Updated from 2:26 p.m. EDT

Microsoft ( MSFT) stock slipped Wednesday and shares of open-source software company VA Software ( LNUX) jumped more than 48% Thursday, as investors reacted to a warning by Microsoft CEO Steve Ballmer, who said his company faces a significant challenge from Linux.

Also up was Red Hat ( RHAT), the developer of the most popular version of Linux.

In recent trading, VA Software gained 73 cents, or 48.7%, to $2.23; Red Hat was up 60 cents, or 7.6%, to $8.52. Formerly known as VA Linux, the company runs a network of news and development sites for open source developers, and sells an open source development tool that runs on Linux. Microsoft shed 81 cents, or 3.3%, to $24.06.

Leaked Wednesday, Ballmer's annual state-of-the-company memo to employees covered a number of topics, including open-source software, which "presents a competitive challenge for us and our entire industry."

Despite the stir, Microsoft's concern about Linux is nothing new, and the drop in the company's share value creates a buying opportunity, said SG Cowen analyst Drew Brosseau. "Headlines that focused on the threat from open source put knee-jerk pressure on the stock yesterday that should reverse as investors absorb the broader focus and opportunity outlined in the memo. Following the recent run in the market, we believe the stock looks compelling, particularly on a relative basis," he wrote in a note to clients. SG Cowen has no banking relationship with Microsoft.

Linux, an open-source operating system, is sold by vendors such as Red Hat, which offer service, support and some features lacking in the free versions available on the Web. It is seen as a powerful server operating system and a competitor to Microsoft's Windows Server 2003.

Faced with tight budgets, more corporate hardware buyers are choosing Linux. Its sales jumped 35% in the first quarter, while the overall server market slumped nearly 4%, according to researcher IDC.

But despite a significant amount of hype concerning Linux on the desktop, few knowledgeable analysts think Linux is a serious threat to Microsoft's lock on the PC operating system market.

Answering criticism that Microsoft is no longer very innovative, Ballmer cited the strong advances and reception for its Windows Server 2003 generation of solutions and its development work on Longhorn, the next generation of Windows client that will include new versions of all the supporting products, including Office, developer tools, MSN and server enhancements.

Longhorn probably will not be available for several years.

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