Microsoft Corporation Annual Report 2005
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NOTES TO FINANCIAL STATEMENTS

NOTE 18    SEGMENT INFORMATION

Segment revenue and operating income/(loss) was as follows:

(In millions)
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Year Ended June 30 2006) spacer 2005) spacer 2004)
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Revenue
Client $13,001)   $11,972)   $11,293)
Server and Tools 10,542)   9,197)   8,031)
Information Worker 12,380)   11,702)   10,990)
Microsoft Business Solutions 906)   776)   735)
MSN 2,488)   2,486)   2,498)
Mobile and Embedded Devices 365)   259)   185)
Home and Entertainment 4,292)   3,110)   2,731)
Reconciling amounts 308)   286)   372)
        Consolidated $44,282)   $39,788)   $36,835)
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Year Ended June 30 2006) spacer 2005) spacer 2004)
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Operating Income/(Loss)
Client $10,043)   $09,418)   $09,061)
Server and Tools 3,525)   2,922)   2,357)
Information Worker 8,982)   8,726)   8,160)
Microsoft Business Solutions 14)   (134)   (91)
MSN 111)   477)   393)
Mobile and Embedded Devices (11)   (37)   (116)
Home and Entertainment (1,283)   (451)   (1,011)
Reconciling amounts (4,909)   (6,360)   (9,719)
        Consolidated $16,472)   $14,561)   $09,034)

SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, establishes standards for reporting information about operating segments. This standard requires segmentation based on our internal organization and reporting of revenue and operating income based upon internal accounting methods. Our financial reporting systems present various data for management to operate the business, including internal profit and loss statements prepared on a basis not consistent with U.S. GAAP. Fiscal years 2005 and 2004 amounts have been restated for certain internal reorganizations and to conform to the current period presentation. The segments are designed to allocate resources internally and provide a framework to determine management responsibility. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our Chief Executive Officer. Our seven segments are Client; Server and Tools; Information Worker; Microsoft Business Solutions; MSN; Mobile and Embedded Devices; and Home and Entertainment. On July 17, 2006 we announced a change in our operating segments reflecting the culmination of our realignment announced in September 2005. These changes will be effective for fiscal year 2007; the seven segments discussed in this analysis are presented the way we internally managed and monitored performance at the business group level in fiscal years 2006, 2005, and 2004.

The types of products and services provided by each segment are summarized below:

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Client – Windows XP Professional and Home; Media Center Edition; Tablet PC Edition; and other standard Windows operating systems.

Server and Tools – Windows Server operating system; Microsoft SQL Server; Exchange Server; Microsoft Consulting Services; product support services; Visual Studio; System Center products, Forefront security family of products; and Biz Talk.

Information Worker – Microsoft Office; Microsoft Project; Microsoft Visio; SharePoint Portal Server client access licenses; Microsoft LiveMeeting; OneNote; and Office Communication Server.

Microsoft Business Solutions – Microsoft Dynamics AX; Microsoft Dynamics CRM; Microsoft Dynamics GP; Microsoft Dynamics NAV; Microsoft Dynamics SL; Microsoft Dynamics Retail Management System; Microsoft Partner Program; and Microsoft Office Small Business Accounting.

MSN – MSN Search; MapPoint; MSN Internet Access; MSN Premium Web Services (consisting of MSN Internet Software Subscription, MSN Hotmail Plus, MSN Bill Pay, and MSN Radio Plus); and MSN Mobile Services.

Mobile and Embedded Devices – Windows Mobile software platform; Windows Embedded device operating system; and Windows Automotive.

Home and Entertainment – Xbox 360; Xbox; Xbox Live; CPxG (consumer software and hardware products); and IPTV.

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, period-end cut-off timing, and accelerated amortization for depreciation, stock awards, and performance-based stock awards. In addition, certain revenue and expenses are excluded from segments or included in corporate-level activity including certain legal settlements and accruals for legal contingencies.

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Significant reconciling items were as follows:

(In millions)
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Year Ended June 30 2006) spacer 2005) spacer 2004)
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Operating income reconciling amounts:          
    Legal settlements and contingent liabilities $(1,321)   $(2,312)   $(2,832)
    Stock-based compensation expense (127)   (1,042)   (4,516)
    Revenue reconciling amounts 308)   286)   372)
    Corporate-level expenses (1) (3,742)   (3,493)   (3,128)
    Other 27)   201)   385)
        Total $(4,909)   $(6,360)   $(9,719)
(1) Corporate-level expenses exclude legal settlements and contingent liabilities, stock-based compensation expense, and revenue reconciling amounts presented separately in those line items.

Sales to Dell and its subsidiaries in the aggregate accounted for approximately 11% of fiscal year 2006 and 10% of total fiscal year 2005 and 2004 revenue. These sales were made primarily through our OEM and volume licensing channels and were included in all operating segments.

Revenue, classified by the major geographic areas in which our customers are located, were as follows:

(In millions)
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Year Ended June 30 2006   2005   2004
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United States (1) $29,730   $26,949   $25,046
Other countries 14,552   12,839   11,789
    Total $44,282   $39,788   $36,835
(1) Includes shipments to customers in the United States and licensing to certain OEMs and multinational organizations.

Long-lived assets, classified by the geographic location of the controlling statutory company in which that company operates, were as follows:

(In millions)
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Year Ended June 30 2006   2005
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United States $6,661   $5,506
Other countries 788   648
    Total $7,449   $6,154
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