Today, Microsoft will unveil the latest version of its Pocket PC handheld OS, dubbed Pocket PC 2002, which will power new devices from Compaq, Hewlett-Packard (HP), and other companies. Pocket PC 2002, like its predecessor, will be based on Windows CE 3.0, a component-based subset of Windows designed for handheld PCs (H/PCs) and other devices. The product has received a minor visual refresh to add a few Windows XP-like elements and the new version addresses customers' top 30 requests. Products based on the new system--which the company code-named Merlin--will be officially available on October 4.

"With Pocket PC 2002, we're going to be extending our lead \[over Palm\]," said Ben Waldman, vice president of Microsoft's mobile-devices unit. The lead Waldman refers to is functionality; the Pocket PC currently trails Palm by a wide margin in sales. But certain Pocket PC products--especially Compaq's best-selling iPAQ line--have been making headway in recent months. Thanks to the iPAQ, the Pocket PC now controls 16 percent of the US market for handheld PCs, up from 10 percent the year before. (Although the market share of devices based on the Palm OS has fallen from 90 percent to 80 percent in the same time period.) Not coincidentally, all Pocket PC 2002 devices will be based on the same StrongArm processor today's iPAQ uses, forcing hardware makers to abandon the previous strategy of supporting multiple platforms. But this approach will make it easier for developers and users, thanks to the common hardware. In addition, all Pocket PC 2002 devices must support a flash ROM--only the iPAQ had this functionality previously--so that users can upgrade the OS in the future.

For the most part, the Pocket PC 2002 family is targeted to businesses, where Microsoft sees the most growth. "The enterprise is where we are putting our bet," says Microsoft Product Manager Ed Suwanjindar. "That market represents the largest volume opportunity. If anyone wants to succeed in handhelds, they have to win in the enterprise." Pocket PC devices tend to be more complicated and expensive than Palm OS devices, but corporations need the functionality and Windows compatibility and are willing to pay a small premium to get them. New Pocket PC 2002 business features include support for VPN, a stronger type of password to better protect corporate data, new Internet Explorer (IE) and Media Player applications, and a version of Windows Messenger for realtime communications. The devices will also sport new icons and screen imagery, new customization capabilities, support for antivirus software, better wireless support, and a simpler infrared interface.

Users who have seen advanced copies of the new devices recognize their steady improvement but have expressed widespread surprise that Pocket PC 2002 isn't a major new release. "It's really just an incremental upgrade over the previous version," one tester told me.