Citing solid performance across its businesses, Microsoft on Thursday reported earnings and revenue that beat analysts' forecasts, but its settlement with Sun Microsystems and a fine by the European Union did take a bite out of the software giant's earnings.

Microsoft reported net income of $1.32 billion, or $0.12 per share, on revenue of $9.18 billion for the third quarter of its 2004 fiscal year, which ended March 31. That compares to net income of $2.14 billion, or $0.20 per share, on revenue of $7.84 billion in the previous year, the company said in a statement.

This year's net income includes an after-tax charge of $1.89 billion, or $0.17 per share, related to Microsoft's settlement with Sun and the European Commission fine. It also includes an after-tax charge of $501 million, or $0.05 per share, for stock-based compensation expenses, Microsoft said.

Without the charges, Microsoft's earnings amounted to $0.34 per share, ahead of the $0.29 per share consensus estimate among analysts polled by Thomson First Call. Microsoft also exceeded its own January forecast of earnings per share between $0.23 and $0.24, including stock-based compensation expenses of about $0.05.

All of Microsoft's business segments met or exceeded the company's expectations, Microsoft Chief Financial Office John Connors said in the statement. Overall corporate IT spending continues to improve and Microsoft expects healthy demand through the end of its fiscal year on June 30, he said.

"Corporate profits are up and businesses seem to be willing to spend more on IT projects," Connors said in a conference call with financial analysts. "Our customers are really seeing the value in our newer products."

Connors mentioned Office 2003, Windows Server 2003 and Small Business Server 2003 as examples of products that are selling well.

Among Microsoft's business segments, Microsoft Business Solutions (MBS) stands out in the quarter for its relatively slow performance, Charles Di Bona, an analyst at Bernstein & Co. said on the call. Connors said that although MBS had the weakest results of any of Microsoft's seven business segments, it did perform in line with company expectations.

MBS sells software that helps companies run their business and includes Great Plains and Navision, two companies that Microsoft acquired to expand its presence in the business software market. MBS results outside the USA are good, but inside the USA the unit is less effective, especially in its dealings with partners, Connors said.

"It is not really a product issue; I think it is more our execution issue," Connors said.

As a result of its better-than-expected performance, Microsoft upped its forecast for its full 2004 fiscal year. The company now expects revenue to be between $37.8 billion and $38.2 billion. That is up from the previous, increased estimate of full-year revenue between $35.6 billion and $35.9 billion.

"We had a fantastic quarter and it looks like we're going to have a great year," Connors said.

Connors also provided guidance for Microsoft's fiscal 2005 year, which starts July 1. The company expects revenue of between $37.8 billion and $38.2 billion and earnings per share of between $1.16 and $1.18, including a stock-based compensation expense of about $0.15.

Next year's forecast is below analysts' expectations of earnings per share of $1.28 on revenue of $38.51 billion, according to Thomson First Call.

Microsoft shares ended the regular trading day on the Nasdaq stock exchange up 1.96 percent at $25.95. In after-market trading on INET, the stock was up further at $27.23.