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ANNOUNCER: Please welcome Senior Vice President, Mobile and Embedded Devices, Pieter Knook.

PIETER KNOOK: Well, good afternoon. We've had a great year. In fact, when you look back at some of the evidence that you can see of our success, you see that we've made a lot of progress. Certainly in the stand-alone PDA category, we are now the undisputed number one, having surpassed Palm's share by quite a margin. You've also seen a lot of evidence of the work that we've been doing with operators around the world. With France Telecom recently, we announced a new product that we'll work on both Wi-Fi and cellular, something that we're bringing to market jointly with that operator. You've seen us innovate in a business model with Vodafone as our MSN group is bringing out IM interconnect offerings, as they're bringing out Windows Mobile products. And you've seen us bring to market in a country like Korea a Smartphone that's aimed at business users, in a market that is very well developed in data services. So there’s lots of evidence of our success.

But of course this audience, particularly from a personal usage standpoint, is a challenging one for us. It's the one that uses a lot of BlackBerry products, and I'm going to spend a little bit of time talking about how we're going to compete for mobile information workers, such as many of you sitting in this room. And there are many elements to that competition, the first of which is a focus on how do we do as a business and how our business model works. When you look at how we've been doing, you see a lot of growth, but the growth as a business has many components to it; the connected devices component, for example, to our overall business has been growing much faster. You'll see in a subsequent slide I talk about 150 percent growth just in that connected device segment, which is one of the key elements.

Windows Mobile is that connected device element. We have been broadening our distribution. We have announced a number of new products this last year—Windows Mobile 5.0—and with the new messaging and security feature pack, we really tackle some of the always up-to-date and security elements that have been deficient for us. So we are really in a very good position for the requirements of an enterprise user.

As far as operators are concerned, we've always represented devices with high average revenue per unit (ARPU). We now have a huge choice of device-makers, of operators around the world, and a range of different countries in which these products are available. And you can see many of them in the booth that we have across the way.

Even in the embedded space we've been doing well. We've just announced our new embedded point-of-sale device software and that has been really going very well with many wins across the retail segment. The Streets and Trips, our navigation products, and the MapPoint group—that has been a big driver for our success. And of course even in the automotive space we've recently launched our newest release of Windows Automotive 5.0 in Japan, which has been having a lot of success, especially in the Japanese market.

So let's now turn to the RIM business model, and particularly how are we going to be successful with operators, which is one of the important dynamics for our success in Windows Mobile. If you look at the typical structure of the retail offering that an operator would make around a RIM device, it has many components. So if you think about a typical price of 24 euros retail, there are many cost elements to that. There's a license fee to participate in the network operations center, there's a cost of delivering the data plan, and of course the always up-to-date access mechanism to that. There's the cost of acquiring the subscriber, and there's a cost of customer care. So in the monthly fee structure, that leaves the operator with a certain level of margin, which is about four euros. When we look—and, by the way, the typical data plan that we're provisioning here is about a 5 megabyte plan—the actual usage is about 2.5 megabytes.

When we look and compare how Windows Mobile devices look, first of all we expect most operators to charge slightly less for a Windows Mobile device. And that's certainly also going to be differentiated between, say, Smartphone products where we expect them to charge perhaps even lower rates—fewer attachments, fewer features, and so on—and for the full-capability Pocket PC device. We might expect a bigger plan even than this. But on average maybe 22 euros is the typical plan. Because in fact there are more attachments and there's more synchronization going on, and certainly these users are using their Internet more frequently than would be the case for the RIM user. We're typically seeing the operators are going to provision a 10-megabyte data plan per month, so there's a greater cost associated with that—$7 or 7 euros rather for the always up-to-date component plus the core data plan.

There are similar costs for customer acquisition and customer care, but at the end of the day, the operator has a greater margin. So our proposition to the operator is that this is a great story with Windows Mobile. It's going to be cheaper to the end user, and you're going to make more profit.

In addition to that, because of the nature of the Windows Mobile product representing both an opportunity for Internet access and for other types of applications in the consumer domain like media, instant messaging, and MSN services, there are plenty of additional plans that can be offered on top of that basic e-mail infrastructure. This means the operator has a big incentive to upsell these users to other service plans. In fact, one of the other attributes we see is that many of these users also have higher voice ARPU characteristics than non-Smartphone device users. So in fact there's a mechanism where we see increased voice ARPU as well as this enhanced data ARPU. So we have a pretty compelling story for the operator.

So let's turn to the business and particularly the IT department. First of all, when you think about the architecture of the solution, today the RIM solution of course has the network center, and you have to install these additional services in front of Exchange. In our solution, those go away and you have a much simpler solution where end-to-end connection is controlled effectively by the IT department. In fact, if there is a network operation center in this picture, it resides inside the corporate IT department. That is where the network operation center lives. That's where the security is managed, that's where the passwords are managed. And then there's a direct SSL secure link between the device, through the firewall, through the operator's network, to the device at the other end.

The other thing to point out is that we've licensed this protocol to many different providers. I personally in fact spent a long time negotiating to make sure we had Nokia on board, that it would be one of the licensees of this active sync protocol, so that we had the widest possible array of devices. Now, from a corporate IT point of view, that means they will recognize the benefits of Exchange, Exchange 2003, and say, "Yup, this is the version of Exchange I want to run because I get the widest possible choice of devices to be able to use, and with the simplest administration model and the lowest cost." And then we compete of course on the merits of the device itself, the capabilities of Pocket Outlook, and all of the software that we write on the device. Even if others use the same protocols, they still have to write the software on the device itself.

So our solution architecture at least is clearly simpler. It also has some big impacts when you look at the cost structure because today you look at a population of 20,000 simultaneous users, which is not uncommon, that's what we do here. You've seen Marks & Spencer announce that they're doing a widespread pilot of mobile e-mail to their users, and there are many, many other accounts who are thinking of deploying e-mail widely to mobile professionals on this kind of scale. And if you're going to do that, then you're going to incur some additional costs if you do it with a BlackBerry solution.

First of all, you are going to incur the cost of additional servers that you need for Exchange to take the load of all those BlackBerry enterprise servers. So, in addition, you need a whole bunch of BlackBerry servers that are going to manage all these mobile users. And then of course you need to pay for the CALs (client access licenses) associated with that. So in total that represents a pretty expensive software licensing solution for that enterprise IT department—the equivalent with a Microsoft solution is all included within the Exchange license. So there's a pretty dramatic difference for a 20,000 user population when you take into consideration that difference in cost structure.

Now, obviously there are the operator plans, you still need to pay for the data, you still need to pay for the device, and so on.

So let's talk about how these solutions work with the other Microsoft components, because mobile information work of course represents a connection between the device and the server—in this case Exchange. But there are many other elements to the Windows Mobile story that connect us to how Office works and in fact how Outlook works on the PC, making that user interface similar to the software we're building on the small device, making sure that the development environment is similar. As Eric already indicated, the fact that the same toolset—Visual Studio—can be used to build applications not only for PC platform, but also for a mobile device, that's a huge asset for us. In fact, we know that the vast majority of all mobile-focused developers are in fact targeting the .NET Compact Framework and our development environment. So that's a very strong indictment of the fact that we had a very strong end-to-end story for developers who want to build applications in addition to some of the mobile information worker features.

Even for the consumer, the fact that we are a PlaysForSure device, the fact that we link into all of the DRM supports so that you can take your MSN Music tunes and play them on the device, the fact that you can take all your MSN Hotmail and manipulate it on your device with the Pocket MSN application that we just announced—these are the consumer assets that further differentiate what we do in the mobile information work for professionals. But when you go home and you have some other things that you do with your device, in fact we have some solutions to those challenges as well, when you turn into a father or when you turn into a consumer as you leave work.

Now, when we look at the whole story, of course it's not complete unless you talk about the devices a little bit as well. And in fact, let me show you a couple of devices here. You can see these again across in the booth here. The first one is this Samsung device, the i300. And this device represents the media component. This device is a normal phone. It's got a very nice little control dial on it, and this is a PlaysForSure device. It has a 3-gigabyte hard disk inside. So this is a device that you would use to store a large quantity of music on, but in addition it's still a normal phone.

Then this device from HP represents one of the typical kind of QWERTY-type devices that you're starting to see. In this case this has multiple radios inside. It has both Wi-Fi and cellular support, a full QWERTY keyboard, full Pocket PC stack. It has all the attachment support, all the latest application support, including now PowerPoint and so on that's coming in Windows Mobile 5.0.

So these kinds of devices—this Compaq one and this one here from HTC that's running Windows Mobile 5.0—in fact, this is the first Windows Mobile 5.0 product. It is also the first 3G product. And, again, it has Wi-Fi as well as cellular. This is a keyboard-enabled device and will also function as a sort of tablet type device when you turn it the other way, and the screen resolution switches from portrait to landscape as you switch.

So with this range of devices, not only do we have a great end-to-end story on how we compete for mobile information workers—how we add a developer story and how we distinguish ourselves with some additional consumer assets—we really have a complete picture with the device, a proposition for the IT department, and a proposition for the operator, all of which work very successfully.

So with that we think the outlook is pretty bright. This last year, as I've said before, we've grown over 150 percent in the connected device segment, and we expect further growth going into fiscal year '06. In fact, this year we shipped well over 5 million connected devices, if you add up all the Pocket PCs, Smartphones, and other devices that have radios inside. So that's a pretty strong position. We're clearly in the number two slot. But, just like you've seen with Palm, we know how to come from behind, we know how to satisfy users, and we know how to build great propositions that appeal to all the constituents in our ecosystems.

So, with that, we expect further success. In fact, on Monday you may have seen the announcement of this device, the Motorola Q, which is being quite widely acclaimed. This is a very thin device. It has a very good keyboard on it. Again, a Windows Mobile 5.0 device. We expect to see this perhaps first in the U.S., and this device will ship in the first quarter of '06, according to Motorola. So this represents a big breakthrough for fiscal '06, for our outlook in where we expect our connected device shipments to go, and how we expect that to affect our financials. So we're pretty bullish about our performance going forward.

Now, when you see what we've done, of course we expand into extra markets. You've seen us bring some devices to market in Korea. We expect or we have also brought out some new arrangements with Flextronics that take us into some lower-cost countries, like India, with lower-cost products, even in the Smartphone category, where we do believe there's big opportunity for us. We have worked with many other local manufacturers in the Chinese market, too. So you can expect further geographical expansion. And to date, we have represented ourselves in most of the major developed markets. So that's a big growth engine for us.

The applications and services story is also one we feel very good about. When you get these devices out there, and you get a lot of developers that are targeting your devices, and you have a lot of success, particularly with corporate IT departments, you start to see that as a reason why people deploy this kind of device. They see there's consistency in the platform, there's a recognition that that's very important in terms of making these devices appealing to the business. In fact we even see that many businesses are starting to say they want to procure these devices directly because then they can control the software and manage that on these devices, in addition to obviously managing the security profiles and so on that we now enable with the Windows Mobile 5.0 and the Exchange 2003 Service Pack 2.0. So those two together really address the always up-to-date as well as the security elements.

On the embedded side, you've seen us make a number of announcements. You've seen our progress in the automotive business where we continue to launch new releases of our embedded software for automotive point of sale. We're just at the beginning of the curve where we see a lot of point-of-sale systems being powered by the software that we've put together, which not only provides a great point-of-sale environment, but a management environment to keep those devices up to date.

And then on the consumer electronics side we see the whole consumer electronics chain changing from custom ASICs to more application platforms with the change to high-definition DVD. You saw the announcement we made with Toshiba about it committing to using Windows CE as part of its consumer electronic devices. That's a big growth area for us in the embedded space. We really think the whole consumer electronics chain change—as you move more into application platform devices with downloadable software, changeable software, far more adaptable devices—we think Windows CE is very, very well suited to that.

So all in all, we're very bullish about not just our opportunities in Windows Mobile, which are clearly strong, but our opportunities in some of these other areas. We anticipate showing you further growth.

So my job was to show you how we bridge between the server world of Eric and Doug and connect that into some of the consumer spaces. So I'm the bridge into Robbie. So I'd like to introduce Robbie Bach, who is going to come tell us a little bit more about the entertainment world. Thank you.

END

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