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Microsoft is preparing to release a cut-down version of Windows Server to give its users something like the netbook experience.

The company plans to release "something akin to" a netbook version of Windows, but for servers, not PCs, over the next month or two, said Microsoft CEO Steve Ballmer. He said that although there is not high demand at the moment for netbook-like server hardware, declining prices in the server market make a low-cost OS an attractive option for customers.

"We don't exactly have a netbook phenomenon, but if somebody can buy a [US]$500 server, they're a little loath to spend $500 for the server operating system that goes with it," Ballmer said.

He described the software as a "low-cost, low-price, low-functionality Windows Server SKU" called "Foundation Edition," but did not offer more details.

Microsoft also posted a blog entry on its Windows Server Division Weblog reiterating Ballmer's comments, but still did not provide specifics about the product.

Microsoft has a range of Windows Server offerings to suit the needs of different customers, but Forrester analyst Chris Voce said the company sees a gap in its portfolio at the lowest end of the market. For some customers, even its Small Business Server product - which bundles Windows Server with Exchange Server, SQL Server and other software - is too much, he said.

"They want to make sure Windows Server is as flexible as it can be," Voce said. He added that he was aware that Microsoft  was readying the new Windows Server SKU but is not at liberty to discuss specifics.

Microsoft's revenue has been affected by the decline in purchases of full-featured PCs in favor of low-cost netbooks, which don't provide as much margin for the company as sales of Windows on PCs do. Further, netbooks run both Linux and Windows XP, the latter an eight-year-old OS, so Microsoft's OS does not have as dominant a position in the netbook market as it does among PCs.

Windows Vista, XP's successor, has too large a hardware and memory footprint to run well on netbooks. However, Microsoft said that Windows 7, which will be out later this year or early next, will be netbook-friendly.

Ballmer spoke to the financial community earlier this week to give them an update on Microsoft's financial outlook for the remainder of the year. He said the company expected PC sales to continue to be slow and the economy to remain challenging for the foreseeable future, and the company will adjust its internal expectations accordingly.

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