(Operator Direction.)

CHARLY TRACY: Welcome, everyone, and thanks for joining us today for a discussion of our small business strategy and an overview of Office Small Business Accounting 2006.

Before we begin, I'd like to take care of the following details: We may make forward-looking statements during this presentation. These statements are based upon our current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of factors discussed during this conference call and in the management's discussion and analysis section of our 2005 Form 10-Qs, our 2004 Form 10k and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statements.

As always, a replay of this Live Meeting will be made available at the Microsoft investor relations Web site, www.microsoft.com/msft.

I'm pleased to be joined today by Steven Guggenheimer, vice president, Small and Mid-Market Solutions and Partner Group; and Guy Gilbert, Group Program Manager for Microsoft Office.

For those of you who may not be familiar with how the Small and Mid-Market Solutions and Partner Group fits within the broader Microsoft organization, I'll provide some brief background. The Small and Mid-Market Solutions and Partner Group is led by senior vice president Orlando Ayala, and is organized under our Microsoft Business Solutions Group. The team works in partnership with Microsoft's seven business units to drive sales and marketing efforts for our small and mid-market customers. In addition, the group oversees the company's channel strategy, supporting a large worldwide partner network, which creates a range of solutions to help customers meet their unique business needs.

Format-wise, Steven will walk through a presentation summarizing our strategy for small businesses, and then Guy will follow with a demo of Office Small Business Accounting 2006. We will then have a short Q&A section.

Please note that only those of you participating via Live Meeting will be able to see the presentation slides and submit questions. We ask that when you submit your questions via Live Meeting you also include your name and firm. I'll then read the questions for Steven and Guy to answer.

We may not have time to answer all the questions, so if you have further questions after the call, feel free to contact investor relations, and we'll be happy to follow up with you at that time.

So with that, I'd like to turn the call over to Steven and Guy. Steve?

STEVEN GUGGENHEIMER: All right, thanks a lot.

All right, we've done all of the blocking and tackling, I'd guess they'd call that, the stuff we've got to do. We're going to try to drive through some slides this morning and a demo, and I talked with Guy, we'd like to go through the material fairly quickly to leave as much time for Q&A as we can. It's sort of a tough order, though, because we're covering—you know, we've been working on our small business strategy for close to three years now, and development of this product being a piece of that, so trying to cover that in a short period of time, if we don't cover all the detail, we're happy to take you guys offline as you want, and go through it with you.

So let's flip in and just start off around small business overall for a few minutes. And let's just start with what is small business, because lots of people define it in different ways. I think most of you are familiar with the taxonomy we use, enterprise, sort of the enterprise and corporate space being our enterprise group, which is about 20,000 entities worldwide. And obviously those entities are folks that we sell to, as well as do marketing in the sense that we have salespeople that will call on them.

The mid-market space, you know, anywhere from 1.4 to 1.7 million entities worldwide. I sort of think of that as half selling and half marketing. We don't actually have reps that call on everyone, but we'll at least use telesales with those entities and then do complementary marketing, but we know the customers and sort of know all the businesses.

When you get into the small business space, we use 50 employees as the differentiation for small, and I'll talk about why in a second, but at that point in the game it's primarily marketing led. With 50 or fewer employees there are over 40 million entities worldwide. The truth is there's more like 70 million entities, only 41 million of which have a PC, so for purposes of our work we sort of stick to the folks that have a PC. And those are all people that actually hang out a shingle in a different building and have their own office; it doesn't include all the people in a home office, so the number gets even larger than 70 million when you include the home offices.

Now, the reason we use 50 or fewer employees as the sort of point for definition of small business is two things. One, it turns out that about 70 percent of the time in a business with 50 or fewer employees, the owner/manager makes the purchasing decision. That means the person you're having a dialogue with—in our case about technology or frankly it could be anything you wanted to have a discussion about—is with the owner/manager, and they're not an IT pro, and they're not sort of a narrower business decision-maker who focuses only on HR or finance, they're an owner/manager.

And they think about things very differently than the IT pros or the other folks; they sort of want to know how do I do more with less, and how do I either better serve the customers I have or reach more customers.

And frankly, when I say do more with less, that means how do I go home a little bit earlier, how do I not lose all my data if one of my employees leave; you know, they don't think in terms of TCO, they think in terms of what can I do month to month.

So when you want to have a dialogue with a small business, you really need to focus on having a dialogue with the owner/manager, and so in terms of who you're having a dialogue with, 50 or fewer employees is a pretty good place to start in terms of the owner/manager being the focal point.

The second thing is because it's all marketing led, it's very broad reach, and we do a lot of things through a lot of different channels there, it's very broad in nature, as opposed to more targeted efforts you do in mid-market or enterprise where you know who the individual is and you're likely to do again telesales calls or an actual sales visit.

And so that's why we do the 50 or fewer employees. Frankly, it's at 60 or 40, it really doesn't matter; it's when the owner/manager is the primary decision-maker, that's the businesses we're really focused on.

Now, if you kick over, small business, obviously since 41 million of them have a PC, they've used technology for a while, but frankly they probably haven't gotten the most that technology can offer, and larger businesses tend to get more from technology earlier on.

But now we're at a point in time where there's a lot of pressure on small businesses to interact digitally is the way I think about it. In that sense, if you're a small manufacturer, as they're working with larger organizations, they're being asked to interact electronically. It starts with e-mail, over time it might be digital invoicing or digital accounting or doing sort of Web-based interactions. For small businesses even the local needs are moving up in terms of interacting online. Many of us go on a Web site today to find information, whether that's local, about a local supplier. If you want to go to the movies, if you want to find, it could be a local plumber, anything of a different nature, we use the Web a lot. And the customer base that looks online is growing. Think of all the kids in school, think of all of us, and broadband is growing.

So in terms of being connected and using technology, both in terms of their core needs, how do I get things done more efficiently and how do I sort of operate more effectively in serving customers; and then frankly, the fact that most of their customer base is moving online means that small businesses are looking for more from technology today, and there's a real opportunity to help them do more with technology.

Now, in the past, a lot of the times that's meant sort of the organizations just giving them the technology that was developed for larger organizations and then hoping that works for the smaller ones. In our case, we've spent a lot of time actually focused on how do we serve this community and this customer base uniquely.

So with that, let's flip over.

We have a very focused effort on sort of how do we create integrated software, so software that works together, specifically designed to help small businesses start, grow and thrive. Small businesses are very focused on either beginning, about 500,000 businesses are created each year in the U.S., around the world it's many more; growing, or ultimately sort of really moving on to the next level, and we want to create software that works for them.

And so if we go to the next slide, the thing that we focus on is really three or fourfold overall. With 40 million entities worldwide, the first thing you have to do is you have to build software that specifically meets the needs of the small business. Where a large organization prefers to mix and match parts, so take the server space, a larger business wants to choose their file and print server, it's probably different from their Internet server, maybe different from whatever they're using for doing sharing, maybe different for remote access et cetera, a small business doesn't want to think about three or four servers, if you get them to think about one server that's a great starting point.

And so the real trick with small business and the owner/manager is how do you bring more things together that work really well together versus pieces that you mix and match, which a larger organization is more likely to be interested in.

So the first thing we focus on is building unique products—and we're going to talk about one of those today. The second thing is how do you actually reach the customers. With all the sort of things going on in the world, how do you break through and talk about the business value specifically for the small business owner/manager, which is again why we focus uniquely on the audience. And if you looked at our marketing materials, and I'll talk briefly about that, they're very targeted about having a dialogue with the owner/manager about the needs they have.

The third thing is assuming you have the right products and you've actually gotten a dialogue started with customers, then how do you serve them. With over 40 million entities, they go to a very wide range of partners. This is breadth partners, this is retailers, this is OEMs, this is other ISVs, and it's very global in nature. So having a very broad set of partners that can serve them is very important, and partners that we know will do a good job for small business.

At the end of the day, we basically connect customers with partners. Since it's the partner community that serves them, we're sort of a matchmaker. If we can build the right solutions, we can help customers understand the value of the solution, we can have a partner base to serve them, then the best thing we can do is connect customers and partners together, and that's how the ecosystem works in this space.

So those are the areas we focused on, and let me just touch briefly on each one of them.

If we start on the product side, this slide is a pretty good way of sort of illustrating our focus on the small business space, and sort of the work we've been doing over the last couple of years.

Along the left side you'll see the sort of how to think about the stack—we often use the term "stack"—in terms of what customers are looking for, and it starts with infrastructure on the bottom, moves its way up to sort of I always think about communication and productivity, how do we interact with others, and then ultimately to Business Solutions.

And in the small business space we sort of think about this in two levels: customers without servers, which is about 80 percent of the small businesses out there, and then customers with servers; and we want to help people have solutions that scale up the stack, and then scale from a no server environment or peer-to-peer enterprise to a server environment.

And so on the client side or the no server environment, obviously Windows XP is at the base, and then we've worked on Office having a business solution specifically for business, so there is actually an Office Small Business Edition that's been available for a couple of years now. And then with the release of this product, we're now adding a Small Business Accounting offering into the mix in terms of the application. We have a point of sale offer in the U.S. And then we've had our Business Contact Manager available as part of our Office Small Business Edition, which is really sort of I won't call it a CRM system, but it is basically a Business Contact Management system for a small business that allows you in a peer-to-peer function to keep track of all of your accounts separately from your personal accounts. So for those of you that haven't used it, if you're sitting in Outlook today, your personal contacts are there. If you're using Office Small Business Edition, you'd actually have a separate contacts area specifically for your business contacts, and you could aggregate individuals to a business, and do some of again the very base level CRM efforts.

So as you can see, we've been working on what are the specific products we want to offer for small businesses that have no server, and over time you'll see us fill in more and more offerings in this area across both stacks.

On the server side, we released our Small Business Server offering around two years ago now, it's done very well in the marketplace, it's been one of the fastest adopted servers around, it's had very high growth, and it is the perfect sort of bringing multiple offerings together in one package sort of designed specifically for small business. So it has all the key functionality they want, but with integrated setup, integrated management, not all the extra stuff they don't need, and again at the right price point, the right offering.

On top of that, you would still use Office Small Business Edition, and then we have solutions that are being built specifically to run on Small Business Server. So we announced at our Partner Conference that with the next release of Microsoft CRM we'll do a version of CRM specifically for Small Business Server.

And then some of our other offerings, we have an accounting offering that's based for sort of a server-based small business environment, and the same thing with the point of sale, we have a retail management solution.

So over time what we're trying to do is fill out the stack for a peer-to-peer environment and then a server-based environment where Small Business Server is the anchor for the server environment, Windows client is the anchor for the peer-to-peer, and as we go forward try and have our solutions work very well together and then migrate very well from no server to a server-based environment. And so, for example, the CRM offering I talked about for Small Business Server, we'll have the tools necessary to migrate a customer from Business Contact Manager to CRM.

So with that, once we have the right solutions, we spend a lot of time on how we connect with customers. I think the simplest thing for you guys to do is if you go out to www.microsoft.com/smallbusiness, you can look within Microsoft.com we've created a Web presence specifically for small business. It's available in 50 countries today, it's a combination of sort of some global content but then local offers, local partners. We try to make sure the information is written around sort of the things that small businesses care about; the language, the photography, the issues are all set up relative to small business. And it ranges from business value content, sort of how to think about taxes, for example, or how to do better marketing, to where can I get support for small business, how to make the most out of products I have.

And it's a good example, we do a lot of other marketing activities, we run go-to-markets, we do advertising online, and a bunch of different activities, but this is the anchor, and it will give you a sense for how we try to have a dialogue with small businesses.

So we start with the product solutions, we then have a lot of marketing activities we do in every country that are very targeted for the owner/manager, and then based once we have sort of a dialogue with customers, ultimately want to help them find the right partners. At our Partner Conference this year we kicked off a new program within the Microsoft Partner Program overall, and we actually have a program now or part of the program that's specifically around those partners that focus on small business. They're called Microsoft Small Business Specialists. We're building a community of them around the world. And these are partners that can be both large and small, so it's not just our large guys but any registered or smaller partner can be involved as well.

And they have to pass a bar in order to become a Small Business Specialist, so they do have to pass some tests, they do have to sign up to an action pack, which means they'll get the latest small business information, but in return we provide them with all of our marketing materials, all of our segmentation, all of our customer understanding, and then on our Web site, that Small Business Center I talked about, when a customer searches for a partner, ultimately we'll surface the Small Business Specialist to the top. So that gives us a tool to better connect our small business customers with those partners we know are actually focused on and will do a good job for small business.

They also get to use—you see that blue logo on top—on their business cards they can talk about the fact that they're a Small Business Specialist or in their marketing materials, and then in our marketing materials we call it out as well. And we actually have a similar designation for our products. So we're starting to build a visual identity that connects the products that are build for small business through the marketing materials and the things that are meant for connecting with customers, and then ultimately to our partners.

So if you go to the next slide, at the end of the day we're basically trying to build sort of a circle of life or a way of connecting with customers. You start by building products that are designed specifically for small business. Small Business Accounting is one of them but so is Small Business Server, our Office Small Business Edition, our CRM for Small Business Server, and then over time others that might make sense.

We then try to bring those offerings to life through our marketing activities, which are the go-to-market efforts in most of the countries, and the things that our partners do.

Once we've sort of made them aware of the value that technology might bring to them, we try to drive them to the Web site, because from the Web site we can provide them with more information, provide them with offers around those products specifically, and ultimately if they're interested in something hook them up with a partner, and in this case we can actually hook them up with a partner that we know focuses on small business, because they'll be Microsoft Small Business Specialists, and then working with that partner they can ultimately sort of get the help from technology that might make the most sense for their business.

So that's a very simplistic view of sort of two and a half, three years worth of work, and there's a lot more depth in terms of the partner program, in terms of how we do our marketing. In terms of our customer understanding we've actually done a lot of research over I'd say about 4,000 customers now worldwide, we have a very deep segmentation we use for ensuring we have the right messages for the right customers, because not all owner/managers are the same, and so we actually have a way of sort of separating those that sort of use and focus more on technology from those that use and focus on technology less to make sure we're having the right dialogue; and sort of in all of the areas the products, the connecting with customers, and the partner space, really trying to do work across all three of those to hook this together.

With 40 million entities worldwide, this is an engine. If you do a really good job, and you could do this at a global level, then you can have a really good opportunity to help small businesses do the things they want. If you have parts of it, you won't be successful. If you have great products but you can't reach customers, it won't work. If you have a great partner base but don't have the right products, it won't work. It really takes sort of a focus on all three of the pillars and hooking it all together to have an impact.

Small businesses have a lot to gain from technology, there's a lot of needs out there that have been unmet, and we're working pretty hard to fill the gap.

So with that as a basis, let's switch over now and talk about Small Business Accounting, which is going to be the latest offering in our overall small business marketplace.

Accounting is one of those areas that everybody sort of does it, so to speak, they all need to do it, the small business owner/managers. It's been under-served relative to sort of the workflow of a small business overall. It turns out that about 40 percent of small businesses are still using Excel or Word or other forms of tools for doing accounting, without using any form of accounting software. And so obviously there is an opportunity in itself. There are 650,000 businesses formed annually that will need accounting software.

And from our perspective, when you look at the sort of—if you sit with a small business and watch them operate, they don't really separate accounting out as a special thing. If you watch them actually work, accounting sort of gets mixed in with e-mail and writing letters and doing spreadsheets and a lot of other things. There's a formal part of it, which they have to do with their accountant that takes place, but on a day-to-day basis things that touch finance sort of get integrated with everything else.

And so when we sat with customers, and literally our development team sat with hundreds of customers over the first six months before they started writing any code, they got a real sense for the fact that it's how well this integrates with the things they do on a day-to-day basis that's important. Doing the basics of accounting hasn't changed in thousands of years, but how you integrate the things you need to do in accounting into what you do in your office live in a day-to-day basis, that's the place where there's sort of breakthrough to be done, and that's the place where I think we can add value, and if you look at the product, which we'll show you later, that's what we focused a lot of our energy on.

So with that, let's go forward, Guy. So let's talk a little bit about the product, and the main thing I want to do is to have Guy give you a few minutes to show it to you. So go ahead.

The offering overall, let's skip this slide and we'll just go to the next one.

We really focused with Small Business Accounting on what we think about as the Office Small Management Edition. While we've done the accounting software, and side by side it will hold up to any other accounting software, what we're really focused on is how does accounting work overall within the day-to-day flow of an office manager or an owner/manager, and in that sense it's the integration between the accounting activities, sort of the core Office areas, and sort of Outlook overall that makes the difference.

And so simple scenarios like, hey, I've got some overdue invoices, and I want to send out an e-mail to all the people that owe me can be done seamlessly, I don't have to sort of cut and paste between two different applications, it's all very seamless. If I want to go back and forth between a Word template and sort of something I'm doing in the accounting area like writing an order, a purchase order, it's all very seamless or back and forth to Excel, and again that's what makes this all work is the workflow, and even sort of things like my schedule overall and billable hours. That's where we really shot for the integration.

The second thing is accounting is part of a pretty broad ecosystem of stuff again that the office manager is doing, and so integration with Office is part of it, but there's a number of other components. So we built a lot of hooks for services, for example. It turns out that payroll is obviously an important part of this. We're not a payroll expert but ADP is. So we've built the hooks in there and very integrated service capabilities so that people could sign up for an integrated payroll offering delivered from sort of the largest payroll provider for small business, ADP. The same thing for checks and forms, the same thing for credit card processing with Chase, so again some of the core services they may need.

Again, on top of that there's a lot of vertical needs in small business, way too many for us to ever address but there are literally thousands of developers out there that work on very small niche areas that apply into this area, and so we did a very strong SDK, we got very good feedback on the SDK itself, we've had a lot of developer momentum, we had a developer conference here on campus a couple months ago now, and we had about 200 plus developers here. We'll have a number of solutions for launch, so really enabling people to build on top of this like a platform, which is something that Microsoft is very good at.

And then lastly sort of at the bottom of this slide, just connecting in with some of the other core functionality, in particular Business Contact Management, since that's an important part of sort of the relationship management and doing more with customers, we really sort of tried to extend that with both Business Contact Management, making this work peer-to-peer, enabling Pocket PC support, et cetera, so it sort of fills out.

So in terms of a solution, it's a very rich solution, you can buy the accounting standalone, but it really comes to life and sort of does more when it's integrated with the Office package all up, which is why we did an Office Small Business Management edition.

In terms of the two offerings, again they'll be standalone. We haven't announced pricing yet. Obviously we know the market well, we know what it would take to be successful, and so we plan to price it in a way that makes sense. And the same thing with the Office Small Business Management edition; again, we won't announce pricing today. You can assume that the prices will be competitive, and we might do some offers or other fun stuff at launch, which is pretty typical, and so at launch time we'll talk about those.

And we also have sort of the services offering, you can see that ADP has already put their payroll offering available today in terms of its pricing, and Deluxe and Chase. The credit card processing, we actually have those deals as well, and we can get you the details if you want. Basically you get a very good rate if you do credit card processing through Chase, if you sign up through the offering.

So with that, I think I'm going to turn it over to Guy. Again, the easiest thing is to sort of show you the product. We don't have a ton of time today. Key highlights to take away are sort of the deep integration in terms of how well it works in terms of workflow for the office manager, and no more cutting and pasting between apps.

With that, I'm going to hand it over to Guy.

Good. Thank you, Steve.

My name is Guy Gilbert. I'm a group product manager with Office, and also the proud product manager for this product. In the next couple of minutes, I'm going to show you the product in two parts. First of all, I'll take the role of the owner/manager, the business owner, and show you how I work with the Office Small Business Management Edition, and specifically with Small Business Accounting. In the second part of the demo I'll take the role of an employee, who typically does not need accounting software, but through Outlook my tool of choice and my daily tool I do get insight into financial and customer information.

So with that, let's go through the demo.

So this is a typical screen in Small Business Accounting 2006. And so as you'll notice, and people who use Outlook 2003 will know that this looks a lot like Outlook 2003. Actually, let me just show you how this navigation bar and the overall layout looks a lot like this Outlook screen. We've got a very similar layout there. So the people who use Outlook and also use Office today immediately get the hang of this product and it's pretty easy for them to get started.

Talking about getting started, as people install the product, they walk through a startup wizard, and that wizard enables them to take Excel data, since we do know that many people capture all their products, customers, and financial information in Excel, it's able to import that Excel data very easily. They can also take QuickBooks data and import that as they first start up their products.

So the goal here of the product is to make it easy for people who don't have an accounting background, so I can easily follow here and click for my customers, my vendors or suppliers, employees or payroll, and do banking.

So let me just give you an overview of what it looks like, like every screen looks very similar, has a very clean screen layout, and we also have on every screen a process layout that easily walks a new user from creating a quote to an invoice to receiving payment. On every screen also I've got every report available within one or two clicks.

So let me just quickly create a new quote. And here as you'll see, for people who are familiar with Outlook, you'll see a very Outlook like screen, a very easy to use form. I can enter the first characters for a customer, in this case Alpine Ski House, enter the name of the products that I'm creating a quote for, for this customer. And let's say the customer was interested in our best bicycle. And as you can see, we've got some inventory information here. We've got some good basic inventory functionality in the product.

In this quote I can also add a link to let's say I've got an Excel spreadsheet that has some information about this quote, I can attack a link to that, and then all I need to do is save and close this information.

So really in a couple of steps I can very easily create a quote or any of the other forms, any of the other forms in the product.

Now, next in the product is we've got several lists. So as you can see here, we've got lists of customers of items or products, or the list of quotes. And as you can see, I've got the list here that I just created for Alpine Ski House, or the quote that I just created for Alpine Ski House.

Now, what I can do with any of these lists is I can very easily export the list to Excel by just hitting this Excel export button. This will create an Excel spreadsheet, and now from within Excel I can easily hit my e-mail button and, for example, send this quote list to my admin and ask her to follow up on these quotes. So it's very easy for me to share information with other people who do not have Small Business Accounting in the company.

Now, let me go back to this quote list and open a quote that I created just before. And without having to retype, which is something that many of our customers and many small businesses are having to do today, without having to retype, I can reuse this quote information and now convert this immediately to an invoice.

And then let me save this invoice. And now I can very easily through the use of Outlook or Word export this information, and again here you'll see some nice integration. For example, if I e-mail this, it will use a Word template that I created, that I used before, that I created before. Let me just take this invoice template. I personalized it before with my own logo, with my own slogan, and now it takes all this information and nicely puts it into an e-mail message. So again I don't have to retype the information that I created in this invoice, but I've got a very nice looking invoice here that I can send immediately to my customer.

So let me go back here and now as a business owner I do want to stay on top of the overall big picture of my company. I also want to stay on top of the details of running the business.

As you start up the product, actually the main homepage is the company homepage, and here you get an overview of today's reminders. Then there's the paid to date, overdue customers, but also things that give you a big picture overview like your cash flow. I can easily customize this report and, for example, get an overview of my profitability instead of my back account summary.

One of the things we heard very clearly from small business owners, as we did many businesses, that cash flow is very crucial for them, and so we worked hard to create a very easy to use, intuitive cash flow forecast tool.

So first of all, on the homepage you get an overview of the cash flow. As I click here, our cash flow forecast tool will load. This gives you an overview in numbers, it gives you a graph. It can easily let you adjust the time horizon for your cash flow forecast. And it uses all the information that's already in your accounting software.

And now I can easily run a what-if scenario. So let me go to my sales forecast. And let's say I know that in two weeks I expect a big order from a customer for $20,000. And as you'll see here, immediately my graph and my numbers get updated. Again, I can take this information, export it easily to Excel, which enables me to share this with my banker or with other people in the company, with my accountants. Again, it's a nice, rich export to Excel, I've got all my information, underlying information here. If I want to continue to work in Excel, I can do that, since all the information is linked and I can continue to do some what-if scenarios here.

Another way for a business owner to stay on top of the business is through reporting. We've got many, almost 50 reports here that are all very customizable, so for different areas of the business. Let me just give you an example of a very common report here, the P&L report. Again, we spend a lot of time here to make the reporting and customizing these reports very easy and intuitive. What I can do here is change the time horizon and make it for this fiscal year, and then make some easy modifications, add or remove some columns. For example, if I want to see these results by quarter, I can do that, or if I want to compare to a previous year, look at dollar change, percentage change. And once I've got this report customized just the way I want it, I can save the report or again I can export this to Excel and then do some more calculations, do some charting, et cetera.

This is one type of integration with Excel. We also offer some really even much deeper integration with Excel and Access, which through the analysis tools we enable some live connections to the underlying Small Business Accounting database.

So here let me just take this Excel spreadsheet that I already created beforehand. This opens up a pivot chart with live data from my Small Business Accounting software, and it gives me an overview of my sales. Let me just, as this is a pivot table, let me move some data here, let me show this information by year, and actually we automatically also created a sales chart.

And as I can see here is that sales are going in the right direction, they're going up, but now I can easily—actually, I can easily from here get some more detail, and I can see that the first quarter was actually doing really well, and the month of January was my really strong month. So within Excel, based on live data, I can get up to date sales information, drill down deeper, and at any point I can save this Excel spreadsheet and refresh it later with the latest up to date information.

We provide within Small Business Accounting is great for a single user and will work fabulously on a Windows XP machine, but we also enable multi user, so multiple people can share the same Small Business Accounting database on a peer-to-peer network, or we can also have other employees using Outlook with Business Contact Manager as a way to look at that financial and customer information.

And this takes me to the second part of my demo. Now I'm an employee, actually a sales person in the same company, and my tool that I use on a daily basis is Outlook, in this case Outlook with Business Contact Manager. It looks like normal Outlook. The one menu item that gets added here is the business tools menu, and the functionality you get with Outlook with Business Contact Manager is the ability to manage your accounts or companies you work with, people you work with, manage sales opportunities or sales leads, and run reports on all those items.

Now, if you have Small Business Accounting in your company, you can also create a link between Outlook with Business Contact Manager and your accounting software, and let me just show you what kind of functionality you get and what rich integration you do get.

Let's say I've got a company here called Adventure Works, and as you'll see, we'll get an Outlook contact card that gives you the information for Adventure Works, gives me an overview of the people I work with, and also gives me a history of all the interactions I've had with this company, like meetings, e-mail messages I send back and forth, sales opportunities.

Now, when I make the integration with Small Business Accounting, I also get a financial history for this company. So here I see all the invoices, the payments, the quotes, et cetera, that were made for this customer. So as a sales person, I do not have to go to the office manager or the bookkeeper to ask the status for a specific invoice; I can simply double-click here and I'll get an overview of the invoice, see if the invoice was paid, yes or no. I also get a financial summary, gives me an overview if the customer is overdue, overview of the sales history for the customer, credit rating, credit limit, et cetera.

Now as a salesperson also from within Outlook with Business Contact Manager, not only can I view financial information, but I can also do some basic financial transactions. Here, for example, I can create a quote for an account, a sales order or an invoice. Even better, if I created a sales opportunity previously, here a couple of weeks ago my customer called me and was interested in buying some golf clubs, and I made him a quote for three of those golf club sets. Now, the customer calls me back and is interested to place an order, wants to place an order. All I need to do is without having to retype any information, I can convert this to a sales order, and let me just add a 5 percent discount here, and now I can save and close this. And now this sales order gets handed off to Small Business Accounting, so as a salesperson, again I don't have to go through the office manager, I just hand off this sales order, no paper has to be passed back and forth, and the office manager will take care of the rest of the order.

Finally, one nice piece of integration with Outlook with Business Contact Manager is particularly interesting for services companies. Let me again go back to my Adventure Works account, and let's say that I had an appointment with Adventure Works earlier today at 9:00, and we were doing some repair services. And now all I need to do is mark this appointment as billable, as billable time. So I click here, save and close this, and this will show up as a normal appointment in my Outlook calendar. At the end of the week, I go back to Outlook, to my business tools, and I decide to submit billable time. And here now I get an overview of all the time that I spend with customers providing services. The only thing I need to do is mark this as a type of a billing item, and then submit, and again this will get added to the Small Business Accounting database, ready for the office manager to bill this time.

So as you've seen, for the business owners through Small Business Accounting some great, robust accounting functionality without the complexity of accounting, with the ease of use of Office, and for other employees in the company through Outlook with Business Contact Manager some great insight into financial and customer information.

STEVEN GUGGENHEIMER: All right, I think that is a very good, very fast overview of the product. Obviously, if anybody wants a copy, we'll get you a copy so you can play with it yourself.

Because we're getting some good questions in, the last three slides basically talk about momentum. When you work on a product like this, you have to look at several different communities, the ISV community, because there are a lot of people who build on top of this, and we've had great support from the ISVs, they really like the SDK, they really think it's easy to work with, and so we're going to have a lot of offerings available at launch, and so you'll see some of those.

The second area is obviously accounting professionals. We have an accounting professional program now that we've been working on, and we're getting good response to that.

We're working with our breadth partner space. I talked about the Small Business Specialist community; many of them are interested in this offering. It works well into their overall small business practices, and so they're very excited about it.

And then customers; we've done a lot of work in our beta programs, had a lot of customer involvement, and we've had a lot of customers actually downloading trials and early versions.

So the net-net is when you think about the ecosystem, when you think about ISVs, when you think about accounting professionals, when you think about the customers, breadth partners, and many of the other distribution channels, we're working with all of them; not making all of our announcements today, but when we get to the launch you'll hear about that. And the other piece of momentum is we've had a lot of people playing with the product and the feedback is good; for a first customer product in terms of overall the product itself and the integration and what it means for customers, very, very positive feedback, and I think that's the number one thing we look towards. There are some quotes on the last two slides you guys can look at, at your leisure, but if you talk to some of the analysts, you talk to people that have played with the product, the feedback is good, and we care a lot about that.

So with that, I think we want to open it up so we can take questions and stop talking.

CHARLY TRACY: Sure. All right, thanks, Steve. We'll turn to the questions that are in the queue now, we've got quite a few, so we'll try to get through these in the time remaining.

So the first question comes from Jeff from Cumberland, and the question is, "Will the Intuit install base be able to export historical data to the Microsoft product, or are new users the primary target of this product".

STEVEN GUGGENHEIMER: So those are two different questions. So the first question, yes, you can take your end data from Intuit, from QuickBooks, and import it into Small Business Accounting, and we are actually working on a tool I believe to do the historical data as well, so not just the ending data but the transactions, so over time you'll be able to do both. So we have a good solution for Intuit users who want to switch over.

Now, to the second part of the question, I think there's a logical place to start, which is for all of those customers that are using Excel today or starting a new business, they're obviously an initial target for us. We're happy to get the switchers as well, but if you looked at the hierarchy of where you might start from a marketing perspective, it's easier to go after the Excel base, and it's easier to go after the new users than it is to get people to switch. We'll work on switchers as well, but I think about in terms of priorities I'd start with the new users and the Excel users or people not using accounting software today, and then let the switching happen over time as people get a better feel for it.

CHARLY TRACY: Okay, great, thanks, Steve.

Our next question is from Rick Sherlund at Goldman Sachs. "Will it be important for Microsoft to offer its products on an on-demand basis like salesforce.com?" So this is moving back to our kind of overall small business strategy.

CHARLY TRACY: Hi, Rick. It's good to hear from you.

In terms of services, it is an important area for small business. I think if you look at this product, for example, it's one of the first products where we have really deep integration for services, so things like payroll and other services that are available.

In terms of on-demand, we haven't heard a lot of feedback from customers that they want to leave their financial data up on the Web yet, they're not quite comfortable. I do think there will be a set of services or offerings that we will want to have available—or a set of offerings that we will want to have as services. We've played with this some in the small business space, we did a trial in Europe, in England specifically with BT around Office as a service; didn't go great on the first incarnation, we're doing some other testing in Latin America.

So I think over time the answer to your question is yes. I think how we do it, which offering, and how we approach it, we're taking I won't say a cautious approach but a thoughtful approach. We really want to make sure if we do that and whether we do it or our partners do it, we do it in a way that's good for our customers and the ecosystem overall.

Today, a lot of things, take hosted Exchange, there's a lot of companies that offer e-mail as a service for small businesses using hosted Exchange, and so we don't want to do something that's going to disrupt the business of our partners.

So net-net is I do think there is an opportunity for having services available for small business. We are thinking about it and looking into it. We do some of it with our partners and some if it we're doing our own research on. We don't have a lot to talk to yet today, but we are paying close attention to this space and working on it.

CHARLY TRACY: Great. Thanks, Steve.

Our next question comes from DJ and says, "Can you talk about the competition and who is your kind of primary competition. Is it Intuit or Peachtree for this product?"

STEVEN GUGGENHEIMER: Yeah, Intuit. Relative to competition, there is the lack of using any software, which is sort of step number one, and then Intuit is clearly the other player in this space of any kind of size. And I think most of the comparisons that have been done by the reviewers have been side by side with Intuit products, and our product has done very well in the head to head. You can look at some of the PC World and PC Connections; those were the early feedback as well, they actually haven't reviewed the final product, that was all from the beta product. So I think you'll see this head to head reference by most of the people in this space against Intuit.

Guy, would you add anything to that that I missed?

GUY GILBERT: Yeah, no, and I think you rightly said that one of our main competitors is also our own products, it's Excel and it's Word, and so we have to convince people that the tool that they're familiar with today, that there's a better solution, and that this complete management solution is it.

STEVEN GUGGENHEIMER: Yeah, I think the press will want to write about this as an Intuit story. They have a lot of fun with competitive stuff that way, and I have a feeling, as much as we try to say anything else, that's where this would end up.

CHARLY TRACY: Okay, great.

Kind of our next question is from Matthew Hammond, and it says, "What is the price point of the product," which we kind of touched on earlier, but it says, "I'm assuming it will be distributed mainly through retail," so we can talk a little bit about which channels we're really looking at.

STEVEN GUGGENHEIMER: So the price point we talked about. I think it's interesting, retail actually ends up being a pretty good marketing vehicle. If you looked at Intuit sales or anybody in terms of retail, they don't sell the bulk of their product through retail, but a lot of small business owner/managers go into retail, and whether they purchase there or not has a lot to do with the retail store itself and how much help they get relative to the needs of a small business.

So you will see us in retail, and you'll also see us in other channels in terms of our traditional partner base, as well as other partner or channels we use traditionally for Office. So anyplace you might see Office today you're likely to see this offering, and that gives you a sense, and it's a fairly broad set of channels.

In terms of selling mostly through retail, actually that's not true. You'll see a big presence in retail, but I bet if you looked at the sales, you guys can do this and go back and look at Intuit's sales, most of their sales are online, and that's true actually for most software, it's not sold in retail, even though a lot of small businesses go to retail.

GUY GILBERT: Yeah, no, and from our point of view I think we'll take a partner-based approach and we're definitely selling to our channels where Office is available for small business customers today.

CHARLY TRACY: Okay, great.

Our next question comes from Brian Keen at Prudential. And his question was, it's a question from Intuit, but it says, "Intuit says Microsoft SBA 2006 is going after the wrong small business market. It says Microsoft has a product like QuickBooks Pro but it should be targeting the low-end." And how do you kind of respond to that statement, and then Brian even caveats this and says, you know, "80 percent of Intuit's units are QuickBooks Pro."

STEVEN GUGGENHEIMER: Yeah, I mean, if I were Intuit, I'd probably say the same thing, which is to try to get this product matched against their low-end product from both a pricing standpoint and a feature standpoint. The truth is it doesn't go against the low end, this goes against their pro product, and we have a very competitive offering for their pro product at the right price point, with the right feature set, with some things they don't have, and they have a few things we don't have, and that's where it gets interesting. Their low-end offering is not sort of anything this competes with; that's really we have a product, which I don't think very many people know about, which is actually a Money offering, which is basically Money small business, which is this is accounting, this is double entry based accounting, which goes against their pro. If you want to keep a separate checkbook for your business, and you want to do that at home, then that's what our Money product is for, and I'd stick that more down at their low-end offering.

So again if I were them, I'd try to do the same thing, but that's not going to work very well I think. I don't think any of the reviewers that will compare the two products are going to compare it against anything other than their pro product.

CHARLY TRACY: Great, thanks, Steve.

Our next question comes from Adam Holt of JP Morgan. It says, "Is there a limit to the amount of historical data that can be uploaded from QuickBooks". Then there is another part of the question that says, "Will the multi-user access be primarily focused on contact management or will multiple users be able to work in the core accounting application".

STEVEN GUGGENHEIMER: So I'll tackle them one at a time. So in the beginning you'll be able to pull all of your end records over from QuickBooks. Over time in terms of the total number of transactions, I don't know if we have that data yet in terms of the size. I don't think there's any limit other than how much time it might take, but we haven't tested it to say, hey, if I wanted to go back ten years, could I go back ten years, so that's something we have to get back to you on.

GUY GILBERT: No, that's true, we haven't done the testing. One thing to point out is that our product is based on our desktop SQL version or desktop SQL, which means that we've got a really robust database underneath the application with very few limitations, no limitations on size or very little limitation on size. And it also ties back to the multi-user aspect of it; having a good, robust database underneath the product means that you can have multiple users working in the product at the same time. Our limit is about five to ten users concurrently working on the product, but if you want to have 20 users who have access to the product you can actually do that, but the database and the robustness of the product allows you to have five to ten concurrent users in the product.

STEVEN GUGGENHEIMER: Yeah, there are two things there. One is the number of people who can concurrently work on the database, which is, as Guy said, five to ten, which is actually higher than the competition in that area. And the second thing—and you can use the same restrictions in terms of who has access to what or not as you would with our SQL database, so that gives the manager good permission.

The second thing is—and I don't know if it came through clearly in the demo—for the users in the office who don't have Small Business Management Edition or the accounting software, as long as they're running the Office Small Business Edition, which comes with Business Contact Manager, they can still have access to the financial data that's important to them. So the demo Guy did in terms of billable hours and getting the financial history, you only have to have Office Small Business Edition to get access to that, as long as you've been enabled by the administrator. And that's a way where we're getting really good connection between the business management edition or sort of the management software, which includes accounting, and the broader Office Small Business Edition, which comes with Business Contact Manager.

In terms of your question on sharing, you can share both the accounting side and Business Contact Manager, they're both set up peer-to-peer.

CHARLY TRACY: Great. Our next question comes from Brent Thil at Prudential. "How much leverage did you get from the Great Plains/Navision group?" This is kind of on the development.

STEVEN GUGGENHEIMER: Good question.

CHARLY TRACY: "And also will this product be launched initially globally or just in the U.S.?"

STEVEN GUGGENHEIMER: Okay, so in terms of who built it, this is one of the best examples of sort of Microsoft working across business groups to build a customer oriented solution. So in terms of the financial aspect, it was actually built out of the MBS team, so a guy named Rajat Taneja and his guys, who work for Satya Nadella, they built the Small Business Accounting and they built some of the Business Contact Management.

Now, because it has the deep integration with Office, we've done a lot of work with Office as well, so this is an offering that was built by the MBS team but done in conjunction with the Office team so that it can ship as an overall Office offering.

And I think that shows how Microsoft is starting to evolve to build solutions that cross our business groups and are focused on a specific customer need or audience, which this is a really good example of.

And then the second question, this is initially launching in the U.S. We haven't sort of gone through our full international strategy yet. It's unlike other products. Normally when we launch a product, like Office, for example, we'll be in nine markets three days at the same time, and then 27 30 days later, and that's based on localizing the product itself. Because financial rules, as you guys all know, don't localize the same, in terms of which markets we go after next, and the time for localization are longer, and so we're still working on our international strategy, and we'll talk more about it at launch, but we will go outside the U.S. over time, and we haven't sort of given our timeframes yet of which countries are next.

CHARLY TRACY: Great. The next question is from Tom Berquist, and he says, "Does the product work with older versions of Office and Windows".

STEVEN GUGGENHEIMER: It does. You can go as far back as Office 97 I believe, but you don't get the great integration with Business Contact Manager, for example. But in terms of primary work, you can go back to 97, is that right?

GUY GILBERT: Yes, that's correct, that is correct. Office 2003 delivers the best experience, and it also works on Windows 2000 and Windows XP as an operating system.

CHARLY TRACY: Okay, great. And I think that's all the questions we've got for right now.

STEVEN GUGGENHEIMER: Yeah, I mean, if you guys have other questions or we didn't answer sort of the gist of the question you were after, just send some mail over to Charly, and we'll back to you online, no problem with that.

CHARLY TRACY: All right, so I want to thank Steven and Guy, and thank you, everyone, for participating in today's Live Meeting.

As I mentioned earlier, this Live Meeting will be made available for replay on the investor relations Web site, www.microsoft.com, and thanks again for joining us today.

END

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