The full rebuttal follows our original story from yesterday, which re-inserts some inadvertent omissions from excerpts of VMware's white paper:

6:52 PM ET February 26, 2007 - In an online white paper published last Friday, VMware published an open letter taking Microsoft to task for allegedly rigging the market for virtualization software to suit its Windows customers. Its language and allegations recall to mind the dark days of 1996, when Microsoft was first challenged in court over its use of artificial roadblocks prohibiting Windows 3.0 and 3.1 from running in its competitor’s DR DOS operating system.

"Microsoft is trying to restrict customers' flexibility and freedom to choose virtualization software," VMware's document begins, "by limiting who can run their software and how they can run it."

The white paper serves, in effect, as an unofficial seven-count indictment of Microsoft's business practices, not so much for making Virtual Server 2005 and Virtual PC 2007 free to users (VMware does some of that as well) as for generating a dependency among Windows users on these products to be able to utilize such software components as Microsoft's virtual hard drives (VHDs), which are geared to run on its own virtual hosts, or hypervisors.

VMware said it has offered the industry an open standard format for virtual storage devices that may be shared among other vendors in the industry, which Microsoft has thus far refused to adopt.

Recently, VMware noted, Microsoft provided demos of its more complex and system-intensive software packages pre-installed on convenient VHDs that can be run in Virtual Server without complex installation. Such VHDs only run in Virtual Server 2005. "The ability to run Windows virtual appliances on any virtualization platform is important to customers," writes VMware, "as well as hardware and software vendors who need to use Windows-based software and technology." (Exchange Server 2007 itself can be installed on other virtualized platforms, including VMware.)

VMware quotes from a Microsoft end-user license agreement, believed to be from Virtual Server 2005 Release 2 for Windows XP (VMware's attribution contains missing words), "You may install and use one copy of the software on your device of which you are running a validly licensed copy of Microsoft Virtual PC or Microsoft Virtual Server. You may not change or convert the virtual hard disk image from the VHD format."

Perhaps most curious of all, VMware showed screenshot evidence of Microsoft products that were already installed on VHDs, but whose built-in activation schemes disable themselves from being run in VMware hosts without re-activation - which Microsoft generally treats as a separate installation. "This is an even more aggressive mechanism," the VMware white paper comments, "to force users to run virtual machines on Microsoft products, essentially undermining customer choice."

In a response statement provided by Microsoft to BetaNews this afternoon, its general manager for virtualization, Mike Neil, paints a picture of a company that is undertaking its own efforts to develop an open platform around virtualization - just perhaps not VMware's open platform.

"Virtualization has long been a core part of server operating systems and this dynamic market is enjoying a fresh round of innovation," writes Neil. "These new technologies will help customers reduce costs, make IT more flexible, and enable vendors to offer more services. Microsoft believes the best approach for customers lies in establishing a foundation of cooperation between vendors, which is why we strive to regard virtual machines and virtualization technology the same way. Windows Server licensing offers a level playing field to all. To encourage interoperability, we openly share technology and have published a set of APIs for all our commercially available virtualization products today and provided documentation on APIs for the hypervisor that will be part of the next version of Windows Server, codenamed Longhorn."

One of the more common claims historically made by companies defending themselves against charges of erecting barriers to competition is that they offer the industry an open platform -- perhaps for free inspection, perhaps for negotiated licensing -- that can be used by any competitor without restrictions. It's perhaps the market's fault, such claims argue, that no one else adopts these APIs.

VMware is making such a claim in its own white paper, stating it has released APIs for paravirtualization (implementing support for programs running in virtual environments that "know" they're in virtual environments) to the open market, for adoption by competitors such as the open-source Xen virtualization tool. (Analysts agree Xen has a tiny percentage of virtualization usage share.)

VMware alleges that Microsoft developed proprietary APIs for interoperability with its Longhorn hypervisor that it claimed in June 2006 at WinHEC would be released openly, but which Microsoft instead chose to make available to exclusive, select partners including Novell. Such partnerships may have been what Microsoft's Neil was referring to, in the phrase, "a foundation of cooperation between vendors."

In a personal blog post yesterday, Mike Neil goes into much further detail, responding to claims made by VMware President Diane Greene in The New York Times, where she said, "Microsoft is looking for any way it can to gain the upper hand."

"Much of the preliminary details on Windows Server virtualization (part of Longhorn) APIs were shared at WinHEC last year, in the included documentation shared with each attendee," Neil writes on his blog. "And like other Windows APIs, we plan to publish these publicly at beta. We're doing this because in the end customers with mixed environments expect it all to work together."

Incidentally, Neil also acknowledges the potential for malicious exploitation of the virtualization layer in Vista, which came to light again last week - a potential which was supposed to have been thwarted in Intel's implementation by tying its VT directly to the Trusted Platform.

"One area that is clear is that our security and data protection features can potentially be subverted by a malicious virtualization layer," writes Neil. "We're working with the hardware and software industry to improve the security of virtualization technologies and we will evolve our licensing policies as virtualization becomes more widely used on client systems."

Tuesday afternoon, Microsoft’s Mike Neil decided a more direct response was in order. Referring directly to VMware’s corporate parent, storage component market leader EMC, and reminding VMware of Microsoft’s cordial relationship with that parent, Neil wrote BetaNews the following:

What’s clear from this response is that Microsoft is now taking VMware seriously, but that it is also working to frame the company not exactly as an equal contender, but as the division of a partner. While Microsoft is openly calling for a negotiation, the situation it’s presenting looks more like an intervention.