MICROSOFT CORP - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For The Fiscal Year Ended June 30, 1997

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From _____ to ____

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Commission File Number 0-14278

MICROSOFT CORPORATION

Washington 91-1144442
(State of incorporation) (I.R.S. ID)

One Microsoft Way, Redmond, Washington 98052-6399

(425) 882-8080

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock

2 3/4% Convertible Exchangeable Principal-Protected Preferred Stock.

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]

The aggregate market value of common stock held by non-affiliates of the
registrant as of September 12, 1997 was $106,179,466,860.

The number of shares outstanding of the registrant's common stock as of
September 12, 1997 was 1,212,567,717.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the 1997 Annual Report to Shareholders are incorporated by
reference into Parts I, II and IV.

Portions of the definitive Proxy Statement dated September 26, 1997 to be
delivered to shareholders in connection with the Annual Meeting of Shareholders
to be held November 14, 1997 are incorporated by reference into Part III.

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MICROSOFT CORPORATION

FORM 10-K

For The Fiscal Year Ended June 30, 1997

INDEX

Part I

Item 1. Business............................................................................. 1
Item 2. Properties........................................................................... 10
Item 3. Legal Proceedings.................................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders.................................. 10

Part II

Item 5. Market for Registrant's Common Stock and Related Stockholder Matters................. 11
Item 6. Selected Financial Data.............................................................. 11
Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition 11
Item 8. Financial Statements and Supplementary Data.......................................... 11
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 11

Part III

Item 10. Directors and Executive Officers of the Registrant................................... 12
Item 11. Executive Compensation............................................................... 13
Item 12. Security Ownership of Certain Beneficial Owners and Management....................... 13
Item 13. Certain Relationships and Related Transactions....................................... 13

Part IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................... 14
Signatures ..................................................................................... 15

PART I

Item 1. Business

GENERAL
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Microsoft Corporation (the "Company" or "Microsoft") was founded as a
partnership in 1975 and incorporated in 1981. Microsoft develops, manufactures,
licenses, sells, and supports a wide range of software products, including
scalable operating systems for information appliances, personal computers (PCs)
and servers; server applications for client/server environments; business and
consumer productivity applications; software development tools; and Internet and
intranet software and technologies. The Company has recently expanded its
interactive content efforts, including entertainment and information software
programs, MSN(TM), The Microsoft(R) Network online service, Internet-based
services, and alliances with companies involved with other forms of digital
interactivity. Microsoft also sells personal computer input devices and books,
and researches and develops advanced technologies for future software products.

Microsoft's business strategy emphasizes the development of a broad line of
software products for business and personal use, marketed through multiple
channels of distribution. The Company is divided into three main groups:
the Product Group, the Sales and Support Group, and the Operations Group.

The Platforms Product Group is comprised of five primary divisions, each
responsible for a particular area of platform software development and
marketing. The Personal Systems Division develops PC operating systems. The
Business Systems Division develops server operating systems and server
applications. The Internet Client and Collaboration Division develops Web
browser technologies and e-mail, editing, and collaboration products. The
Developer Tools Division creates software development tools. The Consumer
Platforms Division develops system software for non-PC devices, multimedia
devices, and digital authoring environments.

The Applications and Content Product Group creates and markets productivity
programs, interactive entertainment and information products, desktop finance
products, and PC input devices. The Desktop Applications Division creates
business productivity applications and products designed for the home, school,
and the small business market. Interactive Media offerings include children's
titles, games, reference sources, online informational services, and MSN. The
Desktop Finance Division develops personal finance products. The Input Device
Division creates PC peripherals.

Microsoft has a research lab dedicated to creating new technology in support of
the Company's vision for the evolution of personal computing.

The Sales and Support Group is responsible for building long-term business
relationships with customers. This group is organized to serve various customer
types, including original equipment manufacturers (OEMs), end-users,
organizations, enterprises, application developers, and Internet content
providers (ICPs) and infrastructure owners. Large enterprises are offered
tailored license programs, enterprisewide support, consulting services, and
other specialized services. The group manages the channels that serve customers
by working with OEMs, distributors, and resellers. In addition to the OEM
channel, Microsoft has three major geographic sales organizations: U.S. and
Canada, Europe, and Other International. The group supports the Company's
products with technical support for end-users, developers, and organizations.

The Operations Group is responsible for managing business operations and overall
business planning. This includes the process of manufacturing and delivering
finished goods and licenses; corporate functions such as finance,
administration, human resources, and legal; and the publishing efforts of
Microsoft Press.

PRODUCTS
PERSONAL SYSTEMS
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The Personal Systems Division has overall responsibility for the Microsoft
Windows(R) PC operating systems. Operating system software performs a variety of
functions, such as allocating computer memory, scheduling applications software
execution, managing information and communication flow among the various PC
components, and enabling end-users to access files and information.

WINDOWS 95. Microsoft's primary personal operating system, the successor to
MS-DOS(R) and Windows 3.1, was released commercially in August 1995; periodic
service releases, system updates, and new device drivers have been made
available to PC OEMs and to end-users via the Internet on the Company's web
site, http://www.microsoft.com. Windows 95 is a fully integrated, multitasking
32-bit operating system, designed to be

compatible with Intel microprocessor-based PCs, most hardware devices, and
Windows 3.1 and MS-DOS applications.

WINDOWS NT WORKSTATION. Also a fully integrated, multitasking 32-bit operating
system, Windows NT(R) Workstation provides greater security, robustness and
portability. Windows NT Workstation is a multithreaded operating system for
mission critical computing which provides the same features and applications
programming interfaces (APIs) for Intel and Alpha AXP microprocessors.

MS-DOS. MS-DOS is a single-user, single-tasking operating system designed for
Intel microprocessor-based PCs. MS-DOS was introduced in 1981 and was
preinstalled by OEMs on most PCs shipped prior to the release of Windows 95.

WINDOWS 3.1. Microsoft Windows 3.1 provides a graphical user interface and other
enhancements for MS-DOS-based PCs. Windows 3.1 supports 16-bit Windows-based
applications, and offers ease of use, aesthetic appeal, and straightforward
integration into corporate computing environments. Windows for Workgroups 3.11
integrates network and workgroup functionality directly into the Windows
operating system.

BUSINESS SYSTEMS
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The Business Systems Division develops and markets Windows NT Server and related
Microsoft BackOffice(R) and Internet server-based applications. Server
operating systems are enterprise-wide platforms for building and deploying
distributed applications for networked PCs.

WINDOWS NT SERVER. Windows NT Server is a powerful operating system foundation
for both server applications and file and print sharing, with extensive network
management features, administration tools, security, and high availability.
Windows NT Server provides a platform for business critical applications and
databases, connectivity, system management, and e-mail servers. The operating
system integrates Web services such as Microsoft Internet Information Server, a
server used to manage intranet and Internet functionality and Microsoft
FrontPage(R) Web site creation and management tool.

MICROSOFT BACKOFFICE. Based on Windows NT Server, the Microsoft BackOffice
family of server applications is an integrated series of software products that
include services for file and print, applications, database, messaging,
groupware, desktop management, Internet access, transaction processing, and host
connectivity. BackOffice enables organizations to share information,
collaborate, and manage and deploy business-critical applications. Microsoft
Exchange Server provides e-mail, group scheduling, and integrated groupware
capabilities; Microsoft SQL Server(TM) manages and stores data; Microsoft Proxy
Server creates a single, secure gateway to the Internet; Microsoft SNA Server
provides connectivity to host data and applications; and Microsoft Systems
Management Server centrally manages this distributed environment.

INTERNET SERVER TOOLS. The Company also offers Internet servers based on Windows
NT Server. In addition to the Web services technologies included in Windows NT
Server, the Company also offers Microsoft Site Server, which allows a
comprehensive management of sophisticated web sites and their content. Microsoft
Transaction Server is a component-based transaction processing system for
developing, deploying, and managing scalable enterprise, Internet, and intranet
server applications.

INTERNET CLIENT AND COLLABORATION
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The Internet Client and Collaboration Division develops Internet browser
technology and e-mail and group collaboration products.

INTERNET SOFTWARE. The division has overall development and marketing
responsibility for Microsoft Internet Explorer, the Company's Internet browser.
It also provides products for developing, running, and managing Internet and
intranet applications and content, including ActiveX(TM) controls. Formerly
known as object linking and embedding (OLE) controls, ActiveX controls are
components (or objects) that can be inserted into a Web page or another
application which allow packaged functionality programmed elsewhere to be reused
and enables real-time, interactive content.

DEVELOPER TOOLS
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The Developer Tools Division provides software development tools and technical
information to Windows and Internet applications developers. These products and
services empower independent software developers, corporate developers,
solutions developers, and Webmasters to create a broad spectrum of applications,
primarily for Windows 95 and Windows NT, but also for the platform-independent
Internet and intranets.

SOFTWARE DEVELOPMENT TOOLS AND COMPUTER LANGUAGES. Software development tools
and computer languages allow software developers to write programs in a
particular computer language and translate programs into a binary machine-
readable set of commands that activate and instruct PC hardware. The Company
develops and markets a number of software development environments, and language
compilers. Microsoft Visual C++(R) is the Company's development system for
Windows application development. The Microsoft Visual Basic(R) programming
system provides easy access to a wide variety of data sources by integrating the
Microsoft Access database engine and the ability to take advantage of
investments in commercial applications through ActiveX controls. Microsoft
Visual J++(TM), a development environment for Java applications and Internet
applets, contains a high productivity Integrated Development Environment and a
collection of integrated components to create, test, tune, and deploy Java code
on multiple platforms using ActiveX controls.

DEVELOPER INFORMATION. The Company provides third party software developers with
a wide range of technical and support information that assists them in
developing software products intended to run on Windows operating systems,
taking advantage of key technologies such as ActiveX controls and Windows 32-bit
APIs. Developers can subscribe to the Microsoft Developer Network (MSDN)
information service and receive periodic updates via CD-ROMs, magazines, and
several on-line information services.

CONSUMER PLATFORMS
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The Consumer Platforms Division is developing software for non-PC devices, the
Broadcast PC, multimedia devices, and network multimedia.

NON-PC DEVICES. The division develops Windows CE, a scaleable Windows platform
for a broad range of communications, entertainment, and mobile computing
devices. The Windows CE operating system enables information appliances to
communicate with each other, share information with Windows PCs, and connect to
the Internet. Handheld PCs based on Windows CE are manufactured and sold by
various hardware OEMs and are designed to be companions to Windows-based PCs.

MULTIMEDIA DEVICES. In August 1997 Microsoft acquired WebTV Networks, Inc., an
online service that enables consumers to experience the Internet through their
televisions via set-top terminals based on WebTV technologies. Future versions
of the set-top terminals will use the Windows CE operating system.

The Consumer Platforms Division is also responsible for Softimage, which
develops, markets, and supports a family of interactive software products
enabling digital media producers to create and edit two- and three-dimensional
content for digital media productions. Softimage supplies 3D visualization
software for broadcast, film production, and other high-end animation
applications. In addition, Softimage has a product line of 2D visualization
software for use on high-end applications, including postproduction editing and
the integration of visual images, text, sound, and special effects technology.
These products are designed for the Windows NT and IRIX operating systems.

SOFTIMAGE 3D. Softimage(R) 3D provides three-dimensional animation software for
film and video professionals, animators, and artists who create and produce
high-end three-dimensional imagery for traditional and new media.

SOFTIMAGE DS. Softimage DS is a digital authoring environment blending 2D and 3D
graphics, digital video, and digital audio. The digital studio environment
accommodates many types of projects for digital multimedia such as high-end
advertising, entertainment, games, and integrated interactive multimedia.

DESKTOP APPLICATIONS
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The Desktop Applications Division develops applications software, which provides
the PC with instructions for the performance of productivity tasks such as
manipulating text, numbers, or graphics. The Company's desktop applications
software is designed for use by a broad class of end-users, regardless of
business, industry, or market segment. Primary examples of desktop applications
software are word processing, spreadsheet, and presentation graphics programs.
The Company's desktop applications programs are developed principally for
Windows and Macintosh operating systems.

MICROSOFT OFFICE. Microsoft Office is a suite of software programs featuring
seamless integration of the most commonly used desktop applications. Microsoft
Office is based upon a document-centric concept, with common commands and
extensive use of cross-application capabilities. Microsoft Office is available
in several versions, with certain combinations of products available for the
various operating system platforms. The most recent version for Windows,
Microsoft Office 97, has enhanced Internet features such as integration with
Microsoft Internet Explorer, a Web toolbar, the ability to save as an HTML
format, connectivity to other Office documents or web sites via hyperlinks, and
support for ActiveX controls. Products offered in the various versions include
Microsoft Word, Microsoft Excel, the Microsoft PowerPoint(R) presentation
graphics program, Microsoft Outlook(TM), the Microsoft Access database,
Microsoft Bookshelf(R), and others. The Microsoft Home Essentials(TM) suite is
marketed primarily toward users in the home.

MICROSOFT WORD. The Company's principal word processing program is Microsoft
Word. Versions of Microsoft Word provide graphical word processing features,
plus the ability to handle graphics, tables, spreadsheet data, charts, and
images imported from other software programs.

MICROSOFT EXCEL. The Company's spreadsheet program is Microsoft Excel. It is an
integrated spreadsheet with pivot table, database, and business graphics
capabilities. Microsoft Excel allows full linking and embedding of objects that
permits users to view and edit graphics or charts from other programs in the
worksheet in which the object is stored. Microsoft Excel graphics capabilities
can be linked to its spreadsheets to allow simultaneous changes to charts as
changes are made to the spreadsheets.

MICROSOFT POWERPOINT. Microsoft PowerPoint is a presentation graphics program
for producing transparencies, slides, overheads, and prints.

MICROSOFT ACCESS. Microsoft Access is a relational database management
application that provides access to structured business data. Database products
control the maintenance and utilization of structured data organized into a set
of records or files.

MICROSOFT OUTLOOK. The division also develops the Microsoft Outlook desktop
information management program, which manages e-mail, calendars, contacts,
tasks, and files on the PC. Outlook helps users communicate through e-mail and
share information by means of public folders, forms, and Internet connectivity.

MICROSOFT PROJECT. Microsoft Project is a critical path project scheduling and
resource allocation program. The product can perform as a budgeting, monitoring,
and cost estimating tool for large business projects and as a critical path and
schedule planning tool.

OTHER PRODUCTIVITY PRODUCTS. The Company also offers other productivity
products, including Microsoft Works, Microsoft Publisher, and Microsoft
FrontPage. Microsoft Works is an integrated software program that contains basic
word processing, spreadsheet, and database capabilities that allows the easy
exchange of information from one tool to another. Microsoft Publisher is an
easy-to-use, entry-level desktop publishing program. Microsoft FrontPage is a
Web site creation and management tool for Web sites on the Internet or
intranets.

INTERACTIVE MEDIA
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The Interactive Media Division develops and markets interactive entertainment
and information products across a variety of media, including the Internet, The
Microsoft Network, and CD-ROM.

LEARNING AND ENTERTAINMENT. Reference titles include Microsoft Encarta(R) and
Microsoft Bookshelf. The Encarta multimedia encyclopedia database blends text in
articles with a wealth of innovative, interactive information presented through
animations, videos, maps, charts, sounds, and pictures. Bookshelf is a
multimedia reference library that integrates seven well-respected and
authoritative works, including a dictionary, world atlas, world almanac,
thesaurus, concise encyclopedia, and two books of quotations.

Personal interest titles include Microsoft Cinemania(R), an interactive guide
to the movies with entries for 19,000 films, Microsoft Dinosaurs, musical
titles, and many others.

Titles for children include Microsoft Creative Writer, a full-featured creative
writing and publishing program. The Company also has a series of products based
on the popular children's book and television series, Scholastic's The Magic
School Bus.

The Company offers a line of entertainment products. Microsoft Flight Simulator
is a popular aircraft flight simulation product available for Windows, MS-DOS,
and Macintosh operating systems. Games include Monster

Truck Madness(TM), Microsoft Golf, and other sports and action titles. Most
games are available for the Windows 95 environment.

INTERACTIVE SERVICE MEDIA. The Company is developing an online decision support
infrastructure for end-users in such fields as automobiles, retail,
entertainment, and travel. Microsoft CarPoint(TM) provides current and objective
information for new car purchases, including test drive reviews, dealer
invoices, and surround videos. Additionally, CarPoint features a new car buying
service. Comprised of a national network of dealers, this service refers
customers to nearby dealers. Microsoft Sidewalk(TM) is a personalized city guide
to local entertainment. The Sidewalk editorial team provides previews, reviews
and even customized suggestions about entertainment events in Seattle, New York,
Boston, and the Minneapolis, with city guides scheduled to launch in San
Francisco, Houston, Washington, D.C., San Diego, Denver, and Sydney, Australia.
Microsoft Expedia(TM) is a free travel service on the World Wide Web and MSN
which enables users to find low fares, book flights, make hotel reservations,
and rent cars. Expedia also offers a comprehensive source of information for
more than 330 destinations including photos, historical information, and local
details. Expedia Streets 98 and Expedia Trip Planner 98 are comprehensive route-
planning programs with detailed maps and road information for routes in North
America.

THE MICROSOFT NETWORK. MSN is Web-based interactive online service. MSN provides
easy and inexpensive access for users to a wide range of graphically rich online
content. The online service provides access to the Internet, electronic mail,
bulletin boards, and a myriad of additional services offered by Microsoft and by
independent content providers (ICPs).

JOINT VENTURES. The Company has entered into joint venture arrangements to take
advantage of creative talent and content from other organizations. Microsoft
owns 50 percent of DreamWorks Interactive L.L.C., a software company that
develops interactive and multimedia products. DreamWorks SKG owns the remaining
50 percent. Microsoft owns 50 percent of MSNBC Cable L.L.C., a 24-hour cable
news and information channel; and 50 percent of MSNBC Interactive News L.L.C.,
an interactive online news service. National Broadcasting Company (NBC) owns
the remaining 50 percent of these two joint ventures.

DESKTOP FINANCE
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Microsoft Money is a financial organization product that allows users to
computerize their household finances. Microsoft Money is available for systems
running Windows 95 and provides online home-banking services with numerous
different banks in the U.S.

Microsoft Investor is an online investing site that provides a comprehensive
offering of information and services designed to help personal investors make
investment decisions, track their securities and understand the market. A blend
of free and subscription-based services, Investor provides portfolio tracking
and analysis, company and mutual fund research, an investment finder, daily
editorial and market summaries, e-mail notifications and alerts, and access to
online trading through leading financial services firms.

PC INPUT DEVICES
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The Company's major input device is the Microsoft Mouse, a hand-held pointing
device that facilitates use of a PC. It can be used with MS-DOS and Windows
operating systems and works with most applications products from Microsoft and
other companies. Microsoft also offers a mouse designed for the home and a mouse
for young children. The Company also markets the Microsoft Natural(R) Keyboard,
an ergonomically designed keyboard. Additionally, Microsoft sells joysticks and
gamepads for use with PC games.

MICROSOFT PRESS
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Microsoft Press publishes books about software products from Microsoft and other
software developers and about current developments in the industry. Books
published by Microsoft Press typically are written and copyrighted by
independent authors who submit their manuscripts to the Company for publication
and who receive royalties based on revenue generated by the book.

Microsoft Press contracts with an independent commercial printer for the
manufacturing of its books. Publisher's Resources, Inc. acts as the Company's
main fulfillment house in the United States, maintaining the majority of the
inventory of Microsoft Press(R) books. Books are marketed by independent sales
representatives and by Microsoft

Press sales personnel. Internationally, Microsoft Press has numerous
international agreements with publishers for the worldwide distribution of its
books. Microsoft Press has granted a publisher in England the right to
distribute English language versions of its books in all countries except the
United States, Canada, Central and South America, and certain Asian countries.
In most cases, Microsoft Press provides each publisher with a book's manuscript,
and the publisher arranges for its translation and the printing, marketing, and
distribution of the translated version.

PRODUCT DEVELOPMENT
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The PC software industry is characterized by extremely rapid technological
change, which requires constant attention to software technology trends and
shifting consumer demand, and rapid product innovation. The pace of change has
recently become even greater due to the surge of interest in the Internet, other
forms of online services, PC server-based networking, and new programming
languages, such as Java.

Most of the Company's software products are developed internally. The Company
also purchases technology, licenses intellectual property rights, and oversees
third-party development and localization of certain products. Internal
development enables Microsoft to maintain closer technical control over the
products and gives the Company the freedom to designate which modifications and
enhancements are most important and when they should be implemented. The Company
has created a substantial body of proprietary development tools and has evolved
development methodologies for creating and enhancing its products. These tools
and methodologies are also designed to simplify a product's portability among
different operating systems, microprocessors, or computers. Product
documentation is generally created internally.

The Company believes that a crucial factor in the success of a new product is
getting it to market quickly to respond to new user needs or advances in PCs,
servers, peripherals, and the Internet, without compromising product quality.
The Company strives to become informed at the earliest possible time about
changing usage patterns and hardware advances that may affect software design.

During fiscal years 1995, 1996, and 1997, the Company spent $860 million, $1.43
billion, and $1.93 billion, respectively, on product research and development
activities. Those amounts represented 14.5%, 16.5%, and 16.9%, respectively, of
revenue in each of those years excluding funding of joint venture activity. The
Company is committed to continue high expenditures for research and product
development.

LOCALIZATION
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In order to best serve the needs of users in foreign countries, Microsoft
"localizes" many of its products to reflect local languages and conventions. In
French versions, for example, all user messages and documentation are in French
and all monetary references are in French francs. Various Microsoft products
have been localized into more than 30 languages.

MANUFACTURING
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Microsoft contracts most of its manufacturing activity to third parties. Outside
manufacturers produce various retail software packaged products, documentation,
and hardware such as mouse pointing devices, keyboards, and joysticks. There are
other custom manufacturers in the event that outsourced manufacturing becomes
unavailable from current sources.

In recent years the Company's sales mix has shifted to OEM and corporate and
organizational licenses from packaged products. Online distribution of software
may increase in the future. During July 1996, Microsoft sold its domestic
manufacturing and distribution operation.

The Company's remaining manufacturing facilities are located in Puerto Rico and
Ireland. The Irish manufacturing facility replicates disks, assembles other
purchased parts, and packages final product. The Puerto Rico facility
manufactures CD-ROMs, assembles other purchased parts, and packages final
product. Quality control tests are performed on purchased parts, finished disks
and CD-ROMs, and other products. The chief materials and components used in
Microsoft products include disks or CD-ROMs, books, and multicolor printed
materials. The Company is often able to acquire component parts and materials on
a volume discount basis. The Company has multiple sources for raw materials,
supplies, and components.

MARKETING AND DISTRIBUTION
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Microsoft aligns its sales and marketing staff with several customer types,
including OEMs, end-users, organizations, enterprises, applications developers,
and Internet content providers (ICPs) and infrastructure owners. The Company's
sales and marketing group seeks to build long-term relationships with customers
of Microsoft products. In addition to the OEM channel, Microsoft has three major
geographic sales and marketing organizations: the U.S. and Canada, Europe, and
elsewhere in the world (Other International).

The OEM customer unit includes the sales force which works with original
equipment manufacturers that preinstall Microsoft software on their PCs.

The end-user customer unit has responsibility for activities that target
end-users that make individual buying decisions for the PCs they use at work or
home. Most sales and marketing activities aimed at end-user customers are
performed by this unit, including developing and administering reseller
relationships; reseller sales terms and conditions; channel marketing and
promotions; end-user marketing programs; support policies; and seminars, events,
and sales training for resellers. The key products marketed by the end-user
customer unit are the Company's desktop operating systems, desktop applications,
and interactive media products.

The organization customer unit has responsibility for activities that target
groups of users in small and medium organizations. The unit works with channel
partners such as distributors, aggregators, value-added resellers, and Solution
Providers to provide complete business solutions to this customer segment. The
unit's sales and marketing activities include providing technical training to
Solution Providers (described below) and channel resellers; developing support
policies; and supporting and providing seminars, events, and sales training for
channel partners.

The enterprise customer unit has responsibility for sales and marketing
activities that target large organizations. The unit works directly with these
organizations, and through large account resellers, to create and support
enterprisewide, mission critical solutions for business computing needs.

The applications developer customer unit targets corporate developers and
independent software vendors (ISVs) who build business applications with a
development platform based on Microsoft Windows and BackOffice architecture. The
unit's sales and marketing activities include providing industry specific
technical training, seminars, and events for ISVs.

The Internet customer unit is responsible for introducing the Company's products
and technologies to the public infrastructure owners and ICPs. Infrastructure
owners include network operators (telephone companies, cable companies, Internet
service providers, etc.) who build, own, and operate the public networks and
ICPs who provide content for the Web.

FINISHED GOODS CHANNELS
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DISTRIBUTORS AND RESELLERS. The Company markets its products in the finished
goods channels primarily through independent non-exclusive distributors and
resellers. Distributors include CHS Electronics, Computer 2000, Ingram Micro,
Softbank, Tech Data, and Merisel. Resellers include Software Spectrum and Stream
International. Microsoft has a network of field sales representatives and field
support personnel who solicit orders from distributors and resellers and provide
product training and sales support.

LARGE ACCOUNTS. The Microsoft Select program offers flexible software
acquisition, licensing, and maintenance options specially customized to meet the
needs of large multinational organizations. Targeted audiences include
technology specialists and influential end-users in large enterprises. Marketing
efforts and fulfillment are generally coordinated with the Microsoft network of
large account resellers.

SOLUTION PROVIDERS. Microsoft's Solution Providers program is a comprehensive
support relationship with independent organizations that provide network and
system integration, custom development, training, and technical support for
business computing solutions. The program supports value-added resellers (VARs),
system integrators, consultants, custom application developers, solution
developers, Internet service and hosting organizations, independent content
providers, and sitebuilders (companies that build Web sites for other
companies), as well as technical support and training organizations. Under this
business partnership strategy, the Company provides sales and product
information, development services, early access to Microsoft products, and
customer support tools including priority telephone support, education, and
business development support. To ensure high-quality technical services for the
Company's products, Microsoft Solution Providers are required to have
Microsoft-certified professionals on staff.

CONSULTING SERVICES. The Company's Consulting Services Division assists
customers in using the Company's computer operating systems, applications, and
communications products. The group works with Solution Providers and helps
create enterprisewide computing solutions for large corporate accounts.

INTERNATIONAL SALES SITES. The Company has established marketing and/or support
subsidiaries in more than 60 countries. Product is generally delivered by the
Company's owned or outsourced manufacturing operations.

The Company's international operations, both OEM and finished goods, are subject
to certain risks common to foreign operations in general, such as governmental
regulations, import restrictions, and foreign exchange rate fluctuations.
Microsoft hedges a portion of its foreign exchange risk.

OEM CHANNEL
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Microsoft operating systems are licensed primarily to OEMs under agreements that
grant the OEMs the right to distribute copies of the Company's products with
their computers. The Company also markets certain desktop applications and
interactive media programs to OEMs under similar arrangements. In addition, the
Company markets the Microsoft Mouse and Natural Keyboard to OEMs for
distribution to buyers of their computers. In almost all cases, the products are
distributed under Microsoft trademarks. The Company has OEM agreements covering
one or more of its products with virtually all of the major PC OEMs, including
AST Research, Acer, Compaq, Digital Equipment Corporation, Dell, Fujitsu,
Gateway 2000, Hewlett-Packard, IBM, NEC, Packard Bell, Siemens, Toshiba, and
Vobis.

ADVERTISING
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The Company works closely with large advertising and direct marketing firms.
Advertising, direct marketing, worldwide packaging, and marketing materials are
targeted to various end-user segments. The Company utilizes broad consumer media
(television, radio, and business publications) and trade publications. Microsoft
has programs under which qualifying resellers and OEMs are reimbursed for
certain advertising expenditures. The Company maintains a broad advertising
campaign emphasizing the Microsoft brand identity.

CUSTOMERS
- --------------------------------------------------------------------------------

The Company's customers include end-users, organizations, enterprises, ISPs,
application developers, and OEMs. Most end-users of Microsoft products are
individuals in businesses, government agencies, educational institutions, and at
home. These end-users obtain Microsoft products primarily through distributors,
resellers, and OEMs, which include certain Microsoft products with their
hardware. Notes to Financial Statements (see Item 8) describe customers that
represent more than 10% of the Company's revenue. The Company's practice is to
ship its products promptly upon receipt of purchase orders from its customers
and, consequently, backlog is not significant.

PRODUCT SUPPORT
- --------------------------------------------------------------------------------

The Company provides product support coverage options to meet the needs of users
of Microsoft products. Support personnel are located in various sites in the
U.S. and around the world. Certain support is also supplied by qualified
third-party support organizations. The Company hires individuals with product
expertise and provides them with productivity tools, continuous product
education and training, and consistent processes to deliver quality support for
Microsoft products. Coverage options range from standard no-charge toll
telephone support to fee-based offerings providing unlimited 800 number
telephone and electronic technical support for all Microsoft products 24 hours
per day, 7 days per week.

Users have access to troubleshooting "wizards" and Microsoft's KnowledgeBase, a
library of thousands of technical articles that is updated regularly with useful
information regarding Microsoft products. Microsoft provides access to
KnowledgeBase via MSN, America Online, CompuServe, Prodigy, and the Internet.
Additionally, several support offerings include Microsoft TechNet and Microsoft
Developer Network information subscription services.

As a supplement or alternative to direct support, the Company enhances the
third-party support channel by providing Microsoft Solution Providers with
education, training, tools, and support. Microsoft Solution Providers include
Authorized Training Centers, which offer advanced product education and
certification on Microsoft

products; and Authorized Support Centers, which provide a wide spectrum of
multinational support, multivendor support, and integration services.

COMPETITION
- --------------------------------------------------------------------------------

The PC software business is intensely competitive and subject to extremely rapid
technological change. Microsoft faces formidable competition in all areas of its
business activity, including competition from many companies much larger than
Microsoft. The rapid pace of technological change constantly creates new
opportunities for existing competitors and start-ups and can quickly render
existing technologies less valuable. The Company also faces constant competition
from software pirates who unlawfully copy and distribute Microsoft's copyrighted
software products.

OPERATING SYSTEMS. Microsoft's operating system products face substantial
competition from a wide variety of companies. Major competitors such as IBM,
Apple Computer, Digital Equipment Corporation, Hewlett-Packard, Sun
Microsystems, and others are vertically integrated in both software development
and hardware manufacturing and have developed operating systems that they
preinstall on computers of their own manufacture. Many of these operating system
software products are also licensed to third-party OEMs for preinstallation on
their machines. Microsoft's operating system products compete with UNIX-based
operating systems from a wide range of companies including IBM, AT&T, Hewlett-
Packard, Sun, The Santa Cruz Operation, and others. Variants of UNIX run on a
wide variety of computer platforms and have gained increasing acceptance as
desktop operating systems. As PC technology increasingly moves toward
connectivity and communications, Microsoft's operating system products will face
increased competition from network server operating systems such as Novell's
NetWare, Banyan's Vines, the many variants of UNIX, IBM's OS/2, "middleware"
products such as IBM's Lotus Notes, and intranet servers from Netscape, IBM,
Sun, and others.

BUSINESS SYSTEMS. The Company is a fairly recent entrant into the business of
providing enterprisewide computing solutions. Several competitors enjoy a larger
share of sales and larger installed bases. Many companies offer operating system
software for mainframes and midrange computers, including IBM, Digital
Equipment, Hewlett-Packard, and Sun. Since legacy business systems are typically
support-intensive, these competitors also offer substantive support services.
Software developers that provide competing server applications for PC-based
distributed client/server environments include Oracle, IBM, Computer Associates,
Sybase, and Informix. There are also several software vendors who offer
connectivity servers. As mentioned above, there are numerous companies and
organizations that offer Internet and intranet server software which compete
against the Company's business systems. Additionally, IBM has a large installed
base of Lotus Notes and cc:Mail, both of which compete with the Company's
workgroup and mail products.

DESKTOP APPLICATIONS. The Company's competitors include many software
application vendors, such as IBM (Lotus), Oracle, Apple (Claris), Corel, and
local application developers in Europe and the Far East. IBM and Corel have
large installed bases with their spreadsheet and word processor products,
respectively, and both have aggressive pricing strategies. Also, IBM and Apple
preinstall certain of their software products on various models of their PCs,
competing directly with Microsoft desktop application software.

DEVELOPER TOOLS. The Company's developer products compete against offerings from
Borland, Macromedia, Oracle, Sun, Sybase, Symantec, and other companies.

NEWS SERVICES. The Company's MSNBC joint ventures face formidable competition
from other 24-hour cable and Internet news organizations such as CNN and Fox
News Network. MSNBC also competes with traditional news media such as newspapers
and broadcast TV and Internet news services.

CONSUMER PLATFORMS. A wide variety of companies develop operating systems for
information appliances, including Apple, Motorola, 3Com, Psion Software, and
others. The Company's nascent WebTV offerings and other multimedia consumer
products face competitors such as Sun, Oracle, NetChannel, and others. An
enormous range of companies, including media conglomerates, telephone companies,
cable companies, retailers, hardware manufacturers, and software developers, are
competing to make interactive services widely available to the home.

INTERNET PLATFORMS AND SERVICES. The advent of the Internet as a computing,
communication, and collaboration platform as well as a low cost and efficient
distribution vehicle increases competition and creates uncertainty as to future
technology directions. The Company faces intense competition in the development
and marketing of Internet (and intranet) software from a wide variety of
companies and organizations including IBM, Netscape, Novell, Oracle, Sun, and
many others. In addition, the very low barriers to entry on the Internet have
allowed numerous Web-based service companies to build significant businesses in
areas such as electronic mail, electronic commerce,

Web search engines, and information of numerous types. Competitors include
Netscape, Lycos, Yahoo, Excite, Infoseek, CitySearch, and many others.

ONLINE SERVICES. Microsoft's online services network, MSN, faces formidable
competition from America Online and other online networks, such as CompuServe
(the sale of which to America Online is pending), Prodigy, and impending
entrants. Additionally, MSN faces competition from online services that are
offered to users directly via the World Wide Web.

INTERACTIVE MEDIA. The Company's Interactive Media division faces many smaller
but focused and branded competitors, particularly in the areas of entertainment
and education. Consolidation in this area of software development has made
certain competitors even stronger. Competitors include Intuit, Broderbund,
Electronic Arts, The Learning Company (including Softkey, MECC, and Compton's),
Voyager, CUC International (including Sierra On Line, Knowledge Adventures, and
Davidson Associates), and Dorling Kindersley. Still other competitors own
branded content, such as Disney and Lucas Arts.

Additionally, PC-based games are increasingly competing head-to-head against
games created for proprietary systems such as Nintendo, Sony PlayStation, and
Sega. Input devices face substantial competition from computer manufacturers,
since computers are typically sold with a keyboard and mouse, and other
manufacturers of these devices.

A number of Microsoft's most significant competitors, including IBM, Sun,
Oracle, and Netscape, have jointly embarked upon various technology development
and marketing initiatives that are intended to increase customer demand for
products from these companies. These initiatives relate in part to efforts to
move software from individual PCs to centrally-managed servers. While the likely
technological and business success of such "thin client" strategies is currently
unknown, widespread adoption of such computing systems would present significant
challenges to the Company's historical business model.

The Company's competitive position may be adversely affected by one or more of
these factors in the future, particularly in view of the fast pace of
technological change in the software industry.

EMPLOYEES
- -------------------------------------------------------------------------------

As of June 30, 1997, the Company employed 22,232 people on a full-time basis,
15,835 in the U.S. and 6,397 internationally. Of the total, 8,059 were in
product research and development, 11,074 in sales, marketing, and support, 1,115
in manufacturing and distribution, and 1,984 in finance and administration.
Microsoft's success is highly dependent on its ability to attract and retain
qualified employees. Competition for employees is intense in the software
industry. To date, the Company believes it has been successful in its efforts
to recruit qualified employees, but there is no assurance that it will continue
to be as successful in the future. None of the Company's employees are subject
to collective bargaining agreements. The Company believes relations with its
employees are excellent.

Item 2. Properties

The Company's corporate offices consist of approximately 3.6 million square feet
of office building space located in King County, Washington. There are two
sites that total approximately 300 acres of land. The Company is constructing
three office buildings comprising approximately 565,000 square feet of space.
Occupancy on this site will be phased starting in the winter of 1997 and
completed by spring of 1998. Additionally, construction is continuing on
another set of office buildings with approximately 423,000 square feet of space.
This site will be occupied in the winter of 1999. The Company owns all of its
corporate campus.

The Company leases a 45,000 square foot disk duplication facility in Humacao,
Puerto Rico. The Puerto Rico facility, which began operation in April 1990, is
leased under a 10-year lease, with an option to renew for an additional 10
years. The Company's European manufacturing operation consists of a 161,000
square foot facility situated on 12 acres in Dublin, Ireland. The Ireland site
also includes office buildings with 157,000 square feet for international
localization. The Ireland facilities are fully owned by the Company. In Les
Ulis, France, the Company owns a 199,000 square foot office building on four
acres of land.

The Company is constructing an office building complex with 225,000 square feet
on 33 acres of land near Redding, England. This is a phased construction
project, occupancy is expected to begin in the fall of 1997 and be completed in
winter of 1997.

In addition, the Company leases office space in numerous locations in the United
States and many other countries.

Item 3. Legal Proceedings

The information set forth in Notes to Financial Statements-Commitments and
Contingencies on page 40 of the 1997 Annual Report to Shareholders is
incorporated herein by reference and is filed herewith as Exhibit 13.4.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1997.

PART II

Item 5. Market for Registrant's Common Stock and Related Stockholder Matters

The information set forth on page 42 of the 1997 Annual Report to Shareholders
is incorporated herein by reference and is filed herewith as Exhibit 13.1.

Item 6. Selected Financial Data

The information set forth on page 1 of the 1997 Annual Report to Shareholders is
incorporated herein by reference and is filed herewith as Exhibit 13.2.

Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition

The information set forth on pages 26-31 of the 1997 Annual Report to
Shareholders is incorporated herein by reference and is filed herewith as
Exhibit 13.3.

Item 8. Financial Statements and Supplementary Data

The following financial statements for the Company and independent auditors'
report set forth on pages 24-25, 32-41, 43 and 44 of the 1997 Annual Report to
Shareholders is incorporated herein by reference and is filed herewith as
Exhibit 13.4.

. Income Statements for the three years ended June 30, 1997
. Cash Flows Statements for the three years ended June 30, 1997
. Balance Sheets as of June 30, 1996 and 1997
. Stockholders' Equity Statements for the three years ended June 30, 1997
. Notes to Financial Statements
. Independent Auditors' Report

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures

None.

PART III

Item 10. Directors and Executive Officers of the Registrant

Information with respect to Directors may be found under the caption "Election
of Directors and Management Information" on pages 1 and 2 of the Company's Proxy
Statement dated September 26, 1997, for the Annual Meeting of Shareholders to be
held November 14, 1997 (the "Proxy Statement"). Such information is
incorporated herein by reference.

The executive officers of Microsoft as of September 12, 1997 were as follows:

Name Age Position with the Company

William H. Gates 41 Chairman of the Board; Chief Executive Officer
Steven A. Ballmer 41 Executive Vice President, Sales and Support
Robert J. Herbold 55 Executive Vice President; Chief Operating Officer
Frank M. (Pete) Higgins 39 Group Vice President, Interactive Media
Paul A. Maritz 42 Group Vice President, Platforms and Applications
Nathan P. Myhrvold 38 Group Vice President, Chief Technology Officier
Jeffrey S. Raikes 39 Group Vice President, Sales and Marketing
James E. Allchin 45 Senior Vice President, Personal and Business Systems Division
Joachim Kempin 55 Senior Vice President, OEM Sales
Michel Lacombe 46 Senior Vice President, Microsoft; President, Microsoft Europe
Craig J. Mundie 48 Senior Vice President, Consumer Platforms Division
William H. Neukom 55 Senior Vice President, Law and Corporate Affairs; Secretary
Brad A. Silverberg 43 Senior Vice President, Applications and Internet Client
Gregory B. Maffei 37 Vice President, Finance; Chief Financial Officer

Mr. Gates co-founded Microsoft in 1975 and has been its Chairman of the Board
and Chief Executive Officer since the original partnership was incorporated in
1981.

Mr. Ballmer was named Executive Vice President, Sales and Support in February
1992. He had been Senior Vice President, Systems Software since 1989. From 1984
until 1989, Mr. Ballmer served as Vice President, Systems Software. He joined
Microsoft in 1980.

Mr. Herbold joined Microsoft as Executive Vice President and Chief Operating
Officer in November 1994. Mr. Herbold had been with The Procter & Gamble Company
since 1968, with experience in information services, advertising and market
research. Most recently, he was P&G's Senior Vice President, Information
Services and Advertising.

Mr. Higgins was named Group Vice President, Interactive Media Group in October
1996. He was named Group Vice President, Applications and Content in May 1995
and Senior Vice President, Desktop Applications Division in March 1993. He had
been Vice President, Desktop Applications Division since 1992. Mr. Higgins
joined Microsoft in 1983.

Mr. Maritz was named Group Vice President, Platforms and Applications in October
1996 and had been Group Vice President, Platforms since May 1995. He had been
Senior Vice President, Product and Technology Strategy in November 1994 and had
been Senior Vice President, Systems Division since February 1992. He had been
Vice President, Advanced Operating Systems since 1989. Mr. Maritz joined
Microsoft in 1986.

Mr. Myhrvold was named Group Vice President and Chief Technology Officer in
October 1996. He was named Group Vice President, Applications and Content in May
1995 and had been Senior Vice President, Advanced Technology since July 1993. He
had been Vice President, Advanced Technology and Business Development since
1989. Mr. Myhrvold joined Microsoft in 1986.

Mr. Raikes was named Group Vice President, Sales and Marketing in July 1996. He
was named Senior Vice President, Microsoft North America in January 1992 and had
been Vice President, Office Systems since 1990. Mr. Raikes joined Microsoft in
1981.

Mr. Allchin was named Senior Vice President, Personal and Business Systems Group
in February 1996. He was named Senior Vice President, Business Systems Division
in November 1994 and had been Vice President, Business Systems Division, since
July 1991. Mr. Allchin joined Microsoft in 1991.

Mr. Kempin was named Senior Vice President, OEM Sales in August 1993. He had
been Vice President, OEM Sales since 1987. Mr. Kempin joined Microsoft in 1983.

Mr. Lacombe was named President, Microsoft Europe in July 1997 and Senior Vice
President, Microsoft in December 1996. He had been Vice President, Europe since
September 1995 and Vice President, End User Customer Unit, Europe since April
1994. Mr. Lacombe had been Regional Director of Southern Europe from May 1991.
Mr. Lacombe joined Microsoft in 1983.

Mr. Mundie was named Senior Vice President, Consumer Platforms in February 1996.
He was named Senior Vice President, Consumer Systems Division in May 1995 and
had been Vice President, Advanced Consumer Technology since July 1993. He
joined Microsoft as General Manager, Advanced Consumer Technology Group in
December 1992.

Mr. Neukom was named Senior Vice President, Law and Corporate Affairs in
February 1994. He joined Microsoft in 1985 as Vice President, Law and Corporate
Affairs.

Mr. Silverberg was named Senior Vice President, Applications and Internet Client
Group in December 1996. He had been Senior Vice President, Internet Platform
and Tools Division since February 1996. He was named Senior Vice President,
Personal Systems Division in November 1994 after joining Microsoft in August
1990 as Vice President, Personal Operating Systems Division.

Mr. Maffei was named Vice President, Finance and Chief Financial Officer in July
1997. He was named Vice President, Corporate Development in July 1996 and
Treasurer in April 1994. He joined Microsoft in April 1993 as Director, Business
Development & Investments. Previously, Mr. Maffei was Executive Vice President
and Chief Financial Officer of Pay 'N Pac Stores, Inc. from 1991 to 1992.

Item 11. Executive Compensation

The information in the Proxy Statement set forth under the captions "Information
Regarding Executive Officer Compensation" on pages 4 through 7 and "Information
Regarding the Board and its Committees" on page 2 is incorporated herein by
reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The information set forth under the caption "Information Regarding Beneficial
Ownership of Principal Shareholders, Directors, and Management" on page 3 of the
Proxy Statement is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

The information set forth in Notes to Financial Statements--Acquisitions on page
40 of the 1997 Annual Report to Shareholders is incorporated herein by reference
and is filed herewith as Exhibit 13.4.

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a) Financial Statements and Schedules

The financial statements as set forth under Item 8 of this report on Form
10-K are incorporated herein by reference.

Financial statement schedules have been omitted since they are either not
required, not applicable, or the information is otherwise included.

(b) Reports on Form 8-K

No reports on Form 8-K were filed during the last quarter of fiscal 1997.

(c) Exhibit Listing

Exhibit
Number Description
------ -----------

3.1 Restated Articles of Incorporation (1)

3.2 Bylaws (1)

10.1 Microsoft Corporation 1991 Stock Option Plan

10.2 Microsoft Corporation 1981 Stock Option Plan (2)

10.3 Microsoft Corporation Stock Option Plan for Non-Employee
Directors (1)

10.4 Microsoft Corporation Stock Option Plan for Consultants and
Advisors (1)

10.5 Microsoft Corporation 1997 Employee Stock Purchase Plan

10.6 Microsoft Corporation Savings Plus Plan (1)

10.7 Trust Agreement dated June 1, 1993 between Microsoft
Corporation and First Interstate Bank of Washington (3)

10.8 Form of Indemnification Agreement (3)

11. Computation of Earnings Per Share

13.1 Quarterly and Market Information Incorporated by Reference to
Page 42 of 1997 Annual Report to Shareholders ("1997 Annual
Report")

13.2 Selected Financial Data Incorporated by Reference to Page 1 of
1997 Annual Report

13.3 Management's Discussion and Analysis of Results of Operations and
Financial Condition Incorporated by Reference to Pages 26-31 of
1997 Annual Report

13.4 Financial Statements Incorporated by Reference to Pages 24-25,
32-41, 43, and 44 of 1997 Annual Report

21. Subsidiaries of Registrant (4)

23. Independent Auditors' Consent

27. Financial Data Schedule

________________

(1) Incorporated by reference to Annual Report on Form 10-K For The Fiscal Year
Ended June 30, 1994.
(2) Incorporated by reference to Registration Statement 33-37623 on Form S-8.
(3) Incorporated by reference to Annual Report on Form 10-K For The Fiscal Year
Ended June 30, 1993.
(4) Incorporated by reference to Exhibit 13.4 filed herein.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Redmond,
State of Washington, on September 26, 1997.

MICROSOFT CORPORATION

By /s/ Gregory B. Maffei
---------------------------
Gregory B. Maffei
Vice President, Finance; Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of Registrant and in
the capacities indicated on September 26, 1997.

Signature Title

/s/ William H. Gates
- --------------------------------------
William H. Gates Chairman of the Board of Directors
and Chief Executive Officer

/s/ Paul G. Allen
- --------------------------------------
Paul G. Allen Director

- --------------------------------------
Jill E. Barad Director

/s/ Richard A. Hackborn
- --------------------------------------
Richard A. Hackborn Director

/s/ David F. Marquardt
- --------------------------------------
David F. Marquardt Director

/s/ Robert D. O'Brien
- --------------------------------------
Robert D. O'Brien Director

/s/ Wm. G. Reed, Jr.
- --------------------------------------
Wm. G. Reed, Jr. Director

/s/ Jon A. Shirley
- --------------------------------------
Jon A. Shirley Director

/s/ Gregory B. Maffei
- --------------------------------------
Gregory B. Maffei Vice President, Finance; Chief Financial Officer
(Principal Financial and Accounting Officer)

EXHIBIT INDEX

Exhibit
Number Description
------ -----------

3.1 Restated Articles of Incorporation (1)

3.2 Bylaws (1)

10.1 Microsoft Corporation 1991 Stock Option Plan

10.2 Microsoft Corporation 1981 Stock Option Plan (2)

10.3 Microsoft Corporation Stock Option Plan for Non-Employee
Directors (1)

10.4 Microsoft Corporation Stock Option Plan for Consultants and
Advisors (1)

10.5 Microsoft Corporation 1997 Employee Stock Purchase Plan

10.6 Microsoft Corporation Savings Plus Plan (1)

10.7 Trust Agreement dated June 1, 1993 between Microsoft
Corporation and First Interstate Bank of Washington (3)

10.8 Form of Indemnification Agreement (3)

11. Computation of Earnings Per Share

13.1 Quarterly and Market Information Incorporated by Reference to
Page 42 of 1997 Annual Report to Shareholders ("1997 Annual
Report")

13.2 Selected Financial Data Incorporated by Reference to Page 1 of
1997 Annual Report

13.3 Management's Discussion and Analysis of Results of Operations and
Financial Condition Incorporated by Reference to Pages 26-31 of
1997 Annual Report

13.4 Financial Statements Incorporated by Reference to Pages 24-25,
32-41, 43, and 44 of 1997 Annual Report

21. Subsidiaries of Registrant (4)

23. Independent Auditors' Consent

27. Financial Data Schedule

________________

(1) Incorporated by reference to Annual Report on Form 10-K For The Fiscal Year
Ended June 30, 1994.
(2) Incorporated by reference to Registration Statement 33-37623 on Form S-8.
(3) Incorporated by reference to Annual Report on Form 10-K For The Fiscal Year
Ended June 30, 1993.
(4) Incorporated by reference to Exhibit 13.4 filed herein.