According to Bloomberg, sources at Microsoft state that the company will be making a very late tablet push, unveiling a dedicated tablet operating system sometime next year (2012).

With Apple announcing its entry-level priced iPad 2 and with a host of Android competitors like Samsung and Motorola releasing higher-powered, more expensive entries, the tablet market is on fire.  The competition is particularly fierce on the operating system side where Apple has poured a great deal of effort to make iOS better suited for a large-screen device.  Similarly Google has put tremendous effort to complete Android 3.0 Honeycomb, which overhauls the past Android UI and makes it truly tablet-friendly.  Even HP's webOS and RIM are looking to get a piece of the tablet business

Microsoft, meanwhile stands watching on the sidelines.  While it will release some Windows 7-based tablets this year, the outlook for them is somewhat poor.  They require Intel x86 processors, and the chipmaker has struggled to deliver energy efficient Atom chips for tablets.  Another trouble spot is the Windows 7 OS itself.  The operating system isn't exactly optimized for a tablet experience, and with dedicated competitors like iOS 4.3 and Android Honeycomb 3.0 on the market, that could seriously stall sales.

Bloomberg quoted Michael Gartenberg, a New Jersey-based analyst, as meeting the news with pessimism, stating, "If 2011 is the year of the tablet wars, Microsoft will be awfully late suiting up for that battle."

And he's not alone; Goldman Sachs was scathing in a recent assessment of Microsoft and Intel's combined tablet efforts.

Then again, a late entry may not spell doom for Microsoft's tablet efforts.  Its other key mobile offering -- smartphones -- looked like a mess after the downhill slide of Windows Mobile and the abysmal failure of Kin.  But by going back to the drawing board and taking the time to reinvent, the company has delivered arguably the most innovative smart phone user interface currently available.  And with a new partnership with Nokia in hand, Microsoft could pass Apple to become the world's second largest smartphone OS maker in terms of sales if it plays its cards right.

The one worrisome sign is that Microsoft is reportedly choosing to build on top of Windows 7, adding more touch features.  While Windows 7 is arguably a great personal computer OS the question is whether even a modified version will be up to speed on tablets.  While such an approach is a quicker and easier, many were hoping the company would port the Windows Phone 7/Zune operating system to a tablet, given its more touch-centric UI.  To Microsoft's credit, many users -- including DailyTech readers -- have clamored for Windows 7-tablets.

Interestingly, Microsoft appears to be preparing to follow a similar approach that Google is following with its upcoming Chrome netbook/notebook OS, giving out test units to commercial partners and the public.  Microsoft will reportedly begin distributing device with test builds of the new OS before the end of the year.

It is unclear whether current generation Windows 7 tablets releasing this year will be upgradeable to the new OS next year, but this presumably would be the case, if hardware makers cooperate.

According to reports [1] [2] by In-Stat, the tablet business will be booming over the next several years, and will, in part, cannibalize PC sales.  In-Stat predicts over 100 new designs from Apple, Android makers (Motorola, Samsung, HTC, Sony-Ericcson, Archos, etc.), RIM, HP (webOS), MeeGo tablet makers (no major named partners), and Windows tablet makers (Dell, Lenovo, etc.) to enter the market this year.  And it predicts sales by 2014 to rise to 58 million units and by 2015 to 118 million units. 

Microsoft is also reportedly preparing its next generation version of Windows, which will support ARM CPUs for notebooks, Windows 8.