Microsoft Reports Record Revenue and Earnings

REDMOND, Wash. -- Jan. 27, 2005 -- Microsoft Corp. today announced record revenue of $10.82 billion for the quarter ended December 31, 2004, a 7% increase over the results in the same period of the prior year. Operating income for the second quarter was $4.75 billion, which was an increase of $3.27 billion over the same period in the prior year. The results of the second quarter of the prior year included $2.21 billion in compensation expense incurred in connection with the Employee Stock Option Transfer Program. Net income for the second quarter was $3.46 billion. Diluted earnings per share exceeded the company's guidance by $0.04 and were $0.32 including stock-based compensation expense.

"Our record revenue came from across-the-board strength in both our business and consumer segments" said John Connors, chief financial officer at Microsoft. "And our long-term approach to growing new businesses is paying off. Home and Entertainment delivered its first profitable quarter and all three of the company's emerging businesses combined generated a nearly $700 million improvement in operating results compared to the second quarter of last fiscal year."

The Server and Tools business grew 18% versus the prior year's comparable quarter. Customer adoption of SQL Server^TM remains particularly robust with over 25% year over year revenue growth. During the quarter, Exchange 2003 marked its one-year product launch anniversary and has had the fastest adoption of Exchange licenses ever. Customers who acquired Microsoft server products during the quarter included Eastman Chemical Company, Hewlett-Packard Company, Morgan Stanley and Premera Blue Cross.

The Home and Entertainment segment delivered record revenue during the quarter and achieved positive operating income. "Our Xbox^® business fired on all cylinders and provided a strong ending to what was a great year for the platform and our partners," said Robbie Bach, senior vice president of the Home and Entertainment group. "Not only did we achieve record software sales with our strongest games lineup to date, but we also sold more consoles than our competitors during the critical holiday sales season in the United States, and increased Xbox Live^TM membership to over 1.4 million members." During the quarter, 6.3 million units of "Halo^® 2" were sold, resulting in a game attach rate of over 30% to the Xbox installed base of almost 20 million consoles.

Business Outlook

Management offers the following guidance for the quarter ending March 31, 2005:

• Revenue is expected to be in the range of $9.7 billion and $9.8 billion.

• Operating income is expected to be in the range of $4.1 billion and $4.2 billion, including stock-based compensation expense.

• Diluted earnings per share are expected to be $0.27 or $0.28, including stock-based compensation expense.

Management offers the following guidance for the full fiscal year ending June 30, 2005:

• Revenue is expected to be in the range of $39.8 billion and $40.0 billion.

• Operating income is expected to be in the range of $16.5 billion and $16.7 billion, including stock-based compensation expense.

• Diluted earnings per share are expected to be in the range of $1.09 and $1.11, including stock-based compensation expense.

Webcast Details and 10-Q filing

Microsoft will hold an audio webcast at 2:30 p.m. PST (5:30 p.m. EST) today with John Connors, chief financial officer, and Scott Di Valerio, corporate controller, to discuss details regarding the company's performance for the quarter and other forward-looking information. The session may be accessed at http://www.microsoft.com/msft. The webcast will be available for replay through the close of business on Jan. 27, 2006.

Microsoft filed its 10-Q with the Securities and Exchange Commission today and it is also available at the company's investor relations website (www.microsoft.com/msft).

About Microsoft

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

Forward-Looking Statements

Statements in this release that are "forward-looking statements" are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of factors such as: entry into markets with vigorous competition, market acceptance of new products and services, continued acceptance of existing products and services, changes in licensing programs, product price discounts, delays in product development and related product release schedules, sales channel disruption such as the bankruptcy of a major distributor, and reliance on sole source suppliers for key components of Xbox that could result in component shortages and delays in product delivery, any of which may cause revenues and income to fall short of anticipated levels; obsolete inventory or product returns by distributors, resellers and retailers; warranty and other claims on hardware products such as Xbox; changes in the rate of PC shipments; technological shifts; the support of third-party software developers for new or existing platforms; the availability of competitive products or services such as the Linux operating system at prices below our prices or for no charge; the ability to have access to distribution channels for MSN that are controlled by third parties; the risk of unanticipated increased costs for network services; the continued ability to protect the company's intellectual property rights; adverse effects on our business that might result if an unauthorized disclosure of a significant portion of our source code were to occur; the ability to obtain on acceptable terms the right to incorporate in the company's products and services technology patented by others; changes in product and service mix; maturing product life cycles; product sale terms and conditions; the risk that actual or perceived security vulnerabilities in our products could adversely affect our revenues; implementation of operating cost structures that align with revenue growth; unavailability of insurance; uninsured losses; adverse results in litigation; unanticipated tax liabilities; the effects of terrorist activity and armed conflict such as disruptions in general economic activity and changes in our operations and security arrangements; the effects of a major earthquake, cyber-attack or other catastrophic event that results in the destruction or disruption of any of our critical business or information technology systems; the level of corporate information technology spending and changes in general economic conditions that affect demand for computer hardware or software; currency fluctuations; and financial market volatility or other changes affecting the value of our investments that may result in a reduction in carrying value and recognition of losses including impairment charges.

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

All information in this release is as of Jan. 27, 2005. The company undertakes no duty to update any forward-looking statement to conform the statement to actual results or changes in the company's expectations.

Microsoft, Xbox, Xbox Live, and Halo are either registered trademarks or trademarks of Microsoft Corp, in the United States and/or other countries. The names of actual companies or products mentioned herein may be the trademarks of their respective owners.

For more information, financial analysts and investors only:

Curt Anderson, general manager, Investor Relations (425) 706-3703

For more information, press only:

Rapid Response Team, Waggener Edstrom, (503) 443-7070, rrt@wagged.com

Note to editors: If you are interested in viewing additional information on Microsoft, please visit the Microsoft Web page at http://www.microsoft.com/presspass on Microsoft's corporate information pages. Web links, telephone numbers and titles were correct at time of publication, but may since have changed. Shareholder and financial information, as well as today's 2:30 p.m. PST conference call with investors and analysts is available at http://www.microsoft.com/msft.