CHRIS LIDDELL: Good morning, everyone. I would like to call the 2005 Annual Shareholder Meeting to order. My name is Chris Liddell. I'm the Chief Financial Officer of the company, and I'll be serving as the chair of this meeting. Brad Smith, Senior Vice President of Law and Corporate Affairs will be serving as secretary. I would like to introduce Bill Gates, Chairman of the Board and Chief Software Architect; and Steve Ballmer, Chief Executive Officer.

Welcome to all our shareholders. Thank you for getting up early to be here. We greatly appreciate your interest in our company. I would also like to acknowledge, this Friday, November 11th, is Veterans Day. Thank you to all of our Veterans in attendance today. (Applause.)

Let me also introduce Tom Murphy and Jim Parkin representing Deloitte and Touche, LLP, our independent public auditor, and Karl Quackenbush representing Preston Cates & Ellis, our primary law firm. Our board members in attendance are Charles Noski, Chairman of the Audit Committee, and Member of the Finance Committee; Jon Shirley, Chairman of the Finance Committee; Steve Ballmer, Chief Executive Officer; and Bill Gates, Chairman of the Board.

Before we proceed with the meeting, let me review a few housekeeping items. Please take time after the meeting to check out the product demos in the back of the room. They are anti-spam, Windows Media Center, Windows Vista, Microsoft TV, Small Business Accounting, Windows Mobile Devices, MSN, and of course Xbox. We also have representatives from our product sales and support services team to answer product questions you may have.

As in prior years, you can purchase Microsoft logoed merchandise from the company store in the back of the room. Members of the Investor Relations team will be available to answer your questions at the Microsoft kiosk in the product fair area after the meeting. Please also be sure to visit our Investor Relations Web site, it's a great resource for financial information about the company. The Web address is www.Microsoft.com/msft. If you parked in the Meydenbauer Center garage, parking will be complementary, no ticket validation is required. And finally, as soon as the business of the meeting is over, we'll have a few minutes for questions and answers.

I would now like to introduce Mellon Investor Services who have been appointed as inspectors of election for the meeting. The inspectors are located in the reception table in the lobby. Most stockholders have already voted by proxy, and we have already talleyed your proxy votes. For those of you who have not yet voted who want to change your vote, ballots are available from the inspectors at the reception table in the lobby. Filling out a ballot and giving it to the inspectors will have the effect of revoking any earlier proxy that you gave.

Now, I'm going to ask Brad Smith to report on the notice of the meeting, and the proxies received.

BRAD SMITH: Thanks, Chris.

The notice of the meeting and a proxy statement was mailed by Mellon Investor Services, the company's transfer agent, beginning on September 30th, 2005, to all shareholders of record as of September 9th, 2005. And as a result, the meeting is being held pursuant to proper notice. Proxies representing more than 87 percent out of the approximately 10.65 billion shares of the company's outstanding stock eligible to vote have been received. And, accordingly, a quorum is present, and the meeting is duly constituted and should proceed.

CHRIS LIDDELL: As chair of the meeting, I have adopted an agenda that will govern the order of the business of the meeting, and I've adopted certain rules for the conduct of the meeting. Copies of the agenda and the rules are available at the reception table outside the meeting room. The polls are open now for voting. If you haven't already voted, or if you want to change your vote, please obtain a ballot from the inspectors at the reception table in the lobby. Once you've voted your shares, the inspectors will take and count your ballot. The polls will close upon conclusion of the matters subject to shareholder consideration.

Until the polls close, any shareholder may revoke or change his or her proxy for any matter, and may vote on any matter. The polls will close in about 10 minutes, following my remarks as the Chief Financial Officer.

We now come to the part of the meeting where shareholders consider the matters set forth in the proxy statement. Voting on all matters is by actual count of the votes cast by ballot or proxy.

The first item of business to come before the meeting is the election of directors. The following ten people have been properly nominated by the board: William H. Gates; Steven A. Ballmer; Dr. James I. Cash, Jr.; Dina Dublon; Raymond B. Gilmartin; Ann McLaughlin Korologos; David F. Marquardt; Charles H. Noski; Dr. Helmut Panke; and Jon A. Shirley.

The second item of business to come before the meeting is the ratification of the company's independent auditor, Deloitte and Touche, LLP. This proposal was discussed in the company's proxy statement, and the board recommends the approval of the proposal.

As Chief Financial Officer, I would now like to review the company's performance for fiscal 2005, and touch on the outlook for the future in driving shareholder value for the company. I would like to start by reminding you that during the meeting we will be making statements that are forward looking. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Our actual results could differ materially because of factors discussed in our 2005 Form 10K, or in other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statement.

You should also note that we posted slides on our Investor Relations site that contains a reconciliation of differences between GAAP and some non-GAAP financial measures that are included in my review of our recent performance. You will find the slides on the first quarter 2006 earnings release page at www.Microsoft.com/msft.

Fiscal 2005 was an excellent year for us. We outperformed financially versus our expectations entering the year, revenue grew by 8 percent relative to our expectations of 4 to 5 percent. Excluding legal settlements, we also managed to exceed our expectations for operating income while at the same time making significant investments in the company. Investment income was about twice what we had forecast and said it would be. Taken together, and including legal settlements, and a non-recurring tax benefit, this all adds up to a year with great than expected earnings per share.

Outstanding performances from many of our businesses drove these results. For example, Server and Tools revenue growth of 16 percent continued a three-year run of consecutive double digit growth on a quarter to quarter basis. Home and Entertainment shipped a record number of Xbox consoles and software, doubled the number of Xbox Live members, and unveiled the Xbox 360. Our Mobile and Embedded business had 36 percent revenue growth, driven by strong momentum in our Windows Mobile product line for connected devices. Lastly, we saw healthy growth in our Client and Information Worker businesses when considering the difficult comparable to the prior year from upgrade advantage revenue recognition.

We also made a number of acquisitions in fiscal 2005 that added to the strength of the company. Acquisitions in the area of collaboration software and security included Grove Networks, Giant Software, and Sybari. We're delighted to have had Ray Ozzie join the Microsoft team as part of the Group Networks transaction, and look forward to his continued leadership in the area of driving and delivering software as a service.

All of our businesses launched innovative products during the year, most notably a number of important updates to our server products, powerful new search technology, and communications services, Windows Mobile 5.0, and of course the Halo2 videogame, which hit single day sales records for an entertainment property. Lastly, we're happy to have been able to return $44 billion to shareholders through dividends and share buybacks. One of, if not the largest one-year payout in corporate history.

With healthy first quarter results just reported, FY '06 is shaping up to be a good year, and an important starting point in our multiyear product cycle. Against the backdrop of a healthy overall IT spending environment, we expect accelerating revenue growth in fiscal 2006 of 10 to 12 percent. We expect our client business to grow 6 to 7 percent based on overall PC growth of 9 to 11 percent. We see our OEM business growing broadly in line with the PC market, and our non-OEM business improving from what we saw in fiscal 2005. We expect Server and Tools to grow 11 to 13 percent underpinned by our SQL Server and Visual Studio launch which occurred just last Monday.

Our outlook for the Information Worker business is for 5 to 6 percent revenue growth, a good result leading up to the launch of Office 12 during the next fiscal year. In Business Solutions we've picked up momentum, and expect double-digit growth rates in fiscal 2006 bolstered by significant product releases under our new Dynamics brand. MED revenue should be about $330 million as devices using our Windows Mobile products continue to gain market segment share. In MSN, we'll see a similar pattern to last year with advertising revenue growth offset by our access business which is declining as customers increasingly move from narrowband access. Lastly, our Home and Entertainment Division is expected to grow revenue more than 50 percent driven by the Xbox 360 launch starting in North America on November 22nd.

From an operating income perspective, we expect the shape of the year to be different from previous years with revenue accelerating throughout the year, and costs relatively front-loaded in support of key product launches. Excluding legal settlements, we expect to grow operating income to $18.3 to $18.8 million, and earnings per share to $1.28 to $1.32, both increasing in line with our outlook for revenue growth.

We always remind you each year that there are some risks associated with our guidance, the most obvious is durability in PC and server shipment growth. This will also be a big year for product launches, so execution of those will be critical. Other factors include annuity license renewals, competition from Linux and non-commercial software, and the impact of foreign exchange rate changes.

I would like to conclude my remarks by summarizing how we intend to drive shareholder value going forward. It starts with revenue growth through innovation in three core areas, by growing our foundation businesses, by expanding the portfolio of our products, and by tapping into new opportunities through the delivery of software services. Each of these areas offers strong potential for future growth, and we're poised to deliver on their potential as a result of the strongest multiyear product pipeline in the company's history.

We're also going to continue to invest aggressively to satisfy customers and to compete and win in the marketplace through big, bold bets, and new opportunities, as well as through acquisitions. We firmly believe that our investments today laid foundations for revenue and profit growth in the future. This approach results in a powerful operating cycle, revenue and profit growth driving strong cash flow, which enables aggressive and sustained investment in our future, all of which allows us to return value to our shareholders in a number of ways. The first is repurchasing our stock. We recently announced an accelerated plan to complete our $30 billion stock repurchase plan by no later than December 2006. In other words, we plan to buyback the remaining $19 billion of stock almost twice as quickly. This acceleration combined with our recent buyback activity and the ability we have to continue to reduce outstanding shares well into the future shows our confidence in our business. It also adds up to a great opportunity for Microsoft to deliver earnings and earnings per share growth over the next few years. When combined with our recurring dividends, this forms the basis for how we will continue to deliver value to you, our shareholders.

Thank you, and I look forward to taking questions at the end of our meeting.

Before we move on to the balance of the presentations, please be advised that the polls are now closed. At this time, I would like to introduce Steve Ballmer, Microsoft's CEO. Steve will talk to you today about how we are positioning the company for future growth. (Applause.)

STEVE BALLMER: Well, thanks, and I guess I will say welcome to Chris. This is his first annual meeting as CFO. And I'm going to switch now to American from New Zealand accents, and talk to you a little bit about our plans for growth. As Chris detailed for you, we achieved strong financial results in 2005. We're off to a very, very good start in 2006. This is a crucial year for us. It's one of the best in terms of the product innovation we're delivering to customers that we've ever had.

A few months ago, I did something in our financial analyst conference that I almost never do. I was simply optimistic. I was outwardly bullish. And, sure, I talked as usual about some of the risks in front of the company, but rather than just sit there and say, yes, this on the one hand, that on the other hand, I really came right out and said that we're on the brink of a new wave of innovation and growth. And now, with just a few months later, I look back and I say that optimism was really justified. We're placing our bets in the right areas, we're executing, and we're really keeping up with the changing marketplace. Microsoft is a strong company, and we're growing stronger.

I've always said that the only way we grow the company and deliver greater shareholder returns is by driving new software innovations into the marketplace, and I'm happy to report that our people have worked harder than ever to deliver. This year we really are releasing more important new products than at almost any time in the company's history. On Monday, we launched SQL Server 2005, Visual Studio 2005, and BizTalk Server 2006, which are really key products in our Server and Tools business. This is one of the key growth engines for the company. This division has been putting up solid double-digit growth year over year, and we're outpacing our competition in this marketplace.

Today, we sell more of our SQL Server products than Oracle and IBM, our two biggest competitors, combined. And our .NET development platform is now used by over 90 percent of the Fortune 100 companies. Windows Server 2003 has really become the server of choice for companies around the world.

We're continuing this momentum with the launch, especially in the Ballmer household amongst my three children, much anticipated Xbox 360, which will be out in time for the holidays. There's already tremendous excitement in the marketplace about the launch, and more than 200 games are in development to take advantage of this next generation high definition platform. This is a business in which we frankly now really established ourselves as the clear technical leader, and this next generation console will be the first to incorporate advances such as high definition display. We're also at the forefront of online play with our Xbox Live service, which now has over two million subscribers. This holiday season will be a blockbuster in terms of Xbox sales, and we're ramping up production just as fast as we can.

But we're not just rolling out new software products. We're also making a major strategy shift to keep up with the changing times. Last week in San Francisco Bill Gates and Ray Ozzie announced two new Internet-based software services, Windows Live and Office Live. This is a revolution in software. We will fuse software and services from the Internet, to expand our product experiences and deliver even greater value to our customers. We believe that this has the potential over time to be a major new revenue stream on top of the new products we are delivering to customers anyway. It makes using the Web, and using the desktop experience a seamless, natural flow.

Just as we've succeeded on the desktop, we're driving to win with services on the Web. We'll continue to expand our offerings, both for business and for consumers. There is a significant growth opportunity for us, as we tap into the growing market for online advertising. There will really only be a few big players in the online advertising market, and our company aims to be, and will be one of them.

We're very bullish about our growth outlook this year and beyond. And that's one reason why we've accelerated our strong buy back program. It's a strong measure of the confidence we have in Microsoft's ability to succeed. However, we have never really used the stock market itself as a barometer of our success. We measure our success by the product breakthroughs we deliver into the hands of our customers. And on that count, this is really a blockbuster period for Microsoft and for our customers.

Maybe the most important factor in our growth outlook is our ability to innovate and execute in the right areas. And to make the big, bold bets that we can uniquely afford to make. I believe Microsoft is innovating across a broader spectrum of human endeavor than any other company, certainly in the IT industry. We have a choice as a company, we can focus just on our core products and grow modestly, or we can set our sites higher and aim for greater growth. We're choosing that path of higher growth. Now is really the time for us to make the big bets that, as I said, we can uniquely afford.

We're investing in and creating software for the broadest array of scenarios and devices, from the businesses to the homes, from PC to Xbox, from mobile phones to set top box for interactive television. We're inventing more new ways for people to communicate and collaborate, to access and organize information, to do business and be entertained, than just about any other company in the world. We're innovating for tomorrow's digital lifestyle, and for tomorrow's digital work style.

We see tremendous synergies between our broad investments and these investments that will really help drive our growth. This is not a time for us to dial back investment, but to increase it. We're investing more to ensure that we are constantly expanding our growth pipeline. We're moving forward with our strongest portfolio in each and every product area. We'll grow not only by innovating and gaining market share in our foundation businesses, but also by expanding our portfolio of products and businesses, and as Chris said, by delivering new software services, many of them based on advertising and subscription models, and really spanning all of our product lines and customer segments.

Our foundation businesses, Windows, Office, and our server businesses are still very much growth businesses. The PC market is growing, the server market is growing, around the world as emerging markets integrate with the world economy we have tremendous opportunity to sell legitimate, legal software in places where piracy is now rampant.

We have opportunities to gain share in the markets for Web servers and high performance computing, where we have not had much of a presence, but with our new server product line, it looks good. So there's plenty of growth in our foundation businesses. We'll deliver Windows Vista in 2006, and it will give users greater clarity and control over all of your information. It will help you better manage the enormous information flow that you face. And I believe it will be met with real excitement from all corners, from the IT department looking for enhanced reliability and security, to consumers buying the premium edition, that lets them use their PC as part of a digital entertainment center.

We're expanding our portfolio in many, many areas, workflow management software, real time communication, document management, search, portals, business intelligence, storage, security. We're launching numerous new products and we're introducing higher value versions of our existing products with additional capability. We did this with Windows when we brought out a Professional Edition, and a Media Center edition. And they have literally, literally driven billions of dollars of revenue and profit growth for the company.

With Windows Vista we have plans for an enterprise edition; with the next generation of Office we have plans for what we call Office Premium. So this year is shaping up as one of our strongest years ever. Our new products and services are broad and far reaching. They'll have a huge impact on both our foundation businesses, and our new businesses. Products like the ones we've introduced this week will further strengthen our great momentum in Server and Tools. Windows Vista will delight PC users. MSN search will really enable a completely new category of demographically targeted searching and advertising. Windows Mobile 5 is already becoming the preferred platform for smart phones from industry leaders like Motorola and Palm. Microsoft Dynamics CRM should lead the way for a new generation of software applications tailored to how small and medium sized businesses really want to operate.

Our new offerings reflect the new processes we've put in place to ensure excellence in our engineering. They also reflect the steps we've taken to stage our product development, for a continuing flow of new releases that deliver real customers value, and sustain this growth momentum.

The outlook for our company has never been brighter, and we've never been more excited. I want to thank you for your support, as we continue to go after the great opportunities that lie before us, and as we continue to grow and strengthen this great company. Thank you very, very much. (Applause.)

I'd like now to turn the meeting over to Bill Gates, our Chairman and Chief Software Architect. Bill is going to talk to you today about the history of innovation, and he'll also have a chance to demonstrate some of the hot new products we have coming on.

Please welcome Bill Gates. (Applause.)

BILL GATES: Microsoft got started 30 years ago, and back then in 1975 computers were very different. Basically there was no software industry. People looked at mainframes as really just a tool of large organizations. Obviously the vision that Paul Allen and I had in founding the company was that we could change that. And every decade there have been breakthroughs, new approaches that have allowed software to move to new levels. In 1975 it was the PC itself, the idea of a kit computer, although it was very limited.

By 1985 we had taken the IBM PC, introduced in 1981, and shown that it was an important business tool and really established Microsoft's key product at that time, MS-DOS, as the primary operating system for that machine. So from 1985 forward a whole industry grew up, an industry of partners building on the Microsoft platform. In the 1980s we took on a challenge of establishing graphics interface as the way that software would be developed, and that was very difficult. The machines were not fast enough, the were many other people doing similar things, but by 1995 Windows had really achieved a central position. In fact, that was the year that Windows 95 and Office 95 came out, and really got people to think of Windows as the product to build on. Again, we drove the number of partners that we had to new levels, and there was a great success there.

Already, though, at that point we could see a challenge and opportunity coming along, as computers were more and more connected together. It was late in 1995 that we talked about the Internet being the thing that Microsoft would focus on. During those years we drove forward, in terms of our development tools, our browser, our server products. And of course, the Internet has become a fantastic thing for all personal computer users. In fact, we've been building software that runs on top of the Internet to make it very easy to connect different systems together.

By the year 2000 we committed ourselves to an overall strategy there, that was the .NET strategy, and today in 2005 we can say that was very successful. So we have that as the foundation to build on. The PC, graphics interface, the Internet, and all of those .NET innovations are now allowing us to shape software in new ways.

The trends in terms of hardware advances are very advantageous to us. For example, there's always been the question whether PC servers could take on the most difficult tasks. But, with the move now to 64-bit microprocessors from Intel and AMD, and with the new software releases around that, there is no doubt that PC servers can provide the very best performance.

The PC itself is doing very well this year, we're looking at growth of about 12 percent in units, which will take us from about 200 million systems sold in a year. So that's a phenomenal improvement. The form factors continue to improve. One of those that we're putting a lot into is called the Tablet form factor. That's grown a lot. Over the next several years we hope to drive that into the mainstream, and think about every student, for example, having that Tablet, and being able to get their course material through the wireless Internet onto that Tablet screen.

The phones are also improving very dramatically. As they become more software intensive, that plays into Microsoft's strengths, as you have speech recognition on the phones, you take those photos and actually do analysis by the images. So you can do things like take, say, a sign in a foreign language, you take a photo of it and come back and translate that for you so you can understand exactly what's being said there, so a lot of innovation to drive rich software into that phone platform.

Wireless networks are connecting systems together more broadly, that's pervasive WiFi and new technologies like ultra-wideband and WiMax that have come along. I think it's fair to say that the hardware industry is giving us everything we need to be more ambitious in terms of what we do with software.

There are two realms that we think software can continue to revolutionize all of our activities, one we call digital work style, and the other we call digital lifestyle. In digital work style, we're literally talking about taking all the processes of business, the way you meet, the way you record meetings, the way you draw people in remotely to those meetings, the way you analyze sales figures, the way you organize sales and market, the way that you manage projects, we're looking at taking software, new software, built around the Office and Windows platforms, and allowing people to do those things in a far better way.

These kinds of productivity advances can make a huge difference for our customers, and they fit into the trends in the economy where it's more and more of a global marketplace, the competition for labor is more intense, and people are having to make decisions based on more information and make those decisions in a very rapid fashion.

In the digital lifestyle there are also dramatic changes coming. Today already we see people in terms of music and photos thinking that the digital approach is the way they'd like to do things. But as we bring in the idea of recording all memories, making it easy to back those up, easy to navigate those things, as we bring digital even to the TV experience itself through what we call Microsoft TV, connecting up through a high speed Internet connection, even TV viewing can be changed, can be improved. The ads can be targeted, the shows can be personalized so that when you're watching a news show you see the things you're interested in. Gaming can be taken to a new level, a level where you can talk to your friends and compete with your friends, you can get involved in contests. And whole new game genres are being made possible by these digital approaches.

Now, one of the big bets that Microsoft is taking is what we call the services approach. This is about what we've also labeled Live Software. As was mentioned, Ray Ozzie and I had a chance to talk about that vision and the bet we're making there just last week, and Ray and I are getting all the product groups to design around this idea that you take rich software and connect it to the services that are delivered in the Internet. We can be a leader in this. There's a lot that hasn't been done, but we would say that we're confident that this live era of software is really coming along.

You can think of it in terms of, say, securing your PC where we constantly have either updates or information about what software you should and shouldn't use that's guiding you. Likewise, you can think about it in terms of communication where when somebody tries to get a hold of you, software, working on your behalf, can decide what you're doing, what device you have, and make sure that your time is used in the best way. So Live Software is really a chance to do things in a much better way than ever before.

At this point, I'd like to ask Craig Beilenson to come up and give you a little glimpse of some of these key products, a little glimpse of Vista, a little glimpse of Windows Mobile, and Xbox 360.

CRAIG BEILINSON: Great, thanks, Bill. (Applause.)

Well, good morning, I'm thrilled to be here today. It's certainly, as everyone has been saying, an exciting time to be at Microsoft with the pipeline of rich products that are coming out between today and the next time we'll see you all in this room next year.

I'd like to show you just a few, and I'll start with Windows Vista. Really in a world where there's more and more information coming at us, more software, more applications, more Web sites, we want to be able to make it much easier for you to find and work with the information that you're looking for.

So let me show you a few quick examples. I'm going to open up a number of windows here. And we know that our users usually have more than one window open at the same time, but we don't give them enough information to feel confident about moving from one to the next or knowing what they're going to click on at any given time.

So what we've done, we've added a few features here where if I move my mouse over the task bar at the bottom of the screen, you'll see a live preview of what I'll see if I actually click on that icon. It's not a static W for Word or a static icon for Excel, but a rich preview of what's on that screen, even, if you can see that, moving video right in the preview, which we can hear a bit now.

Some people like to use the task bar, some people like to use the alt-tab keystroke as well, and we've improved that there, too, so again not just a static icon but the ability to see that Word document, see the spreadsheet or the PowerPoint presentation, and again with live video right in the preview so I know exactly what I'm getting when I click on it.

In fact, we took this a bit further using the Windows Vista presentation platform and decided to take a 3D crack at that. I do this just for fun for hours in my office, I think it's so cool. (Laughter.)

Maybe I want to play a little solitaire, use that animation, or go over to calculator and work it like that; so a number of rich ways to feel very confident about what you're going to get when you click on something in Vista.

The next thing that we've focused on is making sure that you can find anything in Vista. Certainly you're going to be buying PCs very shortly not just measured in megabytes or gigabytes for your disk drives but terabytes very soon. And when you have thousands or millions of documents on your PC, how do you find those.

Well, we've integrated search throughout the operating system. You'll see right on the Start button I can find any application or document that I'm looking for, from the Start button I can even go to the control panel and instead of hunting and pecking around for the right icon, I can simply type, maybe I'm looking for some power settings, and those immediately come to the forefront.

In the exact same way I can head over to My Documents library and bring up all the documents that are available to me. And if there's too many or I'm not exactly sure where it is but I remember that my colleague Eva may have written it, I can just type the letters E-V-A and that document again comes to the front, so I can very quickly navigate through the potentially thousands or millions of documents that I may have on my PC.

Now, certainly the Internet has become an increasingly important part of our lives. Some of us, I would argue, can't live without it these days, and certainly a new generation of PC users don't know the world any other way.

So with Internet Explorer 7 in Vista we're making a number of innovations, not just on the security front like anti-phishing measures to make sure that people aren't conned by malicious Web sites, but also on the usability front.

So in the morning when I get into the office I always read the same seven to eight Web sites, kind of like my version of reading the morning newspaper, but instead of having to click once, load it up, wait, click once, wait, load it up, now in IE 7 what you can do is actually load all your pages at once. So you'll see these tabs all loading in the background. So it looks like the New York Times is ready, so I can go read that, and while I'm reading the paper the Wall Street Journal is loading or, well, sometimes I like to check out ESPN.com, something on CNET or the PI. All these pages are easily available to me.

And while I kind of get a preview up here in the tabs, we've done something new that enables me to see all my pages at once called Quick Tabs. And here I can see a preview of all the pages that are available, so I can go right to the Wall Street Journal or right to the New York Times by getting rich previews of all the Web pages that are available to me.

The next thing I want to show you is what Steve and Bill have been talking about in the realm of services. Last week, we announced a number of new services, I'd like to show you one of them called Windows Live. On our customer's homepages we know they like a variety of things; some people like a programmed experience, that's why MSN.com continues to be, some people like a very clean experience, and some people like to program it themselves, so I want to show you what we can do for those last two sets of users.

Here I'm going to run a search. Just I think the new Harry Potter movie is coming out next weekend, so let's see if there are any early reviews out there. I'll run a search and I get some search results, which are great. I can go on and read about Harry Potter, or I could read the latest news about Harry Potter and I get those results, or I can see what the blogosphere is saying about Harry Potter and see what blogs and RSS feeds are saying about it.

Now, if I'm really interested in this information, I could come back and run this search over and over and over again or I can just add this to my homepage. And now every time I come to my homepage I get the latest and greatest information about, say, Harry Potter reviews or whatever you happen to be interested in. So you can do that for any topic that you search on.

And we'll be providing a number of categories, we are providing a number of categories that you can add to your page, maybe Fortune Magazine, maybe Forbes, if you're into sports or movies, et cetera you can add all of these various things to your page.

And even adding a small piece of software that we call Gadgets, so I can, for example, check my mail. We're running out of room there, so let me close that and customize the columns and drag and drop some things around. So it's really very flexible so that you can personalize your page however you want to.

You'll note that I've got my e-mail right here on my homepage, so I can certainly check my e-mail from Outlook, Exchange, et cetera, my homepage here, or the new device that I'm holding up here, this is the new Palm Treo, which we're expecting next year. The interesting thing about this Palm Treo is that it's not running the Palm OS, it's running Windows Mobile 5.0, a fantastic example of the fusion of great hardware, great software, great service from Verizon that let me check my e-mail, my calendar, my contacts, browse the Web and it happens to be a pretty good cell phone, too.

But I think the most exciting example of hardware, software and services coming together is what we'll be launching in two weeks, called Xbox 360. What we have here is a new game called Project Gotham Racing 3. I'm not too good at this game, so I'll just pick the easy mode.

Now, as we've been saying with—I'm going to come out here because I've just always wanted to do this. It's so much more fun than playing in my house with these big screens.

Okay, so with Xbox 1 we have two million users paying us every month for Xbox Live, and we went from zero to a million faster than any online paid service.

Okay, here's my car, I'm racing around Vegas, a lot of construction in Vegas, I guess. I think that's the new Steve Wynn hotel. And you can get a variety of different—I think you'll recognize some things in Vegas that I keep driving around. Let me look around a little bit. You get a number of different—clearly I'm not a good driver, I'm hearing snickers. You get a few different views here. I can be inside the car, for example, and see if I can pass these guys. Excuse me, pardon me. Look through the windshield here. Or even let me flip around one more time, I think I've figured out why we call this thing Xbox 360 because I can, excuse me, look to my left, look all around, look to the right, see the crowd. There, is that the Mirage, what hotel is that? The Mandalay Bay, thank you very much. (Laughter.) So a quick look at Xbox 360.

Now, at any time I can be invited to a new game, a tournament by my friends or watch a tournament, but one of the key parts of Xbox 360 is not just the gaming aspect, we want this to be a real hub of, as Bill discussed, the digital lifestyle. So here's the Xbox Live central where I can get messages from my friends, download new games, see how I'm doing, but also integrate with the rest of the media in my house.

So what I have here is a music player from iRiver, and what I'm going to do is simply use the USB plug and plug it right into the Xbox. It happens to work with an iPod, too, if any of you have one of those. And now it recognizes all of my music, and we'll just pick someone, and as it loads here we go. There we go, and we can listen to music, there are some nice visualizations there, which you can play around with or control. But at the same time, you can certainly add other devices like a camera. So I'll back out to the photos area and just like I did with the music player I'll plug in my camera, head over to the pictures area, and you'll see that it recognizes my Canon Powershot, there's the slideshow, and I can take a look at some of the photos while listening to music on the device that's hooked up my television. Here's a little shot that we took in New York a few weeks ago.

And just before I wrap up, the last thing that I want to show you, my favorite feature of Xbox 360 is that I can turn it off, thanks to my wireless controller, without getting off the couch.

Thank you very much. (Applause.)

BILL GATES: Well, what Craig showed you is just a small glimpse of the neat new things that are coming out over the next year. Office 12 is another major release and one that I think people are going to be very surprised how dramatic the improvement is both in the user interface and the way it connects up to let people share information in new ways. What we've done in terms of workflow and sharing is probably the most impactful part of that, and we've had incredible success with that and we'll be going into the betas of that in the next few months.

As Steve said, we are taking a long term view of the investments that we're making. A good example of that is the money we've put into our research group. Our research group opened up its fourth site, which is in India, this year. I like to say that wherever on the planet there's a billion people we've got a Microsoft Research Center, and so we're drawing in great people to make sure our products are going to continue to stay at the cutting edge.

We're making progress on some of the toughest problems in software, automatically having secure software, recognizing speech, letting people deal with ink, having machines learn over time; these are very difficult things and in every one of those we've been working for over a decade, but now we're getting results that will be moving into our products and making a big difference.

Many of these advances can take the IT overheads that our customers have had and reduce that quite substantially, freeing up money to do innovative new applications, to work in new ways.

We are one of the few companies in our industry that does this advanced R&D, and I think that's a key to why we've been able to maintain our strong position over these last 30 years as things have changed in our industry again and again and again.

So in conclusion, I'm very excited about where we are today. The bets that we've made across the board, whether it's in phones, advanced TV, new Office software, the .NET platform, all of those bets are now paying off and give us a foundation to do more things. The Live services approach is a new element there, but once again we've got lots of bright people trying that out, and actually in that realm we're able to put things into the marketplace quite rapidly, get feedback and iterate in a way that will let us move forward faster than ever before.

So thank you for your commitments to Microsoft and I think we can all look forward to software that will let us work and live in new ways. Thank you. (Applause.)

CHRIS LIDDELL: Thank you, Bill.

Brad, has the voting tabulation been completed.

BRAD SMITH: Yes, the tabulation has been completed.

CHRIS LIDDELL: Proposal number one is the election of directors. The ten nominees receiving the largest number of votes cast by shares entitled to vote will be elected.

Brad, please report on the vote.

BRAD SMITH: The following ten persons have received the largest number of all votes cast, each with votes in excess of 97 percent of the votes cast: William H. Gates, Steven A. Ballmer, Dr. James I. Cash Jr., Dina Dublon, Raymond V. Gilmartin, Ann McLaughlin Korologos, David F. Marquardt, Charles H. Noski, Dr. Helmut Panke, and Jon A. Shirley.

The ten nominees are elected directors to serve until the next annual shareholder meeting, and until their successors are elected and qualified.

CHRIS LIDDELL: Proposal number two is the ratification of the company's independent auditors for the current fiscal year. The proposal requires the affirmative vote of a majority of the shares voting on this matter.

Brad, please report on this vote.

BRAD SMITH: The company has received affirmative proxies and ballots representing more than 98 percent of the votes cast.

CHRIS LIDDELL: Thank you. The proposal is approved.

We have now completed the business of the meeting and our shareholder meeting is now adjourned.

We will proceed to the question and answer session. The Investor Relations team is in each of the aisles with microphones. We're happy to take as many of your questions as we have time for. Please, however, limit your questions to one each so we can take as many as possible.

I'll take one from number four, thank you.

QUESTION: In the fastest growing economies in the world, they do not have a history of a cultural value or practice of intellectual property protection that we have in Western countries. We could lament that and say it's not fair, but if that's the reality, what are your plans for coping with that reality in the future?

STEVE BALLMER: Well, we're working on that in a number of ways. I think it is important for us to be a positive force in terms of explaining and educating the population, starting with government officials, on the value of proper intellectual property protection, and certainly directly but mostly through our trade association, the Business Software Alliance, we've been quite active in that endeavor.

Number two, we do participate with government in enforcement activities, again typically through the Business Software Alliance, because there certainly even in these emerging markets are businesses and affluent people who are participating broadly in the world's economy and should participate broadly when they use our intellectual property and the proper payment for that.

Third, there are a set of things that we are doing from a technology perspective to try to innovate, if you will, in ways in which our software gets used and paid for in these developing markets. We've launched a new version of Windows, the Starter Edition to work with governments on very low cost PC offerings, there's a set of other trials and experimentations that Craig Mundie, who's one of our chief technology officers, who works for Bill, is shepherding on behalf of the company, because we do see this as a big opportunity.

CHRIS LIDDELL: Thank you. I'll take one on number three.

QUESTION: Thank you. My name is Lonnie Lusardo. My company is the Diversity Collaborative.

Research that I do in the area of generational issues at work shows a void between the way older workers and younger workers do things. The biggest void is that older workers tend to be fearful about technology in general, computers specifically. Most of the new innovations I see seem to me to be targeted to younger audiences. What innovations do you foresee to make the ease of use much more simple for older workers? Thank you.

BILL GATES: Well, we're certainly interested in having people of all ages use our products, and ease of use comes up again and again as a key thing that limits how much people can get in and get at the functionality.

If you look at something like Xbox, our goal here is to take all those different remote controls that you've had in the living room, one for each device, and instead provide a visual interface where you always know as you navigate around what can be going on there.

In terms of the Office software, the next version has a much more visual approach so that commands are nearly as buried down under the menus as they have been.

Another thing that's turning out to be very effective for us is to have training materials, video material available up on our Web site and as users are working through the product we can suggest these little snippets that can guide them in terms of how they use the products. We get constant feedback whether those are helpful to people, which ones get used the most, and so we can refine that not just as we release new products but on an ongoing basis, making sure that that responsiveness is there.

And so as we do usability, we're very interested in looking at workers of all ages. We have been very successful with Office being a tool for all types of workers, but only through new levels of usability do I think we'll be able to drive that forward.

CHRIS LIDDELL: Thank you. Number one.

QUESTION: My name is Brian Airs. I'm a retired high school teacher in Monroe, Washington. And I remember you, Bill, when you played on the chess team at Lakeside High School.

My question is Access has never been part of the Office suite. Is this going to change in Office 12 or are we still going to have to buy that as a standalone?

BILL GATES: Yeah, actually there's different ways that we offer Office. The Professional edition of Office Pro does include Access. The version of Student and Teacher Edition, which is in a sense the lowest priced version, does not include Access, Office Small Business does not include Access. So I think the SKU that gives you Access is the Office Pro. And I think that packaging is going to stay the same as we move to the next version.

STEVE BALLMER: Yeah, if you have specific issues or questions, please feel free, SteveB@microsoft.com, please send them along, on anything.

CHRIS LIDDELL: Thank you. Number two.

QUESTION: Yes. The genome is a fairly new technology and software is a major part of it. Does the company have plans to participate and go forward in this area?

BILL GATES: Yeah, Microsoft itself is not in the development of medicines or medical research, but, in fact, as you say, there's such rapid advances there, lots of companies. We want to make sure our software can be a very effective tool for dealing with the collaboration and the large amounts of data that are being generated there.

And so we've built in, for example, into the recent release of SQL the ability to date mine that will be used by biologists who are dealing with lots of genomic and proteonomic data. We get a substantial amount of our sales of our software into that healthcare sector, we've done very well with it.

We are looking at whether there are special extensions we could do that relate particularly to that field, so that's a constant dialogue. So you won't see us doing the actual medicines or genomic research ourselves, but rather reaching out and making sure our software helps all the other people who are focused on that field.

CHRIS LIDDELL: Thank you. We have time for a couple more questions. Number two again.

QUESTION: Thank you. My name is Doug Kilgore. I'm the executive director of the Worker Owner Council here in Washington State. We're a council of building trade unions and we represent the ownership interest of our members who participate in these many pension funds, Taft Hartley funds throughout North America, and collectively building trade funds hold over 2.5 million shares of Microsoft stock.

So the purpose of my question today is to address the issues surrounding election of directors. One of the most important responsibilities we have as shareholders is our vote for the company's directors. And we appreciate the acknowledgement of the importance of this that the company has made by adopting a policy to notice when a majority of votes are withheld for any director in an election. In September you announced that policy and stated that it was a way of giving consideration to shareholders.

We're disappointed though that at the end of the day and today as we have elected ten directors it still only requires one vote for a director to be duly elected, and despite the policy that requires or that asks a director to resign if they are not recipient of a majority vote, at the end of the day we have a duly elected director that doesn't have to resign, and the shareholders haven't become a part of the process, as our votes really are legally meaningless in an uncontested election.

So the company has really demonstrated a commitment to the best practices and you've stated that your searching for those as you go forward. My question today is would you commit to considering adoption of a true majority vote standard by amending the bylaws rather than simply adding on a non-binding policy that would require a majority affirmative vote for a director to be duly elected? If the director doesn't get that majority vote, they could be held over and the board could decide how to act upon the decision of the shareholders. But that reform, in our view, would give a meaningful role for shareholders who now really have no meaningful role in the election of directors when it's an uncontested election.

BRAD SMITH: Let me answer that. This is an area that we're continuing to pay close attention to. We wanted to be at or near the forefront of the majority principle for the election of directors. It struck us this year that the best way to be at the forefront was to take the step we took, to amend the governance guidelines that we have so that any director who doesn't receive a majority vote is required to tender a resignation to the board and then the board can decide whether to accept that.

This is an issue that corporations across the country are focusing on. We expect there may be further deliberations, including regulatory and legal changes. So you can expect that we will continue to follow what is going on, and we'll continue to focus on what is the best way to implement the principle. I think we agree on the principle and what we need to do is stay focused on the best way to implement it.

CHRIS LIDDELL: Thank you. And just one last question, number two again, thank you.

QUESTION: Thank you. I was wondering if you could elaborate on the Web-based software, whether there will be new security features and programs implemented or whether the Web-based software will continue to rely on the existing security structures that are now in place. Thank you.

STEVE BALLMER: Security is an area in all dimensions where we've had huge focus and a huge investment. In the last year we've bought three or four different companies in the security area, in addition to ramping up our own R&D efforts in the area. We have announced or talked about a product that we'll bring to market or a service we'll bring to market called Windows One Care, which is a service that would provide a range of protection and PC maintenance and support services, including security, to our online users. Think of that as a part of the Windows Live service. We'll be in beta on that service over the course of the next several months. But in every sense we think the security and protection, whether it's phishing or viruses or other malware and spyware, that is an important part of the overall Live services.

CHRIS LIDDELL: Thank you. I apologize, that's all we have time for, and that concludes our Q&A session.

So, ladies and gentlemen, thank you very much for attending and for your continued support and interest in Microsoft. Have a great day. Thank you. (Applause.)

END

Due to the varying sound quality and subject matter of tapes, the information in this transcript may contain inaccuracies.