After all these years, pity the companies -- or even whole industry segments -- that find themselves in Microsoft's ( MSFT) field of vision. No sooner does Microsoft paint a bull's-eye on the back of a competitor than an arrow is sticking out of the competitor's back.

The above thought occurred when an obscure Microsoft executive, Bill Veghte, vice president of device and hardware platforms, displayed a menacing slide at the company's recent analyst extravaganza in Redmond, Wash. Veghte was discussing a tech-world niche in which Microsoft has been an aggressive and well-funded also-ran: the market for so-called embedded software that runs devices from cell phones to personal digital assistants. Most devices have their own software, but Microsoft would like its offerings to be as ubiquitous in gadgets as the Windows operating system is in PCs. That's no small opportunity when you consider that "gadgets" include portable PCs, servers, stereo systems and various combinations of all of these.

Which leads to the menacing slide -- or, more accurately, PowerPoint screen. Veghte displayed what is standard fare at a Microsoft analyst meeting but is chilling all the same. "The Competition: Asking the Hard Questions," read Veghte's slide. There were, in order, one technology and two companies that Microsoft sees as standing in its way to embedded-software dominance: Linux, Palm ( PALM) and Wind River ( WIND).

Linux has been a bugaboo and boon to Microsoft for several years. On the one hand, the open-system movement has threatened Microsoft as techies flocked to the technology, which they hoped would break the monopolist's back. On the other hand, Linux was one way Microsoft could argue that it had legitimate competition. Linux, in other words, simultaneously was a threat and an antitrust suit negotiating point.

Some of Veghte's "hard questions" illustrate the uphill battle the Linux movement faces. "Is there a sustainable business model?" he asked. "Free does not equal free," another slide quipped. "Do you want to be in the OS business?" Translation: Microsoft supports its software. Can you say the same for whoever writes your Linux code? The tide has turned against Linux, of course. One former hardware maker that went boom to bust on the Linux hype train is VA Linux Systems ( LNUX), which said recently it would stop making computers altogether and focus instead on software, perhaps an unfortunate choice given Microsoft's inclinations. Another would-be Linux star, Red Hat ( RHAT), suffered a blow Thursday when Dell Computer said it no longer would offer desktop or notebook computers pre-installed with Linux software, because of low demand.

Next on Microsoft's hit parade was Palm, the leading maker of PDAs and the dominant supplier of software, the Palm OS, that goes into the PDAs of other manufacturers, like Handspring and Sony. "Are they a platform or a hardware company?" Veghte asked. "Can they participate in the enterprise?" Microsoft, of course, is pushing its own PocketPC, which quietly is building momentum against Palm. As if on cue, Palm last week said it is forming a separate subsidiary of its software, or platform, business, which currently accounts for less than 10% of its revenue. Palm hopes one day to offer the subsidiary as a separate public company. Funny how Microsoft forcefully keeps all of its pieces together while the competition voluntarily fragments.

Finally, there's Wind River, the leading maker of embedded software for the telecommunications industry. "Can they deliver a rich apps and services platform?" asked Veghte, obviously comparing Wind River's alleged weakness with the sweet spot of Microsoft's .NET dreams. "Can their business model align with their channel?" he asked, implying that if Wind River tries to move into services it will compete with the consultants who buy its software for clients. Again, as if Microsoft were clairvoyant, Wind River last week cut 20% of its workforce, said it lost money in the second quarter after projecting a profit, and projected sharply lower revenue.

So now the question remains: Who else is on Microsoft's list?

Random musings: The headline in Friday's Wall Street Journal says it all about Japan's problems: "Japan's Big Banks Once Again Raise Bad-Loan Forecasts." In January 1998, I wrote in the San Jose Mercury News that you basically couldn't believe a word Japanese regulators said about bad loans. At the time the level was 76.7 trillion yen, up from 27.9 trillion a few weeks earlier. This week the tally was 43.4 trillion yen ($347 billion). ... Metricom is conducting a public auction of all of its assets and laying off all its employees, as the Wall Street Journal noted, according to an ad in its own paper. Know anyone who wants a "high-speed wireless access network (that) consists of 17 wired cities, 15 of which provide consumers and business people with mobile Internet access speed of 128 Kpbs?" ... I assumed Kmart ( KM) never would reveal the cost to its shareholders of buying a minority share of from Softbank and Martha Stewart Living Omnimedia. Wrong! As TSC's Tim Arango explained, Kmart's $84-million buyout leaves the venture investors and employees with a small loss on their horrendous investment, courtesy of Kmart shareholders. Whattadeal.
In keeping with TSC's editorial policy, Adam Lashinsky doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. Lashinsky writes a column for Fortune called the Wired Investor, frequently guest hosts the TechTV cable television news show Silicon Spin, and is a regular commentator on public radio's Marketplace program. He welcomes your feedback and invites you to send it to Adam Lashinsky.