Key questions and answers from the fourth quarter earnings call conducted by Apple Inc. (AAPL: chart) on October 18, 2006.

David Bailey (Goldman Sachs): What is the impact of the lower price points associated with the new iPods going to have on your blended ASP and gross margin for the December quarter?

Peter Oppenheimer: As a result of the price reductions that we took on September 12th and the introduction of the new $79 Shuffle, we believe that our ASPs and iPods will be down in the December quarter from what they were in September, but we are very excited about the line that we just announced and are looking forward to the holiday season and confident.

David Bailey (Goldman Sachs): Can you give us your outlook on the remainder of the year for your component prices?

Tim Cook: In the notebook hard drive area, we expect that since supply exceeds demand in this area, there will be favorable pricing. For DRAM, NAND Flash, and LCD panels, demand trailer exceeds supply due to the usual seasonal demands. We expect other commodities to decline consistent with historical trends.

Richard Gardner (Citigroup): Could you give us a status update on your retail pilots with incremental retail customers?

Tim Cook: In terms of expanding distribution on the Macintosh, we have had a pilot going by in seven stores. We have just concluded this week to expand that during this quarter to over 50. The stores are located around the country, and they will be selling both desktops and notebooks as well as some Mac software and accessories.

We will continue to evaluate how the program is going over the next several months to conclude what the next step should be. We are also running a small pilot with Circuit City which we really just started and there's no data available. But we will obviously monitor that and conclude what to do with that in the future.

Bill Richards (UBS): What are you preparing for the on the inventory line, or what does it say about the linearity of the quarter on the AR side?

Peter Oppenheimer: It was up about $100 million year-over-year. We have opened 41 stores this year. Virtually all of the increase in inventory is in the retail stores to serve customers. As it relates to accounts receivables, they were up a little over $350 million.

Andrew Neff (Bear Stearns): The CPUs were down in Japan, can you give us background on what's going on there?

Tim Cook: When you combine the channel results with our retail store results, Macintosh units on a year-over-year basis declined by 10%. The market in Japan is among the weakest in the world and IBC was also expecting a contraction during the quarter.

However, having said that, we are not pleased with our performance there and we have got a number of activities underway to attempt to improve them. Despite the reduction in the Macintosh area that from a year-over-year point of view, revenue was up 26% in Japan on strong iPod sales.

Bill Shope (JP Morgan): Can you give us an update on the progress you are seeing in the international markets with the iPod?

Peter Oppenheimer: We continue to be happy with our progress. In the U.K., Canada, Japan, and Australia, our market share ranges from 40 to 50% and in many western European countries, we have picked up market share year-over-year, typically 6 to 7 points in place like France and Germany and Italy and Spain.

Kathy Huberty (Morgan Stanley): On inventory and channel inventories for Macs, do you feel you can get that back to normal levels ahead of the holiday season?

Tim Cook:We did drop below the four to five weeks, due primarily to very strong demand on the MacBook and a great reception to the iMac that we announced in early September, the new lineup of iMac. We anticipate being able to get the channel back to reasonable levels during the quarter.

Robert Semple (Credit Suisse): Can you characterize the demand for the new Nano launch?

Tim Cook: The customer reception was excellent, the analyst reviews have been favorable. If you look at the quarter in the months, iPod demand really accelerated significantly post the launch and it was that acceleration that allowed us to exceed our expectations for the quarter.

Shannon Cross (Cross Research): Can you give us any color on boot camp downloads?

Tim Cook: We are over 1 million downloads, which we are pleased with. We continue to have a plan to integrate boot camp in Leopard next spring.
Richard Farmer (Merrill Lynch): As you think longer term about the evolution of the video distribution market, outside the mainstream content providers, how do you think the landscape is changing and does any of that affect your business?

Peter Oppenheimer: We continue to believe that video will be big in the portable space, not only in PCs but in iPods and we certainly look forward to participating in that going forward.