NEW YORK (CNN/Money) - Microsoft shares pared earlier losses in pre-market trading Friday, but were still below Thursday's close after the software maker reported disappointing results and warned on the future.

Microsoft, the world's largest supplier of computer software and the dominant supplier of operating systems with its various version of Windows, said its third-quarter quarter profit missed Wall Street expectations and warned it would miss fourth quarter sales and earnings projections.

Shares of Microsoft (MSFT: up $0.74 to $57.11, Research, Estimates), which fell as much as $2 after the close Thursday, were up more than 1 percent in early trading Friday after Merrill Lynch and J.P. Morgan upgraded their outlooks on the company.

Merrill raised its mid-term investment rating on Microsoft to a "buy" from "neutral," saying it believes the risk/reward scenario for the stock has improved at the low end of its recent $55 to $65 trading range

"We believe money flows will favor Microsoft in sector recovery, as other large caps struggle," Merrill said in its research note.

Meanwhile, J.P. Morgan said that even though the company lowered its outlook, "digging into the details of (earnings per share) reveals healthy expense controls.''

J.P. Morgan maintained a "buy" rating on Microsoft, and said continued strength from the Windows XP cycle and some acceleration in signing subscription-style licensing deals are the major trends, which "we expect to continue to factor into Microsoft's near-term performance."

After the closing bell, Microsoft said it earned 49 cents per share during the quarter ended March 31. That's better than the 44 cents per share it logged during the same quarter a year ago but was 2 pennies shy of the 51 cents per share most analysts had expected, according to earnings tracker First Call.

At $7.3 billion, Microsoft's revenue for the quarter rose 12.3 percent from the year-ago period. But Connors warned that revenue in the current quarter would fall to a range between $7 billion and $7.1 billion

By First Call's count, most analysts had expected Microsoft's fourth-quarter revenue to be nearer $7.7 billion.

Fiscal fourth-quarter earnings are likely to come in between 41 cents and 42 cents per share, Microsoft's Chief Financial Officer John Connors said. That's below the 44 cents per share analysts generally had expected.

However, Connors told analysts during a conference call Thursday, that the company is poised for a turnaround as the economy improves. He noted that Microsoft's expectations for the June quarter and fiscal 2003 "reflect some guarded optimism in the direction the market is taking."

During the quarter, the company's platforms business, which includes Windows products, had total revenue of $2.3 billion, up slightly from $2.1 billion in the year-ago quarter.

"We also think that the PC market could see growth in the low single digits for fiscal 2003 compared to the low single digit declines we are expecting to see for our full-year fiscal-year with 2002," Connors said.

Microsoft's consumer software, services and devices business, which includes its new Xbox video-game console, showed the strongest year-over-year revenue gains in the fiscal third-quarter, rising to $1.1 billion from $460 million a year ago.

For all of fiscal 2003, Microsoft is forecasting revenue ranging between $31.5 billion and $32.4 billion. Earnings for the coming fiscal year are expected to range between $1.89 per share and $1.92 per share, Connors said.

At last count, analysts surveyed by First Call had expected Microsoft's fiscal 2003 revenue to be nearer $32.6 billion and its earnings per share for the year to come in at $2.01.  

- from staff and wire reports