BOB MUGLIA: Well, it's great to be here this afternoon. It's particularly great following Steve and hearing his transition here to Microsoft. And I will say having him join Microsoft has been an incredible addition, and we're really great partners as we work forward towards our business customers in trying to delight them, as he said, in all the things that they do.

As I sort of start today, what I wanted to do was talk a little bit about what we've done in the last year. And of course it's been a very good financial year for STB in fiscal '08. But it's also been a whole lot of fun with the launch of some great new products, and in particular it's been fun going around the world with the launch events that we've had. We've just gotten through the largest IT pro and developer launch event in history -over 200 different events. We've reached millions of customers, trained hundreds of thousands of customers through this process. And one of the really fun things is we've done it in the context of a celebration of the great success of our business customers and the things that they do with our software. Celebrating IT pros and developers -it's really the heroes that they are, the unsung heroes within their business, because they take the technology that Microsoft helps to provide and they turn it into solutions for their business that drive differentiated value. In every sense that's what I think we are about as a company. Microsoft creates a core platform that excites and enables an entire industry to build solutions that solve business problems in ways that they could not be solved before, and provide value to businesses, and really do so in a value-differentiated way -more cost-competitive, more appropriate to meeting the needs of business today.

And so it's been a fun thing. It's very much based on the fact that we were able to celebrate with some great products -with Windows Server 2008, Visual Studio 2008, and the about-to-ship SQL Server 2008 product, which -all of which form a bedrock of the innovation that Server and Tools is providing to business customers.

And the overall Server and Tools business, the health of that business, begins certainly with the health of Windows Server. And it's been great to see the reaction that we've had from the press in the reviews, from our customers, the fact that it is incredibly widely deployed right now. Microsoft closed all our books on SQL Server 2008 and Windows Server 2008 at the end of this fiscal year. These products are in broad deployment now and are rolling out at a very, very good pace within businesses around the world, and there's great acceptance of this core technology really starting with Windows Server 2008 and of course our new update with Hyper-V.

Now, looking at the last year, looking at the last fiscal year and the growth that we've had -as I've said, we're coming off a really good year. This is the sixth year of consecutive quarters of double-digit growth for STB, so that's certainly something that we're strongly celebrating. We ended the year with 18 percent growth, and we are projecting forward 18 to 19 percent growth in fiscal year '09. So we ended strong and we're projecting a strength going into the next fiscal year, a good strength leading from and with the base and portfolio products that we have just shipped and are about to ship.

I feel really great about where we wound up in the fiscal year. I feel good about the transition that has been happening in our business customers. KT talked about some of the things from some competitive perspectives about the price -the price offering that we have relative to competitors like Oracle -that's even before Oracle did things like increase their prices by 15 percent. But our view is that we have a very strong relationship with our customers that we can build on for the long run. We have a much, much better value for our customers and our product portfolio was very, very strong. So we are in a very strong position.

We've seen customers really react positively to that by buying long-term annuity agreements with us. We've seen that very strong growth in software assurance and EAs over the last fiscal year. And, in fact, we enter this fiscal year with $5 billion in unearned revenue that we'll be earning through our books over the next few years. So we're in a strong position.

Our Developer Tools Group is now a billion-dollar business. It's growing very strongly with the adoption of enterprise-class tools. And of course SQL Server remains a very, very strong growth engine for us. And through this, because we are able to grow our business so effectively without substantive increases in our sales force, we are able to improve our margins overall. So it's been a very, very strong story financially, and as we look forward, particularly with the portfolio products that we have, we see ourselves being in a very strong position to really drive forward and increase that growth in the years to come.

Now, sometimes people ask, Okay, Bob, you're running a business where the average growth in enterprise spend, IT spend, is somewhere on the order of 5 percent, and you're growing at 18 percent right now, and you're still projecting strong growth into the future -how is it that you're doing that? Why is Microsoft able to grow so much faster than the market is overall? And the thing to recognize, if you look at the different businesses, there are some core trends that are happening in the industry that Microsoft is able to capitalize on. The most important trend that we have been riding for quite some time is the transition to industry-standard computing from proprietary computing, such as mainframes and varieties of risk-based computers with UNIX. And really we're still now at the point -we just passed the point where over half of the total IT spend in the business computing space is now on the Windows platform. But there's still a tremendous amount of spend that exists in the non-Windows platform in the overall marketplace. And that spend in general is very, very expensive for customers. So when we look at the businesses that we are in, as a general rule we are a small percentage of the overall dollars that are spent in that business.

Now, Windows Server has a very strong position in the industry-standard computing space and in the overall computing space in the servers, and that strength, coupled with the strength of the product portfolio we have with Server 2008, provides us a foundation to grow our other businesses. And over a period of time what we've been able to do is continue to provide solutions for a broader and broader percentage of the enterprise areas that exist with our customers.

Steve mentioned how 20 years ago we started building the enterprise business, and we came from nothing. My first job at Microsoft, in January of 1988, was program manager for SQL Server when there were two people on the project. And of course back then, in 1988, the idea of Microsoft being an enterprise player was actually comical and we didn't even pretend to do it. Over the following years we've grown with the growth of industry-standard computing and the viability of that technology to take on broader and broader enterprise challenges. We've grown to be able to do a larger and larger percentage of what customers need in their business solution space. And in the process of doing that we've been able to grow a very, very strong business at speeds that are much greater than the overall market.

Now, in the industry-standard computing space, a number of years ago we faced the challenge of what was going to happen with Linux and the growth of open source. And fundamentally we made a decision that business customers make rational business decisions, and the reason they choose an open source product is because they can solve the problem better than they can with a Windows-based product. So when you put it in those sorts of terms, the way we compete against Linux is very simple: we build a better product and we have a great value proposition. Today our customers know Linux isn't free and the overall cost of the solution is in fact in most cases quite a bit higher than a Windows-based solution. And if we can offer a better solution at a great price, then customers choose Windows -and they are. So we are growing strongly.

If you look across with that strong base, starting with Windows Server, if you look at the other businesses we're in - the database business and the developer business -I'll group those two together -those two businesses have the characteristic that we have very high share overall -very high usage in those businesses -people use our products a lot -but we have a very small percentage of the overall dollars spent. As we've seen here today, we've got over $30 billion of spend in database and we're only a very small percentage of that. So as customers see the Windows and SQL Server products as being able to handle their highest-end enterprise needs, and there's really no solutions that they can't solve for them, because we do so in a much more cost-effective way than competitors such as Oracle and IBM, we're growing share both from an overall share perspective and we are growing our revenue substantially in that business.

And the same thing is really happening in developer tools. Most developers spend the majority of their time sitting in front of Visual Studio, but the majority of dollars that enterprise customers spend on developer tools don't flow to Microsoft. So by introducing and driving higher-end versions of our developer tools we're able to grow that marketplace overall.

In the management space we have a huge opportunity as servers grows out and virtualization grows out. I'll talk a little bit more about that in the next slide. But our management business is the fastest-growing management business on the planet today. And as we show great maturity in the ability to manage the Windows space, and in the future manage heterogeneous -we announced heterogeneous management support at our management conference this spring -as we show the ability to provide a very sophisticated and complete management solution, we're able to drive our overall revenue up and our overall percentage of that market.

And in the security and identity, here's this case where Microsoft has an opportunity to come into a marketplace where there is a lot of installed base certainly with competitors such as Symantec. But once again we're able to provide a better value proposition from our customers than security companies such as Symantec can provide, and we're able to drive our revenue growth substantially because we have a great selling motion to go and provide such a cost-effective solution.

So all those things add up to quite a bit, and it's a very strong position to start with. But when I look at future opportunity, one of our big opportunities is growth in the services space where we have a -where we look at the combination of the software assets that Microsoft brings to the picture, together with some of things that customers spend money on, and we see a tremendous opportunity to grow our overall business, say, in the three- to five-year time frame from now.

Now, if we look at overall IT spend, overall IT spend is about $1.6 trillion worldwide. And of that only a small percentage is spent on software. And if you look at the dollars that IT spends in the segments that STB covers, you've got on the order of $450 to $500 billion in spend in the form of capital and operations costs that they spend to run effectively the categories of software that my division produces.

Now, we think, just like Stephen talked about with Exchange and SharePoint, we think we can provide a better value proposition in areas like management, in areas like database, in areas like BI, areas like backup and archive. We can provide a better value proposition for our customers as we introduce services in those spaces. So we see ourselves as having a very strong revenue and profitability growth opportunity as those technologies mature. So it's all pretty exciting if you look at the portfolio we have together with the future.

Now, as we sort of say, okay, well, let's take a look at how the revenue comes in to Server and Tools, I thought it's be useful to kind of go through and step through how we get really from the 7 percent growth that IDC is projecting for the overall market, this roughly corresponding to our fiscal year that just ended in fiscal '08 -how we take that and drive that up to 18 percent growth overall. First of all, we start with the overall market, and that's 7 percent IDC. We are growing above security with Windows Server. Windows Server is growing several points faster than the overall hardware market, so we are taking share overall. That translates into direct revenue growth for us. We are seeing a mix shift from our lower-end editions of Windows Server to our enterprise and datacenter mix. Now, virtualization has been a big fueling function of that. The question was asked to me at lunch, how do we feel about the way we price virtualization and what we are doing. And my answer was we feel great about it, because what we've done is we've structured a value proposition for our customers by incorporating virtualization rights into the premium editions of Windows Server that provides them enhanced rights. And they view this very positively. And at the same as customers choose virtualization, we've been able to drive up our mix shift of these higher-revenue products, which again has driven up our overall revenue in Windows Server considerably. So it's been about two years since we made those licensing changes in Windows Server, and since then we've seen the most dramatic mix shift towards our enterprise and data center editions than we've seen in the history of Windows Server. So it's been a very positive thing.

In the virtualization space, we see great opportunity with Hyper-V and our system center products to provide a fantastic solution at a very, very cost-competitive way, particularly compared to VMware, for our customers. The response from customers to Hyper-V has been fantastic. The product that shipped in July is a rock-solid, great product. It's something that our customers really love, and it just works for them and something that has really pleased our customers. As they've run it and they've done tests on it, they've found that it performs as well, and in many cases better, than ESX. So our first version is performing as well or better than VMware's ESX thing. So we have a very mature solution in the market right now that enables customers to really solve quite a significant percentage of their overall virtualization needs.

And when you couple this with the management capabilities that we have built into System Center, there's a particularly good value proposition there, because we're able to provide a very comprehensive management solution. So where VMware just provides virtualization management, we provide management for the physical hardware, management for the virtual environment, management for the applications, as well as full backup capabilities. And we provide that all at about a third the cost, as KT showed, that VMware provides. So it's a tremendous value proposition at a fraction of the price. And with that combination, together with the rock-solid capabilities that we have in Windows Server 2008 and Hyper-V, it's really a solution that customers can't pass up. And we see ourselves as having a huge growth opportunity. And there is no question we are going to grow share in virtualization this next year, and there's no question that we are going to win customers from VMware. I was just looking at my mail today, we are getting -as we go into this fiscal year we are winning against VMware. Accounts that had VMware are switching to Microsoft, and we are seeing that trend begin right now.

Database is a gigantic growth opportunity for us. When your biggest competitor goes out and raises prices across the board, it's not really something customers really like. We're in this for the long run. I mean, I see us selling to and providing a relationship with our customers not just this fiscal year but the next 10, 15, 20 years and beyond. And that relationship that we've built up together with the enterprise credibility that now exists for Windows Server and SQL Server really allows us to grow our database business even in well-established enterprise accounts. So it's a great, great growth business for us.

And one of the things I said again and again: We grow with the credibility of the Windows platform and the SQL Server platform in the enterprise. As that grows, we grow. And we've now -more and more we're being able to take on the highest-capacity workloads in that space.

One thing we just announced today -we announced this just around noon today -is an acquisition in the database space. We acquired a Southern California company called DATAllegro. DATAllegro provides a very, very high-capability scale-out data warehouse that we will move onto the SQL Server platform and Windows platform. And with this we will have a scale-out data warehouse that will scale into the hundreds of terabytes in size and be able to compete for the highest-end enterprise data warehousing solutions. We've never been able to do that before. The solution with DATAllegro will scale well beyond what Oracle can do today. So having a solution set like this in the marketplace is proof of our commitment to provide the highest-capacity, highest-capability solutions to the enterprise, and once again to do so at a very cost-competitive price. So we had this announcement today. It's something we're quite excited about.

Dev tools -I mentioned that that's a great growing business at a billion dollars and moving into the enterprise. That's been a really good growth solution for us, and we continue to see great growth there.

I mentioned also how we're having great growth in the security business with Forefront. That's a very strong area that as we move into the security business, and as we have our broad enterprise coverage selling that we have, together with Stephen's product, we're able to drive great growth in the security space.

And then finally, to put it all together, our services business is also growing faster than market and is having very strong growth. And so when you put all of those things together that's how we go from a 7 percent market growth to about an 18 percent overall growth in the business in FY '08. And roughly that's how we'll do it again as we move into FY '09. So that gives you an idea of how we grow the Windows Server and the overall Server and Tools business.

So, just sort of to finish up, I'll say the following, which is we entered this fiscal year with the strongest product portfolio that we've ever had in the server business with the shipment of Windows Server, SQL Server and Visual Studio. When we look ahead to what we're doing into the future, we have a very strong product pipeline of new products that will come as we move forward. We are on a strong cadence of new releases, which provides confidence to our customers to continue to buy these annuity agreements from us, because they see a consistent refresh in the value proposition that they get from our products. And we look forward into new versions of SQL Server and new versions of Windows, new versions of our management and security products, new versions for the developer -all of these things collectively provide a great value proposition for our customers and we see very, very strong growth opportunities for the years to come.

So - and then there's services. And I mentioned how there's this massive amount of customer spend on people cost, which is basically a problem that can be solved -or certainly they can get a much better value if software changes it. So we're spending -we're putting R&D dollars into providing innovation in the services space to assure that we have the ability to solve some of the problems that are costing our customers an awful lot of money, and to do so at really a great value for them.

So we've got a great portfolio today, we've got a great innovation pipeline of our software products, and we have great things coming in the services space. So that's why I'm pretty excited about the opportunity in the long-term growth for the overall Server and Tools business today, tomorrow, and for many years to come. So thank you very much.

END

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