"Because it's costly for users to switch to a new operating system, Microsoft maintains a firm grip on this huge customer base. Moreover, these systems, once installed, provide recurring revenue by way of support services and upgrades.

"Sales of PCs have slowed during the recession and will likely remain down through 2009. Microsoft, which gets around 22% of its revenues from PCs sold with preinstalled Windows, has felt the pinch.

"But demand from emerging markets, especially China and India, should start to take up the slack and drive growth. Per capita ownership comparisons show these markets' almost boundless potential: only 36 of 1,000 people in India, and 122 of 1,000 in China, own computers-vs. 800 per 1,000 in the U.S.

"Over the next five years the number of PCs in use worldwide is expected to top 2 billion, astounding given that the 1 billion mark was hit only last year.

"The newest Windows version, Windows 7, is scheduled for retail release in October. This time around, learning from past mistakes with Vista, Microsoft has focused on advanced user-interface support and improved performance rather than on new features.

"And while smaller competitors may continue to nibble around the edges, Microsoft should have little problem remaining overwhelmingly dominant.

"Microsoft's earnings have grown at a double-digit rate in every year but one since it was founded and had been picking up steam of late-hitting 26% in fiscal 2008, ended June 2008-until the recession kicked in.

"From July 2008 through March 2009, earnings declined, but the Windows upgrade cycle should ramp up results in 2010.

"The company's relatively new entertainment division, which sells the Xbox videogame player and other electronic devices, grew rapidly in fiscal 2007 and 2008. It accounted for 13.5% of overall revenues in the latter year and should contribute significantly to growth in coming years.

"At the end of March 2009, Microsoft had more than $25 billion in cash and equivalents and almost no debt; the little debt it has is AAA-rated.

"With all that cash, Microsoft is expected to raise its quarterly dividend 15 percent, to $0.15 from $0.13, starting in September. Shares trade at 12 times 2010 earnings."

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