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Merry Christmas offended people, so it was widely replaced with Happy Holidays (to account for the small % of our population who is Jewish, non Jewish/Christian Africans, and/or indiginous germanic tribal living in America, I suppose), yet wouldnt Happy Holidays still offend atheists and muslims?

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I believe this all started when various organizations/retailers made a conscious effort to shift from saying "Merry Christmas" to "Happy Holidays" (or whatever). It has more to do with avoiding potential offence than anyone actually complaining about anything. Store X wants everybody to spend $2000 at this time of year - why limit it to people who celebrate Christmas? Why even hint at discouraging them? Especially when "non-Christian" is a faster growing demographic than "Christian"?

As for the offensiveness of the phrase "Merry Christmas", it primarily stems from the root word "Christ" which means "annointed one" as in "annointed to be the Son of God". Now I don't care about this. I like Christmas for it's secular charms and I'm just as willing to keep calling it Christmas as I'm willing to say that today is "Tuesday" (i.e. the day of the Norse God Tyr).

The really silly thing about all this is that there is precious little about Christmas that is actually Christian in origin. The "reason for the season" has far more to do with the solstice than Jesus.

On a side note, The Daily Show and Stephen Colbert did a wonderful job on this issue this past week. I especially loved this jab at Bill O'Reilly (paraphrased).

Bill O : I don't understand why anyone would find "Merry chritmas" offensive. It's not.

A different interview:
Bill O : Saying "Happy Holidays" is deeply offensive to Christians.