Asustek kicked off an entirely new category in the mobile computing space when it presented a prototype of its Eee PC at Taiwan's Computex trade show two years ago. Since then, many users have embraced netbook PCs for their small size, light weight and low cost. Their popularity pushed Microsoft to extend the life of Windows XP and they've turned out to be one of the bright spots in the PC industry over the last few months.

But the sector hasn't been a hotbed of innovation. Except for a few exceptions, most netbooks share pretty similar specs and are based on the same Intel Atom processor and Microsoft Windows XP operating system. But now, as the netbook sector enters its third year, new chips and operating systems hold the potential for massive change in the sector.

Leading the charge on the hardware side are Qualcomm and Nvidia.

Qualcomm has produced a new chip called the Snapdragon that uses less power than Intel's Atom, so it runs cooler and doesn't require a heatsink. That means laptops built with it can be thinner and have a longer battery life -- Qualcomm expects between 8 and 10 hours. The chip comes with a feature that will be appreciated by any traveller: compatibility with both major cell phone standards in use worldwide.

But there are potential drawbacks. Qualcomm's processors don't understand the x86 instruction set used by chips from Intel and AMD, so they won't run mainstream Windows. Instead, netbook makers are turning to Linux, which has been ported to many non-x86 processor architectures.

Prototypes of Snapdragon machines, and some based on similar ARM-based chips from companies like Freescale and Texas Instruments, were on show at last week's Computex, but no one was talking launch dates.

NVidia's proposition doesn't attempt to cut Intel out of the equation. It has developed a graphics chip called Ion to supplement the Atom processor and provide some nice performance gains.

"We believe that when a consumer shells out 300 dollars to buy a PC they don't say to themselves 'I didn't pay very much for a PC and I deserve a lousy experience,'" said Jen-Hsun Huang, CEO of Nvidia. "Between these two processors we would be able to enable a really delightful experience whether you're playing games, streaming video or wanting to create some home movies yourself."

In several demonstrations at Computex Nvidia showed Atom-based computers with the Ion chip could transcode video for a portable media player about 5 times faster than a computer based on Atom alone. The Ion can also add multimedia functions like Blu-ray Disc playback to the small, cheap Atom-based computers.

Intel isn't sitting still during this assault on the netbook market. The company continues to refine the Atom platform and the latest version of the platform, known by the code-name Pine Trail, has just been released. It consolidates the number of chips required from four to three and should lead to thinner netbooks with longer battery life and, possibly, lower prices.

On the operating system side the dominance of Windows XP remains strong although, due largely to the ARM-based chips, there's renewed talk about Linux.

Back in 2007 the first prototype of the Asus Eee PC ran Linux and despite a lot of early talk among PC makers about the OS consumers have shown a strong preference for Windows XP. Whether Linux can make it this time remains to be seen but a couple of flavors of the open-source operating system are attracting attention.

Most talked about is Google's Android operating system that is in use on some smart phones. Several prototype devices running Android are on show at Computex although the current iteration of the OS hasn't been adapted for the technically richer environment that netbooks. For that reason many are saying it's quite ready for netbook use.

A second operating system, Moblin, is also attracting interest. Moblin was originally developed by Intel but the company recently turned over stewardship of the OS to the Linux Foundation in the hopes of building wider industry support for it.

How much these technologies will affect the netbooks of tomorrow won't become clearer until closer to Computex 2010 but there's no doubt that several of the biggest names in the netbook market feel there's a lot more room for innovation.

"Acer strongly believes today's netbook is not close to perfection at all," said Jim Wong, president of global product operations at Acer. "Today the netbook is not anytime, anywhere, all the time. The battery life is not long enough, the connections are on-and-off and it's influenced by a lot of things. So we have a lot of room to improve."