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 continues to accelerate, including “open source” software, new computing devices, new  microprocessor architectures, the Internet, and Web-based computing models.



Future initiatives

The Company continues to expand its efforts to provide and support mission-critical systems to large enterprises.  Microsoft is also developing a Windows Web-centric platform and simpler and new natural interfaces for PC users.  Additionally, Microsoft is committed to providing technologies, operating systems, and online services for all types of computing devices, including PCs, televisions, and intelligent appliances.  Future revenue from these initiatives may not duplicate historical revenue growth rates.



PC growth rates

The underlying PC unit growth rate and percentage of new PCs acquired as replacement units directly impact the Company’s software revenue growth.  Additionally, inexpensive PCs and specialty devices create less demand for Microsoft software than traditional PCs. The PC shipment growth rate may continue to decrease, the replacement rate may continue to increase, and limited-use PC growth may increase, reducing future software revenue opportunity.



Product ship schedules

Potential delays in new product releases, including seminal products such as Windows 2000, could dampen revenue growth rates and cause operational inefficiencies that impact manufacturing and distribution logistics and relationships with customers, OEMs, and independent software vendors.



Customer acceptance

While the Company performs extensive usability and beta testing of new products, user acceptance and corporate penetration rates ultimately dictate the success of development and marketing efforts.



Prices

Future product prices may decrease from historical levels, depending on competitive market and cost factors.  European and Asian software prices vary by country and are generally higher than in the United States to cover localization costs and higher costs of distribution.  Increased global license agreements, European monetary unification, or other factors could erode such price uplifts in the future.



Saturation

Product upgrades, which enable users to upgrade from earlier versions of the Company’s products or from competitors’ products, have lower prices and margins than new products.  Also, penetration of the Company’s desktop applications into large organizations is becoming saturated.  These factors are likely to depress future desktop applications revenue growth.



Organizational licenses

Average revenue per unit from organizational license programs is lower than average revenue per unit from retail versions shipped through the finished goods channels.  Unit sales under licensing programs may continue to increase.



Earnings process

An increasingly higher percentage of the Company’s revenue is subject to ratable