That was especially true of owners of the HTC HD2 phone, a powerful slim device that was among the last and most capable of the Windows Mobile 6.5 devices. But while Microsoft never allowed such an upgrade, some tinkerers have managed to get the beta version of Mango — the next release of Windows Phone 7 — running on that HD2.

Although Microsoft has no plan to release such an update commercially, the company seems to be amused rather than irked at the developers’ creativity.

“We say tinker away with Mango and enjoy the juice,” Microsoft spokesman Bill Cox said in a statement to AllThingsD. “But beware the fine print — unlocking phones may void your warranty.”

Microsoft does plan to make the Mango release a free update for all existing Windows Phone 7 devices after the code is finalized this fall. Mango adds, among other things, improved browsing, integrated Twitter support and the ability to run more than one third-party program simultaneously.

“Windows Mobile 6.5 isn’t just a letdown–it barely seems done….[It’s] an OS that hasn’t been fundamentally changed in years, and which bears a strong resemblance to Windows Mobile 6.1, and a startlingly not-weak resemblance to PocketPC.”

– Gizmodo’s John Herman in “Windows Mobile 6.5 Review: There’s No Excuse For This”

If “Windows Phone” is to be the new designation for Microsoft’s mobile OS, the company can’t afford to have four-month-old Windows Mobile 6.5 muddle its branding. So the company is renaming it. The rumored moniker: “Windows Phone Classic.”

An obvious choice, I suppose, if it is indeed a choice–Microsoft (MSFT) refused to confirm this, telling me it hasn’t yet made any “final branding decisions” on Windows Phones 6.x; my sources tell me differently. But it’s entirely ironic given that the definition of “classic” according to Merriam-Webster is variously “serving as a standard of excellence,” “of recognized value,” and “historically memorable.” Windows Mobile 6.5 is none of these; well, it might be “historically memorable,” but if it is, it’s for the wrong reasons.

In any event, the rebranding is a wise move. As widely disparaged as it has been, Windows Mobile 6.5 is still widely used, particularly in enterprise. A December 2009 survey by Aberdeen Group showed 63 percent of respondents using the operating system, second only to BlackBerry’s 74 percent. Given that and the enterprise world’s general aversion to early adoption, continued legacy support of WinMo 6.5 is essential.

But Microsoft’s operating system is potentially nine months from market. In the meantime, Apple will likely introduce a new iPhone and iPhone OS, Google the next iteration of Android OS, and Palm the newest version of webOS. Any of these, if not all three, could make Windows Phone OS 7.0 look like table stakes at a game Microsoft is, once again, losing.

For now, demos show it to be an ambitious, impressive reimagining of Microsoft’s mobile OS, all gloss and sophistication, where Windows Mobile 6.5 was–let’s face it–all PocketPC. As CEO Steve Ballmer said during its launch yesterday at Mobile World Congress, “There is no question in our minds that we needed and wanted to do some things that were out of the box and clearly differentiated from our past and–hopefully you will agree–clearly differentiated from other things going on in the market.”

And, indeed Microsoft is doing so. With a Zune-influenced design and savvy integration of not just the Zune media player, but also Xbox Live, Bing, and Office, Windows Phone OS 7.0 is exactly what a Microsoft mobile OS should be. It’s the OS the company should have built three years ago.

Which, sadly, may mean it’s three years too late. With Microsoft’s share of the mobile market in decline and its new OS launching in a market that Ballmer himself described as one “filled with phones that look the same and do the same things,” the company has its work cut out for it.

That said, similar observations were made about Xbox, and Microsoft has done quite well with it in a similarly competitive market. But the company’s challenge here is far more difficult, I think. The company would have a much easier time succeeding if the launch of Windows Phone OS 7.0 weren’t so far off.

Steve Ballmer is delivering his annual state-of-Microsoft address at the Consumer Electronics Show in Las Vegas tonight–his second since assuming the duties of former CEO Bill Gates.

If anything like last year’s, Ballmer’s address will offer a broad overview of Microsoft’s (MSFT) consumer strategy for the year, touching on everything from the company’s hardware-software ecosystem to its home entertainment offerings.

Likely to figure prominently in tonight’s address: Windows 7 and the new touch-enabled PC form factors it has evidently inspired; Bing; and Natal, Microsoft’s controller-less game control system, which will launch in time for the 2010 holidays.

• The keynote begins with, what else, some introductory remarks from Consumer Electronics Association President Gary Shapiro: “Happy New Year and welcome to 2010 CES, the World Cup of innovation. The past year has been a challenge. The global recession has affected all companies. Fortunately, signs are pointing upward, and I believe CES will be remembered as a turning point.”

  Let’s hope so.

• Shapiro welcomes Steve Ballmer to the stage, and the Microsoft chief begins by noting that 2009, in case you hadn’t noticed, was a year of profound economic turbulence. But innovation persisted. And with that, he rolls a first video designed to demonstrate his point. It features “one random guy’s” experiences with technology this past year, namely Seth Meyers of “Saturday Night Live.” Seth talks to his grandmother on a Web cam. He plays videogames with a kid and loses. “Before texting existed, I never sent the wrong person a letter telling them they’re a jackass. Thanks, technology….Before Twitter, if I knew what someone’s cat was thinking, I would have had to be an idiot.”

• Ballmer: “We’re going to focus on three things tonight. The [first is the] increasing importance of the small screen, the ever-evolving PC and the future of TV. The second is the cloud. Third is natural user interface–NUI technology. The last few decades have been absolutely stunning in the changes they’ve brought.”

• And here’s the sound byte of the evening: “We Bing. And we Bing. And we Bing Bing Bing. At least in my world.” Ballmer says 2009 is a year in which the company has made incredible progress with Bing. “We added 11 million new users….We redefined what search should do for users–we work to understand user intent and anticipate what users are really looking for. We know we’re at the beginning of a long journey, but we think we’re off to a good start.”

  There’s some news about Bing today, a distribution deal that makes it the default search engine on HP PCs in 32 countries.

• Also figuring prominently in 2009: Xbox. Microsoft first launched it at CES in 2001. Today, there are over 39 million Xbox 360s around the world. And more than 500 million games. The console has generated $20 billion in total game revenue.

• Ballmer is moving on to the mobile space now. Windows Phone–technically Windows Mobile 6.5, a necessary stopgap on the path to 7.0–which debuted last fall in a nimbus of disappointment. Ballmer notes that Microsoft is announcing a new Windows Phone partnership today with T-Mobile, which is bringing HTC’s HD2 phone to the U.S. He says little about Windows Mobile 7, Microsoft’s “modern” mobile operating system, which at last check was scheduled to arrive at market sometime in late 2010.

• Ballmer is talking up Windows 7 now. PC sales jumped 50 percent the week the OS debuted, he says. And according to research outfit NPD, sales of Windows PCs grew 50 percent over the 2009 holidays and retailers sold 63 percent more PCs than they did this time last year. Gartner (IT) now sees three percent PC unit growth in 2009–nearly 300 million PCs shipped in 2009. For 2010, Gartner sees a jump of more than 12 percent.

  “Windows 7 is by far the fastest-selling OS in history,” says Ballmer. “Clearly, consumers are saying there’s never been a better time to be a Windows 7 PC….Windows 7 is a rising tide that’s lifting all boats in the PC business.”

• Ballmer calls Ryan Asdourian, senior product manager for Windows, to the stage. “We’re going to see some of Ryan’s favorite hardware and software,” he says. Among them the Sony (SNE) Vaio L–an all-in-one built for high-definition entertainment–and the Asus NX90, a slick-looking laptop designed with help from legendary audio firm Bang & Olufsen.

  “Being in Vegas, you’ve got to look sexy,” says Asdourian. Ballmer: “Good thing we brought some PCs.”

• Next, some software demos–Ray Kurzweil’s Blio Ereader App?, then a new Skydrive collaboration in Windows Live. Ballmer: “Developers baby! Developers! I love the people who’ve built this stuff.”

• Ballmer moves on to Windows Media Center and Mediaroom 2.0, which will now deliver live and on-demand TV through set-top boxes, PCs, and Windows Mobile devices like the HD2. It is coming to AT&T’s (T) U-verse. Streaming video on the HD2 looks pretty slick.

• “The world of entertainment and content will come in different forms and flavors. But no matter what the source, Windows PCs will offer the greatest entertainment experiences in the world,” says Ballmer. And with that, he shows offs some new slate PCs. Sadly, the Courier–the dual-screen multitouch device that many had been hoping to see–is not among them, as BoomTown reported earlier today. There are, however, some cool-looking offerings from Hewlett-Packard (HPQ) and Archos.

• Ballmer rolls another Seth Myers video, “Milestones in Technology.” Not funny. Yeah, I don’t really miss “Saturday Night Live” at all anymore.

• Robbie Bach, president of Microsoft’s Entertainment & Devices division, takes the stage. “Computer science is the only science bounded solely by our imaginations,” he says, referring to Xbox. “2010 is going to be a landmark year for Xbox customers. We’ll be offering the best line of Xbox 360 games.” Examples: Mass Effect 2 and Splinter Cell Conviction. Also an episodic “psychological action thriller” called Alan Wake. “Imagine ‘Lost’ written by Stephen King, filmed by David Lynch,” implores Bach.

• Bach: “What ‘Star Wars’ is to film, what Harry Potter is to fantasy books, Halo is to videogames.” And with that, he rolls some video of Halo Reach that I can’t see because I’m watching the event remotely. The game is coming in the fall of 2010, but will be available as a multiplayer beta on Xbox Live this spring.

• Bach announces Game Room for Xbox Live! More precisely, a vintage gaming service that offers 30 classics from Atari, Intellivision, etc. The company plans to add over 1,000 games to Game Room over the next three years.

• And here comes the pitch for Project Natal: “We’re at an exciting inflection point in tech, where we can create an experience that is more intuitive. With Natal we’re freeing you from the last barrier, the game controller.” Bach rolls a video of the folks behind the Xbox’s new natural user interface, or NUI, which is due out later this year. “Project Natal will be available this holiday 2010….It will work with your existing Xbox 360.”

• “When I said 2010 was going to be a big year for Xbox 360, I was lying: 2010 is going to be the biggest year in Xbox history!”

• Bach wraps things up with some big-picture remarks and–well, I guess that’s it. He leaves the stage and the house lights come back up.

And now, with the official release of Windows Mobile 7 reportedly delayed until late 2010, you’ve got to wonder if the company hasn’t already blown its last chance at a comeback in the mobile space. As Strategic News Service analyst Mark Anderson recently told the New York Times, “It’s time to declare Microsoft a loser in phones. Just get out of Dodge.”

That’s a contentious argument and one to which Microsoft will likely pay little attention. Though perhaps it should, because according to the latest figures from IDC as reported by Needham analyst Charlie Wolf, the company’s mobile business is collapsing. Windows Mobile’s share of the smartphone market fell to 9.6 percent in September from 13.4 percent a year ago. That’s about a 25 percent year-over-year decline.

In the United States, marketshare for the OS has fallen from 32.1 percent in March 2007 to just 13.1 percent in September 2009. In Western Europe, it fell from 18.5 percent to 7.0 percent during the same period. Windows Mobile fared a bit better in Latin America and the Asia Pacific, but not enough to claim a commanding market share in either region.

A grim situation, and with Windows Mobile licensees fast losing interest in the OS, it’s hard to see it changing much anytime soon. Microsoft likes to claim that it has some 30 WinMo licensees. And it does, but of those 30, two–HTC and Samsung–built 65.4 percent of the Windows Mobile devices shipped in September.

This trend is only worsening as new platforms gain traction in the market. “Many of Microsoft’s major licensees are either partially or completely abandoning ship,” Wolf explains. “Among them are Palm, which is now focused exclusively on its WebOS platform, as well as HTC, Motorola and Samsung, which have shifted their development efforts to the Android platform.”

Obviously, this doesn’t bode well for Windows Mobile 6.5 or 7.0–whenever Microsoft gets around to shipping it. Maybe it really is time to get out of Dodge.

Both debuted this morning, along with a Web-based storage and media-sharing service called My Phone. And while they’re certainly better than Microsoft’s offerings to date, the market seems unimpressed. Said Gartner (IT) analyst Carolina Milanesi: “There is nothing in this version that makes drastic changes that will get people to choose Windows who didn’t before.”

And, indeed, that appears to be the case. WinMo 6.5 is very clearly a stopgap on the path to 7.0, which is to be released next year. “Windows Mobile 6.5 isn’t just a letdown–it barely seems done,” Gizmodo’s John Herman complains, adding that its underpinnings reveal “an OS that hasn’t been fundamentally changed in years, and which bears a strong resemblance to Windows Mobile 6.1, and a startlingly not-weak resemblance to PocketPC.”

A startlingly not-weak resemblance to PocketPC. Not the comparison Microsoft (MSFT) was hoping for, I’m sure, especially given the OS’s decidedly flashier competition. But likely about all we could expect when even the company’s own executives are saying privately and publicly that they wish the OS was further along.

So 6.5 is really just a placeholder to keep Microsoft in the game–and just barely. As Windows Mobile Senior Product Manager Greg Sullivan told TechFlash, “It’s not the destination for us, by any stretch of the imagination, it’s a step along the way.”

At its Worldwide Partner Conference in New Orleans this morning, the company said it will begin accepting applications for the store on July 27, with an eye toward opening it by the end of the year. When it does debut, Marketplace will be available to all Windows Mobile 6 devices, not just 6.5 (as the Windows Mobile Blog notes, that’s 30 million devices), and it will host about 600 Microsoft-vetted apps–quite a few more than Apple’s iTunes App Store offered at launch, but significantly fewer than the 65,000 apps Apple (AAPL) boasts today.

Sure, we’ll improve Windows Mobile to better compete with Apple’s (AAPL) iPhone–eventually. Sounds quite a bit like Microsoft CEO Steve Ballmer’s “we’re doing our best” remarks about Windows Mobile back in March.

As I noted at the time, “it’s all well and good that Microsoft is accelerating Windows Mobile development to better meet its competition. But that competition isn’t exactly standing still waiting for Microsoft to bring itself to parity. It lapped Microsoft two years ago, and if the software behemoth continues at its present pace, the competition will lap it again. Perhaps it already has.”

Sure, we’ll improve Windows Mobile to better compete with Apple’s (AAPL) iPhone–eventually. Sounds quite a bit like Microsoft CEO Steve Ballmer’s “we’re doing our best” remarks about Windows Mobile back in March.

As I noted at the time, “it’s all well and good that Microsoft is accelerating Windows Mobile development to better meet its competition. But that competition isn’t exactly standing still waiting for Microsoft to bring itself to parity. It lapped Microsoft two years ago, and if the software behemoth continues at its present pace, the competition will lap it again. Perhaps it already has.”

Microsoft and Verizon are reportedly discussing a touchscreen multimedia cellphone that could launch on the carrier’s network in 2010. The project, code-named “Pink,” will apparently involve some ungodly combination of Windows Mobile and Zune software. That code name is particularly interesting in light of recent reports that Microsoft (MSFT) has requested proposals for a new ad campaign for a mysterious mobile application by the same name.

Beyond that, details are slim. Representatives for Verizon (VZ)–which already has six Windows Mobile touchscreen devices in its lineup–refused to comment on the report. And Microsoft is apparently holding to the party line, insisting that its mobile strategy is to provide a software solution, not devices. Consider these remarks from Microsoft CEO Steve Ballmer at a recent McGraw-Hill (MHP) media conference:

With Windows Mobile, we want to permit a range of hardware innovation, and yet, still have a pretty good experience end-to-end, with good applications, and we want the ability for software developers to target both a very high-end and a lower range or mid-range phone.

And the ability to scale up and down, to work with multiple hardware vendors, to get a range of competition and innovation and price competition amongst the hardware guys is a big asset. It is certainly what our strategy is. It’s very different than Apple’s, and it’s very different than BlackBerry’s. But, unless you assume Apple and BlackBerry are going to sell the lion’s share of most phones … which I don’t, because I think they’re going to get a lot of competition from the Samsungs, LGs, Sony Ericssons, Taiwanese. I mean, there are a lot of guys who are going to be in that phone business.

I think that the play for us is to permit broad innovation at many price points, with a very good and very feature-rich, in terms of applications, experience. If people want keyboard input, that’s great. If they want touch, that’s great. If they, you know, want voice, we need to give them a range of modalities for interaction. And that’s the direction we’re headed with Windows Mobile 6.5 and into the future.

Ah yes, Windows Mobile 6.5. When are we going to see that again?

Also taking inspiration from the App Store: Nokia’s Ovi Store–a location-aware mobile storefront that peddles not just applications, but content as well. “This is not just a place to find applications,” said Nokia executive vice president Niklas Savander. “It’s a smart store. That is not just for smartphones. It actually suggests things you might like and adds social location dynamics to show you relevant applications. And it shows you what your friends have bought. And it changes the inventory based on where you are….Consumers want content that is relevant to their interests, location and the people they care about. We believe that social location is the next wave of consumer demand. The consumption of mobile media is fundamentally different from that on a PC, as it needs to be faster, easier and more appropriate. It’s not about what, but about who, where and when.”

With the “how,” apparently provided by Apple. Because much as Nokia (NOK) would like us to think otherwise, the Ovi Store appears to be little more than Apple’s App Store made location-aware and properly scaled to Nokia’s purposes. Same concept. Same developer revenue share (70 percent).

It would seem then, that the most talked about “innovations” at this year’s GSMA Mobile World Congress–improved touch interfaces, app stores, new content relationships–are little more than rivals’ takes on last year’s Apple news. With the third major revision to the iPhone expected in June, that may well be the case at next year’s Mobile World Congress as well.