Microsoft Corp. has earned a failing grade from school districts in Oregon and Washington, where administrators say the company's licensing tactics could force a rapid move to open-source software.

Educators in both states received letters from the company in March giving them 60 days to perform extensive audits in search of unlicensed software, or risk facing potentially costly penalties. The letter came with a marketing brochure touting the company's latest volume-licensing agreements.

The letter's tone, which some recipients felt was threatening, elicited a strong response from school administrators. They complained loudly, and some even threatened to strip their schools' PCs of Microsoft products. The company quickly backed down on its strict deadlines, and executives now say the whole thing was a misunderstanding.

Nevertheless, the experience has prompted many school administrators to seriously consider switching from Microsoft's operating systems and office applications to free or low-cost alternatives such as Linux and Sun Microsystems Inc.'s StarOffice.

Microsoft's letter arrived in 24 school districts in Oregon and Washington, asking for audits to ensure compliance with software licensing agreements. It specified 261 Microsoft products that schools should inventory on each machine.

School administrators acknowledged that Microsoft was well within its rights to ask for a software audit. However, the company's request that the schools complete the task in 60 days -- and its seeming push toward a volume-licensing scheme that few schools could afford -- left many with hard feelings toward the company.

Simply complying with Microsoft's deadline would impose a major financial burden on some districts, said Scott Robinson, chief technology officer of Portland Public Schools in Oregon.

The letter arrived at the busiest time of the year for the schools, as they were gearing up for the close of the spring semester. And because the public schools in Portland have 25,000 computers spread across 100 buildings, completing the audit on time would have required hiring extra personnel at a total cost of around $300,000, Robinson said. Microsoft's licensing agreements include the offer to send out auditors, but the audit cost would fall to the district if company auditors uncovered any undocumented software, he said.

Microsoft may be accustomed to businesses that quickly comply with its audit requests, but schools simply aren't run the same way, said another administrator.

"Schools don't operate like businesses, with everything managed and centrally distributed," said Steve Carlson, associate superintendent of information and technology for Beaverton School District in Oregon. "A lot of computers come from recyclers or corporate donors, such as Intel, or from individual donations. These machines seldom come with software documentation or licenses."

The company obviously has a right to get paid for its software, but bullying school districts facing deep budget cuts into costly volume deals is no way to win customer loyalty, said another administrator.

"Microsoft keeps saying it cares about education, but they don't have a clue what we're dealing with," said Jeanne Premore, an administrator at Oregon's Multnomah school district. "Budgets are going south, and it's all we can do to manage the machines that come in."

Beyond the audit requests, Microsoft's push for volume licensing has many school administrators fuming. Oregon schools have traditionally purchased two types of licenses from Microsoft: stand-alone licenses that included discounts on software upgrades and volume licenses on new machines.

Under the current volume-licensing agreement, schools pay about $42 per machine per year, regardless of the software on the PC, Carlson said.

Microsoft recently altered its volume-licensing deal to include Macintoshes, however, requiring schools to register any machine capable of using its products. The company also changed its stand-alone licenses and now forces schools to pay full retail cost for many upgrades.

All of those changes mean schools can expect to pay Microsoft more now than in the past, regardless of the type of licensing agreement they sign.

"We're not in a wonderful financial situation as it is," said Robinson. "We took $36 million out of the budget for next year. The cost of licensing would run about $500,000, which for us is the cost of 10 teaching positions."

Faced with increased licensing costs, Robinson said he told Microsoft he would be forced to take machines out of service rather than pay the price hike. "I told them if they forced the issue, I would convert to Linux as fast as I possibly could," he said.

"They didn't take it seriously until I showed them already-completed order forms for setting up 14 Linux computer labs for next year," Robinson said, adding that Microsoft representatives seemed "stunned" by his actions.

Other schools are exploring similar options. "We're actively exploring moving toward open-source software," Carlson said. "We've already talked with Sun about doing some pilot projects with them, and it looks like StarOffice might give us a viable [alternative] to Microsoft Works."

In response to the school districts' open hostility and their talk of migrating to other software platforms, Microsoft executives now say that the schools simply misunderstood its intentions.

In fact, last fall, the company began sending the first of 500 letters to districts in 30 states, and it heard few complaints until the Oregon uproar, said spokesperson Catherine Brooker. She said Microsoft has been meeting with districts individually to negotiate workable deadlines.

The company's aim was to help the schools manage their assets, Brooker said. "Nineteen states have passed executive orders requiring schools to have assets in order," she said. "Microsoft wanted to help those schools be able to say they're in compliance."

As for the 60-day deadline, she said, Microsoft merely wanted to "encourage the schools to make the audits a priority."

Carlson said he looks forward to receiving a promised clarification from the company because up until now, Microsoft hasn't put anything into writing about lifting the audit. "It's like dealing with the IRS. We're talking mostly with salespeople, and you never know if you're dealing with someone who has the authority to tell you what they're telling you," said Carlson.

Ultimately, school administrators said that if Microsoft is serious about helping manage assets, it should develop tools, techniques and licensing agreements that make sense for schools.

"We all need to manage products better than we are," Premore said. "We've challenged Microsoft to come up with a plan that would help us do that across PC and Mac platforms."