Bill Gates has warned that his company, Microsoft, could be prohibited from adding new features to its Windows operating system if harsh penalties, proposed by nine US states, are imposed.

One of the penalties would require Microsoft to carry on selling its previous version of Windows after it released a new version.

You're not interested in giving consumers choice in a variety of prices and a variety of features

Steven Kuney

Mr Gates told US district judge, Colleen Kollar-Kotelly that this would prevent the company recalling or replacing a version if a major security hole was found.

The firm would only be allowed to design software which would negatively affect another firm's packages if there was "good cause" for upgrading Windows.

"It would be subject to endless second-guessing - 'Was that good cause or not'," Mr Gates said.

A lawyer representing the states, Steven Kuney, said Mr Gates really was afraid of giving consumers a choice of taking an older, cheaper version of Windows if they did not want the new features.

Crippled

"You're not interested in giving consumers choice in a variety of prices and a variety of features, because then people would not adopt the new software as quickly as you would like," said Mr Kuney.

The chairman and founder of Microsoft was appearing as a witness for a second day.

During his first day of evidence, Mr Gates said Microsoft would be crippled if the proposed penalties were imposed.

The states' main demand is that Microsoft should produce a stripped down version of its Windows operating system so that it can be customised by computer makers and rival software designers.

Decision on penalties

Mr Gates told the court that the company might have to withdraw the Windows system if the states got their way.

The case against Microsoft began four years ago.

States still pursuing Microsoft

California Connecticut Florida Iowa Kansas Massachusetts Minnesota Utah West Virginia District of Columbia

The company was found guilty of exploiting its monopoly of the operating system market to damage its competitors.

The current hearing is simply to judge what penalty the company should face.

In the original Microsoft trial, Mr Gates gave evidence only on videotape.

Some legal experts said his failure to give evidence in person harmed the company's case.

Last year the US Justice Department and nine states reached a settlement with Microsoft.

Pre-emptive action

But nine other US states and the district of Columbia chose to pursue the case, arguing tougher penalties were needed to prevent the company from continuing to abuse its monopoly in the future.

Key dates of the legal battle

1995 Court orders Microsoft to scrap terms requiring PC makers to install Internet Explorer 1997 Justice Department claims Microsoft is violating earlier court order 1997 Microsoft ordered to supply Windows 95 without a browser 1998 US attorney general and 20 US states launch anti-trust lawsuits April 2000 Microsoft found guilty of anti-competitive behaviour June 2000 Judge orders Microsoft break-up February 2001 Appeals court hearing begins June 2001 Appeals court sets aside break-up ruling

They say the court should take pre-emptive action to restrain Microsoft's potential domination of new technologies rather than merely offer redress for the company's past misdeeds.

Microsoft's lawyers argue the states' demands are excessive, saying the so-called remedies ought to be confined to issues on which Microsoft has been found to be at fault.

Bias

Mr Gates might have to spend two days in the witness box, being questioned by lawyers.

The judge in the original trial ruled that Microsoft had illegally stifled competition and he ordered that the company should be broken up.

An appeal court threw out that judge's remedies, saying he might have given the appearance of bias, and appointed Ms Kollar-Kotelly to determine new penalties.

Ms Kollar-Kotelly is also considering whether to accept the out-of-court settlement.