The economy may be headed south, but Microsoft believes the personal computer market is perking up.

The company in its second quarter report Thursday said it expects worldwide PC shipments in fiscal 2008 to increase by 11% to 13%. That's up a point from the market prediction Microsoft released three months ago in its first-quarter report when it said it expected PC shipments for the year to grow by 10% to 12%.

While the 1% revision may not sound like much, it adds up to a lot of extra hardware on the market.

Gartner Dataquest said it expects worldwide PC shipments in 2007 to come in at 255.7 million units when the final tallies are in. Microsoft's latest projection means it believes that the market this year will grow roughly by between 28.1 and 33.2 million units.

The earlier, first quarter projection called for an increase of between 25.6 and 30.7 million units.

Microsoft said PC shipment growth will be strongest in the consumer market, and that sales in emerging markets like Asia will outpace those in mature markets like North America.

The big question facing Microsoft is how many of those extra PCs will run on the company's Windows Vista operating system.

There's evidence to suggest that Microsoft's share of the OS market has declined considerably since Vista's release last January.

Microsoft has sold more than 100 million Vista licenses -- meaning that the OS was aboard about 39% of all new PCs that shipped last year. By contrast, Windows XP was on about 67% of the new computers that shipped in 2002 -- XP's first full year on the market.

Part of Microsoft's problem is that its Windows franchise now faces stiffer competition. Apple recently released its spiffy Leopard OS, which features a number of new graphical and functional enhancements that rival those found on Vista.

To boot, a number of PC manufacturers -- including Dell -- are beginning to embrace the open source Linux OS as an alternate to Microsoft software. Linux, because of its low cost, is also popular in the emerging markets where Microsoft said it expects most of the PC market's growth to occur.

The bottom line: While Microsoft's OS sales are increasing in absolute terms -- they jumped 68% in the second quarter to $4.3 billion -- the company is getting a smaller slice of a bigger pie.