Updated from 8:51 p.m. ET

The monopolist is making plenty of money in tough times -- but not as much as Wall Street would like.

Microsoft

(MSFT) - Get Microsoft Corporation (MSFT) Report

Thursday warned that first-quarter earnings and revenue would fall short of analyst expectations. The stock dropped in after-hours action as investors worried about the implications of a slowdown at tech's most dependable producer.

The software colossus, which last month fended off a government breakup plan, also beat analysts' expectations for its fiscal fourth quarter. Excluding a $2.6 billion investment loss, the company earned $2.75 billion on revenue of $6.6 billion, or 43 cents per share. A year ago, the company earned 44 cents per share on $6.1 billion in sales.

Analysts were expecting earnings of 43 cents per share on $6.5 billion in revenue, according to Multex.com.

But the software giant took down guidance for next quarter. It said it expects earnings of 39 cents to 40 cents for its September quarter on $6 billion to $6.2 billion in revenue. Analysts are currently expecting 45 cents in earnings on $6.3 billion in revenue, according to Thomson Financial First Call.

It affirmed analysts' estimates for fiscal 2002, however, projecting full-year EPS guidance of $1.91 to $1.95 per share on revenue of $28.8 billion to $29.5 billion for the year ending June 30, 2002. Analysts are expecting earnings of $1.94 per share and $28.8 billion in revenue.

On its conference call with analysts, CFO John Connors said PC growth during the companies 2001 fiscal year was in the middle of the 7% to 8% range the company previously predicted. But the company also said that growth in PCs for the June quarter was worse than the March quarter, and that it didn't see an uptick coming until the end of 2001.

"For the first fiscal quarter, we expect very soft to flat PC demand, and then we're looking for demand to improve somewhat during the year," Connors said. "We expect another full year of modest growth, but slower than this year by one to two percentage points. So we're expecting mid to low single digit PC growth for fiscal 02."

For a company whose revenues are still largely tied to the PC desktop and the applications it powers there -- a market that it holds a death grip over -- that's not exactly a positive indicator.

In regular trading, Microsoft's stock closed up $1.94, or 2.8% at $72.51. But after it released its results, the stock traded down on

Instinet

to $69.75, or 3% lower.

"It's not like Microsoft can grab market share from someone else," says Greg Vogel, an analyst at

Banc of America Securities

. "The risk here is what if PC unit growth doesn't really come back as quickly as expected, and what if

Windows XP

doesn't do as well or doesn't have the functionality that management's looking for? Either of those things would lead to lower numbers than Microsoft is putting out." (Vogel's firm hasn't done underwriting for Microsoft.)

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Microsoft is promoting the next version of its operating system, dubbed Windows XP, heavily this year. It's scheduled to be released Oct. 25.

Microsoft preannounced

last week that its revenue would be $6.5 billion to $6.6 billion, higher than the $6.46 billion analysts were expecting at the time. Since then, analysts also took up their earnings expectations by a penny, back to where they were before Microsoft guided down during its fiscal third-quarter conference call. The company's results today met the higher number.

But while the software giant's results look good against the current backdrop of software companies that are either missing revenue numbers or making up for slower software sales with lower-margin services revenue, the weight of the economy is being felt even on this Goliath's shoulders. Its earnings were a penny lower than the same period last year and it's projecting even slower earnings growth going forward as it invests in new products like Windows XP and its

Xbox

game console.

"What we're seeing is a headwind where the company's operating income is growing more slowly than revenue," says Tim Gaumer, senior equity analyst at

Transamerica Mutual Funds

, which holds Microsoft shares. "That headwind is coming as they build out the infrastructure and the pre-release promotional costs for the XBox and Windows XP."

Gaumer was optimistic on the company's results, though, saying the flip side of the earnings lag is that Microsoft should experience accelerated earnings growth in fiscal 2003. "That headwind will eventually turn into a tailwind," he says.

Still, for the likes of BofA's Vogel, the company's banking a lot on products that don't exist yet, and it's sacrificing future earnings to do so. Which, in his view, means the company isn't worth as much as it once was.

"Earnings are growing slower, with more costs being incurred for development," Vogel says. "That's lowering the profitability picture, and retarding the overall earnings growth picture. When you look at the overall revenue growth in comparison, it's just not as profitable as it used to be, so as an investment, people are not going to pay as much for it."

The results came during a quarter when Microsoft

dodged the break-up bullet in the government's antitrust case against the company, while at the same time getting

branded as having illegally maintained its operating system monopoly. The company also faced increased scrutiny over its forthcoming Windows XP operating system, released its Office XP suite of personal productivity software, and after the quarter's end,

loosened its death-grip over the PC desktop by agreeing to modify its contracts with computer manufacturers.

Still, the company has enjoyed increased momentum in both its business and stock performance in recent months. Its shares are up 70% since last December, and many investors are once again jazzed about the firm's litany of new products and initiatives, including its .Net Internet strategy. Moreover, the company seems emboldened by the appeals court decision that essentially removed the possibility of its breakup.

Microsoft's Good Times
Results are rosy, but future may be softer

As evidence of that, the company just yesterday asked for a new hearing in the case. While many law experts and analysts saw the court's ruling as at least a partial victory for the company because it essentially overturned a lower court's breakup order, Microsoft said the appeals court "overlooked -- or misinterpreted" important evidence.

Today, the court ordered the government to file a response to Microsoft's request by Aug. 3, and that Microsoft would not be allowed to reply to the government's response. Increasingly, legal experts say Microsoft may be trying to slow the case as much as possible so new sanctions can't be rendered against it before it releases Windows XP in October.

Still, using Thursday's results as a gauge, it seems like being a monopoly isn't as easy as it used to be.