Networks of $296 million.

SALES AND MARKETING. The increase in the absolute dollar amount of sales and

marketing expenses in the three-year period was due primarily to expanded

product-specific marketing programs, such as Windows 95 in 1996, Office 97 in

1997, and Windows 98 in 1998.  Sales and marketing costs as a percentage of

revenue decreased due to moderate headcount growth.  Microsoft brand advertising

and product support expenses declined in 1997, but rose slightly in 1998.

GENERAL AND ADMINISTRATIVE. Increases in general and administrative expenses

were attributable to higher legal costs and growth in the number of people and

computer systems necessary to support overall increases in the scope of the

Company's operations.

OTHER EXPENSES. Other expenses increased due to recognition of Microsoft's share

of joint venture activities, including DreamWorks Interactive and the MSNBC

entities.



INTEREST INCOME AND INCOME TAXES

Interest income increased primarily as a result of a larger investment portfolio

generated by cash from operations.  The effective income tax rate was 35.0% in

1996 and 1997.  The effective income tax rate increased to 36.9% in 1998 due to

the nondeductible write-off of WebTV in-process technologies.



NET INCOME

Net income as a percent of revenue increased in 1996, 1997, and 1998 due to the

lower relative cost of revenue, sales and marketing expenses, and general and

administrative expenses, partially offset by investments in research and

development, joint ventures, and WebTV.



FINANCIAL CONDITION

Microsoft's cash and short-term investment portfolio totaled $13.93 billion at

June 30, 1998.  The portfolio is diversified among security types, 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

anticipation of continued international expansion.  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 also invests in equities, including financial investments and

strategic technology companies in many areas.  During 1997, Microsoft invested

$1.0 billion in Comcast Corporation, a cable television and diversified

telecommunications company.  Comcast Special Class A common stock and

convertible preferred stock are included in equity investments at fair market

value on the balance sheet.

During 1996, Microsoft and National Broadcasting Company (NBC) established two

MSNBC joint ventures: a 24-hour cable news and information channel and an

interactive online news service.  Microsoft agreed to pay $220 million over a

five-year period for its interest in the cable venture, to pay one-half of operational funding of both joint ventures for a multiyear period, and to

guarantee a portion of MSNBC debt.

Microsoft 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,