Microsoft will unveil the third version of its Windows CE operating system for palm-size handheld devices next week at Grand Central Station in New York.

As it has done in the past with other operating systems, Microsoft has used the first two versions of WinCE, now called PocketPC, to refine the product, analysts said.

Diana Hwang, a mobile analyst at International Data Corp in Massachusets, said: "This is the OS that should have come out in phase one, but I think they did a very good job with this one."

Microsoft has owned up to the shortcomings of its first two attempts at replacing the Palm as the most popular palm-top OS. And the company has placed a tremendous amount of importance on this third effort, going so far as to say that if they fail this time, they will have to go back to the drawing board. In the meantime, some of Microsoft's best hardware partners are still keeping their distance.

"We still don't see big demand in corporate accounts for Windows CE, largely because these accounts don't want to deal with another OS. But, we're still keeping an eye on it."

Although criticized early for trying to put too much functionality in the OS, Microsoft has gone ahead and added to the capabilities of the operating system. In extending the audio and video multimedia features, the company is hoping to capture the consumer market.

In addition, the software giant will add a File Explorer component for PocketPC devices to manage files and applications as well as an e-book reader application leveraging Microsoft's ClearType technology. Microsoft will also add more functionality to the browser to bring it closer to IE 4.0, which can use plug-ins and read Web sites scripted in Java.

Despite the broadening of PocketPC's functionality, analysts are still bullish.

Tim Scannell, senior analyst at Mobile Insights, in Boston, said: "Before this, Microsoft didn't have a feel for where these devices would end up. But, now they realize the biggest market is in the consumer space. PocketPC is finally clarifying the vision. It is not Microsoft's last gasp, but a breath of fresh air for the consumer market."

Whether or not Microsoft can mount some significant competition to the incumbent Palm will depend on how well the software giant can market the devices, something they failed to do previously.

Hwang said: "They need to put marketing muscle behind this, and it will come down to getting them into users' hands. If this doesn't happen, they need to rethink their strategy for WinCE in the handheld space."