Microsoft said its net profit for the quarter ending June 30 was 3.05 billion dollars, or 34 cents per share of stock, in what amounted to a 29 percent drop from the same period last year.

"Our business continued to be negatively impacted by weakness in the global PC and server markets," said Microsoft chief financial officer Chris Liddell.

Microsoft reported that its revenue in the recently-ended quarter dropped 17 percent to 13.1 billion dollars as compared to the same three months in 2008.

The quarter marked the end of Microsoft's fiscal year and the US software giant reported that its annual profit dropped 18 percent from the prior year to 14.57 billion dollars, or 1.62 dollars per share of stock.

The price of Microsoft's stock slid more than eight percent in after-hours trading, but began to regain ground late Thursday.

"They did miss revenue estimates pretty seriously," said analyst Matt Rosoff of Directions On Microsoft, a private firm that tracks the global software giant.

"I think Microsoft's business is so broad that they really reflect the economy. When the economy goes down they fall farther and when the recovery starts you might assume they will pick up faster than their competitors."

Revenue for the year was 58.44 billion dollars, a three percent dip from the previous year, according to Microsoft.

Liddell described the recently-ended quarter as the most difficult in the Redmond, Washington-based company's history.

"We see the economy making its way through a reset," Liddell said. "There are some signs we have at least seen the worst."

Microsoft expects economic conditions to remain difficult for the rest of 2009 but to begin improving in 2010.

"We are seeing signs of the bottom so we are feeling more confident about the outlook," Liddell said. "Although, I could see it going along the bottom for quite some time. We are not out of the woods."

Microsoft is a major player in the business computer market, and the company saw spending there fall faster than in the consumer sector as businesses tightened budgets or closed operations, according to Rosoff.

Microsoft was also late in tailoring products for the hot netbook market, where its profits are reportedly slim on software for the low-cost, bare-bones laptop computers that have become popular in tough economic times.

"While the netbook segment is good news for PC sales overall, it does hurt Microsoft sales of Windows (operating system)," Rosoff said.

Microsoft said it shifted from buying back stock early in the fourth quarter to building cash reserves.

"Despite revenue being down and it not being a rosy quarter, Microsoft remains a pretty strong cash machine and that can help with research and development and acquisitions," Rosoff said.

Microsoft and Yahoo! both reported lackluster earnings this week and that could heighten the chances of them consummating a rumored deal in the online search and advertising sectors, according to the analyst.

"I think a deal is quite likely," Rosoff said. "Microsoft is dead set on competing in search and Yahoo! is probably looking at it as a way to save costs while having Microsoft do the heavy lifting."

Speculation of an online search deal between Microsoft and Yahoo! has simmered since Microsoft's failed bid to buy the California firm last year in order to better battle Internet online search and advertising king Google.

On Wednesday, a finished version of Microsoft's next-generation operating system Windows 7 was made available to electronics makers for installation on new computers and other "smart" hardware.

Windows 7 is to be publicly released on October 22.

Microsoft has also released Windows Server 2008 software to makers of business computer servers.

"Macro-economic conditions are going to trump everything; we need to see overall spending increase," Liddell said.

There is a "sense of optimism" that a more promising economic outlook will boost spending on business and personal computers next year, according to Liddell.

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