Posting fiscal 2010 first-quarter financials before market opening this morning, Microsoft (MSFT) said it earned 40 cents a share on revenue of $12.92 billion.

And while net income per share was down 17 percent from a year earlier thanks to declining revenue in all but one of the company’s businesses, it still bested analysts’ estimates, which called for a profit of 32 cents a share.

And although sales fell for the third consecutive quarter, dropping 14 percent to $12.9 billion, they too topped forecasts of $12.4 billion.

The software giant attributed the performance to strong Windows and Xbox demand and to cost discipline.

Shares in the company spiked more than 10 percent in premarket stock trading.

(You can peruse slides of the financial results here and a liveblog of the conference call here.)

“We are very pleased with our performance this quarter and particularly by the strong consumer demand for Windows,” said Chris Liddell, CFO at Microsoft. “We also maintained our cost discipline, which allowed us to drive strong earnings performance despite continued tough overall economic conditions.”

Here is the press release on the Q1 results (without performance tables, which you can see here):

Microsoft Reports First-Quarter Results

Windows and Xbox exceed expectations due to strong consumer demand; cost discipline drives earnings per share growth.

REDMOND, Wash.–Oct. 23, 2009–Microsoft Corp. today announced revenue of $12.92 billion for the first quarter ended Sept. 30, 2009, a 14% decline from the same period of the prior year. Operating income, net income and diluted earnings per share for the quarter were $4.48 billion, $3.57 billion and $0.40 per share, which represented declines of 25%, 18% and 17%, respectively, when compared with the prior year period.

These financial results reflect the deferral of $1.47 billion of revenue, an impact of $0.12 of diluted earnings per share, relating to the Windows 7 Upgrade Option program and sales of Windows 7 to OEMs and retailers before general availability. Adding back the deferred revenue, revenue totaled $14.39 billion, a 4% year-over-year decline, and EPS totaled $0.52 per share, an increase of 8% over the same period of the prior year.

“We are very pleased with our performance this quarter and particularly by the strong consumer demand for Windows,” said Chris Liddell, chief financial officer at Microsoft. “We also maintained our cost discipline, which allowed us to drive strong earnings performance despite continued tough overall economic conditions.”

Windows 7 and Windows Server 2008 R2 launched globally on Oct. 22 as anticipated. Also during October, Microsoft released Microsoft Exchange Server 2010 to manufacturing and in July announced a strategic partnership with Yahoo! Inc. to provide search results for their global properties.

“The worldwide launches of Windows 7, Exchange Server 2010 and Windows Server 2008 R2 are exciting milestones for Microsoft, our partners and customers,” said Kevin Turner, chief operating officer at Microsoft. “We are pleased by the early positive response we are receiving for these products.”

Business Outlook

Microsoft is reducing operating expense guidance to $26.2 billion to $26.5 billion, for the full year ending June 30, 2010.

Management will discuss first-quarter results and the company’s business outlook on a conference call and webcast at 7:30 a.m. PDT (10:30 a.m. EDT) today.

And it’s not going to be getting one anytime soon, either, despite rumors that Microsoft is working on one and courting developers to port their iPhone apps over to it. Which is not to say that the company isn’t building an answer to Apple’s App Store–it is. Redmond is just building it for Windows Mobile, not Zune.

“We’re trying to get out of the business of building similar things in the company that don’t work together, and the Windows Mobile team is tackling the challenge of a mobile apps marketplace right now,” Zune marketing manager Brian Seitz told TechFlash. “We don’t necessarily line up perfectly with that, to take advantage of whatever ends up coming out of that from the Zune HD standpoint, but down the line if there’s a way that we can plug into what they’re doing, I’m sure we’ll look into whether that makes sense for the business.”

But by then, of course, it will be too late. Arguably, it’s too late already. As Apple gleefully noted during its annual music event last week, NPD pegs the company’s share of the portable media device market at nearly 74 percent. Meanwhile, Microsoft’s tops out at an estimated 1.1 percent.

Raising that share was already a Sisyphean task for Microsoft (MSFT), and it has only become more difficult now that Apple (AAPL) has introduced not just a new iPod nano with a built-in video camera and FM radio, but also a more inexpensive iPod touch.

Microsoft is pricing the 16GB Zune HD at $219.99 and the 32GB version at $289.99. But you can get a 32GB iPod touch for $299. And you can get an 8GB touch for $199. Now, granted, the touch offers only half the storage of the 16GB Zune HD, but it supports the iTunes App Store. And if you really want that extra 8GB, you can always buy an iPod nano, which shoots video and at $179.00, is $30 cheaper than the Zune HD.

Kai-Fu Lee’s uneventful departure from Google to start a Beijing incubator really belies the spectacle that attended the beginning of his tenure at the search giant.

Lee’s train-hopping from Microsoft (MSFT) to Google (GOOG) back in 2005 touched off a five-month pitched battle marked by all manner of inanities. Among them was this account of Microsoft CEO Steve Ballmer’s now-infamous alleged chair-tossing tantrum told by former Microsoft Distinguished Engineer Mark Lucovsky:

Prior to joining Google, I set up a meeting on or about November 11, 2004 with Microsoft’s CEO Steve Ballmer to discuss my planned departure…At some point in the conversation, Mr. Ballmer said: “Just tell me it’s not Google.” I told him it was Google.

At that point, Mr. Ballmer picked up a chair and threw it across the room hitting a table in his office. Mr. Ballmer then said: “F–king Eric Schmidt is a f–king p–sy. I’m going to f–king bury that guy, I have done it before, and I will do it again. I’m going to f–king kill Google.”

Thereafter, Mr. Ballmer resumed trying to persuade me to stay…Among other things, Mr. Ballmer told me that “Google’s not a real company. It’s a house of cards.”

And there were others as well. Certainly, the sourcing of some of Microsoft’s legal docs was amusing. As I wrote at the time:

Kai-Fu Lee may be a top-drawer research engineer, but his understanding of the mechanics of Microsoft’s desktop environment leaves a bit to be desired. Turns out Microsoft recovered Lee’s employment contract with Google, which figures prominently in its suit against the search leader (see “And, if you’re beaten by Microsoft thugs, our generous health plan will cover you”), from the “recycle bin” of one of Lee’s computers. Odd that Lee would choose to browse offers from his employer’s rivals on his work computer. Odder still that having done so, he would neglect to scrub them with a secure erase program. Clearly, he must have been a bit lightheaded after learning of Google’s promise to allow his stock options in the company to vest even if he was unable to start work for a year.

Then there was Lee’s testimony about a meeting with Bill Gates, during which the Microsoft chairman blew his top, shouting that the Chinese people and the Chinese government had “f—ked” Microsoft.

And, finally, there were the videotaped depositions, like one from Ballmer that included this great bit:

Ballmer: “Kai-Fu had a–a distinct commitment and responsibility on behalf of the company for being the senior executive here in Redmond, with responsibility for godfathering, shepherding all of our R&D activities in China. It’s a structure we also use for India. We have a senior executive with knowledge of India be the R&D godfather for India, encourage work to go there, shepherd, and–and mentor people in the area. Kai-Fu had that broad, important responsibility for China.”

Deposing lawyer: “This term, ‘godfather’–is that an official title within the Microsoft organization?”

Hard to believe Kai-Fu Lee’s tenure at Google China ended with such a whimper, although there are many quiet rumblings of trouble he had with Google’s top execs in Silicon Valley, given the bang it began with.

But it did. And here endeth the history lesson.

“This is the one that stuns me, that people haven’t figured it out,” Ballmer said of investor response to the “boatloads of value” the deal will supposedly bring to Yahoo. “It’s sort of, like, unbelievable.”

As Kara quipped earlier this morning, “Believe it, Steve, especially since everyone thinks Microsoft pulled a fast one on Yahoo.”

And so, to convince them otherwise, Microsoft (MSFT) and Yahoo (YHOO) have fired up the “Choice. Value. Innovation.” propaganda machine to reassure us all that this is exactly what the their partnership will bring. Below, the first broadsides to issue from that machine, which Microsoft has confirmed are authentic: What Experts are Saying About the Microsoft-Yahoo! Deal and The Yahoo!-Microsoft Search Deal: Benefits to Consumers, Customers and the Internet.

The Yahoo_-Microsoft Search Deal – Benefits to Consumers_ Customers and the Internet

What Experts are Saying about Microsoft-Yahoo Deal

Good thing Wall Street wasn’t expecting much from Microsoft. Because it didn’t get it.

After market close Thursday, the Redmond, Wash.-based tech giant reported that fiscal fourth-quarter net income fell to $3.05 billion, or 34 cents a share, from $4.3 billion, or 46 cents a share, in the same period a year earlier.

Revenue for the period ended in June fell 17 percent to $13.1 billion. Wall Street had been looking for earnings of 36 cents a share on $14.37 billion in revenue, according to data compiled by Thomson Reuters.

Online advertising revenue decreased $86 million, or 14 percent, to $529 million, primarily reflecting a decline in display advertising.

The company missed estimates by $1 billion. Gruesome.

“Our business continued to be negatively impacted by weakness in the global PC and server markets,” CFO Chris Liddell said in a statement. “In light of that environment, it was an excellent achievement to deliver over $750 million of operational savings compared to the prior year quarter.”

Microsoft shares are trading down more than eight percent at $23.50, as I write this.

Below is the full earnings release. BoomTown’s Kara Swisher will be liveblogging the earnings call later this afternoon.

Microsoft Reports Fourth-Quarter Results

The company delivered operational efficiency and innovation in a difficult environment

REDMOND, Wash., July 23, 2009–Microsoft Corp. today announced revenue of $13.10 billion for the fourth quarter ended June 30, 2009, a 17% decline from the same period of the prior year. Operating income, net income and diluted earnings per share for the quarter were $3.99 billion, $3.05 billion and $0.34 per share, which represented declines of 30%, 29% and 26%, respectively, when compared with the prior year period.

“Our business continued to be negatively impacted by weakness in the global PC and server markets,” said Chris Liddell, chief financial officer at Microsoft. “In light of that environment, it was an excellent achievement to deliver over $750 million of operational savings compared to the prior year quarter.”

The financial results for the fourth quarter ended June 30, 2009, included the deferral of $276 million of revenue related to the Windows 7 Upgrade Option program that was announced on June 25, 2009. This revenue deferral reduced earnings per share by $0.02.

The fourth-quarter financial results also included $193 million of legal charges, $108 million of impairments to investments and $40 million of additional severance charges related to the previously announced plan. Operating expenses were reduced by $105 million of capitalized research and development expenses due to the technical milestones reached for Windows 7. Combined, these items also reduced earnings per share by $0.02.

Significant product milestones were achieved in the quarter including the releases of Windows 7 release candidate, Windows Server 2008 R2 release candidate, as well as Bing, Microsoft’s search engine designed to help people make faster, more informed decisions.

For the fiscal year ended June 30, 2009, Microsoft reported revenue of $58.44 billion, a 3% decline from the prior year. Operating income, net income and diluted earnings per share for the year were $20.36 billion, $14.57 billion and $1.62, which represented declines of 9%, 18% and 13% respectively.

“While economic conditions presented challenges this year, we maintained our focus on delivering customer satisfaction and providing solutions to our customers to save money,” said Kevin Turner, chief operating officer at Microsoft. “I am very excited by the wave of product and services innovations being delivered in this next fiscal year.”

Business Outlook

Microsoft is providing operating expense guidance of $26.6 billion to $26.9 billion, for the full year ending June 30, 2010.

Management will discuss fourth-quarter results and the company’s business outlook on a conference call and webcast at 2:30 p.m. PDT (5:30 p.m. EDT) today.

In remarks at Microsoft’s Worldwide Partner Conference today, COO Kevin Turner said Microsoft has settled on a location for the retail stores it announced earlier this year: Within spitting distance of Apple stores. “We will have some retail stores that are opened up right next door to Apple stores this fall,” he said.

There goes the neighborhood, right? Anyway…

So Microsoft is going to play McDonald’s (MCD) to Apple’s Burger King (BKC). Makes sense. Apple’s retail locations are very well chosen. Microsoft, if it’s going to go this route, would be wise to have stores there as well. As economic theorists Charles ReVelle and Harold Hotelling once observed, “The best position for a new vendor is back-to-back with the well-positioned first vendor, allowing an even split of the market. Any other position of the new vendor would have given that new entrant a smaller market share.”

And one could argue that Redmond might benefit from a retail presence that brings all its wares together in a single “shopping experience”–Windows, Xbox, Zune. All that partner hardware. Surface. Put a Project Natal booth at the back of the store to draw foot traffic and who knows what might happen?

Between November 2008 and March 2009, Redmond hired away five Yahoo veterans. First, Sean Suchter, VP of search technology at Yahoo, left to become general manager of Microsoft’s Silicon Valley Search Technology Center. Then Yahoo search scientist Qi Lu followed him after being tapped as president of Microsoft’s Online Services Group. Soon after that, Larry Heck, former VP of search & advertising sciences at Yahoo Labs, accepted a job in the R&D department of the software giant’s online services division. Jan Pedersen, who once served as a chief scientist and VP of Yahoo’s Search and Advertising Technology Group and Dayne Sampson, Yahoo’s VP of operations for search and advertising, followed.

Now comes word that three more Yahoo execs have taken jobs at Microsoft (MSFT). Knut Risvik, Yongdong Wang and Kevin Timmons, all Yahoo veterans, are now headed to Microsoft.

Risvik, once a chief architect at Yahoo (YHOO), will work on Microsoft’s search platform and infrastructure. Timmons, formerly a Yahoo VP of operations, has been charged with running the company’s data center expansion. What Yongdong Wang, once a VP of international search, will do remains to be seen. He is, however, reporting to Harry Shum, Microsoft’s corporate vice president for search product development, so presumably he’ll be doing something similar.

A nice little trifecta for Microsoft and one that surely inspired Yahoo CEO Carol Bartz to drop a frustrated F-bomb or three. As I said back in March: If Yahoo employee defections to Microsoft continue apace, there may come a day when Redmond will no longer need to buy the struggling company’s search business. It will already have acquired it.

Said Microsoft: “Windows 7 Professional and Ultimate customers will have the option to downgrade to Windows XP Professional from PCs that ship within 18 months following the general availability of Windows 7 or until the release of a Windows 7 service pack, whichever is sooner, and if a service pack is developed.”

This means OEMs could still be selling XP-equipped PCs as late as April 2011. Which is astonishing when you recall that the company originally planned to cut off sales of XP on Jan. 30, 2008, one year after Windows Vista debuted. But the poor reception given Vista and the unwavering loyalty of XP users caused the company to extend that deadline to June 30, 2008. A few months later, Microsoft (MSFT) pushed the deadline out further, to Jan. 31, 2009. Then, amid reports that more than a third of all new Vista PCs were being downgraded to XP, Redmond extended the XP deadline to May 30, 2009. The company subsequently pushed that extension out to April 22, 2010.

And now we’re into mid-2011.

Early gains do not guarantee a long-term increase in search market share, and thanks to its experience with Live Search and Live Search Cashback, Microsoft (MSFT) knows this better than anyone. That said, Redmond’s new search engine, Bing, does seem to be making some solid progress.

For example, a comScore (SCOR) report said earlier this week that Microsoft’s share of the search market has risen to 11.1 percent from 9.1 percent since Bing’s debut.

And now market researcher Hitwise reports that Bing is among the top 20 most popular Web sites in the U.S. and among the top 10 in Canada (click on chart below).

“In the U.S., Bing ranked 17th among all Web sites out of over 450,000 Web sites, up from 5120 the week before the official launch when the Web site was merely a placeholder,” Heather Dougherty, Director of Research at Hitwise, wrote in a blog post. “Within the Search Engines category, Bing ranked 4th out of the search engines tracked by Hitwise…In Canada, Bing hit the top 10 among all Web sites during the first week of launch and captured 1% of all Canadian Internet visits last week. Bing also ranked 3rd last week in terms of the market share of visits within the Search Engines category behind Google Canada and Google.”

Not bad. Of course, early successes like these are driven as much by marketing as by technological prowess and positive user experience. And right now, Bing’s got some major marketing dollars behind it. But those will only last for so long.

And as Google (GOOG) CEO Eric Schmidt likes to point out, you really can’t expect to buy your way into the search market. “You don’t just buy it with ads,” Schmidt told Fox Business earlier this week. “You earn it, and you earn it customer by customer, search by search, answer by answer.”

Nintendo really should have cut its losses yesterday and cancelled its E3 press conference after Microsoft’s (MSFT) Project Natal demo. How could it possibly have trumped Redmond, Wash.’s controllerless game control system? Certainly not with the Wii Vitality Sensor it showed off today.

The peripheral’s big gaming advancement? It records a user’s vital signs. A nice addition to the Wii Fit, but a far cry from Microsoft’s efforts to turn gamers themselves into controllers.

As I said yesterday, “sucks to be Nintendo.” And today, it most certainly does.

The $200 million verdict is the second-largest patent jury award this year, the largest of all–coincidentally, I’m sure–being the $388 million verdict against Microsoft won by Singapore’s Uniloc in April over an infringement of its security technology. Then, as in the i4i case and most other patent rulings that haven’t gone its way, Redmond responded with incredulity, claiming it couldn’t have possibly infringed on the patent because the patent is invalid. “We believe the evidence clearly demonstrated that we do not infringe and that the i4i patent is invalid,” said David Bowermaster, a Microsoft spokesman, in the company’s now boilerplate statement on such matters. “We believe this award of damages is legally and factually unsupported, so we will ask the court to overturn the verdict.”

Announced today and scheduled for beta in May, Vine is a hyperlocal messaging and alert system intended to be used to share information during a crisis. Properly configured, it will gather local news and public safety announcements along with location information, reports and messages from friends–eventually even those posted to other services, like Facebook and Twitter–into a handy little dashboard. This being Microsoft (MSFT), that dashboard will be proprietary and require PCs running XP SP2 or Vista and 600 MB of hard disk space.

So really, Vine is not so much a societal network for people you care about, but for the PC users you care about. A proprietary disaster messaging system… sigh, only from Microsoft.

Anyway…. It’s an interesting idea–not so much as the “societal network” Microsoft touts it as but as a cunning end run around established services. Twitter and Facebook are fun, recreational, but Vine has gravitas. It’s the network you turn to when things fall apart–assuming you meet the proper system requirements–because it consolidates the Tweets and status updates you actually want to read with need-to-know public safety announcements. Of course, Microsoft won’t admit that. “We intend this to be a service of services–to not replace social networking tools that exist today, but embrace them,” Tammy Savage, Microsoft Vine general manager, told TechFlash.

Yeah, embrace and extend and… well, we all know what comes next.

First, Sean Suchter, VP of search technology at Yahoo, left to become general manager of Microsoft’s Silicon Valley Search Technology Center. Then Yahoo search scientist Qi Lu followed him, tapped as president of Microsoft’s Online Services Group. And soon after that, Larry Heck, former VP of search & advertising sciences at Yahoo Labs, accepted a job in the R&D department of the software giant’s online services division. Now Yahoo alum Jan Pedersen has joined them as well. Admittedly Pedersen arrives at Microsoft (MSFT) by way of Amazon’s (AMZN) A9.com. But prior to that gig, he was chief scientist and VP, Search and Advertising Technology Group, at Yahoo (YHOO).

Apparently, Microsoft is going to combine its search business with Yahoo’s one way or the other.