In the summer of 1972, International Business Machines Corp. was test-marketing products in Europe and considering a challange to American Telephone & Telegraph Co. in the lucrative U.S. telephone equipment market.

At the time communications experts in and out of IBM thought AT&T was in a weakened technological condition the equipment area and vulnerable to competition.

On Sept. 11, in what was at least the second contact between the two corporations on the matter, IBM Chairman Vincent Learson met for lunch with AT&T Chairman John deButts.

Within 48 hours, Learson wrote to a colleague to sum up the meeting: "I talked to deButts Monday," Learson wrote to D. N. Piccone, director of IBM's utility sales program, "and made it clear to him that we are going to avoid like the plague any regulatory hearing involving his company. He appreciated knowing that."

Six months later, IBM decided against competing with AT&T in the equipment business.

Details of the lunch meeting betwen Learson and deButts -- along with internal IBM memos dealing with the equipment case -- surfaced recently in public court records that provide a rare glimpse into the inner workings of the two corporate giants.

It must have been reassuring to deButts to know that the power in the world's booming computer industry did not intend to challenge AT&T in federal and state regulatory proceedings.

The potential competition from IBM in the lucrative telephone equipment field would have struck at the heart of AT&T's business, the neighborhood facilities where local calls are connected with the national network.

The Learson-deButts meeting was disclosed in a series of documents and papers filed by IBM with a federal court in New York City. IBM filed in an effort to keep the issue of its relations with AT&T from surfacing in connection with an antitrust suit against AT&T, one part of a bitter court fight surrounding the AT&T-IBM relationship.

What else they discussed at that meeting and two thers held during that pivotal year for both companies is uncertain. But Litton Industries, which has opened a major antitrust suit in New York City against AT&T, would like to tell a jury of an intriguing set of circumstances characterized as conspiracy allegations surrounding IBM's decision not to market a major product in the United States.

Litton attorneys have argued that the series of events surrounding that decision are evidence of AT&T's ability to discourage even the largest of its potential competitors. Although the Litton papers in connection with the AT&T-IBM charges are under seal, IBM court documents quoting the Litton materials are available.

The crux of Litton's case is the charge that it was forced in the mid-1970s to abandon the telephone equipment business as a result of monopolistic actions by At&t. U.S. District Judge William Conner may rule on the admissability of the IBM-related evidence later-this week.

Whether the jury ever hears the IBM evidence or not, what is clear from the previously secret papers before the court is that the company's top management -- including Learson, who announced his resignation two weeks after the meeting with deButts -- were spending millions of dollars on a test project in Europe and on a study in the United States of the possibility of marketing vital telecommunications equipment in direct competition with AT&T's Western Electric Co. unit.

In fact, about six weeks later and one month after Learson's resignation announcement, which stunned the computer industry although it was attributed to a new IBM mandatory retirement policy for executives 60 and over, Piccone prepared a draft memo for Learson. The memo outlined the vulnerability of AT&T in a key facet of the telephone equipment business, the same field IBM was intensely considering pursuing in the United States.

"The Bell Telephone System has for several years been under severe public pressure to improve the quality of telephone service," Piccone wrote, citing as one reason "the age and technology of existing equipment.

"Although progress is being made, it may take all of the 1970s for AT&T to restore quality communications service, because intricate telephone equipment, much of it tailored to the community it serves, requires long lead times to engineer, develop, manufacture, and install," wrote Piccone, a leading IBM expert on AT&T, in the memo to Learson.

Earlier in October 1972, Booz, Allen & Hamilton, a leading communications and technology consulting firm, said in a study for IBM that the Bell System was in a "weakened position" in the equipment field. The study recommended an "immediate aggressive entry" into the massive equipment or PBX area, a field with annual estimated rental revenues at the time of about $2 billion.

In 1972, the market for such equipment was just beginning to be competitive. AT&T still maintained about 99 percent of the market but the Federal Communications Commission had recently broken the AT&T equipment monopoly, permitting other firms to sell their wares to business customers, and a number of major companies were planning moves into the business.

Four months later, on March 1, 1973, IBM's Management Review Committee, the top IBM decision-making panel met, rejected the recommendation of a key member of the telephone equipment project team and made a decision to use the company's resources in this field "solely on a Europe basis at this time," according to secret IBM minutes.

The project had started in 1969, when IBM began studying the possibility of supplying their telephone switching equipment, called Carnation, in the United States. tBy the end of that year, about $33 million had been spent on the Carnation program in Europe where IBM had been testing both the product and the market.

It was a particularly sensitive study for the giant computer firm, since the selling of Carnation in the United States would put IBM in direct competition with AT&T, the nation's largest company and a substantial buyer of IBM products.

Furthermore, IBM would have been taking on the phone company where it seemed to be most vulnerable, as the Booz, Allen and the IBM internal study confirmed a fact that was widely known in the industry: AT&T's local facilities -- or PBXs as they are known in the trade -- increasingly were becoming outmoded and the company desperately needed new, modern computerized equipment.

But after completing a $9.5 million study on bringing Carnation into the United States, IBM decided in March 1973 to abandon the project -- despite the view of a member of the project team that it could ultimately prove to be an extremely successful venture at a time when IBM management seemed eager to adapt their proven technology to fields beyond data processing.

Ultimately, the Carnation technology proved to be widely accepted in Europe despite difficulties getting the program off the ground. In Britain, for instance, IBM now is said by industry observers to have close to 50 percent of the lucrative PBX business. Experts say that across Europe the program is an unqualified success.

Although it is impossible to say with precision what took place during those years -- vital ones in the two companies' histories -- that ultimately led IBM to its decision, confidential IBM documents refer to a series of circumstances that have led Litton, which is suing AT&T for more than $1.5 billion, to charge that AT&T, through a variety of means, coerced IBM to back off its plans.

In fact, Litton has charged that, over a substantially lower bid from a competitor, AT&T awarded IBM an unprecedented $353 million computer contract just a few months after IBM's decision to abandon the project.

Furthermore, Litton is alleging that in a series of meetings between deButts and Learson -- and later with Frank Cary, another former IBM chairman -- the subject of the Carnation project may have been discussed. Litton also alleges documents show that Learson's proposed agenda for at least one meeting with deButts included a discussion of the venture.

The charges are particularly sensitive for both IBM and AT&T. The two companies are the targets of pending Justice Department antitrusts suits, although the 6-year-old AT&T case appears to be near settlement and later this year a federal judge may issue a decision in the 11-year-old IBM case. Yet, there is no evidence that the government planned to use the Carnation matter as a significant part of either suit.

Both companies have denied that the contract and the meetings had anything to do with the 1973 Carnation decision. "The evidence," IBM said in its brief, "plainly establishes that IBM's decision not to market Carnation domestically was based on substantial price, profit and marketing problems, along with Carnation's marked lack of success in Europe, and that IBM never came close to announcing Carnation in the U.S. AT&T's possible or actual reaction had nothing to do with IBM's decision."

In a statement, IBM also said that "there is no conspiracy between IBM and AT&T or any other company and never has been."

AT&T denied the charges, also responding to the still-sealed Litton papers. "It would be highly prejudicial to suggest to the jury that there is some sort of sinister association between AT&T and IBM, two of the world's largest corporations," AT&T said in a brief filed last week.

"It is true that IBM did decide not to launch a domestic PBX program a few months before the Bell System's decision to purchase IBM computers," AT&T said in its brief. "But there is a notable absence in plaintiff's memorandum of evidence as to any coercion involving the defendants."

But a review of the confidential documents -- which include minutes of IBM executive meetings, memos, afidavits and other confidential IBM papers -- demonstrates a sensitivity at the highest levels of IBM to the project. Some of the documents had been available as a result of a previous antitrust suit against IBM.

perhaps just as fascinating as the charges raised by Litton is what the documents show about the interaction between two very large corporations. In 1979, AT&T made $5.5 billion -- more than any U.S. corporations -- and IBM ranked eighth in sales among U.S. corporations and made $3 billion that year, behind only Exxon in total profits among industrial corporations ranked in the Fortune 500.

For during those years, the two companies danced around each other like animals preparing for a tussle. Ultimately, IBM decided, for example, to put hundreds of millions of dollars into Satellite Business Systems, a partnership with Communications Satellite Corp. (Comsat) and Aetna Life & Casualty that is using satellite technology in competition with AT&T for business communications services. And as AT&T moves into the data processing field through regulatory -- and potentially judicial -- decisions away from the restrictions of a 1956 consent decree with the government, the competition between the two companies will intensify further.

But in the past, IBM and AT&T generally have not been competitors. Although no hard figures are available, the two firms do tens of millions of dollars of business each year as major suppliers for each other. Their close relationship included patent agreements that had permitted them to share technological advances as long as AT&T did not use IBM patents in the data processing field and IBM did not use AT&T patents in the communications business. Now all that has changed.

But during the period when IBM was considering the challenge to AT&T, the communications world was much different and IBM was just getting its feet wet in a market that appeared to be highly lucrative. w

In fact, by February 1971, IBM officials were predicting that the Carnation program worldwide, including the United States, would produce revenues of about $4 billion and profits of about $1 billion over a 10-year period. During most of 1971, at least, prospects for bringing Carnation to the United States seemed rosy.

But by the middle of the following year IBM officials became seriously concerned with the potential effect of the U.S. strategy on IBM's other ventures with AT&T. The data processing division in management meetings predicted that "AT&T would retaliate with a graceful degradation in their conventional computer business relationship with IBM," according to Management Review Committee (MRC) minutes of June 14, 1972.

In August, just before the first of the known Learson-deButts meetings, the IBM Management Committee (MC), a group just below the MRC, said it was "too early" to make a firm judgment about bringing Carnation to the United States.

After the August meeting with deButts, Learson wrote a memo to his staff entitled "What I Have Told Selected AT&T Executives about CARNATION." In that document, Learson, citing the "moderate success" of the European program, predicted that a "go/no-go decision will not be made until the middle of next year. There are many difficult issues that need to be understood."

There is no available record about that August Learson-deButts meeting, but a memo prepared for Learson as a briefing paper suggested that Learson discuss the "long history of cooperation" between the two companies.

"We have a deep interest in the continued success of AT&T," the unsigned memo says. "Not only do we have a common customer and market to serve through teleprocessing, but also because of the contribution that AT&T makes to the national welfare . . .

"AT&T is one of IBM's largest customers. We believe that this has been a mutually beneficial relationship. Hopefully, our equipment is assisting you with your objective of increased productivity and continued high level of service to your customers."

It was then recommended that Learson "provide the environment in which any concerns that AT&T may have about IBM's posture vis-a-vis the telephone industry can be openly and frankly discussed." Carnation listed as one of the "reasons that some people in AT&T are concerned." Other "items of mutual interest" on the proposed agenda include the "problems of managing size" and the "pace of technological change and its effect on capital funding and financial risks." o

The same year the issue of the major IBM sale of "System 7" computers to AT&T became very significant. That project was especially important to the two companies, as Piccone put it in an Aug. 30, 1972 memo, because "there is no precedent in AT&T for making a large-scale commitment and procurement of non-Western Electric equipment for mass deployment in operating company central offices."

The contract was ultimately signed on May 3, 1973. Litton, which was quoted by IBM in its brief accompanying the documents, charges that the $353 million purchase was made despite a bid for similar equipment by Digital Equipment Corp. that would have cost $194 million.

"The evidence shows clearly that IBM's decision not to enter the PBX market and AT&T's decision to purchase computers from IBM were interdependent," IBM quotes Litton as alleging.

On another front, the 1972 period was a tense one for the two giant firms. IBM says that the tension, which manifested itself in what Litton, quoting AT&T documents, calls an AT&T "technical embargo" against IBM, and restrictions in IBM access to Western Electric facilities were the result of a three-year impasse in negotiations between the two companies on developing a new patent agreement. In fact, on February 1972 IBM memo says that Western Electric was not interested in IBM business and that IBM representatives were "persona non grata " at Western.

A 1965 agreement was to expire, apparently at the end of 1969, and a new pact was not settled until December 1973, the same year that IBM dropped its Carnations plans for the United States and entered into the $353 million contract with AT&T.

The IBM brief responds to these charges. "These problems were entirely understandable since in the absence of a patent license, AT&T had to protect itself against disclosure to IBM of technical information that was not covered by a cross-licensing agreement," IBM said in the Jan. 21 brief.

"As a result, AT&T quite legitimately restricted access of IBM personnel to AT&T facilities," IBM concluded in their brief.