Gates, speaking at Microsoft's annual meeting with financial analysts at its Redmond, Wash., headquarters, said the company's R&D budget will grow from $4.3 billion last year to $5.2 billion in fiscal 2003, despite the stagnant economy.
"Because of our optimism (over) what the software can do in the decade ahead, we are increasing our investments," Gates said. Microsoft's employee base is "50,000 strong and growing," he said.
Gates also said that Microsoft's biggest competitors are IBM and Linux, as the company attempts to establish its .Net software architecture.
On the operating system front, Jim Allchin, group vice president at Microsoft, said Windows XP has now sold more than 46 million copies in the nine months since its release, making it the fastest-selling version of Windows ever. Microsoft says that XP has sold 230 percent more copies than Windows 95 and 160 percent more than Windows 98 for the same time period after their debut.
Last week, Microsoftthat its revenue rose 10 percent in the fourth quarter, to $7.25 billion, up from $6.58 billion a year earlier, in part due to increased sales of Windows XP and a new, somewhat controversial, corporate licensing plan.
Allchin said Microsoft will release new versions of Windows XP for a variety of devices later this year: a Tablet PC version for tablet devices and laptops; an entertainment version called Windows Media Center for hybrid TV and PCs, and Windows Power Smart Display for a flat-panel PC that acts as a remote control or window to your regular PC.
The next major release of Windows, code-named Longhorn, is in development, Gates said. Longhorn is expected to be unveiled late next year or early in 2004.
Along with Longhorn will come new releases of Office, Visual Studio.Net , Exchange, MSN and other business software, Gates said. Many of those products will include built-in workflow features for routing documents and data, and the ability to read and understand Extensible Markup Language, Gates said.
The company expects to spend $200 million marketing and advertising its server software products this year, said senior vice president Paul Flessner.
On the drawing board
Gates also demonstrated forthcoming technology that will allow computer users to send complaints and comments about Microsoft products to the company's managers.
In a future update to Microsoft Office, for example, users will be able to click an icon and send a quick comment to Microsoft on a bug or a problem. The user will then be directed to a Microsoft discussion page on the topic that lists similar complaints by other users and responses from Microsoft. Product managers will be able to view a list of the top complaints about their products.
Gates said that in order to find profitable new markets, Microsoft is willing to take a chance on unproven technology, as it has done in the past.
"We're willing to take risks certainly. We have had many products that have not done as well as other products. We have technologies that have not proven out," he said.
"There are things we got into earlier than we needed to, (like) interactive TV," Gates said. "Ten years ago, I said it was important. Today, I say, it's important? How much money did we make? Some big negative number.
"We often will be ahead of things in that way," he added.
On, Microsoft held a daylong conference and presented its plans for its .Net architecture. Gates acknowledged that .Net has been slow to catch on, and he laid out an agenda to move the software strategy ahead.
Gates added that he and Microsoft CEO Steve Ballmer do not receive stock options.
"We have never taken options. (We have) no conflict of interest," he said. " Our interests are overwhelmingly the same as (our) shareholders (interests)."
On the legal front, Gates said he was hopeful that the company's 4-year-old antitrust case would soon come to an end. "We await that and it's significant for the customer," he said.
Ballmer said the company is ready to put its legal issues behind it, promising that the company will compete fairly in the future.
"We know we have to be more open, even more respectful to meet the demands and interest of our partners and customers as it relates to platform leadership," Ballmer said.
Microsoft Chief Financial Officer John Connors said Microsoft's accounting practices are sound and won't face the accounting scandals that have hit Enron and Worldcom.
"We take seriously the financial integrity of this company. You have our word, you will not see us in the articles in the future," he said, referring to news articles on Enron and Worldcom.
Connors also predicted that the company's revenue will grow 11 percent to 13 percent during the 2003 fiscal year, with revenue growth in each product category. He predicted Microsoft will see 7 percent to 8 percent growth in its Windows business, 20 percent to 26 percent growth in the "home and entertainment" business, which includes Xbox; and about 75 percent to 90 percent increase in sales of its "business solutions," which includes Microsoft's customer relationship management software and bCentral Web site for small businesses.
As "we go into fiscal year '03, we're outperforming the majority of those we compare ourselves to," Connors said.
News.com's Mike Ricciuti contributed to this report.