Store due largely to making it available to both Macintosh and Windows users in the U.S., U.K., France, and Germany. 

The Retail segment’s net sales grew 91% to $1.2 billion during 2004 compared to 2003. This increase was largely attributable to the increase in total stores from 65 at the end of 2003 to 86 at the end of 2004, as well as a 36% year-over-year increase in average revenue per store. While the Company’s customers in areas where the Retail segment has opened stores may have elected to purchase from the Retail segment stores rather than the Company’s preexisting sales channels in the U.S. and Japan, the Company believes that a substantial portion of the Retail segment’s net sales is incremental to the Company’s total net sales. See additional comments below related to the Retail segment under the heading “Segment Operating Performance.” 

Net sales of peripherals and other hardware rose by 38% during 2004 compared to 2003 primarily due to an increase in net sales of displays and other computer accessories. Net sales of other computer accessories include AirPort cards and base stations, iSight digital video cameras, and third-party hardware products. The increase in total net sales of peripherals and other hardware was related to the overall increase in Macintosh unit sales and the introduction of new and updated peripheral products and was experienced predominantly by the Company’s Americas, Europe, and Retail segments. 

Net sales of other music related products and services increased $242 million or 672% during 2004 compared to 2003. The Company experienced strong growth in sales of iPod services and accessories consistent with the increase in overall iPod unit sales for 2004. The increased sales from the iTunes Music Store, which was originally introduced in April 2003, was primarily due to making the service available for Windows in October 2003 and the introduction of the service in the U.K., France, and Germany in June 2004. 

Net sales of software rose $140 million or 39% during 2004 compared to 2003 due primarily to higher net sales of the Company’s Apple-branded software and in particular, higher net sales of the Company’s operating system software, including Mac OS X version 10.3 “Panther,” which was released in October 2003. Net sales of Panther accounted for approximately $74 million or over 50% of the increase in software net sales for 2004 compared to 2003. 

The Company’s U.S. education channel experienced year-over-year growth in net sales of approximately 19% for 2004 compared to 2003. Unit sales also increased by 10% during 2004 compared to 2003. The increase in U.S. education net sales for 2004 related primarily to a 40% year-over-year increase in higher education net sales and to a lesser extent the Company’s 3% growth in K-12 net sales. 

Service and other sales increased $37 million or 13% during 2004 compared to 2003. These increases were the result of significant year-over-year increases in net sales associated with APP extended maintenance and support services, as well as increased net sales associated with the Company’s .Mac Internet service. Increased net sales associated with APP were primarily the