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Microsoft's project, which is code-named "Pink," aims to produce a phone that will extend the tech giant's Windows Mobile operating system, adding new software capabilities. It would also likely include Microsoft's new Windows Marketplace for Mobile, a store for cellphone downloads along the lines of Apple's App Store, these people said.

While Microsoft is involved in the design of the phone's software and hardware, a third party is expected to build the device, just as Google has worked closely with partners to make handsets based on its Android operating system, some of these people said.