(FORTUNE Magazine) – Imagine a simple assignment in industrial design. Your mission is to take a powerful microprocessor, some computer memory, and a few other fancy bits of technology and create a very small computer, something that millions of folks will want to carry with them everyday. The design can be as simple or complex as you think the consumer will want. Will they want a miniature keyboard and enough horsepower to run spreadsheets? Will they want a color screen? How about E-mail and a Web browser in a pocket-sized package? Or is a simple electronic calendar, contact list, and to-do list enough to keep the market happy?

Welcome to a grand experiment--a contest to see what kind of pocket computer is most useful and has the greatest appeal in today's marketplace. The big news this year is you have more choices than ever. If you're in the market for a small handheld computer, prepare to make some tough decisions. Where there once were just a few so-called PDAs (personal digital assistants) and perhaps palmtop PCs, there are now connected organizers, handheld PCs, large handheld PCs, palm-sized PCs, personal communicators, and even credit-card-sized devices. Figuring out the industry's vocabulary--let alone which machine is right for you--is a challenge.

The market has already cast one decisive vote. After five years of lackluster sales, Apple Computer recently killed off its Newton Personal Digital Assistant. Apple had introduced the Newton--with its much ballyhooed handwriting recognition capability--as the next great revolution in computing. The market didn't buy it. The handwriting recognition didn't work well enough, and only a kangaroo could carry the bulky Newton in a pocket.

But the huge success of 3Com's PalmPilot and the emergence of Microsoft's Windows CE platform more than makes up for the loss of the early leader. Though Apple has announced plans to release a newly designed mobile device next year, the pocket-power race is now primarily between 3Com and Microsoft and their respective licensees.

The incredible variety of shapes and sizes of pocket computers is largely due to Microsoft's entry into the handheld computing market. Here's a brief overview: In the fall of 1996, Microsoft brought out a new compact version of its popular operating system--Windows CE--that was specifically designed for smaller machines. Despite some interesting models--such as the Philips Velo-1 and the Hewlett-Packard 320LX--this first generation of machines, with their tiny screens and keyboards, was only marginally successful and posed no threat to the handy PalmPilot and its simple one-button desktop synchronization feature.

In the fall of 1997, Microsoft announced version 2.0 of Windows CE, and all of its licensees, now joined by Sharp, introduced new and improved hardware to run it. Again, these machines featured small keyboards and a clamshell-like design. Then, early this year, Microsoft and its licensees unveiled palm-sized machines in response to the success of the PalmPilot. Though they run a version of Windows CE, these machines generally don't have keyboards; they rely on a stylus, the same way the PalmPilot does. In addition to these devices, there are also handhelds and organizers--such as the Psion Series 5 handheld and Sharp's Zaurus ZR-3500--that use their own proprietary operating systems.

Each category of pocket computers fills a different need, so you'll have to be careful to pick the right one. These little machines represent some very sophisticated engineering, but to squeeze all this technology into such tiny packages requires tradeoffs. For example, if you want a color screen--which is much easier to read--it will cost more and drain the batteries more quickly.

The biggest choice in the market is whether or not you need a keyboard. Do you want the simplicity of a palm-sized device or the greater complexity and versatility of a keyboard-based model? Here's an overview of the major classes of pocket computers on the market.

HANDHELDS

Handheld PCs look like miniature notebook computers reduced to the size of a standard video cassette. They offer plenty of power--and surprising functionality. You can do some word processing, run spreadsheets, prepare PowerPoint presentations, use a modem for E-mail and Web browsing, or even hook up a digital camera.

The latest generation of handhelds has been significantly enhanced, incorporating the best features of the first generation and adding some genuine improvements. The smallish 480 x 240 pixel LCD screens have been replaced with the wider 640 x 240 format pioneered by Hewlett-Packard in its 300/320LX. All new units have backlights for better visibility. Most offer one-button voice recording, and most have a CompactFlash slot in addition to the standard PC Card slot, making memory upgrades and expansion easier.

Several handhelds now have soft-modems--that is, the processor itself handles the communications without the need for a modem card, and without the extra battery drain of a hardware modem. The new devices are still powered by a variety of energy-efficient RISC chips from Hitachi, NEC, and Philips Semiconductor, but the latest processors are now significantly faster.

Most manufacturers' handheld product lines now include models with bright color screens, which are much more pleasant to use. However, while handhelds with monochrome screens run up to 25 hours on a set of batteries, those with color screens rarely last longer than three to six hours on a charge.

The keyboard remains the biggest problem for small handhelds. Although engineers can squeeze millions of transistors on a silicon chip, they can't downsize the human hand. A machine with a tiny keyboard may be fine for short notes, but if you want to work on memos and other documents, you'll want a keyboard designed for typing.

Inevitably, handheld PCs are growing bigger--much bigger in some cases. Philips and Casio managed to include wider screens and better keyboards in devices that are barely larger than their predecessors. But some manufacturers have abandoned the micro clamshells in favor of larger designs with keyboards approaching those of notebooks both in size and quality. The super handhelds include NEC's MobilePro 700 and 750C models, LG Electronics' Phenom Ultra, and Hitachi's HPW-200EC.

These big handhelds--which use Windows CE--could easily be confused at first glance with some of the sub-subnotebook computers, such as Toshiba's Libretto. The super handhelds have 9/10th-scale keyboards that allow touch-typing and screens that look like one half of a 9.5-inch notebook display. The large screens and nearly full-sized keyboards mean these machines are more useful for word processing, but don't expect to tuck them into a pocket. They fit more comfortably in an attache case.

Though the majority of new designs use Windows CE, there are other choices. The Psion Series 5 has an ingenious keyboard that feels much bigger than it is and has excellent desktop connectivity and software. Buoyed by robust sales overseas, Psion has attracted licensees such as Geofox, whose sleek handheld PC features a notebook-style trackpad and the best screen of any such device. And Sharp is still selling the Zaurus, a mature product and still a great value.

PALMTOPS

Your other alternative in choosing the perfect tiny computer is to forego the keyboard altogether. Sometimes less really is more. The 3Com PalmPilot has been a runaway success, with over a million units sold, even though--or more likely because--it doesn't have a keyboard. Instead of trying to do too much, the PalmPilot was engineered for small size, simplicity, and easy synchronization with the desktop computer.

If you merely need to jot brief notes or simply want an electronic calendar and contact list you can carry anywhere, then you should look at the palmtops. The controls and features vary from brand to brand, so make sure to try them and then pick the one you feel most comfortable with.

You've got plenty of choices in this segment now. 3Com has a newly designed Palm III and continues to sell the PalmPilot. IBM has licensed 3Com's technology and added some Lotus software to its WorkPad line. Texas Instruments and others have their own palmtops. And earlier this year, Microsoft and its licensees--including Casio, Everex, LG Electronics, Palmax, Philips, Samsung, and Uniden--took direct aim at the PalmPilot with a version of Windows CE that has been adapted and optimized for the smaller screen and data entry via stylus.

Microsoft has done an amazing job scaling down the general look and feel of Windows--including the Start menu--to a screen that measures just three inches diagonally. But you should be aware that the version of Windows CE for palm-sized PCs is more limited than Windows CE for handheld PCs. This palm-sized version does not run Word, Excel, and PowerPoint. Instead, Windows in palm-sized PCs concentrates on traditional organizer tasks, address lists, schedules, and note-taking.

NOTEPAD EXTRAORDINAIRE

There is enough on-board memory for hundreds or thousands of addresses, contacts, and brief notes, and because these units are powered by a pair of AA or AAA batteries, you don't have to worry about expensive battery packs or bringing along a clunky battery charger. These machines can communicate with desktop or notebook PCs via serial cable, infrared, or modem connection so that you can easily synchronize data or move files back and forth. Modems come in a variety of clip-ons or in docking stations, enabling you to send and receive E-mail or browse the Web.

How does Microsoft's palm-sized PC platform compare to 3Com's PalmPilot? Both platforms enable you to take your data on the road, and both easily synchronize with Windows machines. But despite the striking physical similarities, these are different machines under the hood. Windows CE is a larger, more complex operating system that can support more features but needs a more powerful processor. On the other hand, the PalmPilot's operating system was designed to be as simple and compact as possible; the machines can use older, slower processors, and therefore generally run longer on a set of batteries.

There are also some other alternatives in palmtops. Texas Instruments' Avigo and Sharp's SE series of personal communicators both offer E-mail, desktop synchronization, and all the standard features of a personal information manager (PIM) in small, handsome packages and for less than a full-featured PalmPilot or palm-sized PC.

Taking miniaturization to the ultimate extreme, the Rolodex REX is a tiny gadget the size of a credit card and barely thicker. Designed as a read-only electronic calendar and contact list, the REX has an outstanding (albeit non-backlit) screen. You can enter information from a PC via a PC Card slot or a serial dock. Best of all, if you use one of the major PIMs on your desktop or laptop, you can directly synchronize with the REX. And if you own a 360LX or 620LX from Hewlett-Packard, you can even synchronize the REX with your handheld. Then you can use the REX as a peripheral for your handheld PC, an information-age version of those Russian dolls that fit inside one another.

With such a wide range of choices in handheld and pocket computers, you'll have to decide what your priorities are and test various models. A palmtop with a monochrome screen and longer battery life will be fine if you merely want to keep lists, handle E-mail, and jot down short notes. But if you expect to use your handheld for PowerPoint presentations, a color screen is important.

ACCESSORIZE

Also consider the options: Are modem, AC adapter, and docking cradle included or priced separately? How much memory does the machine have--and how easily can it be expanded?

There's also the wealth of add-on technologies available. Tiny digital cameras enable real estate agents, insurance adjusters, or surveyors to take pictures, annotate them on a handheld PC, and store them in an image database. VGA-out ports enable sales force professionals to make their PowerPoint presentations by plugging into a monitor or LCD projector at customer sites. Wireless modem cards enable you to send and receive E-mail without having to find that ever-elusive phone jack. And with a new service called Reuters MarketClip you can get real-time stock market quotes, news headlines, and other information via a wireless connection to your PalmPilot.

Today's handhelds and pocket computers are no match, of course, for full-fledged PCs or big multimedia laptops, but they can nevertheless be surprisingly versatile and useful machines.