FW, what line of business is IBM in? Hardware, software, consulting. What line of business is Microsoft in? Software, consulting. Which company is making more money? Microsoft. Does IBM care what Microsoft does? You bet they do.
A few corrections of your post...
"Websphere is holding its own with .NET"
What does that mean? Do you mean that Websphere is holding its on in terms of sales with Windows .NET Server 2003 which hasn't even been released yet? Do you mean, J2EE solutions which run on Websphere, are holding there own with .NET solutions which run on Windows servers? You aren't too clear here.
"Linux holding its own is servers"
I assume you meant to say in servers. I wonder how much profit IBM has from its Linux servers compared to how much Microsoft has made from Windows servers.
As for where they compete, I've already addressed that. Here are two HUGE ones that you missed though. DB2 vs SQL Server. Lotous Notes/Domino vs Exchange. IBM competes with Microsoft just about everywhere Microsoft does business.
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