Hope is dwindling that out-of- court negotiations in the Microsoft monopoly case will result in a settlement before next week's closing arguments, an unofficial mediation deadline.

Neither the company nor the US justice department has given up on settlement talks before Richard Posner, the chief appellate judge in Chicago recruited to mediate.

But two-and-a-half months into the negotiations the sides have remained so far apart that they continue to meet one- on-one with Judge Posner rather than face-to-face, people familiar with the talks said.

In a sign that Microsoft is already looking beyond the settlement talks, it is cranking up a congressional lobbying campaign to fight a court ordered break-up of the software group.

Microsoft and Justice also appear to be at odds over how any settlement or court ordered sanction would apply to the company's latest product, Windows 2000.

Closing arguments are set for Tuesday before Judge Thomas Penfield Jackson in Washington, who has ruled already that Microsoft has monopoly power in personal computer operating systems with its Windows software.

In his findings the judge said that Microsoft harmed consumers, stymied competitors and stifled innovation. He has yet to rule on whether those actions broke competition law, and that will be the focus of arguments next week.

If Judge Jackson does rule against Microsoft, he would then consider sanctions -ranging from breaking up the company to enforced changes in its business practices.

Nobody has ruled out the possibility that Judge Posner, a widely respected legal intellect and antitrust expert, can come up with a solution that will be acceptable to both Microsoft and the government. Settlement talks can continue after closing arguments, but time is running out.

"I'm not optimistic about a settlement," said a source close to the talks. "There can't be a settlement between now and Tuesday - it's just too late."

Judge Posner apparently has yet to give up on a settlement because he is still holding sessions with each side.

Judge Jackson had warned attorneys that Judge Posner would end the talks if they seemed to be going nowhere.

A good deal of time in those sessions has been spent reviewing the facts of the case, saving any discussion of actual settlement proposals for late in the process.

Microsoft has argued to congressional staffers that it has put a good faith offer on the table - one that would require some sort of change in its conduct but which apparently has yet to satisfy the government. But industry attorneys advising the government are deeply sceptical about the potential of such plans to change the company's conduct.

"Nobody trusts Microsoft to disclose the information necessary to have the products of competitors inter-operate in a timely manner," one industry attorney said.

Until now, Microsoft has avoided talks of a forced break-up and focused on discussing why it has not violated competition laws.

But, in a fundamental shift in strategy, Microsoft lobbyists have begun outlining to congressional staff the problems that Microsoft believes loom with the government plan to seek a break-up of the group.

Meanwhile, the two sides seem to disagree on how the fundamentals of the case relate to Windows 2000. Microsoft officials see significant code and product differences between Windows 2000 and earlier versions of Windows.

But justice department lawyers and the 19 states involved in the case view Windows 2000 as the successor to the monopoly software Judge Jackson addressed.

The importance of the issue arose last week when complaints made by competitors were aired by the European commission's competition directorate.

They complained that Microsoft had bundled the desktop version of Windows 2000 with Windows 2000 for servers "in a way which permits only Microsoft's products to be fully operable".

© The Washington Post