A key witness in the eight-year-old legal battle between the Justice Department and the Inslaw computer software company has been arrested and is being held without bail in a rural Washington state jail.

Michael Riconosciuto, a potential witness on behalf of principal Inslaw owners William and Nancy Hamilton, was arrested late Friday near Tacoma by a local district attorney. Riconosciuto, 42, is being held without bail at the Snohomish County jail in Everett, Wash., an official there said in a telephone interview yesterday. The official said that the arrest record did not indicate what charges had been brought against Riconosciuto.

Riconosciuto, reached yesterday by telephone at the jail, said he thought the charge was for "delivery of controlled substances," but said he was unsure. He said he could not remember if a charge was made at the time of the arrest but overheard an officer stating it later. Riconosciuto was convicted on a drug-related charge in 1972.

He said he was arrested with two local men who had just sold him computer equipment for $1,000. The two were "known drug users," Riconosciuto said.

"I've been set up," he said. "I've been had."

The legal battle Riconosciuto was involved in, which has been shuffled among courts since 1983, involves Promis software, developed by Inslaw, a Washington, D.C.-based company. The software was designed to be used by law enforcement officials to track cases and criminals.

The Hamiltons charge that the software was stolen by the Justice Department in the course of a contract dispute and has been subsequently distributed to intelligence and military agencies in, among other countries, Iraq, Libya, South Korea, Israel and Canada.

Last month Riconosciuto, a computer software technician, filed an affidavit in the case, saying that private interests hired him in 1983 and 1984 to modify the software for use by law enforcement and intelligence agencies worldwide.

In the affidavit, Riconosciuto said that he was called in February by a former Justice Department official and warned against cooperating with an investigation into the case by the House Judiciary Committee.

In the affidavit, Riconosciuto said the former official, Peter Videnieks, told him that if he talked to investigators he would be implicated in one unrelated criminal case and would lose another ongoing child custody case.

Riconosciuto said he had three separate tape recordings of the telephone conversation with Videnieks, two of which were confiscated during his Friday night arrest.