In line with the expectations of the financial community, Microsoft’s earnings are slowing, and layoffs of 5,000 employees are in the offing. Can it get any worse for the world’s largest software maker?

In announcing the widely-expected decision, CEO Steve Ballmer blamed an 11% drop in quarterly profits on the tragic state of the PC industry. That, of course, is probably true as far as Windows is concerned. No doubt the current economic crisis contributed to Microsoft’s woes, but it’s also true that, despite dire predictions, Apple managed to hit record earnings during the last quarter.

While sales of Mac desktops were down, it simply meant that customers were choosing note-books instead. So overall Mac sales remained surprisingly high. Indeed, it does appear that Apple succeeded, in part, by taking away sales from Microsoft. That’s something that Ballmer is never going to admit.

Even worse for Microsoft, Apple didn’t succeed by undercutting PCs on price. In fact, Apple gets most of its Mac sales from products that cost well over a grand, which is certainly far above the sweet spot in PC pricing. So much for the claims that the alleged “Apple Tax” would ultimately do the company in.

Lest we forget, note-books are also more expensive than desktops, yet the former gets 71% of Mac sales. Imagine that!

It’s not that customers aren’t cutting back. It does appear that the cheaper iPods fared better during the holiday season, but when people want something for the long-term, such as a reliable personal computer, price isn’t always an object. And, yes, I maintain that the Mac is priced comparably to a name-brand PC with the same basic standard equipment.

What is also irking Microsoft is the fact that the clear failure of Windows Vista. Sure, Ballmer can point to the number of copies of Vista sold by dint of being bundled with new PCs. But lots of customers, particularly businesses, are busy dumping Vista and downgrading to XP. That has to hurt a lot.

Of course, Ballmer will put his best face forward, touting the great advantages of the forthcoming Windows 7, the operating system that will set the company free. Of course, he isn’t going to admit that the new version of Windows is just a warmed over version of Vista that, regardless, holds the promise of improved performance and offers some interesting interface changes.

Whether those changes are better or not is, I suppose, going to be decided as the public beta of Windows 7 is evaluated in the weeks to come. It’s telling, though, that the new taskbar is clearly ripped off from Apple’s Dock.

But what choice did they have? After all, Vista is a non-starter for businesses, and they would probably stick with XP indefinitely if Microsoft didn’t offer at least the promise of something better, even if the improvements are probably only incremental in nature. Yes, maybe Windows 7 will boot faster, sleep faster, and offer a decent performance boost over its predecessor. However, today’s PC hardware is also more powerful, so even Vista fares well nowadays, although running XP must seem akin to adding a much faster processor.

This doesn’t mean Apple is home free and eventually destined to supplant Microsoft. Even in a slimmed down form, Microsoft is still a formidable competitor. Despite the reality about Windows 7, Microsoft will probably spend huge amounts of marketing dollars to convey the opposite impression. What’s more, the early reviews seem quite favorable. Then again, the Vista beta got pretty good marks. It was only when the final versions were installed on regular PC hardware — not souped up boxes supplied by Microsoft — that its severe limitations were revealed.

So far as Apple is concerned, 2009 is surely going to be a rough year. It’s not just growing in a stagnant market, but convincing customers, the media and Wall Street that they’re perfectly capable of hitting home runs even though Steve Jobs remains on sick leave.

To be sure, Apple’s stock price is on the upswing once again, but it’ll take a long time for it to approach the record levels it achieved long before the morbid Steve Jobs death watch began, amid concerns about the state of his health.

As I said a few weeks ago, I think Microsoft’s long-term prospects don’t look too favorable. It doesn’t mean that the initial round of layoffs will be repeated or expanded in the months to come, nor that red ink is on the horizon.

But if Microsoft doesn’t make serious changes and start to recognize the cruel reality that its sunny existence has become rather cloudy, an inexorable decline may be inevitable, even if it takes five or ten years to happen.

All right, just yesterday I was suggesting that Apple would record good sales for Macs and the iPhone, and, based on a preliminary survey, suggested iPod sales might decline slightly. But, as usual, Apple made the industry analysts and Wall Street money people look foolish.

In the final quarter of 2008, which is actually the first fiscal quarter for the company, Apple reported total sales of $10.17 billion, and a record profit of $1.61 billion, or $1.78 per diluted share. A poll from Thomson First Call of financial analysts came up with $9.75 billion sales, or $1.39 per diluted share. Apple not only beat the street as usual, but continued its amazing growth curve.

In all, a total of 2,524,000 Macs were sold, which comes in at a nine percent growth rate compared to last year. Of these, 71% were note-books. What’s more, despite expectations of lower sales, there was a slight increase in iPod sales, about three percent, with a record 22,727,000 sold. But the increase was solely due to international sales; U.S. sales had a three percent decline. Apple also moved 4,363,000 iPhones, an increase of 88 percent over the previous year.

Apple’s stock Wednesday afternoon soared some 11.24 percent in after hours trading. This is definitely a a fascinating development, because Apple’s stock often tends to decline under those circumstances, regardless of what sort of financial results they report. So maybe the stock market has, for now at least, decided not to let the pall of Steve Jobs’ illness hang over company.

Apple has more than $28 billion dollars in the bank, and one hopes it’s a bank that isn’t suffering in the current economic climate. If you want to get more of the raw numbers, go to Apple’s site for the particulars.

In the analyst conference call after the numbers were released, COO Tim Cook, CFO Peter Oppenheimer and Treasurer Gary Whistler held court as usual. Aside from an apologetic question about Steve Jobs’ health, which elicited a nondescript response, the session dealt strictly with numbers and prospects for the future.

In response to a question about netbooks, which are gaining rapidly in sales, Cook merely echoed the skepticism to their prospects voiced by Steve Jobs in the last quarterly call, He insisted that the “products are inferior and will not provide the experience to customers they are happy with.”

So unless or until Apple feels they have a better variation on the netbook theme, that may be the sum total of their feelings on the subject. It’s not as if there’s a driving need for Apple to rush into a new market to boost sales, even in light of the present market prospects, unless things suddenly get real bad.

There was even some surprising news about Apple TV, as Cook revealed that sales had gone up over three times from the previous year. Apple still considers the product a hobby, but demand for Apple TV, it’s clear that the movie rental business is fueling increased sales. So Apple will stick with the product line for now, it appears, since they clear have confidence it’s going to grow.

As usual in these conferences, details are often kept fairly general. Even though the financial analysts who participate in these calls try to dig a little deeper for solid information about new products, they seldom get a meaningful response. Apple typically keeps details close to the vest and sometimes the responses only raise more questions.

Sometimes Apple can be downright misleading, such as the time, several years ago, when they dismissed the prospects for a low-cost Mac desktop just a few months before the Mac mini was released. So maybe even the denials about the prospects for an Apple netbook are to be taken with a grain of salt. But of course, should Apple come out with a product for that segment, rest assured the word netbook simply won’t be mentioned, and they will deny that the product, whatever it is, is actually a netbook.

There was also nothing new to report about when the next upgrade to Mac OS X, Snow Leopard, will appear. As you no doubt recall, there was no word about Snow Leopard’s status during the final Apple keynote at Macworld Expo, not even a short demonstration to counter the rollout of Windows 7.

More to the point, Apple still isn’t recognizing the 25th anniversary of the Mac. I was also surprised that none of the analysts seemed aware that it was a question worth asking. But that’s just me.

For a company that seems a little down in the dumps these days, this week’s report on Apple Inc.’s quarterly financials is still eagerly awaited with both trepidation and anticipation. Probably with equal doses of both.

The cloud hanging over the company’s stock price is, of course, the health of CEO Steve Jobs and ongoing concerns whether his five-month sick leave may become permanent. Thus, the price drifts ever lower and lower, and it may take a lot of optimistic news to stop the hemorrhaging and set things on the upward path all over again.

The problem is, of course, that the stock market doesn’t necessarily recognize reality. A negative forecast or rumor about a potentially unfavorable development, such as Jobs’ medical condition, can send the price spiraling even if the information has no factual basis.

Take that CNN blog rumor, a few months back, that Jobs had a serious heart attack. In the space of a few minutes, Apple’s market cap fell by several billions of dollars. The story, of course, was untrue, and even with the more recent revelations that his illness is more serious than previously admitted, there’s no evidence that it is related to his heart.

Regardless, Apple will go on with or without its mercurial CEO — most of us hope it’s the former, but I won’t make any predictions. We’ve had far too many dire predictions from talking heads, medical doctors who have no personal knowledge of Jobs’ actual condition, along with a few tech writers who don’t seem to know when enough is enough.

So let’s look at a little bit of positive information for a change.

There’s a report that Piper Jaffray analyst Gene Munster is estimating that sales of new Macs might have actually increased in December, and that the quarter ended with worldwide totals ranging from 2.45 to 2.55 million Macs. if this is the case, the end result may actually be consistent with expectations from the investment community, and that may indeed give the lie to the claim that Apple suffered because its prices are too high.

At the same time however, Munster claims his data shows somewhat of a dip in iPod sales, ranging from minus 10 to minus 14 percent. If that’s true, and we won’t know until the actual figures are released, it would represent the very first time iPod sales have fallen since the product’s debut.

Does that mean that Apple’s hard-earned dominance in the music business is about to end? Probably not. More than likely, other than a general decline in the sales of media players, a fair portion of those purchases are going to iPhones — the ultimate iPod. The rest of the dip in sales may be due to the general economic climate, where many potential customers simply kept their wallets in their pockets rather than buy iPods and other gadgets as gifts.

Whatever numbers Apple releases, you can bet some members of the media will look for downsides. The obvious excuse will be concerns that the economic crisis may persist for over a year, meaning that, if Apple escaped doom last quarter, they can’t avoid the inevitable now. More to the point, media and financial analysts will be free with their advice on what Apple needs to do in order to escape the inevitable collapse in their sales.

Going forward, whatever products Apple does introduce this year, assuming they will stay the course as far as executing their original marketing plans are concerned, there will be no satisfying the skeptics. Even though some of you no doubt feel that the media fawns over Apple a little too much, in point of fact it’s really hard to find reports that are 100% favorable. The body of the story might seem positive, but there will always be something tossed in about potential competitors, Microsoft’s response, whether prices are too high or whether the announcements truly met one’s hopes and dreams.

To be sure, I wouldn’t want to be running Apple or any multinational corporation in this shaky economic climate. The problems that acting CEO Tim Cook is no doubt confronting are monumental, and I have little doubt that he and his fellow executives are under a severe amount of strain trying to cope with the current state of affairs.

I am not inclined to think the sky is falling, however. That approach may sell papers, get ratings and generate hits, but does it represent reality? I doubt it.

It appears that Microsoft’s worst nightmare may not be Apple, but the European Union. Their most recent action, involving a Statement of Objection is, as others have observed, a throwback to the browser wars of the 1990s, where Internet Explorer decimated Netscape. Sure, Microsoft exploited its huge share of the PC market to trounce the competition in an unfair way. That was a major part of the U.S. Department of Justice’s own antitrust action.

More to the point, I think Microsoft deserved what they got, and I don’t disagree that the penalties should have been more severe. No, I don’t necessarily feel that Bill Gates and Steve Ballmer should have gone to jail for their offenses. That’s going a little too far, as far as I’m concerned.

In Europe, the latest complaint of unfair behavior comes from Opera Software, which is an extremely minor player in the desktop browser market. Sure, Opera has pioneered some of the powerful features we take for granted today, such as tabs and so forth, but the company has never been able to achieve a market share of more than one or two percent. Even Apple’s Safari is way ahead.

Understand that neither Mozilla nor Apple found it necessary to cry foul in the courts or to government agencies. Instead, they gained surprisingly robust market shares by dint of having better products, and as a result of Microsoft’s diminishing reputation in the industry.

Today, Internet Explorer gets less than 69% of the market. Mozilla has over 20%. In response, Microsoft has actually promised superior support for Web standards with the forthcoming version 8. If it all comes to pass, it means that Webmasters won’t have to customize their code near as much to work in different ways with different browsers.

You can’t imagine the sort of headaches that situation has caused in the past. When Internet Explorer had over 90% of the market, there were numerous sites that wouldn’t look right in anything else. That’s still true, in part, but the situation isn’t nearly as bad as it used to be. It’s amazing how simple competition can make a company change its ways.

Indeed, Microsoft hasn’t had a lot of success it its efforts to stray beyond its core software and operating system market. While the Xbox has done all right, I’m not sure that Microsoft has quite lived down that severe defect, involving overheated game consoles, for which they allocated over a billion dollars for warranty repairs. And don’t forget the failing Zune music player, and that infamous New Year’s Eve fiasco where the original 30GB model wouldn’t operate because of a bug in the way its firmware measured time.

Oh well, even Apple’s programmers make stupid mistakes.

As far as Opera Software is concerned, I like the desktop browser fine on an intellectual level. The interface is decent enough, and the features are surprisingly expansive. The memory footprint seems low enough, considering there’s also a built-in email client that handles large numbers of messages with an appropriate level of speed.

However, my emotional commitments remain with Firefox and Safari in the browser department. I use Apple Mail, and have tried to come to like Microsoft Entourage and Thunderbird without any success.

So, as far as I’m concerned, Opera doesn’t quite do it for me. Apparently hundreds of millions of personal computer users around the world, regardless of whether they use the Mac OS or Windows, agree with me.

Now maybe Opera Software somehow believes that a sympathetic European Union can change things, and somehow convince the public to embrace their browser. Maybe it’s even true that Microsoft didn’t abide by the laws of Europe in bundling Internet Explorer with Windows. But the loss of MSIE as part of Windows might create problems than it solves.

You see, one of the key reasons people buy a PC is to get online. So does the European somehow expect Microsoft to craft deals with all the browser developers and give people a choice? What about the minor players in the business, or the customized Mozilla variations? Or are the PC makers supposed to negotiate their own contracts with the various browser developers, charging appropriate fees for a spot on the desktop of a new computer, just as they do with other software companies.

In that instance, would Microsoft have to pay to get included? Apple too? Just how far does this concept extend, and would the European Union want to go after Apple, too, because Safari is included on all new Macs as standard issue?

Does this all sound just a little absurd to you?