Microsoft's earnings would have been nearly $2.5 billion (€2.3 billion) lower in its last financial year if it had deducted the costs of issuing stock options to its employees, the firm said yesterday.

News of the expenses, which would have cut after-tax profits to $7.5 billion, follows Microsoft's decision to break ranks with other big tech firms and abandon all stock options awards from now on.

In its annual report filed yesterday, the world's biggest software firm also revealed its continued heavy reliance on the Windows desktop computer operating system for its profits growth, in spite of efforts to diversify into other areas.

The firm's client division, based largely on the personal computer operating system, generated operating profits of $8.4 billion during the past 12 months, a rise of 11 per cent, while maintaining its operating profit margin of 81 per cent.

Meanwhile, Microsoft also cut the losses from some of its newer businesses, reflecting management efforts to curb ambitious spending on things such as the Xbox games system and the MSN online service.

Losses from these and other newer businesses fell to $1.63 billion. - (Financial Times Service)