Palm OS Unit Eyes Spinout by Mid-year

Palm and its shareholders will not be taxed on the distribution of PalmSource shares, the Internal Revenue Service has ruled.

Shares of PalmSource, a Palm subsidiary that develops and licenses the operating systems for handhelds, are expected to be doled out to Palm shareholders in the first half of 2003, pending approval by Palm directors and the Securities and Exchange Commission.

“The IRS ruling puts us another step closer to achieving our objective of creating two independent companies, each focused on the strategies required to strengthen its respective leadership position within the mobile-computing industry,” Eric Benhamou, Palm chairman and CEO said in a statement.

Milpitas, Calif.-based Palm has been laying the groundwork to spin out its subsdiary since July 2001 when it announced separate corporate structure for PalmSource, as well as for its Palm Soulutions Group, which oversees Palm-branded handhelds, enterprise software and peripherals.

Since then, PalmSource has elected its own directors, secured $20 million in outside investment from electronics giant Sony (good for a 6 percent ownership stake).

Sony’s Clie handheld line uses the Palm OS, along with PDAs from manufacturers such as Handspring and Samsung. The deal also calls for Sony and PalmSource to expand their business and technical collaboration.

PalmSource trumpets its OS as running 24 million devices, but it has been losing ground to Microsoft Pocket PC and devices running Windows CE.

Palm saw its market share slip in the second quarter, as customers awaited the release of its latest devices powered by Palm OS 5. According to Gartner Dataquest, the Palm OS captured 50 percent of the worldwide PDA market, while Microsoft Windows CE PDAs had 28 percent.

The company is also looking for growth in the next generation of wireless devices. For example, last month it announced deals to install its OS on new phones from and Samsung Telecommunications America. The phones combine color screens and the functionality of a Palm OS device.