This very question was asked and answered in some depth on the Microsoft recruiters blog. It wasn't too long ago (mainly I think it was around the guy who ended up joining the Channel 9 team and wore a rather cheeky t-shirt) and I think it was Gretchen who wrote the guideline. From (fading) memory it was along the lines of "You're showing respect by making an effort but if we really want you we're going to hear you no matter what you wear (using the C9 recruit as an example because what he'd worn was hardly what one would call "Business casual").
If you can't find it via Google let me know and I'll see if I can dig it out. You should probably read all the blogs going back over time anyway because there's lots of very good advice in there for anybody wanting to interview for Microsoft.
Thanks for pointing that out! I just found it at http://blogs.msdn.com/jobsblog/archive/2004/04/01/105933.aspx