Income Statements (USD $) In Millions, except Per Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Dec. 31, 2009	Dec. 31, 2008	Dec. 31, 2009	Dec. 31, 2008
Revenue	$ 19,022	$ 16,629	$ 31,942	$ 31,690
Operating expenses:
Cost of revenue	3,628	3,907	6,470	6,755
Research and development	2,079	2,290	4,144	4,573
Sales and marketing	3,619	3,662	6,409	6,706
General and administrative	1,124	831	1,865	1,718
Employee severance	59	0	59	0
Total operating expenses	10,509	10,690	18,947	19,752
Operating income	8,513	5,939	12,995	11,938
Other income (expense)	370	(301)	653	(309)
Income before income taxes	8,883	5,638	13,648	11,629
Provision for income taxes	2,221	1,464	3,412	3,082
Net income	$ 6,662	$ 4,174	$ 10,236	$ 8,547
Earnings per share:
Basic	$ 0.75	$ 0.47	$ 1.15	$ 0.95
Diluted	$ 0.74	$ 0.47	$ 1.14	$ 0.94
Weighted average shares outstanding:
Basic	8,856	8,903	8,885	8,994
Diluted	8,951	8,914	8,975	9,052
Cash dividends declared per common share	$ 0.13	$ 0.13	$ 0.26	$ 0.26

Balance Sheets (USD $) In Millions, unless otherwise specified	6 Months Ended	12 Months Ended
	Dec. 31, 2009	Jun. 30, 2009
Current assets:
Cash and cash equivalents	$ 9,422	$ 6,076
Short-term investments (including securities loaned of $2,654 and $1,540)	26,677	25,371
Total cash, cash equivalents, and short-term investments	36,099	31,447
Accounts receivable, net of allowance for doubtful accounts of $506 and $451	11,196	11,192
Inventories	589	717
Deferred income taxes	2,056	2,213
Other	2,547	3,711
Total current assets	52,487	49,280
Property and equipment, net of accumulated depreciation of $8,170 and $7,547	7,402	7,535
Equity and other investments	6,976	4,933
Goodwill	12,368	12,503
Intangible assets, net	1,346	1,759
Deferred income taxes	0	279
Other long-term assets	1,517	1,599
Total assets	82,096	77,888
Current liabilities:
Accounts payable	3,171	3,324
Short-term debt	2,249	2,000
Accrued compensation	2,417	3,156
Income taxes	721	725
Short-term unearned revenue	11,361	13,003
Securities lending payable	2,911	1,684
Other	2,885	3,142
Total current liabilities	25,715	27,034
Long-term debt	3,746	3,746
Long-term unearned revenue	1,167	1,281
Deferred income taxes	377	0
Other long-term liabilities	6,808	6,269
Commitments and contingencies
Stockholders' equity:
Common stock and paid-in capital-shares authorized 24,000; outstanding 8,811 and 8,908	62,566	62,382
Retained deficit, including accumulated other comprehensive income of $1,322 and $969	(18,283)	(22,824)
Total stockholders' equity	44,283	39,558
Total liabilities and stockholders' equity	$ 82,096	$ 77,888

Balance Sheets (Parenthetical) (USD $) In Millions, unless otherwise specified	Dec. 31, 2009	Jun. 30, 2009
Short-term investments, securities loaned	$ 2,654	$ 1,540
Accounts receivable, allowance for doubtful accounts	506	451
Property and equipment, accumulated depreciation	8,170	7,547
Common stock, shares authorized	24,000	24,000
Common stock, outstanding	8,811	8,908
Retained deficit, accumulated other comprehensive income	$ 1,322	$ 969

Cash Flow Statements (USD $) In Millions, unless otherwise specified	3 Months Ended		6 Months Ended
	Dec. 31, 2009	Dec. 31, 2008	Dec. 31, 2009	Dec. 31, 2008
Operations
Net income	$ 6,662	$ 4,174	$ 10,236	$ 8,547
Adjustments to reconcile net income to net cash from operations:
Depreciation, amortization, and other noncash items	615	632	1,261	1,217
Stock-based compensation	485	417	928	860
Net recognized losses (gains) on investments and derivatives	(188)	139	(254)	175
Excess tax benefits from stock-based compensation	(15)	(2)	(24)	(46)
Deferred income taxes	550	454	504	830
Deferral of unearned revenue	6,926	5,969	13,605	10,155
Recognition of unearned revenue	(9,126)	(6,364)	(15,363)	(12,408)
Changes in operating assets and liabilities:
Accounts receivable	(2,789)	(1,647)	(41)	2,338
Other current assets	1,244	797	590	239
Other long-term assets	16	(69)	(62)	(185)
Other current liabilities	285	614	(954)	(3,938)
Other long-term liabilities	304	668	650	1,368
Net cash from operations	4,969	5,782	11,076	9,152
Financing
Short-term borrowings (repayments), maturities of 90 days or less, net	(475)	21	(97)	1,996
Proceeds from issuance of debt, maturities longer than 90 days	1,046	0	1,741	0
Repayments of debt, maturities longer than 90 days	(573)	0	(1,396)	0
Common stock issued	729	96	977	324
Common stock repurchased	(3,867)	(2,820)	(5,407)	(9,313)
Common stock cash dividends	(1,152)	(1,157)	(2,309)	(2,155)
Excess tax benefits from stock-based compensation	15	2	24	46
Net cash used in financing	(4,277)	(3,858)	(6,467)	(9,102)
Investing
Additions to property and equipment	(376)	(842)	(811)	(1,620)
Acquisition of companies, net of cash acquired	(63)	(450)	(102)	(827)
Purchases of investments	(4,287)	(6,596)	(14,777)	(10,842)
Maturities of investments	1,896	290	5,394	754
Sales of investments	3,361	5,700	7,778	12,775
Securities lending payable	(623)	(601)	1,227	(2,144)
Net cash used in investing	(92)	(2,499)	(1,291)	(1,904)
Effect of exchange rates on cash and cash equivalents	(1)	(83)	28	(139)
Net change in cash and cash equivalents	599	(658)	3,346	(1,993)
Cash and cash equivalents, beginning of period	8,823	9,004	6,076	10,339
Cash and cash equivalents, end of period	$ 9,422	$ 8,346	$ 9,422	$ 8,346

Stockholders' Equity Statements (USD $) In Millions, unless otherwise specified	Total	Common stock and paid-in capital	Retained deficit
Balance, beginning of period at Jun. 30, 2008		$ 62,849	$ (26,563)
Net income	8,547		8,547
Common stock issued		312
Other comprehensive income:
Net unrealized gains (losses) on derivatives			766
Net unrealized gains (losses) on investments			(912)
Translation adjustments and other			(409)
Comprehensive income			7,992
Common stock cash dividends			(2,304)
Common stock repurchased		(2,571)	(6,039)
Stock-based compensation		860
Stock-based compensation income tax deficiencies		(58)
Other, net		0
Balance, end of period at Dec. 31, 2008	34,478	61,392	(26,914)
Balance, beginning of period at Sep. 30, 2008		61,655	(28,061)
Net income	4,174		4,174
Common stock issued		86
Other comprehensive income:
Net unrealized gains (losses) on derivatives			473
Net unrealized gains (losses) on investments			(514)
Translation adjustments and other			(251)
Comprehensive income			3,882
Common stock cash dividends			(1,147)
Common stock repurchased		(674)	(1,588)
Stock-based compensation		417
Stock-based compensation income tax deficiencies		(91)
Other, net		(1)
Balance, end of period at Dec. 31, 2008	34,478	61,392	(26,914)
Balance, beginning of period at Jun. 30, 2009	39,558	62,382	(22,824)
Net income	10,236		10,236
Common stock issued		1,027
Other comprehensive income:
Net unrealized gains (losses) on derivatives			(361)
Net unrealized gains (losses) on investments			653
Translation adjustments and other			61
Comprehensive income			10,589
Common stock cash dividends			(2,297)
Common stock repurchased		(1,656)	(3,751)
Stock-based compensation		928
Stock-based compensation income tax deficiencies		(114)
Other, net		(1)
Balance, end of period at Dec. 31, 2009	44,283	62,566	(18,283)
Balance, beginning of period at Sep. 30, 2009		62,293	(21,081)
Net income	6,662		6,662
Common stock issued		779
Other comprehensive income:
Net unrealized gains (losses) on derivatives			(42)
Net unrealized gains (losses) on investments			65
Translation adjustments and other			(35)
Comprehensive income			6,650
Common stock cash dividends			(1,140)
Common stock repurchased		(923)	(2,712)
Stock-based compensation		485
Stock-based compensation income tax deficiencies		(68)
Other, net		0
Balance, end of period at Dec. 31, 2009	$ 44,283	$ 62,566	$ (18,283)

ACCOUNTING POLICIES

6 Months Ended

Dec. 31, 2009

ACCOUNTING POLICIES

NOTE 1 ACCOUNTING POLICIES

Basis of Presentation

In the opinion of management, the accompanying balance sheets and related interim statements of income, cash flows, and stockholders’ equity include all adjustments, consisting only of normal recurring items, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Examples include: estimates of loss contingencies, product warranties, product life cycles, product returns, and stock-based compensation forfeiture rates; assumptions such as the elements comprising a software arrangement, including the distinction between upgrades/enhancements and new products; when technological feasibility is achieved for our products; the potential outcome of future tax consequences of events that have been recognized in our financial statements or tax returns; estimating the fair value and/or goodwill impairment for our reporting units; and determining when investment impairments are other-than-temporary. Actual results and outcomes may differ from management’s estimates and assumptions.

Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with information included in the Microsoft Corporation 2009 Form 10-K filed on July 30, 2009 with the U.S. Securities and Exchange Commission.

Principles of Consolidation

The financial statements include the accounts of Microsoft Corporation and its subsidiaries. Intercompany transactions and balances have been eliminated. Equity investments through which we exercise significant influence but do not exercise control and are not the primary beneficiary are accounted for using the equity method. Investments through which we are not able to exercise significant influence over the investee and which do not have readily determinable fair values are accounted for under the cost method.

Subsequent Events

We evaluated events occurring between the end of our fiscal quarter, December 31, 2009 and January 28, 2010 when the financial statements were issued.

Recently Adopted Accounting Guidance

On July 1, 2009, we adopted guidance issued by the Financial Accounting Standards Board (“FASB”) on business combinations. The guidance retains the fundamental requirements that the acquisition method of accounting (previously referred to as the purchase method of accounting) be used for all business combinations, but requires a number of changes, including changes in the way assets and liabilities are recognized and measured as a result of business combinations. It also requires the capitalization of in-process research and development at fair value and requires the expensing of acquisition-related costs as incurred. We have applied this guidance to business combinations completed since July 1, 2009.

On July 1, 2009, we adopted the guidance issued by the FASB that changes the accounting and reporting for non-controlling interests. Non-controlling interests are to be reported as a component of equity separate from the parent’s equity, and purchases or sales of equity interests that do not result in a change in control are to be accounted for as equity transactions. In addition, net income attributable to a non-controlling interest is to be included in net income and, upon a loss of control, the interest sold, as well as any interest retained, is to be recorded at fair value with any gain or loss recognized in net income. Adoption of the new guidance did not have a material impact on our financial statements.

On July 1, 2009, we adopted the guidance on fair value measurement for nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Adoption of the new guidance did not have a material impact on our financial statements.

Recent Accounting Guidance Not Yet Adopted

In January 2010, the FASB issued guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a roll forward of activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The guidance will become effective for us with the reporting period beginning January 1, 2010, except for the disclosure on the roll forward activities for Level 3 fair value measurements, which will become effective for us with the reporting period beginning July 1, 2011. Other than requiring additional disclosures, adoption of this new guidance will not have a material impact on our financial statements.

In October 2009, the FASB issued guidance on revenue recognition that will become effective for us beginning July 1, 2010, with earlier adoption permitted. Under the new guidance on arrangements that include software elements, tangible products that have software components that are essential to the functionality of the tangible product will no longer be within the scope of the software revenue recognition guidance, and software-enabled products will now be subject to other relevant revenue recognition guidance. Additionally, the FASB issued guidance on revenue arrangements with multiple deliverables that are outside the scope of the software revenue recognition guidance. Under the new guidance, when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method. The new guidance includes new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition. We believe adoption of this new guidance will not have a material impact on our financial statements.

In June 2009, the FASB issued guidance on the consolidation of variable interest entities, which is effective for us beginning July 1, 2010. The new guidance requires revised evaluations of whether entities represent variable interest entities, ongoing assessments of control over such entities, and additional disclosures for variable interests. We believe adoption of this new guidance will not have a material impact on our financial statements.

- Definition

Description containing the entire organization, consolidation and basis of presentation of financial statements disclosure. May be provided in more than one note to the financial statements, as long as users are provided with an understanding of (1) the significant judgments and assumptions made by an enterprise in determining whether it must consolidate a VIE and/or disclose information about its involvement with a VIE, (2) the nature of restrictions on a consolidated VIE's assets reported by an enterprise in its statement of financial position, including the carrying amounts of such assets, (3) the nature of, and changes in, the risks associated with an enterprise's involvement with the VIE, and (4) how an enterprise's involvement with the VIE affects the enterprise's financial position, financial performance, and cash flows. Describes procedure if disclosures are provided in more than one note to the financial statements.

+ References+ Details

INVESTMENTS

6 Months Ended

Dec. 31, 2009

INVESTMENTS

NOTE 4 INVESTMENTS

Investment Components

The components of investments, including associated derivatives, were as follows:


(In millions)	Cost Basis		Unrealized Gains		Unrealized Losses			Recorded Basis		Cash and Cash Equivalents		Short-term Investments		Equity and Other Investments


December 31, 2009

Cash	$	2,151	$	—	$	—		$	2,151	$	2,151	$	—	$	—
Mutual funds		1,713		—		—			1,713		1,662		51		—
Commercial paper		2,440		—		—			2,440		1,816		624		—
Certificates of deposit		3,292		—		—			3,292		3,058		234		—
U.S. government and agency securities		12,542		50		(9	)		12,583		415		12,168		—
Foreign government bonds		3,530		84		(3	)		3,611		—		3,611		—
Mortgage-backed securities		3,981		91		(4	)		4,068		—		4,068		—
Corporate notes and bonds		5,411		288		(14	)		5,685		200		5,485		—
Municipal securities		539		1		(2	)		538		120		418		—
Common and preferred stock		5,171		1,432		(116	)		6,487		—		—		6,487
Other investments		507		—		—			507		—		18		489

Total	$	41,277	$	1,946	$	(148	)	$	43,075	$	9,422	$	26,677	$	6,976


(In millions)	Cost Basis		Unrealized Gains		Unrealized Losses			Recorded Basis		Cash and Cash Equivalents		Short-term Investments			Equity and Other Investments


June 30, 2009

Cash	$	2,064	$	—	$	—		$	2,064	$	2,064	$	—		$	—
Mutual funds		1,007		—		(25	)		982		900		82			—
Commercial paper		2,601		—		—			2,601		400		2,201			—
Certificates of deposit		555		—		—			555		275		280			—
U.S. government and agency securities		13,450		21		(5	)		13,466		2,369		11,097			—
Foreign government bonds		3,450		71		(4	)		3,517		—		3,517			—
Mortgage-backed securities		3,353		81		(16	)		3,418		—		3,418			—
Corporate notes and bonds		4,361		287		(52	)		4,596		—		4,596			—
Municipal securities		255		2		(1	)		256		68		188			—
Common and preferred stock		4,015		627		(182	)		4,460		—		—			4,460
Other investments		465		—		—			465		—		(8	)		473

Total	$	35,576	$	1,089	$	(285	)	$	36,380	$	6,076	$	25,371		$	4,933

Unrealized Losses on Investments

Investments with continuous unrealized losses for less than 12 months and 12 months or greater and their related fair values were as follows:


	Less than 12 Months					12 Months or Greater							Total Unrealized Losses

(In millions)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Total Fair Value


December 31, 2009

U.S. government and agency securities	$	568	$	(9	)	$	—	$	—		$	568	$	(9	)
Foreign government bonds		1,395		(1	)		491		(2	)		1,886		(3	)
Mortgage-backed securities		391		(2	)		20		(2	)		411		(4	)
Corporate notes and bonds		397		(5	)		183		(9	)		580		(14	)
Municipal securities		110		(2	)		—		—			110		(2	)
Common and preferred stock		887		(58	)		243		(58	)		1,130		(116	)

Total	$	3,748	$	(77	)	$	937	$	(71	)	$	4,685	$	(148	)


	Less than 12 Months					12 Months or Greater							Total Unrealized Losses

(In millions)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Total Fair Value


June 30, 2009

Mutual funds	$	3	$	(1	)	$	77	$	(24	)	$	80	$	(25	)
U.S. government and agency securities		4,033		(5	)		—		—			4,033		(5	)
Foreign government bonds		1,444		(3	)		669		(1	)		2,113		(4	)
Mortgage-backed securities		503		(16	)		—		—			503		(16	)
Corporate notes and bonds		713		(10	)		504		(42	)		1,217		(52	)
Municipal securities		16		(1	)		—		—			16		(1	)
Common and preferred stock		1,154		(135	)		120		(47	)		1,274		(182	)

Total	$	7,866	$	(171	)	$	1,370	$	(114	)	$	9,236	$	(285	)

At December 31, 2009 and June 30, 2009, the recorded bases and estimated fair values of common and preferred stock and other investments that are restricted for more than one year or are not publicly traded were $209 million and $204 million, respectively. The estimated fair values are based on publicly available market information or other estimates determined by management. Unrealized losses on fixed-income securities are primarily attributable to changes in interest rates. Unrealized losses on domestic and international equities are due to market price movements. Management does not believe any remaining unrealized losses represent other-than-temporary impairments based on our evaluation of available evidence as of December 31, 2009.

Debt Investment Maturities


(In millions)	Cost Basis		Estimated Fair Value

Due in one year or less	$	9,837	$	9,845
Due after one year through five years		14,945		15,240
Due after five years through 10 years		2,617		2,708
Due after 10 years		4,337		4,423

Total	$	31,736	$	32,216

- Definition

This item represents the entire disclosure related to Available-for-sale Securities which consist of all investments in certain debt and equity securities neither classified as trading or held-to-maturity securities. A debt security represents a creditor relationship with an enterprise. Debt securities include, among other items, US Treasury securities, US government securities, municipal securities, corporate bonds, convertible debt, commercial paper, and all securitized debt instruments. An equity security represents an ownership interest in an enterprise or the right to acquire or dispose of an ownership interest in an enterprise at fixed or determinable prices. Equity securities include, among other things, common stock, certain preferred stock, warrant rights, call options, and put options, but do not include convertible debt. An entity may opt to provide the reader with additional narrative text to better understand the nature of investments in debt and equity securities which are categorized as Available-for-sale.

+ References+ Details

DERIVATIVES

6 Months Ended

Dec. 31, 2009

DERIVATIVES

NOTE 5 DERIVATIVES

We use derivative instruments to manage risks related to foreign currencies, equity prices, interest rates, and credit; to enhance investment returns; and to facilitate portfolio diversification. Our objectives for holding derivatives include reducing, eliminating, and efficiently managing the economic impact of these exposures as effectively as possible. Our derivative programs include strategies that both qualify and do not qualify for hedge accounting treatment. All notional amounts presented below are measured in U.S. currency equivalents.

Foreign Currency

Certain forecasted transactions, assets, and liabilities are exposed to foreign currency risk. We monitor our foreign currency exposures daily to maximize the economic effectiveness of our foreign currency hedge positions. Options and forward contracts are used to hedge a portion of forecasted international revenue for up to three years in the future and are designated as cash-flow hedging instruments. Principal currencies hedged include the euro, Japanese yen, British pound, and Canadian dollar. As of December 31, 2009, the total notional amount of such foreign exchange contracts sold was $9.1 billion. Foreign currency risks related to certain non-U.S. dollar denominated securities are hedged using foreign exchange forward contracts that are designated as fair-value hedging instruments. As of December 31, 2009, the total notional amount of these foreign exchange contracts sold was $3.7 billion. Certain options and forwards not designated as hedging instruments are also used to manage the variability in exchange rates on accounts receivable, cash, and intercompany positions, and to manage other foreign currency exposures. As of December 31, 2009, the total notional amounts of these foreign exchange contracts purchased and sold were $4.5 billion and $4.6 billion, respectively.

Equity

Securities held in our equity and other investments portfolio are subject to market price risk. Market price risk is managed relative to broad-based global and domestic equity indices using certain convertible preferred investments, options, futures, and swap contracts not designated as hedging instruments. From time to time, to hedge our price risk, we may use and designate equity derivatives as hedging instruments, including puts, calls, swaps, and forwards. As of December 31, 2009, the total notional amounts of designated and non-designated equity contracts purchased and sold were immaterial.

Interest Rate

Securities held in our fixed-income portfolio are subject to different interest rate risks based on their maturities. We manage the average maturity of our fixed-income portfolio to achieve economic returns that correlate to certain broad-based fixed-income indices using exchange-traded option and futures contracts and over-the-counter swap and option contracts, none of which are designated as hedging instruments. As of December 31, 2009, the total notional amount of fixed-interest rate contracts purchased and sold were $1.7 billion and $653 million, respectively. In addition, we use “To Be Announced” forward purchase commitments of mortgage-backed assets to gain exposure to agency mortgage-backed securities. These meet the definition of a derivative instrument in cases where physical delivery of the assets is not taken at the earliest available delivery date. As of December 31, 2009, the total notional derivative amount of mortgage contracts purchased was $858 million.

Credit

Our fixed-income portfolio is diversified and consists primarily of investment-grade securities. We use credit default swap contracts, not designated as hedging instruments, to manage credit exposures relative to broad-based indices and to facilitate portfolio diversification. We use credit default swaps as they are a low cost method of managing exposure to individual credit risks or groups of credit risks. As of December 31, 2009, the total notional amounts of credit contracts purchased and sold were immaterial.

Commodity

We use broad-based commodity exposures to enhance portfolio returns and to facilitate portfolio diversification. We use swap and futures contracts, not designated as hedging instruments, to generate and manage exposures to broad-based commodity indices. We use derivatives on commodities as they are low-cost alternatives to the purchase and storage of a variety of commodities, including, but not limited to, precious metals, energy, and grain. As of December 31, 2009, the total notional amounts of commodity contracts purchased and sold were $692 million and $22 million, respectively.

Credit-Risk-Related Contingent Features

Certain of our counterparty agreements for derivative instruments contain provisions that require our issued and outstanding long-term unsecured debt to maintain an investment grade credit rating and require us to maintain a minimum liquidity of $1.0 billion. To the extent we fail to meet these requirements, we will be required to post collateral, similar to the standard convention related to over-the-counter derivatives. As of December 31, 2009, our long-term unsecured debt rating was AAA, and cash investments were in excess of $1.0 billion. As a result, no collateral is required to be posted.

Fair Values of Derivative Instruments

Following are the gross fair values of derivative instruments held at December 31, 2009, excluding the impact of netting derivative assets and liabilities when a legally enforceable master netting agreement exists and fair value adjustments related to our own credit risk and counterparty credit risk:


(In millions)	Foreign Exchange Contracts		Equity Contracts		Interest Rate Contracts		Credit Contracts		Commodity Contracts		Total Derivatives


Assets
Derivatives not designated as hedging instruments:
Short-term investments	$	13	$	112	$	5	$	7	$	26	$	163
Other current assets		80		—		—		—		—		80

Total	$	93	$	112	$	5	$	7	$	26	$	243
Derivatives designated as hedging instruments:
Short-term investments	$	87	$	—	$	—	$	—	$	—	$	87
Other current assets		284		—		—		—		—		284

Total	$	371	$	—	$	—	$	—	$	—	$	371

Total assets	$	464	$	112	$	5	$	7	$	26	$	614


(In millions)	Foreign Exchange Contracts			Equity Contracts			Interest Rate Contracts			Credit Contracts			Commodity Contracts			Total Derivatives


Liabilities
Derivatives not designated as hedging instruments:
Other current liabilities	$	(39	)	$	(5	)	$	(6	)	$	(42	)	$	(9	)	$	(101	)
Derivatives designated as hedging instruments:
Other current liabilities	$	(103	)	$	—		$	—		$	—		$	—		$	(103	)

Total liabilities	$	(142	)	$	(5	)	$	(6	)	$	(42	)	$	(9	)	$	(204	)

See also Note 4 – Investments and Note 6 – Fair Value Measurements.

Fair-Value Hedges

For a derivative instrument designated as a fair-value hedge, the gain (loss) is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributed to the risk being hedged. For options designated as fair-value hedges, changes in the time value are excluded from the assessment of hedge effectiveness and are recognized in earnings.

We recognized in other income (expense) the following gains (losses) on foreign exchange contracts designated as fair value hedges (our only fair value hedges during the period) and their related hedged items:


(In millions)	Three Months Ended December 31,				Six Months Ended December 31,


		2009				2009

Derivatives		$	89			$	(104	)
Hedged items			(85	)			103

Total		$	4			$	(1	)

Cash-Flow Hedges

For a derivative instrument designated as a cash-flow hedge, the effective portion of the derivative’s gain (loss) is initially reported as a component of other comprehensive income (“OCI”) and is subsequently recognized in earnings when the hedged exposure is recognized in earnings. For options designated as cash-flow hedges, changes in the time value are excluded from the assessment of hedge effectiveness and are recognized in earnings. Gains (losses) on derivatives representing either hedge components excluded from the assessment of effectiveness or hedge ineffectiveness are recognized in earnings.

We recognized the following gains (losses) related to foreign exchange contracts designated as cash flow hedges (our only cash flow hedges during the period):


(In millions)	Three Months Ended December 31,			Six Months Ended December 31,


		2009			2009

Effective portion
Gain (loss) recognized in OCI, net of tax effect of $1 and $(111)		$	2		$	(207	)
Gain reclassified from accumulated OCI into revenue		$	68		$	237

Amount excluded from effectiveness assessment and ineffective portion
Gain (loss) recognized in other income (expense)		$	26		$	(14	)

We estimate that $92 million of net derivative gains included in OCI will be reclassified into earnings within the next 12 months. No significant amounts of gains (losses) were reclassified from OCI into earnings as a result of forecasted transactions that failed to occur during the three months and six months ended December 31, 2009.

Non-Designated Derivatives

Gains (losses) from changes in fair values of derivatives that are not designated as hedges are primarily recognized in other income (expense). These amounts are shown in the table below, with the exception of gains (losses) on derivatives presented in income statement line items other than other income (expense), which were immaterial for the three months and six months ended December 31, 2009. Other than those derivatives entered into for investment purposes, such as commodity contracts, the gains (losses) below are generally economically offset by unrealized gains (losses) in the underlying available-for-sale securities, which are recorded as a component of OCI until the securities are sold or other-than-temporarily impaired, at which time the amounts are moved from OCI into other income (expense).


(In millions)	Three Months Ended December 31,			Six Months Ended December 31,


		2009			2009

Foreign exchange contracts		$	47		$	90
Equity contracts			7			16
Interest-rate contracts			9			12
Credit contracts			2			11
Commodity contracts			54			69

Total		$	119		$	198

FAIR VALUE MEASUREMENTS

6 Months Ended

Dec. 31, 2009

FAIR VALUE MEASUREMENTS

NOTE 6 FAIR VALUE MEASUREMENTS

We account for certain assets and liabilities at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

•

Level 1—inputs are based upon unadjusted quoted prices for identical instruments traded in active markets. Our Level 1 non-derivative investments primarily include domestic and international equities, U.S. treasuries and agency securities, and exchange-traded mutual funds. Our Level 1 derivative assets and liabilities include those traded on exchanges.

•

Level 2—inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques (e.g. the Black-Scholes model) for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, foreign exchange rates, and forward and spot prices for currencies and commodities. Our Level 2 non-derivative investments consist primarily of corporate notes and bonds, mortgage-backed securities, certificates of deposit, certain agency securities, foreign government bonds, and commercial paper. Our Level 2 derivative assets and liabilities primarily include certain over-the-counter options, futures, and swap contracts.

•

Level 3—inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models. Our Level 3 non-derivative assets primarily comprise investments in certain corporate bonds. We value these corporate bonds using internally developed valuation models, inputs to which include interest rate curves, credit spreads, stock prices, and volatilities. Unobservable inputs used in these models are significant to the fair values of the investments. Our Level 3 derivative assets and liabilities primarily comprise derivatives for foreign equities. In certain cases, market-based observable inputs are not available and we use management judgment to develop assumptions to determine fair value for these derivatives.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables present the fair values of our financial instruments that are measured at fair value on a recurring basis:


(In millions)		Level 1		Level 2		Level 3		Gross Fair Value		Netting	⁽¹⁾		Net Fair Value


December 31, 2009

Assets
Mutual funds	$	1,713	$	—	$	—	$	1,713	$	—		$	1,713
Commercial paper		—		2,450		—		2,450		—			2,450
Certificates of deposit		—		3,292		—		3,292		—			3,292
U.S. government and agency securities		9,321		3,246		—		12,567		—			12,567
Foreign government bonds		472		3,050		—		3,522		—			3,522
Mortgage-backed securities		—		4,083		—		4,083		—			4,083
Corporate notes and bonds		—		5,381		192		5,573		—			5,573
Municipal securities		—		538		—		538		—			538
Common and preferred stock		6,233		39		5		6,277		—			6,277
Derivatives		22		588		4		614		(149	)		465

Total	$	17,761	$	22,667	$	201	$	40,629	$	(149	)	$	40,480

Liabilities
Derivatives	$	7	$	197	$	—	$	204	$	(147	)	$	57


(In millions)		Level 1		Level 2		Level 3		Gross Fair Value		Netting	⁽¹⁾		Net Fair Value


June 30, 2009

Assets
Mutual funds	$	982	$	—	$	—	$	982	$	—		$	982
Commercial paper		—		2,601		—		2,601		—			2,601
Certificates of deposit		—		555		—		555		—			555
U.S. government and agency securities		7,134		6,105		—		13,239		—			13,239
Foreign government bonds		501		3,022		—		3,523		—			3,523
Mortgage-backed securities		—		3,593		—		3,593		—			3,593
Corporate notes and bonds		—		4,073		253		4,326		—			4,326
Municipal securities		—		256		—		256		—			256
Common and preferred stock		4,218		28		5		4,251		—			4,251
Derivatives		5		623		5		633		(235	)		398

Total	$	12,840	$	20,856	$	263	$	33,959	$	(235	)	$	33,724

Liabilities
Derivatives	$	5	$	344	$	—	$	349	$	(231	)	$	118

(1)	This table includes the impact of netting derivative assets and derivative liabilities when a legally enforceable master netting agreement exists. These amounts also include fair value adjustments related to our own credit risk and counterparty credit risk.

Changes in Financial Instruments Measured at Level 3 Fair Value on a Recurring Basis

The following tables present the changes during the three months and six months ended December 31, 2009 and 2008 in our Level 3 financial instruments that are measured at fair value on a recurring basis. The majority of these instruments consist of investment securities classified as available-for-sale with changes in fair value included in other comprehensive income.


(In millions)	Corporate Notes and Bonds			Common and Preferred Stock			Derivative Assets			Total


Three Months and Six Months Ended December 31, 2009

Balance as of June 30, 2009	$	253		$	5		$	5		$	263
Total realized and unrealized gains (losses):
Included in other income (expense)		1			—			(2	)		(1	)
Included in other comprehensive income		(74	)		—			—			(74	)

Balance as of September 30, 2009	$	180		$	5		$	3		$	188
Total realized and unrealized gains:
Included in other income (expense)		1			—			1			2
Included in other comprehensive income		11			—			—			11

Balance as of December 31, 2009	$	192		$	5		$	4		$	201

Change in unrealized gains (losses) included in other income (expense) for the three months ended December 31, 2009 related to assets held as of December 31, 2009	$	1		$	—		$	1		$	2
Change in unrealized gains (losses) included in other income (expense) for the six months ended December 31, 2009 related to assets held as of December 31, 2009	$	2		$	—		$	(1	)	$	1


(In millions)	Corporate Notes and Bonds			Common and Preferred Stock			Derivative Assets			Total


Three Months and Six Months Ended December 31, 2008

Balance as of June 30, 2008	$	138		$	8		$	71		$	217
Total realized and unrealized gains (losses):
Included in other income (expense)		(9	)		(4	)		48			35
Included in other comprehensive income		(29	)		—			—			(29	)
Purchases, issuances, and settlements		—			—			(104	)		(104	)
Transfers in and out of Level 3		11			—			—			11

Balance as of September 30, 2008	$	111		$	4		$	15		$	130
Total realized and unrealized gains (losses):
Included in other income (expense)		1			(2	)		—			(1	)
Included in other comprehensive income		10			—			—			10
Purchases, issuances, and settlements		—			—			(15	)		(15	)
Transfers in and out of Level 3		(1	)		—			—			(1	)

Balance as of December 31, 2008	$	121		$	2		$	—		$	123

Change in unrealized gains (losses) included in other income (expense) for the three months ended December 31, 2008 related to assets held as of December 31, 2008	$	—		$	(2	)	$	—		$	(2	)
Change in unrealized gains (losses) included in other income (expense) for the six months ended December 31, 2008 related to assets held as of December 31, 2008	$	(9	)	$	(5	)	$	1		$	(13	)

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

We measure certain assets, including our cost and equity method investments, at fair value on a nonrecurring basis when they are deemed to be other-than-temporarily impaired. The fair values of our investments are determined based on valuation techniques using the best information available, and may include quoted market prices, market comparables, and discounted cash flow projections.

An impairment charge is recorded when the cost of the investment exceeds its fair value and this condition is determined to be other-than-temporary. During the three months and six months ended December 31, 2009, we did not record any other-than-temporary impairments on those assets required to be measured at fair value on a non-recurring basis. The following table presents prior period balances for those assets required to be measured at fair value on a nonrecurring basis and the associated losses recognized during the three months and six months ended December 31, 2008:

(In millions)

December 31,
2008

Level 1

Level 2

Level 3

Total
Losses

Assets

Common and preferred stock

164

—

164

(85

)

Total

164

—

164

(85

)

- Definition

This element represents the disclosure related to the fair value measurement of assets and liabilities which includes [financial] instruments measured at fair value that are classified in stockholders' equity. Such assets and liabilities may be measured on a recurring or nonrecurring basis. The disclosures which may be required or desired include: (1) for assets and liabilities measured on a recurring basis, disclosure may include: (a) the fair value measurements at the reporting date; (b) the level within the fair value hierarchy in which the fair value measurements in their entirety fall, segregating fair value measurements using quoted prices in active markets for identical assets or liabilities (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3); (c) for fair value measurements using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances, separately presenting changes during the period attributable to the following: (i) total gains or losses for the period (realized and unrealized), segregating those gains or losses included in earnings (or changes in net assets), and a description of where those gains or losses included in earnings (or changes in net assets) are reported in the statement of income (or activities); (ii) purchases, sales, issuances, and settlements (net); (iii) transfers in and transfers out of Level 3 (for example, transfers due to changes in the observability of significant inputs); (d) the amount of the total gains or losses for the period in subparagraph (c) (i) above included in earnings (or changes in net assets) that are attributable to the change in unrealized gains or losses relating to those assets and liabilities still held at the reporting date and a description of where those unrealized gains or losses are reported in the statement of income (or activities); (e) the valuation technique(s) used to measure fair value and a discussion of changes in valuation techniques, if any, during the period and (2) for assets and liabilities that are measured at fair value on a nonrecurring basis (for example, impaired assets) disclosure may include, in addition to (a) above: (a) the reasons for the fair value measurements recorded; (b) the same as (b) above; (c) for fair value measurements using significant unobservable inputs (Level 3), a description of the inputs and the information used to develop the inputs; and (d) the valuation technique(s) used to measure fair value and a discussion of changes, if any, in the valuation technique(s) used to measure similar assets and/or liabilities in prior periods.

+ References+ Details

GOODWILL

6 Months Ended

Dec. 31, 2009

GOODWILL

NOTE 9 GOODWILL

Following are details of the changes in our goodwill balances during the three months and six months ended December 31, 2009:


(In millions)	Balance		Acquisitions		Purchase Accounting Adjustments and Other			Balance


September 30, 2009				December 31, 2009

Windows & Windows Live Division	$	77	$	—	$	—		$	77
Server and Tools		1,070		49		—			1,119
Online Services Division		6,633		—		(261	)		6,372
Microsoft Business Division		3,998		—		(2	)		3,996
Entertainment and Devices Division		804		—		—			804

Total	$	12,582	$	49	$	(263	)	$	12,368


(In millions)	Balance		Acquisitions		Purchase Accounting Adjustments and Other			Balance


		June 30, 2009		December 31, 2009

Windows & Windows Live Division	$	77	$	—	$	—		$	77
Server and Tools		1,038		82		(1	)		1,119
Online Services Division		6,657		—		(285	)		6,372
Microsoft Business Division		3,927		3		66			3,996
Entertainment and Devices Division		804		—		—			804

Total	$	12,503	$	85	$	(220	)	$	12,368

None of the amounts recorded as goodwill are expected to be deductible for tax purposes. The measurement period for purchase price allocations ends as soon as information on the facts and circumstances becomes available, but will not exceed 12 months. Adjustments in the purchase price allocation may require a recasting of the amounts allocated to goodwill retroactive to the period in which the acquisition occurred. Any change in the goodwill amounts resulting from foreign currency translations are presented as “other” in the table above. Also included within “other” is $263 million for the three months ended December 31, 2009 and $286 million for the six months ended December 31, 2009 of goodwill associated with business dispositions. See also Note 8.

In connection with the disposal of Razorfish, we performed an interim impairment analysis of our Online Services Division goodwill balance during the first quarter of fiscal year 2010. No impairment of goodwill was identified.

DEBT

6 Months Ended

Dec. 31, 2009

DEBT

NOTE 11 DEBT

In September 2008, our Board of Directors authorized debt financings of up to $6.0 billion. Our initial commercial paper program provided for the issuance and sale of up to $2.0 billion. Following the issuance of our long-term debt in May 2009, we increased the commercial paper program and issued an additional $250 million of commercial paper during the six months ended December 31, 2009. As of December 31, 2009, we had $2.25 billion of commercial paper and $3.75 billion of long-term debt issued and outstanding.

Short-term Debt

As of December 31, 2009, our $2.25 billion of commercial paper issued and outstanding had a weighted average interest rate, including issuance costs, of 0.14% and maturities of 16 to 210 days. The estimated fair value of this commercial paper approximates its carrying value.

In November 2009, we replaced our $2.0 billion and $1.0 billion credit facilities with a $2.25 billion 364-day credit facility, which expires on November 5, 2010. This facility serves as a back-up for our commercial paper program. As of December 31, 2009, we were in compliance with the financial covenant in the credit facility, which requires a coverage ratio be maintained of at least three times earnings before interest, taxes, depreciation, and amortization to interest expense. No amounts were drawn against the credit facilities during the six months ended December 31, 2009.

Long-term Debt

As of December 31, 2009, we had issued and outstanding $3.75 billion of debt securities as follows: $2.0 billion aggregate principal amount of 2.95% notes due 2014, $1.0 billion aggregate principal amount of 4.20% notes due 2019, and $750 million aggregate principal amount of 5.20% notes due 2039 (collectively “the Notes”). Interest on the Notes is payable semi-annually on June 1 and December 1 of each year to holders of record on the preceding May 15 and November 15. The Notes are senior unsecured obligations and rank equally with our other unsecured and unsubordinated debt outstanding.

As of December 31, 2009, the total carrying value and estimated fair value of our long-term debt were $3.75 billion and $3.77 billion, respectively. The estimated fair value is based on quoted prices for our publicly-traded debt as of December 31, 2009.

CONTINGENCIES

6 Months Ended

Dec. 31, 2009

CONTINGENCIES

NOTE 15 CONTINGENCIES

Government Competition Law Matters

In March 2004, the European Commission issued a competition law decision that, among other things, ordered us to license certain Windows server protocol technology to our competitors. In March 2007, the European Commission issued a statement of objections claiming that the pricing terms we proposed for licensing the technology as required by the March 2004 decision were “not reasonable.” Following additional steps we took to address these concerns, the Commission announced on October 22, 2007 that we were in compliance with the March 2004 decision and that no further penalty should accrue after that date. On February 27, 2008, the Commission issued a fine of $1.4 billion (€899 million) relating to the period prior to October 22, 2007. In May 2008, we filed an application with the European Court of First Instance to annul the February 2008 fine. We paid the $1.4 billion (€899 million) fine in June 2008, pending the outcome of the appeal.

On December 16, 2009, the European Commission announced that it had adopted a decision that renders legally binding commitments offered by Microsoft to address the Commission’s concerns regarding competition in Web browsing software. This decision ends the Commission’s investigation. It does not address whether a violation of European Commission competition law occurred. The commitments offered by Microsoft broadly ensure that computer manufacturers will remain free to install any browser on the PCs they ship, and they provide for a Web browser “choice screen” to be offered to end users throughout Europe. The Commission had opened its investigation in January 2008 following a complaint filed with the Commission by Opera Software ASA.

In January 2008, the Commission also opened a competition law investigation that relates primarily to interoperability with respect to our Microsoft Office family of products. This investigation resulted from complaints filed with the Commission by a trade association of Microsoft’s competitors. Microsoft has made a number of proposals to address the Commission’s competition law concerns in this area. The Commission announced on December 16, 2009 that it welcomed these proposals and that it will take them into account in assessing this matter.

We are also subject to a Consent Decree and Final Judgment (“Final Judgments”) that resolved lawsuits brought by the U.S. Department of Justice, 18 states, and the District of Columbia in two separate actions. The Final Judgments imposed various constraints on our Windows operating system businesses. The Final Judgments are scheduled to expire in May 2011.

In other ongoing investigations, various foreign governments and several state attorneys general have requested information from us concerning competition, privacy, and security issues.

Antitrust, Unfair Competition, and Overcharge Class Actions

A large number of antitrust and unfair competition class action lawsuits were filed against us in various state, federal, and Canadian courts on behalf of various classes of direct and indirect purchasers of our PC operating system and certain other software products. We obtained dismissals of damages claims of indirect purchasers under federal law and in 15 states. Courts refused to certify classes in two additional states. We have reached agreements to settle all claims that have been made to date in 19 states and the District of Columbia.

Under the settlements, generally class members can obtain vouchers that entitle them to be reimbursed for purchases of a wide variety of platform-neutral computer hardware and software. The total value of vouchers that we may issue varies by state. We will make available to certain schools a percentage of those vouchers that are not issued or claimed (one-half to two-thirds depending on the state). The total value of vouchers we ultimately issue will depend on the number of class members who make claims and are issued vouchers. The maximum value of vouchers to be issued is approximately $2.7 billion. The actual costs of these settlements will be less than that maximum amount, depending on the number of class members and schools that are issued and redeem vouchers.

The settlements in all states have received final court approval. Cases in Canada have not been settled. We estimate the total cost to resolve all of the overcharge class action cases will range between $1.8 billion and $2.0 billion. The actual cost depends on factors such as the claim rate, the quantity and mix of products for which claims are made, the number of eligible class members who ultimately use the vouchers, the nature of hardware and software that is acquired using the vouchers, and the cost of administering the claims. At December 31, 2009, we have recorded a liability related to these claims of approximately $700 million, which reflects our estimated exposure of $1.8 billion less payments made to date of approximately $1.1 billion mostly for vouchers, legal fees, and administrative expenses.

Other Antitrust Litigation and Claims

In November 2004, Novell, Inc. filed a complaint in U.S. District Court for the District of Utah, asserting antitrust and unfair competition claims against us related to Novell’s ownership of WordPerfect and other productivity applications during the period between June 1994 and March 1996. This case was transferred to the District of Maryland. In June 2005, the trial court granted our motion to dismiss four of six claims of the complaint. Both parties appealed, and in October 2007, the court of appeals affirmed the decision of the trial court, and remanded the case to that court for further proceedings. Summary judgment motions were filed in October 2009, and will be heard in March 2010. If any claims survive those motions, the case will be transferred back to Utah for trial.

Patent and Intellectual Property Claims

In 2003, we filed an action in U.S. District Court in California seeking a declaratory judgment that we do not infringe certain Alcatel-Lucent patents (although this action began before the merger of Alcatel and Lucent in 2006, for simplicity we refer to the post-merger entity of Alcatel-Lucent). In April 2008, a jury returned a verdict in Alcatel-Lucent’s favor in a trial on a consolidated group of one video and three user interface patents. The jury concluded that we had infringed two user interface patents and awarded $367 million in damages. In June 2008, the trial judge increased the amount of damages to $512 million to include $145 million of interest. We appealed that award to the Federal Circuit. In December 2008, we entered into a settlement agreement resolving all other litigation pending between Microsoft and Alcatel-Lucent, leaving approximately $500 million remaining in dispute. In April 2009, the U.S. Patent and Trademark Office, after a reexamination of the remaining patent in dispute, determined that the patent was invalid and Alcatel-Lucent has appealed that ruling. On September 11, 2009, the United States Court of Appeals for the Federal Circuit affirmed the liability award but vacated the verdict and remanded the case to the trial court for a re-trial of the damages ruling, indicating the damages previously awarded were too high.

In October 2003, Uniloc USA Inc., a subsidiary of a Singapore-based security technology company, filed a patent infringement suit in U.S. District Court in Rhode Island, claiming that product activation technology in Windows XP and certain other Microsoft programs violated a Uniloc patent. After we obtained a favorable summary judgment that we did not infringe any of the claims of this patent, the court of appeals vacated the trial court decision and remanded the case for trial. In April 2009, the jury returned a $388 million verdict against us, including a finding of willful infringement. On September 29, 2009, the district court judge overturned the jury verdict, ruling that the evidence did not support the jury’s finding that Microsoft infringed the patent. Uniloc has appealed.

In March 2007, i4i Limited Partnership sued Microsoft in U.S. District Court in Texas claiming that certain custom XML technology in Word 2003 and 2007 infringed i4i’s patent. In May 2009, a jury returned a verdict against us, finding damages of $200 million and that we willfully infringed the patent. In August 2009, the court denied our post-trial motions and awarded enhanced damages of $40 million and prejudgment interest of $37 million. The court also issued a permanent injunction prohibiting additional distribution of the allegedly infringing technology. We appealed and the appellate court stayed the injunction pending our appeal. On December 22, 2009, the court of appeals rejected our appeal and affirmed the trial court’s judgment and injunction, except that the court of appeals modified the effective date of the injunction to January 11, 2010. We are seeking a rehearing before the court of appeals.

There are over 50 other patent infringement cases pending against Microsoft, 10 of which are set for trial in fiscal year 2010. These cases include a lawsuit filed against Microsoft by VirnetX Inc. in U.S. District Court in Texas in which VirnetX asserts that various Microsoft products including Windows client and server operating systems software and communications software infringe patents relating to certain secure Internet communications. Trial is scheduled for March 2010.

Other

We also are subject to a variety of other claims and suits that arise from time to time in the ordinary course of our business. Although management currently believes that resolving claims against us, individually or in aggregate, will not have a material adverse impact on our financial statements, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future.

As of December 31, 2009, we had accrued aggregate liabilities of approximately $900 million in other current liabilities and approximately $400 million in other long-term liabilities for all of the contingent matters described in this note. While we intend to vigorously defend these matters, there exists the possibility of adverse outcomes that we estimate could be up to $1.0 billion in aggregate beyond recorded amounts. Were unfavorable final outcomes to occur, there exists the possibility of a material adverse impact on our financial statements for the period in which the effects become reasonably estimable.

EMPLOYEE SEVERANCE

6 Months Ended

Dec. 31, 2009

EMPLOYEE SEVERANCE

NOTE 16 EMPLOYEE SEVERANCE

In January 2009, we announced and implemented a resource management program to reduce discretionary operating expenses, employee headcount, and capital expenditures. As part of this program, we announced the elimination of 5,000 positions in research and development, marketing, sales, finance, legal, human resources, and information technology by June 30, 2010. As of September 30, 2009, we had reduced our overall number of positions by approximately 5,000 and headcount by approximately 4,600.

In November 2009, we identified an additional 800 positions for elimination based on our efforts to manage our expenses. Severance expense of approximately $52 million associated with these additional eliminations was reflected in our second quarter financial statements. To date, we have had a headcount reduction of approximately 5,300 under our resource management efforts.

The changes in our employee severance liabilities related to our resource management efforts during the three months and six months ended December 31, 2009 were as follows:


(In millions)	Three Months Ended December 31,				Six Months Ended December 31,


	2009				2009

Balance, beginning of period		$	42			$	127
Additional accruals			52				52
Adjustments			7				7
Cash payments			(70	)			(155	)

Balance, end of period		$	31			$	31

STOCKHOLDERS' EQUITY

6 Months Ended

Dec. 31, 2009

STOCKHOLDERS' EQUITY

NOTE 17 STOCKHOLDERS’ EQUITY

Share Repurchases

We repurchased the following shares of common stock during the periods presented:

(In millions)

Three Months Ended

December 31,

Six Months Ended

December 31,

2009

2008

2009

2008

Shares of common stock repurchased

125

183

318

Value of common stock repurchased

3,583

2,234

5,028

8,200

We repurchased all shares with cash resources. As of December 31, 2009, approximately $29.5 billion remained of our $40.0 billion repurchase program that we announced on September 22, 2008. The repurchase program expires September 30, 2013 but may be suspended or discontinued at any time without notice.

Dividends

Our Board of Directors declared the following dividends during the periods presented:


Declaration Date	Per Share Dividend		Record Date	Total Amount		Payment Date

				(in millions)
Fiscal year 2010
September 18, 2009	$	0.13	November 19, 2009	$	1,152	December 10, 2009
December 9, 2009	$	0.13	February 18, 2010	$	1,145	March 11, 2010

Fiscal year 2009
September 19, 2008	$	0.13	November 20, 2008	$	1,157	December 11, 2008
December 10, 2008	$	0.13	February 19, 2009	$	1,155	March 12, 2009

The estimate of the amount to be paid as a result of the December 9, 2009 declaration was included in other current liabilities as of December 31, 2009.

- Definition

Disclosures related to accounts comprising shareholders' equity, including other comprehensive income. Includes: (1) balances of common stock, preferred stock, additional paid-in capital, other capital and retained earnings; (2) accumulated balance for each classification of other comprehensive income and total amount of comprehensive income; (3) amount and nature of changes in separate accounts, including the number of shares authorized and outstanding, number of shares issued upon exercise and conversion, and for other comprehensive income, the adjustments for reclassifications to net income; (4) rights and privileges of each class of stock authorized; (5) basis of treasury stock, if other than cost, and amounts paid and accounting treatment for treasury stock purchased significantly in excess of market; (6) dividends paid or payable per share and in the aggregate for each class of stock for each period presented; (7) dividend restrictions and accumulated preferred dividends in arrears (in aggregate and per share amount); (8) retained earnings appropriations or restrictions, such as dividend restrictions; (9) impact of change in accounting principle, initial adoption of new accounting principle and correction of an error in previously issued financial statements; (10) shares held in trust for Employee Stock Ownership Plan (ESOP); (11) deferred compensation related to issuance of capital stock; (12) note received for issuance of stock; (13) unamortized discount on shares; (14) description, terms and number of warrants or rights outstanding; (15) shares under subscription and subscription receivables; effective date of new retained earnings after quasi-reorganization and deficit eliminated by quasi-reorganization and, for a period of at least ten years after the effective date, the point in time from which the new retained dates; and (16) retroactive effective of subsequent change in capital structure.

+ References+ Details

SEGMENT INFORMATION

6 Months Ended

Dec. 31, 2009

SEGMENT INFORMATION

NOTE 18 SEGMENT INFORMATION

In its operation of the business, management reviews certain financial information, including segmented internal profit and loss statements prepared on a basis not consistent with U.S. GAAP. Our five segments are: Windows & Windows Live Division; Server and Tools; Online Services Division; Microsoft Business Division; and Entertainment and Devices Division. We have recast certain prior period amounts within this note to conform to the way we internally managed and monitored segment performance during the current fiscal year, including moving Windows Live from Online Services Division to Windows & Windows Live Division, Mobile Services from Online Services Division to Entertainment and Devices Division, and Razorfish from Online Services Division to Corporate. Razorfish was disposed of during the second quarter of fiscal year 2010.

Segment revenue and operating income (loss) were as follows during the periods presented:


(In millions)	Three Months Ended December 31,						Six Months Ended December 31,


	2009			2008			2009			2008

Revenue
Windows & Windows Live Division	$	5,073		$	3,930		$	9,058		$	8,041
Server and Tools		3,848			3,775			7,285			7,214
Online Services Division		581			595			1,067			1,108
Microsoft Business Division		4,749			4,893			9,155			9,810
Entertainment and Devices Division		2,938			3,256			4,829			5,149
Unallocated and other		1,833			180			548			368

Consolidated	$	19,022		$	16,629		$	31,942		$	31,690

Operating income (loss)
Windows & Windows Live Division	$	3,516		$	2,550		$	6,324		$	5,409
Server and Tools		1,370			1,336			2,606			2,336
Online Services Division		(478	)		(378	)		(972	)		(704	)
Microsoft Business Division		2,914			2,991			5,747			6,096
Entertainment and Devices Division		361			103			654			237
Reconciling amounts		830			(663	)		(1,364	)		(1,436	)

Consolidated	$	8,513		$	5,939		$	12,995		$	11,938

Because of our integrated business structure, operating costs included in one segment may benefit other segments, and therefore these segments are not designed to measure operating income or loss directly related to the products 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 incent shared efforts. Management will continually evaluate the alignment of product development organizations, sales organizations, and inter-segment commissions for segment reporting purposes, which may result in changes to segment allocations in future periods.

Assets are not allocated to segments for internal reporting presentations. A portion of amortization and depreciation is included with various other costs in an overhead allocation to each segment and it is impracticable for us to separately identify the amount of amortization and depreciation by segment that is included in the measure of segment profit or loss.

Reconciling amounts include adjustments to conform with U.S. GAAP and corporate-level activity not specifically attributed to a segment. Significant internal accounting policies that differ from U.S. GAAP relate to revenue recognition, income statement classification, and accelerated depreciation and amortization of stock-based awards. In addition, certain revenue and expenses are excluded from segments or included in corporate-level activity, including certain legal settlements, accruals for legal contingencies, and accruals for employee severance. For the three months ended December 31, 2009, reconciling amounts include the recognition of previously deferred revenue related to sales of Windows Vista with a guarantee to be upgraded to Windows 7 at minimal or no cost and sales of Windows 7 to original equipment manufacturers and retailers before general availability.

Significant reconciling items were as follows:


(In millions)	Three Months Ended December 31,						Six Months Ended December 31,


	2009			2008			2009			2008

Corporate-level activity ⁽¹⁾	$	(1,291	)	$	(979	)	$	(2,229	)	$	(2,086	)
Stock-based compensation		109			191			229			371
Revenue reconciling amounts		1,787			116			421			303
Other		225			9			215			(24	)

Total	$	830		$	(663	)	$	(1,364	)	$	(1,436	)

(1)	Corporate-level activity excludes stock-based compensation and revenue reconciling amounts presented separately in those line items.

Entity Information	6 Months Ended
Entity Information	Dec. 31, 2009	Jan. 25, 2010
Trading Symbol	MSFT
Entity Registrant Name	MICROSOFT CORP
Entity Central Index Key	0000789019
Current Fiscal Year End Date	--06-30
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding		8,770,460,922

Document Information	6 Months Ended
Document Information	Dec. 31, 2009
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Dec. 31, 2009