unification, user interface simplification, and

Internet and intranet integration are also major focus areas.  Additionally,

Microsoft is committed to providing technologies, operating systems, and

interactive content for the future convergence of PCs, televisions, and the

Internet.  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.  The PC shipment growth rate may continue to decrease and the

replacement rate may continue to increase, reducing future software revenue

opportunity.



PRODUCT SHIP SCHEDULES.  Delays in new-product releases dampen revenue growth

rates and can cause operational inefficiencies that impact manufacturing and

distribution logistics, independent software vendor (ISV) and OEM relationships,

and customer support expenses.



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.



EARNINGS PROCESS.  An increasingly higher percentage of the Company's revenue is

subject to ratable recognition.  Subsequent product support and delivery of

unspecified enhancements require the applicable portion of revenue for certain

products to be recognized over the product's life cycle.  This policy may be

required for additional products, depending on specific license terms and

conditions.  Also, maintenance and other subscription programs may continue to

increase in popularity, particularly with organizations.



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.  As the desktop applications market has

become saturated, the sales mix has shifted from standard products to upgrade

products.  This trend is likely to continue.



ORGANIZATION LICENSES.  Average revenue per unit from organization 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.



CHANNEL MIX.  Average revenue per license is lower from OEM licenses than from

retail versions, reflecting the relatively lower direct costs of operations in

the OEM channel.  An increasingly higher percentage of revenue was achieved

through the OEM channel during 1997 and 1998.



COST OF REVENUE.  Although cost of revenue as a percentage of revenue decreased

in 1997 and 1998, it varies with channel mix, product mix