2007

Management’s Discussion and Analysis of Financial Condition and Results of Operations 

Overview

NIKE designs, develops and markets high quality footwear, apparel, equipment and accessory products worldwide. We are the largest seller of athletic footwear and apparel in the world and sell our products primarily through a combination of retail accounts, NIKE-owned retail, including stores and e-commerce, and independent distributors and licensees in the United States and worldwide. Our goal is to deliver value to our shareholders by building a profitable global portfolio of branded footwear, apparel, equipment and accessories. Through this diverse portfolio of brands, our strategy is to create long-term revenue growth by connecting with consumers across geographies. We strive to convert revenue growth to value in three key areas:

Creating the marketplace:

Delivering premium experiences to our consumers •	Delivering superior, innovative products to the marketplace

Operational and organizational excellence:

Making our supply chain a competitive advantage, through operational discipline and excellence

Reducing product costs through a continued focus on lean manufacturing designed to eliminate waste

Improving selling and administrative expense productivity by focusing on investments that drive economic returns in the form of incremental revenue and gross margin

Improving working capital efficiency

Deploying capital effectively:

Utilizing capital capacity to create value for our shareholders

By executing this strategy, we aim to deliver the following long-term financial goals:

High single-digit revenue growth;

Mid-teens earnings per share growth;

Increased return on invested capital and accelerated cash flows; and

Consistent results through effective management of our diversified portfolio of businesses.

In fiscal 2007, we met the majority of these financial goals. Our revenues grew 9% to $16.3 billion, net income grew 7% to $1.5 billion, and we delivered diluted earnings per share of $2.93, an 11% increase versus fiscal 2006. These reported results included a $141.9 million pre-tax charge, related to stock-based compensation expense recognized in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123R “Share-Based Payment” (“FAS 123R”), which we adopted during the first quarter of fiscal 2007 (see Note 1— Summary of Significant Accounting Policies and Note 10 — Common Stock in the accompanying Notes to Consolidated Financial Statements for more information on the adoption of FAS 123R), and the effects of the Converse arbitration ruling in fiscal 2006 and subsequent settlement in fiscal 2007. Excluding these items, our net income grew 11% and we delivered diluted earnings per share of $3.10, a 15% increase versus fiscal 2006 (see Reconciliation of Net Income and Diluted Earnings Per Share Excluding the Converse Arbitration and Stock-Based Compensation Expense below).

Fiscal 2007 results were positively affected by a reduction in our effective tax rate of 2.8 percentage points as compared to fiscal 2006, primarily as a result of the European tax agreement the Company finalized in the second quarter of