The demand for executives to have access to corporate E-mail while out of the office inspired a deal between Microsoft and handheld-computer pioneer Palm Inc. last week, which will bring to market the first Palm handheld running the Windows operating system.

The Windows Mobile 5.0-based Treo 700 will ship early next year, Palm said last week. Verizon Wireless will have an exclusive contract for several months to provide voice and high-speed data-access service for the devices.

Microsoft sees the deal as an opportunity to extend Outlook and Office applications to PDAs and gain access to millions of potential customers. For Palm, the Windows-outfitted Treo could appeal to IT departments that want to give traveling workers access to E-mail and the Web using the familiar Windows user interface.

The deal marks the first time that Palm, which propelled the handheld-computer category in the '90s, is licensing Windows for use in a product. The Palm OS has lost ground to Windows--devices running Windows outsold those running Palm OS for the first time in the third quarter of last year, according to Gartner. Palm spun out its software division as PalmSource two years ago, and it was acquired by Japanese company Access Co. earlier this year for $324 million.

E-mail remains the application driving the adoption of wireless technology, especially in companies that have a mobile workforce. More than half of small businesses plan to give their workers E-mail on PDAs in the next year, and 42% of large companies plan to do the same, according to Forrester Research.

The need for mobile E-mail has stirred interest from nontraditional players like Nokia, which unveiled its Business Center software last month for delivering corporate E-mail to mobile devices. The Nokia 9300 phone from Cingular Wireless, due next month, will work with Research In Motion Ltd.'s BlackBerry Enterprise Server for push E-mail. Cingular will be the first U.S. carrier to offer BlackBerry services on a third-party handset, according to RIM.

Other vendors are rolling out competing products. Intellisync, a provider of wireless E-mail software for businesses, rolled out its new Unified Messaging application last week, which supports E-mail, text, voice mail, SMS, and instant messaging from AOL, Microsoft, Yahoo, Google, and business messaging products like IBM Lotus Sametime.

Palm already offers E-mail on Treo smart phones like Good Technology's GoodLink and Intellisync's Mobile Suite, which are designed for business users. But there are 130 million Exchange E-mail users, and only about 15 million of them have mobile E-mail access, Microsoft chairman Bill Gates said last week. Microsoft long admired Palm's engineering, he said. "We lusted after some of those things they did well and wanted to combine them with things we did well."

Microsoft released Windows Mobile 5.0, its operating system for handhelds, in May and plans to release push E-mail technology by the end of the year that lets Windows-powered devices receive messages without periodically synchronizing with a server. Gates also said there's potential for future smart-phone applications such as foreign-language translation, basic voice recognition, and mapping.

The Treo 700, a new version of Palm's best-selling mobile phone-PDA combo that runs Microsoft's Windows Mobile, will provide corporate Exchange users with Outlook Mobile, Office Mobile, and Internet Explorer Mobile built into the smart phone, as well as direct access to Exchange Server 2003, Microsoft's business E-mail software. "This allows Palm to get into millions of new enterprise and upper-end business accounts," says Tim Bajarin, president of technology consulting company Creative Strategies. "A lot of customers were saying, 'I love the Treo, but I need it to sync with Exchange.'"

Palm will target PDAs running the Palm OS to consumers, small businesses, and schools, Bajarin says. However, the Treo 700 is designed for business users and could help Palm appeal to markets outside the United States. Palm didn't disclose pricing for the 700, but Bajarin says it could sell for $600 to $700 compared with $450 to $650 for Treos that run Palm OS. While Palm already sells 130,000 Treos a month, the company could "easily double that with Windows," he says.

The deal helps Palm and Microsoft compete with RIM's BlackBerry. Some analysts have predicted that Windows Mobile 5.0 will be the "BlackBerry killer" because it will offer push E-mail like the BlackBerry and support direct wireless connections between mobile devices and Microsoft Exchange Server, bypassing additional servers and middleware. Using Windows also helps Palm overcome CIO opposition to users syncing their devices to companies' PCs without official support, says Page Murray, Palm's marketing VP.

Soon, users of Windows-based smart phones may not have to think about syncing up with an E-mail server. Later this year, Microsoft will deliver a feature pack for Windows Mobile 5.0 that will let E-mail appear on the device as soon as it reaches the server. Expect Palm and other device makers to offer that capability by mid-2006.

Nevertheless, the BlackBerry remains very popular. Unit shipments grew nearly 65% to 840,000 in the second quarter, according to Gartner.

In May, PalmSource said that Palm renewed its license for Palm OS through 2009. But views on what the Palm-Microsoft deal will mean for PalmSource are mixed. Some observers say Windows Mobile will become a more popular operating system on the Treo than Palm OS, but others say Palm is trying to stay afloat while it waits for PalmSource to extend Palm OS to Linux. "Windows Mobile gets Palm something to grow with until then," says Gartner analyst Todd Kort. "If they hadn't done this, there might not be a Palm device a year or two from now."