STEVE BALLMER: Well, thanks. It is a real pleasure for me to have a chance to be here with you today. I actually have a lot more I need to cover than I have in many past financial analyst conferences. So I'm going to try to do that with some slides, some alacrity, and hopefully we'll get through a lot of things that are actually pretty important.

We also made a key executive change to come to this room—for those of you who have been to past analyst meetings—as opposed to the other room on the theory that in here, we can actually see each other. It's almost impossible from the stage to see anybody in the other room. I'm not sure that's going to be an improvement for either one of us, but we are really going to try it out in the spirit of a little bit of additional intimacy.

When we were sitting here a year ago, I would say we were living in a very different world economically. And I'm not going to talk a whole heck of a lot about the economy because I'm not an economist, and I can't make any predictions, but I think it's fair for me to say the economy really slowed down, but we did not slow down at Microsoft. We kept our investments and key innovation. They are paying off with, frankly, the strongest wave of products in our history. We have a lot of products that we released in the last 12 months: SQL Server, Office Communications Server, Exchange Online, SharePoint, Bing, etc., and yet over the next 12 months—and you'll see this and we'll talk about this today—we have just an incredible wave of innovation that's coming.

If you take a look at it and you say, okay, 12 months ago, what were the key questions, or at least what did I sense were the key questions on your minds as investors? Will we deliver Windows 7? I think the answer now looks to be certainly yes. I think there was a set of questions around costs. Will we constrain costs? Twelve months ago I would have said, we will do what we should do with costs. And I think most of you would have said you should be spending less. I think that would have been a fair characterization of the dialogue a year ago.

Well, we did have a change in financial condition. I'm not sure we'd be in the same place today, you and me. Yet at the same time, the thing I want everybody to really take from the year is we manage costs very carefully. We always have and we always will. We just don't always manage them exactly the way you would have us manage them. And they're actually quite different. It is quite different for us to decide to invest and invest, or decide not to invest, and we take a little bit different perspective.

This year we said, hey, look, business is certainly being impacted. We don't have visibility on what's going on economically versus guidance. Certainly, we wound up with $3.1 billion less cost. But perhaps to me more importantly, we kept our cost base more or less flat with fiscal year '08, up only 3 percent, despite the fact we gave pay raises before we knew what was going on in the economy, and we didn't slow spend appreciably until really the end of the first quarter.

I think the question persists today, how will we profit from the cloud? I think you should have a little bit more visibility on that today than you did a year ago with the launch of Windows Azure. We have real reference accounts and some real success now with Exchange Online, SharePoint Online. You've had a chance to see a little bit the announcement of our so-called Office Web application companions. I think we've sketched both a business approach and technology approach that lets us benefit from the cloud.

Starting about two years ago, I started to get the question, what's up with the Apple ads? It was one of the few places where I had a lot of investors pushing me to spend money as opposed to constrain the spend of money. Well, those folks ultimately won. We started our new ad campaign in the last 12 months. I will talk a little bit about it. I think so far it has proven to be quite effective.

Will we succeed in phones? Let me just say it was a tough year on succeeding in phones. Mostly our own issues, frankly. Mostly our own issues. And really driving our execution the right way at the right speed. We've readjusted some of our plans. Robbie Bach is going to talk some about that. I still very much believe in the opportunity to be a for-profit software-only player in the phone business. I think that's the winning approach. I think it's the right niche. I think it is the right way to get 50–60 percent kind of market share, maybe the only way. And Robbie is going to talk about kind of how we are driving that later on today.

A year ago, the world was still mostly talking about a thing called a MID. Don't know what a MID is, really never knew what a MID was, but we got a real concrete substantiation of a MID during the last 12 months. A MID was a netbook. And when they first shipped, people said, oh, this is this, this is something brand new, this is blah, blah, blah. And they shipped with Linux, and blah, blah, blah, blah. We now know what a MID is. And we now know a MID is a netbook, and what's a netbook? A netbook is a PC. Nobody wanted any netbooks that didn't have Windows on them. So we went from nothing to about 95–96 percent attach on netbooks. And I will tell you the other 4 percent probably have Windows on them also.

And I will talk a little bit about how it is a PC with some different physical characteristics, no doubt. But the way it is being used, it is a PC. It may be lighter. It may have a longer battery life. It might be lower performance, but it's running Word, it's running Outlook, it's running the browser, it's doing the things that you would expect to do on any PC. And so, I think we've had a very good year.

We were aggressive. I'm going to talk a little bit about that because we wanted to make sure, you know, we're very oriented, it's a long-term customer presence. We think that's the way to create long-term shareholder value, and we drove that pretty hard and we are pleased with the success.

I think the last question, which may not be the last one from last year but it was pretty big, was are you guys going to get any momentum in search? I hear an echo, my own voice coming back to me. So, if somebody doesn't mind turning down the audio of the webcast, that would be helpful. Are we going to have any momentum in search, the question. And I think that with the launch of Bing, with the reception to Bing, I can't exactly claim going from 8 to whatever 8-1/2 percent market share in a few weeks is momentum, but the buzz has been good.

People recognize that the Bing effort represents a significant step forward for that product, its relevance, its capability. We showed a different point of view to the user interface of search, and how you do search. The sort of reviewers and influentials said, yeah, there is innovation and it can come from Microsoft in search. So, a little bit of momentum.

And then, of course, yesterday we announced our partnership with Yahoo!, and I want to talk a little bit about it right now. First of all, I want to get a chance, since we happen—it's not like we planned to do that announcement the day before this meeting. I would love to tell you that that was all scripted and planned, but given that we are doing this meeting the day after that announcement, I want to make sure you get my full explanation and, I'll say, body-English on the issue.

This deal is a win-win deal and it is a win-win partnership because together Yahoo! and Microsoft can bring more choice, better value, and more innovation to the search market. And I will say for this crowd, together we can create economic value, an economic value that's going to benefit Yahoo! shareholders and Microsoft shareholders. And certainly my view just sitting there—sort of taking questions (and I have been taking questions about Yahoo!, let's face it, for about 18 months now) but taking questions over the last 18 months, including yesterday, and walking through the deal and watching the market reaction—is nobody gets it. So I'm going to try to explain it from both companies' perspectives because it's a little bit complicated.

What really happened yesterday? First, let me start on the strategy side. Microsoft, we get a chance by putting together our scale and Yahoo!'s scale in the United States and in some other countries where Yahoo! has scale. You have to understand that in Western Europe neither one of us has much scale, Google has got about 92 percent paid search market share in Europe, so this gives us a little bit more scale, but not a lot more there.

But scale is actually a tool for product improvement. I'm not talking about money improvement. I will get there in a minute. It's a tool for product improvement. The more queries you see, the more you can tune your product. The more you scale you have, the more advertisers advertise on your system and the more relevant they make their ads for your users. It is not about money. It is actually about relevance because the advertising is part of the actual user experience.

If there's a thirteenth-century Italian art dealer in the world, they're going to buy keywords on Google, and they may not buy them today on Yahoo! and Microsoft. Yet, if you're purchasing for thirteenth-century Italian art, you don't probably want a book on Italy, which might be at the most relevant ad one place or more relevant somewhere else. So, this partnership is about product improvement, customer understanding, and scale for advertising relevance.

Product improvement is the key to market share—market share for Bing, market share for Bing as presented on Yahoo.com. For Yahoo! the deal is also about really focusing in on its leadership in online media. And, yes, we will compete some with our MSN efforts, and none of that changed yesterday. But, Yahoo! is the leading online media company in the world, and they really want to invest technologically, etc., behind that. And this is a chance for strategic focus, was one of the key benefits that Carol Bartz has highlighted to me throughout our discussions and yesterday.

Economics is where people get even more confused. What happened? What happened? Nothing got bought. Nothing got sold. People expected something to get bought. Nothing got sold yesterday, and nothing got bought yesterday. But, the partnership in and of itself creates economic value. And not just on the future promise, not just on the future promise of improved product, improved share, and improved revenue, it creates an immediate opportunity, essentially, for synergy.

With more scale, the same CAPEX investment means, or a reasonable CAPEX investment means our COGS at Microsoft for running search should be lower as a percentage of revenue than they are today. That's new economic value for us. There's a little bit of gross margin, not much. We paid an 88 percent TAC rate, and we don't have the same revenue per search that Google does. So 88 percent TAC rate, whoa, that is a big number. So if we are just razor sharp, we may make a percent or two out of the 12 we get to keep. But, we're not going to make much, but we make a little bit.

And because we have more bidders in our advertising marketplace, we have — we will get higher bid prices probably, more liquidity in the marketplace, things this group understands very well, that could and should, not could, will improve monetization. We happened to have some costs, short-term additional costs. We'll have a few hundred million dollars per year for the first two to three years of what I'll call transition costs, transitioning engineers and technology. We have some transition costs. Think of those as one time. And we have what I would call some guarantee risk since we guaranteed revenue per search by market for Yahoo! during the first 18 months post-implementation. So, there's some insurance risk. We don't expect to have that be a real cost, but I'm sort of doing full disclosure.

On the Yahoo! side — and this is the one that stuns me that people haven't figured it out —Yahoo gets 88 percent of the search revenue they have today. They have zero percent COGS against 88 percent revenue, and they have no R&D expense and no ongoing CAPEX. It's sort of like unbelievable.

You know, I don't know what you say because they're focused. But did they sell their search business? No, they get to keep 88 percent of the revenue. That sounds like they didn't sell it. And I'm not selling against interests, I just think this was a win-win partnership. And they said yesterday that they expect their operating income to go up by $500 million on full implementation. Remember, this is a company that makes $700 million. So you're talking about a 70 percent profit expansion just from doing the deal.

It doesn't talk about gaining share, which is something that we have more probability and possibility to do. It doesn't talk about future improvements in the bid density in the marketplace, just the sum of the two volumes as they exist today. This is a huge value creator. But nothing got bought and nothing got sold.

Ever since we made our first bid for Yahoo 18 months ago, the thing I have been trying to say is, there is kind of a magical way to create revenue synergy and cost synergy by putting these two things together. We were — assuming we get regulatory approval, we are able to do that and remain independent companies. And it creates a lot of economic value, a lot of economic value.

And I'll tell you because I went through the negotiation process with Carol, I would love to tell you that we kept most of the economic value. That's not what happened.

Well over 50 percent of the economic value that gets created, without market share gains, goes to Yahoo!. You would say, what are you negotiating with yourself? The deal is done, Steve. What's going on. I just want people to understand, we are in a long-term 10-year partnership with Yahoo!. We're excited about it. We think their constituents and our constituents should both be excited about it. Certainly for us, there is a lot strategically to get excited about. More of our financial upside comes on future work because it is in revenue and it is in COGS. More of their financial upside comes by the immediate elimination of operating expenses year-by-year.

So I don't know, I will tell you I had a little bit of a strange reaction. I know people were sort of frothy in the market, and I don't understand your guys' businesses all that well. But I will tell you, when somebody says to you that they think they can make their pretax operating income go up by about 70 percent, I just don't think there are too many announcements like that that anybody makes. So I was myself kind of surprised by the market reaction.

It is a win-win strategic partnership and it is a win-win deal from my perspective. And I'm excited about it, and I'm excited about working with the Yahoo! management team starting with Carol.

Search is just one of our businesses. As folks know, it is not our largest business. I kind of first designed, basically, this slide and showed it to a group of investors in New York earlier this year. But, if you say, what is the real kind of financial case or financial thesis for Microsoft going forward, it's really leveraged upon building profits in seven, let me call them, areas of endeavor.

The PC, the lead product, of course, is Windows. Communications and productivity, we have many products in that space, but Office is the one that you would most associate with it. Servers, the server market, I know we are in an economic turmoil, but the demand for servers over time is going to continue to grow. Enterprise infrastructure, this is really the software that is used to build the tier-one, the mission-critical applications in companies. You probably most associate here our SQL Server product with that, or Oracle's business, or the IBM mainframe software business. That's kind of the field of endeavor. Phones, software for phones, software for TVs and software to support entertainment, those are kind of 1-1/2 thoughts because you will get entertained on your phone and PC as well, and then the business of information, search, and advertising.

Green means we make a lot of money today, and it will be a growth driver. Yellow means we — it doesn't mean we're breakeven, but at least on the magnitude of Microsoft, they're close to breakeven. They might make a little, they might lose a little, and they need to be great growth drivers. And red means we lose a lot of money, and it is supposed to be a great growth driver.

We had one of those before in Xbox. You kind of graduate sometimes from red to yellow. You don't want to be red first, but sometimes things go red to yellow and then we got to get things to graduate from yellow to green.

I threw on some numbers here that represent how much of our operating expense, roughly, we spend in each area. We have different environments, different competitors, different dynamics, but these are kind of the customer scenarios in which we're investing. So the investment thesis is: Are these big growth businesses or are these not? And do the products that we have behind them support and give us kind of an opportunity to really benefit in these areas?

We've got another set of businesses that I would call "enablers." They reinforce and support the big seven. These businesses all break even or make a little bit of money. That's kind of the design point, but they help drive the top businesses. Our consulting business, IT Services, is an example of that. Our Dynamics business and what it does for enterprise infrastructure is an example. MSN needs to make some money and support what we're trying to get done with search overall.

And then, last but not least, we've got some corporate expenses which we try to manage quite frugally, and I think if you take a look at it for a company of our size, they're quite reasonable.

Across this, and even with the kind of decisions we made to slow cost growth dramatically, we will still spend, in the next 12 months, $9.5 billion on R&D. So 9 1/2 of our—whatever it is, roughly $27 billion—of operating expense will be in R&D. I think at 9 1/2 billion, we are the No. 1 R&D spender of all companies in the world. And actually, a reasonably significant part of the total R&D spend amongst all U.S. companies and governments. And it reflects our deep belief that there's opportunity in this business. There's opportunity in these scenarios to drive revenue, drive profit, and drive shareholder value.

We have to innovate, and we're going to continue what I would call the long-term, tenacious approach which has marked the company. I know this is a little bit always dissonant with some of our shareholders. They say, "Steve, I'm long-term. But, OK, what are you going to do for me?" And long-term is relative. In the investment business, sometimes long-term means, what, three years? For me, one release is, say, two and a half, so long-term might be at least two releases, and you get a little bit of dissonance in the basic discussion.

And yet, I think we all—at least everybody who'd come, who would sit here, who'd be here—we have to really get our minds around the fact that if this company is going to grow on a sustained basis, we have to be investing in things that may not pay off right away, as well as some things that will pay off right away. But we have to really go get the long-term payout on anything we choose to invest in.

And I actually think this is sort of the most important chart I'm going to show you today. You won't think so by the end, but I'm going to highlight for you. In our business, in this industry, probably the greatest source of economic value creation is choosing to be in the right businesses early enough. And when you don't choose to be in early enough, you have a problem. And if you choose to stay out of a business that is a source of great economic value creation, you're not going to grow with the market.

So the innovation is critical behind it; the execution is critical behind it. But if we're picking the wrong things, that in and of itself—or we are picking the right things—that is a very important call that I make along with the rest of the key leaders here at Microsoft.

For the last 12 months, I've actually been running our Windows business. So when it came time to actually say who is going to talk about Windows at this meeting, unfortunately, it was a hard time for me to say to Steven Sinofsky, who got the job all of two or three weeks ago, "Hey, you take it," since most of this year was under my kind of acting leadership. So I'm going to break mold for a minute and talk about one of the businesses, Windows. You are going to hear from our other business leaders about their businesses. And then when I'm done talking about Windows and the PC business overall really, that first box on the chart, then I'm going to come back and talk about some other company-wide themes.

I chose here to talk about the world of Windows. The world of Windows, because in some sense, the strength of Windows, the reason why I characterize it as strong and vibrant, is not just because of what happens in Windows itself and its component, Internet Explorer, and its extension, Windows Live, but it is also a question of what third parties do with existing PCs, peripherals, applications, Web sites—because you can optimize your Web site for IE 8 with some of our new technologies there.

It is also a question of what we do in our own efforts to complement and reinforce Windows. The fact that Windows Server and Windows both exist makes both products stronger. The fact that we have Windows phones and Windows PCs, they may be independent, but they're part of a strategy that makes things stronger. The fact that you can project Windows onto a big screen with a remote control and get video feeds makes the Windows Media Center TVs, makes Windows stronger.

If we had no development tools from this company—all these people with their brand-new operating systems—you got to have great development tools. You just have to. I don't understand how anybody pretends to be in the operating system business without development tools. Super important.

Office: Office has been, for many years now, a key driver of why people choose Windows.

Bing: Over time you will see us do things in Bing that enhance and are really special and smart to support Windows.

And Windows has a lot of competitive—there are certainly a lot of competitive dynamics, shall we say, in the operating system business. And I'm going to talk about them, but at the end of the day, if you ask, new PC designs, boom, we're going to have a heck of a Christmas. You take a look at the kinds of peripherals people do for the PC, and you can see it all the time.

I was coming through customs recently and I saw a new reader they had for passports, funny peripheral, new peripheral that had been built and operated with Windows. You just see it over and over again; the level of innovation is strong.

People continue to enhance their existing applications, and even as people go to the cloud, you see people writing Windows applications as a front end to a number of these things. Try out Hulu sometime. Try out Hulu direct on the Web. Try downloading the Hulu application that sits in front of it that runs on Windows, you will find that it is a very remarkably improved experience.

And as I said with IE 8, we have optimization ability. So there is a vibrancy. You will see Office 2010. We will talk a little bit about it. There is a vibrancy. You see what we'll do with the Visual Studio development tools, what we've done with Silverlight, there is a real strength and real vibrancy.

I want people to have that in your mind, because we're going to come under competitive attack. Any business that's as good and as big and important as Windows deserves competition. And we deserve to compete well. And I think we're doing a very good job, not only ourselves, but in conjunction with literally hundreds of thousands of partner companies around the world.

The bulk of our Windows business comes with the sale of new PCs—over 80 percent of the revenue. And I could talk to you about the upgrade business. I'm not. I'm not going to talk about it today. I just want to talk about the first 80-plus percent, because I think many of you think we have problems we don't have in the Windows business. And I think we've built some great strengths, and yet I want people to understand kind of how revenue and kind of success in the marketplace, what does it look like if we're strong in the marketplace, what does revenue look like?

First of all, I'm going to talk about these market segments of the PC hardware market. There are developed markets—U.S., Canada, Germany, etc.—and there are emerging markets, China and all the other emerging markets. You can almost call China a separate market if you like, because the dynamics in China are not like the dynamics in India or Russia or Brazil. And China is now 15 percent of the world's PCs; 15 percent get bought and used in China. Not produced, but bought and used. And that number is growing.

So you have developed and emerging. In emerging markets, I show only consumer and business PCs, no netbooks. Mostly, that was a simplification. The fact is, we have low prices on consumer PCs in emerging markets that are a lot like our netbook prices in developed markets. So I just simplified the analysis here a little bit for you. And then in developed markets, there is business PCs, consumer PCs, and netbooks.

Now, why would I trouble you with this detailed explanation? Because we essentially have a different pricing and business strategy for every one of these segments. They are not the same. We make the most money when a business PC sells in a developed market. Second, consumer PC in a developed market. Third—well, that one is trickier.

In emerging markets, the problem we have is you might have a lot of PCs sales, but you might only have 10, 20, 30, 50 percent in a given country that actually have a? Windows license that gets attached to them. So you have the combination of what is our price and what is our piracy rate?

And from time to time, we will drop our price to try to improve our piracy rate. And sometimes we guess right, and sometimes we guess wrong. There is no science, knowing full well that the piracy rate worldwide is still actually quite significant, mostly in emerging countries but also in developed countries.

There is also a bit of a question about what's going on with netbooks. So let me talk to the callout here. I said the netbook is a PC. And yet, when I start talking to many of our customers about this, they'll say, "I love the netbook, but can I get one with a bigger screen?" Well, what they're saying is they want a thin, light, long-battery-life, bigger-screen netbook. I think it makes perfect sense. You'll get other people who say, "I want a faster netbook." And what everybody really is trying to tell you is, there are sort of two dimensions in how to think about PCs' characteristics: low performance and higher performance. And let me just say: lower power and lower weight, and heavier power and heavier weight. And you can say this is true of desktops as well as notebooks, and I tried to lay everything in there.

So what we did in this last year—we, Intel, Dell, HP, Acer, Toshiba, Asus, etc. —what we all did is, we created something that was cheaper but in some ways a little better than the expensive thing.

I will give you the Ballmer family personal story on this. My kids go to school where they all have to have a PC. And they've all got beautiful—oh, the two older boys have beautiful Lenovo laptops. I brought home with me a little Acer triple-E PC or something, I don't know. One of the netbooks. And I found in two days the boys are fighting over the triple-E PC.

I said, "You guys have your own notebooks, what the heck is the problem here? Why are you fighting over the machine I brought home just to play around with?" They said, "Dad, it's cool. It's light. We can hold it. It is a little easier to work with."

Now, they said, "Dad, the screen's too small. Why can't we get one like this that has got a screen like our Lenovo?" Well, how the heck did we all—we all, Intel, us, blah, blah, blah—how did we all screw this up? Why don't we have a high-power—I'm sorry, a high-performance, low-power device?

That comes this year. These new ultra-thins—as Intel likes to call them—devices are essentially like high-end netbooks. So we will have a range, and then when our business customers say, "Can we buy a netbook? We want it to have a bigger screen and a little more performance," we'll say, "Yeah, here's a thing called an ultra-thin." It is a high-end netbook. That's very important because we're here to talk about revenue and shareholder value. It is very important. That machine might not sell for $299 or $399. That machine will sell for more money, and it will have all of the best performance and power characteristics. So the dynamics of this will continue to change.

Our license tells you what a netbook is. Our license says it's got to have a super-small screen, which means it probably has a super-small keyboard, and it has to have a certain processor and blah, blah, blah, blah, blah. We want people to be able to get the advantages of lightweight performance and be able to spend more money with us, with Intel, with HP, with Dell and with many, many others. So the shifting dynamics here will continue to evolve.

Now let's talk about our revenue and in the context of the hardware market. I was advised by almost everybody who works here that this slide is too complicated. And I said, "Not for our investors it isn't." (Laughter.)

I've actually done this slide about ways ten different times, and we don't think we break through very well, so I'm going to do it again. And this time we did it in traditional cost accounting. And if you'll bear with me and stay on the left before you let your numbers drift—your eyes drift to the numbers on the right.

If you ask what's happening with our OEM revenue—remember, we are talking about the first 80, 85 percent of our business—you say, OK, there's the PC market. Most of you will ask Chris every quarter, "The PC market grew or shrunk? Why is your number any different than the PC market?"

Well, there are about four factors underneath that. First is the hardware segment mix, which is the shift in what people want to buy from things on the last slide. Do people want netbooks? Are they buying in emerging markets or developed markets? Is it business customers that are buying or PC—consumer customers who are buying?

The truth is, I would love to tell you that that was super controllable by us, but other than having a high-end netbook in the market, we don't control whether the Chinese are buying a lot of PCs versus the Americans. We don't control what's going on in households versus in businesses. We don't control that very much. And once we get this small issue solved, of we need an expensive netbook, we won't control that very much either, but it will be less of a business issue.

So hardware segment mix. We drew a bright line because I do think we very much control the three things below this line and not very much the two things above the line. So what are those? Share versus Apple. Yeah, "control" is a tough word, but that's in our wheelhouse. That's what we work on. That's what we get to do every day.

We have low share, by the way, in the investor audience. I can see the Apple logos versus the PC logos. So we have more work to do, more work to do. Our share is lower in this audience than the average audience. But don't hide it. I've already counted them. I have been doing that since we started talking. (Laughter.)

Anyway, we've got a bank of them right here in the middle. I know where they all are. One over here on the side. But anyway, that's OK. Feel free as long as you're using Office to go right on ahead. (Laughter.)

But there is share versus Apple. There is Windows attach. This is a function of, in any hardware segment, have we improved our attach rate? Now, overall attach can go down because Chinese people buy all the computers—all the computers are sold in China as opposed to sold in the U.S. That would affect our attach rate, but not our Windows attach.

What I did here was normalize—using standard cost accounting techniques—I normalized for segment mix, and I said on average relative to those five segments is our attach rate, that is the number of machines that go out with Windows as opposed to pirated as opposed to Linux or some Linux variant, are we increasing?

The one other thing that affects the attach rate in any one quarter is how much inventory our OEMs load up on. If our OEMs are going to load up on inventory, you'd say, why would they ever do that? Well, in our fourth quarter, sometimes they load up because their prices for the next fiscal year happen to get set based upon purchases ending June 30.

And one of the things we certainly saw was people bought a lot of licenses, probably to stick in inventory in the fourth quarter of '08, and nobody is holding inventory in the fourth quarter of '09. So there is a little bit of inventory effect, but it is mostly about piracy and share versus Linux, Windows attach.

And last but not least is our up-sell and pricing dynamics. So, for example, with today's netbooks, we sell you XP at a price. When we launch Windows 7, an OEM can put XP on the machine at one price, Windows 7 Starter Edition at a higher price, Windows 7 Home Edition at a higher price, and Windows 7 Professional at a higher price.

So in a sense, it's not just what are our prices, that's partly in here, but it's also a function of how well do we do getting, in any segment, people to buy the more expensive offering? Plus any things we do to shift prices.

So I showed you on kind of a percent basis what's going on. In '09 Q3 and '09 Q4 and for the whole fiscal year. We add, essentially, about a quarter and half, almost two quarters that were whatever the old normal was, and then we had two quarters that were the new normal. Maybe I'll focus there.

The PC market we cannot control. It's the economy. For the year, it was up 1 percent, but it was certainly down in the second half of the year. That's overall PCs, plus 1 percent.

Hardware segment mix: If we kept everything else the same, and just based upon the fact that more of the PCs were being sold to consumers and in emerging markets, our revenue would be down—or was down—10 percent. So 10 percent of the revenue—this is not a controllable factor from us, and frankly, will continue to be negative in the future because the fastest growth—it doesn't mean we are not going to get growth in developed market PCs, but the number of PCs being bought by consumers in this country and in emerging markets, is it going to outgrow business PCs, just this kind of fundamental fact?

I don't think this number will be as negative as it was this last fiscal year, but it will continue to be a drag relative to the PC market, and I do not view it as controllable.

Share versus Apple, you know, we think we may have ticked up a little tick, but when you get right down to it, it's a rounding error. Apple's share change, plus or minus from ours, they took a little share a couple quarters, we took share back a couple quarters. But Apple's share globally cost us nothing. Now, hopefully, we will take share back from Apple, but you know, Apple still only sells about 10 million PCs, so it is a limited opportunity.

Windows attach: There is an opportunity here versus piracy, a big opportunity, but it's one of these things where predicting exactly when it's going to kick in is very hard to do. It requires a lot of education, government regulatory work, work with the OEMs, sometimes it requires pricing action, but this number should be zero to positive going forward. It was slightly negative for the whole year this year primarily because of the inventory situation about 12 months ago as OEMs loaded up. And it particularly was a negative factor on us in the fourth quarter of fiscal year '09.

Last but not least is pricing. I think there is sort of a pervasive view that we maybe we've changed Windows pricing negatively dramatically. Pricing this year cost us 4 percent, and it cost us 4 percent primarily because we decided—remember, netbooks aren't in here; they're up in the hardware segment mix. But they're down primarily because we did a program this year to cut price in emerging markets with a theory that the lower price would lead to higher attach and higher total revenue.

The theory was wrong. It's not that it was untested, but it turns out the theory was wrong, and you will see us address the theory in the Windows 7 time frame. We're going to readjust those prices north, so to say, and I think with our Windows 7 SKU lineup, we also have a great chance to do some up-sell, up-sell to Windows 7 Starter, Windows 7 Home, for XP, so I would expect positive there. And, again, this is all additive to what happens with segment mix and market.

You put it all together and you say, maybe we can grow about as fast as the PC market or slightly below on the OEM side. And because this is a launch year, we can have a heck of a good year selling upgrades to consumers, to businesses, etc. So I'm not going to make a specific forecast, but I do think that for this, one of our biggest businesses, and one of the ones that was certainly the one that was the most economically challenged, I would give you a long-form explanation of what was going on.

Competitively, you know, a lot of you asked questions about the competitive environment, and we've got competition coming from a lot of places. I was talking to a group of interns here yesterday, and they said, "What about thin clients? Come on, thin clients are going to wipe you out." One thing we should all agree in this room: Nobody believes in thin clients. Really, they don't. A few IT guys, for a few specific cases. But when you say "thin client," you really mean a client that doesn't execute code; everything happens on the server.

And the truth of the matter is, I don't care whether you are Apple or Google or Microsoft or Linux, all of these constituencies are telling you you are going to want to run code down on your client. They'll say, "You want to run code in my operating system." And they might say their operating system is disguised as a browser. Doesn't make it thin if you download a huge program to run in JavaScript in the Firefox browser. It doesn't mean there's not programmability. It doesn't mean you want local intelligence. It's just a question of whether it's our operating system or their operating system.

So the notion that thin client is going to win, I'll take on and I'll actually—I mean, we have competitors who say they believe in thin clients. What they are really saying is, "We just believe in our browser cum operating system." And you hear it from Google and you hear it from Firefox and you will hear it from a number of others. But don't think there is some magic technology, revolutionary thing that they believe in differently. They don't. OK.

No. 2: Sometimes you'll hear people say, "At the end of the day, we only want to run code that complies with standards—HTML, HTML 5, other standards." We as a company believe in proprietary innovation and standards support. And I actually think most of the commercial guys do too. Certainly, it's important as the standards advance, as HTML moves forward, we have to embrace them. But the standards will never be able to move as fast as the sweeping innovation.

So just when rich graphics comes to HTML, it will all be about touch user interface. It will be about things which are not yet in the standard. So we need to support standards, and we will go beyond standards.

Linux, it's all about Linux. We've been competing with Linux for a number of years. I want to describe our value proposition. We are a high-volume player. We do not, say, like Apple, believe in low volume, very high prices, very—Apple is a great company, does a fine job. But their model says high margin, high quality, high price. That's kind of how they come to market.

We say we want big market share. But with big market share, you take a lower price. Well, along comes Linux, and they say, "We have no price." Which, of course, we know for IP and other reasons, of course they have a price. But they say, "We have no price."

The problem you have with these so-called free alternatives is, there's also not the incentive to do a lot of the hard work to build out the ecosystems, to support the hardware vendors that is required. So a model like ours, which is high volume and high value, but low price, but not free, you can say, "Are you guys in the middle ground or are you where you want to be?" And I say we're exactly where we want to be. We can't be high priced, that doesn't get you the volume that we aspire to. But if you go all the way to free, you also get cognitive dissonance. In the Linux case, you also have some other issues that come to bear. Linux is, quote, open. In our case, we say we are open. We support open standards and open innovation, but you can't change our operating system.

So we maintain a fixed design point in the Windows world, which the Linux community has never managed to do. So Linux is still not Linux. And whether we are talking about Android Linux or other Linux distributions, it's hard to build ecosystem momentum with a very, let me say, chaotic design point.

Apple, flip it around, and say, oh, you don't want to do that. What you really want to do is do everything end to end, don't be as open as you are. To which we'll say, we've hit the right balance point between openness and complete scenarios, between end user, innovation and IT developer innovation. And at least when Apple attacks us, the primary attack that comes from Apple is, hey, at the end of the day, we have the coolest hardware.

When you see the hardware, the PC designs that will come out this Christmas with Windows 7, I think that conventional wisdom can begin to really change. There is some really amazing, amazing work. So it is possible to get great hardware innovation, even when hardware and software comes from separate companies.

Android, Chrome OS, they are part of the competitive landscape, not a part I understand very well. I was just getting my mind fully wrapped around Android. We were expecting to meet Android in the market this year on netbooks. I gather from press reports that those netbooks are going to get delayed to next year. Oh, well. And I don't know what Chrome OS is yet. I know what all of you know, and I don't know its relationship is to an Android, so right now I just put it on the list for competitive completeness more than anything else.

We spent a bunch of money starting this year on these Windows ads. And as shareholders, I think you deserve to know whether they are doing anything or not because we have ramped our marketing spend on Windows quite a lot. Our whole Windows P&L is shifting. Revenue is the big factor, but because we bring Windows and Windows Live together. We started advertising, and I think Chris Liddell and Tammy Reller are going to take some time during Q1 to discuss the evolution of the P&L, but revenue is key, and certainly we've ramped marketing.

And are the ads working? In an independent survey, we asked 18- to 24-year-olds—or they were asked, "Who offers the best value, Apple or Microsoft?" You can kind of see Apple was comfortably ahead despite the fact they —well, despite whatever the facts are. Our ads started in April of '09. You can see kind of what the perception changes have been so far.

This is a piece of data. There is more. All I'm trying to do is tell you I think we're making a difference, which means as shareholders, I'm also telling you to expect us to continue to invest heavily in Windows marketing which is new. We didn't do that three, four, five, six years ago. So it's a new element of the overall Windows P&L cost structure.

I'm way over time, but I'm having fun. So we're going to still have a chance to talk a little bit about Windows 7 itself. Windows 7, I think, is going to be a really nice release. We've got a lot of people signed up who are adopting it, rolling out in IT. You see a list of some of the names. We've had over 8 million downloads of the release candidate. We have 50 percent of enterprise IT people saying they plan to upgrade as soon as it's available. These things are notoriously not reliable as predictors, but that is a high number to have people say. I wouldn't put it down in a model.

But I think the team led by Steven Sinofsky, who's now taken over as president of the Windows and Windows Live Division, has done really a stunning, stunning job on Windows 7. And so I would like Mike Ybarra from the Windows Group to come onstage and do a little bit of a demonstration of Windows 7 for you. Mike.

MIKE YBARRA: Thank you, Steve. Appreciate it.

STEVE BALLMER: Welcome.

MIKE YBARRA: Good morning. I'm really excited to be here to show you a small example of Windows 7. Let's dive right in. What you actually see on the screen right now is a standard Windows 7 desktop. And we made a couple of key enhancements to the Windows user interface to make using the PC a lot easier. Let me give you a demonstration.

On the taskbar here, you can see I have several applications pinned to my taskbar. That gives me single-click access to the applications I use most often. For example, if I use Microsoft Excel every single day, I don't want to go in the Start menu and search for it, I just want it to be pinned to the taskbar.

So I'm going to take Microsoft Excel and I'm going to drop it right on there. And from now on, Microsoft Excel will be pinned there and I can easily access that application.

I can move it around, put it where I want, and in the taskbar in any particular order that I like. That's great for applications, but what about the actual documents that people use? Because a lot of the times people are looking for where documents are instead of spending all their time doing the work they want to do.

Well, with a technology know as Jump List, I can right-click on applications on that taskbar, and I can very easily see recent files that I've opened in Microsoft Excel, as well as pin files that I've pinned here, and that means that they will always show up no matter what different applications I actually open. So if I use this sales data spreadsheet every single day, I can pin it here and have very easy access to that whenever I need it.

Customers also told us that they always have about five to ten things open on their PC at one time. So multitasking is happening very broadly today. And their ability to switch between those applications is quite complex. And in Windows 7, we've enhanced that and made it very easy with a technology called Previews. I'm going to show you what I mean.

You will see that I'm dragging my mouse across my taskbar, and I can very easily peek into what's open. And here in Windows Media Player for example, I actually have a movie playing. And you can see even in Preview, I get that full context.

If you go over to Internet Explorer 8, I have four tabs open. I can very easily see those tabs. If I want to go up, I can switch between them just by going over. I can close a tab if I don't want that one open anymore. So this kind of context switching makes multitasking in Windows 7 really easy for customers.

We also found a lot of customers comparing two documents side by side. They usually are working on a PowerPoint document, and they might have Microsoft Word open, and they are Alt-tabbing between the two. There is no easy way to compare the two documents and work more efficiently.

Well, with Snap in Windows 7, you can see, I'm just going to grab both of those, snap them to each side, and Windows automatically puts it side by side for me so I can make my edits and be more productive in the work that I'm doing.

Same goes for the desktop gadgets. For example, you are here in Redmond, Washington, today, and the weather is pretty hot. If I want to look at my weather gadget, I can see it is 75 degrees and it's going to hit about 99 today. I just moved my mouse to the bottom right-hand corner and I peek right to my desktop. I move it out, and I'm back to where my applications are. If I want to minimize everything, I can click there, everything goes minimized. I can click again and everything comes right back up. So it's just a small example of what we're doing in the user interface to make using the PC easier for our customers.

I want to transition into some of the commercial demos that we're delivering in Windows 7. You know, Steve talked about the world of Windows and how having Windows on a server, PC, and a phone complement each other and actually deliver better scenarios for customers. Many of you are using your laptops right now, and you're probably connected to the Internet access we've given you in this room. You're looking at your e-mail, you're browsing the Net. You probably also have a piece of software on your computer that lets you connect back to your secure corporate network and access corporate resources. Well, with Direct Access, which uses Windows Server 2008 R2 and Windows 7, we're going to make connecting back to your corporate network a lot easier.

Let me do a fast demonstration for you. You can see on the screen, I have my e-mail open here, and I have an e-mail from Perry, and he's asking me to approve an expense report for him that he needs urgently approved today. Let's say I'm at Starbucks and I'm on the public Internet. This PC that you are looking at is not on Microsoft's corporate network, it's on the same network you guys are connected to, MSF TI Net, which is our Internet access that's not connected to our network.

I can click on this MS Expense link, and this is an internal Web site secured on the Microsoft corporate network. And right over the Internet, I have complete access to those resources. So I can approve that expense report without using connection software, which can take a lot of time to actually authenticate, apply updates, and get me into there. It doesn't just work with Web sites. Let's say, for example, someone's going to mail you a PowerPoint deck to review, but it is too big to actually fit through your mail system. They can put it on a share on your corporate network, and you can easily access that share and copy the document over.

The same with applications that your company might have that use SharePoint or a database back in your corporate network. You can launch those through Direct Access and have complete access to that without having your IT organization have to invest in virtual private network infrastructures or your end user actually going through the trouble of having to take the time to run additional software to get authenticated.

Another area in the commercial side of the business that I want to talk about today is that small businesses and enterprise customers came to us and they told us they want to deploy Windows 7 right now because they see all the benefits it's going to give them and their businesses. The challenge their IT organizations have is they have one or two applications that were written five to ten years ago, and it only works on Windows XP, and that delays deployment. And they challenged to us solve this problem for them. And we did so with a technology called XP Mode. XP Mode is a free license of XP to run in a virtual machine of Windows 7 for customers that purchase Windows 7 Professional or higher editions of the operating system. It's not part of Windows 7, so it is a free download that they can get.

Let me show you what XP Mode lets me do. On the screen here you will see I have two pinned programs. One is QuickBooks 5.0. That application only works on Windows XP, and is very popular in the business community. And I also have IE 6. And I have IE 6 because enterprises have told us they build a lot of Web apps built on Internet Explorer 6 and they really need IE 6 compatibility.

These applications are pinned just like any other native Windows 7 application. I can move them around on the taskbar, put them where I want. I click on that, and what I'm showing you is a demonstration how seamless we've integrated in XPVM in Windows 7. If I'm an end user, I just clicked it. I don't have to care if this is a VM on there or anything. I got my application up and I'm working like it is a native application. I can launch IE 6 and do the same type of thing.

So from an end user standpoint, it's seamless for them, and it works flawlessly. From an IT organization standpoint, this gives me enough time to rewrite those applications and update them to work natively in Windows 7, yet I get to deploy Windows 7 immediately and get all the benefits for my business.

Now, I want to switch modes and talk a little bit about some of the consumer features that we're delivering with Windows 7. We built touch and multi-touch at the platform level of Windows 7. And we're seeing OEMs create a great amount of laptops and all-in-one PCs with this great technology built into it for Windows 7. We're also seeing a lot of IHVs creating display panels for desktops and other types of panels that are going to take advantage of multi-touch.

And more importantly, we have a host of ISVs creating great software, either updates to existing software they have now or new versions of the software that really are going to take advantage of multi-touch and give users that new natural interface into those applications.

What I want to do is a very brief demonstration of Media Center just to show you the touch element. This is Media Center on Windows 7. You can see on the screen that I'm touching this and going through kind of the interface. If I want to go into music, I can click music. I can go right into my music library and see all the content in terms of music that I have in Media Center. I can scroll through, click the music and play it. This is an all-in-one PC that we think is going to be out in the market that really will drive this new interface using touch. Just a very small example for you.

We also know that media—people are using, acquiring and consuming media in very big ways with Windows. So we are partnering with premier partners like Netflix, for example. Many of you probably have a Netflix subscription, like I do, and I have my personal account on this. Well if you have a Netflix subscription, right out of the box with Windows 7, you're going to have access to over 12,000 DVDs and content for you to consume right out of the box.

Let me show you what that looks like. I will go into movies and I'll select Netflix. And you can see my personal account comes right up. And I actually have my queue of all the movies I have. I'm kind of a movie buff, so I have a lot of movies in here.

I can look at new arrivals, just like the interface that you have with Netflix. I can see all the content they are bringing up, and again, over 12,000 DVDs for me.

Now, we know that there's a trend happening right now where people are using more and more media on the PC. In fact, there are a lot of articles out there about a shift from people watching on the TV and coming to the PC. And as we approach Windows 7's general availability on Oct. 22, we're going to have more announcements around this particular area.

The last consumer feature I want to talk to you about today is a technology we call Play To. Now, customers have told us that they are acquiring and consuming media more than ever in their home. The challenge that they have is, there is a different interface and many different devices in their home.

They probably have different interface with their DVR than their picture frame, than their wireless speakers that they might have that they stream music to. They also probably have to take that content and install it in many different areas so it's not a centralized place. With Windows 7, we're making the PC the hub of your entertainment in your home.

Let me do a demonstration to show you what I mean. I'm going to start Windows Media Player. And what I have here on the table is a picture frame. It could be any standard picture frame sitting on my desk or perhaps it's sitting on my wall at my home. I have a pair of wireless music speakers here that, let's say for the scenario, I have it out in the back of my deck on the patio.

I also have a Xbox connected to a plasma TV here. And then I have an entertainment PC that, let's say, is in my living room.

Well my wife—on the picture frame—I want to update those pictures, so what I'm going to do in Windows Media Player is, I'm just selecting pictures, as you can see on the screen. I'm going to right-click and use Play To technology to stream them right to this picture frame camera.

Let's also say that my wife is actually out on the back deck and she's hosting a couple of her friends and she likes to have a little ambient music back there while they're talking. So I run these wireless speakers out there, and I'm going to go into music and I'm going to stream a song straight over to her so that it starts playing for her and she can have that ambient music there in the background as she is talking to her friends.

Now, let's say my son is up in the media room and he's got some friends over and they're playing Xbox and they are like, you know what, dad, we want to watch a movie. So I'm going to take a high-def movie trailer and I'm going to stream it straight to that Xbox 360. All of this is happening on one single Windows 7 PC that's the central place for all my digital media. And you can see the plasma TV is going to start up, and that trailer is going to play for them to watch that movie.

Wait, there's more. Let's say I'm actually in the living room with this entertainment PC and I want a little music playing as well. So I'm going to go over to music here, and I will go ahead and play to that PC so that I have a little bit of music here, and it's going to be running. Running right there in Windows Media Player for me.

So three different types of content, four different unique devices in my home, all being managed centrally by Windows 7. It really is—I'm going to shut it all down here—it really is going to deliver the media experience that customers want and makes Windows 7 the hub of that experience for them.

Thank you for your time today. I hope you are as excited as we are about Windows 7, and have a great rest of the day. Thank you, Steve.

STEVE BALLMER: Thanks. (Applause.)

Come on, that product is great. I mean, it really is. And in a sense, it's the flagship. So as we talk about how we're going to do what the year is going to look like, I mean, the dynamics of its revenue are fascinating. But the most important thing we'll do is keep the very large volume of Windows users, pick up some more people from piracy, keep the kind of market presence and market impact that we've had broadly. That is absolutely job one around here for long-term shareholder value.

The chance with Windows as the hub to realize our broader vision of really bringing a coherent approach across all of our businesses to the three screens—the PC, the small screen, the phone, the big screen which we call the TV, but a big screen in a room like this, it is wall-size, it's conference room, it's videoconference. But three screens, consistent technology, building, sharing from the Windows base, extended out into the cloud through our Windows Azure, our Windows Live and our online efforts, and then creating the next generation of user interface, the so-called natural user interface that uses touch, that uses the kind of gesture and camera recognition that you see in Project Natal. That uses the natural-language ability to understand what you mean that we're starting to really pioneer in our search business. To use some of the voice recognition stuff that has been important in our TellMe and our Windows Mobile efforts to continue to drive the UI forward.

That's the technologic vision of how computing and UI transform over the next three, four, five years, ten years, and really bringing the scenarios that are our business to life through these key technology transformations is critical.

If you want to know about shareholder value, it starts with Windows, but it also means taking our platform, if you will, and embracing the key technology changes so that we are our own disrupter, not that somebody else is disrupting us with one of these key kinds of technology shifts that's going on in the market overall.

If you look and, say, OK, that sounds like a cool product, Windows 7 looks good. You know, we are going to talk a lot with you today about innovation, innovation, innovation. And we are going to put it together, Kevin Turner is, with this notion of growing our share.

And so the question is, if we innovate and grow our share, how's our business? Well, I took the lead products in each of the kind of areas that I talked about—PCs, servers, Office and productivity, enterprise infrastructure—and I show you what's gone on in the last year from a market share perspective because that's important, and I also just listed for you how we're embracing the cloud. Because our cloud story today is actually pretty developed. It's not fully implemented, but it is actually pretty developed, and we've got a lot of hard execution in front of us.

Most of our market shares are relatively flat or up slightly. Windows Mobile is the exception. You can see the arrows. Red means we have low market share. Yellow means we have medium relative to our aspirations, and green means we have even pretty good market share relative to our aspirations.

So Windows, we have a good share. It has been relatively flat. IE, our share is in the mid-70s. It went down and we brought it back up with the release of IE 8. We've gained back some share. Office, high. SharePoint and Exchange, we've had an absolutely blowout year. Windows Server, blowout year. SQL Server, we actually have decent unit share, but low revenue share, and relatively flat this year.

Windows Mobile, I said Robbie will talk about. Xbox, share's up and we would like higher share. Those dynamics will become clear. And certainly, we talked about Bing.

In the context of last quarter's results, I do want to make one other sort of observation, because it was kind of a wild quarter. And frankly, it was a wild quarter where we were getting new data even past the close of the quarter because our sales fiscal year-end was actually three days after our GAAP fiscal year-end just because the calendar doesn't lay out perfectly. So we were having business closing July 1, 2, and 3. You know, that was the sort of target date for the salespeople to get everything in. And there is a lot more data to go study.

And if you look at the year in aggregate, particularly in the businesses that I have in this bright blue box, we really had a pretty darn good year, I got to tell you, in our enterprise business.

Now, it was a bad economy and we still had a pretty good year. I'm not trying to get anybody to change their models, blah, blah, blah, blah, blah. That's not my point here. It'll all show up in revenue and unearned revenue and all that kind of stuff. I'm just telling you we actually had a pretty darn good year. And one of the things that became clear to us, even over the last few weeks, is we have customers not buying in some instances, but we have customers moving from buying what is often known as non-annuity licenses, where they pay us up front and don't have a recurring relationship, they're actually not getting out of the market, many of them. Some of them are shifting to annuity licenses.

Annuity licenses have a funny characteristic. They earn less revenue when you book them than a non-annuity license. Some of you have been covering us for a while may remember we went through this a few years ago, the shift to enterprise licensing in the short term depresses revenue, but you build that unearned revenue count, blah, blah, blah, blah, blah, blah.

There is more of that going on, frankly, than we had seen. But if you think about it, it's obvious. With a non-annuity license, you write us a check up front for X. If it's an annuity license, you pay us X over time. In a period of tight finances, tight cash, is it any surprise that we're seeing a shift essentially towards what you might consider a more financed license type from a less financed license type?

So the full dynamics of that are clearer to us. But I know it's important just to give you a minute or two on it, because those businesses are impacted. From a market presence perspective, we really had a pretty darn good year in the context of what was going on economically.

I want to wrap up on innovation and shareholder value. I am super, super excited and proud of the products that we have coming to market that you are going to see and hear about over the next 12 months. Windows 7, Office 2010, Bing future releases, Windows Azure has major milestones end of this year, the new release of Windows Server, the new release of SQL Server, the Camera Edition, Project Natal, and Xbox 360, the new SharePoint release. SharePoint has been such a red-hot product for us. IE 8.

We don't talk much—Stephen Elop will—about Microsoft Online, but we're winning deals with Exchange and SharePoint, etc.; Online, we are winning a lot of deals in the software-plus-services game against what I would call the insurgent competition.

And I'm super, super excited about what we have coming. It's as great a lineup of new products as we have ever put in market in any 12 months. And I say that frequently. And, yet, things do keep getting better. I think as you see these things, you will be inclined to agree with me. And they're critical if we are really going to go create long-term shareholder value.

This is a topic that is super important to me. Somehow, I think there is a perception from time to time that because I own a lot of shares, I actually don't care about shareholder value. And, yet, at the end of the day, I'm a businessperson. I came here. I love the—I didn't know much about what we built when I showed up here in 1980. But the chance to build a great business, to grow it, to measure it the way businesses get measured, that was a fantastic opportunity that Bill gave me 29 years ago. And for me, the scorecard really has always been the same. We want to innovate. We want to change the world, but we're here to realize success as a business, to grow our operating income, to grow our shareholder value, to grow our stock price-slash-return money to investors in some other way.

I live, eat, breathe and sleep it in a way that I think somehow I don't always get through to people. My time horizon is long-term. I'm not going to be shy about that, nor am I going to be shy about the fact that that has served Bill and I, and I think the company, pretty well over time.

I think there are four things that are critical and that you need to kind of evaluate over the course of the day in terms of this issue: No. 1, is the company investing in the right areas? Are we missing something that we should be doing? We may be doing some things we should have been doing earlier. Are we missing things, though, on a go-forward basis? And do you believe these are the areas in which we're investing? We will have long-term payoff that makes economic sense, so the right areas?

No. 2, what do you think of our people? Because the company is no better than the people who are there. We have, in my direct report group, we have two new leaders: Qi Lu, who you'll hear from, who is running our search and online business; and Steven Sinofsky, who I am standing in for today but will be here for lunchtime and cocktail and breakout discussions, who runs our Windows and Windows Live business.

We have had a fantastic recruiting year. We brought in over 65 new people into the most senior ranks at Microsoft. We had to do some tough stuff with reductions in force, and yet our bad attrition—people leaving in that environment—was very low.

And last but certainly not least on people, we had a heck of a college recruiting year, the best. We have five top competitors. We measure what's our win rate versus the five top competitors on campus. It is a list that changes every year, and we don't count graduate school on the list, and we don't—we just don't count graduate school. That's a tough one to compete with.

But our top five competitors, and you can guess, they were Amazon, Google, Apple, Oracle, Cisco. I think those are our five top guys. And when we go head-to-head with our top five this year, we won well over 70 percent of the candidates where we made joint offers. It is not like one of the list was much different than the rest. We had a very successful year on campus getting the next generation's best and brightest to join us.

You have to decide whether this company as a company is well run. You look at that through the lens of cost and discipline. You can look at it in return of cash management and how we think about dividends and share buyback and the like. You have to think about it in terms of sales and marketing excellence. Are we going to actually be able to successfully execute? And engineering excellence. It is not just about the vision. We've got to be disciplined and really be able to perform with excellence in our software development abilities.

And last but not certainly least, you have to look at the products. You've got to say, are these products going to be a catalyst for market share growth, for business growth, for revenue growth and for profit growth? And so I do have a lot of concern about long-term shareholder value, and I can tell you I feel better about where the company is on all four of these dimensions than I have felt in a long time. And I hope at the end of the day you'll agree with me, but at the end of the day you'll at least have all the data, and you can go make the best kind of assessments on your own, and I know you'll act accordingly.

Appreciate your time. Great to have you here. I will look forward to Q&A with you at the end of the day. And with that, I'm going to wrap up and pass to Kevin Turner. Thank you very much. (Applause.)

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