Nancy Paxton - Senior Director, Investor Relations and Corporate Finance Peter Oppenheimer - Chief Financial Officer, Senior Vice President Timothy D. Cook - Chief Operating Officer Gary Wipfler - Treasurer

Gene Munster - Piper Jaffray Bill Fearnley - FTN Midwest David Bailey - Goldman Sachs Richard Gardner - Citigroup Ben Reitzes - Barclays Capital William Shope - Credit Suisse Shannon Cross - Cross Research Toni Sacconaghi - Sanford Bernstein Mike Abramsky - RBC Capital Markets Andy Hargreaves - Pacific Crest Securities Katy Huberty - Morgan Stanley Bryan Marshall - Broadpoint Amtech Chris Whitemore - Deutsche Bank Charles Wolf - Needham & Company

Good day and welcome to this Apple Incorporated third quarter fiscal year 2009 earnings release conference call. Today’s call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Ms. Nancy Paxton, Senior Director of Investor Relations. Please go ahead, Madam.

Thank you. Good afternoon and thanks to everyone for joining us. Speaking today is Apple CFO Peter Oppenheimer and he’ll be joined by Apple COO Tim Cook and Treasurer Gary Wipfler for the Q&A session with analysts. Please note that some of the information you will hear during our discussion today will consist of forward-looking statements including without limitation those regarding revenue, gross margin, operating expenses, other income and expense, stock-based compensation expense, taxes, earnings per share, and future products. 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 2008, the Form 10-Q for the first two quarters of fiscal 2009, and the Form 8-K filed with the SEC today and the attached press release. Apple assumes no obligation to update any forward-looking statements or information which speak as of their respective dates. And with that, I would like to turn the call over to Peter Oppenheimer.

Thank you, Nancy. Thank you for joining us. We are very pleased to report the record June quarter revenue and earnings and to once again report the highest non-holiday quarter revenue and earnings in Apple's history. It was an extremely busy quarter for new product introductions and customers have responded enthusiastically. Revenue for the June quarter was $8.34 billion, representing 12% growth over the prior June quarter’s results. We are very proud of this results, particularly given the economic environment around us. Operating margin percentage for the quarter was over 20%, higher than our guidance due to better-than-expected revenue and gross margin. Net income was $1.23 billion, which translated to earnings per share of $1.35. In terms of non-GAAP measures, adjusted sales totaled $9.7 billion for the June quarter, which was $1.4 billion higher than our reported revenue. Adjusted gross margin was $4 billion, which was $1 billion higher than our reported gross margin. And adjusted net income was $1.9 billion, $700 million higher than our reported net income. We continue to believe that these non-GAAP financial measures provide added transparency to our business and hope they are helpful to you in you analysis and understanding of our performance. Turning to the details of our results, I would like to begin with our Mac products and services. We generated outstanding sales of 2.6 million Macs, setting a new June quarter record and nearly meeting the all-time quarterly record we set last September. Mac sales increased by more than 100,000 units over the prior year’s June quarter. This represents 4% year-over-year growth and compares favorably to IDC’s latest published estimate of a 3% contraction for the market overall. We followed up the transition of our entire desktop lineup in March with significant updates to our entire portable lineup in the June quarter, delivering increased performance and value across the lines. Mac portable shipments increased 13% year over year, driven by continued strong growth in sales of Macbooks and our new Macbook Pros. Customer response to the new portables has been very favorable and we saw an acceleration of sales following the launch. We began and ended the quarter with between three and four weeks of Mac channel inventory. Now I’ll turn to our music product. We sold 10.2 million iPods, which was down from 11 million in the year-ago quarter. There were two key reasons for this decline -- first, we reduced channel inventory by over 400,000. Second, sell-through declined by 4% year over year. I would like to discuss how we are looking at this market. We have three categories of what we call pocket products. Traditional MP3 players, iPod Touch, and iPhone. For traditional MP3 players, which includes Shuffle, Nano, and Classic, we saw a year-over-year decline which we internally had forecasted to occur. This is one of the original reasons we developed the iPhone and the iPod Touch. We expect our traditional MP3 players to decline over time as we cannibalize ourselves with the iPod Touch and the iPhone. However, we have a great business that we believe will last for many, many years and which we will continue to manage well and offer the world’s most innovative products. Despite the decline in our sales, our research shows that about 50% of our recent traditional iPod purchasers are buying their first iPod, including those in our high market share countries such as the U.S., Japan, Australia, Canada, and the U.K. The iPod Touch did extremely well in the quarter, growing more than 130% year over year. Customers continue to embrace this outstanding platform experience, which has been increasingly enhanced by the tremendous offering for the App store. Our share of the U.S. market continues to be over 70% based on the latest monthly data published by NPD and iPod was the top-selling MP3 player and continued to gain share year over year in nearly every country we track, based on the latest data published by GFK. We began and ended the quarter within our target range of four to six weeks of iPod channel inventory. I would now like to turn to the iPhone. We are thrilled to have sold over 5.2 million handsets in the June quarter, compared to 717,000 handsets sold in the year-ago quarter. Response to the new iPhone 3GS has been tremendous, with over 1 million 3GS handsets sold by the third day after its June 19th launch. We are currently unable to make enough iPhone 3GS’ to meet robust demand and we are working to address this. Customers and reviewers have been very impressed by its improved speed, 3-megapixel autofocus camera, video recording capability, and hands-free voice control. The iPhone 3GS is available in 18 countries today and we are quickly rolling it out this summer to the rest of the 80-plus countries where iPhones are sold. Customers are loving the new iPhone OS 3.0 release, which includes more than 100 new features, including cut, copy, and paste, MMS, spotlight search, a landscape keyboard for mail, and expanded parental controls for iTunes and App Store content. The App Store now offers over 65,000 applications and the iPhone OS 3.0 software has helped pave the way for developers to create even more innovation applications with many new features, including in-App purchases, a new maps API, peer-to-peer connections, and push notification. Customer response to the App Store has been phenomenal and we were thrilled to announce the 1.5 billionth download last week. The App Store is a key strategic differentiator of the iPhone and iPod Touch experience and we believe that outstanding software is the key ingredient for a great mobile experience. Recognized revenue from iPhone handset sales, accessory sales, and carrier payments was $1.69 billion during the quarter, compared to $419 million in the year-ago quarter, an increase of over 300%. The sales value of iPhones sold during the quarter was $2.9 billion. Since we announced specific new features of iPhone OS 3.0 on March 17th, we did not begin to recognize revenue or product costs for any iPhone sold from March 17th until the iPhone OS 3.0 software became available on June 17th. For those iPhones, revenue and product costs are being recognized ratably over the remaining terms of their respective 24-month estimated lives from June 17th forward. The iTunes Store delivered another great quarter, fueled by strong sales of music, video, and apps. With the introduction of the iPhone OS 3.0 last month, the iTunes experience keeps getting better. iPhone OS 3.0 software allows customers to wirelessly download movies, TV, and audio programs directly to an iPhone or iPod Touch and I am pleased to report that as of last week, customers had purchased and downloaded over 8 billion songs from the iTunes store, yet another remarkable milestone. I would like to now turn to the Apple retail stores. The stores recognized $1.5 billion of revenue during the June quarter, compared to $1.45 billion in the year-ago quarter. Our stores sold 492,000 Macs compared to 476,000 Macs in the year-ago quarter and about half the Macs sold in our stores during the June quarter were to customers who never owned a Mac before. We opened six new stores during the quarter, bringing us to 258 stores, and we also completed 27 store remodels. With an average of 254 stores open during the quarter, average revenue per store was $5.9 million compared to $6.8 million in the year-ago quarter. Retail segment margin was $321 million, or 21.5%, up from $297 million or 20.6% in the year-ago quarter. We hosted 38.6 million visitors in our stores during the quarter compared to 31.7 million visitors in the year-ago quarter, an increase of 22%. We successfully launched the new and improved one-to-one program and hosted a record 667,000 personal training sessions during the quarter. We remain on track to open a total of about 25 stores during fiscal 2009 and to complete the remodel of 100 stores to our new design. We are also looking forward to opening our first store in France during the holiday quarter. Total company gross margin was 36.3%, which was 330 basis points better than our guidance. This difference was primarily driven by three factors. First, component costs did increase but not to the level we had expected. Second, we spent less than we had expected in several operating areas, including warranty and manufacturing tools. And third, we efficiently ramped our new products in the quarter, spending less than we had planned. Additionally, and to a lesser extent, we benefited from a weaker U.S. dollar and from leverage on higher revenue than we planned. Operating expenses were $1.35 billion, consistent with our guidance and included $151 million of stock-based compensation expense. OI&E was $60 million and the tax rate for the quarter was 29%. Turning to cash, our cash plus short-term and long-term marketable securities totaled $31.1 billion at the end of the June quarter, compared to $28.9 billion at the end of the March quarter, an increase of over $2.2 billion. Cash flow from operations in the June quarter was $2.3 billion. Our investment priority for the cash continues to be preservation of capital, which has served us well in the current environment. We are continuing to focus on short-dated, high quality investment and remain comfortable with our investment portfolio. And while it is not reflected in our June quarter results, in the first week of a September quarter, we made a $500 million pre-payment to Toshiba for future supply of NAND Flash. 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. We will continue our practice of providing guidance based on GAAP and we’ll report our September quarter non-GAAP financial measures to you in October when we release our results. Forecasting in the current macroeconomic environment remains challenging, so we will continue to provide a range of guidance for the September quarter. We expect revenue to be between $8.7 billion and $8.9 billion. We expect gross margin to be about 34%, reflecting approximately $28 million related to stock-based compensation expense. We expect OpEx to be about $1.445 billion, including $150 million related to stock-based compensation. We expect OI&E to be about $30 million, reflective of a short-term interest rate environment, and we expect the tax rate to be about [30%]. We are targeting EPS in the range of about $1.18 to $1.23. In closing, we are thrilled to report record June quarter results and with customers reception of our new portables, iPhone OS 3.0, and the iPhone 3GS. We are very enthusiastic about the upcoming launch of Snow Leopard and the enhanced performance and user experience it will offer to our Mac customers. We remain confident in our strategy and new product pipeline and we are working hard to continue to deliver the industry’s most exciting and innovative products. With that, I would like to open the call to questions.

(Operator Instructions) We’ll take our first question from Gene Munster with Piper Jaffray. Gene Munster - Piper Jaffray: Good afternoon and congratulations. Two brief questions -- first on the Mac side judging by the product lead times, the demand for the new lower priced Macbook Pro caught you off guard. How do you see that demand trending through the September quarter? And second, can you just talk from a high level how you see the relationships with the wireless carriers evolving? Timothy D. Cook: In terms of the Macbook Pro, there are a couple of models that are somewhat constrained today but I believe we will get beyond this in the next few weeks. We don’t feel that the constraint had a material effect on last quarter and we factored our view of supply into the guidance that Peter shared with you. In terms of the relationship with the wireless carriers, I think that most of the carriers that we are doing business with are thrilled over the lower churn that they experienced with iPhone and the higher ARPUs and of course, their customers are demanding the iPhone and so I feel like we’ve got a very good set of relationships and we are obviously continuing to look to expand those. Gene Munster - Piper Jaffray: Okay. Maybe to ask it more specifically, do you see opportunities beyond the iPhone with the carriers, for example, AT&T with data plans and laptops, or AT&T’s living room initiative with [inaudible]? Timothy D. Cook: We have nothing to announce today in terms of other things with the carriers. We are very focused on working with the carriers on iPhone. Gene Munster - Piper Jaffray: Okay, and then I guess on AT&T, any update on the status of that relationship? Timothy D. Cook: I think it’s an excellent relationship and we are very happy with it. Gene Munster - Piper Jaffray: Great. Thank you.

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

And we’ll take our next question from Bill Fearnley with FTN Equity Capital. Bill Fearnley - FTN Midwest: Thanks. If I could on the mix here, when you look at consumer spending and then you look at K-12 and state and local government and the pro segment in the quarter, is there any detail you can give, particularly on the education and the pro segments? And then I have a quick follow-up. Timothy D. Cook: Sure, Bill. Relative to the market, the consumer market performed relatively better for us. The U.S. K-12 institutional business is weak, as you might expect and it’s getting hit by budget shortfalls and last quarter we saw very negligible amount, if any, of the stimulus funds flow all the way to the state and district levels to get spent, so that may or may not occur this quarter. In the pro business, the pro business has also been affected more by the economy than the consumer business is and you can see that some in our ASPs, it’s people that were buying those that were in commercial accounts and small business accounts are delaying purchases. Bill Fearnley - FTN Midwest: Tim, you’ve talked about higher ed growth and K-12 institutional growth before. Can you give us those numbers for this quarter? Timothy D. Cook: Overall, we were negative 6% in the institutional business. The K-12 business was more negative than that and the higher ed business was around the 0% level. Bill Fearnley - FTN Midwest: Okay, and then one other, if I could -- in terms of preliminary view after the price changes on mix with the older Macbook, the 999, and then the newer form factor, any additional details you can give us on the first 30 days of what you saw about mix shift with the price changes? Timothy D. Cook: Generally, as you can see from the data sheet that you’ve got, our units grew faster than our revenue in the portable area, and so ASP did fall some and one of the reasons is the price cuts that we took; another is the transitional cost of doing that. What was a major transition of replacing the whole lineup basically in a day. So we are seeing a mix down versus historic and we think part of that is that the commercial customer who was buying up in the line is delaying purchases in this weak economy. Of course, we’re thrilled with our overall results -- to grow 4% with IDC forecasting a negative 3 and Gardner forecasting a negative 5, that puts us 7 to 9 points ahead of the market and we are thrilled with those performance numbers. Bill Fearnley - FTN Midwest: Thank you.

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

And we’ll take our next question from David Bailey from Goldman Sachs. David Bailey - Goldman Sachs: I know you don’t break out the SKUs of the iPhone explicitly but can you give us some idea of how the $99 iPhone is doing relative to the other price points? And have you see a change in mix since the launch, either away from or toward the lower end phone? Timothy D. Cook: There’s two pieces of information I can give you, David. One is that as we made the changes, the two changes, both the launch of the 3GS and the price reduction of the 3G, we saw a significant acceleration in total unit sales. I don’t want to give you the precise mix because we view that as competitive data and obviously want to hold that tight. As Peter alluded to in his opening comments, the iPhone 3GS is currently constrained in virtually every country that we are shipping in, and so the demand for it has been very robust and I think it speaks to the great product that it is and we are working very hard to fill that demand. David Bailey - Goldman Sachs: Great, and then just a follow-up on that -- can you give us an update on the progress you have made in large enterprise accounts with the iPhone and how you look at that opportunity over the next year? Timothy D. Cook: Well, I think it’s a great opportunity for us and as you might guess, we are seeing growing interest with the release of the 3GS and iPhone OS 3.0, due in part to the new hardware encryption and the improved security policies. The phone is particularly doing well with small business and with large organizations that allow people to purchase the phones for individual use, and this is both in corporate and government settings. Specifically, to give you some numbers, almost 20% of the Fortune 100 have purchased at least 10,000 units or more and there’s now multiple corporations and government agencies who have purchased in excess of 25,000 each. We also had the iPhone approved in over 300 higher education institutions and so we feel really good about how we are doing and you may have noticed also that the most recent study by J.D. Powers has ranked the iPhone the highest in overall satisfaction with business customers, and so we think that we are just at the tip of the iceberg in terms of what the iPhone can do with the business customer. David Bailey - Goldman Sachs: Great. Thanks a lot.

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

And we’ll take our next question from Richard Gardner with Citigroup. Richard Gardner - Citigroup: Thanks. Peter, I was just wondering, regarding your revenue guidance, you are guiding up roughly 4% to 7% sequentially but you’ve got a couple hundred million of iPhone deferred revenue coming off the balance sheet and obviously you are doing very well with the new products. So I was wondering why you are guiding generally in line with last year’s increase and maybe a little bit below what we consider normal seasonality for the September quarter. Thanks.

Rich, we give you guidance that we have reasonable confidence in achieving, so no change in our thinking. Let me talk a little bit about Mac and iPod and iPhone. For Mac, while we usually see an increase in Mac units from the June to September quarters, and we expect to see one this year, we would expect the sequential increase to be less than previous years, since we refreshed every portable last quarter and the desktops in the March quarter, making the comparison sequentially tougher for us. Additionally, as Tim just commented, the U.S. institution, education institution sales remain under pressure from some budget shortfalls. As regard the iPod, similar to June we would expect the traditional MP3 players to decline year over year but iPod Touch to grow significantly. And for phone, last year we sold very few phones in the June quarter as a result of the July transition and $7 million in September, which included 2 million units [of channel fill]. This year we introduced the iPhone 3GS in June, selling 5.2 million in the quarter and in terms of assessing how we will do going from June to September, we are very optimistic about the product, it’s off to a great start but we just don’t have any experience in this seasonality with distribution as wide as we’ve got it, so we’ll report to you in October how we did. Richard Gardner - Citigroup: Thanks, Peter.

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

And we’ll take our next question from Ben Reitzes with Barclays Capital. Ben Reitzes - Barclays Capital: Thank you very much. Peter, could you talk about gross margins? You’ve obviously the last two quarters handily exceeded any of your expectations and guiding above, at one point you said 30% for September and now we’re at 34%. And does that mean that the long-term estimate of 30% no longer holds and that we should probably model something at least higher than 30 due to maybe better execution or something in your business model that’s changed?

The teams are executing phenomenally well and so that’s something that we are very proud of and I think the results have benefited from that. You know, regarding gross margins for the September quarter, we’ve had a chance to go through our complete process and I’m guiding to 34% for the September quarter, which is down from the 36% that we just reported. We expect the margins to decline sequentially as a result of a full quarter of back to school promotion and a full quarter of our new portables and also higher component costs. I don’t want to make comments today about future quarters but I will give you a couple of things that are on our mind. First, for many key components, costs are rising and you are seeing that in the market as well. And secondly, we will continue to focus on delivering state-of-the-art products at price points that our competitors can’t match and we are going to provide customers ever-increasing value. And so as you think about quarters beyond September, I would urge you to consider those factors. Ben Reitzes - Barclays Capital: Okay, thanks and with regard to the surge at the end of the quarter of iPhones, 5.2 million and you’re constrained on the 3GS, what is the inventory situation like? I mean, you were running at over a million, I believe, Tim, and how did you end the quarter on inventory? And how is the pent-up demand look though heading into the next one? Timothy D. Cook: The iPhone channel inventory was flat sequentially, so it was approximately the same number from the beginning of the quarter and at the end of the quarter. And what that means obviously since we were selling a lot more units at the end, that we do not have a channel loaded with the number of units that we would like at this time and you can see that in terms of stock-outs on the 3GS. Ben Reitzes - Barclays Capital: What’s that unit number, and then I’ll cede the floor here? Timothy D. Cook: The unit number? Ben Reitzes - Barclays Capital: Of inventory? Timothy D. Cook: You know, consistent with what I’ve said before, you can do the math, but it’s about 1.83 million, just slightly over 1.8. Ben Reitzes - Barclays Capital: Thanks a lot, Tim. Timothy D. Cook: That includes in-transits that we’ve invoiced and demos we’ve counted in a conservative manner.

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

And we’ll take our next question from William Shope with Credit Suisse. William Shope - Credit Suisse: Okay, great. Thanks, guys. Looking at the response you’ve seen on the 999 Macbook and the more recent Macbook Pro price cuts, can you comment on whether the Mac business is more or less elastic than you previously anticipated and perhaps give us an idea of how you thinking about elasticity in this business over the longer term? Timothy D. Cook: We are obviously thrilled with the results that we’ve had since we done the portable announcement. Mac sales did accelerate after the announcement [at WWDC] and shipment of the portables and we feel great about how they are selling. As we expected, there’s some number of people that are buying up because they can now get a Macbook Pro from $1199, whereas it wasn’t too many months ago that to buy a Macbook Pro, it would cost $1999, and so we’ve made a significant change there. So we are not thinking fundamentally different about the Mac business than we were before. Our goal has been and continues to be to build the best computers in the world and when we can do that at lower prices, we do that. When we can’t, we won't put the Apple brand on a product that doesn’t stand for innovation and doesn’t have the legendary ease of use that we are known for. William Shope - Credit Suisse: Okay, and then just so we’re all on the same page -- any chance you can give us some quantitative color on the gross margin EPS impact from the delayed iPhone recognition in the June quarter?

I can’t do anything specifically. You can make an estimate of what the revenues might have been, now that you know the June quarter sales and you can take a shot at the related gross margin. William Shope - Credit Suisse: Okay, great, we’ll do that. Thanks.

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

And we’ll take our next question from Shannon Cross from Cross Research. Shannon Cross - Cross Research: Thank you. Good afternoon. Can you give us an update on Snow Leopard and how we should think about the $29 price point? I’m kind of curious as to what drove the decision to go so low and how are you thinking about potential adoption rates? Timothy D. Cook: Snow Leopard is an even better Leopard. It redefines about 90% of the projects which make up OS10 and it includes a lot of powerful new core technologies and builds Microsoft Exchange support right into the OS, which is something that even Windows PCs do not do. We have priced it very aggressively so that all of our users can upgrade to it and we are hoping that they do that. As we announced at WWDC, we expect -- we continue to expect to ship it later this quarter. Shannon Cross - Cross Research: Okay, great. And then just a follow-up on the commodities -- I’m just curious as to which ones you expect to be sort of challenging going forward and how should we think about the pre-buy with Toshiba and should we continue to expect additional pre-buys, depending on what you think in terms of inventory and demand and pricing? Timothy D. Cook: In terms of going forward, the market for DRAM and the market for large sized LCDs have shifted to a constrained environment, and the pricing has moved accordingly. The NAND Flash market has now begun to stabilize and we expect it to move toward a supply demand balance. Hard drives and optical drives are now recovering from some supply constraints and pricing is declining at less than historical rates as a result. In terms of the Toshiba pre-buy, we did a long-term supply agreement with Toshiba. As a part of that, as part of the terms and conditions, we paid them $500 million as a pre-pay earlier in the quarter, as Peter had said. You know, we view Flash as a very key component for us because as you know we use it in so much or so many of our products and also we are a reasonable percentage of the user of Flash on a worldwide basis. In terms of doing additional deals, we are always open to doing additional deals with the right terms and conditions and as you know, we’ve done two in this fiscal year. We announced the one with LG earlier on LCDs and we may do others but there’s not one that we are currently working on but I don’t close that door because we are always looking at different things. Shannon Cross - Cross Research: Great. Thank you very much.

Thank you, Shannon. Could we have the next question, please?

And we’ll take our next question from Toni Sacconaghi with Sanford Bernstein. Toni Sacconaghi - Sanford Bernstein: Thank you. I think last quarter you had commented that the percentage of 999 Macs had increased sequentially. Can you comment on this quarter -- it sounds like there was a mix shift to the low-end because of continued economic uncertainty, yet you lowered Mac prices, which was stimulative or -- excuse me, Macbook Pro prices which was stimulative for the Pro. So give us a sense on how consumers netted out -- was your 999 offering a bigger percentage of total Mac notebooks this quarter than it was last quarter, and can you give us a little more color on the dynamic? Timothy D. Cook: Toni, I don’t want to give you exact mix numbers for competitive reasons but let me share with you at a macro point what we saw happening last quarter. After the transition, not our -- our non-education business, we saw a people up-selling from the 999 to the 1199 Macbook Pro. Obviously for $200, it’s a significant amount of features and so we saw that occurring last quarter. Before the transition, we saw a mix that was larger than after it to the 999, but we did see that change at the developers’ conference. Education itself, when you carve education itself out, the bulk of what K-12 would buy would be the lower priced unit and we sell it for even lower prices than the consumer price, obviously. Toni Sacconaghi - Sanford Bernstein: And then can you comment on the dynamics on the iPhone side -- it sounds like the lower price point, the $99 3G phone actually served perhaps more as a traffic driver for the 3GS phone than you would have anticipated. Do you think that was ultimately its role or is that product in and of itself a meaningful contributor to the iPhone story? Timothy D. Cook: You know, we are focused on total iPhone units and so we are very happy when the total comes out to the 5.2 number that came out and we are thrilled [at that]. I think it’s too early to tell what the ultimate mix of those products will be because as you know, the iPhone 3GS is constrained and also it’s only shipping in 18 countries of the 80-plus that we are in, and so I think it will take some amount of time. Also, there’s a phenomenon at the beginning of purchasing where you had people upgrading and those people that upgrade are obviously more likely to select the new phone, and so it’s only been a few weeks and I wouldn’t want to make any grand statements about what things will happen in the longer term. Toni Sacconaghi - Sanford Bernstein: And then one for Peter -- Peter, I think your sequential gross margin guidance in terms of sequential decline is actually more benign than you have guided for in each of the last two years, which is surprising to me because the component environment I think is tougher than its’ been in either of the last two years. Your back-to-school promotion in terms of geographic breadth are considerably broader this quarter and you have notebook price cuts, which you didn’t have in either of the previous fiscal Q4s. So was it -- is the offset in terms of your guiding to a lower gross margin sequential decline, is that all iPhone related or are there other considerations relative to previous years that we ought to be thinking about?

Toni, it’s always hard to talk about gross margin year over year because you are typically in different product cycles and you have different component environments and currencies can be different and mixes and a variety of things, so it’s hard. We are benefiting from a higher mix of iPhone revenues and that is beneficial to our gross margin. So as I think about this year versus last, sure, that is a factor. But as we put our guidance together for the September quarter, we’ve gone through our normal process and we thought about supply, we thought about demand and it resulted in the 34% that we provided you. Toni Sacconaghi - Sanford Bernstein: And then final question, you mentioned you lowered channel inventory on iPod about 400,000 units. Should we be thinking about the reduction in channel inventory being somewhat consistent as a percentage of what you anticipate for reduced iPhone sales in the following quarter? Or otherwise, why would you have taken it down by that amount? Timothy D. Cook: Toni, if you look at the over 400K that we reduced it by, there were two primary reasons. The first reason was that as you may remember in March, we announced and launched a new shuffle very close to the end of the quarter and also Easter, the Easter holiday was at the beginning of the June quarter, and so to support both of these, we ended March with a bit more inventory. Although still within the target range of four to six weeks. With these events behind us, we were able to reduce channel inventory and this accounted for about half of the over 400K unit reduction. The second reason is the overall demand was lower and we believe that this is due to the weak economy, cannibalization from iPhone, and the reduction in the market size for traditional MP3 players that as you heard Peter’s definition for this, we call traditional MP3 players the Shuffle, the Nano, and the Classic. And as a result of this, we adjusted channel inventories to correspond with this lower demand and this accounted for the balance of the over 400K unit reduction. But as a reminder, I don’t want to overstate this but we began and ended the quarter within our target range of four to six weeks and so we are staying within the rails that we have forever set as targets. Toni Sacconaghi - Sanford Bernstein: Thank you.

Thank you, Toni. Could we have the next question, please?

And we’ll take our next question from Mike Abramsky with RBC Capital Markets. Mike Abramsky - RBC Capital Markets: Thanks very much. Tim, there’s competitors that are unveiling application stores now and media and touch features via software -- can you just talk about maybe the dimensions along which you see continuing to out-innovate competitor user experiences and maintain iPhone momentum and share leadership? Timothy D. Cook: Sure, Mike. You know, I don’t want to talk very much about what we have planned in the future but if I just sort of summarize just what’s happened in the last 90 days, we have just shipped the next major version of the world’s most advanced mobile software platform with iPhone 3.0 and the App Store is now available in 77 countries, and reaches an installed base that is now more than 45 million. That’s the sum of iPhone plus iPod Touch. The App Store I think by any measure has been an unprecedented success with over 65,000 apps now in the store and over 1.5 billion apps downloaded. As you may remember, if you look at the App number, the over 65,000 from the store, that compares to the latest numbers we have for RIM and Nokia put them between 1,000 and 2,000 each. And the latest published number that we’ve seen on Android puts it less than 5,000. And so we feel like we have a substantial lead on apps for the phone, on software for the phone, and we think we have brought a great deal of hardware innovation for the phone as well. And so we feel extremely good about our competitive position and continue to believe that we are years ahead of other people. Mike Abramsky - RBC Capital Markets: Thanks. And do you see additional distribution and pricing models important to sustain either your growth in market share gains in iPhone and do you think you can sustain growth based on the current strategy? Timothy D. Cook: Well, I think we just took a major change with the introduction of a $99 product and so the reason we did that was obviously because we knew that there was elasticity there. And in regard to your other question, we are working very hard to continue expanding distribution, both within countries that we’re in where it makes sense to do so and to add new countries because the world has more 80 countries in it, and so we are looking at both of those and we recognize there are some large markets left uncovered currently. Mike Abramsky - RBC Capital Markets: Okay, thanks. And then just lastly, does the positive response to the Mac price cuts provide you some pause regarding the opportunity that you might have for similar momentum for lower priced entry level PCs? In other words, do you still feel that the lower priced PC category is perhaps not attractive versus your business model? I may not exactly be paraphrasing what you said last time but along those lines. Timothy D. Cook: Mike, I would say it differently, really and maybe I haven’t expressed it well -- our goal is not to build the most computers; it’s to build the best. And we will -- whatever price point that we can build the best at, we will play there. At this point, we don’t see a way to build a great product for this 399, 499 this kind of price point unit and we -- but you know, and as I’ve said before and I think this is playing out in several areas, I think some customers, maybe many customers buying these are -- become disappointed and disenchanted after they buy one of these, and so we are going to continue to focus on what we have always done, is making the best, the most innovative, and giving people tremendous value and I feel like the moves that we’ve made across this quarter really puts an exclamation point on those. When you look at being now able to buy a Macbook Pro for $800 less than someone could have done in October of last year, it’s just jaw-dropping. And so we feel very good about our strategy and our pricing and I think frankly the results bear it out. If you look at it now, we’ve now -- the Mac has outrun the market a staggering 18 of the last 19 quarters, and I think that really says that we do have the right approach. Mike Abramsky - RBC Capital Markets: Thank you very much, Tim.

Thank you, Mike. Could we have the next question, please?

And we’ll take our next question from Andy Hargreaves with Pacific Crest. Andy Hargreaves - Pacific Crest Securities: I’m just wondering on the iPhone -- the services and apps, they are obviously growing really fast -- is that putting or is the growth there constrained do you think by the network capacity of your carrier partners? Timothy D. Cook: I think that’s a better question for them but what I see without talking about specific ones, I see them making more investment in order to have faster networks and see them being very happy about driving higher ARPUs and lower churn. You know, this changes their cost of customer acquisition if they are not out churning people left and right and so I think they will continue to make investments to deliver services that people really enjoy, which is faster networks. Andy Hargreaves - Pacific Crest Securities: Do you think you guys will end up making investments on the side, whether it’s a knock or a data center or something to help take some of the pressure off them or offload some of that capacity? Timothy D. Cook: We have no plan to do so. You know, when we entered this business, we looked at it and came to a conclusion that what we could do really well was deliver a world-class handset because of our hardware and software skills and that we could uniquely play in that world and deliver something that was revolutionary. I think there are other people that have much more skills at networks and I think we are dealing with a lot of those as partners. I think that’s their business and they are quite good at it. Andy Hargreaves - Pacific Crest Securities: Okay. Thank you.

Thank you, Andy. Could we have the next question, please?

And we’ll take our next question from Katy Huberty with Morgan Stanley. Katy Huberty - Morgan Stanley: Thanks. A couple of follow-ups, Tim, first on the conversation around 399, 499 netbook or whatever you want to call it -- I understand that the ability of Apple to make something that is high quality at that price point is limited but do you think there is perhaps an emerging market for a truly mobile device that would have perhaps a larger screen where you can do more with it than on the iPhone that is big enough that you may want to participate at, regardless of price? Timothy D. Cook: I never want to discount anything in the future and never want to specifically answer a question on new products, as you probably know, Katy. The point I am making right now is that I think most customers that are buying a portable want a full featured notebook and we delivered those and delivered some incredible values in those and we feel like, and we know from our research the customers are very happy with those. I think some of the netbooks that are being delivered or many of those are -- have very -- are very slow. They have software technology that is old. They don’t have a robust computing experience. They lack horsepower. They have small displays and cramped keyboards -- you know, I could go on and on but I won't. And so that kind of thing I think many people will not be happy with and we are only going to play in things where we can deliver something that is very innovative that we are very proud of.

Thank you, Katy. Could we have the next question, please?

And we’ll take our next question from Bryan Marshall with Broadpoint Amtech. Bryan Marshall - Broadpoint Amtech: Thanks. A question with regard to iPhone activations -- based on my calculations, it seems as though that the U.S. has represented about 40% or so of the total activations over the last couple of quarters. I mean, should we be entering a point here where the international side should start to pick up here and start growing materially faster? I just wonder if you could help us think about this. Timothy D. Cook: We don’t release the percentage of iPhone sales by geography and so I wouldn’t want to get into that. We view it as competitive information. Generally speaking, you would find that smartphones in general are being sold in larger numbers and environments where post-pay is the primary payment mechanism, not that there are zero phones being sold in pre-pay; there are some but it’s much lower and so you can look at and do an analysis of where those post-pay countries are and find that there’s a disproportionate number of phones relative to the total phone market being sold there but that’s not unique to Apple. I think that’s the reality of the smartphone market currently. Bryan Marshall - Broadpoint Amtech: And Tim, having said that, some of your competitors are sort of tinkering around with some of the prepaid models out there. Is that something that you might be interested in down the road? Timothy D. Cook: Well, we’re doing that as well and we see by prepay in markets that are predominantly prepay and I think we have more to learn in that environment. I think this is an environment where we are still a beginner in some ways and I think can make drastic improvements. I think our business model works quite well in the post-pay category but pre-pay is an opportunity for us. We are trying it in both markets where post-pay is dominant of the two and we are trying it where pre-pay is the dominant, so we have multiple things going on right now and hopefully we’ll learn from that and improve as we move forward. Bryan Marshall - Broadpoint Amtech: Okay, final question -- any help you can give with regard to the percent of the iPod Touch user base, which we calculate north of 20 million at this point, that actually upgraded to the new iPhone 3.0 software? Timothy D. Cook: I would call it a good number and I don’t want to be more specific but obviously we priced that extremely aggressively and we are very much wanting to get the platform out there. It’s great for our ecosystem and the developers will sell more apps as a part of that and so we tried very hard to get people to upgrade.

Thank you, Bryan. Could we have the next question, please?

And we’ll take our next question from Chris Whitemore from Deutsche Bank. Chris Whitemore - Deutsche Bank: Thanks very much. Do the supply constraints on the iPhone 3GS in any way impact your rollout for the remaining countries? Or put another way, when do you expect supply demand to reach equilibrium for the iPhone? Timothy D. Cook: Let me answer both questions -- one, I don’t want to predict today when supply and demand will balance. I know that it will not balance in the short-term and I don’t want to give a prediction because as you can guess, it’s very difficult to gauge the demand without having the supply there to find out what it is, and so I don’t want to do that. In terms of affecting the country rollout, I believe the vast majority of the countries that we are selling the 3G in will be selling the 3GS by the end of the fiscal quarter. So it may move a date by a few weeks here or there but I think the vast majority will be shipping in by the end of the fiscal quarter. Chris Whitemore - Deutsche Bank: Tim, any update on the iPhone in China? Timothy D. Cook: Nothing to work, nothing to add today specifically, other than it continues to be a priority project and we hope to be there within a year.

Thank you, Chris. Could we have the next question, please?

And we’ll take our next question from Charles Wolf with Needham & Company. Charles Wolf - Needham & Company: I have a couple of questions. On sales of the iPhone, could you share with us any information you have regarding the division between new activations and upgrades? Timothy D. Cook: Charlie, I can’t share that information. Some of that information is confidential to the carriers themselves. The customer signs up with a carrier. Charles Wolf - Needham & Company: Okay, well, let me ask a question about the App Store then -- in terms of application prices, there appears to be a race to the bottom. I’ve noticed that there’s an increasing number of $0.99 offerings. Do you regard this as a concern and if so, are you taking any steps to enable consumers to separate quality apps from the garbage? Timothy D. Cook: Charlie, we are always looking for ways to categorize apps differently and we do have some ideas in this area. As you know, today we do it by type of App and also have show popular apps and top-selling apps, et cetera. We realize there’s opportunity there for further improvement and are working on that. In terms of the price, the developer sets the price and so it’s up to the developer what to charge and I think what they are doing is they are doing what any good business person would do, is doing the elasticity analysis and deciding where to best set their price. I would think as the installed base grows more and more and more, it makes more and more sense to have a bit lower prices and -- but that’s totally up to the developers and I am sure each of them may do that in a little different manner. Charles Wolf - Needham & Company: Thank you.

Thanks, Charlie, and thanks to everyone. A replay of today’s call will be available for two weeks as a podcast on iTunes Store, as webcast on Apple.com/investor and via telephone, and the numbers for the telephone replay are 888-203-1112, or 719-457-0820. The confirmation code is 2531481. And these replays will be available beginning at approximately 5:00 p.m. Pacific Time today. Members of the press with additional questions can contact Steve Dowling at 408-974-1896, and 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.

Ladies and gentlemen, that does conclude today’s presentation. We do thank everyone for your participation.