Steve Jobs is feeling rather vindicated these days. "The iPod is three years old," says the Apple CEO. "When we started this, nobody knew what it was, or they didn't believe it would be a big hit." But last week at San Jose's vintage California Theatre, Apple's CEO, apparently at full strength after cancer surgery last summer, was triumphantly unveiling the newest twists on his megahit digital music player--with the extra oomph of a performance by U2's singer Bono and guitarist The Edge. As the game Irish frontman belted out a tune from the band's upcoming CD, a verklempt Jobs punched a colleague on the leg and said, "We're going to remember this for the rest of our lives."

Financial analysts will more likely remember the sales results that Jobs unveiled. Specifically, 2 million iPods sold between July and September. It was more than Apple had planned--which didn't stop Jobs from announcing two additions to the iPod collection.

The first one handles your photos. While Jobs believes that screens on hand-held devices are too puny for movies, they're fine to view personal pictures (and can be easily plugged into a TV set for group appreciation). Ergo, iPod Photo, with a color display and storage for up to 25,000 of your favorite digital snapshots. The two-inch screen isn't spacious, but Jobs feels that the ability to bore anyone, anywhere, with images of your recent vacation--and Apple's clear interface and painless integration with your computer--will make the iPod the palm-size photo viewer of choice. Also, consumers with bucks to burn may spring for the $499 and $599 photo pods just to get a color screen, which makes the bundled-in Solitaire game actually playable.

The second innovation is the $349 U2 iPod, which is colored the same shade of midnight as Bono's leather jacket (the click wheel is fire-engine red) and festooned with the band members' laser-etched signatures on the back. The real significance, though, is the relationship Apple has forged with one of the elite bastions of rock, possibly a harbinger of new business models in the digital age. For the last few weeks we've all been inundated with Day-Glo iPod commercials featuring U2, which previously had not lent itself to ad campaigns. But as The Edge explains, "It's easy to be in the iTunes ad because iTunes is promoting us." In addition, Apple will be exclusively selling a $149 "digital boxed set" consisting of all of U2's official recordings, plus 25 previously unreleased cuts. This can be purchased with a single mouseclick (you might want to buy a case of Guinness to pass the time while the songs download, since Jobs estimated it will take "a few hours" to get the 400 songs).

Down the road, Bono and Jobs both envision new opportunities to sell songs and build fan communities, like offering concert recordings at the iTunes store. "We're getting ready to do it," says Jobs. "Wouldn't it be great if the morning after the concert, you can buy it on iTunes, and anyone in the world can listen to it the next day?"

The bottom line for U2 is that success of the iPod and other initiatives has firmly discredited record executives who prophesized that the digital transformation would doom the music industry. "Don't believe those people," Bono says. "We want to stop running from the future, but walk up to it and give it a great big kiss. Give people what they want when they want it." As for Steve Jobs, there's now the worry that he won't be able to supply iPods when people want them... for Christmas gifts. "We had to put in the [manufacturing] orders months ago," he says. "I hope it's enough, but to be honest, I don't think it's gonna be." Then, ever the marketer, he adds, "If you want an iPod for Christmas, I'd get one early."