UPDATED: Microsoft agreed to acquire collaboration software maker Groove Networks for an undisclosed sum, and will install the company's founder and Lotus Notes creator Ray Ozzie as CTO.

Groove's Virtual Office products let any Windows-based PC user create virtual work spaces that allow information workers all over the world to work as though they were in the same office, using the same documents. When integrated with centralized business systems, Groove adds a peer-to-peer layer that can streamline company processes with customers.

Groove's Virtual Office will be tucked into Microsoft Office System, where it will be used to complement and support real-time collaboration software such as Office Live Meeting 2005 and Microsoft Office Live Communications Server, and Office SharePoint Portal Server and Windows SharePoint Services.

Ultimately, Microsoft's Visual Studio.Net will become Groove's primary development platform.

Jeff Raikes, group vice president of Microsoft's Information Worker Group, said on a conference call Thursday that Microsoft believes the combination of real-time, server-based and P2P communication software will help the company extend its lead in the collaboration software market.

"We think this is important because the world of information work is changing very rapidly," Raikes said. "This is something we've all seen with the explosion of e-mail. Information workers have to be self-sufficient within their organization, as well as across organization, geographic and network boundaries."

Ozzie, who will become CTO and report to Microsoft Chief Software Architect Bill Gates, is renowned for creating Lotus Notes, now a multi-billion-dollar business for IBM. He is also one of seven "Windows pioneers," an honor bestowed to engineers who have contributed to the improvement of the operating system.

Gates, who joined the conference call from Redmond, that Groove technology has "fantastic and very unique" properties Microsoft wants to put into Office.

"He's made a huge contribution in terms of giving us feedback about the platform," Gates said, citing Ozzie's work on Windows user interfaces and Visual Studio. "It's very exciting to have Ray and his team joining Microsoft. I think it's really going to help us do a better job for all of the information workers out there."

Noting that he has had the privilege of working with Ozzie for "many decades" as he was building applications on DOS (define) or Windows, Gates said he had wanted to hire Ozzie for a long time. The CTO will have a great deal of say over corporate communication and collaboration offerings.

He will also continue his work with Groove's roughly 200 employees, which will remain at Groove's Beverly, Mass., headquarters as part of Microsoft's Information Worker Group.

Ozzie said his plan for Groove reflected how the business environment was changing, including a different type of security model based less on setting up firewalls and more on how people work with one another.

"Over the years, we've been very fortunate have led us all to be carrying around Wi-Fi-enabled laptops," Ozzie said. "The nature of work itself has changed for many of us. We very commonly do work in a geographically dispersed fashion, in the office, at home, in hotels, at Starbucks and so on. Our interactions involve being on multiple networks..."

Microsoft shares that view, according to Gates.

The acquisition is expected to be complete in the second quarter of 2005. Until then Groove will operate as a separate company, providing customers and partners the same products and services.

The deal hardly comes as a shock: It had been whispered about ever since Microsoft made its first investment in Groove in 2001 for $51 million.

Microsoft followed that up with a $38 million infusion in Groove in 2003, reaffirming its dedication to the collaboration software market.

Groove launched in 2000, and has accrued $155 million in venture capital involving Microsoft, Accel Partners, Intel Capital, and private investors.