across entire corporate, academic, and governmental organizations.

Software license volume increases have been the principal factor in Microsoft'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 original equipment manufacturer (OEM) licenses and organization license

programs is lower than average revenue per license from retail versions.

Likewise, product upgrades have lower prices than new products. Also, prices of integrated suites, such as Microsoft Office,

are less than the sum of the prices for the individual programs included in

these suites when such programs are licensed separately. During each of the

three years an increased percentage of products and programs included elements

which were billed but unearned and recognized ratably, such as Windows operating

systems, Office 97, maintenance, and other subscription models. See accompanying

notes.

PRODUCT GROUPS. Platform product revenue was $4.11 billion, $5.97 billion, and

$7.64 billion in 1996, 1997, and 1998.  Platform revenue is primarily licenses

of PC operating systems; business systems with client/server, Internet, and

intranet architectures; and software development tools.

The Company's principal desktop platform products are its 32-bit operating

systems: Windows 95, Windows 98, and Windows NT Workstation.  Released in August

1995, Windows 95 was a successor to the MS-DOS(R) and Microsoft Windows 3.x

operating systems.  Windows NT Workstation version 4.0 was released in fiscal

1997.  Windows 98 became available at the end of fiscal 1998.  Although the

growth rate of new PC shipments slowed, desktop operating systems contributed to

revenue growth as shipments of new PCs preinstalled with such systems increased

during the three-year period.  Additionally, increased penetration of higher

value 32-bit operating systems, particularly Windows NT Workstation, led to

growth in 1996, 1997, and 1998.  In 1996, retail license sales of Windows 95

were a major factor in the Platform revenue increase, reflecting the typical

sales pattern for major operating system upgrades.  Also in 1996, a portion of

Windows operating system revenue became subject to ratable recognition.

Business systems products offer an enterprise-wide distributed client/server,

Internet, and intranet environment based on the Microsoft Windows NT Server

operating system, Microsoft Exchange Server, Microsoft SQL Server, and other

server applications in the Microsoft BackOffice (R) family of products. Revenue

from these products increased strongly due to greater corporate demand,

particularly for intranet solutions, although the growth rate slowed in 1998.

Although revenue was not significant, sales of WebTV terminals and 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