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PalmSource takes hit on investment report

Analysts say PalmSource's key operating system licensee, PalmOne, will offer a version of its Treo handheld that uses Microsoft's OS.

Shares of PalmSource, the handheld operating system developer, dipped Monday on an investment bank's report that said key licensee PalmOne will--in addition to using PalmSource's product--begin using Microsoft's operating system for handhelds in its Treo line of devices.

PalmOne representatives disputed the contents of the research note, from Needham & Co. The note said that PalmOne "tacitly admitted" it was working to make Microsoft's operating system available on the popular Treo line of phones. The devices currently use PalmSource's Palm OS, and PalmOne is PalmSource's biggest customer.

The two companies used to be one firm but recently split from each other, in order to be more flexible.

Shares of PalmSource fell $2.09 per share, or 9.32 percent, to close at $20.33. Shares were unchanged in after-hours trading.

PalmOne representatives said the report was based on a misunderstanding, adding that the company is platform-agnostic. The representatives also said the company as a policy does not comment on products that may or may not be under development.

PalmSource declined to comment on the report. Microsoft representatives declined to comment on what they called rumors and speculation.

The report said in part, "We know that an announcement is virtually certain," citing comments made by executives following an event on Oct. 5 for PalmOne analysts. However, the report said that the analysts, Charles Wolf and Justin Udelhofen, did not know when a Microsoft version of the Treo would be released.

Udelhofen added that making Microsoft's operating system available on PalmOne's Treo devices would render the products more appealing to large businesses that use other Microsoft operating systems. The analyst said he didn't expect PalmOne to ditch the Palm OS and that Microsoft operating system support would complement the Palm OS.