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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 changesin our organizational structure and leadership. Fueled by strong demand for new and existing products, our
`revenue in 2006 grew by $4.49 billion, an 14 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 billlon—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 mace a number of strategic acquisitions, including FrontBridge Technologies, a pravider of security-enhanced
`managed messaging services; Teleo, which develops voice over Internet protocol (VoIP) software; mobile search technology
`provider MotionBridge; and Massive, a pioneerin 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 sour continual
`innovation and growth. In 2006, we realigned the companyinto 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 assumedBill's title of chief software architect and is working with Bill on technical architecture and
`product oversight. Craig Mundie, named chief research and strategy officer, is working with Bill on the company’s research and
`product incubation efforts.
`
`Thanks to these changes, our leadership team is stronger than it has ever been, and our organizational structure is aligned for
`great execution in the coming years.
`
`Enabling People-Ready Businesses
`At our core, we are a software company. But our defining mission is to help people and businesses realize their full potential. We
`believe that the right software helos companies become people-ready businesses where employees are empowered and
`inspired to use technology to solve problems, collaborate with colleagues, serve customers, and seize new opportunities. From
`the infrastructure innovations in SQL Server 2005 ta the enhanced business process integration of new Microsoft Dynamics
`solutions, many of our product releases in 2006 were designed to provide people with tools and resources they need to drive
`business success.
`
`Product releases in the coming year will strengthen our ability to deliver on our people-ready vision. Windows Vista, the 2007
`Office system, and Exchange 2007 will provide powerful new capabilities that enable people to create new levels of business
`value, fueling further growth for Microsoft.
`
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`A Focus on Long-Term Success
`Throughout our 30-year history, Microsoft has achieved success by taking a long-term approach to technology. This has enabled
`us to deliver ground-breaking products that have truly changed the world.
`
`The success of this approach was seen across our businesses in 2006 as we brought many new products to market and added
`new customers in many segments. In the Platforms & Services Division, the launch of new versions of SQL Server and Visual
`Studio propelled the Server and Tools business to a 15 percent increase in revenue. The Client group saw revenue grow by 9
`percent.
`
`In the Business Division, the launch of Microsoft Dynamics GP 9.0, Dynamics CRM 3.0, Dynamics SL 6.5, and Dynamics Ax 4.0
`helped drive the Business Solutions group past $900 million in revenue. Meanwhile, our Information Worker business grew 5
`percent to $11.76billion.
`
`The Entertainment and Devices Division saw strong growth as well. With 5 million units sold to date, Xbox 360 is the fastest-
`selling video game console ever. It helped drive revenue in the Home and Entertainment business to $4.26billion, from $3.14
`billion in 2005. Mobile and Embedded Devices, which saw revenue increase 44 percent, was our fastest-growing division in
`2006.
`
`A Strategic Foundation for Growth
`In the year ahead—and the years to come—we expect many of our long-term investments to show a significant return in areas
`ranging from online advertising to digital communications, entertainment, and Internet television, even as our more mature
`businesses continue to generate significant revenue growth. To help ensure that our investments translate to growth and
`profitability, we are focusing on our opportunities in three specific ways:
`
`Strengthening core businesses: Windows Client, Information Worker, and Server and Tools remain our largest businesses.
`The 2007 releases of new versions of Windows and Office will drive continued growth for each of these groups. With Windows
`Vista, growth will come from new PC shipments, upgrades across our installed base, and the availability of new premium
`versions. The launch of the 2007 Office system and Exchange 2007 will help us grow as the market for business software and
`services expands.
`
`We also expect growth in the world’s developing countries as their economies develop and they adopt global standards for
`intellectual property protection. In fiscal 2006, nearly 6O million PCs were sold with pirated versions of Windows. Our Windows
`Genuine Advantage program and agreements with PC manufacturers in China are just two examples of our commitment to
`ensuring that we realize the full value of our intellectual property. Meanwhile, innovative payment options like FlexGo, which
`enables people to finance their computer use on a pay-as-you-go basis, will helo us reach new consumers in emerging markets
`around the world.
`
`|n 2007, we will deliver a wave of new products, services, and technologies that will
`Succeeding in adjacent businesses:
`position us to take advantage of a wide range of high-growth opportunities. One example is unified communications, our vision
`for bringing together telephony, e-mail, instant messaging, mobile devices, and Web conferencing, in order to streamline the
`way we communicate at work. To help makethis vision a reality, in June 2006 we created the Unified Communications Group in
`the Business Division. New enterprise information management tools will help knowledge workers create, find, use, and share
`business information quickly and effectively. These technologies promise to have a profound impact on productivity, creativity,
`and collaboration, and we believe they will have a significant impact on our future growth.
`
`In addition, we'll offer new security capabilities, improved management products, and new development tools. By bridging the
`gap between business processes and business practices, Microsoft Dynamics products position us to meet the fast-growing
`demand for better business process management systems. We recently entered the high-performance computing business. And
`we have new offerings and initiatives in industries such as life sciences and manufacturing.
`
`Weare excited by a number of important new opportunities that lie before us. With Xbox 360 and Xbox
`Entering new markets.
`Live®, our ontine gaming and entertainment service, we are redefining how people create, deliver, and experience
`entertainment. We are also poised to see our long-term investment
`in Internet television begin to bear fruit as leading
`broadband service providers around the world prepare to deplay IPTV Edition, our digital television technology. Meanwhile, the
`numberof customers using the Windows Mobile® and Windows embedded platformsis growing rapidly.
`
`Leading the Software Services Transformation
`Internet-based services are transforming the way people create, deploy, manage, and use information technology. We are
`deeply committed to playing a leadership role through our efforts to create the services platform for the next generation of
`applications, communications, and commerce. Across the company, software services are at the core of all of our development
`efforts.
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`In 2006, we introduced Windows Live, which inciudes a wide range of personal Internet services and software, and Office Live,
`which provides small businesses with affordable Internet-based business services hosted by Microsoft. We rolled out new
`search services, including beta releases of Windows Live Search and Windows Live Academic Search. We introduced new and
`enhanced services for computer safety and computer maintenance (Windows Live SafetyCenter and Windows Live OneCare),
`communications (Windows Live Mail and Windows Live Messenger), and entertainment (Xbox Live). We also created Live Labs,
`an applied research program that targets Internet products and services.
`
`Because software services offer strong opportunities for growth, we will continue to refine and improve adCenter, our
`advertising engine for Windows Live, MSN®, and other Microsoft online services. We will roll out new service-based solutions,
`such as Microsoft Dynamics CRM Live, which we announced in July 2006. We will also continue to build out our services
`infrastructure, providing new tools to help partners and businesses create and host services, and adding new data centers to
`meet growing consumer demand for services.
`
`investing in Our Employees and Our Communities
`The cornerstone of our success has always been our ability to attract and retain the most talented empioyees from around the
`world. in May, we announced important changes to help us ensure that Microsoft continues to be one of the world’s best places
`to work. These changes will enable us to better reward anc retain top talent, while providing a workplace that is positive,
`inclusive, and collaborative.
`
`We also continue to work to foster social and economic advancement for communities in developing nations through
`partnerships with public- and private-sector organizations. We support a broad range of efforts to expand access to technology,
`provide training that can give people the skills they need to thrive in today’s economy, and nurture local software economies
`that open the door to new opportunities and greater prosperity.
`
`In 2006, community learning centers supported by our Unlimited Potential program reached more than 14.5 million people in
`100 countries. Through our Partners in Learning program, we helped provide infarmation and communications technology
`curriculum and skilis training to 42 million primary and secondary teachers and situdenis in 101 countries. By 2010, we intend
`to provide technology training to 250 million people who were previously underserved by technology.
`
`Incredible Opportunities in the Decade Ahead
`In many ways, the founding of Microsoft 30 years ago was a critical catalyst for the creation of the software industry, the
`popularizations of the PC, and the rise of the information revolution.
`
`Today, it’s not just the PC that is changing the world. Software is everywhere. It is revolutionizing the telephone and transforming
`the way we watch television. It ties businesses to customers and partners in new ways. It links students to vast collections of
`information stored around the world. It connects hundreds of millions of people across the globe to incredible economic, social,
`and cultural opportunities.
`
`As thrilling as the last 30 years have been, we think the next 10 years promise to be the most exciting in the history of Microsoft
`and our industry as a whole. We believe strongly that everything this company has delivered to date is really just the foundation
`for the truly profound changes wewill see during the next 10 years. Because software is more central every day to the way we
`work, communicate, learn, and play, we believe no companyis better positioned than Microsoft to thrive in the coming decade.
`
`We are deeply inspired by the incredible opportunities that lie ahead for our company. It
`continue to pursue these opportunities. Thank you.
`
`is your support that enables us to
`
`®
`
`William H. Gates lll
`Chairman of the Board
`
`
`
`Steven A. Ballmer
`Chief Executive Officer
`
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`SELECTED FINANCIAL DATA, STOCK PRICE INFORMATION,
`AND ISSUER PURCHASES OF EQUITY SECURITIES
`FINANCIAL HIGHLIGHTS
`
`{In millions, except per share data)
`
`Fiscal Year Ended June 30
`
`2006
`
`2005
`
`2004
`
`2003
`
`2002
`
`$36,835
`9,034
`8,168
`0.75
`0.16
`60,592
`94
`
`7A 1,368
`
`$$
`
`$
`$
`
`$
`S$
`
`$
`§
`
`fN
`
`OM©OORC
`
`
`
`nn
`
`$28,365
`$32,18
`$39,788
`$44,282
`Revenue
`8,272
`9,54
`14,561
`16,472
`Operating income
`5,355
`7,53
`12,254
`12,599
`Net income
`112
`048
`120
`Diluted earnings per share
`cooO
`3.40
`_
`035
`Cash dividends declared per share
`38,652
`49,04
`37,751
`34,161
`Cash and short-term investments
`69,910
`81,73
`70,815
`69,597
`Total assets
`2,722
`2,84
`1,574
`5,823
`7,051
`Long-term obligations
`
`48,115 54,842 1,825 64,91
`
`
`Stockholders’ equity
`40,104
`
`Our common stockis traded on The NASDAQ Stock Market uncer the symbol MSFT. On August 18, 2006, there were 148,993
`ows:
`registered holders of record of our common stock. The high and low common stock prices per share were as fol
`Dec, 31
`Mar, 31
`Quarter Ended
`Sep. 30
`
`June 31
`
`Year
`
`Fiscal year 2005
`Common stock price per share:
`$29.98
`$29.00 $29.98 $26.84 $26.07
`High
`$26.88 $2653 $23.92 $2412 $23.92
`Low
`
`Fiscal year 2006
`Commonstock price per share:
`$27.76 $28.16 $28.15 $27.74 $28.16
`High
`$24.65 $24.30 $26.28 $2151 $2151
`Low
`
`See Note 12 - Stockholders’ Equity of the Notes to Financial Statements for information regarding dividends approved by our
`Board of Directors in fiscal years 2006 and 2005.
`On July 20, 2006, we announced the completion of the repurchase program, approved by our Boarcd of Directors on July 20,
`2004, to buy back up to $30 billion in Microsoft common stock. The repurchases were made using our cash resources. We
`repurchased commonstock in each quarter of fiscal year 2006 asfollows:
`
`Period
`
`duly 1, 2005 - September 30, 2005
`October 1, 2005 - December 31, 2005
`January 1, 2006 - March 31, 2006
`April 1, 2006 - June 30, 2006
`
`Total number of
`shares purchased
`
`114,134,218
`283,112,246
`180,720,830
`175,609,060
`
`Average price
`paid per share
`
`$26.54
`$27.08
`$27.00
`$23.78
`
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`SELECTED FINANCIAL DATA, STOCK PRICE INFORMATION,
`AND ISSUER PURCHASES OF EQUITY SECURITIES (CONTINUED)
`
`Common stock repurchases in the fourth quarter of fiscal year 2006 were as follows:
`
`Period
`
`(a} Total numberof
`shares purchased
`
`(b) Average
`price pald per
`share
`
`(c) Total number of
`shares purchased as
`part of publicly
`announced plans or
`programs
`
`(d) Maximum numberof shares
`{or approximate dollar value}
`of shares that may yet be
`purchased underthe plans or
`programs {in milliens}
`
`38,041,415
`April 1, 2006 - April 30, 2006
`May 1, 2006 - May 31, 2006
`8,618,036
`
`June 1, 2006 - June 30, 2006
`128,949,609
`175,609,060
`
`$27.08
`$24.37
`$22.76
`
`38,041,415
`8,618,036
`128,949,609
`175,609,060
`
`$5,394
`$5,184
`$2,249
`
`On July 20, 2006, we announced that our Board of Directors authorized two new share repurchase programs: a $20 billion
`tender offer which was compisted on August 17, 2006; and authorization for up to an additional $20 billion ongoing share
`repurchase program with an expiration of June 30, 2011. Under the tender offer, we repurchased approximately 155 million
`shares of common stock, or 1.5% of our common shares outstanding, for approximately $3.8 billion at a price per share of
`$24.75.
`On August 18, 2006, we announced that the authorization for the ongoing share repurchase program, previously announced
`on July 20, 2006, had been increased by approximately $16.2 billion. As a result, the companyis authorized to repurchase
`additional shares in an amount up to $36.2 billion through June 30, 2011.
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`Special Note About Forward-Looking Statements
`
`Certain statements in this report, other than purely historical information, including estimates, projections, statements relating
`to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based,
`are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the
`Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are
`nou
`identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,”
`“will,” “would,” “will be,”
`“will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on
`current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to ciffer
`materially from the forward-looking statements. A detailed discussion of these and other risks and uncertainties that could
`cause actual results and events to differ materially from such forward-looking statementsis included in the section entitied Risk
`Factors of this report. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a
`result of new information, future events or otherwise.
`
`BUSINESS DESCRIPTION
`
`GENERAL
`
`Our mission is to enable people and businesses throughout the world to realize their full potential. We work to achieve our
`mission through technology that transforms the way people work, play, and communicate. Since our founding in 1975, we have
`been a leader in this transformation. We develop and market software, services, and solutions that we believe deliver new
`opportunity, convenience, and value to people’s lives. We do business throughout the world and have offices in more than 100
`countries.
`We generate revenue 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, and intelligent devices;
`server applications for distributed computing environments;
`information worker productivity applications; business solution
`applications; high-performance computing applications, and software development tools. We provide consulting and product
`support services, and we train and certify computer system integrators and developers. We sell the Xbox 360 video game
`console and games, PC games, and peripherals. Online offerings and information are delivered through our WindowsLive, Office
`Live, and MSN portals and channels.
`We also research and develop advanced technologies for future software products. We believe that delivering breakthrough
`innovation and high-vaiue solutions through our integrated software piatform is the key to meeting our customers’ needs and to
`our future growth. We believe that over the past few years we have laid the foundation for long-term growth by delivering
`innovative new products, creating opportunities for partners,
`improving customer satisfaction, putting many of our most
`significant
`legal challenges behind us, and improving our internal processes. Our focus is to build on this foundation by
`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. Our research and developmentfacilities are located primarily in Redmond, Washington. We aiso have smailer
`research facilities in other parts of the United States and around the world,
`including, but not limited to, China, Denmark,
`England, india, Ireland, and Israel.
`
`OPERATING SEGMENTS
`
`Our segments provide management with a comprehensive financial view of our key businesses. The segments provide a
`frameworkfor the alignmentof strategies and objectives across the development, sales, marketing, and services organizations,
`and for the timely and rational allocation of development, sales, marketing, and services resources within businesses. The
`segments also help focus strategic planning efforts on key objectives and initiatives across our businesses.
`Due to our integrated business structure, operating costs included in one segment may benefit other segments. Therefore,
`these segments are not designed to measure operating income or loss that is directly related to the products included in each
`segment. Inter-segment cost commissions are estimated by management and used to compensate or charge each segmentfor
`such shared costs and to motivate shared effort. Segments should not be viewed as discrete or easily separable businesses.
`For the fiscal years covered by this filing, our seven segments were: Client; Server and Tools; Information Worker, Microsoft
`Business Solutions; MSN; Mobile and Embedded Devices; and Home and Entertainment. See Note 18 - Segment Information of
`the Notes to Financial Statements for financial information regarding segment reporting. On July 17, 2006, we announced a
`change in our operating segments reflecting the culmination of the business realignment announced in September 2005. These
`changes will be effective for fiscal year 2007; the seven segments discussed in this section are presented in the way we
`internally managed and monitored perfarmance at the business group level in fiscal year 2006, 2005, and 2004.
`
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`BUSINESS DESCRIPTION (CONTINUED)
`
`Client. Client has overall responsibility for the technica! architecture, engineering and product delivery of our Windows product
`family, and is also responsible for our relationships with personal computer manufacturers, including multinational and regional
`original equipment manufacturers (“OEMs”). The segment includes sales and marketing expenses for the Windows client
`operating system and product develapment efforts for the Windows platform. Clent revenue growth is correlated with the
`growth of purchases of personal computers from OEMs that pre-instali versions of Windows operating systems because the
`OEM channel accounts for over 80% of total Client revenue.
`is under development. This development phase
`The next generation of the Windows operating system, Windows Vista,
`represents a major investment that we expect will result in a significantly more manageable and powerful PC operating system
`than previously released by Microsoft. Windows Vista will include advances in security, digital media, user interfaces, and other
`areas that will enhance the user and developer experience.
`
`Products. Windows XP Professional and Home; Media Center Edition; Tablet PC Edition; and other standard Windows
`operating systems.
`
`Competition. Client faces strong competition from well-established companies with differing approaches to the PC market.
`Competing commercial software products,
`including variants of Unix, are supplied by competitors such as Apple Computer,
`Hewlett-Packard,
`IBM, and Sun Microsystems. The Linux operating system, which is also cerived from Unix and is available
`without payment under a General Public License, has gained some acceptance as competitive pressures lead PC OEMs to
`reduce costs. The Windows operating system also faces competition from alternative platforms and new devices that may
`reduce consumer demand for traditional personal computers. Competitors such as Mozilla offer software that competes with
`the Internet Explorer Web browsing capabilities of Windows products. Apple Computer, Real Networks, and others compete with
`Windows Media Player. Our operating system products compete effectively by celivering innovative software, a familiar, easy-to-
`use interface, compatibility with a broad range of hardware and software applications, and the largest support network for any
`operating system.
`
`including Windows Server operating
`Server and Tools. Server and Tools develops and markets Windows Server products,
`systems. Windows Server products are integrated server infrastructure software that are designed to support end-to-end
`software applications and tools built on the Windows Server 2003 operating system. Windows Server products include the
`server platform, operations, security, applications and collaboration software. The segment also bullds standalone and software
`developmentlifecycle toois for software architects, developers, testers and project managers.
`Weoffer a broad range of consulting services and provide product support services. The segment also providestraining and
`certification to developers and information technology professionals about our Server and PC platform products. Server and
`Tools also includes the Enterprise Partner Group, which is responsible for sales, partner management and partner programs for
`medium and large organizations; and the Public Sector sales and marketing organization.
`Approximately half of Server revenue comes from multi-year licensing agreements, one third is purchased through fully
`packaged product and transactional volume licensing programs, and approximately 10% comes from licenses sold to OEMs.
`Approximately 15% of revenue comesfrom consulting and product support services.
`
`Products and Services. Windows Server operating system; Microsoft SQL Server, Exchange Server, Microsoft Consulting
`Services; product support services; Visual Studio; System Center products; Forefront security family of products; and Biz Talk
`Server, among others.
`
`Competition. Our server operating system products face intense competition fram a wide variety of server operating systems
`and server applications, offered by companies with a variety of market approaches. Vertically integrated computer
`manufacturers such as Hewlett-Packard,
`IBM, and Sun Microsystems offer their own variant of Unix preinstalled on server
`hardware. Nearly all computer manufacturers offer server hardware for the Linux operating system. IBM’s endorsement of Linux
`has aided the acceptance of Linux as an alternative ta Unix and Windowsserver operating systems. Linux’s competitive pasition
`has also benefited from the large number of compatible applications now produced by many leading commercial software
`developers and non-commercial software developers. A number of companies supply versions of Linux, including Novell and
`Red Hat.
`We compete in the business of providing enterprise-wide computing solutions with several companies that provide solutions
`and middleware technology platforms. IBM and Sun Microsystems lead a group of companies focused on the Java 2 Platform
`Enterprise Edition J2EE). Commercial software developers that provide competing server applications for PC-based distributed
`client/server environments include CA, IBM, and Oracle.
`
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`Numerous commercial software vendors offer competing commercial software applications for connectivity (both Internet
`and intranet), security, hosting, and s-ousiness servers. System Center competes with BMC, CA, and IBM in the Managementof
`IT infrastructures, while Forefront Security competes with McAfee, Symantec, and Trend Micro in protecting both client and
`server applications. In addition,
`IBM has a large installed base of Lotus Notes and cc:Mail, both of which compete with our
`collaboration and e-mail products. Non-commercial software products, including the widely-deployed Apache Web Server, also
`compete with our solutions. Our products for software developers compete against offerings from Adobe, BEA Systems, Borland,
`IBM, Oracle, Sun Microsystems, and other companies. We believe that our server products provide customers with advantages
`in innovation, performance, total costs of ownership, and productivity, by delivering superior applications development tools and
`development environment, compatibility with a broad base of hardware and software applications, security, and manageability.
`
`Information Worker consists of the Microsoft Office system of programs, services, and software solutions
`Information Worker.
`designed to increase personal,
`team, and organization productivity. The Office system offerings generate over 85% of
`Information Worker revenue. Revenue growth depends on our ability to add value to the core Office product set and to continue
`to expand our product offerings in other information worker areas such as enterprise content management, collaboration,
`unified messaging, and business intelligence.
`Approximately 40% of Information Worker revenue has come from multi-year license agreements with large enterprises.
`Revenues from these licenses generally depend upon the number of information workers in a licensed enterprise. Revenue
`from this category of agreements is therefore relatively independent of the numberof PCs sold in a given year. Consequently,
`general employment
`levels, particularly in North America and Europe, significantly affect
`Information Worker
`revenue.
`Approximately 40% of Information Worker revenue comes from new licenses acquired through fully packaged product and
`volume licensing programs to individual consumers and enterprises of all sizes. Most of this revenue is sensitive to information
`technology budgets, which often depend on general economic conditions. The remaining approximately 20% of Information
`Worker revenue comes from licenses to OEMs for new PCs and is affected by the level of PC shipments. The next wave of our
`flagship product, the 2007 Microsoft Office system, is currently under development.
`
`Products. Microsoft Office; Microsoft Project; Microsoft Visio; SharePoint Portal Server CAL; Microsoft Live Meeting; One Note;
`and Office Communication Server.
`
`Competition. Competitors to the Microsoft Office system include many sof