Handheld computer pioneer Palm Inc. laid aside a long-running rivalry with Microsoft, and the world's No. 1 software company gained access to millions of potential new customers in a deal to bring the first Palm handheld running Windows to market early next year.

Microsoft chairman Bill Gates, Palm CEO Ed Colligan, and Denny Strigl, CEO of wireless carrier Verizon Wireless, made the announcement at a press conference in San Francisco Monday morning. Palm said it would ship the Treo 700, a new version of its best-selling mobile phone-PDA combo that runs a new version of Microsoft's Windows operating system for handhelds, early next year. Verizon will have an exclusive contract for several months to provide voice and high-speed data access to the devices.

The executives said demand for white-collar workers to get access to their corporate E-mail -- most of which runs on Microsoft server and PC software -- while out of the office, inspired the deal. The agreement, which had been in the works for several years, lets Palm reach into companies that have standardized on Windows technology, said Colligan.

Tim Bajarin, president of technology consulting company Creative Strategies, says Palm sells 130,000 Treos a month, and "they'll easily double that with Windows."

"This allows Palm to get into millions of new enterprise and upper-end business accounts," Bajarin says. "A lot of customers were saying, 'I love the Treo, but I need it to synch with Exchange'," Microsoft's business E-mail software.

Palm's new Windows-based Treo could appeal to IT departments that want to give their traveling workers access to E-mail and the Web using the familiar Windows user interface. The deal helps Palm and Microsoft compete with Research in Motion Ltd., which sells the popular BlackBerry wireless E-mail device. Microsoft this year released Windows Mobile 5.0, a new version of its operating system for handheld devices, 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.

The Treo 700 will run on Verizon's BroadBand Access network, which uses the new EV-DO standard to transfer data starting at 400 Kbps, and which can reach speeds as high as 1.5 Mbps. Older networks can only transfer data at about 60 Kbps to 80 Kbps.

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 company's Palm OS has lost ground to Windows--devices running Windows outsold those running Palm OS for the first time during the third quarter of last year, according to market researcher Gartner. Palm spun out its software division as PalmSource two years ago, and it was acquired by Japanese company Access Co. this year for $324 million. "Things have changed," Colligan said.

Making Windows more attractive, Microsoft supplied development tools that let Palm differentiate its products from others using the operating system. "This is the only way we felt this would work for us," Colligan said. Dell and Hewlett-Packard also use Windows Mobile in PDAs.

According to Bajarin, Palm will target PDAs running the Palm OS to consumers, small businesses, and schools. Palm didn't disclose pricing for the 700, but Bajarin said it could sell for $600 to $700, versus $450 to $650 for Treos that run Palm OS. "This is a business product," he said.

Gates said there are 130 million Exchange E-mail users, and only a fraction of them have mobile E-mail access. Microsoft had long admired Palm's engineering, he said. "We lusted after some of the those things they did well and wanted to combine them with things we did well." Gates also said there's potential for future smart-phone applications -- such as foreign language translation, basic voice recognition, and mapping -- to find markets.