The Computer Online Forensic Evidence Extractor can be used in police raids to map hard drives and decrypt passwords without shutting the computer down and losing evidence.
The device was shown off at a three-day security conference for 350 law enforcement officials in Redmond, Washington.
"These are things in which we invest substantial resources, but not from the perspective of making money," Microsoft general counsel Brad Smith told the Seattle Times. "We're doing this to help ensure that the internet stays safe."
The thumb drive has 150 commands and can log hard drive activity, check on surfing history and decrypt some passwords.
Microsoft has distributed the device for free since last year, and claims that it is in use by over 2,000 officers in 15 countries.
However, Smith acknowledged that there is a financial upside for Microsoft in giving away the device, since it makes money selling ancillary software and services.
Microsoft has been holding law enforcement meetings since 2006 in an effort to educate police about cyber-crime.