BOB HERBOLD, Microsoft COO: First of all, good afternoon. Thanks for the opportunity to talk an important subject with you today, and thanks for being here. If the stage seems a little more crowded than a typical press conference, it's because I'm joined here by more than 60 representatives of the personal computer industry. Together they cover the industry's entire spectrum: software manufacturers, PC makers, independent hardware vendors, resellers, retailers, and solution providers. We also have representatives from consumer groups and end-user groups. These are the leaders, the innovators in our remarkable industry. These are also our partners, and we're proud to have them joining us today.

I'm going to ask you to indulge me just a couple of minutes to recognize some of these leaders individually. In doing so, I'm leaving out many important partners who have traveled from all over the country to be here today. So I also want to direct your attention to today's press release, where everyone who is joining us is listed.

We've built some great features into Windows 98 that really take advantage and take important steps forward for people with disabilities. This great work is really in the area of taking our technologies to empower people and make them more independent, and we're proud of our work in this area, and we're committed to it.

Now, joining us today from the Accessibility and Consumer Advocacy Community are Alan Reich, Executive Director for the National Organization on Disabilities; Richard Dodds, Technology Coordinator for the United Cerebral Palsy Association; Francine Tishman, Executive Director, National Center for Disability Services; Jim Firman, President and CEO of National Council on Aging.

Also, from the PC manufacturer community: Mal Ransom, Senior Vice President of Packard Bell; Joe Daltoso, President and CEO of Micron; Paul Bell, Vice President for Home and Small Business computers at Dell.

From the independent software vendor community: Charles Crystle, founder of CHILI!SOFT , Rob Burgess, President and CEO of Macromedia; Richard Halliman, CEO of Vision Software; Kris Kolece, Vice President of the Communications Division of SYMANTEC; Bob Wolf, President of Sheridan Software; Sam Patterson, CEO of COMPONENTSOURCE

We're also pleased to have someone with us from the internet strategy community: Sheldon Laube, Chief Technology Officer for US WEB.

Now, I'll introduce our speakers as we proceed today, but let me begin by saying we are all here to state two important principles: the right of the computer industry to innovate; and the right of many millions of customers to benefit from those innovations. Windows 98 unites these two principles. Windows 98 is not merely an important next step forward in innovation for the PC users, it's also the spark that will light a torch of opportunity for every one of the companies present on this stage and many more across the country. So, today is about innovation, and it's about choice for customers, more growth and more jobs for every state in the United States of America.

Today you're here from some of our industry's leaders. You will also hear about what Windows 98 will mean for those customers and their businesses. We'll spend some time actually looking at Windows 98 rather than just talking about it, as in so many instances recently where that has been done on courthouse steps, in press releases, and in legal filings.

And we hope at the end that we'll have a few moments for questions.

I was asked by everyone on stage here to express from the outset just how excited we are about this incredible innovation that goes on in this industry, and the incredible competitiveness of this industry, and about how many of the partnerships are formed over the years and so important to carry out what we do. Sure, we have differences from time to time, but our millions of mutual customers bring us all together every day to build the best product at the lowest prices, with the latest, greatest innovations that make PCs both more useful and easier to use.

Yet, despite all this innovation, anticipation and excitement, we gather at a time when storm clouds appear to be gathering in Washington, DC, and in a number of state capitols. Let me be clear: We respect the government and its role. Our occasion is that a troubling change in the competitive environment would be quite misguided, one that would be brought about by a small part of the industry, a handful of our competitors that would wrap up the free market with regulation. Most importantly, government intervention would also be immensely harmful to consumers who currently enjoy phenomenal innovation, low prices, healthy competition and incredible choice.

We're going to kick things off by focusing on what brought us all together: the consumer benefits and innovations in Windows 98. I'd like to ask Yusuf Mehdi of Microsoft to come up and take us through some of the great new consumer features in this product. Now, what you're about to see is the source of our competitors' angst, and our beta testing suggests it will be the source of much pride, enjoyment and excitement for consumers, students and companies.

YUSUF MEHDI: Thanks, Bob. Windows 98 is the next major release of the Windows operating system for consumers, and we are excited about what Windows 98 will do for them in that it will run everything you can run today under Windows 95, but it will run things easier, faster and more reliably. Moreover, Windows 98 is going to unlock a whole new range of hardware capabilities, of entertainment capabilities that people have not yet seen before, and I'm going to show you a couple of those today.

I'm going to walk through three parts of the demonstration, first about the impact Windows 98 will provide for consumers; what Windows 98 will provide for software vendors; and what Windows 98 does in concert with PC makers and hardware devices.

So let's get right to it. At the most basic core, Windows 98 is about making it easy for people to access information. On the Windows 98 desktop, we have the My Computer icon that has the Windows Explorer, and what you'll see is very similar to the Windows 95 explorer, except that we've added a few capabilities. One is that by supporting the latest Internet standards, like HTML, we're able to make using the computer simpler for people. For example, I can now click on icons and you'll see on the left part of the screen this HTML-based information that provides useful help for the user; for example, free disk space or used disk space, information about the control panel, or dial-up networking. And, in fact, I can come and take a look at some of the documents that I use a lot, and get a preview now, so I can now actually get a preview of the first page on that PowerPoint or on the Excel document, or even of a particular bitmap or image, so that I can see a little bit about that document without having to open it. So even just the most basic task of searching for information is now easier by integrating support for Internet standards.

Beyond that, we've also made it simple for people to find other data, so if you imagine looking for a piece of information here on the hard disk and then not finding it, saying I might go out and look at the network server, that's the server that we provide out on the Microsoft campus, or being able to actually go out to the Internet. So, for example, I can type in a URL for a site like Yahoo, and I am now out on the Internet in the same pane. As you can see, it's very, very simple for people; it's just one way to access all data. I can, with a single click of a button, go backwards and forwards between the Internet and My PC. It is the simplest, most natural thing that you would expect when you're trying to find a piece of data on your machine.

The second area of improvement we've made is in Help. A lot of people have trouble finding and using Help with their system, but we've improved it quite a bit in Windows 98. And again we've used support for Internet standards to make Help better for everyone.

Let me show you first a little bit about the operation of it. As you can see now, we use the ability to single click and just hyperlink between topics so the Internet style navigation that makes things very simple for people we've brought to Windows and improved Windows. This information here is HTML and I can walk through a problem; for example, if I'm having problems printing a document I can walk through some examples. It might say that the graphics are printing, so try these tips.

And, if, for example, that does not answer my problem or as we improve Windows 98 over time we get more information, we're able now to go out to the Web with the Web Help button and that will let me automatically go out to the Microsoft Support Site, and there I can get the latest information about this particular topic or about future topics.

So that you can see that using the integrated Internet capabilities in Windows, we can make help much easier for people. And the nice thing about this for developers is that in the past we had a closed, proprietary help system that people had to learn how to use to include in their applications. Now, Windows 98 introduces Internet standards-based Help. Anyone can include this Help engine in their application, and it's a much easier Help engine for their application.

The last thing I want to show you is in terms of ease of use is that we've put in new features of Windows 98 that make it easy for people to access information, in particular if they have disabilities, trying to access or find particular information. I'll give you one example, which is we have included a new feature for people who have low vision, have trouble reading the icons or the text underneath icons. It's a little program called the Magnifier, and when I launch it what you're going to see is that the My Computer icon is going to drop down -- so just catch that. And what you'll see in the top pane now is that we actually are able to magnify the screen, and specifically everywhere I move the mouse, so that as I move to My Computer, as you can see, it's much easier to read the text on that screen, and I can increase or decrease the magnification as I desire.

So that's just a couple of things that we have done to really improve the ease of use with which people can access information.

We've also done a lot of work in terms of performance and reliability, and I'm just going to touch on them briefly. In terms of performance, we've studied for the last two and a half years where people wait using their computer, and in particular this applies to any of you who use a computer today, you wait on the booting up of the PC, shutting down the PC, launching applications, or getting information from the Internet. And I'm just going to show you one of these, which is launching applications.

Now, unfortunately, I don't have two machines to do a side by side comparison, but for people who use PhotoShop, I'm going to give you a feel for the performance of launching PhotoShop on this machine. It will pop up, as you see here, quite quickly. What I do have is I have a graph that shows you some of the data that an independent company has found, which is that for any application, on average Windows 98 will launch those applications 36 percent faster.

There are a number of other performance benefits that I won't go through, but things like shutting down the computer and accessing the Internet, and I'm going to come back and talk about one, which is being able to turn on and off your PC and get to it more quickly in a little bit.

The last thing is that we've done a lot of reliability work into Windows 98 to just make it a more stable product, higher quality product for users. The best way to think about the analogy is we've added things like airbags and antilock brakes into Windows 95 to make it actually, again, more stable, less likely to crash, and if it does crash, more likely to save your data.

So that's what we've done for the user. We have done many things, as well, for independent software vendors, and again I'm going to use Internet capabilities as the example. But many of the things that software vendors have asked us is help us use the power of the Internet to make our application better for the customer. And one of the things we've done is we've made the Windows Internet capabilities available to many developers, and I'm going to give you one here. This is Intuit's Quicken software, and as I pull up that software, I'm going to show you a couple of things. One of the things that they're able to do is very easily be able to go out on-line and update the latest quotes and stock information. So if you have a portfolio here on Quicken, you can now just click on-line, get on-line updates, and it will take about a minute here and it will go out and fetch that information from the Internet.

The nice thing is that this software is written here by Microsoft. Intuit, in this case, did not have to write that software. In fact, this software is available to any developer who wants to use it, and they can now very easily now get Internet capabilities into their application without having to do all the hard work that we've put into the Windows system.

So as you can see here, we've gotten some updates on quotes, securities news, et cetera, and I can go and take a look at those.

I'm also going to show you different features, which is the ability to actually view the Internet directly. So Intuit now has the ability to actually search the Internet. Now, previous to the capabilities here, Intuit would have to ask people to go out to a separate application and go and launch it and find information. Now, we can actually render Internet information right within the Quicken application. This is great for users, because it doesn't confuse them about where they are. They know that they're still in Quicken. They're able to use all of the Quicken features, but they get all of the power of Windows Internet capabilities to render and display that information, the latest HTML support, for example.

And, in fact, it's also good for Intuit, because they would like to keep people in their application and keep them -- and not send them out to another application to get Internet information.

So that's one, I think, very good example of the Internet capability provided to software developers. There are many companies taking advantage of these. Virtually all of the major leading software companies today, people like PointCast, Lotus Notes, America Online, Qualcomm Eudora, all these products are using these exact same features in Windows to make their products better for customers.

Another thing I would like to show you now is what -- the ability to actually go ahead and run other applications. So there's been a lot of talk about, well, what if I have an application that doesn't want to use the Internet services. And I'm going to go ahead and show you one of those, one that's been much talked about, which is the Netscape Communicator Software. And I'm going to go ahead and launch this one. We may actually -- since we just dropped off the Internet there, we may not actually be able to connect to the Internet, but I'm going to go ahead and show you the operation.

The first thing I want to show you is that this application will run fine, and as intended. In fact, the first thing it prompts us is to make itself the default browser for the system. And we can go ahead and do that just by clicking "yes." And so it will come up. I'll go ahead and work this one off-line. And what will happen now is I can, as you can see, launch the Netscape Navigator browser. And, in fact, one of the things it does, as it makes itself the default browser, it will change associations, so, for example, Internet shortcuts which were previously associated with Internet Explorer I can update now. When I reboot the PC the shortcuts will update. I'll update it manually now. And as you can see, it updates to the Communicator software.

And I can use many of the features before. For example, I can come into the run command, type in a web page now, and that will use the default browser, which is the Netscape Navigator browser.

So, as you can see, it's very easy to be able to pop out and use the Navigator software quite well on Windows 98. In fact, we actually include the ability to run this application and many other applications. It will launch faster, as I said before. So if it's an application you use, it will launch must faster. I can add it to my quick launch bar here so that I can now launch it with a single click. So there are a number of things we've done for all sorts of applications and improved their capability to run.

The other part of what we've done is we've actually improved quite a bit the ability for content providers to be able to add and customize information on the desktop. So, for example, a user can very easily come in and add information. For example, they can come in and add an MSNBC weather map or ESPN sports ticker. This is essentially a little applet from the Web that gets data updated live from the Internet, in this case weather results. And I can actually put this little control anywhere on the desktop. I have full control. So I can essentially build my own custom desktop with access to data from any source on the Internet and be able to customize it here. And I can add and delete with a single click. So you can see I can turn that off.

Now, many companies in addition to users are taking advantage of this technology. For example, Merrill Lynch is taking great advantage of this to have a custom desktop for software traders, where they use the Internet and Windows to provide that capability. And, in fact, PC makers and Internet Service Providers can do as well. We've mocked up one internally. This is a fictional PC company. But I just wanted to show you the degree to which you can actually customize the desktop. It's a little bit cluttered here, but just to give you an example. On the far right we have news information that that particular manufacturer can provide about their hardware, the new hardware that's coming out. It can have some links to the ability to order that, to get tips and tricks or to get support.

So as you can see, it's a very powerful way for people to customize the entire desktop to benefit consumers.

So the last section I'd like to talk to you about is how we've made Windows 98 a boon for hardware entertainment capabilities for users. And there is a wide number of things here, and we'll just talk to a couple of them. Essentially the biggest problem today for users is that adding new hardware or getting access to new entertainment devices is difficult. It takes multiple steps and it's just not very reliable. Anyone who's installed a new device knows how hard that might be.

Windows 98 simplifies that for the user. It also creates a lot of opportunities for some of our partners here. And I'm going to walk you through a couple of them. One of the ones I want to walk you through is support for a new standard for power management, being able to more easily suspend your machine and boot up your machine much quicker. So you can imagine the user scenario, someone uses their computer and they now want to leave it, they want to power down. All of us hate having to take that computer and wait forever for it to shut down and boot up. Now, on this machine, which is a Compaq Deskpro, which is now supporting one of the newest industry standards called ACPI, we can actually shut down the machine by clicking a button, and it will take a second and actually won't shut down, I'll suspend it. And so a second here, as you can see, it's now suspended.

Just took a couple of seconds, if you can imagine I'll walk away. And then I want to come back and be able to get back to my PC. Rather than having to boot up and go through that whole lengthy process to boot up, I can actually press a button, and yep it will come right back up in a few seconds.

So just dramatically faster times to get to your PC. Again, support for new standards between ourselves and many people in the industry.

The second thing we've done is we've added support for new hardware devices. So today adding devices is very difficult. With the new technology in Windows 98 called Universal Serial Bus, it's supported throughout the industry, and I have a device here that I want to share with a scanner. You guys might have seen this one before. And it's the same scanner we had out in Chicago, and I just want to show it to you here. (Laughter.) But let's say again, just for people who didn't see it, it is a scanner that does not require a power device. All the power comes from one connector. It's the same connector for any device. Normally this takes a lot of time to install. I'm going to go ahead and plug it in here live.

Okay, and what you'll see is that Windows 98 will on the fly automatically detect the device. It's a Storm scanner here. Load the appropriate software and in a few seconds that device will be up and running and ready to go. It will take a few seconds here and now it's ready. And just to show you it's working, we'll go ahead and scan in a picture here, a picture of my son, Nicholas, who's seven months old. I promised him I would show up here. One of the nice features of the scanner as well is that I can click a button and that automatically kicks off the software. I don't have to go and find where to launch the software. This is just done all automatically. It's a function of the hardware.

So I scan in the device. There's a picture of Nicholas. And that took all of less than a minute. Today that takes anywhere from an hour or more to have to do under Windows 95. Under Windows 98 this is just going to be dramatically easier for people.

We're going to do this for over 250 devices that are currently under development for Windows 98, and about 100 more after that. So it's just going to be a fantastic thing for people, this Universal Serial Bus technology.

Okay, the last two things I want to show you, one is support for a new media format called a Digital Virtual Disk or DVD for short. It looks very much like a CD ROM. I have one installed here in the computer, and I just want to give you a feel for what this new media format will do again for users in terms of providing greater storage and higher fidelity of information.

We'll go ahead and boot this up. I'll give you a little sound here so you can see the sound. But it's taking advantage of a number of things here to give you better sound, better graphics. As you can see, it's phenomenally better resolution. This is actually better resolution and better vide quality than you actually get on your television, because of the monitor and the support for the new technology here. It's very powerful technology. (Music playing.)

And the nice thing about this is a couple things. First is that for the people who want to use this technology, for example Encarta ships today on six CD ROMS, it can now ship on one DVD ROM, or for folks who want to actually put out a number of new business titles or games, they can take advantage of this new media format. And in Windows 98 we make it much easier and more reliable to run the DVD type devices on the system. So that's yet another media format.

And the last thing I want to show you is really in keeping with our goals to it easy for people to access information on their computers, we've put in support for the ability to receive TV broadcasts. So, for example, a feature that we have in Windows 98 called WebTV for Windows I'm going to show you, and if we have our cable up and running you'll be able to actually do a number of things. The first thing is you'll be able to get television broadcast right to the computer, where we have the local New York cable, basic cable, and hopefully it will pop up here. And so this is television that we're broadcasting here in New York.

And I can come up and using now the power of software to do a number of things. For example, I can pull up the electronic programming guide, and I can search for channels to see what's playing on a number of channels, for example. And, in fact, if I want to go ahead and do a search, for example, if you want to find out when Jay Leno is playing tonight, I can find the show, find the time, and set up a reminder so that that will prompt me that it's time to watch TV, if that's what you would like to do.

(Laughter.)

And over time, this is going to become very powerful for people, because ofinteractive programming. We'll send down rich programs with lots of content, so that people can not only view the broadcast, but actually interact with HTML information, and really a number of new features that I'm just not even going to touch on for now.

So that gives you just a very brief overview. In summary, Windows 98, we are very excited about Windows 98. It's going to be a fantastic thing for consumers. It's going to run the things that people run today easier, faster, more reliable, but beyond that Windows 98, in partnership with many of the folks here who are building software and hardware, it's going to unlock a whole new range of hardware devices and entertainment capabilities.

Thanks.

BOB HERBOLD: Be sure to tell Nicholas he had his day in the sunshine. I also want to point out that to my left and to your right is a room full of additional partners that I should have acknowledged in the very beginning. Thanks so much for being here.

Our next speaker represents the PC community, and it's a real pleasure to have Eckhard Pfeiffer, President and CEO of Compaq Computer with us today. Eckhard?

ECKHARD PFEIFFER: Thank you, Bob, and good afternoon, everyone. It's always hard to follow a successful, stunning demo, but that's what we're here about this afternoon, it's Windows 98. So, the two most important messages you will hear about this afternoon is, one, optimizing consumer value. That's what we're talking about. And secondly, the vital role innovation is playing in delivering that value.

Innovation is what allows us to meet the rapidly changing and expanding needs of our customers. But whether customers and family investing for the first time into a PC, small and medium size business that wants to sell its product on the Internet, or a global enterprise managing large networks of PC, everybody is affected by that position.

Windows 98 is the kind of product that lets us meet the needs of all of these customers. It is the innovation enabler our customers are asking for, and it's the catalyst for significant advances in PC hardware and obviously PC software and the Internet.

While I can only speak on behalf of Compaq, I think it is safe to say that the entire PC industry has a large stake in the introduction and the success of Windows 98.

As an industry, we have already spent millions, tens of millions of dollars collectively developing, marketing and promoting products to take advantage of the advanced capabilities of this new operating system, as well as the latest microprocessors from Intel, and innovative software from scores of independent software vendors.

Thousands of -- maybe tens of thousands of independent participants have focused their valuable resources and their priorities in making that launch happen. And that's what we're facing today. And that's what we want to go through with.

So all of us are a long chain of innovation in this process. Each of us adds value to a product like Windows 98. As a result, we're able to deliver better performance and greater functionality, and greater value to our customers.

Compaq, for example, recently introduced a new line of commercial desktops that incorporates several technology advances, including support for Windows 98. By working closely together, Compaq and Microsoft also have made significant progress in bringing affordable computing to everyone. Compaq continues to aggressively drive down the price of computing. And with the introduction of Windows 98, we will be able to deliver both an affordable price and enhanced features and performance, and if you take the two together, that's really what makes up the value.

That is, of course, one of the key tasks of a healthy, competitive market that it deliver increasingly superior product at increasingly affordable prices. On that basis alone, it is a healthy competitive and vibrant industry. Even the Commerce Department in a recent report on electronic commerce said that declining prices in IT industries reduced inflation in the overall economy by 1 full percentage point in each of the last three years. That's the IT industry alone.

Why is this the case? Because companies like Microsoft, Compaq and many, many others continue to drive innovation in hardware, software and services.

The consumer PC, in particular, is a seasonal one; as we all know, back to school and the Christmas season. Any delay in the release of Windows 98 will undermine our ability to meet demands when students return to school or when the holiday season arrives. These are the two strongest reasons for the PC industry, certainly, and the consumer segment of the market. And I don't think we can deprive consumers of that tremendous value that we are ready to launch and ready to ship.

If information technology is the largest economic growth engine in the United States today, an injunction delaying Windows 98 would clearly have a negative impact on the country as a whole. If the United States is to lead the world into the digital age, we must let the marketplace, not government, decide and dictate innovation and prices.

I'm confident that Windows 98, together with innovations by others in our industry, will deliver significant benefits to our customers and help fuel additional growth in our industry. Thank you very much.

(Applause.)

BOB HERBOLD: Our next speaker is from Harvard University, where this individual is a professor of economics, and he's going to make some remarks in regard to the impact of innovation on this industry from an economic perspective. With that, I'd like to introduce Dr. Gregory Mankiw.

GREGORY MANKIW: It's an honor and a delight to be here today to join Microsoft and the representatives of the PC industry. Unlike most of the people on this panel, I am not in the computer industry, nor am I an expert in antitrust law. I'm a professor at Harvard, where I teach macroeconomics. So let me talk about the big picture.

The field of economics is sometimes called "the dismal science." We got that nickname a couple of centuries ago when Thomas Malthes predicted that mankind was doomed to forever live in poverty. He argued that an ever increasing population would strain society's ability to produce goods and services, living standards would remain stagnant at subsistence levels. Of course, this prediction proved famously wrong.

Although the world population today is far greater than it was two centuries ago, most people are leading better lives. The reason is simple: growth in mankind's ingenuity has far exceeded growth in population; new ideas about how to produce and the kinds of goods to produce have led to more wealth and higher living standards than Malthes or anyone else of his era ever imagined.

I bring this up because each of the companies represented here is a link in that chain of ever increasing prosperity. Mankind escaped Malthes' dire prediction because of technological advance, but technological advance did not fall from the sky, it comes from the effort of scientists, inventors, engineers and entrepreneurs.

In short, economic prosperity springs from companies like Microsoft and the other companies here today.

When I was growing up, my mother told me about a story when she was young and had to buy ice for the ice box to keep the food fresh. I was amazed at how primitive her life seemed compared to mine. Now, I tell my students that how I learned computer programming in the days of paper, tape and punch cards and they are similarly amazed.

My six-year old daughter uses personal computers at home and at school. She was surprised to learn that you can actually play solitaire with cards. (Laughter.)

Each generation sees farther by standing on the shoulders of their parents. New technologies arise as people use and improve on what has come before.

From this perspective, it's hard to fathom why government policymakers are now considering denying consumers immediate access to the next generation technology. Such a policy would impede a process that leads to long-run growth in productivity and living standards. It would throw sand into the gears of human progress.

Technological advance comes largely from research and development. On this there is little disagreement. Microsoft is a prime example. Microsoft spends a generous 17 percent of revenues in R&D compared to 6 percent for IBM and 10 percent for Sun Microsystems. Microsoft's commitment to long-term research and development is one of the reasons for the company's success.

Economist Joseph Schumpeter called capitalism a process of creative destruction. That phrase fits well the evolution of the computer industry. When I learned about computers as a high school student, IBM with its mainframe was the industry leader. For a while, Apple looked like the next rising star, but it turned out to be Intel and Microsoft. In the decades to come, that leadership will surely be challenged by other companies, perhaps Sun Microsystems, perhaps Netscape or more likely some company we have not yet heard of.

As technologies evolve, some companies rise and other companies fade away, but consumers are better served.

Over the past decade or so, the computer industry has generated a lot of interest among economic theorists. It's easy to see why. The industry's features do not fit neatly into standard textbook models: increasing returns, network affects, rapid innovation and so on. Trying to understand how such markets work is quite naturally an attractive challenge to those of us who spend our lives in the ivory tower. Some of the new theories being developed seem to suggest that government may play a role in shaping the industry. As a professional economist, I must say that I find it deeply troubling how rapidly these new theories seem to be influencing policy. We have known at least since Malthes that many of the theories proposed by economists turn out to be wrong.

There is no consensus in the economic profession about how the government might improve the structure or performance of the computer industry. Economists of many stripes, from Gary Becker, writing recently in Business Week, to Paul Krugman, writing recently in Slate, have expressed skepticism about the government's actions in this case.

To me the implications of all this ambiguity for policymakers is very clear.The government should do what physicians do. They should follow the first rule of physicians, which is, do no harm.

A recent Harris poll indicates that the general public agrees with this modest policy advice. When asked what policy the government should pursue toward Microsoft, a majority said it should do nothing at all. This sensible conclusions is based, I suspect, on the observation that Microsoft has been a leader in an industry that has continually offered consumers better products at lower prices. The computer industry is not broke, and the government should not try to fix it.

Thank you.

(Applause.)

BOB HERBOLD: Thank you very much, Greg.

Our next speaker brings the independent software vendor perspective. In this industry, the ISVs are incredibly important. They generate a lot of excitement for our consumers. Today we have with us Ted Johnson, who's the Chief Technical Officer, Executive Vice President and, in fact, co-founder of Visio. Ted?

TED JOHNSON: Thanks, Bob. Yeah, I would guess Visio's a pretty typical ISV. Well, maybe a little larger than some right now; we are publicly traded. We're based in Seattle. We make drawing and diagramming software. We sell it at a very typical price. Our flagship product, Visio Standard, is $149, and we've sold it to over ten million users over the last five years we've been shipping.

In fact, all of those are Windows users. Our entire company was founded on the premise that Microsoft Windows would become the dominant computing standard, and our business plan wasn't wrong. So all of our customers are also Windows customers.

Like everyone else here, we're very excited about Windows 98, that the demo we saw earlier, you know, stirs that up. Very exciting end user features. But there's also a lot of value to the ISVs, much more than you thought to even hit on there.

You know, maybe to put this in perspective -- and a little story -- it's budget time at Visio right now, and we do that twice a year. We're still fairly small and fast growing. It's the time of year I think I hate the most, or at least I like my job the least, put it like that. And the problem is because we always have more ideas for software than we have the money or the people to build them. And I guess that's a good thing. And the real problem is out of that $149 of Visio, we run our R&D, like Microsoft's 17 percent, $20, that's what I have to spend building new features. That's actually not so bad, fairly normal in our industry.

You know, the problems really comes in the fact that not all of this gets to go to doing features for end users. Imagine, if you will, for a moment that we were back in the days of DOS, and Windows wasn't there, and as an ISV I had to write printer drivers. I mean, our customers have to print, so I'd take away some of my R&D budget. If I had to write display drivers, and there are so many displays and so much variety out there, that would cost a lot of money also. My customers have to see stuff on the screen; I keep eating up my R&D budget. Similarly, without the user interface control that we see in Windows 95 today and improved in Windows 98, I would have to devote effort to that, and I keep eating away my R&D budget.

Now, today my customers are asking for Internet features. The kind of things we saw demoed in Quicken are not unique to one class of applications. Business customers want connectivity with their intranets. Consumers at home want connectivity with a broader Internet. And if we couldn't build those capabilities on top of the base functionality of Windows 98, it would cost us all a lot more. And, in fact, it eats into our R&D budget tremendously. In fact, I think if we had to build everything that we as ISVs get for free, if you will, in the operating system, we'd probably eat up half of our R&D budget.

But fortunately Microsoft's continuous improvements in the Windows operating system allows me to spend less money reinventing the wheel and more money developing features that my customers pay me to develop. It's actually like they're giving me all my R&D budget back, so I get that full $20.

Because when you get right down to it, innovation in the software business, really innovation in any business is not a function of government intervention; it's a function of how many people we have working to invent the future, and that's a function of money.

So we're very excited about Windows 98. With it, we get a richer platform, a step up in functionality, a step up in what we can deliver, and all of us ISVs want to go out there, build great software on that platform and have more money in our R&D budgets to do it. All of us, of course, say let's ship Windows 98.

Thank you.

(Applause.)

BOB HERBOLD: Thanks very much, Ted.

There's no more important interface than the one where the customer meets up with the product, and representing the resellers and retailers today is James Halpin, who is President and CEO of CompUSA. Jim?

JAMES HALPIN: Thank you. Well, I guess I sell everybody's stuff, so it's kind of fun. CompUSA today employs over 17,000 people in 38 states and 60 major markets. We're one of the largest computer retailers in the country and a major corporate reseller. We're counting on Windows 98 to be the biggest launch of any software product since Windows 95. Based on recent numbers that I've seen from some of our companies, the PC industry is going through somewhat of a cyclical downturn, and this product has the potential to bring that up and get the computer industry going again, because we're an industry that just thrives on fashion products.

For CompUSA, the horse is already out of the barn. CompUSA has already invested millions of dollars in advertising and promotional materials in anticipation of the launch of Windows 98. For example, we have signage in all our stores today doing pre-bookings on Windows 98.

We also, because of the lead time, have already printed 26 million preprints. You know, with a company our size, you can't just run down to Kinko and do 26 million ads.

So these are investments that if Windows 98 does not launch on time, our investments cannot be recouped.

We believe that Windows 98, if it is delayed, will start to delay some of the purchasing of our customers, because our customers typically wait for the new technology to come out. And we believe that if this is delayed, we will see a delay in some of our purchasing.

We've also made sizeable investments in inventory products, such as peripherals, accessories and memories because of additional sales anticipated in Windows 98.

Software vendors, most of our software vendors are looking for their major products announced for the year for right around this launch date, because it's going to be a very big and exciting deal for them.

Customers may delay purchases of related products if Windows 98 is delayed.We believe that if Windows 98 is delayed, it will have an extremely negative impact on CompUSA, as well as a ripple effect on the entire PC industry.

The loss of investment and potential sales won't affect just CompUSA, but it could result in lost jobs, decreased growth and fewer choices for the customers.

Thank you.

(Applause.)

BOB HERBOLD: Thanks, Jim.

I think the demo with the scanner today gave you some sense for how easy it is to hook up hardware with this new operating system. Representing the independent hardware vendors is Bill Krause, who is the President and CEO of Storm. Bill?

BILL KRAUSE: Gee, I can't think of who is more relieved to see that scanner work today, me or the guy doing the demo. (Laughter.) Some people can demo and some people can't, Bill. (Laughter.)

Well, thank you for taking time to hear about why we think Windows 98 is an important product in helping to move innovation forward in our industry. I'd like to add a special thanks to those of you attending who are customers of Storm's EasyPhoto line of personal scanners, and I hope you're confident that the scanners we have coming forward in the future will work well with Windows 98.

My role this afternoon is to represent the computer peripheral manufacturers, and to provide our perspective on why Windows 98 is an important product launch for our customers. While I have worked with Bill Gates and Microsoft for over 17 years, I'm not here as an advocate for Microsoft. I am here as an advocate for Windows 98 and the benefits it will offer to our customers.

The computer peripheral market, which includes product categories such as monitors, printing devices, keyboards, modems, printers, scanners and digital cameras, among others, is by my estimate approximately a $30 billion industry today.

Windows 98 offers a tremendous opportunity for the peripheral market specifically as the result of an exciting new input/output peripheral connection technology called Universal Serial Bus or USB. Windows 98 support of USB brings three significant benefits to potential customers. First, it is the simplicity of installation, which you saw during the demo. In the past, in order to add a peripheral, you frequently had to open the PC up, plug in an add-in card and then reconfigure the system software to add the software driver.

Now, I did a quick calculation during the demo and I computed that the average consumer spends today about 30 to 45 minutes installing a peripheral. In 1998, if all of the scanners were shipped with USB connections, it would save consumers 500 years of time spent installing peripherals. That's quite a significant benefit to our consumers.

The second benefit of this input/output connection technology is performance or bandwidth. The USB transfers data at 12 megabytes per second, which is approximately ten times faster than a serial port and almost 2 times faster than a parallel port. Now, this increased performance allows for innovation by peripheral manufacturers for a whole new class of peripherals which include high-speed scanners, which enable you instead of taking over several minutes to scan in a photograph, as you saw it took less than just a few seconds to scan in that photograph. It allows for new kinds of digital videocameras, new force-feedback joysticks for sophisticated robotic applications and new types of pointing devices for entertainment and games, as well as high-speed modems for faster Internet connections.

And finally, the third benefit Windows 98 support of USB brings to consumers is portability. With the hot plug and play feature of Windows 98, consumers can now remove the scanner from their PC in the den and then plug it into the PC in the children's room, all without having to turn their PCs on or off, or having to reinstall the add-in cards and software.

As a result of these benefits, we believe consumers will now connect approximately four to five peripheral devices to their PC instead of the current two to three devices, and this represents a multi-billion dollar market expansion opportunity for our computer peripheral industry.

Now, while any delay in the release of Windows 98 will have a direct and dramatic negative impact on this expanded market opportunity for computer peripheral manufacturers, the real loser will be the everyday consumer. So I hope you now know why I'm here as an advocate for Windows 98 product launch.

Thank you very much.

(Applause.)

BOB HERBOLD: Truly exciting times in the hardware areas. Great to hear about those kinds of capabilities and see them in action with that demo.

Our next speaker is the Chairman and Chief Executive Officer of the Microsoft Corporation, Bill Gates.

(Applause.)

BILL GATES: Well, thank you, Bob. It's great to be here with so many friends and partners. As I look around the room at the array of computer manufactures, hardware and software companies, solution providers and customers, I'm reminded of just how diverse and amazing an industry this is, and how proud I am to be part of it.

There are three things I want to touch on this afternoon. First, the incredible innovation and collaboration that has made the PC industry America's number one economic engine. Second, Windows 98 as a great example of that partnership and innovation at work. And third, the consequences if the government tries to halt this forward progress by blocking the release of new operating systems.

A couple of weeks ago, the US Commerce Secretary William Daley issued a new national report, which highlighted how computers and the Internet are revolutionizing the economy. According to the report, information technology now drives 25 percent of the real economic growth in the United States. It employs over 7 million Americans and is going at over double the rate of the overall US economy.

More recently, in fact, over this weekend I heard President Clinton say in Silicon Valley that computer technology has revolutionized every aspect of American labor. Here's something that even Newt Gingrich agrees with the President on.The success and partnership represented by the PC industry and the companies gathered here today showcase the American marketplace at its best. No other industry is doing more to move America forward. No other industry is more committed to innovation and in creating products that improve people's lives. No other industry is as competitive, dynamic or responsive to consumer demand.

The forthcoming release of Windows 98 just shows what we can achieve. For the same price as Windows 95 cost three years ago, it offers consumers a more reliable, faster and easier to use PC operating system, a PC operating system that is also compatible with the thousands of companies' hardware and software products.

Even I sometimes marvel at how far the PC has come in just a short time. Remember when PCs didn't have hard disks or modems or the ability to connect to a network. Remember when the C:\ prompt was the user interface.

Although our industry is young, the constant cycle of innovation is a well-established tradition.The first part, Microsoft has integrated powerful new features into our operating system for more than 17 years, so that consumers can continue to take advantage of the richness and power of the PC.

Since the beginning, a core function of the operating system has been enabling computer users to locate and use information, first form the hard disk and later from CD ROMS and later from local area networks.

So it only made sense as the Internet began to emerge as the newest and biggest network of all, that we would add Internet functionality into Windows.

Before Netscape was founded, Microsoft realized that integrating Internet technology into the operating system was important to customers and essential to our ability to remain competitive.

Everyone recognizes the Internet as a fundamental part of how business will be done, which is why every other manufacturer of operating systems, including IBM, Sun and Apple have incorporated Internet features into their platforms, just as we have. Netscape meanwhile is headed towards the same goal of integration by promoting their browser as a platform. I recall Marc Andreesen saying last year how Netscape was going to reduce Windows to an unimportant collection of slightly buggy device drivers. That sounds like competition to me.

By now, I hope, it's clear why we are fighting to protect the principles of innovation. Forcing us to divorce the Internet from our operating system would be like requiring one of the automakers to sell cars without car stereos. It would be unfair to Microsoft and it would deny millions of consumers an important choice, and it would hurt every technology which builds products based on the Internet services incorporated into Windows.

In fact, Windows 98, which is the main reason we're all here today, will make it easier for consumers and software developers to take maximum advantage of the Internet. Yusuf showed you just a small part of that in his demo of Windows 98 a few moments ago.

The government's argument all boils down to a claim that we're putting too much Internet support into our product. This is so incredible to me I just have to say that one more time. The government's claim is we're putting too much Internet support into our products.

This is quite a turnaround from how people saw Microsoft a few years ago, thinking that we were behind on the Internet. But we believe that customers need and want access to the Internet through their operating systems, things like the Help being automatically updated, reaching out to all of the resources on the Internet, or the ability to automatically update drivers or get the latest Windows improvements, using the Internet support that's built in to the Windows update feature. All of these things belong in the operating system, and we believe that the government's efforts are misguided. Their theories would have prevented us from ever shipping our Windows 95 product, which has gone on to have such a positive impact.

For 25 years, this industry has grown and prospered, created millions of jobs and lifted this nation's economy without government regulation.I believe the government has an important role to play in making sure the marketplace is open and that consumers are protected, but it would be the ultimate irony if the government acted at the behest of a handful of companies who want government help to sell their products. They would be trying to regulate what is today the most vibrant industry in the country. Such action would have the certain effect of retarding innovation and restricting consumer choice. Beyond that, it would affect an entire ecosystem of companies whose prosperity depends on improvements in the PC.

Any government action that would derail or delay Windows 98 would hurt the American economy and would cost American jobs. It would also create an opening for foreign companies to move into a position of leadership in an industry that has been such a strong exporter for America.

Holding up the release of a major software innovation such as Windows 98 would be like telling General Motors they cannot come out with new cars this fall or telling Paramount they can't come out with any new movies on July 4^th, or telling Wall Street they can't issue any new stocks. The effects would be profound and would ripple through the economy.

For Microsoft, what is at stake is the ability to continue to make the personal computer even better and easier for people to use. I am personally very committed to the day when computers will be able to see, they'll be able to listen, they'll be able to learn. And we're investing millions of dollars in research and development to make that happen.

Back in 1975, when Paul Allen and I started Microsoft, we had a dream of what the personal computer could do, but never did I imagine that it would play as important a role in our society as it does today or that it would be at the center of America's transformation from a nation threatened by the emerging global economy to the leader of the global economy.

Today I stand here with leaders from the personal computer industry united in our belief that any attempt to block the release of Windows 98 would be a step backwards for the industry, for consumers and for the country, because in America innovation is progress and progress is growth for America.

Thank you.

(Applause.)

BOB HERBOLD: Well, I would like to thank all our speakers today and we have a few moments for just a few questions, so if we could take a try. I have one down here. Gary?

GARY BEACH: Thank you. This is for Eckhard Pfeiffer. Eckhard, you talked a lot about the consumers, particularly holding up Windows 98 might particularly impact back to school and holiday sales. Many of the people on stage with you today are selling into corporations. What impact would any holdup have on Compaq Corporation's sales for corporate computers?

ECKHARD PFEIFFER: There's obviously a statement that is very difficult to predict. I think there would be a major national disappointment if Windows 98 would be blocked. How the consumer would react, either delaying, of course, or having to go through with existing or new products in Windows 95, for some there's no choice, you have to go ahead. And so that would continue through the back to school buying season. It might not see the offset opportunity that Windows 98 would have. That's about how we assess it.

BOB HERBOLD: Mark, you have a question over here?

QYes, a question for Chairman Gates. Why is Washington listening so closely to your competitors, as you argue on this antitrust issue, and why have they scored, as you would suggest, such success in Washington?

BILL GATES: Well, I wouldn't say that they've scored any success at this point. The issue has been raised of whether we should be blocked in our innovation, and they've certainly done a good job of raising that question. You can say that Microsoft was naïve in not realizing the competitors were hiring lobbyists in that way. We didn't recognize that was what was going on. Now that we've seen that take place, we've had a lot of our supporters in the industry call us up and say we should do a better job of speaking out, and that's what we're here today doing, speaking out and saying that, you know, this is a product that is a good thing and it should get out there in the marketplace. And I feel quite confident that that point of view is going to prevail.

QChairman Gates, you talked about the dangers of a hold-up to Windows 98. Do you believe there is a serious threat by both federal and/or state regulators that Windows 98 will be blocked?

BILL GATES: Well, certainly there's been a lot of discussion about the possibility of either state Attorneys General or the Department of Justice filing a lawsuit that would include request for an injunction against the shipment of Windows 98. So, in fact, that is something that is receiving consideration. And so that's why it's worth speaking out on behalf of the positive benefits of Windows 98.

QMr. Gates, some of your opponents have taken note of Microsoft's assertion that there is -- there would be such a widespread impact of a delay of Windows 98. They've said, hey, that's reason why -- that's proof that Microsoft is so big and so powerful and so influential that it should have to play by other rules, specifically, a monopolist rule. What's your response to that?

BILL GATES:I think there are hundreds of companies in America who make great innovative products. We're not claiming that we're unique in that in any way.There can be no doubt that Windows 98 is going to bring positive things. A lot of companies have put investments into it. We worked hard on this product. We've gotten response to the beta testers. We do feel that we'll be able to have it in the marketplace by June 25^th, which is what we had been saying over the last few months. And so we think that's the way the economy works, that new products should come out, and, you know, we definitely believe that on an ongoing basis Windows innovations will be important.

QYeah, I realize you can set Netscape as default browser, but what about if you're running other products, such as Quicken, that would use Internet Explorer. Why can't the browser be a plug-in for the operating system, just as Adobe Acrobat is a plug-in to a browser?

BILL GATES: Well, these operating systems are made up of millions of lines of code. There's a memory manager. There's a font manager. There's a disk manager. There's the user interface manager. So in Windows 98 I think it's on the order of four million lines of code. What customers are expecting us to do is to integrate those pieces together, so that the user interface is coherent, and so that it's tested as a whole, and that they can count on that platform, that platform can be documented, people can optimize their hardware to run underneath it, and people can optimize their applications to run on top of it. Of those hundreds and hundreds of features, we couldn't test or support 2-to-the-hundredth versions for people who have replaced and changed those pieces. We have to take the product and create it as a whole. In fact, you can always extend the operating system and build on top of it. And Netscape is in a great position to build applications that run on top of the operating system, as are many other people.

But we've got to do the job to make sure we test all those pieces and make a seamless interface in order to continue to expand the PC marketplace and give more power to the people who are already using PCs.

BOB HERBOLD: We have time for one more question. Right over here.

QThis is really a follow-up of an earlier question. I wonder if this isn't kind of an overwhelming response to a miniscule threat. Can you tell me what you consider the probability of an injunction to stop Windows 98?

BILL GATES: Well, I'm not an odds maker. Certainly a lot of government resources, both at the federal and state level, have gone into getting millions of pages of documents from Microsoft and going out and talking to people around the industry, trying to scour up any kind of theory here. And so this is a very serious situation. I wouldn't give the probability, but, you know, we read every day that there is a very good chance that some people might do this. It is under serious consideration.

BOB HERBOLD: Okay, with that, we will conclude, and thank you very much for your attention.

END

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