The Microsoft Business Division reported $5.62 billion in first quarter revenue, an 8% increase from the prior year period which included the launch of Office 2010. Revenue from Microsoft’s productivity server offerings – including Lync, SharePoint, and Exchange – grew double-digits, and the Dynamics business grew 17% in the quarter.

The Server & Tools segment posted $4.25 billion in first quarter revenue, a 10% increase over the prior year period and the sixth consecutive quarter of double-digit revenue growth. Microsoft also unveiled a developer preview of “Windows Server 8” at the BUILD developer conference in September.

Windows and Windows Live Division revenue was $4.87 billion, a 2% increase over the prior period, in line with the PC market. Windows 7 momentum continued with over 450 million licenses sold since launch. At the BUILD conference, Microsoft showcased and released a developer preview of the next major release of Windows, “Windows 8.”

Windows Phone 7.5 released with a broad array of new features, and received favorable reviews.

Bing organic US market share grew 350 basis points year over year to 14.7% while Bing-powered US market share, including Yahoo! properties, was approximately 27%. The company also showcased the increasing integration of Bing across other products such as Xbox and Windows Phone.

Xbox was the top-selling gaming console in the US for the ninth consecutive month. The company launched the Gears of War 3 game with over three million copies sold in the first week, and announced plans to roll out the next generation of TV entertainment on Xbox LIVE with nearly 40 content providers starting this holiday season.

Microsoft completed its acquisition of Skype.

execution and competitive risks in transitioning to cloud-based computing;

challenges to Microsoft’s business model;

intense competition in all of Microsoft’s markets;

Microsoft’s continued ability to protect its intellectual property rights;

claims that Microsoft has infringed the intellectual property rights of others;

the possibility of unauthorized disclosure of significant portions of Microsoft’s source code;

actual or perceived security vulnerabilities in Microsoft products that could reduce revenue or lead to liability;

improper disclosure of personal data that could result in liability and harm to Microsoft’s reputation;

outages and disruptions of services provided to customers directly or through third parties if Microsoft fails to maintain an adequate operations infrastructure;

government litigation and regulation affecting how Microsoft designs and markets its products;

Microsoft’s ability to attract and retain talented employees;

delays in product development and related product release schedules;

significant business investments that may not gain customer acceptance and produce offsetting increases in revenue;

unfavorable changes in general economic conditions, disruption of our partner networks or sales channels, or the availability of credit that affect demand for Microsoft’s products and services or the value of our investment portfolio;

adverse results in legal disputes;

unanticipated tax liabilities;

quality or supply problems in Microsoft’s consumer hardware or other vertically integrated hardware and software products;

impairment of goodwill or amortizable intangible assets causing a charge to earnings;

exposure to increased economic and regulatory uncertainties from operating a global business;

geopolitical conditions, natural disaster, cyberattack or other catastrophic events disrupting Microsoft’s business; and

acquisitions, joint ventures and strategic alliances that adversely affect the business.

INCOME STATEMENTS

(In millions, except per share amounts) (Unaudited)

Three Months Ended

September 30,

Revenue

Operating expenses:

Cost of revenue

Research and development

Sales and marketing

General and administrative

Total operating expenses

Operating income

Other income

Income before income taxes

Provision for income taxes

Net income

Earnings per share:

Basic

Diluted

Weighted average shares outstanding:

Basic

Diluted

Cash dividends declared per common share

BALANCE SHEETS

(In millions) (Unaudited)

Assets

Current assets:

Cash and cash equivalents

Short-term investments (including securities loaned of $1,119 and $1,181)

Total cash, cash equivalents, and short-term investments

Accounts receivable, net of allowance for doubtful accounts of $297 and $333

Inventories

Deferred income taxes

Other

Total current assets

Property and equipment, net of accumulated depreciation of $10,209 and $9,829

Equity and other investments

Goodwill

Intangible assets, net

Other long-term assets

Total assets

Liabilities and stockholders’ equity

Current liabilities:

Accounts payable

Accrued compensation

Income taxes

Short-term unearned revenue

Securities lending payable

Other

Total current liabilities

Long-term debt

Long-term unearned revenue

Deferred income taxes

Other long-term liabilities

Total liabilities

Commitments and contingencies

Stockholders’ equity:

Common stock and paid-in capital - shares authorized 24,000; outstanding 8,410 and 8,376

Retained deficit, including accumulated other comprehensive income of $751 and $1,863

Total stockholders’ equity

Total liabilities and stockholders’ equity

Operations

Net income

Adjustments to reconcile net income to net cash from operations:

Depreciation, amortization, and other

Stock-based compensation expense

Net recognized gains on investments and derivatives

Excess tax benefits from stock-based compensation

Deferred income taxes

Deferral of unearned revenue

Recognition of unearned revenue

Changes in operating assets and liabilities:

Accounts receivable

Inventories

Other current assets

Other long-term assets

Accounts payable

Other current liabilities

Other long-term liabilities

Net cash from operations

Financing

Short-term debt borrowings (repayments), maturities of 90 days or less, net

Proceeds from issuance of debt, maturities longer than 90 days

Repayments of debt, maturities longer than 90 days

Common stock issued

Common stock repurchased

Common stock cash dividends paid

Excess tax benefits from stock-based compensation

Other

Net cash used in financing

Investing

Additions to property and equipment

Acquisition of companies, net of cash acquired, and purchases of intangible and other assets

Purchases of investments

Maturities of investments

Sales of investments

Securities lending payable

Net cash used in investing

Effect of exchange rates on cash and cash equivalents

Net change in cash and cash equivalents

Cash and cash equivalents, beginning of period

Cash and cash equivalents, end of period

SEGMENT REVENUE AND OPERATING INCOME (LOSS)

(In millions) (Unaudited)

Three Months Ended

September 30,

Revenue

Windows & Windows Live Division

Server and Tools

Online Services Division

Microsoft Business Division

Entertainment and Devices Division

Unallocated and other

Consolidated

Operating income (loss)

Windows & Windows Live Division

Server and Tools

Online Services Division

Microsoft Business Division

Entertainment and Devices Division

Corporate-level activity

Consolidated