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Palm(Springs) Eternal

Handheld computer maker Palm is taking bigger steps towards revitalizing the company. The Santa Clara, Calif.-based firm Thursday filed its Form S-4 filing with the Securities and Exchange Commission as it moves forward its plan to spin off its software division, PalmSource.

The master plan also includes that estimated $169 million acquisition of Handspring , the rival company established by Palm founders Jeff Hawkins and Donna Dubinsky.

Palm says the proposed all-stock deal will help it compete in both the mobile computing and wireless communications market... and maybe, someday, profitability. When the acquisition is completed, Handspring will be combined with the Palm Solutions Group and renamed. Hawkins will become CTO, while Dubinsky, formerly CEO of Palm and Handspring, will take a seat on the board.

The filing does not specify exactly when the separation will occur, but the company has previously stated that it expects both deals to simultaneously close sometime this fall.

While both companies began selling handheld computers using the Palm OS, Gartner analyst Todd Kort said that their product lines now have little overlap. Handspring's wireless Treo line is more like a smart phone and is sold through wireless carriers.

"Palm never had much success with their wireless devices, they never seemed to quite get it right," Kort told internetnews.com.

The merger can be seen as two wounded soldiers propping each other up. Both companies have taken their licks in price wars in both the PDA and smart phone markets, Kort said, and both made disastrous real estate commitments back in the boom days.

"Handspring was not successful in generating lot of support for its PDAs," says Jupiter Research director Michael Gartenberg. "They got into cell phones a little earlier than the market was ready. That's where they got into trouble."

Analysts say Palm's better financial picture will make wireless network operators feel more confident about offering the Treo, while Handspring's carrier connections will give Palm better entry into the wireless industry.

Palm's statement said that spinning off PalmSource would create a level playing field among current and future licensees of the operating system; makers of competitive smart phones and PDAs will in future be disclosing proprietary information to a separate company, rather to a division of a rival.

"It's difficult to license a platform when you also compete with the licensees," Gartenberg said. "The spin-off means the software company will be free to sell to all comers and allow the marketplace to determine which product is best."

To be determined is whether even the combined companies can stave off the challenge of Microsoft's PocketPC and SmartPhone operating systems. Gartenberg says leadership at both the combined companies and the PalmSource spin-off will be "impeccable."

Gartner Dataquest pegs the installed base of Palm OS handheld devices at 20.6 million, with Windows CE at 8.1 million units. In the first quarter of this year, according to the analyst firm's numbers, about 30.2 percent of all enterprise PDA purchases were for Palm OS products, while 55 percent were Windows CE products. In the consumer market, Palm did much better; 29 percent of sales were PocketPC devices; while 56 percent of sales were Palm OS devices.

Despite the wide margins in some areas, analysts say Palm will need to do more than turn handsprings to keep ahead of the pack in market share.

Editor's note: A previous version of this story incorrectly identified Palm's consumer sales numbers.