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It depends on which level of the Office 365 service you purchase. The cheaper ones require you to have a local copy of Office while the more expensive plans include Office as part of the package.
Actually, I am not certain if you are "required" to have Office. The e-mail features of the service may work with other clients. But Office 365 is designed to work with Office.
I've found it to be an excellent service. It has had two outages that I am aware of since it started. Both times Microsoft provided a month's service credit without any action by the customers. I think the prices are very reasonable. The push e-mail and calendar features work perfectly with the Apple iPhone...
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