Microsoft’s Q2 profits beat analyst expectations, but are lower than this quarter last year due to smaller margins. The margin squeeze was caused by Microsoft’s increased X-Box sales, which have smaller margins than its Windows license sales, and a continually challenging PC market (for example, netbook sales dropped from 8% of the market a year ago to 2% of the market today).

But Dynamics continues to shine for Microsoft.

I reported last quarter that Microsoft Dynamics posted 17% growth. The company is reporting double digit growth again this quarter.

Josh Greenbaum, writing for Information Week, notes that although Microsoft is still probably quite far from its original goal of turning Dynamics into a $10 billion business in 10 years, the company sure doesn’t see the division as a failure. Greenbaum notes that Dynamics is being integrated into almost every part of the Microsoft ecosystem, including:

• Azure and the cloud, including Office 365
• SQL Server
• Visual Studio and .NET
• Windows 8, especially mobile
• Kinect
• Lync and Skype
• Business Intelligence
• Sharepoint
• Bing.

That’s significant because Dynamics is starting to become the bridge between Microsoft’s otherwise siloed products. As I reported last year, activity streams and social profiles are coming to Dynamics CRM, which will bring the product inline with other CRM systems like Salesforce.com, SAP Sales on Demand and Oracle Fusions Applications. And more importantly, it will allow Dynamics CRM to become users’ information cortex by streaming information in from many sources.

There’s wasn’t much talk this quarter about Azure. And although Microsoft is porting Hadoop to Windows and offering it through Azure, as we reported earlier today most enterprise decision makers think Linux, not Windows, when they think big data. That could change, but it could be that hosted Dynamics applications end up being Microsoft’s real cloud services play.