Jeff Fidacaro (Merrill Lynch): Your iTunes has been running as break-even or better. You are getting a 30% split of the application revenue. Could you comment on that?

Peter Oppenheimer: We are thinking about the App Store in the same way that we think about the iTunes store. While it will generate some revenues, it will be a small profit generator, and just as with the iTunes store making iPods more attractive, we think the App Store will make the iPhone and iPod Touch more attractive to customers. We will hopefully see an indirect return by selling more iPhones and iPod Touches.

Toni Sacconaghi (Sanford Bernstein): What is baked into your guidance around the health of the U.S. consumer?

Peter Oppenheimer: We are going to leave economic commentary to others but we did not see any obvious impact to the business in the June quarter.

Toni Sacconaghi (Sanford Bernstein): Why do you have such confidence that you can fulfill demand in 20 countries when you were not able to fill demand in 22 countries at initial launch for more than two days?

Timothy D. Cook: I am not predicting the demand. Demand is difficult to predict with a new product of its sort, that has a new price point and it is a revolutionary product. We do have confidence over the supply and it is the confidence over supply that allows us to continue to expand.

Toni Sacconaghi (Sanford Bernstein): The iPhone is the significantly higher gross margin product than your overall business, and that is going to ramp and all else being equal, should push up margins. Will the upward pressure on your gross margins later in 2009 or beyond it be positive due to both the iPhone plus the scale economies that you had talked about?

Peter Oppenheimer: I would not rule that in or out and I am not going to make comments beyond 2009. As regards the iPhone, we do not discuss specific product margins. However, the iPhone is currently a small part of our total revenue and gross margin, as a result of subscription accounting. With the introduction of the iPhone 3G and our authorizing carriers in over 70 countries, we expect to sell significantly more iPhones this quarter and in the future than we have and we are happy with the margins in our new model.

Mike Abramsky (RBC Capital Markets): What key sustainable advantages do you feel that you will have in that environment to sustain the demand that you have seen for iPhone and support the plans that you are expecting for expansion?

Timothy D. Cook: We think that software is the key ingredient for a great mobile experience, and we believe that we are many years ahead of the competition in this area. We welcome any competition, as long as it does not step on our IP.

Peter Oppenheimer: I would add to that that we are excited about our App Store, and in just over a week, there are now over 900 applications available to customers and in just over a week, customers on iPhone and iPod Touch have already downloaded over 25 million applications.

Mike Abramsky (RBC Capital Markets): Do you see this IP issue heating up later?

Timothy D. Cook: We will be aggressive.

Mike Abramsky (RBC Capital Markets): What evidence do you see that this market can support a sustained level of the growth that you have experienced out of the gate for this iPhone opportunity?

Timothy D. Cook: We are not predicting units other than the prediction that we made some time ago about this year, which we are confident in achieving. We believe that we are growing the market and that many people did not have a full view of what a phone could do until we announced the iPhone. We think that there will be a shift in the phone industry over time to more and more people wanting a smartphone versus a standard voice phone.

Mike Abramsky (RBC Capital Markets): Would you say that you do not see the cost commitment that is in front of people to get those new desires, to get the things that they are desiring being a headwind to market growth for the next foreseeable future?

Timothy D. Cook: We did see it being a headwind at the $400 U.S. dollar price, and as we share some time about, about 50% of the people that we surveyed told us that they would have bought an iPhone had it not been for the price, and so with a change in business model, which gets the iPhone to a price of $199 in the U.S., and a price similar to that in local currencies on specific tariffs outside the U.S. in many countries, we believe we are addressing that key concern and the market for the iPhone will expand dramatically.

Mike Abramsky (RBC Capital Markets): Are you reaffirming your 10 million CY08 iPhone goal?

Timothy D. Cook: We are confident in achieving the 10 million for calendar year 2008.

Yair Reiner (Oppenheimer & Company): Can you walk us through the accounting of the back-to-school promotion and how you account for the iPods that are given away and what happens to the ASPs?