Government is definitely the key factor in determining whether or not Linux desktops will be widely adopted. In general, Western governments are trying to balance huge amounts of vendor pressure (e.g. Microsoft) with equally large public expectations re: technology spending and use, especially in terms of security/GWOT-related initiatives.
A few major companies have incorporated Linux and open source into their business models (IBM, Sun, Novell) and have invested heavily in the open source community. They’re still able to profit by charging for support, hardware and related fees, with the additional advantage of using no-licensing as a selling point and they can cut into Microsoft market share without having to develop OSs from scratch. Usually they partner with Linux distro companies, but some are developing their own desktop suites (e.g. Sun).
A few European/Asian cities have already decided to switch over to Linux desktops. IIRC, Microsoft had some last-minute desperate negotiations with Munich before it switched to an IBM-SuSE environment. Other governments are watching closely to see if Munich’s investment (which includes higher training costs for learning the new OS) actually pays off in the long run.
The other thorny problem for governments is procurement. There is a fixed process by which firms compete for government contracts. Figuring out a way for open source solutions to participate in the RFP process (volunteer coders usually don’t have team of analysts writing proposals for USG RFPs) in a way that is not “unfair” to proprietary companies is somewhat difficult. Again, there is serious pressure on governments from big IT companies to avoid this issue altogether. Partnering with a private-sector firm is one answer, but it shouldn’t necessarily be the only solution.
Governments are risk-averse, they like dealing with big, established firms. It makes them feel more comfortable, but also gives them someone to sue if things go wrong. This sort of accountability is very important and needs to be present if Linux is going to make inroads with big governments.