For Release 1:30 PDT

January 18, 1996

Redmond, Washington - January 18, 1996 - Microsoft Corporation today announced second-quarter revenues of $2.2 billion, a 48% increase over the same quarter a year ago.

Net income for the quarter equaled $575 million, up 54% over last year. Earnings per share totaled $.90, composed of $.87 in earnings from operations plus a one-time non-recurring net gain of $.03 per share from the disposition of long-term assets. Earnings from operations of $.87 represented a 45% increase compared to the $.60 earned during the same quarter last year.

"This has been another strong quarter for our company," observed Bob Herbold, Microsoft's chief operating officer. "These record results reflect the continuing adoption of the full range of our products by customers worldwide."

"Momentum continues to build across all markets for both the Microsoft® Windows® 95 and Microsoft Windows NT operating systems," noted Paul Maritz, group vice president, platforms group. "The migration to these 32-bit platforms means more robust performance from the operating systems, higher productivity from desktop applications, and the development of new, more powerful client-server business applications."

"The strength of our 32-bit operating systems and applications products across the board was reflected in our operating results," affirmed Mike Brown, chief financial officer. "Revenues from our BackOffice suite of products doubled over the same quarter of the prior year. OEM had another record quarter, with revenues of $672 million, up 75% over the same quarter of the prior year. Internationally, the enthusiasm for Microsoft Windows 95 carried into Japan, with the successful introduction of the Kanji version of the product."

In advance of the holiday season, the consumer division introduced many new products -- including the Encarta® 96 World Atlas, the Microsoft Fury³ game and the Microsoft SideWinder joystick -- and also reduced prices on its family of best-selling home software products. "We're pleased with how the combination of new products and new pricing fueled the expansion of our business this quarter," noted Patty Stonesifer, senior vice president, consumer division. "SideWinder is off to a roaring start. Microsoft Automap® travel series has secured its position as a leader in the fast-growing mapping category. And with the Encarta 96 World Atlas we have successfully extended our hugely popular Microsoft Encarta franchise."

In other important news from the quarter related to the Internet, Microsoft unveiled the details of its long-term strategy at Internet Strategy Day on December 7^th, outlining the company's wide-ranging commitment to embracing and extending the Internet by integrating our products with this rapidly emerging public network. In addition, Microsoft announced joint ventures with NBC to create a 24-hour news and information channel and an interactive online news service. This week, Microsoft also announced the acquisition of Vermeer Technologies, Inc., creators of FrontPage and a pioneer of visual, standards-based publishing tools for the World Wide Web.

Founded in 1975, Microsoft (NASDAQ "MSFT") is the worldwide leader in software for personal computers. The company offers a wide range of products and services for business and personal use, each designed with the mission of making it easier and more enjoyable for people to take advantage of the full power of personal computing every day.

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Microsoft Corporation Income Statements
(In millions, except earnings per share) (Unaudited)
		Three Months Ended December 31				Six Months Ended December 31
	1994		1995		1994		1995
Net revenues	$	1,482	$	2,195	$	2,729	$	4,211
Costs and expenses:
Cost of revenues		222		330		408		652
Research and development		199		313		377		615
Sales and marketing		479		690		874		1,311
General and administrative		62		76		113		139
Total costs and expenses		962		1,409		1,772		2,717
Operating income		520		786		957		1,494
Interest income - net		42		76		78		142
Other expenses		(5)		23		(7)		19
Income before income taxes		557		885		1,028		1,655
Provision for income taxes		184		310		339		581
Net income	$	373	$	575	$	689	$	1,074
Earnings per share	$	0.60	$	0.90	$	1.10	$	1.68
Weighted average shares outstanding		625		638		624		639

Microsoft Corporation Balance Sheets
(In millions)
	June 30, 1995		Dec. 31, 1995 (1)
Assets
Current assets:
Cash and short-term investments	$	4,750	$	6,017
Accounts receivable - net		581		771
Inventories		88		108
Other		201		207
Total current assets		5,620		7,103
Property, plant, and equipment - net		1,192		1,297
Other assets		398		706
Total assets	$	7,210	$	9,106
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	563	$	651
Accrued compensation		130		148
Income taxes payable		410		680
Unearned revenues		54		495
Other		190		267
Total current liabilities		1,347		2,241
Minority interest		125		125
Put warrants		405		560
Stockholders' equity:
Common stock and paid-in capital		2,005		2,285
Retained earnings		3,328		3,895
Total stockholders' equity		5,333		6,180
Total liabilities and stockholders' equity	$	7,210	$	9,106
(1) Unaudited.

Microsoft Corporation Channel and Product Group Percentages
(Unaudited)
	Three Months Ended December 31				Six Months Ended December 31
	1994		1995		1994		1995
Channels
United States and Canada	33	%	29	%	33	%	33	%
Europe	27		26		25		24
Other International	14		14		15		14
OEM	26		31		27		29
Total net revenues	100	%	100	%	100	%	100	%
Product Groups
Platforms	40	%	51	%	40	%	51	%
Applications & Content	60		49		60		49
Total net revenues	100	%	100	%	100	%	100	%

Revenues

Revenues were $2,195 million, an increase of 48% over the corresponding quarter of the prior year and 9% over the prior quarter.

• OEM Revenues

Revenues from licenses to OEMs (original equipment manufacturers, who pre-install Microsoft® products on PCs) increased from $548 million in the September quarter to a record $672 million in the December quarter. This represents a 75% increase over the comparative quarter of the prior year and a 23% increase over the sequential prior quarter.

• Windows 95 retail upgrade

Microsoft Windows® 95 retail upgrade revenues were $180 million in the December follow-through quarter. This compares to revenues of $260 million in the September launch quarter, reflecting post-launch finished goods patterns. Cumulative unearned Windows 95 revenues in the Company's balance sheet that will be recognized over the remaining life of the product increased from $130 million at the end of the September quarter to $200 million at the end of December.

• Desktop Applications and Other Products

Desktop applications revenues for the quarter were at an all-time record high and significantly exceeded $800 million. Unearned revenues on the balance sheet associated with upgrade coupons that shipped with 16-bit versions of Microsoft Office increased from $120 million last quarter to $230 million at the end of December.

Revenues from the Microsoft BackOffice family of products increased 100% over the corresponding quarter of the prior year, reflecting the growing popularity of Microsoft Windows NT.

Consumer revenues for the quarter increased 23% over the corresponding quarter of the prior year. This quarter Microsoft instituted a series of across-the-board price cuts to increase demand in the consumer marketplace. As a result, we experienced unit volume and market share gain in the kids, games, reference, and finance categories. Other new products from the quarter included a new entry in the games category - Microsoft Fury³ - and the Microsoft SideWinder joystick.

Developer products had an excellent quarter, reflecting the introduction of Microsoft Visual Basic 4.0.

Cost of Revenues

COGS decreased as a percentage of revenues from 16% in the September quarter to 15% in the December quarter, reflecting channel mix and the increasing popularity of CD-ROM media, which typically have lower cost of goods than floppy disks. If these trends continue, cost of revenues as a percentage of revenues in future quarters may be reduced.

Operating Expenses

Research and development expense for the quarter was $313 million. This was up 57% over the corresponding quarter of the prior year and represented 14.3% of revenues, growing faster than revenues.

Sales and marketing was $690 million for the quarter. This was up 44% over the comparable quarter of the prior year, and reflected increases primarily in variable product support services and marketing expenditures.

General and administrative expense was $76 million. This was up 23% over the comparable quarter of the prior year and represented 3.5% of revenues.

Other income and expense includes a $30 million one-time non-recurring net gain from dispositions and adjustments of long-term assets.

Balance Sheet

Cash exceeded $6 billion at December 31, 1995.

Accounts receivable declined from $1,052 million at September 30, 1995 to $771 million at December 31, 1995. Inventories were $108 million, down from $125 million last quarter. Property, plant, and equipment was up slightly, primarily reflecting expansion of the campus.

During the quarter, the Company repurchased 4 million shares of its own stock.

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Microsoft, Automap, BackOffice, Encarta, SideWinder, Windows and Windows NT are either registered trademarks or trademarks of Microsoft Corporation in the United States and/or other countries. FrontPage is a trademark, in the United States and/or other counties, of Vermeer Technologies Inc., a wholly owned subsidiary of Microsoft Corp.

Microsoft investor information is available on The Microsoft Network (go MSFT) and on the Microsoft home page (http://www.microsoft.com/msft).