Timothy D. Cook: We do not forecast ASPs but the iPod ASP did increase sequentially and year over year and that was a result of a successful introduction of the iPod Touch. We just updated the iPod Touch now to include five great mobile applications and the ability to watch movies from the iTunes store and we think that our customers love the product.

Richard Gardner (Citigroup): NPD data suggests a weakening in sell-through for iPod during the month of December this year. Could you comment on the linearity of iPod sales throughout the quarter relative to normal seasonality?

Timothy D. Cook: When you look at the demand curve across the quarter, on a worldwide basis the curve was similar to the curve that we saw last year. In the U.S. the NPD data is that in the gift-buying season, back-loaded in that November and December, we saw a different curve than we did last year but that was made up for in our good growth internationally.

Richard Gardner (Citigroup): Are you concerned that that might be indicative of where the U.S. economy is heading and where consumer demand is heading and have you factored that into your guidance for the March quarter?

Peter Oppenheimer: We give you guidance that we have reasonable confidence in achieving, so no change. In terms of the economy, we will leave the economic forecasting to others and we are focused on managing our business. The business performed well in the December quarter, with revenue in the United States growing 27% year over year. This growth rate was faster than last year’s December quarter, which grew at 21% in the U.S. and for fiscal 2007 in the U.S., it grew at 23%. In the December quarter, our U.S. Mac sales were 43% year over year and the traffic in the retail stores was amazing. Most of the stores are in the U.S. and our traffic grew by over 10 million customers year over year. As we look outside the U.S., we were thrilled with the business, which grew 46% year over year in the December quarter. We remain confident in our strategy and our business and we are going to continue to invest to innovate in hardware and software products that delight customers and continue to improve the buying experience, both in our stores and in the channel.

Richard Gardner (Citigroup): You have $18.5 billion in cash on the balance sheet, no debt, and you are going to generate probably a minimum of $1 billion in free cash flow per quarter this year, and your earnings will rise over time as iPhone produces more of an annuity like profit stream for you. How this factors into the Board’s potential decisions regarding uses of cash and share buy-back?

Peter Oppenheimer: The cash generation of the business on the December quarter was strong. It went up by over $3 billion, of which $2.76 billion came from operations and we are managing the business well. Stock buy-back programs and other forms of returning the cash are discussed with the Board from time to time but our preference continues to be to maintain a strong balance sheet in order to preserve our flexibility to make strategic investments and/or acquisitions.

Ben Reitzes (UBS): Last year on the same conference call a year ago, you guided down about 52% or so sequentially and then came in at 87 cents, down only 24% sequentially in terms of EPS. This year you guide down y better rate at down 47%. Do you feel like the same as last year, that the good things are ahead of you and the product pipeline is as exciting as last year?

Peter Oppenheimer: I am confident in our business, our strategy, and our products. We have fantastic products that are available to customers today. We are confident about what is in the product line. We are innovating. We are delighting customers. We are gaining share and I could not be more proud of the Apple team and confident in what we are doing. We gave you guidance that we have reasonable confidence in achieving and our focus is on managing the business.

Ben Reitzes (UBS): Do you think the MacBook Air will be incremental in terms of your Mac units, or do you think it will cannibalize part of the pro and MacBook lines?

Timothy D. Cook: We have just announced it last week. The customer reaction has been great. The orders are strong for it but it is too early to tell before we are shipping the item of the cannibalization factor on the other notebooks.

Ben Reitzes (UBS): What is in your guidance for iPods going forward and what is in your guidance for cannibalization of the iPhone to the iPod?

Peter Oppenheimer: For iPods in terms of assessing seasonality, we have learned in the last years that what drives the MP3 market to different levels are innovative product launches and the seasonal holiday buying in the December quarter, so we would expect to see a sequential decline in iPod sales from the December to March quarters but we are shipping the best iPods that we have ever made.

Ben Reitzes (UBS): iPods were flat in the U.S. and that was perhaps due to the iPhone. Were there any of the other factors you could elaborate on?

Timothy D. Cook: We set out to achieve three things in the December quarter with the iPod business. The first was we wanted to hold our already high share that we enjoy in the United States. We wanted to continue to grow share internationally and, we are pleased to report that we did both of those. In fact, some of the share gains are stunning when you look at the share gains in the U.K., France, Spain, Australia, and several other countries in Asia. The second thing we wanted to do was to sell at least the number of iPod units that were comprehended in our guidance and we are pleased to report that the sales of over 22 million iPods not only set a company record but were also consistent with what we had contemplated in our guidance. The third thing, and most importantly by far from our point of view, we wanted to establish an entirely new type of iPod, the iPod Touch. The iPod Touch has the potential grow the iPod from being just a music and video player into being the first mainstream WiFi mobile platform running all kinds of mobile applications, and we met this goal. Introducing the Touch at the high end of the line may have traded off of unit volume but it was the right decision to achieve the strategic goal of establishing a platform. In achieving all three of these, we grew iPod revenue 17% year over year and this growth rate is the highest growth rate that we have seen in revenue in iPod for a year.

Shannon Cross (Cross Research): What you are thinking in terms of distribution with Best Buy?

Timothy D. Cook: We ended the quarter with about 286 stores in Best Buy. We are thrilled with the results that we have seen. It has added to the Mac momentum. We have elected to expand that further and have jointly agreed with Best Buy that we will expand from the 286 to 600 over the next six months, so we are happy with how that relationship is coming out.

Shannon Cross (Cross Research): Could you give an idea on your goals for iTunes rentals?

Peter Oppenheimer: We just introduced it. We think customers are going to love it but we will have to see. Our objective with the iTunes store is to run it above break even and we think that it helps us to sell iPods and Macs and that is our strategy.

Shannon Cross (Cross Research): How do you think about MacBook Air from a longer term standpoint into your product roadmap?