NEW YORK (CNN/Money) - Microsoft Corp. Thursday reported a better-than-expected increase in sales of 11 percent for the latest quarter but a profit that came in a shade lower than Wall Street expected.

The world's largest software maker said its net income rose to $1.9 billion, or 18 cents a share, in its fiscal fourth quarter, up 26 percent from $1.5 billion, or 14 cents a share, a year earlier. This year's figure included a charge of 5 cents a share for legal settlements. Excluding that charge, Microsoft earned 23 cents a share, a penny below the First Call consensus estimate of 24 cents.

Microsoft posted sales of $8.1 billion, up from $7.3 billion a year ago and ahead of analysts' estimates of $7.9 billion.

For the full year, Microsoft reported sales of $32.2 billion, a 13 percent increase from fiscal 2002. Earnings for fiscal 2003, excluding charges, came in at $1.04 a share, up from 92 cents a share a year ago.

Shares of Microsoft (MSFT: Research, Estimates) fell 83 cents, or 3 percent, to $26.69 in regular trading but recovered slightly in after-hours trading, gaining 4 cents to $26.73, according to Island ECN.

It appears that investors didn't seem to mind the lower-than-expected earnings for the quarter because of the revenue surprise. What's more, Microsoft raised its sales guidance for the first quarter of fiscal 2004 and for the entire year.

Microsoft said it expects sales to be between $7.9 billion and $8.1 billion for the quarter ending in September. Analysts were predicting revenue of $7.9 billion. For the full year, Microsoft said sales should be in the range of $34.2 billion to $34.9 billion, well ahead of the consensus forecast of $33.9 billion.

"The revenue numbers looked really impressive. There were concerns out there about how Microsoft would grow the top line," said Wendell Perkins, manager of the Johnson Family Large Cap Value fund. Microsoft accounts for more than 2 percent of the fund's assets.

The company also gave some more information about how much its ballyhooed elimination of options would impact earnings. Starting in September, Microsoft will give out restricted stock instead of options to employees. Stock grants, unlike options, must be included on the income statement as a compensation expense.

Microsoft said that for the first quarter, earnings should come in at about 23 cents a share, but that includes a charge of 6 cents a share to reflect compensation expenses. Backing that out, it appears that Microsoft is calling for earnings of 29 cents a share, which is ahead of the First Call estimate of 25 cents.

And for the full year, the company said that earnings should be between 85 cents and 87 cents a shares, including a charge of 24 cents a share for the new stock grant program. Excluding that charge, Microsoft would earn between $1.09 and $1.11 a share, higher than the current consensus of $1.07.

Drake Johnstone, an analyst with Davenport & Co., said that Microsoft was helped by a pickup in PC sales in the quarter. On Wednesday, trade group IDC announced that global PC shipments rose a stronger-than-expected 7.8 percent in the quarter.

However, Microsoft CFO John Connors said during a conference call that the company was expecting PC shipments for its full fiscal year to grow in the mid-single digits and not pick up materially. "Our guidance does not take into account any marked improvement in the macroeconomic environment in the short term," Connors said.

It looks like Microsoft's subscription software model is paying off, though, which bodes well for the company even if PC growth slows. Microsoft reported that its unearned revenue, which measures sales that the company expects in coming quarters from software license renewals, was $9 billion for the quarter.

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Aziz Hamzaogullari, a senior analyst with mutual fund firm Evergreen Investments, which owns 13.9 million shares of Microsoft, said he was hoping to see unearned revenue of $8.7 billion.

Microsoft reported stronger-than-expected sales across the board. Microsoft's home and entertainment business, which includes video game console Xbox, posted an 8 percent year-over-year gain. Hamzaogullari was predicting a decline.

And sales of SQL Server, a database product that competes against Oracle, rose 34 percent. "Microsoft is taking direct aim at Oracle's core product. This should give Larry Ellison cause for concern," said Michael Cohen, director of research for Pacific American Securities, referring to Oracle's CEO.

Still, some concerns dog Microsoft, which has lagged the market's rally this year. The company continues to be plagued by security glitches and bugs. On Wednesday, Microsoft warned customers of a flaw in Windows that could allow hackers to gain access to a computer remotely and steal data.

In addition, Microsoft's stronger-than-expected results don't appear to be due to a pickup in spending on technology, as much as it is an indication of Microsoft's success in getting customers to renew licenses. "It's premature to conclude from this that corporate spending on technology is back in full bloom," said Cohen.

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And Microsoft disappointed some by not mentioning in its release whether it had plans to raise its dividend or pay a special one-time dividend, another topic of much debate lately on Wall Street. The issue is likely to remain a hot one, especially since Microsoft's cash position increased to the gargantuan sum of $49 billion, from $46.2 billion as of the end of March.

"I was hoping that there would be a dividend boost. But the company did just put it into place, so maybe the hopes were overly optimistic," said Perkins.

Connors said Microsoft understands that investors would like to see the company do more than just sit on its cash pile. "We do hear the angst of shareholders," he said.

But Connors added that Microsoft had no plans to increase the dividend in the near future or step up its stock buyback program since the company still faces legal risks, including an antitrust lawsuit by Sun Microsystems.