The world's largest software maker said profit dropped by 32% to $2.98bn (£2bn). Sales slipped to $13.65bn.
Microsoft makes most of its profit selling the Windows operating system and business software such as Office.
However demand has been hit by falling sales of personal computers as consumers and businesses trim spending.
"We expect the weakness to continue through at least the next quarter," said the firm's chief financial officer, Chris Liddell.
'On track'
Microsoft - which became a public company in 1986 - has been looking at ways of cutting costs.
In January, it said it would cut up to 5,000 jobs over the next 18 months, including 1,400 immediately.
Microsoft's fall in profit was more severe than analysts had been expecting.
"There's stuff to be happy with - they're controlling costs and getting that under control," said Kim Caughey, a senior analyst with Fort Pitt Capital.
"The bad thing is demand and consumer preference seems to have affected their top line."
Shares in Microsoft rose by 4% in after-hours trading - possibly reassured by comments from the firm that it was on track to release the next version of its operating system, Windows 7, during its 2010 financial year.
