Microsoft Corp. (MSFT) shares continued to slump Friday, after the world's largest software maker reported fourth-quarter profits soared nearly 37 percent on brisk computer sales, continued strength in the server and tools market, and a big tax benefit.

Shares of Microsoft fell 35 cents, or 1.3 percent, to $26.09 on the Nasdaq Stock Market (search). The stock fell 2 percent in after-hours trading, after closing Thursday at $26.44. The earnings results were released after the markets closed Thursday.

For the three months that ended June 30, Microsoft said net income climbed to $3.7 billion, or 34 cents a share, up from $2.69 billion, or 25 cents, a share a year ago. Sales rose 9 percent to $10.2 billion, up from $9.3 billion a year ago.

The results included a 9 cent per share tax benefit, a stock-based compensation expense of 3 cents per share and legal expenses of 5 cents a share.

Excluding those one-time items, earnings would have been 33 cents a share, topping the mean estimate of 31 cents among analysts polled by Thomson Financial. The revenue figure was in line with Wall Street's forecast.

One analyst surmised that a slight drop in operating income might have concerned some investors. "It was flat enough that people are probably saying, 'Wow, there wasn't a whole lot of year over year growth," said Matt Rosoff, an analyst with independent Directions on Microsoft.

For the fiscal year ending June 30, Microsoft reported earnings of $12.25 billion, or 1.12 cents a share, a nearly 50 percent increase from fiscal 2004, when its profit was $8.17 billion, or 75 cents a share. Revenue was $39.78 billion in fiscal 2005, up from $36.84 billion the previous year.

"2005 turned out to be a much better year than we expected," Chris Liddell, the Redmond, Wash., company's chief financial officer, said in a conference call.

Liddell cited a bigger-than-expected uptick in demand for personal computers, and double-digit growth in sales of servers and tools, as well as Xbox (search) consoles, video games and online game service subscriptions.

One of Microsoft's main cash cows, the Windows operating system (search), posted a $2.18 billion profit, up slightly from $2.03 billion a year ago. Revenue was $3.03 billion, up from $2.76 billion in the fourth quarter of 2004.

Profits in the Redmond, Wash., company's other big moneymaker, the division that includes its Office software suite, dipped slightly to $2 billion, down about $20 million from the same period a year ago. Revenue increased to $2.91 billion, up from $2.84 billion last year.

Rosoff pointed to a solid increase in unearned revenue, money the company must put aside and realize as profit over time. In the Office unit, alone, unearned revenue rose from $2.27 billion in the third fiscal quarter to $2.81 billion in the fourth quarter.

"That's a pretty big jump," Rosoff said. "That's an important thing for Microsoft. That business has been growing most slowly."

A 22 percent spike in Xbox sales narrowed the company's losses in its home and entertainment division to $179 million, compared to $340 million a year ago.

"I think that, to some degree, validates Microsoft's business model in getting into the console space in the first place," Rosoff said. "Microsoft is selling more games and fewer consoles, and that's really the business model. They acknowledged it would be expensive to get a foothold in the market."

The company's mobile and embedded devices unit, which makes software for cell phones and personal digital assistants, also brought in more money. It posted a 39 percent gain in revenue, shrinking its quarterly loss to $14 million, compared to $39 million a year ago.

"It wouldn't shock me if mobile embedded reached profitability sometime soon," said Joe Wilcox, an analyst with Jupiter Research.

Strength in the server and tools market boosted profits in that unit to $800 million, up from $608 million a year ago.

Microsoft has rosy predictions for its prospects. It's slated to release a new Xbox console this holiday season. SQL Server 2005, a new version of the Office software suite and an oft-delayed update of Windows, code-named Longhorn, are also in the pipeline.

For the coming quarter, which ends Sept. 30, Microsoft expects earnings of 29 cents to 31 cents a share on revenue of $9.7 billion to $9.8 billion.

For the coming fiscal year, which ends June 30, 2006, the company said it expects earnings of $1.27 to $1.32 a share, on revenue of $43.7 billion to $44.5 billion.