PR Newswire -- July 22, 2010

REDMOND, Wash., July 22 /PRNewswire-FirstCall/ -- Microsoft Corp. today
announced record fourth-quarter revenue of $16.04 billion for the quarter ended
June 30, 2010, a 22% increase from the same period of the prior year. Operating
income, net income and diluted earnings per share for the quarter were $5.93
billion, $4.52 billion and $0.51 per share, which represented increases of 49%,
48% and 50%, respectively, when compared with the prior year period.

"This quarter's record revenue reflects the breadth of our offerings and our
continued product momentum," said Peter Klein, chief financial officer. "The
revenue growth, combined with our ongoing cost discipline, helped us achieve
another quarter of margin expansion."

Product momentum continued during the quarter with the successful launch of
Office 2010 and strong performance from existing products including Windows 7,
which has sold more than 175 million licenses to date, Windows Server, Xbox, and
Bing, which achieved its 13th consecutive month of share gain.

"We saw strong sales execution across all of our businesses, particularly in the
enterprise with Windows 7 and Office 2010," said Kevin Turner, chief operating
officer. "Our transition to cloud services is well underway with offerings like
Windows Azure and our Business Productivity Online Services, and we look forward
to continuing our product momentum this fall with the upcoming launches of
Windows Phone 7 and Xbox Kinect."

For the fiscal year ended June 30, 2010, Microsoft reported record revenue of
$62.48 billion, a 7% increase from the prior year. Operating income, net income
and diluted earnings per share for the year were $24.10 billion, $18.76 billion
and $2.10, which represented increases of 18%, 29% and 30%, respectively, when
compared with the prior year.

BusinessOutlook

Microsoft offers updated operating expense guidance of $26.9 billion to $27.3
billion for the full year ending June 30, 2011.

WebcastDetails

Peter Klein, chief financial officer, Frank Brod, chief accounting officer, and
Bill Koefoed, general manager of Investor Relations, will host a conference call
and webcast at 2:30 p.m. PDT (5:30 p.m. EDT) today to discuss details of the
company's performance for the quarter and certain forward-looking information.
The session may be accessed at http://www.microsoft.com/msft. The webcast will
be available for replay through the close of business on July 22, 2011.

About Microsoft

Founded in 1975, Microsoft (Nasdaq: MSFT) is the worldwide leader in software,
services and solutions that help people and businesses realize their full
potential.

Forward-Looking Statements

Statements in this release that are "forward-looking statements" are based on
current expectations and assumptions that are subject to risks and
uncertainties. Actual results could differ materially because of factors such
as:

-- challenges to Microsoft's business model;
-- intense competition in all of Microsoft's markets;
-- Microsoft's continued ability to protect its intellectual property
rights;
-- claims that Microsoft has infringed the intellectual property rights of
others;
-- the possibility of unauthorized disclosure of significant portions of
Microsoft's source code;
-- actual or perceived security vulnerabilities in Microsoft products that
could reduce revenue or lead to liability;
-- improper disclosure of personal data could result in liability and harm
to Microsoft's reputation;
-- outages and disruptions of services provided to customers directly or
through third parties if Microsoft fails to maintain an adequate
operations infrastructure;
-- government litigation and regulation affecting how Microsoft designs and
markets its products;
-- Microsoft's ability to attract and retain talented employees;
-- delays in product development and related product release schedules;
-- significant business investments that may not gain customer acceptance
and produce offsetting increases in revenue;
-- unfavorable changes in general economic conditions, disruption of our
partner networks or sales channels, or the availability of credit that
affect demand for Microsoft's products and services or the value of our
investment portfolio;
-- adverse results in legal disputes;
-- unanticipated tax liabilities;
-- quality or supply problems in Microsoft's consumer hardware or other
vertically integrated hardware and software products;
-- impairment of goodwill or amortizable intangible assets causing a charge
to earnings;
-- exposure to increased economic and regulatory uncertainties from
operating a global business;
-- geopolitical conditions, natural disaster, cyber attack or other
catastrophic events disrupting Microsoft's business; and
-- acquisitions and joint ventures that adversely affect the business.

For further information regarding risks and uncertainties associated with
Microsoft's business, please refer to the "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Risk Factors" sections of
Microsoft's SEC filings, including, but not limited to, its annual report on
Form 10-K and quarterly reports on Form 10-Q, copies of which may be obtained by
contacting Microsoft's Investor Relations department at (800) 285-7772 or at
Microsoft's Investor Relations Web site at http://www.microsoft.com/msft.

All information in this release is as of July 22, 2010. The company undertakes
no duty to update any forward-looking statement to conform the statement to
actual results or changes in the company's expectations.

Microsoft Corporation
Income Statements
(In millions, except per share amounts)

Three Months Ended
June 30,
------------------
2010 2009
---- ----

Revenue $16,039 $13,099
Operating expenses:
Cost of revenue 3,170 2,586
Research and development 2,350 2,225
Sales and marketing 3,602 3,192
General and administrative 987 1,069
Employee severance - 40
--- ---
Total operating expenses 10,109 9,112
------ -----
Operating income 5,930 3,987
Other income (expense) 94 155
--- ---
Income before income taxes 6,024 4,142
Provision for income taxes 1,506 1,097
----- -----
Net income $4,518 $3,045
====== ======

Earnings per share:
Basic $0.52 $0.34
===== =====
Diluted $0.51 $0.34
===== =====

Weighted average shares outstanding:
Basic 8,712 8,901
===== =====
Diluted 8,821 8,928
===== =====

Cash dividends declared per common
share $0.13 $0.13
===== =====

Twelve Months Ended
June 30,
-------------------
2010 2009 (1)
---- -------

Revenue $62,484 $58,437
Operating expenses:
Cost of revenue 12,395 12,155
Research and development 8,714 9,010
Sales and marketing 13,214 12,879
General and administrative 4,004 3,700
Employee severance 59 330
--- ---
Total operating expenses 38,386 38,074
------ ------
Operating income 24,098 20,363
Other income (expense) 915 (542)
--- ----
Income before income taxes 25,013 19,821
Provision for income taxes 6,253 5,252
----- -----
Net income $18,760 $14,569
======= =======

Earnings per share:
Basic $2.13 $1.63
===== =====
Diluted $2.10 $1.62
===== =====

Weighted average shares outstanding:
Basic 8,813 8,945
===== =====
Diluted 8,927 8,996
===== =====

Cash dividends declared per common
share $0.52 $0.52
===== =====

(1) Derived from audited financial statements

Microsoft Corporation
Balance Sheets
(In millions)

June 30, June 30,
2010 2009 (1)
---- -------

Assets
Current assets:
Cash and cash equivalents $5,505 $6,076
Short-term investments (including securities
loaned of $62 and $1,540) 31,283 25,371
------ ------
Total cash, cash equivalents, and short-term
investments 36,788 31,447
Accounts receivable, net of allowance for
doubtful accounts of $375 and $451 13,014 11,192
Inventories 740 717
Deferred income taxes 2,184 2,213
Other 2,950 3,711
----- -----
Total current assets 55,676 49,280
Property and equipment, net of accumulated
depreciation of $8,629 and $7,547 7,630 7,535
Equity and other investments 7,754 4,933
Goodwill 12,394 12,503
Intangible assets, net 1,158 1,759
Deferred income taxes - 279
Other long-term assets 1,501 1,599
----- -----
Total assets $86,113 $77,888
======= =======

Liabilities and stockholders' equity
Current liabilities:
Accounts payable $4,025 $3,324
Short-term debt 1,000 2,000
Accrued compensation 3,283 3,156
Income taxes 1,074 725
Short-term unearned revenue 13,652 13,003
Securities lending payable 182 1,684
Other 2,931 3,142
----- -----
Total current liabilities 26,147 27,034
Long-term debt 4,939 3,746
Long-term unearned revenue 1,178 1,281
Deferred income taxes 229 -
Other long-term liabilities 7,445 6,269
Commitments and contingencies
Stockholders' equity:
Common stock and paid-in capital - shares
authorized 24,000;
outstanding 8,668 and 8,908 62,856 62,382
Retained deficit, including accumulated other
comprehensive income
of $1,055 and $969 (16,681) (22,824)
------- -------
Total stockholders' equity 46,175 39,558
------ ------
Total liabilities and stockholders' equity $86,113 $77,888
======= =======

(1) Derived from audited financial statements

Microsoft Corporation
Cash Flows Statements
(In millions)

Three Months Ended
June 30,
------------------
2010 2009
---- ----

Operations
Net income $4,518 $3,045
Adjustments to reconcile net income to net
cash from operations:
Depreciation, amortization, and other
noncash items 718 681
Stock-based compensation 482 416
Net recognized losses (gains) on
investments and derivatives 114 1
Excess tax benefits from stock-based
compensation (7) (4)
Deferred income taxes (483) 300
Deferral of unearned revenue 9,682 8,355
Recognition of unearned revenue (7,055) (6,348)
Changes in operating assets and
liabilities:
Accounts receivable (4,144) (1,820)
Other current assets 114 (767)
Other long-term assets (80) (114)
Other current liabilities 1,352 453
Other long-term liabilities 393 (357)
--- ----
Net cash from operations 5,604 3,841
----- -----
Financing
Short-term borrowings (repayments),
maturities of 90 days or less, net (545) (489)
Proceeds from issuance of debt, maturities
longer than 90 days 1,575 4,468
Repayments of debt, maturities longer than
90 days (1,088) (228)
Common stock issued 912 143
Common stock repurchased (3,839) (22)
Common stock cash dividends (1,130) (1,158)
Excess tax benefits from stock-based
compensation 7 4
Other 10 (19)
--- ---
Net cash from (used in) financing (4,098) 2,699
------ -----
Investing
Additions to property and equipment (758) (867)
Acquisition of companies, net of cash
acquired - (41)
Purchases of investments (4,174) (15,325)
Maturities of investments 1,005 4,522
Sales of investments 2,420 3,704
Securities lending payable (2,612) 150
------ ---
Net cash used in investing (4,119) (7,857)
Effect of exchange rates on cash and cash
equivalents (37) 108
--- ---
Net change in cash and cash equivalents (2,650) (1,209)
Cash and cash equivalents, beginning of
period 8,155 7,285
----- -----
Cash and cash equivalents, end of period $5,505 $6,076
====== ======

Twelve Months Ended
June 30,
-------------------
2010 2009 (1)
---- -------

Operations
Net income $18,760 $14,569
Adjustments to reconcile net income to net
cash from operations:
Depreciation, amortization, and other
noncash items 2,673 2,562
Stock-based compensation 1,891 1,708
Net recognized losses (gains) on
investments and derivatives (208) 683
Excess tax benefits from stock-based
compensation (45) (52)
Deferred income taxes (220) 762
Deferral of unearned revenue 29,374 24,409
Recognition of unearned revenue (28,813) (25,426)
Changes in operating assets and
liabilities:
Accounts receivable (2,238) 2,215
Other current assets 420 (422)
Other long-term assets (223) (273)
Other current liabilities 1,295 (3,371)
Other long-term liabilities 1,407 1,673
----- -----
Net cash from operations 24,073 19,037
------ ------
Financing
Short-term borrowings (repayments),
maturities of 90 days or less, net (991) 1,178
Proceeds from issuance of debt, maturities
longer than 90 days 4,167 4,796
Repayments of debt, maturities longer than
90 days (2,986) (228)
Common stock issued 2,311 579
Common stock repurchased (11,269) (9,353)
Common stock cash dividends (4,578) (4,468)
Excess tax benefits from stock-based
compensation 45 52
Other 10 (19)
--- ---
Net cash from (used in) financing (13,291) (7,463)
------- ------
Investing
Additions to property and equipment (1,977) (3,119)
Acquisition of companies, net of cash
acquired (245) (868)
Purchases of investments (30,168) (36,850)
Maturities of investments 7,453 6,191
Sales of investments 15,125 19,806
Securities lending payable (1,502) (930)
------ ----
Net cash used in investing (11,314) (15,770)
Effect of exchange rates on cash and cash
equivalents (39) (67)
--- ---
Net change in cash and cash equivalents (571) (4,263)
Cash and cash equivalents, beginning of
period 6,076 10,339
----- ------
Cash and cash equivalents, end of period $5,505 $6,076
====== ======

(1) Derived from audited financial statements

Microsoft Corporation
Segment Revenue and Operating Income (Loss)
(In millions)

Three Months Ended
June 30,
--------
2010 2009
---- ----
Revenue
-------
Windows & Windows Live Division $4,548 $3,169
Server and Tools 4,012 3,528
Online Services Division 565 501
Microsoft Business Division 5,250 4,567
Entertainment and Devices
Division 1,600 1,257
Unallocated and other 64 77
--- ---
Consolidated $16,039 $13,099
======= =======

Operating Income (Loss)
-----------------------
Windows & Windows Live Division $3,063 $1,929
Server and Tools 1,546 1,206
Online Services Division (696) (585)
Microsoft Business Division 3,284 2,706
Entertainment and Devices
Division (172) (141)
Corporate-level activity (1,095) (1,128)
------ ------
Consolidated $5,930 $3,987
====== ======

Twelve Months Ended
June 30,
-------------------
2010 2009
---- ----
Revenue
-------
Windows & Windows Live Division $18,491 $14,974
Server and Tools 14,866 14,191
Online Services Division 2,199 2,121
Microsoft Business Division 18,642 18,910
Entertainment and Devices
Division 8,058 8,035
Unallocated and other 228 206
--- ---
Consolidated $62,484 $58,437
======= =======

Operating Income (Loss)
-----------------------
Windows & Windows Live Division $12,977 $9,982
Server and Tools 5,491 4,803
Online Services Division (2,355) (1,652)
Microsoft Business Division 11,776 11,664
Entertainment and Devices
Division 679 108
Corporate-level activity (4,470) (4,542)
------ ------
Consolidated $24,098 $20,363
======= =======

MICROSOFT CORPORATION

FINANCIAL HIGHLIGHTS

This document contains statements that are forward-looking. These statements are
based on current expectations and assumptions that are subject to risks and
uncertainties which may cause actual results to differ materially from the
forward-looking statements in this document. We undertake no obligation to
update or revise publicly any forward-looking statements, whether as a result of
new information, future events, or otherwise.

Summary

(In
millions, Three
except per Months
share Ended Percentage
amounts and
percentages) June 30, Change
------------- -------- ------

2010 2009

Revenue $16,039 $13,099 22%
Operating
income $5,930 $3,987 49%
Diluted
earnings
per share $0.51 $0.34 50%
---------- ----- ----- ---

(In
millions, Twelve
except per Months
share Ended Percentage
amounts and
percentages) June 30, Change
------------- -------- ------

2010 2009

Revenue $62,484 $58,437 7%
Operating
income $24,098 $20,363 18%
Diluted
earnings
per share $2.10 $1.62 30%
---------- ----- ----- ---

Three months ended June 30, 2010 compared with three months ended June 30, 2009

Revenue increased mainly due to strong sales of Windows 7 and the 2010 Microsoft
Office system, which were released in fiscal year 2010, and PC market
improvement. Operating income increased reflecting the change in revenue, offset
in part by higher operating expenses.

-- Cost of revenue increased $584 million or 23%, primarily reflecting
increased online costs, increased royalty costs and charges resulting
from the discontinuation of the KIN phone.
-- Sales and marketing expenses increased $410 million or 13%, primarily
reflecting increased advertising and marketing of Windows 7.
-- Research and development expenses increased $125 million or 6%,
primarily reflecting the capitalization of certain software development
costs related to Windows 7 product development in the prior year.
-- General and administrative expenses decreased $82 million or 8% due
mainly to decreased legal charges.

Diluted earnings per share increased reflecting increased net income and the
repurchase of 380 million shares during fiscal year 2010.

Twelve months ended June 30, 2010 compared with twelve months ended June 30,
2009

Revenue increased mainly due to strong sales of Windows 7 and PC market
improvement. Operating income increased reflecting the change in revenue, offset
in part by higher operating expenses.

-- Sales and marketing expenses increased $335 million or 3%, primarily
reflecting increased advertising and marketing of Windows 7 and Bing and
increased sales force expenses related to Windows 7.
-- General and administrative expenses increased $304 million or 8% due
mainly to increased legal charges and transition expenses associated
with the inception of the Yahoo! Commercial Agreement, offset in part by
a reduction in headcount-related expenses.
-- Cost of revenue increased $240 million or 2%, primarily reflecting
increased online costs and charges resulting from the discontinuation of
the KIN phone, offset in part by decreased Xbox 360 console costs and
reductions in other costs due to resource management efforts.
-- Research and development expenses decreased $296 million or 3%,
primarily reflecting a decrease in third-party development and
programming costs and increased capitalization of certain software
development costs.

Diluted earnings per share increased reflecting increased net income and the
repurchase of 380 million shares during fiscal year 2010.

SEGMENT PRODUCT REVENUE/OPERATING INCOME (LOSS)
-----------------------------------------------

The revenue and operating income (loss) amounts in this section are presented on
a basis consistent with accounting principles generally accepted in the U.S. and
include certain reconciling items attributable to each of the segments. Certain
corporate-level activity has been excluded from our segment operating results
and is presented separately. Prior period amounts have been recast to conform to
the way we internally managed and monitored performance at the segment level
during the current period.

Windows & Windows Live Division

(In
millions, Three
except Months
percentages) Ended Percentage
------------- June 30, Change
-------- ------

2010 2009

Revenue $4,548 $3,169 44%
Operating
income $3,063 $1,929 59%
--------- ------ ------ ---

(In
millions, Twelve
except Months
percentages) Ended Percentage
------------- June 30, Change
-------- ------

2010 2009

Revenue $18,491 $14,974 23%
Operating
income $12,977 $9,982 30%
--------- ------- ------ ---

Windows & Windows Live Division ("Windows Division") offerings consist of
premium and standard edition Windows operating systems and online software and
services through Windows Live. Premium Windows operating systems are those that
include additional functionality and are sold at a price above our standard
editions. Premium editions include Windows 7 Home Premium, Windows 7
Professional, Windows 7 Ultimate, Windows 7 Enterprise, Windows Vista Business,
Windows Vista Home Premium, Windows Vista Ultimate, and Windows Vista
Enterprise. Standard editions include Windows 7 Starter, Windows 7 Home Basic,
Windows Vista Starter, Windows Vista Home Basic, and Windows XP Home. Windows
Live primarily generates revenue from online advertising.

Windows Division revenue growth is largely correlated to the growth of PC
purchases from original equipment manufacturers ("OEMs") that pre-install
versions of Windows operating systems because the OEM channel accounts for
approximately 80% of total Windows Division revenue. The remaining approximately
20% of Windows Division revenue ("other revenue") is generated by commercial and
retail sales of Windows and online advertising from Windows Live.

Three months ended June 30, 2010 compared with three months ended June 30, 2009

Windows Division revenue increased due to strong sales of Windows 7 and PC
market improvement. We estimate total worldwide PC shipments from all sources
grew approximately 22% to 24%. OEM revenue increased $1.1 billion or 46%, while
OEM license units increased 26%. The OEM revenue increase was driven by PC
market growth, higher Windows attach rates across business and consumer segments
and the mix of versions of Windows licensed, partially offset by PC market
strength in emerging markets versus developed markets. Prior year OEM revenue
reflects $273 million of revenue deferred in connection with sales of Windows
Vista with a guarantee to be upgraded to Windows 7 at minimal or no cost upon
general availability. Other revenue increased $262 million or 36% driven
primarily by commercial and retail sales of Windows 7.

Windows Division operating income increased as a result of increased revenue,
offset in part by higher operating expenses. Research and development expenses
increased $89 million or 38%, reflecting capitalization of certain software
development costs related to Windows 7 product development in the prior year.
Cost of revenue increased $83 million or 24%, primarily driven by increased
traffic acquisition costs and royalties. Sales and marketing expenses increased
$77 million or 12% reflecting increased advertising and marketing of Windows 7.

Twelve months ended June 30, 2010 compared with twelve months ended June 30,
2009

Windows Division revenue increased primarily as a result of strong sales of
Windows 7 and PC market improvement. We estimate total PC shipments from all
sources grew approximately 16% to 18%. OEM revenue increased $2.6 billion or
22%, while OEM license units increased 21%. The OEM revenue increase was driven
by PC market growth, higher Windows attach rates across consumer and business
segments, the restoration of normal OEM inventory levels, and the mix of
versions of Windows licensed, offset in part by PC market changes, including
stronger growth of emerging markets versus developed markets and of consumer PCs
versus business PCs. Prior year OEM revenue reflects the $273 million revenue
deferral discussed above. This amount was subsequently recognized in fiscal year
2010. Other revenue increased $912 million or 29% driven primarily by Windows 7
retail sales.

Windows Division operating income increased as a result of increased revenue,
offset in part by higher operating expenses. Cost of revenue increased $296
million or 22%, primarily driven by increased traffic acquisition costs,
royalties and other product costs. Sales and marketing expenses increased $256
million or 11% reflecting increased advertising and marketing of Windows 7.

Server and Tools

(In
millions, Three
except Months
percentages) Ended Percentage
------------- June 30, Change
-------- ------

2010 2009

Revenue $4,012 $3,528 14%
Operating
income $1,546 $1,206 28%
--------- ------ ------ ---

(In
millions, Twelve
except Months
percentages) Ended Percentage
------------- June 30, Change
-------- ------

2010 2009

Revenue $14,866 $14,191 5%
Operating
income $5,491 $4,803 14%
--------- ------ ------ ---

Server and Tools licenses products, applications, tools, content, and delivers
Enterprise Services, all of which are designed to make information technology
professionals, developers, and their systems more productive and efficient.
Server and Tools product and service offerings consist of Windows Server,
Microsoft SQL Server, Windows Azure and other cloud and server offerings. We
also offer developer tools, training and certification. Enterprise Services
comprise Premier product support services and Microsoft Consulting Services.
Server product offerings can be run on-site, in a partner-hosted environment, or
in a Microsoft-hosted environment. We use multiple sales channels, including
pre-installed OEM versions, sales through partners and sales directly to end
customers. Approximately 50% of Server and Tools revenue comes from annuity
volume licensing agreements, approximately 30% is purchased through
transactional volume licensing programs, retail packaged product and licenses
sold to OEMs, and the remainder comes from Enterprise Services.

Three months ended June 30, 2010 compared with three months ended June 30, 2009

Server and Tools revenue increased reflecting growth in product revenue and
Enterprise Services revenue. Product revenue increased $463 million or 17%,
driven primarily by growth in Windows Server, SQL Server and Enterprise CAL
Suites revenue, reflecting continued adoption of Windows platform applications.
Enterprise Services revenue grew $21 million or 3%, primarily due to growth in
Premier product support services, offset in part by decreased consulting
services.

Server and Tools revenue for the fourth quarter of fiscal year 2010 included a
favorable foreign currency exchange impact of $70 million.

Server and Tools operating income increased primarily due to revenue growth,
offset in part by increased operating expenses. Cost of revenue increased $72
million or 11%, reflecting increased services costs and online and product
costs. Sales and marketing expenses increased $55 million or 5%, primarily due
to increased corporate and partner marketing expenses. General and
administrative expenses increased $29 million.

Twelve months ended June 30, 2010 compared with twelve months ended June 30,
2009

Server and Tools revenue increased mainly reflecting growth in product revenue.
Product revenue increased $652 million or 6%, driven primarily by growth in
Windows Server, SQL Server and Enterprise CAL Suites revenue, reflecting
increased revenue from annuity volume licensing agreements and continued
adoption of Windows platform applications, offset in part by a decline in
developer tools revenue. Enterprise Services revenue was relatively flat, with
growth in Premier product support services nearly offset by decreased consulting
services.

Server and Tools operating income increased due mainly to revenue growth and
reduced research and development expenses, offset in part by increased cost of
revenue. Research and development expenses decreased $38 million or 2%,
primarily driven by reduced third-party development and programming costs and
headcount-related expenses, offset in part by increased hosting, localization
and lab costs. Cost of revenue increased $25 million.

Online Services Division

(In
millions, Three
except Months
percentages) Ended Percentage
------------- June 30, Change
-------- ------

2010 2009

Revenue $565 $501 13%
Operating
loss $(696) $(585) (19)%
--------- ----- ----- ----

(In
millions, Twelve
except Months
percentages) Ended Percentage
------------- June 30, Change
-------- ------

2010 2009

Revenue $2,199 $2,121 4%
Operating
loss $(2,355) $(1,652) (43)%
--------- ------- ------- ----

Online Services Division ("OSD") consists of an online advertising platform with
offerings for both publishers and advertisers, online information offerings,
such as Bing, and the MSN portals and channels around the world. We earn revenue
primarily from online advertising, including search, display, and advertiser and
publisher tools. Revenue is also generated through subscriptions and
transactions generated from online paid services and from MSN narrowband
Internet access subscribers ("Access").

Yahoo! Commercial Agreement

On December 4, 2009, we entered into a definitive agreement with Yahoo! whereby
Microsoft will provide the exclusive algorithmic and paid search platform for
Yahoo! websites. We believe this agreement will allow us over time to improve
the effectiveness and increase the value of our search offering through greater
scale in search queries and an expanded and more competitive search and
advertising marketplace.

Three months ended June 30, 2010 compared with three months ended June 30, 2009

OSD revenue increased primarily as a result of increased online advertising
revenue, offset in part by decreased Access revenue. Online advertising revenue
increased $79 million or 19% to $494 million, reflecting higher search and
display advertising revenue, offset in part by decreased advertiser and
publisher tools revenue. Access revenue decreased $14 million or 33%, reflecting
continued migration of subscribers to broadband or other competitively-priced
service providers.

OSD operating loss increased due to increased cost of revenue and research and
development expenses, offset in part by increased revenue. Cost of revenue
increased $157 million, primarily driven by Yahoo! reimbursement and
implementation costs, as well as online traffic acquisition costs. Research and
development expenses increased $39 million or 14%, also primarily due to Yahoo!
reimbursement and implementation costs and third-party development and
programming costs.

Twelve months ended June 30, 2010 compared with twelve months ended June 30,
2009

OSD revenue increased reflecting increased online advertising revenue, offset in
part by decreased Access revenue. Online advertising revenue increased $146
million or 8% to $1.9 billion, reflecting higher search and display advertising
revenue, offset in part by decreased advertiser and publisher tools revenue.
Access revenue decreased $57 million or 31%, reflecting continued migration of
subscribers to broadband or other competitively-priced service providers.

OSD operating loss increased due to increased operating expenses, offset in part
by increased revenue. Cost of revenue increased $565 million, primarily driven
by higher online traffic acquisition costs and Yahoo! reimbursement and
implementation costs. General and administrative expenses increased $136 million
due mainly to transition expenses associated with the inception of the Yahoo!
Commercial Agreement. Sales and marketing expenses increased $56 million or 5%
due mainly to increased marketing of Bing, offset in part by decreased
headcount-related expenses.

Microsoft Business Division

(In
millions, Three
except Months
percentages) Ended Percentage
------------- June 30, Change
-------- ------

2010 2009

Revenue $5,250 $4,567 15%
Operating
income $3,284 $2,706 21%
--------- ------ ------ ---

(In
millions, Twelve
except Months
percentages) Ended Percentage
------------- June 30, Change
-------- ------

2010 2009

Revenue $18,642 $18,910 (1)%
Operating
income $11,776 $11,664 1%
--------- ------- ------- ---

Microsoft Business Division ("MBD") offerings consist of the Microsoft Office
system and Microsoft Dynamics business solutions. Microsoft Office system
products are designed to increase personal, team, and organization productivity
through a range of programs, services, and software solutions. Microsoft Office
system offerings generate over 90% of MBD revenue. Microsoft Dynamics products
provide business solutions for financial management, customer relationship
management, supply chain management, and analytics applications for small and
mid-size businesses, large organizations, and divisions of global enterprises.
We evaluate our results based upon the nature of the end user in two primary
parts: business revenue, which includes Microsoft Office system revenue
generated through volume licensing agreements and Microsoft Dynamics revenue;
and consumer revenue, which includes revenue from retail packaged product sales
and OEM revenue.

Three months ended June 30, 2010 compared with three months ended June 30, 2009

MBD revenue increased primarily reflecting sales of the 2010 Microsoft Office
system, which was launched during the fourth quarter. Consumer revenue increased
$357 million or 51% due to sales of the 2010 Microsoft Office system and growth
in the PC market. Business revenue increased $326 million or 8%, primarily
reflecting licensing of the 2010 Microsoft Office system to transactional
business customers, growth in multi-year licensing revenue and a 4% increase in
Microsoft Dynamics revenue.

MBD revenue for the fourth quarter of fiscal year 2010 included a favorable
foreign currency exchange impact of $108 million.

MBD operating income increased due mainly to increased revenue, offset in part
by increased operating expenses. Sales and marketing expenses increased $67
million or 6%, primarily driven by an increase in corporate marketing
activities. Cost of revenue increased $63 million or 21%, primarily driven by
increased traffic acquisition costs and increased costs of providing services.
These increases were offset in part by a $22 million decrease in research and
development expenses.

Twelve months ended June 30, 2010 compared with twelve months ended June 30,
2009

MBD revenue decreased primarily as a result of the net deferral of $254 million
of revenue related to eligible sales of the 2007 Microsoft Office system with a
guarantee to be upgraded to the 2010 Microsoft Office system at minimal or no
cost (the "Office 2010 Deferral"). Consumer revenue decreased $166 million or
5%, primarily due to the Office 2010 Deferral, offset in part by growth in the
PC market and sales of the 2010 Microsoft Office system, which was launched
during the fourth quarter. Business revenue decreased $102 million or 1%,
primarily reflecting a decline in licensing of the 2007 Microsoft Office system
to transactional business customers, offset in part by growth in multi-year
volume licensing agreement revenue and licensing of the 2010 Microsoft Office
system to transactional business customers. Microsoft Dynamics revenue remained
flat.

MBD operating income increased due mainly to decreased operating expenses,
offset in part by decreased revenue. Sales and marketing expenses decreased $266
million or 6%, primarily driven by a decrease in corporate marketing activities.
Research and development expenses decreased $187 million or 11%, primarily as a
result of capitalization of certain Microsoft Office system software development
costs and lower headcount-related expenses. General and administrative expenses
decreased $53 million or 18% primarily due to expenses in the prior year
associated with the acquisition of Fast Search & Transfer ASA and lower
headcount-related expenses. These decreases were offset in part by a $126
million or 11% increase in cost of revenue, primarily driven by increased
traffic acquisition costs and increased costs of providing services.

Entertainment and Devices Division

(In
millions, Three
except Months
percentages) Ended Percentage
------------- June 30, Change
-------- ------

2010 2009

Revenue $1,600 $1,257 27%
Operating
income
(loss) $(172) $(141) (22)%
--------- ----- ----- ----

(In
millions, Twelve
except Months
percentages) Ended Percentage
------------- June 30, Change
-------- ------

2010 2009

Revenue $8,058 $8,035 0%
Operating
income
(loss) $679 $108 529%
--------- --- --- ---

Entertainment and Devices Division ("EDD") offerings include the Xbox 360
platform (which includes the Xbox 360 gaming and entertainment console, Xbox 360
video games, Xbox LIVE, and Xbox 360 accessories), the Zune digital music and
entertainment platform ("Zune"), PC software games, online games and services,
Mediaroom (our Internet protocol television software), the Microsoft Surface
computing platform, Windows Mobile and Embedded device platforms, application
software for Apple's Macintosh computers, Microsoft PC hardware products, and
other devices. EDD is also responsible for all retail sales and marketing for
Microsoft Office and Windows operating systems.

Three months ended June 30, 2010 compared with three months ended June 30, 2009

EDD revenue increased reflecting an increase in Xbox 360 platform and PC game
revenue and increased revenue from the non-gaming portion of the business. Xbox
360 platform and PC game revenue increased $228 million or 30%, primarily
reflecting increased Xbox 360 consoles sold and increased Xbox LIVE revenue,
partially offset by decreased revenue per console. We shipped 1.5 million Xbox
360 consoles during the fourth quarter of fiscal year 2010, compared with 1.2
million Xbox 360 consoles during the fourth quarter of fiscal year 2009.
Non-gaming revenue increased $115 million or 23%, primarily reflecting increased
sales of Windows Embedded device platforms.

EDD revenue for the fourth quarter of fiscal year 2010 included a favorable
foreign currency exchange impact of $52 million.

EDD operating loss increased primarily reflecting increased operating expenses,
offset in part by increased revenue. Cost of revenue increased $251 million or
38% primarily from charges resulting from the discontinuation of the KIN phone
and increased royalty costs resulting from increased Xbox LIVE digital
marketplace third-party content sales. Sales and marketing expenses increased
$73 million or 29% primarily due to increased Xbox 360 platform marketing
activities. Research and development expenses increased $48 million or 10%,
primarily reflecting increased third-party development and programming costs and
increased headcount-related expenses.

Twelve months ended June 30, 2010 compared with twelve months ended June 30,
2009

EDD revenue was nearly flat reflecting increased revenue from the non-gaming
portion of the business, partially offset by decreased revenue from Xbox 360
platform and PC games. Non-gaming revenue increased $35 million or 1% primarily
reflecting increased sales of Windows Embedded device platforms, offset in part
by decreased Zune and Windows Mobile revenue. Xbox 360 platform and PC game
revenue decreased $12 million, primarily reflecting a reduction in Xbox 360
consoles sold and revenue per console, offset in part by increased Xbox LIVE
revenue. We shipped 10.3 million Xbox 360 consoles during the fiscal year 2010,
compared with 11.2 million Xbox 360 consoles during fiscal year 2009.

EDD operating income increased due to reduced operating expenses. Cost of
revenue decreased $528 million or 11%, primarily due to lower Xbox 360 console
costs, offset in part by increased royalty costs resulting from increased Xbox
LIVE digital marketplace third-party content sales and charges resulting from
the discontinuation of the KIN phone. Research and development expenses
decreased $34 million or 2%, primarily reflecting decreased third-party
development and programming costs.

Corporate-Level Activity

(In
millions, Three
except Months
percentages) Ended Percentage
------------- June 30, Change
-------- ------

2010 2009

Corporate-
level
activity (1,095) $(1,128) 3%
----------- ------ ------- ---

(In
millions, Twelve
except Months
percentages) Ended Percentage
------------- June 30, Change
-------- ------

2010 2009

Corporate-
level
activity $(4,470) $(4,542) 2%
---------- ------- ------- ---

Certain corporate-level activity is not allocated to our segments, including
costs of: broad-based sales and marketing; product support services; human
resources; legal; finance; information technology; corporate development and
procurement activities; research and development; legal settlements and
contingencies; and employee severance.

Three months ended June 30, 2010 compared with three months ended June 30, 2009

Corporate-level expenses decreased due mainly to a reduction in legal charges
and employee severance charges, offset in part by increased costs associated
with broad-based sales and marketing activities. Legal charges were
approximately $97 million compared to $193 million in the prior year.

Twelve months ended June 30, 2010 compared with twelve months ended June 30,
2009

Corporate-level expenses decreased due mainly to employee severance charges of
$330 million incurred in the prior year, decreased partner payments, and
reductions in other costs due to resource management efforts. These decreases in
expenses were offset in part by an increase in legal charges and costs
associated with broad-based sales and marketing activities. Legal charges were
approximately $533 million compared to $283 million in the prior year.

OPERATING EXPENSES
------------------

Cost of Revenue

(In
millions, Three
except Months
percentages) Ended Percentage
------------- June 30, Change
-------- ------

2010 2009

Cost of
revenue $3,170 $2,586 23%
As a
percent
of
revenue 20% 20% 0ppt
-------- --- --- ----

(In
millions, Twelve
except Months
percentages) Ended Percentage
------------- June 30, Change
-------- ------

2010 2009

Cost of
revenue $12,395 $12,155 2%
As a
percent
of
revenue 20% 21% (1)ppt
-------- --- --- ------

Cost of revenue includes: manufacturing and distribution costs for products sold
and programs licensed; operating costs related to product support service
centers and product distribution centers; costs incurred to include software on
PCs sold by OEMs, to drive traffic to our websites and to acquire online
advertising space ("traffic acquisition costs"); costs incurred to support and
maintain Internet-based products and services; warranty costs; inventory
valuation adjustments; costs associated with the delivery of consulting
services; and the amortization of capitalized research and development costs.

Cost of revenue increased reflecting higher online costs, mainly Yahoo!
reimbursement and implementation costs and traffic acquisition costs, as well as
increased royalty costs resulting from increased Xbox LIVE digital marketplace
third-party content sales and charges resulting from the discontinuation of the
KIN phone. For the full fiscal year, these costs were offset in part by lower
Xbox 360 console costs and reductions in other costs due to resource management
efforts.

Research and Development

(In
millions, Three
except Months
percentages) Ended Percentage
------------- June 30, Change
-------- ------

2010 2009

Research
and
development $2,350 $2,225 6%
As a
percent
of
revenue 15% 17% (2)ppt
-------- --- --- ------

(In
millions, Twelve
except Months
percentages) Ended Percentage
------------- June 30, Change
-------- ------

2010 2009

Research
and
development $8,714 $9,010 (3)%
As a
percent
of
revenue 14% 15% (1)ppt
-------- --- --- ------

Research and development expenses include payroll, employee benefits,
stock-based compensation expense, and other headcount-related expenses
associated with product development. Research and development expenses also
include third-party development and programming costs, localization costs
incurred to translate software for international markets and the amortization of
purchased software code and services content.

Three months ended June 30, 2010 compared with three months ended June 30, 2009

Research and development expenses increased, primarily reflecting the
capitalization of certain software development costs related to Windows 7
product development in the prior year.

Twelve months ended June 30, 2010 compared with twelve months ended June 30,
2009

Research and development expenses decreased, primarily reflecting decreased
third-party development and programming costs and the capitalization of certain
Microsoft Office system software development costs. These decreases were offset
in part by the capitalization of certain software and development costs related
to Windows 7 product development in the prior year.

Sales and Marketing

(In
millions, Three
except Months
percentages) Ended Percentage
------------- June 30, Change
-------- ------

2010 2009

Sales and
marketing $3,602 $3,192 13%
As a
percent
of
revenue 22% 24% (2)ppt
-------- --- --- ------

(In
millions, Twelve
except Months
percentages) Ended Percentage
------------- June 30, Change
-------- ------

2010 2009

Sales and
marketing $13,214 $12,879 3%
As a
percent
of
revenue 21% 22% (1)ppt
-------- --- --- ------

Sales and marketing expenses include payroll, employee benefits, stock-based
compensation expense, and other headcount-related expenses associated with sales
and marketing personnel and the costs of advertising, promotions, trade shows,
seminars, and other programs.

Sales and marketing expenses increased, primarily reflecting increased
advertising and marketing of Windows 7 and Bing and increased sales force
expenses related to Windows 7.

General and Administrative

(In
millions, Three
except Months
percentages) Ended Percentage
------------- June 30, Change
-------- ------

2010 2009

General
and
administrative $987 $1,069 (8)%
As a
percent
of
revenue 6% 8% (2)ppt
-------- --- --- ------

(In
millions, Twelve
except Months
percentages) Ended Percentage
------------- June 30, Change
-------- ------

2010 2009

General
and
administrative $4,004 $3,700 8%
As a
percent
of
revenue 6% 6% 0ppt
-------- --- --- ----

General and administrative expenses include payroll, employee benefits,
stock-based compensation expense and other headcount-related expenses associated
with finance, legal, facilities, certain human resources and other
administrative headcount, and legal and other administrative fees.

Three months ended June 30, 2010 compared with three months ended June 30, 2009

General and administrative expenses decreased in nearly all expense categories,
including decreased legal charges and a 4% reduction in headcount-related
expenses.

Twelve months ended June 30, 2010 compared with twelve months ended June 30,
2009

General and administrative expenses increased due to increased legal charges, as
discussed above within Corporate-Level Activity, and transition expenses
associated with the inception of the Yahoo! Commercial Agreement. These
increases were offset in part by a 6% reduction in headcount-related expenses.

Employee Severance

In January 2009, we announced and implemented a resource management program to
reduce employee headcount. We completed this program in fiscal year 2010,
reducing our overall headcount by approximately 5,300 in various functions,
including research and development, marketing, sales, finance, legal, human
resources, and information technology. During fiscal years 2010 and 2009, we
recorded employee severance expense of $59 million and $330 million,
respectively.

OTHER INCOME (EXPENSE) AND INCOME TAXES
---------------------------------------

Other Income (Expense)
The components of other income (expense) were as follows:

(In millions, Three
except Months
percentages) Ended Percentage
------------- ------ ----------
June 30, Change
-------- ------

2010 2009

Dividends and
interest
income $239 $179 34%
Interest
expense (37) (19) (95)%
Net
recognized
gains
(losses) on
investments 49 (72) *
Net gains
(losses) on
derivatives (163) 71 *
Net gains
(losses) on
foreign
currency 25 46 (46)%
remeasurements
Other (19) (50) 62%
----- --- ---

Total $94 $155 (39)%
--- ---

(In millions, Twelve
except Months
percentages) Ended Percentage
------------- ------ ----------
June 30, Change
-------- ------

2010 2009

Dividends and
interest
income $843 $744 13%
Interest
expense (151) (38) (297)%
Net
recognized
gains
(losses) on
investments 348 (125) *
Net gains
(losses) on
derivatives (140) (558) 75%
Net gains
(losses) on
foreign
currency 1 (509) *
remeasurements
Other 14 (56) *
----- --- ---

Total $915 $(542) *
--- -----

* Not meaningful

Three months ended June 30, 2010 compared with three months ended June 30, 2009

Dividends and interest income increased primarily due to higher average
portfolio investment balances, offset in part by lower yields on our
fixed-income investments. Interest expense increased due to our issuance of
long-term debt in May 2009. Net recognized gains on investments increased
primarily due to lower other-than-temporary impairments and higher gains on
sales of investments in the current period as compared to the prior period.
Other-than-temporary impairments were $33 million during the three months ended
June 30, 2010, as compared with $108 million during the three months ended June
30, 2009 and decreased primarily due to improvements in market conditions. Net
losses on derivatives increased primarily due to losses on commodity, equity and
interest rate derivatives as compared to gains in the prior period and higher
losses on foreign currency contracts in the current period.

Twelve months ended June 30, 2010 compared with twelve months ended June 30,
2009

Dividends and interest income increased primarily due to higher average
portfolio investment balances, offset in part by lower yields on our
fixed-income investments. Interest expense increased due to our issuance of long
term debt in May 2009. Net recognized gains on investments increased primarily
due to lower other-than-temporary impairments, offset in part by lower gains on
sales of investments in the current period. Other-than-temporary impairments
were $69 million during fiscal year 2010, as compared with $862 million during
fiscal year 2009 and decreased primarily due to improvements in market
conditions. Net losses on derivatives decreased due to gains on equity and
interest rate derivatives as compared to losses in the prior period and lower
losses on commodity and foreign currency contracts in the current period Net
gains from foreign currency remeasurements were insignificant in fiscal year
2010 compared to net losses of $509 million in the prior year, which had
resulted from the strengthening of the U.S. dollar in the prior year. For fiscal
year 2010, other includes a gain on the divestiture of Razorfish.

Income Taxes

Our effective tax rate was 25% for both the three and twelve months ended June
30, 2010, as compared with 27% for both the three and twelve months ended June
30, 2009. The fiscal year 2010 rate reflects a higher mix of foreign earnings
taxed at lower rates.

UNEARNED REVENUE
----------------

Unearned revenue at June 30, 2010 comprised mainly unearned revenue from volume
licensing programs. Unearned revenue from volume licensing programs represents
customer billings for multi-year licensing arrangements paid for either upfront
or annually at the beginning of each billing coverage period and accounted for
as subscriptions with revenue recognized ratably over the billing coverage
period. Unearned revenue at June 30, 2010 also included payments for:
post-delivery support and consulting services to be performed in the future,
Xbox LIVE subscriptions; unspecified upgrades/enhancements of Microsoft Internet
Explorer on a when-and-if-available basis for Windows XP; Microsoft Dynamics
business solutions products; technology guarantee programs, including the 2010
Microsoft Office technology guarantee program; and other offerings for which we
have been paid upfront and earn the revenue when we provide the service or
software, or otherwise meet the revenue recognition criteria.

The following table outlines the expected future recognition of unearned revenue
as of June 30, 2010:

(In millions)
-------------

Three Months Ending,

September 30, 2010 $5,150
December 31, 2010 4,239
March 31, 2011 2,815
June 30, 2011 1,448
Thereafter 1,178
---------- -----

Total $14,830
-------

CASH FLOWS
----------

Three months ended June 30, 2010 compared with three months ended June 30, 2009

Cash flow from operations increased $1.8 billion, reflecting payment of $1.0
billion to the Internal Revenue Service in the prior year as a result of our
settlement of the 2000-2003 audit examination along with increased cash received
from customers due to strong sales in the current year. Cash used for financing
was $4.1 billion in the three months ended June 30, 2010 as compared with cash
provided by financing of $2.7 billion in the prior fiscal year. This decrease in
cash flow was due to a $3.8 billion increase in stock repurchases along with a
$2.9 billion decrease in proceeds from issuances of debt with maturities longer
than 90 days. Cash used for investing decreased $3.7 billion due to a $6.4
billion decrease in cash used for combined investment purchases, sales, and
maturities partially offset by a $2.8 billion decrease in securities lending
activities.

Twelve months ended June 30, 2010 compared with twelve months ended June 30,
2009

Cash flow from operations increased $5.0 billion, primarily due to payment of
$4.1 billion to the Internal Revenue Service in the prior year as a result of
our settlement of the 2000-2003 audit examination along with increased cash
received from customers in the current year. Cash used for financing increased
$5.8 billion, primarily due to a $5.6 billion decrease in net cash proceeds from
issuance and repayments of short-term and long-term debt. Financing activities
also included a $1.9 billion increase in cash used for common stock repurchases,
which was offset in part by a $1.7 billion increase in cash received from common
stock issued. Cash used for investing decreased $4.5 billion due to a $3.3
billion decrease in cash used for combined investment purchases, sales, and
maturities along with a $1.1 billion decrease in additions to property and
equipment .

SOURCE Microsoft Corp.

Subject Codes: PC/t.100722161504338, PT/lang.en, PC/ticker, IN/STW,
IN/CPR, IN/ITE, IN/MLM, SU/ERN, SU/CCA, SU/ERP,
RE/Washington, PC/priority.r, PC/category.f,
PC/class.1240, PC/WAVO_....c., PC/APT_....c, PC/trade_c,
PC/wavo5_c, PC/class.1278, PC/class.1000, PC/WAVO_..b...,
PC/APT_..b.., PC/circuit_b, PC/wavo3_b, PC/class.1062,
PC/WAVO_w....., PC/APT_w...., PC/state_w, PC/wavo1_w,
PC/DataFeat_natl3, PC/port_32, PC/Billing_FC1,
PC/Billing_IRW, PC/Billing_RWB, PC/Billing_TNW,
PC/Billing_US1, PC/1stAcc_569457, PC/bureau_SF,
PC/port_01, PC/port_96, PC/port_31, PC/port_33,
PC/port_19, PC/port_91, PC/contact, PC/website,
PC/ed-note, PC/photo, PC/id_SF39219

Company Codes: NASDAQ-NMS:MSFT