and convertible preferred stock of Comcast Corporation.  Microsoft also owns an interest in MCI WorldCom, Inc.

Microsoft and National Broadcasting Company (NBC) operate two MSNBC joint ventures: a 24-hour cable news and information channel, and an interactive online news service.  Microsoft is paying $220 million over a five-year period that ends in 2001 for its interest in the cable venture and one-half of the operational funding of both joint ventures.  Microsoft guarantees a portion of MSNBC debt.

Microsoft has no material long-term debt and has $100 million of standby multicurrency lines of credit to support foreign currency hedging and cash management.  Stockholders’ equity at June 30, 1999 was $28.44 billion.

Microsoft will continue to invest in sales, marketing, and product support infrastructure.  Additionally, research and development activities will include investments in existing and advanced areas of technology, including using cash to acquire technology.  Additions to property and equipment will continue, including new facilities and computer systems for R&D, sales and marketing, support, and administrative staff.  Commitments for constructing new buildings were $275 million on June 30, 1999.  Cash will also be used to fund ventures and other strategic opportunities.

In addition, cash will be used to repurchase common stock to provide shares for employee stock option and purchase plans.  The buyback program has not kept pace with employee stock option grants or exercises.  Beginning in fiscal 1990, Microsoft has repurchased 710 million common shares while 1.79 billion shares were issued under the Company’s employee stock option and purchase plans.  The market value of all outstanding stock options was $69 billion as of June 30, 1999.  Microsoft 

enhances its repurchase program by selling put warrants.  During December 1996, Microsoft issued 12.5 million shares of 2.75% convertible exchangeable preferred stock.  Net proceeds of $980 million were used to repurchase common shares.  In December 1999, each preferred share is convertible into common shares or an equivalent amount of cash determined by a formula that provides a floor price of $79.875 and a cap of $102.24 per preferred share, equivalent to $19.97 and $25.56 per common share. 

Management believes existing cash and short-term investments together with funds generated from operations will be sufficient to meet operating requirements for the next 12 months.  The Company’s cash and short-term investments are available for strategic investments, mergers and acquisitions, other potential large-scale cash needs that may arise, and to fund an increased stock buyback program over historical levels to reduce the dilutive impact of the Company’s employee stock option and purchase programs.

Microsoft has not paid cash dividends on its common stock.  The preferred stock pays $2.196 per annum per share.



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