MARK MURRAY: Great. Thanks, everyone, for joining, and we apologize for the late start. There were a number of your colleagues who were continuing to join, so we didn’t want to start until we had a full complement of reporters. There will probably be a few that still join, but we wanted to get started and not keep you waiting.

As all of you know, the European Commission held a news conference earlier today to announce a fine of 280.5 million euros, and we wanted to give you an opportunity to hear directly from the company what our response was to the announcement, and what the process is that we see going forward.

So I’d like to introduce Brad Smith, who is general counsel for Microsoft, to make a few comments, and then after that we’ll have the opportunity to take a few questions.

And I want to state at the outset that the conference call will be available on replay for you, and we’ll also have a transcript done of it and posted to the Microsoft PressPass site fairly shortly, probably within an hour or an hour and a half, so that if you don’t get precise wording you’ll be able to get it from the transcript on the PressPass Web site very shortly.

So with that, I’ll turn it over to Brad Smith, Microsoft General Counsel, for a few informal remarks, and then we’ll take a few questions. Brad?

BRAD SMITH: Great. Thanks, all of you, for joining. I can’t say we’re happy about the fine, obviously, but I do think there’s some important progress emerging in this process, despite the fines. I thought I’d touch on just a few points, and then answer your questions.

The first point I would make is this: Obviously we disagree about the last two years, but we’re encouraged by the Commission’s comments that our recent work is, quote, “extremely good,” unquote. In our view, this issue has never been about compliance, it’s about clarity. Having gotten clarity from the Commission in April, we’ve met every deadline since then, and our top priority is to meet the final deadline two weeks from now. Like the Commission, we’re hopeful that we can put this issue behind us very soon. So that I think is the first point I would make.

The second point would be this: We have great respect for the Commission and this process, but we do not believe that any fine, let alone a fine of this magnitude is appropriate, given the lack of clarity in the Commission’s original decision and our good faith efforts over the past two years.

So we are appealing the decision, and we’ll ask the European courts to determine whether our compliance efforts have been sufficient.

The decision itself, despite its voluminous nature, has only five words that describe the way these documents were supposed to be written. Those five words are “complete and accurate technical specifications”. That’s the only thing we were given in 2004 that describes how to write these.

We did a huge amount of work in 2004. We were given a deadline. The deadline was December 24th, 2004. We beat that deadline by ten days, and we submitted well over 10,000 pages of technical documents. We were proud, frankly, of the work that we had done in 2004 to make that deadline.

In the course of 2005 we got very little feedback from the Commission. We didn’t even hear from them for the first time until June. And every time we got feedback, we tried to address it, and the principal focus in 2005 was on adding some technology to what was documented, so we did that.

Obviously, Professor Barrett was appointed as a trustee. Professor Barrett wanted to see the documents written in a different way. We got some real clarity from him in terms of a specific template by early April that told us exactly how he wanted the documents to be written. He wanted them to all start in the same way so that each protocol would first have a glossary and then a section that would refer to reference works that people could read, and then to a description of what this protocol was and how it related to other protocols, and basically a draft table of contents that we could use for each and every one of these documents. And since April, we have had over 300 people working full time on this project.

I think that the fact that we have made a lot of progress since April is very encouraging, but I think it also shows that we’ve always been willing to do whatever we could to make the documents better. And I think based on that, we don’t think it is appropriate for a fine to be levied. That would be the second point I would make.

I think the third and final point I would make is really to underscore that I do think we now have a constructive process. We’re very grateful for the work that Professor Barrett and his team have put into this over the last few months. I think he and his engineers have been working as hard as our engineers have been working. Both our team and the trustee’s team have basically been working around the clock.

You heard earlier today that over just about half or over half of our protocols have now reached the point of being given the so-called version 1.0 label. That means we’re making progress. We know that we have to continue to have our number one priority focused on getting the rest of these protocol documents done.

I’m disappointed that the Commission issued a decision before the deadline even arrived for us to complete the work, but despite that, our top priority needs to be to complete the work and do the best job we humanly can. That’s what we’re going to do, and I’m hopeful that we will bring this chapter to a close over the next couple of weeks.

In closing, I’d say I do want to put this issue in perspective. As I said, we disagree with this decision and we’ll ask the European courts to sort it out. But we will remain focused on completing our technical documentation, and working with the Commission on a number of other important initiatives.

We place a very high priority on our overall relationship with the European Commission, and we won’t let this issue stand in the way of our strong relationship with the Commission as a whole or our work together on education, economic development, and technology innovation. There are a lot of things that are very important to us and to people in Europe, and we don’t want this issue to get in the way of all of those other things.

So with that, let me pause here and be happy to answer your questions.

MARK MURRAY: So, operator, can you explain the process for questions, and we’ll let people queue up a little bit for questions. We probably have time to take a handful of questions.

QUESTION: Hi there. Just a couple of quick questions. I know that you’re going to appeal this. If you could just be a little more specific about what kind of grounds you’re going to appeal it; will you try to argue that the Commission didn’t have enough evidence, that the Commission used to reach a decision, or they just flat out misinterpreted what you had been asked, which is kind of the basis of your original appeal?

And secondly, if you’ve gotten any kind of feedback from the Commission on other complaints, and I’m referring to the ESIS complaint on Vista and the PDF issue as well. Thank you.

BRAD SMITH: Sure. Let me address each of those. Yeah, first I’d say under the legal rules in Europe we will have two months and 10 days from the time that we receive the formal decision from the Commission to file with the court our application for annulment. And we have so far just received a press release, we don’t yet have the decision itself. We’ll have to read the decision before really determining precisely how we’ll phrase our grounds for appeal.

I would at the outset probably characterize at least three grounds for appeal. The first would be that before the governmental authority imposes a fine on someone for failing to do something, they have an obligation to be clear about what it is they want done, and that this decision did not have the kind of clarity that would justify this type of fine. It’s important to keep in mind that this isn’t a debate about whether we documented the right technology, it’s about whether the documents were written in the right way, did they have the right format, did they have the right information organized the right way. And before one imposes a fine of hundreds of millions of euros, I think that there’s a responsibility that the government has to be specific and concrete about what it wants someone to do. The decision did not do that.

The second point that would be a ground for appeal is that, in fact, these kinds of documents, written in the same way, have been in use by a number of people in the marketplace, because we’ve had licensees in the United States, at the hearing in March we produced statements by six licensees, all companies that are using the documents in practice, and they all said that they were satisfactory. Not a single licensee has complained about the documents. And those statements of licensees were complemented by reviews of very eminent computer science professors in both Germany and the U.K. And therefore we would suggest that this kind of fine is not appropriate

And the third reason we’d say a fine is not appropriate is because every time we’ve been asked to do something, we’ve done it. I think the purpose of a fine or the threat of a fine is to encourage companies to go get something done, and every time we were told to do something we went out and got it done. We didn’t need a fine in order to get us to agree to do things, and the record I think before the court will make that abundantly clear.

So those will at least be among the factors, and if anything the work that we’ve done since April I think verifies that. It’s not a contrast from what came before, we always had many, many people working on this, and we’ve had over 300 employees working around the clock to complete what the Commission has described as our homework, on the schedule established by the Commission itself.

You know, so we’ve met every deadline so far, and the final deadline is still two weeks away on July 24th.

Given that, it’s hard to understand why the Commission is rushing to grade our homework before the due date we’ve all agreed upon.

So those will be among our grounds for appeal.

I will say just a couple of words on Windows Vista. We received a letter from Commissioner Kroes on the 31st of March highlighting some concerns with Windows Vista. We moved very quickly to address those concerns, even making changes in the design of Windows Vista and offering to do more.

Just 11 days later, on the 11th of April, a letter went back to the Commission on this specific issue of PDF. And we offered to make additional changes in the version of Windows Vista that would be released in Europe. Indeed, we laid out four alternative approaches to addressing this issue in Windows Vista, including even removing the competing technology to PDF from the European version of Windows, pending the decision by the Court of First Instance. And we told the Commission that we would be prepared to do any one of those four things and they could simply tell us which of those things they wanted us to do.

So we provided that information on the 11th of April, and we look forward to receiving the Commission’s feedback. Obviously this is a very important product for us, and it’s very substantial, it’s basically a $9 billion R&D commitment for the company. So I’m hopeful that we will receive feedback from the Commission soon that will tell us how they want us to address that issue.

QUESTION: Hello. I just wanted to know how discussions are going on licensing terms, and what you see are the prospects of further fines of up to I think half a million Euros a day going back to December.

BRAD SMITH: Sure, Adam. The way the process has been designed with the trustee called for us first to rewrite the technical documentation and then we will submit revised reports that document all the innovations in or protocols and review the pricing. And that information goes to the Commission at the end of this month.

So we’ll get that information in. We will review our own pricing in the process. And to date there haven’t been any substantive discussions about that issue. That’s simply because everybody agreed that the documents needed to be rewritten, and with the documents rewritten then the trustee will be in the best possible position to evaluate the other issues.

QUESTION: I wanted a clarification that the date that the Commission is requiring the technical documentation. I’ve seen both July 18th and then July 24th out there.

BRAD SMITH: Good question. We received a letter from Commissioner Kroes in April with the July 24 deadline. We worked with the trustee to create a series of interim milestones that would involve the delivery of different documents. And we actually ourselves wanted the last milestone to be ahead of the July 24th deadline. We didn’t want to live that close to the final deadline. So the last milestone is July 18th. That’s when we will deliver the last set of first drafts of these documents.

It is I think helpful for everybody to just appreciate the way the process works. For each milestone we submit first drafts of documents for each protocol. Professor Barrett and his team, among other things, in effect act as editors. They read the documents, they send us editorial comments, and then we get the editorial comments and then we do a revised version of the documents.

So as of the middle of June there was the milestone called “Baker” on the 15th of June, we had only received a few of the editorial comments back from the trustee’s team. They were working on the documents we had submitted up until that time. And that’s why on the 20th of June, as you heard Commissioner Kroes say this morning, only one protocol had reached the final stage. At that point the edited version of that particular protocol document had been done, and the trustee’s team signed off on it.

On the 30th of June, we submitted two things. We submitted first drafts of documents for a number of protocols. We also submitted the second drafts or revised drafts for 16 of the protocols. The revised drafts for all 16 were accepted, which is why we’re seeing these numbers now grow rapidly, because that process is continuing. And that’s why we’re now at a point where roughly half of the protocol documents are finished.

On the 18th of July we have what’s called the Paddington milestone. We will submit new documents for a number of protocols, we’ll submit revised drafts for a number of the documents we did before, and then I would anticipate that after the 18th of July we’ll still need to get the comments back from the trustee, and we’ll need to then turn around the revised versions of those. And that’s why some additional time is built into the process.

QUESTION: I wanted to ask, if I could, about the three concerns that are causing you to appeal. The gist of them seems to be you’ve done everything you were asked to do. Part of the proof of the pudding is comparison to the states. But my understanding is that on May 17th basically the states sort of said, well, we’ve got to do a reset, and you agreed to that, and they sort of said a lot more progress has been made in Europe than here. Can you sort of explain why it is that if things are going better there than they’re going here why they had to do a reset and they’re now using Europe as a model?

BRAD SMITH: Well, first of all, I wouldn’t share, David, your characterization. I read again the transcript of what was said on May 17th in court, I was in court myself with everybody on that same day, and I don’t find in that transcript any comment by anybody for the states or the Department of Justice where they said that things were, quote, “going better in Europe than in the states.” The only thing they said was that the trustee and the Commission was farther along in defining the precise template or specification that they wanted for these documents.

Look, our view of this has always been that no one has ever been asked to do this kind of project before, certainly not in a regulated environment. It is uncharted territory. The technology itself is very complicated. Even when this kind of thing is done in standards organizations it typically takes four to seven years for this kind of project to be completed. And we’ve always said that we think that one needs an iterative process where you do something, you get feedback, and you make improvements.

And I would be the first to acknowledge that I think some important improvements are coming out of the work with Professor Barrett and his team, and I think that’s good news for everyone. I think that important improvements have come out of the work in the United States with the technical committee and the technical committee’s team.

And I think that we, in fact, should have processes that are designed to encourage everyone to learn from experience, apply those lessons learned, and continue to make these kinds of documents more useful as we go forward. I think that’s the kind of process that we’ve had, and that’s the kind of process that we should continue to have.

QUESTION: Hello. I was listening to the webcast by Commissioner Kroes, and she said that this is not just a fine for Microsoft but it’s also an image and a reputation thing that has to be sorted out.

I was just wondering what Microsoft’s take was on that. Will Microsoft suffer any loss of reputation as a consequence of this ruling?

BRAD SMITH: Well, we have always taken it as a first principle that we have an obligation to comply with the decision. And despite these fines, we remain fully committed to full compliance with the Commission’s 2004 decision. And that’s regardless of whether there’s no fine or a small fine or a large fine. We will continue to do whatever the Commission asks us to do in order to comply with their decision, even as these issues are considered by the courts. That has always been the approach that we have tried to take. It is absolutely the approach that we will continue to take.

We do care deeply about our relationship with the Commission, about our responsibility to comply with governmental orders, and about the relationship that we have with governments and customers throughout Europe.

So I do think that it is right to say that this is not just about a fine; we have a duty to comply and we want to live up to that duty.

MARK MURRAY: Great. Thanks very much, and thanks to all of you for joining us.

As I said earlier, this call will be replayed. The dial-in for that replay in the United States is 1.800.925.2366. The dial-in from outside of the United States is +1.203.369.3957. And as I indicated earlier, we will have a transcript of this entire call with the Q&A posted to the PressPass Web site fairly soon, probably within the next 90 minutes or so.

So thanks very much, and if you have additional questions, please contact us at Microsoft PR. Thanks very much.