Federal Judge Thomas Penfield Jackson ruled that the world's leading computer software company had too much power through its Windows operating system and had abused this power against competitors.

The BBC North America business correspondent, Richard Quest, says the case is being seen as a test on how such companies should behave in the internet age.

BBC North America business correspondent Richard Quest: "The judge could order a break up of Microsoft"

In a 207-page document of facts established at the 76-day trial, the judge said Microsoft's actions had harmed consumers and that it had used its power to punish competing firms.

The judge's Findings of Fact - released on the internet at 2330 GMT on Friday - are the first stage of his ruling in a complex legal battle, which could lead to serious sanctions against Microsoft.

Settlement hopes

Microsoft boss Bill Gates said he was disappointed with District Judge Thomas Penfield Jackson's ruling.

The company is planning to continue the legal fight but has indicated there is room for compromise.

"Microsoft is committed to resolving this case in a fair and responsible manner while ensuring that the principles of consumer benefit and innovation are protected," said Mr Gates.

The BBC's Tom Carver reports: "It will have to open up the sofware market to products other than its own"

He could find open ears with the US government. After welcoming the court's decision, Assistant Attorney-General Joel Klein said the federal government was "always prepared to discuss settlements."

But he added that "any talks would have to fully and properly address our competitive concerns."

For many in the high-tech industries the decision is also an indication that the old laws used to break up oil companies and railroads will work just as well in the digital age.

Round two

Judge Jackson could help speed up this process when the court case goes into round two.

There the judge will decide what to do. He has many options, everything from putting restrictions on the type of investments Microsoft makes, to breaking the company up into many parts.

The further schedule of legal proceedings has been laid out in a brief order issued by the judge.

Within a month, by 6 December, the government has to submit its briefing on issues of law, with Microsoft's response due by 17 January.

Bill Gates: We're quite confident that Microsoft's integrity will be upheld

Another round of responses is to follow in which both parties have a week each to respond to each other. According to this schedul, the next stage of the case should be concluded by 31 January. Both Microsoft and the US government have been asked to refrain from making comments on possible remedies in their submissions, though.

The judge said if necessary, a special briefing would be scheduled to address these matters.

Appeal

Microsoft left open the possibility of an appeal. Bill Neukom, Microsoft senior vice president for legal affairs, was not sure at which stage it could be lodged.

Mr Neukom said there was "a possibility" Microsoft could appeal any ruling on liability by Judge Jackson before any remedies were ordered.

However, he said it also was possible Microsoft would not get a chance to appeal until after a remedy was ordered.

In that case Microsoft would ask the appellate court to delay imposition of the remedy until after the appeal was decided, he added.

He estimated the federal appeals process would take "at least a year," even on an expedited basis, with an appeal by either side to the Supreme Court possible after that.

A long-running conflict

The US Justice Department and 19 US states had charged Microsoft, the world's biggest software company, with abusing its monopoly power in order to sell more copies of its own internet browser, Internet Explorer, and damage the business prospects of the rival Netscape Navigator browser.

But Microsoft argued that, although its Windows operating system runs on 90% of the world's personal computers, it did not act as a monopoly and instead benefited its customers by giving them additional features at no extra cost.

Microsoft is the world's biggest company by market value, worth $470bn on the Nasdaq stock market, while Bill Gates has a personal fortune of more than $100bn.