2004



To our shareholders, customers, partners and employees:



For Microsoft, fiscal 2004 was a great year, marked by strong growth and development of exciting new technologies. All of our businesses grew during the year, increasing total revenue by $4.65 billion, or 14 percent, to $36.8 billion. Profit margins from continuing operations improved, particularly in our emerging businesses.



In the past year we delivered amazing new products and services, including Office System 2003, new versions of Windows XP for Media Center and for Tablet PCs, Exchange Server 2003, Windows Small Business Server 2003, BizTalk Server 2004, Speech Server 2004, MSN Messenger 6.2, Windows CE 5.0, and several new business solutions for small and mid-market customers. We made progress against some of the biggest problems facing customers today, such as the costly epidemic of junk e-mail, and security threats from attacks over the Internet. Our progress on security is reflected in the important advances in Windows XP Service Pack 2, which enables safer Web browsing, e-mailing, and instant messaging.



We also made major progress in reducing our legal risks and strengthening relationships within our industry and with governments. Building on this progress, we are confident that Microsoft will continue to grow and create long-term value for shareholders.



Accordingly, the board of directors has approved a plan to return cash to investors on an unprecedented scale. During the next four years, the company is on track to return as much as $75 billion to shareholders, by increasing the regular dividend, expanding our stock buyback program, and declaring a special dividend of $3 per share, subject to shareholder approval as described in the proxy statement. We will continue to have ample resources to pursue the enormous growth opportunities that we see ahead. All of us at Microsoft are intensely focused on realizing these opportunities by continuing to deliver integrated, cutting-edge technology, and through operational excellence.



Integrated Innovation



Microsoft was built on innovation, and our future depends on it. We are in an extraordinary position to deliver even greater value to customers through a broad set of technologies, designed to complement each other and many third-party products and services. This is what we mean by integrated innovation, which is key to our business strategy.



To drive innovation, Microsoft has a long-term commitment to research and development. Our investment to date has brought about many of the successful products we offer today, and has built an increasingly valuable store of intellectual property. In fiscal 2004, we applied for more than 2,000 patents on some of our recent innovations. During the coming year, we plan to file for another 3,000 patents, which will make us one of the largest patent filers in the world. Our innovations are available for broad use in others’ products through our patent licensing programs.



Security.    A key focus of our innovation is security. Beyond the advances in Windows XP SP2, we are developing advanced technologies that will help isolate computers from Internet attacks and make