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NEW YORK — Microsoft is banking on Windows 7 to breathe new life into a PC world where most computer users are running XP — an operating system that was released in the early days of the Bush administration.

Experts expect that PC users will change their operating system for the first time in about eight years when Microsoft (MSFT, Fortune 500) launches Windows 7 on Oct. 22.

Microsoft’s last operating system, Windows Vista, was a disaster when it was released in 2007. Vista was plagued by bugs, software incompatibilities, sluggishness and annoying security alerts. The episode nearly destroyed the tech giant’s reputation with consumers.

“The stakes for Microsoft are astronomically high after the Vista debacle,” said Scott Anthony, managing director of Innosight Ventures, a venture capital and consulting firm. “There is a lot of hunger for computing power around the world, and this release will be a real test for Microsoft.”

Positive reviews for Windows 7 have been pouring in. Computer experts say that Windows 7 is good — if not perfect — and has a shot at eventually usurping XP as the world’s most prevalent operating system.

Right now 71.5% of PCs are still running XP, according to OS market share tracker, while 18.6% of PCs are running Windows Vista.

“There was lots of negativity around Vista, and Microsoft lost a lot of goodwill with its customers,” said Ken Allen, a portfolio manager at T. Rowe Price who manages a tech fund that includes Microsoft as one of its holdings.

Microsoft has aggressively been rolling out products and services (think Bing and Zune HD) to boost its sales, which have declined in the previous two quarters. Its third quarter ended March 31 marked the first time sales fell in Microsoft’s 23-year history as a public company.

“The ‘bad will’ that Microsoft engendered could be reversed if Windows 7 is well received,” said Allen.

It appears Microsoft is on the right road. Demand for new computers is starting to heat up again, and many users are looking for an operating system upgrade. Windows 7’s release coincides with holiday season shopping. With the economy showing signs of recovery, consumers may be more willing to loosen their purse strings.

What XP users can expect: Windows 7 is faster, more secure and easier to network with other computers than XP. Microsoft has also added a number of features to simplify tasks.

For instance, Windows 7 unveils a more efficient task bar allowing users to switch more easily between programs than the current Alt-Tab function in Windows XP. It also allows users to preview programs by hovering over icons on the taskbar.

Users will also be able to simply shake their mouse to unclutter their desktop rather than having to minimize multiple windows.

“Windows 7 is a far superior product than previous versions, and no one will be disappointed if they use it,” said Vishal Dhar, co-founder of iYogi, a global tech support company for consumers. “At the right price point, [consumers] will upgrade for the new features.”

Dhar said people used to XP will be most pleased with Windows 7’s video editing capabilities, which XP did not accommodate, and speed. He also said the $119 upgrade price is likely low enough to lure people to upgrade.

But there’s one hitch and it’s a biggie: upgrading is far from easy. XP users who choose to upgrade their computers to Windows 7 will have to either wipe their hard drives or re-install all of their applications. That means finding the product keys and old CDs. As a result, some experts say XP users interested in Windows 7 are better off just buying a new computer.

Slow boost to PC sales: While many experts expect a brief pop in PC sales from Windows 7, most anticipate the bulk of those sales to occur next year.

“Adoption of Windows 7 may take a while longer than some expect,” said Scott Anthony, managing director of Innosight Ventures, a venture capital and consulting firm. “A lot of consumers are going to wait because they heard about people getting burned on Windows Vista.”

Tech analysts also expect businesses to delay adoption of Windows 7 until next year.

“We don’t expect the release of Windows 7 to significantly influence PC demand at year-end,” said George Shiffler, analyst at Gartner. “At best, Windows 7 may generate a modest bump in home demand and possibly some added demand among small businesses.”

Shiffler said he doesn’t expect most larger businesses to start switching to Windows 7 en masse until late 2010, and believes vendors have overestimated how many people will be interested in the product right off the bat.

Even Microsoft CEO Steve Ballmer said earlier this month that the rise in PC sales as a result of 7’s release “will probably not be huge.”

Experts say it will be difficult to judge the success of Windows 7 for a year or maybe more, but what’s clear is that Microsoft has a lot riding on the latest update to the world’s favorite operating system.