Microsoft's Financial Analysis

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To our shareholders, customers, partners, and employees:

Fiscal 2006 was a year of significant achievement and transformation for Microsoft. During 2006, we celebrated the thirtieth anniversary of our founding, reached new records for revenue and operating income, and laid the foundation for future growth through key changes in our organizational structure and leadership. Fueled by strong demand for new and existing products, our revenue in 2006 grew by $4.49 billion, an 11 percent increase, to $44.28 billion. Operating income reached a record $16.47 billion. We also returned $23 billion to shareholders through dividends and by repurchasing our stock.

The past year saw the successful launch of major products including Xbox 360™, Microsoft® SQL Server™ 2005, Visual Studio® 2005, Microsoft Dynamics™ CRM 3.0, and BizTalk® Server 2006. Meanwhile, we continued to prepare for the most important series of product releases in Microsoft history as we readied Windows Vista™, the 2007 Microsoft Office system, and Exchange Server 2007 for launch in 2007.

We also strengthened our commitment to Internet services as we unveiled Windows Live™ and Office Live, our two Internet-based software services offerings. Throughout the year, we rolled out new Windows Live and Office Live services and we continue to invest in the development of new technologies and products that will help ensure that we are a leader in the Internet services revolution.

During 2006, we maintained our focus on research and development, investing $6.6 billion—more than any other company in our industry. Past investment in R&D paid off in the form of new products and technologies that are helping us redefine the next generation of information technology. Along the way, we received our 5,000th patent.

In 2006, we also made a number of strategic acquisitions, including FrontBridge Technologies, a provider of security-enhanced managed messaging services; Teleo, which develops voice over Internet protocol (VoIP) software; mobile search technology provider MotionBridge; and Massive, a pioneer in delivering advertising within video games.

Through our commitment to research and development, and our passion for pursuing innovations that enable our customers to achieve business success and realize their potential, we are in a great position to strengthen growth and increase innovation as we pursue new and expanding opportunities in business solutions, mobile computing, communication, entertainment and more.
Leadership and Organizational Excellence

Great leadership and a strong, agile organization are essential to Microsoft's future success. During 2006, we took important steps to ensure that the company has the deep roster of leaders and the organizational structure it needs to spur continual innovation and growth. In 2006, we realigned the company into three divisions: the Microsoft Platforms & Services Division led by co-presidents Kevin Johnson and Jim Allchin (who will retire following the launch of Windows Vista); the Microsoft Business Division led by Jeff Raikes as president; and Microsoft Entertainment & Devices Division, where Robbie Bach serves as president. Kevin Turner joined the company as chief operating officer. All of these leaders possess great levels of business experience and technology expertise, combined with a passion for excellence and innovation.

Also during 2006, Bill Gates announced that in 2008 he will reduce his workload at Microsoft to part time. At that time, he will remain as chairman of the company and continue to play a vital role as an advisor on key development projects. To prepare for this transition, two of our top technical leaders—and two of the industry's leading technical visionaries—will take on new responsibilities. Ray Ozzie assumed Bill's title of chief software architect and is working with Bill on technical architecture and product oversight. Craig Mundie, named chief research and strategy...
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