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PalmSource cuts 18 percent of work force

The operating system subsidiary of handheld maker Palm lays off employees from all divisions within the company as it prepares to spin off from its parent.

PalmSource, the operating system subsidiary of handheld company Palm, cut 18 percent of its work force this week.

The Sunnyvale, Calif.-based company laid off employees from all divisions within the company, according to Gabi Schindler, PalmSource's senior vice president of marketing. Schindler declined to comment on the specific number of employees let go.

"We're subject to the same market conditions that other companies are experiencing...We had to bring our costs in line with revenue," Schindler said. "Where and when it is strategically important, we will hire new people."

The cuts come amid a slump in the handheld industry; shipments in 2002 dipped about 9 percent to 12.1 million units, compared with 2001, according to Dataquest, a unit of research firm Gartner. The Palm operating system still dominates the handheld market and is used in 55.2 percent of units shipped, or 6.7 million handhelds. About 25.7 percent of handhelds shipped, or 3.1 million units, use Microsoft's Windows CE operating system.

PalmSource also grew its European retail market share late last year, according to sales data from GFK Marketing Services, and it struck licensing agreements with two major Chinese manufacturers, Legend Group and Group Sense.

The layoffs, first reported Friday by the San Jose Mercury News, come as parent company Palm prepares to spin off PalmSource within the first half of this year, pending approval from the Palm board of directors and the Securities and Exchange Commission.

A December ruling by the Internal Revenue Service should help the process of separating PalmSource from Palm. In January, Palm said it had received a ruling from the IRS that a distribution of PalmSource shares to Palm investors will not be taxed by the federal government.

After the separation, PalmSource will continue to focus on developing and marketing the Palm operating system while Palm's hardware group, the Palm Solutions Group, will continue to concentrate on developing devices using the OS.

A major shareholder in PalmSource will be OS-licensee Sony Electronics, which last year invested $20 million in PalmSource for a 6 percent stake in the company. Sony is valuing the subsidiary at $333 million.