Financial Report

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Harvard Business School 9-100-027 Rev. February 16, 2000 Microsoft's Financial Reporting Strategy We are a company known for being conservative. —Greg Maffei, CFO1 On June 30, 1999, during a conference call with analysts, Microsoft Corporation announced that the company was under investigation by the Securities and Exchange Commission (SEC) for certain accounting practices. Although the exact focus of the investigation was not disclosed, the common belief was that the investigation involved the company’s deferral of revenue and other undisclosed reserve accounts.2 Company Background3 As the developer and manufacturer of products such as the Windows operating system, the Internet Explorer web browser, and the Microsoft Office suite of applications, Microsoft was easily the most widely recognized software developer in the world. The company’s history had been well documented—in articles, books, documentaries and even a made-for-television movie, “Pirates of Silicon Valley.” Bill Gates and Paul Allen founded the company in 1975, with the idea that one day there would be “a computer on every desk and in every home.” The company’s big break came in 1980 when it negotiated with IBM to provide the operating system for IBM’s new personal computer. The result was MS-DOS and by the mid-80s, Microsoft dominated the market for operating systems. The company went public on March 13, 1986 at $25.75 per share. As of June 30, 1999, one share of Microsoft purchased at the initial public offering was worth almost $13,000. By this time, the company also had the highest market value of any U.S. public company (approximately $460 billion) and its CEO, Bill Gates, was the world’s wealthiest individual. Since going public in 1986, the company’s financial performance had been nothing short of extraordinary (see Exhibits 1 and 2). Revenue and operating income

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