expenses rose slightly in 1998, but declined in 1999.



General and administrative

Increases in general and administrative expenses were attributable to higher legal fees, litigation 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 include the recognition of Microsoft’s share of joint venture activities, including DreamWorks Interactive and the MSNBC entities.





Investment Income, Gain on Sale, and Income Taxes



Investment income increased primarily as a result of a larger investment portfolio generated by cash from operations in 1997, 1998, and 1999, coupled with realized gains from the sale of certain bond and equity securities in 1999.

In fiscal 1999, Microsoft sold its Softimage, Inc. subsidiary to Avid Technology, Inc. for a pretax gain of $160 million.

The effective income tax rate was 35.0% in 1997.  The effective income tax rate increased to 36.9% in 1998 due to the nondeductible write-off of WebTV in-process technologies.  Excluding the impact of the gain on the sale of Softimage, Inc., the effective tax rate for fiscal 1999 was 35.0%.



Net Income

Net income as a percent of revenue increased in 1997, 1998, and 1999 due primarily to the lower relative cost of revenue and sales and marketing expenses, combined with greater investment income.



Financial Condition

The Company’s cash and short-term investment portfolio totaled $17.24 billion at June 30, 1999.  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, primarily strategic technology companies.  The Company has made large-scale investments in access providers, including cable, telephony, and wireless communications companies.  During 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.  In connection with AT&T’s proposed merger with MediaOne Group, Inc., the Company agreed to acquire MediaOne’s interest in Telewest Communications plc, a leading provider of cable television and residential and business cable telephony services in the United Kingdom, subject to certain regulatory approvals and other conditions.  During 1997, Microsoft purchased $1.0 billion of Special Class A common stock and convertible preferred stock of Comcast Corporation.  Microsoft also owns an interest in MCI WorldCom, Inc.

Microsoft and National Broadcasting Company (NBC) operate two MSNBC joint ventures: