Threat merely a mix-up, executive says.

Microsoft yesterday attempted to douse one of the most explosive charges in 1 1/2 years of federal antitrust scrutiny - that it threatened Compaq Computer with the industry equivalent of the death penalty for replacing Microsoft software with a competitor_s product. The allegation, which first arose in a 1997 lawsuit brought by the U.S. Department of Justice against Microsoft, is one example federal and state antitrust prosecutors cite to show that Microsoft attempted to illegally protect and extend an alleged monopoly held by its Windows operating system. In summer 1996, Microsoft told Compaq that it intended to revoke the Texas computer maker_s Windows license. The sticking point: Compaq had put Netscape Communications_ Internet browser on the desktop of its PCs, bumping Microsoft_s browser off the screen. The Justice Department and 19 states contend Microsoft_ reaction in this case was an example of an illegal attempt to use its power to harm Netscape and hurt it before its Navigator browser could gain enough popularity to challenge Windows as a kind of operating system. Over the past few days in federal court, Microsoft teamed up with Compaq to answer that allegation by showing a different version of events. Testifying for Microsoft, Compaq Senior Vice President John Rose said the dispute that led to Microsoft_s threat was actually the fault of an internal communications flub. Rose said that its handling of competitors_ software on the Compaq desktop had violated the terms of an agreement requiring that the Microsoft Internet browser remain on the desktop. Rose also testified that America Online pressured Compaq to ensure that AOL was the only Internet software accessible on the desktop through an icon.