Palm Inc. issued a statement on Friday alerting investors to delays in the development of its next operating system for mobile computing devices. The company said the delays could end up affecting its ability to compete in the smart phone and PDA markets.

PalmSource, a spin-off which Palm sold to Access Co. Ltd. of Japan in 2003, is in charge of developing the new OS, under contract with Palm. But, according to published reports, it has run into numerous delays.

In addition, Palm has told investors that PalmSource has violated a key clause in a royalties contract which required PalmSource to meet certain deadlines. As per the agreement between the two companies, Palm was to pay PalmSource licensing and royalty fees for use of the Palm OS in its PDAs and smart phones. While Palm will pay PalmSource the $42.5 million it owes for 2006, it claims it is no longer required to make the minimum payments of $35 million in 2007, $20 million in 2008, and $10 million in 2009, because of PalmSource’s delays in developing the new OS.

Some analysts have suggested that Palm is gearing up to launch new software which will work on the new OS and that this is the reason the company is issuing warnings about its future profitability. The company’s annual report states that delays in the development of the new OS have already had an effect on business.

“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,” the annual report states.

Jim Christensen, director of product communications for Palm, said in published reports that a new deadline for the operating system has yet to be set.

“We’re revising the plan to expand our development and distribution rights and working to resolve development issues,” Christensen was quoted as saying in a report on CNET News. “We’re committed to working with them [PalmSource] in the future.”

For more information about Palm, visit http://www.palm.com/us/.

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Patrick Barnard is Associate Editor for TMCnet and a columnist covering the telecom industry. To see more of his articles, please visit Patrick Barnard’s columnist page.