Microsoft shares fell 3 percent in midday trading.

Speaking at a meeting in New York, Chief Executive Officer Steve Ballmer said Microsoft is looking to the television maker RCA as a role model. RCA spent money on research and development through the Great Depression, then dominated its market, he said.

(In fact, RCA became one of the countrys biggest conglomerates, but it also went a route Ballmer is unlikely to suggest for Microsoft: In the 1980s RCA was acquired by General Electric Co. and then saw its consumer electronics brand sold to Thomson SA of France.)

Ballmer pointed to areas of Microsofts business that will be hit hardest by the downturn and sketched out the products and projects that will get the bulk of the companys $27.5 billion in annual operating expenses.

Microsoft, which recently resorted to its first mass layoffs, will feel the economic pain most acutely in its units that sell the Windows operating system and Office desktop software, Ballmer said. Yet Microsoft plans to spend most heavily on those two segments as the company readies forthcoming versions, Windows 7 and Office 14, and pumps more money into advertising. Microsoft has said it expects to release Windows 7 by January 2010.

The CEO also said Microsoft has poured resources into a new version of the Internet Explorer Web browser to reverse losses in market share.

Ballmer addressed Microsofts strategy for “netbooks,” the brightest spot in todays PC industry. Today, most of these inexpensive, low-powered laptops run a basic version of Windows XP because its replacement system, Vista, requires too many computing resources. Windows XP is less profitable for Microsoft, however, so the company has said that the full versions of Windows 7 will work well on these small laptops.

Microsoft also will offer a version of Windows at the same price as XP – most likely the pared-down Windows 7 Starter Edition – but it is also working on ways to persuade netbook buyers to pay more for full-featured Windows 7 versions.

The Redmond, Wash.-based software maker will continue to fight Google for more of the Web search and advertising markets, even Microsofts two main tries at improving its hand – beefing up its technology and bidding for Yahoo Inc. – have largely flopped.

“You give up, you cant get back in the game,” Ballmer said.

“We know we have to be responsible and reasonable about the total amount of money that we invest. I dont want to wind up being known as the Jerry Yang of this market,” Ballmer said, referring to the Yahoo co-founder who was cast aside as CEO after turning down Microsofts $47.5 billion acquisition bid and failing to reverse Yahoos financial slide.

Ballmer would still like to make a search-related deal with Yahoo that would result in more competition for Google, and said Yahoos new management might help reopen talks. Investors sent Yahoo shares up 56 cents, or 4.7 percent, to $12.53. But Ballmer reiterated having no interest in acquiring all of Yahoo.

Microsoft shares were down 51 cents at $16.70 in afternoon trading.

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