Microsoft sued portable GPS maker TomTom in February for patent infringement, raising the specter of a first Microsoft attempt to file suit over an implementation of the open source Linux operating system, which Microsoft has long claimed violated its patents. TomTom counter sued earlier this month.

Today, Microsoft announced that the companies have settled both suits through a "patent agreement under which TomTom will pay Microsoft for coverage under the eight car navigation and file management systems patents in the Microsoft case. Also as part of the agreement, Microsoft receives coverage under the four patents included in the TomTom countersuit. The agreement, which has a five-year term, does not require any payment by Microsoft to TomTom. It covers both past and future U.S. sales of the relevant products. The specific financial terms of the agreement were not disclosed."

With Microsoft's Redmond campus largely emptied out for the winter holidays, CEO Steve Ballmer crunched the numbers on the proper level of spending for his company against the current economic climate, which he has repeatedly referred to as a "reset" rather than just a recession. Ballmer said his own estimates for the weakness and duration of the downturn tend to be more severe than those of other business leaders he meets.

With that in mind, he settled on $27.5 billion of operating expenses -- a level the company aims to hold relatively steady through the current fiscal year, which ends June 30, and during its 2010 fiscal year. Ballmer made clear to financial analysts meeting in New York this morning for the company's annual strategic update that cutting back even more significantly -- say to $20 billion -- would be "imprudent."

"I think this is right," Ballmer said.

That should give some comfort to those wondering if the modest layoffs Microsoft announced last month were the beginning of a more significant reduction. Wall Street analysts and investors are pressuring companies in every industry to continue cutting costs as sales and profits slow dramatically.

The strategic update call just came to an end. Ballmer gave a detailed look at seven major business areas for the company. Check back here later this morning for more details.

Update, 7:50 a.m.: As he told Congressional Democrats earlier this month, Ballmer said Microsoft's corporate strategists have been evaluating past downturns -- particularly those driven by "deleveraging." The team read company annual reports from 1927 to 1938 to determine who did a good job managing through the Great Depression. "RCA, God rest them in peace, became our role model," Ballmer said. The company was able to dominate the television business because it continued to invest during bad times, he said.

Then he broke down how Microsoft plans to invest.

IBM has created a "Microsoft-free" desktop, according to The Wall Street Journal, which is "a complete suite of applications that run on a backroom server and don't require Microsoft software or costly desktop hardware." The combo of a Linux OS and IBM thin-client office software will cost from $59 to $289 per seat, a savings of $500 to $800 over a Microsoft desktop with Vista, Office and collaboration tools, according to IBM estimates.

Keith Curtis spent 11 years at Microsoft. After he left, he discovered Linux and has just published a book, "After the Software Wars," which explores a future with open source as the dominant model for software. John Markoff gave the book a nice write-up in the New York Times' Bits blog today.