Nancy Paxton - Senior Director, Investor Relations and Corporate Finance Peter Oppenheimer - Chief Financial Officer, Senior Vice President Steven P. Jobs - Chief Executive Officer, Director Timothy D.

Cook - Chief Operating Officer Gary Wipfler - Treasurer

Bill Shope - Credit Suisse Richard Gardner - Citigroup Ben Reitzes - Barclays Capital Shannon Cross - Cross Research Gene Munster - Piper Jaffray Charles Wolf - Needham & Company Toni Sacconaghi - Sanford Bernstein Bill Fearnley - FTN Midwest Mike Abramsky - RBC Capital Markets

Thank you. Good afternoon and thanks to everyone for joining us.

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, and earnings per share. 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 three 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.

And with that, I would like to turn the call over to Apple's CFO, Peter Oppenheimer, for introductory remarks.

Thank you, Nancy. Thank you for joining us.

We are very pleased to report the our September quarter results, which were record-breaking on a number of fronts. First, we sold more Macs than we have in any other quarter in Apple's history.

Second, we sold more iPhones in the September quarter than in all previous quarters combined. Third, we sold more iPods than in any prior non-holiday quarter and finally, we generated more revenue and earnings than in any previous September quarter in Apple's history.

Revenue for the quarter was $7.9 billion, representing 27% growth and an increase of $1.68 billion over the previous September quarter’s revenue of $6.22 billion. Operating margin for the quarter was better than expected at 18.3%, due to higher-than-anticipated gross margin.

Net income was $1.14 billion, which was up 26% over the prior September quarter’s results and translated to earnings per share of $1.26. As we have discussed in the past, because we may provide new features and software applications to iPhone and Apple TV customers in the future free of charge, in accordance with GAAP we use subscription accounting to recognize revenue and cost of sales for these products on a straight line basis over their two-year estimated economic lives.

This results in the deferral of almost all revenue and cost of sales related to iPhone and Apple TV during the quarter in which these products are sold to customers. In contrast, we generally recognize revenue and cost of sales for our other hardware products, such as Macs and iPods, at the time of sales as we do not provide new features or software applications for those products free of charge.

As we reported in our press release, iPhone unit sales grew significantly in the September quarter, resulting in a material increase in the amount of iPhone revenue and product costs that had been deferred for recognition in future periods. Specifically, deferred revenue from iPhone and Apple TV sales grew to $5.8 billion at the end of the September quarter, an increase of nearly $3.8 billion from the end of the June quarter.

If iPhone revenue was not deferred, iPhone would have represented 39% of Apple's revenue in the September quarter. While our GAAP results provide significant insight into our performance, we are supplementing our analysis of the business internally by using non-GAAP financial measures that correspond to the total sales and product costs of iPhones and Apple TVs sold during the quarter.

We believe these non-GAAP measures provide us with meaningful additional insight into the performance of our business, as well as provide information about iPhone and Apple TV that is similar to the information we use to analyze the performance of Macs and iPods. Beginning with this quarter’s earnings release, we plan to provide you quarterly with non-GAAP financial measures we use internally to help us evaluate our performance and make operating decisions.

I encourage you to read the earnings press release as it provides a full description of these non-GAAP measures, including how we use them, how they are derived, and their limitations. I would now like to go through several of the non-GAAP measures.

First, we use a non-GAAP measure that we call adjusted sales to provide more information regarding our underlying sales trends and to evaluate the sales dollars of products sold in the period. We calculated adjusted sales by backing out the September quarter’s amortization of deferred revenue from iPhone and Apple TV sales and adding back all amounts generally due at the time of sale for iPhones and Apple TVs shipped in the September quarter.

Adjusted sales totaled $11.7 billion, which was about $3.8 billion higher than our reported revenue of $7.9 billion. Second, we use a non-GAAP measure we call adjusted cost of sales that corresponds to adjusted sales.

We calculated adjusted cost of sales by backing out the September quarter’s amortization of deferred costs related to iPhone and Apple TV and adding back the total cost of the iPhones and Apple TVs shipped in the September quarter. We also used an estimate of the total future warranty expense related to the iPhones and Apple TVs sold in the September quarter rather than reflecting the actual iPhone and Apple TV warranty expenses incurred during the September quarter.

We then calculated the non-GAAP measure of adjusted gross margin by subtracting adjusted cost of sales from adjusted sales. For the September quarter, adjusted gross margin was $4.6 billion, which was $1.8 billion higher than recorded gross margin.

Third, we used the non-GAAP measure of adjusted net income to evaluate our performance based on the current period iPhone and Apple TV sales and to facilitate ongoing operating decisions. For the September quarter, adjusted net income was $2.4 billion, which was $1.3 billion higher than reported net income.

We believe that these non-GAAP financial measures provide added transparency to our business and hope they are helpful to you in your analysis and understanding of our performance during the September quarter. Now turning to details of our results, I would like to begin with the iPhone, which had a breakout quarter, thanks to the July 11th launch of the iPhone 3G.

We sold nearly 6.9 million iPhones during the September quarter, exceeding the 6.1 million units shipped over the entire lifetime of the first generation iPhone. And with more than two months to go in the calendar year, we have already surpassed our goal of 10 million iPhone sales in calendar 2008.

Recognized revenue from iPhone handset sales, iPhone accessories, and carrier payments totaled $806 million during the quarter. We dramatically expanded iPhone distribution in the last quarter.

We increased the number of countries where we are selling iPhone from six to 51, and we expect to be in more than 70 countries by the end of the December quarter. With the addition of Best Buy, we have over 3,100 points of iPhone distribution in the U.S.

and with our international expansion, we currently have over 30,000 points of distribution around the world. I would like to now talk about our Mac products and services.

We are pleased to have shipped over 2.6 million Macs, which was a new company record for any quarter. This represents 21% year-over-year growth and is higher than the overall PC market rate of growth for the September quarter based on the latest estimate published by IDC.

Although Mac sales grew faster than the market, we believe Mac growth was impacted by purchase delays based on speculation about the new launch of our portables and budgetary constraints affecting education institution purchases. We are unsure how the economy may have affected Mac sales in the quarter.

And of course, we are very enthusiastic about the new notebooks introduced last week. The new MacBook and MacBook Pro redefined notebook design while dramatically lowering the entry price for advanced notebook features, including all metal enclosures, pro performance notebook graphics, brilliant instant on LED backlit displays, and new large glass multi-touch track-pads.

We began and ended the quarter with between three and four weeks of Mac channel inventory. Now I’d like to discuss our music products and services.

We sold 11 million iPods, a new record for a non-holiday quarter and an increase of 8% over the year-ago quarter. Last month we introduced our new line-up of iPods, including the fourth generation iPod Nano featuring a sleek new curved aluminum and glass design in nine great colors.

We also introduced the second generation iPhone Touch, building on its groundbreaking original features while redefining the entry price of $229. Both iPods incorporate the new iTunes 8 Genius technology, which automatically creates playlists from songs in users’ libraries that go great together with just one click.

We remain very pleased with iPod market share. Our share of the U.S.

market for MP3 players was over 70% in the month of September based on the latest data published by NPD, and we continued to gain share year over year in most international markets, including the U.K., France, Germany, Japan, Canada, and Australia, based on the latest data published by GFK and BCN. We began and ended the quarter within our target range of four to six weeks of iPod channel inventory.

The iTunes store had a very good quarter thanks to the strong music and video sales and the tremendous success of the App Store. We now have over 65 million iTunes customer accounts and a music catalog of over 8.5 million titles, and we are very pleased with our fall 2008 TV lineup, which now includes primetime programming from all four major networks in stunning high definition.

I would now like to turn to the Apple retail stores, which delivered strong results with revenue growing 37% year over year to $1.72 billion. The store sold 596,000 Macs during the quarter, an all-time quarterly record and an increase of 26% year over year.

Over half the Macs sold through the retail stores during the quarter were to customers who have never owned a Mac before. We opened 31 new stores during the quarter, including 13 stores outside the U.S.

to end the quarter with 247 stores. With an average of 226 stores open during the quarter, average revenue per store was $7.6 million, compared to $6.6 million in the year-ago quarter, an increase of 15%.

Retail segment margin was $301 million, compared to $268 million in the year-ago quarter. Our stores hosted a new all-time high of 42.7 million visitors during the September quarter, or 14,500 visitors per store per week.

We have continued to invest in our stores to accommodate this record-breaking traffic and to offer customers a great experience. We recently launched the fastest way to buy an iPhone, which customers are loving.

After starting the process by answering a few questions online, customers can complete their iPhone purchase and activations in our stores in just about a minute longer than it takes to purchase an iPod. Total company gross margin was 34.7%, which was better than we anticipated at the beginning of the quarter, due primarily to a better component pricing environment.

To a lesser degree, we also benefited from higher software sales and payments from carriers related to first generation iPhone and lower costs associated with the iPod product transition. Operating expenses were $1.3 billion, including $120 million in stock-based compensation expense.

The OpEx total was about $30 million higher than our guidance, largely as a result of additional advertising and the operating costs of selling 6.9 million iPhones. OI&E was $140 million.

The tax rate for the quarter was 28.2%, below our guidance of 30.5% due largely to a higher-than-anticipated mix of foreign earnings. We are very pleased to have generated $3.7 billion in cash during the quarter, ending with $24.5 billion.

Cash flow from operations was $4.3 billion. Our investment priority has been preservation of capital, which has served us well in these difficult credit markets.

At the end of the September quarter, our unrealized mark-to-market loss was $117 million on the total portfolio of $24.5 billion, which was only an $80 million sequential increase from the end of the June quarter. We plan to hold these investments and do not expect to realize any material losses on them.

Looking ahead to the December 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 will report our December non-GAAP measures to you in January when we release our results.

We enter this holiday quarter with the best products we’ve ever shipped, including the iPhone 3G and new notebooks and iPods, and we remain very confident in our business. Our visibility is low and our forecasting is challenging and as a result, we are going to be prudent in predicting the December quarter.

We are providing a wide range for our guidance for the quarter and we are targeting revenue between $9 billion and $10 billion. We expect gross margin to be between 30% and 31%, reflecting approximately $25 related to stock-based compensation expense, down from 34.7% gross margin in the September quarter.

The sequential decline of our gross margin reflects the recent introductions of the new iPods and notebooks. We expect OpEx to be between $1.45 billion and $1.47 billion, including about $150 million related to stock-based compensation.

We expect OI&E to be about $140 million and we expect the tax rate to be about 30.5%. We are targeting EPS between $1.06 and $1.35.

In closing, we are extremely pleased with the performance of our business during fiscal 2008. We generated nearly $32.5 billion in revenue, a 35% increase from 2007, and we gained market share globally in Macs, iPods, and iPhones.

We are also pleased to have generated $9.1 billion in cash during the fiscal year. We are headed into the holiday season with our best product lineup ever and we are very enthusiastic about our expanding geographic reach with iPhone 3G.

We remain very focused on developing the industry’s most innovative products, managing our business, and gaining share in each of our markets. Before we open the call to questions, we have a special guest here today who would like to say a few words and answer some of your questions -- our CEO, Steve Jobs.

Hi, everyone. Some remarkable things are happening at Apple but everything is now set against the backdrop of this global economic slowdown, so it seemed like a good time for me to make a few remarks and help answer some of your questions.

I would like to go back and talk about the non-GAAP financial results because I think this is a pretty big deal. In addition to reporting an outstanding quarter, today we are also introducing non-GAAP financial results which eliminate the impact of subscription accounting.

As you know, subscription accounting is the solution we adopted to let us provide free software updates to iPhone users under GAAP accounting rules. In accordance with the subscription accounting treatment required by GAAP, Apple recognizes the revenue and the cost of goods sold for the iPhone over its economic life of two years rather than upon sale as we do for Macs and iPods.

Because by its nature subscription accounting spreads the impact of iPhone’s contribution to Apple's overall sales, gross margin, and net income over two years, it can make it more difficult for the average Apple manager or the average investor to evaluate the company’s overall performance. As long as our iPhone business was small relative to our Mac and music businesses, this didn’t really matter much.

But this past quarter, as you heard, our iPhone business has grown to about $4.6 billion, or 39% of Apple's total business, clearly too big for Apple management or investors to ignore. Hence our introduction today of non-GAAP financial results alongside our reported GAAP results.

As you can see, the non-GAAP financial results are truly stunning. By eliminating subscription accounting, adjusted sales for the quarter were $11.68 billion, 48% higher than the reported revenue of $7.9 billion, while adjusted income was $2.44 billion, 115% higher than the reported net income of $1.14 billion.

Adjusted net income that is more than double our reported income -- if this isn't stunning, I don’t know what is, all due to the incredible success of the iPhone 3G. I would like to now highlight two remarkable milestones resulting from iPhone’s outstanding performance last quarter.

The first is that Apple beat RIM. In their most recent quarter, Research in Motion, or RIM, reported selling 6.1 million BlackBerry devices.

Compared to our most recent quarter sales of 6.9 million iPhones, Apple outsold RIM last quarter and this is a milestone for us. RIM is a good company that makes good products and so it is surprising that after only 15 months in the market, we could outsell them in any quarter.

But even more remarkable is this -- measured by revenues, Apple has become the world’s third-largest mobile phone supplier. I know this sounds crazy, but it’s true -- as measured in revenues, not units, Apple has become the third largest mobile phone supplier.

Let’s look at the ranking -- Nokia is clearly number one at 12.7 billion; Samsung number two at 5.9 billion; Apple is number three at 4.6 billion; Sony Ericsson, number four at 4.2; LG, number five at 3.4 billion; Motorola, number six at 3.2; and RIM number seven at 2.1. Pretty amazing.

Now, both of these things, beating RIM in units and becoming the third largest mobile supplier in revenues are amazing feats but part of this was the result of expanding into over 50 countries and there’s no guarantee that sustained sales will equal initial sales. And who knows what the future results will be, given the worldwide economic slowdown but we actually outsold RIM last quarter and ranked as the third largest mobile phone supplier in revenues.

Not bad for being in the market for only 15 months. I would now like to talk about the App Store for a few minutes.

One area that where we have completely changed the value proposition for mobile devices is the App Store. Customers will download the 200 millionth application from the App Store tomorrow, only 102 days since its launch on July 11th -- the 200 millionth app.

We’ve never seen anything like this in our careers. There are now over 5,500 applications offered on the App Store in 62 countries around the world and the rate of new applications being submitted is increasing every week.

Competitors are scrambling to copy our App Store but it’s not as easy as it looks and we are far along in creating the virtuous cycle of cool applications begetting more iPhone sales, thereby creating an even larger market which will attract even more iPhone software development. It is clear that customers are now attracted to iPhone not only for its amazing functionality and revolutionary multi-touch user interface but also for its unique ability to let users easily purchase, download, and use thousands of different applications, ranging from free games to financial planning and health management -- all of this in only 102 days.

And now I’d like to touch on the notebooks that we just introduced. Last week we introduced our new MacBook and MacBook Pro line.

These products are very important since notebooks comprise two-thirds or more of the Macs we sell. These new MacBooks are some of the best products we’ve ever created and it’s already clear that our customers love them.

We’ve had a very, very strong launch and we are anxiously awaiting to see the demand trajectory that will unfold during the quarter. The level of quality these products deliver to customers is mind-blowing for their price points.

The unibody precision aluminum enclosures would normally cost hundreds of dollars by themselves. The electronics, especially the graphics, are state-of-the-art in mobile computing and features like the glass track pad are unique in the industry.

With the introduction of LED backlit displays on these mainstream notebooks, over 90% of the notebooks Apple sells now use LED backlit displays. Another thing worth noting is that these new notebooks are the greenest products Apple has ever offered.

You will hear more and more about that from us in the future. So now let’s turn to the economy, to the broader market conditions resulting from the global economic slowdown and credit crisis.

First, let me say that we are not economists. Your next-door neighbor can likely predict what is going to happen as accurately as we can, but we do know a few things.

First, we have the best customers in the world. I wouldn’t trade our customers for any other company’s customers in the entire world.

They are some of the smartest, most product aware customers in the market and they have chosen Apple's quality, hardware and software products. While they may postpone purchases in tough times, they are unlikely to abandon the quality and seamless integration which they have personally experienced and become accustomed to with Apple's products.

So if the economic downturn does affect them, they are more likely to delay than switch. Two, we still have a minority market share of the PC market and a miniscule market share of the mobile phone market.

While we may not appeal to every prospective customer, the percentage of prospective customers we need to attract in order to significantly increase our market share isn't that many and we have 250 Apple retail stores that already sell half their Macs to new-to-Mac customers. Three, we have the best product lineup in Apple's history.

The new MacBooks in particular should trigger a serious upgrade cycle in our installed base. We’ll see.

I feel very good about our product lineup as we head into the holidays and beyond. Four, we have the most talented and creative employees in the world -- just look at their results -- the new MacBooks, the iMac, the iPhone, the iPod Nano and Touch, Leopard, iLife, and on and on.

None of our competitors can deliver products in this class. And five, we have almost $25 billion safely in the bank and zero debt.

This provides us tremendous stability and the ability to invest our way through this downturn. This is what we did during the last downturn -- we increased R&D investments and created some of our best new products and businesses, like the Apple retail stores, for one.

This downturn may also present some extraordinary opportunities for companies that have the cash to take advantage of them, like Apple does. In summary, we have the strongest product lineup in Apple's history, the most talented employees, and the best customers and $25 billion in the bank.

We may get buffeted around by the waves a little bit but we will be fine and stronger than ever when the water is calm in the future. With that, I’d like to open it up for questions for Peter, Tim, or myself.

Thank you. Steve, clearly your results and the guidance paint two very different pictures of the world and I was wondering, have you seen any new trends in recent business that would suggest such a disparity or is this really simply just prudence, given all the macro headlines we are all seeing right now?

Well, there’s a lot of prudence in there but it’s also October and October has always been a little bit of a foggy month for us. You know, we are always biting our nails, wondering whether we ordered too many iPods or this or that for the holiday quarter because sales often don’t really take off until November some time.

So the months of October and April are our slowest during the year and we think we are doing the right things. We think we know what the results may be but October and April are foggy months for us in terms of predicting the whole quarter but there’s a lot of prudence built in.

We’re not economists and we read the same newspapers you do.

Great. Thank you.

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

Thank you. Steve, thanks for being on the call.

I would like to start off with a question regarding share repurchase and just ask your and the board’s latest thoughts on share repurchase now. I understand that cash is a good thing to have in the current environment but you are using relatively little of that cash for things like retail store openings and for investments in the business.

What are your thoughts on returning some to shareholders?

You know, I think this economic downturn may present some extraordinary opportunities to companies that have cash. I think cash is already king and it may get more so that way, so we are very comfortable with our cash position in the bank and it’s not burning a hole in our pocket.

Okay, thank you. And if I could follow-up, Peter, and maybe ask if you could give us a sense of how much of the gross margin outlook for the fourth quarter is related to the higher costs associated with the aluminum uni-body enclosures, and maybe some sense of how much more expensive that is then the way you were doing things previously?

Well, the guidance that I provided, Rich, the sequential decline really is driven from the introductions of the notebooks and iPods, which we couldn’t be more excited about. And there’s many, many new technologies, new features in those besides the uni-body but that contributed.

As I said on the last call, we were going to introduce these products. They were initially going to have higher costs and through volume manufacturing and cost engineering, we’re going to work down, work to get down the cost curve over time.

But we’ve made a big investment in these products and these are some of the best we’ve ever shipped.

Okay. Peter, could I ask one more -- and that is we have seen a 35% decline in aluminum pricing so far -- well, since you gave the guidance for fiscal ’09 gross margin, aluminum is down 35%.

How quickly can we expect that to start flowing through the P&L? Thank you.

We would certainly sell our new MacBooks cheaper if we just delivered them with a block of aluminum but we have to machine that aluminum and it’s a fairly precision operation, so the cost of the aluminum matters some but is not a dominant cost.

Okay. All right, thank you.

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

Thanks a lot. Steve, can you talk about the pricing of your Mac line right now and how you feel that is positioned going into this economy?

And in particular as well, maybe your thoughts -- there’s this new NetBook category that’s getting a lot of hype and just where do you see that playing out in the marketplace and your position in the market there?

Well, again this particular downturn is not creating a market of cheaper computers. That market has existed for some time and there are parts of that market that we choose not to play in.

I think when people want a product of the class that we make, over and over again people have done the price comparisons and we’re actually quite competitive. So we choose to be in certain segments of the market and we choose not to be in certain segments of the market.

And the question is is the downturn going to drive some of our customers to those lower segments of the marketplace and get to buy lesser products? And I will be surprised if that happens in large numbers and I actually think that there are still a tremendous number of customers that we don’t have in the Windows world or in the other 99% of the phone market we don’t have who would like to and can afford to buy Apple products.

So we’ll see what the ratio of those two things are but we’re not tremendously worried. As we look at the NetBook category, that’s a nascent category.

There’s as best as we can tell not a lot of them getting sold. You know, one of our entrants into that category, if you will, is the iPhone for browsing the Internet and doing e-mail and all the other things that a NetBook lets you do, and being connected via the cellular net wherever you are, an iPhone is a pretty good solution for that, and it fits in your pocket.

But we’ll wait and see how that nascent category evolves and we’ve got some pretty interesting ideas if it does evolve.

Okay, great, thanks and just a quick follow-up on the iPhone -- I mean, given it’s so new for you, Steve, do you have any view on how it will do in this economy, and in particular you still have some international expansion going on, so just given the iPhone is new, we’ve been through downturns maybe with Macs before, although a long time ago, and maybe even consumer devices, this iPhone is so new, how do you see it doing in this economy?

We’ll be glad to tell you how it does.

Okay. Thanks a lot.

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

A question with regard to channel inventory and what you are seeing in terms of -- I mean, iPod, iPhone, Macs, just comments from the retailers -- again, I know it’s October and as you said, it’s a bit foggy but any sort of thoughts on how things are positioned that you can give us, in more detail than maybe what you provided earlier?

In the Mac area, as Peter said in his opening comments, we began and ended the quarter between three and four weeks of inventory and that’s below our target, as you know, of four to five weeks. In the iPod, we began and ended between four and six weeks, which is right in our target range and on the iPhone, we were shipping to carriers in 51 countries by the end of the quarter and we had over 30,000 points of distribution.

With the 44 countries that we had launched prior to the end of August, the weeks of inventory that we had at the end of the quarter for those countries was less than six weeks. For the remaining seven countries where launches occurred in late September or early October, we don’t have enough data yet to quantify the weeks of inventory.

However, to be precise, at the end of the quarter I can tell you that we had about 2 million iPhones in total channel inventory across all of the 51 countries and we feel that this inventory is about right.

Okay, and I’m curious -- any idea on how much the Mac refresh would have impacted sales last quarter as you sort of cleared the channel?

I think if you look at the Mac, there are two things that I believe impacted the Mac sales last quarter and possibly a third. The first is that U.S.

K to 12 institutional sales were down 7% year-on-year to about 200,000 units, and this is due to state and local budget constraints. California in particular was down 28% year-on-year.

That 7% contraction was a significant change from what we had seen in the first three quarters of the fiscal year which were up 29%. In particular, purchases of 1,000 units or more were down significantly, both sequentially and year over year.

If the unit sales had grown last quarter in K to 12 at 29%, which is what we had been seeing going into the quarter instead of contracting by 7%, then Mac unit sales would have been 75,000 units higher and so this was a big issue for the quarter from a Mac perspective. The second thing that we believe was that customers were delaying purchases because of the portable transition.

As you know, there were rampant rumors and lots of press reports about a potential portable transition and we saw some slowing towards particularly the final weeks of September and the initial weeks of October. However, once announcing last week, we saw a considerable rebound in sales and we are very, very optimistic about those results.

Okay, and then just a final question for Steve -- any chance we can get you to make this a recurring event?

Not likely, I’m sorry.

Okay, thanks.

Peter and Tim do such a good job that I don’t think I could add much.

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

Thanks for providing the non-GAAP results. That’s helpful and really points to the power that the iPhone is having and clearly you are off to a phenomenal start there but Steve, can you talk about the bigger picture for the iPhone in 2009 when the field is starting to get more cluttered with iPhone wanna-bes?

And how do you just big picture think about your roadmap for ’09 and the phone?

Well, I think we have to be the best and I think we have to not leave a price umbrella underneath us, and we are working very hard to fulfill both of those goals. And I think we are way out ahead of anybody else right now and we are investing a lot with the most talented people in the world to stay that way.

We have a great partner in AT&T and together I think we are both very committed to making the iPhone a great value for customers, so we’ll be focused on all those things next year and beyond.

Okay. Can you give any sort of split in terms of phones sold in U.S.

versus international?

Not specifically, Gene, but I would tell you that there was a significant percentage international.

Okay, and then just a final question -- Peter, last quarter you talked about the margin impact and the potential for these new products and it seems like margins once again were phenomenal and can you just help us understand, should we still be waiting for something or have we seen what happened and just the pricing environment was much more favorable than you had expected? How do we reconcile your comments last quarter versus what we are seeing right now?

Gene, really the latter -- we’ve introduced stunning new iPods and notebooks. They cost more and that’s why our margin declined sequentially.

As I told you 90 days ago, we don’t talk about new products so it was hard to make the comments that I did and be clear, but you’ve now seen what we’ve done and I have provided guidance for 30% to 31% this quarter and we are going to continue to work to get down the cost curves over time on these great products.

Okay. I guess one final question is did you actually see a deceleration in your business?

I know that there was some anticipation on the new Macs but did you see any sort of deceleration towards the end of September or is the guidance just purely trying to be as conservative as possible?

On the iPod side, iPod was up 8% for the full quarter, as Peter had mentioned earlier. In the final weeks of September and the early weeks of October, we were running flat year over year on a worldwide perspective and as we look forward, it’s very difficult to predict whether the usual seasonal holiday lift will exist in the same pattern as it has before.

As we said, forecasting is very difficult. On the Mac, I commented that we did see what we believe were purchasing delays due to last week’s portable transition and also the K-12 institutional business was down year over year last quarter.

Would it be safe to summarize your comments as that you have seen some sort of an impact, it looks like it’s more a slow-down ahead of the Mac cycle and so it’s less economy related and more just your general conservatism?

It’s difficult to separate how much was the purchase delay versus economy. It could have all been delay, it could be some part due to the economy.

We just don’t know. What we are very excited about is the rebound last week was great and -- however, forecasting that going forward with the visibility that we have is just very difficult.

Thank you.

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

Yes, I have a question for Steve and for -- well, for anybody but the performance of the iPhone was absolutely astonishing, but it was probably more so in this respect that most of the phones sold in the quarter were probably net activations as opposed to re-upgrades from the first gen. I was wondering, do you have any percentages on how many of the iPhones went to new users and how many, what percentage went to the first gen people?

That’s confidential information to our carrier partners but I would point out that we expanded the number of countries that we sold in from six to 51 and so there was an extraordinary amount of iPhone being sold to people for the first time.

Yes, well my point is simply that over half of RIM’s sales, BlackBerry sales, are upgrades, not to new users, so I would argue that Apple did better than it would appear, given the numbers.

We’re happy just to -- we’re just happy to beat them on a number-to-number comparison.

Well, keep it up, Steve.

We’ll try.

Okay, thanks.

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

Thank you. I have a question or two for Peter and Tim, and clarifications for Steve.

For Peter and Tim, can you talk about the forces at work in terms of iPhone volumes for Q4? Typically, I mean, last year we saw iPhone volumes double in the calendar fourth quarter.

You are also expanding distribution. Both of those are obviously forces that would suggest that the iPhone number could be considerably higher.

Obviously on the flip side of that, you did have a stocking of your channel, which won’t be as significant in Q4, and we have economic uncertainty. Should investors be thinking about strong seasonal growth in the iPhone for calendar Q4?

And if not, why?

You know, we don’t predict unit sales at a product level but what I would point out is that we did begin shipping in many more countries last quarter, from six to 51, as I had said, and we just launched the phone on July 11th, so we did have a channel build. That channel build was about 2 million units, as I had mentioned previously, and so that’s something you would have to take into account in predicting our fiscal Q1 sales.

We will expand into more countries. We are on target to be in over 70 by the end of the year.

However, the countries that we are expanding in are clearly have -- there’s less opportunity in those than the 50 that we have rolled out so far, and so you’d have to take that into consideration. We are confident that year over year that sales will be up significantly.

What they do sequentially, our crystal ball is not working at the moment and so we would leave that for you to predict.

And then on the gross margin side, you are guiding for 30% to 31% for Q1 and you said that you expect to be able to ride down the cost curve as volumes ramp going forward. How does that -- how should we think about your previously stated guidance of 30% gross margin for fiscal year 2009 in light of those two statements?

In last quarter’s call, I said that we anticipated gross margin being about 30% in fiscal 2009 and our guidance for the December quarter is consistent with that at 30% to 31%. As we look forward, we continue to anticipate gross margins of about 30% in 2009.

We are delivering state-of-the-art products at price points that our competitors can’t match and that’s resulting in market share gains in each of our product areas. We are going to continue with this strategy of delivering great products and making a reasonable margin but as Steve said, we are not going to leave an umbrella for competitors.

Toni, I would point out, just to show the breadth of what we’ve done, when we took Touch price down, we took it from $299 to $229 for the entry price and the units above it were moved $399 to $299 and $499 to $399, so significant price cuts on Touch. We also doubled the memory at the same price on Nano while providing an incredibly new design.

Also on the notebooks, as you know from last week, the entry price went from $1099 to $999, and in addition, we brought MacBook Pro features down to the MacBook price range, which is essentially at $700 less than what we were offering before. And so we’ve made an enormous round of cuts to provide more value to our customers.

That’s a good segue for the two things I wanted to just clarify with Steve -- Steve, you mentioned a couple of times that you thought there were extraordinary opportunities for companies with cash. I think you could hire almost every engineer in Silicon Valley on a lifetime employment contract and not really dent that significant cash horde that you have.

When you made that statement, are you suggesting that there are significant opportunities for Apple outside of Apple, specifically in terms of acquiring companies?

I just meant exactly what I said, which is I think there’s going to be some significant opportunities. I think hiring every engineer is Silicon Valley is a good idea, though.

Thanks.

And then you had also mentioned the price umbrella statement and you said look, certainly to be successful on iPhone, we don’t want to create a price umbrella. I think in response to another question, you also talked about extraordinary feature functionality in terms of your Mac products.

Do you have the same philosophy around Mac as you do with iPhone, that you have to be careful not to create an umbrella in each? So I guess the simple question is should we continue to see more affordable price points across the Mac product family and across iPhone going forward?

Well, I think what we want to do is deliver a lot, an increasing level of value to these customers. There are some customers which we choose not to serve.

We don’t know how to make a $500 computer that’s not a piece of junk, and our DNA will not let us ship that. But we can continue to deliver greater and greater value to those customers that we choose to serve and there’s a lot of them.

And we’ve seen great success by focusing on certain segments of the market and not trying to be everything to everybody. So I think you can expect us to stick with that winning strategy and continuing to try to add more and more value to those products in those customer bases we choose to serve.

Does that make sense to you?

Yes, it does. I mean, I guess, if I could follow-up, you did in this case add more value in terms of feature functionality with your notebook by actually lowering the price, so you retained the features but lowered the price.

Certainly in terms of the new notebooks, you retained the price and added more features.

Correct.

Can we expect you to continue to attract more customers by doing both, both adding more features at the same price and lowering price and retaining the same features?

Well, we like to attract new customers but you will just have to wait and see.

Thank you.

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

If I could ask a question for Steve and then a quick follow-up to Peter and Tim -- Steve, how are you thinking about Apple TV now? You’ve had a heck of a year.

For fiscal year, you’ve upgrade the iPhone, the iPods, and certainly the Macintoshes as well. If you look at the digital living room category and you look at the upcoming year of 2009, how do you look at the digital living room opportunity and how it relates to Apple TV?

Well again, I think the whole category is still a hobby right now. I don’t think anybody has succeeded at it and actually the experimentation has slowed down.

A lot of the early companies that were trying things have faded away, so I’d have to say that given the economic conditions, given the venture capital outlooks and stuff, I continue to believe it will be a hobby in 2009.

And if I could switch quickly to tablet computing and touch screens, you’ve made some comments about those in the past but when you look at tablet computing and you look at the new form factor for the Macs and those types of things, does that get to be a more attractive opportunity for you going forward here, now that the new Macs are out?

I think we have such creative people that are looking at a lot of things but I really can’t talk about any of the future products we are working on, I’m sorry.

Okay, and then -- thanks for that, and Peter, when you talk about your expectations for the upcoming quarter, what’s your expectation for meeting or getting close to equilibrium from a demand and supply perspective here in the first quarter of ’09, and are there any credit issues in the channel affecting your revenue projections for the upcoming quarter, either in the U.S. or other geos?

So it’s a new product and it’s a credit issue question for the guidance in the first quarter.

Bill, I’ll make a comment or two on the credit and Tim can speak about the first part of your question. You know, this is definitely a concerning environment from a credit perspective.

Our treasury team has done just an amazing job with our cash. I was so proud to tell you in my opening comments that our mark-to-market, unrealized mark-to-market on the portfolio only increased $80 million sequentially on over $24 billion of cash, so they’ve done a great job.

On the receivables side, we’ve historically been very good in that area. We’ve got good people.

We stay on top of collections and we monitor accounts, I think as any company does. But it’s a tough environment out there and we are being as careful as we can and hopefully we won’t have issues in the future.

Bill, let me take the three product areas and briefly comment on your question. In the iPod space at the end of the quarter, we were still filling the channel to get the new product at the right level in the channel.

We’ve now completed that but were not at the end of last quarter. And the iPhone, as I’ve alluded to before, we felt we ended with the right level of channel inventory and it’s difficult to predict demand for the quarter but today I know of no issues in providing the right level of supply.

On the Mac side, we have significant backlogs on the new product and we are working very, very hard around the clock to fill those just as fast as we can and we’ll see what the trajectory of demand is but I’m confident that we can produce a lot. Whether it’s enough, I don’t know because it’s hard to forecast the demand.

Well, if the fog lifts on October and your demand visibility gets better at the beginning of November, do you still have time to ramp your builds to affect the first quarter number then, from a supply chain perspective?

We are obviously making bets on the demand already and -- so we are predicting. It’s just hard for us to forecast for external consumption.

Okay. Thanks for the details, folks.

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

Thanks very much. Steve, you only have really one SKU in the phone biz, and the phone market is 10 times the size of the PC market, so I think you clearly as you said strive to be the best.

At the same time, what might be the opportunities for further innovation or market opportunities within that market?

Well, I wasn’t alive then but from everything I heard, Babe Ruth had only one homerun, he just kept hitting it over and over again. So I don’t think that -- I think the traditional game in the phone market has been to produce a voice phone in a hundred different varieties.

But as software starts to become the differentiating technology of this product category, I think that people are going to find that a hundred variations presented to a software developer is not very enticing and most of the competitors in this phone business do not really have much experience in a software platform business. So we are extremely comfortable with our strategy, our product strategy going forward and we approach it as a software platform company, which is pretty different than most of our competitors.

And I think earlier, there’s been lots of discussion about limited visibility on whether there’s delays to purchases or the economy. When do you think you get better visibility to things like Mac upgrade or uptake cycles versus economy related headwinds or changes in buyer patterns here, given so much uncertainty?

Is that first quarter next year and is your price point comment about we are going to restrict ourselves to certain markets we want to play in, is that firm or are there alternative strategies you might employ if you don’t get the upgrade cycles, or response to the price point stance that you are looking for?

Mike, I think the answer to your question is different by product. On iPod, historically about half of our sell-through occurs in December and so the question of iPod visibility, we’ll get a lot better visibility as we head into December on this quarter.

Before then, the visibility will be limited. In the Mac area, the question is how much was purchasing delay versus economy, if at all, and we’ll gain knowledge on that each week but it will take some number of weeks before we are able to meet the demand in that space, and so I think it will take a little while longer.

Okay. Thank you very much.

Thank you, Mike. 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 5643095, 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 either 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.