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The virtual machine software, a rival to VMWare which is owned by enterprise storage supplier EMC, was acquired when Microsoft bought Connectix in February 2003.
Microsoft said the new version will improve operational efficiency in software testing and development, when migrating legacy line-of-business applications and in server consolidation.
Virtual Server 2005 is also part of the Dynamic Systems Initiative, Microsoft's industry-wide programme which aims to automate how businesses design, deploy, and operate IT systems.
The software can be used to help users migrate from older versions of Windows, such as Windows NT 4.0, to the latest version of the server operating system, Windows Server 2003.
Virtual Server allows users to continue running their NT 4.0 applications on Windows Server 2003 with the advantage of moving the application onto a fully supported platform.
The server software only runs on machines configured with Windows 2003 or XP and at least 250Mbytes of memory.