REDMOND, Wash. — Gary Flake recalled scanning the faces of the three other senior Microsoft Corp. executives at a meeting last month and noticing that, like himself, they were new to the company.

They had all been key players in Internet services, a field that threatens the empire of desktop software that made Microsoft one of the world's most influential corporations. Before the meeting was over, he said, the executives agreed to complete this Internet coup — from the inside.

"We had this realization," Flake, a senior engineer, said after the meeting adjourned. "We came to Microsoft to change the world. But the only way we're going to change the world is we're going to change Microsoft."

Never before in its 30-year history has Microsoft faced a more pressing need to turn its innovative prowess inward and remake itself. The company that became synonymous with computing for hundreds of millions of users worldwide is confronting an onslaught by rivals bent on stripping away Microsoft's customers by providing cheaper — or free — software on the Web.

Microsoft faces a dilemma common to many major corporations, including telephone companies, newspapers and automakers, as they wrestle with how to break loose from their traditional businesses before it's too late. Many have been unable to cannibalize their core operations, remaining intoxicated by the high profits they still provide. But the burden of maintaining the old businesses that made them titans can starve companies of the investment and initiative they need to innovate.

In the next several weeks, Microsoft plans to release new versions of the software responsible for its profitability and industry clout: a more sophisticated version of its Windows operating system called Vista and an updated business-productivity suite called Office 2007. Those two marquee products embody the essence of desktop computing and are on track for release to businesses on Nov. 30 and to consumers in January, Chairman Bill Gates said last week at the company's annual shareholders meeting.

Microsoft is at the same time reinvigorating its effort to scale the heights of the Internet with the release of Office Live, an Internet service for small businesses unrelated to the desktop programs Word and Excel that offers Web sites, domain names, company e-mail accounts and shared online workspaces. The service is part of Microsoft's bid to thread the Internet through its many products and platforms, including game consoles, media players and corporate servers. Chief executive Steven A. Ballmer told shareholders that online services, along with entertainment, would drive growth in the future.

But for now, Windows and Office account for most of the company's revenue, an estimated $6.7 billion in the past quarter, about 62 percent of the total. And they present a fundamental challenge: Each new release carries the baggage of the past because it must be compatible with all the software and hardware that ran on earlier versions.

Tens of thousands of engineering hours were spent on Vista, analysts said. It contains about 50 million lines of computer code, 40 percent more than the previous version of the operating system, Windows XP.

All that is hamstringing Microsoft's efforts at competing online.

"When I came to the company, I could see some people really got it with respect to the shift in the industry," Ray Ozzie, a celebrated engineer who joined Microsoft last year, said last week at an Internet conference in San Francisco. But, he added, "some people were heads down working on Vista, working on Office."

This is not the first time Microsoft and its 70,000 employees have revised its Internet strategy. But in the five years since Windows XP was released, the success of Microsoft's online ventures has taken on new urgency as high-speed Internet access proliferated, software migrated online and Web advertising spawned new media models.

The standard-bearer of the new Internet movement, Google Inc., has emerged as a pretender to Microsoft's throne. It dominates Web search and has introduced other services, including online spreadsheets and word processing programs that compete with Excel and Word. Google also is making the guts of its Web offerings, such as Google Maps, available to software developers so they can build their own products on top of them, much as an earlier generation engineered its software on top of Windows. Google's revenue last quarter increased nearly six times faster than Microsoft's, and its stock price is soaring while Microsoft's is generally unchanged since early 2004.

To help it compete, Microsoft has been raiding Internet rivals and hiring people such as Flake, one of 14 Microsoft employees honored with the corporate distinction of "technical fellow." Flake and his colleagues at the meeting last month have already demonstrated they get the Internet.

They included Steve Berko-witz, a former chief executive of the Internet search company Ask.com who became Microsoft's senior vice president for online services; and Debra Chrapaty, a former president of the E-Trade Group Inc. who is now Microsoft's vice president for Windows Live operations.