In a wide-ranging and sometimes-combative interview with two Gartner analysts yesterday, always-feisty Microsoft CEO Steve Ballmer touched on various points that have kept the grapevine buzzing.

He dismissed Google (NASDAQ: GOOG) as a competitor and re-opened the door to a team-up with Yahoo (NASDAQ: YHOO).

Ballmer also defended Windows Vista and Windows 7, said Microsoft (NASDAQ: MSFT) is adopting a new business model and discussed cloud computing -- giving the audience a peek at the company's future plans.

However, he constantly shifted the focus of the discussion when quizzed by Gartner analysts Neil McDonald and David Smith during the interview, being held on the last day of the Gartner ITxpo in Orlando, Fla.

Asked about Google Apps, which Gartner analyst McDonald said "provide features that are better than what you have," Ballmer said "nobody uses these things" and dismissed Google Apps as "pretty primitive." Google Apps are "flatlined, and Microsoft Office is growing 30 percent in the consumer market," he added.

Google Apps "don't have the best word processor or spreadsheet we compete with; we get more competitive pressure from OpenOffice and StarOffice than we do from those guys," Ballmer said. OpenOffice, from OpenOffice.org, is an open source office software suite that goes head to head with Microsoft Office. It is based on StarOffice, which is offered by Sun Microsystems at a lower price than Microsoft's offerings.

Responding to Gartner analyst Smith's comment that half of 400 users surveyed by Gartner yesterday said they were using Google Apps, Ballmer replied "the real statistics are people try, they don't use."

Pain in the Apps

However, Ballmer tacitly conceded that Google Apps are hurting Microsoft in at least one area. University students, who are "the leading edge of all consumerization phenomena" use Office but "when it comes to sharing stuff they use Google Apps, which is why we're moving to Office Live," he said.

Advertising is where Microsoft sees Google as a competitor. "Google has the lead, but, if we're good at advertising, we'll compete with them in the consumer business," Ballmer said.

That ability to serve up ads online and to do online searches is what drove Microsoft to bid for Yahoo, and Ballmer said Microsoft views search as a critical functionality. "Search is a fundamental thing, and we're out selling [business intelligence], selling search," he explained.

Yahoo has repeatedly rebuffed bids from Microsoft. Asked why it would not make sense to bid for Yahoo now that its price has fallen, Ballmer re-opened the door to a possible purchase.

"They didn't want to sell when we offered $33, and we learned they want to remain independent, but perhaps there's an opportunity to work together around search," he said. "I still think it would make sense economically."

Shortly after Ballmer's interview, however, Microsoft released a statement challenging the notion that the door to a future tie-in with Yahoo still remained ajar.

"Our position hasn't changed. Microsoft has no interest in acquiring Yahoo; there are no discussions between the companies," it said in a statement.

Despite the statement, Yahoo's after-hours share price at press time Thursday evening was $13.39, up 40 cents or 3.08 percent.

Earlier, during the day's discussion McDonald asked why adoption rates for Vista are only 10 percent two years after its release, according to Gartner's research. Ballmer replied that Vista's growth has been faster than the adoption rate for Windows XP, and "we're now seeing a ramp up."

Told that 61 percent of the audience at Gartner's infrastructure and operations management conference in June said they would either skip Vista or had not yet decided whether to buy it, Ballmer turned the focus to Windows 7, which is "compatible with Vista."

Windows 7 is "bigger than a breadbasket, smaller than a refrigerator, it's a real release," Ballmer said, adding that it will "clean up in nice ways on the user interface, we'll pioneer touch and multitouch in the UI and improve the shell."

Looking into tomorrow

Ballmer then gave the audience a peek at what's coming down the line. "The most important thing we'll have to do beyond Windows 7 is redesign our applications and operating system to take advantage of the new processors from Intel (NASDAQ: INTC) and AMD," (NYSE: AMD) he said.

In addition, Microsoft will make "a lot of enhancements we can do on the fundamental NT code base," Ballmer said.

Asked about virtualization, Ballmer said that will be shipped as part of Microsoft's desktop optimization pack next year, and it will be "technology that lets you run the hypervisor and virtualization on the client but won't require a fundamental rewrite of the application."