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

BILL GATES: Good afternoon. It's great to be here and have a chance to share with you my excitement about the years ahead as we take some really unbelievable software products and change the way that people work, and the way they do business, and even the way they learn and entertain themselves.

The world is watching what's going on in the software space more today than ever before. And so, we have the opportunity to grow all of our businesses and deliver fantastic value. And the model that we have working together is different than the traditional computer model. It's not one company trying to do it all. It's our partners, all of you, providing more value to customers than if we tried to do what you do. Your expertise in vertical areas, your field deployment, your understanding of managing large projects, all of these things are world-class. And so, taking the platform we provide and giving us the feedback that allows us to make it better and better, that's a winning combination. Customers get the best of both worlds, of what you do and what we do.

For us, our core expertise is building the platform, whether it's Windows as a platform, Office as a platform, or BackOffice as a platform. Those are our key products, and they'll continue to evolve for the Internet, evolve for scalability, evolve for multi-server scenarios, where some will be hosted, and some will be inside the company.

So, the demand on our technology has never been greater, and we know we can fulfill those demands. We've stepped up to it by increasing our R&D dramatically. In fact, we'll be over $3 and a half billion of R&D spend in this next year. And we bring to you our market momentum, the brand recognition, and the breadth of software solutions, package solutions that are a great starting point for building full customer solutions.

In all of our activities, we take a long-term view, whether it's R&D development on things like speech recognition, whether it's hiring in the engineers and building a very efficient software development environment, or perhaps more importantly in terms of how we nurture the partnerships and the mutual relationships we have with customers.

So, we are totally dependent on the work you do. This was a decision we made when the company was founded that we had one thing that we wanted to do very, very well, and we wanted to stay focused on that.

Now, this strategy you can see reflected very clearly in the numbers in comparison to some of the other players in this industry. If you look at our revenues and say, how much of that comes from services, how much comes from product? We're over 98 percent product revenue. And if you look at some of the other companies, I think it's kind of amazing that in the extreme case they're actually getting more of their revenue from the services side than from the products themselves. And this is not, we think, the way to combine in expertise or be able to draw on partnership excellence. And so the strategy you see here reflected in the numbers is our long-term strategy.

25 years ago, Microsoft started with a vision that computing would be very different, that it would be a tool for the individual, and that all these computers working together would become a revolutionary computer communications device.

Back then, we talked about a computer on every desk and in every home. And that was such a wild vision at the time, in many cases we wouldn't even say "and in every home" because we thought it would be so ludicrous. Today in the United States, over 50 percent of homes have PCs, and on business desktops the penetration is substantially higher than that. And so this vision has made incredible progress.

But we now find that there's been enough changes that we want to even broaden the scope of this vision. It's not only the PC where you'll get software capabilities, it's over the network, and on a variety of devices as well. The PC itself is really quite incredible. The volume increases have surprised the market forecasters every year for the last five years. Again this year, PC growth is very, very strong, over 100 million units being shipped.

The price of what you get in a PC has constantly gone down, fueled by Moore's law. In fact, the performance of these PCs exceeds even what would have been the most expensive computer in years past. I did hear a little comparison between a Cray computer, a supercomputer of 1989, versus a typical Windows Workstation, and we can see that the price difference is substantial, $15,000 for a very beefy workstation versus $14 million. The processor speed is better, the memory speed is better. The fundamental floating point capability is about the same. And, most interestingly, the weight is a lot better, 50 pounds versus 5,000 pounds. So there is progress for you, more than a supercomputer that only a few scientists has access to is now something that is very, very common as a desktop tool.

So, what is this new vision? Well, it's to empower people using great software, anytime, anyplace, and on any device. So, although the PC will still be the most important device, it will be the device you use for creating your documents, for editing documents, you need that full screen, you need that local storage to have the responsiveness. And the PC will continue to get far, far better. But complementing that will be the information that's stored out on the networks, and the capabilities that are running out there to help you out. And those will be connecting up, essentially to your phone, to your pocket PDA device, your TV, to a computer that might be in your car, all of them sharing a common information base and connected to a single network.

And to make that come alive we need to take the Windows platform and making it easy to develop applications that run across all those devices. And that can be done in a way that's evolutionary, that takes Visual Studio, the COM object framework, and advances them into this environment. And so that's one of the very, very important initiatives that we're driving for, and that's why we've taken this vision and made it a more expansive vision, because the new platform is more encompassing than we've ever had before.

What will the PC look like? Well, already in the last few years, we've seen the form factors branch out and improve substantially. We've got laptop computers that are much smaller than we would have expected. They've got nice cameras built in, incredible storage, really no compromise in getting the small, very, very portable device. On the desktop, we're seeing LCD screens being used. We're seeing all-in-one form factors that are easy to move around and don't take up much space, and perhaps most excitingly, we're seeing server architectures using many processors and new memory buses that will allow for performance that's really been unheard of, even in the world of expensive Unix servers or mainframes, they haven't had the kind of performance we're going to get as we move to the switch fabric memory buses and take the software buffering support up to a whole new level. And so the family of machines based on PC technology has expanded quite dramatically, and the rate of innovation, the rich competition here is quite fantastic.

So, we're talking about having lots more flat screens as part of this. Those screens are smaller and they can be dramatically more readable. In fact, the latest poly-silicon LCDs we now can show that a 200 dpi screen can be made available, and that screen combined with some new software that we've done called Clear Type actually has better readability than paper. And so it won't just be paper forms that you fill out that will disappear, over time, as these tablet-type form factors show up, you'll also even take long documents, like a magazine or a memo, and read that off the screen as well.

The way we expand the PC has been improved. The idea of opening it up and plugging cards in, trying to configure the IRQs so you don't get too many conflicts, all that expertise that many of us have spent lots of hours developing will no longer be needed, as you simply clip on a new USB device, it's automatically detected, it can be daisy-chained, and that's the new standard that's driving a lot of new peripherals to show up that are very easy to work with.

We'll see new networks. We think wireless networks are very important; as you take your portable or tablet-type device around the workplace, having that wireless network means that you'll be constantly able to send messages, get up-to-date information, and if you have a group of people walk into a meeting room, will automatically detect over that wireless network who is there. The ability to share the slides or meeting notes will be automatic, because that group name will show up on your screen just based on the dynamic discovery we do across that wireless network. You're seeing a protocol we call Universal Plug and Play.

Part of the PC experience will include video and audio. In the past, it was text and then graphics, but now the sound quality, the compression of that, the storage capacity for that, means that if you want to go back and review information from a phone call or a meeting that's been recorded, that's very, very easy to do.

In fact, we do a thing for all the people on our sales force, where they simply go up to a Web site, and they can download audio information, put it into a Windows CE portable device, and then play that as they're driving in to make sure they're up-to-date on the latest information. So, a great example of how digital audio gives you a new level of flexibility. With video, we haven't seen that start yet. Very few people are doing the kind of video sharing that will be out there. But once that comes along, our ability to index the information, to speed it up, let you find the parts that are relevant to you, will make digital video a big part of the PC experience.

And so, this is a PC that's far better than what we have now, and yet even lower cost than what we have today. As you create information on this PC, it will be replicated up onto the servers. And this technology, which starts out with IntelliMirror in Windows 2000, is very important, because through replication you get the best of both worlds. You get access when you're not connected to the network, you don't overload the network, you don't have the latency that the network would bring in if everything was being accessed remotely, and yet by having the copy up on the server, you get accessibility wherever you go, and you get that automatic backup.

Now, taking that to go beyond files, and having it work on the Internet broadly is part of the work that we're doing today. So, your preferences, your favorites, your music, even things like your digital videos, all of those things will show up on the different devices that you authenticate yourself to.

So, we definitely see the pocket device category, which is very small today, becoming very, very large. We see the intelligent TV, which is sort of a superset of today's game player, or today's set-top box, as also being very important. And we made huge investments in those areas, whether it's creating the new software, teaming up with WebTV to have the product that's the leader in that area. Huge advance bets on making these devices successful, and getting them to work together. So, that's why we talk about this as the "PC-plus era."

Now, one thing that we have to keep in mind is that even with all this progress, we are really just scratching the surface. We haven't made it simple enough, we haven't gotten the rich power out there nearly as much as we can to the man on the street. In fact, to calibrate our understanding of how are people thinking about technology, what do they know about what's going on with it, how can we make it better, we often go out and interview the man on the street. And when we did that recently, it was fascinating, and so I thought I'd share with you a little video that shows how people answer our questions.

(Video shown.)

MR. GATES: We have a long way to go for computing that's as simple and mainstream as we'd like it to be. As we do that, it's really hard to exaggerate how this industry is going to affect every other industry. If you look at the forecast for the IT business, the growth in every category, software, telecommunications, systems and peripherals, and services will be quite explosive. Most of these categories are doubling in size. But, even this understates the importance of what we're doing.

We had a CEO conference a few months ago, and it was incredible the level of CEOs that were coming out to spend three days sitting and talking about how the further expansion of PC success, all connected up to the Internet, was going to change the framework that they do business in. And it was a huge challenge to these business leaders, because they were thinking about it affects their marketing, it affects the information flow internally, it affects how they organize, how they price, and those CEOs will be turning to all of us saying, help me lead in this era. Not just build a new Web site, but change the way my company thinks about information, change the decision processes that I have internally. And so the numbers are pretty exciting, but the actual change that's brought about by our work, I think is even more exciting.

Our rule is going to be like it has been, to focus on the key products. Office, BackOffice, Windows, and our tools environment, which is Visual Studio. In every one of these areas I'm very excited about the work being done. The Office product is really the software change agent that's going to enable the new information flow. BackOffice is scaling up to new levels, bringing together knowledge management capabilities, advanced database capabilities, making the work between those seamless in a way that it hasn't been in the past. Windows, the administration capability we're bringing in there, the improvements in the interface, really it's he first time you can say there's a software release that you'll save just in the cost of ownership, not to mention the new capabilities you get out of it, you'll save the software price literally within a year of that being out there. And then Visual Studio, which will be the delivery vehicle for this new expansion of Windows to be a Web platform, not just a single computer platform.

Across all these products we've got the initiatives, the scalability, that's not optional. We have to make it clear to people that our scalability is better than any other system, regardless of the price. We have a huge step forward there with Windows 2000. But, perception actually lags reality here, so although there's more work to be done, we've also got to get the message out, as well.

Simplicity is a key thing that certainly pays off as we look at reducing the number of commands, reducing the cases where people get error messages. We have something now where for ourselves and some of the beta customers, whenever you get an error message if you think it's an unclear messages you get -- as well as saying it's okay, you have a box called "lame" that you can click on, and it brings up a little form that you can fill out and say why you didn't like that error message. And so far I've contributed more feedback than anyone else on that, because I know we can do so much better.

Talk about this Web platform, the idea of writing applications that can run against different kinds of clients, different screen sizes, different richness, but also perhaps most importantly, not only runs on the server, can also run on the client. So when you write, say, a sales force application, dial into it on the server, but also download it easily with a few clicks to the portable, and have it as you go out to visit the customer. And we think we'll have the only architecture that encompasses all these things, and yet let's people evolve the codebases they have today into this environment.

The work place will be very different, once we're done with this. Paper will not be used in the same way at all. Those forms that are inaccurate, you have to wait to understand what people expect, those are already completely obsolete. The way people meet, the way they have to sit down to watch a bunch of slides being presented, that can be improved very dramatically. How people get notified when projects are changing or about which customers are happy or unhappy, a digital feedback loop that means you can survey customers simply by sitting down and taking a few minutes to create a form, and either anonymously or in an attributed way you can see that feedback within 24 hours. Even just for serving the morale and the thinking about groups inside your own company, it's an invaluable tool that people will come to take for granted. And then finally digital marketplaces, which will be reordering where work is done, and forcing collaboration across company boundaries in new ways.

At the center of this is really the knowledge worker. The knowledge worker wants the best tools. They are the people who drove the PC to its incredible success. They're the people who drove Office to the great success that it's had. These people want to be able to sit down at their PC and within 60 seconds find information about previous work done at the company that might benefit them. If they have to dig through paper files, or go through complex interfaces, they won't benefit from the corporate memory that's there. And yet, I don't think there's hardly any company that achieves that today. Digital dashboard is the idea of taking the key metrics, whether it's the quality metrics, schedule metrics, sales metrics, and not only presenting them, but letting you dive in and using things like pivot tables to navigate through that information. That requires schema standards across many applications, and it requires an even richer environment in the database platform.

These meetings that can take place at a distance, we think those will become fairly commonplace. In fact, internally, we're using that now as we do our project reviews. Meetings where we used to have hundreds of people, now people watch over the network, they actually come into the main meeting room as they're presenting, but they know exactly when they're expected there. They come with their portable computer connected up the wireless network. And so it's a real huge efficiency gain. And of course knowledge workers will be the ones as we get the natural interfaces, as we get the speech recognition and handwriting recognition, they'll be the ones who will take advantage of that. And so every meeting you'll have the full PC or this tablet PC and not just a tablet of paper.

The ability to take business information and have it flow through the organization very rapidly and in a totally unified accurate form has been a dream for a long time. This is something where paper has been very, very involved. There hasn't been much in the way of finding out about different customers, or seeing what's going on in different pieces of the Web site. And this is where the schema initiatives, which in our case BizTalk is our label for that, these are very, very important, not just the work that Microsoft does, but the work with the software developers and the people out in the marketplace, to define information exchange at a semantic level, not just at a pipe level for a communications protocol, but literally things about how do you designate a customer, or a product, or a place, or a time, and have the information flow very easily. And we've put really a lot of our best people on this XML work, and it's very, very important.

It's also a piece in enabling e-commerce. E-commerce is not just for new companies, it's not just for big companies, it's sort of a fact of life for everybody who wants to do business, letting people come in, see the status of their orders, and when you imagine that web site, don't think of the screen as being isolated from the telephone. Today when you call up a phone number all you get is a voice connection. But, let's say you're calling up and you want a schedule, you should be able to talk to somebody and have that information come up on a screen. So the phone will more and more have a screen. Likewise, when you think of your PC, today often it doesn't have a microphone built into it, so when you go to a Web site, if you want to talk to somebody, you know, say, about your bank account information you're seeing, or about a product you might want to buy, it's not a standard feature to be able to get in and have a voice dialogue. That will change. PCs, starting next year, will have that microphone as a standard element. And all Web sites will move up to have voice interaction, as well.

So you can think of the devices, starting with the phone with no screen, and then simply moving up as the screen gets larger and larger, sort of a small screen that fits in your pocket, a tablet sized screen you carry around, a larger screen that's the size of your desktop. Those are the devices that will be connected up to these applications. And so calling in to get status, having the voice recognition behind it, will make that low end device actually far more capable of tapping into this world than it is when you have to go through people to get that information.

So the number of marketplaces and the efficiencies of these marketplaces will be unbelievable. Products that don't sell in huge volume, that have a potential market of 5,000 or 10,000 units a year, now they can find their buyers, which wasn't possible before. So you'll see lots of new kinds of businesses that weren't possible before we had this electronic marketplace.

Now, most of these changes will take place first in the workplace. They'll take place first in business to business commerce. But, it won't be too much of a lag, particularly here in the United States, as we see these things in the home. The move towards having the PC as a great device for educational software, for the productivity software, if you want to take some of that work home and be able to continue to collaborate with other employees, even when you're out of the office, that's really driven the PC into the home.

What's going to keep it there is the capabilities we build in, and the simple interfaces we build in where that PC can store your digital music, it can store your digital videos, and it won't just present them where the PC is, it will be able to project them through that wireless network to any speaker and any screen you have in the house. Projecting onto the living room TV, projecting them onto a portable device. All the digital information that you'll just think of as being in one place, and not having to actually be involved in moving these things around. TV itself, you'll have the video on demand, the interactive ads, deep information that you can go in and find related to any show, and then finally just pure entertainment through amazing graphics that all these devices will have, with incredible chips. So the workplace and the home are both changing a lot.

For us there are some great milestones that are very near term. We've been patiently -- or impatiently -- awaiting the shipment of Windows 2000. And we can say with some confidence now that even though the priority for us was quality, and that will drive the schedule, it's looking pretty good to get the final release to manufacturing by the end of this year. That's a very big foundation product for us.

If that message isn't coming through loud and clear, let me emphasize that once again. That what we've done there is the foundation, as an applications server foundation, as a scalable server, as something where you won't have the cost of ownership because you can do policy-based management, and replicate through Intellimirror. That is a huge, huge piece of work that we're excited to be on the verge of shipping.

Along with that, within three months, comes a major release of Exchange. This is the first time anybody has taken the features of the file system and the Web Store, the Web information, and the messaging system and brought them into something that is the best of all of those and, therefore, a great platform for collaboration. We've got advances in our object infrastructure called COM+, we've got the readability, ClearType, we've got the schemas through BizTalk, we've got new form factors like tablet PCs. Every one of these things will be very, very concrete either this year or next year. And the point in the direction of the kind of changes that really drive us and motivate us to keep driving the same way we have our entire 25 years.

If you look at the chance to grow great businesses here, I think the principles are fairly key. Pick the right partner, decide how you're going to nurture employees. We're in a business where hiring is one of the toughest challenges, and so really developing that channel, those investments in skills, I think will separate the winners from the losers. You'll have to take bets to focus on things, the same way that we've chosen to stick with our core competency in doing high volume software products, staying close to the customers and passing that feedback along to partners. There is nothing more valuable to us than hearing from you where customers are finding that our software products could move in a new direction.

And then, many of you have great businesses today, and as you scale them up to meet this demand, that will provide a great chance to have increased profitability.

So, it's a great era for all of us. These are very important products to be working on, and we thank you for your incredible support.

Thank you.

(Applause and end of event.)