The gloves are off in the contest between the two early giants of the online information age. AOL Time Warner and Microsoft have been circling each other warily for some time, preparing for a clash as they vie for the attention of hundreds of millions of consumers around the world.

The crucial moment came last week when AOL filed what is likely to be the most significant private legal claim to spring from the long-running Microsoft anti-trust case. Although rooted in a particular legal case, the AOL action points to a wider battle over the company that will control the dominant channel through which online consumers entertain and inform themselves.

At the heart of the US Justice Department's anti-trust case lay Microsoft's assault on Netscape, the company that invented the Web browser - the piece of software that all online users need to surf the internet.

The "browser wars" are now over. The first skirmishes of the internet era, they were an ill-matched contest between the giant of the software world and a scrappy start-up. Microsoft's Internet Explorer is now used by more than 80 per cent of online users, relegating Netscape's Navigator to a footnote. Netscape was so badly hurt in the fight that it was taken over in 1999 by AOL.

Microsoft's resounding victory, however, was won illegally. That was the view of a US appeals court, which last year confirmed a lower court ruling that Microsoft had used its Windows monopoly unfairly to elbow Netscape off computer screens.

Microsoft may have escaped the break-up ordered by the lower court, but the finding of illegality has left it exposed to other actions. AOL, as the owner of Netscape, has taken that opportunity. It bought Netscape for $4 billion (€4.63 billion) and is likely to claim billions from Microsoft for the damage the latter allegedly caused to Netscape.

The legal action has far more than historical significance. While the browser wars are over, the contest between the two companies is not. Microsoft and AOL Time Warner are still battling for control of the personal computer desktop. As wireless and broadband technologies transform online access, that fight is shifting to other devices - from mobile telephones to television sets and gaming consoles - that can link people to the internet.

AOL's mission - dubbed "AOL Anywhere" by the company - has been to give its users access to the online service from any device, making it the dominant gateway to the internet. The whole array of Time Warner's media and entertainment "content", from Hollywood films to music and magazines, is being rallied behind that strategy.

Microsoft's approach, on the other hand, could be called "Windows Everywhere". It lacks AOL Time Warner's strength in media content but has a different strength: its dominant operating software.

Microsoft is therefore promoting different versions of Windows for different devices. It is using Windows to try to attract customers to its MSN internet access service.

"Microsoft is clearly a technology company throughout its DNA, while AOL is a consumer marketing company," says John Buckley, an AOL vice-president.

Both companies have made vigorous efforts to acquire each other's strengths, with Microsoft making clearer progress. AOL's acquisition of Netscape was partly aimed at competing head-on with Microsoft, giving it a technology foothold in Silicon Valley to complement its base in suburban Virginia. But many senior Netscape engineers fled the company soon after the merger and after an alliance with Sun Microsystems that was meant to compete with Microsoft for corporate customers fizzled out.

Perhaps most tellingly, AOL's dominant internet access service continues to rely on the Microsoft browser rather than its in-house Netscape product. AOL continues to use Explorer even though Microsoft last year pulled out of a parallel deal under which it promoted the AOL service on computer desktops.

Microsoft has made only limited headway so far in becoming a consumer company. But the Bill Gates formula - keep fine-tuning the product until it works - is showing results. Although MSN remains a distant second to AOL in internet services - it has eight million subscribers, compared with 33 million at AOL - Microsoft is now a clear number two. Windows XP, the latest version of the operating software, clearly has designs on AOL. It includes an instant messaging service that rivals AOL's service.

That makes last week's lawsuit a timely manoeuvre. AOL is trying to do far more than just punish Microsoft with a big financial penalty, or to tie up its rival in more legal knots. Instead, the AOL legal team is hoping to drive another wedge into Mr Gates's core strategy. It wants to limit Microsoft's freedom to use Windows to keep extending its reach and embracing new applications and services.

The courts have so far ruled that this practice - known as "bundling" - is not illegal in itself. But as well as seeking legal damages, AOL says it wants an injunction preventing Microsoft from continuing in this vein.

Details of Microsoft's alleged violations have yet to be made public by AOL, but there is little doubt that Microsoft will file to dismiss the case. One possible ground is that anti-trust law is concerned with damaging consumers rather than competitors. Microsoft will argue that it won the browser wars because its Internet Explorer was a better product that increased consumer choice.

Even if the case is not dismissed or settled, it will probably take more than a year to come to court. This encourages followers of Microsoft.

"The bottom line from a financial point of view is that the case will have no impact for at least a year, depending on Microsoft's accounting practices," says Vikram Churamani, analyst at CSFB.

Yet in the long term, the potential financial damage to Microsoft is considerable. AOL has chosen a jury trial, and juries are unpredictable in the scale of damages they award. The problem for Microsoft is that the company is a cash-generating machine, producing more than $1 billion in cash each month. At the end of the last quarter it had $38.2 billion of cash and short-term investments on its balance sheet, an enticing target for any litigant.

Some analysts believe the case could also succeed in furthering AOL's effort to limit the features in Microsoft's future products and wring concessions out of the software company. Any out-of-court settlement between the two sides could range over a wide array of issues.

Microsoft would probably rather avoid another bruising courtroom battle. Late last year, Mr Gates admitted the barrage of civil litigation against the company had been hugely damaging, even though the company had completed some of its best work in the past few years.

"The experience of the past three years has had a profound impact on me personally as well as the company," he admitted. "We have a new sense of responsibility. We must become more open, an even better industry leader."

Since Steve Ballmer took over as chief executive from Mr Gates, there is little doubt that Microsoft has become more conciliatory. It listened to some complaints from other software companies about its new operating system, Windows XP, and adjusted the product accordingly. Yet it stuck with features such as instant messaging.

Microsoft's reaction to AOL's lawsuit has all of the company's traditional ebullience. "We will contest this vigorously. We will not allow AOL's litigation tactics to prevent us improving our technology for our customers," says Vivek Varma, the company's director of public affairs.

Whatever Mr Gates might have wished, it is difficult to see his company avoiding yet another tough legal battle over its future. - (Financial Times Service)