BILL GATES: Good morning. It's certainly exciting to see the incredible reception that this conference has had. Over the years, WinHEC has been the place where many of the great advances in PC technology have been introduced. It's amazing to me how thousands of companies work together to build the PC platform. The PC industry, as a whole, is taking over more and more computing, and the growth we are having is not only causing problems for all other types of computing, but it's the envy of any business of any kind. The growth working on these where we've passed through 70 million units, and we can still see lots of room for greater and greater volumes. It's quite incredible. Now, part of this is what we've always called the PC success loop, where you go up in volume. You improve the innovation, you get better software, and all of those things reinforce each other simply because the more equipment there is available, the more attractive the PC is.

Now, the PC industry taken broadly has many, many participants. If you look at the kind of companies represented here, I think it's great proof of that. Companies that make chips, companies that make peripherals. Companies doing various types of software. This is what all has to come together for the advances that we've seen. The fact that this comes together in a form that is compatible is very, very important to users. The applications that were written at the very beginning of the PC era are still able to run on these machines today.The separation between hardware and software is of critical importance. If we didn't have that separation, we couldn't have the innovation proceed independently in those two areas. And Microsoft sees part of its role as making sure that that boundary is maintained in a very rich way.

Some of the statistics about the variety of PCs are pretty incredible. I just put down a few of them here. Hundreds of models of new computers shipping, 1,600 new models announced. This is in the last year. In the area of 32-bit applications, over 1,600 of those are out now, and a thousand new ones introduced. And down at the very low end of the software work we're doing with hand-held computers using Windows CE, we've got 25 models available now from eight different manufacturers. And that's an area where we expect to see lots of additional devices building on Windows CE, and having subset compatibility with full-blown Windows that exists for the full screen devices.

In a fast-moving industry, the companies that are successful are those that are able to get out in front of the key trends and really add value in the new applications. The Internet is the most important of all the new applications. In the last year, we can say the Internet has made a lot of progress, moving up to higher-speed modems, a broader set of content out there, a richer way of interacting with the content. It's impressive how standards committees are playing an important role here along with lots of software start-ups, and many of the existing companies.

When we look at the Internet growth, percentage-wise, it's quite impressive. But the vast majority of PCs are still not connected up to the Internet. Either because of the cost of connecting or the complexity of connecting. They haven't seen what's available out there. The really best opportunity for Internet growth comes from PCs that are not connected up. The Internet was able to flourish because of the large base of PCs that were out there. Machines that have graphics interfaces and enough power to do rich HTML display. And the ability to constantly innovate in the browser and the security protocols is because we've had that general-purpose device where we can improve the software and proliferate that across a large base of machines without expecting people to do upgrades there.

Windows 32 machines are the vast majority of what's hooked up to the Internet today, and that's an increasing percentage, of course. Sales of 32-bit Windows are pretty amazing. We're actually selling more Windows 95 upgrades now than we were a year ago by a very substantial amount, about 40 percent higher volume now than a year ago. In fact, the sales have just continued to grow, probably because the price of memory has come down. It's made it very easy for people to move up and have a 16- or even 32- megabyte machine.

Microsoft really got into the Internet game on the server side about a year ago. We put the Internet Information Server into Windows NT. We made it a free add-on, and we were able to draw on the work we've done in high-speed file sharing to provide the fastest HTTP server available. Well, just in that one-year period, we've gone to be now the most popular commercial Internet server. This is a recent milestone for us, but a pretty important milestone.

We got into the browser business a little bit later. It was last August when we came out with the state-of-the- art Internet Explorer. And our share there is now on the order of 25 to 30 percent, but climbing very healthily, particularly because of the key partnerships we have, and we expect that that will also get to a very, very healthy position. Microsoft has gotten involved in the new Java language, and we've brought a lot of practical elements to that. The ability to do debugging, good Java VM execution, and our J++ product is tied for first place as the most popular Java tool.

But we've also taken the concept of thin client and really looked at that hard, talked to a lot of customers, seen what they're interested in. And, in fact, the key message we get back is that anything that has to change every three years or so is not a thin client. When they talk thin client, they want something that's very simple.Putting the browser or a growing operating system into a true thin client is a contradiction in terms. And so we've gone through and said that we're really do true remoting Windows application capability in a way that you don't have anything that can get out of date down on the desktop itself. So it's an approach we call Windows terminal, which is the only thin approach.

Our most important effort here, though, is to really say, what is it that people want? Simplicity. And the initiative we have here is Zero Administration for Windows. There is some very exciting things going on with this. In fact, I'll be demonstrating a few of those this morning.

The priorities for Microsoft are everything that it takes to continue to grow the PC industry. That's how we set our priorities. We benefit as PCs get more popular and as people see the value of putting on the desktops of knowledge workers a state-of-the-art PC that lets them get to all the information they care about -- Intranet, Internet, productivity tools, electronic mail. We build up a required set of elements for a knowledge worker, and we want to make sure that it's constantly easier for companies to provide that and keep it up to date while, at the same time, making those tools richer so they get more value out of those. We can do that for every knowledge worker, and we can do that for every home. The upside for continued growth of this industry is really pretty unbelievable.

So, in order to do that, where are we focusing? Simplicity and manageability. We get a lot of this by integrating products together, making sure, for example, that a small business who wants to go out and get a PC server doesn't have to think about SQL or HTTP or SMTP. They can simply think, okay, here's a server that's got everything I need. I'll just go and plug it in, it'll be a simple setup. And underneath the cover, sure, there's some very complex things that are being done on behalf of the user, including all the rich Internet protocols and compatibility and different types of storage, but they can buy it and think of it as a utility. We can hide a lot of the power behind the right kind of interface.

We're taking a big step in doing this by bringing Internet metaphors and the PC interface metaphors together, so that browsing links, keeping a set of favorites, that applies not just to Internet information, but to navigating your messages, navigating the files and stuff, and navigating any type of documents you have on the system.

We're going beyond the original concept of personal productivity. That is sitting at PC and just working on documents that you print. That doesn't give you the full benefit. As electronic mail is catching on more and more, people are starting to exchange electronic forms. They're starting to send large documents around, and standards are very, very important here. I have no doubt that electronic mail, very rich electronic mail, will become a requirement for all business activities. Companies will see that paper forms are simply inefficient, and be able to electronically replace all of those. Even more important, they'll take all their business processes and align those with the information on-line, in many cases changing where the boundary is between themselves and their suppliers, or between themselves and their customers.

The idea of a scalable family of products has always been key to the Windows' vision. We wanted to let people have low-cost machines. We wanted to let them have powerful machines, portable machines. Variety is very, very crucial. And yet we've got to be able to run the same software applications on all of those because the economics of software are very, very volume driven. That's the problem with people who have come out with non-compatible platforms have always had, is they just can't bootstrap the software that you need.

But we're going to be extending in many respects. Extending down to the low end with Windows CE, and extending to the high end by taking some very advanced techniques to make sure Windows NT machines provide more performance than even the world’s most expensive computers. People will be very sure that they'll never run out of headroom when they're working in the PC arena.

Now, to make this work, we need the entire industry working towards these goals. Plug and play was a great example of that. Even though there are still some devices that are not plug and play, the vast majority are plug and play today. And users have seen the benefit of that. You know, just think of how you use your portable machine today and change devices. Well, a few years ago, that just wasn't possible. Microsoft has seen its support cost for Windows go down substantially. It used to be, for example, that portable machines generated dramatically more support calls than any other type of machine. And that's really been eliminated because of the success of plug and play. And so, it's just one example of how the companies represented here have worked together to make the PC experience even better, and that, in turn has been an element of growing the market.

Windows in the home is one of the areas of huge volume increase. As learning software, game software, or just the idea of being able to take work home or work on a hobby or a home business type activity, as those have gotten more popular, the PC in the home has done very, very well. With the benefit of Moore’s Law type improvements [doubling of computing power every 24 months], we're able to improve the performance of these machines while at the same time bringing the price points down. And so, for the first time this year, we're actually starting to see full-blown machines, very capable machines, somewhat under a thousand dollars. In years past, the machines that broke that price barrier really weren't capable of running the latest applications. And so they did not capture much volume. Now, we're able to do that with a very rich machine, and that's helping to grow the market.

The family PC is used for a lot of different things. And communication is the application, we think, that's just going to skyrocket in terms of its importance. We do see the PC fitting in with other devices. That's a big theme of WinHEC this year. We'll be demonstrating how the PC can add value to video experiences or TV watching, really putting the PC at the center of an entertainment part of your home. And that's a new thing. And we expect that to be a very good market. One of the things that's happening here is the entire world is going digital. And as audio and video go digital, it really lets the PC come in and be very helpful. In fact, it means that some of the standards out of the PC industry will have an effect on all of the consumer electronic devices, and that's partly why we've put such a priority on Windows CE, because it lets you do rich connectivity between the different devices and the PC. We see the PC having the primary role here. It is the full-function device. It is the device with the full-size screen, the full set of applications that will just get richer and richer.

In the business arena, again, quite a range of devices, very complementary to each other. For people who want a small form factor device to carry around, the hand-held PC fills the role there. That's a market that's growing very healthily, but if you compare its size to the size to the PC market, it's still quite small. And the vision of everybody having this wallet PC that connects up over wireless connections, and that uses a smart card type capability, that's still many years in front of us. And yet, year by year, the price of the devices will come down, their power will go up. And that wireless infrastructure will get into place so that these can be an almost standard offering, purely complementary to the full screen PCs, either portable or desktop devices.

We're introducing a new concept here, a task-based device. This is aimed largely at people who would have had terminals in the past. And either by using the Windows terminal approach or by taking a PC and doing some very special things with the software, we're able to make sure that you only see what you're interested in seeing.

Now, on the desktop, we are starting to see a migration from Windows 95 to Windows NT. Microsoft is being very careful here not to try and force the marketplace to make that transition before it's ready. The decline in the price of memory has been extremely helpful here, so a typical new machine has 32 megabytes, or even 64 megabytes today, which makes a great machine for running Windows NT. NT Workstation volumes have gone up very substantially in the last year, and over the next couple of years in the corporate market running on new machines, we expect it to be the standard. The coexistence of Windows 95 and Windows NT Workstation is very strong and so most customers will have mixed environments for quite some time. But the move to Windows NT Workstation is very important because the high-end capabilities, the rich security that we offer, those capabilities are only present in the Windows NT Workstation product.

A very exciting area is the high-end workstation market and the server market.Virtually all the large PC companies have formed special divisions to go after the workstation market, and also special divisions to go after the server market. IBM has a workstation group. Compaq has a workstation group. HP has a workstation group. And these are all taking Windows NT, the latest Intel architecture, and going after markets that historically would have been using would have been using some flavor of Unix.

A very important metric of success here is that Unix workstation volumes last year were actually down from the year before.If you go back and look at the industry analysts and what they predicted three or four years go, that directly contradicts their view of what would happen. And it's a trend that's just going to get stronger. The applications from the workstations are moving across. Even the most obscure applications, oil exploration, real-time financial trading. They are moving. People are now really doing very direct comparisons and they can see that, for example, memory costs on a Unix workstation are more than double what they are on an NT type device.

There's a study that was done recently about cost of ownership, and NT is dramatically lower cost of ownership than the Unix workstation is -- 39 percent in one study, 45 percent in another study. And because it's mainstream and high volume, this will just accelerate. The work that Intel has done to have high performance chips has been a key element here and now all the other pieces are falling into place there.

Now, the same thing will happen in the server space. Intel-based server volume has gone up very, very substantially, and this is a major focus for Microsoft. It is our fastest-growing business, the work we're doing around Windows NT Server and our BackOffice products. These servers have quite a range of capability. At the very high end, you call them enterprise servers. We have an event we're doing next month which really talks about the scalability, talks about our latest breakthroughs in the clustering area. And that's very, very exciting. People are going to see performance numbers on databases that they've never seen before because of the way we're able to use clustering there.

We're moving up in multi-processor systems. Today two and four processors are very typical. Within the next year eight and even 16 processors will be very, very typical.

So a lot of opportunity in the workstation area and the server area to ride the wave here that's absolutely driving forward and redefining these markets, redefining them as higher volume markets, easier to use markets and a wider range of software choices for customers.

A year ago a big theme was what we called "Simply Interactive PC," and a lot of this was thinking about the home environment and how demanding people were in terms of the simplicity they expected -- things like auto-play CDs where you just stick them in and they run, things like plug and play, things like sealed-case machines. If we look at the key elements of that SIPC activity, we've made a lot of progress in the last year. Many of these things are not mainstream in all PCs today. I'll be so bold as to suggest that a year from now they will be.

What do I mean in particular? I mean the full realization of plug and play; things like Device ID; On Now, where you really never turn off your PC, you simply let it go into a suspend state. The new drivers, the WDM drivers, that are both richer in terms of how they support streaming and how they can automatically recognize devices and make it so most peripherals don't have to ship with a driver at all. These are the drivers, of course, that can run on both Windows 95 and NT. These will move into the mainstream within a year.

Finally, the Universal Serial Bus, USB, and the IEEE 1394. USB is very far along. We saw limited shipments on top of a Windows 95 update we did late last year, and there's an exciting number of devices based on USB. In fact, all the pieces are falling into place at about the same time -- the chip, the peripherals and the software support -- to make this something that we'll just take for granted in about a year's time. 1394 is not quite as far along as USB. We think it has incredible potential because of the high-speed capability and because of the way it will tie in to work that the consumer electronics industry is doing. This is a case where now the PC industry is really taking a lead, really getting out in front on this and is going to show what the potential here is.

These are focus items for us, and I think they are great examples of the progress that's being made with the PCs.

Well, now let's talk about digital TV a little bit. Digital TV is simply better than analog TV, but switching to deliver digital TV is a tough transition. It happened first in the satellite arena, where DirectTV came out as a digital system, better pictures, better audio and richer interaction for the user. Now with the FTC licensing of last week, digital TV can be broadcast and the cable industry is also starting to move toward digital transmission. So that's great news.

The PC, of course, has always been digital, and so there's a question of will there be common standards here. At the NAB show over the last few days, this has been a topic of hot discussion.Craig Mundie, who runs our Consumer Systems Division, was a keynote speaker at NAB and talked about some of the key issues. One of these is the video format. Do you transmit an interlaced format that really doesn't fit in with the PC or any of the new screen technologies, or do you transmit a progressive format of video image? The sort of standard issues like this, over the next year or so I feel that they will be resolved.

A key issue is what will be the installed base for watching digital TV, how will this thing get bootstrapped? Well, the big news at NAB was the announcement where Intel, Compaq and Microsoft joined together and said that the PC '98 specifications included support for digital TV. We've specifically designed a 480-line progressive format and a 720-line progressive format for movies and said those would be built into the video support of PC '98. And so what that means is that, instead of waiting for very, very expensive TVs to come along, we'll have literally tens of millions of PCs that can do this digital reception quite rapidly because of the incredible volume coming out of the PC industry.

This provides better pictures. It also provides the ability to carry more information than just the picture, enhanced Web and video programming -- applications like making your TV schedule easy to interact with or getting more information from ads or seeing more about the show or just joining into a chat about the show either as you're watching it or right after. We can download up-to-date information, and because it will be based on standards in the same way that the PC industry has fostered innovation and competition, this will happen here.

One of the key elements to the standard is a technical point, which is we're proposing a layered video format, so as you go to higher resolution, you don't have to take the information and duplicate it, which would use up a lot of bandwidth in a very wasteful way.

It's been recognized for a long, long time that this kind of layered approach is the only way to have a good growth path, and that's what the standard that these key PC companies are proposing is based on, and that is in stark contrast to the interlaced path that many companies in the TV industry have been going down.

So this is a new opportunity for the PC, it's something that it hasn't done before in any significant amount and I think will help drive PC sales.

So the outcome here we see is better PCs and better TVs. Whether it's Web content, game content, these things can be shared so that, although the PC is more powerful and will do more, the common authoring will let you target both devices in the same way. And this draws very heavily on the great advances we've had on the Internet.

[Series of demonstrations by Keith Laepple and Ty Graham from the Windows hardware group. The following technologies were demonstrated:]

• New version of DVDthat allows users to play a CD in a regular CD player with improved video and sound over today’s CDs, and also in a new DVD player that allows more information and more interactivity.
• Ability of Windows-based PCs to display broadcast programs, schedule information and descriptions of programs, and additional data embedded in the broadcast to enhance story lines. (To be included in the next major releases of Windows 95 and Windows NT.)
• Electronic cataloguing and managing of CD content in CD players.
• High-performance 3D graphics to improve games on Windows.

MR. GATES: So there we've seen a lot of things that are happening in the home environment to make the PC not only fit in, but to provide new capabilities.

Another arena that's very important to use is the PC in the business environment, and here the drive for increasing simplicity and manageability is equally strong. One of the things that we came out with is what we call the Zero Administration Kit. And this runs on top of Windows NT and Windows 95. I've asked Valerie See, Microsoft Technical Evangelist, to give us a little bit of a look at how we're using this administration kit to make simple things be very simple.

[Demonstration of reduced management requirements and ability to automatically configure desktop machines in a strict environment that reduces the chance of user error.]

MR. GATES: We're hard at work on the next major releases of Windows, both the Memphis release [next release of Windows 95] and Windows NT 5.0. And these are very important releases for Windows. Memphis carries all these new hardware capabilities, as does Windows NT. Windows NT also has the very rich directory that we've been working on for a long time as part of the original Cairo vision. And this directory plays a major role in the simplicity that Valerie and I were talking about. The administrator, instead of looking at each user and configuring each user, will be able to take groups of users defined in the directory, and be able to update those groups all with one simple operation. The leverage of having that directory be used for mail, directory, database and all of the applications is quite dramatic. And we eliminate the idea of having to have many administrative tools that deal with all of those subsystems.

The major theme for these releases is the simplicity. In the home we talk about that as simply an interactive PC. In the business environment, we talk about Zero Admin Windows. There's a lot of things having to do with the network administration here. One of them that we'll be demonstrating in the next few months is the idea of centralized state. Today it's a real dilemma to decide whether to put state on your local machine or put it up on the server. If you put it up on the server, it's slow, you overload the network, it's not easy to get to because often you're disconnected or you're operating portable. If you put it locally, then you become responsible for managing the disk, backing it up, and you get files that are hard to migrate, when you buy a new machine. When you want to move to someone else's machine and do some work, those local files aren't available to you.

And so what we need is the best of both worlds, local access when we want it, and server access when we want it. And that's exactly what we've defined into NT 5.0. In fact, you don't have to run NT 5.0 on the desktop workstations. You simply need an NT 5.0 server in order to provide this. It keeps a copy of all your work both on your local machine and on the server, and it synchronizes those all the time. So you get the high speed. You don't overload the network. You can work on a portable basis, and that's really a breakthrough in thinking about state management. It means that you make all the PCs identical in a very, very easy way.

As part of Zero Admin for Windows, we've been working with an industry group on systems management. And the great breakthrough here is to draw on Internet advances in order to distribute the information. There's a very rich scheme here that allows the information to be presented in different forms. So that if all you care about are a certain set of machines, or a certain set of business processes, you can see those. If you want to write logic that takes all the events in the network and decides if something important needs to change, it's very easy to do that. And so it's uniform access to the management applications.

Instrumentation we now define in as part of your driver interfaces to the Windows management interface. So that gathers these events and makes sure they all get brought together. Another administrative element that's very important to us is software distribution. We believe that software distribution should just be a built-in feature of Windows, recognizing when a driver is out of date, migrating that down. We'll do that in Memphis and NT 5.0. And this will work across a LAN connection or across a dial-up Internet connection. It's called the code download manager, and we think that's a very important advance.

Now, in parallel with what we're doing on the software side, we're engaging all of the hardware industry in the idea of a specialized specification for the PC we call NetPC. It's quite a focused design. It's a design without the ISA bus, a design with the remote boot ROM so the operating system can come down across the network. It's a design that is a field case design, and the form factor will be a lot like what you saw in the demonstration that Valerie and I did there, very small, no need to open it up. This design is not restricted in terms of which flavor Windows it runs. It will run both Windows 95 and Windows NT.

So, over the next year, what is it that will define success for all of us? Well, the key initiatives are where we need to focus. On Now is a very big deal. When people think of the PC and information at your fingertips, they idea that you have to go over there and wait for a couple of minutes for it to boot, that's an unbelievable barrier. And so we just need to get rid of that, and On Now takes care of that very well.

We need to get USB 1394 out there in large numbers, get the great peripherals out, and that's going to reduce all the problems people have had with things like IRQ overloads. Now, we need to get Net PC done. We will see the leaders shipping NetPCs in the second half of this year. And I'm certain that there will be millions of those that get out into the marketplace.

Driver quality is an area where Microsoft is going to step up in its central role and make sure that all the things that manufacturers ship have gone through more rigorous testing. And we're going to use our Web sites as a distribution point for getting the updates down to machines in a simple and automatic way.

The entertainment experience, there's a lot we can do there. As DVD is catching on, as digital TV is catching on, and I think there's certainly an opportunity for the computer industry to get out in front of that. At the high end, incredible opportunity, both because of the competitive framework where the PC is just simply a better industry structure from both the hardware and software side, and because the market is growing, actual server growth will be much higher than even PC growth, and that's because of the Internet revolution. And certainly PC servers, the devices that all of us work on, are where people are going to find the best cost, the best performance, and the best scalability.

So there's plenty to keep all of us busy over the next year. Plenty to allow us to drive our businesses towards even greater success. And so we look forward to working with you on all of these challenges.

Thank you.

MODERATOR: We'll take some questions from the audience. And then, Bill, yesterday, during registration people submitted questions to us. So what I'm going to do is read you some of these questions. The first question is, PCs are super complex today. NCs are an answer to this complexity. Do you agree with these statements? What is Microsoft doing to reduce complexity on the PC?

MR. GATES: Well, the NC is not really a well-defined term. I mean, does it have a hard disk, does it not have a hard disk? Which browser does it run of the hundreds that are out there? Which of the incompatible operating systems? Which chip set? The only thing one can say for sure about the NC is that it stands for Not Compatible.

And when I say it's not compatible, it's not compatible in several profound ways. The first is that it's not compatible with the PC. It's not the same user interface. It doesn't run any of those applications. And so the first thing they say is, rewrite everything, which, of course, has never happened in the history of computing and is not likely to.

Another important way that it's incompatible is that by giving back to the individual hardware manufacturers the ability to create their own operating system and do their own extensions, you get a situation like Unix. That is, you don't have one body of code that everybody is using and drawing on. And so all the state-of-the-art extensions will be different in the Sun box, and different in the IBM box, different in the other ones that are out there. And so it's a much weaker form of compatibility.

Finally, because it's all very new software, things like figuring out, how do you do printer drivers? Well, right now they just say, don't print. But eventually somebody will say, okay, let's get a printer subsystem in there. And so they're having to grow from scratch both the browser that's growing very, very rapidly, and essentially a duplicate operating system. And that means that there's going to be all sorts of compatibility challenges as that moves forward.

Clearly, we think the path here is to give customers compatibility with what they've learned, what they've invested in, and yet do that with great simplicity. And there's absolutely nothing that stands in the way of that. In fact, I think this next year, people are going to be pretty stunned, the same way they were about how quickly the PC adapted to Internet standards, they're going to see that with simplicity as well.

MODERATOR:The Web and the rest of the Internet are key focuses, but there remain many pivotal issues in the industry such as DVD, USP, On Now. How will you assure that all these and other important hardware issues are not washed up in the Web's wake?

MR. GATES: Well, we've increased pretty substantially over the last year the resources we put into Windows development. It's well over a billion dollars a year that we spend. And that's even as we've been able to share more work between Windows 95 and Windows NT. And so we have groups that are very dedicated to that home experience and that home integration, and all those devices you mentioned, we feel very good about what we've got in Memphis. Over the course of this event people are going to hear a lot more about Memphis and, in fact, everybody here is receiving a new update of Memphis that includes those capabilities.

MODERATOR: Let's go ahead and take a question from right here.

Q
Alex Graham -- (inaudible). You first thought of NC as non-compatible, but you just bought the world's most incompatible PC, WebTV. How is WebTV going to fit into the Windows domination plan?

MR. GATES: Well, I wouldn't characterize the Windows plan quite that way.

Windows has benefited from the momentum of volume and applications and the innovation that's taken place. With WebTV is, we're saying that not every TV will have a PC connected to it, and that there is room in the marketplace for a lower-cost device that won't run games the same way. It won't run productivity software the same way. It won't give you the same resolution that you have. But it can let you reach out into the world of electronic mail and the Internet. And so by building Windows CE into that device, it will be a subset of what we do with the PC. And we've always believed in a variety of devices. We've always believed in hand-held devices. We've always believed in intelligent TV devices. In TheRoad Ahead, I talked about how these will work together. WebTV is something we're very excited about because it will draw on what we've done with Windows CE. It's a very well designed device. And it's a great group of engineers. It's pretty amazing what they were able to do, starting their company less than two years ago.

MODERATOR: Is Microsoft really serious about its efforts to support Java?

MR. GATES: Microsoft should be judged according to what we've shipped. Our virtual machine, the performance it has on the Mac, we're five times faster than anybody else. In the 16-bit environment, we've provided the best performance, but that performance will never be adequate for any real applications. We're the only people who have shipped a virtual machine in that environment. It's about 20 times slower than in the 32-bit environment. We've provided foundation classes with graphics and user interface enhancements. And so we see Java as another language. A very important language, a language that's caught on quite rapidly. We don't see it becoming the only language people use. And, in fact, some of our breakthroughs in our object model are aimed at letting people use C code, Visual Basic code, Java code, and other languages, whatever people's favorites are, and call each other. So we don't have to go and duplicate the database drivers we've already written, or the sound drivers we've written. Just because we have a new language, we don't have to go back and redo all of that work.

So, you know, we're a software company and this new language has come along and given us a great opportunity to provide tools there.

MODERATOR: A lot has been said about the non-scalability of Windows NT. How is Microsoft addressing this, and how many CPUs are you striving for?

MR. GATES: Well, the key in terms of symmetric multi-processor performance is not just the operating system, but also the application. Windows NT, now we feel it operates very, very well in a four-processor situation, quite well in an eight-processor situation. We're doing work to make the eight-way case even better, and even moving up to support 16 processors. With some of the key BackOffice applications, particularly SQL, we're also doing that tuning work and working with key ISVs, people like Oracle, to make sure they're taking advantage of what's available there.

We're going to have an event next month that really is to focus in on scalability, talk about the raw performance we provide, but also the things that go around that, so that NT can be the data center operating system, the job scheduling, hierarchical storage management, transaction processing, all the pieces that people have expected out of a mainframe, but not in a very modern framework built around the NT hardware.

Q: Could you elaborate on this Windows terminal you mentioned and how it might be different from NC?

MR. GATES: As I said, the NC means many different things to many different people. Our concept is here, if you want a low-end device, then you don't put the browser into the device, because browsers are getting very large, browsers are changing quite rapidly. You don't put a new operating system in that's having to change and grow as well, because that means that you're simply taking and making it something that's incompatible but with no additional simplicity.

The simplicity we provide is that it's basically a video protocol coming down to that terminal, and so the terminal can be very, very cheap. And until you radically change the way you interact with the machine, you would never have to change that device.

Now, for a very demanding user who is running lots of productivity applications, that's not the right choice, because you're just shifting the cost from the desktop up to the server. But if it's somebody who's been using a terminal and just does forms-based applications, it's really an excellent choice, because although you do have to get more power from the server, it's less expensive in that case than having a full-blown device.

MODERATOR:We're going to take one more question from the gentleman here.

Q
Rich Carroll from -- (inaudible) -- Corporation. My question involves the partitioning of the market for Windows CE and Windows 95 … We could be CE and it's very nice for what we want to do, or we can put Windows 95 on [a low-end machine] and try to take advantage of Moore's Law … What's your take on that?

MR. GATES: Windows 95 has much richer functionality, but if you're going to use full-blown Windows 95, you basically need a disk. You need to be able to page, because if you didn't have paging, you'd have to have a huge amount of memory. And so, if you have a device that putting a disk into is reasonable, then Windows 95 is gong to be your best choice. If you have a device where you don't want to put a disk in, then I think Windows CE would probably be the best choice, because you're talking about 2 MB of ROM for the operating system, and then the extensions you want to put on top of that. So most of the market you're talking about, I think, will be Windows CE, but there will be a high end set of hand-helds that will be essentially portable PCs.

Q
[Question about new disk designs.]

MR. GATES: Yeah. As you say, there are some things that are like disks, flat disks, and that's where you get right at the boundary there where you could go with either. And that's a case we should sit down and talk about. When we have a family strategy, it's very important to make sure there's no gaps in the strategy. The way to avoid gaps is, you actually have the products have some overlap. So a high end Windows CE device and a low end Windows 95 really do have a very small amount of overlap there.