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Calls to its anti-piracy phone line have shot up by 50 per cent in the last month, leading the vendor to believe its anti-piracy campaign is working.
Microsoft estimates that while 80 per cent of small businesses in the UK use Microsoft product, only 20 per cent are paying for it.
Anti-piracy manager Julia Phillpot said many of the counterfeit CDs were being imported from Asia and assembled in the UK. Large numbers of Internet downloads were also not legitimate, she added.
"Many carry viruses," she warned, adding Microsoft was stepping up its awareness campaign in the run-up to Christmas.
Phillpot said illegal software was costing Microsoft millions of dollars, but argued the situation could be turned into a lucrative money-making venture for resellers.
"Resellers should be working with customers to get them fully licensed and legal," she said.
Aberystwyth-based Microsoft education reseller Pugh Computers said over the last three months it had increased its efforts to get all its customers legal.
Managing director Jeffrey Pugh said many companies did not admit to being underlicensed "but we found a dramatic increase in sales following the questionnaires".
He suggested slip-ups and lack of proper management were the most common reasons for customers not being properly licensed.
Across the UK, revenues from customers exchanging illegal software for authentic upgrades brought in £35m to Microsoft last year.