The online services division also made a loss of $488m in the quarter just passed, which was Microsoft's fourth fiscal quarter.
However annual revenues climbed by 32% to $3.21bn.
The division earns most of its revenues from online advertising with the remainder from consumer services such as subscriptions and internet access.
Microsoft's chief financial officer Chris Liddell announced plans to invest an additional $500m in the business, of which most would go into the online services division.
Earlier this year Microsoft made a $47.5bn bid for rival Yahoo! in order to gain a much bigger share of the online advertising market, but has been continually rebuffed by its prey.
In comments following the publication of the results, many analysts blamed the online services division for holding back Microsoft's overall performance.
The company narrowly missed Wall Street's earnings forecast and its share price fell 6% to $25.70.
Overall revenues for 2007/8 were $60.42bn, which was an increase of 18% on the previous year. Post-tax profit was $17.68bn, up 26%.