Well I got a different oppinion.
MS is doing a great job with their OS (I know you guys don't like Vista, but it sells okay now after SP released, but thats another story) 95% of all PCs run on windows. Their MS Office is doing great,too. Every company is using it and teachers just accept .doc-files as digital homework. Check out numbers published by MS.
Live.com can't mess with google, that is true, but it gain some marketshare so far. But of course, Google > > > Live. Did you know that live.com is ranked fourth of the most popular websites in the world?
That does not mean, MS is out of the online business. They still got the most used browser and they got the greatest instant Messenger with the "Windows Live Messenger". More than 300.000.000 people are using it.
MSN.com is one of the greatest webistes out there, ranked on sixth of the most popular websites of the world.
Besides all that, MS is going in different markets right now. They got the Zune, which can't mess with the ipod, but did okay. They got the Xbox360 which is doing pretty good (compared to the original Xbox it is doing great) and they got live, which might turn into a cashcow with 10 million PAYING customers at the end of the generation. (right now there are 12 million members, but we don't know the correct number of gold-members, but 50/50 seems likely to me.)