Jim Allchin, a senior Microsoft Corp. executive, walked into Bill Gates's office here one day in July last year to deliver a bombshell about the next generation of Microsoft Windows.

"It's not going to work," Mr. Allchin says he told the Microsoft chairman. The new version, code-named Longhorn, was so complex its writers would never be able to make it run properly.

The news got even worse: Longhorn was irredeemable because Microsoft engineers were building it just as they had always built software. Throughout its history, Microsoft had let thousands of programmers each produce their own piece of computer code, then stitched it together into one sprawling program. Now, Mr. Allchin argued, the jig was up. Microsoft needed to start over.