With a decision from the EU due as early as mid-March, the U.S. software giant has been scrambling to avert what could be a far-reaching order to change the way it packages its dominant Windows computer operating system and reveal more of its underlying code to rival manufacturers.
Representatives of the European Commission and Microsoft declined to comment on a report in Tuesday's Financial Times that Microsoft had offered to include rival media player software on a CD-ROM packaged with personal computers to help resolve the case.
Microsoft said only that it "continues to work actively with the European Commission toward an amicable settlement in this case.''
Sources told The Associated Press that Microsoft's offer had been dismissed by the commission as unsatisfactory but that the search continued for ways to make it acceptable to regulators.
Time is running out, however, as a draft decision against Microsoft that has been circulating in Brussels for the past month is expected to go to an advisory committee of national regulators around March 3. The committee is expected to convene again March 15 to review proposed penalties, with the final decision adopted a day or two later.
Once that process is set in motion, only dramatically new concessions from Microsoft that clearly meet all the EU's demands can stop it.
In an echo of the landmark U.S. case involving Internet browsers, the commission's draft decision finds Microsoft abused its Windows monopoly to gain ground over rivals in the media player market.
The U.S. case was settled in 2002 without requiring Microsoft to "untie" its Internet Explorer from Windows. Microsoft argues that adding new features to Windows -- a key to its business strategy -- benefits consumers, while its competitors argue it is aimed at driving them out of business.
In the EU case, Microsoft is trying to avoid an order to remove its Media Player, which is gaining market share at the expense of rivals RealNetworks Inc. and Apple Computer Inc. Such an order could also complicate its next planned Windows innovation: incorporating an Internet search engine to compete with Google Inc.
Last year, EU regulators demanded that Microsoft either sell a stripped-down version of Windows or install rival media players.
The CD-ROM offer seeks to satisfy the second option but sources said the commission, which wants all players on the same level, believes requiring installation from a CD-ROM would deter most users.
Another source said Microsoft might agree to a folder on the computer desktop informing users of the options available on CD, although it was unclear whether Microsoft's media player would be on the CD or pre-installed.
Microsoft's offer to settle the second half of the case -- involving the market for low-end servers, which link desktops together in offices -- was also deemed "not enough" but talks continue, one source said, declining to elaborate.
Microsoft also faces a potential fine for antitrust abuses ranging from a minimum $20 million to around $3 billion -- 10 percent of its global sales.
Unless a settlement is reached, Microsoft is expected to challenge the commission's decision in European courts.
By Paul Geitner