Microsoft has warned of a growing threat to its business model from open source software.

In its annual report the company said that it was facing increasing pressure from open source vendors, who Microsoft claims are stealing its ideas and benefiting from its intellectual property.

"A number of commercial firms compete with us using an open source business model by modifying and then distributing open source software to end users at nominal cost and earning revenue on complementary services and products," it said.

"These firms do not bear the full costs of research and development for the software. Some of these firms may build upon Microsoft ideas that we provide to them free or at low royalties in connection with our interoperability initiatives.

"To the extent open source software gains increasing market acceptance, our sales, revenue and operating margins may decline."

The company also complains that the open source community is also harming its bottom line by developing less functional copies of its applications and selling them at a lower price, costing sales and forcing down prices.

Other threats to the company include global piracy, security threats to its software and intense commercial competition.