FEDERAL JUDGE THOMAS PENFIELD JACKSON HAD some news for his packed courtroom–he had conducted an informal software demonstration. This got the attention of the litigants before him: the world’s most powerful government and the world’s most powerful software company. Specifically, the jurist had wanted to test a claim made earlier in the week by the software firm–which is of course Microsoft, run by gazillionaire Bill Gates and staffed by 20,000 overmotivated light-bulb-heads who aspire to Gates’s genius, drive and cunning. Would removing Microsoft’s Explorer Internet browser from Windows really grind the computer to a halt? Microsoft had insisted it would.

Leaning into the microphone, the burly, white-haired judge read from notes that carefully detailed his experiment, held on Dec. 18, the previous day. Using a standard-issue Micron computer with Windows 95, he had his technician go through the ““deinstall’’ routine until he got a screen message indicating that Explorer was no longer operative on that version of Windows–a result that Microsoft had not been able to offer its licensees despite the judge’s order. ““That entire process,’’ Jackson intoned, ““took less than 90 seconds . . . and when the uninstall process was completed, Windows 95 functioned as flawlessly as before. If the process is . . . not that simple, I’d like to have it refuted by any evidence Microsoft wishes to introduce.’’ Then came this acid comment, which generated titters through the courtroom and, undoubtedly, heart tremors in the American Northwest: ““I want to know whether to believe my eyes.''

Maybe that little moment won’t turn out to be the turning point in the history of 21st-century technology. But you wouldn’t think so from the jubilation coming from Bill Gates’s foes. The competitors and consumer advocates who have long been complaining that Microsoft’s business practices are unfair now believe that they have a shot at changing things. ““For a long time, people said that we were a whiny competitor,’’ says Roberta Katz, counsel for Microsoft’s browser foe Netscape. ““But now they can see it’s a serious issue.''

In fact, the future of Microsoft is the issue in high tech. That’s why the U.S. government’s broadside against it is being followed with O.J.-like intensity. Reading the business section these days is like paging through the final book of the New Testament. The word ““Armageddon’’ keeps popping up. All to address a crucial question: will Microsoft be permitted to continue its domination? Or will government regulation set the parameters of competition in the next era’s most important industry? The answers will affect everyone who deals with a computer chip. In other words, everyone.

After years of disarray and futility, the get-Microsoft forces are reaching critical mass. Nine state attorneys general have been meeting lately, apparently to prepare a tobacco-company-style humdinger court case against the Softies. A Senate committee is conducting hearings about monopolistic practices in software. The European Commission is entertaining complaints from Microsoft competitors. Bill Gates elbowed aside General Motors and standardized tests to become Ralph Nader’s No. 1 target.

Of course, Microsoft is fighting back hard–with such disregard for decorum that some people are baffled by its intensity and apparent willingness to risk bad PR and, worse, the ill will of Judge Jackson. But if its employees were not aggressive, they would not be working at Microsoft. Consider how they responded to Jackson’s temporary order. Microsoft had been forcing its Windows licensees (computer makers like Compaq) to also carry its Explorer browser. According to Janet Reno’s trustbuster Joel Klein, this practice gave Microsoft an unfair advantage over Netscape and other browser creators. Jackson had said he’d decide the main issue later (with the help of a consulting expert in cyberlaw). But for now, he told Microsoft, just offer computer makers the option of shipping an Explorer-free version of Windows.

This needn’t have been a big deal for Microsoft. Most licensees would continue to take the full-blown version of Windows. The question remained how to provide a version without the Explorer’s accompanying it. Microsoft’s solution? Fuggedaboutit. It offered two Explorer-free alternatives that no sane computer maker would dare ship in 1998: a two-year-old version of Windows (14 years old in dog-year-like Internet time) or a current version that didn’t work at all. Think of it this way: if you won’t take our browser, you get either an aging jalopy or a new model sans motor.

And this came under the rubric of compliance. Microsoft also announced it was appealing the entire ruling on the ground that the judge’s reasoning was unsound.

Microsoft haters everywhere point to this as proof of what they’d been saying all along: Redmondites are rotten. ““They’re providing a tutorial to the public on what type of company they really are–above the law and arrogant as hell,’’ said James Love, director of the Microsoft-bashing Consumer Project on Technology.

The Microsoft people didn’t see it that way. They treated the order like a bug fix. The way they read the judge’s ruling (you will be spared the complete explanation, which involves the kinds of terms that appear in on-screen error messages), the letter of law dictates that they had to respond the way they did. If this, um, solution just so happened to benefit them and make a joke of the ruling . . . too bad.

That attitude, in a nutshell, is what has made Microsoft so successful–a relentless, obsessive focus on where it wants to go and the smarts to get there. For much of this year, the company has seemed invincible. After its triumphant adjustment to the Internet, it was cementing its dominance in systems and applications, and improving its share in browsers, network servers and databases, all the while insisting that the company isn’t nearly as scary as competitors and would-be regulators would have you believe. Forget that its own legal briefs filed this week warn that if the courts delay its next operating system, Windows 98, the entire American economy might topple into the quarry. Its executives portray the company as a scrappy, lovable cog in the glorious machine of American high tech.

““Think about the technology business in its broadest sense,’’ says Bob Herbold, Microsoft’s exec VP. ““Microsoft is a small but important player in that very large industry.''

Herbold is being modest. Way modest. While indeed Microsoft’s revenue stream is dwarfed by others (chart), Wall Street regards the firm as a virtual titan, worth more than the entire auto industry. And when it comes to computer software, there is Microsoft and there is everyone else. Though Microsoft executives will not admit this under torture, it’s obvious to computer users and federal judges alike that the Windows operating system (OS) is a monopoly. And Microsoft is also the dominant force in applications software: its Office suite of products trounces the competition.

Other software shops sweat out the process of winning customers among the people who buy personal computers. Microsoft, since its programs are standard issue on new computers, thinks more like a tax collector, measuring progress by how much money it earns from each PC sold (about $100). Bill Gates fondly speaks of the day when Microsoft will collect money from users on a subscription basis–just as people write out checks for the cable bill or electric bill, they’ll periodically pay the Bill bill.

All of this, Microsoft insists, will happen only if customers are pleased with its offerings. Furthermore, the rapid pace of high-tech change ensures that competitors will always get a shot at the champs in Redmond, Wash. In any case, Microsoft’s success story does resonate with millions of people who see it as a paragon of American know-how and can-do. When Bill Gates travels abroad, he is regarded with an awe usually reserved for presidents, divinity or ex-Beatles.

So why is it now a target? The Microsoft people think they know the answer: jealousy and greed. ““There’s this weird thing in America about the way we deal with successful companies,’’ says Microsoft VP Brad Chase, who also cites ““a very effective lobbying campaign’’ by competitors.

But whatever the reason, Microsoft correctly senses big trouble. Most alarmingly, one passage in Judge Jackson’s ruling indicated he was already pondering the anticompetitive aspects of Windows 98, which will so thoroughly integrate browsing that separating Explorer from Windows would be like removing Nestle Quik from milk after the spoon has done its job. Microsoft’s entire strategy is built around this Internet-based OS, and if the government stops this, it’s apocalypse time in Redmond.

““We think this is hugely important,’’ says Nathan Myhrvold, Microsoft’s technology czar. ““The government of the United States is being incredibly capricious with us to satisfy the craven needs of our competitors. In almost every aspect of our business, this will really hurt us. But that’s [our competitor’s] goal–to hurt us, and help their own companies. In doing so, they will hurt our customers, too.''

Actually, Microsoft has a point here. An argument can be made that Internet browsing, an act destined to be as common as accessing a file on one’s hard-disk drive, is a natural addition to an operating system. Customers may benefit when Microsoft builds browsing into Windows. If such a move makes the Netscape browser redundant, well, that’s tough, goes the Microsoft line. How can something be bad if it’s the right thing for customers?

Seems to make sense. But Microsoft doesn’t stop there. It claims a totally unfettered right to include any embellishment in the OS, be it a natural evolution or an anticompetitive smart bomb. If it wanted to, the Softies said to government lawyers, it could require computer makers to put ““a ham sandwich’’ into Windows. Judge Jackson indicated in his Dec. 11 ruling that Microsoft’s right might not be so absolute. And antitrust head Klein wants it firmly established that users will not be forced to munch on software ham sandwiches.

Klein, who considered Microsoft’s hostile response to the judge’s order ““a meaningless remedy inconsistent with the court’s ruling,’’ has turned up the heat. He quickly petitioned the court to declare Microsoft in contempt, to slap on a million-dollar-a-day fine and–most daringly–to compel the company to submit any further software releases to government scrutiny, so the Feds can be sure that Bill Gates is playing fair.

That’s Microsoft’s worst nightmare. ““If the U.S. government is going to decide what features go into software,’’ says Myhrvold, ““it means the end of the software business.’’ It certainly means the end of Microsoft’s business plan. Myhrvold cites the hundreds of millions of dollars the company is spending on research into making software more powerful and easier to use. ““What’s the point of us doing this if we can’t put the features in?''

Poor Microsoft. The year started so promisingly and just kept getting better, its stock soaring, its browser share rising, its reviews glowing, its press clips brimming with tales of all its millionaire option-holders. Now the future holds a bleak procession of briefing deadlines and hearing dates. Every day seems to bring more conscripts to the opposition. Most recently, the Justice Department hired as a consultant superlitigator David Boies. And now it comes out that rival software firms have added the ultimate Beltway insider Bob Dole to their lobbying team. (What might he say? ““Bob Dole never had an operating system. Had to Web-surf with a pencil. Arrgh.’')

Would-be Microsoft-killer attorney Gary Reback thinks that we’re now in the opening stages of a long journey toward software liberation. ““It’s sort of like the situation after the first “Star Wars’ movie,’’ he says, referring to that temporarily exhilarating moment when the Death Star was destroyed, yet the rebel forces realized that the Empire was still in control.

Do not underestimate the Empire. It will take more than a few rulings to knock the ruler of the software world off its hard-won pedestal. But right now, facing a lineup of foes that includes master litigators, a former presidential candidate, a leading consumer advocate, attorneys general from nine states and, apparently, the judge hearing his case, Bill Gates might well be wondering if the Force is indeed with him.

Thanks to its dominance in software, Microsoft is the third most-valuable company in America.

Top 10 companies by market value IN BILLIONS OF DOLLARS COMPANY MARKET VALUE* 1996 REVENUES General Electric $242.2 $78.5 Coca-Cola 158.9 18.5 Microsoft 157.9 11.4[t] Exxon 152.1 116.7 Merck 125.9 19.8 Intel 113.0 20.8 Philip Morris 109.0 54.5 Procter & Gamble 106.7 35.8 IBM 97.2 75.9 AT&T 96.0 64.9

Graph: Operating systems

PERCENT OF UNITS SOLD WORLDWIDE IN 1997** Microsoft (Windows 88.7% and DOS) Apple 5.8 Other 5.5

GRAPH: Web browsers

PERCENT OF WORLD-WIDE MARKET SHARE 1997[tt] Netscape 57.6 Microsoft Explorer 39.4 Other 3.0 *PRICE PER COMMON SHARE AS OF DEC. 19 MULTIPLIED BY NUMBER OF COMMON SHARES OUTSTANDING. [t] FY ENDING JUNE 1997. **FORECAST. [tt] THIRD QUARTER. SOURCES: BLOOMBERG, DATAQUEST