WASHINGTON (Reuters) - Microsoft Corp. MSFT.O Chairman Bill Gates admitted in court on Wednesday that his company already offers a customizable version of Windows, despite his insistence it cannot comply with a similar demand by nine states still suing the software giant.

But Gates said Windows XP Embedded, which is designed for use in specialized devices like cash registers and automatic teller machines, subsequently would not work the same way as the home version of Windows.

After ending his testimony, Gates made a brief statement in front of the courthouse and left without answering questions.

"I'm glad I had an opportunity to come and share my story with the court," Gates said. "Microsoft has been working hard to resolve the issues in this case."

Gates' basic message over the three days was that the states' sanctions would fragment the operating system, cripple Microsoft, harm consumers and hurt the computer industry.

The states, in turn, tried to show he was twisting and exaggerating their proposals.

The demand for a version of Windows that can be customized by computer makers and rival software companies is a key part of the states' proposed antitrust sanctions, aimed at leveling the playing field for Microsoft competitors.

The nine states still pursuing the case are California, Connecticut, Florida, Iowa, Kansas, Massachusetts, Minnesota, Utah, West Virginia, plus the District of Columbia.

Gates told U.S. District Judge Colleen Kollar-Kotelly earlier this week that it would be impossible to engineer a version of Windows with removable features because different components, such as Internet Explorer and Media Player, are "interdependent" on each other.

WINDOWS XP EMBEDDED

But that argument came under attack on Wednesday from states' attorney Steve Kuney.

"You can build an operating system that can run on a PC and support virtually all applications that are currently supported by a PC running XP home (version), correct?" Kuney asked Gates.

"Yes and No," replied Gates, pointing out that the embedded Windows, once configured, did not let a customer load additional software programs.

"You wouldn't be able to go and take an application and install it and have it run," Gates told the judge.

The nine states still pursuing the case have refused to sign on to a proposed settlement of the four-year-old case reached between Microsoft and the Justice Department last November.

The settlement is designed to give computer makers more freedom to feature rival software on the PCs they sell by, among other things, hiding some Windows add-on features.

But the hold-out states say stronger measures are necessary to prevent Microsoft from abusing its Windows monopoly in the future, particularly against recent computer technologies like handheld devices and interactive television.

Microsoft has previously said the embedded version of Windows XP is not comparable to other versions of Windows because it is so specialized.

But Kuney argued that the embedded version was comparable, pointing to a computer screen shot that listed the optional functions available for Windows Embedded.

"There's no suggestion at this point that this is some sort of modified or truncated version of Internet Explorer, is there, Mr. Gates?" Kuney asked.

"That's correct," Gates said.

LICENSE CITED

Kuney also showed the judge a provision in Microsoft's Windows XP Embedded licensing agreement that specifically bars customers from running it on a "general purpose computing device."

Later in the day, under more friendly questioning from Microsoft's own attorney, Gates dismissed any comparison to the embedded operating system.

"It's not in any way about solving the problem of removing things and not having any knock-on effects of the dependent pieces," Gates said.

A federal appeals court in June upheld trial court findings that Microsoft illegally maintained its Windows monopoly in personal computer operating systems with tactics that included trying to crush Netscape's Internet browser.

The appellate judges rejected breaking up the company and sent the case back to the lower court to consider appropriate remedies to prevent future antitrust violations.

The hearings on possible remedies in the case are now in their sixth week and are expected to go through May.

Kollar-Kotelly is also weighing whether to endorse the settlement proposal.