Microsoft has agreed to modify its $1.1 billion antitrust settlement with California in response to Apple Computer's complaints that the original agreement simply provided free Microsoft software to schools in that state. Under the terms of the modified agreement, Microsoft will instead provide California schools with vouchers good toward the purchase of any computer hardware or software, not just software that Microsoft makes. California sued Microsoft in the wake of the company's historic federal antitrust trial, accusing the company of overcharging the state's consumers for Windows, Microsoft Office, and other software products. Microsoft reached its first settlement agreement with California in January.

"We listened to industry feedback \[on the settlement\] and acted on it," said Richard Wallis, an associate general counsel on Microsoft's legal team. Various courts have forced other states with similar lawsuits against Microsoft to drop their cases because of a federal law that prevents consumers from suing companies from which they don't directly buy products; most consumers purchase Windows and Office with new PCs and therefore receive the products from a PC maker, not from Microsoft. But California, with more than 32 million consumers, has strong competition laws that supersede federal statutes.

For Apple, fending off Microsoft in its home state is a crucial move because Apple's education sales--once one of its strongest markets--fell 15 percent in 2002, when California schools faced budget shortfalls and moved to standardize on Windows. Apple was the number-one supplier of computers to schools as recently as 2 years ago, but the company now lags behind Dell and other PC makers as it struggles to recast itself as a digital-media supplier for consumers and creative professionals. Several factors have contributed to Apple's decline, including a widening performance gap between PCs and Macintosh computers, higher prices, and the perceived value of standardizing on Windows. Apple's market share hovers at around just 2 percent; although Apple says its active user base remains unchanged at 25 million people, active Windows users worldwide number several hundred million or more. When you factor in the split between Mac OS X users and "classic" Mac OS users, the math gets even uglier: Currently, only 5 million to 8 million people run the modern and more capable Mac OS X, according to Apple.