The settlement will be paid out to up to 13 million eligible California businesses and consumers in the form of vouchers to buy computers and software, including products made by Microsoft rivals, a lawyer for the plaintiffs said.

The California lawsuits were the largest of their kind pending against Microsoft, although the world's No. 1 software company, which admitted no wrongdoing under the settlement, still faces claims it overcharged consumers in other states.

The settlement came on the same day that a federal judge in Baltimore refused to dismiss antitrust charges brought against the company by competitor Sun Microsystems Inc. SUNW.O and two small software companies.

"We believe that this agreement makes a significant step forward to resolve our antitrust legal issues," Microsoft General Counsel Brad Smith told a conference call.

Final approval of the California settlement is still pending and subject to approval by a San Francisco court later this month.

California consumers and businesses who purchased Microsoft's Windows operating systems, or Excel or Word programs between Feb. 18, 1995, and Dec. 15, 2001 will be eligible to receive the vouchers under the settlement.

The amount of the rebate will be set per software license. Businesses, which often buy Microsoft software licenses for many employees, could get a substantial voucher payment, said Daniel Furniss, a partner at San Francisco-based Townsend Townsend and Crew and co-lead counsel in the case.

"Businesses are going to have big claims," Furniss said.

For example, computer users will receive a voucher for $26 for each copy of Excel purchased during the period in question. The voucher will be set at $16 per copy of Microsoft's flagship operating system software and at $5 per copy of its word-processing program Word or the now-discontinued program Works, Furniss said.

Microsoft will also pay for plaintiff's legal fees, to be determined by the court, and for administration of the voucher program.

The Redmond, Washington-based company has agreed to mail and e-mail notifications to all of the California computers users in its database, publish newspaper ads to publicize the voucher program and set up a Web site to allow users to get claim forms, Furniss said.

Two-thirds of any unclaimed settlement proceeds up to $1.1 billion will be donated to California's neediest public schools to be used for computer equipment and related services in a program to be administered by the state.

Microsoft would keep the remaining one third of any unclaimed portion.

A federal judge had scuttled Microsoft's previously negotiated settlement in class action lawsuits pending against Microsoft in 35 states.

Lawyers for the California plaintiffs had also opposed the terms of that settlement because it had not provided as much latitude for claimants to use their vouchers for competing computer-related goods.

Microsoft said that it is working to resolve lawsuits remaining in Arizona, Kansas, South Dakota, North Dakota, Minnesota, Iowa, Wisconsin, Tennessee, Mississippi, Florida, West Virginia, Montana, North Carolina, Massachusetts, Vermont, and the District of Columbia.

"We are very focused on reaching terms whenever possible," Microsoft General Counsel Brad Smith told a conference call.

The unclaimed money in the California settlement would go toward cash-strapped California schools just as the state looks to cut back sharply on its own spending and increase taxes to make up for deep budget shortfalls.

"Coming at a time when California is in the middle of a significant budget crisis, these funds and software will help to ensure that California's school children get technology they can use," Jack O'Connell, California's State Superintendent of Public Instruction said in a statement.

The vouchers can be transferred to another person up to a value of $650 under the settlement and a single person can acquire up to a total of $10,000 in the vouchers. Claimants will have four months to claim the vouchers after final settlement is approved by the court.

The first California lawsuit that became the basis of the class-action claim was filed in February 1999.

Shares in Microsoft closed 11 cents higher at $55.92 on Friday on the Nasdaq, a five-week high. (Reporting by Reed Stevenson; editing by Brian Perry; Reuters Messaging: reed.stevenson.reuters.com@reuters.net; 206-652-2326))