OF OPERATIONS FOR 2002, 2003, AND 2004 



Management’s Discussion and Analysis (MD&A) contains statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of factors discussed in “Issues and Uncertainties” and elsewhere in this report.



OVERVIEW 



The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand Microsoft Corporation. MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes (“Notes”).

We generate revenues, income and cash flows by developing, manufacturing, licensing, and supporting a wide range of software products for many computing devices. Our software products include operating systems for servers, personal computers (PCs), and intelligent devices; server applications for distributed computing environments; information worker productivity applications; business solutions applications; and software development tools. We provide consulting and product support services, and we train and certify system integrators and developers. We sell the Xbox video game console and games, PC games and peripherals. Online communication services and information services are delivered through our MSN portals and channels around the world.

We also research and develop advanced technologies for future software products. Delivering breakthrough innovation and high-value solutions through our integrated platform are the key to meeting customer needs and to our future growth.

We believe that over the last few years we have laid a foundation for long-term growth, delivering innovative new products, creating opportunity for partners, improving customer satisfaction with key audiences, putting some of our most significant legal challenges behind us, and solidifying internal processes. Our focus in fiscal 2005 is building on this foundation and executing well in key areas, including continuing to innovate on our integrated software platform, delivering compelling value propositions to customers, responding effectively to customer and partner needs, and continuing to focus internally on product excellence, business efficacy, and accountability across the company.

Key market opportunities include:



•	Meeting the needs of a growing worldwide base of PC users, which we project will top 1 billion by 2010;



•	Delivering new scenarios such as collaboration, authoring, communicating, planning, and analysis for information workers;



•	Continuing to compete against Linux and Unix for commercial workloads;



•	Reducing complexity and cost for IT professionals and developers;



•	Delivering IT services for smaller business, and consumers;



•	Creating and delivering business solutions for small and mid-market segments;



•	Creating non-PC consumer electronics in areas such as mobile phones, handheld devices, home entertainment and TV;



•	Delivering compelling entertainment experiences in areas such as music, TV, movies, photos, and games;



•	Expanding online advertising, and advances in search,