By Bloomberg<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

Apple said second-quarter profit rose 88 percent after demand soared for its iPod media players and Macintosh computers.

The company’s shares surged 6.3 percent in extended trading. Net income increased to $770 million, or $0.87, from $410 million, or $0.47, a year earlier, the Cupertino, California-based company said today in a statement. Analysts surveyed by Bloomberg had estimated earnings of $0.63 a share.

Sales rose 21 percent to $5.26 billion, beating expectations. Apple sold 10.5 million iPods and 1.52 million Macs in the quarter ended March 31, boosted by demand for notebook computers and the low-cost iPod Shuffle.

Falling prices for memory chips and screens increased the company’s profit margin. In a separate statement, Apple’s board expressed confidence in Chief Executive Officer Steve Jobs amid a government probe into stock options.

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“The numbers were pretty unbelievable,'” said Chris Armbruster, an analyst at Al Frank Asset Management in <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Laguna Beach, California. The firm manages about $900 million and owns Apple shares. “The biggest thing that jumps out at me was their gross margin.”

Gross margin, the percentage of sales left after excluding production costs, widened to 35.1 percent in the quarter from 29.8 percent a year earlier. Most analysts expected 30 percent, said Shaw Wu at American Technology Research in San Francisco.

Shares Jump

Apple shares rose $6.05 to $101.40 in extended trading after the results were released. If the stock makes a similar gain tomorrow in regular trading, it will be the first time it has climbed above $100. The stock advanced $2.11 to $95.35 at 4:00 p.m. New York time in Nasdaq Stock Market trading.

Sales this quarter will be $5.1 billion and profit will be about $0.66 a share, Apple said in the statement. Sales may get a boost from the iPhone, a combination iPod and mobile phone, due in late June. The company said today it’s developing software for the new device and will sell iPhone accessories.

Analysts on average were expecting third-quarter revenue of $5.43 billion and $0.67 in earnings, according to a Bloomberg poll. Apple typically gives conservative forecasts, Mr. Wu said. The U.S. Securities and Exchange Commission said yesterday that Apple won’t be sanctioned for backdating options, though it did cast blame on two former executives.

Former Chief Financial Officer Fred Anderson settled an SEC lawsuit against him, and former General Counsel Nancy Heinen’s lawyers said she will fight the SEC’s civil lawsuit filed against her.

‘Complete Confidence’

Mr. Anderson said yesterday he cautioned Mr. Jobs in January 2001 that the company may need to take a charge for stock-option grants that were not properly dated. An Apple probe in December cleared Mr. Jobs of any wrongdoing.

“We have complete confidence in the conclusions of Apple’s independent investigation, and in Steve’s integrity and his ability to lead Apple,” said six of Apple’s board members, including former U.S. Vice President Al Gore, in a statement today.

“The SEC investigated the matter thoroughly and its complaint speaks for itself, in terms of what it says, what it does not say, who it charges, and who it does not charge.'”

The cost of flash-memory chips, which store songs on iPods, plunged as much as 45 percent last quarter, according to the online trading site DRAMexchange.com. The average price for liquid-crystal displays declined 9 percent in the first quarter, said LG.Philips LCD, the world’s second-largest maker of the displays after Samsung Electronics Co.

‘A Windfall’

“Falling component costs in the quarter were clearly going to be a windfall; it was just a question of how much,”' said Matthew Kather, an analyst at WR Hambrecht, who has a “buy”' rating on the stock. Component prices fell more than Apple anticipated, said Chief Operating Officer Tim Cook today.

Sales of Mac notebooks rose 83 percent to $1.35 billion, outpacing a 10 percent rise in desktop computer sales. Analysts had estimated total sales on average of $5.16 billion.

“Both the Mac and iPod exceeded our expectations,”' Chief Financial Officer Peter Oppenheimer said. Demand for notebook PCs contributed to an “awesome Mac quarter,”' he said. Mr. Jobs didn’t unveil new Mac or iPod designs last quarter, his usual strategy for spurring sales, though analysts expect new products later this year to spur back-to-school and holiday demand.

His one major product introduction was Apple TV, a $299 device released last month that beams digital videos from computers to televisions. The company plans to sell two models of the iPhone, for $499 and $599, at its 177 retail stores and through AT&T Inc., the largest U.S. mobile-phone service.

More than 1 million consumers have contacted AT&T to find out when the iPhone will go on sale, AT&T Chief Operating Officer Randall Stephenson said last month.

Apple said today it would amortize the selling costs for the iPhone over the product’s 24-month subscription. It will record the revenue from the device at the time of sale. The policy won’t affect cash flow, the company said.