On the media front, Microsoft has added a new application called Pictures that allows users to store, edit and display digital photos on their devices, and a new version of Windows Media Player that supports higher quality video.

The new operating system supports Microsoft's .NET Compact Framework, which Suwanjindar said will allow developers to target Pocket PCs with the same tools they use to build applications for Windows. A developer's kit for the new OS is available at www.microsoft.com/mobile/developer.

Microsoft said that existing Pocket PC makers Dell, Toshiba, Viewsonic and HP, as well as new partner JVC would announce support for the new operating system on Monday. Gateway confirmed last week that it would enter the PDA market with a mid-range device using the new Windows Mobile software later this summer.

Dell, which launched its first PDA in November, said that the new OS would be available on its Axim X5 device beginning Monday. The company said it would also offer a $29 upgrade to existing Axim owners.

Also on Monday, ViewSonic planned to announce the V36, which features a built-in 300K digital camera and a 300MHz Intel Xscale processor for $329. The device is expected to be available in August, along with ViewSonic's new 802.11b SDIO (secure digital input/output) card. The $129 card will add wireless functionality to the V36.

The handheld market has declined over the last couple of quarters, but Microsoft continues to make inroads in its quest to wrest control of the market from rival Palm. Windows CE-based devices accounted for 36 percent of the market in the first quarter of 2003, and shipments increased by more than 330,000 from the previous year, according to research firm Gartner. CE actually surpassed Palm on an end-user revenue basis for the first time with 52 percent of the market, compared with 37 percent for Palm OS licensees.

Still, the battle is far from over, said Michael Gartenberg, an analyst with Jupiter Research (ed. note: Jupiter Research is owned by the parent company of this publication). "Microsoft is not simply going to take over the market. It's still in the early stages -- we're going to see a competitive race."

Gartenberg called the software upgrade "evolutionary, not revolutionary." Microsoft is expected to unveil a major overhaul of the operating system, code-named Magneto, next year. Meanwhile, Palm has started to talk up the next version of its operating system, called Sahara, which will emphasize security, among other things.

"Palm OS 6 looks more than capable of going up against Microsoft's offering," Gartenberg said. "It will be interesting to see what Microsoft has to counter that in its next iteration of the operating system."

The real battleground, though, is in the so-called connected devices arena, he said, as interest in handhelds shifts to smartphones and PDAs with built-in wireless capabilities. "It's a market that's not yet dominated."

Microsoft trails Symbian, the London-based company whose mobile phone OS is backed by most of the major cell phone makers, in the smartphone market. Palm's plans to acquire Handspring, which makes the Treo smartphone, makes it, too, a player.