By Michael Y. Park

Steve Marcus/Reuters Microsoft Chairman and CEO Bill Gates might be under pressure to split the company

The Washington Post on Thursday said prosecutors apparently are mulling over several options.

One approach would be to split Microsoft horizontally into a company that sells the Windows operating system, one that sells applications such as the Office software suite, another that provides Internet-related software and services.

Another option would be to split the firm vertically into two or three nearly identical units, the Post reported.

A third approach, which some antitrust experts believe the Justice Department favors, would combine the previous two, splitting the applications side of Microsoft from the operating-system side and then dividing the operating-system unit into two competing companies.

The Post account added to swirling speculations, first posed by USA Today Wednesday, when it said federal and state prosecutors favored a breakup of the company in at least two parts. The newspaper, citing anonymous sources, said prosecutors want to spin off the company's software division into a separate organization from the wing that handles its Windows operating system. What would happen to Microsoft's all-important Internet operations is uncertain.

However, after USA Today's account went out nationwide, Justice Department spokeswoman Gina Talamona said the colorful publication had fouled up.

"The story is incorrect in several important respects. It does not accurately represent our views," she said, without elaborating.

Sources familiar with the Microsoft case said USA Today had been inaccurate about the way the government wants to restructure the company, but not about its goal of splitting it up. Those close to the discussions spoke on condition of anonymity, concerned they might anger U.S. Circuit Judge Richard Posner, the federal mediator in Chicago holding ongoing settlement talks.

Microsoft Likely to Fight Breakup

A federal judge would have to agree to a breakup, but if it did occur, it would dismantle the software empire built by Bill Gates that is among America's most successful companies.

But Microsoft is not likely to agree to be sent to the chopping block, considered the "death penalty" among possible remedies. It could spur Microsoft to seek a lesser sanction in settlement. But it could also stymie the sensitive negotiations and encourage Microsoft to battle the case through America's courts for years.

Microsoft spokesman Jim Cullinan said: "The notion of breaking up Microsoft is an extreme and radical proposal not justified by what has been presented in this case."

However, the Justice Department believes that lesser sanctions — such as prohibiting the company from abusing its influence or publishing its wholesale prices — would be inadequate to rein in Microsoft.

Justice Department lawyers laid out their proposal favoring to break Microsoft into three parts during a secret meeting last week in Washington with representatives of 19 states, people familiar with the talks said. The states are also suing the company over alleged antitrust violations.

Source said the government expects to formally present the breakup plan next week when it meets privately again in Chicago with Posner.

Microsoft's 12-Month Performance

Computer World Should Brace for Changes

Regardless of the details, the consequences for the computer-using world would be immense.

Analysts have pointed out similarities between the Microsoft case and the momentous break up of AT&T; in 1981, where the telephone giant was broken into several "Baby Bells." The success of the Justice Department in that case opened up the way for the telecommunications revolution of the 1990s.

But critics warn that competing versions of Windows could lead to software that doesn't run on some versions or some computers.

Breaking up Microsoft into smaller companies would be "stupid, because it just creates confusion in the marketplace," said Michael Cusumano, a Massachusetts Institute of Technology professor who has written about Microsoft's battle with the former Netscape Communications Corp. "The breakup sounds like a mess to me."

Despite reports of Microsoft's resistance to a breakup, others hypothesizing have said it might actually help the software company, with each Baby Bill still a giant in its respective market.

Technology pundit and Forbes columnist John Dvorak in November told FOXNews.com that the Washington-based corporation may even have been readying itself.

"Microsoft has been preparing itself for this for some time," Dvorak said. "It reminds me of Terminator 2, when they bust the bad character, who re-forms itself in different ways. They already have the communication channels put together to continue to work as one company. Shareholders will definitely benefit, because the parts are worth more than the whole. (Microsoft Chairman Bill) Gates' net worth should double."

And to concerns that a break-up could lead to different flavors of Windows, confusing consumers, Dvorak said that's basically the system already in place and it seems to work.

"None of this is going to help or hurt consumers," he said.

Microsoft came under fire for anticompetitive practices for allegedly using its de facto monopoly on computer operating systems to squelch competition and innovation, reward supporters of its Explorer Web browser and punish smaller companies that favored rival Netscape.

It was dealt a serious blow when U.S. District Judge Thomas Penfield Jackson last November essentially branded the company a predatory monopolist. Jackson hasn't decided on remedies — ranging from a fine to a break-up — in the lawsuit because he hasn't yet made an official ruling on whether Microsoft actually violated antitrust laws. Arguments for the next stage of the trial are scheduled for late February.

But Microsoft allies were encouraged when prosecutors and company lawyers agreed to meet to possibly negotiate a settlement. Now in its sixth week of negotiations with prosecutors, it's not clear whether the prosecutors' hard-line stance is a bargaining tactic or signals a breakdown in the talks.

Some government lawyers have complained that Gates had unilaterally taken certain solutions off the table, such as publicly auctioning off the Windows source code or giving up the right to decide what goes into the Windows software.

Posner has been seen as generally reluctant to divide up a corporations, but he notably backed the stripping of AT&T.;

Gates himself has repeatedly dodged questions about whether he'd accept lesser penalties or a possible split.

"I don't see how a lot of things that are being discussed would benefit consumers (and) that's what this all comes down to in the final analysis," he told ABC's "Good Morning America" after the blistering Penfield opinion in November. "We are very curious about any sort of resolution that could come along. We'll sit and be willing to discuss that. People who speculate about penalties are really off the mark at this point.''

—The Associated Press contributed to this report

—Reuters contributed to this report