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

Richard Gardner – Citigroup Benjamin Reitzes – Barclays Capital Gene Munster – Piper Jaffray Scott Price - Banc of America Mike Abramsky - RBC Capital Markets Shannon Cross - Cross Research Bill Shope – Credit Suisse David Bailey - Goldman Sachs Mark Moskowitz – JP Morgan Toni Sacconaghi - Sanford Bernstein Maynard Um – UBS Chris Whitemore - Deutsche Bank Shaw Wu - Kaufman Brothers Brian Marshall – Broadpoint Amtech Bill Fearnley - FTN Midwest

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

Speaking today is Apple CFO Peter Oppenheimer and he’ll be joined by Apple COO Tim Cook and Treasurer Gary Wipfler for the Q&A session with analysts. Please note that some of the information you will hear during our discussion today will consist of forward-looking statements including without limitation those regarding revenues, gross margin, operating expenses, other income and expense, stock-based compensation expense, taxes, earnings per share, and future products.

Actual results or trends could differ materially from our forecasts. For more information, please refer to the risk factors discussed in Apple's Form 10-K for 2008, the Forms 10-Q for the first three quarters of fiscal 2009, and the Form 8-K filed with the SEC today and the attached press release.

Apple assumes no obligation to update any forward-looking statements or information which speak as of their respective dates. 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 extremely pleased to report Apple’s most profitable quarter ever, and sales of more Macs and iPhones than in any previous quarter. We are thrilled with these record-breaking results, particularly given the economic environment around us.

Revenue for the quarter was $9.87 billion, representing 25% growth over the prior September quarter’s results. This was Apple's second-highest quarterly revenue ever, next to the record results reported for the last September quarter.

Operating margin was Apple's highest ever at $2.19 billion, representing over 22% of revenue and higher than our guidance due to better-than-expected revenue and gross margin. Net income was $1.67 billion, which translated to earnings per share of $1.82.

In terms of non-GAAP measures, adjusted sales totaled $12.25 billion for the September quarter, which was almost $2.4 billion higher than our reported revenue. Adjusted gross margin was $5.21 billion, which was almost $1.6 billion higher than our reported gross margin.

And adjusted net income was $2.85 billion, or almost $1.2 billion higher than our 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 in the September quarter.

Turning to the details of our results, I’d like to begin with our Mac products and services. We generated outstanding Mac sales of 3.05 million, beating our previous record set in the year-ago quarter by over 440,000.

The Mac is showing fantastic momentum, growing faster than the market in 19 of the past 20 quarters. We believe this is the result of our unmatched innovation and commitment to providing customers with the best hardware, the best software, and the best user experience in the world.

Quarterly Mac sales grew 17% year over year and this compares extremely favorably to IDC’s latest published estimate of 2% growth for the market overall in the September quarter. Customers continue to respond very positively to our Mac portable lineup which we updated in June.

Portable sales increased 35% year over year and represented 74% of our Mac mix. Our execution in the quarter was outstanding and we were particularly pleased with the 42% year over year growth in our Asia-Pacific segment.

We once again had a very successful back-to-school season and we are very pleased with a 12% year-over-year increase in Mac sales to U.S. education institutions, which resulted in the highest quarterly Mac sales ever for our U.S.

education business. The shipments to U.S.

education institutions this quarter included 50,000 Macbooks to the State of Maine as part of its ongoing one-to-one initiative. Customer response to the August 28th release of Snow Leopard has been tremendous.

Through the end of the September quarter, we generated consumer box upgrade sales at twice the rate we experienced with the Leopard release. Snow Leopard delivers hundreds of refinements, is the only operating system to support Exchange out-of-the-box, and has successfully introduced new core technologies.

Snow Leopard allows developers to take full advantage of hardware features, including 64-bit technologies, multi-core processors, and advanced graphics processing units. We began and ended the quarter with between three and four weeks of Mac channel inventory.

Now I’ll turn to our music products. We sold almost 10.2 million iPods, which was down from just over 11 million in the year-ago quarter.

Our latest research indicates that 50% of recent iPod buyers were purchasing their first iPod, including those in our high market share countries such as the U.S., Japan, Australia, Canada, and the U.K. Customers love the recently announced iPod Nano’s new features, including the built-in videocamera, FM radio, pedometer, and larger display.

Sales of iPod Touch grew strongly during the quarter, up 100% year over year, fueled by a very successful back-to-school season and the continued incredible popularity of the Apps store. With the new $199 entry price point for the iPod Touch and the updated features of the iPod Shuffle, Nano, and Classic, we believe the iPod’s lineup is attractively positioned for the holiday season.

Our share of the U.S. market for MP3 players remains at over 70% based on the latest monthly data published by NPD, and iPod was the top-selling MP3 player and continued to gain share year over year in nearly every country we track, based on the latest data published by GFK.

We began and ended the quarter within our target range of four to six weeks of iPod channel inventory. The iTunes store delivered another great quarter with strong sales of music, video, and apps.

Customers are loving last month’s release of iTunes 9 and its many new features, including iTunes LT, home-sharing, and genius mixes, as well as improved thinking and the redesigned iTunes store. With stores in 23 countries, iTunes is the world’s largest music retailer, now offering over 11 million songs in addition to over 50,000 TV episodes and 7,500 films.

I would now like to turn to the iPhone. We are thrilled to have sold almost 7.4 million handsets in the September quarter.

That’s a new company record and an increase of 7% over the prior September quarter when we increased channel inventory by 2 million handsets following the introduction of the iPhone 3G and the dramatic expansion of geographic distribution. iPhone sell-through in the quarter increased 38% year over year.

Response to the new iPhone 3GS has continued to be tremendous and we were very pleased with JD Power & Associates’ announcement earlier this month that iPhone has once again topped the charts for both consumer and business smartphone customer satisfaction. iPhone not only maintained its lead since the last JD Power report was issued six months ago, but it widened it over the next closest competitor in both categories.

We are looking forward to selling iPhones in China beginning later this month as this very large market represents a great opportunity to expand iPhone's reach even more broadly. We also plan to expand our carrier relationships in the U.K.

and Canada. The Apps store continues to be an unparalleled success, with over 85,000 apps available and over 2 billion customer downloads to date, including over half a billion downloads in the September quarter.

In addition to adding more apps at an amazing pace, we have continue to enhance the Apps Store experience with iPhone OS 3.1 which includes new features such as genius recommendations and a streamlined way to organize apps within iTunes. Recognized revenue from the iPhone handset sales, accessory sales and carrier payments was $2.3 billion during the quarter compared to $806 million in the year-ago quarter, an increase of 185%.

The sales value of iPhones sold during the quarter was $4.5 billion. I would now like to turn to the Apple retail stores.

The stores had a record quarter posting the highest revenue, segment margin and Mac sales ever. Revenue in the quarter was $1.87 billion compared to $1.72 billion in the year-ago quarter.

Our stores sold 670,000 Macs compared to 596,000 Macs in the year-ago quarter. About half the Macs sold in our stores during the September quarter were to customers who had never owned a Mac before.

We opened 15 new stores during the quarter, bringing us to a total of 273. With an average of 262 stores open during the quarter, average revenue per store was $7.1 million compared to $7.6 million in the year-ago quarter.

Retail segment margin was $410 million or 22%, up from $301 million or 17.5% in the year-ago quarter. We hosted 45.9 million visitors in our stores during the quarter, compared to 42.7 million visitors in the year-ago quarter, an increase of 7%.

We hosted 608,000 personal training sessions and we sold 208,000 memberships to our One-to-One program, an increase of over 120% year-over-year. Fiscal 2009 was a milestone year for our retail stores.

In addition to opening 26 new stores we remodeled 72 stores to our updated design and for the first time we opened more stores internationally than in the United States. In November we plan to open our first new stores in France, including one at the Louvre as well as our fourth high-profile store in Manhattan on the Upper West Side.

Total company gross margin was 36.6% which was 260 basis points better than our guidance. There were two groups of factors that were the primary causes of this difference: First, we sold more Snow Leopards, had a better product mix and spent less on the iPod transition than planned.

Second, component costs did increase, but not to the level we had expected and we benefited from leverage on the higher revenue and lower freight and other costs than planned. Operating expenses were $1.42 billion and included $151 million of stock-based compensation expense.

OI&E was $45 million and the tax rate for the quarter was 26%. Turning to cash, our cash plus short-term and long-term marketable securities totaled $34 billion at the end of the September quarter compared to $31.1 billion at the end of the June quarter, an increase of $2.9 billion.

Cash flow from operations was $3.1 billion and that was net of our $500 million prepayment to Toshiba early in the September quarter to secure a future supply of NAND flash. Our investment priority for the cash continues to be preservation of capital which has served us well in the current environment.

We are continuing to focus on short-dated, high quality investments and remain comfortable with our investment portfolio. 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.

On September 23, the Financial Accounting Standards Board ratified EITF 093, which will change the way we account for iPhones and Apple TV today. Under EITF 093, only the estimated sales value of future upgrade rights to iPhones and Apple TV software are required to be deferred at the time of sale, with the balance of the iPhones and Apple TV sales price being recognized immediately as revenue.

The deferred amount will be recognized over the 24 months estimated life of the product, similar to the way we have applied subscription accounting to these product sales today. We don’t know at this time the specific amount of revenue deferral for each iPhone and Apple TV sold under EITF 093, but we do believe that a substantial portion of the revenues will be recognized for these products at the time of sale.

We are very pleased with the FASB adoption of this new rule, as we believe it will enable us to more closely align our reported results with the economics of the iPhone and Apple TV sales. We will be required to adopt the new accounting rules no later than the first quarter of our fiscal 2011; a year from now.

But we do have the option of adopting earlier than that, sometime in our fiscal 2010. We are currently assessing the impact of the new rule on our accounting and reporting systems and processes.

Making this change will be complex and as of now, we are uncertain as to the timing of our adoption; therefore, we don't have anything more specific to discuss with you today about this change. The guidance for the December quarter that we are providing today is based on a subscription accounting treatment that we have applied today for the iPhone and Apple TV sales.

In other words, it is based on the assumption that the full amounts of revenue and product costs of past and future iPhone and Apple TV sales continue to be recognized ratably over the estimated 24-month life of the product. Forecasts in the current economic macro environment remains challenging but we will continue to provide a range of guidance for the December quarter.

For the December quarter, we expect the revenues to be between about $11.3 billion and $11.6 billion. We expect gross margin to be about 34%, reflecting approximately $33 million related to stock-based compensation expense.

We expect OpEx to be about $1.64 billion, including about $178 million related to stock-based compensation. We expect OI&E to be about $30 million, reflective of the short-term interest rate environment, and we expect the tax rate to be about 30%.

We are targeting EPS in the range of about $1.70 to $1.78. In closing, we are thrilled with our outstanding September quarter results and with our record fiscal 2009.

For the year, we generated $36.5 billion in revenue and $5.7 billion in net income. That is 12% annual revenue growth and 18% net income growth in extraordinarily challenging economic times.

During the year, we continued to introduce incredibly innovative products, including the new aluminum unibody MacBook Pro, the iPhone 3GS, and the iPhone OS 3.0, Mac OS10 Snow Leopard, and of course, the wildly popular new features and offerings in iTunes and the Apps Store. As we begin our fiscal 2010 we are looking forward to delivering additional exciting new products and are confident in our new product pipeline.

We remain focused on our strategy of bringing the best and most innovative products and solutions to our customers and we are very enthusiastic about the year ahead. With that, I would like to open the call to questions.

Peter, I was just hoping you could talk a little bit about the factors in forming your guidance for the following quarter. Specifically, why the sequential jump in revenue is so far below what you have experienced for the last couple of years and also why gross margins should be down as much as you've got it sequentially, the main factors there?

Let me start with gross margin and I will come back to revenue. We expect gross margins to decline sequentially about 34%, primarily as a result of four factors: First, for the new products that we have and will announce, we are delivering greater value to our customers and these products have lower gross margins than their predecessors.

Second and as expected, we will see a seasonally higher mix of iPods and expect Snow Leopard box sales to be less than the second quarter. Third, we will incur significantly more air freight.

And fourth, we expect component costs to be higher than what we saw in the September quarter. Regarding our revenue, as you know, the education and back-to-school seasons have largely concluded and the December quarter has been typically driven by holiday purchases in the second half of the quarter.

Our guidance this quarter includes double-digit revenue growth from last year, which was the best quarter from a revenue perspective in Apple's history. We are also seeing lower ASPs this year.

But Rich, we remain very confident in our business. We are shipping the best products that we ever have in Apple’s history and customers have clearly responded.

I have two questions. One on iPhone, can you discuss channel inventory, what it was ending the quarter and what the supply situation is, if there are any supply constraints during the quarter?

We noticed lack of availability overseas and then that looked alleviated towards the end of the quarter. It would seem like there is pent up demand heading in to December, so if you could discuss that, that would be great.

For much of the quarter most of the countries where we are selling the iPhone 3GS was very low in inventory, as demand outstripped the supply. We did improve supply markedly in September and supply and demand converged in the vast majority of countries either in September or in early October.

In terms of your channel inventory question, we now have about 2.4 million units in the channel and that’s an additional 585,000 from the previous quarter end.

Are you comfortable with that, given that you have China launching and maybe even a few other geos?

I would have liked to have had more, honestly, because we were still short in some countries at quarter end. As I indicated, it was early October before we were able to get supply and demand balanced in some countries.

I know you don’t want to quantify China, maybe, but is there any certain level of excitement you have or any limitations in terms of apps and iTunes that may limit the sales out of the gate or anything else you could say qualitatively around that launch that would give us an idea of the velocity of units?

We’re thrilled to be launching there on October 30th with China Unicom and we’re going to start with about 1,000 points of sale and then expand further over the next several months thereafter. They’ve announced the plans and prices that they’ll have for the device and for the service.

There’s a very wide range here on the post-paid side from $18 a month all the way up to $85, $100 a month. At the higher price point an individual is able to actually get the device for free and it goes up as you go down the ARPU, as it would in most countries.

As you know, as we’ve shipped the 3G and the 2G phone prior to that, we discovered that there were quite a few phones going in to China so it would seem to us to indicate that there’s a good opportunity and we’re really excited to get started. We’re not making any projections on the volume but it is a huge market, the largest market in the world in terms of total phones and I think it’s very important that we get started to make it as large as possible on Smartphones.

Do you guys have any updated comments on the economy? That’s my last question.

It seemed like the quarter must have closed very strong, especially with those Mac numbers.

We just spend our time projecting our business and leave the economy forecasting and comments to the economists.

We’re looking at the iPhone, it’s pretty clear we’re still in a greenfield opportunity here, but if you start to go to multiple carriers can you talk a little bit about the pricing of the phone when you go from exclusivity to multiple carriers? And obviously, not specific but any sort of color we can have in terms of pricing dynamics change on the phone from you to the carrier?

Our pricing is confidential, Gene, so it’s not something I could comment on in detail but generally speaking from markets where we’re already selling I would not expect to see a wholesale price difference as we bring on other carriers. However, the end user price is really set by the carriers themselves so you may or may not see a street price difference.

So when you go from exclusive to multiple carriers, you wouldn’t necessarily see change in pricing that you are charging the carrier? Is that correct?

That’s correct.

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

Tim, I know you guys don’t have a lot of experience with the seasonality of the iPhone business, but how do you think about the seasonality here into the fourth quarter? And a question for Peter on tax.

Can you walk us through why the tax rate is going to go up here in the near-term? Thanks.

You know, as you said, when we looked at the September to December quarter, we have very few September to Decembers to look at in the iPhone business since we’ve just been selling for a couple of years and in fact in the vast majority of countries, we’ve only been selling [in one], and some of those just a partial; and so honestly speaking, we are new in the business still and I think for me to make any kind of seasonality forecast would not be a good idea. The things that we look at in terms of coming up with our forecasts would be the popularity of the iPhone 3GS has been phenomenal; we were very surprised by the demand.

We were selling in 64 countries by the end of the quarter. We’ll roll out to some others this quarter, notably China, which has already been mentioned in the call.

We hope to roll out in Korea as well and as Gene mentioned previously, we will be adding some carriers in some countries where we only had one carrier before, such as the United Kingdom and Canada, as an example. So those are the things that we think about as we think about our December forecast.

Scott, related to your tax question, our tax rate for the quarter was 26% and it was below our guidance of 30%, primarily due to a higher mix of foreign earnings. But for the year, we were about 29%.

The past two years we’ve been pretty much right on 30% so from what I see at this point for fiscal ‘10, we’ll see about 30% for our tax rate, really consistent with what we’ve seen in the last couple of years.

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

Thanks very much. Tim, what are your thoughts in the holiday season, given the increase in competitive intensity against iPhone?

There’s a lot of obviously wannabes that are coming to market in the season, particularly Android and many of them are offering touch screens and richer browsing and media and app stores and are being given carrier support. How do you think about maintaining your momentum and differentiation amidst that kind of environment?

Well, Mike, we feel great about how we ended the fiscal year with selling 7.4 million, as Peter talked about in the preamble. And that put us over 20 million -- almost 21 million for the fiscal year, which was up 78% from before.

And so we have significant momentum. Also when you look at the ecosystem that we’ve got with iTunes and the Apps store with the Apps store having over 85,000 apps, which is a country mile more than anyone else, plus the very strong product pipeline that we have, we feel very, very good about sitting up and competing against anyone.

Frankly I think that people are really just trying to catch up with the first iPhone that was announced two years ago and we’ve long since moved beyond that.

Were you pleasantly surprised at the mix of 3GS versus 99, and what did that tell you perhaps about the value proposition of Apple and how that drives iPhone going forward?

As I indicated before, the demand for the 3GS did exceed our expectation and we quickly changed our orders for components, et cetera, that are different between the models. I think it shows that there’s an intense appetite for Apple's latest technology and we were very pleased with the result.

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

Hi, thank you. Can you talk a bit about the Mac business?

The channel inventory levels, what the mix has been, now that you have had a few months since the refresh of your line-up?

Sure, Shannon. This is Tim.

Last quarter was the quarter of the portable, up 35% year over year compared to IDC at 9% and so we really had a blow out quarter for portables. It is the result of the line-up that we announced in June and as you know we had backlog in the quarter on that line.

Also the Mac itself via back-to-school which was the strongest back-to-school we had ever had, as Peter talked about, and the launch of Snow Leopard which occurred later in the quarter. So there was a group of things that came together to push us to a level above $3 million which was above our own expectations internally, or even some of our stretch targets.

From a channel inventory point of view, we started the quarter between three and four weeks, we ended the quarter between three and four weeks and to be specific on the inventory change, so there is no misunderstanding, the inventory changed less than 15,000 units from beginning to end, so we had very minor growth, particularly when you compare that to the growth in sales from a sequential point of view.

Great. Any idea of the penetration of Snow Leopard right now out in the installed base?

I think Peter mentioned fewer shipments of box sales in the coming quarter, but any idea as to where you are at?

The upgrade sales of Snow Leopard, which we include the family in the box set, were more than double what we experienced for Leopard over the same five-week initial sales period, so this doubling was much more than we had planned and were very pleasantly surprised by it.

Great. I guess the price cut worked.

Thank you.

Yes, it did. Thank you.

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

Great, thanks guys. Last year you provided some commentary around longer-term gross margin trends.

Do you have any thoughts on this for Fiscal 2010, or at least how we should think about this longer term?

I can give you some qualitative thoughts. For the December quarter I have guided to about 34%.

I don’t want to make forecasts today for future quarters on a quantitative basis, but I think there are two things that you have to be aware of. First, for some key components costs are rising.

I think that is visible to you. Second, we are continuing to focus on delivering state of the art products at price points our competitors can’t match and we are going to continue to provide ever increasing value to our customers.

On the iPhone with the wholesale price for the iPhone the same whether you have an exclusive agreement or whether you have multiple carriers, what are the benefits of having exclusive agreements in some of those bigger countries?

For Apple or for the carrier?

For Apple.

In an exclusive relationship you can generally have some level of innovation that would be more difficult to do with several carriers. Digital voicemail was an example of that we had in the initial iPhone,as you recall.

Also in some cases an exclusive carrier may be willing to invest more, lthough we found no lack of people wanting to sell iPhones,frankly. So I am not sure whether that is true on a broad basis or not.

I think that may be true in some individual cases. Other than that, I would ask them because they can probably give you a better view than I could.

Could you give us any sort of sense qualitatively in terms of what Apple has seen with respect to the impact of the remodeled stores as well as the increasing penetration of the Apple Retail stores internationally? Are you seeing any sort of synergies both with your direct or indirect sales levels because of these initiatives or is it still too early to be determined?

I will take that question. We are seeing strong results from our remodeled stores.

Lon and his team have remodeled, as I said, this year 72 of the stores to bring them to our most updated design. Those designs are providing the best customer experience in the industry, bar none, whether it be upfront in the selling part of the store or certainly in the back of the store with the genius bars or the creative bars.

Customers are having a great experience. In terms of international, the growth there was quite strong in the quarter.

Our average store revenue was actually up over 20% for our international stores this quarter.

The other question revolves around the OpEx ratio going forward. You talked in your prepared remarks about 2010 and the new product pipeline.

Can you give us a sense in terms of how investors should think about the R&D or SG&A moving up? Is that going to hold steady or will there be changes regarding that pipeline?

I don’t want to give a specific, quantitative percent. I think over the last year we have managed operating expenses well but we have been investing confidently for our future especially in engineering, distribution and our marketing and advertising.

We saw the benefit in the last downturn in 2001 and 2002 of coming out of that with just an amazingly strong pipeline and we are repeating that very positive lesson this time around. So I think we are being careful with money.

We are making good choices but continuing to invest wisely and confidently in our future.

You had very strong ASP performance in both Mac and iPhone. On the Mac side you are typically down because of the back-to-school promotion because of ASP.

You were up even on the Notebook side this quarter. Can you comment on that?

On the iPhone side it does look like your ASP went up $40 or $50 sequentially on a cash basis. You had stated last quarter that 3GS was outstripping the $99 phone so was it mix alone or was there something else around currency translation or something else that is affecting that?

Let me start with iPhone. The iPhone ASP in the quarter was just over $600 and this reflected both a high mix of the 3GS sell through and also the benefit of the rebalancing the ending channel inventory more towards the 3GS as a result of the introduction.

On a sequential basis yes, our ASPs were up a bit in the portable space. This was really a function of our seeing a higher mix of our new Mac Book Pros as Tim commented.

A very, very strong quarter after the June introduction. We had the best back-to-school season that we have ever had.

On a sequential basis we also got a little benefit from the dollar as well. On a year-over-year basis the dollar was a negative but sequentially it was a small positive.

Then on the availability issues that you had on the phone, was that a good old fashion demand exceeds supply issue or were there any component availability issues that constrained your supply? Related to that you had also mentioned that air freight you expected to go up next quarter as a reason for gross margins, I’m not sure if that was in relation to phones or anything else but perhaps you can address that as well?

On the availability portion Toni, the iPhone 3GS demand outstripped the supply of the iPhone 3GS so I think you would probably put that in your first category of a good old fashioned demand issue which is a nice problem to have in the scheme of things. Now, because it was outstripping supply it creates component shortages as we go out to the market to secure more components.

Generally speaking, the ones that are hardest to get are silicon and so it takes a little longer however, I was really happy that we were able to solve the bulk of these, the vast majority of them in September or in early October so I feel good about how we are positioned now. The air freight is not related to the iPhone so these are unrelated topics.

But, generally speaking the air freight is planned to get enough units into the channel in time for the holidays and is necessary for that reason.

Now, I would imagine that you have that typically in most Q4s and accordingly is that larger than usual for this quarter because your demand perception may have changed over the last 30 or 60 days, or is that just a normal sequential seasonal headwind to margins that you always experience?

It’s more than normal and so you’re correct that in general we spend more in freight in Q1. However, this increase is larger than usual.

I’m sorry I can’t be specific on the product but it’s an abnormal sequential increase.

Can you just talk about how many non-Apple retail store distribution points you have and whether there’s more growth there? I’m just trying to think about the mix of your retail stores versus your indirect going forward.

Then, I have a follow up question on CapEx.

Maynard is that specific to the Mac?

To the Mac, yes.

For the Mac we have a little less than 13,000 worldwide and our focus in terms of expansion in the in direct channel is much more so in the international market. As you probably could tell from our results we grew the Mac much stronger outside the US than inside the US and I am sure part of that is just the economic difference between the two.

But, the international business, particularly in Europe and in Asia was extremely strong last quarter.

Okay, and just in particular, Europe, was that broad-based or Western or Eastern? Any more specifics on Europe?

I can give you some highlights. If you look at the leads, Spain was extremely strong, which I know is going to be a surprise.

It was over 40%. Germany was 40%, France was 39%, and so you had Western Europe less the U.K.

extremely strong, a tremendous multiple from market growth, and even countries, Switzerland and Italy, were in the mid-30s and so several European countries, sizable countries were incredibly strong.

Great, and then just on the CapEx, it was about 4.7% of your sales and I’m just trying to understand, I know you have the new stores in there but aside from that, you talk about normal replacement of existing capital assets, manufacturing-related equipment. Any more details you can provide on that piece of the CapEx that is being spent on the capital assets?

In particular, what that is and when that should start to decrease as a percentage of sales?

I’m not sure I would look at it as a percent of sales but in fiscal 09, our CapEx was about $1.15 billion, up from about $1.1 billion last year. We spent a little under $400 million in both years on retail stores.

As I look forward, we are going to continue to confidently open retail stores and keep them fresh and exciting from a remodel perspective. The other parts of our business, we are spending capital on the facilities, infrastructure, and in the manufacturing spaces as well.

But in $1.1 billion in the last two years, we’ve not been terribly capital intensive.

Thank you.

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

First on the Mac business, looking forward to the December quarter, do you expect to hold Mac units roughly flat sequentially?

The things that we are considering -- we don’t give Mac-specific forecasts, as you know, or product specific forecasts -- but the things I think you should consider that we considered, anyway, in coming up with our numbers, the September quarter was benefited by a 50,000 unit order from the State of Maine. This completed the 70,000 unit order.

The other 20,000 had shipped in our fiscal Q3. It also benefited from an extremely strong back-to-school season and we had an extremely strong promotion wrapped around that, as you are aware.

We also had Snow Leopard and with every new OS, you have some pent-up demand that ships with the operating systems as people hold to get the latest software. Finally, and I wouldn’t underestimate this, the demand for the portables that we announced in June was a key for the quarter at 35% growth and some of that was demand that was probably existed in June but we were unable to fill.

So it got the quarter off to a very good start. So those are the things that we thought about as we forecasted the Mac business.

Second question on iPhone supply. Can you quantify the magnitude of the unit shortfall?

In other words, what do you think you could have shipped had you had adequate supply during the quarter?

You know, that’s a very tough question to answer because unfortunately we can't run the experiment both ways. What I know is that for almost the entire quarter, until we got into September, the iPhone 3GS was short virtually everywhere.

What I don’t know is how many people waited until it was available versus bought a competitive phone and there’s just -- there is not a good way to tell that.

Still on track to reach 80 countries by year-end for iPhone shipments, iPhone availability?

To be specific, we already shipped the iPhone 3G in over 80 today. We shipped the 3GS in 64 countries as of the end of last quarter and we would forecast that we would be in over 80 by the end of the calendar year with the 3GO.

The last question relates to guidance. Given the account change, in my opinion, GAAP accounting loses some meaning.

Can you provide a range of pro forma expectations for December? I think that would be more meaningful to the investment community.

I have provided you the guidance that we have provided. It's very detailed and consistent with when we began to ship the iPhone.

We provide guidance on GAAP and we will report to you our numbers in January for the December quarter.

I have a question on I guess the enterprise business. Two questions.

First, on your iPhone business, any color you can share with us, the break-out between consumer and enterprise? At least qualitatively and how that has been trending?

And then the second question is one of the key features with Snow Leopard is native support for Exchange. Any comment on how that's helping your enterprise effort?

In terms of the iPhone and the corporate market, what I can tell you is that employee demand for iPhone, in the corporate environment, is very strong. Since the launch of the iPhone 3GS, which coupled with the software, made a number of improvements that CIOs were looking for.

The iPhone is either being deployed or being piloted in well over 50% of the Fortune 100 and from an international point of view, if you look at Europe, this is true in about 50% of the Financial Times 100. And so we feel very good with the progress that we've made since the iPhone 3GS was announced.

Also, another very key market for us, that some people call enterprise, is that over 350 higher-ed institutions have approved iPhones for their faculty, staff, and students. And in addition to both of these, we continue to be very happy with our sales in the government arena.

In terms of Snow Leopard and Exchange, I don't have any statistics to go over with you yet. It is very early.

As you know, we just started shipping SP end of August, last quarter, and so we will see how that does. But it clearly makes it very simple for the Windows user with Exchange working right out of the box.

Nice quarter. I guess a question with regard to the enterprise as well.

I think last quarter you may have commented, you know there are several government agencies out there that have kind of 30,000+ iPhone uses installed. I was wondering if we could get an update there on maybe some granular specifics of some of those.

No new update on specific numbers but we continue to be very pleased with the market and the number of agencies that are adopting the iPhone.

And the same with regard to corporate entities as well?

Yes, and I just went through that in the previous call, but to repeat it, well over 50% of the Fortune 100 are deploying or piloting the iPhone, and this strength is also happening internationally and if you take Europe, about 50% of the Financial Times 100 are deploying or actively evaluating iPhones for a broad deployment. These numbers are very impressive to us and we feel like we are making great progress in this market.

And Tim, I think that you commented in the past that three of that Fortune 100 had 25,000 units or greater. Any updates on there?

None that we can provide. As you can probably guess, many of these companies would like to keep their specific numbers confidential.

Understood. And final question, any chance that the international activations grew on a year-over-year basis for the iPhone?

Well, iPhone sell-through was up 38% year-over-year. You know, as Peter went through in the preamble last year, and I think it's very important to remember, we expanded channel inventory by about 2 million units because it was the launch of the iPhone 3G, during that quarter.

We only grew inventory this particular year by less than 600,000 and so that sell through increase of 38% compares to a projected rate of market growth of 5% from analysis. So it is a significant multiple to market growth based on the market statistics that we have.

That 5%, just to clarify, is international?

That 5% is a worldwide number.

I have a question for you on the Macintosh side if I could to do a deeper dive on the education sector. A question for Tim, you have been pretty cautious regarding state spending here given the tax issues that you quoted for the different states.

What powered the upside in education, specifically K12 and higher ed? Also if you could give additional color on what happened in the student buy versus your expectations as well given the popularity of Notebooks for students.

Then I have one follow-up if I could.

Let me start with the last one first. The student buy, you can see those numbers trickling through our retail results and you can’t see this because we don’t quite break it out separately but they significantly helped our online results and the institutions that buy through bookstores so that the back-to-school season again was our strongest ever and I would attribute a great piece of that to the individual business we were talking about.

In terms of the institutional business, I have been worried about state spending. I am still worried about state spending.

We saw no material stimulus funding slowing last quarter. We saw a little but it was a very small number.

We may see more this quarter but it is too early to tell. In terms of the institutional increase, institutions grew about 12% and that increase was the big thing that pushed us over the zero mark there, the state of Maine order.

It was extremely key in the education institution achievement.

On Mac inventory, doing a deeper dive here on the air freight question, I know you won’t talk about the products but what is driving the increase in air freight? Is it timing of new announcements?

Are you having issues with component availability? Are you running into manufacturing yield issues?

Why the uptick here?

What is driving the air freight is we haven’t been able to figure out a way to move the holiday season. We have to get all of these units into the channel for holiday sales.

I’m sorry I can’t be more specific than that. You have to have a little bit of fun on these calls.

That concludes our Q&A session for today. A replay of today’s call will be available for two weeks as podcast on the iTunes store, as a webcast on Apple.com/Investor and via telephone.

The numbers for the telephone replay are 888-203-1112 or 719-457-0820. The confirmation code is 1248587.

These replays will be available beginning at approximately 5:00 p.m. PT today.

Members of the press with additional questions can contact Steve Dowling at 408-974-1896 and financial analysts can contact John or met with additional questions. John is at 408-974-4570 and I am at 408-974-5420.

Thanks again for joining us.