Microsoft, the world's biggest software maker, is considering launching a hostile bid for Yahoo! as early next week if Yahoo! does not begin talks soon, chief financial officer, Chris Liddell, said yesterday after the world’s biggest software maker reported an 11 per cent drop in its third-quarter profit to $4.39 billion.

The company, reporting results two days before a deadline set by Steve Ballmer, the chief executive, for Yahoo! board to accept Microsoft’s unsolicited takeover offer or face a proxy fight, said that net income in the three months to March 31 fell to 47 cents a share, from 50 cents the year before, as revenues rose slightly from $14.39 to $14.45 billion.

Microsoft added that profits during the current quarter, ending June 30, could just miss the consensus analyst forecast of 48 cents a share, predicting that they would come in at between 45 and 48 cents.

The shares fell $1.43 to $30.37 in extended trading at $31.80 at on the Nasdaq Stock Market, as investors reacted to Microsoft's outlook for this quarter.

Yahoo! management has “unrealistic expectations” of its value, Mr Liddell said. “We have been clear that speed is of the essence to make sense,” he added. Microsoft will provide an update on its plans for Yahoo! next week.

Furthermore, although third-quarter revenues matched expectations, investors were also disappointed that they were not a little higher and concerned that sales of Microsoft’s Windows software package were not better.

Microsoft's client division, which makes its Windows operating system, reported $4.03 billion in sales, down 24 per cent. The business division, which includes Office software, recorded a 1.7 per cent decline in sales to $4.75 billion.

In online services, one of Microsoft's smallest but potentially most important divisions, sales grew 40 per cent, although its loss widened to $228 million.

Third-quarter profit and sales a year ago were helped by $1.67 billion in Windows and Office software orders held over from the previous quarter for accounting reasons.

This year’s third-quarter results included a 15-cent-a-share charge related to an antitrust fine by the European Commission, cancelled out by a 15-cent-a-share tax-related benefit.

On Wednesday, Mr Ballmer threw down the gauntlet in the battle for Yahoo!, hinting that the software group would walk away if its unsolicited offer was rejected by investors.

Speaking after he had addressed a conference in Milan, Mr Ballmer said: “We know what Yahoo! is worth to us. We offered a lot of money: $44 billion. If their board thinks that’s fair, great. If not, we’ll move forward without a merger.”

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