He vowed to meet the challenge.

"Over the long term, I'm optimistic about our growth opportunities. But we face significant challenges in the near and mid term," he said in the e-mail, a copy of which was obtained by AFP.

"Non-commercial software products in general and Linux in particular, present a competitive challenge for us and for our entire industry, and they require our concentrated focus and attention," he said.

Linux, a freely available operating system used mostly by businesses, had grown as a rival since IBM Corp. decided two years ago to spend a billion dollars to offer it to customers as an alternative.

"IBM's endorsement of Linux has added credibility and an illusion of support and accountability," Ballmer said.

As businesses fretted about lean budgets and about Microsoft's attention to customers, non-commercial software such as Linux was seen as an "interesting" alternative, he said.

Many customers were looking at Linux because it would let them move to an Intel microchip-based computer while using existing UNIX software skills and applications, he said. Linux is an offshoot of UNIX.

Linux's weakness, however, was the lack of a central body investing in its development in areas such as engineering, manageability, compatibility and security, Ballmer said.

The major new Windows operating system release -- Longhorn -- would put Microsoft back in front, Ballmer said.

But the software titan would not rush to get Longhorn out to customers until it got the program right, he said.

Microsoft had made a big bet on Longhorn, the Microsoft chief executive said.

"One of our board members asked me recently: 'Is Longhorn a bet-the-company product?' I said that would be a pretty good way to put it. Big bets are obviously about putting money down on something you believe in, but more importantly, they're about breakthroughs."

Longhorn was potentially a bigger breakthrough than the first Windows, eventually incorporating almost all Microsoft products, he said.

"People have asked me: if competing with Linux is so important, can the company wait as long as it will take to get Longhorn done?" Ballmer said.

"My answer is twofold. First, the Windows Server 2003 generation of products offers stronger performance and value than Linux in most IT scenarios. Second, while we are not taking a relaxed approach to Longhorn, we will do the work and take the time required to get it right, because it truly is the next quantum leap in computing, which will put us years ahead of any other product on the market."

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