Microsoft is targeting the development of software that understands human speech as the next "macro revolution" in computing.

Improved speech recognition is being billed as a major advance in Vista, the upgrade to the Windows operating system that Microsoft will release to consumers on January 30. For example, the voice software in Vista, expected to be installed on 500 million machines in the next five years, will "read" its users' e-mails to familiarise itself with their vocabulary.

However, speaking to The Times at the company’s headquarters in Redmond, 13 miles from Seattle, Jim Allchin, co-president of Microsoft's Platforms and Services division, said machines that actually understand speech - rather than using sounds as prompts for pre-defined actions - would define the next industry breakthrough.

"You can dictate a letter to Vista, but it is not like the Vista really understands what you’re saying. That will be the next revolutionary step," he said.

Dubbed the "Vista Godfather", Mr Allchin is a member of Microsoft’s Senior Leadership Team, who, the company says, is "responsible for developing Microsoft's core direction … along with [chief executive] Steve Ballmer and [chairman] Bill Gates".

Speech-controlled devices already feature heavily in Microsoft’s "home of the future", a showcase of "tangible prototypes" at its Redmond campus. The high-tech house, a "concept car-type model" of the near future, is controlled through "Grace" a talking, listening user interface named after Grace Hopper, a pioneer in early computing languages.

"I've got a young son. He's going to grow up thinking nothing of talking to walls," Jonathan Cluts, Microsoft’s director of strategic prototyping said.

Microsoft Research, the group's internal research unit, already has groups in Redmond and Beijing working on building a "fully speech-enabled computer". Such is the reach of Microsoft's development campus, as much as a quarter of America’s computer PhDs serve an internship at one of its labs.

Grace plays a starring role among the featured technologies in the Microsoft home, all of which the group believes can be introduced to market within the next five to ten years, and at a cost not 20 per cent above an equivalent item today.

In the entertainment room, for example, a parent reading out a pre-programmed storybook to a child triggers the room’s lights to dim. An appropriate backdrop is beamed on to the walls from a panel of embedded lightcams in the ceiling, while a stereo system provides sound effects. When the parent reads out "the cow jumps over the moon" from the story, a matching animation appears on the room's widescreen TV.

With the introduction of "partypack" software, the ceiling-installed lightcams beam place settings on to a dinner table. In front of each guest appears a control panel for a 2-D aeroplane, projected on to the surface. Cover up portions of the controls and you "fly" the plane around the table. The group of hardened technology journalists being shown the device actually groaned with disappointment when it was time to move on and the game was turned off.

LED wallpaper, a super-thin lighting technology being used by Philips, decorates a child’s bedroom and can be programmed to give different backgrounds or to show webcam-style views into other children’s rooms via the internet. The feature replicates an online networking site-style environment in the physical world, Microsoft says.

However, those hoping that robotic assistants will revolutionise daily chores will be disappointed. "We just don't believe [that robots] are on the same cost curve as silicon," Mr Cluts said. "They are not going to get cheap in the same way as software is."

Instead, the RFID radio technology already used by groups such as Wal-Mart to identifiy and track warehouse stock plays a prominent role. Using RFID tags embedded in packaging, the Microsoft house is able to recognise and make an inventory of the goods in the larder. It can then send a list to a mobile phone, if you are out shopping. Place some ingredients on a work top in the home and a sensor hidden below will identify them and Grace will ask you if you need help. Answer "yes" and the house will beam a list of possible recipe ingredients on to the work surface from a lightcam embedded in the ceiling – giving you a warning if you are missing any ingredients.

The same RFID tags, which cost less than a penny each, can also be placed into toys, determine their location, and assess how tidy a child's room is. This tracking system is tied into a "fun credits" scheme – where a child can earn time playing a computer game by tidying his or her room or by putting toys into their proper places.

The home, which undergoes a major revamp every two years, has a record of correctly predicting trends. One of the key concepts when the original version was opened in 1994 was audio on demand. "That was really the idea that you'd be able to pick whatever music you wanted to play in your house at any time," Mr Cluts said. "And lots of internet services enable that today."

However, he admitted that what most visitors want to know is how many of these gadgets have found themselves into Bill Gates's house?

"Yes, Bill has a very advanced home," Mr Cluts said. "But you have to understand, he has a much larger budget than us."

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