"While we expect general economic conditions to remain stable with the improvements seen in the second half of fiscal 2004, we expect PC and server unit shipment growth rates to decline in fiscal 2005 from the high growth rates in fiscal 2004," Microsoft said in a filing Wednesday with the US Securities and Exchange Commission.

Microsoft projected that in its 2005 fiscal year, which began July 1, global sales of personal computers will rise between seven and nine percent, translating into company revenues from the sector growing five to seven percent.

In late July, the company predicted sales for 2005 range from 38.4 billion to 38.8 billion dollars. That represents a rise of 4.3 percent to 5.4 percent from the 36.8 billion reported for 2004.

Comparatively, Microsoft posted a rise in sales of just over 14 percent for 2004 compared to the prior year, which was up slightly from a full-year gain of 13.5 percent posted for 2003.

Aside from personal computer sales, Microsoft said its outlook could be affected by growing use of open-source software such as Linux, which is making inroads in servers and PCs.

"We continue to watch the evolution of open source software development and distribution, and continue to differentiate our products from competitive products including those based on open source software," the filing said.

"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."

Additionally, Microsoft said profits may be lower because of reduced investment earnings following its decision earlier this year to use some 75 billion dollars to pay out dividends and buy back shares.

"We expect our operating income growth in fiscal 2005 to exceed our revenue growth," the company said.

"Operating income is expected to reflect lower operating expenses due to the absence of certain legal settlements which occurred in fiscal 2004, lower stock-based compensation costs, and benefits achieved through continued progress in our previously announced cost efficacy initiative."

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