Microsoft says 2005 could be a difficult year, as Linux continues to pinch customers from the software giant.

In a report filed with the US Securities and Exchange Commission, the company says it recognises the threat posed by its open source competitor. "We continue to watch the evolution of open source software development and distribution. We believe Microsoft's share of server units grew modestly in fiscal 2004, while Linux distributions rose slightly faster on an absolute basis," the filing said.

"The increase in Linux distributions reflects some significant public announcements of support and adoption of open source software in both the server and desktop markets in the last year. To the extent open source software products gain increasing market acceptance, sales of our products may decline, which could result in a reduction in our revenue and operating margins."

The company mentions in the report that sluggish PC sales will also hamper its progress. "For fiscal 2005, we believe industry-wide factors such as PC unit growth and the success of non-commercial software could significantly affect our results of operations and financial condition.”

From itWeb