Microsoft Corporation Annual Report 2005
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NOTES TO FINANCIAL STATEMENTS

NOTE 15    EARNINGS PER SHARE

Basic earnings per share is computed on the basis of the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed on the basis of the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options, stock awards, and shared performance stock awards. The components of basic and diluted earnings per share are as follows:

(In millions, except earnings per share)
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Year Ended June 30 2003 spacer 2004 spacer 2005
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Net income available for common shareholders (A) $07,531   $08,168   $12,254
Weighted average outstanding shares of common stock (B) 10,723   10,803   10,839
Dilutive effect of employee stock options and awards 159   91   67
Common stock and common stock equivalents (C) 10,882   10,894   10,906
Earnings per share:
Basic (A/B) $000.70   $000.76   $001.13
Diluted (A/C) $000.69   $000.75   $001.12

For the years ended June 30, 2003, 2004, and 2005, 1.09 billion, 1.2 billion and 854 million shares attributable to outstanding stock options were excluded from the calculation of diluted earnings per share because the exercise prices of the stock options were greater than or equal to the average price of the common shares, and therefore their inclusion would have been anti-dilutive. For the year ended June 30, 2005, 25.24 million shared performance stock awards, out of the 35.3 million targeted amount outstanding, have been excluded from the calculation of diluted earnings per share because the number of shares ultimately issued is contingent on our performance against metrics established for the performance period, as discussed in Note 14 – Employee Stock and Savings Plans.

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