In anticipation of its release of Windows 7 this fall, Microsoft announced some changes to its Starter edition. The Starter editions are popular on netbooks, smaller laptops that cost about $300.

Netbooks have become a strong growth segment in computer sales, and most are sold with Starter editions of Windows, which cost less than desktop and business versions of Windows. Previous Starter versions could only run three applications at a time. That restriction will be lifted in the Starter edition of Windows 7.

Having said that, the Starter edition will still have limits: It will not run DVDs, Windows Media Center (for watching recorded TV), the highly touted taskbar preview function for Windows 7, XP mode for applications that are not ready for Windows 7.

Netbooks should be able to run the more expensive "home" version of Windows 7, which will include all those features, Microsoft says. Buyers will just have to upgrade.

Ray Ozzie, Microsoft's chief software architect, sat down for a question and answer session at the Technology Alliance lunch today at the Westin in downtown Seattle.
Ed Lazowska, a computer science professor at the University of Washington, asked questions and took a few from the audience. Ozzie talked about the cloud, netbooks and took a stroll down memory lane to describe the first Internet-ish system he used in 1974.

(Photo credit: Microsoft, 2008)

We will be liveblogging Microsoft's third-quarter earnings call tomorrow at 2:30 p.m. so come back, click in and share your thoughts on the tech giant's report card.

Here's what to look for in the earnings call. Analysts are expecting a weak quarter as the general state of the economy has pressured businesses to pull back on IT spending.

It did not help that Microsoft declined to provide any financial guidance for this quarter in its last call, when it announced it planned to cut 5,000 jobs between then and 2010.

First Call has put analyst profit estimates at about 39 cents per share, or $14.2 billion, compared with 47 cents per share in the same quarter last year.

Sid Parakh, analyst at McAdams Wright Ragen, is expecting earnings to come in below that. "We cited weakness in enterprise spending as well as the factor of netbooks that you might want to consider," he said. Microsoft has been selling a version of Windows XP for the low-cost laptops, but the company makes less than what it would for a copy of Windows installed on a desktop PC.

Parakh has done a round of checks and believes the company could be preparing for another round of deeper cuts. He recommends paying close attention any time someone says "enterprise spending," "netbooks" and "operating expenses."

Matt Rosoff, an analyst at Directions on Microsoft, said he also expects a "pretty down quarter." He's seen evidence that the company is offering special deals on its enterprise software such as SQL, Exchange and Sharepoint, and offering incentives to large companies to renew their agreements. "Typically at Microsoft they don't offer a lot of deals," he said.

Still, Rosoff said most financial analysts have already accounted for lowered spending: "I don't know that Microsoft is going to disappoint them by missing."

We will also be listening for anything related to search, given all the talk about a Microsoft-Yahoo search partnership in the works.

We doubt that CEO Steve Ballmer and CFO Chris Lidell will drop any f-bombs, as Yahoo CEO Carol Bartz did on the company's earnings call Tuesday.

More background reading:

• Apple just reported better year-over-year results in its earnings> Here's Ars Technica
's account.