Updated from 2:22 p.m. EST

Online search, smartphones, servers and netbooks will all be high on

Microsoft's

(MSFT) - Get Report

agenda during the coming year, according to CEO Steve Ballmer, who outlined his firm's strategy at an analyst event Tuesday in New York.

The hard-charging executive, known for his energetic public performances, was relatively subdued while providing the company's strategic update, but described Microsoft's plans to combat the tech spending climate.

The software giant, which missed analysts' earnings and revenue estimates in its recent

second-quarter results

, is clearly keen to gain traction in a slew of markets outside of desktop software.

"Some of you will ask 'why do you stay in search and advertising?' " said Ballmer, acknowledging the company's small presence a market outside its core business. "This is a huge opportunity -- if we give up, we can't get back in the game."

Online search, which is dominated by the likes of

Google

(GOOG) - Get Report

and

Yahoo!

(YHOO)

, can open the door to lucrative advertising revenues, and Ballmer explained that his firm has "good ideas" in this area.

"We have got to make new releases quickly," said the Microsoft chief. "

And we have to invest in marketing and distribution."

Microsoft, which signed

distribution deals

for its Live Search offering with

Dell

(DELL) - Get Report

and

Verizon

(VZ) - Get Report

earlier this year, also wants to get closer to one-time

acquisition target

, Yahoo.

The search giant rejected a

$47.5 billion

bid from Microsoft last year, although Yahoo! has since undergone major management changes, with Carol Bartz taking the role vacated by former CEO Jerry Yang.

Microsoft, which had stalked Yahoo! throughout 2008, still has

feelings

for the search specialist, according to Ballmer.

"I would like to pool Microsoft and Yahoo!," he said, adding that he is not necessarily thinking about an acquisition.

With new management in place at Yahoo Ballmer hope that the two firms can carve out a new relationship, although he could not resist taking a swipe at Yang.

"That whole episode made me realize how investors get frustrated with management that is not serious about performance," he said.

News of Microsoft's plans did little for the company's share price. Despite a broader rally in tech stocks that saw the Nasdaq rise 3.65%, Microsoft's shares fell 7 cents, or 0.4%, to $17.12 Tuesday.

Like most of the tech sector, Microsoft's stock has taken a

pounding

during the

economic downturn

, and the firm recently pulled out the ax on 5,000 employees.

Set against this turbulent backdrop, Ballmer outlined

plans

to tap the lucrative smart-phone market.

"It's not our strategy to build our own phone," he said, explaining that Microsoft will instead focus on

smartphone

software, unveiling Windows Mobile 7 next year. "Smartphones will grow, in my opinion, even as the phone market as a whole decreases."

Microsoft, which recently

unveiled

Windows Mobile 6.5, is building more traditional Windows features into Mobile version 7, such as a more Windows-style browser and similar presentation of services.

"There's still a distinction between what is a PC and what is a phone," said Ballmer. "

But Windows and Windows Mobile will become closer in many ways.

The non-mobile version of Windows 7 is also seen as crucial to the company's future after Vista's ignominious showing. Early reviews of the software, which could be launched in 2009, have been glowing, and

TheStreet.com

's gadget guy Gary Krakow found it "lightning fast."

Microsoft is also looking to boost its presence in the mini-laptop market thanks to the souped-up version of Windows.

"Windows 7 will be available on the netbook," said Ballmer, explaining that netbook users are currently limited to Windows XP. "We're going to have a lot more opportunities about how we get the customer to trade up from the lower-priced offering to a higher-priced offering."

Other products on the Microsoft roadmap include a low-cost, stripped-down version of Windows Server, which will be available in the next couple of months, and a high end version of SQL Server aimed at data centers, which will be available sometime in the "next year or so," according to Ballmer. The Redmond, Washington-based company is also planning to launch version 14 of its Office software, although the CEO said that this will not be on the market in 2009.

Ballmer was also quizzed by analysts about his plans to

open Microsoft retail stores

, which

TheStreet.com

's Jim Cramer, feels could be a

step in the wrong direction

.

"Let me first say that when we have a real complete plan we will tell you what our real complete plan is," replied Ballmer, in response to an analyst's question. "We don't intend to dig a big economic hole with our stores."

The CEO added that Microsoft is still working out how many stores it will open and what products will be carried.