Microsoft is introducing a new low-price, entry-level server for small businesses with fewer than 15 employees as a way to introduce them to the company's broader server software line and address falling server hardware prices.

"If somebody can buy a $500 server, they're a little loathe to spend $500 for the server operating system that goes with it," Microsoft CEO Steve Ballmer said last month, explaining the new version of Windows Server to financial analysts.

With Microsoft's Redmond campus largely emptied out for the winter holidays, CEO Steve Ballmer crunched the numbers on the proper level of spending for his company against the current economic climate, which he has repeatedly referred to as a "reset" rather than just a recession. Ballmer said his own estimates for the weakness and duration of the downturn tend to be more severe than those of other business leaders he meets.

With that in mind, he settled on $27.5 billion of operating expenses -- a level the company aims to hold relatively steady through the current fiscal year, which ends June 30, and during its 2010 fiscal year. Ballmer made clear to financial analysts meeting in New York this morning for the company's annual strategic update that cutting back even more significantly -- say to $20 billion -- would be "imprudent."

"I think this is right," Ballmer said.

That should give some comfort to those wondering if the modest layoffs Microsoft announced last month were the beginning of a more significant reduction. Wall Street analysts and investors are pressuring companies in every industry to continue cutting costs as sales and profits slow dramatically.

The strategic update call just came to an end. Ballmer gave a detailed look at seven major business areas for the company. Check back here later this morning for more details.

Update, 7:50 a.m.: As he told Congressional Democrats earlier this month, Ballmer said Microsoft's corporate strategists have been evaluating past downturns -- particularly those driven by "deleveraging." The team read company annual reports from 1927 to 1938 to determine who did a good job managing through the Great Depression. "RCA, God rest them in peace, became our role model," Ballmer said. The company was able to dominate the television business because it continued to invest during bad times, he said.

Then he broke down how Microsoft plans to invest.

Analysts at Morgan Stanley cut their price target on Microsoft shares to $24 and also lowered its estimates. Microsoft shares were down 88 cents, 4.3 percent, to $19.73 in mid-afternoon trading on the Nasdaq.

Meanwhile, Ina Fried at CNET interviews Bob Muglia, senior vice president of the Microsoft Server and Tools Division, who said "IT budgets are cramped. It's not like IT is going to dramatically contract, but it is certainly slowing pretty dramatically."

Ellen M. Banner / THE SEATTLE TIMES

Stacy Thrasher, great grand-daughter of F. K. Kirsten, poses for a photo inside my favorite local humidor.

Before we go much further, isn't that just a great code name? There are so many awful code names in tech, it's nice to see one that makes sense.

Microsoft and open-source purveyor Novell are marking the second full year of their interoperability partnership, which surprised some in the software industry when it was announced Nov. 2, 2006. "This is almost like the lion and the lamb laying down together," analyst Laura DiDio told me at the time.

Two years after fielding its first software designed specifically for supercomputers, Microsoft has cracked the top 10 list of the world's fastest machines. Its Windows HPC Server 2008 powers the Shanghai Supercomputer Center's "Dawning 5000A", which was clocked at 180.6 teraflops -- trillions of floating point operations per second -- for the twice-annual TOP500 list of supercomputers.

Day 2 of Microsoft's Windows Hardware Engineering Conference starts at 9:30 a.m. with a speech from Bill Laing, corporate vice president of the Windows Server Division. Access to the Webcast is here.

LOS ANGELES -- Bob Muglia, senior vice president of Microsoft's server and tools business, shared his expectations of the impact Microsoft's new services platform will have on company profit margins, where he sees opportunities for collaboration with Amazon.com -- the company's biggest cloud competitor not named Google -- and more in an interview earlier today.

Check out these edited excerpts of our conversation. I've put the particularly interesting bits in bold for easier scanning.

Microsoft wants to "democratize" business intelligence software so that everyone who does office work can know when they're missing their quarterly targets, not just the 10 to 25 percent of employees who do now. At its business intelligence conference in Seattle today, executives laid out their strategy to expand usage of this category of software.

Microsoft will tout its recent buy, DATAllegro, at a business intelligence conference beginning Monday in Seattle.

Microsoft announced the acquisition of the high-end database company in July during its Financial Analyst Meeting. The acquisition was viewed as a broadside on Oracle in the high-end database market. DATAllegro makes a data warehousing appliance, which combines multiple database servers with hardware.

Cray just announced a $25,000 to $80,000 high-performance computer, the CX1, targeted at a broader market of scientists, business analysts, engineers and others whose data-intensive work increasingly demands more computing horse power. The Seattle super-computer maker is loading the CX1 with Windows HPC Server 2008, Microsoft's latest high-performance computing operating system. The CX1 is built on Intel Xeon processors.

A former co-worker of the CEO and founder of DATAllegro -- a high-end data warehousing company Microsoft is acquiring -- is suing the company for patent infringement.

Microsoft said today it intends to buy Aliso Viejo, Calif.,-based DATAllegro, a data warehousing appliance company.