KEVIN JOHNSON: Great, thanks, Colleen.

Well, it was great to have an opportunity to listen to Jeff Raikes and Kevin Turner talk about our core businesses. And certainly I've been in this role now about a year and a half, and in my first year in this particular role a big priority was making sure that we ship Windows Vista and really position that business for continued growth, and I feel very good about that.

In this last year, I've really amplified my personal focus on building this new core business around online advertising.

FY '07 from my perspective has been a foundational year, laying foundation for the future. How would I characterize where we're at today? Four things. Number one, opportunity. This is a big market opportunity estimated at $40 billion this year, more than doubling to over $80 billion over the next three to four years.

We have line of sight to the revenue and profit pools that we are going after in this industry, so that's number one, opportunity. Number two is clarity. Because we've got line of sight to the revenue and profit pools, we've done a lot of work to get clear strategy and focus, some key strategic focus areas. I'm going to take you through those today. Number three, big bets. We've made some big bets from an R&D standpoint on things we're doing organically, some acquisitions we've made, but we are bringing the assets together that I think will enable us to really pursue the revenue and profit streams in the future. And number four is about progress and traction. As we come out of FY '07, I can point to some great progress and traction that we have in a number of areas of this business.

Over the next 20 minutes, I want to kind of share my view of the framework that we're thinking about and the way we're going about this. Number two, I want to share the key focus areas, the areas of focus relative to our strategy. And number three, I want to share a view of where and how we want to create economic value. What does that market opportunity look like and how do we segment it into a taxonomy?

So let me begin by talking about this framework. This framework in online advertising has many components. And each of those components plays a significant role in this. I'll start with audience. There's audience created by services delivered from Microsoft, whether it's MSN or Windows Live or Office Live. There's audience created by third-party publishers whether you look at companies like Facebook or Digg, and many, many others.

Audience creation is about a combination of breadth of usage and depth of usage. Now the fact that audience aggregation creates inventory. Inventory attracts advertisers and ad agencies. The ad platform then plays a very, very important role. The ad platform is about connecting with the right consumers at the right time. The ad platform is about driving yield for the publishers and ROI for the advertisers. The ad platform is driving workflow efficiencies. And today there are tremendous opportunities to drive workflow efficiency, everything from campaign creation to media planning to media buying to campaign execution to results.

So this model is significant. Now, think about where we've come from as a company. We've been involved building our own first-party audience with MSN. We've had a little bit of direct ad sales force. We would sell our premium ad inventory. But up until a year ago, we would outsource major components of our ad platform. We'd outsource our paid search to Overture. We'd outsource our remnant inventory to aQuantive. So we were laying the foundation for some of our first-party audience, and a little bit of the element in the advertising platform.

And, certainly as you look at the steps we've taken this last year, with adCenter we took a significant step forward to start to build out that ad platform. Having the paid search or paid keyword business in an auction format and opening that up, that's a step forward. Well, now we're putting the assets together to go after this advertising platform in a big way.

So let me describe for you four priorities, four strategic priorities that we're going after, three of them involve how we're creating audience for first-party, and the fourth, then, is how we're building out this ad platform to serve not only our first-party inventory for Microsoft, but how we're now making that available and delivering value to publishers.

First key strategy we'll talk about is attracting users to these services. Let me give you a sense of the assets that are out there. The install base of Windows PCs is about a billion, one billion PCs in the install base. There are over 1.1 billion Internet users. These Internet users use PCs, they use phones. And today we have 380 million Live IDs.

Now, what's a Live ID? This is an important thing to understand. A Live ID in our terminology is a user that signs in and uses one or more of our services every 30 days. These are active users of our services, people that sign in from PCs, they sign in from phones, and they use one or more of our services every day. Now, why are Live IDs important? Answer: breadth of usage. Getting lots and lots of people to engage and use these services.

There are four key things that are important. Live IDs in these services are sticky. People sign on and they use these services because it's about contacts that are important to them, data that's important to them, information and their profile in services that they use that's important to individuals. So it's a very sticky service.

Number two, it's revenue monetization. We can drive what I call direct revenue per live ID, the display ads or the in-screen videos or the searches done from these services as well as indirect revenue for Live ID. Indirect revenue per Live ID is as they come into the network, our ability to route traffic and flow them to other services, other parts of the network creates another revenue monetization opportunity.

So you have two things, sticky users, and you've got revenue production. Direction revenue for Live ID, indirect revenue for Live ID. Third, it enables ad serving. This creates significant amount of opportunity for us to know more about the users when they are signed in versus just a cookie or an IP address. As users are signed in, we can do a better job of behavioral targeting or ad targeting to these particular users, which is good for the user, more relevant advertising, and it's good for the advertiser. It's more targeted at the audience they're trying to get after.

And we have some momentum coming out of fiscal year '07. We grew Live IDs in fiscal year '07 by over 20 percent to get to that 380 million. Where are we going in fiscal year '08? The next release of Windows Live will be coming out this fall. It is a suite of user services, a single suite of user services. A single download, single download and install to the PC that will enable users to use these services whether they're on the PC, on the phone, or just directly from browser to Internet. A very rich set of services.

This next release of Windows Live is the must-have free upgrade to the Windows experience. And so we're going to drive very hard on continuing to expand the number of users we have using these Windows Live services. Let me give you some perspective. We're at 380 million Live IDs. We're getting ready to release this next release of Windows Live in the fall. Yahoo is about 245 million active registered users; Google has approximately 75 million signed-in users.

Our ability as a company to better connect to the Windows experiences such as mail, Photo Gallery, as well as the experience on the phone and extend those into services experiences, I think, will enable us to expand Live IDs and really grow our reach in the network. So that's one key priority our engineering teams are focused on, our marketing teams, our field teams.

Second key area of the strategy is driving more depth. Breadth of usage, we've got to drive more depth. And this is done by doing a better job across network traffic flow. And we've got some key assets. For example, MSN. MSN, we have nearly 500 million unique users per month. Our page views overall on the network have grown significantly over this last year. If you look at the page views driven by the full range of services, we grew by over 16 percent.

We've launched some new events, created events such as Live Earth that delivered over 50 million live and on-demand video streams. Now why is this important? The combination of services we have, whether it's Windows Live, MSN, Office Live, search, we can do a better job routing traffic.

One of the things we did this year is we plotted the network traffic map. We looked at every point on our network that users entered the network. When they entered that network, where did they click and go from there, and where did they exit the network? And as a result, we found areas in MSN, for example, we had dead ends, you know, paths that took users nowhere. We discovered that we weren't doing a great job on things like content to search, search to content. And so we are on a mission to do a much better job of driving deeper engagement.

Now, why is this important? Number one, it expands the user time in the network, traffic flow, deepening the user engagement. Number two, it generates a significant amount of online advertising inventory. So delivering a great experience to the user, we're going to work to attract them with Live IDs and a set of services spanning the phone and PC, we're going to route traffic and drive deeper engagement, a better user experience, deeper minutes of usage, and then that gets down to the third element of the strategy: search. A lot of attention on search this year.

And from my perspective, I step back and I say, look, FY '07 has been a year of progress. Some competitors in the search marketplace have been at this nearly a decade. We've been at it now three years. We launched Live Search version one in October of last year, and the data is clear. In the U.S., we held share roughly throughout that period. We saw an uptick in Q4. We lost a little bit of share worldwide over that period. And when CommScore announces worldwide share in the next few days, we're confident we're going to see an uptick in worldwide search share as well.

But here's the more interesting thing. We've got our first version, we've got a credible offering, we're in the game, we've held some share, we're seeing some uptick. The interesting statistics from CommScore, though, is the fact that 75 to 80 percent of search users use two or more search engines. 75 to 80 percent of searchers use two or more search engines.

Now, if you look at CommScore data and you look at the data that's being tracked, the number of unique searchers that we have has grown. Guess what, it's grown to about the same level as Yahoo. You know, they've got about 250 million, we're at about 230 million, we're roughly the same number of search users as Yahoo.

Now you say, OK, well, why is their share different? Answer: the average search user on a monthly basis does 18 searches with Yahoo, and they do eight searches with us. So one question you say, how can you double share for Live Search? We've got the searchers using our search engine, we've just got to continue to enhance on the experience and through a set of creative things, drive opportunity for searchers to do more searches in a deeper way with Microsoft.

Our core product has gotten better and we are in the game. Now in some areas, our experience is better. Let me give you some examples. Live Local. Live Local won PC Magazine Editor's Choice. Mobile search. Mobile search won the best mobile search in a comparison takeoff that was done by PC Magazine, and one published just the other day by Gear Digest.

The combination of improvements that we are making in the search experience combined with the customer loyalty programs that we launched in the last quarter, we believe, has led to our uptick in share in Q4. Over the next 12 months, we have an aggressive development schedule, and you will see multiple search releases. In the fall, you can expect continued enhancements around the core. Relevance continuing to improve as we dramatically expand the search index. Performance, we're on a path to provide 2X improvement in our performance on search. Mobile enhancement, and we're building out some core verticals. New vertical experiences.

Now, this really is about creating the momentum to become the fastest-growing search engine on the planet. And certainly if you step back and you say, look, before we get to No. 1 in search, we're going to have to pass No. 2. And that's our next step.

Now to give you a sense of one of these scenarios and the work that we are doing, I want to show you, though, a demo, the mobile scenario. And to do that, I'd like to introduce Derrick Connell to come out on stage and give us a quick demo of the mobile search. Derrick.

DERRICK CONNELL: So what I'm going to talk about, I'm just going to show you the Mobile scenario. Kevin talked about software and services, and Mobile scenario kind of illuminates that for me in probably the best way. So that's what I want to kind of show you now is a couple of things. We're making progress in three areas on Mobile. One, it's very important to get the network operators to get their content on the deck, and our Motion Bridge gives us the leading technology. The second area we're focused in on is the -- just standard old browser on the Mobile search. We go do a search with the browser, and you get access to all of the deep content, all the index we built out, the maps, the images, and all the other things we have in our back end.

So that's just in the browser, you go search. I'm just going to keep going. So the third part, which is the part I want to show you the most, is we have client software which is available today which you install on a Windows Mobile-based device, which gives you access to the scenarios that consumers really care about the most, and that is local search. So finding a business, finding a person, getting a map, getting directions. And that's what we've done here.

So the thing we like about the service in the cloud, all the index, the maps, the Web documents, that's very rich. Then you have to innovate on the UI, and I'm sure many of you have mobile devices and it's kind of hard to type when you're trying to get things done. So where we've really invested is client software to make that experience much easier.

So what we've done here, and I'll just browse down, you can pick your location very, very easily. You can just browse into categories if you're looking for a particular type of business, say a restaurant, nightlife, etc., you're in a city you don't know. It is very easy to use the scroller. You don't have to kind of type in and triple type, it gives you access very quickly to search for those businesses.

But the example I want to kind of give you today is actually a real example. I like to demo using real examples. Just to show the technology off, and I love this software. And it's an example last night I was -- I'm sort of new to the city. My wife and I had some dinner plans last night downtown, we live near here. So I was heading out of the office and she called me to tell me dinner plans had changed, we had a new restaurant we were going to go to downtown. So she said we're going to Jazz Alley. So I'm sitting in my car and I said, OK, don't worry, I'll use Live Search for Mobile to help me find what I'm looking for.

So you can just type in Jazz and search for that -- and off it goes to search for Jazz Alley near Seattle. And what this is doing it's out there searching all of the index on the Web. Don't worry, we'll get there -- let me just try that again one more time. You can see why we've innovated the UI because you do miss searching all the time with triple tapping, it is very difficult.

So, great, now we've got the results back. So brought back two results, one Alley Jazz, one Jazz Alley. She told me it was on Sixth Avenue. So let's just zoom in on this particular venue. And what we've done is brought back information so I can SMS it to a friend, I can search for nearby locations. But the thing I'm looking for is I want to get directions to the place because I actually don't know where it is exactly. I know it's downtown, I know how to get there.

So we make it very easy to scroll down. We put in the destination location. I can pick where I'm coming from, which is the office, and then go look for the route. Again, it brings me back to this beautiful turn-by-turn directions on my phone so I can just follow those. But I'd like to get a map. I'm sitting in my car thinking, just show me the map. And we start up, again, bringing that service through to the client where we bring all of our mapping right there into the product.

This is phenomenal. But, of course, for those of you who know Seattle, traffic can be a little rough in the evening. So, you know, when I was going last night, I wanted to see kind of how traffic is. So, again, on the client we reach out and bring back real-time traffic directions right into the phone. So it's reaching out to the cloud, and kind of got two different ways you can get to downtown from the office. One is one bridge, and the other is the other. So, generally speaking, you'll pick which bridge looks worse or better depending on the location.

Wireless network is giving me some trouble here. So I'm going to go back. So we got the map. But let me show you just the regular map here, and I want to zoom in. These are turn-by-turn directions. Let's go back to our map. So what I want to do is I want to zoom in because the part I want to know is the last mile because I know how to get from the office to the freeway, from the freeway into the city. So let's zoom right into our location.

Again, we make it easy with the scroller just to zoom right into the location. You pick your location. Let's go to street level, I'm able to zoom right into that location, which is very nice. And now I can see, OK, so it's near Virginia, which is up at the top end of Sixth Avenue, I kind of know how to get there. But we also make it easy for you to switch your map view and go to an aerial view, which is also very nice because you get to see the area around the building so you might, you know, recognize some buildings you've passed before. So let's zoom in and see what the real detailed 100-foot view looks like. Zoom in, okay, there it is. Okay, great. Now I know where to get to because it's right there by the Westin Hotel. So that's really easy for me to visualize and see how this map, the service in the cloud, has been brought right into the device.

But the other thing I promised my wife, which I hadn't really gotten around to until she called me and reminded me, was I had promised to book the movie for the -- we're meeting some friends, I promised to book the movie for after the event. The other thing you'll see here is we've made it easy -- and this is just a start, we've made it easy to search for movies directly here in the client.

And it goes out and finds all the movies that are in our database and brings them right back. And you can see how we'll extend that over time. And you can scroll right down through them – “Captivity” -- my wife likes horror movies. I’m not a big fan, but she likes them, so maybe we should go to see “Captivity.” You can drill in and see more details. You can see the theaters it's playing in. So it's playing in two, Pacific Place and the Galleria. Looks like one is downtown, so let's have a look and see what's happening there.

You can then take a look again at the map. So, again, it makes it easy. It looks like it's downtown, but is it close to our restaurant? Well, let's zoom in a little bit and see what happens if I zoom. Is it close to the restaurant? Well, it looks like it is because there in the top left-hand corner is the Westin Hotel, so it looks like it's about four blocks from where we're going to be eating, so that's a great place. So I can click and call and book the movie.

This is just a little example of how we're bringing software on the client together with service in the cloud. All of the indexing, the maps, all of that's rich functionality right into the client application, which for me really illuminates this software and service and shows how our mobile technology can really start to enhance the experience for users.

So those of you who have a mobile browser, you can download this today at wls.live.com, and you can start to use it right now to help you with your trip here to Seattle. Thank you.

KEVIN JOHNSON: So that's a little bit of a flavor of the Mobile search scenario. Now, I talked about breadth of users and what we're doing with Windows plus Windows Live to attract more users and Live IDs to the network. Depth in our focus on this concept of one network and traffic flow. In fact, we are in the game on search, and we're now working to become the fastest-growing search engine on the planet.

These audience assets are important. They create a set of robust inventory for the advertising platform. So now let's talk about what goes into the advertising platform. The ad platform is really about four key things: It's about the buy-sell process, connecting buyers with sellers, sellers that have inventory with buyers who are looking to buy ads. It's about the ad serving, having the data and having the algorithm to do the appropriate ad serving to meet those particular needs. It's about tools for publishers and advertisers to help improve workflow and help improve their planning and their entire workflow. And it's about doing this across multiple IP-based devices.

So let's talk about this a little bit. We made some big bets around the core advertising engines. We've made some bets around our cross-device capability. Organically, we made a big bet on adCenter. We launched adCenter in the U.S. a year ago, we rolled it out to some other countries. You know, frankly, when we launched it, people wondered, hey, will you be able to attract advertisers? Will you be able to provide the same levels of monetization that we had when we were on Overture?

Answer: Yes. adCenter enabled the buy-sell capability for paid keywords. We attracted advertisers. We exceeded the RPS that we were getting on Overture in this last year. And we are now expanding adCenter into content ads. In the first quarter of this fiscal year, we're rolling out content ads across our own network, and by the end of the fiscal year, we will have this available for third-party publishers.

We made some big bets on adCenter, and they're paying off. We've also made some big bets on some acquisitions, certainly aQuantive. Now what does aQuantive bring? aQuantive brings us four key things: It brings an ad network with the buy-sell capabilities to DRIVEpm. It bring ad serving capabilities including the data and the algorithm and advertisers with its Atlas suite, and it brings the tools for publishers and advertisers. And they've got broad reach in the advertiser community while building out that tool set for publishers. It also comes with the world's largest digital media ad agency in Avenue A and Razorfish. So it's a significant, significant piece of building out this ad platform.

Now, when we did this acquisition, some people would question and say, well, what about the premiums that you paid? How do you feel about that? Let me just share my personal perspective. Number one, this is a big market opportunity. This $80 billion of online advertising is a big market opportunity, and billions and billions of dollars of economic value will be created over the next several years.

Number two, aQuantive was a unique, prized asset. It was a very competitive bid situation. There was us and two others, I understand, bidding aggressively. This was a view that having aQuantive combined with the adCenter and our ad capabilities, along with our first-party inventory, uniquely positioned us.

We were delighted to have won that competitive bid, and we've been working hard on the integration. We do anticipate closing on aQuantive by mid-August. We've cleared regulatory hurdles, and they have a shareholder vote, I believe, on August ninth. So we're well on the way of really driving that integration and making that a great complement to the organic set of work we've done around adCenter.

Today, we are announcing another acquisition. Today, this acquisition complements aQuantive and the assets that they bring, and expands our capability to include an auction exchange for display ads. Today we are acquiring AdECN, a company that launched an exchange within the last year that has 37 member ad networks. The exchange concept is similar to Nasdaq, which serves as a hub for financial brokerages.

The Nasdaq kind of enables all parties to come together and have access through a neutral party to a larger pool of supply and demand for their clients. In the ad business, the ad exchange does a similar thing. It provides liquidity. Liquidity for publishers, liquidity for advertisers. And so with this AdECN acquisition, it complements the work we've done with adCenter, it extends the work that aQuantive brings, and it now enables us to move forward with all of the core components that we need to enable this ad platform.

We have an ad network for buy-sell, plus now we have the ad exchange. We have ad serving for search as well as non-search. We can span CPC, CPM, CPA business models. We have tools for publishers and for advertisers, and we have the world's largest digital media ad agency. We are now going about bringing these assets together in an integrated way to build out for broader use of this ad platform.

Now, this ad platform will serve multiple devices, intelligent devices at the edge of the network, IT-based devices, phones, PCs, gaming consoles and IPTV as it rolls out.

This last year we brought ScreenTonic into the fold through an acquisition. It is enabling our capability to deliver ads on mobile. They currently are managing and delivering 1.4 billion impressions sold, with over 200 mobile advertisers.

Through Massive, the acquisition of Massive, we have in-game advertising. We have over 40 publishers, and by the end of this year we will have more than 100 game titles with dynamic in-game advertising.

We're also focused with Robbie and the Mediaroom team on our video delivery capabilities to the Mediaroom solution. We're building on the video delivery capabilities that we have with MSN Video and delivering in-stream ads there, plus aQuantive brings capability for video advertising on demand through a set of technology and relationships they have.

On the PC we continue to enhance the advertising capabilities through solutions such as Silverlight. Silverlight provides an infinite zoom capability that is very unique in the industry, and something that advertisers are embracing as a new ad format.

We're also expanding this ad platform not only across multiple devices but bringing on more partners. Certainly this last year Facebook as a publisher on our ad platform, they've been expanding rapidly in the area of social networking, and we're pleased to be their monetization partner.

Yesterday, we announced the addition of Digg, and we're pleased to be the monetization engine for the 17 million unique users that Digg sees every month.

We've also this week announced the expansion of dynamic in-game advertising with Electronic Arts through five just fantastic 2008 titles -- “Madden NFL,” “NASCAR,” “NHL,” “Tiger Woods” and “Skate” -- building in-game advertising using dynamic in-game advertising from Massive.

So, we've really worked to pull all of this together. Now the question is, we've got a set of things we're doing on audience, a set of things we're doing on advertising; how does that map to the market opportunity? Let me take you to that.

We took a look at the online advertising industry in calendar year 2006, and we mapped all the revenue and profit streams from the Internet companies in those businesses. I show that on the left. And on the audience side we broke it into three categories: search; information content; communications and social networking -- all underpinned by an advertising platform. The ad platform we included tools for advertisers, publishers, the buy/sell process, and the whole ad-serving process.

The boxes that you see are relatively proportional to the amount of revenue of that $26 billion market. We excluded some things like classified ads and some of the other things, but that $26 billion market is representative of the size of those boxes.

We then looked and mapped where that goes by 2010, and within that we understand where the profit streams are in each of those boxes. So, we've line of sight to the areas that we are investing, and how we're going to get there.

Let me now bridge to how did we do in FY '07. You know, I said, look, we've got opportunity, line of sight, we've got clarity of the strategy and the focus that we have; how did we do in FY '07 and how do we see that momentum?

Last year, at this meeting we said revenue growth for our online services business would be in the range of 7 to 11 percent. We finished FY '07 at 8 percent.

Our online ad revenue, though we started disclosing on a quarterly basis as a marker, has grown from Q1 in FY '07 it grew 5 percent; Q2 20 percent; Q3 it grew 23 percent; in Q4 we grew online advertising revenue 33 percent. So, we've got some momentum in terms of the revenue growth coming out of FY '07.

For FY '08 revenue guidance we've guided to 10 to 13 percent for our overall online services business, and for the online advertising revenue growth we've guided that to be in excess of 20 percent. Certainly it is our intent to grow online advertising faster than the online advertising market.

From a quarterly perspective we've shared markers with you. Live IDs: We grew that over 20 percent to 380 million. We'll continue to share that. And from a monetization we're going to continue to share the online advertising revenue growth.

Certainly Chris and I talked, once aQuantive closes we will look at those markets and the set of information that we're sharing on a quarterly basis. There may be some additional things that would be appropriate for us to share on a quarterly basis relative to post-aQuantive transactions.

Now, in the focus areas around audience, we're going to drive breadth of usage with this Windows Live service and the Live IDs, and we're geared up to do that.

We're going to drive depth of usage by better flowing traffic throughout the network. We're focused on continued improvements in our search experience, building out our customer loyalty program, and a rapid innovation with multiple releases of our search in this next fiscal year, to become the fastest growing search engine on the planet.

We're very focused on the advertising area. With the integration of the components we've assembled, we've assembled all the components that we need to integrate to really have a compelling offering for advertisers and publishers, not only to serve our first-party inventory but something we think is of value to our third-party publishers.

This online advertising business and the online advertising platform, it really is a game of technology, which plays to our strengths. It's about R&D to create the algorithms and the way you manage the data. It's a game of scale. It's a game of scale around audience, scale of inventory, scale of publishers, scale of advertisers. And because it's a game of technology combined with scale, it also requires capital, the datacenters and servers to meet those needs.

When you put those things together, those three attributes, we believe that if you look out over the next few years, there will be very few significant players in the advertising platform business, and we intend to be one of the top two.

We're on a clear focus on our strategy across these four areas. We've assembled the components we need, we're doing the integration, and we are clearly in execution mode.

So, if I look at FY '07 as a foundational year, I think we've set the foundation, we've defined the opportunity, we've clarified strategy in some focus areas, and we are now in execution mode.

I'd be happy to take questions.

QUESTION: Thanks a lot. Sarah Friar from Goldman Sachs.

Two questions for you. Just firstly could you touch on the area of enterprise search, because obviously this is one area where you can be very differentiated from Google, and that you have the enterprise from an apps perspective and an infrastructure perspective?

And then secondarily, you've laid out obviously a great growth strategy, which I think is the most important thing right now for the OSB area, but on the cost side the investors sitting in the audience are thinking about what about margins, how do you think about break even, how do you think about that tradeoff to profitability.

KEVIN JOHNSON: Yeah, let me take the first question on enterprise search. Certainly the work that we've done to build out our enterprise search capability with SharePoint, SharePoint is a huge asset in terms of the enterprise search capability. And one thing we've found in the enterprise is that when a person is searching in the enterprise for relevant documents and information, that algorithm that serves up the relevant documents that we have in SharePoint really is much more attuned to what those enterprise customers look for. And so we're going to continue to put the focus on our enterprise search solution around the concept of SharePoint, and Jeff and his team in the business division are very, very focused on that scenario, and how we provide value there.

Your second question related to investment. Fiscal year '08 will be another year of investment for online services, and certainly Chris Liddell, it is included in the guidance that we provided, and we've got the aQuantive close coming up and some other things, but we're very focused on executing against this strategy. So, the guidance we've provided includes the set of investments that we will make, but you should expect online services business for FY '08 to be another year of investment.

Number two.

QUESTION: Hi. It's Jason Maynard from Credit Suisse.

You made the comment when you were talking about Windows Live and your initiatives in terms of bringing together I think you called it a suite of user services, and I guess just one of the things that strikes me as a consumer of a lot of different Web technologies is that there's not one thing that I really think of under sort of the Windows brand or the Microsoft brand that is sort of the killer service. With Google it's search, with Yahoo! you could argue it's Yahoo! Finance, Yahoo! Mail. So, while you're amalgamating a lot of services, it seems like it's sort of number two here, number three here, number four here, so you have sort of worst of breed but integrated, to steal a quote from one of your friends. Where is the killer service? What's the wow factor within the property that's going to really get me excited to say, hey, I'm going to Microsoft because they're the best at X, Y, Z?

KEVIN JOHNSON: Well, the comments you make about having a suite of services and where is the value proposition, I guess 15, 20 years ago, 15 years ago, people could ask the same thing about Office. You've got Word, you've got Excel, you've got PowerPoint, and the fact that we really focused on how those applications interoperate with one another, how they provide a seamless user experience across the applications, how they provide a deeper integration using Windows, certainly one of the attributes we look at is we do believe that users will benefit by having a suite of services that are seamless and smooth, and that has as single download. Now, that's number one.

Number two, we believe that the differentiation of providing that suite of services and being able to access them PC to phone to Web is a unique proposition.

Now, you can say in many cases utility services like mail, look, with the new release of Hotmail we've made significant improvements to that user experience where we're winning awards and reviews when people compare Hotmail to other things. So, I would contend in certain categories we have best of breed individual services. Granted, you may say it's a utility kind of service, is that a really exciting service, but the fact is a lot of people on the planet need utility services as well. And so we're going to do a great job with the set of services that we weave into the Windows Live experience.

There are new things coming along with that, though. For example, take photos. The fact that in Windows Vista, Windows Photo Gallery is a great service. People can load their digital photos, they can edit them, they can tag them, search on them. But with Windows Live Photo Gallery it's going to download the new experience but now extends it to enable them to click a button, upload certain photos to the Web. It integrates their address book contacts so that they can click on which family and friends they want to share those photos.

So, you start broadening out the scenarios that people can do in a very seamless integrated way, we believe that does create a great value proposition.

Number three.

QUESTION: Yeah, Kevin, could you maybe give us a handle on say two to three years from now what the ad revenue, the ad platform revenue composition might look like? The way we've thought about it is four buckets. One is traditional Microsoft properties like MSN. Another bucket is emerging Microsoft properties like mobile and Xbox, also traditional Microsoft properties like Office, and then the non-Microsoft Internet properties like Facebook and Digg.

KEVIN JOHNSON: And the question with the Microsoft properties is what?

QUESTION: It's the ad platform revenue breakdown by those four buckets, if those are the right four buckets, and just directionally.

KEVIN JOHNSON: Yeah, I don't have a directional statement for each of those individual four buckets. Let me try and --

QUESTION: Are those the right buckets?

KEVIN JOHNSON: Well, let me just start with the simple buckets that says Microsoft first-party inventory, inventory that we're bringing from Microsoft, whether it's Office Live, Xbox Live, Windows Live, MSN. If you look and say what do we anticipate with the percent of revenue flowing through our ad platform of our first-party audience relative to third-party publishers, if you look out into the future, to be a successful, effective advertising platform, you've got to have a high percentage of that revenue stream that is serving third-party publishers. Certainly your first-party inventory helps complement that, but you've got to have a majority of your revenue being served out for third-party publishers. The Internet is a big place, and $80 billion of online advertising business is going to be driven by a lot of different publishers.

So, our aspiration is to have an advertising platform that certainly is appealing to publishers, where I would certainly anticipate that more than 50 percent of the revenue flowing through that advertising platform is coming from publishers, and that's a longer term directional aspiration.

Number two?

QUESTION: Charlie DiBona with Sanford Bernstein.

Steve mentioned, just alluded to syndicating adCenter during the course of the year here. Can you elaborate a little bit on that and how that's going to work, how you monetize it, how it fits in your strategy?

KEVIN JOHNSON: Yeah. adCenter, we launched adCenter as a way for advertisers to bid on paid keywords that show up in our search experience. We are now moving to content ads on our network, which means that advertisers can bid on paid keywords, and a content ad will scrape a screen or look at a certain experience and then pull out keywords from that, and use the same paid keywords that were used for search to then determine what ads to serve.

So, in Q1 we're going to launch the content ads on our network, and then by the end of the fiscal year we're going to allow third-party publishers that want to have a CPC model with content ads on their network to be able to do that. And the model will be a standard tax kind of model where revenue is shared between the online advertising platform for Microsoft and the third-party publishers.

Yeah, number two.

QUESTION: Hi, thank you. Heather Bellini with UBS.

I was just wondering how Microsoft could take advantage of the growth opportunities that lie ahead in mobile search, and use that as potential game-changer both obviously in search share but also in advertising? Are there agreements, exclusive agreements that you could pay up for in order to gain access to wireless subscribers? Can you talk to us a little bit about how you see mobile search playing out over the next five years, and your ability to capitalize on that?

KEVIN JOHNSON: Yeah, certainly making our Live Search mobile experience available direct to consumers for downloads that they can use is certainly important, but we've signed deals with Hutch in India, with China Telecom in China for distribution of our mobile search. So, in those cases we have a rev share agreement and are driving distribution with them. So, that model certainly is one that when we look at markets with large numbers of mobile users, one that we've engaged in. And certainly we do anticipate mobile search being an area that will continue to grow, and the fact that we've got a very good offering in that particular area is something that helps. But we will continue to work on distribution partnerships such as the ones I mentioned with the telcos and the service providers.

Number one.

QUESTION: Thanks a lot. Kash Rangan, Merrill Lynch.

Kevin, I'm just wondering, there are two big markets we've heard about. One is you see $40 billion opportunity, the other one is obviously the stuff you've presented. When I look at the share of search market that you have, even if you were to expand that by a couple hundred basis points per year, it looks like you've got another four to five years to be a good number two in the market. What are the pros and cons of getting there overnight, not literally overnight, through an acquisition you after all have one of the valued assets in the marketplace that might not persist for a while? So, I want to hear you out on the pros and cons of doing that, coupled with the enormous flexibility you have on your balance sheet -- it's more of a CFO question, but I'm sure you've heard it, along with the rest of the executive team, maybe take on some debt, be able to afford large acquisitions, because we've not really seen Microsoft step up and do big acquisitions.

KEVIN JOHNSON: Yeah, your first question around how quickly can share shift, two data points I would give. The fact that 75 to 80 percent of searchers use two or more search engines today is reflective of the fact that there are very low switching costs. And so if you say that here's a business that has very low switching costs, that you've got to provide a unique compelling experience, and if you're creative on marketing with customer loyalty programs and other things, you can cause movement to happen in terms of usage patterns.

Now, in that type of market your question says, well, would you consider acquisitions that help complement that? First of all, I'm not going to comment on any specific things that we've considered, but if I look at that in general, the one challenge in search is that that audience can move very quickly. So, if you're doing an acquisition for audience, I would characterize that as one approach where right now we're on an organic plan. We feel like we are in the game with a credible offering, we've got plans for very aggressive search R&D over this next year, and with the release of Live Search version 2 we think we have opportunities to drive that growth, and that's our focus.

Number two.

QUESTION: Kevin, Rick Sherlund, Galleon Group.

It was mentioned earlier, I can't remember if it was Steve or Jeff mentioned that you would like to change the business model around search going forward, and I wasn't real sure what that was alluding to, and I wondered if you could expand on that.

KEVIN JOHNSON: Well, you look at the overall online advertising industry, and it's one that certainly is going through a lot of dynamics right now. If you say it kind of got built on a cost per impression basis, cost per clicks came along, cost per action is a new area, look, we just think that over time there are ways to explore not only new user experiences but new monetization experiences with searchers. Some advertisers might look and say, hey, today I'm paying for clicks as a paid keyword when really what I'm looking for is just some brand and some impression. They may pay for some clicks and hope no one ever clicks, because they're getting some brand in there. There might be some unique things that could be done there to start to shift the way that people monetize paid search in a way that benefits not only the merchant or the advertiser but also ways that benefit the consumers, and we will explore those.

One last question, number three.

QUESTION: Marshall Jaffe, Henry Armstrong Associates.

Two questions actually. Number one, maybe you can talk about how you might enhance the monetization of mobile search, given the limited screen real estate and the lesser inclination of people to browse when they're using a mobile device.

The second question is I wonder if you're perhaps underestimating the mindshare eyeballs that social networking will consume from search, that will steal from search. You showed I think relatively similar positions going out to 2010 for those two types of use, and I wonder if you've rigged them in that dynamic.

KEVIN JOHNSON: Yeah, well certainly as you highlight, driving search queries and search volume through a great mobile experience is one aspect of it, but then how do you do a great job monetizing it, and this is where we look and say it's the combination of search, certainly the work we've done in Live Local and connecting merchants with searchers who are looking to find things locally, plus what we've done in ScreenTonic where you can then start to weave in some display ads, plus the fact that the Windows Live next release will have a mobile capability, mobile client. We just look there and say, OK, we're building audience, we're building usage, and I think there certainly are opportunities for us to continue to drive monetization.

On your question about social networking, certainly social networking is growing. Facebook as an example is growing and perhaps taking some share from MySpace. The whole social network phenomenon is one that we watch closely, and certainly we're delighted to have Facebook as a monetization partner.

But one key element of our strategy in this online advertising business is we want to have a core asset in that advertising platform. So, if there are new fads or new trends that come and go, this online advertising platform can be a creator of economic value that's going to serve those new trends and those new fads as they work their way through the system.

Now, social networking I think is something that is very unique and probably here to say. The big question will be, are there multiple social networking sites and multiple social networking experiences, does it converge around one, what will happen to that. Certainly we're watching that closely. We've got our own offering with Spaces as part of Windows Live, which has a bit of a different approach or strategy, but we do see the social networking growing along with the communications.

So, thank you very much, and I'll look forward to visiting with you more at lunch and at the break. Thank you.

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