News of the talks surfaced just one hour before a scheduled press conference at which the Justice Department's fair competition tsar, Joel Klein, had been set to outline his action against Microsoft. The attorneys general of three US states who, with about 16 other states, have also been threatening to file suits against the company, had been expected to join Mr Klein.
Microsoft, meanwhile, said it was delaying until Monday the first shipments of its new Windows 98 operating platform to personal computer manufacturers. It had planned to release the software today.
Sources said Microsoft had come forward with "major concessions". If they prove insufficient, however, Mr Klein and the attorneys general may yet forge ahead with the lawsuits that could be as far-reaching as the forcible break-up of the old AT&T in 1984 and Standard Oil in 1911.
The remarkable all-out assault on Microsoft, arguably the most revered but also the most feared of American enterprises, stems from a deepening conviction in US government that the company has abused its near-monopoly position in the personal computer market illegally to trample its rivals and to deny consumers any realistic choices on how their machines function.
The suits were said to include a call on the courts to block the shipment of Windows 98 unless Microsoft agreed to a series of restrictions on the software's contents and the agreements Microsoft had been expecting to reach with the manufacturers who will install it in new computers.
The precise scope of the action that now threatens Microsoft is not fully known. The extraordinary spectacle of Microsoft scrambling to settle suggested the conditions being presented to the company were far from minor. Lawyers for Mr Gates were expected to continue the talks in Washington this morning.
At the extreme, the suits could demand the actual break-up of Microsoft into disparate companies. It could, for instance, be divided into two businesses, one making operating systems and the other delivering products for the Internet. Such draconian medicine has only been successfully administered twice before - in the cases of Standard Oil and AT&T. An attempt in the early Eighties to dismantle IBM failed.
At a minimum, both Mr Klein and the 19-odd states are thought to be demanding that Microsoft strip from Windows 98 any automatic function giving users access to the World Wide Web via Microsoft's own browser, the Internet Explorer. The so-called "bundling" of the browser into Windows has been at the heart of the Justice Department's tug-of-war with Microsoft, which dates back to the launch of Windows 95.
Among the perceived victims of Microsoft's virtual hegemony is Netscape Communications, which pioneered the browser device with its Netscape Navigator. Netscape's once-mighty share of the browser market has slumped since Microsoft integrated the Explorer into Windows 95.
But Mr Klein is thought also to be targeting the licensing agreements granted by Microsoft to the myriad PC manufacturers. He may, for example, be seeking an end to a condition that the Windows menu, which instantly offers such functions as the Explorer, must be the first thing that appears on the screen when their PC's are powered up by users.
If those agreements are loosened companies such as Compaq or Dell could customise their products to display alternative start-up menus offering functions produced by other software makers, such as the Netscape Navigator.
At the core of the Justice Department's action is the fear that with the Internet Explorer, Microsoft will for ever be able to control the gateway to a new and potentially monolithic business in all kinds of on- line transacting. Already, consumers are beginning to use the Internet to buy books, cars, holidays and make stock investments. The scope is only just beginning to be understood.
There remains some doubt as to whether the Justice Department has the legal case to win any wide-ranging action against Microsoft in the courts. It would have to prove not just that Microsoft has achieved a near-monopoly but that it has been acting illegally to protect and expand it. Until yesterday, Microsoft had been defiant, arguing that the government had no right to force it to rip anything from its platform. Microsoft indicated, however, that it was still hoping to get the new software into shops as it has previously planned by 25 June.
Leader, page 20
Outlook, page 25