Microsoft (MSFT, $29.95, down $1.85) dropped the ball on its latest earnings report and the stock is taking a hit. Shares are currently trading below $30 after the company reported that earnings per share fell from $0.50 to $0.47 on revenue of $14.45 billion. The numbers were slightly higher than Wall Street estimates of $0.44 a share on $14.4 billion in sales.

The company also issued guidance for the current quarter for a profit of $0.45 to $0.48 a share, which only matched Wall Street’s current view of $0.48. This and the fact that sales of its Windows software fell 24% to $4 billion are some of the reasons the stock is down 5%. Although this was a pretty solid quarter, earnings per share would have been worse if Microsoft hadn’t aggressively bought back its shares.

This leads us back to Yahoo (YHOO, $26.69, down $0.61). Microsoft reiterated in its conference call that it would not raise its bid for Yahoo but continued losses in Microsoft’s online division – which it plans to merge with Yahoo – swelled to $228 million from $171 million in the same period last year.

These results suggest that Microsoft could certainly use Yahoo but with a deadline of Saturday for a deal to get done, it’s looking more and more like Microsoft could walk away which is why Yahoo’s stock is feeling some heat.

Rick Rouse