10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended August 29, 2003

OR

¨    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 incorporation or organization)	(I.R.S. Employer Identification No.)
400 N. McCarthy Blvd. Milpitas, California	95035
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code:  (408) 503-7000

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  x    No  ¨

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).    Yes  x    No  ¨

As of September 26, 2003, 31,798,462 shares of the Registrant’s Common Stock were outstanding.

This report contains a total of 58 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 months ended August 31, 2003 and 2002	3
	Condensed Consolidated Balance Sheets August 31, 2003 and May 31, 2003	4
	Condensed Consolidated Statements of Cash Flows Three months ended August 31, 2003 and 2002	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	50
Item 4.	Controls and Procedures	51
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	51
Item 6.	Exhibits and Reports on Form 8-K	54
Signatures		58

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

References to “Palm,” “Company,” “we,” “us,” and “our” in this Form 10-Q refer to Palm, Inc. and its subsidiaries unless the context requires otherwise.

Graffiti, HotSync, Palm OS and PalmSource are registered trademarks and Palm, AnyDay, palmOne, Palm Powered, Tungsten and Zire are trademarks of Palm, Inc. or its subsidiaries. Bluetooth is a trademark of Bluetooth SIG, Inc., U.S.A.

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 August 31,
	2003			2002
Revenues	$	177,435		$	172,268
Costs and operating expenses:
Cost of revenues (excluding the applicable portion of amortization of intangible assets)		115,592			117,653
Sales and marketing		39,192			44,774
Research and development		25,787			29,916
General and administrative		12,109			11,852
Amortization of intangible assets (*)		302			2,361
Separation costs		1,885			1,426
Restructuring charges		2,670			(581	)
Total costs and operating expenses		197,537			207,401
Operating loss		(20,102	)		(35,133	)
Interest and other income (expense), net		(199	)		(3,486	)
Loss before income taxes		(20,301	)		(38,619	)
Income tax provision		1,445			220,126
Net loss	$	(21,746	)	$	(258,745	)
Net loss per share:
Basic and Diluted	$	(0.74	)	$	(8.93	)
Shares used in computing per share amounts:
Basic and Diluted		29,349			28,968
(*) Amortization of intangible assets:
Cost of revenues	$	204		$	1,763
Sales and marketing		—			—
Research and development		65			565
General and administrative		33			33
Total amortization of intangible assets	$	302		$	2,361

See notes to condensed consolidated financial statements.

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Palm, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except par value amounts)

	August 31, 2003			May 31, 2003
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	266,840		$	242,432
Accounts receivable, net of allowance for doubtful accounts of $5,134 and $4,645, respectively		76,631			97,437
Inventories		24,048			22,748
Prepaids and other		8,521			8,406
Total current assets		376,040			371,023
Restricted investments		5,383			2,619
Land not in use		60,000			60,000
Property and equipment, net		30,797			34,622
Goodwill		68,785			68,785
Intangible assets, net		376			976
Deferred income taxes		34,800			34,800
Other assets		2,505			3,801
Total assets	$	578,686		$	576,626
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	68,437		$	83,037
Accrued restructuring		34,722			35,235
Other accrued liabilities		119,296			119,074
Total current liabilities		222,455			237,346
Non-current liabilities:
Long-term convertible debt		50,000			50,000
Deferred revenue and other		13,779			13,494
Minority interest in consolidated subsidiary		20,582			20,000
Stockholders’ equity:
Preferred stock, $.001 par value, 125,000 shares authorized; outstanding: none		—			—
Common stock, $.001 par value, 2,000,000 shares authorized; outstanding: 31,711 shares and 29,230 shares, respectively		32			29
Additional paid-in capital		1,161,948			1,123,819
Unamortized deferred stock-based compensation		(458	)		(508	)
Accumulated deficit		(890,535	)		(868,789	)
Accumulated other comprehensive income		883			1,235
Total stockholders’ equity		271,870			255,786
Total liabilities and stockholders’ equity	$	578,686		$	576,626

See notes to condensed consolidated financial statements.

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Palm, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Three Months Ended August 31,
	2003			2002
Cash flows from operating activities:
Net loss	$	(21,746	)	$	(258,745	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		5,726			6,030
Amortization		1,334			3,861
Deferred income taxes		—			219,625
Recognized loss on equity investments		—			3,206
Changes in assets and liabilities, net of effect of disposition:
Accounts receivable		20,806			(13,372	)
Inventories		(1,300	)		9,784
Prepaids and other		(691	)		1,251
Accounts payable		(14,600	)		(686	)
Accrued restructuring		(513	)		(8,449	)
Other accrued liabilities		(1,613	)		12,083
Net cash used in operating activities		(12,597	)		(25,412	)
Cash flows from investing activities:
Purchases of property and equipment		(1,983	)		(4,803	)
Sale of Palm Digital Media product line		3,700			—
Purchases of restricted investments		(2,764	)		(131	)
Purchases of short-term investments		—			(9,841	)
Net cash used in investing activities		(1,047	)		(14,775	)
Cash flows from financing activities:
Proceeds from issuance of common stock:
Through private placements		37,015			—
Under employee stock plans, net		1,037			(12	)
Net cash provided by (used in) financing activities		38,052			(12	)
Change in cash and cash equivalents		24,408			(40,199	)
Cash and cash equivalents, beginning of period		242,432			278,547
Cash and cash equivalents, end of period	$	266,840		$	238,348
Other cash flow information:
Cash refund (paid) for income taxes	$	(414	)	$	1,654
Cash paid for interest	$	(1,272	)	$	(1,350	)

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. (“Palm,” the “Company,” “us,” “we” or “our”), without audit, pursuant to the rules of the Securities and Exchange Commission (“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 August 31, 2003 and results of operations and cash flows for the three months ended August 31, 2003 and 2002. 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/A for the fiscal year ended May 31, 2003. The results of operations for the three months ended August 31, 2003 are not necessarily indicative of the operating results for the full fiscal year or any future period.

Palm was legally separated from 3Com Corporation (“3Com”) on February 26, 2000 (“the Separation Date”) and completed its initial public offering on March 2, 2000. Final distribution of Palm common stock from 3Com to its stockholders was completed on July 27, 2000.

Palm is organized into two operating segments — PalmSource, Inc. (“PalmSource”) and the Solutions Group. In the first quarter of fiscal year 2002, Palm announced its strategy to separate its Palm OS business (PalmSource) and its device business (the Solutions Group) into two independent companies. In December 2002, Palm received a ruling from the Internal Revenue Service that a distribution of PalmSource stock to Palm stockholders, if it occurs in accordance with the terms of the ruling, will be tax-free to the Company and its U.S. stockholders. On June 4, 2003, Palm entered into an agreement for a transaction in which Palm will distribute, on a pro rata basis to its existing stockholders, all of the shares of PalmSource common stock it owns; and immediately following the PalmSource distribution, Palm will acquire Handspring, Inc. (“Handspring”), and Handspring stockholders will receive Palm common stock in exchange for their Handspring common stock. In the PalmSource distribution, the 10.0 million shares (which gives effect to PalmSource’s one-for-five reverse stock split in September 2003) of PalmSource common stock held by Palm will be distributed to existing Palm stockholders on a pro rata basis. The final exchange ratio for the PalmSource distribution will be determined based on the number of shares of Palm common stock outstanding at the distribution date. In the Handspring merger, the stockholders of Handspring will receive 0.09 of a share of Palm common stock for each share of Handspring common stock held (an aggregate of approximately 13.5 million shares of Palm common stock, based on the number of shares of Handspring common stock outstanding at September 23, 2003). The closing of the transaction effecting the PalmSource distribution and the Handspring merger is subject to stockholder approval and other customary conditions. On September 26, 2003, the SEC declared effective Palm’s Registration Statement on Form S-4 relating to the PalmSource distribution and the Handspring merger. The stockholder vote on this transaction is scheduled to take place on October 28, 2003.

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. Both fiscal year 2004 and 2003 contain 52 weeks. For presentation purposes, the periods are shown as ending on August 31, November 30, February 28 and May 31, as applicable.

On October 15, 2002, Palm effected a one-for-twenty reverse stock split. All share and per share information herein reflect this reverse stock split. Certain prior year balances have been reclassified to conform to the current year presentation. These reclassifications had no impact on net earnings or total shares outstanding.

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2. Recent Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”) No. 46, Consolidation of Variable Interest Entities. FIN No. 46 requires an investor with a majority of the variable interests in a variable interest entity to consolidate the entity and also requires majority and significant variable interest investors to provide certain disclosures. A variable interest entity is an entity in which the equity investors do not have a controlling interest or the equity investment at risk is insufficient to finance the entity’s activities without receiving additional subordinated financial support from the other parties. The implementation of this interpretation did not have a significant impact on our historical financial condition or results of operation.

In April 2003, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 149 requires that contracts with comparable characteristics be accounted for similarly and clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative and when a derivative contains a financing component. SFAS No. 149 also amends the definition of an underlying to conform it to language used in FIN No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, with certain exceptions. Palm adopted SFAS No. 149 as of June 1, 2003, and the adoption of this statement did not have an impact on the Company’s historical financial position or results of operations.

In May 2003 the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity, which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument that falls within its scope as a liability (or an asset in some circumstances). SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, which for Palm is the quarter ended November 30, 2003. Palm adopted SFAS No. 150 as of June 1, 2003, and the adoption of this statement did not have an impact on the Company’s historical financial position or results of operations.

3. Stock-Based Compensation

Palm has employee stock plans, which are described more fully in the notes to consolidated financial statements included in the Company’s Annual Report on Form 10-K/A for the fiscal year ended May 31, 2003. Palm accounts for its employee stock plans under the intrinsic value method prescribed by Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees, and FIN No. 44, Accounting for Certain Transactions Involving Stock Compensation (an Interpretation of APB No. 25), and has adopted the disclosure-only provisions of 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.

Pursuant to 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 under its stock option plan, collectively called “options.” Concurrently, the Company’s 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 restrictions, and for which compensation expense equal to the fair market value on the date of the grant is recognized over the vesting period.

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.

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The following table illustrates the effect on net loss and net loss per share if Palm had elected to recognize stock-based compensation expense based on the fair value of the options granted at the date of grant as prescribed by SFAS No. 123. For the purposes 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.

	Three Months Ended August 31,
(In thousands, except per share amounts)	2003			2002
Net loss, as reported	$	(21,746	)	$	(258,745	)
Add: Stock-based compensation expense included in net loss, as reported, net of related tax effects		712			1,180
Less: Stock-based compensation expense determined under fair value method for all awards, net of related tax effects		(6,845	)		(13,849	)
Pro forma net loss	$	(27,879	)	$	(271,414	)
Net loss, as reported - basic and diluted	$	(0.74	)	$	(8.93	)
Pro forma net loss per share - basic and diluted	$	(0.95	)	$	(9.37	)

SFAS No. 123 requires the use of option valuation models that were not developed for use in valuing employee stock options. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because options held by Palm employees and directors have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in the opinion of management, the existing models do not necessarily provide a reliable single measure of the fair value of these options.

The fair value of each option grant during the three months ended August 31, 2003 and 2002 was estimated at the date of grant using the Black-Scholes option valuation model with the following weighted average assumptions:

	Three Months Ended August 31,
	2003		2002
Risk-free interest rate	1.9	%	2.4	%
Volatility	100	%	100	%
Options term (in years)	2.93		3.09
Dividend yield	0.0	%	0.0	%

The weighted average estimated fair value of stock options granted during the three months ended August 31, 2003 and 2002 was $9.79 per share and $8.79 per share, respectively.

4. Net Loss Per Share

Basic net loss per share 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 loss per share is calculated based on the weighted average shares of common stock outstanding because the effect of shares of restricted stock subject to repurchase and stock options and warrants outstanding, calculated using the treasury stock method, would have been anti-dilutive. For the three months ended August 31, 2003 and 2002, approximately 343,000 and 4,000 common equivalent shares, respectively, were excluded from the computations of diluted net loss per share.

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5. Comprehensive Loss

The components of comprehensive loss are (in thousands):

	Three Months Ended August 31,
	2003			2002
Net loss	$	(21,746	)	$	(258,745	)
Other comprehensive income (loss):
Unrealized gain (loss) on investments		3			(582	)
Accumulated translation adjustments		(355	)		155
Total comprehensive loss	$	(22,098	)	$	(259,172	)

6. Cash and Available for Sale and Restricted Investments

The Company’s cash and available for sale and restricted investments consist of (in thousands):

	August 31, 2003							May 31, 2003
	Adjusted Cost		Unrealized Loss			Carrying Value		Adjusted Cost		Unrealized Loss		Carrying Value
Cash	$	37,547	$	—		$	37,547	$	31,927	$	—	$	31,927
Cash equivalents:
Money market funds		63,543		—			63,543		49,605		—		49,605
State and local government obligations		98,750		—			98,750		117,900		—		117,900
Corporate notes/bonds		54,000		—			54,000		33,000		—		33,000
Foreign corporate notes/bonds		13,000		—			13,000		10,000		—		10,000
		229,293		—			229,293		210,505		—		210,505
Total cash and cash equivalents	$	266,840	$	—		$	266,840	$	242,432	$	—	$	242,432
Equity investments in publicly traded companies	$	253	$	(50	)	$	203	$	463	$	—	$	463
Restricted investments:
U.S. government agency obligations	$	4,486	$	—		$	4,486	$	1,722	$	—	$	1,722
Certificates of deposit		897		—			897		897		—		897
	$	5,383	$	—		$	5,383	$	2,619	$	—	$	2,619

7. Inventories

Inventories consist of (in thousands):

	August 31, 2003		May 31, 2003
Finished goods	$	18,436	$	16,835
Work-in-process and raw materials		5,612		5,913
	$	24,048	$	22,748

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8. Goodwill

The changes in the carrying amount of goodwill are as follows (in thousands):

	Solutions Group			PalmSource		Total
Balances, May 31, 2002	$	15,091		$	53,694	$	68,785
Goodwill transferred between reporting units		(1,276	)		1,276		—
Balances, May 31, 2003	$	13,815		$	54,970	$	68,785
Balances, August 31, 2003	$	13,815		$	54,970	$	68,785

9. Intangible Assets

Intangible assets consist of (in thousands):

	Amortization Period	August 31, 2003										May 31, 2003
		Gross Carrying Amount		Accumulated Amortization			Sale of PDM			Net		Gross Carrying Amount		Accumulated Amortization			Impairment Charges			Net
Core technology	24-48 months	$	14,849	$	(14,368	)	$	(170	)	$	311	$	18,659	$	(15,493	)	$	(2,540	)	$	626
Non-compete covenants	6-24 months		12,759		(12,694	)		—			65		12,759		(12,596	)		—			163
Other	36 months		710		(582	)		(128	)		—		710		(523	)		—			187
		$	28,318	$	(27,644	)	$	(298	)	$	376	$	32,128	$	(28,612	)	$	(2,540	)	$	976

Amortization expense related to intangible assets was $0.3 million and $2.4 million for the three months ended August 31, 2003 and 2002, respectively. Estimated future amortization expense for the remaining nine months of fiscal year 2004 and for fiscal year 2005 are $0.3 million and $0.1 million, respectively.

During the quarter ended August 31, 2003, PalmSource entered into a series of transactions with PalmGear, Inc. (“PalmGear”) that involved the sale of its Palm Digital Media (“PDM”) product line, including $0.3 million of intangible assets. These transactions included a stock purchase agreement, strategic alliance and service provider agreement and a brand license agreement between the parties. The initial term of the strategic alliance is three years. The net proceeds of $3.4 million ($3.7 million less $0.3 million of related identifiable intangible assets originally acquired from peanutpress.com, Inc.) are to be recognized ratably over the three-year term of the arrangement.

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10. Deferred Income Taxes

As of August 31, 2003, Palm’s deferred tax assets were comprised of net operating loss carryforwards, deferred expenses and tax credit carryforwards of $349.8 million offset by a valuation allowance of $314.9 million. The valuation allowance reduces deferred tax assets to estimated realizable value, based on estimates and certain tax planning strategies. The carrying value of Palm’s net deferred tax assets assumes that it is more likely than not that Palm will be able to generate sufficient future taxable income in certain tax jurisdictions to realize the net carrying value.

As of the end of fiscal year 2002, Palm had recorded a net deferred tax asset of $254.4 million. The realization of the net deferred tax asset was supported by certain identified tax strategies, involving the potential sale or transfer of appreciated assets, which were prudent and feasible and which management would implement, if necessary, to realize the related tax benefits before Palm’s net operating loss carryforwards expired. The identified tax strategies included the potential sale or transfer of certain identified business operations, consisting of Palm’s PalmSource, Inc. subsidiary and wireless access service operations, as well as the transfer of certain intellectual property from a foreign subsidiary to the United States, on a taxable basis. During the first quarter of fiscal year 2003, there was a significant decline in the value of these identified business operations and assets. In addition, the Company’s business plans had developed such that the potential sale or transfer of PalmSource, Inc. and its wireless access service operations on a taxable basis were no longer feasible tax planning strategies. As a result, during the quarter ended August 31, 2002, the Company recorded a tax provision of $219.6 million to increase its valuation allowances reflecting these changes and to reduce the net deferred tax assets to $34.8 million, which is the amount supported by the value of its intellectual property transfer strategy which, as of that date and at August 31, 2003, continues to be prudent, feasible and one that management would implement, if necessary, to realize the related tax benefits before Palm’s net operating loss carryforwards expired. The valuation allowance also increased as a result of the operating losses incurred during the quarter ended August 31, 2003.

11. Commitments and Guarantees

Palm facilities are leased under operating leases that expire at various dates through September 2011.

In December 2001, Palm issued a subordinated convertible note in the principal amount of $50.0 million to Texas Instruments. The note bears interest at 5.0% per annum, is due in December 2006 and is convertible into common stock at an effective conversion price of $92.64 per share. Palm may force a conversion at any time beyond one year of the closing, provided its common stock has traded above $142.65 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 proposed PalmSource distribution does not represent a significant distribution of assets under terms of the note. The note agreement defines certain events of default pursuant to which the full amount of the note plus interest could become due and payable.

In September 2001, PalmSource’s president and chief executive officer received two restricted stock grants in aggregate of 7,500 shares of Palm common stock under a two-year vesting schedule subject to vesting restrictions and a guarantee that the fair market value of the related 7,500 shares of Palm common stock would be at least $2.0 million at September 2003. The guaranteed amount is recorded ratably as compensation expense over the vesting period. Because on September 1, 2003 the fair market value was less than $2.0 million, PalmSource’s president and chief executive officer received a cash payment, on September 15, 2003, equal to $1.9 million, all of which was recorded as a liability as of August 31, 2003.

Palm has a minimum purchase commitment with a third party under which it could be liable for payments of up to a maximum of $4.9 million during calendar year 2003.

Palm has patent and license agreements with third party vendors under which Palm is committed to pay $3.4 million for the remaining nine months in fiscal year 2004, $4.7 million in fiscal year 2005, $2.1 million in fiscal year 2006, $0.5 million in fiscal year 2007, $0.4 million in fiscal year 2008 and $0.3 million in fiscal year 2009.

Palm utilizes contract manufacturers to build its products. These contract manufacturers acquire components and build product based on demand forecast information supplied by Palm, which typically covers a rolling

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12-month period. Consistent with industry practice, Palm acquires inventories through a combination of formal purchase orders, supplier contracts and open orders based on projected demand information. Such formal and informal purchase commitments typically cover Palm ‘s forecasted component and manufacturing requirements for periods ranging from 30 to 90 days. As of August 31, 2003, Palm’s third party manufacturers had inventory on-hand and component purchase commitments related to the manufacturer of its products of approximately $123 million.

As of May 31, 2003, Palm had in place an asset-backed borrowing-base credit facility from a group of financial institutions for up to a maximum of $150.0 million with the actual amount available determined by eligible accounts receivable and inventory as well as a real estate line of credit less the amount of any outstanding cash advances and letters of credit. In June 2003, the asset-backed borrowing-base credit facility expired.

In August 2003, Palm entered into a two-year, $30.0 million revolving credit line from Silicon Valley Bank (“SVB”). The credit line is secured by assets of Palm, including but not limited to cash and cash equivalents, accounts receivable, inventory and property and equipment. The interest rate is equal to SVB’s prime rate (4% at August 31, 2003) or, at Palm’s election subject to specific requirements, equal to LIBOR plus 1.75% (2.87% at August 31, 2003). The interest rate may vary based on fluctuations in market rates. Palm is subject to a financial covenant requirement under this agreement to maintain cash on deposit in the United States of not less than $100.0 million.

During the third quarter of fiscal year 2001, Palm issued to a vendor a fully vested warrant to purchase up to 12,500 shares of common stock at an exercise price of $584.38 per share. On each anniversary date beginning with January 2002, 25% of the shares subject to the warrant become exercisable. The warrant expires in January 2006. The fair value of the warrant of $3.8 million was capitalized and is being amortized to cost of revenues over the term of the agreement. The fair value of the warrant was estimated at the date of grant using the Black-Scholes valuation model with the following assumptions: risk-free interest rate, 4.9%; volatility, 67%; option term, 5 years; dividend yield, 0.0%.

As part of the agreements with 3Com relating to Palm’s separation from 3Com, Palm agreed to assume liabilities arising out of the Xerox, E-Pass Technologies, and Connelly litigation and to indemnify 3Com for any damages it may incur related to these cases.

Under the indemnification provisions of the Company’s standard reseller agreements and software license agreements, the Company agrees to defend the reseller/licensee against third party claims asserting infringement by the Company’s products of certain intellectual property rights, which may include patents, copyrights, trademarks or trade secrets, and to pay any judgments entered on such claims against the reseller/licensee.

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 specific known issues.

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

	Three Months Ended August 31, 2003
Balance, beginning of period	$	17,911
Payments made		(8,267	)
Change in liability for product sold during the period		6,611
Change in liability for pre-existing warranties		—
Balance, end of period	$	16,255

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12. Minority Interest in Consolidated Subsidiary

Minority interest in consolidated subsidiary reflects the interest of the stockholders of PalmSource, other than Palm.

During August 2003, 932,965 shares of restricted common stock of PalmSource (with an estimated aggregate value of $14.0 million) were awarded to eight key employees of PalmSource giving these employees an aggregate equity ownership position of approximately 8.04% of PalmSource as of August 4, 2003. The value of this stock, net of unamortized deferred compensation costs related to these shares, is included in minority interests in the consolidated balance sheet.

During the second quarter of fiscal year 2003, Sony Corporation (“Sony”) invested $20.0 million in PalmSource, a then equity ownership position of approximately 6.25% of PalmSource. PalmSource sold an aggregate of 3,333,333 shares of its Series A Preferred Stock at a purchase price of $6.00 per share. Sony has been and continues to be a licensee of the Palm OS owned by PalmSource. Under the terms of the software license agreement between PalmSource and Sony, PalmSource recorded license, royalty and support revenues of $2.2 million and $2.6 million during the three months ended August 31, 2003 and 2002, respectively.

13. Common Stock Issued

On August 22, 2003, Palm sold 1.2 million shares of its common stock under its universal shelf registration statement to an institutional investor at a price of $15 per share, with proceeds to Palm of $18.0 million. The net proceeds of the offering are allocated to the Solutions Group and will be used for general corporate purposes, including capital expenditures and to meet working capital needs.

On August 29, 2003, Palm sold 1.2 million shares of its common stock under its universal shelf registration statement to a group of institutional investors at a price of $15.90 per share, with proceeds to Palm of approximately $19.1 million. The net proceeds of the offering are allocated to the Solutions Group and will be used for general corporate purposes, including capital expenditures and to meet working capital needs.

14. Restructuring and Impairment Charges

Restructuring charges recorded during the first quarter of fiscal year 2004 consist of $2.7 million related to restructuring actions taken during the first quarter of fiscal year 2004, including workforce reductions, primarily in the United States, of approximately 35 regular employees from the Solutions Group, facilities and property and equipment disposed of or removed from service and canceled projects. Restructuring charges relate to the implementation of a series of actions to adjust the business consistent with Palm’s future wireless plans. As of August 31, 2003, approximately 22 regular employees from Solutions Group had been terminated as a result of this restructuring.

Accrued liabilities related to the first quarter of fiscal year 2004 restructuring actions consist of (in thousands):

	Discontinued project costs			Excess facilities and equipment costs			Workforce reduction costs			Total
Solutions Group
Restructuring expense	$	680		$	790		$	1,200		$	2,670
Cash payments		(23	)		(58	)		(358	)		(439	)
Solutions Group balances, August 31, 2003		657			732			842			2,231
Total Palm balances, August 31, 2003	$	657		$	732		$	842		$	2,231

Cost reduction actions initiated in the first quarter of fiscal year 2004 are expected to be substantially complete by the end of the second quarter of fiscal year 2004.

The third quarter of fiscal year 2003 restructuring actions consisted of workforce reductions, primarily in the United States, of approximately 140 regular employees from the Solutions Group and approximately 60 regular

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employees from PalmSource, facilities and property and equipment disposed of or removed from service and canceled projects. Restructuring charges relate to the implementation of a series of actions to better align the Company’s expense structure with its revenues. As of August 31, 2003, approximately 129 regular employees from Solutions Group and 60 regular employees from PalmSource had been terminated as a result of this restructuring.

Accrued liabilities related to the third quarter of fiscal year 2003 restructuring actions consist of (in thousands):

	Discontinued project costs			Excess facilities and equipment costs			Workforce reduction costs			Total
Solutions Group
Restructuring expense	$	10,577		$	2,445		$	6,085		$	19,107
Cash payments		(4,700	)		(106	)		(4,580	)		(9,386	)
Fixed asset write-offs		(3,510	)		(743	)		(131	)		(4,384	)
Solutions Group balances, May 31, 2003		2,367			1,596			1,374			5,337
Cash payments		—			(284	)		(502	)		(786	)
Solutions Group balances, August 31, 2003		2,367			1,312			872			4,551
PalmSource
Restructuring expense		—			172			2,064			2,236
Cash payments		—			(172	)		(1,715	)		(1,887	)
PalmSource balances, May 31, 2003		—			—			349			349
Cash payments		—			—			(274	)		(274	)
PalmSource balances, August 31, 2003		—			—			75			75
Total Palm
Restructuring expense		10,577			2,617			8,149			21,343
Cash payments		(4,700	)		(278	)		(6,295	)		(11,273	)
Fixed asset write-offs		(3,510	)		(743	)		(131	)		(4,384	)
Balances, May 31, 2003		2,367			1,596			1,723			5,686
Cash payments		—			(284	)		(776	)		(1,060	)
Balances, August 31, 2003	$	2,367		$	1,312		$	947		$	4,626

Cost reduction actions initiated in the third quarter of fiscal year 2003 are expected to be substantially complete by the end of the second quarter of fiscal year 2004.

The fourth quarter of fiscal year 2001 restructuring charges related to 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 250 regular employees and were completed during the year ended May 31, 2003. As of August 31, 2003, the balance consists of lease commitments, payable over eight years, offset by estimated net sublease proceeds of approximately $13.8 million.

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Accrued liabilities related to the fourth quarter of fiscal year 2001 restructuring actions consist of (in thousands):

	Excess facilities and equipment costs			Workforce reduction costs			Total
Balances, May 31, 2002	$	16,552		$	325		$	16,877
Restructuring adjustments		21,358			(284	)		21,074
Cash payments		(8,361	)		(41	)		(8,402	)
Balances, May 31, 2003		29,549			—			29,549
Cash payments		(1,684	)		—			(1,684	)
Balances, August 31, 2003	$	27,865		$	—		$	27,865

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 set forth below and is vigorously contesting these matters. Palm is not currently able to estimate, with reasonable certainty, the possible loss, or range of loss, if any, from the cases listed below, but an unfavorable resolution of these lawsuits could materially adversely affect Palm’s business, results of operations or financial condition.

On April 28, 1997, Xerox Corporation filed suit in the United States District Court for the Western District of New York. The case came to be captioned Xerox Corporation v. 3Com Corporation, U.S. Robotics Corporation, U.S. Robotics Access Corp., and Palm Computing, Inc., Civil Action No. 97-CV-6182T. The complaint alleged willful infringement of U.S. Patent No. 5,596,656, entitled “Unistrokes for Computerized Interpretation of Handwriting.” The complaint sought 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 using Palm’s operating systems. 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 is valid, enforceable and infringed. The defendants filed a Notice of Appeal on December 21, 2001. On February 22, 2002, the court denied a request for an injunction sought by Xerox to prohibit the manufacture or sale of products using the Graffiti handwriting recognition system. The court also rejected a request by Xerox to set a trial date to determine damages Xerox claims it is owed. In connection with the denial of Xerox’s request to set a trial date on damages, the court required Palm to post a $50.0 million bond, which was satisfied with a letter of credit from a financial institution. A Notice of Appeal from the District Court’s order of February 22, 2002 was filed by Palm on March 15, 2002. A cross-appeal from the District Court’s order of February 22, 2002 was filed by Xerox on March 4, 2002. A hearing on the appeal and cross-appeal was held on January 6, 2003 before the CAFC. The CAFC has remanded the case to the District Court for a determination on the issue of invalidity of the ‘656 patent. Xerox petitioned the CAFC for reconsideration of its determination on the appeal and cross-appeal, but the CAFC has denied this petition and eliminated the requirement for the $50 million bond from Palm. If Palm is not successful regarding the remand to the District Court, the CAFC has noted that an injunction will apply. If an injunction is sought by Xerox and issued, it could result in business interruption for Palm that would have a significant adverse impact on Palm’s operations and financial condition if Palm has not transitioned to a handwriting recognition system outside the scope of Xerox’s asserted claims. In addition, if Palm is not successful with regard to this remand to the District Court, Xerox has stated in its court pleadings that it will seek at a trial, a significant compensatory and punitive damage award or license fees from Palm. Furthermore, if Palm is not successful with regard to this remand to the District Court, Palm might be liable to Palm’s licensees and other third parties under contractual obligations or otherwise sustain adverse financial impact if Xerox seeks to enforce its patents claims against Palm’s licensees and other third parties. In connection with Palm’s separation from 3Com, pursuant to the terms of the Indemnification and Insurance Matters Agreement between 3Com and Palm, Palm may be required to indemnify and hold 3Com harmless for any damages or losses which may arise out of the Xerox litigation.

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On February 28, 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 is now captioned E-Pass Technologies, Inc. v. 3Com Corporation, a/k/a 3Com, Inc. and Palm, Inc., Civil Action No. 00 CIV 1523. 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.” The complaint seeks unspecified compensatory and treble damages and to permanently enjoin the defendants from infringing the patent in the future. The case was transferred to the United States District Court for the Northern District of California. In an Order dated August 12, 2002, the Court granted Palm’s motion for summary judgment that there was no infringement. E-Pass appealed the Court’s decision to the CAFC. The issues on appeal before the CAFC have been fully briefed and argued by the parties. On August 21, 2003, the CAFC issued a ruling reversing the claim construction of the District Court and the attendant summary judgment motion and remanded the case to the District Court for further proceedings. In connection with Palm’s separation from 3Com, pursuant to the terms of the Indemnification and Insurance Matters Agreement between 3Com and Palm, Palm may be required to indemnify and hold 3Com harmless for any damages or losses which may arise out of the E-Pass litigation.

On March 14, 2001, NCR Corporation filed suit against Palm and Handspring, Inc. in the United States District Court for the District of Delaware. The case is captioned NCR Corporation v. Palm, Inc. and Handspring, Inc., Civil Action No. 01-169. The complaint alleges infringement of U.S. Patent Nos. 4,634,845 and 4,689,478, entitled, respectively, “Portable Personal Terminal for Use in a System for Handling Transactions” and “System for Handling Transactions Including a Portable Personal Terminal.” The complaint seeks unspecified compensatory and treble damages and to permanently enjoin the defendants from infringing the patents in the future. The case was referred to Magistrate Judge Mary P. Thynge. In a Memorandum Opinion dated July 11, 2002, the Magistrate Judge indicated that she would recommend that the District Court grant the defendants’ motion for summary judgment that there was no infringement. NCR filed objections to the recommendations of the Magistrate Judge, and Palm has filed a response to NCR’s objections. On August 28, 2003, the District Court granted Palm’s motion for summary judgment, ruling that Palm products do not infringe the NCR patents, and denied NCR’s motion.

On January 23, 2003, Peer-to-Peer Systems LLC filed a complaint against Palm in the United States District Court for the District of Delaware. The case is captioned Peer-to-Peer Systems, LLC vs. Palm, Inc., Civil Action No. 03-115. The complaint alleges infringement of U.S. Patent No. 5,618,045 entitled “Interactive Multiple Player Game System and Method of Playing a Game Between at Least Two Players”. The complaint seeks unspecified compensatory and treble damages and to permanently enjoin the defendant from infringing the patent in the future. Palm believes that the claims are without merit and intends to defend against them vigorously. The parties have begun the discovery process.

In June 2001, the first of several putative stockholder class action lawsuits was filed in United States District Court, 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. Other actions have been filed making similar allegations regarding the initial public offerings of more than 300 other companies. All of these various consolidated cases have been coordinated for pretrial purposes as In re Initial Public Offering Securities Litigation, Civil Action No. 21-MC-92. 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 has denied Palm’s motion to dismiss. A special committee of Palm’s Board of Directors recently approved a tentative settlement proposal from plaintiffs, which includes a guaranteed recovery to be paid by the issuer defendants’ insurance carriers and an assignment of certain claims the issuers, including Palm, 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 court approval. Palm believes that it has meritorious defenses to the claims against it and intends to defend the action vigorously if the case does not settle.

On August 7, 2001, a purported consumer class action lawsuit was filed against Palm and 3Com in California

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Superior Court, San Francisco County. The case is captioned Connelly et al v. Palm, Inc., 3 Com Corp et al, Case No. 323587. An amended complaint alleging breach of warranty and violation of California’s Unfair Competition Law was filed and served on Palm on August 15, 2001. The amended complaint, filed on behalf of purchasers of Palm III, IIIc, V and Vx handhelds, alleges that certain Palm handhelds may cause damage to PC motherboards by permitting an electrical charge, or “floating voltage,” from either the handheld or the cradle to be introduced into the PC via the serial and/or USB port on the PC. The plaintiffs allege that this damage is the result of a design defect in one or more of the following: HotSync software, handheld, cradle and/or the connection cable. The complaint seeks restitution, rescission, damages, an injunction mandating corrective measures to protect against future damage as well as notifying users of potential harm. Discovery is closed. The parties engaged in mediation and have reached an agreement in principle to settle the action, subject to acceptable documentation and court approval. In connection with Palm’s separation from 3Com, pursuant to the terms of the Indemnification and Insurance Matters Agreement between 3Com and Palm, Palm may be required to indemnify and hold 3Com harmless for any damages or losses which may arise out of the Connelly litigation.

On January 23, 2002, a purported consumer class action lawsuit was filed against Palm in California Superior Court, San Francisco County. The case is captioned Eley et al v. Palm, Inc., Case No. 403768. The unverified complaint, filed on behalf of purchasers of Palm m500 and m505 handhelds, alleges (1) that the HotSync function in certain Palm handhelds does not perform as advertised and the products are therefore defective and (2) that upon learning of the problem, Palm did not perform proper corrective measures for individual customers as set forth in the product warranty. The complaint alleges Palm’s actions are a violation of California’s Unfair Competition Law and a breach of express warranty. The complaint seeks alternative relief including an injunction to have Palm desist from selling and advertising the handhelds, to recall the defective handhelds, to restore the units to their advertised functionality, to pay restitution or disgorgement of the purchase price of the units and/or damages and attorneys’ fees. Palm filed its answer denying the allegations and the parties engaged in document and deposition discovery. Plaintiff and Palm engaged in mediation and have reached an agreement in principle to settle the action, subject to acceptable documentation and court approval. No trial date has been set.

On March 11, 2002, a purported consumer class action lawsuit was filed against Palm in the Wayne County Circuit Court, Detroit, Michigan. The case is captioned Hayman, et al. v Palm, Inc., Case No. 02-208249-CP. Plaintiffs allege that certain of Palm’s advertisements for its Palm III, V and m100 handheld devices were false or misleading regarding the ability of the device to wirelessly and remotely access emails or the Internet without the need for additional hardware or software sold separately. Plaintiffs allege violations of the Michigan Consumer Protection Act, breach of express and implied warranties and Michigan common law, and seek to recover the purchase price of the device from Palm for themselves and a class of all similarly situated consumers. Palm has filed a motion to dismiss the lawsuit in its entirety. The Court has heard arguments on that motion, and it has advised that it would rule on Palm’s motion to dismiss before considering the suitability of this lawsuit for class treatment.

In October 2002, a purported consumer class action lawsuit was filed against Palm in Illinois Circuit Court, Cook County. The case is captioned Goldstein v. Palm, Inc., Case No. 02CH19678. The case alleges consumer fraud regarding Palm’s representations that its m100, III, V, and VII handheld personal digital assistant, as sold, would provide wireless access to the Internet and email accounts, and would perform common business functions including data base management, custom form creation and viewing Microsoft Word and Excel documents, among other tasks. The case seeks unspecified actual damages and indemnification of certain costs. In September 2003, the Court granted Palm’s motion to dismiss the complaint, but allowed the plaintiff the opportunity to amend and refile.

In August and September 2002, four purported consumer class action lawsuits were filed against Palm in California Superior Court, Santa Clara County; California Superior Court, San Diego County; Illinois Circuit Court, Cook County; and Illinois Circuit Court, St. Clair County. The respective cases are captioned Lipner and Ouyang v. Palm, Inc., Case No. CV-810533; Veltman v. Palm, Inc., Case No. 02CH16143; Wireless Consumer’s Alliance, Inc. v. Palm, Inc., Case No. GIC-794940; and Cokenour v. Palm, Inc., Case No. 02L0592. All four cases allege consumer fraud regarding Palm’s representations that its m130 handheld personal digital assistant supported more than 65,000 colors. Certain of the cases also allege breach of express warranty and unfair competition. In general, the cases seek unspecified damages and/or to enjoin Palm from continuing it’s allegedly misleading advertising. The parties have tentatively agreed to a settlement in principle,

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subject to acceptable documentation and court approval.

On February 27, 2003, a purported consumer class action lawsuit was filed against Palm in California Superior Court, Santa Clara County. The case is captioned Hemmingsen et al v. Palm, Inc., Case No. CV815074. The unverified complaint, filed on behalf of purchasers of Palm m515 handhelds, alleges that such handhelds fail at unacceptably high rates, and in particular that instant updating and synchronization of data with PCs often will not occur. The complaint further alleges that, upon learning of the problem, Palm did not perform proper corrective measures for individual customers as set forth in the product warranty, among other things. The complaint alleges that Palm’s actions violate California’s Unfair Competition Law and constitute a breach of warranty. The complaint seeks restitution, disgorgement, damages, an injunction mandating corrective measures including a full replacement program for all allegedly defective m515s or, alternatively mandating a refund to all purported class members of the full purchase price for their m515s, and attorneys’ fees. The parties have begun the discovery process.

On or about June 17 and 19, 2003, respectively, two putative class action lawsuits were filed in the Court of Chancery in the State of Delaware in and for the County of New Castle against Palm, Handspring and various officers and directors of Handspring. The cases are captioned Goldhirsch v. Handspring, Inc., et. al, Civil Action No. 20376-NC and Majarian v. Handspring, Inc., et. al, Civil Action No. 20381-NC. The Majarian complaint was amended on or about June 23, 2003 to, among other things, delete certain previously named officer defendants. Both complaints allege that the officers and directors of Handspring breached their fiduciary duties to Handspring stockholders by, among other things, failing to undertake an appropriate evaluation of Handspring’s net worth as a merger or acquisition candidate and failing to maximize Handspring stockholder value by not engaging in a meaningful auction of Handspring. The Majarian complaint also alleges, among other things, that the officers and directors of Handspring breached their fiduciary duties by failing to act independently so that the interests of Handspring’s public stockholders would be protected and enhanced. Both complaints allege that Palm aided and abetted the alleged breaches of fiduciary duty of Handspring’s officers and directors. Both complaints seek, among other things, a preliminary and permanent injunction against the transaction, a recission of the transaction if it is consummated and unspecified damages. The Goldhirsch complaint also requests, among other things, that the Court order Handspring’s officers and directors to take all necessary steps to maximize stockholder value, including open bidding and/or a market check. Palm believes that the lawsuits are without merit and intends to vigorously defend the cases.

16. Related Party Transactions

Transactions with 3Com Corporation

Subsequent to the date of separation of Palm from 3Com, Palm had paid 3Com for certain leased facilities and for transitional services required while Palm established its independent infrastructure, with transitional services being completed in the third quarter of fiscal year 2002.

A Tax Sharing Agreement allocates 3Com’s and Palm’s responsibilities for certain tax matters. The agreement requires Palm to pay 3Com for the incremental tax costs of Palm’s inclusion in consolidated, combined or unitary tax returns with affiliated corporations. The agreement also provides for compensation or reimbursement as appropriate to reflect re-determinations of Palm’s tax liability for periods during which Palm joined in filing consolidated, combined or unitary tax returns with affiliated corporations.

Each member of a consolidated group for United States federal income tax purposes is jointly and severally liable for the group’s federal income tax liability. Accordingly, Palm could be required to pay a deficiency in the group’s federal income tax liability for a period during which Palm was a member of the group even if the Tax Sharing Agreement allocates that liability to 3Com or another member.

Effective as of the date of separation of Palm from 3Com, subject to specified exceptions, Palm and 3Com each released the other from any liabilities arising from their respective businesses or contracts, as well as liabilities arising from a breach of the separation agreement or any ancillary agreement.

Under the terms of a software license agreement between PalmSource and 3Com, PalmSource recorded $0 million and $0.1 million of support revenues for the three months ended August 31, 2003 and 2002,

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respectively.

Other Transactions and Relationships

In October 2002, Sony purchased Series A Preferred Stock of PalmSource, giving Sony a then equity ownership position of approximately 6.25% of PalmSource. Sony has been and continues to be a licensee of the Palm OS owned by PalmSource. Under the terms of a software license agreement between PalmSource and Sony, PalmSource recorded $2.2 million and $2.6 million of license, royalty and support revenues the three months ended August 31, 2003 and 2002, respectively. Effective October 2002, PalmSource entered into a business collaboration agreement which expires in October 2012 with Sony under which PalmSource and Sony agreed to share certain information regarding ongoing product and development plans and, for a period of at least three years, to establish mutually agreed written co-development plans for potential areas of joint development.

In fiscal year 2003, Palm made a $1.0 million equity investment in and entered into a product procurement agreement with Mobile Digital Media, Inc., a company founded by Barry Cottle, the former Senior Vice President and Chief Internet Officer of Palm until his employment with Palm terminated in February 2002. Palm paid $2.6 million and $0 million for products purchased under the product procurement agreement during the three months ended August 31, 2003 and 2002, respectively. These products were purchased by Palm for resale.

Palm purchased less than $0.1 million during each of the three months ended August 31, 2003 and 2002, respectively, of products from SanDisk Corporation through a series of purchase orders and without further obligations on the part of Palm. Judy Bruner, Palm’s Chief Financial Officer, serves as a member of SanDisk’s Board of Directors.

17. Business Segment Information

Palm develops, designs and markets Palm Branded handheld devices, accessories and the Palm OS operating system. Palm is organized into two operating segments – the Solutions Group and PalmSource. The Solutions Group develops and markets handheld devices and accessories to provide the user with a simple, elegant and useful productivity tool. PalmSource develops and licenses the Palm OS^® operating system and related software, which is referred to as the Palm platform. The Palm platform is the foundation for Palm devices and is also used in devices manufactured by third-party licensees.

The accounting policies of the operating segments are the same as for Palm as a whole, except that for segment reporting purposes, PalmSource recognizes intersegment revenues from the Solutions Group based on information reported by the Solutions Group in the month subsequent to the period of sale by the Solutions Group of a Palm OS device, in accordance with the Palm OS license agreement between PalmSource and the Solutions Group. For management reporting purposes, Palm does not allocate income tax provision (benefit) to the operating segments.

The Solutions Group licenses the Palm platform from PalmSource and pays an intersegment royalty. Intersegment revenues and expenses between Solutions Group and PalmSource are eliminated in consolidation.

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	Three Months Ended August 31, 2003
	Solutions Group			PalmSource			Eliminations			Total Palm
	(In thousands)
Revenues	$	168,608		$	17,132		$	(8,305	)	$	177,435
Cost of revenues *		121,228			1,728			(7,364	)		115,592
Sales and marketing		34,636			4,556			—			39,192
Research and development		16,855			8,932			—			25,787
General and administrative		8,726			3,383			—			12,109
Segment operating contribution (loss)		(12,837	)		(1,467	)
Amortization of intangible assets		—			302			—			302
Separation costs		861			1,024			—			1,885
Restructuring charges		2,670			—			—			2,670
Operating income (loss)		(16,368	)		(2,793	)		(941	)		(20,102	)
Interest and other income (expense), net		(157	)		(42	)		—			(199	)
Segment income (loss) before income taxes	$	(16,525	)	$	(2,835	)	$	(941	)	$	(20,301	)
	Three Months Ended August 31, 2002
	Solutions Group			PalmSource			Eliminations			Total Palm
	(In thousands)
Revenues	$	164,725		$	15,050		$	(7,507	)	$	172,268
Cost of revenues *		127,075			1,499			(10,921	)		117,653
Sales and marketing		40,726			4,107			(59	)		44,774
Research and development		19,241			11,016			(341	)		29,916
General and administrative		9,091			2,696			65			11,852
Segment operating contribution (loss)		(31,408	)		(4,268	)
Amortization of intangible assets		810			1,551			—			2,361
Separation costs		943			483			—			1,426
Restructuring charges		(581	)		—			—			(581	)
Operating income (loss)		(32,580	)		(6,302	)		3,749			(35,133	)
Interest and other income (expenses), net		208			(3,694	)		—			(3,486	)
Segment income (loss) before income taxes	$	(32,372	)	$	(9,996	)	$	3,749		$	(38,619	)

* Segment cost of revenues excludes the applicable portion of amortization of intangible assets which is included in the line ‘amortization of intangibles assets’.

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

This quarterly report contains forward-looking statements within the meaning of the federal securities laws. These statements include those concerning Palm’s expectations, beliefs and/or intentions regarding the following: (a) the timing, costs and benefits of the separation of the PalmSource and Solutions Group businesses; (b) actions to reduce costs and Palm’s ability to achieve savings resulting from restructuring; (c) the use of proceeds from the potential sale of securities under Palm’s universal shelf registration statement; (d) the sufficiency of Palm’s cash, cash equivalents and credit facility to satisfy its anticipated cash requirements; (e) strategic alliances and the benefits of such strategic alliances; (f) the effects of changes in market interest rates; (g) investment activities, the value of investments and the use of Palm’s financial instruments; (h) realization of, and actions which Palm may implement to realize, the tax benefits associated with Palm’s net operating loss carryforwards; (i) Palm’s defenses to legal proceedings and litigation matters; (j) provisions in Palm’s charter documents and Delaware law and the potential effects of a stockholder rights plan; (k) the development and introduction of new products and services; and (l) competitors and competition in the markets in which Palm operates. These statements are subject to risks and uncertainties that could cause actual results and events to differ materially. For a detailed discussion of these risks and uncertainties, see the “Business Environment and Risk Factors” section of this report. Palm undertakes no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this report.

Overview

Palm, Inc. is the leading global provider of handheld computing devices and operating systems for handheld devices. For purposes of this report, we refer to the devices designed and sold by Palm as Palm Branded devices, and we refer to devices running on the Palm OS as Palm Powered devices. Palm Powered devices include Palm Branded devices as well as devices designed and sold by third parties licensing the Palm OS.

Palm was founded in 1992 as Palm Computing, Inc. In 1995, it was acquired by U.S. Robotics Corporation and sold its first handheld product in 1996, quickly establishing a leadership role in the handheld device industry. In 1997, 3Com Corporation acquired U.S. Robotics, and in 1999, 3Com announced the intent to separate the Palm business into an independent company. In preparation for becoming an independent, publicly traded company, Palm Computing, Inc. changed its name to Palm, Inc. and was reincorporated in Delaware in December 1999. In March 2000, approximately 6% of the shares of Palm common stock were sold in an initial public offering and concurrent private placements, and in July 2000, 3Com distributed the remaining shares of Palm common stock it owned, approximately 94% of Palm’s common stock then outstanding, to 3Com’s stockholders. In December 2001, Palm formed PalmSource, Inc., a stand-alone subsidiary for its operating system business, and subsequently announced its intent to establish PalmSource as an independent, publicly traded company.

Palm is organized into two operating segments—PalmSource and the Solutions Group. In the first quarter of fiscal year 2002, we announced our strategy to separate our Palm OS business (PalmSource) and our device business (the Solutions Group) into two independent companies. We believe the separation of our two businesses brings greater clarity of mission and focus to each unit and better serves our existing and future licensees. In December 2002, Palm received a ruling from the Internal Revenue Service that a distribution of PalmSource stock to Palm stockholders, if it occurs in accordance with the terms of the ruling, will be tax-free to the Company and its U.S. stockholders. On June 4, 2003, we entered into an agreement for a transaction in which we will distribute, on a pro rata basis to our existing stockholders, all of the shares of PalmSource common stock we own; and immediately following the PalmSource distribution, we will acquire Handspring, and Handspring stockholders will receive Palm common stock in exchange for their Handspring common stock. In the PalmSource distribution, the 10.0 million shares (which gives effect to PalmSource’s one-for-five reverse stock split in September 2003) of PalmSource common stock held by us will be distributed to our existing stockholders on a pro rata basis. Based on the number of shares of Palm common stock outstanding at August 29, 2003, Palm stockholders are expected to receive approximately 0.32 of a share of PalmSource common stock for each share of Palm common stock. The final exchange ratio for the PalmSource distribution will be determined based on the number of shares of Palm common stock outstanding at the distribution date. In the Handspring merger, the stockholders of Handspring will receive 0.09 of a share of Palm common stock for each share of Handspring common stock held (an aggregate of approximately 13.5 million shares

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of Palm common stock, based on the number of shares of Handspring common stock outstanding at September 23, 2003). The closing of the transaction effecting the PalmSource distribution and the Handspring merger is subject to stockholder approval and other customary conditions. On September 26, 2003, the SEC declared effective Palm’s Registration Statement on Form S-4 relating to the PalmSource distribution and the Handspring merger. The stockholder vote on this transaction is scheduled to take place on October 28, 2003.

Palm’s total revenue has grown from approximately $1 million in fiscal year 1995 to $871.9 million in fiscal year 2003. Substantially all of Palm’s revenues to date have been generated from sales of its handheld devices and related add-ons and accessories. As of August 31, 2003, Palm had shipped over 22.9 million Palm Branded devices, and approximately 30.1 million Palm Powered devices had been sold worldwide.

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 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, future events 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, 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 consolidated financial statements.

Revenue is recognized when earned in accordance with applicable accounting standards, including AICPA Statement of Position (“SOP”) No. 97-2, Software Revenue Recognition, as amended. We recognize revenues from sales of handheld device products upon shipment, net of estimated returns, provided that collection is determined to be probable and no significant obligations remain. 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, inventory levels in the channel 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.

Within PalmSource, revenue from software license agreements with manufacturers of handheld devices is generally recognized on a per-unit or volume royalty basis, and any prepaid royalties received under the license agreements are generally deferred and recognized on a per-unit or net sales basis in the period information is reported by licensees, generally the month or quarter subsequent to the period of sale by the licensee. Upfront license fees from subscription license arrangements are generally recognized ratably over the term of the subscription period. Post contract support revenue consists primarily of fees for providing unspecified software updates when and if available and technical support for software products to licensees. Post contract support revenue is deferred and recognized ratably over the term of the agreement.

Within the Solutions Group, revenue from software license agreements with end-users is recognized upon delivery of the software, provided that persuasive evidence of an arrangement exists, 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 these software license agreements 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

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there is a change in a major customer’s credit worthiness or actual defaults differ from our historical experience, our estimates of recoverability of amounts due us could be affected.

We accrue for warranty costs based on historical rates of usage as a percentage of shipment levels and the expected repair cost per unit, service policies and specific known issues. 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 be affected.

Long-lived assets such as land not in use, 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 or more frequently if impairment indicators arise, as required under Statement of Financial Accounting Standards (“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, which is the same as the business segment level. A goodwill impairment loss is 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 is 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 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 (“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 net operating loss carryforwards and 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. If these estimates and related assumptions change in the future, we may be required to increase our valuation allowance against the deferred tax assets resulting in additional income tax expense.

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

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Results of Operations

Our 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. For presentation purposes, the periods are shown as ending on August 31. Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is organized into three sections: consolidated Palm, and our two segments, Solutions Group and PalmSource, as described in “Overview” in this Item 2 of Part I of this Form 10-Q.

The business segment information included in this MD&A has been prepared in accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, and is based upon the financial information used by management for assessing segment performance. The accounting policies of the operating segments are the same as for the Company as a whole, except that for segment reporting purposes, PalmSource recognizes intersegment revenues from the Solutions Group based on information reported by the Solutions Group in the month subsequent to the period of sale by the Solutions Group of a Palm OS device, in accordance with the Palm OS license agreement between PalmSource and the Solutions Group. Intersegment revenues and expenses between Solutions Group and PalmSource are eliminated in consolidation. For management reporting purposes, the Palm does not allocate income tax provision (benefit) to the operating segments.

The following tables set forth consolidating statement of operations data which is also expressed as a percentage of revenues for the respective segment and fiscal periods as indicated:

	Three Months Ended August 31, 2003
	Solutions Group					PalmSource					Eliminations			Total Palm
	(Dollars in thousands)
Revenues	$	168,608		100.0	%	$	17,132		100.0	%	$	(8,305	)	$	177,435		100.0	%
Costs and operating expenses:
Cost of revenues (excluding the applicable portion of amortization of intangible assets)		121,228		71.9			1,728		10.1			(7,364	)		115,592		65.1
Sales and marketing		34,636		20.5			4,556		26.6			—			39,192		22.1
Research and development		16,855		10.0			8,932		52.1			—			25,787		14.5
General and administrative		8,726		5.2			3,383		19.7			—			12,109		6.8
Amortization of intangible assets (*)		—		—			302		1.8			—			302		0.2
Separation costs		861		0.5			1,024		6.0			—			1,885		1.1
Restructuring charges		2,670		1.6			—		—			—			2,670		1.5
Total costs and operating expenses		184,976		109.7			19,925		116.3			(7,364	)		197,537		111.3
Operating loss		(16,368	)	(9.7	)		(2,793	)	(16.3	)		(941	)		(20,102	)	(11.3	)
Interest and other income (expense), net		(157	)	(0.1	)		(42	)	(0.2	)		—			(199	)	(0.1	)
Loss before income taxes	$	(16,525	)	(9.8	)%	$	(2,835	)	(16.5	)%	$	(941	)	$	(20,301	)	(11.4	)%
(*) Amortization of intangible assets:
Cost of revenues	$	—		—	%	$	204		1.2	%	$	—		$	204		0.1	%
Research and development		—		—			65		0.4			—			65		0.1
General and administrative		—		—			33		0.2			—			33		—
Total amortization of intangible assets	$	—		—	%	$	302		1.8	%	$	—		$	302		0.2	%

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	Three Months Ended August 31, 2002
	Solutions Group					PalmSource					Eliminations			Total Palm
	(Dollars in thousands)
Revenues	$	164,725		100.0	%	$	15,050		100.0	%	$	(7,507	)	$	172,268		100.0	%
Costs and operating expenses:
Cost of revenues (excluding the applicable portion of amortization of intangible assets)		127,075		77.1			1,499		10.0			(10,921	)		117,653		68.3
Sales and marketing		40,726		24.7			4,107		27.3			(59	)		44,774		26.0
Research and development		19,241		11.7			11,016		73.2			(341	)		29,916		17.3
General and administrative		9,091		5.5			2,696		17.9			65			11,852		6.9
Amortization of intangible assets (*)		810		0.5			1,551		10.3			—			2,361		1.4
Separation costs		943		0.6			483		3.2			—			1,426		0.8
Restructuring charges		(581	)	(0.3	)		—		—			—			(581	)	(0.3	)
Total costs and operating expenses		197,305		119.8			21,352		141.9			(11,256	)		207,401		120.4
Operating loss		(32,580	)	(19.8	)		(6,302	)	(41.9	)		3,749			(35,133	)	(20.4	)
Interest and other income (expense), net		208		0.1			(3,694	)	(24.5	)		—			(3,486	)	(2.0	)
Loss before income taxes	$	(32,372	)	(19.7	)%	$	(9,996	)	(66.4	)%	$	3,749		$	(38,619	)	(22.4	)%
(*) Amortization of intangible assets:
Cost of revenues	$	318		0.2	%	$	1,445		9.6	%	$	—		$	1,763		1.0	%
Research and development		492		0.3			73		0.5			—			565		0.4
General and administrative		—		—			33		0.2			—			33		—
Total amortization of intangible assets	$	810		0.5	%	$	1,551		10.3	%	$	—		$	2,361		1.4	%

The following is a discussion and analysis of the consolidated statement of operations data of Palm. Further discussion and analysis of the statement of operations data by our Solutions Group and PalmSource segments is provided later in this MD&A.

Revenues

We derive our revenues primarily from sales of our handheld computing devices, add-ons and accessories by the Solutions Group, and licensing of the Palm OS by PalmSource. Revenues for the three months ended August 31, 2003 were $177.4 million, an increase of $5.2 million or approximately 3% from revenues for the three months ended August 31, 2002. The increase consists of a $3.9 million increase in Solutions Group revenues and a $1.3 million increase in PalmSource revenues from third party customers. The increase in the Solutions Group revenues was primarily driven by an increase in average selling price partially offset by a decline in unit shipments. The increase in PalmSource revenue consisted primarily of royalties from third party licensees. See Solutions Group and PalmSource MD&A sections for further analysis.

Total Cost of Revenues

‘Total cost of revenues’ is comprised of ‘Cost of revenues’ and the applicable portion of ‘Amortization of intangible assets’. ‘Total cost of revenues’ was $115.8 million for the three months ended August 31, 2003, a decrease of $3.6 million or approximately 3% from ‘Total cost of revenues’ for the three months ended August 31, 2002. This decrease consists of a $2.6 million decrease in Solutions Group ‘Total cost of revenues’ exclusive of intersegment royalty expenses and a $1.0 million decrease in PalmSource ‘Total cost of revenues’ for the first quarter of fiscal year 2004 compared to the first quarter of fiscal year 2003. ‘Total cost of revenues’ as a percentage of revenues were 65.2% in the first quarter of fiscal year 2004 compared to 69.3% in the comparable quarter of fiscal year 2003. This 4.1% decrease in ‘Total cost of revenues’ as a percentage of revenues primarily reflects a more favorable product mix, improved standard margins and higher average selling prices during the three months ended August 31, 2003 as compared to the three months ended August 31, 2002. See Solutions Group and PalmSource MD&A sections for further analysis.

Sales and Marketing

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Sales and marketing expenses consist principally of advertising and marketing programs, salaries and benefits for sales and marketing personnel, sales commissions, travel expenses and related information technology and facilities costs. Sales and marketing expenses were $39.2 million for the three months ended August 31, 2003, a decrease of $5.6 million or approximately 12% from sales and marketing expenses for the three months ended August 31, 2002. This decrease consists of a $6.1 million decrease in Solutions Group sales and marketing expenses offset by a $0.5 million increase in PalmSource sales and marketing expenses for the first quarter of fiscal year 2004 compared to the first quarter of fiscal year 2003. Sales and marketing expenses as a percentage of revenues were 22.1% in the first quarter of fiscal year 2004 compared to 26.0% in the first quarter of fiscal year 2003. The reduction in our consolidated sales and marketing expenses was primarily due to cost cutting efforts to better align our spending with current revenue levels. See Solutions Group and PalmSource MD&A sections for further analysis.

Research and Development

Research and development expenses consist principally of employee related costs, third party development costs, program materials, depreciation and related information technology and facilities costs. Research and development expenses were $25.8 million for the three months ended August 31, 2003, a decrease of $4.1 million or approximately 14% from research and development expenses for the three months ended August 31, 2002. This decrease consists of a $2.4 million decrease in Solutions Group research and development expenses and a $1.7 million decrease in PalmSource research and development expenses, exclusive of intersegment research and development activity, for the first quarter of fiscal year 2004 compared to the first quarter of fiscal year 2003. Research and development expenses as a percentage of revenues were 14.5% in the first quarter of fiscal year 2004 compared to 17.3% in the first quarter of fiscal year 2003. The reduction in our consolidated research and development expenses was primarily due to cost cutting efforts to better align our spending with current revenue levels. See Solutions Group and PalmSource MD&A sections for further analysis.

General and Administrative

General and administrative expenses consist of employee related costs, travel expenses and related 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. General and administrative expenses were $12.1 million for the three months ended August 31, 2003, an increase of $0.3 million or approximately 2% from general and administrative expenses for the three months ended August 31, 2002. This increase consists of a $0.4 million decrease in Solutions Group general and administrative expenses offset by a $0.7 million increase in PalmSource general and administrative expenses for the first quarter of fiscal year 2004 compared to the first quarter of fiscal year 2003. General and administrative expenses as a percentage of revenues were 6.8% in the first quarter of fiscal year 2004 compared to 6.9% in the first quarter of fiscal year 2003. See Solutions Group and PalmSource MD&A sections for further analysis.

Amortization of Intangible Assets

Amortization of intangible assets was $0.3 million for the three months ended August 31, 2003 compared to $2.4 million for the three months ended August 31, 2002, as a result of certain intangible assets becoming fully amortized. See Solutions Group and PalmSource MD&A sections for further analysis.

Separation Costs

Separation costs reflect costs related to the establishment of PalmSource as a separate business, such as consulting and professional fees. Separation costs were $1.9 million for the three months ended August 31, 2003 compared to $1.4 million for the three months ended August 31, 2002. We expect to continue to incur separation costs in fiscal year 2004 relating to the PalmSource separation. See Solutions Group and PalmSource MD&A sections for further analysis.

Restructuring Charges

Restructuring charges relate to the implementation of a series of actions to better align our expense structure with our revenues. Restructuring charges were $2.7 million for the three months ended August 31, 2003 compared to a restructuring adjustment of $0.6 million for the three months ended August 31, 2002. See Solutions Group and

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PalmSource MD&A sections for further analysis.

Interest and Other Income (Expense), Net

Interest and other income (expense), on a net basis, was $0.2 million of expense for the three months ended August 31, 2003 compared to $3.5 million of expense for the three months ended August 31, 2002. During the first quarter of fiscal year 2003 we recorded a $3.2 million charge to write down an investment in a privately-held company, which had been carried at cost and for which we determined the decline in value to be other than temporary. See Solutions Group and PalmSource MD&A sections for further analysis.

Income Tax Provision

	Three Months Ended August 31,
(In thousands)	2003			2002
Loss before income taxes	$	(20,301	)	$	(38,619	)
Income tax provision		1,445			220,126
Net loss	$	(21,746	)	$	(258,745	)

The consolidated income tax provision was $1.4 million for the three months ended August 31, 2003, reflecting income taxes in foreign jurisdictions. The consolidated income tax provision for the three months ended August 31, 2002 was $220.1 million, reflecting a $219.6 million increase in the valuation allowance for deferred tax assets, first established in fiscal year 2002, as well as $0.5 million for income taxes in foreign jurisdictions.

As of the end of fiscal year 2002, Palm had recorded a net deferred tax asset of $254.4 million. The realization of the net deferred tax asset was supported by certain identified tax strategies, involving the potential sale or transfer of appreciated assets, which were prudent, feasible and which management would implement, if necessary, to realize the related tax benefits before Palm’s net operating loss carryforwards expired. The identified tax strategies included the potential sale or transfer of certain identified business operations, consisting of our PalmSource subsidiary and our wireless access service operations, as well as the transfer of certain intellectual property from a foreign subsidiary to the United States, on a taxable basis. During the first quarter of fiscal year 2003, there was a significant decline in the value of these identified business operations and assets. In addition, our business plans had developed such that the potential sale or transfer of PalmSource and our wireless access service operations on a taxable basis were no longer feasible tax planning strategies. As a result, during the three months ended August 31, 2002, we increased our valuation allowance by $219.6 million to reflect these changes and to reduce the net deferred tax assets to $34.8 million, which is the amount supported by the value of our intellectual property transfer strategy which, as of that date and at August 31, 2003, continues to be prudent, feasible and one that management would implement, if necessary, to realize the related tax benefits before our net operating loss carryforwards expired. The net operating loss carryforwards, which are a significant component of the deferred tax assets of Palm and which totaled $350 million at August 31, 2003, remain available for us to utilize against future profits.

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Results of Operations—Solutions Group

The following table sets forth the Solutions Group segment statement of operations data which is also expressed as a percentage of Solutions Group revenues for the periods indicated (dollars in thousands):

	Three Months Ended August 31,
	2003					2002
Revenues	$	168,608		100.0	%	$	164,725		100.0	%
Costs and operating expenses:
Cost of revenues (excluding the applicable portion of amortization of intangible assets)		121,228		71.9			127,075		77.1
Sales and marketing		34,636		20.5			40,726		24.7
Research and development		16,855		10.0			19,241		11.7
General and adminstrative		8,726		5.2			9,091		5.5
Amortization of intangible assets (*)		—		—			810		0.5
Separation costs		861		0.5			943		0.6
Restructuring charges		2,670		1.6			(581	)	(0.3	)
Total costs and operating expenses		184,976		109.7			197,305		119.8
Operating loss		(16,368	)	(9.7	)		(32,580	)	(19.8	)
Interest and other income (expense), net		(157	)	(0.1	)		208		0.1
Loss before income taxes	$	(16,525	)	(9.8	)%	$	(32,372	)	(19.7	)%
(*) Amortization of intangible assets:
Cost of revenues	$	—		—	%	$	318		0.2	%
Research and development		—		—			492		0.3
General and adminstrative		—		—			—		—
Total amortization of intangible assets	$	—		—	%	$	810		0.5	%

Revenues

We derive our revenues primarily from sales of our handheld computing devices, add-ons and accessories as well as related services and software. Revenues for the three months ended August 31, 2003 were $168.6 million, an increase of $3.9 million or approximately 2% from revenues for the three months ended August 31, 2002. The increase in revenues was primarily driven by a 37% increase in average selling prices to $230 for the first quarter of fiscal year 2004 from $167 for the comparable quarter of fiscal year 2003, partially offset by a decline in total units shipped. Net unit shipments of devices were 645 thousand units in the first quarter of fiscal year 2004, a decrease of 21% from the comparable quarter of fiscal year 2003. The increase in average selling price reflects the higher-end mix of products sold for the quarter. The decrease in units shipped reflects soft overall market demand as well as some shift of U.S. retail demand toward competitive products.

International revenues were approximately 39% of revenues for the three months ended August 31, 2003 compared to approximately 36% of revenues for the three months ended August 31, 2002. The 2% increase in total revenues, consists of a 10% increase in international revenues offset by a 2% decrease in United States revenues. International revenues increased 10% in the first quarter of fiscal year 2004 over the comparable quarter of fiscal year 2003 as a result of a 20% increase in average selling prices internationally, partially offset by a 5% decrease in units shipped internationally. The 2% decrease in United States revenues is a result of a 28% decrease in units shipped domestically partially offset by a 48% increase in average selling prices domestically.

Total Cost of Revenues

‘Total cost of revenues’ is comprised of ‘Cost of revenues’ and the applicable portion of ‘Amortization of intangible assets’ as shown in the Solutions Group results of operations table. ‘Total cost of revenues’ was $121.2 million and

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$127.4 million for the three months ended August 31, 2003 and 2002, respectively. ‘Total cost of revenues’ as a percentage of revenues was 71.9% for the first quarter of fiscal year 2004 compared to 77.3% for the comparable period in fiscal year 2003. ‘Cost of revenues’ primarily consists of costs to produce and deliver our devices, accessories and related services and represented 71.9% and 77.1% of revenues for the three months ended August 31, 2003 and 2002, respectively. The decrease in ‘Cost of revenues’ as a percentage of revenues was primarily due to a more favorable product mix partially due to the introduction of new products with improved product standard margins and higher average selling prices during the first quarter of fiscal year 2004 compared to the first quarter of fiscal year 2003. The ‘Amortization of intangible assets’ applicable to cost of revenues decreased 100% for the first quarter of fiscal year 2004 from $0.3 million for the first quarter of fiscal year 2003 as a result of certain intangible assets becoming fully amortized or impaired.

Intersegment cost of revenues for royalties to PalmSource recorded by the Solutions Group for the three months ended August 31, 2003 and 2002 of $7.4 million and $10.9 million, respectively, are eliminated in consolidation.

Sales and Marketing

Sales and marketing expenses were $34.6 million for the three months ended August 31, 2003 compared to $40.7 million for the three months ended August 31, 2002, a decrease of $6.1 million or approximately 15%. Sales and marketing expenses as a percentage of revenues were 20.5% for the first quarter of fiscal year 2004 compared to 24.7% for the comparable period in fiscal year 2003. The decrease in sales and marketing expenses as a percentage of revenues and in absolute dollars reflects decreased spending related to marketing programs and promotions of approximately $4.0 million and decreased personnel and related costs of approximately $0.9 million primarily due to actions to better align our cost structure with our business operations.

Research and Development

Research and development expenses were $16.9 million for the three months ended August 31, 2003 compared to $19.2 million for the three months ended August 31, 2002, a decrease of $2.4 million or approximately 12%. Research and development expenses as a percentage of revenues were 10.0% for the first quarter of fiscal year 2004 compared to 11.7% for the comparable period in fiscal year 2003. Approximately $1.1 million of the decrease is due to lower project costs and approximately $1.1 million of the decrease is a result of lower personnel and related costs as a result of restructuring actions initiated to align our cost structure with our business operations.

General and Administrative

General and administrative expenses were $8.7 million for the three months ended August 31, 2003 compared to $9.1 million for the three months ended August 31, 2002, a decrease of $0.4 million or approximately 4%. General and administrative expenses as a percentage of revenues were 5.2% for the first quarter of fiscal year 2004 compared to 5.5% for the comparable period in fiscal year 2003. The decrease in absolute dollars and as a percentage of revenues was due to reduced consulting expenses of $0.4 million and lower employee related costs of $0.8 million resulting from restructuring actions initiated to align our cost structure with our business operations, partially offset by an increase in our provision for doubtful accounts of $1.0 million.

Amortization of Intangible Assets

Amortization of intangible assets was $0.8 million for the three months ended August 31, 2002. During the fiscal year ended May 31, 2003 the intangible assets became fully amortized or were fully impaired.

Separation Costs

Separation costs were $0.9 million for the three months ended August 31, 2003 compared to $0.9 million for the three months ended August 31, 2002. We expect to continue to incur separation costs in fiscal year 2004 relating to the PalmSource separation.

Restructuring Charges

Restructuring charges recorded during the first quarter of fiscal year 2004 consist of $2.7 million related to the

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restructuring actions taken during the first quarter of fiscal year 2004, including workforce reductions, primarily in the United States, of approximately 35 regular employees from the Solutions Group, facilities and property and equipment disposed of or removed from service and canceled projects. Restructuring charges relate to the implementation of a series of actions to adjust our business consistent with our future wireless plans. As of August 31, 2003, approximately 22 regular employees from Solutions Group had been terminated as a result of this restructuring.

Restructuring adjustments recorded during the first quarter of fiscal year 2003 consist of $0.3 million of adjustments made to each of the second quarter fiscal year 2002 and the fourth quarter fiscal year 2001 restructuring accruals due to changes in the estimated costs of those actions.

Cost reduction actions initiated in the first quarter of fiscal year 2004 are expected to be substantially complete by the end of the second quarter of fiscal year 2004.

Interest and Other Income (Expense), Net

Interest and other income (expense), on a net basis, was expense of $0.2 million for the three months ended August 31, 2003 compared to income of $0.2 million for the three months ended August 31, 2002. Interest and other expense for the first quarter of fiscal year 2004 primarily consisted of interest income on our cash balances of $0.7 million offset by expense of $0.9 million consisting of interest expense and bank and other charges. Interest and other income for the first quarter of fiscal year 2003 primarily consisted of interest income of $1.2 million on our cash balances and insurance proceeds of $1.2 million from a partial insurance settlement of a business interruption claim, offset by expense of $2.2 million consisting of interest expense, and bank and other charges. Interest income decreased primarily as the result of lower cash balances and reduced interest rates on our investments. Interest expense and bank and other charges decreased primarily due to the expiration of the $150 million asset-backed borrowing-base credit facility in June 2003.

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Results of Operations—PalmSource

The following table sets forth PalmSource segment statement of operations data which is also expressed as a percentage of PalmSource revenues for the periods indicated (dollars in thousands):

	Three Months Ended August 31,
	2003					2002
Revenues	$	17,132		100.0	%	$	15,050		100.0	%
Costs and operating expenses:
Cost of revenues (excluding the applicable portion of amortization of intangible assets)		1,728		10.1			1,499		10.0
Sales and marketing		4,556		26.6			4,107		27.3
Research and development		8,932		52.1			11,016		73.2
General and adminstrative		3,383		19.7			2,696		17.9
Amortization of intangible assets (*)		302		1.8			1,551		10.3
Separation costs		1,024		6.0			483		3.2
Total costs and operating expenses		19,925		116.3			21,352		141.9
Operating loss		(2,793	)	(16.3	)		(6,302	)	(41.9	)
Interest and other income (expense), net		(42	)	(0.2	)		(3,694	)	(24.5	)
Loss before income taxes	$	(2,835	)	(16.5	)%	$	(9,996	)	(66.4	)%
(*) Amortization of intangible assets:
Cost of revenues	$	204		1.2	%	$	1,445		9.6	%
Research and development		65		0.4			73		0.5
General and adminstrative		33		0.2			33		0.2
Total amortization of intangible assets	$	302		1.8	%	$	1,551		10.3	%

The business segment information included in this MD&A has been prepared in accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, and is based upon the financial information used by management for assessing segment performance. The accounting policies of the operating segments are the same as for the Company as a whole, except that for segment reporting purposes, PalmSource recognizes intersegment revenues from the Solutions Group based on information reported by the Solutions Group in the month subsequent to the period of sale by the Solutions Group of a Palm OS device, in accordance with the Palm OS license agreement between PalmSource and the Solutions Group. Intersegment revenues and expenses between Solutions Group and PalmSource are eliminated in consolidation. For management reporting purposes, Palm does not allocate income tax provision (benefit) to the operating segments.

Revenues

We derive our revenues primarily from licensing and support of the Palm OS. Revenues were $17.1 million for the three months ended August 31, 2003 and $15.1 million for the three months ended August 31, 2002, an increase of $2.0 million or 14%. Revenues from the Solutions Group were $8.3 million and $7.5 million, representing 48.5% and 49.9% for the three months ended August 31, 2003 and 2002, respectively. Revenues from Sony were $2.2 million and $2.6 million, representing 12.7% and 17.6% for the three months ended August 31, 2003 and 2002, respectively. License and royalty revenues from third-party customers were $5.5 million for the first quarter of fiscal year 2004 compared to $4.1 million for the first quarter of fiscal year 2003, an increase of 35% primarily due to increased fees from continuing and new licensees of approximately $1.4 million. Third party support and service revenues increased approximately $0.5 million in the first quarter of fiscal year 2004 from the comparable quarter of fiscal year 2003 due to $0.3 million increase in support from new licensees and $0.2 million in professional services.

Total Cost of Revenues

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‘Total cost of revenues’ is comprised of ‘Cost of revenues’ and the applicable portion of ‘Amortization of intangible assets’ as shown in the PalmSource results of operations table. ‘Total cost of revenues’ was $1.9 million and $2.9 million for the three months ended August 31, 2003 and 2002, respectively. ‘Total cost of revenues’ as a percentage of revenues was 11.3% for the first quarter of fiscal year 2004 compared to 19.6% for the comparable period in fiscal year 2003. ‘Cost of revenues’ principally represents royalty payments to third-party technology vendors, costs to provide software updates and technical support for software products, and costs to provide product development, engineering services, consulting and training. ‘Cost of revenues’ was $1.7 million for the three months ended August 31, 2003 compared to $1.5 million for the three months ended August 31, 2002, representing 10.1% and 10.0% of revenues, respectively. The ‘Amortization of intangible assets’ applicable to cost of revenues was $0.2 million for the first quarter of fiscal year 2004, a decrease of $1.2 million from the comparable quarter of fiscal year 2003 as a result of certain intangible assets becoming fully amortized.

Sales and Marketing

Sales and marketing expenses were $4.6 million for the three months ended August 31, 2003 compared to $4.1 million in fiscal year 2002, an increase of $0.5 million or approximately 11%. Sales and marketing expenses as a percentage of revenues were 26.6% and 27.3% for the three months ended August 31, 2003 and 2002, respectively. The increase in absolute dollars in sales and marketing expenses primarily was due to a $0.4 million increase in variable and stock-based compensation. The decrease in sales and marketing expenses as a percentage of revenues reflects the increase in revenues in the first quarter of fiscal year 2004 compared to the first quarter of fiscal year 2003.

Research and Development

Research and development expenses were $8.9 million for the three months ended August 31, 2003 compared to $11.0 million for the three months ended August 31, 2002, a decrease of $2.1 million or approximately 19%. Research and development expenses as a percentage of revenues were 52.1% and 73.2% for the three months ended August 31, 2003 and 2002, respectively. The decrease in research and development expenses in absolute dollars and as a percentage of revenues was due to reduced personnel and related expenses of $1.3 million as a result of restructuring actions implemented in the third quarter of fiscal year 2003. In addition, the decreases were also attributed to a $1.0 million decrease in real estate and information technology costs offset by a $0.3 million increase in variable and stock-based compensation.

General and Administrative

General and administrative expenses were $3.4 million for the three months ended August 31, 2003 compared to $2.7 million for the three months ended August 31, 2002, an increase of $0.7 million or approximately 25%. General and administrative expenses as a percentage of revenues were 19.7% and 17.9% for the three months ended August 31, 2003 and 2002, respectively. The increase in absolute dollars and as a percentage of revenues was primarily due to a $0.9 million increase in variable and stock-based compensation.

Amortization of Goodwill and Intangible Assets

Amortization of intangible assets was $0.3 million and $1.6 million for the three months ended August 31 2003 and 2002, respectively. The decrease in amortization of intangibles for the first quarter of fiscal year 2004 from the comparable period in fiscal year 2003 was primarily due to purchased intangibles for WeSync, Smartcode and Actual Software becoming fully amortized during fiscal year 2003.

Separation Costs

Separation costs were $1.0 million and $0.5 million for the three months ended August 31, 2003 and 2002, respectively. PalmSource expects to continue to incur separation costs in fiscal year 2004 relating to its separation from Palm.

Interest and Other Income (Expense), Net

Interest and other expense was less than $0.1 million for the three months ended August 31, 2003 compared to $3.7 million for the three months ended August 31, 2002. The decrease in interest and other expense in the first quarter of

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fiscal year 2004 from the comparable period in fiscal year 2003 was primarily due to a $3.2 million charge to write down an investment in a privately-held company, which had been carried at cost and for which we determined the decline in value to be other than temporary, taken in the first quarter of fiscal year 2003.

Liquidity and Capital Resources

Cash and cash equivalents at August 31, 2003 were $266.8 million, compared to $242.4 million at May 31, 2003. The increase of $24.4 million in cash and cash equivalents was attributable to $38.1 million of cash proceeds from the issuance of our common stock, including $37.0 million as a result of private placements, offset by cash used in operating activities of $12.6 million and cash used in investing activities of $1.0 million. Cash used in operating activities consisted primarily of the net loss of $21.7 million reduced by non-cash charges of $7.1 million and a net $2.1 million increase related to the changes in assets and liabilities, net of the effect of dispositions. In connection with investing activities, we received $3.7 million in net proceeds from the sale of our Palm Digital Media product line, offset by the use of $2.0 million to purchase property and equipment and $2.8 million to purchase restricted investments.

Net accounts receivable were $76.6 million at August 31, 2003, a decrease of $20.8 million or 21% from $97.4 million at May 31, 2003. The decrease in accounts receivable was primarily due to a decrease in revenues of approximately $48.3 million in the first quarter of fiscal year 2004 compared to the fourth quarter of fiscal year 2003. Days sales outstanding of receivables (“DSO”) was 39 days at both August 31, 2003 and May 31, 2003.

The following is a summary of the contractual commitments associated with our debt and lease obligations, as well as our purchase commitments as of August 31, 2003 (in thousands):

	Nine Months Ending May 31, 2004		Year Ending May 31,
			2005		2006		2007		2008		Thereafter
Operating lease commitments	$	8,779	$	11,079	$	6,747	$	5,369	$	5,481	$	17,468
Capital lease commitments		668		149		—		—		—		—
Long-term convertible note		—		—		—		50,000		—		—
Guarantee of fair value of certain restricted stock		2,000		—		—		—		—		—
Minimum purchase commiments:
Minimum commitment to third party		4,900		—		—		—		—		—
Patent and license		3,390		4,723		2,135		475		439		335
Total contractual commitments	$	19,737	$	15,951	$	8,882	$	55,844	$	5,920	$	17,803

Palm’s facilities are leased under operating leases that expire at various dates through September 2011.

In December 2001, Palm issued a subordinated convertible note in the principal amount of $50 million to Texas Instruments. The note bears interest at 5.0% per annum, is due in December 2006 and is convertible into common stock at an effective conversion price of $92.64 per share. Palm may force a conversion at any time beyond one year of the closing, provided its common stock has traded above $142.65 per share for a defined period of time. In the event Palm distributes significant assets, the Company may be required to repay a portion of the note. The proposed PalmSource distribution does not represent a significant distribution of assets under terms of the note. The note agreement defines certain events of default pursuant to which the full amount of the note plus interest could become due and payable. On September 26, 2003, the SEC declared effective Palm’s Registration Statement on Form S-4 relating to the PalmSource distribution and the Handspring merger. The stockholder vote on this transaction is scheduled to take place on October 28, 2003. In connection with the PalmSource distribution, Palm and Texas Instruments have agreed that the existing Palm note will be divided into and replaced by two notes: one issued by Palm (“the new palmOne note”) and one issued by PalmSource (“the PalmSource note”). The new palmOne note will be issued in the principal amount of $35 million and the PalmSource note will be issued in the principal amount of $15 million. The new palmOne note will be convertible only into palmOne common stock and the PalmSource note will be convertible only into PalmSource common stock. Each of the new notes will bear interest at 5.0% per annum and will be due in December 2006. The conversion price of each of the two notes will

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be set according to formulas agreed to by Palm and Texas Instruments and will be effective upon the PalmSource distribution.

In September 2001, PalmSource’s president and chief executive officer received two restricted stock grants in aggregate of 7,500 shares of Palm common stock under a two-year vesting schedule subject to vesting restrictions and a guarantee that the fair market value of the related 7,500 shares of Palm common stock would be at least $2.0 million at September 2003. The guaranteed amount is recorded ratably as compensation expense over the vesting period. Because on September 1, 2003 the fair market value was less than $2.0 million, PalmSource’s president and chief executive officer received a cash payment, on September 15, 2003, equal to $1.9 million, all of which was recorded as a liability as of August 31, 2003.

Palm has a minimum purchase commitment with a third party under which it could be liable for payments of up to a maximum of $4.9 million during calendar year 2003.

Palm has patent and license agreements with third party vendors under which Palm is committed to pay $3.4 million for the remaining nine months in fiscal year 2004, $4.7 million in fiscal year 2005, $2.1 million in fiscal year 2006, $0.5 million in fiscal year 2007, $0.4 million in fiscal year 2008 and $0.3 million in fiscal year 2009.

Palm utilizes contract manufacturers to build its products. These contract manufacturers acquire components and build product based on demand forecast information supplied by Palm, which typically covers a rolling 12-month period. Consistent with industry practice, Palm acquires inventories through a combination of formal purchase orders, supplier contracts and open orders based on projected demand information. Such formal and informal purchase commitments typically cover Palm’s forecasted component and manufacturing requirements for periods ranging from 30 to 90 days. As of August 31, 2003, Palm’s third party manufacturers had inventory on-hand and component purchase commitments related to the manufacture of our products of approximately $123 million, which in the normal course of business will result in the usage of our cash.

On September 26, 2003, the SEC declared effective Palm’s Registration Statement on Form S-4 relating to the PalmSource distribution and the Handspring merger. The stockholder vote on this transaction is scheduled to take place on October 28, 2003. As of August 31, 2003, we had $2.6 million of deferred transaction costs which are included in prepaids and other current assets on our consolidated balance sheet. In addition, we anticipate Palm and PalmSource incurring an additional $10—$12 million of banking, legal, mailing, printing, accounting, solicitation and consulting costs primarily in the second fiscal quarter of fiscal year 2004 related to this transaction. These amounts do not include the costs incurred by Handspring which will be assumed by Palm as a result of this transaction.

As of May 31, 2003, Palm had in place an asset-backed borrowing-base credit facility from a group of financial institutions for up to a maximum of $150.0 million with the actual amount available determined by eligible accounts receivable and inventory as well as a real estate line of credit less the amount of any outstanding cash advances and letters of credit. In June 2003, the asset-backed borrowing-base credit facility expired.

In August 2003, Palm entered into a two-year, $30.0 million revolving credit line from Silicon Valley Bank (“SVB”). The credit line is secured by assets of the Company, including but not limited to cash and cash equivalents, accounts receivable, inventory and property and equipment. The interest rate is equal to SVB’s prime rate (4% at August 31, 2003) or, at Palm’s election subject to specific requirements, equal to LIBOR plus 1.75% (2.87% at August 31, 2003). The interest rate may vary based on fluctuations in market rates. Palm is subject to a financial covenant requirement under the agreement to maintain unrestricted cash on deposit in the United States of not less than $100.0 million.

In March 2002, we filed a universal shelf registration statement to give us the flexibility to sell up to $200 million of debt securities, common stock, preferred stock, depository shares and warrants in one or more offerings and in any combination thereof. The net proceeds from the sale of securities offered are intended for general corporate purposes, including to meet working capital needs and for capital expenditures. During August 2003, we sold 2.4 million shares of Palm common stock under the shelf registration statement to institutional investors for net proceeds of approximately $37.0 million.

We denominate our sales to certain European customers in the Euro and in Pounds Sterling. We also incur expenses

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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. All such gains (losses), $0.2 million and $(0.6) million for the three months ended August 31, 2003 and 2002, respectively, are included in interest and other income (expense) in our consolidated statements of operations. Our foreign exchange forward contracts generally mature within 30 days. We do not intend to utilize derivative financial instruments for trading purposes.

Based on current plans and business conditions, we believe that our existing cash and cash equivalents will be sufficient to satisfy our anticipated cash requirements for at least the next 12 months. The net cash used in operating activities during the first quarter of fiscal year 2004 was approximately $12.6 million. We anticipate our August 31, 2003 cash and cash equivalents balance of $266.8 million will satisfy our operational cash flow requirements over the next 12 months. Based on our current forecast, we do not anticipate any short-term or long-term liquidity deficiencies. We cannot be certain, however, that our underlying assumed levels of revenues and expenses will be accurate. If our operating results do not meet our expectations or if inventory, accounts receivable or other assets require a greater use of cash than is currently anticipated, we could be required to seek additional funding through public or private financings or other arrangements. In such event, adequate funds may not be available when needed or may not be available on favorable terms, which could have a negative effect on our business and financial condition.

Stock Option Information

Our stock option program is a broad-based, long-term retention program that is intended to attract and retain talented employees and align stockholder and employee interests. We consider our option program critical to productivity and all of our employees participate in the program. The program consists of two plans: one stock option plan under which options to purchase shares of common stock may be granted to employees, directors and consultants; and a second stock option plan under which options to purchase common stock may be granted to non-employee members of the Board of Directors. Option vesting periods typically range from one to four years. On October 15, 2002, Palm effected a 1-for-20 reverse stock split. All share information reflects this reverse stock split.

See the “Report Of The Compensation Committee Of The Board of Directors On Executive Compensation” appearing in our joint proxy statement/prospectus dated September 26, 2003 for further information concerning the policies and procedures of Palm and the Compensation Committee regarding the use of stock options.

The following table provides information about stock options granted for fiscal year-to-date 2004, fiscal year 2003 and fiscal year 2002 for certain executive officers. For fiscal year-to-date 2004, the stock option data is for our Chief Executive Officer and the four other most highly compensated individuals who are currently serving as executive officers of Palm For fiscal years 2003 and 2002, the stock option data relates to the named executive officers in the executive compensation table of the Proxy Statement for the respective fiscal year.

Employee and Named Executive Officer Option Grants

	2004 YTD		2003		2002
Net grants during the period as a % of outstanding shares	5.6	%	5.9	%	2.1	%
Grants to top five executive officers during the period as a % of total options granted	10.2	%	7.6	%	15.9	%
Grants to top five executive officers during the period as a % of outstanding shares	0.7	%	0.7	%	0.9	%
Cumulative options held by named executive officers as a % of total options outstanding	15.9	%	13.5	%	11.4	%

During the three months ended August 31, 2003, we granted options to purchase approximately 2.2 million shares of Palm common stock, and options to purchase approximately 0.4 million shares of Palm common stock were forfeited. The net grants represented 6.1% of shares outstanding at the beginning of this fiscal year.

Activity under all stock option plans

	Three Months Ended August 31, 2003				Year Ended May 31, 2003
	Shares		Weighted average exercise price		Shares		Weighted average exercise price
	(Shares in thousands)
Outstanding, beginning of period	4,021		$	110.57	2,327		$	239.96
Granted	2,203		$	16.06	2,615		$	14.05
Exercised	(77	)	$	13.78	(18	)	$	12.96
Cancelled	(398	)	$	205.17	(903	)	$	165.48
Outstanding, end of period	5,749		$	69.17	4,021		$	110.57

In-the-Money and Out-of-the-Money Option Information  

As of August 31, 2003

	Exercisable			Unexercisable			Total
	Shares	Weighted average exercise price		Shares	Weighted average exercise price		Shares	Weighted average exercise price
	(Shares in thousands)
In-the-Money	488	$	13.94	3,720	$	15.01	4,208	$	14.89
Out-of-the-Money (1)	1,286	$	214.92	255	$	230.35	1,541	$	217.48
Total Options Outstanding	1,774	$	159.60	3,975	$	28.82	5,749	$	69.17

(1) Out-of-the money options are those options with an exercise price equal to or greater than the closing priceof $18.27 per share at the end of the quarter.

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Option Exercises of Named Executive Officers (1)
	Three Months Ended August 31, 2003			Number of Shares Underlying Unexercised Options at August 31, 2003		Value of Unexercised In-the-Money Options at August 31, 2003 (2)
Name	Number of Shares Acquired on Exercise	Dollar Gain Realized		Exercisable	Unexercisable	Exercisable		Unexercisable
	(In thousands)
Eric A. Benhamou	—	$	—	51,751	63,499	$	—	$	370,200
R. Todd Bradley	—	$	—	55,414	247,086	$	94,751	$	562,324
Judy Bruner	—	$	—	54,218	73,715	$	40,972	$	174,529
David Nagel	—	$	—	2,500	250	$	—	$	—
Marianne Jackson	—	$	—	12,325	61,842	$	34,141	$	159,009

(1) This list represents the named executive officers who appeared in the joint proxy statement/prospectus dated September 26, 2003 and who are employees of Palm.

(2) Based on a fair market value of $18.27 per share as of August 31, 2003, the closing sale price per share of Palm’s common stock on that date as reported on the Nasdaq National Market.

Securities Authorized for Issuance under Equity Compensation Plans

The following table summarizes our equity compensation plans as of August 31, 2003:

Equity Compensation Plan Information
	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)		Weighted average exercise price of outstanding options, warrants and rights (b)		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders	5,743,894	(3)	$	69.11	2,626,354	(1)(2)
Equity compensation plans not approved by security holders	—			—	—
Total	5,743,894		$	69.11	2,626,354

(1) This number of shares includes approximately 1.8 million shares of our common stock reserved for future issuance under our 1999 Employee Stock Purchase Plan, as amended, (the “1999 ESPP”), 0.5 million shares of our common stock reserved for future issuance under our 1999 Stock Plan, as amended, (the “1999 Stock Plan”) and 0.3 million shares of our common stock reserved for future issuance under our Non-Employee Director Stock Option Plan.

(2) Our 1999 Stock Plan, also provides for annual increases on the first day of each fiscal year in the number of shares available for issuance under the 1999 Stock Plan equal to 5% of the outstanding shares of our common stock on such date, or a lesser amount as may be determined by our Board of Directors. In addition, the 1999 ESPP provides for annual increases on the first day of each fiscal year in the number of shares available for issuance under the 1999 ESPP equal to the lesser of 2% of the outstanding shares of our common stock on such date, 500,000 shares or the amount determined by our Board of Directors.

(3) This number of shares does not include outstanding options to purchase 4,648 shares of our common stock assumed through various mergers and acquisitions. At August 31, 2003, these assumed options had a weighted average exercise price of $141.55 per share. Except for shares of our common stock underlying the options outstanding under these plans, there are no shares of Palm common stock reserved under these plans, including shares for new grants. In the event that any such assumed option is not exercised, no further option to purchase shares of our common stock will be issued in place of such unexercised option. However, we do have the authority, if necessary, to reserve additional

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shares of Palm common stock under these plans to the extent such shares are necessary to effect the adjustment to maintain option value, including intrinsic value, of the outstanding options under these plans as a result of the PalmSource distribution.

Business Environment and Risk Factors

You should carefully consider the risks described below and the other information in this Form 10-Q. The risks and uncertainties described below are not the only ones facing Palm, and there may be additional risks that we do not presently know of or that we currently deem immaterial. The business, results of operations or financial condition of Palm could be seriously harmed if any of these risks materialize. The trading price of shares of Palm common stock may also decline due to any of these risks.

Company-Specific Trends and Risks:

Risks Related to Our Business

On June 4, 2003, we announced our intention to distribute the shares that we own of our PalmSource subsidiary to our stockholders and to acquire Handspring through a merger transaction. If the transaction is not completed, our stock price and business may be adversely affected, and we may have an outstanding note from Handspring that may be subject to risk of default. Even if the transaction is completed, we may not realize the benefits because of integration and other challenges.

On June 4, 2003, we announced a definitive agreement to distribute the shares that we own of our PalmSource subsidiary to our stockholders and to acquire Handspring. The boards of directors of both Palm and Handspring have approved the merger, but final consummation of the PalmSource distribution and Handspring merger, which is expected to be completed this fall, is contingent on the vote of both the Palm and Handspring stockholders as well as other customary closing conditions.

Palm and Handspring have made the required filings under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 with the United States Federal Trade Commission and Department of Justice and the statutory waiting period has terminated. Even after the statutory waiting period or the completion of the Handspring merger, governmental authorities could seek to block or challenge the Handspring merger. Palm and Handspring also may agree to restrictions or conditions imposed by antitrust authorities in order to obtain regulatory approval, and these restrictions or conditions could harm the combined company’s operations. Moreover, a competitor, customer or other third party could initiate a private action under the antitrust laws challenging or seeking to enjoin the Handspring merger, before or after it is completed. The stockholders of either Palm or Handspring may also fail to approve the Handspring merger at their respective stockholder meetings.

If the transaction is not completed, the trading price of Palm common stock may decline. In addition, our business and operations may be harmed to the extent that customers, suppliers and others believe that we cannot effectively compete in the marketplace without the transaction, or there is customer or employee uncertainty surrounding the future direction of our product and service offerings and strategy on a standalone basis. Moreover, Palm has incurred and will incur transaction costs associated with the Handspring merger, including but not limited to banking, legal, mailing, printing, accounting, solicitation and consulting costs which will not be recoverable if the merger transaction does not close. In addition, each of Palm and Handspring have agreed to pay to the other a termination fee if the merger agreement is terminated, under certain specified circumstances. Any delay in the completion of the Handspring merger could diminish the anticipated benefits of the merger, result in additional transaction costs or result in loss of revenue or other effects associated with uncertainty about the transaction.

In connection with the merger agreement, we may be required to loan up to $20.0 million to Handspring to fund its operations. As of June 28, 2003, Handspring’s accumulated deficit was $417.3 million and its net worth was $6.6 million. In addition, Handspring is likely to continue to incur losses in the short-term. If the transaction does not close, the term loans may be subject to a risk of default, and while the loans would be collateralized by all of the assets of Handspring, such assets may not be sufficient to allow Palm to fully recover the loaned funds. Furthermore, the loaned funds could help Handspring in competing against us in various segments of the mobile computing market.

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Realizing the benefits of the transaction will depend in part on the integration of technology, operations and personnel. The integration of the companies is a complex, time consuming and expensive process that, without proper planning and implementation, could significantly disrupt our Solutions Group business. We are currently planning this integration process which is diverting the attention of our management and employees and causing us to incur expenses and use cash. If the transaction is not completed, this time and money will not be recoverable. Furthermore, our failure to meet the challenges involved in integrating the operations of our Solutions Group and Handspring in a timely manner, or at all, or otherwise to realize any of the anticipated benefits of the transaction could seriously harm our results of operations.

If we do not externally separate our PalmSource and Solutions Group businesses, our business, results of operations and stock price could suffer.

If we do not distribute our PalmSource common stock to our stockholders, our business may be adversely affected because we may lose current licensees and/or attract fewer new licensees to the Palm OS platform due to concern about lack of independence from the products of our Solutions Group. This could result in the Palm OS platform being less competitive. In addition, we may face challenges managing our two independent businesses in a single company without compromising business opportunities for one business because of potentially conflicting business priorities with the other business. We may also have difficulty attracting and retaining key employees without an external separation. In addition, if the distribution of PalmSource common stock to our stockholders is delayed or not completed, our stock price could decline, and we would not be able to recover the significant costs and diversion of management and employee attention that we have incurred and will continue to incur in planning for and implementing the external separation.

If we fail to develop and introduce new products and services successfully and in a 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 future 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 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. In addition, if we fail to timely develop wireless products that meet carrier product planning cycles, our wireless device sales volumes may be negatively impacted. As a result, our revenues and cost of revenues could be adversely affected.

As we introduce new or enhanced products or integrate new technology into new or existing products, we face risks relating to such transitions 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 arising from the integration of new technology, and a potentially different sales and support environment relating to any new technology. 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 and financial results.

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

The demand for our products depends on many factors, including pricing levels, and is difficult to forecast due in part to competition, variations in economic conditions, seasonality, changes in consumer and enterprise preferences and relatively short product life cycles. It is particularly difficult to forecast demand by individual product. Significant unanticipated fluctuations in demand could result in costly excess production of inventories or the inability to secure sufficient quantities or cost-effective production of our handheld devices. This could adversely

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impact our cost of revenues and financial condition.

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 predict. 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. Factors that may cause fluctuations in our operating results include, but are not limited to, the following:

• changes in consumer and enterprise spending levels;

• changes in general economic conditions and specific market conditions;

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

• price and product competition from other handheld devices or other devices with similar functionality;

• seasonality of demand for our products and services;

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

• quality issues with our products;

• changes in pricing or promotional programs;

• inability of our third party manufacturers to produce quality products on time;

• failure to achieve targeted product cost reductions and operating expense reductions;

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

• excess inventory or insufficient inventory to meet demand;

• unpredictability of product introductions by our licensees and market acceptance of such products; and

• litigation brought against us.

Any of the foregoing factors, or any other factors discussed elsewhere herein, could have a material adverse effect on our business, results of operations, and financial condition.

Economic conditions and increased competition could lead to reduced demand for our products.

The downturn in general economic conditions and the substantial decline in the stock market have led to reduced demand for a variety of goods and services, including many technology products. Economic conditions have created a challenging environment in the PDA market which experienced a decline in unit shipments and value of shipments from calendar year 2001 to 2002, according to IDC, declining average selling prices and increased competition. If conditions continue to decline, or fail to improve, we could see a further decrease in the overall demand for our products that could negatively affect our operating results. This is particularly true with respect to a number of our premium products as they typically carry a list price in excess of $300 and therefore are expensive purchases for many consumers and enterprises.

We rely on third parties to design, manufacture and support our handheld devices and third party distribution centers to distribute our handheld devices, and our reputation and revenues 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. 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

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quality hardware design, our reputation and revenues could suffer.

We outsource all of our manufacturing requirements to third party manufacturers. We depend on them to produce a sufficient volume of our products in a timely fashion and at satisfactory quality levels. If our third party manufacturers fail to produce quality products on time and in sufficient quantities, our reputation and results of operations could suffer. 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 could suffer.

Our device products are currently manufactured by our third party manufacturers at their international facilities, which are primarily located in China. In addition, we have entered into an agreement with a third party manufacturer to manufacture and sell our handheld device products in Brazil. The cost, quality and availability of third party manufacturing operations are essential to the successful production and sale of our handheld devices. Our reliance on third party manufacturers exposes us to risks, which are not in our control and our revenues or cost of revenues could be negatively impacted. For example, an outbreak of Severe Acute Respiratory Syndrome (SARS) in China could result in quarantines or closures of our third party manufacturers or their suppliers. In the event of such a quarantine or closure, our revenues, or cost of revenues and results of operations, could be negatively impacted.

We do not have manufacturing agreements with all of the third party manufacturers upon which we rely to manufacture our device products. The absence of a manufacturing agreement means that, with little or no notice, 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. In addition, if these manufacturers were to change the terms under which they manufacture for us, our manufacturing costs could increase and our cost of revenues could increase.

We outsource most of the warranty support, product repair and technical services for our products to third party providers. We depend on their expertise and we rely on them to provide satisfactory quality 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 revenues could suffer. We are currently in the process of transitioning a portion of our product support to a new third party provider and if this transition is not completed in a timely and seamless manner, the satisfaction of our customers and our results of operations could suffer.

Our contract distribution facilities are physically separated from our contract manufacturing locations. This requires additional lead-time to move products to customers. If we are shipping products near the end of the quarter, this extra time could result in us not meeting anticipated shipment volumes for that quarter, which may negatively impact the timing of our revenues. As a result of economic conditions or other factors, our distribution facility providers may close or move their facilities with little notice to us, which could cause disruption in our ability to deliver products. In addition, we do not have contracts with all of our third party distribution providers. The absence of agreements means that, with little or no notice, these distribution facility providers could refuse to continue to provide warehouse and distribution services for all or some of our devices or change the terms under which they provide such services. Any disruption of distribution facility services could have a negative impact on our revenues and results of operations. For example, our largest distribution facility provider, servicing all of the United States and Canada and most of Latin America, recently closed the warehouse and distribution facility that we previously utilized and transitioned services to another facility. We have little experience with the new facility and its staff, and our business could be subject to disruptions as the new facility becomes familiar with our business practices and products. Any interruption or delay in delivery of our products could have a significant, adverse impact on our market share, revenues, results of operations and financial condition.

Changes in transportation schedules due to terrorist threats or attacks, military activity, labor disruptions or carrier financial difficulties could cause transportation delays and increase our costs for both receipt of inventory and shipment of products to our customers. For instance, our primary domestic freight carrier filed for bankruptcy immediately after the close of our first quarter of fiscal year 2003. This led to delayed deliveries to our customers. Additionally, labor disputes of West coast dockworkers in the second quarter of fiscal year 2003 led to less capacity and higher costs for the transportation alternatives we normally use. If these types of disruptions occur, our results of operations could be adversely impacted.

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

Our device products contain components, including liquid crystal displays, touch panels, memory chips, microprocessors, cameras and batteries, that are procured from a variety of suppliers. The cost, quality and availability of components are essential to the successful production and sale of our device products.

Some components, such as displays and certain integrated circuits, digital signal processors, microprocessors, radio frequency components and other discrete components, come from sole source suppliers, one of which is also a competitor of ours in certain markets. Alternative sources are not always available or may be financially prohibitive. If suppliers were unable or unwilling to meet our demand for sole source components and if we are unable to obtain an alternative source or if the price for an alternative source is prohibitive, our ability to maintain timely and cost-effective production of our handheld computing device products will be seriously harmed.

We enter into agreements for the development and licensing of third party technology to be incorporated into some of our products. Our ability to release and sell our products could be seriously harmed if the third party technology is not delivered to us in a timely manner or contains errors or defects which are not discovered and fixed prior to release of our products. Our inability to obtain alternative technology could result in damage to our reputation as well as lost revenues and divert our development resources from other business objectives.

We rely on our handheld device products as the primary source of our revenues.

Our revenues and our results of operations depend substantially on the commercial success of our Palm handheld devices. If revenues from our Palm handheld devices fail to meet expectations, our other revenue sources will likely not be able to compensate for this shortfall and our results of operations may suffer. For the three months ended August 31, 2003, revenues from sales of devices and accessories constituted more than 90% of our consolidated revenues.

According to IDC, from calendar year 2001 to calendar year 2002, the market for handheld devices has declined and we derive substantially all of our revenues from this market. If this market fails to return to growth or continues to decline, our results of operations and our growth potential could be negatively impacted. Our proposed acquisition of Handspring, which is risky, is an effort to expand into a new product market. However, the Handspring merger may not be completed or be successful and, regardless of whether the Handspring merger is completed or successful, we may not have sufficient cash, resources, capacity or experience to expand into other markets successfully, or at all.

We rely on distributors, retailers and resellers to sell our products, and disruptions to these channels would adversely affect our ability to generate revenues from the sale of our handheld devices.

Our distributors, retailers and resellers sell products offered by our competitors. If our competitors offer our distributors, retailers and resellers 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 distributors, retailers and resellers may de-emphasize or decline to carry our products. In addition, certain channel customers could decide to de-emphasize the product categories that we offer in exchange for other product categories that they believe provide higher returns. For example, we were recently notified by one of our significant retail customers that it plans to move away from handheld organizer devices. If we are unable to maintain successful relationships with distributors, retailers and resellers or maintain adequate coverage within these distribution channels, our business will suffer.

Because we sell our products primarily to 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, our distributors, retailers or resellers could modify their business practices, such as payment terms or inventory levels. Unexpected changes in return requests, inventory levels, payment terms or other practices by our channel customers could negatively impact our revenues or our financial condition.

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

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If we are unable to compete effectively with existing or new competitors our resulting loss of competitive position could result in price reductions, fewer customer orders, reduced margins and loss of market share, and our results of operations and financial condition would suffer.

We compete in the handheld device and operating system software markets. The markets for these products and services are highly competitive, and we expect increased competition in the future, particularly as companies from various established industry segments, such as mobile handset, personal computer and consumer electronics, increasingly develop and market products that compete with us. Some of our competitors or potential competitors possess capabilities developed over years of serving customers in their respective markets. In addition, many of our competitors have significantly greater financial, technical and marketing resources 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. They may also devote greater resources to the development, promotion and sale of their products. They may also be better able to withstand lower prices in order to gain market share at our expense. Finally, these competitors bring with them customer loyalties, and such loyalties may limit our ability to attract new users despite superior product offerings.

Our handheld computing devices compete with a variety of handheld computing products. Our principal handheld device competitors include:

• personal computer companies which also develop and sell handheld computing products, such as Acer, Dell, Hewlett-Packard and Toshiba;

• consumer electronics companies which also develop and sell handheld computing products, such as Casio, Sharp and Sony;

• Research In Motion Limited (“RIM”), a leading provider of wireless email, instant messaging and Internet connectivity;

• mobile handset manufacturers which also develop and sell wireless handheld and smartphone products such as Audiovox, Ericsson, Handspring, HTC Corporation, Kyocera, LG Motorola, Nokia, Samsung, Sanyo and Sony-Ericsson; and

• a variety of privately held start-up companies looking to compete in our current and future markets, such as Danger and Good Technology.

Some competitors sell or license server, desktop and/or laptop computing products in addition to handheld computing products and may choose to market and sell or license their handheld products at a discounted price or give them away for free with their other products, which could negatively affect our revenues, sales and marketing expenses and financial condition.

Certain competitors may have longer and closer relationships with the senior management of enterprise customers who decide which products and technologies will be deployed in their enterprises. Moreover, these competitors may have larger and more established sales forces calling upon potential 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 business, revenues, sales and marketing expenses and financial condition.

The separation of our Solutions Group and PalmSource businesses into two independent companies may result in more competition for our Solutions Group’s handheld devices as PalmSource may license the Palm OS to companies who compete directly or indirectly with our Solutions Group’s business. For example, PalmSource has a license agreement with Sony and has recently signed Palm OS license agreements with HuneTech, Lenovo (formerly known as Legend) and Group Sense (International) Limited, located in the Asia Pacific region. If the revenues and gross margins of our Solutions Group business suffer because of competition from licensees of the Palm OS platform, our revenues and results of operations could be negatively impacted.

Our Palm OS platform competes in the operating system software and services markets. The markets for these

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products and services are highly competitive, and we expect competition to increase in the future. We compete primarily with Microsoft and Symbian. Microsoft has substantially more resources than we do and has the ability to impact interoperability with their desktop operating systems and software. Symbian is supported by companies such as Nokia and Sony-Ericsson and has a significant portion of the worldwide smartphone market that is important to our future success. Additionally, there are proprietary operating systems, open source operating systems, such as Linux, and other software technologies, such as Java and RIM’s licensed technology, which could be integrated into devices that compete with Palm Powered devices. Some of our competitors or potential competitors have significantly greater financial, technical and marketing resources than we do. These competitors may provide additional or better functionality than we do, or may be able to respond more rapidly than we can to new or emerging technologies or changes in customer requirements. They may also devote greater resources to the development, promotion and sale of their products and services and the third-party developer community, which could attract the attention of influential user segments. In addition, if Microsoft or other competitors’ actions were to disrupt the interoperability of Palm Powered devices, the marketability and market share of Palm OS and Palm Branded devices could be adversely affected.

Successful new product introductions or enhancements by our competitors, or increased market acceptance of competing products could reduce the sales and market acceptance of our products, cause intense price competition or could 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, fewer customer orders, reduced margins and loss of market share. Our failure to compete successfully against current or future competitors could seriously harm our business, financial condition and results of operations.

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

Our Palm OS platform and our 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. We must develop our software and hardware products quickly to keep pace with the rapidly changing handheld device and operating system markets. Products and services 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 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 and increased customer service and support costs and warranty claims, which could harm our business, revenues, cost of revenues and financial condition.

If we are unable to obtain key technology from third parties on a timely basis free from errors or defects, we may have to cancel or delay the release of certain features in our Palm OS platform and handheld device product shipments or incur increased costs.

We license third-party software for use in the Palm OS platform and in our handheld device products, as well as to provide software development tools to enable applications to be written for our Palm OS platform. In addition to third-party licensed software, we may enter into joint development agreements with certain licensees of the Palm OS platform whereby a licensee will develop a specific feature for our Palm OS platform that we will then own and may later incorporate into new releases of the Palm OS platform. Our ability to release and sell our products could be seriously harmed if the third-party technology is not delivered to us in a timely manner or contains errors or defects that are not discovered and fixed prior to release of our products and we are unable to obtain alternative technology to use in our products. As a result, our product shipments could be delayed or our offering of features could be reduced, which could adversely affect our business or results of operations. Furthermore, a third-party developer or joint developer may improperly use or disclose the software we include in the Palm OS platform or handheld device products, which could adversely affect our competitive position.

In addition, because we license some of our development tools from third parties, our business would suffer if we could no longer obtain those tools from those third parties or if the tools developers wanted to use were not

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available. If we are unable to offer technology that our licensees need to build successful Palm Powered products, which we obtain by licensing the technology from third parties or developing it internally, then our business may suffer.

For example, we recently modified the Graffiti handwriting recognition system in our Palm OS, which now includes a subcomponent of the Jot technology we license from the Communication Intelligence Corporation (“CIC”). If the technology we license from CIC contains errors or defects or cannot be seamlessly integrated into the products of our licensees, our licensees’ ability to market their products may be delayed or cancelled. Further, should we be required to license the Jot technology after expiration or termination of the Jot license, we may be unable to renegotiate the license on favorable terms or obtain alternative technology from another third party, which may require us to license other third-party solutions or develop aspects of the functionality ourselves. Any of these events may result in higher licensing costs to us and delay the shipment of products based on Palm OS, which could adversely affect our business, results of operations and financial condition.

We have internally separated our business into two independent businesses by transferring our Palm OS and licensing business to our PalmSource subsidiary. If we fail to manage our separate businesses effectively, our on-going business prospects and overall financial performance may suffer.

In December 2001, we internally separated our business into two independent businesses and formed our PalmSource subsidiary to hold our Palm OS platform and licensing business with the intent to make PalmSource an independent public company in 2003. The two independent businesses may fail to sustain efficient operations or successfully implement their business strategies. The implementation of the two independent business strategies may result in actions or decisions that are unfavorable to the other business. For example, in order for PalmSource to diversify its revenue, it may focus its development efforts on functionality that does not match the direction or needs of the Solutions Group. Failure to effectively manage two independent business operations could cause a decline in our revenues, compromise our on-going business prospects and impair our overall financial performance.

PalmSource currently derives its revenue from a small number of licensees of Palm OS, and the failure of one or more of them to sustain sales of Palm Powered products from which PalmSource derives revenue could significantly harm PalmSource’s future business prospects.

PalmSource currently derives its revenue from a small number of licensees of Palm OS. Revenue from the Solutions Group was $8.3 million, or 48.5% of revenues, in the first quarter of fiscal year 2004 and $7.5 million, or 49.9% of revenues, in the first quarter of fiscal year 2003. Revenue from Sony was $2.2 million, or 12.7% of revenue, in the first quarter of fiscal year 2004 and $2.6 million, or 17.6% of revenue, in the first quarter of fiscal year 2003. Revenue from Handspring was $1.6 million, or 9.1% of revenue, in the first quarter of fiscal year 2004 and $1.7 million, or 11.1% of revenues, in the first quarter of fiscal year 2003. Although PalmSource recently expanded its number of licensees, many of these new licensees have yet to introduce products on the market or sell significant numbers of units based on Palm OS. Additionally, the combination of Palm Solutions Group and Handspring will increase the concentration of PalmSource’s customers. PalmSource expects that Palm Solutions Group and Sony will continue to account for a substantial portion of its revenue for the foreseeable future. If revenues from either Palm Solutions Group or Sony do not grow as PalmSource anticipates, if either of them decide to not incorporate Palm OS into their future products, or if Palm Solutions Group experiences financial difficulties and is not able to satisfy its annual minimum royalty commitments, PalmSource will have to significantly reduce its expenses or increase its revenue from other sources in order to stay in business. The term of PalmSource’s license agreement with Palm Solutions Group will expire in December 2006, its license arrangement with Sony will expire in October 2012 and its license agreement with Handspring will be terminated following the Handspring merger. Nothing restricts these licensees from competing with PalmSource or offering products based on competing operating systems and these licensees may stop incorporating Palm OS in their products during the term of their agreements with limited notice to PalmSource. Once these license arrangements expire, PalmSource may not be able to renegotiate them on favorable terms, if at all. If PalmSource does not continue to generate significant revenues from Palm Solutions Group or Sony or if PalmSource is unable to generate an increased percentage of its revenues from other licensees, PalmSource’s business, results of operations and financial condition will be significantly harmed.

If we do not deliver the wireless functionality and solutions that the market desires or if we fail to provide wireless devices on additional domestic and international carrier networks, our results of operations could suffer.

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We must continue to develop solutions to compete in the evolving wireless space, which includes solutions for Wide Area Network (“WAN”) with carriers, Local Area Network with 802.11 or similar technology and Personal Area Network with Bluetooth or similar technology. The success of these products is in part based upon the broader adoption of the underlying wireless technology and because the wireless market is still evolving, we cannot be assured which wireless technologies will be broadly adopted. While we currently have offerings in each of these areas, we cannot assure that there will be demand for our wireless solutions or that individuals will widely adopt our handheld devices as a means of accessing wireless services. We are reliant on pricing plans put into effect by carriers. If carriers charge above a rate 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.

The success of our WAN based product, Tungsten W, as well as any future wireless products, is highly dependent on our ability to establish new relationships and build on our existing relationships with strategic domestic and international wireless carriers. We cannot assure that we will be successful in establishing new relationships or advancing existing relationships with wireless carriers or that these carriers will act in a manner that will promote the success of our Tungsten W. For example, service for our GSM/GPRS-based Tungsten W in the United States is only offered on the AT&T Wireless network. If AT&T Wireless should stop providing service for this product, our revenues would be adversely impacted. In addition, wireless products are subject to lengthy certification processes with wireless carriers and governmental or regulatory authorities. These certification requirements could delay the offering of the Tungsten W on additional carrier networks and delay the introduction of future wireless products.

Our success largely depends on our ability to hire, retain, integrate and motivate sufficient numbers of qualified personnel.

Our future success depends on our ability to attract and retain highly skilled personnel. We compensate our employees through a combination of salary, bonuses, benefits and equity compensation. If we fail to provide competitive compensation to our employees, we may be unable to retain them. Volatility or lack of positive performance in our stock price may also affect our ability to retain key employees, all of who have been granted stock options.

Palm’s practice has been to provide incentives to all of its employees through the use of broad based stock option plans. Proposed accounting rules concerning the expensing of stock options may cause us to reevaluate our use of stock options as an employee incentive. Our ability to hire, retain and motivate our personnel may suffer as a result.

In addition, many key personnel and executives hold options that have exercise prices per share that are significantly above the market price of our common stock and the number of shares available for new option grants is limited. We may find it difficult to provide competitive stock option grants and the ability to hire, retain and motivate key personnel may suffer.

In recent 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. These reductions have resulted in reallocations of employee duties, which could result in employee and contractor uncertainty. Reductions in our workforce could make it difficult to motivate and retain the remaining employees and contractors, which could affect our ability to deliver our products in a timely fashion and negatively affect our business.

Third parties have claimed and may claim in the future that we are infringing their intellectual property, and we could suffer significant litigation or licensing expenses or be prevented from selling products if 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. We evaluate the validity and applicability of these intellectual property rights, and determine in each case whether we must negotiate licenses or cross-licenses to incorporate or use the proprietary technologies in our products. Third parties may claim that we, our customers, or Palm OS platform licensees, 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 require a license to use those rights. We may be unaware of intellectual property rights of others that may cover some of our technology, products and services.

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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 current uncertainty of the law and the increasing competition and overlap of product functionality in our markets. Claims of intellectual property infringement might also require us to enter into costly royalty or license agreements or indemnify our customers or Palm OS platform licensees. 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 development and sale or our products.

For information concerning pending matters, see “Legal Proceedings” in Item 1 of Part II of this Form 10-Q.

If Palm is unsuccessful in its litigation with Xerox, our business, results of operations and financial condition could be significantly harmed and our licensees may be prevented from offering products with Graffiti handwriting recognition software.

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 computers operating the Palm OS. While the District Court dismissed the case in 2000, ruling that the Xerox patent is not infringed by the Graffiti handwriting recognition system, Xerox appealed the dismissal. The Appellate Court reversed and remanded the case to the District Court for further proceedings. The District Court subsequently found the patent valid, enforceable and infringed. Palm appealed the judgment in December 2001.

In February 2002, the District Court rejected an injunction sought by Xerox to prohibit the manufacture or sale of products using the Graffiti handwriting recognition system. The Court also rejected a request by Xerox for a trial date to determine damages, but required us to post a $50 million bond, a decision from which we appealed; Xerox filed a cross-appeal. The Federal Appeals Court decided in February 2003 that the Xerox patent is infringed by the Graffiti handwriting recognition system, but remanded the case to the District Court to determine whether the patent is valid, thereby lifting the requirement that Palm post a bond. In its opinion, however, the Appellate Court directed that, in the event the patent is held valid, Xerox would be entitled to an injunction. Proceedings on the issue of the validity of the patent are now pending in the district court.

We cannot assure you that Palm will be successful in the litigation. If we are not successful, we may be required to pay Xerox significant damages or license fees or pay significant amounts with respect to Palm OS licensees for their losses. 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. Accordingly, if Xerox is successful, our business, results of operations and financial condition could be significantly harmed and we may be rendered insolvent. In addition, Xerox might again seek an injunction preventing us or Palm OS licensees from offering products with Palm OS with Graffiti handwriting recognition software. We have largely transitioned our products to a handwriting recognition software that does not use Graffiti.

For information concerning pending matters, see “Legal Proceedings” in Item 1 of Part II of this Form 10-Q.

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 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 operating results.

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

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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.

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. The unauthorized use of our technology or of our proprietary information by competitors could have a material adverse effect on our ability to sell our products.

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 a proprietary. Accordingly, we cannot assure you that we will be able to protect our proprietary rights against unauthorized third party copying or use. Use by others of our proprietary rights could materially harm our business.

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 countries with large populations and propensities for adopting new technologies. However, many of these targeted 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 are active 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.

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 damages or remedies.

In the course of our business, we occasionally receive consumer protection claims, general commercial claims related to the conduct of our business and the performance of our products and services and other litigation claims. Any litigation regarding these consumer, commercial and other claims 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 consumer, commercial 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.

For information concerning pending matters, see “Legal Proceedings” in Item 1 of Part II of this Form 10-Q.

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:

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• 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;

• potentially negative consequences from changes in tax laws;

• 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 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 results of operations and business growth could be harmed.

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

We have announced the proposed Handspring merger and we have made acquisitions in the past, notably ThinAirApps, Inc., certain assets of Be Incorporated, peanutpress.com, Inc., WeSync.com, Inc., AnyDay.com, Inc. and Actual Software Corporation. We will continue to evaluate other acquisition opportunities that could provide us with additional product or service offerings or additional industry expertise as they arise. Acquisitions could result in difficulties assimilating acquired operations and products, and result in the diversion of capital and management’s attention away from other business issues and opportunities. Integration of acquired companies may result in problems related to integration of technology and management teams. We may not successfully integrate operations, personnel or products that we have acquired or may acquire in the future. If we fail to successfully integrate acquisitions, our business could be materially harmed. In addition, our acquisitions may not be successful in achieving our desired strategic objectives, which would also cause our business to suffer. These transactions may result in the diversion of capital and management’s attention away from other business issues and opportunities. 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 position.

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

We currently believe that our existing cash and cash equivalents will be sufficient to satisfy our anticipated cash requirements for the next twelve 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 and financial condition. In addition, if funds are available, the result of our issuing equity securities could dilute the value of shares of our common stock and cause the market price to fall and the result of issuing debt securities could be restrictive covenants which could impair our ability to engage in certain business transactions.

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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 to 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. While we currently have no immediate plans to sell this property, 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.

Business interruptions could adversely affect our business.

Our operations and those of our suppliers and customers are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure, terrorist attacks, wars, health epidemics and other events beyond our control. In addition, the business interruption insurance we carry may not be sufficient to compensate us fully for losses or damages that may occur as a result of such events. Any such losses or damages incurred by us could have a material adverse effect on our business.

War, 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 revenues and results of operations.

Recently enacted and proposed changes in securities laws and regulations are likely to increase our costs.

The Sarbanes-Oxley Act of 2002 along with other recent and proposed rules from the SEC and Nasdaq require changes in our corporate governance, public disclosure and compliance practices. Many of these new requirements will 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 requires stockholder approval. 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.

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 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.

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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.

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 thereof 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. These available-for-sale securities are subject to interest rate risk and will fall in value if market interest rates increase. The primary objective of our investment activities is to maintain the safety of principal and preserve liquidity while maximizing yields without significantly increasing risk. This is accomplished by investing in marketable investment grade securities and by limiting exposure to any one issue or issuer. We do not use derivative financial instruments in our investment portfolio, and due to the nature of our investments, primarily debt securities with maturities of less than 90 days, an immediate and uniform increase in market interest rates by 10 percent from levels at August 31, 2003 would cause an immaterial decline in the fair value of our investment portfolio. We would not expect our operating results or cash flows to be affected to any significant degree by a sudden change in market interest rates.

Foreign Currency Exchange Risk

We denominate our sales to certain European customers in the Euro and in Pounds Sterling. 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. The net of gains and losses from these contracts and the revaluation of the foreign denominated assets and liabilities was a gain (loss) of $0.2 million and $(0.6) million for the three months ended August 31, 2003 and 2002, respectively, and is included in interest and other income (expense) in our condensed consolidated statements of operations. 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

We have investments in public and private companies valued at approximately $2.0 million as of August 31, 2003. Investments in publicly traded companies are subject to market price volatility, and investments in privately held

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companies are illiquid and inherently risky, as their technologies or products are typically in the early stages of development and may never materialize. We could experience declines in the value of our investments or even lose the entire value of these investments.

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 quarterly 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 quarterly 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 recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

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 period covered by this report 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

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 set forth below and is vigorously contesting these matters. Palm is not currently able to estimate, with reasonable certainty, the possible loss, or range of loss, if any, from the cases listed below, but an unfavorable resolution of these lawsuits could materially adversely affect Palm’s business, results of operations or financial condition.

On April 28, 1997, Xerox Corporation filed suit in the United States District Court for the Western District of New York. The case came to be captioned Xerox Corporation v. 3Com Corporation, U.S. Robotics Corporation, U.S. Robotics Access Corp., and Palm Computing, Inc., Civil Action No. 97-CV-6182T. The complaint alleged willful infringement of U.S. Patent No. 5,596,656, entitled “Unistrokes for Computerized Interpretation of Handwriting.” The complaint sought 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 using Palm’s operating systems. 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 is valid, enforceable and infringed. The defendants filed a Notice of Appeal on December 21, 2001. On February 22, 2002, the court denied a request for an injunction sought by Xerox to prohibit the manufacture or sale of products using the Graffiti handwriting recognition system. The court also rejected a request by Xerox to set a trial date to determine damages Xerox claims it is owed. In connection with the denial of Xerox’s request to set a trial date on damages, the court required Palm to post a $50.0 million bond, which was satisfied with a letter of credit from a financial institution. A Notice of Appeal from the District Court’s order of February 22, 2002 was filed by Palm on March 15, 2002. A cross-appeal from the District Court’s order of February 22, 2002 was filed by Xerox on March 4, 2002. A hearing on the appeal and cross-appeal was held on January 6, 2003 before the CAFC. The CAFC has remanded the case to the District Court for a determination on the issue of invalidity of the ‘656 patent. Xerox petitioned the CAFC for reconsideration of its determination on the appeal and cross-appeal, but the CAFC has denied this petition and eliminated the requirement for the $50 million bond from Palm. If Palm is not successful regarding the remand to the District Court, the CAFC has noted that an injunction will apply. If an injunction is sought by Xerox and issued, it could result in business interruption for Palm that would have a significant adverse impact on Palm’s operations and financial condition if Palm has not transitioned to a handwriting recognition system outside the scope of

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Xerox’s asserted claims. In addition, if Palm is not successful with regard to this remand to the District Court, Xerox has stated in its court pleadings that it will seek at a trial, a significant compensatory and punitive damage award or license fees from Palm. Furthermore, if Palm is not successful with regard to this remand to the District Court, Palm might be liable to Palm’s licensees and other third parties under contractual obligations or otherwise sustain adverse financial impact if Xerox seeks to enforce its patents claims against Palm’s licensees and other third parties. In connection with Palm’s separation from 3Com, pursuant to the terms of the Indemnification and Insurance Matters Agreement between 3Com and Palm, Palm may be required to indemnify and hold 3Com harmless for any damages or losses which may arise out of the Xerox litigation.

On February 28, 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 is now captioned E-Pass Technologies, Inc. v. 3Com Corporation, a/k/a 3Com, Inc. and Palm, Inc., Civil Action No. 00 CIV 1523. 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.” The complaint seeks unspecified compensatory and treble damages and to permanently enjoin the defendants from infringing the patent in the future. The case was transferred to the United States District Court for the Northern District of California. In an Order dated August 12, 2002, the Court granted Palm’s motion for summary judgment that there was no infringement. E-Pass appealed the Court’s decision to the CAFC. The issues on appeal before the CAFC have been fully briefed and argued by the parties. On August 21, 2003, the CAFC issued a ruling reversing the claim construction of the District Court and the attendant summary judgment motion and remanded the case to the District Court for further proceedings. In connection with Palm’s separation from 3Com, pursuant to the terms of the Indemnification and Insurance Matters Agreement between 3Com and Palm, Palm may be required to indemnify and hold 3Com harmless for any damages or losses which may arise out of the E-Pass litigation.

On March 14, 2001, NCR Corporation filed suit against Palm and Handspring, Inc. in the United States District Court for the District of Delaware. The case is captioned NCR Corporation v. Palm, Inc. and Handspring, Inc., Civil Action No. 01-169. The complaint alleges infringement of U.S. Patent Nos. 4,634,845 and 4,689,478, entitled, respectively, “Portable Personal Terminal for Use in a System for Handling Transactions” and “System for Handling Transactions Including a Portable Personal Terminal.” The complaint seeks unspecified compensatory and treble damages and to permanently enjoin the defendants from infringing the patents in the future. The case was referred to Magistrate Judge Mary P. Thynge. In a Memorandum Opinion dated July 11, 2002, the Magistrate Judge indicated that she would recommend that the District Court grant the defendants’ motion for summary judgment that there was no infringement. NCR filed objections to the recommendations of the Magistrate Judge, and Palm has filed a response to NCR’s objections. On August 28, 2003, the District Court granted Palm’s motion for summary judgment, ruling that Palm products do not infringe the NCR patents, and denied NCR’s motion.

On January 23, 2003, Peer-to-Peer Systems LLC filed a complaint against Palm in the United States District Court for the District of Delaware. The case is captioned Peer-to-Peer Systems, LLC vs. Palm, Inc., Civil Action No. 03-115. The complaint alleges infringement of U.S. Patent No. 5,618,045 entitled “Interactive Multiple Player Game System and Method of Playing a Game Between at Least Two Players”. The complaint seeks unspecified compensatory and treble damages and to permanently enjoin the defendant from infringing the patent in the future. Palm believes that the claims are without merit and intends to defend against them vigorously. The parties have begun the discovery process.

In June 2001, the first of several putative stockholder class action lawsuits was filed in United States District Court, 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. Other actions have been filed making similar allegations regarding the initial public offerings of more than 300 other companies. All of these various consolidated cases have been coordinated for pretrial purposes as In re Initial Public Offering Securities Litigation, Civil Action No. 21-MC-92. 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 has denied Palm’s motion to dismiss. A special committee of Palm’s Board of Directors recently approved a tentative settlement proposal from plaintiffs, which

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includes a guaranteed recovery to be paid by the issuer defendants’ insurance carriers and an assignment of certain claims the issuers, including Palm, 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 court approval. Palm believes that it has meritorious defenses to the claims against it and intends to defend the action vigorously if the case does not settle.

On August 7, 2001, a purported consumer class action lawsuit was filed against Palm and 3Com in California Superior Court, San Francisco County. The case is captioned Connelly et al v. Palm, Inc., 3 Com Corp et al, Case No. 323587. An amended complaint alleging breach of warranty and violation of California’s Unfair Competition Law was filed and served on Palm on August 15, 2001. The amended complaint, filed on behalf of purchasers of Palm III, IIIc, V and Vx handhelds, alleges that certain Palm handhelds may cause damage to PC motherboards by permitting an electrical charge, or “floating voltage,” from either the handheld or the cradle to be introduced into the PC via the serial and/or USB port on the PC. The plaintiffs allege that this damage is the result of a design defect in one or more of the following: HotSync software, handheld, cradle and/or the connection cable. The complaint seeks restitution, rescission, damages, an injunction mandating corrective measures to protect against future damage as well as notifying users of potential harm. Discovery is closed. The parties engaged in mediation and have reached an agreement in principle to settle the action, subject to acceptable documentation and court approval. In connection with Palm’s separation from 3Com, pursuant to the terms of the Indemnification and Insurance Matters Agreement between 3Com and Palm, Palm may be required to indemnify and hold 3Com harmless for any damages or losses which may arise out of the Connelly litigation.

On January 23, 2002, a purported consumer class action lawsuit was filed against Palm in California Superior Court, San Francisco County. The case is captioned Eley et al v. Palm, Inc., Case No. 403768. The unverified complaint, filed on behalf of purchasers of Palm m500 and m505 handhelds, alleges (1) that the HotSync function in certain Palm handhelds does not perform as advertised and the products are therefore defective and (2) that upon learning of the problem, Palm did not perform proper corrective measures for individual customers as set forth in the product warranty. The complaint alleges Palm’s actions are a violation of California’s Unfair Competition Law and a breach of express warranty. The complaint seeks alternative relief including an injunction to have Palm desist from selling and advertising the handhelds, to recall the defective handhelds, to restore the units to their advertised functionality, to pay restitution or disgorgement of the purchase price of the units and/or damages and attorneys’ fees. Palm filed its answer denying the allegations and the parties engaged in document and deposition discovery. Plaintiff and Palm engaged in mediation and have reached an agreement in principle to settle the action, subject to acceptable documentation and court approval. No trial date has been set.

On March 11, 2002, a purported consumer class action lawsuit was filed against Palm in the Wayne County Circuit Court, Detroit, Michigan. The case is captioned Hayman, et al. v Palm, Inc., Case No. 02-208249-CP. Plaintiffs allege that certain of Palm’s advertisements for its Palm III, V and m100 handheld devices were false or misleading regarding the ability of the device to wirelessly and remotely access emails or the Internet without the need for additional hardware or software sold separately. Plaintiffs allege violations of the Michigan Consumer Protection Act, breach of express and implied warranties and Michigan common law, and seek to recover the purchase price of the device from Palm for themselves and a class of all similarly situated consumers. Palm has filed a motion to dismiss the lawsuit in its entirety. The Court has heard arguments on that motion, and it has advised that it would rule on Palm’s motion to dismiss before considering the suitability of this lawsuit for class treatment.

In October 2002, a purported consumer class action lawsuit was filed against Palm in Illinois Circuit Court, Cook County. The case is captioned Goldstein v. Palm, Inc., Case No. 02CH19678. The case alleges consumer fraud regarding Palm’s representations that its m100, III, V, and VII handheld personal digital assistant, as sold, would provide wireless access to the Internet and email accounts, and would perform common business functions including data base management, custom form creation and viewing Microsoft Word and Excel documents, among other tasks. The case seeks unspecified actual damages and indemnification of certain costs. In September 2003, the Court granted Palm’s motion to dismiss the complaint, but allowed the plaintiff the opportunity to amend and refile.

In August and September 2002, four purported consumer class action lawsuits were filed against Palm in California Superior Court, Santa Clara County; California Superior Court, San Diego County; Illinois Circuit Court, Cook County; and Illinois Circuit Court, St. Clair County. The respective cases are captioned Lipner and Ouyang v. Palm, Inc., Case No. CV-810533; Veltman v. Palm, Inc., Case No. 02CH16143; Wireless Consumer’s Alliance, Inc. v. Palm, Inc., Case No. GIC-794940; and Cokenour v. Palm, Inc., Case No. 02L0592. All four cases allege consumer fraud regarding Palm’s representations that its m130 handheld personal digital assistant supported more than 65,000

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colors. Certain of the cases also allege breach of express warranty and unfair competition. In general, the cases seek unspecified damages and/or to enjoin Palm from continuing it’s allegedly misleading advertising. The parties have tentatively agreed to a settlement in principle, subject to acceptable documentation and court approval.

On February 27, 2003, a purported consumer class action lawsuit was filed against Palm in California Superior Court, Santa Clara County. The case is captioned Hemmingsen et al v. Palm, Inc., Case No. CV815074. The unverified complaint, filed on behalf of purchasers of Palm m515 handhelds, alleges that such handhelds fail at unacceptably high rates, and in particular that instant updating and synchronization of data with PCs often will not occur. The complaint further alleges that, upon learning of the problem, Palm did not perform proper corrective measures for individual customers as set forth in the product warranty, among other things. The complaint alleges that Palm’s actions violate California’s Unfair Competition Law and constitute a breach of warranty. The complaint seeks restitution, disgorgement, damages, an injunction mandating corrective measures including a full replacement program for all allegedly defective m515s or, alternatively mandating a refund to all purported class members of the full purchase price for their m515s, and attorneys’ fees. The parties have begun the discovery process.

On or about June 17 and 19, 2003, respectively, two putative class action lawsuits were filed in the Court of Chancery in the State of Delaware in and for the County of New Castle against Palm, Handspring and various officers and directors of Handspring. The cases are captioned Goldhirsch v. Handspring, Inc., et. al, Civil Action No. 20376-NC and Majarian v. Handspring, Inc., et. al, Civil Action No. 20381-NC. The Majarian complaint was amended on or about June 23, 2003 to, among other things, delete certain previously named officer defendants. Both complaints allege that the officers and directors of Handspring breached their fiduciary duties to Handspring stockholders by, among other things, failing to undertake an appropriate evaluation of Handspring’s net worth as a merger or acquisition candidate and failing to maximize Handspring stockholder value by not engaging in a meaningful auction of Handspring. The Majarian complaint also alleges, among other things, that the officers and directors of Handspring breached their fiduciary duties by failing to act independently so that the interests of Handspring’s public stockholders would be protected and enhanced. Both complaints allege that Palm aided and abetted the alleged breaches of fiduciary duty of Handspring’s officers and directors. Both complaints seek, among other things, a preliminary and permanent injunction against the transaction, a recission of the transaction if it is consummated and unspecified damages. The Goldhirsch complaint also requests, among other things, that the Court order Handspring’s officers and directors to take all necessary steps to maximize stockholder value, including open bidding and/or a market check. Palm believes that the lawsuits are without merit and intends to vigorously defend the cases.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits.

Exhibit Number	Description
2.1(1)	Agreement and Plan of Reorganization between the registrant, Peace Separation Corporation, Harmony Acquisition Corporation and Handspring, Inc., dated June 4, 2003.
2.2(2)	Master Separation and Distribution Agreement between 3Com and the registrant effective as of December 13, 1999, as amended.
2.3(3)	Assignment and Assumption Agreement between 3Com and registrant, as amended.
2.4(3)	Master Technology Ownership and License Agreement between 3Com and the registrant.
2.5(3)	Master Patent Ownership and License Agreement between 3Com and the registrant.
2.6(3)	Master Trademark Ownership and License Agreement between 3Com and the registrant.
2.7(3)	Employee Matters Agreement between 3Com and the registrant.
2.8(3)	Tax Sharing Agreement between 3Com and the registrant.
2.9(3)	Master Transitional Services Agreement between 3Com and the registrant.
2.10(3)	Real Estate Matters Agreement between 3Com and the registrant.
2.11(3)	Master Confidential Disclosure Agreement between 3Com and the registrant.
2.12(3)	Indemnification and Insurance Matters Agreement between 3Com and the registrant.
2.13(2)	Form of Non-U.S. Plan.
2.14(1)	Amended and Restated Master Separation Agreement between the registrant and PalmSource, Inc.
2.15(1)	General Assignment and Assumption Agreement between the registrant and PalmSource, Inc.

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2.16(1)	Amendment No. 1 to General Assignment and Assumption Agreement between the registrant and PalmSource, Inc.
2.17(1)	Amended and Restated Indemnification and Insurance Matters Agreement between the registrant and PalmSource, Inc.
2.18(1)	Amended and Restated Software License Agreement between the registrant and PalmSource, Inc.
2.19(1)	Amendment No. 1 to Amended and Restated Software License Agreement between the registrant and PalmSource, Inc.
2.20(1)	Amendment No. 2 to Amended and Restated Software License Agreement between the registrant and PalmSource, Inc.
2.21(1)	Elaine Software License and Software and Services Agreement between the registrant and PalmSource, Inc.
2.22(1)	SDIO License Agreement between the registrant and PalmSource, Inc.
2.23(1)	Development Agreement between the registrant and PalmSource, Inc.
2.24(1)	Amended and Restated Tax Sharing Agreement between the registrant and PalmSource, Inc.
2.25(1)	Amended and Restated Intercompany Loan Agreement between the registrant and PalmSource Holding Company.
2.26(1)	Assignment and Assumption Agreement for the Amended and Restated Intercompany Loan Agreement between the registrant and PalmSource Holding Company and PalmSource, Inc.
2.27(1)	Master Technology Ownership and License Agreement between the registrant and PalmSource, Inc.
2.28(1)	Amendment No. 1 to Master Technology Ownership and License Agreement between the registrant and PalmSource, Inc.
2.29(1)	Master Confidential Disclosure Agreement between the registrant and PalmSource, Inc.
2.30(1)	Amendment No. 1 to Master Confidential Disclosure Agreement between the registrant and PalmSource, Inc.
2.31(1)	Master Patent Ownership and License Agreement between the registrant and PalmSource, Inc.
2.32(1)	Strategic Collaboration Agreement between the registrant and PalmSource, Inc.
2.33(1)	Amendment No. 1 to Strategic Collaboration Agreement between the registrant and PalmSource, Inc.
2.34(4)	Xerox Litigation Agreement between the registrant and PalmSource, Inc., as amended.
2.35(1)	Employee Matters Agreement between the registrant and PalmSource, Inc.
2.36(1)	Letter Agreement Regarding Cash Contributions between the registrant and PalmSource, Inc.
2.37(1)	Business Services Agreement between the registrant and PalmSource, Inc.
2.38(1)	Amended and Restated Operating Agreement of Palm Trademark Holding Company, LLC.
2.39(1)	Amended and Restated Trademark License Agreement between the registrant and Palm Trademark Holding Company, LLC.
2.40(1)	Loan Agreement between the registrant and Handspring, Inc., dated as of June 4, 2003.
3.1(5)	Amended and Restated Certificate of Incorporation.
3.2(6)	Amended and Restated Bylaws.
3.3(7)	Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock.
4.1	Reference is made to Exhibits 3.1, 3.2 and 3.3 hereof.
4.2(8)	Specimen Stock Certificate.
4.3(7)	Preferred Stock Rights Agreement between the registrant and EquiServe Trust Company, N.A. (formerly Fleet National Bank).
4.4(9)	5% Convertible Subordinated Note Due 2006, dated as of December 6, 2001.
4.5(4)	Letter Agreement regarding $50,000,000 5% Convertible Subordinated Note between the registrant and Texas Instruments Incorporated.
10.1(10)	1999 Stock Plan, as amended.
10.2(2)	Form of 1999 Stock Plan Agreements.
10.3(11)	1999 Employee Stock Purchase Plan.
10.4(2)	Form of 1999 Employee Stock Purchase Plan Agreements.
10.5(12)	Amended and Restated 1999 Director Option Plan.
10.6(2)	Form of 1999 Director Option Plan Agreements.
10.7(2)	Form of Indemnification Agreement entered into by the registrant with each of its directors and executive officers.
10.8(2)**	RAM Mobile Data USA Limited Partnership Value Added Reseller Agreement between RAM Mobile Data USA Limited Partnership (now Cingular Wireless) and the registrant.
10.9(2)**	Supply Agreement between Manufacturers’ Services Salt Lake City Operations, Inc. and the registrant.

55

10.10(2)	Common Stock Purchase Agreement between America Online (now AOL Time Warner) and the registrant.
10.11(2)	Common Stock Purchase Agreement between Motorola and the registrant.
10.12(2)	Common Stock Purchase Agreement Between Nokia and the registrant.
10.13(2)	Form of Management Retention Agreement.
10.14(13)**	First Amendment to Supply Agreement between Manufacturers’ Services Salt Lake City Operations, Inc. and the registrant.
10.15(5)	Employment Offer Letter for David C. Nagel dated September 13, 2001.
10.16(9)**	Agreement and General Release of All Claims between the registrant and Carl J. Yankowski dated as of November 8, 2001.
10.17(9)**	Convertible Note Purchase Agreement dated December 6, 2001.
10.18(9)	Registration Rights Agreement dated as of December 6, 2001.
10.19(9)**	Amendment Number Two to Loan Agreement by and among the registrant, Foothill Capital Corporation, Heller Financial, Inc. and The CIT Group/Business Credit, Inc. dated as of November 30, 2001.
10.20(9)**	Loan Agreement by and among Palm Europe Limited, Foothill Capital Corporation, Heller Financial, Inc. and The CIT Group/Business Credit, Inc. dated as of November 30, 2001.
10.21(14)**	Guarantee and Debenture by and between Palm Europe Limited and Foothill Capital Corporation dated as of November 30, 2001.
10.22(14)	General Continuing Guaranty by the registrant in favor of Foothill Capital Corporation, Heller Financial, Inc. and The CIT Group/Business Credit, Inc. dated as of November 30, 2001.
10.23(14)	Share Charge by and between Palm Ireland Investment and Foothill Capital Corporation dated as of November 30, 2001.
10.24(9)**	Loan Agreement by and among Palm Global Operations Ltd., Foothill Capital Corporation, Heller Financial, Inc., and The CIT Group/Business Credit, Inc. dated as of November 30, 2001.
10.25(14)	Guarantee and Debenture by and between Palm Global Operations Limited and Foothill Capital Corporation dated as of January 7, 2002.
10.26(14)	General Continuing Guaranty by the registrant in favor of Foothill Capital Corporation, Heller Financial, Inc. and The CIT Group/Business Credit, Inc. dated as of November 30, 2001.
10.27(14)	Share Charge by and between Palm Ireland Investment and Foothill Capital Corporation dated as of November 30, 2001.
10.28(15)**	Amendment Number One to Value Added Reseller 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.
10.29(16)**	Sublease Agreement by and between Cisco Systems Inc. and the registrant.
10.30(16)	Lease Agreement between Network Appliance, Inc. and PalmSource, Inc.
10.31(16)	Amendment No. 1 to Lease Agreement and Work Letter Agreement.
10.32(5)	Amendment Number Three to Loan Agreement by and among the registrant, Foothill Capital Corporation, Heller Financial, Inc. and The CIT Group/Business Credit, Inc. dated as of March 22, 2002.
10.33(5)	Amendment Number Four to Loan Agreement by and among the registrant, Foothill Capital Corporation, Heller Financial, Inc. and The CIT Group/Business Credit, Inc. dated as of June 7, 2002.
10.34(5)	Management Retention Agreement by and between the registrant and R. Todd Bradley dated as of September 17, 2002.
10.35(5)	Form of Severance Agreement for Executive Officers.
10.36(5)	Management Retention Agreement between the registrant and Marianne Jackson dated as of February 12, 2002.
10.37(11)	2001 Stock Option Plan for Non-Employee Directors, as amended.
10.38(8)	Management Retention Agreement between the registrant and Judy Bruner dated as of March 17, 2000.
10.39†	Loan and Security Agreement between the registrant and Silicon Valley Bank.
10.40	Severance Agreement between the registrant and Marianne Jackson dated as of September 18, 2003.
31.1	Certification of Chief Executive Officer under Rule 13a-14(a).
31.2	Certification of Chief Financial Officer under Rule 13a-14(a).
32.1	Certification of Chief Executive Officer and Chief Financial Officer under Rule 13a-14(b).

56

(1) Incorporated by reference from the Registrant’s Registration Statement on Form S-4 (No. 333-106829) filed with the Commission on July 3, 2003, as amended.

(2) Incorporated by reference from the Registrant’s Registration Statement on Form S-1 (No. 333-92657) filed with the Commission on December 13, 1999, as amended.

(3) Incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q filed with the Commission on April 10, 2000.

(4) Incorporated by reference from the Registrant’s Annual Report on Form 10-K/A filed with the Commission on September 26, 2003.

(5) Incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q filed with Commission on October 11, 2002.

(6) Incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q filed with the Commission on October 15, 2001, as amended.

(7) Incorporated by reference from the Registrant’s Current Report on Form 8-K filed with the Commission on November 22, 2000.

(8) Incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q filed with the Commission on April 14, 2003.

(9) Incorporated by reference from the Registrant’s Form 10-Q/A filed with the Commission on April 17, 2002.

(10) Incorporated by reference from the Registrant’s Registration Statement on Form S-8 (No. 333-109302) filed with the Commission on September 30, 2003.

(11) Incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q filed with the Commission on January 10, 2003.

(12) Incorporated by reference from the Registration Statement on Form S-8 filed with the Commission on October 2, 2000.

(13) Incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q filed with the Commission on April 11, 2001.

(14) Incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q filed with the Commission on January 14, 2002, as amended.

(15) Incorporated by reference from the Registrant’s Form 10-Q/A filed with the Commission on February 26, 2002.

(16) Incorporated by reference from the Registrant’s Annual Report on Form 10-K filed with the Commission on July 30, 2002.

** Confidential treatment granted on portions of this exhibit.

† Confidential treatment requested on portions of this exhibit. Unredacted versions of this exhibit have been filed separately with the Commission.

(b) Reports on Form 8-K

(1) On June 6, 2003, Palm filed a Current Report on Form 8-K reporting under Item 5 of Form 8-K that on June 4, 2003 Palm had entered into an Agreement and Plan of Reorganization dated as of June 4, 2003 by and among Palm, Peace Separation Corporation, a direct wholly-owned subsidiary of Palm, Harmony Acquisition Corporation, a direct wholly-owned subsidiary of Palm, and Handspring, Inc.

(2) On June 24, 2003, Palm furnished a Current Report on Form 8-K reporting under Item 9 of Form 8-K that on June 24, 2003, Palm was issuing a press release and holding a conference call regarding its financial results for the fourth quarter of fiscal 2003.

57

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: October 10, 2003	By:	/s/ JUDY BRUNER
		Judy Bruner Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

58

Exhibit Number	Description
2.1(1)	Agreement and Plan of Reorganization between the registrant, Peace Separation Corporation, Harmony Acquisition Corporation and Handspring, Inc., dated June 4, 2003.
2.2(2)	Master Separation and Distribution Agreement between 3Com and the registrant effective as of December 13, 1999, as amended.
2.3(3)	Assignment and Assumption Agreement between 3Com and registrant, as amended.
2.4(3)	Master Technology Ownership and License Agreement between 3Com and the registrant.
2.5(3)	Master Patent Ownership and License Agreement between 3Com and the registrant.
2.6(3)	Master Trademark Ownership and License Agreement between 3Com and the registrant.
2.7(3)	Employee Matters Agreement between 3Com and the registrant.
2.8(3)	Tax Sharing Agreement between 3Com and the registrant.
2.9(3)	Master Transitional Services Agreement between 3Com and the registrant.
2.10(3)	Real Estate Matters Agreement between 3Com and the registrant.
2.11(3)	Master Confidential Disclosure Agreement between 3Com and the registrant.
2.12(3)	Indemnification and Insurance Matters Agreement between 3Com and the registrant.
2.13(2)	Form of Non-U.S. Plan.
2.14(1)	Amended and Restated Master Separation Agreement between the registrant and PalmSource, Inc.
2.15(1)	General Assignment and Assumption Agreement between the registrant and PalmSource, Inc.
2.16(1)	Amendment No. 1 to General Assignment and Assumption Agreement between the registrant and PalmSource, Inc.
2.17(1)	Amended and Restated Indemnification and Insurance Matters Agreement between the registrant and PalmSource, Inc.
2.18(1)	Amended and Restated Software License Agreement between the registrant and PalmSource, Inc.
2.19(1)	Amendment No. 1 to Amended and Restated Software License Agreement between the registrant and PalmSource, Inc.
2.20(1)	Amendment No. 2 to Amended and Restated Software License Agreement between the registrant and PalmSource, Inc.
2.21(1)	Elaine Software License and Software and Services Agreement between the registrant and PalmSource, Inc.
2.22(1)	SDIO License Agreement between the registrant and PalmSource, Inc.
2.23(1)	Development Agreement between the registrant and PalmSource, Inc.
2.24(1)	Amended and Restated Tax Sharing Agreement between the registrant and PalmSource, Inc.
2.25(1)	Amended and Restated Intercompany Loan Agreement between the registrant and PalmSource Holding Company.
2.26(1)	Assignment and Assumption Agreement for the Amended and Restated Intercompany Loan Agreement between the registrant and PalmSource Holding Company and PalmSource, Inc.
2.27(1)	Master Technology Ownership and License Agreement between the registrant and PalmSource, Inc.
2.28(1)	Amendment No. 1 to Master Technology Ownership and License Agreement between the registrant and PalmSource, Inc.
2.29(1)	Master Confidential Disclosure Agreement between the registrant and PalmSource, Inc.
2.30(1)	Amendment No. 1 to Master Confidential Disclosure Agreement between the registrant and PalmSource, Inc.
2.31(1)	Master Patent Ownership and License Agreement between the registrant and PalmSource, Inc.
2.32(1)	Strategic Collaboration Agreement between the registrant and PalmSource, Inc.
2.33(1)	Amendment No. 1 to Strategic Collaboration Agreement between the registrant and PalmSource, Inc.
2.34(4)	Xerox Litigation Agreement between the registrant and PalmSource, Inc., as amended.
2.35(1)	Employee Matters Agreement between the registrant and PalmSource, Inc.
2.36(1)	Letter Agreement Regarding Cash Contributions between the registrant and PalmSource, Inc.
2.37(1)	Business Services Agreement between the registrant and PalmSource, Inc.
2.38(1)	Amended and Restated Operating Agreement of Palm Trademark Holding Company, LLC.
2.39(1)	Amended and Restated Trademark License Agreement between the registrant and Palm Trademark Holding Company, LLC.
2.40(1)	Loan Agreement between the registrant and Handspring, Inc., dated as of June 4, 2003.
3.1(5)	Amended and Restated Certificate of Incorporation.
3.2(6)	Amended and Restated Bylaws.
3.3(7)	Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred

59

	Stock.
4.1	Reference is made to Exhibits 3.1, 3.2 and 3.3 hereof.
4.2(8)	Specimen Stock Certificate.
4.3(7)	Preferred Stock Rights Agreement between the registrant and EquiServe Trust Company, N.A. (formerly Fleet National Bank).
4.4(9)	5% Convertible Subordinated Note Due 2006, dated as of December 6, 2001.
4.5(4)	Letter Agreement regarding $50,000,000 5% Convertible Subordinated Note between the registrant and Texas Instruments Incorporated.
10.1(10)	1999 Stock Plan, as amended.
10.2(2)	Form of 1999 Stock Plan Agreements.
10.3(11)	1999 Employee Stock Purchase Plan.
10.4(2)	Form of 1999 Employee Stock Purchase Plan Agreements.
10.5(12)	Amended and Restated 1999 Director Option Plan.
10.6(2)	Form of 1999 Director Option Plan Agreements.
10.7(2)	Form of Indemnification Agreement entered into by the registrant with each of its directors and executive officers.
10.8(2)**	RAM Mobile Data USA Limited Partnership Value Added Reseller Agreement between RAM Mobile Data USA Limited Partnership (now Cingular Wireless) and the registrant.
10.9(2)**	Supply Agreement between Manufacturers’ Services Salt Lake City Operations, Inc. and the registrant.
10.10(2)	Common Stock Purchase Agreement between America Online (now AOL Time Warner) and the registrant.
10.11(2)	Common Stock Purchase Agreement between Motorola and the registrant.
10.12(2)	Common Stock Purchase Agreement Between Nokia and the registrant.
10.13(2)	Form of Management Retention Agreement.
10.14(13)**	First Amendment to Supply Agreement between Manufacturers’ Services Salt Lake City Operations, Inc. and the registrant.
10.15(5)	Employment Offer Letter for David C. Nagel dated September 13, 2001.
10.16(9)**	Agreement and General Release of All Claims between the registrant and Carl J. Yankowski dated as of November 8, 2001.
10.17(9)**	Convertible Note Purchase Agreement dated December 6, 2001.
10.18(9)	Registration Rights Agreement dated as of December 6, 2001.
10.19(9)**	Amendment Number Two to Loan Agreement by and among the registrant, Foothill Capital Corporation, Heller Financial, Inc. and The CIT Group/Business Credit, Inc. dated as of November 30, 2001.
10.20(9)**	Loan Agreement by and among Palm Europe Limited, Foothill Capital Corporation, Heller Financial, Inc. and The CIT Group/Business Credit, Inc. dated as of November 30, 2001.
10.21(14)**	Guarantee and Debenture by and between Palm Europe Limited and Foothill Capital Corporation dated as of November 30, 2001.
10.22(14)	General Continuing Guaranty by the registrant in favor of Foothill Capital Corporation, Heller Financial, Inc. and The CIT Group/Business Credit, Inc. dated as of November 30, 2001.
10.23(14)	Share Charge by and between Palm Ireland Investment and Foothill Capital Corporation dated as of November 30, 2001.
10.24(9)**	Loan Agreement by and among Palm Global Operations Ltd., Foothill Capital Corporation, Heller Financial, Inc., and The CIT Group/Business Credit, Inc. dated as of November 30, 2001.
10.25(14)	Guarantee and Debenture by and between Palm Global Operations Limited and Foothill Capital Corporation dated as of January 7, 2002.
10.26(14)	General Continuing Guaranty by the registrant in favor of Foothill Capital Corporation, Heller Financial, Inc. and The CIT Group/Business Credit, Inc. dated as of November 30, 2001.
10.27(14)	Share Charge by and between Palm Ireland Investment and Foothill Capital Corporation dated as of November 30, 2001.
10.28(15)**	Amendment Number One to Value Added Reseller 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.
10.29(16)**	Sublease Agreement by and between Cisco Systems Inc. and the registrant.
10.30(16)	Lease Agreement between Network Appliance, Inc. and PalmSource, Inc.
10.31(16)	Amendment No. 1 to Lease Agreement and Work Letter Agreement.
10.32(5)	Amendment Number Three to Loan Agreement by and among the registrant, Foothill Capital

60

	Corporation, Heller Financial, Inc. and The CIT Group/Business Credit, Inc. dated as of March 22, 2002.
10.33(5)	Amendment Number Four to Loan Agreement by and among the registrant, Foothill Capital Corporation, Heller Financial, Inc. and The CIT Group/Business Credit, Inc. dated as of June 7, 2002.
10.34(5)	Management Retention Agreement by and between the registrant and R. Todd Bradley dated as of September 17, 2002.
10.35(5)	Form of Severance Agreement for Executive Officers.
10.36(5)	Management Retention Agreement between the registrant and Marianne Jackson dated as of February 12, 2002.
10.37(11)	2001 Stock Option Plan for Non-Employee Directors, as amended.
10.38(8)	Management Retention Agreement between the registrant and Judy Bruner dated as of March 17, 2000.
10.39†	Loan and Security Agreement between the registrant and Silicon Valley Bank.
10.40	Severance Agreement between the registrant and Marianne Jackson dated as of September 18, 2003.
31.1	Certification of Chief Executive Officer under Rule 13a-14(a).
31.2	Certification of Chief Financial Officer under Rule 13a-14(a).
32.2	Certification of Chief Executive Officer and Chief Financial Officer under Rule 13a-14(b).

(1) Incorporated by reference from the Registrant’s Registration Statement on Form S-4 (No. 333-106829) filed with the Commission on July 3, 2003, as amended.

(2) Incorporated by reference from the Registrant’s Registration Statement on Form S-1 (No. 333-92657) filed with the Commission on December 13, 1999, as amended.

(3) Incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q filed with the Commission on April 10, 2000.

(4) Incorporated by reference from the Registrant’s Annual Report on Form 10-K/A filed with the Commission on September 26, 2003.

(5) Incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q filed with Commission on October 11, 2002.

(6) Incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q filed with the Commission on October 15, 2001, as amended.

(7) Incorporated by reference from the Registrant’s Current Report on Form 8-K filed with the Commission on November 22, 2000.

(8) Incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q filed with the Commission on April 14, 2003.

(9) Incorporated by reference from the Registrant’s Form 10-Q/A filed with the Commission on April 17, 2002.

(10) Incorporated by reference from the Registrant’s Registration Statement on Form S-8 (No. 333-109302) filed with the Commission on September 30, 2003.

(11) Incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q filed with the Commission on January 10, 2003.

(12) Incorporated by reference from the Registration Statement on Form S-8 filed with the Commission on October 2, 2000.

(13) Incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q filed with the Commission on April 11, 2001.

(14) Incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q filed with the Commission on January 14, 2002, as amended.

(15) Incorporated by reference from the Registrant’s Form 10-Q/A filed with the Commission on February 26, 2002.

(16) Incorporated by reference from the Registrant’s Annual Report on Form 10-K filed with the Commission on July 30, 2002.

** Confidential treatment granted on portions of this exhibit.

† Confidential treatment requested on portions of this exhibit. Unredacted versions of this exhibit have been filed separately with the Commission.

61

EX-10.39

Exhibit 10.39

LOAN AND SECURITY AGREEMENT

BY AND BETWEEN

PALM, INC.

AND

SILICON VALLEY BANK

AUGUST 28, 2003

[**] = Information redacted pursuant to a confidential treatment request. Such omitted information has been filed separately with the Securities and Exchange Commission.

TABLE OF CONTENTS

			PAGE
2.	LOAN AND TERMS OF PAYMENT		1
	2.1	Promise to Pay	1
	2.2	Overadvances	3
	2.3	Interest Rate, Payments	3
	2.4	Fees	3
3.	CONDITIONS OF LOANS		4
	3.1	Conditions Precedent to Initial Advance	4
	3.2	Conditions Precedent to all Advances	4
4.	CREATION OF SECURITY INTEREST		4
	4.1	Grant of Security Interest.	4
	4.2	Authorization to File; Delivery of Additional Documentation	4
5.	REPRESENTATIONS AND WARRANTIES		5
	5.1	Due Organization; Organizational Structure; Authorization	5
	5.2	Collateral	5
	5.3	Litigation	5
	5.4	No Material Adverse Change in Financial Statements	6
	5.5	Solvency	6
	5.6	Regulatory Compliance	6
	5.7	Investments	6
	5.8	Full Disclosure	6
6.	AFFIRMATIVE COVENANTS		7
	6.1	Designated Senior Indebtedness	7
	6.2	Government Compliance	7
	6.3	Financial Statements, Reports, Certificates	7
	6.4	Inventory; Returns	8
	6.5	Taxes	8
	6.6	Insurance	8
	6.7	Financial Covenant	8
	6.8	Investable Funds with Bank	8

TABLE OF CONTENTS

(CONTINUED)

			PAGE
	6.9	Registration of Intellectual Property Rights	9
	6.10	Use of Proceeds	9
	6.11	Account Control Agreements	9
	6.12	Charge on Shares	9
	6.13	Certificate of Qualification	9
	6.14	Further Assurances	9
7.	NEGATIVE COVENANTS		9
	7.1	Dispositions	9
	7.2	Changes in Business, Ownership, or Name	10
	7.3	Mergers or Acquisitions	10
	7.4	Indebtedness	10
	7.5	Encumbrance	10
	7.6	Distributions; Investments	10
	7.7	Transactions with Affiliates	11
	7.8	Subordinated Debt	11
	7.9	Compliance	11
8.	EVENTS OF DEFAULT		11
	8.1	Payment Default	11
	8.2	Covenant Default	11
	8.3	Intentionally Omitted	12
	8.4	Attachment	12
	8.5	Insolvency	12
	8.6	Other Agreements	12
	8.7	Judgments	13
	8.8	Misrepresentations	13
	8.9	Guaranty	13
9.	BANK’S RIGHTS AND REMEDIES		13
	9.1	Rights and Remedies	13
	9.2	Power of Attorney	14
	9.3	Accounts Collection	14

ii.

TABLE OF CONTENTS

(CONTINUED)

			PAGE
	9.4	Bank Expenses	14
	9.5	Bank’s Liability for Collateral	14
	9.6	Remedies Cumulative	15
	9.7	Notices of Control	15
	9.8	Demand Waiver	15
10.	NOTICES		15
11.	CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER		15
12.	GENERAL PROVISIONS		16
	12.1	Successors and Assigns	16
	12.2	Indemnification	16
	12.3	Time of Essence	16
	12.4	Severability of Provision	16
	12.5	Amendments in Writing; Integration	16
	12.6	Counterparts	17
	12.7	Survival	17
	12.8	Confidentiality	17
	12.9	Attorneys’ Fees, Costs and Expenses	17
13.	DEFINITIONS		17

iii.

THIS LOAN AND SECURITY AGREEMENT, dated as of August 28, 2003, is by and between SILICON VALLEY BANK (“Bank”), whose address is 3003 Tasman Drive, Santa Clara, California, 95054, and PALM, INC. (“Borrower”), whose address is 400 North McCarthy Blvd., Milpitas, California, 94035, and provides the terms on which Bank will lend to Borrower and Borrower will repay Bank. The parties hereto agree as follows:

1. DEFINITIONS; ACCOUNTING AND OTHER TERMS

Capitalized terms used herein shall have the meanings given to such terms in Section 13 of this Agreement and in Appendix A hereto. Accounting terms not defined in this Agreement will be construed following GAAP. Calculations and determinations must be made following GAAP. The term “financial statements” includes the notes and schedules thereto. The terms “including” and “includes” always mean “including (or includes) without limitation,” in this or any Loan Document.

2. LOAN AND TERMS OF PAYMENT

2.1 Promise to Pay.

Borrower promises to pay Bank the unpaid principal amount of all Advances and interest on the unpaid principal amount of the Advances.

2.1.1 Advances.

(a) Bank will make Advances not exceeding the Committed Revolving Line minus (i) the outstanding principal balance of the Advances minus (ii) the amount of all outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit) minus (iii) the FX Reserve and minus (iv) all amounts for services utilized for Cash Management Services. Amounts borrowed hereunder that remain available for borrowing under this Agreement may be repaid and reborrowed prior to the Maturity Date.

(b) To obtain an Advance, Borrower must notify Bank pursuant to the terms of Section 1 of Appendix A. Borrower must promptly confirm the notification by delivering to Bank a Loan Payment/Advance Request Form (the “Payment/Advance Form”) for a Prime Rate Loan, and a Libor Rate Borrowing Certificate for a Libor Rate Loan. Bank will credit Advances to Borrower’s deposit account. Bank may make Advances under this Agreement based on instructions from a Responsible Officer or his or her designee or without instructions if the Advances are necessary to meet Obligations which have become due. Bank may rely on any telephone notice given by a person whom Bank believes is a Responsible Officer or designee. Borrower will indemnify Bank for any loss Bank suffers due to such reliance.

(c) The Committed Revolving Line shall terminate on the Maturity Date, and all Advances are immediately due and payable on the Maturity Date.

(d) Bank’s obligation to lend the undisbursed portion of the Committed Revolving Line will terminate if, (i) there is a material impairment in the perfection or priority of Bank’s security interest in the Collateral or in the value of such Collateral which is

[**] = Information redacted pursuant to a confidential treatment request. Such omitted information has been filed separately with the Securities and Exchange Commission.

1.

not covered by adequate insurance or (ii) Bank determines, based upon information available to it and in its reasonable judgment, that there is a reasonable likelihood that Borrower will fail to comply with any financial covenant in Section 6.7 during the next succeeding financial reporting period (a “Material Adverse Change”).

(e) Bank will review the credit facility contemplated by this Agreement on each anniversary of the Closing Date and may, in its sole discretion, elect to extend the Maturity Date by an additional twelve month period.

2.1.2 Letters of Credit.

(a) Bank will issue or have issued documentary or standby Letters of Credit for Borrower’s account not exceeding the amount available under the Committed Revolving Line (each, a “Letter of Credit”). Each Letter of Credit will have an expiry date of no later than 180 days after the Maturity Date, but Borrower’s reimbursement obligation will be secured by cash on terms acceptable to Bank at any time after the Maturity Date if such Maturity Date is not extended by Bank or if an Event of Default occurs and continues. Borrower agrees to execute any further documentation in connection with the Letters of Credit as Bank may reasonably request.

(b) Prior to or simultaneously with the opening of each Letter of Credit, Borrower shall pay to Bank Bank’s customary fees in connection with the opening of a letter of credit (the “Letter of Credit Fees”). For standby Letters of Credit, the Letter of Credit Fees shall be [**] per annum if the face amount is less than [**], and [**] per annum if the face amount is equal to or greater than [**]. The Letter of Credit Fees shall be paid upon the opening of each Letter of Credit and upon each anniversary thereof, if required. In addition, Borrower shall pay to Bank, for its own account, any and all additional issuance, negotiation, processing, transfer or other fees to the extent and as and when required by the provisions of any application for Letters of Credit. All Letter of Credit Fees shall be part of the Obligations.

(c) If any Letter of Credit is drawn upon, such amount shall constitute an Advance but shall be immediately due and payable. If such amount is not paid immediately, then the full amount thereof shall accrue interest at the rate set forth in Section 2.3.1.

2.1.3 Foreign Exchange.

If there is availability under the Committed Revolving Line, then Borrower may enter into foreign exchange forward contracts with the Bank under which Borrower commits to purchase from or sell to Bank a set amount of foreign currency more than one Business Day after the contract date (the “FX Forward Contract”). Bank will subtract [**] of each outstanding FX Forward Contract from the amount available under the Committed Revolving Line (the “FX Reserve”). Bank may terminate the FX Forward Contracts if an Event of Default occurs and is not cured. Bank shall not charge Borrower a fee in connection with the FX Forward Contracts.

2.

2.1.4 Cash Management Services.

Borrower may use the availability under the Committed Revolving Line for Bank’s Cash Management Services, which may include merchant services, direct deposit of payroll, business credit cards, automated clearing house transactions, controlled disbursement accounts and check cashing services identified in various cash management services agreements related to such services (the “Cash Management Services”). Such aggregate amounts utilized for Cash Management Services will at all times reduce the amount otherwise available to be borrowed under the Committed Revolving Line. Any amounts Bank pays on behalf of Borrower or any amounts that are not paid by Borrower for any Cash Management Services will be treated as Advances under the Committed Revolving Line and will accrue interest at the rate for Advances.

2.2 Overadvances.

If, at any time, Borrower’s Obligations hereunder exceed the Committed Revolving Line, Borrower shall immediately pay Bank the excess upon demand.

2.3 Interest Rate, Payments.

2.3.1 Interest Rate. Advances accrue interest on the outstanding principal balance thereof at the Interest Rate. Borrower may elect to borrow Prime Rate Loans or LIBOR Rate Loans, all as more particularly set forth in Appendix A hereto. After an Event of Default has occurred, Obligations shall accrue interest at a rate per annum equal to [**] percent above the rate effective immediately before the Event of Default. The Interest Rate applicable to Prime Rate Loans increases or decreases when the Prime Rate changes. Interest is computed on a 360 day year for the actual number of days elapsed.

2.3.2 Payments. Interest due on the Advances is payable on the first day of each month. Bank may debit any of Borrower’s deposit accounts, including account number [**], for principal and interest payments owing or any amounts Borrower owes Bank. Bank will promptly notify Borrower when it debits Borrower’s accounts. These debits are not a set-off. Payments received after 12:00 noon Pacific Time are considered received at the opening of business on the next Business Day. When a payment is due on a day that is not a Business Day, the payment is due the next Business Day and additional fees or interest accrue.

2.4 Fees.

Borrower will pay:

(a) Commitment Fee. A fully earned, non-refundable loan fee in the amount of [**] of the Committed Revolving Line [**] less the [**] deposit previously paid to Bank is due on or before the Closing Date and on each anniversary of the Closing Date.

(b) Bank Expenses. All Bank Expenses (including reasonable attorneys’ fees and expenses) incurred through and after the date of this Agreement are payable upon demand.

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3. CONDITIONS OF LOANS

3.1 Conditions Precedent to Initial Advance.

Bank’s obligation to make the initial Advance is subject to the condition precedent that it receive the agreements, documents and fees it required by this Agreement and other agreements entered into in connection with this Agreement.

3.2 Conditions Precedent to all Advances.

Bank’s obligation to make each Advance, including the initial Advance, is subject to the following:

(a) timely receipt of any Payment/Advance Form for a Prime Rate Loan or a Libor Rate Borrowing Certificate for a Libor Rate Loan; and

(b) the representations and warranties in Section 5 must be materially true on the date of the Payment/Advance Form and on the effective date of each Advance and no Event of Default may have occurred and be continuing, or result from such Advance (except to the extent they relate specifically to an earlier date, in which case such representations and warranties shall continue to have been true and accurate as of such date specified). Each Advance is Borrower’s representation and warranty on that date that the representations and warranties of Section 5 remain true.

4. CREATION OF SECURITY INTEREST

4.1 Grant of Security Interest.

Borrower grants Bank a continuing security interest in all presently existing and later acquired Collateral to secure all Obligations and performance of each of Borrower’s duties under the Loan Documents. Any security interest will be a first priority security interest in the Collateral. If this Agreement is terminated, Bank’s lien and security interest in the Collateral will continue until Borrower fully satisfies its Obligations, other than any inchoate obligations to indemnify Bank. Upon that satisfaction, Bank will terminate its security interest in the Collateral.

4.2 Authorization to File; Delivery of Additional Documentation.

Borrower authorizes Bank to file financing statements without notice to Borrower, with all appropriate jurisdictions, as Bank deems appropriate, in order to perfect or protect Bank’s security interest in the Collateral. Borrower shall execute and deliver to Bank, at the request of Bank, all documents that Bank may reasonably request, in form satisfactory to Bank, to perfect and continue perfected Bank’s security interest in the Collateral and in order to fully consummate all of the transactions contemplated under the Loan Documents.

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5. REPRESENTATIONS AND WARRANTIES. Except as described in the Schedule, Borrower represents and warrants as follows:

5.1 Due Organization; Organizational Structure; Authorization.

Borrower and each Subsidiary is duly existing and in good standing in its state of formation and qualified and licensed to do business in, and in good standing in, any state in which the conduct of its business or its ownership of property requires that it be qualified, except where the failure to do so could not reasonably be expected to cause a Material Adverse Change.

Borrower has not ceased to be a Delaware corporation and has not changed any organizational number assigned by its jurisdiction of formation.

The execution, delivery and performance of the Loan Documents have been duly authorized, and do not conflict with Borrower’s formation documents, nor constitute an event of default under any material agreement by which Borrower is bound. Borrower is not in default under any agreement to which or by which it is bound in which the default could reasonably be expected to cause a Material Adverse Change.

5.2 Collateral.

Borrower has good title to the Collateral and its Intellectual Property, free of Liens except Permitted Liens. All of Borrower’s deposit accounts are described on the Schedule, as updated from time to time. The Accounts are bona fide, existing obligations, and the service or property has been performed or delivered to the account debtor or its agent for immediate shipment to and unconditional acceptance by the account debtor. The Collateral is not in the possession of any third party bailee (such as at a warehouse). In the event that Borrower, after the date hereof, intends to store or otherwise deliver the Collateral to such a bailee, then Borrower will use commercially reasonable efforts to obtain a bailee acknowledgment in form and substance satisfactory to Bank that the bailee is holding such collateral for the benefit of Bank. All Inventory is in all material respects of good and marketable quality, free from material defects, except for Inventory for which adequate reserves have been made in accordance with GAAP. Borrower is the sole owner of the Intellectual Property, except for Intellectual Property licensed to Borrower and licenses permitted under Section 7.1. To the best of Borrower’s knowledge, each issued Patent owned by Borrower is valid and enforceable and no part of the Intellectual Property has been judged invalid or unenforceable, in whole or in part, and, except as publicly disclosed by Borrower and disclosed on a Compliance Certificate, no claim has been made that any part of the Intellectual Property violates the rights of any third party, except to the extent such invalidity, unenforceability, or claim could not reasonably be expected to cause a Material Adverse Change. Except as permitted pursuant to Section 7.1, Borrower shall not change the location of any Collateral without 10 days prior written notice to Bank.

5.3 Litigation.

Except as shown in the Schedule, there are no actions or proceedings pending or, to the knowledge of Borrower’s Responsible Officers, threatened by or against Borrower or any Subsidiary in which a likely adverse decision could reasonably be expected to cause a Material Adverse Change.

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5.4 No Material Adverse Change in Financial Statements.

All consolidated financial statements for Borrower, and any Subsidiary, delivered to Bank fairly present in all material respects Borrower’s consolidated financial condition and Borrower’s consolidated results of operations. There has not been any material deterioration in Borrower’s consolidated financial condition since the date of the most recent financial statements submitted to Bank.

5.5 Solvency.

The fair salable value of Borrower’s assets (including goodwill minus disposition costs) exceeds the fair value of its liabilities; the Borrower is not left with unreasonably small capital after the transactions in this Agreement; and Borrower is able to pay its debts (including trade debts) as they mature.

5.6 Regulatory Compliance.

Borrower is not an “investment company” or a company “controlled” by an “investment company” under the Investment Company Act. Borrower is not engaged as one of its important activities in extending credit for margin stock (under Regulations T and U of the Federal Reserve Board of Governors). Borrower has complied in all material respects with the Federal Fair Labor Standards Act. Borrower has not violated any laws, ordinances or rules, the violation of which could reasonably be expected to cause a Material Adverse Change. None of Borrower’s or any Subsidiary’s properties or assets has been used by Borrower or any Subsidiary or, to the best of Borrower’s knowledge, by previous Persons, in disposing, producing, storing, treating, or transporting any hazardous substance other than legally. Borrower and each Subsidiary has timely filed all required tax returns and paid, or made adequate provision to pay, all material taxes, except those being contested in good faith with adequate reserves under GAAP. Borrower and each Subsidiary has obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all government authorities that are necessary to continue its business as currently conducted, except where the failure to do so could not reasonably be expected to cause a Material Adverse Change.

5.7 Investments.

Borrower does not own any stock, partnership interest or other equity securities except for Permitted Investments.

5.8 Full Disclosure.

No written representation, warranty or other statement of Borrower in any certificate or written statement given to Bank (taken together with all such written certificates and written statements to Bank) contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained in the certificates or statements not misleading (it being recognized by Bank that the projections and forecasts provided by Borrower in good faith and based upon reasonable assumptions are not viewed as facts and that actual results during the period or periods covered by such projections and forecasts may differ from the projected and forecasted results).

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6. AFFIRMATIVE COVENANTS

Borrower will do all of the following for so long as Bank has an obligation to lend, or there are outstanding Obligations:

6.1 Designated Senior Indebtedness.

Borrower shall designate the Loan Documents as “Designated Senior Indebtedness” (as that term is defined in the Convertible Note), and the Loan Documents shall constitute Designated Senior Indebtedness for purposes of the Convertible Note.

Borrower shall designate the Loan Documents as “Designated Senior Indebtedness”, or such similar term, in any future convertible note entered into by Borrower after the date hereof, if such convertible note contains such term or similar term.

6.2 Government Compliance.

Borrower will maintain its and all Subsidiaries’ legal existence and good standing in its jurisdiction of formation and maintain qualification in each jurisdiction in which the failure to so qualify would reasonably be expected to cause a material adverse effect on Borrower’s business or operations. Borrower will comply, and have each Subsidiary comply, with all laws, ordinances and regulations to which it is subject, noncompliance with which could have a material adverse effect on Borrower’s business or operations or would reasonably be expected to cause a Material Adverse Change.

6.3 Financial Statements, Reports, Certificates.

(a) Borrower will deliver to Bank: (i) as soon as available, but no later than 5 days after filing with the SEC, the Borrower’s 10K and 10Q reports; (ii) a Compliance Certificate together with delivery of the 10K and 10Q reports; (iii) not more than 30 days after each fiscal year end or the date delivered to Borrower’s Board of Directors, whichever is later, annual financial projections (including an income statement, balance sheet, and statement of cash flows on an at least quarterly basis) in form and substance commensurate with those provided to Borrower’s board of directors or utilized by Borrower’s executive management; (iv) a prompt report of any legal actions pending or threatened against Borrower or any Subsidiary that could result in damages or costs to Borrower or any Subsidiary of [**] or more; and (v) budgets, sales projections, operating plans or other financial information Bank reasonably requests.

(b) For so long as either (i) the aggregate amount of outstanding Advances and Letters of Credit, FX Forward Reserve and Cash Management Services, without duplication, exceed [**] for more than thirty (30) consecutive days or (ii) unrestricted cash for Borrower and its Subsidiaries is less than [**], then Borrower will deliver to Bank as soon as available, but no later than 30 days after the last day of each month, a company prepared consolidated balance sheet and income statement covering Borrower’s consolidated operations during the period certified by a Responsible Officer commensurate with that prepared for Borrower’s executive management, together with a Compliance Certificate.

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(c) Within 30 days after the last day of each month, Borrower will deliver to Bank a cash balance report.

(d) Borrower will allow Bank to audit Borrower’s Collateral at Borrower’s reasonable expense if an Event of Default shall have occurred.

6.4 Inventory; Returns.

Borrower will keep all Inventory in good and marketable condition, free from material defects. Returns and allowances between Borrower and its account debtors will follow Borrower’s customary practices as they exist at execution of this Agreement.

6.5 Taxes.

Borrower will make, and cause each Subsidiary to make, timely payment of all material federal, state, and local taxes or assessments (other than taxes and assessments which Borrower is contesting in good faith, with adequate reserves maintained in accordance with GAAP) and will deliver to Bank, on demand, appropriate certificates attesting to the payment.

6.6 Insurance.

Borrower will keep its business and the Collateral insured for risks and in amounts standard for Borrower’s industry, and as Bank may reasonably request. Insurance policies will be in a form, with companies, and in amounts that are satisfactory to Bank in Bank’s reasonable discretion. Bank acknowledges that the insurance policies and insurance companies in place as of the Closing Date are acceptable to Bank. All property policies will have a lender’s loss payable endorsement showing Bank as an additional loss payee and all liability policies will show the Bank as an additional insured and provide that the insurer must give Bank at least 20 days notice before canceling its policy. At Bank’s request, Borrower will deliver an insurance certificate evidencing those policies and evidence of all premium payments. Proceeds payable under any policy will, at Bank’s option after the occurrence of an Event of Default, be payable to Bank on account of the Obligations.

6.7 Financial Covenant.

Borrower will maintain the following as of the last day of each month: Unrestricted Cash on deposit in the United States in an amount not less than One Hundred Million Dollars ($100,000,000).

6.8 Investable Funds with Bank.

Borrower shall deposit and maintain with Bank or any Affiliate of Bank not less than [**] at all times, provided that Borrower shall have the option to deposit all or any portion of such amount with institutions in connection with which Borrower uses Bank’s investment advisory services.

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6.9 Registration of Intellectual Property Rights.

Borrower will (a) protect, defend and maintain the validity and enforceability of the Intellectual Property and promptly advise Bank in writing of material infringements and (b) not allow any Intellectual Property material to Borrower’s business to be abandoned, forfeited or dedicated to the public without Bank’s written consent.

6.10 Use of Proceeds.

Borrower shall use the Advances (including Advances constituting Letters of Credit) only for its working capital requirements and general corporate purposes.

6.11 Account Control Agreements.

Within 30 days from the date hereof, Borrower shall deliver to Bank an Account Control Agreement executed by any financial institution located in the United States with which Borrower maintains any type of deposit or operating account into which balance sheet cash is deposited immediately upon the opening of any such account.

6.12 Charge on Shares.

Within 60 days from the date hereof, Borrower shall (a) execute and deliver to Bank a Charge on Shares pledging [**] of the stock of [**] owned by Borrower, and (b) instruct counsel at [**] to take any action necessary, including but not limited to, completing all governmental filings, to effect the purposes thereof.

6.13 Certificate of Qualification.

Within 60 days from the date hereof, Borrower shall deliver to Bank a Massachusetts Certificate of Qualification to Do Business certified by the Massachusetts Secretary of the Commonwealth.

6.14 Further Assurances.

Borrower will execute any further instruments and take further action as Bank reasonably requests to perfect or continue Bank’s security interest in the Collateral or to effect the purposes of this Agreement.

7. NEGATIVE COVENANTS

Borrower will not do any of the following without Bank’s prior written consent for so long as Bank has an obligation to lend or there are any outstanding Obligations:

7.1 Dispositions.

Convey, sell, lease, transfer or otherwise dispose of (collectively “Transfer”), or permit any of its Subsidiaries to Transfer, all or any part of its business or property, except for

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(a) Transfers in the ordinary course of business which would not otherwise result in a breach of Section 6.7 above; or (b) of worn-out or obsolete equipment.

7.2 Changes in Business, Ownership, or Name.

Engage in or permit any of its Subsidiaries to engage in any business other than the businesses currently engaged in by Borrower or reasonably related thereto or have a Change in Control. Borrower will not, without at least 30 days prior written notice, change its state of incorporation and, except as permitted pursuant to Section 7.3 below, its name.

7.3 Mergers or Acquisitions.

Merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with any other Person, or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person, except where (a) no Event of Default under Section 6.7 above has occurred and is continuing or would result from such action during the term of this Agreement and (b) Borrower is the sole surviving entity; provided that, upon prior written notice to Bank, Borrower may create a wholly-owned Subsidiary and effect a short form merger of Borrower into such Subsidiary solely for the purpose of changing the name under which Borrower does business to “pa1mOne” or a derivative thereof, and immediately upon the change of Borrower’s name pursuant to such short form merger or otherwise, Borrower shall provide Bank with its new legal name.

7.4 Indebtedness.

Create, incur, assume, or be liable for any Indebtedness, or permit any Subsidiary to do so, other than Permitted Indebtedness.

7.5 Encumbrance.

Create, incur, or allow any Lien on any of its property (including its Intellectual Property), or assign or convey any right to receive income, including the sale of any Accounts, or permit any of its Subsidiaries to do so, except for Permitted Liens, or permit any Collateral not to be subject to the first priority security interest granted hereunder.

7.6 Distributions; Investments.

(a) Except as permitted under Section 7.3 and for Permitted Investments, directly or indirectly acquire or own any Person, or make any Investment in any Person, or

(b) Pay any dividends (other than dividends payable solely in stock of Borrower) or make any distribution or payment or redeem, retire or purchase any capital stock, in each case for (a) and (b) other than in the ordinary course of business and only to the extent that a default under Section 6.7 above would not result, or permit any of its Subsidiaries to do so.

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7.7 Transactions with Affiliates.

Directly or indirectly enter into or permit to exist any material transaction with any Affiliate of Borrower except for transactions that are in the ordinary course of Borrower’s business (it being understood that employment arrangements with executive officers are within such ordinary course of business), upon fair and reasonable terms or transactions with its Subsidiaries.

7.8 Subordinated Debt.

Make or permit any payment on any Subordinated Debt, except under the terms of such Subordinated Debt, or amend any provision in any document relating to any Subordinated Debt without Bank’s prior written consent.

7.9 Compliance.

Become an “investment company” or a company controlled by an “investment company,” under the Investment Company Act of 1940 or undertake as one of its important activities extending credit to purchase or carry margin stock, or use the proceeds of any Advance for that purpose; fail to meet the minimum funding requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur; fail to comply with the Federal Fair Labor Standards Act or violate any other law or regulation, if the violation could reasonably be expected to have a material adverse effect on Borrower’s business or operations or would reasonably be expected to cause a Material Adverse Change, or permit any of its Subsidiaries to do so.

References to “Subsidiaries” in Article 7 above shall apply to PalmSource, Inc. so long as PalmSource, Inc. is a subsidiary of Borrower unless the Loan and Security Agreement by and between Bank and PalmSource, Inc. is in effect.

8. EVENTS OF DEFAULT

Any one of the following is an Event of Default:

8.1 Payment Default.

If Borrower fails to pay any of the Obligations within [**] Business Days after their due date. During the additional period the failure to cure the default is not an Event of Default (but no Advance will be made during the cure period);

8.2 Covenant Default.

If Borrower does not perform any obligation in Section 6 or violates any covenant in Section 7, provided, however, that failure to perform under Section 6.7 or violation of any covenant in Section 7 may be cured by the immediate pledge of cash to secure the entire amount of Advances, Letters of Credit, FX Forward Reserve and Cash Management Services then outstanding or issued; or

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If Borrower does not perform or observe any other material term, condition or covenant in this Agreement, any Loan Documents, or in any agreement between Borrower and Bank and as to any default under a term, condition or covenant that can be cured, has not cured the default within [**] after it occurs, or if the default cannot be cured within [**] or cannot be cured after Borrower’s attempts within [**] period, and the default may be cured within a reasonable time, then Borrower has an additional period (of not more than [**] ) to attempt to cure the default. During the additional time, the failure to cure the default is not an Event of Default (but no Advances will be made during the cure period);

8.3 Intentionally Omitted.

8.4 Attachment.

If any material portion of Borrower’s assets is attached, seized, levied on, or comes into possession of a trustee or receiver and the attachment, seizure or levy is not removed in [**] , or if Borrower is enjoined, restrained, or prevented by court order from conducting a material part of its business or if a judgment or other claim becomes a Lien on a material portion of Borrower’s assets, or if a notice of lien, levy, or assessment is filed against any of Borrower’s assets by any government agency and not paid within [**] after Borrower receives notice. These are not Events of Default if stayed or if a bond is posted pending contest by Borrower (but no Advances will be made during the cure period);

8.5 Insolvency.

If Borrower becomes insolvent or if Borrower begins an Insolvency Proceeding or an Insolvency Proceeding is begun against Borrower and not dismissed or stayed within [**] (but no Advances will be made before any Insolvency Proceeding is dismissed);

8.6 Other Agreements.

If (a) there is a default in any agreement between Borrower and a third party that gives the third party the right to accelerate any Indebtedness exceeding [**] or that could reasonably be expected to cause a Material Adverse Change or (b) any holder of the Convertible Note exercises its right to require the Borrower to repurchase all or any portion of the Convertible Note pursuant to Section 2 of the Convertible Note; provided, however, that the Event of Default under clause (a) of this Section 8.6 caused by the occurrence of a default under another agreement described in this Section shall be automatically cured for purposes of this Agreement upon the cure or waiver of the default under such other agreement if (i) Bank has not exercised its right under Section 9.1(a) hereof to accelerate the maturity of the Obligations, (ii) such cure or waiver does not result in an Event of Default under any other provision of this Agreement, and (iii) in connection with such cure or waiver, the agreement with the third party is not modified in a manner which increases the payments from the Borrower to the third party or otherwise makes such agreement materially less advantageous to the Borrower.

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8.7 Judgments.

If a money judgment(s) in the aggregate of at least [**] (not covered by insurance) is rendered against Borrower and is unsatisfied and unstayed for [**] (but no Advances will be made before the judgment is stayed or satisfied);

8.8 Misrepresentations.

If Borrower or any Person acting for Borrower makes any material misrepresentation or material misstatement now or later in any warranty or representation in this Agreement or in any writing delivered to Bank or to induce Bank to enter this Agreement or any Loan Document; or

8.9 Guaranty.

Any guaranty of any Obligations ceases for any reason to be in full force or any Guarantor does not perform any obligation under any guaranty of the Obligations, or any material misrepresentation or material misstatement exists now or later in any warranty or representation in any guaranty of the Obligations or in any certificate delivered to Bank in connection with the guaranty, or any circumstance described in Sections 8.4, 8.5 or 8.7 occurs to any Guarantor.

9. BANK’S RIGHTS AND REMEDIES

9.1 Rights and Remedies.

When an Event of Default occurs and continues Bank may, without notice or demand, do any or all of the following:

(a) Declare all Obligations immediately due and payable (but if an Event of Default described in Section 8.5 occurs all Obligations are immediately due and payable without any action by Bank);

(b) Stop advancing money or extending credit for Borrower’s benefit under this Agreement or under any other agreement between Borrower and Bank;

(c) Settle or adjust disputes and claims directly with account debtors for amounts, on terms and in any order that Bank considers advisable;

(d) Make any payments and do any acts it considers necessary or reasonable to protect its security interest in the Collateral. Borrower will assemble the Collateral if Bank requires and make it available as Bank designates. Bank may enter premises where the Collateral is located, take and maintain possession of any part of the Collateral, and pay, purchase, contest, or compromise any Lien which appears to be prior or superior to its security interest and pay all expenses incurred. Borrower grants Bank a license to enter and occupy any of its premises, without charge, to exercise any of Bank’s rights or remedies;

(e) Apply to the Obligations any (i) balances and deposits of Borrower it holds, or (ii) any amount held by Bank owing to or for the credit or the account of Borrower;

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(f) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell the Collateral. Bank is granted a non-exclusive, royalty-free license or other right to use, without charge, Borrower’s labels, Patents, Copyrights, Mask Works, rights of use of any name, trade secrets, trade names, Trademarks, service marks, and advertising matter, or any similar property as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and, in connection with Bank’s exercise of its rights under this Section, Borrower’s rights under all licenses and all franchise agreements inure to Bank’s benefit; and

(g) Dispose of the Collateral according to the Code.

9.2 Power of Attorney.

Effective only when an Event of Default occurs and continues, Borrower irrevocably appoints Bank as its lawful attorney to: (a) endorse Borrower’s name on any checks or other forms of payment or security; (b) sign Borrower’s name on any invoice or bill of lading for any Account or drafts against account debtors, (c) make, settle, and adjust all claims under Borrower’s insurance policies; (d) settle and adjust disputes and claims about the Accounts directly with account debtors, for amounts and on terms Bank determines reasonable; and (e) transfer the Collateral into the name of Bank or a third party as the Code permits. Bank may exercise the power of attorney to sign Borrower’s name on any documents necessary to perfect or continue the perfection of any security interest regardless of whether an Event of Default has occurred. Bank’s appointment as Borrower’s attorney in fact, and all of Bank’s rights and powers, coupled with an interest, are irrevocable until all Obligations have been fully repaid and performed and Bank’s obligation to provide Advances terminates.

9.3 Accounts Collection.

When an Event of Default occurs and continues, Bank may notify any Person owing Borrower money of Bank’s security interest in the funds and verify the amount of the Account. Borrower must collect all payments in trust for Bank and, if requested by Bank, immediately deliver the payments to Bank in the form received from the account debtor, with proper endorsements for deposit.

9.4 Bank Expenses.

If Borrower fails to pay any amount or furnish any required proof of payment to third persons, Bank may make all or part of the payment or obtain insurance policies required in Section 6.6, and take any action under the policies Bank deems prudent. Any amounts paid by Bank are Bank Expenses and immediately due and payable, bearing interest at the then applicable rate and secured by the Collateral. No payments by Bank are deemed an agreement to make similar payments in the future or Bank’s waiver of any Event of Default.

9.5 Bank’s Liability for Collateral.

If Bank complies with reasonable banking practices and the Code, it is not liable for: (a) the safekeeping of the Collateral; (b) any loss or damage to the Collateral; (c) any diminution in

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the value of the Collateral; or (d) any act or default of any carrier, warehouseman, bailee, or other person. Borrower bears all risk of loss, damage or destruction of the Collateral.

9.6 Remedies Cumulative.

Bank’s rights and remedies under this Agreement, the Loan Documents, and all other agreements are cumulative. Bank has all rights and remedies provided under the Code, by law, or in equity. Bank’s exercise of one right or remedy is not an election, and Bank’s waiver of any Event of Default is not a continuing waiver. Bank’s delay is not a waiver, election, or acquiescence. No waiver is effective unless signed by Bank and then is only effective for the specific instance and purpose for which it was given.

9.7 Notices of Control.

During the cure period, if any, of any Event of Default, Bank will not deliver notices of exclusive control or otherwise deny Borrower’s right to exercise any rights over deposit accounts or investments accounts in which Borrower has an interest.

9.8 Demand Waiver.

Borrower waives demand, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees held by Bank on which Borrower is liable.

10. NOTICES

All notices or demands by any party about this Agreement or any other related agreement must be in writing and be personally delivered or sent by an overnight delivery service, by certified mail, postage prepaid, return receipt requested, to the addresses set forth at the beginning of this Agreement or by facsimile to the persons and numbers set forth below each party’s name on the signature page hereof against written confirmation of receipt thereof; provided that failure to send a notice to any person designated to receive a copy of such notice shall not cause the delivery of such notice to be ineffective. A party may change its notice address by giving the other party written notice.

11. CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER

California law governs the Loan Documents without regard to principles of conflicts of law. Borrower and Bank each submit to the exclusive jurisdiction of the State and Federal courts in Santa Clara County, California.

BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY CONTEMPLATED TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS

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AGREEMENT. EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.

12. GENERAL PROVISIONS

12.1 Successors and Assigns.

This Agreement binds and is for the benefit of the successors and permitted assigns of each party. Borrower may not assign this Agreement or any rights under it without Bank’s prior written consent which may be granted or withheld in Bank’s discretion. Bank has the right, without the consent of or notice to Borrower, to sell, transfer, negotiate, or grant participation in all or any part of, or any interest in, Bank’s obligations, rights and benefits under this Agreement, provided that if Bank grants any participation in Bank’s rights and benefits under this Agreement, the Borrower shall only be required to deal with Bank with respect to the administration of the transactions under this Agreement, including, without limitation, by only being required to give any notices hereunder to Bank or take directions hereunder from Bank.

12.2 Indemnification.

Borrower will indemnify, defend and hold harmless Bank and its officers, employees, and agents against: (a) all obligations, demands, claims, and liabilities asserted by any other Person in connection with the transactions contemplated by the Loan Documents; and (b) all losses or Bank Expenses incurred, or paid by Bank from, following, or consequential to transactions between Bank and Borrower (including reasonable attorneys’ fees and expenses), except with respect to (a) and (b) above, for losses caused by Bank’s gross negligence or willful misconduct.

12.3 Time of Essence.

Time is of the essence for the performance of all obligations in this Agreement.

12.4 Severability of Provision.

Each provision of this Agreement is severable from every other provision in determining the enforceability of any provision.

12.5 Amendments in Writing; Integration.

All amendments to this Agreement must be in writing and signed by Borrower and Bank. This Agreement represents the entire agreement about this subject matter, and supersedes prior negotiations or agreements. All prior agreements, understandings, representations, warranties, and negotiations between the parties about the subject matter of this Agreement merge into this Agreement and the Loan Documents.

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12.6 Counterparts.

This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, are an original, and all taken together, constitute one Agreement.

12.7 Survival.

All covenants, representations and warranties made in this Agreement continue in full force while any Obligations (other than Obligations under Section 12.2 to the extent they remain inchoate at the time the other outstanding Obligations are paid in full) remain outstanding. The obligations of Borrower in Section 12.2 to indemnify Bank will survive until all statutes of limitations for actions that may be brought against Bank have run.

12.8 Confidentiality.

In handling any confidential information, Bank will exercise the same degree of care that it exercises for its own proprietary information (but no less than reasonable care), but disclosure of information may be made (a) to Bank’s subsidiaries or affiliates in connection with their business with Borrower, (b) to prospective transferees or purchasers of any interest in the loans (provided, however, Bank shall use commercially reasonable efforts in obtaining such prospective transferee or purchasers agreement of the terms of this provision), (c) as required by law, regulation, subpoena, or other order, (d) as required in connection with Bank’s examination or audit and (e) as Bank reasonably considers appropriate exercising remedies under this Agreement. Confidential information does not include information that either: (x) is in the public domain (other than as a result of Bank’s disclosure) or in Bank’s possession when disclosed to Bank, or becomes part of the public domain after disclosure to Bank; or (y) is disclosed to Bank by a third party, if Bank does not know that the third party is prohibited from disclosing the information.

12.9 Attorneys’ Fees, Costs and Expenses.

In any action or proceeding between Borrower and Bank arising out of the Loan Documents, the prevailing party will be entitled to recover its reasonable attorneys’ fees and other reasonable costs and expenses incurred, in addition to any other relief to which it may be entitled.

13. DEFINITIONS

In this Agreement:

“Account Control Agreement” is an account control agreement, in form and substance satisfactory to Bank, executed and delivered by Borrower, Bank, and all applicable depositary institutions located within the United States, with respect to Borrower’s deposit or operating accounts, or applicable securities intermediaries, with respect to Borrower’s securities accounts.

“Accounts” are all existing and later arising accounts, contract rights, and other obligations owed Borrower in connection with its sale or lease of goods (including licensing

17.

software and other technology) or provision of services, all credit insurance, guaranties, other security and all merchandise returned or reclaimed by Borrower and Borrower’s Books relating to any of the foregoing.

“Advance” or “Advances” is a loan advance (or advances) under the Committed Revolving Line, including Advances used to fund Letters of Credit, the FX Reserve or Cash Management Services.

“Affiliate” of a Person is a Person that owns or controls directly or indirectly the Person, any Person that controls or is controlled by or is under common control with the Person, and each of that Person’s senior executive officers, directors, partners and, for any Person that is a limited liability company, that Person’s managers and members.

“Bank Expenses” are all audit fees and expenses and reasonable costs and expenses (including reasonable attorneys’ fees and expenses) for preparing, negotiating, administering, defending and enforcing the Loan Documents (including appeals or Insolvency Proceedings).

“Borrower’s Books” are all Borrower’s books and records including ledgers, records regarding Borrower’s assets or liabilities, the Collateral, business operations or financial condition and all computer programs or discs or any equipment containing the information.

“Business Day” is any day that is not a Saturday, Sunday or a day on which the Bank is closed; provided, however, with respect to LIBOR Rate Loans, a “Business Day” is a day of the year (a) that is not a Saturday, Sunday or other day on which banks in the State of California or the City of London are authorized or required to close and (b) on which dealings are carried on in the interbank market in which Bank customarily participates.

“Cash Management Services” are defined in Section 2.1.4.

“Change in Control” is a transaction in which any “person” or “group” (within the meaning of Section 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) becomes the “beneficial owner” (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of a sufficient number of shares of all classes of stock then outstanding of Borrower ordinarily entitled to vote in the election of directors, empowering such “person” or “group” to elect a majority of the board of directors of Borrower, who did not have such power before such transaction.

“Closing Date” is the date of this Agreement.

“Code” is the Uniform Commercial Code in effect in any applicable jurisdiction.

“Collateral” is the property described on Exhibit A.

“Committed Revolving Line” is an amount up to the aggregate principal amount of $30,000,000.

“Compliance Certificate” is a Compliance Certificate signed by a Responsible Officer in substantially the same form of Exhibit C attached hereto.

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“Contingent Obligation” is, for any Person, any direct or indirect liability, contingent or not, of that Person for (i) any indebtedness, lease, dividend, letter of credit or other obligation of another such as an obligation directly or indirectly guaranteed, endorsed, co-made, discounted or sold with recourse by that Person, or for which that Person is directly or indirectly liable; (ii) any obligations for undrawn letters of credit for the account of that Person; and (iii) all obligations from any interest rate, currency or commodity swap agreement, interest rate cap or collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; but “Contingent Obligation” does not include endorsements in the ordinary course of business. The amount of a Contingent Obligation is the stated or determined amount of the primary obligation for which the Contingent Obligation is made or, if not determinable, the maximum reasonably anticipated liability for it determined by the Person in good faith; but the amount may not exceed the maximum of the obligations under the guarantee or other support arrangement.

“Convertible Note” is that certain 5% Convertible Subordinated Note Due 2006 in the aggregate original principal amount of $50,000,000 executed by Borrower in favor of Texas Instruments Incorporated, as amended from time to time.

“Copyrights” are all copyright rights, applications or registrations and like protections in each work or authorship or derivative work, whether published or not (whether or not it is a trade secret) now or later existing, created, acquired or held.

“ERISA” is the Employment Retirement Income Security Act of 1974, and its regulations.

“Foreign Subsidiary” means any Subsidiary of Borrower organized under the laws of any jurisdiction other than the United States of America or a subdivision thereof.

“FX Forward Contract” is defined in Section 2.1.3.

“FX Reserve” is defined in Section 2.1.3.

“GAAP” is generally accepted accounting principles.

“Guarantor” is any present or future guarantor of the Obligations.

“Indebtedness” is (a) indebtedness for borrowed money or the deferred price of property or services, such as reimbursement and other obligations for surety bonds and letters of credit, (b) obligations evidenced by notes, bonds, debentures or similar instruments, (c) capital lease obligations and (d) Contingent Obligations.

“Insolvency Proceeding” are proceedings by or against any Person under the United States Bankruptcy Code, or any other bankruptcy or insolvency law, including assignments for the benefit of creditors, compositions, extensions generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief.

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“Intellectual Property” is:

(a) Copyrights, Trademarks, Patents, and Mask Works including amendments, renewals, extensions, and all licenses or other rights to use and all license fees and royalties from the use;

(b) Any trade secrets and any intellectual property rights in computer software and computer software products now or later existing, created, acquired or held; and

(c) All design rights which may be available to Borrower now or later created, acquired or held.

“Interest Period” means for each LIBOR Rate Loan, a period of approximately one, two or three months as the Borrower may elect, provided that the last day of an Interest Period for a LIBOR Rate Loan shall be determined in accordance with the practices of the LIBOR interbank market as from time to time in effect, provided, further, in all cases such period shall expire not later than the applicable Maturity Date.

“Interest Rate” shall mean as to: (a) Prime Rate Loans, a rate equal to Prime Rate, and (b) LIBOR Rate Loans, a rate of 1.75 % per annum in excess of the LIBOR Rate (based on the LIBOR Rate applicable for the Interest Period selected by the Borrower).

“Inventory” is present and future inventory in which Borrower has any interest, including merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products intended for sale or lease or to be furnished under a contract of service, of every kind and description now or later owned by or in the custody or possession, actual or constructive, of Borrower, including inventory temporarily out of its custody or possession or in transit and including returns on any accounts or other proceeds (including insurance proceeds) from the sale or disposition of any of the foregoing and any documents of title.

“Investment” is any beneficial ownership of (including stock, partnership interest or other securities) any Person, or any loan, advance or capital contribution to any Person.

“Letter of Credit” is defined in Section 2.1.2.

“Letter of Credit Fees” is defined in Section 2.1.2.

“LIBOR Base Rate” means, for any Interest Period for a LIBOR Rate Loan, the rate of interest per annum determined by Bank to be the per annum rate of interest as which deposits in United States Dollars are offered to Bank in the London interbank market in which Bank customarily participates at 11:00 a.m. (local time in such interbank market) two (2) Business Days before the first day of such Interest Period for a period approximately equal to such Interest Period and in an amount approximately equal to the amount of such LIBOR Rate Loan.

“LIBOR Rate” shall mean, for any Interest Period for a LIBOR Rate Loan, a rate per annum (rounded upwards, if necessary, to the nearest 1/16 of 1%) equal to (a) the LIBOR Base Rate for such Interest Period divided by (a) 1 minus the Reserve Requirement for such Interest Period.

20.

“LIBOR Rate Loans” means any Advances made or a portion thereof on which interest is payable based on the LIBOR Rate in accordance with the terms of Appendix A.

“Lien” is a mortgage, lien, deed of trust, charge, pledge, security interest or other encumbrance.

“Loan Documents” are, collectively, this Agreement, any note, or notes or guaranties executed by Borrower or Guarantor, any pledge agreements or similar agreements pledging shares of stock owned by Borrower, any negative pledge agreements, any account control agreements, and any other present or future agreement between Borrower or for the benefit of Bank in connection with this Agreement, all as amended, extended or restated.

“Mask Works” are all mask works or similar rights available for the protection of semiconductor chips, now owned or later acquired.

“Material Adverse Change” has the meaning set forth in Section 2.1.1(d) hereof.

“Maturity Date” is August 27, 2005.

“Obligations” are debts, principal, interest, Bank Expenses and other amounts Borrower owes Bank now or later, including cash management services, letters of credit and foreign exchange contracts, if any and including interest accruing after Insolvency Proceedings begin and debts, liabilities, or obligations of Borrower assigned to Bank.

“Patents” are patents, patent applications and like protections, including improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same.

“Permitted Indebtedness” is:

(a) Borrower’s Indebtedness to Bank under this Agreement or any other Loan Document;

(b) Indebtedness existing on the Closing Date and shown on the Schedule;

(c) Subordinated Debt;

(d) Indebtedness to trade creditors incurred in the ordinary course of business and with respect to surety bonds and similar obligations incurred in the ordinary course of business;

(e) An additional [**] in guaranty to [**] to support credit needs of [**] solely with respect to such entity’s foreign exchange hedging activities;

(f) Indebtedness secured by Permitted Liens other than the types of Permitted Liens described in clause (c) of the definition thereof;

21.

(g) Indebtedness arising from the endorsement of instruments in the ordinary course;

(h) Unsecured Indebtedness and Indebtedness secured by the types of Permitted Liens described in clause (c) of the definition thereof, the aggregate outstanding principal balance of which does not exceed [**] or, with prior written notice to Bank, [**]; and

(i) Extensions, refinancings, modifications, amendments, and restatements of any items of Permitted Indebtedness described in clauses (a) through (h) above, provided that the principal amount thereof is not increased or the terms thereof are not modified to impose more burdensome terms upon Borrower or its Subsidiaries, as the case may be.

“Permitted Investments” are:

(a) Investments shown on the Schedule and existing on the Closing Date;

(b) (i) marketable direct obligations issued or unconditionally guaranteed by the United States or its agency or any State maturing within 1 year from its acquisition, (ii) commercial paper maturing no more than 1 year after its creation and having the highest rating from either Standard & Poor’s Corporation or Moody’s Investors Service, Inc., (iii) Bank’s certificates of deposit issued maturing no more than 1 year after issue, and (iv) Investments made in accordance with Borrower’s investment policy, as approved from time to time by Borrower’s Board of Directors;

(c) a line of credit provided to Handspring, Inc. in an amount not to exceed $20,000,000 and on substantially the terms set forth in the Loan Agreement between Palm, Inc. as Lender and Handspring, Inc. as Borrower dated as of June 4, 2003;

(d) acquisitions permitted under Section 7.3 hereof;

(e) Investments constituting Transfers permitted by Section 7.1 hereof;

(f) Investments consisting of repurchases of the stock of officers, directors, and employees under stock purchase plans approved from time to time by Borrower’s board of directors;

(g) strategic Investments in customers, vendors, suppliers, and other Person in the same or related industries as Borrower and its Subsidiaries, including the exercise of warrants to purchase capital stock of such Persons in an aggregate amount not to exceed [**] per year;

(h) Investments consisting of the conversion of any of Borrower’s convertible securities into other securities pursuant to the terms of such convertible securities or otherwise in exchange thereof;

22.

(i) any open-market purchase or exchange of Borrower’s publicly-traded equity securities; and

(j) cash Investments of a total of not more than [**] in Subsidiaries (excluding, for purposes of calculating said amount, cash Investments made in the ordinary course of business).

“Permitted Liens” are:

(a) Liens existing on the Closing Date and shown on the Schedule or arising under this Agreement or other Loan Documents;

(b) Liens for taxes, fees, assessments or other government charges or levies, either not delinquent or being contested in good faith and for which Borrower maintains adequate reserves on its Books, if they have no priority over any of Bank’s security interests;

(c) Purchase money Liens (i) on equipment acquired or held by Borrower or its Subsidiaries incurred for financing the acquisition of such equipment, or (ii) existing on equipment when acquired, if the Lien is confined to the property and improvements and the proceeds of the equipment;

(d) Licenses or sublicenses granted in the ordinary course of Borrower’s business and any interest or title of a licensor or under any license or sublicense, if the licenses and sublicenses permit granting Bank a security interest;

(e) Leases or subleases granted in the ordinary course of Borrower’s business, including in connection with Borrower’s leased premises or leased property;

(f) Liens for taxes, fees, assessments or other government charges or levies, either not delinquent or being contested in good faith and for which Borrower maintains adequate reserves on its Books, if they have no priority over any of Bank’s security interests;

(g) Liens arising from judgments, decrees, or attachments which do not constitute an Event of Default hereunder;

(h) Liens on earnest money deposit required under a letter of intent or purchase agreement;

(i) Liens in favor of other financial institutions arising in connection with Borrower’s deposit or investments accounts held at such institutions to secure fees and charges in connection with said accounts;

(j) Statutory Liens securing claims or demands of materialmen, mechanics, carriers, warehousmen, landlords, and other like Persons imposed without action of such parties;

23.

(k) Liens to secure payment of workers’ compensation, employment insurance, old-age pensions, social security, and other like obligations incurred in the ordinary course of business;

(l) Liens on insurance proceeds in favor of insurance companies granted solely as security for financed premiums;

(m) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods;

(n) Liens which constitute rights of offset of a customary nature that are not prior to the Bank’s security interests;

(o) Liens arising from the filing of any financing statement relating to operating leases otherwise permitted hereunder;

(p) Liens on escrowed cash representing a portion of the proceeds of sales of assets established to satisfy contingent post-closing obligations that it owes (including earn-outs, indemnities, and working capital adjustments;

(q) Liens on cash collateral securing reimbursement obligations to Bank under letters of credit;

(r) Easements, reservations, rights-of-way, restrictions, minor defects or irregularities in title and other similar charges or encumbrances affecting real property not causing a material adverse effect on Borrower’s business or operations;

(s) Licenses and sublicenses permitted under Section 7.1 hereof; and

(t) Liens incurred in the extension, renewal or refinancing of the indebtedness secured by Liens described in (a) through (s), but any extension, renewal or replacement Lien must be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness may not increase.

“Person” is any individual, sole proprietorship, partnership, limited liability company, joint venture, company association, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or government agency.

“Prime Rate” means the variable rate of interest per annum, most recently announced by Bank as its “prime rate,” whether or not such announced rate is the lowest rate available from Bank. The interest rate applicable to the Prime Rate Loans shall change on each date there is a change in the Prime Rate.

“Prime Rate Loans” means any Advances made or a portion thereof on which interest is payable based on the Prime Rate in accordance with the terms of Appendix A.

24.

“Regulatory Change” means, with respect to Bank, any change on or after the date of this Loan Agreement in United States federal, state or foreign laws or regulations, including Regulation D, or the adoption or making on or after such date of any interpretations, directives or requests applying to a class of lenders including Bank of or under any United States federal or state, or any foreign, laws or regulations (whether or not having the force of law) by any court or governmental or monetary authority charged with the interpretation or administration thereof.

“Reserve Requirement” means, for any Interest Period, the average maximum rate at which reserves (including any marginal, supplemental or emergency reserves) are required to be maintained during such Interest Period under Regulation D against “Eurocurrency liabilities” (as such term is used in Regulation D) by member banks of the Federal Reserve System. Without limiting the effect of the foregoing, the Reserve Requirement shall reflect any other reserves required to be maintained by Bank by reason of any Regulatory Change against (a) any category of liabilities which includes deposits by reference to which the LIBOR Rate is to be determined as provided in the definition of “LIBOR Base Rate” or (b) any category of extensions of credit or other assets which include Loans.

“Responsible Officer” is each of the Chief Executive Officer, the Chief Financial Officer, Corporate Treasurer, and the Corporate Controller of Borrower.

“Schedule” is any attached schedule of exceptions.

“Subordinated Debt” is debt incurred by Borrower subordinated to Borrower’s indebtedness owed to Bank and which is reflected in a written agreement in a manner and form acceptable to Bank and approved by Bank in writing and in which Bank is specifically designated “Designated Senior Debt”, or such similar term, if applicable.

“Subsidiary” is for any Person, or any other business entity of which more than 50% of the voting stock or other equity interests is owned or controlled, directly or indirectly, by the Person or one or more Affiliates of the Person.

“Trademarks” are trademark and servicemark rights, registered or not, applications to register and registrations and like protections, and the entire goodwill of the business of Assignor connected with the trademarks.

“Unrestricted Cash” is Borrower’s unrestricted cash and short-term cash equivalents on deposit in the name of Borrower, as represented on Borrower’s monthly balance sheet.

[signature page follows]

25.

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

BORROWER:

PALM, INC.

By:

Printed Name:

Title:

Notices may be sent by facsimile to:

(408) 503-2530

Attn: Treasurer

cc: (408) 503-2750

      Attn: General Counsel

BANK:

SILICON VALLEY BANK

By:

Printed Name:

Title

Notices may be sent by facsimile to:

(510) 608-4787

Attn: Quentin Falconer

APPENDIX A

LIBOR SUPPLEMENT

1. Requests for Loans. Each LIBOR Rate Loan shall be made upon the irrevocable written request of Borrower received by Bank not later than 11 :00 a.m. (Santa Clara, California time) on the Business Day three (3) Business Days prior to the date such Loan is to be made. Each such notice shall specify the date such Loan is to be made, which day shall be a Business Day; the amount of such Loan, the Interest Period for such Loan, and comply with such other requirements as Bank determines are reasonable or desirable in connection therewith.

Each written request for a LIBOR Rate Loan shall be in the form of a LIBOR Rate Loan Borrowing Certificate as set forth on Exhibit A, which shall be duly executed by the Borrower.

Each Prime Rate Loan shall be made upon the irrevocable written request of Borrower received by Bank not later than 11:00 a.m. (Santa Clara, California time) on the Business Day one (1) Business day prior to the date such Loan is to be made. Each such notice shall specify the date such Loan is to be made, which day shall be a Business Day and the amount of such Loan, and comply with such other requirements as Bank determines are reasonable or desirable in connection therewith.

2. Conversion/Continuation of Loans.

(a) Borrower may from time to time submit in writing a request that Prime Rate Loans be converted to LIBOR Rate Loans or that any existing LIBOR Rate Loans continue for an additional Interest Period. Such request shall specify the amount of the Prime Rate Loans which will constitute LIBOR Rate Loans (subject to the limits set forth below) and the Interest Period to be applicable to such LIBOR Rate Loans. Each written request for a conversion to a LIBOR Rate Loan or a continuation of a LIBOR Rate Loan shall be substantially in the form of a LIBOR Rate Conversion/Continuation Certificate as set forth on Exhibit B to this Supplement which shall be duly executed by the Borrower. Subject to the terms and conditions contained herein, three (3) Business Days after Bank’s receipt of such a request from Borrower, such Prime Rate Loans shall be converted to LIBOR Rate Loans or such LIBOR Rate Loans shall continue, as the case may be provided that:

(i) no Event of Default or event which with notice or passage of time or both would constitute an Event of Default exists;

(ii) no party hereto shall have sent any notice of termination of this Supplement or of the Loan Agreement;

(iii) Borrower shall have complied with such customary procedures as Bank has established from time to time for Borrower’s requests for LIBOR Rate Loans;

(iv) the amount of a LIBOR Rate Loan shall be [**] or such greater amount which is an integral multiple of [**]; and

(v) Bank shall have determined that the Interest Period or LIBOR Rate is available to Bank which can be readily determined as of the date of the request for such LIBOR Rate Loan.

Any request by Borrower to convert Prime Rate Loans to LIBOR Rate Loans or continue any existing LIBOR Rate Loans shall be irrevocable. Notwithstanding anything to the contrary contained herein, Bank shall not be required to purchase United States Dollar deposits in the London interbank market or other applicable LIBOR Rate market to fund any LIBOR Rate Loans, but the provisions hereof shall be deemed to apply as if Bank had purchased such deposits to fund the LIBOR Rate Loans.

(b) Any LIBOR Rate Loans shall automatically convert to Prime Rate Loans upon the last day of the applicable Interest Period, unless Bank has received and approved a complete and proper request to continue such LIBOR Rate Loan at least three (3) Business Days prior to such last day in accordance with the terms hereof. Any LIBOR Rate Loans shall, at Bank’s option, convert to Prime Rate Loans in the event that (i) an Event of Default, or event which with the notice or passage of time or both would constitute an Event of Default, shall exist, (ii) this Supplement or the Loan Agreement shall terminate, or (iii) the aggregate principal amount of the Prime Rate Loans which have previously been converted to LIBOR Rate Loans, or the aggregate principal amount of existing LIBOR Rate Loans continued, as the case may be, at the beginning of an Interest Period shall at any time during such Interest Period exceeds the Committed Revolving Line. Borrower agrees to pay to Bank, upon demand by Bank (or Bank may, at its option, charge Borrower’s loan account) any amounts required to compensate Bank for any loss (including loss of anticipated profits), cost or expense incurred by such person, as a result of the conversion of LIBOR Rate Loans to Prime Rate Loans pursuant to any of the foregoing.

(c) On all Loans, Interest shall be payable by Borrower to Bank monthly in arrears not later than the first (1^st) day of each calendar month at the applicable Interest Rate.

3. Additional Requirements/Provisions Regarding LIBOR Rate Loans, Etc.

(a) If for any reason (including voluntary or mandatory prepayment or acceleration), Bank receives all or part of the principal amount of a LIBOR Rate Loan prior to the last day of the Interest Period for such Loan, Borrower shall immediately notify Borrower’s account officer at Bank and, on demand by Bank, pay Bank the amount (if any) by which (i) the additional interest which would have been payable on the amount so received had it not been received until the last day of such Interest Period exceeds (ii) the interest which would have been recoverable by Bank by placing the amount so received on deposit in the certificate of deposit markets or the offshore currency interbank markets or United States Treasury

2.

investment products, as the case may be, for a period starting on the date on which it was so received and ending on the last day of such Interest Period at the interest rate determined by Bank in its reasonable discretion. Bank’s determination as to such amount shall be conclusive absent manifest error.

(b) Borrower shall pay to Bank, upon demand by Bank, from time to time such amounts as Bank may determine to be necessary to compensate it for any costs incurred by Bank that Bank determines are attributable to its making or maintaining of any amount receivable by Bank hereunder in respect of any Loans relating thereto (such increases in costs and reductions in amounts receivable being herein called “Additional Costs”), in each case resulting from any Regulatory Change which:

(i) changes the basis of taxation of any amounts payable to Bank under this Supplement in respect of any Loans (other than changes which affect taxes measured by or imposed on the overall net income of Bank by the jurisdiction in which such Bank has its principal office); or

(ii) imposes or modifies any reserve, special deposit or similar requirements relating to any extensions of credit or other assets of, or any deposits with or other liabilities of Bank (including any Loans or any deposits referred to in the definition of “LIBOR Base Rate”); or

(iii) imposes any other condition affecting this Supplement (or any of such extensions of credit or liabilities).

Bank will notify Borrower of any event occurring after the date of the Loan Agreement which will entitle Bank to compensation pursuant to this section as promptly as practicable after it obtains knowledge thereof and determines to request such compensation. Bank will furnish Borrower with a statement setting forth the basis and amount of each request by Bank for compensation under this Section 3. Determinations and allocations by Bank for purposes of this Section 3 of the effect of any Regulatory Change on its costs of maintaining its obligations to make Loans or of making or maintaining Loans or on amounts receivable by it in respect of Loans, and of the additional amounts required to compensate Bank in respect of any Additional Costs, shall be conclusive absent manifest error.

(c) Borrower shall pay to Bank, upon the request of Bank, such amount or amounts as shall be sufficient (in the sole good faith opinion of such Bank) to compensate it for any loss, costs or expense incurred by it as a result of any failure by Borrower to borrow a Loan on the date for such borrowing specified in the relevant notice of borrowing hereunder.

(d) If Bank shall determine that the adoption or implementation of any applicable law, rule, regulation or treaty regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by Bank (or its applicable lending office)

3.

with any respect or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on capital of Bank or any person or entity controlling Bank (a “Parent”) as a consequence of its obligations hereunder to a level below that which Bank (or its Parent) could have achieved but for such adoption, change or compliance (taking into consideration its policies with respect to capital adequacy) by an amount deemed by Bank to be material, then from time to time, within [**] days after demand by Bank, Borrower shall pay to Bank such additional amount or amounts as will compensate Bank for such reduction. A statement of Bank claiming compensation under this Section and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive absent manifest error.

(e) If at any time Bank, in its sole and absolute discretion, determines that: (i) the amount of the LIBOR Rate Loans for periods equal to the corresponding Interest Periods are not available to Bank in the offshore currency interbank markets, or (ii) the LIBOR Rate does not accurately reflect the cost to Bank of lending the LIBOR Rate Loan, then Bank shall promptly give notice thereof to Borrower, and upon the giving of such notice Banks obligation to make the LIBOR Rate Loans shall terminate, unless Bank and the Borrower agree in writing to a different interest rate Loans shall terminate, unless Bank and the Borrower agree in writing to a different interest rate applicable to LIBOR Rate Loans. If it shall become unlawful for Bank to continue to fund or maintain any Loans, or to perform its obligations hereunder, upon demand by Bank, Borrower shall prepay the Loans in full with accrued interest thereon and all other amounts payable by Borrower hereunder (including, without limitation, any amount payable in connection with such prepayment pursuant to Section 3(a) of this Supplement).

4.

EXHIBIT A TO LIBOR SUPPLEMENT

LIBOR RATE LOAN BORROWING CERTIFICATE

The undersigned hereby certifies as follows:

I,                                 , am the duly elected and acting                                  of Palm, Inc. (“Borrower”).

This certificate is delivered pursuant to Section 2 of that certain LIBOR Supplement to Agreement together with the Loan and Security Agreement by and between Borrower and SILICON VALLEY BANK (“Bank) (the “Loan Agreement”). The terms used in this Borrowing Certificate which are defined in the Loan Agreement have the same meaning herein as ascribed to them therein .

Borrower hereby requests on                 , 200   a LIBOR Rate Loan (the “Loan”) as follows:

(a) The date on which the Loan is to be made is                 , 200  .

(b) The amount of the Loan is to be                                  ($                    ) for an Interest Period of              month( s).

All representations and warranties of Borrower stated in the Loan Agreement are true, correct and complete in all material respects as of the date of this request for a loan; provided, however, that those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of such date.

IN WITNESS WHEREOF, this Borrowing Base Certificate is executed by the undersigned as of this          day of                 , 200  .

PALM, INC.

By:

Title:

For Internal Bank Use Only

LIBOR Pricing Date	I LIBOR Rate	I LIBOR Rate Variance	Maturity Date
		%

EXHIBIT B TO LIBOR SUPPLEMENT

LIBOR RATE CONVERSION/CONTINUATlON CERTIFICATE

The undersigned hereby certifies as follows:

1,                                 , am the duly elected and acting                                  of Palm, Inc. (“Borrower”).

This certificate is delivered pursuant to Section 2 of that certain LIBOR Supplement to Agreement together with the Loan and Security Agreement by and between Borrower and SILICON VALLEY BANK (“Bank”) (the “Loan Agreement”). The terms used in this LIBOR Rate Conversion/Continuation Certificate which are defined in the Loan Agreement have the same meaning herein as ascribed to them therein.

Borrower hereby requests on                 , 200   a LIBOR Rate Loan (the “Loan”) as follows:

(a)	(i)	A rate conversion of an existing Prime Rate Loan from a Prime Rate Loan to a LIBOR Rate Loan; or
	(ii)	A continuation of an existing LIBOR Rate Loan as a LIBOR Rate Loan;
		[Check (i) or (ii) above]

(b) The date on which the Loan is to be made is                 , 200  .

(c) The amount of the Loan is to be                     ($                ), for an Interest Period of              month(s).

All representations and warranties of Borrower stated in the Loan Agreement are true, correct and complete in all material respects as of the date of this request for a loan; provided, however, that those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of such date.

IN WITNESS WHEREOF, this LIBOR Rate Conversion/Continuation Certificate is executed by the undersigned as of this      day of                 , 200  .

PALM, INC.

By:

Title:

For Internal Bank Use Only

LIBOR Pricing Date	I LIBOR Rate	I LIBOR Rate Variance	Maturity Date
		%

2.

SCHEDULE OF EXCEPTIONS

Deposit Accounts (Section 5.2)

See attached.

Transfers (Section 7.1)

None

Affiliate Transactions (Section 7.7)

See attached.

Litigation (Section 5.3)

See attached.

Permitted Indebtedness (Section 13)

See attached.

Permitted Investments (Section 13)

See attached.

Permitted Liens (Section 13)

See attached.

EXHIBIT A

The Collateral consists of all of Borrower’s right, title and interest in and to the following, whether now owned or hereafter existing:

All goods and equipment now owned or hereafter acquired, including, without limitation, all machinery, fixtures, vehicles (including motor vehicles and trailers), and any interest in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing, wherever located;

All inventory, now owned or hereafter acquired, including, without limitation, all merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products including such inventory as is temporarily out of Borrower’s custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above;

All contract rights and general intangibles now owned or hereafter acquired, including, without limitation, payment intangibles, leases, contracts, licenses, license agreements, franchise agreements, blueprints, drawings, purchase orders, customer lists, route lists, infringements, claims, computer programs, software, computer discs, computer tapes, literature, reports, catalogs, design rights, tax and other types of refunds, payments of insurance and rights to payment of any kind;

All now existing and hereafter arising rights to payment of any kind, including accounts, commercial tort claims (including any claim arising under Palm, Inc. v. Allianz Insurance Co., et al, Case No. 1-03-CV815620), contract rights, royalties, license rights and all other forms of obligations owing to Borrower arising out of the sale or lease of goods, the licensing of technology or the rendering of services by Borrower, whether or not earned by performance, and any and all credit insurance, insurance (including refund) claims and proceeds, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by Borrower;

All documents (including warehouse receipts), cash, cash equivalents, deposit accounts, securities, securities entitlements, securities accounts (including health care insurance receivables and credit card receivables), investment property, financial assets, letters of credit, letter of credit rights (whether or not evidenced by a writing), certificates of deposit, instruments, chattel paper and electronic chattel paper rights now owned or hereafter acquired and Borrower’s Books relating to the foregoing;

All investment property, whether held directly or as a security entitlement, securities account, commodity contract or a commodity account, or maintained with any securities intermediary or commodity intermediary; and

All Borrower’s Books relating to the foregoing and any and all claims, rights and interests in any of the above and all substitutions for, additions and accessions to and proceeds thereof.

2.

Notwithstanding the foregoing, the Collateral shall not include (i) real property of Borrower located at 101 Holger Way, San Jose, California, (ii) license or any rights to the extent that (a) the grant of a security interest therein would be contrary to applicable law, or (b) such license or contract prohibits the grant of a security interest therein (but only to the extent such prohibition is enforceable under applicable law), (iii) the shares of capital stock of any Foreign Subsidiary other than [**] (iv) the shares of capital stock of [**] other than [**] of the shares of [**] pledged pursuant to the terms of the Charge on Shares between Bank and Borrower; (v) the shares of PalmSource, Inc.; and (vi) any copyrights, copyright applications, copyright registration and like protection in each work of authorship and derivative work thereof, whether published or unpublished, now owned or hereafter acquired; any patents, patent applications and like protections including without limitation improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same, trademarks, servicemarks and applications therefor, whether registered or not, and the goodwill of the business of Borrower connected with and symbolized by such trademarks, any trade secret rights, including any rights to unpatented inventions, know-how, operating manuals, license rights and agreements and confidential information, now owned or hereafter acquired; or any claims for damage by way of any past, present and future infringement of any of the foregoing (collectively, the “Intellectual Property”), except that the Collateral shall include the proceeds of all the Intellectual Property that are accounts, (i.e. accounts receivable) of Borrower, or general intangibles consisting of rights to payment, and, if a judicial authority (including a U.S. Bankruptcy Court) holds that a security interest in the underlying Intellectual Property is necessary to have a security interest in such accounts and general intangibles of Borrower that are proceeds of the Intellectual Property, then the Collateral shall automatically, and effective as of the date hereof, include the Intellectual Property to the extent necessary to permit perfection of Bank’s security interest in such accounts and general intangibles of Borrower that are proceeds of the Intellectual Property.

Borrower and Bank are parties to a Negative Pledge Agreement whereby Borrower, in connection with Bank’s loan or loans to Borrower, has agreed, among other things, subject to the terms stated therein, not to sell, transfer, assign, mortgage, pledge, lease, grant a security interest in, or encumber any of its Intellectual Property.

3.

EXHIBIT B

PRIME RATE LOAN PAYMENT/ADVANCE REQUEST FORM

DEADLINE FOR SAME DAY PROCESSING IS 12:00 NOON PACIFIC TIME

Fax To:                                        Date:                            

Borrower: Palm, Inc.

¨ Loan Payment:

From Account #	To Account #
(Name and Deposit Account #)	(Loan Account #)
Principal $                                                                                  and/or Interest $

Borrower’s representations and warranties in the Loan and Security Agreement are true, correct and complete in all material respects on and as of the date hereof, but those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of such date.

Authorized Signature:                                                              Phone Number:                                             

¨ LOAN ADVANCE:

Complete Outgoing Wire Request section below if all or a portion of the funds from this loan advance are for an outgoing wire.

From Account #	To Account #
(Loan Account #)	(Name and Deposit Account #)
Amount of Advance $

Borrower’s representations and warranties in the Loan and Security Agreement are true, correct and complete in all material respects on and as of the date of the requested Advance, but those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of such date.

Authorized Signature:                                                              Phone Number:                                             

OUTGOING WIRE REQUEST

Complete only if all or a portion of funds from the loan advance above are to be wired.

Deadline for same day processing is 12:00 noon, Pacific Time

Beneficiary Name:	Amount of Wire: $
Beneficiary Bank:	Account Number:
City and State:
Beneficiary Bank Transit (ABA) #:	Beneficiary Bank Code (Swift, Sort, Chip, etc.):
	(For International Wire Only)
Intermediary Bank:	Transit (ABA) #:
For Further Credit to:
Special Instruction:

By signing below, I (we) acknowledge and agree that my (our) funds transfer request shall be processed in accordance with and subject to the terms and conditions set forth in the agreements(s) covering funds transfer service(s), which agreements(s) were previously received and executed by me (us).

Authorized Signature:	2nd Signature (if required):
Print Name/Title:	Print Name/Title:
Telephone #	Telephone #

2.

EXHIBIT C

COMPLIANCE CERTIFICATE

TO: SILICON VALLEY BANK

3003 Tasman Drive

Santa Clara, CA 95054

FROM: PALM, INC.

400 North McCarthy Blvd.

Milpitas, CA 95035

The undersigned authorized officer of PALM, INC. (“Borrower”) certifies that under the terms and conditions of the Loan and Security Agreement between Borrower and Bank (the “Agreement”), (i) Borrower is in complete compliance for the period ending                          with all required covenants, except as noted below, and (ii) all representations and warranties in the Agreement are true and correct in all material respects on this date. Attached are the required documents supporting the certification. The undersigned officer certifies that such documents were prepared in accordance with Generally Accepted Accounting Principles (GAAP) consistently applied from one period to the next, except as explained in an accompanying letter or footnotes. The undersigned officer acknowledges that no borrowings may be requested at any time or date of determination that Borrower is not in compliance with any of the terms of the Agreement, and that compliance is determined not just at the date this certificate is delivered.

Please indicate compliance status by circling Yes/No under “Complies” column.

Financial Covenant	Required	Actual	Complies
Maintain on a Monthly Basis:
Unrestricted Cash on deposit in the United States	$100,000,000	$	Yes	No
Reporting Covenant	Required		Complies
Monthly financial statements, (if required)	Monthly within 30 days		Yes	No	N/A
10K and 10Q reports	Within 5 days of filing		Yes	No
Compliance Certificate	With monthly or SEC reports, as applicable		Yes	No
Annual Financial Projections	Within 30 days after FYE or when delivered to Board		Yes	No
Cash Balance Report	Monthly within 30 days		Yes	No

[continued on following page]

Borrower only has deposit accounts located at the following institutions:                                                                                                                                                                    .

Disclosures, if any, regarding validity or enforceability of Intellectual Property:                                                                                                                                                                                         .

Sincerely,	BANK USE ONLY
	Received by:
PALM, INC.	AUTHORIZED SIGNER
__________________________________________ SIGNATURE __________________________________________ TITLE __________________________________________ Date	Date:
	Verified:
	AUTHORIZED SIGNER
	Date:
	Compliance Status:                Yes     No

2.

EX-10.40

Exhibit 10.40

September 18, 2003

Ms. Marianne Jackson

Dear Marianne:

This will confirm our agreement concerning the termination of your employment with Palm, Inc. (referred to in this letter as “Palm” or the “Company”).

Your employment as an officer and as the Senior Vice President, Human Resources of Palm will terminate, effective November 1, 2003, or the date the Handspring acquisition closes, whichever is earlier (the “Effective Date”). You agree in the interim to assist in increasing communication to Palm employees concerning the Handspring acquisition, in shepherding the completion of human resources initiatives necessary to the integration of the two companies, and in such other matters as I may reasonably request, not in any case to exceed an aggregate time commitment of twenty (20) hours per week. You have also agreed to introduce me to Gary Berger of ISR. Finally, you have agreed to meet with Tricia Tomlinson at an appropriate and mutually convenient time to transition your responsibilities, and to share all information regarding the current status of your efforts on behalf of Palm. The foregoing obligations are collectively referred to as the “Interim Obligations.” You may work from home during this period, though I expect you to visit the office as is necessary to perform the Interim Obligations.

From the date hereof through and including the Effective Date, you will be compensated at your current base rate of pay, less all applicable state and federal payroll taxes, payable on ordinary Company payroll dates in accordance with Company policies and procedures. On the Effective Date, or on the eighth day following your execution of this letter agreement, whichever is later (the “Payment Date”), you will receive a lump sum payment in the amount of one hundred percent (100%) of your annual base salary, or $275,000, less all applicable state and federal payroll taxes. In addition, provided you remain with the Company through the Effective Date and satisfy your Interim Obligations, you will receive an additional lump sum payment on the Payment Date in the amount of $187,000, less all applicable state and federal payroll taxes, which represents your bonus at target for the 18-month period commencing June 1, 2002, less the amount of $19,250 already paid to you. Palm will also provide you executive outplacement services, to be supplied by a provider of your choice for a period not to exceed six (6) months from the Effective Date and at a cost not to exceed Ten Thousand Dollars ($10,000).

Ms. Marianne Jackson

September 18, 2003

Page 2

On the Effective Date you will receive payment of your accrued but unused paid time off through the Effective Date and, following your submission of proper expense reports, the total unreimbursed amount of all expenses incurred by you in connection with your employment with Palm that are reimbursable in accordance with the Company’s policies. On the Effective Date, you agree to return any and all property of Palm, including all tangible property and equipment and all notes, memos, correspondence, computer-recorded information and any other embodiment or reproduction (in whole or in part) of any Company confidential or proprietary information.

Any shares covered by Company stock options granted to you that are unvested and unexpired on the Effective Date, except for options that vest solely upon the achievement of a performance objective or objectives or options that have their vesting accelerate upon the achievement of a performance objective or objectives, will become fully vested and exercisable on the Effective Date if the shares otherwise would have vested (solely by virtue of your continued employment with the Company and not, directly or indirectly, due to a change of control of the Company) during the one-year period commencing on the Effective Date. All other unvested options will be forfeited on the Effective Date. In addition, fifty percent of any shares of stock that you have purchased from the Company that remain subject to a right of repurchase on the Effective Date will vest on the Effective Date and the Company’s right of repurchase will terminate on that date, except for shares that vest and have the Company’s right of repurchase terminate solely upon the achievement of a performance objective or objectives or shares that have their vesting accelerate and have the Company’s right of repurchase terminate upon the achievement of a performance objective or objectives.

The Company will pay the premiums otherwise payable by you and your eligible dependents for health, dental and vision benefits coverage during the one-year period beginning on the Effective Date, provided you elect continuation coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”), within the time period prescribed under COBRA. After the one-year period, you will be responsible for the payment of any COBRA premiums. The Company will not reimburse you for any taxable income imputed to you because the Company has paid your COBRA premiums or those of your eligible dependents.

For a period of twelve (12) months from the date hereof, and provided this agreement has not been revoked, neither Palm nor any of its officers, directors or employees will: (1) disparage you, directly or indirectly, to any person, including prospective employers, in providing formal or informal employment references; (2) make any public statement or statements to analysts or the press concerning you (except to the effect that, in order to effect full integration of the management teams of Palm and Handspring and to insure retention of Handspring employees, Tricia Tomlinson was selected to fill the SVP, Human Resources position, and your relationship with the Company was terminated on mutually agreeable terms, or as otherwise required by law), without in each case obtaining approval from you.

For a period of twelve (12) months from the date hereof, and provided this agreement has not been revoked, you will not directly or indirectly disparage the Company, its business,

Ms. Marianne Jackson

September 18, 2003

Page 3

products, services, officers or employees, or make any public statement or statements to analysts or the press concerning Palm, its business, prospects, products, services or employees (except to the effect that, in order to effect full integration of the management teams of Palm and Handspring and to insure retention of Handspring employees, Tricia Tomlinson was selected to fill the SVP, Human Resources position, and your relationship with the Company was terminated on mutually agreeable terms, or as otherwise required by law), without in each case first obtaining written approval from Palm.

You hereby acknowledge and agree that, except as provided by this agreement, no further, additional or other sums, benefits or consideration are due and owing, or will hereafter become due and owing, to you in consideration of your employment with Palm.

You further acknowledge that the Palm, Inc. Employee Agreement, between you and Palm, dated February 4, 2002, imposes obligations on you that survive the termination of your employment, and you hereby agree to honor such obligations.

Except with respect to the obligations created by, acknowledged by, or arising out of this agreement, you, on behalf of yourself, your heirs, administrators, representatives, executors, successors and assigns, and each of them, hereby release Palm, its current and former stockholders, directors, officers, employees, agents, attorneys, successors and assigns, and each of them (the “Palm Released Parties”) of and from any and all claims, actions and causes of action, whether now known or unknown, which you now have, ever had, or shall or may hereafter have against the Palm Released 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 you sign this letter agreement, including, but not limited to, any claims arising from or related to your employment with the Company 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 you have or may have for liabilities arising from your actions within the course and scope of your employment for the Company.

In connection with the foregoing general release, you acknowledge that you have read and understand 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.

You hereby expressly waive and relinquish all rights and benefits that you have or may have under Section 1542 with respect to the release of unknown claims granted in this agreement. You acknowledge that you or your agents may hereafter discover facts or claims in addition to or

Ms. Marianne Jackson

September 18, 2003

Page 4

different from those you now know or believe to exist, but that you nevertheless intend to fully and finally settle all claims released herein.

You further warrant and represent that you have 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 matters released by this agreement.

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

The parties agree that in the event any claim or dispute arises between them based on or relating to the interpretation, performance or breach of this agreement, whether in tort, contract or otherwise, we shall attempt to resolve such claim or dispute first on an amicable basis through good faith discussions. If we are not able to resolve any dispute through good faith discussions within a reasonable period of time given the nature of the claim or dispute (not in any case to exceed 30 days), we hereby agree promptly to submit any such claim or dispute to arbitration under the provisions of Section 12 of the Severance Agreement between you and the Company, dated February 12, 2002.

This agreement, together with the Palm, Inc. Employee Agreement between you and Palm dated February 4, 2002, and the Severance Agreement between you and the Company dated February 12, 2002, constitute the entire understanding and agreement between you and Palm with respect to the subject matter contained herein, and supersede any prior negotiations, agreements and understandings, whether written or oral, with respect thereto, including the letter agreements between you and Palm of August 12, 2002 (the Palm Executive Retention Program), March 27, 2002 (the Palm Senior Executive FY’03 Turnaround Incentive Plan), and January 25, 2002 (your offer of employment).

If any provision of this agreement, 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 agreement shall be interpreted so as best to reasonably effect the intent of the parties hereto. We 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 agreement shall be effective only if in writing and signed by the parties hereto.

This Agreement 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 agreement, and Palm shall take all actions necessary to insure that any such corporation or transferee is bound by the provisions of this agreement.

Ms. Marianne Jackson

September 18, 2003

Page 5

If the provisions of this letter accurately set forth our understanding, please acknowledge your agreement by signing the enclosed copy of this letter and returning it to me.

Sincerely,

/s/    TODD BRADLEY        

Todd Bradley

I UNDERSTAND THAT I SHOULD CONSULT WITH AN ATTORNEY PRIOR TO SIGNING THIS AGREEMENT AND THAT I AM GIVING UP ANY LEGAL CLAIMS I HAVE OR MAY HAVE AGAINST THE PARTIES RELEASED ABOVE BY SIGNING THIS AGREEMENT. I ALSO UNDERSTAND THAT I MAY HAVE UP TO 21 DAYS TO CONSIDER THIS AGREEMENT, THAT I MAY REVOKE IT AT ANY TIME DURING THE 7 DAYS AFTER SIGNING IT BY WRITTEN NOTICE TO PALM, AND THAT IT WILL NOT BECOME EFFECTIVE UNTIL THAT 7-DAY PERIOD HAS PASSED. I HEREBY ACKNOWLEDGE THAT I AM SIGNING THIS AGREEMENT KNOWINGLY, WILLINGLY AND VOLUNTARILY IN EXCHANGE FOR THE COMPENSATION AND BENEFITS DESCRIBED IN THIS LETTER, WHICH EXCEED THOSE TO WHICH I WOULD HAVE OTHERWISE BEEN ENTITLED.

ACKNOWLEDGED AND AGREED:

/s/    MARIANNE JACKSON        

Marianne Jackson

Date: September 23, 2003

EX-31.1

Exhibit 31.1

Certifications

I, Eric A. Benhamou, Chairman and Chief Executive Officer of Palm, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Palm, Inc.;

2. Based on my knowledge, this quarterly 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 quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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)) 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 quarterly report is being prepared;

b) [Paragraph omitted pursuant to SEC release Nos. 33-8238 and 34-47986]

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 quarterly 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: October 10, 2003	By:	/s/ ERIC A. BENHAMOU
	Name:	Eric A. Benhamou
	Title:	Chairman and Chief Executive Officer

EX-31.2

Exhibit 31.2

Certifications

I, Judy Bruner, Senior Vice President and Chief Financial Officer of Palm, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Palm, Inc.;

2. Based on my knowledge, this quarterly 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 quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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)) 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 quarterly report is being prepared;

b) [Paragraph omitted pursuant to SEC release Nos. 33-8238 and 34-47986]

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 quarterly 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: October 10, 2003	By:	/s/ JUDY BRUNER
	Name:	Judy Bruner
	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, Eric Benhamou, 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 August 29, 2003 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/ ERIC A. BENHAMOU
Name:	Eric A. Benhamou
Title:	Chairman and Chief Executive Officer

I, Judy Bruner, 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 August 29, 2003 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/ JUDY BRUNER
Name:	Judy Bruner
Title:	Senior Vice President and
	Chief Financial Officer