STOCKREPORTS		 Microsoft Corporation Nasdaq Symbol MSFT
In S&P 500
15-AUG-98 Industry:
Computer (Software & Services)		 Summary: Microsoft, the world's largest software company, develops and markets PC software, including the Windows operating system and Office application suite.

Recent Price 104.25
52 Wk Range 119.63 - 59.00		 Yield Nil
12-Mo. P/E 62.4

Quantitative Evaluation:
Outlook (1 Lowest - 5 Highest)
3-
Fair Value
119.00
Risk
LOW
Earn/Div Rank
B+
Technical Evaluation:
BULLISH since 02/96
Rel. Strength Rank (1 Lowest - 99 Highest)
88
Insider Activity
UnFavorable

Overview 22-JUL-98

Revenue growth should slow somewhat in FY 99 (Jun.), after a 28% rise in FY 98, reflecting few major product releases. However, growth will remain solid, with continued strength in operating systems, desktop applications, and enterprise software. Windows 98 was launched in late June 1998, and appears to be off to a strong start. The company's Office suite of applications, which includes Word and Excel, is the dominant force in the business application market; the next version will be released in 1999. Enterprise software products, including Windows NT, are expected to continue to gain momentum. Margins are expected to remain steady, with continued high R&D spending and a less favorable product mix offset by well controlled expenses. Results in the first quarter of FY 98 included a charge of $0.22 a share for the acquisition of WebTV Networks, Inc.

Valuation 22-JUL-98

The shares are up sharply thus far in 1998, despite expectations of slower revenue growth in FY 99. Near-term earnings drivers include strength of Windows 98, Office 97 and Windows NT. However, nearly $3 billion spent on R&D in FY 98 will lead to several new products over the next few years, including Windows NT 5.0 (still about a year away), Office 2000 (to be launched in 1999), and SQL Server 7.0 (the company's database software) and Start.com (an Internet portal site), which will be introduced later this year. While the cloud of the antitrust case still lingers over MSFT, and remains a concern, we do not expect it to have a material impact on the company's business. The shares deserve a premium market valuation, in light of MSFT's strong competitive position and future growth prospects. We recommend accumulating the shares for the long term.

Key Stock Statistics

S&P EPS Est. 1999 2.14
P/E on S&P Est. 1999 48.7
Dividend Rate/Share Nil
Shs. outstg. (M) 2464.1
Avg. daily vol. (M) 15.971
Tang. Bk. Value/Share 5.58
Beta 1.26
Shareholders 53,400
Market cap. (B) $256.9
Inst. holdings 34%
Value of $10,000 invested 5 years ago:$ 97,686

Fiscal Year Ending Jun. 30

Revenue (Million $)
1998 1997 1996 1995 1994 1993
Q1 3,130 2,295 2,016 1,247 983.0 818.0
Q2 3,585 2,680 2,195 1,482 1,129 938.0
Q3 3,774 3,208 2,205 1,587 1,244 958.0
Q4 3,995 3,175 2,255 1,621 1,293 1,039
Year 14,484 11,358 8,671 5,937 4,649 3,753

Earnings Per Share ($)
1998 1997 1996 1995 1994 1993
Q1 0.25 0.24 0.20 0.13 0.10 0.09
Q2 0.42 0.28 0.23 0.15 0.12 0.10
Q3 0.50 0.40 0.22 0.16 0.10 0.10
Q4 0.50 0.40 0.22 0.14 0.15 0.11
Year 1.67 1.31 0.85 0.58 0.47 0.39

Dividend Data
Amount ($) Date Decl. Ex-Div. Date Stock of Record Payment Date
2-for-1 Jan. 26 Feb. 23 Feb. 06 Feb. 20 '98

Business Summary 22-JUL-98

This dominant player in the PC software market, which rose to prominence on the popularity of its operating systems software, now rules the business applications software market, and has its sights set on becoming the leading provider of software and services for the Internet. By virtue of its size, market positioning and financial strength, Microsoft (MSFT) is a formidable competitor in any market that it targets. Earnings have grown rapidly over the past several years, aided by a strong PC market in general, new product introductions, and market share gains.

MSFT is best known for its operating systems software programs, which run about 90% of the PCs currently in use. Its original DOS operating system gave way to Windows, a graphical user interface program run in conjunction with DOS, which made using a PC easier. Windows 98, MSFT's newest version of its flagship PC operating system, with sales closely tied to PC shipments, was introduced on June 25, 1998. Its predecessor, Windows 95, has an installed base of more than 100 million users. Windows NT, a network operating system providing network management and administration tools, security and operating stability, now has an installed base of more than seven million users, and continues to grow rapidly.

MSFT entered the business applications market in the early 1990s through a line-up of strong offerings combined with aggressive and innovative marketing and sales techniques. Its Office 97 suite, which includes the popular Word (word processing), Excel (spreadsheet) and PowerPoint (graphics) software programs, is now by far the number one selling application software package. The company is also devoting resources and forming alliances to offer interactive media, including children's titles, games and information products. Microsoft owns 50% of Dreamworks Interactive, MSNBC Cable, and MSNBC Interactive News. The company also recently acquired WebTV Networks, and made investments in Comcast and Apple Computer.

MSFT has rapidly repositioned itself as a major provider of software and services for the Internet. Its Explorer browser is challenging Netscape's Navigator, the market leader. In addition, MSFT's server and development tools for the Internet are being well received.

The company continues to spend heavily on research and development. Some $2.2 billion (about 20% of revenues) was spent in FY 97 (Jun.), of which about $400 million was targeted directly at the Internet. An additional $2.9 billion was spent in FY 98.

Powerful distribution channels, including strong relationships with original equipment manufacturers (OEMs, the makers of PCs), relationships with resellers, as well as guaranteed shelf space in retail stores, all give MSFT an advantage over smaller, less well established rivals.

Per Share Data ($)
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
Tangible Bk. Val. NA 4.07 2.89 2.27 1.92 1.44 0.99 0.64 0.44 0.28
Cash Flow NA 1.52 1.04 0.69 0.57 0.45 0.34 0.24 0.15 0.10
Earnings 1.67 1.31 0.86 0.58 0.47 0.39 0.30 0.21 0.13 0.08
Dividends Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil
Payout Ratio Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil
Prices - High 119 5/8 75 3/8 43 1/8 27 3/8 16 1/4 12 1/4 11 7/8 9 3/8 4 1/2 2 1/2
- Low 62 1/4 40 3/8 20 14 5/8 9 3/4 8 3/4 8 1/4 4 1/8 2 5/16 1 1/4
P/E Ratio - High 72 57 50 47 35 31 39 45 35 29
- Low 37 31 23 25 21 22 27 20 18 15

Income Statement Analysis (Million $)
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
Revs. NA 11,358 8,671 5,937 4,649 3,753 2,759 1,843 1,183 804
Oper. Inc. NA 5,687 3,558 2,307 1,963 1,464 1,097 714 434 260
Depr. NA 557 480 269 237 138 101 67.0 46.0 25.0
Int. Exp. NA Nil Nil Nil 2.0 1.0 2.0 4.5 3.6 2.3
Pretax Inc. NA 5,314 3,379 2,167 1,722 1,401 1,041 671 411 251
Eff. Tax Rate NA 35% 35% 33% 33% 32% 32% 31% 32% 32%
Net Inc. NA 3,439 2,195 1,453 1,146 953 708 463 279 171

Balance Sheet & Other Fin. Data (Million $)
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
Cash NA 8,966 6,940 4,750 3,614 2,290 1,345 686 449 301
Curr. Assets NA 10,373 7,839 5,620 4,312 2,850 1,770 1,029 720 469
Total Assets NA 14,387 10,093 7,210 5,363 3,805 2,640 1,644 1,105 721
Curr. Liab. NA 3,610 2,425 1,347 913 563 447 293 187 159
LT Debt NA Nil Nil Nil Nil Nil Nil Nil Nil Nil
Common Eqty. Nil 9,797 6,908 5,333 4,450 3,242 2,193 1,351 919 562
Total Cap. NA 10,777 7,033 5,458 4,450 3,242 2,193 1,351 919 562
Cap. Exp. NA 499 494 495 278 239 318 275 159 92.0
Cash Flow NA 3,996 2,675 1,722 1,383 1,091 809 530 326 196


1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
Curr. Ratio NA 2.9 3.2 4.2 4.7 5.1 4.0 3.5 3.9 3.0
% LT Debt of Cap. NA Nil Nil Nil Nil Nil Nil Nil Nil Nil
% Net Inc.of Revs. Nil 30.3 25.3 24.5 24.7 25.4 25.7 25.1 23.6 21.2
% Ret. on Assets NA 28.2 25.4 23.1 25.0 29.1 32.5 33.4 30.1 27.9
% Ret. on Equity NA 41.2 35.9 29.7 29.8 34.6 39.3 40.4 37.1 36.1

Data as orig. reptd.; bef. results of disc. opers. and/or spec. items. Per share data adj. for stk. divs. as of ex-div. date. Bold denotes diluted EPS (FASB 128). E-Estimated. NA-Not Available. NM-Not Meaningful. NR-Not Ranked.

Office--One Microsoft Way, Redmond, WA 98052-6399. Tel--(206) 882-8080. Website--http://www.microsoft.com Chrmn & CEO--W. H. Gates III. Pres--S. Ballmer. EVP & COO--R. J. Herbold. VP-Fin & CFO--G. B. Maffei. Secy--W. H. Neukom. Investor Contact--Carla Lewis (425-936-3703). Dirs--P. G. Allen, J. E. Barad, W. H. Gates III, R. Hackborn, D. F. Marquardt, R. D. O'Brien, W. G. Reed Jr., J. A. Shirley. Transfer Agent--ChaseMellon Shareholder Services, Ridgefield Park, NJ. Incorporated--in Washington in 1981; reincorporated in Delaware in 1986. Empl-- 22,232. S&P Analyst: Brian Goodstadt


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