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					                  March 12, 2009                                                     TECHNOLOGY (ENTERPRISE SOFTWARE)



               Henry Fund Research

MICROSOFT CORPORATION (MSFT)                                                                             Investment Recommendation            HOLD
Arindam Majumdar                                                                                                Current Price               $16.59
arindam-majumdar@uiowa.edu                                                                                      Target Price                $29.71

                                                                                        INVESTMENT THESIS
                                                                                           Microsoft’s revenue is primarily generated from the sale
                                                                                           of its licensed products such as the Windows line of
                                                                                           operating systems and its various server offerings,
                                                                                           coupled with its foray into the e-entertainment and
                                                                                           business vis-à-vis media players and gaming consoles.
                                                                                           Thus it is critical to the growth of the company that
                                                                                           Microsoft continues to constantly turnover its product
                                                                                           offerings. Its new OS offering, Windows 7, which is
                                                                                           slated to be released in early 2010 is generating a lot of
                                                                                           buzz in the industry. Additionally, with users now having
                                                                                           the option to migrate from XP to Windows 7 directly,
Source: http://google.com/finance                                                          using Microsoft Deployment Tool 2010, Microsoft has
                                                                                           ensured that adoption of Windows 7 is easier for
Key Stock Statistics                                                                       customers who aren’t willing to upgrade to Vista. We
52-Week Price Range                                             $32.10-14.87               believe Microsoft will see double digit growth in its client
                                                                                           business segment in 2009-2010 and will compromise
Market Capitalization (B)                                                  $152.12
                                                                                           almost 35% of its revenue stream.
Shares Outstanding (M)                                                       8890          Microsoft is becoming more aggressive in the mobile
Institutional Ownership                                                       60%          phone application software industry. Its recent
60-Month Beta                                                                 0.96         announcement of launching Windows Mobile 6.5 and
Dividend Yield                                                                13%          the new Windows Marketplace for hand-held mobile
                                                                                           devices reflects the changing face of Microsoft which
Price/Earnings (ttm)                                                          9.17
                                                                                           has recognized Apple’s success in the same vertical
Price/Book                                                                    4.25         and is striving hard to replicate it.
Price/Sales                                                                   2.36         Additionally in February, Microsoft also announced the
ROA (ttm)                                                                  22.15%          launch of its retail stores in the United States. These
ROE(ttm)                                                                   50.01%          would house its products such as Xbox gaming console,
                                                                                           in addition to Windows Mobile 6.5 powered smart-
Projected 5-Year Growth                                                    10.22%
                                                                                           phones and Windows 7 powered PC’s. We believe
                                                                                           these diversifications, especially its renewed effort to
                                                                                           forge a partnership with Yahoo Inc! for its online
PS ($)                                                                                     advertising business will help investors feel bullish about
Year       2006         2007        2008        2009E        2010E          2011E          Microsoft in 2009-10.
EPS        1.21         1.44        1.90         1.77         1.85           1.92          From FY 02 through FY 08, total revenue for Microsoft
  All earnings represent earnings from operations and have been filtered                   increased at a CAGR of 13.4%. Overall gross margins
                       from net nonrecurring gains.
                                                                                           declined to 80.8% from 81.7% mainly due to higher
                                                                                           sales of products such as the Xbox, which has lower
                                                                                           gross margins. Other operating expenses as a
Valuation Models                                                                           percentage of total revenues expanded to 43.6% from
DCF-EP Model                                                                $29.71
                                                                            $43.77
                                                                                           39.7% in FY02.Other earnings rose to CAGR of 11.2%.
Relative P/E
Relative PEG                                                                $23.49         EPS advanced from $0.70 in FY02 to 1.90 in FY08. In
                                                                                           our view, this bullish run has been sustained due to


                                                      Important disclosures appear on the last page of this report.
                                                                                                                           THE UNIVERSITY OF IOWA
Henry Fund Research                                                                                       Henry B. Tippie School of Management

    Microsoft’s market leader position in the PC software
    industry and also due to its aggressive marketing and
    sales strategies. But we believe, with the current
    downturn and increasing competition from Apple, HP
    and IBM, in addition to Google’s presence in the online
    advertising business, Microsoft will lean heavily on new
    product launches and their success to maintain its
    market leader position.
    Microsoft continues to face competition from Linux and
    other open source technologies in the server software
    segment. Now, free desktop Linux available from Ubuntu
    and a licensed version of desktop Linux from Novell are
    sufficiently user-friendly that some corporations and
    consumers may switch from Windows to reduce costs.
    This is a threat Microsoft needs to counter, which is why
    it is partnering with Novell in the server software
    segment.
    Software-as-a-service is a trend in the industry which
    Microsoft needs to swiftly implement in its product
    offerings. This service uses the Internet as a distribution
    channel for software which customers, particularly           Source (IBIS Report for Software Publishing in the US + Analysts Valuation
    businesses, pay a fee for access to software programs.                                        Model)

    We believe that corporations will move away from the
    traditional software model to Software-as-a-Service, The spending of corporate houses in the US vis-à-vis
    which will help them reduce their technology expenditure. application software will be hugely impacted by this current
                                                                downturn. The below displayed graph illustrates the
                                                                application software spending by various sectors.
EXECUTIVE SUMMARY
Our outlook on the application software sub-industry is
negative. The US economy is showing little signs of turning
around and the global credit crunch and financial meltdown
are trailing the US market. We believe that in the short-term
                               1
US GDP will shrink at -1.15% . At the time of the creation of
this report the unemployment rate in the US was hovering
                         1
around a high of 8.1% . These key performance indicators
(KPI’s) clearly suggest that during 2009 the US economy will
continue to struggle to emerge from the recessionary weather
of 2008. This will impact the application software industry
adversely.

The below attached graph clearly displays estimated revenue
growth figures for the industry.

                                                                                 Source (IBIS Report for Software Publishing in the US)

                                                                        As can be viewed from the pie-chart, some of the biggest
                                                                        spenders in the application software industry have been
                                                                        sectors such as Finance and Insurance and Manufacturing.
                                                                        The sub-prime induced recession has impacted these two
                                                                        sectors hugely which reflects clearly on the revenue growth
                                                                        projections for the industry.

                                                                        But we believe that the industry will have a tailwind with
                                                                        improved consumer confidence after the success of the
                                                                        government intervention is reflected in some of the sectors



                                                                    2
                                                                                                                         THE UNIVERSITY OF IOWA
Henry Fund Research                                                                                      Henry B. Tippie School of Management

which have been traditionally high spenders in the application
software sub-industry.

Microsoft Corporation is by far the biggest and the most
influential player in the operating system market with a market
share of 48%. Its footprint in the middleware and enterprise
segment is still developing. Microsoft’s other dominating
business unit is its servers business. Though facing stiff
competition from IBM and Sun, Microsoft continues to be a
market force in this business segment with entrenched client
relationships and license agreements.

Despite being a behemoth in the technology industry,
Microsoft has often been at the wrong end of anti-trust
litigations because monopolistic strategies of bundling
products and limiting access of rival products onto its publicly
available platforms and operating systems. This has eroded
Microsoft’s goodwill forcing the strengthening of the open
source movement. We believe this phenomenon will continue
to challenge Microsoft in the future. But with its renewed                        Source (Microsoft 2008 Annual Report)
efforts to talk to Yahoo Inc! after Yahoo changed its senior
management post a breakdown in talks with Microsoft, its Operating Segments
diversification efforts in the mobile OS vertical in addition to Microsoft’s five operating segments are as follows:
upcoming product launches, we believe Microsoft is
positioned attractively to weather the storm.                    i) Client
                                                                 The segment includes sales and marketing expenses for the
Nonetheless we think that despite the mission criticality of Windows operating system and product development efforts
application software systems, most enterprises will delay for the Windows platform. This segment contributed 27.91%
purchasing new software. This would mean that most of the revenues in fiscal year 2008.
corporations would forego the adoption of Windows Vista and The performance of this segment year-on-year has been as
wait until the release of Windows 7, though the beta version is shown in the chart below.
already publicly available. The following report will provide
more detail on Microsoft’s current market position, its future,
and detailed support for the HOLD recommendation provided.



COMPANY DESCRIPTION
Business Overview
Microsoft is the world’s largest software maker, driven by its
monopolistic behavior in the operating systems business. It
generates revenues by - development, manufacturing,
licensing and support of - software products and services of
various computing devices.

Microsoft’s software products and services include operating
systems for servers, personal computers, and intelligent
devices, server applications for distributed computing                        Source (Microsoft 2008 Annual Report and Analyst predictions)
environments, information worker productivity applications,
business solutions applications, high-performance computing           The drop in revenues is due to a decreased spending in the
applications, software development tools, video games and             retail and corporate clientele base of Microsoft. Despite the
consulting and product support services                               drop, we envisage that installed worldwide base for Microsoft
                                                                      upgrades should provide for growth for many years.
Microsoft’s revenue breakup for the fiscal year 2008 by its           Our guidance for this business segment of Microsoft is that
various business segments is as follows:                              2009 will see revenue growth rates drop by 6% for the first



                                                                  3
                                                                                                                        THE UNIVERSITY OF IOWA
Henry Fund Research                                                                                       Henry B. Tippie School of Management

time in Microsoft’s history. But the timely release of Windows
7 should see the revenue growth rates jump up again and we                  Our guidance for this business segment of Microsoft is that
forecast a CAGR of 9.35% till 2013 for the Client business                  2009 will see revenue growth rates drop by 4% for the first
segment.                                                                    time in Microsoft’s history. But improving economic conditions
                                                                            and increasing spending on IT infrastructure in the years to
Products                                                                    come should see the revenue growth rates stabilize again and
The primary product of this segment is the Windows OS.                      we forecast a CAGR of 5.94% till 2013 for the Server and
                                                                            Tools business segment.
Competition
This business segment faces strong competition from well-                   Products and Services
established companies with differing approaches to the PC                   The primary products of this business segment are the Windows
market. Competing commercial software products, including                   Server operating systems, System Center products and Forefront
                                                                            security products.
variants of UNIX, are supplied by competitors such as Apple,
Hewlett-Packard, IBM, and Sun Microsystems. The Linux
                                                                            Competition
operating system, which is also derived from Unix and is
                                                                            Microsoft’s server operating system products face intense
available without payment under a General Public License,
                                                                            competition from a wide variety of server operating systems
has gained some acceptance as competitive pressures lead
                                                                            and server applications, offered by companies with a variety
PC OEMs to reduce costs and new, lower price PC form
                                                                            of market approaches. Vertically integrated computer
factors gain adoption. Apple takes an integrated approach to
                                                                            manufacturers such as Hewlett-Packard, IBM, and Sun
the PC experience and has made inroads in share,
                                                                            Microsystems offer their own versions of the Unix operating
particularly in the U.S. and in the consumer segment.
                                                                            system preinstalled on server hardware.
Despite the competition, we believe Microsoft is entrenched                 In fact the recent near merger of IBM and Sun would have
enough in this vertical to stave off competition for some time              seen Microsoft’s market share in this segment shrink
to come. Also, critical to the longevity of its reign as market             considerably. We will analyze the IBM-Sun deal in some
leader in this segment will be the success of its product                   detail in a later section.
launches in 2009-10.                                                        We believe that the competitive position of Linux has also
                                                                            benefited from the large number of compatible applications
                                                                            now produced by many leading commercial software
ii) Server and Tools                                                        developers and non-commercial software developers. A
This segment develops and markets software server                           number of companies supply versions of Linux, including
products, services, and solutions. The segment also builds                  Novell and Red Hat. Server virtualization platform providers,
standalone and software development lifecycle tools for                     such as VMware, are another form of competition for the
software architects, developers, testers, and project                       Windows server operating system.
managers.                                                                   Microsoft’s Web application platform software competes with
                                                                            open source software such as Linux, Apache, MySQL, and
This segment has performed consistently for the last 3 fiscal               PHP, and Microsoft also competes against Java middleware
years, contributing around 21% to the total revenues of                     such as JBoss, Geronimo, and Spring Framework.
Microsoft Corporation.
                                                                            iii) Online Services Business
                                                                            This segment consists of an on-line advertising platform with
                                                                            offerings for both publishers and advertisers, personal
                                                                            communications services such as email and instant
                                                                            messaging, online information offerings such as Live Search,
                                                                            and the MSN portals and channels around the world. This
                                                                            segment has historically had a share of about 5% in
                                                                            Microsoft’s revenue stream. The 2008 figure was $3.3 Billion,
                                                                            comprising 5.32% of its revenues.




        Source (Microsoft 2008 Annual Report and Analyst predictions)




                                                                        4
                                                                                                                   THE UNIVERSITY OF IOWA
Henry Fund Research                                                                                  Henry B. Tippie School of Management

                                                                     As shown in the charts above, the combined ad revenues
                                                                     totaled $8.5 billion in the fourth quarter, up from $8.2 billion in
                                                                     the third quarter and $7.8 billion in the fourth quarter of 2007.
                                                                     Google continued to dominate, accounting for 65 percent of
                                                                     those revenues, up from 61 percent from a year ago but
                                                                     slightly down from its 65.3 percent share in the third quarter.
                                                                     Google contributed slightly more than half of the growth.
                                                                     Yahoo’s 19.1 percent share of revenues went up quarter-
                                                                     over-quarter by the same amount that Google’s went down
                                                                     (0.3 percent). Microsoft’s $866 million in online revenues
                                                                     gave it a 10.2 share, up from 9.4 percent in the third quarter.
                                                                     And AOL’s advertising revenues remained flat at $507 million,
                                                                     giving it a 6.0 percent share (down 0.2 percent). This clearly
                                                                     suggests that Google continues to be the market leader as far
                                                                     as online ad revenue generation is concerned. We believe
       Source (Microsoft 2008 Annual Report and Analyst predictions) this will be a continuing feature of Google’s business model
                                                                     driven by its strong algorithms such as AdSense. But we
Our guidance for this business segment of Microsoft is that expect Microsoft to progress aggressively in this vertical and
2009 will see revenue growth rates jump by almost 58%. This continue to strive for a partnership with Yahoo to stave off
can be attributed to Microsoft’s recent acquisition of Google’s threat.
aQuantitative and also its aggressive strategy to garner a
bigger share of the online advertising revenues industry. We iv) Microsoft Business Division
forecast a CAGR of 22.29% until 2013 for the Online Services
business segment of Microsoft.                                       The offerings of this segment include the Microsoft Office
                                                                     system and Microsoft Dynamics business solutions. This
Products                                                             business segment has been performing consistently with
The primary products of this business segment for Microsoft are Live revenue share of 31.33% in the fiscal year 2008.
Search, MSN, Windows Live; MSN Mobile Services;
                                                                       We envisage a slowdown in the revenue growth of this
Competition                                                            division because Microsoft will face stiff competition from
This segment faces competition from AOL and Google. To                 OpenOffice and Googledocs in addition to a decrease in the
counter this threat Microsoft planned for the merger with              renewal of product licenses due to the decrease in IT
Yahoo. The deal was called of formally on the 12th of March.           spending by retail and institutional end-users. OpenOffice is
But interestingly, after Yahoo’s change in senior                      free and has interoperability with MSOffice. We expect that
management, it is rumoured that Microsoft and Yahoo are                customers will prefer to shift to OpenOffice instead of paying
renegotiating once again.To support Microsoft’s interest in            licensing and upgrade fees to Microsoft. Googledocs is a free,
Yahoo, please find below the chart which highlights                    Web-based word processor, spreadsheet, and presentation
Microsoft’s current position in the online advertising business        application offered by Google. It allows users to create and
vertical.                                                              edit documents online while collaborating in real-time with
                                                                       other users. Microsoft will need to provide value additions to
                                                                       MSOffice to an extent that customers should be willing to buy
                                                                       MSOffice instead of using freely downloadable office
                                                                       software. We don’t see this happening as open-source
                                                                       software quickly catch up with any new features added to
                                                                       MSOffice.

                                                                       Our guidance for this business segment of Microsoft is that
                                                                       2009 will see single digit revenue growth rates of about 2%.
                                                                       But with increasing stability of capital markets and with
                                                                       increasing IT spending budgets if corporations, we forecast
                                                                       stabilizing revenue growth in this business segment with its
                                                                       revenue witnessing a CAGR of 6.85% until 2013 for the
                                                                       Business Division business segment of Microsoft.

                  Source (www.techcrunch.com)




                                                                   5
                                                                                                                               THE UNIVERSITY OF IOWA
Henry Fund Research                                                                                           Henry B. Tippie School of Management




         Source (Microsoft 2008 Annual Report and Analyst predictions)                 Source (Microsoft 2008 Annual Report and Analyst predictions)

                                                                             Being a discretionary item, we forecast the sales in this
Products                                                                     segment to be affected the most due to the recessionary
The primary products of this segment are Microsoft Office,                   spending cuts. Our guidance for this business segment of
Microsoft Project, Microsoft Visio and Microsoft Exchange                    Microsoft is that 2009 will see a reduced revenue growth rate
Server.                                                                      of about 32% from a growth rate of 34% observed in 2008.We
                                                                             forecast revenue growth in this business segment with its
Competition                                                                  revenue witnessing a CAGR of 1.32% until 2013 for the
Competitors to the Microsoft Office system include many                      Business Division business segment of Microsoft.
software application vendors such as Apple, Corel, Google,
IBM, Novell, Oracle, Red Hat, Sun Microsystems. IBM                          Products
(Smartsuite) and Corel (WordPerfect Suite) have measurable                   The main products for this unit are the Xbox 360 console and
installed bases with their office productivity products. Apple               games. Additionally there are numerous consumer software
may distribute certain of its application software products with             and hardware products (such as mice and keyboards and
various models of its PCs.                                                   Windows Embedded device operating systems.
We think that the OpenOffice.org project provides a freely
downloadable cross-platform application that also has been                   Competition
adapted by various commercial software vendors to sell under                 We believe that the entertainment segment is highly
their brands, including IBM, Novell, Red Hat, and Sun.                       competitive and typically characterized by rapid product life-
Additionally Google has also launched Google Apps, a hosted                  cycles. In this vertical Microsoft’s Xbox hardware business
messaging and productivity suite, and also provides an                       competes with Nintendo and Sony. In addition MS’s product,
enterprise search offering that competes with Microsoft Office               Zune is a distant second to the market leader, Apple’s i-Pod.
SharePoint Server for Search, Microsoft’s new enterprise                     Below is a chart which highlights the major characteristics if
search product. We are also of the belief that web-based                     each media-player, i-pod and Zune.
offerings such as AjaxWrite, gOffice, iNetOffice, SimDesk,
ThinkFree, wikiCalc, or other small projects competing with
individual applications, can also provide an alternative to
Microsoft Office system products.

v) Entertainment and Devices Division
This segment responsible for developing, producing, and
marketing the Xbox video game system, including consoles
and accessories, third-party games, games published under
the Microsoft brand, and Xbox Live operations, as well as
research, sales, and support of those products.



                                                                                                                          6
                                                                                                   Source (Blog Wired.com )




                                                                         6
                                                                                                                     THE UNIVERSITY OF IOWA
Henry Fund Research                                                                                    Henry B. Tippie School of Management

It is clearly evident that there very few technical differences         Market Profile
between the two product ranges but Apple’s brand loyalty,
product design and first mover advantage in the vertical has            According to IDC, global spending on packaged software
ensured a market leader position for it in the media player             totaled $211.3 Billion in 2005, with Microsoft’s share totaling
industry. Zune’s and i-pod’s revenue comparison shown in a              $35 Billion (17% of the total market). IDC expects the system
chart below clearly exhibit this phenomenon.                            infrastructure market to grow at a CAGR of 9.1 % from 2005
                                                                        to 2010. Almost 50% of MSFT’s revenues come from this
                                                                        vertical. The applications market, which constitutes almost
                                                                        33% of Microsoft’s revenues, is expected to grow at 7% and
                                                                        the application development and deployment market is
                                                                        forecasted to expand at a rate of 7.1%.

                                                                        Corporate Strategy
                                                                        Microsoft’s core strategy is centered on software as a service.
                                                                        This strategy was initially proposed by Bill Gates in 2002,
                                                                        when he spoke about Microsoft’s .Net strategy. The 3 key
                                                                        elements of this strategy are as follows - advertising-
                                                                        supported business models, trial-version downloads as a
                                                                        model for new software adoption and demand from users for
                                                                        integrated user experiences that “just work”.

                                                                        We believe that these themes are expected to be Microsoft’s
                                                                        core principles which drive its business in the years to come.
                                                                        It is therefore focused on creating seamless user experiences
                       Source (Google Trends7)                          across PC’s, cell phones, PDA’s, home entertainment
                                                                        consoles and devices. It also envisions delivering multiple
Also Microsoft’s product, Mediaroom faces competition                   levels of different services, some of which maybe free or
primarily from a variety of competitors that provide elements           advertising supported, some of which will have low prices,
of an Internet protocol television delivery platform, but that do       and some at high pricing points, depending on the needs of
not provide end-to-end solutions for the network operator.              the user.
Windows Mobile software and services faces substantial
competition from Apple, Nokia, Openwave Systems, Palm,         We think MSFT’s corporate strategy will be driven by their
QUALCOMM, Research In Motion, and Symbian.                     belief in the fact that software must be sold as an application,
                                                               which resides on the user’s system or network and as a
                                                               service, with the application and data residing on its servers
The revenue distribution for Microsoft with respect to various with users gaining access through the internet. Though
segments, for the years 2006 to 2008, are displayed in the inherently a threat to its core business model, but our analysis
below attached chart.                                          suggests that Windows 7 will see a paradigm shift in the way
                                                               Microsoft allows its end-users to connect to their various
                                                               Microsoft powered devices seamlessly, inching towards
                                                               strategy of selling software as an application rather than a
                                                               software.

                                                                        Additionally, Microsoft’s foray into the mobile OS industry also
                                                                        has witnessed the implementation of this strategy with
                                                                        providing developers the opportunity to interface with the OS
                                                                        and also going as far as revenue sharing with developers
                                                                        based on use of their applications housed on their devices.


                                                                        RECENT DEVELOPMENTS
                                                                            Microsoft received a notice (15th January 20098)from the
                                                    1
                Source (Microsoft 2008 Annual Report )                      EU which objected to its bundling IE with its OS. The EU
                                                                            alleged that the company violated antitrust laws and has



                                                                    7
                                                                                                                 THE UNIVERSITY OF IOWA
Henry Fund Research                                                                              Henry B. Tippie School of Management

   requested the company to revert by 21st of April. If these
   allegations are proved right, Microsoft’s bottom line will
   be adversely affected due to increase in cost of re-
   engineering (by almost 15% of its base cost) its product
   for the European market and de-coupling IE from its OS.
   This will also hurt its work-in-progress product
   development of Windows 7. Any delays in its launch will
   be punished by the market.

   Microsoft recently announced its entry into the retail
   industry by proposing to open dedicated retail stores like
   Apple. These stores will be opened across the US and
   will house products like the Xbox, Windows 7 enabled
   devices and mobile phones powered by Windows Mobile
   6.5. We think Microsoft's decision to open up its own
   retail stores is a challenging project. The core issue is                                                         9
                                                                                           Source (www.intomobile.com )
   that we think Microsoft’s ploy of trying to follow the ‘Apple
   way’ has its inherent disadvantages. Apple has
                                                                          The above chart clearly suggests that the worldwide,
   advantage as it has more of an owned ecosystem than                    smartphone sales were up 13.9% in 2008, compared
   Microsoft has since Apple makes the finished products it               with figures from 2007. We think that the global
   sells,     whereas       Microsoft's    software--particularly         demand for smartphones has outpaced the dwindling
   Windows--typically comes on hardware from dozens of                    global economy which highlights the importance of
   companies. Additionally the PC industry already has its                Microsoft’s push into the mobile OS market.
   own well-defined distribution channels to bring those                    Enhanced input methodologies, including fingers,
   products to market. The upside for PC makers is that                   speech, and use of a camera to sense motion
   Microsoft-branded stores could display products that are
   hard to fit into the big-box retail shopping experience, like            Addition of the "sliding panels" interface -- already
   high-end Alienware PCs or HP's Home Server. Also,                      featured on Windows Mobile Standard devices -- to
   these stores do not necessarily have to be about sales as              Windows Mobile Professional touch-screen devices
   Apple seems to be finding the hard way. At the moment,
                                                                           Possible integration with Microsoft's Zune music
   Microsoft and its partners don't really have a one-stop
                                                                          marketplace
   shopping experience that can put all the pieces together
   the way Apple can in its stores and the Microsoft stores
   could go a long way in filling that gap. It also displays the
   implementation of the corporate strategy that we spoke of            Microsoft has provided guidance for the fiscal year 2009
   earlier.                                                             as follows:

   MS’s will be launching Window’s Mobile 6.5 this year.                Client: Microsoft expects PC market growth will exceed
   Some of its features would be as follows:                            Client revenue growth. It also believes that PC unit
                                                                        growth rates will be higher in the consumer segment than
        A centralized "Skymarket" store for OTA (over-the-              in the business segment and higher in emerging markets
     air) download of applications. This is will be                     than in mature markets. But we believe that given the
     competition for some of the other smart phone OS                   economic climate and the decrease in consumer
     manufacturers such as Nokia and Apple. The current                 spending, worldwide, unit PC sales will drop and
     (2008) smartphone sale by end users is displayed in a              corporate houses will also refrain from committing excess
     chart below.                                                       expenditure for application software procurement, more
                                                                        so because Windows 7 is expected to be released early
                                                                        next year.

                                                                        Server and Tools: Microsoft expects continued growth in
                                                                        both product and services revenue driven by strong
                                                                        customer demand for the recently released Windows
                                                                        Server 2008 and Visual Studio 2008 and upcoming
                                                                        release of SQL Server 2008. We believe that the Server
                                                                        and Tools revenues will continue to be bullish for
                                                                        Microsoft.



                                                                    8
                                                                                                                THE UNIVERSITY OF IOWA
Henry Fund Research                                                                               Henry B. Tippie School of Management

   IBM’s acquisition of Sun – When talking about                       performance of the 2007 Microsoft Office system and
   Microsoft’s Server and Tools business, it is imperative             business demand for other applications. Fiscal year
                                                                       2009 represents an important year in delivering MSFT’s
   that we talk about IBM’s proposed acquisition of Sun and
                                                                       software plus services strategy with the upcoming releases of
   the effect the merger would have had on Microsoft’s                 Exchange Online, SharePoint Online, and Office Communication
   server and tools business. To begin with, the deal -                Server Online.
   Apparently the deal ended on April 5th. At that point IBM
                                                                       Entertainment and Devices division: Microsoft expects
   withdrew an offer for Sun valued at around $6.85bn or
                                                                       revenues to be flat or to decrease due to year-over-year
   approximately $9.40 per Sun share, after Sun terminated
                                                                       variations in product launches, volume, mix, and prices
   exclusive negotiations with IBM. According to variously             across our portfolio of products and services. We think
   reported comments from undisclosed sources, a                       that entertainment and devices revenues will be hit hard
   characteristic feature of these never-formally-admitted             by the recessionary climate of 2009.
   IBM-Sun talks, Sun wanted a much firmer commitment
   from IBM to complete the takeover in the face of potential
   anti-trust objections.
                                                                    INDUSTRY TRENDS
                                                                 The key industry trends which Microsoft needs to be sensitive
   We believe that a combined IBM-Sun business would about are the following:
   dominate the enterprise-server market with a near 50 per
   cent share pushing Microsoft to a distant third after HP,       Application Software for Mobile Devices:
   slightly more if just Unix servers are considered. This
                                                                     Hand-held devices with impressive computing prowess
   would have set anti-trust alarm bells ringing and IBM’s
                                                                     are the latest innovation raking in the revenues in the
   non-committal stance on such issues led it to walk away
                                                                     application software industry. Apple with its i-phone and
   from the deal. Sun shares peaked at $8.89 when
                                                                     RIM with its Blackberry have set the benchmark high with
   speculation on the talks was at its height on March 18th,         respect customer expectations. Out of the 100 billion
   up from a low point of $3.51 in January. They are now             camera phones shipped out in 2008, smart-phones, with
   trading at $6.13, giving it a market capitalization of            full email support, will represent about 10% of the market
   $4.57bn.                                                          or about 100 million units. This is a big market and with
                                                                     technologies such as 3G and 4G, has the potential to be
   Online Services Business: Microsoft expects revenue,              the next big thing in the entertainment industry. Smart
   including advertising revenue; to increase in fiscal year         hand held devices have also enabled synergy between
   2009 as it begins to see returns from investments made,           retail technology products, allowing devices to “talk” to
   including acquisition of aQuantive. It also expects               each other. This has broadened the opportunity and
   operating expenses to increase as Microsoft’s continue to         scope for the application software industry.
   invest in long-term strategy. One of Microsoft’s key
   investments is its proposed merger with Yahoo to counter        Software-As-A-Services (SAAS):
   Google’s position as the market leader in the online
   services business.
                                                                     The Internet helped the emergence of non-traditional
                                                                     software sales models such as software-as-a-service (or
   Proposed Acquisition of Yahoo! Inc. - To accelerate
                                                                     on demand software). Software-as-a-service vendors
   Microsoft’s advertising strategy, during fiscal year 2008, it
                                                                     maintain software on servers within their own data center
   submitted a proposal to the Yahoo! Inc. board of directors
                                                                     and then provide access to the software to their
   to acquire all of the outstanding shares of Yahoo! For $31
                                                                     customers via the Internet. With this model, customers
   per share in a cash and stock deal valued at $44.6
                                                                     pay the fee for the usage of software over a period of
   Billion. But the price demanded by Yahoo! was not
                                                                     time and avoid upfront license fees. According to IDC, a
   agreed upon by Microsoft. Subsequently, proposals to
                                                                     technology market research firm, investment in on-
   purchase ($33 per share) Yahoo!’s search business and
                                                                     demand software delivery models will increase from $3.7
   make an investment in Yahoo!, all of which were rejected
                                                                     billion in 2006 to $14.8 billion by 2011, with a compound
   by Yahoo!. Though Microsoft persists to invest heavily in
                                                                     annual growth rate (CAGR) of 32% Salesforce.com and
   new tools, Web experiences, improved search
                                                                     Google are successful providers of online software
   performance, and advertiser satisfaction, its proposed
                                                                     products. Realizing the shift in the industry trend,
   takeover of Yahoo finally fell through in March 2009.
                                                                     Microsoft is making online versions of its email, calendar,
                                                                     contact-management, and other software widely
   Business Division: MSFT expects revenue to continue               available to businesses. This model is in complete
   to increase over the prior year due to the strong                 contrast to Microsoft’s traditional business model:



                                                                9
                                                                                                                 THE UNIVERSITY OF IOWA
Henry Fund Research                                                                            Henry B. Tippie School of Management

    businesses buy software from Microsoft that they install        The below attached graph depicts the short-term inflation
    and operate on computers they own. For this industry            rates forecast in the US
    shift to happen, software service providers should invest
    in maintaining huge data centers. We believe that with
    this shift in industry trend, Microsoft will face a daunting
    task to retain its market share. Even if its online versions
    of software products are successful, it will be competing
    with itself--losing market share in the packaged software
    market and gaining in online versions.


ECONOMIC OUTLOOK
The major economic factors affecting the application software
industry are as follows:

   Real GDP Growth
                                                                                       Data from Forecasts.org

   Real GDP growth signifies a healthy economy. It
   measures the wealth of a society by indicating the growth        The almost deflationary environment will have an adverse
   of profits and the expected return in capital.                   effect on the enterprise software industry

   The below graph illustrates the short-term GDP forecast          Foreign Exchange Currency Rates
   for real GDP growth rate the United States.
                                                                    In the recent past, the US dollar has strengthened
                                                                    significantly with respect to the global currencies.




                  Data from Forecasts.org10

The real GDP for 2008 for the US was 1.8%, down from 2.0% in
2007. It is forecasted to further slow down to 0.9% in 2009.

The downward slope clearly suggests a recessionary
environment which indicates lower IT spending and a bearish
investor perception of application software companies.

   Inflation

   Increased inflation eats into the income of households,
   decreasing the consumer spending as well. This directly
   hurts the industries such as housing, automobiles, retail
   and percolates down to industries such as healthcare and
   financial services, leading to decreased cash flows. This
   in-turn leads to budgetary cuts where the application
   software spending often faces the wrath of management
   of these organizations. Thus inflation and in-turn
   consumer spending is very important to the health of the
   application software industry.




                                                               10
                                                                                                               THE UNIVERSITY OF IOWA
Henry Fund Research                                                                            Henry B. Tippie School of Management




                                            11
                    Data from X-Rates.com


  As is shown in the charts attached, the strengthening of
  the dollar has hurt the interests of most of the global                          Source (Microsoft Annual Report 2008)
  application software developers and providers. We believe
  that the current USD rates against most global currencies       The dependence on international business – 46.75% of its
  will remain stable because of the economic downturn             net income of $23.8 Billion, exposes it to foreign exchange
  being faced by almost all regions of the world. This foreign    rate fluctuation.      These fluctuating rates have a
  exchange movement will hurt Microsoft because its               considerable say in its bottom line. Additionally, the federal
  international revenues have grown as a percentage of its        government’s plan to tax outsourced businesses will
  total revenues to 41% in 2008 from 37% in 2006. The             adversely affect Microsoft’s business model.
  chart displayed below is a graphical representation of
  Microsoft’s revenue break-up with respect to geographies.
                                                                  MS’s business model has been based upon customers
                                                                  paying a fee to license software that we develop and
                                                                  distribute. Under this license-based software model,
                                                                  software developers bear the costs of converting original
                                                                  ideas into software products through investments in
                                                                  research and development, offsetting these costs with the
                                                                  revenue received from the distribution of their products.
                                                                  Open source software business models such as those of
                                                                  UNIX and Linux, challenges Microsoft’s license-based
                                                                  software model.


                                                                  As a leading global software maker, Microsoft receives
                                                                  close scrutiny from government agencies under U.S. and
                   Source (Microsoft Annual Report 2008)
                                                                  foreign competition laws. Some jurisdictions also provide
                                                                  private rights of action for competitors or consumers to
                                                                  assert claims of anti-competitive conduct. For example, it
  The increase in the proportion of international revenues
                                                                  has been involved in the following actions.
  derived from international markets increases Microsoft’s
  exposure to fluctuations in foreign currency to U.S. dollar
  exchange rates.                                                  i)   Lawsuits brought by the U.S. Department of Justice,
                                                                        18 states, and the District of Columbia in two
                                                                        separate actions were resolved through a Consent
INVESTMENT NEGATIVES                                                    Decree that took effect in 2001 and a Final
  A substantial part of Microsoft’s revenues are generated              Judgment entered in 2002. These proceedings
  from international markets. Shown below is a chart                    imposed various constraints on Microsoft’s Windows
  displaying domestic and international incomes as a                    operating system businesses. These constraints
  percentage of revenues.                                               include limits on certain contracting practices,
                                                                        mandated disclosure of certain software program
                                                                        interfaces and protocols, and rights for computer
                                                                        manufacturers to limit the visibility of certain
                                                                        Windows features in new PCs. If Microsoft fails to
                                                                        comply with them, additional restrictions could be
                                                                        imposed on it that would adversely affect its business.




                                                             11
                                                                                                                        THE UNIVERSITY OF IOWA
Henry Fund Research                                                                                       Henry B. Tippie School of Management

    ii)   The European Commission closely scrutinizes the                   computing. We feel that ultimately it comes down to Google’s
          design of high-volume Microsoft products and the                  algorithms/technology behind its Internet search, which reigns
          terms on which it makes certain technologies used in              supreme in the industry. Microsoft was the original innovator
          these products, such as file formats, programming                 in this field with its Keywords technology but dropped the
                                                                            technology and lessened its pursuit of the Internet search
          interfaces, and protocols, available to other
                                                                            market to focus on other business segments.
          companies.      In 2004, the Commission ordered
          Microsoft to create new versions of Windows that do               Internet Browser Market
          not include certain multimedia technologies and to                In this case Microsoft leads the way when it comes to the
          provide its competitors with specifications for how to            Internet browser market. Internet Explorer controls about 70%
          implement         certain    proprietary     Windows              of the United States Browser market, well ahead of its closest
          communications protocols in their own products. The               browser competitor, Mozilla Firefox, which controls about 20%
          Commission’s impact on product design may limit                   of this market. Firefox gained this 20% of the market very fast
          Microsoft’s ability to innovate in Windows or other               as its Internet browser was “cutting edge” so to speak and
                                                                            contained many user-friendly options/features that Internet
          products in the future, diminish the developer appeal
                                                                            Explorer lacked. Microsoft saw its market share deteriorating
          of the Windows platform, and increase its product                 and “borrowed” some of Firefox’s innovative features. Internet
          development costs. The availability of licenses                   Explorer version 7 seemed to mirror many of these unique
          related to protocols and file formats may enable                  Firefox features, which helped Mozilla capture a lot of their
          competitors to develop software products that better              market share from Microsoft. These features include the
          mimic the functionality of MS’s own products which                addition of a new tab/window option along with some of the
          could      result     in   decreased      sales     of            unique Internet security features of Firefox. Clearly Firefox
          Microsoft’s products.                                             was better than Internet Explorer 6, but the differences
                                                                            between Firefox and IE7 are very minimal due to this
                                                                            “borrowing” of features. However, Google has taken a splash
PEER COMPARISON                                                             at this market and released its own web browser, Chrome.
                                                                            Chrome can be described as more of an operating system
Compared to its peers, Microsoft is relatively inexpensive,                 than an Internet browser. Google’s Chrome leads the way
trading at a P/E of 20.1. Its return on equity is one of the                when it comes to browsers preparing for the next shift in
highest, with a value of 50.1.                                              IT, cloud computing. Basically we think that the the Internet
                                                                            will eventually become the “operating system” and Google is
                                                                            already positioning itself very nicely for this shift. Chrome
                                                                            appears to be the innovative and “fresh” browser. Chrome will
                                                                            open the door for cloud computing and the use of the Internet
                                                                            as an operating system. Chrome will also thrive off of open
                                                                            source developing. If Microsoft wishes to keep its hold on the
                                                                            Web Browser market it is very likely that it may have to
                                                                            “borrow” some of the features from Google’s Chrome in its
                                                                            next release, just as it did with Firefox and IE7. Google’s
                                                                            business is the Internet. If Microsoft allows for further
                                                                            development of a browser that feels more like an operating
                                                                            system, it will pave the way for Google to capitalize and
                                                                            generate revenue off of the Internet, playing right into
                                                                            Google’s strategy of centralizing computing around the
                                                                            Internet.

                                                                            Microsoft v/s Apple

                                                             For many in the industry, Microsoft is the quintessential
                                                             monopolist whereas Apple is the innovator. With design as
           Source (MSN Stick Screener – Industry – Application Software)
                                                             the cornerstone of its branding, Steve Jobs post i-pod and i-
Microsoft v/s Google                                         phone Apple is a new beast. Capturing lost ground in the
                                                             smartphone business and also with increased Mac sales,
Internet Search Market                                       Apple is finally living up to its reputation of being a competitor
Google is the clear leader when it comes to the Internet for Microsoft. We believe that in 2009-2010, Microsoft with its
Search Market. Google controls roughly 60% of the market Windows Mobile 6.5 and Windows 7 buzz will increase its
followed by Yahoo with close to 18%. Microsoft’s Live distance from Steve Jobs-less Apple. What will be interesting
Search accounts for about 13% of this market. Off late we is when Steve Jobs return to take over the reins at Cupertino
have seen a strong push by Microsoft to gain a bigger market after his ill-health forced hiatus.
share in the Internet Search Market as Microsoft understands
the revenue generating capabilities of the Internet and
recognizes the current IT trend/movement towards the cloud



                                                                           12
                                                                         Yahoo. Using a weighted average cost of capital of 8.55%
INVESTMENT POSITIVES                                                     and a continuing value growth rate of 1.0%, our model
                                                                         arrived at a target price of $29.71 for the share. The relative
   While Microsoft owns certain mortgage- and asset-                     P-E and PEG models forecasted a share price of 43.77 and
   backed fixed-income securities, its portfolio as of June              $23.49 respectively.
   30, 2008 does not contain direct exposure to subprime
   mortgages or structured vehicles that derive their value              The critical assumptions for our valuation models was a
   from subprime collateral. The majority of the mortgage-               market risk premium of 5% in addition to a revenue CAGR of
   backed securities is collateralized by prime residential              5% and we also assumed the percentage of normal cash to
   mortgages and carries a 100% principal and interest                   revenue to be 5%.
   guarantee, primarily from Federal National Mortgage
   Association, Federal Home Loan Mortgage Corporation, and              Based on our models we and our analysis of Microsoft’s
   Government     National      Mortgage     Association. The            current valuation, our recommendation is a HOLD.
   remainder of the mortgage position is collateralized by
   high quality international prime residential mortgage
   loans. This ensures that its fixed income investments will
                                                                         REFERENCES
   not be adversely affected by the capital markets                      The references section is more than just a list of sources used to
   meltdown, thus not affecting its bottom-line.                         create the report. We suggest using numbered endnotes for each
                                                                         citation. These numbers can then be referenced throughout the text
                                                                         where appropriate.
   The big news in the computing world is the new Microsoft
   PC OS, Windows 7. With the beta version having already
   been downloaded by 2.5 million users globally within a
                                                                         1- Microsoft Annual Report 2008.
   week of its release, we feel, Microsoft’s client segment              2 – www.TechCrunch.com (Erick Schonfeld - Feb 2009) -
   business will be impacted very positively in 2010. For a               http://www.techcrunch.com/2009/02/05/is-the-worst-
   long term investor, Microsoft is a great buy right now,               behind-us-online-ad-revenues-pick-up-in-the-fourth-quarter/
   hovering around its 52 week low value. The release of
   the new OS might also coincide with a upswing in the                  3 - Standard and Poors stock report – Microsoft
   economy, thus skewing its sales figures towards high                  Corporation.
   volumes.
                                                                         4 - http://www.forecasts.org/gdprealgrowth.htm
   There has been a definite shift in stance by Microsoft with
   respect to technology interoperability. This is reflected in          6 - http://blog.wired.com
   its recent announcement of new developer strategy of                  (http://blog.wired.com/gadgets/2008/09/showdown-new-
   allowing developers to get their apps on the new                      zu.html - September 2008 - Brian X. Chen)
   Windows Marketplace for Mobile. For starters MS will                  7-
   take a 30% cut and allow developers 70% of the revenue                http://checkout.google.com/trends/results?q=ipod,%20zune
   from the mobile applications. This is big change from
   historically Microsoft closing its doors to open source               8-(http://news.cnet.com January 16, 2009 by CNET News
   technology. We view this as a positive change because                 Staff) http://news.cnet.com/8301-10805_3-10144746-
                                                                         75.html
    i)    It will help improve Microsoft’s image and goodwill
          in the technology community.                                   9 – IntoMobile News by Will Park, 13th March 2009 -
                                                                         http://www.intomobile.com/2009/03/13/mobile-os-market-
    ii)   Help it avoid sticky antitrust issues.                         share-stats-confirm-rim-apple-leading-the-charge.html

                                                                         10 - http://forecasts.org/
VALUATION
We have conducted detailed analyses of the revenue drivers               11- X-rates.com - www.x-rates.com
for each segment of Microsoft using the expected rates of
growth. We assumed that Client and Servers & Tools
divisions dip due to the recessionary weather and retail and
corporate customers will be conservative about their                     IMPORTANT DISCLAIMER
investments especially with regard to application software
which though critical to certain functions, can survive                  This report was created by a student(s) enrolled in the
continued use for a period. We expect Microsoft Online                   Applied Securities Management (Henry Fund) program at
Business and Entertainment and Devices segments to                       the University of Iowa’s Tippie School of Management. The
witness less than strong revenue growth because of the                   intent of these reports is to provide potential employers and
decrease in spending across industries and the loss of                   other interested parties an example of the analytical skills,
revenue that Microsoft had valued after for the merger with              investment knowledge, and communication abilities of Henry

                                        Important disclosures appear on the last page of this report.
                                                                                                                    THE UNIVERSITY OF IOWA
Henry Fund Research                                                                                   Henry B. Tippie School of Management

Fund students. Henry Fund analysts are not registered                    From time to time, the University of Iowa, its faculty, staff,
investment advisors, brokers or officially licensed financial            students, or the Henry Fund may hold a financial interest in
professionals. The investment opinion contained in this                  the companies mentioned in this report.
report does not represent an offer or solicitation to buy or sell
any of the aforementioned securities. Unless otherwise
noted, facts and figures included in this report are from
publicly available sources. This report is not a complete
compilation of data, and its accuracy is not guaranteed.




                                                                    14
Microsoft Corporation Assumptions
                                                                       2004      2005      2006      2007      2008
                                           Marginal Tax Rate           33%       26%       31%       30%       26%    29%
                                                                                                                                 Marginal Tax Rate
                                             Inflation Rate             3.0%
                                            CV Growth Rate              1.0%                                                10
                                             Risk Free Rate             3.5%    30 year T-Bonds                             35
                                         Market Risk Premium            5.0%    1928-2008 Geometric Average Return          50
                                          Current Stock Price         #VALUE!   MSN Money Updateable Stock Quote
                                         Revenue Growth Rate            5.0%    MSFT Recent Quarterly Results               50
                                    Percentage of Cash(Competition)     5.0%                                                50
    Microsoft Corporation-Balance Sheet

                                                         2006           2007           2008          2009E          2010E          2011E          2012E          2013E            CV

       Cash & cash equivalents                          6,714,000      6,111,001     10,339,002     10,855,952     11,941,547     13,135,702     14,055,201     15,039,065     15,791,018
       Short-term investments                          27,447,000     17,300,000     13,323,000     13,989,150     15,388,065     16,926,872     18,111,753     19,379,575     20,348,554
Total cash, cash equivalents, & short-term
investments                                            34,161,000     23,411,001     23,662,002     24,845,102     27,329,612     30,062,573     32,166,954     34,418,640     36,139,572
Accounts receivable, net                                9,316,000     11,338,000     13,589,000     11,448,336     12,593,169     13,852,486     14,822,160     15,859,712     16,652,697
Inventories                                             1,478,000      1,127,000        985,000      1,014,550      1,044,987      1,076,336      1,108,626      1,141,885      1,176,142
Deferred income taxes                                   1,940,000      1,899,000      2,017,000      2,084,333      2,153,915      2,225,819      2,300,123      2,376,908      2,456,257
Other current assets                                    2,115,000      2,393,000      2,989,000      3,124,773      3,266,713      3,415,101      3,570,229      3,732,404      3,901,945
Total current assets                                   49,010,000     40,168,001     43,242,002     42,517,094     46,388,396     50,632,316     53,968,093     57,529,549     60,326,613
       Land                                               362,000        428,000        518,000        533,540        549,546        566,033        583,014        600,504        618,519
       Buildings & improvements                         2,228,000      3,170,000      4,302,000      4,431,060      4,563,992      4,700,912      4,841,939      4,987,197      5,136,813
       Leasehold improvments                              918,000      1,077,000      1,728,000      1,779,840      1,833,235      1,888,232      1,944,879      2,003,226      2,063,322
       Computer equipment & software                    2,682,000      3,458,000      4,475,000      4,609,250      4,747,528      4,889,953      5,036,652      5,187,751      5,343,384
       Furniture & equipment                            1,033,000      1,233,000      1,521,000      1,566,630      1,613,629      1,662,038      1,711,899      1,763,256      1,816,154
   Property & equipment, at cost                        7,223,000      9,366,000     12,544,000     12,920,320     13,307,930     13,707,167     14,118,383     14,541,934     14,978,192
   Less: accumulated depreciation                      (4,179,000)    (5,016,000)    (6,302,000)    (6,302,000)    (6,302,000)    (6,302,000)    (6,302,000)    (6,302,000)    (6,302,000)
Property & equipment, net                               3,044,000      4,350,000      6,242,000      6,618,320      7,005,930      7,405,167      7,816,383      8,239,934      8,676,192
Equity & other investments                              9,232,000     10,117,000      6,588,000      6,588,000      6,588,000      6,588,000      6,588,000      6,588,000      6,588,000
Goodwill                                                3,866,000      4,760,000     12,108,000     12,108,000     12,108,000     12,108,000     12,108,000     12,108,000     12,108,000
Intangible assets, net                                    539,000        878,000      1,973,000      1,141,812      1,255,993      1,381,593      1,478,304      1,581,785      1,660,875
Deferred income taxes                                   2,611,000      1,389,000        949,000        729,000        509,000        289,000         69,000       (151,000)      (371,000)
Other long-term assets                                  1,295,000      1,509,000      1,691,000      1,741,730      1,793,982      1,847,801      1,903,235      1,960,332      2,019,142
Total assets                                           69,597,000     63,171,001     72,793,002     71,443,956     75,649,301     80,251,877     83,931,015     87,856,601     91,007,822
       Accounts payable                                 2,909,000      3,247,000      4,034,000      4,155,020      4,279,671      4,408,061      4,540,303      4,676,512      4,816,807
       Accrued compensation                             1,938,000      2,325,000      2,934,000      3,287,741      3,386,374      3,487,965      3,592,604      3,700,382      3,811,393
       Income taxes                                     1,557,000      1,040,000      3,248,000      3,410,400      3,751,440      4,126,584      4,415,445      4,724,526      4,960,752
       Short-term unearned revenue                      9,138,000     10,779,000     13,397,000     12,743,153     14,017,468     15,419,215     16,498,560     17,653,459     18,536,132
       Securities lending payable                       3,117,000      2,741,000      2,614,000      1,784,888      1,784,888      1,784,888      1,784,888      1,784,888      1,784,888
       Other current liabilities                        3,783,000      3,622,000      3,659,000      3,308,543      3,639,397      4,003,336      4,283,570      4,583,420      4,812,591
Total current liabilities                              22,442,000     23,754,000     29,886,000     28,689,744     30,859,237     33,230,048     35,115,369     37,123,186     38,722,563
Long-term unearned revenue                              1,764,000      1,867,000      1,900,000      1,959,250      2,018,500      2,077,750      2,137,000      2,196,250      2,255,500

       Tax contingencies & other tax liabilities   -                   5,071,000      3,812,000      2,865,578      2,154,128      1,619,313      1,217,279        915,059        687,874
       Legal contingencies                         -                     778,000        530,000        114,794        712,217      1,149,667      1,471,664      1,711,865      1,895,768
       Product warranty                            -                     487,000        278,000        291,900        321,090        353,199        377,923        404,378        424,596
       Other long-term liabilities                 -                     117,000        101,000        106,050        116,655        128,321        137,303        146,914        154,260
Other long-term liabilities                             5,287,000      6,453,000      4,721,000      3,378,321      3,304,089      3,250,499      3,204,169      3,178,216      3,162,498
       Common stock & paid-in capital                  59,005,000     60,557,000     62,849,000     63,477,490     64,112,265     64,753,388     65,400,921     66,054,931     66,715,480
       Retained earnings (accumulated
       deficit)                                        (18,901,000)   (29,460,000)   (26,563,000)   (26,563,000)   (26,563,000)   (26,563,000)   (26,563,000)   (26,563,000)   (26,563,000)
Total stockholders' equity                              40,104,000     31,097,000     36,286,000     36,914,490     37,549,265     38,190,388     38,837,921     39,491,931     40,152,480
Total Liabilities + Stock Holder's Equity               69,597,000     63,171,000     72,793,000     71,443,956     75,649,301     80,251,877     83,931,015     87,856,601     91,007,822
 Microsoft Corporation -Common Sized Balance Sheet

                                                           2006         2007         2008          2009E        2010E         2011E         2012E        2013E         CV
Total Revenues                                           44,282,000   51,122,001   60,420,001    63,441,001   69,785,101    76,763,611    82,137,064   87,886,659   92,280,992
Revenue Percentage Growth/Decline                                            15%           18%           5%           10%           10%           7%           7%
Total cash, cash equivalents, & short-term investments      77%          46%          39%           39%          39%           39%           39%          39%         39%
Accounts receivable, net                                    21%          22%          22%           18%          18%           18%           18%          18%         18%
Deferred income taxes                                      4.38%        3.71%        3.34%         3.34%        3.34%         3.34%         3.34%        3.34%       3.34%
Other current assets                                       4.78%        4.68%        4.95%         4.54%        4.54%         4.54%         4.54%        4.54%       4.54%
Property & equipment, net                                    7%           9%          10%           10%          10%           10%           10%          10%         10%
Accumulated Depreciation as Percentage of PPE              -58%         -54%          -50%          -56%         -56%          -56%          -56%         -56%        -56%
Equity & other investments                                  10%         -35%           0%           -10%         -10%          -10%          -10%         -10%        -10%
Intangible assets, net                                       1%           2%           3%            2%           2%            2%            2%           2%          2%
Deferred income taxes                                    -1010000     -1222000      -440000       -220000      -220000       -220000       -220000      -220000     -220000
Accounts Payable(Accounts Payable/Inventory)               197%         288%         410%          410%         410%          410%          410%         410%        410%
Accrued Compensation                                        75%          65%          61%           66%          66%           66%           66%          66%         66%
Income Tax                                                   4%           2%           5%            5%           5%            5%            5%           5%          5%
Short Term unearned revnue                                  21%          21%          22%           20%          20%           20%           20%          20%         20%
Security lendings Payable                                   34%          27%          40%           27%          27%           27%           27%          27%         27%
Other Current Liability                                      9%           7%           6%            5%           5%            5%            5%           5%          5%
Tax Contingencies                                             -            -          -25%          -25%         -25%          -25%          -25%         -25%        -25%
Legal Contingencies                                           -         1.52%        0.88%         0.88%        0.88%         0.88%         0.88%        0.88%       0.88%
Product Warranty                                              -         0.95%        0.46%         0.46%        0.46%         0.46%         0.46%        0.46%       0.46%
Other Long Term Liabilities                                   -         0.23%        0.17%         0.17%        0.17%         0.17%         0.17%        0.17%       0.17%
Long-term unearned revenue                                 99000       103000        33000         59250        59250         59250         59250        59250       59250
    Microsoft Corporation-Income Statement

                                                        2006             2007              2008             2009E             2010E             2011E             2012E               2013E          CAGR
             Client                                   13,107,000       14,976,000        16,865,000        15,860,250        20,935,530        23,029,083        24,641,119           26,365,998
                                                                           14.26%            12.61%             -5.96%            32.00%            10.00%            7.00%                 7.00%    9.35%
             Server and Tools                          9,665,000       11,171,000        13,170,000        12,688,200        14,654,871        19,190,903        20,534,266           17,577,332
                                                                           15.58%            17.89%             -3.66%            15.50%            30.95%            7.00%               -14.40%    5.94%
             Online Services Business                  2,296,000        2,441,000         3,214,000         5,075,280         5,582,808         7,676,361         8,213,706            8,788,666
                                                                            6.32%            31.67%            57.91%             10.00%            37.50%            7.00%                 7.00%    22.29%
             Microsoft Business Division              14,465,000       16,402,000        18,932,000        19,032,300        20,935,530        23,029,083        24,641,119           26,365,998
                                                                           13.39%            15.42%              0.53%            10.00%            10.00%            7.00%                 7.00%    6.85%
             Entertainment and Devices Division        4,732,000        6,069,000         8,140,000        10,716,141         7,600,649         3,754,898         4,017,741            8,693,315
                                                                           28.25%            34.12%            31.65%            -29.07%           -50.60%            7.00%              116.37%     1.32%
              Other                                       17,000           63,000            99,000            68,829             75,712            83,283           89,113                95,351
       Revenue                                        44,282,000       51,122,001        60,420,001        63,441,001        69,785,101        76,763,611        82,137,064        87,886,658.71
       Revenue growth Rate                                                    15%               18%                 5%               10%               10%               7%                     7%   7.78%
              Cost of revenue                          7,650,000       10,693,000        11,598,000        11,572,038        12,729,242        14,002,166        14,982,318        16,031,080.25
              Research & development expense           6,584,000        7,121,000         8,164,000        10,019,964        11,021,960        12,124,156        12,972,847        13,880,946.34
              Sales & marketing expense                9,818,000       11,455,000        13,039,000        14,023,602        15,425,962        16,968,559        18,156,358        19,427,302.79
              General & administrative expense         3,758,000        3,329,000         5,127,000         6,029,482         6,632,430         7,295,673         7,806,370         8,352,816.23
       Total operating expenses                       27,810,000       32,598,000        37,928,000        41,645,086        45,809,595        50,390,554        53,917,893        57,692,145.61
Operating income (loss)                               16,472,000       18,524,001        22,492,001        21,795,915        23,975,506        26,373,057        28,219,171        30,194,513.11
Earnings (losses) on equity investees & other     -                -                 -                               -                 -                 -                -                   -
Investment income (loss)                          -                -                 -                 -                 -                 -                 -                 -
       Dividends & interest                       -                     1,319,000           888,000           765,247           659,464           568,303           489,744           422,043.93
       Net recognized gains on investments        -                       650,000           346,000           298,171           256,953           221,433           190,823           164,445.04
       Net gains (losses) on derivatives          -                      (358,000)          226,000           194,759           167,836           144,636           124,642           107,412.08
       Other investment income (losses)           -                       (34,000)         (138,000)         (118,924)         (102,484)          (88,317)          (76,109)          (65,587.91)
Investment income & other                              1,790,000        1,577,000         1,322,000         1,139,254           981,769           846,054           729,100           628,313.14
Income (loss) before income taxes                     18,262,000       20,101,001        23,814,001        22,935,169        24,957,276        27,219,111        28,948,271        30,822,826.25
   Current taxes provision (benefit) - total           5,454,000        5,704,000         5,620,000         6,136,887         6,677,953         7,283,165         7,745,846         8,247,430.42
   Deferred taxes provision (benefit) - total            209,000          332,000           513,000           560,182           609,571           664,816           707,050           752,834.84
Provision (benefit) for income taxes                   5,663,000        6,036,000         6,133,000         6,697,069         7,287,524         7,947,981         8,452,895         9,000,265.26
Net income (loss)                                     12,599,000       14,065,001        17,681,001        16,238,099        17,669,751        19,271,131        20,495,376        21,822,560.98

   Year end shares outstanding                        10,062,000        9,380,000         9,151,000         9,151,000         9,151,000         9,151,000         9,151,000         9,151,000.00
   Net earnings (loss) per share-basic                         1                1                 2                 2                 2                 2                 2                 2.38
Microsoft Corporation - Common Sized Income Statement

                                                                 2006       2007      2008     2009E     2010E     2011E     2012E     2013E        CV
             Client                                             29.60%    29.29%    27.91%    25.00%    30.00%    30.00%    30.00%    30.00%    30.00%
              Server and Tools                                  21.83%    21.85%    21.80%    20.00%    21.00%    25.00%    25.00%    20.00%    20.00%
              Online Services Business                           5.18%      4.77%     5.32%     8.00%     8.00%   10.00%    10.00%    10.00%    10.00%
              Microsoft Business Division                       32.67%    32.08%    31.33%    30.00%    30.00%    30.00%    30.00%    30.00%    30.00%
              Entertainment and Devices Division                10.69%    11.87%    13.47%    16.89%    10.89%      4.89%     4.89%     9.89%     9.89%
              Other                                              0.04%      0.12%     0.16%     0.11%     0.11%     0.11%     0.11%     0.11%     0.11%
       Revenue                                                  100.00%   100.00%   100.00%   100.00%   100.00%   100.00%   100.00%   100.00%   100.00%
              Cost of revenue                                   17.28%    20.92%     19.20%   18.24%    18.24%    18.24%    18.24%    18.24%    18.24%
              Research & development expense                    14.87%    13.93%     13.51%   15.79%    15.79%    15.79%    15.79%    15.79%    15.79%
              Sales & marketing expense                         22.17%    22.41%     21.58%   22.10%    22.10%    22.10%    22.10%    22.10%    22.10%
              General & administrative expense                   8.49%      6.51%     8.49%     9.50%     9.50%     9.50%     9.50%     9.50%     9.50%
       Total operating expenses                                 62.80%    63.77%     62.77%   65.64%    65.64%    65.64%    65.64%    65.64%    65.64%
Operating income (loss)                                         37.20%    36.23%     37.23%   34.36%    34.36%    34.36%    34.36%    34.36%    34.36%
Earnings (losses) on equity investees & other                    0.00%      0.00%     0.00%     0.00%     0.00%     0.00%     0.00%     0.00%     0.00%
Investment income (loss)                                         0.00%      0.00%     0.00%     0.00%     0.00%     0.00%     0.00%     0.00%     0.00%
       Dividends & interest                                      0.00%      2.58%     1.47%     1.21%     0.94%     0.74%     0.60%     0.48%     0.39%
       Net recognized gains on investments                       0.00%      1.27%     0.57%     0.47%     0.37%     0.29%     0.23%     0.19%     0.15%
       Net gains (losses) on derivatives                         0.00%     -0.70%     0.37%     0.31%     0.24%     0.19%     0.15%     0.12%     0.10%
       Other investment income (losses)                          0.00%     -0.07%    -0.23%    -0.19%    -0.15%    -0.12%    -0.09%    -0.07%    -0.06%
Investment income & other                                        0.00%      3.08%     2.19%     1.80%     1.41%     1.10%     0.89%     0.71%     0.59%
Investment income & other                                        0.00%      0.00%     0.00%     0.00%     0.00%     0.00%     0.00%     0.00%     0.00%
   Income (loss) before income taxes - United States            25.75%    25.24%     20.99%   19.25%    19.05%    18.88%    18.77%    18.68%    18.61%
   Income (loss) before income taxes - International            15.49%    14.08%     18.42%   16.90%    16.72%    16.58%    16.47%    16.39%    16.33%
Income (loss) before income taxes                               41.24%    39.32%     39.41%   36.15%    35.76%    35.46%    35.24%    35.07%    34.94%
       Current taxes provision (benefit)- U.S. federal          10.10%      8.98%     7.21%     7.50%     7.42%     7.36%     7.31%     7.28%     7.25%
       Current taxes provision (benefit) - U.S. state & local    0.23%      0.30%     0.42%     0.44%     0.44%     0.43%     0.43%     0.43%     0.43%
       Current taxes provision (benefit) - international         1.99%      1.87%     1.67%     1.73%     1.71%     1.70%     1.69%     1.68%     1.68%
   Current taxes provision (benefit) - total                    12.32%    11.16%      9.30%     9.67%     9.57%     9.49%     9.43%     9.38%     9.35%
   Deferred taxes provision (benefit) - total                    0.47%      0.65%     0.85%     0.88%     0.87%     0.87%     0.86%     0.86%     0.85%
Provision (benefit) for income taxes                            12.79%    11.81%     10.15%   10.56%    10.44%    10.35%    10.29%    10.24%    10.20%
Net income (loss)                                               28.45%    27.51%     29.26%   25.60%    25.32%    25.10%    24.95%    24.83%    24.74%
                       Microsoft Corporation

                                                                    2005            2006             2007             2008
              Client                                                    5.15%            7.87%           14.26%          12.61%
              Server and Tools                                         15.69%           -2.75%           15.58%          17.89%
              Online Services Business                                          -                         6.32%          31.67%
              Microsoft Business Division                               5.66%        1745.03%            13.39%          15.42%
              Entertainment and Devices Division                        0.00%   -                        28.25%          34.12%
              Other                                                     6.07%          -99.90%         270.59%           57.14%
       Revenue                                                          8.02%           11.29%           15.45%          18.19%
              Cost of revenue                                          -7.68%           23.39%           39.78%            8.46%
              Research & development expense                          -20.50%            6.47%            8.16%          14.65%
              Sales & marketing expense                                 4.43%           13.15%           16.67%          13.83%
              General & administrative expense                        -16.63%           -9.79%          -11.42%          54.01%
       Total operating expenses                                        -9.26%           10.24%           17.22%          16.35%
Operating income (loss)                                                61.18%           13.12%           12.46%          21.42%
Earnings (losses) on equity investees & other                           0.00%   -                -                -
Investment income (loss)                                                0.00%   -                -                -
       Dividends & interest                                             0.00%   -                -                      -32.68%
       Net recognized gains on investments                              0.00%   -                -                      -46.77%
       Net gains (losses) on derivatives                                0.00%   -                -                     -163.13%
       Other investment income (losses)                                 0.00%   -                -                      305.88%
Investment income & other                                                              -13.40%         -11.90%          -16.17%    -13.82%
Investment income & other                                               0.00%       #REF!      -                  -
   Income (loss) before income taxes - United States                    0.00%           16.30%          13.14%           -1.71%
   Income (loss) before income taxes - International                    0.00%            0.53%           4.97%           54.63%
Income (loss) before income taxes                                      84.06%            9.83%          10.07%           18.47%
       Current taxes provision (benefit)- U.S. federal          -                       31.46%           2.73%           -5.14%
       Current taxes provision (benefit) - U.S. state & local         -96.14%          -33.55%          52.48%           66.23%
       Current taxes provision (benefit) - international              -13.73%           -3.18%           8.50%            5.22%
   Current taxes provision (benefit) - total                          -10.65%           22.18%           4.58%           -1.47%
   Deferred taxes provision (benefit) - total                         -90.70%         -332.22%          58.85%           54.52%
Provision (benefit) for income taxes                                    8.59%           29.47%           6.59%            1.61%
Net income (loss)                                                     144.79%            2.82%          11.64%           25.71%
Microsoft Corporation-Cash Flow

                                                               2006           2007           2008          2009E             2010E              2011E                 2012E                 2013E                    CV

      Net income (loss)                                       12,599,000    14,065,001    17,681,001     16,238,099     17,669,751               19,271,131           20,495,376             21,822,561              22,829,954
      Depreciation, amort, & other noncash items                 903,000     1,440,000     2,056,000      2,078,000      3,012,000                3,055,000            5,600,000              5,800,000               8,700,000
      Stock-based compensation                                 1,715,000     1,550,000     1,479,000     (5,115,225)   (17,442,962)             (59,480,653)        (202,829,544)          (691,650,511)         (2,358,534,267)
      Net recognized (gains) losses on investments              (270,000)     (292,000)     (572,000)     1,978,302      6,746,027               23,004,012           78,443,880            267,494,315             912,157,945
      Stock option income tax benefits                     -              -             -             -              -              -                          -                     -                      -
      Excess tax benefits from stock-based payment arrangements (89,000)       (77,000)     (120,000)       415,028      1,415,250                4,826,016            16,456,758             56,117,689            191,361,807
      Deferred income taxes                                      219,000       421,000       935,000     (3,233,763)   (11,027,160)             (37,602,711)         (128,225,574)          (437,250,323)        (1,491,027,410)
      Unearned revenue                                        16,453,000    21,032,000    24,532,000    (84,845,640) (289,324,372)             (986,598,628)       (3,364,309,916)       (11,472,326,120)       (39,120,732,005)
      Recognition of unearned revenue                        (14,729,000) (19,382,000) (21,944,000)      75,894,861    258,802,137              882,517,540         3,009,392,500         10,262,054,638         34,993,695,708
      Accounts receivable                                     (2,071,000)   (1,764,000)   (1,569,000)     5,426,496     18,504,400               63,100,165           215,172,112            733,738,777          2,502,055,622
      Other current assets                                    (1,405,000)      232,000       153,000       (529,161)    (1,804,444)              (6,153,171)          (20,982,367)           (71,550,053)          (243,986,303)
      Other long-term assets                                     (49,000)     (435,000)      (98,000)       338,940      1,155,788                3,941,247            13,439,686             45,829,446            156,278,809
      Other current liabilities                                 (145,000)     (552,000)     (748,000)     2,587,010      8,821,728               30,082,169           102,580,459            349,800,258          1,192,821,928
      Other long-term liabilities                              1,273,000     1,558,000      (173,000)       598,333      2,040,319                6,957,507            23,725,160             80,903,001            275,879,938
Net cash flows from operating activities                      14,404,000    17,796,001    21,612,001      2,642,461      5,549,167                6,104,084             4,700,145              5,029,155              3,843,711

      Common stock issued                                      2,101,000      6,782,000     3,494,000         427,205           897,131             986,844               759,870                813,061                621,411
      Common stock repurchased                               (19,207,000)   (27,575,000) (12,533,000)      (1,532,387)       (3,218,013)         (3,539,815)           (2,725,657)            (2,916,453)            (2,229,004)
      Common stock cash dividends                             (3,545,000)    (3,805,000)   (4,015,000)       (490,907)       (1,030,904)         (1,133,995)             (873,176)              (934,298)              (714,071)
      Excess tax benefits from stock-based payment arrangements 89,000           77,000       120,000          14,672            30,812              33,893                26,097                 27,924                 21,342
      Other financing activities, net                      -                    (23,000) -             -                 -                 -                   -                     -                      -
Net cash flows from financing activities                     (20,562,000)   (24,544,000) (12,934,000)      (1,581,417)       (3,320,976)         (3,653,073)           (2,812,866)            (3,009,767)            (2,300,322)

      Additions to property & equipment                       (1,578,000)    (2,264,000)    (3,182,000)      (389,057)         (817,021)           (898,723)             (692,016)              (740,458)              (565,921)
      Acquisitions of companies, net of cash acquired           (649,000)    (1,150,000)    (8,053,000)      (984,626)       (2,067,714)         (2,274,486)           (1,751,354)            (1,873,949)            (1,432,232)
      Purchase of investments                                (51,117,000)   (36,308,000)   (20,954,000)    (2,562,008)       (5,380,217)         (5,918,238)           (4,557,043)            (4,876,037)            (3,726,685)
      Maturities of investments                                3,877,000      4,736,000      2,597,000        317,531           666,814             733,496               564,792                604,327                461,878
      Sales of investments                                    54,353,000     41,451,000     25,132,000      3,072,844         6,452,973           7,098,271             5,465,668              5,848,265              4,469,746
      Securities lending payable                               3,117,000       (376,000)      (127,000)       (15,528)          (32,609)            (35,870)              (27,620)               (29,553)               (22,587)
Net cash flows from investing activities                       8,003,000      6,089,000     (4,587,000)      (560,844)       (1,177,773)         (1,295,550)             (997,574)            (1,067,404)              (815,801)

      Effect of exch rates on cash & equivalents                 18,000         56,000        137,000          16,751            35,177             38,694                29,795                 31,880                 24,366
Net change in cash & equivalents                              1,863,000       (602,999)     4,228,001         516,950         1,085,595          1,194,155               919,499                983,864                751,953
Cash & equivalents, beginning of period                       4,851,000      6,714,000      6,111,001      10,339,002        10,855,952         11,941,547            13,135,702             14,055,201             15,039,065
Cash & equivalents, end of period                             6,714,000      6,111,001     10,339,002      10,855,952        11,941,547         13,135,702            14,055,201             15,039,065             15,791,018
                                                                                  2006             2007             2008             2009E            2010E            2011E            2012E            2013E              CV
                NOPLAT
                                                           EBITA               18,262,000.00    20,101,000.78    23,814,001.12    22,935,168.54    24,957,275.52    27,219,111.49    28,948,271.31    30,822,826.25    32,245,697.14
                                 Less: Taxes on EBITA
                                    Marginal Tax Rate                              31%              30%              26%              29%              29%              29%              29%              29%              29%
                                    Total Income Tax Provision                  5,663,000.00     6,036,000.00     6,133,000.00     6,697,069.21     7,287,524.45     7,947,980.55     8,452,895.22     9,000,265.26     9,415,743.57
                                 Plus: Change in Deferred Taxes                   239,000.00       (41,000.00)      118,000.00        67,333.48        69,581.27        71,904.10        74,304.48        76,784.98        79,348.30
                                 NOPLAT                                        12,838,000.00    14,024,000.78    17,799,001.12    16,305,432.81    17,739,332.34    19,343,035.04    20,569,680.56    21,899,345.97    22,909,301.87

INVESTED CAPITAL
                                 Operating Working Capital:
                                    Plus: Normal Cash                           2,214,100.00     2,556,100.04     3,021,000.06     3,172,050.06     3,489,255.06     3,838,180.57     4,106,853.21     4,394,332.94     4,614,049.58
                                    Plus: Receivables                           9,458,000.00    11,455,000.00    13,742,000.00    11,577,233.93    12,734,957.32    14,008,453.05    14,989,044.76    16,038,277.90    16,840,191.79
                                    Plus: Inventory                             1,478,000.00     1,127,000.00       985,000.00     1,014,550.00     1,044,986.50     1,076,336.10     1,108,626.18     1,141,884.96     1,176,141.51
                                    Plus: Other Current Assets                  2,115,000.00     2,393,000.00     2,989,000.00     3,124,772.90     3,266,713.17     3,415,100.97     3,570,229.16     3,732,403.92     3,901,945.34
                                    Less: Accounts Payable                      2,909,000.00     3,247,000.00     4,034,000.00     4,155,020.00     4,279,670.60     4,408,060.72     4,540,302.54     4,676,511.62     4,816,806.96
                                    Less: Accrued Expenses: Property Tax        1,938,000.00     2,325,000.00     2,934,000.00     3,287,741.28     3,386,373.52     3,487,964.73     3,592,603.67     3,700,381.78     3,811,393.23
                                    Less: Income Taxes Payable                  1,557,000.00     1,040,000.00     3,248,000.00     3,410,400.00     3,751,440.00     4,126,584.00     4,415,444.88     4,724,526.02     4,960,752.32
                                    Less: Short Term Unearned Revenue           9,138,000.00    10,779,000.00    13,397,000.00    12,743,152.79    14,017,468.07    15,419,214.88    16,498,559.92    17,653,459.11    18,536,132.07
                                 Net Operating Working Capital                   (276,900.00)      140,100.04    (2,875,999.94)   (4,707,707.19)   (4,899,040.14)   (5,103,753.64)   (5,272,157.70)   (5,447,978.81)   (5,592,756.36)
                                 Net Property, Plant and Equipment              3,044,000.00     4,350,000.00     6,242,000.00     6,618,320.00     7,005,929.60     7,405,167.49     7,816,382.51     8,239,933.99     8,676,192.01
                                 Other Operating Assets                         1,295,000.00     1,509,000.00     1,691,000.00     1,741,730.00     1,793,981.90     1,847,801.36     1,903,235.40     1,960,332.46     2,019,142.43
                                 Plus: Operating Lease                            737,000.00     1,102,000.00       810,000.00       760,000.00       710,000.00       660,000.00       610,000.00       580,000.00     1,132,000.00
                                 Less: Long Term Unearned Revenue               1,764,000.00     1,867,000.00     1,900,000.00     1,959,250.00     2,018,500.00     2,077,750.00     2,137,000.00     2,196,250.00     2,255,500.00
                                 Less: Other Long Term Liabilities              5,287,000.00     6,453,000.00     4,721,000.00     3,378,321.50     3,304,089.39     3,250,499.06     3,204,168.71     3,178,216.42     3,162,497.61
                                 NET INVESTED CAPITAL                          (2,251,900.00)   (1,218,899.96)     (753,999.94)     (925,228.69)     (711,718.02)     (519,033.86)     (283,708.50)      (42,178.79)      816,580.47

ROIC (NOPLAT/Invested Capital)
                                 NOPLAT                                        12,838,000.00    14,024,000.78    17,799,001.12    16,305,432.81    17,739,332.34    19,343,035.04    20,569,680.56    21,899,345.97    22,909,301.87
                                 Invested Capital (Beginning)                   3,219,000.00    (2,251,900.00)   (1,218,899.96)     (753,999.94)     (925,228.69)     (711,718.02)     (519,033.86)     (283,708.50)       (42,178.79)
                                 ROIC (NOPLAT/Invested Capital)                      398.82%         -622.76%        -1460.25%        -2162.52%        -1917.29%        -2717.79%        -3963.07%        -7718.96%       -54314.75%

FREE CASH FLOW
                                 NOPLAT                                        12,838,000.00    14,024,000.78    17,799,001.12    16,305,432.81    17,739,332.34    19,343,035.04    20,569,680.56    21,899,345.97    22,909,301.87
                                 Net Investment (change in invested capital)   (5,470,900.00)    1,033,000.04       464,900.02      (171,228.74)      213,510.67       192,684.17       235,325.36       241,529.71       858,759.25
                                 Free Cash Flow (NOPLAT - Net Investment)      18,308,900.00    12,991,000.74    17,334,101.10    16,476,661.55    17,525,821.67    19,150,350.87    20,334,355.20    21,657,816.26    22,050,542.62

ECONOMIC PROFIT
                                 Invested Capital (Beginning)                   3,219,000.00    (2,251,900.00)   (1,218,899.96)     (753,999.94)     (925,228.69)     (711,718.02)     (519,033.86)     (283,708.50)       (42,178.79)
                                 ROIC                                                398.82%         -622.76%        -1460.25%        -2162.52%        -1917.29%        -2717.79%        -3963.07%        -7718.96%       -54314.75%
                                 WACC                                                  8.55%            8.55%            8.55%            8.55%            8.55%            8.55%            8.55%            8.55%             8.55%
                                 EP (Invested Capital*(ROIC-WACC))             12,562,775.50    14,216,538.23    17,903,217.06    16,369,899.80    17,818,439.39    19,403,886.93    20,614,057.96    21,923,603.04    22,912,908.16

NON-OPERATING ASSETS
                                 Cash on Hand                                     6,714,000        6,111,001       10,339,002       10,855,952       11,941,547       13,135,702       14,055,201       15,039,065        15,791,018
                                 "Normal" Cash                                    2,214,100        2,556,100        3,021,000        3,172,050        3,489,255        3,838,181        4,106,853        4,394,333         4,614,050
                                 Excess Cash                                      4,499,900        3,554,901        7,318,002        7,683,902        8,452,292        9,297,521        9,948,348       10,644,732        11,176,969
                                 Investments                                      9,232,000       10,117,000        6,588,000        6,588,000        6,588,000        6,588,000        6,588,000        6,588,000         6,588,000
                                 Non-Operating Assets                            13,731,900       13,671,901       13,906,002       14,271,902       15,040,292       15,885,521       16,536,348       17,232,732        17,764,969
                                                Cash                 Revenues        Cash/Rev    Gross Margin        Net Income            EBITDA              Total Assets        Total Liabilities   PE Ratio         Market Cap      Employees Daily Price
Hewlett-Packard Co                      $10,153,000,000.00     $118,364,000,000.00      9%         $24.03        $8,329,000,000.00   $13,840,000,000.00   $113,331,000,000.00   $74,389,000,000.00      $8.55      $69,224,167,326.00    321000    $28.65
International Business Machines Corp.   $12,741,000,000.00     $103,630,000,000.00     12%         $44.06       $12,334,000,000.00   $22,495,000,000.00   $109,524,000,000.00   $96,058,000,000.00      $9.87     $120,066,742,203.00    438080    $89.49
McKesson Corp. (New)                     $1,362,000,000.00     $101,703,000,000.00      1%          $4.93         $990,000,000.00     $1,613,000,000.00    $24,603,000,000.00   $18,482,000,000.00     $13.37      $11,131,278,169.00     32900    $40.65
Microsoft Corporation                   $23,662,000,000.00      $60,420,000,000.00     39%         $80.80       $17,681,000,000.00   $25,214,000,000.00   $72,793,000,000.00    $36,507,000,000.00      $8.53     $143,315,880,974.00     91000    $16.12
Apple Inc                               $11,875,000,000.00      $32,479,000,000.00     37%         $34.31        $4,834,000,000.00    $6,288,000,000.00    $39,572,000,000.00   $18,542,000,000.00     $16.61      $81,191,781,842.00     32000    $91.17
Oracle Corp.                             $8,262,000,000.00      $22,430,000,000.00     37%         $77.79        $5,521,000,000.00    $9,431,000,000.00    $47,268,000,000.00   $24,243,000,000.00     $13.36      $75,490,808,112.00     84233    $14.96
Unisys Corp.                              $544,000,000.00        $5,233,200,000.00     10%         $21.53        ($130,100,000.00)     $575,800,000.00     $2,824,100,000.00     $4,278,400,000.00      ($1.11)      $147,955,032.00      29000     $0.40
CA Inc                                   $2,796,000,000.00       $4,277,000,000.00     65%         $85.57         $500,000,000.00     $1,062,000,000.00    $11,756,000,000.00    $8,047,000,000.00     $12.07       $8,452,350,828.00     13700    $16.29
Electronic Arts, Inc.                                            $3,665,000,000.00                 $50.75        ($454,000,000.00)    ($449,000,000.00)    $6,059,000,000.00    $1,720,000,000.00       ($4.46)    $5,126,591,137.00       9000    $15.93
Adobe Systems, Inc.                                              $3,579,889,000.00                 $89.87         $871,814,000.00     $1,182,485,000.00     $5,821,598,000.00    $1,411,244,000.00     $10.07       $8,552,261,256.00      7335    $16.32
Intuit Inc                                                       $3,070,974,000.00                 $81.50         $476,762,000.00      $966,738,000.00     $4,666,584,000.00     $2,593,630,000.00     $17.99       $7,513,382,594.00      8200    $23.39
Activision Blizzard, Inc.                                        $3,026,000,000.00                 $39.23        ($107,000,000.00)    ($141,000,000.00)   $14,701,000,000.00    $3,174,000,000.00          -       $13,163,655,910.00      7000    $10.07
LSI Corp                                                         $2,677,077,000.00                 $39.93        ($622,253,000.00)    ($497,710,000.00)    $3,344,194,000.00    $1,903,272,000.00       ($3.04)    $1,892,556,147.00       5488     $2.92
Autodesk Inc.                                                    $2,171,900,000.00                 $90.47         $356,200,000.00      $507,300,000.00     $2,208,900,000.00      $978,400,000.00       $7.36       $2,830,875,129.00      7300    $12.51
Equifax, Inc.                                                    $1,935,700,000.00                 $59.77         $272,800,000.00      $638,800,000.00     $3,260,300,000.00     $1,947,900,000.00     $10.37       $2,793,907,522.00      6500    $22.09
VMWARE, Inc.                                                     $1,881,027,000.00                 $83.83         $290,133,000.00      $427,101,000.00     $3,839,205,000.00     $1,769,138,000.00     $28.12       $1,911,896,016.00      6700    $21.09
                                                             Top 7 Average                 21%
MICROSOFT - DCF Model                                                                             WACC                                                   8.55% MRP                                  5.00%
                                                                                                  CV Growth Rate                                         1.00% Beta                                  1.01
                                                                                                  CV ROIC                                           -54314.75% Risk Free Rate                       3.50%
                                                                                                  Cost of Equity                                         8.55%

                            DCF Model                 1                2               3                4               5                5                               EP Model               1                2                 3               4               5                5
                                                   2009E             2010E           2011E            2012E           2013E             CV                                                    2009E            2010E            2011E            2012E           2013E             CV
                                FCF              16,476,661.55    17,525,821.67   19,150,350.87    20,334,355.20   21,657,816.26   303,440,048.49                           EP              12,562,775.50    14,216,538.23    17,903,217.06   16,369,899.80   17,818,439.39   303,482,227.27
                              PV(FCF)           15178868.31       14873690.25     14972256.27      14645732.39     14370289.78     201337077.4                            PV(EP)           11573261.63       12065191        13997213.72      11790350.34     11822804.96     201365063.7

                             NPV(FCF)          $275,377,914.41                                                                                                            PV(EP)           261,859,885.39
                        Non-Operating Assets        13,906,002                                                                                                     Non-Operating Assets        13,906,002
                                                                                                                                                                     Invested Capital            (754,000)
                                                                                                                                                                      PV(Operations)      $275,377,914.41
                              PV(Debt)          $16,881,000.00                                                                                                           PV(Debt)          $16,881,000.00
                             PV(Leases)             810,000.00                                                                                                          PV(Leases)             810,000.00
                              PV(ESOP)            ($262,660.84)                                                                                                          PV(ESOP)            ($262,660.84)
                         Shares Outstanding       9,151,000.00                                                                                                      Shares Outstanding       9,151,000.00
                        DCF Forecasted Price            $29.71                                                                                                            DCF EP                   $29.71
WACC:
Common Shares Outstanding     9151000
Current Price                  $15.27
Market Value of Equity      139735770   100.0%



Value of Capital (E)        139735770   100.0%

Risk Free Rate                          3.50%
Market Premium                          5.00%
Beta                                      1.01 http://finance.yahoo.com/q/ks?s=MSFT
Cost of Equity                           8.55%



WACC                                     8.55%
VALUATION OF OPTIONS GRANTED IN ESOP



Ticker Symbol                                         MSFT
Current Stock Price                                    19.76
Risk Free Rate                                        3.50% 30 Year T-Bond - Bloomberg
Current Dividend Yield                                1.50% Microsoft 10-K Report
Annualized St. Dev. of Stock Returns                 20.00%



                                       Average      Average        B-S            Value
Range of                    Number     Exercise   Remaining      Option       of Options
Outstanding Options       of Shares       Price    Life (yrs)     Price         Granted
Range 1                    364,000     $28.12           3.01 $    (0.72) $     (262,661)

Total                                                                     $     (262,661)
Ticker                  Company             2009 projected stock price    EPS 09E    P/E 09 Est 5 yr growth rate   PEG 09
YHOO                    Yahoo! Inc          $                    14.91   $    0.37     40.30       15.53%           2.59
BIDU                    Baidu, Inc          $                  177.64    $    5.50     32.30       34.25%           0.94
GOOG                    Google Inc          $                  439.81    $ 21.04       20.90       18.51%           1.13
ORCL                Oracle Corporation      $                    20.22   $    1.42     14.24       14.29%           1.00
AAPL                    Apple Inc.          $                  130.77    $    5.20     25.15       17.15%           1.47
RIMM              Research in Motion Ltd.   $                    69.64   $    3.86     18.04       22.64%           0.80

MSFT              Microsoft Corporation     $                   23.55    $   1.74    25.15         10.22%             1.32

         PEG 09                             $                   23.49
         PE 09                              $                   43.77