Microsoft is outraged that someone in Australia was acquitted for selling video game modification chips. Microsoft wants Australia to change its law in order to protect Microsoft's business model. I think Msft is very arrogant to think that it has some sort of right to stop modifications of a consumer device. Its Xbox has already been hacked to run Linux, but Msft is shutting down the sites that explain how to do it. They were only able to hack it because of some Xbox bugs. I think Msft should just fix its bugs instead.
Palladium is Microsoft's name for the version of the Xbox technology that will have the power to restrict what applications can do on the PC. On the Xbox, it means that only licensed games will run. After a year, people figured out how to bypass the tests by swapping a ROM chip, but that was only because of bugs in the early version of Palladium. The PC Palladium will be harder to break once it ships.
Why is Msft doing Palladium? The obvious answer is for digital rights management of copyrighted audio and video, better control over its own software licensing, and an attack on the open source software movement. According to this Wired story, Msft denies that Palladium could be used to enforce software piracy, so Lucky Green applied for his own patents on ideas for using Palladium that way. Clever. But I suspect that Msft, IBM, Intel, and HP already have a lot of patents pending for applications of Palladium (which Intel calls LaGrande and the others call TCPA).
Update: John sends this story about Microsoft threatening to pull the Xbox from the Australian market.