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Microsoft's Gates, Ballmer Talk Up New OS

Also, Ballmer reiterates that Microsoft is discussing a Yahoo! deal that does not involve a full acquisition.

SAN FRANCISCO -- Little more than a year after the release of its Vista operating system,


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executives offered a peek at its replacement Tuesday evening.

In a wide-ranging discussion at the annual D6 meeting, hosted in Carlsbad, Calif., by

The Wall Street Journal

, which reported the proceedings on its All Things Digital Web site, Microsoft Chairman Bill Gates and Chief Executive Steve Ballmer acknowledged public dissatisfaction with Vista before demonstrating the user interface for Windows 7, which is expected in late 2009 at the earliest.

The executives also repeated previous disclosures regarding their deal talks with



, without shedding any light on where the process stands.

The partial unveiling of Windows 7 comes at a sensitive time. The Redmond, Wash., software company is working hard to move corporations onto the new system, while fighting a stream of criticism and pleas for Microsoft to continue selling its previous XP system until Windows 7 is ready. The client division -- primarily Windows PC software -- recently reported revenue of $12.5 billion for the first three quarters of the company's fiscal year, up 12% from the same period of fiscal 2007.

"Vista is not a failure," Ballmer said, according to the Web site. "Is it something that with 20/20 hindsight we'd do differently? Sure." The chief consumer complaint about Vista is that Microsoft altered the Windows user interface, he added.

When asked if Vista has damaged the Windows brand, Gates, who in July will step back from daily involvement in the company, said Vista has given Microsoft the opportunity to improve on the system -- a company goal with all of its software.

Some 150 million copies of Vista had been installed by the end of April since its launch in early 2007, according to Microsoft. Despite previous assertions that the newest operating system was rolling out on course, Vista is widely seen as a disappointment. Due to market demand, the company has had to extend the availability of XP for ultra-low-cost PCs. XP requires less computing power than Vista.

Windows 7, as demonstrated Tuesday, will be capable of using the multitouch technology developed for Microsoft's tabletop Surface device, which is sold to hotels and casinos. Gates said the technology represents the beginning of computing based on a new hierarchy of input systems, such as "speech, gesture, vision, ink." Microsoft also owns speech-to-text software technology.

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Ballmer reiterated that Microsoft is talking to Yahoo! about a new deal that does not involve a full acquisition. The two companies broke off talks in early May after they couldn't agree on a price. Microsoft offered up to $33 a share for Yahoo! at that time. Microsoft reserves the right to rebid for the company, Ballmer added.

The addition of Yahoo!'s search and online advertising businesses would strengthen Microsoft's hand in competition against


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, the dominant player in search. (Meanwhile,

Business Week

reported that Microsoft

might still be interested

in buying all of Yahoo!.)

Regarding the Windows 7 demo, Roger Kay, Microsoft analyst with Endpoint Technologies, said he had no idea "they were going to talk so much about this product this early. It's a little surprising to be so public about this" while Microsoft is still struggling for market acceptance of Vista, and could indicate that development of the new operating system is further along than expected.

"They probably realize the sentiment is not with them on Vista," Kay added.

Officially, Windows 7 is expected to be released in 2010, although it would likely be available in beta in 2009, Kay said.

Windows 7 will not be a departure from Vista, Kay predicted, because it will employ the same graphics driver and security model. But Kay has urged Microsoft product managers to create a modular version of Windows 7 that reduces boot-up time and the need for powerful processors in smaller devices. Vista boots up a plethora of services, such as one for tablet PCs, but only 1% of PCs are tablets, making the system unnecessarily slow for most users, Kay said.

"I'd love to see an operating system with no services" launched at start-up, he said. "When it needs them, it would call them up."

A recap of the Gates and Ballmer interview may be found