About Microsoft

To our shareholders, customers, partners and employees:

Fiscal 2008 was a successful year for Microsoft that saw the company deliver outstanding financial results, introduce significant innovations across the breadth of our product portfolio, and make key investments that position the company for strong future growth.

Thanks to the continued success of our core Windows and Office businesses, and double-digit growth in all of our business groups, revenue jumped to $60.4 billion in fiscal 2008, an increase of 18 percent compared with the previous fiscal year. Operating income grew by 21 percent, reaching $22.5 billion for the year. Earnings per share reached $1.87. We returned $16.5 billion to shareholders through stock buybacks and dividends.

Throughout fiscal 2008 we saw strong adoption of Windows Vista, which has sold more than 180 million licenses, and the 2007 Microsoft Office system, which has sold more than 120 million licenses. Microsoft Office SharePoint Server 2007 passed the 100 million mark for licenses sold and recorded more than $1 billion in revenue.

During the year, we brought a wide range of new innovations to market. We launched Microsoft Windows Server 2008 and Microsoft Visual Studio 2008. We released Windows Vista Service Pack 1 and introduced advances in our search and online advertising technologies. We rolled out Surface--a groundbreaking new device that transforms a tabletop into a computing surface that enables people to interact with digital content using gestures, touch, and physical objects--in a number of retail and hotel locations. We unveiled new products and services for the healthcare industry. We announced important changes to our technology and business practices to increase the openness of our products and drive greater interoperability and choice for developers, partners, customers, and competitors.

We also announced important strategic acquisitions to strengthen our offerings in key markets and add to our broad innovation portfolio. The acquisitions of AdECN, Rapt, and YaData, for example, bring leading-edge capabilities for advertisers and publishers to our advertising platform. With the acquisitions of Multimap, Fast Search & Transfer, and Farecast, we added important new technologies to our consumer and enterprise search services. As part of our mobile computing initiatives, we acquired Musiwave, a leading provider of mobile music entertainment services; Danger, which provides software and services that power consumer handsets; and MobiComp, a pioneer in mobile data backup and restoration. By acquiring Calista Technologies and Kidaro, we continue to position ourselves as a leader in the critical market for virtualization.

In February 2008, we submitted a proposal to acquire Yahoo!. The proposed transaction was designed to accelerate our strategy in online search and advertising. After careful consideration, we determined that the economics of the deal terms demanded by Yahoo! and the need to move forward quickly in partnership on regulatory review and to integrate the two companies meant that the deal was no longer in the best interest of our shareholders. Although we withdrew our offer, we remain committed to being a leader in online search and advertising--we have the right people in place and we continue to make investments that will enable us to succeed.

Transformation Through Innovation

At the heart of our success lies our commitment to innovation. No company in our industry invests more in research and development or has the same depth and breadth of talented researchers, scientists, and engineers working across the globe to create new technology breakthroughs.

In 2008, we invested $8.2 billion in research and development, an increase of almost 15 percent compared with fiscal 2007. During the year, we opened a new software development center in Vancouver, British Columbia; established