SAN FRANCISCO -- With the possible end of the federal government's antitrust case in sight,

Microsoft

(MSFT) - Get Report

boosters are embracing bright fortunes for the shares of the software giant.

"It's hard not to rule out what a wild card the lawsuit is," says Frank Husic, portfolio manager of

Husic Capital

, who likes the company but has stayed away from the stock because of the legal uncertainty. "The stock would be substantially higher now if it weren't for the government case."

Maybe so, but that doesn't obscure widespread questions about the company, even if the antitrust case produces relatively inconsequential restrictions. At the core is whether one of the most popular companies on Wall Street can successfully compete in a world in which technology is moving from the PC, where Microsoft became a colossus, to the Internet, where it is still trying to gain a foothold.

Many analysts and investors think it can adapt and that it is just a matter of time before the company transfers the talent and muscle it brought to desktop operating systems and software applications to such burgeoning fields as hand-held communications, Internet commerce and home entertainment. And while the company's main business has slowed, the boosters are optimistic about at least the short-term profitability of the

Windows 2000

operating system.

Critics, though, think the good times for Microsoft are over and that it will have difficulty adapting to the new software environment. The company's profit growth -- at 48% a year from 1996 to 1999 -- is predicted by financial analysts to slow to 22% this calendar year and to 14% next year, according to a

Thomson First Call

survey of analysts.

"Microsoft is not an attractive holding anymore,'' says Michael Hahn, a portfolio manager at

Merrill Lynch Asset Management

. The two funds he co-manages, the

(MAFOX) - Get Report

Focus 20 and

Premier Growth

funds, will only invest in companies that will grow earnings at least 25% a year, and that seems to leave Microsoft out, he says.

Taking Stock

Many fund managers like Hahn view Microsoft's core business, including desktop operating systems, as a yawner, with sales growth of personal computers expected to slow to 16% this year from 24% in 1999. Instead, they are dazzled by much higher growth rates in areas that Microsoft barely touches, such as business-to-business electronic commerce, telecommunications and portable computing.

Consider the immense popularity of handheld Internet enabled devices -- most of which don't use a Windows operating system. When

3Com

(COMS)

offered shares of its

Palm

(PALM)

division to the public March 2 at an initial price of 38, the shares shot up to 165 before closing at 95 1/16 for the day.

Microsoft will prove skeptics wrong, says Craig Chodash, analyst at mutual fund manager

J.&W. Seligman & Co.

Profits will surge on roaring sales of Windows 2000 in the second half of the year, he says. Anyone who dismisses Microsoft's ability to make money and take market share in B2B, Internet services and telecommunications is underestimating the company and its recent investments and alliances, he says. "You have some of the smartest people in Redmond, Wash.," he says. "It's not like they haven't seen this coming."

Coming from Behind

While its operating system dominates the desktop market, Microsoft has yet to gain much of a foothold in the handheld sector.

Windows CE

, the company's mobile entry, holds only a 14% market share of the market, while Palm holds a 78% share, according to research firm

International Data Corp.

Microsoft has made its battle against Palm a top priority and IDC predicts that by 2003, Microsoft's share in handheld devices will increase to 40%. On April 19 Microsoft will roll out its new

PocketPC

technology, which includes a new streamlined version of its Windows CE operating system, a media player and a reader for electronic books. And it has formed an alliance with

Texas Instruments

(TXN) - Get Report

, the leading maker of digital signal processors for wireless devices, to enhance Windows CE. Partnerships also have been formed with

Ericsson

(ERICY)

,

Qualcomm

(QCOM) - Get Report

and

Sony

(SNE) - Get Report

to put Microsoft's operating system and Mobile Explorer browser on those companies' products.

The Battle Moves to the Living Room

A second front for Microsoft is in the living room, where it is targeting its software to be the main platform for set-top devices and consoles. Its biggest nemesis is

America Online

(AOL)

, which is pinning its future on cable television and which seems to match Microsoft on strategic alliances and investments. Nine months after Microsoft's blockbuster $5 billion deal with

AT&T

(T) - Get Report

to guarantee it access to AT&T's cable boxes, AOL

acquired

cable giant

Time Warner

(TWX)

.

In other deals, Microsoft recently invested $200 million in computer retailer

Best Buy

(BBY) - Get Report

and

$100 million in

Radio Shack

owner

Tandy

(TAN) - Get Report

.

But AOL had already partnered with

Wal-Mart

(WMT) - Get Report

and

Gateway

(GTW)

.

Microsoft is also taking on computer gaming leader Sony next year by coming out with the

X-Box

gaming console, a machine that will run on Windows 2000, have a hard drive and enable Internet access and DVD movies. But critics say Microsoft is too far behind Sony's

PlayStation2

to be able to dent that market.

Sticking Its Nose In Business-to-Business

Meanwhile, many investors consider Microsoft a laggard in the booming market for B2B e-commerce, where revenue is expected to total $2 trillion a year by 2003, according to market research firm

Boston Consulting Group

.

But Microsoft is making a huge push. It has invested $60 million in application service providers

Digex

(DIGX)

and

Corio

to encourage the use of Microsoft's platforms, applications and services. And it invested $100 million in leading e-business facilitator

VerticalNet

(VERT)

to spur development and marketing of a new software services program.

Michael Tucker, an analyst with

Federated Investors

, a large Microsoft investor, says that while Microsoft may not be a pure B2B company like

Ariba

(ARBA)

, it stands to benefit greatly from growth in B2B commerce. "B2B is a whole lot of things, and it's running on top of Windows and Microsoft applications. They

Microsoft are in my mind a very big B2B player."

One reason some people doubt Microsoft's ability to compete in new markets is that it has proven itself fallible in a number of ventures. After three years of owning

WebTV

, Microsoft has just 1 million subscribers to its interactive TV service, a small dent in a market that now numbers 11 million. And last week it stopped development of its

TaxSaver

tax software, released in January, and announced it will distribute

H&R Block's

TaxCut program online.

Its Windows operating system also has been derided because of a tendency to freeze and force users to restart their computers.

Microsoft's advertising campaign for Windows 2000 has all but acknowledged the shortcomings by touting a new reliability feature. The system's weaknesses gave rise two years ago to

Linux

, a Unix-base operating system, which captured 4% of the operating system market in 1998, just below that of

MacOS

. And Linux packager

VA Linux Systems

(LNUX)

currently has a respectable market capitalization of $5.4 billion.

While Microsoft's stumbles have drawn headlines, however, they generally represent a negligible piece of the software giant's pie. And even Eric Hahn, one of the original investors in Linux seller

Red Hat

(RHAT)

, doesn't think Linux poses a threat to Microsoft. "I don't think Linux' success comes at Microsoft's downfall," Hahn says.

And while Microsoft's Internet businesses, such as

Microsoft Network

,

Expedia.com

(EXPE) - Get Report

and

Hotmail

, have yet to make money, few Internet ventures have, says J.W. Seligman's Chodash. But they are attracting sizeable audiences, he says, and points out that

Media Metrix

, which measures Web audiences, ranks Microsoft third, behind AOL and Yahoo!, in the number of unique users it reaches.

Still, Microsoft has to produce solid numbers before it will attract momentum investors, Chodash admits. In the last quarter, which ended Dec. 31, Microsoft's sales rose a respectable 18% to $6.1 billion and its earnings rose 22% to $2.44 billion. But that's not good enough when you compare it to telecom equipment maker

Cisco

(CSCO) - Get Report

, where revenue shot up 53% to $4.35 billion and earnings grew 49% to $906 million for the quarter ended Jan. 29. And investors have poured money into Cisco, raising its shares 45% so far this year.

Chodash says you can't judge Microsoft by a quarter that ended right before New Years 2000 and before the heralded rollout of Windows 2000. And analysts' expectations for slower growth the next two years are based on overly conservative estimates for Windows 2000 revenue, he says, and also discount Microsoft's ability to earn money in other areas. The historically high growth won't end, he says.

Husic, the wary portfolio manager of

Husic Capital

, says he expects to buy back into Microsoft once an outcome is reached. Microsoft has always been an able competitor, he says, and the stock will reflect that. "Microsoft has the luxury of being able to set their strategies based on others' experiences and leverage upon that," he says. In other words, even if they are late to certain markets, Microsoft has the money -- it will spend $3.8 billion this year on research and development and has about $30 billion in cash and short-term investments -- to buy itself market penetration in any market it can't conquer alone.

Some Microsoft watchers feel that in the long run, a pounding in the market may be just the kick in the pants Microsoft needs. "Microsoft is a great software development house," says Chris LeTocq, a software analyst at

Dataquest

. "But in desktop applications lack of competition has not inspired them to make great new creations."