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PAGE 2
To our shareholders, customers, partners, and employees:
Fiscal 2005 was another successful year for Microsoft. Customers around the world continue to benefit from our innovations,
while our development of new technologies will position the company for future growth. With healthy demand across all our
customer segments and channels, 2005 revenue increased by nearly $3 billion to a record $39.79 billion. Operating income
increased by 61 percent.
During the past five years, Microsoft’s revenue increased 73 percent. We generated more than $162 billion in revenue over the
past five years, and about $75 billion in net cash flow from operations. We returned $69 billion of this cash to shareholders in
dividends and stock repurchases.
Meanwhile, we increased our annual investment in research and development by 23 percent since 2001. Our sixth research
facility opened last year in Bangalore, India. We also continued to invest in strategic acquisitions. In 2005, they included Sybari
Software, a leading provider of enterprise security solutions, and Groove Networks, a leading provider of collaboration software.
And we continued allocating resources to reduce our legal risks. Last year we resolved many legal issues and settled class-
action lawsuits in several states.
Our future prospects are strong. Before the end of calendar year 2005, several important new products will emerge from our
pipeline. We will introduce a new generation of servers and tools with Microsoft® SQL Server™ 2005, Visual Studio® 2005, and
BizTalk® Server 2006. We will release Office Small Business Accounting 2006 and Microsoft CRM 3.0, a complete suite of
powerful marketing, sales, and service capabilities. We also will launch Xbox 360™, a next-generation video game platform
optimized for high-definition entertainment and online play. Next year, we will gather even more momentum with Windows®
Vista, our next-generation operating system, and a major upgrade of Office, among many other new products and services.
Empowering People for Success
Driven by passion for empowering people to achieve business success and realize their potential, each of our seven major
business groups grew in 2005. Growth in Server and Tools was particularly strong, helped by rapid customer adoption of SQL
Server. We released several important updates to our server products, including Microsoft Operations Manager 2005, Internet
Security and Acceleration Server 2004, Virtual Server 2005, and Windows Server™ 2003 Service Pack 1.
Mobile and Embedded revenue increased 36 percent as we launched Windows Mobile™ 5.0, our software for mobile devices.
We now partner with more than 40 mobile device makers and 68 mobile operators.
MSN® achieved its second consecutive year of profitability, launching many new information and communications services as
part of its innovative platform for online advertising, which we see as a large market opportunity. Among other innovations, MSN
released a powerful new Web search engine and the MSN Search Toolbar with Windows Desktop Search. We launched MSN
Music, which provides an easy way for consumers to find and download music online, and we launched MSN Spaces, a blog
hosting service that attracted more than 18 million spaces within its first six months.
In our Home and Entertainment business, cumulative shipments of the Xbox® video game system reached 22 million, and the
Xbox Live® online game service doubled its subscriber base to 2 million. The popular Halo® 2 game, released in November
2004, generated $125 million in North American sales in one day, making its launch one of the largest in entertainment history.
Many other important products were launched by our Client, Information Worker, and Microsoft Business Solutions businesses:
64-bit editions of Windows XP Professional and Windows Server 2003; new versions of Windows XP for Media Centers and
Tablet PCs; Office Live Communications Server 2005 and Office Communicator 2005; Office Live Meeting 2005; Office
Outlook® Live; and the Microsoft Business Solutions-Navision® 4.0 software suite for small and mid-sized businesses.
Among business customers, our work to deliver greater business value through our software has brought wider recognition of
the advantages of Microsoft technologies. In the past year, research reports from more than a dozen independent analyst firms
concluded that the Windows Server System is superior to Linux in many important ways.