Microsoft has acknowledged Linux as a competitor to its Windows desktop client business for the first time.
Microsoft listed Linux distributors Canonical and Red Hat among competing commercial software suppliers in its annual report to the US Securities and Exchange Commission.
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In past years, Microsoft has named Red Hat only as a competitor to its server and tools business, which includes the server version of Windows.
The report said the Linux operating system had gained "some acceptance" as PC makers look to reduce costs and more people buy netbook PCs that mainly run Linux.
Windows Vista has proven to be too large and too costly for netbooks, which has driven adoption of Linux.
Microsoft's Windows 7, due for release in October ,is to have a special light version optimised for use on netbooks.
The report also acknowledges growing competition from Apple, Google, Mozilla and Opera as internet browsing moves away from traditional PCs to mobile devices.
"User and usage volumes on mobile devices are increasing around the world relative to the PC," the report said.
But Microsoft said Windows will continue to compete effectively by delivering "innovative software" backed by the "largest support network" for any operating system.