Under the deal, AT&T -- which recently purchased Tele-Communications Inc and has agreed to buy MediaOne Group -- will increase its use of Microsoft's TV software platform in set-top cable boxes, and both companies will work together to showcase new digital cable services in two US cities. The companies said AT&T will increase its use of Microsoft's Windows CE-based operating system software in its digital set-top devices, through which companies deliver communications, entertainment and information services to cable subscribers.

AT&T, Basking Ridge, NJ, has a commitment to use the Windows CE-based system in five million set-top devices. The agreement announced Thursday expands the licence to cover an additional 2.5 million to five million devices.AT&T will also licence Microsoft client/server software,which facilitates e-mail and interactive television entertainment.

The two companies plan to deploy client/server TV software in two showcase cities by the second quarter of 2000.

Also, Microsoft, Redmond, Wash., will pay $5 billion for newly issued AT&T convertible trust preferred securities and warrants.

The preferred securities, which will have a face value of $5 billion and be priced at $50 per security, will make a quarterly payment of 62.5 cents per security.

The preferred securities, which will be convertible into 66.7 million shares of AT&T common stock at a price of $75 per share, will have a maturity of 30 years, and the conversion feature can be terminated, under certain conditions, after three years. The warrants will be exercisable in three years to purchase 40 million AT&T common shares at a price of $75 per share.