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

Bill Fearnley - FTN Midwest Richard Gardner - Citigroup Ben Reitzes - Lehman Brothers Andy Hargreaves - Pacific Crest Securities Charles Wolf - Needham & Company Gene Munster - Piper Jaffray David Bailey - Goldman Sachs Keith Bachman - Bank of Montreal Shannon Cross - Cross Research Mark Moskowitz - J.P. Morgan Katy Huberty - Morgan Stanley Jeff Fidacaro - Merrill Lynch Toni Sacconaghi - Sanford Bernstein Mike Abramsky - RBC Capital Markets Yair Reiner - Oppenheimer & Company Shaw Wu - American Technology Research

Good day and welcome to this Apple Incorporated Apple fiscal year 2008 third quarter results 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 Investor Relations and Corporate Finance. 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 may consist of forward-looking statements including without limitation those regarding revenue, iPhone sales, gross margin, operating expenses, other income and expense, stock-based compensation expense, taxes, earnings, 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 2007, the Form 10-Q for the first two quarters of fiscal 2008, 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. 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 highest June quarter revenue and earnings in Apple's history. Revenue in the quarter was $7.46 billion, representing 38% growth and an increase of more than $2 billion over the previous June quarter’s revenue of $5.41 billion. The strong year-over-year growth was driven by the highest quarterly Mac shipments ever and higher revenue from iPod, iTunes, and iPhone, which celebrated its first anniversary on June 29th. Operating margin for the quarter was better than expected at 18.6%, due primarily to higher-than-anticipated revenue and gross margin. Net income was $1.07 billion, which was up 31% over the prior June quarter’s results, and translated to earnings per share of $1.19. Before getting into the details of the quarter’s results, I would like to begin with a few points that demonstrate how well Apple has continued to perform. The current June quarter’s revenue growth of 38% was significantly above the 24% growth rate we achieved in last year’s June quarter and we continued to see healthy growth in all regions. Sales in our retail stores, most of which are in the U.S., were extremely strong, growing 58% year over year and store traffic was about 32 million, up 10 million from the year-ago quarter. In looking at our performance for the first six months of calendar 2008, Apple's total revenue increased by $4.3 billion year over year, a very impressive growth rate of 40%. We are very proud of these results. I would like to now talk about our Mac products and services, which represented 61% of our total revenue in the June quarter. We’re extremely pleased to have shipped 2.5 million Macs, the greatest number of Macs shipped in any quarter in Apple's history. This translates into 41% year-over-year growth and is nearly three times the overall PC market rate of growth for the June quarter based on the latest estimate published by IDC. Mac desktop sales grew sharply at 49% year over year, driven by strong demand for iMac which we updated in April. Sales of portables were up 37% year over year, driven by continued growth in demand for Macbooks and Macbook Pros, and the addition of Macbook Air to the portable lineup in January. We’ve been thrilled with the momentum of our Mac business. In the U.S. channels tracked and reported by NPD, Apple's share of total personal computers sold in the month of June increased to 19.5% this year from 15.4% last year, and it was the best Mac quarter ever for our U.S. education business, with unit growth of 25% year over year. We were extremely pleased with our strong growth in both the K to 12 market, where we reached a new all-time high for quarterly Mac sales, as well as the higher ed market, where we sold more Macs than in any previous June quarter. We ended the quarter with between three and four weeks of Mac channel inventory. Now I’d like to discuss our music products and services, which accounted for 33% of total revenue growth during the quarter. We sold 11 million iPods, an increase of 12% from the year-ago quarter, with the growth being driven by Shuffle as well as the introduction of the iPod Touch last September. We were pleased with the iPod sales growth of 10% in the United States and 15% internationally. iPod revenue grew 7% year over year, less than the unit rate of growth, due to lower ASPs driven largely by the Shuffle price reduction taken in February. We’re happy with the demand elasticity that we’ve seen for the iPod Shuffle and think the tradeoff between ASP and units was a good one. We were very successful in maintaining our high MP3 market share in the U.S. during the quarter and gaining share internationally. Our share is now over 70% in both the United States and Australia, over 60% in Canada, and over 50% in the U.K., Japan, and Switzerland, based on the latest published data from NPD, GFK, and BCN. We have strong double-digit share in numerous other European and Asian countries and we continue to gain share year over year in most countries for which we have data. We began and ended the quarter within our target range of four to six weeks of iPod channel inventory. The iTunes store achieved a number of milestones during the quarter and sales were once again very strong. As we indicated last month, we have now sold over 5 billion songs through iTunes and continue to build on our industry-leading catalog of content, which features over 8 million songs, 20,000 TV episodes, and 2,200 films, including over 450 in HD. In the June quarter, we introduced new content from HBO to iTunes in the U.S., premiered movies in Canada and the U.K., and introduced television programming in Germany, France, and Australia. iTunes also began offering new movies from major studios and premier independent studios on the same dates as they became available on DVD. During the June quarter, we shipped 717,000 first generation iPhones, and recognized revenue from iPhone handset sales, accessories, and carrier payments of $419 million. As we indicated previously, because we announced the iPhone 2.0 software and its many new features on March 6th but did not make it available until this month, we did not begin recognizing handset revenue for any iPhones sold on or after March 6th until we made the iPhone 2.0 software available. For those phones recognized -- for those phones, we began recognizing handset revenue on July 11th and we will continue to do so over the respective remaining terms of their 24-month estimated economic lives. Therefore, any iPhone handset revenue recognized during the June quarter relates to iPhones sold prior to March 6th. We’re off to a great start with the iPhone 3G. We have begun shipping in 22 countries. As we announced last week, we sold our 1 millionth iPhone 3G just three days after its launch, in contrast to the 74 days it took us to sell 1 million first generation iPhones. Customer reaction to the iPhone 3G has been overwhelmingly positive and we look forward to getting it into the hands of many more customers around the world in the coming weeks and months. We launched the App Store on July 11th with a tremendous selection of innovative applications, such as games, advanced medical solutions, and robust productivity tools for the enterprise. The App Store currently offers more than 900 applications, with more than 20% that are free and more than 90% priced at less than $10. Customers are really loving the App Store and the iPhone and iPod Touch users have already downloaded over 25 million applications. We believe this amazing selection of mobile applications will continue to keep us years ahead of the competition. I would now like to turn to the Apple retail stores, which delivered very strong results with revenue growing 58% year over year to $1.44 billion. The store sold 476,000 Macs during the quarter, an increase of 44% year over year, and over half were sold to customers who have never owned a Mac before. The stores also provided a record high 598,000 personal training sessions during the quarter, helping customers to learn more about their Apple products. We opened eight stores during the quarter, including our store on Boylston Street in Boston and our first store in Australia to end the quarter with 216 stores. With an average of 211 stores open during the quarter, average revenue per store was $6.8 million compared to $5.1 million in the year-ago quarter, an increase of 33%. Retail segment margin was $297 million, compared to $184 million in the year-ago quarter, an increase of 61%. We’re on track to end fiscal 2008 with 242 stores. We opened our first store in Beijing this past weekend and we look forward to extending our international retail store presence by opening stores in Switzerland and Germany during the second half of this calendar year. Total company gross margin was 34.8%, which exceeded our guidance by about 180 basis points as a result of several factors. First, we realized a net benefit to gross margin of about 70 basis points, primarily related to a one-time true-up of our contractor or contract manufacturer deferred margin. Second, the remaining 110 basis points resulted primarily from a better commodity environment, a richer product mix, and leverage from higher-than-expected revenue. Operating expenses were $1.21 billion, including $112 million in stock-based compensation expense. OI&E was $118 million. The tax rate for the quarter was 29%, below our guidance of 31% due to a higher-than-anticipated mix of foreign earnings. We generated $1.33 billion in cash during the quarter, ending with $20.8 billion. Cash flow from operations was $1.32 billion. In the first three quarters of fiscal 2008, Apple generated over $5.4 billion in cash on $3.7 billion in net income. The primary contributor to the difference between our reported income and our cash growth is the tremendous cash generation from iPhone sales that has not been fully reflected as earnings yet due to subscription accounting. 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 of about $7.8 billion, or approximately 25% growth over the prior September quarter. We’re off to a great start with the iPhone 3G and expect to sell more iPhones this quarter than we have in any other quarter thus far. Under subscription accounting, iPhone sales today will have limited impact on reported results in the quarter sold. However, those sales will build significant revenue and earnings that will be reported in future quarters. We expect gross margin to be about 31.5%, reflecting approximately $23 million related to stock-based compensation expense, down from 34.8% in the June quarter. This sequential decline is expected due to three primary factors; first, the full quarter impact of the back-to-school promotion; second, a future product transition, which I can’t discuss today; and third, the one-time true-up of our contract manufacturer deferred margin that we realized in the June quarter. We expect OpEx to be about $1.270 billion, including $125 million related to stock-based compensation. We expect OI&E to be about $120 million and we expect the tax rate to be about 30.5%. We expect to generate EPS of about $1. In closing, we are very pleased with our results. We’ve just reported the strongest quarterly Mac sales in Apple's history and have completed a fabulous first year with the iPhone. We’re very enthusiastic about iPhone 3G, as well as the potential of the developer community and the App Store to provide outstanding applications to make the iPhone and the iPod Touch even richer experiences for our customers. We expect revenues in fiscal 2008 to be about $32.4 billion, an increase of 35% year over year. We also remain very excited about our product pipeline and look forward to delivering more great new products later this year. With that, I would like to open the call to questions.

(Operator Instructions) And our first question will come from Bill Fearnley with FTN Midwest. Bill Fearnley - FTN Midwest: Thanks. Peter, you mentioned quickly here future product transitions and its effect on gross margins. Is there a corresponding effect on revenue growth here that you are expecting in the September quarter? Because the September quarter revenue growth quite frankly looks conservative. Does the product transition affect revenue growth expectations as well? And then I just have a quick follow-up.

Okay. Bill, for the quarter, we are targeting revenue of about $7.8 billion, which is 25% growth over last September. We have included in our revenue guidance the full quarter ASP impact of the back-to-school promotion, a future product transition that I can’t discuss today, and also the elasticity that we’ve seen from the iPod Shuffle price reduction and it’s result on ASP. I would tell you that we are very happy with our revenue growth and we’ve just reported the best Mac quarter ever and double-digit iPod growth, and are off to a fantastic start with the iPhone 3G. We expect to sell more iPhones this quarter than we have in any previous quarter, but this will have a limited impact on the September quarter but will build a significant revenue and earnings, which we’ll report in future quarters. If iPhone sales were reported as revenue when sold, the September revenue guidance would be significantly higher. Bill Fearnley - FTN Midwest: Okay, thanks. And then a lot of folks are talking about Apple's penetration in emerging markets. Could you give additional color about sales outside the U.S. for Mac and iPod in particularly here? Any additional color in terms of where you saw upside surprises and then any additional color you can give preliminarily on the few days that you’ve been out there in the China? Thanks. Timothy D. Cook: Europe had an outstanding quarter. Revenue grew at 43%, so higher than the overall company, and Japan for the third straight quarter has grown higher than the overall company this quarter at 40%. And Asia-Pacific continues to do extremely well, with a year-over-year increase in the Mac area of 53%. And so if you look at the Mac areas in each one, Europe was growing at about four times the market, according to IDC. Japan was growing at four to five times. Asia-Pacific was growing at two to three times. In terms of some of the markets that you mentioned, we had several markets in the developing market area that were growing over 50% in revenue year over year, such as China, Russia, and Latin America. But surprisingly, we also saw some of the more mature markets growing at over 50% year over year, such as France and Germany and Australia. So overall, it was a very, very strong quarter in every major geographic region. And the store is off to a good start in Beijing. We’re very happy with what we see there thus far. Bill Fearnley - FTN Midwest: And one last question, if I could, on the new stores; any change to your expectations here for store openings in the next 12 months?

: Bill, we’ve not announced our plans for ’09 but as I said in my prepared remarks, we expect to end fiscal ’08 at 242 stores. That is up 45 from last year. Bill Fearnley - FTN Midwest: Okay. Thanks very much.

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

From Citigroup, we’ll hear from Richard Gardner. Richard Gardner - Citigroup: Thank you. Tim, could you talk about how many Best Buy stores you added in the quarter? And then Peter, as a follow-up, it looks like you are still below your target range on Mac channel inventory. Is the target range changing or at some point should we expect the Mac inventories to get back to the sort of four to five week range that you’ve talked about historically? Timothy D. Cook: We added about 170 Best Buy stores across the quarter. That brings us to a total of about 570, and we plan to be at around 600 by the end of the summer. Globally, we now have about 10,300 storefronts carrying the Macintosh, and that’s up about 1,600 storefronts year over year. And the channel inventory, we did end at three to four weeks. We still feel that four to five weeks is the appropriate target. Richard Gardner - Citigroup: Okay. Thank you.

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

We’ll hear from Ben Reitzes with Lehman Brothers. Ben Reitzes - Lehman Brothers: Good afternoon. Thanks. Could you talk a little bit about gross margins? Obviously so good in the quarter, even taking out the 70 basis points, and then you are guiding to 31.5. Could we just talk a little bit about the changes in commodity environment, in particular maybe a little bit more about -- it sounds like it’s more the BTS promo, back-to-school promo and the product transition excluding the true-up here, but could you just talk a little bit more about what you think components will do and why?

Let me start by just going through some of the factors that caused us to do a little better in June, what we see for the September quarter, and then Tim can answer your commodity question. And then I’d actually like to follow-up after Tim does and talk a little bit about what we see in some future quarters. In the June quarter, we did do about 180 basis points better than our guidance, and this was driven, as I said in my prepared remarks, by a one-time true-up that we had with our contract manufacturer deferred margin about 70 basis points. The remaining 110 was primarily driven by a better commodity environment than we planned, a bit richer of a product mix and leverage from the higher revenue. As I look forward to the September quarter, I would see gross margin being about 31.5%, down from the 34.8% as a result of primarily three factors: first the full quarter impact of the back-to-school promotion that we are running; second, we’ve got a future product transition that I can’t discuss with you today; and then finally, the one-time true-up with the contract manufacturer deferred margin won’t repeat. Tim. Timothy D. Cook: Ben, on some of the key components on LCDs and NAND Flash, we expect a favorable cost environment. The DRAM market is entering a seasonally stronger demand period relative to where it’s been and we believe that price will recover from these historically low levels until we see increases in this area. Hard drives, optical drives, and most other commodities are in supply/demand balance and we envision these trends following historical norms. Ben Reitzes - Lehman Brothers: Okay, so I mean basically though, it sounds like you guys may reprice or rethink about how you are pricing maybe with some of the transitions and you want to drive a lot of volume. Is there any change in the company’s philosophy in terms of margin and volume, or stay tuned?

Ben, let me talk a little bit about what I would see beyond the September quarter for margins. As you know, we can’t discuss future products so the first part of your question, we’re not able to answer today. We’re delivering state-of-the-art products at price points that our competitors can’t match, which has resulted in market share gains in each of our products. We plan to continue this strategy and to deliver great value to our customers while making a reasonable margin but not a margin so high as to leave an umbrella for our competitors. In addition, and one of the investments that we make is to introduce new products that initially cost more because they deliver an entirely new level of value to the customer. Then we ride the cost curves down with value engineering and volume manufacturing, leaving us far ahead of our competitors. We have some of these types of investments in front of us that I can’t discuss with you today and we plan to continue to execute this strategy in the future. As we look beyond the September quarter, we would anticipate gross margins being about 30% in fiscal 2009. We are very confident in our new product pipeline, our growth opportunities, and the decisions we are making for our future. Ben Reitzes - Lehman Brothers: Okay, thanks. And then my last thing is just I would like to ask it as respectfully as possible; a New York newspaper today obviously called into question some issues around Steve and obviously his health, and we get a lot of questions about it and I’m really sorry to ask, because it’s a very private matter, but would you mind addressing the situation and just making it so we can have your official statement? And I apologize in advance for having to ask the question.

Ben, Steve loves Apple. He serves as the CEO at the pleasure of Apple's board and has no plans to leave Apple. Steve’s health is a private matter.

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

From Pacific Crest Securities, we’ll hear from Andy Hargreaves. Andy Hargreaves - Pacific Crest Securities: Could you just touch on CapEx? It jumped quite a bit in the quarter. Could you talk about what the spending was on and is the target still $1.25 billion in the year?

Our capital expenditures in the June quarter were $304 million. We spent $113 million in our retail stores and $191 million outside of our retail stores, in our IT areas, facilities, and some of our manufacturing. And we do anticipate CapEx for fiscal ’08 being $1.2 billion, about $400 million in retail and $800 million in the other parts of our business. Andy Hargreaves - Pacific Crest Securities: And then I wonder if I could just ask about Apple TV really quick and wondering if you can give us any clue or any indication on the number of video rentals or how the launch of that service has impacted hardware sales? Timothy D. Cook: We started shipping Apple TV, as you know, in February and we’ve been pleased with the sales that we’ve had. However, the Apple TV remains a hobby, as we call it, because it’s not -- this business is not nearly as large as the Macintosh business or the music business and does not have the potential of the iPhone business. However, we are very excited about the potential of it and continue to invest in it. Andy Hargreaves - Pacific Crest Securities: Thank you.

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

From Needham, we’ll hear from Charles Wolfe. Charles Wolf - Needham & Company: I have a quick question -- what was the division of iPod sales between the U.S. and international?

Charlie, that’s not something that we specifically break out but I can tell you that our iPod sales in the United States grew 10% and we grew 15% outside the United States. Charles Wolf - Needham & Company: So I should be able to saw for it? Thank you. Thanks, Peter.

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

From Piper Jaffray, we’ll hear from Gene Munster. Gene Munster - Piper Jaffray: Good afternoon. Obviously the iPhone is off to a good launch and seemed to be in line across the country and we’re down to 2% of your stores have iPhones. Can you give us any sort of expectations beyond you’re doing your best to refill the channel in terms of when we should expect to see a little bit broader inventory? Timothy D. Cook: The response to the new iPhone 3G has been stunning. As Peter said in his opening comments, we sold our 1 millionth iPhone just three days after the launch, and to contrast that, it took us 74 days to sell 1 million of the first generation iPhone and almost two years to sell our 1 millionth iPod, and so we are thrilled with what we see. As you say, there are a number of stock outs. This is a factor of the overwhelming demand. I am very pleased with the production ramp, very pleased with the trajectory of it. We’re shipping units as fast as we can and obviously we’re trying to catch the demand and serve our customers. We are confident enough in the production ramp that we will be launching about 20 additional countries on August 22nd, which would bring our total to over 40, and we still expect to be selling the iPhone in over 70 countries later this calendar year. Gene Munster - Piper Jaffray: Would you be launched in some of those other countries if you expected stock outage in the U.S.? Timothy D. Cook: You know, as I said, I like what I’m seeing in the production ramp and I am confident in our ability to supply. I’m not going to predict when supply will meet demand. We’ve been selling the phone for 10 days and so this is a very difficult thing to do with this level of data. Gene Munster - Piper Jaffray: One final question -- can you remind us of the accounting on the iPod Touch, the accounting treatment?

Sure, Gene. We recognize revenue on all iPods when we ship them. Gene Munster - Piper Jaffray: Okay, so why is the phone accounted differently than the iPod Touch?

Because we are giving a way to current customers at no charge new software applications, an update to the software features when we make them available, and we are not doing that with iPods or Macs. Gene Munster - Piper Jaffray: Thank you.

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

We’ll hear from David Bailey with Goldman Sachs. David Bailey - Goldman Sachs: Great. Thank you very much. Just a question about your go-forward gross margin target of 30% in fiscal ’09. Obviously that’s quite a bit lower than what you’ve seen over the past couple of years and I’m trying to understand if that’s more about pricing or mix or what else is causing such a steep drop-off.

David, as I said a few minutes ago, we’ll delivering state-of-the-art products at price points that our competitors can’t match, which has resulted in market share gains in each of our product areas, and we plan to continue this strategy into the future and deliver great value to customers. And as a result of that, I would see our gross margins being about 30% in fiscal 2009 and I can’t get into you what we have in our new product pipeline if we don’t talk about future products. David Bailey - Goldman Sachs: I guess I’m just trying to get a better handle on the fact that -- I mean, you’ve always been delivering the same type of products at those price points, with gross margins a few hundred basis points higher than that. So what’s the change?

We have some investments in front of us that I can’t discuss with you today where we are going to be delivering state-of-the-art new products that our competitors just aren’t going to be able to match and as a result, I would see gross margins being about 30%, and that’s all I can tell you at this point. David Bailey - Goldman Sachs: Okay.

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

We’ll hear from Keith Bachman with Bank of Montreal. Keith Bachman - Bank of Montreal: I wanted to go back on the guidance issue for a second; over the last three years, Peter, you’ve generally guided from June to September to have revenues up 3% and EPS varied a little bit but down [18.9%]. In reality, the results that you’ve delivered have been order of magnitude -- and those are sequential changes -- revenue has been up 10% and EPS has been in fact not down but up 9%. In each of those periods in September, you typically have price downs or reduction in prices. You always have back-to-school transitions. The only difference I heard this quarter was a reversal of deferred at the contract manufacturer. So still trying to understand what’s different this quarter in terms of how this is going to play out where in fact you are going to deliver September results that are above where you’ve guided from and historically, that’s exactly what’s happened over the past three years. If you could comment on that, please.

Sure. Keith, we gave you guidance that we have reasonable confidence in achieving and we have a process we go through to evaluate what we think demand for our products will be and what we can make and what it’s going to cost us, and we give you guidance accordingly. I have guided revenue up this quarter on 5% from where we ended the June quarter. We are confident in our business. We believe we will sell more Macs in the September quarter than we did in the June quarter but we do see our gross margin being down, and I’ve told you the three reasons that I think are primarily going to drive that. Keith Bachman - Bank of Montreal: Okay, well let me ask a follow-up then to Mr. Bailey’s question -- when you were describing why gross margins would be down to 30% in the out-quarters, I heard you mention price a couple of different times during your prepared and follow-on remarks. It sounds like what you are suggesting is in addition to mix though is price is going to be one of the things that you think leads the gross margins down, because in fact you haven’t been to those gross margins in over eight quarters.

Again, I can’t talk about future products. That certainly could be the case and we also plan to continue to announce state-of-the-art products the deliver incredible value to our customers and we are very excited about what we have in our new product pipeline. Keith Bachman - Bank of Montreal: Okay. I’ll leave it there. Thank you.

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

From Cross Research, we’ll hear from Shannon Cross. Shannon Cross - Cross Research: Good afternoon. Maybe just a -- hello? Can you hear me?

We can. Shannon Cross - Cross Research: Okay, good. Sorry, I’m on an iPhone 3G, so I hope you can. Anyway, looking at the -- moving past the gross margin, maybe we can talk a little bit about operating profit or operating margin. You know, Peter, if you can give some idea of if you are focused on running the business for gross margin or actually for the gross profit dollars that fall off of it, therefore there’s still substantial room for upside to EPS, even if gross margin gets compressed a bit.

Shannon, I think as I look back, I think the management team has made excellent decisions with our products and how we’ve managed the business. With the guidance that we’ve provided to you today, we expect our top line for fiscal ’08 to be $32.4 billion, up 35% year over year from fiscal ’07, which grew at -- which grew to $24 million. We’re just getting started really with the iPhone. In the September quarter, we think we’re going to sell more than we ever have, so I think we run the business very, very well, plan to continue to do that in the future. We’re investing in the business but we’ve been providing leverage from an OpEx perspective for some period of time now and would hope to do that in the future as well. Shannon Cross - Cross Research: Okay, and then just one question, because obviously with the accounting on the iPhone, the cash is going to become substantially more important, so can you talk a little bit about use of cash, management’s thoughts on cash, obviously given the relatively small return you are getting right now on your cash?

I don’t have a change in our position to share with you today. Shannon Cross - Cross Research: Okay. Thank you.

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

Mark Moskowitz with J.P. Morgan. Mark Moskowitz - J.P. Morgan: Thank you. Good afternoon. A few questions; Peter, I want to get back to David and Keith’s question regarding the commentary on margins going forward. Is it safe to say then you are kind of suggesting, without announcing your new products, that Apple could introduce a more flexible pricing structure across the product lines in terms of not having the reputation of being the high-priced configuration provider of old? And maybe being a lot more volume driven, particularly on the Mac side of the house?

Again, I can’t get in to what we will do in the future but as I look at our products today, I think we are incredibly well-priced from a competitive perspective. With the iPod, we start at $49 and go up to about $400, with many choices in between for customers, and I think we are as competitive today on the Mac as we’ve even been in the 12 years that I’ve been with Apple, so I’m very comfortable with our pricing. Mark Moskowitz - J.P. Morgan: Okay, and then Tim, could you help us understand how we should think about the longer term trajectory of your retail footprint overseas over time? I think you said 10,300 storefronts, but where do you see that going by the end of this year and next? Timothy D. Cook: That’s obviously the channel numbers that, just to clarify for everyone, not our own retail store. I see it continuing to increase, because as we grow our market share, the Mac will need more coverage. It doesn’t need the amount of coverage that iPod has, which has over 45,000, nor the amount that the phone will eventually have. But I do envision it continuing to grow. Mark Moskowitz - J.P. Morgan: And then just lastly, I know it’s very early here with the 3G iPhone but there seems to be a lot of buzz within the corporate IT houses regarding the phone. Can you maybe give us the sense in terms of what level of discussion has been stirred so far in terms of folks that want to fold in not only the iPhone but maybe even Macs into the corporate environment? Timothy D. Cook: On the iPhone, there’s been a significant interest. As you know, about a third of the Fortune 500 were in our iPhone 2.0 Beta Program, and we’ve got very large enterprises that, just to name a few, Kraft, First American, Disney, Genentech, Oracle, and the Southern Company who are all beginning to deploy iPhones within their organization. Also, there have been companies that are writing applications, and you can see some of these on the App Store, such as Salesforce.com with Salesforce Mobile and Oracle with Oracle Business Indicators, and there are many, many more enterprises that are writing custom apps for their particular enterprise. So we see significant excitement. Many of the carrier partners, as you probably know, have very large sales forces to call on these companies direct and they are very excited about pushing and evangelizing the iPhone in these accounts. Mark Moskowitz - J.P. Morgan: Thank you.

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

We’ll hear from Katy Huberty with Morgan Stanley. Katy Huberty - Morgan Stanley: Thanks. Peter, I understand this is a low base, but inventory did increase 50% sequentially, so is it fair to assume that that number normalized post the 3G launch?

Katy, the increase in inventories related primarily to a buy ahead we did to -- largely related to the launch of the iPhone 3G. Katy Huberty - Morgan Stanley: Okay, and then profits at Apple stores grew faster than revenue over the past few quarters. How are you thinking about continuing to flow that margin upside to the bottom line versus reinvesting in either store layout or resources to support what should be higher traffic, post the 3G phone launch?

Well, to date, Ron has I think really done a -- and his team a wonderful job of giving customers a great experience in the store and traffic just continues to go up. Again, we were up over 10 million people year over year to 32 million in just 211 stores that were open on average. We’re opening -- we’ll open this year about 45 stores. Ron is remodeling some of the early stores that we opened to give customers a better experience, so we are making investments in the stores and he, with the revenue growth, has been able to provide some leverage, as you point out, along the way. Katy Huberty - Morgan Stanley: Thanks.

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

We’ll hear from Jeff Fidacaro with Merrill Lynch. Jeff Fidacaro - Merrill Lynch: Peter, I was wondering if you could talk a little bit about the operating margin impact, maybe in the September quarter, from the iPhone launch. In other words, what cannot be deferred along with the handset revenues?

Sure. We incur our OpEx in engineering, sales, and marketing related to the iPhone currently, while recognizing the revenue over -- and product costs over a two-year period of time. And we do have launch expenses for the iPhone 3G that are built into the September quarter and that’s provided for in the $1.27 billion guidance that I gave you. Jeff Fidacaro - Merrill Lynch: And if you can talk about also the rollout into different geographies, it sounds like you are doing another 20 countries by August 22nd. Do you intend to do them in blocks or is it going to be more linear after that to get up to the 70 number? Timothy D. Cook: The August 22nd one is a block, as I indicated, and we would prefer to do more in blocks but we’ll likely have some of each as the year goes on to close out the year greater than 70. Jeff Fidacaro - Merrill Lynch: Great, and just one last follow-up, just on the App Store. Expectations here going forward, I know your iTunes has been generally run as break-even or better. You’re getting a 30% split of the application revenue. Clearly this has done well over the -- just the initial launch. I just wanted to get your thoughts and your expectations as far as contributing to profits.

Sure. We’re thinking about the App Store in the same way that we think about the iTunes store. While it will generate some revenues, it will be a small profit generator, and just as with the iTunes store making iPods more attractive, we think the App Store will make the iPhone and iPod Touch more attractive to customers. We’ll hopefully see an indirect return by selling more iPhones and iPod Touches.

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

We’ll hear from Toni Sacconaghi with Sanford Bernstein. Toni Sacconaghi - Sanford Bernstein: Thank you. I have a few questions, please; firstly, can you comment at all, or do you care to comment on what’s baked into your guidance around the health of the U.S. consumer? You are still doing phenomenally well in your stores but if we look sequentially, Mac units grew 67% last quarter; they grew 44% this quarter in your stores against a much easier compare. If we look at your store traffic, it was actually down sequentially from 33.7 million to 32. It looks like it’s typically up between Q2 and Q3. Do these indicators mean anything to you and do you have anything baked into your forecast for fiscal Q4 that incorporates a view about the health of the U.S. consumer?

Toni, we’re going to leave economic commentary to others but we didn’t see any obvious impact to the business in the June quarter, and I talked a little bit about in my prepared remarks just how we did at the company level but also in the U.S., in our retail stores with our iPods and our education unit, which had the best June quarter in our history. We’re certainly aware of the economic environment and we’ve considered it among other factors in preparing our guidance. Toni Sacconaghi - Sanford Bernstein: And then secondly, just in terms of the iPhone ramp, you mentioned that this was really a demand issue. Can you confirm that there have been no production or component issues to date? And if there haven’t been, I guess the question is why wouldn’t you push the launch date out one or two weeks so you wouldn’t have created what appears to be widespread stock-outs, frustration among customers that they can’t get it, et cetera? Was it just beyond the three standard deviation expectation for demand initially or -- so A, can you confirm that there hasn’t been a production or component shortage issue to date? And then B, if that hasn’t been the case, why wouldn’t have business practice suggest that waiting to ramp capacity and launching in way that could have been more satisfying to more customers had been prudent? Timothy D. Cook: Toni, as I said before, the demand has been staggering almost in every country that we’ve shipped in. And on the manufacturing ramp, it is right on schedule. We’re very pleased with the trajectory of it and the confidence that that gives us to -- or it gives us the confidence to launch in 20 additional countries in August. Toni Sacconaghi - Sanford Bernstein: I guess the question is why do you have such confidence that you can fulfill demand in 20 countries when you weren’t able to fill demand in 22 countries at initial launch for more than two days? Timothy D. Cook: I’m not predicting the demand. Demand is very difficult to predict with a new product of its sort, that has a new price point and it’s a revolutionary product. But we do have confidence over the supply and it’s the confidence over supply that allows us to continue to expand. Toni Sacconaghi - Sanford Bernstein: And then the final question I had was just revisiting this gross margin commentary you made about going forward. My impression is that the iPhone is the significantly higher gross margin product than your overall business, and obviously that’s going to ramp and all else being equal, should push up margins. I understand your commentary about ’09, and you mentioned the word umbrella and you didn’t want to create an umbrella, so I think the only inference is that you are going to be incrementally more aggressive on pricing on select products. But as we think about that over time, shouldn’t the upward pressure on your gross margins later in ’09 or beyond ’09 be positive due to both the iPhone plus the scale economies that you had talked about?

Toni, a couple of things; first of all, I wouldn’t rule that in or out and I’m not going to make comments beyond ’09. As regards the iPhone, we don’t discuss specific product margins. However, the iPhone is currently a small part of our total revenue and gross margin, as a result of subscription accounting. And with the introduction of the iPhone 3G and our authorizing carriers in over 70 countries, we expect to sell significantly more iPhones this quarter and in the future than we have and we are very happy with the margins in our new model. Toni Sacconaghi - Sanford Bernstein: Thank you.

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

From RBC Capital Markets, we’ll hear from Mike Abramsky. Mike Abramsky - RBC Capital Markets: Thanks very much. I guess they say that imitation is the sincerest form of flattery. We’ve seen that already with a number of iPhone knock-offs that are proliferating, about to proliferate. I would imagine that it’s going to be a very crowded fall season with a lot of choices for consumers, both in North America and outside, as they vie for similar kinds of user experiences that you’ve been able to do. What key sustainable advantages do you feel that you will have in that kind of environment to sustain the kind of demand that you’ve seen for iPhone and support the kind of plans that you are expecting for expansion? Timothy D. Cook: We think that software is really the key ingredient for a great mobile experience, and we believe that we are many years ahead of the competition in this area. And so we welcome any competition, as long as it doesn’t step on our IP.

Mike, I would add to that that we are very excited about our App Store, and as I said in my prepared remarks, in just a bit over a week, there are now over 900 applications available to customers and in just over a week, customers on iPhone and iPod Touch have already downloaded over 25 million applications. Mike Abramsky - RBC Capital Markets: Do you see this IP issue heating up later? How aggressive will you be in enforcing, for example, your multi-touch patent over what is obviously going to be globally a number of similar initiatives from other handset makers? Timothy D. Cook: We’ll be very aggressive. Mike Abramsky - RBC Capital Markets: How under-penetrated do you think this iPhone market -- excuse me, the smartphone market as it relates to iPhone is globally? This is obviously a product that does require a fairly high cost commitment from a number of users. We can’t ignore -- we’re not talking about economy, I recognize, but we certainly can’t ignore the pressures globally. What evidence do you see that this market can support a sustained level of the kind of growth that you’ve experienced out of the gate for this iPhone opportunity? Timothy D. Cook: Well you know, as I said before, we’re not predicting units other than the prediction that we made some time ago about this year, which we are extremely confident in achieving. But we believe that we are growing the market and that many people really didn’t have a full view of what a phone could do until we announced the iPhone. And so we think that there will be a shift in the phone industry over time to more and more people wanting a smartphone versus a standard voice phone. Mike Abramsky - RBC Capital Markets: And would you say that you don’t see the kind of cost commitment that is in front of people to get those new desires, to get the things that they are desiring being a headwind to market growth for the next foreseeable future? Timothy D. Cook: We did see it being a headwind at the $400 U.S. dollar price, and as we share some time about, about 50% of the people that we surveyed told us that they would have bought an iPhone had it not been for the price, and so with a change in business model, which gets the iPhone to a price of $199 in the U.S., and a price similar to that in local currencies on specific tariffs outside the U.S. in many countries, we believe we are addressing that key concern and the market for the iPhone will expand dramatically. Mike Abramsky - RBC Capital Markets: And just lastly, are you reaffirming your 10 million CY08 iPhone goal? Timothy D. Cook: We’re very confident in achieving the 10 million for calendar year ’08. Mike Abramsky - RBC Capital Markets: Thanks.

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

From Oppenheimer & Company, we’ll hear from Yair Reiner. Yair Reiner - Oppenheimer & Company: A quick question first on the back-to-school promotion. Can you walk us through the accounting of that and how you account for the iPods that are given away and what happens to the ASPs?

Sure. In our retail stores, for example, if you are a qualifying student and you buy a qualifying Mac and an iPod, we will send you a rebate for the cost of the iPod, and again it’s a qualifying Mac and iPod. We account for the rebate as a reduction in revenue and it is done proportionately to both the Mac and the iPod in proportion to the revenue related to the Mac and the iPod sales. Yair Reiner - Oppenheimer & Company: Got it. And on iPods, ASPs obviously down quite a bit in the quarter because of the higher Shuffle mix. Is this the mix that we should look at moving forward? And how do you see the overall iPod business developing now that it’s clearly getting some competition, at least, from the iPhone?

We don’t provide guidance at the product level. We were very happy with our iPhone sales in the June quarter. We grew 10% in the U.S., 15% internationally, gained share internationally, which we were very happy with. As a result -- as regards the iPhone, it’s hard to precisely tell but there likely was some element of cannibalization and our view is that if there is going to be iPod cannibalization, we want it to be from the iPhone. Yair Reiner - Oppenheimer & Company: Got it. Just a final question on the gross margin guidance for the following quarter; I understand the comments about new product innovation. I don’t quite understand why that would impact gross margins rather than OpEx and the R&D line; if you can help us think through that, it would be great.

Sure. We have been introducing state-of-the-art new products that have technologies and features that our competition just can’t match. And when we do that early in introduction, our costs are higher and then we work to bring costs down over time with value engineering and with volume manufacturing. Yair Reiner - Oppenheimer & Company: So just to be clear, this implies that these new products will actually be shipping or being built in this quarter?

I can’t get into our new product pipeline but I have told you regarding the September quarter, that one of the reasons that we see gross margin being down sequentially is because of a product transition, yes. Yair Reiner - Oppenheimer & Company: Okay. Thank you.

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

With American Technology, we’ll hear from Shaw Wu. Shaw Wu - American Technology Research: Thanks. Just a quick question, I guess perhaps for Tim, just on the Japan business. It looks like it somewhat regressed this quarter, after some improvement over the last two quarters. Just any comments there in terms of how do you feel about that business? And then just to revisit the iPod ASP question, understand that your back-to-school promotion definitely has some impact there but despite that, it seems like it was down a little bit more than expected. Is that a function of mix or is it -- would you attribute that to the back-to-school promotion? Thanks. Timothy D. Cook: Shaw, very happy with how our Japan subsidiary is doing. They are off to a great start in fiscal 2007. In each of the first three quarters, they’ve exceeded the company’s overall revenue growth rate and if you’ve noticed that this past quarter, they grew at 40% year over year versus the company’s growth at 38%. And I think that is particularly good when you think about how the markets there are doing. In the PC industry, IDC was predicting a 5% year-over-year increase for the market. The Macintosh was up 23% in units, so up four to five times. Our share improved year over year from about 4% to 5%, and in iPods, our share grew about 10 points year over year, up to 56% in May, according to BCN. And so we feel great about how we are doing in Japan. It’s quite the turnaround from how we were doing in 2006.

Shaw, in your follow-up on your iPod ASP question, it was down sequentially really as a result of the full quarter impact of the iPod Shuffle on price decrease. The back-to-school promotion, while we started it in the first part of June, really will have its biggest impact over the summer months, so that didn’t play a particularly large role within that. And as we said, we are very happy with the elasticity that we’ve seen on the iPod Shuffle and think the tradeoff between ASP and units was a good one. Shaw Wu - American Technology Research: Thanks for the color.

Thanks, Shaw. A replay of today’s call will be available for two weeks as a podcast on the iTunes store, as a webcast on apple.com/investor, and via telephone, and the numbers for the telephone replay are 888-203-1112, or 719-457-0820. And the confirmation code is 4120259. 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. Financial analysts can contact Joan Hoover or me with additional questions, and Joan is at 408-974-4570 and I’m 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. Have a wonderful day.