Palm Inc. on Friday warned investors that delays in Palm's next operating system are affecting the company's ability to effectively compete in smart phone and PDA markets.

Palm indicated that its spin-off company which develops the operating system, PalmSource, is suffering from considerable development delays as it strives to build its next-generation software.

In its annual report, Palm also indicated that its sister company had violated royalty contracts established between the two. PalmSource, sold to Access Co. Ltd. of Japan in 2003, did not meet some of the deadlines set out by the agreement according to Palm.

The Sunnyvale Calif.-based company must pay Access a minimum license and royalty fee of US$42.5 million a year this year, but the minimum payment obligation in future years has been waived because Access missed the development dates. Palm also said it owed Access royalties and license fees totaling $35.4 million in its fiscal year to May 31, and $32 million in the preceding fiscal year.

Jim Christensen, director of product communications for Palm said that a new deadline for the operating system has yet to be set but appropriate measures were being taken to resolve the current issues.

We're revising the plan to expand our development and distribution rights and working to resolve development issues, he said We're committed to working with them in the future.

Palm revolutionized the industry with the first commercially successful PDA in 1996 and shortly thereafter introduced cell phone-PDA hybrids, called smart phones. It has seen increasing competition from from RIM, Nokia, Motorola, HTC and others.

However, Vivek Arya of Merril Lynch compared Palm to Apple Computer, saying its strengths will help it compete.

In his report issued last Wednesday, Arya said Palm's highly-regarded ease-of-use and industrial design should set it apart from competition.

Japan Electronics Smartphone