Microsoft on Thursday reported quarterly earnings in line with Wall Street expectations but down slightly from the same quarter last year, reflecting the challenges the software giant faces in an increasingly competitive market.

For the three months ending March 31, Microsoft reported revenue of US$14.45 billion, in line with the consensus polled by Thomson Financial and up slightly from the same quarter last year, when Microsoft brought in $14.40 billion in revenue.

Diluted earnings per share were $0.47, higher than Thomson Financial's consensus of $0.44 and down from the $0.50 reported during the same quarter last year.

However, Microsoft's earnings per share results included a charge of $0.15 per share for the fine the European Commission charged the company for failing to comply with the Commission's antitrust ruling.

Operating income was $4.41 billion, down from $6.59 billion for the same period last year. Operating income in the most recent quarter included a charge of $1.42 billion for the European Commission fine.

Microsoft highlighted growth in its entertainment and devices segment, which increased revenue by 68 percent compared to the same quarter last year, primarily due to sales of Xbox 360 game consoles. Cumulative console sales passed 19 million during the quarter, an increase of 74 percent from a year ago, Microsoft said.

Another bright spot was its server and tools business, which grew revenue by 18 percent compared to the same quarter in 2007. During the quarter, Microsoft made major product launches for Windows Server 2008, SQL Server 2008 and Visual Studio 2008.

While Microsoft, like most companies, would be impacted if the economic downturn in the U.S. gets worse, the company has weathered the slowdown so far and is insulated by its geographic reach and product diversity, Microsoft Chief Financial Officer Chris Liddell said on a conference call to discuss the earnings. Two-thirds of Microsoft's business comes from outside the U.S., he said. "So we have a good geographic spread, and the weak U.S. dollar helps us in that perspective."

Liddell had little to say about the impact of Vista sales on a decrease in revenue in Microsoft's client segment for the quarter compared to last year. "The only Vista impact really is the launch last year and a strong comparable, but that's not really a comment on this quarter," he said. Even if customers prefer XP over Vista, that's not a negative for Microsoft, he said. "If we sell a unit of XP rather than Vista, we're still relatively happy," he said.

While Microsoft has reported strong sales for Vista, the operating system has met with criticism from some quarters of the market, in part because of hardware compatibility issues and some bugs.

While results for the quarter were mostly flat, Microsoft revised its expectations for its full fiscal year, ending June 30. It now expects revenue in the range of $66.9 billion to $68 billion instead of its previous prediction of $59.9 billion to $60.5 billion. Diluted earnings per share for the year should be $2.13 to $2.19, rather than $1.85 to $1.88, Microsoft now says. In addition, the company now expects operating income to be $26.7 billion to $27.4 billion, instead of $24.2 billion to $24.4 billion.