stock option-related expenses.  The increase in fiscal years 1999 and 1998 were attributable to higher legal fees, settlement costs, and headcount-related costs necessary to support the Company’s expanding operations.



Other Expenses

Other expenses incorporate miscellaneous items, including certain gains; recognition of Microsoft’s share of joint venture activities for the MSNBC entities, TransPoint, and other joint venture activities; and charitable contributions and miscellaneous taxes.





Investment Income, Gain on Sales, and Income Taxes



Investment income increased primarily as a result of a larger investment portfolio generated by cash from operations in 1998, 1999, and 2000, coupled with realized gains from the sale of securities in 1999 and 2000.

In fiscal 2000, Microsoft sold the entertainment city guide portion of MSN Sidewalk to Ticketmaster Online-CitySearch, Inc. (TMCS) for a combination of TMCS stock and warrants with a value of $223 million.  The transaction also included a distribution arrangement.  Microsoft recognized a gain of $156 million on the sale and will recognize revenue amounts related to the distribution arrangement over the terms of the agreement.  In fiscal 1999, Microsoft sold its Softimage, Inc. subsidiary to Avid Technology, Inc. for a pretax gain of $160 million.

The effective tax rate for fiscal 2000 was 34.0%.  Excluding the impact of the gain on the sale of Softimage, Inc., the effective tax rate for fiscal 1999 was 35.0%.  The effective income tax rate for fiscal 1998 was 36.9%, reflecting the nondeductible write-off of WebTV in-process technologies.  





Financial Condition



The Company’s cash and short-term investment portfolio totaled $23.80 billion at June 30, 2000.  The portfolio consists primarily of fixed-income securities, diversified among industries and individual issuers.  Microsoft’s investments are generally liquid and investment grade.  The portfolio is invested predominantly in U.S. dollar denominated securities, but also includes foreign currency positions in order to diversify financial risk.  The portfolio is primarily invested in short-term securities to minimize interest rate risk and facilitate rapid deployment in the event of immediate cash needs.

Microsoft works with many technology companies and often provides investment funding as part of these alliances.  During fiscal 2000, the Company purchased approximately $400 million of Rogers Communications Inc. convertible preferred securities and $200 million of Best Buy Co., Inc. common stock.  Also, subsequent to fiscal year-end, Microsoft acquired an additional shareholding in Telewest Communications plc for approximately $2.6 billion.  During fiscal 1999, the Company purchased $5.0 billion of AT&T convertible preferred securities and warrants, $600 million of Nextel Communications, Inc. common stock, $500 million of NTL, Inc. convertible preferred stock, $330 million of United Pan-Europe Communications common stock, and $200 million of Qwest Communications International Inc. common stock.

Microsoft and National Broadcasting Company (NBC) operate two MSNBC joint ventures: a 24-hour cable news and information channel,