According to the 10-K statement, PalmSource failed to meet certain milestones as per a co-development agreement Palm signed to renew the Palm OS license "relieving us of our obligation to make minimum royalty payments under the license agreement after calendar year 2006." These conditions haven't been made public by Palm or PalmSource.

Palm's director of product communications Jim Christensen said to PDAStreet, "The filing is part of a normal course of business. Companies are obligated to report risk factors." He added that "in May of 2005, Palm extended its license agreement with PalmSource, permitting Palm to continue making and marketing products based on Palm OS until the year 2010.”

So the company would still pay everything it owes to PalmSource, $42 million, for this year, but the $35 million for 2007, $20 million for 2008, and $10 million for 2009 have been waived. So instead of owing PalmSource a minimum, Palm will most likely only have to make a payment to PalmSource for every Garnet/ Palm OS 5 (the latest edition of the platform) device sold.

The regulatory filing adds, however, "We are presently in negotiations with PalmSource to expand our development and distribution rights to the current version of the Palm OS. If we are unable to successfully conclude these negotiations, it may adversely affect our ability to develop and distribute new products based on a next-generation version of the Palm OS."

Surprisingly, this next-gen mobile platform is a joint effort between Palm and PalmSource. "Palm has been collaborating with PalmSource to develop a new OS that has a Linux kernel," explained Christensen to PDAStreet. He emphasized, however, that "Palm is working with PalmSource on a revised plan to expand Palm’s own development and distribution rights of the Palm OS" and the company "remains committed to working with PalmSource to resolve the development issues."

Christensen acknowledges it is in the best interest of both companies for Palm to at least continue to license the current version of the Palm OS, Garnet. "Regardless, Palm intends to continue developing and selling products based on Palm OS 5/Garnet, in support of its current and future customers of Palm OS-based products," he said.

As we said earlier, the Palm platform is used in nearly all of Palm’s products today, in addition to at least one or two in its upcoming product roadmap. As for PalmSource, Palm is by far its largest licensee.

Overdue Update
And yet there have been no major updates to Garnet in four years. Palm has added many new features and UI improvements to the platform itself to help keep it competitive, even though others - like Windows Mobile and Symbian - have far outstripped the Palm OS in terms of performance. And the platform's market share has taken an equally huge hit, falling far behind market leader Symbian, as well as RIM BlackBerry, Linux (mostly thanks to Motorola) and Windows Mobile. Palm is really the only vendor keeping it afloat.

For instance, there is yet to be a Palm OS smartphone with GSM/UTMS high-speed data cellular networking. In Garnet you can't run two applications at the same time either like with the platform’s competitors as well. Another reason the next-gen edition is so important.

"The now-ancient Palm OS 5 (Garnet) suffers from a paucity of enterprise-friendly features, such as robust security, VPN capability and, most notably, an inability to multitask," said Carmi Levy, senior research analyst at Info-Tech Research Group to Unstrung. "It should have been put out to pasture long ago, but Palm has dropped the ball enough times in the interim that most enterprises can’t be blamed for looking elsewhere. It’s impossible to plan a mobile roadmap when the vendor lacks a roadmap of its own."

As for PalmSource, it really isn't going to develop a future version of the Palm OS anyway, but a whole new platform built on a Linux kernel with some Palm platform features. ALP merges open source components—GIMP ToolKit (GTK+), GStreamer, and SQLite—with PalmSource’s middleware (messaging and telephony), HotSync, Palm Desktop and personal information management expertise, parent company ACCESS's Netfront Web browser, and a new graphic user interface and application framework code-named MAX. Expect both ALP and MAX to both receive new names by the time PalmSource ships the smartphone platform to manufacturers and developers.

ACCESS said to IDG it is continuing to work on the OS at sites in the U.S., Europe and China.

PalmSource expects to release the ALP/MAX software development kit to software developers and hardware vendors by the end of 2006. ALP devices aren't due until later in 2007, however. Not as much of a problem for a company with deep pockets like ACCESS, but potentially a real issue for Palm if it is counting on ALP for its PDAs and smartphones.

Even with all the posturing in its annual report, Palm has yet to come out in support of ALP, which many are rightly or wrongly interpreting as the next version of the Palm OS. Today's news is the closest we've come to an acknowledgement of ALP by the PDA pioneer, however.

There are rumors that Palm is even developing a mobile Linux platform of its own. The company hired a slew of Linux engineers when it failed to re-acquire PalmSource and one job posting from Palm even mentioned a "new software platform."

Then again, as Christensen mentions above, Palm is working on a new OS with a Linux kernal (ALP?) with PalmSource. This would account for all the Linux activity on the part of Palm. And yet, Palm still doesn't mention ALP by name. So the Linux kernal may not even be ALP at all.

Palm bought the exclusive rights to the Palm brand back from PalmSource last year - when it then preceded to change its name back to Palm from palmOne - so it is the only one of the two that can name its platform the Palm OS; something PalmSource is disinclined to do anyway. But it is something Palm may want to do, since it is what customers have come to expect.

Perhaps Palm will continue to develop Garnet itself, separately from PalmSource, which has moved its resources to ALP development and has said no more Palm OS 5 development would occur on its part.

Lastly, Gartner analyst Todd Kort thinks the chances of Palm dumping the Palm OS anytime soon is pretty slim. "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," Kort explained to CNET.

Christensen basically confirms this when he says Palm intends to continue to create and market products based on Palm OS 5/Garnet. It really doesn't have a choice right now. Does it?