The MacBook Air was a top-seller for Apple last quarter, helping to deliver the equivalent of a second holiday season. Image: Apple

iPod growth has stalled. The iPhone is basically doing as expected. So in Apple’s financial results, the real surprise was the MacBook Air.

This time, gadgets didn’t save the day for Apple (AAPL). Even after adding a pink iPod nano to its lineup in time for Valentine’s Day, the company sold just 100,000 more iPods in the first three months of this year than it did a year before. iPhone sales came in 26 percent (or 600,000 units) lower than the holiday quarter, which isn’t a great sign.

Hard drives and flash memory are increasingly vying for share in the storage market. Image: Sandisk, Samsung

Hard drive maker Seagate (STX) filed a patent suit against flash drive maker STEC (STEC) in federal court on Monday, firing the first shot in a new intellectual property battle between hard drive makers and providers of flash storage technology.

Seagate, the world’s largest hard drive maker, claims that STEC has violated four of its patents covering the way a storage device communicates with a computer. The suit was filed in the Northern District of California.

STEC said it believes Seagate’s lawsuit is “completely without merit and primarily motivated by competitive concerns rather than a desire to protect its intellectual property.” The company said it began building flash drives before Seagate won its patents. (STEC’s full statement is below.)

Microsoft has a profitable business building software for the Mac; now it has an eye on the iPhone, too. Image: Apple

Tom Gibbons, head of Microsoft’s Specialized Devices and Applications Group, said the focus would be on extending Office functions onto the iPhone and iPod touch. Image: Microsoft

Don’t think for a minute that Microsoft is ignoring the iPhone. In fact, the software giant is probing the gadget for profit opportunities.

For a little more than a week, a team of the company’s Silicon Valley software engineers has been examining the iPhone software development kit (SDK for short), a set of tools Apple (AAPL) released this month that let outsiders build software for the iPhone and the iPod touch. Microsoft (MSFT) executives aren’t sure yet whether they’ll find worthwhile opportunities to sell iPhone software – but they seem eager to find out.

“It’s really important for us to understand what we can bring to the iPhone,” Tom Gibbons, corporate vice president of Microsoft’s Specialized Devices and Applications Group, told Fortune on Monday. “To the extent that Mac Office customers have functionality that they need in that environment, we’re actually in the process of trying to understand that now.”

Though it’s typical to think of Apple and Microsoft as pure software rivals, their relationship is actually more complicated. For more than a decade, Microsoft has maintained a group of engineers whose sole job is to develop software for Apple’s Macintosh operating systems. Most of the engineers in Microsoft’s Mac Business Unit are based in Mountain View, Calif., a few miles from Apple’s headquarters. (They also happen to be quite close to the headquarters of archrival Google (GOOG).)

The Mac unit’s work certainly isn’t charity – it delivers millions of dollars in profit for the company with its Mac version of the Office productivity suite. Microsoft doesn’t break out exact numbers, but we can extrapolate: Gibbons said the Mac Business Unit provides about a third of the revenue for the Specialized Devices and Applications Group, which also includes Windows Embedded, Microsoft Hardware, the Automotive Business Unit and Microsoft Surface Computing; the whole group did more than $1 billion in sales last year. So it’s reasonable to guess that the Mac unit provided about $350 million – and since Gibbons said the Mac group was one of the group’s more profitable units, it’s possible that Microsoft made somewhere in the neighborhood of $200 million in profit from Mac software.

By Jon Fortt and Michal Lev-Ram

Will Apple give up some control over the iPhone in order to court corporate customers?

That’s one of the juiciest questions surrounding a gathering on Apple’s (AAPL) campus Thursday, where CEO Steve Jobs has promised to open up the iPhone’s software secrets to the world for the first time. Apple’s invitation to the event also hinted at new business-friendly features for the device, and Silicon Valley is abuzz about what that could mean. Will the BlackBerry-toting masses be able to trade in the company smartphone for an iPhone?

On Wednesday, Apple sent this invitation to its iPhone software launch. Image courtesy of Apple.

Apple (AAPL) on Wednesday sent invitations to its eagerly anticipated iPhone event, where it is expected to unveil tools that will allow developers to write software for the device. The company also hinted that “exciting new enterprise features” would be unveiled at the March 6 gathering on Apple’s campus.

Mint CEO Aaron Patzer isn’t itching to sell his online budgeting service, but a company like Microsoft would do well to buy it anyway.

No one’s said much about it, but there it was, plain as day, in Apple’s (AAPL) earnings call this week: Chief Financial Officer Peter Oppenheimer said the ‘A’ word.

Acquisitions.

When an analyst asked what Apple would do with more than $18 billion in cash it’s sitting on, Oppenheimer downplayed the possibility of a major stock buyback, and hinted that Apple could go shopping instead. “Our preference,” he said, “continues to be to maintain a strong balance sheet in order to preserve our flexibility to make strategic investments and/or acquisitions.”

Which is a fine segue to my piece in the latest issue of Fortune, which seeks to tackle the issue of what, exactly, Apple and others should do with their growing stacks of Benjamins. Among my recommendations: Apple should buy a green startup, Microsoft (MSFT) should buy Mint, and Google (GOOG) should buy TiVo (TIVO).

Though Apple normally doesn’t buy many companies, I suggest 2008 might be a good time for Jobs & Co. to throw some money around. (Same goes for Microsoft and Google, which do a lot more spending than Apple.)

Apple executives are fond of talking about seven years ago, the last time Wall Street seriously underestimated the company. Faced with an economic slowdown that saw his tech industry peers slashing staff and cutting projects, CEO Steve Jobs proclaimed that he and the rest of Apple would instead “innovate our way” out of the slump.

Jobs made good on that promise. Soon after, Apple (AAPL) unveiled the iTunes Store, the iPod took off, and … well, the rest is history.

This week, you can bet the true believers around Apple’s Cupertino headquarters are thinking back to 2001, while loading up on some suddenly discounted shares. Talk about an after-Christmas bargain: Apple stock is trading at about $140, 30 percent off its December 28 high of $202.96. That’s about the same place where Wall Street valued the stock six months ago, before it became clear that the new iPhone would sell nearly 4 million units in 200 days.

Flash-based laptops? Suped-up iPhones? The wait is over for Apple’s biggest announcements of the year.

The crowd at Macworld 2008 settles in for the Steve Jobs keynote. Photo: Jon Fortt

SAN FRANCISCO — The keynote has begun. There’s a Mac vs. PC commercial showing. PC is talking about what a bad year 2007 was, with all of Apple’s announcements including the iPhone. PC says 2008, though, will be a great year. “What are you going to do?” Mac asks. “I’m just going to copy everything you did in 2007.”

Steve Jobs walks onstage from the left.

Journalists prepare for the start of the Sony pre-CES press conference. Image: Jon Fortt

LAS VEGAS - Fresh from its news that Warner has backed its Blu-ray format for high definition, Sony (SNE) is vying to show that it is still an electronics innovator, and isn’t languishing in the shadow of iPod maker Apple (AAPL).

To that end, the electronics giant said it will immediately begin selling an 11-inch version of a super-slim TV in the United States. The TV uses OLED techonology, which allows devices to be thinner than today’s LCDs and more power efficient. Sony also showed off new cell phones, cameras and the Rolly speaker system, a novel egg-shaped robotic speaker system that actually moves to the sound of the music it plays. Below, the way the Sony press conference unfolded:

Trying to pick the winners in ‘08? Watch these three conferences.

In January, politics has Iowa, New Hampshire and South Carolina. Tech has DEMO, Macworld and the Consumer Electronics Show.

Just as primaries and caucuses define the year’s political landscape, these three big technology trade shows compete to introduce trends that will shape 2008. Each show has its own personality and its own surprises – and its own part in influencing whether a few months from now we’re all clamoring for new iPhones, wireless HD home theaters, or the next challenger to Facebook.