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Asia-Pacific

Net sales in Asia Pacific increased $2.9 billion or 151% during the second quarter of 2011 and increased $6.0 billion or 163% during the first six months of 2011 compared to the same periods in 2010. The Company experienced particularly strong year-over-year net sales growth in China, Hong Kong and Korea during the second quarter of 2011 and first six months of 2011. Higher net sales in the Asia Pacific segment were due mainly to the increase in iPhone revenue primarily attributable to new carrier launches, introduction of iPad, and increased sales of Macs. The Asia Pacific segment represented 19% and 14% of total net sales in the second quarter of 2011 and 2010, respectively, and 19% and 13% of total net sales in the first six months of 2011 and 2010, respectively.

Retail

Retail net sales increased $1.5 billion or 90% during the second quarter of 2011 compared to the second quarter of 2010. The increase in net sales was driven primarily by higher iPhone sales, the launch of iPad, and higher sales of Macs. The Company did not open any new retail stores during the second quarter of 2011, ending the quarter with 323 stores open compared to 286 stores at the end of the second quarter of 2010. With an average of 323 stores and 284 stores open during the second quarter of 2011 and 2010, respectively, average revenue per store increased 67% to $9.9 million in the second quarter of 2011 compared to the second quarter of 2010. The Retail segment represented 13% and 12% of total net sales in the second quarter of 2011 and 2010, respectively.

Retail net sales grew $3.4 billion or 93% during the first six months of 2011 compared to the same period in 2010 driven primarily by the launch of iPad, a significant year-over-year increase in iPhone sales, and higher sales of Macs. Average revenue per store increased 68% to $21.9 million for the first six months of 2011 compared to the same period in 2010. The Retail segment represented 14% and 12% of total net sales for the first six months of 2011 and 2010, respectively.

The Retail segment reported operating income of $807 million during the second quarter of 2011 compared to operating income of $373 million during the second quarter of 2010, and reported operating income of $1.8 billion during the first six months of 2011 compared to $854 million during the first six months of 2010. The year-over-year increase in Retail operating income was primarily attributable to higher overall net sales that resulted in significantly higher average revenue per store during the second quarter and first six months of 2011 compared to the same periods in 2010.

Expansion of the Retail segment has required and will continue to require a substantial investment in fixed assets and related infrastructure, operating lease commitments, personnel, and other operating expenses. Capital asset purchases associated with the Retail segment since inception totaled $2.3 billion through the second quarter of 2011. As of March 26, 2011, the Retail segment had approximately 30,200 full-time equivalent employees and had outstanding lease commitments associated with retail space and related facilities of $2.0 billion. The Company would incur substantial costs if it were to close multiple retail stores and such costs could adversely affect the Company’s financial condition and operating results.

March 26, 2011

March 27, 2010

March 26, 2011

March 27, 2010

$

24,667 14,449

$

13,499 7,874

$

51,408 30,892

$

29,182 17,146

$

10,218 41.4%

$

5,625 41.7%

$

20,516 39.9%

$

12,036 41.2%

Gross Margin

Net sales Cost of sales

Gross margin for the three- and six-month periods ended March 26, 2011 and March 27, 2010 was as follows (in millions, except gross margin percentages):

Three Months Ended

Six Months Ended

Gross margin Gross margin

percentage

The gross margin percentage in the second quarter of 2011 was 41.4%, relatively consistent with the 41.7% in the second quarter of 2010. The gross margin percentage for the first six months of 2011 was 39.9% compared to 41.2% for the first six months of 2010. This year-over-year decline in gross margin is primarily attributable to new and innovative products that have higher cost structures, including iPhone 4 and iPad, that was partially offset by lower other manufacturing costs.

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