Microsoft_2000 Annual Report

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Nov 2, 2013 (3 years and 7 months ago)

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Microsoft_2000 Annual Report

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Table of Contents




Letter to Shareholders




.Net Information




Windows 2000 Information




.NET Partner
Quotes




Financial Highlights




Income Statements




Management's Discussion and Analysis




Cash Flow Statements




Balance Sheets




Stockholders' Equity Statements




Notes to Financial Statements




Quarterly Information




Rep
ort of Management




Report of Independent Auditors




Directors and Officers




Worldwide Marketing Locations




Investor Relations
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Lett
er to Shareholders





In 1975, Microsoft had three employees, $16,000 in revenue and a single software product


a
version of the BASIC computer language that ran the first personal computer, the Altair 8800.

In 2000, as we mark our 25th year, Microsoft i
s the world’s largest software company, with
nearly 40,000 employees, $23 billion in revenue, and a wide range of powerful software and
Internet products, including the most popular PC operating system, productivity software and
Internet network.

It’s been

truly amazing to be at the focal point of two revolutions that have swept the world
since Microsoft’s modest beginnings: a PC revolution that has made powerful and affordable
computing available to hundreds of millions of people around the globe, and an I
nternet revolution
that is fundamentally changing how people communicate, learn and share information, and the
way entire industries operate.

At the core of these remarkable advances is software


the magic that makes this technology
useful. At Microsoft,

software is our passion, the reason we’re excited to come to work every
morning. As we look to the future, our commitment to advance the frontiers of software
technology offers extraordinary opportunities for consumers, businesses and our company.

With th
e release of Windows
®

2000, the continuing strength of Microsoft
®

Office, our
expanding enterprise server family and the surging popularity of MSN
®
, we have strong core
businesses. At the same time, we are making significant strategic investments for the
future in
key growth areas, including wireless technologies, digital devices, games, TV, small business
and, most important, the new Microsoft .NET platform. Over the next year, we will invest more
than $4 billion in research and development to advance our

core businesses, build on our
strategic investments and deliver on the promise of our most important software initiative ever


Microsoft .NET.



Microsoft .NET


Just as our development of PC operating systems and other software technologies have driven
g
rowth in the industry over the past quarter century, today we are working to enable a new era of
empowerment for computer users, and growth opportunities for both businesses and software
developers. Microsoft .NET comprises the software and services that
will power the Next
Generation Internet.

As anyone who has used a PC knows, today’s Internet experience can be fun, exciting and
informative. It also can be confusing and difficult. For example, Web browsing, content authoring
and editing, e
-
mail, calend
aring and contacts each require separate applications that have widely
varying functionality and compatibility. Communicating between devices such as PCs, mobile
phones and handheld devices is challenging at best. Meanwhile, information on the Internet
c
ontinues to exist on “digital islands” of independent Web sites. This information is easy to
browse, but difficult to edit or manipulate in any useful way. There is enormous benefit and
opportunity in linking these isolated islands of data, services and
devices in ways that will enable
people and businesses to communicate and collaborate more easily. This is where Microsoft
.NET comes into play, enabling easier, more personalized and more productive Internet
experiences by harnessing constellations of sm
art devices and Web sites with advanced software
based on open Internet standards and protocols, including XML. In addition, Microsoft .NET will
offer computer users a unified interface that adapts to whatever they are doing, wherever they
are, and is dev
ice
-
independent


a kind of “universal canvas” for the Digital Age.

Microsoft .NET will create immense opportunity for hundreds of thousands of developers and
industry partners, by providing the tools to build a new generation of truly distributed Web
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ser
vices that will transform the Internet and every other aspect of computing. Microsoft .NET will
revolutionize computing and communications in the first decade of the 21st century, by being the
first platform that takes full advantage of both. Microsoft .
NET will take several years to come to
full fruition, but we are tremendously excited about the potential.



The Foundations of Microsoft .NET



Microsoft .NET will build extensively on Microsoft’s current core businesses, including the
Windows family of d
esktop and server operating systems, enterprise server applications,
Microsoft Office and MSN, each of which is performing strongly today. Windows 2000 has met
with strong customer adoption and highly favorable reviews among IT managers, office users and
industry analysts, making it the most powerful business operating system ever released by
Microsoft. Underscoring its reliability and the value of its new features, General Motors, Royal
Dutch/Shell, Xerox Corp., and leading PC manufacturers


such as Com
paq Computer Corp.,
Dell Computer Corp., Hewlett
-
Packard Co., IBM Corp., and Toshiba Corp.


are all deploying
Windows 2000.

Windows Me, the latest version of the Windows operating system designed specifically for
home users, released in September, provide
s consumers with an improved user and Internet
experience, enhanced home
-
based networking features and compelling new digital media tools.

Today, Windows 2000 servers are powering the World Wide Web. A majority of the top
Internet retail sites, business
-
t
o
-
business Web sites and secure Web sites are running on
Windows 2000 Server or Windows 2000 Advanced Server, and more Fortune 500 sites are
running on Windows 2000 technology than any other technology. Windows 2000 Datacenter
Server, launched in Septembe
r 2000, will provide even more power and reliability for high
-
traffic
networks.

If Windows 2000 is the foundation of Microsoft’s .NET strategy, our .NET Enterprise Server
products are the cornerstones. In the year ahead we are launching seven new and upda
ted
enterprise server products. Microsoft’s range of server applications, combined with the power
and reliability of Windows 2000, offer versatility and affordability unrivaled by any of our
competitors. They also represent significant new opportunities
to enhance Microsoft’s revenue
stream.

Microsoft Office revenue was strong as major enterprise accounts continued to adopt the
world’s most popular productivity suite. The growing deployment of Windows 2000 on the
desktop is expected to further stimulate
sales of Office 2000. New technologies that integrate
Web services directly into the Office user experience, as well as tools that enable users to more
efficiently store, access and analyze crucial business information, are being developed for future
vers
ions of Microsoft Office. Office.NET will offer a powerful productivity and communications
service designed to meet the needs of 21st century knowledge workers. Use of Microsoft’s
Visio
®

and Microsoft Project applications is also continuing to grow and e
mpower knowledge
workers in important new ways.

Fiscal year 2000 was a defining year for MSN. In June, the MSN network of Internet services
became the #1 worldwide Internet destination for consumers. In the United States, MSN grew
significantly faster th
an Yahoo! or AOL. With MSN services available in 33 international markets
and 17 languages, it is the #1 site among consumers in many countries around the world. Our
MSN Internet Access business grew by more than 50 percent. Key to this remarkable growt
h is
MSN best
-
of
-
breed services, including MSN Hotmail
®
, the world’s largest e
-
mail system with
more than 67 million active accounts; MSN Messenger Service, our instant messaging service
with more than 18 million users; MSN Search, the second most popular
search service on the
Web; and MSN eShop, which experienced a significant increase in holiday traffic last year.


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Investments in Tomorrow



One of the keys to Microsoft’s success over our first 25 years is the long
-
term view we have taken
toward the devel
opment of technologies such as Windows, Office, MSN and other products. In
the coming year, we will continue to focus on promising new technological advances in a number
of key fields.


Television

Digital and enhanced television products and services repr
esent a significant growth opportunity
for Microsoft and one that will give consumers more choice and control over when and what they
watch, richer participation with TV programming, and convenient access to the Internet and family
and friends. Microsoft
is investing in three areas:



>

Working with television service operators


including AT&T in the United States, UPC in
Europe, Rogers in Canada, and Towngas/iCare in Hong Kong


to deploy enhanced TV to
more than 15 million subscribers via the Microsoft
platform;


>

Joining with DIRECTV, Thomson, and Sony to produce UltimateTV, a one
-
box, one
-
service
enhanced TV solution that will include two digital tuners to enable background recording, and
a 40
-
gigabyte hard drive capable of recording 35 hours of TV pr
ogramming.


>

Continuing to grow the WebTV
®

service, which now has more than 1 million subscribers who
can participate in new ways with their favorite TV shows, vote in live polls, receive up
-
to
-
the
-
minute news coverage, and send and receive e
-
mail using t
heir TV set at home.


Games

In the last few years, Microsoft has emerged as one of the top PC games publishers in the United
States. In calendar 1999, Microsoft had two of the top five best sellers: Flight Simulator and Age
of Empires
®
. During the 1999 h
oliday season, we were the only games publisher with three titles
on the Top 10 list. Building on this success,
Microsoft is investing significant resources to
develop Xbox™, which will compete with the Sony PlayStation and game consoles by Sega and
Nintendo in a multi
-
billion
-
dollar industry. The hardware design for Xbox is already complete, and
Microsoft has 30 g
ame titles for it under development in
-
house, with more in the works by third
-
party developers. The fall 2001 launch of Xbox will be Microsoft’s biggest ever


larger even than
Windows 95.


Wireless

Microsoft will invest substantially in the coming year t
o enable truly intelligent communications
that fluidly traverse the boundaries of work, individual and family time, while offering ways to
control the tremendous volume of available information. Alliances are key to our wireless
strategy. For example, we

are working with AT&T and British Telecommunications on mobile
applications for next
-
generation data networks; with NTT DoCoMo of Tokyo to develop wireless
portals; and with Ericsson to create end
-
to
-
end solutions and services for the wireless Internet.

O
ne of the biggest opportunities is working with network operators and carriers to empower
their service platforms with Microsoft’s existing and emerging technologies. The building blocks
of .NET will further enhance the types of services we will be able t
o provide. Microsoft is
developing platforms and applications for a variety of mobile handheld devices, including
cellular/mobile phones, Pocket PCs and smart phones. These devices will offer both voice and
rich data capabilities, including true HTML Web

browsing on color displays. Our research in
smart cards, location
-
based services, and speech technologies will also have important
applications in the wireless arena.

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Small Business

A great opportunity exists for Microsoft to help small businesses incr
ease productivity and take
advantage of the Internet to connect in new ways with customers, industry partners, and
suppliers. Today, small businesses represent nearly 60 percent of the global economy. Yet their
investments in software are far smaller per

desktop than larger enterprises, even as they are
being increasingly impacted by the digital economy.

The emergence of the Internet and .NET services will make technology more accessible and
relevant to small businesses than ever before. By providing com
plete business solutions that
include productivity, customer management and collaboration software, as well as technologies to
power the specific needs of small
-
business operations and e
-
commerce, Microsoft can enable
small businesses to better use technol
ogy to their business advantage. Over the next four years,
technology spending by small businesses is forecast to increase by more than $50 billion. With
more than 1 million registered users, bCentral™, Microsoft’s Web
-
based small
-
business portal is
alre
ady #1 in terms of reach. Over the next year, bCentral will deliver a number of new Web
services, as well as launch in five additional countries. We will also be launching a new version
of the leading small
-
business server suite, Small Business Server 20
00.


Building the Future Together


In partnership with thousands of other technology companies that share our vision of high
-
performance, affordable computing, Microsoft has helped build a high
-
tech industry that is thriving
on innovation and competition,
and driving growth in the U.S. economy. That is one of the
reasons why we believe the appellate courts will rule in Microsoft’s favor in the antitrust lawsuit
and uphold the well
-
established legal precedent that U.S. antitrust law should encourage, not
di
scourage, firms to improve their products rapidly to meet customer needs. We also believe the
appellate courts will recognize that the district court’s order to break up Microsoft and impose
crippling regulations reached far beyond the facts of the case,
and would lead to less innovation,
fewer choices and higher prices.

Finally, on the occasion of Microsoft’s 25th anniversary, we would like to take a moment to
acknowledge the passionate, smart, dedicated employees who have helped make Microsoft the
global

leader in software, as well as our millions of shareholders, thousands of business partners,
and hundreds of millions of customers around the world who have enabled the company to
succeed over the years. The future is filled with amazing possibilities an
d opportunities, and our
passion for improving people’s lives through great software will allow us to contribute even more
than in our first 25 years.














Bill Gates

Chairman and Chief Software Architect

Steven A. Ballmer

President and Chief Ex
ecutive Officer

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A wide range of .NET experiences will open the door to significant new benefits for consumers
and business users, as well as revenue opportunities for Microsoft. These include:


Windows.NET


The next generation of Windows will be desig
ned to put users in control of their digital information
through customized applications and services created by Microsoft and a wide range of third
-
party providers.



MSN.NET


Will enable consumers to create a single digital identity, and use smart servic
es to ensure
consistent, seamless and safe access to information, entertainment and people any time, any
place and on any device.



Subscription Services


Building on the depth of our experience creating software for personal use, these subscription
servic
es will offer many of the benefits of today’s desktop applications with the flexibility,
integration and “roaming” support of the new .NET family of user experiences.



Office.NET


Will include a new natural user interface, a new architecture based on smar
t clients, and services
to provide rich functionality and performance and universal collaboration services.



bCentral.NET


Our small
-
business Web services will be built on .NET infrastructure and be greatly expanded to
deliver commerce and collaboration s
olutions as well as business automation services such as
customer lead
-
tracking.



Visual Studio.NET


An XML
-
based programming model and rapid application development tool that will enable the
easy delivery of highly distributed programmable services runni
ng across stand
-
alone machines,
corporate data centers and the Internet.

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Microsoft’s lineup of new enterprise server products includes:


Microsoft SQL Server™ 2000

The newest version of Microsoft’s database and analysis server enables customers to rapidly
build scalable e
-
commerce, line
-
of
-
business and data warehousing solutions. SQL Server 2000
is fully Web
-
enabled, with end
-
to
-
end suppor
t for XML and a new, integrated data
-
mining engine.



Microsoft Exchange 2000 Server

The latest version of Microsoft’s messaging and collaboration server, designed to meet the needs
of businesses of all sizes, provides a single infrastructure and user mode
l for working with
messages, documents and applications to increase knowledge worker productivity.



BizTalk™ Server 2000

BizTalk Server’s document routing, transformation, and tracking infrastructure enables companies
to integrate, manage and automate business processes by exchanging business documents,
such as purchase orders and invoices, between appli
cations within, or across, organizational
boundaries.



Application Center 2000

Application Center 2000 enables organizations to use off
-
the
-
shelf PC servers, rather than
expensive proprietary hardware, to manage Web applications across multiple servers by

simplifying the tasks involved in software scaling, adding new servers, and deploying and
managing distributed applications. With software scaling there is no single point of failure, and
capacity can be added economically and as needed.



Host Integrati
on Server 2000

The follow
-
on release to SNA Server extends Windows to other systems by providing application,
data, and network integration that enables businesses to preserve their investments in existing
mainframe, AS/400 and Unix networks, applications
and databases.



Commerce Server 2000

Commerce Server 2000 provides the infrastructure that enables organizations to build an
effective online business. User profiling and management, product and service management,
transaction processing, and targeted ma
rketing and merchandising are all integrated to create a
comprehensive, customizable system.



Internet Security and Acceleration Server 2000


By combining enterprise firewall and high
-
performance Web cache functions, Microsoft Internet
Security and Accele
ration Server delivers secure, fast, manageable Internet connectivity.

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“Microsoft .NET really brings to the Web what we’ve been missing, and that’s the ability to drive
greater consistency and simplicity. Compaq’s full range of products and services, co
upled with
our longstanding relationship with Microsoft, puts us in a unique position to take .NET to market.”


Michael D. Capellas, President and CEO, Compaq Computer Corp.



“Microsoft’s vision for Microsoft .NET is a whole new level of capability, inte
raction and
customization in the user experience


it will really leverage the power of the Internet.”


Michael Dell, CEO, Dell Computer Corp.



“When Qwest looks at leveraging Microsoft .NET, what we have in our minds eye is to change the
way people acc
ess software, not just from where they are but from the devices they use, from the
ease of use, from the ability to write applications in a more efficient way and distribute them more
efficiently. I think that has a profound effect on how software is used

as an enabling technology.
Qwest sees itself helping its clients change the way they do business by helping them understand
the power of this new technology.”


Joseph P. Nacchio, Chairman and CEO, Qwest



“Verio shares Microsoft’s vision of .NET, that
businesses want to have a complete package that
allows them to integrate applications, share data and compete effectively in this new online
economy. First, we’ll roll out the Microsoft .NET Passport service. This will allow us to help
attract consumers
and customers to our business Web sites. In the future, we see a lot of
excitement in the collaboration tools, messaging services and commerce services that Microsoft
plans to bring to the fold.”


Justin Jaschke, CEO, Verio Inc.



“Andersen Consulting i
s really excited about Microsoft .NET because this is a big win for our
clients. It lets our clients leverage their IT investments. It lets them move to the Web
-
enabled
world. It lets them simplify systems integration so that they can concentrate on wha
t they do
best, and that is changing their business to compete in the new economy.”


Joe W. Forehand, Managing Partner & CEO, Andersen Consulting

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Financial Highlights


I n millions, except earnings per share


Year Ended June 30

1996

1997

1998

1999

2000


R
evenue

$

9,050

$

11,936

$

15,262

$

19,747

$

22,956

Net income

2,195

3,454

4,490

7,785

9,421

Di luted earni ngs per share

0.43

0.66

0.84

1.42

1.70

Cash and short
-
term i nvestments

6,940


8,966

13,927

17,236

23,798

Total assets

10,093

14,387

22,357

38,625

52,
150

Stockhol ders’ equi ty

6,908

10,777

16,627

28,438

41,368


See accompanying notes.
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Income Statements


I n millions, except earnings per share


Year Ended June 30


1998


1999


2000


Revenue

$

15,262

$

19,747

$

22,956

Operati ng expenses:


Cost of revenue


2,
460


2,814


3,002


Research and devel opment


2,601


2,970


3,775


Acqui red i n
-
process technol ogy


296








Sal es and marketi ng


2,828


3,231


4,141


General and admini strati ve


433


689


1,009


Other expenses


230


115


92



Total operating expenses


8,8
48


9,819


12,019

Operating i ncome


6,414


9,928


10,937

Investment i ncome


703


1,803


3,182

Gain on sales





160


156

Income before i ncome taxes


7,117


11,891


14,275

Provi si on for income taxes


2,627


4,106


4,854

Net income

$

4,490

$

7,785

$

9,421

E
arni ngs per share:


Basi c

$

0.92

$

1.54

$

1.81


Di luted

$

0.84

$

1.42

$

1.70


See accompanying notes.
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Management’s Discussion and Analysis


Results of Operations for 1998, 1999, and 2000


Mi crosoft devel ops, manufactures, l i censes, and supports a wi de rang
e of software products for a mul ti tude of computing devices.
Mi crosoft software i ncl udes scal abl e operati ng systems for servers, personal computers (PCs), and i ntel l i gent devi ces; server

appl i cati ons for cl i ent/server envi ronments; knowl edge worker produc
ti vi ty appl i cati ons; and software devel opment tool s. The
Company’s onl i ne efforts i ncl ude the MSN network of Internet products and servi ces and al l i ances wi th compani es i nvol ved wi th

broadband access and vari ous forms of di gi tal i nteractivity. Mi crosoft
also l i censes consumer software programs; sel l s hardware
devi ces; provi des consul ti ng servi ces; trai ns and certi fi es system i ntegrators and devel opers; and researches and devel ops
advanced technol ogi es for future software products.

Thi s Management’s Di scus
si on and Anal ysi s contai ns statements that are forward
-
l ooki ng. These statements are based on
current expectati ons that are subj ect to ri sks and uncertai nties. Actual resul ts wi l l vary because of factors di scussed bel o
w under
“Issues and Uncertai nti es.”



Revenue


The Company’s revenue growth rate was 28% i n fi scal 1998, 29% i n fi scal 1999, and 16% i n fi scal 2000. Revenue growth i n
fi scal 2000 was dri ven by strong l i censi ng of the Mi crosoft sui te of products i ncl udi ng Mi crosoft Wi ndows NT
®

Workstati on,
W
i ndows 2000 Professi onal, Wi ndows NT Server, Wi ndows 2000 Server, Mi crosoft Offi ce 2000, and SQL Server 7.0. Wi ndows
2000, rel eased duri ng fi scal 2000, i s the next versi on of the Wi ndows NT operating system. Consumer revenue, i ncluding Inter
net
access, t
he onl i ne properti es, entertai nment software, and hardware peri pheral s al so grew strongl y. Parti al l y offsetti ng those
i tems was sl ower growth from Wi ndows operati ng systems sol d through the ori ginal equipment manufacturer (OEM) channel due
to sl ow demand
for busi ness PCs throughout a si gni fi cant porti on of fi scal 2000. Revenue growth i n fi scal 1998 and 1999
refl ected the continued adoption of Wi ndows operating systems and Mi crosoft Offi ce. Software organizati onal l i cense i ncrease
s in
1998, 1999, and 2000

have been a si gni fi cant factor i n the Company’s revenue growth. The average sel li ng pri ce per l i cense has
decreased, pri mari ly because of general shi fts i n the sal es mi x from retai l packaged products to l i censi ng programs, from new

products to product up
grades, and from stand
-
al one desktop appl i cati ons to i ntegrated product sui tes. Average revenue per
l i cense from OEM l i censes and organizational l icense programs i s l ower than average revenue per l i cense from retai l versi ons.

Li kewi se, product upgrades h
ave l ower pri ces than new products. See accompanyi ng notes to fi nanci al statements.

The Company’s busi ness model continues to evol ve from retailing packaged products to l i censi ng organi zati onal l i censes
and subscri pti ons. The Company’s products are gener
al ly deli vered to end users through a mul ti
-
ti ered channel of di stri butors
and resel l ers, but the di stri buti on model i s al so changi ng for sel ected retai l products that are now bei ng shi pped strai ght t
o
resel l ers and other sel ected products that are now bei
ng shi pped strai ght to end users. Due to these changes i n channel
mechani cs and the busi ness model, the ri sk of returns of product from di stri butors and resel l ers has decl i ned. Accordi ngl y,
the
esti mate for future product returns was reduced by $250 mi l l
i on i n the fourth quarter of fi scal 1999.

In fi scal 1999, Mi crosoft made two changes rel ated to the ratabl e recogni ti on of revenue for a porti on of i ts revenue for
certai n products. Ameri can Insti tute of Certi fi ed Publ ic Accountants (AICPA) Statement of P
osi ti on (SOP) 98
-
9,
Modi fi cati on of
SOP 97
-
2, Software Revenue Recognition, Wi th Respect to Certai n Transacti ons,

requi res compani es to use the average sal es
pri ce of each undel i vered el ement of software arrangements to unbundl e revenue. Pri or authori tati
ve gui dance al l owed a
compari son of the total pri ce differential between a l i censed product sol d through di fferent channel s of di stri buti on to deri
ve the
val ue of undeli vered elements offered to customers acqui ring product from one channel but not the othe
r. Upon adopti on of thi s
new rul e i n the fourth quarter of fi scal 1999, the percentages of the total arrangement treated as unearned decreased. Thi s
change reduced the amount of Microsoft Wi ndows and Mi crosoft Offi ce sal es treated as unearned and i ncreas
ed the amount of
revenue recogni zed upon shi pment. Addi ti onal ly, as part of the Company’s l ong range planning process and a revi ew of product

shi pment cycl es, i t was determi ned that the l i fe cycl e of Wi ndows shoul d be extended from two years to three year
s.

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13


Business Divisions

Mi crosoft has three maj or segments: Productivity Applicati ons and Devel oper; Wi ndows
Pl atforms; and Consumer and Other.


Productiv ity Applications and Dev eloper

Producti vi ty Appl icati ons and Devel oper revenue was $7.04 bi l l i on, $8.
82 bi l l i on, and
$10.47 bi ll ion i n 1998, 1999, and 2000. Producti vity Appl ications and Devel oper products
i ncl ude desktop appl i cati ons such as Mi crosoft Offi ce, server appl i cati ons such as
Mi crosoft SQL Server and Mi crosoft Exchange Server, and software de
vel oper tool s.

In fi scal 2000, revenue growth from Mi crosoft Offi ce i ntegrated sui tes, i ncl udi ng the
Premi um, Professi onal, Small Busi ness, and Standard Editions was very sol i d. Revenue
from server appl i cations grew strongl y compared to fi scal 1999, l arge
l y due to the strong
success of SQL Server 7.0. Software devel oper tools revenue decl ined, due to i ncreased
sui te l i censi ng versus stand
-
al one l i censes, and the l ack of a rel ease upgrade of the
Vi sual Studi o
®

devel opment system.

In fi scal 1999, revenue gr
owth from Mi crosoft Office i ntegrated sui tes was strong. Revenue from server appl i cations al so grew
strongl y, refl ecti ng, i n part, the rel ease of SQL Server 7.0. The Vi sual Studi o 6.0 devel opment system drove heal thy softwar
e
devel oper tools revenue grow
th. In fi scal 1998, revenue from the vari ous Mi crosoft Offi ce i ntegrated sui tes i ncreased strongl y,
whi l e revenue from stand
-
al one versi ons of Mi crosoft Excel, Mi crosoft Word, Mi crosoft Access, and Mi crosoft PowerPoi nt
®

presentati on graphi cs program decre
ased.


Windows Platforms

Wi ndows Pl atforms revenue was $6.28 bi l lion, $8.50 bi l l i on, and $9.38 bi l l i on i n 1998,
1999, and 2000. Wi ndows Pl atforms products i ncl ude pri mari l y Wi ndows 98, Wi ndows
2000 Professi onal, Wi ndows 2000 Server, Wi ndows NT Workstati o
n, and Wi ndows NT
Server.

In fi scal 2000, Wi ndows desktop operati ng systems revenue growth was modest due
to soft demand for busi ness PCs duri ng most of the year; a sl owdown i n shi pments i n
anti ci pation of the post mi d
-
year avai labi lity of Wi ndows 2000 ope
rati ng systems; and, as
expected, a l onger busi ness mi grati on cycl e for the newest Wi ndows operati ng system
offeri ngs. In addi tion, Wi ndows desktop operati ng systems average earned revenue per
l i censed operating system decreased compared to fi scal 1999.
Wi ndows Pl atform Server
revenue growth over fi scal 1999 was parti cul arl y strong l ed by i ncreased adopti on by
customers of Wi ndows NT Server and Wi ndows 2000 Server.

In fi scal 1999, Wi ndows uni ts l i censed through the OEM channel, parti cul arl y
Wi ndows NT Wor
kstati on, i ncreased strongl y over the pri or year. Organizational l icensing
of Wi ndows NT Workstati on and Wi ndows 98 al so contri buted to the growth. The
revenue growth rate for Wi ndows NT Server was heal thy. In fi scal 1998, Wi ndows uni ts l i censed through

the OEM channel,
i ncl udi ng Wi ndows 95, Wi ndows 98, and Wi ndows NT Workstati on, exhi bi ted robust growth over the pri or year.


Consumer and Other

Consumer and Other revenue was $1.94 bi l lion, $2.43 bill ion, and $3.11 bi l l i on i n 1998,
1999, and 2000. Consu
mer and Other products i ncl ude Internet access and onl i ne
servi ces; l earni ng and entertai nment software; hardware devi ces; consul ti ng servi ces;
and trai ni ng and certi fi cati on.

In fi scal 2000, onl ine revenue growth was very strong and refl ected hi gher subsc
ri ber
total s, offset by l ower net pri ces for Internet access subscri pti ons compared to the pri or
year. Addi ti onal l y, the conti nued success of the Company’s new hardware devi ce
offeri ngs and strong sel l
-
through of entertai nment software produced robust rev
enue
growth.

In fi scal 1999, onl ine advertisi ng revenue and consul ti ng servi ces rose substanti al l y
and Internet access revenue i ncreased moderatel y, whi l e revenue from hardware
devi ces, consumer software, and Mi crosoft Press was rel ati vel y fl at. In fi scal

1998, online
revenue i ncreased due to hi gher Internet access subscri ber l evel s and hardware and
l earni ng and entertai nment revenue i ncreased
.



msf t


14

Distribution Channels

Mi crosoft di stri butes i ts products pri mari ly through OEM l icenses, organi zati onal l icenses
, onl i ne properti es, and retai l packaged
products. OEM channel revenue represents l i cense fees from ori gi nal equi pment manufacturers who prei nstal l Mi crosoft
products, pri mari l y on PCs. Mi crosoft has three maj or geographi c sal es and marketi ng organi zati o
ns: the South Paci fi c and
Ameri cas Regi on; the Europe, Mi ddl e East, and Afri ca Regi on; and the Asi a Regi on. Sal es of organi zati onal l i censes and
packaged products vi a these channel s are pri mari l y to and through di stri butors and resel l ers.

OEM revenue wa
s $4.72 bi l lion i n 1998, $6.40 bill ion i n 1999, and $7.01 bill ion i n 2000. The rel ati vel y l ow growth rate i n fiscal
2000 was due to l ower busi ness PC shi pment growth percentages, especi all y as a resul t of the soft demand for busi ness PCs and

component sho
rtages for part of the year. These i ssues combi ned wi th post mi d
-
year avail ability of the newest busi ness operating
system, Wi ndows 2000 Professi onal, resul ted i n l ower revenue growth. Average earned revenue per l i cense al so decl i ned
compared to the pri o
r year, due i n part to a mi x shi ft to the l ower
-
pri ced Wi ndows 98 operati ng system refl ecti ng the softness i n
demand for busi ness PCs and l ower pri ces on operati ng systems l i censed through certai n OEM channel sectors. In both fi scal
1999 and 1998, PC shi p
ment growth coupled wi th an i ncreased penetrati on of hi gher val ue 32
-
bi t operati ng systems drove the
OEM revenue i ncreases.

South Paci fic and Ameri cas Regi on revenue was $5.57 bi llion, $7.25 bi llion, and $8.33 bi l l i on i n 1998, 1999, and 2000. In
fi scal 2
000, Offi ce 2000 i ntegrated sui tes, Wi ndows 2000 Server, online revenue, and SQL Server sal es were the pri mary dri vers
of the revenue growth. Strong retail sal es of hardware devi ces and consumer software al so contri buted to the growth over the

pri or year.

Revenue growth was parti cul arly strong i n Latin Ameri ca and Austral ia, moderate i n Canada, and modest i n the Uni ted
States. In fi scal 1999, server appl i cati ons, Wi ndows NT Server, Wi ndows NT Workstati on, and Mi crosoft Offi ce all exhibited s
ol i d
year
-
ove
r
-
year growth rates. Organi zati onal l icensi ng acti vi ty was strong. Revenue growth was sol i d i n the Uni ted States and
moderate i n Latin America and the South Pacific. In fi scal 1998, revenue growth refl ected strong l i censi ng of Mi crosoft Offi
ce.

Europe,
Mi ddle East, and Afri ca Region revenue was $3.50 bi ll ion, $4.33 bi lli on, and $5.02 bil lion i n 1998, 1999, and 2000. In
fi scal 2000, retai l sal es of Wi ndows operati ng systems and Offi ce l i censi ng produced moderate growth i n the regi on. Growth f
rom
SQL Ser
ver l i censi ng, new hardware devi ce offerings, and entertai nment software was excepti onal l y strong. Revenue growth,
measured i n constant dol lars, was very heal thy i n Germany and Italy, robust i n the Middle East, and l ow i n the Uni ted Ki ngdom
.
In fi scal 19
99, al l major products grew strongl y over the pri or year. Revenue growth was sol i d i n the Uni ted Ki ngdom, Germany,
and France, and was parti cul arl y high i n Sweden, the Netherlands, and Spain. In fi scal 1998, organizational l i censi ng of des
ktop
appl i cati o
ns and busi ness systems grew strongl y. Revenue growth was parti cul arl y hi gh i n the Uni ted Ki ngdom.

Asi a Regi on revenue was $1.48 bi lli on i n 1998, $1.78 bil lion i n 1999, and $2.60 bi l l i on i n 2000. In fi scal 2000, the regi on’
s
growth rate refl ected strong
performance resul ting from i mproved l ocal economic condi ti ons. Revenue growth was al so i nfl uenced
by robust growth of l ocal i zed versi ons of Mi crosoft Offi ce 2000, especi al l y the Offi ce Personal Edi ti on sol d i n Japan; Wi ndow
s
pl atform and server l i censi ng;

and strong adopti on of SQL Server. Revenue grew strongl y i n nearl y al l countri es i n the Asi a
regi on. In fi scal 1999, Japan, Taiwan, China, Hong Kong, and Southeast Asi a had moderate revenue growth, whi le revenue grew
very strongl y i n Korea. In fi scal 1
998, revenue was rel ati vel y flat i n Japan and Southeast Asi a due to economi c i ssues and weak
currenci es.

The Company’s operati ng resul ts are affected by forei gn exchange rates. Approxi matel y 32%, 29%, and 30% of the
Company’s revenue was col l ected i n fore
i gn currencies duri ng 1998, 1999, and 2000. Si nce a portion of l ocal currency revenue is
hedged and much of the Company’s i nternati onal manufacturi ng costs and operati ng expenses are al so i ncurred i n l ocal
currenci es, the i mpact of exchange rates i s parti
al l y mi ti gated.



Operating Expenses


Cost of Revenue

Cost of revenue as a percent of revenue was 16.1% i n 1998, 14.3% i n 1999, and 13.1% i n 2000. Cost of revenue i n fi scal 2000
refl ected l ower costs associ ated wi th WebTV Networks’ operati ons, parti al l y o
ffset by the growth i n hardware peri pheral s costs.
The percentage decreases i n fi scal 1999 and 1998 resul ted pri mari l y from the trend i n mi x shi ft to OEM and organi zati onal
l i censes. The decreases were al so due to the shi fts i n mi x to CD
-
ROMs, whi ch carr
y l ower cost of goods than fl oppy di sks, and
hi gher
-
margin Wi ndows NT Server, other servers, and cl i ent access l i censes i n the BackOffi ce
®

product family. Additionally, cost
of revenue i n 1999 was posi ti vely i mpacted by a reduction i n esti mates of obsol et
e i nventory and other manufacturi ng costs of $67
mi l l ion. As di scussed previ ousl y, the Company’s busi ness model conti nues to evol ve toward l i censi ng from sal es of packaged
products through di stri bution channels. Consequentl y, ri sks associ ated wi th manufa
cturi ng and hol di ng physi cal product have
decl i ned.


Research and Development

Mi crosoft conti nued to i nvest heavil y i n the future by funding research and development (R&D). The i ncrease i n fi scal 2000 w
as
dri ven pri mari ly by hi gher headcount
-
rel ated costs
. The i ncrease i n fi scal 1999 reflected higher devel opment headcount
-
rel ated
costs offset by l ower i nfrastructure and thi rd
-
party devel opment costs. Fi scal 1998 expenses were dri ven pri mari l y by hi gher
devel opment headcount
-
rel ated costs and thi rd
-
party
devel opment costs.

In fi scal 1998, the Company acqui red WebTV Networks, Inc., an onl i ne servi ce that enabl es consumers to experi ence the
Internet through thei r televisi ons vi a set
-
top termi nal s. Mi crosoft pai d $425 mi ll i on i n stock and cash. The accompan
yi ng fi scal
msf t


15

1998 i ncome statement refl ects a one
-
ti me wri te
-
off of i n
-
process technol ogies under devel opment by WebTV Networks of $296
mi l l i on.


Sales and Marketing

In fi scal 2000, sal es and marketi ng expenses as a percentage of revenue i ncreased due to hi
gher rel ati ve marketi ng costs
associ ated wi th new product rel eases and onl i ne marketi ng. In fi scal 1999, sal es and marketi ng expense as a percentage of
revenue decreased due to l ower rel ati ve sal es expenses and l ower rel ati ve marketi ng costs. In fi scal 1
998, the sal es and
marketi ng expense as a percent of revenue decreased due to l ower rel ati ve sal es expenses.


General and Administrativ e

Fi scal 2000 general and administrati ve expenses i ncl uded a charge for the settl ement of a l awsui t wi th Cal dera, Inc. an
d al so
refl ected i ncreased l egal fees and certai n employee stock opti on
-
related expenses. The i ncrease i n fi scal years 1999 and 1998
were attri butabl e to hi gher l egal fees, settl ement costs, and headcount
-
rel ated costs necessary to support the Company’s
e
xpandi ng operati ons.


Other Expenses

Other expenses i ncorporate mi scel laneous i tems, i ncl uding certai n gains; recognition of Mi crosoft’s share of j oi nt venture ac
ti vities
for the MSNBC enti ti es, TransPoi nt, and other j oi nt venture acti vi ti es; and chari tabl
e contri buti ons and mi scel l aneous taxes.



Investment Income, Gain on Sales, and Income Taxes


Investment i ncome i ncreased pri maril y as a resul t of a l arger i nvestment portfol i o generated by cash from operati ons i n 1998,

1999, and 2000, coupl ed wi th real i z
ed gai ns from the sal e of securi ti es i n 1999 and 2000.

In fi scal 2000, Mi crosoft sol d the entertainment ci ty guide porti on of MSN Si dewal k to Ti cketmaster Onl i ne
-
Ci tySearch, Inc.
(TMCS) for a combi nation of TMCS stock and warrants wi th a val ue of $223 mi ll
ion. The transacti on al so i ncl uded a di stri buti on
arrangement. Mi crosoft recogni zed a gai n of $156 mi l l i on on the sal e and wi l l recogni ze revenue amounts rel ated to the
di stri buti on arrangement over the terms of the agreement. In fi scal 1999, Mi crosoft
sol d i ts Softi mage, Inc. subsi di ary to Avi d
Technol ogy, Inc. for a pretax gai n of $160 mi l l i on.

The effecti ve tax rate for fi scal 2000 was 34.0%. Excl uding the i mpact of the gain on the sal e of Softimage, Inc., the effec
ti ve
tax rate for fi scal 1999 was 3
5.0%. The effective i ncome tax rate for fi scal 1998 was 36.9%, refl ecting the nondeductibl e wri te
-
off
of WebTV i n
-
process technol ogi es.



Financial Condition


The Company’s cash and short
-
term i nvestment portfol io totaled $23.80 bill ion at June 30, 2000
. The portfol i o consi sts pri mari l y
of fi xed
-
i ncome securi ties, di versi fied among i ndustri es and i ndivi dual i ssuers. Mi crosoft’s i nvestments are general l y l i qui d and
i nvestment grade. The portfol i o i s i nvested predomi nantl y i n U.S. dol l ar denomi nated sec
uri ti es, but al so i ncl udes forei gn
currency posi ti ons i n order to di versi fy fi nanci al ri sk. The portfol io i s pri marily i nvested i n short
-
term securi ti es to mi ni mize i nterest
rate ri sk and faci l i tate rapi d depl oyment i n the event of i mmedi ate cash needs.

M
i crosoft works wi th many technology companies and often provi des i nvestment fundi ng as part of these al l i ances. Duri ng
fi scal 2000, the Company purchased approximately $400 mi lli on of Rogers Communications Inc. converti bl e preferred securi ti es
and $200 mi
l l i on of Best Buy Co., Inc. common stock. Al so, subsequent to fi scal year
-
end, Mi crosoft acqui red an addi ti onal
sharehol di ng i n Tel ewest Communications pl c for approxi mately $2.6 bi lli on. Duri ng fi scal 1999, the Company purchased $5.0
bi l l ion of AT&T con
vertibl e preferred securi ties and warrants, $600 mil lion of Nextel Communi cati ons, Inc. common stock, $500
mi l l ion of NTL, Inc. converti ble preferred stock, $330 mi l l i on of Uni ted Pan
-
Europe Communi cati ons common stock, and $200
mi l l i on of Qwest Communi cat
i ons Internati onal Inc. common stock.

Mi crosoft and Nati onal Broadcasti ng Company (NBC) operate two MSNBC j oi nt ventures: a 24
-
hour cabl e news and
i nformation channel, and an onl ine news servi ce. Mi crosoft i s payi ng $220 mill ion over a fi ve
-
year peri od th
at ends i n 2001 for i ts
i nterest i n the cabl e venture and one
-
hal f of the operati onal fundi ng of both j oi nt ventures. Mi crosoft guarantees a porti on of
MSNBC debt.

Mi crosoft has no materi al l ong
-
term debt and has $164 mi l l i on of standby mul ti currency l i ne
s of credi t to support forei gn
currency hedgi ng and cash management. Stockhol ders’ equi ty at June 30, 2000 was $41.37 bi l l i on.

Mi crosoft wi l l conti nue to i nvest i n sal es, marketi ng, and product support i nfrastructure. Addi ti onal l y, research and
devel opme
nt acti vities wi l l i nclude i nvestments i n exi sti ng and advanced areas of technol ogy, i ncl udi ng usi ng cash to acqui re
technol ogy. Additions to property and equi pment wi l l continue, i ncludi ng new facil ities and computer systems for R&D, sal es
and
marketi ng,

support, and admi nistrati ve staff. Commitments for constructi ng new bui ldings were $299 mi l l i on on June 30, 2000.
Cash wi l l al so be used to fund ventures and other strategi c opportuni ti es.

Si nce fi scal 1990, Mi crosoft has repurchased 765 mi l l i on common
shares whi l e 1.99 bi l l i on shares were i ssued under the
Company’s empl oyee stock opti on and purchase pl ans. Mi crosoft enhanced i ts repurchase program by sel l i ng put warrants. In
msf t


16

January 2000, the Company termi nated i ts stock buyback program. Subsequent t
o fi scal year
-
end 2000, the Company
announced a share repurchase program which wi ll provide shares for i ssuance to empl oyees under the Company’s stock opti on
and stock purchase programs. The market val ue of al l outstandi ng stock opti ons was $67 bi l l i on as

of June 30, 2000. Duri ng
December 1996, Microsoft i ssued 12.5 mi llion shares of 2.75% converti ble exchangeable preferred stock. Net proceeds of $980
mi l l ion were used to repurchase common shares. The Company’s converti bl e preferred stock matured on Dec
ember 15, 1999.
Each preferred share was converted i nto 1.1273 common shares.

Management bel i eves exi sti ng cash and short
-
term i nvestments together wi th funds generated from operati ons wi l l be
suffi ci ent to meet operati ng requi rements. The Company’s ca
sh and short
-
term i nvestments are avai l abl e for strategi c
i nvestments, mergers and acqui si tions, and other potential l arge
-
scal e cash needs that may ari se. Mi crosoft has not pai d cash
di vi dends on i ts common stock.


Recently Issued Accounting Standards


S
tatement of Fi nanci al Accounti ng Standards (SFAS) 133,
Accounti ng for Deri vati ve Instruments and Hedgi ng Acti vi ti es,

as
amended by SFAS 137,
Accounting for Deri vati ve Instruments and Hedgi ng Acti vi ti es


Deferral of the Effecti ve Date of FASB
Statement No.

133,

and SFAS 138,
Accounting for Certai n Deri vative Instruments and Certai n Hedging Acti vi ti es,

i s effecti ve for
the Company as of Jul y 1, 2000. SFAS 133 requi res that an entity recognize all derivati ves as ei ther assets or l i abi l ities m
easured
at fai r
val ue. The accounting for changes i n the fair val ue of a deri vati ve depends on the use of the deri vati ve. Adopti on of these

new accounti ng standards wi l l resul t i n cumulative after
-
tax reducti ons i n net i ncome of approxi matel y $350 mi l l i on and other
comp
rehensi ve i ncome of approxi mately $50 milli on i n the fi rst quarter of fi scal 2001. The adopti on wi l l al so i mpact assets and
l i abi l i ti es recorded on the bal ance sheet.

The Securi ti es and Exchange Commi ssi on (SEC) i ssued Staff Accounti ng Bul l eti n (SAB) 101,

Revenue Recogni ti on i n
Fi nanci al Statements,

i n December 1999. The SAB summarizes certai n of the SEC staff’s vi ews i n appl yi ng general l y accepted
accounti ng pri nciples to revenue recognition i n fi nancial statements. In June 2000, the SEC i ssued SAB 101B
, whi ch del ays the
i mpl ementati on date of SAB 101 until no l ater than the fourth fi scal quarter of fi scal years begi nni ng after December 15, 199
9.
The Company does not bel i eve that adopti on of thi s SAB wi l l have a materi al i mpact on i ts fi nanci al statemen
ts.

In March 2000, the Fi nancial Accounting Standards Board (FASB) i ssued FASB Interpretation (FIN) 44,
Accounti ng for Certain
Transacti ons i nvol ving Stock Compensation,

whi ch cl ari fi es the appl i cati on of APB 25 for certai n i ssues. The i nterpretati on i s
e
ffecti ve Jul y 1, 2000, except for the provi si ons that rel ate to modifications that di rectly or i ndi rectly reduce the exerci se

pri ce of an
award and the defi nition of an empl oyee, whi ch are effecti ve after December 15, 1998. The Company does not bel i eve th
at
adopti on of FIN 44 wi l l have a materi al i mpact on i ts fi nanci al statements.


Issues and Uncertainties


Whi l e Mi crosoft management i s opti mi sti c about the Company’s l ong
-
term prospects, the fol l owi ng i ssues and uncertai nti es,
among others, shoul d be cons
i dered i n eval uati ng i ts growth outl ook.


Rapid Technological Change and Competition

Rapi d change, uncertainty due to new and emergi ng technol ogi es, and fi erce competi ti on characteri ze the software i ndustry,
whi ch means that Mi crosoft’s market posi ti on i s
al ways at ri sk. Mi crosoft’s abi l i ty to mai ntai n i ts current success i s dependent
upon the Company’s abi lity to develop and i ntroduce new products and enhance exi sti ng products to sati sfy consumer demand for

new computer technol ogi es. Thi s process i s chal
l engi ng because the pace of change conti nues to accel erate, creati ng new
opportuni ti es for competi tors and subj ecti ng busi ness pl anni ng to substanti al uncertai nty. Competi tors, worki ng wi th new
technol ogy, may arri ve at a technol ogy that creates a new mar
ket al together and renders the Company’s product offeri ngs
obsol ete. “Open source” software, new computi ng devi ces, new mi croprocessor archi tectures, the Internet, and Web
-
based
computi ng model s are current exampl es of the rapi d pace of change and i ntensi
fyi ng competi ti on. If Mi crosoft does not
successful l y i denti fy new product opportunities and develop and bring new products to market i n a ti mely and efficient manner
, the
Company’s busi ness growth wi l l suffer and demand for i ts products wi l l decrease. C
ompeti ng operati ng systems, pl atforms, and
products may gai n popul ari ty wi th customers, computer manufacturers, and devel opers, reduci ng Mi crosoft’s future revenue.


Future Initiatives

The Company plans to conti nue si gni fi cant i nvestments i n software resea
rch and devel opment i ncluding Mi crosoft .NET, wi rel ess
technol ogi es, di gital devices, games, tel evisi on, and smal l busi ness. Mi crosoft i s al so maki ng si gni fi cant i nvestments i n st
rategi c
rel ati onshi ps wi th thi rd parti es, and i n onl i ne products and servi ce
s such as MSN, CarPoi nt™ onl i ne automoti ve servi ce, and
HomeAdvi sor™ onl ine real estate servi ce, where the Company has the opportuni ty to establ i sh l eadershi p i n new busi nesses. It

i s anti ci pated that these i nvestments i n research and devel opment wi l l i nc
rease over hi stori cal spendi ng l evel s wi thout
correspondi ng growth i n revenue i n the near future. Si gnificant revenue from these product opportunities may not be achieved

for
a number of years, i f at al l.

msf t


17

PC Growth Rates

The nature of the PC marketpl ace
i s changing i n ways that may reduce Mi crosoft’s software sal es and revenue growth. Recently,
manufacturers have sought to reach more consumers by devel oping and producing l ower cost PCs


PCs that come wi thout pre
-
i nstal l ed software or contain software wi
th reduced functional ity. In addition to the i nfl ux of l ow
-
cost PCs, a market for handhel d
computi ng and communicati on devices has devel oped. Whi le these devi ces are not as powerful or versati l e as PCs, they threate
n
to erode sal es growth i n the market f
or PCs wi th pre
-
i nstal l ed software. Thi s may affect Mi crosoft’s revenue growth because
manufacturers may choose not to i nstal l Mi crosoft software i n these l ow
-
cost PCs or consumers may purchase al ternati ve
i ntel l igent devices that do not uti l i ze Mi crosoft

software. These l ower
-
pri ced devi ces requi re Mi crosoft to provi de l ower
-
pri ced
software wi th a subset of the ori gi nal functi onali ty. As a resul t, the Company may generate l ess revenue from the sal e of so
ftware
produced for these devi ces than from the sa
l e of software for PCs.


Product Ship Schedules

The PC software i ndustry i s i nherently complex. New products and product enhancements can requi re l ong devel opment and
testi ng peri ods. Si gni fi cant del ays i n new product rel eases or si gni fi cant probl ems i n
creati ng new products coul d damage
Mi crosoft’s busi ness.


Saturation

Product upgrades, whi ch enable users to upgrade from earl ier versi ons of the Company’s products or from competi tors’ products
,
have l ower pri ces and margi ns than new products. Al so, pene
trati on of the Company’s desktop appl i cati ons i nto l arge
organi zati ons i s becomi ng saturated. These factors are l i kel y to depress future desktop appl i cati ons revenue growth.


Prices

The competi ti ve factors descri bed above may requi re Mi crosoft to l ower pr
oduct pri ces to meet competi ti on, reduci ng the
Company’s net i ncome.


Earnings Process

An i ncreasi ngl y higher percentage of the Company’s revenue i s subj ect to ratable recognition, whi ch i mpacts the ti ming of rev
enue
and earni ngs recognition. This pol icy
may be required for additional products, dependi ng on speci fic l icense terms and condi ti ons.
Al so, mai ntenance and new subscri pti on programs such as the appl i cati on servi ce provi der (ASP) model are i ncreasi ng i n
popul ari ty.


Employee Compensation

Mi crosof
t empl oyees currentl y recei ve sal ari es, i ncenti ve bonuses, other benefi ts, and stock opti ons. New government
regul ati ons, poor stock pri ce performance, or other factors coul d di mi ni sh the val ue of the opti on program to current and
prospecti ve empl oyees an
d force the Company i nto more of a cash compensati on model.


International Operations

Mi crosoft devel ops and sel l s products throughout the worl d. The pri ces of the Company’s products i n countri es outsi de of the

Uni ted States are generall y higher than the
Company’s pri ces i n the Uni ted States because of the costs i ncurred i n l ocal i zi ng
software for non
-
U.S. markets. The costs of produci ng and sel l i ng the Company’s products i n these countri es are al so hi gher.
Pressure to gl obal ize Mi crosoft’s pri ci ng struc
ture mi ght require that the Company reduce the sal es pri ce of i ts software i n other
countri es, even though the costs of the software conti nue to be hi gher than i n the Uni ted States. Negati ve changes i n softwa
re
“pi racy” trade protecti on l aws, pol i ci es and

measures and other regul atory requi rements affecti ng trade and i nvestment;
unexpected changes i n regul atory requirements for software; soci al, pol i ti cal, l abor or economi c conditions i n a speci fi c cou
ntry or
regi on; di fficulties i n staffi ng and managing f
orei gn operati ons; and potenti al adverse forei gn tax consequences; among other
factors, coul d al so have an i mpact on the Company’s busi ness and resul ts of operati ons outsi de of the Uni ted States.


Market Risk

The Company i s exposed to forei gn currency, i nt
erest rate, and securi ti es pri ce ri sks. A porti on of these ri sks i s hedged, but
fl uctuations coul d i mpact the Company’s resul ts of operati ons and fi nanci al posi ti on. The Company hedges the exposure of
accounts recei vabl e and a portion of anti cipated reve
nue to forei gn currency fl uctuati ons, pri mari l y wi th opti on contracts. The
Company moni tors i ts forei gn currency exposures dai l y to maxi mi ze the overal l effecti veness of i ts forei gn currency hedge
posi ti ons. Pri nci pal currenci es hedged i ncl ude the Euro,
Japanese yen, Bri ti sh pound, and Canadi an dol l ar. Fi xed i ncome
securi ti es are subj ect to i nterest rate ri sk. The portfol i o i s di versi fi ed and consi sts pri mari l y of i nvestment grade securi
ti es to
mi ni mize credi t ri sk. The Company routinely uses opti ons t
o hedge i ts exposure to i nterest rate ri sk i n the event of a catastrophi c
i ncrease i n i nterest rates. Many securi ti es hel d i n the Company’s equi ty and other i nvestments portfol i o are subj ect to pri c
e ri sk.
The Company uses opti ons to hedge i ts pri ce ri sk

on certai n hi ghl y vol ati l e equi ty securi ti es.

The Company uses a val ue
-
at
-
ri sk (VAR) model to esti mate and quanti fy i ts market ri sks. The VAR model i s not i ntended to
represent actual l osses i n fai r val ue, but i s used as a ri sk esti mati on and management
tool. Assumpti ons appl i ed to the VAR
model at June 30, 1999 and 2000 i nclude the fol lowi ng: normal market conditions; Monte Carl o model i ng wi th 10,000 si mul ated
market pri ce paths; a 97.5% confi dence i nterval; and a 20
-
day esti mated l oss i n fai r val ue for

each market ri sk category.
msf t


18

Accordi ngl y, 97.5% of the ti me the esti mated 20
-
day l oss i n fai r val ue woul d be nomi nal for forei gn currency denomi nated
i nvestments and accounts recei vable at June 30, 1999 and 2000, and would not exceed $95 mi llion and $211 m
ill i on at June 30,
1999 and 2000 for i nterest
-
sensi ti ve i nvestments or $1.38 bi l lion or $1.02 bill ion at June 30, 1999 and 2000 for equi ty securi ti es.


Intellectual Property Rights

Mi crosoft di l i gently defends i ts i ntel lectual property ri ghts, but unl icens
ed copying of software represents a l oss of revenue to the
Company. Whi l e thi s adversel y affects U.S. revenue, revenue l oss i s even more si gni fi cant outsi de of the Uni ted States,
parti cul arly i n countri es where l aws are l ess protecti ve of i ntel l ectual pro
perty ri ghts. Throughout the worl d, Mi crosoft acti vel y
educates consumers on the benefi ts of l i censi ng genui ne products and educates l awmakers on the advantages of a busi ness
cl i mate where i ntel l ectual property ri ghts are protected. However, conti nued ef
forts may not affect revenue posi ti vel y.


Litigation

Li ti gation regarding i ntellectual property ri ghts, patents, and copyri ghts occurs i n the PC software i ndustry. In addi ti on,
there are
government regulation and i nvesti gation ri sks al ong wi th other gener
al corporate l egal ri sks. The Company i s a defendant i n a
l awsui t fi l ed by the Antitrust Di vi si on of the U.S. Department of Justi ce and a group of ni neteen state Attorneys General al l
egi ng
vi ol ati ons of the Sherman Act and vari ous state anti trust l aws. A
fter the tri al, the Di stri ct Court entered Fi ndi ngs of Fact and
Concl usi ons of Law stati ng that Mi crosoft had vi olated secti ons of the Sherman Act and vari ous state anti trust l aws. A Judgm
ent
was entered on June 7, 2000 ordering, among other thi ngs, the b
reakup of Mi crosoft i nto two companies. On June 20, 2000, the
Di stri ct Court entered an order stayi ng the Judgment of June 7, 2000 i n i ts enti rety unti l the appeal therefrom i s heard and
deci ded, unless the stay i s earl i er vacated by an appellate court.
Al though Mi crosoft bel ieves i t wi l l obtain ultimate rel i ef from the
Judgment, the Company cannot predict wi th certainty when or the extent to whi ch such rel i ef wi ll be obtained. The fai lure to
obtain
rel i ef from certai n provi si ons of the Judgment through t
he appeal would l ikel y have a material adverse effect on the Company. A
l arge number of anti trust cl ass acti on l awsui ts have been i ni ti ated agai nst Mi crosoft. These cases al l ege that Mi crosoft has

competed unfairl y and unl awfully monopoli zed alleged mark
ets for operati ng systems and certai n software appl i cati ons and seek
to recover al l eged overcharges that the complaints contend Microsoft charged for these products. Al though Microsoft believes

the
cl ai ms are wi thout merit and i s vi gorousl y defending the
cases, the Company cannot predi ct wi th certai nty the outcome of these
l awsui ts.


Future Growth Rate

The revenue growth rate i n 2001 may not approach the l evel attained i n pri or years. As di scussed previ ousl y, certai n operati
ng
expenses are expected to i nc
rease i n 2001. Because of the fi xed nature of a si gni ficant porti on of operati ng expenses, coupl ed
wi th the possi bi l i ty of sl ower revenue growth, operati ng margi ns i n 2001 may decrease from those i n 2000.

msf t


19


Cash Flows Statements


I n millions

Year Ended Ju
ne 30


1998


1999


2000


Operati ons





Net i ncome

$

4,490

$

7,785

$

9,421


Depreci ati on, amorti zation, and other noncash i tems


1,024


926


748


Wri te
-
off of acqui red i n
-
process technol ogy


296








Gai n on sal es





(160)


(156)


Stock opti on i ncome ta
x benefits


1,553


3,107


5,535


Unearned revenue


3,268


5,877


6,177


Recogni ti on of unearned revenue from pri or peri ods


(1,798)


(4,526)


(5,600)


Other current l i abi lities


208


1,050


(445)


Accounts recei vabl e


(520)


(687)


(944)


Other current ass
ets


(88)


(235)


(775)



Net cash from operati ons


8,433


13,137


13,961


Fi nanci ng


Common stock i ssued


959


1,350


2,245


Common stock repurchased


(2,468)


(2,950)


(4,896)


Put warrant proceeds


538


766


472


Preferred stock di vi dends


(28)


(28)


(
13)



Net cash used for fi nanci ng


(999)


(862)


(2,192)


Investi ng


Addi ti ons to property and equipment


(656)


(583)


(879)


Cash porti on of WebTV purchase pri ce


(190)








Cash proceeds from sal e of Softi mage, Inc.





79





Purchases of i nvestments


(19,114)


(36,441)


(43,158)


Maturi ti es of i nvestments


1,890


4,674


4,025


Sal es of i nvestments


10,798


21,080


28,085



Net cash used for i nvesti ng


(7,272)


(11,191)


(11,927)

Net change i n cash and equi val ents


162


1,084


(158)

Effect of exchange

rates on cash and equi val ents


(29)


52


29

Cash and equi valents, begi nning of year


3,706


3,839


4,975

Cash and equi valents, end of year

$

3,839

$

4,975

$

4,846


See accompanying notes.
msf t


20

Balance Sheets


I n millions

June 30



1999


2000


Assets

Current a
ssets:


Cash and equi valents

$

4,975

$

4,846


Short
-
term i nvestments


12,261


18,952



Total cash and short
-
term i nvestments


17,236


23,798


Accounts recei vabl e


2,245


3,250


Deferred i ncome taxes


1,469


1,708


Other



752


1,552



Total current assets


21,702


30,308


Property and equi pment, net


1,611


1,903


Equi ty and other i nvestments


14,372


17,726


Other assets


940


2,213




Total assets

$

38,625

$

52,150


Li abi li ti es and stockhol ders’ equi ty

Current l i abi lities:


Accounts payabl e

$

874

$

1,083


Accrued compensati on


396


557


Income taxes


1,691


585


Unearned revenue


4,239


4,816


Other



1,602


2,714



Total current l iabilities


8,802


9,755

Deferred i ncome taxes


1,385


1,027

Commi tments and contingenci es

Stockhol ders’ equi ty:


Converti bl e p
referred stock


shares authori zed 100;



shares i ssued and outstandi ng 13 and 0


980





Common stock and pai d
-
i n capital


shares authori zed 12,000;



shares i ssued and outstandi ng 5,109 and 5,283


13,844


23,195


Retai ned earnings, i ncl uding other comp
rehensi ve i ncome



of $1,787 and $1,527


13,614


18,173



Total stockhol ders’ equi ty


28,438


41,368




Total l iabilities and stockhol ders’ equi ty

$

38,625

$

52,150


See accompanying notes.
msf t


21

Stockholders’ Equity Statements


I n millions

Year Ended June 30


1998


1999


2000


Converti bl e preferred stock


Bal ance, begi nning of year

$

980

$

980

$

980



Conversi on of preferred to common stock








(980)



Bal ance, end of year


980


980





Common stock and pai d
-
i n capital


Bal ance, begi nning of year


4,509


8,
025


13,844


Common stock i ssued


1,262


2,338


3,554


Common stock repurchased


(165)


(64)


(210)


Structured repurchases pri ce di fferenti al


328


(328)





Proceeds from sal e of put warrants


538


766


472


Stock opti on i ncome tax benefits


1,553


3,107


5,535



Bal ance, end of year


8,025


13,844


23,195


Retai ned earnings





Bal ance, begi nning of year


5,288


7,622


13,614


Net i ncome


4,490


7,785


9,421


Other comprehensi ve i ncome:



Net unreal i zed i nvestment gains/(l osses)


627


1,052


(283)



Tran
sl ati on adj ustments and other


(124)


69


23




Comprehensi ve i ncome


4,993


8,906


9,161


Preferred stock di vi dends


(28)


(28)


(13)


Immateri al pooli ng of i nterests








97


Common stock repurchased


(2,631)


(2,886)


(4,686)



Bal ance, end of year


7
,622


13,614


18,173




Total stockhol ders’ equi ty

$

16,627

$

28,438

$

41,368


See accompanying notes.
msf t


22

Notes to Financial Statements


Accounting Policies


Accounting Principles

The fi nancial statements and accompanying notes are prepared i n accordance wi th

generall y accepted accounti ng pri nci pl es i n
the Uni ted States.


Principles of Consolidation

The fi nanci al statements i ncl ude the accounts of Mi crosoft and i ts subsi di ari es. Si gni fi cant i ntercompany transacti ons and
bal ances have been eliminated. Investm
ents i n unconsol i dated j oi nt ventures are accounted for usi ng the equi ty method; the
Company’s share of j oi nt ventures’ acti vi ti es i s refl ected i n other expenses.


Estimates and Assumptions

Prepari ng fi nancial statements requi res management to make esti mat
es and assumpti ons that affect the reported amounts of
assets, l i abi li ti es, revenue, and expenses. Exampl es i ncl ude provisi ons for returns, concessi ons and bad debts, and the l eng
th of
product l i fe cycl es and bui l di ngs’ l i ves. Actual resul ts may di ffer f
rom these esti mates.


Foreign Currencies

Assets and l i abili ti es recorded i n foreign currenci es are transl ated at the exchange rate on the bal ance sheet date. Transl a
ti on
adj ustments resul ti ng from thi s process are charged or credi ted to other comprehensi v
e i ncome. Revenue and expenses are
transl ated at average rates of exchange prevai l i ng duri ng the year. Gai ns and l osses on forei gn currency transacti ons are
i ncl uded i n other expenses.


Rev enue Recognition

Revenue i s recogni zed when earned. The Company’
s revenue recogni ti on pol i ci es are i n compl i ance wi th al l appl i cabl e
accounti ng regulations, i ncl uding American Insti tute of Certi fied Publi c Accountants (AICPA) Statement of Posi ti on (SOP) 97
-
2,
Software Revenue Recognition,

and SOP 98
-
9,
Modificati on of
SOP 97
-
2, Wi th Respect to Certain Transacti ons.

Revenue from
products l i censed to ori gi nal equi pment manufacturers i s recorded when OEMs shi p l i censed products whi l e revenue from certai n

l i cense programs i s recorded when the software has been del i vered an
d the customer i s i nvoi ced. Revenue from packaged
product sal es to and through di stri butors and resel l ers i s recorded when rel ated products are shi pped. Mai ntenance and
subscri pti on revenue i s recogni zed ratably over the contract peri od. Revenue attri bu
tabl e to undel i vered el ements, i ncl udi ng
techni cal support and Internet browser technol ogi es, i s based on the average sal es pri ce of those el ements and i s recogni zed
ratabl y on a strai ght
-
l i ne basi s over the product’s l i fe cycl e. When the revenue recogni t
i on cri teri a requi red for di stri butor and
resel l er arrangements are not met, revenue i s recogni zed as payments are recei ved. Costs rel ated to i nsi gni fi cant obl i gati on
s,
whi ch i ncl ude tel ephone support for certai n products, are accrued. Provi si ons are rec
orded for returns, concessi ons and bad
debts.


Cost of Revenue

Cost of revenue i ncl udes di rect costs to produce and di stri bute product and di rect costs to provi de onl i ne servi ces, consul ti
ng,
product support, and trai ni ng and certi fi cati on of system i ntegr
ators.


Research and Development

Research and devel opment costs are expensed as i ncurred. Statement of Fi nanci al Accounti ng Standards (SFAS) 86,
Accounti ng for the Costs of Computer Software to Be Sol d, Leased, or Otherwi se Marketed,

does not materi al l y a
ffect the
Company.


Advertising Costs

Adverti si ng costs are expensed as i ncurred. Adverti si ng expense was $732 mi l lion i n 1998, $804 mill ion i n 1999, and $1.1 bi l
l i on
i n 2000.


Income Taxes

Income tax expense i ncludes U.S. and i nternational i ncome taxes,
pl us the provi si on for U.S. taxes on undi stri buted earni ngs of
i nternati onal subsi diari es. Certai n i tems of i ncome and expense are not reported i n tax returns and fi nanci al statements i n
the
same year. The tax effect of thi s di fference i s reported as def
erred i ncome taxes.

msf t


23

Notes to Financial Statements
conti nued


Financial Instruments

The Company consi ders al l l iquid i nterest
-
earni ng i nvestments wi th a maturity of three months or l ess at the date of purchase to
be cash equi val ents. Short
-
term i nvestment
s generall y mature between three months and si x years from the purchase date. Al l
cash and short
-
term i nvestments are cl assi fi ed as avai l able for sal e and are recorded at market usi ng the speci fi c i denti fi cati on
method; unreal i zed gai ns and l osses are ref
l ected i n other comprehensi ve i ncome. Cost approxi mates market for al l
cl assi fi cati ons of cash and short
-
term i nvestments; real i zed and unreal i zed gai ns and l osses were not materi al.

Equi ty and other i nvestments i ncl ude debt and equity i nstruments. Debt

securi ti es and publ i cl y traded equi ty securi ti es are
cl assi fi ed as avai l able for sal e and are recorded at market usi ng the speci fic i dentificati on method. Unreal i zed gai ns and l
osses
are refl ected i n other comprehensi ve i ncome. Al l other i nvestments, ex
cl uding j oint venture arrangements, are recorded at cost.

Deri vati ve fi nanci al i nstruments are used to hedge certai n i nvestments, i nternati onal revenue, accounts recei vabl e, and
i nterest rate ri sks, and are, therefore, held pri marily for purposes other tha
n tradi ng. These i nstruments may i nvol ve el ements of
credi t and market ri sk i n excess of the amounts recogni zed i n the fi nancial statements. The Company moni tors i ts posi ti ons a
nd
the credi t qual ity of counter parties, consi sti ng pri maril y of maj or fi nan
cial i nsti tutions, and does not antici pate nonperformance by
any counter
-
party.

SFAS 133,
Accounti ng for Deri vative Instruments and Hedgi ng Activi ti es,

as amended by SFAS 137,
Accounting for Deri vative
Instruments and Hedgi ng Activities


Deferral of the E
ffective Date of FASB Statement No. 133,

and SFAS 138,
Accounti ng for
Certai n Deri vati ve Instruments and Certain Hedging Acti vities,

i s effecti ve for the Company as of Jul y 1, 2000. SFAS 133 requires
that an enti ty recognize al l deri vatives as ei ther asse
ts or l i abi lities measured at fai r val ue. The accounting for changes i n the fai r
val ue of a deri vative depends on the use of the deri vati ve. Adoption of these new accounting standards wi l l resul t i n cumul a
ti ve
after
-
tax reducti ons i n net i ncome of approx
i mately $350 mil lion and other comprehensi ve i ncome of approxi mately $50 mil l i on i n
the fi rst quarter of fi scal 2001. The adopti on wi l l al so i mpact assets and l i abi l i ti es recorded on the bal ance sheet.


Property and Equipment

Property and equi pment i s sta
ted at cost and depreci ated usi ng the strai ght
-
line method over the shorter of the esti mated l i fe of
the asset or the l ease term, rangi ng from one to 15 years. As requi red by SOP 98
-
1,
Accounting for Costs of Computer Software
Devel oped or Obtained for In
ternal Use,

Microsoft began capital izing certain computer software devel oped or obtained for i nternal
use i n fi scal 2000. Capitalized computer software i s depreci ated usi ng the strai ght
-
l ine method over the shorter of the esti mated
l i fe of the software or

three years.


Reclassifications

As requi red by Emergi ng Issues Task Force (EITF) Issue 00
-
15,
Cl assi fi cation i n the Statement of Cash Fl ows of the Income Tax
Benefi t Recei ved by a Company upon Exerci se of a Nonqual ified Empl oyee Stock Opti on,

stock opti on

i ncome tax benefi ts are
cl assi fi ed as cash from operati ons i n the cash fl ows statement. Pri or peri od cash fl ows statements have been restated to con
form
wi th thi s presentati on. Certai n other recl assi fi cati ons have been made for consi stent presentati on.



Unearned Revenue


A porti on of Mi crosoft’s revenue i s earned ratably over the product l ife cycl e or, i n the case of subscri pti ons, over the per
i od of the
l i cense agreement.

End users recei ve certai n elements of the Company’s products over a peri od of ti m
e. These el ements i ncl ude i tems such as
browser technol ogies and technical support. Consequently, Microsoft’s earned revenue refl ects the recognition of the fai r va
l ue of
these el ements over the product’s l i fe cycl e. Upon adopti on of SOP 98
-
9 duri ng the

fourth quarter of fi scal 1999, the Company
was requi red to change the methodol ogy of attributing the fai r val ue to undel i vered el ements. The percentages of undel i vered

el ements i n rel ati on to the total arrangement decreased, reduci ng the amount of Wi ndow
s and Offi ce revenue treated as
unearned, and i ncreasi ng the amount of revenue recogni zed upon shi pment. The percentage of revenue recogni zed ratabl y
decreased from a range of 20% to 35% to a range of approxi matel y 15% to 25% of Wi ndows desktop operati ng
systems. For
desktop appl i cati ons, the percentage decreased from approximately 20% to a range of approxi matel y 10% to 20%. The ranges
depend on the terms and conditions of the l i cense and pri ces of the el ements. In addition, i n the fourth quarter of fi s
cal 1999, the
Company extended the l i fe cycl e of Wi ndows from two to three years based upon management’s revi ew of product shi pment
cycl es. Product l i fe cycl es are currentl y esti mated at 18 months for desktop appl i cati ons. The Company al so sel l s subscri p
ti ons
to certai n products vi a mai ntenance and certai n organi zati onal l i cense agreements. At June 30, 1999 and 2000, Wi ndows
Pl atforms products unearned revenue was $2.17 bi l l i on and $2.61 bi l l i on and unearned revenue associ ated wi th Producti vi ty
Appl i cati
ons and Devel oper products total ed $1.96 bill ion and $1.99 bi llion. Unearned revenue for other miscel l aneous programs
total ed $116 mi l l i on and $210 mi l l i on at June 30, 1999 and 2000.

msf t


24

Notes to Financial Statements
conti nued


Financial Risks


The Company’s

cash and short
-
term i nvestment portfol i o i s di versi fi ed and consi sts pri mari l y of i nvestment grade securi ti es.
Investments are hel d wi th hi gh
-
quali ty fi nancial i nsti tuti ons, government and government agenci es, and corporati ons, thereby
reduci ng credi t ri
sk concentrati ons. Interest rate fl uctuations i mpact the carryi ng val ue of the portfol i o. The Company routi nel y
hedges the portfol io wi th options i n the event of a catastrophi c i ncrease i n i nterest rates. The noti onal amount of the opti
ons
outstandi ng w
as $4.0 bi ll ion and $3.6 bill ion at June 30, 1999 and 2000. The fair val ue and premiums pai d for the options were not
materi al. Much of the Company’s equi ty securi ty portfol i o i s hi ghl y vol ati l e, so certai n posi ti ons are hedged.

Fi ni shed goods sal es to i n
ternati onal customers i n Europe, Japan, Canada, and Austral i a are pri mari l y bi l l ed i n l ocal
currenci es. Payment cycl es are rel atively short, generally l ess than 90 days. Certai n i nternational manufacturi ng and opera
tional
costs are i ncurred i n l ocal curr
enci es. Local currency cash bal ances i n excess of short
-
term operati ng needs are general l y
converted i nto U.S. dollar cash and short
-
term i nvestments on recei pt. Al though foreign exchange rate fl uctuati ons general l y do
not create a ri sk of materi al bal an
ce sheet gai ns or l osses, the Company hedges a porti on of accounts recei vabl e bal ances
denomi nated i n l ocal currencies, pri mari ly wi th purchased options. The noti onal amount of options outstanding was $662 mi l l i
on
and $1.46 bi l l i on at June 30, 1999 and 20
00. The fai r val ue and premi ums pai d for the opti ons were not materi al.

Forei gn exchange rates affect the transl ated resul ts of operati ons of the Company’s forei gn subsi di ari es. The Company
hedges a porti on of pl anned i nternational revenue wi th purchased

options. The notional amount of the opti ons outstandi ng was
$2.25 bi l lion and $2.08 bill ion at June 30, 1999 and 2000. The fai r val ue and premi ums pai d for the opti ons were not materi a
l.

At June 30, 1999 and 2000, approxi matel y 50% and 42% of accounts r
ecei vabl e represented amounts due from 10
customers. A si ngl e customer accounted for approxi matel y 8%, 11%, and 9% of revenue i n 1998, 1999, and 2000.

Mi crosoft l ends certai n fi xed i ncome and equi ty securi ti es to enhance i nvestment i ncome. Col l ateral and
/or securi ty
i nterest i s determi ned based upon the underl yi ng securi ty and the credi t worthi ness of the borrower.

msf t


25

Notes to Financial Statements
conti nued (i n mi llions)


Cash and Short
-
Term Investments


June 30



1999


2000


Cash and equi valents:


Cash


$

635

$

849


Commerci al paper


3,805


1,986


Certi fi cates of deposi t


522


1,017


U.S. government and agency securi ties





729


Corporate notes and bonds





265


Money market preferreds


13






Cash and equi valents


4,975


4,846

Short
-
term i nvestments:




Commerci al paper


1,026


612


U.S. government and agency securi ties


3,592


7,104


Corporate notes and bonds


6,996


9,473


Muni ci pal securi ti es


247


1,113


Certi fi cates of deposi t


400


650



Short
-
term i nvestments


12,261


18,952




Cash and short
-
ter
m i nvestments

$

17,236

$

23,798



Property and Equipment


June 30



1999


2000


Land



$

158

$

176

Bui l dings



1,347


1,387

Computer equi pment and software


1,433


1,909

Other




578


842


Property and equi pment


at cost


3,516


4,314

Accumul ated depreci
ation


(1,905)


(2,411)



Property and equi pment


net

$

1,611

$

1,903



Duri ng 1998, 1999, and 2000, depreciati on expense, of whi ch the majority rel ated to computer equi pment, was $528 mi l l i on,
$483 mi l l i on, and $668 mi l l i on; di sposal s were not materi al.

msf t


26

Notes to Financial Statements
conti nued (i n mi llions)


Equity and Other Investments





Cost

Unrealized

Unrealized

Recorded

June 30, 1999

Basis

Gains

Losses

Basis


Debt securi ti es recorded at market, maturi ng:


Wi thi n one year

$

682

$

8

$



$

690


Between

10

and
15

years


533


30


(
33
)


530


Beyond
15

years


4
,
731


347





5
,
078



Debt securi ti es recorded at market


5
,
946


385


(
33
)


6
,
298

Common stock and warrants


3
,
029


3
,
598


(
799
)


5
,
828

Preferred stock


2
,
179








2
,
179

Other i nvestments


67








67



Equi ty and other i nvestments

$

11
,
221

$

3
,
983

$

(
832
)

$

14
,
372





Cost

Unrealized

Unrealized

Recorded

June 30, 2000

Basis

Gains

Losses

Basis


Debt securi ti es recorded at market, maturi ng:


Wi thi n one year

$

498

$

27

$




$

525


Between
2

and
10

year
s


388


11


(
3
)


396


Between
10

and
15

years


775


14


(
93
)


696


Beyond
15

years


4
,
745





(
933
)


3
,
812



Debt securi ti es recorded at market


6
,
406


52


(
1
,
029
)


5
,
429

Common stock and warrants


5
,
815


5
,
655


(
1
,
697
)


9
,
773

Preferred stock


2
,
319








2
,
319

Other i nvestments


205








205



Equi ty and other i nvestments

$

14
,
745

$

5
,
707

$

(
2
,
726
)

$

17
,
726



Debt securi ti es i ncl ude corporate and government notes and bonds and derivative securi ties. Debt securi ti es maturi ng beyond
15 years are composed

enti rel y of AT&T 5% converti bl e preferred debt wi th a contractual maturi ty of 30 years. The debt i s
converti bl e i nto AT&T common stock on or after December 1, 2000, or may be redeemed by AT&T upon sati sfacti on of certai n
condi ti ons on or after June 1, 20
02. Equity securi ti es that are restri cted for more than one year or not publicly traded are recorded
at cost. At June 30, 1999 and 2000, the esti mated fai r val ue of these i nvestments i n excess of thei r recorded basi s was $2.3

bi l l ion and $2.7 bi lli on, ba
sed on publ i cl y avai l abl e market i nformati on or other esti mates determi ned by management. The
Company hedges the ri sk of si gni fi cant market decli nes on certai n hi ghly vol atil e equi ty securi ti es wi th opti ons. The opti on
s are
recorded at market, consi stent

wi th the underl yi ng equi ty securi ti es. At June 30, 1999 and 2000, the noti onal amount of the
opti ons outstandi ng was $2.1 bi ll ion and $4.0 bill ion; the fai r val ue represents obl i gati ons of $1.0 bi l l i on and $1.7 bi l l i on
; and
premi ums pai d for the opti ons
were not materi al. Real i zed gai ns and l osses of equi ty and other i nvestments i n 1998 were not
materi al; real ized gains were $623 mi llion and $1.7 bi l l i on i n 1999 and 2000 and l osses were not materi al i n 1999 and 2000.

msf t


27

Notes to Financial Statements
conti n
ued (i n mi llions)


Income Taxes


The provi si on for i ncome taxes consi sted of:


Year Ended June 30


1998


1999


2000


Current taxes:


U.S. and state

$

2,518

$

4,027

$

4,744


Internati onal


526


281


535



Current taxes


3,044


4,308


5,279

Deferred taxes


(
417)


(202)


(425)




Provi si on for i ncome taxes

$

2,627

$

4,106

$

4,854


U.S. and i nternati onal components of i ncome before i ncome taxes were:


Year Ended June 30


1998


1999


2000


U.S.



$

5,072

$
10,649

$

11,860

Internati onal


2,045


1,242


2,415


Inco
me before i ncome taxes

$

7,117

$
11,891

$

14,275


The effecti ve i ncome tax rate i ncreased to 36.9% i n 1998 due to the nondeducti bl e wri te
-
off of WebTV i n
-
process
technol ogi es. In 1999, the effective tax rate was 35.0%, excl uding the i mpact of the gain on
the sal e of Softi mage, Inc. In 2000,
the effecti ve tax rate was 34.0%, and i ncluded the effect of a 2.5% reduction from the U.S. statutory rate for tax credi ts an
d a 1.5%
i ncrease for other i tems. The components of the di fferences between the U.S. statut
ory tax rate and the Company’s effecti ve tax
rate i n 1998 and 1999 were not si gni fi cant.


Deferred i ncome taxes as of June 30 were:





1999


2000


Deferred i ncome tax assets:


Revenue i tems

$

1,145

$

1,320


Expense i tems


648


2,122



Deferred i ncome ta
x assets


1,793


3,442

Deferred i ncome tax l iabi lities:


Unreal i zed gain on i nvestments


(1,046)


(874)


Internati onal earnings


(647)


(1,766)


Other


(16)


(121)



Deferred i ncome tax l iabi lities

$

(1,709)

$

(2,761)

msf t


28

Notes to Financial Statements
conti nu
ed (i n mi llions)


The Internal Revenue Servi ce (IRS) has assessed taxes for 1990 and 1991, whi ch the Company i s contesti ng i n U.S. Tax
Court. Income taxes, except for taxes rel ated to the 1990 and 1991 assessments, have been settl ed wi th the IRS for al l y
ears
through 1994. The IRS i s exami ni ng the Company’s U.S. i ncome tax returns for 1995 and 1996. Management bel i eves any
rel ated adj ustments that mi ght be required wi l l not be material to the fi nanci al statements. Income taxes pai d were $1.1 bi l
l i on i n
1998, $874 mi l l i on i n 1999, and $800 mi l l i on i n 2000.



Convertible Preferred Stock


Duri ng 1996, Mi crosoft i ssued 12.5 milli on shares of 2.75% converti bl e exchangeabl e pri nci pal
-
protected preferred stock. Net
proceeds of $980 mi l l i on were used to repurch
ase common shares. The Company’s converti bl e preferred stock matured on
December 15, 1999. Each preferred share was converted i nto 1.1273 common shares.



Common Stock


Shares of common stock outstandi ng were as fol l ows:


Year Ended June 30

1998

1999

2
000


Bal ance, beginni ng of year

4,816

4,940

5,109

Issued

202

213

229

Repurchased

(78)

(44)

(55)


Bal ance, end of year

4,940

5,109

5,283



Repurchase Program

In January 2000, the Company termi nated i ts stock buyback program. Pri or to thi s termi nati on, the
Company peri odi cal l y
repurchased i ts common shares i n the open market to provi de shares for i ssuance to empl oyees under stock opti on and stock
purchase pl ans. Duri ng 1998, the Company executed two forward settl ement structured repurchase agreements wi th a
n
i ndependent thi rd party total i ng 42 mi l l i on shares of stock and pai d cash for a porti on of the purchase pri ce. In 1999, the
Company settl ed the agreements by returni ng 28 mill i on shares of stock, based upon the stock pri ce on the date of settl ement.

Th
e ti mi ng and method of settl ement were at the di screti on of the Company. The di fferential between the cash pai d and the pri c
e
of Mi crosoft common stock on the date of the agreement was ori gi nal l y refl ected i n common stock and pai d
-
i n capi tal.



Put Warran
ts


Pri or to the termi nation of the stock buyback program, Mi crosoft enhanced the program by sel l i ng put warrants to i ndependent
thi rd parti es. These put warrants enti tle the hol ders to sel l shares of Mi crosoft common stock to the Company on certai n dat
es

at
speci fi ed pri ces. On June 30, 2000, warrants to put 157 mi l l i on shares were outstandi ng wi th stri ke pri ces rangi ng from $70
to
$78 per share. The put warrants expi re between September 2000 and December 2002. The outstandi ng put warrants permi t a
net
-
share settl ement at the Company’s opti on and do not resul t i n a put warrant l i abi l i ty on the bal ance sheet.

msf t


29

Notes to Financial Statements
conti nued (i n mi llions)


Other Comprehensive Income


The changes i n the components of other comprehensi ve i ncome are

as fol l ows:


Year Ended June 30


1998


1999


2000


Net unreal i zed i nvestment gains/(l osses):

Unreal i zed holding gains, net of tax effect of $355 i n 1998,


$772 i n 1999, and $248 i n 2000

$

660

$

1,432

$

531

Recl assi fi cati on adj ustment for gai ns i ncl uded i n



net i ncome, net of tax effect of $(18) i n 1998,


$(205) i n 1999, and $(420) i n 2000


(33)


(380)


(814)



Net unreal i zed i nvestment gains/(l osses)


627


1,052


(283)

Transl ati on adj ustments and other


(124)


69


23




Other comprehensi ve i ncome/(l oss)

$

503

$

1,121

$

(260)



Employee Stock and Savings Plans


Employee Stock Purchase Plan

The Company has an empl oyee stock purchase pl an for al l el i gi bl e empl oyees. Under the pl an, shares of the Company’s
common stock may be purchased at si x
-
month i ntervals
at 85% of the l ower of the fair market val ue on the fi rst or the l ast day of
each si x
-
month peri od. Empl oyees may purchase shares havi ng a val ue not exceeding 10% of thei r gross compensati on duri ng
an offeri ng peri od. Duri ng 1998, 1999, and 2000, employe
es purchased 4.4 mil lion, 2.7 milli on, and 2.5 milli on shares at average
pri ces of $27.21, $52.59, and $72.38 per share. At June 30, 2000, 68.4 mi l l i on shares were reserved for future i ssuance.


Savings Plan

The Company has a savi ngs pl an, whi ch quali fi es

under Secti on 401(k) of the Internal Revenue Code. Parti ci pati ng empl oyees
may contri bute up to 15% of their pretax sal ary, but not more than statutory l imits. The Company contri butes fi fty cents for

each
dol l ar a parti cipant contri butes, wi th a maxi mum

contri buti on of 3% of a parti cipant’s earni ngs. Matchi ng contri buti ons were $39
mi l l i on, $49 mi l l i on, and $65 mi l l i on i n 1998, 1999, and 2000.


Stock Option Plans

The Company has stock opti on plans for di rectors, offi cers, and employees, whi ch provi de fo
r nonqual i fi ed and i ncenti ve stock
opti ons. Opti ons granted pri or to 1995 generall y vest over four and one
-
hal f years and expi re 10 years from the date of grant.
Opti ons granted duri ng and after 1995 generally vest over four and one
-
half years and expi re

seven years from the date of grant,
whi l e certai n opti ons vest ei ther over four and one
-
half years or over seven and one
-
hal f years and expi re after 10 years. At June
30, 2000, opti ons for 341 mi l l i on shares were vested and 734 mi l l i on shares were avai l a
bl e for future grants under the pl ans.

msf t


30

Notes to Financial Statements
conti nued (i n mi llions, except per share amounts)


Stock opti ons outstandi ng were as fol l ows:




Pri ce per Share







Wei ghted



Shares


Range

Average


Bal ance, June 30, 1997

956

$

0.56




$

29.80

$

7.86


Granted

138

16.56



43.63

31.28


Exerci sed

(176)

0.56



31.24

4.64


Cancel ed

(25)

4.25



41.94

14.69

Bal ance, June 30, 1998

893

0.56



43.63

11.94


Granted

78

45.59



83.28

54.62


Exerci sed

(175)

0.56



53.63

6.29


Cancel ed

(30)

4.25



74.28

21.06

Bal ance, June 30, 1999

766

0.56



83.28

23.87


Granted

304

65.56



119.13

79.87


Exerci sed

(198)

0.56



82.94

9.54


Cancel ed

(40)

4.63



116.56

36.50

Bal ance, June 30, 2000

832

0.56



119.13

41.23


For vari ous pri ce ranges, wei ghted average cha
racteristi cs of outstandi ng stock opti ons at June 30, 2000 were as fol l ows:




Outstanding Options



Exercisable Options





Remaining

Weighted


Weighted


Range of


Lif e

Av erage


Av erage


Exercise Prices

Shares

(Years)

Price

Shares

Price



$ 0.56



$ 5.97


133

2.1

$ 4.57

127

$ 4.53


5.98



13.62


104

3.0

10.89

84

10.83


13.63



29.80


135

3.7

14.99

77

14.83


29.81



43.62


96

4.5

32.08

39

31.98


43.63



83.28


198

7.3

63.19

14

54.64


83.29



119.13


166

8.6

89.91





msf t


31

Notes to Financial Statements
conti nued (i n mi llions, except per share amounts)


The Company follows Accounting Pri nci pl es Board Opi ni on 25
, Accounti ng for Stock Issued to Empl oyees,

to account for
stock opti on an
d employee stock purchase pl ans. An al ternative method of accounti ng for stock opti ons i s SFAS 123,
Accounti ng
for Stock
-
Based Compensati on.

Under SFAS 123, empl oyee stock opti ons are val ued at grant date usi ng the Bl ack
-
Schol es
val uati on model, and thi s

compensati on cost i s recogni zed ratabl y over the vesti ng peri od. Had compensati on cost for the
Company’s stock opti on and employee stock purchase pl ans been determi ned as prescri bed by SFAS 123, pro forma i ncome
statements for 1998, 1999, and 2000 woul d
have been as fol l ows:


Year Ended June 30


1998



1999



2000



Reported

Pro Forma

Reported

Pro Forma

Reported

Pro Forma


Revenue

$

15,262

$

15,262

$

19,747

$

19,747

$

22,956

$

22,956

Operati ng expenses:


Cost of revenue


2,460


2,603


2,814


3,013


3,002


3,277


Research and devel opment


2,601


2,963


2,970


3,479


3,775


4,817


Acqui red i n
-
process technol ogy


296


296














Sal es and marketi ng


2,828


2,977


3,231


3,438


4,141


4,483


General and admini strati ve


433


508


689


815


1,009


1,243


O
ther expenses


230


230


115


115


92


92



Total operating expenses


8,848


9,577


9,819


10,860


12,019


13,912

Operating i ncome


6,414


5,685


9,928


8,887


10,937


9,044

Investment i ncome


703


703


1,803


1,803


3,182


3,182

Gain on sales








160


160


156


156

Income before i ncome taxes


7,117


6,388


11,891


10,850


14,275


12,382

Provi si on for income taxes


2,627


2,369


4,106


3,741


4,854


4,210

Net income

$

4,490

$

4,019

$

7,785

$

7,109

$

9,421

$

8,172

Di luted earni ngs per share

$

0.84

$

0.75

$

1.42

$

1.30

$

1.70

$

1.48


The wei ghted average Bl ack
-
Schol es val ue of options granted under the stock opti on pl ans duri ng 1998, 1999, and 2000 was
$11.81, $20.90, and $36.67. Value was esti mated usi ng a wei ghted average expected l ife of 5.3 years i n 19
98, 5.0 years i n 1999,
and 6.2 years i n 2000, no di vi dends, vol atility of .32 i n 1998 and 1999 and .33 i n 2000, and ri sk
-
free i nterest rates of 5.7%, 4.9%,
and 6.2% i n 1998, 1999, and 2000.



msf t


32

Notes to Financial Statements
conti nued (i n mi llions, except pe
r share amounts)


Earnings Per Share


Basi c earni ngs per share i s computed on the basi s of the wei ghted average number of common shares outstandi ng. Di l uted
earni ngs per share i s computed on the basi s of the wei ghted average number of common shares outsta
ndi ng pl us the effect of
outstandi ng preferred shares usi ng the “i f
-
converted” method, assumed net
-
share settl ement of common stock structured
repurchases, and outstandi ng stock opti ons usi ng the “treasury stock” method.

The components of basi c and di l uted

earni ngs per share were as fol l ows:


Year Ended June 30


1998


1999


2000


Net i ncome

$

4,490

$

7,785

$

9,421

Preferred stock di vi dends


28


28


13

Net i ncome avai lable for common sharehol ders

$

4,462

$

7,757

$

9,408


Wei ghted average outstandi ng shares
of common stock


4,864


5,028


5,189

Di l uti ve effect of:


Common stock under structured repurchases


6


13





Put warrants








2


Preferred stock


34


16


7


Empl oyee stock opti ons


458


425


338

Common stock and common stock equi val ents


5,362


5,482


5,536


Earni ngs per share:


Basi c

$

0.92

$

1.54

$

1.81


Di l uted

$

0.84

$

1.42

$

1.70



Operational Transactions


In August 1997, Mi crosoft acquired WebTV Networks, Inc., an onl i ne servi ce that enabl es consumers to experi ence the Internet
through thei r tel
evi si ons vi a set
-
top termi nal s based on propri etary technol ogi es. A di rector of the Company owned 10% of
WebTV. Mi crosoft paid $425 mil lion i n stock and cash for WebTV. The Company recorded an i n
-
process technol ogies wri te
-
off of
$296 mi l l i on i n the fi r
st quarter of fi scal 1998.

In August 1998, the Company sol d a whol ly
-
owned subsi di ary, Softi mage, Inc. to Avi d Technology, Inc. and recorded a pretax
gai n of $160 mi l l i on. As part of a transi ti onal servi ce agreement, Mi crosoft agreed to make certai n devel
opment tool s and
management systems avai l abl e to Avi d for use i n the Softi mage busi ness.

In November 1998, Microsoft acquired LinkExchange, Inc., a l eading provi der of online marketi ng servi ces to Web si te owners
and smal l and medi um
-
si zed busi nesses. Mi c
rosoft pai d $265 mi l l i on i n stock.

In September 1999, the Company sol d the entertai nment ci ty gui de porti on of MSN Si dewal k to Ti cketmaster Onl i ne
-
Ci tySearch, Inc. (TMCS) for a combi nati on of TMCS stock and warrants wi th a val ue of $223 mi l l i on. The tra
nsacti on al so
i ncl uded a di stri buti on agreement. Microsoft recognized a gai n of $156 mi llion on the sal e and wi l l recogni ze revenue amount
s
rel ated to the di stri buti on arrangement over the term of the agreement.

In November 1999, Expedia, Inc. completed a
n i nitial public offering of i ts common stock. Expedi a, which i s maj ori ty
-
owned by
Mi crosoft, i s a l eadi ng provi der of branded onl i ne travel servi ces for l ei sure and smal l busi ness travel ers. Expedi a’s fi nan
ci al
resul ts and fi nanci al condi ti on are consol
i dated wi th the operati ons of Mi crosoft.

In January 2000, the Company merged wi th Vi si o Corporation i n a transacti on that was accounted for as a pool i ng of i nterests.

Mi crosoft i ssued 14 mi l l ion shares i n the exchange for the outstandi ng stock of Vi si o.
Vi si o’s assets and l i abi l i ti es, whi ch were
nomi nal, are i ncluded wi th those of Mi crosoft as of the merger. Operating resul ts for Vi si o from peri ods pri or to the merger

were
not materi al to the combi ned resul ts of the two companies. Accordi ngly, the fi nan
cial statements for such peri ods have not been
restated.

Duri ng fi scal 1999 and 2000, Mi crosoft al so acqui red several other enti ti es pri mari l y provi di ng onl i ne technol ogi es and
servi ces. The Company di d not record si gni fi cant i n
-
process technol ogy wri te
-
o
ffs i n connecti on wi th these transacti ons.

msf t


33

Notes to Financial Statements
conti nued


Commitments


The Company has operating l eases for most U.S. and i nternati onal sal es and support offi ces and certai n equi pment. Rental
expense for operati ng l eases was $95

mi l li on, $135 mi llion, and $201 mill ion i n 1998, 1999, and 2000. Future mi ni mum rental
commi tments under noncancelabl e l eases, i n mi l lions of dol l ars, are: 2001, $178; 2002, $172; 2003, $160; 2004, $151; 2005,
$139; and thereafter, $437.

Mi crosoft has co
mmi tted $299 mi l l i on for constructi ng new bui l di ngs and $200 mi l l i on for the manufacturi ng of products.
Duri ng 1996, Mi crosoft and Nati onal Broadcasti ng Company (NBC) establ i shed two MSNBC j oint ventures: a 24
-
hour cabl e news
and i nformation channel and a
n i nteractive onl ine news servi ce. Mi crosoft agreed to pay $220 mill i on over a fi ve
-
year peri od for
i ts i nterest i n the cabl e venture, to pay one
-
hal f of operati onal fundi ng of both j oi nt ventures for a mul ti year peri od, and to
guarantee a porti on of MSNB
C debt.



Contingencies


On October 7, 1997, Sun Mi crosystems, Inc. (“Sun”) brought sui t agai nst Mi crosoft i n the U.S. Di stri ct Court for the Northern

Di stri ct of Cal i forni a. Sun’s compl ai nt al l eges several cl ai ms agai nst Mi crosoft, al l rel ated to the par
ti es’ rel ati onshi p under a
March 11, 1996 Technology Li cense and Di stri bution Agreement (Agreement) concerni ng certai n Java programmi ng l anguage
technol ogy.

On March 24, 1998, the Court entered an order enjoining Microsoft from usi ng the Java Compatibili ty

l ogo on Internet Explorer
4.0 and the Mi crosoft Software Devel opers Ki t (SDK) for Java 2.0. Mi crosoft has taken steps to ful l y compl y wi th the order.

On November 17, 1998, the Court entered an order granting Sun’s request for a prel i minary i nj unction, ho
l di ng that Sun had
establ i shed a l i kel i hood of success on i ts copyri ght i nfri ngement cl ai ms, because Mi crosoft’s use of Sun’s technol ogy i n i ts
products was beyond the scope of the parti es’ l i cense agreement. The Court ordered Mi crosoft to make certai n ch
anges i n i ts
products that i ncl ude Sun’s Java technology and to make certai n changes i n i ts Java software devel opment tools. The Court al
so
enj oi ned Microsoft from enteri ng i nto any l icensi ng agreements that were condi ti oned on exclusi ve use of Mi crosoft’
s Java Vi rtual
Machi ne. Mi crosoft appeal ed that rul i ng to the 9th Ci rcui t Court of Appeal s on December 16, 1998.

On August 23, 1999 the 9th Ci rcui t Court of Appeals vacated the November 1998 prel i mi nary i nj uncti on and remanded the
case to the Di stri ct Cou
rt for further proceedi ngs. Sun i mmedi atel y fi l ed two moti ons to rei nstate and expand the scope of the
earl i er i nj unction on the basi s of copyri ght i nfri ngement and unfair competition. On January 25, 2000, the Court i ssued rul i
ngs on
the two moti ons, den
yi ng Sun’s moti on to rei nstate the prel iminary i njunction on the basi s of copyri ght i nfringement and granti ng,
i n part, Sun’s moti on to rei nstate the prel iminary i nj unction based on unfair competition. Mi crosoft i s i n compl iance wi th t
he terms
of the part
i al ly rei nstated preli minary i njuncti on and wi l l not need to undertake any further acti on to compl y wi th the terms of the
i nj uncti on. No other heari ng or tri al dates have been set.

The parti es have fi l ed mul ti ple summary j udgment motions on the i nterpreta
tion of the Agreement and on Sun’s copyri ght and
trademark i nfri ngement cl ai ms. On February 25, 2000, the Court entered an order denyi ng both parti es’ moti ons for summary
j udgment as to whether the Agreement authori zes Mi crosoft to di stri bute i ndependentl
y developed Java Technol ogy. On Apri l 5,
2000, the Tri al Court entered an order denyi ng Sun’s moti on for summary j udgment regardi ng the i nterpretation of Section 2.7(
a),
whi ch sets forth certai n requi rements that Sun must meet when they del iver Java Techn
ology to Mi crosoft. On May 9, 2000, the
Court entered an order granti ng Microsoft’s moti on to dismi ss Sun’s copyri ght i nfri ngement cl ai m and on May 25, 2000, the Cou
rt
i ssued a tentati ve order granting Microsoft’s moti on to di smi ss Sun’s cl ai m that i t i s
enti tl ed to l i qui dated damages based on the
al l eged i mproper posti ng of i ts source code by Mi crosoft. The Court has i ndi cated i ts i ntention to set a heari ng on the rema
i ni ng
moti ons i n September 2000.

On May 18, 1998, the Antitrust Di vi si on of the U.S. D
epartment of Justi ce (DOJ) and a group of state Attorneys General fi l ed
two anti trust cases agai nst Mi crosoft i n the U.S. Di stri ct Court for the Di stri ct of Col umbia. The DOJ complai nt al leges vi o
l ations of
Secti ons 1 and 2 of the Sherman Act. The DOJ co
mplai nt seeks decl aratory rel ief as to the vi ol ati ons i t asserts and prel i mi nary
and permanent i nj uncti ve rel i ef regardi ng: the i ncl usi on of Internet browsi ng software (or other software products) as part o
f
Wi ndows; the terms of agreements regardi ng non
-
M
i crosoft Internet browsi ng software (or other software products); taki ng or
threateni ng “acti on adverse” i n consequence of a person’s fai l ure to l i cense or di stri bute Mi crosoft Internet browsi ng softwa
re (or
other software product) or di stri buti ng competi n
g products or cooperati ng wi th the government; and restri cti ons on the screens,
boot
-
up sequence, or functions of Mi crosoft’s operati ng system products. The state Attorneys General al l ege l argel y the same
cl ai ms and vari ous pendent state cl aims. The stat
es seek decl aratory rel i ef and preliminary and permanent i njunctive rel ief si milar
to that sought by the DOJ, together wi th statutory penal ti es under the state l aw cl aims. The foregoi ng descri ption i s qual if
ied i n i ts
enti rety by reference to the full tex
t of the complai nts and other papers on fi l e i n those acti ons, case numbers 98
-
1232 and 98
-
1233.

msf t


34

Notes to Financial Statements
conti nued


On May 22, 1998, Judge Jackson consol i dated the two actions. The j udge granted Microsoft’s moti on for summary j udgmen
t
as to the states’ monopoly l everage cl aim and permitted the remaining cl ai ms to proceed to tri al. Tri al began on October 19,

1998
and ended wi th cl osi ng arguments on September 21, 1999. On November 5, 1999, Judge Jackson i ssued hi s Fi ndi ngs of Fact.
O
n Apri l 3, 2000 the Court entered i ts Concl usi ons of Law, determining that Microsoft “ti ed” Internet Explorer and Wi ndows 95/
98
i n vi ol ation of Section 1 of the Sherman Act, that Microsoft vi ol ated Section 2 of the Sherman Act by taki ng actions to mai nt
ai n

i ts
monopoly i n the desktop
-
PC operating system market, and that Mi crosoft attempted to monopol ize the Internet browser market i n
vi ol ati on of Section 2 of the Sherman Act. The Court al so hel d that Mi crosoft di d not vi ol ate Secti on 1 of the Sherman Act b
y
enteri ng i nto a number of contracts chal lenged by the government. The Court establ i shed a schedul e for consi derati on of the
remedy to be i mposed i n a fi nal j udgment. On Apri l 28, 2000, the pl ai nti ffs submi tted a j oi nt proposed remedy that i ncl uded
a
pr
oposed break
-
up of Mi crosoft i nto two compani es, an operati ng systems company, and a company that woul d own al l of
Mi crosoft’s other products and busi nesses. Mi crosoft submi tted i ts proposed remedy and i ts proposal for further remedy
proceedi ngs on May 10
, 2000. On June 7, 2000, Judge Jackson entered the government’s proposed order nearl y verbatim as hi s
fi nal j udgment i n the case. That j udgment orders a di vesti ture that wi l l create two separate compani es, an “Operati ng System
s
Busi ness” and an “Appl i cat
ions Busi ness,” to be i mpl emented one year fol lowing a fi nal decisi on on appeal. It al so provi des for a
broad range of “conduct” remedi es that woul d have gone i nto effect i n 90 days, absent a stay. On June 13, 2000, Mi crosoft
appeal ed to the Uni ted State
s Court of Appeals. The Court of Appeals i mmediately entered an order notifying the parti es that the
Court woul d hear al l matters rel ated to thi s appeal
en banc
. The government then asked Judge Jackson to enter an order
certi fyi ng the case for di rect appe
al to the Supreme Court. On June 20, 2000, Judge Jackson certi fi ed the case for di rect appeal
to the Supreme Court and si mul taneousl y granted Mi crosoft’s request to stay the enti re remedy pendi ng fi nal appeal. The
certi fi cation divests the Court of Appeal
s of j uri sdi cti on over the case unti l the Supreme Court deci des whether or not to accept
j uri sdi cti on of the case, whi ch i s enti rely di screti onary. The parties have agreed to a bri efing schedule on thi s i ssue, acc
ordi ng to
whi ch Mi crosoft fi l ed i ts Juri sd
i cti onal Statement on July 26, 2000, the government responded on August 15, 2000, and Mi crosoft
repl i ed on August 22, 2000. If the Supreme Court declines to accept j uri sdi cti on, the appeal wi ll return to the Court of App
eal s. If
the Supreme Court accepts

j uri sdi cti on, a schedule wi ll be establ ished for bri efi ng and oral argument on the meri ts of our appeal.

In other ongoi ng i nvesti gati ons, the DOJ and several state Attorneys General have requested i nformati on from Mi crosoft
concerni ng vari ous i ssues. I
n addi tion, the European Commi ssi on has i nsti tuted proceedings i n whi ch i t all eges that Mi crosoft has
fai l ed to di scl ose i nformati on that Sun cl ai ms i t needs to i nteroperate ful l y wi th Wi ndows 2000 cl i ents and has engaged i n
di scri mi natory l i censi ng of suc
h technol ogy. The remedi es sought, though not ful l y defi ned, i ncl ude mandatory di scl osure of
Mi crosoft i ntel lectual property concerni ng Wi ndows operati ng systems and i mposi tion of fi nes. Microsoft denies the Commissi o
n’s
al l egati ons and i ntends to contes
t the proceedi ngs vi gorousl y.

A l arge number of antitrust cl ass acti on l awsui ts have been i ni ti ated against Mi crosoft. These cases al l ege that Mi crosoft h
as
competed unfairl y and unl awfully monopoli zed alleged markets for operati ng systems and certai n sof
tware appl i cati ons and seek
to recover al l eged overcharges that the complaints contend Microsoft charged for these products. Mi crosoft bel i eves the cl ai
ms
are wi thout meri t and i s vi gorousl y defendi ng the cases.

The Securi ties and Exchange Commissi on i s

conducti ng a non
-
publ i c i nvesti gati on i nto the Company’s accounti ng reserve
practi ces. Mi crosoft i s al so subj ect to vari ous l egal proceedi ngs and cl ai ms that ari se i n the ordi nary course of busi ness.

Management currentl y bel i eves that resol vi ng these mat
ters wi l l not have a materi al adverse i mpact on the Company’s
fi nanci al posi ti on or i ts resul ts of operati ons.

msf t


35

Notes to Financial Statements
conti nued (i n mi llions)


Segment Information





Product ivity



Windows

Applicat ions and

Consumer

Reconciling

Year

Ended June 30

Platf orms

Developer

and Ot her

Amounts

Consolidat ed


1998

Revenue

$

6,236

$

7,458

$

1,765

$

(197)

$

15,262

Operating i ncome

3,661

4,824

(1,050)

(1,021)

6,414


1999

Revenue

$

8,570

$

8,636

$

1,854

$

687

$

19,747

Operating i ncome

5,476

4,950

(1
,241)

743

9,928


2000

Revenue

$

9,265

$

10,089

$

2,718

$

884

$

22,956

Operating i ncome

5,813

4,935

(1,455)

1,644

10,937


The Company’s organi zational structure and fundamental approach to busi ness refl ect the needs of i ts customers. As such,
Mi crosoft has

three maj or segments: Wi ndows Pl atforms; Producti vi ty Appl i cati ons and Devel oper; and Consumer and Other.
Wi ndows Pl atforms i ncl udes the Wi ndows Di vi si on, whi ch i s pri mari l y responsi bl e for devel opi ng and marketi ng Wi ndows NT
Workstati on, Wi ndows 2000 P
rofessi onal, Wi ndows 98, Wi ndows 95, Wi ndows NT Server, and Wi ndows 2000 Server.
Producti vi ty Appl icati ons and Devel oper i ncl udes the Busi ness Producti vi ty Di vi si on, whi ch i s responsi bl e for devel opi ng and
marketi ng desktop appl i cations, server appl i cati o
ns, and devel oper tool s. Consumer and Other products and servi ces i ncl ude
pri mari l y l earning, entertainment, and PC i nput device products; WebTV and PC onli ne access; and portal and verti cal properti
es.
Assets of the segment groups are not rel evant for m
anagement of the busi nesses nor for di scl osure.

Segment i nformation i s presented i n accordance wi th SFAS 131,
Di scl osures about Segments of an Enterpri se and Rel ated
Informati on.

Thi s standard i s based on a management approach, whi ch requi res segmentati on

based upon the Company’s
i nternal organization and discl osure of revenue and operating i ncome based upon i nternal accounting methods. The Company’s
fi nanci al reporting systems present vari ous data for management to run the busi ness, i ncl uding i nternal pr
ofi t and l oss statements
(P&Ls) prepared on a basi s not consi stent wi th general l y accepted accounti ng pri nci pl es. Reconci l i ng i tems i ncl ude certai n
el ements of unearned revenue, the treatment of certai n channel i nventory amounts and esti mates, and the cl a
ssi fi cati on of
revenue from product support and consul ti ng. Addi ti onal l y, the i nternal P&Ls use accel erated methods of depreci ati on and
amorti zation. In fi scal 2000, the Company’s i nternal P&Ls i ncl uded the Bl ack
-
Schol es val ue of empl oyee stock opti on gr
ants,
amorti zed over the remai ning months of the fi scal year of the grant, as wel l as mi nor changes to the segments’ composi tion du
e to
vari ous i nternal reorganizations duri ng the year. Fi scal 1999 di scl osures have been restated for consi stent presentatio
n. It i s not
practi cabl e to restate fi scal 1998 for these changes.

Revenue attri butable to U.S. operations i ncl udes shi pments to customers i n the Uni ted States, l i censi ng to OEMs and certai n
mul ti national organizations, and exports of fi ni shed goods, pri m
ari l y to Asi a, Lati n Ameri ca, and Canada. Revenue from U.S
operati ons totaled $10.1 bi lli on, $13.7 bi lli on, and $15.7 bil lion i n 1998, 1999, and 2000. Revenue from outsi de the Uni ted
States,
excl udi ng l icensi ng to OEMs and certain multinational organizat
ions and U.S. exports, total ed $5.2 bi ll i on, $6.0 bi l l i on, and $7.3
bi l l i on i n 1998, 1999, and 2000.

Long
-
l i ved assets total ed $1.5 bil lion and $1.8 bi llion i n the United States i n 1999 and 2000 and $154 mil lion and $126 mi l l i on
i n other countri es i n 1999
and 2000.

msf t


36

Quarterly Information

Unaudi ted (i n mi llions, except per share amounts)









Quart er Ended






Sept. 30


Dec. 31


Mar. 31

June 30

Year

1998

Revenue

$

3,334

$

3,792

$

3,984

$

4,152

$

15,262

Gross profi t


2,800


3,179


3,344


3,479


12,802

Ne
t income


663


1,133


1,337


1,357


4,490

Basi c earni ngs per share


0.14


0.24


0.27


0.27


0.92

Di luted earni ngs per share


0.13


0.21


0.25


0.25


0.84

Common stock pri ce per share:


Hi gh


37.69


36.66


45.47


54.28


54.28


Low


30.82


29.50


31.10


40.9
4


29.50


1999

Revenue

$

4,193

$

5,195

$

4,595

$

5,764

$

19,747

Gross profi t


3,544


4,407


3,887


5,095


16,933

Net income


1,683


1,983


1,917


2,202


7,785

Basi c earni ngs per share


0.34


0.40


0.38


0.43


1.54

Di luted earni ngs per share


0.31


0.36


0.
35


0.40


1.42

Common stock pri ce per share:







Hi gh


59.81


72.00


94.63


95.63


95.63


Low


47.25


43.88


68.00


75.50


43.88


2000

Revenue

$

5,384

$

6,112

$

5,656

$

5,804

$

22,956

Gross profi t


4,672


5,356


4,904


5,022


19,954

Net income


2,191


2,
436


2,385


2,409


9,421

Basi c earni ngs per share


0.43


0.47


0.46


0.46


1.81

Di luted earni ngs per share


0.40


0.44


0.43


0.44


1.70

Common stock pri ce per share:


Hi gh


100.75


119.94


118.63


96.50


119.94


Low


81.63


84.38


88.13


60.38


60.38


The

Company’s common stock i s traded on The Nasdaq Stock Market under the symbol MSFT. On Jul y 31, 2000, there were
107,824 regi stered hol ders of record of the Company’s common stock. The Company has not pai d cash di vidends on i ts common
stock
.

msf t


37

Report of M
anagement


Management i s responsi bl e for prepari ng the Company’s fi nanci al statements and the other i nformati on that appears i n thi s
annual report. Management bel i eves that the fi nanci al statements fai rl y refl ect the form and substance of transacti ons and

reasonabl y present the Company’s fi nancial condition and resul ts of operati ons i n conformity wi th generall y accepted accounti
ng
pri nci pl es. Management has i ncl uded i n the Company’s fi nanci al statements amounts that are based on esti mates and
j udgments, w
hi ch i t bel i eves are reasonabl e under the ci rcumstances.

The Company maintains a system of i nternal accounting pol i ci es, procedures, and control s i ntended to provi de reasonabl e
assurance, at appropri ate cost, that transacti ons are executed i n accordance wi
th Company authori zati on and are properl y
recorded and reported i n the fi nanci al statements, and that assets are adequatel y safeguarded.

Del oi tte & Touche LLP audits the Company’s fi nancial statements i n accordance wi th general l y accepted audi ti ng standard
s
and provi des an obj ecti ve, i ndependent revi ew of the Company’s i nternal control s and the fai rness of i ts reported fi nanci al
condi ti on and resul ts of operati ons.

The Mi crosoft Board of Di rectors has an Audi t Committee composed of nonmanagement Di rectors.

The Commi ttee meets
wi th fi nancial management, i nternal audi tors, and the i ndependent audi tors to revi ew i nternal accounting controls and account
i ng,
audi ti ng, and fi nanci al reporti ng matters.






John G. Connors

Seni or Vi ce Presi dent, Fi nance and Admi n
i strati on;

Chi ef Fi nanci al Offi cer

msf t


38

Report of Independent Auditors


To the Board of Di rectors and Stockhol ders of Mi crosoft Corporati on:


We have audi ted the accompanying consol i dated bal ance sheets of Mi crosoft Corporati on and subsi di ari es as of June 30,

1999 and 2000, and the rel ated consol idated statements of i ncome, cash fl ows, and stockhol ders’ equi ty for each of the three
years i n the peri od ended June 30, 2000, appeari ng on page 11 and pages 19 through 36. These fi nancial statements are the
respons
i bi l i ty of the Company’s management. Our responsi bi lity i s to express an opi ni on on these fi nancial statements based
on our audi ts.

We conducted our audi ts i n accordance wi th audi ti ng standards general l y accepted i n the Uni ted States of Ameri ca.
Those st
andards requi re that we pl an and perform the audi t to obtai n reasonabl e assurance about whether the fi nanci al
statements are free of materi al misstatement. An audit i ncludes exami ning, on a test basi s, evi dence supporting the amounts
and di scl osures i n th
e fi nancial statements. An audit al so i ncludes assessi ng the accounti ng pri nci pl es used and si gni fi cant
esti mates made by management, as wel l as eval uati ng the overal l fi nanci al statement presentati on. We bel i eve that our
audi ts provi de a reasonabl e basi
s for our opi ni on.

In our opi ni on, such consol i dated fi nanci al statements present fai rl y, i n al l materi al respects, the fi nanci al posi ti on of
Mi crosoft Corporati on and subsi di aries as of June 30, 1999 and 2000, and the resul ts of thei r operati ons and thei r

cash fl ows
for each of the three years i n the peri od ended June 30, 2000 i n conformity wi th accounti ng pri nci pl es general l y accepted i n
the Uni ted States of Ameri ca.






Seattl e, Washi ngton

Jul y 18, 2000

msf t


39

Directors and Officers



Directors








Will
iam H. Gates, III

Chai rman of the Board;

Chi ef Software Archi tect,
Mi crosoft Corporati on


Stev en A. Ballmer

Presi dent;

Chi ef Executi ve Officer,
Mi crosoft Corporati on

Paul G. Allen

Chai rman of the Board,
Vul can Northwest Inc.


Richard A. Hackborn

Chai rman

of the Board;
Executi ve Vi ce

Presi dent (reti red),

Hewl ett
-
Packard Company


Dav id F. Marquardt

General Partner,

August Capi tal


Ann McLaughlin

Chai rman Emeritus,

The Aspen Insti tute;

Seni or Advi sor,

Benedetto and

Gartl and & Company, Inc.


Wm. G. Reed
, Jr.

Chai rman, Si mpson
Investment Company

(reti red)


Jon A. Shirley

Presi dent and Chi ef
Operati ng Officer,
Mi crosoft Corporati on
(reti red)






Executive Officers








William H. Gates, III

Chai rman of the Board;

Chi ef Software Archi tect


Stev en A.

Ballmer

Presi dent;

Chi ef Executi ve Officer


Robert J. Herbold

Executi ve Vi ce Presi dent;

Chi ef Operati ng Officer


William H. Neukom

Executi ve Vi ce Presi dent,

Law and Corporate Affai rs;
Secretary


James E. Allchin

Group Vi ce Presi dent,

Pl atforms


Orland
o Ayala Lozano

Group Vi ce Presi dent,

Sal es, Marketi ng and

Servi ces


Richard E. Belluzzo

Group Vi ce Presi dent,

Personal Servi ces

and Devi ces

Paul A. Maritz

Group Vi ce Presi dent,

Pl atforms Strategy &
Devel oper


Robert L. Muglia

Group Vi ce Presi dent,

.
NET Servi ces


Jeffrey S. Raikes

Group Vi ce Presi dent,
Producti vi ty and

Busi ness Servi ces


Robert J. Bach

Seni or Vi ce Presi dent,

Home & Retai l


Brad Chase

Seni or Vi ce Presi dent,
MSN.com


Dav id Cole

Seni or Vi ce Presi dent,
Personal Servi ces Pl atform


John G
. Connors

Seni or Vi ce Presi dent,

Fi nance and Admi nistrati on;
Chi ef Fi nancial Offi cer


Jean
-
Philippe Courtois

Seni or Vi ce Presi dent;
Presi dent, Mi crosoft Europe,
Mi ddl e East, and Afri ca


Jon DeVaan

Seni or Vi ce Presi dent,

TV Servi ce & Pl atform


Paul Flessn
er

Seni or Vi ce Presi dent,

.NET Enterpri se Server


Paul H. Gross

Seni or Vi ce Presi dent,
Col l aboration & Mobility


Joachim Kempin

Seni or Vi ce Presi dent,

OEM


Michel Lacombe

Seni or Vi ce Presi dent;
Chai rman, Microsoft Europe,
Mi ddl e East, and Afri ca


Brian M
acDonald

Seni or Vi ce Presi dent,
Subscri pti on Servi ce


Craig Mundie

Seni or Vi ce Presi dent,
Consumer Strategy


Richard F. Rashid

Seni or Vi ce Presi dent,
Research


Stev en J. Sinofsky

Seni or Vi ce Presi dent,

Offi ce


Brian Valentine

Seni or Vi ce Presi dent,
Wi ndow
s


Dav id Vaskevitch

Seni or Vi ce Presi dent,
Busi ness Appl i cations


Bernard P. Vergnes

Seni or Vi ce Presi dent;

Chai rman Emeritus,
Mi crosoft Europe, Mi ddle
East, and Afri ca


msf t


40


Worldwide Marketing Locations*


www.microsoft.com/worldwide/


South Pacific and Ame
ricas Region






Argent ina

www.microsof t.com/argent ina/

Guat emala

www.microsof t.com/guat emala/

Aust ralia

www.microsof t.com/aust ralia/

Jamaica

www.microsof t.com/lat am/

Boliv ia

www.microsof t.com/boliv ia/

México

www.microsof t.com/mexico/

Brazil

www.mic
rosof t.com/brasil/

New Zealand

www.microsof t.com/nz/

Canada

www.microsof t.com/canada/

Panama

www.microsof t.com/panama/

Caribbean I slands

www.microsof t.com/lat am/

Perú

www.microsof t.com/peru/

Chile

www.microsof t.com/chile/

Puerto Rico

www.microsof t.com/p
uertorico/

Colombia

www.microsof t.com/colombia/

Trinidad & Tobago

www.microsof t.com/latam/

Costa Rica

www.microsof t.com/costarica/

United States


Dominican Republic

www.microsof t.com/dominicana/


of America

www.microsof t.com/usa/

Ecuador

www.micros
of t.com/ecuador/

Uruguay

www.microsof t.com/uruguay/

El Salv ador

www.microsof t.com/elsalv ador

Venezuela

www.microsof t.com/v enezuela



Europe, Middle East, and Africa Region






Austria

www.microsof t.com/austria/

Morocco

www.microsof t.com/northaf rica/

Belgium

www.microsof t.com/benelux/

The Netherlands

www.microsof t.com/benelux/

Bulgaria

www.microsof t.com/bulgaria/

Nigeria

www.microsof t.com/northaf rica/

Croatia

www.microsof t.com/croatia/

Norway

www.microsof t.com/norge/

Czech Republic

www.microsof t.c
om/cze/

Pakistan

www.microsof t.com/middleeast/

Denmark

www.microsof t.com/danmark/

Poland

www.microsof t.com/poland/

Egy pt

www.microsof t.com/middleeast/

Portugal

www.microsof t.com/portugal/

Finland

www.microsof t.com/f inland/

Romania

www.microsof t.com/roma
nia/

France

www.microsof t.com/f rance/

Russia

www.microsof t.com/rus/

Germany

www.microsof t.com/germany/

Saudi Arabia

www.microsof t.com/middleeast/

Greece

www.microsof t.com/hellas/

Slov akia

www.microsof t.com/slov akia/

Hungary

www.microsof t.com/hun/

Slov e
nia

www.microsof t.com/slov enija/

Indian Ocean Islands

www.microsof t.com/af rica/southeast/

South Af rica

www.microsof t.com/southaf rica/

Ireland

www.microsof t.com/ireland/

Spain

www.microsof t.com/spain/

Israel

www.microsof t.com/israel/

Sweden

www.microsof t
.com/sv erige/

Italy

www.microsof t.com/italy/

Switzerland

www.microsof t.com/switzerland/

Iv ory Coast

www.microsof t.com/northaf rica/

Tunisia

www.microsof t.com/northaf rica/

Keny a

www.microsof t.com/af rica/southeast/

Turkey

www.microsof t.com/turkiy e/

Kuwait

www.microsof t.com/middleeast/

United Arab Emirates

www.microsof t.com/middleeast/

Latv ia

www.microsof t.com/europe/

United Kingdom

www.microsof t.com/uk/

Lebanon

www.microsof t.com/middleeast/

Zimbabwe

www.microsof t.com/af rica/southeast/

Mauritius

www.mic
rosof t.com/af rica/southeast/




Asia Region






Hong Kong

www.microsof t.com/hk/

Philippines

www.microsof t.com/philippines/

India

www.microsof t.com/india/

Singapore

www.microsof t.com/singapore/

Indonesia

www.microsof t.com/indonesia/

Taiwan

www.microso
f t.com/taiwan/

Japan

www.microsof t.com/japan/

Thailand

www.microsof t.com/thailand/

Korea

www.microsof t.com/korea/

Vietnam

www.microsof t.com/worldwide/phone/

Malay sia

www.microsof t.com/malay sia/


ph_v ietn.htm

The People’s





Republic of China

www.
microsof t.com/china/





*

For a complete list of subsidiaries, joint ventures, and other legal entities, see the Company’s Form 10
-
K at http://www.microsof t.com/msft/

msf t


41

Investor Relations


www.microsoft.com/msf t/


As a Mi crosoft sharehol der,
you’re i nvi te
d to take
ad癡ntage of shareholder
ser癩捥s or to request more
i nformation about j i 捲osoft.


Account Questions

Our transfer agent can

hel p you wi th a vari ety

of sharehol der
-
rel ated
servi ces, i ncl udi ng:



Change of address



i ost sto捫 捥rti fi 捡tes



qran
sfer of sto捫 to
another person



Addi ti onal

admi nistrati 癥 ser癩捥s


vou 捡n 捡l l our transfer
agent tol l
J
free at

EUMMF OUR
J
㜷㜲T


vou 捡n al so wri te

them atW

Chasej el l on

pharehol der per癩捥s

m.l. Bo砠PPNR

pouth ea捫ensa捫I kg

〷㘰M
J
ㄹㄵ


lr 祯u 捡n e
J
mai l our

transfer agent atW

msft@捨asemel l on.捯m


pharehol ders of re捯rd who
re捥i 癥 more than one 捯p礠
of thi s annual report 捡n
捯nta捴 our transfer agent
and arrange to ha癥 their
a捣cunts 捯nsol i dated.
pharehol ders who own
j i 捲osoft sto捫 through

a brokerage 捡n 捯nta捴

thei r broker to request
捯nsol i dation of their
a捣cunts.


Annual Meeting

Mi crosoft sharehol ders are
i nvi ted to attend our annual
meeti ng, whi ch wi ll be held

on Thursday, November 9,
2000 from 8 to 9 A.M. at

the Washi ngton State
C
onventi on & Trade Center,

800 Conventi on Pl ace,
Seattl e, Washi ngton.

Parki ng at the Center i s
l i mi ted: please pl an ahead

i f you are dri vi ng to the
meeti ng.



Inv estor Relations

You can contact Mi crosoft’s
fn癥stor oel ati ons group an礠
ti me to order fi na
n捩al
do捵ments su捨 as thi s
annual report and the corm

J
h. Cal l us tol l
J
free at
EUMMF OUR
J
TTTO. xlutsi de

the rni ted ptatesI 捡l l

EQORF VPS
J
QQMM.z lr send

a fa砠to EQORF VPS
J
UMMM.

te 捡n be 捯nta捴ed during
test Coast busi ness hours

to answer i n
癥stment
J
ori ented questi ons about
j i 捲osoft.


fn addi ti onI 祯u 捡n wri te

us atW

fn癥stor oel ati ons

j i 捲osoft Corporati on

lne j i 捲osoft tay

oedmondI tashi ngton

㤸〵V
J
㘳㤹

lr better 祥tI send us

an e
J
mai l atW

msft@mi 捲osoft.捯m


Freedom to

Innov ate Netw
ork

You are encouraged to

make your voi ce heard i n

the i mportant public poli cy
debates that wi l l shape the
future of the technology
i ndustry by joi ni ng the
Freedom to Innovate

Network (FIN). The FIN i s

a free servi ce that wi l l al low
you to share your vi
ews,

send a l etter di rectl y to your
el ected offici als, and

recei ve regul ar i ssue

updates on i mportant
l egi sl ation faci ng Microsoft.
Joi n today by contacting the
FIN at:

www.mi crosoft.com/

freedomtoinnovate/

by e
-
mai l at:
msfi n@mi crosoft.com,

or cal l 1
-
888
-
321
-
3999.


Get Financial

Information Online

Anyone wi th access to the
Internet can vi ew thi s annual
report el ectroni cal ly, along
wi th a wi de vari ety of other
fi nanci al materials at:
www.mi crosoft.com/msft/


No part of thi s report may be reproduced o
r transmi tted i n any form or by any means, el ectroni c or otherwi se, wi thout the express wri tten permi ssi on of Mi crosoft Corpo
rati on.

Some i nformati on contai ned i n thi s document rel ates to prerel ease software product, whi ch may be substanti al l y modi fi ed bef
ore i ts fi rst commerci al rel ease. Accordi ngl y, the
i nformati on may not accuratel y descri be or refl ect the software product when fi rst commerci al l y rel eased.

Other i nformati on contai ned i n thi s document represents the current vi ew of Mi crosoft Corporati on o
n the i ssues di scussed as of the date of publ i cati on. Because Mi crosoft must
respond to changi ng market condi ti ons, i t shoul d not be i nterpreted to be a commi tment on the part of Mi crosoft.

© 2000 Mi crosoft Corporati on. Al l ri ghts reserved.

Mi crosoft, Ag
e of Empi res, BackOffi ce, CarPoi nt, HomeAdvi sor, Hotmai l, Li nkExchange, MSN,
.NET

l ogo, PowerPoi nt, Vi si o, Vi sual Studi o, WebTV, Where do you want to go
today?, Wi ndows, the Wi ndows l ogo, Wi ndows NT, and Xbox are ei ther regi stered trademarks or trademarks
of Mi crosoft Corporati on i n the Uni ted States and/or other countri es.
The names of actual compani es and products menti oned herei n may be the trademarks of thei r respecti ve owners.