update RALEIGH, North Carolina--Microsoft quintupled royalties for IBM to $220 million after the company surprised Microsoft chairman Bill Gates by refusing to drop a rival operating system, an IBM witness testified today.

IBM's Garry Norris, who will be a key rebuttal witness for the government when Microsoft antitrust trial resumes next week, answered questions from Microsoft lawyers for three hours under oath at a deposition here.

The questioning elicited bits of a tangled story about a bitter falling out among the two giants of the computer industry in 1994 and 1995, offering details of charges, threats, and retaliation as Microsoft fought for the dominance of its Windows operating system over IBM's 0S/2 system.

Norris, who worked for the IBM personal computer company, said that when the two companies tried to repair their relationship in a July 24 conference call with Gates, he heard Gates explain the problem.

"Gates was irate because of a lack of respect IBM had for Microsoft," he said.

The questioning by a Microsoft lawyer also revealed that IBM at one point underpaid royalties to Microsoft, and ultimately settled the dispute by paying the Redmond, Washington, firm $30 million.

Norris also testified that when he tried to sell IBM's OS/2 to personal computer makers, they feared purchasing it because of threats from Microsoft--even though they had customers who wanted it. Norris said the relationship became so contentious that IBM and Microsoft did not reach a licensing agreement for Windows 95 until 15 minutes before that operating system was launched on August 24, 1995.

Years ago, IBM gave Microsoft its big opportunity by choosing the young firm to provide software for the IBM personal computer. A few years later the two jointly developed the OS/2 operating system, until Microsoft changed course. IBM continued to go it alone on OS/2, as Microsoft switched its focus to Windows.

According to Norris' testimony, an important turning point in the relationship occurred during a meeting at the Comdex computer show in Las Vegas during the summer of 1994.

At the top-level meeting, Gates and his executive in charge of relations with computer makers, Joachim Kempin, proposed an agreement for IBM to cut back on shipments of OS/2 and replace it with Microsoft Windows.

IBM said no. Norris was not at the meeting, but was briefed on it when he was transferred within IBM to its PC company.

"I was told that Gates was surprised," Norris testified, adding that "Kempin was expecting an agreement."

"Kempin was embarrassed," testified Norris. After that, he said, "they took retaliatory action."

Norris said he was told by Microsoft, "As long as you're shipping competitive products...you will suffer," in pricing terms, conditions and support programs.

For example, IBM paid $40 million in royalties in 1995, but when it came time to renegotiate the company wound up paying Microsoft $220 million in 1996, he said. In addition, Microsoft set a host of other costly conditions, such as requiring IBM to redesign its screen and make hardware changes.

And simple tests that IBM needed from Microsoft took 60 to 90 days instead of a week or two, he said.

IBM, which had originally paid nothing for the Microsoft operating system because of joint development, still had the best deal in the industry for Windows 3.1, with a cost of $9 per copy, Norris said. But that changed.

Norris at one point testified that Microsoft jumped that price to $45.90--a five-fold increase. At another point, however, he testified that the price was $60 a copy, including discounts. A person close to the case said the situation was "complicated," and that only parts of it were being revealed in the testimony so far.

Microsoft lawyer Rick Pepperman asked Norris if he knew that during the 1994-1995 period Microsoft had done a 10-month audit which turned up $50 million in royalty underpayments by IBM. Eventually, IBM agreed to pay Microsoft $30 million to settle the underpayment, Pepperman said.

Norris said he had heard of the audit but did not know the details.

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