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 March 2, 2007

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.)

950 West Maude Avenue

Sunnyvale, California

94085

(Address of principal executive offices and zip code)

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

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

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

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

Large accelerated filer  x    Accelerated filer  ¨    Non-Accelerated filer  ¨

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

As of March 30, 2007, 103,447,182 shares of the Registrant’s Common Stock were outstanding.

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

Palm, Inc. (*)

Table of Contents

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
	Condensed Consolidated Statements of Income Three and nine months ended February 28, 2007 and 2006	3
	Condensed Consolidated Balance Sheets February 28, 2007 and May 31, 2006	4
	Condensed Consolidated Statements of Cash Flows Nine months ended February 28, 2007 and 2006	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		31
Item 4. Controls and Procedures		31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		31
Item 1A. Risk Factors		32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		44
Item 6. Exhibits		46
Signatures		49

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

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

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

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Palm, Inc.

Condensed Consolidated Statements of Income

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended February 28,				Nine Months Ended February 28,
	2007		2006		2007		2006
Revenues	$	410,529	$	388,540	$	1,159,213	$	1,175,373
Cost of revenues (*)		259,183		257,865		737,500		804,407
Gross profit		151,346		130,675		421,713		370,966
Operating expenses:
Sales and marketing (*)		68,949		53,464		185,859		153,360
Research and development (*)		50,619		38,298		133,763		98,536
General and administrative (*)		15,155		9,813		44,421		30,997
In-process research and development		3,700		—		3,700		—
Amortization of intangible assets		340		340		1,020		4,249
Restructuring charges		—		—		—		1,954
Total operating expenses		138,763		101,915		368,763		289,096
Operating income		12,583		28,760		52,950		81,870
Interest and other income (expense), net		5,181		3,406		16,143		6,980
Income before income taxes		17,764		32,166		69,093		88,850
Income tax provision (benefit)		6,007		2,227		28,062		(220,155	)
Net income	$	11,757	$	29,939	$	41,031	$	309,005
Net income per share:
Basic	$	0.12	$	0.30	$	0.40	$	3.08
Diluted	$	0.11	$	0.28	$	0.39	$	2.95
Shares used in computing per share amounts:
Basic		102,142		101,109		102,607		100,172
Diluted		103,711		105,972		104,327		104,921
(*)    Costs and expenses include stock-based compensation as follows:
Cost of revenues	$	583	$	3	$	1,851	$	13
Sales and marketing		1,423		166		4,681		586
Research and development		2,004		152		6,917		280
General and administrative		1,701		130		5,412		609
	$	5,711	$	451	$	18,861	$	1,488

Prior to June 1, 2006, the Company accounted for stock-based compensation expense under APB No. 25, Accounting for Stock Issued to Employees, which measured stock-based compensation expense using the intrinsic value method. As of June 1, 2006, the Company accounts for stock-based compensation expense under SFAS No. 123(R), Share-Based Payment, which requires stock-based compensation expense to be recognized based on grant date fair value. Periods prior to June 1, 2006, have not been restated to conform with the provisions of SFAS No. 123(R).

See notes to condensed consolidated financial statements.

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Palm, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except par value amounts)

(Unaudited)

	February 28, 2007			May 31, 2006
ASSETS
Current assets:
Cash and cash equivalents	$	181,970		$	113,461
Short-term investments		322,115			405,433
Accounts receivable, net of allowance for doubtful accounts of $4,485 and $4,801, respectively		213,881			204,337
Inventories		37,505			58,010
Deferred income taxes		143,226			153,854
Investment for committed tenant improvements		2,609			3,967
Prepaids and other		11,697			10,937
Total current assets		913,003			949,999
Land held for sale		60,000			60,000
Property and equipment, net		34,914			22,990
Goodwill		167,911			166,538
Intangible assets, net		80,553			25,783
Deferred income taxes		257,374			260,713
Other assets		1,499			1,499
Total assets	$	1,515,254		$	1,487,522
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	198,616		$	184,501
Income taxes payable		55,336			50,021
Accrued restructuring		5,673			7,209
Provision for committed tenant improvements		2,609			3,967
Current portion of long-term convertible debt		—			35,000
Other accrued liabilities		216,179			216,374
Total current liabilities		478,413			497,072
Non-current liabilities:
Non-current liabilities		8,243			6,545
Stockholders’ equity:
Preferred stock, $0.001 par value, 125,000 shares authorized; none outstanding		—			—
Common stock, $0.001 par value, 2,000,000 shares authorized; outstanding: 102,650 shares and 103,469 shares, respectively		103			103
Additional paid-in capital		1,473,500			1,475,319
Unamortized deferred stock-based compensation		—			(2,752	)
Accumulated deficit		(447,050	)		(488,081	)
Accumulated other comprehensive income (loss)		2,045			(684	)
Total stockholders’ equity		1,028,598			983,905
Total liabilities and stockholders’ equity	$	1,515,254		$	1,487,522

See notes to condensed consolidated financial statements.

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Palm, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Nine Months Ended February 28,
	2007			2006
Cash flows from operating activities:
Net income	$	41,031		$	309,005
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation		10,008			12,294
Stock-based compensation		18,861			1,488
Amortization of intangible assets		3,820			4,249
In-process research and development		3,700			—
Deferred income taxes		15,613			(272,634	)
Realized (gain) loss on equity investments		(100	)		607
Excess tax benefit related to stock-based compensation		(3,049	)		—
Tax benefit related to stock options		—			5,843
Changes in assets and liabilities:
Accounts receivable		(9,544	)		21,084
Inventories		20,505			(15,521	)
Prepaids and other		303			(964	)
Accounts payable		14,115			20,805
Income taxes payable		5,745			41,192
Accrued restructuring		(1,536	)		(5,717	)
Other accrued liabilities		5,813			44,558
Net cash provided by operating activities		125,285			166,289
Cash flows from investing activities:
Purchase of brand name intangible		(44,000	)		—
Purchase of property and equipment		(19,623	)		(15,686	)
Sale of short-term investments		598,552			349,935
Purchase of short-term investments		(512,248	)		(521,446	)
Cash paid for acquisitions		(19,000	)		—
Net cash provided by (used in) investing activities		3,681			(187,197	)
Cash flows from financing activities:
Proceeds from issuance of common stock, employee stock plans		10,501			24,387
Purchase and subsequent retirement of common stock		(30,963	)		—
Excess tax benefit related to stock-based compensation		3,049			—
Repayment of debt		(43,044	)		—
Net cash (used in) provided by financing activities		(60,457	)		24,387
Change in cash and cash equivalents		68,509			3,479
Cash and cash equivalents, beginning of period		113,461			128,164
Cash and cash equivalents, end of period	$	181,970		$	131,643
Other cash flow information:
Cash paid for income taxes	$	7,139		$	4,405
Cash paid for interest	$	1,724		$	1,773
Non-cash investing and financing activities:
Liability for property and equipment acquired	$	2,309		$	—

See notes to condensed consolidated financial statements.

5

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, or SEC. In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments necessary for a fair presentation of Palm’s financial position as of February 28, 2007 and results of operations for the three and nine months ended February 28, 2007 and 2006 and cash flows for the nine months ended February 28, 2007 and 2006. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in Palm’s Annual Report on Form 10-K for the fiscal year ended May 31, 2006. The results of operations for the nine months ended February 28, 2007 are not necessarily indicative of the operating results for the full fiscal year or any future period. Palm was incorporated in 1992 as Palm Computing, Inc. In 1995, the Company was acquired by U.S. Robotics Corporation. In 1996, the Company sold its first handheld computer, quickly establishing a significant position in the handheld computing industry. In 1997, 3Com Corporation, or 3Com, acquired U.S. Robotics. In 1999, 3Com announced its intent to separate the handheld device business from 3Com’s business to form an independent, publicly-traded company. In preparation for that spin-off, Palm Computing, Inc. changed its name to Palm, Inc., or Palm, and was reincorporated in Delaware in December 1999. In March 2000, Palm sold shares in an initial public offering and concurrent private placements. In July 2000, 3Com distributed its remaining shares of Palm common stock to 3Com stockholders.

In December 2001, Palm formed PalmSource, Inc., or PalmSource, a stand-alone subsidiary for its operating system business. On October 28, 2003, Palm distributed all of the shares of PalmSource common stock held by Palm to Palm stockholders. On October 29, 2003, Palm acquired Handspring, Inc., or Handspring, and also changed the Company’s name to palmOne, Inc., or palmOne.

In connection with the spin-off of PalmSource, Palm Trademark Holding Company, LLC, was formed to hold all trade names, trademarks, service marks and domain names containing the word or letter string “palm”. In May 2005, the Company acquired PalmSource’s interest in Palm Trademark Holding Company, LLC, including the Palm trademark and brand, for $30.0 million, payable over 3.5 years. The rights to the brand had been co-owned by the two companies since the October 2003 spin-off of PalmSource from Palm. In July 2005, the Company changed its name back to Palm, Inc., or Palm.

Palm’s 52-53 week fiscal year ends on the Friday nearest to May 31, with each fiscal quarter ending on the Friday generally nearest to August 31, November 30 and February 28. Fiscal years 2007 and 2006 both contain 52 weeks. For presentation purposes, the periods presented are shown as ending on August 31, November 30, February 28 and May 31, as applicable.

Certain prior period balances have been reclassified to conform to current quarter presentation.

2. Recent Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board, or FASB, issued Financial Accounting Standards Board Interpretation, or FIN, No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109. This interpretation clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with Statement of Financial Accounting Standards, or SFAS, No. 109, Accounting for Income Taxes. It prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken or expected to be taken on a tax return. This interpretation is effective for fiscal years beginning after December 15, 2006. The Company will be required to adopt this interpretation in the first quarter of fiscal year 2008. Management is currently evaluating the requirements of FIN No. 48 and has not yet determined the impact on the consolidated financial statements.

In September, 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 provides a framework for measuring fair value, clarifies the definition of fair value, and expands disclosures regarding fair value measurements. SFAS No. 157 does not require any new fair value measurements and eliminates inconsistencies in guidance found in various prior accounting pronouncements. Palm is required to adopt SFAS No. 157 for the fiscal year beginning June 1, 2008. The Company is currently evaluating the effect that the adoption of SFAS No. 157 will have on its consolidated results of operations and financial condition, but does not expect it to have a material impact.

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3. Net Income Per Share

Basic net income 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 income per share is calculated based on the weighted average shares of common stock outstanding during the period, plus the dilutive effect of shares of restricted stock subject to repurchase, stock options outstanding, the assumed issuance of stock under the Company’s employee stock purchase plan, performance shares, or restricted stock units, calculated using the treasury stock method, and the convertible debt, calculated using the “if converted” method.

The following table sets forth the computation of basic and diluted net income per share for the three and nine months ended February 28, 2007 and 2006 (in thousands, except per share amounts):

	Three Months Ended February 28,				Nine Months Ended February 28,
	2007		2006		2007		2006
Numerator:
Numerator for basic net income per share	$	11,757	$	29,939	$	41,031	$	309,005
Effect of dilutive securities:
Interest expense on convertible debt, net of taxes		—		263		—		788
Numerator for diluted net income per share	$	11,757	$	30,202	$	41,031	$	309,793
Denominator:
Shares used to compute basic net income per share (weighted average shares outstanding during the period, excluding shares of restricted stock subject to repurchase)		102,142		101,109		102,607		100,172
Effect of dilutive securities:
Restricted stock awards subject to repurchase		13		47		18		35
Convertible debt		—		1,084		—		1,084
Stock options and employee stock purchase plan		1,546		3,732		1,697		3,630
Restricted stock units		10		—		5		—
Shares used to compute diluted net income per share		103,711		105,972		104,327		104,921
Basic net income per share	$	0.12	$	0.30	$	0.40	$	3.08
Diluted net income per share	$	0.11	$	0.28	$	0.39	$	2.95

Weighted options to purchase Palm common stock of approximately 12,366,000 and 1,196,000 for the three months ended February 28, 2007 and 2006, respectively, and approximately 11,163,000 and 4,586,000, for the nine months ended February 28, 2007 and 2006, respectively, were excluded from the computations of diluted net income per share because these options’ exercise prices were above the average market price during the period and the effect of including such stock options would have been anti-dilutive. Palm accounted for the effect of the convertible debt in the diluted earnings per share calculation using the “if converted” method. Under that method, the convertible debt was assumed to be converted to shares at a conversion price of $32.30, and interest expense, net of taxes, related to the convertible debt was added back to net income. During the three months ended February 28, 2007, Palm retired its outstanding convertible debt. For the nine months ended February 28, 2007 approximately 1,084,000 shares, were excluded from the computation of diluted net income per share because the effect would have been anti-dilutive.

4. Stock-Based Compensation

On June 1, 2006, Palm adopted SFAS No. 123(R), Share-Based Payment, or SFAS No. 123(R). This statement replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes Accounting Principles Board, or APB, No. 25, Accounting for Stock Issued to Employees. In January 2006, the SEC issued Staff Accounting Bulletin, or SAB, No. 107, which provides supplemental implementation guidance for SFAS No. 123(R). SFAS No. 123(R) requires companies to record compensation expense for share-based awards issued to employees and directors in exchange for services provided. The amount of the compensation expense is based on the estimated fair value of the awards on their grant dates and is recognized over the requisite service period. Palm’s share-based awards include stock options, restricted stock awards, restricted stock units and Palm’s Employee Stock Purchase Plan.

Prior to the adoption of SFAS No. 123(R), Palm applied the intrinsic value method set forth in APB No. 25 to calculate the compensation expense for share-based awards. Under APB No. 25, when the exercise price of the Company’s employee stock options was equal to the market price of the underlying stock on the date of the grant, no compensation expense was recorded. In addition, the Company applied the disclosure provisions of SFAS No. 123 as amended by

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SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, as if the fair value based method had been applied in measuring compensation expense. For restricted stock awards, the valuation and calculation of compensation expense under APB No. 25 and SFAS No. 123(R) is the same.

Palm adopted SFAS No. 123(R) using the modified prospective method, which requires the application of the accounting standard to all share-based awards issued on or after June 1, 2006 and to any outstanding share-based awards that were issued but not vested as of June 1, 2006. Accordingly, Palm’s condensed consolidated financial statements as of February 28, 2006 and for the three and nine months then ended have not been restated to reflect the impact of SFAS No. 123(R).

As required by SFAS No. 123(R), the Company reclassified the unamortized deferred stock-based compensation of $2.8 million on June 1, 2006 to additional paid-in capital.

As of February 28, 2007, the Company has three share-based employee compensation plans: the 1999 Employee Stock Purchase Plan, the 1999 Stock Plan, and the 2001 Stock Option Plan for Non-employee Directors.

1999 Employee Stock Purchase Plan

Palm has an employee stock purchase plan, or ESPP, under which eligible employees can contribute up to 10% of their compensation, as defined in the plan, towards the purchase of shares of Palm common stock at a discount through payroll deductions. The ESPP consists of twenty-four-month offering periods with four six-month purchase periods in each offering period. Employees can purchase shares of Palm common stock at a price of 85% of the lower of the fair market value at the beginning of the offering period or the end of each six-month purchase period, whichever price is lower, over a two-year period. The number of shares authorized for issuance is limited to a total of 3,000 shares per participant per offering period. Under the terms of the ESPP, at each purchase date, the exercise price of an outstanding subscription is automatically reset to 85% of the current stock price for the next purchase if the current price of the stock is less than the original subscription price. These repricings are accounted for as a modification to the original offer, resulting in $0.8 million to be recognized over the term of the new offering. All participants in the reset offering are enrolled in the new offering. As of February 28, 2007, approximately 7,703,000 shares were reserved for future issuance under the ESPP.

Stock Option Plans

Under the 1999 Stock Plan, Palm may grant restricted stock awards, stock appreciation rights, performance units, performance shares, or restricted stock units, and options to purchase shares of common stock to employees, directors and consultants. As of February 28, 2007, 21,818,000 shares of common stock have been reserved for issuance and 7,829,000 are available for future grant under the stock option plan. Stock options are generally granted at not less than the fair market value on the date of grant, typically vest over a two- to four-year period and generally expire seven to ten years after the date of grant. Palm also grants restricted stock awards, under which shares of common stock are issued at par value to key employees and officers, subject to vesting restrictions. Restricted stock issued under the plan generally vests annually over two to four years but is considered outstanding at the time of grant. Restricted stock units are granted at par value to employees, officers and directors, subject to vesting restrictions. Restricted stock units issued under the plan generally vest annually over four years.

Palm also has various stock option plans assumed in connection with various mergers and acquisitions. Except for shares of Palm common stock underlying the options outstanding under these plans (1,131,000 shares at February 28, 2007), 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 Palm common stock will be issued in place of such unexercised option. However, Palm has the authority, if necessary, to reserve additional shares of Palm common stock under these plans to the extent such shares are necessary to effect an adjustment to maintain option value, including intrinsic value, of the outstanding options under these plans.

2001 Non-employee Director Stock Option Plan

Under the 2001 Stock Option Plan for Non-employee Directors, options to purchase common stock are granted to non-employee members of the Board of Directors at an exercise price equal to fair market value on the date of grant and typically vest over a 36-month period. The Company also has an Amended and Restated 1999 Director Option Plan which remains in effect only with respect to outstanding options previously granted and under which no future grants of stock options will be made. As of February 28, 2007, 1,645,000 shares of common stock have been reserved for issuance under the director stock option plan and approximately 871,000 shares of common stock were available for future grant.

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Determining Fair-Value

Palm uses the Black-Scholes option valuation model to determine the fair value of stock options and employee stock purchase plan shares. The determination of the fair value of share-based payment awards on the date of grant using an option-valuation model is affected by the Company’s stock price as well as assumptions regarding a number of complex variables. These variables include the Company’s expected stock price volatility over the term of the awards, projected employee stock option exercise behavior, expected risk-free interest rate and expected dividends.

Palm estimates the expected term of options granted based on historical time from vesting until exercise. Palm estimates the volatility of its common stock based upon the implied volatility derived from the historical market prices of the Company’s traded options with similar terms. Palm’s decision to use this measure of volatility was based upon the availability of actively traded options on its common stock and the Company’s assessment that this measure of volatility is more representative of future stock price trends than the historical volatility in the Company’s common stock. Palm bases the risk-free interest rate for option valuation on Constant Maturity Rates provided by the U.S. Treasury with remaining terms similar to the expected term of the options. Palm does not anticipate paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of zero in the option valuation model. In addition, SFAS No. 123(R) requires forfeitures of share-based awards to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Palm uses historical data to estimate pre-vesting option forfeitures and records share-based compensation expense only for those awards that are expected to vest. In the pro forma information required under SFAS No. 123 for periods prior to June 1, 2006, Palm accounted for forfeitures as they occurred. The expected term of employee stock purchase plan shares is the average life of the purchase periods under each offering.

Upon adoption of SFAS No. 123(R), Palm changed its expensing method to straight-line attribution of the value of share-based compensation for options and awards granted beginning June 1, 2006. Compensation expense for all share-based awards granted prior to June 1, 2006 will continue to be recognized using the accelerated expensing method.

Under both SFAS No. 123(R) and SFAS No. 123 Palm used the Black-Scholes option valuation model to estimate the fair value of the Company’s option awards and employee stock purchase plan. There was a new employee stock purchase plan offering period beginning in October 2006 with the following assumptions: risk-free interest rate of 4.8%, volatility of 44%, option term of 1.25 years, dividend yield of 0.0%, and weighted average fair value at date of grant of $3.75. There were no other offerings during fiscal year 2007. The key assumptions used in the valuation model for option awards during the three and nine months ended February 28, 2007 and 2006 are provided below:

	Three Months Ended February 28,						Nine Months Ended February 28,
	2007			2006			2007			2006
Assumptions applicable to stock options:
Risk-free interest rate		4.7	%		4.6	%		4.7	%		4.3	%
Volatility		41	%		75	%		42	%		75	%
Option term (in years)		3.50			3.49			3.49			3.47
Dividend yield		0.0	%		0.0	%		0.0	%		0.0	%
Weighted average fair value at date of grant	$	5.04		$	9.69		$	5.15		$	7.65

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Stock-Based Compensation Expense

Stock-based compensation expense in the three and nine months ended February 28, 2007 includes (i) compensation expense for stock options granted prior to June 1, 2006 but not yet vested as of June 1, 2006, based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS No. 123, (ii) compensation expense for stock options granted subsequent to June 1, 2006 based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R), (iii) compensation expense for the Company’s ESPP, (iv) compensation expense for restricted stock awards that are not yet vested based on the grant date intrinsic value and (v) compensation expense for restricted stock units that are not yet vested based on the grant date intrinsic value. Total stock-based compensation recognized on Palm’s condensed consolidated statement of income for the three and nine months ended February 28, 2007 is as follows (in thousands):

	Option Grants		ESPP		Restricted Stock Awards		Restricted Stock Units		Total
Three months:
Income statement classifications:
Cost of revenues	$	503	$	74	$	—	$	6	$	583
Sales and marketing		1,101		237		20		65		1,423
Research and development		1,561		391		4		48		2,004
General and administrative		1,368		105		195		33		1,701
	$	4,533	$	807	$	219	$	152	$	5,711
	Option Grants		ESPP		Restricted Stock Awards		Restricted Stock Units		Total
Nine months:
Income statement classifications:
Cost of revenues	$	1,575	$	270	$	—	$	6	$	1,851
Sales and marketing		3,682		872		60		67		4,681
Research and development		5,436		1,421		12		48		6,917
General and administrative		4,398		382		585		47		5,412
	$	15,091	$	2,945	$	657	$	168	$	18,861

Palm had no stock-based compensation costs capitalized as part of the cost of an asset.

Prior to the adoption of SFAS No. 123(R), Palm presented all tax benefits for deductions resulting from the exercise of stock options and disqualifying dispositions as operating cash flows on its consolidated statement of cash flows. SFAS No. 123(R) requires the benefits of tax deductions in excess of recognized compensation expense to be reported as a financing cash flow, rather than as an operating cash flow. This requirement reduces net operating cash flows and increases net financing cash flows in periods after adoption. Total cash flow will remain unchanged from what would have been reported under prior accounting rules.

On November 10, 2005, the FASB issued FASB Staff Position No. SFAS 123(R)-3, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards. The Company has elected to adopt the alternative transition method provided in the FASB Staff Position for calculating the tax effects of stock-based compensation pursuant to SFAS No. 123(R). The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital pool, or APIC pool, related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC pool and condensed consolidated statements of cash flows for the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS No. 123(R).

The total income tax benefit realized from stock option exercises and ESPP rights in the three and nine months ended February 28, 2007 was $1.1 million and $2.5 million, respectively.

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Pro-forma Disclosures

The following table illustrates the effect on net income and net income per share as if the Company had applied the fair value recognition provision of SFAS No. 123 to stock-based compensation during the three and nine months ended February 28, 2006 (in thousands, except per share amounts):

	Three Months Ended February 28, 2006			Nine Months Ended February 28, 2006
Net income, as reported	$	29,939		$	309,005
Add: Stock-based compensation expense included in reported net income, net of related tax effects		451			1,488
Less: Stock-based compensation expense determined under fair value method for all awards, net of related tax effects		(5,765	)		(16,032	)
Pro forma net income	$	24,625		$	294,461
Net income per share, as reported:
Basic	$	0.30		$	3.08
Diluted	$	0.28		$	2.95
Pro forma net income per share:
Basic	$	0.24		$	2.94
Diluted	$	0.24		$	2.82

Stock-Based Options and Awards Activity

The following table sets forth the summary of option activity under the Company’s stock option program for the nine months ended February 28, 2007 (dollars and shares in thousands, except per share data):

	Outstanding Options
	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Beginning of period	14,769		$	13.09
Options granted	3,057		$	14.26
Options exercised	(1,053	)	$	6.92
Options canceled	(1,056	)	$	17.33
End of period	15,717		$	13.44	7.3	$	84,589
Options vested and expected to vest at February 28, 2007	13,330		$	13.25	7.2	$	75,273
Exercisable at February 28, 2007	7,362		$	12.16	6.7	$	52,116

The intrinsic value represents the difference between the Company’s closing stock price on the last trading day of the fiscal period, which was $18.30 as of February 28, 2007, and the option exercise price of the shares for options that were in the money multiplied by the number of options outstanding. Total intrinsic value of options exercised was $5.1 million and $9.0 million for the three and nine months ended February 28, 2007, respectively, and $15.7 million and $24.9 million for the three and nine months ended February 28, 2006, respectively.

As of February 28, 2007, there was $22.2 million of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested options granted to Palm employees. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures and is expected to be recognized over the next 1.8 years.

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The options outstanding and exercisable as of February 28, 2007 have been segregated into ranges for additional disclosure as follows (shares in thousands):

	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number of Shares	Weighted Average Exercise Price		Weighted Average Contractual Life	Number of Shares	Weighted Average Exercise Price
	(in years)
$  0.29 to $   5.60	1,988	$	3.75	4.8	1,966	$	3.74
$  5.61 to $ 12.36	1,586	$	9.47	6.6	1,121	$	8.86
$12.37 to $ 12.47	1,866	$	12.46	8.7	537	$	12.46
$12.48 to $ 13.99	1,420	$	13.62	7.9	442	$	13.51
$14.00 to $ 14.01	1,894	$	14.01	6.8	79	$	14.01
$14.02 to $ 14.99	1,581	$	14.47	7.8	435	$	14.43
$15.00 to $ 15.30	2,062	$	15.29	7.6	1,143	$	15.29
$15.31 to $ 16.56	1,573	$	16.22	7.7	987	$	16.23
$16.57 to $ 23.16	1,662	$	18.87	8.3	586	$	18.31
$23.17 to $411.53	85	$	98.49	4.9	66	$	120.78
$ 0.29 to $411.53	15,717	$	13.44	7.3	7,362	$	12.16

A summary of Palm’s non-vested restricted stock awards as of February 28, 2007 and the changes during the nine months ended February 28, 2007 are as follows (shares in thousands):

	Non-vested Shares		Weighted Average Grant Date Fair Value
Beginning of period	188		$	16.72
Awarded	—		$	—
Released	(32	)	$	14.69
Forfeited	—		$	—
End of period	156		$	17.14

The weighted average estimated intrinsic value of restricted stock awards granted was $13.65 per share during the nine months ended February 28, 2006. As of February 28, 2007, total unrecognized compensation costs related to non-vested restricted stock awards was $2.1 million, which is expected to be recognized over the next 2.3 years.

A summary of Palm’s restricted stock units as of February 28, 2007 and the changes during the nine months ended February 28, 2007 are as follows (dollars and shares in thousands, except per share data):

	Restricted Stock Units		Weighted Average Grant Date Fair Value		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Beginning of period	—		$	—
Awarded	189		$	14.25
Released	—		$	—
Forfeited	(3	)	$	14.03
End of period	186		$	14.26	2.1	$	3,411
Restricted stock units vested and expected to vest at February 28, 2007	113		$	14.30	1.8	$	2,068

As of February 28, 2007, total unrecognized compensation costs, adjusted for estimated forfeitures, related to non-vested restricted stock units was $1.4 million, which is expected to be recognized over the next 2.1 years.

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A summary of Palm’s ESPP as of February 28, 2007 and the changes during the nine months ended February 28, 2007 are as follows (dollars and shares in thousands, except per share data):

	Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding/Exercisable at February 28, 2007	837	$	13.36	0.9	$	4,273
ESPP shares vested and expected to vest at February 28, 2007	656	$	13.48	0.8	$	3,280

The remaining unrecognized compensation cost for the ESPP plan at February 28, 2007 of $2.0 million is expected to be recognized over the next 0.9 years.

5. Stock Repurchase Program

In September 2006, the Company’s Board of Directors authorized a stock buyback program for the Company to repurchase up to $250.0 million of its common stock. The program allows the Company to repurchase its shares at its discretion, depending on market conditions, share price and other factors.

The stock repurchase program is designed to return value to the Company’s stockholders and minimize dilution from stock issuance. The program will be funded using the Company’s existing cash balance and future cash flows. The share repurchases will occur through open market purchases, privately negotiated transactions and/or transactions structured through investment banking institutions as permitted by securities laws and other legal requirements.

During the three months ended February 28, 2007, no shares were repurchased under the stock buyback program. During the nine months ended February 28, 2007, the Company repurchased 2,154,000 shares of common stock through open market purchases at an average price of $14.37 per share. Total cash consideration for the repurchased stock was $31.0 million during the nine months ended February 28, 2007. The repurchased shares have been subsequently retired.

6. Business Combinations

During February 2007, Palm acquired the assets of two sole proprietorships focused on mobile computing and media devices, one a developer of user interface environments and the other a developer of email software applications. Palm acquired these assets in all-cash transactions and agreed to the purchase prices based on arm’s length negotiations. The Company expects these acquisitions to accelerate the development of future products. The purchase prices of $19.2 million are comprised of $19.0 million in cash, of which $2.5 million was deposited with an escrow agent pursuant to the terms of the escrow agreements and $0.2 million in direct transaction costs that Palm expects to incur. These acquisitions were accounted for as a purchase in accordance with SFAS No. 141, Business Combinations.

The Company has performed valuations and allocated the total purchase consideration to the assets and liabilities acquired, including identifiable intangible assets based on their respective fair values on the acquisition dates, generally using a discounted cash flow approach. The Company acquired $14.6 million of intangible assets consisting of $13.7 million in core-technology, $0.5 million in non-compete agreements and $0.4 million in customer relationships to be amortized over a weighted-average period of approximately 79 months. Additionally, approximately $3.7 million of the purchase prices represented in-process research and development, or IPR&D, that had not yet reached technological feasibility, had no future alternative use and was charged to operations. Palm did not acquire any tangible assets or assume any liabilities as a result of the acquisitions. Goodwill, representing the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired, was $0.9 million and is expected to be fully deductible for tax purposes.

The results of operations for the acquisitions completed during the nine months ended February 28, 2007 have been included in the Company’s results of operations since the acquisition dates. The financial results of these businesses prior to their acquisition are considered immaterial for purposes of pro forma financial disclosures.

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7. Goodwill

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

	Total
Balance, May 31, 2005	$	249,161
Goodwill adjustments		(82,623	)
Balance, May 31, 2006		166,538
Acquisition of businesses		916
Goodwill adjustments		457
Balance, February 28, 2007	$	167,911

Goodwill adjustments during fiscal year 2006 of approximately $82.6 million are primarily the result of the release of the valuation allowance of the deferred tax assets associated with the Handspring acquisition. For the nine months ended February 28, 2007 goodwill increased by approximately $1.4 million due to the acquisition of the assets of two sole proprietorships resulting in goodwill of $0.9 million and the recognition of foreign tax loss carry forwards associated with the Handspring acquisition of $0.5 million. The Company will continue to adjust goodwill as required for changes in tax associated with the Handspring acquisition.

8. Intangible Assets

Intangible assets consist of the following (dollars in thousands):

	Weighted Average Amortization Period (months)	February 28, 2007							May 31, 2006
		Gross Carrying Amount		Accumulated Amortization			Net		Gross Carrying Amount		Accumulated Amortization			Net
Brand	240	$	27,200	$	(2,437	)	$	24,763	$	27,200	$	(1,417	)	$	25,783
Palm OS Garnet license	60		44,000		(2,800	)		41,200		—		—			—
Core technology	83		13,670		—			13,670		—		—			—
Contracts and customer relationships	12		400		—			400		—		—			—
Non-compete covenants	36		520		—			520		—		—			—
		$	85,790	$	(5,237	)	$	80,553	$	27,200	$	(1,417	)	$	25,783

Amortization expense related to intangible assets was $3.1 million and $0.3 million for the three months ended February 28, 2007 and 2006, respectively, and $3.8 million and $4.2 million for the nine months ended February 28, 2007 and 2006, respectively.

The following table presents the estimated future amortization of intangible assets (in thousands):

Three months ending May 31, 2007	$	3,795
Fiscal Year
2008		15,481
2009		15,147
2010		11,204
2011		8,078
2012		5,874
Thereafter		20,974
	$	80,553

In May 2005, Palm acquired PalmSource’s 55 percent share of the Palm Trademark Holding Company and its rights to the brand name Palm. The rights to the brand had been co-owned by the two companies since the October 2003 spin-off of PalmSource from Palm, Inc. Under the agreement, Palm will pay $30.0 million in installments over 3.5 years (net present value of $27.2 million) and has granted PalmSource certain rights to Palm trademarks for PalmSource and its licensees for a four-year transition period.

In December 2006, Palm signed an agreement with ACCESS Systems Americas, Inc. (formerly PalmSource, Inc.), or ACCESS Systems, to license the source code for

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Palm OS Garnet, the version of the Palm OS used in several Treo smartphone models and all Palm handheld computers. Under the agreement, Palm has a royalty-free perpetual license to use as well as to innovate on the Palm OS Garnet code base. Palm will retain ownership rights in its innovations. The new agreement also provides Palm flexibility to use Palm OS Garnet in whole or in part in any Palm product, and together with any other system technologies. The Company plans to ensure that applications now compatible with Palm OS Garnet will operate with little or no modification in future Palm products that employ Palm OS Garnet as the Company evolves it over time to support Palm’s product differentiation strategy. In addition, Palm has secured an expansion of its existing patent license from ACCESS Systems to cover all current and future Palm products, regardless of the underlying operating system. For all of these rights, Palm paid ACCESS Systems a total of $44.0 million in the third quarter of fiscal year 2007 and will amortize the intangible asset over the next five years.

9. Comprehensive Income

The components of comprehensive income are (in thousands):

	Three Months Ended February 28,					Nine Months Ended February 28,
	2007		2006			2007			2006
Net income	$	11,757	$	29,939		$	41,031		$	309,005
Other comprehensive income (loss):
Unrealized gain (loss) on available-for-sale investments		241		(690	)		2,691			(1,569	)
Recognized (gain) loss included in earnings		10		5			(100	)		607
Accumulated translation adjustments		154		285			138			213
	$	12,162	$	29,539		$	43,760		$	308,256

10. Cash and Available-for-Sale and Restricted Investments

The Company’s cash and available-for-sale and restricted investments are as follows (in thousands):

	February 28, 2007						May 31, 2006
	Adjusted Cost		Unrealized Gain/(Loss)		Carrying Value		Adjusted Cost		Unrealized Gain/(Loss)			Carrying Value
Cash	$	67,778	$	—	$	67,778	$	62,077	$	—		$	62,077
Cash equivalents, money market funds		114,192		—		114,192		51,384		—			51,384
Total cash and cash equivalents	$	181,970	$	—	$	181,970	$	113,461	$	—		$	113,461
Short-term investments:
Federal government obligations	$	133,110	$	200	$	133,310	$	191,847	$	(1,537	)	$	190,310
State and local government obligations		14,850		—		14,850		14,000		—			14,000
Corporate notes/bonds		168,703		427		169,130		173,789		(330	)		173,459
Foreign corporate notes/bonds		4,810		15		4,825		27,745		(81	)		27,664
	$	321,473	$	642	$	322,115	$	407,381	$	(1,948	)	$	405,433
Investment for committed tenant improvements, money market funds	$	2,609	$	—	$	2,609	$	3,967	$	—		$	3,967

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

11. Inventories

Inventories consist of the following (in thousands):

	February 28, 2007		May 31, 2006
Finished goods	$	35,698	$	57,239
Work-in-process and raw materials		1,807		771
	$	37,505	$	58,010

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12. Land Held for Sale

In August 2005, the Company entered into an agreement with a real estate broker to market for sale the 39 acres of land owned by Palm in San Jose, California. In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company reclassified the land not in use to land held for sale at that time. In February 2006, the Company entered into a Purchase and Sale Agreement, or the Agreement, with Hunter/Storm, LLC, a California limited liability company, or the Buyer, pursuant to which the Company will sell these 39 acres of land for a total purchase price of $70.0 million. On March 9, 2007 the Buyer and Palm entered an amendment to the Agreement reducing the purchase price to $66.0 million in consideration for the elimination of Palm’s obligation to have retained from the sales proceeds the sum of $5.0 million, which sum was intended to be applied to possible traffic mitigation fees charged by the City of San Jose in connection with the Buyer’s proposed development of the property. The Buyer has delivered deposits to an escrow agent totaling $0.7 million, all of which are non-refundable to the Buyer except in the event of certain defaults by Palm under the Agreement. Subject to the satisfaction of certain closing conditions, the sale is expected to close in May 2007.

13. Deferred Income Taxes

As of February 28, 2007, Palm had operating loss carryforwards for federal tax purposes totaling approximately $347 million. Palm also had approximately $234 million of remaining federal and state operating loss carryforwards acquired through business combinations, state net operating loss carryforwards of approximately $60 million and federal and state research and experimental credit carryforwards and foreign tax credits of approximately $59 million. Palm also has federal and state alternative minimum tax credit carryforwards of approximately $2 million. The net operating loss carryforwards have been offset by a valuation allowance of $7.7 million, tax effected, relating to stock option deductions not yet realized in conformity with SFAS No. 123(R). The remaining valuation allowance of $1.6 million at February 28, 2007 consists of an allowance for capital loss carryforwards and state net operating loss carryforwards whose realization is not considered more likely than not.

For the three and nine months ended February 28, 2007, Palm’s income tax expense was $6.0 million and $28.1 million, respectively, which consisted of federal, state and foreign income taxes. The effective tax rate for the three and nine months ended February 28, 2007 was 33.8% and 40.6%, respectively. The provision for income taxes for the three and nine months ended February 28, 2007 differs from the amount computed by applying the federal statutory income tax rate primarily due to state taxes, tax credits, foreign income taxed at different rates, and non-deductible stock-based compensation expense.

Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax expense recorded for the nine months ended February 28, 2007 reflect changes in all categories of deferred tax assets, including the utilization of U.S. tax loss carryforwards related to non-qualifying stock option deductions. During the quarter the Company also realized deductions related to stock option expense. These deductions related to options granted, vested or exercised both before and after the adoption of SFAS No. 123(R). Accordingly, the Company recorded tax expense that resulted in an increase in additional paid-in capital related to options granted and vested prior to the adoption of SFAS No. 123(R), as well as recording a deferred tax asset related to post-adoption options that were granted during the quarter.

14. Commitments

Palm facilities are leased under operating leases that expire at various dates through January 2013.

In December 2001, Palm issued a subordinated convertible note in the principal amount of $50.0 million to Texas Instruments. In connection with the PalmSource distribution on October 28, 2003, the note was canceled and divided into two separate obligations. Palm retained an obligation in the amount of $35.0 million, or the Note, and the remainder was assumed by PalmSource. The Note was transferred from Texas Instruments to Metropolitan Life Insurance Company as of August 26, 2005, retaining the same terms. The Note bore interest at 5.0% per annum, and was repaid in December 2006 in accordance with its terms.

In May 2005, Palm acquired PalmSource’s 55 percent share of Palm Trademark Holding Company and its rights to the brand name Palm. The rights to the brand had been co-owned by the two companies since the October 2003 spin-off of PalmSource from Palm. Palm agreed to pay $30.0 million in five installments due in May 2005, 2006, 2007 and 2008 and November 2008, and granted PalmSource certain rights to Palm trademarks for PalmSource and its licensees for a four-year transition period. The net present value of these payments, $27.2 million, was recorded as an intangible asset and is being amortized over 20 years. The remaining amount due to PalmSource under this agreement was $15.0 million as of February 28, 2007 and $22.5 million as of May 31, 2006.

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Palm accrues for royalty obligations to certain technology and patent holders based on unit shipments of its smartphone and handheld computing devices, as a percentage of applicable revenue for the net sales of products using certain software technologies or as a fully paid-up license fee, all as determined in accordance with the terms of the applicable license agreements. Where agreements are not finalized, accrued royalty obligations represent management’s current best estimates using appropriate assumptions and projections based on negotiations with third party licensors. Palm has accrued royalty obligations of $29.0 million and $35.4 million as of February 28, 2007 and May 31, 2006, respectively, including estimated royalties of $21.2 million and $30.5 million, respectively, which are reported in other accrued liabilities. While the amounts ultimately agreed upon may be more or less than the current accrual, management does not believe that finalization of the agreements would have had a material impact on the amounts reported for its financial position as of February 28, 2007 and May 31, 2006 or for the reported results for the three and nine months ended February 28, 2007 and 2006. The effect of finalization of these agreements in the future may be significant to the period in which recorded.

Palm utilizes contract manufacturers to build its products. These contract manufacturers acquire components and build products based on demand forecast information supplied by Palm, which typically covers a rolling 12-month period. Consistent with industry practice, Palm acquires inventories from such manufacturers through blanket purchase orders against which orders are applied based on projected demand information and availability of goods. Such purchase commitments typically cover Palm’s forecasted product and manufacturing requirements for periods ranging from 30 to 90 days. In certain instances, these agreements allow Palm the option to cancel, reschedule and/or adjust its requirements based on its business needs. Consequently, only a portion of Palm’s purchase commitments arising from these agreements may be non-cancelable and unconditional commitments. As of February 28, 2007 and May 31, 2006, Palm’s commitments to contract with third-party manufacturers for their inventory on-hand and component purchase commitments related to the manufacture of Palm products were approximately $158.8 million and $163.1 million, respectively.

In October 2005, Palm entered into a three-year, $30.0 million revolving credit line with Comerica Bank. The interest rate is equal to Comerica’s prime rate (8.25% at February 28, 2007) or, at Palm’s election, subject to specific requirements, equal to LIBOR plus 1.75% (7.08% at February 28, 2007). The interest rate may vary based on fluctuations in market rates. The line of credit is unsecured as long as the Company maintains over $100.0 million in unrestricted domestic cash, cash equivalents and short-term investments. If the Company’s domestic unrestricted cash plus cash equivalents and short-term investments fall below $100.0 million, Comerica will have a first priority security interest in all of the Company’s assets including but not limited to cash and cash equivalents, short-term investments, accounts receivable, inventory and property and equipment but excluding intellectual property and real estate. As of February 28, 2007 and May 31, 2006, Palm used its credit line to support the issuance of letters of credit totaling $9.3 million and $10.2 million, respectively.

During fiscal year 2007, Palm entered into a license agreement with Oracle Corporation to purchase software and one year of maintenance for $3.3 million (net present value of $2.9 million). Under the terms of the agreement, Palm agreed to make quarterly payments over a three-year period ending July 2009. As of February 28, 2007 Palm made payments of $0.5 million under the agreement. The remaining amount due under the agreement is $2.8 million as of February 28, 2007.

Pursuant to the agreements relating to Palm’s separation from 3Com, Palm has agreed to defend, and may be required to indemnify and hold harmless 3Com from any liabilities and damages arising out of the E-Pass Technologies litigation. (See Note 16 to condensed consolidated financial statements.)

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

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

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

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

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

	Nine Months Ended February 28,
	2007			2006
Balance, beginning of period	$	42,909		$	19,653
Payments made		(57,193	)		(60,777	)
Change in liability for product sold during the period		59,794			74,971
Change in liability for pre-existing warranties		(4,481	)		6,749
Balance, end of period	$	41,029		$	40,596

15. Restructuring Charges

In accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, restructuring costs are recorded as incurred. Restructuring charges for employee workforce reductions are recorded upon employee notification for employees whose required continuing service period is 60 days or less, and ratably over the employee’s continuing service period for employees whose required continuing service period is greater than 60 days.

The second quarter of fiscal year 2006 restructuring actions consisted of workforce reductions, primarily in Europe, of approximately 20 regular employees. Restructuring charges were a result of the Company’s effort to focus its international sales force on smartphone products. Cash payments of $2.1 million were made related to these workforce reductions as of May 31, 2006. Cost reduction actions initiated in the second quarter of fiscal year 2006 are complete.

The first quarter of fiscal year 2004 restructuring actions consisted of workforce reductions, primarily in the United States, of approximately 45 regular employees, facilities and property and equipment disposed of or removed from service and canceled projects. Restructuring charges related to the implementation of a series of actions to adjust the business consistent with Palm’s future wireless plans. Cost reduction actions initiated in the first quarter of fiscal year 2004 were completed during the year ended May 31, 2006.

The fourth quarter of fiscal year 2001 restructuring actions 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 205 regular employees and were completed during the year ended May 31, 2003. As of February 28, 2007, the balance consists of lease commitments, payable over approximately five years, offset by estimated sublease proceeds of approximately $15.0 million.

The restructuring action recorded in connection with the Handspring acquisition included $1.8 million related to workforce reductions primarily in the United States, of approximately 50 Handspring employees, $3.7 million related to Handspring facilities not intended for use for Palm operations and therefore considered excess, and $0.7 million related to other miscellaneous charges incurred as a result of the acquisition which did not benefit Palm in the future. From the date of acquisition through fiscal year 2005, the Company adjusted the initial estimate of liabilities directly related to the acquisition as a result of greater costs than originally estimated for employee termination benefits, costs to exit certain facilities and other costs associated with the acquisition, as a net increase in goodwill. As of May 31, 2005, cost reduction actions initiated in connection with the Handspring acquisition were complete, except for remaining contractual payments for excess facilities.

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

	Q2 2006 Action			Q1 2004 Action			Q4 2001 Action			Action Recorded In Connection with the Handspring Acquisition
	Workforce Reduction Costs			Excess Facilities Costs			Excess Facilities Costs			Excess Facilities Costs			Total
Balance, May 31, 2005	$	—		$	344		$	12,894		$	2,162		$	15,400
Restructuring adjustments		2,050			—			—			(1,258	)		792
Cash payments		(2,050	)		(344	)		(6,260	)		(329	)		(8,983	)
Balance, May 31, 2006		—			—			6,634			575			7,209
Cash payments		—			—			(1,339	)		(197	)		(1,536	)
Balance, February 28, 2007	$	—		$	—		$	5,295		$	378		$	5,673

16. Litigation

Palm is a party to lawsuits in the normal course of its business. Litigation in general, and intellectual property litigation in particular, can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. Palm believes that it has defenses to the cases pending against it, including those set forth below, and is vigorously contesting each matter. Palm is not currently able to estimate, with reasonable certainty, the possible loss, or range of loss, if any, from the cases listed below, and accordingly no provision for any potential loss which may result from the resolution of these matters has been recorded in the accompanying condensed consolidated financial statements except with respect to those cases where preliminary settlement agreements have been reached. An unfavorable resolution of these lawsuits could materially adversely affect Palm’s business, results of operations or financial condition. (Although Palm was formerly known as palmOne, Inc. and is now Palm, Inc. once again and Handspring has been merged into Palm, the pleadings in the pending litigation continue to use former company names, including Palm Computing, Inc., Palm, Inc., palmOne, Inc. and Handspring, Inc.).

In February 2000, E-Pass Technologies, Inc. filed suit against 3Com, Inc. in the United States District Court for the Southern District of New York and later filed, on March 6, 2000, an amended complaint against Palm and 3Com. The case was transferred to the United States District Court for the Northern District of California. The amended complaint alleges willful infringement of U.S. Patent No. 5,276,311, entitled “Method and Device for Simplifying the Use of Credit Cards, or the Like” and inducement to infringe the same patent. The complaint seeks unspecified compensatory and treble damages and to permanently enjoin the defendants from infringing the patent in the future. On February 9, 2004, E-Pass filed another lawsuit in the United States District Court for the Northern District of California naming Palm, Handspring and PalmSource as defendants. This second suit alleges infringement, contributory infringement and inducement of infringement of the same patent, but identifies additional products as infringing and seeks unspecified compensatory damages, treble damages and a permanent injunction against future infringement. Palm filed motions for summary judgment in all cases. On March 17, 2006, the Court granted Palm’s summary judgment motions and entered judgment in favor of Palm and the other co-defendants. E-Pass has appealed that ruling to the Court of Appeals for the Federal Circuit, or CAFC. On January 12, 2007 the CAFC unanimously upheld the summary judgments in favor of Palm and the co-defendants and subsequently denied E-Pass’s request for a rehearing. Pursuant to the agreements relating to Palm’s separation from 3Com, Palm has agreed to defend, and may be required to indemnify and hold harmless 3Com from any liabilities and damages arising out of this case.

In June 2001, the first of several putative stockholder class action lawsuits was filed in the United States District Court for the Southern District of New York against certain of the underwriters for Palm’s initial public offering, Palm and several of its former officers. The complaints, which have been consolidated under the caption In re Palm, Inc. Initial Public Offering Securities Litigation, Case No. 01 CV 5613, assert that the prospectus from Palm’s March 2, 2000 initial public offering failed to disclose certain alleged actions by the underwriters for the offering. The complaints allege claims against Palm and the officers under Sections 11 and 15 of the Securities Act of 1933, as amended. Certain of the complaints also allege claims under Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934, as amended. Similar complaints were filed against Handspring in August and September 2001 in regard to Handspring’s June 2000 initial public offering. Other actions have been filed making similar allegations regarding the initial public offerings of more than 300 other companies. An amended consolidated complaint was filed in April 2002. The claims against the individual defendants have been dismissed without prejudice pursuant to an agreement with plaintiffs. The Court denied Palm’s motion to dismiss. Special committees of both Palm’s and Handspring’s respective Boards of

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Directors approved a tentative settlement proposal from plaintiffs, which includes a guaranteed recovery to be paid to plaintiffs by the issuer defendants’ insurance carriers and an assignment to plaintiffs of certain claims the issuers, including Palm and Handspring, may have against the underwriters. On August 31, 2005, the Court entered an order granting preliminary approval of the proposed settlement. On April 24, 2006, the Court held a fairness hearing in connection with the motion for final approval of the settlement but has yet to rule on that motion. On December 5, 2006 the Second Circuit Court of Appeals reversed the District Court’s October 2004 Order certifying a class in six test cases that were selected by the underwriter defendants and plaintiffs pursuant to an agreed upon proceeding. Neither Palm nor Handspring is one of the test cases and it is unclear what impact the Second Circuit ruling will have on the Palm and Handspring cases. There is no guarantee that the settlement will become final as it is subject to a number of conditions, including final Court approval. Should the settlement become final, it will not be material to Palm’s financial position.

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

On November 6, 2006, NTP, Inc. filed suit against Palm in the Eastern District of Virginia. In the lawsuit, entitled NTP, Inc. v. Palm, Inc., NTP alleges direct and indirect infringement of seven patents and seeks unspecified compensatory and treble damages and to enjoin Palm from infringing the patents in the future. On December 22, 2006, Palm responded to the complaint. Palm also moved to stay the litigation pending conclusion and any appeal of reexamination proceedings currently before the U.S. Patent and Trademark Office. On March 22, 2007 the Court granted Palm’s motion and ordered the case be stayed “…until the validity of the patents-in-suit is resolved at the Patent and Trademark Office and through any consequent appeals.”

On March 21, 2005, M-F Downtown Sunnyvale, LLC and M-D Ventures, Inc. filed a case against palmOne, Inc. in the California Superior Court for Santa Clara County captioned M-F Downtown Sunnyvale, LLC; and M-D Ventures, Inc. v. palmOne, Inc., et al. The complaint alleges damages in the amount of not less than $3,612,240 arising from Palm’s breach of contract and breach of the covenant of good faith and fair dealing regarding a Warrant to Purchase Common Stock issued by Handspring, Inc. and assumed by Palm in connection with its purchase of Handspring. The case is scheduled for trial in May 2007.

17. Related Party Transactions

Transactions with PalmSource

In December 2001, Palm entered into a software license agreement with PalmSource which was amended and restated in May 2005. The agreement includes a minimum annual royalty and license commitment of $42.5 million for the contract year ending December 2, 2006 at which time the agreement expired. Under the software license and source code agreement, Palm incurred expenses of $8.1 million during the three months ended February 28, 2006 and $22.8 million and $35.5 million during the nine months ended February 28, 2007 and 2006, respectively. Palm’s Chairman of the Board, Eric Benhamou, was also the Chairman of the Board of PalmSource through October 2004. On November 14, 2005, PalmSource was acquired by ACCESS Co., Ltd.

Other Transactions and Relationships

In fiscal year 2005, Palm made a $1.0 million equity investment in and entered into an agreement to host Palm’s software sales with Motricity, Inc. This equity investment is included in other assets. Palm paid nominal service fees to Motricity for hosting Palm’s software sales during the three and nine months ended February 28, 2007 and 2006.

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

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

This quarterly report contains forward-looking statements within the meaning of the federal securities laws, including, without limitation, statements concerning Palm’s expectations, beliefs and/or intentions regarding the following: the expected terms and vesting of options, restricted stock units and ESPP shares; unrecognized compensation cost under our stock plans; stock price volatility; option exercise behavior under Palm’s stock plans; the timing of our sale of land owned by us and recovery of the carrying value of the land; repair costs; our objective of being the leader in mobile computing; revenue and income growth; profit levels; operating results; cash flows; expansion of the smartphone market and our ability to capitalize on this expansion; rebates and price protection; the sale of software; tax rates; revenue and credit concentration with our largest customers; the development and introduction of new products and services; acceptance of our wireless solutions; our leadership in the handheld device market; competitors and competition in the markets in which Palm operates; the sufficiency of Palm’s cash, cash equivalents and short term investments to satisfy its anticipated cash requirements; interest rates and the effects of changes in market interest rates; investment activities, the value of investments and the use of Palm’s financial instruments; dividends; realization of, and actions which Palm may implement to realize, the tax benefits associated with Palm’s net operating loss carryforwards; Palm’s relationship with holders of patents related to mobile communication standards; Palm’s defenses to legal proceedings and litigation matters; regulatory requirements; provisions in Palm’s charter documents and Delaware law and the potential effects of a stockholder rights plan; and the potential impact of our critical accounting policies and changes in financial accounting standards or practices. Actual results and events could differ materially from those contemplated by these forward-looking statements due to various risks and uncertainties, including those discussed in the “Risk Factors” section and elsewhere in this quarterly report. Palm undertakes no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this report.

Overview and Executive Summary

Palm, Inc. is a leading provider of mobile computing solutions. Our leadership is the result of creating devices that make it easy for end users to manage their lives and communicate with others, to access and share their most important information and to avail themselves of the power of computing wherever they are. We design our devices to appeal to consumer, professional, business, education and government users around the world. We currently offer Treo smartphones as well as handheld computers, add-ons and accessories. We distribute these products through a network of wireless carriers and retail and business distributors worldwide.

Palm was founded on two fundamental beliefs: the future of personal computing is mobile and the mobile computing solutions that we create should deliver a powerful computing experience in a simple and intuitive manner. Ten years after we introduced our first product, these beliefs remain the driving tenets of our business.

Our objective is to be the leader in mobile computing. We intend to achieve this objective by providing our customers and end users with high value products, services and support that are easy to use and that enable them to achieve a strong return on investment. Management periodically reviews certain key business metrics in order to evaluate our strategy and operational efficiency, allocate resources and maximize the financial performance of our business. These key business metrics include the following:

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

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

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

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

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

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

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

Critical Accounting Policies

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

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

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

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

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

Palm accrues for royalty obligations to other technology and patent holders based on unit shipments of its smartphone and handheld computing devices, as a percentage of applicable revenue for the net sales of products using certain software technologies or as a fully paid-up license fee, all as determined in accordance with the terms of the applicable license

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agreements. Where agreements are not finalized, accrued royalty obligations represent management’s current best estimates using appropriate assumptions and projections based on negotiations with third party licensors. Palm has accrued royalty obligations of $29.0 million and $35.4 million as of February 28, 2007 and May 31, 2006, respectively, including estimated royalties of $21.2 million and $30.5 million, respectively, which are reported in other accrued liabilities. While the amounts ultimately agreed upon may be more or less than the current accrual, management does not believe that finalization of the agreements would have had a material impact on the amounts reported for its financial position as of February 28, 2007 and May 31, 2006 or for the reported results for the three and nine months ended February 28, 2007 and 2006. The effect of finalization of these agreements in the future may be significant to the period in which recorded.

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

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

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

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

During the first quarter of fiscal year 2007, we adopted the provisions of, and account for stock-based compensation in accordance with, SFAS No. 123(R), Share-Based Payments. We elected the modified prospective method, under which prior periods are not revised for comparative purposes. Under the fair value recognition provisions of this statement, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period.

We currently use the Black-Scholes option valuation model to determine the fair value of stock options and employee stock purchase plan shares. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex variables. These variables include our expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, expected risk-free interest rate and expected dividends.

We estimate the expected term of options granted based on historical time from vesting until exercise. We estimate the volatility of our common stock based upon the implied volatility derived from the historical market prices of our traded options with similar terms. Our decision to use this measure of volatility was based upon the availability of actively traded options on our common stock and our assessment that this measure of volatility is more representative of future stock price trends than is historical volatility. We base the risk-free interest rate for option valuation on Constant Maturity Rates provided by the U.S. Treasury with remaining terms similar to the expected term of the options. We do not anticipate paying any cash dividends in the foreseeable future and therefore use an expected dividend yield of zero in the option valuation model. We are required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest.

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The guidance in SFAS No. 123(R) and SAB 107 is relatively new. The application of these principles may be subject to further interpretation and refinement over time. There are significant differences among valuation models, and there is a possibility that we will adopt different valuation models in the future. This may result in a lack of consistency in future periods and materially affect the fair value estimate of stock-based payments. It may also result in a lack of comparability with other companies that use different models, methods and assumptions.

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

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

Although the Company has determined that a valuation allowance is no longer required with respect to its domestic net operating loss carryforwards, deferred expenses and tax credit carryforwards, recovery is dependent on achieving the forecast of future operating income over a protracted period of time. As of February 28, 2007, the Company would require approximately $836 million in cumulative future operating income to be generated at various times over approximately the next 15-20 years to realize the net deferred tax assets. Based upon the Company’s historical results for the most recent fiscal periods, it would take the Company less than 9 years to utilize its current NOL and tax credit carryforwards. The Company will review its forecast in relation to actual results and expected trends on an ongoing basis.

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

Results of Operations

Revenues

	Three Months Ended February 28,				Increase/ (Decrease)		Nine Months Ended February 28,				Increase/ (Decrease)
	2007		2006				2007		2006
	(dollars in thousands)
Revenues	$	410,529	$	388,540	$	21,989	$	1,159,213	$	1,175,373	$	(16,160	)

We derive our revenues from sales of our smartphone and handheld computing devices, add-ons and accessories. Revenues for the three months ended February 28, 2007 increased approximately 6% from the three months ended February 28, 2006. Smartphone revenue was $354.1 million for the three months ended February 28, 2007 and increased 23% from $288.5 million for the three months ended February 28, 2006. Handheld revenue was $56.4 million for the three months ended February 28, 2007 and decreased 44% from $100.0 million for the three months ended February 28, 2006. During the three months ended February 28, 2007, net device units shipped were 1,051,000 units at an average selling price of $379. During the three months ended February 28, 2006, net device units shipped were 1,075,000 units at an average selling price of $343. The unit shipments were down approximately 2% and the average selling price was up approximately 11% in the three months ended February 28, 2007 as compared to the same period a year ago. Of the 6% increase in revenues, the increase in average selling prices contributed approximately 10 percentage points and unit shipments and lower accessories sales offset this increase by approximately 4 percentage points. The increase in average selling price reflects a continuing shift towards smartphones, which carry a higher average selling price. In addition, average selling price was affected by a greater mix of recently introduced products at higher average selling prices. The decrease in unit shipments is due to a decline in handheld unit shipments as a result of a declining handheld market.

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International revenues were approximately 23% of worldwide revenues in the three months ended February 28, 2007 compared with approximately 20% in the three months ended February 28, 2006.

International revenues increased by 4 percentage points compared to an increase in United States revenues of 2 percentage points, resulting in a 6% increase in worldwide revenues in the three months ended February 28, 2007 as compared to the three months ended February 28, 2006. Average selling prices for our devices increased in the United States by 4% and increased internationally by approximately 36% during the three months ended February 28, 2007 from the three months ended February 28, 2006. The increase in average selling price in the United States is primarily the result of a greater mix of recently introduced products at higher average selling prices. The increase in the average selling price internationally is primarily the result of a shift towards smartphones, which carry a higher average selling price. Net units sold remained consistent in the United States and decreased 7% internationally from the year-ago period. The decrease in net units sold internationally is primarily due to a decrease in handheld unit sales for the three months ended February 28, 2007 as compared to the three months ended February 28, 2006. This decrease was partially offset by an increase in international unit sales of smartphone devices.

Revenues for the nine months ended February 28, 2007 decreased approximately 1% from the nine months ended February 28, 2006. Smartphone revenue was $905.8 million for the nine months ended February 28, 2007 and increased 15% from $786.0 million for the nine months ended February 28, 2006. Handheld revenue was $253.4 million for the nine months ended February 28, 2007 and decreased 35% from $389.4 million for the nine months ended February 28, 2006. During the nine months ended February 28, 2007, net device units shipped were 3,242,000 units at an average selling price of $346. During the nine months ended February 28, 2006, net device units shipped were 3,630,000 units at an average selling price of $307. The unit shipments were down approximately 11% and the average selling price was up approximately 13% in the nine months ended February 28, 2007 as compared to the same period a year ago. Of the 1% decrease in revenues, unit shipments and accessories sales decreased approximately 13 percentage points, partially offset by an increase in average selling prices of approximately 12 percentage points. The increase in average selling price reflects a greater mix of recently introduced smartphone products at higher average selling prices.

International revenues were approximately 25% of worldwide revenues in the nine months ended February 28, 2007 compared with approximately 24% in the nine months ended February 28, 2006.

International revenues increased by 1 percentage point and were offset by a 2 percentage point decrease in United States revenues, resulting in a 1% decrease in worldwide revenues in the nine months ended February 28, 2007 as compared to the nine months ended February 28, 2006. Average selling prices for our devices increased in the United States by 9% and increased internationally by approximately 22% during the nine months ended February 28, 2007 from the nine months ended February 28, 2006. The increase in average selling price in the United States and internationally is primarily the result of the continuing shift towards smartphones, which carry a higher average selling price. In addition, average selling price was affected by a greater mix of recently introduced products at higher average selling prices. Net units sold decreased approximately 10% in the United States and decreased 13% internationally from the year-ago period. The decrease in net units sold in the United States and internationally is primarily due to a decrease in handheld unit sales for the nine months ended February 28, 2007 as compared to the nine months ended February 28, 2006.

Total Cost of Revenues

	Three Months Ended February 28,						Increase/ (Decrease)		Nine Months Ended February 28,						Increase/ (Decrease)
	2007			2006					2007			2006
	(dollars in thousands)
Cost of revenues	$	259,183		$	257,865		$	1,318	$	737,500		$	804,407		$	(66,907	)
Applicable portion of amortization of intangible assets		—			—			—		—			375			(375	)
Total cost of revenues	$	259,183		$	257,865		$	1,318	$	737,500		$	804,782		$	(67,282	)
Percentage of revenues		63.1	%		66.4	%				63.6	%		68.5	%

‘Total cost of revenues’ is comprised of ‘Cost of revenues’ and the applicable portion of ‘Amortization of intangible assets’ as shown in the table above. Cost of revenues principally consists of material and transformation costs to manufacture our products, operating system, or OS, and other royalty expenses, warranty and technical support costs, freight, scrap and rework costs, the cost of excess or obsolete inventory, and manufacturing overhead which includes manufacturing personnel related costs, depreciation, and allocated information technology and facilities costs. Cost of revenues as a percentage of revenues decreased by 3.3% to 63.1% for the three months ended February 28, 2007 from 66.4% for the three months ended

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February 28, 2006. The decrease in cost of revenues as a percentage of revenues for the three months ended February 28, 2007 is primarily the result of approximately 2.1 percentage points of lower product costs related to a shift in product mix. In addition, we experienced a 0.8 percentage point decrease in OS royalty rates primarily because the quarterly amortization costs of the new ACCESS license agreement entered into in December 2006 is less than the per-unit royalty payments paid under the original agreement. Warranty costs decreased 0.6 percentage points due to lower per unit repair costs. We also experienced a decrease in technical service costs of approximately 0.3 percentage points due to lower call center volume. Partially offsetting these decreases was an increase in scrap and rework of 0.7 percentage points as a result of open-box returns.

Cost of revenues as a percentage of revenues decreased by 4.9% to 63.6% for the nine months ended February 28, 2007 from 68.5% for the nine months ended February 28, 2006. The decrease is primarily the result of approximately 2.7 percentage points of lower product costs. In addition, we experienced a 2.4 percentage point decrease in warranty expenses due to lower rates of warranty returns and lower per unit repair costs in the current period as compared to the same period a year ago. Partially offsetting these decreases was an increase in our OS royalty rates during the nine months ended February 28, 2007 compared to the same period last year due to a shift in revenue mix to Windows-based smartphone products, which have a higher OS cost as compared to the Palm OS cost, contributing approximately 0.1 percentage points. We also experienced an increase in technical service costs of approximately 0.1 percentage points due to higher call center costs on average during the nine months ended February 28, 2007.

The ‘Amortization of intangible assets’ applicable to the cost of revenues decreased $0.4 million during the nine months ended February 28, 2007 compared to nine months ended February 28, 2006, due to the intangible assets acquired in the Handspring acquisition becoming fully amortized in fiscal year 2006.

Sales and Marketing

	Three Months Ended February 28,						Increase/ (Decrease)		Nine Months Ended February 28,						Increase/ (Decrease)
	2007			2006					2007			2006
	(dollars in thousands)
Sales and marketing	$	68,949		$	53,464		$	15,485	$	185,859		$	153,360		$	32,499
Percentage of revenues		16.8	%		13.8	%				16.0	%		13.0	%

Sales and marketing expenses consist principally of advertising and marketing programs, salaries and benefits for sales and marketing personnel, sales commissions, travel expenses and allocated information technology and facilities costs. Sales and marketing expenses in the three months ended February 28, 2007 increased approximately 29% from the three months ended February 28, 2006. The increase in sales and marketing expenses as a percentage of revenues and in absolute dollars is due to several factors. Product promotional programs and advertising increased approximately $10.2 million during the current period as compared to the comparable period a year ago primarily as a result of increased product advertising and also as a result of units provided to our carrier partners for product certification and demonstration purposes. Consulting services increased $1.7 million to support our web store activities. We also experienced an increase in employee related expenses of approximately $1.7 million resulting from an increase in our headcount during the three months ended February 28, 2007 by approximately 20 employees compared to the comparable quarter a year ago and associated travel and related costs to support our increased sales and marketing activity. In addition, we experienced increases in marketing development expenses with our carrier and retail customers of approximately $0.8 million as a result of our increased revenues. These increases were partially offset by a decrease in allocated information technology costs of $0.2 million. Stock-based compensation expense increased $1.3 million during the current period as a result of the adoption of SFAS No. 123(R).

Sales and marketing expenses in the nine months ended February 28, 2007 increased approximately 21% from the nine months ended February 28, 2006. The increase in sales and marketing expenses as a percentage of revenues and in absolute dollars is due to several factors. Product promotional programs and advertising increased approximately $22.9 million during the current period as compared to the comparable period a year ago primarily as a result of increased product advertising and also as a result of units provided to our carrier partners for product certification and demonstration purposes. An increase in employee related expenses of approximately $4.3 million resulted from an increase in our headcount during the nine months ended February 28, 2007 and associated travel and related costs to support our increased sales and marketing activity. In addition, we experienced increases in consulting services of $3.8 million to support our product services and web site activities. These increases were partially offset by reduced marketing development expenses with our carrier and retail customers of approximately $2.3 million associated with our decreased revenues compared to the same period last year, in addition to a $0.6 million decrease in allocated information technology costs. Stock-based compensation expense increased $4.1 million during the current period as a result of the adoption of SFAS No. 123(R).

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Research and Development

	Three Months Ended February 28,						Increase/ (Decrease)		Nine Months Ended February 28,						Increase/ (Decrease)
	2007			2006					2007			2006
	(dollars in thousands)
Research and development	$	50,619		$	38,298		$	12,321	$	133,763		$	98,536		$	35,227
Percentage of revenues		12.3	%		9.9	%				11.5	%		8.4	%

Research and development expenses consist principally of employee related costs, third party development costs, program materials, depreciation and allocated information technology and facilities costs. Research and development expenses during the three months ended February 28, 2007 increased approximately 32% from the comparable quarter a year ago. The increase in research and development expenses as a percentage of revenues and in absolute dollars during the three months ended February 28, 2007 is due to several factors. We experienced an increase in outsourced engineering, data communications and project material costs of approximately $4.7 million, reflecting our commitment to the development of our smartphone products. Employee related expenses increased approximately $3.2 million due to approximately 130 additional employees hired to support our commitment to the development of smartphone products. Consulting expense increased by approximately $1.7 million to further support our efforts in the smartphone space. Allocated information technology costs also increased approximately $0.9 million as a result of our increased headcount. Stock-based compensation expense increased $1.9 million during the current period as a result of the adoption of SFAS No. 123(R).

Research and development expenses during the nine months ended February 28, 2007 increased approximately 36% from the comparable quarter a year ago. The increase in research and development expenses as a percentage of revenues and in absolute dollars during the nine months ended February 28, 2007 is due to several factors. We experienced an increase in outsourced engineering, data communications and project material costs of approximately $13.9 million, reflecting our commitment to the development of our smartphone products. An increase in employee related expenses of approximately $7.9 million reflected an increase of additional employees hired to support our commitment to the development of smartphone products. Consulting expense increased by approximately $4.0 million to further support our efforts in the smartphone space. Allocated information technology costs also increased approximately $2.8 million as a result of our increased headcount. Stock-based compensation expense increased $6.6 million during the nine months ended February 28, 2007 as a result of the adoption of SFAS No. 123(R).

General and Administrative

	Three Months Ended February 28,						Increase/ (Decrease)		Nine Months Ended February 28,						Increase/ (Decrease)
	2007			2006					2007			2006
	(dollars in thousands)
General and administrative	$	15,155		$	9,813		$	5,342	$	44,421		$	30,997		$	13,424
Percentage of revenues		3.7	%		2.5	%				3.8	%		2.6	%

General and administrative expenses consist principally of employee related costs, travel expenses and allocated information technology and facilities costs for finance, legal, human resources and executive functions, outside legal and accounting fees, provision for doubtful accounts and business insurance costs. The increase in absolute dollars and as a percentage of revenues for the three months ended February 28, 2007 is due to several factors. Professional and legal expenses increased by approximately $3.1 million, primarily related to settlement costs of one lawsuit and defense of patent litigation in the current period. An increase in employee-related expenses of approximately $0.5 million was the result of an increase in our headcount of approximately 15 additional employees hired to support our infrastructure. The charge for our allowance for doubtful accounts also increased by $0.4 million as a result of higher accounts receivable balances at the end of the period. Stock-based compensation expense increased $1.6 million during the current period as a result of the adoption of SFAS No. 123(R).

The increase in general and administrative expenses in absolute dollars and as a percentage of revenues for the nine months ended February 28, 2007 is due to several factors. Professional and legal expenses increased by approximately $5.1 million, primarily for the settlement of three lawsuits, defense of patent litigation and patent filings. The charge for our allowance for doubtful accounts increased by $1.6 million as a result of higher accounts receivable balances at the end of the period. An increase in employee-related expenses of approximately $1.2 million was the result of an increase in our headcount to support our infrastructure. Stock-based compensation expense increased $4.8 million during the current period as a result of the adoption of SFAS No. 123(R).

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In-process research and development

	Three Months Ended February 28,						Increase/ (Decrease)		Nine Months Ended February 28,						Increase/ (Decrease)
	2007			2006					2007			2006
	(dollars in thousands)
In-process research and development	$	3,700		$	—		$	3,700	$	3,700		$	—		$	3,700
Percentage of revenues		0.9	%		—	%				0.3	%		—	%

In-process research and development for the three and nine months ended February 28, 2007 in absolute dollars was the result of the acquisitions of assets completed during the third quarter of fiscal year 2007 which represented purchased in-process research and development that had not yet reached technological feasibility, had no alternative future use and was charged to operations.

Amortization of Intangible Assets

	Three Months Ended February 28,						Increase/ (Decrease)		Nine Months Ended February 28,						Increase/ (Decrease)
	2007			2006					2007			2006
	(dollars in thousands)
Amortization of intangible assets	$	340		$	340		$	—	$	1,020		$	4,249		$	(3,229	)
Percentage of revenues		0.1	%		0.1	%				0.1	%		0.4	%

The decrease in amortization of intangible assets in absolute dollars is because the intangible assets acquired in connection with the Handspring acquisition became fully amortized during fiscal year 2006.

Restructuring Charges

	Three Months Ended February 28,						Increase/ (Decrease)		Nine Months Ended February 28,						Increase/ (Decrease)
	2007			2006					2007			2006
	(dollars in thousands)
Restructuring charges	$	—		$	—		$	—	$	—		$	1,954		$	(1,954	)
Percentage of revenues		—	%		—	%				—	%		0.2	%

The second quarter of fiscal year 2006 restructuring actions consisted of workforce reductions, primarily in Europe, of approximately 20 regular employees. Restructuring charges were a result of the Company’s effort to focus its international sales force on smartphone products. Cost reduction actions initiated in the second quarter of fiscal year 2006 are complete.

Interest and Other Income (Expense), Net

	Three Months Ended February 28,						Increase/ (Decrease)		Nine Months Ended February 28,						Increase/ (Decrease)
	2007			2006					2007			2006
	(dollars in thousands)
Interest and other income (expense), net	$	5,181		$	3,406		$	1,775	$	16,143		$	6,980		$	9,163
Percentage of revenues		1.3	%		0.9	%				1.4	%		0.6	%

Interest and other income (expense) for the three months ended February 28, 2007 primarily consisted of approximately $5.9 million of interest income on our cash, cash equivalent and short-term investment balances, partially offset by $0.8 million of interest expense and bank and other charges. Interest and other income for the three months ended February 28, 2006 primarily consisted of approximately $4.6 million of interest income on our cash, cash equivalents and short-term investment balances, partially offset by $1.2 million of interest expense and bank and other charges. Interest income increased primarily as a result of increased average cash, cash equivalent and short-term investment balances and more favorable interest rates. Interest expense and bank and other charges decreased primarily due to lower outstanding debt.

Interest and other income for the nine months of fiscal year 2007 primarily consisted of approximately $19.0 million of interest income on our cash, cash equivalent and short-term investment balances, partially offset by $2.9 million of interest expense and bank and other charges. Interest and other income for the nine months of fiscal year 2006 primarily consisted of $11.1 million of interest income on our cash, cash equivalent and short-term investment balances, partially offset by $4.1

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million of interest expense and bank and other charges. Interest income increased primarily as a result of increased average cash, cash equivalent and short-term investment balances and more favorable interest rates. Interest expense and bank and other charges decreased primarily due to lower outstanding debt.

Income Tax Provision (Benefit)

	Three Months Ended February 28,						Increase/ (Decrease)		Nine Months Ended February 28,						Increase/ (Decrease)
	2007			2006					2007			2006
	(dollars in thousands)
Income tax provision (benefit)	$	6,007		$	2,227		$	3,780	$	28,062		$	(220,155	)	$	248,217
Percentage of revenues		1.5	%		0.6	%				2.4	%		(18.7	)%

For the three and nine months ended February 28, 2007, Palm’s income tax expense was $6.0 million and $28.1 million, respectively, which consisted of federal, state and foreign income taxes. The effective tax rate for the three and nine months ended February 28, 2007 was 33.8% and 40.6%, respectively. The provision for income taxes for the three and nine months ended February 28, 2007 differs from the amount computed by applying the federal statutory income tax rate primarily due to state taxes, foreign income taxed at different rates, and non-deductible stock-based compensation expense.

Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax expense recorded for the nine months ended February 28, 2007 reflect changes in all categories of deferred tax assets, including the utilization of U.S. tax loss carryforwards related to non-qualifying stock option deductions. During the quarter the Company also realized deductions related to stock option expense. These deductions related to options granted, vested or exercised both before and after the adoption of SFAS No. 123(R). Accordingly, the Company recorded tax expense that resulted in an increase in additional paid-in capital related to options granted and vested prior to the adoption of SFAS No. 123(R), as well as recording a deferred tax asset related to post-adoption options that were granted during the quarter.

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

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

Liquidity and Capital Resources

Cash and cash equivalents at February 28, 2007 were $182.0 million, compared to $113.5 million at May 31, 2006, an increase of $68.5 million. Contributing to this increase were net income of $41.0 million, non-cash charges of $48.8 million, and changes in assets and liabilities of $35.4 million. In addition, we had net sales of short-term investments of $86.3 million and $13.6 million of stock related activity. These increases were partially offset by the purchase of the Palm OS Garnet license from ACCESS Systems Americas, Inc. (formerly PalmSource, Inc.) for $44.0 million, the repayment of debt of $43.0 million, cash used to repurchase and retire shares of $31.0 million, cash paid for acquisitions of $19.0 million and cash used for the purchase of property and equipment of $19.6 million.

We anticipate our February 28, 2007 total cash, cash equivalents and short-term investments balance of $504.1 million will satisfy our operational cash flow requirements for at least the next twelve months including the anticipated impact of the share repurchase program approved by our Board of Directors in September 2006. Based on our current forecast, we do not anticipate any short-term or long-term deficiencies.

Net accounts receivable was $213.9 million at February 28, 2007, an increase of $9.6 million, or 5%, from $204.3 million at May 31, 2006. Days sales outstanding, or DSO, of receivables increased to 47 days at February 28, 2007 from 46 days at May 31, 2006. During the third quarter of fiscal year 2007, the cash conversion cycle decreased 10 days to -9 days compared to 1 day at fiscal year end 2006 primarily due to increased inventory turns. The cash conversion cycle is -9 days at February 28, 2007 because DSO added to days of supply in inventories, or DSI, is less than days payable outstanding, or DPO.

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In September 2006, our Board of Directors authorized a stock buyback program to repurchase up to $250.0 million of our common stock. The program allows repurchases of our shares at our discretion, depending on market conditions, share price and other factors.

The stock repurchase program is designed to return value to our stockholders and minimize dilution from stock issuance. The program will be funded using our existing cash balance and future cash flows. The share repurchases will occur through open market purchases, privately negotiated transactions and/or transactions structured through investment banking institutions as permitted by securities laws and other legal requirements.

During the three months ended February 28, 2007, no shares were repurchased under the stock buyback program. During the nine months ended February 28, 2007, the Company repurchased 2,154,000 shares of common stock through open market purchases at an average price of $14.37 per share. Total cash consideration for the repurchased stock was $31.0 million during the nine months ended February 28, 2007. The repurchased shares have been subsequently retired.

Palm facilities are leased under operating leases that expire at various dates through January 2013.

In May 2005, Palm acquired PalmSource’s 55 percent share of Palm Trademark Holding Company and its rights to the brand name Palm. The rights to the brand had been co-owned by the two companies since the October 2003 spin-off of PalmSource from Palm. Palm agreed to pay $30.0 million in five installments due in May 2005, 2006, 2007 and 2008 and November 2008, and granted PalmSource certain rights to Palm trademarks for PalmSource and its licensees for a four-year transition period. The net present value of these payments, $27.2 million, was recorded as an intangible asset and is being amortized over 20 years. The remaining amount due to PalmSource under this agreement was $15.0 million as of February 28, 2007 and $22.5 million as of May 31, 2006.

Palm accrues for royalty obligations to other technology and patent holders based on unit shipments of its smartphone and handheld computing devices, as a percentage of applicable revenue for the net sales of products using certain software technologies or as a fully paid-up license fee, all as determined in accordance with the terms of the applicable license agreements. Where agreements are not finalized, accrued royalty obligations represent management’s current best estimates using appropriate assumptions and projections based on negotiations with third party licensors. Palm has accrued royalty obligations of $29.0 million and $35.4 million as of February 28, 2007 and May 31, 2006, respectively, including estimated royalties of $21.2 million and $30.5 million, respectively, which are reported in other accrued liabilities. While the amounts ultimately agreed upon may be more or less than the current accrual, management does not believe that finalization of the agreements would have had a material impact on the amounts reported for its financial position as of February 28, 2007 and May 31, 2006 or for the reported results for the three and nine months ended February 28, 2007 and 2006. The effect of finalization of these agreements in the future may be significant to the period in which recorded.

Palm utilizes contract manufacturers to build its products. These contract manufacturers acquire components and build products based on demand forecast information supplied by Palm, which typically covers a rolling 12-month period. Consistent with industry practice, Palm acquires inventories from such manufacturers through blanket purchase orders against which orders are applied based on projected demand information and availability of goods. Such purchase commitments typically cover Palm’s forecasted product and manufacturing requirements for periods ranging from 30 to 90 days. In certain instances, these agreements allow Palm the option to cancel, reschedule and/or adjust its requirements based on its business needs. Consequently, only a portion of Palm’s purchase commitments arising from these agreements may be non-cancelable and unconditional commitments. As of February 28, 2007 and May 31, 2006, Palm’s commitments to contract with third-party manufacturers for their inventory on-hand and component purchase commitments related to the manufacture of Palm products were approximately $158.8 million and $163.1 million, respectively.

In October 2005, Palm entered into a three-year, $30.0 million revolving credit line with Comerica Bank. The interest rate is equal to Comerica’s prime rate (8.25% at February 28, 2007) or, at Palm’s election, subject to specific requirements, equal to LIBOR plus 1.75% (7.08% at February 28, 2007). The interest rate may vary based on fluctuations in market rates. The line of credit is unsecured as long as the Company maintains over $100.0 million in unrestricted domestic cash, cash equivalents and short-term investments. If the Company’s domestic unrestricted cash plus cash equivalents and short-term investments fall below $100.0 million, Comerica will have a first priority security interest in all of the Company’s assets including but not limited to cash and cash equivalents, short-term investments, accounts receivable, inventory and property and equipment but excluding intellectual property and real estate. As of February 28, 2007 and May 31, 2006, Palm used its credit line to support the issuance of letters of credit totaling $9.3 million and $10.2 million, respectively.

During fiscal year 2007, Palm entered into a license agreement with Oracle Corporation to purchase software and one year of maintenance for $3.3 million (net present value of $2.9 million). Under the terms of the agreement, Palm agreed to make quarterly payments over a three-year period ending July 2009. As of February 28, 2007 Palm made payments of $0.5 million under the agreement. The remaining amount due under the agreement is $2.8 million as of February 28, 2007.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

We currently maintain an investment portfolio consisting mainly of cash equivalents and short-term investments. These available-for-sale securities are subject to interest rate risk and will fall in value if market interest rates increase. The objectives of our investment activities are to maintain the safety of principal, assure sufficient liquidity and achieve appropriate returns. This is accomplished by investing in marketable investment grade securities and by limiting exposure to any one issuance or issuer. We do not use derivative financial investments in our investment portfolio. Our cash equivalents are primarily money market funds and an immediate and uniform increase in market interest rates of 100 basis points from levels at February 28, 2007 would cause an immaterial decline in the fair value of our cash equivalents. As of February 28, 2007, we had short-term investments of $322.1 million. Our investment portfolio primarily consists of highly liquid investments with original maturities at the date of purchase of greater than three months, and of marketable equity securities. These available-for-sale investments, consisting primarily of auction-rate securities, including government, domestic and foreign corporate debt securities and marketable equity securities, are subject to interest rate and interest income risk and will decrease in value if market interest rates increase. An immediate and uniform increase in market interest rates of 100 basis points from levels at February 28, 2007 would cause a decline of less than 2%, or $4.3 million, in the fair market value of our short-term investment portfolio. We would expect our operating results or cash flows to be similarly affected by such a change in market interest rates.

Foreign Currency Exchange Risk

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

Equity Price Risk

As of February 28, 2007 we do not own any material equity investments. Therefore, we do not currently have any material direct equity price risk.

Item 4. Controls and Procedures

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

There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the third quarter of fiscal year 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The information set forth in Note 16 of the condensed consolidated financial statements of this Form 10-Q is incorporated herein by reference.

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Item 1A. Risk Factors

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

Risks Related to Our Business

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

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

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

• changes in consumer and enterprise spending levels;

• quality issues with our products;

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

• loss or failure of carriers or other key sales channel partners;

• competition from other smartphone or handheld devices or other devices with similar functionality;

• competition for consumer and enterprise spending on other products;

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

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

• changes in terms, pricing or promotional programs;

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

• failure to achieve product cost and operating expense targets;

• excess inventory or insufficient inventory to meet demand;

• seasonality of demand for some of our products and services;

• growth, decline, volatility and changing market conditions in the mobile computing device market;

• litigation brought against us; and

• changes in general economic conditions and specific market conditions.

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

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

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

The development of new products and services is very difficult and requires high levels of innovation. The development process is also lengthy and costly. If we fail to accurately anticipate technological trends or our end users’ needs or preferences 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.

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

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

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

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

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

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

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

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

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

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

• timely build out of advanced wireless carrier networks that enhance the user experience for data centric services through higher speed and “always on” functionality;

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

• wireless carriers’ pricing requirements and subsidy programs; and

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

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

Wireless carriers have substantial bargaining power as we enter into agreements with them. They may require contract terms that are difficult for us to satisfy and could result in higher costs to complete certification requirements and negatively impact our results of operations and financial condition. Moreover, we do not have agreements with some of the wireless carriers

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with whom we do business internationally and, in some cases, the agreements may be with third-party distributors and may not pass through rights to us or provide us with recourse or contact with the carrier. The absence of agreements means that, with little or no notice, these wireless carriers could refuse to continue to purchase all or some of our products or change the terms under which they purchase our products. If these wireless carriers were to stop purchasing our products, we may be unable to replace the lost sales channel on a timely basis and our results of operations could be harmed.

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

Carriers, who control most of the distribution and sale of, and virtually all of the access for, smartphone products could commoditize smartphones, thereby reducing the average selling prices and margins for our smartphone products which would have a negative impact on our business, results of operations and financial condition. In addition, if carriers move away from subsidizing the purchase of smartphone products, this could significantly reduce the sales or growth rate of sales of smartphone products. This could have an adverse impact on our business, revenues and results of operations.

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

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

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

Our three largest customers in terms of revenue represented 55% of our revenues during fiscal year 2006 compared to our three largest customers representing 34% of our revenues during fiscal year 2005. We determine our largest customers to be those who represent 10% or more of our total revenues. We expect this trend of revenue concentration with our largest customers, particularly with wireless carriers, to continue. If any significant customer discontinues its relationship with us for any reason, or reduces or postpones current or expected purchases from us, it could have an adverse impact on our business, results of operation and financial condition.

In addition, our largest customers in terms of outstanding customer accounts receivable balances accounted for 66% of our accounts receivable at the end of fiscal year 2006 and 24% of our accounts receivable at the end of fiscal year 2005. We determine our largest customers to be those who have outstanding customer accounts receivable balances at the period end are 10% or more of our total net accounts receivables. We expect this trend of increased credit concentration with our largest customers, particularly with wireless carriers, to continue, increasing our bad debt risks and the costs of mitigating those risks. We routinely monitor the financial condition of our customers and review the credit history of each new customer.

While we believe that our allowances for doubtful accounts adequately reflect the credit risk of our customers, as well as historical trends and other economic factors, we cannot assure you that such allowances will be accurate or sufficient. If any of our significant customers defaults on its account, or if we experience significant credit expense for any reason, it could have an adverse impact on our business, results of operations and financial condition.

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

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

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Some of our competitors or potential competitors possess capabilities developed over years of serving customers in their respective markets that might enable them to compete more effectively than we compete in certain segments. In addition, many of our competitors have significantly greater engineering, technical, manufacturing, sales, marketing and financial resources and capabilities than we do. These competitors may be able to respond more rapidly than we can to new or emerging technologies or changes in customer requirements, including introducing a greater number and variety of products than we can. They may also be in a better position financially or otherwise to acquire and integrate companies and technologies that enhance their competitive positions and limit our competitiveness. In addition, they may devote greater resources to the development, promotion and sale of their products than we do. They may have lower costs and be better able to withstand lower prices in order to gain market share at our expense. They may also be more diversified than we are and better able to leverage their other businesses, products and services to be able to accept lower returns in the mobile computing device market and gain market share. Finally, these competitors bring with them customer loyalties, which may limit our ability to compete despite superior product offerings.

Our devices compete with a variety of mobile devices. Our principal competitors include: mobile handset and smartphone manufacturers such as High Tech Computer, or HTC, iMate, Motorola, Nokia, Research in Motion, or RIM, Samsung and Sony-Ericsson; computing device companies such as Acer, ASUSTek, BenQ, Dell, Hewlett-Packard, Lenovo, Medion, MiTac and Toshiba; consumer electronics companies, such as Apple, Garmin, NEC, Sharp Electronics, Sony and Yakumo; and a variety of early-stage technology companies.

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

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

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

A number of our competitors have longer and closer relationships with the senior management of enterprise customers who decide which products and technologies will be deployed in their enterprises. Many competitors have larger and more established sales forces calling on carriers and 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 carriers and enterprise customers deciding not to choose our products and services, which would adversely impact our revenues.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Our smartphone and handheld products contain software applications and hardware and firmware components, including liquid crystal displays, touch panels, memory chips, microprocessors, cameras, radios and batteries, which are procured from a variety of suppliers, including some who are our competitors. The cost, quality and availability of software applications and hardware and firmware components are essential to the timely and successful development, production and sale of our device products. For example, components such as radio technologies and software such as email applications are critical to the functionality of our smartphone devices. Some components, such as screens and related integrated circuits, digital signal processors, microprocessors, radio frequency components and other discrete components, come from sole source suppliers. Alternative sources are not always available or may be prohibitively expensive. In addition, even when we have multiple qualified suppliers, we may compete with other purchasers for allocation of scarce components. Some components come from companies with whom we compete in the mobile computing device market. If suppliers are unable or unwilling to meet our demand for components and if we are unable to obtain alternative sources or if the price for alternative sources is prohibitive, our ability to maintain timely and cost-effective production of our smartphone and handheld products will be harmed. Shortages affect the timing and volume of production for some of our products as well as increasing our costs due to premium prices paid for those components. Some of our suppliers may be capacity-constrained due to high industry demand for some components and relatively long lead times to expand capacity.

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Our product strategy is substantially dependent on the operating systems that we include in our mobile computing devices.

Many of our products, including all of our handheld computing products, have historically been and continue to be dependent on the competitiveness of the Palm OS platform. We originally developed the Palm OS before spinning it off into a separate company, PalmSource, in 2003. PalmSource was subsequently acquired by ACCESS Co., Ltd., or ACCESS, bringing the Palm OS under new management and control. We continued to innovate and customize on the version of the Palm OS that we licensed from PalmSource, and we recently obtained a license from ACCESS Systems (formerly PalmSource), the rights to modify the source code, and ownership of any improvements that we make to that version of the Palm OS. The Palm OS allows us to differentiate our products from the products of most of our competitors. We cannot assure you that the Palm OS or our efforts to customize and innovate using the Palm OS will continue to draw the customer interest necessary for the Palm OS to provide us with a level of competitive differentiation. Our business could also be harmed if we were to breach the license agreements and ACCESS Systems terminated the license.

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

Although ACCESS Systems generally indemnifies us for damages arising from lawsuits involving the Palm OS, and from damages relating to intellectual property infringement by the Palm OS that occurred prior to the spin-off of PalmSource from Palm, we could still be adversely affected by a determination adverse to ACCESS Systems as a result of market uncertainty, or product changes that may be advisable or required due to such lawsuits, or the failure of ACCESS Systems or ACCESS to adequately indemnify us.

We have also introduced smartphones based on a version of Microsoft’s Windows Mobile OS. We cannot assure you that we will be able to sufficiently differentiate our smartphones from the multitude of other devices based on the Windows Mobile OS. Our business could also be harmed if we were to breach the license agreement and Microsoft terminated the license.

In addition, there is significant competition from makers of smartphones using other operating system software, including proprietary operating systems such as Symbian, open source operating systems, such as Linux, other proprietary operating systems and other software technologies, such as Java and RIM’s licensed technology. These and other competitors could devote greater resources to the development and promotion of alternative operating systems and to the support of the third-party developer community, which could attract the attention of influential user segments.

Our ability to develop the Palm OS and innovate on top of the Microsoft Windows Mobile OS will significantly impact the success of our products and the strength of our relationship with the carriers that carry our smartphones. If the use of these operating systems in our mobile computing devices does not continue to be competitive, our revenues and results of operations could be adversely affected.

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

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

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

We operate in the mobile computing device market which includes both smartphone and handheld products. Over the last few years, we have seen year-over-year declines in the volume of handheld devices while demand for smartphone devices has increased. Although we are the leading provider of handheld products and while we intend to maintain this leadership position, we have shifted our investment towards smartphone products in response to forecasted market demand trends. We cannot assure you that declines in the volume of handheld device units will not continue or that the growth of smartphone devices will offset any decline in handheld device sales. Nor can we assure you that the smartphone market will continue to grow as forecasted. If we are unable to adequately respond to changes in demand for smartphone and handheld products, our

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revenues and results of operations could be adversely affected. In addition, as our products and product categories mature and face greater competition, we may experience pressure on our product pricing to preserve demand for our products, which would adversely affect our margins, results of operations and financial condition.

This reliance on the success of and trends in our industry is compounded by the size of our organization and our focus on smartphone and handheld products. These factors also make us more dependent on investments of our limited resources. For example, we face many resource allocation decisions, such as: where to focus our research and development, geographic sales and marketing and partnering efforts; which aspects of our business to outsource; which operating systems and email solutions to support; and the balance between our smartphone and handheld products. We have shifted the focus of our engineering resources towards the smartphone opportunity. Given the size and undiversified nature of our organization, any error in investment strategy could harm our business, results of operations and financial condition.

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

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

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 regardless of whether these claims are successful.

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

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

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

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

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

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

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

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

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

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

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

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

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financial condition could be adversely affected. Volatility or lack of positive performance in our stock price may also affect our ability to retain key employees, all of whom have been granted stock options, other equity incentives or both. We also are in the process of opening and expanding design centers internationally, including China, and expanding our international workforce. Entry into new locations involves seeking initial management hiring and competing for technical talent in the local labor markets. For example, as we hire international personnel in new locations we need to familiarize ourselves with the local labor laws and regulations and competitive compensation practices. In addition, in China and other developing economies the competition for highly qualified and experienced technical talent is particularly high.

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

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. In 2005, we made a significant investment in acquiring the rights to the Palm and related trademarks and will continue to invest in that brand and in our patent portfolio.

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

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

We may be required to spend significant resources to monitor and police our intellectual property rights. Effective policing of the unauthorized use of our products or intellectual property is difficult and litigation may be necessary in the future to enforce our intellectual property rights. Intellectual property litigation is not only expensive, but time-consuming, regardless of the merits of any claim, and could divert attention of our management from operating our 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.

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

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

As part of our business strategy, we target customers and relationships with suppliers and original design manufacturers in countries with large populations and propensities for adopting new technologies. However, many of these countries do not address misappropriation of intellectual property or deter others from developing similar, competing technologies or intellectual property. Effective protection of patents, copyrights, trademarks, trade secrets and other intellectual property may

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be unavailable or limited in some foreign countries. In particular, the laws of some foreign countries in which we do business may not protect our intellectual property rights to the same extent as the laws of the United States. As a result, we may not be able to effectively prevent competitors in these regions from infringing our intellectual property rights, which would reduce our competitive advantage and ability to compete in those regions and negatively impact our business.

We are subject to audit by the Internal Revenue Service and other taxing authorities. Any assessment arising from an audit and the cost of any related dispute could adversely affect our results of operations and financial condition.

Our operations are subject to income and transaction taxes in the United States and in multiple foreign jurisdictions and to review or audit by the Internal Revenue Service, or IRS, and state, local and foreign tax authorities. While we strongly believe our tax positions are compliant with applicable tax laws and regulations, our positions could be subject to dispute by the taxing authorities. Any such dispute could be costly and time-consuming and could divert the attention of our management and key personnel from our business operations.

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

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

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

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

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

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

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

• changes in foreign currency exchange rates;

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

• changes in international relations;

• trade protection measures and import or export licensing requirements;

• changes in tax laws;

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

• difficulty in managing widespread sales operations; and

42

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

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

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

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

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

Business interruptions could adversely affect our business.

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

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

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

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

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

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

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

43

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

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

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

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

• quarterly variations in our operating results;

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

• speculation in the press or investment community;

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

• actions by institutional stockholders or financial analysts;

• general market conditions; and

• domestic and international economic factors unrelated to our performance.

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

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

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

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

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

The following table summarizes stock repurchase activity for the three months ended February 28, 2007:

	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of a Publicly Announced Plan (2)	Average Price Paid Per Share	Approximate Dollar Value of Shares that May Yet be Purchased under the Plan (2)
December 1, 2006— December 31, 2006 (1)	4,469	$	14.05	—	—	$	219,037,247
January 1, 2007— January 31, 2007	—		—	—	—	$	219,037,247
February 1, 2007 —February 28, 2007	—		—	—	—	$	219,037,247
	4,469	$	14.05	—

44

(1) During the three months ended February 28, 2007, the Company repurchased 4,469 shares of common stock at an average price of $14.05. These shares repurchased include those shares of Palm common stock that employees deliver back to the Company to satisfy tax-withholding obligations at the settlement of restricted stock exercises and the forfeiture of restricted shares upon the termination of an employee. As of February 28, 2007, a total of approximately 156,000 shares may still be repurchased.

(2) In September 2006, the Company’s Board of Directors authorized a stock buyback program for the Company to repurchase up to $250.0 million of its common stock. The program does not have a specified expiration date. During the three months ended February 28, 2007 no shares were repurchased under the stock buyback program. As of February 28, 2007, $219.0 million remains available for future repurchase.

45

Item 6. Exhibits

Exhibit Number	Exhibit Description	Incorporated by Reference				Filed Herewith
		Form	File No.	Exhibit	Filing Date
2.1	Master Separation and Distribution Agreement between 3Com and the registrant effective as of December 13, 1999, as amended.	S-1/A	333-92657	2.1	1/28/00
2.2	Tax Sharing Agreement between 3Com and the registrant.	10-Q	000-29597	2.7	4/10/00
2.3	Indemnification and Insurance Matters Agreement between 3Com and the registrant.	10-Q	000-29597	2.11	4/10/00
2.4	Form of Non-U.S. Plan.	S-1	333-92657	2.12	12/13/99
2.5	Agreement and Plan of Reorganization between the registrant, Peace Separation Corporation, Harmony Acquisition Corporation and Hand-spring, Inc., dated June 4, 2003.	8-K	000-29597	2.1	6/6/03
2.6	Amended and Restated Master Separation Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.14	8/18/03
2.7	Amended and Restated Indemnification and Insurance Matters Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.17	8/18/03
2.8	Amended and Restated Tax Sharing Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.23	8/18/03
2.9	Master Patent Ownership and License Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.30	8/18/03
2.10	Xerox Litigation Agreement between the registrant and PalmSource, Inc., as amended.	10-K/A	000-29597	2.34	9/26/03
3.1	Amended and Restated Certificate of Incorporation.	10-Q	000-29597	3.1	10/11/02
3.2	Amended and Restated Bylaws.	10-Q	000-29597	3.2	10/5/06
4.1	Reference is made to Exhibits 3.1 and 3.2 hereof.	N/A	N/A	N/A	N/A	N/A
4.2	Specimen Stock Certificate.	10-K	000-29597	4.2	7/29/05
4.3	Preferred Stock Rights Agreement between the registrant and EquiServe Trust Company, N.A. (formerly Fleet National Bank), as amended.	8-K	000-29597	4.1	11/22/00
4.4	5% Convertible Subordinated Note, dated as of November 4, 2003.	10-Q	000-29597	4.4	4/6/04
4.5	Amendment to Preferred Stock Rights Agreement between the registrant and EquiServe Trust Company, N.A.	8-A/A	000-29597	4.2	11/18/04
4.6	Certificate of Ownership and Merger Merging Palm, Inc. into palmOne, Inc.	10-K	000-29597	4.6	7/29/05
10.1*	Amended and Restated 1999 Stock Plan.	10-K	000-29597	10.1	7/29/05
10.2*	Form of 1999 Stock Plan Agreements.	S-1/A	333-92657	10.2	1/28/00
10.3*	Amended and Restated 1999 Employee Stock Purchase Plan.	S-8	000-29597	10.2	11/18/04
10.4*	Form of 1999 Employee Stock Purchase Plan Agreements.	S-1/A	333-92657	10.4	1/28/00
10.5*	Amended and Restated 1999 Director Option Plan.	S-8	333-47126	10.5	10/2/00

46

Exhibit Number	Exhibit Description	Incorporated by Reference				Filed Herewith
		Form	File No.	Exhibit	Filing Date
10.6*	Form of 1999 Director Option Plan Agreements.	S-1/A	333-92657	10.6	1/28/00
10.7	Form of Indemnification Agreement entered into by the registrant with each of its directors and executive officers.	S-1/A	333-92657	10.8	1/28/00
10.8**	RAM Mobile Data USA Limited Partnership Value Added Reseller Agreement between RAM Mobile Data USA Limited Partnership (now Cingular Wireless) and the registrant.	S-1/A	333-92657	10.9	2/25/00
10.9*	Form of Management Retention Agreement.	S-1/A	333-92657	10.14	2/28/00
10.10	Amendment Number One to Value Added Re-seller Agreement between Cingular Interactive, L.P. (formerly known as BellSouth Wireless Data, L.P., which was formerly known as RAM Mobile Data USA Limited Partnership) and the registrant.	10-Q/A	000-29597	10.37	2/26/02
10.11*	Management Retention Agreement by and between the registrant and R. Todd Bradley dated as of September 17, 2002.	10-Q	000-29597	10.43	10/11/02
10.12*	Form of Severance Agreement for Executive Officers.	10-Q	000-29597	10.44	10/11/02
10.13*	Amended and Restated 2001 Stock Option Plan for Non-Employee Directors.	10-Q	000-29597	10.13	10/5/06
10.14*	Handspring, Inc. 1998 Equity Incentive Plan, as amended.	S-8	333-110055	10.1	10/29/03
10.15*	Handspring, Inc. 1999 Executive Equity Incentive Plan, as amended.	S-8	333-110055	10.2	10/29/03
10.16*	Handspring, Inc. 2000 Equity Incentive Plan, as amended.	S-8	333-110055	10.3	10/29/03
10.17	Separation Agreement between the registrant and R. Todd Bradley dated as of January 24, 2006.	10-Q	000-29597	10.26	4/5/05
10.18	Amendment No. 3 to the Loan and Security Agreement between the registrant and Silicon Valley Bank.	10-Q	000-29597	10.29	4/5/05
10.19	Sub-Lease between the registrant and Philips Electronics North America Corporation.	10-Q	000-29597	10.30	4/5/05
10.20*	Offer Letter from the registrant to Andrew J. Brown dated as of December 13, 2004.	10-Q	000-29597	10.31	4/5/05
10.21	Loan Modification Agreement between the registrant and Silicon Valley Bank.	10-K	000-29597	10.25	7/29/05
10.22	Second Amended and Restated Software License Agreement between the registrant and PalmSource, Inc., PalmSource Overseas Limited and palmOne Ireland Investment, dated May 23, 2006.	8-K	000-29597	10.2	7/28/05
10.23	Purchase Agreement between the registrant, PalmSource, Inc. and Palm Trademark Holding Company, LLC, dated May 23, 2006.	8-K	000-29597	10.1	5/27/05
10.24	Retention Agreement between the registrant and Celeste Baranski, dated June 29, 2006.	10-Q	000-29597	10.28	10/7/05
10.25	Purchase and Sale Agreement and Escrow Instructions between the registrant and Hunter/Storm, LLC, dated February 2, 2007.	10-Q	000-29597	10.25	4/11/06

47

Exhibit Number	Exhibit Description	Incorporated by Reference				Filed Herewith
		Form	File No.	Exhibit	Filing Date
10.26	Release Agreement between the registrant and Ken Wirt dated as of March 13, 2007.	10-Q	000-29597	10.26	4/11/06
10.27	First Amendment of Purchase and Sale Agreement and Escrow Instructions, dated March 13, 2007.	10-Q	000-29597	10.27	4/11/06
10.28	Second Amendment of Purchase and Sale Agreement and Escrow Instructions, dated April 3, 2007.	10-Q	000-29597	10.28	4/11/06
10.29	Patent License and Settlement Agreement between the registrant and Xerox Corporation, dated June 27, 2007.	10-K	000-29597	10.29	7/28/06
10.30*	Form of Performance Share Agreement for Directors under 1999 Stock Plan.	8-K	000-29597	10.1	10/12/06
10.31*	Form of Performance Share Agreement for US Grantees Under 1999 Stock Plan.	10-Q	000-29597	10.31	1/9/07
10.32	2006 Software License Agreement between the registrant and ACCESS Systems Americas, Inc., dated December 5, 2006.	8-K	000-29597	10.1	4/4/07
10.33	Amendment No. 1 to Master Patent Ownership and License Agreement between the registrant and ACCESS Systems Americas, Inc., dated December 5, 2006.	8-K	000-29597	10.2	4/4/07
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.					X
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.					X
32.1	Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer.					X

* Indicates a management contract or compensatory plan, contract arrangement in which any Director or Executive Officer participates.

** Confidential treatment granted on portions of this exhibit.

48

Signatures

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

	Palm, Inc.
	(Registrant)
Date: April 5, 2007	By:	/s/ ANDREW J. BROWN
		Andrew J. Brown
		Senior Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

49

EXHIBIT INDEX

Exhibit Number	Exhibit Description	Incorporated by Reference				Filed Herewith
		Form	File No.	Exhibit	Filing Date
2.1	Master Separation and Distribution Agreement between 3Com and the registrant effective as of December 13, 1999, as amended.	S-1/A	333-92657	2.1	1/28/00
2.2	Tax Sharing Agreement between 3Com and the registrant.	10-Q	000-29597	2.7	4/10/00
2.3	Indemnification and Insurance Matters Agreement between 3Com and the registrant.	10-Q	000-29597	2.11	4/10/00
2.4	Form of Non-U.S. Plan.	S-1	333-92657	2.12	12/13/99
2.5	Agreement and Plan of Reorganization between the registrant, Peace Separation Corporation, Harmony Acquisition Corporation and Hand-spring, Inc., dated June 4, 2003.	8-K	000-29597	2.1	6/6/03
2.6	Amended and Restated Master Separation Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.14	8/18/03
2.7	Amended and Restated Indemnification and Insurance Matters Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.17	8/18/03
2.8	Amended and Restated Tax Sharing Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.23	8/18/03
2.9	Master Patent Ownership and License Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.30	8/18/03
2.10	Xerox Litigation Agreement between the registrant and PalmSource, Inc., as amended.	10-K/A	000-29597	2.34	9/26/03
3.1	Amended and Restated Certificate of Incorporation.	10-Q	000-29597	3.1	10/11/02
3.2	Amended and Restated Bylaws.	10-Q	000-29597	3.2	10/5/06
4.1	Reference is made to Exhibits 3.1 and 3.2 hereof.	N/A	N/A	N/A	N/A	N/A
4.2	Specimen Stock Certificate.	10-K	000-29597	4.2	7/29/05
4.3	Preferred Stock Rights Agreement between the registrant and EquiServe Trust Company, N.A. (formerly Fleet National Bank), as amended.	8-K	000-29597	4.1	11/22/00
4.4	5% Convertible Subordinated Note, dated as of November 4, 2003.	10-Q	000-29597	4.4	4/6/04
4.5	Amendment to Preferred Stock Rights Agreement between the registrant and EquiServe Trust Company, N.A.	8-A/A	000-29597	4.2	11/18/04
4.6	Certificate of Ownership and Merger Merging Palm, Inc. into palmOne, Inc.	10-K	000-29597	4.6	7/29/05
10.1*	Amended and Restated 1999 Stock Plan.	10-K	000-29597	10.1	7/29/05
10.2*	Form of 1999 Stock Plan Agreements.	S-1/A	333-92657	10.2	1/28/00
10.3*	Amended and Restated 1999 Employee Stock Purchase Plan.	S-8	000-29597	10.2	11/18/04
10.4*	Form of 1999 Employee Stock Purchase Plan Agreements.	S-1/A	333-92657	10.4	1/28/00
10.5*	Amended and Restated 1999 Director Option Plan.	S-8	333-47126	10.5	10/2/00

50

Exhibit Number	Exhibit Description	Incorporated by Reference				Filed Herewith
		Form	File No.	Exhibit	Filing Date
10.6*	Form of 1999 Director Option Plan Agreements.	S-1/A	333-92657	10.6	1/28/00
10.7	Form of Indemnification Agreement entered into by the registrant with each of its directors and executive officers.	S-1/A	333-92657	10.8	1/28/00
10.8**	RAM Mobile Data USA Limited Partnership Value Added Reseller Agreement between RAM Mobile Data USA Limited Partnership (now Cingular Wireless) and the registrant.	S-1/A	333-92657	10.9	2/25/00
10.9*	Form of Management Retention Agreement.	S-1/A	333-92657	10.14	2/28/00
10.10	Amendment Number One to Value Added Re-seller Agreement between Cingular Interactive, L.P. (formerly known as BellSouth Wireless Data, L.P., which was formerly known as RAM Mobile Data USA Limited Partnership) and the registrant.	10-Q/A	000-29597	10.37	2/26/02
10.11*	Management Retention Agreement by and between the registrant and R. Todd Bradley dated as of September 17, 2002.	10-Q	000-29597	10.43	10/11/02
10.12*	Form of Severance Agreement for Executive Officers.	10-Q	000-29597	10.44	10/11/02
10.13*	Amended and Restated 2001 Stock Option Plan for Non-Employee Directors.	10-Q	000-29597	10.13	10/5/06
10.14*	Handspring, Inc. 1998 Equity Incentive Plan, as amended.	S-8	333-110055	10.1	10/29/03
10.15*	Handspring, Inc. 1999 Executive Equity Incentive Plan, as amended.	S-8	333-110055	10.2	10/29/03
10.16*	Handspring, Inc. 2000 Equity Incentive Plan, as amended.	S-8	333-110055	10.3	10/29/03
10.17	Separation Agreement between the registrant and R. Todd Bradley dated as of January 24, 2006.	10-Q	000-29597	10.26	4/5/05
10.18	Amendment No. 3 to the Loan and Security Agreement between the registrant and Silicon Valley Bank.	10-Q	000-29597	10.29	4/5/05
10.19	Sub-Lease between the registrant and Philips Electronics North America Corporation.	10-Q	000-29597	10.30	4/5/05
10.20*	Offer Letter from the registrant to Andrew J. Brown dated as of December 13, 2004.	10-Q	000-29597	10.31	4/5/05
10.21	Loan Modification Agreement between the registrant and Silicon Valley Bank.	10-K	000-29597	10.25	7/29/05
10.22	Second Amended and Restated Software License Agreement between the registrant and PalmSource, Inc., PalmSource Overseas Limited and palmOne Ireland Investment, dated May 23, 2006.	8-K	000-29597	10.2	7/28/05
10.23	Purchase Agreement between the registrant, PalmSource, Inc. and Palm Trademark Holding Company, LLC, dated May 23, 2006.	8-K	000-29597	10.1	5/27/05
10.24	Retention Agreement between the registrant and Celeste Baranski, dated June 29, 2006.	10-Q	000-29597	10.28	10/7/05
10.25	Purchase and Sale Agreement and Escrow Instructions between the registrant and Hunter/Storm, LLC, dated February 2, 2007.	10-Q	000-29597	10.25	4/11/06

51

Exhibit Number	Exhibit Description	Incorporated by Reference				Filed Herewith
		Form	File No.	Exhibit	Filing Date
10.26	Release Agreement between the registrant and Ken Wirt dated as of March 13, 2007.	10-Q	000-29597	10.26	4/11/06
10.27	First Amendment of Purchase and Sale Agreement and Escrow Instructions, dated March 13, 2007.	10-Q	000-29597	10.27	4/11/06
10.28	Second Amendment of Purchase and Sale Agreement and Escrow Instructions, dated April 3, 2007.	10-Q	000-29597	10.28	4/11/06
10.29	Patent License and Settlement Agreement between the registrant and Xerox Corporation, dated June 27, 2007.	10-K	000-29597	10.29	7/28/06
10.30*	Form of Performance Share Agreement for Directors under 1999 Stock Plan.	8-K	000-29597	10.1	10/12/06
10.31*	Form of Performance Share Agreement for US Grantees Under 1999 Stock Plan.	10-Q	000-29597	10.31	1/9/07
10.32	2006 Software License Agreement between the registrant and ACCESS Systems Americas, Inc., dated December 5, 2006.	8-K	000-29597	10.1	4/4/07
10.33	Amendment No. 1 to Master Patent Ownership and License Agreement between the registrant and ACCESS Systems Americas, Inc., dated December 5, 2006.	8-K	000-29597	10.2	4/4/07
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.					X
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.					X
32.1	Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer.					X

* Indicates a management contract or compensatory plan, contract arrangement in which any Director or Executive Officer participates.

** Confidential treatment granted on portions of this exhibit.

52

EX-31.1

Exhibit 31.1

Certifications

I, Edward T. Colligan, certify that:

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

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 5, 2007	By:	/s/ EDWARD T. COLLIGAN
	Name:	Edward T. Colligan
	Title:	President and Chief Executive Officer

EX-31.2

Exhibit 31.2

Certifications

I, Andrew J. Brown, certify that:

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

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 5, 2007	By:	/s/ ANDREW J. BROWN
	Name:	Andrew J. Brown
	Title:	Senior Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Edward T. Colligan, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Palm, Inc. on Form 10-Q for the fiscal quarter ended March 2, 2007 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Palm, Inc.

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

I, Andrew J. Brown, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Palm, Inc. on Form 10-Q for the fiscal quarter ended March 2, 2007 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Palm, Inc.

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