increase in higher education net sales due to increased iMac shipments, portable system shipments, and online sales. The Company also experienced 11% growth in K-12 net sales due to increased iBook sales and education 1:1 sales. While net sales to the K-12 market were slightly higher during 2005 than 2004, the Company believes this market continues to be subject to budget constraints and competitive pressures. 

Net sales of software, service and other sales rose $270 million or 33% during 2005 compared to 2004. This growth was primarily attributable to increased net sales in AppleCare Protection Plan (APP) extended service and support contracts, driven primarily by higher associated Macintosh computer sales. Additionally, the Company experienced increases in net sales of .Mac Internet service, professional and consumer applications, third-party software, and Mac OS X that was primarily attributable to the release of version 10.4 Tiger in April 2005. 

Fiscal Year 2004 versus 2003 

During 2004, net sales increased 33% or $2.1 billion from 2003. Several factors contributed favorably to net sales during 2004: 

Net sales of Macintosh systems increased $432 million or 10% during 2004 compared to 2003 while net sales per Macintosh unit sold remained relatively flat on a year-over-year basis. Unit sales of Macintosh systems increased 278,000 units or 9% during 2004 compared to 2003. These increases in net sales and unit sales were a result of strong demand for all of the Company’s Macintosh systems, except the iMac. The Company’s portable systems, consisting of the PowerBook and iBook, produced the strongest revenue and unit growth during 2004 compared to 2003 of approximately 26% and 33%, respectively. Unit sales of portable systems accounted for 51% of all Macintosh systems sold during 2004 compared to only 42% during 2003. The Company believes that these results reflected an overall trend in the industry towards portable systems. Performance of the Company’s Power Macintosh systems also yielded positive results in 2004 over 2003, including a 15% and 6% increase in net sales and unit sales, respectively. The increase in Power Macintosh sales in 2004 was due primarily to the introduction of the Power Mac G5, which began shipping at the end of 2003. Although Power Macintosh sales increased from 2003, sales of this product were constrained in the second half of 2004 as a result of manufacturing problems at IBM, the Company’s sole supplier of the PowerPC G5 processor. 

Net sales of iPods rose $961 million or 279% during 2004 compared to 2003. Unit sales of iPods totaled 4.4 million in 2004, which represents an increase of 370% from the 939,000 iPod units sold in 2003. Strong demand for the iPods during 2004 were experienced in all of the Company’s operating segments and was driven by enhancements to the iPod, the introduction of the iPod mini, increased expansion of the Company’s iPod distribution network, and continued success of the iTunes Music 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