FISH RICHARDSON

Transcription

FISH RICHARDSON

FISH
RICHARDSON
P.C.
. .
1425K STREET,
N.W.
IITH
FLOOR
WASHINGTON,
DC 20005
Iiederick P. Fish
Telephone
202 783-5070
1855-1930
Facsimile
W.K. Richaidson
202 783-2331
1859-1951
June 21,2002
Web Site
www.fr.com
The Honorable Marilyn R. Abbott
Secretary
U.S. International Trade Commission
500 E Street, S.W.
Washington, DC 20436
.
I
c-5
N
r
Re:
3
Certain Video Game Systems, Accessories, and Components Th&o f
.
’
5
I
A
Dear Secretary Abbott:
J
-a
:Ll
BOSTON
DALLAS
DELAWARE
N E W YORK
SAN DIEGO
S I L I C O N VALLEY
TWIN CITIES
Enclosed for filing on behalf of Microsoft Corporation (“Microsoft”) are tlfe
following documents in support of Microsoft’s request that the Commissiz
commence an investigation pursuant to the provision of Section 337 of the Tariff Act
of 1930, as amended. Please note that Confidential Exhibit 22 to the Complaint
contains confidential business information. Pursuant to the Commission’s Rules of
Practice and Procedure, a request for confidential treatment of these documents is
concurrently transmitted along with this filing. Accordingly, Microsoft submits the
following:
WASHINGTON, DC
1.
an original and fourteen (14) copies of Microsoft’s verified Complaint
and accompanying exhibits (confidential versions) (confidential
information segregated from other material submitted) (original and
one copy unbound, without tabs) (Rules 201.6(c), 210.4(f)(3)(i), and
2 10.8(a));
2.
four (4) copies of the public version of Microsoft’s verified Complaint
and accompanying exhibits (two copies unbound, without tabs) (Rules
20 1.6(c), 2 10.4(f)( 3)(i), and 2 10.8(a));
3.
one (1) additional copy of both the public and confidential versions of
the Complaint and accompanying exhibits, for service upon the
proposed Respondent (Rules 210.4(f)(3)(i), 210.8(a) and 210.1 l(a));
4.
a certified copy of United States Patent No. D452,282 (“the ‘282
patent”) (Rule 210.12(a)(g)(i));
5.
a certified copy of the assignment of the ‘282 patent (Rule
210.12(a)(g)(ii));
r”.
CL
5
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i.4
N
F I S H 8r R I C H A R D S OP N
.C.
June 21,2002
Page 2
6.
four (4) copies of the prosecution history of the ‘282 patent (a certified
copy of the prosecution history of the ‘282 patent will be submitted
once received from the U.S. Patent and Trademark Office)(Rule
2 10.12(c)(2));
7.
four (4) copies of each reference document mentioned in the
prosecution history of the ‘282 patent (Rule 210.12(~)(3));
8.
a certified copy of United States Patent No. D452,534 (“the ‘534
patent”) (Rule 210.12(a)(9)(i));
9.
a certified copy of the assignment of the ‘534 patent (Rule
2 lO.l2(a)(9)(ii));
10.
four (4) copies of the prosecution history of the ‘534 patent (a certified
copy of the prosecution history of the ‘534 patent will be submitted
once received from the U.S. Patent and Trademark Office)(Rule
2 10.12(c)(2));
11.
four (4) copies of each reference document mentioned in the
prosecution history of the ‘534 patent (Rule 220.12(~)(3));
12.
a sample of Microsoft’s XBOXTMvideo game console, a sample of
Respondent’s X-Selector product, and a sample of Respondent’s XConnection product; and
13.
a letter and certification pursuant to Commission Rules 210.6(b) and
2 10.5(d) requesting confidential treatment of Confidential Exhibit 22
filed with the Complaint.
Thank you for your attention to this matter,
Respectfully submitted,
Brian T. Racilla
Counsel for Complainant
Microsoft Corporation
Enclosures
FISHtz RICHARDSON
P.C.
1425 K STREET,N.W.
IITH
FLOOR
WASIIINGTON,
DC 20005
Frederick P. Fish
Telephone
W.K.Richardson
Facsimile
202
1851-1930
1859-1951
202
783-5070
783-2331
Web Site
www.fr.co m
June 21,2002
Secretary
U.S. International Trade Commission
500 E Street, S.W.
Washington, D.C. 20436
Re: Certain Video Game Systems, Accessories, and Components Thereof
BOSTON
DALLAS
DELAWARE
NEW YORK
SAN DlEGO
S I L I C O N VALLEY
TWIN C I T I E S
WASHINGTON, DC
Dear Secretary Abbott:
I am counsel for Microsoft Corporation ("Microsoft"). In accordance with
Commission Rules 201.6 and 210.5, Microsoft requests confidential treatment of the
confidential business information contained in Confidential Exhibit 22 to the
Complaint.
The information for which confidential treatment is sought is a summary o f certain
criteria evidencing a domestic industry in connection with U.S. Patent Nos. D452,282
and D452,534 (Confidential Exhibit 22).
The information described above qualifies as confidential business information
pursuant to Rule 201.6(a) in that:
(a)
it is not available to the public;
(b)
unauthorized disclosure of such information could cause substantial
harm to the competitive position oiMicrosoft; and
F I S H & R I C H A R D S OP N
.C.
June 2 1,2002
Page 2
(c)
the disclosure of which could impair the Commission’s ability to
obtain information necessary to perform its statutory functions.
Brian T. Racilla
Counsel for Complainant
&--
d/
.-.I
Subscribed and sworn to before me this
day of June, 2002.
Notary Public
I,
BARBARA A BEE
NOTARY PUBUC OF DISTRICT OF COLUMBIA
MY COMMISSION EXPIRESMARCH 31,2005
UNITED STATES INTERNATIONAL TRADE COMMISSION
WASHINGTON, D.C. 20436
In the Matter of
)
CERTAIN VIDEO GAME SYSTEMS, )
ACCESSORIES, AND COMPONENTS )
THEREOF
Investigation No. 337-TA--
1
COMPLAINT UNDER SECTION 337 OF
THE TARIFF ACT OF 1930, AS AMENDED
Complainant:
Proposed Respondent:
One Microsoft Way
Redmond, Washington 98052
Telephone: (425) 882-8080
Ultimate Game Club Ltd.
1491 Boston Post Road
Old Saybrook, Connecticut 06475
Counsel for Complainant:
Ruffin B. Cordell
Michael J.McKeon
Brian T. Racilla
Fish & Richardson P.C.
1425 K Street, N.W.
Telephone: (202) 783-5070
John E. Gartman
4350 La Jolla Village Drive, Suite 500
San Diego, California
Telephone: (858) 678-5070
Steven McGrath
One Microsoft Way
Redmond, Washington 98052
Telephone: (425) 882-8080
TABLE OF CONTENTS
TABLE OF CONTENTS .....................................................................................................
LIST OF EXHIBITS AND APPENDICES .......................................................................
I.
INTRODUCTION ........................................................................................................
i
...
111
1
I1. COMPLAINANT .........................................................................................................
2
I11. RESPONDENT ............................................................................................................
3
IV . THE PRODUCTS AT ISSUE .....................................................................................
4
THE MICROSOFT PATENTS ..................................................................................
6
V.
A . The ‘282 Patent
.................................................................................................
6
1. Identification of the Patent and Ownership ...........................................
6
2 . Non-Technical Description of the ‘282 Patented Design
.....................
7
3. Foreign Counterparts ............................................................................
7
................................................................................................
8
B . The ‘534 Patent
1. Identification of the Patent and Ownership ...........................................
8
2 . Non-Technical Description of the ‘534 Patented Design
.....................
8
3. Foreign Counterparts ............................................................................
9
VI .
UNFAIR ACTS OF THE RESPONDENT - PATENT INFRINGEMENT ...........9
VI1.
SPECIFIC INSTANCES OF UNFAIR IMPORTATION AND SALE ................12
VI11. LICENSES ............................................................................................................. 13
IX .
DOMESTIC N U S T R Y ......................................................................................
14
A . Microsoft’s Domestic Products......................................................................
14
B . Microsoft’s Domestic Industry Activities......................................................
14
i
X.
RELATED LITIGATION ..................................................................................... 15
XI .
REQUESTED RELIEF ..........................................................................................
..
11
15
EXHIBITS
Exhibil
No.
Description
1
Certified copy of U.S. Patent No. D452,282
(“the ‘282 patent”)
2
Certified copy of Assignment of the ‘282 Patent to
3
Certified copy of U S . Patent No. D452,534
(“the ‘534 patent”)
4
Certified copy of Assignment of the ‘534 Patent to
5
Microsoft 2001 Online Annual Report
6
Instruction Manual for XBOXTMvideo game console
7
Photographs of the housing of Complainant’s XBOXTM
console
8
Certificate of Incorporation and 2002 Dun & Bradstreet
Report for Respondent Ultimate Game Club Ltd.
9
Copy of correspondence between UGC and the United
States Patent and Trademark Office
10
Copy of Electronic Boutique of America’s online product
offerings at EBgames.com
11
Photocopies of the retail packaging of Respondent’s XSelector product
12
Photographs of the housing of Respondent’s X-Selector
product
13
Photocopies of the retail packaging of Respondent’s
X-Connection product
14
Photographs of the housing of Respondent’s X-Connection
product
...
111
Exhibit
No.
Description
15
Copy of EBgames.com webpage depicting Respondent’s
X-Selector product
16
Declaration of John P. Schnurer
17
Copy of EBgames.com webpage depicting Respondent’s
18
Copy of Gamestop.com webpage depicting Respondent’s
19
Receipt of purchase for Respondent’s X-Selector product
from EBgames.com website
20
Receipt of purchase for Respondent’s X-Connection product
from EBgames.com website
21
Receipt of purchase for Respondent’s X-Connection product
from GameStop.com website
22
CONFIDENTIAL - Information concerning Microsoft’s
domestic industry
iv
PHYSICAL EXHIBITS
Physical
Exhibit
No.
Description
1
A sample of Microsoft’s XBOXTMvideo game console
2
A sample of Respondent’s X-Selector product
3
A sample of Respondent’s X-Connection product
V
I.
INTRODUCTION
1.1
Complainant Microsoft Corporation (“Microsoft”) requests that the United
States International Trade Commission commence an investigation pursuant to section
337 of the Tariff Act of 1930, as amended, 19 U.S.C. $0 1337(a)(l)(B) (“Section 337”),
to remedy the unlawful importation into the United States, the sale for importation into
the United States, and/or the sale within the United States after importation by the owner,
importer, or consignee of articles covered by valid and enforceable United States Design
Patents owned by Complainant.
1.2
The proposed Respondent, Ultimate Game Club Ltd. (“UGC”), has
engaged in unfair acts in violation of Section 337 through the unlicensed importation into
the United States, sale for importation into the United States, and/or sale within the
United States after importation of certain video game accessories and components thereof
that infringe United States Patent Nos. D452,282 (“the ‘282 patent”) and D452,534 (“the
‘534 patent”) (collectively “the Microsoft patents”)..
1.3
A certified copy of the ‘282 patent accompanics this complaint as Exhibit
1. Microsoft owns by assignment the entire right, title, and interest in this patent. A
certified copy of the recorded assignment accompanies this complaint as Exhibit 2.
1.4
A certified copy of the ’534 patent accompanies this complaint as Exhibit
3. Microsoft owns by assignment the entire right, title, and interest in this patent. A
certified copy of the recorded assignment accompanies this complaint as Exhibit 4.
1.5
An industry as required by Section 337(a)(2) and defined by Section
337(a)(3) exists in the United States relating to video game systems, and components
thereof, that are protected by the ‘282 and ‘534 patents. The designs claimed in the ‘282
1
and ‘534 patents are used in Microsoft’s XBOXTMvideo game system, an innovative and
cutting-edge video game system sold throughout the United States. The domestic
industry for the ‘282 and ‘534 patents includes Microsoft’s substantial United States
investment and expenditures in the engineering, research, development, marketing, and
sales relating to products that use the designs claimed in the Microsoft patents.
1.6
Complainant seeks an order pursuant to section 337(d) permanently
excluding from entry into the United States all imported video game accessories and
components thereof that infringe the ‘282 and ‘534 patents. Complainant further seeks a
cease-and-desist order pursuant to section 337(f) directing Respondent to immediately
discontinue the importation into the United States, or the sale within the United States
after importation of all infringing articles.
11.
COMPLAINANT
2.1
Complainant Microsoft is a corporation organized and existing under the
laws of the state of Washington, with its corporate headquarters at One Microsoft Way,
Redmond, Washington 98052. Microsoft is a global technology company that develops,
manufactures, and supports a wide range of software and hardware products for a variety
of different applications. Additional information concerning Microsoft can be obtained
from Microsoft’s most recent annual report attached as Exhibit 5.
2.2
In late 2001, Microsoft revolutionized the video gameplay experience with
the introduction of its XBOXTMvideo game system which provides high quality graphics
and game creation that blur the lines between fantasy and reality, and which provides a
platform that will in the future enable gameplay over the Internet. Microsoft sells and
markets throughout the United States the XBOXTMvideo game system and related
2
XBOXTMvideo games and accessories. Despite its relatively short period of availability,
the XBOXTMvideo game system has earned remarkable success in the marketplace and is
now one of the leading video game systems available. The XBOXTMvideo game system
is shown and described in an Instruction Manual attached as Exhibit 6 and may be
further understood with reference to a Microsoft website at www.xbox.com. The console
housing of the XBOXTMvideo game system is further depicted in the photographs
attached as Exhibit 7. A sample of the XBOXTMconsole housing for the XBOXTMvideo
game system has also been filed as Physical Exhibit 1. Microsoft is the owner of the
‘282 and ‘534 patents, which each claim designs used in Microsoft’s innovative
XBOXTMvideo game system.
111.
RESPONDENT
3.1
The success of Microsoft’s XBOXTMvideo game system has not gone
unnoticed by others who seek to gain from Microsoft’s investment, ingenuity, and
goodwill. Respondent UGC is in the business of manufacturing, importing, distributing
and/or selling video game accessories including the “X-Selector” and the “XConnection” that evidence a clear motive to misappropriate Microsoft’s patented designs
in addition to Microsoft’s valuable brand awareness.
3.2
Respondent UGC is a corporation organized and existing under the laws
of the state of Connecticut, having a principal place of business at 1491 Boston Post
Road, Old Saybrook, Connecticut 06475. UGC’s Certificate of Incorporation and a copy
of a corporate report from Dun & Bradstreet, Inc. relating to UGC are attached as
Exhibit 8. Upon information and belief, Respondent UGC and various unincorporated
3
divisions of UGC including “Innovation Technologies” and “Future Tech,” were formed
and are operated by Mr. Keith J. Taruski.
3.3
Upon information and belief, “Iwovation” is a trade name for an
unincorporated division of Respondent UGC that has been described by Respondent as
follows:
Innovation is the trademark for Innovation Technologies which is
Ultimate Game Club, Ltd. ’s desigdmanufacturing division which
manufactures video game cartridges, video output games, video game
joysticks, and other video game accessories.
UGC made this representation during the prosecution of the “Innovation” trademark
application in the United States Patent and Trademark Office, See Exhibit 9. Moreover,
the retail packaging of each accused product contains the text “Innovation is a trademark
of UGC Ltd.,” examples of which can be seen at Exhibits 11 and 13.
3.4
Upon information and belief, “Future Tech” (including at least one
alternate spelling thereof (e.g.,“Futureteck”)) is a trade name of an unincorporated
division of Respondent UGC and is a trade name by which UGC does business. Upon
information and belief, Future Tech is a division of UGC that is responsible for the sales
and delivery of video game accessories purchased from a website sponsored by
Respondent (www.innovation1 .corn). This relationship is indicated on the shipping label
that accompanied a delivery of video game accessories ordered from Respondent. A
copy of the shipping label has been attached as Exhibit E to Exhibit 16.
IV.
THE PRODUCTS AT ISSUE
4.1
The articles involved in this investigation are video game systems,
accessories, and components thereof.
4
4.2
Microsoft’s XBOXTMvideo game system includes an XBOXTMvideo
game console, an XBOXTMvideo game controller, an AC adapter and a standard A/V
cable in addition to many other accessories that may be purchased to further enhance the
gameplaying experience. An instruction manual that shows and describes the XBOXTM
video game system is attached as Exhibit 6. The XBOXTMconsole includes a housing
that encases the hardware components and assemblies of the video game system.
Photographs of the XBOXTM video game console are attached as Exhibit 7. The
XBOXTM console incorporates the designs claimed in the ‘282 and ‘534 patents.
4.3
Microsoft sells its X130XTMvideo game system through a variety of
retailers including Electronic Boutique of America which offcrs the XBOXTMfor sale in
its many retail locations as well as online at www.EBgames.com. A copy of online
offerings from Electronic Boutique’s website is attached as Exhibit 10. As shown, the
website offers a variety of different products and has pages devoted to the XBOXTM
including “accessories” and “hardware.” Since its introduction in 2001, total sales of the
XBOXTMvideo game console system have been in the hundreds of millions of dollars.
4.4
Respondent’s X-Selector is a video game accessory that includes an
electronic housing and that serves to interface between a TV or monitor and up to four
video game systems, including Microsoft’s XBOXTMvideo game system. Features of the
X-Selector are described on the packaging of the product, photocopies of which are
attached as Exhibit 11. Photographs that depict the housing of the X-Selector are
attached as Exhibit 12. Each of the X-Selectors purchased from Respondent UGC,
EBGames.com, and GameStop.com are assembled with the same housing photographed
in Exhibit 12.
5
4.5
Respondent’s X-Connection is a video game accessory that includes an
electronic housing and that serves to interface between Microsoft’s XBOXTM console and
Sony’s PlayStationB controllers, Features of the X-Connection are described on the
packaging of the product, photocopies of which are attached as Exhibit 13. Photographs
that depict the housing of X-Connection products purchased from EBGames.com and
GameStop.com are attached as Exhibit 14.
V.
THE MICROSOFT PATENTS
A.
The ‘282 Patent
1.
5.1
Identification of the Patent and Ownership
U.S. Patent No. D452’282 entitled “Portion of an Electronic Housing”
issued to Microsoft on December 18,2001 and names as inventors James R. Stewart and
Hok-Sum Horace Luke. A certified copy of the ‘282 patent accompanies this Complaint
as Exhibit 1. The named inventors assigned the ‘282 patent to Microsoft as indicated on
the face of the ‘282 patent. A certified copy of the assignment also accompanies this
Complaint as Exhibit 2.
5.2
Pursuant to Rule 210.12(c) of the Commission’s Rules of Practice and
Procedure, this Complaint is accompanied by: (1) four copies of the prosecution history
of the ‘282 patent (Appendix A) and (2) four copies of each reference document
mentioned in the prosecution history (Appendix B).
6
2.
5.3
Non-Technical Description of the ‘282 Patented Design
The design claimed in the ‘282 patent covers a novel, ornamental design
for a portion of an electronic housing, which is used in the console of the XBOXTMvideo
game system. The following figure is from the ‘282 patent and shows the novel,
ornamental design:
At the time this design was conceived, no prior art existed with a dominant “X”
configuration integrated as part of a geometric box shape having integrally formed
vertical fins. This unique ornamental design of an electronic housing captures qualities
of high power, high fidelity, and high energy bounded within a geometrically shaped
housing.
3.
5.4
Foreign Counterparts
Microsoft has filed applications corresponding to the ‘282 patent in France
and Canada. The corresponding French collective was registcred on January 29,2001 as
French Reg. No. 10529 01 0529. The corresponding Canadian application was registered
7
on April 19,2002 as Canadian Reg. No. 2001-0153. Other than the identified
counterparts, there are no foreign patents or patent applications corresponding to the ‘282
patent that have been issued, abandoned, denied, or remain pending.
B.
The ‘534 Patent
1.
5.5
Identification of the Patent and Ownership
U.S. Patent No. D452,534 entitled “Portion of an Electronic Housing”
issued to Microsoft on December 25,2001 and names as inventors James R. Stewart and
Hok-Sum Horace Luke, A certified copy of the ‘534 patent accompanies this Complaint
as Exhibit 3. The named inventors assigned the ‘534 patent to Microsoft as indicated on
the face of the ‘534 patent. A certified copy of the assignment accompanies this
Complaint as Exhibit 4.
5.6
Pursuant to Rule 2 10.12(c) of the Commission’s Rules of Practice and
Procedure, this Complaint is accompanied by: (1) four copies of the prosecution history
of the ‘534 patent (Appendix C) and (2) four copies of each reference document
mentioned in the prosecution history (Appendix D).
2.
5.7
Non-Technical Description of the ‘534 Patented Design
The design claimed in the ‘534 patent covers a novel, ornamental design
for a portion of an electronic housing, which is used in the console of the XBOXTM video
game system.
8
At the time this design was conceived, no prior art existed with the dominant “X”
configuration integrated as part of a geometric box shape. Like the ‘282 patent, the
unique ornamental design of the ‘534 captures qualities of high power, high fidelity, and
high energy bounded within a geometrically shaped housing.
3.
5.8
Foreign Counterparts
Microsoft has filed applications corresponding to the ‘534 patent in France
and Canada. The corresponding French collective was registcred on January 29,2001 as
French Reg. No. 10529 01 0529. The corresponding Canadian application was registered
on April 19,2002 as Canadian Reg. No. 2001-0150. Other than the identified
counterparts, there are no foreign patents or patent applications corresponding to the ‘534
patent that have been issued, abandoned, denied, or remain pending.
VI.
UNFAIR ACTS OF RESPONDENT - PATENT INFRINGEMENT
6.1
Respondent UGC is making, using, selling, importing and/or offering to
sell video game accessories that infringe the ‘282 and ‘534 patents. For example,
Respondent UGC is making, using, selling, importing and/or offering to sell the X9
Selector and the X-Connection that each clearly infringe on the designs claimed in the
‘282 and ‘534 patents. Microsoft reserves the right to include other infringing products
based on further analysis and discovery.
6.2
Respondent’s X-Selector is available in the United States through various
online marketers. For example, the X-Selector may be purchased through Electronic
Boutique’s website at www.EBgames.com at a price of $19.99 per unit. A printout of a
web page from that website showing the X-Selector is attached as Exhibit 15. As shown,
the X-Selector is included within the “accessories” category for Microsoft’s XBOXTM
video game system. In addition, the X-Selector may be purchased directly from
Respondent through the Internet as described in the Declaration of John P. Schnurer
attached as Exhibit 16.
6.3
Photographs of the X-Selector are attached as Exhibit 12. The
photographs of Exhibit 12 depict the housing of the X-Selector products purchased from
the EBGames.com website and directly from Respondent. The X-Selector is also shown
and described on its packaging, photographs of which are attached as Exhibit 11. Also
filed as Physical Exhibit 2 is a sample of the infringing X-Selector article (including its
packaging) that was purchased from Respondent. As the photographs and sample clearly
indicate, the X-Selector infringes the design of the ‘282 patent. The X-Selector includes
an electronic housing that is the same or substantially the same to the eye of the ordinary
observer as the electronic housing shown and described in the ‘282 patent. Similarly, as
the photographs and sample clearly indicate, the X-Selector infringes the design of the
‘534 patent. The X-Selector includes an electronic housing that is the same or
10
substantially the same to the eye of the ordinary observer as the electronic housing shown
and described in the ‘534 patent.
6.4
Respondent’s X-Connection is available in the United States through
various online marketers. For example, the X-Connection may be purchased through
Electronic Boutique’s website at www.EBgames.com at a price of $24.99 per unit and
Barnes & Noble’s affiliated website at www.Gamestop.com at a price of $24.99 per unit.
A printout of the Electronic Boutique website showing the X-Connection is attached as
Exhibit 17 and printout of the affiliated Barnes & Noble website showing the XConnection is attached as Exhibit 18. As shown in Exhibit 17, the X-Connection is
included within the “accessories” category for the XBOXTMvideo game console system.
6.5
Photographs of the X-Connection are attached as Exhibit 14. The
photographs of Exhibit 14 depict the housing of X-Connection products purchased from
the EBGames.com and GameStop.com websites. The X-Connection is also shown and
described on its packaging, photocopies of which are attached as Exhibit 13. Also filed a
Physical Exhibit 3 is a sample of the infringing X-Connection article (including its
packaging) purchased from EBGames.com. As the photographs and sample clearly
indicate, the X-Connection infringes the design of the ‘282 patent. The X-Connection
includes an electronic housing that is the same or substantially the same to the eye of the
ordinary observer as the electronic housing shown and described in the ‘282 patent.
Similarly, as the photographs and sample clearly indicate, the X-Connection infringes the
design of the ‘534 patent. The X-Connection includes an electronic housing that is the
same or substantially the same to the eye of the ordinary observer as the electronic
housing shown and described in the ‘534 patent.
11
VII.
SPECIFIC INSTANCES OF UNFAIR IMPORTATION AND SALE
7.1
Upon information and belief, the infringing X-Selector is not
manufactured in the United States, but rather is manufactured in the People’s Republic of
China. The retail packaging of each purchased X-Selector states that the product was
“Made in China.” A copy of the retail packaging is attached as Exhibit 11. In addition,
the housing of each purchased X-Selector contains a “Made in China” mark as can be
seen in a photograph of the X-Selector attached as Exhibit 12. The packaging of each
purchased X-Selector further indicates:
Innovation is a trademark of UGC Ltd. This product is manufactured by
Innovation and is not related, sponsored, endorsed or manufactured by any
other company.
Exhibit 11.
7.2
Upon information and belief, the infringing X-Selector is imported into
the United States and sold within the United States after importation. For example, the
X-Selector can be observed being offered for sale by Electronic Boutique at its website
www.EBgames.com. A printout of that website showing the X-Selector is attached as
Exhibit 15. On March 25, 2002, Respondent’s X-Selector was purchased in the United
States through the EBgames.com website. A copy of the purchase receipt is attached as
Exhibit 19. Photographs of an X-Selector that was purchased are attached as Exhibit 12.
7.3
In addition, as noted above, the X-Selector may be purchased directly
from Respondent through the Internet as described in the Declaration of John P. Schnurer
attached as Exhibit 16. On March 26,2002, the X-Selector was purchased directly from
Respondent. A copy of the shipping receipt is attached as an exhibit to the Declaration of
John P. Schnurer attached as Exhibit 16.
12
7.4
Upon information and belief, the infringing X-Connection is not
manufactured in the United States, but rather is manufactured in the People’s Republic of
China. The retail packaging of the X-Connection states that the product was “Made in
China.” A copy of the retail packaging is attached as Exhibit 13. In addition, the
housing of the X-Connection contains a “Made in China” mark as can be seen in a
photograph of the X-Connection attached as Exhibit 14.
7.5
Upon information and belief, the X-Connection is imported into the
United States and sold within the United States after importation. For example, the XConnection can be observed being offered for sale by Electronic Boutique at its website
www.EBgames.com. A printout of that website showing the X-Connection is attached as
Exhibit 17. On March 15,2002, Respondent’s X-Connection was purchased in the
United States through the EBgames.com website. A copy of the purchase receipt is
attached as Exhibit 20. Respondent’s X-Connection may also be observed being offered
for sale at Barnes & Noble’s affiliated website www.GameStop.com. A printout of the
Barnes & Noble website showing the X-Connection is attached as Exhibit 18. On March
28,2002, Respondent’s X-Connection was purchased in the United States through the
GameStop.com website. A copy of the purchase receipt is attached as Exhibit 21.
7.6
The infringing articles are believed to fall within at least the following
classifications of the Harmonized Tariff Schedules of the United States: Nos. 9504.10.00
and 9504.90.40.
VIII. LICENSES
8.1
Microsoft has not granted any licenses under the ‘282 and ‘534 patents.
13
IX.
DOMESTIC INDUSTRY
9.1
An industry as required by Section 337(a)(2) and defined by Section
337(a)(3) exists in the United States relating to products madc by Microsoft covered by
the ‘282 and ‘534 patents including (A) significant United States investment in plant and
equipment, (B) significant employment of labor and capital in the United States, and (C)
substantial investment in exploitation of the ‘282 and ‘534 patents, including engineering
and research and development related to products covered by the Microsoft patents. With
respect to the requirements of Section 337(a)(2), Microsoft relies primarily on its
substantial investment in the exploitation of the ‘282 and ‘534 patents within the meaning
of Section 337(a)(3).
A.
Microsoft’s Domestic Products
9.2
Microsoft’s domestic activities relate to its XBOXTMvideo game system
which includes the XBOXTMconsole. The XBOXTMvideo game system is shown and
described in a product manual attached as Exhibit 6. The XBOXTMconsole is further
depicted in the photographs attached as Exhibit 7. Also, a sample of the XBOXTM
console housing for the XBOXTMvideo game system has been filed as Physical Exhibit
1. The XBOXTMvideo game system incorporates designs that are protected by the ‘234
and ‘534 patents. The console of the XBOXTM video game system includes an electronic
housing that is the same or substantially the same to the eye of the ordinary observer as
the electronic housing shown and described in the ‘282 and ‘534 patents.
B.
Microsoft’s Domestic Industry Activities
9.3
Although Microsoft’s XBOXTMvideo game system is not manufactured in
the United States, there are substantial activities relating to the XBOXTM video game
14
system that are conducted in the United States. These activities include Microsoft’s
significant investment in plant and equipment, significant employment of labor and
capital, and substantial investment in the exploitation of the Microsoft patents, including
engineering, research and development activities relating to the XBOXTMvideo game
console system. Detailed information concerning Microsoft’s investment in plant and
equipment, employment of labor and capital, and investment in the exploitation of the
Microsoft patents is contained in Confidential Exhibit 22.
X.
RELATED LITIGATION
10.1
Microsoft is filing concurrently with the filing of this Complaint in the
United States International Trade Commission, a complaint in the United States District
Court for the District of Connecticut alleging inter alia infringement by Respondent of
the ‘282 and ‘534 patents.
XI.
REQUESTED RELIEF
11.1. WHEREFORE, by reason of the foregoing, Complainant requests that the
United States International Trade Commission:
a)
Institute an immediate investigation pursuant to Section 337 of the
Tariff Act of 1930, as amended, 19 U.S.C. 0 1337, into the unlawful importation
into the United States, the sale for importation into the United States or the sale
within the United States after importation by the proposed Respondent and others
of video game systems, accessories, and components thereof that infringe United
States Patent Nos. D452,282 and D452,534.
b)
Determine that there has been a violation of Section 337;
15
c)
Issue a permanent exclusion order pursuant to Section 337(d) of
the Tariff Act of 1930, as amended, excluding from entry into and sale within the
United States all video game systems, accessories, and components thereof that
are manufactured, imported, or sold by or on behalf of Respondent, its affiliates,
subsidiaries, successors, executives, directors, employees, or assigns that infringe
United States Patent Nos. D452,282 and D452,534.
d)
Issue a permanent cease-and-desist order pursuant to Section
337(f) of the Tariff Act of 1930, as amended, prohibiting Respondent, its
affiliates, subsidiaries, successors, executives, directors, employees, or assigns,
from marketing, demonstrating, distributing, offering for sale, selling, or
otherwise transferring, including the movement or shipment of inventory, in the
United States any video game systems, accessories, and components thereof that
infringe United States Patent Nos. D452,282 and D452,534; and
e)
Issue such other and further relief as the Commission deems just
and proper based on the facts determined by the investigation and the authority of
the Commission.
16
1425 K Street, N.W.
Telephone: (202) 783-5070
John E. Gartman
4350 La Jolla Village Drive, Suite 500
San Diego, California
Telephone: (858) 678-5070
Steven McGrath
One Microsoft Way
Redrnond, Washington 98052
Telephone: (425) 882-8080
Attorneys for Complainant
Dated: June 13,2002
17
EXHIBIT 1
UNITED STATES DEPARTMENT OF COMMERCE
United States Patent and Trademark Office
March 27,2002
THIS IS TO CERTIFY THAT ANNEXED HERETO IS A TRUE COPY FROM
THE RECORDS OF THIS OFFICE OF:
U.S. PATENT: 0452,282
ISSUE DATE: December 18,2001
l11ll11lllIl11111111USOOD452282Bl
111111111
1l1I11l1l1111I1Ill1llH
1
I11111
(12)
United States Design Patent
Stewart et al.
(45)
(54)
PORTION OF AN ELECTRONIC HOUSING
(75)
Inventors: James R. Stewart, Woodinville;
Hok-Sum Horace Luke, Mercer Island,
both of WA (US)
(73)
Assignee: Microsoft Corporation, Redmond, WA
(")
Tern:
(21)
Appl. No.: 29/135,335
(22)
Filed:
(51)
(52)
(58)
LOC (7) CI. .........................................................
21-01
U.S. CI. .............................................................
D2ln33
Field of Search ..............
D21/324, 328-333;
D141400. 401, 435,495; 2731148 B; 46311.
47
(US)
-
Jan. ll, 2001
* 1011995 Oikawa
811999
* ionom
* l2/2W
* lnWl
* 3/1993
* 1111999
7DW1
469
...............................
..............
Oslerhout
Kaio et ai. .
H~~
Swaason et al.
Yu
Inoue et al. ............................
Dmckman
&ski e l al.
D21032
D21/329
.................................. ~ 2 1 , 3 3 3
................... D21B28
....................................... D21D33
4-53/46
.............................. 463146
............................ 463147
OTHER PUBLICA7lONS
www.Amazan.com, Color Pictures of Outdoor Trekker
product by V-Tech, 2 pages, (date unknown but prior to Jan.
11,2001).
i
I
i
D e c 18,2001
Color pictures of Garnecubc video game system by Nin-
tendo, from various internet web pages, 3 pages, (date
unknown but prior to Jan. 11,2001).
Color pictures of Playstation 2 video game system by Sony,
from various internet web pages, 3 pages, (date unknown but
prior to Jan. 11,2001).
(57)
References Cited
* la1996
US D452,282 S
Primary Exuminer4%abhakar Deshmukh
(74) Anorney, Agent, or Firm-Banncr & Witcoff, Ltd.
U.S. PATENT DOCUMENTS
D. 362,869
D. 376,822
D. 412,940
D. 433,076
D. 435,272
D.435,871
5,192@2
5,976,018
6,254,477
NO.:
Date of Patent:
* cited by examiner
14Years
29-359
(56)
(IO) Patent
CLAIM
The ornamental design for a portion of an electronic housing, 8s Shorn and described.
DESCRIPTION
FIG. 1 is a perspective view of a poriion of ao electronic
housing s h o k g our new design;
FIG. 2 is a tup plan view thereof;
FIG. 3 is a front view thereof;
FIG. 4 is rear view thereof;
FIG. 5 is right side view thereof; and,
FIG. 6 is a left side view thereof.
The broken line showing o f the circle within Ihc claimed
design and the remainder of the electronic housing is for
illustrative piirposes only and form no part of the claimed
design. The unshaded regions including the region inside of
the unclaimed circle, and the bottom of the electronic
housing form no part of the claimed design.
1 Claim, 3 Drawlng Sheets
U.S. Patent
Dec. 18,2001
Sheet 1 of 3
.--- --
FIG. I
..
US D452,282 S
US. Patent
Dec. 18,2001
Sheet 2 of 3
US D452,282 S
2
- --c
.
I
-.
FIG. 2
FIG. 3
U.S. Patent
II
-I
I
i
111
111
- --i
Dec. 18,2001
Sheet 3 of 3
US D452,282 S
...
I
1
111
111
111
1
I
!
I
FIG. 4
FIG. 5
EXHIBIT 2
March 29,2002
THIS IS TO CERTIFY THAT ANNEXED IS A TRUE COPY FROM THE
RECORDS OF THIS OFFICE OF A DOCUMENT RECORDED ON
January 11,2001
I
Address (Ilne 2)
I
(line 3)
]
Addmri
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(WA
SUtdCantry
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Domestic Representative Name and Address
Name
Address (llnti 1)
Address (lino 2)
Address (Ilnu 3)
AddfDSS ( I h 3 4)
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ADDRESS
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npced.
Enkr tor tho h t R&ng
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FOR OFFICE USE ONLY
Mall documante lo k merd.dwkh mqulnd COVOI .hod(*) lnbnnalon to:
Commlamlonar of Palmta and ' T m ~ a f k 4 Box
.
ASs.lpnrmnt8, Warhlngton, D.C. 20251
PATENT
'
REEL: 011496 FRAME: 0860
Eorrebpondent Name and Addresb
Address (Ilnu 2)
1Robert S. Ketz
I Banner 8 Witcoff, Ltd.
I 1001 G. Street, N.W.,Suite 1100
Addresr (IM)3)
[ Washington, D.C. 20001
Neme
Address (IlnO 1)
I 20u508~9100
Area Code and Telephone Number
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1
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Pages
Entrr the total numbor of pager Of tho altachod convryanco documont
Includlng any r t t a c h ~ n l r
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Appllcatlon Nurnbsr(s)or Patent Nurnber(r)
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.P a f e d Apphcsfkm Number or the P h n r N u d m (DoNOT ENTER BOTH n v n k n fortho aum prop.cty).
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Robert S . K a b
Name of Person Slgnlng
PATlllNX
REEL: 011491 FRAMW Obl9
Ms # 163031.1
13797.Oo042
i
ASSIGNMENT
WHEREAS, we, James R Stewart and Hok-Sum Horace Luke @creinaAer referred to 8s
ASSIGNORS), having post office addresses of 19422 229* Avenue NE,Woodinville, WA 98072 and
3763 77* Place S.E., Mcrcer Island, W A 98040, rcspcctivtly, a n the joint inventors of an invention
entitled “PORTION OF AN ELZCTRONIC HOUSING,” M described and claimed in the
specification forming part of an application for United Statea lcttcn,patcnt executed htrewilh;
WI-IEREAS, Microsoft Corporation @ar c f d to as ASSIGNEE), a corporation of the
State of Washington having a place of business at One Microdoft Way, Redmond, W A 98052, is
desirous of acquiring the entire right, title and interest in and to the invention and in and to any lettcrs
patent that may be granted therefor in the United Statca and in any and all foreign countries;
NOW, THEBEFORE, in exchange for good and valuable consideration, the receipt o f which is
hereby acknowledged, ASSIGNORS hereby sell, assign and transfer unto Said ASSIGNEE, the entire
right, title and interest in and to said invention, said application and any and dl lebe granted for 8ajd invention the Uaited SUks of America and its thtol-jalp o s s e s s i ~and in my
and all foreign c ~ ~ m t n eand
s , in any and all divisions, rciasuea and continuatiom, and continuadon-inpart thereof, including the right to file foreign applications diractly in the name of ASSIGNEiE and to
claim priority rights deriving h m said United States application to which said foreign applications are
entitled by virtue of international convention, trcaty or othenvise, said invention, application and all
letters patent on said invention to be held and cnjoyd by ASSIGNEE and its SUGCWSO~Sand assigns for
their use and benefit and of their S U C C C S S O ~and
~
assigns as fully and eatiraly as the same would have
been held and enjoyed by ASSIGNORS had this assignment, transfer and d e not been made.
ASSIGNORS hcrcby authorize and request tbe Commission of Patents and Trademarks to issue all
letters patent on said invention to ASSIGNEE. ASSIGNORS a p e to oxtcuto all inatnuncsta and
documents nquirtd for the &g
and prosecution of applications for United states and foreign kttu’~
Datent on said Invention, for litigation regarding said letter patent, or for the purpose of protwthg title to
said invention or letter p-nt thercfbr.
InVCIltoC
1
PATENT
REEL: 011496 FRAME: 0862
2
RECORDED: 0111112001
PATENT
REEL: 011496 FRAME: 0863
EXHIBIT 3
-
March 27,2002
THIS IS TO CERTIFY THAT ANNEXED HERETO IS A TRUE COPY FROM
THE RECORDS OF THIS OFFICE OF:
I 1Il11111Il u
l l11111l1lIIIII11111ll111111111111111111Il111
f
USOOD452534Bl
(12)
United States Design Patent
Stewart et al.
(45)
PORTION OF Ah' ELECTRONIC HOUSING
Inventors: James R. Stewart, Woodinville;
Hok-Sum Homce Luke, Mercer Island,
both of WA (US)
Assignee: Microsnfl Corporation, Redmond, WA
Patent NO.:
Date of Patent:
US D452,534 S
w Dec 25,2001
Color picturcs of Gamccubc vidco game system by Nintendo, from various internet web pages, 3 pages, (date
unknown but prior to Jan. 11, 2001).
Color picNres of Playstation 2 video game system by Sony,
from various internel web pages, 3 pages, (date unlmown but
prior to Jan. 11, 2001).
cited by examiner
(US)
Term:
(10)
14Years
Primary Exam'ner-Prabhakar Dcshmukh
(74) Anorney, Agent, or F i r d a n n e r & Wiicoff, Ltd.
Appl. No.: 291135,334
Jan. ll, 2001
LOC (7) c1. .........................................................
Filed:
(57)
21.01
U.S. C1. .............................................................
D21/333
D21B24-328,
Field of Search ....................................
D21/333; D141400, 401, 435, 495; 2731148 B;
46311, 29-35,46,47
T h e ornamental design for a portion of an electronic hous-
References Cited
U.S.
PATENT DOCUMENTS
...............................
362,869 1011995 Oikawa
DZlt332
D21/329
376,822 12/19% Ostcrhout ............................
D. 412,940
8/1999 Kalo el al. .
D. 433,076 * lOL?.OOO Hayes ..................................
D21D33
D. 435,272 * 12/2oOO Swanson et al. ................... D>21/328
D. 435,871
1,2001 YU .......................................
DZlD33
3/1993 lnoue el al. ............................
463146
5,192,082
5,976,018
1111959 Dmckman ..............................
463/46
463147
6,254,477 * 7/2001 &ski el al. ............................
OTHER
PUBLlCATlONS
www.Amazon.com, Color Pictures of Outdoor Trekker
product by V-Tech, 2 pages, (date unknown but prior to Jan.
11,2001).
CULM
ing, as shown and described.
DESCRIPTION
FIG. 1 is a perspective view of a portion of an electronic
housing showing our new design;
FIG. 2 is a top plan vicw thcreof;
FIG.3 is a front view thereof;
PIG.4 is a rear view thereot
FIG.5 is a right si& view thereof; and,
FIG. 6 is a left side view thereof.
The broken line showing of the circle within the claimed
design and thc remainder of the electronic housing is for
illustrative purposes only and form no pan of the claimed
design. Tbe unshaded region inside of the circle, and the
bottom of tbc housing form no pan of the claimed design.
1 Claim, 3 Drawing Sheets
U.S. Patent
D=
25,2001
Sheet 1 of 3
I
FIG. 1
US D452,534 S
U.S. Patent
Dec. 25,2001
Sheet 2 of 3
US D452,534 S
FIG. 2
I
4
1
-__------_
cc-
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-
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Dec. 25,2001
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11
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II
- _-_I
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EXHIBIT 4
March 29,2002
THIS IS TO CERTIFY THAT ANWEXED IS A TRUE COPY FROM THE
RECORDS OF THIS OFFICE OF A DOCUMENT RECORDED ON
January 11,2001
I
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02-09-2001
FORM PTO-1619A
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:orrespondent Name and Address
Name
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Addre66 (ltne2)
I 1001 G.Street, N.W., S u b 1100
Address (line 3)
[ Washington, D.C. 20001
Address (line 4)
I 202/50&B100
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REEL: 0111494 FRAME: 0683
MS # 163030.1
13797.0004 1
ASSIGNMENT
W K E W A S , WC, 3-B
R Stewart ad Hok-Sum Horace Luke
n f d to a~
ASSIGNORS), having post office addresses of 19422 229* Avenue NE,Woodinville, WA 98072 and
3763 77* Place S.E., Merctr Island, WA 98040, respcctivtly, arc the joint mventorn of an invention
entitled "PORTION OF AN ELECI'ROMC HOUSING," a desaibcd end daimcd in the
specificationforming part of an application for United Statca letters patent executed hemwith;
WHEREAS, Microsoft Corporation (hacinaftet r e f d to aa ASSIGNEE), a corporation o f the
State of Washington having a place of business at One Miemsoft Way, Redmond, W A 98022, is
desirous of acquiring the entire right, title and interest in and to the invention and m and to any letters
patent that may be granted therefor in the United States and in any and all fmigncountrjcs;
PATENT
REEL: 011494 FRAM&:01164
2
RECORDED: 01/11/2001
PATENT
REEL: 011494 FRAME: Ob6U
EXHIBIT 5
Microsoft 2001 Online Annual report
A t Microsoft, we see no limits to the human imagination.
Our purpose is not simply to unlock the potential of today's new technologies. Our goal is to unleash the
creativity in every person, every family, and every business. Because we believe the real measure of our
success is not the power of our software but the power it unleashes in you.
2
Creating possibilities: We believe in the value of software.
Over the years, software has helped transform the way we work and live. But it is just the beginning.
What can only be imagined today will be commonplace tomorrow. A t Microsoft, we continually research
and develop new technologies that help realize the potential that resides within us all. To make
connections where none existed before. To lead to new understanding and discoveries. To inspire,
entertain, and inform. Our new products and services will help you experience your world in entirely new
ways, It's why we're so passionate about the power of software. And all the possibilities it holds in store
for you.
Energizing the PC: Software that works the way you work.
We learn from you. Your expectations. Your way of working. The users of Office and Windows@ benefit
because we combine what we learn from our customers with our strengths in research and development,
The results are new breakthroughs for Microsoft and for computer users around the world. Software that
recognizes your handwriting and your speech. Software that collaborates, remembers, and reminds you.
Software developed by people who know reliability and performance are important to you. Microsoft@
Office XP and Microsoft Windows XP give PC users what they want: more capabilities, more productivity,
and more ways to experience the digital world.
Microsoft Office XP
Launched on May 31, Microsoft Office XP empowers customers to achieve more and unleashes the next
wave of productivity gains. More specifically, Office XP revolutionizes the way people collaborate with
one another, access important information, and accomplish their tasks. Thanks to innovative
technologies such as smart tags, Task Panes, speech/handwriting recognition, and SharePointTMTeam
Services, Office XP offers customers new experiences and capabilities that redefine productivity.
Microsoft Windows XP
Our latest operating system will enable inspiring new experiences that help people unlock the full
possibilities of their PCs from advanced communication, collaboration, and remote access to digital
photos, music, video, and building home networks. When Microsoft Windows XP launches in fall 2001, it
will strive to establish a new standard in reliability and performance, offering customers the freedom to
create, connect, and communicate in ways that weren't possible before.
Tablet PC
The Tablet PC is an exciting new evolution of the laptop that combines the power of the PC with the
simplicity of pen and paper. I t is a full-featured, highly mobile PC that runs Windows XP Professional and
supports all current Windows-based applications. When it. launches in fall 2002, there will be many
innovative applications that will leverage the Tablet PCs pen and speech capabilities, wireless support,
long battery life, and best-of-breed portability.
4
Delivering business agility: Helping companies make the right connections.
The Microsoft .NET platform redefines and expands the idea of a connected business, delivering the
ability t o quickly respond t o challenges and oppbrtunities. With .NET technology, barriers to doing
business are down and the limits o f time and distance are drastically reduced. Real time information is
no longer a dream, but the reality that drives the free flow of information and ideas within an enterprise
and on to vendors, partners, and customers. This brings every aspect of the business closer together:
people with questions are connected to people with answers. Supply is connected directly to demand.
Ideas are connected to action. And your business is connected to success.
Microsoft .NET Enterprise Sewers
Over the last 12 months, Microsoft has released a dozen new server applications that enable customers
to rapidly build and run flexible Web-based solutions that integrate with their existing systems. From
new releases of our messaging, database, e-commerce, and management products to offerings in mobile
information access and Web content management, the Microsoft@ .NET Enterprise Server family
provides the scalability, reliability, and manageability that today’s agile businesses need.
Microsoft Windows .NET
Microsoft’s latest server operating system addresses the emerging business challenge of managing
complex business computing across multiple interconnected applications and services. The Windows@
.NET Server platform will provide the infrastructure necessary to deploy, manage, and orchestrate XML
Web services, connecting businesses and allowing customers to quickly develop and deploy business-tobusiness and electronic commerce applications, content management, messaging and collaboration
tools.
Windows 2000
Windows 2000 Server is the multipurpose network operating system for businesses of all sizes. The
newest version of this bestselling server operating system, Windows 2000 Server lets you share files and
printers reliably and securely, choose from thousands of business applications compatible t o run today
on Windows 2000 Server, and build Web applications and connect to the Internet. This combination and
flexibility delivers a strong business value proposition for today’s I T customer.
bCentral
The Microsoft bCentralTMportal provides online subscription services to help small businesses get online
for B2C and 828 opportunities without making an investmE.;lt in their own large-scale I T infrastructure.
bCentral helps improve marketing effectiveness, increase sales, and provide better customer service.
With more than 1.6 million registered users, bCentral is a key part of Microsoft’s overall .NET strategy to
deliver software as a service to consumers and businesses of all sizes.
Great Plains Software
1
With 140,000 customers in 132 countries, Microsoft@ Great Plains@ provides e-business applications
that help small and mid-sized companies compete and win in today’s interconnected economy. Great
Plains delivers the capability t o automate financial and operational processes, build collaboration
throughout an organization, deploy Customer Relationship Management technology and Supply Chain
Management, and allow companies to extend specific information and procedures securely via the
Internet to employees, customers, suppliers and partners.
5
.NET Enterprise products
Application Center
B"nTalkrMServer
Commerce Server
:
Content Management
Server
Exchange Server
Host Integration Server
Internet Security and Acceleration Server
Mobile Information Server
Share Point Portal
Server
Microsoft SQL ServerTM
Windows 2000 Server
Windows 2000 Advanced Server
Windows 2000 Datacenter Server
6
Delighting consumers: A new world of services and devices.
We believe that the PC is one of the most flexible, valuable tools ever invented. And we’re taking
everything we know about the PC and applying i t to smart, mobile devices, to the Internet, and to
gaming. So that what the PC has done for your working life can be brought t o every other aspect of your
life. From your PC to your lV and everything in between, Microsoft is delivering a new level of
technology that will keep you in touch, informed, entertained, and connected, all on your own terms. It‘s
a watershed year for new ideas: the latest version of MSNO, and the upcoming releases of XboxTM,
Pocket PC, and Smart Phone will expand your idea of what’s possible.
Microsoft .NET My Services
Microsoft .NET My Services puts users in control of their own data and information and allows access at
anytime from any device. .NET My Services are oriented around people, instead cf around a specific
device, application, service, or network. They also protect personal information by allowing the user to
control who can have access to their information and providing a new level of ease of use and
personalization. .NET My Services, available in 2002, are just the first set of the XML Web services being
built by Microsoft.
MSN
MSN is now one of the most popular destinations on the Internet. And with the launch of the newest
version of MSN in the fall of 2001, the momentum continues. This latest offering will include a new home
page design, improved performance, and several updates to he[p users better communicate and enjoy
digital media. It will also provide fast and reliable Internet access in the United States with the new MSN
Broadband service.
Xbox
Xbox is Microsoft’s future-generation video game system that gives game players experiences they have
yet to imagine. With a built-in hard disk drive, Xbox delivers much richer game worlds. And with Dolby
Digital 5.1 sound, garners will actually feel whats happening. When Xbox goes online, it will take games
to the next level. It’s the only system designed to enable players to compete or collaborate with other
players around the world through broadband online gaming.
Microsoft@ TV
Microsoft@ TV is a complete family of software products for the television industry that makes television
more useful, fun, and engaging for consumers the world over-today and in the future. Microsoft lV
software powers a range of current digital and next generation TV devices-from advanced set-top boxes
and digital video recorders, to integrated TVs and combination devices.
Pocket PC
I
Because of its ease-of-use and power, the Pocket PC is quickly becoming the PDA of choice for mobile
professionals. Customers can take their personal and business information with them on the road or take
advantage of the Pocket PCs flexibility by adding wireless options to access business or Internet
information. Available in fall 2001, the next-generation Pocket PC will deliver a new user interface,
powerful new features, and support for integrated wireless connectivity.
Smart Phone Technology
7
Available in the first half of 2002, smart phones powered by Microsoft Windows will deliver a dramatic
leap in phone capability and experience. Though the primary purpose of the Smart Phone is to make and
receive voice calls, it will also enable customers t o browse Web sites, read e-mail, update their contacts,
manage their calendar, and stay connected with relevant information while mobile.
8
Unleashing developer creativity: New tools, new ideas, and new opportunities.
There needs to be a way to fulfill the distinct software application needs o f every business. A highly
customized way to integrate systems, access data and unleash the potential embedded in the
information of companies everywhere. Nearly 6 million independent developers know the way. They work
with businesses every day, all over the world, to develop applications for every conceivable business
need. And they do it with tools developed by Microsoft. With Visual Studio@ 6.0, and the upcoming
release of Visual Studio .NET, developers have all they need to create exciting new opportunities for
themselves, and for their customers.
Visual Studio .NET
The biggest challenge developers face is moving their products to the new services-based architecture of
the Internet. With the release of Microsoft Visual Studio .NET, developers will have access to a worldclass tool set and support for over 20 of the most popular programming languages, mission-critical tools,
and a complete development suite that will allow them to bring their application development expertise
and experience seamlessly to the Internet. As a result, it will be much easier to build today's applications
and next-generation XML Web services.
Visual Studio 6.0
To succeed in today's business environment, applications must be more scalable, reliable, and flexible
than ever before. At the same time, the fast pace of business change means that developers must design
and launch enterprise applications in days or weeks rather than months or years. Working in languages
they already know, Microsoft Visual Studio version 6.0 is a complete enterprise-class development
system that helps developers meet those demands by providing the tools to create powerful, missioncritical applications quickly and efficiently.
Customer Case Studies
Continental Airlines
By developing a new mobile travel-planning application with the Microsoft .NET Framework and Visual
Studio .NET, Continental Airlines is significantly reducing deployment time, eliminating the overhead of
tightly coupled remote-procedure-call implementation, ensuring rapid and flexible scalability, and
providing transparent interoperability with host systems. Moreover, with the .NET Framework and Visual
Studio .NET, developers envision an entirely new approach to creating and updating applications in the
future.
CyberWatcher
Seeking more powerful integration and communications capabilities, CyberWatcher, the top European
provider of Web-based tools for internal, and external data mining and monitoring, is implementing a
new release of its software using the Microsoft .NET Framework and Visual Studio .NET. As a result, the
9
company has managed to double its developer productivity, integrate its solution with portals and other
customers four times faster, and streamline debugging and low-level database access.
Comedy Central
Comedy Central, a cable TV network, provides comedy programming to 46 million viewers around the
United States. With 250 employees throughout the U.S., keeping people up-to-date on day-to-day and
timely information demanded the creation of a dynamic and effective corporate intranet.
Comedy Central chose Microsoft Visual Studio and Microsoft Internet Information Server (11s) and
Microsoft SQL Server as its database core.
As Comedy Central continues to grow, Microsoft technology will make it easy t o scale systems and
applications to meet higher demands, all without extensive re-development. Maintenance is easy and
integration with Comedy Central's other Microsoft technologies, including SQL Server and Microsoft
Access, is seamless. So, the Comedy Central intranet will connect employees more closely to their
company, making work more efficient, more effective, and probably more fun.
Inventing tomorrow: Making technology even more human.
Technology carries the promise of tomorrow. To continue fulfilling that promise, Microsoft's investment in
research will approach $5 billion over the next- fiscal year, so that we can tackle some of the toughest
problems in computer technology. More than 600 people are at work on projects to make computers
easier to use, and to achieve the dream of computers that really do see, listen, and learn. These
innovations are all geared to creating a greater sense of connection with the technologies you use every
day, and to make your computing experience more personal, more productive, and more fulfilling.
'
Microsoft Research
Truly international in scope, Microsoft Research is focused on a broad array of new technology challenges
and issues. You'll find our researchers in software labs on three continents, at work in over 40 areas of
computer science. We're building Microelectrical Mechanical Systems creating machipes smaller than the
width of a human hair. We're developing the technology that will allow your computer to recognize not
just your speech, but the shades of meaning imparted by inflection. We're even writing the code for the
latest generation of video games. All together, it shows that Microsof? Research plays a central role in
bringing advanced technology t o businesses, organizations, and individuals.
During the past ten years, Microsoft Research has established a highly successful track record in
technology transfer. Our research applies to virtually every product Microsoft ships, from Windows 95 up
to the latest .NET products. These practical benefits are the result of an orientation that keeps us focused
on the seemingly limitless possibilities of technology to make our lives, and our world, a better place.
Today, were doing the research that will help you in the near and distant future. With discoveries that
will make work easier and more productive, leisure more fulfilling. Discoveries that demonstrate software
is one of the greatest tools in our effort to realize human potential.
-ResearchProjects
Ring Camera
Microsoft is developing new imaging cameras like the RingCam in order to develop software of the future
to facilitate meeting recording and teleconferencing, as well 3s other applications in computer vision.
Notificat ion Platform
Imagine having the freedom and the peace of mind to go to a movie, have dinner with friends, and know
that critical information will get through to you ye) you wont be interrupted by irrelevant messages.
That's the idea behind the new notification and communications technology developed at Microsoft that
can serve as a virtual secretary technology. Your virtual secretary will be working for you all the time
and will actually be able to learn about your interests, needs, and priorities. It can read your e-mail,
update your schedule and filter messages by importance.
Face Mapping
11
Microsoft Research has developed a system that cpnstructs textured 3D facial models and videos with
minimal user interaction. I n the future, a user, with a PC and an ordinary camera, can use this system to
generate his or her facial model in just minutes, then input the image for use in online games,
conference call systems, or e-commerce.
Vision Technology
d
Vision-based research aims to find simpler, more 'intuitive interfaces with computers by using live video
input. The project looks at endowing computer with the potential to see and understand a user's
physical actions. There are a number of consumer benefits and applications with technology that tracks
users, reads lips, recognizes faces, understands expressions, interprets gestures. etc.
12
Improving people’s lives: We believe software can make a difference.
The benefits of technology belong to all of us. Benefits that create new opportunities and open doors to a
better life. To keep those doors open, Microsoft began one of the first formal giving programs in the
high-tech industry. Today no other technology company contributes more to those in need. Last year
alone Microsoft and its employees gave over $215 million in cash and software to organizations that
reach under-served populations and help bridge the “digital divide.” As a result, more than 5,000
nonprofit organizations were empowered to better deliver their services and fulfill their missions to
people and communities around the world. Being a responsible leader is something we take quite
seriously. Because at Microsoft, we don’t simply believe in making great software. We also believe in
making a difference.
Expanding Access to Technology
Not everyone has been able to take advantage of the digital revolution. To help improve access to
technology for children and young adults, Microsoft has contributed $100 million in cash and software to
“technology-enable” every Boys & Girls Club over the next five years. More than 3 million Club kids will
be given the resources to create, explore, and discover the world around them through technology. To
further expand access, Microsoft has awarded 166 Connected Learning Community Grants to
organizations that provide those in underserved populations with technology tools to help them achieve
their ambitions.
But our commitment does not end there. Microsoft is determined to make technology more accessible to
the elderly and disabled. We‘re working on innovations to the user interface as well as creating software
that functions more like a personal assistant. Because of these advances, the benefits of technology will
be more available to all. By helping people stay connected to their friends, their family and the world
around them, we help people not just to better manage their lives, but to better live them.
Providing Resources to Nonprofits
Smaller nonprofit organizations often don’t have the resources to realize the full possibility of technology
to help them serve others. The Microsoft & NPower National Partnership will strengthen thousands of
nonprofits through the increased efficiency and productivity that result from an effective use of
technology. Microsoft has committed $25 million in financial and software support to create NPower
programs in 12 major cities across the United States. I n addition, Microsoft’s Technology Leadership
Grants provide large, national nonprofit organizations with substantial software donations to enhance
their efficiency.
Contributing to a Diverse Technology Workforce
Microsoft is committed to taking a leadership role in expanding opportunities for all communities. Our
Working Connections program has networked 63 ,community colleges across the country with one
another and with local businesses to provide technology training programs to diverse and underserved
populations. I n alliance with the National Business & Disability Council, we have created the Able to
Work consortium, which is dedicated to increasing employment opportunities for millions of physically
challenged individuals. As a result of these efforts, a wider range of people are participating in the
opportunities of today’s digital workplace.
Strengthening Communities Around the World
13
Microsoft supports both immediate relief and long term community development programs. Microsoft has
supported disaster relief efforts at home and around the world, in places such as New York, Kosovo,
Taiwan, India, and Venezuela. When catastrophe strikes, we not only supply cash to meet emergencies,
but also look for ways to use technology to improve the capabilities of relief organizations.
Internationally, Microsoft has also worked with local governments, other companies, and nonprofit
agencies to create Digital Villages. As part of that program, Microsoft has opened eight centers with
trained staff and multimedia, Internet-connected PCs. More than 2,000 people have benefited from the
Digital Villages in South Africa alone. I n the US.,the Technology Enriched Communities program allows
Microsoft's regional field offices to work closely with community-based nonprofit organizations to develop
grant requests for technology resources and assistance.
A 'Tradition of Giving
Microsoft is committed to helping people in many ways. For a deeper look at the way we give our
support to individuals, organizations, and communities, please visit http://www.microsoft.com/giving.
14
To Shareholders, customers, partners and employees
Twenty years ago, the MS-DOSO-based IBM PC had a tiny processor, a minuscule amount of memory,
an even smaller amount of storage, and sold for $1,595 - equivalent to more than $3,000 in today's
dollars. Even so, it was a remarkable advance in technology. Today, a PC that is thousands of times
more powerful sells for less than $800. But it's not just the power and the price that have changed so
dramatically over the last two decades. What's most remarkable is how software advances have made
the PC an increasingly indispensable and versatile tool in the workplace, at home and at school.
-
Other electronic advances of this century, like the radio, the TV and the fax machine
while
breakthroughs to be sure - have but one use. Software makes the PC, by comparison, a multi-talented
workhorse. Software powers the operations of the world's largest businesses. I t enables people to shop
for cars, books, music or just about anything else from the convenience of their home. Software
facilitates instantaneous communication between people living in Sydney and S6o Paulo. And i t helps
junior high school students in New York do research for their classes.
Even more amazing are the opportunities ahead. As software grows increasingly dynamic, flexible and
responsive, the PC is becoming the hub of an expanding universe of software-connected devices that will
enable businesses and people to realize their potential.
2001
Fiscal 2001 was a year of solid customer enthusiasm for Microsoft products and services - all the more
significant considering the challenging economic climate and turbulence in the technology industry.
Revenues increased by $2.34 billion to $25.3 billion, and operating income increased by $710 million to
$11.72 billion.
The Windows family of products turned in a strong performance, led by brisk sales of Windows 2000
Professional. Microsoft SQL ServerfM 2000 and Exchange 2000 Server drove record revenues for
Microsoft's rapidly growing enterprise server business. Our productivity and business-services offerings
expanded significantly with the launch of Office XP - the newest version of Microsoft's business
productivity suite - and the acquisition of Great Plains Software, Inc., a leading supplier of mid-market
business applications. Microsoft's consumer software and services business, led by MSN momentum,
grew at an impressive 20 percent rate, despite a rugged environment in the online space.
2002
Building on Microsoft .NET - the company's platform for next-generation software and services - fiscal
2002 promises to be a year of continued growth for plicrosoft in five key areas:
Expanding on the power and flexibility of the personal computer and taking the PC experience to the
next level of opportunity for customers and the I T industry;
15
Meeting the needs of business customers - from the enterprise to medium and small businesses
new generation of mission-critical servers and business applications;
- with a
Taking advantage of key market opportunities in the consumer space with emerging businesses such as
MSN, devices and games;
Partnering with developers around the globe to create next-generation XML-based softflare applications,
solutions and experiences;
Capitalizing on the enormous potential of services delivered over the Internet and across an expanding
range of devices.
Major product developments in Fiscal 2002 will include the launch of Windows XP - the most significant
new desktop operating system product since Windows 95, and Xbox, Microsoft's future-generation
videogame system. We will extend and advance the range and abilities of Microsoft's Windows .NET
Server operating systems and .NET Enterprise Server applications, and deploy new solution offerings
that help businesses connect with customers, integrate seamlessly with partners, enable employees and
extend into new business opportunities. We will see continued adoption of our flagship Office XP suite for
knowledge workers, and expansion of our Great Plains@ business applications. The developer community
is eagerly anticipating the release of Visual Studio@ .NET, Microsoft's rapid application-development tool
for building next-generation Web applications and XML Web services. And we will continue to see
significant growth in MSN Internet access and network services.
Microsoft .NET and XML Web Services
I n addition to these major new product launches, Microsoft is laying a solid framework for the future with
a projected investment of approximately $5 billion in research and development in fiscal 2002. A t the
center of our R&D efforts is Microsoft .NET, an innovative effort as significant in the development of
computing as the graphical user interface and the introduction of the Internet. .NET is Microsoft's
platform for a new computing model built around XML Web -;ervices. Just as the Web revolutionized how
users interact with content, XML is revolutionizing how applications communicate with data and how
computers and devices communicate - by providing a universal data format that lets information be
easily shared, adapted or transformed. .NET will create new opportunities for Microsoft and for thousands
of developers and industry partners by enabling constellations of PCs, servers, smart devices and
Internet-based services to collaborate seamlessly. Businesses will be able to integrate their processes,
share data and join forces to offer customers much more dynamic, personalized and productive
experiences - across the PC and an expanding universe of devices - than are available today.
I n 1995, Microsoft's primary business and revenue stream was from our desktop products - Windows
and Office. I n 2002, desktop products will still provide the majority of our revenue, although our server
and enterprise business is a rapidly growing contributor to our overall revenues, and MSN, Xbox and
other emerging businesses continue to expand our foundation for the future. Over the next five years, as
16
we infuse XML Web Services into all our businesses, we see the opportunities for growth continuing. This
transformation is key t o expanding our revenue stream moving forward.
People
As we expect to grow this year to more than 50,OOa employees, we will continue to put a high priority on
developing our next generation of business leaders, and ensuring that we have the appropriate
management initiatives and tools to enable and empower a creative work environment. Our attrition rate
- at 8 percent annually - is less than half the average of the overall software and IT-services industry.
Meanwhile, we continue to explore new ways to foster a progressive work environmer?t that attracts and
inspires bright, passionate people who are committed to continuously improving our products, and to
creating a collaborative work environment where individual excellence and teamwork is rewarded.
Facilitating a diverse workforce at Microsoft and within our industry continues to be an important
priority.
The Antitrust Lawsuit
Microsoft is committed t o continuing t o deliver innovations to customers and new opportunities for
partners and the technology industry as a whole. The U.S.Court of Appeals ruling in the antitrust lawsuit
significantly narrowed a lower court ruling that threatened to stifle industry innovation. We are
continuing to work vigorously t o resolve the remaining issues in the case in a manner that will provide
clarity to Microsoft and the marketplace while enabling Microsoft to meet the needs of consumers and
the industry.
Industry Leadership
As a successful company, we understand that we have a responsibility to provide leadership in the
broader industry. Particularly given the difficult economic times, it's important that our industry work
together to build on the technological advances that have fueled productivity and growth over the last
decade. Our work on .NET, XML Web Services and open industry standards are examples of the deep
industry engagement to which Microsoft is dedicated. While vigorous competition will always be a
healthy hallmark of our industry, we are also committed to building relationships - with partners and
even competitors.
Two years ago, we outlined a set of values that have evolved since Microsoft's founding and which
As we look to the future,
capture the spirit of our business practices (microsoft.com/mscorp/values.htm).
the cultural assets that have been such an important part of Microsoft's success over the past 25 years
will continue to evolve. One of the most fundamental of these cultural attributes is our commitment to
accountability. Accountability to customers by continuing to improve product satisfaction. Accountability
to partners, including smaller businesses and start-ups, who share the vision of affordable, connected
computing. Accountability to the technical community through support of resources that enable software
developers to create the next generation of products and grow successful businesses. Accountability to
shareholders by continuing to invest in growth opportunities for the future, while staying focused on
managing our business today.
The Digital Decade
17
Over the past 20 years the personal computer has transformed the way people work, communicate,
learn and play. It has stimulated productivity and collaboration in the workplace, connected people
around the world, and become a powerful and affordable tool for learning and entertainment.
Yet even greater technological advances are just ahead. XML Web Services will open up new possibilities
in e-commerce, business planning, and customer service. Document and workflow management will
become simpler and more comprehensive. Technologies such as the advanced speech and handwritingrecognition capabilities of the next-generation Tablet PC will transform the workplace for knowledge
workers. Inexpensive, high-capacity disk drives, powerful audio and video capabilities and easy-to-use
digital cameras will make the PC an entertainment and information hub for the home.
More than 500 million PCs are already in use around the world, and another 130 million or more will be
purchased in calendar 2001 - more than the number of TVs that will likely be purchased this year.
Increasingly, the PC is moving to the center of an ever-expanding network of smart, connected devices from mobile phones to televisions and handheld devices, even household appliances. There has never
been a more exciting time in the history of our industry.
The coming digital decade will be a time of enormous opportunity: for consumers, for the technology
industry, and for Microsoft as we realize the vision of empowering people through great software - any
time, any place and on any device.
Bill Gates
Steven A. Ballmer
Chairman and Chief Software Architect
Chief Executive Officer
18
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended June 30,2001
0 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from
to
Commission File Number 0-14238
MICROSOFT CORPORATION
91-1144442
Washington
(State of incorporation)
(I.R.S. ID)
One Microsoft Wag, Redmond, Washington 98052-6399
(425) 882-8080
Securities registered pursuant to Section 12(b) o f the Act:
Nane
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
Indicate by check mark whether the registrant ( 1 ) has filed all reports requircd to be filed by Section 13 or 15(d) o f the Securities Exchange Act o f
1934 during the preceding 12 months (or for such shorter period that the registrant was required to tile such reports), and (2) has been subject to
such filing requirements for the past 9 0 days.
Yesm
No 0
Indicate by check mark if disclosure o f delinquent filers pursuant to Item 405 o f Regulation S-Kis not contained herein, and will not be containcd,
to the best o f registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part I l l o f this Form 10-K or any
amendment to this Form I O-K. 0
The aggregate market value o f common stock held by non-affiliates ofthe registrant as o f Septcmber IO, 2001 was 15258,033.100,664.
The number o f shares outstanding of the registrant’s common stock as of September I O , 200 1 was 5,401,944,951.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement dated September 10, 2001 to be delivered to shareholders in connection with the Annual Meeting of
Shareholders to be held November 7, 2001 are incorporated by reference into Part 111.
19
.-._. .
FORM 10-K
For The Fiscal Year Ended June 30. 2001
INDEX
Part I
Item 1.
Business ..............................................................................................................................................................
1
Item 2.
Properties ............................................................................................................................................................
12
Item 3 .
Legal Proceedings ...............................................................................................................................................
12
Item 4 .
Submission of Matters to a Vote of Security Holders .........................................................................................
12
Executive Officers of the Registrant ...................................................................................................................
13
Item 5.
Market for Registrant's Common Stock and Related Stockholder Matters .........................................................
16
Item 6.
Selected Financial Data ...........................................................
,...........................................................................
17
Item 7 .
Management's Discussion and Analysis of Results of Operations and Financial Condition ...............................
18
Item 7a .
Quantitative and Qualitative Disclosures about Market Risk ..............................................................................
26
Item 8.
Financial Statements and Supplementary Data ...................................................................................................
27
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosures .............................
47
Part I1
Part 111
Item 10.
Directors of the Registrant .................................................................................................................................. 47
Item 11.
Executive Compensation ...............................................
:.....................................................................................
47
Item 12.
Security Ownership of Certain Beneficial Owners and Management .................................................................
47
Item 13.
Certain Relationships and Related Transactions ................................................................................................
47
Exhibits. Financial Statement Schedules. and Reports on Form 8-K ..................................................................
48
Signatures ............................................................................................................................................................
49
Part IV
Item 14.
PART I
Item 1. Business
GENERAL
Microsoft Corporation (the “Company” or “Microsoft”) was founded as a partnership in 1975 and incorporated in
1981. Microsoft develops, manufactures, licenses, and supports a wide range of software products for a multitude of
computing devices. Microsoft@ software includes scalable operating system for servers, personal computers (PCs),
and intelligent devices; server applications for clienb‘server environments; knowledge worker productivity
applications; and software development tools. The Company’s online efforts include the MSNQJnetwork of Internet
products and services and alliances with companies involved with broadband access and various forms of digital
interactivity. Microsoft also licenses consumer software programs; sells hardware devices; provides consulting
services; trains and certifies system integrators and developers; and researches and develops advanced technologies
for hture software products.
Microsoft’s business strategy emphasizes the development of a broad line of software products for information
technology (IT) professionals, knowledge workers, developers, and consumers, marketed through multiple channels
of distribution. The Company is structured around the following core groups: the Business Groups; the Worldwide
Sales, Marketing, and Services Group; Microsoft Research; and the Operations Group.
The Company’s product segments, which are based on the Business Groups, are Desktop and Enterprise Software
and Services, Consumer Software, Services, and Devices, Consumer Commerce Investments, and Other. The
Desktop and Enterprise Software and Services segment includes the Platforms Group and the Productivity and
Business Services Group. The Platforms Group has responsibility for continuing to evolve the Windows platform. In
addition, the division includes the .NET Enterprise Server Group, the Developer Tools Division, and the Windows
Digital Media Division. The Productivity and Business Services Group drives Microsoft’s broad vision for
productivity and business process applications and services. T h s group includes the Office Division, the Emerging
Technologies Group, the Business Tools Division, and the Business Applications Group, which includes bCentralTM
and Microsoft Great Plains@.
The Consumer Software, Services, and Devices segment contains the MSN Business Group; the Personal Services
Business Group; and the Home and Retail Division. MSN Business group^ runs the network programming, business
development, and worldwide sales and marketing for MSN and Microsoft’s other services efforts, including MSN
eShop, the MSNBC venture, Slate@, and MSNTV. The Personal Services Group (PSG) focuses on making it easier
for consumers and businesses to connect online and to deliver software as a service on a variety of devices. PSG
encompasses Microsoft’s Personal .NET initiative, the Services Platform Division, the Mobility Group, the MSN
Internet Access, Consumer Devices Group, and the User Interface Flatform Division. The Home and Retail Division
develops and markets learning and entertainment software and the future Xbox game console.
The Consumer Commerce Investment segment includes Expedia, Inc., the HomeAdvisorTMonline real estate service,
and the MSN CarPointB online automotive service.
For financial reporting, revenue from Microsoft Press@ and Hardware is included in the Other segment.
The Worldwide Sales, Marketing, and Services Group integrates the activities of Microsoft’s sales and service
partners with the needs of Microsoft customers around the world. In addition, the group includes Microsoft Product
Support Services, the Network Solutions Group, the Enterprise Partner Group, the Central Marketing Organization,
and all three of Microsoft’s major business-sales regions wbrldwide.
Microsoft Research works on devising innovative solutions to computer science problems, such as making
computers easier to use, designing software for the next ‘generation of hardware, improving the software design
process, and investigating the mathematical underpinnings of computer science.
The Operations Group is responsible for managing business operations and overall business planning. This includes
corporate functions such as finance, administration, human resources, and information technology.
PRODUCTS
Microsof? has four product segments: Desktop and Enterprise SofMare and Services; Consumer Software. Services.
and Devices; Consumer Commerce Investments; and Other. See Notes to Financial Statements for financial
information regarding segment reporting.
Desktop and Entermise Software and Services
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Desktop and Enterprise Software and Services includes Desktop Applications; Desktop Platforms; and Enterprise
Software and Services. For segment reporting purposes, Desktop Applications includes revenue from Microsoft
Office, Microsoft Project, Microsoft VisioB, Microsoft Great Plains, bCentral; and client access licenses for
Windows NT@ Server and Windows 2000 Server, Exchange, and BackOficeB. Desktop Platforms includes
revenue from Windows 2000 Professional, Windows NT Workstation, Windows Millennium Edition, Windows 98.
and other desktop operating systems. Enterprise Software and Services includes Enterprise Platforms, Server
Applications, Developer Tools and Services, and Enterprise Services.
Desktop Applications
Microsofr OfBce. 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, and available for the Windows and Macintosh operating systems. Microsoft
Office XP helps users complete common business tasks, including word processing, electronic mail (e-mail),
presentations, and data management, with features like smart tags, task panes, integrated e-mail, document recovery,
and send for review. Products offered in the various versions include the word processor Microsoft Word, Microsoft
Excel spreadsheet, Microsoft Outlook@ personal information management and communication client, Microsoft
PowerPointB presentation graphics program, Microsoft Access database management application, and others.
Microsoft: Word is a word-processing program designed to create documents such as reports, letters, business plans,
and more. Microsoft Excel creates data-rich spreadsheets for universal viewing on the Internet and for collaboration,
allows users to analyze data with charts, and incorporates Microsoft PivotTable@ views and graphs. Microsoft
Outlook personal information management and communication client provides a single, integrated solution for
organizing and managing digital communication tools such as e-mail and instant messaging, along with day-to-day
information, including calendars, contacts, task lists, and notes. Microsoft PowerPoint presentation graphics
program is a complete set of tools for creating professional presentations. Microsoft Access database management
application allows for easy access and retrieval of information and includes pre-packaged solutions to create
databases quickly. Microsoft Frontpage@ is a Web site creation and management tool for Web sites on the Internet
or intranets. Microsoft Publisher business desktop publishing is a program for creating professional-looking
marketing and business materials.
Other Desktop Application Products. The Company also offers other stand-alone desktop application products.
Microsoft Project is a project management program for scheduling, organizing, and analyzing tasks, deadlines, and
resources. Microsoft Visio is a diagramming program that helps people visualize and communicate ideas,
information, and systems. Most of the applications included in the srious software program suites are also licensed
separately.
Microsofr Great Plains. Microsoft Great Plains offers a range of integrated business and accounting products,
including Dynamics, Solomon, and ehterprise, which deliver broad and deep functionality. Dynamics provides
Internet-ready accounting and business management capabilities for small- to mid-sized companies. Solomon offers
a full range of e-business and accounting applications for omall- to mid-sized companies. eEnterprise supports midsized to larger companies by providing a collaborative environment for information management and sharing.
bCentral.. Microsoft’s small businesses portal, bCentral, allows companies to leverage the ,Internet to drive their
business forward. Microsoft bCentral Site Manager is a Web site managerncnt and hosting service which empowers
small businesses to easily create and manage their own Web sites, while allowing for higher-end editing in Microsoft
FrontPage. Microsoft bCentral LinkExchangeTM provides services to small businesses and Web site owners to
increase their online traffic and sales with free advertising banner ads on their site in exchange for placing ads on
other network sites.
Client Access Licenses. A client access license gives a client computer the legal right to access a computer running
a Microsoft server product and the services supported by the server.
Desktop Platforms
Windows XP. Windows XP is the next major version of the Windows operating system and is scheduled for
widespread availability in October 2001. Windows. XP extends the personal computing experience by uniting PCs,
devices, and services, and brings the solid foundation of Windows 2000 to home PC users, enhancing reliability,
security, and performance. Windows XP Home Edition is designed for individuals or families at home and includes
experiences for digital media, home networking, and communications. Windows XP Professional is for businesses
of all sizes and for people who demand the most out of their computing experience. Windows XP Professional adds
remote access, security, performance, manageability, and multilingual features to help users improve productivity
and connectivity.
Windows 2000 Professional. The successor to Windows NT Workstation, Windows 2000 Professional operating
system combines features to create a mainstream operating system for desktop and notebook computing in all
organizations. Windows 2000 Professional contains the enhanced business features of Windows 98 such as Plug and
Play, easy-to-use user interface, and power management and integrates the strengths of Windows NT Workstation
including standards-based security, manageability, and reliability.
Windows NT Workstation. A fully integrated, multitasking 32-bit PC operating system, Windows NT Workstation
provides security, robustness, and portability. Windows NT Workstation combines the Windows 98 operating
system interface and usability features with the reliability and security of Windows NT for the business environment.
Windows Millennium Edition. Windows Millennium Edition (Me) operating systern is designed specifically for
home users to manage digital photos and music, work with video, create a home network, and communicate with
other consumers.
Windows 98. The successor to Windows 95, Windows 98 is a personal computer operating system that provides a
Web-oriented user interface and better system performance along with easier system diagnostics and maintenance.
Windows 98 supports graphcs, sound, and multimedia technologies and provides the ability to easily add and
remove peripheral devices and support for Universal Serial Bus (USB).
Enterprise Software and Services
Windows 2000 Server, Advanced Server, and Datacenter Server. Windows 2000 Server family builds on the
Windows NT technology, integrating standards-based directory, Web, application. communications, file and print
services with high reliability, efficient management, and support for networking hardware to provide the foundation
for integrating with the Internet. Windows 2000 Server is a multipurpose network operating system for businesses of
all sizes. Windows 2000 Advanced Server operating system is ideal for e-commerce and line-of-business
applications and provides enhanced performance and scalability through symmetric multiprocessing (SMP) and
extended memory support. Windows Datacenter Server operating system is built for large-scale line-of-business and
enterprise backend usage and supports server consolidation and enhanced scalability.
Windows NT Server. Windows NT Server is an operating system'foundation for both server applications and file
and print sharing, with network management features, administration tools, security, and high availability. Windows
NT Server provides a scalable platform for business critical applications and databases, connectivity, system
management, and e-mail servers. The operating system integr;tes Web services such as Microsoft Internet
Information Server, a service used to manage intranet and Internet functionality, and Microsoft FrontPage Web site
creation and management tool. Windows NT Server, Terminal Server Edition, an extension to the Windows NT
Server, offers the application support of the Windows operating system platform with the centrally managed
environment of the mainframe with terminal. Windows NT Server Enterprise Edition provides the means for
building and deploying large-scale distributed applications for large and mission-critical servers featuring
comprehensive clustering for scalability and availability.
I
Microsoft .NET Enterprise Servers. Microsoft .NET Enterprise Servers include Microsoft SQL ServerTM,
Exchange Server, Application Center, BizTalkTMServer, Commerce Server, Content Management Server, Host
Integration Server, Internet Security and Acceleration Server, Mobile Information Server, and SharePointTMPortal
Server. SQL Server is a filly Web-enabled database and data analysis product, providing core support for
Extensible Markup Language (XML) and the ability to query across the Internet and beyond the firewall. Exchange
Server is a messaging and collaboration server which provides e-mail, group scheduling, task management, and
document routing capabilities. Application Center 'is Microsoft's, deployment and management tool for high-
availability Web applications built on the Microsoft Windows 2000 operatmg system. BizTalk Server enables
companies to rapidly build and deploy integrated business processes within their organizations and with partners.
Commerce Server provides a comprehensive set of features for building scalable, user-centric, business-to-consumer.
and business-to-business e-commerce sites. Content Management Server is the enterprise Web content management
system that enables companies to quickly and efficiently build, deploy, and maintain highly dynamic Internet.
intranet, and extranet Web sites. Host Integration Server extends Microsoft Windows to other systems by providing
application, data, and network integration. Internet Security and Acceleration Server provides secure, fast, and
manageable Internet connectivity. It integrates an extewible, multilayer enterprise firewall and a scalable highperformance Web cache. Mobile Information Server mobile-enables the enterprise, extending the reach of Microsoft
.NET Enterprise applications, enterprise data, and intranet content to the mobile user. SharePoint Portal Server
extends the capabilities of Microsoft Windows and Microsoft Office by offering knowledge workers 3 powerfd new
way to easily organize, find, and share information. It combines the ability to easily create corporate Web portals
with document management, content searching, and team collaboration features.
'
Other Servers. Designed for the branch office, department, and medium-sized business, Backoffice Server provides
a wide range of infrastructure and application services including directory, networking, Web application, database,
messaging and collaboration, Internet proxy and firewall, host integration, and Windows desktop management.
Proxy Server is an extensible firewall and Web cache server that provides Internet security while improving network
response time and efficiency. Site Server is the powerhl intranet server, optimized for Microsoft Windows NT
Server with Internet Information Server, for publishng and finding information easier and faster. Site Server
Commerce is a comprehensive Internet commerce server that organizatioiis can use to build and monitor dynamic
and cost-effective business sites that take full advantage of the Web. Small Business Server is the flexible network
solution designed to help small businesses with up to 50 computers. SNA Server provides connectivity to host data
and applications. Systems Management Server helps centrally manage the distributed environment with integrated
features, including hardware inventory, software inventory and metering, software distribution and installation, and
remote troubleshooting tools.
Developer Tools and Services. Software development tools and computer languages allow software developers to
write programs in a particular computer language and translate program into a binary machine-readable set of
commands that activate and instruct various hardware devices. The Company develops and markets a number of
software development environments and language compilers. Microsoft Visual C++@ is the Company's
development system for Windows-based application development. The Microsoft Visual Basic@ development
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. The Microsoft Visual InterDevO
development system includes integrated, team-based development tools for building Web-based applications based
on HTML, Script, and components written in any language. Microsoft Visual J++ development system for Java
contains a high productivity Integrated Development Environment and a collection of integrated components to
create, test, tune, and deploy Java code on multiple platfoms. Microsoft Visual Studio@ development system for
Windows-based development is a suite of developer tools enabling developers to build components and applications
using Visual Basic, Visual C++, Microsoft Visual FoxPro@ database development system, Visual InterDev, and
Visual J++. Developers can subscribe to the Microsoft Developer Network (MSDNO) information service and
receive periodic updates via CD-ROMs, magazines, and several online information services. In addition, Microsoft
receives certification fees through the Microsoft Certified Professional (MCP) program, a program that provides
credentials for those who have demonstrated in-depth knowledge of at least one Microsoft product.
Enterprise Services. Microsoft Enterprise Services assist organizations with every stage of technology planning,
building, deployment, and support. Specializing in real-life IT solutions for the enterprise, Microsoft offers a full
range of consulting services for advance technology requirements, including custom solutions services, enterprise
application planning, architecture and design services, ind proof-of-concept services. The Company provides
product support services aligned to the customer segments, partner segments, and communities. Support offerings
include the Alliance program, tailored for large enterprises running mission-critical applications on Microsoft
platforms; the Premier program for enterprises; the Authorized Premier Support for all types of businesses who work
jointly with Microsoft and Microsoft Gold Certified Partners; the Professional program for IT professionals,
developers, and OEMs; and the Personal program for home users, which provides free online self-help resources and
paid assisted phone support.
Consumer Software. Services. and Devices
Consumer Software, Services, and Devices includes MSN Internet access, MSN network services, PC and online
games, B o x , learning and productivity software, mobility and embedded systems.
MSN Internet Access. MSN Internet access is a Web-based online service. MSN provides easy and inexpensive
access for users to a wide range of graphically rich online content. MSN Internet access includes MSN Explorer, the
Internet software from Microsoft that makes it easier to get more from the Web. MSN Internet access subscribers
can access their account fiom multiple sources, including a computer, television, Internet appliances, and Personal
Data Assistants.
MSN Network Services. MSN network service provides services on the Internet, encompassing MSN properties
such as Homepage and Search, as well as other services. MSN Hotmail@ is the world’s leading fiee Web-based email service. MSN Messenger Service is a free Internet messaging service that enables users to see when others are
online and exchange instant messages with them, W C on MSN Money, located exclusively on MSN. is a
complete online personal financial service that combines the award-winning finance tools and content from
Microsoft with exclusive investment news and analysis from CNBC. MSN Music provides consumers with one
place online to find old favorites, as well as discover new music, and delivers a h g h quality listening experience.
MSN eShop is a one-stop online shopping resource.
PC and Online Games. The Company offers a line of entertainment products from classic software games to online
games, simulations, sport products, and strategy games. Microsoft Flight Simulator is a popular aircraft flight
simulation product. Other games include Combat Flight Simulator, Age of Empires@, MechWarriorTM,Microsoft
Links@, and other sports and action titles. Zone.com is a gaming community on the Internet allowing multiplayer
gaming competitions of Microsoft’s popular CD-ROM games and classic card, board, and puzzle games.
Xbox. Microsoft %oxTM, scheduled for North America release in November 2001, is Microsoft’s future-generation
video game console system that delivers h g h quality graphics and audio gameplay experiences and will ultimately
enable new online gaming scenarios.
Learning and Productivity Sofiware. Learning titles include Microsoft EncartaB multimedia encyclopedia and
Microsoft Bookshelf33 CD-ROM reference library. The Encarta family of products includes a multimedia
encyclopedia database with interactive information, an interactive world atlas with three-dimensional maps, a world
English dictionary, and an online version with monthly updates. Microsoft Bookshelf is a multimedia reference
library that gives users fast, easy access to reference resources. Titles for children include My Personal Tutor, a
comprehensive, grade-based learning suite with TutorAssist learning technology that identifies a child’s specific
learning needs and offers instruction, and a series of products based on the popular children’s book and television
series, Scholastic’s The Magic School Bus@. Microsoft’s productivity offerings include Microsoft Works, 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. Micro:-oft Money offers leading tools and resources to
conduct a wide range of financial activities. The Works Suite provides B comprehensive collection of software,
including Microsoft Works, Microsoft Word, Microsoft Money, Microsoft Encarta encyclopedia, Microsoft Picture
It!@ Publishing, and Microsoft Streets & Trips.
MobiZity and Embedded Systems. Microsoft develops a number of software platforms for mobile computing form
factors. Products such as Pocket PC, Microsoft Mobile Explorer, and Microsoft Smartphone platform (currently
codenamed Stinger) are designed to enable a variety of mobile scenarios. Microsoft’s embedded offerings include
two embedded operating systems, Microsoft Windows CE and Microsoft Windows NT Embedded, as well as device
specific solutions. Microsoft Windows CE, a robust real-time embedded operating system, is targeted at small
footprint, mobile 32-bit devices. Microsoft Windows NT Embedded, based on the desktop and server versions of
Microsoft’s operating systems, is targeted at higher-end embedded products and devices. Both embedded operating
systems offer integrated tool sets to enable embedded system developers to quickly create sophisticated embedded
device and application solutions. Microsoft Mobile Explorer enables secure mobile access to corporate or personal
e-mail, corporate networks, and the Internet when connected to a wireless network. Microsoft Mobile Information
Server is a scalable and reliable mobile applications server that provides enterprise customers and mobile operators
with a rich platform for extending .NET Enterprise application and securely delivering real-time, wireless data to
mobile devices.
Consumer Commerce In vestments
Consumer Commerce Investments include Expedia, Inc., the HomeAdvisor online real estate service, and the
CarPoint online automotive service.
Expedia, Inc. Expedia, Inc. operates Expedia.com a leading online travel service in the United States with localized
versions in Canada, Germany, and the United Kingdom. Expedia.com provides air, car, and hotel booking, vacation
package and cruise offerings, destination information, and mapping. On July 16, 2001, USA Networks, Inc. (USA)
announced an agreement to acquire a controlling interest in Expedia through the purchase of up to 37.5 million
shares, approximately 75% of the current outstanding shilres. If holders of more than 37.5 million Expedia shares
elect to sell their shares to USA, there will be a pro rata reduction among all electing shareholders. Microsoft has
agreed to transfer all of its 33.7 million shares and warrants, subject to pro-ration. It is expected thai the transaction
will close by December 3 1,2001.
HomeAdvisor online real estate service. The HomeAdvisor online real estate service is a complete guide to the
home-buying process and provides comprehensive tools for finding homes and loans on the Internet. HomeAdvisor
provides users with the information and knowledge needed to take control of the home-buying process. This
includes customized search features, worksheets and calculators, and editorial content and home-buying advice.
CarPoint online automotive service. The CarPoint online automotive service is the leading online automotive
marketplace, visited by more than 7 million consumers each month. With details on more than 10,000 car models
and 100,000 used vehcles, users can research and compare cars of virtually every make and model, identify local
dealers, and receive instructions for post-purchase service and maintenance.
Other
Hardware. The Company develops and markets several PC input devices including the Microsoft IntelliMouse@
family of hand-held pointing devices that facilitate using the PC. The Company also markets several types of
keyboards including the Microsoft Natural@ Keyboard, an ergonomically designed keyboard. Microsoft sells
various Microsoft Sidewinder@ game controllers and force feedback joysticks with realistic performance technology
to use with PC games.
Microsoft Press. Microsoft Press offers comprehensive learning and tralning resources to help new users, power
users, and professionals get the most from Microsoft technology through books, CDs, self-paced training kits, and
videos that are created to accommodate different learning styles and preferences. Microsoft Press books are
authored by professional and technical writers, both by Microsoft employees and independent authors.
EQUITYINVESTMENTS
The Company has entered into joint venture arrangements to take advantage of creative talent and content from other
organizations. Microsoft owns 50 percent of MSNBC Cable L.L.C., a 24-hour cable news and infomiation 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 entures. Microsoft owns 49 percent of Avanade
Inc., a joint venture with Accenture Ltd, which offers solutions and services based on Windows 2000.
1
PRODUCT
DEVELOPMENT
The software industry is characterized by rapid technological change, whch requires constant attention to computing
technology trends, and shifting consumer demand, and rapid product innovation. The pace of change is accelerating
as the computing needs of our customers move beyond the PC toward intelligent devices and appliances.
.
Most of the Company’s software products are developed internally. The Company also purchases technology,
licenses intellectual property rights, and oversees thd-party development and localization of certain products.
Internal development enables Microsoft to maintain closer technical control over its 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 an? 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 computing
devices. Product documentation is generally created internaliy.
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 intelligent devices, PCs, servers, 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. Before releasing new software platforms, Microsoft provides to
software vendors a range of development, training, testing resources, and guidelines for developing applications.
To best serve the needs of users around the world, Microsoft “localizes” many of ,its products to reflect local
languages and conventions and to improve the quality and usability of the product in international markets.
Localizing a product might require modifying the user interface, altering dialog boxes, and translating text. In
Japanese versions, for example, all user messages and documentation are in Japanese with monetary references in the
Japanese yen. Various Microsoft products have been localized into more than 30 languages.
During fiscal years 1999, 2000, and 2001, the Company spent $2.97 billion, $3.77 billion, and $4.38 billion,
respectively, on product research and development activities excluding f‘unding of joint venture activity. Those
amounts represented 15.0%, 16.4%, and 17.3%, respectively, of revenue in each of those years. The Company is
committed to continue high expenditures for research and product development.
Microsoft .NET is Microsoft’s platform for X M L Web services. XML Web services allow applications to
communicate and share data over the Internet, regardless of operating system or programming language. The
Microsoft .NET platform includes a comprehensive family of products, built on XML and Internet industry
standards, which provide for each aspect of developing, managing, using, and experiencing XML Web services.
There are five areas where Microsoft is building the .NET platform today: Tools, Servers, XML Web Services,
Clients, and .NET Experiences. In the Tools area, Visual Studio .NET and the Microsoft .NET framework supply a
complete solution for developers to build, deploy, and run XML Web services. They maximize the performance,
reliability, and security of XML Web services. The .NET Enterprjse Servers, including the Windows 2000 Server
family, make up Microsoft .NET’S server infrastructure for deploying, managing, and orchestrating XML Web
services. Designed with mission-critical performance in mind, they provide enterprises with the agility they need to
integrate their systems, applications, and partners through XML Web services, and the flexibility to adapt to
changing business requirements.
In addition to developers creating XML Web services, Microsoft is creating a core set of building block services that
perform routine tasks and act as the backbone for developers to build upon. The first set of XML Web services
being built, codenamed “Hailstorm”, is a group of user-centric services oriented around people, rather than specific
devices, networks, or applications. Hailstorm is based upon the Microsoft Passport user authentication system.
With Hailstorm, users receive relevant information, as they need it, delivered to the devices they are using, and
based on preferences they have established.
Clients are PCs, laptops, workstations, phones, handheld computers, Tablet PCs, game consoles, and other smart
devices. These smart clients and devices use software that supports XML Web services, which enable users to
access their data regardless of the location, type, and number of clients used. Smart clients and devices leverage
XML Web services to create .NETexperiences that allow users to access information across the Internet and from
stand-alone applications in an integrated way. Some of the products that Microsoft is transitioning into .NET
experiences are Office, MSN, bCentral, .and Visual Studio .NE.T.
MANUFACTURING
Microsoft contracts out most of its manufacturing activity to third parties. Outside manufacturers produce various
retail software packaged products and hardware. There are other custom manufacturers Microsoft could use in the
event outsourced manufacturing becomes unavailable from current vendors.
The Company’s CD-ROM manufacturing facilities are located in Puerto Rico. The Company has multiple sources
for raw materials, supplies, and components and is often able to acquire component parts and materials on a volume
discount basis. Quality control tests are performed on purchased parts, CD-ROMs,and other products.
OPERATIONS
Microsoft manages all product fulfillment, licensing, and logistics services. The Company has regional operations
centers in Ireland, Singapore, and the Greater Seattle area. The regional centers support all operations activities.
including information processing, vendor management, logistics, and related supporting functions by geographical
regions. The regional center in Dublin, Ireland supports the European, African, and Middle East regions, the center
in Singapore supports the Asia Pacific region, and the center in the Greater Seattle area supports North and South
America. Microsoft Licensing Incorporated (MSLI), a wholly-owned subsidiary in Reno, Nevada, manages the
Company’s original equipment manufacturer (OEM) and certain organizational licensing operations.
MARKETING
AND DISTRIBUTION
The Company’s sales and marketing group seeks to build long-term relationships with customers of Microsoft. The
OEM sales group includes the sales force that works with original equipment manufacturers that preinstall Microsoft
software on their PCs. In addition to the OEM channel, Microsoft has three major geographic sales and marketing
organizations: the South Pacific and Americas; Europe, Middle East, and Africa; and Asia.
Finished Goods Channels
Distributors and Resellers. The Company licenses and sells its products in the finished goods channels primarily to
and through independent non-exclusive distributors and resellers. Distributors and resellers include Ingram Micro,
Tech Data, Software Spectrum, Corporate Software & Technology, SOFTBANK, Software House International,
ASAP Software Express, and Tech Pacific Group. 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.
Enterprise Accounts. The Microsoft Select program offers flexible software acquisition, licensing, and maintenance
options specially customized to meet the needs of large multinatiimal organizations. Targeted audiences include
technology specialists and influential end users in large enterprises. Marketing efforts and fulfillment are generally
coordinated with large account resellers. The Microsoft Open program is a licensing program that is targeted for
small- and medium-sized organizations. It is available through the reseller channel and offers discounts based on
initial purchase volumes. The Microsoft Enterprise Agreement program is a licensing program designed to provide a
flexible licensing and service solution tailored to customers making a long-term licensing commitment. The
agreements are designed to increase customer satisfaction by simplifying license administration, payment terms, and
the contract process.
CertijZed Parfners. Microsoft Certified Partners are ind,ependent companies that offer their clients leading-edge
technology through consulting, deployment, remote and on-site maintenance, helpdesk support, packaged software
applications, hosting services, training, and more. Microsoft Certified Partners encompass a broad range of expertise
and vendor affiliations and have experience ranging from networking, e-commerce, collaboration, business
intelligence, and other,leading edge disciplines.
International Sales Sites. The Company has established marketing and/or support subsidiaries in more than 80
countries. Product is generally delivered by the Company’s owned or outsourced manufacturing operations, which
are located in the geographical region in which the product was sold. By organizing geographically, the Company is.
able to provide service to international channel customers and access to Microsoft professionals located in the same
region to serve their specific needs. Subsidiaries have the responsibility for selling products to customers. managing
licensing programs, and providing support to all types of customers based m international countries.
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
Microsoft operating systems are licensed primarily to OEMs under agreements that grant the O E h 3 the right to
distribute copies of the Company’s products with their computing devices, principally PCs. The Company also
markets and licenses certain server operating systems, desktop applications, hardware devices, and consumer
software programs to OEMs under similar arrangements. 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 Acer, Actebis, Compaq, Dell, eMachnes, Fujitsu, Fujitsu Siemens Computers,
Gateway, Hewlett-Packard, IBM, Micron, NEC, Samsung, Sony, and Toshba. A substantial amount of OEM
business is also conducted with system builders, which are low-volume customized PC vendors.
Advertising
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 uses broad
consumer media (television, radio, the Internet, and business publications) and trade publications. Microsoft has
programs under which qualifying resellers and OEMs are reimbursed for certain advertising expenditures.
COSTOMERS
The Company’s customers include consumers, small- and medium-sized organizations, enterprises, educational
institutions, ISPs, application developers, and OEMs. Most consumers of Microsoft products are individuals in
businesses, government agencies, educational institutions, and at home. The consumers and organizations obtain
Microsoft products primarily through resellers and OEMs, which include certain Microsoft products with their
computing hardware. The Notes to Financial Statements (see Item 8) quantify 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.
COMPETITION
The software business is intensely competitive and subject to rapid technological change. As the company pursues
its largest strategic initiative, Microsoft .NET, the Company could experience more intense competition during the
transition from the traditional core businesses to its new products based on the .NET platform. The Company
continues to face movements from PC-based applications to server-based applications or Web-based application
hosting services, from proprietary software to open source software, and from PCs to Internet-based devices. A
number of Microsoft’s most significant competitors, including IBM, Sun Microsystems, Oracle, and AOL Time
Warner, are collaborating with one another on various initiatives directed at competing with Microsoft. These
initiatives relate in part to efforts to move software from individual PCs to centrally managed servers, which would
present significant challenges to the Company’s historical business model. Other competitive collaborative efforts
include the development of new platform technologies that are intended to replicate much of the value of Microsoft
Windows operating systems. New computing form factors, including non-PC information devices, are gaining
popularity and competing with PCs running Microsoft’s software products.
Microsoft faces formidable competition in these new areas and in all areas of its current business activity, including
competition from many companies much larger than Microsoft. The rapid pace of technological change, particularly
in the area of Internet platforms and services, continually c’reates new opportunities for existing competitors and
start-ups and can quickly render existing technologies less valuable. The Company also faces relentless competition
from software pirates who unlawfully copy and distribute Microsoft’s copyrighted software products. depriving the
Company of large amounts of revenue on an annual basis.
The Company’s competitive position may be adversely affected by one or more of the following factors in the future,
particularly in view of the fast pace of technological change in the computing industry.
Desktop and Enterprise Software and Services
The Company’s competitors include many software application vendors, such as IBM (Lotus), Oracle, Apple
(Filemaker, Inc.), Sun Microsystems, Corel, Qualcomm, and local application developers in Europe and Asia. 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 application software products on
various models of their PCs, competing directly with Microsoft‘s desktop application software. Sun Microsystems’
Star Office is also very aggressive with its pricing, offering a free download from the Web or nominal charge for a
CD. Additionally, Web-based application hosting services provide an alternative to PC-based applications such as
Microsoft Office.
Microsoft’s operating system products face substantial competition from a wide variety of companies. Competitors
such as IBM, Apple Computer, Sun Microsystems, and others are vertically integrated in both software development
and hardware manufacturing and have developed operating systems that they preinstall on their own computers.
Many o f these operating system software products are also licensed to third-party OEMs for preinstallation on their
computers. Microsoft’s operating system products compete with UNIX-based operating systems from a wide range
of companies, including IBM, Hewleff-Packard, Sun Microsystems, and others. Variants of UNIX run on a wide
variety of computer platforms and have gained increasing acceptance as desktop operating systems. With increased
attention toward open source software, the Linux operating system has gained increasing acceptance as well. Several
computer manufacturers preinstall Linux on PC servers and many leading sohvare developers have written
applications that run on Linux. Microsoft Windows operating systems are also threatened by alternative platforms
such as those based on Internet browsing software and Java technology promoted by .AOL Time Warner and Sun
Microsystems.
The Company competes in the business of providing enterprise-wide computing solutions with several competitors
who enjoy a larger share of sales and larger installed bases. Many companies offer operating system software for
mainframes and midrange computers, including IBM, Hewlett-Packard, and Sun Microsystems. Since legacy
business systems are typically support-intensive, these Competitors also offer substantial support services. Software
developers that provide competing server applications for PC-based distributed clienuserver 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 bcsiness systems. Additionally, IBM has a large
installed base of Lotus Notes and cc:Mail, both of which compete with the Company’s collaboration and e-mail
products.
The Company’s developer products compete against offerings from Borland, Macromedia, Oracle, Sun
Microsystems, Sybase, Symantec, and other companies.
Consumer Sofmare, Services. and Devices
Microsoft’s online services network, MSN, faces fomidable competition from AOL Time Warner (including its
CompuServe unit), Yahoo!, and a vast array of Web sitks and portals that offer content of all types and e-mail,
instant messaging, calendaring, chat, and search and shopping services, among other things. In addition, the ease of
entry into Internet services has allowed numerous Web-based service companies to build significant businesses in
areas such as e-mail, electronic commerce, Web search engines, directories, and information of numerous types.
Competitors include AOL Time Warner, Yahoo!, Excite, Lycos, Infoseek, AltaVista, and many others. . The
Company’s MSNBC joint ventures face considerable competition from other 24-hour cable and Internet news
organizations such as CNN, CNN Headline News, and Fox News Network. MSNBC also competes with traditional
news media such as newspapers, magazines, and broadcast TV.
The Company’s Consumer Group continues to see consQlidation across the various entertainment and productivity
segments in whch Microsoft competes. Competitors include Vivendi (Havas), Intuit, Electronic Arts, The Learning
Company, Infogrammes, and Logitech. Still other competitors own branded content, such as Disney and LucasArts.
Additionally, PC-based games and the Company’s hture Xbox compete and will compete head-to-head against
games created for proprietary systems such as the Nintendo GameCube and the Sony Playstation. Game developers
like Electronic Arts, Namco, Midway, Activision, Konami, THQ,to name a few, are both partners and competitors
in the games software development segment.
Microsoft faces many competitors in the Mobile Devices space, including Palm, Symbian, Nokia, and Openwave.
The embedded operating system market is hghly fragmented with many competitive offerings. Key competitors
include Wind River and versions of embeddable Linux from commercial Linux vendors such as Red Hat, Lineo. and
Monta Vista. The largest competitor remains in-house operating systems developed by device manufacturers.
However, this is changing as more device builders opt for commercial offerings as connectivity and richer features
are required in devices.
Consumer Commerce Investments
In the United States, Expedia, Inc. competes with traditional travel distribution channels and online travel services
such as Travelocity.com, Hotel Reservations Network, Priceline.com, CheapTickets.com, Biztravel.com,
Worldres.com, and Trip.com. Expedia also competes with supplier-owned sites such as United.com, Delta.com, and
Marriott.com. In addition, two new competitors owned by various airlines, Orbitz and Hotwire, emerged in fiscal
year 2001. Internationally, Expedia competes with a different set of participants in each market. Microsoft faces
many competitors in the online real estate service space, including AOL’s Ilouse and Home channel and Homestore.
The Company also faces many competitors in the online automotive service space, including Autobytel, CarsDirect,
AOL autos, and Yahoo! autos.
Other
-
PC input devices face substantial competition from computer manufacturers, since computers are typically sold with
a keyboard and mouse, and other manufacturers of these devices. Microsoft Press competes in the retail book and
eLearning markets with publishers that also create content on Microsoft technologies. A few of the retail
competitors are Pearson, WROX, Sybex, and Wiley. The major eLearning competitors are Smartforce and NetG.
EMPLOYEES
As of June 30, 2001, the Company employed approximately 47,600 people on a full-time basis. 33,000 in the United
States and 14,600 internationally. Of the total, 19,400 were in product research and development, 22,500 in sales,
marketing, and support, 1,900 in manufacturing and distribution, and 3,800 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 coi-tinue to be as successful in the future. None of
the Company’s employees is subject to collective bargaining agreements. The Company believes relations with its
employees are excellent.
item 2. Properties
The Company’s corporate offices consist o f approximately 7.9 million square feet o f office building space located in
King County, Washington. The Company is constructing three buildings with approximately 720,000 square feet of
space that will be occupied in the Fall o f 2001. The Company owns 4.8 million square feet o f corporate campus
space situated on slightly more than 300 acres o f land and leases approximately 3.1 million square feet around the
Puget Sound region. To accommodate expansion needs the Company has an option to purchase 150 acres o f land in
Issaquah, Washington, which can accommodate 2.95 million square feet of additional office space.
The Company leases many sites domestically totaling approximately 3.0 mllion square feet o f office building space.
This includes the recent acquisition of the Great Plains facilities whch totaled 425,000 square feet.
The Company leases many sites internationally totaling approximately 4.1 million square feet. The Company’s
European operations center and localization division leases a 382,000 square-foot campus in Dublin, Ireland. The
Company leases a 45,000 square-foot disk duplication facility in Humacao. Puerto Rico and leases a 36,000 squarefoot facility in Singapore for its Asia Pacific operations center. The Company has office building space leased in the
following locations: Tokyo, Japan 343,000 square feet; Unterschleissheixn, Germany 253,000 square feet; United
Kingdom campus 242,000 square feet; Les Ulis, France 229,000 square feet; and Beijing, China 115,000 square feet.
The Company’s facilities are fully used for current operations of all segments and suitable additional space is
available to accommodate expansion needs.
item 3. Legal Proceedings
See Notes to Financial Statementeontingencies (Item 8) for information regarding legal proceedings.
Item 4. Submission of Matters to a Vote of Securit), Holders
No matters were submitted to a vote o f security holders during the fourth quarter of fiscal 2001.
Executive Oflicers of the Registrant
The executive officers of Microsoft as of September 10, 2001 were as follows:
Name
Age
Position with the Company
William H. Gates, I11
Steven A. Ballmer
Richard E. Belluzzo
45
Chairman of the Board; Chief Software Archtect
James E. Allchin
Orlando Ayala
Robert J. (Robbie) Bach
Douglas J. Burgum
45
47
49
45
39
45
David W. Cole
John G. Connors
Jean-Philippe Courtois
39
42
41
Jon Stephan DeVaan
Richard P. Emerson
Paul Flessner
Kevin R. Johnson
Robert L. Muglia
Craig J. Mundie
40
39
42
40
41
52
William H. Neukom
Jeffrey S. Raikes
Richard F. Rashid
Steven J. Sinofsky
Brian Valentine
David Vaskevitch
Deborah N. Willingham
59
43
49
36
41
48
45
President; Chief Operating Officer
Group Vice President, Platforms
Group Vice President, Worldwide Sales, Marketing, and Services
Senior Vice President, Games
Senior Vice President, Business Solutions; President, Great Plains
Division
Senior Vice President, Services Platform Division
Senior Vice President; Chef Financial Officer
Senior Vice President; President, Microsoft Europe, Middle East, and
Africa
Senior Vice President, TV Division
Senior Vice President, Corporate Development and Strategy
Senior Vice President, .NET Enterprise Servers
Senior Vice President, US.Sales. Marketing, and Services
Group Vice President, Personal Services Group
Senior Vice President; Chief Technical Officer, Advanced Strategies and
Policy
Executive Vice President, Law and Corporate Affairs; Secretary
Group Vice President, Productivity and Business Services
Senior Vice President, Research
Senior Vice President. Office
Senior Vice President, Windows
Senior Vice President; Chief Technical Officer, Business Platforni
Senior Vice President, Human Resources
Mr. Gates co-founded Microsoft in 1975 and served as its Chiel' Executive Officer from the time the original
partnership was incorporated in 198 1 until January 2000, when he resigned as Chief Executive Officer and assumed
the position of Chief Software Architect. Mr. Gates has served as Chairman of the Board since the Company's
incorporation.
Mr. Ballmer was named Chief Executive Officer and a director of the Company in January 2000. He had been
President from July 1998 to February 2001. Previously, he had served as Executive Vice President, Sales and
Support since February 1992. He was Senior Vice President, Systems Software from 1989 to 1992. From 1984
until 1989, Mr. Ballmer served as Vice President, Systems Software. He joined Microsoft in 1980.
Mr. Belluzzo was named President and Chief Operating Officer in February 2001. He had been Group Vice
President, Personal Services and Devices since August 2000. He joined Microsoft as Group Vice President,
Consumer and Commerce in September 1999. Mr. Belluzzo had been Chairman of the Board and Chief Executive
Officer, Silicon Graphics, Inc. since January 1998. Prior to his employment at Silicon Graphics,. Inc., Mr. Belluzzo
was employed by the Hewlett-Packard Company for 22 years, serving since 1995 as Executive Vice President and
General Manager of the computer organization.
Mr. Allchin was named Group Vice President, Platforms in December 1999. He had been Senior Vice President, .
Platforms since March 1999. He was previously Senior Vice President, Personal and Business Systems since
February 1996, Senior Vice President, Business Systems Division since November 1994. and had been Vice
President, Business Systems Division since July 1991. Mr. Allchin joined Microsoft in 1991.
Mr. Ayala was named Group Vice President, Worldwide Sales, Marketing, and Services in August 2000. He had
been Senior Vice President, South Pacific and Americas since February 1998, and before holding that position. was
Vice President of the developing markets of Africa, India, the Mediterranean and Middle East, Latin America,
Southeast Asia and the South Pacific. He joined Microsoft in May 1991 as Senior Director of the Latin America
Region.
Mr. Bach was named Senior Vice President, Games in March 2000. He had been Vice President, Home and Retail
since March 1999. Before holding that position, he had been Vice President, Leaining, Entertainment and
Productivity since 1996. Mr. Bach joined Microsoft in 1988.
Mr. Burgum joined the Company upon Microsoft’s acquisition of Great Plains Software, Inc. in April 2001. Mr.
Burgum became Great Plains’ first outside investor in March 1983. He was named President of Great Plains in 1984
and subsequently named Chairman and Chief Executive Officer.
Mr. Cole was named Senior Vice President, Services Platform Division in August 2000. He had been Senior Vice
President, Consumer Services since December 1999. Before holding that position, he had been Vice President,
Consumer Windows since March 1999. Previously, he was Vice President, Web Client and Consumer Experience
and Vice President, Internet Client and Collaboration. Mr. Cole joined Microsoft in 1986.
Mr. Connors was named Senior Vice President and Chief Financial Officer in December 1999. He had been Vice
President, Enterprise since March 1999. Mr. Connors had been Vice President, Information Technology, and Chief
Information Officer since July 1996. He joined Microsoft in January 1989.
Mr. Courtois was named Senior Vice President and President, Microsoft Europe, Middle East, and Africa in July
2000. He had been Vice President, Customer Marketing since July 1998. Before holding that position, he had been
Vice President of Microsoft Europe since 1997 and General Manager for Microsoft France since 1994. Mr. Courtois
joined Microsoft in 1984.
Mr. DeVaan was named Senior Vice President, TV Division in December 1!)99. He had been Senior Vice President,
Consumer and Commerce since September 1999. Mr. DeVaan had been Vice President, Consumer and Commerce
since March 1999. He had been Vice President, Desktop Applications since 1995. Mr. DeVaan joined Microsoft in
1985.
Mr. Emerson joined Microsoft in November 2000 as Senior Vice President, Corporate Development and Strategy.
Prior to joining Microsoft, he was Managing Director and co-head of Technology and Telecommunications Advisory
Services at international investment bank Lazard Freres & Co. LLC. He spent 12 years in San Francisco and New
York with Lazard and Morgan Stanley, specializing in advising clients in the technology and telecommunications
sectors on mergers, acquisitions, and strategic partnerships.
Mr. Flessner was named Senior Vice President, .NET Enterprise Servers in December 1999. He had been Vice
President, Database and Data Access. Since joining the Company, Mr. Flessner’s primary responsibilities have been
the development of Microsoft’s database business. He assumed responsibility for the engineering of Microsoft SQL
Server in 1995. He joined Microsoft in 1994.
Mr. Johnson was named Senior Vice President, U.S. Sales, Marketing, and Services in August 2001. He had been
Vice President, U.S. Sales, Marketing and Services. Mr. Johnson was named Vice President, Product Support
Services in July 1998. He joined Microsoft in 1992.
Mr. Muglia was named Group Vice President, Personal SFrvices Group in August 2000. He had been Group Vice
President, Business Productivity since December 1999. He was named Senior Vice President, Business Productivity
in March 1999 and was named Senior Vice President, Applications and Tools in February 1998. He had been Vice
President, Server Applications since 1997 and was Vice President, Developer Tools since 1995. He joined
Microsoft in January 1988.
Mr. Mundie was named Senior Vice President and Chief Technical Officer, Advanced Strategies and Policy in
August 2001. He was named Senior Vice President, Consumer Platforms in February 1996. He was named Senior
Vice President, Consumer Systems in May 1995 and had been Vice President, Advanced Consumer Technology
since July 1993. He joined Microsoft as General Manager, Advanced Consumer Technology in December 1992.
Mr. Neukom was named Executive Vice President, Law and Corporate Affairs in October 1999. He had been Senior
Vice President, Law and Corporate Affairs since February 1994. He joined Microsoft in 1985 as Vice President.
Law and Corporate Affairs.
Mr. Raikes was named Group Vice President, Productivity and Business Services in August 2000. He had been
Group Vice President, Sales and Support since July 1998. Before holding that position, he had been Group Vice
President, Sales and Marketing since 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. Rashd was named Senior Vice President, Research in May 2000. He had been Vice President, Research since
July 1994. He joined Microsoft in September 1991.
Mr. Sinofsky was named Senior Vice President, Office in December 1999. He had been Vice President, Office since
December 1998. Mr. Sinofsky joined the Office team in 1994, increasing hs responsibility with each subsequent
release of the desktop suite. He joined Microsoft in July 1989.
Mr. Valentine was named Senior Vice President, Windows in Decembcr 1999. He had been Vice President,
Business and Enterprise since March 1999. He had been Vice President, Windows since December 1998. Before
managing the Windows group, Mr. Valentine managed the server applications division and had been responsible for
the Exchange product unit. He joined Microsoft in 1987.
Mr. Vaskevitch was named Senior Vice President and Chief Technical Officer, Business Platform in August 2001.
He was named Senior Vice President, Business Applications in March 2000. He had been Senior Vice President,
Developer since December 1999. Before holding that position, he had been Vice President, Distributed Applications
Platform. He joined Microsoft in 1986.
Ms. Willingham was named Senior Vice President, Human Resources in February 2001. She had been Vice
President, Human Resources since April 2000. Ms. Willingham had been Vice President, Business and Enterprise
Division Marketing and was responsible for Windows operating system client and server marketing strategy and
training, as well as for providing centralized marketing services for the Consumer Windows Marketing and
Streaming Media Marketing teams. She joined Microsoft in 1993.
PART II
Item 5. Market f o r Registrant S Common Stock and Related Stockholder Matters
The Company’s common stock is traded on The Nasdaq Stock Market under the symbol MSFT. On July 3 1, 2001,
there were 112,001 registered holders of record of the Company’s common stock. The Company has not paid cash
dividends on its common stock. The h g h and low common stock prices per share were as follows:
Quarter Ended
Sept. 30
Dec. 31
Mar. 31
June 30
Year
High
$100.75
$119.94
$118.63
$96.50
$119.94
Low
8 1.63
84.38
88.13
60.38
60.38
2000
Common stock price per share:
~
2001
Common stock price per share:
High
$82.00
$70.88
$64.69
$73.68
$82.00
Low
60.31
41.50
43.38
51.94
41.50
On April 11, 2001, the Company closed the acquisition of substantially ‘all of the assets of icommunicate Holding,
Inc., a Delaware corporation (‘Wommunicate”). Promptly thereafter, the Company issued an aggregate of 272,093
of its common shares to iCommunicate, which were subsequently distributed to iCommunicate’s eleven shareholders
in the liquidation of icommunicate. All of the shares issued in this transaction were issued in a non-public offering
pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended (the “1933
Act”), under Section 4(2) of the 1933 Act.
On May 4, 2001, the Company issued an aggregate of 926,077 of its common shares pursuant to the merger of a
subsidiary of the Company with Ensemble Studios Corporation, a Delaware corporation (“Ensemble”), owned by 45
shareholders. All of the shares issued in this transaction were issued in a non-public offering pursuant to an
exemption from the registration requirements of the 1933 Act, under Section 4(2) of the 1933 Act.
The above described sales were made without general solicitation or advertising. The Company has filed a
Registration Statement on Form S-3 covering the resale of such securities issued pursuant to such acquisitions. All
net proceeds from the sale of such securities will go to the selling shareholders who offer and sell their shares. The
Company has not received and will not receive any proceeds from-the sale of these common shares other than the
assets and certain liabilities of icommunicate and in connection with the merger with Ensemble.
Item 6. Selected Financial Data
FiNANCiAL HiGHLiGHTS
(In millions, except earnings per share)
Year Ended June 30
1997
1998
1999
2000
2001(11
$11,936
3,454
$15.262
4,490
$19,747
7,785
$22.956
9,42 1
$25.296
3,454
4,490
7,785
9,42 1
7,346
0.66
0.84
1.42
1.70
1.38
0.84
1.42
1.70
1.32
Cash and short-term investments
Total assets
0.66
8,966
13,927
17,236
23,798
31,600
14,387
22,357
38,625
52,150
59,257
Stockholders’ equity
10,777
16,627
28.438
41,368
47,289
Revenue
Income before accounting change
Net income
Diluted earnings per share before
accounting change
Diluted earnings per share
(1)
7,721
Fiscal year 2001 includes an unfavorable cumulative effect of accounting change of $375 million or $0.06
per diluted share and $3.92 billion (pre-tax) in impairments o f certain investments, primarily cable and
telecommunication investments.
Item 7. Management’s Discussion and Analysis of Results of Operations and Financial Condition
RESULTS
OF OPERATIONS FOR 1999, 2000, A@ 2001
Microsoft develops, manufactures, licenses, and suppoqs a wide range of software products for a multitude of
computing devices. Microsoft software includes scalable operating systems for servers, personal computers (PCs),
and intelligent devices; server applications for clienVserver environments; knowledge worker productivity
applications; and software development tools. The Company’s online efforts include the MSN network of Internet
products and services and alliances with companies involved with broadband access and various forms of digital
interactivity. Microsoft also licenses consumer software programs; sells hardware devices: provides consulting
services; trains and certifies system integrators and developers; and researches and develops advanced technologies
for future software products.
Management’s Discussion and Analysis contains statements that ate forward-looking. These statements are based on
current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially
because of factors discussed below under “Issues and Uncertainties.”
Revenue
The Company’s revenue growth rate was 29% in fiscal 1999, 16% in fiscal 2000, and 10% in fiscal 2001. Revenue
growth in fiscal 2001 was driven primarily by licensing of Microsoft Windows 2000 Professional, Microsoft SQL
Server, and the other .NETEnterprise Servers. Consumer Software, Services, and Devices revenue also grew
strongly. Partially offsetting those items was flat revenue growth from Windows Millennium Edition (Windows Me)
and Windows 98 operating systems, reflecting the slowdown in consumer PC shipments and a higher mix of
Windows 2000 Professional and Windows NT Workstatibn. Revenue growth in fiscal 2000 was driven by strong
licensing of Microsoft Windows NT Workstation, Windoys 2000 Professional, Windows NT Server, Windows 2000
Server, Microsoft Office 2000, and SQL Server. Consdmer Software, Services, and Devices revenue also grew
strongly. Partially offsetting those items was slower growth from Windows operating systems sold through the
original equipment manufacturer (OEM) channel due to slow demand for business PCs throughout a significant
portion of fiscal 2000. Revenue growth in fiscal 1999 reflected the continued adoption of Windows operating
systems and Microsoft Office. In addition, the Company’s estimate for future product returns was reduced by $250
million in fiscal 1999.
In fiscal 1999, Microsoft made two changes related to the ratable recognition of revenue for a portion of its revenue
for certain products. American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 98-9,
Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Trclnsnctions. requires
companies to use the average sales price of each undelivered element of software arrangements to unbundle revenue.
Prior authoritative accounting guidance allowed a comparison of the total price differential between a licensed
product sold through different channels of distribution to derive the value of undelivered elements offered to
customers acquiring product from one channel but not the other.., Upon adoption of this new rule in the fourth
quarter of fiscal 1999, the percentages of the total arrangement treated as unearned decreased. This change reduced
the amount of Microsoft Windows and Microsoft Office sales treated as unearned and increased the amount of
revenue recognized upon shipment. Additionally, as part of the Company’s long range planning process and a
review of product shipment cycles, it was determined that the life Lycle of Windows should be extended from two
years to three years.
Product Revenue
Microsoft has four segments: Desktop and Enterprise Software and Services; Consumer Software, Services, and
Devices; Consumer Commerce Investments: and Other. The Management Discussion and Analysis presentation of
revenue differs from that reported under the Company’s Gegnient Information appearing in the Notes to Financial
Statements because reconciling items are allocated to those segments.
Desktop and Enterprise Sofiare and Services
Desktop and Enterprise Software and Services revenue was $17.84 billion, $20.40 billion, and $22.41 billion in
1999, 2000, and 2001. Desktop and Enterprise Software and Services includes Desktop Applications; Desktop
Platforms; and Enterprise Software and Services. .
Desktop Applications revenue was $7.77 billion, $9.30 billion, and $9.54 billion in 1999, 2000, and 2001. Desktop
Applications includes revenue from Microsoft Office; Microsoft Project; Visio; client access licenses (CALs) for
Windows NT Server and Windows 2000 Server, Exchange, and Backoffice; Microsoft Great Plains; and bCentral.
In fiscal 2001, revenue from client access licenses increased 14% reflecting strong licensing growth of Windows NT
Server and Windows 2000 Server CALs. Office revenue growth was flat during the year. In fiscal 2000 and 1999,
revenue growth from Microsoft Office integrated suites, including the Premium, Professional, Small Business, and
Standard Editions were very solid.
Desktop Platforms revenue was $6.74 billion, $7.02 billion, and $8.04 billion in 1999, 2000, and 2001. Desktop
Platforms includes revenue from Windows 2000 Professional, Windows NT Workstation, Windows Me, Windows
98, and other desktop operating systems. Fiscal 2001 revenue growth reflected the strong adoption of Windows
2000 Professional, partially offset by flat revenue growth from Windows Me and Windows 98 operating systems,
reflecting the slowdown in consumer PC shipments and a hgher mix of Windows 2000 Professional and Windows
NT Workstation. In fiscal 2000, Desktop Platforms revenue growth was modest due to soft demand for business
PCs during most of the year; a slowdown in shipments in anticipation of the post mid-year availability of Windows
2000 operating systems; and, as expected, a longer business migration cycle for the newest Windows operating
system offerings. In fiscal 1999, Windows units licensed through the OEM channel, particularly Windows NT
Workstation, increased strongly over the prior year. Organizational licensing of Windows NT workstation and
Windows 98 also contributed to the growth.
Enterprise Software and Services revenue was $3.33 billion, $4.08 billion, and $4.83 billion in 1999, 2000, and
200 1. Enterprise Software and Services includes Enterprise Platforms, Server Applications, Developer Tools and
Services, and Enterprise Services. As a result of the continued adoption of Microsoft’s .NET Enterprise Server
offerings in fiscal 2001, Server Applications revenue increased 3 1% versus the prior year. Enterprise Services
revenue, representing consulting and product support services, was up 34% compared to fiscal 2000. Enterprise
Platforms, whch includes Windows 2000 Server and Windows NT Server operating systems, increased 10% while
revenue from Developer Tools and Services was flat with the prior year. In fiscal 2000, Enterprise Platforms
revenue growth was particularly strong led by increased adoption by customers of Windows NT Server and
Windows 2000 Server. Revenue from Server Applications grew strongly, largely due to the strong success of SQL
Server 7.0. Software Developer Tools and Services revenue declined, due to increased suite licensing versus standalone licenses, and the lack of a release upgrade of the Visual Studio development system. In fiscal 1999, the
revenue growth rate for Windows NT Server was healthy. Revenue from Server Applications grew strongly,
reflecting, in part, the release of SQL Server 7.0. The Visual Studio 6.0 development system drove healthy
Developer Tools and Services revenue growth. Consulting services revenue rose substantially.
Consumer Sofmare, Services, and Devices
Consumer Software, Services, and Devices revenue was $1.19 billioa, $1.63 billion, and $1.95 billion in 1999, 2000,
and 2001. Consumer Software, Services, and Devices includes MSN Internet access; MSN network service; WebTV
Internet access and services; PC and online games; learning and productivity software; mobile and wireless devices;
and embedded systems. In fiscal 2001, revenue from MSN network services grew strongly in light of the decline in
the online advertising market. MSN Internet access revenue also gr :w solidly as a result of an increased subscriber
base, partially offset by a decline in the average revenue per subscriber due to a larger mix of subscribers contracted
under rebate programs. Revenue from embedded systems grew strongly from the prior year, while learning and
productivity software revenue and PC and online games revenue declined, reflecting sofmess in the overall consumer
market. In fiscal 2000, online revenue growth was very strong and reflected higher subscriber totals, offset by lower
net prices for Internet access subscriptions compared to the prior year. Additionally, strong sell-through of
entertainment software produced robust revenue growth. IQ fiscal 1999, online advertising revenue rose substantially
and Internet access revenue increased moderately.
Consumer Commerce Investments
Consumer Commerce Investments revenue was $62 million, $182 million, and $299 million in 1999. 2000. and
2001. Consumer Commerce Investments include Expedia, Inc., the HomeAdvisor online real estate service, and the
CarPoint online automotive service. Acquisitions of Travelscape.com and VacationSpot.com by Expedia, Inc.. and
increased product offerings from Expedia led to the strong revenue growth in fiscal 2001. The increased overall
reach of all properties led to the strong revenue growth in fiscal 2000 and 1999.
On July 16, 2001, USA Networks, Inc. (USA) announced an agreement to acquire a controlling interest in Expedia
through the purchase of up to 37.5 million shares, approximately 75% of the current outstanding shares. If holders
of more than 37.5 million Expedia shares elect to sell their shares to USA, there will be a pro rata reduction among
all electing shareholders. Microsoft has agreed to transfer all of its 33.7 million shares and warrants, subject to proration. It is expected that the transaction will close by December 3 1,200 1.
Other
Other revenue was $653 million, $754 million, and $630 million in 1999, 2000, and 2001. Other primarily includes
Hardware and Microsoft Press. Lower sales of gaming devices and other hardware peripherals as a result of
weakness in the consumer market caused the decline in revenue in fiscal 2001. Continued success of the Company’s
new hardware device offerings led to the revenue growth in fiscal 2000. Revenue from hardware devices and
Microsoft Press was relatively flat in fiscal 1999.
Distribution Channels
Microsoft distributes its products primarily through OEM licenses, organizational licenses, online services and
products, and retail packaged products. OEM channel revenue represents license fees from original equipment
manufacturers who preinstall Microsoft products, primarily on PCs. Microsoft has three major geographic sales and
marketing regions: the South Pacific and Americas Region; the Europe, Middle East, and Africa Region; and the
Asia Region. Sales of organizational licenses and packaged products via these channels are primarily to and through
distributors and resellers.
OEM revenue was $6.40 billion in 1999, $7.01 billion in 2000, and $7.86 billion in 2001. Although total licenses
were impacted by a slowdown in PC shpments in fiscal 2001, the mix of the higher priced Windows 2000
Professional and Windows NT Workstation in the OEM channel increased substantially resulting in higher average
revenue per license. The relatively low growth rate in fiscal 2000 was due to lower business PC shipment growth,
especially as a result of the soft demand for business PCs and component shortages for part of the year. These issues
combined with post mid-year availability of Windows 2000 Professional resulted in lower revenue growth. Average
earned revenue per license also declined compared to the prior year, due in part to a mix shift to the lower-priced
Windows 98 operating system reflecting the softness in demand for business PCs and lower prices on operating
systems licensed through certain OEM channel sectors. In fiscal 1999, PC shipment growth coupled with an
increased penetration of hgher value 32-bitoperating systems drove the OEM revenue increases.
South Pacific and Americas Region revenue was $7.25 billion, $8.33 billion, and $9.52 billion in 1999, 2000, and
2001. In fiscal 2001, revenue growth, principally in the United States, was led by strong licensing of Windows 2000
Professional and the family of .NETEnterprise Servers, particularlv SQL Server 2000 and Exchange 2000 Server.
Revenue from Enterprise services and MSN subscription and services grew strongly. In fiscal 2000, Office 2000
integrated suites, Windows 2000 Server, online revenue, and SQL Server sales were the primary drivers of the
revenue growth. Strong retail sales of hardware devices and consumer software also contributed to the growth over
the prior year. Revenue growth was particularly strong in Latin P merica and Australia, moderate in Canada, and
modest in the United States. In fiscal 1999, server applications, Windows NT Server, Windows NT Workstation,
and Microsoft Office all exhibited solid year-over-year growth rates. Organizational licensing activity was strong.
Revenue growth was solid in the United States and moderate in Latin America and the South Pacific.
Europe, Middle East, and Africa Region revenue was $4.33 billion. $5.02 billion, and $4.86 billion in 1999, 2000,
and 2001. In fiscal 2001, weakening local currencies negatively impacted translated revenue compared to the prior
year. Revenue in the region would have increased 6% if foreign exchange rates were constant with those of the prior
year. Revenue from Windows 2000 Professional and the .NET Enterprise Server family of products was very
healthy. In fiscal 2000, retail sales of Windows operating systems and Office licensing produced moderate growth in
the region. Growth from SQL Server licensing. new hardware device offerings. and entertainment software was
especially strong. Revenue grswth, measured in constant dollars, was very healthy in Germany and Italy; robust in
the Middle East, and low in the United Kingdom. In fiscal 1999, all major products grew strongly over the prior
year. Revenue growth was solid in the United Kingdom, Germany, and France, and was particularly high in Sweden,
the Netherlands, and Spain.
Asia Region revenue was $1.78 billion in 1999, $2.60 billion in 2000, and $3.06 billion in 2001. In fiscal 2001, the
region’s growth rate reflected strong revenue from localized versions of Microsoft Ofice 2000 and Microsoft Office
XP, especially the Office Personal suite. The growth was also attributable to Windows 2000 Professional and .NET
Server applications licensing. Revenue growth was particularly strong in Korea and the greater China region.
resulting from advantageous economic conditions as well as successful anti-piracy efforts. In fiscal 2000, the
region’s growth rate reflected strong performance resulting from improved local economic conditions. Revenue
growth was also influenced by robust growth of localized versions of Microsoft Office 2000, especially the Office
Personal Edition sold in Japan, Windows platform and server licensing, and strong adoption of SQL Server.
Revenue grew strongly in nearly all countries in the Asia region. In fiscal 1999, Japan, Taiwan, China, Hong Kong,
and Southeast Asia had moderate revenue growth, whle revenue grew very strongly in Korea.
The Company’s operating results are affected by foreign exchange rates. Approximately 29%, 30%, arld 27% of the
Company’s revenue was collected in foreign currencies during 1999, 2000, and 2001. Since a portion of local
currency revenue is hedged and much of the Company’s international manufacturing costs and operating expenses
are also incurred in local currencies, the impact of exchange rate‘s is partially mitigated.
Operating Expenses
Cost of Revenue
Cost of revenue as a percent of revenue was 14.3% in 1999, 13.1% in 2000, and 13.7% in 2001. In fiscal 2001,
higher support and service costs associated with the MSN Internet access and MSN network services were partially
offset by the lower relative costs associated with organizational licensing and the drop in the mix of packaged
product versus the prior year. Cost of revenue in fiscal 2000 reflected lower costs associated with WebTV
Networks’ operations, partially offset by the growth in hardware peripherals costs. Cost of revenue as a percentage
of revenue decreased in fiscal 1999 primarily due to the trend in mix shift to OEM and organizational licenses.
Additionally, cost of revenue in 1999 was positively impacted by a reduction in estimates of obsolete inventory and
other manufacturing costs of $67 million.
Research and Development
Microsoft continued to invest heavily in the future by funding research and development (R&D). In fiscal 2001, the
increase in R&D expense was the result of higher headcomt-related costs and investments in new product initiatives.
The increase in fiscal 2000 was driven primarily by higher headcount-related costs. The increase in fiscal 1999
reflected higher development headcount-related costs offset by lower infrastructure and third-party development
costs.
Sales and Marketing
In fiscal 2001, sales and marketing expenses as a percentage of revenue increased due to higher relative headcountrelated costs, higher marketing and sales expenses associated with MSN, the Microsoft Agility advertising campaign,
and other new sales initiatives. In fiscal 2000, sales and marketing expenses as a percentage of revenue increased
due to higher relative marketing costs associated with new product releases and online marketing. In fiscal 1999,
sales and marketing expense as a percentage of revenue decreased due to lower relative sales expenses and lower
relative marketing costs.
General and Administrative
In fiscal 2001, general and administrative costs decreased due to a charge related to the settlement of the lawsuit with
Caldera, Inc. recorded in fiscal 2000. Excluding this charge, genrral and administrative expenses in fiscal 2001
increased from the prior year due to higher headcount-related costs and legal fees. For fiscal 2000, besides the
settlement of the lawsuit, general and administrative expenses also reflected increased legal fees and certain
employee stock option-related expenses. The increase in fiscal year 1999 was attributable to higher legal fees,
settlement costs, and headcount-related costs necessary to support the Company’s expanding operations.
Non-operating Items, Investment Income/(Loss), and Income Taxes
Losses on equity investees and other incorporates Microsoft’s share of income or loss from the MSNBC entities,
Avanade, Wireless Knowledge, StarBand Communications, and other investments accounted for using the equity
method. The increase in losses on equity investees and other in fiscal 2001 reflects an increase in the number of such
investments during the year. In fiscal 2000 and 1999, losses on equity investees decreased reflecting smaller losses
from the MSNBC entities.
In fiscal 2001, the Company reported an investment loss of $36 million, a decrease in investment income of $3.36
billion versus fiscal 2000. Net recognized losses were $2.22 billion in fiscal 2001, reflecting $4.80 billion in
impairments of certain investments, primarily in the cable and telecommunication industries, and $592 million of net
losses attributable to derivative instruments. These losses were partially offset by higher net gains from the sales of
investments, including a gain from Microsoft’s investment in Titus Communications (which was merged with Jupiter
Telecommunications) and the closing of the sale of .Transpoint to CheckFree Holdings Corp. Interest and dividend
income increased $591 million from the prior year, reflecting a larger investment portfolio. In fiscal years 2000 and
1999, investment income increased primarily as a result of a larger investment portfolio generated by cash from
operations coupled with realized gains from the sale of securities.
The effective tax rate for fiscal 2001 was 33%. The effective tax rate for fiscal 2000 was 34%. Excluding the
impact of the gain on the sale of Softimage, Inc., the effective tax rate for fiscal 1999 was 35%.
Accounting Change
Effective July 1, 2000, Microsoft adopted Statement of Financial Accounting Standards (SFAS) 133, Accountiizg for
Derivative instruments and Hedging Activities, whch establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other contracts and for hedging activities. All
derivatives, whether designated in hedging relationshps or not, are required to be recorded on the balance sheet at
fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and the
hedged item are recognized in earnings. If the derivative is designated as a cash flow hedge, changes in the fair
value of the derivative are recorded in other comprehensive income (OCI) and are recognized in the income
statement when the hedged item affects earnings.
The adoption of SFAS 133 resulted in a cumulative pre-tax reduction to income of $560 million ($375 million aftertax) and a cumulative pre-tax reduction to OCI of $1 12 million ($75 million after-tax). The reduction to income was
mostly attributable to a loss of approximately $300 million reclassified from OCI for the time‘value o f options and a
loss of approximately $250 million reclassified ftom OCI for derivatives not designated as hedging instruments. The
reduction to OCI was mostly attributable to losses of approximately $670 million on cash flow hedges offset by the
reclassifications out of OCI of the approximately $300 million loss for the time value of options and the
approximately $250 million loss for derivative instruments not designated as hedging instruments.
FINANCIAL CONDITION
The Company’s cash and short-term investment portfolio totaled $3 1.60 billion at June 30, 2001. The portfolio
consists primarily of fixed-income securities, diversified among industries and individual issuers. Microsoft’s
investments are generally liquid and investment grade. The portfolio is invested predominantly in U.S.dollar
denominated securities, but also includes foreign currency positions in order to diversify financial risk. The portfolio
is primarily invested in short-term securities to minimize interest rate risk and facilitate rapid deployment for
immediate cash needs.
Cash flow from operations was $13.42 billion in fiscal 2001, an increase of $2.00 billion from the prior year. The
increase was primarily attributable to the growth in revenue and other changes in working capital, partially offset by
the decrease in the stock option income tax benefit, reflecting decreased stock option exercises by employees. Cash
used for financing was $5.59 billion in fiscal 2001, an increase of T3.39 billion from the prior year. The increase
primarily reflects the repurchase of put warrants in fiscal 2001, compared to the sale of put warrants in the prior
fiscal year, as well as an increase in common stock repurchased. All outstanding put warrants were either retired or
exercised during fiscal 2001. During fiscal 2001, the Company repurchased 89.0 million shares. Cash used for
investing was $8.71 billion in fiscal 2001, a decrease of $658 million from the prior year.
In fiscal 2000, cash flow from operations was $1 1.43 billion, a decrease of $720 million from the prior year,
reflecting working capital changes partially offset by the increase in the stock option income tax benefit. Cash used
for financing was $2.19 billion in fiscal 2000, an increase of $1.33 billion from the prior year, reflecting an increase
in common stock repurchased versus the prior year. During fiscal 2000, the Company repurchased 55.2 million
shares. Cash used for investing was $9.39 billion in fiscal 2000, a decrease of $808 million from the prior year. In
fiscal 1999, cash flow from operations was $12.15 billion, an increase of $3.78 billion from the prior year, reflecting
the growth in revenue and the increase in the stock option income tax benefit. Cash used for financing was $862
million in fiscal 1999, a decrease of $137 million from the prior year. During fiscal 1999, the Company repurchased
44.9 million shares. Cash used for investing was $10.20 billion in fiscal 1909, an increase of $3.00 billion from the
prior year, reflecting the growth in the investment portfolio.
Microsoft has no material long-term debt. Stockholders’ equity at June 30, 2001 was $47.29 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
$181 million on June 30, 2001. Cash will also be used for strategic opportunities.
In addition, cash will be used to repurchase common stock to provide shares for employee stock option and purchase
plans. Since fiscal 1990, Microsoft has repurchased 854 million common shares while 2.12 billion shares were
issued under the Company’s employee stock option and burchase plans. The market value of all outstanding stock
options was $66 billion as of June 30,2001. During December 1996, Microsoft issued 12.5 inillion rhares of 2.75%
convertible exchangeable preferred stock. The Company’s convertible preferred stock matured on December 15,
1999. Each preferred share was converted into 1.1273 common shares.
Management believes existing cash and short-term investments together with funds generated from operations should
be sufficient to meet operating requirements. The Company’s cash and short-term investments are available for
strategic investments, mergers and acquisitions, and other potential large-scale needs and to fund the share
repurchase program. Microsoft has not paid cash dividends on its common stock.
RECENTLY
ISSUEDACCOUNTING
STANDARDS
In June 2001, the Financial Accounting Standards Board issued SFAS 141, Business Combinations, and SFAS 142.
Goodwill and Other intangible Assets.- SFAS 141 requires business combinations initiated after June 30, 2001 to be
accounted for using the purchase method of accounting. It also specifies the types of acquired intangible assets that
are required to be recognized and reported separately from goodwill. SFAS 142 will require that goodwill and
certain intangibles no longer be amortized, but instead tested for impairment at least annually. SFAS 142 is required
to be applied starting with fiscal years beginning after December 15, 2001, with early application permitted in certain
circumstances. The Company plans to early adopt SFAS 142 in fiscal 2002 and does not expect any impairment of
goodwill upon adoption. Goodwill amortization was approximately $300 million in fiscal 200 1 and approximately
$225 million in fiscal 2000.
lSSUES 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
market share may depend upon the Company’s ability to satisfy customer requirements, enhance existing products,
develop and introduce new products and achieve market acceptance of such products. T h s process grows more
challenging as the pace of change continues to accelerate. Open source software, new. computing devices, new
microprocessor architectures, the Internet, and Web-based computing models are among the competitive challenges
the Company must meet. If Microsoft does not successfully identify new product opportunities and develop and
bring new products to market in a timely and cost-efficient manner, the Company’s business growth will suffer and
demand for its products will decrease.
Future fniriatives
The Company plans to continue to make significant investments in software research and development including
Microsoft .NET, “HailStorm”, %ox, wireless technologies, digital devices, television, and small business. It is
anticipated that these investments in research and development will increase over historical spending levels.
Significant revenue from these product opportunities may not be achieved for a number of years, if at all.
PC Growth Rates
The nature o f the PC marketplace is changing in ways that may reduce Microsoft’s software sales add revenue
growth. Overall market demand for PCs can significantly impact Microsoft’s revenue growth. Recently,
manufacturers have sought to reach more consumers by developing and producing lower cost PCs - PCs that come
without pre-installed software or contain software with reduced functionality. In addition to the influx of low-cost
PCs, a market for handheld computing and communication devices has developed. While these devices are not as
powerful or versatile as PCs, they threaten to erode sales growth in the market for PCs with pre-installed software.
This may affect Microsoft’s revenue growth because manufacturers may choose not to install Microsoft software in
these low-cost PCs or consumers may purchase alternative intelligent devices that do not use Microsoft software.
These lower-priced devices require Microsoft to provide lower-priced software with a subset of the original
functionality. As a result, the Company may generate less revenue from the sale of software produced for these
devices than from the sale of software for PCs.
Product Development
The software industry is inherently complex. New products and product enhancements can require long
development and testing periods. Significant delays in new product releases or significant problems in creating new
products could damage Microsoft’s business. The Company anticipates that Windows XP and Xbox will be released
in fiscal 2002. Delays in either product may adversely affect revenue and net income.
Prices
The competitive factors described above may require Microsoft ‘to lower product prices to meet competition,
reducing the Company’s revenue and net income.
Earnings Process
An increasingly higher percentage of the Company’s revenue is suaject to ratable recognition, which impacts the
timing of revenue and earnings recognition. Ratable revenue recognition may be required for additional products,
depending on specific license terms and conditions. Also, maintenance and new subscription programs are
increasing in popularity.
Employee Compensation
Microsoft employees currently receive salaries, incentive bonuses, other benefits, and stock options. New
government regulations, poor stock price performance, or other factors could diminish the value of the option
program to current and prospective employees and require the Company to pay higher salaries and other cash
compensation.
International Operations
Microsoft develops and sells products throughout the world. The prices of the Company’s products in countries
outside of the United States are generally higher than the Company’s prices in the United States because of the cost
incurred in localizing software for non-U.S.markets. The costs of producing and selling the Company’s products in
these countries are also higher. Pressure to globalize Microsoft’s priclng structure might require that the Company
reduce the sales price of its software in other countries, even though the costs of the software continue to be higher
than in the United States. Unfavorable changes in software “piracy” trade protection laws, policies and measures,
and other regulatory requirements affecting trade and investment; unexpected changes in regulatory requirements for
software; social, political, labor, or economic conditions in a specific country or region; difliculties in staffing and
managing foreign operations; and potential adverse foreign tax consequences; among other factors, could also have
an impact on the Company’s business and results of operations outside of the United States.
Intellectual Property Rights
Microsoft diligently defends its intellectual property rights, but unlicensed copying of software represents a loss of
revenue to the Company. While this adversely affects U.S. ,revenue, revenue loss is even more significant outside of
the United States, particularly in countries where laws are less protective of intellectual property rights. Throughout
the world, Microsoft actively educates consumers on the benefits of licensing genuine products and educates
lawmakers on the advantages of a business climate where intellectual property rights are protected. However,
continued efforts may not affect revenue positively.
Litigation
Litigation regarding intellectual property rights, patents, and copyrights occurs in the software industry. In addition,
there are government regulation and investigation risks along with other general corporate legal risks. The Company
is a defendant in a lawsuit filed by the Antitrust Division of the U.S.Department of Justice and a group of eighteen
state Attorneys General alleging violations of the Sherman Act and various state antitrust laws. After the trial, the
District Court entered Findings of Fact and Conclusions o f Law stating that Microsoft had violated Sections 1 and 2
of the Sherman Act and various state antitrust laws. A Judgment was entered on June 7,2000 ordering, among other
things, the breakup of Microsoft into two companies. The Judgment was stayed pending an appeal. On June 28,
2001, the U.S. Court of Appeals for the District of Columbia Circuit a f f i l e d in part, reversed in part, and vacated
the Judgment in its entirety and remanded the case to the District Court for a new trial on one Section 1 claim and for
entry of a new judgment consistent with its ruling. In its ruling, the Court of Appeals substantially narrowed the
bases of liability found by the District Court, but affirmed some of the District Court’s conclusions that Microsoft
had violated Section 2. On September 6, 2001, the plaintiffs announced that on remand they will not ask the Court
to break Microsoft up, that they will seek imposition of conduct remedies, and that they will not retry the one Section
1 claim returned to the District Court by the Court of Appeals. On August 7 , 2001, Microsoft petitioned the
Supreme Court for a writ of certiorari to review the appellate court’s ruling concerning its disqualification of the
District Court judge. Microsoft may petition the Supreme Court to review other aspects of the appellate court’s
decision after final judgment is entered. In response to the Court of Appeal’s decision, Microsoft has modified the
terms of its agreements with computer manufacturers to permit them to remove Internet Explorer icons from
Windows when the manufacturer wants to promote an alternative browser, and modifying other provisions of the
agreements. While the Company cannot predict with certainty the final outcome of this matter, its resolution may
result in additional changes to the Company’s business practices and could affect how the Company develops and
markets new products and services. In addition, while the Court of Appeals ruling vacated the remedies portion of
the Judgment in its entirety, it is possible the District Court could enter a new judgment providing for certain
remedies that would have a material adverse effect on the Company if the Company cannot obtain relief from such
provisions on appeal.
A large number of antitrust class action lawsuits have been initiated against Microsoft. These cases allege that
Microsoft has competed unfairly and unlawfully monopdized alleged markets for operating system and certain
software applications and seek to recover alleged overcharges that the complaints contend Microsoft charged for
these products. Although Microsoft believes the claims are without merit and is vigorously defending the cases, the
Company cannot predict with certainty the outcome of these lawsuits.
Future Growth Rate
The revenue growth rate in 2002 may not approach the level attained in prior years. Because of the fixed nature of a
significant portion of operating expenses, coupled with the possibility of slower revenue growth, operating margins
in 2002 may decrease from those in 2001. In addition, with the anticipated introduction of Xbox in fiscal 2001. cost
of revenue as a percentage of revenue may increase versus prior years.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to foreign currency, interest rate, and securities price risks. A portion of these risks is
hedged, but fluctuations could impact the Company’s results of operations and financial position. The Company
hedges the exposure of accounts receivable and a portion of anticipated revenue to foreign currency fluctuations,
primarily with option contracts. The Company monitors its foreign currency exposures daily to maximize the overall
effectiveness of its foreign currency hedge positions. Principal currencies hedged include the Euro, Japanese yen,
British pound, and Canadian dollar. Fixed income securities are subject to interest rate risk. Tlle portfolio is
diversified and consists primarily of investment grade securities to minimize credit risk. The Company routinely
uses options to hedge its exposure to interest rate risk in the event of a catsstrophc increase in interest rates. Many
securities held in the Company’s equity and other investments portfolio are subject to price risk. The Company uses
options to hedge its price risk on certain highly volatile equity securities.
The Company uses a value-at-risk (VAR) model to estimate and quantify its market risks. The VAR model is not
intended to represent actual losses in fair value, but is used as a risk estimation and management tool. Assumptions
applied to the VAR model at June 30, 2000 and June 30, 2001 include the following: normal market conditions;
Monte Carlo modeling with 10,000 simulated market price paths; a 97.5% confidence interval; and a 20-day
estimated loss in fair value for each market risk category. Accordingly, 97.5% of the time the estimated 20-day loss
in fair value would be nominal for foreign currency denwninated investments and accounts receivable at June 30,
2000 and June 30, 2001, and would not exceed $21 1 million and $363 million at June 30, 2000 and June 30, 2001
for interest-sensitive investments or $1.02 billion and $520 million at June 30, 2000 and June 30, 2001 for equity
securities.
Item 8. Financial Statements and Supplementan, Data
INCOME
STATEMENTS
(In millions, except earnings per share)
Year Ended June 30
1999
2000
2001
$19,747
$22,956
$25,296
Cost of revenue
2,814
3,002
3,455
Research and development
2,970
3,772
- 4,379
Sales and marketing
3,238
4,126
4,885
715
1,050
857
9,737
11,950
13,576
10,010
11,006
11,720
(70)
(57)
(159)
Investment income/(loss)
Income before income taxes
1,951
11,891
3,326
14,275
(36)
11,525
Provision for income taxes
4,106
4,854
3,804
Cumulative effect of accounting change (net of income
taxes o f $185)
7,785
9,42 1
7,721
-
-
(375)
$
7,785
$ 9,421
$ 7,346
S;
1.54
1.81
$ 1.45
-
(0.07)
Revenue
Operating expenses:
General and administrative
Total operating expenses
Operating income
Losses on equity investees and other
Net income
Basic earnings per share:
Before accounting change
Cumulative effect of accounting change
$
$
1.54
$
1.81
$
1.38
$
1.42
$
1.70
$ 1.38
-
-
(0.06)
1.42
S 1.70
$ 1.32
5,028
5,189
.5,341
5,482
5,536
5.574
Diluted earnings per share:
Before accounting change
$
Weighted average shares outstanding:
Basic
Diluted
See accompanying notes.
I
BALANCE
SHEETS
(In millions)
June 30
Assets
2000
2001
$ 4,846
$ 3,922
Current assets:
Cash and equivalents
Short-term investments
18,952
27,678
23,798
31.600
Accounts receivable
3.250
3,671
Deferred income taxes
1,708
1,949
1,552
2,417
30.308
39,637
1,903
17,726
2,309
14,141
2,213
3,170
$52,150
$59,257
$ 1,083
$ 1,188
Accrued compensation
557
742
Income taxes
585
1,468
Unearned revenue
4,816
5,614
Other
2,714
2,120
9.755
11,132
1.027
836
23,195
28,390
comprehensive income of $1,527 and $587
18,173
18,899
Total stockholders’ eauity
4 1.368
47.289
$52,150
$59.251
Total cash and short-term investments
Other
~
Total current assets
Property and equipment, net
Equity and other investments
Other assets
Total assets
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable
Total current liabilities
Commitments and contingencies
Stockholders’ equity:
Common stock and paid-in capital-shares
authorized 12,000;
shares issued and outstanding 5,283 and 5,383
Retained earnings, including accumulated other
Total liabilities and stockholders’ equity
CASHFLOWS
STATEMENTS
(In millions)
Year Ended June 30
Operations
Net income
1999
$
Cumulative effect of accounting change, net of tax
Depreciation, amortization, and other noncash items
'
7,785
2000
$
9,421
-
-
926
1,250
Net recognized (gains)/losses on investments
(803)
Stock option income tax benefits
2001
$
7,346
375
'
1,536
(1,732)
2,221
3,107
5,535
2,066
(650)
5,877
(425)
6,177
(420)
6,970
(4,526)
(5,600)
(6,369)
Accounts receivable
(687)
Other current assets
(235)
(944)
(775)
(418j
(482)
Other long-term assets
(117)
1,469
(864)
(617)
(330)
927
12,146
11,426
13,422
1,350
2,245
1,620
(2,950)
766
(4,896)
472
(6,074)
(1,367)
(28)
(13)
-
-
-
235
(862)
(2,192)
(5,586)
Purchases of investments
(583)
(34,686)
(879)
(42.290)
(1,103)
(66,346)
Maturities of investments
3,063
4,025
5,867
2 1,006
29.752
52,848
(10 200)
(9,392)
(8,734)
1,084
(158)
(898)
52
29
(26)
3,839
4.975
4,846
4.846
fi 3,922
Unearned revenue
Recognition of unearned revenue
Other current liabilities
Net cash from operations
Financing
Common stock issued
Common stock repurchased
Sales/(repurchases) of put warrants
Preferred stock dividends
Other, net
Net cash used for financing
Investing
Additions to property and equipment
Sales of investments
Net cash used for investing
Net change in cash and equivalents
Effect of exchange rates on cash and equivalents
Cash and equivalents, beginning of year
Cash and equivalents, end of year
$!
4,975
$
I
STOCKHOLDERS'
EQUITY
STATEMENTS
(in millions)
Year Ended June 30
1999
2000
2001
Convertible preferred stock
Balance, beginning of year
Conversion of preferred to common stock
$
980
-
$
980
3!
-
(980)
980
Balance, end o f year
Common stock and paid-in capital
Balance, beginning o f year
8,025
13,844
23,195
Common stock issued
2,338
3,554
5,154
(64)
766
(210)
472
(394)
(1,367)
Stock option income tax benefits
3,107
5,535
2,066
Other, net
(328)
-
(264)
13,844
23,195
28,390
Balance, beginning o f year
7,622
13,614
18,173
Net income
7,785
9,42 1
7,346
Sales/(repurchases) o f put warrants
Retained earnings
Other comprehensive income:
Cumulative effect o f accounting change
-
-
(75)
Net gains on derivative instruments
-
-
634
1,052
(283)
(1,460)
69
23
8,906
9,161
6,406
(28)
-
-
(13)
97
(2,886)
(4,686)
(5,680)
13,614
18.173
18,899
$28,438
$41,368
$47.289
Net unrealized investment gains/(losses)
Translation adjustments and other
Comprehensive income
Immaterial pooling of interests
Total stockholders' equity
~
I
~~
'
(39)
-
NOTESTO FINANCIAL
STATEMENTS
Accounting Policies
Accounting Principles
The financial statements and accompanying notes are prepared in accordance with generally accepted accounting
principles in the United States.
Principles of Consolidation
The financial statements include the accounts of Microsoft and its subsidiaries. Intercompany transactions and
balances have been eliminated. Equity investments in whch Microsoft owns at least 20% of the voting securities are
accounted for using the equity method, except for investments in which the Company is not able to exercise
significant influence over the investee, in which case, the cost method of accounting is used. Issuances of shares by a
subsidiary are accounted for as capital transactions.
Estimates and Assumptions
Preparing financial statements requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenue, and expenses. Examples include provisions for returns, concessions and bad
debts; and the length of product life cycles and buildings’ lives. Actual results may differ fiom these estimates.
Foreign Currencies
Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date.
Translation adjustments resulting from this process are charged or credited to other comprehensive income.
Revenue and expenses are translated at average rates of exchange prevailing during the year.
Revenue Recognition
Revenue from products licensed to original equipment manufacturers is recorded when OEMs ship licensed products
while revenue from certain license programs is recorded when the software has been delivered and the customer is
invoiced. Revenue from packaged product sales to and through distributors and resellers is recorded when related
products are shipped. Maintenance and subscription revenue is recognized ratably over the contract period.
Revenue attributable to undelivered elements, including technical support and Internet browser technologies, is
based on the average sales price of those elements and is recognized ratably on a straight-line basis over the
product’s life cycle. When the revenue recognition criteria required for distributor and reseller arrangements are not
met, revenue is recognized as payments are received. Costs related to insignificant obligations, which include
telephone support for certain products, are accrued. Provisions are recorded for returns, concessions, and bad debts.
Cost of Revenue
Cost of revenue includes direct costs to produce and distribute product and direct costs to provide online services,
consulting, product support, and training and certification of system integrators.
Research and Development
Research and development costs are expensed as incurred. Statemeit of Financial Accounting Standards (SFAS) 86,
Accounting for the Costs of Computer Sofhvare to Be Sold, Leased. or Othenvise Marketed, does not materially
affect the Company.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense was $804 million in 1999, $1.23 billion in 2000,
and $1.36 billion in 2001.
Income Taxes
Income tax expense includes U.S. and international income taxes, plus the provision for U.S.taxes on undistributed
earnings of international subsidiaries. Certain items of income and expense are not reported in tax returns and
financial statements in the same year. The tax effect of this difference is reported as deferred income taxes.
Financial Instruments
The Company considers all liquid interest-earning investments with a maturity of three months or less at the date of
purchase to be cash equivalents. Short-term investments generally mature between three months and six years from
the purchase date. All cash and short-term investments are classified as available for sale and are recorded at market
value using the specific identification method; unrealized gains and losses are reflected in other comprehensive
income (OCI).
Equity and other investments include debt and equity instruments. Debt securities and publicly traded equity
securities are classified as available for sale and are recorded at market using the specific identification method.
Unrealized gains and losses (excluding other-than-temporary losses) are reflected in other comprehensive income.
All other investments, excluding those accounted for usmg the equity method, are recorded at cost.
Microsoft lends certain fixed income and equity securities to enhance investment income. Collateral andior security
interest is determined based upon the underlying security and the creditworthmess of the borrower. The fair value of
collateral that Microsoft is permitted to sell or repledge was $499 million at June 30, 2001. There was no collateral
that Microsoft was permitted to sell or repledge at June 30,2000.
Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary. The
Company employs a systematic methodology that considers available evidence in evaluating potential impairment of
its investments. In the event that the cost of an investment exceeds its fair value, the Company evaluates, among
other factors, the duration and extent to which the fair value is less than cost; the financial health of and business
outlook for the investee, including industry and sector performance, changes in technology, and operational and
financing cash flow factors; and the Company’s intent and ability to hold the investment. Once a decline in fair
value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis in the
investment is established. In 2001, the Company recognized $4.80 billion in impairments of certain investments,
primarily in the cable and telecommunication industries.
The Company uses derivative instruments to manage exposures to foreign currency, security price, and interest rate
risks. The Company’s objectives for holding derivatives are to minimize these risks using the most effective
methods to eliminate or reduce the impact of these exposures.
Foreign Currency Risk
Certain forecasted transactions and assets are exposed to foreign currency risk. The Company monitors its foreign
currency exposures daily to maximize the overall effectiveness of its foreign currency hedge positions. ’ Principal
currencies hedged include the Euro, Japanese yen, British pound, and Canadian dollar. Options used to hedge a
portion of forecasted international revenue for up to three years in the future are designated as cash flow hedging
instruments. Options and forwards not designated as hedging instruments under SFAS 133 are also used to hedge
the impact of the variability in exchange rates on accounts receivable and collections denominated in certain foreign
currencies.
Securities Price Risk
Strategic equity investments are subject to market price risk. From time to time, the Company uses.and designates
options to hedge fair values and cash flows on certain equity securities. The security, or forecasted sale thereof,
selected for hedging is determined by market conditions, up-front costs, and other relevant factors. Once
established, the hedges are not dynamically managed or traded, and are generally not removed until maturity.
’
Interest Rate Risk
Fixed-income securities are subject to interest rate risk. The fixed-income portfolio is diversified and consists
primarily of investment grade securities to minimize credit risk. The. Company routinely uses options, not designated
as hedging instruments, to hedge its exposure to interest rate risk in the event of a catastrophic increase in interest
rates.
Other Derivatives
In addition, the Company may invest in warrants to purchase securities of other companies as a strategic investment.
Warrants that can be net share settled are deemed derivative financial insmiments and are not designated as hedging
instruments.
For options designated either as fair value or cash flow hedges, changes in the time value are excluded from the
assessment of hedge effectiveness.
I
Property and Equipment
Property and equipment is stated at cost and depreciated using the straight-line method over the shorter of the
estimated life of the asset or the lease term, ranging from one to 15 years. Computer software developed or obtained
for internal use is depreciated using the straight-line method over the shorter of the estimated life of the software or
three years.
Intangible Assets
Goodwill and other intangible assets are amortized using the straight-line method over their estimated period of
benefit, ranging from three to seven years. The Company periodically evaluates the recoverability of intangible
assets and takes into account events or circumstances that warrant revised estimates of usefbl lives or that indicate
that an impairment exists.
In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards
(SFAS) 141, Business Combinations, and SFAS 142, Goodwill and Other Intangible Assets. SFAS 141 requires
business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting. It
also specifies the types of acquired intangible assets that are required to be recognized and reported separately from
goodwill. SFAS 142 will require that goodwill and certain intangibles no longer be amortized, but instead tested for
impairment at least annually. SFAS 142 is required to be applied starting with fiscal years beginning after December
15, 2001, with early application permitted in certain circumstances. The Company plans to early adopt SFAS 142 in
fiscal 2002 and does not expect any impairment of goodwill upon adoption. Goodwill amortization was
approximately $300 million in fiscal 2001 and approximately $225 million in fiscal 2000.
Reclassifications
Certain reclassifications have been made for consistent presentation.
Accounting Change
Effective July 1, 2000, the Company adopted SFAS 133, Accounting for Derivative Instluments and Hedging
Activities, which establishes accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities. All derivatives, whether designated in
hedging relationships or not, are required to be recorded on the balance sheet at fair value. If the derivative is
designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to
the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions
of changes in the fair value of the derivative are recorded in other comprehensive income and are recognized in the
income statement when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash
flow hedges are recognized in earnings.
The adoption of SFAS 133 on July 1, 2000, resulted in a cumulative pre-tax reduction to income of $560 million
($375 million after-tax) and a cumulative pre-tax reduction to OCI of $1 12 million ($75 million after-tax). The
reduction to income was mostly attributable to a loss of approximately $300 million reclassified from OCI for the
time value of options and a loss of approximately $250 million reclassified from OCI for derivatives not designated
as hedging instruments. The reduction to OCI was mostly attributable to losses of approximately $670 million on
cash flow hedges offset by reclassifications out of OCI of the approximately $300 million loss for the time value of
options and the approximately $250 million loss for derivative instruments not designated as hedging instruments.
The net derivative losses included in OCI as of July 1, 2000 were reclassified into earnings during the twelve months
ended June 30,2001.
The change in accounting from the adoption of SFAS 133 did not materially affect net income in 2001
Unearned Revenue
A portion of Microsoft’s revenue is earned ratably over the product life cycle or, in the case of subscriptions, over
the period of the license agreement.
End users receive certain elements of the Company’s products over a period of time. These elements include items
such as browser technologies and technical support. Consequently, Microsoft’s earned revenue reflects the
recognition of the fair value of these elements over the product’s life cycle. Upon adoption of American Institute of
Certified Public Accountants (AICPA) Statement of Position (SOP) 98-9, Modification o f SUP 97-2. With Respect to’
Certain Transactions, during the fourth quarter of fiscal 1999, the Company was required to change the methodology
of attributing the fair value to undelivered elements. The percentages of undelivered elements in relation to the total
arrangement decreased, reducing the amount of Windows and Office revenue treated as unearned, and increasing the
amount of revenue recognized upon shipment. The percentage of revenue recognized ratably decreased from a range
o f 20% to 35% to a range of approximately 15% to 25% of Windows desktop operating systems. For desktop
applications, the percentage decreased from approximately 20% to a range of approximately 10% to 20%. The
ranges depend on the terms and conditions of the license and prices of the elements. In addition, in the fourth quarter
of fiscal 1999, the Company extended the life cycle of Windows from t w to
~ three years based upon management’s
review o f product shipment cycles. Product life cycles are currently estimated at 18 months for desktop applications.
The Company also sells subscriptions to certain products via maintenance and certain organizational license
agreements.
At June 30, 2000 and 2001, Desktop Applications unearned revenue was $1.84 billion and $2.19 billion. Desktop
Platforms unearned revenue was $2.34 billion and $2.59 billion. Enterprise Software and Services unearned revenue
was $433 million and $413 million. Unearned revenue associated with Consumer Software, Services, and Devices,
and Other was $200 million and $427 million at June 30,2000 and 2001.
Cash and Short-Term Investments
In Millions / June 30
Cash and equivalents:
Cash
Commercial paper
Certificates of deposit
U.S. government and agency securities
Corporate notes and bonds
Municipal securities
Cash and equivalents
Short-term investments:
Commercial paper
U.S. government and agency securities
Corporate notes and bonds
Municipal securities
Certificates of deposit
Short-term investments
Cash and short-term investments
2000
2001
$ 849
4,846
$1,145
894
286
400
1,130
67
3,922
612
7,104
9,473
1,113
650
18,952
$23,798
638
7,322
17,321
1,703
694
27,678
$31,600
1,986
1,017
729
265
-
As of June 30, 2000 and 2001, cost approximated market for all ciassifications o f cash and short-terni investments.
Realized gains and (losses) from cash and short-term investments were $150 million and $(131) million in 1999, $80
million and $(226) million in 2000, and $541 million and $(369) million in 2001.
Property and Equipment
Land
Buildings
Computer equipment and software
Other
Property and equipment-at cost
Accumulated depreciation
Property and equipment-net
2000
176
1,387
1,909
842
4,314
(2,411)
$ 1,903
$
2001
$ 185
1,584
2,431
1,075
5,275
(2.966)
$2.309
During 1999, 2000, and 2001, depreciation expense, of which the majority related to computer equipment, was $483
rmllion, $668 rmllion, and $764 rmllion.
Equity and Other Investments
In Millions / June 30,2000
Debt securities recorded at market, maturing:
Within one year
Between 2 and 10 years
Beyond 15 years
Debt securities recorded at market
Common stock and warrants
Preferred stock
Other investments
In Millions /June 30,2001
Debt securities recorded at market, maturing:
Within one year
Beyond 15 years
Debt securities recorded at market
Common stock and warrants
Preferred stock
Other investments
Cost
Basis
Unrealized
Gains
498
388
775
4,745
6,406
5,815
2,319
205
$14,745
$ 2 7
11
14
Cost
Basis
$
500
643
513
4,754
6,410
5,555
881
379
$13,225
$
Unrealized
Losses
Recorded
Basis
-
-
$5,707
$(2.726)
525
396
696
3.8 12
5.429
9,773
2.319
205
$17.726
Unrealized
Cains
Unrealized
Losses
Recorded
Basis
-
52
5,655
$
-
-
$
-
12
12
2,030
-
$2,042
-
(31
(93)
(933)
( 1,029)
( 1,697)
$
-
(3)
(9)
(829)
(841)
(285)
-
-
$(1.126)
$
500
652
504
3.925
5.581
7,300
881
379
$14,141
$
Debt securities include corporate and govemment notes and bonds and derivative securities. Debt securities
maturing beyond 15 years are composed entirely of AT&T 5% convertible preferred debt with a contractual maturity
of 30 years. The debt is convertible into AT&T common stock on or after December 1, 2000. or may be redeemed
by AT&T upon satisfaction of certain conditions on or after June 1, 2002. Equity securities that are restricted for
more than one year or not publicly traded are recorded at cost. At June 30, 2000 and 2001, the estimated fair value
of these investments in excess of their recorded basis was $2.70 billion and $161 million, based on publicly available
market information or other estimates determined by management. Realized gains and (losses) from equity and other
investments (excluding impairments discussed previously) were $786 million and $(2) mllion in 1999, $1.94 billion
and $( 10) million in 2000, and $3.03 billion and $(23) million in 2001.
Derivatives
For the twelve months ended June 30, 2001, investment income ixluded a net unrealized loss of $592 million,
comprised of a $214 million gain for changes in the time vglue of options for fair value hedges, $21 1 million loss for
changes in the time value of options for cash flow hedges, and $595 nillion loss for changes in the fair value of
derivative instruments not designated as hedging instruments.
Derivative gains and losses included in OCI are reclassified into earnings at the time forecasted revenue or the sale
of an equity investment is recognized. During the twelve months ended June 30, 2001, $214 million of derivative
gains were reclassified to revenue and $4 16 million of derivative losses were reclassified to investment
income/(loss). The derivative losses reclassified to investment incomei(1oss) were offset by gains on the item being
hedged. The Company estimates that $144 million of net derivative gains included in other comprehensive income
will be reclassified into earnings within the next twelve months.
For instruments designated as hedges, hedge ineffectiveness, determined in accordance with SFAS 133, had no
impact on earnings for the twelve months ended June 30, 2001. No fair value hedges or cash flow hedges were
derecognized or discontinued for the twelve months ended June 30,2001.
Investment Income/(Loss)
The components of investment income/(loss) are as follows:
In Millions / Year Ended June 30
Dividends
Interest
Net recognized gains/(losses) on investments
Investment income/( loss)
1999
2000
118
1,030
$ 363
803
1,732
$1,951
$3,326
$
1,23 1
2001
377
1,808
(2.22 1)
$ (36)
$
Income Taxes
The provision for income taxes consisted of:
Current taxes:
U.S. and state
International
Current taxes
Deferred taxes
1999
2000
2001
$4,027
28 1
4,308
(202)
$4.106
$4,744
535
5,279
(425)
$4,854
$3,243
51 4
3,757
47
$3.804
U.S. and international components of income before income taxes were:
U.S.
International
1999
$10,649
1,242
$11,891
2000
$11,860
2,415
$14,275
2001
$9,189
2,336
$11,525
In 1999, the effective tax rate was 35.0%, excluding the impact of the gain on the sale of Softimage, Inc. In 2000,
the effective tax rate was 34.0%, and included the effect of a 2.5% reduction from the U.S. statutory rate for tax
credits and a 1.5% increase for other items. In 2001, the effective tax rate was 33.0%, and included the effect of a
3.1% reduction from the U.S. statutory rate for tax credits and a 1.1% increase for other Items. The components of
the differences between the U.S. statutory tax rate and the Company’s effective tax rate in 1999 were not significant.
Deferred income taxes were:
Deferred income tax assets:
Revenue items
Expense items
Deferred income tax assets
Deferred income tax liabilities:
Unrealized gain on investments
International earnings
Other
Deferred income tax liabilities
2000
2001
$ 1,320
$ 1,469
2,122
3,442
(874)
(1,766)
(121)
$(2,761)
1,761
3,230
(395)
(1,667)
8
(55)
$(2,117)
During fiscal 2001, the U.S. Tax Court issued an adverse ruling which is being appealed to the gthCircuit Court of
Appeals for taxes assessed in 1990 and 1991. Income taxes, except for 1990 and 1991 assessments, have been
settled with the Internal Revenue Service (IRS) for all years through 1994. The IRS is exanlining the Company’s
1995 and 1996 U.S. income tax returns. Management believes any adjushnents which may be required will not be
material to the financial statements. Income taxes paid were $874 million in 1999, $800 million in 2000, and $1.3
billion in 200 1.
Convertible Preferred Stock
During 1996, Microsoft issued 12.5 million shares of 2.75% convertible exchangeable principal-protected preferred
stock. The Company’s convertible preferred stock matured on December 15, 1999. Each preferred share was
converted into 1.1273 common shares.
Common Stock
Shares of common stock outstanding were as follows:
Balance, beginning of year
Issued
Repurchased
Balance, end of year
1999
4,940
213
(44)
5,109
2000
5,109
229
(55)
5,283
2001
5,283
189
(89)
5,383
Repurchase Program
The Company repurchases its common shares in the open market to provide shares for issuance to employees under
stock option and stock purchase plans. During 1998, the Company executed two forward settlement structured
repurchase agreements with an independent third party totaling 42 million shares of stock and paid cash for a portion
of the purchase price. In 1999, the Company settled the agreements by returning 28 million shares of stock, based
upon the stock price on the date of settlement. The t i w g and method of settlement were at the discretion of the
Company. The differential between the cash paid and the price of Microsoft common stock on the date of the
agreement was originally reflected in common stock and paid-in capital. In 2001, the Company entered into a
structured stock repurchase transaction giving it the right to acquire 5.1 million of its shares (2.55 million shares in
October 2001 and 2.55 million shares in June 2002) in exchange for an up-front net payment of $264 million.
Put Warrants
To enhance its stock repurchase program, Microsoft sold put warrants to independent third parties. These put
warrants entitled the holders to sell shares of Microsoft common stock to the Company on certain dates at specified
prices. In the third quarter of fiscal 2001, the Company issued 2.8 million shares to settle a portion of the
outstanding put warrants. During fiscal 2001, all the remaining outstanding put warrants were either retired or
exercised.
Other Comprehensive Income
The changes in the components of other comprehensive income were as follows:
Cumulative effect of accounting change, net of tax effect of $(37)
Net gain on derivative instruments:
Unrealized gains, net of tax effect of $246
Reclassification adjustment for losses included in
net income, net of tax effect of $67
Net gain on derivative instruments
Net unrealized investment gains/(losses):
Unrealized holding gains/(losses), net of tax effect of $772 in 1996,
$248 in 2000, and $(351) in 2001
Reclassification adjustment for gains included in
net income, net of tax effect of $(205) in 1999,
$(420) in 2000, and $( 128) in 2001
Net unrealized investment gains/( losses)
Other comprehensive income/( loss)
1999
$
-
2000
$
-
2001
$ (75)
-
-
499
-
-
-
135
634
1,432
53 1
(1.200)
(380)
1,052
69
$1,121
(814)
(283)
23
$(260)
(260)
(1,460)
(39)
S(940)
The components of accumulated other comprehensive were:
Net gains on derivative instruments
Net unrealized investment gains
Accumulated other ComDrehensive income
2000
$
-
1,676
(149)
$1.527
2001
177
598
(1 88)
$ 587
$
Employee Stock and Savings Plans
Employee Stock Purchase Plan
The Company has an employee stock purchase plan for all eligible employees. Under the plan, shares of the
Company’s common stock may be purchased at six-month intervals at 85% of the lower of the fair market value on
the first or the last day of each six-month period. Employees may purchase shares having a value not exceeding 10%
of their gross compensation during an offering period. During 1.999, 2000, and 2001, employees purchased 2.7
million, 2.5 million, and 5.7 million shares at average prices of $52.59, $72.38. and $36.87 per share. At June 30,
2001, 62.7 million shares were reserved for hture issuance.
Savings Plan
The Company has a savings plan, which qualifies under Section 401;k) of the Internal Revenue Code. Participating
employees may contribute up to 15% of their pretax salary, but not more than statutory limits. The Company
contributes fifty cents for each dollar a participant contributes, with a maximum contribution of 3% of a participant’s
earnings. Matching contributions were $49 million, $65 million, and $86 million in 1999, 2000, and 2001.
Stock Option Plans
The Company has stock option plans for directors, officers, and employees, which provide for nonqualified and
incentive stock options. Options granted prior to 1995 generally vest over four and one-half years and expire 10
years from the date of grant. Options granted between 1995 and 2000 generally vest over four and one-half years
and expire seven years from the date of grant, while certain options vest either over four and one-half years or over
seven and one-half years and expire after 10 years. Options granted during 2001vest over four and one-half years
and expire 10 years from the date of grant. At June 30, 2001, options for 331 million shares were vested and 550
million shares were available for fiture grants under the plans.
Stock options outstanding were as follows:
In Millions, Except Per Share Amounts
Shares
Balance, June 30, 1998
Granted
Exercised
Canceled
Balance, June 30, 1999
Granted
Exercised
Canceled
Balance, June 30,2000
Granted
Exercised
Canceled
Balance, June 30,2001
893
78
(175)
(30)
766
304
(198)
(40)
832
224
(123)
(35)
898
Price per Share
Weighted
Range
Average
0.56- 43.63
45.59- 83.28
0.56- 53.63
4.25 - 74.28
0.56- 83.28
65.56- 119.13
0.56- 82.94
4.63 - 116.56
0.56- 119.13
41.50- 80.00
0.59- 85.81
13.83 - 119.13
0.56 - 119.13
$11.94
54.62
6.29
21.06
23.87
79.87
9.54
36.50
4 1.23
60.84
11.13
63.57
49.54
For various price ranges, weighted average characteristics of outstanding stock options at June 30, 2001 were as
follows:
Outstanding Options
Range of
Remaining
Weighted
Exercise Prices Shares Life (Years) Average Price
Exercisable Options
Shares
Weighted Average
Price
$0.56- $5.97
73
1.6
$4.75
67
$4.71
5.98- 13.62
75
1.3
11.01
72
11.02
13.63- 29.80
110
3.0
15.06
92
14.92
29.81- 43.62
84
3.6
32.20
52
32.08
43.63- 60.00
191
7.8
55.82
25
53.17
60.01- 83.28
210
6.1
68.28
11
69.20
83.29-119.13
155
5.5
89.91
12
87.39
The Company follows Accounting Principles Board Opinion 25, Accounting for Stock issued to Emplovees. to
account for stock option and employee stock purchase plans. An alternative method of accounting for stock options
is SFAS 123, Accounting for Stock-Based Compensation. Under SFAS 123, employee stock options are valued at
grant date using the Black-Scholes valuation model, and this compensation cost is recognized ratably over the
vesting period. Had compensation cost for the Company’s stock option and employee stock purchase plans been
determined as prescribed by SFAS 123, pro forma income statements for 1999, 2000, and 2001 would have been as
follows:
Year Ended June 30
1999
2000
Reported Pro Forma
Revenue
2001
Reported Pro Forma
Reported Pro Forma
$19,747.
$19,747
$22,956
$22,956
$25,296
$25,296
2,814
2,970
3,238
3,013
3,479
3,445
3,002
3,772
4,126
3,455
3,775
4,379
6,106
4,885
5,888
715
84 1
1,050
3.277
4,814
4,468
1,284
857
1,184
9,737
10,778
11,950
13,843
13,576
16,953
10,010
8,969
11,006
9,113
11,720
8,343
(70)
1,951
(70)
1,95 1
(57)
3,326
(57)
3,326
(159)
(36)
(1 59)
(36)
11,891
4,106
10,850
3,741
14,275
4,854
12,382
4.2 10
11,525
8,148
3,804
2,689
7,785
7,109
9,42 1
8,172
7,72 1
5,459
(375)
(375)
Si 7.346
%! 5.084
Operating expenses:
Cost of revenue
Research and development
Sales and marketing
General and admmistrative
Total operating expenses
Operating income
Losses on equity investees and other
Investment income/(loss)
Net income
-
+
$7.785
$
-
7.109
S 9.421
$
8.172
Basic earnings per share
$
1.54
$ 1.41
$ 1.81
$
1.57
$
1.38
$ 0.95
$
1.42
S 1.30
$ 1.70
$
1.48
$
1.32
$ 0.91
The weighted average Black-Scholes value o f options granted under the stock option plans during 1999, 2000, and
2001 was $20.90, $36.67, and $29.31. Value was estimated using weighted average expected life of 5.0 years in
1999, 6.2 years in 2000, and 6.4 years in 2001, no dividends, volatility of .32 in 1999, .33 in 2000. and .39 in 2001,
and risk-free interest rates of 4.9%, 6.2%, and 5.3% in 1999, 2000, and 200 1.
Earnings Per Share
Basic earnings per share is computed on the basis of the weighted average number of common shares outstanding.
Diluted earnings per share is computed on the basis of the weighted average number of common shares outstanding
plus the effect of outstanding preferred shares using the “if-convened” method, assumed net-share settlement of
common stock structured repurchases, outstanding put warrants using the “reverse treasury stock” method, and
outstanding stock options using the “treasury stock” method.
The components of basic and diluted earnings per share were as follows:
Year Ended June 30
Net income available for common shareholders
1999
$7,785
28
$7,757
2000
$9,421
13
$9,408
$7,721
5,028
5,189
5,341
13
-
-
-
Weighted average outstanding shares of common stock
Dilutive effect of:
Common stock under structured repurchases
Put warrants
Preferred stock
Employee stock options
Common stock and common stock equivalents
16
425
5.482
2
7
338
5,536
Earnings per share before accounting change:
Basic
Diluted
$1.54
$1.42
$1.81
$1.70
2001
$7,721
-
21
212
5.574
$1.45
$1.38
Operational Transactions
In November 1998, Microsoft acquired LinkExchange, Inc., a leading provider of online marketing services to Web
site owners and small- and medium-sized businesses. Microsoft paid $265 million in stock.
In November 1999, Expedia, Inc. completed an initial public offering of its common stock. Expedia, which is
majority-owned by Microsoft, is a leading provider of branded online travel services for leisure and small business
travelers. Expedia’s financial results and financial condition are consolidated with the operations of Microsoft.
In January 2000, the Company merged with Visio Corporation in a transaction that was accounted for as a pooling of
interests. Microsoft issued 14 million shares in the exchange for the outstanding stock of Visio. Visio’s assets and
liabilities, which were nominal, are included with those of Microsoft as of the merger. Operating results for Visio
from periods prior to the merger were not material to the combined results of the two companies. Accordingly, the
financial statements for such periods have not been restated.
In July 2000, the Company acquired an interest in Telewest C o r n inications plc for approximately $2.6 billion in
stock. Telewest is a leading broadband cable communications operator in the United Kingdom.
In April 2001, the Company acquired Great Plains Software, Inc. for approximately $1.1 billion in stock. Great
Plains is a leading supplier of mid-market business applications. The acquisition was accounted for by the purchase
method and operating results for Great Plains subsequent to the date of acquisition are included with those of
Microsoft. ‘Thepro forma impact of Great Plains’ operating results prior to the date of acquisition was not material.
Commitments
The Company has operating leases for most US. and international sales and support offices and certain equipment.
Rental expense for operating leases was $135 million, $201 million, and $281 million in 1999, 2000, and 2001.
Future minimum rental commitments under noncancellable leases, in millions of dollars, are: 2002, $218; 2003,
$210; 2004, $185; 2005, $162; 2006, $140; and thereafter, $430. Microsoft has committed $181 million for
constructing new buildings and $46 million for the manufacturing of products. In addition, the Company has.
guaranteed $420 million in debt of its equity investees.
Contingencies
On January 23, 2001, Microsoft and Sun Microsystems, Inc. (“Sun”) entered into a Settlement Agreement. Under
the terms of the public agreement, the parties agreed to a dismissal with prejudice of all pending claims in the suit
brought by Sun against Microsoft on October 7, 1997 in the U.S. District Court for the Northern District of
California. Sun also granted to Microsoft a non-exclusive license to continue distribution of certain Sun technology
for a seyen year period. Microsoft further agreed to pay Sun $20 million.
.
’
’
The Company is a defendant in US.v. Microsof, a lawsuit filed by the Antitrust Division of the U.S.Department of
Justice (DOJ) and a group of eighteen state Attorneys General alleging violations of the Sherman Act and various
state antitrust laws. After the trial, the District Court entered Findings of Fact and Conclusions of Law stating that
Microsoft had violated Sections 1 and 2 of the Sherman Act and various state antitrust laws. A Judgment was
entered on June 7, 2000 ordering, among other things, the breakup of Microsoft into two companies. The Judgment
was stayed pending an appeal. On June 28, 2001, the U S . Court of Appeals for the District of Columbia Circuit
affirmed in part, reversed in part, and vacated the Judgment in its entirety and remanded the case to the District
Court for a new trial on one Section 1claim and for entry of a new judgment consistent with its ruling. In its ruling,
the Court of Appeals substantially narrowed the bases of liability found by the District Court, but affirmed some of
the District Court’s conclusions that Microsoft had violated Section 2. On September 6 , 2001. the plaintiffs
announced that on remand they will not ask the Court to break Microsoft up, that they will seek imposition of
conduct remedies, and that they will not retry the one Section 1claim returned to the District Court by the Court of
Appeals. On August 7, 2001, Microsoft petitioned the Supreme Court for a writ of certiorari to review the appellate
court’s ruling concerning its disqualification of the District Court judge. Microsoft may petition the Supreme Court
to review other aspects of the appellate court’s decision after final judgment is entered.
In other ongoing investigations, the DOJ and several state Attorneys General have requested information from
Microsoft concerning various issues. In addition, the European Commission has instituted proceedings in which it
alleges that Microsoft has failed to disclose information that Microsoft conipetitors claim they need to interoperate
filly with Windows 2000 clients and servers and has engaged in discriminatory licensing of such technology. The
remedies sought, though not fully defined, include mandatory disclosure of Microsoft Windows operating system
technology and imposition of fines. Microsoft denies the European Commission’s allegations and intends to contest
the proceedings vigorously.
A large number of overcharge class action lawsuits have been initiated against Microsoft. These cases allege that
Microsoft has competed unfairly and unlawfklly monopolized alleged markets for operating systems and certain
software applications and seek to recover alleged overcharges that the complaints contend Microsoft charged for
these products. Microsoft believes the claims are without merit and is vigorously defending the cases. To date,
Microsoft has won dismissals of all claims for damages by indirect purchasers under Federal law and in 15 separate
state court proceedings. Claims on behalf of foreign purchasers have also been dismissed. Plaintiffs have appealed
most of these rulings. Whle no trials or other proceedings have been held concerning any liability issues, courts in
several states have ruled that these cases may proceed as class actiom, while one court has denied class certification
status to the claims in that state proceeding.
Two purported class action employment discrimination cases are pending against Microsoft, Donaldson v. Microsoji,
a class case consolidating three separately filed class action complaints filed in October 2000 and February 2001 in
Federal court in Seattle, Washington, and Jackson v. Microsofi, an amendment to an existing case alleging class
claims filed on January 3, 2001 in Federal court in Washington, D.C. Microsoft’s motion to transfer the Jackson
case to Federal court in Seattle was granted on May 3, ‘2001. The D o n n l s o n plaintiffs purport to represent a
nationwide class of current and former African American and female Microsoft employees and seek injunctive relief,
an unspecified amount of compensatory and punitive damages, and attorneys’ fees. The Jackson plaintiffs purport to
represent a nationwide class of current and former African American Microsoft employees and seeks injunctive
relief, $5 billion in compensatory and punitive damages, and attorneys’ fees. Both cases allege that Microsoft’s
compensation, evaluation, and promotion policies are discriminatory with respect to the plaintiffs in violation of
Title VI1 of the 1964 Civil Rights Act and 42 U.S.C. 4 1981. Microsoft denies the allegations and is vigorously
defending both cases.
The Securities and Exchange Commission is conducting a non-public investigation into the Company‘s accounting
reserve practices. Microsoft is also subject to various legal proceedings and claims that arise in the ordinary course
of business.
Management currently believes that resolving these matters will not have a material adverse impact on the
Company’s financial position or its results of operations.
Segment Information
Desktop and
Enterprise
Software and
Services
1999
Revenue
2000
Revenue
Operating income/(loss)
2001
Revenue
Operating incomel(1oss)
Consumer
Software,
Services, and
Devices
Consumer
Commerce
Investments
Other
Reconciling
Amounts
Consolidated
$17,810
$1,148
$62
$593
$134
$19.747
$20,410
13,210
$1,654
( 1:090)
$182
(60)
$691
86
$19
(1.140)
$22,956
11,006
$22,720
14,261
$1,961
(1,446)
$522
(222)
$652
97
$(559)
(750)
$25,296
11,720
Desktop and Enterprise Software and Services Revenue:
Desktop Applications
Desktop Piatforms
Desktop Software
Enterprise Software and Services
Total Desktop and Enterprise Software and Services
1999
2000
$ 7,590
$ 9.013
6,932
14,522
3,288
$17.810
7,383
16.396
4,014
$20.4 10
2001
9,580
8,265
17,845
4,875
$22,720
$
In 2001, Microsoft changed the composition of its segments to reflect the internal reorganization around Microsoft
.NET, the Company’s vision for the next-generation of Internet-based products and services. Except for 1999
operating income/(loss), prior year disclosures have been restated for consistent presentation. It is not practicable to
discern operating income for 1999 for the current segments due to previous internal reorganizations. Microsoft has
four segments: Desktop and Enterprise Software and Services;. Consumer Software, Services, and Devices:
Consumer Commerce Investments; and Other. Desktop and Enterprise Software and Services operating segment
includes Desktop Applications, Desktop Platforms, and Enterprise Software and Services. Desktop Applications
include Microsoft Office; Project; Visio; client access licenses for Windows 2000 Server, Windows NT Server,
Exchange, and Backoffice; Microsoft Great Plains; and bCentra,. Desktop Platforms include Windows 2000
Professional, Windows NT Workstation, Windows Millennium Edition (Windows Me), Windows 98, and other
desktop operating systems. Enterprise Software and Services includes Windows NT Server and Windows 2000
Server operating systems, SQL Server and client access licenses, Exchange Server, developer tools, consulting
services, product support services, and training and certification. Consumer Software, Services, and Devices
operating segment includes MSN Internet access, MSN network services. WebTV Internet access and services,
gaming, learning and productivity software, mobile and wireless devices, and embedded systems. Consumer
Commerce Investments operating segment includes Expedia, Inc., the HomeAdvisor online real estate service, and
the CarPoint online automotive service. Other includes Hardware and Press.
Segment information is presented in accordance with SFAS 131, Disclosures about Segments of an Enterprise and
Related Inforntation. This standard is based on a management approach, which requires segmentation based upon
the Company’s internal organization and disclosure of revenue and operating income based upon internal accounting
methods. The Company’s financial reporting systems present various data for management to run the business,
including internal profit and loss statements (P&Ls) prepared on a basis not consistent with generally accepted
accounting principles. Assets are not allocated to segments for internal.reporting purposes.
Reconciling items for revenue include certain elements of unearned revenue and the treatment of certain channel
inventory amounts and estimates. In addition to the reconciling items for revenue, reconciling items for operating
income/(loss) include general and admuusnative e.xpenses ($1,050 million in 2000 and $857 million in 2001).
certain research expenses ($141 million in 2000 and $154 million in 2001), and other corporate level adjustments.
The internal P&Ls use accelerated methods of depreciation and amortization. Additionally, losses on equity
investees and minority interest are classified in operating income for internal reporting presentations.
Revenue attributable to U.S. operations includes shpments to customers in the United States, licensing to OEMs and
certain multinational organizations, and exports of finished goods, primarily to Asia, Latin America, and Canada.
Revenue from U.S. operations totaled $13.7 billion, $15.7 billion, and $17.8 billion in 1999, 2000, and 2001.
Revenue from outside the United States, excluding licensing to OEMs and certain multinational organizations and
U.S. exports, totaled $6.0 billion, $7.3 billion, and $7.5 billion in 1999, 2000, and 2001. A single customer
accounted for approximately 1I%, 9%, and 8% of revenue in 1999,2000, and 2001.
Long-lived assets totaled $1.8 billion and $2.2 billion in the United States in 2000 and 2001 and $126 million and
$154 million in other countries in 2000 and 200 1.
Subsequent Event
On July 16, 2001, USA Networks, Inc. (USA) announced an agreement to acquire a controlling interest in Expedia.
Inc. through the purchase of up to 37.5 million shares, approximately 75% of the current outstanding shares. If
holders of more than 37.5 million Expedia shares elect to sell their shares to USA, there will be a pro rata reduction
among all o f those electing shareholders. Microsoft has agreed to transfer all of its 33.7 million shares and warrants,
subject to pro-ration. It is expected that the transaction will close by December 3 1,2001.
QUARTERLY INFORMATION
(In millions, except per share amounts) (Unaudited)
Quarter Ended
Sept. 30
Dec. 31
Mar. 31
June 30
Year
$4,193
$ 5,195
$4,595
$ 5,764
$19,747
Gross profit
3,544
4,407
3,887
5,095
16,933
Net income
1999
Revenue
1,683
1,983
1,917
2,202
7,785
0.34
0.40
0.38
0.43
1.54
0.3 1
0.36
0.35
0.40
1.42
6,112
5,356
$ 5,656
$ 5,804
4,672
4,904
5,022
$22.956
19,954
2,191
0.43
2,436
0.47
2.385
0.46
2,409
0.46
9,42 1
1.81
0.40
0.44
0.43
0.44
1.70
Revenue (1)
$5,766
$ 6,550
$ 6,403
$6,577
$25,296
Gross profit
4,941
5,686
5,504
5,710
21,841
Net income (2)(3)
2,206
2,624
2.451
65
7,346
Basic earnings per share (2)(3)
0.42
0.49
0.46
0.01
1.38
Diluted earnings per share (2)(3)
0.40
0.47
0.44
0.01
1.32
2000
Revenue
Gross profit
Net income
$ 5,384
$
2001
(1) For the first three quarters of 2001, revenue and cost of revenue have been reclassified to report
Expedia merchant revenue on a net basis, which represents the amount charged to the customer
less the amount paid to the supplier.
(2) First quarter of 2001 includes an unfavorable cumulative effect of accounting change of $375
million or $0.07 per basic share and $0.06 per diluted share.
(3) Fourth quarter of 2001 includes $3.92 billion (pre-tax) in impairments of certain investments,
primarily cable and telecommunication investments.
‘9
INDEPENDENT
AUDITORS’REPORT
To the Board of Directors and Stockholders of Microsoft Corporation:
We have audited the accompanying consolidated balance sheets of Microsof? Corporation and subsidiaries as of June
30, 2000 and 2001, and the related consolidated statements of income, cash flows, and stockholders’ equity for each
of the three years in the period ended June 30, 2001. These fmancial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these fmancial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America.
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis. evidence
supporting the amounts and disclosures in the fmancial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated fmancial statements present fairly, in all material respects, the financial position of
Microsoft Corporation and subsidiaries as of June 30, 2000 and 2001, anti the results of their operations and their
cash flows for each of the three years in the period ended June 30, 2001 in conformity with accounting principles
generally accepted in the United States of America.
As discussed in the notes to the financial statements, the Company was required to adopt Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments a i d Hedging Activities, effective July 1,
2000.
Deloitte & Touche LLP
Seattle, Washington
July 19,2001 (September 6,2001 as to the second paragraph of Contingencies note)
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
None.
.
PART 111
item IO. Directors of the Registrant
Information with respect to Directors may be found under the caption “Election of Directors and Management
Information” of the Company’s Proxy Statement dated September 10, 2001, for the Annual Meeting of Shareholders
to be held November 7, 2001 (the “Proxy Statement”). Such information is incorporated herein by reference.
‘
Item 11. Executive Compensation
The information in the Proxy Statement set forth under the captions “Information Regarding Executive Officer
Compensation” and “Information Regarding the Board and its Committees” is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Managemelit
The information set forth under the caption “Information Regarding Beneficial Ownership of Principal Shareholders,
Directors, and Management” of the Proxy Statement is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information set forth under the captions “Certain Relationships and Related Transactions” and “Indebtedness of
Executive Officers” of the Proxy Statement is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Scliedules, and Reports 011Form 8-K
(a) Financial Statements and Schedules
The financial statements are set forth under Item 8 of this report on Form 10-K
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
The Company filed no reports on Form 8-K during the quarter ended June 30.2001.
(c) Exhibit Listing
Exhibit Number Description
(1)
(2)
(3)
(4)
(5)
(6)
(7)
3.1
Restated Articles of Incorporation of Microsoft Corporation (1)
3.2
Bylaws of Microsoft Corporation
10.1
Microsoft Corporation 1991 Stock Option Plan (2)
10.2
Microsoft Corporation 1981 Stock Option Plan (3)
10.3
Microsoft Corporation 1999 Stock Option Plan for Non-Employee Directors (4)
10.4
Microsoft Corporation Stock Option Plan for Consultants and Advisors (5)
10.5
Microsoft Corporation 1997 Employee Stock Purchase Plan
10.6
Microsoft Corporation Savings Plus Plan (6)
10.7
Trust Agreement dated June 1, 1993 between Microsoft Corporation and First Interstate Bank
of Washington (7)
10.8
Form of Indemnification Agreement (7)
21.
Subsidiaries of Registrant
23.
Independent Auditors’ Consent
Incorporated by reference to Annual Report on Form 10-K For The Fiscal Year
Incorporated by reference to Registration Statement 33-37623 on Form S-8.
Incorporated by reference to Registration Statement 333-91755 on Form S-8.
Incorporated by reference to Annual Report on Fomi 10-K For The Fiscal Year
Incorporated by reference to Annual Report on Fomi 10-K For The Fiscal Year
Ended June 30. 1999.
Ended June 30, 1993.
SIGNA TURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has dul!.
caused this report to be signed on its behalf by the undersigned; thereunto duly authorized. in the City of Redmond.
State of Washmgton, on September 17,2001.
By
l s l John G. Connors
John G. Connors
Senior Vice President; Chief Firiancial OJ~CLJI.
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 17,2001.
Title
Signature
/s/ William H. Gates, 111
William H. Gates, 111
Chairman of the Board of Directors
and Chief Software Archtect
Is/ Steven A. Ballmer
Steven A. Ballmer
/SI James I. Cash. Jr.
James I. Cash, Jr.
Director
/SI
Raymond V. Gilrnartin
Raymond V. Gilmartin
Director
/s/ Ann McLaughlin Korologos
Ann McLaughlin Korologos
Director
/SI David F. Marquardt
David F. Marquardt
Director
G. Reed. Jr.
Wm. G. Reed, Jr.
Di rcctor
Is/ Jon A. Shirley
Jon A. Shirley
Director
/siWm.
/SI
John G. Connors
John G. Connors
1
Senior VICCPrcsidcnt. Chicf Financial Officer
(Principal Financial and Accounting Officcr)
EXHIBIT 6
IN5TRUCTION mRNURL
mRNURL IIE I N 5 T R U E C I U N E S
mRNUEL D ' I N 5 T R U C T I O N 5
F23-00061
You can play Xbox games and audio CDs with the XboxTnvideo
game system from Microsoft. Make sure you have received all
of the fotlowing components of the Xbox video game system
in this package:
Power'cord
Xbox console
.* Xbox Controller
-%/
Xbox Standard AV Cable
Xbox Console
Standard AV cable
Power cord
Instruction Manual and other printed materials
Please keep these instructions.
I f you have q u e s t i o n s a b o u t this
http:/ /www.xbox.com or call
Xbox Controller
Documentation set
(including this manual)
product, s e e
United States a n d Canada: 1-800-4MY-XBOX.
TTY users: 1-866-740-XB OX.
Mexico: 001 866 745 83 12.
TTY users: 001 866 251 26 21.
The following Xbox peripherals are sold'separately:
For customers in the USA:
KO4-00001
Xbox Controller
K02-00001
Xbox Memory Unit
expansion device
KOB-00001
Xbox System Link Cable cable to
connect two Xbox consoles for head-tohead multiplayer games
This equipment has been tested and found to comply with the
limits for a Class B digital device, pursuant to Part 15 of the
FCC rules. These limits are designed to provide reasonable
protection against harmful interference in a residential installation. This equipment generates, uses, and can radiate radio
frequency energy and, if not installed and used in accordance
witti the instructions, may cause harmful interference to radio
communications.
K01-00004
Xbox D V D Movie Playback Kit - remote
control and receiver for playing DVD
movies
K06-00001
Xbox Standard AV Cable
adapter
- composite AV
K05-00001
Xbox Advanced AV Pack
digital audio adapter
- S-video and
- gamepad
- portable storage
-
Reorient or relocate the receiving antenna.
-
K03-00001
Xbox High Definition AV Pack component
video and digital audio adapter
K07-00001
Xbox RF Adapter
adapter
K09-00001
However, there is no guarantee that interference will not OCcur in a particular installation. If this equipment does cause
harmful interference to radio or television reception, which
can be determined by turning the equipment o f f and on, the
user is encouraged to try to correct the interference by one or
more of the following measures:
- antenna [coaxial cable]
-
Xbox Communicator [available in 2002)
voice chat and command headset expansion device
Increase the separation between the equipment and
receiver.
Connect the equipment into an outlet on a circuit
different from that to which the receiver is connected.
Consult the dealer or an experienced radio/TV technician for help.
Note Any changes or modifications made on the system not
expressly approved by the manufacturer could void the user's
authority to operate the equipment.
http: f f www.xbox.com
................................................................................................................................................. 2
Xbox Peripherals ........................................................................................................................................................................
2
......................................................... ................................... 4
Important Safety Information ........................................................
Important Health Warnings .......................................................................................................................................................
6
Selecting a Location for the Xbox Console .............................................................................................................................
7
Connecting to a TV ....................................................................................................................................................................
8
Connecting Xbox Controllers ....................................................................................................................................................
9
Using Xbox Controllers ............................................................................................................................................................. 9
Turning on the Xbox Console ..................................................................................................................................................
10
Initial Setup ...............................................................................................................................................................................
11
Audio, Video, and Olher Settings ...........................................................................................................................................
I1
Playing Games and Music .......................................................................................................................................................
12
Soundtracks .............................................................................................................................................................................
13
Parental Control .......................................................................................................................................................................
13
Managing Memory ................................................................................................................................................................... 14
MultipWayer Games ...................................................................................................................................................................
15
Cleaning the Xbox Video Game System ................................................................................................................................
15
Troubleshooting .......................................................................................................................................................................
16
Specifications ...........................................................................................................................................................................
17
Warranty ...................................................................................................................................................................................
18
The Xbox Video Game System
The following symbols are used on labels on the Xbox video
game system.Jrom Microsoft:
Declaration of Conformity
Trade Name:
Microsoft Corp.
Responsible Party:
Address:
Xbox Customer Care
One Microsoft Way
A
This symbol is intended to alert the user to
the presence of important safety, operating,
and maintenance instructions in the literature
accompdnying the console.
Redmond, WA, 98052 U.S.A.
Telephone No.:
This symbol is intended to alert the user to
the presence of uninsulated "dangerous voltage" within the product's enclosure that may
be of sufficient magnitude to constitute a risk
of electric shock to persons,
1-800-4MY-XBOX
This device complies with Part 15 of the FCC Rules.
Operation is subject to the following two conditions:
(11This device may not cause harmful interference, and
(21 this device must accept any interference received,
including interference that may cause undesired
operatio n
.
For Customers in Canada:
This Class B digital apparatus complies
Warning: To reduce the risk of fire or electric shock, do
not expose this apparatus to rain or moisture.
with Canadian
ICES-003.
http:/ /www.xbox.com
.
.
This manual Contains important information about how to
safely and properly set up, use, and care for the Xbox video
game system.
D~ not
push or insert anything into ventilation
openings.
Voltage is present within the Xbox video game system when
the console is connected to power, whether it is turned on or
off. To eliminate all voltage to the Xbox console, first turn off
the Xbox console, and then disconnect the power cord from
the power outlet.
Take precautions to keep children from putting
anything, especially metal objects, inside the Xbox
console.
Failure to properly set up, use, and care for the Xbox
video game system can increase the risk of electric
shock or fire. I t can also increase the risk of the Xbox
console falling and possibly hitting someone. To reduce the risk of serious injury or death, or damage to
the Xbox video game system:
Read these instructions.
Keep these instructions.
Do not insert objects into ventilation openings when
cleaning the Xbox console.
Take Precautions to Keep the Xbox Console from Falling
Heed alt warnings.
If the Xbox console falls and hits someone, especially a small
child, it could cause serious injury. To reduce the risk of such
injuries or damage to the Xbox console, properly set up and
use the Xbox video game system according to the instructions
in Selecting a Location for the Xbox Console on page 7 and
in Inllne Release on page 9.
Foiiow all instructions.
Stay Away from Dangerous
Voltage Inside the Xbox Console
Contact with energized Darts inside the Xbox
console can cause serious injury or death from electric shock.
I t can also lead to fire and/or damage to the Xbox console.
Do not take the Xbox console apart.
Do not attempt to service or repair the Xbox console yourself.
Refer all servicing to qualified service personnel. Servicing is
required when the apparatus has been damaged in any way,
such as:
!
Power-supply cord or plug is damaged.
Liquid has been spilled or objects have fallen into the
apparatus.
The apparatus has been exposed to rain or moisture,
does not operate normally, or has been dropped.
D o not attempt to modify the Xbox console in any way.
http://www.xbox.com
General Electrical Precautions
Clean the outside of the Xbox console properly.
As with many other electrical devices, failure t o
take the following precautions can result in serious injury or death from electric shock or fire, or
damage t o the Xbox video game system.
Clean only with a dry cloth. For more information, see Cleaning t h e Xbox Video Game System on page 15.
I
Unplug this apparatus during lightning storms or
when unused for long periods of time.
Avoid damaging the power cord.
Protect the power cord from being walked on or
pinched particularly a t plugs, convenience receptacles,
and the point where they exit from the apparatus.
Also, do not leave the Xbox video game system unattended
with the power on for extended periods.
!
Do not jerk, knot, sharply bend, or otherwise abuse the
power cord.
.
Only use attachmentslperipherals specified by the
manufacturer.
Do not expose the power cord t o sources of heat.
Keep children and pets away from the power cord and
do not allpw them t o bite or chew on it.
When disconnecting the power cord from the Xbox
console or a power outlet, pull on the plug-do not
pull on the cord.
I f the power cord becomes damaged in any way, stop using it
immediately and call the Microsoft Xbox Customer Support
number on page 2.
Prevent the Xbox Console from
Ovetheating
Do n o t block any ventilation openings. Install in accordance
with the manufacturer's instructions. For more information,
see Selecting a Location for t h e Xbox Console on page 7.
Do n o t i n s t a l l near any h e a t sources, such as radiators,
heat registers, stoves, or other apparatus [including amplifiers) that produce heat.
Do not overload an extension cord, wall outlet, or
other type of receptacle.
The Xbox video game system can consume up t o 100 watts.
Do not exceed the stated ratings of cords or receptacles.
Use the type of power source indicated on the
Xbox console.
If you are not sure of the type of power supply t o your home,
consuk a qualified electrician.
Do not expose the Xbox video game system to
liquids or moisture.
Do not use this apparatus near water (for example,
sinks, tubs, pools) or expose it t o rain, moisture, or
dripping or splashing liquids.
Do not place objects filled with liquids, such as
beverages or vases, on or near the Xbox console.
Do not clean the Xbox console with water, liquid
cleaners, solvents, or aerosols.
d
4-
About Photosensitive Seizures
About Musculoskeletal Disorders
A very small percentage of people may experience a seizure
when exposed t o certain visual images, including flashing'lights
or patterns that may appear in video games. Even people who
have no history o f seizures or epilepsy may have an undiagnosed condition that can cause these "photosensitive epileptic seizures'' while watching video games.
Use of game controllers, keyboards, mice, or other electronic
input devices may be linked t o serious injuries or disorders.
These seizures may have a variety of symptoms, including
lightheadedness, altered vision, eye or face twitching, jerking
or shaking of arms or legs, disorientation, confusion, or momentary loss of awareness. Seizures may'also cause loss of
consciousness or convulsions that can lead t o injury from falling down or striking nearby objects.
Immediately stop playing and consult a doctor if you experience any of these symptoms. Parents should watch for or
ask their children about the above symptoms-children and
teenagers are more likely than adults t o experience these
seizures.
The risk of photosensitive epileptic seizures may be reduced
by taking the following precautions:
Sit farther from the television screen
Use a smaller television screen
Play in a well-lit room
Do not play when you are drowsy or fatigued
I f you or any of your relatives have a history of seizures or
epilepsy, consult a doctor before playing.
When playing video games, as with many activities, you may
experience occasional discomfort in your hands, arms, shoulders, neck, or other parts of your body. However, if you experience symptoms such as persistent or recurring discomfort,
pain, throbbing, aching, tingling, numbness, burning sensation, or stiffness, DO NOT IGNORE THESE WARNING SIGNS.
PROMPTLY SEE A QUALIFIED HEALTH PROFESSIONAL, even if
symptoms occur when you are not playing a video game. Symptoms such as these can be associated with painful and sometimes permanently disabling injuries or disorders of the nerves,
muscles, tendons, blood vessels, and other parts of the body.
These musculoskeletal disorders [MSDs] include carpal tunnel syndrome, tendonitis, tenosynovitis, vibration syndromes,
and other conditions.
While researchers are not yet able t o answer many questions
about MSDs, there is general agreement that many factors
may be linked t o their occurrence, including medical and physical conditions, stress and how one copes with it, overall health,
and how a person positions and uses their body during work
and other activities [including playing a video game]. Some
studies suggest that the amount o f time a person performs
'
an activity may also be a factor.
Some guidelines that may help you work and play more comfortably and possibly reduce your risk of experiencing an MSD
can be found in the Healthy Gaming Guide [available a t
http:/ /www.xbox.com]. These guidelines address topics such as:
n,
Positioning yourself t o use comfortable, not awkward
postures.
Keeping your hands, fingers, and other body parts
. relaxed.
Taking breaks.
Developing a healthy lifestyle.
I f you have questions about how your own lifestyle, activities,
or medical or physical condition may be related t o MSDs, see
a qualified health professional.
h t t p : / /www.xbox.com
Select a Safe Location
When selecting a location for the Xbox video game system,
consider the following topics and the I m p o r t a n t Safety Information on page 4.
Prevent the Xbox Console from Falling
I f the Xbox console falls and hits someone, especially a small
child, it could cause serious injury. To reduce the risk of such
injuries and damage to the Xbox
place the Xbox
console on a surface that:
is flat and level.
is stable and not tikely t o tip over.
atlows all four f e e t of the Xbox console t o be in
contact with the surface.
is clean and free of dust or debris.
is not likely t o allow the Xbox console t o stip or
slide off.
Avoiding Damage to Your Television or
Other Av Equipment
D O n o t use w i t h certain televisions. Some televisions, espe-
cially front- or rear-projection types, can be damaged if any
video games, including Xbox games, are played on them. Static
images piesented during the normal course of gameplay may
"burn" into the screen, causing a permanent shadow of the
static image
appear at
times, even when video games
are not being ptayed, Similar damage may occur from static
images created when placing a video game on hold or pause,
Consult your tetevision owner's manuat t o determine if video
games can be played safely on your set. I f you are unable t o
find this information in the owner's manual, contact your teLevision dealer or the manufacturer t o determine if video games
can be played safely on your set.
Before connecting or disconnecting any AV device [for example,
television or VCRI, make sure that the power t o the Xbox
console and t o the AV device is turned off.This will reduce the
risk af electrical damage t o the equipment.
To avoid damage t o AV equipment or t o the Xbox console, do
not touch AV cord terminals or the Xbox AV port with your
fingers or allow metal parts t o touch them.
Take Precautions with Cables and Cords
Arrange all cables and cords so that people and pets are
not likely t o trip over or accidentally pull on them as they
move around or walk through the area.
When the Xbox console i s not in use, you may need t o disconnect all cables and cords in the front and rear of the
Xbox console t o prevent children from pulling on them. Do
not allow children t o play with cables or cords.
Prevent the Xbox Console from
Overheating
Do not block any ventilation openings. Do not place the
Xbox console on a bed, sofa, or other soft surface that may
block ventilation openings.
Do not place the Xbox console in a confined space, such as
a bookcase, rack, or stereo cabinet, unless the space is well
ventilated.
Do not install the Xbox console near any heat sources, such
as radiators, heat registers, stoves, or other devices (including amplifiers) that produce heat.
http://www.xbox.com
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0
Connecting Using the Xbox Standard
AV Cable
If your TV has composite video input, use the standard AV
cable included with the Xbox video game system.
To connect t o a
N
1.Connect the Xbox AV connector to the AV port on the
Xbox console.
I f your TV is connected to a VCR and the VCR has composite
[integrated] video input, you can use the standard AV cable to
connect to the VCR.
To connect to a VCR
1.Connect the Xbox AV connector to the AV port on the
Xbox console.
2. Connect the color-coded connectors to the corresponding jack on the VCR: yellow to yetlow (video), red to
red (right audio), and white to white [left audio].
2. Connect the color-coded connectors to the corresponding jacks on the TV: yellow to yellow [video), red
to red (right audio), and white to white [left audio).
Jacks may be on the front or back of the TV.
Note :For monaural NS,
which have only one audio jack,
connect either the right or left audio connector to the
audio jack.
3. Select the appropriate video input on your TV. For
more information, see No Picture under Troubieshooting on page 16.
Note
left audio connector to the audio jack.
3. Do not change the existing connection between the
VCR and TV.
4. Select VCR for the TV/VCR setting of the VCR.
I
5. Select the appropriate video input on your VCR. For
more information, see No Picture under Troubleshooting on page 16.
You may not be able to connect to your TV using the standard
AV cable. If you have antenna, S-video or component video
input, or digital audio input, use the appropriate Xbox AV pack
or
adapter.
For
more
information,
http://www.xbox.com or Xbox Peripherals on page 2.
For monaural VCRs, connect either the right or
see
http:/ /ww.xbox.com
Connecting and Disconnecting Xbox
ControIlers
To connect an Xbox Controller, insert the Xbox Controller connecter into any controller port on the front of the Xbox console.
'
'
To disconnect, unplug the Xbox Controller connector from the
Xbox Controller port. When disconnecting, pull on the controller connector, not the cable or inline release.
Do not touch Xbox Controller cord terminals or the Xbox Controller ports with your fingers or allow metal parts to touch
them. Doing so may damage the Xbox Controller or the Xbox
console.
Using the Xbox Controller in Games
For information about Osing the Xbox Controller with a game,
see your game manual.
lnline Release
Each Xbox Controller cord has an inline release. This is a safety
feature designed t o reduce the chance of the Xbox console
falling when the cord is pulled. If the Xbox console falls and
hits someone, especially a small child, it could cause serious
injury. To reduce the risk o f such injuries or of damage t o the
Xbox console, it is important t o properly use the Xbox Controllers and the inline release.
To Console
1
Use the Xbox Controller connector, not the inline release, t o
routinely connect and disconnect the Xbox Controller. If an
inline release disconnects, simply reconnect it by aligning the
grooved indentations on the two parts of the inline release
and pressing the two parts completely together. The Xbox
Controller will not work unless the inline release is properly
connected.
WARNING! Never tape, glue, or otherwise prevent an inline
release from pulling apart.
The inline release reduces, but does not eliminate, the risk of
the Xbox console being pulled off its surface. To further reduce the risk:
Do not allow anyone t o pull on the Xbox ControUers or
controller cords in a way that causes the Xbox console
t o move.
t
A
To Controller
c
Read and follow the instructions in Selecting a
Location for t h e Xbox Console on page 7.
Do not allow Xbox Controller cords t o become crossed
or tangled with one another,
http://www.xbox.com
Using Xbox Controller Expansion Slots
The Xbox Controller has two expansion slots that allow you t o
connect expansion devices t o the Xbox Controller. For example,
you can add portable storage t o the Xbox video game system
by connecting an Xbox Memory Uliit [shown] [part number
K02-00001,sold separately). For more information, see Xbox
Peripherals on page 2 or the instruction manual for your
Xbox expansion device.
Plug the power cord into the Xbox consote, and then fully
insert the plug into the power outlet. See General Electrical
yrecautions on page 5 for more information.
Turn on the Xbox console by pressing the power button. The
status indicator light will light up.
(urn off the Xbox console by pressing the power button. To eliminate all voltage inside the Xbox console, turn off the Xbox console, and then unplug the power cord from the power outlet.
The first time you turn on your Xbox video game system, you
must set the default language and the clock before playing a
game or audio CD. Once these settings are specified, you don’t
have to set them again if you leave the Xbox console connected to power.
To move the selection focus on the screen, press the directional pad of the Xbox Controller. To select, press A. To cancel,
press B.
t
I n addition to the initial language and clock settings, you can
specify other settings for the Xbox video game system. To
choose settings for your system, turn on the Xbox video game
system without a disc in the disc tray.
To chooise audio or video settings
1.Select Settings, and then select Audio or Video.
2. SeLect appropriate options for your system.
You can configure the Xbox console to automatically turn off
if left unattended for six hours.
To choose Auto Off
1.Select Settings, and then select Auto Off.
2.Select Yes to have the Xbox console turn off automatically, or No [the default).
http://www.xbox.com
\
.
,
Eject button
Disc tray
Powerlreset button
Playing Games
Playing Music
The Xbox video game system can play only game
discs licensed by Microsoft for the Xbox video game
system. Licensed games have this logo:
The Xbox video game system can play
audio CDs that have this logo:
To play audio CDs
To start a game
1.Press the eject button to open the disc tray.
2. Place the audio CD on the, disc tray with the label
facing up.
2. Place the Xbox game disc on the disc tray with the
label facing up.
''
3. Press the eject button to close the disc tray. The game
will play.
3. Press the eject button to close the disc tray. The audio
CD will play.
To switch t o another game
Playing DVD Movie Discs
2. Remove the game disc.
To play DVD movies on the Xbox video game system, you need
the Xbox DVD Movie Playback Kit (part number KO1-00004,
sold separately). For more information about playing DVD movies, see the Instruction Manual for the Xbox DVD Movie Playback Kit.
3. Place a new Xbox game disc on the disc tray.
4. Press the eject button to close the disc tray. The new
game will play.
To end a game
Avoiding Damage to Discs or to the DVD Drive
1.Press the eject button and the disc tray will open.
2. Remove the Xbox game disc.
3. Press the eject button again to close the disc tray.
Do not leave a disc in the Xbox console for extended
periods when not in use.
Do not move the Xbox console while the power is on
and a disc is inserted.
Do not apply labek, stickers, or other foreign objects
to discs.
http: / / www.xbox.com
You can copy tracks from audio CDs using the Xbox video
game system. Then you can arrange these tracks into
soundtracks and play them from the Xbox video game system
without inserting the original CD audio disc. You can play your
soundtracks while playing Xbox games.
To copy tracks
1. Play an audio CD.
2. Select Back from the music player.
3. Select Copy t o display tracks.
4. Select the tracks you want t o copy. You can selyct one
track, multiple tracks, or all tracks.
5. Select Copy t o begin copying the tracks.
6. Select an existing soundtrack, or create a new
soundtrack t o store the copied tracks. I f you create a
new soundtrack, enter a name using the virtual
keyboard.
To play soundtracks
1. Turn on the Xbox console with no disc in the
disc tray.
2. Select Music, and then select a soundtrack rather
than Audio CD.
3. Select Play t o begin playing
You can limit the type of content played on the Xbox video
game system based on the ESRB rating level. By default, the
Xbox video game system is set t o play all content. You can
select separate parental control levels for games and DVD
movies. To play DVD movies on the Xbox video game system,
you need the Xbox DVD Movie Playback Kit (part number KO10000.1, sold separately].
To change t h e level of content that can be played
1. Turn on the Xbox console with no disc in the
disc tray.
2. Select Settings, then select Parental Control, and
then select Games.
3. Select the new level: All, M (Mature], T [Teen], E
[Everyone], K-A [Kids t o Adults], EC [Early Childhood),
or None.
The Xbox video game system will play games and DVD movies
that are rated a t or below the selected level. For example, if the
selected level is T, games rated T, E, K-A, and EC can play. I f you
choose any level other than All, you must select a pass code.
I f you lose or forget your pass code, call the Xbox Customer
Support number on page 2.
The Xbox video game system includes an internal hard dlisk for
saving game information and soundtracks. For information about
saving games, see your Xbox game manual. For information
about saving soundtracks, see Soundtracks on page 13.
To manage or free space on the Xbox hard disk, you can remove all stored information and saved games for a given Xbox
game, or copy or delete specific saved games.
To remove all information about a game
1.Turn on the Xbox console with no disc in the
disk tray.
2. Select Memory, and then select Xbox Hard Disk.
3. Select a game.
4. Select Remove Game to delete the selected game,
including all its saved games, from the Xbox hard disk,
Select Yes when prompted, "Are you sure you want to
permanently remove this title?"
To copy or delete a saved game
1.Turn on the Xbox console with no disc in the
disk tray.
2. Select.Memory, and then select Xbox Hard Disk.
3. Select an individual saved game name in the collection
of saved games.
4. Setect Copy to move that saved game to an Xbox
Memory Unit (part number K02-00001, sold separately) or Delete to remove the selected game from
the Xbox hard disk. When deleting, select Yes when
prompted, "Are you sure you want to permanently
remove this saved game?"
Connect up to four Xbox controllers to the Xbox console for
games that allow multiple players. Not all Xbox games will
allow multiple players. To determine if the game allows multiple players, see your game manual.
Some games can be played using the Xbox System Link Cable
[part number K08-00001, sold separately), which connects two
Xbox consoles for head-to-head gameplay. For more information, see the instruction manual for the Xbox System Link Cable.
Do not connect a telephone line to the Ethernet connector on
the back of the Xbox console. Broadband capability is scheduled to go live in the summer of 2002. For more information,
visit http://www.xbox.eorn.
Cleaning the Xbox Console
To clean Xbox game discs or audio CDs
I t is important to keep the rubber feet on the bottom of the
Xbox console clean and free of dust and debris to reduce
the risk of the Xbox console falling and possibly hitting
someone.
I f the rubber feet ever become dirty or dusty, wipe
them off with a dry cloth.
* Keep the surface on which the Xbox.console rests
clean by wiping with a dry cloth.
.
Hold discs by the edges: do not touch disc surface with
fingers. ’
Clean discs using a soft cloth, lightly wiping from the
center outwards.
Do not use solvents such a s benzene, which can
damage the disc.
If you clean the Xbox console:
Unplug the Xbox console from the power outlet.
Clean the outside of the Xbox console only. Make sure
that no objects are inserted into ventilation openings.
not use abrasive pads, detergents,
Use a dry cloth-do
scouring powders, solvents (for example, alcohol,
gasoline, paint thinner, or benzene), or other liquid or
aerosol cleaners.
Game Does Not Start
Play only licensed Xbox game discs [see Playing Games and
Music on page 12).
To reduce the risk of serious injury or death from electric shock or fire, do not attempt to service or repair
the Xbox console. Do not attempt to take apart the
Xbox console or modify it in any way. Refer all servicing to qualified service personnel.
Insert the disc with the label up and close the disc tray (see
Playing Games and Music on page 121.
Clean the disc (see Cleaning the Xbox Video Game System
on page 151.
No Picture
Connect the appropriate AV cable [see Connecting t o a TV
on page 81.
Please follow these steps to troubleshoot difficulties with the
Xbox video game system:
-
No Power
Connect the power cord [see Turning O n the Xbox Console
on page 10).
Status Indicator Light Flashes Continually
The status indicator light should be green while the Xbox video
game system is on, or flash green when you press the eject
button. I f the status indicator light flashes continually during
operation, the #box video game system has a n internal problem:
Continual orange flashing: The Xbox console is too hot
and will not play games until cooled. Place the Xbox
console in a well-ventilated area away from other heat
sources. Once the console cools, the flashing will stop
and the Xbox video game system can be played. For
more information, see Selecting a Location for the
Xbox Console on page 7.
Continual green and orange flashing: The AV cable
not connected property. Connect according to the
instructions in Connecting to a TV on page 8.
IS
All other patterns: Internal problem requires service.
Contact Xbox Customer Support according t o the
instructions in If You Need Help on page 17.
...
Disc Tray Does Not Open
Connect the power cord [see Turning O n the Xbox Console
on page 101.
Turn on the Xbox console by pressing the power button (see
Turning O n the Xbox Console on page 1D).
Turn on the TV
Select the video input on the TV [or VCR, if connected to a
VCR] that displays the Xbox game. Common names for video
input are Input Select, AUX, Line In, Line, I n , Input, Source,
or EXT, depending upon your TV or VCR type. For more information, see your TV or VCR manual.
Play only supported types of discs [Xbox games, audio CDs;
see Playing Games and Music on page 12).
Poor-Quality Picture
Clean the disc [see Cleaning the Xbox Video Game System
on page 151.
No Sound
Properly connect the AV cable [see Connecting t o a TV on
page 81.
Check the volume on the TV and turn off TV mute [see your
TV manual].
Select the correct audio output [see Connecting t o a TV on
page 81.
Play only supported types of discs [Xbox games, audio CDs;
see Playing Games and Music on page 121.
Poor-Quality Sound
Clean the disc (see Cleaning the Xbox Video Game System
on page 15).
Play Dolby@ Digital audio only to speakers that support Dolby
Digital.
Select the audio output that is supported by your system or TV
[Stereo or Dolby@ Surround for stereo speakers, Mono for monaural
speaken]. [See Audio, Video, and Other Settings on page 111.
I f sound is coming from only one speaker, check that all audio
cables are connected correctly.
Xbox Controller or Peripheral Does Not
Work
General
Connect the Xbox Controller to any controller port [see Connecting Xbox Controllers on page 9).
Power consumption: 100 W
Make sure the controller connectors, including the inline release, are connected securely [see Using Xbox Controllers
on page. 91.
Use only Xbox-compatible peripherals that have this logo:
Power requirements: 120 V AC, 60
Hz
Dimensions [approximate): 300 x 80 x 180 mm;
12 x 4 x 0 inches (w/h/d]
Mass [approximate): 4 kg (8 lb 13 021
xec)><'"
Operating temperature: 5 "C to 35 "C
I
For a list of Microsoft's Xbox peripheral products, see Xbox
Peripherals on page 2.
Make sure the Xbox game supports any optional peripherals
connected to the Xbox video game system. I f a peripheral is
not supported by the specific game, the game may not play.
Laser diode properties: Material
Wavelength l = 650 nm
e
[41 "F to 95
OF)
GaAIAs,
Inputsloutputs
Controller ports (4)
Ethernet port (11
AV port (11
Cannot Save Game
AC I N power port [I]
The Xbox hard disk or memory unit must have enough free
blocks to save the game. For information on how to free space,
see Managing Memory on page 14.
Supplied Peripherals
If You Need Help...
Should problems persist, do not attempt to take apart, service, or modify the Xbox console in any way. Doing so could
present the risk of serious injury or death from electric shock
or fire, a n d it will void . y o u r warranty. Please s e e
http:/ /www.xbox.com or call the Xbox C u s t o m e r
Support number:
See The Xbox Video Game System on page 2.
Optional Peripherals
See Xbox Peripherals on page 2.
Design and specifications are subject to change without notice.
United S t a t e s a n d Canada: 1-800-4MY-XBOX.
TTY users: 1-666-740-XBOX.
Mexico: 001 866 745 83 12.
TTY users: 001 866 251 26 21.
Do not take your Xbox video game system or peripheral to
your retailer for repair or service, unless instructed to do so
by an Xbox Customer Support representative.
PLEAS€ READ THIS LIMITED WARRANTY CAREFULLY TO UNDERSTAND YOUR RIGHTS AND OBLIGATIONS!
LIMITED WARRANTY
The term "Xbox Product" means the Microsoft Xbox Video Game
System console including [when considered as a whole) the
Microsoft software stored on the hard disk and embedded in
microprocessors within the Xbox console, and Xbox-compatible
hardware manufactured by or for Microsoft, whether included
with the Xbox Video Game System or purchased separately.
A. W A R R A N T I E S
1 90-Day Express Warranty. Subject to the terms and conditions, of this Limited Warranty, Microsoft warrants to you
only [the original purchaser), that under normal use and service the Xbox Product will substantially conform with the accompanying printed user instruction materials for a period of
90 days starting as of the date of your sales receipt [the
"Warranty Period").
2 Implied Warranty. You may also have an implied warranty
and/or condition under the laws of some jurisdictions, which
is hereby limited to the duration of the Warranty Period. Some
jurisdictions do not allow limitations on how long an implied
warranty or condition lasts, s o the foregoing limitation may
not apply to you.
As to any defects discovered after the Warranty Period, there
is no warranty or condition of any kind,
8. O B T A I N I N G WARRANTY SERVICE. To receive instructions for obtaining repair or replacement warranty services
you must call:
Within the U.S.,U.S. Territories and Canada:
1-800-4MYXBOX. TTY users: 1-866-740-XBOX.
Within Mexico: 001 866 745 83 12.
TTY users: 001 866 251 26 21.
You must also:
1 Submit proof of purchase in the form of a bona fide, dated
bill of sale, receipt, or invoice [or a copy) evidencing that your
request for service is made within the Warranty Period.
2 Follow Microsoft's instructions if it determines that all or
part of your Xbox Product requires return for repair or replacement. Microsoft will arrange for shipping your Xbox Product to Microsoft or its authorized repair centers at Microsoft's
expense, or instruct you where to take the Xbox Product in
your area'.
3 Delete or remove any files or data you consider private or
confidential prior to sending the Xbox Product to Microsoft.
4 Return the Xbox Product in the packaging materials provided to you by Microsoft, using the labels and addresses provided in the return authorization kit. Failure to use these materials may result in delays.
Failure t o follow the above instructions may result ih delays, cause you t o incur additional charges, or may void
your warranty.
C. EXCLUSIVE REMEDY. During the Warranty Period and
subject to applicable law, Microsoft will, at its option and a s
your exclusive remedy for breach of this Limited Warranty or
any implied warranties:
1 Repair or replace a.defective Xbox Product, or
2 Following return of your Xbox Product, make payment to
you for the allowable damages that you incur in reasonable
reliance but only up to the amount of the purchase price that
you paid for your Xbox Product. This refund may include a
deduction for depreciation based on your actual use.
3 Any replacement parts or Xbox Product will be new or
refurbished or serviceably used, comparable in function and
performance to the original part or Xbox Product and warranted for the remainder of the original Warranty Period or 30
days from the date of shipment of the Xbox Product back to
you, whichever is longer.
4 Microsoft may, a t its sole option, elect to replace the
hard disk contained in your Xbox Product even If this
causes a loss of data. Y O U AGREE THAT MICROSOFT I S
N O T L I A B L E TO Y O U FOR A N Y L O S S OF YOUR DATA.
5 After the Warranty Period has expired, Microsoft may charge
you a fee for its efforts to diagnose and service any Xbox
Product-related problems.
6 Microsoft will use commercially reasonable efforts to diagnose and attempt to correct, or suggest solutions for, Xbox
Product defects that are covered by this Limited Warranty.
MICROSOFT D O E S NOT P R O V I D E A N Y WARRANTIES REGARDING ITS WARRANTY SERVICES AND, EXCEPT FOR THE'
PRECEEDING SENTENCE, D I S C L A I M S ALL D U T I E S (IF ANY]
OF W O R K M A N L I K E EFFORT OR OF L A C K OF NEGLIGENCE.
D. N O OTHER WARRANTIES. The express warranty stated
in Section A above is the only express warranty made to you
and is provided in lieu of a\\ other express or implied warranties and conditions (if any) including any created by any other
'I documentation or packaging. No other warranties or conditions are made with respect to the Xbox Product or the warranty services by any person, including but not limited to
Microsoft and its suppliers. No information (oral or written)
.or suggestions given by Microsoft, its agents or suppliers
or its or their employees, shall create a warranty or condition or expand the scope of this Limited Warranty. Also,
there is no warranty or condition of title, quiet enjoyment, or
noninfringement in the Xbox Product. You may have greater
rights existing under legislation in your jurisdiction. Where
any term of this Limited Warranty is prohibited by such laws,
it shall be null and void, but the remainder of the Limited
Warranty shall remain in full force and effect.
E. E X C L U S I O N S F R O M L I M I T E D WARRANTY. This Limited
Warranty shall not apply and Microsoft has no liability under
this Limited Warranty if the Xbox Product:
1 is used with products not sold or licensed by Microsoft
(including, but not limited to, non-licensed games and game
enhancement devices, adaptors and power supply sources) or
which are otherwise not compatible;
2 is used for commercia( purposes (including rental or lease);
3 is modified or tampered with:
4 is damaged by Acts of God, power surge, misuse, abuse, negligence, accident, wear and tear, mishandling, misapplication,or
other causes unretated to defective materials or workrnanship;
5 serial number is defaced, akered or removed;
6 . is damaged by programs, data, viruses, or files, or during
shipments;
4 This 'Limited Warranty applies to the original purchaser only
and may not be assigned or transferred. However, some jurisdictions extend the protection of imptied warranties to subsequent consumers and therefore this limitation may not apply
to you.
H. GOVERNING LAW. This Limited Warranty is valid only in
the United States of America, and Canada and Mexico. If you
acquired the Product in the United States, the laws of the
State of Washington, U.S.A.,will apply to this Limited Warranty.
If you acquired the Product in Canada, except where expressly
7 is not used in accordance with the accompanying documentation and use instructions; or
prohibited by local law, the laws in force in the Province of
Ontario, Canada will apply.
8 is repaired, modified or altered by other than Microsoft
authorized repair centers.
I f you acquired the Product in Mexico, then the Laws of Mexico
will apply.
This Limited Warranty does not cover your data, any separate
software or Xbox game? whether or not packaged or inctuded
with the Xbox Product, or any Xbox accessories or peripheral
devices that are not manufactured by or for Microsoft.
I. Q U E S T I O N S ?
P l e a s e call l-EO0-4MYXBOX
(TTY users: 1-866-740-XBOX) within the U.S., U.S. Territories
and Canada, and within Mexico Cali 001 866 7 4 5 83 12
[TTY users: 001 866 251 26 21).
F. EXCLlJSION OF CONSEQUENTIAL, INCIDENTAL A N D CERTAIN OTHER D A M A G E S a,nd LIMITATION OF LIABILITY
This Limited Warranty gives you specific legal rights, and you
may also have other rights which vary from jurisdiction to
jurisdiction.
TO THE FULL EXTENT ALLOWED BY LAW, MICROSOFT I S NOT
LIABLE FOR ANY:
[il CONSEQUENTIAL OR INCIDENTAL DAMAGES; [ii) DAMAGES
OR L O S S OF ANY NATURE WHATSOEVER RELATING TO LOST
PROFITS, LOSS OF DATA OR PRIVACY OR CONFIDENTIALITY,
ANY INABILITY TO USE ALL OR PART OF THE XBOX PRODUCT, PERSONAL INJURY, OR ANY FAILURE TO MEET ANY DUTY
[INCLUDING BUT NOT LIMITED TO ANY LACK O F NEGLIGENCE
OR OF WORKMANLIKE EFFORT); OR [iiil INDIRECT, SPECIAL,
OR PUNITIVE DAMAGES; ARISING OUT OF RELATING I N ANY
WAY TO THE XBOX PRODUCT.
Microsoft Corporation, One Microsoft Way, Redrnond, WA 98052
U.S.A.
THE FOREGOING APPLIES EVEN I F MICROSOFT OR ANY SUPPLIER Ofl AGENT H A S BEEN ADVISED OF THE POSSIBILITY
OF SUCH LOSSES OR DAMAGES; EVEN I N THE EVENT OF FAULT,
TORT [INCLUDING NEGLIGENCE), STRICT OR PRODUCT LIABILITY, MISREPRESENTATION OR OTHER REASON; AND EVEN
I F ANY REMEDY FAILS OF I T S ESSENTIAL PURPOSE. Some
jurisdictions do not allow the exclusion or limitation of incidental or consequential damages, so the above limitations or
exclusions may not apply to you.
G. A D D I T I O N A L C O N D I T I O N S
1 The software included in the Xbox Product is licensed to
you, not sotd. You are licensed to use such software only in
your Xbox Product and you may not reverse engineer it, except as expressly permitted by applicable law notwithstanding this limitation.
2 Your Xbox Product and its internal components are new
pursuant to industry standards, unless otherwise indicated on
the Xbox Product retail packaging a s "Refurbished".
3 You agree to comply with all applicable export laws and
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Information in this document, including URL and other Internet Web site references, is Subject to change without notice. Unless otherwise noted. the
example companies, organizations. products, domain names, e-mail addresses, logos. peopte, places and events depicted herein are fictitious. and n o
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Except as expressly provided in any written license agreement from Microsoft, the furnishing of this document does not give you any license to these
patents, tradernarks. copyrights. or other intellectual property.
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Microsoft, Xbox and the Xbox logos are either registered trademarks or trademarks of Microsoft Corporation in the United States and/or other
countries.
This product incorporates copyright protection technology that is protected by method claims of certain US.patents and other intellectual property
rights owned by Macrovision Corporation and other rights owners. Use of this copyright protection technology must be authorized by Macrovision
Corporation, and is intended for home and other limited viewing uses only unless otherwise authorized by Macrovision Corporation. Reverse engineering
or disassembly is prohibited.
Manufactured under license from Dolby Laboratories. "Dolby" and the d o u b l e 4 symbol are tradernarks of Dolby Laboratories. Conridential unpublished
works. Copyright 1999-2001 Dolby Laboratories. All rights reserved.
The names of actual companies and products mentioned herein may be the trademarks of their respective owners.
La information contenida en este documento, como direcciones URL y otras reterencias a sitios Web de Internet. est6 sujeta a cambios sin previo aviso.
A no ser que se indique lo contrario, 10s nombres de cornpabias. organizaciones, productos, dominios, direcciones de correo electronico, logotipos,
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organizaciones, productos, dominios. direcciones de correo electronico, logotipos. personas. tupares o eventos reales. El cumplimento de todas \as
leyes de derechos de autor aplicables es responsabilidad del usuario. Sin limitar los derechos especificados en los derechos d> autor, queda prohibida
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Microsoft puede tener patentes, aplicaciones de patentes, marcas comerciales, derechos de autor u otros derechos de propiedad intelectual aplicables
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entrega de este documento no Le otorga ninguna licencia sobre dichas patentes, marcas comercidles, derechos de autor u otros derechos de propiedad
intelectual.
IC) 2001 Microsoft Corporation. Reservados todos los derechos.
Microsoft, Xbox y el logotipo de Xbox son marcas registradas o marcas comerciales de Microsoft Corporation e n Estados Unidos y f o en otros paises.
Este product0 incorpora tecnologia de proteccion de copyright mediante determinadas patentes de EE.UU. y otros derechos de la propiedad intelectual
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para us0 domestic0 y solo para otros USOS de visualizacion limitados autorizados por Macrovision Corporation. S e prohibe el desmontaje del aparato y
La ingenieria inversa.
Fabricado bajo licencia de Dolby Laboratories. "Dolby" y et simbolo de la doble D son marcas cornerciates de Dolby Laboratories. Trabajo confidencial
no publicado. Copyright 1999-2001 Dolby Laboratories. Todos los derechos reservados.
Los nombres de los productos y compariias reales mencionados en el presente documento s e r i n marcas comerciales de s u s respectivos propietarios.
Les informations contenues dans le present document, p compris les URL et les autres references a des sites Web, peuvent faire l'objet de modifications
sans preavis. Sauf indication contraire, les entreprises. organismes. prodults, noms de domaine, adresses electroniques. logos. personnes, lieux et
evenements figurant dans ce manuel sont fictifs et sans quelconque rapport, intentionnel ou implicite, avec une entreprise. un organisme, un produit,
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relative aux droits d'auteur, applicable dans son pays. Sans limitation des droits d'auteur. aucune partie de ce document ne peut Etre reproduite,
stockee ni introduite dans un systPme de restitution, ou transmise b quelque fin, par quelque moyen que ce soit [electronique, mecanique, photocopie,
enregistrement ou autre] ou dans un but quelconque. sans la permission expresse et ecrite de Microsoft Corporation.
Microsoft peut detenir des brevets, avoir depose des demandes d'enregistrement de brevets ou Ptre titulaire de marques, droits d'auteur ou autres
droits de propriete intellectuelle portant sur L'ensemble ou une partie des elements qui font l'objet du present document. Sauf stipulation expresse
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marques, droits d'auteur o u autres droits de propriete intellectuelle.
( c ) 2001 Microsoft Corporation. Tous droits reserves.
Microsoft, Xbox et les logos Xbox sont des marques de commerce ou des marques deposees de Microsoft Corporation aux Etats-Unis et/ou dans
d'autres pays.
Ce produit integre une technologie de protection du copyright qui est protegee par des revendications de rnethode inherentes b certains brevets
americains et autres droits de propriete intellectuelle detenus par Macrovision Corporation et d'autres detenteurs de droits. Cutilisation de cette
technologie de protection du copyright doit Stre approuvee par Macrovision Corporation et est reservee a u n usage prive et limite, sauf mention
contraire par Macrovision Corporation. Cingenierie inverse ou le desassemblage est interdit.
Fabrique sous licence de Dolby Laboratories. Le terme e Dolby N et le sigle double D sont des marques commerciales de Dolby Laboratories. E u v r e s
inedites confidentielles. Droits d'auteur, 1999-2001 Dolby Laboratories. Tous droits reserves.
Les noms de societes et de produits reels mentionnes dans ce manuel peuvent Etre des marques de commerce de leurs proprietaires respectifs.
0901 Part Number: XO8-52583
Printed in Mexico
Microsoft*
UUVDoLsv]
D I G I T A L
EXHIBIT 7
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EXHIBIT 8
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OF C O N N E C T I C U T
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BUSINESS ABSTRACT
D&B Completed Analysis:11-21-2001
Database Last Updated:12-19-2001
Source:Copyright (c) 2002 by Dun & Bradstreet,
Inc.
Current Date:03/28/2002
COMPANY INFORMATION
DUNS:84-239-6822
Name:ULTIMATE GAME CLUB
Registered Address:605 W MAIN ST
BRANFORD, CT 06405-3421
Country :USA
North America
Telephone:203-483-6936
BUSINESS DESCRIPTION
Line of Business:MISC RTL STRS NEC
Primary SIC:
5999Ret misc merchandise
FINANCIAL INFORMATION
Net Worth (US):$Not Available
Net Worth (Local):$Not Available
Profit (US) : $Not Available
Prof it (Local): $Not Available
Currency:U.S. Dollar
SALES INFORMATION
Annual Sales (US):$160,000-Estimated
Annual Sales (Local):$Not Available
EMPLOYEE INFORMA!'ION
Total Employees:3
Employees Here:3
'
COMPANY HISTORY/OPERATIONS/RELATIONSHIPS
&
OTHER INFORMATION
This Company's Specifics:
DUNS:84-239-6822
Located 1n:County:
NEW HAVEN
Ownership 1s:Privately Owned
Business Is A:Single Location
END OF DOCUMENT
Copr. 0 West 2002 No Claim to Orig. U.S. Govt. Works
BUSINESS ABSTRACT
D&B completed ~nalysis:11-21-2001
Database Last Updated:12-19-2001
S0urce:Copyright ( c ) 2002 by Dun & Bradstreet,
Inc.
Current Date:03/28/2002
COMPANY INFORMATION
DUNS:79-700-3878
Name:ULTIMATE GAME CLUB
Registered Address:120 RIVERVIEW CTR
MIDDLETOWN, CT 06457-3585
Country:USA
North America
Telephone:860-346-5071
BUSINESS DESCRIPTION
Line of Business:MISC RTL STRS NEC
Primary SIC:
5999Ret misc merchandise
FINANCIAL INFORMATION
Net Worth (US):$Not Available
Net Worth (Local):$Not Available
Profit (US):$Not Available
Profit (Local):$Not Available
Currency:U.S. Dollar
SALES INFORMATION
Annual Sales (US):$160,000-Estimated
Annual Sales (Local):$Not Available
EMPLOYEE INFORMAT ION
Total Employees:3
Employees Here:3
COMPANY HISTORY/OPERATIONS/RELATIONSHIPS
&
OTHER INFORMATION
This Company's Specifics:
DUNS:79-700-3878
Located 1n:County:
MIDDLESEX
Ownership 1s:Privately Owned
Business Is A:Single Location
END OF DOCUMENT
Copr. 0 West 2002 No Claim to Orig. US.Govt. Works
EXHIBIT 9
JAH--26--9I
TU€
1 6 :
l e
1491 Boston Post Road, Old Saybrook, CT 06475
Phone (203)395-3093FAX (203)388-0084
i
FAX Cover Sheet
To:
Kathleen Cooney
taw Office 8
From: Stephen Schofield
203-395-3093
Number of pages (including Cover Sheet)
.I.
!
1
1
L
----... .
If there are any errors in transmission contact sender immediatelg
votes:
I
i
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I
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!
Page 1 of 3
.,
-91
TUE
1 6 , : l l
(Ultimata Game Club)
1491 Boston Post Road, Old Saybrook, CT 06475
Phone (203)395-3093 FAX (203)388-0084
To:
:
Commissioner Of Patents And Trademarks
Box5
Attn: Kathleen Cooney
Law Ofke 8
re:
Serial Number:
Mar&
Mark Type:
Drawing Type:
74B036.46
lnnovalion
Trademark
Stylized words, letters, or numbers
Dear Ms. Cooney,
Here the identificationclarification you requested:
I
)---c
-
'
I
--
"Innovation is the trademark for Innovation Technologies which is
Ultimate Game Club, Ltd.3 deslgdmanufacturlng division which manufactures
video game cartridges,video output games, video game joysticks, and other
video game accessories"
-
/
In reference to the other parties names appearing on specimen A(enclos8d) Sega Of
America, Inc. is a subsidiary of Sega Entereises, Ltd. which manufactures the "Game Gear"
handheld video game system for which we have designed and manufacture accessories, ie
"Master Link"wh1ch is a product of Innovation TechnOlOQisS,our designlmanufacturlng division.
If you have any questions or need any further clarification,please don't hesitate to call me
at any time. Thank you for your help.
1
Spedal Projects Director
Page 2 of 3
JFlI-4-26-93
1 6 : l l
J.
EXHIBIT 10
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Experience the thrills of the WWF like
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_ -Arcade-Stick
Price: $19.99
Category: XBox
ESRB: N/A
Xbox RF A-da&eI
I
-
.;I
Price: $19.99
Category: XBox
ESRB: N/A
X-Selector Video Gam-e System-Select01
Price: $19.99
Category: XBox
ESRB: N/A
http://www.ebgames.com/ebx/categories/products/deptpage.asp?offset=
1 &web-dept=XBox&Web-Sub-.
.. 3/28/2002
EBgames.com: 'Box-Accessories'
k
Page 2 of 3
SYSTEM SELECTOR SVID INNOV XB
Corporate Info
Store Locator
Store Rebates
Catalog Request
Contact Us
Price: $19.99
Category: XBox
ESRB: N/A
n
Affiliate Program
Privacy Statement
Xbox Advanced AV Pack
Price: $19.99
Category: XBox
ESRB: N/A
Bk
Xbox High Definition AV Pack
Price: $19.99
Category: XBox
ESRB: N/A
Svstem Selector for Xbox
Price: $17.99
Category: XBox
ESRB: N/A
Interact RFU Adauter for Xbox
Price: $14.99
Category: XBox
ESRB: N/A
____
Xbox Standard AV C m e
Price: $14.99
Category: XBox
ESRB: N/A
Price: $14.99
Category: XBox
ESRB: N/A
Interact S-Video/AV Cable for Xbox
, 1 Usually Ships Within 24 Hours
Price: $9.99
Category: XBox
ESRB: N/A
Interact AC Cable for Xbox
Price: $7.99
Category: XBox
ESRB: N/A
http://www.ebgames.com/ebx/categories/products/deptpage.asp?offset=l&web
-dept=XBox&Web-Sub- ... 3/28/2002
Page 3 of 3
Xtension Cable
Back Order
Price: $7.99
Category: XBox
ESRB: N/A
Previous 20 Results
Welcome I PlavStation 2 PlavStation Xbox I Game Bov A d v a m I GameCube I Dreamcast
PC Games I PC Hardware I Preowned I Action Fiqures I Movies
Copyright 0 1996-2002 EBWorld.com, Inc All rights reserved Terms Privacv Stakment
For information on joining our Affiliates Program, slickere.
http://www.ebgames.com/ebx/categories/products/deptpage.asp?offset=l&web-dept=XBox&Web-Sub- ...
3/28/2002
EXHIBIT 11
EXHIBIT 12
...
EXHIBIT 13
a party controllers may not work
I
dual shock compatible controller
I
EXHIBIT 14
i
1
EXHIBIT 15
~
Page 1 of 2
EBgames.com - X-Selector Video Game System Selector
click here to log-in!
Advanced Search
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q
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Welcome
Playstation 2
PIayS tati on
Xbox
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Platform
Preowned
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Game Boy Adv.
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6ack to
top
Overall customer rating:
**~3
fr
a-2
_
"DONT
___
PLAY
_ _G_
AM
_E_
S_
IN_
THE
~ -DARKIIC
"A good thing to have b u t ..."
Read full reviews
Write vour own review
Back to top
PC Home
PC Education
PC Office
Tax Shop
Toys
The Simpsons
Lord of Rings
McFarlane Toys
http://www.ebgames.com/ebx/categories/products/product.asp?pf~id=2
13973
n
3/28/2002
EBgaines.com - X-Selector Video Game System Selector
Page 2 of 2
Store Rebates
Contact Us
Affiliate Program
Privacy Statement
Welcome I Playstation 2 I Playstation 1 Xbox I Game Boy Advance I GameCube I Dreamcast
PC Games I PC Hardware I Preowned I A&B Fdures I Movies
Copyright 0 1996-2002 EBWorld.com. Inc. All rights reserved. G m .Privacv Statement.
All prices appearing on this site are in US.Dollars.
For information on joining our Affiliates Program, click here.
1 3973
3/28/2002
EXHIBIT 16
DECLARATION OF JOHN P. SCHNURER
I, John P. Schnurer, do hereby declare and state as follows:
1.
I am an attorney with the law firm of Fish & Richardson P.C., counsel for
Microsoft Corporation (“Microsoft”). I make this declaration in support of Microsoft’s
complaint for filing in the United States International Trade Commission. I make this
declaration of my own knowledge and could and would competently testify as to the
matters set forth herein.
2.
On or about March 13,2002, I visited the website at
wwwhnovation 1.corn and printed a copy of the website, a copy of which is attached as
Exhibit A. On or about March 15,2002, I sent an e-mail to the e-mail address listed on
the website for inquiries, which was ktinnovation@hotmail.com.
I requested information
about %oxTM accessories that Innovations Technologies may have for sale. I received
an e-mail the same day from ktinnovation@hotniail.com providing me the information I
requested as an attached file. A copy of the e-mail string is attached as Exhibit B. A
copy o f the attached file, a product catalog, is attached as Exhibit C.
3.
On or about March 26, I sent an e-mail to ktiniiovation@hotinail.coni
requesting an X-Selector for $20 and an X-Connection for $25. I received an e-mail from
ktinnovation@,hotmail.com the same day indicating the price for the X-Selector and X-
Connection. A file was also attached to the e-mail, which provided instructions for
payment. The instructions indicated that payment was to be made by money order,
Paypal or Bidpay. Payment was to be sent to the e-mail address Ict@cyberzone.net if
Paypal or Bidpay was used. A copy of the e-mail string is attached as Exhibit D.
4.
On or about March 26,2002, I opened an account at Paypal and sent
$50.00 to kt@,cyberzone.net as instructed. On or about March 26,2002, I received an email from Ict@,cyberzone.net which indicated that my purchase would be shipped the next
day.
1
5.
On or about April 11,2002, I received my purchase, i.e., one X-Selector
and one X-Connection, which was sent through the United States Postal Service. A copy
of the shipping label is attached as Exhibit E. The X-Selector I received had the same
ornamental design as the X-Selector offered for sale on www.EBgames.com, but the XConnection had an ornamental design that was different from the ornamental design of an
X-Connection that I had previously ordered fiom www.EBgames.com as reflected in an
invoice attached as Exhibit F.
I declare under penalty of perjury that the foregoing is true and correct.
Dated: April 24,2002
By:
o h P. Schnurer
2
EXHIBIT A
Page 1of 1
Innovation Technologies
DC ModChip Plan
-
&
Adding the Chip
DC 4M V M S PC Rogram Download
http://www.innovation 1.codnavbar.htm
3/13/2002
EXHIBIT B
,
Page 1 of 1
Hotmail Message
Calenda
Previous Next I Close
From : "ktinnovation" <ktinnovation@hotmaiI.com>
_-
To : "John Schnurer" <jschnurer@hotmail.com>
Subject : Re: X-boxes
Date : Fri, 15 Mar 2002 20:05:28 -0500
Attachment : Gamecube-xbox-1x2-retaiI.xls(25k)
(Forwardl rieG-1rPut in Folder.. .
jRepl;']
Printer Friendlv Version
here is a list of xbox stuff we have.
Hotmail
Free New
MSN Fea
POP Mail
Find Mes
Reminde
Directori
Explore
Free Gam
Find a Sp
'Net Acce
Share Ph
Send Cas
Futureteck
1491 boston post road
old saybrook,Cr 06475
fax 860-388-0084
www.innovationl.com
Chat Roo
Upgrade
Find Old
Shop AT
More.. .
----
Original Message --From: John Schnurer
To: kt@innovationl .corn
Sent: Friday, March 15, 2002 7:30 PM
Subject: X-boxes
Dear customer service,
I like your inventory for game consoles, but Ialready have a playstation2. I'm interested in an Xbox. DO you sell any. Also, I'm interested in any accessories available for the x-box. Thanks.
John
ISend and receive Hotmail on your mobile device: Click Here
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http://lwl4fd.law 14.hotmail.msn.com/cgi-bin/getmsg?curmbox=FOO00000O
1&a=d87f633f2a 4/23/2002
EXHIBIT C
F
no,
n9
tft
0
m
'?
t-
I
I*
EXHIBIT D
Page 1 o f 2
Hotmail Message
MSNHome
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Hotmail
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I
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Money
-",
7-.-l
_cll"""-l
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Calenda
jschnurer@hotmaii.com
; Save Address(es) 1 Block
~
I
From : "ktinnovation" <ktinnovation@hotmaiI.corn>
To : "John Schnurer" <jschnurer@hotrnail.corn>
-
I
-
Subject : Re: Purchase request
Date : Tue, 26 Mar 2002 13:30:42 -0500
Attachment : ot)enthisfileforDavmentinfo.itisnotavirus!
.doc (32k)
Printer Friendlv Version
yes.cost is $25.00 for x connection and $20.00 for x selector video version or $25.00 s video
version.shipping on both is $10.00
Futureteck
1491 boston post road
old saybrook,Cr 06475
fax 860-388-0084
www.innovationl.com
Original Message ---From: John Schnurer
To: ktinnovation@hotmail.com
---Sen
2-
Subject: Purchase request
Hotmail
Free New
MSN Fea
POP Mail
Find Mes
Reminde
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'Net Acce
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Find Old
Shop AT
More...
12:18 PM
Dear Customer Service:
I'd like to purchase 1x-selector and 1x-connection. What do you require? Can I fax in the order
request.
Thanks,
John
>From: "Minnovation"
>To: "John Schnurer"
>Subject: Re: X-boxes
>Date: Fri, 15 Mar 2002 20:05:28 -0500
>
>here is a list of xbox stuff we have.
>Futureteck
> 1491 boston post road
>old saybrook,Cr 06475
>fax 860-388-0084
>www.innovationl.com
> ----- Original Message ----> From: John Schnurer
> To: kt@innovationl.com
> Sent: Friday, March 15, 2002 7:30 PM
> Subject: X-boxes
>
http://lw14fd.law14.hotmail.msn.com/cgi-bin/getmsg?curmbox=FOOO0000O1&a=d87f633Qa 4/23/2002
Page 2 of 2
Hotmail Message
>
> Dear customer service,
>
> I like your inventory for game consoles, but Ialready have a playstation2. I'm interested in an
X-box. DO you sell any. Also, I'm interested in any accessories available for the x-box. Thanks.
>
> John
>
>
>
>-----------------------------------------------------------------------------> Send and receive Hotmail on your mobile device: Click Here
>
><< Gamecube-xbox-ps2-retail.xls >>
Noti
; Attachments are
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Advertise TRUSTe Approved Privacy Statement
http://lw 14fd.lawl4.hotmail.msn.com/cgi-bin/getmsg?curmbox=F0OOOOOOO1&a=d87f633f2a 4/23/2002
EXHIBIT E
*.!A
..
-.e
.C"
.
.
?l:
P
2 LBS
KEITH TFlRUSKI
.
1491
BOSTON POST
OLD SWBROOK
RD
CT 06475-1716
?,
'!; SHIP TO:
i
ni?
$1
JOHN SCHHUREN
16319 SRLIDR DEL SOL
cCA 92065
1 OF 1
Ir.9
f
CA 92065
I
EXHIBIT F
Ordered By:
JOHN
7 5 4 5 Group # :
SCHNURER
PO BOX 2 4
Have a question about your order? POWAY, CA
Visit: www.ebworld.com/rnyaccountUSA
Call: toll-free (877) 432-9675
E-Mail: help Q ebworld.com
920 7 4
4 3 5 0 LA JOLLA VILLAGE DR
SUITE 5 0 0
SYSTEM SELECTOR INNOVATIO 2 1 3 9 7 3 - 7 3 8 0 1 2 6 6 6 1 2 8
<BOX X-CONNECTION XB
Order Date:
3/15/02
217352-738012123379
Order I D : 0 0 2 0 5 6 4 6 5 - 4 0 8 7 4 8 3 1
Thank you for shopping at EBWorld.com.
RETURN LABEL
40874831
EB Product Fulfillment
931 South Matlack Street
West Chester, PA 19382
172478Pull #:022681
JOHN SCHNURER
FISH & RICHARDSON
SAN DIEGO, CA 92122
USA
UAMlTl
;HIPPED
- IESCRIPTION
1
1
Shipped To:
UNIT
PRICE
TOTAL
19.99
24.99
19.99
24.99
Subtotal
FRT
Tax
Total
44.98
8.99
PRICE
.oo
53.97
EXHIBIT 17
EBgames.com - X-Connection
a
5 e t u r n i n g shoppers,
Find it!
Page 1 of 2
;":X-Connection
1
m.. .
Advanced Search
.s
Sign up for
our Newsletter
.
';f>:,y&P
Welcome
Playstation 2
Playstation
Xbox
Accessories
Adventure
Family
Fighting
Hardware
Platform
Preowned
Racing
RPG
Shooters
Simulation
Sports
Strategy
Game Boy Adv.
Game Boy
GameCube
Dreamcast
PC Games
PC Hardware
Preow ned
Action Figures
DVD Movies
Nintendo 64
2.: p&:rL$l&
,%hqy>;?
PC Home
PC Education
PC Office
Tax Shop
'rays
'The Simpsons
Lord of Rings
McFarlane Toys
The X-Connection allows you to play Xbox console games with
Playstation controllers. Simply connect the Xbox console t o the TV,
pop in your favorite game, switch on the power, and plug the
convertor into the Xbox. Then, plug the Playstation controller into
the X-Connection and you're ready to go.
I
9
Pu b1isher:INNOVATION
TECHNOLOGIES
Category: XBox
'd
Back to top
Overall customer rating:
"Does Not Work Properly"
"Doesn"t work with all a a m e g
"has its uses_;
***.k
Read all reviews
Write your own review
Back to top
http://www.ebgames.conllebxlcategories/products/product.asp ?p f-id=217352
3/28/2002
EBgames.com - X-Connection
Page 2 of 2
Store Rebates
Contact Us
Affiliate Program
Privacy Statement
Welcome I Playstation 2 I Playstation Xbox I Game Bov AdvaGameCube Dreamcast
PC Games I PC Hardware I Preowned I Action Fiaures I Movies
Copyright 0 1996-2002 EBWorld com, Inc All rights reserved Ergs Privacv Statement
For information on joining our Affiliates Program, c;lick here.
17352
3/28/2002
EXHIBIT 18
Page 1of 2
Gamestop.com - Home
tireat rjamestop utters!
rs shooter that will blow you
th awesome weapons and
Hurry1 When the clock" runs down or
supplies are gone. the sale is over!
Vision Tek G4 128MB Video Ca--'
Freedom Force FRE"
Preowned G T A A M
I
, .
-
Dungeon Siege $47.99
Ships April 4thl Dungeon Siege
plunges you into a continuous 3D
fantasy world where you face off
against an a n y of evil that has been
unleashed!
Sybex's Strategies & Secrets
Also try: Neverwinter Nights.
~
I
Resident Evil - $49.99
GC - Ships 5/14
An entirely new
Neon Genesis Evangelion
ence on 2 discs! Be Collection IDVDI
airaio ...be very afraid ...
Spiderman (XBOX)
I
b
4/09
Check out this and
I
I
E Blood Omen 2 - $49.99
I,
are Vampire
. the
most evil figure
ce a video game.
1
rc
http://www.gamestop:coml
)
-
~
I I IC JCI ICD LI 1 1 1
NFL Blitz 2002 (Xbox)
3/19
Yu-gi-oh1 Dark Duel Stories
3,18
(GB)
Yu-gi-oh1 Forbidden
3/18
Memories (PSX)
[Spawn Series 12 Figures
Dungeon Siege
Sony PS2 Memorq1 Card
innovation XBox X tension
Cable
I
Freedom Force with Bonus
I ~ d Kninht
i
II IPAI Outcast
$47.99
$39.99
I
$7.99
$39.99
$49.99
3/28/2002
Page 2 of 2
Ganiestop.com - Home
-
PC Even Sims could use
a break once in a while!
Take them skiing, to the
beech or more!
ignited the 3D fighting
genre has returned!
Sega Dreamcast System with
Crazy Taxi Free $69.99
Purchase a preowned Sega Dreamcast
System and receive Crazy Taxi
absolutely FREE!
Preowned PS2 System with
FREE Zone of the Endersl
Jedi Knight 11. Jedi Outcast
_Collector's Edition
Yu-gi-oh! Dark Duel Stories
Yu-gt-oh' Card Booster Pack
Playstation 2 System with SSX
Free $249.99
Receive SSX FREE when you purchase
a Preowned Playstation 2 System in our
exclusive bundle!
-
-
Dre3mcmLRumhkePa~k-:
Nintendo 8:BBCo_ntr_oller
sE!9
84.99
Now you can fully experience your
Dreamcast games in all their
action-packed glory!
-
Do you need to play rnultiplayer
games on your NES? Of course! Get
another controller!
NES AC Adanter
$249,9s
$59,99
$29.99
$2.99
Harvest Moon Save the Homeland
- PS2
New Price S34 99
Old Price $49 99
Baseball Mogul 2002 - PC
New Piice $19 99
Old Price $29 99
Driven - GBA
New Price $1 9 99
Old Price $29 99
Powerpuff Girls Chemical XTraction - N64
New Price $29 99
Old Price $39 99
onkey Kong? Can
ch out Pikachu?
4
sm Be& to Top
Contact Us I Newsletter Sian-Up I Affiliate ProqramInvestor Relations I Employment I Corporate Information I Disclaimer
Back to Top
153
http://www.gamestop.coml
3/28/2002
--
_I
Page 1 of 2
Garriestop.com - Innovation XBox X-Connection Playstation 2 Dual Shock Converter
GameStotm
A
~
~Company-~
~HOME I VIEW CART
E
~ ACCOUNT I ~STORE LOCATOR
~ I HELP
I ORDER~TRACKlNG I MY
ACCESSORIES[
Innovation XBox X-Connection
Playstation 2 Dual Shock
Converter
Innovation XBox Xtension Cable
Publisher: Innovation Technologies
Developer: Innovation Technologies
P l a t f o r m : XBOX
$7.99
Category: Accessories, Cables & Adapters
=mRE
AtlAJhABIbPTY
Z I P Code:
Innovation presents the XBox Xtension Cable
which adds 6 feet of cable t o the original
Microsoft Xbox controller. The Xtension Cable
features an inline ...[More]
$24.99
Back O r d e r e d
Add to Cart
Distance:
Add t o Cart
@
The X-Connection allows you to play Xbox console games with Playstation
controllers. Simply connect the Xbox console to the W , pop in your
favorite game, switch on the power, and plug the convertor into the Xbox.
Then, plug the Playstation controller into the X-Connection and you're
ready to go.
ALS XBox Carry Case
$29.99
Interact Universal SAV Cable
$14.99
Add t o Cart
Add t o Cart
Interact XBox AV/SVideo Cable
$7.99
Add t o Cart
Interact
RFU
Ad a Rte r
$7.99
Add t o Cart
MadCatz U n L v e E e
AV Cable
$14,99
A d d t o CaIt
$7.99
Add t o Cart
Cab le
Mlcrosoft
$14.99
Add to Cart
Monster
Cable
$29.99
Add t o Cart
$29.99
Add t o Cart
$49.99
Add-to Cart
Monster XBox
GarneLink 300 S-Video $34.99
AV
Add to Cart
Cable
Monster XBox
GarneLink 100 Fiber
Optic
Monster XBox
GarneLink 4-00
Corn ponent
$14.99
Add to c a r t
Pelican XBOX
Extension Cable
$7.99
Add to Cart
Intec XBOX Extension
Cable
$7.99
Add t o Cart
Microsoft X B O m
C&
http://www .gamestop .codproduct.asp?product_id=8 0 1382
312812002
~
Page 2 o f 3
Gamestop.com - Innovation XBox X-Connection Playstation 2 Dual Shock Converter
Join the legendary Jedi Knight Obi-Wan Kenobi
as he takes o n the worst scum and villainy the
galaxy has to offer in level after level of fastpaced action. [More]
...
'
Back to Top
Contact Us
Relations
_Investor_
_
I
Batman Venqeance
$49.99
Add t o Cart
NBA Live 2002
$49.99
Add t o Cart
New Legends
$49.99
Add to Cart
Jet Set RadioFuNre
$49.99
Add to Ca-rt
Eider Scrolls 111:
Morrowind
$49.99
Add to Cart
NFL 2K2
$49.99
Addtocart
Genma. Onimusha
$49.99
Add to Cart
I Newsletter Sign-Up I Affiliate P r o q m
Employment I Corporate Information I Disclaimer
d
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154
http://www.gamestop:com/product.asp?product-id=SO1 382
3/28/2002
EXHIBIT 19
Ordered By:
7687 Group
MELODY HABECKER
2222 Q ST. N.W. APT. 1
Have a question about your order? WASHINGTON, JJC 2 0 0 0 8
Visit:
www.ebworld.com/myaccount~~~
Call:
toll-free(877) 432-9675
E-Mail: help@ebworld.com
Shipped To:
#:
174892Pull # : 022856
MELODY HABECKER
2222 Q ST. N.W. APT. 1
WASHINGTON, DC 20008
USA
~
UANTITY
)ESCRIPTION
;HIPPED
YSTEM SELECTOR INNOVATIO 213973-738012666128
2
Order Date:
3/25/02
Order ID:002066347-40894700
RETURN LABEL
,
r
40894700
UNIT
FRICE
TOTAL
PRICE
19.99
39.98
Subtotal :
PRT :
Tax :
Total :
39.98
8.99
.oo
48.97
EXHIBIT 20
Shipped To:
7545 Group # :
172478Pull #:022681
JOHN
SCHNURER
JOHN SCHNURER
4350 LA JOLLA VILLAGE DR
PO BOX 24
SUITE 500
Have a question about your order? POWAY, CA 92 074
FISH & RICHARDSON
Visit: www.ebworld.com/myaccountUSA
SAN DIEGO, CA
92122
Call: toll-free (877) 432-9675
Ordered By:
E-Mail: help@ebworld.com
"Aw'nl
USA
I
RDERED SHIPPED DESCRIPTION
1
1
SYSTEM SELECTOR INNOVATIO 213973-738012666128
1
1
XBOX X-CONNECTION XB
Order Date:
3/15/02
217352-738012123379
Order ID:002056465-40874831
RETURN LABEL
/-
i
40874831
IlllllllllllIllllnl111/Il1
MI1779330
UNIT
PRICE
TOTAL
PRICE
19.99
24.99
19.99
24.99
Subtotal
FRT
Tax
Total
44.98
8.99
.oo
53.97
EXHIBIT 21
Game
Shipping Method
Wave No
Bin No
Filler No
Packed By
www. arnestop.com
2250
illiam D. Tate Avenue
Grapevine, Texas 7605 1
1 of 1
:8744
: 15
:1
:LF
00004020327085729102
Order Number: 4020327085729102
Shipping Mode: FedEx Standard Overnight
2201 L Street, NW
Apartment 7 12
Washington, DC 20037
(202)223-2799
Store Number: 400000
Ship Date:
0312812002
Payment:
Visa 9189
Shipment No:
Wave No:
:FedEx Standard Overnight
1
I
8744
I
'L
PACKING LIST
01382
1
1
1
0
1
a O X X Connection (Innovation)
a O X X Connection (Innovation)
For International Customers: Order Value for
Customs =Subtotal.
0
Country of Origin is the
US unless otherwise stated.
0
JPN
JPN
t4.99
t4.99
p;
Any additional customs duties, import fees and
taxes are the responsibility of the recipient.
SubTotal :
Shipping and Handling :
Total Charges :
49.98
7.99
57.97
Return Label
Gamestop.comc/o Babbage's Etc.
2250 William D.Tate Avenue
Grapevine,TX 76051
Order #
RMA #
.
.
I
GAMESTOP.6: M RETURN POLICY
Defective Items
Defective products may be returned up to 30 days past the shipment date of your order. If you
want to return a defective product, please follow these instructions:
1 Contact us to obtain a Return Authorization Number (RMA#). Please do not ship
merchandise back to us without first obtaining an RMA # as this may sianificantlV
delaV the process of crediting your order or replacinq Vour defective item.
2. Using the return label on the front of this page, mail the defective merchandise
back to us. We suggest that you insure your package so you can track it.
3. We will mail out a replacement product to you at ne extra charge.
Non-Defective Items
Non-defective products may be returned up to 30 days past the shipment date of your order. If
you want to return non-defective merchandise to us, please follow these instructions:
1. Contact us to obtain a Returri Authorization Number (RMA#). Please do not
ship merchandise back to us without first obtaining an RMA# as this may
siqnificantly delay the process of creditinq Vour order.
2. Using the return label on the front of this page, mail the merchandise back to us.
We suggest that you insure your package so you can track it.
3. Upon the receipt of the returned merchandise, we will credit your account.
-Customer Service Bepat-lment
You may contact our customer sewice department via phone or email:
e
EMAIL: orders@qamestop.com
* PHONE: 1-817-424-2200.
Our customer service department is open from Monday through Friday from 8 am to 7 pm
Central Standard Time. Please allow up to 48 hours for us to process your request.
EXHIBIT 22

FISH RICHARDSON

Transcription

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