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Microsoft's Q1 results comfortably 'beat the Street' - but the Street seems to be getting a mite suspicious. The company yanked earnings up from $2.19 billion a year ago to $2.21 billion, but the increase came from a surge in income from company investments, up from $550 million to an impressive $1.13 billion.

Some analysts however churlishly declined to be impressed by how effective a VC/bank Microsoft is becoming, and pointed instead to a drop in profits from operations of $12 million. So Microsoft isn't doing particularly well as far as what it's supposed to do is concerned, but is making a lot of money from what it does as well. One analyst ominously observed that Microsoft was "pulling a legacy business which accounts for 70 per cent of their revenue."

That appearance of the L-word in the mouth of one of the people Microsoft feeds should be deeply worrying. Analysts have been listening to what Microsoft's been saying about .NET, like what they hear about subscription models, and are just maybe starting to think of the core business as doomed. While at the same time making sceptical noises about Microsoft's ability to pull off the switch to subscriptions.

Microsoft has certainly gone out of its way to make .NET look like a bigger risk and a bigger bet than it is, but the company may accidentally have created a Frankenstein's Monster of a vision that will ultimately disappoint, while knocking the shine off the core business along the way.

Maybe. Some of the shine is however coming off the core business anyway. Revenue from Office actually fell, while growth elsewhere wasn't exactly sparkling. CFO John Connors talked bravely of strong sales for Win2k server and rapid adoption of WinME, but analysts countered by sourly drawing attention to the big bang upgrade model Microsoft traditionally derives its growth from. How long can this go on?

Overall it's maybe not as bad as it looks, and from an analysts point of view, overall it's pretty good, because the numbers are still going up. Microsoft also took the $375 million charge related to the accounting switch in the quarter, and without that earnings would have been $2.58 billion.

But the traditional moneyspinner, Office, is currently on the slide, and the big investment gains were largely down to the money from Microsoft's stake in Transpoint, which sold to Checkfree, and the sale of Sidewalk to Ticketmaster. The overall analysts' verdict should be relieved, but worried about the future. ®

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