Microsoft's next operating system (OS) will come with multi-touch features as an alternative to the mouse. It is hoped the successor will have a better reception than the much-maligned Vista OS, released last year.
Scheduled for release in 2009 the new fingertip interface lets users enlarge and shrink photos, trace routes on maps, paint pictures or play the piano.
"The way you interact with the system will change dramatically," said Microsoft chairman Bill Gates.
Speaking at the All Things Digital conference in San Diego, the Microsoft Chairman said Windows 7 would incorporate new forms of communication and interaction.
"Today almost all the interaction is keyboard-mouse. Over years to come, the role of speech, vision, ink - all of those things - will be huge."
Chief executive Steve Ballmer described the limited demo of the multi touch screen at the conference as "a small snippet" of the next version of Windows after admitting he wants "to do better" than Vista.
Even though Vista has suffered from a poor public image and a lukewarm welcome from many firms and users, Mr Ballmer said the company has shipped 150 million copies of the programme.
Touch enabled
Industry watchers say Microsoft is hoping that Windows 7 can change the way people interact with PCs in the future.
"Touch is quickly becoming a common way of interacting with software and devices," writes Windows product manager Chris Flores in a blog post.
"Touch-enabled surfaces are popping up everywhere including laptop touch pads, cell phones, remote controls, GPS devices and more."
When challenged as to who will get to market first with a new touch screen device, Microsoft or Apple, Mr Ballmer said it was not much of an issue.
"We'll sell 290 million PCs and Apple will sell 10 million Pcs."
"They're fantastically successful and so are we and our partners. But it's a different job. Steve (Jobs Apple CEO) can flip his hand and sell a few models and I don't take a thing away from him."
Website Beta News reports that "beta testing of the product should begin later this year although a lack of touch-screen devices could slow widespread trials of the new interface".
We walked away
During the conference, CEO Steve Ballmer also talked about the company's failure to buy Yahoo, following its offer of $47.5 billion.
"Look, we made a bid for Yahoo. It was out there for three months and there was a difference between bid and ask."
"We thought we could accelerate our business. We were going to be financially disciplined about it. We walked away. We are talking with them about other ideas but we are not re-bidding on the company. We reserve the right to do so. That's not on the docket."
Mr Gates said: "I've been supportive of everything Steve has done. Totally supportive."
World's best search
While many attending the D6 conference focused on the Windows 7 announcement and comments on Yahoo, a spotlight was also turned on Bill Gates who is counting down to his last day at Microsoft on 1 July.
At a reception earlier in the day, Mr Gates chatted to reporters about what the future holds for him. He said even though he was retiring from his "daily duties" at the firm he founded, he wouldn't be letting go completely.
Instead of spending 80% of his time at Microsoft and 20% at the Bill and Melinda Gates Foundation he would now reverse that.
Mr Gates, who will remain as chairman of Microsoft, said he would still have an office in Redmond and spend time writing, thinking and working on a variety of pet projects including the next generation Microsoft Office.
"I'm very involved in search, the internal development," he said. "We will build the world's best search."
BBC NEWS | Technology | Microsoft demos 'touch Windows'
Me and Meow were discussing drag and drop for uploads yesterday, well Meow... Imagine being able to drag and drop pictures straight into TFs gallery without even needing a mouse, just using a finger to drag it to it's resting place, now that would be pretty cool.