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?

Timothy D. Cook: We create products that we hope will appeal to all types of people and we think that the MacBook Air will appeal to travelers, to professors, to all different kinds of people who want to access the computer quickly wherever they are. It is leading edge, it is a superior combination of size, weight and performance and form factor, while being competitively priced if you look at what other people are charging for these, and so we think it is a great segment for us and a great new product.

Keith Bachman (Bank of Montreal): Could you talk about Leopard?

Peter Oppenheimer: Leopard is off to a great start. Customer and reviewer response has just been off the chart and about 19% as of the end of the quarter of the Mac OS 10 installed base is already enjoying Leopard. Our sales going back to Tiger in its first quarter were $100 million, or about $100 million and in its second quarter were about $35 million. Leopard sales in its first quarter were 170.

Keith Bachman (Bank of Montreal): Would you expect a similar trajectory over the course of the March quarter?

Peter Oppenheimer: Customer response has been strong. Sales will be down sequentially in the March quarter and I do not know if it is going to follow the same trend that Tiger did. Your sales in the first quarter for consumer software titles are always the best but Tiger is doing incredibly well and the installed base is bigger today than what it was when we first shipped Tiger.

Keith Bachman (Bank of Montreal): Japan had a bounce back. Was that easy compares or was leading the charge in Japan?