Microsoft and the US Department of Justice have reached a proposed settlement in the historic antitrust case, which aims to stop the software giant's unlawful conduct and restore competition in the software market.

Under the terms of the settlement, Microsoft may not enter into licensing agreements with PC manufacturers that restrict them from working with other software developers.

The settlement pact also includes a broad definition for middleware products and the freedom for computer OEMs (Original Equipment Manufacturer) to substitute competing middleware software on Microsoft's operating system.

It would also require Microsoft to provide other software makers access to elements of its Windows source code, called application programming interfaces, or APIs, to make their applications work under Windows.

In addition, a panel of three independent, on-site, full-time computer experts to assist in enforcing the settlement will have access to the software giant's books, systems, records and employees, for five years.

The agreement does not, however, impose any restriction on the features Microsoft is permitted to integrate in its Windows operating system, which leaves Microsoft's Windows operating system intact.

"This is a difficult time for our nation and our economy. While this settlement imposes new rules and regulations, we believe that settling the case now is the right thing to do for our customers, for the technology industry and for the economy," said Bill Gates, Microsoft chairman.

Gates described the agreement as fair and necessary, despite the restrictions on his company.

However, the agreement is not the final word. The 18 states that are part of the lawsuit have until Tuesday to respond to the proposal, which will then be reviewed by US District Judge Colleen Kollar-Kotelly.

Kollar-Kotelly agreed to review the settlement and said: "I will applaud the effort to come to an agreement...in this time of rapid national change," alluding to her earlier plea for the rival sides to settle their case in the aftermath of the 11 September terrorist attacks.