Indeed, based on what I saw at the Wall Street Journal’s D: All Things Digital conference in Carlsbad last week, there is still plenty of tread on Microsoft’s tires.

Microsoft CEO Steve Ballmer was one of the speaker’s at D, where he responded to questions from conference co-host and Wall Street Journal Personal Technology columnist Walt Mossberg. Although upbeat on Microsoft, Ballmer was not optimistic about a quick economic turnaround, saying “to think that things would be back in a year seems naive to me.” He went on to say that it could be a very long recovery and “maybe today is normal and yesterday was a blooper.”

He also said that Microsoft has flattened out its research and development spending. It’s not that it has stopped investing in new products; it’s just that it is no longer continuing to increase the level of spending at a steady rate.

Still, the company has been productive in recent months. For one thing, it’s only a few months away from releasing Windows 7, which Ballmer confirmed should be ready in time for the holidays.

I’ve been testing Windows 7 for months and, based on my experience, it’s the best and most stable operating system Microsoft has ever created. My PC that runs a Windows 7 “release candidate” still occasionally slows down and even crashes but far less often than with Vista or XP.

And the user interface — especially the ability to peer into the windows of running programs by clicking on their icon on the task bar — makes using Windows a lot easier.

But the big news at D was about search. Ballmer officially unveiled the company’s new search engine, which it is calling Bing. Bing.com will go live on June 3, but if you go to the site now, you’ll see a preview video. Before unveiling Bing, Ballmer showed a video about all the different brands that Microsoft has applied to its search efforts, including MSN Search and Live Search. Ballmer thinks that Bing is more likely to resonate with users. “Brand doesn’t substitute for innovation, but innovation doesn’t substitute for a brand consumers can get their mind around,” he said.

It would be a gross exaggeration to call Bing a Google killer, but that’s OK. Google doesn’t have to die for Microsoft to succeed in search. Besides, Ballmer made it very clear that he doesn’t expect Bing to overtake Google in the foreseeable future. Microsoft, if anything, is persistent. It took three tries before Microsoft Word was worthy of becoming the dominant word processing program, and it wasn’t until version 3.0 that Windows began to get serious traction.

To differentiate itself from Google, Bing is not only visually more attractive, it’s also more informative. Functioning as what Microsoft is calling a “decision engine,” rather than simply linking you to sites, Bing searches often end with information directly from Bing. For example, if you type in the name of a city you get local weather, hotel prices and other information without having to click anywhere. And, depending on the content licensing rules of sites that Bing draws from, it can sometimes display content directly — from Wikipedia for example — without the user having to click through. It even has a built-in shopping engine that, when you search for a product, shows you images, offerings from multiple merchants as well as product information, customer reviews and expert reviews.

The search engine also helps you find travel deals and lets you book travel without having to leave the site. I’m not sure how well it works, but it includes a “price predictor” that helps determine if the price of the ticket you’re thinking of buying is likely to go up or down.

Despite Google’s current dominance, search doesn’t have to be a winner-takes-all business. If Microsoft can increase its market share gradually over time, it stands to take in billions in additional revenue. In the meantime, Google isn’t standing still. Just as Ballmer was in Carlsbad talking about Microsoft’s foray into search, Google executives were in San Francisco talking about how they are beefing up their offerings, including some that will compete head-on with Microsoft’s core applications.

The economy may be in a recession, but tech isn’t in a slowdown. Thanks to startups and innovative thinking from big companies like Google and Microsoft, 2009 might be remembered as a banner year for innovation.

I don’t know how much Microsoft plans to charge for the upgrade once it’s officially available, but the company should give it away free to anyone who bought Vista or a PC with Vista preinstalled. Even though there are some new features, Windows 7 strikes me mostly as a bug fix. It speeds up Windows and fixes one of its most annoying “features” and makes one particularly useful change to the user interface. It seems to me that anyone who paid for Vista is entitled to this upgrade.

Microsoft has launched a free, public, beta test of the software, but to participate you must download it by Feb. 10. It’s not for everyone. Microsoft strongly recommends that “only experienced computer users sign up” for the beta program. Displayed on the screen is the caveat, “For testing purposes only.” The beta will expire in August, but should be replaced by a newer beta or the real product. If you’re game, you can download the beta test of Windows 7 at Microsoft’s Web site

I installed it on two machines, a brand new desktop and an older notebook PC. The notebook installation was an upgrade of an old copy of Vista that I’ve had for a couple of years. As is often the case with Windows, the OS on that machine got pretty slow after two years of use. But Windows 7 sped it up. Until now, every new version of Windows was slower than the one it replaced.
Windows 7 is what Vista should have been. Like Vista, it retains the translucent “aero” and much of the operating system’s look and feel. But with Windows 7, aero is more than window dressing.

For example, the task bar at the bottom of the screen now displays icons for all running programs. If you mouse over that icon, you’ll see the window translucently appear in a preview mode over part of the bottom of the screen. If that program has more than one window you’ll see all of them. With Internet Explorer (but not yet Firefox), you’ll also see all open tabs. You can mouse over one of those windows to see a full-screen preview and click on it to bring it to the foreground.

Based on my limited tests, Windows 7 also seems to go to sleep and wake up faster. When I open the lid on my notebook PC, the computer comes to life almost immediately and–as is the case with Macs–it immediately restores my wireless networking connection, so I don’t have to wait or click around to get back online. It’s as if Microsoft finally entered the 21st century.

You can also “pin” icons to the task bar so that they’re always there. And Windows 7 features “jump lists” that show you files you recently opened with that program. Another change is that the dreaded “user account control,” or UAC, which nags you whenever you try to install software, is more granular. With Vista it was either on or off. But with Windows 7, you have more control over how it operates. For example, you can tell UAC not to notify you when you make changes to Windows settings, or only when programs try to install software or make changes to your computer (a good idea to protect you against malicious software).

Although none of my PCs supports it, Windows 7 comes with multitouch. So if you have compatible hardware, you’ll be able to use gestures with your fingers for all sorts of tasks, including zooming in and out of Web pages and photos. It’s too early to know whether Windows 7 will work with the vast majority of programs and devices out there. In my tests, it performed well. It works with my old printer, router, and other peripherals, plus all the programs I’ve tested. But it will take months of testing before we know if it will work with the millions of possible combinations of hardware and software. That’s why it’s not a good idea to install it on a machine that you use for real tasks.

Bottom line: Windows 7 is prettier, cleaner, faster, and generally better than Windows Vista. But it’s not really a new operating system as much as a fix for things that are wrong with Vista. It looks like Microsoft got it right this time. Let’s hope it does right by its existing Vista customers by offering it as a free or very low-cost upgrade.

Podcast: Larry Magid talks about Windows 7 with CNET’s Ina Fried.