In a unique alliance with Microsoft, HTC has become the software giant's closest collaborator in the design, development and production of the most advanced Windows-based smartphones for cellular network operators around the world.

Outside of major suppliers such as Nokia, Motorola, Sony Ericsson and Samsung Electronics, the world's growing demands for smartphones are being met by specialist original design manufacturers (ODM) such as HTC and Quanta Computer.

'Since we focused purely on wireless devices our [ODM] competitors continue to play catch-up,' said HTC president Peter Chou.

High demand for HTC products was reflected in its first-quarter net income, which hit a record high of NT$5.4 billion ($1.32 billion) - a whopping 243 per cent year-on-year increase. Large clients include operators Vodafone, T-Mobile and Cingular Wireless.

HTC sales last year doubled to reach an estimated US$2.2 billion. That helped triple profits to US$356 million, which pushed its share price up by more than 1,000 per cent since 2003.

Apparently, it is a good time to be in the smartphone business as more and more cellular network subscribers want handheld devices with the combined functions of a cellular phone, PDA and other information appliances.

Research firm Gartner has forecast that smartphones - which run on operating systems including Windows Mobile, Linux and Symbian - will make up 26 per cent of worldwide cellular handset sales by 2009 from just 6 per cent this year.

Since HTC developed the first Windows-based smartphone in 2002, Microsoft has bolstered its collaboration with the company. It needs HTC to build more advanced gadgets to help expand the number of Windows-based smartphone and PDA users worldwide. The software giant also receives royalties on every Windows handheld device sold to cellular operators.

HTC has a track record of being a trendsetter, developing products ahead of the curve.

The company was launched in 1997 by Cher Wang, the daughter of Taiwanese petrochemicals billionaire Wang Yung-ching. Her goal for the design and manufacturing outfit was to develop and sell what was then a unique product for business executives: a PDA with mobile phone capability.

The path towards that goal, however, almost sank HTC under a mountain of debt, as no market seemed interested in the concept. But HTC persevered, throwing more money at its research and development team to boost design and engineering capabilities. Microsoft has been a strategic technology partner since 1997.

All that work paid off handsomely when HTC won the contract to make the iPaq PDA for Compaq Computer and later for Hewlett-Packard, which acquired Compaq. In 2002, HTC developed the first Windows smartphone.

'We encourage our people to go a step further and come up with cutting-edge phones,' Mr Chou said.

That has meant ditching expensive projects and starting from scratch on others. The focus is to ensure quality and improve on it, which is in stark contrast to other Taiwanese manufacturers, who are more concerned with cost-cutting.

HTC now boasts a 950-person research and development team, with engineers huddling over handsets and working through problems even as designers shuffle past with plans for the next cool PDA or smartphone.

Testing engineers put the devices through their paces: slamming them against walls, checking for defects and testing for radiation.

'We are all about R&D and innovation. It's a given that we provide the best,' Mr Chou said.

Last year he established a new research and development division called Magic Labs. It is tasked to come up with ideas for completely new products, such as the Star Trek clamshell phone.

Competition, however, from other ODMs and the major handset makers looms.

'I am convinced the battleground will intensify for Microsoft-based smartphones in the second half of the year,' said Daniel Wang, an analyst with Primasia in Taipei.

'Operators don't have much choice beyond HTC's offering. But they want more because it will give them a chance to drive the price down as more players come into the market.'

While HTC dominates in the Windows handset market, smartphones based on the Symbian operating system continue to command three-quarters of the worldwide market, according to research group Canalys.

Its ties with Microsoft make it difficult for HTC to develop phones using Symbian software or other alternatives, such as Linux.

HTC must also mount a challenge against Canadian firm Research in Motion's BlackBerry handheld communications device. HTC has reportedly been working overtime with Microsoft to launch a cheaper alternative, but analysts are sceptical about its chances of gaining ground on the BlackBerry.