"We identified over 100 possible candidates talked with several dozen and then focused our energy intensely on a group of about 20 individuals," Microsoft board member John Thompson said in an update posted online.
"As you would expect, this group has narrowed," he continued. "We're moving ahead well, and I expect we'll complete our work in the early part of 2014."
"Unless you're constantly inventing something new, you're old and tired," Ballmer said at a conference in Rome. "Today we're having to remake ourselves."
Ballmer was a classmate and friend of Bill Gates from their days at Harvard University in the 1970s.
He took over from Gates in 2000 but earlier this year said he will step down by August 2014.
When Ballmer took over, Microsoft was the undisputed tech sector leader, and the world's largest company in market value. But in recent years it has struggled as consumers began to move from desktop and laptop PCs to mobile devices.
"Microsoft has had only two CEOs in its 38-year history," Thompson said.
"We are determined and confident that the company's third CEO will lead Microsoft to renewed and continued success."