To say FY97 was a difficult period for Autodesk and its partners would be an understatement. Europe, our largest market last year and one that had previously shown steady growth, entered an economic slowdown. The strength of the US dollar hurt us on foreign currency exchange, and we just didn't achieve the sales volumes expected for AutoCAD® Release 13. For the first time in company history, Autodesk experienced a decline in revenue and loss of some relative market share.

But FY97 was also a very exciting business year. We shipped more than 20 new products, carried forward our market group diversification strategy, and pioneered Internet-based design technology. We also entered the final testing stages of what promises to be the fastest, most compelling, and highest quality AutoCAD ever developed—AutoCAD Release 14.

In my letter this year, I want to speak frankly with you about both the good and the bad of FY97. I'll start by reviewing our financial performance.

FINANCIAL SUMMARY

Net revenues for the fiscal year ended January 31, 1997, were $497 million, down approximately 7 percent from the previous fiscal year. Net revenues by geography were down 11 percent in Europe, down 10 percent in the Americas, and up approximately 5 percent in Asia/Pacific. Changes in foreign currency exchange rates negatively impacted revenues for the year by more than $17 million.

While the majority of this slowdown was AutoCAD related, we continued to grow the installed base by 15 percent and maintained AutoCAD upgrade revenue at just over 9 percent of total revenues. We shipped more than 200,000 new copies of AutoCAD for the year, bringing the installed base to more than 1.6 million seats.

Total non-AutoCAD revenues were up 28 percent over the previous year. We grew the installed base for our second-highest revenue generator, AutoCAD LT®, by 55 percent to 450,000 units. Other year-end installed base numbers include 25,000 units for Mechanical Desktop™ software—more than five times its nearest competitor—and 26,000 units for 3D Studio MAX®. Total Kinetix® revenues grew only 11 percent; however, revenues for 3D Studio® and 3D Studio MAX software posted sequential growth for every quarter and finished the year up 33 percent.

Net income for FY97 was $42 million, or $0.88 per share, compared to $88 million, or $1.76 per share, in fiscal year 1996. FY97 results include onetime charges of approximately $0.10 per share related to strategic acquisitions made during the year.

The balance sheet for FY97 year-end remained very strong as reflected by the $14 million increase in cash and marketable securities from a year ago to $286 million, despite spending $67 million repurchasing Autodesk shares and $10 million on acquisitions. Both receivable and inventory levels improved. In addition, the increased linearity of our business coupled with strong cash collections have led to days sales outstanding lower than they have been in more than five years.

A YEAR OF CHALLENGES

Five years ago, we made a decision to rearchitect AutoCAD software to take advantage of the performance potential of object-oriented technology. We made the right decision. That strategy has moved us years ahead of the competition, but it also presented key challenges—and not just from an engineering standpoint. To take advantage of AutoCAD Release 13 and the 32-bit operating system it is designed for, most of our customers had to upgrade their hardware and operating systems. Because object-oriented file formats are structured differently from procedural formats and require different application programming interfaces (APIs), our independent developers also faced some substantial reengineering challenges for their add-on products.

These key challenges have largely been met during the last year. The power and capacity of Pentium® systems, and their declining costs, have taken care of the hardware dilemma, and the Windows NT® and Windows® 95 platforms are firmly established as the operating systems of choice. With AutoCAD Release 13 c4 we achieved Windows 95 compliance with a high-quality product. And developers began delivering impressive object-oriented add-on applications.

So we entered FY97 with high hopes for AutoCAD Release 13 in the last year of its product cycle. But our customers still didn't upgrade in the numbers we expected. To learn firsthand from our AutoCAD Release 12 users why so many were choosing not to buy AutoCAD Release 13, every member of the executive staff and a number of employees conducted a phone survey. Our customers told us that the initial negative perception some users had of AutoCAD Release 13 during its first year on the market discouraged others. In fact, due to the early perception problems, almost 30 percent of poll respondents had never even seen a Release 13 demo. Finally, even though AutoCAD Release 13 was the 13th release of AutoCAD software, it was the first release of our new object-oriented architecture, and it behaved like a release-1 product.

We paid attention to what our survey participants said about their quality expectations. (I'll have more to say about that later when I discuss the prerelease testing we've been conducting with AutoCAD Release 14.) But we also received encouraging news from our users. They told us that they still believe in our products and in our company. They'll upgrade from Release 12, they said, when they have a compelling reason to do so. They'll have that reason with AutoCAD Release 14.

MAINTAINING FOCUS

Even though FY97 was a tough financial year for the company, we took significant steps to support our dealers and developers. Lower product inventories and higher specialization demands are the wave of the future, and we helped our channel partners prepare by stepping up our vertical-market training seminars around the world and by continuing to move closer to a just-in-time approach to product inventories.

We're focusing on the Internet as the technology of choice for providing more timely interactivity among our channel partners, developers, and customers. We launched the Autodesk® Developer Network, an online product marketing and technical support extranet that enables our virtual corporation partners to tap into a controlled-access area of our internal communications network. We're taking a similar approach with customer service by developing online product registration and technical support—a key charter of our newly formed Customer Satisfaction Center.

We also sharpened our focus by moving away from non-Windows® platforms and concentrating our product-engineering effort on Microsoft® Windows NT- and Windows 95-based products. These are the PC platforms of choice, and we gain product integrity and development momentum by focusing on them.

We built up our market groups, adding staff in key areas so that we could continue our product diversification strategy. We'll see the results of these efforts throughout FY98 with the release of several new products.

And we shipped a number of vertical-market products in FY97. The GIS Market Group released AutoCAD Map™, the first vertical-market "flavor" of AutoCAD software. The GIS team will follow up in the first half of FY98 with a high-level mapping and GIS analysis product—Autodesk World™. Both these products, combined with Autodesk MapGuide™, the group's Internet-based server and client software, make this a market group to watch in the coming year. The worldwide mapping/GIS market is growing and the Autodesk GIS Market Group is poised to provide total solutions.

The Mechanical Market Group showed some real "velocity"—its theme for FY97—by launching Mechanical Desktop software and then delivering two upgrades in its first 10 months. Mechanical Desktop has received strong praise from industry-leading companies for its powerful 3D functionality, best-of-class design-through-manufacturing solutions, and low price point. The MCAD team leveraged its third-party development partnership with 15 key mechanical-design firms—the Mechanical Applications Initiative—to land volume sales contracts with such internationally known firms as ABB, Hughes Space and Communications Group, Philips, Siemens, and Wisne. The MCAD Market Group will also release a mechanical-flavored AutoCAD during FY98.

We complemented our Autodesk® Mechanical Library series with new subscription products from the AEC Market Group—PlantSpec™ and DesignBlocks®. These CD-ROM subscriptions contain hundreds of thousands of parts from leading manufacturers in the mechanical, process and power, and building/construction industries. We also offered a Web-based subscription option, PartSpec® Online, this year.

Our Data Management Market Group continues to study the opportunities in this market. We delivered a successful WorkCenter® product two years ago, but our customers' workgroup-size demands have outpaced our original technology. We took important steps to address this customer need in FY97 by entering a joint-development agreement with Documentum, Inc. Utilizing Documentum's Enterprise Document Management System and middleware technology, future releases of WorkCenter will have the flexibility to support larger design workgroups and to provide enhanced workflow capabilities. We also shipped versions of WorkCenter for Windows 95 and Windows NT this year, and we will be releasing WorkCenter® for the Web in Q2—enabling design teams to use both company intranets and external Internet sites to share controlled-access AutoCAD DWG files.

FY97 also marked the debut of a low-end product that has already made quite an impression on the retail market. The Advanced Product Group's Picture This Home!™ Kitchen is the first software title to earn the Good Housekeeping Seal. Featuring point-and-click ease-of-use and photo-quality graphics, this consumer-design product targets impulse shoppers at discount retail outlets. We plan more releases in the Picture This Home! series for FY98.

Kinetix, now in its second year as a separate Autodesk business unit, will build on its early successes with 3D Studio MAX in the multimedia film, video, and special-effects market even as it targets the AEC design visualization space in FY98. And in the first quarter of the new fiscal year, Kinetix will ship Hyperwire™ software, a 3D authoring tool for the Web.

And, finally, our AEC Market Group is strategically positioned to provide next-generation solutions in the AEC design space as a result of our March 1997 merger with Softdesk. More than any other independent AutoCAD developer, Softdesk has optimized the object-oriented technology introduced with AutoCAD Release 13 by including intelligent objects in its products. Its software enables designers and drafters to design doors and windows, for example, that "remember" their door and window properties, no matter where they are moved within a drawing, which means higher productivity for our customers. The new AEC Market Group will ship key Softdesk® products simultaneously with shipment of AutoCAD Release 14 in the second quarter of FY98.

BUILDING BEYOND FY97

During difficult financial periods, companies often show their true character. In their rush to protect the bottom line for the short term, some companies lose sight of long-term strategies—an unwise move, in my opinion. In our company, we had our share of spirited debates during executive staff meetings about whether to modify our short-term strategies, but I'm proud to say that no one argued against investing in Autodesk's long-term growth.

We chose not to introduce a hiring freeze, for example, because we needed to invest in our market groups to develop the kind of products that will help us lead the field in FY98 and beyond. However, during this time I did institute a policy that required my personal approval for each new position. Nor did we scale back our acquisition plans. During Q1, we acquired Creative Imaging Technologies. That acquisition led to the release of Picture This Home! Kitchen by our Advanced Products Group and our entry into the consumer home-decorating and home-remodeling markets. The image-analysis technology we acquired along with our purchase of Teleos Research will strengthen future product-development efforts from our Advanced Products Group. Our acquisition of Argus Technologies during the third quarter enabled the GIS Market Group to offer Internet-based solutions with its Autodesk MapGuide products.

We are making the Internet a large part of our development strategy because we think it's inevitable that design teams will migrate to the Net during the next several years. Design is no longer an isolated act. It's a collaborative process involving not only internal team members but customers and contractors frequently located in other cities, states, or even countries. We see a great future for us in bringing design teams together on the Internet. During FY97 we established a leadership position for Internet-enabled CAD by introducing the AutoCAD® Release 13 Internet Publishing Kit. Using this technology, AutoCAD users can convert DWG files to our new drawing Web format (DWF) and post them to Web sites. We have built this capability into AutoCAD Release 14. Our Autodesk MapGuide product brings GIS applications to the Web, and we are pioneering the exchange of vector-based digital content on the Web with PartSpec Online.

In addition to making more of our products Web-capable, we will use the Internet more and more for customer service and technical product support.

IT'S ALL ABOUT EXECUTION

Not only did we invest in acquisitions, we also moved ahead with product development across all markets. In FY98 several of our market group teams will introduce second- and third-generation product releases, but none will be more anticipated than the next release from our AutoCAD Market Group. By the time you read this letter, AutoCAD Release 14 software will be in customers' hands. That is if—and only if—the AutoCAD Release 14 team achieves its quality and performance objectives. Judging by the reports we've received from alpha and beta testers, those targets will not only be met—they'll be exceeded.

Our users helped us focus on the theme for this release—performance. They want software that will allow them to produce a maximum number of drawings in a minimum amount of time. Our alpha and beta testers reported early on that the performance is there—faster than even Release 12 for DOS.

But we had another overriding theme for Release 14, and users helped us maintain our focus on this as well. We took steps to build quality in from the very beginning. We began by specifying our product through market research and by collecting customer feedback. Programmers reviewed this data, designed feature areas in detail, then proposed their work to a review board that included quality assurance (QA) testing and marketing staff. The team made sure coding for the proposed features could be completed in a high-quality fashion and tested offline by QA before a feature got checked in to Release 14. In addition to QA staff testing, we ran thousands of automated tests on every build.

We also brought in a corps of Autodesk application engineers and customer "power users" of AutoCAD from all around the world for four separate testing sessions. Their charter was to try to break the program by recreating the thorniest production problems they'd encountered in the field. Programmers and QA team members sat beside them recording their feedback on the highs and lows of prerelease features and performance.

We launched an alpha testing program that in five months grew from 30 testers to more than 1,000. And then in our final testing stage, we drew upon the design talent of more than 16,000 beta testers to polish our product. We are very pleased with the results. We believe AutoCAD Release 14 will restore the confidence of our user base and win new volume accounts.

We are using this build-the-quality-in approach in developing all of our products. And our customers will continue to be a vital part of our development teams.

VISION, RESOLVE, PERFORMANCE —THE RELAUNCHING OF AUTODESK

I want to conclude by talking with you about some intangibles. We made several decisions during this year that can't be easily quantified, but they were decisions that will help return us to a leadership and revenue growth position in FY98.

At the executive staff level, we appointed Eric Herr president and chief operating officer. The sales geographies, the majority of the market groups, and Operations now report to Eric. That has allowed me to devote more of my time to overseeing product development and quality standards and to carrying out long-term growth strategies.

Management and employees are sharing the responsibility for this year's disappointing results by forgoing performance bonuses and delaying salary action until mid-FY98. While this decision helps lower costs, another all-hands effort promises to have an even more profound impact on the company's bottom line. Every employee is taking part in a campaign to return Autodesk to revenue growth and market leadership. We're basing this campaign on five carefully developed key initiatives, and we're calling this effort the "relaunching" of Autodesk.

We have set the performance bar very high with this all-hands campaign, but as I reflect on the past year—in many ways, the most difficult in Autodesk history—I feel confident that we will meet and exceed our own expectations. I feel that way because of the spirit and determination I see in every Autodesk employee. We've been battered a bit, but we are by no means down. Our collective resolve will put Autodesk back on track in FY98.

I also take heart from the loyalty of our stockholders. I want to express my sincere appreciation to those of you who have invested for the long term, who have stood by us during this most trying year, and who have encouraged us to follow our long-term strategies. Indeed we have stayed on course, and we believe you will be rewarded for your faith in Autodesk in FY98 and beyond.

I'll close by saying that the proof is in the performance. Our focus in the coming year will be on just that. All of the hard work that went into product development and into sales and marketing over the past year will provide a great foundation for our future. I'm excited by the many opportunities ahead.

To all of our stockholders, our business partners, our employees—and our customers—I extend my personal thanks.

Carol Bartz, Chief Executive Officer and Chairman of the Board

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