Peter Oppenheimer: In terms of iPhone, we are recognizing revenue from handset sales over a 24-month period of time. We do that on a daily basis. Our revenue from iPhone, which includes amortization of handsets, accessory sales, and payments from AT&T was $118 million in the quarter.

Gene Munster (Piper Jaffray): Is the AT&T a longer term agreement or more near-term?

Peter Oppenheimer: It is a multi-year exclusive agreement.

Gene Munster (Piper Jaffray): How many Best Buy stores were up and running at the end of the quarter? How many do you expect by the end of the December quarter?

Timothy D. Cook: We had 230 operating at the end of the September quarter and we expect more than 270 at the end of the December quarter.

Richard Gardner (Citigroup): It was quite encouraging that your PC channel inventories were below your target range, despite the fact that you did expand the Best Buy agreement in the quarter. Could you comment on that?

Timothy D. Cook: We primarily have low inventories at the end of the quarter because our sales were higher than expected.

Richard Gardner (Citigroup): The higher component prices were one of the reasons that you cited for sequentially lower gross margin in the fourth calendar quarter. But, based on our checks, most components seem to be coming down in price now. Could you reconcile that for us?

Timothy D. Cook: DRAM and NAND Flash markets were favorable last quarter and we believe that will continue during our Q1. Hard drive and LCDs were tight last quarter and they continue to be at the beginning of this quarter, but we do expect these to stabilize as the quarter unfolds. The other commodities are trading near or are declining near historical norms.

Richard Gardner (Citigroup): How your accounting for the iPhone rebate in the quarter?

Peter Oppenheimer: We are accounting for the credits as they are redeemed by customers and will charge the associated product costs to costs of goods sold. We anticipate that most of these redemptions will occur by the end of the December quarter.

David Bailey (Goldman Sachs): Could you help us understand your pricing strategy for iPhone in Europe, where the pricing is higher and effectively going up versus the U.S. price as the dollar weakens?

Peter Oppenheimer: We set our price in Europe when we announced and that price also includes VATs and other related duties.

David Bailey (Goldman Sachs): What the percentage of direct sales were in the quarter and what you are expecting for the December quarter, since this will be a drag on gross margin?

Peter Oppenheimer: In the September quarter, our direct sales were 57% of total company revenue, and that was up from 53% in the year-ago quarter. I can’t give you a forecast for this December quarter, but last year in Q1, direct sales were 44% of total company revenue.

Katy Huberty (Morgan Stanley): Europe out grew the U.S. now for four quarters in a row. Is that sustainable or are there some currency factors that are showing up in the numbers?

Timothy D. Cook: Europe did have excellent growth. In fact, year over year, we were up 37% in revenue and 47% in units, as you combine the retail stores with the channel results. In terms of Mac units, this is over four times the IDC projected gain for Western Europe. Europe did not have the typical lull in August that we have seen. The iMac announcement and then followed by the iPod announcement early September was enough to overcompensate for that. We factored our view of the future into the guidance provided earlier.

Katy Huberty (Morgan Stanley): Are there any nuances that will show up in the model as non-U.S. revenues become a larger percentage of the business, as it relates to tax rate over time?

Peter Oppenheimer: Generally for most U.S. companies, growth in foreign earnings is a benefit to your taxes, your U.S. tax rate.

Shannon Cross (Cross Research): Could you talk about efforts you have to address the SMB channel, both with Macs and iPhone?