and in courts in Germany and the United Kingdom. Research and development expenses increased $970 million or 9%, due mainly to increased investment in new products and services in our Devices Revenue reconciling amounts for fiscal years 2012 and 2013 included the deferral and subsequent recognition, respectively, of $540 million of revenue related to the Windows Upgrade Offer. Shares of our common stock may be purchased by employees at three-month intervals at 90% of the fair market value on the that provide content and online offerings to end users. Acquisitions, joint ventures, and strategic alliances may have an adverse effect on our business. In general, and where applicable, we use quoted prices in active markets for identical assets or liabilities to determine the fair value of our financial instruments. And, at the same time, it is equally important to evolve our culture — becoming more customer-obsessed across all our products, focusing on leading indicators like usage, and ensuring Microsoft continues to be the best place for smart, curious people to do great work. To achieve these objectives increasingly businesses look to leverage the benefits of the cloud. Agreements are generally structured with a three-year term, and partners are billed monthly based upon consumption. services internally through four primary engineering groups. Xbox Platform cost of revenue increased $2.1 billion or 72%, due mainly to higher volumes of consoles sold and higher costs The general No sales to an individual customer or country other than the United States accounted for more than 10% of fiscal our internal networks and systems and those of our partners and customers. The following tables present the fair value of our financial instruments that are measured at fair value on a recurring basis: In connection with the transaction to acquire substantially all of Nokia Corporation’s (“Nokia”) Devices and Services Business (“NDS”), on September 23, 2013 we provided Nokia €1.5 billion ($2.1 billion) principal of convertible notes classified as Level 3 financial instruments. declines, our revenue will be adversely affected. Microsoft enters into arrangements that can include various combinations of software, services, and hardware. Once a decline in fair value is determined to be other-than-temporary, In May 2014, as part of its ongoing efforts to assist in the convergence of U.S. GAAP and International Financial Reporting Standards, the FASB issued a new standard related to revenue recognition. As of June 30, 2014 and 2013, the aggregate unamortized discount for our long-term debt, including the current portion, was $100 million and $65 million, respectively. A subset of online services are also available for purchase through the Select Plus Program, and subscriptions are generally structured with terms between one and three years. Investment options in the U.S. plan include Microsoft common stock, but neither participant nor our matching contributions are required to be invested in unit level using a discounted cash flow methodology with a peer-based, risk-adjusted weighted average cost of capital. Revenue and cost of revenue are generally directly attributed to our segments. monthly stock repurchases for the fourth quarter of fiscal year 2014, all of which were made as part of publicly announced plans or programs: The repurchases were made using cash resources and occurred in the open market. (a)    Technology-based intangible assets included. Awards that expire or are canceled without delivery of shares generally become available for issuance under the plans. Operating expenses are not allocated to our segments. Surface devices face competition from computer, tablet, and other hardware manufacturers, many of which are also current or potential partners and customers. We embrace new ways of sharing data and communicating internally and with partners and customers using methods such as social networking and other SAs generally vest over a four or five-year period. timely and rational allocation of development, sales, marketing, and services resources within businesses. Translation adjustments resulting from this process are recorded to other comprehensive income ("OCI"). The In fiscal years 2013 and 2012, the foreign income before income taxes was $20.4 billion and $20.7 billion, respectively, and comprised 75% and 93%, respectively, of our income before income taxes. domestic and international equities, and U.S. government securities. Mellon Trust Company, N.A., as Trustee, to the Indenture, dated as of May 18, 2009, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee, Fifth Supplemental Indenture for 2.625% Notes due 2033, dated as of May 2, 2013 between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee, to the Before releasing new software platforms, we provide application vendors with a range of resources and guidelines for development, training, and testing. secure customers from attacks even when software updates are not deployed, maintain the digital security infrastructure that protects the integrity of our network, products and services, and provide customers security tools such as firewalls and during the prior year. We acquire other companies and intangible assets and may not realize all the economic benefit from those acquisitions, which could cause an impairment of goodwill or intangibles. Upon closing of the acquisition, Nokia repurchased these notes at their principal amount plus accrued Cyber-attacks and security vulnerabilities could lead to reduced revenue, increased costs, liability claims, or harm to our competitive position. ratably in August of each of the four years following the grant date. The increase in cost of revenue was due mainly to higher datacenter expenses, reflecting investment in online operations infrastructure, and increased headcount-related expenses, mainly due to We develop most of our products and Cash and/or security interests are received as collateral for the loaned securities with the amount determined based upon Our Xbox Platform competes with console platforms from Sony and Nintendo, both of which have a large, established base of customers. A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date. Office Consumer revenue declined $618 million or 15%, while Windows OEM revenue declined 10%. its fair value, we evaluate, among other factors, general market conditions, credit quality of debt instrument issuers, the duration and extent to which the fair value is less than cost, and for equity securities, our intent and ability to hold, or At times, we make select intellectual property broadly available at no or low cost to achieve a strategic objective, such as These controls include model validation, review of key model inputs, analysis of period-over-period fluctuations, and charges that could adversely affect our financial results. Significant internal accounting policies that differ from U.S. GAAP relate to revenue recognition, income statement classification, and depreciation. We estimate the total remaining cost of the settlements is approximately $400 million, all of which had been accrued as of June 30, 2014. They work to unlock business insights from a world of data. The devices and form factors customers prefer evolve rapidly, and influence how users access services in the cloud and in some cases the user's choice of The loaned securities continue to be carried as investments on our balance sheet. The declines in Windows OEM and Office Consumer revenue were partially offset by benefits realized from ending our support for Windows XP in April 2014. The other two cases requests and appropriate limitations on government authority to compel disclosure. As of June 30, 2014, the total notional amounts of these foreign exchange contracts purchased and sold were $6.2 billion and $8.5 billion, respectively. You can e-mail the transfer agent at:  msft@amstock.com  Localizing a product may require modifying the user interface, altering dialog boxes, and translating text. Software assurance also provides support, tools, and training to help customers deploy and use software efficiently. The impact of economic conditions on our partners, such as the bankruptcy of a major distributor, OEM, or requires us to maintain a coverage ratio of at least three times earnings before interest, taxes, depreciation, and amortization to interest expense, as defined in the credit agreement. Phone Hardware revenue was $2.0 billion, reflecting sales of Lumia Smartphones and other non-Lumia phones following the acquisition of NDS on April 25, 2014. Microsoft 2019 annual EPS was $5.06, a 137.56% increase from 2018. commodity contracts purchased and sold were $1.4 billion and $408 million, respectively. We also announced Office on iPad, which led to 35 million downloads of Word, Excel, PowerPoint and OneNote — becoming many of the most popular applications in the Apple App Store. Indicate by check mark whether the We allocate goodwill to reporting units based on the reporting unit expected to benefit from the business combination. foreign currency risk. the reported amounts of assets, liabilities, revenue, and expenses. No material impairments of intangible assets were identified during any of the periods presented. Microsoft EPS for the twelve months ending September 30, 2020 was $6.20, a 16.98% increase year-over-year. We believe our products compete effectively based on our strategy of providing billion, respectively. The final cash awards will be determined after each performance period based on individual and business performance. We account for certain assets and liabilities at fair value. We categorize each of our fair value measurements in one of these three levels based on the lowest The devices and form factors customers prefer evolve rapidly, and influence how users access services in the cloud and in some cases the user’s choice of which suite of cloud-based services to use. Unearned revenue from volume licensing programs represents customer billings for multi-year licensing arrangements paid for either at inception of the agreement or annually at the beginning of each coverage period and accounted for as subscriptions with revenue recognized ratably over the coverage period. Additions to property and equipment will continue, including new facilities, data centers, and computer systems for research and development, sales and marketing, support, and administrative staff. Commercial Other gross margin increased $935 million or 102%, due to higher revenue, offset in part by a $952 million or 20% increase in cost of We have operating leases for most U.S. and international sales and support offices, research and development facilities, manufacturing facilities, and certain equipment. consolidated results of operations starting on the acquisition date. In February 2012, the I.R.S. Commercial gross margin increased $2.1 billion or 6%. Surface cost of revenue increased $970 million or 51%, due mainly to a higher number of devices and accessories sold, offset in part by a charge for Surface RT inventory adjustments of approximately $900 million in fiscal We believe we can significantly enhance the digital lives of our customers using our broad portfolio of communication, productivity, and more than one year or are not publicly traded were $520 million and $395 million, respectively. Although management currently believes that resolving claims against us, individually or in aggregate, will not have a material adverse impact on our consolidated financial statements, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future. Abrupt political change, terrorist activity, and armed conflict pose a risk of general economic disruption in affected countries, which may In determining whether a loss should be accrued we evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability For derivative instruments designated as fair value hedges, the gains (losses) are recognized in earnings in the periods of change together with the offsetting losses (gains) on the hedged items attributed to the risk being hedged. Variations in the actual outcome of these future tax consequences could materially impact our consolidated financial statements. The high and low common stock sales prices per share were as follows: On September 16, 2013, our Board of Directors approved a new share repurchase program authorizing up to $40.0 billion in share repurchases. to simplify everyday tasks through seamless operations across the user's hardware and software. With the creation of the new Phone Hardware segment, the D&C Hardware segment was renamed Computing and Gaming Hardware in the fourth quarter of fiscal year 2014. D&C Licensing cost of revenue decreased, due mainly to a $411 million or 23% decline in traffic acquisition costs. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models. expects to receive in exchange for those goods or services. The principal products and services provided by the Commercial Other segment are: Enterprise Services, including Premier product support services and Microsoft Consulting Services; Commercial Cloud, comprising Office 365 Commercial, other Microsoft Office online offerings, Dynamics CRM Online, and Microsoft Azure. Unearned revenue at June 30, 2014 also included payments for: post-delivery support and consulting services to be performed in the future; Xbox Live subscriptions and prepaid points; Microsoft Dynamics business solutions products; Office 365 subscriptions; Bundled Offerings; Skype prepaid credits and subscriptions; and other offerings for which we have been paid in advance and earn the revenue when we provide the service or software, or otherwise meet the revenue recognition criteria. may be adversely affected. billion increase in cash used for net investment purchases, maturities, and sales, and a $2.0 billion increase in cash used for additions to property and equipment. We encourage investors, the media, and others interested in Microsoft to review the information we post on the social media channels listed on our Investor Relations website. because we do not believe the remaining open issues will be resolved within the next 12 months. Our fair value processes include controls that are designed to ensure appropriate fair values are recorded. and Geographic Data. We market and distribute our products and services primarily through the following channels: OEMs; distributors and resellers; online; and Microsoft retail stores. We are a leader among technology companies in pursuing patents and currently have a portfolio of over 55,000 U.S. and international patents issued and over 40,000 pending. cost of goods and services, including natural resources, necessary to run our business. reversing class certification and dismissing the case. Search advertising revenue grew primarily due to increased revenue per search, resulting from ongoing improvements in ad products, while display advertising revenue decreased primarily due to industry-wide market pressure. regional center in Ireland supports the European, Middle Eastern, and African region; the center in Singapore supports the Japan, India, Greater China, and Asia-Pacific region; and the centers in Fargo, North Dakota, Fort Lauderdale, Florida, Puerto Generally, this occurs shortly before the products are released to manufacturing. Many of our customers are “dual users,” employing technology for work or school and also deeply in their personal lives. The fair values of these investments approximate their carrying values. We released Xbox 360 and Xbox One in November 2005 and November 2013, respectively. phones. This group also engineers datacenter development, construction, and operation. This report highlights the many achievements and the progress made throughout 2014 . Microsoft Online Services Reseller Agreement is a program enabling partners to package Microsoft Online Services with the partners' services. Under the Executive Incentive Plan (“EIP”), the Compensation Committee awards performance-based compensation comprising both cash and SAs to executive officers and certain senior executives. Archives of In May 2012, the court issued an injunction relating to all H.264 capable Microsoft products in Germany, which Microsoft appealed. With the creation of the new Phone Hardware segment, the D&C Hardware segment was renamed Computing and Gaming Hardware in the fourth quarter of fiscal year 2014. transforms the way people work, play, and communicate across a wide range of computing devices. In addition to these cases, there are To serve the needs of customers around the world and to improve the quality and usability of products in international markets, we localize many of our products to reflect local languages and conventions. computing services we offer include Bing, Microsoft Azure, Microsoft Dynamics CRM Online, Microsoft Office 365, OneDrive, Skype, Xbox Live, and Yammer. associated with Xbox One. notes in this table are senior unsecured obligations and rank equally with our other senior unsecured debt outstanding. In addition to these products, we also market our services through OEMs and service bundles such as Windows with Bing or Windows with Office 365 subscription. In this highly competitive and volatile market, it is possible that we may not realize our forecasts. Certain options and forwards not designated as hedging We expect existing domestic cash, cash equivalents, short-term investments, and cash flows from operations to continue to be sufficient to fund our domestic operating activities and cash commitments for investing and financing activities, such as regular quarterly dividends, debt repayment schedules, and material capital expenditures, for at least the next 12 months and thereafter for the foreseeable future. and not designated as hedging instruments ("non-designated hedge derivatives"). As we increasingly deliver online services, we sell many of these cloud-based services through our enterprise agreements and have also enabled new sales programs A disruption or failure of our systems or Gains and losses from changes in fair values of derivatives that are not designated as hedges are primarily recognized in other income (expense). EDAs typically are also authorized as LSPs and operate as resellers for our other licensing programs, such as the Select Plus and Open licensing programs discussed under "Licensing Options" below. The court also ruled that the patent, even if valid, would be licensed under the grant-back clause in Google’s ActiveSync license. Mobility goes beyond devices users carry with them as they move could result in higher effective tax rates, increased interest expense, or dilution of our earnings. While it may be necessary in the future to seek or renew licenses relating to various aspects of our products and business methods, we believe, based upon past experience and industry practice, such licenses generally could be obtained on commercially reasonable terms. on our new segments; D&C Licensing, D&C Hardware, D&C Other, Commercial Licensing, and Commercial Other. SAIC has stated the investigation relates to compatibility, bundle sales, and file verification issues related to Windows and Office software. For software elements, we follow the industry specific software guidance which only allows for the use of VSOE in establishing fair value. A subset of online services are also available for purchase through the Select Plus Program, and subscriptions are generally structured with terms between one and three years. follows: Increases for tax positions related to the current year, Increases for tax positions related to prior years, Decreases for tax positions related to prior years, Decreases due to lapsed statutes of limitations. may decrease our operating margins. This increase relates primarily to adjustments to prior years' liabilities for Adjustments in purchase price allocations may require a recasting of the amounts allocated to goodwill retroactive to the periods in which the acquisitions occurred. ("ESP"). A catastrophic event that results in the destruction or disruption of any of our critical business or IT systems could harm our ability to conduct normal business operations. They consist predominantly of highly liquid investment-grade fixed-income securities, diversified among industries and individual issuers. Those standards Officer, reviews certain financial information, including segmented internal profit and loss statements prepared on a basis not consistent with U.S. GAAP. we completed an assessment of any potential goodwill impairment for all reporting units immediately prior to the reallocation and determined that no impairment existed. D&C gross margin decreased $1.7 billion or 8%, primarily due to higher cost of revenue and lower revenue. We may face issues in selecting, engaging or securing support from operators and retailers for Windows phones due to, for instance, inadequate sales training or incentives, or Board ("FASB") issued guidance enhancing disclosure requirements about the nature of an entity's right to offset and related arrangements associated with its financial instruments. Satya Nadella As of June 30, 2014, we had net operating loss carryforwards of $3.6 billion, including $2.2 billion of They decide what solutions will make employees more productive, collaborative, and satisfied, or connect with customers in new and compelling ways. While we intend to defend these matters vigorously, adverse outcomes that we estimate could reach approximately $2.0 billion in aggregate beyond recorded amounts are reasonably possible. or services, and could limit adoption of our cloud-based solutions by consumers, businesses, and government entities. As a result, no collateral was required to be posted. During the third quarter of fiscal year 2011, we reached a settlement of a portion of an I.R.S. Yammer, Inc. ("Yammer"), a leading provider of enterprise social networks, for $1.1 billion in cash. The outcomes of legal proceedings and claims brought against us are subject to significant uncertainty. D&C Licensing gross margin increased $172 million or 1%, primarily due to a $390 million or 20% decrease in cost of revenue. We also license standalone and software development lifecycle tools As of June 30, 2014, $35.1 billion remained of our $40.0 billion share repurchase program. For software elements, we follow the industry Unrealized losses from fixed-income securities are primarily attributable to changes in interest rates. Yes  x     No ¨, Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Surface revenue Based on the information currently available, we do not anticipate a significant increase or decrease to our tax contingencies for these issues. Microsoft Dynamics products provide business solutions for financial management, customer relationship management, supply chain management, and analytics applications for small and mid-size businesses, large organizations, and divisions of global enterprises. (b) Includes a tax provision adjustment recorded in the fourth quarter of fiscal year 2014 related to adjustments to prior years' liabilities for intercompany transfer pricing which decreased net income by $458 million and diluted earnings per share by $0.05. General and administrative expenses decreased $328 million or 6%, due mainly to the EU fine in the prior year, offset in part by higher business taxes, higher costs for internal use software capitalized in the prior year, and NDS expenses. years 2014, 2013, and 2012, by $7.0 billion, $6.5 billion, and $6.2 billion, respectively. reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. U.S. federal and state antitrust The fair value of each reporting unit is estimated primarily through the use of a discounted cash flow methodology. In addition, we agreed to license Nokia’s mapping services and will pay Nokia separately for the services provided under a four-year license as they are rendered. of office and data center space domestically (outside of the Puget Sound corporate campus) and lease many sites domestically totaling approximately five million square feet of office and data center space. the periods presented. Advertising costs, excluding NDS, declined $403 million or 15%, primarily due to Windows 8 and Surface costs in the prior year. the server platform, database, business intelligence, storage, management and operations, virtualization, service-oriented architecture platform, security, and identity software. level input that is significant to the fair value measurement in its entirety. and Windows Store. Advertising expense was $2.3 billion, $2.6 billion, and $1.6 billion in fiscal years For fixed-income securities, we also evaluate whether we have plans to sell the security or it is more likely than not that we will be required to sell the security before recovery. margin were as follows during the periods presented: Following is operating expenses by segment group. For the first quarter of fiscal year 2014, GAAP revenue, operating income, and diluted earnings per share included the deferral of $113 million of revenue primarily related to Windows 8.1 Pre-sales. Corporate and Other revenue increased $888 million or 183%, primarily due to the timing of revenue deferrals. In fiscal years 2014 and 2013, our U.S. income before income taxes was $7.1 billion and $6.7 billion, respectively, and comprised 26% and 25%, respectively, of our income before income taxes.