10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 3, 2006

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to

Commission File No. 000-29597

Palm, Inc.

(Exact name of registrant as specified in its charter)

Delaware	94-3150688
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

950 West Maude Avenue
Sunnyvale, California
94085
(Address of principal executive offices and zip code)

Registrant’s telephone number, including area code: (408) 617-7000

Former name, former address and former fiscal year, if changed since last report: N/A

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of March 31, 2006, 102,975,477 shares of the Registrant’s Common Stock were outstanding.

This report contains a total of 49 pages of which this page is number 1.

Palm, Inc. (*)
Table of Contents

	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations Three and nine months ended February 28, 2006 and 2005		3
Condensed Consolidated Balance Sheets February 28, 2006 and May 31, 2005		4
Condensed Consolidated Statements of Cash Flows Nine months ended February 28, 2006 and 2005		5
Notes to Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
Item 3. Quantitative and Qualitative Disclosures About Market Risk		44
Item 4. Controls and Procedures		44
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		45
Item 6. Exhibits		46
Signatures		49
EXHIBIT 10.25
EXHIBIT 10.26
EXHIBIT 10.27
EXHIBIT 10.28
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1

(*) Palm’s 52-53 week fiscal year ends on the Friday nearest May 31, with each fiscal quarter ending on the Friday generally nearest August 31, November 30 and February 28. For presentation purposes, the periods are shown as ending on August 31, November 30, February 28 and May 31, as applicable.

The page numbers in this Table of Contents reflect actual page numbers, not EDGAR page tag numbers.

Palm, Treo, Palm OS, and Graffiti are among the trademarks or registered trademarks owned by or licensed to Palm, Inc. All other brand and product names are or may be trademarks of, and are used to identify products or services of, their respective owners.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Palm, Inc.

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended				Nine Months Ended
	February 28,				February 28,
	2006		2005		2006			2005
Revenues	$	388,540	$	285,265	$	1,175,373		$	934,590
Costs and operating expenses:
Cost of revenues (*)		257,862		196,773		804,394			645,054
Sales and marketing		53,298		44,391		152,774			126,994
Research and development		38,146		23,410		98,256			62,385
General and administrative		9,683		9,416		30,388			30,527
Amortization of intangible assets and deferred stock-based compensation (**)		791		2,520		5,737			7,386
Employee separation costs		—		3,666		—			3,666
Restructuring charges		—		—		1,954			—
Total costs and operating expenses		359,780		280,176		1,093,503			876,012
Operating income		28,760		5,089		81,870			58,578
Interest and other income (expense), net		3,406		1,205		6,980			1,782
Income before income taxes		32,166		6,294		88,850			60,360
Income tax provision (benefit)		2,227		1,921		(220,155	)		11,702
Net income	$	29,939	$	4,373	$	309,005		$	48,658
Net income per share:
Basic	$	0.30	$	0.04	$	3.08		$	0.50
Diluted	$	0.28	$	0.04	$	2.95		$	0.47
Shares used in computing per share amounts:
Basic		101,109		97,501		100,172			96,507
Diluted		105,972		102,882		104,921			102,592

(*)	Cost of revenues excludes the applicable portion of amortization of intangible assets and deferred stock-based compensation.
(**)	Amortization of intangible assets and deferred stock-based compensation:

Cost of revenues	$	3	$	30	$	388	$	693
Sales and marketing		506		1,629		4,086		4,997
Research and development		152		64		280		192
General and administrative		130		463		983		1,170
Employee separation costs		—		334		—		334
	$	791	$	2,520	$	5,737	$	7,386

See notes to condensed consolidated financial statements.

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Palm, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except par value amounts)

(Unaudited)

	February 28,			May 31,
	2006			2005
ASSETS
Current assets:
Cash and cash equivalents	$	131,643		$	128,164
Short-term investments		404,632			234,535
Accounts receivable, net of allowance for doubtful accounts of $4,168 and $6,874, respectively		119,078			140,162
Inventories		51,065			35,544
Deferred income taxes		82,495			—
Investment for committed tenant improvements		4,936			6,182
Prepaids and other		10,303			8,225
Total current assets		804,152			552,812
Restricted investments		775			775
Land held for sale		60,000			—
Land not in use		—			60,000
Property and equipment, net		22,550			19,158
Goodwill		166,538			249,161
Intangible assets, net		26,123			30,373
Deferred income taxes		325,349			36,217
Other assets		1,512			1,536
Total assets	$	1,406,999		$	950,032
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	156,525		$	135,720
Income taxes payable		49,633			8,441
Accrued restructuring		9,683			15,400
Provision for committed tenant improvements		4,936			6,182
Current portion of long-term convertible debt		35,000			—
Other accrued liabilities		200,342			156,009
Total current liabilities		456,119			321,752
Non-current liabilities:
Long-term convertible debt		—			35,000
Other non-current liabilities		13,381			12,257
Stockholders’ equity:
Preferred stock, $0.001 par value, 125,000 shares authorized; none outstanding					—
Common stock, $0.001 par value, 2,000,000 shares authorized; outstanding: 102,069 shares and 98,977 shares, respectively		102			99
Additional paid-in capital		1,454,245			1,406,885
Unamortized deferred stock-based compensation		(1,565	)		(2,422	)
Accumulated deficit		(515,246	)		(824,251	)
Accumulated other comprehensive income (loss)		(37	)		712
Total stockholders’ equity		937,499			581,023
Total liabilities and stockholders’ equity	$	1,406,999		$	950,032

See notes to condensed consolidated financial statements.

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Palm, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Nine Months Ended
	February 28,
	2006			2005
Cash flows from operating activities:
Net income	$	309,005		$	48,658
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		12,294			12,105
Amortization		5,737			7,386
Deferred income taxes		(272,634	)		(600	)
Realized (gain) loss on equity and short-term investments		607			(26	)
Changes in assets and liabilities:
Accounts receivable		21,084			(37,467	)
Inventories		(15,521	)		(31,590	)
Prepaids and other		(964	)		522
Accounts payable		20,805			37,795
Income taxes payable		41,192			(141	)
Tax benefit related to stock options		5,843			—
Accrued restructuring		(5,717	)		(7,875	)
Other accrued liabilities		44,558			47,789
Net cash provided by operating activities		166,289			76,556
Cash flows from investing activities:
Purchase of property and equipment		(15,686	)		(9,312	)
Purchase of short-term investments		(521,446	)		(263,870	)
Sale of restricted investments		—			400
Sale of equity securities		—			1,200
Sale of short-term investments		349,935			186,935
Net cash used in investing activities		(187,197	)		(84,647	)
Cash flows from financing activities:
Proceeds from issuance of common stock, employee stock plans		24,387			15,903
Net cash provided by financing activities		24,387			15,903
Change in cash and cash equivalents		3,479			7,812
Cash and cash equivalents, beginning of period		128,164			98,569
Cash and cash equivalents, end of period	$	131,643		$	106,381
Other cash flow information:
Cash paid for income taxes	$	4,405		$	6,264
Cash paid for interest	$	1,773		$	1,847

See notes to condensed consolidated financial statements.

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Palm, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1.	Basis of Presentation
	The accompanying unaudited condensed consolidated financial statements have been prepared by Palm, Inc. (formerly palmOne, Inc.) (“Palm,” the “Company,” “us,” “we” or “our”), without audit, pursuant to the rules of the Securities and Exchange Commission, or SEC. In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments necessary for a fair presentation of Palm’s financial position as of February 28, 2006 and results of operations for the three and nine months ended February 28, 2006 and 2005 and cash flows for the nine months ended February 28, 2006 and 2005. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in Palm’s Annual Report on Form 10-K for the fiscal year ended May 31, 2005. The results of operations for the nine months ended February 28, 2006 are not necessarily indicative of the operating results for the full fiscal year or any future period.
	Palm was incorporated in 1992 as Palm Computing, Inc. In 1995, the Company was acquired by U.S. Robotics Corporation. In 1996, the Company sold its first handheld computer, quickly establishing a significant position in the handheld computing industry. In 1997, 3Com Corporation, or 3Com, acquired U.S. Robotics. In 1999, 3Com announced its intent to separate the handheld device business from 3Com’s business to form an independent, publicly-traded company. In preparation for that spin-off, Palm Computing, Inc. changed its name to Palm, Inc., or Palm, and was reincorporated in Delaware in December 1999. In March 2000, Palm sold shares in an initial public offering and concurrent private placements. In July 2000, 3Com distributed its remaining shares of Palm common stock to 3Com stockholders.
	In December 2001, Palm formed PalmSource, Inc., or PalmSource, a stand-alone subsidiary for its operating system business. On October 28, 2003, Palm distributed all of the shares of PalmSource common stock held by Palm to Palm stockholders. On October 29, 2003, Palm acquired Handspring, Inc., or Handspring, and also changed the Company’s name to palmOne, Inc., or palmOne.
	In connection with the spin-off of PalmSource, the Palm Trademark Holding Company, LLC, was formed to hold all trade names, trademarks, service marks and domain names containing the word or letter string “palm”. In May 2005, the Company acquired PalmSource’s interest in the Palm Trademark Holding Company, LLC, including the Palm trademark and brand, for $30.0 million, payable over 3.5 years. In July 2005, the Company changed its name back to Palm, Inc., or Palm.
	Palm’s 52-53 week fiscal year ends on the Friday nearest to May 31, with each fiscal quarter ending on the Friday generally nearest to August 31, November 30 and February 28. Fiscal year 2006 contains 52 weeks and fiscal year 2005 contained 53 weeks. For presentation purposes, the periods are shown as ending on August 31, November 30, February 28 and May 31, as applicable.
	On February 13, 2006, the Company announced that its Board of Directors had declared a two-for-one stock split to be effected in the form of a stock dividend of its common stock to stockholders of record at the close of business on February 28, 2006 (“Stockholders of Record”). The stock dividend was distributed to Stockholders of Record on March 14, 2006. All share and per share amounts referred to in this Form 10-Q have been adjusted to reflect this stock split.
	Certain prior period balances have been reclassified to conform to current quarter presentation.
2.	Stock-Based Compensation
	Palm has employee stock plans, which are described more fully in the notes to consolidated financial statements included in Palm’s Annual Report on Form 10-K for the fiscal year ended May 31, 2005. Palm accounts for awards under its employee stock plans under the intrinsic value method prescribed by Accounting Principles Board Opinion, or APB, No. 25, Accounting for Stock Issued to Employees, and Financial Accounting Standards Board Interpretation, or FIN, No. 44, Accounting for Certain Transactions Involving Stock Compensation (an Interpretation of APB No. 25), and has adopted the disclosure-only provisions of Statement of Financial Accounting Standards, or SFAS, No. 123, Accounting for Stock-Based Compensation. The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 and related guidance.
	In accordance with APB No. 25, Palm generally recognizes no compensation expense with respect to shares issued under its employee stock purchase plan and options granted to employees and directors under its stock option plans, referred to together as “options.” The Company’s Amended and Restated 1999 Stock Option Plan also allows for the issuance of restricted stock awards, under which shares of common stock are issued at par value to key employees, subject to certain restrictions, and for which compensation expense equal to the fair market value on the date of the grant is recognized over the vesting period.

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Pursuant to FIN No. 44, options assumed in a purchase business combination are valued at the date of acquisition at their fair value calculated using the Black-Scholes option valuation model. The fair value of the assumed options is included as part of the purchase price. The intrinsic value attributable to the unvested options is recorded as unearned stock-based compensation and amortized over the remaining vesting period of the related options.

The following table illustrates the effect on net income and net income per share if Palm had elected to recognize stock-based compensation expense based on the fair value of the options granted to employees at the date of grant as prescribed by SFAS No.
123. For the purpose of this pro forma disclosure, the estimated fair value of the options is assumed to be amortized to expense over the options’ vesting periods, using the multiple option approach (in thousands, except per share amounts):

	Three Months Ended						Nine Months Ended
	February 28,						February 28,
	2006			2005			2006			2005(1)
Net income, as reported	$	29,939		$	4,373		$	309,005		$	48,658
Add: Stock-based compensation expense included in reported net income, net of related tax effects		450			250			1,620			1,240
Less: Stock-based compensation expense determined under fair value method for all awards, net of related tax effects		(9,365	)		(10,677	)		(26,063	)		(23,108	)
Pro forma net income (loss)	$	21,024		$	(6,054	)	$	284,562		$	26,790
Net income per share, as reported
Basic	$	0.30		$	0.04		$	3.08		$	0.50
Diluted	$	0.28		$	0.04		$	2.95		$	0.47
Pro forma net income (loss) per share
Basic	$	0.21		$	(0.06	)	$	2.84		$	0.28
Diluted	$	0.20		$	(0.06	)	$	2.73		$	0.26

(1) Stock-based compensation expense determined under the fair value method for the nine months ended February 28, 2005 includes amortization related to options cancelled in connection with the option exchange program initiated on March 1, 2004.

The fair value of each option grant during the three and nine months ended February 28, 2006 and 2005, was estimated at the date of grant using the Black-Scholes option valuation model with the following weighted average assumptions:

	Three Months Ended						Nine Months Ended
	February 28,						February 28,
	2006			2005			2006			2005
Risk-free interest rate		4.6	%		3.5	%		4.3	%		3.0	%
Volatility		75	%		75	%		75	%		75	%
Option term (in years)		3.49			3.49			3.47			3.18
Dividend yield		0.0	%		0.0	%		0.0	%		0.0	%

	The weighted average estimated fair value of stock options granted were $9.69 per share and $8.25 per share during the three months ended February 28, 2006 and 2005, respectively, and $7.65 per share and $7.94 per share during the nine months ended February 28, 2006 and 2005, respectively.
3.	Recent Accounting Pronouncements
	In December 2004, the Financial Accounting Standards Board, FASB, issued SFAS No. 123(R), Share-Based Payment. This statement replaces SFAS No. 123, Accounting for Stock-Based Compensation and supersedes APB No. 25, Accounting for Stock Issued to Employees. SFAS No. 123(R) requires companies to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees and to record compensation cost for all stock awards granted after the required date of adoption and to awards modified, repurchased, or cancelled after that date. In addition, the Company is required to record compensation expense for the unvested portion of previously granted awards that remain outstanding at the date of adoption as such previous awards continue to vest. SFAS No. 123(R) will be effective for years beginning after June 15, 2005, which is Palm’s fiscal year 2007. Management has not yet determined the impact that SFAS No. 123(R) will have on its financial position, results of operations and statement of cash flows, but expects that the impact will be material.

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4.	Net Income Per Share
	Basic net income per share for the three and nine months ended February 28, 2006 and 2005 is calculated based on the weighted average shares of common stock outstanding during the period, excluding shares of restricted stock subject to repurchase. Diluted net income per share for the three and nine months ended February 28, 2006 and 2005 is calculated based on the weighted average shares of common stock outstanding during the period, plus the dilutive effect of shares of restricted stock subject to repurchase, stock options, the current portion of long-term convertible debt and warrants outstanding, calculated using the treasury stock method.
	The following table sets forth the computation of basic and diluted net income per share for the three and nine months ended February 28, 2006 and 2005 (in thousands, except per share amounts):

	Three Months Ended				Nine Months Ended
	February 28,				February 28,
	2006		2005		2006		2005
Numerator:
Numerator for basic net income per share	$	29,939	$	4,373	$	309,005	$	48,658
Effect of dilutive securities:
Interest expense on long-term convertible debt, net of taxes		263		—		788		—
Numerator for diluted net income per share	$	30,202	$	4,373	$	309,793	$	48,658
Denominator:
Shares used to compute basic net income per share (weighted average shares outstanding during the period, excluding shares of restricted stock subject to repurchase)		101,109		97,501		100,172		96,507
Effect of dilutive securities:
Restricted stock subject to repurchase		47		252		35		253
Current portion of long-term convertible debt		1,084		—		1,084		—
Stock options and warrants		3,732		5,129		3,630		5,832
Shares used to compute diluted net income per share		105,972		102,882		104,921		102,592
Basic net income per share	$	0.30	$	0.04	$	3.08	$	0.50
Diluted net income per share	$	0.28	$	0.04	$	2.95	$	0.47

	Weighted options to purchase Palm common stock of approximately 1,196,000 and 6,465,000 for the three months ended February 28, 2006 and 2005, respectively, and approximately 4,586,000 and 3,047,000 for the nine months ended February 28, 2006 and 2005, respectively, were excluded from the computations of diluted net income per share because these options’ exercise prices were above the average market price during the period and the effect of including such stock options would have been anti-dilutive. Palm accounts for the effect of the current portion of long-term convertible debt in the diluted earnings per share calculation using the “if converted” method. Under that method, the current portion of long-term convertible debt is assumed to be converted to shares at a conversion price of $32.30, and interest expense, net of taxes, related to the current portion of long-term convertible debt is added back to net income. For the three and nine months ended February 28, 2005, approximately 1,084,000 shares were excluded from the computations of diluted net income per share because the effect would have been anti-dilutive.
5.	Comprehensive Income
	The components of comprehensive income are (in thousands):

	Three Months Ended						Nine Months Ended
	February 28,						February 28,
	2006			2005			2006			2005
Net income	$	29,939		$	4,373		$	309,005		$	48,658
Other comprehensive income (loss):
Unrealized loss on available-for-sale investments		(690	)		(310	)		(1,569	)		(546	)
Recognized loss (gain) included in earnings		5			(191	)		607			(26	)
Accumulated translation adjustments		285			87			213			730
Total comprehensive income	$	29,539		$	3,959		$	308,256		$	48,816

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6.	Cash and Available-for-Sale and Restricted Investments
	The Company’s cash and available-for-sale and restricted investments consist of (in thousands):

	February 28, 2006							May 31, 2005
	Adjusted		Unrealized			Carrying		Adjusted		Unrealized			Carrying
	Cost		Loss			Value		Cost		Loss			Value
Cash	$	66,471	$	—		$	66,471	$	44,341	$	—		$	44,341
Cash equivalents, money market funds		65,172		—			65,172		83,823		—			83,823
Total cash and cash equivalents	$	131,643	$	—		$	131,643	$	128,164	$	—		$	128,164
Short-term investments:
Federal government obligations	$	202,487	$	(1,298	)	$	201,189	$	86,936	$	(292	)	$	86,644
State and local government obligations		21,000		—			21,000		12,000		—			12,000
Corporate notes/bonds		174,822		(100	)		174,722		120,796		(159	)		120,637
Foreign corporate notes/bonds		7,745		(24	)		7,721		15,263		(9	)		15,254
	$	406,054	$	(1,422	)	$	404,632	$	234,995	$	(460	)	$	234,535
Investment for committed tenant improvements, money market funds	$	4,936	$	—		$	4,936	$	6,182	$	—		$	6,182
Restricted investments, certificates of deposit	$	775	$	—		$	775	$	775	$	—		$	775

	Due to the short-term nature of these investments, the carrying value approximates fair value. The unrealized losses on these investments were primarily due to interest rate fluctuations and are considered to be temporary in nature.
7.	Inventories
	Inventories consist of the following (in thousands):

	February 28,		May 31,
	2006		2005
Finished goods	$	49,798	$	33,567
Work-in-process and raw materials		1,267		1,977
	$	51,065	$	35,544

8.	Land held for sale
	In February 2006, the Company entered into a Purchase and Sale Agreement, or the Agreement, with Hunter/Storm, LLC, a California limited liability company, or the Buyer, pursuant to which the Company will sell approximately 39 acres of land located in San Jose, California for a total purchase price of $70.0 million. The Buyer has delivered a $100,000 refundable deposit to an escrow holder and will have 60 days following February 2, 2006, within which to complete due diligence. The Buyer may elect to terminate the Agreement at any time within such 60 day period and the initial deposit will be refunded to the Buyer. Following the initial due diligence period, if the Buyer elects to proceed with the purchase of the property, the Buyer will deliver an additional $200,000 deposit. Under certain circumstances and upon payment of the additional deposit, the Buyer may extend the due diligence period, during which period the Buyer may terminate the Agreement. However, upon the payment of the additional deposit, the entire deposit will become non-refundable, subject to certain other circumstances. At the closing date, the deposit made by the Buyer will be applied to the purchase price. Subject to the satisfaction of certain closing conditions, the sale is expected to close no later than February 2007.
9.	Business Combinations
	On October 29, 2003, Palm acquired Handspring, a leading provider of smartphones and communicators, exchanging 0.045 of a share of Palm common stock for each outstanding share of Handspring common stock and assuming outstanding options and warrants to purchase Handspring common stock based on this same exchange ratio. Palm derived the exchange ratio for the acquisition based on an arm’s length negotiation. The Handspring acquisition resulted in the issuance of approximately 27.2 million shares of Palm common stock (as adjusted for the March 14, 2006 2-for-1 stock split). The purchase price of $249.9 million is comprised of (a) approximately $209.2 million representing the fair value of Palm common stock issued to former Handspring stockholders, (b) $28.0 million representing the estimated fair value of Handspring options and warrants assumed using the Black-Scholes option valuation model, (c) $6.5 million of direct transaction costs and (d) $6.2 million of other liabilities directly related to the acquisition.

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The $6.2 million of other liabilities directly related to the Handspring acquisition includes $1.8 million related to workforce reductions primarily in the United States of approximately 50 Handspring employees, $3.7 million related to Handspring facilities not intended for use for Palm operations and therefore considered excess, and $0.7 million related to other miscellaneous charges incurred as a result of the acquisition which will not benefit Palm in the future. During fiscal year 2004, the Company adjusted the initial estimate of liabilities directly related to the acquisition as a result of greater than originally estimated costs for employee termination benefits and costs to exit certain facilities, then further refined those estimates in fiscal year 2005 as the result of lower costs than estimated during fiscal year 2004. Adjustments to the other liabilities directly related to the Handspring acquisition were recorded as a net increase in goodwill.

Accrued liabilities recognized in connection with the Handspring acquisition consist of (in thousands):

	Initial Liability
	Recognized at							Balance at					Balance at
	October 29,		Cash					May 31,		Cash			February 28,
	2003		Payments			Adjustments		2005		Payments			2006
Workforce reduction costs	$	1,805	$	(2,029	)	$	224	$	—	$	—		$	—
Excess facilities costs		3,689		(3,303	)		1,776		2,162		(272	)		1,890
Other		660		(673	)		13		—		—			—
	$	6,154	$	(6,005	)	$	2,013	$	2,162	$	(272	)	$	1,890

10.	Goodwill
	Changes in the carrying amount of goodwill are (in thousands):

	Total
Balance, May 31, 2004	$	257,363
Goodwill adjustments		(8,202	)
Balance, May 31, 2005		249,161
Goodwill adjustments		(82,623	)
Balance, February 28, 2006	$	166,538

	Goodwill adjustments during fiscal year 2005 of approximately $8.2 million were primarily the result of the release of the valuation allowance on a portion of the deferred tax assets associated with the Handspring acquisition and adjustments to the initial estimate of liabilities directly related to the Handspring acquisition as a result of lower costs than originally estimated for employee termination benefits and costs to exit certain facilities partially offset by the settlement of pre-acquisition litigation and adjustment to the Company’s estimated royalty obligations. Goodwill adjustments during the nine months ended February 28, 2006 of approximately $82.6 million are primarily the result of the release of the valuation allowance on a portion of the deferred tax assets associated with the Handspring acquisition. The Company will continue to adjust goodwill as required for changes in the value of deferred tax assets associated with the Handspring acquisition.
11.	Intangible Assets
	Intangible assets consist of the following (dollars in thousands):

		February 28, 2006							May 31, 2005
		Gross							Gross
	Amortization	Carrying		Accumulated					Carrying		Accumulated
	Period	Amount		Amortization			Net		Amount		Amortization			Net
Brand	240 months	$	27,200	$	(1,077	)	$	26,123	$	27,200	$	(57	)	$	27,143
Contracts and customer relationships	24 months		11,900		(11,900	)		—		11,900		(9,420	)		2,480
Customer backlog	4 months		4,200		(4,200	)		—		4,200		(4,200	)		—
Product technology	24 months		1,800		(1,800	)		—		1,800		(1,425	)		375
Trademarks	24 months		1,400		(1,400	)		—		1,400		(1,108	)		292
Non-compete covenants	24 months		400		(400	)		—		400		(317	)		83
		$	46,900	$	(20,777	)	$	26,123	$	46,900	$	(16,527	)	$	30,373

Amortization expense related to intangible assets was $0.3 million and $1.9 million for the three months ended February 28, 2006 and 2005, respectively, and $4.2 million and $5.8 million for the nine months ended February 28, 2006 and 2005, respectively. Estimated future amortization expense is $0.3 million for the remaining three months of fiscal year 2006 and approximately $1.4 million for each year thereafter through fiscal year 2025.

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12.	Deferred Income Taxes
	During the second quarter of fiscal year 2006, the Company determined, based on current and preceding years’ results of operations and anticipated profit levels in future periods, that it is more likely than not that its domestic deferred tax assets will be realized in the future and that it was appropriate to release the valuation allowance previously recorded against those deferred tax assets. As a result, during the second quarter of fiscal year 2006, the Company released $324.5 million of valuation allowance of which $16.4 million relating to previously exercised stock options was credited directly to additional paid-in capital, $81.8 million relating to net operating losses of Handspring prior to its acquisition was credited to goodwill and $226.3 million was recorded as a non-cash income tax benefit resulting in an increase in earnings.
	Through the third quarter of fiscal year 2006, the total valuation allowance reversal of $337.6 million consists of $56.7 million recognized as a result of income earned in the second and third quarters of fiscal year 2006 and $280.9 million representing amounts recognizable due to sufficient positive evidence regarding realization of these tax benefits through income in future fiscal years, and excludes the benefit relating to expected earnings for the remaining three months of fiscal year 2006. At February 28, 2006, Palm’s deferred tax assets were comprised of the tax effects of net operating loss carryforwards, of tax credit carryforwards and of temporary differences that will result in tax benefits in future years of $433.8 million, offset by a valuation allowance of $25.9 million. The valuation allowance at February 28, 2006 includes $16.4 million which will be reversed in the remaining three months of fiscal year 2006 based on expected earnings over that period. This will result in an effective tax rate which recognizes this benefit in those three months. The remaining valuation allowance of $9.5 million consists of an allowance of $1.8 million for capital loss carryforwards and state net operating loss carryforwards whose realization is not considered more likely than not, and $7.7 million relating to the tax benefit of stock option exercises which will be reversed and recognized as a credit to additional paid-in capital when the benefit is realized.
	The income tax expense for the three months ended February 28, 2006 was $2.2 million, which consisted of federal, state and foreign income taxes of approximately $15.3 million offset by the $13.1 million valuation allowance reversal. The income tax benefit for the nine months ended February 28, 2006 was $220.2 million, which consisted of the $239.4 million valuation allowance reversal described above, offset by federal, state and foreign income taxes of approximately $18.0 million and federal tax expense arising from adjustments for the Handspring net operating loss carryforward of $1.2 million.
13.	Commitments and Guarantees
	Palm facilities are leased under operating leases that expire at various dates through June 2014.
	In December 2001, Palm issued a subordinated convertible note in the principal amount of $50.0 million to Texas Instruments. In connection with the PalmSource distribution on October 28, 2003, the note was canceled and divided into two separate obligations. Palm retained an obligation in the amount of $35.0 million, or the Note, and the remainder was assumed by PalmSource. The Note was transferred from Texas Instruments to Metropolitan Life Insurance Company as of August 26, 2005, retaining the same terms. The Note bears interest at 5.0% per annum, is due in December 2006 and is convertible into Palm common stock at an effective conversion price of $32.30 per share. Palm may force a conversion at any time, provided its common stock has traded above $49.74 per share for a defined period of time. In the event Palm distributes significant assets, Palm may be required to repay a portion of the Note. The Note defines certain events of default pursuant to which the full amount of the Note plus interest could become due and payable.
	In May 2005, Palm acquired PalmSource’s 55 percent share of the Palm Trademark Holding Company resulting in full rights to the brand name Palm. The rights to the brand had been co-owned by the two companies since the October 2003 spin-off of PalmSource from Palm. Palm agreed to pay $30.0 million in five installments due in May 2005, 2006, 2007 and 2008 and November 2008, and granted PalmSource certain rights to Palm trademarks for PalmSource and its licensees for a four-year transition period. The remaining amount due to PalmSource was $22.5 million as of both February 28, 2006 and May 31, 2005.

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Palm is party to a software license agreement with PalmSource that grants Palm certain licenses to the PalmSource operating system and other related software. This agreement was amended and restated in May 2005 to provide for continued development, manufacture and marketing of Palm products based on the PalmSource operating system through 2009. Under the agreement, Palm agreed to pay PalmSource license and royalty fees based upon net revenue of its products which incorporate PalmSource software, as well as a source code license fee and maintenance and support fees. The initial source code license fee was $6.0 million paid in three equal annual installments of $2.0 million each in June 2003, June 2004 and June 2005. The continuing source code license fee was reduced under the amended license agreement to $1.2 million and is payable in three equal annual installments of $0.4 million each in June 2006, June 2007 and June 2008. Annual maintenance and support fees are approximately $0.7 million per year. The amended and restated agreement includes a minimum annual royalty and license commitment of $41.0 million, $42.5 million, $35.0 million, $20.0 million and $10.0 million for the contract years ending December 3, 2005 through 2009, respectively.

Palm also accrues for royalty obligations to other technology and patent holders based on unit shipments of its handheld computing and smartphone devices, as a percentage of applicable revenue for the net sales of products using certain software technologies or as a fully paid-up license fee, all as determined in accordance with the terms of the applicable license agreements. Where agreements are not finalized, accrued royalty obligations represent management’s current best estimates using appropriate assumptions and projections based on negotiations with third party licensors. Palm has accrued royalty obligations of $38.8 million and $32.0 million as of February 28, 2006 and May 31, 2005, respectively, including estimated royalties of $34.9 million and $29.7 million, respectively, which are reported in other accrued liabilities. While the amounts ultimately agreed upon may be more or less than the current accrual, management does not believe that finalization of the agreements would have had a material impact on the amounts reported for its financial position as of February 28, 2006 and May 31, 2005 or for the reported results for the three months then ended; however, the effect of finalization in the future may be significant to the period in which it is recorded.

Palm utilizes contract manufacturers to build its products. These contract manufacturers acquire components and build products based on demand forecast information supplied by Palm, which typically covers a rolling 12-month period. Consistent with industry practice, Palm acquires inventories from such manufacturers through blanket purchase orders against which orders are applied based on projected demand information and availability of goods. Such purchase commitments typically cover Palm’s forecasted product and manufacturing requirements for periods ranging from 30 to 90 days. In certain instances, these agreements allow Palm the option to cancel, reschedule and/or adjust its requirements based on its business needs. Consequently, only a portion of Palm’s purchase commitments arising from these agreements may be non-cancelable and unconditional commitments. As of February 28, 2006, Palm’s commitments to contract and third-party manufacturers for inventory on-hand and component purchase commitments related to the manufacture of Palm products were approximately $117.2 million.

In October 2005, Palm entered into a three-year, $30.0 million revolving credit line with Comerica Bank. The interest rate is equal to Comerica’s prime rate (7.5% at February 28, 2006) or, at Palm’s election subject to specific requirements, equal to LIBOR plus 1.75% (6.51% at February 28, 2006). The interest rate may vary based on fluctuations in market rates. Per the agreement, the line of credit is unsecured as long as the Company maintains over $100.0 million in unrestricted domestic cash, cash equivalents and short-term investments. If the Company’s domestic unrestricted cash plus cash equivalents and short-term investments fall below $100.0 million, Comerica will have a first priority security interest in all of the Company’s assets including but not limited to cash and cash equivalents, short-term investments, accounts receivable, inventory and property and equipment but excluding intellectual property and real estate. As of February 28, 2006, Palm had used its credit line to support the issuance of letters of credit totaling $6.8 million.

Pursuant to the agreements relating to Palm’s separation from 3Com, Palm has agreed to defend, and may be required to indemnify and hold harmless 3Com from any liabilities and damages arising out of the Xerox and E-Pass Technologies litigation. (See Note 15 to condensed consolidated financial statements.)

As part of the agreements with PalmSource relating to the PalmSource distribution, Palm agreed to defend, indemnify and hold harmless PalmSource and PalmSource’s licensees from liabilities, damages and other monetary relief awarded to Xerox in connection with patent infringement claims by Xerox alleging infringement of the Xerox uni-stroke patent by certain versions of the PalmSource operating system. (see Note 15 to condensed consolidated financial statements.)

Under the indemnification provisions of Palm’s customer and certain of its supply agreements, Palm agrees to offer some level of indemnification protection against certain types of claims arising from Palm’s products and services (such as intellectual property infringement or personal injury or porperty damage caused by Palm’s products or by Palm’s negligence or misconduct).

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Under the indemnification provisions with respect to representations and covenants made to PalmSource in connection with the Palm brand and with respect to trademark infringement in the amended and restated trademark license agreement with PalmSource, Palm agrees to defend and indemnify PalmSource and its affiliates for losses incurred, up to $25.0 million under each agreement.

We defend and indemnify our directors and certain of our current and former officers from third-party claims. Certain costs incurred for providing such defense and indemnification may be recoverable under various insurance policies. We are unable to reasonably estimate the maximum amount that could be payable under these arrangements since these exposures are not capped and due to the conditional nature of our obligations and the unique facts and circumstances involved in each agreement.

Palm’s product warranty accrual reflects management’s best estimate of probable liability under its product warranties. Management determines the warranty liability based on historical rates of usage as a percentage of shipment levels and the expected repair cost per unit, service policies and its experience with products in production or distribution.

Changes in the product warranty accrual are (in thousands):

	Nine Months Ended
	February 28,
	2006			2005
Balance, beginning of period	$	19,653		$	27,839
Payments made		(60,777	)		(44,584	)
Change in liability for product sold during the period		74,971			37,764
Change in liability for pre-existing warranties		6,749			509
Balance, end of period	$	40,596		$	21,528

14.	Restructuring Charges
	In accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, restructuring costs are recorded as incurred. Restructuring charges for employee workforce reductions are recorded upon employee notification for employees whose required continuing service period is 60 days or less, and ratably over the employee’s continuing service period for employees whose required continuing service period is greater than 60 days.
	The second quarter of fiscal year 2006 restructuring actions consisted of workforce reductions, primarily in Europe, of approximately 20 regular employees. Restructuring charges were a result of the Company’s effort to focus its international sales force on smartphone products. Cost reduction actions initiated in the second quarter of fiscal year 2006 are anticipated to be complete as of the second quarter of fiscal year 2007.
	The third quarter of fiscal year 2004 restructuring actions consisted of workforce reductions, in the United States and United Kingdom, of approximately 100 regular employees. Restructuring charges related to the implementation of actions to streamline the Company consistent with its strategic plan. Cost reduction actions initiated in the third quarter of fiscal year 2004 were completed during the year ended May 31, 2005.
	The first quarter of fiscal year 2004 restructuring actions consisted of workforce reductions, primarily in the United States, of approximately 45 regular employees, facilities and property and equipment disposed of or removed from service and canceled projects. Restructuring charges related to the implementation of a series of actions to adjust the business consistent with Palm’s future wireless plans. Cost reduction actions initiated in the first quarter of fiscal year 2004 were substantially completed by the end of fiscal year 2004, except for remaining contractual payments for excess facilities.
	The third quarter of fiscal year 2003 restructuring actions consisted of workforce reductions, primarily in the United States, of approximately 140 regular employees, facilities and property and equipment disposed of or removed from service and canceled projects. Restructuring charges related to the implementation of a series of actions to better align the Company’s expense structure with its revenues. Cost reduction actions initiated in the third quarter of fiscal year 2003 were completed during the year ended May 31, 2005.

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The fourth quarter of fiscal year 2001 restructuring actions consisted of carrying and development costs related to the land on which Palm had previously planned to build its corporate headquarters, facilities costs related to lease commitments for space no longer intended for use, workforce reduction costs across all geographic regions and discontinued project costs. These workforce reductions affected approximately 205 regular employees and were completed during the year ended May 31, 2003. As of February 28, 2006, the balance consists of lease commitments, payable over approximately six years, offset by estimated sublease proceeds of approximately $24.4 million.

Accrued liabilities related to restructuring actions consist of (in thousands):

	Q2 2006 Action			Q3 2004 Action			Q1 2004 Action			Q3 2003 Action						Q4 2001 Action
							Excess Facilities			Discontinued			Excess Facilities
	Workforce			Workforce			and Equipment			Project			and Equipment			Excess
	Reduction Costs			Reduction Costs			Costs			Costs			Costs			Facilities Costs			Total
Balance, May 31, 2004	$	—		$	708		$	805		$	2,367		$	317		$	19,402		$	23,599
Restructuring charge		—			(98	)		—			(342	)		80			—			(360	)
Cash payments		—			(610	)		(461	)		(1,980	)		(397	)		(6,508	)		(9,956	)
Write-offs		—			—			—			(45	)		—			—			(45	)
Balance, May 31, 2005		—			—			344			—			—			12,894			13,238
Restructuring charge		1,954			—			—			—			—			—			1,954
Cash payments		(1,630	)		—			(190	)		—			—			(5,579	)		(7,399	)
Balance, February 28, 2006	$	324		$	—		$	154		$	—		$	—		$	7,315		$	7,793

	Accrued restructuring as of February 28, 2006 includes accrued liabilities recognized in connection with the Handspring acquisition. (See Note 9 to condensed consolidated financial statements.)
15.	Litigation
	Palm is a party to lawsuits in the normal course of its business. Litigation in general, and intellectual property litigation in particular, can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. Palm believes that it has defenses to the cases pending against it, including those set forth below, and is vigorously contesting each matter. Palm is not currently able to estimate, with reasonable certainty, the possible loss, or range of loss, if any, from the cases listed below, and accordingly no provision for any potential loss which may result from the resolution of these matters has been recorded in the accompanying condensed consolidated financial statements except with respect to those cases where preliminary settlement agreements have been reached. An unfavorable resolution of these lawsuits could materially adversely affect Palm’s business, results of operations or financial condition. (Although Palm was formerly known as palmOne, Inc. and is now Palm, Inc. once again and Handspring has been merged into Palm, the pleadings in the pending litigation continue to use former company names, including Palm Computing, Inc., Palm, Inc., palmOne, Inc. and Handspring, Inc.)
	In April 1997, Xerox Corporation filed suit in the United States District Court for the Western District of New York. As a result of subsequent amendments, the case currently names as defendants 3Com Corporation, U.S. Robotics Corporation, U.S. Robotics Access Corp., Palm Computing, Inc., Palm, Inc., PalmSource, Inc., and palmOne, Inc. The complaint alleges willful infringement of U.S. Patent No. 5,596,656 (the “656 patent”), entitled “Unistrokes for Computerized Interpretation of Handwriting.” The complaint seeks unspecified damages and to permanently enjoin the defendants from infringing the patent in the future. In 2000, the District Court dismissed the case, ruling that the patent is not infringed by the Graffiti handwriting recognition system used in handheld computers employing the PalmSource operating system. Xerox appealed the dismissal to the United States Court of Appeals for the Federal Circuit (“CAFC”). On October 5, 2001, the CAFC affirmed-in-part, reversed-in-part and remanded the case to the District Court for further proceedings. On December 20, 2001, the District Court granted Xerox’s motion for summary judgment that the patent at issue is valid, enforceable and infringed. The defendants filed a Notice of Appeal on December 21, 2001. The CAFC affirmed the finding of infringement, but remanded the case to the District Court for a determination on the issue of invalidity of the ‘656 patent. On May 21, 2004, the District Court granted Palm’s motion for summary judgment that the ‘656 patent is invalid. Palm filed a Motion for Clarification of the ruling and Xerox filed a Motion for Alteration or Amendment of and Relief from Judgment. In February 2005, the District Court granted Palm’s motion, finding the patent invalid, and denied Xerox’s motion. Xerox has appealed the ruling to the CAFC and oral argument was heard on April 3, 2006. In connection with the PalmSource distribution, Palm is required to defend, indemnify and hold harmless PalmSource from liabilities, damages and other monetary relief awarded to Xerox in this case. Pursuant to the agreements relating to Palm’s separation from 3Com, Palm has agreed to defend, and may be required to indemnify and hold harmless 3Com from any liabilities and damages arising out of this case.

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In February 2000, E-Pass Technologies, Inc. filed suit against 3Com, Inc. in the United States District Court for the Southern District of New York and later filed, on March 6, 2000, an amended complaint against Palm and 3Com. The case was transferred to the United States District Court for the Northern District of California. The amended complaint alleges willful infringement of U.S. Patent No. 5,276,311, entitled “Method and Device for Simplifying the Use of Credit Cards, or the Like” and inducement to infringe the same patent. The complaint seeks unspecified compensatory and treble damages and to permanently enjoin the defendants from infringing the patent in the future. On August 21, 2003, the CAFC issued a ruling reversing summary judgment in favor of Palm and 3Com and remanded the case to the District Court for further proceedings. On February 9, 2004, E-Pass filed another lawsuit in the United States District Court for the Northern District of California naming Palm, Handspring and PalmSource as defendants. This second suit alleges infringement, contributory infringement and inducement of infringement of the same patent, but identifies additional products as infringing and seeks unspecified compensatory damages, treble damages and a permanent injunction against future infringement. Palm filed motions for summary judgment in all cases. On March 17, 2006, the Court granted Palm’s summary judgment motions and entered judgment in favor of Palm and the other co-defendants. Pursuant to the agreements relating to Palm’s separation from 3Com, Palm has agreed to defend, and may be required to indemnify and hold harmless 3Com from any liabilities and damages arising out of this case.

In June 2001, the first of several putative stockholder class action lawsuits was filed in the United States District Court for the Southern District of New York against certain of the underwriters for Palm’s initial public offering, Palm and several of its officers. The complaints, which have been consolidated under the caption In re Palm, Inc. Initial Public Offering Securities Litigation, Case No. 01 CV 5613, assert that the prospectus from Palm’s March 2, 2000 initial public offering failed to disclose certain alleged actions by the underwriters for the offering. The complaints allege claims against Palm and the officers under Sections 11 and 15 of the Securities Act of 1933, as amended. Certain of the complaints also allege claims under Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934, as amended. Similar complaints were filed against Handspring in August and September 2001 in regard to Handspring’s June 2000 initial public offering. Other actions have been filed making similar allegations regarding the initial public offerings of more than 300 other companies. An amended consolidated complaint was filed in April 2002. The claims against the individual defendants have been dismissed without prejudice pursuant to an agreement with plaintiffs. The Court denied Palm’s motion to dismiss. Special committees of both Palm’s and Handspring’s respective Boards of Directors approved a tentative settlement proposal from plaintiffs, which includes a guaranteed recovery to be paid to plaintiffs by the issuer defendants’ insurance carriers and an assignment to plaintiffs of certain claims the issuers, including Palm and Handspring, may have against the underwriters. There is no guarantee that the settlement will become final, however, as it is subject to a number of conditions, including final Court approval. Should the settlement become final, it will not be material to Palm’s financial position.

In September and October 2005, five purported consumer class action lawsuits were filed against Palm, four in the U.S. District Court for the Northern District of California (Moya v. Palm, Berliner v. Palm, Loew v. Palm, and Geisen v. Palm) and one in the Superior Court of California for Santa Clara County (Palza v. Palm), on behalf of all purchasers of Palm Treo 600 and Treo 650 products. All five complaints allege in substance that Palm made false or misleading statements regarding the reliability of its Treo 600 and 650 products in violation of various California laws, that the products have certain alleged defects, and that Palm breached its warranty of these products. The complaints seek unspecified damages, restitution, disgorgement of profits and injunctive relief. In September 2005, a purported consumer class action lawsuit entitled Gans v. Palm was filed against Palm in the U.S. District Court for the Northern District of California on behalf of all purchasers of the Treo 650 product. The complaint alleges that, in violation of various California laws, Palm made false or misleading statements regarding automatic email delivery to the Treo 650 product. The complaint seeks unspecified damages, restitution, disgorgement of profits and injunctive relief. Palm removed the Palza case to the U.S. District Court for the Northern District of California. Subsequently, all six cases were related before a single judge in that Court. The related cases are in the early stages of litigation.

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16.	Related Party Transactions
	Transactions with PalmSource
	In December 2001, Palm entered into a software license agreement with PalmSource which was amended and restated in May 2005. The agreement includes a minimum annual royalty and license commitment of $41.0 million, $42.5 million, $35.0 million, $20.0 million and $10.0 million for the contract years ending December 3, 2005 through 2009, respectively. Under the software license and source code agreement, Palm incurred expenses of $8.1 million and $9.9 million during the three months ended February 28, 2006 and 2005, respectively, and $35.5 million and $35.3 million during the nine months ended February 28, 2006 and 2005, respectively. As of February 28, 2006 and May 31, 2005, Palm had accounts payable to PalmSource of $7.6 million and $11.1 million, respectively, as a result of the software license agreement. Palm’s Chairman of the Board, Eric Benhamou, was also the Chairman of the Board of PalmSource through October 2004.
	Other Transactions and Relationships
	Palm has related party relationships with the following entities with which Palm engages in only nominal amounts of business transactions:
	Palm has a relationship with RealNetworks, Inc. in connection with bundling of products, web site referrals and engineering assistance. Eric Benhamou, Chairman of Palm’s Board of Directors, is also a member of RealNetworks’ Board of Directors.
	Palm is involved in a co-promotional sales and marketing relationship with Good Technology, Inc. Good Technology is a value-added reseller of Palm products. Bruce Dunlevie, a current member of Palm’s Board of Directors, also serves as a member of Good Technology’s Board of Directors and is a partner at Benchmark Capital, which owns more than 5% of Good Technology stock.
	Palm purchased software licenses and services from Kontiki, Inc. during the nine months ended February 28, 2006 and the three and nine months ended February 28, 2005. Michael Homer, a current member of Palm’s Board of Directors, is the Chairman of Kontiki, Inc. Bruce Dunlevie, a current member of Palm’s Board of Directors, is a partner at Benchmark Capital, which owns more than 10% of the Kontiki stock.
	In fiscal year 2005, Palm made a $1.0 million equity investment in and entered into an agreement to host Palm’s software sales with Motricity, Inc. This equity investment is included in other assets. Palm paid service fees to Motricity for hosting Palm’s software sales during the three and nine months ended February 28, 2006.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the condensed consolidated financial statements and notes to those financial statements included in this Form 10-Q. Our 52-53 week fiscal year ends on the Friday nearest to May 31, with each quarter ending on the Friday generally nearest August 31, November 30 and February 28. Fiscal year 2006 contains 52 weeks and fiscal year 2005 contained 53 weeks. For presentation purposes, the periods are shown as ending on August 31, November 30, February 28 and May 31, as applicable.

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This quarterly report contains forward-looking statements within the meaning of the federal securities laws, including, without limitation, statements concerning Palm’s expectations, beliefs and/or intentions regarding the following: demand for Palm’s products; Palm’s market position; shifts in Palm’s average selling price, product mix and geographic revenue mix; the development and introduction of new products and services; competitors and competition in the markets in which Palm operates; expansion of the smartphone market; earnings and operating income; trends in revenues, gross margin, operating income and royalty rates, the timing for completion of cost reduction actions; warranty and repair costs, sales and marketing expenses, research and development expenses, employee related expenses and other expenses, headcount, return rates, accounts receivable and other assets and cash generation; the timing for completion of cost reduction actions; the use of proceeds from the potential sale of securities under Palm’s universal shelf registration statement; the sufficiency of Palm’s cash, cash equivalents and credit facility to satisfy its anticipated cash requirements; the effects of changes in market interest rates; investment activities, the value of investments and the use of Palm’s financial instruments; realization of, and actions which Palm may implement to realize, the tax benefits associated with Palm’s net operating loss carryforwards and Palm’s domestic deferred tax assets; the timing and levels of reversal of our deferred tax asset valuation allowance; the realization of capital, tax credit and net operating loss carryforwards; Palm’s effective tax rate; the impact of SFAS No. 123(R); Palm’s defenses to legal proceedings and litigation matters; provisions in Palm’s charter documents and Delaware law and the potential effects of a stockholder rights plan; adjustments to goodwill and future amortization expense; and the potential impact of our critical accounting policies and changes in financial accounting standards or practices. Actual results and events could differ materially from those contemplated by these forward-looking statements due to various risks and uncertainties, including those discussed in the “Business Environment and Risk Factors” section and elsewhere in this quarterly report. Palm undertakes no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this report.

Overview and Executive Summary

Palm, Inc. is a global provider of mobile computing solutions. Our objective is to be the leader in mobile computing. In order to accomplish our objective, we have defined the following strategy: develop market-defining products that deliver a great user experience, capitalize on industry trends, manage a diversified portfolio of mobile computing products and build our brand. Management periodically reviews certain key business metrics in order to evaluate our strategy and operational efficiency, allocate resources and maximize the financial performance of our business. These key business metrics include the following:

Revenue — Management reviews many elements to understand our revenue stream. These include supply availability, unit shipments, average selling prices and channel inventory levels. Revenue growth is impacted by increased unit shipments and variations in average selling prices. Unit shipments are determined by supply availability, end-user and channel demand, and channel inventory. We monitor average selling prices throughout the product life cycle, taking into account market demand and competition. To avoid empty shelves at retail store locations and to minimize product returns and obsolescence, we strive to maintain channel inventory levels within a desired range.

Margins — We review gross margin in conjunction with revenues to maximize operating performance. We strive to improve our gross margin through disciplined cost and product life-cycle management, supply/demand management and control of our warranty and technical support costs. To achieve desired operating margins, we also monitor our operating expenses closely to keep them in line with our projected revenue.

Cash flows — We strive to convert operating results to cash. To that effect, we carefully manage our working capital requirements through balancing accounts receivable and inventory with accounts payable. We monitor our cash balances to maintain cash available to support our operating and capital expenditure requirements.

We believe the mobile computing solutions market dynamics are generally favorable to us.

•      While the market for handheld computers is maturing, our leadership position and our ability to develop high quality products enable us to produce solid operating performance from this product line. Our handheld computing device product line also provides a brand and scale that can be leveraged across our entire product portfolio.

•      The emerging high-speed wireless networks which enable true “always-on” connectivity are fueling the growth of the market for smartphone devices. With our computing heritage, we are able to work closely with carriers to deploy advanced wireless data applications that take advantage of their recently deployed wireless data networks.

We expect to experience revenue and operating income growth as a result of our smartphone product line. The smartphone market is in its infancy and people are just beginning to understand the personal and professional benefits of being able to access email or browse the web on a smartphone. We expect this market to expand and we expect to capitalize on this expansion.

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Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported in Palm’s condensed consolidated financial statements and accompanying notes. We base our estimates and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances. However, these estimates and judgments are subject to change and the best estimates and judgments routinely require adjustment. The amounts of assets and liabilities reported in our balance sheets and the amounts of revenues and expenses reported for each of our fiscal periods are affected by estimates and assumptions which are used for, but not limited to, the accounting for rebates, price protection, product returns, allowance for doubtful accounts, warranty and technical service costs, royalty obligations, goodwill and intangible asset impairments, restructurings, inventory and income taxes. Actual results could differ from these estimates. The following critical accounting policies are significantly affected by judgments, assumptions and estimates used in the preparation of our condensed consolidated financial statements.

Revenue is recognized when earned in accordance with applicable accounting standards and guidance, including Staff Accounting Bulletin, or SAB, No. 104, Revenue Recognition, as amended, and AICPA Statement of Position, or SOP, No. 97-2, Software Revenue Recognition, as amended. We recognize revenues from sales of handheld computing and smartphone devices under the terms of the customer agreement upon transfer of title to the customer, net of estimated returns, provided that the sales price is fixed or determinable, collection of the resulting receivable is probable and no significant obligations remain. For one of our web sales distributors, we recognize revenue based on a sell-through method utilizing information provided by the distributor. Sales to resellers are subject to agreements allowing for limited rights of return, rebates and price protection. Accordingly, we reduce revenues for our estimates of liabilities related to these rights at the time the related sale is recorded. The estimates for returns are adjusted periodically based upon historical rates of returns, channel inventory levels and other related factors. The estimates and reserves for rebates and price protection are based on specific programs, expected usage and historical experience. Actual results could differ from these estimates.

Revenue from software arrangements with end users of our devices is recognized upon delivery of the software, provided that collection is determined to be probable and no significant obligations remain. Deferred revenue is recorded for post-contract support and any other future deliverables, and is recognized over the support period or as the elements of the agreement are delivered. Vendor specific objective evidence of the fair value of the elements contained in software arrangements is based on the price determined by management having the relevant authority when the element is not yet sold separately, but is expected to be sold in the marketplace within six months of the initial determination of the price by management.

The allowance for doubtful accounts is based on our assessment of the collectibility of specific customer accounts and an assessment of international, political and economic risk as well as the aging of the accounts receivable. If there is a change in a major customer’s creditworthiness or actual defaults differ from our historical experience, our actual results could differ from our estimates of recoverability.

We accrue for warranty costs based on historical rates of repair as a percentage of shipment levels and the expected repair cost per unit, service policies and our experience with products in production or distribution. If we experience claims or significant changes in costs of services, such as third-party vendor charges, materials or freight, which could be higher or lower than our historical experience, our cost of revenues could differ from our estimates.

Palm accrues for royalty obligations to other technology and patent holders based on unit shipments of its handheld computing and smartphone devices, as a percentage of applicable revenue for the net sales of products using certain software technologies or as a fully paid-up license fee, all as determined in accordance with the terms of the applicable license agreements. Where agreements are not finalized, accrued royalty obligations represent management’s current best estimates using appropriate assumptions and projections based on negotiations with third party licensors. Palm has accrued royalty obligations of $38.8 million and $32.0 million as of February 28, 2006 and May 31, 2005, respectively, including estimated royalties of $34.9 million and $29.7 million, respectively, which are reported in other accrued liabilities. While the amounts ultimately agreed upon may be more or less than the current accrual, management does not believe that finalization of the agreements would have had a material impact on the amounts reported for its financial position as of February 28, 2006 and May 31, 2005 or for the reported results for the three months then ended; however, the effect of finalization in the future may be significant to the period in which it is recorded.

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Long-lived assets such as land held for sale, and property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not ultimately be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its ultimate disposition.

We evaluate the recoverability of goodwill annually during the fourth quarter of the fiscal year, or more frequently if impairment indicators arise, as required under Statement of Financial Accounting Standards, or SFAS, No. 142, Goodwill and Other Intangible Assets. Goodwill is reviewed for impairment by applying a fair-value-based test at the reporting unit level within our single reporting segment. A goodwill impairment loss would be recorded for any goodwill that is determined to be impaired. Under SFAS No. 144, Accounting for the Disposal of Long-Lived Assets, intangible assets are evaluated whenever events or changes in circumstances indicate that the carrying value of the asset may be impaired. An impairment loss would be recognized for an intangible asset to the extent that the asset’s carrying value exceeds its fair value, which is determined based upon the estimated undiscounted future cash flows expected to result from the use of the asset, including disposition. Cash flow estimates used in evaluating for impairment represent management’s best estimates using appropriate assumptions and projections at the time.

Effective for calendar year 2003, in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which supersedes Emerging Issues Task Force, or EITF, Issue No. 94-3, Liability Recognition for Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring), we record liabilities for costs associated with exit or disposal activities when the liability is incurred instead of at the date of commitment to an exit or disposal activity. Prior to calendar year 2003, in accordance with EITF Issue No. 94-3, we accrued for restructuring costs when we made a commitment to a firm exit plan that specifically identified all significant actions to be taken. We record initial restructuring charges based on assumptions and related estimates that we deem appropriate for the economic environment at the time these estimates are made. We reassess restructuring accruals on a quarterly basis to reflect changes in the costs of the restructuring activities, and we record new restructuring accruals as liabilities are incurred.

Inventory purchases and purchase commitments are based upon forecasts of future demand. We value our inventory at the lower of standard cost (which approximates first-in, first-out cost) or market. If we believe that demand no longer allows us to sell our inventory above cost or at all, then we write down that inventory to market or write-off excess inventory levels. If customer demand subsequently differs from our forecasts, requirements for inventory write offs could differ from our estimates.

Our deferred tax assets represent the tax effects of net operating loss (NOL) carryforwards, of tax credit carryforwards and of temporary differences that will result in deductible amounts in future years if we have taxable income. A valuation allowance reduces deferred tax assets to estimated realizable value, based on estimates and certain tax planning strategies. The carrying value of our net deferred tax assets assumes that it is more likely than not that we will be able to generate sufficient future taxable income in certain tax jurisdictions to realize the net carrying value. The valuation allowance is reviewed quarterly and is maintained until sufficient positive evidence exists to support the reversal of the valuation allowance based upon current and preceding years’ results of operations and anticipated profit levels in future years. If these estimates and related assumptions change in the future, we may be required to adjust our valuation allowance against the deferred tax assets resulting in additional provision (benefit) to income tax expense.

During the second quarter of fiscal year 2006, the Company determined, based on current and preceding years’ results of operations and anticipated profit levels in future periods, that it is more likely than not that its domestic deferred tax assets will be realized in the future and, accordingly, that it was appropriate to release the valuation allowance recorded against those deferred tax assets. In reaching this conclusion, the Company weighed both negative and positive evidence regarding the realizability of these deferred tax assets and considered the extent to which the evidence could be objectively verified. The primary factors considered by the Company during the second quarter of fiscal year 2006 were that:

•      The Company had cumulative profits before income taxes of $59.5 million for the three-year period ended with the second quarter of fiscal year 2006, excluding the effects in fiscal year 2004 of discontinued operations and the write-down of the land held for sale.

•       Since the Company spun off PalmSource and acquired Handspring in the second quarter of fiscal year 2004, the Company was profitable in eight of nine quarters and had experienced cumulative profits before income taxes of $148.8 million.

In addition, the Company also considered the following factors:

•       Based upon the Company’s recent results of operations, as well as its internal projections, the Company expects to utilize its NOL carryforwards and tax credit carryforwards prior to their expiration over approximately the next 15-20 years.

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•      The Company has never had any expired operating loss carryovers in its history, and after utilization of net operating losses against the fiscal year 2005 federal taxable income, the first federal NOL carryforward scheduled to expire is in the year 2021.

•      Although the Company operates in an industry which is competitive and experiences rapid technological change, we have operated successfully in this environment. During the previous eight quarters, we have expanded our product mix from solely handheld computing devices to include smartphones, while maintaining consistent profitability and year-over-year growth, which now comprise a majority of our revenues. We have maintained profitability and achieved year-over-year revenue growth during this period. The smartphone market is expected to continue to expand in the future and we expect to experience revenue and profit growth.

As a result, during the second quarter of fiscal year 2006, the Company released approximately $324.5 million of valuation allowance of which $16.4 million relating to previously exercised stock options was credited directly to additional paid-in capital, $81.8 million relating to net operating losses of Handspring prior to its acquisition was credited to goodwill and $226.3 million was recorded as a non-cash income tax benefit resulting in an increase in earnings.

Although the Company has determined that a valuation allowance is no longer required with respect to its domestic net operating loss carryforwards, deferred expenses and tax credit carryforwards, recovery is dependent on achieving the forecast of future operating income over a protracted period of time. As of February 28, 2006, the Company would require approximately $1 billion in cumulative future operating income to be generated at various times over approximately the next 15-20 years to realize our net deferred tax assets. Based upon the Company’s results for the most recent four quarters, it would take the Company less than 10 years to utilize its current NOL and tax credit carryforwards. Through the third quarter of fiscal year 2006, the Company has experienced nine consecutive quarters of double-digit year-over-year revenue growth. During this period the Company’s profits have also grown, which, if projected into the future, would result in utilization of current NOL and tax credit carryforwards in an even shorter number of years. The Company will review its forecast in relation to actual results and expected trends on an ongoing basis. The trends include the expected continued growth of the smartphone market. Failure by the Company to achieve its future operating income targets or negative changes to expected trends may change the assessment regarding the recoverability of the net deferred tax assets and such change could result in a valuation allowance being recorded against some or all of the deferred tax assets. Any increase in a valuation allowance would result in additional income tax expense and could have a significant impact on our earnings in future periods.

Our key critical accounting policies are reviewed with the Audit Committee of the Board of Directors.

Results of Operations

Revenues

	Three Months Ended February 28,						Nine Months Ended February 28,
					Increase/						Increase/
	2006		2005		(Decrease)		2006		2005		(Decrease)
	(dollars in thousands)
Revenues	$	388,540	$	285,265	$	103,275	$	1,175,373	$	934,590	$	240,783

We derive our revenues from sales of our smartphone and handheld computing devices, add-ons and accessories as well as related services. Revenues for the three months ended February 28, 2006 increased approximately 36% from the three months ended February 28, 2005. Smartphone revenue was $288.5 million for the three months ended February 28, 2006 and increased 120% from $131.2 million in the year ago period. Handheld revenue was $100.0 million for the three months ended February 28, 2006 and decreased 35% from $154.1 million in the year ago period. During the three months ended February 28, 2006, net device units shipped were approximately 1,075,000 units at an average selling price of $343 per unit. During the three months ended February 28, 2005, net device units shipped were approximately 938,000 units at an average selling price of $285 per unit. Of this 36% increase in revenues the increase in average selling prices contributed approximately 20 percentage points and the increase in unit shipments contributed approximately 16 percentage points. The increase in average selling price reflects a continued shift towards smartphones during fiscal year 2006. Smartphones carry a higher average selling price than handheld computing devices. The increase in unit shipments is due to a higher volume of smartphone unit sales primarily in the United States to our carrier partners and the introduction of a smartphone that uses the Microsoft Windows Mobile operating system, partially offset by a decrease in handheld unit sales.

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International revenues were approximately 20% of worldwide revenues in the three months ended February 28, 2006, compared with approximately 33% in the three months ended February 28, 2005. Of the 36% increase in worldwide revenues from the three months ended February 28, 2005, approximately 42 percentage points resulted from an increase in United States revenues, partially offset by approximately a 6 percentage point decrease in international revenues. Average selling prices for our devices increased in the United States by 25% while international average selling prices decreased 4% during the three months ended February 28, 2006 as compared to the three months ended February 28, 2005. The increase in average selling prices in the United States is primarily the result of broader penetration of smartphones with carriers in the United States. The decrease in average selling prices internationally is primarily due to a shift in the mix of handheld computing devices towards products in the $99 to $299 price point range. Net units sold increased approximately 33% in the United States and decreased approximately 16% internationally. The increase in the United States is primarily due to broader penetration of our smartphones through increased volume to our carrier partners during the three months ended February 28, 2006 as compared to the three months ended February 28, 2005, partially offset by a decrease in handheld unit sales. The decrease in net unit sales internationally is primarily the result of a decline in unit sales of our handheld units which was partially offset by an increase in smartphone unit sales.

Revenues for the nine months ended February 28, 2006 increased approximately 26% from the nine months ended February 28, 2005. Smartphone revenue was $786.0 million for the three months ended February 28, 2006 and increased 94% from $405.2 million in the year ago period. Handheld revenue was $389.4 million for the three months ended February 28, 2006 and decreased 26% from $529.4 million in the year ago period. During the nine months ended February 28, 2006, net device units shipped were approximately 3,630,000 units at an average selling price of $307 per unit. During the nine months ended February 28, 2005, net device units shipped were approximately 3,497,000 units at an average selling price of $253 per unit. Of this 26% increase in revenues the increase in average selling prices contributed approximately 21 percentage points and the increase in unit shipments contributed approximately 5 percentage points. The increase in average selling price reflects a continued shift towards smartphones during fiscal year 2006. Smartphones carry a higher average selling price than handheld computing devices. The increase in unit shipments is due to a higher volume of smartphone unit sales primarily in the United States to our carrier partners and the introduction of a smartphone that uses the Microsoft Windows Mobile operating system, partially offset by a decrease in handheld unit sales.

International revenues were approximately 24% of worldwide revenues in the nine months ended February 28, 2006 compared with approximately 33% in the nine months ended February 28, 2005. Of the 26% increase in worldwide revenues from the nine months ended February 28, 2005 approximately 28 percentage points resulted from an increase in United States revenues, partially offset by a decrease in international revenues of 2 percentage points. Average selling prices for our devices increased in the United States by 26% and internationally by 7% for the nine months ended February 28, 2006 when compared with the nine months ended February 28, 2005. The increase in average selling prices is primarily the result of broader penetration of smartphones with carriers both in the United States and internationally. Net units sold increased approximately 14% in the United States and decreased approximately 15% internationally. The increase in the United States is primarily due to broader penetration of our smartphones through increased volume to our carrier partners during the nine months ended February 28, 2006 as compared to the nine months ended February 28, 2005, partially offset by a decrease in handheld unit sales. The decrease in net unit sales internationally is primarily the result of a decline in unit sales of our handheld units, which was partially offset by an increase in smartphone unit sales.

Total Cost of Revenues

	Three Months Ended February 28,									Nine Months Ended February 28,
							Increase/									Increase/
	2006			2005			(Decrease)			2006			2005			(Decrease)
	(dollars in thousands)
Cost of revenues	$	257,862		$	196,773		$	61,089		$	804,394		$	645,054		$	159,340
Applicable portion of amortization of intangible assets and deferred stock-based compensation		3			30			(27	)		388			693			(305	)
Total cost of revenues	$	257,865		$	196,803		$	61,062		$	804,782		$	645,747		$	159,035
Percentage of revenues		66.4	%		69.0	%					68.5	%		69.1	%

‘Total cost of revenues’ is comprised of ‘Cost of revenues’ and the applicable portion of ‘Amortization of intangible assets and deferred stock-based compensation’ as shown in the table above. ‘Cost of revenues’ principally consists of material and transformation costs to manufacture our products, operating system and other royalty expenses, warranty and technical support costs, freight, scrap and rework costs, the cost of excess or obsolete inventory, and manufacturing overhead which includes manufacturing personnel related costs, depreciation, and allocated information technology and facilities costs. ‘Cost of revenues’ as a percentage of revenues decreased by 2.6 percentage points to 66.4% for the three months ended February 28, 2006 from 69.0% for the three months ended February 28, 2005. The decrease is primarily the result of approximately 3.5 percentage points of lower product costs due to a shift in our product mix towards smartphones which constituted 74% of our revenues during the third quarter of fiscal year 2006 compared to 46% during the same period last year. In addition, we experienced reduced manufacturing division spending rates during

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the three months ended February 28, 2006, compared to the same period last year, contributing approximately 0.5 percentage points, as a result of reduced depreciation costs due to our tooling becoming fully depreciated. Freight and shipping costs decreased by approximately 0.7 percentage points primarily due to a reduction in expedited shipments to customers. In addition, excess and obsolete costs decreased by 0.2 percentage points due to a reduction in our provision for end-of-life products in the current year as compared to the comparable period a year ago. Partially offsetting these decreases was an increase in warranty expenses of 1.7 percentage points due to a shift in our product mix towards smartphones. Smartphones carry higher warranty costs than handheld computing devices as a percentage of their respective revenues. In addition, we experienced an increase in technical service costs of approximately 0.5 percentage points primarily due to higher call center expenses as well as additional training costs associated with a new product introduction.

‘Cost of revenues’ as a percentage of revenues decreased by 0.6 percentage points to 68.4% for the nine months ended February 28, 2006 from 69.0% for the nine months ended February 28, 2005. The decrease is primarily the result of approximately 2.2 percentage points of lower product costs due to a shift in our product mix towards smartphones which constituted 67% of our revenues during the first nine months of fiscal year 2006 compared to 43% in the same period last year. Freight costs decreased by 0.5 percentage points due to a reduction in expedited shipments and due to freight cost recoveries from customers. In addition, we experienced a decrease in manufacturing division spending of 0.4 percentage points, as tooling and fixtures have become fully depreciated. We also experienced decreased operating system royalty costs of approximately 0.3 percentage points compared to the same period last year, due to contractual decreases in our royalty rates. Partially offsetting these decreases was an increase in warranty expenses of approximately 2.7 percentage points during the nine months ended February 28, 2006, as compared to the same period a year ago, due to a shift in our product mix towards smartphones which carry higher warranty costs than handheld computing devices as a percentage of their respective revenues. In addition, the increase in warranty expenses was impacted by an increase in our estimates of return rates of our earlier model smartphone and higher per unit repair costs.

The ‘Amortization of intangible assets and deferred stock-based compensation’ applicable to the cost of revenues decreased in absolute dollars during the three and nine months ended February 28, 2006 compared to the three and nine months ended February 28, 2005, due to the cancellation of restricted stock awards forfeited upon employee terminations during fiscal year 2005.

Sales and Marketing

	Three Months Ended February 28,								Nine Months Ended February 28,
							Increase/								Increase/
	2006			2005			(Decrease)		2006			2005			(Decrease)
	(dollars in thousands)
Sales and marketing	$	53,298		$	44,391		$	8,907	$	152,774		$	126,994		$	25,780
Percentage of revenues		13.7	%		15.6	%				13.0	%		13.6	%

Sales and marketing expenses consist principally of advertising and marketing programs, salaries and benefits for sales and marketing personnel, sales commissions, travel expenses and allocated information technology and facilities costs. The decrease in sales and marketing expenses as a percentage of revenues during the three months ended February 28, 2006 is primarily due to our increased revenues during the period compared to the comparable period a year ago. Sales and marketing expenses in the three months ended February 28, 2006 increased approximately 20% from the three months ended February 28, 2005. The increase in sales and marketing expenses in absolute dollars is primarily due to increased marketing development expenses with our carrier customers of approximately $4.7 million associated with our increased revenues. Increased commission and employee-related expenses of approximately $3.4 million are primarily due to an increase in our sales and marketing headcount during the three months ended February 28, 2006 by approximately 50 employees compared to the period a year ago. In addition, there were increased product promotional programs of approximately $1.2 million and increased consulting expenses of approximately $1.2 million. The increase in consulting expense is due to the use of consulting assistance to support marketing activities until full-time employees are hired to sustain these activities. Facilities costs and allocations increased by approximately $0.7 million during the three months ended February 28, 2006 as a result of the increased headcount. These increases were partially offset by reduced direct marketing spending of approximately $2.5 million, primarily due to a shift to Palm funding of carrier marketing activities.

The decrease in sales and marketing expenses as a percentage of revenues during the nine months ended February 28, 2006 is primarily due to our increased revenues during the period compared to the comparable period a year ago. Sales and marketing expenses increased approximately 20% in the nine months ended February 28, 2006 from the nine months ended February 28, 2005. The increase in absolute dollars is primarily due to increased marketing development expenses with our retail and carrier customers of approximately $18.4 million associated with our increased revenues. Increased commission and employee-related expenses of approximately $8.5 million are primarily due to an increase in our headcount during the nine months ended February 28, 2006. In

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addition, there were increased product promotional programs of approximately $4.1 million and increased consulting expenses of approximately $3.3 million. The increase in consulting expense is due to the use of consulting assistance during the period to support marketing activities until full-time employees are hired to sustain these activities. Facilities costs and allocations increased by approximately $2.2 million during the nine months ended February 28, 2006 as a result of the increased headcount. These increases were partially offset by reduced direct marketing spending of approximately $11.6 million primarily due to ad campaigns that ran during the nine months ended February 28, 2005, which were not repeated during the nine months ended February 28, 2006 and due to a shift to Palm funding of carrier marketing activities.

Research and Development

	Three Months Ended February 28,								Nine Months Ended February 28,
							Increase/								Increase/
	2006			2005			(Decrease)		2006			2005			(Decrease)
	(dollars in thousands)
Research and development	$	38,146		$	23,410		$	14,736	$	98,256		$	62,385		$	35,871
Percentage of revenues		9.8	%		8.2	%				8.4	%		6.7	%

Research and development expenses consist principally of employee-related costs, third-party development costs, program materials, depreciation and allocated information technology and facilities costs. Research and development expenses during the three months ended February 28, 2006 increased approximately 63% from the comparable period a year ago. The increase in research and development expenses as a percentage of revenues and in absolute dollars during the three months ended February 28, 2006 is primarily due to an increase in employee-related expenses of approximately $8.9 million reflecting approximately 170 additional employees hired to support our commitment to the development of smartphone products and due to increased allocated information technology and facilities costs of approximately $1.5 million as a result of the increased headcount. In addition, consulting expenses increased by approximately $2.4 million to further support our smartphone development efforts until we hire full-time employees. We also experienced an increase in non-recurring engineering, data communications and project material costs of approximately $2.2 million, primarily due to the development of our smartphone products.

Research and development expenses during the nine months ended February 28, 2006 increased approximately 57% from the comparable period a year ago. The increase in research and development expenses as a percentage of revenues and in absolute dollars during the nine months ended February 28, 2006 is primarily due to an increase in employee-related expenses of approximately $26.1 million reflecting additional employees hired to support our commitment to the development of smartphone products and due to increased allocated information technology and facilities costs of approximately $6.5 million as a result of the increased headcount. In addition, consulting expenses increased by approximately $5.2 million to further support our smartphone development efforts until we hire full-time employees. These increases were partially offset by a decrease in non-recurring engineering and project material costs of approximately $2.0 million, primarily due to recognition of development support payments received from a third party.

General and Administrative

	Three Months Ended February 28,								Nine Months Ended February 28,
							Increase/								Increase/
	2006			2005			(Decrease)		2006			2005			(Decrease)
	(dollars in thousands)
General and administrative	$	9,683		$	9,416		$	267	$	30,388		$	30,527		$	(139	)
Percentage of revenues		2.5	%		3.3	%				2.6	%		3.3	%

General and administrative expenses consist of employee-related costs, travel expenses and allocated information technology and facilities costs for finance, legal, human resources and executive functions, outside legal and accounting fees, provision for doubtful accounts and business insurance costs. The decrease in general and administrative expenses as a percentage of revenues during the three months ended February 28, 2006 is primarily due to increased revenues during the three months ended February 28, 2006 as compared to the three months ended February 28, 2005. The increase in absolute dollars is primarily due to an increase in employee-related expenses of approximately $0.3 million and related allocations of $0.1 million as a result of an increase in our headcount of approximately 15 additional employees hired to support our infrastructure. In addition, professional and legal expenses increased by approximately $0.6 million, primarily resulting from defense of certain of our patent and other litigation matters. This was partially offset by the provision for doubtful accounts which decreased by $0.8 million in the third quarter of fiscal year 2006 as compared to the third quarter of fiscal year 2005 due to lower overall accounts receivable balances.

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The decrease in general and administrative expenses as a percentage of revenues during the nine months ended February 28, 2006 is primarily due to increased revenues during the nine months ended February 28, 2006 as compared to the nine months ended February 28, 2005. The decrease in absolute dollars is primarily due to a decrease in the provision for doubtful accounts of $1.6 million due to improvements in the condition of our accounts receivable at February 28, 2006 in comparison to February 28, 2005. This was partially offset by an increase in employee-related expenses of approximately $0.5 million, reflecting additional employees hired to support our infrastructure. In addition, legal and professional expenses increased by approximately $1.1 million, primarily due to the defense of certain of our patent and other litigation matters.

Amortization of Intangible Assets and Deferred Stock-Based Compensation

	Three Months Ended February 28,									Nine Months Ended February 28,
							Increase/									Increase/
	2006			2005			(Decrease)			2006			2005			(Decrease)
	(dollars in thousands)
Amortization of intangible assets and deferred stock-based compensation	$	791		$	2,520		$	(1,729	)	$	5,737		$	7,386		$	(1,649	)
Percentage of revenues		0.2	%		0.9	%					0.5	%		0.8	%

The decrease in amortization of intangible assets and deferred stock-based compensation in absolute dollars for the three months ended February 28, 2006 is primarily due to a $2.0 million decrease in amortization of intangible assets acquired in connection with the Handspring acquisition because these assets became fully amortized during the second quarter of fiscal year 2006. This decrease was partially offset by a $0.3 million increase in amortization resulting from the acquisition of the Palm brand in May 2005.

The decrease in amortization of intangible assets and deferred stock-based compensation in absolute dollars for the nine months ended February 28, 2006 is primarily due to a $2.6 million decrease in amortization of intangible assets acquired in connection with the Handspring acquisition because these assets became fully amortized during the second quarter of fiscal year 2006. This decrease was partially offset by a $1.0 million increase in amortization resulting from the acquisition of the Palm brand in May 2005.

Employee Separation Costs

	Three Months Ended February 28,									Nine Months Ended February 28,
							Increase/									Increase/
	2006			2005			(Decrease)			2006			2005			(Decrease)
	(dollars in thousands)
Employee separation costs	$	—		$	3,666		$	(3,666	)	$	—		$	3,666		$	(3,666	)
Percentage of revenues		—	%		1.3	%					—	%		0.4	%

Employee separation costs represent one-time payments recorded in connection with the termination of certain of our employees, including our former chief executive officer.

Restructuring Charges

	Three Months Ended February 28,								Nine Months Ended February 28,
							Increase/								Increase/
	2006			2005			(Decrease)		2006			2005			(Decrease)
	(dollars in thousands)
Restructuring charges	$	—		$	—		$	—	$	1,954		$	—		$	1,954
Percentage of revenues		—	%		—	%				0.2	%		—	%

During the second quarter of fiscal year 2006, restructuring actions consisted of workforce reductions, primarily in Europe, of approximately 20 regular employees. Restructuring charges were a result of the Company’s effort to focus its international sales force on smartphone products. Cash payments of approximately $1.6 million were made related to these workforce reductions as of February 28, 2006. Cost reduction actions initiated in the second quarter of fiscal year 2006 are anticipated to be complete as of the second quarter of fiscal year 2007.

Interest and Other Income (Expense), Net

	Three Months Ended February 28,								Nine Months Ended February 28,
							Increase/								Increase/
	2006			2005			(Decrease)		2006			2005			(Decrease)
							(dollars in thousands)
Interest and other income (expense), net	$	3,406		$	1,205		$	2,201	$	6,980		$	1,782		$	5,198
Percentage of revenues		0.9	%		0.4	%				0.6	%		0.2	%

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Interest and other income for the third quarter of fiscal year 2006 primarily consisted of approximately $4.6 million of interest income on our cash, cash equivalent and short-term investment balances, partially offset by $1.2 million of interest expense and bank and other charges. Interest and other income for the third quarter of fiscal year 2005 primarily consisted of $1.8 million of interest income on our cash, cash equivalent and short-term investment balances and a $0.2 million gain on the sale of an equity investment, partially offset by $0.8 million of interest expense and bank and other charges. Interest income increased primarily as a result of increased cash, cash equivalent and short-term investment balances and more favorable interest rates. Interest expense and bank and other charges increased primarily due to increased interest expense recognized as a result of the debt incurred in connection with the acquisition of the Palm brand.

Interest and other income for the nine months of fiscal year 2006 primarily consisted of approximately $11.1 million of interest income on our cash, cash equivalent and short-term investment balances, partially offset by $4.1 million of interest expense and bank and other charges. Interest and other income for the nine months of fiscal year 2005 primarily consisted of $4.0 million of interest income on our cash, cash equivalent and short-term investment balances and a $0.2 million gain on the sale of an equity investment, partially offset by $2.4 million of interest expense and bank and other charges. Interest income increased primarily as a result of increased cash, cash equivalent and short-term investment balances and more favorable interest rates. Interest expense and bank and other charges increased primarily due to increased interest expense recognized as a result of the debt incurred in connection with the acquisition of the Palm brand.

Income Tax Provision (Benefit)

	Three Months Ended February 28,								Nine Months Ended February 28,
							Increase/								Increase/
	2006			2005			(Decrease)		2006			2005			(Decrease)
	(dollars in thousands)
Income tax provision (benefit)	$	2,227		$	1,921		$	306	$	(220,155	)	$	11,702		$	(231,857	)
Percentage of revenues		0.6	%		0.7	%				(18.7	)%		1.3	%

The income tax expense for the three months ended February 28, 2006 was $2.2 million which consisted of federal, state and foreign income taxes of approximately $15.3 million offset by a $13.1 million valuation allowance reversal. The income tax benefit for the nine months ended February 28, 2006 was $220.2 million, which consisted of a $239.4 million valuation allowance reversal offset by federal, state and foreign income taxes of approximately $18.0 million and federal tax expense arising from adjustments for the Handspring net operating loss carryforward of $1.2 million.

During the second quarter of fiscal year 2006, the Company determined, based on current and preceding years’ results of operations and anticipated profit levels in future periods, that it is more likely than not that its domestic deferred tax assets will be realized in the future and, accordingly, that it was appropriate to release the valuation allowance recorded against those deferred tax assets. In reaching this conclusion, the Company weighed both negative and positive evidence regarding the realizability of these deferred tax assets and considered the extent to which the evidence could be objectively verified. The primary factors considered by the Company during the second quarter of fiscal year 2006 were that:

•      The Company had cumulative profits before income taxes of $59.5 million for the three-year period ended with the second quarter of fiscal year 2006, excluding the effects in fiscal year 2004 of discontinued operations and the write-down of the land held for sale.

•      Since the Company spun off PalmSource and acquired Handspring in the second quarter of fiscal year 2004, the Company was profitable in eight of nine quarters and had experienced cumulative profits before income taxes of $148.8 million.

In addition, the Company also considered the following factors:

•      Based upon the Company’s recent results of operations, as well as its internal projections, the Company expects to utilize its NOL carryforwards and tax credit carryforwards prior to their expiration over approximately the next 15-20 years.

•      The Company has never had any expired operating loss carryovers in its history, and after utilization of net operating losses against the fiscal year 2005 federal taxable income, the first federal NOL carryforward scheduled to expire is in the year 2021.

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•      Although the Company operates in an industry which is competitive and experiences rapid technological change, we have operated successfully in this environment. During the previous eight quarters, we have expanded our product mix from solely handheld computing devices to include smartphones, while maintaining consistent profitability and year-over-year growth, which now comprise a majority of our revenues. We have maintained profitability and achieved year-over-year revenue growth during this period. The smartphone market is expected to continue to expand in the future and we expect to experience revenue and profit growth.

The total valuation allowance reversal of $337.6 million consists of $56.7 million recognized as a result of income earned in the second and third quarters of fiscal year 2006 and $280.9 million representing amounts recognizable due to sufficient positive evidence regarding realization of these tax benefits through income in future fiscal years, and excludes the benefit relating to expected earnings for the remaining three months of fiscal year 2006. At February 28, 2006, Palm’s deferred tax assets were comprised of the tax effects of net operating loss carryforwards, of tax credit carryforwards and of temporary differences that will result in deductible amounts in future years of $433.8 million, offset by a valuation allowance of $25.9 million. The valuation allowance at February 28, 2006 includes $16.4 million which will be reversed in the remaining three months of fiscal year 2006, based on expected earnings over that period. This will result in an effective tax rate which records the recognition of this benefit in those three months. The remaining valuation allowance of $9.5 million consists of an allowance of $1.8 million for capital loss carryforwards and state net operating loss carryforwards whose realization is not considered more likely than not, and $7.7 million relating to the tax benefit of stock option exercises which will be reversed and recognized as a credit to additional paid-in capital when the benefit is realized.

Although the Company has determined that a valuation allowance is no longer required with respect to its domestic net operating loss carryforwards, deferred expenses and tax credit carryforwards, recovery is dependent on achieving the forecast of future operating income over a protracted period of time. As of February 28, 2006, the Company would require approximately $1 billion in cumulative future operating income to be generated at various times over approximately the next 15-20 years to realize our net deferred tax assets. Based upon the Company’s results for the most recent four quarters, it would take the Company less than 10 years to utilize its current NOL and tax credit carryforwards. Through the third quarter of fiscal year 2006, the Company has experienced nine consecutive quarters of double-digit year-over-year revenue growth. During this period the Company’s profits have also grown, which, if projected into the future, would result in utilization of current NOL and tax credit carryforwards in an even shorter number of years. The Company will review its forecast in relation to actual results and expected trends on an ongoing basis. The trends include the expected continued growth of the smartphone market. Failure by the Company to achieve its future operating income targets or negative changes to expected trends may change the assessment regarding the recoverability of the net deferred tax assets and such change could result in a valuation allowance being recorded against some or all of the deferred tax assets. Any increase in a valuation allowance would result in additional income tax expense and could have a significant impact on our earnings in future periods.

The income tax provision for the three and nine months ended February 28, 2005, which included foreign and state income taxes of approximately $0.5 million and $4.5 million, respectively, and acquisition accounting adjustments to goodwill of approximately $1.4 million and $7.2 million, respectively, represented approximately 31% of pretax income for the three months ended February 28, 2005 and approximately 19% of pretax income for the nine months ended February 28, 2005.

Liquidity and Capital Resources

Cash and cash equivalents at February 28, 2006 were $131.6 million, compared to $128.2 million at May 31, 2005. The increase of $3.4 million in cash and cash equivalents was primarily attributable to net income of $309.0 million reduced for non-cash items by $254.0 million, changes in assets and liabilities of $111.2 million, and proceeds of $24.4 million from employee stock plan activity. This was partially offset by $171.5 million in net purchases of short-term investments and by cash used for the purchase of property and equipment of $15.7 million.

We anticipate our February 28, 2006 total cash, cash equivalents and short-term investments balance of $536.3 million will satisfy our operational cash flow requirements for at least the next twelve months. Based on our current forecast, we do not anticipate any short-term or long-term deficiencies.

Net accounts receivable were $119.1 million at February 28, 2006, a decrease of $21.1 million or 15% from $140.2 million at May 31, 2005. Days sales outstanding, or DSO, of receivables decreased to 28 days at February 28, 2006 from 38 days at May 31, 2005, primarily due to the linearity of our quarterly sales coupled with lower overall accounts receivable balances compared to the end of the fourth quarter of fiscal year 2005.

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Palm facilities are leased under operating leases that expire at various dates through June 2014.

In December 2001, Palm issued a subordinated convertible note in the principal amount of $50.0 million to Texas Instruments. In connection with the PalmSource distribution on October 28, 2003, the note was canceled and divided into two separate obligations. Palm retained an obligation in the amount of $35.0 million, or the Note, and the remainder was assumed by PalmSource. The Note was transferred from Texas Instruments to Metropolitan Life Insurance Company as of August 26, 2005, retaining the same terms. The Note bears interest at 5.0% per annum, is due in December 2006 and is convertible into Palm common stock at an effective conversion price of $32.30 per share. Palm may force a conversion at any time, provided its common stock has traded above $49.74 per share for a defined period of time. In the event Palm distributes significant assets, Palm may be required to repay a portion of the Note. The Note defines certain events of default pursuant to which the full amount of the Note plus interest could become due and payable.

In May 2005, Palm acquired PalmSource’s 55 percent share of the Palm Trademark Holding Company resulting in full rights to the brand name Palm. The rights to the brand had been co-owned by the two companies since the October 2003 spin-off of PalmSource from Palm, Inc. Palm agreed to pay $30.0 million in five installments due in May 2005, 2006, 2007 and 2008 and November 2008, and granted PalmSource certain rights to Palm trademarks for PalmSource and its licensees for a four-year transition period. The remaining amount due to PalmSource was $22.5 million as of both February 28, 2006 and May 31, 2005.

Palm is party to a software license agreement with PalmSource that grants Palm certain licenses to the PalmSource operating system and other related software. This agreement was amended and restated in May 2005 to provide for continued development, manufacture and marketing of Palm products based on the PalmSource operating system through 2009. Under the agreement, Palm agreed to pay PalmSource license and royalty fees based upon net revenue of its products which incorporate PalmSource software, as well as a source code license fee and maintenance and support fees. The initial source code license fee was $6.0 million paid in three equal annual installments of $2.0 million each in June 2003, June 2004 and June 2005. The continuing source code license fee was reduced under the amended license agreement to $1.2 million and is payable in three equal annual installments of $0.4 million each in June 2006, June 2007 and June 2008. Annual maintenance and support fees are approximately $0.7 million per year. The amended and restated agreement includes a minimum annual royalty and license commitment of $41.0 million, $42.5 million, $35.0 million, $20.0 million and $10.0 million for the contract years ending December 3, 2005 through 2009, respectively.

Palm also accrues for royalty obligations to other technology and patent holders based on unit shipments of its handheld computing and smartphone devices, as a percentage of applicable revenue for the net sales of products using certain software technologies or as a fully paid-up license fee, all as determined in accordance with the terms of the applicable license agreements. Where agreements are not finalized, accrued royalty obligations represent management’s current best estimates using appropriate assumptions and projections based on negotiations with third party licensors. Palm has accrued royalty obligations of $38.8 million and $32.0 million as of February 28, 2006 and May 31, 2005, respectively, including estimated royalties of $34.9 million and $29.7 million, respectively, which are reported in other accrued liabilities. While the amounts ultimately agreed upon may be more or less than the current accrual, management does not believe that finalization of the agreements would have had a material impact on the amounts reported for its financial position as of February 28, 2006 and May 31, 2005 or for the reported results for the three months then ended; however, the effect of finalization in the future may be significant to the period in which it is recorded.

Palm utilizes contract manufacturers to build its products. These contract manufacturers acquire components and build products based on demand forecast information supplied by Palm, which typically covers a rolling 12-month period. Consistent with industry practice, Palm acquires inventories from such manufacturers through blanket purchase orders against which orders are applied based on projected demand information and availability of goods. Such purchase commitments typically cover Palm’s forecasted product and manufacturing requirements for periods ranging from 30 to 90 days. In certain instances, these agreements allow Palm the option to cancel, reschedule and/or adjust its requirements based on its business needs. Consequently, only a portion of Palm’s purchase commitments arising from these agreements may be non-cancelable and unconditional commitments. As of February 28, 2006, Palm’s commitments to third party manufacturers for inventory on-hand and component purchase commitments related to the manufacture of Palm products were approximately $117.2 million.

In October 2005, Palm entered into a three-year, $30.0 million revolving credit line with Comerica Bank. The interest rate is equal to Comerica’s prime rate (7.5% at February 28, 2006) or, at Palm’s election subject to specific requirements, equal to LIBOR plus 1.75% (6.51% at February 28, 2006). The interest rate may vary based on fluctuations in market rates. Per the agreement, the line of credit is unsecured as long as the Company maintains over $100.0 million in unrestricted domestic cash, cash equivalents and short-term investments. If the Company’s domestic unrestricted cash plus cash equivalents and short term investments fall below $100.0 million, Comerica will have a first priority security interest in all of the Company’s assets including but not limited to cash and cash equivalents, short-term investments, accounts receivable, inventory and property and equipment but excluding intellectual property and real estate. As of February 28, 2006 Palm had used its credit line to support the issuance of letters of credit totaling $6.8 million.

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We denominate our sales to certain international customers in the Euro, in Pounds Sterling, in Brazilian Real and in Swiss Francs. We also incur expenses in a variety of currencies. We hedge certain balance sheet exposures and intercompany balances against future movements in foreign currency exchange rates by using foreign exchange forward contracts. Gains and losses on the contracts are intended to offset foreign exchange gains or losses from the revaluation of assets and liabilities denominated in currencies other than the functional currency of the reporting entity. Our foreign exchange forward contracts generally mature within 30 days. We do not intend to utilize derivative financial instruments for trading purposes.

Cash Flow Presentation of Discontinued Operations

Subsequent to the issuance of the Company’s consolidated financial statements for the year ended May 31, 2005, the Company determined that the cash flows associated with discontinued operations were incorrectly presented as a net investing activity within the Consolidated Statements of Cash Flows. The Company could have elected to separately present the cash flows from operating, investing and financing activities of its discontinued operations on the face of the statement of cash flows. The Company has changed its statement of cash flows to conform to this presentation.

The effect of this change was to decrease the reported amount of net cash used in the investing activities of continuing operations by $6.0 million to $6.9 million for the year ended May 31, 2004, and to decrease the amount of cash provided by the investing activities of continuing operations by $0.8 million to $52.1 million for the year ended May 31, 2003. There was no effect on the statement of cash flows for the year ended May 31, 2005, as there were no discontinued operations for that period.

Palm, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)

	Years Ended May 31,
	2005			2004			2003
Cash flows from operating activities:
Net income (loss)	$	66,387		$	(21,849	)	$	(442,582	)
Loss from discontinued operations		—			11,634			24,727
Income (loss) from continuing operations		66,387			(10,215	)		(417,855	)
Adjustments to reconcile income (loss) from continuing operations to net cash provided by (used in) operating activities of continuing operations		46,661			(2,843	)		363,026
Net cash provided by (used in) operating activities of continuing operations		113,048			(13,058	)		(54,829	)
Net cash provided by (used in) investing activities of continuing operations (Revised)		(102,706	)		(6,887	)		52,091
Net cash provided by financing activities of continuing operations		19,253			56,447			2,477
Cash (invested in) transferred from discontinued operations		—			(6,000	)		819
Change in cash and cash equivalents		29,595			30,502			558
Cash and cash equivalents, beginning of period		98,569			68,067			67,509
Cash and cash equivalents, end of period	$	128,164		$	98,569		$	68,067
Cash flows from discontinued operations: (Revised)
Net cash used in operating activities	$	—		$	(4,602	)	$	(9,071	)
Net cash used in investing activities		—			—			(3,333	)
Cash flows from financing activities:
Sale of preferred stock								20,000
Cash transferred from (to) continuing operations		—			6,000			(819	)
Net cash provided by financing activities		—			6,000			19,181
Change in cash and cash equivalents*		—			1,398			6,777
Cash and cash equivalents, beginning of period*		—			37,465			30,688
Cash and cash equivalents included in net assets distributed to stockholders*		—			(38,863	)		—
Cash and cash equivalents, end of period*	$	—		$	—		$	37,465
* Cash and cash equivalents of PalmSource are included in current assets of discontinued operations
Other cash flow information:
Cash paid for income taxes	$	7,561		$	3,779		$	2,808
Cash paid for interest	$	1,992		$	2,572		$	2,696
Non-cash investing and financing activities:
Fair value of stock options and warrants assumed in business combination	$	—		$	28,064		$	—
Common stock issued for acquisition of businesses	$	—		$	209,173		$	—
Debt for brand-name intangible asset	$	19,700		$	—		$	—
Accrued liability for long-term investment	$	984		$	—		$	—

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Business Environment and Risk Factors

You should carefully consider the risks described below and the other information in this Form 10-Q. The business, results of operations or financial condition of Palm could be seriously harmed and the trading price of Palm common stock may decline due to any of these risks.

Risks Related to Our Business

Our operating results are subject to fluctuations, and if we fail to meet the expectations of securities analysts or investors, our stock price may decrease significantly.

Our operating results are difficult to forecast. Our future operating results may fluctuate significantly and may not meet our expectations or those of securities analysts or investors. If this occurs, the price of our stock will likely decline. Many factors may cause fluctuations in our operating results including, but not limited to, the following:

• changes in general economic conditions and specific market conditions;

• changes in consumer and enterprise spending levels;

• changes in consumer, enterprise and carrier preferences for our products and services;

• competition from other handheld or wireless communications devices or other devices with similar functionality;

• competition for consumer and enterprise spending on other products;

• seasonality of demand for our products and services;

• timely introduction and market acceptance of new products and services;

• variations in product costs or the mix of products sold;

• quality issues with our products;

• changes in terms, pricing or promotional programs;

• loss or failure of key sales channel partners;

• failure by our third party manufacturers or suppliers to meet our quantity and quality requirements for products or product components on time;

• failure to add or replace third party manufacturers or suppliers in a timely manner;

• failure to achieve product cost and operating expense targets;

• excess inventory or insufficient inventory to meet demand; and

• litigation brought against us.

Any of the foregoing factors could have a material adverse effect on our business, results of operations and financial condition.

If we do not correctly forecast demand for our products, we could have costly excess production or inventories or we may not be able to secure sufficient or cost effective quantities of our products or production materials and our revenues, cost of revenues and financial condition could be adversely impacted.

The demand for our products depends on many factors, including pricing and channel inventory levels, and is difficult to forecast due in part to variations in economic conditions, changes in consumer and enterprise preferences, relatively short product life cycles, changes in competition, seasonality and reliance on key sales channel partners. It is particularly difficult to forecast demand by individual product. Significant unanticipated fluctuations in demand, the timing and disclosure of new product releases or the timing of key sales orders could result in costly excess production or inventories or the inability to secure sufficient, cost-effective quantities of our products or production materials. This could adversely impact our revenues, cost of revenues and financial condition.

The market for mobile communications and computing devices is volatile, and changing market conditions, or failure to adjust to changing market conditions, may adversely affect our revenues, results of operations and financial condition, particularly given our size, limited resources and lack of diversification.

We operate in the mobile communications and computing industry which includes both handheld and smartphone devices. Over the last few years, we have seen year-over-year declines in the volume of handheld devices while demand for smartphone devices has increased. Although we are the leading provider of handheld products and while we intend to maintain this leadership position, we are rebalancing investment towards smartphone products in response to forecasted market demand trends. We cannot assure you that declines in the volume of handheld device units will not continue or that the growth of smartphone devices will offset any decline in handheld device sales. If we are unable to adequately respond to changes in demand for handheld and smartphone devices, our revenues and results of operations could be adversely affected. In addition, as our products and product categories mature and face greater competition, we may experience pressure on our product pricing to preserve demand for our products, which would adversely affect our margins, results of operations and financial condition.

This reliance on the success of and trends in our industry is compounded by the size of our organization and our focus on handheld computing and smartphone devices. These factors also make us more dependent on investments of our limited resources. For example, we face many resource allocation decisions, such as: where to focus our research and development, geographic sales and marketing and partnering efforts; which aspects of our business to outsource; which operating systems and email solutions to support; and the balance between our handheld and smartphone products. Our smartphone products-related revenue grew from approximately 46% of our total revenue during the nine months of fiscal year 2005 to approximately 74% during the nine months of fiscal year 2006, causing us to shift the focus of a large portion of our engineering resources towards the smartphone opportunity as well as hire and integrate new employees. Given the size and undiversified nature of our organization, any error in investment strategy could harm our business, results of operations and financial condition.

If we fail to develop and introduce new products and services successfully and in a cost effective and timely manner, we will not be able to compete effectively and our ability to generate revenues will suffer.

We operate in a highly competitive, rapidly evolving environment, and our success depends on our ability to develop and introduce new products and services that our customers and end users choose to buy. If we are unsuccessful at developing and introducing new products and services that are appealing to our customers and end users with acceptable quality, prices and terms, we will not be able to compete effectively and our ability to generate revenues will suffer.

The development of new products and services can be very difficult and requires high levels of innovation. The development process is also lengthy and costly. If we fail to anticipate our end users’ needs or technological trends accurately or are unable to complete the development of products and services in a cost effective and timely fashion, we will be unable to introduce new products and services into the market or successfully compete with other providers.

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As we introduce new or enhanced products or integrate new technology into new or existing products, we face risks including, among other things, disruption in customers’ ordering patterns, excessive levels of older product inventories, delivering sufficient supplies of new products to meet customers’ demand, possible product and technology defects, and a potentially different sales and support environment. Premature announcements or leaks of new products, features or technologies may exacerbate some of these risks. Our failure to manage the transition to newer products or the integration of newer technology into new or existing products could adversely affect our business, results of operations and financial condition.

We rely on third parties to design, manufacture, distribute, warehouse and support our handheld and smartphone devices, and our reputation, revenues and results of operations could be adversely affected if these third parties fail to meet their performance obligations.

We outsource most of our hardware design to third party manufacturers, some of whom, such as High Tech Computer, or HTC, compete with us. We depend on their design expertise, and we rely on them to design our products at satisfactory quality levels. If our third party manufacturers fail to provide quality hardware design, our reputation and revenues could suffer. These third party designers and manufacturers have access to our intellectual property which increases the risk of infringement or misappropriation of such intellectual property. In addition, these third parties may claim ownership rights in certain of the intellectual property developed for our products, which may limit our ability to have these products manufactured by others.

We outsource all of our manufacturing requirements to third party manufacturers at their international facilities, which are located primarily in China, Taiwan and Brazil. In general our products are manufactured by sole source providers. We depend on these third parties to produce a sufficient volume of our products in a timely fashion and at satisfactory quality levels. In addition, we rely on our third party manufacturers to place orders with suppliers for the components they need to manufacture our products. If they fail to place timely and sufficient orders with suppliers, our revenues and cost of revenues could suffer. Our reliance on third party manufacturers in foreign countries exposes us to risks that are not in our control, including outbreaks of disease (such as an outbreak of Severe Acute Respiratory Syndrome, or SARS, or bird flu), economic slowdowns, labor disruptions, trade restrictions, political conflicts and other events that could result in quarantines, shutdowns or closures of our third party manufacturers or their suppliers. The cost, quality and availability of third party manufacturing operations are essential to the successful production and sale of our handheld and smartphone devices. If our third party manufacturers fail to produce quality products on time and in sufficient quantities, our reputation, business and results of operations could suffer.

These manufacturers could refuse to continue to manufacture all or some of the units of our devices that we require or change the terms under which they manufacture our device products. If these manufacturers were to stop manufacturing our devices, we may be unable to replace the lost manufacturing capacity on a timely basis and our results of operations could be harmed. If these manufacturers were to change the terms under which they manufacture for us, our manufacturing costs and cost of revenues could increase. While we may have contractual remedies under manufacturing agreements, our business and reputation could be harmed. In addition, our contractual relationships are principally with the manufacturers of our products, and not with component suppliers. In the absence of a contract with the manufacturer that requires it to obtain and pass through warranty and indemnity rights with respect to component suppliers, we may not have recourse to any third party in the event of a component failure.

We may choose from time to time to transition to or add new third party manufacturers. If we transition the manufacturing of any product to a new manufacturer, there is a risk of disruption in manufacturing and revenues and our results of operations could be adversely impacted. The learning curve and implementation associated with adding a new third party manufacturer may adversely impact revenues and our results of operations.

We rely on third party distribution and warehouse services providers to warehouse and distribute our products. Our contract warehouse facilities are physically separated from our contract manufacturing locations. This requires additional lead-time to deliver products to customers. If we are shipping products near the end of a fiscal quarter, this extra time could result in us not meeting anticipated shipment volumes for that quarter, which may negatively impact our revenues for that fiscal quarter.

As a result of economic conditions or other factors, our distribution and warehouse services providers may close or move their facilities with little notice to us, which could cause disruption in our ability to deliver products. With little or no notice, these distribution and warehouse services providers could refuse to continue to provide distribution and warehouse services for all or some of our devices or change the terms under which they provide such services. Any disruption of distribution and warehouse services could have a negative impact on our revenues and results of operations.

Changes in transportation schedules or the timing of deliveries due to terrorist threats or attacks, military activity, labor disruptions, shipping problems acts of nature or carrier financial difficulties could cause transportation delays and increase our costs for both receipt of inventory and shipment of products to our customers. If these types of disruptions occur, our results of operations could be adversely impacted.

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We outsource most of the warranty support, product repair and technical support for our products to third party providers, which are located around the world. We depend on their expertise, and we rely on them to provide satisfactory levels of service. If our third party providers fail to provide consistent quality service in a timely manner and sustain customer satisfaction, our reputation and results of operations could suffer.

Our handheld computing and smartphone devices may contain errors or defects, which could result in the rejection or return of our products, damage to our reputation, lost revenues, diverted development resources and increased service costs, warranty claims and litigation.

Our handheld computing and smartphone devices are complex and must meet stringent user requirements. In addition, we warrant that our products will be free of defect for 90 to 365 days after the date of purchase, depending on the product. In Europe, we are required by law in some countries to provide a two-year warranty for certain defects. In addition, certain of our contracts with wireless carriers include epidemic failure clauses with low thresholds that we have in some instances exceeded. If invoked, these clauses may entitle the carrier to return or obtain credits for products and inventory, or to cancel outstanding purchase orders.

In addition, we must develop our hardware and software application products quickly to keep pace with the rapidly changing mobile communications and computing market, and we have a history of frequently introducing new products. Products as sophisticated as ours are likely to contain undetected errors or defects, especially when first introduced or when new models or versions are released. Our handheld computing and smartphone products may not be free from errors or defects after commercial shipments have begun, which could result in the rejection of our products, damage to our reputation, lost revenues, diverted development resources, increased customer service and support costs and warranty claims and litigation which could harm our business, results of operations and financial condition.

If we are unable to compete effectively with existing or new competitors, we could experience price reductions, reduced demand for our products and services, reduced margins and loss of market share, and our business, results of operations and financial condition would be adversely affected.

The mobile communications and computing device market is highly competitive, and we expect increased competition in the future, particularly as companies from established industry segments, such as mobile handset, personal computer and consumer electronics, enter this market or increasingly expand and market their competitive product offerings or both.

Some of our competitors or potential competitors possess capabilities developed over years of serving customers in their respective markets that might enable them to compete more effectively than us in certain segments. In addition, many of our competitors have significantly greater engineering, manufacturing, sales, marketing and financial resources and capabilities than we do. These competitors may be able to respond more rapidly than we can to new or emerging technologies or changes in customer requirements, including introducing a greater number and variety of products than we can. They may also devote greater resources to the development, promotion and sale of their products. They may have lower costs and be better able to withstand lower prices in order to gain market share at our expense. Finally, these competitors bring with them customer loyalties, which may limit our ability to compete despite superior product offerings.

Our devices compete with a variety of mobile devices. Our principal competitors include:

• personal computer companies, such as Acer, ASUSTek, BenQ, Dell, Hewlett-Packard, Medion and MiTac, and consumer electronics companies, such as Garmin, NEC and Yakumo, which also develop and sell handheld computing products, mobile managers and/or smartphone products running on the Palm OS and/or other operating systems, such as Microsoft’s Windows Mobile operating system, Linux, Symbian or proprietary operating systems;

• mobile handset manufacturers, such as HTC, Kyocera, LG, Motorola, Nokia, Research in Motion, Samsung, Sanyo, Siemens and Sony-Ericsson, which also develop smartphones, other wireless products and/or mobile managers running on the Palm OS and/or other operating systems, such as Microsoft’s Windows Mobile operating system, Linux, Symbian or proprietary operating systems; and

• a variety of early-stage technology companies.

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Some of these competitors, such as HTC, produce smartphones as carrier-branded devices. As technology advances, we also expect to compete with mobile phones without branded operating systems that synchronize with personal computers, as well as ultramobile personal computers and laptop computers with VoIP, and WiFi phones with VoIP.

In addition, our devices compete for a share of disposable income and enterprise spending on consumer electronic, telecommunications and computing products such as MP3 players, Apple’s iPod, media/photo views, digital cameras, personal media players, handheld gaming devices, GPS devices and other such devices.

Some competitors sell or license server, desktop and/or laptop computing products, software and/or recurring services in addition to mobile communications and computing products and may choose to market their mobile communications and computing products at a discounted price or give them away for free with their other products or services, which could negatively affect our ability to compete.

A number of our competitors have longer and closer relationships with the senior management of enterprise customers who decide which products and technologies will be deployed in their enterprises. Many competitors have larger and more established sales forces calling upon enterprise customers and therefore could contact a greater number of potential customers with more frequency. Consequently, these competitors could have a better competitive position than we do, which could result in potential enterprise customers deciding not to choose our products and services, which would adversely impact our revenues.

Successful new product introductions or enhancements by our competitors could cause intense price competition or make our products obsolete. To remain competitive, we must continue to invest significant resources in research and development, sales and marketing and customer support. We cannot be sure that we will have sufficient resources to make these investments or that we will be able to make the technological advances necessary to be competitive. Increased competition could result in price reductions, reduced demand for our products and services, increased expenses, reduced margins and loss of market share. Failure to compete successfully against current or future competitors could harm our business, results of operations and financial condition.

We are highly dependent on wireless carriers for the success of our wireless handheld and smartphone products.

The success of our wireless business strategy and our wireless communications products is highly dependent on our ability to establish new relationships and build on our existing relationships with domestic and international wireless carriers. We cannot assure you that we will be successful in establishing new relationships, or maintaining or advancing existing relationships, with wireless carriers or that these wireless carriers will act in a manner that will promote the success of our wireless communications products. Factors that are largely within the control of wireless carriers, but which are important to the success of our wireless communications products, include:

• testing of our wireless communications products on wireless carriers’ networks;

• quality and coverage area of wireless voice and data services offered by the wireless carriers;

• the degree to which wireless carriers facilitate the introduction of and actively promote, distribute and resell our wireless communications products;

• the extent to which wireless carriers require specific hardware and software features on our wireless communications products to be used on their networks;

• timely build out of advanced wireless carrier networks such as Universal Mobile Telecommunications System, or UMTS, Enhanced Data GSM Evolution, or EDGE, and Evolution Data Optimized, or EVDO, which enhance the user experience for email and other services through higher speed and “always on” functionality;

• contractual terms and conditions imposed on us by wireless carriers that, in some circumstances, could limit our ability to make similar products available through competitive carriers in some market segments;

• wireless carriers’ pricing requirements and subsidy programs; and

• pricing and other terms and conditions of voice and data rate plans that the wireless carriers offer for use with our wireless communications products.

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For example, flat data rate pricing plans offered by some wireless carriers may represent some risk to our relationship with such carriers. While flat data pricing helps customer adoption of the data services offered by carriers and therefore highlights the advantages of the data applications of our wireless communications products, such plans may not allow our smartphones to contribute as much average revenue per user, or ARPU, to wireless carriers as when they are priced by usage, and therefore reduces our differentiation from other, non-data devices in the view of the carriers. In addition, if wireless carriers charge higher rates than consumers are willing to pay, the acceptance of our wireless solutions could be less than anticipated and our revenues and results of operations could be adversely affected.

Wireless carriers have substantial bargaining power as we enter into agreements with them. They may require contract terms that are difficult for us to satisfy and could result in higher costs to complete certification requirements and negatively impact our results of operations and financial condition. Moreover, we do not have agreements with some of the wireless carriers with whom we do business and, in some cases, the agreements may be with third-party distributors and may not pass through rights to us or provide us with recourse or contact with the carrier. The absence of agreements means that, with little or no notice, these wireless carriers could refuse to continue to purchase all or some of our products or change the terms under which they purchase our products. If these wireless carriers were to stop purchasing our products, we may be unable to replace the lost sales channel on a timely basis and our results of operations could be harmed.

Wireless carriers also significantly affect our ability to develop and launch products for use on their wireless networks. If we fail to address the needs of wireless carriers, identify new product and service opportunities or modify or improve our wireless communications products in response to changes in technology, industry standards or wireless carrier requirements, our products could rapidly become less competitive or obsolete. If we fail to timely develop wireless communications products that meet carrier product planning cycles or fail to deliver sufficient quantities of products in a timely manner to wireless carriers, those carriers may choose to emphasize similar products from our competitors and thereby reduce their focus on our products which would have a negative impact on our business, results of operations and financial condition.

Carriers, who control most of the distribution and sale to, and virtually all of the access for, smartphone products could commoditize smartphones, thereby reducing the average selling prices and margins for our smartphone products which would have a negative impact on our business, results of operations and financial condition.

As we build strategic relationships with wireless carriers, we could be exposed to significant fluctuations in revenue for our wireless communications products.

Because of their large sales channels, wireless carriers may purchase large quantities of our products prior to launch so that the products are widely available. Reorders of products may fluctuate quarter to quarter, depending upon end-customer demand and inventory levels required by the carriers. As we develop new strategic relationships and launch new products with wireless carriers, our wireless communications products-related revenue could be subject to significant fluctuation based upon the timing of carrier product launches, carrier inventory requirements and our ability to forecast and satisfy carrier and end-customer demand.

The amount of future wireless carrier subsidies is uncertain, and wireless carriers are free to reduce or eliminate their subsidies with little notice to us, which could negatively impact our revenue and results of operations.

When we sell our wireless products on our own website, we sometimes have the opportunity to earn end-customer acquisition subsidies from wireless carriers if the end-customer also purchases a voice or data plan from the wireless carrier. The wireless carriers that currently provide Palm with subsidies may reduce or discontinue these subsidies with little notice. While we believe wireless carriers will continue to offer subsidies to Palm, if these subsidies were reduced or eliminated, the gross margins for the affected products sold through our web site would decline and we would be more limited in our ability to price our products competitively to cost sensitive consumers.

If carriers move away from subsidizing the purchase of wireless devices, this could significantly reduce the sales or growth rate of sales of wireless devices. This could have an adverse impact on our business, revenues and results of operations.

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If our wireless products do not meet wireless carrier and governmental or regulatory certification requirements, we will not be able to compete effectively and our ability to generate revenues will suffer.

We are required to certify our wireless products with governmental and regulatory agencies and with the wireless carriers for use on their networks. The certification process can be time consuming, could delay the offering of our wireless device products on carrier networks and affect our ability to timely deliver products to customers. As a result, carriers may choose to offer, or consumers may choose to buy, similar products from our competitors and thereby reduce their focus on our products, which would have a negative impact on our wireless communications products sales volumes, our revenues and our cost of revenues.

We rely on third parties to sell and distribute our products, and we rely on their information to manage our business. Disruption of our relationship with these channel partners, changes in their business practices, their failure to provide timely and accurate information or conflicts among our channels of distribution could adversely affect our business, results of operations and financial condition.

The wireless carriers, distributors, retailers and resellers who sell and distribute our products also sell products offered by our competitors. If our competitors offer our sales channel partners more favorable terms or have more products available to meet their needs or utilize the leverage of broader product lines sold through the channel, those wireless carriers, distributors, retailers and resellers may de-emphasize or decline to carry our products. In addition, certain of our sales channel partners could decide to de-emphasize the product categories that we offer in exchange for other product categories that they believe provide higher returns. If we are unable to maintain successful relationships with these sales channel partners or to expand our distribution channels, our business will suffer.

Because we sell our products primarily to wireless carriers, distributors, retailers and resellers, we are subject to many risks, including risks related to product returns, either through the exercise of contractual return rights or as a result of our strategic interest in assisting them in balancing inventories. In addition, these sales channel partners could modify their business practices, such as inventory levels or seek to modify their contractual terms, such as return rights or payment terms. Unexpected changes in product return requests, inventory levels, payment terms or other practices by these sales channel partners could negatively impact our business, results of operations and financial condition.

We rely on wireless carriers, distributors, retailers and resellers to provide us with timely and accurate information about their inventory levels as well as sell-through of products purchased from us. We use this information as one of the factors in our forecasting process to plan future production and sales levels, which in turn influences our public financial forecasts. We also use this information as a factor in determining the levels of some of our financial reserves. If we do not receive this information on a timely and accurate basis, our results of operations and financial condition may be adversely impacted.

Distributors, retailers and traditional resellers experience competition from Internet-based resellers that distribute directly to end-customers, and there is also competition among Internet-based resellers. We also sell our products directly to end-customers from our Palm.com web site and our Palm stores. These varied sales channels could cause conflict among our channels of distribution, which could harm our business, revenues and results of operations.

We are dependent on a concentrated number of significant customers and the loss or credit failure of any of those customers could have an adverse affect on our business, results of operation and financial condition.

Our largest customer(s) in terms of revenue represented 44% of our revenues during the third quarter of fiscal year 2006 compared to 32% during the fourth quarter of fiscal year 2005. We determine our largest customers to be those who represent 10% or more of our total revenues. We expect this trend of increased revenue concentration with our largest customers, particularly with wireless carriers, to continue. If any significant customer discontinues its relationship with us for any reason, or reduces or postpones current or expected purchases from us, it could have an adverse impact on our business, results of operation and financial condition.

In addition, our largest customers in terms of outstanding customer accounts receivable balances accounted for 38% of our accounts receivable as of February 28, 2006 and 24% of our accounts receivable at the end of fiscal year 2005. We determine our largest customers to be those who have outstanding customer accounts receivable balances at the period end as 10% or more of our total net accounts receivables. We expect this trend of increased credit concentration with our largest customers, particularly with wireless carriers, to continue, increasing our bad debt risks and the costs of mitigating those risks. We routinely monitor the financial condition of our customers and review the credit history of each new customer. While we believe that our allowances for doubtful accounts adequately reflect the credit risk of our customers, as well as historical trends and other economic factors, we cannot assure you that such allowances will be accurate or sufficient. If any of our significant customers defaults on its account, or if we experience significant credit expense for any reason, it could have an adverse impact on our business, results of operations and financial condition.

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We rely on third parties to manage and operate our e-commerce web store and related telesales call center, and disruption to this sales channel could adversely affect our revenues and results of operations.

We outsource the operations of our e-commerce web store and related telesales call centers to third parties. We depend on their expertise and rely on them to provide satisfactory levels of service. If these third party providers fail to provide consistent quality service in a timely manner and sustain customer satisfaction, our e-commerce web store and revenues could suffer. If these third parties were to stop providing these services, we may be unable to replace them on a timely basis and our e-commerce web store and results of operations could be harmed. In addition, if these third parties were to change the terms and conditions under which they provide these services, our selling costs could increase.

We depend on our suppliers, some of which are the sole source, for certain components, software applications and elements of our technology and some of which are competitors, and our production or reputation could be harmed if these suppliers were unable or unwilling to meet our demand or technical requirements on a timely and/or a cost effective basis.

Our handheld computing and smartphone products contain software applications and components, including liquid crystal displays, touch panels, memory chips, microprocessors, cameras, radios and batteries, which are procured from a variety of suppliers, including some who are our competitors. The cost, quality and availability of software applications and components are essential to the successful production and sale of our device products. For example, email applications are critical to the functionality of our smartphone devices.

Some components, such as screens and related integrated circuits, digital signal processors, microprocessors, radio frequency components and other discrete components, come from sole source suppliers. Alternative sources are not always available or may be prohibitively expensive. In addition, even when we have multiple qualified suppliers, we may compete with other purchasers for allocation of scarce components. Some components come from companies with whom we compete in the mobile communications and computing industry. If suppliers are unable or unwilling to meet our demand for components and if we are unable to obtain alternative sources or if the price for alternative sources is prohibitive, our ability to maintain timely and cost-effective production of our handheld computing and smartphone products will be harmed. Shortages affect the timing and volume of production for some of our products as well as increasing our costs due to premium prices paid for those components. Some of our suppliers may be capacity-constrained due to high industry demand for some components and relatively long lead times to expand capacity.

Our product strategy is substantially dependent on the Palm OS, which is owned by PalmSource, a former subsidiary of Palm that was recently acquired by Access Co.

We have a license agreement with PalmSource which extends through December 2009. Our license of the Palm OS from PalmSource is critical to the operation of many of our products. We rely on PalmSource to provide the operating system for all of our handheld and a significant portion of our smartphone products. PalmSource was recently acquired by Access Co., bringing the Palm OS under new management and control. While we have just begun shipping a product which utilizes Microsoft’s Windows Mobile operating system, we cannot predict how well the market will receive products based on the Microsoft or any other operating system and its corresponding impact on our relationship with PalmSource or Access.

Termination of the Palm OS license, an adverse change in our relationship with PalmSource or Access, failure by PalmSource and Access to supply a competitive platform, retain employees or otherwise remain viable, or an unfavorable outcome in any material lawsuit involving the Palm OS, could harm our business. Additionally, we are contractually obligated to make minimum annual payments to PalmSource, regardless of the volume of devices we sell containing the Palm OS. Our business could be harmed if:

• we were to breach the license agreement and PalmSource terminated the license;

• PalmSource and Access do not continuously upgrade the Palm OS and otherwise maintain the competitiveness of the Palm OS platform;

• our Palm OS-based devices drop in volume, yet we still owe PalmSource minimum royalties; or

• our announcement of a product on Microsoft’s Windows Mobile operating system, or our development of other devices on the Microsoft or any other operating system, impacts our volumes of Palm OS-based devices or impacts the perception of the Palm OS’s viability in the market, which could cause a deterioration of our volume of Palm OS-based devices.

We cannot be certain that the Palm OS or other PalmSource intellectual property important to our business will not eventually fall to a company less strategically aligned with us than PalmSource and Access. While our license and other agreements with PalmSource include certain protections for us if PalmSource or Access is acquired, these protections may not be adequate to fully protect our interests, which may reduce our ability to compete in the marketplace and cause us to incur significant costs.

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Other than the restrictions on the use of certain trademarks and domain names, nothing prohibits PalmSource or Access from competing with Palm or offering the PalmSource operating system to competitors of Palm. Palm and PalmSource or Access may not be able to resolve any potential conflicts that may arise between us, which may damage our relationship with PalmSource or Access.

Palm is a defendant in at least one intellectual property lawsuit involving the Palm OS. Although PalmSource generally indemnifies us for damages arising from such lawsuits, other than with respect to the litigation with Xerox, and from damages relating to intellectual property infringement by the Palm OS that occurred prior to the spin-off of PalmSource from Palm, we could still be adversely affected by a determination adverse to PalmSource as a result of market uncertainty, or product changes that may be advisable or required due to such lawsuits, or the failure of PalmSource or Access to adequately indemnify us.

If we are unable to obtain key technologies from third parties on a timely basis and free from errors or defects, we may have to delay or cancel the release of certain products or features in our products or incur increased costs.

We license third-party software and hardware for use in our handheld and smartphone products, including the Palm OS and third-party software embedded in the Palm OS. Our ability to release and sell our products, as well as our reputation, could be harmed if the third-party technologies are not delivered to us in a timely manner, on acceptable business terms or contain errors or defects that are not discovered and fixed prior to release of our products and we are unable to obtain alternative technologies on a timely and cost effective basis to use in our products. As a result, our product shipments could be delayed, our offering of features could be reduced or we may need to divert our development resources from other business objectives, any of which could adversely affect our reputation, business and results of operations.

Our success largely depends on our ability to hire, retain, integrate and motivate sufficient numbers of qualified personnel, including senior management. Our strategy and our ability to innovate, design and produce new products, sell products, maintain operating margins and control expenses depend on key personnel that may be difficult to replace.

Our success depends on our ability to attract and retain highly skilled personnel, including senior management. Over the past twelve months, we have experienced turnover in some of our senior management positions. We filled some of these positions and are actively recruiting to fill the remainder. We compensate our employees through a combination of salary, bonuses, benefits and equity compensation. Recruiting and retaining skilled personnel, including software and hardware engineers, is highly competitive, particularly in the San Francisco Bay Area where we are headquartered. If we fail to provide competitive compensation to our employees, it will be difficult to retain, hire and integrate qualified employees and contractors and we may not be able to maintain and expand our business. If we do not retain our senior managers or other key employees for any reason, we risk losing institutional knowledge and experience, expertise and other benefits of continuity. In addition, we must carefully balance the growth of our employee base with our current infrastructure, management resources and anticipated revenue growth. For example, we have recently moved into, invested in and committed ourselves to a six-year headquarters lease, but that space may not be adequate for our needs over the full term of the lease. If we are unable to manage the growth of our employee base, particularly software and hardware engineers, we may fail to develop and introduce new products successfully and in a cost effective and timely manner. If our revenue growth or employee levels vary significantly, our results of operations and financial condition could be adversely affected. Volatility or lack of positive performance in our stock price may also affect our ability to retain key employees, all of whom have been granted stock options or other equity incentives, or both.

Palm’s practice has been to provide incentives to all of its employees through the use of broad based stock option plans, but the number of shares available for new option grants is limited and new accounting rules from the Financial Accounting Standards Board and other agencies concerning the expensing of stock options, which will require us and other companies to record substantial charges to earnings, may cause us to re-evaluate our use of stock options as an employee incentive. Therefore, we may find it difficult to provide competitive stock option grants or other equity incentives and our ability to hire, retain and motivate key personnel may suffer.

In past quarters, we have initiated reductions in our workforce of both employees and contractors to balance the size of our employee base with our anticipated revenue base or areas of focus and we have seen some turnover in our workforce. These reductions have resulted in reallocations of duties, which could result in employee and contractor uncertainty. Reductions in our workforce could make it difficult to attract, motivate and retain employees and contractors, which could affect our ability to deliver our products in a timely fashion and negatively affect our business.

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Third parties have claimed, and may claim in the future, that we are infringing upon their intellectual property, and we could suffer significant litigation or licensing expenses or be prevented from selling products regardless of whether these claims are successful.

In the course of our business, we frequently receive claims of infringement or otherwise become aware of potentially relevant patents or other intellectual property rights held by other parties. For example, as our focus has shifted to wireless communication devices, we have received, and expect to continue to receive communications from holders of patents related to GSM, GPRS, CDMA and other mobile communication standards. We evaluate the validity and applicability of these intellectual property rights, and determine in each case whether we must negotiate licenses to incorporate or use the proprietary technologies in our products. Third parties may claim that our customers or we are infringing or contributing to the infringement of their intellectual property rights, and we may be found to infringe or contribute to the infringement of those intellectual property rights and may be required to pay significant damages and obligated either to refrain from the further sale of our products, or to license the right to sell our products on an ongoing basis. We may be unaware of intellectual property rights of others that may cover some of our technology, products and services. We may not have contractual relationships with some of the software and applications providers for our products, including some software and applications provided with our products, and as a result, we may not have indemnification, warranties or other protection with respect to such software or applications. Furthermore, claims against us or our suppliers may cause us or our customers to delay the introduction of or to stop using our devices or applications for our devices and, as a result, our revenues, business and results of operations may be adversely affected.

Any litigation regarding patents or other intellectual property could be costly and time consuming and could divert our management and key personnel from our business operations. The complexity of the technology involved and the uncertainty of litigation generally increase the risks associated with intellectual property litigation. Moreover, patent litigation has increased due to the increased numbers of cases asserted by intellectual property licensing entities as well as increasing competition and overlap of product functionality in our markets. Claims of intellectual property infringement may also require us to enter into costly royalty or license agreements or to indemnify our customers. However, we may not be able to obtain royalty or license agreements on terms acceptable to us or at all. We also may be subject to significant damages or injunctions against the development and sale of our products.

If we are unsuccessful in our litigation with Xerox, our results of operations and financial condition could be harmed.

We are engaged in a civil action brought by Xerox Corporation in 1997 in New York federal district court alleging willful infringement of a Xerox patent by the Graffiti handwriting recognition system employed in handheld devices operating the Palm OS, as described in Note 15 to the condensed consolidated financial statements in this quarterly report. We cannot assure you that Palm will prevail against this claim, and we may be required to pay Xerox significant damages or license fees and pay significant amounts with respect to Palm OS licensees for their losses. We are also contractually obligated to indemnify PalmSource for the amount of any damages awarded in, or agreed to in settlement of this litigation or for any claims brought against PalmSource by its licensees as a result of this alleged infringement. It may also result in other indirect costs and expenses, such as significant diversion of management resources, loss of reputation and goodwill, damage to our customer relationships and declines in our stock price. In addition, Xerox, unsuccessfully sought, but might again seek, an injunction preventing us or Palm OS licensees from offering products with Palm OS which include Graffiti handwriting recognition software, even though we have transitioned our products to a handwriting recognition software that does not use Graffiti as well as to physical keyboards. Accordingly, if Xerox is successful, our results of operations and financial condition could be harmed.

We are subject to general commercial litigation and other litigation claims as part of our operations, and we could suffer significant litigation expenses in defending these claims and could be subject to significant damage awards or other remedies.

In the course of our business, we receive consumer protection claims, general commercial claims related to the conduct of our business and the performance of our products and services, employment claims and other litigation claims. Any litigation resulting from these claims could be costly and time-consuming and could divert the attention of our management and key personnel from our business operations. The complexity of the technology involved and the uncertainty of consumer, commercial, employment and other litigation increase these risks. We also may be subject to significant damages or equitable remedies regarding the development and sale of our products and operation of our business.

Our products are subject to increasingly stringent laws, standards and other regulatory requirements, and the costs of compliance or failure to comply may adversely impact our business, results of operations and financial condition.

Our products must comply with a variety of laws, standards and other requirements governing, among other things, safety, materials usage, packaging and environmental impacts and must obtain regulatory approvals and satisfy other regulatory concerns in the various jurisdictions where our products are sold. Many of our products must meet standards governing, among other things, interference with other electronic equipment and human exposure to electromagnetic radiation. Failure to comply with such requirements can subject us to liability, additional costs and reputational harm and in severe cases prevent us from selling our products in certain jurisdictions.

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For example, many of our products are subject to laws and regulations that restrict the use of lead and other substances and require producers of electrical and electronic equipment to assume responsibility for collecting, treating, recycling and disposing of our products when they have reached the end of their useful life. In Europe, substance restrictions will apply to the products we sell beginning July 1, 2006, and new recycling, labeling, financing and related requirements came into effect with respect to certain of our products in August 2005. Failure to comply with applicable environmental requirements can result in fines, civil or criminal sanctions and third-party claims. If products we sell in Europe after July 1, 2006 are found to contain more than the permitted percentage of lead or another listed substance, it is possible that we could be forced to recall the products, which could lead to substantial replacement costs, contract damage claims from customers, and reputational harm. We are now and expect in the future to become subject to similar requirements in the United States, China and other parts of the world.

As a result of these new European requirements and anticipated developments elsewhere, we are now facing increasingly complex procurement and design challenges, which, among other things, require us to incur additional costs identifying suppliers and contract manufacturers who can provide compliant materials, parts and end products and re-designing products so that they comply with these and the many other requirements applicable to them.

Allegations of health risks associated with electromagnetic fields and wireless communications devices, and the lawsuits and publicity relating to them, regardless of merit, could adversely impact our business, results of operations and financial condition.

There has been public speculation about possible health risks to individuals from exposure to electromagnetic fields, or radio signals, from base stations and from the use of mobile devices. While a substantial amount of scientific research by various independent research bodies has indicated that these radio signals, at levels within the limits prescribed by public health authority standards and recommendations, present no evidence of adverse effect to human health, we cannot assure you that future studies, regardless of their scientific basis, will not suggest a link between electromagnetic fields and adverse health effects. Government agencies, international health organizations and other scientific bodies are currently conducting research into these issues. In addition, other mobile device companies have been named in individual plaintiff and class action lawsuits alleging that radio emissions from mobile phones have caused or contributed to brain tumors and the use of mobile phones pose a health risk. Although our products are certified as meeting applicable public health authority safety standards and recommendations, even a perceived risk of adverse health effects from wireless communications devices could adversely impact use of wireless communications devices and our reputation, business, results of operations and financial condition.

If third parties infringe our intellectual property or if we are unable to secure and protect our intellectual property, we may expend significant resources enforcing our rights or suffer competitive injury.

Our success depends in large part on our proprietary technology and other intellectual property rights. We recently made a significant investment in acquiring the rights to the Palm and related trademarks and will continue to invest in that brand and in our patent portfolio.

We rely on a combination of patents, copyrights, trademarks and trade secrets, confidentiality provisions and licensing arrangements to establish and protect our proprietary rights. Our intellectual property, particularly our patents, may not provide us a significant competitive advantage. If we fail to protect or to enforce our intellectual property rights successfully, our competitive position could suffer, which could harm our results of operations.

Our pending patent and trademark applications for registration may not be allowed, or others may challenge the validity or scope of our patents or trademarks, including patent or trademark applications or registrations. Even if our patents or trademark registrations are issued and maintained, these patents or trademarks may not be of adequate scope or benefit to us or may be held invalid and unenforceable against third parties.

We may be required to spend significant resources to monitor and police our intellectual property rights. Effective policing of the unauthorized use of our products or intellectual property is difficult and litigation may be necessary in the future to enforce our intellectual property rights. Intellectual property litigation is not only expensive, but time-consuming, regardless of the merits of any claim, and could divert attention of our management from operating the business. Despite our efforts, we may not be able to detect infringement and may lose competitive position in the market before we do so. In addition, competitors may design around our technology or develop competing technologies. Intellectual property rights may also be unavailable or limited in some foreign countries, which could make it easier for competitors to capture market share.

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In the past, there have been leaks of proprietary information associated with our intellectual property. We have implemented a security plan to reduce the risk of future leaks of proprietary information. We may not be successful in preventing those responsible for past leaks of proprietary information from using our technology to produce competing products or in preventing future leaks of proprietary information.

Despite our efforts to protect our proprietary rights, existing laws, contractual provisions and remedies afford only limited protection. Intellectual property lawsuits are subject to inherent uncertainties due to, among other things, the complexity of the technical issues involved, and we cannot assure you that we will be successful in asserting intellectual property claims. Attempts may be made to copy or reverse engineer aspects of our products or to obtain and use information that we regard as proprietary. Accordingly, we cannot assure you that we will be able to protect our proprietary rights against unauthorized third party copying or use. The unauthorized use of our technology or of our proprietary information by competitors could have an adverse effect on our ability to sell our products.

We have an international presence in countries whose laws may not provide protection of our intellectual property rights to the same extent as the laws of the United States, which may make it more difficult for us to protect our intellectual property.

As part of our business strategy, we target customers and relationships with suppliers and original distribution manufacturers in countries with large populations and propensities for adopting new technologies. However, many of these countries do not address misappropriation of intellectual property or deter others from developing similar, competing technologies or intellectual property. Effective protection of patents, copyrights, trademarks, trade secrets and other intellectual property may be unavailable or limited in some foreign countries. In particular, the laws of some foreign countries in which we do business may not protect our intellectual property rights to the same extent as the laws of the United States. As a result, we may not be able to effectively prevent competitors in these regions from infringing our intellectual property rights, which would reduce our competitive advantage and ability to compete in those regions and negatively impact our business.

Our ability to utilize our net operating losses may be limited if we engage in transactions which bring cumulative change in ownership for Palm to 50% or more.

As a result of the acquisition of Handspring, we experienced a change in our ownership of approximately 30%. If over a rolling three-year period, the cumulative change in our ownership exceeds 50%, our ability to utilize our net operating losses to offset future taxable income may be limited. This would limit the net operating loss available to offset taxable income each year following the cumulative change in our ownership over 50%. In the event the usage of these net operating losses is subject to limitation and we are profitable, our earnings and cash flows could be adversely impacted due to our increased tax liability.

Recently enacted and proposed changes in securities laws and regulations have increased and will continue to increase our costs.

The Sarbanes-Oxley Act of 2002 along with other recent and proposed rules from the SEC and Nasdaq have required changes in our corporate governance, public disclosure and compliance practices. Many of these new requirements increase our legal and financial compliance costs, and make some corporate actions more difficult, such as proposing new or amendments to stock option plans, which now require stockholder approval. For example, compliance with Section 404 of the Sarbanes-Oxley Act requires the commitment of significant resources to document and review internal controls over financial reporting.

In addition, these developments could make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These developments also could make it more difficult for us to attract and retain qualified executive officers and qualified members of our Board of Directors, particularly to serve on our audit committee.

Changes in financial accounting standards or practices may cause unexpected fluctuations in and adversely affect our reported results of operations.

Any change in financial accounting standards or practices that cause us to change the methodology or procedures by which we track, calculate, record and report our results of operations or financial condition or both could cause fluctuations in and adversely affect our reported results of operations and cause our historical financial information to not be reliable as an indicator of future results. For

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example, in December 2004, the FASB issued SFAS No. 123(R), which requires companies to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees and to record compensation cost for all stock awards granted after the required date of adoption and to awards modified, repurchased, or cancelled after that date. In addition, the Company is required to record compensation expense for the unvested portion of previously granted awards that remain outstanding at the date of adoption as such previous awards continue to vest. SFAS No. 123(R) will be effective for fiscal years beginning after June 15, 2005, which is Palm’s fiscal year 2007. The adoption of SFAS No. 123(R) is expected to have a material impact on our results of operations. If investors attempt to compare our results with the results of other companies, our company and valuation may appear less attractive, which could adversely affect the market price of our common stock.

We may pursue strategic acquisitions and investments which could have an adverse impact on our business if they are unsuccessful.

We have made acquisitions in the past and will continue to evaluate other acquisition opportunities that could provide us with additional product or service offerings or with additional industry expertise, assets and capabilities. Acquisitions could result in difficulties integrating acquired operations and products, technology, internal controls, personnel and management teams and result in the diversion of capital and management’s attention away from other business issues and opportunities. If we fail to successfully integrate acquisitions, including timely integration of internal controls to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, our business could be harmed. In addition, our acquisitions may not be successful in achieving our desired strategic objectives, which would also cause our business to suffer. Acquisitions can also lead to large non-cash charges that can have an adverse effect on our results of operations as a result of write-offs for items such as acquired in-process research and development, impairment of goodwill or the recording of deferred stock-based compensation. In addition, we have made strategic venture investments in other companies that provide products and services that are complementary to ours. If these investments are unsuccessful, this could have an adverse impact on our results of operations and financial condition.

We may need or find it advisable to seek additional funding which may not be available or which may result in substantial dilution of the value of our common stock.

We currently believe that our existing cash, cash equivalents and short-term investments will be sufficient to satisfy our anticipated cash requirements for at least the next 12 months. We could be required to seek additional funding if our expectations are not met.

Even if our expectations are met, we may find it advisable to seek additional funding. If we seek additional funding, adequate funds may not be available on favorable terms, or at all. If adequate funds are not available on acceptable terms, or at all, we may be unable to adequately fund our business plans and it could have a negative effect on our business, results of operations and financial condition. In addition, if funds are available, the issuance of equity securities or securities convertible into equity could dilute the value of shares of our common stock and cause the market price to fall and the issuance of debt securities could impose restrictive covenants that could impair our ability to engage in certain business transactions.

Our historical financial information may not be reliable as an indicator of future results due to the spin-off of PalmSource and the acquisition of Handspring. In addition, charges to earnings resulting from the application of the purchase method of accounting may adversely affect our results of operations.

The historical financial information for Palm, which includes results of the PalmSource business as discontinued operations, does not necessarily reflect what Palm’s financial condition, results of operations and cash flows would have been had the PalmSource business not been a part of Palm during historical periods.

In accordance with United States generally accepted accounting principles, we accounted for the acquisition of Handspring using the purchase method of accounting. Under the purchase method of accounting, we allocated the total purchase price to Handspring’s net tangible assets and amortizable intangible assets, based on their fair values as of the effective date of the acquisition of Handspring, and recorded the excess of the purchase price over those fair values as goodwill. To the extent the value of goodwill becomes impaired, we may be required to incur material charges relating to the impairment of those assets that may adversely affect our results of operations.

41

We own land that is not currently being utilized in our business. If our expected ability to ultimately recover the carrying value of this land is impaired, we would incur a non-cash charge against our results of operations.

We own approximately 39 acres of land in San Jose, California which we do not plan to develop. In the third quarter of fiscal year 2003, we reported an impairment charge to adjust the carrying cost of the land to its then current fair market value. We have entered into an agreement for the sale of this land, which has several conditions which have not yet been met. If this sale were not completed, a future sale or other disposition of the land at less than its carrying value, or a further deterioration in market values that impacts our expected recoverable value, would result in a non-cash charge which would negatively impact our results of operations.

Our future results could be harmed by economic, political, regulatory and other risks associated with international sales and operations.

Because we sell our products worldwide and most of the facilities where our devices are manufactured, distributed and supported are located outside the United States, our business is subject to risks associated with doing business internationally, such as:

• changes in foreign currency exchange rates;

• changes in a specific country’s or region’s political or economic conditions, particularly in emerging markets;

• changes in international relations;

• trade protection measures and import or export licensing requirements;

• changes in tax laws;

• compliance with a wide variety of laws and regulations which may have civil and/or criminal consequences for us and our officers and directors who we indemnify;

• difficulty in managing widespread sales operations; and

• difficulty in managing a geographically dispersed workforce in compliance with diverse local laws and customs.

In addition, we are subject to changes in demand for our products resulting from exchange rate fluctuations that make our products relatively more or less expensive in international markets. If exchange rate fluctuations occur, our business and results of operations could be harmed by decreases in demand for our products or reductions in margins.

While we sell our products worldwide, one component of our strategy is to expand our sales efforts in China, India and other countries with large populations and propensities for adopting new technologies. We have limited experience with sales and marketing in some of these countries. There can be no assurance that we will be able to market and sell our products in all of our targeted international markets. If our international efforts are not successful, our business growth and results of operations could be harmed.

We use third parties to provide significant operational and administrative services, and our ability to satisfy our customers and operate our business will suffer if the level of services is interrupted or does not meet our requirements.

We use third parties to provide services such as data center operations, desktop computer support and facilities services. Should any of these third parties fail to deliver an adequate level of service on a timely basis, our business could suffer. Some of our operations rely upon electronic data systems interfaces with third parties or upon the Internet to communicate information. Interruptions in the availability and functionality of systems interfaces or the Internet could adversely impact the operations of these systems and consequently our results of operations.

Business interruptions could adversely affect our business.

Our operations and those of our suppliers and customers are vulnerable to interruption by fire, hurricanes, earthquake, power loss, telecommunications failure, computer viruses, computer hackers, terrorist attacks, wars, health epidemics and other natural disasters and events beyond our control. For example, a significant part of our third-party manufacturing is based in Taiwan that has experienced earthquakes and is considered seismically active. In addition, the business interruption insurance we carry may not be sufficient to compensate us fully for losses or damages - - including, for example, loss of market share and diminution of our brand, reputation and customer loyalty - that may occur as a result of such events. Any such losses or damages incurred by us could have an adverse effect on our business.

42

Wars, terrorist attacks or other threats beyond our control could negatively impact consumer confidence, which could harm our operating results.

Wars, terrorist attacks or other threats beyond our control could have an adverse impact on the United States and world economy in general, and consumer confidence and spending in particular, which could harm our business, results of operations and financial condition.

PalmSource may be required to indemnify us for tax liabilities we may incur in connection with the distribution of PalmSource common stock to our stockholders, and we may be required to indemnify PalmSource for specified taxes.

We received a private letter ruling from the Internal Revenue Service, or IRS, to the effect that the distribution of the shares of PalmSource common stock held by us to our stockholders would not be taxable to our U.S. stockholders or us. This ruling is generally binding on the IRS, subject to the continuing accuracy of certain factual representations and warranties. Although some facts have changed since the issuance of the ruling, in the opinion of our tax counsel, these changes will not adversely affect us. We are not aware of any material change in the facts and circumstances of the distribution that would call into question the validity of the ruling. Notwithstanding the receipt of the ruling described above, the distribution may nonetheless be taxable to us under Section 355(e) of the Internal Revenue Code of 1986, as amended, if 50% or more of our stock or PalmSource stock is acquired as part of a plan or series of related transactions that include the PalmSource distribution.

Under the tax sharing agreement between PalmSource and us, PalmSource would be required to indemnify us if the sale of PalmSource’s common stock caused the distribution of PalmSource’s common stock to be taxable to us. In addition, under the tax sharing agreement, Palm has agreed to indemnify PalmSource for certain taxes and similar obligations that PalmSource could incur under certain circumstances. PalmSource may not be able to adequately satisfy its indemnification obligation under the tax sharing agreement. Finally, although under the tax sharing agreement PalmSource is required to indemnify us for taxes of PalmSource, we may be held jointly and severally liable for taxes determined on a consolidated basis.

Risks Related to the Securities Markets and Ownership of Our Common Stock

Our common stock price may be subject to significant fluctuations and volatility.

The market price of our common stock has been subject to significant fluctuations since the date of our initial public offering. These fluctuations could continue. Among the factors that could affect our stock price are:

• quarterly variations in our operating results;

• changes in revenues or earnings estimates or publication of research reports by analysts;

• speculation in the press or investment community;

• strategic actions by us, our customers, our suppliers or our competitors, such as new product announcements, acquisitions or restructurings;

• actions by institutional stockholders or financial analysts;

• general market conditions; and

• domestic and international economic factors unrelated to our performance.

The stock markets in general, and the markets for high technology stocks in particular, have experienced high volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock.

43

Provisions in our charter documents and Delaware law and our adoption of a stockholder rights plan may delay or prevent acquisition of us, which could decrease the value of shares of our common stock.

Our certificate of incorporation and bylaws and Delaware law contain provisions that could make it more difficult for a third party to acquire us without the consent of our Board of Directors. These provisions include a classified Board of Directors and limitations on actions by our stockholders by written consent. Delaware law also imposes some restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock. In addition, our Board of Directors has the right to issue preferred stock without stockholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer. Although we believe these provisions provide for an opportunity to receive a higher bid by requiring potential acquirers to negotiate with our Board of Directors, these provisions apply even if the offer may be considered beneficial by some stockholders.

Our Board of Directors adopted a stockholder rights plan, pursuant to which we declared and paid a dividend of one right for each share of common stock outstanding as of November 6, 2000. Unless redeemed by us prior to the time the rights are exercised, upon the occurrence of certain events, the rights will entitle the holders to receive upon exercise of the rights shares of our preferred stock, or shares of an acquiring entity, having a value equal to twice the then-current exercise price of the right. The issuance of the rights could have the effect of delaying or preventing a change in control of us.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

We currently maintain an investment portfolio consisting mainly of cash equivalents and short-term investments. These available-for-sale securities are subject to interest rate risk and will fall in value if market interest rates increase. The objectives of our investment activities are to maintain the safety of principal, assure sufficient liquidity and achieve appropriate returns. This is accomplished by investing in marketable investment grade securities and by limiting exposure to any one issuance or issuer. We do not use derivative financial investments in our investment portfolio. Our cash equivalents are primarily money market funds and an immediate and uniform increase in market interest rates of 100 basis points from levels at February 28, 2006 would cause an immaterial decline in the fair value of our cash equivalents. As of February 28, 2006, we had short-term investments of $404.6 million. Our investment portfolio primarily consists of highly liquid investments with original maturities at the date of purchase of greater than three months, and of marketable equity securities. These available-for-sale investments, consisting primarily of auction-rate securities, including government, domestic and foreign corporate debt securities and marketable equity securities, are subject to interest rate and interest income risk and will decrease in value if market interest rates increase. An immediate and uniform increase in market interest rates of 100 basis points from levels at February 28, 2006 would cause a decline of less than 2% in the fair market value of our short-term investment portfolio. We would expect our operating results or cash flows to be similarly affected by such a change in market interest rates.

Foreign Currency Exchange Risk

We denominate our sales to certain international customers in the Euro, in Pounds Sterling, in Brazilian Real and in Swiss Francs. Expenses and other transactions are also incurred in a variety of currencies. We hedge certain balance sheet exposures and intercompany balances against future movements in foreign currency exchange rates by using foreign exchange forward contracts. Gains and losses on the contracts are intended to offset foreign exchange gains or losses from the revaluation of assets and liabilities denominated in currencies other than the functional currency of the reporting entity. Our foreign exchange forward contracts generally mature within 30 days. We do not intend to utilize derivative financial instruments for trading purposes. Movements in currency exchange rates could cause variability in our revenues, expenses or interest and other income (expense).

Equity Price Risk

As of February 28, 2006 we do not own any material equity investments. Therefore, we do not currently have any material direct equity price risk.

Item 4. Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective in ensuring that information required to be disclosed by us in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

44

There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the third quarter of fiscal year 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The information set forth in Note 15 of the condensed consolidated financial statements of this Form 10-Q is incorporated herein by reference.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     The following table summarizes employee stock repurchase activity for the three months ended February 28, 2006:

	Total Number		Average Price
	of Shares		Paid Per
	Purchased		Share
December 1, 2005 — December 31, 2005		4,468	$	15.12
January 1, 2006 — January 31, 2006		2,132		17.48
February 1, 2006 — February 28, 2006		—		—
		6,600	$	15.88

The total number of shares repurchased include those shares of Palm common stock that employees deliver back to the Company to satisfy tax-withholding obligations at the settlement of restricted stock exercises and the forfeiture of restricted shares upon the termination of an employee. As of February 28, 2006, a total of approximately 137,000 shares may still be repurchased. Palm does not have a publicly announced plan to repurchase any of its shares of common stock.

45

Item 6. Exhibits

		Incorporated by Reference
Exhibit							Filed
Number	Exhibit Description	Form	File No.	Exhibit		Filing Date	Herewith
2.1	Master Separation and Distribution Agreement between 3Com and the registrant effective as of December 13, 1999, as amended.	S-1/A	333-92657		2.1	1/28/00
2.2	Tax Sharing Agreement between 3Com and the registrant.	10-Q	000-29597		2.7	4/10/00
2.3	Indemnification and Insurance Matters Agreement between 3Com and the registrant.	10-Q	000-29597		2.11	4/10/00
2.4	Form of Non-U.S. Plan.	S-1	333-92657		2.12	12/13/99
2.5	Agreement and Plan of Reorganization between the registrant, Peace Separation Corporation, Harmony Acquisition Corporation and Hand-spring, Inc., dated June 4, 2003.	8-K	000-29597		2.1	6/6/03
2.6	Amended and Restated Master Separation Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829		2.14	8/18/03
2.7	Amended and Restated Indemnification and Insurance Matters Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829		2.17	8/18/03
2.8	Amended and Restated Tax Sharing Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829		2.23	8/18/03
2.9	Master Patent Ownership and License Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829		2.30	8/18/03
2.10	Xerox Litigation Agreement between the registrant and PalmSource, Inc., as amended.	10-K/A	000-29597		2.34	9/26/03
3.1	Amended and Restated Certificate of Incorporation.	10-Q	000-29597		3.1	10/11/02
3.2	Amended and Restated Bylaws.	8-K	000-29597		3.2	10/5/05
4.1	Reference is made to Exhibits 3.1 and 3.2 hereof.	N/A	N/A		N/A	N/A	N/A
4.2	Specimen Stock Certificate.	10-K	000-29597		4.2	7/29/05
4.3	Preferred Stock Rights Agreement between the registrant and EquiServe Trust Company, N.A. (formerly Fleet National Bank), as amended.	8-K	000-29597		4.1	11/22/00
4.4	5% Convertible Subordinated Note, dated as of November 4, 2003.	10-Q	000-29597		4.4	4/6/04
4.5	Amendment to Preferred Stock Rights Agreement between the registrant and EquiServe Trust Company, N.A.	8-A/A	000-29597		4.2	11/18/04
4.6	Certificate of Ownership and Merger Merging Palm,Inc. into palmOne, Inc.	10-K	000-29597		4.6	7/29/05
10.1	Amended and Restated 1999 Stock Plan.	10-K	000-29597		10.1	7/29/05
10.2	Form of 1999 Stock Plan Agreements.	S-1/A	333-92657		10.2	1/28/00

46

		Incorporated by Reference
Exhibit							Filed
Number	Exhibit Description	Form	File No.	Exhibit		Filing Date	Herewith
10.3	Amended and Restated 1999 Employee Stock Purchase Plan.	S-8	000-29597		10.2	11/18/04
10.4	Form of 1999 Employee Stock Purchase Plan Agreements.	S-1/A	333-92657		10.4	1/28/00
10.5	Amended and Restated 1999 Director Option Plan.	S-8	333-47126		10.5	10/2/00
10.6	Form of 1999 Director Option Plan Agreements.	S-1/A	333-92657		10.6	1/28/00
10.7	Form of Indemnification Agreement entered into by the registrant with each of its directors and executive officers.	S-1/A	333-92657		10.8	1/28/00
10.8**	RAM Mobile Data USA Limited Partnership Value Added Reseller Agreement between RAM Mobile Data USA Limited Partnership (now Cingular Wireless) and the registrant.	S-1/A	333-92657		10.9	2/25/00
10.9	Form of Management Retention Agreement.	S-1/A	333-92657		10.14	2/28/00
10.10	Amendment Number One to Value Added Re- seller Agreement between Cingular Interactive, L.P. (formerly known as BellSouth Wireless Data, L.P., which was formerly known as RAM Mobile Data USA Limited Partnership) and the registrant.	10-Q/A	000-29597		10.37	2/26/02
10.11	Management Retention Agreement by and between the registrant and R. Todd Bradley dated as of September 17, 2002.	10-Q	000-29597		10.43	10/11/02
10.12	Form of Severance Agreement for Executive Officers.	10-Q	000-29597		10.44	10/11/02
10.13	Amended and Restated 2001 Stock Option Plan for Non-Employee Directors.	424(b)(3)	333-106829	ANN E		9/29/03
10.14	Handspring, Inc. 1998 Equity Incentive Plan, as amended.	S-8	333-110055		10.1	10/29/03
10.15	Handspring, Inc. 1999 Executive Equity Incentive Plan, as amended.	S-8	333-110055		10.2	10/29/03
10.16	Handspring, Inc. 2000 Equity Incentive Plan, as amended.	S-8	333-110055		10.3	10/29/03
10.17	Separation Agreement between the registrant and R. Todd Bradley dated as of January 24, 2005.	10-Q	000-29597		10.26	4/5/05
10.18	Amendment No. 3 to the Loan and Security Agreement between the registrant and Silicon Valley Bank.	10-Q	000-29597		10.29	4/5/05
10.19	Sub-Lease between the registrant and Philips Electronics North America Corporation.	10-Q	000-29597		10.30	4/5/05
10.20	Offer Letter from the registrant to Andrew J. Brown dated as of December 13, 2004.	10-Q	000-29597		10.31	4/5/05
10.21	Loan Modification Agreement between the registrant and Silicon Valley Bank.	10-K	000-29597		10.25	7/29/05
10.22	Second Amended and Restated Software License Agreement between the registrant and PalmSource, Inc., PalmSource Overseas Limited and palmOne Ireland Investment, dated May 23, 2005.	8-K	000-29597		10.2	7/28/05

47

		Incorporated by Reference
Exhibit							Filed
Number	Exhibit Description	Form	File No.	Exhibit		Filing Date	Herewith
10.23	Purchase Agreement between the registrant, PalmSource, Inc. and Palm Trademark Holding Company, LLC, dated May 23, 2005.	8-K	000-29597		10.1	5/27/05
10.24	Retention Agreement between the registrant and Celeste Baranski, dated June 29, 2005.	10-Q	000-29597		10.28	10/7/05
10.25	Purchase and Sale Agreement and Escrow Instructions between the registrant and Hunter/Storm, LLC, dated February 2, 2006.						X
10.26	Release Agreement between the registrant and Ken Wirt dated as of March 13, 2006.						X
10.27	First Amendment of Purchase and Sale Agreement and Escrow Instructions, dated March 13, 2006						X
10.28	Second Amendment of Purchase and Sale Agreement and Escrow Instructions, dated April 3, 2006						X
31.1	Rule 13a-14(a)/15d—14(a) Certification of Chief Executive Officer.						X
31.2	Rule 13a-14(a)/15d—14(a) Certification of Chief Financial Officer.						X
32.1	Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer.						X

** Confidential treatment granted on portions of this exhibit.

48

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Palm, Inc.
	(Registrant)
Date: April 10, 2006	By:	/s/ Andrew J. Brown
		Andrew J. Brown
		Senior Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

49

EXHIBIT INDEX

		Incorporated by Reference
Exhibit							Filed
Number	Exhibit Description	Form	File No.	Exhibit		Filing Date	Herewith
2.1	Master Separation and Distribution Agreement between 3Com and the registrant effective as of December 13, 1999, as amended.	S-1/A	333-92657		2.1	1/28/00
2.2	Tax Sharing Agreement between 3Com and the registrant.	10-Q	000-29597		2.7	4/10/00
2.3	Indemnification and Insurance Matters Agreement between 3Com and the registrant.	10-Q	000-29597		2.11	4/10/00
2.4	Form of Non-U.S. Plan.	S-1	333-92657		2.12	12/13/99
2.5	Agreement and Plan of Reorganization between the registrant, Peace Separation Corporation, Harmony Acquisition Corporation and Hand-spring, Inc., dated June 4, 2003.	8-K	000-29597		2.1	6/6/03
2.6	Amended and Restated Master Separation Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829		2.14	8/18/03
2.7	Amended and Restated Indemnification and Insurance Matters Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829		2.17	8/18/03
2.8	Amended and Restated Tax Sharing Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829		2.23	8/18/03
2.9	Master Patent Ownership and License Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829		2.30	8/18/03
2.10	Xerox Litigation Agreement between the registrant and PalmSource, Inc., as amended.	10-K/A	000-29597		2.34	9/26/03
3.1	Amended and Restated Certificate of Incorporation.	10-Q	000-29597		3.1	10/11/02
3.2	Amended and Restated Bylaws.	8-K	000-29597		3.2	10/5/05
4.1	Reference is made to Exhibits 3.1 and 3.2 hereof.	N/A	N/A		N/A	N/A	N/A
4.2	Specimen Stock Certificate.	10-K	000-29597		4.2	7/29/05
4.3	Preferred Stock Rights Agreement between the registrant and EquiServe Trust Company, N.A. (formerly Fleet National Bank), as amended.	8-K	000-29597		4.1	11/22/00
4.4	5% Convertible Subordinated Note, dated as of November 4, 2003.	10-Q	000-29597		4.4	4/6/04
4.5	Amendment to Preferred Stock Rights Agreement between the registrant and EquiServe Trust Company, N.A.	8-A/A	000-29597		4.2	11/18/04
4.6	Certificate of Ownership and Merger Merging Palm,Inc. into palmOne, Inc.	10-K	000-29597		4.6	7/29/05
10.1	Amended and Restated 1999 Stock Plan.	10-K	000-29597		10.1	7/29/05
10.2	Form of 1999 Stock Plan Agreements.	S-1/A	333-92657		10.2	1/28/00
10.3	Amended and Restated 1999 Employee Stock Purchase Plan.	S-8	000-29597		10.2	11/18/04

50

		Incorporated by Reference
Exhibit							Filed
Number	Exhibit Description	Form	File No.	Exhibit		Filing Date	Herewith
10.4	Form of 1999 Employee Stock Purchase Plan Agreements.	S-1/A	333-92657		10.4	1/28/00
10.5	Amended and Restated 1999 Director Option Plan.	S-8	333-47126		10.5	10/2/00
10.6	Form of 1999 Director Option Plan Agreements.	S-1/A	333-92657		10.6	1/28/00
10.7	Form of Indemnification Agreement entered into by the registrant with each of its directors and executive officers.	S-1/A	333-92657		10.8	1/28/00
10.8**	RAM Mobile Data USA Limited Partnership Value Added Reseller Agreement between RAM Mobile Data USA Limited Partnership (now Cingular Wireless) and the registrant.	S-1/A	333-92657		10.9	2/25/00
10.9	Form of Management Retention Agreement.	S-1/A	333-92657		10.14	2/28/00
10.10	Amendment Number One to Value Added Re- seller Agreement between Cingular Interactive, L.P. (formerly known as BellSouth Wireless Data, L.P., which was formerly known as RAM Mobile Data USA Limited Partnership) and the registrant.	10-Q/A	000-29597		10.37	2/26/02
10.11	Management Retention Agreement by and between the registrant and R. Todd Bradley dated as of September 17, 2002.	10-Q	000-29597		10.43	10/11/02
10.12	Form of Severance Agreement for Executive Officers.	10-Q	000-29597		10.44	10/11/02
10.13	Amended and Restated 2001 Stock Option Plan for Non-Employee Directors.	424(b)(3)	333-106829	ANN E		9/29/03
10.14	Handspring, Inc. 1998 Equity Incentive Plan, as amended.	S-8	333-110055		10.1	10/29/03
10.15	Handspring, Inc. 1999 Executive Equity Incentive Plan, as amended.	S-8	333-110055		10.2	10/29/03
10.16	Handspring, Inc. 2000 Equity Incentive Plan, as amended.	S-8	333-110055		10.3	10/29/03
10.17	Separation Agreement between the registrant and R. Todd Bradley dated as of January 24, 2005.	10-Q	000-29597		10.26	4/5/05
10.18	Amendment No. 3 to the Loan and Security Agreement between the registrant and Silicon Valley Bank.	10-Q	000-29597		10.29	4/5/05
10.19	Sub-Lease between the registrant and Philips Electronics North America Corporation.	10-Q	000-29597		10.30	4/5/05
10.20	Offer Letter from the registrant to Andrew J. Brown dated as of December 13, 2004.	10-Q	000-29597		10.31	4/5/05
10.21	Loan Modification Agreement between the registrant and Silicon Valley Bank.	10-K	000-29597		10.25	7/29/05
10.22	Second Amended and Restated Software License Agreement between the registrant and PalmSource, Inc., PalmSource Overseas Limited and palmOne Ireland Investment, dated May 23, 2005.	8-K	000-29597		10.2	7/28/05
10.23	Purchase Agreement between the registrant, PalmSource, Inc. and Palm Trademark Holding Company, LLC, dated May 23, 2005.	8-K	000-29597		10.1	5/27/05

51

		Incorporated by Reference
Exhibit							Filed
Number	Exhibit Description	Form	File No.	Exhibit		Filing Date	Herewith
10.24	Retention Agreement between the registrant and Celeste Baranski, dated June 29, 2005.	10-Q	000-29597		10.28	10/7/05
10.25	Purchase and Sale Agreement and Escrow Instructions between the registrant and Hunter/Storm, LLC, dated February 2, 2006.						X
10.26	Release Agreement between the registrant and Ken Wirt dated as of March 13, 2006.						X
10.27	First Amendment of Purchase and Sale Agreement and Escrow Instructions, dated March 13, 2006						X
10.28	Second Amendment of Purchase and Sale Agreement and Escrow Instructions, dated April 3, 2006						X
31.1	Rule 13a-14(a)/15d—14(a) Certification of Chief Executive Officer.						X
31.2	Rule 13a-14(a)/15d—14(a) Certification of Chief Financial Officer.						X
32.1	Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer.						X

** Confidential treatment granted on portions of this exhibit.

52

EX-10.25

EXHIBIT 10.25

PURCHASE AND SALE AGREEMENT
AND ESCROW INSTRUCTIONS

     This Agreement is dated as of February 2, 2006 (the “Effective Date”), by and between Palm, Inc., a Delaware corporation (“Seller”), and Hunter/Storm, LLC, a California limited liability company (“Buyer”). Buyer and Seller are individually referred to as a “Party” and collectively as the “Parties.”

     In consideration of the respective agreements hereinafter set forth, Seller and Buyer agree as follows:

     1. Property Included in Sale. Seller shall sell and convey to Buyer, and Buyer shall purchase from Seller, subject to the terms and conditions set forth herein, the following:

          1.1 Real Property. The unimproved real property located in the City of San Jose, County of Santa Clara, State of California, consisting of approximately thirty-six and six-tenths (36.6) acres, which is described in EXHIBIT A attached hereto and incorporated by reference herein (the “Real Property”); provided, however, that no representation is made by Seller as to the size of the Real Property;

          1.2 Appurtenances. All of Seller’s right, title and interest in and to all rights, privileges and easements or other appurtenances used in connection with the beneficial use and enjoyment of the Real Property (collectively, the “Appurtenances”); and

          1.3 Intangible Property. All of Seller’s right, title and interest in and to all intangible property related to the use or operation of the Property (defined below), including without limitation, all licenses and permits required in connection with the operation of the Property, all governmental zoning, use and operating permits, and all other governmental permits, licenses, approvals, applications, subdivision maps, entitlements, certificates, rights under development agreements, building permits, development allocations, and development rights relating to the Real Property and all utility and other permits relating to the Real Property (collectively, the “Intangible Property”), all of which shall, to the extent assignable, be assigned to and assumed by Buyer pursuant to an Assignment and Assumption Agreement (the “Assignment”) in the form attached hereto as EXHIBIT B and incorporated by reference herein. Seller shall provide Buyer a written list of the existing Intangible Property no later than ten (10) business days following the Effective Date. Not later than the last day of the Due Diligence Period (as defined in paragraph 4.1 below), Buyer shall notify Seller in writing which of the foregoing items Buyer shall want assigned to Buyer (to the extent assignable) at Close of Escrow (as defined in paragraph 7.2 below).

     The Real Property, Appurtenances and Intangible Property are collectively referred to as the “Property.”

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     2. Purchase Price.

          2.1 Purchase Price. The purchase price for the Property is Seventy Million Dollars ($70,000,000.00) (the “Purchase Price”). The Purchase Price shall be paid as set forth below.

          2.2 Initial Deposit. Within three (3) business days after the Effective Date of this Agreement, and as a condition to the Parties’ rights and obligations hereunder, Buyer shall deliver into escrow with Chicago Title Company, 110 West Taylor Street, San Jose, California 95110 (“Escrow Holder” or “Title Company”), attn: Sharman McKenna, a deposit in the amount of One Hundred Thousand Dollars ($100,000) (the “Initial Deposit”). The Initial Deposit shall be refundable to Buyer prior to the delivery of the Election Notice (as defined in paragraph 4.1) to Escrow Holder.

          2.3 Additional Deposit. If Buyer elects to proceed with this Agreement, then not later than one business day after the expiration of the Due Diligence Period, Buyer shall deliver to Escrow Holder an additional deposit in the amount of Two Hundred Thousand Dollars ($200,000.00) (the “Additional Deposit”), together with the Election Notice (as defined in paragraph 4.1). Except as expressly provided herein, the Initial Deposit and the Additional Deposit shall become non-refundable to Buyer immediately upon Buyer’s delivery of the Additional Deposit and the Election Notice to Escrow Holder, but shall be applicable to the Purchase Price if the Closing (as defined in paragraph 7.2 below) occurs as set forth in this Agreement. The Initial Deposit and the Additional Deposit are referred to herein collectively as the “Deposit”.

          2.4 Applied to Purchase Price. The Deposit shall be applied to the Purchase Price at Close of Escrow.

          2.5 Interest. Escrow Holder shall hold the Deposit and all other funds deposited by Buyer into escrow pursuant to this Agreement, including, without limitation, the balance of the Purchase Price if and when deposited into escrow in accordance with paragraph 7.4, in an interest bearing account for the benefit of Buyer until the Close of Escrow.

          2.6 Cash Balance. The balance of the Purchase Price, plus or minus prorations and other adjustments as provided in this Agreement, if any, shall be due at Closing and shall be paid by Buyer by wire transfer of immediately available funds paid to the Title Company one (1) business day prior to the Closing.

     3. Title to the Property. At the Closing, Seller shall convey to Buyer title to the Real Property subject only to the Approved Exceptions (as defined in paragraph 5.1 below) by a duly executed and acknowledged Grant Deed in Title Company’s standard form (the “Grant Deed”). At the Closing, Title Company shall issue to Buyer a CLTA Owner’s Policy of Title Insurance in the amount of the Purchase Price insuring fee simple title to the Property in Buyer, subject only to the Approved Exceptions (as defined in paragraph 5.1). Buyer may elect to obtain an ALTA Extended Owner’s Policy of Title Insurance, instead of a CLTA Owner’s Policy of Title Insurance, in the amount of the Purchase Price subject only to the Approved Exceptions, provided (i) Buyer shall be solely responsible for providing any survey (the “Survey”) required by the Title Company for such

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purpose, or, if Seller has a Survey of the Real Property, Buyer shall be entitled to use the same in which case Buyer shall be solely responsible for the cost of updating the Survey; (ii) Buyer shall be responsible for the payment of any title insurance premium in excess of the premium that would have been charged for a CLTA Owner’s Policy of Title Insurance; and (iii) in no event will the issuance of the ALTA Extended Owner’s Policy of Title Insurance delay the Closing. The CLTA Owner’s Policy of Title Insurance or, if requested by Buyer in accordance with this paragraph, the ALTA Extended Owner’s Policy of Title Insurance to be issued in accordance with this paragraph 3 is referred to as the “Title Policy.”

     4. Due Diligence and Time for Satisfaction of Conditions; Right of Entry.

          4.1 Due Diligence Period. Buyer, and/or its agents, members, partners, related and affiliated entities, employees, representatives, consultants, contractors, successors or assigns (collectively, “Buyer’s Agents”), shall have until 5:00 p.m., Pacific Time, on the date that is sixty (60) days after the Effective Date (the “Due Diligence Period”) in which to examine, inspect, and investigate the Property, and to determine whether the purchase of the Property is satisfactory to Buyer, in its sole and absolute discretion. If Buyer does not give Seller and Escrow Holder written notice of Buyer’s election to proceed with this Agreement (the “Election Notice”) prior to the expiration of the Due Diligence Period, then Buyer shall be deemed to have elected to terminate this Agreement, in which case Escrow Holder shall immediately return the Initial Deposit to Buyer, this Agreement shall terminate and neither Party shall have any further obligation to the other hereunder, except as provided in paragraph 4.2 below and except for the waivers, releases, Information (as defined below), indemnity and insurance obligations of the Buyer and Seller that are stated to survive the termination of this Agreement (the “Surviving Obligations”). In such event, Buyer shall deliver to Seller all information, materials and data (collectively, the “Information”) that Buyer and/or its Agents discover, obtain or generate in connection with or resulting from Buyer’s investigation of the Property (including, without limitation, any Inspection conducted pursuant to paragraph 4.2 below), other than internal analyses produced by Buyer of a proprietary nature or matters subject to the attorney-client privilege, and neither Buyer nor Seller shall thereafter have any further rights or obligations under this Agreement unless expressly provided otherwise herein. The Information shall be delivered to Seller on an “as-is with all faults basis” and without any representation or warranty as to the accuracy or completeness thereof.

          4.1.1 Extended Due Diligence Period. Notwithstanding the foregoing, if the Condition Precedent set forth in paragraph 5.1.5 has not been satisfied on or before the expiration of the Due Diligence Period, Buyer shall have the right to extend the Due Diligence Period for an additional period of one hundred twenty (120) days (the “Extended Due Diligence Period”) solely for the purpose of satisfying the Condition Precedent set forth in paragraph 5.1.5. If Buyer elects to extend the Due Diligence Period as provided above, Buyer shall notify Seller in writing (the “Extension Notice”) on or before the last day of the Due Diligence Period of its election to do so. Furthermore, as a condition to the extension of the Due Diligence Period, Buyer shall (i) concurrently with the delivery of the Extension Notice (or as part of the Extension Notice) deliver to Seller and Escrow Holder the Election Notice (which shall state that Buyer approves or waives the Conditions Precedent set forth in paragraphs 5.1.2 and 5.1.3, and (ii) within one business day after the expiration of the Due Diligence Period deliver the Additional Deposit to Escrow Holder. If Buyer does not give Seller and Escrow Holder written notice of Buyer’s election to proceed with this

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Agreement (the “Second Election Notice”) prior to the expiration of the Extended Due Diligence Period, then Buyer shall be deemed to have elected to terminate this Agreement, in which case this Agreement shall terminate and neither Party shall have any further obligation to the other hereunder, except as provided in paragraph 4.2, below and except for Buyer’s and Seller’s Surviving Obligations. In such event, Buyer shall deliver to Seller the Information, as set forth in and subject to paragraph 4.1 above, and neither Buyer nor Seller shall thereafter have any further rights or obligations under this Agreement unless expressly provided otherwise herein.

          4.2 Property Inspection. Prior to the Closing Date, Seller shall afford Buyer and Buyer’s Agents reasonable access to the Real Property for the purpose of conducting surveys, architectural, engineering, geotechnical and environmental inspections and tests, and any other physical inspections, studies, or tests reasonably required by Buyer (collectively, the “Inspections”) with respect to the Property. Buyer shall maintain for itself and on behalf of its consultants and contractors, or Buyer shall maintain and shall ensure that its agents, consultants and contractors maintain, public liability and property damage insurance insuring against any liability arising out of any entry, tests or investigations of the Property pursuant to the provisions hereof. Such insurance maintained by Buyer and/or its consultants, agents and contractors (as applicable) shall be in the amount of One Million Dollars ($1,000,000.00) combined single limit for injury to or death of one or more persons in an occurrence, and for damage to tangible property (including loss of use) in an occurrence. The policy maintained by Buyer shall insure the contractual liability of Buyer covering the indemnities herein and shall (i) name the Seller and its successors, assigns and affiliates as additional insureds, (ii) contain a cross-liability provision, and (iii) contain a provision that “the insurance provided by Buyer hereunder shall be primary and non-contributing with any other insurance available to Seller.” Buyer shall provide Seller with evidence of such insurance coverage prior to any entry, tests or investigations of the Property. The aforementioned insurance coverage may be obtained under a blanket policy carried by Buyer or its agents, consultants or contractors, as the case may be. Notwithstanding the foregoing, Buyer shall not be permitted to undertake any intrusive or destructive testing of the Property, including without limitation a “Phase II” environmental assessment, (“Physical Testing”) without in each instance first obtaining Seller’s written consent thereto, which consent Seller shall not unreasonably withhold. Prior to entering the Property (and on each and every occasion), Buyer shall deliver to Seller prior written notice thereof (or verbal notice wherein Buyer actually speaks with a representative of Seller (not a voicemail message) with written notice delivered immediately thereafter, if requested at such time), and shall afford Seller a reasonable opportunity to have a representative of Seller present to accompany Buyer while Buyer performs its evaluations, inspections, tests, Physical Testing and other investigations of the physical condition, including without limitation, the environmental condition, of the Property. Buyer also shall have the right to contact any governmental agency with respect to any Hazardous Materials (as defined below) on, or the environmental condition of, the Property, including, without limitation, in connection with a “Phase I” or “Phase II” environmental assessment. Prior to any such contact, Buyer shall give Seller written notice thereof (or verbal notice wherein Buyer actually speaks with a representative of Seller (not a voicemail message) with written notice delivered immediately thereafter, if requested at such time), and shall afford Seller a reasonable opportunity to have a representative of Seller present to accompany Buyer while Buyer contacts any such governmental agency. In addition, prior to any entry to perform any necessary on-site inspections, tests, Physical Testing or investigations with respect to the physical condition of the Property, Buyer

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shall give Seller written notice thereof (or verbal notice wherein Buyer actually speaks with a representative of Seller (not a voicemail message) with written notice delivered immediately thereafter, if requested at such time), including the identity of the company or party(s) who will perform such inspections, tests, Physical Testing or investigations and the proposed scope of the inspections, tests, Physical Testing or investigations, including, without limitation, the soil, drainage and seismic condition of the Property, its compliance with applicable laws, codes, regulations and governmental approvals, and the zoning, availability of utilities and feasibility of the Property for the use intended by Buyer. Seller shall approve or disapprove any proposed inspections, tests, Physical Testing or investigations and the party(s) performing the same within one (1) business day after receipt of such notice. Seller’s failure to advise Buyer of its disapproval of any proposed inspections, tests, Physical Testing or investigations and the party(s) performing the same within such one (1)- business day period shall be deemed Seller’s approval thereof, except to the extent said proposed inspections, tests, Physical Testing or investigations relate to “Phase II” environmental matters, in which event Seller’s failure to advise Buyer of its approval or disapproval of any proposed environmental inspections, tests or investigations and the party(s) performing the same within such one (1) business day period shall be deemed Seller’s disapproval thereof. Notwithstanding anything to the contrary contained in this Agreement, if Buyer believes that applicable law requires disclosure to any governmental authority or regulatory agency regarding any Hazardous Material on or environmental condition of the Property, including, without limitation, in connection with Buyer’s performance of a “Phase I” or “Phase II” environmental site assessment, Buyer shall so notify Seller and Seller shall determine whether disclosure is required and, if so, shall make such disclosure. If Seller determines that disclosure is required, Seller shall provide Buyer with evidence of Seller’s disclosure within the period within which such disclosure is required to be made. The term “Hazardous Materials” as used in this Agreement shall mean and refer to (a) any hazardous or toxic wastes, materials or substances, or chemicals, and other pollutants or contaminants, which are or become regulated by applicable local, state, regional and/or federal orders, ordinances, statutes, rules, regulations (as interpreted by judicial and administrative decisions) and laws; (b) asbestos, asbestos-containing materials or urea formaldehyde; (c) polychlorinated biphenyls; (d) flammables, explosive, corrosive or radioactive materials; (e) medical waste and biochemicals; and (f) gasoline, diesel, petroleum or petroleum by-products.

               4.2.1 Natural Hazard Disclosure Statement. Buyer and Seller acknowledge that Seller is required to disclose if any of the Property lies within the following natural hazard areas or zones: (i) a special flood hazard area designated by the Federal Emergency Management Agency; (ii) an area of potential flooding; (iii) a very high fire hazard severity zone; (iv) a wild land area that may contain substantial forest fire risks and hazards; (v) an earthquake fault or special studies zone; or (vi) a seismic hazard zone. Buyer acknowledges that Seller has or will have engaged the services of Disclosure Source (“Natural Hazard Expert”) to examine the maps and other information specifically made available to the public by government agencies for the purposes of enabling Seller to fulfill its disclosure obligations with respect to the natural hazards and to report the results of its examination to Buyer and Seller in writing. The written report prepared by the Natural Hazard Expert regarding the results of its examination fully and completely discharges Seller from its disclosure obligations referred to herein, and, for the purposes of this Agreement, the provisions of Civil Code Section 1103.4 regarding the non-liability of Seller for errors and/or omissions not within its personal knowledge shall be deemed to apply and the Natural Hazard Expert shall be deemed to

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be an expert, dealing with matters within the scope of its expertise with respect to the examination and written report regarding the natural hazards referred to above. Not later than ten (10) business days after the Effective Date, Seller shall deliver to Buyer a copy of a current Natural Hazard Disclosure Statement issued by the Natural Hazard Expert with respect to the Property.

          4.3 Indemnity. Buyer, at its sole cost and expense, shall comply with all applicable federal, state and local laws, rules, statutes, regulations, ordinances, or policies in conducting the Inspections and Physical Testing. Buyer and Buyer’s Agents shall keep the Property free clear of any liens arising from Buyer’s and Buyer’s Agent’s activities on the Property and shall hold harmless, protect, defend (with counsel reasonably acceptable to Seller) and indemnify Seller and Seller’s partners, members, trustees, directors, officers, shareholders, employees, representatives, property managers, asset managers, agents, attorneys, affiliated and related entities, heirs, successors and assigns (collectively, the “Indemnitees”) and the Property from and against any liabilities, claims, demands, judgments, causes of action, losses, costs, damages, penalties, fines, taxes, remedial actions, removal and disposal costs, investigation and remedial costs and expenses (including, without limitation, attorneys’, expert and consultant fees), whether direct or indirect, known or unknown (collectively, “Claims”) arising out of or in connection with (1) any injuries to persons (including death) or damage to any property; provided, however, that the foregoing indemnity shall not extend to any liabilities to the extent arising as a result of the mere discovery by Buyer of a pre-existing condition that has a deleterious effect on the Property, or (2) any mechanic’s, workers’ or other liens on the Property, by reason of or relating to the work or activities conducted on the Property by Buyer or Buyer’s Agents. The foregoing provisions shall not be limited by in any way by any other terms of this Agreement, and shall survive the Closing and/or the expiration or earlier termination of this Agreement. Buyer, at its sole cost and expense, shall clean up and repair the Property in whatever manner necessary after Buyer or Buyer’s Agents’ entry thereon so that the Property shall be returned to the same condition that existed prior to Buyer’s or Buyer’s Agents’ entry thereon; provided, however, that Buyer shall not have any obligation to clean up or repair any condition not caused by Buyer or Buyer’s Agents.

          4.4 Information. Seller shall promptly be provided with a copy of all Information that Buyer or Buyer’s Agents discover, obtain or generate in connection with or resulting from their Inspections, Physical Testing and work under paragraph 4.2, which Information shall be subject to the disclaimer set forth in paragraph 4.1 above. All such Information shall be deemed confidential, and Buyer shall not disclose or permit Buyer’s Agents to disclose to any third party, other than Buyer’s consultants, agents, lenders and attorneys associated with the applicable investigation of the Property and other than as may be required by applicable law (subject to the provisions of paragraph 4.2 above), the results of Buyer’s Inspection.

     5. Conditions to Closing.

          5.1 Buyer’s Conditions. The following conditions are conditions precedent to Buyer’s obligation to purchase the Property (the “Buyer’s Conditions Precedent”), which conditions are for the benefit of Buyer only and the satisfaction of which may be waived only in writing by Buyer:

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               5.1.1 Buyer’s review and approval of title to the Property, as follows: Buyer shall obtain or Seller shall cause to be delivered to Buyer, a preliminary title report on the Property, issued by Title Company, accompanied by copies of all documents referred to in the preliminary title report (collectively, the “Preliminary Report”), and, if Buyer so elects, the Survey (or any update of Seller’s existing Survey). Buyer shall advise Seller, within thirty (30) days after the later of (a) Buyer’s receipt of the Preliminary Report, and (b) the Effective Date, what exceptions to title, if any, are objected to by Buyer. If Buyer fails to deliver a timely notice of any objections to such title exceptions, Buyer shall be deemed to have disapproved of such exceptions. If Buyer fails to obtain its own Survey (or update Seller’s existing Survey) and render objections to any matters described thereon within such thirty (30) -day period, any matters that would be disclosed by a Survey shall be deemed Approved Exceptions (as defined below). Seller shall have ten (10) days after receipt of Buyer’s objections to give Buyer: (i) notice that said exceptions will be removed on or before the Closing Date; or (ii) notice that Seller elects not to cause such exceptions to be removed. If Seller fails to give notice under either clause (i) or clause (ii), Seller shall be deemed to have elected not to cause such exceptions to be removed. Except as provided below, Seller shall have no obligation to remove or otherwise address Buyer’s objections to title. If Seller gives Buyer notice under clause (ii), Buyer shall notify Seller prior to the expiration of the Due Diligence Period, whether Buyer elects to proceed with the purchase or terminate this Agreement. If Buyer fails to give Seller the Election Notice prior to the expiration of the Due Diligence Period, Buyer shall be deemed to have elected to terminate this Agreement. If Buyer gives Seller the Election Notice prior to the expiration of the Due Diligence Period, Buyer shall be deemed to have elected to proceed with this Agreement and to accept title subject to the Approved Exceptions and the objected-to exceptions that Seller has not agreed to remove. The title exceptions approved pursuant to this paragraph 5.1.1 are referred to herein as the “Approved Exceptions”. Notwithstanding the foregoing, in no event shall any financing secured by the Property or any monetary liens (unless created by Buyer or Buyer’s Agents) other than supplemental taxes and property taxes, assessments, special assessments and the like not yet due and payable be deemed Approved Exceptions, and Seller agrees to remove any such exception at the Close of Escrow.

               5.1.2 Buyer’s review and approval, within the Due Diligence Period, of all physical characteristics and conditions of the Property, including the environmental condition thereof (including the approval of Phase I and Phase II Environmental Site Assessments of the Property if Buyer so desires, subject, however, to the provisions of paragraph 4.2 above), the condition of the Real Property, all governmental requirements and restrictions relating to the operation, use or occupancy of the Property, and any other factors as Buyer deems necessary to fully understand the Property and its suitability for Buyer’s intended use of the Property.

               5.1.3 Buyer’s review and approval in its sole discretion, for any reason or no reason, within the Due Diligence Period, of the Property Information, as defined herein. To the extent such items are in Seller’s possession, and are not either proprietary to Seller or subject to any agreement by Seller to maintain their confidentiality, within ten (10) business days after the Effective Date Seller shall provide to Buyer the following information and documents: any ALTA survey of the Property, environmental reports, including any environmental reports prepared by or on behalf of Seller, soils tests, building plans, surveys, engineering reports and leases (the “Property Information”). Seller has not undertaken any independent investigation as to the truth or accuracy of the Property Information and is providing the same solely as an accommodation to Buyer, and,

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except as expressly provided herein, without representation or warranty of any kind as to the thoroughness or accuracy of the information contained therein or Buyer’s ability to rely thereon. The provisions of this paragraph 5.1.3 shall survive Closing and/or any expiration or earlier termination of this Agreement, provided that following the Closing, Buyer shall be entitled to employ all data and information with respect to the Property as reasonably required in connection with the ownership and operation of the Property.

               5.1.4 Buyer’s review and approval of a Seller certificate pursuant to which Seller certifies to Buyer in writing, to Seller’s knowledge, that there have been no changes to the physical condition of the Real Property. The foregoing certificate shall be delivered to Buyer no sooner than thirty (30) days prior to the Close of Escrow and no later than fifteen (15) days prior to the Close of Escrow.

               5.1.5 As of the Due Diligence Period or the Extended Due Diligence Period, as applicable, the legislative entitlements for Buyer’s proposed development of the Real Property, specifically, a General Plan Amendment and zoning amendment (collectively, “Buyer’s Entitlements”), shall have been enacted by the City of San Jose. As used in this Agreement, “enacted” shall mean that the City Council of the City of San Jose has voted to enact the Buyer’s Entitlements, and that the thirty (30)- day period for filing a referendum petition on Buyer’s Entitlements shall have expired. If a valid referendum petition on Buyer’s Entitlements is timely filed, within ten (10) days thereafter Buyer, in its sole discretion, may waive this condition. If Buyer does not waive this condition within the ten (10)- day period, the condition shall be deemed unsatisfied, and the provisions of Paragraph 5.3 shall apply.

               5.1.6 Intentionally omitted.

               5.1.7 Seller shall have performed all obligations to be performed by Seller pursuant to this Agreement prior to Closing.

               5.1.8 Seller’s representations and warranties set forth herein shall have been true and correct as of the Effective Date and shall be true and correct as of the Closing Date, as if made by Seller effective as of the Closing Date.

               5.1.9 The Title Company shall be irrevocably and unconditionally committed to issue the Title Policy to Buyer as of the Closing Date, subject only to the Approved Exceptions.

     The Buyer’s Conditions Precedent are intended solely for the benefit of Buyer. If any of the Buyer’s Conditions Precedent are not satisfied in the time and manner specified above, Buyer shall have the right in its sole discretion either to terminate this Agreement by written notice to Seller and, subject to the provisions of paragraph 5.3 below, to recover the Deposit or to waive the Condition Precedent and proceed with the transaction provided for in this Agreement without reduction of the Purchase Price.

          5.2 Seller’s Conditions. The obligation of Seller to sell and convey the Property pursuant to this Agreement is subject to the satisfaction on or before the Closing Date (or such earlier date as is specifically set forth in this Agreement) of all of the following conditions precedent (“Seller’s Conditions Precedent”), which conditions are for the benefit of Seller only and the satisfaction of which may be waived only in writing by Seller:

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               5.2.1 Delivery and execution by Buyer of all monies, items and instruments required to be delivered by Buyer pursuant to this Agreement;

               5.2.2 Buyer’s warranties and representations set forth herein shall be true and correct as of the Effective Date and shall be true and correct as of the Closing Date as if made by Buyer effective as of the Closing Date; and

               5.2.3 Buyer shall have performed each and every agreement to be performed by Buyer pursuant to this Agreement.

     The Seller’s Conditions Precedent are intended solely for the benefit of Seller. If any of the Seller’s Conditions Precedent are not satisfied in the time and manner specified above, Seller shall have the right in its sole discretion either to terminate this Agreement by written notice to Buyer and, subject to the provisions of paragraph 5.3 below, to return the Deposit to Buyer or to retain the Deposit, as applicable, or to waive the Condition Precedent and proceed with the transaction provided for in this Agreement without reduction of the Purchase Price.

          5.3 Failure of Conditions. If any of the conditions set forth in paragraphs 5.1 or 5.2 above are not timely satisfied or waived by the applicable party, for any reason other than the default of Buyer or Seller under this Agreement, then this Agreement and the rights and obligations of Buyer and Seller shall terminate and be of no further force or effect except as to those matters as specifically stated in this Agreement to survive expiration or early termination, in which case the Title Company is hereby instructed to return promptly to Buyer the Deposit in accordance with paragraph 4.1 and to the party which placed such items into Escrow the documents that are held by the Title Company on the date of termination. Notwithstanding anything to the contrary contained in this Agreement, the Parties acknowledge that, if Buyer elects to extend the Due Diligence Period pursuant to paragraph 4.1.1 above, the Initial Deposit and the Additional Deposit become non-refundable to Buyer except (i) in the event of a default by Seller hereunder (in which event the provisions of paragraph 6.2 shall apply), or (ii) in the event of a failure of any of Seller’s representations or warranties contained herein due to changed circumstances not caused by an act of Seller (as opposed to Seller’s breach or inaccuracy in any representation of Seller as of the date of this Agreement pursuant to paragraph 8 below) as of the Close of Escrow, in which case Buyer shall have the option either to (i) proceed with the Closing and the Deposit shall be applied to the Purchase Price, or (ii) terminate this Agreement and the Deposit shall be returned to Buyer. Consequently, except as set forth in the preceding sentence, if Buyer terminates this Agreement pursuant to this paragraph 5.3 at any time after Buyer’s election to extend the Due Diligence Period, Title Company hereby is instructed to promptly release the Deposit to Seller.

          5.4 Satisfaction of Conditions. The occurrence of the Closing shall constitute satisfaction of conditions set forth in paragraphs 5.1 and 5.2 not otherwise specifically satisfied or waived by Buyer or Seller.

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     6. Remedies.

          6.1 LIQUIDATED DAMAGES. IF ESCROW FAILS TO CLOSE DUE TO BUYER’S DEFAULT UNDER THIS AGREEMENT, BUYER AND SELLER AGREE THAT BASED UPON THE CIRCUMSTANCES NOW EXISTING, KNOWN AND UNKNOWN, IT WOULD BE IMPRACTICAL OR EXTREMELY DIFFICULT TO ESTABLISH SELLER’S DAMAGES CAUSED BY BUYER’S DEFAULT UNDER THIS AGREEMENT. ACCORDINGLY, BUYER AND SELLER AGREE THAT IN THE EVENT ESCROW FAILS TO CLOSE DUE TO BUYER’S DEFAULT UNDER THIS AGREEMENT, IT WOULD BE REASONABLE AT SUCH TIME TO AWARD SELLER “LIQUIDATED DAMAGES” EQUAL TO THE AMOUNT OF THE DEPOSIT PREVIOUSLY PAID BY BUYER. THEREFORE, IF ESCROW FAILS TO CLOSE DUE TO BUYER’S DEFAULT UNDER THIS AGREEMENT, THIS AGREEMENT SHALL TERMINATE, ESCROW HOLDER SHALL CANCEL THE ESCROW AND SELLER SHALL BE ENTITLED TO RETAIN THE PORTION OF THE DEPOSIT PREVIOUSLY PAID BY BUYER AND RELEASED TO SELLER. RETENTION OF THE NONREFUNDABLE DEPOSIT BY SELLER SHALL BE SELLER’S SOLE AND EXCLUSIVE REMEDY AGAINST BUYER IN THE EVENT ESCROW FAILS TO CLOSE DUE TO A BREACH BY BUYER, AND SELLER WAIVES ANY AND ALL RIGHT TO SEEK OTHER RIGHTS OR REMEDIES AGAINST BUYER, INCLUDING, WITHOUT LIMITATION, SPECIFIC PERFORMANCE. THE PAYMENT AND RETENTION OF SUCH AMOUNT AS LIQUIDATED DAMAGES IS NOT INTENDED AS A FORFEITURE OR PENALTY WITHIN THE MEANING OF CALIFORNIA CIVIL CODE SECTIONS 3275 OR 3369, BUT IS INTENDED TO CONSTITUTE LIQUIDATED DAMAGES TO SELLER PURSUANT TO CALIFORNIA CIVIL CODE SECTIONS 1671, 1676 AND 1677. IN ADDITION, BUYER SHALL PAY ALL TITLE, SURVEY AND ESCROW CANCELLATION CHARGES. SELLER HEREBY WAIVES THE PROVISIONS OF CALIFORNIA CIVIL CODE SECTION 3389. NOTWITHSTANDING THE FOREGOING, IN NO EVENT SHALL THIS SECTION 6.1 LIMIT THE DAMAGES RECOVERABLE BY EITHER PARTY AGAINST THE OTHER PARTY DUE TO (A) THE OTHER PARTY’S OBLIGATION TO INDEMNIFY SUCH PARTY IN ACCORDANCE WITH THIS AGREEMENT, OR (B) THIRD PARTY CLAIMS. BY THEIR SEPARATELY EXECUTING THIS PARAGRAPH 6.1 BELOW, BUYER AND SELLER ACKNOWLEDGE THAT THEY HAVE READ AND UNDERSTOOD THE ABOVE PROVISION COVERING LIQUIDATED DAMAGES, AND THAT EACH PARTY WAS REPRESENTED BY COUNSEL WHO EXPLAINED THE CONSEQUENCES OF THIS LIQUIDATED DAMAGES PROVISION AT THE TIME THIS AGREEMENT WAS EXECUTED. UPON TERMINATION OF THIS AGREEMENT AS PROVIDED HEREIN, NEITHER PARTY SHALL HAVE ANY FURTHER RIGHTS OR OBLIGATIONS HEREUNDER, EACH TO THE OTHER, EXCEPT FOR THE RIGHT OF SELLER TO RETAIN SUCH LIQUIDATED DAMAGES AND BUYER’S SURVIVING OBLIGATIONS.

INITIALS: Seller /s/ AB Buyer /s/ ES/DH

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          6.2 Buyer’s Remedies. In the event Close of Escrow does not occur by reason of any breach or default by Seller under this Agreement, including any breach or inaccuracy in any representation made by Seller pursuant to paragraph 8 below as of the date of this Agreement (as opposed to a failure of such representation due to changed circumstances not caused by an act of Seller), Buyer’s remedies shall be limited to either (i) the termination of this Agreement, in which event Buyer shall be entitled to the return of the Deposit, and all accrued interest thereon, and Seller shall reimburse Buyer for Buyer’s reasonable out-of-pocket costs and expenses incurred by Buyer in entering into this Agreement and conducting its due diligence investigation of the Property and the processing of Buyer’s Entitlements, up to but not in excess of $250,000.00, as evidenced by reasonable documentation with respect thereto, which return and recovery shall operate to terminate this Agreement and release Seller from any and all liability hereunder, or (ii) an action for specific performance; provided, however, that if an action for specific performance is not available solely because of any act of Seller in breach of this Agreement, and at the time of such act Buyer is not then in breach or default under this Agreement, Buyer shall have the right, in lieu thereof, to bring an action for its monetary damages resulting from Seller’s default hereunder in an amount not to exceed Three Million Dollars ($3,000,000.00). Buyer shall be deemed to have elected to terminate this Agreement and receive back the Deposit (if applicable) and reimbursement for Buyer’s reasonable out-of-pocket costs as described herein if Buyer fails to file suit for specific performance against Seller in a court having jurisdiction in the county and state in which the Property is located, on or before ninety (90) days following the date upon which the Closing Date was to have occurred. Except for, and in consideration of, the foregoing right of Buyer to sue for specific performance (or to bring an action for monetary damages, where specific performance is not available solely for the reason set forth in subparagraph (ii) above), or alternatively, to obtain a refund of the Deposit and reimbursement of Buyer’s documented and reasonable out-of-pocket expenses incurred in performing its inspections, investigations and other due diligence review of the Property, Buyer hereby waives any other remedies available at law or in equity. Except as expressly provided above, Buyer expressly waives its rights to seek damages if the Closing does not occur in the event of Seller’s default hereunder. Buyer acknowledges and agrees that the limitation of Buyer’s remedies to those set forth in this paragraph 6.2 was negotiated by Seller as an integral and material part of the transaction contemplated by this Agreement and that Seller would not have entered into this Agreement but for Buyer’s agreement to limit its remedies as provided herein.

          Buyer’s Initials: /s/ ES/DH                       

          6.3 Limitations on Seller’s Liability. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS AGREEMENT, IN NO EVENT WILL SELLER OR ANY OTHER INDEMNITEE BE LIABLE TO BUYER IN CONTRACT, TORT OR OTHERWISE WITH RESPECT TO ANY INDIRECT, CONSEQUENTIAL, SPECIAL, EXEMPLARY OR INCIDENTAL DAMAGES ARISING FROM OR RELATING TO THIS AGREEMENT OR ANY CLOSING DOCUMENT OTHER THAN ANY INTENTIONAL OR NEGLIGENT MISREPRESENTATION BY SELLER. IN ADDITION, IN NO EVENT WILL SELLER OR ANY OTHER INDEMNITEE BE LIABLE TO BUYER UNLESS AND UNTIL THE AGGREGATE AMOUNT OF DAMAGES FOR WHICH SELLER IS OBLIGATED TO PAY OR INDEMNIFY BUYER PURSUANT TO THIS AGREEMENT EXCEEDS THE SUM OF FIVE THOUSAND DOLLARS ($5,000.00) (THE “BASE AMOUNT”) WHEREUPON SELLER SHALL BE LIABLE FOR ALL SUCH DAMAGES, INCLUDING THE BASE AMOUNT, BUT, NOTWITHSTANIDNG ANYTHING TO THE CONTRARY CONTAINED IN THIS AGREEMENT, IN NO EVENT WILL SELLER BE LIABLE TO BUYER FOR ANY DAMAGES TO THE BUYER IN EXCESS OF THE SUM OF ONE MILLION DOLLARS ($1,000,000.00); PROVIDED, HOWEVER, THAT THE LIMITATION ON SELLER’S LIABILITY IN THE EVENT THAT SPECIFIC PERFORMANCE IS NOT AVAILABLE TO BUYER SOLELY FOR THE REASON SET FORTH IN SUBPARAGRAPH (ii) OF PARAGRAPH 6.2 ABOVE SHALL REMAIN AN AMOUNT NOT TO EXCEED THREE MILLION DOLLARS ($3,000,000.00) AS SET FORTH IN PARAGRAPH 6.2.

          Buyer’s Initials: /s/ ES/DH                       

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          6.4 Waiver. Buyer hereby acknowledges that it has read and is familiar with the provisions of California Civil Code Section 1542, which is set forth below: By initialing below, Buyer hereby waives the provisions of Section 1542 solely in connection with the matters which are the subject of the foregoing waivers and releases:

          “A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.”

          Buyer’s Initials: /s/ ES/DH                       

          6.5 Representations and Warranties. Notwithstanding anything to the contrary contained in this Agreement, if any representation and warranty made by Seller pursuant to paragraph 8 below was an intentional or negligent misrepresentation as of the date of this Agreement, and Buyer discovers such intentional or negligent misrepresentation during the period commencing with the date of the Closing until the last day of the Survival Period (as defined in paragraph 8 below), Buyer shall have the right, during the Survival Period and as its sole remedy, to bring an action against Seller for its monetary damages resulting from such intentional or negligent misrepresentation, subject to the limitation on Seller’s liability in an amount not to exceed One Million Dollars ($1,000,000.00), as more particularly set forth in paragraph 6.3 above.

          6.6 Survival. All of the foregoing waivers and releases by Buyer set forth in this paragraph 6 shall survive any expiration or earlier termination of this Agreement, and shall not be deemed merged into any instrument or conveyance delivered at Closing.

     7. Closing and Escrow.

          7.1 Escrow Instructions. Upon mutual execution of this Agreement, the parties hereto shall deposit an executed counterpart of this Agreement with Escrow Holder and this Agreement shall serve as instructions to Escrow Holder for the consummation of the purchase and sale contemplated hereby. Seller and Buyer each shall have the right to execute such additional escrow instructions as may be appropriate to enable Escrow Holder to comply with the terms of this Agreement; provided, however, in the event of any conflict between the provisions of this Agreement and any supplementary escrow instructions, the terms of this Agreement shall control.

          7.2 Closing Date. The closing of the purchase and sale contemplated hereunder (the “Closing”) shall take place on the earlier to occur of (i) five (5) days following the enactment of Buyer’s Entitlements as set forth in paragraph 5.1.5, or (ii) August 1, 2006 (the “Closing Date” or “Close of Escrow”), or such earlier date as Buyer and Seller may agree upon in writing.

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          7.3 Seller’s Deposits. At or before the Closing (except to the extent otherwise specifically provided below), Seller shall deliver to Escrow Holder the following:

               (i) the Grant Deed, duly executed and acknowledged by Seller;

               (ii) the Assignment, duly executed by Seller;

               (iii) an affidavit pursuant to Section 1445(b)(2) of the Federal Code, and on which Buyer is entitled to rely, that Seller is not a “foreign person” within the meaning of Section 1445(f)(3) of the Federal Code (the “Nonforeign Affidavit”);

               (iv) a properly executed California Withholding Exemption Certificate (Form 593-C) certifying that Buyer is not required to withhold any portion of the Purchase Price at the Close of Escrow (the “California Form 593-C”);

               (v) such proof of Seller’s authority and authorization to enter into this Agreement and consummate the transaction contemplated hereby and such proof of the power and authority of the individual(s) executing and/or delivering any instruments, documents or certificates on behalf of Seller to act for and bind Seller as may be reasonably required by the Title Company; and

               (vi) any other instruments, records or correspondence called for hereunder which have not previously been delivered. Buyer may waive compliance on Seller’s part under any of the foregoing items by an instrument in writing.

          7.4 Buyer’s Deposits. At or before the Closing, Buyer shall deliver to Escrow Holder the following:

               (i) the balance of the Purchase Price and such additional sums necessary to pay Buyer’s share of Closing Costs fees and prorations as more particularly described in paragraph 7.6 below;

               (ii) the Assignment, duly executed by Buyer;

               (iii) such proof of Buyer’s authority and authorization to enter into this Agreement and consummate the transaction contemplated by this Agreement, and such proof of the power and authority of the individual(s) executing and/or delivering any instruments, documents or certificates on behalf of Buyer to act for and bind Buyer as may be reasonably required by the Title Company or Seller; and

               (iv) any other instruments, records or correspondence called for hereunder which have not previously been delivered. Seller may waive compliance on Buyer’s part under any of the foregoing items by an instrument in writing.

          7.5 Deposits Required by Escrow Holder. Seller and Buyer shall each deposit such other instruments as are reasonably required by Escrow Holder or otherwise required to close the escrow and consummate the purchase of the Property in accordance with the terms hereof.

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          7.6 Prorations. The following are to be apportioned as of the Closing Date, as follows:

               (i) Real Estate Tax and Assessments. General real estate taxes and any assessments shall be prorated as of the Closing Date.

               (ii) Closing Costs. Seller shall pay the CLTA portion of the premium for the Title Policy, the recording fees for the Grant Deed, one-half of the escrow fees. Seller shall pay the County of Santa Clara documentary transfer taxes and one-half of the City of San Jose transfer taxes. Buyer shall pay the ALTA portion of the premium for the Title Policy, one-half of the escrow fees and one-half of the City of San Jose transfer taxes. All other costs and charges of the escrow for the sale not otherwise provided for in this paragraph or elsewhere in this Agreement shall be paid in accordance with the custom in Santa Clara County. The parties shall each pay their own legal fees, if any are incurred.

          If any information needed for the proration of any item is not available at the Closing, the parties shall re-prorate such item after Closing and payment shall be made promptly to the party entitled thereto. After the Closing, Seller shall remain solely responsible for and shall promptly pay before delinquency any real estate taxes and assessments for the Property relating to periods prior to the Closing Date. The provisions of this paragraph shall survive the Close of Escrow.

          7.7 Escrow Holder’s Actions. On the Closing Date, when Escrow Holder holds the items required to be deposited into escrow by Seller and Buyer as described above and Title Company is prepared to issue and deliver the Title Policy to Buyer, Escrow Holder is instructed and authorized to (i) record the Grant Deed in the Office of the County Recorder of Santa Clara County; (ii) pay any transfer taxes; (iii) instruct the County Recorder to return the Grant Deed to Buyer (with a copy to Seller); (iv) disburse to Seller from the funds deposited into Escrow by Buyer the Purchase Price less Seller’s escrow and cash charges as described herein; (v) disburse to the appropriate party from funds deposited into escrow by Buyer amounts toward payment of all other items chargeable to the account of Buyer hereunder, and disburse the balance of such funds, if any, to Buyer; and (vi) deliver to Buyer one original of the Assignment, the Nonforeign Affidavit, the California Form 593-C and the Title Policy, with one original of the Assignment and copies to Seller of all of the foregoing except for the Title Policy.

          7.8 Escrow Cancellation Charges. If the Closing does not occur because of the default of a Party, the defaulting Party shall bear all Escrow Cancellation Charges. If the Closing does not occur for any reason other than a default of a Party, then Buyer and Seller shall each pay one-half (¹/2) of any Escrow Cancellation Charges. As used herein, “Escrow Cancellation Charges” means all fees, charges and expenses incurred by Escrow Holder or third parties engaged by Escrow Holder, as well as all expenses related to the services of the Title Company in connection with the issuance of the Preliminary Report and other title matters.

     8. Seller’s Representations. Seller hereby makes the following representations and warranties, each of which shall be continuing and shall survive the Closing for a period of nine (9) months after the Closing (the “Survival Period”). Any claim based on any of the following representations and warranties must be filed, if at all, before the end of the Survival Period.

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Whenever in this Agreement a representation or warranty is being made to Seller’s knowledge, such qualification indicates that the warranty is being made to the current actual knowledge of Ed Axelsen, Director of Real Estate, without any implied, imputed or constructive knowledge and without any independent investigation having been made or any implied duty to investigate. Seller represents that Mr. Axelsen is the person within Seller’s organization that is most knowledgeable regarding the matters described in such representations. No claim for a breach or failure of any representation or warranty of Seller shall be actionable or payable if the breach or failure in question results from or is based on a condition, state of facts or other matter which was known to Buyer prior to Closing. Seller shall have no liability to Buyer for a breach of any representation or warranty unless written notice containing a description of the specific nature of such breach shall have been given by Buyer to Seller prior to the expiration of the Survival Period and any action shall have been commenced by Buyer against Seller within nine (9) months after Closing. Except as expressly set forth in this Agreement, Seller has not made any warranty or representation, express or implied, written or oral, concerning the Property.

          8.1 Hazardous Materials. Except to the extent disclosed in the Property Information, or disclosed to Buyer through any Physical Testing or inspection of the Property or otherwise, to Seller’s knowledge, during Seller’s ownership of the Property there has been no production, disposal, release or storage by Seller on or at the Property of any Hazardous Material in violation of any applicable laws relating thereto.

          8.2 Notices of Violation. Except to the extent disclosed in the Property Information, or disclosed to Buyer through any Physical Testing or inspection of the Property or otherwise, Seller has not received and, to Seller’s knowledge, Seller is not aware of, any written notice from any governmental authority that any condition at the Property violates any material provision of applicable building codes, zoning or land use laws, other local, state or federal laws and regulations, or restrictive easements or covenants affecting the Property.

          8.3 Possession. Except to the extent disclosed in the Property Information, or disclosed to Buyer through any Physical Testing or inspection of the Property or otherwise, there are no parties in possession or occupancy of any of the Property or any parts thereof except for that certain lease, dated as of May 16, 2005 (“Lease”), between Seller, as Lessor, and Preston Pipelines, a California corporation, as Lessee, which Lease may be terminated by either party upon thirty (30) days’ prior written notice, nor, except pursuant to the Lease, are there any parties who have any possessory rights with respect to any of the Property or any part thereof.

          8.4 Condemnation. Except to the extent disclosed in the Property Information, or disclosed to Buyer through any Physical Testing or inspection of the Property or otherwise, Seller has not received written notice from any governmental authority of any existing, pending or threatened condemnation or taking by eminent domain of any part of the Property.

          8.5 Litigation. Except to the extent disclosed in the Property Information, or disclosed to Buyer through any Physical Testing or inspection of the Property or otherwise, Seller has not received written notice of any litigation which has been filed against Seller that arises out of the ownership of the Property and would materially affect the Property or use thereof, or Seller’s ability to perform hereunder. Except to the extent disclosed in the Property Information, or disclosed to Buyer through any Physical Testing or inspection of the Property or otherwise, Seller has not received written notice of any threatened litigation relating to the Property.

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          8.6 Authority. The execution and delivery of this Agreement and the performance of Seller’s obligations hereunder have been or will be duly authorized by all necessary action on the part of Seller and this Agreement constitutes the legal, valid and binding obligation of Seller. The person executing this Agreement on behalf of Seller is duly authorized to do so.

          8.7 Due Formation; Power. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and authorized to transact business in the State of California. Seller has full capacity, right, power and authority to enter into this Agreement and to perform its obligations hereunder. Neither the execution of this Agreement nor the consummation of any of the transactions contemplated by this Agreement violates any provision of any agreement or document to which Seller is a party or by which Seller or the Property is bound. No consent from any third party is required before the Property may be conveyed to Buyer.

          8.8 Bankruptcy. Neither Seller, nor any entity or person that directly or indirectly owns or controls Seller is bankrupt or insolvent under any applicable Federal or state standard, nor has any such party filed for protection or relief under any applicable bankruptcy or creditor protection statute nor has any such party been threatened by creditors with an involuntary application of any applicable bankruptcy or creditor protection statute. Seller is not entering into the transaction described in this Agreement with an intent to defraud any creditor or to prefer the rights of one creditor over any other. Seller and Buyer have negotiated this Agreement at arms-length and the consideration to be paid represents fair value for the assets to be transferred.

          8.9 Rights of Other Parties. Except for the Lease, to Seller’s knowledge, no party has a right of first opportunity, right of first refusal, right of first offer, or any similar right to purchase or lease any portion of the Property and that Seller will not enter into negotiations with any other party for the sale and/or lease of the Property while this Agreement is in effect.

     9. Buyer’s Representations; As-Is Acquisition, General Release and Indemnity.

          9.1 Buyer’s Representations. Buyer hereby makes the following representations and warranties, each of which shall survive the Close of Escrow for a period of twelve (12) months:

               a. Authority. The execution and delivery of this Agreement and the performance of Buyer’s obligations hereunder have been or will be duly authorized by all necessary action on the part of Buyer and this Agreement constitutes the legal, valid and binding obligation of Seller. The persons executing this Agreement on behalf of Buyer are duly authorized to do so.

               b. Due Formation; Power. Buyer is a limited liability company duly organized, validly existing and in good standing under the laws of the State of California and authorized to transact business in the State of California. Buyer has full capacity, right, power and authority to enter into this Agreement and to perform its obligations hereunder. Neither the execution of this Agreement nor the consummation of any of the transactions contemplated by this Agreement violates any provision of any agreement or document to which Buyer is a party or by which Buyer or the Property is bound. No consent from any third party is required before any of the Property may be acquired by Buyer.

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               c. Bankruptcy. Neither Buyer, nor any entity or person that directly or indirectly owns or controls Buyer is bankrupt or insolvent under any applicable Federal or state standard, nor has any such party filed for protection or relief under any applicable bankruptcy or creditor protection statute nor has any such party been threatened by creditors with an involuntary application of any applicable bankruptcy or creditor protection statute. Buyer is not entering into the transaction described in this Agreement with an intent to defraud any creditor or to prefer the rights of one creditor over any other. Seller and Buyer have negotiated this Agreement at arms-length and the consideration to be paid represents fair value for the assets to be transferred.

               d. Conflicts and Pending Action. There is no agreement to which Buyer is a party or to Buyer’s knowledge binding on Buyer which is in conflict with this Agreement. There is no action or proceeding pending or, to Buyer’s knowledge, threatened against Buyer which challenges or impairs Buyer’s ability to execute or perform its obligations under this Agreement.

               e. No Encumbrance. Prior to Closing, Buyer shall neither encumber nor cause any liens to be created against the Property in any way which shall not be removed before the Closing or termination of this Agreement, as applicable, or which shall not be assumed by Buyer at the Closing, nor shall Buyer, at any time, record this Agreement or a memorandum thereof.

               f. Principal; Financial Resources. Buyer is acting as a principal in connection with the transaction as contemplated by this Agreement and will possess as of the Closing the financial resources (either with an equity partner or through an acquisition loan) to timely consummate the purchase and sale transaction contemplated by this Agreement.

               g. No Reliance on Documents. All materials, data and Property Information delivered by Seller to Buyer in connection with the transaction contemplated hereby are provided to Buyer as a convenience only and that any reliance on or use of such materials, data or information by Buyer shall be at the sole risk of Buyer. Neither Seller nor any person or entity which prepared any report or reports delivered by Seller to Buyer shall have any liability to Buyer for any inaccuracy in or omission from any such reports.

     9.2 Buyer’s Release. Except for any intentional or negligent misrepresentations of Seller relating to this Agreement, Buyer on its own behalf and on behalf of Buyer’s Agents hereby agrees that each of Seller and the Indemnitees shall be, and are hereby, fully and forever released and discharged from any and all Claims with respect to any and all Claims, whether direct or indirect, known or unknown, foreseen or unforeseen, that may arise on account of or in any way be connected with the Property including, without limitation, the physical, environmental and structural condition of the related Land or any law or regulation applicable thereto, including, without limitation, any Claim or matter (regardless of when it first appeared) relating to or arising from (i) the presence of any environmental problems, or the use, presence, storage, release, discharge, or migration of Hazardous Materials on, in, under or around the Property regardless of when such Hazardous Materials were first introduced in, on or about the Property, (ii) any patent or latent defects or deficiencies with respect to the Property, (iii) any and all matters related to the Property or any

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portion thereof, including without limitation, the condition and/or operation of the Property and each part thereof, and (iv) the presence, release and/or remediation of asbestos and asbestos containing materials in, on or about the Property regardless of when such asbestos and asbestos containing materials were first introduced in, on or about the Property. Buyer hereby waives and agrees not to commence any action, legal proceeding, cause of action or suits in law or equity, of whatever kind or nature, including, but not limited to, a private right of action under the federal superfund laws, 42 U.S.C. Sections 9601 et seq. and California Health and Safety Code Sections 25300 et seq. (as such laws and statutes may be amended, supplemented or replaced from time to time), directly or indirectly, against Seller and the Indemnitees or their agents in connection with Claims described above and expressly waives the provisions of Section 1542 of the California Civil Code which provides:

          A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR

and all similar provisions or rules of law. Buyer elects to and does assume all risk for such Claims heretofore and hereafter arising, whether now known or unknown by Buyer. The aforementioned release shall not include or be applicable to any Claims arising out of the entry into or performance of this Agreement by Seller nor any Claims directly resulting from or relating to a breach by Seller of any of the representations made in paragraph 8 hereof so long as any such Claim (in each instance) is made by Buyer within the nine (9) month survival period specified in paragraph 8 above. After the expiration of said nine (9) month period the aforementioned release will also include all Claims resulting from or relating to any breach by Seller of the representations made in paragraph 8 of this Agreement. In this connection and to the greatest extent permitted by law, Buyer hereby agrees, represents and warrants that Buyer realizes and acknowledges that factual matters now unknown to it may have given or may hereafter give rise to causes of action, claims, demands, debts, controversies, damages, costs, losses and expenses which are presently unknown, unanticipated and unsuspected, and Buyer further agrees, represents and warrants that the waivers and releases herein have been negotiated and agreed upon in light of that realization and that Buyer nevertheless hereby intends to release, discharge and acquit Seller from any such unknown Claims, debts, and controversies which might in any way be included as a material portion of the consideration given to Seller by Buyer in exchange for Seller’s performance hereunder. Without limiting the foregoing, if Buyer has actual knowledge of (a) a default in any of the covenants, agreements or obligations to be performed by Seller under this Agreement and/or (b) any breach or inaccuracy in any representation of Seller pursuant to paragraph 8 above as of the date of this Agreement (as opposed to a failure of such representation due to changed circumstances not caused by an act of Seller), and Buyer nonetheless elects to proceed to Closing, then, upon the consummation of the Closing, Buyer shall be conclusively deemed to have waived any such default and/or breach or inaccuracy and shall have no Claim against Seller or hereunder with respect thereto. Notwithstanding anything to the contrary contained herein, if Buyer obtains actual knowledge of any material default by Seller or any such breach or inaccuracy in any such representation of Seller which, in Buyer’s reasonable judgment, would have a material adverse effect on the Property or on Buyer’s intended development of the Property, Buyer may terminate this Agreement and receive a return of the Deposit upon written notice to Seller within five (5) days after Buyer learns of such default or breach if, within five (5)

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days after Buyer’s notice to Seller, Seller notifies Buyer in writing that Seller elects not to cure or remedy any such default or breach. Failure by Seller to so notify Buyer shall be deemed Seller’s election not to cure or remedy any such default or breach or inaccuracy. Upon such termination, Seller shall reimburse Buyer for Buyer’s reasonable out-of-pocket costs and expenses incurred by Buyer in entering into this Agreement and conducting its due diligence investigation of the Property and the processing of Buyer’s Entitlements, up to but not in excess of $250,000.00, as evidenced by reasonable documentation with respect thereto, and thereafter the parties shall have no further obligations hereunder except for Buyer’s and Seller’s Surviving Obligations. Notwithstanding anything to the contrary herein, subject to Buyer’s termination and recovery right described above, Seller shall not have any liability whatsoever to Buyer with respect to any matter disclosed to or discovered by Buyer or its agents or representatives prior to the Closing Date.

          Seller has given Buyer material concessions regarding this transaction in exchange for Buyer agreeing to the provisions of this paragraph 9.2. Seller and Buyer have each initialed this paragraph 9.2 to further indicate their awareness and acceptance of each and every provision hereof. The provisions of this paragraph 9.2 shall survive the Closing and/or any expiration or earlier termination of this Agreement, and shall not be deemed merged into any instrument or conveyance delivered at the Closing.

          SELLER’S INITIALS: /s/ AB              BUYER’S INITIALS:/s/ ES/DH          

          9.3 As-Is Condition of Property. Buyer specifically acknowledges, represents and warrants that prior to Closing, it and its agents and representatives will have thoroughly inspected the Property and observed the physical characteristics and condition of the Property. By Buyer purchasing the Property and upon the occurrence of the Closing, Buyer waives any and all right or ability to make a claim of any kind or nature against Seller or any Indemnitee (except for claims reserved pursuant to paragraph 6.5 above) for any and all deficiencies or defects in the physical characteristics and condition of the Property which would be disclosed by such inspection, and expressly agrees to acquire the Property with any and all of such deficiencies and defects and subject to all matters disclosed by Seller herein or in any separate writing with respect to the Property and/or disclosed in and set forth in the Natural Hazard Disclosure Statement for the Property. Buyer further acknowledges and agrees that except for any representations expressly made by Seller in paragraph 8 of this Agreement, neither Seller nor any of Seller’s employees, agents or representatives have made any representations, warranties or agreements by or on behalf of Seller of any kind whatsoever, whether oral or written, express or implied, statutory or otherwise, as to any matters concerning the Property, the condition of the Property, the size of the Land, the present use of the Property or the suitability of Buyer’s intended use of the Property. Buyer hereby acknowledges, agrees and represents that the Property is to be purchased, conveyed and accepted by Buyer in its present condition, “AS IS”, “WHERE IS” AND WITH ALL FAULTS, and that no patent or latent defect or deficiency in the condition of the Property, whether or not known or discovered, shall affect the rights of either Seller or Buyer hereunder nor shall the Purchase Price be reduced as a consequence thereof. Any and all information and documents furnished to Buyer by or on behalf of Seller relating to the Property shall be deemed furnished as a courtesy to Buyer but without any warranty of any kind from or on behalf of Seller. Buyer hereby represents and warrants to Seller that Buyer has performed an independent inspection and investigation of the Property and has also investigated and has knowledge of operative or proposed governmental laws and regulations, including, without

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limitation, land use laws and regulations to which the Property may be subject. Buyer further represents that, except for any representations expressly made by Seller in paragraph 8 of this Agreement, it shall acquire the Property solely upon the basis of its independent inspection and investigation of the Property, including, without limitation, (i) the quality, nature, habitability, merchantability, use, operation, value, marketability, adequacy or physical condition of the Property or any aspect or portion thereof, including, without limitation, appurtenances, access, landscaping, sewage, and utility systems, facilities and appliances, soils, geology and groundwater, or whether the Land lies within a special flood hazard area, an area of potential flooding, a very high fire hazard severity zone, a wildland fire area, an earthquake fault zone or a seismic hazard zone, (ii) the dimensions or lot size of the Land, (iii) the development or income potential, or rights of or relating to, the Property or its use, habitability, merchantability or fitness, or the suitability, value or adequacy of such Property for any particular purpose, (iv) the zoning or other legal status of the Property or any other public or private restrictions on the use of the Property, (v) the compliance of the Property or its operation with any applicable codes, laws, regulations, statutes, ordinances, covenants, conditions and restrictions of any governmental or regulatory agency or authority or of any other person or entity (including, without limitation, the American with Disabilities Act), (vi) the ability of Buyer to obtain any necessary governmental approvals, licenses or permits for Buyer’s intended use or development of the Property, (vii) the presence or absence of Hazardous Materials on, in, under, above or about the Property or any adjoining or neighboring property, (viii) the condition of title to the Land, (ix) any agreements affecting the Property or the intentions of any party with respect to the negotiation and/or execution of any lease or contract with respect to the Property, (x) Seller’s ownership of the Property or any portion thereof, or (xi) the economics of, or the income and expenses, revenue or expense projections or other financial matters, relating to the operation of the Property. Without limiting the generality of the foregoing, Buyer expressly acknowledges and agrees that Buyer is not relying on any representation or warranty of Seller, nor any member partner, officer, employee, attorney, property manager, agent or broker of Seller, whether implied, presumed or expressly provided at law or otherwise, arising by virtue of any statute, common law or other legally binding right or remedy in favor of Buyer except as expressly provided in paragraph 8 above. Buyer further acknowledges and agrees that Seller is not under any duty to make any inquiry regarding any matter that may or may not be known to the Seller or any member, partner, officer, employee, attorney, property manager, agent or broker of Seller.

          SELLER’S INITIALS: /s/ AB              BUYER’S INITIALS: /s/ ES/DH         

Any reports, repairs or work required by Buyer are the sole responsibility of Buyer, and Buyer agrees that there is no obligation on the part of Seller to make any changes, alterations or repairs to the Property or to cure any violations of law or to comply with the requirements of any insurer. Buyer is solely responsible for obtaining any certificate of occupancy or any other approval or permit necessary for transfer or occupancy of the Property and for any repairs or alterations necessary to obtain the same, all at Buyer’s sole cost and expense. The provisions of this paragraph 9.3 shall survive the Closing and/or any expiration or earlier termination of this Agreement, and shall not be deemed merged into any instrument or conveyance delivered at the Closing.

     10. Possession. Possession of the Property shall be delivered to Buyer on the Closing Date free and clear of all tenancies and other third party occupancy rights.

     11. Maintenance of the Property. Between Seller’s execution of this Agreement and the Closing, Seller shall maintain the Property in its present condition (“AS-IS”), subject to normal wear and tear, all in a manner consistent with Seller’s past practice. Seller shall notify Buyer in writing if Seller becomes aware of any material change in the physical condition or operation of the Property.

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     12. Buyer’s Consent to Contracts And Leases. Seller shall not, after the date of Seller’s execution of this Agreement, enter into any contract or lease affecting the Property which would remain in effect after the Close of Escrow without in each case obtaining Buyer’s prior written consent thereto, which consent shall not be unreasonably withheld.

     13. Damage or Destruction. If, prior to the Closing, any part of the Property is damaged or destroyed by earthquake, flood, landslide, fire or other casualty, Seller shall immediately notify Buyer of such fact. Neither party shall have the right to terminate this Agreement, but Seller shall assign and turn over to Buyer, and Buyer shall be entitled to receive and keep all insurance proceeds, if any, payable to Seller with respect to such destruction (but not in excess of the Purchase Price) and the parties shall proceed to the Closing pursuant to the terms hereof without modification of the terms of this Agreement and without any reduction in the Purchase Price. Seller shall keep its present casualty insurance and, to the extent Seller carries it, earthquake insurance with respect to the Property in full force and effect until Closing.

     14. Condemnation. In the event that all or any substantial portion of the Property shall be taken in condemnation or under the right of eminent domain after the Effective Date and before the Closing, Buyer, at its option, may either (i) terminate this Agreement by written notice thereof to Seller and, subject to the provisions of paragraph 5.3 above, receive an immediate refund of the Deposit, together with any interest earned thereon, or (ii) proceed to close the transaction contemplated herein pursuant to the terms hereof in which event Seller shall assign and turn over to Buyer, and Buyer shall be entitled to receive and keep all awards for the taking by eminent domain which accrue to Seller and there shall be no reduction in the Purchase Price. For purposes of this provision, a “substantial portion” of the Property shall mean (a) more than five percent (5%) of the Property is taken; or (b) the access to the Property is materially reduced or restricted. In the event that a portion of the Property less than a substantial portion is taken, or Buyer elects not to terminate this Agreement, Buyer shall proceed to close the transaction contemplated herein and there shall be no reduction in the Purchase Price and Seller shall assign and turn over to Buyer and Buyer shall be entitled to receive and keep all awards for the taking by eminent domain which accrue to Seller.

     15. Miscellaneous.

          15.1 Notices. Any notice, consent or approval required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been received on the date (i) of hand delivery to the receiving Party, (ii) of delivery by telecopy transmission as evidence by confirmation of transmission, provided such transmission is sent prior to 5:00 p.m. PST or if sent after 5:00 p.m. PST, then the next business day, (iii) one business day following delivery to a reputable overnight courier, or (iv) three (3) days after being deposited in the U.S. Mail, certified mail return receipt requested. Mailed or couriered notices shall be addressed as set forth below.

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If to Seller:	Palm, Inc.
	950 W. Maude Avenue
	Sunnyvale, California 94085
	Attn: Ed Axelsen, Director of Real Estate
	Telephone No.: (408) 617-7396
	Telecopy No.: (408) 617-0100
With copy to:	GCA Law Partners LLP
	1891 Landings Drive
	Mountain View, California 94043
	Attn: Deborah C. Aikins
	Telephone No.: (650) 237-7216
	Telecopy No.: (650) 428-3901
If to Buyer:	Hunter/Storm, LLC
	20725 Valley Green Drive, Suite 200
	Cupertino, CA 95014
	Attn: Edward D. Storm
	Telephone No.: 408-287-8402
	Telecopy No.: 408-996-8301
With copy to:	Berliner Cohen
	Ten Almaden Blvd., Eleventh Floor
	San Jose, CA 95113
	Attention: Mark Makiewicz
	Telephone No.: 408-286-5800
	Telecopy No.: 408-998-5388

or such other address as either party may from time to time specify in writing to the other.

          15.2 Brokers. Seller has been represented by Cornish & Carey Commercial in connection with this transaction. Buyer has been represented by BT Commercial in connection with this transaction. Each Party shall be solely responsible for compensating its respective broker for services provided in connection with this transaction pursuant to separate written agreements with such brokers. Except as provided above, neither Party has had any contact or dealings regarding the Property, or any communication in connection with the subject matter of this transaction, through any other real estate broker or other person who can claim a right to a commission or finder’s fee in connection with the sale contemplated herein. If any other broker or finder perfects a claim for a commission or finder’s fee based upon any such contact, dealings or communication, the party through whom the broker or finder makes its claim shall be responsible for said commission or fee and all costs and expenses (including reasonable attorneys’ fees) incurred by the other party in defending against the same. The provisions of this paragraph shall survive the Closing.

          15.3 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors, heirs, administrators and assigns.

          15.4 No Oral Amendments. Except as otherwise provided herein, this Agreement may be amended or modified only by a written instrument executed by Seller and Buyer.

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          15.5 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California.

          15.6 Merger Prior to Amendments. This Agreement and the exhibits hereto constitute the entire agreement between the parties and supersede all prior agreements and understandings between the parties relating to the subject matter hereof.

          15.7 Negotiated Agreement. Seller and Buyer acknowledge that this Agreement has been negotiated and that each party has had an opportunity to have the Agreement reviewed by legal counsel. Accordingly, notwithstanding the fact that this Agreement was prepared by Buyer’s counsel, the doctrine that ambiguities in an agreement shall be construed against the drafting party shall not be employed in connection with this Agreement.

          15.8 Enforcement. If either Party commences legal proceedings to enforce the terms of this Agreement, the prevailing party shall be entitled to recover from the other party its attorneys’ fees and court costs incurred therein.

          15.9 Time of the Essence. Seller and Buyer agree that time is of the essence of this Agreement. If either Party fails to perform an obligation contained herein by the date such performance is required, it shall not be deemed to be unreasonable for the other party to pursue its remedies hereunder, including termination of this Agreement. Should any period of time prescribed herein end on a Saturday, Sunday or legal holiday (recognized in San Francisco, California), the period of time shall automatically be extended to 11:59 p.m. (or such other time as is expressly provided herein) of the next full business day.

          15.10 Severability. If any provision of this Agreement or the application thereof to any person, place or circumstance shall be held by a court of competent jurisdiction to be invalid, unenforceable or void, the remainder of this Agreement and such provisions as applied to other persons, places and circumstances shall remain in full force and effect.

          15.11 Tax Deferred Exchange. Both Parties shall have the right to complete the transaction contemplated by this Agreement as an exchange which will qualify for nonrecognition of gain under Section 1031 of the Internal Revenue Code of 1986, as amended. Both Parties agree to reasonably cooperate in effecting such an exchange transaction if requested to do so by the other but at no cost to the non-exchanging party and without (i) accepting title to any other property other than the Real Property, (ii) executing any promissory notes, deeds of trust or other agreements (other than an acknowledgment of the assignment of rights to a qualified intermediary), and (iii) providing any representations, warranties or indemnities to any third party. In the event of such exchange, the exchanging party shall indemnify and hold the non-exchanging party harmless from any and all liabilities, losses and expenses (including attorney’s fees) incurred by the non-exchanging party arising from such exchange, which liabilities, losses and expenses would not have been incurred if there had not been a exchange of properties. This indemnity and hold-harmless shall survive the Close of Escrow.

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          15.12 Assignment. Except as provided below, Buyer shall not assign this Agreement without the prior written consent of Seller, which consent shall not be unreasonably withheld. Notwithstanding the foregoing, Buyer shall have the right to assign this Agreement without Seller’s consent to an entity that controls, is controlled by or under common control with Buyer, provided that Buyer notifies Seller in writing of such assignment prior to the Close of Escrow and delivers a copy of a fully executed written assignment at the Close of Escrow. Notwithstanding Seller’s consent to any assignment, where consent is required, and notwithstanding Buyer’s assignment to an entity that controls, is controlled by or under common control with Buyer, no such assignment or delegation will release Buyer from any of its obligations under this Agreement.

          15.13 Counterparts; Facsimile. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which shall constitute one and the same document. Seller and Buyer each (i) has agreed to permit the use from time to time, where appropriate, of facsimile signatures in order to expedite the transaction contemplated by this Agreement, (ii) intends to be bound by its respective facsimile signature, (iii) is aware that the other will rely on the facsimiled signature, and (iv) acknowledges such reliance and waives any defenses to the enforcement of this Agreement and the documents affecting the transaction contemplated by this Agreement based on the fact that a signature was sent by facsimile only.

          15.14 Filing of Reports. The Title Company shall be solely responsible for the timely filing of any reports or returns required pursuant to the provisions of Section 6045(e) of the Internal Revenue Code of 1986 as amended (and any similar reports or returns required under any state or local laws) in connection with the Closing.

          15.15 Third Party Beneficiaries. This Agreement is for the benefit of Buyer and Seller and their respective shareholders, partners and successors, and no third party shall be entitled to the benefit of any of the provisions of this Agreement.

          15.16 Survival. The provisions of this Agreement shall not merge with the delivery of the Deed but shall, except as otherwise provided in this Agreement, survive the Closing.

          15.17 Mutual Cooperation. Each party hereto agrees to execute, acknowledge and deliver or to cause to have executed, acknowledged and delivered, such other and further instruments and documents as may reasonably be requested by the other to carry out this Agreement. Each party hereto shall use its good faith efforts to cause satisfaction of all conditions to its obligation under this Agreement, and to exercise good faith in fulfilling its obligations under this Agreement.

          15.18 Waiver of Jury Trial. TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE PARTIES HEREBY IRREVOCABLY WAIVE ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR THE TRANSACTIONS CONTEMPLATED HEREBY.

[SIGNATURES APPEAR ON NEXT PAGE]

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     IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.

SELLER:		BUYER:
Palm, Inc., a Delaware corporation		Hunter/Storm, LLC, a California
		limited liability company
By:	/s/ ANDREW J. BROWN	By:	/s/ EDWARD D. STORM
Name:	Andrew J. Brown	Name:	Edward D. Storm
Title:	Senior Vice President and	Title:	Managing Member
	Chief Financial Officer
	(Principal Financial and	By:	/s/ DEKE K. HUNTER JR.
	Accounting Officer)	Name:	Deke K. Hunter Jr.
		Title:	Managing Member

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EXHIBIT A

Legal description of the Real Property

[to be attached]

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EXHIBIT B

Assignment and Assumption Agreement

     This Assignment and Assumption Agreement (the “Assignment”) is made and entered into as of this ___day of                     , 200___(“Assignment Date”), by and between Palm, Inc., a Delaware corporation (“Assignor”), and Hunter/Storm, LLC, a California limited liability company (“Assignee”), with reference to the following facts.

RECITALS

          A. Assignor and Assignee are parties to that certain Purchase and Sale Agreement and Escrow Instructions, made and entered into as of                     , 2006 (the “Purchase Agreement”), pursuant to which Assignor agreed to sell to Assignee, and Assignee agreed to purchase from Assignor that certain unimproved real property located in the City of San Jose, County of Santa Clara, State of California, as more particularly described on Exhibit A attached hereto and made a part hereof (the “Real Property”), together with all of Seller’s right, title and interest in (i) all plans, specifications, maps, drawings and other renderings of the Real Property and all licenses and permits required in connection with the operation of the Property, (ii) all governmental zoning, use and operating permits, and all other governmental permits, licenses, approvals, applications, subdivision maps, entitlements, certificates, rights under development agreements, building permits, development allocations, and development rights relating to the Real Property and all utility and other permits relating to the Real Property; (iii) all warranties, claims, indemnities and any similar rights relating to and benefiting the Property or the assets transferred hereby; (iv) all intangible rights, goodwill and similar rights benefiting the Property; (v) all development rights benefiting the Property; and (vi) all rights, claims or awards benefiting the Property (collectively, the “Intangible Property”).

     1. Assignment and Assumption. Effective as of the Assignment Date, Assignor hereby grants, transfers, conveys, assigns and delegates to Assignee all of the rights and interests of Assignor in, to and under the Intangible Property. Effective as of the Assignment Date, Assignee hereby accepts such assignment and delegation by Assignor and agrees to fully perform and assume all the obligations of Assignor under the Intangible Property.

     2. No Warranties. Assignee does hereby covenant with Assignor, and represents and warrants to Assignor, that Assignor is transferring the Intangible Property (to the extent the terms of any of the foregoing do not limit or restrict such right) without any warranty or representation of any kind or nature. This Assignment shall not be construed as a representation or warranty by Assignor as to the transferability or enforceability of the Intangible Property, and Assignor shall have no liability to Assignee in the event that any or all of the Intangible Property (a) is not transferable to Assignee, or (b) is cancelled or terminated by reason of this Assignment or any acts of Assignee.

     3. Dispute Costs. In the event of any dispute between Assignor and Assignee arising out of the obligations of the parties under this Assignment or concerning the meaning or interpretation of any provision contained herein, the losing party shall pay the prevailing party’s costs and expenses of such dispute, including without limitation,

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reasonably attorneys’ fees and costs. Any such attorneys’ fees and other expenses incurred by either party in enforcing a judgment in its favor under this Assignment shall be recoverable separately from and in addition to any other amount included in such judgment, and such attorneys’ fees obligation is intended to be severable from the other provisions of this Assignment and to survive and not be merged into any such judgment.

     4. Counterparts. This Assignment may be executed in counterparts, each of which shall be deemed an original, and all of which shall taken together be deemed one document. Assignor and Assignee agree that the delivery of an executed copy of this Assignment by facsimile shall be legal and binding and shall have the same full force and effect as if an original executed copy of this Assignment had been delivered.

     5. Survival. This Assignment and the provisions hereof shall inure to the benefit of and be binding upon the parties to this Assignment, and their respective successors, heirs and permitted assigns.

     6. Miscellaneous. This Assignment shall be governed by and construed in accordance with the laws of the State of California. Any waiver by either party of any breach of any term or condition of this Assignment shall not operate as a waiver of any other breach of such term or condition or of any other term or condition, nor shall any failure to enforce such provision hereof operate as a waiver of such provision or of any other provision hereof, nor constitute nor be deemed as a waiver or release of any other party for anything arising out of, connected with or based upon this Assignment.

     7. Limited Liability. This Assignment is made without recourse and without any express or implied representation or warranty of any kind or nature, except as expressly set forth herein or in the Purchase Agreement. Assignee and Assignor on its own behalf and on behalf of its agents, members, partners, employees, representatives, successors and assigns each hereby agrees that in no event or circumstance shall any of the members, partners, employees, representatives, officers, directors, agents, property management company, affiliated or related entities of Assignor or of Assignee, have any personal liability under this Assignment, or to any of the other’s creditors, or to any other party in connection with the Property.

     8. No Third Party Beneficiaries. Except as otherwise expressly set forth herein, Assignor and Assignee do not intend, and this Assignment shall not be construed, to create a third-party beneficiary status or interest in, nor give any third-party beneficiary rights or remedies to, any other person or entity not a party to this Assignment.

     IN WITNESS WHEREOF, the parties hereto have executed this Assignment and Assumption Agreement as of the Assignment Date..

ASSIGNOR:	ASSIGNEE:
Palm, Inc., a Delaware corporation	Hunter/Storm, LLC, a California limited liability company
By:	By:
Name:	Name:
Title:	Title:

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EXHIBIT A
Property

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The land referred to in this report is situated in the State of California, County of and is described as follows:

All that certain Real Property in the City of San Jose, County of Santa Clara, State of California, described as follows:

PARCEL ONE:

All of Parcel 1, as shown upon that certain Map entitled, “Amended Parcel Map”, which Map was filed for record in the Office of the Recorder of the County of Santa Clara, State of California, on December 22, 1983 in Book 523 of Maps, at pages 7.

EXCEPTING THEREFROM:

All that certain real property situate in the City of San Jose, County of Santa Clara, State of California, being a portion of Parcel 1, as shown on the Amended Parcel Map recorded in Book 523 of Maps at page 7, Santa Clara County Records, being more particularly described as follows:

Beginning at the most Westerly corner of said Parcel 1, being on the Northeasterly line of North First Street; thence North 71°56’56” East, 341.59 feet along the Northerly line of said Parcel 1; thence South 37°32’48” West, 281.82 feet to said Northeasterly line of North First Street; thence along said Northeasterly line North 52°27’37” West, 193.00 feet to the true point of beginning.

ALSO EXCEPTING THEREFROM:

That portion described in the Grant Deed to the City of San Jose, a municipal corporation recorded August 20, 1987 in Book K267, page 156 Official Records of Santa Clara County and being more particularly described as follows:

All that certain real property situate in the City of San Jose, County of Santa Clara, State of California, being a portion of Parcel 1 as shown on the Amended Parcel Map recorded in Book 523 of Maps, at page 7, Santa Clara County Records, being also a portion of Parcel 2 as described in the deed recorded October 21, 1985 in Book J492 of Official Records at page 1703, Santa Clara County Records, being more particularly described as follows:

Beginning at the most Southerly corner of the parcel of land described in the deed recorded October 21, 1985 at Series Number 8564627, Book J492 of Official Records at page 1698, Santa Clara County Records; thence along the Southeasterly line of said parcel described in said deed recorded October 21, 1985, North 37°32’48” East, 281.82 feet to the Northwesterly line of said Parcel 2; thence along said Northwesterly line the following three courses: North 37°32’48” East, 20.53 feet; thence along a curve to the right having a radius of 300.00 feet through a central angle of 7°12’ 34” for an arc length of 37.75 feet; thence North 44°45’22” East, 261.02 feet to the Northeasterly line of said Parcel 2; thence along said Northeasterly South 45°14’38” East, 27.00 feet to a line that is parallel with and 27.00 Southeasterly of said Northwesterly line; thence along said parallel line South 44°45’22” West, 261.02 feet; thence along a curve to the left having a radius of 273.00 feet through a central angle of 7°12’34” for an arc length of 34.35 feet; thence South 37°32’48” West, 252.35 feet; thence along a curve to the left having a radius of 50.00 feet through a central of 90°00’00” for an arc length of 78.54 feet to the Northeasterly line of North First Street; thence along said Northeasterly line North 52°27’12” West, 77.00 feet to the point of beginning.

AND, IN ADDITION THERETO, THE FOLLOWING AREA:

TRANSFER AREA 1

Beginning at 4” x 4” stake marked A.D.C.M.1, standing on the Southerly line of the Alviso and Milpitas Road, from which stake a stone monument standing at the point of intersection of the South line of the Alviso and Milpitas Road with the center line of the San Jose and Alviso Road bears West 28.14 chains; running thence along the South line of the Alviso and Milpitas Road East 38.88 chains to a 4” x 4” stake marked C.M.N.M.1; thence S 7 deg. 20’ E., 7.835 chains to a 4” x 4” stake marked C.M.N.M.2 standing on the Southerly line of the lands formerly belonging to the Estate of John W. Meads; thence along said Southerly line S 88 deg. 55’ W., 36.74 chains to a 4” x 4” stake marked M.4, thence S 59 deg. 57’ E., 1.322 chains to a 4” stake marked M.3; thence S 71 deg. 48’ W., 3.35 chains to a 4” x 4” stake marked A.D.C.M. 3; thence N 1 deg. 28’ W. 5.02 chains to a 4” x 4” stake marked A.D.C.M.2; thence N 10 deg. 18’ W., 5.474 chains to the place of beginning, and being Lot 2 as shown on the Map accompanying the report of the sole commissioner in the Partition of the Estate of John W. Meads, deceased.

Excepting therefrom a portion of that Parcel of Land described in the Deed Recorded September 21, 1966 as Instrument No. 3120626 in Book 7512, Page 79, Official Records of Santa Clara County, said portion being more particularly described as follows:

Commencing at the Northeasterly corner of that Parcel of Land described in the Deed to the State of California, Recorded November 15, 1957 in Volume 3937, Page 635, Official Records of Santa Clara County; thence along the Northerly line of said Parcel (7512 OR 79) S. 89 deg. 01’ 21” E., 2959.87 feet, and N 74 deg. 49’ 08” E., 1314.86 feet to the Easterly line of last said Parcel; thence along last said line S. 6 deg. 22’ 52” E., 76.47 feet; thence S. 80 deg. 54’ 25” W., 72.96 feet to a line parallel with and distant 67.83 feet Southerly at right angles, from the course described above as “N. 74 deg. 49’ 08” E., 1314.86 feet”; thence along said parallel line S. 74 deg. 49’ 08” W., 1034.16 feet; thence along a tangent curve to the right with a radius of 1395.00 feet through an angle of 16 deg. 09’ 31”, an arc length of 393.42 feet to a line parallel with and distant 65.59 feet Southerly, at right angles, from the course described above as “S. 89 deg. 01’ 21” E., 2959.87 feet”; thence along last said parallel line N. 89 deg. 01’ 21” W., 2767.11 feet to the Easterly line of said State of California parcel; thence along last said line N. 9 deg. 29’ 21” W., 66.70 feet to the point of commencement, as granted to the State of California by Deed Recorded February 17, 1970 Series No. 3764080, Book 8830, Page 352 and Series No. 3764081, Book 8830, Page 355, Official Records Santa Clara County.

ALSO EXCEPTING THEREFROM:

All that certain real property situate in the City of San Jose, County of Santa Clara, State of California, being a portion of the parcel of land described in the Deed recorded July 26, 1984 in Book 1749 of Official Records, page 539, Santa Clara County Records, and being more particularly described as follows:

Beginning at the most Westerly corner of Parcel 1, as shown on the Amended Parcel Map recorded in Book 523 of Maps, at page 7, Santa Clara County Records, said corner being on the Northeasterly line of North First Street; thence along the Northerly line of said Parcel 1, North 71°56’56” East 787.15 feet to the Westerly line of said parcel described in the said deed recorded July 26, 1984; thence along said Westerly line North 1°19’04” West 327.06 feet to the true point of beginning; thence continuing along said Westerly line North 1°19’04” West 4.26 feet; thence North 10°16’10” West 261.37 feet; thence leaving said Westerly line South 89°50’02” East 218.46 feet; thence South 0°09’58” West 88.17 feet; thence Southwesterly along a non-tangent curve to the left having a radius of 325.00 feet whose radius point bears South 43°03’16” East, through a central angle of 2°11’22” for an arc length of 12.42 feet; thence South 44°45’22” West 230.93 feet to the true point of beginning.

ALSO EXCEPTING THEREFROM:

That portion described in the Grant Deed to the City of San Jose, a municipal corporation, recorded August 20, 1987, in Book K267, page 162, Official Records, and being more particularly described as follows:

All that certain real property situate in the City of San Jose, County of Santa Clara, State of California, being a portion of the parcel of land described in the deed recorded July 26, 1984 in Book 1749 of Official Records, at page 539, Santa Clara County Records, being also a portion of the Parcel 4 as described in the deed recorded October 21, 1985 in Book J492 of Official Records, at page 1713, Santa Clara County Records, and being more particularly described as follows:

Beginning at the most Westerly corner of said Parcel 4; thence along the Northwesterly line of said Parcel 4, North 44°45’22” East 278.16 feet to the Westerly line of said Parcel described in said deed recorded July 26, 1984; thence along said Westerly line North 1°19’04” West 37.49 feet to the Southeasterly line of Parcel 3, as described in the deed recorded October 21, 1985 in Book J492 of Official Records, at page 1708, Santa Clara County Records; thence along said Southeasterly line North 44°45’22” East, 230.93 feet; thence Northeasterly along a curve to the right having a radius at 325.00 feet through a central angle of 45°24’36” for an arc length of 257.58 feet; thence South 89°50’02” East 2099.12 feet; thence along a curve to the left, having a radius of 2000.00 feet, through a central angle of 6°03’43” for an arc length of 211.60 feet; thence North 84°06’15” East 709.89 feet; thence along a curve to the right having a radius of 350.00 feet through a central angle of 31°13’08” for an arc length of 190.71 feet; thence South 64°40’37” East 358.91 feet; thence along a curve to the right having a radius of 226.00 feet through a central angle of 42°17’12” for an arc length of 166.890 feet to a point of reverse curvature; thence along a curve to the left having a radius of 173.00 feet through a central angle of 55°40’26” for an arc length of 168.10 feet to a point compound curvature; thence along a curve to the left having a radius of 43.00 feet through a central angle of 106°08’43” for an arc length of 79.66 feet to a point of reverse curvature; thence along a curve to the right having a radius of 1065.00 feet through a central angle of 2°47’46” for an arc length of 51.97 feet; thence South 1°24’49” West 358.65 feet; thence along a curve to the left having a radius of 931.00 feet through a central angle of 1°55’58” for an arc length of 31.40 feet to a point on the Westerly line of Zanker Road; thence along said Westerly line South 7°05’54” East 546.38 feet to the Southerly line of said parcel described in said Deed recorded July 26, 1984; thence along said Southerly line South 88°44’54” West 72.55 feet; thence Northwesterly along a non-tangent curve to the right having a radius of 226.00 feet whose radius point bears North 0°26’07” East, through a central angle of 67°10’28” for an arc length of 264.97 feet to a point of reverse curvature; thence along a curve to the left having a radius of 173.00 feet through a central angle of 42°17’12” for an arc length of 127.68 feet; thence North 64°40’37” West 358.91 feet; thence along a curve to the left having a radius of 297.00 feet through a central angle of 31°13’08” for an arc length of 161.83 feet; thence South 84°06’15” West 709.89 feet; thence along a curve to the right having a radius of 2053.00 feet through a central angle of 6°03’43” for an arc length of 217.71 feet; thence North 89°50’02” West 1574.68 feet; thence along a curve to the left having a radius of 50.00 feet, through a central angle of 90°50’02” for an arc length of 78.54 feet; thence South 0°09’58” West 247.88 feet; thence along curve to the right having a radius of 177.00 feet through a central angle of 37°22’50” for an arc length of 115.48 feet to said Southerly line, being also the Northwesterly corner of Parcel 1 shown on the Parcel Map recorded in Book 531 of Maps at page 42, Santa Clara County Records; thence along said Southerly line South 88°44’54” West 69.29 feet; thence leaving said line North

37°32’48” East 43.41 feet; thence along a curve to the left having a radius of 123.00 feet through a central angle of 37°22’50” for an arc length of 80.25 feet; thence North 0°09’58” East 247.88 feet; thence along a curve to the left, having a radius of 50.00 feet through a central angle of 90°00’00” for an arc length of 78.54 feet; thence North 89°50’02” West 365.69 feet; thence along a curve to the left having a radius of 280.00 feet through a central angle of 45°24’36” length of 221.92 feet; thence South 44°45’22” West 532.74 feet to the Southwesterly line of said Parcel 4; thence along said Southwesterly North 45°14’38” West 27.00 feet to the point of beginning.

Also excepting therefrom:

That portion thereof as shown in that Final Order of Condemnation recorded March 30, 1994 in Book N373, page 560, Official Records, and all that portion lying thereof and being more particularly described as follows:

All that certain real property situate in the City of San Jose, County of Santa Clara,
described as follows:

Beginning at the Northwest corner of Parcel 3 as described in the deed from Highway 237 Associates, a California general partnership to John Arrillaga, et al, recorded October 21, 1985 in Book J492 of Official Records, at page 1708, Santa Clara County Records; thence from said point of beginning, along the Northerly prolongation of the Westerly line of said Parcel 3 North 9°29’16” West 11.25 feet; thence leaving said Northerly prolongation North 88°43’01” East 202.59 feet; thence North 89°49’56” East 330.95 feet; thence North 0°58’44” East 6.61 feet to a point in the Southerly line of that certain 6.465 acre parcel described in the deed from Edward S. J. Cali, et al., to the State of California, recorded February 17, 1970 in Book 8830 of Official Records, at page 352, Santa Clara County Records; thence along said Southerly line South 89°01’16” East 1954.77 feet; thence leaving said Southerly line South 86°14’18” East 317.01 feet to a point in the general Northerly line of the 6474 acre parcel described in the Deed from Metropolitan Life Insurance Company, a New York Corporation to the City of San Jose, a municipal corporation of the State of California recorded August 20, 1987 in Book K267 of Official Records at page 162, Santa Clara County Records; thence along said general Northerly line the following courses: South 84°55’33” West, 51.74 feet; thence from a tangent bearing of South 84°54’26” West along a curve to the right with a radius of 1999.89 feet, through a central angle of 6°03’42” for an arc length of 211.58 feet; North 89°01’32” West 2099.03 feet; and thence from a tangent bearing of North 89°01’57” West, along a curve to the left with a radius of 324.98 feet; through a central angle of 43°13’13” for an arc length of 245.14 feet, to the Southeasterly corner of Said Parcel 3; thence along the Easterly line of said Parcel 3, North 0°58’29” East 88.17 feet to the Northeast corner of said Parcel 3; thence along the Northerly line of said Parcel 3, North 89°01’31” West, 218.48 feet to the point of beginning.

ALSO EXCEPTING THEREFROM:

Beginning at the Southwest corner of that certain 6.465 acre parcel of land described in the Deed from Edward S. J. Cali, et al, to the State of California, recorded February 17, 1970 in Book 8830 of Official Records, at page 352, Santa Clara County Records, at page 352, Santa Clara County Records; thence from said point of beginning, along the Southerly line of said 6.465 acre parcel South 89°01’16” East 537.24 feet; thence leaving said Southerly line, at right angles South 0°58’44” West 6.61 feet; thence South 89°49’56” West 330.95 feet; thence South 88°43’01” West 202.59 feet to a point in the Southerly prolongation of the Westerly line of said 6.4675 acre parcel; thence along said Southerly prolongation North 9°29’16” West 21.59 feet to the point of beginning.

Also excepting therefrom:

Being a portion of that parcel of land described in the Deed recorded June 5, 1987 in Book K178 of Official Records, at page 366, Santa Clara County Records, and being more particularly described as follows:
Beginning at the Southeast corner of Lot 2 as shown on the Map accompanying the report of the Sole Commissioner in the Partition of the Estate of John W. Meads, Deceased, said point of beginning being also the Southwest corner of Lot 3 as shown on said Map; thence South 88°44’54” West, 1510.35 feet along the Southerly line of said Lot 2, to the Easterly line of Headquarters Drive, said point being on a nontangent curve concave to the West having a radius of 177.00 feet and from which a radial bears North 52°27’12” West; thence Northeasterly and Northerly 115.48 feet along the arc of said curve and through a central angle of 37°22’50”; thence North 00°09’58” East 247.90 feet along the Easterly line of Headquarters Drive, to a curve to the right having a radius of 50.00 feet; thence Northeasterly 78.53 feet along the arc of said curve and through a central angle of 90°00’00”; thence South 89°50’27” East 1574.10 feet along the Southerly line of Holger Way to the Easterly line of said Lot 2; thence South 07°30’06” East 366.03 feet along said Eastern line to the point of beginning.

AND, IN ADDITION THERETO, THE FOLLOWING AREA:

TRANSFER AREA 2

Real Property in the City of San Jose, County of Santa Clara, State of California described as follows:

All that certain real property situate in the City of San Jose, County of Santa Clara, State of California, being a portion of that parcel of land described in the Deed recorded May 3, 1979 in Book E464 of Official Records, at page 51, Santa Clara County Records, being more particularly described as follows:

Beginning at the most Westerly corner of Parcel 1, as shown on the Amended Parcel Map recorded in Book 523 of Maps, at page 7, Santa Clara County Records, said corner being on the Northeasterly line of North First Street; thence along the Northerly line of said Parcel 1, North 71°56’56” East 341.59 feet to the true point of beginning; thence continuing along said Northerly line North 71 deg. 56’ 56” East 358.60 feet; thence North 45 deg. 14’ 38” West 168.78 feet; thence South 44 deg. 45’ 22” West 260.95 feet; thence along a curve to the left, having a radius of 300.00 feet through a central angle of 7 deg. 12’ 34” 48” West 20.53 feet to the True Point of Beginning.

Excepting therefrom:

That portion described in the Grant Deed to the city of San Jose, A Municipal Corporation, recorded August 20, 1987 in Book K267, Page 156, Official Records of Santa Clara County, and being more particularly described as follows:

All that certain real property situate in the City of San Jose, County of Santa Clara, State of California, being a portion of Parcel 1, as shown on the Amended Parcel Map recorded in Book 523 D Maps, at Page 7, Santa Clara County Records, being also a portion of Parcel 2 as described in the Deed, recorded October 21, 1985 in Book J492 of Official Records, at Page 1703, Santa Clara County Records, being more particularly described as follows:

Beginning at the most Southerly corner of the Parcel of Land described in the Deed recorded October 21, 1985 at Series No. 8564627, Book J492 of Official Records, at Page 1698, Santa Clara County Records; thence along the Southeasterly line of said parcel

described in said Deed recorded October 21, 1985, North 37 deg. 32’ 48” East 281.82 feet to the Northwesterly line of said Parcel 2; thence along said Northwesterly line the following three courses: North 37 deg. 32’ 48” East 20.53 feet; thence along a curve to the right having a radius of 300.00 feet through a central angle of 7 deg. 12’ 34” for an arc length of 37.75 feet; thence North 44 deg. 45’ 22” East 260.95 feet to the Northeasterly line of said Parcel 2; thence along said Northeasterly line South 45 deg. 14’ 38” East 27.00 feet to a line that is parallel with and 27.00 feet Southeasterly of said Northwesterly line; thence along said parallel line South 44 deg. 45’ 22” West, 260.95 feet; thence along a curve to the left having a radius of 273.00 feet through a central angle of 7 deg. 12’ 34” for an arc length of 34.35 feet; thence South 37 deg. 32’ 48” West 252.34 feet; thence along a curve to the left having a radius of 50.00 feet through a central angle of 90 deg. 00’ 00” for an arc length of 78.54 feet to the Northeasterly line of North First Street; thence along said Northeasterly line North 52 deg. 27’ 12” West 77.00 feet to the Point of Beginning.

AND IN ADDITION THERETO, THE FOLLOWING AREA:

TRANSFER AREA 3

All that certain real property situate in the City of San Jose, County of Santa Clara, State of California, being a portion of that parcel of land described in the Deed recorded May 3, 1979 in Book E464 of Official Records at page 51, Santa Clara County Records, being more particularly described as follows:

Beginning at the most Westerly corner of Parcel as shown on the Amended Parcel Map recorded in Book 523 of Maps at page 7, Santa Clara County Records, said corner being on the Northeasterly line of North First Street; thence along the Northerly line of said Parcel 1, North 71 deg 56’ 56” East 700.17 feet to the True Point of Beginning; thence continuing along said Northerly line North 71 deg. 56’ 56” East 86.88 feet to the Easterly line of said parcel of land described in the Deed recorded May 3, 1979; thence along said Easterly line North 1 deg. 19’ 04” West 289.47 feet; thence leaving said Easterly line South 44 deg. 45’ 22” West 278.09 feet; thence South 45 deg. 14’ 38” East 168.78 feet to the True Point of Beginning.

Excepting therefrom:

That portion described in the Grant Deed to the City of San Jose, A Municipal Corporation recorded August 20, 1987 in Book K267, Page 162 Official Records, and being more particularly described as follows:

All that certain real property situate in the City of San Jose, County of Santa Clara, State of California, being a portion of Parcel of Land described in the Deed recorded July 26, 1984 in Book 1749 of Official Records at Page 539, Santa Clara County Records, being also a portion of Parcel 4 as described in the Deed recorded October 21, 1995 in Book J492 of Official Records at Page 1713, Santa Clara County Records, being more particularly described as follows:

Beginning at the Westerly corner of said Parcel 4; thence along the Northwesterly line of said Parcel 4, North 44 deg. 45’ 22” East 278.16 feet to the Westerly line of said parcel described in said Deed recorded July 26, 1984; thence along said Westerly line North 1 deg. 19’ 04” West 37.49 feet to the Southeasterly line of Parcel 3 as described in the Deed recorded October 21, 1985 in Book J492 of Official Records, at Page 1708, Santa Clara County Records; thence along said Southeasterly line North 44 deg. 45’ 22” East 230.93 feet; thence feet; thence Northeasterly along a curve to the right having a radius of 325.00 feet through a central angle at 45 deg. 24’ 36” for an arc length of

257.58 feet; thence South 89 deg. 50’ 02” East 2099.12 feet; thence along a curve to the left, having a radius of 2000.00 feet, through a central angle of 6 deg. 03’ 43” for an arc length of 211.60 feet; thence North 84 deg. 06’ 15” East 709.89 feet; thence along a curve to the right having a radius of 350.00 feet through a central angle of 31 deg. 13’ 08” for an arc length of 190.71 feet; thence South 64 deg. 40’ 37” East 358.85 feet; thence along a curve to the right having a radius of 226.00 feet through a central angle of 42 deg. 17’ 12” for an arc length of 166.80 feet to a point of reverse curvature; thence along a curve to the left having a radius of 173.00 feet through a central angle of 55 deg. 40’ 26” for an arc length of 168.10 feet to a point of compound curvature; thence along a curve to the left having a radius of 43.00 feet through a central angle of 106 deg. 08’ 43” for an arc length of 79.66 feet to a point of reverse curvature; thence along a curve to the right having a radius of 1065.00 feet through a central angle of 2 deg. 47’ 46” for an arc length of 51.97 feet; thence North 1 deg. 24’ 49” West 358.65 feet; thence along a curve to the left having a radius of 931.00 feet through a central angle of 1 deg. 55’ 58” for an arc length of 31.40 feet to a point on the Westerly line of Zanker Road; thence along said Westerly line South 7 deg. 05’ 54” East 546.69 feet to the Southerly line of said parcel described in said recorded July 26, 1984; thence along said Southerly line South 88 deg. 44’ 54” West 72.55 feet; thence Northwesterly along a non-tangent curve to the right having a radius of 226.00 feet whose radius point bears North 0 deg. 26’ 07” East, through a central angle of 68 deg. 51’ 41” for an arc length of 271.62 feet to a point of reverse curvature; thence along a curve to the left having a radius of 173.00 feet through a central angle of 42 deg. 17’ 12” for an length of 127.68 feet; thence North 64 deg. 40’ 37” West 358.85 feet; thence along a curve to the left having a radius of 297.00 feet through a central angle of 31 deg. 13’ 08” for an arc length of 161.83 feet; thence South 84 deg. 06’ 15” West 709.89 feet; thence along a curve to the right having a radius of 2053.00 feet through a central angle of 6 deg. 03’ 20” for an arc length of 216.98 feet; thence North 89 deg. 50’ 25” West 1574.10 feet; thence along a curve to the right having a radius of 50.00 feet, through a central angle of 90 deg. 00’ 00” an arc length of 78.53 feet; thence South 0 deg. 09’ 58” West 247.90 feet; thence along a curve to the right having a radius of 177.00 feet through a central angle of 37 deg. 22’ 50” for an arc length of 115.48 feet to said Southerly line, being also the Northwesterly corner of Parcel 1 shown on the Parcel Map recorded in Book 531 of Maps, at Page 42, Santa Clara County Records; thence along said Southerly line South 88 deg. 44’ 54” West 69.29 feet; thence leaving said line North 37 deg. 32’ 48” East 43.41 feet; thence along a curve to the left having a radius of 123.00 feet through a central angle of 37 deg. 22’ 50” for an arc length of 80.25 feet; thence North 0 deg. 09’ 58” East 247.88 feet; thence along a curve to the left having a radius of 50.00 feet through a central angle of 90 deg. 00’ 00” for an arc length of 78.53 feet; thence North 89 deg. 50’ 25” West 365.70 feet; thence along a curve to the left having a radius of 280.00 feet through a central angle of 45 deg. 24’ 13” for an arc length of 221.88 feet; thence South 44 deg. 45’ 22” West 532.79 feet to the Southwesterly line of said Parcel 4; thence along said Southwesterly line North 45 deg. 14’ 38” West 27.00 feet to the Point of Beginning.

PARCEL TWO:

Parcel One as shown on the certain Map entitled “Parcel Map, being a portion of Parcel 1 as shown on the Amended Parcel Map recorded in Book 523 of Maps at Page 9 and a portion of Lot 1, as shown on the Map accompanying the Report of the Sole Commissioner in the Partition of the Estate of John W. Meads, Deceased and a portion of that parcel of land conveyed by Deed No. 16421 to the State of California, recorded November 15, 1957 in Volume 3937, Page 635 and lying in the city of San Jose, Santa Clara County, California”, which Map was filed for Record in the Office of the Recorder of the County of Santa Clara, State of California on October 29, 1996 in Book 683 of Maps, at Pages 44 and 45.

EX-10.26

EXHIBIT 10.26

RELEASE OF CLAIMS

     This Release of Claims (“Release”) is entered this 13th day of March, 2006, by and between Ken Wirt and Palm, Inc. (“Palm”) pursuant to and in accordance with the terms of the July 10, 2002 Severance Agreement (“Severance Agreement”) between the parties.

     The parties hereby acknowledge and agree that Mr. Wirt is eligible for the severance benefits described in Section 2 of the Severance Agreement in connection with his separation from employment with Palm, effective March 24, 2006 (“Termination Date”).

     Except with respect to the obligations created by, acknowledged by, or arising out of this Release, Mr. Wirt, on behalf of himself, his heirs, administrators, representatives, executors, successors and assigns (the “Wirt Parties”), and each of them, hereby releases Palm, its current and former stockholders, directors, officers, employees, agents, attorneys, successors and assigns (the “Palm Parties”), and each of them, of and from any and all claims, actions and causes of action, whether now known or unknown, which the Wirt Parties now have, ever had, or shall or may hereafter have against the Palm Parties, or any of them, based upon or arising out of any matter, cause, fact, thing, act or omission whatsoever occurring or existing at any time up to and including the date of this Release, including, but not limited to, any claims arising from or related to Mr. Wirt’s employment with Palm or the termination of that employment, and any claims of breach of contract, wrongful termination, fraud, defamation, infliction of emotional distress or discrimination due to national origin, race, religion, age, sex, sexual orientation, disability or other discrimination or harassment under the Civil Rights Act of 1964, the Age Discrimination in Employment Act of 1967, the Americans with Disabilities Act, the California Fair Employment and Housing Act or any other applicable law. The foregoing release shall not extend to any right of indemnification the Wirt Parties have or may have for liabilities arising from Mr. Wirt’s actions within the course and scope of his employment with Palm.

     In connection with the foregoing general release, Mr. Wirt acknowledges that he has read and understands Section 1542 of the Civil Code of the State of California, which provides in full as follows:

A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor.

Mr. Wirt, on behalf off the Wirt parties, hereby expressly waives and relinquishes all rights and benefits he has or may have under Section 1542 with respect to the release of unknown claims granted in this agreement. Mr. Wirt acknowledges that he or his agents may hereafter discover facts or claims in addition to or different from those he now knows or believes to exist, but that he nevertheless intends to fully and finally settle all claims released herein.

     Mr. Wirt further warrants and represents that he has not voluntarily, by operation of law, or otherwise, assigned or transferred to any other person or entity any interest in all or any portion of those claims, actions, and causes of action released by this agreement.

     In addition to the benefits set forth in Section 2 of the Severance Agreement, an incremental twenty-five percent of those shares of stock that Mr. Wirt has purchased from the Company and that remain subject to a right of repurchase on the Termination Date will vest on the Termination Date and the Company’s right of repurchase will terminate on that date.

     Mr. Wirt acknowledges that the Palm, Inc. Employee Agreement between him and Palm, dated and effective as of July 24, 2001 (“Employee Agreement”), imposes obligations on him that survive the termination of his employment, and he hereby agrees to honor such obligations.

     This Release, the Severance Agreement and the Employee Agreement, together with those certain stock option and employee stock purchase agreements documenting options granted to Mr. Wirt or his participation in Palm’s employee stock purchase plan, constitute the entire understanding and agreement between Mr. Wirt and Palm concerning his employment with Palm and the termination of that employment, and supersede any prior negotiations, agreements and understandings, whether written or oral, with respect thereto.

     If any provision of this Release, or the application thereof, shall for any reason and to any extent be held invalid or unenforceable under any applicable law by an arbitrator or a court of competent jurisdiction, the remainder of this Release shall be interpreted so as best to reasonably effect the intent of the parties hereto. The parties further agree to replace any such invalid or unenforceable provision with a valid and enforceable provision that will achieve, to the extent possible, the economic, business and other objectives of the invalid or unenforceable provision.

     Any waiver, modification or amendment of any provision of this Release shall be effective only if in writing and signed by the parties hereto.

     This Release is not assignable by either party, except that Palm may assign it in connection with an acquisition, merger, consolidation or sale of all or substantially all of the assets of the company. In the event of any such merger or transfer of assets, the surviving corporation or the transferee of Palm’s assets shall be bound by and shall have the benefit of the provisions of this Release, the Severance Agreement, the Employee Agreement and the applicable stock option and stock purchase agreements, and Palm shall take all actions necessary to insure that any such corporation or transferee is bound by the provisions of this Release and all such agreements.

     This Release will be governed by and construed according to the laws of the State of California.

MR. WIRT UNDERSTANDS THAT HE SHOULD CONSULT WITH AN ATTORNEY PRIOR TO SIGNING THIS RELEASE AND THAT HE IS GIVING UP ANY LEGAL CLAIMS HE HAS OR MAY HAVE AGAINST THE PALM PARTIES BY SIGNING THIS RELEASE. MR. WIRT ALSO UNDERSTANDS THAT HE MAY HAVE UP TO 21 DAYS

2

TO CONSIDER THIS AGREEMENT, THAT HE MAY REVOKE IT AT ANY TIME DURING THE SEVEN DAYS AFTER SIGNING IT BY WRITTEN NOTICE TO RENA LANE, SENIOR VICE PRESIDENT OF HUMAN RESOURCES FOR PALM, AND THAT IT WILL NOT BECOME EFFECTIVE UNTIL THAT 7-DAY PERIOD HAS PASSED. MR. WIRT HEREBY ACKNOWLEDGES THAT HE IS SIGNING THIS AGREEMENT KNOWINGLY, WILLINGLY AND VOLUNTARILY IN EXCHANGE FOR THE COMPENSATION AND BENEFITS DESCRIBED IN THE SEVERANCE AGREEMENT AND IN THIS DOCUMENT, WHICH EXCEED THOSE TO WHICH HE WOULD OTHERWISE HAVE BEEN ENTITLED.

Palm, Inc.
/s/ Rena Lane	/s/ Kenneth R. Wirt
Rena Lane, Senior V.P., Human Resources	Ken Wirt
Date: March 13, 2006	Date: March 13, 2006

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EX-10.27

EXHIBIT 10.27

FIRST AMENDMENT TO PURCHASE AND SALE AGREEMENT
AND ESCROW INSTRUCTIONS

     This First Amendment to Purchase and Sale Agreement and Escrow Instructions (this “Amendment”) is entered into as of March 13, 2006 by and between Hunter/Storm, LLC, a California limited liability company (“Buyer”), and Palm, Inc., a Delaware corporation (“Seller”).

RECITALS

     A.     Buyer and Seller are parties to that certain Purchase and Sale Agreement and Escrow Instructions dated as of February 2, 2006 (the “Agreement”).

     B.     Buyer and Seller desire to amend the Agreement as set forth in this Amendment.

     Now, therefore, for valuable consideration, receipt of which is hereby acknowledged, Buyer and Seller hereby agree as follows:

     1.     Capitalized Terms. Any capitalized terms used in this Amendment but not defined herein shall have the meanings ascribed to such terms in the Agreement.

     2.     Title Review Period. Section 5.1 of the Agreement is hereby amended to provide that Buyer shall have the right to render objections to any matters described on its own Survey (or any update of Seller’s existing Survey) by delivering written notice to Seller on or before March 20, 2006. Seller shall have until 5 p.m. PST on March 30, 2006 to give Buyer: (i) notice that said objections will be removed on or before the Closing Date; or (ii) notice that Seller elects not to cause such objections to be removed. If Seller fails to give notice under clause (i), Seller shall be deemed to have elected not to cause such objections to be removed. If Seller either fails to give Buyer notice under clause (i) or gives Buyer notice under clause (ii), Buyer shall notify Seller prior to the expiration of the Due Diligence Period whether Buyer elects to proceed with the purchase or terminate the Agreement. If Buyer fails to give Seller the Election Notice prior to the expiration of the Due Diligence Period, Buyer shall be deemed to have elected to terminate this Agreement. If Buyer gives Seller the Election Notice prior to the expiration of the Due Diligence Period, Buyer shall be deemed to have elected to proceed with the Agreement and to accept title subject to the Approved Exceptions (as provided in paragraph 5.1.1, excluding, however, any references to exceptions disclosed by the Survey which shall be subject to the terms of this paragraph) and any exception approved pursuant to this paragraph. The term “Approved Exceptions” shall be deemed to include the title exceptions approved pursuant to this paragraph and paragraph 5.1.1 of the Agreement.

     3.     Full Force and Effect. Except as expressly amended by this Amendment, the terms of the Agreement shall remain and continue in full force and effect and are hereby ratified and confirmed in all respects by each of Buyer and Seller. In the event of any conflict between the terms of the Agreement and this Amendment, the terms of this Amendment shall govern and control. All references to the “Agreement” in the Agreement shall, from and after the date of this Amendment be deemed to be references to the Agreement as amended by this Amendment. This Amendment may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

     In witness whereof, the parties have executed this Amendment as of the date first above written.

SELLER:		SELLER:
Palm, Inc., a Delaware corporation		Hunter/Storm, LLC, a California limited liability company
By:	/s/ ANDREW J. BROWN	By:	/s/ EDWARD D. STORM
Name:	Andrew J. Brown	Name:	Edward D. Storm
Its:	Senior Vice President and Chief Financial Officer	Its:	Managing Member
	(Principal Financial and Accounting Officer)
		By:	/s/ DEKE K. HUNTER JR.
		Name:	Deke K. Hunter Jr.
		Its:	Managing Member

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EX-10.28

EXHIBIT 10.28

SECOND AMENDMENT TO PURCHASE AND SALE AGREEMENT
AND ESCROW INSTRUCTIONS

     This Second Amendment to Purchase and Sale Agreement and Escrow Instructions (this “Amendment”) is entered into as of April 3, 2006 (the “Effective Date”) by and between Hunter/Storm, LLC, a California limited liability company (“Buyer”), and Palm, Inc., a Delaware corporation (“Seller”).

RECITALS

     A. Buyer and Seller are parties to that certain Purchase and Sale Agreement and Escrow Instructions dated as of February 2, 2006, which was amended by that certain First Amendment to Purchase and Sale Agreement and Escrow Instructions dated March 13, 2006 (together, the “Agreement”).

     B. Buyer and Seller desire to amend the Agreement as set forth in this Amendment.

     Now, therefore, for valuable consideration, receipt of which is hereby acknowledged, Buyer and Seller hereby agree as follows:

     1. Capitalized Terms. Any capitalized terms used in this Amendment but not defined herein shall have the meanings ascribed to such terms in the Agreement.

     2. Waiver of Certain of Buyer’s Conditions Precedent; Delivery of Additional Deposit Extension of the Due Diligence Period.

          a. Buyer hereby approves Buyer’s Conditions Precedent set forth in paragraphs 5.1.1, 5.1.2 and 5.1.3 of the Agreement.

          b. Buyer has delivered the Additional Deposit to Escrow Holder. Notwithstanding the provisions of paragraph 2.3 or elsewhere in the Agreement, the Deposit shall be subject to disposition as follows:

               1) Buyer shall have the right, in its sole and absolute discretion, to terminate the Agreement due to its disapproval of the content or status of the General Plan Amendment at any time prior to August 1, 2006. Upon such termination, Buyer will receive half of the Deposit ($300,000 ÷ 2 = $150,000) and all the interest accrued to date from the Escrow account, and Seller shall retain the remaining sum of $150,000 as its sole remedy for Buyer’s termination of the Agreement.

               2) If Buyer terminates the Agreement on or after August 1, 2006, for any reason other than Seller’s default under the Agreement or the failure, as of the Close of Escrow, of any of Seller’s representations or warranties contained in the Agreement to be true and correct, the Deposit shall be nonrefundable to Buyer.

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               3) On or before November 1, 2006, Buyer may notify Seller in writing of Buyer’s intent to extend the Closing Date until no later than February 15, 2007. In that event, Buyer shall increase the Deposit by $700,000 to a total of $1,000,000. Thereafter, all references in the Agreement to the “Deposit” shall be deemed to refer to the amount of $1,000,000. Thereafter, the Deposit shall be nonrefundable (except in the event of Seller’s default under the Agreement or the failure, as of the Close of Escrow, of any of Seller’s representations or warranties contained in the Agreement to be true and correct), but shall be applicable to the Purchase Price.

     3. Close of Escrow. Paragraph 7.2 of the Agreement is amended to read in full as follows: “The Closing of the purchase and sale contemplated hereunder (the “Closing”) shall take place November 15, 2006, or such earlier date as Buyer and Seller may agree upon in writing; provided, however, that if Buyer elects to extend the Close of Escrow as provided in Section 2.b.3 of this Amendment, the Closing Date shall be February 15, 2007, or such earlier date as Buyer and Seller may agree upon in writing. The date that the Closing occurs shall be referred to herein as the “Closing Date” or “Close of Escrow.”

     4. Escrow Holder/Title Company. Buyer shall have the right, with Seller’s consent, to move the escrow currently opened with Chicago Title Company to a title company to be selected by Buyer at any time within thirty (30) days following the Effective Date of this Amendment. Seller agrees not to unreasonably withhold or delay its consent to such transfer and to reasonably cooperate with the transfer of the escrow as provided herein.

     5. Full Force and Effect. Except as expressly amended by this Amendment, the terms of the Agreement shall remain and continue in full force and effect and are hereby ratified and confirmed in all respects by each of Buyer and Seller. In the event of any conflict between the terms of the Agreement and this Amendment, the terms of this Amendment shall govern and control. All references to the “Agreement” in the Agreement shall, from and after the date of this Amendment be deemed to be references to the Agreement as amended by this Amendment. This Amendment may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

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     In witness whereof, the parties have executed this Amendment as of the date first above written.

SELLER:		SELLER:
Palm, Inc., a Delaware corporation		Hunter/Storm, LLC, a California limited liability company
By:	/s/ ED AXELSEN	By:	/s/ DEKE K. HUNTER JR.
Name:	Ed Axelsen	Name:	Deke K. Hunter Jr.
Its:	Director, Global Real Estate	Its:	Managing Member
		By:
		Name:
		Its:

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EX-31.1

Exhibit 31.1

Certifications

I, Edward T. Colligan, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Palm, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 10, 2006	By:	/s/ Edward T. Colligan
	Name:	Edward T. Colligan
	Title:	President and Chief Executive Officer

EX-31.2

Exhibit 31.2

Certifications

I, Andrew J. Brown, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Palm, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 10, 2006	By:	/s/ Andrew J. Brown
	Name:	Andrew J. Brown
	Title:	Senior Vice President and
		Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     I, Edward T. Colligan, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Palm, Inc. on Form 10-Q for the fiscal quarter ended March 3, 2006 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Palm, Inc.

By:	/s/ Edward T. Colligan
Name:	Edward T. Colligan
Title:	President and Chief Executive Officer

     I, Andrew J. Brown, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Palm, Inc. on Form 10-Q for the fiscal quarter ended March 3, 2006 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Palm, Inc.

By:	/s/ Andrew J. Brown
Name:	Andrew J. Brown
Title:	Senior Vice President and
	Chief Financial Officer