But for much of that decade the software giant retroactively set the grant date for its options at the lowest point for the stock over the previous month, a variation on the "backdating" practice now under investigation by federal authorities. In doing so, Microsoft likely wasn't following the accounting rule in question, accounting experts said.

As a result, Microsoft potentially misled investors and regulators when it described its option program in its securities filings, while its auditor, Deloitte & Touche LLP, may have signed off on incorrect financial statements.

Microsoft, of Redmond, Wash., said in 1999 that it had stopped the options-dating practice at issue and disclosed to investors then that it had "historically" used that technique. It also took a $217 million charge against earnings for fiscal-year 1999 in recognition of the expense of issuing backdated options.

Microsoft believed "then and now" that it complied with generally accepted accounting principles governing how to book the cost of employee stock options in the 1990s. In a statement, Larry Cohen, Microsoft's general manager for corporate communications, said: "As administered by Microsoft, the 30-day-lowest-strike-price practice was not selectively applied and did not involve 'backdating' as we understand that term is being used in current reports of investigations of other companies."

In a statement, a spokesman for Deloitte said the firm "is not aware of any material misstatements in Microsoft's financial statements either during the 1990s or more recently."

Microsoft's options practices in the 1990s have come under scrutiny as federal prosecutors and regulators probe a growing number of companies over possible backdating of stock options. In its most egregious form, backdating allowed top executives to retroactively lock in a low price at which they could buy stock. Microsoft's variant applied to all its employees, not just top executives.

Stock options allow employees to purchase shares at a future date at a preset exercise price. Under accounting rules in place in the 1990s - and since changed - a company didn't have to book any expense for granting stock options if the exercise price was the same as the share price on the day of issue, often called the grant date. But Microsoft during much of that decade often set the exercise price to the lowest stock price over the course of a month. That usually meant the exercise price was below the stock price. Such options are said to be "in the money" because they would yield a profit if cashed in immediately.

Granting in-the-money options to employees without disclosing them to shareholders can violate federal securities laws. Firms must also properly account for them, and that is where Microsoft may have run into problems.

Under the then-in-place rule, Accounting Principles Board Opinion 25, a firm had to book an expense for an in-the-money option. (Effective this year, companies must book an expense for all options grants.)

Proxy filings, corporate insider-trading forms and other securities filings show Microsoft engaged in the monthly-low exercise-price practice starting in at least 1992 and made grants at the monthly-low price in each year from 1992 to 1999. That would have produced in-the-money grants in most of those years.

In SEC filings, Microsoft told investors otherwise. In its annual report for fiscal year 1998, Microsoft said in a footnote that it "follows APB Opinion 25 to account for (employee stock option) plans in its published financial statements. Accordingly, no compensation cost is recognized because the option exercise price is equal to the market price of the underlying stock on the date of grant." Microsoft used identical language in its SEC filing for fiscal 1997.

One potential explanation: Microsoft and Deloitte may have reckoned that even if it wasn't adhering to APB 25 the potential expense was immaterial to the company's financial results and didn't have to be booked or disclosed, say accounting experts. In that case, even if Microsoft didn't comply with APB 25, it would be complying with generally accepted accounting principles. In 1999, the fiscal year for which Microsoft took the $217 million charge, it posted $7.8 billion in net income.

Yet the company said in SEC filings that it was complying with APB 25. "Right there you may have a problem, because it's not true if it's in conflict with what the facts were," said Jack Ciesielski, editor of the Analyst's Accounting Observer.

Materiality aside, Microsoft may not have believed its options were "in the money," say people familiar with its thinking, because it defined the options' grant date as the date of the monthly low.

But APB 25 required a firm to determine if an option was "in the money" when it had all measurement data for it. Since Microsoft didn't set the exercise price until the end of the month, it didn't know the exercise price until then.

For example, say Microsoft set a grant date of July 7 for options because that day marked its lowest stock price for the month. "If we didn't know the price and number of options on July 7, then July 7 wasn't the grant date," said Rebecca Todd McEnally, director of the capital markets policy group at the CFA Institute, a financial-markets organization. While companies may have taken a liberal approach to the definition of what constitutes a grant date under APB 25, it "wasn't as loose as company managers made it appear," she added.

The important date in determining if an option was in the money, and so therefore should be expensed, was the date on which the company knew the exercise price and how many options would be issued, said Norman Strauss, an accounting professor at Baruch College.

Greg Maffei, the former Microsoft finance chief who in 1999 oversaw the ending of the options-dating practice, also believes the accounting didn't fall within the rules, though he says Microsoft was a "leader" in presenting the cost of options to investors. "When it became clearer to us that (the practice) was not in compliance with GAAP, we took a charge and we fully revealed our policy and changed it," he said in an interview late last week.