WASHINGTON — The antitrust lawsuit that the Federal Trade Commission is expected to file against Intel Corp. sets the stage for another government-industry showdown over competition in the U.S. computer industry, and raises questions over whether Intel and partner Microsoft Corp. should be compelled to change the way they deal with PC makers.

Industry and legal observers agree that Intel's bitter legal battle with Intergraph Corp. (Huntsville, Ala.) was a turning point in the FTC's decision to pursue an antitrust case against Intel. In that case, Judge Edwin Nelson of U.S. District Court ruled on April 10 that Intel had engaged in "anti-competitive practices" by attempting to extend its monopoly in microprocessors to other markets. Intel is appealing that decision.

Legal observers said that while Judge Nelson may have overreached, he provided FTC investigators with the legal means to build an antitrust case against Intel. "The judge has thrown a whole bunch of balls in the air, and some may stay up," said a former antitrust enforcer.

Sources said the FTC's case will likely focus on whether Intel retaliated against PC makers who sought to use alternative processes to those required by the chip maker. The case could also focus on whether interface changes that Intel made in its Pentium microprocessor design represented a performance improvement, or instead created incompatibilities that locked in OEMs.

The change involved the replacement of the chip-level Socket-7 CPU interface used in Intel's original Pentium chip to a proprietary Slot-1 interface between a processor module and the motherboard. The new module includes a super-fast, low-voltage, wide CPU bus, a separate cache bus, and special, dedicated cache SRAMs.

Still, the prime focus of the FTC probe is expected to be Intel's business practices, specifically its use of nondisclosure agreements with OEMs. "The big-picture issue here is, given the level of [Intel's] dominance and influence, what standard do they need to be held to" in restricting their customers? said Michael Slater, editor of The Microprocessor Report. The fundamental disagreement is that Intel thinks its policy on nondisclosure agreements is legal, and the FTC considers them anti-competitive, Slater said.

Speaking of the tight nondisclosure agreements that Intel imposes on its customers and partners, some industry observers said the procedure indicates that Intel is serious about keeping a lid on its innovations until it is ready to publicly announce a product. Typically, Intel hands out pro forma nondisclosure agreements and letters of intent so that OEMs can begin to design hardware prior to the release of a new CPU. (Indeed, it is this information that Intergraph failed to provide to Intel once the legal dispute flared.) The Intel documents set forth provisions that all technical and market information provided by Intel will be treated as confidential by the recipient.

For hardware OEMs, nondisclosure agreements may cover information such as documents that detail, for example, the Katmai New Instruction (Katmai NI) set, or Intel's electrical and mechanical design guidelines for its upcoming Xeon-based workstation reference platform. The information is provided both in advance technical documents (so-called "Blue books") as well as in more informal printouts and, often, verbal briefings.

More important than any physical documentation is the ready access that OEMs get to knowledgeable engineers at Intel, who can be consulted when an OEM's design engineers run into trouble. That access is important because many of the hints and kinks of designing with a new architecture don't appear on any printout.

Intel and Intergraph first locked horns last fall when Intergraph filed a lawsuit in U.S. District Court in Montgomery, Ala., charging Intel with "anti-competitive practices." The allegations stated that Intel sought to obtain rights to a series of Intergraph cache-management patents through "coercive tactics," according to the complaint.

Intel suffered a setback earlier this month when an appeals court ruled that Intel must sell microprocessors to Intergraph while the case wends its way through the courts.

Another shoe dropped this week when Intergraph moved to quash what it called premature reports of settlement talks between itself and Intel. "Contrary to some recent news accounts, Intel has not approached Intergraph's management or attorneys about conducting settlement negotiations related to the lawsuit," Intergraph chief executive Jim Meadlock said in a statement.

"Intergraph is open to serious negotiations with Intel," Meadlock continued. "However, all of the following must be resolved in any settlement: protection from possible retaliatory or coercive actions by Intel, royalty payments for Intergraph's patents, and payment of damages for the lost sales and delay in market momentum suffered by Intergraph."

Meanwhile, legal observers said the FTC's case against Intel may move to a vote by the five FTC commissioners in the next two weeks. "I anticipate that it will move along quickly," said Howard Morse, a Washington attorney and former assistant director of the FTC's Bureau of Competition.

After FTC staff attorneys working on the Intel case issue their recommendation to the Bureau of Competition, director William Baer would meet with Intel attorneys and decide whether to forward the antitrust case to the full commission. If Baer recommends, as expected, that the FTC pursue and antitrust case against Intel, the company would meet individually with all five commissioners before they vote on whether to file an antitrust suit, Morse said.

An FTC spokeswoman declined to comment on the Intel investigation.

Intel said that it is cooperating with investigators and insisted that its business practices are lawful. Company executives reportedly met with FTC investigators in May in a failed attempt to negotiate a settlement.