Oct. 25 (Bloomberg) -- Microsoft Corp. said first-quarter earnings rose 23 percent, exceeding analysts' estimates, and raised its forecasts for this year on sales of the new versions of Windows and the ``Halo 3'' video game.

The stock surged 10 percent in late trading to the highest level since 2002 after Microsoft said net income increased to $4.29 billion, or 45 cents a share. Sales advanced 27 percent to $13.8 billion, beating projections by more than $1 billion.

Microsoft, the world's biggest software maker, brought in $300 million in one week from ``Halo 3,'' the latest in the best- selling series for its Xbox game system, double some analysts' estimates. More computer makers installed the pricier versions of the new Windows Vista program on their machines, expanding the Redmond, Washington-based company's profit.

``I couldn't be more pleased,'' said Kimberly Caughey, an analyst at Fort Pitt Capital Group in Pittsburgh, which manages $1.2 billion and owns Microsoft shares. ``It shows robust demand.''

Sales of Windows for personal computers jumped 25 percent and Xbox almost doubled, putting both units ahead of Microsoft's forecasts in the first quarter. The Xbox division posted its first quarterly profit since the release of ``Halo 2'' in 2004.

Profit will be $1.78 to $1.81 a share this year, on sales of $58.8 billion to $59.7 billion, Microsoft said in its statement today. That would exceed the average estimates of $1.73 in earnings and $57.4 billion in revenue from analysts.

Shares Gain

Microsoft jumped $3.32 to $35.31 in extended trading after rising 2.4 percent earlier to $31.99 as of 4 p.m. New York time on the Nasdaq Stock Market. The shares, which have trailed rivals such as Oracle Corp., Google Inc. and Apple Inc. this year, had increased 8.6 percent since the end of the quarter on optimism results would exceed analysts' estimates.

``These first-quarter numbers are really outstanding,'' said Brendan Barnicle, a Pacific Crest Securities analyst in Portland, Oregon. ``It looks like the momentum from these new products is really going to start to kick in on the second half of this year.''

Earnings beat the 39-cent average of 15 projections in a survey by Bloomberg. Sales estimates averaged $12.6 billion. A year earlier, Microsoft earned $3.48 billion, or 35 cents.

Microsoft said profit in the quarter that began Oct. 1 will be 44 cents to 46 cents a share on sales of $15.6 billion to $16.1 billion. That compares with 45 cents and $15.8 billion, the average estimates of analysts in the survey.

In the year-ago quarter, profit was 26 cents on sales of $12.5 billion, held down by the deferral of $1.64 billion in sales because of an accounting rule.

Ballmer's Efforts

Chief Executive Officer Steve Ballmer, 51, promoted more- expensive versions of Vista with extra security features for businesses and TV recording software for consumers. To compete with Google, he's making acquisitions and signing Internet ad deals to find a new source of growth.

``All of the businesses met or exceeded our expectations,'' Chief Financial Officer Chris Liddell said in an interview. ``That across-the-board strength is what allowed us beat on a revenue basis by over a billion dollars.''

Microsoft said yesterday that it will buy a 1.6 percent stake in Palo Alto, California-based social-networking Web site Facebook Inc. for $240 million and will sell ads for the Internet company overseas. Liddell said sales from the expanded agreement won't increase significantly in the next few quarters.

Xbox Surge

``Halo 3,'' on sale for less than a week in the quarter, exceeded analysts' forecasts. The game debuted Sept. 25 and became the top seller in the U.S. for the month of September, according to market researcher NPD Group Inc. in Port Washington, New York. That helped the Xbox 360 console beat Nintendo Co.'s Wii in monthly sales for the first time.

Microsoft sold 1.8 million Xboxes last quarter, Liddell said, beating a 1.2 million estimate from Scott Neuendorf, an analyst at Hester Capital Management in Austin, Texas.

Sales in the Xbox business rose 91 percent, instead of Microsoft's forecast for up to 40 percent growth. Because the ``Halo'' game was made by Microsoft, it carries higher profit margins than other titles, shoring up efforts to post the first annual profit in the division.

Sales of Windows for PCs rose to $4.14 billion. About 75 percent of Windows copies sold were the higher-priced versions, up from 50 percent a year ago, Liddell said.

Holiday Demand

PC makers now offer the higher-priced Vista Home Premium, which brings in $50 more per copy than Vista Basic, on most consumer machines, according to UBS AG analyst Heather Bellini in New York. Microsoft doesn't disclose the prices PC makers pay.

Windows sales also benefited from declining piracy rates in countries like Russia and China, Liddell said.

The company expects PC sales to rise up to 13 percent this quarter, fueled by holiday demand. Microsoft boosted its PC forecast for its fiscal year that ends in June to an increase of as much as 12 percent.

Twenty-five analysts suggest buying Microsoft shares, eight recommend holding them and two have ``sell'' ratings, according to data compiled by Bloomberg.

To contact the reporter on this story: Dina Bass in Seattle at dbass2@bloomberg.net

Last Updated: October 25, 2007 17:59 EDT