Fastow took the witness stand against Enron founder Kenneth Lay and Skilling, whom federal prosecutors have accused of fraud, conspiracy and other charges in the spectacular collapse of the company in 2001.

In the most highly anticipated testimony yet in the trial, he told jurors about a partnership, known as LJM1, set up in 1999 to help Enron "solve a problem" - future losses from its investment in a startup firm.

"We were doing this to inflate our earnings, and I don't think we wanted to show people what we were doing," Fastow said.

The ex-chief financial officer described a conversation with Skilling in 1999 in which he said LJM1, the first partnership, would only be able to do limited transactions because it had raised only $15 million in investments.

Fastow said he told his former boss they would need to raise more money to continue making similar transactions - an effort that would come to be known as LJM2.

"He said, `Get me as much of that juice as you can,'" Fastow recalled.

At the time, Skilling was chief operating officer of Enron. He later served as chief executive of the energy trading company for six months until resigning in August 2001, when Lay resumed the role.

Fastow said the partnerships were designed to "swap" assets with Enron in carefully coordinated transactions designed to allow the company to "report the numbers it wanted to report."

The ex-CFO described Skilling as concerned about how much of the partnership could be disclosed to investors and analysts.

"Because it would attract attention, and if dissected, people would see what the purpose of the partnership was, which was to mask potentially hundreds of millions of dollars of losses," Fastow testified.

The partnership posed no financial risk for Fastow, who was guaranteed a $500,000 annual fee when it was set up in 1999 and was also promised 2 percent of the invested capital in the partnerships. Fastow said he raised almost $400 million for LJM2.

In another conversation, Fastow described being urged by Skilling to have one of the LJM partnerships buy a minority stake in a Brazilian power plant owned by Enron because Enron's South American unit was struggling to meet its earnings target.

"I told him it was a piece of (expletive), and no one would buy it," Fastow recalled. He said he relented in part because he stood to make money personally on the deal and Skilling assured him he would lose no money.

Fastow spoke calmly and clearly, and appeared slightly resigned when he entered court Tuesday morning - producing a whirl of turned heads in the packed Houston courtroom.

During his testimony, Lay and Skilling occasionally took notes but showed little reaction otherwise.

The ex-CFO testified that Enron's board approved his role in the partnerships and waived Enron's code of conduct, which barred officers from participating in ventures that posed a conflict of interest.

Fastow, who has already pleaded guilty and faces up to 10 years in prison on two counts of conspiracy, is a critical pillar of the government's quest to prove Lay and Skilling lied to Wall Street and to their own employees to conceal the crumbling finances that drove the company to seek bankruptcy protection in 2001.

Fastow, 44, is central to the defense case as well: Lawyers for Lay and Skilling say there was no overarching fraud at Enron, and that it fell victim in part to Fastow's theft from the company.

The ex-CFO took the stand after lawyers finished questioning Kevin Hannon, a former executive in Enron's broadband unit.

Hannon had provided the trial's most dramatic moment so far. He quoted Skilling as saying, "They're on to us," at a May 2001 meeting with top executives when a small analyst firm began to question Enron's finances.

But Hannon conceded Monday under cross-examination that it may have been no more than a sarcastic remark from Skilling, who was miffed at short-sellers betting that Enron stock would fall.

Skilling lawyer Mark Holscher also reminded Hannon of extensive testimony he gave to the Securities and Exchange Commission in 2002 that depicted a far rosier picture of the broadband unit's performance.

On the witness stand, Hannon admitted he had lied to the SEC.

"You lied under oath?" Lay lawyer Bruce Collins said.

"Yes," Hannon answered.

"That's perfect," said the defense lawyer.

The defense claims more than a dozen prosecution witnesses who have pleaded guilty in the Enron collapse - including Hannon - confessed to crimes they never committed, submitting to pressure from the federal Enron Task Force.

Federal prosecutors have the power to recommend reductions in those executives' sentences if they cooperate in court - more than enough incentive, the defense claims, for them to tell the government what it wants to hear.

Fastow is unique in that he has already agreed to a prison term of 10 years. His only hope of serving less time will be to behave well in prison, possibly landing him a reduction of 18 months. But prosecutors have reserved the right to charge Fastow on dozens of other criminal counts originally brought against him.

Under questioning from a federal prosecutor Tuesday, Fastow acknowledged committing crimes in order to manipulate Enron earnings and enrich himself.

He originally pleaded not guilty but changed the plea, he said, because "I thought it was in the best interest of my family not to go to trial, to take responsibility for my actions and to try to move forward in my life."

-- ERIN McCLAM (AP National Writer); AP Business Writer Kristen Hays contributed to this report.