Updated from 4:49 p.m. EST


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on Thursday beat analysts' second-quarter earnings estimates and boosted its third-quarter earnings target. But the company warned that it didn't see robust growth returning to the world economy or to the PC business.

For its second quarter ended Dec. 31, the software giant posted net income of $2.28 billion, or 41 cents a diluted share. Those figures include a charge of $660 million, or 8 cents a share, associated with consumer class-action lawsuits. Excluding the charge, earnings were 49 cents a share; Wall Street analysts expected the Redmond, Wash., giant to earn 43 cents a share, according to Thomson Financial/First Call. A year ago, the company earned 47 cents a share on revenue of $6.55 billion.

Microsoft also offered guidance for its third quarter, saying it expects to earn 50 to 51 cents a share on revenue of $7.3 billion to $7.4 billion. Wall Street had been expecting the company to earn 47 cents on revenue of $7.49 billion in the quarter, which closes March 31.

After rising $1.99 to $69.86 during regular trading Thursday, Microsoft shares dropped $1.55 in after-hours action, to $68.31.

Not Bad

"I think it was a good quarter," says Alan Loewenstein, co-portfolio manager of the


John Hancock Technology fund, a Microsoft shareholder. "People are buying personal computers," he says, adding that Microsoft's results correspond to recent positive comments from

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But Bill Gates's charges weren't taking quite as sanguine a line as all that. Microsoft CFO John Connors said in a postclose earnings conference call that the company was now more pessimistic about the PC market than it has been in the recent past. As a result of that fact, a weak market for Microsoft Office software in Japan, and a bigger-than-expected shift toward multiyear software licensing agreements in place of one-time purchases, the company trimmed its operating earnings forecasts for the second half of 2002.

"We do not think we are in a recovery leading to positive growth in the near future," Connors said. "It does appear that the current challenges have not yet passed."

Connors said that though the company hadn't done detailed forecasting for fiscal 2003, judging by analysts' current forecasts for Microsoft and other technology firms, people are expecting quite a strong recovery. But "from our perspective, it's premature to call that," he said. "We don't see a booming recovery anytime soon."

No Need to Wear Shades

For the fiscal year ending June 30, Microsoft's says revenue will be in the $28.8 billion to $29.1 billion range, higher than the First Call consensus of $28.6 billion. Operating income, says the company, should fall in the range of $11.5 billion to $11.8 billion, with diluted earnings per share ranging from $1.57 to $1.60, including 28 cents in charges. That's in line with the current consensus of a $1.83 profit.

Projected operating income for the second half of the year, said Connors, is about $400 million to $450 less than what analysts would have come up with had they integrated the December quarter's results into prior guidance. Revenue will be roughly $200 million lower than previously forecast; cost of goods sold will be $200 million higher, given a better-than-expected consumer business, which includes the launch of the company's Xbox videogame system; and operating expenses will be about $70 million higher, he said.