The Justice Department and 17 states Friday asked a federal judge to divest Microsoft Corp. into two smaller companies. One company would produce the Windows operating system and the other would handle all other software applications, including Internet Explorer as well as the Office suite.

The government is also asking that the divested Microsoft (MSFT) operations be barred from reuniting for 10 years.

The proposed split would occur after Microsoft had exhausted all its appeals. But the proposed restrictions on the company's business practices would go into effect immediately and remain for three years.

In a statement following the announcement, Microsoft Chairman Bill Gates said the government's proposed remedies would have a "chilling effect on innovation."

"Microsoft could never have developed Windows under these rules. Looking forward, this kind of regulation would make it impossible for Microsoft to develop the next generation of great software," he said.

The proposal was submitted to U.S. District Judge Thomas Penfield Jackson shortly after Friday's market close. Jackson ruled on April 3 that Microsoft repeatedly broke federal antitrust laws intended to maintain fair competition by using its power in computer operating systems to stomp on its rivals.

The government plan contained restrictions on Microsoft business practices, noting that neither of the divested companies would be allowed to threaten personal computer manufactures for using rival products or to withhold licenses and technical support needed to use the former Microsoft products.

The new operating system company would be required to disclose key source code to developers of Windows applications. The company would also be barred from designing software for the purpose of interfering with or degrading the operations of rival products and be required to treat all hardware and software makers equally with respect to pricing, licensing of Microsoft products and access to required technical codes.

Further, the Justice Department asked for a ban on tying future use of Windows to any other Microsoft products.

The proposal, if accepted by the judge, would bar Microsoft Chairman and Co-Founder Bill Gates, as well as company officers and directors, from owning stock in more than one of the new companies.

Microsoft has said it will appeal Jackson's ruling and insists no laws were broken. Following the release of the government plan Microsoft spokesman Rick Miller said the government's proposal would hurt customers, hinder innovation and would likely face defeat in the court system.

"These demands are not supported by the facts and are not likely to be sustained by the judicial system," said Miller.

Microsoft has until May 10 to respond to the government's filing, but it is expected to request an extension. Following that, the government will get another week for a rebuttal. An open court hearing on the proposed remedies is scheduled for May 24.

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