Microsoft has unveiled its Pocket PC operating system (OS) with enhanced capabilities for wireless communication and security. Analysts said Pocket PC 2002's official release early next month would further press market leader Palm to improve its OS. Users want their personal digital assistants (PDAs) to work more akin to laptop computers. Microsoft researcher Craig Dewar demonstrated the software, which carried the codename Merlin, at an event marking the 10th anniversary of the company's research division. He said the OS was ideal for corporate users who wanted to browse files on their network via a wireless or cable connection. The software supports wireless standards such as 802.11b and Bluetooth. 'I can go to a Starbucks or an airport and connect to their wireless network and then tunnel back into my server and check my e-mail securely,' Mr Dewar said. Pocket PC 2002 also includes improvements to the Explorer Internet browser and updates to Windows Media Player, as well as instant messaging and an added capability to use anti-virus software. Mr Dewar said it could run Office XP applications off a server. Analysts expect Pocket PC to continue to erode Palm's dominance, particularly among high-end users. Andrew Scott, a research associate with Needham & Co, told Reuters: 'In the consumer space, the simplicity of the Palm OS and consumers' basic needs have given Palm a competitive advantage. 'But Microsoft is well positioned to attack the enterprise hand-held market - and Palm is the underdog.' According to research house International Data Corp (IDC), Palm's OS has dropped to a 69 per cent market share, while Pocket PC has about 17 per cent, up from 10 per cent a year ago. IDC forecast parity between the Palm OS and Pocket PC by 2005. About 12 companies are using Pocket PC in their devices, about double from a year ago. Giga Information Group analyst Rob Enderle said the Pocket PC upgrade was targeted at those who would use a PDA instead of a laptop but still expected a wide range of functions. He said Palm's software was in dire need of an overhaul. 'Palm is going to be bringing out a new [OS] . . . the belief is they'll have it done by the end of next year,' Mr Enderle said. 'But it's hard to ship those things on time. It could take years, and Palm doesn't have years.'