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BILL VEGHTE: Thank you, Kevin. All right. Good morning. So I'm Bill Veghte. I run the Windows business here at Microsoft. By way of brief introduction, I've been at Microsoft for about 18 years managing in a variety of capacities. I ran the development of things like Windows 98, Windows CE 3.0, our Windows Server 2003 wave of releases, and then for about three years, I managed our North American business, our U.S. and Canadian sales and services marketing effort.

I moved back onto the Windows business about a year ago, and this is a fun year to talk about. I'm going to run through, I'm going to spend a couple minutes talking you through some of the headlines that you saw for FY08, we'll shift gears, have a conversation around some of the things that you're asking relative to Windows Vista, and then I'll give you how I think about the P&L, the Windows business, and the opportunities that we see going forward.

So FY08 is a fun conversation for us to have. You look at the health of the PC market, very, very healthy PC market, and we grew this business 13 percent. We saw OEM unit sales outpacing PC market sales by two or three points. You saw healthy, continued demand for our premium experience, our premium products, whether that be Windows Vista Home Premium or Windows Vista Business and our annuity mix was very, very strong.

Against that backdrop, though, some of the questions you have is how do we think about Windows Vista, the investments we made, the bets we made, and where we are in this platform cycle. When I think about Windows and the investments we make and apply it to Windows Vista, I think about it in the context of the platform investments that we made to fundamentally move the PC platform forward. I think about it in the context of the user experiences or features that we deliver, and then the ecosystem support that we're engendering.

Again, each one of those -it's a good time to actually take a step back and look at where we are in that cycle. You look at Windows Vista was in many dimensions a very bold and ambitious release in terms of the platform and architectural investments that we made across many dimensions. You've looked at it in the context of the changes that we've made through advanced networking and support for things like IPD-6, graphics, support for the next generation of flat panels and things like 1080p aspect ratios. You look at the advancements that we made in management. You look at the advancements we made in security. And when I was preparing for this presentation, I went back and I looked at the slides that we did with you in 2002 and the Q&As that you had with us. One of the key questions that you had in 2002 is could we re-plumb and re-architect Windows to deliver a very, very secure platform.

You look 18 months in, and on each one of these, core architectural investments that we've made are holding very, very strong. You look, for example, at security while 18 months ago we could make claims about the changes that we made, we hadn't borne the brunt of what I'll call the marketplace looking at and trying to attack and hack into Windows Vista and the experience that we delivered.

Today, you have a platform and a product that is 62 percent more secure that what we delivered in Windows XP SP2 and effectively the conversation with businesses and consumers relative to the security of Windows is not an issue for us based on that.

I look at the user experience side of things and I look at things whether it be at the end- user side with Arrow or desktop search. I look at the single worldwide image that fundamentally improves -lowers the cost of deployment for enterprises. Very, very good set of capabilities, and you're seeing that in the continued strength of our license sales as customers are evaluating and buying.

But what about the ecosystem? With all of the changes that we made, the reality is that the breadth of ecosystem support and compatibility that we aspire to wasn't there at general availability. You had broad device support, you had broad application support, but relative to the whole capability of the marketplace, that was a key opportunity for us. And over the last year, we've been working very, very hard on that, even as we set up for Windows 7. And I think about it across a couple different dimensions. I think about it in the context of the core value -one of the core value propositions of Windows, it's about the broad choice of hardware and software to PCs in the marketplace. I look at it in the context of do we have IHVs supporting and delivering capabilities on Windows Vista? I look at it in the software titles and in the PCs.

On the hardware side, we've made huge, huge strides. One of my favorite features in Windows Vista is the incredible telemetry capability that we have in that product. And by telemetry, it means that I can go -I understand where the user has an incompatibility problem with a device or a software application, where they have reliability robustness problems and we can hone right into that. The way I think about it in some fashion is we were able to move our development process from a development process of decibels, but we get in that conversation we have this is what's the issue or is that the issue or is that the issue? To being able to look across the broad base of users and say this is the number one incompatible device we've got to address. It's enabled us to be very focused in the work we do and have enormous drive in the compatibility of the experience.

You look at, for example, because we have 100 million plus users going up to Windows update on Windows Vista every month, it gives us great data to say where, for example, at general availability we had about 79 to 80 percent of systems breadth of compatibility. Now we are over 96 and a half percent of those systems on the device side.

On the application side, 88 of the top 100 consumer titles, we had -we built with the enterprise sales force, we built a list of about 250 enterprise applications that were holding deployment for over 5 million seats. And every single one of those enterprise applications we have a remediation or a solution for today.

We of course delivered Windows Vista SP1. Service Pack 1, as you and I both know, is important on two dimensions: One, of course, is that we're updating the product real time, and those of you that are running Windows Vista for example in your home and have Windows Update automatically turned on know that you're regularly getting updates to improve that experience. But Service Pack 1 provided a convenient single package for us to deliver those to our enterprise customers, to our OEM customers, and of course remove an important psychological barrier.

The final piece of it is what we do with our PC partners, whether that be HP or Dell or Sony or the many others that are a key part of the Windows ecosystem. We worked subsequent to general availability, we worked with each one of these vendors to do what we called the Windows Vista Velocity Program. And think of this as running a set of those systems and the entire software load that they have on them through a very extensive set of tests to measure everything from reliability to security to compatibility, boot time, et cetera. We ran over 280 systems through that process and you're starting to see the results of that in the market today.

So, where does that leave us? When I look at, as a result of this work, I look at it then on a couple dimensions: Are people buying the product? Are people using the product? Do people like the product? And then correspondingly, what is the perception in the marketplace?

You look on the purchase side, and obviously the reports or the results that Chris and team were able to deliver for you at the end of the fiscal year, 180 million in license sales says that that value proposition and that opportunity was very strong. As you know and as you’ve dug into those numbers, you'll know that that's very balanced across both consumer and enterprise.

Usage. Are people using it? And the question that you asked is, okay, talk to me in the context of the consumer side. On the consumer side, you've seen very, very high mix shift to PCs running Windows Vista. On the enterprise side, you've seen the enterprises particularly post Service Pack 1, because we saw a very strong acceleration post Service Pack 1. You saw those enterprises accelerating that deployment. And as one of you wrote on recently, we're seeing that track very consistently with the deployment cycle we saw in enterprises around XP.

The final piece of it is: So what is the experience? The support that we've had and worked with the ecosystem over the last year has dramatically improved that experience. But what I saw -we did an interesting experiment. I do -of course I do flash surveys periodically just to sample satisfaction levels with the product. Are they satisfied, very satisfied, would they recommend it to friends, family, et cetera. But about three weeks ago -and so it's been continuing to trend better and better, it looks pretty good. But I commissioned a third party firm to do a more significant sort of study, something that I can look across a broader set of geographies and a broader set of customers. And those results came back where right now on Windows Vista, because these are Windows Vista users, we have 89 percent satisfied or very satisfied, and 83 percent of those customers would recommend it to friends, family, et cetera. That is a very good result when you compare and contrast the satisfaction levels on other products.

The other thing that we did, though, is I went down -actually this last week, we took a camera crew down and we did some focus groups where we recruited a set of XP users -think of it as just going down and calling -doing a random-digit dial, generating a bunch of XP users. And the qualification was they had to be using XP, and they had to have a negative perception relative to Windows Vista. They're not using it, but they are predisposed to think about it in a negative way. And I wanted to show you the results of this video. This is sort of a rough cut from about 30 of the people -the first 30 people that we interviewed, and we've run through about 60 of those subsequently. Let's go ahead and roll the video.

(Video segment.)

BILL VEGHTE: That's our opportunity. Perception versus reality, that's a conversation that we've got to go have with our customers. As Chris talked to you, we are making a set of investments in consumer marketing this year. We're making those investments in the context of Windows Vista, but a broader conversation around the opportunity with Windows. Having that conversation is something that we must do. We must do to support and continue to extend that incredible brand and value proposition that we have with Windows, and you'll see a variety of efforts on this front as we go forward in the fall.

Okay. Let me shift gears now and talk about how we grow Windows. I think about it on four quadrants. I think about it in the context of a healthy PC market, I think about it in the context of, okay, I've got a healthy PC market, are people paying for genuine software? Are they pirating? Are they choosing to run Windows on each one of those sockets? As they choose to run Windows and as they choose to buy a product, are they choosing to buy those premium experiences, the very best versions for their respective segments, whether that be large enterprises, small businesses, or consumers? And then finally, are we continuing to deliver and build a very strong innovation pipeline that extends to both the platform for the ecosystem as well as the experiences that we develop and deliver for end users?

So against this backdrop, let me just walk through each one of these. The PC market -I mean, it's sort of amazing when you think about this business and an incredible milestone that we reached this year. You look at the worldwide install base of PCs in 1995 was 245 million PCs. We blew through that number as an industry this year just in our annual run rate, and next year we will blow through and ship, as an industry, over 300 million PCs.

When I look at the PC market, think about it in the context of these dimensions. PC market as I think some of you have in your analysis, and I agree with, is that the PC market this next year will grow in line with what we saw this year. But I think a lot about that mix. I think Kevin Turner did a good job setting up how to think about emerging versus mature and where that growth comes from.

My price points are obviously different between mature and emerging and the premium that I can charge between consumer and business. So that mix is a very, very important driver for the health and the growth of the profitability of the Windows business. I think you'll see -I think next year we'll see the mature market grow a little bit slower than we saw this year, but you'll see emerging market pick up that slack and drive very, very healthy growth overall.

On the consumer and business side, the consumer business continues to be very, very strong. I think you'll start to see a little bit of acceleration on the business or the commercial replacement cycle, but that consumer business, when you think about how I deliver those consumer units, increasingly, I continue to deliver more and more of those consumer units through the multinational OEMs as we deliver it.

Okay, so PC market. Against the PC market, how are we doing in getting people to attach Windows? So attach Windows versus competitive offerings and attach genuine Windows, that is to say that they're actually purchasing the product as opposed to pirating. This is, I think, as most of you know, is a huge revenue opportunity for us, but it's also a very tricky balance.

In the work that I do with the field and the R&D teams, we think about it on three dimensions. It's about reinforcing the importance of intellectual property rights. It's about the demand that we drive with the ultimate end user, and then the supply or channel incentives that we put in place.

On the intellectual property rights, this is an ongoing conversation that we have with governments around the world, and you see variability from geography to geography and from administration to administration. However, net-net, you're seeing increasing focus on intellectual property rights in emerging markets and you're seeing us continue to improve and refine our playbook with those governments on a global basis.

On the demand side, there's demand for Windows Vista genuine for a Windows genuine product that we do through marketing, et cetera. The big news here, and I think it was an important shift for us in FY08 and will set up for FY09 is we put a set of technologies in Windows Vista that fundamentally made it harder to pirate, number one, and number two, we have the ability in Windows Vista to update the product based on piracy types that we're seeing in the market.

So, for example, over the last 12 months, there are three leading piracy types, three leading ways that people are pirating Windows Vista, getting around the things that we've done, and we've updated millions of systems globally to address that leak or that hole. Now, then the next question is how do you express that to the end user? You express that to the end user through what we call notification. So think of it as if we detect that this product might not be genuine, then we simply alert the user to the fact that that product might not be genuine, and then provide both a convenient and commercially reasonable way for them to get genuine.

We've seen very, very good results in the efforts that we've done to date, and certainly you saw in our bottom line numbers the progress that we made on this front last fiscal year, and I certainly expect as this technology and as Windows Vista makes its way more broadly into the install base that those demand efforts will continue to pay dividends.

The final piece of it is on the supply side. And on this front, think of this as the pricing model and the promotions and the incentives we put in place with our partners to make sure that they are not going out with a naked system, but they are instead choosing to attach with genuine Windows. This is work that we do with our multinational OEMs as well as what we call our small local system-builders, the smaller OEMs that participate, particularly local PC markets.

This is something that we will continue to be very, very aggressive on. It's a big opportunity for us, but we'll be very, very aggressive in making sure that we attach Windows to those systems. Aggressive is a statement about marketing and incentives, aggressive is in terms of price point to make sure that I get genuine Windows on that and I'm reinforcing and supporting the behavior that as people buy a PC, they buy it with genuine Windows out of the gate.

Premium sales. This has been a great story for us this year. You saw a big bump on the consumer side where we had significant increases in consumer premium mix as we made that shift to Windows Vista Home Premium. And we have nearly 75 -nearly three quarters of our customers opting to a premium experience. When I look forward to FY09, you see our SKU lineup for Windows Vista from Windows Vista basic to Home Premium to Business to Ultimate, and that mix is something that we feel very, very good about.

You'll see as Windows Vista sort of settles in and people get very, very familiar with the business SKUs, as Chris and team have talked to you, we will see pressure on how to think about what percentage of customers are going to buy Windows Vista Business versus Home Premium, but in both cases, that is a good premium experience for us and some price uplift.

The other thing that I would highlight to you, at least in the reports that I read from some of you, is how strong our enterprise business has grown and been over the last couple of years. If we were having this conversation in the 2002-2003 time frame, attaching Windows client to an enterprise agreement or software assurance was something that represented a big opportunity for us. Today, that business is incredibly healthy. As I think we've talked about with you, we've got over 20 percent growth in that business, and over 80 percent renewal rates.

So as you and I talk about whether customers are buying Windows Vista in business and in those largest enterprises, the answer is emphatically yes, and this value proposition -the work that we've done in Windows Vista Enterprise Edition, and the software assurance work has been super, super good for us. It's also starting to push down into the upper midmarket as well. So I see this in FY09 as a continued strong growth opportunity for us.

The last piece I want to talk to you about is when we think about Windows -it's the products we sell, it's also about the innovation pipeline that we're building and delivering. Delivering Windows Vista Service Pack 1 was an important milestone, particularly at a perception level in the marketplace. We've delivered that. The Windows Vista desktop or the Microsoft desktop optimization pack is an important way that I anchor that software assurance or enterprise agreement value proposition. We've had very, very good growth in that. In fact, it is probably on the commercial side, it's the fastest-growing product that we've had at Microsoft.

You've got over 10 million licenses out there that we've sold, and you will see us delivering a set of updates to the desktop optimization pack this year. And we are continuing to invest in this as a great way of delivering value to customers. You've seen me do a set of acquisitions this year, Softricity and Kidaro, and we'll continue to invest in that and deliver those innovations in the marketplace.

We'll deliver Windows Live Wave 3 this year, Windows 7 -a lot of questions on where we are on Windows 7. The product is tracking very, very well, and we stay -we are committed and looking good relative to our commitment to you on three years from the general availability of Windows Vista.

The last product that I want to talk about, and it's a very important one, and I'm actually going to give you a quick demo is of Internet Explorer 8. Internet Explorer is the market-leading browser. The browser is an essential way that you and I consume the richness of experiences on the Web, and Internet Explorer continues to be a critical vehicle not only for end users, but for the ecosystem to deliver that richness of experience on the Web.

And what I thought I'd do here is -let's go ahead and shift screens, and I'm going to just do a quick spin through Internet Explorer 8. This is the product that we'll release to the Web later this year. We'll be in beta in a month or so from now. And as you look at it, think about it in the context of not only what it does for all of you as extensive Web users that depend on the browser, but also what it does for the ecosystem.

I'm going to actually start by showing you a piece of work that eBay has done. eBay has taken advantage of a product feature called WebSlices. And the whole premise to Web Slices is that you and I want to stay current. You guys work very hard to stay current on whether it be financial information, current news stories that are running, or periodically, sports scores. The ability to do that, many of you depend on RSS feeds. But for the broad user population, that's not something that is particularly available or that they've leveraged.

With Internet Explorer 8, we've provided a very, simple, convenient way for them to take advantage and stay current. In this case, what I'm going to do is let's say you're in town and you want to go see a ball game. We're going to go see the Seattle Mariners. This time of year, Safeco Field is a beautiful field, I highly recommend it even though the Mariners aren't so good this year.

So we'll go in here and we'll go and we'll type in the Seattle Mariners. We'll go ahead and search for that. And you'll see as I go up here, this looks pretty familiar except with one critical difference which is this little icon here. What this enables me to do is very quickly and easily subscribe to this option. And as I subscribe to that, you'll notice it was added up here in my toolbar. It gives me as a user a very simple and convenient way. So now I'm just going to go check how truly miserable the Mariners are.

I go over here, but I want to keep track of that option. Very, very simple and convenient way for the user, but also providing a rich set of experiences. This is wonderful for eBay and other people that are trying to create an ongoing, in-depth experience with their users.

The next thing I want to show you is this whole concept of how you and I interact and do a set of activities on the Web. And in this case, I've gotten those tickets and I look at this -gosh, that looks like a beautiful ballpark. And I need to be able to get there. And I don't know Seattle very well. So I'll go over here and I'll copy this. You guys probably know this step very, very well. I'll go here, I'll connect, and then I'll go up here and I'll type in www.local.live.com. I'll bring that up and, of course, I want -if you haven't used our market best mapping experience, I encourage you to use that, and of course I get the map.

Now, that's a painful experience. That's a bunch of clicks. I don't have to do that. What I really want to do is I want to be able to go here and see that map real time. So in this case, I just click here and I've got a set of activities that I can run against this texturing, whether it be translation or in this case map with Live Maps. Quick, convenient, while providing a rich experience for the users. These are two very simple short examples, and of course there are many, many more in Internet Explorer 8.

But the reality is that the Web today is something where we constantly have the tussle between the convenience and the simplicity of the Web with the security challenges that you and I face as end users. And you look at as the sophistication of those security attacks increase, not so long ago was about defacing a Web site. Somebody would go up, deface the Web site and try and trick you into an action.

The next thing many of you have gotten many, many e-mails trying to trick you into an e-mail -taking an action either on the site or on an e-mail. In this case, Tailspin Toys, I have two young boys, they look at this and they say, gosh, I'm going to download those demo applications. We're putting increasing bumpers in Internet Explorer to help protect you as end users.

The one that I wanted to talk to you about today is the anti-phishing filters that we put in Internet Explorer 7, first browser to do that broadly, received with much market acclaim. We're blocking about a million plus phishing attacks every week on your systems and in the marketplace in general.

The big thing that we're seeing now on the security front is this concept of cross-site scripting. And the whole premise of cross-site scripting is that a hacker will inject -the page looks absolutely identical so that you as a user feel like you're interacting, but they've injected a set of scripts on that Web site so that they can mirror the actions that you're taking and capture your personal data.

And I'm going to actually show you how an example of that here in a second, but the first thing I've got to do is I'm going to go in here and I'm going to turn off the feature in Internet Explorer 8 so you can get a sense of it. So we'll go down here -of course no user would ever have to do this -but I'm going to do it here so you get a sense of it. Yes, I want to save these settings, we'll choose okay, we'll go in to log into Woodgrove Bank. This is the Woodgrove Bank Web site. It looks absolutely identical, no changes. I want to go ahead in here and I want to log in and I'm having that ongoing dialogue that I always have with Woodgrove Bank as I go over here and I type in my account information.

But as I do that, and in this case I've put up this -my keystrokes were mirrored across to another location on the Web. As I type in that information, that’s a big problem for you and I as end users, and you're seeing these cross-site scripting attacks accelerating dramatically on the Web.

So what we've done in Internet Explorer 8 is if I go back -here, let's go back. Let's now turn that back off -let's go ahead and enable it so that we can protect you and users broadly as they browse the Internet. So I want to change these and go back in here. I go ahead and log into my account. And you'll watch, this is real-time rendering. We've picked up -there was some script injected into that site and blocked it. And so now when I go ahead and I log into the account, of course it's not mirroring across somewhere else.

That's just one quick example, Internet Explorer 8, very exciting release for us. Critical for us as we continue to deliver the world's most popular browser, the world's best browser, whether it be on ease of use and simplicity as well as richness and security.

Great, thank you very much.

END

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