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Updated from 8:19 p.m. EDT

REDMOND, Wash. -- With the announcement of a big cash-distribution plan under its belt,


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now must answer one big question still on investors' minds: Where's the growth going to come from?

Microsoft tried to answer that question Thursday at a relatively uneventful annual analyst day. The software giant pointed to a number of growth avenues, ranging from new types of PCs such as the Tablet and Media Center PC, to selling cheaper software in emerging markets, to online advertising to gaming. But the company did little to dispel some investors' perception that it is becoming a more mature, slower-growth company.

The company's long-anticipated

announcement more than a week ago of a plan to distribute its enormous cash hoard, currently sitting at $60.6 billion, seemed only to feed into that perception. The plan includes a one-time special dividend of $3 a share, a $30 billion share-buyback program over four years and doubling of the company's regular dividend on an annual basis to 32 cents a share.

Just two days later Microsoft posted an impressive 14% growth in revenue in fiscal 2004 at a time when other software vendors are still suffering from shrinking sales.

"We had an amazing blow-out fiscal year 04," beamed a self-described "super pumped up" CEO Steve Ballmer. But he pointed out that the law of large numbers make growth that much harder for Microsoft, noting only three or four other companies have posted operating income at Microsoft's level, at $13.8 billion in fiscal 2004, excluding some charges.

I know that when we think about what's possible, we think we can do a very, very good job, and a very, very good job ... over the next four years might be able to grow a whole Nokia, a whole Siemens, potentially even a whole Intel," Ballmer said, with growth measured by the increase in operating income. "I think there is incredible growth -- growth that should amaze, growth that should impress."

In fiscal 2005, however, analysts on average are looking for revenue to grow more slowly, at only 5.6%, according to Thomson First Call. Earnings are expected to decline a penny in fiscal 2005 because of the company's cash-distribution plan and then jump 11.3% in fiscal 2006.

Despite the steady parade of Microsoft executives cheerleading about growth Thursday, not everyone was convinced. "The innovation pace is not that dramatic ... not powerful enough to pull the tech sector out of the doldrums," said Trip Chowdhry, a software analyst with FTN Midwest Research.

"None of this is revolutionary, none of this is ground-breaking," he added, arguing that the company has not successfully shown what drives growth and when.

Others, however, were impressed with Microsoft's Media Center PC, first unveiled a couple years ago.

The Media PC offers both traditional PC applications and media-centric applications to more easily manage and play with -- through a remote control -- photos, video and music. It also includes a TiVo-like personal video recorder to save television shows on a hard drive, and 14-day programming guide. Microsoft views the Media PC as a way to sell consumers a second PC for their home.

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IDC estimates sales of Media Center PCs will grow from 1.5 million units in 2004 to 20 million in 2008, according to Microsoft. But in a sign of its limited reach to date, only a handful of the approximately 300 investors, analysts and journalists at the analyst day raised their hands when asked by Microsoft Senior Vice President Will Poole how many people have a Media Center PC.

TV-PC Disconnect

One problem with Media Center PC, says Chowdhry, is there's a disconnect between TV and PC use that is difficult to overcome. Television, he noted, is a group event while the PC is an individual experience. Tech analysts aren't a good judge of its success; media analysts or couch potatoes would be a better gauge, Chowdhry quipped.

One thing that may help Media Center PC shipments increase, however, is the release this fall of the Media Center extender, a small box that sits on the top of a television set and connects a Media Center PC from another room to the television set. That could overcome one hurdle in adoption of the Media Center PC -- consumer resistance to putting a PC in their living room. Microsoft also is planning to sell a title for its Xbox game console that will enable Xbox to turn into an extender.

"Personally, I would like to have that in my house," SG Cowen analyst Drew Brosseau said of the Media Center PC.

Similarly, Brosseau noted that the Tablet PC, now in its fourth generation since its launch about 18 months ago, has been getting better; something Brosseau said he'd like as a replacement to his current laptop. (He is recommending Microsoft stock and has firm hasn't done banking with Microsoft.)

Both Media Center and Tablet PCs are potential areas of growth in the next 12 months, before the release of Longhorn, the next version of the Windows operating system, Brosseau pointed out. Analysts and investors are viewing Longhorn as a big source of future growth, but it's not due out in beta form until the first half of 2005. Chairman and Chief Software Architect Bill Gates seemed to temper expectation of Longhorn driving big sales.

During a lunchtime address, Gates pointed out that Microsoft is not raising the cost of the operating system with Longhorn's release and that about 90% of sales of the operating system come with new machines. Ballmer later echoed that sentiment, saying he believes that the financial analyst community has overemphasized the revenue impact of Longhorn.

"The company is playing possum," retorted Sanford C. Bernstein analyst Charlie Di Bona, who is expecting Longhorn to drive measurable revenue growth. Longhorn actually could drive hardware replacements, noted Di Bona, who has an outperform rating on Microsoft. (His firm doesn't do investment banking.)

Conversely, Linux open-source software is now the biggest cloud hanging over Microsoft's growth story, Di Bona argued.

Open Source, Games, Search and Piracy

Kevin Johnson, group vice president of worldwide sales, marketing and services, served up several customer examples and research studies showing that the cost of Microsoft is actually cheaper than free Linux software, which rivals such as

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bundle with other services that they charge for.

Many of those studies have been out there for some time, Di Bona noted. The issue is whether customers care about the facts or what they want to believe, he said, suggesting in some cases it still may be the latter.

Another area hurting Microsoft's growth is piracy. Worldwide, 36% of personal computers are using unlicensed versions of Windows, the company estimates. That percentage skyrockets to 92% in Asia and falls to 22% in the U.S. Microsoft has created a cheaper, slimmed-down version of Windows, called Windows XP starter edition, to sell into emerging markets. The company has announced pilots in Thailand and Malaysia.

One of Microsoft's relatively new ventures -- Xbox -- remains in the No. 2 position behind leader


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, acknowledged Bryan Lee, corporate vice president and CFO of the home and entertainment division. Microsoft also continues to lose money on every Xbox sold.

But the company is "laser-focused on being number one" in the next cycle, Lee added. That cycle will be driven by the software, rather than hardware, as in the past, Lee argued, and the company that defines interactivity with friends, other media, PCs and other devices will win the next cycle.

"We think we've proven we can play; our goal now is to prove we can lead," Lee said.

For the first time, Microsoft also unveiled a new PC search tool. Right from an application such as Outlook, a user can search his entire PC by typing in a key word, with the results showing up in milliseconds and then easy to categorize by document, email, etc.

Microsoft also is experimenting with including a concurrent search option that also looks for the word on the Internet and displays the results on the right side of the screen, which could offer more advertising opportunities, said Yusuf Mehdi, corporate vice president of MSN.

That new search tool is a direct challenge to


, which already has announced its own plans to capitalize on Microsoft's current painfully slow PC search feature by offering its own.

Ballmer said Thursday that the company always wants to be first, but if it's not, it wants to be a fast follower. He summed up the company's philosophy this way: "Be first, and if you're not first, run extra, extra hard and be sure you're still in the game.

"You want to be first to cool. But if you're not going to be first to cool, don't get scared away. Be first to super-cool," he added. And "you want to really be the first guy to make a lot of money."

Although Microsoft may be the follower in search -- the company recently unveiled its first streamlined search site remarkably similar to Google and is working on its own algorithm-driven engine -- it's not too late, said Tony Ursillo, an analyst with Loomis Sayles & Co., which holds Microsoft shares. Search, he said, is a high-margin and potentially very large market.

"The challenge Microsoft has going forward is to find really big markets that still offer good growth," he added.

However, the identity of those markets didn't necessarily become crystal clear at Microsoft's analyst day. As Ursillo observed, "I don't think most people are going to leave this meeting with a lot of new information."