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PalmSource delays hurting Palm?

Palm warns that delays in new OS are bad for business, but it's working with PalmSource on a new deadline.

Palm on Friday warned investors that development delays by PalmSource on Palm's next operating system have hurt the hardware maker's ability to compete in the smart phone and PDA markets.

PalmSource, Palm's spun-off software division, has also violated a royalties contract, Palm said in its annual report.

Despite those potential hurdles, Palm says it is continuing to work with PalmSource to develop , though no timetable has been set.

Palm sold PalmSource to mobile device software maker Access in 2005 for $324.3 million.

"(A new deadline) hasn't been established, but we're revising the plan to expand our development and distribution rights and working to resolve development issues," Jim Christensen, director of product communications for Palm, told CNET "We're committed to working with them in the future."

The contract in question required Palm to pay PalmSource licensing and royalty fees for use of the Palm OS in its PDAs and smart phones. While the company will pay the $42.5 million owed for 2006, Palm is no longer required to make the minimum payments of $35 million in 2007, $20 million in 2008, and $10 million in 2009 because the contract was "subject to conditions that have not been met," according to the report.

Christensen declined to elaborate on those conditions, saying they have not yet been made public.

The annual report made it clear to investors that the repeated delays in the development of a next-generation operating system have hurt business, saying, "We cannot assure you that the Palm OS and/or our efforts to customize the Palm OS will continue to draw the customer interest necessary for the Palm OS to provide us with a level of competitive differentiation."

PalmSource did not return phone calls or e-mails seeking comment.

Though Christensen said Palm was fulfilling its obligation to inform investors of all possible risk factors, some say the situation could be a case of Palm positioning itself for future development agreements with PalmSource.

Warning not to make "a mountain out of a molehill," Gartner analyst Todd Kort said he believes the statements made in the annual report could be a sign of posturing by Palm.

"Palm has a product in development now that is going to use Palm OS. I think they're probably going to have a product in the market, certainly even the (Treo) 700p is going to be in market, in calendar year 2007. For them to say they're not going to use Palm OS anymore is not very likely, in my opinion. It could be sort of a threat. Until Palm has something other than a Windows product, like a Linux product available, I don't think they're in a very strong position."