(FORTUNE Magazine) – SINCE ITS FOUNDING A GENERATION ago, Microsoft has been famous (and famously reviled) for guarding its secrets as vigilantly as the former KGB. But in a series of surprising and little-noticed moves, the company is making an about-face. Call it glasnost in Redmond.

The shift has all been brought about by Linux. Traditionally Microsoft hoarded its crown jewels--the source codes for its operating system and desktop applications--by treating them as trade secrets. But with the arrival of commercial-quality open-source software in the 1990s--software whose code was open for all to see and modify--Microsoft's model came under competitive stress. The transparency of open-source products appealed to customers who were concerned about security and interoperability. In response Microsoft has undergone, if not exactly a conversion experience, at least a sea change. To be sure, it has not posted its source code on the Internet and turned itself into a charity. It has, however, abandoned the trade-secrets strategy in favor of a patent strategy. (For an account of Microsoft's changing strategies toward security issues, see "Why Hackers Are a Giant Threat to Microsoft.")

This whole shift began in 2001 when Microsoft cautiously launched its first "shared source" initiatives. It allowed major clients, like financial services company UBS, to inspect Windows source code. It also began giving some premium customers-- like Hitachi, Samsung, and Mitsubishi Electric--the right to modify Windows CE (for devices like cellphones and PDAs) and even to copyright their modifications.

Then, in January 2003, Microsoft began allowing many foreign governments to inspect Windows source code. More than 30 have now done so, including Russia, China, Turkey, and the NATO alliance. In September of this year it made Microsoft Office code available as well. Governments have special security concerns--including the need to assure themselves that Microsoft hasn't built back doors into its products and given the keys to the CIA.

As the company drops its trade-secret approach, it's using another weapon--patent protections--instead. Notwithstanding its huge R&D budgets over the years, Microsoft was historically slow to build its patent portfolio. In June 2003 general counsel Brad Smith hired Marshall Phelps Jr., IBM's former chief lawyer for intellectual property and licensing, to become his deputy. In December the company began making some of its patents available for licensing at "fair and reasonable" rates. Last April it spent $1.3 billion to license in patents from Sun Microsystems and InterTrust Technologies, and in May it reached major cross-licensing deals with Siemens and SAP.

By beefing up its own patent portfolio (it now ranks fifth in the computer industry, according to MIT's Technology Review), the company has been able to make a selling point of its ability to "stand behind" its products, inviting invidious comparison with open-source distributors. Microsoft's promise: If its volume customers are hit with third-party IP claims stemming from their use of Microsoft software--like the licensing demands so notoriously visited upon corporate Linux users by the SCO Group in 2003--Microsoft will defend its customers and hold them harmless. Because of the uncertain pedigree of much open-source code, neither open-source distributors, like Red Hat and Novell, nor their corporate backers, like IBM and HP, have yet come close to matching the breadth of Microsoft's vow. Open-source advocates hope that the liability issue will ultimately be neutralized by startups like Open Source Risk Management, a company that plans to eventually offer insurance against such risk.

Microsoft officials are predicting a "move to the middle," in which the differences between shared-source and commercial open-source licenses grow ever narrower. If so, Microsoft's products would have only one slight remaining disadvantage in competing with Linux and the like: price.