The Microsoft Corp. today said that talks with federal and state officials are at an impasse over government demands that Microsoft abandon its principle of product innovation. Federal and state lawyers asserted that making the Windows operating system work well with the Internet is somehow illegal. They also demanded that Microsoft give up its right to display the Windows user interface, a fundamental part of the operating system, when consumers turn on a new PC for the first time. Further, the government demanded that Microsoft give up its right to display the Web-browsing functionality that is a core part of Windows, thereby making it hard for consumers to use those technologies. They also demanded that Microsoft include Netscape Communications Inc.'s [sic] competing browsing software in every copy of Windows. Over the past two weeks, Microsoft has engaged in serious discussions with federal and state officials to resolve this matter and avoid a protracted and expensive lawsuit, but government demands went too far and appeared to be in the interest of a single competitor, not consumers. Microsoft also announced today that it plans to ship Windows 98 code to PC manufacturers on Monday. Windows 98 remains on schedule for its June 25 launch. "This impasse is disappointing. We worked hard to try and resolve this, but the government demands went too far with no basis in law and, most important, were not in the best interest of consumers," said Bill Gates, chairman and CEO of Microsoft. "What the government is asking would significantly hamper us from competing through innovation and would put everything we've worked for and built for the last 23 years at risk. We unfortunately had no other choice but to resolve this matter in court. We are confident that what we are doing is entirely pro-competitive and in the best interest of consumers. "Microsoft will continue to vigorously defend the right of every American company to innovate and continually improve its products for consumers," Gates continued. "We cannot compromise on this principle. If we are guilty of anything, it is listening to customers and working hard to build products that improve people's lives." Microsoft said a lawsuit, expected to be filed by federal and state government lawyers on Monday, is without merit and would hurt consumers and the American software industry, a leading contributor to the U.S. economy. It also would set a harmful precedent in which government intervention into a healthy, competitive and innovative industry adversely impacts consumers and U.S. companies' ability to improve their products. "We negotiated in good faith from the beginning, always with an eye toward what our customers would want today and in the future," said William H. Neukom, senior vice president for law and corporate affairs at Microsoft. "The government's theories for the personal computer industry were not in the interest of PC users and would have set a bad precedent for other technology companies in the PC industry.