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Gadgets gave Microsoft a boost during the Christmas shopping season, but Redmond remains heavily dependent on the sale of PC and server software.

On Thursday, Microsoft reported an 86 per cent jump in income for the unit that's home to the Xbox, Kinect, and Windows Phone 7, and the unit's revenue grew 55 per cent.

Chief financial officer Bill Klein said in a statement that the world's largest software company is "enthusiastic" about the consumer response to its holiday lineup of products, a line up that included the launch of Kinect. He said the company exceeded expectations by selling eight million units of the controller-free XBox addition t Xbox in 60 days.

Thanks to Kinect sales, Microsoft expects revenue for the unit will grow 50 per cent in the third quarter and 40 per cent for the fiscal year. There was no mention of sales expectations for phones running Windows Phone 7.

All those per centages are very impressive, but the reality is that E&D is a relatively small consideration for Microsoft. Operating income for the entertainment and devices unit was $679m on revenue of $3.6bn for Kinect, Xbox, and Windows Phone 7.

It was the business division, home to Office and the business applications, that was the company's top performer during the three months ending December 31, 2010. Operating income increased 34 per cent to $3.9bn, while revenue climbed 24 per cent to $6bn.

The server and tools unit - which handles SQL Server and Windows Server - had a solid quarter. Operating income increased 21 per cent to $1.7bn, with revenue growing 10 per cent to $4.3bn.

During the quarter, S&T's president Bob Muglia announced he's leaving the company. The departure is due to a disagreement with Ballmer over the so-called cloud. Ballmer believes Muglia has failed to sell enough Azure, Microsoft's Amazon-EC2-wannabe. Muglia's departure was not raised during Microsoft's earnings call with Wall Street analysts.</p

Meanwhile, the online unit - home to Bing - wobbled. In the period when Microsoft finally completed its integration with Yahoo! on search and ads, the group reported a loss of $543m compared to a $463m loss the previous year, despite an increase in revenue of 19 per cent to $691m.

Chief financial officer Peter Klein said there had been some "market-place disruption", but he expects the "benefits of integration to increase". Yahoo!-earned dollars will continue to dominate the revenue stream.

Operating income for the Windows and Windows Live unit dropped 39 per cent, while revenue fell 29 per cent to $3.3bn and $5bn. This partly due to the fact that Windows 7 launched in the fall of 2009. There was a spike in sales at launch, and at the same time, Microsoft came into a decent chunk of deferred cash from sales of the OS prior to launch. Microsoft claimed a total of 300 million Windows-7 licenses sold, with Windows 7 running on 20 per cent of internet-connected PCs.

Microsoft reported company-wide revenue of $19.9bn and earnings per share of $0.77. That was an increase of five and four per cent respectively, with the numbers adjusted for $1.7bn in deferred revenue from Windows 7. Without the Windows 7 adjustment, revenue and EPS grew 15 and 28 per cent. Income was flat landing at $6.6bn. ®

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