NEW YORK (IDG News Service) — Even now, Steve Mills fields incredulous questions about how his company and other vendors make money working with freely available open-source technologies like Linux, the IBM Corp. software head said Thursday.

In a Thursday morning LinuxWorld keynote address primarily devoted to a run-down of some notable IBM customer deployments of Linux, Mills affirmed that Linux is a large and growing revenue generator for IBM. IBM estimates that industry-wide Linux expenditures will grow at an average annual rate of 35 percent through 2006.

Hardware spending was the initial focus of companies making Linux investments, but the percentage of total Linux spending devoted to hardware is dwindling, said Mills, senior vice president and group executive of IBM's software group. Middleware and services are among the fastest-growing spending categories, he said.

Before a packed auditorium here, Mills highlighted the work some of IBM's 4,600 Linux customers are doing consolidating data centers, cutting retail and branch-operation costs, crunching data with computing clusters, and running distributed applications.

The customers range from expected cutting-edge technology adopters such as financial-services firms Banco Mercantil SA and Dresdner Kleinwort Wasserstein to more unexpected Linux users, such as China Post.

The Chinese post office was seeking to automate for the first time around 1,200 branch offices, and worked with IBM on installing a Linux-based system and training workers generally unskilled with IT management on the system's use and maintenance. Success stories like the China Post's should help dispel the "folklore" that Linux is a raw, hard-to-work-with operating system, Mills said.

For the future, IBM and the 5,000 employees it has involved with Linux projects will continue working on internal Linux product development, on advancing core Linux technologies such as the kernel, and on "catalyzing" other industry vendors to enlarge their own Linux portfolios, Mills said.

"We have clearly moved into a new era," he said. "Linux has clearly come of age."