Microsoft Corporation

Second Quarter – Fiscal Year 2007January 25, 2007

This presentation may contain 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 because of

factors in this presentation or discussed in today’s

press release, in the management’s discussion

and analysis section of the company’s 2006 Form

10-K or in other reports and filings with the

Securities and Exchange Commission. We

undertake no duty to update or revise any forward

looking statements, whether as a results of new

information, future events or otherwise.

Agenda

Quarterly Overview & Second Quarter Results

Business Segment Financial Overview

Guidance

Appendix

Agenda

Quarterly Overview & Second Quarter Results

Business Segment Financial Overview

Guidance

Appendix

Quarterly OverviewGood close to first half of the fiscal year

Financial performance at or above high end of guidance

Strength in PC hardware market

Launch of flagship products to business customers during the quarter

Robust consumer demand for PCs and Xbox 360 consoles and games

Operating income and EPS benefited from strong revenue growth and lower than expected spending, which shifted from Q2 to the rest of the year

Fiscal Year 2007 Overview

Consumer launches of Windows Vista and the 2007 Office system next week

Continue to expect double digit revenue growth

Excluding legal charges and tax benefit, EPS expected to grow faster than revenue

Financial Summary – FY07 Financial Summary – FY07 Q2Q2Revenue: $12.5 billion

6% growth over the comparable period last yearGuidance was $11.8 – $12.4 billionRevenue was $14.2 billion when adjusted for the impact of the technology guarantee and pre-shipment deferrals

Operating income: $3.5 billionGuidance was $2.9 - $3.1 billionOperating income was $5.1 billion when adjusted for the impact of the technology guarantee and pre-shipment deferrals

Diluted earnings per share: $0.26Guidance was $0.22 - $0.24Diluted earnings per share were $0.38 when adjusted for the impact of the technology guarantee and pre-shipment deferrals

Cash returned to shareholdersThe company repurchased $6 billion worth of stock and paid $980 million in dividends to shareholders during the quarter

FY07 – Q2 Key Data PointsPC market growth estimate: 8% - 10%

Approximate billing mixOEM: 30%Multi-year licensing agreements: 25%License only: 20%

Unearned balance of $11.9 billion, including $1.7 billion of deferrals, primarily related to the technology guarantee

Contracted, not billed balance exceeds $9.5 billion9

AgendaAgenda

Quarterly Overview & Second Quarter Results

Business Segment Financial Overview

Guidance

Appendix10

11

Client Revenue

25% Y/Y

Decline

Windows Vista ships to business customers

$3.43

$2.59

$3.35$3.15

Q2 SummaryOEM license unit growth of 10%OEM premium mix increased 18% pts. over prior year on strength of Media CenterIncludes impact of $1.1 billion of revenue deferrals related to the technology guarantee programs and pre-shipments

$1

$2

$3

$4

(in

bill

ions

)

Q2-FY06 Q3-FY06 Q4-FY06 Q1-FY07 Q2-FY07

$3.30

12

Server & Tools Revenue

Broad based revenue growth driven by continued strength in SQL Server 2005

17% 17% Y/Y Y/Y

GrowtGrowthh

$2.44$2.44 $2.40$2.40

$2.69$2.69

$2.50$2.50

Q2 SummarySQL Server revenue growth exceeds 30% Y/Y on strength of SQL Server™ 200518th consecutive quarter of double digit revenue growth

$1

$2

$3

Q2-FY06 Q3-FY06 Q4-FY06 Q1-FY07 Q2-FY07

(in b

illio

ns)

$2.85$2.85

13

Online Services Business Revenue

5% 5% Y/Y Y/Y

GrowthGrowth

$0.59$0.59 $0.56$0.56 $0.58$0.58$0.54$0.54

$0.62$0.62

Q2 SummaryAdvertising revenue was up 20% driven by growth in display advertising offset by an expected decline in access and subscription revenueOSB ended the quarter with:

Over 268M active Hotmail accountsOver 263M active Messenger accounts

Advertising revenue benefits from Advertising revenue benefits from growth in both Display and Searchgrowth in both Display and Search

$-

$1

Q2-FY06 Q3-FY06 Q4-FY06 Q1-FY07 Q2-FY07(i

n bi

llion

s)

14

Microsoft Business Division Revenue

$3.69$3.69

5% 5% Y/Y Y/Y

DeclinDeclinee

$3.61$3.61

$3.91$3.91

$3.42$3.42

Q2 Summary2007 Microsoft Office system and Exchange 2007 released to volume licensing customersStrong annuity growth and earlier than expected uptake in license only business drive revenue growthQ2 revenue impacted by $500M of revenue deferrals for technology guarantee programs and pre-shipmentsDynamics customer billings grew 19% Y/Y

$1

$2

$3

$4

Q2-FY06 Q3-FY06 Q4-FY06 Q1-FY07 Q2-FY07

(in

bill

ion

s)

$3.51$3.51

November 30th marked availability of 2007 Microsoft Office system and Exchange 2007 to business customers

15

Entertainment & Devices Division Revenue

Xbox 360 console and game sales drive strong holiday season growth

76% 76% Y/Y Y/Y

GrowtGrowthh

$1.69$1.69

$1.18$1.18$1.28$1.28

$1.03$1.03

Q2 Summary10.4M life to date Xbox 360 console sales

Gears of War sold over 2.7M units in its first 8 weeks in marketStrong growth in MED

Licenses for Windows Mobile based phones up over 90% Y/Y

Launched Zune digital media player and service in the U.S.

$-

$1

$2

Q2-FY06 Q3-FY06 Q4-FY06 Q1-FY07 Q2-FY07

(in

bill

ion

s)

$2.96$2.96

Agenda

Quarterly Overview & Second Quarter Results

Business Segment Financial Overview

Guidance

Appendix

16

GuidanceGuidance$ Billions (except EPS)

Total revenue $13.7B - $14.0B $50.2B - $50.7B

PC market 9% - 11% 8% - 10%

EPS $0.45 - $0.46 $1.45 - $1.47

FY07-Q3 FY07

Cost of goods sold* N/A Up 1% pt.

Operating income $6.1B - $6.3B $19.3B - $19.7B

Server market N/A 10% - 12%*as a percentage of revenue

Unearned revenue Decline Up 6% - 8%

Contracted, not billed N/A Up from FY06

17

Reporting Segment Guidance

Revenue Guidance

FY07-Q3 FY07

Server and Tools 16% - 17% 16% - 17%

MBD 27% - 28% 10% - 11%

Online Services 4% - 10% 3% - 8%

E&D Decline of 15% - 25% 26% - 31%

Client 54% - 56% 11% - 12%

18

FY07-Q3 financial impact of technology guarantee

GuidanceIncluding

technology guaranteeExcluding

technology guarantee

Operating income* 42% - 46% 3% - 7%

Client 54% - 56% 16% - 18%

EPS* 45% - 48% 6% - 10%

MBD 27% - 28% 13% - 14%

Total revenue 26% - 28% 10% - 13%

FY07-Q3

*Excludes legal charges19

Agenda

Quarterly Overview & Second Quarter Results

Business Segment Financial Overview

Guidance

Appendix

20

21

Reconciliation Slidesand Appendix

22

Reconciliation of differences between GAAP and Non-GAAP financial measuresWe may from time to time discuss second quarter performance using the non-GAAP financial measures presented on the following five slides.  The following tables provide a reconciliation of the differences between the non-GAAP financial measures presented and the most directly comparable financial measures calculated and presented in accordance with GAAP.The following five slides include reconciliations for:

Revenue adjusted for technology guarantee & pre-shipmentsOperating expenses Operating income adjusted for technology guarantee & pre-

shipmentsEarnings per share adjusted for technology guarantee & pre-

shipmentsUnearned Revenue adjusted for technology guarantee & pre-

shipmentsOEM revenue growth adjusted for technology guarantee & pre-

shipments and Commercial & Retail (C&R) revenue growth adjusted for technology guarantee & pre-shipments

Client, Server & Tools, and Microsoft Business Division revenue adjusted for technology guarantee & pre-shipments

23

Reconciliation of differences between GAAP and Non-GAAP financial measures: Revenue & Operating expense

The non-GAAP measures provided above, which removes the technology guarantee and pre-shipments from the most directly comparable GAAP measures are included as an additional clarifying item to aid readers of the financial statements in further understanding the Company's second quarter performance and the impact that certain items and events had on the financial results. The non-GAAP financial measures provided above should not be considered as a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP.

23

24

Reconciliation of differences between GAAP and Non-GAAP financial measures: Operating income and Earnings per share

The non-GAAP measures provided above, which removes the technology guarantee and pre-shipments and tax benefit from the most directly comparable GAAP measures are included as an additional clarifying item to aid readers of the financial statements in further understanding the Company's second quarter performance and the impact that certain items and events had on the financial results. The non-GAAP financial measures provided above should not be considered as a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP.

*Guidance may not add due to rounding.

25

Reconciliation of differences between GAAP and Non-GAAP financial measures: Unearned revenue

The non-GAAP measures provided above, which remove the technology guarantee and pre-shipments from the most directly comparable GAAP measures are included as an additional clarifying item to aid readers of the financial statements in further understanding the Company's second quarter performance and the impact that certain items and events had on the financial results. The non-GAAP financial measures provided above should not be considered as a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP.

26

Reconciliation of differences between GAAP and Non-GAAP financial measures: Client OEM Revenue growth and Client Commercial & Retail revenue growth

The non-GAAP measures provided above, which remove the technology guarantee and pre-shipments from the most directly comparable GAAP measures are included as an additional clarifying item to aid readers of the financial statements in further understanding the Company's second quarter performance and the impact that certain items and events had on the financial results. The non-GAAP financial measures provided above should not be considered as a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP.

27

Reconciliation of differences between GAAP and Non-GAAP financial measures: Client, Server & Tools, and Microsoft Business Division revenue

The non-GAAP measures provided above, which removes the technology guarantee and pre-shipments from the most directly comparable GAAP measures are included as an additional clarifying item to aid readers of the financial statements in further understanding the Company's second quarter performance and the impact that certain items and events had on the financial results. The non-GAAP financial measures provided above should not be considered as a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP.

28

Reconciliation of Differences Between GAAP and Non-GAAP FY07 guidance

The following slide includes reconciliations for:

FY07 operating income guidanceFY07 earnings per share guidance

We may from time to time discuss fiscal year 2007 guidance using the non-GAAP financial measures presented on the following slide.  The following tables provide a reconciliation of the difference between the non-GAAP financial measures presented and the most directly comparable financial measures calculated and presented in accordance with GAAP.

29

Reconciliation of differences between GAAP and Non-GAAP financial measures: FY07 operating income and earnings per share

*Guidance may not add due to rounding.The non-GAAP measures provided above, which remove certain settlement charges, and the tax benefit from the most directly comparable GAAP measures, are included as an additional clarifying item to aid readers of the financial statements in further understanding the Company's fiscal year 2007 guidance and the impact that certain items and events had on the financial guidance. The non-GAAP financial measures provided above should not be considered as a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP.

30

Technology Guarantee

The following slides include tables reconciling the FY07-Q3 financial impact of the technology guarantee for Windows Vista and the 2007 Office release:

Windows Client and Microsoft Business Division revenue guidance

Microsoft revenue, operating income, and EPS guidance

31

FY07 – Q3 Financial impact of technology guarantee: Client and Microsoft Business Division (MBD) revenue growth

*Guidance may not add due to rounding.The non-GAAP measures provided above, which remove the technology guarantee and pre-shipments from the most directly comparable GAAP measures, are included as an additional clarifying item to aid readers of the financial statements in further understanding the Company's fiscal year 2007 third quarter guidance and the impact that certain items and events had on the financial guidance. The non-GAAP financial measures provided above should not be considered as a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP.

32

FY07 – Q3 Financial impact of technology guarantee: Total revenue and operating income

*Guidance may not add due to rounding.The non-GAAP measures provided above, which remove certain settlement charges and technology guarantee and pre-shipments from the most directly comparable GAAP measures, are included as an additional clarifying item to aid readers of the financial statements in further understanding the Company's fiscal year 2007 third quarter guidance and the impact that certain items and events had on the financial guidance. The non-GAAP financial measures provided above should not be considered as a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP.

33

FY07 – Q3 Financial impact of technology guarantee: EPS

*Guidance may not add due to rounding.The non-GAAP measures provided above, which remove certain settlement charges and technology guarantee and pre-shipments from the most directly comparable GAAP measures, are included as an additional clarifying item to aid readers of the financial statements in further understanding the Company's fiscal year 2007 third quarter guidance and the impact that certain items and events had on the financial guidance. The non-GAAP financial measures provided above should not be considered as a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP.

3434

Operating Segment HistoryOperating Segment History

The following slide includes tables for:The following slide includes tables for:Unaudited 2006 pro forma results for changes to Unaudited 2006 pro forma results for changes to the FY07 operating segmentsthe FY07 operating segments

35

Unaudited 2006 pro forma results for changes to the FY07 operating segments

3636

Fiscal Q2 ResultsFiscal Q2 Results

Fiscal Q2 Results

37

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© 2006 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in 2006 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries. The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this the U.S. and/or other countries. The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.AS TO THE INFORMATION IN THIS PRESENTATION.