palmOne is surrounded by giants.

There's Microsoft on the left with Windows Mobile, Hewlett-Packard on the right with its iPAQ handhelds, and Nokia straight ahead with its Symbian-based mobile handsets.

It's a tribute to the Palm platform and palmOne's ingenuity that it has held its own in the crowded handheld market for so long. In fact, palmOne helped drive another giant, Sony, from the field of battle. The electronics company announced earlier this summer it would take its Clie PDAs and exit the North American and European markets, setting up camp in Japan while it determines its next move.

And as a result of palmOne's acquisition of Handspring and its highly regarded Treo line of smartphones last year, the mobile device company became the top seller of smartphones in the United States.

The market has rewarded palmOne's success with the Treo 600 (see image) by pushing its stock to new heights over the past year. Yesterday, however, shares of palmOne plunged 11 percent on high volume after an A.G. Edwards research report mentioned possible competition from Nokia for the Treo 600.

You see, the report said Nokia "may" develop a Treo 600 clone with a thumb-keyboard built on the Series 60 flavor of the Symbian OS. Developed for the American market, the unnamed Nokia smartphone would also feature a high-resolution screen and Bluetooth; directly attacking two of the Treo 600's few weak points.

Should this news have spooked investors? Yes and no.

In spite of loosing market share to competitors like Samsung and Motorola over the last couple of years, Nokia is still the dominant mobile phone vendor. Today, for example, Gartner reported that last quarter Nokia accounted for 29.7 percent of cell phone sales—a drop of close to 6 percent from the same quarter a year earlier, but still twice as large as number two Motorola.

Such a large percentage of the market creates clout with mobile operators, the key to success for any mobile handset, traditional cell phone or smartphone. Nokia could conceivably use its influence to encourage wireless carriers to offer its Treo "clone" instead of palmOne's genuine Treo.

palmOne, on the other hand, isn't about to sit still and let another mobile device company out-Treo its own products. The company reportedly has a next-generation smartphone, the Treo 650, ready to go. This new mobile handset should address the weaknesses of the current model.

Here's what we know:

Unlike the Treo 600 and its 160 x 160 screen, the Treo 650 has a high-resolution 320 x 320 display, which would make it easier to read documents and Web pages. The Treo 650 should also integrate Bluetooth, a glaring omission in the current model. Bluetooth would let you use wireless headsets and print to Bluetooth-enabled printers, for example.

As opposed to the Treo 600, the Treo 650 should also feature a swappable battery and a high-resolution 1.3-megapixel camera for taking pictures and video. It should also run on a powerful 312MHz processor.

Like the Treo 600, the Treo 650 will come in CDMA and GSM editions, making it attractive to the widest possible number of mobile operators and consumers.