Let me start out on the products. I feel very good about the work that was done last year. Customers wanted products with Internet capabilities, and we were challenged to do that very rapidly. The world of the Internet moves very quickly. The Internet of today is much richer than the Internet of a year ago, and that will be true a year from now as well. So we’re having to move very quickly, but I’m very proud of how we’ve adopted to that. Our work on the standards committees and what we’re delivering through these products are really moving us into a very strong position. The shipment of Internet Explorer 4.0 certainly has to be viewed as a milestone. We expect that to increase our browser share during its lifetime to somewhere near the 50 percent mark, and we’re already seeing movement in that direction. One of the latest surveys had us at a little over 40 percent.

We have, of course, a number of product areas. But our initiatives, like support for the Internet, span all of the products. And there are three major initiatives that are ongoing right now. The first continues to be Internet support. We’ve come a long way, but there’s still more that we’re doing there.

The second is what we call scalability. This is the idea of taking PC technology which, historically, people thought of as low-cost but low-power computing, and moving that up to take on the most difficult software applications, including even applications that historically would have required very expensive mainframes or other large computers. There’s a lot that has to be done to achieve this. We have the benefit of the great work that Intel and the miracle of chip technology bring us. The chips are getting faster and we’re able to put more of those chips into the computers and we’re able to tie these computers together in so-called clusters. On the software side, we’re speeding up the databases, but we’re also providing a lot of software so the customer can manage environments with many different servers and so they can have systems that they can have extremely high reliability. So scalability is a big piece of work for us, and it brings us into competition with the high-end UNIX products and even mainframes as we move forward on that. It’s not something that we’ll solve overnight; not even in the next year. But every month we do better and better on this, and it’s based on the great customer feedback we get. We had a real milestone in terms of being able to show NT processing over a billion transactions in a day as part of an event we did about six months ago. So there is a lot of excitement about the opportunity there and about the technology we’re bringing to bear, and the partnerships we have that are pushing us forward.

The final initiative of the three is the most important, and it’s what we call simplicity. Using a personal computer today is still more frustrating, still more complicated than we’d like it to be. People are trying to do more and more with their personal computers. They’re reaching out and viewing it as a critical communications tool. So things like security, like setting up lists of electronic mail names, being able to create rich documents and share them with lots of people--these are things no one would have dreamed of doing with their personal computer years ago. Now they not only want to do these things, they want them to be very simple to do. So we’ve got a lot of work that needs to go on here. Customers are now looking at the costs they have--not just of buying the hardware, but of keeping the software up-to-date and supporting the users there--and they’re seeing that that can be a significant expense for them. So everything we can do in the software to reduce that cost of ownership and make it easier to work with the machine has a huge payback for that incredible base of customers.

We’re doing a lot of important things here. We’re taking all the phone calls we get, having our engineers sit and listen to those and see how they can avoid them in the future. We’re taking all the error messages in our system, many of which are confusing and obscure, and thinking through how could we help people. What if an expert was standing over your shoulder when you got that error message? How would they help you out, and why can’t we build that intelligence into the software so that it becomes a lot easier to work with. So this is a major jihad for us. We’re bringing our best minds to bear on it, and it really is critical to all the products, particularly to Windows itself.

I think of the company as having four product areas: Windows on the desktop--and the arrival of reasonably low-cost personal computers is continuing to help drive the volume there. We’ve seen machines that are under $1,000 and as we move forward there will be machines under $800, even machines eventually under $600 that will help drive the home market if we provide the simplicity that I’ve talked about there. We are fairly far along in terms of a new version of a major update to Windows 95, which will be called Windows 98, and we’re in beta testing on that. And we’re also fairly far along in a new, major version of NT--- NT version 5, that will be a huge milestone for us. We’re not predicting an exact ship date, but we are beginning the beta testing. We do need to get a lot of testing experience on this, because it is a very rich product and one that will be the backbone for computing in the years ahead. At the low end, our Windows CE product is doing quite well. It’s being used in various hand-held devices and the partnerships we have with people like Compaq, Philips, Casio, H-P and Sharp are very important to us there.

The second product area is the productivity software, particularly Office. Office 97 is doing very well. It was the first release that has our natural language support, grammar checking, and a lot of intelligence built in where you can just use natural language if you’re confused about something, and it will help guide you. It really points to the future; computers, more and more, will be accepting dialogue in natural language.

A third business area for us is our software that runs up in the server. A lot of milestones there. We just released Small Business Server, and we released a special version of our NT Server called the Enterprise Edition, that deals with these high-end systems and provides the very first built-in support for clustering capability. That server area is an area of great growth for us. It is our fastest-growing business. The enterprise customers that we address there are very demanding in terms of support and hand-holding. And certainly in the area of Exchange, that’s part of this business, we have a lot of competition from IBM’s Notes product. In the area of database, where SQL Server is quite important to us, companies like Oracle have a dominant share and a very strong position. So we’re having to do a lot to earn our way into those areas. And although there’s progress, there’s an immense amount more to do.

The final and fourth business area is all the things we’re doing with interactive media. This is an exciting area. There’s a wide range of things that we’re doing. We continue to put out packaged games and Encarta. We continue to put out some of the hardware products. Bob mentioned our Barney offering. It’s a very high technology product inside that nice, a plush appearance. And then finally we have all the things we do online--Investor, Expedia, CarPoint. We’re seeing incredible traffic on these sites. Our news site is either the number one news site or very close to it. The investor site is a leader in its category. Our travel site, Expedia, is a leader in its category. We’re constantly refining these sites and making them better and better. Even on a three-month cycle, you’ll go up and see that these have improved a lot. However, I would caution that the business model for all Internet sites--not just Microsoft’s, but everybody who’s out there--it’s very tough because you have so many people competing, and for many of these things, the only revenue is the advertising, and the amount of advertising out on the Internet is very small today, so it will probably take five to 10 years before that takes off. So although I’m very much a believer in those areas and we’re committed long term, I don’t think they’ll be a source of significant profitability for a long time to come. So we have to have a very patient outlook there.

One of the big themes you’ll hear from Microsoft really got kicked off with the CEO conference we had about five months ago, where the theme was the Digital Nervous System. It’s a term I came up with to describe the idea that every business in this Information Age has to think of how they best use personal computers connected to the Internet to change the way that information flows inside their company, the way they deal with standard process like sales planning and employee management, the way they deal with surprises like a project being delayed or a competitor coming out with something that’s particularly strong. I believe that the difference in winners and losers in years ahead will be determined by the companies that do the best job using these tools. So we’re doing a lot to really highlight the companies that are out in front. We’re making ourselves a showcase in terms of eliminating paper forms and having all the information online and really articulating what the benefits of that are. So that’s a really fun mission because it lets us highlight the creativity that’s being exercised in many companies to take advantage of these tools.

We will be seeing very rapid advance in the hardware front. That’s important to Microsoft. Chip speeds are going to continue to go up at the same exponential rate they have in the past. Storage capacity on these machines--it’s amazing that a new device just recently introduced a three and a half inch drive that has 16 gigabytes of capacity. It’s always hard, having learned to program in an era where storage was very scarce and even a drive a ten thousandth that size was something to be used very carefully. Now every personal computer is going to have many gigabytes of storage. But that’s great news. It means our software can be more ambitious in what we do. And flat screen technology and high-speed connections will also come along to really make it possible for us to do software that lets you reach out to the world of information. Hand-held devices will keep getting better. And you’ll start to see the television connected up to a very intelligent set-top box. Our discussions with the cable industry get in the news a lot. Our key focus there is to show them the opportunity they have to take the latest chip technology and Microsoft software technology and put it into that set-top box and be able to offer new things to consumers through the advanced TV set. That will be purely complementary to what goes on with the PC. In a sense, you’ll think of your TV set in the future as a very simple, low-end device where the PC can do all that it can do and more. And this is why we made the acquisition of the Web TV company. In the near term, their business is not a huge business, but we expect that to grow and we expect their technologies to really be crucial in driving for the partnerships with cable companies and many others that will allow our software to play a leading role there.

We’re investing very heavily in long-term R&D. I’ve told the people who do our pure R&D that there’s not a financial constraint on what they do; that it’s simply making sure they’re picking the best people to drive us forward in speech technology, vision technology, learning technology and advanced graphics technology, just to mention a few of the areas that they work on. And I’m very proud of the progress that we’ve made there. You’ll start to see that show up on our products. We are a company that not only believes in great R&D, but has a way of taking the ideas from the researcher, getting it into high volume products so that people can benefit.

Just in closing on this product section, I want to strike the same cautious and conservative note that Bob did talking about the financial view of the company. We are a very conservative company. We don’t optimize for the short term, and so we’re very frank about the challenges that are out there. Saturation in terms of people having bought a lot of PCs already is a challenge. In the world of technology, nobody has a guaranteed position. New ideas like browsers and Java operating system or software built on artificial intelligence technology--if that’s done very well and we don’t do something that’s even better, our leading position could be eroded quite rapidly in this changing business. So we very much have to be on our toes. We have to continue to hire the best people, we’ve got to continue to use customer feedback, and we’ve got to make computing more simple. We’ve got to scale up and we’ve got to continue to lead in driving the Internet forward.

A new phenomenon is that many of our competitors who would have been working independently in the past are now allied with each other. IBM, Oracle and Sun, which are very large companies, more and more coordinate their, let’s say, anti-Microsoft activities. And it ends up creating a fairly powerful message that we have to be very aware of---the fact that that’s an intense competition at a level beyond what we’ve seen in the past.

So I’m very enthused about our product work, and I see great long-term opportunity for the great software we do, but we have a very sober view of what’s required of us in order to have the continued success.

Let me switch now and talk a little bit about all the attacks on Microsoft. And I really include in this two things: the Department of Justice suit against us, as well as things like this Ralph Nader conference that started yesterday in Washington, D.C. and is still ongoing today. We do have some competitors who have chosen to fund these things and promote these activities in order to handicap Microsoft in the competitive market.

I think there’s a lot that’s left out here. The PC industry is the model industry in the entire economy. The rate of innovation, the openness--all of these things are just fantastic. And Microsoft’s role in creating this has been absolutely fundamental. People do have a choice of the hardware that they buy. The do benefit from the very low prices that the rapid improvements bring to these people. And the Windows product is in a very central position there. The evangelism that we’ve done, the way that we’ve kept the price of that product very, very low, has been quite significant. In terms of Internet technologies, everyone should be rooting us in terms of getting those into our product. There’s nothing more open than the Internet. There’s nothing that’s going to foster business efficiency and competition like the Internet. And you can reach out to any site that you want. You can publish any information that you want. And Microsoft having that technology in every personal computer is not only demanded by customers, it’s a very positive thing. Our decision to put browser technology into the operating system actually predates the founding of Netscape. It was not a decision that was made based on some view of competitive dynamics. It was simply a natural progression of putting integrated features into our operating system.

Our right to continue to do these integrated features is irrespective of whether those capabilities have been available separately in advance. It’s the march of progress and we’re certainly very clear that things like speech and linguistics and many other things are necessary for our operating system to be competitive. We find it highly ironic that we’re being told that these browser people are a threat to our operating system, which we certainly agree with, and yet we’re being asked to not compete with them by having the browser features be in the product.

Now I am confident that the legal system will protect Microsoft’s ability to compete. But what I’m also interested in is seeing that the great work that goes on in the PC industry and the very positive role that Microsoft plays here is recognized. It’s important for our employees, it’s important for our partners, and so you’ll see us speaking back in terms of asking people to look into what motivates these attacks and what’s really behind them. Our industry has an incredible story to tell. Microsoft has a great story to tell because this is not a country where success and great products should be punished.

We’ve been in situations before that have some parallels, although I’d say the visibility of these goes beyond those. When Apple sued us to say that we should take the Windows product out of the marketplace, it was a six-year series of legal things where we retained our confidence throughout that. And in fact, we continued to support Apple. I think it’s a fairly phenomenal thing that with that dire threat, the way we handled that and the way we behaved.

I’ll just close on this by saying that we think it’s great that many of the shareholders are speaking out on our behalf. When you get a witch hunt atmosphere like this, it’s nice not only to defend yourself, but also to have the owners, which you are, and also the customers that have benefited from these products speaking up as well. And so enough about that area.

Finally, I have an opportunity to really thank somebody for their great contributions to Microsoft, and that’s Bob O’Brien. Bob was chairman of Univar. And he’s been a tireless member helping with the compensation committee and running the audit committee from the inception. And he never hesitates to ask good hard questions at the Board Meetings. He’s really a remarkable individual. He still plays tennis every week and certainly has done great things for us. To recognize his service we’re giving a $100,000 scholarship gift in his name to the O’Brien Endowment at the Albers School of Business and Economics at Seattle University. And so, Bob, I want to thank you for everything you’ve done for us. (Mr. O’Brien made remarks)

A question and answer session followed. Questions answered by Mr. Gates included the following:

QUESTION: My name is Jeff Wolman. I have a question. You spent a lot of money on the cable area in communications. What are your plans for satellite and how you expect to attack that area?

BILL GATES: The world of TV is moving from analog transmission to digital transmission. And as they make that change, there’s an opportunity not only to have a higher quality picture, but also to bring some interactivity in by using advanced chips into the boxes that connect up. So the Web TV technology combined with our software technology would be appropriate for a satellite received system, as well as a cable system. We are in discussions with people who do satellite broadcasting systems to see if they find what we’re doing attractive. We do not have any design wins at this time in that area. But we do see that as a very exciting area, particularly when you get into countries where cable is not well-established--the satellite will have an important rol---Asia being a good example of that. So, we’re definitely pursuing licensing technology to the satellite companies.

QUESTION: Approximately two years ago, Microsoft was awarded at the Boy Scouts of America breakfast, an award for being the top company in the area. At that meeting, Laura Jennings made an incredible presentation and she talked about what was coming in the next two years regarding the impact of 400K and 1500K modems and interactive TV. Where are we with this technology and how is going to affect us as a company? I guess Bill Gates or possibly Laura--whoever can relate that--because it was a pretty exciting presentation.

BILL GATES: Sure. The term interactive television isn’t used much because that was the label about four years ago when a lot of companies, particularly the phone companies and the cable companies got a little over-excited about how quickly they’d be able to do digital video delivery. Now, a lot of those visions are starting to come true. They just don’t use that term. The way that it’s ended up rolling out is it starts with the Internet where you have fairly slow-speed connections over the phone line. But you use that as a bootstrap to get people to create material and to get involved. And then that creates enough of a base of applications that users are enthused about paying for higher speed connections. Now we have PC cable modems, ADSL, and various other approaches to give those high-speed connections. Eventually the speed gets high enough to do what is the most difficult thing--and that is to send video down to the users. These high-speed connections, over the next decade, will become quite popular in the United States. In the next year or two we’ll see incremental growth because there’s still a lot of work being done to improve the infrastructure and there’s a lot of regulatory questions. But if you take that 10-year timeframe our assumption is that you’ll have high-speed connections. The opportunity there for us is a great one. That’s partly why we’re encouraging companies to invest in that area. The opportunity is to have your PC be so connected up that your files are always backed-up. You can get new software by just clicking. And you have a guaranteed good experience because anything you do, if you want to go back, you can restore it very easily. If you want some advice, somebody will show up on the screen--literally right there on your screen--and see what you’re doing and help guide you along. So those connections are very important to help push our business forward. And they definitely will happen through the next decade.

QUESTION: My name is Al Mateu. I’m an investor and also have a lot of interest in Microsoft. My question is--what is the impact on Microsoft of Intel’s progression in the processors, including the DEC Alpha technology that they might acquire?

BILL GATES: Intel is actually doing the fabrication of the Alpha on behalf of Digital, assuming the settlement agreement between those two companies is approved by the government. But it’s still very much up to Digital to promote the Alpha. Ee have a good relationship with Digital where their primary offering on the Alpha is our Windows NT product. And there are a lot of very happy customers using that. Our engineering is set up so that the extra cost to us of supporting Alpha, as well as Intel, is fairly small. Now, having said that, there’s no doubt that the overwhelming volume of high-powered chips are going to be Intel’s unique designs--their so-called Pentium II-type design that they’re moving the speed up on very rapidly. And they have a new generation coming called Merced, which is a 64-bit chip. So we’re building Windows NT for that Merced. We’re very far along with that. And Intel’s hoping to get that into the market in the next couple of years. So, I think that will not only be a super high-performance system, it will do very, very well. We’re really counting on that in order to take over the most demanding applications that I mentioned in our scalability initiative.

QUESTION: My name is Andrew Rosenthal. I’m just wondering if you guys are going to be continuing to support the Macintosh operating system? And if yes, how?

BILL GATES: Yah. Microsoft was the only software company, besides Apple, to be there on the day the machine shipped and have applications. And we’ve continued to do a lot of work on Macintosh applications. In early ’98 we will do a release of our Office product for the Macintosh. We’re very excited about that. It’s a major release. We’ve gotten good customer feedback. We’ll also have the Internet Explorer 4.0 that will not only be available for the Macintosh, but it will be featured as the default browser on the systems that Apple ships. So we continue to have a strong relationship there, in terms of building applications.

I will say that the volume of Macintosh sales have gone down. So there are some products that we don’t develop for both platforms. Internet Explorer and Office makes good sense for us to continue to do those for both platforms. But there are a number of products that are not quite the same volume that we choose to develop only for the Windows platform. But we enjoy a very good relationship with the new Apple management and certainly hope that they continue to push forward with innovative products.

QUESTION: Mr. Chairman, Mr. President--not a question. My name is Al Romano. I am a shareholder of many many years. I thought somebody else would do this part. But I truly believe it would be a gross miscarriage of justice--and I know you want to close--if I did not take one moment as a shareholder, to thank the members of the Board of Directors, all of the Officers, for the commendable job they have done over the years. The gentleman from New York said his stock went from $86 to $131. A tear would be in your eyes if you knew how little I paid in relation to what…I don’t have to tell you what the stock is today. And it is only because of you Officers and the Board Members that are concerned with our shareholders. And as conservative as you are, Chairman Gates, what a commendable performance. And I cannot thank you enough. And on behalf of the shareholders--I hope you’ll all join me to just say thank you.

BOB HERBOLD: Thank you. I can’t think of a better way to end the meeting. Thank you very much.