has no material long-term debt and has $100 million of standby

multicurrency lines of credit to support foreign currency hedging and cash

management.  Stockholders' equity at June 30, 1998 was $16.63 billion.

Microsoft will continue to invest in sales, marketing, and product support

infrastructure.  Additionally, research and development activities will include

investments in existing and advanced areas of technology, including using cash

to acquire technology and to fund ventures and other strategic opportunities.

Additions to property and equipment will continue, including new facilities and

computer systems for research and development, sales and marketing, support, and

administrative staff.  Commitments for constructing new buildings were $420

million on June 30, 1998.

Cash will also be used to repurchase common stock to provide shares for employee

stock option and purchase plans.  The buyback program has not kept pace with

employee stock option grants or exercises.  Beginning in fiscal 1990, Microsoft

has repurchased 347 million common shares while 807 million shares were issued

under the Company's employee stock option and purchase plans.  The market value

of all outstanding stock options was $48 billion as of June 30, 1998.  Microsoft

enhances its repurchase program by selling put warrants.  During December 1996,

Microsoft issued 12.5 million shares of 2.75% convertible preferred stock.  Net

proceeds of $980 million were used to repurchase common shares.

Management believes existing cash and short-term investments together with funds

generated from operations will be sufficient to meet operating requirements for

the next 12 months.  Microsoft's cash and short-term investments are available

for strategic investments, mergers and acquisitions, other potential large-scale

cash needs that may arise, and to fund an increased stock buyback program over

historical levels to reduce the dilutive impact of the Company's employee stock

option and purchase programs.

Microsoft has not paid cash dividends on its common stock.  The preferred stock

pays $2.196 per annum per share.



ISSUES AND UNCERTAINTIES

Microsoft does not provide forecasts of future financial performance.  While

Microsoft management is optimistic about the Company's long-term prospects, the

following issues and uncertainties, among others, should be considered in

evaluating its growth outlook.



RAPID TECHNOLOGICAL CHANGE AND COMPETITION.  Rapid change, uncertainty due to

new and emerging technologies, and fierce competition characterize the PC

software industry.  The pace of change has recently accelerated due to the

Internet and new programming languages, such as Java.



FUTURE INITIATIVES.  The Company is expanding its efforts to provide and support

mission-critical systems to large enterprises.  Scalability of BackOffice server

and application products, total cost of ownership of Windows- and Office-based

systems, information storage unification, user interface simplification, and

Internet and intranet integration are also major focus areas.  Additionally,

Microsoft is committed to providing technologies, operating systems,