Investors are looking to Microsoft Corp's earnings report on Thursday for a sign that the worst may be over for the economy and that the recent surge in technology stocks is not pure froth.

The world's largest software company is expected to post lower revenue and profit than a year ago, hurt by falling computer sales, but attention will focus on whether it backs chip-maker Intel Corp's comment last week that PC sales may have bottomed out in the first quarter.

That would send a powerful signal that the economy at large is on the mend, despite a lack of hard evidence.

There is also a possibility that Microsoft will announce an early release date for its new Windows 7 operating system, offering the chance to put the public relations nightmare of its unpopular Vista system behind it.

Windows 7 has received good reviews from limited public tests, and an early release could set Microsoft up for a strong holiday shopping season, when sales of PCs typically jump.

It wouldn't surprise me, said Kim Caughey, an analyst at money manager Fort Pitt Capital Group, on the subject of a Windows announcement. The beta (testing) has been going very well, and that generally sets the date. They'd like some news, and they've done that in the past during the earnings call.

A relatively positive outlook on PC sales or an early Windows 7 release could jolt Microsoft's stock, which has largely missed out on the tech rally this year.

Despite gaining 25 percent from a more than 10-year low of $14.87 in early March, the shares are still hovering below the $19 mark, about half what they were worth 18 months ago.

The stock is down 2.6 percent so far this year, compared with a 3.6 percent rise in the Nasdaq and a whopping 24 percent jump in Google Inc's shares.

NETBOOK WOE

Microsoft has suffered over the past three months after upsetting investors in January by withdrawing its full-year earnings and revenue forecasts, on top of a big dip in profit. It is not expected to issue any new forecasts on Thursday.

It failed to win any favor with a plan to cut 5,000 jobs over the next year and a half, saving about $1.5 billion a year, and has also been dogged by uncertainty over its online strategy, recently renewing talks with Yahoo Inc over some type of search advertising deal.

Microsoft's fiscal third-quarter results are expected to reflect the harsh reality of cash-strapped companies cutting back on technology spending, and thrifty individuals moving to lower-priced netbooks which yield less profit to Microsoft.

Global shipments of personal computers fell 7.1 percent in the first quarter, according to industry tracker IDC, although the U.S. market fell only 3.1 percent.

The bad news for Microsoft is that the figures would have been much worse had it not been for a surge in sales of netbooks, the mini-laptops good for basic tasks like websurfing and e-mail, made by the likes of Acer Inc <2353.TW>, Hewlett-Packard Co and Dell Inc .

Microsoft, which sells versions of its old Windows XP for netbooks, gets much less money for each unit sold than for Vista on a laptop or PC. It partly blamed the shift to netbooks for lower profit at its operating system unit last quarter.

The company is hoping to ride the back of the netbook phenomenon with a restricted version of Windows 7, but for now netbooks are hurting its so-called Client business.

Client is going to be tougher -- that's something they are already expecting, said Sid Parakh, an analyst at McAdams Wright Ragen, who has a buy rating on Microsoft.

REVENUE DROP

Wall Street expects Microsoft to report revenue of $14.15 billion for the quarter, according to Reuters Estimates, down from last year's $14.45 billion.

Analysts expect profit of 39 cents per share, on average, below last year's 47 cents, partly due to lower sales, but also because of the upfront costs of layoffs announced in January.

Microsoft stock is now trading at 9.7 times analysts' average forecast for fiscal 2010 profit and 10.7 times the current year. That is about half its five-year average of a price/earnings ratio of 21.4.

That makes it worth buying, according to many analysts and investors.

It's a good value right now, said Caughey at Fort Pitt, which owns Microsoft stock. They have issues they have to address, but overall the company has a whole lot of assets to throw at these problems, and a pretty good track record of meeting those challenges.

(Reporting by Bill Rigby; Editing by Gary Hill)

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