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Article by DailyStocks_admin    (08-25-08 07:10 AM)

The Daily Magic Formula Stock for 08/24/2008 is Microsoft Corp. According to the Magic Formula Investing Web Site, the ebit yield is 11% and the EBIT ROIC is >100 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


Dailystocks.com makes NO RECOMMENDATIONS whatsoever, and provides this for informational purpose only.

BUSINESS OVERVIEW

GENERAL

Our mission is to enable people and businesses throughout the world to realize their full potential. Since the company was founded in 1975, we have worked to achieve this mission by creating technology that transforms the way people work, play, and communicate. We develop and market software, services, hardware, and solutions that we believe deliver new opportunities, greater convenience, and enhanced value to people’s lives. We do business throughout the world and have offices in more than 100 countries.

We generate revenue by developing, manufacturing, licensing, and supporting a wide range of software products and services for many different types of computing devices. Our software products and services include operating systems for servers, personal computers, and intelligent devices; server applications for distributed computing environments; information worker productivity applications; business solutions applications; high-performance computing applications; software development tools; and video games. We provide consulting and product support services, and we train and certify computer system integrators and developers. We also design and sell hardware including the Xbox 360 video game console, the Zune digital music and entertainment device, and peripherals. Online offerings and information are delivered through Live Search, Windows Live, Office Live, our MSN portals and channels, and the Microsoft Online Services platform which includes offerings for businesses such as Microsoft Dynamics CRM Online, Exchange Hosted Services, Exchange Online, and SharePoint Online. We enable the delivery of online advertising across our broad range of digital media properties and on Live Search through our proprietary adCenter® platform.

We also research and develop advanced technologies for future software products and services. We believe that delivering breakthrough innovation and high-value solutions through our integrated software platform is the key to meeting our customers’ needs and to our future growth. We believe that we will continue to lay the foundation for long-term growth by delivering new products and services, creating new opportunities for partners, improving customer satisfaction, and improving our internal processes. Our focus is to build on this foundation through ongoing innovation in our integrated software platforms; by delivering compelling value propositions to customers; by responding effectively to customer and partner needs; and by continuing to emphasize the importance of product excellence, business efficacy, and accountability.

OPERATING SEGMENTS

We have five operating segments: Client, Server and Tools, Online Services Business, Microsoft Business Division, and Entertainment and Devices Division. Our segments provide management with a comprehensive financial view of our key businesses. The segments enable the alignment of strategies and objectives across the development, sales, marketing, and services organizations, and they provide a framework for timely and rational allocation of development, sales, marketing, and services resources within businesses. The segments also help focus strategic planning efforts on key objectives and initiatives across our businesses.

Due to our integrated business structure, operating costs included in one segment may benefit other segments. Therefore, these segments are not designed to measure operating income or loss that is directly related to the products and services included in each segment. Inter-segment cost commissions are estimated by management and used to compensate or charge each segment for such shared costs and to motivate shared effort. Segments should not be viewed as discrete or easily separable businesses.

Client

Client has overall responsibility for technical architecture, engineering, and product delivery of our Windows product family and is responsible for our relationships with personal computer manufacturers, including multinational and regional original equipment manufacturers (“OEMs”). The segment includes sales and marketing expenses for the Windows operating system and product development efforts for the Windows platform. Client revenue growth is correlated with the growth of purchases of personal computers from OEMs that pre-install versions of Windows operating systems as the OEM channel accounts for over 80% of total Client revenue.

We released Windows Vista, the most recent version of the Windows operating system, in fiscal year 2007. This release concluded a major development phase that we believe resulted in a significantly more manageable and powerful PC operating system compared with prior releases. Windows Vista includes advances in security, digital media, user interfaces, and other areas that enhance the user and developer experience.

Client offerings consist of premium and standard edition Windows operating systems. Premium editions are those that include additional functionality and are sold at a price above our standard editions.

Products: Windows Vista, including Home, Home Premium, Ultimate, Business, Enterprise and Starter Edition; Windows XP Professional and Home; Media Center Edition; Tablet PC Edition; and other standard Windows operating systems.

Competition

Client faces strong competition from well-established companies with differing approaches to the PC market. Competing commercial software products, including variants of Unix, are supplied by competitors such as Apple, Hewlett-Packard, IBM, and Sun Microsystems. The Linux operating system, which is also derived from Unix and is available without payment under a General Public License, has gained some acceptance as competitive pressures lead PC OEMs to reduce costs and new, lower price PC form factors gain adoption. Apple takes an integrated approach to the PC experience and has made inroads in share, particularly in the U.S. and in the consumer segment.

The Windows operating system also faces competition from alternative platforms and new devices that may reduce consumer demand for traditional personal computers. Competitors such as Mozilla offer software that competes with the Internet Explorer Web browsing capabilities of Windows products. User and usage volumes on mobile devices are increasing around the world relative to the PC.

Our operating system products compete effectively by delivering innovative software, giving customers choice and flexibility, a familiar, easy-to-use interface, compatibility with a broad range of hardware and software applications, and the largest support network for any operating system.

Server and Tools

Server and Tools develops and markets software server products, services, and solutions. Windows Server-based products are integrated server infrastructure and middleware software designed to support software applications and tools built on the Windows Server operating system. Windows Server-based products include the server platform including targeted segment solutions, database, storage, management and operations, service-oriented architecture platform, and security and identity software. The segment also builds standalone and software development lifecycle tools for software architects, developers, testers, and project managers. Server products can be run on-site, in a hosting environment, or in a Web-based environment.

We offer a broad range of consulting services and provide product support services and industry solutions. We also provide training and certification to developers and information technology professionals about our Server and Tools and Client platform products.

Approximately 45% of Server and Tools revenue comes from multi-year licensing agreements, approximately 25% is purchased through fully packaged product and transactional volume licensing programs, and approximately 10% comes from licenses sold to OEMs. The remainder of Server and Tools revenue comes from consulting and product support services.

Major releases from Server and Tools in fiscal year 2008 included Windows Server 2008 and Visual Studio 2008. Windows Server 2008 provides virtualization technologies, security enhancements, new Internet tools and infrastructure, and management utilities while Visual Studio 2008 provides rapid application development, team collaboration tools, and advances in building connected applications. In fiscal year 2009, we plan to release Microsoft SQL Server 2008 which will deliver advances in database scalability, performance, security, and policy-based management.

Products and Services: Windows Server operating system; Microsoft SQL Server; Microsoft Enterprise Services; product support services; Visual Studio; System Center products; Forefront security products; Biz Talk Server; MSDN; and other products and services.

Competition

Our server operating system products face intense competition from a wide variety of server operating systems and server applications, offered by companies with a variety of market approaches. Vertically integrated computer manufacturers such as Hewlett-Packard, IBM, and Sun Microsystems offer their own versions of the Unix operating system preinstalled on server hardware. Nearly all computer manufacturers offer server hardware for the Linux operating system and many contribute to Linux operating system development. The competitive position of Linux has also benefited from the large number of compatible applications now produced by many leading commercial software developers and non-commercial software developers. A number of companies supply versions of Linux, including Novell and Red Hat. Server virtualization platform providers, such as VMware, are another form of competition for the Windows server operating system.

We have entered into business and technical collaboration agreements with Novell and other Linux providers to build, market, and support a series of solutions to enhance the interoperability of our products with their virtualization, management, and network security solutions, and to provide each other’s customers with patent coverage for their respective products.

We compete to provide enterprise-wide computing solutions with several companies that offer solutions and middleware technology platforms. IBM and Sun Microsystems lead a group of companies focused on the Java 2 Platform Enterprise Edition (J2EE). Commercial software developers that provide competing server applications for PC-based distributed client/server environments include CA, Inc., IBM, and Oracle. Our Web application platform software competes with open source software such as Linux, Apache, MySQL, and PHP, and we compete against Java middleware such as JBoss, Geronimo, and Spring Framework.

Numerous commercial software vendors offer competing commercial software applications for connectivity (both Internet and intranet), security, hosting, and e-business servers. System Center competes with Hewlett-Packard, BMC, CA, Inc., and IBM in the management of information technology infrastructures, while our Forefront line of business security products compete with McAfee, Symantec, and Trend Micro in protecting both client and server applications. Our products for software developers compete against offerings from Adobe, BEA Systems, Borland, IBM, Oracle, Sun Microsystems, and other companies. These offerings include open source projects like Eclipse (sponsored by IBM and Oracle). We believe that our server products provide customers with advantages in innovation, performance, total costs of ownership, and productivity by delivering superior applications, development tools, and compatibility with a broad base of hardware and software applications, security, and manageability.

Online Services Business

The Online Services Business (“OSB”) consists of an on-line advertising platform with offerings for both publishers and advertisers, personal communications services such as email and instant messaging, online information offerings such as Live Search, and the MSN portals and channels around the world. We earn revenue primarily from online advertising, including search, display, and email and messaging services. Revenue is also generated through subscriptions and transactions generated from online paid services, from advertiser and publisher tools, digital marketing and advertising agency services, and from MSN narrowband Internet access subscribers. We continue to launch new online offerings and expect to do so in the future. During fiscal year 2008, we launched new releases of Windows Live Search, the Windows Live suite of applications and services, and updated our MSN Video Service. In addition, we launched a new release of adCenter, our proprietary advertising platform, and also expanded our advertising platform portfolio through acquisitions.

We acquired a number of companies during the fiscal year, the most significant of which was aQuantive, Inc., a digital marketing business that we expect will play a key role in the future development of our Online Services Business. We believe the acquisition will help us build and support next-generation advertiser and publisher solutions for cross media planning, video-on-demand, and Internet protocol television.

Products: Live Search; MSN; MapPoint; MSN Internet Access; MSN Premium Web Services (consisting of MSN Internet Software Subscription, MSN Hotmail Plus, and MSN Software Services); Windows Live; MSN Mobile Services; AvenueA Razorfish media agency services; Atlas online tools for advertisers; and the Drive PM ad network for publishers.

Competition

OSB competes with AOL, Google, Yahoo!, and a wide array of Web sites and portals that provide content and online offerings of all types to end users. We compete with these organizations to provide advertising opportunities for merchants. OSB also competes for narrowband Internet access users with AOL, Earthlink, and other ISPs for dial-up Internet access in the United States. The Internet advertising industry has grown significantly over the past several years, and we anticipate that this trend will continue. Competitors are aggressively developing Internet offerings that seek to provide more effective ways of connecting advertisers with audiences through enhanced functionality in communication services, improvements in information services such as Internet search, and improved advertising infrastructure and support services. We have developed our own algorithmic search engine to provide end users with more relevant search results, expanded search services, and a broader selection of content. To support the growth of our advertising business, we also are investing in our communication services, technology, operations, and sales efforts. We will continue to introduce new products and services, including Windows Live services that are aimed at attracting additional users through improvements in the user online experience. As consumers migrate from narrowband to broadband Internet access, we expect our narrowband Internet access subscriber base to continue to decline and this portion of our business to decrease in importance. We believe that we can compete effectively across the breadth of our Internet services by providing users with software innovation in the form of information and communication services that help them find and use the information and experiences they want online and by providing merchants with effective advertising results through improved systems and sales support.

Microsoft Business Division

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. Growth of revenue from the Microsoft Office system offerings, which generate over 90% of MBD revenue, depends on our ability to add value to the core Office product set and to continue to expand our product offerings in other information worker areas such as content management, enterprise search, collaboration, unified communications and business intelligence. 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 MBD 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. Approximately 80% of MBD revenue is generated from sales to businesses. Revenue from this category generally depends upon the number of information workers in a licensed enterprise and is therefore relatively independent of the number of PCs sold in a given year. Approximately 20% of MBD revenue is derived from sales to consumers. Most of this revenue is generated from new licenses acquired through fully packaged products and licenses sold through OEMs for new PCs and is generally affected by the level of PC shipments and product launches.

Products: Microsoft Office; Microsoft Project; Microsoft Visio; Microsoft Office SharePoint Server; Microsoft PerformancePoint; Microsoft Office Live; FAST ESP; Microsoft Exchange Server; Microsoft Exchange Hosted Services; Microsoft Office Live Meeting; Microsoft Office Communication Server; Microsoft Office Communicator;

Microsoft Tellme Service, Microsoft Dynamics AX; Microsoft Dynamics CRM; Microsoft Dynamics CRM Online; Microsoft Dynamics GP; Microsoft Dynamics NAV; Microsoft Dynamics SL; Microsoft Dynamics Retail Management System; Microsoft Partner Program; and Microsoft Office Accounting.

Competition

Competitors to the Microsoft Office system include many software application vendors such as Apple, Corel, Google, IBM, Novell, Oracle, Red Hat, Sun Microsystems, and local application developers in Europe and Asia. IBM (Smartsuite) and Corel (WordPerfect Suite) have measurable installed bases with their office productivity products. Apple may distribute certain of its application software products with various models of its PCs. The OpenOffice.org project provides a freely downloadable cross-platform application that also has been adapted by various commercial software vendors to sell under their brands, including IBM, Novell, Red Hat, and Sun. Corel’s suite and many local software suites around the world are aggressively priced for OEMs to preinstall on low-priced PCs. Google has launched Google Apps, a hosted messaging and productivity suite, and also provides an enterprise search offering that competes with Microsoft Office SharePoint Server for Search, our new enterprise search product. Web-based offerings such as AjaxWrite, gOffice, iNetOffice, SimDesk, ThinkFree, wikiCalc, or other small projects competing with individual applications, can also provide an alternative to Microsoft Office system products. IBM has many different points of competition with Office system products with its Notes and Workplace offerings.

As we continue to respond to market demand for additional functionality and products, we will compete with additional vendors, most notably in enterprise content management and search, collaboration tools, unified communications, and business intelligence. These competitors include Autonomy, Cisco, Endeca, Google, IBM, Oracle, and SAP.

Our Microsoft Dynamics products compete with well-known vendors such as Intuit and Sage in the market focused on providing solutions for small and mid-sized businesses. The market for large organizations and divisions of global enterprises is intensely competitive with a small number of primary vendors including Oracle and SAP. These vendors are positioning many of their business applications to focus more intensely on small and mid-sized businesses. Additionally Salesforce.com’s on-demand customer relationship management offerings compete directly with Microsoft Dynamics CRM Online and Microsoft Dynamic CRM’s on-premise offerings. We believe our products compete effectively with these vendors based on our strategy of providing interoperable, adaptable solutions that work well with technologies our customers already have.

Entertainment and Devices Division

The Entertainment and Devices Division (“EDD”) is responsible for developing, producing, and marketing the Xbox video game system, including consoles and accessories, third-party games, games published under the Microsoft brand, and Xbox Live operations, as well as research, sales, and support of those products. In addition to Xbox, we offer the Zune digital music and entertainment device; PC software games; online games; Mediaroom, our Internet protocol television software; mobile and embedded device platforms, Surface computing platform; and other devices. EDD also leads the development efforts of our line of consumer software and hardware products including application software for Macintosh computers and Microsoft PC hardware products, and is responsible for all retail sales and marketing for Microsoft Office and the Windows operating systems.

Products: Xbox 360 console and games; Xbox Live; Zune; Mediaroom; numerous consumer software and hardware products (such as mice and keyboards); Windows Mobile software and services platform; Windows Embedded device operating system; Windows Automotive; and Surface computing platform.

Competition

Entertainment and devices businesses are highly competitive, characterized by rapid product life cycles, frequent introductions of new products and titles, and the development of new technologies. The markets for our products are characterized by significant price competition. We anticipate continued pricing pressure from our competitors. From time to time, we have responded to this pressure by reducing prices on certain products. Our competitors vary in size from very small companies with limited resources to very large, diversified corporations with substantial financial and marketing resources. We compete primarily on the basis of product innovation, quality and variety, timing of product releases, and effectiveness of distribution and marketing.

Our Xbox hardware business competes with console platforms from Nintendo and Sony, both of which have a large, established base of customers. The lifecycle for video game consoles averages five to seven years. We released Xbox 360, our second generation console, in November 2005. Nintendo and Sony released new versions of their game consoles in late 2006. We believe the success of video game consoles is determined by the availability of games for the console, providing exclusive game content that gamers seek, the computational power and reliability of the console, and the ability to create new revenue sources such as advertising and downloadable content. We think the Xbox 360 is positioned well against competitive console products based on significant innovation in hardware architecture, new developer tools, expanded revenue sources, and continued strong exclusive content from our own game franchises such as Halo.

In addition to competing against software published for non-Xbox platforms, our games business also competes with numerous companies that we have licensed to develop and publish software for the Xbox consoles. Zune competes with the Apple iPod and other digital music and entertainment devices. Our PC hardware products face aggressive competition from computer and other hardware manufacturers, many of which are also current or potential partners. Mediaroom faces competition primarily from a variety of competitors that provide elements of an Internet protocol television delivery platform, but that do not provide end-to-end solutions for the network operator. Windows Mobile software and services faces substantial competition from Apple, Nokia, Openwave Systems, Palm, QUALCOMM, Research In Motion, and Symbian. The embedded operating system business is highly fragmented with many competitive offerings. Key competitors include IBM, Wind River, and versions of embeddable Linux from commercial Linux vendors such as Metrowerks and MontaVista Software.

OPERATIONS

To serve the needs of customers around the world and to improve the quality and usability of products in international markets, we “localize” many of our products to reflect local languages and conventions. Localizing a product may require modifying the user interface, altering dialog boxes, and translating text.

Our operational centers support all operations in their regions, including customer contract and order processing, credit and collections, information processing, and vendor management and logistics. The regional center in Ireland supports the European, Middle Eastern, and African region; the center in Singapore supports the Japan, Greater China and Asia-Pacific region; and the centers in Fargo, North Dakota, Puerto Rico, Redmond, Washington, and Reno, Nevada support Latin America and North America.

We contract most of our manufacturing activities for Xbox 360 and related games, Zune, various retail software packaged products, and Microsoft hardware to third parties. Our products may include some components that are available from only one or limited sources. Our Xbox 360 console includes certain key components that are supplied by a single source. The central processing unit is purchased from IBM and the graphics chips and embedded dynamic random access memory chips for the graphics processing unit are purchased from Taiwan Semiconductor Manufacturing Company and NEC Corporation, respectively. Although we have chosen to initially source these key Xbox 360 components from a single supplier, we are under no obligation to exclusively source components from these vendors in the future. Beyond the exceptions noted, we generally have the ability to use other custom manufacturers if the current vendor becomes unavailable. We generally have multiple sources for raw materials, supplies, and components, and are often able to acquire component parts and materials on a volume discount basis.

PRODUCT DEVELOPMENT

During fiscal years 2008, 2007, and 2006, research and development expense was $8.2 billion, $7.1 billion, and $6.6 billion, respectively. These amounts represented 14%, 14%, and 15%, respectively, of revenue in each of those years. We plan to continue to make significant investments in a broad range of research and product development efforts.

While most of our software products are developed internally, we also purchase technology, license intellectual property rights, and oversee third-party development and localization of certain products. We believe we are not materially dependent upon licenses and other agreements with third parties relating to the development of our products. Internal development allows us to maintain closer technical control over our products. It also gives us the freedom to decide which modifications and enhancements are most important and when they should be implemented. Generally, we also create product documentation internally. We strive to obtain information as early as possible about changing usage patterns and hardware advances that may affect software design. Before releasing new software platforms, we provide application vendors with a range of resources and guidelines for development, training, and testing.

Investing in Business and Product Development. Innovation is a key factor in Microsoft’s growth. Our model for growth is based on broad adoption of the products and services we develop and market, our willingness to enter new markets, and our ability to embrace and act on disruptive technology trends. We continue our long-term commitment to research and develop, in a wide spectrum of technologies, tools, and platforms spanning communication and collaboration; information access and organization; entertainment; business and e-commerce; and devices. Increasingly, we are taking a global approach to innovation. While our main research and development facilities are located in Redmond, Washington, we also operate research facilities in other parts of the United States and around the world, including Canada, China, Denmark, England, India, Ireland, and Israel. This global approach will help us remain competitive in local markets and enables us to continue to attract top talent from across the globe.

Based on our broad focus on innovation and long-term approach to new markets, we see the following key opportunities for growth:

Consumer technology. To build on our strength in the consumer marketplace with Windows Vista, the 2007 Microsoft Office System, Xbox 360, Microsoft Windows Live, Windows Mobile, and Zune, we are focused on delivering products that we believe are compelling and cutting edge in terms of design, features, and functionality. To succeed in consumer technologies, we also are working to define the next era of consumer electronics. In the past, consumer electronics was a hardware-centric business; today, the innovation in consumer electronics devices lies in the software that powers them. This is creating new opportunities for us to deliver end-to-end experiences that connect users to information, communications, entertainment, and people in new and compelling ways.

Software plus services. Underlying our opportunities in all of our businesses is a company-wide commitment to embrace software plus services. The ability to combine the power of desktop and server software with the reach of the Internet represents an opportunity across every one of our businesses. As we continue to build out our services platform, we will bring a broad range of new products and service offerings to market that target the needs of large enterprises, small and medium-sized businesses, and consumers.

Expanding our presence on the desktop, the server, and with developers. We believe we are well-positioned to build on our strength with businesses of all sizes and with developers. Fiscal year 2008 saw widespread adoption of Windows Vista and the 2007 Microsoft Office system and the launch of Windows Server 2008, SQL Server 2008, and Visual Studio 2008. We will continue to focus expanding adoption of these products in fiscal year 2009, and in providing additional value in security, messaging, systems management, and collaboration. We also continue to focus on developers with the release of new tools such as Silverlight. We will continue to pursue new opportunities in high-performance computing, unified communications, healthcare, and business intelligence. Emerging markets are also an important opportunity for us.

CEO BACKGROUND

William H. Gates III, 51, a co-founder of Microsoft, has served as Chairman since our incorporation in 1981. Mr. Gates served as Chief Software Architect from January 2000 until June 2006, when he announced a two-year plan for his transition out of a day-to-day role, after which he will continue to serve as Chairman and an advisor on key development projects. Mr. Gates served as our Chief Executive Officer from 1981 until January 2000, when he resigned as Chief Executive Officer and assumed the position of Chief Software Architect. Mr. Gates is also a director of Berkshire Hathaway Inc.

Steven A. Ballmer, 51, has been a director since 2000. Mr. Ballmer has headed several Microsoft divisions during the past 27 years, including operations, operating systems development, and sales and support. In July 1998, he was promoted to President, a role that gave him day-to-day responsibility for running Microsoft. He was named Microsoft’s Chief Executive Officer in January 2000, assuming full management responsibility.

James I. Cash Jr., Ph.D., 59, has been a director since 2001. Dr. Cash is formerly The James E. Robison Professor of Business Administration at Harvard Business School, where he also served as Senior Associate Dean and Chairman of HBS Publishing. Dr. Cash is also a member of the board of directors of The Chubb Corporation, General Electric Company, Phase Forward Incorporated, and Wal-Mart Stores, Inc.

Dina Dublon, 54, has been a director since 2005. From December 1998 until her retirement in September 2004, Ms. Dublon served as Executive Vice President and Chief Financial Officer of JPMorgan Chase. Ms. Dublon joined Chemical Bank’s capital markets group as a trainee on the trading floor in 1981. Prior to joining Chemical Bank, Ms. Dublon worked for the Harvard Business School and Bank Hapoalim in Israel. Ms. Dublon is also a member of the board of directors of Accenture Ltd. and PepsiCo, Inc.

Raymond V. Gilmartin, 66, has been a director since 2001. Mr. Gilmartin served as the Chairman of the Board, President, and Chief Executive Officer of Merck & Co., Inc. from 1994 to May 2005, when he relinquished those titles as part of the succession planning process leading up to his planned retirement in April 2006. In the interim, he served as Special Advisor to the Executive Committee of the Merck board of directors. Prior to joining Merck, Mr. Gilmartin was Chairman, President, and Chief Executive Officer of Becton Dickinson and Company. He joined that company in 1976 as Vice President, Corporate Planning, taking on positions of increasing responsibility over the next 18 years. In July 2006, Mr. Gilmartin joined the faculty of Harvard Business School as Professor of Management Practice teaching in the MBA program. Mr. Gilmartin also serves on the board of directors of General Mills, Inc.

Reed Hastings, 46, has been a director since March 2007. Mr. Hastings co-founded Netflix, Inc., in 1997 and has served as Chairman of the Board from its inception. Mr. Hastings was named Chief Executive Officer of Netflix, Inc., in September 1998. Prior to Netflix, from 1991 to 1997 Mr. Hastings was founder, Chief Executive Officer, and Chairman of Pure Software.

David F. Marquardt, 58, has served as a director since 1981. Mr. Marquardt is a founding general partner of August Capital, a venture capital firm formed in 1995, and has been a general partner of various Technology Venture Investors entities, which are private venture capital limited partnerships, since August 1980. He is a director of Seagate Technology, Inc., and various privately-held companies.

Charles H. Noski, 55, has served as a director since 2003. From December 2003 to March 2005, Mr. Noski served as Corporate Vice President and Chief Financial Officer of Northrop Grumman Corporation and served as a director from November 2002 to May 2005. Mr. Noski joined AT&T in 1999 as Senior Executive Vice President and Chief Financial Officer and was named Vice Chairman of AT&T’s board of directors in 2002. Mr. Noski retired from AT&T upon the completion of its restructuring in November 2002. Prior to joining AT&T, Mr. Noski was President, Chief Operating Officer, and a member of the board of directors of Hughes Electronics Corporation, a publicly traded subsidiary of General Motors Corporation in the satellite and wireless communications business. He is a member of the American Institute of Certified Public Accountants, Financial Executives International, and the Standing Advisory Group of the Public Company Accounting Oversight Board, and is a past member of the Financial Accounting Standards Advisory Council. Mr. Noski is also a director of Air Products and Chemicals, Inc., and Morgan Stanley.

Dr. Helmut Panke, 61, has served as a director since 2003. Dr. Panke served as Chairman of the Board of Management of BMW Bayerische Motoren Werke AG from May 2002 through August 2006. From 1999 to 2002, he served as Member of the Board of Management for Finance. From 1996 to 1999, Dr. Panke was Member of the Board of Management for Human Resources and Information Technology. In his role as Chairman and Chief Executive Officer of BMW (US) Holding Corp. from 1993 to 1996, he was responsible for the company’s North American activities. He joined BMW in 1982. Dr. Panke is also a director of UBS AG and is a member of the supervisory board of Bayer AG.

Jon A. Shirley, 69, served as President and Chief Operating Officer of Microsoft from 1983 to 1990. He has been a director since 1983. Prior to joining Microsoft, Mr. Shirley was with Tandy Corporation in a variety of positions.

MANAGEMENT DISCUSSION FROM LATEST 10K

RESULTS OF OPERATIONS FOR FISCAL YEARS 2008, 2007, AND 2006

OVERVIEW

The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the results of operations and financial condition of Microsoft Corporation. MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes to the financial statements (“Notes”).

We generate revenue by developing, manufacturing, licensing, and supporting a wide range of software products and services for many different types of computing devices. Our software products and services include operating systems for servers, personal computers, and intelligent devices; server applications for distributed computing environments; information worker productivity applications; business solutions applications; high-performance computing applications; software development tools; and video games. We provide consulting and product support services, and we train and certify computer system integrators and developers. We also design and sell hardware including the Xbox 360 video game console, the Zune digital music and entertainment device, and peripherals. Online offerings and information are delivered through Live Search, Windows Live, Office Live, our MSN portals and channels, and the Microsoft Online Services platform which includes offerings for businesses such as Microsoft Dynamics CRM Online, Exchange Hosted Services, Exchange Online, and SharePoint Online. We enable the delivery of online advertising across our broad range of digital media properties and on Live Search through our proprietary adCenter® platform.

Our revenue historically has fluctuated quarterly and has generally been the highest in the second quarter of our fiscal year due to corporate calendar year-end spending trends in our major markets and holiday season spending by consumers. Our Entertainment and Devices Division is particularly seasonal as its products are aimed at the consumer market and are in highest demand during the holiday shopping season. Typically, the Entertainment and Devices Division has generated over 40% of its yearly segment revenues in our second fiscal quarter. In fiscal year 2007, our revenue was highest in the third quarter due to the recognition of $1.7 billion of revenue previously deferred from the Express Upgrade to Windows Vista and Microsoft Office Technology Guarantee programs and pre-shipments of Windows Vista and the 2007 Microsoft Office system. The technology guarantee programs provided customers who purchased current products with free or discounted rights to Windows Vista and the 2007 Microsoft Office system when those products became available to consumers.

We intend to sustain the long-term growth of our businesses through technological innovation, engineering excellence, and a commitment to delivering high-quality products and services to customers and partners. Recognizing that one of our primary challenges is to help accelerate worldwide PC adoption and software upgrades, we continue to advance the functionality, security, and value of Windows operating systems and to develop operating system versions targeted at emerging markets. We also are increasing our focus on selling our products in emerging markets and reducing the amount of unlicensed software used in those markets. In addition, we continue to develop innovative software applications and solutions that we believe will enhance the productivity of information workers, improve communication and collaboration in work groups, aid business intelligence, and streamline processes for small and mid-sized businesses. To sustain the growth of our Server and Tools business amid competition from other vendors of proprietary and open source software, our goal is to deliver products that provide the best platform for network computing – software that is easiest to deploy and manage, and that is most secure – with the lowest total cost of ownership.

We continue to invest in research and development in existing and new lines of business, including online solutions, business solutions, mobile computing, communication, entertainment, and other areas that we believe may contribute to our long-term growth. We also invest in research and development of advanced technologies for future software products. We believe that delivering innovative and high-value solutions through our integrated platform is the key to meeting customer needs and to our future growth.

We believe that over the last few years we have laid a foundation for long-term growth by delivering innovative products, creating opportunities for partners, improving customer satisfaction with key audiences, and improving our internal business processes. Our focus in fiscal year 2009 is to continue to build on this foundation and to continue to execute well in key areas, including continuing to innovate on our integrated software platform, responding effectively to customer and partner needs, and continuing to focus internally on product excellence, business efficacy, and accountability across the company.

Key market opportunities include:

Consumer technology. We are focused on delivering consumer software products that we believe are compelling in terms of design, features, and functionality. We also are working to define the next era of consumer electronics through the development of innovative software that runs on a wide range of devices and connects people quickly and easily to the information, experiences, and communities they care about.

Software plus services. The ability to combine the power of desktop and server software with the reach of the Internet represents an opportunity across every one of our businesses. We believe our software plus services approach will enable us to deliver new experiences to end users and new value to businesses.

Expanding our presence on the desktop, the server, and with developers. Through our ability to deliver additional value in security, messaging, systems management, and collaboration, and new technology for high-performance computing, unified communications, and business intelligence, we believe we are well-positioned to build on our strength with businesses of all sizes and with developers. Fiscal year 2008 saw widespread adoption of Windows Vista and the 2007 Microsoft Office system and the launch of Windows Server 2008, SQL Server 2008, and Visual Studio 2008.

Summary of Results for Fiscal Years 2008, 2007, and 2006

Fiscal year 2008 compared with fiscal year 2007

Revenue growth was driven primarily by increased licensing of the 2007 Microsoft Office system, increased Xbox 360 platform sales, increased revenue associated with Windows Server and SQL Server, and increased licensing of Windows Vista. Foreign currency exchange rates accounted for a $1.6 billion or three percentage point increase in revenue during the year.

Operating income increased primarily reflecting increased revenue, partially offset by increased headcount-related expenses, increased costs for legal settlements and legal contingencies, and increased cost of revenue. Headcount-related expenses increased 12%, reflecting an increase in headcount during the year. We incurred $1.8 billion of legal charges during the year primarily related to the European Commission fine of $1.4 billion ( € 899 million) as compared with $511 million of legal charges during the prior year. Cost of revenue increased $905 million or 8%, reflecting increased data center and equipment costs, online content expenses, and increased costs associated with the growth in our consulting services, partially offset by decreased Xbox 360 costs. The decreased Xbox 360 costs reflect the $1.1 billion charge in fiscal year 2007 related to the expansion of our Xbox 360 warranty coverage as discussed below, partially offset by increased Xbox 360 product costs reflecting growth in unit console sales.

The diluted earnings per share growth was impacted by the $1.1 billion Xbox 360 charge in fiscal year 2007 and current year share repurchases.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

The following MD&A is intended to help the reader understand the results of operations and financial condition of Microsoft Corporation. MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes to the financial statements (“Notes”).

We develop, manufacture, license, and support a wide range of software products for many computing devices. Our software products include operating systems for servers, PCs, and intelligent devices; server applications for distributed computing environments; information worker productivity applications; business solutions applications; and software development tools. We provide consulting and product support services, and we train and certify system integrators and developers. We sell the Xbox video game console and games, the Zune digital music and entertainment device, PC games, and PC peripherals. Online communication and information services are delivered through our MSN portals, channels around the world, and through our search products.

Our revenue historically has fluctuated quarterly and has generally been the highest in the second quarter of our fiscal year due to corporate calendar year-end spending trends in our major markets and holiday season spending by consumers. Our Entertainment and Devices Division is particularly seasonal as its products are aimed at the consumer market and are in highest demand during the holiday shopping season. Typically, the Entertainment and Devices Division has generated over 40% of its yearly segment revenues in our second fiscal quarter. In fiscal year 2007, our revenue was highest in the third quarter due to the recognition of $1.7 billion of revenue previously deferred from the Express Upgrade to Windows Vista and Microsoft Office Technology Guarantee programs and pre-shipments of Windows Vista and the 2007 Microsoft Office system. The technology guarantee programs provided customers who purchased current products with free or discounted rights to Windows Vista and the 2007 Microsoft Office system when those products became available to consumers. We believe the seasonality of revenue is likely to continue in the future consistent with our experience prior to fiscal year 2007.

All growth and percentage comparisons refer to the three or nine months ended March 31, 2008, as compared with the three or nine months ended March 31, 2007, unless otherwise noted.

Proposed Acquisition of Yahoo! Inc.

On January 31, 2008, we made a proposal to the Yahoo! Inc. (“Yahoo”) board of directors to acquire all the outstanding shares of Yahoo common stock for consideration of $31 per Yahoo share, representing a total value of approximately $44.6 billion at the time of the offer. Our proposal would allow the Yahoo shareholders to elect to receive cash or 0.9509 of a share of Microsoft common stock for each of their shares of Yahoo common stock, subject to proration so that in the aggregate, one-half of the outstanding shares of Yahoo common stock would be exchanged for shares of Microsoft common stock and the other half would be exchanged for cash. On February 11, 2008, the Yahoo board of directors stated publicly that our offer undervalued the company and was not in the best interests of its shareholders. There are no assurances that any acquisition will be completed.

Revenue growth for the three months ended March 31, 2008 was driven primarily by increased Xbox platform sales, increased Windows Server and SQL Server revenue, and increased online advertising revenue, offset by decreased licensing revenue from Windows Vista and the 2007 Microsoft Office system. During the three months ended March 31, 2007, we recognized approximately $1.7 billion of revenue deferred during the first half of fiscal year 2007 related to the Express Upgrade to Windows Vista and Microsoft Office Technology Guarantee programs and pre-shipments of Windows Vista and the 2007 Microsoft Office system. Revenue growth for the nine months ended March 31, 2008 was driven primarily by licensing of the 2007 Microsoft Office system, increased Xbox platform sales, increased revenue associated with Windows Server and SQL Server, and increased licensing of Windows Vista. Foreign currency exchange rates accounted for a $403 million or three percentage point increase in revenue during the three months and a $1.0 billion or three percentage point increase during the nine months ended March 31, 2008.

Operating income declined during the three months ended March 31, 2008, driven primarily by increased costs for legal settlements and legal contingencies, increased headcount-related expenses, and increased cost of revenue (data center and online costs, costs associated with the growth in consulting services, and Xbox 360 product costs reflecting increased Xbox 360 console sales, partially offset by decreased Xbox 360 manufacturing costs per console). Operating income growth for the nine months ended March 31, 2008 was primarily driven by the increased revenue, partially offset by increased costs for legal settlements and legal contingencies, increased cost of revenue (reflecting the items noted above and increased Windows Vista product costs), and increased headcount-related expenses. We incurred $1.5 billion of legal charges during the three months and $1.8 billion during the nine months ended March 31, 2008, primarily related to the European Commission fine of €899 million as compared with $296 million of legal charges during the three months and $494 million during the nine months ended March 31, 2007, primarily related to antitrust and unfair competition consumer class actions and intellectual property claims. Total headcount-related expenses increased 14% during the three months and 11% during the nine months ended March 31, 2008, driven by a 13% increase in headcount over the past 12 months and an increase in salaries and benefits for existing headcount.

Worldwide macroeconomic factors have a strong correlation to business and consumer demand for our software, services, games, and Internet service offerings. We are monitoring the changing economic conditions and expect the following for fiscal year 2008: we continue to expect double-digit revenue growth; we estimate worldwide PC shipments will grow 11% to 13%; and we expect a continued favorable impact from changes in year-over-year foreign currency exchange rates.

SEGMENT PRODUCT REVENUE/OPERATING INCOME/(LOSS)

Revenue and operating income/(loss) amounts in this section are presented on a basis consistent with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include certain reconciling items attributable to each of the segments. Segment information appearing in Note 9 – Segment Information is presented on a basis consistent with our current internal management reporting, in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 131, Disclosures about Segments of an Enterprise and Related Information . Certain corporate-level activity has been excluded from segment operating results and is analyzed separately. Prior period amounts have been recast to conform to the way we internally manage and monitor performance at the segment level during the current period.

Client offerings consist of premium edition and standard Windows operating systems. Premium offerings are those that include additional functionality and are sold at a price above our standard versions. Premium offerings include Windows XP Professional, Windows XP Media Center Edition, Windows XP Tablet PC Edition, Windows Vista Business, Windows Vista Home Premium, Windows Vista Ultimate, and Windows Vista Enterprise. Standard Windows operating systems include Windows XP Home and Windows Vista Home Basic. Client revenue growth correlates with the growth of purchases of PCs from OEMs that pre-install versions of Windows operating systems because the OEM channel accounts for approximately 80% of total Client revenue. The differences between unit growth rates and revenue growth rates from year to year are affected by changes in the mix of OEM Windows operating systems licensed with premium edition operating systems as a percentage of total OEM Windows operating systems licensed (“OEM premium mix”), changes in the geographical mix, and changes in the channel mix of products sold by large, multi-national OEMs versus those sold by local and regional system builders.

Client revenue decreased during the three months ended March 31, 2008, primarily reflecting revenue of approximately $1.2 billion recognized during the third quarter of the prior fiscal year upon the January 2007 release of Windows Vista to consumers. The amount had been deferred during the first half of fiscal year 2007 as a result of the Express Upgrade to Windows Vista Technology Guarantee program. Client revenue increased during the nine months ended March 31, 2008, primarily reflecting licensing of Windows Vista. During the three months ended March 31, 2008, OEM revenue decreased $1.1 billion or 25%, primarily reflecting revenue recognized during the third quarter of fiscal year 2007 related to the technology guarantee program, partially offset by a 5% increase in OEM license units. During the nine months ended March 31, 2008, OEM revenue increased $1.3 billion or 14%, driven by 14% growth in OEM license units. Revenue from commercial and retail licensing of Windows operating systems decreased $146 million or 18% during the three months ended March 31, 2008, primarily reflecting revenue recognized during the third quarter of the prior year related to the January 2007 consumer launch of Windows Vista. Revenue from commercial and retail licensing of Windows operating systems increased $71 million or 4% during the nine months ended March 31, 2008, primarily due to sales from Enterprise Agreements and anti-piracy efforts in emerging markets. The OEM premium mix increased five percentage points to 76% compared with the third quarter of last year and nine percentage points to 75% compared with the first nine months of last year, driven by increased consumer premium mix. Based on our estimates, total worldwide PC shipments from all sources grew 8% to 10% from the third quarter of the previous year and 12% to 14% from the first nine months of the previous year driven by demand in both emerging and mature markets.

Client operating income decreased during the three months ended March 31, 2008, reflecting the decreased revenue, partially offset by decreased sales and marketing expenses and decreased cost of revenue. Client operating income increased during the nine months ended March 31, 2008, reflecting the increased revenue, partially offset by increased cost of revenue. Sales and marketing expenses decreased $111 million or 21% during the three months, driven by decreased global advertising. Cost of revenue decreased $31 million or 11% during the three months, reflecting higher support services related to commercial and retail licensing during the third quarter of the prior fiscal year for the Windows Vista launch, and increased $162 million or 30% during the nine months, driven by Windows Vista product costs. Headcount-related expenses decreased 7% during the three months and were flat during the nine months ended March 31, 2008, driven by a 2% decrease in headcount over the past 12 months and decreased stock-based compensation expense.

For the fourth quarter of fiscal year 2008, we expect PC market growth will exceed OEM revenue growth. We expect PC shipments to grow 11% to 13% for fiscal year 2008. We believe that PC unit growth rates will be higher in the consumer segment than in the business segment and higher in emerging markets than in mature markets.

CONF CALL

Colleen Healy

Good afternoon, everyone, and thank you for joining us today. This afternoon I am joined by: Chris Liddell, Senior Vice President and Chief Financial Officer; Frank Brod, Corporate Vice President and Chief Accounting Officer; and John [Setok], Deputy General Counsel.

Today’s call will start with Chris providing some key takeaways for the fourth quarter of fiscal year 2008 and an overview of expectations for fiscal year ‘09. I will then provide details around our fourth quarter results and then hand it back to Chris for a more detailed discussion of our guidance for the full year and first quarter of fiscal 2009. After that, we’ll take your questions.

Our earnings release includes and addendum of financial highlights, which contains more detailed information about revenue, operating expenses, and other items. We also posted our quarterly financial summary slide deck, which is intended to follow the flow of our prepared remarks in order to assist you. The slide deck offers highlights from the quarter, outlines our guidance, and provides a reconciliation of differences between GAAP and non-GAAP financial measures [inaudible].

You can find the earnings release, the financial highlights, and the quarterly financial summary slide deck on the investor relations website at www.microsoft.com/msft.

Today’s call will be recorded. Please be aware that if you decide to ask a question, it will be included in both our live transmission as well as any future use of the recording. As always, shareholders and analysts can listen to a live webcast of today’s call at the Microsoft investor relations website. A replay of the call will be available at the same site through the close of business on July 25, 2009.

This conference call report is protected by copyright law and international treaties. Unauthorized reproduction or distribution of this report, or any portion of it, may result in civil and criminal penalties. Any recording or other use or transmission of the text or audio of today’s call is not allowed without the express permission of Microsoft.

We will be making statements during this call that are 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 in today’s earnings press release, in the comments made during this conference call, and in our most recent Form 10-K, subsequent quarterly reports on Form 10-Q, and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statement.

With that, let me now turn it over to Chris.

Christopher P. Liddell

Thanks, Colleen, and good afternoon, everyone. I will start today’s call with a few highlights from the year and then give you an overview of our expectations for fiscal year 2009.

Quarter four results capped off an outstanding year for the company in terms of both operating and financial performance. All three of our key financial measures met or exceeded the guidance we provided entering the year, despite a challenging economic environment. For the year, revenue, operating income, and earnings per share increased 18%, 21%, and 32% respectively.

Furthermore, the 18% revenue growth represents our fastest annual revenue growth in almost a decade. These results demonstrate the breadth of our business model, revenue growth being fueled by strong customer demand for our products and services across all of our businesses.

Our core businesses of client, Microsoft business division, and server and tools turned in fantastic results, growing revenue a combined 15% in the year. The online services business grew revenue 32%, while entertainment and devices division was up 34% for the year.

Looking at the fiscal year results from a geographic perspective, revenue in the U.S. increased approximately 15%. Other mature markets were up 16% and emerging markets grew a tremendous 35%.

Now for a couple of key points on our outlook for fiscal 2009, with our planning and budgeting process [in place]. Our revenue and operating income [growth trends] remain relatively consistent with what we told you in April. Specifically, we expect revenue growth of 11% to 13%, operating income growth of 17% to 20%, and earnings per share growth of [13% to 17%].

Since we last gave you guidance, we’ve increased investments in three ways. First, we’ve continued to make a number of important inorganic acquisitions. We’re taking the view that the current environment is in fact a positive one to acquire companies if you are in the fortunate position of having a strong balance sheet and a willingness to take a long-term view.

Second, we’ve increased organic investments in operating expenses, driven in particular by a deliberate decision to invest more aggressively in our online services strategy.

Last, we remain committed to investing in ourselves through our ongoing share repurchases. For the year, we repurchased over $12 billion of our stock, with $5 billion of that amount occurring in the fourth quarter.

One final comment before we get into the details; clearly we’re disappointed that our strong financial results are not reflected in our share price because of general market turbulence combined with Microsoft specific issues, including the uncertainty over the outcome of Yahoo! discussions.

In this environment, we remain focused on driving the factors inside our control. In particular, from my perspective, improving long-term earnings per share. I’m satisfied that despite difficult economic conditions, should we achieve the middle of our guidance for fiscal year ’09, we will have increased our earnings per share from $1.42 to $2.15 in two years, an increase of 50% over that period.

With those high level themes for 2008 and 2009, I’m going to turn the call over to Colleen now for more details on how we closed out last year.

Colleen Healy

Thanks, Chris. The fourth quarter was a solid finish to an outstanding year. For the quarter we met our top and bottom line guidance, driven by 18% revenue growth. Let me provide you with the details of our financial performance, starting with revenue. I will discuss top line financial and business momentum points and then follow with revenue performance for each of the business units. Then I’ll review the rest of the income statement.

All growth comparisons relate to the comparable quarter of last year unless otherwise specified.

Revenue grew 18% to $15.8 billion, with every business growing in the mid-teens or higher. Our annuity sales mix, which is approximately 40% of our billing revenue, continued to grow on both a year-over-year and sequential basis, with enterprise agreement renewal rates in line with historical trends.

The remainder of our product billings for the quarter was approximately 25% from OEM, around 15% from license only sales, and the balance from our other businesses.

Our unearned revenue grew 21% to $15.3 billion, over $600 million above our high-end guidance. Our contracted not billed balance increased both sequentially and year over year to over $13 billion, about $3 billion above where we started the fiscal year. When taken together with reported revenue, total bookings for the company grew 23%, driven by over 20% bookings growth for our core businesses of server and tools, client, and the Microsoft business division.

Overall, changes in foreign exchange rates added about four percentage points to our revenue growth.

Now I will provide revenue highlights by business segment, starting with client and its biggest driver, the PC market. We estimate that the PC unit growth rates for the quarter returned to the 12% to 14% range that we experienced in the first half of the fiscal year. This is about three points above our forecast, due to improvements in mature markets, including in the United States. This helps to drive client revenue growth of 15% to $4.4 billion, which was over $150 million above our high-end guidance.

During the quarter, our OEM license units increased by 22%, about nine points faster than the overall hardware market. OEM unit growth outpaced that of the PC market, primarily driven by a couple of factors: one, our OEM partners always have channel fluctuations. With this quarter, we estimate were a combination of replenishing the channel from lower Q3 levels as well as buying [hit some] pricing tiers during the quarter; and two, we returned to the trend of making gains on piracy, including in Asia.

OEM revenue increased by 13%. The difference between OEM revenue and unit growth is due to three trends, which you are already well familiar: one, volume mix shift towards emerging markets, which generally have lower ASPs; two, channel mix shift towards large OEMs with volume pricing; and three, premium mix shift toward consumer premium offerings. Specifically, while business and consumer premium units were up year-on-year and the overall OEM premium mix remained unchanged from the prior year at 72%, the premium mix composition shifted down four points of business premium and up four points of consumer premium.

The remaining roughly 20% of client revenue comes from commercial and retail licensing. This portion of the business grew over 20%, driven by continued strength in client annuity licensing as business customers continued to demand our enterprise offerings, including those that help them more efficiently manage their desktop infrastructure.

During the quarter, we surpassed the 180 million for Windows Vista licenses sold to date and Windows Vista had driven client revenue to an average growth rate of 16% since it became generally available.

Moving to server and tools, revenue was $3.7 billion, growing an outstanding 21% on top of the string of Q4 double-digit growth quarters. And this quarter marks the group’s 24th consecutive quarter of double-digit growth.

[inaudible] for annuity contracts, covering our [server and tools] offerings continued during the quarter, driving server and tools unearned revenues increased 37% from the beginning of the year. This customer commitment to annuity contracts demonstrates the increasingly critical role our server products perform in information technology infrastructure, as well as an increasing interest in the value offered in our long-term product roadmap.

Demand for our consulting and support services remains strong, driving associated revenue growth of 30%.

On the product side during the quarter, we released our eagerly anticipated virtualization feature, Hyper-V, two months ahead of schedule. We also made significant progress on SQL Server 2008, which is targeted for release during this, the first quarter of fiscal year 2009.

Online services business grew revenue 24% to $838 million. Online advertising grew 18%, including $33 million of ad revenue from aQuantive. While both search queries and page views were up and in line with expectations, monetization lagged, driven by tightening advertising budgets combined with a more competitive display pricing environment. We continued to attract users to our properties with live IDs hitting 460 million, up 80 million from last year. And we grew the number of advertisers utilizing our advertising platform by 28% during the year.

We closed the acquisitions of FairCast, which offers technology to aid in the purchase of online tickets at the lowest price, and Navic Networks, which develops tools to deliver targeted ads to television set-top boxes.

In May, we announced the beta launch of Live Search Cashback. Since then, we have 680 merchants participating in the program with about 200,000 registered users.

Microsoft business division revenue was up 14% to $5.3 billion. The business element of MBD revenue grew almost $700 million, or 19% on both strong enterprise agreement signings and license only sales.

Consumer revenue declined $66 million, down 7%. This reflects both a difficult comparison to last year’s quarter following the Office 2007 launch, and a continuation of a shift towards our lower price consumer SKUs.

Our emerging business product momentum continues, with SharePoint revenue up over 30% and unified communications revenue up over 20%. During the quarter, we completed the acquisition of Fast Search & Transfer, expanding our spectrum of enterprise search solutions for customers.

Our Dynamics business also had a good quarter, with customer billings growth of 22% and two product releases, Dynamics AX2009 and Dynamics CRM Online. Dynamics CRM continues to deliver the function and flexibility customers want, evidenced by over 120,000 CRM seats being sold in the quarter.

Entertainment and devices division grew revenues 37% to $1.6 billion. We sold 1.3 million Xbox 360 consoles, representing 88% growth over the prior year and passing the milestone of 20 million consoles sold life to date. In May, we announced that Xbox Live reached 12 million members, roughly doubling in membership for each of the last two years. Software attach rate continued to lead the industry at 7.7 software titles per console.

As was evident at E3 earlier this week, the interactive entertainment business was extremely busy during the quarter, securing industry-leading media content providers such as Netflix, NBC, Universal, Constantine, MGM International, as well as developing innovative new gaming and social experiences that will continue to expand our audiences.

The mobility business within the entertainment and devices division completed the acquisition of Danger and released System Center Mobile Device Manager 2008, which has created the opportunity for our sales force to partner with customers’ IT departments, helping them manage their mobile device assets with capabilities similar to those already used to manage PCs.

And Microsoft Surface moved into early commercial deployment in AT&T stores and [inaudible], [as you know.]

Now for the rest of the income statement: adjusting last year for the impact of the $1.1 billion charge related to the expansion of the Xbox 360 warranty policy, cost of revenue as a percent of sales increased one point to 18%, driven by increasing Xbox 360 console sales, costs associated with the growth of our consulting and support services, as well as data center equipment and online content expenses in our online services business.

Operating expenses increased $1.1 billion, or 19%, driven primarily by headcount related costs, acquisition related expenses, and marketing related expenses. Expenses came in $500 million higher than our guidance, split rather evenly between cost of revenue and operating expenses.

First, cost of revenue; we sold more Xbox 360 consoles than our guidance had reflected. In server and tools, the higher revenue growth in our consulting and support services carries higher associated costs than does software revenue. In our online services business, we were able to bring servers in our data centers online faster than expected and we invested in premium online content, which is [higher creative and agency fees associated with it].

Moving on to operating expenses, we took advantage of the economic environment out there to attract top talent for the company, yielding higher close rates and filling headcount openings. Also, across a number of our businesses, we spent more on product development and efforts to ready marketing campaigns, and foreign currency rates presented some headwind.

Operating income was $5.7 billion, up 42% or 13% after adjusting for the impacts of the warranty related charge in the year-ago period. Investment income and other totaled $284 million, as the Microsoft treasury team continues to successfully navigate a challenging capital market environment.

Our effective tax rate for the quarter was 28%, a couple points lower than expected, driven by an earnings mix increase in lower tax jurisdictions.

During the quarter, we repurchased 171 million shares, or almost $5 billion of company stock, and paid out about $1 billion in dividends to shareholders.

Diluted shares outstanding were $9.4 billion, down 3% from the prior year, as a result of share repurchases. Earnings per share were $0.46, in line with our guidance and growing 48%, or 18% after adjusting for the warranty related charge in the prior year.

So in summary, we had our fastest growing fourth quarter revenue since 1999. Adjusting of the year-ago Xbox warranty charge, operating income and EPS grew 13% and 18% respectively.

With that, let me turn it back to Chris who will provide you with our first quarter and full year guidance for fiscal 2009.

Christopher P. Liddell

Thanks, Colleen. I’m going to spend my remaining time on the call talking about what we see coming for the full year and for the first quarter. Let me begin by outlining some of our key assumptions around the economy and general demand in the industry. The forecast generally assumes a continuation of the economic conditions and demand we experienced in the fourth quarter to continue into the first half of fiscal year ’09, with some improvement over the second half of the year.

We expect PC unit to remain healthy with growth rates similar to those in 2008. Specifically, we expect PC unit growth in fiscal 2009 to be 12% to 14% for the year and between 10% to 12% for the first quarter. We estimate that growth rates will continue to be driven by roughly 20% growth in emerging markets, with high-single-digit growth in mature markets.

Now let me go through our detailed guidance; for the full year, we expect our revenue to come in between $67.3 billion to $68.1 billion, growing 11% to 13%. For the first quarter, we expect revenue of $14.7 billion to $14.9 billion, which represents an increase of 7% to 8%.

With that, revenue guidance by business group is as follows: for client, we expect full year growth to be 9% to 10% and Q1 growth to be 6% to 7%. The PC market growth will outpace that of client revenue because of a continuation of the underlying PC market dynamic, namely emerging market PC growth outpacing mature markets, consumer growth exceeding business growth, and the shift in the system build channel to large OEM.

Server and tools revenue should be up 18% to 19% for the year and 19% to 20% for the first quarter. Coming off another impressive year of growth in fiscal year ’08, the server and tools business is expected to continue to show double-digit growth across the breadth of our server platform products and services, driven by strong customer demand for the recently refreshed Windows Server and Digital Studio offerings, and the soon-to-be-available SQL Server 2008.

We forecast revenue in the online services business to increase 18% to 20% for the year, and 7% to 11% for the first quarter. The advertising component of revenue is expected to grow at approximately 25% for the year and 15% for the quarter.

Our Q1 guidance assumes the continuation of the challenging online advertising market experienced in the fourth quarter. We expect revenue growth will accelerate through the year as we begin seeing returns from the additional investments we are making in the business.

Our business division revenue should be up 14% to 15% for the year and 15% to 16% in the first quarter. We should continue to see business demand for Microsoft Office 2007, SharePoint, and Dynamic products. Combined with growth in our emerging unified communication and business intelligence offering, this will drive another year of very strong growth.

Fiscal 2009 also represents an important year in delivering on our software for services strategy, with the upcoming releases of Exchange Online, SharePoint Online, and Office Communications Online later this calendar year.

For the entertainment and devices division, we expect revenue to be down 4% to flat for the full year, and down 23% to 26% in Q1. The strong customer demand for Halo 3 following its launch in fiscal 2008 makes for challenging year-over-year comparisons in the entertainment and devices division. But having said that, we remain committed to a profitable performance in fiscal year ’09.

Turning back to company wide performance, operating income for the year is expected to be between $26.3 billion and $26.9 billion, increasing 17% to 20%, or 10% to 12% excluding certain tax and legal charges in fiscal 2008. For the first quarter, we expect operating income to be between $5.9 billion and $6 billion.

Q1 operating income includes the impact of increased spending associated with our online services business, costs associated with a number of new acquisitions, and investments in a new Windows consumer marketing campaign.

I would like to address the overall level of -- the impact of the overall level of spending on the company margin. To do so, as I’ve told you before, we need to look at the three individual parts of the company that have distinct margin structures. The core businesses of client, server and tools, and Microsoft business division collectively will have an operating margin in fiscal 2009 that’s essentially flat. This performance is obviously very good, given that we are making a number of investments to drive the overall health of the business and absorbing a number of acquisitions we’ve made this year and growing revenue in mid-teens.

The margin for entertainment and devices should also remain roughly the same year-on-year in fiscal year ’09, even without a first party game release of Halo 3’s magnitude.

So taken together, our businesses representing over 90% of our revenue will grow double-digits next year with the margin structure intact.

Clearly the online services business has a totally different dynamic and is in a period of significant investment. We do not make these investments lightly, as the loss in this division will be a drag on an otherwise exceptionally good performance.

However, we believe that the additional investments of several hundreds of millions of dollars is worth the short-term cost, given the opportunity to participate in a market where the opportunity is measured in the tens of billions of dollars.

So I wanted on the call to take a few minutes to frame our reasoning behind the additional online service business investments. I will start with an overview of our broad strategy and then provide details into the additional investments.

With the online ad spending expected to reach $80 billion by 2012, this area represents one of the largest growth opportunities for the company. We segment the market for online advertising in four distinct categories -- search, advertising platforms, information content, and communication and social networking.

For search, we’re focused on driving query share improvements and business model innovation, specifically in the area of high value commercial search. Our recent release of Cashback is a good example of executing on our strategy, which combines innovation in the shopping experience with a shift in the distribution of advertiser economic towards the end users.

Additionally, we also [seek to win] targeted distribution through OEMs, ISPs, ISVs, and retailers. The recently announced deal with HP in the U.S. is an example of [this].

Turning to the ad platform, our strategy can be summarized as consolidate [when in] display, and there we are focused on integrating our advertising assets into a single comprehensive system that can deliver our publishing partners’ industry leading yields and our advertisers optimal return on their ad spend.

In the area of communication and social networking, which includes our mail, messenger, and social networking assets, such as Spaces, we’ll deliver the leading end-to-end experiences across the PC, phone, and web.

And finally, in the category of information content, we plan to invigorate our MSN portal experience with improvements in user experience, social media consumption, and premium content.

As well as overall advertising revenue, which is clearly the overall measure of success, we have aggressive growth targets in each of the above areas over the next five to 10 years. These targets can be broken down in terms of the percentage of share of worldwide page views, percentage of share of Internet [inaudible], the percentage share of search queries, and percentage of the growth of the online advertising dollars that pass through our platform.

Clearly the Yahoo! transaction, which I’ll make some more comments on later, would have accelerated our progress towards these goals. However, during the quarter, a transaction became increasingly unlikely. Further, as you know, during the quarter Yahoo! signed a search outsourcing agreement with Google. Given that environment, we made some decisions to accelerate our online services’ organic growth strategy. Mainly we decided to increase our investment in the high-margin scalable areas of search and ad platforms.

So about two-thirds of the incremental spend that we are planning is related to investments to drive usage of our search offering. We’re dialing up our search distribution initiatives with targeted OEM toolbar [alt] search deals, scaling search globally with investments in localized engineering and data centers, pursuing acquisitions and partnerships to build vertical content to support our commercial strategy, accelerating the rollout of our Cashback program, and increasing marketing in the business to grow awareness and drive traffic.

Second, we are upping the investments in our ad platform and increasing the number of advertisers and high quality inventory on that platform. Specifically, these investments are in the area of accelerating the integration of our ad platform assets, expanding our sales and service capabilities, small acquisitions to enhance the platform technology, and investments in strategic partnerships to increase third-party inventory available to advertisers on our ad platform.

So turning to EPS, our diluted earnings per share for the year are expected to come in at $2.12 to $2.18, representing growth of 13% to 17%, two to four points faster than revenue.

To put this performance in context, as I mentioned at the front of the call, if we achieve the middle of our guidance, we’ll have increased earnings per share from $1.42 to $2.15 in two years, an increase of 50%. But first quarter we expect earnings per share of $0.47 to $0.48, and these earnings assume an effective tax rate of 28%.

From a balance sheet perspective, we expect total unearned revenue to finish fiscal 2009 up 8% to 9%. [Contracts not filled] should also finish 2009 up from current levels.

When thinking about sequential changes in unearned revenue from Q4 fiscal year ’08 to Q1 fiscal year ’09, we expect a sequential decrease from Q4 to Q1 to exceed the rate of decline we experienced the last few years.

As always, when thinking about the guidance we provide, you should also consider the risks. These include competitors, legal, execution and general market risks such as foreign exchange rate movements, fluctuations in PC and server hardware growth rates, IT spending, changes in the piracy rate, and customer acceptance of our new and existing products. Additionally, changes in the mix of our billings between annuity and license only can have an impact on revenue, operating income, and EPS by delaying revenue recognition into future periods.

So in closing, the strong results of fiscal year ’08 were the outcome of both business and engineering execution. In addition to the financial out-performance, we delivered the final phase in our multi-year product refresh cycle with the availability of Windows Server 2008 and Visual Studio 2008, and are well-positioned to continue that momentum into fiscal 2009.

The next fiscal year will be an important year, driving mass adoption across the portfolio of products. With our breadth of products and global diversification, we are confident in our ability to continue to deliver double-digit revenue increases even off our base of over $60 billion, and we will continue to use our strong cash flow to invest in our organic growth, inorganic growth through acquisitions, and in ourselves through buy-backs.

Before I hand the call back to Colleen, I want to take a moment to clarify the terms of our recent proposal for a search transaction with Yahoo!. Given the upcoming Yahoo! shareholder meeting, I won’t be taking any questions on this topic in the Q&A section that will follow this presentation and we won’t be providing any additional comments on matters we’ve already discussed. But with that, let me outline for you the key elements of our proposal.

Firstly, we are providing significant revenue guarantees. Microsoft proposed a 10-year minimum revenue guarantee totaling between $19.5 billion and $26.5 billion. For the first five years, the guarantee is $2.3 billion per year. There afterwards, both Yahoo! and Microsoft have the option to extend the agreement for an additional five-year period. If Yahoo! unilaterally chooses to extend the agreement, the guarantee would be for $1.6 billion per year after the extension. Conversely, if Microsoft unilaterally chooses to extend the agreement, the guarantee to Yahoo! would be $3 billion per year after the extension. These guarantees are not conditional on Yahoo!’s search queries, but rather the guarantees are tied to Yahoo!’s homepage performance.

Our proposal includes an 85% TAC rate for the first three years of the agreement and 70% there afterwards. Microsoft would pay Yahoo! $1 billion for its search assets, provide $2.8 billion of senior debt to Yahoo! on favorable terms, and make a significant equity investment in Yahoo! through the purchase of $3.9 billion of Yahoo! stock at $19.50 per share, reflecting our view of the value of the company as a result of our proposed transaction and the distribution of cash and the Yahoo! Asian investments by Yahoo! to its stockholders.

I should also note that Microsoft’s proposal did not and does not include changes to Yahoo!’s governance. We clearly continue to believe that our proposal is a compelling one.

With that, I am going to hand the call back to Colleen so we can get started taking your questions, and I clearly look forward to seeing a number of you at our financial analyst meeting, which is next Thursday.

Colleen Healy

Thanks, Chris. Let’s now proceed to questions. We want to accommodate questions from as many people as possible, so please avoid multi-part questions and limit yourselves to just one question. Operator, will you please repeat your instructions?

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