Armed with an array of PowerPoint charts, a team of Microsoft lawyers and economists this week sought to refute charges that the software giant used its market power to crush competition unfairly in Europe.

Observers at the closed-door hearing before the European Commission described Microsoft's eight-hour presentation as a "glitzy" and "overwhelming" argument against sanctions that could include billions of dollars in fines and an order to modify the company's flagship Windows operating system.

Wednesday marked the first of three days of hearings into whether Microsoft improperly leveraged the dominance of Windows to win position in the European market for servers and audiovisual software.

As it concluded its evidence yesterday, Microsoft said it would be forced to offer European consumers a substandard version of Windows if the European Union made it rewrite its operating system, sources close to the case said.

After the company finished its presentation at the hearing, Microsoft general counsel Mr Brad Smith told reporters he hoped for a settlement in the case.

"We have come to Brussels not only to discuss the issues, but to work things out," Mr Smith said.

He added that the company would "explore every possible way to come to solutions to the [European Commission's\] questions and concerns".

At the core of the Commission's case is the argument often made by competitors that Microsoft manipulates Windows to ensure that rival software will not work as well as its own.

The hearings in the concrete, bunker-like Borschette complex include Microsoft competitors as well as representatives from the 15 European Union governments, but are closed to the public and media.

It was not immediately clear what effect Microsoft's presentation had on regulators, who are expected to rule on the case in the spring.

Although the Commission could fine Microsoft up to 10 per cent of its global sales - $32 billion (€27 billion) last year - such fines rarely exceed 1 per cent.

Microsoft ally Mr Jonathan Zuck, head of the Association for Competitive Technology, described Wednesday's presentation as "kind of overwhelming".

Another observer called it a "very glitzy presentation that on style points was an A, but on substance and accuracy was a D".

The stakes are high for Microsoft, which has been under investigation by European and US regulators for years.

The European Commission case focuses on Microsoft's dominance in server software and on the bundling of its Media Player with Windows.

Observers expect European regulators to be harsher on Microsoft than their counterparts in Washington.

In addition to the fines, Microsoft could be forced to remove Media Player from Windows and make more of the computer code that powers the operating system available to other software developers.

Microsoft has argued that its settlement with the US Department of Justice provides enough detail of Windows' inner workings to ensure competitive software design.

But the historically combative company has, nonetheless, made conciliatory statements leading up to the hearings. Throughout Wednesday, Microsoft executives expressed optimism and at times demonstrated some levity in remarks outside the hearing room.

Microsoft general counsel Mr Brad Smith told reporters that "hope springs eternal", when asked if the company might reach a settlement with European regulators. A few hours later, after emerging from the morning session, Mr Smith flashed a smile and described the morning hearing as "very interesting".

Microsoft's presentation yesterday was followed by the Computer and Communications Industry Association (CCIA), which is funded by Microsoft's rivals, as well as the Free Software Foundation Europe, Novell and others.

"We believe there is a strong case that Microsoft violated competition law in the European Union and grew to the detriment of consumers and innovation," said Mr Ed Black, president of the CCIA.

Sun Microsystems, which filed the original complaint in Brussels against Microsoft in 1998, and RealNetworks take the stand today, followed by two Microsoft-friendly trade groups.

Microsoft gets 75 minutes for a final statement before the hearing ends.

Microsoft's main concern is defending its long-standing practice of keeping Windows on top by incorporating new features in the operating system - which it sees as benefiting consumers and rivals view as unfair competition.

Its next generation of Windows, code-named Longhorn, will have a built-in search engine that could threaten Google, Yahoo! and other companies.

An EU ruling is expected by June 2004, after which the case could go to court. - (Reuters/LA Times Service)