NOTE 16   COMMITMENTS AND GUARANTEES

We have committed $821 million for constructing new buildings.

We have operating leases for most U.S. and international sales and support offices and certain equipment. Rental expense for operating leases was $326 million, $276 million, and $299 million, in fiscal years 2007, 2006, and 2005, respectively. Future minimum rental commitments under noncancellable leases are as follows:

(In millions)
Year Ended June 30	Amount
2008	$0,349
2009	242
2010	202
2011	174
2012 and thereafter	374
	$1,341

In connection with various operating leases, we issued residual value guarantees, which provide that if we do not purchase the leased property from the lessor at the end of the lease term, then we are liable to the lessor for an amount equal to the shortage (if any) between the proceeds from the sale of the property and an agreed value. As of June 30, 2006, the maximum amount of the residual value guarantees was approximately $271 million. During 2007, we exercised a provision in the operating lease agreements to purchase the outstanding portion of certain operating leases for approximately $41 million and are no longer subject to the residual value guarantees.

We provide indemnifications of varying scope and size to certain customers against claims of intellectual property infringement made by third parties arising from the use of our products. In addition, we also provide indemnification against credit risk in several geographical locations to our volume license resellers in case the resellers fail to collect from the end user. Due to the nature of the indemnification provided to our resellers, we cannot estimate the fair value, nor determine the total nominal amount of the indemnification. We evaluate estimated losses for such indemnifications under SFAS No. 5, Accounting for Contingencies, as interpreted by FIN No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others. We consider such factors as the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. To date, we have not encountered material costs as a result of such obligations and have not accrued any liabilities related to such indemnifications in our financial statements. We provide for the estimated costs of hardware and software warranties at the time the related revenue is recognized. For hardware warranty, we estimate the costs based on historical and projected product failure rates, historical and projected repair costs, and knowledge of specific product failures (if any). The specific hardware warranty terms and conditions vary depending upon the product sold and country in which we do business, but generally include technical support, parts, and labor over a period generally ranging from 90 days to three years. For software warranty, we estimate the costs to provide bug fixes, such as security patches, over the estimated life of the software. We regularly reevaluate our estimates to assess the adequacy of the recorded warranty liabilities and adjust the amounts as necessary.

In July 2007, we expanded our global Xbox 360 warranty coverage to three years from the date of purchase for a general hardware failure indicated by three flashing red lights. The basic Xbox 360 console warranty remains in place with a warranty period of one year from the date of purchase in most geographies.

The changes in our aggregate product warranty liabilities, which are included in other current liabilities and other long term-liabilities on our balance sheets, were as follows:

(In millions)	Amount
Balance at July 1, 2005	$ 14
Accruals for warranties issued	45
Adjustments to pre-existing warranties	(7)
Settlements of warranty claims	(42)
Balance at June 30, 2006	10
Accruals for warranties issued(1)	974
Adjustments to pre-existing warranties	92
Settlements of warranty claims	(226)
Balance at June 30, 2007	$850
(1)    Includes warranty expense incurred as a result of the expansion of our Xbox 360 warranty coverage as discussed above.