A federal judge has ruled that Microsoft Corp should be broken into two companies and heavily regulated to stop the software company's anti-competitive behaviour.

The ruling by US District Court Judge Thomas Penfield Jackson ends one phase of the historic antitrust case - and begins another.

Bill Gates, Microsoft's chairman and chief software architect, said in a statement posted on the company's Web site that Microsoft will appeal the decision and believes it has "a very strong case" for overturning Jackson's decision.

"We believe this ruling is inconsistent with the past decisions by the Appeals Court, with fundamental fairness and with the reality of the marketplace," Gates said. "This is clearly the most massive attempt at government regulation of the technology industry ever, and it was conceived by the government and imposed by this ruling without a single day of testimony or scrutiny."

The US Department of Justice expects the appeal to head directly to the US Supreme Court.

Right remedy Jackson apparently accepted the government's recommendation for a break-up with little or no change. As requested by the DOJ and the 17 states involved in the case, the judge ordered that Microsoft be split into two separate companies - one for its operating systems, the other for its applications and Internet Explorer Web browser businesses.

If implemented, Microsoft's Macintosh Business Unit would become a part of the applications company.

"The court's order is the right remedy for Microsoft's serious and repeated violations of antitrust laws," said Joel Klein, assistant US attorney general for antitrust, in a statement.

According to the break-up order, within 12 months Microsoft must separate its operating systems business from its applications business and transfer all assets from one of its businesses - including personnel, systems and intellectual property - into a separate entity.

Microsoft has four months to submit a proposed divestiture plan, Jackson ruled. The Justice Department will then have 60 days to submit any objections to Microsoft's plan, and Microsoft will have 30 days to answer the DOJ.

Break-up rules Until the break-up plan is implemented, the final judgement stipulates, Microsoft must maintain and run its operating system and application units as "ongoing, economically viable businesses," with their managements and operations kept as separate as they were on April 27. It also forbids the company from taking any action "that undermines, frustrates, interferes with or makes more difficult" the break-up ordered by the judge.

After the break-up is completed, the two new companies would be prohibited from the following:

- Merging or entering into a joint venture with each other.
- Developing products for each other or reselling products created by the other company if the products aren't made available to other vendors.
- Providing application programming interfaces and other technical information to each other without sharing them with other companies.
- Licensing software to each other under terms that are more favourable than other companies are offered.
- Three months after the break-up plan was implemented, and then on a continuing basis after that, the two companies would have to file with the DOJ a copy of every business agreement they had signed with each other as well as a memorandum describing any oral agreements. The two companies and members of their respective boards of directors would also be barred from owning the other's stock, and officers, directors and employees of one company couldn't work for the other.

Right remedy Jackson ruled on April 3 that Microsoft violated federal antitrust law by abusing its monopoly position in the PC operating systems market. The US Department of Justice and 17 states recommended a remedy that would regulate Microsoft's conduct with PC vendors and split Microsoft into a Windows business and an applications software business.

"I believe very strongly that today is the first day of the rest of this case," Gates said in a conference call with reporters after the ruling was announced. He called Jackson's decision "an unwarranted and unjustified intrusion into the marketplace," and added that keeping Microsoft together as a single company is crucial to developing future products, such as a new user interface that will include handwriting and speech recognition.

Gates refused to say whether Jackson's ruling would prevent Microsoft from launching Next Generation Windows Services (NGWS), a plan for delivering software services on the Internet that's due to be announced June 22. But he said the company would go ahead with NGWS while attempting to obtain a stay of the remedies ordered by Jackson.

’Unintelligible’ language The two sides squabbled this week about the details of the government's proposed remedy. Microsoft said it was too harsh, with unrealistic deadlines, onerous rules and "unintelligible" language. The Justice Department maintained the remedy is needed to restrain Microsoft's aggressive efforts to thwart competition.

Jackson dismissed Microsoft's contention that a forced divestiture is "draconian" and required more evidence and hearings. He wrote that Microsoft should have known that a break-up was a possibility and he curtly ruled: "There will be no more proceedings."

The judge continued: "The court is convinced for several reasons that a final - and appealable - judgement should be entered quickly. It has also reluctantly come to the conclusion, for the same reasons, that a structural remedy has become imperative: Microsoft as it is presently organized and led is unwilling to accept the notion that it broke the law or accede to an order amending its conduct."

Patrick Thibodeau and Dominique Deckmyn contributed to this report.