Key questions from the fourth quarter earnings call conducted by Microsoft Corporation on July 17, 2008.

Sara Friar (Goldman Sachs): Could you give your overview on the macro environment and how that has changed when you think back to give earnings three months ago?

Christopher P. Liddell: The macro environment broadly speaking is the same as what we were expecting in April. People are getting concerned now about the length of softness here in the U.S., but as you have seen for revenue, we have taken it up since April, so in terms of the visibility into our products, we are feeling good about our position, not only here in the U.S. but outside the U.S. If you look at the company overall, our sales in the U.S. in the year that we just completed were up 15%. The company overall is up 18% so we grew faster outside the U.S. than we did inside the U.S., but at 15%, given it has been a difficult environment for a number of companies, growing at 15% off our base was good. Going into next year, we are cautious like everyone is about the impact of the environment but for our products overall, we are feeling good. I would say the one proviso to that is in the online advertising space, where we are seeing a direct impact. It was weak in the fourth quarter and you are seeing from results of other companies as to the weakness in that general space. There is a direct impact and we are not immune to that in the online space and we will see that continuing for the next quarter. Overall in terms of our core business growth, it feels good.

Sara Friar (Goldman Sachs): Your cash flow came in weaker than we were anticipating. DSOs were up higher than you have ever seen for Microsoft. Was there a collections issue, more back-end loading?

Christopher P. Liddell: The biggest thing in the cash flow that was a negative was the payment of the fine to the E.U., which was over $1.5 billion, so that was a big negative from a cash flow point of view. Other than that, there was not anything remarkable from a cash flow point of view. In fact, it was a strong quarter, given the results overall.

Heather Bellini (UBS): If you are unsuccessful in getting all or even a part of Yahoo!, how you are going to be able to compete with Google?

Christopher P. Liddell: Regardless of what happens with Yahoo!, it is a space that we are committed to. I said that in the prepared remarks and it is one that we are committed to on a long-term basis. I would split the market, as I did in my prepared remarks, into four areas, of which search is only one - ad platform, communications, central networking, and information content being the other ones, and we have a good position in information content and communications in an ad platform with the acquisition of aQuantive. We feel good about our relative position in those areas and a number of our investments are going into that. The search area is the one where, relatively speaking, we are the most behind and that is why we are taking a different approach. We are focusing in particular on the areas of search where there is a strong commercial intent, our verticals like retail, travel, real estate, local. We are looking at different approaches where we might potentially take a disruptive and innovative business model, for example, Cashback, and then looking at winning distribution deals. Now in the short-term, that is not going to make the division profitable and from our guidance, that is not the case. If you look at the operating margin structure of the company, you have to look at the three distinct businesses. We feel good about the margin structure for our core businesses in particular growing double-digit revenue on. Entertainment and devices will be broadly flat but online is going to be negative.

Heather Bellini (UBS): You are performing well on the top line but your spending the upside so that people are not getting margin expansion. How long do you expect that to continue?

Christopher P. Liddell: We are not going to give guidance for fiscal year 2010 and 2011. Some of these investments that we are making will be multi-year, so it will depend to a large extent on our revenue growth as to when that division becomes profitable. It will need to continue to grow relatively substantially in order to cover the level of investments that we are making, but it is going to be an investment in the area, in particular things like the ad platform, where we see it converging to two natural players over time, of which we would expect to be one, and that is an area where spending in particular on infrastructure is likely to be high. I can not promise you that you are going to see a massive turnaround in the short-term, and in fiscal year 2009, which is the year that we are guiding to today, it is going to be a continuation of an investment. But again, put it in the context of what we would describe as the overall opportunity and the size of the company overall.

Charles Di Bona (Sanford C. Bernstein): You have had an issue about being disappointing on margins. Can you give color on what looks to be a persistent control issue in fourth quarter and in some cases it looks like you might be pulling some of the expenses forward?

Christopher P. Liddell: I always distinguish between the costs, which were, if you like, a function of the revenue, a function of decisions that we made, and functions of unexpected low quality spend. On the revenue side, we sold more Xboxes, so we had more COGS. That is good news. We do not make any money from those but overall in terms of long-term health of the business, the more consoles we sell, the better. In server and tools, the higher enterprise services revenue carries higher COGS with it. So the mix inside server and tools might not be as strong as you would like from a revenue point of view, but that is just a natural consequence. In terms of decisions that we made, we have budgeted headcount and people hired to their budgeted levels. That is a good thing in the sense that we hired people that we want to hire and we were particularly successful. That is a reflection to a large extent of the economic environment and the fact that if anything at the moment, we are an even more attractive company than we have been to people. That hits us from an expense point of view, but I would describe it in one of the categories, it is a conscious decision to hire people. In terms of things that were outside our control, FX was a factor. FX has been our friend throughout the year in terms of driving more revenue upside than more expense, net net it has been a positive, because we have more revenue outside the U.S. than we do expenses. In the fourth quarter, it was an unusual quarter in that we hired a lot of people outside the U.S. and the mix of expenses was such that the FX impact was higher on OpEx than it was on revenue. If you look across the year, that is not the case but in the quarter, it was.

Kash Rangan (Merrill Lynch): Stepping up investments in the online services business seems the right thing to do. I would have expected that to be accompanied by an increase to the revenue guidance, yet when you look back over the last 12 months, excluding aQuantive, I still come up with much faster revenue growth in the online services business. Is the return on these investments going to take more than one year lag to show up in the financials, or is there some conservatism in how you are budgeting for the revenue productivity as a result of these investments?

Christopher P. Liddell: Online spending is likely to be more of a fiscal year 2010 impact on revenue. The answer is yes, and that is not only because of the nature of some of the investments that we are making. Things like marketing Cashback, that is going to take time in terms of seeing the real impact from that. The online advertising area is the part of the business in the short-term which we think is most challenging. From an economic environment point of view, we have done remarkably well in our commercial businesses and overall for PCs, getting through difficult and choppy economic waters. The online advertising area is difficult at the moment and that is across the board. We might see benefits, for example, in share but I am not sure that share is necessarily in best display in the search area. It translates in the first six months and across the year to significant revenue growth but you could expect to see us make progress in the areas that I talked about, which is the underlying dynamics, the driver of the percentage minutes, percentage share, et cetera. That is how we are going to have to measure ourselves over the next year.

Kash Rangan (Merrill Lynch): The 6% to 7% growth absent currency looks to be low on the 2% to 3%. What was the thought process that went into that guidance?

Christopher P. Liddell: In the 6% to 7% that is relatively light. To some extent, it is because of the high, strong quarter one that we had last year. We had a strong quarter one piracy performance in last year. It is also part of the strong fourth quarter performance from this year which was some channel inventory. If you like, it was a strong unit growth in quarter four fiscal year 2008. Some of that was because of a weak third quarter. Our third quarter call, we talked about some of the inventory issues there and that was one of the reasons why third quarter of last year was weak. It feels like a borrowing from third into fourth quarter, and also we think of some of our customers may have bought forward from first into fourth quarter as well, so that is one of the reasons. The other is we have got 10% to 12% PC unit growth expectation, which relative to the year of 12% to 14%, we are just seeing that quarter as being one of the low points. You combine all of those factors and we think that is going to be the lowest revenue growth quarter for client in the year.

Brent Thill (Citigroup): The overall buy-back for 2008 was more than cut in half from 2007. that is understandable considering the acquisition strategy, but as it relates to the overall plan, you only have $3 billion left on the current $36 billion plan. How aggressive at 25 and change will you be with the stock here?

Christopher P. Liddell: Going backwards and then going forwards, you are right, it was lower than the previous year. One of the reasons for that is we were getting down to a level of cash that we feel more comfortable with, so there was some accelerated buying in the previous year. The other impact was we see that the aQuantive acquisition, which was relatively expensive this year, and the last factor is when we announced the Yahoo! acquisition earlier this year, we went out of the market but from a sensitivity point of view, and at that stage we are envisaging having to use a large part of that cash for the acquisition. Subsequent to May when it was clear that the overall transaction was not going to happen, we went back into the market and we have been buying at levels that are more like historic levels. So those are the reasons why we have been less in the year. It was $5 billion for the quarter, so it was a reasonably strong buy-back quarter. At these prices, it is incredibly attractive from a buy-back perspective. I can not tell you, as I never do on a quarter by quarter basis exactly how much we will buy back. We only have about $3 billion worth of our buy-back left. That is good news in the sense that we gave ourselves until 2012 to complete it, so we can put it ahead of schedule. What we do here is we complete the current buy-back, and then we go back to the board for authorization of any subsequent buy-back, and that would be exactly the process that we do here and if and when we get authorization from the board to do further buy-backs, we would clearly announce the amount at that stage. But similarly would not announce exactly the shape of what we do. The value of the company relative to the last three years is as good as it has been.

Adam Holt (Morgan Stanley): Office 2007 has been a terrific product cycle, but MBD has been light relative to guidance for the last couple of quarters. Where are you in the Office 2007 cycle, and what gives you confidence that you will see a reacceleration of growth in MBD next year versus what you saw in the back half of this year?

Christopher P. Liddell: Overall, the MBD division did extremely well last year, so put that in context but you are right in the sense that Office was lighter than we might have thought, mainly to be honest in the consumer area, and that is around lower price SKUs in retail. We are seeing more of a buy from the volume that we are seeing. The volumes are good and business sales are good but the volumes in the retail side tend to be more in the lower priced SKUs, so that is having an impact overall. The overall volume and the overall adoption and reaction to Office 2007 has been good, so we feel good and we have put it inside our business group, which grew at 15% to 20% last year.

Adam Holt (Morgan Stanley): As you look at it next year, are you thinking about dynamics and share points being the key drivers, or do you expect office to reaccelerate?

Christopher P. Liddell: Those emerging products are going to make a big difference. We are guiding 14% to 15%. Office is unlikely to grow at 14% to 15%. It is likely to grow at more like high to single digits. The other parts of the business will grow well, and that is going to average it up to 14% to 15%. SharePoint, Office Communications, some of the online services that we are bringing in will start to have an impact. Overall, it is now our biggest division in terms of revenue, 14% to 15% looks good.