory. We continue to be very enthusiastic about iPod. Based on the latest data published by NPD, iPod accounts for over 75% of the U.S. market for MP3 players. iPod is also the top-selling MP3 player in many large markets, such as Canada, Australia, the U.K., France, Spain, Italy and Japan, according to the latest data published from NPD, GFK and BCN. Other music product revenue was $457 million, up 90% year over year. These results were a function of continued strong sales from the iTunes Music Store and very solid performance for iPod accessories. The iTunes Music Store continues to lead the industry, accounting for 85% share of the market for legally purchased and downloaded music in the U.S., based on the latest data available from Nielsen SoundScan. We have continued to enhance and expand the iTunes Music Store, now offering over 3 million songs, 9,000 music videos and over 150 television programs to the U.S. market. We are investing heavily in iPod and iTunes engineering and are very enthusiastic about our products in the pipeline. The iPod ecosystem continues to thrive with innovative new products, such as the Nike + iPod Sport Kit, which allows runners to get real-time feedback on their performance through their iPod Nanos. It was another exciting quarter for the Apple retail stores. Fueled by very strong sales of MacBooks and MacBook Pros, the retail stores generated revenue of $715 million, representing 29% year-over-year growth. The stores generated $29 million in segment profit, excluding $148 million in associated manufacturing profit. We opened 14 stores during the quarter, ending with 155. With an average of 146 stores open during the quarter, average quarterly revenue per store was $4.9 million. Store traffic continued to be very strong, with over 17 million customers visiting our stores during the quarter. Based on the latest retail store survey, nearly 50% of customers buying Macs in our stores are new to the Mac. One of the highlights of the quarter was the opening of our Fifth Avenue store in Manhattan. The store has quickly become our highest volume store, and we recently welcomed the store's 500,000th visitor. Customers are visiting the store in record numbers around the clock. We were very pleased with our education business results, generating the highest quarterly revenue through our U.S. education channel in over 10 years, and shipping more Macs than in any other June quarter in the company's history. Our higher education customers have been extremely receptive of the MacBook and MacBook Pro, and our back-to-school promotion has already proven very popular with customers. In terms of geographic results, including sales from our retail stores, quarterly revenue in the Americas, Europe and Japan was up 27%, 22% and 13% respectively. Gross margin was 30.3% on a GAAP basis, about 190 basis points higher than our guidance, primarily due to a very favorable component pricing environment, and secondarily due to a more favorable mix of direct Mac sales. Included in GAAP cost of goods sold was $6 million in stock-based compensation expense. Excluding that expense, non-GAAP gross margin was 30.4%. GAAP operating expenses were $759 million, including $31 million in expense related to stock-based compensation. OI&E was $95 million, about $10 million higher than guidance, primarily due to higher-than-expected cash balances and higher-than-expected yields on cash investment. The tax rate for the quarter was just under 29%. This differed from our previous tax rate guidance of about 32%, primarily due to a tax benefit reported for the implementation of tax planning strategy associated with the repatriation of foreign earnings under the American Jobs Creation Act that more than offset a tax charge reported for the repatriation. This resulted in a net benefit in the quarter of $24 million, or $0.03 per diluted share. We had very strong cash generation during the quarter, increasing our cash balance by $950 million, to end with about $9.2 billion. This was primarily a function of cash flow from operations of just over $1 billion. Looking ahead to the September quarter, I would like to review our outlook, which includes the types of forward-looking information that Nancy referred to at the beginning of the call. For the quarter, we are targeting revenue between $4.5 billion and $4.6 billion. We expect the total quarterly cost of non-cash, stock-based compensation to be approximately $40 million. We expect GAAP gross margins to be about 28.4%, reflecting approximately $6 million related to stock-based compensation expense. Without that expense, we expect non-GAAP gross margin to be about 28.5%. We expect GAAP op-ex to be about $785 million, including about $34 million related to stock-based compensation. We expect non-GAAP op-ex to be about $751 million. We expect OI&E to be about $100 million and we expect the tax rate to be about 32%. We expect to generate GAAP EPS of about $0.46 to $0.48, which includes an anticipated $0.03 per share related to non-cash, share-based compensation expense. We expect non-GAAP EPS to be about $0.49 to $0.51. We are thrilled to have just reported the second-highest revenue and earnings in Apple's history and are very pleased with our Intel transition progress. We are also very excited about and confident in the products in our pipeline. With that, I would like to open the call to questions.

Thank you. (Operator Instructions) We will go first to Andrew Neff with Bear Stearns. Andrew Neff - Bear Stearns: If you could talk, to the extent you can, about how you are viewing the balance of the year. In the press release, you talk about an exciting new pipeline of iPod products. There is a lot of concern, obviously, out there about what sort of plans you have. How important is it for you to hit the holiday season? Is that in your expectations as you look out at the balance of the year? How innovative can innovative be?

Andy, you know that we do not talk about unannounced products, so there is really a limit to what I can say. I will just tell you two things. The first is, we are very confident in the products in our pipeline and I just do not imagine that the creativity at Apple could ever be low.

Thanks, Andy. Could we have the next question please?

We’ll go next to Shannon Cross with Cross Research. Shannon Cross - Cross Research: Good afternoon. Just a question on your gross margin guidance and how you are going to position -- well, you cannot talk about that, so let's talk about gross margin guidance. It looks like there is a substantial decrease quarter over quarter relative to where you came in. Are we to assume more price aggressiveness and mix shift on the product side is driving that, or do you anticipate a big change in the commodity market environment? Also, if you can just talk about what you are seeing in commodities in general.

I will start generally, and Tim can provide some further color on the commodity environment. We expect the favorable commodity environment to continue, and have guided our non-GAAP gross margins at 28.5%, which is above our historical target range. We expect the gross margin percent to decline sequentially, largely driven by a full quarter of the back-to-school promotion, lower international pricing from our June price reductions, and a different product mix, including more MacBooks, from the full quarter of availability.

As Peter said earlier, the component pricing was very favorable in Q3. It was favorable across almost all categories. It was a great time to be a buyer. In terms of the quarter that we are now in, Q4, and this is included in the guidance that Peter gave earlier, we expect that we will continue to have a favorable environment on NAND Flash, on flat-panel displays, on portable hard-drives, all of which -- those areas are places where supply exceeds demand, as in the broader industry. On the DRAM market, we expect it to be relatively balanced and for the prices to trade within a fairly narrow range. Shannon Cross - Cross Research: Thank you.

Thanks, Shannon. Could we have the next question please?

We’ll go next to Ben Reitzes with UBS. Benjamin Reitzes - UBS: Thank you. Could you talk, Peter and maybe Tim, about the economic environment, consumer versus education in particular? Maybe give us a view of what you are seeing out there in the economy, given some of the worries out there.

We will let Tim talk a little bit about some of our markets, and Gary then will give you a few thoughts on the economy.

In terms of what we saw across the quarter, once we announced the MacBook and began shipping it, we saw a very robust consumer and higher education demand. In the pro markets, we were slow and we were slow because we believe that customers are delaying purchases, waiting on a PowerMac with an Intel chip in it, and in some cases waiting for applications, such as Adobe's Creative Suite. The ed. market had a fabulous quarter. It was the best June quarter in 10 years, as Peter said earlier. We grew 11% year over year in the ed. market versus an IDC projection of the ed. market, which was shrinking by 4%. The higher ed. market, which is a subset of total ed. market, grew 31% year over year. We had a very fabulous consumer and higher education market season. We believe that we are very well-poised going into the back-to-school season, with the MacBook being so well-received and also the promotion that we are running with the Nano. Gary?

I am going to speak a little bit more generally. From the data we have seen, the U.S. economy and the consumer are holding up pretty well in the face of all this stuff, the geopolitical uncertainty and the higher oil prices and energy prices and higher interest rates. That said, and most of you are aware fed Chairman Bernanke made a few comments this morning suggesting or intimating the economy and consumer was beginning to moderate a little. Benjamin Reitzes - UBS: I guess based on Tim's comments, you might not be seeing that yet. Just one last thing is, you came in above at least my expectations for iPods and Macs, but not in some of the other things, like other music, perhipherals and other. Granted the year-over-year’s were decent on some of those, but was there anything holding those back? Was there anything in particular going on in other music or peripherals? I would have thought with more Mac sales that line might have done a little better sequentially. It looks like the quarter could have even been even more impressive, because I think the iPod/Macs overall were pretty good. Could you just comment there?

On the software side, the comparison there is to the launch quarter of Tiger a year ago, so it is very, very difficult to compare. Sequentially, we had iLife announced in Q2. On the peripherals and other hardware category, we have integrated more and more things that were in peripherals before into the Macintosh itself and shipped it as part of the base configuration. The other music related products and services piece, basically a 6% decline sequentially, tracked to the iPod itself. Benjamin Reitzes - UBS: Thanks a lot.

Thanks, Ben. Could we have the next question please?

We’ll go next to Keith Bachman with Banc of America. Keith Bachman - Banc of America Securities: Thank you. I have a question on the retail side. There was some volatility between this quarter and last quarter in terms of both the units and revenues. I was just hoping you could speak to that a little bit, and I have a follow-up. Thanks.

Yes, units, Keith, for Macs in retail were up 40% year over year. The response in the stores to both the MacBook and MacBook Pro was very, very strong. As I indicated, about half the Macs we sold were to people that had never owned a Mac before. Keith Bachman - Banc of America Securities: Peter, just to be clear, was most of that delta, if you will, between the March quarter and the June quarter of units up 50% this quarter in total at retail, versus 7 last quarter? Was that disproportionately driven by the new Mac notebooks?

We had much more availability of our Intel-based Macs, yes. As we said in the last call in the March quarter, Ron really began to focus from January at Macworld on the Intel transition and we did not have products in January, in particular. With our having availability, not only of the MacBook Pro and Intel-based Mac but now the MacBook, he had just a fantastic quarter in the stores, not only with Mac sales but just sales in general. Keith Bachman - Banc of America Securities: Peter, you mentioned what the average revenue was per store for the average store opened. Could you refresh us on what that was last quarter? Thanks.

I will have to follow up with you. I do not recall what last quarter was. Keith Bachman - Banc of America Securities: Okay. Thank you.

Thanks, Keith. Could we have the next question please?

We’ll go next to Robert Semple with Credit Suisse. Robert Semple - Credit Suisse: Can you walk me through the revenue outlook? If you take the midpoint of it, I know it is similar to what you did last year, but last year you guys were taking down inventories on the iPod side, for I guess both the Nano and the eventual video launch. Historically, you have been up a little bit more seasonally than that in September. Can you just kind of walk me through the thought process there?

Sure. Our guidance for the September quarter actually is consistent with our past seasonality. Our range represents growth of 22% to 25% over last year. Again, last year, the last year September quarter was the best Mac sales quarter we had in education in 10 years. Robert Semple - Credit Suisse: Then just switching gears to iPod. I noticed ASP was off about $15 sequentially. Is that more of a mix issue, or was it because you started the kind of back-to-school free iPod with the Mac a little bit earlier than you did last year?

The main thing that drove that was the introduction in Q2 of the 1-gigabyte Nano for $149, and so in Q3 we had a full quarter at that. Robert Semple - Credit Suisse: Thank you.

Thanks, Rob. Could we have the next question please?

We’ll go next to Harry Blount, Lehman Brothers. Harry Blount - Lehman Brothers: Peter, just in terms of Leopard, are you assuming any contribution from Leopard in the September quarter for the margins?

I am sorry -- for the September quarter? Harry Blount - Lehman Brothers: Yes.

We have not announced the ship dates for Leopard. Our Developers Conference begins on August 7 next month, and we look forward to talking about Leopard and showing you many of the new features. Harry Blount - Lehman Brothers: In terms of the retail performance, if I look at revenue per walk-in customer and revenue per store, I am looking at revenue per walk-in customer is down for the sixth consecutive quarter on a year-over-year basis. I am wondering if you have a sense as to why that might be. Also, on the same-store sales, we are also seeing that down year over year the last two quarters.

Traffic through the stores has just been phenomenal. We had over 17 million people come through the stores this past quarter. As I said in my prepared remarks, our Fifth Avenue store has seen over 500,000 people since it has been open in May. The average store sales were down slightly year over year, but our total revenue from the stores is up about 29%. The average store revenue was down, a result of iPod sales being relatively flat year over year, as we have had a greatly-expanded channel, but our Mac sales continue to increase and we are up 50% year over year. Harry Blount - Lehman Brothers: Peter, last thing on the housekeeping side of the equation, can you maybe give us a sense of how many distribution points you have for both the iPod and the Mac? Also, a rough sense as to how many of the Macs sold in the quarter were tied to the iPod promotion? Thank you.

On the iPod side, we have close to 40,000 distribution points, which is up slightly from the previous quarter, as we have added a few select resellers around the world. On the Macintosh, we have about 7,000 points of sale. We are conducting some pilots to potentially expand that, but we are not making any announcements today about that. In terms of the promotion, we started back in the beginning of June, and so there were not a significant number of those within the quarter. Harry Blount - Lehman Brothers: Great, thank you very much.

Thanks, Harry. Could we have the next question please?

We’ll go next to Richard Farmer with Merrill Lynch. Richard Farmer - Merrill Lynch: Thank you. Peter, I would like to ask a couple of questions on gross margins, please. In the past, you have commented, at least qualitatively, on the iPod hardware gross margin. I wonder if you can provide any color there on how much that might have changed sequentially and year over year. The same question as it would relate to the Mac hardware in gross margin change. Finally, just a broader question on your philosophy in gross margin management longer-term. It seems like historically, you had been managing a little bit more to lower the prices or increase the feature set so that the gross margins were more stable, and that the upside in gross margins was quickly put back into price to stimulate growth. This quarter and some other recent data points, it seems like you are managing more for margin leverage. I understand the component cost had something to do with that, but if you look longer-term, are you making a decision here to manage the company more for margin leverage? Or should we think of you as investing a lot of that back into features and price so that the margin leverage we are seeing is more temporary?

In terms of product gross margins, we have a long-standing practice of not releasing specific gross margins, specific product gross margins. However, the iPod gross margin was up sequentially in the June quarter and that was really attributable to the very favorable commodity environment. The Mac products precipitated in that too. Now, as regards our philosophy, I think that we are very competitive today, both on our Mac products and iPod. We will continue to be aggressive with both our pricing and our feature and function. From a long-term perspective, we are not putting out a financial model, but I would target gross margin generally in the 27 to 28 some range. I've discussed with you in the past the factors that add and subtract to that. The primary positive factors include direct sales, where we retain the channel margin, as well as software and AppleCare and accessories. The primary adverse factors to gross margin are hardware, including iPod. Richard Farmer - Merrill Lynch: Thank you.

Thanks, Richard. Could we have the next question please?

We’ll go next to Richard Gardner with Citigroup. Richard Gardner - Citigroup: Thank you. Just two quick questions. First of all, Tim, I was hoping you might be able to give us a sense of supply/demand balance on the MacBook exiting the quarter. Secondly, also for Tim, does the fact that Intel rolls out new chips and drops prices more frequently than your prior processor partners create additional challenges for you on the inventory management front? Will you be rolling your products more frequently and adjusting your prices more frequently as the bill of materials comes down? Or will you do it the same way that you have done historically, which is adjust your prices at the time of new product introduction? Thank you.

In regards to the MacBook, we shipped a significant number of MacBooks, particularly in the month of June. However, despite that, we did exit the quarter with some backlog. We are working very hard to fulfill that backlog during this quarter. For the full quarter, I do not envision having a supply issue that would negate that. In terms of Intel, we are very pleased to be working with Intel. They have been a great partner for us. We feel that they have the best processor by far for us to use in the products that we both want to make and are currently shipping. Frankly, I am pleased that there are new products coming out there and that we can change over time. As you know, we do not discuss unannounced products, so I really would not want to go into our philosophy about when we would roll with them and how we might change pricing. Richard Gardner - Citigroup: Thank you.

Thanks, Rich. Could we have the next question please?

We’ll go next to Bill Fearnley with FTN Midwest Securities. Bill Fearnley - FTN Midwest Securities: Just a follow-up question on the iPod units -- what was the effect of the major and Mac promo being moved up in June? Was that significant to contributing to the iPod units for the quarter?

It was not significant. Bill Fearnley - FTN Midwest Securities: Then on the iPod ASPs, how should we be thinking about the blended ASPs going forward for the category? Should we be thinking that they should stay within the range that they have been the last few quarters?

Bill, I am sorry. That is a question we cannot answer. We do not provide product level forecast. Bill Fearnley - FTN Midwest Securities: Okay. On the direct versus indirect mix, could you give additional color on that as well? That’s it, thanks.

Sure. In the quarter, our direct sales, which we define as sales through our retail stores, online stores directly to customers and the iTunes Music Store, were 50% in the June quarter, up from 44% in the March quarter. Bill Fearnley - FTN Midwest Securities: Thank you.

Thanks, Bill. Could we have the next question please?

We’ll go next to Rebecca Runkle with Morgan Stanley. Rebecca Runkle - Morgan Stanley: Good afternoon, two questions, first on retail distribution. Can you just confirm what pilots you are currently running and have underway and when approximately they began? I have a quick follow-up.

Rebecca, the main one that we are running right now is with BestBuy. We are in a few of their stores, half of which have Apple people selling product and half of which do not. We are working with BestBuy to evaluate those results. We have been doing that for about two months. Rebecca Runkle - Morgan Stanley: Nothing else currently underway?

Not with a major partner. We have some select things that are of a smaller nature. Rebecca Runkle - Morgan Stanley: Perfect. Then, Peter, if we were to go back and look at historical OS launches, will you give us some color in terms of the impact and trending that you saw in the business, perhaps look at it, the quarter before an OS release, what types of variations did you see in the business as a result? Then, during the quarter of the OS release, what types of trends did you see?

You mean for the OS sales itself? Rebecca Runkle - Morgan Stanley: Just in terms of how the OS has trended, but then also how it has impacted the overall business. I am trying to get to, holistically, how we should be thinking about historical OS releases and how they have impacted the business model, broadly speaking.

Okay. First of all, when we released Tiger in the June quarter a year ago, our revenues from Tiger in that quarter from shrink wrap and license sales, so not including any allocation for what would have been on a Mac, was $100 million in the quarter. Your first-quarter sales are always your best. We certainly think that Mac OS X is the best operating system. I think it is a part of, along with our design, our transition to Intel, our retail stores and other great channel partners, are why the Mac has been growing so well and we have been gaining share. Rebecca Runkle - Morgan Stanley: Just to clarify, in the quarter before historical releases, did you typically see any slowdown in CPU sales in anticipation of the new OS?

Well, that is really hard to… Rebecca Runkle - Morgan Stanley: I know that is subjective.

…to evaluate. The software sales are the best at the front end of a release, and over time they are still good. Our OS sales even in the June quarter were good, but they are not what they are in the first quarter of launch. Rebecca Runkle - Morgan Stanley: Perfect, thanks so much.

Thanks, Rebecca. Could we have the next question please?

We’ll go next to Jonathan Hoopes with ThinkEquity. Jonathan Hoopes - ThinkEquity: Thank you. Looking at the unit shipment levels between the Mac desktops and the notebooks, are we to understand then that the vergence was mainly a function of the pro community not having products there to upgrade into, or was it a function of the education? As we move forward into the September education period, do you expect desktops to regain some strength there?

The main thing affecting desktops, frankly, are the compelling notebooks that we announced. So as the market is moving more notebook, Apple is leading the way and with the incredible announcement that we had with the MacBook Pro in Q2 and then the MacBook in Q3, there was just a very compelling reason to buy a laptop. On the desktop side, the comparison there would be, on a pro business, is fairly slower than a year ago, as people await a PowerMac with an Intel chip and/or an application from a third-party developer. The other thing that was happening was that the e-Mac was really at a close to an end-of-life last quarter, so sales on that were not as robust as they were a year ago. Jonathan Hoopes - ThinkEquity: Thank you. Do you have an idea as to how long a pro user typically waits before they upgrade? Are they more of a wait-and-see, or do you believe you had a wait list for pro users on an intel refresh?

I believe that pro users act like other users, and there is a time-standard deviation between different types of segments with them. I would not want to estimate what the average it is, or would be. Jonathan Hoopes - ThinkEquity: Thank you very much.

Thanks, Jonathan. Could we have the next question please?

We’ll go next to Chris Whitmore with Deutsche Bank. Chris Whitmore - Deutsche Bank Securities: Thank you. Just a follow-up on the last question, is there any way you could provide a percentage of desktops to the pro market, both in the June quarter of ’06 and compare that to the June quarter of ’05, just so we can get a feel as to the size of that market? Secondly, is there any way you could quantify the missed sales due to supply constraints on the MacBook business? Thank you.

On the size of the market, we do not disclose size of market numbers. Frankly, it is very hard to conclude exactly what they are because we sell both directly and indirectly, so that would be very hard to do. What was your second question? Chris Whitmore - Deutsche Bank Securities: Hoping to get a quantification of the notebook upside missed due to supply constraints, on the size of the backlog.

We did ship a significant amount in June. We left with some backlog, but we are continuing to ship, obviously in this month and view that that will not be an issue for the quarter. Chris Whitmore - Deutsche Bank Securities: To ask that first question a second way, can you provide us a percentage of shipments that were PowerMacs in each of those quarters?

We release things at desktop and portable level. Chris Whitmore - Deutsche Bank Securities: Thank you.

Thanks, Chris. Could we have the next question please?

We’ll go next to Bill Shope with JP Morgan. Bill Shope - JP Morgan: Thank you. I believe last quarter, you know that you got more aggressive with the market efforts overseas for the iPod. Can you give us some comment on the progress you might have seen in this arena throughout the quarter?

We did get more aggressive. We had put more energy outside the U.S. as we had the supply capability to do that. As a consequence, we saw share gains in several countries in Europe, including the U.K., Spain, Italy and France. We are very pleased with that. Also, through the month of May, BCN has reported that we saw more of the 50% share in Japan as well, and so we appear to be making good progress. Bill Shope - JP Morgan: One more question -- I am not sure if it is too early to ask this one yet, but have you been able to gather any data to help you understand if Bootcamp is actually stimulating Mac switchers?

We released the Beta in April, the number of downloads that we have had are significant, and the customer feedback that we’ve had on Bootcamp is very, very good. It is clear that for a Windows user that is considering switching to a Mac, that it makes it even more appealing to them to switch. Bill Shope - JP Morgan: Great, thank you.

Thanks, Bill. Could we have the next question please?

We’ll go next to Kevin Hunt with Thomas Weisel Partners Kevin Hunt - Thomas Weisel Partners: Thank you. I had a couple of additional follow-ups on the gross margin question. First of all, in the response to someone asking about why gross margin guidance was down 200 basis points, it sounded to me like you said everything was going to be the same as this quarter, so I guess I am still not clear why it would be down 200 basis points. Secondly, in terms of the Intel transition on the Mac side, can you talk about what direct impact that might be having, moving to an Intel chip rather than your historical chips? Also, whether using the Intel chipsets essentially lowers any other kind of component cost that you use within the PC?

Again, the reason we are guiding gross margin down is we will see a full quarter impact of the back-to-school promotion. It was a very aggressive promotion, where with a purchase of a qualifying Mac and an iPod Nano, a customer can get a rebate for the iPod Nano. We lowered our international pricing towards the end of the quarter as a result of a weakening in the dollar. We expect a different product mix, including more MacBooks, from having a full quarter of availability. I do not think we have really any comments on our Intel-based product gross margins. Kevin Hunt - Thomas Weisel Partners: Is that a positive factor or a negative factor? Can you at least say that?

Again, we do not have a comment.

Thanks, Kevin. Could we have the next question please?

We’ll go next to Charles Wolf with Needham & Company. Charles Wolf - Needham & Company: Yes, I have a question about the music model. I was wondering if the actions of some European countries, most notably France, pose any threat to Apple's music model.

Charlie, we believe that any legislation that requires the sharing of DRMs will result in state-sponsored piracy, which we think will cause artists to disallow their works to be sold digitally just as the market is beginning to grow. We hope that the countries will let the extremely competitive marketplace, driven by consumer choice, decide which players and online music stores are offered to customers. Charles Wolf - Needham & Company: Yes, I have one quick follow-up. Will there be any surprises at the Developers Conference?

You will have to come and attend. Charles Wolf - Needham & Company: Thank you.

Thanks, Charlie. Could we have the next question please?

We’ll go next to Shaw Wu with American Technology Research. Shaw Wu - American Technology Research: Thank you. Just some questions on your Japan business. It was down sequentially, double-digit for the second quarter in a row, but up on a year-over-year basis. I am just wondering, is Japan performing up to your expectations? Then, just some comments on the executive departure there. Thanks.

In the PC market in Japan, sequentially the market is generally down 15% or so, so the sequential performance is not surprising. In addition to that, we took some number of units out of the channel in iPod. On a year-over-year basis, if you look at Japan and you combine it with our retail stores that are in Japan, we were up 13%. That 13% is lower than the company average of 24, and we are not happy about that. We are continuing to look for and seek improvements in the business in Japan.

Regarding the change, Shaw, we mutually agreed on his resignation, which has already occurred. Our Japan marketing team will continue to report directly to Phil Schiller in Cupertino, and Phil will take the interim position to lead our overall marketing in Japan.

Thanks, Shaw. Could we have the next question please?

We’ll go next to Gene Munster with Piper Jaffray. Mr. Munster, your line is open. Please go ahead. Gene Munster - Piper Jaffray: Good afternoon. A couple of international questions. First, if you look at the success you had in the U.S., it really has not rolled out internationally. I think you went over some of the growth rates, and it seemed a little bit less in Europe and Asia. What is the big issue? Is it just a price point issue? Maybe you can address if you think about expanding the Apple brand globally, and a follow-up question.

Gene, if you look at Europe as an example, Europe’s revenue was up 21% year over year; that compares to the company average of 24%. If you combine it with the retail segment, or the groups, the stores that we have in Europe, it was up 22% compared to the company average of 24%. So Europe is very close. When we deploy a new product, and in this case, we deployed MacBook, as you know, it takes longer to deploy a new product into Europe than it does the U.S. In the first quarter, generally speaking, Europe would get less advantage of a new product. I think that is the primary difference in the growth rate in Europe. Japan we just spoke about. Gene Munster - Piper Jaffray: What about even markets, like the markets that are not talked much about, like South America and Central America and things like this? You just do not seem to really have much of a footprint at all, and these are obviously big markets.

The growth rate that we had in Latin America last quarter was tremendous. It almost doubled. However, we can always improve in the absolute level of revenue in that area and we are focused on doing that. Gene Munster - Piper Jaffray:

We do not release iPod shipments on a geographic basis. Gene Munster - Piper Jaffray: Can you address if some of the legislative issues in France, or potentially some of the things going on with Sony Ericsson and some of their new products, are you seeing an impact from any of those?

Gene, I have not seen an impact from the Sony products that I can comment on. As I said, I answered this for Charlie, but we just think and hope that the governments will let the extremely competitive marketplace, driven by customer choice, decide which players and which online music stores are offered to consumers. Gene Munster - Piper Jaffray: But it is safe to say that you have not seen an impact from either of those, to the best of your knowledge, Peter?

I have not looked specifically at Sony, so I do not want to comment on that. Gene Munster - Piper Jaffray: Okay. I guess just conceptually, some of the things that Sony is doing, what are your thoughts on that? Obviously, it had tremendous growth with the Sony Walkman phone. When you guys step back and see some of that success, what do you even think about?

Well, we are very confident in our ability to compete in the marketplace, and we are very excited about what we have in the product pipeline. You know that I cannot comment on that. As regards cell phones, we do not think that the phones that are available today make the best music players. We think the iPod is. But over time, that is likely to change, and we are not sitting around doing nothing. Gene Munster - Piper Jaffray: Great, thank you.

Thanks, Gene. Could we have the next question please?

We’ll go next to David Bailey with Goldman Sachs. David Bailey - Goldman Sachs: Thank you. Similar to what you have done on the Mac side, have you done any studies on what percentage of iPod sales are to existing owners? To go along with that, what are you doing to drive sales into your install base between product cycles?

I am not aware of studies or data that we have in that regard, David. In terms of what are we doing -- great marketing, offering great points of presence around the world, both in our retail stores and online and through our channel partners, and offering customers what we think is the absolute best products in the marketplace, in not only the iPod but the iTunes Music Store. I think the market share that we command around the world supports that.

Thanks, David. Could we have the next question please?

We’ll go next to Steve Lidberg with Pacific Crest Securities. Steve Lidberg - Pacific Crest Securities: Thank you. First, with regard to the MacBook, it seemed like you had shipments relatively within equilibrium exiting the June quarter in terms of supply. Relative to the online store, now you are showing a wait time of five to seven days. Can you give some insight into what that is related to? Then, as an additional question, Peter, with regard to the last couple of your quarters, you stated and highlighted the strength in the product pipeline, yet really from a product introduction standpoint, what we have seen has been relatively well-anticipated, i.e., the Intel transition devices. Is there some challenges on the execution side of the R&D pipeline? How should we think about that?

I have high confidence in the team here at Apple. We remain very confident in and excited about the products in our pipeline, and look forward to the future.

Steve, on MacBook, we are working very hard to fill our backorders on MacBook.

Thanks, Steve, and thanks to everyone for joining us today. A recording of today's call will be available for replay via telephone for seven days, beginning at 5:00 p.m. Pacific time today. The number for the replay is 719-457-0820 and the confirmation code is 1069240. A replay of the audio webcast of this call will also be available beginning at approximately 5:00 p.m. Pacific time today at www.apple.com/investor. Members of the press with additional questions can contact Steve Dowling at 408-974-1896. Financial analysts can contact Joan Hoover, or me, with additional questions. Joan is at 408-974-4570, and I am at 408-974-5420. Thanks again for joining us.

Thank you, everyone. That does conclude today's conference. You may now disconnect.