VMware Tuesday reported first-quarter revenues, up 69% year-over-year to $438 million, better than the $422.4 million Wall Street expected.

The market has been down on the company out of fear it will be trumped by the increasing competition, particularly Microsoft. But, for the moment at least it regretted its negativism and pushed the stock up over 16% after-hours into the high 60s, a level it hasn’t seen since February.

However, the Nasdaq newbie, last year’s IPO darling, was in the hundreds in October and early November so it’s got a lot of ground still to make up.

VMware repeated the forecast that made Wall Street nervous last quarter and said it continues to expect 2008 revenue growth of approximately 50% over 2007.

Second-quarter revenues are supposed to increase about 55% to something around $460 million, less than the $463.6 million analysts have in mind.

CEO Diane Greene remarked that research indicated only two unidentified billion-dollar-a-year companies have been able to grow revenues at a rate of better than 50%. She predicted that rate would last “well beyond 2008” for VMware.

The Street, however, found the Q2 projection decelerating at a rate greater than the first-quarter seasonality of VMware’s OEMs would account for (VMware is a quarter behind on OEM payments).

On a non-GAAP basis, VMware earned $88 million, or 22 cents a share, in Q1, hitting Wall Street’s forecasts on the nose. After allowing for special items it cleared $43 million, or 11 cents a share, flat year-over-year when it earned $41 million.

Q1 software license revenues were up 73% year-over-year to $294 million and service revenues, including support, subscription and professional services, increased 62% to $144 million.

Deferred revenue, roughly split between licenses and service, was up 88% to $641 million.

Greene claimed the competitive lead and said VMware was the “first choice” among the virtualization wannabes. Of course, Microsoft hasn’t unloaded both barrels yet.

She also said the company was seeing no “hesitancy” from accounts because of economic conditions, no even among the financial services firms, although the weak dollar depressed its operating margin to 24%, off 225 basis points.

The company said Q1 US revenues grew 65% year-over-year on increased demand from large enterprises standardizing on the VMware platform and an increase in the number of smaller transactions delivered through VMware channel partners.

International revenues, up 74%, were driven in part by triple-digit business growth across Australia and emerging markets including Brazil, China, India and Russia.

Greene said emerging countries like India were “in a hurry” and were skipping the usual foreplay, moving directly to a VMware-based architecture. Fifteen countries she would classify as emerging, she said, recorded triple-digit growth last quarter.

VMware is most closely identified with server virtualization but wants to lead desktop virtualization as well. Greene said there’s been a palpable spike in desktop pilots, with “hundreds of thousands” in test, but predicted the rollouts wouldn’t happen until next year.