Dr. SCHMIDT: Well, again, without going into the specifics, you should expect that in all of these possible transactions, all of the regulatory bodies will be reviewing them. If there were an acquisition of Yahoo!, for example, the Department of Justice would also be doing a review. And the anti-trust laws allow the government--and I think properly so--to look at both commercial deals as well as acquisitions.

BARTIROMO: What kind of a combination would you like to see with Yahoo!? What kind of a partnership would you like to see?

Dr. SCHMIDT: Oh, well, we actually enjoyed working with Yahoo!. We also compete with them. They're a well run and, I think, impressive company. We've primarily been concerned about the possibility of a Microsoft acquisition of Yahoo! because of Microsoft's history and because of the assets that Yahoo! has are quite valuable. And we actually think that in the wrong hands, they could be used in the wrong way.

BARTIROMO: What do you mean, Microsoft's history?

Dr. SCHMIDT: I think people are aware of the anti-trust trial from 10 years ago. Microsoft has a long history in that area.

BARTIROMO: Yeah, you can bet, I guess, who tipped off the DOJ about the phone call that was made, Steve Ballmer or somebody from that side.

So what do we know about Microsoft and Yahoo!? Tell me this. I mean, I know that, you know, we're waiting on possible news from Microsoft, possibly, a hostile--we don't know what's going to happen next. But what kind of a challenge would Microsoft/Yahoo! be for Google?

Dr. SCHMIDT: Well, today we actually do not know what's going on. We read in the press that there's discussions and we'll see what they decide to do. If they go ahead and the merger's ultimately successful, it would be possible for Microsoft to integrate some of the properties and essentially eliminate consumer choice, particularly in electronic mail, instant messaging, the things where they have 80 or 90 percent market share, and that's a sweet spot for Microsoft in its ability to eliminate choice.

BARTIROMO: Mm-hmm. And, of course, Google has been getting all these new killer apps, whether it's Gmail or Maps or, you know, spreadsheets. Ultimately is the game to compete direct, head on, with Microsoft?

Dr. SCHMIDT: Well, Google is actually trying to be an innovator, and we're always concerned about competition. We have found that if we can simply invent a brand-new product that really solves a problem that really does matter to you, we can get your business, we can get your attention, we can get your traffic and your customers or what have you. We're trying in a new thing called cloud computing to offer very powerful Web services that do the common things--e-mail, word processing and so forth--where the data's kept in the cloud, it's kept by somebody else, it's managed by professionals. You don't need to worry about where you keep all that information. We like that model a lot. We're getting traction. It is a competitive threat to other companies, but we think it's a technological breakthrough.

BARTIROMO: How will you respond if Microsoft goes hostile?

Dr. SCHMIDT: Well, a lot will depend on whether their strategy is successful. In the short term, we have pointed out the possibility of a bad outcome, but it really depends on what happens in the hostile.

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