8:02 a.m. As I wrote yesterday, Strategic Decision #1: Steve Ballmer's decision to speak today, "directly to investors." He'll be answering questions from the little guy and the question on everyone's lips: will he be defensive?

8:04 a.m. Ballmer wants to speak about the business from both the perspective of an investor and a manager, and he promises not to yell at the audience. Heh. He starts out by saying that the next 10 years has as much potential for world-changing strides in computers and software as the last 10 years, and he's excited to be part of a company which "invests, profits from, and takes advantage of the incredible opportunity there is to innovate."

8:06 a.m. The thing that will change in the next 10 years? Digital writing. "Pencil and paper will be replaced by superior technology that is digital. And somebody will have the ability to benefit from that technology." He already sounds both (a) angry and (b) frantic. Maybe it's just his thang.

8:09 a.m. Does he want to build or buy? Both. He's going to be spending cash out the wazoo. "We want to be first, absolutely first, in everything we do: but if we can't be first we're prepared to be second, and out-innovate the first guy." The investment in Windows took years and years to pay back ... but "I don't think anyone's complaining now." Frantic he is. "We've got to drive into new markets ... and we're also still in a world with a rising tide ... everything we do is still in a rising market." And Microsoft's job right now is to hold still as the waves crash on the shore.

8:13 a.m. In the core, Microsoft has a lot to do. He has to keep "watering" Windows so it will continue to flourish. Some of the research notes (he says he's exaggerating) wonder why he's not "milking" Windows more. Because he needs to lead the market in everything, taking share from Linux (specifically) in server operating systems ... for instance.

8:15 a.m. Microsoft needs to innovate to take share in third-world countries, especially China and Russia. He reminds us of their cool FlexGo program meant to stamp out software piracy. Oh yeah, and to help people. Enterprise search, workflow software, health care, education, e-science and other speculative investments will be places the company works to innovate.

8:20 a.m. Plans to continue operating expense increases for the next few years. What about cost mitigation? "We do see opportunities ... but do we like our portfolio? The answer is yes." He wants people to focus on the "number one productivity measure: revenue." How about online customer acquisition? The amount of money he'll invest there is still an open question. He cares about shareholder value. But that doesn't mean he's going to reduce expenses. "Most of our [operating income] growth will come organically ... most of our growth will come from investing operating expense." So he'll spend it, and you'll like it.

8:23 a.m. What if they spend $4 billion on the Xbox before they make any money on it? Great! (Oh my.) After all, if they'd bought Nintendo, they'd have a business that they didn't understand, that they didn't create. And it would have been more expensive! Huh.

8:25 a.m. "We're not Exxon-Mobil, and we're not GE. But with those two exceptions, we're right up there." He's all about generating cash. He sees lots of opportunities, and also lots of risks in his business. He and the management team prefer to take operating risks (like legal ones!) than they do financial risks. After all, he returned $87 billion to shareholders since 2001, while the cash position is within $2 billion of where it was in the end of 2001.

8:27 a.m. Microsoft takes a long-term approach. "Invest for the long-term, be patient." Investments in Japan and Europe were forward-thinking back when the company was only 30 people. "We're guys who are looking to build new businesses." As he talks about how they come in every day and ask each other "how do we innovate," I get this mental image of Ballmer walking into someone's office, putting both fists on the desk, towering over his manager with that steely look in his eye, and yelling that. Ballmer's intense, man.

8:30 a.m. Question time! What is Google's threat, and how will he respond to them? The issue isn't really any one company, Google or anyone else ... the question is whether we get on top of business transformation. Open source was a new business model, and it took them a few years to decide how to compete." I thought he hated open source. Whaddya know. He mentions needed to build the advertising business and the subscription business, as well as investing in high-performance computing. If you want to mention names, I guess they're Yahoo! and Google.

8:32 a.m. How do you recruit people and maintain morale when your stock-based compensation isn't as attractive as other companies? He's doing a great job of recruiting people! He doesn't think morale or recruiting has been seriously affected by stock price, but he pays attention. Really he does.

8:34 a.m. What about operating expenses? (everyone wants to know, really) Ballmer asks a rhetorical (to him) question: what's the number one measure of operating efficiency? It's revenue! It's almost worse on the revenue side -- or presenting a hole to the competition -- than to save half a billion dollars in operating expenses. Ballmer? He likes the trade off. He doesn't want to miss big opportunities. The places he's spending money are advertising as an opportunity (he wants to be first) and, though he doesn't mention it, the Xbox.

8:37 a.m. Where is the money going? Business intelligence, document management, role-based productivity (is that what he said?), he lists a bunch of other things ... and then says those are the three biggest focuses. He's talking too fast for me to type it and obviously not counting very conventionally.

8:40 a.m. About the Dell-Google agreement: what do you think? The cost of customer acquisition is going up, and everyone has to decide what they want to pay-to-play. Bravo, he says. Microsoft decided that the return wasn't there. That sounds like "we lost the bid and we're coming up with the only possible answer, why."

8:42 a.m. How are you looking at the organizational structure going forward? How will you prevent becoming bureaucratic? Just keep thinking about it a lot. Instead of talking about integration innovation, they're innovating to integrate. What?

8:44 a.m. What was the catalyst for the sudden announcement of higher operating expenses? Umm... it's his normal process. Maybe he'll be better next time! Because now he's got feedback that letting people know in late April that operating expenses are growing so fast for that fiscal year, is a bit late. He wants to ship a lot of Xboxes this year and it's expensive!

8:47 a.m. How do you monetize emerging markets? He says that all of the markets together are three markets in one, affluent customers, emerging middle class, and the poor. There are 100 or 200 million people in China and India (each) that actually have enough money to buy a computer and the software. He'll need to continue to innovate business model and technology to capture those emerging middle class with programs like FlexGo. The poor? Maybe they'll get phones, or TV set-top boxes. Steve... umm... do you know what poor means? If you're defining the emerging middle class as those who can potentially afford the $300 investment your FlexGo project will take, I'm thinking that the poor can't afford anything. Poor means $1 a day or less in income and those guys are not spending their precious money on Microsoft software for their telephone. I don't think.

8:52 a.m. His final comment: "the cash is the investor's cash and we want to generate more of that." That's all the time they have and a short burst of applause follows before the webcast closes down.