Key questions and answers from the first quarter earnings call conducted by Apple Inc. (AAPL: chart) on January 17, 2007.

Benjamin Reitzes (UBS): In your guidance, are you factoring for any pause in demand ahead of the iPhone, perhaps in the iPod markets or anything?

Peter Oppenheimer: We have factored our view of customer demand and supply into our guidance. As we have said, we just announced the iPhone last week and it is really too soon to tell, but we believe we have a great iPod product offering today, with a range of prices, capacities and form factors to meet many customers needs and uses.

For iPods, in terms of assessing the MP3 market seasonality, we have learned over the last few years that what really drives the MP3 market to new levels is innovative product launches and the holiday season buying in the December quarter. iPod demand this quarter was extraordinary.

We were able to ship over 21 million units. Unlike the previous year, iPod supply and demand were largely in balance. Given this, we would expect a higher seasonal decline from the December quarter to the March quarter this year than we saw last.

For Macs, Apple does a significant percentage of its December quarter in the consumer segment and sequentially, we would expect to see the holiday buying season drop off and the education buying to begin to ramp up in the spring.

Benjamin Reitzes (UBS): With regard to your stock option investigation, have you received any commentary from the SEC or Justice Department?

Peter Oppenheimer: We from the beginning have voluntarily and proactively provided all details of our internal review and the independent investigation to the SEC and the U.S. Attorney for the Northern District of California.

The exhaustive and independent investigation found no misconduct by any member of Apple's current management team, and the Board has expressed complete confidence in the management team.

Richard Gardner (Citigroup): Could you talk about which commodities in particular were more favorable than expected in the quarter?

Tim Cook: Last quarter, we saw favorable pricing across the board. It was a great time to be a buyer. For this quarter, we see that favorable pricing environment continuing on LCDs and Flash memory, and we believe that DRAM will be relatively supply/demand balanced.

Toni Sacconaghi (Sanford Bernstein): Stores’ revenue was up only 6%, despite CPU growth being up 60% and revenue up 70%, implying a deceleration year over year in iPod unit shipments in the stores. Could you comment on why that happened?

Peter Oppenheimer: The retail store revenue, grew 6% year over year as total Mac sales increased by 60%. This was partially offset by lower iPod revenue, which resulted from the price reductions that we took in September, and also our expanded and well-supplied distribution channel that we had this year.

Richard Farmer (Merrill Lynch): Is the operating margin of 18.6% sustainable?

Peter Oppenheimer: We were thrilled with the operating margin in the quarter at 18.6%, but it was exceptionally high, driven by gross margin of 31%, which is well above where we have been operating and our target range, and was certainly positively influenced by the record revenue of over $7.1 billion, so do not get used to 18% operating margins.

With the guidance provided for the March quarter, we have effectively guided to slightly over a 12% operating margin.

Tim Cook: We realize that right now we are on a very favorable commodity cycle, but we would never project that to continue in the long-term.

Rebecca Runkle (Morgan Stanley): What were the drivers there that caused that sequential drop in Mac units?

Tim Cook: If you look at the Americas as an entity, and you combine the retail result, the Mac units sequentially were down 16%. That is exactly the sequential decline the previous year, and frankly it is the decline about every year.

We have an extremely strong educational business in the fourth quarter period that includes substantial institutional business, and that institutional business corrects significantly as we get into the first quarter.

Keith Bachman (Banc of America Securities): Was a lot of the upside in your iPod driven by sales outside of the U.S.?