LCS 2005, code-named "Vienna," went to beta this summer. Microsoft announced that it had delivered to testers the near-final "release candidate" beta in mid-September. Microsoft is expected to launch the final release later this month.

Microsoft officials have described LCS 2005 as "a next-generation enterprise IM (instant messaging) and presence-awareness server."

But Microsoft also will use LCS 2005 as a way to gain a toehold in the VOIP (voice over IP) space, according to sources claiming familiarity with the company's plans.

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"Microsoft's end game is to become a telephony provider and give Vonage, Verizon, etc., a run for their money," said one source close to the company, who requested anonymity. "They are going SIP [Session Initiation Protocol] in a big way. And because SIP is multimedia-capable [can start with voice and switch to video, conferencing, etc. in midstream], it's a nice protocol for them."

With LCS 2005, Microsoft is thinking about "collaboration" in the broadest sense of the term. Whether it's voice, instant messaging or Web conferencing, LCS 2005 will be the centerpiece, in Microsoft's worldview. And earlier this year, Microsoft officials said to expect LCS 2005 to allow IM clients from not just Microsoft, but also from AOL and Yahoo, to interoperate.

Microsoft's current LCS 2003 release, code-named "Greenwich," relies on Windows Messenger, an enterprise-ready variant of Microsoft's MSN Messenger IM client, as the front end of choice.

But with LCS 2005, Microsoft also is working on a new client, code-named "Istanbul," according to sources. Istanbul will be more of a full-fledged communications client, which will allow users to switch seamlessly between text and voice, sources said.

A number of Microsoft business units, ranging from Windows client to the mobile and embedded division, have been working on various pieces of the company's private/public carrier-communications strategy.

Different units have discussed both publicly and privately Microsoft's intentions to play in VOIP; multicast, multimedia IP conferencing; automatic call-center client and server application; PBX software; interactive voice response and other real-time collaboration arenas.

Microsoft and partner Hewlett-Packard Co. have shown prototypes of communications PCs. But there's also talk that Microsoft may be working on some kind of Microsoft-branded phone that could plug into a USB port. Such a device could debut in the next six months to a year, sources claim.

To read the full story on Microsoft Watch, click here.