future software products.

This Management’s Discussion and Analysis contains statements that are forward-looking.  These statements are based on current expectations that are subject to risks and uncertainties.  Actual results will vary because of factors discussed below under “Issues and Uncertainties.”



Revenue



The Company’s revenue growth rate was 28% in fiscal 1998, 29% in fiscal 1999, and 16% in fiscal 2000.  Revenue growth in fiscal 2000 was driven by strong licensing of the Microsoft suite of products including Microsoft Windows NT® Workstation, Windows 2000 Professional, Windows NT Server, Windows 2000 Server, Microsoft Office 2000, and SQL Server 7.0.  Windows 2000, released during fiscal 2000, is the next version of the Windows NT operating system.  Consumer revenue, including Internet access, the online properties, entertainment software, and hardware peripherals also grew strongly.  Partially offsetting those items was slower growth from Windows operating systems sold through the original equipment manufacturer (OEM) channel due to slow demand for business PCs throughout a significant portion of fiscal 2000.  Revenue growth in fiscal 1998 and 1999 reflected the continued adoption of Windows operating systems and Microsoft Office.  Software organizational license increases in 1998, 1999, and 2000 have been a significant 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 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.  See accompanying notes to financial statements.

The Company’s business model continues to evolve from retailing packaged products to licensing organizational licenses and subscriptions.  The Company’s products are generally delivered to end users 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 end users.  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.

In fiscal 1999, Microsoft made two changes related to the ratable recognition of revenue for a portion of its revenue for certain products.  American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions, requires companies to use the average sales price of each undelivered element of software arrangements to unbundle revenue.  Prior authoritative guidance allowed a comparison of the total price differential