Merrill Lynch

analyst Henry Blodget has assumed coverage of

Microsoft

(MSFT) - Get Report

, and this morning he hit the software maker with a downgrade, citing the likelihood of slower-than-expected long-term earnings growth.

Shares of Microsoft, which is based in Redmond, Wash., recently slipped $1.06, or 1.6%, to $63.56 in morning trading on the

Nasdaq

.

In his report, Blodget cut the software bellwether's long-term rating to accumulate from buy, saying Microsoft's long-term "potential upside" wasn't "particularly compelling" at its current price.

While Blodget kept his earnings per share and revenue estimates unchanged, he said year-to-year earnings per share growth of more than 10% would be "very difficult" given Microsoft's dependence on sales of software for PCs. Blodget expects operating profit from the desktop business to grow "only a modest 5% to 7% per year over the next five years."

"Desktop is such an enormous percentage of operating profit that if its growth falters, nothing else matters," Blodget said.

Blodget expects 2001 earnings of $1.81 a share, compared with 2000 earnings of $1.70 a share. He also projected a profit of $1.97 a share in 2002. He also indicated that Microsoft's long-term performance depends on continued strong gains in its enterprise and consumer markets. According to

First Call/Thomson Financial

, analysts expect earnings of $1.81 a share in fiscal 2001 and $2 in 2002.

For the 2001 calendar year, Blodget pointed to four factors that will weigh heavily on Microsoft's performance -- the success of the Office XP launch, the rate of Windows 2001 upgrades, the amount of momentum in the company's enterprise business and the resolution of the legal situation with the

Justice Department

.

Blodget also indicated that the company's planned Xbox gaming console "is a potentially large opportunity," but will still be "immaterial" over the next two years.