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CRAIG MUNDIE: Good afternoon.

I'm finishing my 14th year at Microsoft, and I came here on a handshake with Bill Gates almost 14 years ago, basically to do startups within the company. And I've partnered closely with Bill for all that time, and I think we've made great progress.

Many of the things that you've seen talked about by the people up to this point in the program are really built on many of the decisions that were made, the investments that were made, many, many years ago.

To some extent my job at Microsoft now, particularly as Bill transitions to the foundation over the next two years, is to ensure that, as Kevin said, the company has the ability to convert strategy into business results through great execution. That really takes two parts. You have to have some strategy, and you have to have great execution.

The people that have talked so far today are the people who really focus on what I think of as the more forecastable part of the business. And when we sit here today at Financial Analyst Meeting, I think, of course, the natural tendency is to try to analyze Microsoft.

To some extent, my job and Bill's job, as Steve mentioned this morning, for many years has been to ensure that there's at least a component of the company that's looking out into the unforecastable future. And there are many reasons that I think that's important, and there are many reasons that it's actually difficult in order to operate reliably in that space.

We are in a technology-driven business that has perhaps the highest rate of change that history has ever known. We are operating in a time where the globalization of our economy is changing things in ways that most businesses have historically never had to deal with or certainly not at this rate of change.

And so Microsoft has as a company had a heritage of thinking about the long cycle innovation. And what I'd like to do is share with you the way we think about this long cycle innovation and why without it I think it would be unlikely that you or your successors would be sitting in this room or think it important to sit in this room 10 or 15 years from today. But my job and that of the research organization and some of the other advanced development people in the company is to ensure that, in fact, it is important for you to be in this room 10 or 15 years from today. My job, and that of the research organization, and some of the other advance development people in the company, is to ensure that, in fact, it is important for you to be in this room 10 or 15 years from today.

Big changes take time and effort. We all grew up in an era where consumer electronics or just electronics were one of the things that really drove changes in our society. And many business franchises were built around them. But it's often easy to lose sight in retrospect of how long it takes to build up some of these franchises. If you look even at these individual devices in the consumer electronics space, analog color TV transmission took quite a few years, and eventually reaches a saturation in the U.S. These are all U.S. curves. VCRs grew a little more quickly. DVD players have been among the most rapid to move forward, but they were building on a foundation of these previous devices and experiences. And now high-definition television is turning past the knee of the curve, and growing quite quickly.

In the computing space, we see a similar pattern. If you look at the growth of the personal computer from 1984 to the present, it's been on a fairly slow ramp in terms of a very long ramp in terms of getting to 70 percent penetration, and many of the things that we're doing are really taking computing beyond the personal computer and creating it where more people will compute, they just won't do it in the confines of what we historically thought of as only a personal computer.

The Internet, while its technologies actually date from the mid-70s, really began its commercialization in around the mid-1990s, and even that has taken quite a while to grow, and now asymptotically approached the penetration of the personal computer. Broadband as an improvement over that is, like the DVD player, riding on the back of the install base, and growing quite quickly.

When you look back at the history of Microsoft, I think people forget how long it actually took us even in what you today think of as our big, established franchises to get where we got. Windows took us 10 years and four releases before it outsold stand-alone MS-DOS. Office, the original word processor that's now part of Office, took 11 years and nine releases before it was the best-selling word processor. Excel took 10 years and five releases to become the best-selling spreadsheet. So, it's easy to think we've had these franchises forever, but, in fact, the company competed against people who had brought some of these products forward, but perhaps didn't mature them, or evolve them in a way that allowed them to sustain their franchise.

So, for many years, the company has, in my view, been systematically working toward our vision. When I came here in 1992, and Bill and Nathan Myhrvold and I sat around and talked about what did we think was going to happen in computing, it seemed quite obvious to us that the microprocessor would find its way into a lot of other devices, and that would create a requirement for software. And very rapidly, by 1994, we were working on interactive television, we had started work that was the first watch we did with Timex, we did the first joint game console that we were involved in with Sega. Many of these things that we tried, where we learned, were key to our ability, ultimately, to prevail in these markets, but it's easy to lose sight of the fact that it was 10, 12, even 14 years ago that some of these things began.

Robbie talked to you today about IPTV. IPTV is a direct derivative of the work we started in 1993 around interactive television. Back then, most people thought the network underneath it was going to be an ATM network, not an IP packet switching network. But we evolved that. We were able to take our research results, and the work that we had in the personal computer space, and more of the fundamental ideas that we had around interactive television into the set-top box, and end-to-end service offerings that we're now selling, and believe we will be the world leader in interactive television.

We laid out a strategy in the mid-1990s that said, we believe that ultimately people will benefit the most when all of these devices get smaller, and they get together and they work together. And this was at a time before the Internet had become the phenomenon we know today, before we had search engines, or the level of mobility that we all know and expect today. We knew then that these would be important, and we set out a strategy. And that strategy said, we're going to try to compete against in almost every case substantial, incumbent companies, and we're going to try to get those devices to be smart, run software, and we want to be a player in every one of those markets. Today, years later, despite many people scoffing at our entries in phones, and PDAs, and other things, today in pocket computers, and smartphones, and other things, Microsoft is clearly a player. And I think our ability under Ray's guidance to now integrate these in conjunction with the Live Services is the ultimate manifestation of a specific strategy that we outlined in 1994 and 1995.

So, each of these things has morphed. On this slide you can see some of our first attempts, the first handheld computer we did, WebTV which became MSN TV, and that's a picture of the first Auto PC, which we brought to market in the late 1990s. Today, there are a lot of companies that are building their cars using our embedded platform, most people don't even know about it, but, indeed, we have the capability to bring those cars into this ecosystem much more readily than people might expect.

So, today, we have momentum. Robbie talked about the Media Center -- it has now become shipping at a rate of about a million units a month, and more than 50 percent of all retail desktop PCs in the United States are the Media Center Edition. That's a really transformational thing. It means people go down to the store and they think they want to buy a computer, they now expect and demand that it has all of these additional capabilities. If you look back as far as 1995, the first thing we did when we started to approach the mobility marketplace was, that was the heyday of the pager, and we worked on a data pager manager. We did Windows CE handhelds, and ultimately the Pocket PCs and the smartphones. And today, as I think Robbie mentioned, our phone devices are passing that knee of the curve, they're turning up, the business is becoming profitable. Like was the case with word processors and spreadsheets, it actually takes a long and sustained investment, and the ability to react to the changes in the marketplace.

So when it comes to sustained investment, we're pretty much in our industry now king of the hill. If you look back over the time period just since the year 2000, and you accumulate R&D investment against leading companies, certainly in our industry, some of the newcomers, companies like Sony which had the traditional franchises in many of these spaces with the consumer, even though many of them are spending to refresh on an annual cycle their hardware components, I think we get a more accretive effect from our investment in software research and development, and we are outspending, and are certainly now globally competitive with anybody in the world in any field in our rate of the development of intellectual property.

It's these investments that I think are really critical to the company's ability to spread out. In fact, a key component of our ability to spread out is based on our ability to get the best people. For many, many years we were a global recruiter of the best talent, and we brought it all to the United States. Eventually we began to realize our appetite for the people was greater than we could get in, particularly given the regulatory changes on visas here, but we also recognized that our clientele was becoming culturally more diverse, and certainly geographically more diverse. As Kevin said today, in these 251 countries people are actively buying and using our technology.

So we gradually built up our global research and development capability. This slide, the green dots show where we actually have pure research facilities, and in this transition with Bill to me and Ray I have now taken on formal responsibility for all of those green dots. The red dots are where the company has significant development activities. These are essentially under the province of each of the business groups that you heard the presidents talk about today. In combination, it gives us the ability to do research and development essentially around the clock, and across all the major geographies. And we expect we'll have to continue to grow this over time, but certainly our reach in terms of our access to people, and our ability to be in and among the cultures in which we expect to deliver these products is really quite good.

When you think of these innovations, and we talk about that word a lot, as do other people, I think it's important to realize that not all innovation is created equal. Change creates opportunities for new products. Those changes can come in a variety of ways, they can come due to the change in the marketplace dynamics, they can change some underlying technology that was unexpected.

I think it becomes very, very important to think about how we create a capability to deal with those changes or opportunities. And I put them in two buckets. I think of disruptive innovations, and responsive innovation. And it's Microsoft's ability to do both of these things, along with a third category that I think of as sustaining innovation, that really allows the company's continuing success to not be an accident. It is something that comes from diligent prosecution of strategies, over very long periods of time, and sustained investment in all three categories.

Let me give you an example of why I think it's important to have muscles developed in each of these spaces. Obviously in the sustaining category we're sitting here talking about what we think are revolutionary versions of Office and Windows. Even though you could say they sort of do the things the prior versions do, they really reflect deep research, for example, in the new UI of Office, to bring the capabilities of these products to the fore in a much more recognizable way, or easily exposed way, thereby addressing the need of getting an ever-larger audience to be able to get benefit from these capabilities in a world where they have less and less access to training.

Responsive is really critical, we clearly are not always going to anticipate every technological advance. We're not going to have every great idea. And the real question is, are we able to bring our assets forward in a timely way to respond to those events that really could otherwise disrupt the company? I think our track record is pretty good. If you actually look at game machines, we started playing in this space, pardon the pun, quite a few years ago. We tried a variety of ways to enter the business, then eventually we decided that, for a number of factors, we had to actually get in, have a branded console, and we needed to engineer a new computer, the entire operating environment for it, the tool chain for it, and bring it to market.

We were able to harness from across the company the talent and the research assets in order to bring that forward. To some extent, if all we did was Xbox, and we were anteing up against the PlayStation, and its incumbency, and that of Nintendo and Sega, one could argue it would be almost a fool's errand to go into that very expensive business. We knew that really we had to up the ante. If you look at the left side of this chart, we did Xbox Live, we did it in the first product. We made the assumption that everybody would ultimately have broadband connectivity, and that that would ultimately revolutionize the gaming experience. So it was our ability to bring forward in the gaming industry a disruptive innovation, in the form of the Live service for Xbox, and deliver it in conjunction with the responsive innovation in the form of Xbox itself, in order to position us now through great execution to have what we think will be a 10 million unit lead in the next generation.

Another thing people don't realize is that we had a disruptive strategy in the tool chain for gaming. In the first generation, that was largely invisible, but as the machine complexities have continued to grow, that tool chain is going to be another invisible differentiator in the world of high-performance gaming. The coupling of that to the traditional PC gaming community that Robbie talked about earlier, really becomes a sustaining innovation as we move forward.

So in each category the company has looked not to just replicate other ideas that people have brought forward, or new markets that present themselves, but we always look into our back pocket full of research assets and great people, to come forward with something that we think does up the ante, not just ante up. But, we always do it recognizing how long it takes to change these things, because the scale of Microsoft, and the scale at which the technologies are used, really has caused us to think very carefully about how long it takes for these things to become great, global, sustainable franchises.

Let me talk now through a few demos of ways in which we think we're going to be able to both ante up, and up the ante, in some areas that people are clearly interested in. First I'd like to talk about enabling new ways to search and browse. Browsing, of course, everybody is familiar with. It's now moving from the desktop to a more mobile environment. Searching is something that everybody is clearly aware of, and I want to talk about how the community is going to continue to add things, beyond the Web pages that people know today, and how we can disruptively change the way people think that they gain access to this.

So we have a piece of work that's been done in our research lab in Asia, and we call it photo to search. Everybody is carrying around a cell phone today, and every cell phone virtually has a camera on it. And today, you think about search, you think about the little white box, you type some words in it and you see what comes back. So you put in words, you get back words, but in fact, there's increasing interest in things, in photos, videos, maps and other forms of information that also provide a lot of potential utility. The challenge is, how do you type in the little white box the description of the thing that you really want to know? It's very, very hard.

So they set about to say, could we actually use software and computer intelligence, in the case of photos, to be able to do what humans do, recognize that photo, and use it as a matching criteria? So the team has actually done that. You can take a picture of a unique, for example, building. We can look at that building and develop a mathematical representation of the patterns, and then we can essentially put that in as a match to a universe of photographs that have been similarly characterized by the machine. And that gives us the ability to say, “Well, where am I?” If I'm a lost, I'm a tourist in Japan or China, you can take a picture of a landmark building, and having done that do a search on the building, it will come back and say, "I know where that building is," and then it can, for example, give you a map and say, "Okay, this is where you are," or "These are the things that might be around you." So you didn't do anything about typing a text box, you didn't have to know where you were -- you might not even be able to read the street signs. But in fact you could convert your cell phone picture-taking capability into a useful piece of information with literally a few pushes of the button.

We think that these kinds of technologies can be disruptive in terms of what people come to expect or demand out of their search engine capabilities.

What I'd like to do now is have Blaise Aguera y Arcas come out. He's an architect who joined our Live Labs Group through an acquisition earlier this year. Blaise, great to see you.

BLAISE AGUERA Y ARCAS: Thanks.

CRAIG MUNDIE: And what I'm going to show you is that, while we do long-cycle innovation, we really are also focused on how we can take great technologies and blend them together with these things we developed over a much longer period of time through our research assets to develop very compelling products, and as part of the live capability be able to accelerate their availability in the marketplace -- so that they complement the long-cycle delivery platforms we've got in the case of the PC or Office or the basic Windows Mobile technologies, or even television technologies. It allows us to add value on top of those things on a much more accelerated basis.

So, Blaise, let's talk about what you've got going here. What is that big doc they see?

BLAISE AGUERA Y ARCAS: Up on the screen now is our dowry. So this is some technology that I brought to Microsoft from my start-up, just acquired at the end of 2005. So this is Seadragon technology. It's a method for interacting with very large volumes of visual information very rapidly. So these are mostly cell phone pictures, although we have a few here that are really large, like this map that is in the 100-megapixel range. This is an experience that one can have over an ordinary broadband or even narrowband connection. A thin cell pipe can do this.

CRAIG MUNDIE: So this is some technology that allows us to take essentially pictures of any size from something you take as a low-res picture on your cell phone to something that is in fact entire documents that are represented as a single image of ultimately the resolution necessary to read. I think you're going to show them one of those now?

BLAISE AGUERA Y ARCAS: Right. So -- well, this is actually another document type now, which is all of "Bleak House," the entire book. Every column is a chapter. And you can see this is not an image. This is real text. So this is the kind of technology that we expect is going to be really changing quite a number of things at Microsoft in the coming years. We've actually done this on cell phones as well.

CRAIG MUNDIE: So this is a new model of navigation. You just zoom around in a two-dimensional space in this case.

So what else do you think we can do with this?

BLAISE AGUERA Y ARCAS: Well, so, a couple of months after the acquisition -- this is now only about four months ago -- we were -- our acquisition I should mention was driven by technical fellow Gary Flake, who founded Live Labs, the idea of Live Labs being to really shorten the innovation cycle dramatically and to bring a lot of the interesting things happening in Microsoft Research very quickly to prototype and to market.

CRAIG MUNDIE: Right.

BLAISE AGUERA Y ARCAS: So a couple of months after that acquisition I saw an amazing demo of some research at Microsoft Research at Tech Fest, which is the fair for those things. Can we go to video?

What these guys had gone is develop a system that allows you take a bunch of images -- in this case these are images tagged "Trevi Fountain." Here they're mined from Flickr, so there are lots of cameras, lots of times of day, times of year.

CRAIG MUNDIE: So Flickr is a Web site -- has nothing to do with Microsoft -- where people put their photos up there, and then the community can tag them. So you can put it in and say it's Trevi Fountain. Somebody else comes along, says, “Oh, I know what that is -- that's Trevi Fountain.” And they're adding tags to these pictures. So here they basically took them. And --

BLAISE AGUERA Y ARCAS: Well, what they're able to do is figure out from those images alone what the three-dimensional model was of the Trevi Fountain. That's what's being shown on the screen now. Each of those triangles is the location of a particular camera. So you can simultaneously solve for the geometry of what you're looking at, as well as where the camera was.

CRAIG MUNDIE: So even though none of those people knew each other, none of the pictures were taken at the same time or from the same place --

BLAISE AGUERA Y ARCAS: Right, they're cell phone pictures.

CRAIG MUNDIE: They were able to take them all up and make a 3-D model of that fountain.

BLAISE AGUERA Y ARCAS: Exactly.

CRAIG MUNDIE: So what did that inspire you to do?

BLAISE AGUERA Y ARCAS: Well, of course when I first saw this one of the first things I wanted to do was put it together with our stuff. And this is the result. This is only after about four months of work, so you'll excuse me if it crashes. But this is a collection of images that have been synthesized together using that technology. These are a few hundred images of St. Peter's Basilica in Rome, taken by one of our guys in Italy a few weeks ago. And --

CRAIG MUNDIE: So he just wandered around St. Peter's and took a bunch of pictures?

BLAISE AGUERA Y ARCAS: He wandered around, took a bunch of these pictures. These white boxes are where those pictures were taken. And so let's zoom around. He went up to the top of the cupola. And here's that picture from above. He took these images from the top.

And you can see what's happening here is that all these images are being registered together in 3-D, and they give you an experience that's almost game-like of moving around in the space. All these are places where we stood and took shots in the center, and what that shot was taken of. We can move around from image to image in this way. So it's sort of halfway between a game and a slide show.

CRAIG MUNDIE: So, the 3-D model, which was synthesized by the machine from all the pictures, produces the navigation metaphor. And the Seadragon technology allows us to stream the entire collection of photos to you, just hooking them all together seamlessly, so you're operating within that 3-D space.

BLAISE AGUERA Y ARCAS: Exactly. So this is pretty interesting technology just for collections of images like this. But where we really think this comes into its own is when one thinks about what can happen when we take this technology and deploy it at Web scale, which we'll be doing. So this technology with canned environments we'll be releasing as a technical preview in the fall. And the scaling up to the Web we'll see. But the idea is if we can incorporate this into the Web crawler for images, then we can build up organically a three-dimensional model of the entire world. And that model is built entirely out of those photos in an unstructured way. It can incorporate everything from satellite and aerial photographs that give you a sense of what cities look like from high above down to street-level shots and down to close-ups. And it's one of those really revolutionary kind of paradigm-shifting things. We believe that this can give you a new way of interacting not only with images, but with the information behind it.

CRAIG MUNDIE: And a new way to get information and to discover things. That's fabulous. Thanks a lot. Thanks for sharing with us.

BLAISE AGUERA Y ARCAS: Thanks so much, Craig. (Applause.)

CRAIG MUNDIE: So this is a case, when I think of the search business, where Microsoft is certainly doing all the necessary work to go compete in the traditional notion of search. But in the fall we'll actually put this preview out and people will begin to play with it. And hopefully maybe even by the end of the year we'll actually have a production version of this running, and we'll be able to allow people to come to our Web site or register their photos or just allow them to be crawled. And our ability to make 3-D models will allow a completely new metaphor for navigation and discovery. Somebody can send you a photo, you can click on a link, you can go to a Web site. When you get there you look around. And we can annotate things within pictures with, for example, links that could be brands -- that could be any of a variety of other kinds of information.

And so I think when people realize that the community process can begin to function using this data type to create a new model of collaboration and navigation -- you know, we may see the kind of phenomenon we've seen with YouTube in the video case or MySpaces or Facebook, where the power of the community really begins to function on a global basis. And we are creating some technology that I think will allow that to happen.

So I also want to talk about innovation in a technological sense, but in the case of business models. There's an interesting challenge that I discovered, and I think my colleagues realized a few years ago, as we really began to focus on market expansion into the emerging-economy countries. And one of those problems was that, while the demand for access and use of personal computers and our technology was extremely high -- as high as it is in the developed world -- their ability to pay for it in some sense, or at least the psychology of whether they could pay for it or not, is really quite different. In most cases they don't have access to consumer credit, they don't have a level of savings that allows them to buy our products from us in the models that we historically used for 30 years in the rich world, which was to pay an upfront fee for our software and have a perpetual use license, until we came up with another better version, and then you decide to make another purchase.

These people said to us, Look, I'd really love to use Microsoft software -- a lot of it -- but you need to make it available to me more in the model that I use like with my cell phone. So we took that quite literally, and said, Well, how could we alter the combination of personal computer hardware, our software system and the economic ecosystem that exists in these countries and come up with a new model to give them access? And so we started two years ago designing a new technology, essentially a security, a metering technology, that has now been licensed by Microsoft to a number of the computer manufacturers. We trialed this a little more than a year ago in a variety of countries, and we made our first commercial launch and announced it a couple months ago with Magazine Luiza, which is the largest retailer in Brazil. And, you know, as I said, my world I'm operating in is the harder-to-forecast world.

I think it's fascinating to look at this graph. The blue line is the steady growth line across Magazine Luiza's stores that started a long, long time ago and has been growing quite nicely. It's our traditional PC business. We introduced this FlexGo technology, the pay-as-you-go technology where people can pay for the use of our software or pay for a partially subsidized personal computer system by pay-as-you-go technology. Just like most of the people in the world use prepaid cards to buy cell phone time, they can now buy access to our technology, our software, on a pay-as-you-go basis using the same prepaid cards that they use on cell phones.

But we didn't displace our traditional business. We said, let's just offer this as a new way people can buy our technology. And now that only happened two months ago, but here's the first eight weeks of sales data from Magazine Luiza. And PC sales are up 82 percent in eight weeks. And I find this quite fascinating, because we know we have literally hundreds of millions of people around the world who either use our software and don't pay for it, or who want to use our software, and the only legitimate way they think they can gain access to it is to go down to an Internet cafe. So even if you dream the dream of live economics and ad-supported models for consumers, or more small businesses in the world running Microsoft Dynamics, if we can't find a way to make it available to them where it's financeable within their either personal, small-business or financial ecosystem they operate in, then you just don't get that acceleration. And so my dream has been, and I think we're starting to achieve it, the global rollout of an alternative way for people in the lower demographic profiles globally to be able to get access to Microsoft technology.

So here we're doing it on the simplest possible model, just time. You know, you buy a month of usage or a hundred hours of usage, and when it's over, if you got enough money you can recharge it, and if you can't the machine ceases to function. And that cease-to- function is basically the way people control cell phones where if you don't pay you don't get calls. We never had a way to do that for computers before. And even the Internet doesn't provide that mechanism. So here we took some of our technology in security and we brought it forward to create a new business model, which I think will largely be completely additive in these markets to that which we've always done.

We also have looked broadly at the question of how are people going to answer into the use of computing in these emerging middle-class environments, and certainly in the case of the huge numbers of the rural poor in the world. And many people, including us, have been looking at different ways to lower the cost of the device. The FlexGo technology is a way not to lower the ultimate cost of the product, but to change the business offer to make it more approachable for people.

But clearly one of the things that's just booming globally is the use of the phone, the cell phone. You can go to the poorest villages around the world these days and go to a family in a very poor environment, and you typically will find that there are two things that they have at least: They have a television, and now they have a cell phone.

And the question is as these cell phones are becoming increasingly powerful; in fact, today, as Ray said, that the cell phone in his pocket not only was more powerful than the supercomputers that he and I grew up programming in college, they're frankly more powerful than most desktop computers that are deployed in the emerging economy countries today. Most of those are still running Windows 95- or Windows 98-class machines for all the reasons I talked about a minute ago. And our ability to get these people and their entire families onto the onramp to larger scale or more powerful computing I think is going to come through phones and televisions and other devices.

So we've clearly been investing heavily to have a capability in the phone space. But we've always been targeting largely at the top of the pyramid. Back in January Bill Gates and I were at the world economic foreign and there was a lot of discussion about could we help the world or was the world going to be helped by having really low-cost devices like $100 laptops and other things.

And our response at the time was, "Hey, we love the idea of having ultra cheap computers and getting them in the hands of kids” but our off-hand comment at the time was that he and I had been chatting about, "But couldn't we actually use the cell phone," and some of the infrastructure like televisions that were out there in order to get this process started a lot sooner than would come from any collective dream of putting new computers in the hands of all the children worldwide.

And so we said, "What about doing something like that?" Well, we have a long history in this. It's going all the way back to our work with WebTV, and so I'm going to show you now a live demo of a prototype that some people who work with me at Microsoft have done. So this is not a product. It's not ready to go, but it starts with a cell phone, smartphone technology. We've worked with some people to make a very inexpensive chip that will actually drive video out, and you can take, for example, a Bluetooth enabled mouse, a portable keyboard like this, or you could use even less expensive wired ones. And by bringing these things together what you're actually looking at, projected on the screen, is the output of this phone. And its output has standard television signals, and then we've converted it for you to see on this screen.

So here you're looking at the WebTV technology that ran on Windows CE, put into a cell phone in an experiment to say could this be your first computer? And if it was, what could you do with it? So, well one thing I can do, I can open and read e-mail. So here's an e-mail to me. I'll open this. Here's got a Word doc attached?is this correct?. I can open up the Word doc. I can read the Word doc. I could change the zoom factor on the Word doc. I could edit this. I could save it. I could send it back.

Basically I've got the full capability of what we call our Pocket Office Suite on this phone. By moving you beyond the ability to just work on the little phone using the keyboard, using the mouse, and putting it on a larger display for at least simplified applications, it's harder to distinguish this from a computer.

And so we think that that gives us some interesting opportunities, so let me show you some other things we could potentially do with this. I can cruise the Internet. I could use it for the search I talked about earlier but here maybe I'll say let's look for a Starbucks nearby. Search and goes out to the Internet because this phone not only has a cellular connection, it's got a Wi-Fi connection so we're connected to the Wi-Fi network here.

It says, okay here's a Starbucks 1.16 miles away. Tell me about that Starbucks. Goes on the Internet, brings that back and in a minute it will get me a map. So, and I could do more. I can, for example, have full access to all kinds of media. So here I've got full motion video television that is recorded on the cell phone or it could be streamed over the Internet if I had access to a Wi-Fi connection or a higher speed cellular connection.

But this doesn't have to be the news although this does provide through the Internet global access to all of the world's video. It could be educational materials. So I get personally quite excited about these kind of capabilities because I think that parents all over the world are quite interested in getting their kids access. We'd like to find ways to help not just the rich world but ultimately the middle class and the bottom of the pyramid globally to be able to use these technologies to further enhance the global economy and the global quality of life.

And I think that this shows that we can do rapid innovation. Bill and I did an interview about this in January. Our prototyping people have been able to get this running this much today, and we're going to look at what it would take for us to bring that to market, not just in a rich-world cell phone but ultimately even in lower capability phones as they continue to evolve.

So this leads me onto sort of the last thing I want to talk a little bit about which is not new business models, new technology per se, but whole new markets. As I said I came here 14 years ago and my first 6 years were essentially laying the foundation for Microsoft to have a position in virtually every form of intelligent consumer electronics. And today the businesses that you see us in are building on that long-term investment.

When I look around the world today, clearly one of the things that every government, every country is struggling with, the money that is being spent on healthcare and education. If you look at this graph it shows that the range is from a low of about 20 percent to a high of about in the U.S. 37 percent on the most recently available numbers as a percentage of all government outlays that go into just these two categories.

And yet nobody anywhere in the world is happy with the outcomes. And most of the world doesn't actually have healthcare and education of any substantive level of quality. And so it's pretty clear to me that this is a huge need and a huge opportunity. And so we, Steve and I and Peter Nuepert, a couple of years ago decided we should begin to think about not just how does Microsoft sell its traditional technology to the people who are on the business of healthcare. How do we think about going beyond that? How do we think about using our research assets and our understanding of these technologies to think about what we could bring as value-added capability into these markets directly and not just in the developed world, but in the developing world as well?

So if you look at this the two ovals represent, if you will, what ultimately has to happen. The developed countries in green today we have a fairly low number of people served per doctor. And we have reasonably comprehensive care. But everybody wants that to get a lot better. In the emerging markets we have a big problem in that there's just no way in my opinion that we're going to see any economically viable or practical way of scaling rich-world healthcare to meet the needs of the another 5 billion people.

And only technology is going to deliver both the capability and the scaling to allow what we know today as rich world healthcare to be made available at some level to the rest of the planet. And so the question is how -- what are those technologies and what role could we play in it?

Well, today if you think about even in the United States or the G8 countries how does computing apply to healthcare the answer is not very well. It's been applied dramatically within the diagnostic side of the house, but it's really been applied very poorly in almost every other aspect.

And today especially on the medical data itself what you really have is just completely isolated islands of information. You can apply some local interpretation or investigation but it's very hard to go well beyond and it's certainly -- while everybody knows there's benefits no one has really succeeded in integrating across these different diverse data sets.

So our question to ourselves was, what could we do to facilitate this situation? And so the first step clearly is you have to get an electronic medical record. And there's lots of people who have been thinking about how to create an economical one and if we had that and prospectively could put all the data in that that would get us going down the right path. But that looks like a pretty long-term effort.

On the other hand we have felt that a big part of the future of health is going to be based on the personal health record. And that ultimately the real decisions that you want to make, the way you're going to empower the consumer as well as the healthcare professional is to bring together what the individual can contribute at a personal level, and consumer electronics and other things are going to contribute to this over the next few years along with an institutional combination of all that information.

And then the level of interpretation that can be done supplemented by breakthrough technologies like genomics and proteomics that everybody agrees and our essentially our information technology-based medicine, these are the things that have the potential to revolutionize the medical environment.

So one of the parts of our strategy has been to say, how do we get into this environment? How do we bring value in the short term? And as Steve mentioned yesterday, we completed the acquisition of a technology called Azyxxi, which is developed by Dr. Craig Feied and his colleagues at the Washington Medical Center, part of the MedStar hospital system, and it's been deployed there for the last nine years while it's been in development. So we completed and announced this acquisition yesterday, and it's really the first public part that we're coming out with in our new business of taking Microsoft broadly into the health field.

What I want to show you is why this is a little different than what people historically think about as this next step of getting to the electronic medical record. Much as the earlier demo showed our dream is to be able to analyze and synthesize information out of what otherwise seems to be a disparate collection of random data. And the Azyxxi system was not only built as a set of sort of business intelligence connectors to all of the sources of both operational and clinical data in a hospital, it was also built to have the capability to do this type of data analysis.

So here's just a representation of a screen shot of what the raw medical record would be. The example I'm going to take you through of interpretation is one that Dr. Feied did. It was well-known in the D.C. area that every so often there would be a spike of people who got sick, who had severe gastric distress. And it would come and go, come and go. No one had for a long time been able to figure out why. So he decided well let's see if we could take our data and figure that out.

So he took this data over a period of a year. He used one of the visualization tools that's embedded, built this graph in a matter of a few seconds. Realized that the blue bubbles were outbreaks of this phenomena and looking at it week by week he was able to say let's zoom in some of these weeks. So this is a new -- another form of zooming in on the data. So he took a few of these things and looked at them and correlated it with a lot of external information. And interestingly they found that these attacks corresponded to above-average rainfall. And he said, "Hmm, that's interesting." That doesn't correlate that many other things. And so they said, "Well let's try to figure out what is it about these people that they might have in common."

So they went to the records of addresses of all these people from all the hospitals and they did a mash up on top of a map and lo and behold they found that no matter what hospital these people showed up at this is where they lived. And they all, except one case, they all lived in one very tightly confined part of the District in that part of Maryland and all on one side of one creek. So they actually with the EPA and other people went and did the study. To make a long story short, when it rained there was one community whose rainwater handling system would overflow. It happened to overflow into the sewage treatment plant.

The sewage treatment plant then couldn't handle the volume of water so it basically discharged sewage instead of clean effluent out into that creek. It ran down the creek a little ways on the side of the river to what happened to be the inlet to the next town's water supply.

At that point the bacterial content was higher than those systems are designed for, so the bacteria flowed through that system a little bit, and into the water supply. And those people got up and brushed their teeth in the morning and ingested the bacteria, and then they went to work. And after they got to work, they got sick, and then they went to the hospital they were closest to.

So only the ability to mine all this stuff together and do this type of deep state analysis produces this kind of capability. So this is just one instance of the kind of things that we think we can do where we're adding value on top of what people historically have been doing in trying to add electronic medical records to these systems.

But we think that this is paradigmatic of what will happen as we now try to move toward personalized medicine, the ability to take this incredible rich environment of proteonomic and genomic data and bring this forward into a new world of healthcare. And if we can do this in conjunction with things like that phone, that can your television, or these other nontextual ways of searching and discovering information, we think we can do great things, not only for our business in terms of people's interest in acquiring this technology and deploying it, but ultimately for society, because we may, in fact, be at the heart of the technology change that would allow us to give healthcare and education not just to the billion richest people on the planet, but perhaps a significant part if not ultimately all of the people on the planet.

So when you look at this and you look back over the years, I want to show that we have been very, very systematic in building up the capability to keep you coming back every year, and that we're doing that now and we'll continue to do it in the future.

Everybody knows about Windows and Office. As I said, those things took a lot longer to come to the fore than people realized. But years ago, and Kevin Johnson, who's the president of the platform division, said in a comment the other day that his first job, I think it was in 1994, was participating in the launch of Windows NT. Windows NT was developed so that Microsoft could enter the enterprise software business. And today Bob Muglia got up with him and said, hey, you know, we're a factor in enterprise software, we have a huge and growing franchise in the fastest-growing segment of that business, which is the Windows Server 2003 technology, and that's a direct descendent of that capability.

As I've said, I started back in the mid 1990s doing Pocket PC, Windows CE, we started MSN back there in 1994 and 1995. We built and bought Hotmail. All these things were creating the underlying capability, the learning, that muscle that allows the company to both respond and to innovate. Things like Blaise showed you I think are where we're bringing these long-term assets quickly now through these kind of technologies and bringing them out. And, of course, it was quite a while ago we did Xbox and television.

And so all these things are the ones that you kind of focus on and see, but if you think about where we really are today, this is really the graph I think about. And this meeting mostly, importantly talks about the things that are in the two right-most columns. They're the ones that are out there, they're becoming profitable, they're the big franchises. But if you look at the depth of the pipeline that this company has, and the investments we continue to make in order to be prepared for that future, whether it's a technological or a market adaptation, or a competitive adaptation, you know, I think you'd be hard pressed to find a company that has systematically prepared for the future the way that we have, and the way that we intend to think and need to do.

And so the new things that I'm incubating -- education, healthcare, pay-as-you-go computing, technical computing, which was essentially its first genesis -- were alluded to today in Bob's remarks about high-performance computing, the Compute Cluster Server. We basically assembled that capability, even though it was a business we'd never been in, and today we think we're going to be a player in that. The emerging market: Recently this year, probably didn't get on your radar screen, but we actually put up on the Web for free the first access for students and interested parties to Microsoft's first robotics Software Development Kit. So we've been developing some fundamentally new technology that we think could revolutionize the way that people use robotics or develop robotic systems. And while that's not a big factor in our business today, it could be a very important factor in the future.

So I'm very happy and proud to be a part of the company, I think that we will continue to have a great partnership between the long-cycle innovation people in the company, which I will manage and continue to drive, as I have with Bill for the last eight years, and the great execution that turns those strategies into business performance as opposed to hallucination, as Kevin said. And I think that the company is going to have a great future.

Thank you very much. (Applause.)

END

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