Friday's ruling by a federal district judge that Microsoft is a "harmful" monopoly could be the historic first step in the dismantling of a software empire headed by Bill Gates, the world's richest man.

In a long-awaited finding of fact after a yearlong federal antitrust trial, Judge Thomas Penfield Jackson declared that the Redmond, Wash., high-tech giant dominated the software market at the cost of inhibiting innovation and harming consumers.

Jackson's finding sets the stage for the next phase in the case: He now has to rule whether Microsoft gained and maintained its monopoly through illegal means. If the judge decides Microsoft broke the law, the judge will have to decide on a sanction, which could involve breaking up the high-tech behemoth.

"Microsoft enjoys so much power in the market for Intel- compatible PC operating systems that if it wished to exercise this power solely in terms of price, it could charge a price for Windows substantially above that which could be charged in a competitive market," Jackson wrote in his 207-page opinion. "Moreover, it could do so for a significant period of time without losing an unacceptable amount of business to competitors."

"In other words,' Jackson said, "Microsoft enjoys monopoly power in the relevant market."

The finding was met with guarded criticism by Microsoft officials and praise from the company's rivals in Silicon Valley.

Gates, Microsoft's chairman and chief executive officer, said at a news conference after the ruling that he remained hopeful the case could be settled out of court.

"We remain committed to resolving these issues in a fair and responsible manner as quickly as possible," Gates said. "In this industry, no company has a guaranteed position.

"We compete vigorously but fairly," he added.

Jim Barksdale, the former CEO of Netscape, one of Microsoft's many high-tech rivals, issued a statement praising the judge's ruling, saying it was a "tremendous victory for consumers and the high-tech industry."

Jackson's decision goes beyond the factual determination of the monopoly status of Microsoft. It clearly criticizes the company for its conduct as a computer software market bully.

"Most harmful of all is the message that Microsoft's actions have conveyed to every enterprise with the potential to innovate in the computer industry," the judge wrote. "Through its conduct toward Netscape, IBM, Compaq, Intel and others, Microsoft has demonstrated that it will use its prodigious market power and immense profits to harm any firm that insists on pursuing initiatives that could intensify competition against one of Microsoft's core products."

Jackson also criticized Microsoft's past business practices. "Microsoft's past success in hurting such companies and stifling innovation deters investment in technologies and businesses that exhibit the potential to threaten Microsoft," the judge said. "The ultimate result is that some innovations that would truly benefit consumers never occur for the sole reason that they do not coincide with Microsoft's self-interest."

Being a monopoly is not an illegal act. Corporations are allowed to gain a monopoly position by creating a better product or through good timing or simple luck.

But a company breaks antitrust laws when it uses its market dominance to continue that monopoly or extend its grip on other markets.

Assistant Attorney General Joel I. Klein, who has been overseeing the government's case, said, "This is a tremendous victory for America's consumers . . . (that) shows once again that in America no person and no company is above the law."

"Silicon Valley is cautiously cheering," said California Attorney General William Lockyer, who brought the state into the antitrust lawsuit against Microsoft. Nineteen states, including California, are party to the government's lawsuit.

Lockyer, who was criticized by some for joining the antitrust suit, said the findings helped vindicated California's participation.

"So many businesses were impacted, so many competitive opportunities were smothered, it was an easy decision," Lockyer said at a press conference following the decision.

Jackson's decision is based on a mountain of documents, taped depositions and 76 days of the trial testimony, which began Oct. 19, 1998, after almost eight years of investigations, court orders, subpoenas and other maneuvers between the government and the giant software maker.

Attorneys for the U.S. Justice Department and the states charged that Microsoft pressured computer makers to bundle its Internet Explorer Web browsing software with its dominant Windows operating system, squashing Mountain View-based Netscape Communications' own Navigator Internet Web browser.

A browser is software that allows a computer user to view and navigate the World Wide Web.

The government also contended that Microsoft in 1995 made an illegal offer to Netscape to split the emerging Web browser market and that Microsoft paid computer makers to leave Netscape off their new machines.

Microsoft's attorneys countered that it had simply played hard - but fair - in the rough-and-tumble high-tech marketplace.

Microsoft also returned Netscape's fire, charging that Netscape's top executives were making up the charges to goad the government into filing antitrust charges against a business rival.

Friday's findings are the beginning of another long chapter in this corporate struggle.

Both sides will now spend months preparing for hearings before Jackson to determine whether the findings constitute a violation of antitrust laws. Microsoft can also appeal the findings of fact before Jackson decides on the company's possible antitrust violations.

Legal experts said the decision is a broadside against the company.

"It was the harshest decision Microsoft could have expected," said Nicholas Economides , a New York University professor of economics who has been following the case closely. "The judge ruled in every way against the company."

According to Economides , Jackson will also have to determine what action the government will take against the company. The possibilities range from tinkering with its contracts with outside vendors to breaking the company into smaller parts.

"Now that the judge has determined that Microsoft acted in such a way, he'll have to figure out what to do about it," said Economides . "That will now be the focus of this case."