to customers.  Due to these changes in channel mechanics and the business model, the risk of returns of product from distributors and resellers has declined.  Accordingly, the estimate for future product returns was reduced by $250 million in the fourth quarter of fiscal 1999.

The Company changed the way it reports revenue and costs associated with product support, consulting, MSN Internet access, and training and certification of system integrators.  Amounts received from customers for these activities have been classified as revenue in a manner more consistent with Microsoft’s primary businesses.  These amounts had been previously netted in sales and marketing expenses, except for MSN access fees, which had been netted in research and development expenses.  Direct costs of these activities are classified as cost of revenue.  Prior financial statements and disclosures have been reclassified for consistent presentation.  Revenue from these activities was $578 million, $778 million, and $1.06 billion in 1997, 1998, and 1999.

Microsoft also made two changes related to the ratable recognition of revenue for a portion of its revenue for certain products.  A new accounting rule that interprets American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2, Software Revenue Recognition, requires companies to use the average sales price of each undelivered element of software arrangements.  Prior authoritative guidance allowed a comparison of the total price differential between a licensed product sold through different channels of distribution to derive the value of undelivered elements offered to customers acquiring product from one channel but not the other.  Upon adoption of this new rule in the fourth quarter of fiscal 1999, the percentages of the total arrangement treated as unearned decreased.  This change in the timing of revenue recognition reduced the amount of Microsoft Windows and Microsoft Office sales treated as unearned and increased the amount of revenue recognized upon shipment.  Additionally, as part of the Company’s long range planning process and a review of product shipment cycles, it was determined that the life cycle of Windows should be extended from two years to three years.  The net impact of these changes was to increase reported revenue $80 million in the fourth quarter of 1999.



Business divisions

Microsoft has three major segments: Windows Platforms; Productivity Applications and Developer; and Consumer, Commerce, and Other.



Windows Platforms revenue was $4.92 billion, $6.28 billion, and $8.50 billion in 1997, 1998, and 1999.  Platform revenue is primarily licenses of PC operating systems and business and enterprise server systems with client/server, Internet, and intranet architectures.

The Company’s principal PC operating systems are Windows 95, Windows 98, and Windows NT® Workstation.  Windows 95 was released in August 1995, while its successor, Windows 98, became available at the end of fiscal 1998.  Windows NT Workstation version 4.0 was released in fiscal 1997.  Although the growth rate of new PC shipments slowed, PC operating systems contributed to revenue growth as