service and

preinstallations of Windows CE by OEMs on intelligent devices were strong in

1998.

Independent software vendors, corporate developers, and solutions developers

license tools such as the Microsoft Visual Basic(R) development system to

develop software for Windows operating systems and the Internet.  Revenue from

developer products increased steadily in 1996 and 1997 and was flat in 1998.

Applications and Content revenue was $4.56 billion, $5.39 billion, and $6.84

billion in 1996, 1997, and 1998.  Applications and Content revenue includes

primarily licenses of desktop and consumer productivity applications,

interactive media programs, and PC input devices.  Microsoft Office for Windows

95 was released in fiscal 1996 and Microsoft Office 97 was released in fiscal

1997.  Applications and Content revenue grew 27% in 1996, 18% in 1997, and 27%

in 1998.  The lower growth rate in 1997 was due primarily to the application of

the ratable revenue recognition model for Office 97.

Absolute increases in desktop applications revenue during the three-year period

were led by the various Microsoft Office integrated suites, including Standard,

Professional, and Small Business Editions.  The primary programs in Microsoft

Office are the word processor Microsoft Word, Microsoft Excel spreadsheet, and

Microsoft PowerPoint(R) presentation graphics program.  Various versions of

Office, which are available for the 32-bit version of Windows, the 16-bit

version of Windows, and Macintosh operating systems, also include Microsoft

Access database management program, Microsoft Outlook(TM) messaging and

collaboration client, or other programs.  Revenue from stand-alone versions of

Microsoft Excel, Word, and PowerPoint continued to decrease as the sales mix shifted to integrated

product suites. Microsoft Project scheduling and project management program

revenue increased during the three-year period.

Microsoft offers a broad range of interactive media products, which also showed

moderate growth.  Products include CD-ROM multimedia reference titles and

programs for home and small office productivity, children's creativity, and

entertainment.  In addition to the Microsoft Network, online Internet services

include travel information and reservations, local event information, and car

buying information.

The Company also markets input devices.  Mouse and gaming device sales increased

while keyboard revenue was steady during the three-year period.

SALES CHANNELS. The Company distributes its products primarily through OEM

licenses, organization licenses, and retail packaged products.  OEM channel

revenue represents license fees from original equipment manufacturers.

Microsoft has three major sales and marketing geographies: the United States and

Canada, Europe, and elsewhere in the world (Other International).  Sales of

organization licenses and packaged products in these channels are primarily to

distributors and resellers.  The trend has continued toward a higher percentage

of organization licensing versus packaged products.

OEM channel revenue was $2.50 billion in 1996, $3.48 billion in 1997, and $4.72

billion in 1998.  The