results of operations are subject to local economic environments and foreign exchange rate fluctuations.



Market risk

The Company is exposed to foreign currency, interest rate, and equity price risks.  A portion of these risks is hedged, but fluctuations could impact the Company’s results of operations and financial position.  The Company hedges the exposure of accounts receivable and a portion of anticipated revenue to foreign currency fluctuations, primarily with option contracts.  The Company monitors its foreign currency exposures daily to ensure the overall effectiveness of its foreign currency hedge positions.  Principal currencies hedged include the Japanese yen, British pound, German mark, French franc, and Canadian dollar.  Fixed income securities are subject to interest rate risk.  The portfolio is diversified and consists primarily of investment grade securities to minimize credit risk.  The Company routinely hedges its exposure to interest rate risk with options in the event of a catastrophic increase in interest rates.  Many securities held in the Company’s equity and other investments portfolio are subject to equity price risk.  The Company hedges its equity price risk on certain highly volatile equity securities with options.

The Company used a value-at-risk (VAR) model to estimate and quantify its market risks.  The VAR model is not intended to represent actual losses in fair value, but is used as a risk estimation and management tool.  Assumptions applied to the VAR model at June 30, 1999 include the following: normal market conditions; Monte Carlo modeling with 10,000 simulated market price paths; a 97.5% confidence interval; and a 20-day estimated loss in fair value for each market risk category.  Accordingly, 97.5% of the time the estimated 20-day loss in fair value would be nominal for foreign currency denominated investments and accounts receivable, and would not exceed $95 million for interest-sensitive investments or $1.38 billion for equity securities.

Previously, the Company used a sensitivity analysis to estimate interest rate and equity price risk.  A 10% increase in interest rates would have reduced the carrying value of interest-sensitive securities by $128 million and $101 million at June 30, 1998 and 1999.  A 10% decrease in market values would have reduced the carrying value of the Company’s equity securities by $300 million and $1.37 billion at June 30, 1998 and 1999.



Intellectual property rights	Microsoft diligently defends its intellectual property rights, but unlicensed copying of software represents a loss of revenue to the Company.  While this adversely affects U.S. revenue, revenue loss is even more significant outside of the United States, particularly in countries where laws are less protective of intellectual property rights.  Throughout the world, Microsoft actively educates consumers on the benefits of licensing genuine products and educates lawmakers on the advantages of a business climate where intellectual property rights are protected.  However, continued efforts may not affect revenue positively.



Litigation

Litigation regarding intellectual property rights, patents, and copyrights