Microsoft reports profit surge

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a narrow $4 million loss, compared with the $110 million loss a year ago. Revenue increased to $91 million from $63 million a year ago.

• Buoyed by strong Xbox sales, The Home and Entertainment unit posted an $84 million profit on revenue of $1.41 billion. A year ago, the unit saw losses of $397 million on sales of $1.27 billion.

Microsoft did not break out results for the division between hardware and software, but the quarter included the release of the Microsoft-published Xbox game "Halo 2," which has sold 6.4 million copies to date.

"Game sales were definitely the big driver, but we've also done some really good work on reducing console costs," said Maroof Haque, Xbox business manager for Microsoft.

As Microsoft has nothing remotely like "Halo 2" on the horizon, the end-of-year profit should be considered an anomaly, Haque said. "We're not expecting profitability on a sustained basis," he said. "We're focusing on investment for sustained profitability long-term."

Microsoft hiked its forecast for Xbox sales and subscribers to the Xbox Live online service. The company now expects that by the end of June it will have sold 21 million to 22 million Xboxes since the product debuted, up from an earlier forecast of less than 20 million. By the same point, it expects to have 1.6 million to 1.8 million Xbox live subscribers, up from a prior prediction of 1.5 million subscribers.

Microsoft is widely expected to release a new version of the Xbox late this year, although Connors declined during the conference call to reveal a date for Xbox 2. Haque said the route to profitability could be faster for the next Xbox.

"We've definitely learned a lot from this generation, as far as the partnerships we've made, the efficiencies we've built," he said. "We're going to be taking that key learning into the future."

CNET News.com's David Becker contribute to this report.