the new opportunities for great software products are still incredible.  I appreciate the unwavering support and trust of our shareholders and customers as Microsoft enters the 21st century.



Bill Gates





Management’s Discussion and Analysis



Results of Operations for 1997, 1998, and 1999

Microsoft develops, manufactures, licenses, and supports a wide range of software products for a multitude of computing devices.  Microsoft software includes scalable operating systems for intelligent devices, personal computers (PCs), and servers; server applications for client/server environments; knowledge worker productivity applications; and software development tools.  The Company’s online efforts include the MSN network of Internet products and services; e-commerce platforms; and alliances with companies involved with broadband access and various forms of digital interactivity.  Microsoft also licenses consumer software programs; sells PC input devices; trains and certifies system integrators; and researches and develops advanced technologies for future software products.



Revenue

The Company’s revenue growth rate was 32% in fiscal 1997, 28% in fiscal 1998, and 29% in fiscal 1999.  Revenue growth rates reflected the continued adoption of Windows operating systems and Microsoft Office, particularly as Microsoft software is deployed across entire corporate, academic, and governmental organizations.  Software license volume increases have been the principal factor in the Company’s revenue growth.  The average selling price per license has decreased, primarily because of general shifts in the sales mix from retail packaged products to licensing programs, from new products to product upgrades, and from stand-alone desktop applications to integrated product suites.  Average revenue per license from original equipment manufacturer (OEM) licenses and organizational license programs is lower than average revenue per license from retail versions.  Likewise, product upgrades have lower prices than new products.  Also, prices of integrated suites, such as Microsoft Office and BackOffice, are less than the sum of the prices for the individual programs included in these suites when such programs are licensed separately.  During each of the three years, an increased percentage of products and programs included elements that were billed but unearned and recognized ratably, such as Microsoft Windows, Microsoft Office, maintenance, and other subscription models.  See accompanying notes to financial statements.

As noted above, the Company’s business model continues to evolve from selling packaged products to licensing organizational licenses and subscriptions.  The Company’s products are generally delivered to customers through a multi-tiered channel of distributors and resellers, but the distribution model is also changing for selected retail products that are now being shipped straight to resellers and other selected products that are now being shipped straight 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