There's no two ways about it: Microsoft's (NASDAQ:MSFT) earnings this quarter were decent, but about as exciting as Big Bill's cardigans and Harvard haircut.

Revenues increased 11% for Q1 of fiscal year 2007, and net profit was up 11%. There were some legal charges last year that shaved $0.02 from the per-share total. This year's tally was $0.35, a good $0.04 more than the average Wall Street analyst expected.

In revenue growth, the heavy lifting this quarter was done by the server and tools division, which put up 17% growth, and entertainment, which posted 70% growth. The latter is owed to the Xbox 360, of course, which is why margins look so foul this quarter. The Xbox 360 console, remember, is a money-losing venture for now, with the hope that the entire game ecosystem begins to provide profitable growth down the road. For the time being, it means investors like you and me have to gut out percentage-point drops in gross margins. (Find a happy place . find a happy place..)

Much will be made in upcoming months over the success or failure (my bet -- I hope it's wrong) of the Zune media player, and the Xbox 360's throwdown with Sony's (NYSE:SNE) PlayStation 3. And the slim 5% growth in online advertising revenue may have a lot of people chuckling when Google (NASDAQ:GOOG) is still growing like a weed.

And, of course, the drumbeat continues for Vista, the latest version of Windows, due to debut in mere weeks for businesses, and in early 2007 for us plebes. There will be plenty of jawboning about this being the make-or-break product for Microsoft, but I think you can safely disregard the chatterboxes. Unless Vista is pretty crummy -- which seems very unlikely, given the reviews I'm reading -- the uptake will go just fine. Couple the snazzier OS with speedy dual- and quad- core CPUs from Intel (NASDAQ:INTC) and AMD (NYSE:AMD), and I expect to see a pretty healthy computer upgrade cycle next year, unless the entire economy heads into the tank.

But where does that leave us today? The market has responded to the earnings "surprise" with slightly better than a yawn, and uncertainty may be the reason why. Microsoft's full-year guidance wasn't exactly earth-shattering: $50 billion to $51 billion in revenues, and earnings per share in the range of $1.43 to $1.46. That represents 18%-ish earnings growth over the last calendar year.

But when I model Mr. Softy's cash flows based on a conservative read of those projections, I have an awfully hard time getting these shares to look like they're worth anything less than $33 each.

Microsoft's strong free cash flow, and its habit of paying that cash out to investors, are two of the reasons it's a favorite of Motley Fool Inside Value . Intel is also a pick. A free, all-access pass gets you a look at the recommendations, as well as all past issues.

At the time of publication, Seth Jayson was long Intel common and Microsoft common and calls, but he had no position in any other firm mentioned here. View his stock holdings and Fool profile here. See what he's Digging these days. Fool rules are here.