product opportunities and develop and bring new products to market in a timely and efficient manner, the Company’s business growth will suffer and demand for its products will decrease.  Competing operating systems, platforms, and products may gain popularity with customers, computer manufacturers, and developers, reducing Microsoft’s future revenue.



Future Initiatives

The Company plans to continue significant investments in software research and development including Microsoft .NET, wireless technologies, digital devices, games, television, and small business.  Microsoft is also making significant investments in strategic relationships with third parties, and in online products and services such as MSN, CarPoint™ online automotive service, and HomeAdvisor™ online real estate service, where the Company has the opportunity to establish leadership in new businesses.  It is anticipated that these investments in research and development will increase over historical spending levels without corresponding growth in revenue in the near future.  Significant revenue from these product opportunities may not be achieved for a number of years, if at all.



PC Growth Rates

The nature of the PC marketplace is changing in ways that may reduce Microsoft’s software sales and revenue growth.  Recently, manufacturers have sought to reach more consumers by developing and producing lower cost PCs – PCs that come without pre-installed software or contain software with reduced functionality.  In addition to the influx of low-cost PCs, a market for handheld computing and communication devices has developed.  While these devices are not as powerful or versatile as PCs, they threaten to erode sales growth in the market for PCs with pre-installed software.  This may affect Microsoft’s revenue growth because manufacturers may choose not to install Microsoft software in these low-cost PCs or consumers may purchase alternative intelligent devices that do not utilize Microsoft software.  These lower-priced devices require Microsoft to provide lower-priced software with a subset of the original functionality.  As a result, the Company may generate less revenue from the sale of software produced for these devices than from the sale of software for PCs.



Product Ship Schedules

The PC software industry is inherently complex.  New products and product enhancements can require long development and testing periods.  Significant delays in new product releases or significant problems in creating new products could damage Microsoft’s business.



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.  Also, penetration of the Company’s desktop applications into large organizations is becoming saturated.  These factors are likely to depress future desktop applications revenue growth.



Prices

The competitive factors described above may require Microsoft to lower product prices to meet competition, reducing the Company’s net income.



Earnings Process

An increasingly higher percentage of the Company’s revenue is subject to ratable