When it comes to Windows Phone, Microsoft is in a bit of a bind. On the one hand, the software giant has created an innovative and useful mobile platform that offers important improvements over the Android and iPhone competition. But on the other hand, no one seems to be buying the phones and, if anything, Microsoft has actually lost mobile usage share over the past year.

So give Microsoft some credit for at least being honest about this concern, and the company is now looking to the following year—with its major Nokia partnership and the release of Windows Phone v2, code-named "Mango"—to jumpstart the ailing platform.

"In a year, we've gone from very small to ... very small," Ballmer deadpanned during Monday's Worldwide Partner Conference (WPC) 2011 keynote address, referring to Windows Phone usage. That drew laughs from the audience, but the message was certainly clear enough: Microsoft needs to do better in mobile.

To demonstrate the advances it's making along those lines, the company showed off second-generation Windows Phone handsets for the first time on Tuesday, also at WPC. The new devices add features that will be exposed by Mango, but also boast other improvements, including a waterproof handset from Fujitsu and a beautiful new Samsung design with a huge screen and very thin and light form factor. Microsoft noted that ZTE, one of the largest smartphone manufacturers in the world, would be making a Windows Phone, though the company is relatively unknown outside of China. Acer is also on board.

Another key complaint about Windows Phone today is camera quality: All of the first-generation Windows Phone handsets have lousy cameras, even by smartphone standards. But that's changing in the second generation, with Nokia and its superior optics leading the way, Microsoft says.

Microsoft Windows Phone Division President Andy Lees said Tuesday that the release of Mango would be a major milestone for the fledgling platform.

"With Windows Phone 7 and our upcoming 'Mango' release, we bring a familiar platform and tools together with the breadth of Microsoft products to help partners scale and reach new customers," he said. "This represents a huge opportunity for partners to thrive and grow their business in the rapidly expanding Windows Phone ecosystem."

But Lees later ran into some controversial territory when he finally addressed a key topic at the heart of any Windows Phone discussion: Why isn't Microsoft using this innovative OS in a tablet, as Apple did with iOS and Google did with Android? "We view a tablet as a PC," Lees said—which is a curious position for the guy in charge of Microsoft's non-PC OS. One has to think that Lees would personally love to see Windows Phone OS on a tablet.

Of course, Microsoft's tablet plans are wrapped up in Windows 8, which should ship by mid-2012. But that's two years after the first iPad, giving Apple—and now a host of other competitors—a huge head start.