PARKING FACILITY AND DRIVING DIRECTIONS

September 29, 2009

Dear Shareholder:

You are cordially invited to attend the Annual Meeting of Shareholders of Microsoft Corporation, which will be held at Meydenbauer Center, 11100 NE 6th Street, Bellevue, Washington 98004, on November 19, 2009 at 8:00 a.m. Doors open at 7:00 a.m. and a product fair will also open at that time. Driving directions to Meydenbauer Center can be found on the inside front cover of this document. Parking will be validated only for Meydenbauer Center garage. Please note that parking is limited, so plan ahead if you are driving to the meeting.

The attached Notice of Annual Meeting and Proxy Statement contain details of the business to be conducted at the Annual Meeting.

Whether or not you attend the Annual Meeting, it is important that your shares be represented and voted at the meeting. Therefore, I urge you to promptly vote and submit your proxy via the Internet, by phone, or by signing, dating, and returning the enclosed proxy card in the enclosed envelope. If you decide to attend the Annual Meeting, you will be able to vote in person, even if you have previously submitted your proxy.

We will provide a live webcast of the Annual Meeting from the Microsoft Investor Relations Web site at www.microsoft.com/msft. The transcript along with video and audio of the entire Annual Meeting of Shareholders will be available on the Investor Relations Web site after the meeting. We hope this will allow those of you who are unable to attend the meeting to hear Microsoft executives discuss the year’s results. In addition, we make available at our Investor Relations Web site free of charge a variety of information for investors. Our goal is to maintain the Investor Relations Web site as a portal through which investors can easily find or navigate to pertinent information about us.

On behalf of the Board of Directors, I would like to express our appreciation for your continued interest in the affairs of Microsoft. I look forward to greeting as many of our shareholders as possible.

Sincerely,

Steven A. Ballmer

Chief Executive Officer

The use of cameras at the Annual Meeting is prohibited and they will not be allowed into the meeting or any other related areas, except by credentialed media. We realize that many cellular phones have built-in digital cameras; while these phones may be brought into the venue, the camera function may not be used at any time.

MICROSOFT CORPORATION

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

November 19, 2009

To the Shareholders:

The Annual Meeting of the Shareholders of Microsoft Corporation will be held at Meydenbauer Center, 11100 NE 6th Street, Bellevue, Washington 98004, on November 19, 2009 at 8:00 a.m. for the following purposes:

Only shareholders of record at the close of business on September 4, 2009 are entitled to notice of, and to vote at, this meeting.

By order of the Board of Directors

Bradford L. Smith

Secretary

Redmond, Washington

September 29, 2009

IMPORTANT

Whether or not you expect to attend the Annual Meeting in person, we urge you to vote your shares at your earliest convenience. This will ensure the presence of a quorum at the meeting. Promptly voting your shares via the Internet, by telephone, or by signing, dating, and returning the enclosed proxy card will save us the expenses and extra work of additional solicitation. If you wish to vote by mail, we have enclosed an addressed envelope for which no postage is required if mailed in the United States. Submitting your proxy now will not prevent you from voting your shares at the meeting if you desire to do so, as your proxy is revocable at your option.

Important Notice Regarding the Availability of Proxy Materials for the Shareholder Meeting to be Held on November 19, 2009. Our Proxy Statement and Annual Report to Shareholders are available at www.microsoft.com/msft/annualreports.

Proxy Statement Table of Contents

MICROSOFT CORPORATION

ONE MICROSOFT WAY

REDMOND, WASHINGTON 98052

PROXY STATEMENT FOR ANNUAL MEETING OF SHAREHOLDERS

TO BE HELD NOVEMBER 19, 2009

This Proxy Statement was first mailed to shareholders on or about October 5, 2009. It is furnished in connection with the solicitation of proxies by the Board of Directors of Microsoft Corporation, to be voted at the Annual Meeting of Shareholders for the purposes set forth in the accompanying Notice of Annual Meeting of Shareholders. The Annual Meeting of Shareholders will be held at 8:00 a.m. on November 19, 2009 at Meydenbauer Center, 11100 NE 6th Street, Bellevue, Washington 98004. Shareholders who execute proxies retain the right to revoke them at any time before the shares are voted by proxy at the meeting. A shareholder may revoke a proxy by delivering a signed statement to our Corporate Secretary at or prior to the Annual Meeting or by timely executing and delivering, by Internet, telephone, mail, or in person at the Annual Meeting, another proxy dated as of a later date. Microsoft will pay the cost of solicitation of proxies.

Shareholders of record at the close of business on September 4, 2009 will be entitled to vote at the meeting on the basis of one vote for each share held. On September 4, 2009, there were 8,928,107,654 shares of common stock outstanding, held of record by 142,195 shareholders.

PROPOSAL 1:

ELECTION OF DIRECTORS AND MANAGEMENT INFORMATION

The Company’s Board of Directors currently consists of ten members. James I. Cash, Jr. is retiring from the Board effective as of the date of the Annual Meeting. In connection with Dr. Cash’s retirement, the Board has authorized a reduction in the size of the Board to nine members effective as of November 19, 2009, as permitted by the Company’s Bylaws.

Nine directors are to be elected at the Annual Meeting to hold office until the next annual meeting of shareholders, and until their respective successors are elected and qualified. If, for any reason, the directors are not elected at an annual meeting, they may be elected at a special meeting of shareholders called for that purpose in the manner provided by the Bylaws. The accompanying proxy will be voted in favor of the nominees named below to serve as directors unless the shareholder indicates to the contrary on the proxy. All of the nominees are current directors.

The Board of Directors expects that each of the nominees will be available for election, but if any of them is unable to serve at the time the election occurs, the proxy will be voted for the election of another nominee to be designated by the Board of Directors.

MAJORITY VOTE STANDARD FOR DIRECTOR ELECTIONS

Microsoft’s Bylaws require that in an uncontested election each director will be elected by a vote of the majority of the votes cast. A majority of votes cast means that the number of shares cast “for” a director’s election exceeds the number of votes cast “against” that director. We will not treat as cast any shares (a) whose ballot is marked as withheld, (b) that are otherwise present at the meeting but for which there is an abstention, or (c) to which a shareholder gives no authority or direction. In a contested election, the directors will be elected by a plurality of the votes cast, meaning the directors receiving the largest number of “for” votes are elected to the open positions.

As provided in Section 2.2 of our Bylaws, a contested election is one in which:

In an uncontested election, a nominee who does not receive a majority vote will not be elected. Except as explained in the next paragraph, an incumbent director who is not elected because he or she does not receive a majority vote will continue to serve as a holdover director until the earliest of: (a) 90 days after the date on which an inspector determines the voting results as to that director; (b) the date on which the Board of Directors appoints an individual to fill the office held by that director; or (c) the date of the director’s resignation.

The Board of Directors may fill any vacancy resulting from the non-election of a director as provided in our Bylaws. The Governance and Nominating Committee will consider promptly whether to fill the office of a nominee who fails to receive a majority vote and make a recommendation to the Board of Directors about filling the office. The Board of Directors will act on the Governance and Nominating Committee’s recommendation and within 90 days after the certification of the shareholder vote will disclose publicly its decision. Except as provided in the next sentence, no director who fails to receive a majority vote for election will participate in the Governance and Nominating Committee recommendation or Board decision about filling his or her office. If no director receives a majority vote in an uncontested election, then the incumbent directors (a) will nominate a slate of directors and hold a special meeting for the purpose of electing those nominees as soon as practicable, and (b) may in the interim fill one or more offices with the same director(s) who will continue in office until their successors are elected.

For additional information, the complete Bylaws are available on our Web site at www.microsoft.com/about/corporategovernance.

Our Board recommends a vote FOR the election to the Board of each of the following nominees:

NOMINEES

William H. Gates III, 53, a co-founder of Microsoft, has served as Chairman since our incorporation in 1981. Mr. Gates retired as an employee effective July 1, 2008, but continues to serve as an advisor on key development projects. Mr. Gates served as Chief Software Architect from January 2000 until June 2006, when he announced his two-year plan for transition out of a day-to-day full-time employee role. Mr. Gates served as our Chief Executive Officer from 1981 until January 2000, when he resigned as Chief Executive Officer and assumed the position of Chief Software Architect. Mr. Gates is also a director of Berkshire Hathaway Inc.

Steven A. Ballmer, 53, has served as a director since 2000. Mr. Ballmer has headed several Microsoft divisions during the past 29 years, including operations, operating systems development, and sales and support. In July 1998, he was promoted to President, a role that gave him day-to-day responsibility for running Microsoft. He was named Microsoft’s Chief Executive Officer in January 2000, assuming full management responsibility for the Company.

Dina Dublon, 56, has served as a director since 2005. From December 1998 until her retirement in September 2004, Ms. Dublon served as Executive Vice President and Chief Financial Officer of JPMorgan Chase. Ms. Dublon joined Chemical Bank’s capital markets group as a trainee on the trading floor in 1981. Prior to joining Chemical Bank, Ms. Dublon worked for the Harvard Business School and Bank Hapoalim in Israel. Ms. Dublon is also a member of the board of directors of Accenture Ltd. and PepsiCo, Inc.

Raymond V. Gilmartin, 68, has served as a director since 2001. Mr. Gilmartin served as the Chairman of the Board, President, and Chief Executive Officer of Merck & Co., Inc. from 1994 to May 2005, when he relinquished those titles as part of the succession planning process leading up to his planned retirement in April 2006. In the interim, he served as Special Advisor to the Executive Committee of the Merck board of directors. Before joining Merck, Mr. Gilmartin was Chairman, President, and Chief Executive Officer of Becton Dickinson and Company. He joined that company in 1976 as Vice President, Corporate Planning, taking on positions of increasing responsibility over the next 18 years. In July 2006, Mr. Gilmartin joined the faculty of Harvard Business School as Professor of Management Practice teaching in the MBA program. Mr. Gilmartin also serves on the board of directors of General Mills, Inc.

Reed Hastings, 48, has served as a director since 2007. Mr. Hastings co-founded Netflix, Inc., in 1997 and has served as Chairman of the Board from its inception. Mr. Hastings was named Chief Executive Officer of Netflix, Inc., in September 1998. Prior to Netflix, from 1991 to 1997 Mr. Hastings was founder, Chief Executive Officer, and Chairman of Pure Software.

Maria Klawe, Ph.D., 58, has served as a director since March 2009. Since 2006, Dr. Klawe has been president of Harvey Mudd College, a private liberal arts college in Claremont, California that focuses on engineering, science, and mathematics. Dr. Klawe served as dean of engineering and a professor of computer science at Princeton University from 2003 to 2006, and held several positions at the University of British Columbia from 1988 to 2002 including dean of science, vice president of student and academic services, and head of the Department of Computer Science.

David F. Marquardt, 60, has served as a director since 1981. Mr. Marquardt is a founding general partner of August Capital, a venture capital firm formed in 1995, and has been a general partner of various Technology Venture Investors entities, which are private venture capital limited partnerships, since August 1980. He is a director of Seagate Technology, Inc., and various privately-held companies.

Charles H. Noski, 57, has served as a director since 2003. From 2003 to 2005, Mr. Noski served as Corporate Vice President and Chief Financial Officer of Northrop Grumman Corporation and served as a director from 2002 to 2005. Mr. Noski joined AT&T in 1999 as Senior Executive Vice President and Chief Financial Officer and was named Vice Chairman of AT&T’s board of directors in 2002. Mr. Noski retired from AT&T upon the completion of its restructuring in November 2002. Prior to joining AT&T, Mr. Noski was President, Chief Operating Officer, and a member of the board of directors of Hughes Electronics Corporation, a publicly traded subsidiary of General Motors Corporation in the satellite and wireless communications business. He is a member of the American Institute of Certified Public Accountants and Financial Executives International, and is a past member of the Financial Accounting Standards Advisory Council of the Financial Accounting Standards Board and the Standing Advisory Group of the Public Company Accounting Oversight Board. Mr. Noski is also a director of Air Products and Chemicals, Inc., Automatic Data Processing, Inc., and Morgan Stanley.

Helmut Panke, Ph.D., 63, has served as a director since 2003. Dr. Panke served as Chairman of the Board of Management of BMW Bayerische Motoren Werke AG from 2002 through 2006. From 1999 to 2002, he served as Member of the Board of Management for Finance. From 1996 to 1999, Dr. Panke was Member of the Board of Management for Human Resources and Information Technology. In his role as Chairman and Chief Executive Officer of BMW (US) Holding Corp. from 1993 to 1996, he was responsible for the company’s North American activities. He joined BMW in 1982. Dr. Panke is also a director of UBS AG and Singapore Airlines Limited, and is a member of the supervisory board of Bayer AG.

RETIRING DIRECTOR

James I. Cash, Jr., Ph.D., 61, has served as a director since 2001. Dr. Cash is the James E. Robison Professor & Senior Associate Dean, Emeritus, at Harvard Business School where he also served as Chairman of HBS Publishing. Dr. Cash is also a member of the board of directors of The Chubb Corporation, General Electric Company, and Wal-Mart Stores, Inc.

PROCEDURES FOR NOMINATION OF DIRECTORS

The Governance and Nominating Committee annually reviews with the Board of Directors the applicable skills and characteristics required of Board nominees, considering current Board composition and Company circumstances. In making its recommendations to the Board, the Governance and Nominating Committee considers, among other things, the qualifications of individual director candidates. The Committee retains any search firms and approves payment of their fees. The Governance and Nominating Committee works with the Board to determine the appropriate characteristics, skills, and experiences for the Board as a whole and its individual members with the objective of having a Board with diverse backgrounds and experience in business, education, and public service. Characteristics expected of all directors include independence, integrity, high personal and professional ethics, sound business judgment, and the ability and willingness to commit sufficient time to the Board. In evaluating the suitability of individual Board members, the Board takes into account many factors, including general understanding of marketing, finance, and other disciplines relevant to the success of a large publicly traded company in today’s business environment; understanding of our business and technology; educational and professional background; personal accomplishment; and geographic, gender, age, and ethnic diversity. The Board evaluates each individual in the context of the Board as a whole, with the objective of recommending a group that can best perpetuate the success of our business and represent shareholder interests through the exercise of sound judgment using its diversity of experience. In determining whether to recommend a director for re-election, the Governance and Nominating Committee also considers the director’s past attendance at meetings, participation in and contributions to the activities of the Board, and the results of the most recent Board self-evaluation.

Shareholders have previously elected each of the directors submitted at the 2009 annual meeting, except Dr. Klawe. As part of the recruitment process leading to Dr. Klawe’s election by the Board, the Governance and Nominating Committee requested that members of the Microsoft Research division leadership recommend potential candidates from academia and Dr. Klawe was selected from those recommendations.

The Governance and Nominating Committee will consider shareholder recommendations for candidates for the Board, using the same criteria described in the preceding paragraph. The name of any recommended candidate for director, together with a brief biographical sketch, a document indicating the candidate’s willingness to serve, if elected, and evidence of the nominating shareholder’s ownership of Company stock should be sent to the attention of MSC 123/9999, Corporate Secretary, Microsoft Corporation, One Microsoft Way, Redmond, WA 98052-6399. If you wish to formally nominate a candidate you must follow the procedures described in Sections 1.3, 1.13, and 1.14 of our Bylaws.

DIRECTOR INDEPENDENCE

Our Corporate Governance Guidelines provide that a substantial majority of our directors will be independent. Our Board has adopted director independence guidelines to assist in determining each director’s independence. These guidelines are available on our Web site at www.microsoft.com/about/independenceguidelines. The guidelines include, and either meet or exceed, the independence requirements of the NASDAQ Stock Market (“NASDAQ”) on which the Company’s shares are traded. The guidelines identify categories of relationships that the Board has determined would not affect a director’s independence, and therefore are not considered by the Board in determining director independence.

Under the director independence guidelines, the Board must affirmatively determine that a director has no relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. To facilitate this determination, annually each director completes a questionnaire that provides information about relationships that might affect the determination of independence. Management provides the Governance and Nominating Committee and Board with relevant facts and circumstances of any relationship bearing on independence of a director or nominee that is outside the categories permitted under the director independence guidelines.

Based on the review and recommendation by the Governance and Nominating Committee, the Board of Directors analyzed the independence of each director and determined that Messrs. Cash, Gilmartin, Hastings, Marquardt, Noski, and Panke, and Mme. Dublon and Klawe meet the standards of independence under our Corporate Governance Guidelines, director independence guidelines, and applicable NASDAQ listing standards, including that each member is free of any relationship that would interfere with his or her individual exercise of independent judgment. In making this determination, the Board considered that certain Board members have in the past and may in the future invest in investment funds of which Mr. Marquardt is a general partner or that are managed directly or indirectly by the firm of which Mr. Marquardt is a partner.

CORPORATE GOVERNANCE PRINCIPLES AND PRACTICES

Microsoft’s Board of Directors is committed to maintaining strong corporate governance principles and practices. The Board periodically reviews evolving legal, regulatory, and best practice developments to determine those that will best serve the interests of our shareholders, and adopts policies designed to strengthen our corporate governance framework. Microsoft’s Corporate Governance Guidelines were most recently updated in July 2009. Highlights of Microsoft’s corporate governance framework include:

Board Independence

CEO, Chairman, and Lead Independent Director

Board Committees

Shareholder Authority

Compensation

Stock Ownership

Political Contributions

MICROSOFT CORPORATE GOVERNANCE WEBSITE

If you would like additional information about Microsoft’s corporate governance practices, you may view the following documents at www.microsoft.com/about/corporategovernance:

We will provide any of the foregoing information without charge upon written request to MSC 123/9999, Corporate Secretary, Microsoft Corporation, One Microsoft Way, Redmond, WA 98052-6399.

CORPORATE GOVERNANCE GUIDELINES AND COMMITTEE CHARTERS

The Corporate Governance Guidelines and the charters of the five standing committees of the Board of Directors describe our governance framework. The Corporate Governance Guidelines and charters are intended to ensure that our Board has the necessary authority and practices in place to review and evaluate our business operations and to make decisions that are independent of management. The Corporate Governance Guidelines also are intended to align the interests of directors and management with those of our shareholders. The Corporate Governance Guidelines establish the practices the Board follows with respect to board composition and selection, board meetings and involvement of senior management, chief executive officer performance evaluation, succession planning, board committees, and director compensation. The Board annually conducts a self-evaluation to assess adherence to the Corporate Governance Guidelines and identify opportunities to improve Board performance.

The Corporate Governance Guidelines and committee charters are reviewed periodically and updated as necessary to reflect changes in regulatory requirements and evolving oversight practices. The Corporate Governance Guidelines comply with requirements contained in the NASDAQ listing standards and otherwise enhance our corporate governance policies.

MEETINGS AND MEETING ATTENDANCE

Our Board of Directors holds regularly scheduled quarterly meetings. Typically, committee meetings occur the day before the Board meeting. During one quarter each year, the committee and Board meetings occur on a single day so that the evening and following day can be devoted to presentations and discussions with senior management about Microsoft’s long-term strategy as part of the Board’s annual retreat. In addition to the quarterly meetings, typically there are two other regularly scheduled meetings and several special meetings each year. At each quarterly Board meeting time is set aside for the independent directors to meet without management present. Our Board met nine times during fiscal year 2009.

All incumbent directors attended 75% or more of the aggregate of all Board meetings and meetings of the committees on which they served during the last fiscal year. Directors are encouraged to attend the Annual Meeting of Shareholders. Five directors attended the 2008 Annual Meeting.

CEO, CHAIRMAN AND LEAD INDEPENDENT DIRECTOR

Since 2000, the roles of chairman and chief executive officer have been held separately. Mr. Gates serves as Chairman and Mr. Ballmer serves as Chief Executive Officer. The Chair of our Governance and Nominating Committee serves as the Lead Independent Director. Mr. Gilmartin has served as Lead Independent Director since 2004. The Lead Independent Director is responsible for leading the independent directors in conducting a review of the chief executive officer’s performance. Additonally, the Lead Independent Director coordinates the activities of the independent directors, coordinates with the chief executive officer to set the agenda for Board meetings, and chairs executive sessions of the independent directors. See “Shareholder Communication with Directors” on page 13 for information about how to communicate with the Lead Independent Director.

BOARD COMMITTEES

Our Board has five standing committees: an Audit Committee, a Compensation Committee, a Governance and Nominating Committee, a Finance Committee, and an Antitrust Compliance Committee. Each committee has a written charter. The table below provides current membership and fiscal year 2009 meeting information for each of the Board committees. Committee memberships changed during the fiscal year. Jon A. Shirley retired from the Board as of the Company’s Annual Meeting on November 19, 2008. Following the election of directors at the Company’s Annual Meeting on November 19, 2008, Mr. Marquardt stepped down from and Dr. Cash was appointed to the Governance and Nominating Committee and Dr. Cash stepped down from and Mr. Hastings was appointed to the Compensation Committee.

Below is a description of each standing committee of our Board of Directors. Each committee has authority to engage legal counsel or other advisors or consultants as it deems appropriate to carry out its responsibilities.

Audit Committee.    The Audit Committee assists the Board of Directors in its oversight of the quality and integrity of our accounting, auditing, and reporting practices. The Committee’s role includes:

The Audit Committee is responsible for the appointment, compensation, retention, and oversight of the independent auditor engaged to prepare or issue audit reports on our financial statements and internal control over financial reporting. The Committee relies on the expertise and knowledge of management, the internal auditor, and the independent auditor in carrying out its oversight responsibilities. The Audit Committee Responsibilities Calendar accompanying the Audit Committee Charter describes the Committee’s specific responsibilities. The Board of Directors has determined that each Committee member has sufficient knowledge in financial and auditing matters to serve on the Committee. In addition, the Board has determined that Dr. Cash, Ms. Dublon, and Mr. Noski are “audit committee financial experts” as defined by Securities and Exchange Commission (“SEC”) rules.

Compensation Committee.    The primary responsibilities of the Compensation Committee are to:

The Compensation Committee periodically reviews the compensation paid to non-employee directors, and makes recommendations to the Board for any adjustments. The Committee may delegate to the senior human resources officer the authority to make equity compensation grants to employees who are not executive officers.

Our senior vice president, human resources and corporate vice president of compensation, benefits, and performance management support the Compensation Committee in its work. Dan Marcus, Managing Principal, Semler Brossy Consulting Group LLC, advises the Committee on marketplace trends in executive compensation, management proposals for compensation programs, and executive officer compensation decisions. Mr. Marcus also evaluates compensation for the next levels of senior management and equity compensation programs generally. He also has consulted with the Committee about its recommendations to the Board on director compensation. Mr. Marcus is directly accountable to the Committee. To maintain the independence of the firm’s advice, Semler Brossy does not provide any other services for Microsoft. The Committee has adopted Compensation Consultant Independence Standards which can be viewed at www.microsoft.com/about/compensationconsultant. This policy requires that the Committee annually assess the independence of its compensation consultant. A consultant satisfying the following requirements will be considered independent. The consultant and the organization employing the consultant:

The Compensation Committee must approve any other services performed by the consultant. In performing the annual assessment of the consultant’s independence, the Committee considers the nature and amount of work performed for the Committee during the year, the nature of any unrelated services performed for the Company, and the amount of fees paid for those services in relation to the firm’s total revenues. The consultant annually prepares for the Committee an independence letter providing appropriate assurances and confirmation of the consultant’s independent status pursuant to the policy. The Committee believes that Mr. Marcus has been independent during his service for the Committee.

The Compensation Committee Charter describes the specific responsibilities and functions of the Compensation Committee. See the Compensation Discussion and Analysis beginning on page 15 for more information about the Committee’s work.

Governance and Nominating Committee.    The principal responsibilities of the Governance and Nominating Committee are to:

In addition, the Chair of the Governance and Nominating Committee acts as the Lead Independent Director and is responsible for leading the Board of Directors’ annual performance review of our chief executive officer. The Committee

regularly reviews the charters of Board committees and, after consultation with the respective committee chairs, makes recommendations, if necessary, about changes to the charters. The Governance and Nominating Committee Charter describes the specific responsibilities and functions of the Committee.

Finance Committee.    The Finance Committee is responsible for overseeing and making recommendations to the Board about our financial affairs and policies including:

From time to time, the Board may delegate to the Finance Committee decisions with respect to specific transactions. The Finance Committee Charter describes the specific responsibilities and functions of the Finance Committee.

Antitrust Compliance Committee.    The Antitrust Compliance Committee oversees the performance of the compliance officer, who is charged under the Final Judgment entered by the District Court for the District of Columbia in State of New York et al. v. Microsoft Corp., No. 98-1232 (the “Final Judgment”) with developing and supervising Microsoft’s internal programs and processes to ensure compliance with antitrust laws and the Final Judgment. The compliance officer reports directly to the Committee and our chief executive officer, and may be removed by our chief executive officer only with the concurrence of the Committee. The Antitrust Compliance Committee Responsibilities Checklist attached to the Antitrust Compliance Committee Charter describes the Committee’s specific responsibilities. The compliance officer is required to maintain a record of complaints received and actions taken and to report credible evidence of violations of the Final Judgment to the Final Judgment plaintiffs. The Committee receives regular reports from the compliance officer about existing and planned internal compliance programs and processes, complaints received and our response to them, and violations reported to the Final Judgment plaintiffs. In addition, the Committee receives reports from the general counsel and from other members of management about compliance with the Final Judgment and about other issues that may arise concerning our compliance with antitrust and competition laws. The Committee can authorize further inquiries into matters reported to it for the purpose of ensuring the adequacy of our processes and programs for fulfilling its obligations under the Final Judgment and antitrust laws. The Committee provides guidance to the compliance officer and to management and reports regularly to the Board of Directors.

DIRECTOR COMPENSATION

During fiscal year 2009, Mr. Ballmer received no compensation for serving as a director, except that he, like all directors, is eligible to be reimbursed for expenses incurred in attending Board and committee meetings. Each director, other than Mr. Ballmer, is entitled to receive compensation for serving on our Board of Directors and committees of the Board as follows:

The Board retainer is paid quarterly in arrears. Quarterly periods are measured beginning on the date of the annual shareholders meeting and each three months after that date. At the end of each quarterly period each director is paid 25% of the total annual retainer, provided he or she continues to serve as a director as of the last day of the performance period.

Under our Deferred Compensation Plan for Non-Employee Directors, non-employee directors may elect to defer and convert to equity all or part of their annual cash retainer, and to defer receipt of all or part of their annual equity re-

tainer. Amounts deferred by non-employee directors are maintained in bookkeeping accounts that are deemed invested in Microsoft common stock, and dividends paid on our common stock are deemed to be invested in our common stock. Accounts in the Plan are distributed in shares of Microsoft common stock, with payments either in installments beginning on separation from Board service or in a lump amount paid no later than the fifth anniversary after separation from Board service.

To align the interests of our directors and shareholders, our Board believes that directors should have a significant financial stake in Microsoft. Under the Corporate Governance Guidelines, each director should own Microsoft shares equal in value to a minimum of three times the base annual retainer payable to a director. Directors should achieve this ownership level by the later of February 28, 2011 or five years after the director has become a Board member. Stock deferred under the Deferred Compensation Plan for Non-Employee Directors counts towards the minimum ownership requirement.

Mr. Ballmer, an employee director, is excluded from the following table because we describe his compensation under “Chief Executive Officer” on pages 20 and 21 and under “Components of Compensation and Fiscal Year 2009 Awards” on pages 22 and 23.

Outstanding stock options held by Dr. Cash and Messrs. Gilmartin and Marquardt as of June 30, 2009 are described in the footnotes to the table regarding beneficial ownership on page 14.

In addition, to assist directors in developing an in-depth understanding of our businesses, products, and services, and to facilitate the efficient operation of the Board through the use of computing devices that feature Microsoft software, if requested directors are provided with a personal computer, printer, and associated peripherals for their use while they serve on the Board. Each year, directors also may receive an additional personal computing device and a game or media player device, each with associated peripherals, and Microsoft software and subscription services with an aggregate value of up to $10,000.

SHAREHOLDER COMMUNICATION WITH DIRECTORS

Shareholders may contact an individual director, the Lead Independent Director, the Board as a group, or a specified Board committee or group, including the non-employee directors as a group, by the following means:

Each communication should specify the applicable addressee or addressees to be contacted, as well as the general topic of the communication. Management will initially receive and process communications before forwarding them to the addressee. We also may refer communications to other departments in Microsoft. We generally will not forward to the directors a communication that is primarily commercial in nature, relates to an improper or irrelevant topic, or requests general information about Microsoft.

Concerns about accounting or auditing matters or possible violations of our Standards of Business Conduct should be reported pursuant to the procedures outlined in the Microsoft Standards of Business Conduct, which are available on our Web site at www.microsoft.com/mscorp/legal/buscond.

INFORMATION REGARDING BENEFICIAL OWNERSHIP OF PRINCIPAL SHAREHOLDERS, DIRECTORS, AND MANAGEMENT

The following table sets forth, as of September 4, 2009, information about the beneficial ownership of our common stock by all directors, our chief executive officer, chief financial officer and the three other highest paid executive officers (collectively, the “named executive officers”), and our directors and all executive officers as a group.

In computing the number of shares beneficially owned and the percentage ownership, shares of common stock that may be acquired within 60 days of September 4, 2009 pursuant to the exercise of options or the vesting of stock awards are deemed to be outstanding for that person. Such shares, however, are not deemed outstanding for the purpose of computing the percentage ownership of any other person.

NAMED EXECUTIVE OFFICER COMPENSATION

COMPENSATION DISCUSSION AND ANALYSIS

Executive Summary

Purpose of Compensation Discussion and Analysis

This Compensation Discussion and Analysis provides information about the fiscal year 2009 compensation program for our fiscal year 2009 named executive officers, who are:

Fiscal Year 2009 Corporate Performance

A worldwide economic recession that created the most difficult business environment in decades made fiscal 2009 a challenging year for us. As consumers and businesses reset their spending at lower levels, PC sales and corporate information technology investments fell. As a result, we saw our first-ever drop in annual revenue, from $60.4 billion in fiscal 2008 to $58.4 billion in fiscal 2009, a decline of 3 percent. Operating income was $20.4 billion, down 9 percent. Earnings per share fell 13 percent to $1.62. Responding to these changes, we focused on opportunities to cut costs and use resources more effectively. We reduced expenses by more than $3 billion compared with our original fiscal 2009 plan.

We also sharpened our focus on our most important opportunities for growth. To drive innovation, we maintained our commitment to smart, long-term investment in research and development. We increased our investment in research and development by 10% in fiscal 2009 and made significant progress in key areas of product development and technology innovation that position us for growth in the years ahead. We launched new releases of some of our flagship products and services, including Internet Explorer 8, our new Web search technology Bing, SQL Server 2008, and software-plus-services offerings such as Office Online and Exchange Online. Our development groups also positioned other important offerings for release in fiscal year 2010 including Windows 7, Office 2010, Windows Azure, Windows Server 2008 R2, Windows Mobile 6.5, and Silverlight 3.0.

Our compensation decisions for fiscal year 2009 reflect the difficult economic environment, the impact of that environment on company financial performance, and the degree of success each executive officer achieved in meeting these challenges.

Base Salary Freezes

Given the uncertainty surrounding the impact of the current economic climate, in January 2009 we announced that all of our employees, including Mr. Ballmer and all of our executive officers, would not receive merit-based salary increases for fiscal year 2010. Accordingly, base salaries for our named executive officers in effect at the end of fiscal year 2009 remain the same for fiscal year 2010.

New Incentive Compensation Program

In fiscal year 2009, we changed how we deliver cash and stock-based incentive compensation to our executive officers. Previously, our executive officer incentive compensation consisted of annual cash bonuses and annual grants of performance-based restricted stock units (“stock awards”) that vested over multiple years. Our new Executive Officer Incentive Plan (“Incentive Plan”) replaced the prior separate cash bonus and stock award programs. The Incentive Plan provides a unified framework for assessing executive officer performance and determining the appropriate cash and stock-based compensation for that performance.

Awards under the Incentive Plan are not derived under a formula. Instead, the Compensation Committee uses its business judgment to determine Incentive Plan awards. The Committee approves Incentive Plan awards after considering executive officer performance across a wide range of financial, operational, and strategic measures,

Mr. Ballmer’s recommendations for awards, and other relevant information, as described on pages 22 and 23. As in previous years, Mr. Ballmer’s incentive compensation for fiscal year 2009 was limited to a cash payment of up to 200% of his fiscal year 2009 base salary, consistent with his request that we not award him equity compensation. The fiscal year 2009 Incentive Plan awards for other executive officers were payable:

Reflecting the company’s performance during the severe economic downturn, our executive officers, taken as a group, received Incentive Plan awards equal to 77% of their target awards and 29% lower than the comparable cash bonus and stock awards for fiscal year 2008.

Total Direct Compensation Awarded Named Executive Officers for Fiscal Year 2009

The table below is intended to provide insight into the compensation that our named executive officers were awarded for their performance in fiscal year 2009. The table sets forth their base salaries and the cash and stock-based incentive compensation they were awarded for fiscal years 2008 and 2009, providing a simple year-over-year comparison.

This table is intended to supplement, not replace, the Summary Compensation Table on page 27, which lists our fiscal year 2009 named executive officers and reports their compensation in the format required by SEC rules. Because the Summary Compensation Table definition of compensation for fiscal year 2009 includes the value of stock-based compensation that was awarded in previous fiscal years, and includes only a portion of the value of the stock-based compensation we awarded for fiscal year 2009 performance, we believe this alternative table should help investors to understand our fiscal year 2009 compensation actions.

More information about our fiscal year 2009 Incentive Plan awards can be found beginning on page 22.

Contents of Compensation Discussion and Analysis

Section 1  describes our compensation philosophy and overall goals of our compensation programs for our executive officers.

Section 2  explains how we make decisions on the design and operation of our compensation program for executive officers.

Section 3  describes (a) the major components of executive officer compensation and (b) the amount of compensation awarded to our named executive officers for fiscal year 2009 and the reasons for the awards.

Section 4  provides a summary of other aspects of executive officer compensation at Microsoft, including our executive compensation recovery policy, stock ownership policy, perquisites, and severance and change in control arrangements.

Section 1. Compensation Philosophy

We design the compensation program for our executive officers to attract, motivate, and retain the key executives who drive our success and industry leadership. We achieve these objectives through a compensation package that:

Section 2. Decision Making

Compensation Program Actions and Governance

Actions under our compensation program for our executive officers fall into three categories:

The table below depicts the roles of management, the Compensation Committee, and the Board of Directors in recommending or approving actions relating to the compensation of our executive officers.

Compensation Program Design

Program Review

We compete with global information technology and large market capitalization U.S. companies for senior executive talent. Each year, we review the market competitiveness of our executive compensation relative to technology and broad industry peers (described in detail below). If the review shows that our executive compensation is not competitive, we will recommend changes to the Compensation Committee. We may also recommend changes to the executive compensation program based on changes in our strategic goals or the business environment in which we operate.

The Compensation Committee periodically reviews the overall goals of our executive compensation program and the elements of the program, including the mix of cash and stock-based compensation and the mix of short term and long term compensation, to determine whether they are appropriate, properly coordinated, and achieve their intended purposes. From time to time, the Compensation Committee may make modifications or revisions to existing plans and adopt new plans. In reviewing our executive compensation program, our Compensation Committee retains and is advised by an independent compensation consultant, as described on page 10.

Peer Group

To assist the Committee in assessing the competitive position of our executive compensation program and making decisions about individual compensation elements, we provide the Compensation Committee with the results of our review of third-party surveys and publicly available executive compensation data for two specific groups of peer companies.

Technology peer group.    These are companies in the information technology industry that focus on producing software or hardware or providing online services and that employ work forces with skill sets and professional backgrounds similar to those of our work force.

Dow 30 peer group.    Generally, these are large, diversified companies with significant international operations. As an industry and worldwide business leader, we compete for senior executive talent with top companies across a variety of other industries, not just those in information technology.

The table below represents the peer companies that were in place when we conducted our compensation analysis planning for fiscal year 2009.

Positioning of Pay

The Compensation Committee determines target total direct compensation (base salary and target Incentive Plan awards) for our named executive officers (other than Mr. Ballmer) after considering a variety of data sources that provide information on compensation for similar positions, including surveys and proxies, and considering internal comparisons of the executive officer’s total compensation to the total compensation of our other executive officers. We do not apply a formula that ties our target compensation levels to specific market percentiles. In general, our target compensation levels for the named executive officers (other than Mr. Ballmer) will be above median but below the 75^th percentile for similar positions within our peer group companies.

Mix of Pay Elements

As described in Section 1 above, our philosophy is to provide a significant portion of total compensation linked to performance that we believe will create long-term shareholder value. Further, a significant portion of the named executive officers’ total compensation (with the exception of Mr. Ballmer) is delivered through stock awards under the Incentive Plan with a multi-year vesting schedule to align our executive officers to the long-term interests of the Company and shareholders to encourage the named executive officers to act as owners.

The following chart provides information about the target mix of pay for our named executive officers (excluding the chief executive officer) and the named executive officers of our current peer group as of the end of fiscal year 2009.

Assessment of Risk

By design our compensation program for executive officers does not incentivize excessive risk taking. Our base salary component of compensation does not encourage risk-taking because it is a fixed amount. The current Incentive Plan awards have the following risk-limiting characteristics:

Performance Review Process

Each year, our named executive officers participate in a performance review process that leads to decisions on the size of their Incentive Plan awards for the prior fiscal year and whether their base salaries should be increased.

Chief Executive Officer

Following the end of each fiscal year, the Compensation Committee recommends to the independent members of the Board of Directors Mr. Ballmer’s proposed Incentive Plan award based on his performance during the just concluded fiscal year and whether there should be any adjustment to Mr. Ballmer’s base salary for the current fiscal year. The Compensation Committee, which meets in executive session to formulate its recommendations, does not apply a formula to determine any Incentive Plan award or proposed base salary adjustment. Instead, the Compensation Committee exercises its judgment in formulating its recommendations, taking into consideration:

The evaluation conducted by the independent members of the Board of Directors, led by the Chair of the Governance and Nominating Committee, assesses Mr. Ballmer’s success in achieving his performance commitments for the just-completed fiscal year, which typically include financial, operational, strategic, and company culture/leadership objectives. Mr. Ballmer provides the independent members of the Board of Directors with a self-evaluation of his performance. Microsoft provides the Board of Directors with a summary of Mr. Ballmer’s performance on a wide range of quantitative and qualitative financial, operational, and strategic measures that were developed by management and reviewed with the Board of Directors at the beginning of the fiscal year as part of the annual business planning process. The independent members of the Board of Directors also conduct in-depth interviews with Mr. Ballmer’s direct reports to evaluate his performance. In addition, as part of our annual review processes all employees have the opportunity to provide written feedback and ratings on the performance of their direct and next level managers. This information from Mr. Ballmer’s next level reports is compiled and provided to the independent members of the Board of Directors for consideration as part of its evaluation.

Other Named Executive Officers

During the fiscal year, the Compensation Committee discusses on several occasions executive officer performance. Following the end of the fiscal year, the Committee devotes one of its meetings to a comprehensive discussion of all executive officers’ performance and long-term potential. The meeting is attended by the members of the Committee, Mr. Ballmer, Lisa Brummel, our Senior Vice President of Human Resources, and the Committee’s compensation consultant. The Committee also reviews tally sheets prepared by our Human Resources division that set forth each executive officer’s historical earnings, the value of outstanding and unvested equity awards, current holdings of shares of Microsoft common stock, any perquisites and benefits, and, if applicable, any potential severance payments and benefits. Based on its discussions at this meeting and recommendations from Mr. Ballmer, the Committee approves the amount of each executive officer’s Incentive Plan award and any base salary adjustments after considering:

Setting Compensation Opportunities

At the beginning of the fiscal year, the Compensation Committee approves a target Incentive Plan award amount for each of our executive officers based on the following:

As the principal leader of Microsoft, Mr. Ballmer focuses on building our long-term success, and, as a significant shareholder, his personal wealth is tied directly to Microsoft’s value. While the Compensation Committee believes Mr. Ballmer is underpaid for his role and performance, it has accepted his recommendation to continue with Microsoft’s historical practice for setting his total compensation opportunity to exclude any long-term equity compensation award. Based on proxy statement compensation information disclosed by our peer companies as of August 20, 2009, excluding those with founder chief executive officers (Apple, Dell, and Oracle), the average chief executive officer annual base salary was $1.4 million, average bonus compensation was $4.1 million, and average total compensation was $14.0 million. For fiscal year 2009, Mr. Ballmer’s maximum pay opportunity was $1,997,499 consisting of base salary and a potential Incentive Plan award of up to 200% of his base salary for the fiscal year. This maximum pay opportunity will remain the same for fiscal year 2010.

Section 3. Components of Compensation and Fiscal Year 2009 Awards

For fiscal year 2009, the primary components of compensation for the named executive officers were base salary and Incentive Plan awards.

Base Salary

The Compensation Committee reviews base salaries of our executive officers annually to ensure they fairly and competitively compensate these individuals for the jobs they perform. Effective September 1, 2008, the fiscal year 2009 base salaries of our named executive officers were increased between 3.2% and 3.9%. These percentage increases were consistent with the range of increases for our U.S.-based employees in September 2008. Based on the challenging economic environment in fiscal year 2009 and our decision that employees would not receive merit increases in fiscal year 2010:

Incentive Plan

In September 2009, the Compensation Committee approved our new Incentive Plan to provide both cash and equity incentive compensation for our executive officers. The Incentive Plan replaces the annual cash bonus opportunity and stock award programs we used in previous fiscal years. Awards under the Incentive Plan are determined following a discretionary evaluation of performance for the fiscal year, and are not based on achievement of pre-established formulaic criteria. The Incentive Plan provides a more flexible framework that:

The Incentive Plan is designed to deliver a significant portion of total direct compensation to our named executive officers (excluding Mr. Ballmer) through shares of Microsoft common stock. We rely on stock-based compensation with a multi-year vesting schedule to enhance retention and align our executive officers to the long-term interests of the Company and shareholders.

For fiscal year 2009, the Incentive Plan awards granted to our named executive officers (excluding Mr. Ballmer) were made in the following steps.

When we assess the performance of our executive officers we do not use a formula or apply specific weights to performance results. Instead, the Compensation Committee members (or, for Mr. Ballmer, the independent members of the Board) use their business judgment to determine an appropriate award after considering the information discussed on page 21, which includes the executive officer’s performance across a wide range of quantitative and qualitative financial, operational, and strategic measures. These measures vary based on individual responsibilities and the business function, division, or group that an executive officer manages. Among the most important factors that we have used in prior fiscal years to evaluate performance and continued to use in fiscal year 2009 are:

Mr. Ballmer’s participation in the Incentive Plan for fiscal year 2009 was limited to a range of 0% to 200% of his fiscal year 2009 base salary, payable in cash, consistent with our past practice and his request that we not award him equity compensation. His maximum award was the lesser of 200% of his fiscal year 2009 base salary or the maximum pool percentage assigned to him; his target award was 100% of his fiscal year 2009 base salary; and the award was payable following the end of fiscal year 2009.

For fiscal year 2009, Mr. Ballmer’s Incentive Plan award was $600,000 which was 90% of his base salary. This amount was recommended by the Compensation Committee to the Board based on his performance appraisal by the independent members of the Board and other information deemed relevant, including Mr. Ballmer’s performance against his individual commitments, the Company’s progress in key product development areas such as Windows and online search, his leadership in expense management which helped to offset the declines in revenue due to the economic downturn, and the financial performance of the Company relative to the 25 largest technology companies (measured by operating income). The independent members of the Board of Directors considered the recommendation of the Compensation Committee and approved Mr. Ballmer’s Incentive Plan award.

After considering Mr. Ballmer’s assessment of each of the other named executive officer’s performance during fiscal year 2009 and factors including those listed on page 21, the Compensation Committee made the fiscal year 2009 Incentive Plan awards set forth below (and in the table on page 16) to our other named executive officers. Our named executive officers were each reviewed on their performance on a wide range of measures, which included for the business division leaders the financial performance of the business or organization they led. In each case, financial results were less than expected due to the impact of worldwide economic conditions on our business. As a result, the Incentive Plan awards to our named executive officers for fiscal year 2009 were below both the target level for their awards and their actual fiscal year 2008 incentive compensation awards (for Mr. Elop his annualized fiscal year 2008 award).

Mr. Bach.    Mr. Bach is President of the Entertainment & Devices (“E&D”) Division, which is responsible for developing, producing, and marketing the Xbox video game system and related products and services, games and online services for Windows PCs, the Windows Mobile and Windows Embedded device platforms, the Zune digital music and entertainment device and accessories, the Mediaroom internet protocol television offerings, PC hardware accessories, and Microsoft Office for the Macintosh.

Under Mr. Bach’s leadership, E&D experienced strong performance in the Xbox platform, including unit console sales growing at 30%, year-over-year growth of 42% in online subscribers, and development of Xbox’s Project Natal technologies. In addition, there were solid results against our customer satisfaction goals, building key strategic partnerships, and strengthening the leadership of the Windows Mobile division to address slower progress in Windows Mobile. Consistent with the economy, however, the financial results for E&D were below goal, with operating income decreasing by $328 million. Based on his fiscal year 2009 performance, Mr. Bach received an Incentive Plan award of $5,600,000, which was 80% of his target award and 27% lower than his combined cash bonus and stock awards for fiscal year 2008.

Mr. Elop.    Mr. Elop is President of the Microsoft Business Division (“MBD”). This division is responsible for the Microsoft Office system of programs, servers and software-based services, Microsoft Dynamics business applications for small and midsize businesses, large organizations and divisions of global enterprises, and Microsoft’s Unified Communications products which provide software-based communications tools to business.

During fiscal year 2009, Mr. Elop led MBD to improvements in developers targeting Office, progress in product development, a slight decrease in Office license unit volumes, and an overall increase in revenue from business customers, despite a difficult IT spending environment. The financial results for the Microsoft Business Division were below goal, with revenue decreasing by $35 million and operating income decreasing 2%. Based on his fiscal year 2009 performance, Mr. Elop received an Incentive Plan award of $4,200,000, which was 60% of his target award and 45% lower than his annualized combined cash bonus and stock awards for fiscal year 2008.

Mr. Liddell.    As Chief Financial Officer, Mr. Liddell is responsible for leading Microsoft’s worldwide finance organization. Mr. Liddell helped lead company-wide efforts focused on cost reduction and greater efficiency that resulted in an approximately $3 billion reduction in expenses from our original fiscal year 2009 plan. Mr. Liddell’s contributions helped offset the impact of the worldwide economic downturn on Microsoft’s financial results, which included a 3% decrease in revenue and 9% decrease in operating income. Based on his fiscal year 2009 performance, Mr. Liddell received an Incentive Plan award of $2,975,000, which was 70% of his target award and 30% lower than his combined cash bonus and stock awards for fiscal year 2008.

Mr. Turner.    As Microsoft’s Chief Operating Officer, Mr. Kevin Turner is responsible for the strategic and operational leadership of Microsoft’s worldwide sales, marketing, and services organization. In addition, Mr. Turner manages corporate support organizations, including product and customer support services, branding, advertising, public relations, marketing research, relationship marketing, corporate operations and internal information technology.

Mr. Turner led his organization to strong results against our customer satisfaction goals. He helped increase internal efficiency through cost control efforts, including reductions in sales and marketing expenses. He also maintained the renewal rate of key accounts and led the creation of a new retail strategy. Under Mr. Turner’s leadership, Microsoft outperformed the market in 11 of Microsoft’s 13 global sales geographic regions. Microsoft’s revenues from the OEM channel, however, declined 16%. In the wake of the economic downturn, the financial results for the sales, marketing, and services organization were below goal, with net revenue and contribution margin each declining 3%. Based on his fiscal year 2009 performance, Mr. Turner received an Incentive Plan award of $4,760,000, which was 68% of his target award and 40% lower than his combined cash bonus and stock awards for fiscal year 2008.

Fiscal Year 2010 Incentive Plan

For fiscal year 2010, the Compensation Committee determined that it would grant awards to the executive officers as of July 1, 2010 from an incentive pool with maximum funding of 0.45% of Microsoft’s fiscal year 2010 corporate operating income. The maximum funding in fiscal year 2010 increased 0.1% of corporate operating income over the rate in effect in fiscal year 2009 following the addition of two executive officers. As with the fiscal year 2009 Incentive Plan awards, each executive officer’s Incentive Plan award from this pool will be limited to a fixed percentage of the pool. The Compensation Committee intends that each executive officer (other than Mr. Ballmer) will receive between zero and 150% of his target award as established by the Committee, subject to the availability of pool funding.

Section 4. Other Compensation Topics

Compensation Committee Advisor

During fiscal year 2009, the Compensation Committee continued retaining Dan Marcus, Managing Principal, Semler Brossy Consulting Group, LLC, as an independent compensation consultant. Information on the role and independence of the compensation consultant is provided on page 10.

Executive Benefits and Perquisites

Our named executive officers are eligible for the same benefits made available to our other United States-based full-time regular employees, including our 401(k) Plan, employee stock purchase plan, health care plan, life insurance plans, and other welfare benefit programs. In addition to the standard benefits offered to all employees, we maintain a non-qualified deferred compensation plan for executives and senior managers in which the named executive officers may participate. The plan is unfunded, and participation is voluntary. The non-qualified deferred compensation plan allows our named executive officers the opportunity to defer their base salary, the cash portion of their Incentive Plan awards, and certain on-hire bonuses. We do not contribute to the non-qualified deferred compensation plan. None of our named executive officers participated or had a balance outstanding in the deferred compensation plan in fiscal year 2009.

Perquisites are provided to our named executive officers only in special situations, including relocation for newly hired executive officers. During fiscal year 2009, other than relocation assistance, we did not provide any significant perquisites to our named executive officers.

Relocation Assistance

Mr. Elop received assistance with relocation expenses that we customarily offer officer candidates, including travel, shipping household goods, and temporary housing. As part of the arrangements negotiated to induce Mr. Elop to accept an employment offer and reflecting the specific circumstances of his hiring, he also received assistance with the sale of his prior home. For more information see Note 1 to the “All Other Compensation” table on page 28.

Severance, Retirement, and Change in Control Arrangements

Our named executive officers do not have employment contracts, and (other than Mr. Turner) are not entitled to any payments upon termination of their employment or following a change of control of Microsoft, with the following exceptions:

Pursuant to Mr. Turner’s offer letter, he received an on-hire stock award of 320,000 shares, half of which will vest during his first five years of employment and the remainder of which will vest upon retirement at age 60 or older. In addition, in the case of termination of employment by Microsoft for any reason other than for cause, 160,000 shares of his 320,000 share on-hire stock award will vest immediately.

Tax/Accounting Treatment of Compensation

Under Section 162(m) of the Internal Revenue Code, we may not be able to deduct as compensation expense amounts in excess of $1 million paid in one year to certain of our named executive officers. Certain performance- based compensation approved by shareholders is not subject to this deduction limit. Generally, in structuring compensation for the named executive officers, we consider whether a form of compensation will be deductible; however, other factors discussed above may be of greater importance than preserving deductibility for a particular form of compensation. Awards under the Incentive Plan are expected to qualify as performance based compensation under Section 162(m). No non-deductible compensation was paid in fiscal year 2009.

In accordance with SFAS No. 123(R), we measure the fair value of stock awards, including those under the Incentive Plan, based on the market price of the underlying common stock as of the date of grant, reduced by the present value of estimated future dividends. These awards are amortized over their applicable vesting period using the straight-line method.

Executive Compensation Recovery Policy

Accountability is a fundamental value of Microsoft. To reinforce this value through our executive compensation program, the Compensation Committee maintains an executive compensation recovery policy that applies to our executive officers and our chief accounting officer. In fiscal year 2009, the Compensation Committee amended this policy to expand the circumstances that would permit the recovery of incentive compensation. Under the amended policy, the Compensation Committee may seek to recover payments of incentive compensation if the performance results leading to the payment are later subject to a downward adjustment or restatement of financial or nonfinancial performance. The Committee may use its judgment in determining the amount of the incentive compensation to be recovered where the incentive compensation was awarded on a discretionary basis, as with awards under the Incentive Plan for fiscal year 2009. Further, the Compensation Committee may recover incentive compensation whether or not the executive officer’s actions involve “misconduct.” When an executive officer has engaged in intentional misconduct that contributed to the payment the Compensation Committee may take other remedial action, including seeking to recover the entire payment. Payments of incentive compensation include awards under the Incentive Plan as well as prior year compensation related to annual bonuses and incentive stock awards.

Stock Ownership Requirements for Company Executives

The Compensation Committee has adopted stock ownership requirements that require each of our executive officers to maintain a minimum equity stake in Microsoft. The requirements formalize the Compensation Committee’s belief that our executive officers should maintain a material personal financial stake in Microsoft to promote a long-term perspective in managing our business, and to align executive and shareholder interests. The requirements ensure the alignment of executive and shareholder interests, which reduces the incentives for excessive short-term risk-taking. The requirements provide for stock ownership as follows:

Minimum share ownership levels are determined annually using the base pay rate in effect as of the end of the fiscal year and the average daily closing share price for the just-completed fiscal year. Following the conclusion of each fiscal year, compliance with the requirements is measured and executive officers are notified about their ownership requirement, current holdings, and whether they must hold additional shares.

For purposes of determining ownership levels, the following forms of equity interests in Microsoft count towards the stock ownership requirement:

All of our named executive officers currently comply with these ownership requirements.

SUMMARY COMPENSATION TABLE

The following table contains information about compensation earned by the named executive officers for the fiscal years ended June 30, 2009, June 30, 2008, and June 30, 2007. None of the named executive officers received stock options during fiscal years 2009, 2008, and 2007.