With the new version of its Pocket PC operating system for handhelds, Microsoft is all business. As reported earlier, Microsoft will unveil Pocket PC 2002 on Thursday and demonstrate a number of new features that the company asserts will make the OS a more useful tool for corporate workers. However, new memory and processor requirements could spell the end of sub-$200 Pocket PC-based devices, making the gadgets less attractive to consumers. "The enterprise is where we are putting our bet," Microsoft product manager Ed Suwanjindar said. "That market represents the largest volume opportunity. If anyone wants to succeed in handhelds, they have to win in the enterprise." On 4 October, Microsoft plans to release the new OS, which was code-named Merlin. Handheld makers that plan to use Merlin, such as Compaq Computer, are expected to announce new products on the same date. Hewlett-Packard and Symbol will announce new devices that use Pocket PC 2002 on Thursday. The most significant new feature of the OS is its support for virtual private networking, which allows handheld users to securely access corporate data. Another feature allows IT managers to control a PC or server from the device, assuming their company has a wireless network. Courting the IT crowd is a smart way to convince businesses they need handheld devices, IDC analyst Kevin Burden said. "The IT department has a fairly large say in what technology gets in," Burden said. "If you make life easier for IT managers," it lowers the resistance to buying the devices. As previously reported, the new OS gets some of its look and feel from Microsoft's upcoming Windows XP operating system. With Pocket PC 2002, Microsoft is also coming up with stricter requirements for new devices. All future Pocket PC-based handhelds must now include an ARM4-based processor and offer flash memory so that programs stored in read-only memory can be upgraded. Suwanjindar said devices that use Pocket PC 2002 will range from $400 to $600 (about £280 to £420), depending on the amount of memory and other factors. "I wouldn't rule out any movement into cheaper price bands," Suwanjindar said. But he added that the greater opportunity in both sales and profits is for devices that cost $350 or more. Before the release of Pocket PC 2002, device makers had been introducing cheaper handhelds in an effort to broaden the appeal to consumers. In January, Compaq introduced a black-and-white version of the iPaq, which has been selling recently for as low as $149 after rebate. And in March, HP announced a scaled-down version of its Jornada. At the higher prices, Burden said, the consumer appeal of Pocket PC devices will be limited. Pocket PC has grabbed about 10 percent of the US retail market, which measures consumer purchases. It is also the market in which the rival Palm OS dominates. It is hard to say whether Pocket PC will gain or lose consumer share with Pocket PC 2002, Burden said. "Consumers are so price-sensitive," he said. "We've really seen that over the past six months." Microsoft plans to show off Pocket PC 2002 on Thursday at the Demomobile conference near San Diego. Despite Microsoft's focus on the business market, the new operating system is still adding features popularised by the Palm OS, such as sorting contacts by company name. "That was the No. 1 request," Suwanjindar said. He noted that Microsoft tried to add the top 30 requested features, including a spell checker in Pocket Word and Pocket Excel and easier beaming of contact information to Palm OS-based handhelds. "They took a lot of the things that irked users and fixed them," Burden said. Microsoft also is adding the ability to enter text using the Graffiti handwriting-recognition software from Palm. Microsoft said the technology behind Graffiti is in the public domain and that the company doesn't need to license it because Microsoft uses its own name, Block Recognizer. Jason Hertzberg, director of competitive analysis for Palm, said he doesn't know whether there are any legal issues surrounding Microsoft's adoption of Graffiti but considers the move an acknowledgment of Palm's leadership. "You can't blame them for trying to do something that works," Hertzberg said. "As far as converting Palm users, I don't think that's an issue." Hertzberg added that there is already virtual private networking software available for the Palm, as well as other programs designed to make the handhelds more secure. See the Windows News Section for the latest Windows headlines. See the Mobile Technology News Section for full coverage. Have your say instantly, and see what others have said. Click on the TalkBack button and go to the Microsoft forum. Let the editors know what you think in the Mailroom. And read other letters.