(Business 2.0) – When Palm split in two last fall, the consensus was that its software unit, PalmSource, would have an easier go than the gadget makers at PalmOne. PalmSource, creator of the OS powering the Treo and all other Palm devices, seemed liberated to grab new customers from among former rival PDA makers like Dell and Hewlett-Packard.

As it turned out, however, PalmSource has struggled to sign new licensees. That has allowed Microsoft to pull even in the PDA market. The toll: PalmSource has lost $12 million in nine months, and its stock is down by half to the low 20s.

Far more damaging, though, was PalmSource's failure to capitalize on the boom in smartphones. With no coherent strategy for getting its OS into other high-end phones, PalmSource watched while Motorola recently went with Microsoft, and as Symbian, an OS created by Nokia and other phone giants specifically for smartphones, took a commanding lead. The Treo's success has given PalmSource a foothold, but no more than that. It will account for just 5 percent of smartphone sales this year. And as Symbian and Microsoft gain popularity, even PalmOne may be forced to license their systems in the future. PalmSource says its latest version, Cobalt, will give it traction with other phone makers. If not, we may soon be hearing the sound of only one Palm clapping. -- MATTHEW MAIER