The address is scheduled to be the last of its kind by Putin, who has vowed not to seek a third term in the March 2008 presidential election.
As in previous years, Putin began by applauding Russia's booming, oil-fueled economy.
"The situation in the country has begun to improve gradually, still slowly, step-by-step," Putin said. "Not only has Russia fully overcome a long period of production decline, but it is now ranking among the world's top-10 largest economies."
Despite that thinly veiled jab at the late Boris Yeltsin, blamed by many for plunging Russia into economic and political chaos, Putin called for a minute of silence in memory of his predecessor, who died of heart failure this week and was buried on April 25.
Putin today was expected to recap his achievements during two terms in office. But instead, he focused largely on priorities for the year ahead.
"In the past, in the era of colonialism, colonialist countries talked about their so-called civilizing role. Today, [some countries] use slogans of spreading democracy for the same purpose, and that is to gain unilateral advantages and ensure their own interests." -- Putin
As part of efforts to translate Russia's oil windfall into better living standards for the population, he announced a sweeping housing offensive, pledged to modernize schools, and proposed a state-sponsored pension-saving scheme.
He outlined a string of ambitious reforms to overhaul industries as diverse as transport, aviation, fishing, and nanotechnology.
In the sphere of energy, he called for a two-thirds increase in domestic-power generation by 2020 and the creation of a special nuclear corporation to run Russia's nuclear power plants.
The speech comes just months before December's parliamentary elections, which Putin called the most import event of the year in Russia. He said the introduction of a system of proportional representation would ensure a fair poll.
He said foreign cash is being pumped into Russia to meddle in its internal affairs under the pretense of fostering democracy.
"There is a growth in the flow of money from abroad used for direct interference in our internal affairs," Putin said. "In the past, in the era of colonialism, colonialist countries talked about their so-called civilizing role. Today, [some countries] use slogans of spreading democracy for the same purpose, and that is to gain unilateral advantages and ensure their own interests."
Putin did not name specific countries, but his comments echoed earlier criticism of Washington's funding of nongovernmental organizations in Russia.
The president also lashed out at U.S. plans to deploy elements of a missile-defense shield in Poland and the Czech Republic, while declaring a freeze on Russian commitments under the 1990 Conventional Forces in Europe Treaty.
"Despite our earlier agreements with NATO, new NATO members, such as Slovakia and the Baltic states, for instance, have not yet joined the Conventional Forces in Europe Treaty, which creates real dangers with unpredictable surprises for us," Putin said. "In this regard, I consider it expedient to declare a moratorium on Russia's implementation of this treaty -- at least until all NATO countries, with no exception, have ratified it."
Despite Washington's assurances that its proposed missile-defense system would protect Europe from countries such as Iran or North Korea, Moscow says the shield would pose a threat to Russia.
Although today's state-of-the-nation address is likely to have been the last of its kind by Putin, the president said it was not a farewell speech.
He wrapped up his address by saying it would be "premature" to issue his political testimony.