2002



Letter to our shareholders, customers, partners, and employees:

Fiscal 2002 was a year of solid revenue growth, significant product releases, and a continued focus on developing new technologies that position Microsoft for the future. Despite a challenging economic climate, revenues for the year increased by $3.07 billion to $28.37 billion, and operating income grew by $190 million to $11.91 billion.

Strong demand for Windows XP and other desktop software contributed to our positive performance. Revenue from enterprise software outpaced the highly competitive server market by a wide margin. And our consumer businesses saw a dramatic rise in sales, with the launch of the Xbox video game system and strong growth in MSN subscription income.



During the coming year, Microsoft will launch several important new products, including Windows XP Tablet PC Edition and Windows .NET Servers, and we plan to increase spending on research and development by 20 percent, to $5.2 billion. To reflect our role as an industry leader and to focus our efforts on the opportunities ahead, we have embraced a new corporate mission: to enable people and businesses throughout the world to realize their full potential. Delivering on this mission requires a clearly defined set of values and tenets. We are working to integrate these principles into everything we do.



INNOVATIVE PLATFORM LEADERSHIP



A highlight of the past year was the overwhelming market acceptance that greeted the launch of Windows XP, which brings enhanced reliability, security, and performance to PC users at home and work. The year also saw sustained momentum for Office XP, with more than 60 million licenses sold in the 12 months after its launch in May 2001. A new version of Office, scheduled for release in 2003, will enable users to communicate and collaborate in new ways with even greater ease.



Delivering on our vision of software that empowers people any time, any place, and on any device, we launched new versions of Windows for small and mobile devices, including Pocket PCs and set-top boxes for digital cable TV. Fall 2002 brings the launch of the first Tablet PCs, designed to boost productivity by combining the power and speed of a full-featured desktop computer with the flexibility and portability of a notepad.



One of our key goals is to expand our role as a provider of software solutions for small- and mid-sized businesses. In July 2002, we acquired Navision, a leading global provider of integrated software for financial management and other business processes. Combining Navision with Microsoft Great Plains to form Microsoft Business Solutions, we now offer a wide range of applications and services that enable companies to reduce costs, streamline operations, and improve service. We are planning many new products for this market, including a solution for customer relationship management that will launch this fiscal year.



THE PROMISE OF .NET AND XML WEB SERVICES



A significant portion of the company’s revenue growth over the next five years will come from Microsoft’s .NET architecture, which holds enormous potential to connect information, people, systems, and devices