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Palm's Major Credibility Problem

Palm's got a credibility problem, and it's the kind of thing that seems so insidious, and so systemic, that it might pose a deep threat to the company's ability to keep going.

That's because the number of people who believe what this company is saying seems to be dwindling.

The latest dust up occurred yesterday with the company pre-announcing its quarter, dramatically slashing its revenue outlook in the current quarter and for the full year.

And then, an internal memo from CEO Jon Rubinstein was leaked which suggests that Palm's top domestic carriers, Verizon and Sprint , have stopped ordering new phones. Which would all be bad enough on its own.

But the story has another angle worth examining.

Let's take a look at the chronology here: On February 11, rumors began to circulate that Palm's Chinese manufacturing partner had suspended work on Palm's Pre and Pre-Plus smart phones. When asked about this, Palm released a statement saying that because of the Chinese New Year, and because of the new deal with Verizon, the company was ramping up ahead of the holiday, and then would resume manufacturing afterward. Palm also made a passing reference to trying to keep manufacturing in line with customer orders. But it was its casual connection to the Chinese New Year that made a suspension in manufacturing no big deal.

Well, it's a decidedly bigger deal in the context of news now that Verizon and Sprint have stopped ordering new phones. So, when did Palm know about that? A source at Palm confirmed to me this morning that the company did in fact know three weeks ago that Verizon and Sprint had halted new orders of the company's phones. The question at the time was not whether that part of the Palm story ought to be disclosed; instead it was centered on, "Can we back this up? When it comes time to pre-announce, can we back this up?"

This all smells wildly fishy to me.

If the company knew three weeks ago that Verizon and Sprint were stopping orders, why not just announce it then? Why dribble the news out, and attribute a manufacturing stoppage to the Chinese New Year, which would ultimately not pass the smell test since the work holiday typically only lasts a week and Palm's manufacturing has been suspended for the entire month?

I put these questions to Palm spokesperson Lynn Fox earlier today. She says, "We ramped up production, just before the Chinese New Year and in preparation for Verizon and intend to start the line back up at the end of February, and that would have been the same even if we didn't pre-announce."

That might be the case, but the analysts I'm talking to are furious.

Management has a serious credibility issue, I'm told, and this only makes it substantially worse. Another told me that Palm's attempts to throw investors off the scent of an order slowdown by its major customers by connecting a manufacturing stoppage to the Chinese New Year isn't nearly as forthcoming as the company ought to be. (He had more colorful language to share, but that's what he meant.)

This is potentially a big problem for Palm.

Better put, it's potentially ANOTHER big problem for Palm. The company seems to be playing fast and furious with the truth. Analysts are wary. And judging by the company's continuing plunge, investors are throwing in the towel. Difficulty competing in the marketplace is one thing; losing trust is quite another.

Questions? Comments? TechCheck@cnbc.com