SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities measured at fair value.  The accounting for changes in the fair value of a derivative depends on the use of the derivative.  Adoption of these new accounting standards will result in cumulative after-tax reductions in net income of approximately $350 million and other comprehensive income of approximately $50 million in the first quarter of fiscal 2001.  The adoption will also impact assets and liabilities recorded on the balance sheet.

The Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) 101, Revenue Recognition in Financial Statements, in December 1999.  The SAB summarizes certain of the SEC staff’s views in applying generally accepted accounting principles to revenue recognition in financial statements.  In June 2000, the SEC issued SAB 101B, which delays the implementation date of SAB 101 until no later than the fourth fiscal quarter of fiscal years beginning after December 15, 1999.  The Company does not believe that adoption of this SAB will have a material impact on its financial statements.

In March 2000, the Financial Accounting Standards Board (FASB) issued FASB Interpretation (FIN) 44, Accounting for Certain Transactions involving Stock Compensation, which clarifies the application of APB 25 for certain issues.  The interpretation is effective July 1, 2000, except for the provisions that relate to modifications that directly or indirectly reduce the exercise price of an award and the definition of an employee, which are effective after December 15, 1998.  The Company does not believe that adoption of FIN 44 will have a material impact on its financial statements.



Issues and Uncertainties



While Microsoft management is optimistic about the Company’s long-term prospects, the following issues and uncertainties, among others, should be considered in evaluating its growth outlook.



Rapid Technological Change and Competition

Rapid change, uncertainty due to new and emerging technologies, and fierce competition characterize the software industry, which means that Microsoft’s market position is always at risk.  Microsoft’s ability to maintain its current success is dependent upon the Company’s ability to develop and introduce new products and enhance existing products to satisfy consumer demand for new computer technologies.  This process is challenging because the pace of change continues to accelerate, creating new opportunities for competitors and subjecting business planning to substantial uncertainty.  Competitors, working with new technology, may arrive at a technology that creates a new market altogether and renders the Company’s product offerings obsolete.  “Open source” software, new computing devices, new microprocessor architectures, the Internet, and Web-based computing models are current examples of the rapid pace of change and intensifying competition.  If Microsoft does not successfully identify new 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